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| TCB > SEC Filings for TCB > Form 10-Q on 28-Oct-2009 | All Recent SEC Filings |
28-Oct-2009
Quarterly Report
OVERVIEW
TCF Financial Corporation ("TCF" or the "Company"), a Delaware corporation, is a financial holding company based in Wayzata, Minnesota. Its principal subsidiaries, TCF National Bank and TCF National Bank Arizona ("TCF Bank"), are headquartered in South Dakota and Arizona, respectively. TCF has 443 banking offices in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana, Arizona and South Dakota.
TCF provides convenient financial services through multiple channels in its primary banking markets. TCF has developed products and services designed to meet the needs of all consumers. The Company focuses on attracting and retaining customers through service and convenience, including branches that are open seven days a week and on most holidays, extensive full-service supermarket branches, automated teller machine ("ATM") networks and telephone and internet banking. TCF's philosophy is to generate interest income, fees and other revenue growth through business lines that emphasize higher yielding assets and low or no interest-cost deposits. The Company's growth strategies include new branch expansion, acquisitions and the development of new products and services. New products and services are designed to build on existing businesses and expand into complementary products and services through strategic initiatives.
TCF's core businesses include retail and small business banking, commercial banking, consumer lending, leasing and equipment finance and inventory finance. The retail banking business includes traditional and supermarket branches, campus banking, EXPRESS TELLER® ATMs and Visa® cards.
TCF's lending strategy is to originate high credit quality, primarily secured, loans and leases. TCF's largest core lending business is its consumer real estate loan operation, which offers fixed- and variable-rate loans and lines of credit secured by residential real estate properties. Commercial loans are generally made on local properties or to local customers. The leasing and equipment finance businesses consist of TCF Equipment Finance, Inc. ("TCF Equipment Finance"), a company that delivers equipment finance solutions to businesses in select markets and Winthrop Resources Corporation ("Winthrop Resources") and Fidelity National Capital, Inc. ("FNCI"), companies that primarily lease technology and data processing equipment. TCF's leasing and equipment finance businesses have equipment installations in all 50 states and, to a limited extent, in foreign countries. TCF Inventory Finance Inc. ("TCF Inventory Finance") provides inventory financing to electronics and appliances and lawn and garden retailers in the United States and to a limited extent in Canada.
Net interest income, the difference between interest income earned on loans and leases, securities available for sale, investments and other interest-earning assets and interest paid on deposits and borrowings represented 56% of TCF's total revenue for the three months ended September 30, 2009. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest-earning assets and the mix of interest-bearing and non-interest bearing deposits and borrowings. TCF manages the risk of changes in interest rates on its net interest income through an Asset/Liability Committee and through related interest-rate risk monitoring and management policies.
Non-interest income is a significant source of revenue for TCF and an important factor in TCF's results of operations. Key drivers of non-interest income are the number of deposit accounts and related transaction activity. Recent legislative proposals would, if enacted, restrict or limit TCF's ability to impose overdraft fees on retail checking accounts and interchange fees on debit card transactions and could have a significant adverse impact on TCF's non-interest income. The Federal Reserve is expected to issue a new regulation in November of 2009 that will regulate the imposition of overdraft fees and which could also have a significant adverse impact on TCF's non-interest income.
TCF recently announced that it would introduce a new checking account product known as TCF Convenience CheckingSM in the first quarter of 2010 that would carry a monthly account deposit maintenance fee for accounts with a balance below designated levels and charge daily negative balance deposit maintenance fees instead of per item overdraft fees. The account will also provide for a monthly maintenance fee. TCF believes this new product includes a number of features that will be attractive to many customers and addresses many of the concerns of the Federal Reserve Board and various Congress communications relative to banking fees. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Consolidated Non-Interest Income" for additional information.
The Company's Visa debit card program has grown significantly since its inception in 1996. TCF is the 10th largest issuer of Visa Classic debit cards in the United States, based on sales volume for the three months ended June 30, 2009, as published by Visa. TCF earns interchange revenue from customer card transactions paid primarily by merchants, not by TCF's customers. These products represent 22% of fee revenue for the three months ended September 30, 2009. Visa has significant litigation against it regarding interchange pricing and there is a risk this revenue could be impacted by any settlement or adverse rulings in such litigation. Interchange pricing has also been the subject of various pending legislative proposals that may seek to limit such fees. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Expense" for further discussion.
The following portions of the Management's Discussion and Analysis of Financial Condition and Results of Operations focus in more detail on the results of operations for the three and nine months ended September 30, 2009 and 2008 and on information about TCF's balance sheet, credit quality, liquidity, funding sources, capital and other matters.
RESULTS OF OPERATIONS
Performance Summary
TCF reported net income of $17.5 million and $67.6 million for the third quarter and first nine months of 2009, respectively, compared with $30.1 million and $101.3 million for the same 2008 periods. Diluted earnings per common share was 14 cents and 39 cents for the third quarter and first nine months of 2009, respectively, compared with 24 cents and 81 cents for the same 2008 periods. In the second quarter of 2009, the non-cash deemed dividend on the redemption of preferred stock reduced earnings per common share by 10 cents.
For the third quarter and first nine months of 2009, return on average assets was .39% and .52%, respectively, compared with .73% and .83% for the same 2008 periods. Return on average common equity was 6.03% for the third quarter and 7.13% for the first nine months of 2009, excluding the non-cash deemed preferred stock dividend, compared with 11.11% and 12.29% for the same 2008 periods. The return on average common equity was 5.73% for the first nine months of 2009, including the impact of the non-cash deemed dividend on the redemption of preferred stock in the second quarter of 2009.
Operating Segment Results
See Note 12 of Notes to Consolidated Financial Statements for the financial results of TCF's operating segments.
BANKING, consisting of retail banking, commercial banking, small business banking, consumer lending and treasury services, reported net income of $11.3 million and $49.2 million for the third quarter and first nine months of 2009, respectively, compared with $26 million and $83.3 million for the same 2008 periods. Banking net interest income for the third quarter and first nine months of 2009 was $131.1 million and $379.2 million, respectively, compared with $132.8 million and $388.9 million for the same 2008 periods.
The banking provision for credit losses was $65.7 million and $151.5 million for the third quarter and first nine months of 2009, respectively, compared with $47.2 million and $132.6 million for the same 2008 periods. The increase from the third quarter of 2008 was primarily due to increased consumer real estate and commercial net charge-offs and provisions for impaired consumer real estate loans. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Consolidated Provision for Credit Losses" for further discussion.
Banking non-interest income totaled $111.7 million for the third quarter of 2009, up 1.2% from $110.4 million for the same 2008 period primarily due to increases in fees and service charges, partially offset by a decrease in investment and insurance revenue. Banking non-interest income totaled $336 million for the first nine months of 2009, up .7% from $333.7 million for the same 2008 period primarily due to a $14.2 million increase in gain on securities, partially offset by an $8.3 million gain in 2008 on the redemption of Visa shares and a $9 million decrease in investment and insurance revenues.
Banking non-interest expense for the third quarter and first nine months of 2009 was $162.6 million and $487.4 million, respectively, compared with $156.6 million and $460.4 million for the same 2008 periods primarily due to increased FDIC premiums and assessments, deposit account premium expenses and increased levels of foreclosed real estate activity.
LEASING AND EQUIPMENT FINANCE, an operating segment composed of TCF's wholly-owned subsidiaries TCF Equipment Finance, Winthrop Resources and FNCI, provides a broad range of lease and equipment finance products. Leasing and equipment finance reported net income of $7.6 million and $22.7 million for the third quarter and first nine months of 2009, respectively, compared with $7.8 million and $21.5 million for the same 2008 periods. Net interest income for the third quarter and first nine months of 2009 was $26.7 million and $77.9 million, respectively, compared with $19.6 million and $58.2 million for the same 2008 periods.
The provision for credit losses for this operating segment was $9.6 million and $28.7 million for the third quarter and first nine months of 2009, respectively, compared with $4.9 million and $12.4 million for the same 2008 periods primarily due to higher net charge-offs and the resulting portfolio reserve increases in the middle market and small ticket segments.
Leasing and equipment finance non-interest income for the third quarter and first nine months of 2009 totaled $15.2 million and $44.7 million, respectively, up from $13 million and $39.2 million for the same 2008 periods primarily due to an increase in sales-type lease revenue. Leasing and equipment finance revenues may fluctuate from period to period based on customer driven factors not entirely within the control of TCF. Leasing and equipment finance non-interest expense totaled $20.4 million and $58.6 million for the third quarter and first nine months of 2009, respectively, compared with $15.5 million and $49 million for the same 2008 periods primarily as a result of increased compensation from expansion and increased expense for repossessed assets.
OTHER, including the holding company, corporate functions and TCF Inventory Finance, reported a net loss of $1.7 million and $4.4 million for the third quarter and first nine months of 2009, respectively, compared with a net loss of $3.7 million and $3.6 million for the same 2008 periods. The decrease in net loss from the third quarter of 2008 was due in part to improved operating results of TCF Inventory Finance.
Consolidated Net Interest Income
Net interest income for the third quarter of 2009 totaled $161.5 million, up from $152.2 million for the third quarter of 2008 and $156.5 million from the second quarter of 2009. Net interest income for the first nine months of 2009 totaled $463.4 million, up from $446.6 million for the same 2008 period. The increase in net interest income from the third quarter of 2008 was primarily attributable to a $995 million, or 7.7%, increase in average loans and leases, partially offset by a five basis point decrease in net interest margin. The increase in net interest income from the second quarter of 2009 was primarily due to a $119.6 million, or .9%, increase in average loans and leases and a 12 basis point increase in net interest margin. The increase in net interest
income from the first nine months of 2008 was primarily due to a $1.1 billion, or 8.4%, increase in average loans and leases, partially offset by a 14 basis point decrease in net interest margin.
Net interest margin for the third quarter of 2009 was 3.92%, down from 3.97% for the third quarter of 2008 and up from 3.80% from the second quarter of 2009. Net interest margin for the first nine months of 2009 was 3.80%, down from 3.94% for the first nine months of 2008. The decrease in net interest margin from the third quarter of 2008 was primarily due to declines in yields on interest-earning assets, resulting from lower market interest rates, the effect of higher balances of non-accrual loans and leases and loan modifications and investments in lower yielding debentures, partially offset by declines in rates on average deposits. The increase in net interest margin from the second quarter of 2009 was primarily due to reductions in rates paid on savings and certificates of deposit, partially offset by the effects of higher balances of non-accrual loans and leases and loan modifications and lower average yields on the leasing and equipment finance portfolio.
Achieving net interest income growth over time is primarily dependent on TCF's ability to generate higher-yielding assets and lower-cost deposits. While interest rates and consumer preferences continue to change over time, TCF is currently liability sensitive as measured by its interest rate gap (the difference between interest-earning assets and interest-bearing liabilities maturing, repricing, or prepaying during the next twelve months). Being liability sensitive generally means that TCF's net interest income is subject to compression in rising interest rate environments. However, since TCF is primarily deposit funded, the degree is controlled by TCF partially based on how its competitors price comparable products. See "Consolidated Financial Condition Analysis - Deposits" and "Quantitative and Qualitative Disclosures about Market Risk" for further discussion on TCF's interest-rate risk position.
The following table summarizes TCF's average balances, interest, dividends and yields and rates on major categories of TCF's interest-earning assets and interest-bearing liabilities for the three months ended September 30, 2009 and 2008.
Three Months Ended September 30,
2009 2008
Average Average
Yields Yields
Average and Average and
(Dollars in thousands) Balance Interest (1) Rates (2) Balance Interest (1) Rates (2)
Assets:
Investments and other $ 389,583 $ 1,217 1.24 % $ 157,612 $ 1,644 4.16 %
U.S. Government
sponsored entities:
Mortgage-backed
securities 1,432,670 17,185 4.80 2,157,047 28,542 5.29
Debentures 600,098 3,283 2.19 - - -
Other securities 489 6 4.91 3,840 35 3.64
Total securities
available for sale (3) 2,033,257 20,474 4.03 2,160,887 28,577 5.29
Education loans held
for sale - - - 12,516 123 3.91
Loans and leases:
Consumer real estate:
Fixed-rate 5,394,711 86,440 6.36 5,550,124 93,490 6.70
Variable-rate (4) 1,873,913 27,026 5.72 1,758,458 27,375 6.19
Consumer - other 35,016 754 8.55 45,939 963 8.34
Total consumer real
estate
and other 7,303,640 114,220 6.21 7,354,521 121,828 6.59
Commercial real estate:
Fixed- and
adjustable-rate 2,645,261 40,233 6.03 2,181,838 33,598 6.11
Variable-rate (4) 548,425 5,744 4.16 594,992 7,440 4.97
Total commercial real
estate 3,193,686 45,977 5.71 2,776,830 41,038 5.88
Commercial business:
Fixed- and
adjustable-rate 166,008 2,378 5.68 167,079 2,363 5.63
Variable-rate (4) 311,033 2,879 3.67 377,747 4,363 4.59
Total commercial
business 477,041 5,257 4.37 544,826 6,726 4.91
Leasing and equipment
finance 2,811,165 47,625 6.78 2,300,429 41,059 7.14
Inventory finance 185,914 4,228 9.10 - - -
Total loans and leases
(5) 13,971,446 217,307 6.18 12,976,606 210,651 6.47
Total interest-earning
assets 16,394,286 238,998 5.80 15,307,621 240,995 6.27
Other assets (6) 1,132,239 1,103,938
Total assets $ 17,526,525 $ 16,411,559
Liabilities and Equity:
Non-interest bearing
deposits:
Retail $ 1,380,591 $ 1,409,855
Small business 591,451 597,894
Commercial and
custodial 277,135 253,900
Total non-interest
bearing deposits 2,249,177 2,261,649
Interest-bearing
deposits:
Checking 1,800,583 1,770 .39 1,837,540 2,478 .54
Savings 5,071,509 13,663 1.07 2,791,559 10,157 1.45
Money market 723,098 1,638 .90 629,905 2,310 1.46
Subtotal 7,595,190 17,071 .89 5,259,004 14,945 1.13
Certificates of deposit 1,757,884 10,442 2.36 2,469,327 18,785 3.02
Total interest-bearing
deposits 9,353,074 27,513 1.17 7,728,331 33,730 1.74
Total deposits 11,602,251 27,513 .94 9,989,980 33,730 1.34
Borrowings:
Short-term borrowings 25,267 14 .22 429,861 2,301 2.13
Long-term borrowings 4,306,009 49,982 4.61 4,567,706 52,799 4.60
Total borrowings 4,331,276 49,996 4.58 4,997,567 55,100 4.39
Total interest-bearing
liabilities 13,684,350 77,509 2.25 12,725,898 88,830 2.77
Total deposits and
borrowings 15,933,527 77,509 1.93 14,987,547 88,830 2.36
Other liabilities 435,215 339,304
Total liabilities 16,368,742 15,326,851
Total TCF Financial
Corp. stockholders'
equity 1,157,509 1,084,708
Non-controlling
interest in
subsidiaries 274 -
Total equity 1,157,783 1,084,708
Total liabilities and
equity $ 17,526,525 $ 16,411,559
Net interest income and
margin $ 161,489 3.92 % $ 152,165 3.97 %
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(1) Tax-exempt income was not significant and thus yields on interest-earning assets and net interest margin have not been presented on a tax equivalent basis. Tax-exempt income of $347,000 and $329,000 was recognized during the three months ended September 30, 2009 and 2008, respectively.
(2) Annualized.
(3) Average balances and yields of securities available for sale are based upon the historical amortized cost.
(4) Certain variable-rate loans have contractual interest rate floors.
(5) Average balances of loans and leases includes non-accrual loans and leases, and are presented net of unearned income.
(6) Includes operating leases.
The following table summarizes TCF's average balances, interest, dividends and yields and rates on major categories of TCF's interest-earning assets and interest-bearing liabilities for the nine months ended September 30, 2009 and 2008.
Nine Months Ended September 30,
2009 2008
Average Average
Yields Yields
Average and Average and
(Dollars in thousands) Balance Interest (1) Rates (2) Balance Interest (1) Rates (2)
Assets:
Investments and other $ 442,428 $ 3,210 .97 % $ 152,232 $ 4,713 4.13 %
U.S. Government sponsored
entities:
Mortgage-backed securities 1,695,377 63,195 4.97 2,146,185 85,299 5.30
Debentures 381,022 6,177 2.16 - - -
Other securities 497 20 5.37 15,938 415 3.48
Total securities available
for sale (3) 2,076,896 69,392 4.45 2,162,123 85,714 5.29
Education loans held for
sale - - - 116,754 5,331 6.10
Loans and leases:
Consumer real estate:
Fixed-rate 5,441,462 263,858 6.48 5,544,173 280,546 6.76
Variable-rate (4) 1,844,578 79,807 5.78 1,688,362 82,071 6.49
Consumer - other 36,921 2,357 8.54 45,481 2,937 8.63
Total consumer real estate
and other 7,322,961 346,022 6.32 7,278,016 365,554 6.71
Commercial real estate:
Fixed- and adjustable-rate 2,529,735 114,404 6.05 2,073,784 96,710 6.23
Variable-rate (4) 571,724 17,093 4.00 593,164 23,654 5.33
Total commercial real
estate 3,101,459 131,497 5.67 2,666,948 120,364 6.03
Commercial business:
Fixed- and adjustable-rate 171,450 7,392 5.76 167,502 7,551 6.02
Variable-rate (4) 315,230 7,798 3.31 371,846 14,229 5.11
Total commercial business 486,680 15,190 4.17 539,348 21,780 5.39
Leasing and equipment
finance 2,751,935 142,063 6.88 2,223,811 123,137 7.38
Inventory finance 111,479 7,312 8.75 - - -
Total loans and leases (5) 13,774,514 642,084 6.23 12,708,123 630,835 6.63
Total interest-earning
assets 16,293,838 714,686 5.86 15,139,232 726,593 6.41
Other assets (6) 1,144,931 1,167,973
Total assets $ 17,438,769 $ 16,307,205
Liabilities and Equity:
Non-interest bearing
deposits:
Retail $ 1,418,244 $ 1,429,752
Small business 575,558 580,248
Commercial and custodial 255,066 231,184
Total non-interest bearing
deposits 2,248,868 2,241,184
Interest-bearing deposits:
Checking 1,780,380 6,407 .48 1,855,963 9,998 .72
Savings 4,569,882 46,072 1.35 2,800,120 35,599 1.70
Money market 686,830 5,718 1.11 609,629 7,474 1.64
Subtotal 7,037,092 58,197 1.11 5,265,712 53,071 1.35
Certificates of deposit 2,100,342 42,745 2.72 2,480,262 66,341 3.57
Total interest-bearing
deposits 9,137,434 100,942 1.48 7,745,974 119,412 2.06
Total deposits 11,386,302 100,942 1.19 9,987,158 119,412 1.60
Borrowings:
Short-term borrowings 32,739 132 .54 397,514 7,888 2.65
Long-term borrowings 4,326,634 150,247 4.64 4,467,752 152,737 4.57
Total borrowings 4,359,373 150,379 4.61 4,865,266 160,625 4.41
Total interest-bearing
liabilities 13,496,807 251,321 2.49 12,611,240 280,037 2.97
Total deposits and
borrowings 15,745,675 251,321 2.13 14,852,424 280,037 2.52
Other liabilities 406,271 356,031
Total liabilities 16,151,946 15,208,455
Total TCF Financial Corp.
stockholders' equity 1,286,731 1,098,750
Non-controlling interest
in subsidiaries 92 -
Total equity 1,286,823 1,098,750
Total liabilities and
equity $ 17,438,769 $ 16,307,205
Net interest income and
margin $ 463,365 3.80 % $ 446,556 3.94 %
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(1) Tax-exempt income was not significant and thus yields on interest-earning assets and net interest margin have not been presented on a tax equivalent basis. Tax-exempt income of $1,020,000 and $1,322,000 was recognized during the nine months ended September 30, 2009 and 2008, respectively.
(2) Annualized.
(3) Average balances and yields of securities available for sale are based upon the historical amortized cost.
(4) Certain variable-rate loans have contractual interest rate floors.
(5) Average balances of loans and leases includes non-accrual loans and leases, and are presented net of unearned income.
(6) Includes operating leases.
Consolidated Provision for Credit Losses . . . |
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