EXHIBIT 13
DESCRIPTION OF BUSINESS
TCF Financial Corporation is a Minneapolis-based national bank holding company
with nearly $10 billion in assets. TCF's banks are based in Minnesota,
Illinois, Wisconsin, and Colorado as TCF National Bank, and in Michigan as Great
Lakes National Bank. Other TCF affiliates include business-equipment leasing,
consumer finance, mortgage banking, title insurance, annuity and mutual fund
sales companies.
TCF has a proven community banking philosophy focused on creating franchise and
shareholder value. We emphasize higher-yielding consumer and commercial loans
and leases, and lower interest-cost checking, savings, and money market deposit
accounts. Since 1992, these POWER ASSETS-SM- and POWER LIABILITIES-SM- have
more than doubled over their originally reported balances. That growth has
fueled our core earnings improvement and created shareholder value. A $100
investment in TCF stock at the end of 1992 would have grown to $525 at year-end
1997 with dividends reinvested. The same investment in the Standard & Poor's
500 Composite Stock Price Index, which is comprised of 500 widely held stocks,
would have been worth $251.
TABLE OF CONTENTS
Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 34
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 40
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . 69
Selected Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . 70
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review
FINANCIAL REVIEW
The financial review presents management's discussion and analysis of the
consolidated financial condition and results of operations of TCF Financial
Corporation ("TCF" or the "Company"). This review should be read in conjunction
with the consolidated financial statements and other financial data beginning on
page 34.
On September 4, 1997, TCF acquired all of the outstanding common stock of
Standard Financial, Inc. ("Standard"), a community-oriented thrift institution
with $2.6 billion in assets, $1.9 billion in deposits, and 14 full-service
offices on the southwest side of Chicago and in the nearby southwestern and
western suburbs. The acquisition has been accounted for by the purchase method
of accounting and, accordingly, the results of operations of Standard have been
included in TCF's consolidated financial statements from September 4, 1997.
On June 24, 1997, TCF completed its acquisition of Winthrop Resources
Corporation ("Winthrop"), a leasing company with $363 million in assets. 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.
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.
On January 30, 1998, TCF National Bank Illinois ("TCF Illinois") completed
its acquisition of 76 branches and 178 automated teller machines ("ATM") in
Jewel-Osco stores in the Chicago area previously operated by Bank of America.
TCF Illinois plans to open branches in 11 more Jewel-Osco stores in 1998, and 25
branches per year in subsequent years until branches have been installed in all
targeted stores. TCF anticipates that the 1998 cost of this expansion will be
weighted more heavily in the first half of 1998. TCF accounted for the
acquisition using the purchase method of accounting.
Further detail on the acquisitions is provided in Note 2 of Notes to
Consolidated Financial Statements.
During the fourth quarter of 1997, TCF adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128
supersedes the standards for computing and presenting earnings per share ("EPS")
previously found in Accounting Principles Board ("APB") Opinion No. 15,
"Earnings per Share." SFAS No. 128 replaces Primary EPS and Fully Diluted EPS
with Basic EPS and Diluted EPS, respectively. SFAS No. 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. In accordance with SFAS No. 128, all prior-period
EPS data presented has been restated to reflect the adoption of SFAS No. 128.
The per-share amounts for 1996 and 1995 have also been restated giving
retroactive recognition to TCF's November 28, 1997 two-for-one stock split. See
"Financial Condition - Stockholders' Equity."
Further detail on the adoption of SFAS No. 128 is provided in Note 1 of
Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
PERFORMANCE SUMMARY
TCF reported net income of $145.1 million for 1997, up from $100.4 million
for 1996 and $72.2 million for 1995. Basic earnings per common share were $1.72
for 1997, compared with $1.23 for 1996 and 88 cents for 1995. Diluted earnings
per common share were $1.69 for 1997, compared with $1.20 for 1996 and 86 cents
for 1995. Return on average assets was 1.77% in 1997, compared with 1.39% in
1996 and .95% in 1995. Return on average realized common equity was 19.57% in
1997, compared with 16.77% in 1996 and 13.69% in 1995. Basic cash earnings per
common share, which exclude amortization of goodwill and deposit base
intangibles, were $1.85 for 1997, compared with $1.26 for 1996 and 91 cents for
1995.
TCF's 1997 results reflect a branch reorganization at Great Lakes National
Bank Michigan ("Great Lakes Michigan") and Great Lakes National Bank Ohio
("Great Lakes Ohio"), including the sale of all eight Great Lakes Ohio branches
and related deposits for a net gain of $10.6 million, the accelerated
amortization of Great Lakes Michigan's remaining $8.7 million of deposit base
intangibles, and the write-off of $1.5 million of Great Lakes Michigan's teller
equipment.
17
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
TCF's 1996 results included a one-time special assessment of $34.8 million
from the Federal Deposit Insurance Corporation ("FDIC") to recapitalize the
Savings Association Insurance Fund ("SAIF") under federal legislation enacted on
September 30, 1996. On an after-tax basis, the FDIC special assessment totaled
$21.7 million, or 26 cents per basic common share.
TCF's 1995 results included certain merger-related charges incurred in
connection with TCF's acquisition of Great Lakes Bancorp, A Federal Savings Bank
("Great Lakes"), which is described in Note 2 of Notes to Consolidated Financial
Statements. On an after-tax basis, these merger-related charges totaled $32.8
million, or 41 cents per basic common share.
Net income totaled $145.1 million for 1997, up 18.8% from $122.1 million
for 1996 before the FDIC special assessment. Net income totaled $105.1 million
for 1995 before the merger-related charges. On the same basis, basic earnings
per common share were $1.72, up 15.4% from $1.49 for 1996, and $1.29 for 1995,
and diluted earnings per common share were $1.69 for 1997, up 15.8% from $1.46
for 1996, and $1.25 for 1995. Basic cash earnings per common share, on the same
basis, were $1.85 for 1997, up from $1.52 for 1996 and $1.32 for 1995.
Return on average assets was a record 1.77% for 1997, compared with
1.70% for 1996 before the special assessment, and 1.38% for 1995 before the
merger-related charges. On the same basis, return on average realized common
equity was 19.57% for 1997, compared with 20.40% for 1996 and 19.97% for
1995. As the Standard acquisition was accounted for as a purchase
transaction, TCF's results for periods prior to the Standard acquisition have
not been restated. Since Standard's performance ratios were lower than
TCF's, the Company's performance ratios for 1997 were negatively impacted by
the acquisition of Standard. The Company's performance ratios for 1998 will
continue to be negatively impacted due to the inclusion of Standard for the
entire year.
NET INTEREST INCOME
A significant component of TCF's earnings is net interest income, which
is the difference between interest earned on loans and leases, securities
available for sale, investments, mortgage-backed securities held to maturity,
and other interest-earning assets (interest income), and interest paid on
deposits and borrowings (interest expense). This amount, when divided by
average interest-earning assets, is referred to as the net interest margin,
expressed as a percentage. Net interest income and net interest margin are
affected by changes in interest rates, the volume and the mix of
interest-earning assets and interest-bearing liabilities, and the level of
non-performing assets. The arithmetic difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities
expressed as a percentage is referred to as the net interest-rate spread.
Net interest income was a record $393.6 million for the year ended December
31, 1997, up from $354.6 million in 1996 and $329.1 million in 1995. This
represents an increase of 11% in 1997, following increases of 7.7% in 1996 and
15.3% in 1995. Total average interest-earning assets increased 12.5% in 1997,
following decreases of 5.6% in 1996 and 1.3% in 1995. The net interest margin
for 1997 was 5.20%, compared with 5.27% in 1996 and 4.61% in 1995. TCF's net
interest margin for 1997 was negatively impacted by the acquisition of Standard
and is expected to decline further in 1998 due to the impact of Standard's lower
net interest margin for the entire year. In addition, TCF's net interest-rate
spread was 4.54% in 1997, compared with 4.68% and 4.14% in 1996 and 1995,
respectively.
18
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
The following table presents TCF's average balance sheets, interest and
dividends earned or paid, and the related yields and rates on major categories
of TCF's interest-earning assets and interest-bearing liabilities:
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------------------ ------------------------------ ------------------------------
Interest Interest Interest
Yields Yields Yields
(Dollars in thousands) Average and Average and Average and
Balance Interest(1) Rates Balance Interest(1) Rates Balance Interest(1) Rates
---------- ------------ ------- ---------- ------------ ------- --------- ------------ -------
ASSETS:
Securities available
for sale(2) $1,338,295 $ 95,701 7.15% $1,054,434 $ 75,303 7.14% $ 57,170 $ 4,055 7.09%
---------- -------- ---------- -------- ---------- --------
Loans held for sale 211,192 15,755 7.46 227,226 17,080 7.52 226,922 18,253 8.04
---------- -------- ---------- -------- ---------- --------
Mortgage-backed securities
held to maturity - - - - - - 1,275,073 91,037 7.14
---------- -------- ---------- -------- ---------- --------
Loans and leases:
Residential real estate 2,674,107 206,853 7.74 2,416,865 191,348 7.92 2,690,667 211,128 7.85
Commercial real estate 856,712 77,829 9.08 923,838 82,971 8.98 980,074 87,764 8.95
Commercial business 205,402 18,068 8.80 157,400 13,905 8.83 186,928 17,568 9.40
Consumer 1,856,299 221,758 11.95 1,624,449 197,916 12.18 1,417,189 171,973 12.13
Lease financing 335,534 39,458 11.76 263,709 29,914 11.34 212,952 23,330 10.96
--------- ------- --------- ------- --------- -------
Total loans and leases (3) 5,928,054 563,966 9.51 5,386,261 516,054 9.58 5,487,810 511,763 9.33
--------- ------- --------- ------- --------- -------
Investments:
Interest-bearing deposits
with banks 15,040 1,593 10.59 6,946 282 4.06 10,343 570 5.51
Federal funds sold 4,959 279 5.63 2,448 135 5.51 8,484 506 5.96
U.S. Government and other
marketable securities
held to maturity 3,963 213 5.37 3,817 199 5.21 3,595 200 5.56
FHLB stock 59,243 4,338 7.32 52,642 3,831 7.28 64,757 4,814 7.43
FRB stock 12,941 769 5.94 - - - - - -
--------- ------- --------- ------- --------- -------
Total investments 96,146 7,192 7.48 65,853 4,447 6.75 87,179 6,090 6.99
--------- ------- --------- ------- --------- -------
Total interest-
earning assets 7,573,687 682,614 9.01 6,733,774 612,884 9.10 7,134,154 631,198 8.85
------- ----- ------- ----- ------- -----
Other assets (4) 600,083 467,328 476,148
--------- --------- ---------
Total assets $8,173,770 $7,201,102 $7,610,302
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Non-interest bearing deposits $ 782,836 $ 608,213 $ 507,550
---------- ---------- ----------
Interest-bearing deposits:
Checking 551,501 6,133 1.11 510,979 5,571 1.09 529,329 6,606 1.25
Passbook and statement 901,576 17,653 1.96 793,975 14,389 1.81 855,492 18,507 2.16
Money market 658,894 20,533 3.12 630,382 19,256 3.05 649,189 21,878 3.37
Certificates 2,868,833 150,863 5.26 2,458,291 132,159 5.38 2,657,859 146,253 5.50
----------- ------- ---------- ------- ---------- -------
Total interest-bearing
deposits 4,980,804 195,182 3.92 4,393,627 171,375 3.90 4,691,869 193,244 4.12
----------- ------- ---------- ------- ---------- -------
Borrowings:
Securities sold under
repurchase agreements and
federal funds purchased 346,339 19,892 5.74 506,298 28,597 5.65 596,935 36,095 6.05
FHLB advances 817,464 48,142 5.89 674,703 37,277 5.52 860,948 50,729 5.89
Discounted lease rentals 222,558 18,430 8.28 180,586 14,906 8.25 163,871 13,614 8.31
Subordinated debt 37,953 3,581 9.44 28,911 2,564 8.87 46,429 4,986 10.74
Collateralized obligations 37,938 2,439 6.43 40,831 2,586 6.33 41,586 2,880 6.93
Other borrowings 21,656 1,352 6.24 15,829 1,011 6.39 8,095 558 6.89
----------- ------- ---------- ------- ---------- -------
Total borrowings 1,483,908 93,836 6.32 1,447,158 86,941 6.01 1,717,864 108,862 6.34
----------- ------- ---------- ------- ---------- -------
Total interest-bearing
liabilities 6,464,712 289,018 4.47 5,840,785 258,316 4.42 6,409,733 302,106 4.71
------- ----- -------- ----- ------- -----
Other liabilities (4) 180,585 153,373 157,142
----------- ---------- ----------
Total liabilities 7,428,133 6,602,371 7,074,425
----------- ---------- ----------
Stockholders' equity: (4)
Preferred equity - - 13,472
Common equity 745,637 598,731 522,405
----------- ---------- ----------
Total stockholders'
equity 745,637 598,731 535,877
----------- ---------- ----------
Total liabilities
and stockholders'
equity $8,173,770 $7,201,102 $7,610,302
----------- ---------- ----------
----------- ---------- ----------
Net interest income $393,596 $354,568 $329,092
-------- -------- --------
-------- -------- --------
Net interest-rate spread 4.54% 4.68% 4.14%
------ ------ ------
------ ------ ------
Net interest margin 5.20% 5.27% 4.61%
------ ------ ------
------ ------ ------
- --------------------------------
(1) Tax-exempt income was not significant and thus has not been presented on a
tax equivalent basis. Tax-exempt income of $201,000, $363,000 and $511,000
was recognized during the years ended December 31, 1997, 1996 and 1995,
respectively.
(2) Average balance and yield of securities available for sale is based upon
the historical amortized cost balance.
(3) Average balance of loans and leases includes non-accrual loans and leases,
and is presented net of unearned income.
(4) Average balance is based upon month-end balances.
19
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
The following table presents the components of the changes in net
interest income by volume and rate:
Year Ended Year Ended
December 31, 1997 December 31, 1996
Versus Same Period in 1996 Versus Same Period in 1995
-------------------------------- --------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------- --------------------------------
(In thousands) Volume(1) Rate(1) Total Volume(1) Rate(1) Total
--------- ---------- --------- --------- ---------- ---------
Securities available for
sale $ 20,293 $ 105 $ 20,398 $ 71,219 $ 29 $ 71,248
--------- ---------- --------- --------- ---------- ---------
Loans held for sale (1,191) (134) (1,325) 24 (1,197) (1,173)
--------- ---------- --------- --------- ---------- ---------
Mortgage-backed securities
held to maturity - - - (91,037) - (91,037)
--------- ---------- --------- --------- ---------- ---------
Loans and leases:
Residential real estate 19,946 (4,441) 15,505 (21,649) 1,869 (19,780)
Commercial real estate (6,061) 919 (5,142) (5,084) 291 (4,793)
Commercial business 4,210 (47) 4,163 (2,647) (1,016) (3,663)
Consumer 27,655 (3,813) 23,842 25,231 712 25,943
Lease financing 8,401 1,143 9,544 5,748 836 6,584
--------- ---------- --------- --------- ---------- ---------
Total loans and leases 54,151 (6,239) 47,912 1,599 2,692 4,291
--------- ---------- --------- --------- ---------- ---------
Investments:
Interest-bearing
deposits with banks 551 760 1,311 (160) (128) (288)
Federal funds sold 141 3 144 (336) (35) (371)
U.S. Government and
other marketable
securities held to
maturity 8 6 14 12 (13) (1)
FHLB stock 486 21 507 (887) (96) (983)
FRB stock 769 - 769 - - -
--------- ---------- --------- --------- ---------- ---------
Total investments 1,955 790 2,745 (1,371) (272) (1,643)
--------- ---------- --------- --------- ---------- ---------
Total interest
income 75,208 (5,478) 69,730 (19,566) 1,252 (18,314)
--------- ---------- --------- --------- ---------- ---------
Deposits:
Checking 457 105 562 (220) (815) (1,035)
Passbook and statement 2,026 1,238 3,264 (1,266) (2,852) (4,118)
Money market 847 430 1,277 (613) (2,009) (2,622)
Certificates 21,705 (3,001) 18,704 (10,921) (3,173) 14,094)
--------- ---------- --------- --------- ---------- ---------
Total deposits 25,035 (1,228) 23,807 (13,020) (8,849) (21,869)
--------- ---------- --------- --------- ---------- ---------
Borrowings:
Securities sold under
repurchase agree-
ments and federal
funds purchased (9,155) 450 (8,705) (5,223) (2,275) (7,498)
FHLB advances 8,251 2,614 10,865 (10,424) (3,028) (13,452)
Discounted lease rentals 3,470 54 3,524 1,390 (98) 1,292
Subordinated debt 843 174 1,017 (1,657) (765) (2,422)
Collateralized
obligations (187) 40 (147) (51) (243) (294)
Other borrowings 365 (24) 341 496 (43) 453
--------- ---------- --------- --------- ---------- ---------
Total borrowings 3,587 3,308 6,895 (15,469) (6,452) (21,921)
--------- ---------- --------- --------- ---------- ---------
Total interest
expense 28,622 2,080 30,702 (28,489) (15,301) (43,790)
--------- ---------- --------- --------- ---------- ---------
Net interest income $ 46,586 $ (7,558) $ 39,028 $ 8,923 $ 16,553 $ 25,476
--------- ---------- --------- --------- ---------- ---------
--------- ---------- --------- --------- ---------- ---------
- -------------------------------
(1) 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.
20
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
In 1997, TCF's net interest income increased primarily due to the
acquisition of Standard, the growth of higher-yielding consumer loans,
commercial business loans, lease financings, and lower-cost retail deposits,
and increased capital. Net interest income increased $39 million, or 11%, and
total average interest-earning assets increased by $839.9 million, or 12.5%,
from 1996 levels. TCF's net interest income improved by $46.6 million due to
volume changes and decreased $7.6 million due to rate changes. The favorable
impact of the growth in consumer loan, securities available for sale,
residential real estate loan and lease financing volumes was partially offset by
decreased yields on consumer and residential real estate loans, decreased
volumes in commercial real estate loans, and increased certificate of deposit
volumes. TCF's net interest margin for the fourth quarter of 1997 was 4.93%,
compared with 5.24% for the third quarter of 1997 and 5.37% for the fourth
quarter of 1996. As previously noted, TCF's net interest margin for 1997 was
negatively impacted by the acquisition of Standard. Margin growth is dependent
on TCF's ability to generate higher-yielding assets. TCF expects that the
current interest rate environment and the resulting increase in prepayment
activity will make it more difficult to generate, or increase the balance of,
such higher-yielding assets. Interest income increased $69.7 million in 1997,
reflecting an increase of $75.2 million due to volume, partially offset by a
decrease of $5.5 million due to rate changes. Interest expense increased $30.7
million in 1997, primarily due to the acquisition of Standard, reflecting
increases of $28.6 million due to volume and $2.1 million due to a higher cost
of funds. The decrease in net interest income due to the unfavorable impact of
rate changes reflects the acquisition of Standard, partially offset by TCF's
changing asset/liability mix, with greater emphasis on higher-yielding consumer
loans and lease financings.
If variable index rates (e.g., prime) were to decline, TCF may experience
compression of its net interest margin depending on the timing and amount of any
reductions, as it is possible that interest rates paid on retail deposits will
not decline as quickly, or to the same extent, as the decline in the yield on
interest-rate-sensitive assets such as home equity loans. In addition,
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 also experience compression in its net interest
margin if the rates paid on deposits increase. See "Financial Condition -
Deposits" and "Financial Condition - Market Risk - Interest-Rate Risk."
In 1996, TCF's net interest income, net interest margin and interest-rate
spread increased primarily due to the growth of higher-yielding consumer loans
and lease financings, the favorable impact of the 1995 merger-related
restructuring activities, the November 30, 1995 redemption of $34.5 million of
10% subordinated capital notes, lower average levels of non-performing assets,
and increased capital. Net interest income increased $25.5 million, or 7.7%,
even though total average interest-earning assets decreased by $400.4 million,
or 5.6%, from 1995 levels. TCF's net interest income improved by $8.9 million
due to volume changes and by $16.6 million due to rate changes. The favorable
impact of the lower cost of funds and growth in consumer loan, lease financing
and securities available for sale volumes was partially offset by decreased
volumes in mortgage-backed securities and residential real estate loans.
Interest income decreased $18.3 million in 1996, reflecting a decrease of $19.6
million due to volume and an increase of $1.3 million due to rate changes.
Interest expense decreased $43.8 million in 1996, reflecting decreases of $28.5
million due to volume and $15.3 million due to a lower cost of funds. The
increase in net interest income due to the favorable impact of rate changes
reflects in part TCF's changing asset/liability mix, with greater emphasis on
higher-yielding consumer loans and lease financings and less emphasis on
mortgage-backed securities.
In 1995, TCF's net interest income, net interest margin and interest-rate
spread increased primarily due to increased yields and growth of consumer loans
and lease financings, the favorable impact of the Great Lakes merger-related
restructuring activities, lower average levels of non-performing assets, and
increased capital. Net interest income increased $43.6 million, or 15.3%, even
though total average interest-earning assets decreased by $92.3 million, or
1.3%, from 1994 levels. TCF's net interest income improved by $15 million due
to volume changes and by $28.7 million due to rate changes. The favorable
impact of growth in higher-yielding consumer loans and lease financings was
partially offset by the negative impact of a higher cost of funds and decreased
volumes in mortgage-backed securities held to maturity and securities available
for sale. Interest income increased $62.3 million in 1995, reflecting an
increase of $53 million due to higher yields on interest-earning assets.
Interest expense increased $18.7 million in 1995, reflecting a $24.3 million
increase due to a higher cost of funds. The increase in net interest income due
to the favorable impact of rate changes reflects in part the benefit from TCF's
changing asset/liability mix.
PROVISION FOR CREDIT LOSSES
TCF provided $17.8 million for credit losses in 1997, compared with $21.2
million in 1996 and $16.1 million in 1995. Included in the 1995 provision for
credit losses were $5 million of merger-related provisions. The merger-related
provisions were established to conform Great Lakes' credit loss reserve
practices and methods to those of TCF and to allow for the accelerated
disposition of Great Lakes' remaining problem assets. The allowance for loan
and lease losses and industrial revenue bond reserves totaled $84 million at
December 31, 1997, compared with $73.5 million at December 31, 1996. See
"Financial Condition - Allowance for Loan and Lease Losses and Industrial
Revenue Bond Reserves."
21
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
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 and loans, non-interest income increased
$38.9 million, or 22.4%, during 1997 to $212.3 million. The increase was
primarily due to increases in fee and service charge revenues, ATM network
revenues, leasing revenues and gains on sales of securities available for
sale. The following table presents the components of non-interest income:
Percentage
Year Ended December 31, Increase (Decrease)
------------------------------------- -------------------------
(Dollars in thousands) 1997 1996 1995 1997/96 1996/95
---- ---- ---- ------- -------
Fee and service charge revenues $101,329 $ 90,424 $ 81,862 12.1% 10.5%
Leasing revenues 32,025 23,814 19,739 34.5 20.6
ATM network revenues 30,808 21,478 18,418 43.4 16.6
Title insurance revenues 13,730 13,492 11,509 1.8 17.2
Commissions on sales of annuities 7,894 9,134 8,557 (13.6) 6.7
Gain on sale of loans held for
sale 4,777 5,038 3,735 (5.2) 34.9
Gain on sale of securities
available for sale 8,509 86 158 N.M. (45.6)
Gain on sale of loan servicing 1,622 - 1,535 100.0 (100.0)
Other 11,642 9,956 7,284 16.9 36.7
Gain on sale of loans 145 5,443 - (97.3) 100.0
Gain on sale of branches 14,187 2,747 1,103 416.5 149.0
Merger-related charges:
Loss on sale of mortgage-
backed securities - - (21,037) - N.M.
Loss on sale of securities
available for sale - - (310) - N.M.
-------- -------- --------
Total non-interest income $226,668 $181,612 $132,553 24.8 37.0
-------- -------- --------
-------- -------- --------
- -----------------------------
N.M. Not meaningful.
Fee and service charge revenues increased $10.9 million in 1997 and $8.6
million in 1996 primarily as a result of expanded retail banking activities.
Included in fee and service charge revenues are fees of $14.6 million, $15.3
million and $15.1 million received for the servicing of loans owned by others
during 1997, 1996 and 1995, respectively. At December 31, 1997, 1996 and 1995,
TCF was servicing real estate loans for others with aggregate unpaid principal
balances of $4.4 billion, $4.5 billion and $4.5 billion, respectively.
Leasing revenues increased $8.2 million, or 34.5%, in 1997 and $4.1
million, or 20.6%, in 1996. Leasing revenues can fluctuate as a result of
changes in the mix of leases classified as sales-type, direct financing or
operating leases in accordance with generally accepted accounting principles.
In addition, leasing revenues may be negatively impacted by a decline in
economic activity and a resulting decrease in demand for leased equipment.
ATM network revenues increased $9.3 million, or 43.4%, in 1997 and $3.1
million, or 16.6%, in 1996. These increases reflect TCF's efforts to provide
banking services through its ATM network. TCF expanded its network to 1,156
ATMs at December 31, 1997, an increase of 239 ATMs during 1997. As
previously noted, on January 30, 1998, TCF acquired 178 ATMs in connection
with its acquisition of 76 branches in Jewel-Osco stores. The Company
anticipates installing additional ATMs during 1998.
Title insurance revenues increased $238,000 in 1997 to $13.7 million,
following an increase of $2 million in 1996 to $13.5 million. Title insurance
revenues are cyclical in nature and are largely dependent on industry levels of
residential real estate loan originations and refinancings.
Commissions on sales of annuities decreased $1.2 million to $7.9 million in
1997, following an increase of $577,000 to $9.1 million in 1996. Sales of
annuities may fluctuate from period to period, and future sales levels will
depend upon continued favorable tax treatment, the level of interest rates,
general economic conditions and investor preferences. Sales of annuities may be
negatively impacted by the current interest rate environment.
Gains on sales of loans held for sale decreased $261,000 in 1997
following an increase of $1.3 million in 1996. Gains on sales of securities
available for sale totaled $8.5 million in 1997, an increase of $8.4 million
from the $86,000 recognized in 1996. Gains or losses on sales of loans held
for sale and 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.
Gains on sales of third-party loan servicing rights totaled $1.6 million
in 1997 on the sale of $144.7 million of third-party loan servicing rights.
Gains of $1.5 million were recognized in 1995 on the sale of $146.3 million
of third-party loan servicing rights. TCF periodically sells loan servicing
rights depending on market conditions.
22
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
Other non-interest income increased $1.7 million in 1997 to $11.6 million,
and $2.7 million in 1996 to $10 million. The increases were primarily due to
increased commission revenue earned on sales of insurance and mutual fund
products.
During 1997, TCF recognized gains of $14.2 million on the sales of eleven
branches, compared with gains of $2.7 million on the sales of five branches
during 1996.
During 1997, TCF recognized a $145,000 gain on the sale of $2.8 million
of loans related to the sale of a branch. During 1996, TCF recognized a $4.6
million gain on the sale of $39.6 million of credit card loans. The Company
now provides credit card products on behalf of a third party through a
marketing agreement. Also during 1996, TCF recognized a gain of $810,000 on
the sale of $7.2 million of loans related to the sale of branches.
During 1995, Great Lakes sold $232.2 million of collateralized mortgage
obligations from its held-to-maturity portfolio at a pretax loss of $21 million.
Also in 1995, Great Lakes sold $17.3 million of securities available for sale at
a pretax loss of $310,000. These merger-related asset sales were completed as
part of TCF's strategy to reduce Great Lakes' interest-rate and credit risk to
levels consistent with TCF's existing interest-rate risk position and credit
risk policy.
TCF's non-interest income in future periods may be negatively impacted by
pending state and federal legislative proposals, which, if enacted, could limit
loan, deposit or other fees and service charges. See "Financial Condition -
Forward-Looking Information" and "Financial Condition - Legislative and
Regulatory Developments."
NON-INTEREST EXPENSE
Non-interest expense increased $8 million, or 2.3%, in 1997, and $26.6
million, or 8.1%, in 1996, compared with the respective prior years. The
following table presents the components of non-interest expense:
Percentage
Year Ended December 31, Increase (Decrease)
------------------------------------- -------------------------
(Dollars in thousands) 1997 1996 1995 1997/96 1996/95
---- ---- ---- ------- -------
Compensation and employee
benefits $180,482 $157,554 $143,822 14.6% 9.5%
Occupancy and equipment 58,352 51,958 50,953 12.3 2.0
Advertising and promotions 19,157 17,014 16,807 12.6 1.2
Federal deposit insurance
premiums and assessments 4,689 12,019 13,540 (61.0) (11.2)
Amortization of goodwill and
other intangibles 15,757 3,540 3,163 345.1 11.9
Other 83,125 76,638 72,461 8.5 5.8
FDIC special assessment - 34,803 - (100.0) 100.0
Merger-related charges:
Merger-related expenses - - 21,733 - (100.0)
Cancellation cost on early
termination of interest-
rate exchange contracts - - 4,423 - (100.0)
-------- -------- --------
Total non-interest
expense $361,562 $353,526 $326,902 2.3 8.1
-------- -------- --------
-------- -------- --------
Compensation and employee benefits, representing 49.9% and 44.6% of total
non-interest expense in 1997 and 1996, respectively, increased $22.9 million, or
14.6%, in 1997, and $13.7 million, or 9.5%, in 1996. The 1997 increase was
primarily due to costs associated with expanded retail banking activities,
including the impact of the acquisitions of Standard and BOC. The 1996 increase
was primarily due to the expansion of consumer lending operations and other
retail banking activities.
Occupancy and equipment expenses increased $6.4 million in 1997 and $1
million in 1996. The 1997 increase reflects the costs associated with expanded
retail banking activities, including the addition of 25 bank branch offices.
The increase in 1996 reflected the opening of 12 bank branch offices.
Advertising and promotion expenses increased $2.1 million in 1997 and
$207,000 in 1996. The increases reflect the increase in direct mail and other
marketing expenses relating to the promotion of TCF's consumer lending, deposit
and leasing products.
Federal deposit insurance premiums and assessments decreased $7.3 million
in 1997 and $1.5 million in 1996. The decrease in 1997 reflects a reduction in
the rate charged to TCF by the FDIC for federal deposit insurance premiums from
23 basis points to approximately 6.50 basis points as a result of federal
legislation enacted on September 30, 1996 to recapitalize the SAIF, partially
offset by higher deposit levels due to the acquisition of Standard. The
decrease in 1996 was primarily due to lower deposit levels and a decrease in the
1996 fourth quarter deposit insurance premium rates as a result of the
recapitalization of the SAIF.
Amortization of goodwill and other intangibles increased $12.2 million in
1997 and $377,000 in 1996. The increase in 1997 was due to the previously
mentioned accelerated amortization of $8.7 million of deposit base intangibles
and the amortization of goodwill and deposit base intangibles resulting from the
acquisitions of Standard and BOC.
Other non-interest expense increased $6.5 million, or 8.5%, in 1997 and
$4.2 million, or 5.8%, in 1996. The increase for 1997 reflects the write-off of
$1.5 million of teller equipment in connection with the previously mentioned
Great Lakes Michigan branch reorganization and the recognition of $1.5 million
of non-recurring merger-related costs in connection with TCF's acquisition of
Winthrop. The increase in 1997 also reflects costs
23
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
associated with expanded retail banking activities, including the impact of
the acquisitions of Standard and BOC. The increase in 1996 was primarily due
to costs associated with the relocation and consolidation of certain
back-office operations, the expansion of TCF's consumer lending operations,
and other retail banking activities. In addition, the increase reflects an
increase in Michigan state business taxes due to improved profitability.
TCF's 1996 results included a one-time special assessment of $34.8 million
from the FDIC to recapitalize the SAIF under federal legislation enacted on
September 30, 1996. See "Financial Condition - Legislative and Regulatory
Developments."
Merger-related expenses for 1995 included $13.9 million of equipment
charges associated with the integration of Great Lakes' data processing system
into TCF's, $4.7 million of employment contract, severance and employment
benefit costs reflecting the consolidation of certain Great Lakes functions, and
$2.2 million of professional fees and $864,000 of other expenses which were
incurred by Great Lakes as a direct result of the merger.
During 1995, Great Lakes prepaid $112.3 million of Federal Home Loan
Bank ("FHLB") advances at a pretax loss of $1.5 million. This amount, net of
a $578,000 income tax benefit, was recorded as an extraordinary item.
Interest-rate exchange contracts with notional principal amounts totaling
$544.5 million were terminated by Great Lakes during 1995 at a pretax loss of
$4.4 million. These actions were taken in order to reduce Great Lakes' level
of higher-cost wholesale borrowings and to reduce interest-rate risk.
TCF, like most owners of computer software, will be required to ascertain
that its computer systems will function properly in the year 2000. TCF has
established a year 2000 task force and has evaluated its data processing and
other systems to determine whether they are year 2000 compliant. Remediation of
certain software applications has already begun, and TCF expects substantially
all remediation work to be complete by the end of 1998, leaving 1999 for
testing. Many of TCF's data processing applications are supplied by third party
software vendors. TCF is also evaluating whether such vendor supplied
applications are or will be year 2000 compliant. TCF estimates the total
additional costs to be incurred prior to 2000 to range from approximately $5
million to $6 million. In addition, a significant amount of existing internal
resources will be allocated to this project. Maintenance or modification costs
will be expensed as incurred, while the costs of new software will be
capitalized and amortized over the software's useful life. TCF's year 2000
compliance initiatives are subject to certain uncertainties which may delay or
increase the cost of achieving compliance. To some extent, TCF's operations
will be dependent on the year 2000 compliance achieved by outside vendors,
borrowers and government agencies or instrumentalities such as the Federal
Reserve System, and also on the cooperation of such parties in testing the
effectiveness of compliance initiatives. See "Financial Condition -
Forward-Looking Information."
INCOME TAXES
TCF recorded income tax expense of $95.8 million in 1997, compared with $61
million in 1996 and $45.5 million in 1995. Income tax expense represented 39.8%
of income before income tax expense and extraordinary item during 1997, compared
with 37.8% and 38.3% in 1996 and 1995, respectively. The higher tax rate in
1997 reflects the impact of relatively higher non-deductible expenses, including
goodwill amortization resulting from the acquisitions of Standard and BOC, and
higher state tax rates due to business expansion. TCF expects that its
effective tax rate will increase in 1998, principally due to increased
amortization of goodwill.
Further detail on income taxes is provided in Note 13 of Notes to
Consolidated Financial Statements.
FINANCIAL CONDITION
INVESTMENTS
Total investments decreased $326.6 million in 1997 to $129.6 million at
December 31, 1997. The decrease is primarily due to a decrease of $365.7
million in interest-bearing deposits with banks, partially offset by an
increase of $15.9 million in FHLB stock, and the purchase of $23 million
of Federal Reserve Bank ("FRB") stock in connection with the conversion of
TCF's savings bank subsidiaries to national banks. See "Legislative and
Regulatory Developments." TCF had no non-investment grade debt securities
(junk bonds) and there were no open trading account or investment option
positions as of December 31, 1997.
SECURITIES AVAILABLE FOR SALE
Securities available for sale are carried at fair value with the
unrealized gains or losses, net of deferred income taxes, reported as a
separate component of stockholders' equity. Securities available for sale
increased $426.5 million during 1997 to $1.4 billion at December 31, 1997.
The increase reflects the acquisition of $866.8 million and $83.1 million of
securities available for sale as part of the Standard and BOC transactions,
respectively, and purchases of $507 million, partially offset by sales of
$467.7 million and payment and prepayment activity. At December 31, 1997,
TCF's securities available-for-sale portfolio included $930.1 million and
$496 million of fixed-rate and adjustable-rate mortgage-backed securities,
respectively. Securities available for sale totaled $999.6 million at
December 31, 1996.
LOANS HELD FOR SALE
Residential real estate and education loans held for sale are carried at
the lower of cost or market. Education loans held for sale decreased $11
million and residential real estate loans held for sale increased $51.7
million from year-end 1996, and totaled $135.3 million and $109.3 million,
respectively, at December 31, 1997.
24
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
LOANS AND LEASES
The following table sets forth information about loans and leases held
in TCF's portfolio, excluding loans held for sale:
At December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In thousands)
Residential real estate $3,619,527 $2,261,237 $2,618,725 $2,662,707 $2,305,844
Consumer 2,039,221 1,801,066 1,593,439 1,299,458 1,080,499
Commercial real estate 862,164 861,056 970,763 997,632 1,091,084
Commercial business 239,728 156,712 167,663 190,975 214,774
Lease financing 414,270 341,721 281,122 227,578 184,043
Deferred costs (fees) and
unearned discounts and
finance charges, net (105,722) (128,872) (115,364) (65,590) (51,075)
---------- ---------- ---------- ---------- ----------
Total loans and leases $7,069,188 $5,292,920 $5,516,348 $5,312,760 $4,825,169
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Residential real estate loans increased $1.4 billion from year-end 1996
to $3.6 billion at December 31, 1997, principally due to the acquisition of
Standard. At December 31, 1997, TCF's residential real estate loan portfolio
was comprised of $1.4 billion of fixed-rate loans and $2.2 billion of
adjustable-rate loans.
Consumer loans, comprised of bank originated and consumer finance
originated loans, increased $238.2 million from year-end 1996 to $2 billion
at December 31, 1997, reflecting increases of $225.8 million and $28.4
million in home equity loans and automobile loans, respectively. These
increases reflect the acquisition of $24.2 million of home equity loans and
$64.2 million of automobile loans due to the Standard transaction. 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 these higher-yielding,
shorter-term loans, including home equity loans.
TCF had 60 consumer finance offices in 16 states as of December 31,
1997. TCF's consumer finance loan portfolio totaled $521.5 million at
December 31, 1997, compared with $496.3 million at December 31, 1996. The
Company is seeking to increase the outstanding loan balances and improve the
profitability of its consumer finance subsidiaries. See "Forward-Looking
Information."
TCF's consumer finance subsidiaries primarily originate automobile and
home equity loans and purchase automobile loans. The average individual
balance of consumer finance automobile loans and home equity loans were
$8,000 and $31,000, respectively, at December 31, 1997. At December 31, 1997
and 1996, automobile loans comprised $292.6 million, or 56.1%, and $299.6
million, or 60.4%, respectively, of total consumer finance loans outstanding.
At December 31, 1997 and 1996, home equity loans comprised $218.8 million,
or 42%, 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. Included in the consumer finance
loans at December 31, 1997 are $241.3 million of sub-prime automobile 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 owed by borrowers who are unable to obtain credit
from traditional sources because of significant past credit problems or
limited credit histories.
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, these
loans carry a higher level of credit risk and higher interest rates. The
consumer finance portfolio also carries 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.
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. See Note 6 of Notes to
Consolidated Financial Statements for additional information concerning the
geographic locations of TCF's consumer finance loan portfolio.
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 on a limited basis up to 100%, that carry no private mortgage insurance.
These loans carry a higher level of credit risk and are made at higher
interest rates.
25
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
The following table summarizes TCF's commercial real estate loan
portfolio by property type:
At December 31,
-------------------------------------------------------------
1997 1996
------------------------------ -----------------------------
Number Number
(Dollars in thousands) Balance (1) of Loans Balance (1) of Loans
----------- -------- ----------- --------
Apartments $304,866 675 $339,809 638
Office buildings 167,607 241 144,642 234
Retail services 148,985 232 127,312 187
Warehouse/industrial buildings 79,980 143 87,486 130
Hospitality facilities 60,544 29 78,746 37
Health care facilities 12,494 10 17,181 14
Other 87,688 393 65,880 308
-------- ----- -------- ------
$862,164 1,723 $861,056 1,548
-------- ----- -------- ------
-------- ----- -------- ------
Average balance $500 $556
---- ----
---- ----
- ---------------------------
(1) Includes construction and development loans.
Commercial real estate loans increased $1.1 million from year-end 1996
to $862.2 million at December 31, 1997. Commercial business loans increased
$83 million in 1997 to $239.7 million at December 31, 1997. TCF is seeking
to expand its commercial business lending activity and, to a lesser extent,
its commercial real estate 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 in the case of
commercial real estate loans, is subject to fluctuations in real estate
values. At December 31, 1997, approximately 92% of TCF's commercial real
estate loans outstanding were secured by properties located in its primary
markets. The average individual balance of commercial real estate loans was
$500,000 at December 31, 1997. Apartment loans comprised $304.9 million, or
35.4%, of total commercial real estate loans outstanding at December 31,
1997. The average individual balance of commercial business loans was
$291,000 at December 31, 1997.
Lease financings increased $72.5 million from year-end 1996 to $414.3
million at December 31, 1997, reflecting a $79.7 million increase in direct
financing leases, partially offset by a $9.9 million decrease in sales-type
leases.
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 and other business-essential equipment. These leases are
flexible in structure to accommodate equipment additions and upgrades to meet
customers' changing needs. Small Ticket Leases 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
unaffiliated 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 enters into standard lease agreements with each customer.
Winthrop's leases 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 that 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 return the equipment to Winthrop, renew the lease for
an additional term, or in certain circumstances 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.
26
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
Winthrop's ability to arrange financing is important to its business.
Winthrop may arrange 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
other 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 lease 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 institution may, however, take title to the
collateral in the event the customer fails to make lease payments or certain
other defaults by the lease customer occur under the terms of the lease.
TCF is seeking to expand its leasing activity to achieve growth over
time. TCF has started to internally fund certain Value Added Leases, and
consequently retains the credit risk on such leases. TCF and Winthrop also
internally fund Small Ticket Leases which, as previously mentioned, generally
carry a higher level of credit risk and higher implicit interest rates.
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.
ALLOWANCE FOR LOAN AND LEASE LOSSES AND INDUSTRIAL REVENUE BOND RESERVES
Credit risk is the risk of loss from a customer default. TCF has in
place a process to identify and manage its credit risks. The process
includes initial credit review and approval, periodic monitoring to measure
compliance with credit agreements and internal credit policies,
identification of problem loans and leases and special procedures for
collection of problem loans and leases. The risk of loss is difficult to
quantify and is subject to fluctuations in values and general economic
conditions. See Note 1 of Notes to Consolidated Financial Statements for
additional information concerning TCF's allowance for loan and lease losses.
At December 31, 1997, the allowance for loan and lease losses and
industrial revenue bond reserves totaled $84 million, compared with $73.5
million at December 31, 1996. The increase reflects the addition of $8.9
million and $1.7 million of allowances for loan losses as part of the
Standard and BOC acquisitions, respectively. Net loan and lease and
industrial revenue bond charge-offs were $17.9 million in 1997, compared
with $16 million in 1996. 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 increased to 3.02% for the year ended December 31,
1997, compared with 2.42% for 1996. In addition, the net loan charge-offs as
a percentage of average loans outstanding for TCF's indirect consumer finance
portfolio increased to 4.64% and 4.31% for the three months and year ended
December 31, 1997, respectively, compared with 3.59% for the year ended
December 31, 1996. The unallocated portion of TCF's allowance for loan and
lease losses totaled $29.4 million at December 31, 1997, compared with $22.4
million at December 31, 1996.
A summary of the allowance for loan and lease losses and industrial
revenue bond reserves and selected statistics is presented in Note 7 of Notes
to Consolidated Financial Statements.
NON-PERFORMING ASSETS
Non-performing assets (principally non-accrual loans and leases and
other real estate owned) totaled $58.7 million at December 31, 1997, up $12.4
million from the December 31, 1996 total of $46.3 million. The increase in
non-performing assets reflects increases of $4.5 million and $5.8 million in
residential real estate and consumer finance non-accrual loans, respectively.
The increase in residential non-accrual loans reflects the addition of $4.7
million due to the acquisition of Standard. Approximately 68% of
non-performing assets 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.
27
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
Non-performing assets are summarized in the following table:
At December 31,
----------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Non-accrual loans and leases (1):
Consumer:
Bank lending $ 3,495 $ 1,746 $ 1,799 $ 1,295 $ 1,264
Consumer finance lending 17,542 11,726 5,688 832 58
------- ------- ------- ------- --------
21,037 13,472 7,487 2,127 1,322
Residential real estate 8,451 3,996 7,045 7,211 9,705
Commercial real estate 3,818 7,604 22,255 18,452 52,463
Commercial business 3,370 1,149 7,541 5,972 24,770
Lease financing 117 176 - - -
------- ------- ------- ------- --------
36,793 26,397 44,328 33,762 88,260
Other real estate owned and
other assets 21,953 19,937 26,402 23,849 25,062
------- ------- ------- ------- --------
Total non-performing assets $58,746 $46,334 $70,730 $57,611 $113,322
------- ------- ------- ------- --------
------- ------- ------- ------- --------
Non-performing assets as a
percentage of net loans
and leases .84% .89% 1.30% 1.10% 2.38%
Non-performing assets as a
percentage of total assets .60 .62 .94 .71 1.45
- ---------------------
(1) Included in total loans and leases in the Consolidated Statements of
Financial Condition.
The following table sets forth information regarding TCF's delinquent
loan and lease portfolio, excluding loans held for sale and non-accrual loans
and leases:
At December 31,
-------------------------------------------------------
1997 1996
---------------------------- -------------------------
Percentage of Percentage of
Principal Gross Loans Principal Gross Loans
(Dollars in thousands) Balances and Leases Balances and Leases
---------- --------------- --------- --------------
Loans and leases
delinquent for:
30-59 days $38,902 .54% $46,520 .87%
60-89 days 12,730 .18 8,263 .15
90 days or more - - - -
------- ------- ------- --------
Total $51,632 .72% $54,783 1.02%
------- ------- ------- --------
------- ------- ------- --------
The over 30-day delinquency rate on TCF's loans and leases (excluding loans
held for sale and non-accrual loans and leases) was .72% of gross loans and
leases outstanding at December 31, 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 December 31,
----------------------------------------------------
1997 1996
-------------------------- -------------------------
Percentage Percentage
of Gross of Gross
Principal Loans Principal Loans
(Dollars in thousands) Balances and Leases Balances and Leases
--------- ------------ ---------- ------------
Consumer:
Bank lending $ 9,646 .66% $ 7,473 .61%
Consumer finance lending 28,964 5.13 21,515 3.86
--------- ---------
38,610 1.91 28,988 1.62
Residential real estate 10,567 .29 8,330 .37
Commercial real estate 1,173 .14 5,114 .60
Commercial business 396 .17 9 .01
Lease financing 886 .21 12,342 3.61
--------- ---------
Total $51,632 .72 $54,783 1.02
--------- ---------
--------- ---------
28
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
TCF's over 30-day delinquency rate on gross consumer loans was 1.91% at
December 31, 1997, up 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 5.13% at December 31, 1997, compared
with 3.86% at December 31, 1996. TCF's over 30-day delinquency rate on gross
automobile and home equity consumer finance loans was 6.81% and 2.40%,
respectively, at December 31, 1997, compared with 4.24% and 3.09% 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 loans and leases, there were commercial real
estate and commercial business loans with an aggregate principal balance of
$23.6 million outstanding at December 31, 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.
LIQUIDITY MANAGEMENT
TCF manages its liquidity position to ensure that the funding needs of
depositors and borrowers are met promptly and in a cost-effective manner. Asset
liquidity arises from the ability to convert assets to cash as well as from the
maturity of assets. Liability liquidity results from the ability of TCF to
attract a diversity of funding sources to meet funding requirements promptly.
Deposits are the primary source of TCF's funds for use in lending and for
other general business purposes. In addition to deposits, TCF derives funds
primarily from loan repayments, proceeds from the discounting of leases,
advances from the FHLB and proceeds from reverse repurchase borrowing
agreements. Deposit inflows and outflows are significantly influenced by
general interest rates, money market conditions, competition for funds and other
factors. TCF's deposit inflows and outflows have been affected by these factors
and may continue to be affected in future periods. See "Forward-Looking
Information." Borrowings may be used to compensate for reductions in normal
sources of funds, such as deposit inflows at less than projected levels, net
deposit outflows or to support expanded activities. Historically, TCF has
borrowed primarily from the FHLB, from institutional sources under reverse
repurchase agreements and, to a lesser extent, from other sources. See
"Borrowings."
Potential sources of liquidity for TCF Financial Corporation (parent
company only) include cash dividends from TCF's wholly owned bank subsidiaries,
issuance of equity securities, borrowings under the Company's $100 million bank
line of credit, and interest income. TCF's subsidiary banks' ability to pay
dividends or make other capital distributions to TCF is restricted by regulation
and may require regulatory approval. Undistributed earnings at December 31,
1997 includes approximately $134.4 million for which no provision for federal
income tax has been made. This amount represents earnings appropriated to bad
debt reserves and deducted for federal income tax purposes and is generally not
available for payment of cash dividends or other distributions to shareholders.
Payments or distributions of these appropriated earnings could invoke a tax
liability for TCF based on the amount of earnings removed and current tax rates.
DEPOSITS
Deposits totaled $6.9 billion at December 31, 1997, up $1.9 billion from
December 31, 1996, and reflects the acquisition of $1.9 billion and $160.9
million due to the Standard and BOC transactions, respectively, partially offset
by the previously described branch sales. Lower interest-cost checking, savings
and money market deposits totaled $3.3 billion, up $673.9 million from year-end
1996, and comprised 47.8% of total deposits at December 31, 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 3.42% at December 31,
1997, from 3.29% at December 31, 1996, reflecting a greater proportion of
higher-rate certificates at December 31, 1997 than at December 31, 1996,
primarily as a result of the Standard acquisition.
BORROWINGS
Borrowings are used primarily to fund the purchases of investments and
securities available for sale. These borrowings totaled $1.7 billion at
December 31, 1997, up $19 million from year-end 1996. The increase was
primarily due to increases of $198.5 million in FHLB advances and $43 million in
discounted lease rentals, partially offset by decreases of $181.5 million in
securities sold under repurchase agreements and $38 million in collateralized
obligations. The weighted-average rate on borrowings increased to 6.43% at
December 31, 1997, from 6.19% at December 31, 1996.
29
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
STOCKHOLDERS' EQUITY
Stockholders' equity at December 31, 1997 was $953.7 million, or 9.8% 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 due to a $185.8 million
increase resulting from the issuance of 7,700,000 shares of TCF common stock in
connection with the acquisition of Standard, net income of $145.1 million for
the year ended December 31, 1997, the June 3, 1997 secondary offering of
1,400,000 shares of TCF common stock for net proceeds of $29.3 million, and the
issuance of 839,000 shares of TCF common stock in connection with the conversion
of the remaining $7.1 million of 7 1/4% convertible subordinated debentures due
2011, partially offset by the payment of $38.2 million in common stock dividends
and the repurchase of 1,295,800 shares of TCF's common stock at a cost of $27.3
million.
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 June 3, 1997, TCF completed a public offering of 1,400,000 shares of its
common stock at a price of $21.6875 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 were used as a
portion of the cash consideration paid in connection with the acquisition of
Standard.
On October 20, 1997, TCF's Board of Directors (the "Board") declared a
two-for-one stock split in the form of a 100% common stock dividend payable
November 28, 1997 to stockholders of record as of November 7, 1997. The
stock split increased TCF's outstanding common shares from 46.4 million to
92.8 million shares.
On January 19, 1998, the Board authorized the repurchase of up to 5% of
TCF's common stock, or approximately 4.6 million shares. The repurchased shares
will become treasury shares. On January 20, 1997, the Board authorized the
repurchase of up to 5% of TCF's common stock, or approximately 3.5 million
shares, but in February 1997, the Board formally rescinded this prior common
stock repurchase program in connection with the Company's merger with Winthrop.
On January 20, 1998, TCF declared a quarterly dividend of 12.5 cents per
common share, payable on February 27, 1998 to stockholders of record as of
February 6, 1998.
RECENT ACCOUNTING DEVELOPMENTS
In June 1997, the Financial Accounting Standards Board ("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. 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.
Management believes the adoption of this statement will not significantly impact
TCF's financial condition or results of operations.
In June 1997, 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. Management believes the adoption of this statement will not significantly
impact TCF's financial condition or results of operations.
FORWARD-LOOKING INFORMATION
There are a number of important factors which could cause future results to
differ materially from historical performance. These include but are not
limited to possible legislative changes; the possibility of adverse economic
developments which may increase default and delinquency risks in TCF's loan
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 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 and investment
portfolios; results of litigation or other significant uncertainties. TCF's
recently completed acquisitions of Winthrop, Standard and the Jewel-Osco
branches (and its commitment to construct additional Jewel-Osco branches in
future periods) are subject to additional uncertainties, including the possible
failure to fully realize or realize within the expected time frame expected cost
savings or cost controls from the transactions; lower than expected income or
revenue following the transactions; or higher than expected operating costs;
business disruption relating to the transactions; greater than expected costs or
difficulties related to the integration, retention and attraction of employees
or management of the acquired business operations with those of TCF; litigation
costs and delays caused by litigation; and other unanticipated occurrences which
may increase the costs related to the transactions or decrease the expected
financial benefits of the transactions.
30
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
LEGISLATIVE AND REGULATORY DEVELOPMENTS
Federal and state legislation imposes numerous legal and regulatory
requirements on financial institutions. Future legislative or regulatory
change, or changes in enforcement practices or court rulings, may have a
dramatic and potentially adverse impact on TCF and its bank and other
subsidiaries.
Federal legislation enacted on September 30, 1996 addressed inadequate
funding of the SAIF, which had resulted in a large deposit insurance premium
disparity between banks insured by the Bank Insurance Fund ("BIF") and
SAIF-insured thrifts. As a result of this legislation, a one-time special
assessment was imposed on thrift institutions, and TCF recognized a $34.8
million pretax charge for assessments imposed on its bank subsidiaries during
the third quarter of 1996. The legislation also provided for a reduction in
deposit insurance premiums in subsequent periods and other regulatory reforms.
Federal legislation was enacted in 1996 that repealed the reserve method of
accounting for thrift bad debt reserves. This legislation eliminated the
recapture of a thrift institution's bad debt reserve under certain
circumstances, including the institution's conversion to a bank or as a result
of similar charter changes.
After passage of both the BIF/SAIF legislation and the repeal of the
reserve method of accounting for bad debts, TCF completed the conversion of its
savings bank subsidiaries to national banks and TCF became a national bank
holding company on April 7, 1997. In connection with the national bank
conversions, TCF chartered two new national bank subsidiaries, Great Lakes Ohio
and TCF National Bank Colorado ("TCF Colorado"). As previously mentioned, TCF
sold all eight branches and related deposits of Great Lakes Ohio in 1997. TCF
now operates five national bank subsidiaries: TCF National Bank Minnesota, TCF
Illinois, TCF National Bank Wisconsin, TCF Colorado and Great Lakes Michigan.
MARKET RISK - 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, and the Company's ability to manage its interest-rate risk. Although
TCF manages other risks, such as credit and liquidity risk, in the normal course
of its business, the Company considers interest-rate risk to be its most
significant market risk. TCF, like most financial institutions, has a material
interest-rate risk exposure to changes in both short-term and long-term interest
rates as well as variable index interest rates (e.g., prime). Since TCF does
not hold a trading portfolio, the Company is not exposed to significant market
risk from trading activities.
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 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 for 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. The principal objective
of TCF's asset/liability management activities is to provide maximum levels of
net interest income while maintaining acceptable levels of interest-rate risk
and liquidity risk and facilitating the funding needs of the Company. The
amounts in the maturity/rate sensitivity table below represent management's
estimates and assumptions. Also, the amounts 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, competition and a general rise in interest rates. Decisions by
management to purchase or sell assets, or retire debt could change the
maturity/repricing and spread relationships. TCF's one-year interest-rate gap
was a negative $184.7 million, or (2)% of total assets, at December 31, 1997,
compared with a positive $114 million, or 2% of total assets, at December 31,
1996.
31
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
The following table summarizes TCF's interest-rate gap position at December 31,
1997:
Maturity/Rate Sensitivity
----------------------------------------------------------------------------------
30 Days 6 Months
Within to to
(Dollars in thousands) 30 Days 6 Months 1 Year 1 to 3 Years 3+ Years Total
------------ ----------- ----------- ------------- ----------- ------------
Interest-earning assets:
Loans held for sale $ 167,790 $ 72,876 $ 3,946 $ - $ - $ 244,612
Securities available for sale 67,687 304,968 257,718 354,707 441,051 1,426,131
Real estate loans (1) 322,508 614,920 766,464 1,515,805 1,264,064 4,483,761
Lease financings 12,909 26,963 116,292 153,497 58,860 368,521
Other loans (1) 1,461,062 143,909 126,930 280,209 204,796 2,216,906
Due from brokers 126,662 - - - - 126,662
Investments (2) 106,633 - - - 22,979 129,612
------------ ----------- ----------- ------------- ----------- ------------
2,265,251 1,163,636 1,271,350 2,304,218 1,991,750 8,996,205
------------ ----------- ----------- ------------- ----------- ------------
Interest-bearing liabilities:
Checking deposits (3) 90,821 11,833 - - 1,366,003 1,468,657
Passbook and savings deposits (3) 46,736 124,310 124,561 352,412 486,659 1,134,678
Money market deposits 698,312 - - - - 698,312
Certificate deposits 387,265 1,658,943 899,467 566,715 93,273 3,605,663
Federal Home Loan Bank advances 288,735 72,000 255,300 673,269 50,274 1,339,578
Discounted lease rentals 9,252 18,861 70,312 107,812 22,359 228,596
Other borrowings 53,488 6,469 68,240 731 30,050 158,978
------------ ----------- ----------- ------------- ----------- ------------
1,574,609 1,892,416 1,417,880 1,700,939 2,048,618 8,634,462
------------ ----------- ----------- ------------- ----------- ------------
Interest-earning assets over (under)
interest-bearing liabilities $ 690,642 $ (728,780) $ (146,530) $ 603,279 $ (56,868) $ 361,743
------------ ----------- ----------- ------------- ----------- ------------
------------ ----------- ----------- ------------- ----------- ------------
Cumulative gap $ 690,642 $ (38,138) $ (184,668) $ 418,611 $ 361,743 $ 361,743
------------ ----------- ----------- ------------- ----------- ------------
------------ ----------- ----------- ------------- ----------- ------------
Cumulative gap as a percentage of
total assets:
At December 31, 1997 7% - % (2)% 4% 4% 4%
------------ ----------- ----------- ------------- ----------- ------------
------------ ----------- ----------- ------------- ----------- ------------
At December 31, 1996 1% (1)% 2 % 5% 4% 4%
------------ ----------- ----------- ------------- ----------- ------------
------------ ----------- ----------- ------------- ----------- ------------
- -------------------------
(1) Based upon contractual maturity, repricing date, if applicable, scheduled
repayments of principal and projected prepayments of principal based upon
experience.
(2) Includes interest-bearing deposits with banks, U.S. Government and other
marketable securities held to maturity, FRB stock and FHLB stock.
(3) Includes non-interest bearing deposits.
32
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Financial Review - (Continued)
The following table provides information about TCF's financial
instruments and derivative financial instruments that are held for purposes
other than trading and are sensitive to changes in interest rates. For loans
held for sale, securities available for sale, real estate loans, other loans,
and liabilities with contractual maturities, the table presents principal
cash flows and related weighted-average interest rates by contractual
maturities as modified by the Company's historical experience of the impact
of interest rate fluctuations on the prepayment of the assets. For checking,
passbook and statement and money market deposits that have no contractual
maturity, the table presents principal cash flows and, as applicable, related
weighted-average interest rates based on the Company's historical experience,
management's judgment, and statistical analysis, with respect to customer
account retention. For forward mortgage loan sales commitments, the table
presents notional amounts and, as applicable, weighted-average interest rates
by contractual maturity date. Notional amounts are used to calculate the
contractual payments to be exchanged under the commitments. For commitments
to extend credit, the balance represents the notional amount of the
off-balance-sheet item and the average interest rate represents the weighted
average interest rate of the underlying loans. The expected
principal/notional maturity amounts at December 31, 1997 are as follows:
Year Ended December 31,
----------------------------------------------------------------------
(Dollars in thousands) 1998 1999 2000 2001 2002
----------- -------- --------- --------- ----------
RATE SENSITIVE ASSETS:
Fixed-rate loans held for sale $ 47,131 $ - $ - $ - $ -
Average interest rate 7.31% - % - % - % - %
Variable-rate loans held
for sale 197,219 - - - -
Average interest rate 7.17% - % - % - % - %
Fixed-rate securities
available for sale 185,051 190,019 126,549 73,863 60,620
Average interest rate 7.20% 7.20% 7.20% 7.20% 7.20%
Variable-rate securities
available for sale 128,275 94,775 70,064 51,839 38,398
Average interest rate 7.46% 7.46% 7.46% 7.46% 7.46%
Fixed-rate real estate loans 367,312 276,493 223,184 233,867 114,806
Average interest rate 7.68% 7.62% 7.64% 7.82% 7.81%
Variable-rate real estate loans 813,053 549,785 405,341 288,068 228,701
Average interest rate 7.90% 7.82% 7.87% 7.86% 7.95%
Fixed-rate other loans 311,511 201,775 125,332 73,021 43,350
Average interest rate 15.63% 14.45% 13.07% 11.58% 10.35%
Variable-rate other loans 183,975 134,264 122,117 79,821 87,326
Average interest rate 10.50% 10.82% 10.98% 11.12% 10.81%
Fixed-rate investments 24,633 - - - -
Average interest rate 6.09% - % - % - % - %
Variable-rate investments - - - - -
Average interest rate - % - % - % - % - %
Due from brokers 126,662 - - - -
Average interest rate 6.86% - % - % - % - %
RATE SENSITIVE LIABILITIES:
Checking deposits 38,482 - - - -
Average interest rate .45% - % - % - % - %
Passbook and savings deposits 290,955 202,542 151,905 113,930 85,447
Average interest rate 2.04% 2.04% 2.04% 2.04% 2.04%
Money market deposits 4,217 - - - -
Average interest rate 3.07% - % - % - % - %
Certificate deposits 2,931,999 400,893 177,899 68,895 18,778
Average interest rate 5.04% 5.46% 5.54% 5.78% 5.19%
Fixed-rate Federal Home Loan
Bank advances 347,300 375,510 297,758 25,132 -
Average interest rate 5.92% 6.04% 6.16% 6.09% - %
Variable-rate Federal Home
Loan Bank advances 175,000 93,735 - - -
Average interest rate 5.96% 5.69% - % - % - %
Fixed-rate other borrowings 74,248 - - - -
Average interest rate 7.17% - % - % - % - %
Variable-rate other borrowings 53,441 - - - -
Average interest rate 5.63% - % - % - % - %
RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS:
Forward mortgage loan sales
commitments 81,937 - - - -
Average interest rate 6.77% - % - % - % - %
Commitments to extend
credit (1) 158,452 - - - -
Average interest rate 7.12% - % - % - % - %
Fair
(Dollars in thousands) Thereafter Total Value
------------ ---------- -----------
RATE SENSITIVE ASSETS:
Fixed-rate loans held for sale $ - $ 47,131 $ 48,786
Average interest rate - % 7.31%
Variable-rate loans held
for sale - 197,219 199,555
Average interest rate - % 7.17%
Fixed-rate securities
available for sale 293,968 930,070 930,070
Average interest rate 7.20% 7.20%
Variable-rate securities
available for sale 112,710 496,061 496,061
Average interest rate 7.46% 7.46%
Fixed-rate real estate loans 306,691 1,522,353 1,531,548
Average interest rate 7.69% 7.70%
Variable-rate real estate loans 674,390 2,959,338 3,021,938
Average interest rate 8.07% 7.92%
Fixed-rate other loans 81,189 836,178 825,928
Average interest rate 10.10% 13.80%
Variable-rate other loans 835,268 1,442,771 1,572,901
Average interest rate 11.17% 11.01%
Fixed-rate investments 22,977 47,610 47,610
Average interest rate 6.00% 6.05%
Variable-rate investments 82,002 82,002 82,002
Average interest rate 7.34% 7.34%
Due from brokers - 126,662 126,662
Average interest rate - % 6.86%
RATE SENSITIVE LIABILITIES:
Checking deposits 1,430,175 1,468,657 1,468,657
Average interest rate .45% .45%
Passbook and savings deposits 289,899 1,134,678 1,134,678
Average interest rate 2.04% 2.04%
Money market deposits 694,095 698,312 698,312
Average interest rate 3.07% 3.07%
Certificate deposits 7,199 3,605,663 3,637,981
Average interest rate 5.40% 5.13%
Fixed-rate Federal Home Loan
Bank advances 25,143 1,070,843 1,068,279
Average interest rate 5.78% 6.03%
Variable-rate Federal Home
Loan Bank advances - 268,735 268,735
Average interest rate - % 5.86%
Fixed-rate other borrowings 31,289 105,537 106,972
Average interest rate 9.24% 7.78%
Variable-rate other borrowings - 53,441 53,441
Average interest rate - % 5.63%
RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS:
Forward mortgage loan sales
commitments - 81,937 (326X2)
Average interest rate - % 6.77%
Commitments to extend
credit (1) - 158,452 (209X2)
Average interest rate - % 7.12%
(1) Excludes commitments to extend credit with floating interest rates and
repricing terms of one year or less.
(2) Negative amounts represent liabilities.
33
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands, except per-share data)
ASSETS
At December 31,
-----------------------------
1997 1996
---- ----
Cash and due from banks $ 297,010 $ 236,446
Interest-bearing deposits with banks 20,572 386,224
U.S. Government and other marketable securities held to
maturity (fair value of $4,061 and $3,910) 4,061 3,910
Federal Reserve Bank stock, at cost 22,977 -
Federal Home Loan Bank stock, at cost 82,002 66,061
Securities available for sale (amortized cost
of $1,411,979 and $995,384) 1,426,131 999,586
Loans held for sale 244,612 203,869
Loans and leases:
Residential real estate 3,619,527 2,261,237
Commercial real estate 862,164 861,056
Commercial business 239,728 156,712
Consumer 2,039,221 1,801,066
Lease financing 414,270 341,721
Unearned discounts and deferred fees (105,722) (128,872)
----------- -----------
Total loans and leases 7,069,188 5,292,920
Allowance for loan and lease losses (82,583) (71,865)
----------- -----------
Net loans and leases 6,986,605 5,221,055
Premises and equipment 165,790 129,785
Other real estate owned 18,353 15,771
Accrued interest receivable 54,336 42,173
Due from brokers 126,662 -
Goodwill 177,700 15,431
Deposit base intangibles 19,821 10,843
Mortgage servicing rights 19,512 17,360
Other assets 78,516 81,973
----------- -----------
$9,744,660 $7,430,487
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Checking $1,468,657 $1,212,771
Passbook and statement 1,134,678 783,026
Money market 698,312 631,922
Certificates 3,605,663 2,349,911
----------- -----------
Total deposits 6,907,310 4,977,630
----------- -----------
Securities sold under repurchase agreements and federal
funds purchased 112,444 293,732
Federal Home Loan Bank advances 1,339,578 1,141,040
Discounted lease rentals 228,596 185,604
Subordinated debt 34,998 42,147
Collateralized obligations 2,539 40,505
Other borrowings 8,997 5,144
----------- -----------
Total borrowings 1,727,152 1,708,172
Accrued interest payable 23,510 20,666
Accrued expenses and other liabilities 133,008 93,332
----------- -----------
Total liabilities 8,790,980 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; 92,821,529 and 85,242,232 shares issued 928 852
Additional paid-in capital 460,684 274,320
Unamortized deferred compensation (25,457) (7,693)
Retained earnings, subject to certain restrictions 508,969 402,109
Loan to Executive Deferred Compensation Plan - (68)
Unrealized gain on securities available for sale, net 8,556 2,376
Treasury stock, at cost, 2,370,036 shares in 1996 - (41,209)
----------- -----------
Total stockholders' equity 953,680 630,687
----------- -----------
$9,744,660 $7,430,487
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
34
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per-share data)
Year Ended December 31,
----------------------------------------
1997 1996 1995
---- ---- ----
Interest income:
Loans $524,508 $486,140 $488,433
Lease financing 39,458 29,914 23,330
Loans held for sale 15,755 17,080 18,253
Securities available for sale 95,701 75,303 4,055
Investments 7,192 4,447 6,090
Mortgage-backed securities held to maturity - - 91,037
-------- -------- --------
Total interest income 682,614 612,884 631,198
-------- -------- --------
Interest expense:
Deposits 195,182 171,375 193,244
Borrowings 93,836 86,941 108,862
-------- -------- --------
Total interest expense 289,018 258,316 302,106
-------- -------- --------
Net interest income 393,596 354,568 329,092
Provision for credit losses 17,795 21,246 16,054
-------- -------- --------
Net interest income after provision
for credit losses 375,801 333,322 313,038
-------- -------- --------
Non-interest income:
Fee and service charge revenues 101,329 90,424 81,862
Leasing revenues 32,025 23,814 19,739
ATM network revenues 30,808 21,478 18,418
Title insurance revenues 13,730 13,492 11,509
Commissions on sales of annuities 7,894 9,134 8,557
Gain on sale of loans held for sale 4,777 5,038 3,735
Gain (loss) on sale of securities available for sale 8,509 86 (152)
Gain on sale of loan servicing 1,622 - 1,535
Gain on sale of loans 145 5,443 -
Loss on sale of mortgage-backed securities - - (21,037)
Gain on sale of branches 14,187 2,747 1,103
Other 11,642 9,956 7,284
-------- -------- --------
Total non-interest income 226,668 181,612 132,553
-------- -------- --------
Non-interest expense:
Compensation and employee benefits 180,482 157,554 143,822
Occupancy and equipment 58,352 51,958 50,953
Advertising and promotions 19,157 17,014 16,807
Federal deposit insurance premiums and assessments 4,689 12,019 13,540
Amortization of goodwill and other intangibles 15,757 3,540 3,163
FDIC special assessment - 34,803 -
Merger-related expenses - - 21,733
Cancellation cost on early termination of
interest-rate exchange contracts - - 4,423
Other 83,125 76,638 72,461
-------- -------- --------
Total non-interest expense 361,562 353,526 326,902
-------- -------- --------
Income before income tax expense
and extraordinary item 240,907 161,408 118,689
Income tax expense 95,846 61,031 45,482
-------- -------- --------
Income before extraordinary item 145,061 100,377 73,207
Extraordinary item:
Penalties on early repayment of FHLB advances,
net of tax benefit of $578 - - (963)
-------- -------- --------
Net income 145,061 100,377 72,244
Dividends on preferred stock - - 678
-------- -------- --------
Net income available to common shareholders $145,061 $100,377 $ 71,566
-------- -------- --------
-------- -------- --------
Basic earnings per common share:
Income before extraordinary item $ 1.72 $ 1.23 $ .89
Extraordinary item - - (.01)
-------- -------- --------
Net income $ 1.72 $ 1.23 $ .88
-------- -------- --------
-------- -------- --------
Diluted earnings per common share:
Income before extraordinary item $ 1.69 $ 1.20 $ .87
Extraordinary item - - (.01)
-------- -------- --------
Net income $ 1.69 $ 1.20 $ .86
-------- -------- --------
-------- -------- --------
Dividends declared per common share $ .46875 $.359375 $.296875
-------- -------- --------
-------- -------- --------
See accompanying notes to consolidated financial statements.
35
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $ 145,061 $ 100,377 $ 72,244
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 23,185 19,724 18,258
Amortization of goodwill and other intangibles 15,757 3,540 3,163
Amortization of fees, discounts and premiums 259 (529) (2,028)
Proceeds from sales of loans held for sale 624,192 857,050 652,964
Principal collected on loans held for sale 9,174 10,225 12,100
Originations and purchases of loans held for
sale (799,319) (802,777) (706,243)
Net (increase) decrease in other assets and
liabilities, and accrued interest (15,067) 29,231 16,002
Provision for credit losses 17,795 21,246 16,054
(Gain) loss on sale of securities available
for sale (8,509) (86) 152
Gain on sale of loans (145) (5,443) -
Loss on sale of mortgage-backed securities - - 21,037
Gain on sale of branches (14,187) (2,747) (1,103)
Gain on sale of loan servicing (1,622) - (1,535)
Penalties on early repayment of FHLB advances - - 1,541
Cancellation cost on early termination of
interest-rate exchange contracts - - 4,423
Write-off of equipment 1,528 - 13,435
Other, net (6,149) 241 (3,869)
----------- ----------- -----------
Total adjustments (153,108) 129,675 44,351
----------- ----------- -----------
Net cash provided (used) by operating
activities (8,047) 230,052 116,595
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of mortgage-backed
securities - - 211,117
Principal collected on mortgage-backed
securities - - 180,112
Principal collected on loans and leases 1,952,057 1,868,774 1,417,079
Loan originations (1,952,261) (1,687,214) (1,585,233)
Purchase of equipment for lease financing (179,165) (175,608) (130,360)
Proceeds from sales of loans 15,910 61,302 -
Net (increase) decrease in interest-bearing
deposits with banks 453,895 (374,630) 190,490
Proceeds from sales of securities available
for sale 476,218 16,636 90,572
Proceeds from maturities of and principal
collected on securities available for sale 445,145 201,914 128,167
Purchases of securities available for sale (506,970) (32,993) (45,805)
Proceeds from redemption of FHLB stock 15,880 19,055 24,119
Purchases of FHLB stock (10,080) (25,020) (4,848)
Purchases of FRB stock (23,397) - -
Net decrease in short-term federal funds sold 45,000 - 6,900
Proceeds from sales of loan servicing 2,288 - 1,750
Purchases of premises and equipment (32,837) (25,379) (19,718)
Acquisitions of Standard Financial, Inc. and
BOC Financial Corporation, net of
cash acquired (218,896) - -
Acquisitions of deposits, net of cash acquired - - 5,752
Sale of deposits, net of cash paid (184,917) (60,550) (57,007)
Other, net 35,175 28,983 25,383
----------- ----------- -----------
Net cash provided (used) by investing
activities 333,045 (184,730) 438,470
----------- ----------- -----------
36
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows - (Continued)
(In thousands)
Cash flows from financing activities:
Net increase (decrease) in deposits 79,819 (150,667) (155,401)
Proceeds from securities sold under repurchase
agreements and federal funds purchased 10,214,941 11,398,478 10,473,013
Payments on securities sold under repurchase
agreements and federal funds purchased (10,396,229) (11,557,672) (10,451,056)
Proceeds from FHLB advances 1,075,650 1,778,292 1,839,390
Payments on FHLB advances (1,313,023) (1,530,839) (2,302,007)
Proceeds from discounted lease rentals 146,086 92,787 105,066
Proceeds from subordinated debt - 28,750 -
Payments on subordinated debt - - (34,500)
Payments for termination of interest-rate
exchange contracts - - (4,581)
Proceeds from other borrowings 613,368 335,460 83,185
Payments on collateralized obligations and
other borrowings (647,652) (371,407) (48,878)
Proceeds from exercise of stock warrants and
stock options 1,506 1,698 15,309
Proceeds from issuance of common stock 29,266 13,726 -
Repurchases of common stock (27,318) (42,108) (2,076)
Payments for redemption of preferred stock - - (27,100)
Payments for dividends on common stock (38,201) (26,487) (21,841)
Other, net (2,647) (11,679) (13,590)
----------- ----------- -----------
Net cash used by financing activities (264,434) (41,668) (545,067)
----------- ----------- -----------
Net increase in cash and due from banks 60,564 3,654 9,998
Cash and due from banks at beginning of year 236,446 232,792 222,794
----------- ----------- -----------
Cash and due from banks at end of year $ 297,010 $ 236,446 $ 232,792
----------- ----------- -----------
----------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest on deposits and borrowings $ 285,722 $ 239,653 $ 291,868
----------- ----------- -----------
----------- ----------- -----------
Income taxes $ 97,319 $ 73,309 $ 28,285
----------- ----------- -----------
----------- ----------- -----------
Supplemental schedule of non-cash investing
activities:
Transfer of loans to other real estate owned
and other assets $ 40,837 $ 37,417 $ 28,015
----------- ----------- -----------
----------- ----------- -----------
Transfer of mortgage-backed securities to
securities available for sale $ - $ - $1,187,394
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
37
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
Number Unamor-
of tized
Common Pre- Additional Deferred
Shares ferred Common Paid-in Compen- Retained
Issued Stock Stock Capital sation Earnings
------ ------ ------ ---------- -------- --------
Balance, December 31, 1994,
as originally stated 68,344,692 $ 27 $683 $250,833 $ (6,986) $ 244,779
Adjustments for pooling
of interests 12,392,206 - 124 9,536 - 35,657
----------- ------ ----- -------- -------- ---------
Balance, December 31,1994,
as restated 80,736,898 27 807 260,369 (6,986) 280,436
Net income - - - - - 72,244
Dividends on preferred stock - - - - - (678)
Dividends on common stock - - - - - (21,917)
Purchase of 64,800 shares to
be held in treasury - - - - - -
Issuance of 616,800 shares
of restricted stock, of
which 608,800 shares were
from treasury 8,000 - - 5,166 (10,628) -
Grant of 90,000 shares of
restricted stock to
outside directors - - - 369 (1,431) -
Issuance of 747,520 shares
from treasury to effect
merger with Great Lakes (747,520) - (7) (6,367) - -
Issuance of shares to
Dividend Reinvestment Plan 1,200 - - 11 - -
Redemption of preferred stock - (27) - (27,073) - -
Repurchase and cancellation of
shares (153,838) - (1) (167) - (1,084)
Cancellation of shares of
restricted stock (18,178) - - (175) 175 -
Amortization of deferred
compensation - - - - 7,675 -
Exercise of stock options and
stock warrants 3,314,584 - 33 17,401 - -
Issuance of common stock on
conversion of convertible
debentures 311,636 - 3 2,653 - -
Payments on Loan to Executive
Deferred Compensation Plan
and ESOP debt - - - - - -
Change in unrealized gain
(loss) on securities
available for sale, net - - - - - -
----------- ------ ----- -------- -------- ---------
Balance, December 31, 1995 83,452,782 - 835 252,187 (11,195) 329,001
Net income - - - - - 100,377
Dividends on common stock - - - - - (26,595)
Purchase of 2,380,136 shares to
be held in treasury - - - - - -
Issuance of 72,800 shares of
restricted stock, of which
6,000 shares were from
treasury 66,800 - 1 4,519 (4,609) -
Grant of 4,100 shares of
restricted stock to outside
directors from treasury - - - 295 (366) -
Issuance of shares of common
stock, net 1,164,900 - 12 13,714 - -
Repurchase and cancellation
of shares (66,942) - (1) (51) - (674)
Cancellation of shares of
restricted stock (46,400) - (1) (635) 574 -
Amortization of deferred
compensation - - - - 7,903 -
Exercise of stock options 656,660 - 6 4,168 - -
Issuance of common stock on
conversion of convertible
debentures 14,432 - - 123 - -
Payments on loan to Executive
Deferred Compensation Plan - - - - - -
Change in unrealized gain (loss)
on securities available for
sale, net - - - - - -
----------- ------ ----- -------- -------- ---------
Balance, December 31, 1996 85,242,232 - 852 274,320 (7,693) 402,109
Net income - - - - - 145,061
Dividends on common stock - - - - - (38,201)
Issuance of 1,400,000 shares
of common stock from
treasury, net - - - 2,532 - -
Issuance of 7,700,000 shares
of common stock to effect
purchase acquisition, of
which 1,194,268 were from
treasury 6,505,732 - 65 162,937 - -
Purchase of 1,295,800 shares
to be held in treasury - - - - - -
Issuance of 929,200 shares of
restricted stock, of which
869,200 shares were from
treasury 60,000 - - 10,102 (25,270) -
Grant of 23,984 shares of
restricted stock to outside
directors from treasury - - - 421 (840) -
Cancellation of shares of
restricted stock (2,000) - - (58) 15 -
Issuance of 133,784 shares
of treasury stock to
employee benefit plans - - 1 374 - -
Repurchase and cancellation
of shares (86) - - (2) - -
Amortization of deferred
compensation - - - - 8,331 -
Exercise of stock options, of
which 44,600 were from
treasury 176,585 - 2 2,917 - -
Issuance of common stock on
conversion of convertible
debentures 839,066 - 8 7,141 - -
Payments on Loan to Executive
Deferred Compensation Plan - - - - - -
Change in unrealized gain (loss)
on securities available for
sale, net - - - - - -
----------- ------ ----- -------- -------- ---------
Balance, December 31, 1997 92,821,529 $ - $928 $460,684 $(25,457) $508,969
----------- ------ ----- -------- -------- ---------
----------- ------ ----- -------- -------- ---------
See accompanying notes to consolidated financial statements.
38
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity - (Continued)
(Dollars in thousands)
Loan to Unrealized
Executive Gain
Deferred (Loss) on
Compen- Securities
sation Available
Plan and for Sale, Treasury
ESOP Debt Net Stock Total
---------- ----------- -------- -------
Balance, December 31, 1994,
as originally stated $(1,695) $ (1,160) $(11,012) $475,469
Adjustments for pooling
of interests - - - 45,317
--------- -------- -------- --------
Balance, December 31,1994,
as restated (1,695) (1,160) (11,012) 520,786
Net income - - - 72,244
Dividends on preferred stock - - - (678)
Dividends on common stock - - - (21,917)
Purchase of 64,800 shares to
be held in treasury - - (824) (824)
Issuance of 616,800 shares
of restricted stock, of
which 608,800 shares were
from treasury - - 5,462 -
Grant of 90,000 shares of
restricted stock to
outside directors - - - (1,062)
Issuance of 747,520 shares
from treasury to effect
merger with Great Lakes - - 6,374 -
Issuance of shares to
Dividend Reinvestment Plan - - - 11
Redemption of preferred stock - - - (27,100)
Repurchase and cancellation of
shares - - - (1,252)
Cancellation of shares of
restricted stock - - - -
Amortization of deferred
compensation - - - 7,675
Exercise of stock options and
stock warrants - - - 17,434
Issuance of common stock on
conversion of convertible
debentures - - - 2,656
Payments on Loan to Executive
Deferred Compensation Plan
and ESOP debt 1,564 - - 1,564
Change in unrealized gain
(loss) on securities
available for sale, net - 12,862 - 12,862
-------- ------- ------- --------
Balance, December 31, 1995 (131) 11,702 - 582,399
Net income - - - 100,377
Dividends on common stock - - - (26,595)
Purchase of 2,380,136 shares to
be held in treasury - - (41,382) (41,382)
Issuance of 72,800 shares of
restricted stock, of which
6,000 shares were from
treasury - - 102 13
Grant of 4,100 shares of
restricted stock to outside
directors from treasury - - 71 -
Issuance of shares of common
stock, net - - - 13,726
Repurchase and cancellation
of shares - - - (726)
Cancellation of shares of
restricted stock - - - (62)
Amortization of deferred
compensation - - - 7,903
Exercise of stock options - - - 4,174
Issuance of common stock on
conversion of convertible
debentures - - - 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 (68) 2,376 (41,209) 630,687
Net income - - - 145,061
Dividends on common stock - - - (38,201)
Issuance of 1,400,000 shares
of common stock from
treasury, net - - 26,734 29,266
Issuance of 7,700,000 shares
of common stock to effect
purchase acquisition, of
which 1,194,268 were from
treasury - - 22,805 185,807
Purchase of 1,295,800 shares
to be held in treasury - - (27,316) (27,316)
Issuance of 929,200 shares of
restricted stock, of which
869,200 shares were from
treasury - - 15,168 -
Grant of 23,984 shares of
restricted stock to outside
directors from treasury - - 419 -
Cancellation of shares of
restricted stock - - - (43)
Issuance of 133,784 shares
of treasury stock to
employee benefit plans - - 2,555 2,930
Repurchase and cancellation
of shares - - - (2)
Amortization of deferred
compensation - - - 8,331
Exercise of stock options, of
which 44,600 were from
treasury - - 844 3,763
Issuance of common stock on
conversion of convertible
debentures - - - 7,149
Payments on Loan to Executive
Deferred Compensation Plan 68 - - 68
Change in unrealized gain (loss)
on securities available for
sale, net - 6,180 - 6,180
-------- ------- ------- --------
Balance, December 31, 1997 $ - $ 8,556 $ - $953,680
-------- ------- ------- --------
-------- ------- ------- --------
See accompanying notes to consolidated financial statements.
39
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of TCF
Financial Corporation and its wholly owned subsidiaries. TCF Financial
Corporation ("TCF" or the "Company") is a national bank holding company
engaged primarily in retail community banking, consumer finance lending
and lease financing through its wholly owned subsidiaries, TCF National
Bank Minnesota ("TCF Minnesota"), TCF National Bank Illinois ("TCF
Illinois"), TCF National Bank Wisconsin, TCF National Bank Colorado, and
Great Lakes National Bank Michigan. The preparation of TCF financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. All significant
intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to prior years'
financial statements to conform to the current year presentation. For
consolidated statements of cash flows purposes, cash and cash
equivalents include cash and due from banks.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 ("APB") Opinion No. 15, "Earnings per
Share." TCF adopted SFAS No. 128 effective December 31, 1997. In
accordance with SFAS No. 128, all prior-period EPS data has been
restated.
The following table reconciles the weighted average shares
outstanding and the income before extraordinary item available to common
shareholders used for basic and diluted EPS:
Year Ended December 31,
------------------------------------------
(Dollars in thousands, except per-share data) 1997 1996 1995
---------- ---------- ----------
Weighted average number of common shares outstanding
used in basic earnings per common share calculation 84,477,536 81,903,690 81,115,264
Net dilutive effect of:
Stock option plans and common stock warrants 468,275 537,900 1,057,861
Restricted stock plans 838,189 654,918 376,108
Assumed conversion of 71/4% convertible subordinated debentures 349,936 842,850 1,010,394
---------- ---------- ----------
Weighted average number of shares outstanding adjusted
for effect of dilutive securities 86,133,936 83,939,358 83,559,627
---------- ---------- ----------
---------- ---------- ----------
Income before extraordinary item $ 145,061 $ 100,377 $ 73,207
Less: Dividends on preferred stock - - (678)
---------- ---------- ----------
Income before extraordinary item available to
common shareholders 145,061 100,377 72,529
Add: Interest expense on 71/4% convertible subordinated
debentures, net of tax 132 328 382
---------- ---------- ----------
Income before extraordinary item available to common
shareholders including effect of dilutive securities $ 145,193 $ 100,705 $ 72,911
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per common share before extraordinary item $ 1.72 $ 1.23 $ .89
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per common share before extraordinary item $ 1.69 $ 1.20 $ .87
---------- ---------- ----------
---------- ---------- ----------
40
CHANGE IN METHOD OF ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENTS OF LIABILITIES
Effective January 1, 1997, TCF adopted the provisions of 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.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes financial
accounting and reporting standards for stock-based employee compensation
plans. SFAS No. 123 defines a fair value based method of accounting for
an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee
stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Entities electing to retain the
accounting under APB Opinion No. 25 must make pro forma disclosures of
net income and earnings per share as if the fair value based method of
accounting under SFAS No. 123 had been applied. TCF has
elected to retain the intrinsic value based method of accounting. See
Note 18 for additional information concerning SFAS No. 123.
INVESTMENTS
Investments are carried at cost, adjusted for amortization of
premiums or accretion of discounts using methods which approximate a
level yield.
SECURITIES AVAILABLE FOR SALE
Securities available for sale are carried at fair value with the
unrealized holding gains or losses, net of deferred income taxes,
reported as a separate component of stockholders' equity. Cost of
securities sold is determined on a specific identification basis and
gains or losses on sales of securities available for sale are recognized
at trade dates.
LOANS HELD FOR SALE
Residential real estate and education loans held for sale are
carried at the lower of cost or market determined on an aggregate basis.
Cost of loans sold is determined on a specific identification basis and
gains or losses on sales of loans held for sale are recognized at
settlement dates. Net fees and costs associated with originating and
acquiring loans held for sale are deferred and are included in the basis
for determining the gain or loss on sales of loans held for sale.
LOANS AND LEASES
Net fees and costs associated with originating and acquiring loans
and leases are deferred and amortized over the lives of the assets. Net
fees and costs associated with loan commitments are deferred in other
assets or other liabilities until the loan is advanced. Discounts and
premiums on loans purchased, net deferred fees and/or costs, unearned
discounts and finance charges, and unearned lease income, which are
considered yield adjustments, are amortized using methods which
approximate a level yield over the estimated remaining lives of the
loans and leases.
Leases that transfer substantially all of the benefits and risks of
equipment ownership to the lessee are classified as direct financing or
sales-type leases and are included in loans and leases. Direct
financing and sales-type leases are carried at the combined present
value of the future minimum lease payments and the lease residual value,
which represents the estimated fair value of the leased equipment at the
termination of the lease based on management's experience and judgment.
Lease residual values are reviewed on an ongoing basis and any downward
revisions are recorded in the periods in which they become known.
Interest income on direct financing and sales-type leases is recognized
using methods which approximate a level yield over the term of the
leases. Sales-type leases generate dealer profit which is recognized at
lease inception by recording lease revenue net of the lease cost.
Revenue consists of the present value of the future minimum lease
payments discounted at the rate implicit in the lease. Cost consists of
the leased equipment's book value, less the present value of its
residual.
Impaired loans include all non-accrual and restructured commercial
real estate and commercial business loans. Consumer and residential
real estate loans and lease financings are excluded from the definition
of an impaired loan. Loan impairment is measured as the present value
of expected future cash flows discounted at the loan's initial effective
interest rate, the fair value of the collateral of an impaired
collateral-dependent loan or an observable market price.
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 adequacy of the allowance
41
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
for loan and lease losses 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. Such estimates, appraisals,
evaluations and cash flows may be subject to frequent adjustments due to
changing economic prospects of borrowers, lessees or properties. These
estimates are reviewed periodically and adjustments, if necessary, are
recorded in the provision for credit losses in the periods in which they
become known.
Interest income is accrued on loan and lease balances outstanding.
Loans and leases, including loans that are considered to be impaired, are
reviewed regularly by management and are placed on non-accrual status when
the collection of interest or principal is 90 days or more past due, unless
the loan or lease is adequately secured and in the process of collection.
When a loan or lease is placed on non-accrual status, unless collection of
all principal and interest is considered to be assured, uncollected
interest accrued in prior years is charged off against the allowance for
loan and lease losses. Interest accrued in the current year is reversed.
Interest payments received on non-accrual loans and leases are generally
applied to principal unless the remaining principal balance has been
determined to be fully collectible.
Cost of loans sold is determined on a specific identification basis
and gains or losses on sales of loans are recognized at trade dates.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost and are depreciated or
amortized on a straight-line basis over their estimated useful lives.
OTHER REAL ESTATE OWNED
Real estate in judgment and real estate acquired through
foreclosure are recorded at the lower of cost or fair value minus
estimated costs to sell at the date of transfer to other real estate
owned. If the fair value of an asset minus the estimated costs to sell
should decline to less than the carrying amount of the asset, the
deficiency is recognized in the period in which it becomes known and is
included in other non-interest expense.
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights are capitalized and amortized in
proportion to, and over the period of, estimated net servicing income.
TCF periodically evaluates its capitalized mortgage servicing rights for
impairment. Loan type and note rate are the predominant risk
characteristics of the underlying loans used to stratify capitalized
mortgage servicing rights for purposes of measuring impairment. Any
impairment is recognized through a valuation allowance.
INTANGIBLE ASSETS
Goodwill resulting from acquisitions is amortized over 25 years on
a straight-line basis. Deposit base intangibles are amortized over 10
years on an accelerated basis. The Company periodically reviews the
recoverability of the carrying values of these assets.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
TCF enters into sales of securities under repurchase agreements
(reverse repurchase agreements). Such agreements are treated as
financings, and the obligations to repurchase securities sold are
reflected as liabilities in the Consolidated Statements of Financial
Condition. The securities underlying the agreements remain in the asset
accounts in the Consolidated Statements of Financial Condition.
DERIVATIVE FINANCIAL INSTRUMENTS
TCF utilizes derivative financial instruments in order to meet the
ongoing credit needs of its customers and in order to manage the market
exposure of its residential loans held for sale portfolio and its
commitments to extend credit for residential loans. Derivative
financial instruments include commitments to extend credit and forward
mortgage loan sales commitments. See Note 16 for additional information
concerning these derivative financial instruments.
ADVERTISING AND PROMOTIONS
Expenditures for advertising costs are expensed as incurred.
INCOME TAXES
Income taxes are accounted for using the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
42
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(2) BUSINESS COMBINATIONS AND ACQUISITIONS
STANDARD FINANCIAL, INC.
On September 4, 1997, TCF acquired all of the outstanding common
stock of Standard Financial, Inc. ("Standard"), a community-oriented
thrift institution with $2.6 billion in assets, $1.9 billion in
deposits, and 14 full-service offices on the southwest side of Chicago
and in the nearby southwestern and western suburbs, for a purchase price
of $423.7 million, which consisted of $237.9 million in cash, including
payments of $20.8 million to the holders of all of the outstanding
employee and director options to purchase Standard common stock, and
7,700,000 shares of TCF common stock.
The acquisition has been accounted for by the purchase method of
accounting and, accordingly, the results of operations of Standard have
been included in TCF's consolidated financial statements from September
4, 1997. The excess of the purchase price over the fair value of
tangible and identifiable intangible assets acquired and liabilities
assumed of approximately $151 million has been recorded as goodwill and
is being amortized over 25 years on a straight-line basis. In
connection with the acquisition, Standard was merged into TCF's existing
Illinois-based wholly owned national bank subsidiary, TCF Illinois.
The following unaudited pro forma financial information presents
the combined results of operations of TCF and Standard as if the
acquisition had been effective January 1, 1995 after giving effect to
certain adjustments, including amortization and accretion of discounts,
premiums, goodwill and deposit base intangibles, foregone interest
income resulting from the planned sale of securities available for sale,
reduced occupancy and equipment expense resulting from the write-off of
certain fixed assets and duplicative data processing hardware and
software, increased interest expense on debt related to the acquisition,
and related income tax effects. The pro forma financial information does
not necessarily reflect the results of operations that would have
occurred had TCF and Standard constituted a single entity during such
periods. TCF expects that the acquisition of Standard will enhance
future revenues through improved interest rate margins and fee income as
a result of expanded product and service offerings to Standard
customers. TCF also expects to achieve operating cost savings primarily
through reductions in staff and the consolidation of certain functions
such as data processing, investments and other back office operations at
Standard. The revenue enhancements and operating cost savings are
expected to be achieved in various amounts at various times during the
years subsequent to the acquisition of Standard and not ratably over, or at
the beginning or end of, such periods. No adjustment has been reflected in
the following pro forma financial information for the revenue enhancements
or anticipated cost savings.
(In thousands, except
per-share data) Year Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(Unaudited)
Interest income $788,214 $753,972 $746,763
-------- -------- --------
-------- -------- --------
Net interest income $431,653 $411,519 $382,788
-------- -------- --------
-------- -------- --------
Non-interest income $229,990 $190,492 $137,859
-------- -------- --------
-------- -------- --------
Net income $145,829 $100,713 $ 77,385
-------- -------- --------
-------- -------- --------
Basic earnings per common share $ 1.63 $ 1.12 $ .86
-------- -------- --------
-------- -------- --------
Diluted earnings per common share $ 1.60 $ 1.10 $ .84
-------- -------- --------
-------- -------- --------
WINTHROP RESOURCES CORPORATION
On June 24, 1997, TCF completed its acquisition of Winthrop
Resources Corporation ("Winthrop"), a leasing 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 13.4 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 purchase Winthrop common stock. Winthrop is
operated as a direct subsidiary of TCF 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.
43
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
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 Year Ended December 31,
In thousands, except March 31, -----------------------
per-share data) 1997 1996 1995
-------- -------- --------
Interest income: (Unaudited)
TCF $145,136 $582,861 $607,690
Winthrop 8,244 30,023 23,508
-------- -------- --------
Combined $153,380 $612,884 $631,198
-------- -------- --------
-------- -------- --------
Net interest income:
TCF $ 86,018 $340,140 $319,198
Winthrop 4,073 14,428 9,894
-------- -------- --------
Combined $ 90,091 $354,568 $329,092
-------- -------- --------
-------- -------- --------
Non-interest income:
TCF $ 40,381 $157,797 $112,776
Winthrop 6,374 23,815 19,777
-------- -------- --------
Combined $ 46,755 $181,612 $132,553
-------- -------- --------
-------- -------- --------
Net income:
TCF $ 28,931 $ 85,663 $ 60,688
Winthrop 4,096 14,714 11,556
-------- -------- --------
Combined $ 33,027 $100,377 $ 72,244
-------- -------- --------
-------- -------- --------
Basic earnings per common share:
TCF $ .43 $ 1.24 $ .87
-------- -------- --------
-------- -------- --------
Winthrop $ .24 $ .89 $ .73
-------- -------- --------
-------- -------- --------
Combined $ .41 $ 1.23 $ .88
-------- -------- --------
-------- -------- --------
Diluted earnings per common share:
TCF $ .42 $ 1.21 $ .85
-------- -------- --------
-------- -------- --------
Winthrop $ .23 $ .87 $ .72
-------- -------- --------
-------- -------- --------
Combined $ .40 $ 1.20 $ .86
-------- -------- --------
-------- -------- --------
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.
GREAT LAKES BANCORP, A FEDERAL SAVINGS BANK
On February 8, 1995, TCF completed its acquisition of Great Lakes
Bancorp, A Federal Savings Bank ("Great Lakes"), a Michigan-based
savings bank with $2.8 billion in assets and $1.6 billion in deposits.
In connection with the acquisition, TCF issued approximately 19.4
million shares of its common stock for all of the outstanding common
shares of Great Lakes. In addition, each outstanding share of Great
Lakes preferred stock was exchanged for one share of TCF preferred stock
with substantially identical terms. 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 Great Lakes for all
periods presented, except for dividends declared per share. In connection
with the acquisition, an after-tax merger-related charge of $32.8 million
was incurred during the 1995 first quarter.
The following table summarizes the major components of the
merger-related charges (in thousands):
Loss on sale of mortgage-backed securities $21,037
Loss on sale of securities available for sale 310
Loss on prepayment of FHLB advances 1,541 (1)
Interest-rate exchange contract termination costs 4,423
Provision for credit losses 5,000
Merger-related expenses:
Equipment charges 13,933
Severance and employee benefits 4,721
Professional fees 2,215
Other 864
-------
Total merger-related expenses 21,733
-------
Total pretax merger-related charges $54,044
-------
-------
----------------------
(1) Reflected in the Consolidated Statements of Operations as an
extraordinary item, net of tax benefit of $578.
During 1995, Great Lakes sold $232.2 million of collateralized
mortgage obligations from its held-to-maturity portfolio at a pretax
loss of $21 million. Proceeds from the sale of collateralized mortgage
obligations totaled $211.1 million. Gross losses of $21 million and
gross gains of $8,000 were recognized in 1995. Also in 1995, Great
Lakes sold $17.3 million of securities available for sale at a pretax
loss of $310,000. These
44
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
merger-related asset sales were completed as part of TCF's strategy to
reduce Great Lakes' interest-rate and credit risk to levels consistent
with TCF's existing interest-rate risk position and credit risk policy.
In addition to these asset sales, Great Lakes prepaid $112.3 million of
Federal Home Loan Bank ("FHLB") advances at a pretax loss of $1.5 million
during 1995. This amount, net of a $578,000 income tax benefit, was
recorded as an extraordinary item. Interest-rate exchange contracts with
notional principal amounts totaling $544.5 million were terminated by Great
Lakes at a pretax loss of $4.4 million. These actions were taken in order
to reduce Great Lakes' level of higher-cost wholesale borrowings and to
reduce interest-rate risk.
Great Lakes recorded $5 million in provisions for credit losses in
1995 to conform its credit loss reserve practices and methods to those
of TCF and to allow for the accelerated disposition of its remaining
problem assets.
In connection with its acquisition of Great Lakes, TCF committed to
restructure certain existing business activities of Great Lakes and to
integrate Great Lakes' data processing system into TCF's. These actions
were also designed to reduce staff by consolidating certain functions
such as data processing, investments and certain other back office
operations. Subsequent to its merger with TCF, Great Lakes recognized a
pretax charge of $21.7 million for these restructuring and merger-related
expenses.
ACQUISITION
On January 30, 1998, TCF Illinois completed its acquisition of 76
branches in Jewel-Osco stores in the Chicago area previously operated by
Bank of America. TCF Illinois converted existing deposits by offering
TCF Illinois products to Bank of America customers and acquired the
related fixed assets and 178 ATMs located in Jewel-Osco stores at no
cost. TCF accounted for the acquisition using the purchase method of
accounting.
(3) INVESTMENTS
Investments consist of the following:
At December 31,
---------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996
----------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Carrying Unrealized Unrealized Fair Carrying Unrealized Unrealized Fair
Value Gains Losses Value Value Gains Losses Value
-------- ---------- ---------- -------- -------- ---------- ---------- --------
Interest-bearing deposits
with banks $ 20,572 $- $- $ 20,572 $386,224 $- $- $386,224
U.S. Government and other
marketable securities
held to maturity 4,061 - - 4,061 3,910 - - 3,910
Federal Reserve Bank stock,
at cost 22,977 - - 22,977 - - - -
Federal Home Loan Bank stock,
at cost 82,002 - - 82,002 66,061 - - 66,061
-------- --- --- -------- -------- --- --- --------
$129,612 $- $- $129,612 $456,195 $- $- $456,195
-------- --- --- -------- -------- --- --- --------
-------- --- --- -------- -------- --- --- --------
Weighted-average yield 6.86% 5.50%
----- -----
----- -----
The carrying value and fair value of investments at December 31,
1997, by contractual maturity, are shown below:
Carrying Fair
(In thousands) Value Value
-------- -----
Due in one year or less $ 24,633 $ 24,633
No stated maturity 104,979 104,979
-------- --------
$129,612 $129,612
-------- --------
-------- --------
Interest and dividend income on investments consist of the following:
Year Ended December 31,
-------------------------------------
(In thousands) 1997 1996 1995
---- ---- ----
Interest-bearing deposits with banks $1,593 $ 282 $ 570
Federal funds sold 279 135 506
U.S. Government and other marketable
securities held to maturity 213 199 200
Federal Reserve Bank stock 769 - -
Federal Home Loan Bank stock 4,338 3,831 4,814
------ ------ ------
$7,192 $4,447 $6,090
------ ------ ------
------ ------ ------
Accrued interest receivable on investments totaled $3,000 and $18,000
at December 31, 1997 and 1996, respectively.
There were no sales of U.S. Government and other marketable
securities held to maturity during 1997, 1996 or 1995.
45
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
(4) SECURITIES AVAILABLE FOR SALE
Securities available for sale consist of the following:
At December 31,
----------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996
------------------------------------------------ ------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- ---------- ---------- ---------- --------- ---------- -------- --------
U.S. Government and other
marketable securities $ - $ - $ - $ - $ 32 $ - $ - $ 32
---------- -------- -------- ---------- -------- ------- -------- --------
Mortgage-backed
securities:
FHLMC 701,195 10,280 (676) 710,799 318,441 2,710 (3,974) 317,177
FNMA 466,820 4,083 (1,003) 469,900 539,475 5,906 (3,234) 542,147
GNMA 43,079 932 (18) 43,993 112,732 3,766 (110) 116,388
Private issuer 199,738 1,381 (794) 200,325 23,272 28 (769) 22,531
Collateralized
mortgage obligations 1,147 - (33) 1,114 1,432 - (121) 1,311
---------- ------- -------- ---------- -------- ------- -------- --------
1,411,979 16,676 (2,524) 1,426,131 995,352 12,410 (8,208) 999,554
---------- ------- -------- ---------- -------- ------- -------- --------
$1,411,979 $16,676 $(2,524) $1,426,131 $995,384 $12,410 $(8,208) $999,586
---------- ------- -------- ---------- -------- ------- -------- --------
---------- ------- -------- ---------- -------- ------- -------- --------
Weighted-average yield 7.04% 7.15%
----- -----
----- -----
Accrued interest receivable on securities available for sale was $9.5
million and $6.5 million at December 31, 1997 and 1996, respectively.
Proceeds from sales of securities available for sale totaled $476.2
million, $16.6 million and $90.6 million during 1997, 1996 and 1995,
respectively. Gross gains of $9.1 million, $102,000 and $442,000 and
gross losses of $602,000, $16,000 and $594,000 were recognized during
1997, 1996 and 1995, respectively.
In November 1995, the FASB issued a Special Report entitled "A
Guide to Implementation of Statement No. 115 on Accounting for Certain
Investments in Debt and Equity Securities." In conjunction with the
issuance of the guide, the FASB provided entities with a one-time
opportunity to reassess the classification of their held-to-maturity
debt securities without calling into question the entities' intent to
hold to maturity their remaining portfolio of such securities. During
the 1995 fourth quarter, TCF reassessed the balance sheet
classifications of its mortgage-backed securities. As a result, TCF
reclassified its remaining $1.2 billion in mortgage-backed securities
from "held to maturity" to "available for sale" effective December 31,
1995. This reclassification allowed for increased asset/liability
management flexibility.
(5) LOANS HELD FOR SALE
Loans held for sale consist of the following:
At December 31,
---------------------------
(In thousands) 1997 1996
---- ----
Residential real estate $109,519 $ 57,657
Education 134,831 145,835
-------- --------
244,350 203,492
Less:
Deferred loan costs, net (407) (502)
Unearned discounts, net 145 125
-------- --------
$244,612 $203,869
-------- --------
-------- --------
Accrued interest receivable on loans held for sale was $5.5 million
and $5.7 million at December 31, 1997 and 1996, respectively.
46
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
(6) LOANS AND LEASES
Loans and leases consist of the following:
At December 31,
-------------------------
(In thousands) 1997 1996
---- ----
Residential real estate $3,619,527 $2,261,237
---------- ----------
Commercial real estate:
Apartments 294,231 336,038
Other permanent 481,759 466,624
Construction and development 86,174 58,394
---------- ----------
862,164 861,056
---------- ----------
Total real estate 4,481,691 3,122,293
---------- ----------
Commercial business 239,728 156,712
---------- ----------
Consumer:
Home equity 1,519,644 1,293,871
Automobile 444,903 416,535
Loans secured by deposits 10,112 8,230
Other secured 19,955 19,106
Unsecured 44,607 63,324
---------- ----------
2,039,221 1,801,066
---------- ----------
Lease financing:
Direct financing leases 344,889 265,161
Sales-type leases 40,592 50,532
Lease residuals 28,789 26,028
---------- ----------
414,270 341,721
---------- ----------
7,174,910 5,421,792
Less:
Unearned (premiums) discounts on loans purchased (11,898) 2,441
Deferred loan fees, net 6,842 6,129
Unearned discounts and finance charges, net 65,029 75,539
Deferred lease costs (6,264) (6,705)
Unearned lease income 47,255 46,971
Unearned lease residual income 4,758 4,497
---------- ----------
$7,069,188 $5,292,920
---------- ----------
---------- ----------
Accrued interest receivable on loans was $39.3 million and $30
million at December 31, 1997 and 1996, respectively.
At December 31, 1997, the recorded investment in loans that are
considered to be impaired was $7.2 million for which the related
allowance for loan losses was $1.7 million. All of the impaired loans
were on non-accrual status. The average recorded investment in impaired
loans during the year ended December 31, 1997 was $13.5 million. For
the year ended December 31, 1997, TCF recognized interest income on
impaired loans of $417,000, of which $208,000 was recognized using the
cash basis method of income recognition.
At December 31, 1996, the recorded investment in loans that are
considered to be impaired was $10.4 million for which the related
allowance for loan losses was $2.8 million. The balance of impaired
loans on non-accrual status was $8.8 million at December 31, 1996. The
average recorded investment in impaired loans during the year ended
December 31, 1996 was $22.1 million. For the year ended December 31,
1996, TCF recognized interest income on impaired loans of $926,000, of
which $878,000 was recognized using the cash basis method of income
recognition.
At December 31, 1997, 1996 and 1995, loans and leases on
non-accrual status totaled $36.8 million, $26.4 million and $44.3
million, respectively. Had the loans and leases performed in accordance
with their original terms throughout 1997, TCF would have recorded gross
interest income of $4.7 million for these loans and leases. Interest
income of $2.9 million has been recorded on these loans and leases for
the year ended December 31, 1997.
Included in loans and leases at December 31, 1997 and 1996, are
commercial real estate loans aggregating $1.3 million and $3 million,
respectively, with terms that have been modified in troubled debt
restructurings. Had the loans performed in accordance with their
original terms throughout 1997, TCF would have recorded gross interest
income of $197,000 for these loans. Interest income of $135,000 has
been recorded on these loans for the year ended December 31, 1997.
47
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
There were no material commitments to lend additional funds to customers
whose loans or leases were classified as restructured or non-accrual at
December 31, 1997.
Included in commercial real estate loans at December 31, 1997 and
1996, are $32.2 million and $35.8 million, respectively, of loans to
facilitate the sale of real estate accounted for by the installment
method. The installment method of accounting was applied because the
borrower's initial and continuing investment was not adequate for full
accrual profit recognition.
TCF had 60 consumer finance offices in 16 states as of December 31,
1997. TCF's consumer finance loan portfolio totaled $521.5 million at
December 31, 1997, compared with $496.3 million at December 31, 1996.
The underwriting criteria for loans originated by TCF's consumer finance
offices are generally less stringent than those historically adhered to
by TCF and, as a result, these loans have a higher level of credit risk.
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 December 31,
---------------------------------------------
1997 1996
-------------------- ----------------------
Loan Loan
(Dollars in thousands) Balance Percent Balance Percent
------- ------- ------- -------
Illinois $126,505 24.3% $132,474 26.7%
Minnesota 98,701 18.9 99,279 20.0
Florida 41,808 8.0 33,458 6.7
Michigan 35,955 6.9 23,214 4.7
Georgia 35,506 6.8 32,270 6.5
Wisconsin 31,097 6.0 33,328 6.7
North Carolina 29,829 5.7 24,137 4.9
Missouri 27,258 5.2 26,185 5.3
Tennessee 19,218 3.7 17,313 3.5
Ohio 16,415 3.1 15,503 3.1
Mississippi 15,676 3.0 15,579 3.1
Other 43,561 8.4 43,596 8.8
-------- ----- -------- -----
Total consumer
finance loans $521,529 100.0% $496,336 100.0%
-------- ----- -------- -----
-------- ----- -------- -----
Future minimum lease payments for direct financing and sales-type
leases as of December 31, 1997 are as follows:
Payments to Payments to be
be Received Received by Other
(In thousands) by TCF Financial Institutions Total
----------- ---------------------- --------
1998 $ 36,161 $110,764 $146,925
1999 32,970 78,909 111,879
2000 19,318 42,604 61,922
2001 8,370 21,338 29,708
2002 3,309 4,041 7,350
-------- -------- --------
$100,128 $257,656 $357,784
-------- -------- --------
-------- -------- --------
At December 31, 1997, 1996 and 1995, TCF was servicing real estate
loans for others with aggregate unpaid principal balances of
approximately $4.4 billion, $4.5 billion and $4.5 billion, respectively.
During 1997 and 1995, TCF sold servicing rights on $144.7 million and
$146.3 million of loans serviced for others at net gains of $1.6 million
and $1.5 million, respectively. There were no sales of servicing rights
on loans serviced for others during 1996.
48
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
(7) ALLOWANCE FOR LOAN AND LEASE LOSSES AND INDUSTRIAL REVENUE BOND RESERVES
Following is a summary of the allowance for loan and lease losses,
industrial revenue bond reserves and selected statistics:
Allowance Industrial
for Loan Revenue
and Lease Bond
(In thousands) Losses Reserves Total
--------- ----------- -----
Balance, December 31, 1994 $ 56,343 $2,759 $ 59,102
Provision for losses 16,973 (919) 16,054
Charge-offs (15,017) (158) (15,175)
Recoveries 7,991 278 8,269
-------- ------ --------
Net charge-offs (7,026) 120 (6,906)
-------- ------ --------
Balance, December 31, 1995 66,290 1,960 68,250
Provision for losses 21,446 (200) 21,246
Charge-offs (24,294) (100) (24,394)
Recoveries 8,423 - 8,423
-------- ------ --------
Net charge-offs (15,871) (100) (15,971)
-------- ------ --------
Balance, December 31, 1996 71,865 1,660 73,525
Acquired balance 10,592 - 10,592
Provision for losses 17,995 (200) 17,795
Charge-offs (26,813) - (26,813)
Recoveries 8,944 - 8,944
-------- ------ --------
Net charge-offs (17,869) - (17,869)
-------- ------ --------
Balance, December 31, 1997 $ 82,583 $1,460 $ 84,043
-------- ------ --------
-------- ------ --------
Year Ended December 31,
--------------------------------
1997 1996 1995
---- ---- ----
Ratio of net loan and lease
charge-offs to average loans
and leases outstanding (1) .30% .29% .13%
Allowance for loan and lease
losses as a percentage of gross
loan and lease balances at
year-end (1) 1.15 1.33 1.18
- ---------------------------------------------
(1) Excluding loans held for sale.
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 totaled $11.8 million and $12.2 million at December 31, 1997
and 1996, respectively. The provision for credit losses on industrial
revenue bond financial guarantees reflects a reduction in the balance of
the financial guarantees. 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.
49
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(8) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
At December 31,
----------------------
(In thousands) 1997 1996
-------- --------
Land $ 32,664 $ 25,876
Office buildings 131,720 100,940
Leasehold improvements 23,266 18,345
Furniture and equipment 128,845 108,073
-------- --------
316,495 253,234
Less accumulated depreciation and amortization 150,705 123,449
-------- --------
$165,790 $129,785
-------- --------
-------- --------
TCF leases certain premises and equipment under operating leases.
Net lease expense was $15 million, $14.7 million and $13.9 million in
1997, 1996 and 1995, respectively.
At December 31, 1997, the total annual minimum lease commitments for
operating leases were as follows:
(In thousands)
------------------------------
1998 $13,741
1999 11,575
2000 9,426
2001 6,258
2002 5,227
Thereafter 20,558
-------
$66,785
-------
-------
(9) OTHER REAL ESTATE OWNED
Other real estate owned is summarized as follows:
At December 31,
---------------------
(In thousands) 1997 1996
------- -------
Real estate held for development $ - $ 213
Real estate in judgment, subject to redemption 9,760 10,862
Real estate acquired through foreclosure 8,593 4,696
------- -------
$18,353 $15,771
------- -------
------- -------
(10) MORTGAGE SERVICING RIGHTS
Mortgage servicing rights, net of valuation allowance, are summarized
as follows:
Year Ended December 31,
------------------------------------
(In thousands) 1997 1996 1995
------- ------- -------
Balance at beginning of year, net $17,360 $16,286 $12,247
Acquired balance 2,177 - -
Mortgage servicing rights
capitalized 5,229 5,822 7,904
Amortization (4,753) (4,648) (3,805)
Sale of servicing (401) - (60)
Valuation adjustments due to
accelerated prepayments (100) (100) -
------- ------- -------
Balance at end of year, net $19,512 $17,360 $16,286
------- ------- -------
------- ------- -------
The valuation allowance for mortgage servicing rights is summarized
as follows:
Year Ended December 31,
----------------------------------
(In thousands) 1997 1996 1995
------ ------ ------
Balance at beginning of year $1,494 $1,394 $1,394
Provisions 100 100 -
Charge-offs - - -
------ ------ ------
Balance at end of year $1,594 $1,494 $1,394
------ ------ ------
------ ------ ------
50
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements -- (Continued)
(11) DEPOSITS
Deposits are summarized as follows:
At December 31,
------------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
Weighted- Weighted-
Average % of Average % of
(Dollars in thousands) Rate Amount Total Rate Amount Total
--------- ------ ----- --------- ------ -----
Checking:
Non-interest bearing 0.00% $ 840,714 12.2% 0.00% $ 694,824 14.0%
Interest bearing 1.05 627,943 9.1 1.04 517,947 10.4
---------- ----- ---------- -----
.45 1,468,657 21.3 .45 1,212,771 24.4
---------- ----- ---------- -----
Passbook and statement 2.04 1,134,678 16.4 1.75 783,026 15.7
Money market 3.07 698,312 10.1 3.10 631,922 12.7
Certificates:
6 months and less 3.79 214,775 3.1 4.47 183,989 3.7
over 6 to 18 months 5.06 2,009,114 29.1 5.16 1,076,951 21.6
over 18 to 30 months 5.53 400,588 5.8 5.66 380,479 7.6
over 30 months 5.56 477,252 6.9 5.75 436,233 8.8
$100,000 minimum 5.25 503,934 7.3 5.46 272,259 5.5
---------- ----- ---------- -----
5.13 3,605,663 52.2 5.33 2,349,911 47.2
---------- ----- ---------- -----
3.42 $6,907,310 100.0% 3.29 $4,977,630 100.0%
---------- ----- ---------- -----
---------- ----- ---------- -----
Certificates had the following remaining maturities:
(Dollars in At December 31,
--------------------------------------------------------------------------------------------------------
millions) 1997 1996
------------------------------------------------- --------------------------------------------------
Weighted- Weighted-
$100,000 Average $100,000 Average
Maturity Minimum Other Total Rate Minimum Other Total Rate
- -------- -------- -------- -------- --------- -------- -------- -------- ---------
0-3 months $279.0 $ 834.0 $1,113.0 4.98% $149.5 $ 505.9 $ 655.4 5.17%
4-6 months 89.6 812.4 902.0 4.99 31.7 420.4 452.1 5.16
7-12 months 79.0 838.0 917.0 5.16 35.0 508.3 543.3 5.28
13-24 months 30.3 370.6 400.9 5.46 34.2 430.4 464.6 5.53
25-36 months 14.5 163.4 177.9 5.54 9.9 120.4 130.3 5.68
37-48 months 9.2 59.7 68.9 5.78 4.0 44.0 48.0 5.87
49-60 months 2.2 16.6 18.8 5.19 7.0 36.0 43.0 6.33
Over 60 months .1 7.1 7.2 5.40 1.0 12.2 13.2 5.63
------ -------- -------- ------ -------- --------
$503.9 $3,101.8 $3,605.7 5.13 $272.3 $2,077.6 $2,349.9 5.33
------ -------- -------- ------ -------- --------
------ -------- -------- ------ -------- --------
Interest expense on deposits is summarized as follows:
Year Ended December 31,
------------------------------------
(In thousands) 1997 1996 1995
-------- -------- --------
Checking $ 6,133 $ 5,571 $ 6,606
Passbook and statement 17,653 14,389 18,507
Money market 20,533 19,256 21,878
Certificates 151,693 132,861 147,086
-------- -------- --------
196,012 172,077 194,077
Less early withdrawal penalties 830 702 833
-------- -------- --------
$195,182 $171,375 $193,244
-------- -------- --------
-------- -------- --------
Accrued interest on deposits totaled $15.4 million and $11.3 million
at December 31, 1997 and 1996, respectively.
Mortgage-backed securities aggregating $61.6 million were pledged as
collateral to secure certain deposits at December 31, 1997.
At December 31, 1997, TCF was required by Federal Reserve Board
regulations to maintain reserve balances of approximately $116.8 million in
cash on hand or at various Federal Reserve Banks.
51
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(12) BORROWINGS
Borrowings consist of the following:
At December 31,
----------------------------------------------------
(Dollars in thousands) 1997 1996
------------------------ ------------------------
Weighted Weighted
Year of Average Average
Maturity Amount Rate Amount Rate
-------- ------ -------- ------ --------
Securities sold under
repurchase agreements and
federal funds purchased:
Securities sold under
repurchase agreements 1997 $ - - % $ 225,732 5.88%
1998 112,244 5.99 68,000 6.18
---------- ----------
112,244 5.99 293,732 5.95
Federal funds purchased 1998 200 6.84 - -
---------- ----------
112,444 5.99 293,732 5.95
---------- ----------
Federal Home Loan Bank
advances 1997 - - 766,514 5.51
1998 522,300 5.93 310,300 5.88
1999 469,245 5.97 41,000 5.98
2000 297,758 6.16 8,074 7.24
2001 25,132 6.09 15,000 6.97
2003 25,000 5.78 - -
2008 143 6.15 152 6.17
---------- ----------
1,339,578 6.00 1,141,040 5.66
---------- ----------
Discounted lease rentals 1997 - - 78,885 9.22
1998 95,142 8.57 58,406 8.70
1999 70,438 8.56 31,789 8.82
2000 38,922 8.55 13,883 8.90
2001 20,151 8.59 2,641 9.05
2002 3,943 8.43 - -
---------- ----------
228,596 8.56 185,604 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 5.94
Less unamortized
discount - - 28 -
---------- ----------
- - 37,472 5.94
---------- ----------
Collateralized mortgage
obligations 2008 894 6.50 1,555 6.50
2010 1,720 5.90 1,622 5.90
---------- ----------
2,614 6.11 3,177 6.19
Less unamortized
discount 75 - 144 -
---------- ----------
2,539 6.26 3,033 6.44
---------- ----------
2,539 6.26 40,505 5.98
---------- ----------
Other borrowings:
Treasury, tax and
loan note 1997 - - 5,131 5.21
1998 8,997 5.26 - -
Other 1997 - - 13 7.60
---------- ----------
8,997 5.26 5,144 5.21
---------- ----------
$1,727,152 6.43 $1,708,172 6.19
---------- ----------
---------- ----------
52
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
At December 31, 1997, borrowings with a contractual maturity of one
year or less consisted of the following:
Weighted-
Average
(Dollars in thousands) Amount Rate
-------- ---------
Securities sold under repurchase
agreements and federal funds purchased $112,444 5.99%
Federal Home Loan Bank advances 522,300 5.93
Discounted lease rentals 95,142 8.57
Treasury, tax and loan note 8,997 5.26
--------
$738,883 6.27
--------
--------
Accrued interest on borrowings totaled $8.1 million and $9.4
million at December 31, 1997 and 1996, respectively.
At December 31, 1997, securities sold under repurchase agreements were
collateralized by mortgage-backed securities and had the following
maturities:
Repurchase Borrowing Collateral Securities
-------------------- -----------------------
Interest Carrying Market
(Dollars in thousands) Amount Rate Amount (1) Value (1)
------ -------- -------- ------
Maturity:
January 1998 $ 44,244 5.70% $ 45,895 $ 45,895
August 1998 68,000 6.18 73,815 73,815
-------- -------- --------
$112,244 5.99 $119,710 $119,710
-------- -------- --------
-------- -------- --------
------------------------------
(1) Includes accrued interest.
The securities underlying the repurchase agreements are book entry
securities. During the period, book entry securities were delivered by
appropriate entry into the counterparties' accounts through the Federal
Reserve System. The dealers may sell, loan or otherwise dispose of such
securities to other parties in the normal course of their operations, but
have agreed to resell to TCF identical or substantially the same securities
upon the maturities of the agreements. At December 31, 1997, all of the
securities sold under repurchase agreements provided for the repurchase of
identical securities. Securities sold under repurchase agreements averaged
$341.1 million and $498.4 million during 1997 and 1996, respectively, and
the maximum amount outstanding at any month-end during 1997 and 1996 was
$469.7 million and $647.7 million, respectively.
Great Lakes prepaid $112.3 million of FHLB advances at a pretax loss
of $1.5 million during 1995. This amount, net of a $578,000 income tax
benefit, was recorded as an extraordinary item in the Consolidated
Statements of Operations.
During 1997, TCF redeemed 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 $8.52 per share. TCF issued approximately 839,000
shares of common stock in connection with the conversion of the remaining
$7.1 million of Debentures.
The $28.8 million of senior subordinated debentures mature in July
2003. These debentures will be redeemable at par plus accrued interest to
the date of redemption beginning July 1, 2001. The $6.2 million of 18%
Senior Subordinated Debentures due 2006 (the "Senior Debentures") will be
redeemable at par beginning March 1, 1998. TCF intends to exercise its
right of redemption on the Senior Debentures in 1998.
At December 31, 1997, mortgage-backed securities collateralizing TCF's
collateralized mortgage obligations had a market value of $2.5 million.
TCF has a $100 million bank line of credit which is unsecured and
contains certain covenants common to such agreements with which TCF is in
compliance. The interest rate on the line of credit is based on either the
prime rate or LIBOR. TCF has the option to select the interest rate and
term for the line of credit. The line of credit expires in October 1998.
FHLB advances are collateralized by FHLB stock and residential real
estate loans with an aggregate carrying value of $2.1 billion at December
31, 1997.
Interest expense on borrowings is summarized as follows:
Year Ended December 31,
-------------------------------
(In thousands) 1997 1996 1995
---- ---- ----
FHLB advances $48,142 $37,277 $ 50,729
Securities sold under repurchase
agreements and federal funds purchased 19,892 28,597 36,095
Discounted lease rentals 18,430 14,906 13,614
Subordinated debt 3,581 2,564 4,986
Collateralized obligations 2,439 2,586 2,880
Other borrowings 1,352 1,011 558
------- ------- --------
$93,836 $86,941 $108,862
------- ------- --------
------- ------- --------
53
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(13) INCOME TAXES
Income tax expense (benefit) consists of:
(In thousands) Current Deferred Total
------- -------- -----
Year ended December 31, 1997:
Federal $77,465 $1,395 $78,860
State 16,464 522 16,986
------- ------ -------
$93,929 $1,917 $95,846
------- ------ -------
------- ------ -------
Year ended December 31, 1996:
Federal $49,446 $ 934 $50,380
State 11,300 (649) 10,651
------- ------ -------
$60,746 $ 285 $61,031
------- ------ -------
------- ------ -------
Year ended December 31, 1995:
Federal $33,930 $4,997 $38,927
State 5,613 942 6,555
------- ------ -------
$39,543 $5,939 $45,482
------- ------ -------
------- ------ -------
Total income tax expense of $95.8 million, $61 million and $45.5
million for the years ended December 31, 1997, 1996 and 1995, respectively,
did not include tax benefits specifically allocated to stockholders'
equity. The tax benefit allocated to additional paid-in capital for
compensation expense for tax purposes in excess of amounts recognized for
financial reporting purposes totaled $2.3 million, $2.5 million and $2.1
million for the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997, TCF has net operating loss ("NOL")
carryforwards for federal income tax purposes of $3.8 million, which are
available to offset future federal taxable income through 2008, as a result
of the acquisition of BOC. The realization of the NOLs is subject to
certain Internal Revenue Code ("IRC") limitations. In addition, TCF has
certain alternative minimum tax ("AMT") credit carryforwards of
approximately $1 million, which are available to reduce future federal
income taxes over an indefinite period as a result of the acquisitions of
BOC and Winthrop. The realization of the AMT credits is subject to certain
IRC limitations. TCF has, in its judgment, made certain reasonable
assumptions relating to the realizability of the deferred tax assets.
Based upon these assumptions, the Company has determined that no valuation
allowance is required with respect to the deferred tax assets.
Income tax expense differs from the amounts computed by applying the
federal income tax rate of 35% to income before income tax expense and
extraordinary item as a result of the following:
Year Ended December 31,
-----------------------------------
(In thousands) 1997 1996 1995
------- ------- -------
Computed income tax expense $84,317 $56,493 $41,541
Increase (reduction) in income tax
expense resulting from:
ESOP dividend deduction (792) (649) (553)
Amortization of goodwill 1,287 562 648
State income tax, net of
federal income tax benefit 11,041 6,980 4,319
Other, net (7) (2,355) (473)
------- ------- -------
$95,846 $61,031 $45,482
------- ------- -------
------- ------- -------
54
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
The tax effects of temporary differences that give rise to the
deferred tax assets and deferred tax liabilities are as follows:
At December 31,
-----------------------
(In thousands) 1997 1996
---- ----
Deferred tax assets:
Allowance for loan and lease losses $24,434 $22,014
Discounts on loans arising from acquisitions - 825
Pension and other compensation plans 9,117 4,444
Insurance premiums 3,750 2,832
Net operating loss carryforward 1,326 -
Alternative minimum tax credit carryforward 992 3,225
Other 1,044 993
------- -------
Total deferred tax assets 40,663 34,333
------- -------
Deferred tax liabilities:
Securities available for sale 5,596 1,826
FHLB stock 4,711 4,027
Loan basis differences 1,536 2,166
Premises and equipment 2,632 3,379
Loan fees and discounts 6,715 6,314
Mortgage servicing rights 3,926 2,546
Lease financing 29,305 23,620
Intangible assets 2,316 -
Other - 370
------- -------
Total deferred tax liabilities 56,737 44,248
------- -------
Net deferred tax liabilities $16,074 $ 9,915
------- -------
------- -------
(14) STOCKHOLDERS' EQUITY
RESTRICTED RETAINED EARNINGS
In general, TCF's subsidiary banks may not declare or pay a dividend
to TCF in excess of 100% of their net profits for that year combined with
their retained net profits for the preceding two calendar years without
prior approval of the Office of the Comptroller of the Currency ("OCC").
Based on their retained net profits as of December 31, 1997, TCF's
subsidiary banks currently would be permitted to make additional capital
distributions under OCC regulations of approximately $33.3 million.
Additional limitations on dividends declared or paid on, or repurchases of,
TCF's subsidiary banks' capital stock are tied to the national banks' level
of compliance with their regulatory capital requirements.
Undistributed earnings at December 31, 1997 includes approximately
$134.4 million for which no provision for federal income tax has been made.
This amount represents earnings appropriated to bad debt reserves and
deducted for federal income tax purposes and is generally not available for
payment of cash dividends or other distributions to shareholders. Payments
or distributions of these appropriated earnings could invoke a tax
liability for TCF based on the amount of earnings removed and current tax
rates. In August 1996, federal legislation was enacted which repealed the
favorable bad debt method for savings and loan associations. Subsequent to
this repeal, TCF continues to be subject to this potential tax liability to
the extent payments or distributions of these appropriated earnings occur.
SHAREHOLDER RIGHTS PLAN
TCF's preferred share purchase rights will become exercisable only if
a person or group acquires or announces an offer to acquire 15% or more of
TCF's common stock. This triggering percentage may be reduced to no less
than 10% by TCF's Board of Directors (the "Board") under certain
circumstances. When exercisable, each right will entitle the holder to buy
one one-hundredth of a share of a new series of junior participating
preferred stock at a price of $90 per share. In addition, upon the
occurrence of certain events, holders of the rights will be entitled to
purchase either TCF's common stock or shares in an "acquiring entity" at
half of the market value. The Board is generally entitled to redeem the
rights at 1 cent per right at any time before they become exercisable. The
rights will expire on June 9, 1999, if not previously redeemed or
exercised.
STOCK SPLIT
On October 20, 1997, the Board declared a two-for-one stock split in
the form of a 100% common stock dividend payable November 28, 1997 to
stockholders of record as of November 7, 1997. The stock split increased
TCF's outstanding common shares from 46.4 million to 92.8 million shares.
Stockholders' equity has been restated to give retroactive recognition to
the stock split for all periods presented by reclassifying from additional
paid-in capital to common
55
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
stock the par value of the additional shares arising from the stock split.
In addition, all references in the Consolidated Financial Statements and
Notes thereto to number of shares, per-share amounts, stock option data and
market prices of the Company's common stock have been restated giving
retroactive recognition to the stock split.
STOCK OFFERING
On June 3, 1997, TCF completed a public offering of 1,400,000 shares
of its common stock at a price of $21.6875 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 were used as a portion of the cash consideration paid in connection
with the acquisition of Standard.
TREASURY STOCK
On December 19, 1995, the Board authorized the repurchase of up to 5%
of TCF common stock, or 3.6 million shares. On January 20, 1997, the Board
authorized the repurchase of up to 5% of TCF common stock, or 3.5 million
shares. On February 25, 1997, the Board formally rescinded TCF's common
stock repurchase program in connection with the Company's merger with
Winthrop. On January 19, 1998, the Board authorized the repurchase of up
to 5% of TCF common stock, or 4.6 million shares. TCF purchased 1,295,800,
2,380,136 and 64,800 shares of common stock during the years ended December
31, 1997, 1996 and 1995, respectively.
PREFERRED STOCK
On July 3, 1995, TCF exercised its right of redemption on its
2.7 million shares of preferred stock at $10 per share.
STOCK WARRANTS
In connection with TCF's acquisition of Great Lakes, TCF assumed the
obligation to issue common stock upon the exercise of the outstanding
warrants to purchase Great Lakes common stock. The warrants to purchase
common stock expired on July 1, 1995.
(15) REGULATORY CAPITAL REQUIREMENTS
TCF is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by the federal banking agencies, that, if
undertaken, could have a direct material effect on TCF's financial
statements. Under capital adequacy guidelines and the regulatory framework
for "prompt corrective action," TCF must meet specific capital guidelines
that involve quantitative measures of the Company's assets, stockholders'
equity, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The following table sets forth the Tier 1 leverage,
Tier 1 risk-based and total risk-based capital levels, and applicable
percentages of adjusted assets, together with the excess over the minimum
capital requirements for TCF at December 31, 1997 and 1996:
At December 31,
----------------------------------------------
1997 1996
----------------------- ---------------------
(Dollars in thousands) Amount Percentage Amount Percentage
------ ---------- ------ ----------
Tier 1 leverage capital $752,091 7.80% $601,726 8.56%
Tier 1 leverage capital
requirement 289,132 3.00 210,772 3.00
-------- ----- -------- -----
Excess $462,959 4.80% $390,954 5.56%
-------- ----- -------- -----
-------- ----- -------- -----
Tier 1 risk-based capital $752,091 11.97% $601,726 12.54%
Tier 1 risk-based capital
requirement 251,273 4.00 191,917 4.00
-------- ----- -------- -----
Excess $500,818 7.97% $409,809 8.54%
-------- ----- -------- -----
-------- ----- -------- -----
Total risk-based capital $830,639 13.22% $675,229 14.07%
Total risk-based capital
requirement 502,547 8.00 383,834 8.00
-------- ----- -------- -----
Excess $328,092 5.22% $291,395 6.07%
-------- ----- -------- -----
-------- ----- -------- -----
At December 31, 1997, TCF exceeded its regulatory capital
requirements and believes it would be considered "well-capitalized"
under guidelines established by the Federal Reserve Board. At December
31, 1997, TCF's bank subsidiaries exceeded their regulatory capital
requirements and believe they would be considered "well-capitalized"
under guidelines established pursuant to the Federal Deposit Insurance
Corporation Improvement Act of 1991.
56
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
TCF is a party to financial instruments with off-balance-sheet risk in
the normal course of business, primarily to meet the financing needs of its
customers. These financial instruments, which are issued or held by TCF
for purposes other than trading, include commitments to extend credit,
standby letters of credit, financial guarantees written, forward mortgage
loan sales commitments, and financial guarantees on certain loans sold with
recourse and on other contingent obligations. These instruments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the Consolidated Statements of Financial
Condition. The contract or notional amounts of those instruments reflect
the extent of involvement TCF has in particular classes of financial
instruments.
TCF's exposure to credit loss in the event of non-performance by
the counterparty to the financial instrument for commitments to extend
credit, standby letters of credit, financial guarantees written and
financial guarantees on certain loans sold with recourse is represented
by the contractual amount of the commitments. TCF uses the same credit
policies in making commitments and conditional obligations as it does
for on-balance-sheet instruments. For Veterans Administration ("VA")
loans serviced with partial recourse and forward mortgage loan sales
commitments, the contract or notional amount exceeds TCF's exposure to
credit loss. TCF controls the credit risk of forward mortgage loan
sales commitments through credit approvals, credit limits and monitoring
procedures.
Unless noted otherwise, TCF does not require collateral or other
security to support financial instruments with credit risk. The contract
or notional amounts of these financial instruments are as follows:
At December 31,
------------------------
(In thousands) 1997 1996
---- ----
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $1,230,727 $1,058,890
Standby letters of credit 30,678 24,055
Financial guarantees written 11,830 12,165
Loans sold with recourse 16,696 23,311
Financial instruments whose credit risk is
less than the notional or contract amount:
VA loans serviced with partial recourse 335,850 383,806
Forward mortgage loan sales commitments 81,575 91,132
COMMITMENTS TO EXTEND CREDIT
As part of its normal business operations, and in order to meet the
ongoing credit needs of its customers, TCF has outstanding at any time a
significant number of commitments to extend credit. Commitments to
extend credit are agreements to lend to a customer provided there is no
violation of any condition established in the contract. These
commitments take the form of mortgage loan applications, approved loans,
commercial business and consumer credit line products and lease
applications. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
certain of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent future
cash requirements. TCF evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by TCF upon extension of credit, is based on management's
credit evaluation of the borrower. Collateral predominantly consists of
residential and commercial real estate and personal property. Included
in the total commitments to extend credit at December 31, 1997 were
mortgage loan commitments and loans in process aggregating $908.8
million, including commercial and residential construction and
development commitments totaling $84.4 million. Of the total mortgage
loan commitments and loans in process at December 31, 1997, $221.4 million
were for fixed-rate loans. Also included in the total commitments to
extend credit at December 31, 1997 were various consumer credit line
products aggregating $537.7 million, of which $46 million were unsecured
and $483.9 million were mortgage loan commitments.
STANDBY LETTERS OF CREDIT
Standby letters of credit are conditional commitments issued by TCF
guaranteeing the performance of a customer to a third party. The
standby letters of credit are primarily issued to support public and
private borrowing arrangements including bond financing, and expire in
various years through the year 2005. The credit risk involved in
issuing standby letters of credit is essentially the same as that
involved in making commercial loans to customers. The amount of
collateral TCF obtains to support
57
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
standby letters of credit is based on management's credit evaluation of
the borrower. Collateral held primarily consists of commercial real estate
mortgages. Since the conditions under which TCF is required to fund
standby letters of credit may not materialize, the cash requirements are
expected to be less than the total outstanding commitments. TCF's
commitments to the beneficiaries under its outstanding standby letters of
credit at December 31, 1997 were collateralized by $24.3 million of TCF's
mortgage-backed securities.
FINANCIAL GUARANTEES WRITTEN
Financial guarantees written represent agreements whereby, for a
fee, certain of TCF's mortgage-backed securities are pledged as
collateral for Housing Revenue Bonds and Industrial Development Revenue
Bonds which were issued by municipalities to finance commercial and
multi-family real estate owned by third parties. In the event the
third-party borrowers default on principal or interest payments on the
bonds, TCF is required to either pay the amount in default or acquire
the then outstanding bonds. TCF may foreclose on the underlying real
estate to recover amounts in default. At December 31, 1997, the
financial guarantees totaled $11.8 million and mortgage-backed
securities aggregating approximately $22.1 million were held by the
trustees as collateral for these financial guarantees. Further, in order
to protect TCF's ability to recover losses in the event of default by
the third-party borrowers, TCF may also be required to pay real estate
taxes and other liabilities of the underlying collateral. The
collateral agreements expire on various dates from 2004 through 2011.
LOANS SOLD WITH RECOURSE AND VA LOANS SERVICED WITH PARTIAL RECOURSE
During the normal course of business, TCF may sell certain loans
with limited recourse provisions. In addition, TCF services VA loans on
which it must cover any principal loss in excess of the VA's guarantee
if the VA elects its "no-bid" option upon the foreclosure of a loan. A
significant portion of the loans are partially supported by
government-sponsored insurance, private mortgage insurance or the VA
partial guarantee, and all of the loans are collateralized by
residential real estate.
FORWARD MORTGAGE LOAN SALES COMMITMENTS
As part of its residential mortgage banking operation, TCF enters
into forward mortgage loan sales commitments in order to manage the
market exposure on its residential loans held for sale and its
commitments to extend credit for residential loans. Because gains or
losses to be realized on the sale of residential loans held for sale are
dependent on interest rates, forward mortgage loan sales commitments are
used to reduce the impact of changes in interest rates on TCF's mortgage
banking operation. Forward mortgage loan sales commitments are
contracts for the delivery of mortgage loans or pools of loans in which
TCF agrees to make delivery at a specified future date of a specified
instrument, at a specified price or yield. Risks arise from the
possible inability of the counterparties to meet the terms of their
contracts and from movements in mortgage loan values and interest rates.
Included in the total at December 31, 1997 and 1996 were $15 million
and $14 million, respectively, of standby forward mortgage loan sales
commitments for which TCF has the option to deliver the mortgage loans.
Premiums paid for standby forward mortgage loan sales commitments are
amortized to gain on sale of loans held for sale over the terms of the
agreements. The fair value of the forward mortgage loan sales
commitments is not recognized in the financial statements.
(17) FAIR VALUES OF FINANCIAL INSTRUMENTS
TCF is required to disclose the estimated fair value of financial
instruments, both assets and liabilities on and off the balance sheet,
for which it is practicable to estimate fair value. Fair value
estimates are made at a specific point in time, based on relevant market
information and information about the financial instruments. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time TCF's entire holdings of a particular
financial instrument. Because no market exists for a significant portion
of TCF's financial instruments, fair value estimates are subjective in
nature, involving uncertainties and matters of significant judgment, and
therefore cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on- and
off-balance-sheet financial instruments without attempting to estimate
the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. For example,
TCF has established customer relationships that contribute significant
fee income annually. These customer relationships are not considered
financial instruments, and their values have not been incorporated into
the fair value estimates. Certain financial instruments, including lease
financings and discounted lease rentals, and all non-financial
instruments are excluded from fair value of financial instrument
disclosure requirements. In addition, the tax effects of unrealized
gains and losses have not been considered in the estimates, nor have
costs necessary to execute a sale been considered. Accordingly, the
aggregate fair value amounts presented do not represent the underlying
value of TCF, or the value TCF would realize in a negotiated sale of
these instruments.
58
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
Fair value estimates, methods and assumptions are set forth below
for TCF's financial instruments. These financial instruments are issued
or held by TCF for purposes other than trading. The carrying amounts
disclosed below are included in the Consolidated Statements of Financial
Condition under the indicated captions, except where noted otherwise.
The estimated fair values of TCF's financial instruments are set forth
in the following table and explained below:
At December 31,
--------------------------------------------------------
(In thousands) 1997 1996
-------------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- --------- ------------ -----------
Financial instrument assets:
Cash and due from banks $ 297,010 $ 297,010 $ 236,446 $ 236,446
Investments 129,612 129,612 456,195 456,195
Securities available for sale 1,426,131 1,426,131 999,586 999,586
Residential loans held for sale (1) 109,315 110,415 57,566 58,276
Education loans held for sale (1) 135,297 137,926 146,303 149,448
Loans: (1)
Residential real estate 3,623,845 3,686,635 2,252,311 2,274,098
Commercial real estate 859,916 866,851 858,224 862,244
Commercial business 240,207 239,611 157,057 153,499
Consumer (2) 1,976,699 2,159,218 1,725,635 1,946,955
Allowance for loan losses (3) (79,166) - (70,749) -
---------- ---------- ---------- ----------
6,621,501 6,952,315 4,922,478 5,236,796
Due from brokers 126,662 126,662 - -
Accrued interest receivable 54,336 54,336 42,173 42,173
---------- ---------- ---------- ----------
Total financial instrument assets $8,899,864 $9,234,407 $6,860,747 $7,178,920
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Financial instrument liabilities:
Deposits with no stated maturity $3,301,647 $3,301,647 $2,627,719 $2,627,719
Certificates of deposit 3,605,663 3,637,981 2,349,911 2,379,526
Securities sold under repurchase
agreements and federal funds purchased 112,444 112,535 293,732 293,823
Federal Home Loan Bank advances 1,339,578 1,337,014 1,141,040 1,140,394
Subordinated debt 34,998 36,270 42,147 53,807
Collateralized obligations 2,539 2,611 40,505 40,566
Other borrowings 8,997 8,997 5,144 5,144
Accrued interest payable 23,510 23,510 20,666 20,666
---------- ---------- ---------- ----------
Total financial instrument liabilities $8,429,376 $8,460,565 $6,520,864 $6,561,645
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Financial instruments with off-balance-sheet risk: (4)
Commitments to extend credit $ 3,463 $ (209) $ 4,860 $ (978)
Standby letters of credit (17) (58) (56) (67)
Forward mortgage loan sales commitments 56 (326) 53 154
Financial guarantees written (1,662) (1,662) (1,778) (1,778)
---------- ---------- ---------- ----------
Total off-balance-sheet financial instruments $ 1,840 $ (2,255) $ 3,079 $ (2,669)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
- ------------------------------
(1) Net of unearned discounts, premiums and deferred fees.
(2) Excludes lease receivables not subject to fair value disclosure of $927,000
and $2.7 million at December 31, 1997 and 1996, respectively.
(3) Excludes the allowance for lease losses.
(4) Positive amounts represent assets, negative amounts represent liabilities.
CASH AND DUE FROM BANKS
The carrying amount of cash and due from banks approximates its fair
value.
INVESTMENTS
The carrying amounts of short-term investments approximate their fair
values since they mature in 90 days or less and do not present
unanticipated credit concerns. The fair values of U.S. Government and
other marketable securities held to maturity are based on quoted market
prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments. The
carrying amounts of FHLB stock and FRB stock approximate their fair values.
SECURITIES AVAILABLE FOR SALE
The fair values of U.S. Government and other marketable securities
available for sale are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on quoted
market prices of comparable instruments. The fair values of
mortgage-backed securities available for sale are based on quoted market
prices.
59
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
LOANS HELD FOR SALE
The fair value of residential mortgage loans held for sale is
estimated based on quoted market prices. The fair value of education loans
held for sale is estimated based on an existing forward sale agreement TCF
has with the Student Loan Marketing Association, or on sales of comparable
loans.
The estimated fair value of capitalized mortgage servicing rights
totaled $32.2 million at December 31, 1997, compared with a carrying amount
of $19.5 million. The estimated fair value of capitalized mortgage
servicing rights is based on estimated cash flows discounted using rates
commensurate with the risks involved. Assumptions regarding prepayments,
defaults and interest rates are determined using available market
information.
LOANS
The fair values of loans are estimated for portfolios of loans with
similar characteristics. Loans are segregated by type, and include
residential, commercial real estate, commercial business and consumer, and
by sub-type within these categories. Each of these categories is further
segmented into fixed- and adjustable-rate interest terms, and by performing
and non-performing status. For certain variable-rate loans that reprice
frequently and that have experienced no significant change in credit risk,
fair values are based on carrying values. For certain homogeneous
categories of loans, such as certain residential and consumer loans, fair
values are estimated using quoted market prices. The fair values of other
performing loans are estimated by discounting contractual cash flows
adjusted for prepayment estimates, using interest rates currently being
offered for loans with similar terms to borrowers with similar credit risk
characteristics. The fair values of significant non-performing loans are
based on recent internal or external appraisals, or estimated cash flows
discounted using rates commensurate with the risks associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows and
discount rates are judgmentally determined using available market
information and specific borrower information.
DEPOSITS
The fair value of deposits with no stated maturity, such as checking,
passbook and statement, and money market accounts, is deemed equal to the
amount payable on demand. The fair value of certificates is estimated
based on discounted cash flow analyses using interest rates offered by TCF
at December 31, 1997 and 1996 for certificates of similar remaining
maturities.
The fair value estimates do not include the benefit that results from
the lower-cost funding provided by deposits compared with the cost of
wholesale borrowings. That benefit is commonly referred to as a deposit
base intangible.
BORROWINGS
The carrying amounts of short-term borrowings approximate their fair
values. The fair values of TCF's long-term borrowings are estimated based
on quoted market prices or discounted cash flow analyses using interest
rates offered at December 31, 1997 and 1996 for borrowings of similar
remaining maturities.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The fair values of residential commitments to extend credit and
forward mortgage loan sales commitments associated with residential loans
held for sale are based upon quoted market prices. The fair values of
TCF's remaining commitments to extend credit, standby letters of credit and
financial guarantees written are estimated using fees currently charged to
enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments and standby letters of credit issued in
conjunction with fixed-rate loan agreements, fair value also considers the
difference between current levels of interest rates and the committed
rates. For financial guarantees written, fair value also considers
reserves established relating to TCF's potential obligation on the
outstanding guarantees. The carrying amounts for commitments to extend
credit and forward mortgage loan sales commitments are included in other
assets in the Consolidated Statements of Financial Condition. The carrying
amounts for standby letters of credit and financial guarantees written are
included in accrued expenses and other liabilities in the Consolidated
Statements of Financial Condition.
In addition to the financial instruments with off-balance-sheet risk
noted above, TCF had $16.7 million and $23.3 million of loans sold with
recourse and serviced $335.9 million and $383.8 million of VA loans with
partial recourse at December 31, 1997 and 1996, respectively. TCF has not
incurred, and does not anticipate, significant losses as a result of the
recourse provisions associated with these financial instruments. As a
result, the carrying amounts and related estimated fair values of these
financial instruments were not material at December 31, 1997 and 1996.
60
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(18) STOCK OPTION AND INCENTIVE PLAN
The TCF Financial 1995 Incentive Stock Program (the "Program") was
adopted to enable TCF to attract and retain key personnel. Under the
program, no more than 5% of the shares of TCF common stock outstanding on
the date of initial shareholder approval may be awarded. Options generally
become exercisable over a period of one to 10 years from the date of the
grant and expire after 10 years. All outstanding options have a fixed
exercise price equal to the market price of TCF common stock on the date of
grant. Restricted stock granted in 1997 generally vests within five years,
but may be subject to a delayed vesting schedule if certain return on
equity goals are not met. Other restricted stock grants generally vest
over periods from three to eight years.
As disclosed in Note 1, TCF has elected to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option and restricted stock grants. Accordingly,
no compensation expense has been recognized for TCF's stock option grants.
Compensation expense for restricted stock under APB Opinion No. 25 is
recorded over the vesting periods, and totaled $8.3 million, $7.9 million
and $6.3 million in 1997, 1996 and 1995, respectively.
Had compensation expense been determined based on the fair value at
the grant dates for awards under the Program consistent with the method of
SFAS No. 123, TCF's pro forma net income and earnings per common share
would have been as follows:
Year Ended December 31,
------------------------------------
(In thousands,
except per-share data) 1997 1996 1995
-------- --------- ---------
Net income:
As reported $145,061 $100,377 $72,244
-------- --------- ---------
-------- --------- ---------
Pro forma $146,155 $100,553 $72,328
-------- --------- ---------
-------- --------- ---------
Basic earnings per common share:
As reported $ 1.72 $ 1.23 $ .88
-------- --------- ---------
-------- --------- ---------
Pro forma $ 1.73 $ 1.23 $ .88
-------- --------- ---------
-------- --------- ---------
Diluted earnings per common share:
As reported $ 1.69 $ 1.20 $ .86
-------- --------- ---------
-------- --------- ---------
Pro forma $ 1.70 $ 1.20 $ .86
-------- --------- ---------
-------- --------- ---------
Since the pro forma disclosures of results under SFAS No. 123 are only
required to consider grants awarded in 1995, 1996 and 1997, the pro forma
effects of applying SFAS No. 123 during this initial phase-in period may
not be representative of the effects on reported results for future years.
The fair value of each option grant is estimated on the grant date
using the Black-Scholes option pricing model, with the following
assumptions used for 1997, 1996 and 1995, respectively: risk-free interest
rates of 5.95, 6.5, and 6.25%; dividend yield of 1.7, 2.1, and 1.0%;
expected lives of 10, 5, and 5 years; and volatility of 26.4, 19.6, and
21.1%.
The weighted-average grant-date fair value of options granted was
$11.98, $3.32 and $2.93 in 1997, 1996 and 1995, respectively. The
weighted-average grant-date fair value of restricted stock was $22.23,
$16.75 and $10.14 in 1997, 1996 and 1995, respectively.
Prior to being acquired by TCF, Winthrop had a separate stock option
plan. TCF assumed the obligation to issue common stock upon the exercise
of the outstanding employee and director options to purchase Winthrop
common stock. Winthrop did not have compensatory stock option grants or
61
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
restricted stock transactions with employees. The following table reflects
TCF's restricted stock transactions since December 31, 1994 and the pooled
Winthrop and TCF stock option transactions since December 31, 1994 as if
all Winthrop options were granted, exercised or cancelled as equivalent TCF
shares:
Stock Options Restricted Stock
---------------------------------------------- ---------------------------
Exercise Price
--------------------------------
Shares Range Weighted-Average Shares Price Range
----------- ------------ ----------------- ----------- ----------------
Outstanding at
December 31, 1994 2,316,835 $ 1.94 -9.28 $ 4.03 1,169,148 $ 2.22 -8.75
Granted 77,660 7.73-11.43 10.25 616,800 9.41-14.83
Exercised (846,868) 2.22 -7.74 3.99 - -
Forfeited (15,008) 6.78 -7.74 7.57 (10,178) 9.89
Vested - - - (446,906) 2.22 -9.89
---------- ---------
Outstanding at
December 31, 1995 1,532,619 1.94-11.43 4.33 1,328,864 7.66-14.83
Granted 108,722 11.19-17.54 13.59 72,800 16.56-18.91
Exercised (691,941) 1.94 -9.28 3.32 - -
Expired (832) 3.00 3.00 - -
Forfeited (5,600) 5.33 -9.28 8.15 (42,400) 8.10 -9.89
Vested - - - (167,398) 7.66-16.56
---------- ---------
Outstanding at
December 31, 1996 942,968 2.22-17.54 6.12 1,191,866 7.66-18.91
Granted 123,032 20.40-33.28 31.66 929,200 20.88-27.34
Exercised (224,955) 2.22-17.54 7.06 - -
Forfeited (4,000) 7.74 7.74 - -
Vested - - - (172,138) 8.10 -9.89
---------- ---------
Outstanding at
December 31, 1997 837,045 2.22-33.28 9.61 1,948,928 7.66-27.34
---------- ---------
---------- ---------
Exercisable at
December 31, 1997 707,545 2.22-20.40 6.05
----------
----------
The following table summarizes information about stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
--------------------------------------------------- ----------------------------
Weighted-Average
Weighted-Average Remaining Contractual Weighted-Average
Exercise Price Range Shares Exercise Price Life in Years Shares Exercise Price
- -------------------- ------- ---------------- --------------------- ------- -----------------
$2.22 to $5.00 370,064 $ 3.40 4.1 370,064 $ 3.40
$5.01 to $10.00 250,757 6.94 5.6 228,757 6.79
$10.01 to $15.00 77,660 11.33 7.9 77,660 11.33
$15.01 to $33.28 138,564 30.07 9.7 31,064 18.97
------- -------
Total Options 837,045 9.61 5.8 707,545 6.05
------- -------
------- -------
At December 31, 1997, there were 3,148,561 shares reserved for
issuance under the Program, including 837,045 shares for which options had
been granted but had not yet been exercised.
(19) EMPLOYEE BENEFIT PLANS
PENSION PLANS
The TCF Cash Balance Pension Plan (the "Plan") is a defined benefit
qualified plan covering all "regular stated salary" employees who are at
least 21 years old and have completed a year of eligibility service with
TCF. Certain part-time employees and employees of Winthrop and Standard
are also eligible beginning in 1998. TCF makes a monthly allocation to the
participant's account based on a percentage of the participant's
compensation. The percentage is based on the sum of the participant's age
and years of employment with TCF. Participants are fully vested after five
years of vesting service. The projected unit credit method is the
actuarial cost method used to compute the pension cost.
62
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
Net pension cost (credit) included the following components:
Year Ended December 31,
--------------------------------------
(In thousands) 1997 1996 1995
--------- --------- --------
Service cost - benefits earned
during the year $ 2,091 $ 2,107 $ 1,762
Interest cost on projected benefit
obligation 1,207 945 762
Gain on plan assets (13,365) (5,325) (7,266)
Net amortization and deferral 9,782 2,047 4,806
--------- --------- --------
Net pension cost (credit) $ (285) $ (226) $ 64
--------- --------- --------
--------- --------- --------
The following tables set forth the Plan's funded status at the dates
indicated:
At October 1,
----------------------
(In thousands) 1997 1996
-------- --------
Actuarial present value of accumulated benefit
obligations:
Vested benefits $13,102 $10,489
Non-vested benefits 1,501 1,115
-------- --------
Total accumulated benefits $14,603 $11,604
-------- --------
-------- --------
At December 31,
----------------------
(In thousands) 1997 1996
-------- --------
Projected benefit obligation for service
rendered to date $ 17,027 $13,551
Plan assets at fair value 53,374 38,657
-------- --------
Plan assets in excess of projected benefit
obligation 36,347 25,106
Unrecognized prior service cost (4,782) (3,200)
Unrecognized net gain (17,063) (7,689)
-------- --------
Prepaid pension cost included in other assets $ 14,502 $14,217
-------- --------
-------- --------
The Plan's assets consist primarily of listed stocks and government
bonds. At December 31, 1997 and 1996, the Plan's assets included TCF
common stock with a market value of $12.2 million and $7.8 million,
respectively.
The weighted-average discount rate and rate of increase in future
compensation used to measure the projected benefit obligation and the
expected long-term rate of return on plan assets were as follows:
At December 31,
------------------------
1997 1996 1995
---- ---- ----
Weighted-average discount rate 7.75% 8.00% 7.75%
Rate of increase in future compensation 5.00 5.00 5.00
Expected long-term rate of return on plan assets 9.50 9.50 9.50
Great Lakes was a participant in the multi-employer Financial
Institutions Retirement Fund ("FIRF"). Great Lakes withdrew from the
FIRF effective December 31, 1995 and commenced participation in the
Plan effective January 1, 1996. The FIRF does not segregate the
assets, liabilities or costs by participating employer. As a result,
disclosures required by SFAS No. 87, "Employers' Accounting for
Pensions," cannot be made. Contributions for plan years beginning
July 1, 1988 have not been required due to plan performance. As a
result, Great Lakes did not record pension expense during 1995.
POSTRETIREMENT PLANS
In addition to providing retirement income benefits, TCF provides
health care benefits for eligible retired employees, and in some cases
life insurance benefits. Substantially all full-time employees may
become eligible for health care benefits if they reach retirement age
and have completed 10 years of service with the Company, with certain
exceptions. These and similar benefits for active employees are provided
through insurance companies or through self-funded programs. Employees
of Winthrop and Standard will become eligible for TCF's postretirement
benefit plan in 1998.
63
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
TCF's postretirement benefit plan is currently unfunded. The
following table reconciles the status of the plan with the amounts
recognized in TCF's Consolidated Statements of Financial Condition at the
dates indicated:
At December 31,
----------------
(In thousands) 1997 1996
Accumulated postretirement benefit obligation:
Retirees and beneficiaries $ (6,024) $ (6,005)
Fully eligible active plan participants (955) (745)
Other active plan participants (1,624) (1,121)
--------- ---------
Total accumulated postretirement benefit obligation (8,603) (7,871)
Unrecognized prior service cost 988 1,097
Unrecognized net gain (1,495) (2,184)
Unrecognized transition obligation 5,117 5,459
-------- ---------
Accrued postretirement benefit cost included in
other liabilities $ (3,993) $ (3,499)
--------- ---------
--------- ---------
Net periodic postretirement benefit cost included the following
components:
(In thousands) Year Ended December 31,
-------------------------
1997 1996 1995
---- ---- ----
Service cost - benefits earned during the year $ 236 $ 177 $ 285
Interest cost on accumulated postretirement benefit
obligation 604 778 772
Amortization of unrecognized transition obligation 342 342 342
Amortization of unrecognized net (gain) loss (116) - 138
Amortization of unrecognized prior service cost 109 109 -
------- ------- ------
Net periodic postretirement benefit cost $1,175 $1,406 $1,537
------- ------- ------
------- ------- ------
In connection with TCF's acquisition of Great Lakes, a $329,000
curtailment loss and $168,000 in special termination benefits were
recognized in 1995 associated with benefits provided under Great Lakes'
postretirement benefit plan. These costs are included in merger-related
expenses in the Consolidated Statements of Operations.
The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.75%, 8.0% and 7.75%
at December 31, 1997, 1996 and 1995, respectively. For active
participants, an 8.4% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1998. This rate is assumed
to decrease gradually to 6% for the year 2004 and remain at that level
thereafter. For retired participants, other than certain Great Lakes'
retirees, the annual rate of increase is assumed to be 4% for all future
years, which represents the Plan's annual limit on increases in TCF's
contributions for retirees. The health care cost trend rate assumption
does not have a significant effect on the amounts reported.
EMPLOYEE STOCK PURCHASE PLAN
The TCF Employees Stock Purchase Plan generally allows participants
to make contributions by salary deduction of up to 12% of their salary
on a tax-deferred basis pursuant to section 401(k) of the IRC. TCF
matches the contributions of all employees at the rate of 50 cents per
dollar, with a maximum employer contribution of 3% of the employee's
salary. Employee contributions vest immediately while the Company's
matching contributions are subject to a graduated vesting schedule based
on an employee's years of vesting service. The Company's matching
contributions are expensed when made. TCF's contribution to the plan
was $2.2 million, $1.8 million and $1.4 million in 1997, 1996 and 1995,
respectively.
PROFIT SHARING 401(k) PLAN
Prior to being acquired by TCF, Winthrop established a 401(k)
profit sharing plan (the "Winthrop Plan"). The Winthrop Plan was a
salary reduction cash or deferred profit sharing plan intended to meet
the requirements of Sections 401(k) and 401(a) of the IRC. All
employees who had completed at least one year of service and had
attained the age of 21 were eligible to participate in the Winthrop
Plan. The Winthrop Plan allowed eligible employees to contribute a
certain percentage of their base compensation into the Winthrop Plan
each year. Winthrop could make discretionary contributions
to the Winthrop Plan on behalf of eligible participants at the
discretion of its Board of Directors. Employee contributions vested
immediately while Winthrop's contributions were subject to a graduated
vesting schedule. Winthrop's contributions were expensed when made.
Winthrop's contribution to the Winthrop Plan was $270,000, $184,000 and
$120,000 in 1997, 1996 and 1995, respectively. The Winthrop Plan was
terminated (subject to Internal Revenue Service approval) on January 1,
1998 and all of Winthrop's contributions vested on such date. Winthrop's
employees became eligible for the TCF Employees Stock Purchase Plan on
January 1, 1998.
64
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(20) PARENT COMPANY FINANCIAL INFORMATION
TCF Financial Corporation's (parent company only) condensed
statements of financial condition as of December 31, 1997 and 1996, and
the condensed statements of operations and cash flows for the years
ended December 31, 1997, 1996 and 1995 are as follows:
Condensed Statements of Financial Condition
At December 31,
-------------------
(In thousands) 1997 1996
---- ----
Assets:
Cash $ 16 $ 117
Interest-bearing deposits with banks 19,821 5,438
Investment in subsidiaries:
Bank subsidiaries 895,527 608,787
Other subsidiaries - 1,544
Premises and equipment 6,330 4,471
Loan to unconsolidated subsidiary 1,709 2,014
Other assets 41,761 17,221
-------- --------
$965,164 $639,592
-------- --------
-------- --------
Liabilities and Stockholders' Equity:
Notes payable to non-bank subsidiaries $ - $ 957
Other liabilities 11,484 7,948
------- --------
Total liabilities 11,484 8,905
Stockholders' equity 953,680 630,687
-------- --------
$965,164 $639,592
-------- --------
-------- --------
Condensed Statements of Operations
Year Ended December 31,
-----------------------------
(In thousands) 1997 1996 1995
---- ---- ----
Interest income $ 1,099 $ 352 $ 1,412
Interest expense 758 923 3,680
-------- --------- --------
Net interest income (expense) 341 (571) (2,268)
Provision for credit losses 679 - -
-------- --------- --------
Net interest expense after provision
for credit losses (338) (571) (2,268)
-------- --------- --------
Cash dividends received from subsidiaries:
Bank subsidiaries 109,791 103,500 27,500
Other subsidiaries 1,549 4,102 2,832
-------- --------- --------
Total cash dividends received from subsidiaries 111,340 107,602 30,332
-------- --------- --------
Other non-interest income:
Affiliate service fee revenues 54,007 44,369 36,427
Other (4) 7 (4)
-------- --------- --------
Total other non-interest income 54,003 44,376 36,423
-------- --------- --------
Non-interest expense:
Compensation and employee benefits 42,828 34,174 27,189
Occupancy and equipment 12,217 10,958 8,435
Other 18,149 16,414 13,508
-------- --------- --------
Total non-interest expense 73,194 61,546 49,132
-------- --------- --------
Income before income tax benefit and equity
in undistributed earnings of subsidiaries 91,811 89,861 15,355
Income tax benefit 7,518 6,879 5,991
-------- --------- --------
Income before equity in undistributed earnings
of subsidiaries 99,329 96,740 21,346
Equity in undistributed earnings of subsidiaries 45,732 3,637 50,898
-------- --------- --------
Net income $145,061 $100,377 $72,244
-------- --------- --------
-------- --------- --------
All dividends were received from consolidated subsidiaries
during the three-year period ended December 31, 1997.
65
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
Condensed Statements of Cash Flows
Year Ended December 31,
--------------------------
(In thousands) 1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net income $145,061 $100,377 $ 72,244
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of
subsidiaries (45,732) (3,637) (50,898)
Net increase in other assets and
liabilities (2,394) (3,702) (3,604)
Other, net 11,019 9,501 8,849
--------- --------- ---------
Total adjustments (37,107) 2,162 (45,653)
--------- --------- ---------
Net cash provided by operating activities 107,954 102,539 26,591
--------- --------- ---------
Cash flows from investing activities:
Net (increase) decrease in interest-bearing
deposits with banks (14,383) 6,273 24,467
Investments in and advances to
subsidiaries, net (66,265) (117) (16,001)
Loan originations, net 305 (1,049) 381
Purchases of premises and equipment, net (3,913) (2,678) (2,457)
Other, net 964 63 64
--------- --------- ---------
Net cash provided (used) by investing
activities (83,292) 2,492 6,454
--------- --------- ---------
Cash flows from financing activities:
Dividends paid on preferred stock - - (678)
Dividends paid on common stock (37,341) (25,279) (20,968)
Proceeds from issuance of common stock, net 29,266 - -
Proceeds from exercise of stock options and
stock warrants 1,506 1,639 12,455
Proceeds from conversion of convertible
debentures 7,149 123 2,656
Repurchases of common stock (27,318) (41,382) (876)
Redemption of preferred stock - - (27,100)
Proceeds from bank line of credit 69,100 52,275 40,000
Repayment of commercial bank note and
bank line of credit (69,100) (92,275) (3,500)
Repayment of subordinated capital notes - - (34,500)
Issuance of treasury stock to employee
benefit plans 2,930 - -
Other, net (955) (85) (529)
--------- --------- ----------
Net cash used by financing activities (24,763) (104,984) (33,040)
--------- --------- ----------
Net increase (decrease) in cash (101) 47 5
Cash at beginning of year 117 70 65
--------- --------- ----------
Cash at end of year $ 16 $ 117 $ 70
--------- --------- ----------
--------- --------- ----------
66
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(21) BUSINESS SEGMENTS
The following summarizes financial data for TCF's business segments:
Year Ended December 31,
------------------------------
(In thousands) 1997 1996 1995
---- ---- ----
Revenues:
Financial institution $720,225 $629,777 $632,837
Consumer finance 82,756 74,930 48,279
Mortgage banking operations 36,339 33,498 32,881
Leasing operations 72,610 53,838 43,285
Insurance operations 32,817 32,797 27,809
Real estate development 1,102 437 288
Eliminations (35,475) (30,350) (21,341)
--------- --------- ---------
$910,374 $794,927 $764,038
--------- --------- ---------
--------- --------- ---------
Earnings (loss) from continuing
operations before income tax
expense and extraordinary item:
Financial institution $179,711 $115,448 $ 76,443
Consumer finance 5,515 (3,846) 2,368
Mortgage banking operations 9,833 10,427 7,585
Leasing operations 30,700 24,361 19,260
Insurance operations 13,825 14,398 12,448
Real estate development 1,065 303 169
Eliminations 258 317 416
-------- --------- --------
$240,907 $161,408 $118,689
-------- --------- --------
-------- --------- --------
At December 31,
---------------------
(In thousands) 1997 1996
---- ----
Identifiable assets:
Financial institution $9,319,590 $7,045,604
Consumer finance 519,597 497,619
Mortgage banking operations 140,157 83,607
Leasing operations 376,675 350,110
Insurance operations 23,424 18,303
Real estate development 46 293
Eliminations (634,829) (565,049)
----------- -----------
$9,744,660 $7,430,487
---------- -----------
---------- -----------
Real estate development revenues in the Consolidated Statements of
Operations are presented net of costs of operations of real estate and are
included in other non-interest expense.
67
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements - (Continued)
(22) FEDERAL DEPOSIT INSURANCE CORPORATION SPECIAL ASSESSMENT
Federal legislation enacted on September 30, 1996 addressed
inadequate funding of the Savings Association Insurance Fund ("SAIF"),
which had resulted in a large deposit insurance premium disparity
between banks insured by the Bank Insurance Fund ("BIF") and
SAIF-insured thrifts. As a result of this new legislation, a one-time
special assessment was imposed on thrift institutions, and TCF
recognized a $34.8 million pretax charge for assessments imposed on
its bank subsidiaries. The legislation also provided for a reduction
in deposit insurance premiums in subsequent periods and other regulatory
reforms.
(23) LITIGATION AND CONTINGENT LIABILITIES
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 of 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.
68
INDEPENDENT AUDITOR'S REPORT
[LOGO]
To the Board of Directors and Stockholders
of TCF Financial Corporation:
We have audited the accompanying consolidated statements of financial condition
of TCF Financial Corporation and Subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TCF Financial
Corporation and Subsidiaries at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 20, 1998
69
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Supplementary Information
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, At At At At At At At At
except per-share data) Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1997 1997 1997 1997 1996 1996 1996 1996
SELECTED FINANCIAL CONDITION DATA:
Total assets $9,744,660 $9,796,154 $7,403,760 $7,317,584 $7,430,487 $7,433,682 $7,340,539 $7,316,569
Investments (1) 129,612 130,261 82,098 60,458 456,195 402,328 157,414 63,136
Securities available for sale 1,426,131 1,628,126 1,181,126 1,242,457 999,586 998,001 1,049,219 1,117,476
Loans and leases 7,069,188 7,052,032 5,382,356 5,354,941 5,292,920 5,332,800 5,393,769 5,418,564
Deposits 6,907,310 6,976,687 5,243,574 5,291,894 4,977,630 5,018,672 5,052,557 5,150,023
Borrowings 1,727,152 1,754,445 1,349,369 1,273,411 1,708,172 1,671,598 1,584,493 1,453,895
Stockholders' equity 953,680 919,952 701,063 626,716 630,687 599,573 597,632 597,891
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
- --------------------------------------------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1997 1997 1997 1997 1996 1996 1996 1996
- --------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATIONS DATA:
Interest income $198,739 $173,253 $157,242 $153,380 $150,452 $153,049 $153,611 $ 155,772
Interest expense 87,725 73,399 64,605 63,289 62,288 63,551 64,419 68,058
-------- -------- -------- -------- -------- -------- -------- ---------
Net interest income 111,014 99,854 92,637 90,091 88,164 89,498 89,192 87,714
Provision for credit losses 5,859 6,341 4,097 1,498 4,048 6,972 7,324 2,902
-------- -------- -------- -------- -------- -------- -------- ---------
Net interest income after
provision for credit losses 105,155 93,513 88,540 88,593 84,116 82,526 81,868 84,812
-------- -------- -------- -------- -------- -------- -------- ---------
Non-interest income:
Gain on sale of loans 145 - - - 810 4,633 - -
Gain on sale of loan servicing - - - 1,622 - - - -
Gain (loss) on sale of securities
available for sale 3,179 2,852 1,093 1,385 2 - (1) 85
Gain on sale of branches 742 10,635 2,810 - 1,022 - 480 1,245
Other non-interest income 55,489 53,917 49,051 43,748 46,340 43,828 43,270 39,898
------- ------- ------- ------- ------- -------- -------- ---------
Total non-interest income 59,555 67,404 52,954 46,755 48,174 48,461 43,749 41,228
------- ------- ------- ------- ------- --------- -------- ---------
Non-interest expense:
Amortization of goodwill and
other intangibles 2,844 10,559 1,161 1,193 881 893 893 873
FDIC special assessment - - - - - 34,803 - -
Other non-interest expense 95,082 87,794 82,982 79,947 80,590 81,097 75,317 78,179
------- ------- ------- ------- ------- -------- ------- -------
Total non-interest expense 97,926 98,353 84,143 81,140 81,471 116,793 76,210 79,052
------- ------- ------- ------- ------- -------- -------- ---------
Income before income tax expense 66,784 62,564 57,351 54,208 50,819 14,194 49,407 46,988
Income tax expense 26,895 25,354 22,416 21,181 18,923 5,346 19,196 17,566
-------- -------- -------- -------- -------- -------- -------- ---------
Net income $ 39,889 $ 37,210 $ 34,935 $ 33,027 $ 31,896 $ 8,848 $ 30,211 $ 29,422
-------- -------- -------- -------- -------- -------- -------- ---------
-------- -------- -------- -------- -------- -------- -------- ---------
Per common share:
Basic earnings $ .44 $ .44 $ .43 $ .41 $ .39 $ .11 $ .37 $ .36
-------- -------- --------- -------- -------- -------- -------- ---------
-------- -------- --------- -------- -------- -------- -------- ---------
Diluted earnings $ .43 $ .43 $ .42 $ .40 $ .38 $ .11 $ .36 $ .35
-------- -------- --------- -------- -------- -------- -------- ---------
-------- -------- --------- -------- -------- -------- -------- ---------
Dividends declared $ .125 $ .125 $ .125 $ .09375 $ .09375 $ .09375 $ .09375 $ .078125
-------- -------- --------- -------- -------- -------- -------- ---------
-------- -------- --------- -------- -------- -------- -------- ---------
FINANCIAL RATIOS:
Return on average assets (2) 1.63% 1.80% 1.90% 1.82% 1.81% .49% 1.67% 1.59%
Return on average realized common
equity (2) 17.28 19.37 21.35 21.26 20.81 5.82 20.35 20.21
Return on average common equity (2) 17.10 19.20 21.37 21.26 20.78 5.89 20.51 19.93
Average total equity to average
assets 9.53 9.38 8.91 8.56 8.73 8.40 8.14 7.99
Net interest margin (2)(3) 4.93 5.24 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, FRB stock and
FHLB stock.
(2) Annualized.
(3) Net interest income divided by average interest-earning assets.
70-71