TCF Bank 2014 Annual Report Download - page 6

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4
manufacturers, primarily in the
powersports, lawn and garden,
appliances and electronics, and
marine industries. We nance the
inventory shipped to the retail
dealers of the manufacturers. Not
only do we have the inventory as
collateral, but we underwrite each
dealer’s credit and generally have
agreements with manufacturers to
reallocate repossessed inventory at
no loss to us. These loans turn very
quickly with an estimated weighted
average life of four months.
Inventory nance has been our best
performing business in terms of
losses, even during the recession.
Net charge-offs in 2014 were
0.04 percent while peak losses since
the business began were 0.17 percent
in 2010. This is a high credit quality
business because it has multiple
sources of credit support, including
the credit of the retailer, the value of
the collateral and the arrangements
with the manufacturers. In addition,
credit risk is spread across more than
9,600 active dealers in all 50 states
and Canada.
Auto nancing, on the other hand, is
a newer business which we have been
in for three years. We acquired the
business with a fully developed
origination and servicing platform, as
well as a seasoned management team
averaging 25 years of experience in
autonance. Net charge-offs in 2014
were 0.66 percent. As the portfolio is
still maturing, losses may continue to
slowly increase and are expected to
stabilize around 75 basis points. The
biggest risks in the auto business are
a weak economy and falling auto
values. We mitigate these risks by
selling our lower FICO originations
and consistently underwriting with a
focus on all aspects of the transaction,
including credit, stability and ability
to pay. The current average FICO of
the portfolio loans is 724.
Our most seasoned national lending
business is Leasing and Equipment
Finance, which we have been in since
1997 with the acquisition of Winthrop
Resources Corporation, our high-tech
leasing company. Winthrop, TCF’s
highest ROA business, is able to
mitigate risk by nancing business-
essential equipment through high
credit quality borrowers. Our other
leasing business, TCF Equipment
Finance, is well diversied in select
segments such as specialty vehicles,
manufacturing, medical, construction
and technology. Together, these
businesses are well diversied by
equipment type and geography
with an average loan size of just
$74 thousand. These businesses had
net charge-offs of only 0.10 percent
in 2014 and are both run by very
experienced management teams.
Our legacy lending businesses,
commercial and retail lending, have
also added national lending
components in recent years. As part
of our commercial business, we
started TCF Capital Funding, an
asset-based and cash ow lending
business, in 2012. Similar to our other
businesses, TCF Capital Funding is run
by a very experienced management
team, which we recruited as a group,
and has seen no charge-offs since its
inception. Risks are mitigated by
secured lending and diverse
collateral types. While we are letting
our legacy rst residential mortgage
portfolio run off, we are originating
high-quality junior lien mortgages to
high FICO borrowers across the
United States. Risks are mitigated
through the portfolio’s strong loan-
to-value and debt-to-income ratios as
well as quarterly loan sales to manage
concentration risk. This portfolio had
no net charge-offs in 2014, nearly no
delinquencies and a current average
FICO of 742.
In late 2014, we further mitigated the
balance sheet credit risk of our legacy
retail portfolio by selling $405.9
million of consumer troubled debt
restructurings (“TDRs”) which
resulted in a $23.1 million pre-tax
charge. We expect to recover this
loss in less than three years through
reduced net charge-offs, lower
expenses and increased margin
created by redeploying funds into
higher yielding assets. We also
expect to see a quicker reduction
of non-performing assets moving
forward as the TDR sale will help to
TCF Financial Corporation and Subsidiaries
4
Loan & Lease Originations
Billions of Dollars
$5.2
10
$5.5
11
$10.8
12
$12.1
13
$13.5
14
Loan & Lease Portfolio
Billions of Dollars
$14.8
10
$14.2
11
$15.4
12
$15.8
13
$16.4
14
Consumer Real Estate and Other
Auto Finance
Commercial
Leasing and Equipment Finance
Inventory Finance