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TCB > SEC Filings for TCB > Form 10-Q on 30-Oct-2012All Recent SEC Filings

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Form 10-Q for TCF FINANCIAL CORP


30-Oct-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial

Condition and Results of Operations

OVERVIEW

TCF Financial Corporation ("TCF" or the "Company"), a Delaware corporation, is a bank holding company based in Wayzata, Minnesota. Its principal subsidiary, TCF National Bank ("TCF Bank"), is headquartered in South Dakota. TCF had 429 banking offices in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana, Arizona and South Dakota (TCF's primary banking markets) at September 30, 2012.

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 internet, mobile and telephone 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. TCF's growth strategies have included the development of new products and services, new branch expansion and acquisitions. 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 Lending and Funding. Lending includes retail lending, commercial banking, leasing and equipment finance, inventory finance and auto finance. Funding includes branch banking and treasury services. Treasury services includes the Company's investment and borrowing portfolios and management of capital, debt and market risks, including interest rate and liquidity risks.

TCF's lending strategy is to originate high credit quality, primarily secured, loans and leases. TCF's retail lending operation offers fixed- and variable-rate loans and lines of credit secured by residential real estate properties. Commercial loans are generally made on properties or to customers located within TCF's primary banking markets. The leasing and equipment finance businesses consist of TCF Equipment Finance, Inc., which delivers equipment finance solutions to businesses in select markets, and Winthrop Resources Corporation ("Winthrop"), which primarily leases 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. originates commercial variable-rate loans to businesses in the United States, Canada and Latin America which are secured by equipment under a floorplan arrangement and supported by repurchase agreements from original equipment manufacturers. In November 2011, TCF entered into the auto finance business with its acquisition of Gateway One Lending & Finance, LLC ("Gateway One"). Gateway One currently originates loans on new and used autos in 40 states, and services loans nationwide.

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 66.8% of TCF's total revenue, excluding gains on securities, for the nine months ended September 30, 2012. 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 Management Committee and through related interest-rate risk monitoring and management policies. See Part I, Item 3. Quantitative and Qualitative Disclosures about Market Risk, for further information.

Non-interest income is a significant source of revenue for TCF and an important factor in TCF's results of operations. Increasing fee and service charge revenue has been challenging as a result of economic conditions, changing customer behavior and the impact of the implementation of new regulation. Providing a wide range of retail banking services is an integral component of TCF's business philosophy and a major strategy for generating additional non-interest income. Key drivers of non-interest income are the fee structure, number of deposit accounts and related transaction activity.

The following portions of Management's Discussion and Analysis of Financial Condition and Results of Operations


("Management's Discussion and Analysis") focus in more detail on the results of operations for the three and nine months ended September 30, 2012 and 2011, and on information about TCF's balance sheet, loan and lease portfolio, liquidity, funding resources, capital and other matters.

RESULTS OF OPERATIONS

Performance Summary

TCF recorded net income of $9.3 million and a net loss of $242 million for the third quarter and first nine months of 2012, respectively, compared with net income of $32.3 million and $93 million for the same periods in 2011. TCF's net loss for the first nine months of 2012 included a net, after tax charge of $295.8 million, or $1.87 per common share, related to the repositioning of TCF's balance sheet completed in the first quarter of 2012. Net income for the third quarter and first nine months of 2012 included a net after-tax charge of $20.6 million, or 13 cents per common share, related to the implementation of clarifying regulatory guidance requiring loans subject to a borrower's discharge from personal liability following Chapter 7 bankruptcy, to be reported as non-accrual loans, and written down to the estimated collateral value, regardless of delinquency status. Of these loans, 93 percent were less than 60 days past due on their payments as of September 30, 2012. TCF's diluted earnings per common share was 6 cents for third quarter of 2012, and a loss of $1.52 for first nine months of 2012 compared with earnings per common share of 20 cents and 60 cents for the same periods in 2011.

On March 13, 2012, TCF announced the repositioning of its balance sheet by prepaying $3.6 billion of long-term debt and selling $1.9 billion of mortgage-backed securities, which it anticipated would increase net interest margin and reduce interest rate risk going forward. TCF's current asset growth strategy and the outlook of the interest rate environment made it prudent for TCF to develop and execute a comprehensive balance sheet repositioning transaction. A reliance on longer term, fixed-rate debt was appropriate for TCF's previous strategy of growth in real estate assets with longer durations, such as residential and commercial real estate loans and mortgage-backed securities. Given TCF's current strategic focus on growth in nationally-oriented lending businesses with shorter loan durations and/or variable interest rates, a more flexible funding structure is expected to significantly increase TCF's ability to maximize net interest income and net interest margin going forward.

TCF's long-term, fixed-rate debt was originated at market rates prior to the 2008 economic crisis. At the time of the balance sheet repositioning, the interest rates on these borrowings were significantly above current market rates. In addition, in late January 2012, the Federal Reserve forecasted interest rates to remain at historically low levels through at least 2014. As a result, this action better positioned TCF for the current interest rate outlook while reducing interest rate risk tied to longer duration, fixed-rate mortgage-backed securities.

Return on average assets was .30% and negative 1.73% for the third quarter and first nine months of 2012, respectively, compared with .71% and .69% for the same periods in 2011. Return on average common equity was 2.36% and negative 19.50% for the third quarter and first nine months of 2012, respectively, compared with 7.12% and 7.33% for the same periods in 2011.

Operating Segment Results

The financial results of TCF's operating segments are located in Note 17 of the Notes to Consolidated Financial Statements included in Part 1, Item 1. Financial Statements.

Lending reported a net loss of $11.7 million and net income of $6.9 million for the third quarter and first nine months of 2012, respectively, compared with net income of $6.6 million and $29.6 million for the same periods in 2011. Lending net interest income for the third quarter and first nine months of 2012 was $133 million and $384.8 million, respectively, compared with $118.6 million and $353.1 million for the same 2011 periods. The increase in net interest income for both periods was primarily due to loan growth in the inventory finance and auto finance portfolios.

Lending's provision for credit losses totaled $95.3 million and $198 million for the third quarter and first nine months of 2012, respectively, compared with $51.2 million and $140.4 million for the same 2011 periods. The increase in provision


from the third quarter and the first nine months of 2011 was primarily due to the implementation of clarifying regulatory guidance requiring loans subject to a borrowers discharge from personal liability following chapter 7 bankruptcy, to be reported as non-accrual loans and written down to the estimated collateral value regardless of delinquency status. See Results of Operations - Provision for Credit Losses in this Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

Lending non-interest income totaled $37.7 million and $100.2 million for the third quarter and first nine months of 2012, respectively, compared with $24.4 million and $77.7 million for the same 2011 periods. The increase for both periods was primarily due to gains on sales of auto finance loans and increased auto loan servicing income. Lending non-interest expense totaled $91.2 million and $268.9 million for the third quarter and first nine months of 2012, respectively, compared with $79.6 million and $238.6 million for the same 2011 periods. The increase from the third quarter and first nine months of 2011 was primarily due to the newly acquired auto finance business as well as increased headcount related to achieving staffing levels to support the Bombardier Recreational Products, Inc. ("BRP") program in Inventory Finance.

Funding reported net income of $31 million and a net loss of $249.7 million for the third quarter and first nine months of 2012, respectively, compared with net income of $26.3 million and $64.7 million for the same periods in 2011. The net loss for the first nine months of 2012 was due to the balance sheet repositioning completed in the first quarter of 2012. Funding net interest income totaled $68.2 million and $196.1 million for the third quarter and first nine months of 2012, respectively, compared with $58.1 million and $174.7 million for the same periods in 2011.

Funding non-interest income totaled $74.6 million and $277.1 million for the third quarter and first nine months of 2012, respectively, compared with $97.6 million and $281.6 million for the same periods in 2011. The decrease from third quarter of 2011 was primarily due to lower transaction volume related to a lower account base driven by our deposit product fee structure changes. The decrease from first nine months of 2011 resulted from the decline in fee revenue due to deposit product fee structure changes offset by a gain on the sales of mortgage backed securities. Non-interest expense totaled $92.7 million and $865.1 million for the third quarter and first nine months of 2012, respectively, compared with $112.3 and $349.2 million for the same periods in 2011. The decrease from third quarter of 2011 was primarily due to decreased deposit account premiums associated with the reintroduction of the free checking product. The increase from the first nine months of 2011 was primarily due to the loss on termination of debt in the first quarter of 2012 in connection with the balance sheet repositioning.

Consolidated Net Interest Income

Net interest income for the third quarter of 2012 increased $24.5 million, or 13.9%, compared with the third quarter of 2011. This increase was primarily due to higher average balances of inventory finance loans and auto finance loans during the third quarter of 2012 as a result of the newly acquired auto finance business and BRP program and the lower cost of deposits. Offsetting the increase were lower yields on leasing and equipment finance loans and leases and consumer and commercial real estate as the portfolios rebalance to the current rate environment. Net interest income for the third quarter of 2012 increased $2.3 million, or 1.2%, compared with the second quarter of 2012. The increase in net interest income from the second quarter of 2012 was primarily due to a higher average balance of auto finance loans. This was partially offset by a lower average balance of inventory finance loans. Additionally interest expense decreased due to the redemption of $115 million of Trust Preferred securities partially offset by the $110 million issuance of subordinated debt plus one additional day in the third quarter of 2012 versus second quarter of 2012, and higher deposit expenses due to product mix primarily in certificates of deposit. Net interest income for the first nine months of 2012 totaled $579 million, up $52.7 million, or 10%, from $526.3 million from the same period in 2011. This increase was primarily due to the balance sheet repositioning completed in the first quarter of 2012, which resulted in an $86.3 million reduction to the cost of borrowings, partially offset by a $29.9 million reduction of interest income on mortgage-backed securities. Additionally, higher average balances of inventory finance and auto finance loans and lower average cost of deposits were offset by decreased income from consumer and commercial real estate loans due to a change in the consumer real estate portfolio mix and lower average balances of commercial real estate loans.

Net interest margin in the third quarter of 2012 was 4.85%, compared with 3.96% in the third quarter of 2011. This increase was primarily due to a lower average cost of borrowings due to the effects of the balance sheet repositioning completed in March 2012, which increased net interest margin by 92 basis points, as well as increases related to the auto finance and inventory finance portfolios. These increases were partially offset by a decrease in yields in the consumer,


commercial, and leasing and equipment finance portfolios as a result of the lower interest rate environment. Net interest margin decreased by 1 basis point in the third quarter from 4.86% in second quarter of 2012. Net interest margin for the first nine months of 2012 was 4.61%, compared with 4.01% from the same 2011 period. See Consolidated Financial Condition Analysis - Borrowings and Liquidity in this Management's Discussion and Analysis for further discussion.

Achieving net interest income growth over time depends primarily on TCF's ability to generate growth in higher-yielding assets and low or no interest-cost deposits. While interest rates and consumer preferences continue to change over time, TCF is currently asset 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). A positive interest rate gap position exists when the amount of interest-earning assets maturing or re-pricing exceeds the amount of interest-bearing liabilities maturing or re-pricing, including assumed prepayments, within a particular time period. Since TCF is primarily deposit funded, the degree of the impact on net interest income is somewhat controlled by TCF, but is impacted by how its competitors price comparable products.

See Consolidated Financial Condition Analysis - Deposits in this Management's Discussion and Analysis and Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk for further discussion on TCF's interest rate risk position.

The following tables summarize TCF's average balances, interest, dividends and yields and rates on major categories of TCF's interest-earning assets and interest-bearing liabilities on a fully tax equivalent basis.


                                                     Three Months Ended September 30,
                                              2012                                     2011
                                Average                 Yields and       Average                  Yields and
(Dollars in thousands)          Balance     Interest    Rates (1)        Balance      Interest    Rates (1)
Assets:
Investments and other        $    479,083   $   2,508        2.09  %   $    958,996   $   1,997         .83  %
U.S. Government sponsored
entities:
Mortgage-backed securities,
fixed rate                        710,835       5,605        3.15         2,339,862      22,556        3.86
U.S. Treasury securities                -           -           -            10,761           1         .04
Other securities                      154           2        3.32               340           4        4.68
Total securities available
for sale (2)                      710,989       5,607        3.15         2,350,963      22,561        3.84
Loans and leases held for
sale                               80,549       1,597        7.89                 -           -           -
Loans and leases:
Consumer real estate:
Fixed-rate                      4,197,903      62,679        5.94         4,592,855      70,087        6.06
Variable-rate                   2,531,351      32,071        5.04         2,392,966      30,845        5.11
Total consumer real estate      6,729,254      94,750        5.60         6,985,821     100,932        5.73
Commercial:
Fixed- and adjustable-rate      2,682,193      37,565        5.57         2,853,117      41,150        5.72
Variable-rate                     855,918       8,116        3.77           711,081       7,759        4.33
Total commercial                3,538,111      45,681        5.14         3,564,198      48,909        5.44
Leasing and equipment
finance                         3,164,592      42,152        5.33         3,066,208      46,072        6.01
Inventory finance               1,440,298      22,395        6.19           826,198      15,151        7.28
Auto finance                      367,271       5,515        5.97                 -           -           -
Other                              16,280         320        7.83            18,183         387        8.44
Total loans and leases (3)     15,255,806     210,813        5.50        14,460,608     211,451        5.81
Total interest-earning
assets                         16,526,427     220,525        5.32        17,770,567     236,009        5.28
Other assets                    1,190,094                       -         1,222,700                       -
Total assets                 $ 17,716,521                       -      $ 18,993,267                       -
Liabilities and Equity:
Non-interest bearing
deposits:
Retail                       $  1,275,722                       -      $  1,396,857                       -
Small business                    746,511                       -           704,272                       -
Commercial and custodial          324,739                       -           294,253                       -
Total non-interest bearing
deposits                        2,346,972                       -         2,395,382                       -
Interest-bearing deposits:
Checking                        2,255,561         698         .12         2,103,184       1,057         .20
Savings                         6,153,079       4,720         .31         5,789,188       7,912         .54
Money market                      848,899         816         .38           650,598         692         .42
Subtotal                        9,257,539       6,234         .27         8,542,970       9,661         .45
Certificates of deposit         1,953,208       4,523         .92         1,114,934       2,222         .79
Total interest-bearing
deposits                       11,210,747      10,757         .38         9,657,904      11,883         .49
Total deposits                 13,557,719      10,757         .32        12,053,286      11,883         .39
Borrowings:
Short-term borrowings              65,531          81         .49            43,073          31         .29
Long-term borrowings            1,985,094       8,455        1.70         4,403,724      47,465        4.28
Total borrowings                2,050,625       8,536        1.66         4,446,797      47,496        4.24
Total interest-bearing
liabilities                    13,261,372      19,293         .58        14,104,701      59,379        1.67
Total deposits and
borrowings                     15,608,344      19,293         .49        16,500,083      59,379        1.43
Other liabilities                 343,336                       -           672,944                   -
Total liabilities              15,951,680                       -        17,173,027                   -
Total TCF Financial Corp.
stockholders' equity            1,749,951                       -         1,813,384                   -
Non-controlling interest in
subsidiaries                       14,890                       -             6,856                   -
Total equity                    1,764,841                                 1,820,240
Total liabilities and equity $ 17,716,521                              $ 18,993,267
Net interest income and
margin                                      $ 201,232        4.85  %                  $ 176,630        3.96  %

(1) Annualized.
(2) Average balances and yields of securities available for sale are based upon the historical amortized cost and excludes equity securities.
(3) Average balances of loans and leases include non-accrual loans and leases, and are presented net of unearned income.


                                                     Nine Months Ended September 30,
                                              2012                                     2011
                                Average                 Yields and       Average                 Yields and
(Dollars in thousands)          Balance     Interest    Rates (1)        Balance     Interest    Rates (1)
Assets:
Investments and other        $    551,653   $   7,550        1.83  % $     744,934   $   5,634        1.01  %
Mortgage-backed securities,
fixed rate                      1,175,514      30,529        3.46        2,136,516      62,581        3.91
U.S. Treasury securities                -           -           -           64,414          34         .07
Other securities                      203           6        3.92              360          14        5.20
Total securities available
for sale (2)                    1,175,717      30,535        3.46        2,201,290      62,629        3.79
Loans and leases held for
sale                               43,871       2,621        7.98                -           -
Loans and leases:
Fixed-rate                      4,335,073     192,263        5.92        4,660,371     212,508        6.10
Variable-rate                   2,453,953      92,341        5.03        2,379,947      91,691        5.15
Total consumer real estate      6,789,026     284,604        5.60        7,040,318     304,199        5.78
Commercial:
Fixed- and adjustable-rate      2,716,583     113,017        5.56        2,880,986     124,634        5.78
Variable-rate                     779,531      23,179        3.97          713,898      23,173        4.34
Total commercial                3,496,114     136,196        5.20        3,594,884     147,807        5.50
Leasing and equipment
finance                         3,146,345     129,261        5.48        3,084,613     139,813        6.04
Inventory finance               1,392,828      64,811        6.22          889,709      47,816        7.19
Auto finance                      226,092      10,933        6.46                -           -           -
Other                              17,166       1,025        7.97           19,788       1,300        8.78
Total loans and leases (3)     15,067,571     626,830        5.55       14,629,312     640,935        5.85
Total interest-earning
assets                         16,838,812     667,536        5.29       17,575,536     709,198        5.39
Other assets                    1,256,931           -           -        1,176,606           -           -
Total assets                 $ 18,095,743                               18,752,142
Liabilities and Equity:
Non-interest bearing
deposits:
Retail                       $  1,317,448                            $   1,443,033
Small business                    726,732                                  685,435
Commercial and custodial          313,240                                  288,202
Total non-interest bearing
deposits                        2,357,420                                2,416,670
Interest-bearing deposits:
Checking                        2,258,843       2,482         .15        2,120,083       3,633         .23
Savings                         6,022,751      15,323         .34        5,608,783      22,688         .54
Money market                      753,486       2,144         .38          657,570       2,331         .47
Subtotal                        9,035,080      19,949         .29        8,386,436      28,652         .46
Certificates of deposit         1,567,258      10,067         .86        1,100,029       6,665         .81
Total interest-bearing
deposits                       10,602,338      30,016         .38        9,486,465      35,317         .50
Total deposits                 12,959,758      30,016         .31       11,903,135      35,317         .40
Borrowings:
Short-term borrowings             401,305         945         .31           53,619         144         .36
Long-term borrowings            2,593,917      55,679        2.86        4,538,823     145,929        4.30
Total borrowings                2,995,222      56,624        2.52        4,592,442     146,073        4.25
Total interest-bearing
liabilities                    13,597,560      86,640         .85       14,078,907     181,390        1.72
Total deposits and
borrowings                     15,954,980      86,640         .72       16,495,577     181,390        1.47
Other liabilities                 411,114           -           -          558,119           -       -
Total liabilities              16,366,094           -           -       17,053,696           -       -
Total TCF Financial Corp.
stockholders' equity            1,714,238           -           -        1,689,695           -       -
Non-controlling interest in
subsidiaries                       15,411           -           -            8,751           -       -
Total equity                    1,729,649                                1,698,446
Total liabilities and equity $ 18,095,743                               18,752,142
Net interest income and
margin                                      $ 580,896        4.61  %                 $ 527,808        4.01  %

(1) Annualized.
(2) Average balances and yields of securities available for sale are based upon the historical amortized cost and excludes equity securities.
(3) Average balances of loans and leases include non-accrual loans and leases, and are presented net of unearned income.


Provision for Credit Losses



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