Attached files

file filename
EX-32.2 - EX-32.2 - TCF FINANCIAL CORPa12-28676_1ex32d2.htm
EX-32.1 - EX-32.1 - TCF FINANCIAL CORPa12-28676_1ex32d1.htm
EX-31.1 - EX-31.1 - TCF FINANCIAL CORPa12-28676_1ex31d1.htm
EX-31.2 - EX-31.2 - TCF FINANCIAL CORPa12-28676_1ex31d2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q/A

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended

September 30, 2012

 

or

 

 [  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-10253

 

TCF FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

41-1591444

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

200 Lake Street East, Mail Code EX0-03-A,

Wayzata, Minnesota 55391-1693

(Address and Zip Code of principal executive offices)

 

(952) 745-2760

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]                                                   No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

  Yes [X]                                                  No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

[X]

 

Accelerated filer

[   ]

Non-accelerated filer

[   ]

(Do not check if a smaller reporting company)

Smaller reporting company

[   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ]                                               No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

Outstanding at

Class 

 

October 26, 2012

Common Stock, $.01 par value

 

163,335,368 shares

 


 

EXPLANATORY NOTE

This Amended Quarterly Report on Form 10-Q/A is being filed for the purpose of correcting certain dollar amounts included in the Contractual Obligations and Commitments table located on page 55 and percentages of interest received on consumer real estate troubled debt restructurings, included in Loan Modifications – Consumer Real Estate discussion located on page 48, presented in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  These changes do not impact the financial condition and results of operations reported in the Quarterly Report on Form 10-Q filed on October 30, 2012 (the “Quarterly Report”).

 

This Amendment should be read in conjunction and as if filed concurrently with the Quarterly Report.  This amendment speaks as of the original filing date of the Quarterly Report and except as expressly set forth in this Explanatory Note, this Amendment does not modify or update disclosures contained in the Quarterly Report and does not reflect events occurring after the filing of the Quarterly Report.

 


 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Part I — FINANCIAL INFORMATION

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

 

36


 

(“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

 

37


 

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 million 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 a $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,

 

38


 

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.

 

39

 


 

 

 

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.

 

40


 

 

 

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.

 

41


 

Provision for Credit Losses

 

The following tables summarize the composition of TCF’s provision for credit losses and percentage of the total provision expense for the three and nine months ended September 30, 2012 and 2011.

 

 

 

Three Months Ended

 

 

 

 

 

September 30,

 

Change

 

(Dollars in thousands)

 

2012

 

2011

 

          $

 

            %

 

Consumer real estate

 

$

66,231

 

68.8

 %

$

45,551

 

87.1

 %

$

20,680

 

45.4

 %

Commercial

 

23,604

 

24.5

 

3,756

 

7.2

 

19,848

 

N.M

.

Leasing and equipment finance

 

3,402

 

3.5

 

1,472

 

2.8

 

1,930

 

131.1

 

Inventory finance

 

313

 

.3

 

258

 

.5

 

55

 

21.3

 

Auto finance

 

1,887

 

2.0

 

-

 

-

 

1,887

 

N.M

.

Other

 

838

 

.9

 

1,278

 

2.4

 

(440

)

(34.4

)

Total

 

$

96,275

 

100.0

 %

$

52,315

 

100.0

 %

$

43,960

 

84.0

 %

 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

Change

 

(Dollars in thousands)

 

2012

 

2011

 

          $

 

           %

 

Consumer real estate

 

$

141,428

 

71.1

 %

$

120,392

 

85.1

 %

$

21,036

 

17.5

 %

Commercial

 

37,328

 

18.8

 

12,523

 

8.8

 

24,805

 

198.1

 

Leasing and equipment finance

 

9,003

 

4.5

 

6,049

 

4.3

 

2,954

 

48.8

 

Inventory finance

 

5,281

 

2.7

 

1,166

 

.8

 

4,115

 

N.M

.

Auto finance

 

4,262

 

2.1

 

-

 

-

 

4,262

 

N.M

.

Other

 

1,621

 

.8

 

1,464

 

1.0

 

157

 

10.7

 

Total

 

$

198,923

 

100.0

 %

$

141,594

 

100.0

 %

$

57,329

 

40.5

 %

N.M. Not Meaningful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF recorded provision expense of $96.3 million and $198.9 million in the third quarter and first nine months of 2012, respectively, compared with $ 52.3 million and $141.6 million in the same periods in 2011. The increase from the third quarter and first nine months of 2011 was primarily due to an additional provision totaling $31.5 million related to the implementation of clarifying bankruptcy-related regulatory guidance and increased provision in the commercial portfolio as TCF aggressively addressed credit issues in the third quarter of 2012.

 

Net loan and lease charge-offs for the third quarter and first nine months of 2012 were $104.5 million, or  2.74% (annualized) of average loans and leases, and $188.2 million, or  1.67% (annualized), respectively, compared with $53.4 million, or  1.48% (annualized), and $153.1 million, or  1.39% (annualized), in the same periods of 2011.

 

Consumer real estate net charge-offs for the third quarter and first nine months of 2012 were $74.7 million and $145.2 million, respectively, compared to $43.8 million and $115.8 million for the same 2011 periods.  The increase from both periods was primarily due to additional net charge-offs of $43.9 million related to the implementation of bankruptcy-related regulatory guidance in the third quarter of 2012.  Commercial net charge-offs for the third quarter and first nine months of 2012 were $20.5 million and $30.5 million, respectively, compared to $5 million and $25.5 million for the same 2011 periods.  The increase from both periods was primarily due to increased net charge-offs on a small population of commercial loans, which was driven by a more aggressive workout approach.  Leasing and equipment finance net charge-offs for the third quarter and first nine months of 2012 totaled $7.5 million and $8.8 million, respectively, compared with $2.8 million and $9.1 million for the same periods in 2011. The increase from the third quarter of 2011 was due to increased charge-offs in the Winthrop portfolio related to the third quarter write-off of one large lease exposure.  The decrease in net charge-offs from the first nine months of 2011 was primarily due to decreased net charge-offs in the middle market and small ticket segments, offset by the increased Winthrop charge-offs.

 

The provision for credit losses is calculated as part of the determination of the allowance for loan and lease losses.  The determination of the allowance for loan and lease losses and the related provision for credit losses is a critical accounting estimate which involves a number of factors such as historical trends in net charge-offs, delinquencies in the loan and lease portfolio, year of loan or lease origination, value of collateral, general economic conditions and management’s

 

42


 

assessment of credit risk in the current loan and lease portfolio.  See also Consolidated Financial Condition Analysis – Allowance for Loan and Lease Losses in this Management’s Discussion and Analysis.

 

Consolidated Non-Interest Income

 

Non-interest income is a significant source of revenue for TCF and is an important factor in TCF’s results of operations. 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. Non-interest income totaled $112.1 million and $390.3 million for the third quarter and first nine months of 2012, respectively, compared with $117.8 million and $346.1 million for the same periods in 2011.

 

Fees and Service Charges

 

Fees and service charges totaled $43.7 million and $133.7 million for the third quarter and first nine months of 2012, respectively, compared with $58.5 million and $168.4 million for the same periods in 2011. The decrease in banking fees and revenues from both the third quarter and first nine months of 2011 was primarily due to lower transaction volume, deposit fee structure changes and the reintroduction of free checking products.

 

Card Revenues

 

Card revenues totaled $12.9 million and $39.7 million for the third quarter and first nine months of 2012, respectively, compared with $27.7 million and $82.5 million for the same periods in 2011. The decrease in both periods was due to a decrease in the average interchange rate per transaction due to new debit card interchange regulations which took effect on October 1, 2011.

 

TCF is the  12th largest issuer of Visa® small business debit cards and the  14th largest issuer of Visa consumer debit cards in the United States, based on payments volume for the three months ended June 30, 2012, as provided by Visa. TCF earns interchange revenue from customer card transactions paid by merchants, not from TCF’s customers. Card products represented 18.7% of banking fee revenue for both the three and nine months ended September 30, 2012. 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.  The continued success of TCF’s debit card program depends significantly on the success and viability of Visa and the continued use by customers and acceptance by merchants of its cards.

 

 

 

Three Months Ended

 

 

 

 

 

September 30,

 

Change

 

(Dollars in thousands)

 

2012

 

2011

 

Amount

 

%

 

Sales volume for the three months ended:

 

 

 

 

 

 

 

 

 

Off-line (Signature)

 

$

1,558,657

 

$

1,681,737

 

$

(123,080

)

(7.3

)%

On-line (PIN)

 

291,619

 

235,886

 

55,733

 

23.6

 

Total

 

$

1,850,276

 

$

1,917,623

 

$

(67,347

)

(3.5

)

Average transaction size (in dollars)

 

$

35

 

$

35

 

-

 

-

 

Average number of transactions per card per month

 

25.3

 

23.6

 

1.7

 

7.1

 

Percentage off-line (sales volume)

 

84.2

 %

87.7

 %

 

 

(346

)bps

Average interchange per transaction (in dollars)

 

$

.22

 

$

.48

 

$

(0.3

)

(53.7

)%

Average interchange rate per transaction

 

.63

 %

1.37

 %

 

 

(74

)bps

 

43


 

 

 

Nine Months Ended

 

 

 

 

 

September 30,

 

Change

 

(Dollars in thousands)

 

2012

 

2011

 

Amount

 

%

 

Sales volume for the nine months ended:

 

 

 

 

 

 

 

 

 

Off-line (Signature)

 

$

4,826,918

 

$

5,035,073

 

$

(208,155

)

(4.1

)%

On-line (PIN)

 

853,509

 

718,501

 

135,008

 

18.8

 

Total

 

$

5,680,427

 

$

5,753,574

 

$

(73,147

)

(1.3

)

Average transaction size (in dollars)

 

$

35

 

$

36

 

(1

)

(2.8

)

Average number of transactions per card per month

 

37.7

 

34.8

 

2.9

 

8.3

 

Percentage off-line (sales volume)

 

85.0

 %

87.5

 %

 

 

(254

)bps

Average interchange per transaction (in dollars)

 

$

.22

 

$

.49

 

$

(0.3

)

(54.6

)%

Average interchange rate per transaction

 

.63

 %

1.36

 %

 

 

(73

)bps

 

ATM Revenue

 

ATM revenue was $6.1 million and $18.6 million for the third quarter and first nine months of 2012, respectively, compared with $7.5 million and $21.3 million for the same periods in 2011. The decrease in ATM revenue was primarily due to fewer fee generating transactions and a reduced number of available ATMs.

 

Gain on Sales of Auto Loans

 

During the three months ended September 30, 2012, TCF sold $161.1 million of consumer auto loans with servicing retained and received cash of $157.6 million, resulting in gains of $7.5 million.  During the nine months ended September 30, 2012, TCF sold $377.1 million of consumer auto loans with servicing retained and received cash of $368.9 million, resulting in gains of $15.2 million.

 

Gains on Sales of Consumer Loans

 

During the third quarter of 2012, TCF sold $136.7 million of consumer real estate loans without recourse and recognized a $4.6 million gain.

 

Gain on Securities, Net

 

During the third quarter of 2012, TCF recognized $13 million related to sales of mortgage backed securities.  Additionally, during the nine months ended September 30, 2012, TCF recognized $90.2 million related to sales of mortgage-backed securities and $13.1 million related to the sale of Visa Class B stock.

 

Consolidated Non-Interest Expense

 

Non-interest expense totaled $196.8 million and $1.1 billion for the third quarter and first nine months of 2012, compared with $188.8 million and $576.9 million for the same 2011 periods.

 

Compensation and Employee Benefits

 

Compensation and employee benefits expense totaled $98.4 million and $292.2 million for the third quarter and first nine months of 2012, compared with $87.8 million and $266.2 million for the same 2011 periods.  The increases were primarily due to the expansion of the auto finance business which was acquired in November, 2011, as well as increased staffing levels to support growth in TCF’s inventory finance business.

 

Advertising and Marketing

 

Advertising and marketing expense totaled $4.2 million and $12.3 million for the third quarter and first nine months of 2012, compared with $1.1 million and $7.8 million for the same periods in 2011.  The increases were primarily the result of increased spending on media advertising in advance of the reintroduction of the free checking product.

 

44


 

Deposit Account Premiums

 

Deposit account premium expense totaled $485 thousand and $8.1 million for the third quarter and first nine months of 2012, compared with $7 million and $16.4 million for the same periods in 2011.  These decreases were attributable to an enhanced strategy to gain higher quality accounts through the reintroduction of free checking products.

 

Loss on Termination of Debt

 

In connection with the balance sheet repositioning completed in March 2012, TCF restructured $3.6 billion of long-term borrowings that had a 4.3% weighted average rate at a pre-tax loss of $551 million. TCF also replaced $2.1 billion of 4.4% weighted average fixed-rate, Federal Home Loan Bank advances with a mix of floating and fixed-rate, long- and short-term borrowings with a current weighted average rate of .5%. In addition, TCF terminated $1.5 billion of 4.2% weighted average fixed-rate borrowings under repurchase agreements.

 

Foreclosed Real Estate and Repossessed Assets, Net

 

Foreclosed real estate and repossessed assets, net expenses totaled $10.7 million and $33.8 million for the third quarter and first nine months of 2012, compared with $12.4 million and $37.9 million for the same periods in 2011. The decreases were primarily due to fewer consumer real estate properties owned.

 

Income Taxes

 

TCF recorded income tax expense of $6.3 million for the third quarter of 2012, or 32.3% of the income before income tax expense, compared with income tax expense of $19.2 million, or 36.4%, in 2011.  For the first nine months of 2012, income tax benefit totaled $143.4 million, or 37.9% of the loss before income tax expense, compared with income tax expense of $57 million, or 37.1%, in 2011.

 

The determination of current and deferred income taxes is a critical accounting estimate which is based on complex analyses of many factors, including interpretation of income tax laws, the evaluation of uncertain tax positions, differences between the tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts due or owed such as the timing of reversal of temporary differences and current financial accounting standards.  Additionally, there can be no assurance that estimates and interpretations used in determining income tax liabilities may not be challenged by taxing authorities.  Actual results could differ significantly from the estimates and tax law interpretations used in determining the current and deferred income tax liabilities.

 

In addition, under generally accepted accounting principles in the United States (“GAAP”), deferred income tax assets and liabilities are recorded at the income tax rates expected to apply to taxable income in the periods in which the deferred income tax assets or liabilities are expected to be realized.  If such rates change, deferred income tax assets and liabilities must be adjusted in the period of change through a charge or credit to the Consolidated Statements of Comprehensive Income.  Also, if current period income tax rates change, the impact on the annual effective income tax rate is applied year-to-date in the period of enactment.

 

45


 

CONSOLIDATED FINANCIAL CONDITION ANALYSIS

 

Loans and Leases

 

The following table sets forth information about loans and leases held in TCF’s portfolio.

 

 

 

At

 

At

 

 

 

 

 

September 30,

 

December 31,

 

Percentage

 

(Dollars in thousands)

 

2012

 

2011

 

Change

 

Consumer real estate:

 

 

 

 

 

 

 

First mortgage lien

 

$

4,344,701

 

$

4,742,423

 

(8.4)

%

Junior lien

 

2,303,335

 

2,152,868

 

7.0

 

Total consumer real estate

 

6,648,036

 

6,895,291

 

(3.6)

 

Commercial:

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

Permanent

 

3,106,738

 

3,039,488

 

2.2

 

Construction and development

 

130,400

 

159,210

 

(18.1)

 

Total commercial real estate

 

3,237,138

 

3,198,698

 

1.2

 

Commercial business

 

274,096

 

250,794

 

9.3

 

Total commercial

 

3,511,234

 

3,449,492

 

1.8

 

Leasing and equipment finance:(1)

 

 

 

 

 

 

 

Equipment finance loans

 

1,236,811

 

1,110,803

 

11.3

 

Lease financings:

 

 

 

 

 

 

 

Direct financing leases

 

1,921,855

 

2,039,096

 

(5.7)

 

Sales-type leases

 

24,145

 

29,219

 

(17.4)

 

Lease residuals

 

124,148

 

129,100

 

(3.8)

 

Unearned income and deferred lease costs

 

(148,982)

 

(165,959)

 

10.2

 

Total lease financings

 

1,921,166

 

2,031,456

 

(5.4)

 

Total leasing and equipment finance

 

3,157,977

 

3,142,259

 

.5

 

Inventory finance

 

1,466,269

 

624,700

 

134.7

 

Auto finance

 

407,091

 

3,628

 

N.M.

 

Other

 

27,610

 

34,885

 

(20.9)

 

Total loans and leases

 

$

15,218,217

 

$

14,150,255

 

7.5

%

N.M. Not Meaningful.

(1) Operating leases of $58 million and $69.6 million at September 30, 2012 and December 31, 2011, respectively, are included in other assets in the Consolidated Statements of Financial Condition.

 

Approximately 70% of the consumer real estate portfolio at September 30, 2012, consisted of closed-end amortizing loans.  TCF’s consumer real estate lines of credit require regular payments of interest and do not require regular payments of principal.  Outstanding balances on consumer real estate lines of credit were $2 billion and $1.8 billion at September 30, 2012 and December 31, 2011, respectively.  The average Fair Isaac Corporation (“FICO”) credit score at loan origination for the retail lending portfolio was 729, at September 30, 2012 and 727 at December 31, 2011. As part of TCF’s credit risk monitoring, TCF obtains updated FICO score information quarterly. The average updated FICO score for the retail lending portfolio was 727 at September 30, 2012, compared with 727 at December 31, 2011.  As of September 30, 2012, 34.3% of the consumer real estate loan balance has been originated since January 1, 2009, with 2012 net charge offs of .3% (annualized).

 

TCF continues to expand its commercial lending activities, generally to borrowers located in its primary markets, with a focus on secured lending.  At September 30, 2012, approximately 92% of TCF’s commercial real estate loans outstanding were secured by real estate located in its primary banking markets.  At September 30, 2012, approximately 99% of TCF’s commercial real estate and commercial business loans were secured either by real estate or other business assets.

 

The leasing and equipment finance backlog of approved transactions was $509 million at September 30, 2012, up from $455 million at December 31, 2011.

 

46


 

Credit Quality

 

Past Due Loans and Leases

 

The following tables set forth information regarding TCF’s delinquent loan and lease portfolio. Delinquent balances are determined based on the contractual terms of the loan or lease. See Note 7 of the Notes to Consolidated Financial Statements included in Part I, Item 1. Financial Statements for additional information.

 

 

 

At September 30,

 

At December 31,

 

(Dollars in thousands)

 

2012

 

2011

 

Principal balances:

 

 

 

 

 

60-89 days

 

$

42,811

 

$

45,531

 

90 days or more

 

56,412

 

72,105

 

Non-accrual loans and leases

 

421,813

 

298,311

 

Total

 

$

521,036

 

$

415,947

 

 

 

 

 

 

 

Percentage of loans and leases:

 

 

 

 

 

60-89 days

 

.3

%

.3

%

90 days or more

 

.4

 

.5

 

Non-accrual loans and leases

 

2.8

 

2.1

 

Total

 

3.5

%

2.9

%

 

The following table summarizes TCF’s over 60-day delinquent loan and lease portfolio by loan type.

 

 

 

At September 30, 2012

 

At December 31, 2011

 

 

 

Principal

 

Percentage of

 

Principal

 

Percentage of

 

(Dollars in thousands)

 

Balances

 

Portfolio

 

Balances

 

Portfolio

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

First mortgage lien

 

$

80,153

 

1.93

%

$

87,358

 

1.89

%

Junior lien

 

13,388

 

.59

 

22,277

 

1.04

 

Total consumer real estate

 

93,541

 

1.46

 

109,635

 

1.63

 

Commercial real estate

 

2,652

 

.09

 

1,099

 

.04

 

Commercial business

 

-

 

-

 

49

 

.02

 

Total commercial

 

2,652

 

.08

 

1,148

 

.03

 

Leasing and equipment finance:

 

 

 

 

 

 

 

 

 

Middle market

 

457

 

.03

 

1,061

 

.07

 

Small ticket

 

903

 

.12

 

2,018

 

.28

 

Winthrop

 

-

 

.01

 

235

 

.07

 

Other

 

194

 

.08

 

198

 

.11

 

Total leasing and equipment finance

 

1,554

 

.05

 

3,512

 

.13

 

Inventory finance

 

80

 

.01

 

160

 

.03

 

Auto finance

 

305

 

.08

 

-

 

-

 

Other

 

22

 

.09

 

41

 

.12

 

Subtotal (1)

 

98,154

 

.67

 

114,496

 

.85

 

Delinquencies in acquired portfolios (2)

 

1,069

 

.50

 

3,140

 

.84

 

Total

 

$

99,223

 

.67

%

$

117,636

 

.85

%

(1)    Excludes delinquencies and non-accrual loans in acquired portfolios as delinquency and non-accrual migration in these portfolios are not expected to result in losses exceeding the credit reserves netted against the loan balances.

 

(2)    Remaining balances of acquired loans and leases were $211.8 million and $371.9 million at September 30, 2012 and December 31, 2011, respectively.

 

47


 

Loan Modifications-Consumer Real Estate

 

TCF has several programs designed to assist consumer real estate customers by extending payment dates or reducing customers’ contractual payments (but not a reduction of principal). Under these programs, TCF reduces a customer’s contractual payments for a period of time appropriate for the borrower’s condition. All loan modifications are made on a case-by-case basis.   Loan modifications are not reported as TDRs in the calendar years after modification if the loans were modified at an interest rate equal to or greater than the yields of new loan originations with comparable risk and the loan is performing based on the restructured terms.

 

If TCF has not granted a concession as a result of the modification, the loan is not considered a TDR. Modifications that are not classified as TDRs primarily involve interest rate changes to current market rates for similarly situated borrowers who have access to alternative funds. Loan modifications to borrowers who are not experiencing financial difficulties are not included in the following reporting of loan modifications.

 

Although loans classified as TDRs are considered impaired, TCF was able to receive more than 56.2%* and 54.4%* of the contractual interest due on accruing consumer real estate TDRs for the three and nine months ended September 30, 2012, respectively, by modifying the loan to a qualified customer instead of foreclosing on the property.  Only  7.4% of accruing consumer real estate TDRs were more than 60-days delinquent at September 30, 2012. Approximately 4.7% of the $456.8 million accruing consumer real estate TDRs modified during the 15 months preceding September 30, 2012 defaulted during the three months ended September 30, 2012.

 

 

 

At September, 30 2012

 

At December, 31 2011

 

 

 

Loan

 

60+ Days
Delinquent

 

Loan

 

60+ Days
Delinquent

 

(Dollars in thousands)

 

Balance

 

As a % of Balance

 

Balance

 

As a % of Balance

 

Permanently modified accruing TDRs

 

$

386,143

 

4.86

%

$

198,882

 

4.63

%

Temporarily modified accruing TDRs

 

70,652

 

17.61

 

234,196

 

9.01

 

Total accruing TDRs

 

456,795

 

7.38

 

433,078

 

7.00

 

Other loan modifications

 

4,266

 

49.40

 

13,397

 

20.66

 

Total accruing loan modifications

 

$

461,061

 

7.77

%

$

446,475

 

7.41

%

 

Loan Modifications-Other

 

A commercial loan may be modified through a term extension with a reduction of contractual payments or a change in interest rate. Commercial loan modifications which are not classified as TDRs primarily involve loans on which interest rates were modified to current market rates for similarly situated borrowers who have access to alternative funds or on which TCF received additional collateral or loan conditions. Loan modifications to borrowers who are not experiencing financial difficulties are not included in the following reporting of loan modifications.

 

Commercial loans that are 90 or more days past due and not well secured at the time of modification remain on non-accrual status. Regardless of whether contractual principal and interest payments are well-secured at the time of modification, equipment finance loans that are 90 or more days past due remain on non-accrual status. All loans modified when on non-accrual status continue to be reported as non-accrual loans until there is sustained repayment performance for six months. At September 30, 2012, over 53.4% of total commercial TDRs were accruing and TCF was able to recognize all of the contractual interest due on accruing commercial TDRs during the first nine months of 2012. Only 5 of the 86 accruing commercial TDRs that were modified during the 15 months preceding September 30, 2012, totaling $9.4 million, defaulted during the three months ended September 30, 2012.

 

*Updated to correct number originally reported in Quarterly Report filed October 30, 2012.

 

48


 

TCF utilizes a multiple note structure as a workout alternative for certain commercial loans. The multiple note structure restructures a troubled loan into two notes. The first note is established at a size and with market terms, that provide reasonable assurance of payment and performance. The second note is generally not reasonably assured of repayment and is typically charged-off. The second note is still outstanding with the borrower, and should the borrower’s financial position improve, may become recoverable. At September 30, 2012, nine loans with a contractual balance of $31.5 million and a remaining book balance of $22.4 million had been restructured under this workout alternative.

 

For additional information regarding TCF’s loan modifications refer to Note 7 of the Notes to Consolidated Financial Statements included in Part I, Item 1. Financial Statements.

 

The following table summarizes the balance of accruing modified commercial and leasing and equipment finance loans as of September 30, 2012 and December 31, 2011.

 

 

 

At September 30, 2012

 

 

 

Commercial

 

Leasing and
Equipment Finance

 

 

 

 

 

60+ Days Delinquent

 

 

60+ Days Delinquent

(Dollars in thousands)

 

Loan Balance

 

as a % of Balance

Loan Balance

 

as a % of Balance

TDRs

 

$

120,254

 

2.21

%

$

655

 

-

%

Other loan modifications

 

4,410

 

-

 

1,436

 

-

 

Total accruing loan modifications

 

$

124,664

 

2.13

%

$

2,091

 

-

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2011

 

 

 

Commercial

 

Leasing and
Equipment Finance

 

 

 

 

 

60+ Days Delinquent

 

 

60+ Days Delinquent

(Dollars in thousands)

 

Loan Balance

 

as a % of Balance

Loan Balance

 

as a % of Balance

TDRs

 

$

98,448

 

-

%

$

776

 

-

%

Other loan modifications

 

13,318

 

-

 

4,829

 

2.40

 

Total accruing loan modifications

 

$

111,766

 

-

%

$

5,605

 

2.07

%

 

Non-accrual Loans and Leases

 

Non-accrual loans and leases are summarized in the following table.

 

 

 

At

 

At

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2012

 

2011

 

Consumer real estate:

 

 

 

 

 

First mortgage lien

 

$

197,649

 

$

129,114

 

Junior lien

 

35,936

 

20,257

 

Total consumer real estate

 

233,585

 

149,371

 

Commercial real estate

 

159,090

 

104,744

 

Commercial business

 

10,249

 

22,775

 

Total commercial

 

169,339

 

127,519

 

Leasing and equipment finance

 

15,812

 

20,583

 

Inventory finance

 

1,120

 

823

 

Other

 

1,957

 

15

 

Total non-accrual loans and leases

 

$

421,813

 

$

298,311

 

 

 

49


 

At September 30, 2012 and December 31, 2011, non-accrual loans and leases included $275.3 million and $130.9 million, respectively, of loans that were modified and categorized as TDRs.  Non-accrual loans and leases increased $123.5 million, or 41.4%, from December 31, 2011, primarily due to $103.2 million of additional consumer non-accrual loans resulting from the implementation of clarifying bankruptcy-related regulatory guidance in the third quarter of 2012.  Consumer real estate loans are charged-off to their estimated realizable values less estimated selling costs upon entering non-accrual status. Any necessary additional reserves are established for commercial loans, leasing and equipment finance loans and leases and inventory finance loans when reported as non-accrual. Most of TCF’s non-accrual loans and past due loans are secured by real estate.

 

Changes in the amount of non-accrual loans and leases for the three and nine months ended September 30, 2012 are summarized in the following table.

 

 

 

At or For the Three Months Ended September 30, 2012

 

 

 

 

 

 

 

Leasing and

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

Equipment

 

Inventory

 

 

 

 

 

(In thousands)

 

Real Estate

 

Commercial

 

Finance

 

Finance

 

Other

 

Total

 

Balance, beginning of period

 

$

140,678

 

$

150,215

 

$

29,429

 

$

1,900

 

$

2,204

 

$

324,426

 

Additions

 

161,369

 

44,354

 

3,261

 

1,924

 

8

 

210,916

 

Charge-offs

 

(13,553)

 

(20,769

)

(14,304

)

(385

)

(105

)

(49,116

)

Transfers to other assets

 

(23,391)

 

(877

)

(348

)

(16

)

-

 

(24,632

)

Return to accrual status

 

(28,416)

 

-

 

(129

)

(1,755

)

-

 

(30,300

)

Payments received

 

(2,810)

 

(4,049

)

(2,088

)

(556

)

(149

)

(9,652

)

Other, net

 

(292)

 

465

 

(9

)

8

 

(1

)

171

 

Balance, end of period

 

$

233,585

 

$

169,339

 

$

15,812

 

$

1,120

 

$

1,957

 

$

421,813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At or For the Nine Months Ended September 30, 2012

 

 

 

 

 

 

 

Leasing and

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

Equipment

 

Inventory

 

 

 

 

 

(In thousands)

 

Real Estate

 

Commercial

 

Finance

 

Finance

 

Other

 

Total

 

Balance, beginning of period

 

$

149,371

 

$

127,519

 

$

20,583

 

$

823

 

$

15

 

$

298,311

 

Additions

 

279,246

 

97,395

 

24,766

 

6,906

 

12

 

408,325

 

Charge-offs

 

(46,655

)

(30,870

)

(17,710

)

(604

)

(1,188

)

(97,027

)

Transfers to other assets

 

(70,979

)

(9,951

)

(2,647

)

(769

)

(362

)

(84,708

)

Return to accrual status

 

(69,404

)

(26

)

(1,134

)

(3,179

)

-

 

(73,743

)

Payments received

 

(7,604

)

(12,802

)

(8,036

)

(2,246

)

(427

)

(31,115

)

Other, net

 

(390

)

(1,926

)

(10

)

189

 

3,907

 

1,770

 

Balance, end of period

 

$

233,585

 

$

169,339

 

$

15,812

 

$

1,120

 

$

1,957

 

$

421,813

 

 

50

 


 

Allowance for Loan and Lease Losses

 

The determination of the allowance for loan and lease losses is a critical accounting estimate. TCF’s methodologies for determining and allocating the allowance for loan and lease losses focus on ongoing reviews of larger individual loans and leases, historical net charge-offs, delinquencies in the loan and lease portfolio, the level of impaired and non-accrual assets, values of underlying loan and lease collateral, the overall risk characteristics of the portfolios, changes in character or size of the portfolios, geographic location, year of origination, prevailing economic conditions and other relevant factors. The various factors used in the methodologies are reviewed on a periodic basis.

 

In the third quarter of 2012, TCF refined the methodology for calculating the allowance for loan and lease losses for certain commercial loans.  The updated methodology primarily provided for the use of the underlying loans’ risk ratings in determining the allowance for commercial loans collectively evaluated for loss potential.  The change reduced the commercial allowance for loans and lease loss by $13.3 million at September 30, 2012 and resulted in the collective evaluation of $250 million in commercial loans that were previously evaluated individually.

 

TCF considers the allowance for loan and lease losses of $264.8 million appropriate to cover probable losses incurred in the loan and lease portfolios as of September 30, 2012. However, no assurance can be given that TCF will not, in any particular period, sustain loan and lease losses that are sizable in relation to the amount reserved, or that subsequent evaluations of the loan and lease portfolio, in light of factors then prevailing, including economic conditions, and TCF’s ongoing credit review process or regulatory requirements, will not require significant changes in the balance of the allowance for loan and lease losses. Among other factors, a continued economic slowdown, increasing levels of unemployment and/or a decline in commercial or residential real estate values in TCF’s markets may have an adverse impact on the current adequacy of the allowance for loan and lease losses by increasing credit risk and the risk of potential loss.

 

The total allowance for loan and lease losses is generally available to absorb losses from any segment of the portfolio. The allocation of TCF’s allowance for loan and lease losses disclosed in the following table is subject to change based on changes in the criteria used to evaluate the allowance and is not necessarily indicative of the trend of future losses in any particular portfolio.

 

In conjunction with Note 7 of the Notes to Consolidated Financial Statements included in Part I, Item 1. Financial Statements, the following table includes detailed information regarding TCF’s allowance for loan and lease losses.

 

 

 

At September 30, 2012

 

At December 31, 2011

 

 

 

 

 

Total Loans

 

Allowance as

 

 

 

Total Loans

 

Allowance as

(Dollars in thousands)

 

Allowance

 

and Leases

 

a % of
Balance

 

Allowance

 

and Leases

 

a % of
Balance

Consumer real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage lien

 

$

114,068

 

$

4,344,701

 

2.63

 %

$

115,740

 

$

4,742,423

 

2.44

%

Junior lien

 

64,874

 

2,303,335

 

2.82

 

67,695

 

2,152,868

 

3.14

 

Consumer real estate

 

178,942

 

6,648,036

 

2.69

 

183,435

 

6,895,291

 

2.66

 

Commercial

 

53,756

 

3,511,234

 

1.53

 

46,954

 

3,449,492

 

1.36

 

Leasing and equipment finance

 

21,331

 

3,157,977

 

.68

 

21,173

 

3,142,259

 

.67

 

Inventory finance

 

7,003

 

1,466,269

 

.48

 

2,996

 

624,700

 

.48

 

Auto finance

 

3,059

 

407,091

 

.75

 

-

 

3,628

 

-

 

Other

 

750

 

27,610

 

2.72

 

1,114

 

34,885

 

3.19

 

Total allowance for loan and lease losses

 

$

264,841

 

$

15,218,217

 

1.74

 %

$

255,672

 

$

14,150,255

 

1.81

%

 

At September 30, 2012, the allowance as a percent of total loans and leases decreased to 1.74% compared with 1.81% at December 31, 2011.  The increase in total loans and leases is due to growth in the auto and inventory finance portfolios.  The increase in the allowance for commercial loans from December 31, 2011 was primarily due to increased provision expense driven by a more aggressive workout approach.  The level of commercial lending allowances is generally volatile due to reserves for specific loans based on individual facts and collateral values as loans migrate to classified commercial loans or to non-accrual.  Charge-offs are taken against such specific reserves.

 

51


 

The following tables set forth additional information regarding net charge-offs:

 

 

 

Three Months Ended

 

 

 

September 30, 2012

 

September 30, 2011

 

 

 

Net

 

Loss

 

Net

 

Loss

 

(Dollars in thousands)

 

Charge-offs

 

Rate (1)

 

Charge-offs

 

Rate (1)

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

First mortgage liens

 

$

40,469

 

3.60

 %

$

27,590

 

2.29

 %

Junior liens

 

34,202

 

6.12

 

16,247

 

2.99

 

Total consumer real estate

 

74,671

 

4.44

 

43,837

 

2.51

 

Commercial real estate

 

15,777

 

1.93

 

3,665

 

.45

 

Commercial business

 

4,770

 

7.06

 

1,375

 

1.83

 

Total commercial

 

20,547

 

2.32

 

5,040

 

.57

 

Leasing and equipment finance

 

7,521

 

.95

 

2,783

 

.36

 

Inventory finance

 

444

 

.12

 

262

 

.13

 

Auto Finance

 

280

 

.30

 

-

 

-

 

Other

 

991

 

N.M

.

1,480

 

N.M

.

Total

 

$

104,454

 

2.74

 %

$

53,402

 

1.48

 %

 

 

 

Nine Months Ended

 

 

 

September 30, 2012

 

September 30, 2011

 

 

 

Net

 

Loss

 

Net

 

Loss

 

(Dollars in thousands)

 

Charge-offs

 

Rate (1)

 

Charge-offs

 

Rate (1)

 

Consumer real estate:

 

 

 

 

 

 

 

 

 

First mortgage liens

 

$

78,365

 

2.26

 %

$

71,134

 

1.96

 %

Junior liens

 

66,851

 

4.10

 

44,678

 

2.70

 

Total consumer real estate

 

145,216

 

2.85

 

115,812

 

2.19

 

Commercial real estate

 

25,241

 

1.04

 

20,236

 

.82

 

Commercial business

 

5,285

 

2.75

 

5,266

 

2.30

 

Total commercial

 

30,526

 

1.16

 

25,502

 

.95

 

Leasing and equipment finance

 

8,845

 

.37

 

9,050

 

.39

 

Inventory finance

 

1,312

 

.13

 

798

 

.12

 

Auto Finance

 

363

 

.21

 

-

 

-

 

Other

 

1,985

 

N.M

.

1,898

 

N.M

.

Total

 

$

188,247

 

1.67

 %

$

153,060

 

1.39

 %

(1) Represents the ratio of net charge-offs to average loans and leases, annualized.

N.M. Not Meaningful.

 

Consumer real estate net charge-offs for the third quarter and first nine months of 2012 were $74.7 million and $145.2 million, respectively, compared with $43.8 million and $115.8 million for the same 2011 periods.  The increase from both periods was primarily due to additional net charge-offs of $43.9 million related to the implementation of bankruptcy-related regulatory guidance in the third quarter of 2012.  Commercial net charge-offs for the third quarter and first nine months of 2012 were $20.5 million and $30.5 million, respectively, compared with $5 million and $25.5 million for the same 2011 periods.  The increase from both periods was primarily due to increased net charge-offs on a small population of commercial loans, driven by a more aggressive workout approach.  Leasing and equipment finance net charge-offs for the third quarter and first nine months of 2012 totaled $7.5 million and $8.8 million, respectively, compared with $2.8 million and $9.1 million for the same periods in 2011. The increase from the third quarter of 2011 was due to increased charge-offs in the Winthrop portfolio related to the third quarter write-off of one large lease exposure.  The decrease in net charge-offs from the first nine months of 2011 was primarily due to decreased net charge-offs in the middle market and small ticket segments, partially offset by the increased Winthrop charge-offs.

 

52


 

Other Real Estate Owned and Repossessed and Returned Assets

 

Other real estate owned and repossessed and returned equipment are summarized in the following table.

 

 

 

At

 

At

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2012

 

2011

 

Other real estate owned: (1)

 

 

 

 

 

Residential real estate

 

$

85,764

 

$

87,792

 

Commercial real estate

 

34,662

 

47,106

 

Total other real estate owned

 

120,426

 

134,898

 

Repossessed and returned assets

 

3,739

 

4,758

 

Total other real estate owned and
repossessed and returned equipment

 

$

124,165

 

$

139,656

 

(1) Includes properties owned and foreclosed properties subject to redemption.

 

Other real estate owned is recorded at the lower of cost or fair value less estimated costs to sell the property. At September 30, 2012, TCF owned 425 consumer real estate properties that were not subject to redemption, a decrease of 40 from December 31, 2011. The average length of time to sell consumer real estate properties during the third quarter of 2012 was 6.1 months from the date they were no longer subject to customer redemption.

 

The changes in the amount of other real estate owned for the three and nine months ended September 30, 2012, are summarized in the following tables.