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TCB > SEC Filings for TCB > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for TCF FINANCIAL CORP

Form 10-Q for TCF FINANCIAL CORP


6-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial

Condition and Results of Operations

Overview

TCF Financial Corporation, a Delaware corporation ("we," "us," "our," "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. References herein to "TCF Financial" refer to TCF Financial Corporation on an unconsolidated basis. At June 30, 2014, TCF had 380 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 specific 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 interest-cost deposits. TCF's growth strategies may include organic growth in existing businesses, development of new products and services, new branch expansion, new customer acquisition through electronic channels and acquisitions of portfolios or companies. New products and services are designed to build on existing businesses and expand into complementary products and services through strategic initiatives. TCF continues to focus on asset growth in its leasing and equipment finance, inventory finance and auto finance businesses.

Net interest income, the difference between interest income earned on loans and leases, securities, investments and other interest-earning assets and interest paid on deposits and borrowings, represented 66.5% of TCF's total revenue for the three months ended June 30, 2014. 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" and "Part II, Item 1A. Risk Factors" for further discussion.

Non-interest income is a significant source of revenue for TCF and an important component of TCF's results of operations. Increasing fee and service charge revenue has been challenging as a result of changing customer behavior and the impact of changes in 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 addition, as an effort to diversify TCF's non-interest income sources, the Company continues to enhance and increase loan sales primarily in auto finance and consumer real estate to improve gains on sales as well as increase servicing fee income through the growth of loans sold with servicing retained by TCF.

The following portions of this 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 six months ended June 30, 2014 and 2013, and on information about TCF's balance sheet, loan and lease portfolio, liquidity, funding resources, capital and other matters.


Table of Contents

Results of Operations

Performance Summary TCF reported diluted earnings per common share of 29 cents and 54 cents for the second quarter and first six months of 2014, respectively, compared with diluted earnings per common share of 21 cents and 37 cents for the same periods in 2013. TCF reported net income of $53.1 million and $97.9 million for the second quarter and first six months ended of June 30, 2014, respectively, compared with net income of $38.9 million and $68.9 million for the same periods in 2013.

Return on average assets was 1.17% and 1.09% for the second quarter and first six months of 2014, respectively, compared with .9% and .8% for the same periods in 2013. Return on average common equity was 10.99% and 10.18% for the second quarter and first six months of 2014, respectively, compared with 8.39% and 7.39% for the same periods in 2013.

Reportable Segment Results

Lending TCF's lending strategy is primarily to originate high credit quality secured loans and leases. The lending portfolio consists of consumer real estate, commercial real estate and business lending, leasing and equipment finance, inventory finance and auto finance. Lending's 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 available to common stockholders of $50.1 million and $96.8 million for the second quarter and first six months of 2014, respectively, compared with net income of $32.7 million and $57.2 million for the same periods in 2013.

Lending net interest income for the second quarter and first six months of 2014 was $149.4 million and $294.2 million, respectively, compared with $142.2 million and $280.6 million for the same periods in 2013. These increases were primarily due to higher average loan and lease balances in the auto finance, inventory finance and leasing and equipment finance businesses. This was partially offset by downward pressure on yields across the lending businesses in this increasingly competitive low-interest rate environment as well as lower average balances of consumer real estate and higher yielding commercial fixed-rate loans due to run-off exceeding originations.

Lending provision for credit losses totaled $9.1 million and $23.4 million for the second quarter and first six months of 2014, respectively, compared with $31.9 million and $70.1 million for the same periods in 2013. The decreases were primarily due to decreased net charge-offs in the consumer real estate portfolio resulting from improved home values and a reduction in incidents of default, as well as reduced reserve requirements in the commercial and consumer real estate portfolios due to improved credit quality in those portfolios.

Lending non-interest income totaled $47.2 million and $98.5 million for the second quarter and first six months of 2014, respectively, compared with $40.7 million and $77.7 million for the same periods in 2013. The increases were primarily due to customer-driven events impacting sales-type lease revenue in the leasing and equipment finance portfolio and an increase in gains on sales of consumer real estate loans, along with increased servicing revenue.

Lending non-interest expense totaled $104.9 million and $210.4 million for the second quarter and first six months of 2014, respectively, compared with $99.8 million and $196 million for the same periods in 2013. The increases were primarily due to increased staff levels to support the growth of auto finance and risk management. This was partially offset by a reduction in write-downs in balances of existing foreclosed properties as a result of improved property values.


Table of Contents

Funding TCF's funding is primarily derived from branch banking and wholesale borrowings, with a focus on building and maintaining quality customer relationships through free checking. Deposits are generated from consumers and small businesses providing a source of low-cost funds and fee income. Borrowings may be used to offset reductions in deposits or to support lending activities. Funding reported net income available to common stockholders of $2.6 million and $2.4 million for the second quarter and first six months of 2014, respectively, compared with net income available to common stockholders of $7.5 million and $13.2 million for the same periods in 2013.

Funding net interest income for the second quarter and first six months of 2014 was $57.4 million and $114.6 million, respectively, compared with $60.6 million and $122 million for the same periods in 2013. The decreases were primarily due to a reduction of interest income as a result of lower mortgage-backed securities balances, partially offset by the reduced cost of borrowings.

Funding non-interest income totaled $56 million and $107.6 million in the second quarter and first six months of 2014, respectively, compared with $59.1 million and $114.8 million for the same periods in 2013. The decreases were primarily due to customer behavior changes and higher average checking account balances per customer.

Funding non-interest expense totaled $108.5 million and $217.2 million in the second quarter and first six months of 2014, respectively, compared with $107.3 million and $215.1 million for the same periods in 2013.

Consolidated Income Statement Analysis

Net Interest Income Net interest income, the difference between interest earned on loans and leases, securities, investments and other interest-earning assets (interest income), and interest paid on deposits and borrowings (interest expense), represented 66.5% of TCF's total revenue in the second quarter of 2014, compared with 66.9% in the second quarter of 2013. 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 both non-interest bearing deposits and interest-bearing liabilities, the level of non-accrual loans and leases and other real estate owned, and the impact of modified loans and leases.


Table of Contents

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 on a fully tax-equivalent basis.

                                                      Three Months Ended June 30,
                                             2014                                     2013
                               Average                  Yields and      Average                  Yields and
(Dollars in thousands)         Balance      Interest    Rates (1)       Balance      Interest    Rates (1)
Assets:
Investments and other        $    623,721   $   4,054         2.61 % $     729,514   $   3,699         2.03 %
Securities held to
maturity                          217,477       1,443         2.65           5,564          62         4.47
Securities available for
sale:
U.S. Government sponsored
entities:
Mortgage-backed
securities, fixed rate            408,000       2,804         2.75         654,968       4,636         2.83
U.S. Treasury securities                -           -            -             494           -          .07
Other securities                       75           1         2.46              93           1         2.54
Total securities available
for sale (2)                      408,075       2,805         2.75         655,555       4,637         2.83
Loans and leases held for
sale                              240,304       5,001         8.35         116,390       2,535         8.74
Loans and leases:
Consumer real estate:
Fixed-rate                      3,393,788      48,372         5.72       3,809,066      55,977         5.89
Variable-rate                   2,710,998      34,757         5.14       2,621,619      33,545         5.13
Total consumer real estate      6,104,786      83,129         5.46       6,430,685      89,522         5.58
Commercial:
Fixed-rate                      1,515,353      19,503         5.16       1,833,144      24,006         5.25
Variable- and
adjustable-rate                 1,615,967      16,151         4.01       1,503,262      15,602         4.16
Total commercial                3,131,320      35,654         4.57       3,336,406      39,608         4.76
Leasing and equipment
finance                         3,500,647      41,276         4.72       3,236,799      39,990         4.94
Inventory finance               2,061,437      30,482         5.93       1,875,810      27,860         5.96
Auto finance                    1,518,194      16,770         4.43         823,102      10,193         4.97
Other                              12,040         230         7.63          13,060         263         8.10
Total loans and leases (3)     16,328,424     207,541         5.10      15,715,862     207,436         5.29
Total interest-earning
assets                         17,818,001     220,844         4.97      17,222,885     218,369         5.08
Other assets (4)                1,123,148                                1,110,213
Total assets                 $ 18,941,149                            $  18,333,098
Liabilities and Equity:
Non-interest bearing
deposits:
Retail                       $  1,579,528                            $   1,476,173
Small business                    788,540                                  752,395
Commercial and custodial          388,562                                  326,773
Total non-interest bearing
deposits                        2,756,630                                2,555,341
Interest-bearing deposits:
Checking                        2,363,106         261          .04       2,351,652         377          .06
Savings                         5,887,133       2,406          .16       6,059,640       2,790          .18
Money market                    1,019,543       1,098          .43         791,859         547          .28
Subtotal                        9,269,782       3,765          .16       9,203,151       3,714          .16
Certificates of deposit         2,742,832       5,112          .75       2,360,881       5,137          .87
Total interest-bearing
deposits                       12,012,614       8,877          .30      11,564,032       8,851          .31
Total deposits                 14,769,244       8,877          .24      14,119,373       8,851          .25
Borrowings:
Short-term borrowings             220,042         145          .26           7,314           8          .44
Long-term borrowings            1,368,480       4,968         1.45       1,879,576       6,705         1.43
Total borrowings                1,588,522       5,113         1.29       1,886,890       6,713         1.42
Total interest-bearing
liabilities                    13,601,136      13,990          .41      13,450,922      15,564          .46
Total deposits and
borrowings                     16,357,766      13,990          .34      16,006,263      15,564          .39
Other liabilities                 541,458                                  420,398
Total liabilities              16,899,224                               16,426,661
Total TCF Financial Corp.
stockholders' equity            2,020,815                                1,886,138
Non-controlling interest
in subsidiaries                    21,110                                   20,299
Total equity                    2,041,925                                1,906,437
Total liabilities and
equity                       $ 18,941,149                            $  18,333,098
Net interest income and
margin                                      $ 206,854         4.65 %                 $ 202,805         4.72 %

(1) Annualized.

(2) Average balances and yields of securities available for sale are based upon the historical amortized cost and exclude equity securities.

(3) Average balances of loans and leases include non-accrual loans and leases, and are presented net of unearned income.

(4) Includes operating leases.


Table of Contents

                                                       Six Months Ended June 30,
                                             2014                                     2013
                               Average                  Yields and      Average                  Yields and
(Dollars in thousands)         Balance      Interest    Rates (1)       Balance      Interest    Rates (1)
Assets:
Investments and other        $    622,277   $   8,039         2.60 % $     769,379   $   6,881         1.80 %
Securities held to
maturity                          179,509       2,407         2.68           5,608         126         4.50
Securities available for
sale:
U.S. Government sponsored
entities:
Mortgage-backed
securities, fixed rate            437,708       5,967         2.73         664,858       9,430         2.84
U.S. Treasury securities                -           -            -             696           -          .07
Other securities                       78           1         2.47             100           2         2.52
Total securities available
for sale (2)                      437,786       5,968         2.73         665,654       9,432         2.83
Loans and leases held for
sale                              218,210       8,979         8.30         135,472       5,139         7.65
Loans and leases:
Consumer real estate:
Fixed-rate                      3,446,020      96,904         5.67       3,862,590     113,035         5.90
Variable-rate                   2,769,663      70,573         5.14       2,630,618      66,627         5.11
Total consumer real estate      6,215,683     167,477         5.43       6,493,208     179,662         5.58
Commercial:
Fixed-rate                      1,537,549      38,999         5.11       1,866,667      49,191         5.31
Variable- and
adjustable-rate                 1,589,169      32,329         4.10       1,474,400      30,485         4.17
Total commercial                3,126,718      71,328         4.60       3,341,067      79,676         4.81
Leasing and equipment
finance                         3,467,851      82,055         4.73       3,218,252      80,903         5.03
Inventory finance               1,968,431      57,951         5.94       1,780,058      53,465         6.06
Auto finance                    1,423,240      31,557         4.47         747,022      18,835         5.08
Other                              12,654         472         7.52          13,348         539         8.15
Total loans and leases (3)     16,214,577     410,840         5.10      15,592,955     413,080         5.33
Total interest-earning
assets                         17,672,359     436,233         4.97      17,169,068     434,658         5.10
Other assets (4)                1,109,685                                1,118,397
Total assets                 $ 18,782,044                            $  18,287,465
Liabilities and Equity:
Non-interest bearing
deposits:
Retail                       $  1,558,414                            $   1,451,381
Small business                    780,229                                  748,304
Commercial and custodial          387,749                                  328,373
Total non-interest bearing
deposits                        2,726,392                                2,528,058
Interest-bearing deposits:
Checking                        2,353,156         522          .04       2,330,078         874          .08
Savings                         6,003,000       4,935          .17       6,074,949       6,159          .20
Money market                      919,981       1,673          .37         803,551       1,177          .30
Subtotal                        9,276,137       7,130          .15       9,208,578       8,210          .18
Certificates of deposit         2,643,639       9,784          .75       2,342,178      10,322          .89
Total interest-bearing
deposits                       11,919,776      16,914          .29      11,550,756      18,532          .32
Total deposits                 14,646,168      16,914          .23      14,078,814      18,532          .27
Borrowings:
Short-term borrowings             159,401         225          .28           7,966          16          .42
Long-term borrowings            1,430,941      10,204         1.43       1,903,227      13,475         1.42
Total borrowings                1,590,342      10,429         1.31       1,911,193      13,491         1.42
Total interest-bearing
liabilities                    13,510,118      27,343          .41      13,461,949      32,023          .48
Total deposits and
borrowings                     16,236,510      27,343          .34      15,990,007      32,023          .40
Other liabilities                 531,806                                  404,571
Total liabilities              16,768,316                               16,394,578
Total TCF Financial Corp.
stockholders' equity            1,995,373                                1,874,348
Non-controlling interest
in subsidiaries                    18,355                                   18,539
Total equity                    2,013,728                                1,892,887
Total liabilities and
equity                       $ 18,782,044                            $  18,287,465
Net interest income and
margin                                      $ 408,890         4.66 %                 $ 402,635         4.72 %

(1) Annualized.

(2) Average balances and yields of securities available for sale are based upon the historical amortized cost and exclude equity securities.

(3) Average balances of loans and leases include non-accrual loans and leases, and are presented net of unearned income.

(4) Includes operating leases.


Table of Contents

Net interest income, including the impact of tax-equivalent adjustments of $753 thousand, was $206.9 million for the second quarter of 2014, an increase of 2% from $202.8 million for the same period of 2013. The increase in net interest income in the second quarter of 2014 was primarily driven by higher average loan and lease balances in the auto finance, inventory finance and leasing and equipment finance businesses, as well as a reduced cost of borrowings. This increase was partially offset by downward pressure on yields across the lending businesses in this increasingly competitive low interest rate environment, as well as lower average balances of consumer real estate and higher yielding commercial fixed-rate loans due to run-off exceeding originations.

Net interest income, including the impact of tax-equivalent adjustments of $1.5 million, was $408.9 million for the first six months of 2014, an increase of 1.6% from $402.6 million for the same period of 2013. The increase in net interest income from the first six months of 2013 was primarily due to higher average loan and lease balances in the auto finance, inventory finance, and leasing and equipment finance portfolios. This increase was partially offset by reduced interest income due to lower consumer real estate loan average balances resulting from continued run-off of the first mortgage lien portfolio, as well as lower average balances of commercial real estate loans due to the continued efforts to work out problem loans and lower yields due to increased competition.

Net interest margin was 4.65% and 4.72% for the second quarter of 2014 and 2013, respectively. Net interest margin was 4.66% and 4.72% for the first six months of 2014 and 2013, respectively. The decrease from both periods was primarily due to downward pressure on origination yields in the leasing and equipment finance and consumer businesses due to the increasingly competitive low interest rate environment, as well as a shift in commercial real estate from higher yielding fixed-rate loans to lower yielding variable-rate loans due to marketplace demand.

Provision for Credit Losses The provision for credit losses is calculated as part of the determination of the allowance for loan and lease losses which is a critical accounting estimate. TCF's methodologies for determining and allocating the allowance for loan and lease losses and the related provision for credit losses focus on historical trends in net charge-offs, delinquencies in the loan and lease portfolio, value of collateral, general economic conditions and management's assessment of credit risk in the current loan and lease portfolio.

The following tables summarize the composition of TCF's provision for credit losses for the second quarter and the first six months of 2014 and 2013.

                                     Three Months Ended June 30,              Change
(Dollars in thousands)                2014                2013              $          %
Consumer real estate          $    4,106    41.4  % $ 24,393    74.8  % $ (20,287)   (83.2 ) %
Commercial                        (1,168 ) (11.8 )     3,965    12.2       (5,133)    N.M.
Leasing and equipment finance      1,534    15.5         678     2.1           856   126.3
Inventory finance                   (752 )  (7.6 )      (535 )  (1.6 )       (217)    40.6
Auto finance                       5,521    55.7       3,405    10.4         2,116    62.1
Other                                668     6.8         685     2.1          (17)    (2.5 )
Total                         $    9,909   100.0  % $ 32,591   100.0  % $ (22,682)   (69.6 ) %




                                      Six Months Ended June 30,                Change
(Dollars in thousands)                 2014                2013              $          %
Consumer real estate          $    11,185    45.8  % $ 56,350    79.4  % $ (45,165)   (80.2 ) %
Commercial                         (1,048 )  (4.3 )     8,795    12.4       (9,843)    N.M.
Leasing and equipment finance       2,173     8.9      (1,608 )  (2.3 )       3,781    N.M.
Inventory finance                     925     3.8       1,090     1.5         (165)   (15.1 )
Auto finance                       10,348    42.4       5,519     7.8         4,829    87.5
Other                                 818     3.4         828     1.2          (10)    (1.2 )
Total                         $    24,401   100.0  % $ 70,974   100.0  % $ (46,573)   (65.6 ) %

N.M. Not Meaningful

TCF provided $9.9 million and $24.4 million for credit losses during the second quarter and first six months of 2014, respectively compared with $32.6 million and $71 million for the same periods in 2013. The decrease in both periods was primarily due to decreased net charge-offs in the consumer real estate portfolio as home values improved and incidents of default declined, along with improved credit quality in the commercial portfolio.


Table of Contents

Net loan and lease charge-offs for the second quarter and first six months of 2014 were $18.4 million, or .45% (annualized) of average loans and leases, and $35.8 million, or .44% (annualized) of average loans and leases, respectively, compared with $27.7 million, or .7% (annualized), and $68.7 million, or .88% (annualized), for the same periods in 2013. The decreases in both periods were primarily driven by improved credit quality in the consumer real estate portfolio as home values improved and incident rates of default declined, as well as continued efforts to actively work out problem loans within the commercial portfolio.

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