UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended
June 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
__________________
Commission File
No. 0-16431
__________________
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)
801 Marquette Avenue, Minneapolis, Minnesota 55402
-----------------------------------------------------
(Address and Zip Code of principal executive offices)
Registrant's telephone number, including area code: (612) 661-6500
--------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class July 31, 1997
--------------------------- -----------------
Common Stock, $.01 par value 42,450,294 shares
1
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information Pages
-----
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at June 30, 1997 and December 31, 1996. . . . . . . . . . . . 3
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1997 and 1996 . . . . . . 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996 . . . . . . . . . . . 5
Consolidated Statements of Stockholders' Equity for
the Year Ended December 31, 1996 and for the
Six Months Ended June 30, 1997. . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . . 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three
and Six Months Ended June 30, 1997 and 1996. . . . . . 10-29
Supplementary Information . . . . . . . . . . . . . . . . . . . 30-31
Part II. Other Information
Items 1-6. . . . . . . . . . . . . . . . . . . . . . . . . . . 32-34
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands, except per-share data)
(Unaudited)
At At
June 30, December 31,
1997 1996
----------- -----------
ASSETS
Cash and due from banks $ 251,388 $ 236,446
Interest-bearing deposits with banks 14,364 386,224
U.S. Government and other marketable securities
held to maturity (fair value of $3,962 and $ 3,910) 3,962 3,910
Federal Home Loan Bank stock, at cost 50,181 66,061
Federal Reserve Bank stock, at cost 13,591 -
Securities available for sale (amortized cost of $1,175,458
and $995,384) 1,181,126 999,586
Loans held for sale 225,729 203,869
Loans and leases:
Residential real estate 2,180,102 2,261,237
Commercial real estate 854,781 861,056
Commercial business 198,499 156,712
Consumer 1,910,970 1,801,066
Lease financing 360,719 341,721
Unearned discounts and deferred fees (122,715) (128,872)
----------- -----------
Total loans and leases 5,382,356 5,292,920
Allowance for loan and lease losses (72,466) (71,865)
----------- -----------
Net loans and leases 5,309,890 5,221,055
Premises and equipment 144,322 129,785
Real estate 14,193 15,771
Accrued interest receivable 44,916 42,173
Goodwill 30,049 15,431
Deposit base intangibles 12,855 10,843
Mortgage servicing rights 16,351 17,360
Other assets 90,843 81,973
----------- -----------
$7,403,760 $7,430,487
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Checking $1,301,215 $1,212,771
Passbook and statement 839,827 783,026
Money market 635,348 631,922
Certificates 2,467,184 2,349,911
----------- -----------
Total deposits 5,243,574 4,977,630
----------- -----------
Securities sold under repurchase agreements 341,485 293,732
Federal Home Loan Bank advances 641,030 1,141,040
Discounted lease rentals 239,859 185,604
Subordinated debt 34,998 42,147
Collateralized obligations 40,297 40,505
Other borrowings 51,700 5,144
----------- -----------
Total borrowings 1,349,369 1,708,172
Accrued interest payable 21,325 20,666
Accrued expenses and other liabilities 88,429 93,332
----------- -----------
Total liabilities 6,702,697 6,799,800
----------- -----------
Stockholders' equity:
Preferred stock, par value $.01 per share, 30,000,000
shares authorized; none issued and outstanding - -
Common stock, par value $.01 per share, 140,000,000 shares
authorized; 43,047,428 and 42,621,116 shares issued 430 426
Additional paid-in capital 288,165 274,746
Unamortized deferred compensation (22,181) (7,693)
Retained earnings, subject to certain restrictions 454,077 402,109
Loan to Executive Deferred Compensation Plan (35) (68)
Unrealized gain on securities available for sale, net 3,412 2,376
Treasury stock, at cost, 597,134 and 1,185,018 shares (22,805) (41,209)
----------- -----------
Total stockholders' equity 701,063 630,687
----------- -----------
$7,403,760 $7,430,487
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
Annual financial statements are subject to audit.
3
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per-share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
Interest income:
Loans $121,708 $121,635 $240,785 $244,485
Lease financing 8,684 7,242 16,889 14,080
Loans held for sale 3,679 4,536 7,192 9,110
Securities available for sale 21,824 19,171 43,207 39,522
Investments 1,347 1,027 2,549 2,186
--------- --------- --------- ---------
Total interest income 157,242 153,611 310,622 309,383
--------- --------- --------- ---------
Interest expense:
Deposits 43,198 42,974 85,356 87,670
Borrowings 21,407 21,445 42,538 44,807
--------- --------- --------- ---------
Total interest expense 64,605 64,419 127,894 132,477
--------- --------- --------- ---------
Net interest income 92,637 89,192 182,728 176,906
Provision for credit losses 4,097 7,324 5,595 10,226
--------- --------- --------- ---------
Net interest income after provision for credit losses 88,540 81,868 177,133 166,680
--------- --------- --------- ---------
Non-interest income:
Fee and service charge revenues 28,325 25,011 53,963 47,611
ATM network revenues 3,694 2,634 7,230 5,146
Title insurance revenues 3,274 3,604 6,023 7,191
Commissions on sales of annuities 2,110 2,366 4,044 4,535
Leasing revenues 7,994 6,118 14,352 11,517
Gain on sale of loans held for sale 529 594 1,406 2,077
Gain (loss) on sale of securities available for sale 1,093 (1) 2,478 84
Gain on sale of loan servicing - - 1,622 -
Gain on sale of branches 2,810 480 2,810 1,725
Other 3,125 2,943 5,781 5,091
--------- --------- --------- ---------
Total non-interest income 52,954 43,749 99,709 84,977
--------- --------- --------- ---------
Non-interest expense:
Compensation and employee benefits 42,864 37,229 84,325 75,175
Occupancy and equipment 13,887 12,657 27,709 25,690
Advertising and promotions 5,113 4,710 10,106 9,505
Federal deposit insurance premiums and assessments 1,059 3,202 2,130 6,363
Amortization of goodwill and other intangibles 1,161 893 2,354 1,766
Provision for real estate losses (60) (151) 38 297
Other 20,119 17,670 38,621 36,466
--------- --------- --------- ---------
Total non-interest expense 84,143 76,210 165,283 155,262
--------- --------- --------- ---------
Income before income tax expense 57,351 49,407 111,559 96,395
Income tax expense 22,416 19,196 43,597 36,762
--------- --------- --------- ---------
Net income $ 34,935 $ 30,211 $ 67,962 $ 59,633
--------- --------- --------- ---------
--------- --------- --------- ---------
Per common share:
Net income $ .83 $ .72 $ 1.62 $ 1.42
--------- --------- --------- ---------
--------- --------- --------- ---------
Dividends declared $ .25 $ .1875 $ .4375 $ .34375
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to consolidated financial statements.
Annual financial statements are subject to audit.
4
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 30,
--------------------------
1997 1996
----------- -----------
Cash flows from operating activities:
Net income $ 67,962 $ 59,633
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,849 9,567
Amortization of goodwill and other intangibles 2,354 1,766
Amortization of fees, discounts and premiums 391 (211)
Proceeds from sales of loans held for sale 254,633 458,611
Principal collected on loans held for sale 4,827 6,991
Originations and purchases of loans held for sale (281,231) (430,597)
Net increase in other assets and liabilities,
and accrued interest (14,554) (7,553)
Provisions for credit and real estate losses 5,633 10,523
Gain on sale of securities available for sale (2,478) (84)
Gain on sale of loan servicing (1,622) -
Gain on sale of branches (2,810) (1,725)
Other, net 2,178 (2,376)
----------- -----------
Total adjustments (21,830) 44,912
----------- -----------
Net cash provided by operating activities 46,132 104,545
----------- -----------
Cash flows from investing activities:
Principal collected on loans and leases 829,794 974,993
Loan originations (857,437) (853,836)
Purchase of equipment for lease financing (89,737) (81,567)
Net (increase) decrease in interest-bearing deposits
with banks 371,860 (86,189)
Proceeds from sales of securities available for sale 194,883 16,630
Proceeds from maturities of and principal collected on
securities available for sale 85,438 106,449
Purchase of securities available for sale (375,397) -
Proceeds from redemption of FHLB stock 15,880 11,054
Purchase of FRB stock (13,591) -
Net (increase) decrease in short-term federal funds sold 45,000 (5,000)
Proceeds from sales of real estate 8,424 18,617
Payments for acquisition and improvement of real estate (1,716) (1,421)
Proceeds from sales of loan servicing 2,286 -
Purchases of premises and equipment (15,901) (8,001)
Acquisition of BOC Financial Corporation,
net of cash acquired (24,093) -
Sales of deposits, net of cash paid (42,246) (31,679)
Other, net 6,331 1,287
----------- -----------
Net cash provided by investing activities 139,778 61,337
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in deposits 145,092 (106,050)
Proceeds from securities sold under repurchase
agreements and federal funds purchased 5,726,662 6,653,432
Payments on securities sold under repurchase agreements
and federal funds purchased (5,678,909) (6,636,715)
Proceeds from FHLB advances 356,765 627,117
Payments on FHLB advances (856,775) (728,460)
Proceeds from discounted lease rentals 101,017 44,502
Proceeds from other borrowings 274,058 244,612
Payments on collateralized obligations and other borrowings (227,809) (228,629)
Payments of dividends on common stock (15,994) (12,755)
Proceeds from exercise of stock options 202 1,449
Proceeds from issuance of common stock 29,266 -
Repurchases of common stock (27,316) (33,566)
Other, net 2,773 (3,366)
----------- -----------
Net cash used by financing activities (170,968) (178,429)
----------- -----------
Net increase (decrease) in cash and due from banks 14,942 (12,547)
Cash and due from banks at beginning of period 236,446 232,792
----------- -----------
Cash and due from banks at end of period $ 251,388 $ 220,245
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest on deposits and borrowings $ 118,605 $ 123,552
----------- -----------
----------- -----------
Income taxes $ 45,386 $ 55,229
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
Annual financial statements are subject to audit.
5
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
(Unaudited)
Unrealized
Loan to Gain
Unamor- Executive (Loss) on
tized Deferred Securities
Additional Deferred Compen- Available
Number of Common Common Paid-in Compen- Retained sation for Sale, Treasury
Shares Issued Stock Capital sation Earnings Plan Net Stock Total
---------------- ------ ---------- -------- -------- --------- ---------- -------- ---------
Balance, December 31, 1995,
as originally reported 35,604,531 $356 $243,122 $(11,195) $283,821 $(131) $11,702 $ - $527,675
Adjustments for pooling
of interests 6,121,860 61 9,483 - 45,180 - - - 54,724
---------- ---- -------- -------- -------- ----- ------- ------- --------
Balance December 31, 1995
as restated 41,726,391 417 252,605 (11,195) 329,001 (131) 11,702 - 582,399
Net income - - - - 100,377 - - - 100,377
Dividends on common stock - - - - (26,595) - - - (26,595)
Purchase of 1,190,068 shares to
be held in treasury - - - - - - - (41,382) (41,382)
Issuance of 36,400 shares of
restricted stock, of which
3,000 shares were from
treasury 33,400 - 4,520 (4,609) - - - 102 13
Repurchase and retirement of
shares (33,471) - (52) - (674) - - - (726)
Issuance of shares of common
stock, net 582,450 6 13,720 - - - - - 13,726
Grant of 2,050 shares of
restricted stock to outside
directors from treasury - - 295 (366) - - - 71 -
Cancellation of shares of
restricted stock (23,200) - (636) 574 - - - - (62)
Amortization of deferred
compensation - - - 7,903 - - - - 7,903
Exercise of stock options 328,330 3 4,171 - - - - - 4,174
Issuance of common stock on
conversion of convertible
debentures 7,216 - 123 - - - - - 123
Payments on loan to Executive
Deferred Compensation Plan - - - - - 63 - - 63
Change in unrealized gain (loss)
on securities available for
sale, net - - - - - - (9,326) - (9,326)
---------- ---- -------- -------- -------- ----- ------- ------- --------
Balance, December 31, 1996 42,621,116 426 274,746 (7,693) 402,109 (68) 2,376 (41,209) 630,687
Net income - - - - 67,962 - - - 67,962
Dividends on common stock - - - - (15,994) - - - (15,994)
Issuance of 700,000 shares
of common stock from
treasury, net - - 2,532 - - - - 26,734 29,266
Purchase of 647,900 shares to
be held in treasury - - - - - - - (27,316) (27,316)
Repurchase and retirement
of shares (43) - (2) - - - - - (2)
Issuance of 434,600 shares of
restricted stock from
treasury - - 3,361 (18,529) - - - 15,168 -
Grant of 11,992 shares of
restricted stock to outside
directors from treasury - - 180 (599) - - - 419 -
Issuance of 66,892 shares of
treasury stock to employee
benefit plans - - 375 - - - - 2,555 2,930
Amortization of deferred
compensation - - - 4,640 - - - - 4,640
Exercise of stock options, of
which 22,300 shares were
from treasury 6,822 - (172) - - - - 844 672
Issuance of common stock on
conversion of convertible
debentures 419,533 4 7,145 - - - - - 7,149
Payments on loan to Executive
Deferred Compensation Plan - - - - - 33 - - 33
Change in unrealized gain on
securities available for
sale, net - - - - - - 1,036 - 1,036
---------- ---- -------- -------- -------- ----- ------- ------- --------
Balance, June 30, 1997 43,047,428 $430 $288,165 $(22,181) $454,077 $ (35) $ 3,412 $(22,805) $701,063
---------- ---- -------- -------- -------- ----- ------- ------- --------
---------- ---- -------- -------- -------- ----- ------- ------- --------
See accompanying notes to consolidated financial statements.
Annual financial statements are subject to audit.
6
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation. The
results of operations for interim periods are not necessarily indicative of
the results to be expected for the entire year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do
not include all information and notes necessary for complete financial
statements in conformity with generally accepted accounting principles.
The material under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" is written with the
presumption that the users of the interim financial statements have read or
have access to the most recent Annual Report on Form 10-K of TCF Financial
Corporation ("TCF" or the "Company"), which contains the latest audited
financial statements and notes thereto, together with Management's
Discussion and Analysis of Financial Condition and Results of Operations as
of December 31, 1996 and for the year then ended. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior period
financial statements to conform to the current period presentation. For
consolidated statements of cash flows purposes, cash and cash equivalents
include cash and due from banks.
(2) NATIONAL BANK CONVERSION
On April 7, 1997, TCF completed the conversion of its savings bank
subsidiaries to national banks and TCF became a national bank holding
company. In connection with the national bank conversions, TCF chartered
two new national bank subsidiaries, Great Lakes National Bank Ohio ("Great
Lakes Ohio") and TCF National Bank Colorado ("TCF Colorado"). TCF now
operates six national bank subsidiaries: TCF National Bank Minnesota, TCF
National Bank Illinois, TCF National Bank Wisconsin, TCF Colorado, Great
Lakes National Bank Michigan and Great Lakes Ohio. TCF Colorado commenced
operations on July 1, 1997.
(3) EARNINGS PER COMMON SHARE
The weighted average number of common and common equivalent shares
outstanding used to compute earnings per common share were 41,971,028 and
41,749,479 for the three months ended June 30, 1997 and 1996, respectively,
and 41,844,838 and 42,001,507 for the six months ended June 30, 1997 and
1996, respectively.
(4) BUSINESS COMBINATIONS AND ACQUISITIONS
WINTHROP RESOURCES CORPORATION
On June 24, 1997, TCF completed its acquisition of Winthrop Resources
Corporation ("Winthrop"), a Minneapolis-based financial services company
with $363 million in assets. Winthrop leases computers, telecommunications
equipment, point-of-sale systems and other business-essential equipment to
companies nationwide. In connection with the acquisition, TCF issued
approximately 6.7 million shares of its common stock for all of the
outstanding common shares of Winthrop. TCF also assumed the obligation to
issue common stock upon the exercise of the outstanding employee and
director options to
7
purchase Winthrop common stock. Winthrop is operated as a direct subsidiary
of TCF National Bank Minnesota.
The consolidated financial statements of TCF give effect to the
acquisition, which has been accounted for as a pooling-of-interests
combination. Accordingly, TCF's consolidated financial statements for
periods prior to the combination have been restated to include the accounts
and the results of operations of Winthrop for all periods presented, except
for dividends declared per share. There were no material intercompany
transactions prior to the acquisition and no material differences in the
accounting and reporting policies of TCF and Winthrop.
Certain operating financial data previously reported by TCF and Winthrop on
a separate basis and the combined amounts presented in the accompanying
consolidated financial statements are summarized as follows:
Three Months Ended
----------------------- Six Months Ended
March 31, June 30, June 30,
1997 1996 1996
--------- --------- ----------------
Interest income:
TCF $145,136 $146,394 $295,287
Winthrop 8,244 7,217 14,096
-------- -------- --------
Combined $153,380 $153,611 $309,383
-------- -------- --------
-------- -------- --------
Net interest income:
TCF $ 86,018 $ 85,876 $170,330
Winthrop 4,073 3,316 6,576
-------- -------- --------
Combined $ 90,091 $ 89,192 $176,906
-------- -------- --------
-------- -------- --------
Non-interest income:
TCF $ 40,381 $ 37,632 $ 73,461
Winthrop 6,374 6,117 11,516
-------- -------- --------
Combined $ 46,755 $ 43,749 $ 84,977
-------- -------- --------
-------- -------- --------
Net income:
TCF $ 28,931 $ 26,651 $ 52,938
Winthrop 4,096 3,560 6,695
-------- -------- --------
Combined $ 33,027 $ 30,211 $ 59,633
-------- -------- --------
-------- -------- --------
Earnings per common share:
TCF $ .83 $ .75 $ 1.48
-------- -------- --------
-------- -------- --------
Winthrop $ .46 $ .45 $ .85
-------- -------- --------
-------- -------- --------
Combined $ .79 $ .72 $ 1.42
-------- -------- --------
-------- -------- --------
BOC FINANCIAL CORPORATION
On January 16, 1997, TCF completed its purchase of BOC Financial
Corporation ("BOC"), an Illinois-based bank holding company with $183.1
million in assets and $168 million in deposits. TCF accounted for the
acquisition using the purchase method of accounting.
STANDARD FINANCIAL, INC.
On March 17, 1997, TCF and Standard Financial, Inc. ("Standard") signed a
definitive merger agreement for TCF to acquire Standard. Standard is a
community-oriented thrift institution with $2.6 billion in assets and 14
full-service offices on the southwest side of Chicago and in the nearby
southwestern and western suburbs. The transaction will be structured as a
cash election merger in which holders of Standard's common stock will have
the right to choose
8
either cash or TCF common stock, or a combination of the two. The
transaction will be a tax-free exchange for Standard's stockholders to
the extent they receive shares of TCF common stock. The merger is
subject to approval by Standard's stockholders, and required regulatory
filings and approvals, among other conditions. The merger is expected to
close in the third quarter of 1997 and be accounted for as a purchase
transaction.
9
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
TCF reported record net income of $34.9 million, or 83 cents per common share,
for the second quarter of 1997, up 15.6% from $30.2 million, or 72 cents per
common share, for the same 1996 period. For the first six months of 1997, TCF
reported net income of $68 million, or $1.62 per common share, compared with
$59.6 million, or $1.42 per common share, for the same 1996 period. Cash
earnings per common share, which exclude amortization of goodwill and deposit
base intangibles, were 85 cents and $1.67 for the second quarter and first six
months of 1997, respectively, up 14.9% and 15.2% from 74 cents and $1.45 for the
same 1996 periods. Return on average assets was 1.90% and 1.86% for the second
quarter and first six months of 1997, respectively, compared with 1.67% and
1.63% for the same 1996 periods. Return on average realized common equity was
21.35% and 21.28% for the second quarter and first six months of 1997,
respectively, compared with 20.35% and 20.33% for the same 1996 periods.
NET INTEREST INCOME
Net interest income for the second quarter of 1997 was a record $92.6 million,
up 3.9% from $89.2 million for the second quarter of 1996. The net interest
margin for the second quarter of 1997 was a record 5.41%, up from 5.27% for the
same 1996 period. Net interest income for the first six months of 1997 totaled
$182.7 million, up 3.3% from $176.9 million for the same 1996 period. The net
interest margin for the first six months of 1997 was 5.36%, up from 5.17% for
the same period in 1996. TCF's net interest income and net interest margin
increased primarily due to the growth of higher-yielding consumer loans,
commercial business loans, direct financing leases and lower-cost retail
deposits. Changes in net interest income are dependent upon the movement of
interest rates, the volume and the mix of interest-earning assets and
interest-bearing liabilities, and the level of non-performing assets.
Maintaining net interest margin growth is dependent on TCF's ability to generate
higher yielding assets and lower-cost retail deposits. Competition for
checking, savings and money market deposits, an important source of lower cost
funds for TCF, has intensified among depository and other financial
institutions. TCF may experience compression in its net interest margin if the
rates paid on deposits increase. See "Asset/Liability Management -
Interest-Rate Risk" and "Financial Condition - Deposits."
10
The following rate/volume analysis details the increases (decreases) in net
interest income resulting from interest rate and volume changes during the
second quarter and first six months of 1997 as compared to the same periods last
year. Changes attributable to the combined impact of volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
Versus Same Period in 1996 Versus Same Period in 1996
---------------------------------------- ---------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------------- ---------------------------------------
(In thousands) Volume Rate Total Volume Rate Total
--------- --------- --------- --------- --------- ---------
Securities available for sale $ 2,545 $ 108 $ 2,653 $ 3,355 $ 330 $ 3,685
--------- --------- --------- --------- --------- ---------
Loans held for sale (729) (128) (857) (1,739) (179) (1,918)
--------- --------- --------- --------- --------- ---------
Loans and leases:
Residential real estate (5,063) - (5,063) (11,234) (617) (11,851)
Commercial real estate (2,145) 256 (1,889) (4,375) 283 (4,092)
Commercial business 791 12 803 1,066 84 1,150
Consumer 4,371 1,851 6,222 13,396 (2,303) 11,093
Lease financing 1,769 (327) 1,442 3,636 (827) 2,809
--------- --------- --------- --------- --------- ---------
Total loans and leases (277) 1,792 1,515 2,489 (3,380) (891)
--------- --------- --------- --------- --------- ---------
Investments:
Interest-bearing deposits
with banks 75 109 184 195 107 302
Federal funds sold (12) (12) (24) (1) (4) (5)
U.S. Government and other
marketable securities
held to maturity 2 - 2 4 - 4
FHLB stock (44) 12 (32) (133) 5 (128)
FRB stock 190 - 190 190 - 190
--------- --------- --------- --------- --------- ---------
Total investments 211 109 320 255 108 363
--------- --------- --------- --------- --------- ---------
Total interest income 1,750 1,881 3,631 4,360 (3,121) 1,239
--------- --------- --------- --------- --------- ---------
Deposits:
Checking 14 (15) (1) 20 (67) (47)
Passbook and statement (7) 195 188 (49) 228 179
Money market 56 152 208 168 186 354
Certificates (477) 306 (171) (2,060) (740) (2,800)
--------- --------- --------- --------- --------- ---------
Total deposits (414) 638 224 (1,921) (393) (2,314)
--------- --------- --------- --------- --------- ---------
Borrowings:
Securities sold under
repurchase agreements (1,083) 260 (823) (2,870) 336 (2,534)
FHLB advances (1,059) 649 (410) (2,400) 1,121 (1,279)
Discounted lease rentals 793 42 835 956 159 1,115
Subordinated debt 421 (174) 247 950 (445) 505
Collateralized obligations (11) 27 16 (24) 8 (16)
Other borrowings 98 (1) 97 (39) (21) (60)
--------- --------- --------- --------- --------- ---------
Total borrowings (841) 803 (38) (3,427) 1,158 (2,269)
--------- --------- --------- --------- --------- ---------
Total interest expense (1,255) 1,441 186 (5,348) 765 (4,583)
--------- --------- --------- --------- --------- ---------
Net interest income $ 3,005 $ 440 $ 3,445 $ 9,708 $(3,886) $ 5,822
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
PROVISIONS FOR CREDIT LOSSES
TCF provided $4.1 million for credit losses in the second quarter of 1997,
compared with $7.3 million for the same prior-year period. In the first six
months of 1997, TCF provided $5.6 million for credit losses, compared with
$10.2 for the same 1996 period. At June 30, 1997, the allowances for loan
and lease and real estate losses and industrial revenue bond reserves totaled
$74.9 million, compared with $74.7 million at year-end 1996. See "Financial
Condition - Allowances for Loan and Lease and Real Estate Losses and
Industrial Revenue Bond Reserves."
11
NON-INTEREST INCOME
Non-interest income is a significant source of revenues for TCF and 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.
Excluding gains on sales of branches, non-interest income increased $6.9
million, or 15.9%, to $50.1 million for the second quarter of 1997, compared
with $43.3 million for the same period in 1996. For the first six months of
1997, non-interest income, excluding gains on sales of branches, totaled
$96.9 million, compared with $83.3 million for the same period in 1996. The
increases were primarily due to increases in fee and service charge revenues,
automated teller machine ("ATM") network revenues, leasing revenues and gains
on sales of securities available for sale.
Fee and service charge revenues totaled $28.3 million and $54 million for the
second quarter and first six months of 1997, respectively, representing
increases of 13.3% from $25 million and $47.6 million for the same 1996
periods. These increases are primarily due to expanded retail banking
activities.
ATM network revenues totaled $3.7 million and $7.2 million for the second
quarter and first six months of 1997, respectively, representing increases of
40.2% and 40.5% from $2.6 million and $5.1 million for the same 1996 periods.
This increase reflects TCF's efforts to provide banking services through its
ATM network. TCF expanded its network of ATMs to 1,033 at June 30, 1997,
installing 84 ATMs during the second quarter of 1997. The Company
anticipates installing additional ATMs during the remainder of 1997.
Title insurance revenues totaled $3.3 million and $6 million during the
second quarter and first six months of 1997, respectively, compared with $3.6
million and $7.2 million for the same 1996 periods. Title insurance revenues
in 1996 were positively affected by an industry-wide increase in residential
real estate loan originations and refinancing activities. Title insurance
revenues are cyclical in nature and are largely dependent on the level of
residential real estate loan originations and refinancings.
Leasing revenues totaled $8 million and $14.4 million for the second quarter
and first six months of 1997, respectively, representing increases of 30.7%
and 24.6% from $6.1 million and $11.5 million for the same 1996 periods.
Leasing revenues are based on customer demand and fluctuate depending on the
manner and timing in which leasing revenues are recognized over the term of
each particular lease. The recognition of leasing revenues is also a function
of lease classifications as determined in accordance with generally accepted
accounting principles.
Gains on sales of securities available for sale totaled $1.1 million and $2.5
million for the second quarter and first six months of 1997, respectively, an
increase of $1.1 million and $2.4 million from the amounts recognized during
the same periods in 1996. Gains or losses on securities available for sale
may fluctuate significantly from period to period due to changes in interest
rates and volumes, and results in any period related to these transactions
may not be indicative of results which will be obtained in future periods.
Results for the first six months of 1997 include a pretax gain of $1.6
million on the sale of $150 million of third-party loan servicing rights.
TCF periodically sells and purchases loan servicing rights depending on
market conditions. TCF's third-party residential loan servicing portfolio
totaled $4.3 billion at June 30, 1997, compared to $4.5 billion at December
31, 1996.
12
During the second quarter of 1997, TCF recognized a $2.8 million gain on the
sale of two Michigan branches, compared with a $480,000 gain on the sale of
one Wisconsin branch during the same 1996 period. Results for the first six
months of 1996 also include a $1.2 million gain on the sale of two Michigan
branches.
NON-INTEREST EXPENSE
Non-interest expense totaled $84.1 million for the second quarter of 1997,
including $1.5 million of non-recurring merger-related costs recognized in
connection with the acquisition of Winthrop, up 10.4% from $76.2 million for
the same 1996 period. For the first six months of 1997, non-interest expense
totaled $165.3 million, up 6.5% from $155.3 million for the same 1996 period.
Compensation and employee benefits expense totaled $42.9 million and $84.3
million for the 1997 second quarter and first six months, respectively,
compared with $37.2 million and $75.2 million for the same periods in 1996.
The increased expenses in 1997 were primarily due to costs associated with
expanded retail banking activities.
Federal deposit insurance premiums and assessments totaled $1.1 million and
$2.1 million for the second quarter and first six months of 1997,
respectively, compared with $3.2 million and $6.4 million for the same
periods in 1996. The decrease reflects a reduction, effective January 1,
1997, in the rate charged to TCF by the Federal Deposit Insurance Corporation
for federal deposit insurance premiums from 23 basis points to 6.50 basis
points as a result of Federal legislation enacted on September 30, 1996 to
recapitalize the Savings Association Insurance Fund.
Amortization of goodwill and other intangibles totaled $1.2 million and $2.4
million for the second quarter and first six months of 1997, respectively,
compared with $893,000 and $1.8 million for the same 1996 periods. The
increases are due to the amortization of goodwill and deposit base
intangibles resulting from the acquisition of BOC.
Other expense totaled $20.1 million and $38.6 million for the second quarter
and first six months of 1997, respectively, compared with $17.7 million and
$36.5 million for the same 1996 periods. The increase for the second quarter
of 1997 reflects the recognition of $1.5 million of non-recurring
merger-related costs in connection with TCF's acquisition of Winthrop, as
previously mentioned.
INCOME TAXES
TCF recorded income tax expense of $22.4 million and $43.6 million for the
second quarter and first six months of 1997, or 39.1% of income before income
tax expense, respectively, compared with $19.2 million and $36.8 million, or
38.9% and 38.1%, for the comparable 1996 periods. The higher rate in 1997
reflects the impact of relatively higher non-deductible expenses, including
increased goodwill amortization resulting from the acquisition of BOC, and
higher state tax rates due to business expansion.
ASSET/LIABILITY MANAGEMENT - INTEREST-RATE RISK
TCF's results of operations are dependent to a large degree on its net interest
income, which is the difference between interest income and interest expense.
Like most financial institutions, TCF's interest income and cost of funds are
significantly affected by general economic conditions and by policies of
regulatory authorities. The mismatch between maturities and interest-rate
sensitivities of assets and liabilities results in interest-rate risk. Although
the measure is subject to a number of assumptions and is only one of a number of
measurements, management believes the interest-rate gap (difference between
interest-earning assets and interest-bearing
13
liabilities repricing within a given period) is an important indication of
TCF's exposure to interest-rate risk and the related volatility of net
interest income in a changing interest rate environment. In addition to the
interest-rate gap analysis, management also utilizes a simulation model to
measure and manage TCF's interest-rate risk.
For an institution with a negative interest-rate gap for a given period, the
amount of its interest-bearing liabilities maturing or otherwise repricing
within such period exceeds the amount of interest-earning assets repricing
within the same period. In a rising interest rate environment, institutions
with negative interest-rate gaps will generally experience more immediate
increases in the cost of their liabilities than in the yield on their assets.
Conversely, the yield on assets of institutions with negative interest-rate
gaps will generally decrease more slowly than the cost of their funds in a
falling interest rate environment.
TCF's Asset/Liability Management Committee manages TCF's interest-rate risk
based on interest rate expectations and other factors. Management's
estimates and assumptions could be significantly affected by external
factors such as prepayment rates other than those assumed, early withdrawals
of deposits, changes in the correlation of various interest-bearing
instruments, and competition. Decisions by management to purchase or sell
assets, or retire debt could change the maturity/repricing and spread
relationships. TCF's one-year adjusted interest-rate gap was a negative $180
million, or (2)% of total assets, at June 30, 1997, compared with a positive
$114 million, or 2% of total assets, at December 31, 1996.
FINANCIAL CONDITION
INVESTMENTS
Total investments decreased $374.1 million from year-end 1996 to $82.1
million at June 30, 1997, reflecting decreases of $371.9 million in
interest-bearing deposits with banks and $15.9 million in FHLB stock,
partially offset by the purchase of $13.6 million in FRB stock in connection
with the conversion of TCF's banking subsidiaries to national banks.
14
SECURITIES AVAILABLE FOR SALE
Securities available for sale are carried at fair value with unrealized gains
or losses, net of deferred income taxes, reported as a separate component of
stockholders' equity. Securities available for sale increased $181.5 million
from year-end 1996 to $1.2 billion at June 30, 1997. The increase reflects
the acquisition of $83.1 million of securities available for sale as part of
the BOC transaction and purchases of $375.4 million of securities available
for sale, partially offset by sales of $194.9 million and payment and
prepayment activity. At June 30, 1997, TCF's securities available-for-sale
portfolio included $1.1 billion and $60.9 million of fixed-rate and
adjustable-rate mortgage-backed securities, respectively. The following
table summarizes securities available for sale:
At June 30, 1997 At December 31, 1996
-------------------------- --------------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
----------- ----------- ----------- -----------
U.S. Government and other
marketable securities $ - $ - $ 32 $ 32
Mortgage-backed securities:
FHLMC 657,499 659,382 318,441 317,177
FNMA 410,053 410,688 539,475 542,147
GNMA 84,504 87,854 112,732 116,388
Private issuer 22,084 21,995 23,272 22,531
Collateralized mortgage
obligations 1,318 1,207 1,432 1,311
----------- ----------- ----------- -----------
$1,175,458 $1,181,126 $995,384 $999,586
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
LOANS HELD FOR SALE
Education and residential real estate loans held for sale are carried at the
lower of cost or market. Education loans held for sale increased $1.9
million and residential real estate loans held for sale increased $20 million
from year-end 1996, respectively, and totaled $148.2 million and $77.5
million at June 30, 1997.
15
LOANS AND LEASES
The following table sets forth information about loans and leases held in
TCF's portfolio, excluding loans held for sale:
At At
June 30, December 31,
(In thousands) 1997 1996
------------ ------------
Residential real estate $2,180,102 $2,261,237
------------ ------------
Commercial real estate:
Apartments 315,653 336,038
Other permanent 467,486 466,624
Construction and development 71,642 58,394
------------ ------------
854,781 861,056
------------ ------------
Total real estate 3,034,883 3,122,293
------------ ------------
Commercial business 198,499 156,712
------------ ------------
Consumer:
Home equity 1,423,791 1,293,871
Automobile and marine 405,871 416,535
Loans secured by deposits 8,367 8,230
Other secured 20,020 19,106
Unsecured 52,921 63,324
------------ ------------
1,910,970 1,801,066
------------ ------------
Lease financing:
Direct financing leases 290,920 265,161
Sales-type leases 42,614 50,532
Lease residuals 27,185 26,028
------------ ------------
360,719 341,721
------------ ------------
5,505,071 5,421,792
Less:
Unearned discounts on loans purchased 2,259 2,441
Deferred loan fees, net 5,353 6,129
Unearned discounts and finance charges
on loans, net 70,910 75,539
Deferred lease costs (7,262) (6,705)
Unearned lease income 46,851 46,971
Unearned lease residual income 4,604 4,497
------------ ------------
$5,382,356 $5,292,920
------------ ------------
------------ ------------
Loans and leases increased $89.4 million from year-end 1996 to $5.4 billion
at June 30, 1997, of which $33.9 million was due to the acquisition of BOC.
Residential real estate loans totaled $2.2 billion at June 30, 1997, a
decrease of $81.1 million from December 31, 1996. This decrease reflects
payment and prepayment activity, partially offset by the origination and
retention of $118.5 million of residential real estate loans.
Consumer loans increased $109.9 million from year-end 1996 to $1.9 billion at
June 30, 1997, reflecting a $129.9 million increase in home equity loans.
The growth in home equity loans reflects TCF's expanded consumer lending and
consumer finance operations. Consumer loan growth in recent years reflects
TCF's emphasis on expanding its portfolio of higher-yielding, shorter-term
loans, including home equity loans. At June 30, 1997, TCF's average home
equity line of credit was approximately $38,000 and the average loan balance
outstanding was approximately $21,000, or 55% of the available line.
16
TCF has significantly expanded its consumer finance operations in recent
years and had 61 consumer finance offices in 16 states as of June 30, 1997.
TCF's consumer finance loan portfolio totaled $520.7 million at June 30,
1997, compared with $496.3 million at December 31, 1996. The Company intends
to concentrate on increasing the outstanding loan balances of its existing
consumer finance offices and improving the profitability of its consumer
finance subsidiaries before considering any further expansion of this
operation.
The consumer finance subsidiaries primarily originate automobile and home
equity loans and purchase automobile loans. The average individual balance
of consumer finance automobile and marine loans, and home equity loans were
$8,000 and $30,000, respectively, at June 30, 1997. At June 30, 1997 and
December 31, 1996, automobile and marine loans comprised $302.4 million, or
58.1%, and $299.6 million, or 60.4%, respectively, of total consumer finance
loans. At June 30, 1997 and December 31, 1996, home equity loans comprised
$211.2 million, or 40.6%, and $185.2 million, or 37.3%, respectively, of
total consumer finance loans. TCF's consumer finance subsidiaries are
seeking to increase the percentage of home equity loans to total consumer
finance loans over time. Home equity loans originated by the Company's
consumer finance subsidiaries are generally closed-end.
Through their purchases of automobile loans, TCF's consumer finance
subsidiaries provide indirect financing. The Company's consumer finance
subsidiaries serve as an alternative source of financing to customers who
might otherwise not be able to obtain financing from more traditional
sources. Included in the consumer finance loans at June 30, 1997 are $249
million of sub-prime automobile and marine loans which carry a higher level
of credit risk and higher interest rates. The term sub-prime refers to the
Company's assessment of credit risk and bears no relationship to the prime
rate of interest or persons who are able to borrow at that rate. There can
be no assurances that the Company's sub-prime lending criteria are the same
as those utilized by other lenders. Loans classified as sub-prime are to
borrowers that because of significant past credit problems or limited credit
histories are unable to obtain credit from traditional sources.
Although competition in the sub-prime lending market has increased, the
Company believes that sub-prime borrowers represent a substantial market and
their demand for financing has not been adequately served by traditional
lending sources. The underwriting criteria for loans originated by TCF's
consumer finance subsidiaries generally have been less stringent than those
historically adhered to by TCF's bank subsidiaries and, as a result, carry a
higher level of credit risk and higher interest rates. These portfolios also
represent an increased risk of loss in the event of adverse economic
developments such as a recession. TCF believes that important determinants
of success in sub-prime automobile financing include the ability to control
borrower and dealer misrepresentations at the point of origination; the
evaluation of the creditworthiness of sub-prime borrowers; and the
maintenance of an active program to monitor performance and collect payments.
Sub-prime lending is inherently more risky than traditional lending and
there can be no assurance that all appropriate underwriting criteria have
been identified or weighted properly in the assessment of credit risk, or
will afford adequate protection against the higher risks inherent in lending
to sub-prime borrowers.
17
Many of the consumer finance offices are relatively new and are outside TCF's
traditional market areas. The geographic location of consumer finance loans
may change significantly in future periods. The following table sets forth
the geographic locations (based on the location of the office originating or
purchasing the loan) of TCF's consumer finance loan portfolio:
At June 30, 1997 At December 31, 1996
---------------------- ------------------------
Loan Loan
(Dollars in thousands) Balance Percent Balance Percent
-------- ------- -------- -------
Illinois $132,588 25.5% $132,474 26.7%
Minnesota 98,523 18.9 99,279 20.0
Florida 39,574 7.6 33,458 6.7
Georgia 35,962 6.9 32,270 6.5
Michigan 32,680 6.3 23,214 4.7
Wisconsin 31,570 6.1 33,328 6.7
North Carolina 29,135 5.6 24,137 4.9
Missouri 24,438 4.7 26,185 5.3
Tennessee 19,647 3.8 17,313 3.5
Kentucky 15,858 3.0 17,198 3.5
Ohio 15,836 3.0 15,503 3.1
Mississippi 15,610 3.0 15,579 3.1
Other 29,271 5.6 26,398 5.3
-------- ------- -------- -------
Total consumer finance loans $520,692 100.0% $496,336 100.0%
-------- ------- -------- -------
-------- ------- -------- -------
TCF's bank and consumer finance subsidiaries have also initiated the
origination of home equity loans with loan-to-value ratios in excess of 80%,
and up to 100%, that may carry no private mortgage insurance. These loans
carry a higher level of credit risk and higher interest rates.
Commercial real estate loans decreased $6.3 million from year-end 1996 to
$854.8 million at June 30, 1997. Commercial business loans increased $41.8
million in the first six months of 1997 to $198.5 million at June 30, 1997,
of which $24.6 million relates to the acquisition of BOC. TCF is seeking to
expand its commercial real estate and commercial business lending activity to
borrowers located in its primary midwestern markets in an attempt to maintain
the size of these lending portfolios and, where feasible under local economic
conditions, achieve some growth in these lending categories over time. These
loans generally have larger individual balances and a greater inherent risk
of loss. The risk of loss is difficult to quantify and is subject to
fluctuations in real estate values. At June 30, 1997, approximately 92% of
TCF's commercial real estate loans outstanding were secured by properties
located in its primary markets. At June 30, 1997, the average individual
balance of commercial real estate loans and commercial business loans was
$520,000 and $262,000, respectively.
Included in performing loans at June 30, 1997 are commercial real estate
loans aggregating $2.9 million with terms that have been modified in troubled
debt restructurings, compared with $3 million at December 31, 1996.
At June 30, 1997, the recorded investment in loans that are considered to be
impaired was $5.3 million. All of these loans were on non-accrual status.
Included in this amount are $4.7 million of impaired loans for which the related
allowance for credit losses is $902,000 and $554,000 of impaired loans that, as
a result of write-downs, do not have a specific allowance for credit losses.
The average recorded investment in impaired loans during the three and six
months ended June 30, 1997 was $8.8 million and $9.5 million, respectively. For
the three and six months ended June 30, 1997, TCF recognized interest income on
impaired loans of $133,000 and $289,000, of which
18
$108,000 and $255,000, respectively, was recognized using the cash basis
method of income recognition.
Lease financings increased $19 million from year-end 1996 to $360.7 million
at June 30, 1997, reflecting a $25.8 million increase in direct financing
leases, partially offset by a $7.9 million decrease in sales-type leases.
TCF entered the lease financing business as a result of its acquisition of
Winthrop.
Winthrop provides a range of comprehensive lease finance products addressing
the financing needs of diverse companies through four product groups. The
Value Added Lease, which has been Winthrop's primary focus, generally has a
term from two to five years and is entered into with large organizations
(generally corporations with revenue of $50 million or more). Such leases
typically range from $250,000 to $20 million and cover high-technology
equipment and business-essential equipment. These leases are flexible in
structure to accommodate equipment additions and upgrades to meet customers'
changing needs. Small Ticket Lease are typically less than $250,000, have
lease terms of between two and five years, and cover business-essential
equipment. Winthrop developed the Small Ticket Lease in response to the
expanding technological needs of increasing numbers of small, growing
businesses. Leasing to small, growing businesses is inherently more risky
than leasing to large, established corporations. The Enterprise Lease is
designed to meet the needs of large corporations with influence over multiple
business entities (for example, franchise operations). The Enterprise Lease
integrates the Value Added Lease and the Small Ticket Lease for organizations
in need of enterprise-wide equipment and systems solutions. Through the
Wholesale Lease, Winthrop acts as a lease broker that, for a fee, arranges
lease financing with other leasing companies for a variety of unrelated
brokers and vendors. The Wholesale Lease is generally sold to an outside
funding source and does not become part of Winthrop's lease portfolio.
Winthrop's standard lease agreements are entered into with each customer and
are noncancelable "net" leases which contain provisions under which the
customer, upon acceptance of the equipment, must make all lease payments
regardless of any defects in the equipment and which require the customer to
maintain and service the equipment, insure the equipment against casualty
loss and pay all property, sales and other taxes related to the equipment.
Winthrop typically retains ownership of the equipment it leases and, in the
event of default by the customer, Winthrop, or the financial institution who
has provided non-recourse financing for a particular lease, may declare the
customer in default, accelerate all lease payments due under the lease and
pursue other available remedies, including repossession of the equipment.
Upon completion of the initial term of the lease, the customer may: (1)
return the equipment to Winthrop; (2) renew the lease for an additional term;
or in certain circumstances (3) purchase the equipment. If the equipment is
returned to Winthrop, it is either re-leased to another customer or sold into
the secondary-user marketplace.
Winthrop's ability to arrange financing is important to its business. Winthrop
in prior periods has arranged permanent financing of Value Added Leases through
non-recourse discounting of lease rentals with various other financial
institutions at fixed interest rates. The proceeds from the assignment of
the lease rentals are equal to the present value of the remaining lease
payments due under the lease, discounted at the interest rate charged by the
financial institutions. Interest rates obtained under this type of financing
are negotiated on a transaction-by-transaction basis and reflect the
financial strength of the customer, the term of the lease and the prevailing
interest rates. For a lease discounted on a non-recourse basis, the other
financial institution has no recourse against Winthrop unless Winthrop is in
default of the terms of the agreement under which the lease and the leased
equipment are assigned to the other financial institution as collateral. The
other financial
19
institution may, however, take title to the collateral in the event the
customer fails to make lease payments or certain other defaults by the
customer occur under the terms of the lease.
TCF is seeking to expand its leasing activity to achieve growth over time.
Value Added Leases generally have larger individual balances and a greater
inherent risk of loss. TCF also plans to fund certain Value Added Leases
over time, and thereby retain the credit risk on such leases. Small Ticket
Leases generally carry a higher level of credit risk and higher interest
rates and represent an increased risk of loss in the event of adverse
economic conditions such as a recession.
TCF believes that it has in place experienced personnel and acceptable
standards for maintaining the credit quality of its lease portfolio, but no
assurance can be given as to the level of future delinquencies and lease
charge-offs.
Future minimum lease payments for direct financing and sales-type leases as
of June 30, 1997 are as follows (in thousands):
Period Payments to Payments to be
Ending be Received Received by Other
December 31, by TCF Financial Institutions Total
- ------------ ----------- ---------------------- -----
1997 $14,903 $ 59,443 $ 74,346
1998 17,153 97,238 114,391
1999 18,174 64,590 82,764
2000 7,328 32,374 39,702
2001 3,554 16,542 20,096
2002 540 1,193 1,733
------- -------- --------
$61,652 $271,380 $333,032
------- -------- --------
------- -------- --------
ALLOWANCES FOR LOAN AND LEASE AND REAL ESTATE LOSSES AND INDUSTRIAL REVENUE
BOND RESERVES
A summary of the activity of the allowances for loan and lease and real
estate losses and industrial revenue bond reserves, and selected statistics
follows (dollars in thousands):
Three Months Ended Six Months Ended
June 30, 1997 June 30, 1997
----------------------------------- ------------------------------------
Industrial Industrial
Allowance for Loan and Lease Allowance for Revenue Allowance for Revenue
Losses and Industrial Revenue Loan and Bond Loan and Bond
Bond Reserves: Lease Losses Reserves Total Lease Losses Reserves Total
------------- ---------- -------- ------------- ---------- --------
Balance at beginning of period $72,873 $1,610 $74,483 $71,865 $1,660 $73,525
Acquired balance (1) - - - 1,653 - 1,653
Provision for credit losses 4,147 (50) 4,097 5,695 (100) 5,595
Charge-offs (6,626) - (6,626) (11,946) - (11,946)
Recoveries 2,072 - 2,072 5,199 - 5,199
------------- ---------- -------- ------------- ---------- --------
Net charge-offs (4,554) - (4,554) (6,747) - (6,747)
------------- ---------- -------- ------------- ---------- --------
Balance at end of period $72,466 $1,560 $74,026 $72,466 $1,560 $74,026
------------- ---------- -------- ------------- ---------- --------
------------- ---------- -------- ------------- ---------- --------
Ratio of annualized net loan and lease
charge-offs to average loans and leases
outstanding, excluding loans held
for sale .34% .25%
Allowance for loan and lease losses as
a percentage of gross loan and lease
balances, excluding loans held for sale 1.32% 1.32%
- -------------------------
(1) Reflects acquisition of BOC.
20
Three Months Ended Six Months Ended
June 30, 1996 June 30, 1996
----------------------------------- ------------------------------------
Industrial Industrial
Allowance for Loan and Lease Allowance for Revenue Allowance for Revenue
Losses and Industrial Revenue Loan and Bond Loan and Bond
Bond Reserves: Lease Losses Reserves Total Lease Losses Reserves Total
------------- ---------- -------- ------------- ---------- --------
Balance at beginning of period $67,474 $1,760 $69,234 $66,290 $1,960 $68,250
Provision for credit losses 7,324 - 7,324 10,426 (200) 10,226
Charge-offs (7,108) (100) (7,208) (10,694) (100) (10,794)
Recoveries 2,517 - 2,517 4,185 - 4,185
------- ------ ------- ------- ------ -------
Net charge-offs (4,591) (100) (4,691) (6,509) (100) (6,609)
------- ------ ------- ------- ------ -------
Balance at end of period $70,207 $1,660 $71,867 $70,207 $1,660 $71,867
------- ------ ------- ------- ------ -------
------- ------ ------- ------- ------ -------
Ratio of annualized net loan and lease
charge-offs to average loans and
leases outstanding, excluding loans
held for sale .34% .24%
Allowance for loan and lease losses as
a percentage of gross loan and lease
balances, excluding loans held for sale 1.27% 1.27%
Three Months Ended Six Months Ended
Allowance for Real Estate Losses: June 30, June 30,
1997 1996 1997 1996
------ ------ ------ ------
Balance at beginning of period $1,137 $1,331 $1,127 $1,526
Provision for losses (60) (151) 38 297
Charge-offs (207) (31) (295) (674)
------ ------ ------ ------
Balance at end of period $ 870 $1,149 $ 870 $1,149
------ ------ ------ ------
------ ------ ------ ------
TCF has experienced an increase in the level of net loan charge offs related
to its consumer finance portfolio. As a result, net loan charge offs as a
percentage of average loans outstanding for TCF's consumer finance portfolio
were 3.07% and 2.95% for the second quarter and six months ended June 30,
1997, respectively, compared with 2.25% and 1.96% for the same periods of
1996. In addition, the net loan charge-offs as a percentage of average loans
outstanding for TCF's indirect consumer finance portfolio was 4.34% for the
second quarter and six months ended June 30, 1997, compared with 3.35% and
3.00% for the same periods in 1996.
On an ongoing basis, TCF's loan, lease and real estate portfolios are
reviewed and analyzed as to credit risk, performance, collateral value and
quality. The allowance for loan and lease losses is maintained at a level
believed to be adequate by management to provide for estimated loan and lease
losses. Management's judgment as to the adequacy of the allowance is a result
of ongoing review of larger individual loans and leases, the overall risk
characteristics of the portfolios, changes in the character or size of the
portfolios, the level of non-performing assets, net charge-offs, geographic
location and prevailing economic conditions. The allowance for loan and
lease losses is established for known or anticipated problem loans and
leases, as well as for loans and leases which are not currently known to
require specific allowances. Loans and leases are charged off to the extent
they are deemed to be uncollectible. The unallocated portion of TCF's
allowance for loan and lease losses totaled $23.9 million at June 30, 1997,
compared with $22.4 million at December 31, 1996.
The allowance for real estate losses is based on management's periodic
analysis of real estate holdings and is maintained at a level believed to be
adequate by management to provide for estimated real estate losses. The
allowance for real estate
21
losses is established to reduce the carrying value of real estate to fair
value less disposition costs. A weakness in commercial real estate markets
may result in declines in the values of TCF's real estate or the sale of
individual properties at less than previously estimated values, resulting in
additional charge-offs. TCF recognizes the effect of such events in the
periods in which they occur.
TCF guarantees certain industrial development and housing revenue bonds
issued by municipalities to finance commercial and multi-family real estate
owned by third parties. The balance of such financial guarantees at June 30,
1997 was $12.1 million, compared with $12.2 million at December 31, 1996.
Management has considered these guarantees in its review of the adequacy of
the industrial revenue bond reserves, which are included in accrued expenses
and other liabilities in the Consolidated Statements of Financial Condition.
The adequacy of the allowances for loan, lease and real estate losses and
industrial revenue bond reserves is highly dependent upon management's
estimates of variables affecting valuation, appraisals of collateral,
evaluations of performance and status, and the amounts and timing of future
cash flows expected to be received on impaired loans and leases. Such
estimates, appraisals, evaluations and cash flows may be subject to frequent
adjustments due to changing economic prospects of borrowers or properties.
These estimates are reviewed periodically and adjustments, if necessary, are
reported in the provisions for credit and real estate losses in the periods
in which they become known. Management believes the allowances for loan and
lease and real estate losses and industrial revenue bond reserves are
adequate.
22
NON-PERFORMING ASSETS
Non-performing assets (principally non-accrual loans and leases and real
estate acquired through foreclosure) totaled $40.4 million at June 30, 1997,
down $6 million from the December 31, 1996 total of $46.3 million. The
decrease in non-performing assets reflects the disposition of certain of
Great Lakes' remaining problem assets, partially offset by a $1.2 million
increase in consumer finance non-performing assets. Approximately 69.5% of
non-performing assets at June 30, 1997 consist of, or are secured by, real
estate. The accrual of interest income is generally discontinued when loans
and leases become 90 days or more past due with respect to either principal
or interest unless such loans and leases are adequately secured and in the
process of collection. Non-performing assets are summarized in the following
table:
At At
June 30, December 31,
(Dollars in thousands) 1997 1996
-------- ------------
Non-accrual loans and leases (1):
Consumer:
Bank lending $ 2,288 $ 1,746
Consumer finance lending 12,392 11,726
------- -------
14,680 13,472
Residential real estate 4,191 3,996
Commercial real estate 3,369 7,604
Commercial business 287 1,149
Lease financing 71 176
------- -------
22,598 26,397
Real estate and other assets (2) 17,771 19,937
------- -------
Total non-performing assets $40,369 $46,334
------- -------
------- -------
Non-performing assets as a percentage
of net loans and leases .76% .89%
Non-performing assets as a percentage
of total assets .55 .62
(1) Included in total loans and leases in the Consolidated Statements of
Financial Condition.
(2) Includes residential real estate of $9.1 million and $8.3 million,
commercial real estate of $690,000 and $2.7 million and automobiles of $2.7
million and $3.2 million at June 30, 1997 and December 31, 1996,
respectively.
23
TCF had no accruing loans and leases 90 days or more past due at June 30,
1997. The over 30-day delinquency rate on TCF's loans and leases (excluding
loans held for sale and non-accrual loans and leases) was .70% of gross loans
and leases outstanding at June 30, 1997, compared with 1.02% at year-end
1996. TCF's delinquency rates are determined using the contractual method.
The following table sets forth information regarding TCF's over 30-day
delinquent loan and lease portfolio, excluding loans held for sale and
non-accrual loans and leases:
At June 30, 1997 At December 31, 1996
------------------------ ------------------------
Percentage Percentage
Principal of Gross Loans Principal of Gross Loans
(Dollars in thousands) Balances and Leases Balances and Leases
--------- ---------- --------- ----------
Consumer:
Bank lending $ 7,702 .58% $ 7,473 .61%
Consumer finance lending 20,259 3.53 21,515 3.86
------- -------
27,961 1.47 28,988 1.62
Residential real estate 6,601 .30 8,330 .37
Commercial real estate 899 .11 5,114 .60
Commercial business 286 .14 9 .01
Lease financing 2,403 .67 12,342 3.61
------- -------
$38,150 .70 $54,783 1.02
------- -------
------- -------
TCF's over 30-day delinquency rate on gross consumer loans was 1.47% at June
30, 1997, down from 1.62% at year-end 1996. Management continues to monitor
the consumer loan portfolio, which will generally have higher delinquencies,
especially consumer finance loans. TCF's over 30-day delinquency rate on
gross consumer finance loans was 3.53% at June 30, 1997, compared with 3.86%
at December 31, 1996. TCF's over 30-day delinquency rate on gross automobile
and marine and home equity consumer finance loans was 4.15% and 2.44% at June
30, 1997, compared with 4.24% and 3.09%, respectively, at December 31, 1996.
Consumer finance lending is generally considered to involve a higher level of
credit risk. TCF believes that it has in place experienced personnel and
acceptable standards for maintaining credit quality that are consistent with
its goals for expanding its portfolio of these higher-yielding loans, but no
assurance can be given as to the level of future delinquencies and loan
charge-offs.
In addition to the non-accrual and restructured loans, there were commercial
real estate and commercial business loans with an aggregate principal balance
of $16.6 million outstanding at June 30, 1997 for which management has
concerns regarding the ability of the borrowers to meet existing repayment
terms. This amount consists of loans that were classified for regulatory
purposes as substandard, doubtful or loss, or were to borrowers that
currently are experiencing financial difficulties or that management believes
may experience financial difficulties in the future. This compares with $16
million of such loans at December 31, 1996. Although these loans are secured
by commercial real estate or other corporate assets, they may be subject to
future modifications of their terms or may become non-performing. Management
is monitoring the performance and classification of such loans and the
financial condition of these borrowers.
24
DEPOSITS
Deposits totaled $5.2 billion at June 30, 1997, up $265.9 million from
December 31, 1996, of which $160.9 million was due to the acquisition of BOC.
Lower interest-cost checking, savings and money market deposits totaled $2.8
billion, up $148.7 million from year-end 1996, and comprised 52.9% of total
deposits at June 30, 1997. Checking, savings and money market deposits are
an important source of lower cost funds and fee income for TCF. The
Company's weighted average rate for deposits, including non-interest bearing
deposits, increased to 3.34% at June 30, 1997 from 3.29% at December 31,
1996. The following table summarizes TCF's deposits:
At June 30, 1997 At December 31, 1996
----------------------------- ----------------------------
Weighted Weighted
Average % of Average % of
(Dollars in thousands) Rate Amount Total Rate Amount Total
-------- ---------- ------ -------- ---------- ------
Checking:
Non-interest bearing 0.00% $ 785,077 15.0% 0.00% $ 694,824 14.0%
Interest bearing 1.05 516,138 9.8 1.04 517,947 10.4
---------- ------ ---------- ------
.41 1,301,215 24.8 .45 1,212,771 24.4
---------- ------ ---------- ------
Passbook and statement 1.82 839,827 16.0 1.75 783,026 15.7
Money market 3.12 635,348 12.1 3.10 631,922 12.7
Certificates 5.45 2,467,184 47.1 5.33 2,349,911 47.2
---------- ------ ---------- ------
3.34 $5,243,574 100.0% 3.29 $4,977,630 100.0%
---------- ------ ---------- ------
---------- ------ ---------- ------
Certificates had the following remaining maturities:
At June 30, 1997 At December 31, 1996
----------------------------------------- -----------------------------------------
Weighted Weighted
(Dollars in Negotiable Average Negotiable Average
millions) Rate Other Total Rate Rate Other Total Rate
--------- -------- -------- ---------- ---------- ------- -------- --------
Maturity:
0-3 months $121.8 $ 419.6 $ 541.4 5.03% $ 81.2 $ 539.7 $ 620.9 5.16%
4-6 months 26.4 494.8 521.2 5.35 26.1 452.0 478.1 5.17
7-12 months 20.9 695.7 716.6 5.52 6.6 543.2 549.8 5.28
13-24 months 1.2 483.8 485.0 5.71 1.7 464.8 466.5 5.54
25-36 months .1 111.2 111.3 5.80 .1 130.3 130.4 5.68
37-48 months .1 59.1 59.2 6.00 .1 48.1 48.2 5.86
49-60 months - 23.0 23.0 6.20 - 42.8 42.8 6.35
Over 60 months - 9.5 9.5 5.51 - 13.2 13.2 5.66
------ -------- -------- ------ -------- --------
$170.5 $2,296.7 $2,467.2 5.45 $115.8 $2,234.1 $2,349.9 5.33
------ -------- -------- ------ -------- --------
------ -------- -------- ------ -------- --------
BORROWINGS
Borrowings totaled $1.3 billion as of June 30, 1997, down $358.8 million from
$1.7 billion at year-end 1996. The decrease was primarily due to a decrease
of $500 million in FHLB advances, partially offset by an increase of $47.8
million in securities sold under repurchase agreements, $54.3 million in
discounted lease rentals and $44.9 million in TCF's treasury, tax and loan
note payable. The weighted average rate on borrowings increased to 6.51% at
June 30, 1997, from 6.19% at December 31, 1996. At June 30, 1997, borrowings
with a maturity of one year or less totaled $826 million.
25
TCF's borrowings consist of the following:
At June 30, 1997 At December 31, 1996
----------------------- ----------------------
Weighted Weighted
Year of Average Average
(Dollars in thousands) Maturity Amount Rate Amount Rate
-------- ---------- -------- ---------- ---------
Securities sold under
repurchase agreements 1997 $ 273,485 5.69% $ 225,732 5.88%
1998 68,000 6.18 68,000 6.18
---------- ----------
341,485 5.79 293,732 5.95
---------- ----------
Federal Home Loan Bank
advances 1997 162,509 5.76 766,514 5.51
1998 435,300 5.82 310,300 5.88
1999 35,000 5.92 41,000 5.98
2000 8,074 7.24 8,074 7.24
2001 - - 15,000 6.97
2008 147 6.15 152 6.17
---------- ----------
641,030 5.83 1,141,040 5.66
---------- ----------
Discounted lease rentals 1997 50,622 8.83 78,885 9.22
1998 84,535 8.84 58,406 8.70
1999 58,100 8.93 31,789 8.82
2000 29,638 9.04 13,883 8.90
2001 15,787 9.22 2,641 9.05
2002 1,177 8.77 - -
---------- ----------
239,859 8.91 185,604 8.96
---------- ----------
Subordinated debt:
Convertible subordinated
debentures 1997 - - 7,149 7.25
Senior subordinated
debentures 2003 28,750 9.50 28,750 9.50
Senior subordinated
debentures 2006 6,248 18.00 6,248 18.00
---------- ----------
34,998 11.02 42,147 10.38
---------- ----------
Collateralized obligations:
Collateralized notes 1997 37,500 6.19 37,500 5.94
Less unamortized discount 13 - 28 -
---------- ----------
37,487 6.19 37,472 5.94
---------- ----------
Collateralized mortgage
obligations 2008 1,248 6.50 1,555 6.50
2010 1,670 5.90 1,622 5.90
---------- ----------
2,918 6.16 3,177 6.19
Less unamortized discount 108 - 144 -
---------- ----------
2,810 6.36 3,033 6.44
---------- ----------
40,297 6.20 40,505 5.98
---------- ----------
Other borrowings:
Bank line of credit 1997 1,700 6.47 - -
Treasury tax and loan note 1997 50,000 5.69 5,131 5.21
Other 1997 - - 13 7.60
---------- ----------
51,700 5.72 5,144 5.21
---------- ----------
$1,349,369 6.51 $1,708,172 6.19
---------- ----------
---------- ----------
26
During the 1997 second quarter, TCF called for redemption the convertible
subordinated debentures (the "Debentures") at par plus accrued and unpaid
interest to the date of redemption. The Debentures were convertible into TCF
common stock at a conversion price of $17.04 per share. TCF issued
approximately 419,000 shares of common stock in connection with the
conversion of the remaining $7.1 million of Debentures.
Effective January 1, 1997, TCF adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," not
deferred by SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." The adoption of SFAS No. 125 did not
impact TCF's financial condition or results of operations.
STOCKHOLDERS' EQUITY
Stockholders' equity at June 30, 1997 was $701.1 million, or 9.5% of total
assets, up from $630.7 million, or 8.5% of total assets, at December 31,
1996. The increase in stockholders' equity is primarily the result of net
income of $68 million for the first six months of 1997, the June 3, 1997
secondary offering of 700,000 shares of TCF common stock for net proceeds of
$29.3 million and the issuance of 419,000 shares of TCF common stock in
connection with the conversion of the remaining $7.1 million of Debentures,
partially offset by the repurchase of 647,900 shares of TCF's common stock at
a cost of $27.3 million and the payment of $16 million in common stock
dividends.
On January 20, 1997, TCF's Board of Directors (the "Board") authorized the
repurchase of up to 5% of TCF's common stock, or approximately 1.7 million
shares. On February 25, 1997, TCF announced that the Board had formally
rescinded TCF's common stock repurchase program in connection with the
Company's merger with Winthrop.
On April 23, 1997, TCF's shareholders approved an increase in the number of
authorized shares of TCF common stock from 70,000,000 to 140,000,000.
On July 21, 1997, TCF declared a quarterly dividend of 25 cents per common
share payable on August 29, 1997 to stockholders of record as of August 8,
1997.
On June 30, 1997, TCF's bank subsidiaries exceeded their regulatory capital
requirements and believe that they would be considered "well-capitalized"
under guidelines established pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991.
On June 3, 1997, TCF announced that it had completed a public offering of
700,000 shares of its common stock at a price of $43.375 per share. The
purpose of the offering was to meet one of the criteria for TCF's merger with
Winthrop to be accounted for as a pooling of interests. The net proceeds of
$29.3 million will be used for payment of a portion of the cash consideration
to be paid in connection with the acquisition of Standard. If the merger
with Standard does not occur, the net proceeds will be used for working
capital and for general corporate purposes.
27
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." SFAS No. 128 establishes standards for computing
and presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. SFAS No. 128
supersedes the standards for computing EPS previously found in Accounting
Principles Board Opinion ("APB") No. 15, "Earnings per Share." SFAS No. 128
is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. SFAS No. 128 requires restatement of all prior-period EPS data
presented.
Disclosure of earnings per share calculated in accordance with APB No. 15 is
contained in Exhibit 11. The following presentation illustrates proforma
basic and diluted EPS based on the provisions of SFAS No. 128 (dollars in
thousands, except per share data):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
Weighted average number of common shares outstanding
used in basic earnings per common share calculation 40,646,491 40,782,640 40,517,886 41,010,527
Dilutive effect of stock option and restricted
stock plans after application of treasury
stock method 628,810 572,989 652,860 586,498
Dilutive effect from assumed conversion of 71/4%
convertible subordinated debentures 280,554 421,009 349,936 423,308
---------- ---------- ---------- ----------
Weighted average number of shares outstanding adjusted
for effect of dilutive securities 41,555,855 41,776,638 41,520,682 42,020,333
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income available to common shareholders $ 34,935 $ 30,211 $ 67,962 $ 59,633
Add: Interest expense on 71/4% convertible subordinated
debentures, net of tax 53 80 132 163
---------- ---------- ---------- ----------
Income available to common shareholders including
effect of dilutive securities $ 34,988 $ 30,291 $ 68,094 $ 59,796
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic earnings per common share $ .86 $ .74 $ 1.68 $ 1.45
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted earnings per common share $ .84 $ .73 $ 1.64 $ 1.42
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
The statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. The statement is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. It is too early to determine what effect
SFAS No. 130 will have on TCF's financial statements.
In June, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The statement establishes standards for
the way that public business enterprises report information about operating
segments and certain other information in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement
is effective for financial statements for periods beginning after December
15, 1997. It is too early to determine what effect SFAS No. 131 will have on
TCF's financial statements.
28
FORWARD LOOKING INFORMATION
In recent years, significant new federal legislation has imposed numerous new
legal and regulatory requirements on financial institutions. In addition to
the uncertainties posed by possible legislative change, there are many other
uncertainties that may make TCF's historical performance an unreliable
indicator of its future performance, and forward-looking information,
including projections of future performance, is subject to numerous possible
adverse developments, including but not limited to the possibility of adverse
economic developments which may increase default and delinquency risks in
TCF's loan and lease portfolios; shifts in interest rates which may result in
shrinking interest margins; deposit outflows; interest rates on competing
investments; demand for financial services and loan and lease products;
increases generally in competitive pressure in the banking and financial
services industry; changes in accounting policies or guidelines, or monetary
and fiscal policies of the Federal government; changes in the quality or
composition of TCF's loan, lease and investment portfolios; or other
significant uncertainties.
TCF's pending acquisition of Standard and its recently completed acquisition
of Winthrop are subject to additional uncertainties, including the
possibility that the Standard transaction may not be completed or, if
completed, the possible failure to fully realize or realize within the
expected time frame expected cost savings from either transaction; lower than
expected income or revenues following the transactions, or higher than
expected operating costs; business disruption relating to the transactions
(both before and after completion); greater than expected costs or
difficulties related to the integration of the management of the acquired
companies with that of TCF; litigation costs and delays caused by litigation;
higher than expected costs in completing the acquisitions or unanticipated
regulatory delays or constraints or changes in the proposed transactions
imposed by regulatory authorities; declines in TCF's common stock price which
permit Standard to elect not to proceed with the transaction; and other
unanticipated occurrences which may delay consummation of the Standard
transaction, increase the costs related to either transaction or decrease the
expected financial benefits of either transaction.
29
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Supplementary Information
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
At At At At At At
(Dollars in thousands June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
except per-share data) 1997 1997 1996 1996 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL CONDITION DATA:
Total assets $7,403,760 $7,317,584 $7,430,487 $7,433,682 $7,340,539 $7,316,569
Investments (1) 82,098 60,458 456,195 402,328 157,414 63,136
Securities available for sale 1,181,126 1,242,457 999,586 998,001 1,049,219 1,117,476
Loans and leases 5,382,356 5,354,941 5,292,920 5,332,800 5,393,769 5,418,564
Deposits 5,243,574 5,291,894 4,977,630 5,018,672 5,052,557 5,150,023
Borrowings 1,349,369 1,273,411 1,708,172 1,671,598 1,584,493 1,453,895
Stockholders' equity 701,063 626,716 630,687 599,573 597,632 597,891
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
- ----------------------------------------------------------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1997 1997 1996 1996 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATIONS DATA:
Interest income $157,242 $153,380 $150,452 $153,049 $153,611 $155,772
Interest expense 64,605 63,289 62,288 63,551 64,419 68,058
-------- -------- -------- -------- -------- --------
Net interest income 92,637 90,091 88,164 89,498 89,192 87,714
Provision for credit losses 4,097 1,498 4,048 6,972 7,324 2,902
-------- -------- -------- -------- -------- --------
Net interest income after provision
for credit losses 88,540 88,593 84,116 82,526 81,868 84,812
-------- -------- -------- -------- -------- --------
Non-interest income:
Gain on sale of loans - - 810 4,633 - -
Gain on sale of loan servicing - 1,622 - - - -
Gain (loss) on sale of securities
available for sale 1,093 1,385 2 - (1) 85
Gain on sale of branches 2,810 - 1,022 - 480 1,245
Other non-interest income 49,051 43,748 46,340 43,828 43,270 39,898
-------- -------- -------- -------- -------- --------
Total non-interest income 52,954 46,755 48,174 48,461 43,749 41,228
-------- -------- -------- -------- -------- --------
Non-interest expense:
Provision for real estate losses (60) 98 15 121 (151) 448
Amortization of goodwill and other
intangibles 1,161 1,193 881 893 893 873
FDIC special assessment - - - 34,803 - -
Other non-interest expense 83,042 79,849 80,575 80,976 75,468 77,731
-------- -------- -------- -------- -------- --------
Total non-interest expense 84,143 81,140 81,471 116,793 76,210 79,052
-------- -------- -------- -------- -------- --------
Income before income tax expense 57,351 54,208 50,819 14,194 49,407 46,988
Income tax expense 22,416 21,181 18,923 5,346 19,196 17,566
-------- -------- -------- -------- -------- --------
Net income $ 34,935 $ 33,027 $ 31,896 $ 8,848 $ 30,211 $ 29,422
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Per common share:
Net income $ .83 $ .79 $ .76 $ .21 $ .72 $ .70
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Dividends declared $ .25 $ .1875 $ .1875 $ .1875 $ .1875 $ .15625
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
FINANCIAL RATIOS:
Return on average assets (2) 1.90% 1.82% 1.81% .49% 1.67% 1.59%
Return on average realized common equity (2) 21.35 21.26 20.81 5.82 20.35 20.21
Return on average common equity (2) 21.37 21.26 20.78 5.89 20.51 19.93
Average total equity to average assets 8.91 8.56 8.73 8.40 8.14 7.99
Net interest margin (2)(3) 5.41 5.31 5.37 5.36 5.27 5.07
(1) Includes interest-bearing deposits with banks, federal funds sold, U.S.
Government and other marketable securities held to maturity, FHLB stock and
FRB stock.
(2) Annualized.
(3) Net interest income divided by average interest-earning assets.
30
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Supplementary Information (Continued)
Consolidated Average Balance Sheets, Interest and Dividends
Earned or Paid, and Related Interest Yields and Rates
Six Months Ended June 30,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Interest
Average Yields and Average Yields and
(Dollars in thousands) Balance Interest(1) Rates (2) Balance Interest(1) Rates (2)
----------- ----------- ---------- ---------- ----------- ----------
Assets:
Securities available
for sale(3) $1,202,582 $ 43,207 7.19% $1,107,850 $ 39,522 7.13%
----------- ----------- ---------- -----------
Loans held for sale 195,729 7,192 7.35 242,890 9,110 7.50
----------- ----------- ---------- -----------
Loans and leases:
Residential real
estate 2,210,259 87,091 7.88 2,496,653 98,942 7.93
Commercial real estate 848,535 38,146 8.99 946,205 42,238 8.93
Commercial business 190,325 8,432 8.86 166,289 7,282 8.76
Consumer 1,782,502 107,116 12.02 1,574,064 96,023 12.20
Lease financing 313,477 16,889 10.78 246,636 14,080 11.42
----------- ----------- ---------- -----------
Total loans
and leases(4) 5,345,098 257,674 9.64 5,429,847 258,565 9.52
----------- ----------- ---------- -----------
Investments:
Interest-bearing
deposits with banks 14,011 382 5.45 5,481 80 2.92
Federal funds sold 1,959 52 5.31 2,002 57 5.69
U.S. Government and
other marketable
securities held
to maturity 3,925 102 5.20 3,774 98 5.19
FHLB stock 50,693 1,823 7.19 54,450 1,951 7.17
FRB stock 6,307 190 6.03 - - -
----------- ----------- ---------- -----------
Total investments 76,895 2,549 6.63 65,707 2,186 6.65
----------- ----------- ---------- -----------
Total interest-
earning assets 6,820,304 310,622 9.11 6,846,294 309,383 9.04
----------- ---------- ----------- ----------
Other assets(5) 484,657 467,923
----------- ----------
Total assets $7,304,961 $7,314,217
----------- ----------
----------- ----------
Liabilities and
Stockholders' Equity:
Noninterest-bearing
deposits $ 743,388 $ 579,811
----------- ----------
Interest-bearing
deposits:
Checking 520,357 2,811 1.08 517,271 2,858 1.11
Passbook and
statement 803,062 7,483 1.86 809,225 7,304 1.81
Money market 641,399 9,883 3.08 630,132 9,529 3.02
Certificates 2,445,335 65,179 5.33 2,523,475 67,979 5.39
----------- ----------- ---------- -----------
Total interest-
bearing
deposits 4,410,153 85,356 3.87 4,480,103 87,670 3.91
----------- ----------- ---------- -----------
Borrowings:
Securities sold
under repurchase
agreements and
federal funds
purchased 433,323 12,286 5.67 535,635 14,837 5.54
FHLB advances 628,921 18,232 5.80 712,740 19,511 5.47
Discounted lease rentals 207,395 8,586 8.28 184,156 7,471 8.11
Subordinated debt 40,958 1,494 7.30 17,569 989 11.26
Collateralized
obligations 40,312 1,270 6.30 41,074 1,286 6.26
Other borrowings 22,141 670 6.05 22,811 713 6.25
----------- ----------- ---------- -----------
Total borrowings 1,373,050 42,538 6.20 1,513,985 44,807 5.92
----------- ----------- ---------- -----------
Total interest-
bearing
liabilities 5,783,203 127,894 4.42 5,994,088 132,477 4.42
----------- ---------- ----------- ----------
Other liabilities(5) 139,080 151,691
----------- ----------
Total liabilities 6,665,671 6,725,590
----------- ----------
Stockholders' equity:(5)
Preferred equity - -
Common equity 639,290 588,627
----------- ----------
Total stockholders'
equity 639,290 588,627
----------- ----------
Total liabilities
and stockholders'
equity $7,304,961 $7,314,217
----------- ----------
----------- ----------
Net interest income $182,728 $176,906
----------- -----------
----------- -----------
Net interest rate spread 4.69% 4.62%
---------- ----------
---------- ----------
Net interest margin 5.36% 5.17%
---------- ----------
---------- ----------
(1) Tax-exempt income was not significant and thus has not been presented on a
tax equivalent basis. Tax-exempt income of $109,000 and $202,000 was
recognized during the six months ended June 30, 1997 and 1996,
respectively.
(2) Annualized.
(3) Average balance and yield of securities available for sale is based upon
the historical amortized cost balance.
(4) Average balance of loans and leases includes non-accrual loans and leases
and is presented net of unearned income.
(5) Average balance is based upon month-end balances.
31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, TCF is a party to legal proceedings arising out of its
general lending and operating activities. TCF is and expects to become
engaged in a number of foreclosure proceedings and other collection actions
as part of its loan collection activities. From time to time, borrowers have
also brought actions against TCF, in some cases claiming substantial amounts
in damages. TCF is also from time to time involved in litigation relating to
its retail banking, consumer credit and mortgage banking operations and
related consumer financial services, including class action litigation.
Management, after review with its legal counsel, believes that the ultimate
disposition of its litigation will not have a material effect on TCF's
financial condition.
On November 2, 1993, TCF National Bank Minnesota ("TCF Minnesota") filed a
complaint in the United States Court of Federal Claims seeking monetary
damages from the United States for breach of contract, taking of property
without just compensation and deprivation of property without due process.
TCF Minnesota's claim is based on the government's breach of contract in
connection with TCF Minnesota's acquisitions of certain savings institutions
prior to the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), which contracts allowed TCF Minnesota to
treat the "supervisory goodwill" created by the acquisitions as an asset that
could be counted toward regulatory capital, and provided for other favorable
regulatory accounting treatment. The United States has not yet answered TCF
Minnesota's complaint. TCF Minnesota's complaint involves approximately $80.3
million in supervisory goodwill.
In August 1995, Great Lakes National Bank Michigan ("Great Lakes") filed with
the United States Court of Federal Claims a complaint seeking monetary
damages from the United States for breach of contract, taking of property
without just compensation and deprivation of property without due process.
Great Lakes' claim is based on the government's breach of contract in
connection with Great Lakes' acquisitions of certain savings institutions
prior to the enactment of FIRREA in 1989, which contracts allowed Great Lakes
to treat the "supervisory goodwill" created by the acquisitions as an asset
that could be counted toward regulatory capital, and provided for other
favorable regulatory accounting treatment. The United States has not yet
answered Great Lakes' complaint. Great Lakes' complaint involves
approximately $87.3 million in supervisory goodwill.
On July 1, 1996, the United States Supreme Court issued a decision affirming
the August 30, 1995 decision of the United States Court of Appeals for the
Federal Circuit, which decision had affirmed Court of Federal Claims'
liability determinations in three other "supervisory goodwill" cases,
consolidated for review under the title WINSTAR CORP. V. UNITED STATES, 64
U.S.L.W. 4739 (1996). In rejecting the United States' consolidated appeal
from the Court of Federal Claims' decisions, the Supreme Court held in
WINSTAR that the United States had breached contracts it had entered into
with the plaintiffs which provided for the treatment of supervisory goodwill,
created through the plaintiffs' acquisitions of failed or failing savings
institutions, as an asset that could be counted toward regulatory capital.
Two of the three cases consolidated in the Supreme Court proceedings are now
proceeding to trials before the Court of Federal Claims on the issue of
damages. One of these trials commenced on February 24, 1997, and the other
is currently scheduled to begin on January 20, 1998. In connection with the
trials in those cases, the Court of Federal Claims in December of 1996 denied
the government's motion seeking to preclude the plaintiffs in these cases
from offering evidence regarding the scope and extent of any lost profits
they suffered as a result of the government's breach.
There are a variety of contracts and contract provisions in the TCF Minnesota
and Great Lakes transactions. The government has indicated that it will have a
number of
32
affirmative defenses against goodwill litigation filed against it. There can
be no assurance that the U.S. Supreme Court decision in WINSTAR will mean
that a similar result would be obtained in the actions filed by TCF Minnesota
and Great Lakes. There also can be no assurance that the government will be
determined liable in connection with the loss of supervisory goodwill by
either TCF Minnesota or Great Lakes or, even if a determination favorable to
TCF Minnesota or Great Lakes is made on the issue of the government's
liability, that a measure of damages will be employed that will permit any
recovery on TCF Minnesota's or Great Lakes' claim. Because of the complexity
of the issues involved in both the liability and damages phases of this
litigation, and the usual risks associated with litigation, the Company
cannot predict the outcome of TCF Minnesota's or Great Lakes' cases, and
investors should not anticipate any recovery.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 24, 1997, a special meeting of the shareholders of TCF was held to
obtain the approval of shareholders of record as of May 20, 1997 in
connection with the matter indicated below. Following is a brief description
of the matter voted on at the meeting, and the number of votes cast for,
against or withheld, as well as the number of abstentions and broker
nonvotes, as to such matter:
Vote
----------------------------------------------
Against or Broker
For Withheld Abstain Nonvote
---------- ---------- --------- ---------
1. Reorganization between TCF
and Winthrop. 24,743,118 141,538 75,352 98,025
On April 23, 1997, the Annual Meeting of the shareholders of TCF was held to
obtain the approval of shareholders of record as of March 7, 1997 in
connection with the three matters indicated below. Following is a brief
description of each matter voted on at the meeting, and the number of votes
cast for, against or withheld, as well as the number of abstentions and
broker nonvotes, as to each such matter:
Vote
---------------------------------------------
Against or Broker
For Withheld Abstain Nonvote
---------- ---------- --------- --------
1. Election of Directors:
Bruce G. Allbright 30,394,050 163,282 N/A N/A
Robert J. Delonis 30,296,153 261,179 N/A N/A
John M. Eggemeyer, III 30,393,539 163,793 N/A N/A
Daniel F. May 30,393,500 163,832 N/A N/A
William F. Bieber 30,289,993 267,339 N/A N/A
2. Ratification of KPMG Peat
Marwick LLP as independent
public accountants for 1997. 30,418,949 72,941 65,442 0
3. Approval of an increase in the
number of authorized shares of
TCF common stock. 28,479,332 1,962,877 115,123 0
33
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Index to Exhibits on page 36 of this report.
(b) Reports on Form 8-K.
A Current Report on Form 8-K, dated April 11, 1997, was filed in connection
with TCF's announcement that it had completed the conversion of its savings
bank subsidiaries to national banks and had become a national bank holding
company. A Current Report on Form 8-K, dated May 21, 1997, was filed in
connection with TCF's announcement that its wholly-owned subsidiary, Great
Lakes National Bank Michigan, would redeem its remaining $7.1 million of
7 1/4% convertible subordinated debentures due 2011. A Current Report on
Form 8-K, dated May 30, 1997, was filed in connection with TCF's
announcement that Great Lakes National Bank Michigan will open six branches
at Kroger Company of Michigan stores and TCF's announcement that it had
reached an agreement to sell the branches and deposits of Great Lakes
National Bank Ohio to Fifth Third Bancorp. A Current Report on Form 8-K,
dated June 5, 1997, was filed in connection with the increase of TCF's
authorized common stock from 70,000,000 to 140,000,000 shares. A Current
Report on Form 8-K, dated June 12, 1997, was filed in connection with TCF's
announcements that the Federal Reserve Board approved the acquisition of
Winthrop, that a public offering of 700,000 shares of its common stock at a
price of $43.375 per share had been completed and that the issuance of
approximately 419,000 shares of common stock would occur in connection with
the conversion by holders of the Great Lakes National Bank Michigan $7.1
million of 7 1/4% convertible subordinated debentures due 2011. A Current
Report on Form 8-K, dated July 1, 1997, was filed in connection with TCF's
announcement that it had completed its acquisition of Winthrop following
approval of the transaction by shareholders of TCF and Winthrop and that
TCF had obtained the consent of the holders of Winthrop's 9.50% Senior
Notes due 2003 (the "Notes") to amendments to the Bond Indenture under
which the Notes were issued that eliminated certain covenants in return for
the addition of TCF as a co-obligor of the Notes.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TCF FINANCIAL CORPORATION
/s/ Ronald J. Palmer
-------------------------------------------
Ronald J. Palmer, Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Mark R. Lund
-------------------------------------------
Mark R. Lund, Senior Vice President,
Assistant Treasurer and Controller
(Principal Accounting Officer)
Dated: August 13, 1997
35
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
FOR FORM 10-Q
Exhibit Sequentially
Number Description Numbered Page
------- ----------- -------------
4(a) Copies of instruments with respect N/A
to long-term debt will be furnished
to the Securities and Exchange
Commission upon request.
11 Computation of Earnings Per Common Share 37
36