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| TCB > SEC Filings for TCB > Form 10-K on 22-Feb-2013 | All Recent SEC Filings |
22-Feb-2013
Annual Report
Table of Contents Page Overview 20 Results of Operations 21 Performance Summary 21 Reportable Segment Results 21 Consolidated Income Statement Analysis 22 Net Interest Income 22 Provision for Credit Losses 26 Non-Interest Income 27 Non-Interest Expense 28 Income Taxes 29 Consolidated Financial Condition Analysis 29 Securities Available for Sale 29 Loans and Leases 30 Credit Quality 33 Other Real Estate Owned and Repossessed and Returned Assets 42 Liquidity Management 42 Deposits 43 Borrowings 43 Contractual Obligations and Commitments 44 Capital Resources 45 Critical Accounting Policies 46 Recent Accounting Pronouncements 47 Legislative, Legal and Regulatory Developments 47 Forward-Looking Information 47
Management's discussion and analysis of the consolidated financial condition and results of operations of TCF Financial Corporation should be read in conjunction with the Consolidated Financial Statements in Item 8 and Selected Financial Data in Item 6.
Overview
TCF Financial Corporation, a Delaware corporation ("TCF" or the "Company), is a national bank holding company based in Wayzata, Minnesota. Unless otherwise indicated, references herein to "TCF" include its direct and indirect subsidiaries. Its principal subsidiary, TCF National Bank ("TCF Bank"), is headquartered in South Dakota. At December 31, 2012, TCF had 428 branches in Illinois, Minnesota, Michigan, Colorado, Wisconsin, Arizona, Indiana and South Dakota (TCF's primary banking markets).
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 the largest consumer segments in the market. 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. The Company's growth strategies include organic growth in existing businesses, 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. In 2012, TCF continued to focus on asset growth in its national lending businesses as it focused on making these businesses a more substantial part of its loan and lease portfolio. Additionally, TCF reintroduced free checking, bringing an increase in new account production and a decrease in account attrition.
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 61.4% and 61.2% of TCF's total revenue in 2012 and 2011, respectively. 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 "Item 1A. Risk Factors" and "Item 7A. Quantitative and Qualitative Disclosures about Market Risk" for further discussion.
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 the slowing of the economy, changing customer behavior and the impact of the implementation of new regulations. Providing a wide range of retail banking services is an integral component of TCF's business philosophy and a major strategy for generating non-interest income. Key drivers of bank fees and service charges are the number of deposit accounts and related transaction activity.
In 2011, TCF introduced a new anchor checking account that replaced its free checking product. This new anchor checking account required a monthly maintenance fee if specific requirements were not met by the customer. After listening to customer feedback, in June 2012, TCF introduced TCF Free CheckingSM to focus on quality customer relationships. TCF Free Checking has no monthly maintenance fee and no minimum balance requirement.
TCF continues to be the 15th largest issuer of VisaŽ consumer debit cards in the
United States, based on payment volumes for the three months ended September 30,
2012, as provided by Visa. TCF earns interchange revenue from customer card
transactions paid primarily by merchants, not TCF's customers. In October 2011,
Section 1075 (commonly known as the "Durbin Amendment") of the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") went
into effect, which reduced the amount of interchange revenue recognized on
transaction activity. For 2012, the Durbin Amendment was in effect for the full
year.
Over the years, TCF has diversified its revenue sources through the growth of its national lending businesses. These businesses generate a growing portion of fee revenue through leasing revenue, gain on sale of loans and other fees for value added services and products provided.
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 2012, 2011 and 2010 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 reported diluted loss per common share of $1.37 for 2012, compared with diluted earnings per common share of 71 cents for 2011 and $1.08 for 2010. TCF reported a net loss of $218.5 million for the year ended December 31, 2012, compared with net income of $109.4 million and $150.9 million for the years ended December 31, 2011 and 2010, respectively. TCF's 2012 net loss 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.
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 resulted in a $119.9 million reduction to the cost of borrowings, partially offset by a $47.1 million reduction of interest income on lower levels of mortgage-backed securities for 2012. TCF's long-term, fixed-rate debt was originated at market rates that prevailed prior to the 2008 economic crisis and 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.
The return on average assets was a negative 1.14% in 2012, compared with positive returns on average assets of .61% in 2011 and .85% in 2010. The return on common equity was a negative 13.33% in 2012, compared with a positive return of 6.32% in 2011 and 10.67% in 2010. The effective income tax rate for 2012 was 39.1%, compared with 36% in 2011 and 36.9% in 2010.
Reportable Segment Results
Lending TCF's lending strategy is to originate high credit quality, primarily secured, loans and leases. The lending portfolio consists of retail lending, commercial banking and the national lending businesses. The national lending businesses are comprised of leasing and equipment finance, inventory finance and auto finance. Lending's consistent disciplined portfolio growth generates earning assets and, along with its fee generating capabilities, produces a significant portion of the Company's revenue. Lending generated net income attributable to common stockholders of $30.9 million for 2012, compared with net income of $31.5 million in 2011.
Lending net interest income for 2012 was $524.4 million, up 11.5% from $470.2 million for 2011. This increase was primarily due to an increase in the average balances in the national lending businesses, partially offset by yield compression due to the continued low interest rate environment.
Lending provision for credit losses totaled $245.4 million in 2012, up 23.8% from $198.1 million for 2011. The increase was primarily due to the implementation of clarifying regulatory guidance on consumer loans and increased provision in the commercial portfolio as TCF aggressively addressed credit issues. See Item 7. Management's Discussion and Analysis - "Consolidated Income Statement Analysis - Provision for Credit Losses" section for further discussion.
Lending non-interest income totaled $138.5 million in 2012, up 36.8% from $101.2 million for 2011, primarily due to gains on sales of auto finance and consumer real estate loans. See Item 7. Management's Discussion and Analysis - "Consolidated Income Statement Analysis - Non-Interest Income" for further discussion.
Lending non-interest expense totaled $367.2 million for 2012, up 15.3% from $318.4 million for 2011. The increase was primarily due to the full year impact of the acquisition and ramp-up of the recently acquired auto finance business as well as increased staffing levels to support the new Bombardier Recreational Products, Inc. ("BRP") program in inventory finance.
Funding TCF's funding is primarily derived from branch banking, consumer and small business deposits, and treasury investments. With a renewed focus on quality customer relationships through the introduction of TCF Free Checking, deposits provide a source of low-cost funds and fee income. Borrowings may be used to offset reductions in deposits or to support expanded lending activities. Funding reported a net loss of $239.1 million for 2012, compared with net income of $77.5 million in 2011. The net loss in 2012 was due to the balance sheet repositioning completed in the first quarter of 2012.
Funding net interest income for 2012 was $258.3 million, up 11.5% from $231.6 million in 2011 primarily related to the reduced costs of borrowings resulting from the balance sheet repositioning, partially offset by a reduction of interest income as a result of lower levels of mortgage backed securities.
Funding non-interest income totaled $338.9 million in 2012, down 6% from $360.6 million in 2011. The decrease was primarily due to lower banking fees and revenues related to changes in our deposit product fee structure and the full year effect of the new regulations limiting interchange fees associated with our debit card transactions.
Funding non-interest expense totaled $969.5 million in 2012, up from $463.8 million in 2011. The increase was primarily due to the loss on termination of debt of $550.7 million in the first quarter of 2012 in connection with the balance sheet repositioning.
Support Services TCF's Support Services segment consists of the holding company and corporate functions that provide data processing, bank operations and other professional services to the operating segments. Support Services reported a net loss attributable to common stockholders of $9.9 million and $4.6 million for 2012 and 2011, respectively.
Consolidated Income Statement Analysis
Net Interest Income Net interest income, the difference between interest earned on loans and leases, investments and other interest-earning assets (interest income), and interest paid on deposits and borrowings (interest expense), represented 61.4% of TCF's total revenue in 2012, 61.2% in 2011 and 56.5% in 2010. Net interest income divided by average interest-earning assets is referred to as the net interest margin, expressed as a percentage. Net interest income and net interest margin are affected by changes in prevailing short- and long-term interest rates, loan and deposit pricing strategies and competitive conditions, the volume and the mix of interest-earning assets and interest-bearing liabilities, the level of non-performing assets, and the impact of modified loans and leases.
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.
Year Ended Year Ended
December 31, 2012 December 31, 2011 Change
Yields Yields Yields and
Average and Average and Average Rates
(Dollars in thousands) Balance Interest Rates Balance Interest Rates Balance Interest (bps)
Assets:
Investments and other $ 574,422 $ 10,404 1.81 % $ 820,981 $ 7,836 .95 % $ (246,559 ) $ 2,568 86
U.S. Government sponsored
entities:
Mortgage-backed
securities, fixed rate 1,055,868 35,143 3.33 2,198,188 85,138 3.87 (1,142,320 ) (49,995 ) (54 )
U.S. Treasury securities - - - 48,178 34 .07 (48,178 ) (34 ) (7 )
Other securities 180 7 3.70 329 16 4.86 (149 ) (9 ) (116 )
Total securities available
for sale (1) 1,056,048 35,150 3.33 2,246,695 85,188 3.79 (1,190,647 ) (50,038 ) (46 )
Loans and leases held for
sale 46,201 3,689 7.98 1,215 131 10.78 44,986 3,558 (280 )
Loans and leases:
Consumer real estate:
Fixed-rate 4,254,039 252,233 5.93 4,627,047 281,427 6.08 (373,008 ) (29,194 ) (15 )
Variable-rate 2,503,473 126,158 5.04 2,386,234 122,532 5.13 117,239 3,626 (9 )
Total consumer real estate 6,757,512 378,391 5.60 7,013,281 403,959 5.76 (255,769 ) (25,568 ) (16 )
Commercial:
Fixed- and adjustable-rate 2,691,004 149,793 5.57 2,854,327 164,368 5.76 (163,323 ) (14,575 ) (19 )
Variable-rate 794,214 30,653 3.86 710,758 30,742 4.33 83,456 (89 ) (47 )
Total commercial 3,485,218 180,446 5.18 3,565,085 195,110 5.47 (79,867 ) (14,664 ) (29 )
Leasing and equipment
finance 3,155,946 170,991 5.42 3,074,207 184,575 6.00 81,739 (13,584 ) (58 )
Inventory finance 1,434,643 88,934 6.20 856,271 61,583 7.19 578,372 27,351 (99 )
Auto finance 296,083 17,949 6.06 363 13 3.31 295,720 17,936 275
Other 16,549 1,332 8.05 19,324 1,702 8.81 (2,775 ) (370 ) (76 )
Total loans and leases (2) 15,145,951 838,043 5.53 14,528,531 846,942 5.83 617,420 (8,899 ) (30 )
Total interest-earning
assets 16,822,622 887,286 5.27 17,597,422 940,097 5.34 (774,800 ) (52,811 ) (7 )
Other assets(3) 1,233,042 1,194,550 38,492
Total assets $18,055,664 $18,791,972 $ (736,308 )
Liabilities and Equity:
Non-interest bearing
deposits:
Retail $ 1,311,561 $ 1,414,659 $ (103,098 )
Small business 738,949 698,903 40,046
Commercial and custodial 317,432 291,986 25,446
Total non-interest bearing
deposits 2,367,942 2,405,548 (37,606 )
Interest-bearing deposits:
Checking 2,256,237 3,105 .14 2,114,098 4,451 .21 142,139 (1,346 ) (7 )
Savings 6,037,939 19,834 .33 5,671,889 28,942 .51 366,050 (9,108 ) (18 )
Money market 770,104 2,859 .37 658,693 2,951 .45 111,411 (92 ) (8 )
Subtotal 9,064,280 25,798 .28 8,444,680 36,344 .43 619,600 (10,546 ) (15 )
Certificates of deposit 1,727,859 15,189 .88 1,103,231 8,764 .79 624,628 6,425 9
Total interest-bearing
deposits 10,792,139 40,987 .38 9,547,911 45,108 .47 1,244,228 (4,121 ) (9 )
Total deposits 13,160,081 40,987 .31 11,953,459 45,108 .38 1,206,622 (4,121 ) (7 )
Borrowings:
Short-term borrowings 312,417 937 .30 49,442 171 .35 262,975 766 (5 )
Long-term borrowings 2,426,655 62,680 2.58 4,500,564 192,984 4.29 (2,073,909 ) (130,304 ) (171 )
Total borrowings 2,739,072 63,617 2.32 4,550,006 193,155 4.24 (1,810,934 ) (129,538 ) (192 )
Total interest-bearing
liabilities 13,531,211 104,604 .77 14,097,917 238,263 1.69 (566,706 ) (133,659 ) (92 )
Total deposits and
borrowings 15,899,153 104,604 .66 16,503,465 238,263 1.44 (604,312 ) (133,659 ) (78 )
Other liabilities 412,170 551,206 (139,036 )
Total liabilities 16,311,323 17,054,671 (743,348 )
Total TCF Financial Corp.
stockholders' equity 1,729,537 1,729,660 (123 )
Non-controlling interest
in subsidiaries 14,804 7,641 7,163
Total equity 1,744,341 1,737,301 7,040
Total liabilities and
equity $18,055,664 $18,791,972 $ (736,308 )
Net interest income and
margin $782,682 4.65 % $701,834 3.99 % $ 80,848 66
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(1) Average balances and yields of securities available for sale are based upon the historical amortized cost and exclude equity securities.
(2) Average balances of loans and leases include non-accrual loans and leases, and are presented net of unearned income.
(3) Includes operating leases.
Year Ended Year Ended
December 31, 2011 December 31, 2010 Change
Yields
Yields Yields and
Average and Average and Average Rates
(Dollars in thousands) Balance Interest Rates Balance Interest Rates Balance Interest (bps)
Assets:
Investments and other $ 820,981 $ 7,836 .95 % $ 337,279 $ 5,509 1.63 % $483,702 $ 2,327 (68 )
U.S. Government sponsored
entities:
Mortgage-backed securities,
fixed rate 2,198,188 85,138 3.87 1,817,413 80,332 4.42 380,775 4,806 (55 )
U.S. Treasury securities 48,178 34 .07 71,233 93 .13 (23,055 ) (59 ) (6 )
Other securities 329 16 4.86 454 20 4.41 (125 ) (4 ) 45
Total securities available for
sale (1) 2,246,695 85,188 3.79 1,889,100 80,445 4.26 357,595 4,743 (47 )
Loans and leases held for sale 1,215 131 10.78 - - - 1,215 131 1,078
Loans and leases:
Consumer real estate:
Fixed-rate 4,627,047 281,427 6.08 5,082,487 313,573 6.17 (455,440 ) (32,146 ) (9 )
Variable-rate 2,386,234 122,532 5.13 2,148,171 116,436 5.42 238,063 6,096 (29 )
Total consumer real estate 7,013,281 403,959 5.76 7,230,658 430,009 5.95 (217,377 ) (26,050 ) (19 )
Commercial:
Fixed- and adjustable-rate 2,854,327 164,368 5.76 2,956,699 176,018 5.95 (102,372 ) (11,650 ) (19 )
Variable-rate 710,758 30,742 4.33 730,325 30,604 4.19 (19,567 ) 138 14
Total commercial 3,565,085 195,110 5.47 3,687,024 206,622 5.60 (121,939 ) (11,512 ) (13 )
Leasing and equipment finance 3,074,207 184,575 6.00 3,056,006 196,570 6.43 18,201 (11,995 ) (43 )
Inventory finance 856,271 61,583 7.19 677,214 49,881 7.37 179,057 11,702 (18 )
Auto finance 363 13 3.31 - - - 363 13 331
Other 19,324 1,702 8.81 26,576 2,303 8.67 (7,252 ) (601 ) 14
Total loans and leases (2) 14,528,531 846,942 5.83 14,677,478 885,385 6.03 (148,947 ) (38,443 ) (20 )
Total interest-earning assets 17,597,422 940,097 5.34 16,903,857 971,339 5.75 693,565 (31,242 ) (41 )
Other assets(3) 1,194,550 1,286,683 (92,133 )
Total assets $18,791,972 $18,190,540 $601,432
Liabilities and Equity:
Non-interest bearing deposits:
Retail $ 1,414,659 $ 1,429,436 $ (14,777 )
Small business 698,903 641,412 57,491
Commercial and custodial 291,986 284,750 7,236
Total non-interest bearing
deposits 2,405,548 2,355,598 49,950
Interest-bearing deposits:
Checking 2,114,098 4,451 .21 2,071,990 6,466 .31 42,108 (2,015 ) (10 )
Savings 5,671,889 28,942 .51 5,410,681 40,023 .74 261,208 (11,081 ) (23 )
Money market 658,693 2,951 .45 656,691 4,532 .69 2,002 (1,581 ) (24 )
Subtotal 8,444,680 36,344 .43 8,139,362 51,021 .63 305,318 (14,677 ) (20 )
Certificates of deposit 1,103,231 8,764 .79 1,054,179 10,208 .97 49,052 (1,444 ) (18 )
Total interest-bearing deposits 9,547,911 45,108 .47 9,193,541 61,229 .67 354,370 (16,121 ) (20 )
Total deposits 11,953,459 45,108 .38 11,549,139 61,229 .53 404,320 (16,121 ) (15 )
Borrowings:
Short-term borrowings 49,442 171 .35 124,891 474 .38 (75,449 ) (303 ) (3 )
Long-term borrowings 4,500,564 192,984 4.29 4,580,786 208,972 4.56 (80,222 ) (15,988 ) (27 )
Total borrowings 4,550,006 193,155 4.24 4,705,677 209,446 4.45 (155,671 ) (16,291 ) (21 )
Total interest-bearing
liabilities 14,097,917 238,263 1.69 13,899,218 270,675 1.95 198,699 (32,412 ) (26 )
Total deposits and borrowings 16,503,465 238,263 1.44 16,254,816 270,675 1.66 248,649 (32,412 ) (22 )
Other liabilities 551,206 511,589 39,617
Total liabilities 17,054,671 16,766,405 288,266
Total TCF Financial Corp.
stockholders' equity 1,729,660 1,415,161 314,499
Non-controlling interest in
subsidiaries 7,641 8,974 (1,333 )
Total equity 1,737,301 1,424,135 313,166
Total liabilities and equity $18,791,972 $18,190,540 $601,432
Net interest income and margin $701,834 3.99 % $700,664 4.15 % $ 1,170 (16 )
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(1) Average balances and yields of securities available for sale are based upon the historical amortized cost and exclude equity securities.
(2) Average balances of loans and leases include non-accrual loans and leases, and are presented net of unearned income.
(3) Includes operating leases.
The following table presents the components of the changes in net interest income by volume and rate.
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