FORM 10-Q - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended
September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
------------------
Commission File
No. 0-16431
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TCF FINANCIAL CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1591444
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
801 Marquette Avenue, Mail Code 100-01-A, Minneapolis, Minnesota 55402
- -------------------------------------------------------------------------------
(Address and Zip Code of principal executive offices)
Registrant's telephone number, including area code: (612) 661-6500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class October 31, 1998
- --------------------------------------- 86,890,471 shares
Common Stock, $.01 par value
1
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information Pages
-----
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at September 30, 1998 and December 31, 1997................................................ 3
Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1998 and 1997.......................................... 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997................................................... 5
Consolidated Statements of Stockholders' Equity for
the Year Ended December 31, 1997 and for the
Nine Months Ended September 30, 1998....................................................... 6
Notes to Consolidated Financial Statements................................................... 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three
and Nine Months Ended September 30, 1998 and 1997.................................. 10-23
Supplementary Information.................................................................... 24-25
Part II. Other Information
Items 1-6......................................................................................... 26-27
Signatures ................................................................................................. 28
Index to Exhibits .......................................................................................... 29
2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands, except per-share data)
(Unaudited)
At At
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Cash and due from banks $ 360,793 $ 297,010
Interest-bearing deposits with banks 933 20,572
Federal funds sold 23,000 -
U.S. Government and other marketable securities
held to maturity (fair value of $4,208 and $4,061) 4,208 4,061
Federal Reserve Bank stock, at cost 23,107 22,977
Federal Home Loan Bank stock, at cost 84,243 82,002
Securities available for sale (amortized cost of $1,650,128 and $1,411,979) 1,673,722 1,426,131
Loans held for sale 193,588 244,612
Loans and leases:
Residential real estate 3,727,318 3,623,845
Commercial real estate 812,040 859,916
Commercial business 267,123 240,207
Consumer 1,910,016 1,976,699
Lease financing 376,142 368,521
------------- ------------
Total loans and leases 7,092,639 7,069,188
Allowance for loan and lease losses (78,955) (82,583)
------------- ------------
Net loans and leases 7,013,684 6,986,605
Premises and equipment 171,763 165,790
Other real estate owned 13,693 18,353
Accrued interest receivable 54,066 54,336
Due from brokers - 126,662
Goodwill 168,578 177,700
Deposit base intangibles 17,134 19,821
Mortgage servicing rights 21,115 19,512
Other assets 76,812 78,516
------------- ------------
$ 9,900,439 $ 9,744,660
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Checking $ 1,722,571 $ 1,468,657
Passbook and statement 1,176,010 1,134,678
Money market 706,201 698,312
Certificates 3,128,586 3,605,663
------------- ------------
Total deposits 6,733,368 6,907,310
------------- ------------
Securities sold under repurchase agreements and federal
funds purchased 158,079 112,444
Federal Home Loan Bank advances 1,598,456 1,339,578
Discounted lease rentals 189,326 228,596
Subordinated debt 28,750 34,998
Other borrowings 185,337 11,536
------------- ------------
Total borrowings 2,159,948 1,727,152
Accrued interest payable 26,338 23,510
Accrued expenses and other liabilities 111,359 133,008
------------- ------------
Total liabilities 9,031,013 8,790,980
------------- ------------
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, 280,000,000 shares
authorized; 92,919,016 and 92,821,529 shares issued 929 928
Additional paid-in capital 501,061 460,684
Unamortized deferred compensation (25,723) (25,457)
Retained earnings, subject to certain restrictions 584,769 508,969
Loan to Executive Deferred Compensation Plan (6,406) -
Shares held in trust for deferred compensation plans,
at cost (37,803) -
Accumulated other comprehensive income 14,262 8,556
Treasury stock, at cost, 5,491,045 shares in 1998 (161,663) -
------------- ------------
Total stockholders' equity 869,426 953,680
------------- ------------
$ 9,900,439 $ 9,744,660
------------- ------------
------------- ------------
See accompanying notes to consolidated financial statements. Annual financial
statements are subject to audit.
3
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per-share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Interest income:
Loans $145,567 $132,333 $441,238 $373,118
Lease financing 12,407 10,833 36,911 27,722
Loans held for sale 3,402 4,146 10,655 11,338
Securities available for sale 21,480 24,355 66,573 67,562
Investments 2,373 1,586 8,231 4,135
-------- -------- -------- --------
Total interest income 185,229 173,253 563,608 483,875
-------- -------- -------- --------
Interest expense:
Deposits 53,662 50,193 164,130 135,549
Borrowings 26,943 23,206 78,405 65,744
-------- -------- -------- --------
Total interest expense 80,605 73,399 242,535 201,293
-------- -------- -------- --------
Net interest income 104,624 99,854 321,073 282,582
Provision for credit losses 4,544 6,341 13,360 11,936
-------- -------- -------- --------
Net interest income after provision for credit losses 100,080 93,513 307,713 270,646
-------- -------- -------- --------
Non-interest income:
Fee and service charge revenues 33,875 25,785 92,320 73,378
ATM network revenues 13,509 8,360 36,239 21,960
Leasing revenues 9,688 9,299 23,949 23,651
Title insurance revenues 5,247 3,698 14,790 9,721
Commissions on sales of annuities 2,059 1,991 6,482 6,035
Commissions on sales of mutual funds 1,566 903 4,301 2,885
Gain on sale of loans held for sale 2,679 1,825 6,041 3,231
Other 2,640 2,056 8,482 5,855
-------- ------- -------- --------
71,263 53,917 192,604 146,716
-------- ------- -------- --------
Gain on sale of loan servicing 2,414 - 2,414 1,622
Gain (loss) on sale of securities available for sale (43) 2,852 2,246 5,330
Gain on sale of branches 226 10,635 6,534 13,445
Gain on sale of joint venture interest - - 5,580 -
-------- -------- ------- --------
2,597 13,487 16,774 20,397
-------- -------- -------- --------
Total non-interest income 73,860 67,404 209,378 167,113
-------- -------- -------- --------
Non-interest expense:
Compensation and employee benefits 56,446 45,055 164,395 129,380
Occupancy and equipment 18,299 14,365 53,246 42,074
Advertising and promotions 5,157 5,228 15,881 15,334
Federal deposit insurance premiums and assessments 1,375 1,183 4,154 3,313
Amortization of goodwill and other intangibles 2,828 10,559 8,570 12,913
Other 27,777 21,963 72,688 60,622
-------- -------- -------- --------
Total non-interest expense 111,882 98,353 318,934 263,636
-------- -------- -------- --------
Income before income tax expense 62,058 62,564 198,157 174,123
Income tax expense 25,477 25,354 81,482 68,951
-------- -------- -------- --------
Net income $ 36,581 $ 37,210 $116,675 $105,172
-------- -------- -------- --------
-------- -------- -------- --------
Net income per common share:
Basic $ .42 $ .44 $ 1.31 $ 1.28
-------- -------- -------- --------
-------- -------- -------- --------
Diluted $ .42 $ .43 $ 1.30 $ 1.25
-------- -------- -------- --------
-------- -------- -------- --------
Dividends declared per common share $ .1625 $ .125 $ .45 $ .34375
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes to consolidated financial statements. Annual financial
statements are subject to audit.
4
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 116,675 $ 105,172
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 21,583 16,796
Amortization of goodwill and other intangibles 8,570 12,913
Amortization of fees, discounts and premiums 6,470 125
Proceeds from sales of loans held for sale 455,587 422,192
Principal collected on loans held for sale 6,927 6,457
Originations and purchases of loans held for sale (459,819) (487,728)
Net increase in other assets and liabilities,
and accrued interest (7,729) (28,472)
Provision for credit losses 13,360 11,936
Gain on sale of securities available for sale (2,246) (5,330)
Gain on sale of joint venture interest (5,580) -
Gain on sale of branches (6,534) (13,445)
Gain on sale of loan servicing (2,414) (1,622)
Other, net (2,767) (5,972)
----------- -----------
Total adjustments 25,408 (72,150)
----------- -----------
Net cash provided by operating activities 142,083 33,022
----------- -----------
Cash flows from investing activities:
Principal collected on loans and leases 2,277,809 1,311,659
Originations and purchases of loans (2,260,529) (1,392,855)
Purchases of equipment for lease financing (126,356) (140,879)
Proceeds from sales of loans 19,875 1,639
Net decrease in interest-bearing deposits with banks 19,639 465,375
Proceeds from sales of securities available for sale 231,438 416,945
Proceeds from maturities of and principal collected on
securities available for sale 472,216 280,643
Purchases of securities available for sale (816,616) (382,761)
Proceeds from redemption of FHLB stock 1,784 15,880
Purchases of FRB stock (130) (22,663)
Proceeds from sale of joint venture interest 6,351 -
Net (increase) decrease in short-term federal funds sold (23,000) 24,000
Proceeds from sales of loan servicing 635 2,286
Purchases of premises and equipment (30,862) (23,201)
Acquisitions of Standard Financial, Inc. and BOC Financial
Corporation, net of cash acquired - (218,896)
Sales of deposits, net of cash paid (117,928) (171,174)
Other, net 15,985 24,706
----------- -----------
Net cash provided (used) by investing activities (329,689) 190,704
----------- -----------
Cash flows from financing activities:
Net (decrease) increase in deposits (47,157) 134,774
Proceeds from securities sold under repurchase agreements
and federal funds purchased 3,017,287 8,481,194
Payments on securities sold under repurchase agreements
and federal funds purchased (2,971,652) (8,676,392)
Proceeds from FHLB advances 880,700 818,825
Payments on FHLB advances (621,306) (1,114,611)
Proceeds from discounted lease rentals 41,490 126,630
Proceeds from other borrowings 769,156 502,229
Payments on other borrowings (595,401) (446,766)
Payments on subordinated debt (6,248) -
Repurchases of common stock (165,960) (27,316)
Payments of dividends on common stock (40,875) (26,607)
Proceeds from issuance of common stock - 29,266
Other, net (8,645) (2,933)
----------- -----------
Net cash provided (used) by financing activities 251,389 (201,707)
----------- -----------
Net increase in cash and due from banks 63,783 22,019
Cash and due from banks at beginning of period 297,010 236,446
----------- -----------
Cash and due from banks at end of period $ 360,793 $ 258,465
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest on deposits and borrowings $ 230,833 $ 196,685
----------- -----------
----------- -----------
Income taxes $ 90,642 $ 77,261
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements. Annual financial
statements are subject to audit.
5
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
(Unaudited)
Shares
Loan to Held in Accumu-
Unamor- Executive Trust for lated
Addi- tized Deferred Deferred Other
Number tional Deferred Compen- Compen- Compre-
of Common Common Paid-in Compen- Retained sation sation hensive Treasury
Shares Issued Stock Capital sation Earnings Plan Plans Income Stock Total
------------- ----- ------- -------- -------- --------- --------- -------- -------- -----
Balance,
December 31, 1996 85,242,232 $852 $274,320 $ (7,693) $402,109 $ (68) $ - $ 2,376 $(41,209) $630,687
Net income - - - - 145,061 - - - - 145,061
Dividends on common
stock - - - - (38,201) - - - - (38,201)
Issuance of 1,400,000
shares of common
stock from
treasury, net - - 2,532 - - - - - 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 6,505,732 65 162,937 - - - - - 22,805 185,807
Purchase of 1,295,800
shares to be held
in treasury - - - - - - - - (27,316) (27,316)
Issuance of 929,200
share of restricted
stock, of which
869,200 shares were
from treasury 60,000 - 10,102 (25,270) - - - - 15,168 -
Grant of 23,984 shares
of restricted stock
to outside directors
from treasury - - 421 (840) - - - - 419 -
Cancellation of shares
of restricted stock (2,000) - (58) 15 - - - - - (43)
Issuance of 133,784
shares of treasury
stock to employee
benefit plans - 1 374 - - - - - 2,555 2,930
Repurchase and
cancellation of shares (86) - (2) - - - - - - (2)
Amortization of deferred
compensation - - - 8,331 - - - - - 8,331
Exercise of stock options,
of which 44,600 shares
were from treasury 176,585 2 2,917 - - - - - 844 3,763
Issuance of common stock
on conversion of
convertible debentures 839,066 8 7,141 - - - - - - 7,149
Payments on Loan to
Executive Deferred
Compensation Plan - - - - - 68 - - - 68
Change in unrealized
gain on securities
available for sale,
net of tax and
reclassification
adjustment - - - - - - - 6,180 - 6,180
---------- ---- -------- -------- -------- ------- -------- ------- --------- --------
Balance,
December 31, 1997 92,821,529 928 460,684 (25,457) 508,969 - - 8,556 - 953,680
Net income - - - - 116,675 - - - - 116,675
Dividends on common stock - - - - (40,875) - - - - (40,875)
Purchase of 5,618,500
shares to be held in
treasury - - - - - - - - (165,728) (165,728)
Issuance of 108,200
shares of restricted
stock, of which 61,000
shares were from
treasury 47,200 1 2,564 (4,498) - - - - 1,933 -
Cancellation of shares
of restricted stock (11,400) - (219) 192 - - - - - (27)
Grant of shares of
restricted stock to
outside directors - - (59) (173) - - - - - (232)
Amortization of deferred
compensation - - - 4,213 - - - - - 4,213
Exercise of stock options,
of which 66,455 shares
were from treasury 61,687 - 288 - - - - - 2,132 2,420
Shares held in trust for
deferred compensation
plans - - 37,803 - - - (37,803) - - -
Loan to Executive Deferred
Compensation Plan - - - - - (6,406) - - - (6,406)
Change in unrealized gain
on securities available
for sale, net of tax and
reclassification
adjustment - - - - - - - 5,706 - 5,706
---------- ---- -------- -------- -------- ------- -------- ------- --------- --------
Balance,
September 30, 1998 92,919,016 $929 $501,061 $(25,723) $584,769 $(6,406) $(37,803) $14,262 $(161,663) $869,426
---------- ---- -------- -------- -------- ------- -------- ------- --------- --------
---------- ---- -------- -------- -------- ------- -------- ------- --------- --------
See accompanying notes to consolidated financial statements. Annual financial
statements are subject to audit.
6
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation. The
results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore
do not include all information and notes necessary for complete
financial statements in conformity with generally accepted accounting
principles. The material under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is written
with the presumption that the users of the interim financial statements
have read or have access to the most recent Annual Report on Form 10-K
of TCF Financial Corporation ("TCF" or the "Company"), which contains
the latest audited financial statements and notes thereto, together
with Management's Discussion and Analysis of Financial Condition and
Results of Operations as of December 31, 1997 and for the year then
ended. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made
to prior period financial statements to conform to the current period
presentation. For consolidated statements of cash flows purposes, cash
and cash equivalents include cash and due from banks.
(2) COMPREHENSIVE INCOME
Effective January 1, 1998, TCF adopted Statement of Financial
Accounting Standards ("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 requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be disclosed in the financial
statements.
Comprehensive income is defined as the change in equity during a period
from transactions and other events from non-owner sources.
Comprehensive income is the total of net income and other comprehensive
income, which for TCF is comprised entirely of unrealized gains and
losses on securities available for sale.
7
The following table summarizes the components of comprehensive income for the
periods noted:
Three Nine
Months Ended Months Ended
(In thousands) September 30, September 30,
------------------ -------------------
1998 1997 1998 1997
---- ---- ---- ----
Net income $ 36,581 $ 37,210 $ 116,675 $ 105,172
Other comprehensive income, net of tax:
Unrealized holding gains arising during the period on securities available for
sale (net of tax expense of $4,799 and $5,251 for the three months
ended September 30, 1998 and 1997, respectively, and $4,625 and $6,408
for the nine months ended September 30, 1998 and 1997, respectively) 7,330 7,615 7,063 10,402
Reclassification adjustment for (gains) losses included in net income (net of
tax expense (benefit) of ($15) and $1,305 for the three months ended
September 30, 1998 and 1997, respectively, and $889 and $2,032 for the
nine months ended September 30, 1998 and 1997, respectively) 28 (1,547) (1,357) (3,298)
--------- --------- --------- ---------
Total other comprehensive income 7,358 6,068 5,706 7,104
--------- --------- --------- ---------
Comprehensive income $ 43,939 $ 43,278 $ 122,381 $ 112,276
--------- --------- --------- ---------
--------- --------- --------- ---------
(3) DEFERRED COMPENSATION PLANS
During the third quarter of 1998, TCF applied the consensus reached in
the Emerging Issues Task Force ("EITF") Issue No. 97-14, "Accounting
for Deferred Compensation Arrangements Where Amounts Earned Are Held
in a Rabbi Trust and Invested." As a result, the assets of TCF's
deferred compensation plans were consolidated with those of TCF. The
cost of TCF common stock held by the deferred compensation plans is
reported separately in a manner similar to treasury stock (that is,
changes in fair value are not recognized) with a corresponding
deferred compensation obligation reflected in additional paid-in
capital. The application of EITF 97-14 did not impact TCF's total
stockholders' equity or results of operations for 1998 or any prior
period.
(4) EARNINGS PER COMMON SHARE
The weighted average number of common shares outstanding used to
compute basic earnings per common share were 87,133,594 and 85,124,188
for the three months ended September 30, 1998 and 1997, respectively,
and 89,157,432 and 82,398,577 for the nine months ended September 30,
1998 and 1997, respectively. The weighted average number of common and
common equivalent shares outstanding used to compute diluted earnings
per common share were 87,973,243 and 86,438,280 for the three months
ended September 30, 1998 and 1997, respectively, and 90,020,436 and
84,173,668 for the nine months ended September 30, 1998 and 1997,
respectively.
8
(5) ACQUISITION
On January 30, 1998, TCF National Bank Illinois ("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
automated teller machines ("ATM") located in Jewel-Osco stores. TCF
accounted for the acquisition using the purchase method of accounting.
9
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
TCF reported net income of $36.6 million and $116.7 million for the third
quarter and first nine months of 1998, respectively, compared with $37.2 million
and $105.2 million for the same 1997 periods. Diluted earnings per common share
were 42 cents and $1.30 for the third quarter and first nine months of 1998,
respectively, compared with 43 cents and $1.25 for the same 1997 periods. Return
on average assets was 1.54% and 1.63% for the third quarter and first nine
months of 1998, respectively, compared with 1.80% and 1.84% for the same 1997
periods. Return on average realized common equity was 16.75% and 17.13% for the
third quarter and first nine months of 1998, respectively, compared with 19.37%
and 20.60% for the same 1997 periods. Diluted cash earnings per common share,
which exclude amortization and reduction of goodwill and deposit base
intangibles, were 44 cents and $1.42 for the third quarter and first nine months
of 1998, respectively, compared with 51 cents and $1.35 for the same 1997
periods. On the same basis, cash return on average assets was 1.64% and 1.78%
for the third quarter and first nine months of 1998, respectively, compared with
2.13% and 1.99% for the same 1997 periods, and cash return on average tangible
equity was 22.48% and 23.41% for the third quarter and first nine months of
1998, respectively, compared with 25.94% and 24.32% for the same periods in
1997. As TCF's September 4, 1997 acquisition of Standard Financial, Inc.
("Standard") was accounted for as a purchase transaction, TCF's results for
periods prior to the acquisition have not been restated. Since Standard's
performance ratios were lower than TCF's, the Company's performance ratios for
1998 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.
TCF has significantly expanded its retail banking franchise in recent periods
and had 310 retail banking branches at September 30, 1998. Since July 1,
1995, TCF has opened 141 branches, of which 124 were supermarket branches.
The cost of this expansion resulted in a $2.6 million after-tax reduction in
earnings for the third quarter of 1998 and a $7.3 million after-tax reduction
in earnings in the first nine months of 1998. TCF anticipates opening nine
more branches in the remainder of 1998, and additional branches in subsequent
years, including 25 Jewel-Osco supermarket branches per year in subsequent
years until branches have been installed in all targeted stores. See
"Financial Condition - Forward-Looking Information."
TCF's 1997 third quarter 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 million of
Great Lakes Michigan's teller equipment.
NET INTEREST INCOME
Net interest income for the third quarter of 1998 was $104.6 million, up 4.8%
from $99.9 million for the third quarter of 1997. The net interest margin for
the third quarter of 1998 was 4.82%, compared with 5.24% for the same 1997
period and 4.94% for the second quarter of 1998. Net interest income for the
first nine months of 1998 totaled $321.1 million, up 13.6% from $282.6
million for the same 1997 period. The net interest margin for the first nine
months of 1998 was 4.90%, compared with 5.31% for the same period in 1997.
TCF's net interest income increased primarily due to the acquisition of
Standard and the growth of lower interest-cost retail deposits. TCF's net
interest margins for 1998 were negatively impacted due to the impact of
Standard's lower net interest margin, loan prepayments and the purchase of
$671.4 million of mortgage-backed securities yielding approximately 6.5%
during the third quarter of 1998. Although these mortgage-backed securities
are expected to contribute to future earnings, they will continue to
negatively impact TCF's net interest margin. Changes in net interest income
are dependent upon the movement of interest rates, the volume
10
and the mix of interest-earning assets and interest-bearing
liabilities, and the level of non-performing assets. Achieving net interest
margin growth is dependent on TCF's ability to generate higher-yielding assets
and lower-cost retail deposits. The current interest rate environment and the
resulting increase in prepayment activity has made it more difficult for TCF to
increase the balance of such higher-yielding assets. Competition for checking,
savings and money market deposits, an important source of lower cost funds for
TCF, has intensified among depository and other financial institutions. TCF may
experience compression in its net interest margin if the rates paid on deposits
increase, or if yields earned on loans and leases or other interest-earning
assets decline or decline faster or by a greater amount than declines in rates
paid on deposits or borrowings. See "Market Risk - Interest-Rate Risk" and
"Financial Condition Deposits."
The following rate/volume analysis details the increases (decreases) in net
interest income resulting from interest rate and volume changes during the third
quarter and first nine months of 1998 as compared to the same periods last year.
Changes attributable to the combined impact of volume and rate have been
allocated proportionately to the change due to volume and the change due to
rate.
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
Versus Same Period in 1997 Versus Same Period in 1997
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------ ------------------------------
(In thousands) Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
Securities available for sale $ (1,817) $ (1,058) $ (2,875) $ 656 $ (1,645) $ (989)
-------- -------- -------- -------- -------- --------
Loans held for sale (530) (214) (744) (200) (483) (683)
-------- -------- -------- -------- -------- --------
Loans and leases:
Residential real estate 19,267 (3,789) 15,478 67,457 (4,063) 63,394
Commercial real estate (631) (614) (1,245) (789) (829) (1,618)
Commercial business 1,083 (138) 945 3,661 (200) 3,461
Consumer 197 (2,141) (1,944) 7,591 (4,708) 2,883
Lease financing 946 628 1,574 4,603 4,586 9,189
-------- -------- -------- -------- -------- --------
Total loans and leases 20,862 (6,054) 14,808 82,523 (5,214) 77,309
-------- -------- -------- -------- -------- --------
Investments:
Interest-bearing deposits
with banks (119) (5) (124) (419) 3 (416)
Federal funds sold 379 (2) 377 2,400 - 2,400
U.S. Government and other
marketable securities
held to maturity 3 3 6 8 11 19
FHLB stock 459 (35) 424 1,518 (28) 1,490
FRB stock 103 1 104 603 - 603
-------- -------- -------- -------- -------- --------
Total investments 825 (38) 787 4,110 (14) 4,096
-------- -------- -------- -------- -------- --------
Total interest income 19,340 (7,364) 11,976 87,089 (7,356) 79,733
-------- -------- -------- -------- -------- --------
Deposits:
Checking 310 (133) 177 907 (122) 785
Passbook and statement 1,086 (717) 369 3,387 (577) 2,810
Money market 347 (222) 125 916 (336) 580
Certificates 3,320 (522) 2,798 25,843 (1,437) 24,406
-------- -------- -------- -------- -------- --------
Total deposits 5,063 (1,594) 3,469 31,053 (2,472) 28,581
-------- -------- -------- -------- -------- --------
Borrowings:
Securities sold under
repurchase agreements and
federal funds purchased (2,753) 32 (2,721) (12,175) 186 (11,989)
FHLB advances 7,522 (39) 7,483 26,390 154 26,544
Discounted lease rentals (907) (36) (943) (363) (258) (621)
Subordinated debt (171) (152) (323) (455) 294 (161)
Other borrowings 64 177 241 (1,345) 233 (1,112)
-------- -------- -------- -------- -------- --------
Total borrowings 3,755 (18) 3,737 12,052 609 12,661
-------- -------- -------- -------- -------- --------
Total interest expense 8,818 (1,612) 7,206 43,105 (1,863) 41,242
-------- -------- -------- -------- -------- --------
Net interest income $ 10,522 $ (5,752) $ 4,770 $ 43,984 $ (5,493) $ 38,491
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
11
PROVISION FOR CREDIT LOSSES
TCF provided $4.5 million for credit losses in the third quarter of 1998,
compared with $6.3 million for the same prior-year period. In the first nine
months of 1998, TCF provided $13.4 million for credit losses, compared with
$11.9 million for the same 1997 period. At September 30, 1998, the allowance for
loan and lease losses and industrial revenue bond reserves totaled $80.3
million, compared with $84 million at year-end 1997. See "Financial Condition -
Allowance for Loan and Lease Losses and Industrial Revenue Bond Reserves."
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 or
losses on sales of loan servicing, securities available for sale and branches,
non-interest income increased $17.3 million, or 32.2%, to $71.3 million for the
third quarter of 1998, from $53.9 million for the 1997 third quarter. For the
first nine months of 1998, non-interest income, excluding the items noted above
and a gain on the sale of a joint venture interest, totaled $192.6 million,
compared with $146.7 million for the same period in 1997. The increases were
primarily due to increased deposit, ATM and title insurance revenues, and
reflect TCF's expanded retail banking activities.
Fee and service charge revenues totaled $33.9 million and $92.3 million for the
third quarter and first nine months of 1998, respectively, representing
increases of 31.4% and 25.8% from $25.8 million and $73.4 million for the same
1997 periods. These increases are primarily due to expanded retail banking
activities.
ATM network revenues totaled $13.5 million and $36.2 million for the third
quarter and first nine months of 1998, respectively, representing increases of
61.6% and 65% from $8.4 million and $22 million for the same 1997 periods. These
increases reflect TCF's effort to provide banking services through its ATM
network. TCF's network of ATMs totaled 1,396 at September 30, 1998, an increase
of 240 ATMs from December 31, 1997. On January 30, 1998, TCF acquired 178 ATMs
in connection with its acquisition of 76 branches in Jewel-Osco stores. See Note
5 of Notes to Consolidated Financial Statements. The Company anticipates
installing additional ATMs during the remainder of 1998.
Leasing revenues totaled $9.7 million and $23.9 million for the third quarter
and first nine months of 1998, respectively, representing increases of $389,000
and $298,000 from $9.3 million and $23.7 million for the same 1997 periods.
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.
Title insurance revenues totaled $5.2 million and $14.8 million for the third
quarter and first nine months of 1998, respectively, representing increases of
41.9% and 52.1% from $3.7 million and $9.7 million for the same 1997 periods.
Title insurance revenues are cyclical in nature and are largely dependent on the
level of residential real estate loan originations and refinancings.
Gains on sales of loans held for sale totaled $2.7 million and $6 million for
the third quarter and first nine months of 1998, respectively, representing
increases of $854,000 and $2.8 million from the amounts recognized during the
same periods in 1997. Gains or losses on sales of loans held 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.
12
Results for the third quarter and first nine months of 1998 included a pretax
gain of $2.4 million on the sale of $200.4 million of third-party loan servicing
rights. Results for the first nine months of 1997 included a pretax gain of $1.6
million on the sale of $144.7 million of third-party loan servicing rights. TCF
periodically sells and purchases loan servicing rights depending on market
conditions. TCF's third-party residential loan servicing portfolio totaled $4
billion at September 30, 1998, compared with $4.4 billion at December 31, 1997.
Gains (losses) on sales of securities available for sale totaled ($43,000) and
$2.2 million for the third quarter and first nine months of 1998, respectively,
compared with $2.9 million and $5.3 million for the comparable 1997 periods. TCF
periodically sells securities available for sale based on market conditions.
During the third quarter of 1998, TCF recognized a $226,000 gain on the sale of
one branch, compared with a $10.6 million gain on the previously mentioned sale
of all eight Ohio branches during the same 1997 period. Results for the first
nine months of 1998 include gains of $5.6 million on the sale of TCF's joint
venture interest in Burnet Home Loans and $6.5 million on the sales of seven
branches, compared with gains of $13.4 million on the sales of 10 branches for
the same 1997 period.
NON-INTEREST EXPENSE
Non-interest expense totaled $111.9 million for the third quarter of 1998, up
13.8% from $98.4 million for the same 1997 period. For the first nine months of
1998, non-interest expense totaled $318.9 million, up 21% from $263.6 million
for the same 1997 period. Compensation and employee benefits expense totaled
$56.4 million and $164.4 million for the 1998 third quarter and first nine
months, respectively, compared with $45.1 million and $129.4 million for the
comparable periods in 1997. Occupancy and equipment expenses totaled $18.3
million and $53.2 million for the third quarter and first nine months of 1998,
respectively, compared with $14.4 million and $42.1 million for the same 1997
periods. The increased expenses in 1998 were primarily due to the costs
associated with expanded retail banking activities, including the acquisition of
Standard and the opening of 88 branches in Jewel-Osco stores.
Amortization of goodwill and other intangibles totaled $2.8 million and $8.6
million for the third quarter and first nine months of 1998, respectively,
compared with $10.6 million and $12.9 million for the same 1997 periods. The
decreases are primarily due to the previously mentioned 1997 accelerated
amortization of $8.7 million of deposit base intangibles, partially offset by
the amortization of goodwill and deposit base intangibles resulting from the
acquisition of Standard. Reductions of goodwill associated with branch sales,
which are reported as a component of gains on sales of branches, totaled $3.3
million for the first nine months of 1998.
YEAR 2000
During 1998, TCF has continued to address the "Year 2000" computer issue. The
Year 2000 issue relates to the use of two digits rather than four by computer
systems to define the applicable year and whether such systems will properly
process information when the year changes to 2000. Failure of computer systems
to properly recognize the Year 2000 could potentially result in the production
of erroneous data, miscalculations of financial information such as interest,
system failures, business disruption and other operational problems.
TCF has established a Year 2000 Task Force and has evaluated its data processing
and other systems with imbedded technologies, such as ATMs, vaults and security
systems, to determine whether they are Year 2000 compliant. Remediation of
certain software is in process, and TCF expects substantially all such work to
be complete by the end of 1998, leaving 1999 for testing. Such testing includes
testing of individual application systems
13
and "integration testing," which tests the way multiple systems work
together. Many of TCF's data processing applications are supplied by
third-party vendors. TCF has also evaluated whether such vendor supplied
applications are or will be Year 2000 compliant. Additionally, federal
banking regulators are conducting special examinations of FDIC-insured banks
and savings associations to determine whether they are taking necessary steps
to prepare for the Year 2000 issue, and are closely monitoring the progress
made by these institutions in completing key steps required by their
individual Year 2000 plans.
TCF has incurred $2.7 million of internal and external costs of replacement,
renovation and testing of its critical internal computer hardware and software
and imbedded technologies through September 30, 1998, and expects such costs to
total $9.1 million over the three-year period ending December 31, 1999. Of the
$2.7 million of Year 2000 costs incurred through September 30, 1998, $700,000
have been capitalized. Approximately $1.9 million of future Year 2000 costs are
expected to be capitalized.
TCF's Year 2000 Task Force is also developing contingency plans to mitigate
potential delays or other problems. TCF's contingency plans include back-up
solutions for mission-critical applications and business continuation plans for
significant vendors and other business partners. Alternative courses of action
for dealing with non-compliant systems are difficult to identify in general
terms because they depend on the nature of the system, whether internal or
external personnel are responsible for the system, and the cost and availability
of replacement systems, among other factors. Although TCF believes its plans
address significant contingencies over which it is able to exercise some
control, there may be contingencies which cannot be readily identified or
contingencies over which it has little or no control and for which few, if any,
alternatives are available (for example, system failures that affect the Federal
Reserve System.)
The effect of the Year 2000 issue on TCF will also depend on the way the Year
2000 issue is addressed by TCF's customers, including significant borrowers,
vendors, service providers, counterparties, competitors, utilities, governmental
agencies and other entities with which TCF does business. TCF has surveyed and
continues to monitor parties with which it does business to determine how they
are addressing the Year 2000 issue and whether computer hardware and software
and other services provided to TCF will be, or are, Year 2000 compliant.
Additionally, TCF's applicable lending and investment units have implemented
procedures for identifying, managing, and underwriting Year 2000 credit risk.
TCF is also monitoring the Year 2000 preparation of entities such as the Federal
Reserve System, which provides services for processing and settling payments and
securities transactions between banks.
The Year 2000 efforts of third parties are ultimately not within TCF's control,
and their failure to remediate Year 2000 issues successfully could result in a
disruption in the services TCF provides, including deposit and loan services,
and could increase TCF's operating costs and credit risk. At the present time,
it is not possible to determine with certainty whether any such events are
likely to occur, or to quantify any potential negative impact they may have on
TCF's future results of operations and financial condition.
The foregoing discussion regarding Year 2000, including the discussion of the
timing and effectiveness of implementation and costs of TCF's Year 2000 efforts,
contains forward-looking statements which are based on management's best
estimates derived using assumptions considered reasonable. See "Financial
Condition - Forward-Looking Information." These forward-looking statements
involve inherent risks and uncertainties, and actual results could differ
materially from those contemplated by such statements. Factors that might cause
material differences include, but are not limited to, availability and cost of
programmers and other systems personnel, TCF's ability to locate and correct all
relevant Year 2000 computer code, including imbedded technologies, and the
ability of TCF's customers, including significant borrowers, vendors,
competitors and counterparties to effectively address the Year 2000 issue. Such
material differences
14
could result in, among other things, business disruption, operational
problems, financial loss, legal liability and similar risks.
INCOME TAXES
TCF recorded income tax expense of $25.5 million and $81.5 million for the third
quarter and first nine months of 1998, or 41.1% of income before income tax
expense, respectively, compared with $25.4 million and $69 million, or 40.5% and
39.6%, respectively, for the comparable 1997 periods. The higher tax rates in
1998 reflect the impact of relatively higher non-deductible expenses, including
goodwill amortization resulting from the acquisition of Standard, and higher
state taxes due to business expansion.
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).
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.
Management's estimates and assumptions could be significantly affected by
external factors such as prepayment rates other than those assumed, early
withdrawals of deposits, changes in the correlation of various interest-bearing
instruments, competition and changes 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 positive $237.1
million, or 2% of total assets, at September 30, 1998, compared with a negative
$184.7 million, or (2)% of total assets, at December 31, 1997.
15
FINANCIAL CONDITION
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 accumulated other
comprehensive income, which is a separate component of stockholders' equity.
Securities available for sale increased $247.6 million from year-end 1997 to
$1.7 billion at September 30, 1998. The increase reflects purchases of $816.6
million of securities available for sale, partially offset by sales of $229.2
million and payment and prepayment activity. At September 30, 1998, TCF's
securities available-for-sale portfolio included $1.3 billion and $327.9 million
of fixed-rate and adjustable-rate mortgage-backed securities, respectively. The
following table summarizes securities available for sale:
At September 30, 1998 At December 31, 1997
---------------------- ----------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
--------- ----- --------- -----
Mortgage-backed securities:
FHLMC $ 964,452 $ 980,353 $ 701,195 $ 710,799
FNMA 533,491 540,973 466,820 469,900
GNMA 35,960 36,802 43,079 43,993
Private issuer 115,301 114,670 199,738 200,325
Collateralized mortgage
obligations 924 924 1,147 1,114
---------- ---------- ---------- ----------
$1,650,128 $1,673,722 $1,411,979 $1,426,131
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
LOANS HELD FOR SALE
Education and residential real estate loans held for sale are carried at the
lower of cost or market. Education loans held for sale decreased $7.8 million
and residential real estate loans held for sale decreased $43.2 million from
year-end 1997, respectively, and totaled $127.5 million and $66.1 million at
September 30, 1998.
16
LOANS AND LEASES
The following table sets forth information about loans and leases held in TCF's
portfolio, excluding loans held for sale:
At At
September 30, December 31,
(In thousands) 1998 1997
------------ -----------
Residential real estate $ 3,720,692 $ 3,619,527
Unearned premiums and deferred loan fees 6,626 4,318
----------- -----------
3,727,318 3,623,845
----------- -----------
Commercial real estate:
Apartments 264,412 294,231
Other permanent 452,946 481,759
Construction and development 96,592 86,174
Unearned discounts and deferred loan fees (1,910) (2,248)
----------- -----------
812,040 859,916
----------- -----------
Total real estate 4,539,358 4,483,761
----------- -----------
Commercial business 266,588 239,728
Deferred loan costs 535 479
----------- -----------
267,123 240,207
----------- -----------
Consumer:
Home equity 1,529,335 1,519,644
Automobile 370,863 444,903
Loans secured by deposits 8,169 10,112
Other secured 20,044 19,955
Unsecured 35,567 44,607
Unearned discounts and deferred loan fees (53,962) (62,522)
----------- -----------
1,910,016 1,976,699
----------- -----------
Lease financing:
Direct financing leases 357,264 344,889
Sales-type leases 33,562 40,592
Lease residuals 28,726 28,789
Unearned income and deferred lease costs (43,410) (45,749)
----------- -----------
376,142 368,521
----------- -----------
$ 7,092,639 $ 7,069,188
----------- -----------
----------- -----------
Loans and leases increased $23.5 million from year-end 1997 to $7.1 billion at
September 30, 1998, reflecting increases of $103.5 million, $26.9 million and
$7.6 million in residential real estate and commercial business loans and lease
financings, respectively, partially offset by decreases of $66.7 million and
$47.9 million in consumer and commercial real estate loans, respectively. TCF's
growth in its loan and lease portfolios has been negatively impacted by growth
in prepayment activity due to lower long-term interest rates. Unearned discounts
and deferred fees totaled $92.1 million at September 30, 1998 and $105.7 million
at December 31, 1997.
Consumer loans, comprised of bank originated and consumer finance originated
loans, decreased $66.7 million from year-end 1997 to $1.9 billion at September
30, 1998, reflecting decreases of $74 million and $9 million in automobile and
unsecured loans, respectively, partially offset by an increase of $9.7 million
in home equity loans. TCF continues its emphasis on expanding its home equity
portfolio.
17
TCF had 53 consumer finance offices in 15 states as of September 30, 1998. TCF's
consumer finance loan portfolio totaled $475.3 million at September 30, 1998,
compared with $521.5 million at December 31, 1997. The Company is seeking to
improve the profitability of its consumer finance activities and is reviewing
curtailment of its remaining indirect automobile lending activities. See
"Forward-Looking Information."
The consumer finance subsidiaries primarily originate home equity loans and
purchase automobile loans. The average individual balances of consumer finance
automobile and home equity loans were $8,000 and $34,000, respectively, at
September 30, 1998. At September 30, 1998 and December 31, 1997, automobile
loans comprised $254.6 million, or 53.6%, and $292.6 million, or 56.1%,
respectively, of total consumer finance loans. At September 30, 1998 and
December 31, 1997, home equity loans comprised $211.5 million, or 44.5%, and
$218.8 million, or 42%, 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 September
30, 1998 are $201 million of sub-prime automobile loans which carry a higher
level of credit risk and higher interest rates. Loans classified as sub-prime
are generally made to borrowers who are unable to obtain credit from traditional
sources because of significant past credit problems or limited credit histories.
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 assurance that the Company's sub-prime lending
criteria are the same as those utilized by other lenders.
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.
Commercial real estate loans decreased $47.9 million from year-end 1997 to $812
million at September 30, 1998. Commercial business loans increased $26.9 million
in the first nine months of 1998 to $267.1 million at September 30, 1998.
At September 30, 1998, there were no commercial real estate loans with terms
that have been modified in troubled debt restructurings included in performing
loans, compared with $1.3 million at December 31, 1997.
At September 30, 1998, the recorded investment in loans that are considered to
be impaired was $8.6 million for which the related allowance for credit losses
was $2.4 million. All of the impaired loans were on non-accrual status. The
average recorded investment in impaired loans during the three and nine months
ended September 30, 1998 was $8.3 million and $8.5 million, respectively.
Lease financings increased $7.6 million from year-end 1997 to $376.1 million at
September 30, 1998, reflecting a $12.4 million increase in direct financing
leases, partially offset by a decrease of $7 million in sales type leases. TCF
internally funds certain leases and consequently retains the credit risk on such
leases.
18
ALLOWANCE FOR LOAN AND LEASE LOSSES AND INDUSTRIAL REVENUE BOND RESERVES
A summary of the activity of the allowance for loan and lease losses and
industrial revenue bond reserves, and selected statistics follows:
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
-------------------------------------- --------------------------------------
Industrial Industrial
Allowance for Revenue Allowance for Revenue
Loan and Bond Loan and Bond
(Dollars in thousands) Lease Losses Reserves Total Lease Losses Reserves Total
------------- ---------- ----- -------------- ---------- -----
Balance at beginning of period $80,138 $1,301 $81,439 $82,583 $1,460 $84,043
Provision for credit losses 4,544 - 4,544 13,519 (159) 13,360
Charge-offs (7,696) - (7,696) (22,489) - (22,489)
Recoveries 1,969 - 1,969 5,342 - 5,342
------- ------ ------- ------- ------ -------
Net charge-offs (5,727) - (5,727) (17,147) - (17,147)
------- ------ ------- ------- ------ -------
Balance at end of period $78,955 $1,301 $80,256 $78,955 $1,301 $80,256
------- ------ ------- ------- ------ -------
------- ------ ------- ------- ------ -------
Ratio of annualized net loan and lease
charge-offs to average loans and leases
outstanding, excluding loans held
for sale .32% .32%
Allowance for loan and lease losses as
a percentage of total loan and lease
balances, excluding loans held for sale 1.11% 1.11%
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
-------------------------------------- --------------------------------------
Industrial Industrial
Allowance for Revenue Allowance for Revenue
Loan and Bond Loan and Bond
(Dollars in thousands) Lease Losses Reserves Total Lease Losses Reserves Total
------------- ---------- ----- -------------- ---------- -----
Balance at beginning of period $72,466 $1,560 $74,026 $71,865 $1,660 $73,525
Acquired balance 8,939 - 8,939 10,592 - 10,592
Provision for credit losses 6,391 (50) 6,341 12,086 (150) 11,936
Charge-offs (7,290) - (7,290) (19,236) - (19,236)
Recoveries 1,533 - 1,533 6,732 - 6,732
------- ------ ------- ------- ------ -------
Net charge-offs (5,757) - (5,757) (12,504) - (12,504)
------- ------ ------- ------- ------ -------
Balance at end of period $82,039 $1,510 $83,549 $82,039 $1,510 $83,549
------- ------ ------- ------- ------ -------
------- ------ ------- ------- ------ -------
Ratio of annualized net loan and lease
charge-offs to average loans and leases
outstanding, excluding loans held
for sale .39% .30%
Allowance for loan and lease losses as
a percentage of total loan and lease
balances, excluding loans held for sale 1.16% 1.16%
TCF has experienced an increase in the level of net loan charge-offs related to
its consumer finance portfolio. As a result, net loan charge-offs as a
percentage of average loans outstanding for TCF's consumer finance portfolio
were 4.09% and 3.85% for the third quarter and nine months ended September 30,
1998, respectively, compared with 2.95% for the same periods of 1997 and 3.61%
for the three months ended June 30, 1998. In addition, the net loan charge-offs
as a percentage of average loans outstanding for TCF's indirect consumer finance
portfolio were 6.06% and 5.37% for the third quarter and nine months ended
September 30, 1998, compared with 3.94% and 4.21% for the same periods in 1997
and 4.40% for the three months ended June 30, 1998.
19
Management believes the allowance for loan and lease losses and industrial
revenue bond reserves are adequate. The unallocated portion of TCF's allowance
for loan and lease losses totaled $24.4 million at September 30, 1998, compared
with $29.4 million at December 31, 1997.
NON-PERFORMING ASSETS
Non-performing assets (principally non-accrual loans and leases and other real
estate owned) totaled $53.5 million at September 30, 1998, down $5.3 million
from the December 31, 1997 total of $58.7 million. Approximately 71% of
non-performing assets at September 30, 1998 consist of, or are secured by, real
estate. The accrual of interest income is generally discontinued when loans and
leases become 90 days or more past due with respect to either principal or
interest unless such loans and leases are adequately secured and in the process
of collection. Non-performing assets are summarized in the following table:
At At
September 30, December 31,
(Dollars in thousands) 1998 1997
------------ -----------
Non-accrual loans and leases (1):
Consumer:
Bank lending $ 4,037 $ 3,495
Consumer finance lending 16,107 17,542
---------- ----------
20,144 21,037
Residential real estate 8,749 8,451
Commercial real estate 4,754 3,818
Commercial business 3,841 3,370
Lease financing 117 117
---------- ----------
37,605 36,793
Other real estate owned and other assets (2) 15,870 21,953
---------- ----------
Total non-performing assets $ 53,475 $ 58,746
---------- ----------
---------- ----------
Non-performing assets as a percentage
of net loans and leases .76% .84%
Non-performing assets as a percentage
of total assets .54% .60%
(1) Included in total loans and leases in the Consolidated Statements of
Financial Condition.
(2) Includes residential real estate of $11.7 million and $11.2 million,
commercial real estate of $1.8 million and $6.7 million and automobiles
of $2.1 million and $2.6 million at September 30, 1998 and December 31,
1997, respectively.
20
TCF had accruing loans and leases 90 days or more past due totaling $66,000 at
September 30, 1998. The over 30-day delinquency rate on TCF's loans and leases
(excluding loans held for sale and non-accrual loans and leases) was .67% of
gross loans and leases outstanding at September 30, 1998, compared with .72% at
year-end 1997. TCF's delinquency rates are determined using the contractual
method. The following table sets forth information regarding TCF's over 30-day
delinquent loans and leases, excluding loans held for sale and non-accrual loans
and leases:
At September 30, 1998 At December 31, 1997
-------------------------- ---------------------------
Principal Percentage of Principal Percentage of
(Dollars in thousands) Balances Portfolio Balances Portfolio
-------- --------- -------- ---------
Consumer:
Bank lending $ 6,326 .44% $ 9,646 .66%
Consumer finance lending 28,106 5.55 28,964 5.13
------- -------
34,432 1.77 38,610 1.91
Residential real estate 8,102 .22 10,567 .29
Commercial real estate 1,603 .20 1,173 .14
Commercial business 3,258 1.24 396 .17
Lease financing 525 .13 886 .21
------- -------
$47,920 .67 $51,632 .72
------- -------
------- -------
TCF's over 30-day delinquency rate on gross consumer loans was 1.77% at
September 30, 1998, down from 1.91% at year-end 1997. Management continues to
monitor the consumer loan portfolio, which will generally have higher
delinquencies, especially consumer finance loans. TCF's over 60-day delinquency
rate on gross consumer finance loans was 1.42% at September 30, 1998, compared
with 1.25% at December 31, 1997. TCF's over 60-day delinquency rate on gross
automobile and home equity consumer finance loans was 1.93% and .68% at
September 30, 1998, compared with 1.65% and .6%, respectively, at December 31,
1997. 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, 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 loans, commercial business loans, and lease financings with an aggregate
principal balance of $13.8 million outstanding at September 30, 1998 for which
management has concerns regarding the ability of the borrowers to meet existing
repayment terms. This amount consists of loans and leases 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
$23.6 million of such loans and leases at December 31, 1997. Although these
loans and leases 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 leases and the financial condition of these borrowers.
DEPOSITS
Deposits totaled $6.7 billion at September 30, 1998, down $173.9 million from
December 31, 1997. The decrease reflects a $477.1 million decrease in
higher-rate certificates, and includes the effects of the previously
described branch sales. Lower interest-cost checking, savings and money
market deposits totaled $3.6 billion, up $303.1 million from year-end 1997,
and comprised 53.6% of total deposits at September 30, 1998. 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, decreased to 3.08% at September 30,
1998, from 3.42% at December 31, 1997. This decrease reflects growth in lower
interest-cost checking,
21
savings and money market deposits, decreases in rates paid on such deposits,
and a lower proportion of higher-rate certificates at September 30, 1998 than
at December 31, 1997.
BORROWINGS
Borrowings totaled $2.2 billion as of September 30, 1998, up $432.8 million from
year-end 1997. The increase was primarily due to increases of $258.9 million in
FHLB advances, $45.8 million in securities sold under repurchase agreements,
$114.8 million in treasury, tax and loan notes and $59.5 million in TCF's bank
line of credit, partially offset by a decrease of $39.3 million in discounted
lease rentals. The increase in FHLB advances and securities sold under
repurchase agreements reflects the previously mentioned purchase of $671.4
million in securities available for sale in the third quarter of 1998. The
weighted-average rate on borrowings decreased to 6.02% at September 30, 1998,
from 6.43% at December 31, 1997. At September 30, 1998, borrowings with a
maturity of one year or less totaled $1 billion.
STOCKHOLDERS' EQUITY
Stockholders' equity at September 30, 1998 was $869.4 million, or 8.8% of total
assets, down from $953.7 million, or 9.8% of total assets, at December 31, 1997.
The decrease in stockholders' equity is primarily due to the repurchase of
5,618,500 shares of TCF's common stock at a cost of $165.7 million and the
payment of $40.9 million in common stock dividends, partially offset by net
income of $116.7 million for the first nine months of 1998.
On January 19, 1998, TCF's Board of Directors (the "Board") authorized the
repurchase of up to 5% of TCF's common stock, or approximately 4.6 million
shares. On June 22, 1998, the Board authorized another repurchase of up to 5% of
TCF's common stock, or approximately 4.5 million shares. TCF purchased a total
of 5,618,500 shares of common stock under these plans during the first nine
months of 1998. TCF has remaining authorization of 3.5 million shares under its
June 22, 1998 5% stock repurchase program.
During the third quarter of 1998, loans totaling $6.4 million were made by TCF
to the Executive Deferred Compensation Plan trustee on a nonrecourse basis to
purchase shares of TCF common stock for the accounts of participants. The loans
are repayable over five years, bear interest of 7.41% and are secured by the
shares of TCF common stock purchased with the loan proceeds. These loans are
reflected as a reduction of stockholders' equity as required by generally
accepted accounting principles.
On October 19, 1998, TCF announced a quarterly dividend of 16.25 cents per
common share, payable on November 30, 1998 to shareholders of record as of
November 6, 1998.
At September 30, 1998, TCF and its bank subsidiaries exceeded their regulatory
capital requirements and are considered "well-capitalized" under guidelines
established by the Federal Reserve Board and the Federal Deposit Insurance
Corporation Improvement Act of 1991.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 requires recognition of all derivative instruments as either assets or
liabilities in the statement of financial condition and measurement of those
instruments at fair value. A derivative may be designated as a hedge of an
exposure to changes in the fair value of a recognized asset or liability, an
exposure to variable cash flows of a forecasted transaction, or a foreign
currency exposure. The accounting for gains and losses associated with changes
in the fair value of a derivative and the impact on TCF's consolidated
statements will depend on its hedge designation and whether the hedge is
22
highly effective in offsetting changes in the fair value or cash flows of the
underlying hedged item. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. It is too early to predict what
effect, if any, the statement will have on TCF.
FORWARD-LOOKING INFORMATION
There are a number of important factors which could cause TCF's future results
to differ materially from historical performance and which make any
forward-looking statements about TCF's financial results subject to a number of
risks and uncertainties. These include but are not limited to possible
legislative changes; adverse economic developments which may increase default
and delinquency risks in TCF's loan and lease portfolios or lead to other
adverse developments; increases in bankruptcy filings by TCF's loan and lease
customers; shifts in interest rates which may result in shrinking interest
margins, increased borrowing costs or other adverse developments; deposit
outflows; interest rates on competing investments; demand for financial services
and loan and lease products; increases in competition in the banking and
financial services industry; changes in accounting policies or guidelines, or
monetary and fiscal policies of the federal government; inflation; changes in
the quality or composition of TCF's loan, lease and investment portfolios;
adverse changes in securities markets; results of litigation or other
significant uncertainties. TCF's year 2000 compliance initiatives or other
required technological changes are subject to certain uncertainties which may
delay or increase the cost of implementation. 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. TCF's 1997 and 1998 acquisitions (and
its commitment to construct additional Jewel-Osco branches in future periods)
are subject to additional uncertainties, including the possible failure to fully
realize anticipated benefits from the transactions. Significant uncertainties in
such transactions include lower than expected income or revenue or higher than
expected operating costs; greater than expected costs or difficulties related to
the integration and retention of employees of the acquired business operations;
and other unanticipated occurrences which may increase the costs related to the
transactions or decrease the expected financial benefits of the transactions.
23
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Supplementary Information
SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
- -------------------------------------------------------------------------------
At At At At At At At
(Dollars in thousands Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
except per-share data) 1998 1998 1998 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL
CONDITION DATA:
Total assets $9,900,439 $9,393,060 $9,664,849 $9,744,660 $9,796,154 $7,403,760 $7,317,584
Investments (1) 135,491 122,888 246,364 129,612 130,261 82,098 60,458
Securities available for sale 1,673,722 1,122,490 1,306,853 1,426,131 1,628,126 1,181,126 1,242,457
Loans and leases 7,092,639 7,103,686 7,036,646 7,069,188 7,052,032 5,382,356 5,354,941
Deposits 6,733,368 6,741,288 6,925,024 6,907,310 6,976,687 5,243,574 5,291,894
Borrowings 2,159,948 1,617,240 1,631,021 1,727,152 1,754,445 1,349,369 1,273,411
Stockholders' equity 869,426 906,485 948,070 953,680 919,952 701,063 626,716
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended
- ----------------------------------------------------------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1998 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATIONS DATA:
Interest income $185,229 $186,903 $191,476 $198,739 $173,253 $157,242 $153,380
Interest expense 80,605 79,606 82,324 87,725 73,399 64,605 63,289
-------- -------- -------- -------- -------- -------- --------
Net interest income 104,624 107,297 109,152 111,014 99,854 92,637 90,091
Provision for credit losses 4,544 2,882 5,934 5,859 6,341 4,097 1,498
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for credit losses 100,080 104,415 103,218 105,155 93,513 88,540 88,593
-------- -------- -------- -------- -------- -------- --------
Non-interest income:
Gain on sale of loan servicing 2,414 - - - - - 1,622
Gain (loss) on sale of securities
available for sale (43) 1,787 502 3,179 2,852 1,093 1,385
Gain on sale of joint venture
interest - - 5,580 - - - -
Gain on sale of branches 226 4,260 2,048 742 10,635 2,810 -
Other non-interest income 71,263 63,531 57,810 55,634 53,917 49,051 43,748
-------- -------- -------- -------- -------- -------- --------
Total non-interest income 73,860 69,578 65,940 59,555 67,404 52,954 46,755
-------- -------- -------- -------- -------- -------- --------
Non-interest expense:
Amortization of goodwill and other
intangibles 2,828 2,826 2,916 2,844 10,559 1,161 1,193
Other non-interest expense 109,054 102,857 98,453 95,082 87,794 82,982 79,947
-------- -------- -------- -------- -------- -------- --------
Total non-interest expense 111,882 105,683 101,369 97,926 98,353 84,143 81,140
-------- -------- -------- -------- -------- -------- --------
Income before income tax expense 62,058 68,310 67,789 66,784 62,564 57,351 54,208
Income tax expense 25,477 28,110 27,895 26,895 25,354 22,416 21,181
-------- -------- -------- -------- -------- -------- --------
Net income $ 36,581 $ 40,200 $ 39,894 $ 39,889 $ 37,210 $ 34,935 $ 33,027
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Per common share:
Basic earnings $ .42 $ .45 $ .44 $ .44 $ .44 $ .43 $ .41
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Diluted earnings $ .42 $ .45 $ .43 $ .43 $ .43 $ .42 $ .40
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Diluted cash earnings (3) $ .44 $ .48 $ .49 $ .46 $ .51 $ .43 $ .41
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Dividends declared $ .1625 $ .1625 $ .125 $ .125 $ .125 $ .125 $ .09375
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
FINANCIAL RATIOS:
Return on average assets (2) 1.54% 1.69% 1.66% 1.63% 1.80% 1.90% 1.82%
Cash return on average assets (2)(3) 1.64 1.84 1.86 1.73 2.13 1.95 1.87
Return on average realized common
equity (2) 16.75 17.52 16.99 17.28 19.37 21.35 21.26
Return on average common equity (2) 16.58 17.37 16.83 17.10 19.20 21.37 21.26
Cash return on average tangible
equity (2)(3) 22.48 23.73 23.78 23.09 25.94 23.48 23.35
Average total equity to average assets 9.28 9.75 9.83 9.53 9.38 8.91 8.56
Net interest margin (2)(4) 4.82 4.94 4.94 4.93 5.24 5.41 5.31
- ---------------------------------
(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) Excludes amortization and reduction of goodwill and deposit base
intangibles.
(4) Net interest income divided by average interest-earning assets.
24
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Supplementary Information (Continued)
Consolidated Average Balance Sheets, Interest and Dividends
Earned or Paid, and Related Interest Yields and Rates
Nine Months Ended September 30,
--------------------------------------------------------------------------------
1998 1997
---------------------------------------- ---------------------------------------
Interest Interest
Average Yields and Average Yields and
(Dollars in thousands) Balance Interest(1) Rates(2) Balance Interest(1) Rates (2)
------- ----------- ---------- ------- ----------- -----------
Assets:
Securities available
for sale (3) $1,279,872 $ 66,573 6.94% $1,257,257 $ 67,562 7.17%
---------- ---------- ---------- ----------
Loans held for sale 199,286 10,655 7.13 202,903 11,338 7.45
---------- ---------- ---------- ----------
Loans and leases:
Residential real
estate 3,671,236 201,800 7.33 2,356,250 138,406 7.83
Commercial real estate 839,638 56,066 8.90 851,284 57,684 9.03
Commercial business 260,196 16,587 8.50 198,637 13,126 8.81
Consumer 1,933,632 166,785 11.50 1,817,742 163,902 12.02
Lease financings 376,538 36,911 13.07 326,257 27,722 11.33
---------- ---------- ---------- ----------
Total loans and
leases (4) 7,081,240 478,149 9.00 5,550,170 400,840 9.63
---------- ---------- ---------- ----------
Investments:
Interest-bearing
deposits with banks 3,414 145 5.66 13,430 561 5.57
Federal funds sold 59,910 2,491 5.54 2,175 91 5.58
U.S. Government and
other marketable
securities held
to maturity 4,143 174 5.60 3,943 155 5.24
FHLB stock 82,202 4,385 7.11 52,929 2,895 7.29
FRB stock 23,080 1,036 5.98 9,646 433 5.99
---------- ---------- ---------- ----------
Total investments 172,749 8,231 6.35 82,123 4,135 6.71
---------- ---------- ---------- ----------
Total interest-
earning assets 8,733,147 563,608 8.60 7,092,453 483,875 9.10
---------- ---- ------- ----
Other assets (5) 817,553 540,444
---------- ----------
Total assets $9,550,700 $7,632,897
---------- ----------
---------- ----------
Liabilities and
Stockholders' Equity:
Non-interest bearing
deposits $ 985,558 $ 765,766
---------- ----------
Interest-bearing
deposits:
Checking 664,491 5,175 1.04 531,057 4,390 1.10
Passbook and
statement 1,134,941 14,769 1.74 836,382 11,959 1.91
Money market 699,517 15,676 2.99 647,722 15,096 3.11
Certificates 3,322,605 128,510 5.16 2,604,886 104,104 5.33
---------- ---------- ---------- ----------
Total interest-
bearing
deposits 5,821,554 164,130 3.76 4,620,047 135,549 3.91
---------- ---------- ---------- ----------
Borrowings:
Securities sold under
repurchase agree-
ments and federal
funds purchased 111,863 4,950 5.90 395,367 16,939 5.71
FHLB advances 1,275,914 56,193 5.87 676,794 29,649 5.84
Discounted lease
rentals 212,390 12,973 8.14 218,344 13,594 8.30
Subordinated debt 30,099 2,376 10.53 38,949 2,537 8.68
Other borrowings 39,713 1,913 6.42 64,125 3,025 6.29
---------- ---------- ---------- ----------
Total borrowings 1,669,979 78,405 6.26 1,393,579 65,744 6.29
---------- ---------- ---------- ----------
Total interest-
bearing
liabilities 7,491,533 242,535 4.32 6,013,626 201,293 4.46
---------- ---- ---------- ----
Other liabilities (5) 156,585 170,017
---------- ----------
Total liabilities 8,633,676 6,949,409
Stockholders' equity (5) 917,024 683,488
---------- ----------
Total liabilities
and stockholders'
equity $9,550,700 $7,632,897
---------- ----------
---------- ----------
Net interest income $ 321,073 $ 282,582
---------- ----------
---------- ----------
Net interest-rate spread 4.28% 4.64%
---- ----
---- ----
Net interest margin 4.90% 5.31%
---- ----
---- ----
(1) Tax-exempt income was not significant and thus has not been presented on
a tax equivalent basis. Tax-exempt income of $112,000 and $158,000 was
recognized during the nine months ended September 30, 1998 and 1997,
respectively.
(2) Annualized.
(3) Average balance and yield of securities available for sale is based upon
the historical amortized cost balance.
(4) Average balance of loans and leases includes non-accrual loans and
leases, and is presented net of unearned income.
(5) Average balance is based upon month-end balances.
25
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, TCF is a party to legal proceedings generally arising out
of its general lending, deposit and operating activities. TCF is and expects
to become engaged in a number of foreclosure proceedings and other collection
actions as part of its loan collection activities. From time to time,
borrowers have also brought actions against TCF, in some cases claiming
substantial amounts in damages. TCF is also from time to time involved in
litigation relating to its retail banking, consumer credit, mortgage banking
and deposit operations and related consumer financial services, including
class action litigation. Management, after review with its legal counsel,
believes that the ultimate disposition of its litigation will not have a
material effect on TCF's financial condition.
On November 2, 1993, TCF National Bank Minnesota ("TCF Minnesota") filed a
complaint in the United States Court of Federal Claims seeking monetary damages
from the United States for breach of contract, taking of property without just
compensation and deprivation of property without due process. TCF Minnesota's
claim is based on the government's breach of contract in connection with TCF
Minnesota's acquisitions of certain savings institutions prior to the enactment
of the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"), which contracts allowed TCF Minnesota to treat the "supervisory
goodwill" created by the acquisitions as an asset that could be counted toward
regulatory capital, and provided for other favorable regulatory accounting
treatment. The United States has not yet answered TCF Minnesota's complaint. TCF
Minnesota's complaint involves approximately $80.3 million in supervisory
goodwill.
In August 1995, Great Lakes National Bank Michigan ("Great Lakes Michigan")
filed with the United States Court of Federal Claims a complaint seeking
monetary damages from the United States for breach of contract, taking of
property without just compensation and deprivation of property without due
process. Great Lakes Michigan's claim is based on the government's breach of
contract in connection with Great Lakes Michigan's acquisitions of certain
savings institutions prior to the enactment of FIRREA in 1989, which contracts
allowed Great Lakes Michigan to treat the "supervisory goodwill" created by the
acquisitions as an asset that could be counted toward regulatory capital, and
provided for other favorable regulatory accounting treatment. The United States
has not yet answered Great Lakes Michigan's complaint. Great Lakes Michigan's
complaint involves approximately $87.3 million in supervisory goodwill.
On July 1, 1996, the United States Supreme Court issued a decision affirming the
August 30, 1995 decision of the United States Court of Appeals for the Federal
Circuit, which decision had affirmed the Court of Federal Claims' liability
determinations in three other "supervisory goodwill" cases, consolidated for
review under the title WINSTAR CORP. V. UNITED STATES, 116 S.Ct. 2432 (1996). In
rejecting the United States' consolidated appeal from the Court of Federal
Claims' decisions, the Supreme Court held in WINSTAR that the United States had
breached contracts it had entered into with the plaintiffs which provided for
the treatment of supervisory goodwill, created through the plaintiffs'
acquisitions of failed or failing savings institutions, as an asset that could
be counted toward regulatory capital. Two of the three cases consolidated in the
Supreme Court proceedings have since been tried before the Court of Federal
Claims on the issue of damages. One of these trials commenced on February 24,
1997, the submission of evidence at trial was completed in April 1998,
post-trial briefing was completed in the summer of 1998, and final arguments
were heard in September of this year. The Court of Federal Claims has not yet
determined the amount, if any, that the plaintiff may recover in damages from
the government's breach of contract. The other case settled in June 1998. In
connection with the trials in those cases, the Court of Federal Claims in
December of 1996 denied the
26
government's motion seeking to preclude the plaintiffs in these cases from
offering evidence regarding the scope and extent of any lost profits they
suffered as a result of the government's breach.
On December 22, 1997, the Court of Federal Claims issued a decision finding the
existence of contracts and governmental breaches of those contracts in four
other "supervisory goodwill" cases, consolidated for purposes of that decision
only under the title CALIFORNIA FEDERAL BANK V. UNITED STATES, 39 Fed Cl. 753
(1997). In reaching its decision, the Court of Federal Claims rejected a number
of "common issue" defenses that the government has raised in a number of
"supervisory goodwill" cases.
The government has indicated that it will have a number of affirmative defenses
against goodwill litigation filed against it. The TCF Minnesota and Great Lakes
Michigan actions involve a variety of different types of transactions, contracts
and contract provisions. There can be no assurance that the U.S. Supreme Court
decision in WINSTAR or the Court of Federal Claims' recent decision in
CALIFORNIA FEDERAL will mean that a similar result would be obtained in the
actions filed by TCF Minnesota and Great Lakes Michigan. There also can be no
assurance that the government will be determined liable in connection with the
loss of supervisory goodwill by either TCF Minnesota or Great Lakes Michigan or,
even if a determination favorable to TCF Minnesota or Great Lakes Michigan is
made on the issue of the government's liability, that a measure of damages will
be employed that will permit any recovery on TCF Minnesota's or Great Lakes
Michigan's claim. Because of the complexity of the issues involved in both the
liability and damages phases of this litigation, and the usual risks associated
with litigation, the Company cannot predict the outcome of TCF Minnesota's or
Great Lakes Michigan's cases, and investors should not anticipate any recovery.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
The Securities and Exchange Commission has amended its Rule 14a-4, which governs
the use by the Company of its discretionary voting authority with respect to
certain shareholder proposals. Pursuant to this amendment, the Company's proxy
card for its 1999 annual meeting of shareholders may confer discretionary
authority on any matter as to which the Company does not receive notice by at
least sixty days prior to the date of the 1999 annual meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Index to Exhibits on page 29 of this report.
(b) Reports on Form 8-K.
None.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TCF FINANCIAL CORPORATION
/s/ Neil W. Brown
----------------------------------------
Neil W. Brown, Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)
/s/ Mark R. Lund
------------------------------------
Mark R. Lund, Senior Vice President,
Assistant Treasurer and Controller
(Principal Accounting Officer)
Dated: November 12, 1998
28
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
FOR FORM 10-Q
Exhibit Sequentially
Number Description Numbered Page
------ ----------- -------------
4(a) Copies of instruments with respect N/A
to long-term debt will be furnished
to the Securities and Exchange
Commission upon request.
10(c) Amended and Restated TCF Financial Corporation
Executive Deferred Compensation Plan effective
November 1, 1998.
10(d) Amended and Restated Trust Agreement for TCF
Financial Corporation Executive Deferred
Compensation Plan effective September 1,
1998; amendment adopted effective November 1, 1998.
10(m) Supplemental Employee Retirement Plan, as amended
and restated effective July 21, 1997 [incorporated by
reference to Exhibit 10(m) to TCF Financial Corporation's
Annual Report on Form 10-K for the year ended December 31,
1997, No. 0-16431]; amendment adopted effective September
30, 1998.
10(o) TCF Financial Corporation Senior Officer Deferred
Compensation Plan as amended and restated
effective November 1, 1998.
10(p) Amended and Restated Trust Agreement for TCF
Financial Corporation Senior Officer Deferred
Compensation Plan effective September 1, 1998;
amendment adopted effective November 1, 1998.
10(q) Directors Stock Program [incorporated by reference
to Program filed with registrant's definitive
proxy statement dated March 22, 1996, No. 0-16431];
amendment adopted June 20, 1998.
10(v) TCF Directors Deferred Compensation Plan [incorporated
by reference to Plan filed with registrant's
definitive proxy statement dated March 15, 1995,
No. 0-16431], as amended October 22, 1996
[incorporated by reference to Exhibit 10(x) to
TCF Financial Corporation's Annual Report on
Form 10-K for the year ended December 31, 1996,
No. 0-16431]; amendment adopted effective
September 30, 1998.
11 Computation of Earnings Per Common Share.
29