<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended
September 30, 1995
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
__________________
Commission File
No. 0-16431
__________________
TCF FINANCIAL CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 41-1591444
- -------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
801 Marquette Avenue, Suite 302, 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, 1995
- ----------------------------- --------------------
Common Stock, $.01 par value 17,784,276 shares
<PAGE>
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
Part I. Financial Information Pages
-----
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at September 30, 1995 and December 31, 1994 . . . . 3
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1995
and 1994 . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1995 and 1994. . . 5
Consolidated Statements of Stockholders' Equity for
the Year Ended December 31, 1994 and for the
Nine Months Ended September 30, 1995. . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the Three
and Nine Months Ended September 30, 1995
and 1994. . . . . . . . . . . . . . . . . . . . 10-30
Supplementary Information . . . . . . . . . . . . . . 31-32
Part II. Other Information
Items 1-6. . . . . . . . . . . . . . . . . . . . . . . . 33
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2
<PAGE>
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)
<TABLE>
<CAPTION>
At At
September 30, December 31,
1995 1994
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 218,485 $ 224,266
Interest-bearing deposits with banks 10,621 193,751
Federal funds sold - 6,900
U.S. Government and other marketable securities held to maturity (fair value of
$3,631 and $3,526) 3,631 3,528
Federal Home Loan Bank stock, at cost 59,399 78,925
Securities available for sale (amortized cost of $34,342 and $140,074) 32,117 138,430
Loans held for sale 242,166 201,511
Mortgage-backed securities held to maturity (fair value of $1,208,518 and
$1,512,606) 1,199,231 1,601,200
Loans:
Residential real estate 2,699,019 2,662,707
Commercial real estate 958,827 997,632
Commercial business 193,533 190,975
Consumer 1,540,084 1,299,458
Unearned discounts and deferred fees (67,551) (32,391)
------------- -------------
Total loans 5,323,912 5,118,381
Allowance for loan losses (63,754) (56,343)
------------- -------------
Net loans 5,260,158 5,062,038
Premises and equipment 119,658 136,158
Real estate:
Total real estate 28,951 23,922
Allowance for real estate losses (1,470) (2,576)
------------- -------------
Net real estate 27,481 21,346
Accrued interest receivable 48,967 46,465
Due from brokers - 27,379
Goodwill 11,783 13,355
Deposit base intangibles 13,129 14,662
Mortgage servicing rights 15,718 12,247
Other assets 69,418 63,427
------------- -------------
$ 7,331,962 $ 7,845,588
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Checking $ 1,110,222 $ 1,031,039
Passbook and statement 866,696 940,459
Money market 614,268 646,732
Certificates 2,590,579 2,781,488
------------- -------------
Total deposits 5,181,765 5,399,718
------------- -------------
Securities sold under repurchase agreements 651,814 429,469
Federal Home Loan Bank advances 809,770 1,354,663
Subordinated debt 48,020 50,676
Collateralized obligations 41,567 42,035
Other borrowings 2,522 8,152
------------- -------------
Total borrowings 1,553,693 1,884,995
Accrued interest payable 15,185 20,043
Accrued expenses and other liabilities 90,777 65,363
------------- -------------
Total liabilities 6,841,420 7,370,119
------------- -------------
Stockholders' equity:
Preferred stock, par value $.01 per share, 30,000,000 shares authorized; 2,710,000
shares issued and outstanding in 1994 - 27
Common stock, par value $.01 per share, 70,000,000 shares authorized; 17,776,688
and 17,086,173 shares issued 178 171
Additional paid-in capital 241,132 251,345
Unamortized deferred compensation (13,071) (6,986)
Retained earnings, subject to certain restrictions 263,900 244,779
Loan to Executive Deferred Compensation Plan (148) (195)
Employee Stock Ownership Plan debt - (1,500)
Unrealized loss on securities available for sale, net (1,449) (1,160)
Treasury stock, at cost, 322,880 shares in 1994 - (11,012)
------------- -------------
Total stockholders' equity 490,542 475,469
------------- -------------
$ 7,331,962 $ 7,845,588
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
Annual financial statements are subject to audit.
3
<PAGE>
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, Except Per-share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $ 125,066 $ 102,827 $ 362,324 $ 293,354
Interest on loans held for sale 5,252 4,212 13,825 13,442
Interest on mortgage-backed securities held to maturity 21,789 29,322 70,216 80,448
Interest on investments 1,334 2,695 4,606 8,526
Interest on securities available for sale 595 2,252 3,497 11,120
--------- --------- --------- ---------
Total interest income 154,036 141,308 454,468 406,890
--------- --------- --------- ---------
Interest expense:
Interest on deposits 48,060 45,002 145,446 137,256
Interest on borrowings 24,489 23,406 72,595 64,096
--------- --------- --------- ---------
Total interest expense 72,549 68,408 218,041 201,352
--------- --------- --------- ---------
Net interest income 81,487 72,900 236,427 205,538
Provision for credit losses 2,951 3,262 12,563 7,246
--------- --------- --------- ---------
Net interest income after provision for credit losses 78,536 69,638 223,864 198,292
--------- --------- --------- ---------
Non-interest income:
Fee and service charge revenues 22,680 21,376 65,975 62,385
Data processing revenue 2,875 2,279 7,939 6,647
Commissions on sales of annuities 1,846 3,209 6,774 8,762
Title insurance revenues 3,417 2,484 8,557 7,752
Gain on sale of loans held for sale, net 1,646 783 2,018 1,742
Loss on sale of mortgage-backed securities, net - - (21,037) -
Gain (loss) on sale of securities available for sale, net - (52) (190) 2,670
Gain on sale of loan servicing, net 3 518 1,532 1,772
Gain on sale of branches, net - - 1,103 -
Other 1,700 1,262 4,482 4,266
--------- --------- --------- ---------
Total non-interest income 34,167 31,859 77,153 95,996
--------- --------- --------- ---------
Non-interest expense:
Compensation and employee benefits 34,662 32,469 104,548 95,087
Occupancy and equipment, net 12,544 11,812 37,556 35,651
Advertising and promotions 3,916 3,680 12,643 10,898
Federal deposit insurance premiums and assessments 3,449 3,661 10,372 11,426
Amortization of goodwill and other intangibles 791 823 2,372 2,468
Provision for real estate losses 195 682 736 3,309
Cancellation cost on early termination of interest-rate exchange
agreements - - 4,423 -
Merger-related expenses - - 21,733 -
Other 16,983 16,019 46,951 46,849
--------- --------- --------- ---------
Total non-interest expense 72,540 69,146 241,334 205,688
--------- --------- --------- ---------
Income before income tax expense and extraordinary item 40,163 32,351 59,683 88,600
Income tax expense 15,750 12,917 23,515 35,172
--------- --------- --------- ---------
Income before extraordinary item 24,413 19,434 36,168 53,428
Extraordinary item:
Penalties on early repayment of FHLB advances, net of tax benefit of
$578 - - (963) -
--------- --------- --------- ---------
Net income 24,413 19,434 35,205 53,428
Dividends on preferred stock - 678 678 2,033
--------- --------- --------- ---------
Net income available to common shareholders $ 24,413 $ 18,756 $ 34,527 $ 51,395
--------- --------- --------- ---------
--------- --------- --------- ---------
Per common share:
Income before extraordinary item $ 1.36 $ 1.09 $ 1.99 $ 2.98
Extraordinary item - - (.05) -
--------- --------- --------- ---------
Net income $ 1.36 $ 1.09 $ 1.94 $ 2.98
--------- --------- --------- ---------
--------- --------- --------- ---------
Dividends declared $ .3125 $ .25 $ .875 $ .75
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
Annual financial statements are subject to audit.
4
<PAGE>
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1995
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 35,205 $ 53,428
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 13,484 13,380
Amortization of goodwill and other intangibles 2,372 2,468
Amortization of fees, discounts and premiums (1,543) (1,091)
Proceeds from sales of loans held for sale 438,381 951,677
Principal collected on loans held for sale 9,778 7,541
Originations and purchases of loans held for sale (488,660) (734,442)
Net decrease in other assets and liabilities, and accrued interest 5,903 614
Provisions for credit and real estate losses 13,299 10,555
(Gain) loss on sale of securities available for sale, net 190 (2,670)
Gain on sale of loan servicing, net (1,532) (1,772)
Gain on sale of branches, net (1,103) --
Penalties on early repayment of FHLB advances 1,541 --
Loss on sale of mortgage-backed securities, net 21,037 --
Cancellation cost on early termination of interest-rate exchange agreements 4,423 --
Write-off of equipment 13,435 --
Other, net (1,646) 2,551
----------- -----------
Total adjustments 29,359 248,811
----------- -----------
Net cash provided by operating activities 64,564 302,239
----------- -----------
Cash flows from investing activities:
Proceeds from sales of mortgage-backed securities 211,117 --
Principal collected on mortgage-backed securities 130,311 334,116
Purchases of mortgage-backed securities -- (544,447)
Principal collected on loans 973,800 936,332
Loan originations (1,203,579) (1,273,864)
Net (increase) decrease in interest-bearing deposits with banks 183,130 (23,518)
Net increase in securities purchased under resale agreements -- (14,400)
Proceeds from sales of securities available for sale 90,218 203,436
Proceeds from maturities of securities available for sale 127,114 599,501
Purchases of securities available for sale (45,805) (561,786)
Proceeds from maturities of U.S. Government and other marketable securities -- 667
Proceeds from redemption of FHLB stock 24,049 10,000
Purchases of term federal funds sold -- (76,000)
Proceeds from maturities of term federal funds sold -- 86,000
Net (increase) decrease in short-term federal funds sold 6,900 (153,500)
Sales of deposits, net of cash paid (57,007) --
Proceeds from sales of real estate 11,616 20,503
Payments for acquisition and improvement of real estate (2,585) (1,161)
Proceeds from sales of loan servicing 1,736 2,063
Purchases of premises and equipment (14,477) (12,812)
Other, net 3,368 7,966
----------- -----------
Net cash provided (used) by investing activities 439,906 (460,904)
----------- -----------
Cash flows from financing activities:
Net decrease in deposits (158,724) (288,162)
Proceeds from securities sold under repurchase agreements and federal funds purchased 7,758,962 3,312,379
Payments on securities sold under repurchase agreements and federal funds purchased (7,535,617) (2,899,297)
Proceeds from FHLB advances 1,390,623 1,214,058
Payments on FHLB advances (1,937,057) (1,166,873)
Payments for termination of interest-rate exchange agreements (4,581) --
Payments on collateralized obligations and other borrowings (5,464) (2,473)
Proceeds on exercise of stock warrants and stock options 16,796 2,159
Payments for redemption of preferred stock (27,100) --
Repurchases of common stock -- (14,456)
Other, net (8,089) (5,629)
----------- -----------
Net cash provided (used) by financing activities (510,251) 151,706
----------- -----------
Net decrease in cash and due from banks (5,781) (6,959)
Cash and due from banks at beginning of period 224,266 198,324
----------- -----------
Cash and due from banks at end of period $ 218,485 $ 191,365
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid for:
Interest on deposits and borrowings $ 220,963 $ 204,668
----------- -----------
----------- -----------
Income taxes $ 7,825 $ 38,466
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
Annual financial statements are subject to audit.
5
<PAGE>
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER UNAMOR-
OF TIZED
COMMON PRE- ADDITIONAL DEFERRED
SHARES FERRED COMMON PAID-IN COMPEN- RETAINED
ISSUED STOCK STOCK CAPITAL SATION EARNINGS
---------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993, as originally reported 12,361,569 $ -- $ 124 $ 150,602 $ (1,272) $146,502
Adjustments for pooling-of-interests 4,286,983 27 43 87,958 -- 48,329
---------- --- ----------- ----------- ----------- --------
Balance, December 31, 1993, as restated 16,648,552 27 167 238,560 (1,272) 194,831
Cumulative effect of change in accounting for
securities available for sale at January 1,
1994, net of tax -- -- -- -- -- --
Net income -- -- -- -- -- 70,183
Dividends on preferred stock -- -- -- -- -- (2,710)
Dividends on common stock 174,411 -- 2 5,266 -- (17,525)
Purchase of 535,000 shares to be held in treasury -- -- -- -- -- --
Issuance of 189,200 shares of restricted stock, of
which 183,200 shares were from treasury 6,000 -- -- 2,007 (7,541) --
Grant of 28,500 shares of restricted stock to
outside directors from treasury -- -- -- 117 (1,065) --
Issuance of 420 shares to employee benefit plans
from treasury -- -- -- 4 -- --
Issuance of shares to Dividend Reinvestment Plan 4,030 -- -- 122 -- --
Issuance of shares under Officers' Stock Performance
Investment Plan 23,045 -- -- 705 -- --
Cancellation of shares of restricted stock (1,500) -- -- (56) 40 --
Amortization of deferred compensation -- -- -- -- 2,852 --
Exercise of stock options 109,111 -- 1 2,132 -- --
Exercise of stock warrants 122,524 -- 1 2,488 -- --
Payments on Loan to Executive Deferred Compensation
Plan -- -- -- -- -- --
Payments on Employee Stock Ownership Plan debt -- -- -- -- -- --
Change in unrealized gain (loss) on securities
available for sale, net -- -- -- -- -- --
---------- --- ----------- ----------- ----------- ---------
Balance, December 31, 1994 17,086,173 27 171 251,345 (6,986) 244,779
Net income -- -- -- -- -- 35,205
Dividends on preferred stock -- -- -- -- -- (678)
Dividends on common stock -- -- -- -- -- (15,406)
Purchase of 16,200 shares to be held in treasury -- -- -- -- -- --
Issuance of shares to Dividend Reinvestment Plan 300 -- -- 11 -- --
Issuance of 186,880 shares from treasury to effect
merger with Great Lakes (186,880) -- (2) (6,372) -- --
Issuance of 152,200 shares of restricted stock
from treasury -- -- -- 3,830 (9,292) --
Grant of restricted stock to outside directors -- -- -- -- (1,062) --
Redemption of preferred stock -- (27) -- (27,073) -- --
Repurchase and cancellation of shares (1,338) -- -- (52) -- --
Amortization of deferred compensation -- -- -- -- 4,269 --
Exercise of stock options 168,166 -- 2 4,069 -- --
Exercise of stock warrants 632,358 -- 6 12,719 -- --
Issuance of common stock on conversion of
convertible debentures 77,909 -- 1 2,655 -- --
Payments on Loan to Executive Deferred Compensation
Plan -- -- -- -- -- --
Payments on Employee Stock Ownership Plan debt -- -- -- -- -- --
Change in unrealized loss on securities available for
sale, net -- -- -- -- -- --
---------- --- ----------- ----------- ----------- --------
Balance, September 30, 1995 17,776,688 $ -- $ 178 $ 241,132 $ (13,071) $263,900
---------- --- ----------- ----------- ----------- --------
---------- --- ----------- ----------- ----------- --------
<CAPTION>
LOAN TO UNREALIZED
EXECUTIVE GAIN
DEFERRED (LOSS) ON
COMPEN- SECURITIES
SATION AVAILABLE
PLAN AND FOR SALE, TREASURY
ESOP DEBT NET STOCK TOTAL
----------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1993, as originally reported $ (348) $ -- $ -- $295,608
Adjustments for pooling-of-interests (3,900) -- -- 132,457
----------- ------------ -------------- -----------
Balance, December 31, 1993, as restated (4,248) -- -- 428,065
Cumulative effect of change in accounting for
securities available for sale at January 1,
1994, net of tax -- 3,276 -- 3,276
Net income -- -- -- 70,183
Dividends on preferred stock -- -- -- (2,710)
Dividends on common stock -- -- -- (12,257)
Purchase of 535,000 shares to be held in treasury -- -- (17,524) (17,524)
Issuance of 189,200 shares of restricted stock, of
which 183,200 shares were from treasury -- -- 5,550 16
Grant of 28,500 shares of restricted stock to
outside directors from treasury -- -- 948 --
Issuance of 420 shares to employee benefit plans
from treasury -- -- 14 18
Issuance of shares to Dividend Reinvestment Plan -- -- -- 122
Issuance of shares under Officers' Stock Performance
Investment Plan -- -- -- 705
Cancellation of shares of restricted stock -- -- -- (16)
Amortization of deferred compensation -- -- -- 2,852
Exercise of stock options -- -- -- 2,133
Exercise of stock warrants -- -- -- 2,489
Payments on Loan to Executive Deferred Compensation
Plan 153 -- -- 153
Payments on Employee Stock Ownership Plan debt 2,400 -- -- 2,400
Change in unrealized gain (loss) on securities
available for sale, net -- (4,436) -- (4,436)
----------- ------------ -------------- -----------
Balance, December 31, 1994 (1,695) (1,160) (11,012) 475,469
Net income -- -- -- 35,205
Dividends on preferred stock -- -- -- (678)
Dividends on common stock -- -- -- (15,406)
Purchase of 16,200 shares to be held in treasury -- -- (824) (824)
Issuance of shares to Dividend Reinvestment Plan -- -- -- 11
Issuance of 186,880 shares from treasury to effect
merger with Great Lakes -- -- 6,374 --
Issuance of 152,200 shares of restricted stock
from treasury -- -- 5,462 --
Grant of restricted stock to outside directors -- -- -- (1,062)
Redemption of preferred stock -- -- -- (27,100)
Repurchase and cancellation of shares -- -- -- (52)
Amortization of deferred compensation -- -- -- 4,269
Exercise of stock options -- -- -- 4,071
Exercise of stock warrants -- -- -- 12,725
Issuance of common stock on conversion of
convertible debentures -- -- -- 2,656
Payments on Loan to Executive Deferred Compensation
Plan 47 -- -- 47
Payments on Employee Stock Ownership Plan debt 1,500 -- -- 1,500
Change in unrealized loss on securities available for
sale, net -- (289) -- (289)
----------- ------------ -------------- -----------
Balance, September 30, 1995 $ (148) $ (1,449) $ -- $490,542
----------- ------------ -------------- -----------
----------- ------------ -------------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
Annual financial statements are subject to audit.
6
<PAGE>
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation. The
results of operations for interim periods are not necessarily indicative of
the results to be expected for the entire year.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and therefore do
not include all information and notes necessary for complete financial
statements in conformity with generally accepted accounting principles.
The material under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" is written with the
presumption that the users of the interim financial statements have read or
have access to the most recent Annual Report on Form 10-K of TCF Financial
Corporation ("TCF"), 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, 1994 and
for the year then ended. TCF is a holding company engaged primarily in
retail community banking through its wholly owned savings bank
subsidiaries, TCF Bank Minnesota fsb ("TCF Minnesota") and Great Lakes
Bancorp, A Federal Savings Bank ("Great Lakes").
Certain reclassifications have been made to prior period balances to
conform to current period presentation. For consolidated statements of
cash flows purposes, cash and cash equivalents include cash and due from
banks.
(2) CHANGE IN METHOD OF ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting
for Mortgage Servicing Rights." Under the provisions of SFAS No. 122,
entities are required to recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. An
entity that either purchases or originates mortgage loans and subsequently
sells or securitizes the mortgage loans and retains the mortgage servicing
rights is required to allocate the total cost of the mortgage loans to the
mortgage servicing rights and the mortgage loans (without the mortgage
servicing rights) based on their relative fair values. SFAS No. 122 also
requires that capitalized mortgage servicing rights be assessed for
impairment based on the fair value of those rights. TCF adopted SFAS No.
122 on a prospective basis effective April 1, 1995 and capitalized $1.7
million and $2.8 million of originated mortgage servicing rights, net of
amortization, in the third quarter and first nine months of 1995,
respectively. In accordance with SFAS No. 122, prior period financial
statements have not been restated to reflect the change in accounting
method.
7
<PAGE>
(3) CHANGE IN METHOD OF ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN
Effective January 1, 1995, TCF adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
SFAS No. 114 requires that impaired loans be measured at 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, if one exists, may be used as
an alternative to discounting. If the measure of the impaired loan is less
than the recorded investment in the loan, impairment is to be recognized
through the allowance for loan losses. A loan is considered impaired when,
based on current information and events, it is probable that a creditor
will be unable to collect all amounts due according to the contractual
terms of the loan agreement. SFAS No. 118 amends SFAS No. 114 to allow a
creditor to use existing methods for recognizing interest income on
impaired loans and to clarify disclosure requirements. The adoption of
SFAS No. 114 and SFAS No. 118 did not impact TCF's results of operations
for the first nine months of 1995 or any prior period. In accordance with
SFAS No. 114 and SFAS No. 118, prior period financial statements have not
been restated to reflect the change in accounting method.
(4) EARNINGS PER COMMON SHARE
The weighted average number of common and common equivalent shares
outstanding used to compute earnings per common share were 17,946,914 and
17,253,617 for the three months ended September 30, 1995 and 1994,
respectively, and 17,792,001 and 17,244,488 for the nine months ended
September 30, 1995 and 1994, respectively.
(5) BUSINESS COMBINATION
On February 8, 1995, TCF completed its acquisition of Great Lakes, a
Michigan-based savings bank with $2.8 billion in assets, $1.6 billion in
deposits, 39 offices in Michigan and five offices in western Ohio. In
connection with the acquisition, TCF issued approximately 4.9 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. TCF also assumed the obligation to issue common stock
upon the exercise or conversion of the outstanding warrants to purchase
Great Lakes common stock, the outstanding employee and director options to
purchase Great Lakes common stock, and the outstanding 7 1/4% convertible
subordinated debentures due 2011 of Great Lakes. In connection with the
acquisition, a pretax merger-related charge of $54 million was incurred
during the 1995 first quarter. The merger-related charges are described in
Management's Discussion and Analysis of Financial Condition and Results of
Operations on pages 10 through 30.
As a result of the acquisition, Great Lakes merged into TCF's existing
Michigan-based wholly owned savings bank subsidiary, TCF Bank Michigan fsb.
The resulting savings bank is operated as a direct subsidiary of TCF and
retained the Great Lakes name, certain members of its board of directors,
and headquarters in Ann Arbor, Michigan. The resulting savings bank
operates 54 offices in Michigan and five offices in western Ohio.
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
8
<PAGE>
operations of Great Lakes for all periods presented, except for dividends
declared per share. There were no material intercompany transactions prior
to the acquisition.
The significant accounting and reporting policies of TCF and Great
Lakes differed in certain respects. As required in a pooling-of-
interests business combination, the restated consolidated financial
statements for periods prior to the combination reflect certain
adjustments to conform Great Lakes' accounting methods to those of
TCF. These adjustments retroactively restate, for all periods
presented, Great Lakes' method of adoption of SFAS No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift
Institutions," SFAS No. 109, "Accounting for Income Taxes," and SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," to conform to TCF's method of adoption of these same
statements. Great Lakes adopted SFAS No. 115 effective December 31,
1993 on a prospective basis whereas TCF adopted SFAS No. 115
effective January 1, 1994 on a prospective basis. The adjustments
to conform Great Lakes' method of adoption of SFAS No. 115 to that
of TCF decreased stockholders' equity at December 31, 1993 by $1.9
million. No adjustments were required to the restated consolidated
financial statements presented herein to conform Great Lakes' method
of adoption of SFAS No. 72 and SFAS No. 109 to that of TCF.
The results of operations previously reported by TCF and Great Lakes
on a separate basis and the combined amounts presented in the
accompanying consolidated financial statements are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1994 1994
------------------- -------------------
<S> <C> <C>
Interest income:
TCF $ 91,481 $263,347
Great Lakes 49,827 143,543
-------- --------
Combined $141,308 $406,890
-------- --------
-------- --------
Net interest income:
TCF $ 54,534 $149,812
Great Lakes 18,366 55,726
-------- --------
Combined $ 72,900 $205,538
-------- --------
-------- --------
Net income:
TCF $ 15,459 $ 41,610
Great Lakes 3,975 11,818
-------- --------
Combined $ 19,434 $ 53,428
-------- --------
-------- --------
Earnings per common share:
TCF $ 1.25 $ 3.35
-------- --------
-------- --------
Great Lakes $ .49 $ 1.46
-------- --------
-------- --------
Combined $ 1.09 $ 2.98
-------- --------
-------- --------
</TABLE>
9
<PAGE>
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Item 2. - Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
TCF Financial Corporation ("TCF" or the "Company") reported record net income of
$24.4 million for the third quarter of 1995, compared with $19.4 million for
the same period in 1994. Net income available to common shareholders for the
third quarter of 1995 was $24.4 million, or $1.36 per common share, compared
with $18.8 million, or $1.09 per common share, for the third quarter of 1994.
For the first nine months of 1995, TCF reported net income of $35.2 million,
compared with $53.4 million for the same 1994 period. Net income available to
common shareholders for the first nine months of 1995 was $34.5 million, or
$1.94 per common share, compared with $51.4 million, or $2.98 per common share,
for the same 1994 period.
TCF's 1995 first quarter 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 5 of Notes to
Consolidated Financial Statements. The following table summarizes the major
components of the merger-related charges, which were previously disclosed in
TCF's prospectus relating to the acquisition (in thousands):
<TABLE>
<S> <C>
Loss on sale of securities available for sale $ 310
Loss on sale of mortgage-backed securities 21,037
Loss on prepayment of FHLB advances 1,541(1)
Interest-rate exchange agreement 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
-------
-------
</TABLE>
- ------------------------
(1) Reflected in the Consolidated Statements of Operations as an extraordinary
item, net of tax benefit of $578.
On an after-tax basis, these merger-related charges totaled $32.8 million, or
$1.85 per common share for the first nine months of 1995.
During the first quarter of 1995, Great Lakes sold $232.2 million of
collateralized mortgage obligations from its held to maturity portfolio at a
pretax loss of $21 million. In addition, Great Lakes sold $17.3 million of
securities available for sale at a pretax loss of $310,000. The combined
weighted average yield on the assets sold was 6.30%. The collateralized
mortgage obligations and securities available for sale were sold in order to
reduce Great Lakes' interest-rate and credit-loss risk to levels consistent with
TCF's existing interest-rate risk position and credit-loss risk policy. In
addition to these asset sales, Great Lakes prepaid Federal Home Loan Bank
("FHLB") advances, paid down wholesale borrowings and terminated interest-rate
exchange contracts during the first quarter of 1995. Great Lakes prepaid $112.3
million of FHLB advances at a pretax loss of $1.5 million during the first
quarter of 1995. This amount, net of a $578,000 income tax benefit, was
recorded as an
10
<PAGE>
extraordinary item in the Consolidated Statements of Operations.
The FHLB advances had a weighted average cost of 9.03% and a weighted average
life of one year. 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 the first
quarter of 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 in the first
quarter of 1995 for these restructuring and merger-related expenses.
Income for the first nine months of 1995, excluding the $32.8 million in after-
tax merger-related charges, totaled $68 million, or $3.79 per common share, a
27.4% increase from $53.4 million, or $2.98 per common share, for the same
period in 1994. On the same basis, return on average common equity was 19.52%
and return on average assets was 1.22% for the first nine months of 1995
compared with 16.44% and .95%, respectively, for the same 1994 period.
NET INTEREST INCOME
Net interest income for the third quarter of 1995 was a record $81.5 million, up
11.8% from $72.9 million recorded in the third quarter of 1994. The net
interest margin for the third quarter of 1995 was 4.71%, up from 4.11% for the
same period in 1994. Net interest income for the first nine months of 1995
totaled $236.4 million, up 15% from $205.5 million for the same 1994 period.
The net interest margin for the first nine months of 1995 was 4.53%, up from
3.89% for the same period in 1994. TCF's net interest income and net interest
margin increased primarily due to increased yields and growth of consumer loans,
the favorable impact of the first-quarter merger-related activities at Great
Lakes, lower average levels of non-performing assets, and increased capital.
If variable index rates (e.g., prime) were to decline dramatically, TCF may
experience compression of its net interest margin, as it is likely 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 and savings deposits,
an important source of lower cost funds for TCF, has intensified among
depository and other financial institutions. As a result of this competition,
TCF has experienced a slight increase in the rates paid on its deposits. TCF
may experience compression in its net interest margin if the rates paid on
deposits continue to increase. See "Asset/Liability Management-Interest Rate
Risk."
11
<PAGE>
The following rate/volume analysis details the increases (decreases) in interest
income and expense resulting from interest rate and volume changes during the
third quarter and first nine months of 1995 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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1995 September 30, 1995
Versus Same Period in 1994 Versus Same Period in 1994
-------------------------- --------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale $(1,664) $ 7 $(1,657) $(10,108) $ 2,485 $ (7,623)
------- ------- ------- -------- ------- --------
Loans held for sale 701 339 1,040 (1,960) 2,343 383
------- ------- ------- -------- ------- --------
Mortgage-backed securities
held to maturity (8,312) 779 (7,533) (12,720) 2,488 (10,232)
------- ------- ------- -------- ------- --------
Loans:
Residential real estate 3,992 2,564 6,556 16,842 5,977 22,819
Commercial real estate (478) 1,144 666 (1,778) 3,469 1,691
Commercial business 331 343 674 526 1,937 2,463
Consumer 8,005 6,338 14,343 21,460 20,537 41,997
------- ------- ------- -------- ------- --------
Total loans 11,850 10,389 22,239 37,050 31,920 68,970
------- ------- ------- -------- ------- --------
Investments:
Interest-bearing deposits
with banks (349) 88 (261) (778) 314 (464)
Federal funds sold (996) 201 (795) (4,227) 1,271 (2,956)
U.S. Government and other
marketable securities
held to maturity 1 10 11 (5) (70) (75)
FHLB stock (448) 132 (316) (965) 540 (425)
------- ------- ------- -------- ------- --------
Total investments (1,792) 431 (1,361) (5,975) 2,055 (3,920)
------- ------- ------- -------- ------- --------
Total interest income 783 11,945 12,728 6,287 41,291 47,578
------- ------- ------- -------- ------- --------
Deposits:
Checking (161) (380) (541) (419) (541) (960)
Passbook and statement (668) 415 (253) (1,877) 1,720 (157)
Money market (550) 847 297 (1,070) 4,156 3,086
Certificates (1,415) 4,970 3,555 (4,464) 10,685 6,221
------- ------- ------- -------- ------- --------
Total deposits (2,794) 5,852 3,058 (7,830) 16,020 8,190
------- ------- ------- -------- ------- --------
Borrowings:
Securities sold under
repurchase agreements 1,959 932 2,891 5,942 2,446 8,388
FHLB advances (1,418) (333) (1,751) (2,102) 1,723 (379)
Subordinated debt (58) (192) (250) (72) (211) (283)
Collateralized obligations (12) 88 76 (47) 477 430
Other borrowings 68 49 117 161 182 343
------- ------- ------- -------- ------- --------
Total borrowings 539 544 1,083 3,882 4,617 8,499
------- ------- ------- -------- ------- --------
Total interest expense (2,255) 6,396 4,141 (3,948) 20,637 16,689
------- ------- ------- -------- ------- --------
Net interest income $ 3,038 $ 5,549 $ 8,587 $ 10,235 $20,654 $30,889
------- ------- ------- -------- ------- --------
------- ------- ------- -------- ------- --------
</TABLE>
PROVISIONS FOR CREDIT AND REAL ESTATE LOSSES
TCF provided $3 million for credit losses in the third quarter of 1995, compared
with $3.3 million for the same prior-year period. In the first nine months of
1995, TCF provided $12.6 million for credit losses, compared with $7.2 million
for the first nine months of 1994. Net charge-offs were $1.7 million and $5.2
million for the third
12
<PAGE>
quarter and first nine months of 1995, respectively, compared with $2.8
million and $6.8 million for the same 1994 periods. The provision for real
estate losses for the third quarter of 1995 was $195,000, compared with
$682,000 for the same prior-year period. In the first nine months of 1995,
TCF provided $736,000 for real estate losses, compared with $3.3 million for
the first nine months of 1994. The provision for credit losses in the first
nine months of 1995 includes $5 million in merger-related provisions, which
were established to conform Great Lakes' accounting and credit loss reserve
practices and methods to those of TCF and to allow for the accelerated
disposition of Great Lakes' remaining problem assets.
TCF's investments in commercial real estate loans and commercial business loans
have decreased significantly in recent years. TCF is seeking to expand its
commercial real estate and commercial business lending activity to borrowers
located in its primary markets of Minnesota, Illinois, Wisconsin, Michigan and
other Midwestern states 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 substantially greater inherent risk of loss. The risk
of loss on such loans is difficult to quantify and is subject to fluctuations in
real estate values. At September 30, 1995, the allowances for loan and real
estate losses and industrial revenue bond reserves totaled $67.9 million,
compared with $61.7 million at year-end 1994. See "Financial Condition -
Allowances for Loan and Real Estate Losses and Industrial Revenue Bond Reserves"
for additional information.
13
<PAGE>
NON-INTEREST INCOME
- -------------------
Non-interest income increased $2.3 million, or 7.2%, to $34.2 million for the
third quarter of 1995, compared with $31.9 million for the same period in 1994.
This increase is primarily due to increases in fee and service charge revenues,
title insurance revenues and data processing revenue, partially offset by a
decrease in commissions on sales of annuities. For the nine months ended
September 30, 1995, non-interest income, excluding the gain on sale of branches
and the losses from merger-related asset sales at Great Lakes, totaled $97.4
million, up slightly from the 1994 comparative total of $96 million. The
following table presents the components of non-interest income:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Dollars in thousands) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Fees and service charge revenues $22,680 $21,376 $ 65,975 $62,385
Data processing revenue 2,875 2,279 7,939 6,647
Commissions on sales of annuities 1,846 3,209 6,774 8,762
Title insurance revenues 3,417 2,484 8,557 7,752
Gain on sale of loans held for
sale, net 1,646 783 2,018 1,742
Gain (loss) on sale of securities
available for sale, net - (52) 120 2,670
Gain on sale of loan servicing, net 3 518 1,532 1,772
Other 1,700 1,262 4,482 4,266
------- ------- -------- -------
34,167 31,859 97,397 95,996
Gain on sale of branches, net - - 1,103 -
Merger-related charges:
Loss on sale of securities
available for sale, net - - (310) -
Loss on sale of mortgage-backed
securities, net - - (21,037) -
------- ------- -------- -------
$34,167 $31,859 $ 77,153 $95,996
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
Data processing revenue totaled $2.9 million and $7.9 million for the third
quarter and first nine months of 1995, respectively, representing increases of
26.2% and 19.4% from $2.3 million and $6.6 million for the same 1994 periods.
These increases reflect TCF's efforts to provide and expand electronic banking
transaction services through its automated teller machine ("ATM") network. TCF
expanded its network of ATM's to 741 at September 30, 1995 by installing 45
ATM's during the third quarter of 1995, and the Company anticipates installing
additional ATM's during the remainder of 1995.
Commissions on sales of annuities totaled $1.8 million and $6.8 million during
the third quarter and first nine months of 1995, respectively, compared with
$3.2 million and $8.8 million for the same periods in 1994. 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.
Title insurance revenues totaled $3.4 million and $8.6 million during the third
quarter and first nine months of 1995, respectively, compared with $2.5 million
and $7.8 million for the same 1994 periods. Title insurance revenues are
cyclical in nature and are largely dependent on market interest rates and the
level of residential loan originations and refinancings.
14
<PAGE>
Gains on sales of loans held for sale totaled $1.6 million during the third
quarter of 1995, compared with $783,000 during the same period in 1994. For
the nine months ended September 30, 1995, TCF recognized gains on sales of
loans held for sale of $2 million, compared with $1.7 million during the same
1994 period. TCF adopted Statement of Financial Accounting Standards ("SFAS")
No. 122, "Accounting for Mortgage Servicing Rights," on a prospective basis
effective April 1, 1995. As a result, approximately $1.7 million and $2.8
million of originated mortgage servicing rights, net of amortization, were
capitalized in the third quarter and first nine months of 1995, respectively.
See Note 2 of Notes to Consolidated Financial Statements for additional
information. There were no gains or losses on sales of securities available
for sale in the third quarter of 1995, compared with a loss of $52,000 during
the same period in 1994. For the nine months ended September 30, 1995, gains
on sales of securities available for sale, excluding merger-related sales,
totaled $120,000, compared with $2.7 million for the same 1994 period. 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.
During the second quarter of 1995, TCF Bank Minnesota fsb ("TCF Minnesota")
recognized a $1.1 million net gain on the sale of three branches located outside
its primary metropolitan retail markets.
The results for the third quarter and first nine months of 1995 include pretax
gains of $3,000 and $1.5 million on the sale of $1.2 million and $145.1 million,
respectively, of third-party loan servicing rights. TCF's results for the third
quarter and first nine months of 1994 included pretax gains of $518,000 and $1.8
million on the sale of $40.8 million and $122.3 million, respectively, of third-
party loan servicing rights. TCF periodically sells loan servicing rights
depending on market conditions. TCF's residential loan servicing portfolio
totaled $7.2 billion at September 30, 1995, down slightly from year-end 1994.
During the first quarter of 1995, Great Lakes sold $176.1 million of private
issuer collateralized mortgage obligations and $56.1 million of FNMA and FHLMC
collateralized mortgage obligations from its held to maturity portfolio. The
sales were completed to reduce Great Lakes' interest-rate and credit-loss risk
to levels consistent with TCF's existing interest-rate risk position and credit-
loss risk policy. The fair values of the collateralized mortgage obligations at
the time of sale were $211.2 million. As a result, a pretax loss of $21 million
was recorded on these sales during the first quarter of 1995.
Also in the 1995 first quarter, Great Lakes sold $17.3 million of mortgage-
backed securities, private issuer collateralized mortgage obligations, corporate
securities and structured notes from its available for sale portfolio at a
pretax loss of $310,000. These sales were also completed as part of TCF's
strategy to reduce Great Lakes' interest-rate and credit-loss risk to levels
consistent with those of TCF.
15
<PAGE>
NON-INTEREST EXPENSE
- --------------------
Non-interest expense (excluding the provision for real estate losses and
merger-related charges) totaled $72.3 million for the third quarter of 1995,
up 5.7% from $68.5 million for the same 1994 period. For the first nine
months of 1995, non-interest expense, excluding the items noted above,
totaled $214.4 million, up 6% from $202.4 million for the same 1994 period.
The increased expenses in 1995 were primarily due to costs associated with
expanded consumer lending and consumer finance operations, and other retail
banking activities. The following table presents the components of
non-interest expense:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Dollars in thousands) 1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Compensation and employee benefits $34,662 $32,469 $104,548 $ 95,087
Occupancy and equipment, net 12,544 11,812 37,556 35,651
Advertising and promotions 3,916 3,680 12,643 10,898
Federal deposit insurance premiums
and assessments 3,449 3,661 10,372 11,426
Amortization of goodwill and
other intangibles 791 823 2,372 2,468
Other 16,983 16,019 46,951 46,849
------- ------- -------- --------
72,345 68,464 214,442 202,379
Provision for real estate losses 195 682 736 3,309
Merger-related charges:
Merger-related expenses - - 21,733 -
Cancellation cost on early
termination of interest-rate
exchange agreements - - 4,423 -
------- ------- -------- --------
$72,540 $69,146 $241,334 $205,688
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
Compensation and employee benefits expense totaled $34.7 million and $104.5
million for the 1995 third quarter and first nine months, respectively, compared
with $32.5 million and $95.1 million for the same periods in 1994. The
increases in 1995 were primarily due to the expansion of consumer lending,
consumer finance operations and other retail banking activities. As the
restructuring of Great Lakes' operations was not completed until the third
quarter of 1995, TCF did not experience the full benefit of the expense
reduction in the first nine months of 1995.
Advertising and promotion expenses totaled $3.9 million and $12.6 million for
the third quarter and first nine months of 1995, respectively, compared with
$3.7 million and $10.9 million for the same 1994 periods. The increases in 1995
reflect the increase in direct mail and other marketing expenses relating to the
promotion of TCF's consumer lending and deposit products.
Federal deposit insurance premiums and assessments totaled $3.4 million and
$10.4 million for the 1995 third quarter and first nine months, respectively,
compared with $3.7 million and $11.4 million for the same periods in 1994.
The decreases in 1995 were primarily due to lower deposit levels and a
decrease in the deposit insurance premium rates of TCF Minnesota's wholly
owned savings bank subsidiaries, TCF Bank Wisconsin fsb ("TCF Wisconsin") and
TCF Bank Illinois fsb ("TCF Illinois"), subsequent to their acquisition by
TCF. Pending federal legislation to recapitalize the Savings Association
Insurance Fund ("SAIF") would entail charging savings institutions
approximately $6 billion in the form of a special assessment. The special
assessment, recently estimated to range from .78% to .90% of total insured
deposits, or approximately $41.6 million to $48 million pretax for TCF, would
be tax deductible for federal and state income tax purposes and would be in
addition to TCF's annual deposit insurance premium. Deposit insurance
premium rates would likely decline following such a charge.
16
<PAGE>
Included in merger-related expenses for the first quarter of 1995 are $13.9
million of equipment charges which reflect costs associated with the integration
of Great Lakes' data processing system into TCF's and the write-off of certain
redundant data processing equipment and software. In the first quarter of 1995,
$13.4 million of redundant equipment was written off. In addition, an accrual
of $500,000 was established for data processing contract cancellation costs,
$422,000 of which was paid in the first nine months of 1995. The data
processing integration was completed in July 1995.
Merger-related expenses for the first quarter of 1995 include $4.7 million of
employment contract, severance and employee benefit costs reflecting the
consolidation of certain functions such as data processing, investments and
certain other back office operations. A reduction of approximately 200
employees in the combined work force occurred in the first nine months of 1995
as a result of the consolidation of these functions. The severance benefit
arrangement was communicated to all employees affected by the consolidation of
certain functions, and generally provided for a minimum of one month of
severance up to a maximum of seven months depending upon years of service and
job classification. In addition, staying bonuses with higher levels of employee
benefits were offered to certain individuals in addition to the severance
benefits. Approximately $3 million of severance and employee benefit costs were
paid in the first nine months of 1995.
In the first quarter of 1995, approximately $2.2 million of merger-related
expenses for professional services, including investment advisor, legal and
accounting services, and $864,000 of other expenses were incurred by Great Lakes
as a direct result of the merger.
In the first quarter of 1995, Great Lakes terminated $544.5 million of high-cost
interest-rate exchange agreements at a pretax loss of $4.4 million. The
agreements were terminated in connection with the asset sales and paydown of
wholesale borrowings as part of the merger-related restructuring activities.
Upon completion of the termination actions, Great Lakes is no longer a party to
any interest-rate exchange agreements.
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 applies to all entities and to long-
lived assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used and to long-lived assets and certain identifiable
intangibles to be disposed of. SFAS No. 121 does not apply to financial
instruments, long-term customer relationships of a financial institution (for
example, deposit base intangibles and credit cardholder intangibles), mortgage
and other servicing rights, deferred policy acquisition costs, or deferred tax
assets. Under the provisions of SFAS No. 121, an entity shall review long-lived
assets and certain identifiable intangibles for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. SFAS No. 121 applies to financial statements issued for fiscal
years beginning after December 15, 1995, with earlier application encouraged.
Management has not yet determined what effect, if any, this pronouncement will
have on TCF's financial condition or results of operations.
17
<PAGE>
INCOME TAXES
- ------------
TCF recorded income tax expense of $15.8 million and $23.5 million for the third
quarter and first nine months of 1995, or 39.2% and 39.4% of pretax income
before extraordinary items, respectively, compared with $12.9 million and $35.2
million, or 39.9% and 39.7%, respectively, for the comparable 1994 periods.
ASSET/LIABILITY MANAGEMENT - INTEREST-RATE RISK
TCF's results of operations are dependent to a large degree on its net interest
income, which is the difference between interest income and interest expense.
Like most financial institutions, TCF's interest income and cost of funds are
significantly affected by general economic conditions and by policies of
regulatory authorities. The mismatch between maturities and interest rate
sensitivities of assets and liabilities results in interest-rate risk. Although
the measure is subject to a number of assumptions and is only one of a number of
measurements, management believes the interest rate gap (difference between
interest-earning assets and interest-bearing liabilities repricing within a
given period) is an important indication of TCF's exposure to interest-rate risk
and the related volatility of net interest income in a changing interest rate
environment. In addition to the interest rate gap analysis, management also
utilizes a simulation model to measure and manage TCF's interest-rate risk.
For an institution with a negative interest rate gap for a given period, the
amount of its interest-bearing liabilities maturing or otherwise repricing
within such period exceeds the amount of interest-earning assets repricing
within the same period. In a rising interest rate environment, institutions
with negative interest rate gaps will generally experience more immediate
increases in the cost of their liabilities than in the yield on their assets.
Conversely, the yield on assets of institutions with negative interest rate gaps
will generally decrease more slowly than the cost of their funds in a falling
interest rate environment.
As a result of the Great Lakes acquisition, TCF's exposure to rising and falling
interest rates has increased slightly. TCF's strategy is to reduce this
interest-rate risk over time by continuing to emphasize growth in core deposits
and higher yielding home equity and other consumer loans, and by extending the
maturities on borrowings. Consistent with this strategy, TCF has extended the
maturities on $85 million of borrowings and converted $68 million of variable-
rate FHLB advances to long-term fixed rate FHLB advances since the acquisition
of Great Lakes. In addition, the Company sold $45.6 million of long-term fixed-
rate securities available for sale and paid down short-term borrowings. TCF's
one-year adjusted interest rate gap at September 30, 1995 reflects these
transactions and was a negative $289.5 million, or (4)% of total assets,
compared with a negative $511.6 million, or (7)% of total assets, at December
31, 1994.
TCF's Asset/Liability Management Committee manages TCF's interest-rate risk
based on interest rate expectations and other factors. 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,
and competition. Decisions by management to purchase or sell assets, or retire
debt could change the maturity/repricing and spread relationships.
18
<PAGE>
The following table summarizes TCF's one-year adjusted interest rate gap at
September 30, 1995:
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
-------------------------
(Dollars in thousands)
Within One Year
---------------
<S> <C>
Interest-earning assets:
Loans held for sale $ 242,166
Securities available for sale 17,598
Mortgage-backed securities held to maturity (1) 300,986
Real estate loans (1) 1,470,522
Other loans (1) 1,496,706
Investments (2) 73,651
----------
3,601,629
----------
Interest-bearing liabilities:
Deposits (3) 2,739,848
FHLB advances 538,739
Borrowings 617,578
----------
3,896,165
----------
Interest-bearing liabilities over interest-earning
assets (primary gap) (294,536)
Impact of interest-rate exchange agreement 5,000
----------
One-year adjusted gap $ (289,536)
----------
----------
One-year adjusted gap as a percentage of total assets:
At September 30, 1995 (4)%
----------
----------
At December 31, 1994 (7)%
----------
----------
</TABLE>
(1) Based upon a) contractual maturity, b) repricing date, if applicable,
c) scheduled repayments of principal and d) projected prepayments of
principal based upon experience.
(2) Includes interest-bearing deposits with banks, federal funds sold, U.S.
Government and other marketable securities held to maturity and FHLB stock.
(3) Includes noninterest-bearing deposits. Money market accounts, 17% of
checking accounts and 23% of passbook and statement accounts are included
in amounts repricing within one year. All remaining checking and passbook
and statement accounts are assumed to mature in periods subsequent to one
year. While management believes these assumptions are well based, no
assurance can be given that amounts on deposit in checking and passbook and
statement accounts will not significantly decrease or be repriced in the
event interest rates rise.
19
<PAGE>
FINANCIAL CONDITION
INVESTMENTS
Total investments decreased $209.5 million from year-end 1994 to $73.7
million at September 30, 1995, reflecting decreases of $183.1 million in
interest-bearing deposits with banks, $19.5 million in FHLB stock and $6.9
million in federal funds sold. The proceeds from these maturities were
generally used to repay borrowings. See "Borrowings."
During October 1995, the FASB announced that it plans to allow entities a
one-time opportunity to reclassify their debt securities between the held to
maturity, available for sale and trading categories prescribed by SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
without calling into question the entities' intent to hold to maturity their
remaining portfolio of held to maturity debt securities. TCF plans to review
its options concerning the possible reclassification of certain of its debt
securities after review of the guidance to be published by the FASB.
SECURITIES AVAILABLE FOR SALE
Securities available for sale are carried at fair value with unrealized gains
and losses, net of deferred income taxes, reported as a separate component of
stockholders' equity. Securities available for sale decreased $106.3 million
from year-end 1994 to $32.1 million at September 30, 1995. The decrease was
partially due to maturities and the previously described Great Lakes' sale of
$17.3 million of securities available for sale in the first quarter of 1995.
The decrease was also partially due to the sale of $45.6 million of
securities available for sale in the second quarter of 1995. The following
table summarizes securities available for sale as of September 30, 1995 and
December 31, 1994:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
--------------------- ---------------------
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
--------- ----- --------- -----
<S> <C> <C> <C> <C>
U.S. Government and other
marketable securities:
U.S. Government and agency
obligations $ 1,003 $ 1,012 $ 54,462 $ 54,298
Corporate bonds -- -- 15,202 14,918
Commercial paper -- -- 14,955 14,843
Marketable equity securities 3 47 3 30
------- ------- -------- --------
1,006 1,059 84,622 84,089
------- ------- -------- --------
Mortgage-backed securities:
Mortgage-backed securities 13,612 11,873 45,841 44,697
Collateralized mortgage
obligations 19,724 19,185 9,611 9,644
------- ------- -------- --------
33,336 31,058 55,452 54,341
------- ------- -------- --------
$34,342 $32,117 $140,074 $138,430
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
LOANS HELD FOR SALE
Residential real estate and education loans held for sale are carried at the
lower of cost or market. Loans held for sale increased $40.7 million from
year-end 1994, totaling $242.2 million at September 30, 1995. Residential
real estate loans held for sale increased $38 million to $83.7 million at
September 30, 1995, as production levels exceeded loan sales activity.
20
<PAGE>
The following table summarizes loans held for sale as of September 30, 1995
and December 31, 1994:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1995 1994
------------- ------------
<S> <C> <C>
Residential real estate $ 83,744 $ 45,744
Education 158,134 155,524
------------- ------------
241,878 201,268
Less:
Deferred loan costs, net (551) (489)
Unearned discounts, net 263 246
------------- ------------
$242,166 $201,511
------------- ------------
------------- ------------
</TABLE>
MORTGAGE-BACKED SECURITIES HELD TO MATURITY
Mortgage-backed securities held to maturity are carried at amortized cost and
totaled $1.2 billion at September 30, 1995, a decrease of $402 million from
December 31, 1994. This decrease is primarily due to the previously
described Great Lakes' sale of $232.2 million of collateralized mortgage
obligations, and repayment and prepayment activity. In addition to selling
certain collateralized mortgage obligations, Great Lakes also transferred
$38.4 million of private issuer mortgage-backed securities and collateralized
mortgage obligations from its held to maturity portfolio to its securities
available for sale portfolio in the first quarter of 1995. The transfers are
consistent with the strategy to reduce Great Lakes' interest-rate and
credit-loss risk to levels consistent with those of TCF. At September 30,
1995 and December 31, 1994, TCF's mortgage-backed securities held to maturity
portfolio had gross unrealized gains of $16.6 million and $3.6 million,
respectively, and gross unrealized losses of $7.3 million and $92.2 million,
respectively.
The following table summarizes mortgage-backed securities held to maturity as
of September 30, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1995 1994
------------- ------------
<S> <C> <C>
Mortgage-backed securities:
Agency $1,178,854 $1,303,606
Private issuer 15,955 31,261
------------- ------------
1,194,809 1,334,867
------------- ------------
Collateralized mortgage obligations:
Agency -- 84,347
Private issuer -- 177,409
------------- ------------
-- 261,756
------------- ------------
Net premiums 4,422 4,577
------------- ------------
$1,199,231 $1,601,200
------------- ------------
------------- ------------
</TABLE>
21
<PAGE>
LOANS
Total loans increased $205.5 million from year-end 1994 to $5.3 billion at
September 30, 1995. Residential real estate loans increased $36.3 million
during the first nine months of 1995 to $2.7 billion. This increase reflects
the origination and retention of $321.5 million of residential loans,
partially offset by loan repayments. Commercial real estate loans decreased
$38.8 million from year-end 1994. At September 30, 1995, approximately 91%
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 $567,000 at September 30, 1995.
TCF continues to expand its consumer lending and consumer finance operations.
During the first nine months of 1995, the Company opened 23 new consumer
finance offices, most of which were in areas outside its traditional market
locations. As of September 30, 1995, TCF had 69 such offices in 16 states.
As a result of this expansion, TCF's consumer finance loan portfolio totaled
$336.2 million at September 30, 1995, compared with $201 million at December
31, 1994. TCF anticipates opening five additional consumer finance offices
during the next six months. The Company intends to concentrate on increasing
the outstanding loan balances of these existing offices and improving the
profitability of its consumer finance subsidiaries before opening any
additional consumer finance offices. Consumer loans outstanding increased
$240.6 million during the first nine months of 1995, reflecting a $99.8
million increase in home equity loans and a $135.6 million increase in
automobile, marine and recreational vehicle loans. The growth in home equity
loans and automobile, marine and recreational vehicle loans reflects the
expanded consumer lending and consumer finance operations. At September 30,
1995, TCF's consumer finance loan portfolio included $150.5 million of home
equity loans, $171 million of automobile, marine and recreational vehicle
loans and $14.7 million of other consumer finance loans. Included in the
consumer finance subsidiaries outstanding automobile, marine and recreational
vehicle loans are $111.8 million of sub-prime sales finance loans which carry
a higher risk of credit loss.
The following table summarizes loans as of September 30, 1995 and December 31,
1994:
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands) 1995 1994
------------- ------------
<S> <C> <C>
Residential real estate $2,699,019 $2,662,707
------------- ------------
Commercial real estate:
Apartments 418,525 432,114
Other permanent 487,641 526,773
Construction and development 52,661 38,745
------------- ------------
958,827 997,632
------------- ------------
Total real estate 3,657,846 3,660,339
------------- ------------
Commercial business 193,533 190,975
------------- ------------
Consumer:
Home equity 1,094,236 994,472
Automobile, marine and recreational vehicle 286,192 150,565
Credit card 42,631 34,698
Loans secured by deposits 10,118 9,685
Other secured 17,659 15,935
Unsecured 89,248 94,103
------------- ------------
1,540,084 1,299,458
------------- ------------
5,391,463 5,150,772
Less:
Unearned discounts on loans purchased 3,519 4,103
Deferred loan fees, net 9,170 11,456
Unearned discounts and finance charges, net 54,862 16,832
------------- ------------
$5,323,912 $5,118,381
------------- ------------
------------- ------------
</TABLE>
22
<PAGE>
At September 30, 1995, the recorded investment in loans that are considered
to be impaired under the criteria established by SFAS No. 114 and SFAS No.
118 was $28.8 million. All of these loans were on non-accrual status.
Included in this amount are $28.7 million of impaired loans for which the
related allowance for credit losses is $5.8 million and $23,000 of impaired
loans that, as a result of write-downs, do not have a specific allowance for
credit losses. The average recorded investment in impaired loans during the
three and nine months ended September 30, 1995 was $28.5 million and
$27.6 million, respectively. For the three and nine months ended September
30, 1995, TCF recognized interest income on impaired loans of $157,000 and
$244,000, respectively, all of which was recognized using the cash basis
method of income recognition.
Included in performing loans at September 30, 1995 are commercial real estate
and commercial business loans aggregating $1.6 million with terms that have
been modified in troubled debt restructurings, compared with $4.3 million at
December 31, 1994.
The results of hotel and motel operations have suffered in recent years.
Included in commercial real estate loans at September 30, 1995 are $80.6
million of loans secured by hotel or motel properties. Seven loans comprise
$41.8 million, or 51.8%, of the total hotel and motel portfolio. Of the
total hotel and motel portfolio balance, six loans totaling $17.7 million
are included in loans subject to management concern and four loans totaling
$1.1 million are included in non-accrual loans. TCF continues to closely
monitor the performance of these loans and properties.
NON-PERFORMING ASSETS
Non-performing assets (principally non-accrual loans and real estate acquired
through foreclosure) totaled $68.5 million at September 30, 1995, up $10.9
million from the December 31, 1994 total of $57.6 million. At September 30,
1995, 11 loans or properties comprised $26.7 million, or 39%, of total
non-performing assets. These loans or properties had been written down by
$6.7 million as of September 30, 1995. Properties acquired are being
actively marketed. Approximately 80% of the non-performing assets at
September 30, 1995 consisted of, or were secured by, real estate.
Non-performing assets are summarized in the following table:
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1995 1994
------------ ------------
<S> <C> <C>
Loans (1):
Residential real estate $ 5,893 $ 7,211
Commercial real estate 19,729 18,452
Commercial business 9,077 5,972
Consumer 3,989 2,127
------------ ------------
38,688 33,762
Real estate and other assets (2) 29,825 23,849
------------ ------------
Total non-performing assets $68,513 $57,611
------------ ------------
------------ ------------
Non-performing assets as a percentage
of net loans 1.30% 1.14%
Non-performing assets as a percentage
of total assets .93 .73
</TABLE>
(1) Included in total loans in the Consolidated Statements of Financial
Condition.
(2) Includes commercial real estate of $14.4 million and $15 million at
September 30, 1995 and December 31, 1994, respectively.
TCF had accruing loans 90 days or more past due totaling $2.2 million at
September 30, 1995, compared with $2.4 million at December 31, 1994. These
loans are in the process of collection and management believes they are
adequately secured. The over 30-day delinquency rate on TCF's loans and
loans held for sale (excluding non-accrual loans)
23
<PAGE>
was .76% of gross loans outstanding at September 30, 1995, compared with .43%
at year-end 1994. The increase in the over 30-day delinquency rate is
primarily due to an increase in consumer loan delinquencies. TCF's
delinquency rates are determined using the contractual method. The following
table sets forth information regarding TCF's over 30-day delinquent loan
portfolio, excluding non-accrual loans:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
---------------------- ---------------------
Percentage Percentage
Principal of Gross Principal of Gross
(Dollars in thousands) Balances (1) Loans (1) Balances (1) Loans (1)
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Consumer:
Savings bank lending $12,846 .98% $ 5,317 .43%
Consumer finance lending 11,248 2.92 4,492 2.09
------- -------
24,094 1.42 9,809 .68
Residential real estate 16,297 .59 8,764 .32
Commercial real estate 661 .07 3,460 .35
Commercial business 1,268 .69 1,077 .58
------- -------
$42,320 .76 $23,110 .43
------- -------
------- -------
</TABLE>
- ------------------
(1) Includes loans held for sale.
TCF's over 30-day delinquency rate on gross consumer loans was 1.42% at
September 30, 1995, up from .68% at year-end 1994. Management continues to
monitor the consumer loan portfolio, which will generally have higher
delinquencies, especially consumer finance loans. Management expects the
over 30-day consumer loan delinquency rate to increase as the consumer
finance loan portfolio seasons. Consumer finance lending is generally
considered to involve a higher level of credit risk. The underwriting
criteria for loans originated by TCF's consumer finance offices are generally
less stringent than those historically adhered to by TCF's savings bank
subsidiaries and, as a result, these loans have a higher level of credit risk
and higher interest rates. 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.
In addition to the non-accrual, restructured and accruing loans 90 days or
more past due, there were commercial real estate and commercial business
loans with an aggregate principal balance of $57.3 million outstanding at
September 30, 1995 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 $74.2 million of such loans
at December 31, 1994. Although these loans are secured by commercial real
estate or other corporate assets, they may be subject to future modifications
of their terms or may become non-performing. Management is monitoring the
performance and classification of such loans and the financial condition of
these borrowers.
24
<PAGE>
ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES AND INDUSTRIAL REVENUE BOND RESERVES
A summary of the activity of the allowances for loan and real estate losses
and the industrial revenue bond reserves and selected statistics follows
(dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1995 September 30, 1995
------------------------------------ -------------------------------------
Industrial Industrial
Revenue Revenue
Allowance for Bond Allowance for Bond
Loan Losses Reserves Total Loan Losses Reserves Total
------------- ---------- ----- ------------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Allowance for Loan Losses and
Industrial Revenue Bond Reserves:
Balance at beginning of period $62,596 $2,609 $65,205 $ 56,343 $2,759 $ 59,102
Provision for credit losses 3,157 (206) 2,951 12,919 (356) 12,563
Charge-offs (3,419) -- (3,419) (10,306) -- (10,306)
Recoveries 1,420 278 1,698 4,798 278 5,076
------- ------ ------- -------- ------ --------
Net recoveries (charge-offs) (1,999) 278 (1,721) (5,508) 278 (5,230)
------- ------ ------- -------- ------ --------
Balance at end of period $63,754 $2,681 $66,435 $ 63,754 $2,681 $ 66,435
------- ------ ------- -------- ------ --------
------- ------ ------- -------- ------ --------
Allowance for loan losses as a
percentage of total gross loans 1.18% 1.18%
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1994 September 30, 1994
------------------------------------ -------------------------------------
Industrial Industrial
Revenue Revenue
Allowance for Bond Allowance for Bond
Loan Losses Reserves Total Loan Losses Reserves Total
------------- ---------- ----- ------------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Allowance for Loan Losses and
Industrial Revenue Bond Reserves:
Balance at beginning of period $54,336 $2,759 $57,095 $ 54,444 $2,689 $ 57,133
Provision for credit losses 3,262 -- 3,262 7,246 -- 7,246
Charge-offs (3,981) -- (3,981) (11,800) -- (11,800)
Recoveries 1,220 -- 1,220 4,947 70 5,017
------- ------- ------- -------- ------ --------
Net recoveries (charge-offs) (2,761) -- (2,761) (6,853) 70 (6,783)
------- ------- ------- -------- ------ --------
Balance at end of period $54,837 $2,759 $57,596 $ 54,837 $2,759 $ 57,596
------- ------- ------- -------- ------ --------
------- ------- ------- -------- ------ --------
Allowance for loan losses as a
percentage of total gross loans 1.10% 1.10%
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Allowance for Real Estate Losses:
Balance at beginning of period $1,569 $ 3,736 $ 2,576 $ 2,439
Provision for losses 195 682 736 3,309
Charge-offs (294) (2,320) (1,842) (3,650)
------ ------- ------- -------
Balance at end of period $1,470 $ 2,098 $ 1,470 $ 2,098
------ ------- ------- -------
------ ------- ------- -------
</TABLE>
25
<PAGE>
The allowance for loan losses is maintained at a level believed to be adequate
by management to provide for estimated loan losses. Management's judgment as to
the adequacy of the allowance is a result of ongoing review of larger individual
loans, the overall risk characteristics of the portfolio, changes in the
character or size of the portfolio, the levels of non-performing assets, net
charge-offs, geographic location and prevailing economic conditions. The
allowance for loan losses is established for known or anticipated problem loans,
as well as for loans which are not currently known to require specific
allowances. The adequacy of the allowance for loan 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 or properties. The unallocated
portion of TCF's allowance for loan losses totaled $19.5 million at
September 30, 1995.
Prior to being acquired by TCF in 1993, Republic Capital Group, Inc. had entered
into agreements guaranteeing certain industrial development and housing revenue
bonds issued by municipalities to finance commercial and multi-family real
estate owned by third parties. In the event a third-party borrower defaults on
principal or interest payments on the bonds, TCF, as acquiring entity, is
required to either fund the amount in default or acquire the then outstanding
bonds. TCF may foreclose on the underlying real estate to recover amounts in
default. The balance of such financial guarantees at September 30, 1995 was
$16.5 million. Management has considered these guarantees in its review of the
adequacy of the industrial revenue bond reserves.
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 certain 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. TCF's wholly owned savings bank subsidiaries are required by federal
regulation to maintain a monthly average minimum asset liquidity ratio of 5%.
During the first nine months of 1995, these subsidiaries maintained average
monthly liquidity ratios in excess of this requirement.
26
<PAGE>
DEPOSITS
Deposits totaled $5.2 billion at September 30, 1995, down $218 million from the
year-end 1994 total. The decrease in deposits reflects a significant runoff of
Great Lakes' brokered deposits and the previously described sale of three
branches. The following table summarizes TCF's deposits at September 30, 1995
and December 31, 1994:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
--------------------------------- ------------------------------
Weighted Weighted
Average % of Average % of
Rate Amount Total Rate Amount Total
(Dollars in thousands) ---------- -------- ------ --------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Checking:
Non-interest bearing 0.00% $ 593,615 11.5% 0.00% $ 456,867 8.5%
Interest bearing 1.08 516,607 10.0 1.41 574,172 10.6
---------- ----- ---------- -----
.50 1,110,222 21.5 .78 1,031,039 19.1
Passbook and statement 2.04 866,696 16.7 2.13 940,459 17.4
Money market 3.20 614,268 11.8 3.26 646,732 12.0
Certificates 5.59 2,590,579 50.0 5.07 2,781,488 51.5
---------- ----- ---------- -----
3.62 $5,181,765 100.0% 3.53 $5,399,718 100.0%
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>
Certificates had the following remaining maturities:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------------------------------------- -----------------------------------------------
Weighted Weighted
Negotiable Average Negotiable Average
Rate Other Total Rate Rate Other Total Rate
(Dollars in millions) ---------- ------- ------- --------- ----------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maturity:
0-3 months $123.8 $ 524.5 $ 648.3 5.36% $203.2 $ 498.0 $ 701.2 4.74%
4-6 months 13.0 516.8 529.8 5.52 25.4 542.4 567.8 4.84
7-12 months 15.0 565.1 580.1 5.67 46.2 600.7 646.9 4.97
13-24 months 1.5 474.0 475.5 5.66 4.5 432.5 437.0 5.47
25-36 months 1.9 182.0 183.9 5.82 1.2 184.3 185.5 5.52
37-48 months .3 92.4 92.7 5.76 1.8 124.1 125.9 5.75
49-60 months -- 33.4 33.4 5.87 .3 64.9 65.2 5.47
Over 60 months -- 46.9 46.9 6.49 -- 52.0 52.0 6.36
------ -------- -------- ------ -------- --------
$155.5 $2,435.1 $2,590.6 5.59 $282.6 $2,498.9 $2,781.5 5.07
------ -------- -------- ------ -------- --------
------ -------- -------- ------ -------- --------
</TABLE>
Included in deposits at September 30, 1995 and December 31, 1994 are
$3.8 million and $147.2 million, respectively, of brokered deposits
acquired primarily as a result of the Great Lakes acquisition.
BORROWINGS
Borrowings are used primarily to fund the purchase of investments and mortgage-
backed securities. These borrowings totaled $1.6 billion as of September 30,
1995, down $331.3 million from year-end 1994. The decrease was primarily due
to a $544.9 million decrease in FHLB advances, including the previously
mentioned prepayment of $112.3 million of higher-rate FHLB advances as part
of the merger-related activities at Great Lakes, partially offset by an
increase in securities sold under repurchase agreements of $222.3 million.
As part of its strategy to reduce interest-rate risk, TCF extended the
maturities on $85 million of borrowings, converted $68 million of
variable-rate FHLB advances to long-term fixed-rate FHLB advances, exercised
its right of redemption on $50 million of higher cost fixed-rate FHLB
advances, and repaid short-term borrowings. See "Results of Operations --
Asset/Liability Management -- Interest-Rate Risk." The weighted average
rate on borrowings decreased to 6.11% at September 30, 1995, from 6.29% at
December 31, 1994.
27
<PAGE>
TCF's borrowings consist of the following:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
--------------------------- ---------------------------
Weighted Weighted
Year of Average Average
(Dollars in Thousands) Maturity Amount Rate Amount Rate
-------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Securities sold under
repurchase agreements 1995 $ 576,814 5.87% $ 429,469 5.78%
1997 75,000 6.12 - -
---------- ----------
651,814 5.90 429,469 5.78
---------- ----------
Federal Home Loan Bank
advances 1995 200,639 6.11 661,405 6.17
1996 328,100 5.79 386,900 6.15
1997 96,014 5.96 76,014 6.54
1998 73,000 5.69 73,000 5.80
1999 78,000 6.50 123,000 6.98
2000 8,074 7.24 8,074 7.34
2001 25,000 7.23 25,000 7.33
2008 333 6.27 345 6.27
2009 610 6.52 925 6.86
---------- ----------
809,770 6.01 1,354,663 6.27
---------- ----------
Subordinated debt:
Subordinated capital notes
of TCF Financial
Corporation 2002 34,500 10.00 34,500 10.00
Senior subordinated
debentures 2006 6,248 18.00 6,248 18.00
Convertible subordinated
debentures 2011 7,272 7.25 9,928 7.25
---------- ----------
48,020 10.62 50,676 10.45
---------- ----------
Collateralized obligations:
Collateralized notes 1997 37,500 6.25 37,500 6.81
Less unamortized discount 67 - 90 -
---------- ----------
37,433 6.26 37,410 6.83
---------- ----------
Collateralized mortgage
obligations 2006 - - 488 6.50
2008 2,854 6.50 3,000 6.50
2010 1,508 5.90 1,443 5.90
---------- ----------
4,362 6.29 4,931 6.32
Less unamortized discount 228 - 306 -
---------- ----------
4,134 6.64 4,625 6.74
---------- ----------
41,567 6.30 42,035 6.82
---------- ----------
Other borrowings:
Federal funds purchased 1995 2,500 6.59 1,500 6.13
Industrial development
revenue bonds 2015 - - 3,125 4.65
Bank loan 1998 - - 3,500 9.50
Other 1998 22 7.60 27 7.60
---------- ----------
2,522 6.60 8,152 7.01
---------- ----------
$1,553,693 6.11 $1,884,995 6.29
---------- ----------
---------- ----------
</TABLE>
28
<PAGE>
At September 30, 1995, borrowings with a maturity of one year or less consisted
of the following:
<TABLE>
<CAPTION>
Weighted
Average
(Dollars in Thousands) Amount Rate
---------- --------
<S> <C> <C>
Securities sold under repurchase agreements $ 576,814 5.87%
Federal Home Loan Bank advances 498,739 5.97
Federal funds purchased 2,500 6.59
----------
$1,078,053 5.92
----------
----------
</TABLE>
On October 26, 1995, TCF announced that it will exercise its right of
redemption on its $34.5 million of 10% Subordinated Capital Notes due 2002 on
December 1, 1995. The notes will be redeemed at par plus accrued interest to
the date of redemption. The funding for this redemption will come from an
increased bank line of credit that the Company has obtained.
In October 1995, the FASB issued an Exposure Draft of a Proposed Statement of
Financial Accounting Standards, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The proposed statement
would provide consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings, among other
things. The proposed statement would require that a transfer of a financial
asset in which the transferor surrenders control over the financial asset
shall generally be accounted for as a sale, with appropriate recognition of
gain or loss. The proposed statement provides that the transferor has
surrendered control if and only if certain conditions are met, including that
the transfer is not assuredly temporary. Under the proposed statement's
definition, reverse repurchase agreements qualify as assuredly temporary
transfers only if they have maturities under three months or have indefinite
maturities, are repriced daily at overnight market rates, and can be
terminated by either party on short notice. The proposed statement would be
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and would be applied
prospectively. Earlier or retroactive application would not be permitted.
It is too early to predict whether the proposed statement will be adopted in
its present form or what effect, if any, the proposed statement will have on
TCF's financial condition or results of operations.
STOCKHOLDERS' EQUITY
Stockholders' equity was $490.5 million at September 30, 1995, or 6.7% of total
assets, up from $475.5 million, or 6.1% of total assets, at December 31, 1994.
The increase in stockholders' equity is primarily due to net income of $35.2
million for the first nine months of 1995, and the receipt of $16.8 million on
the exercise of stock options and common stock warrants, partially offset by the
payment of $15.4 million in common stock dividends. The common stock warrants,
which were assumed in connection with the acquisition of Great Lakes, expired
July 1, 1995. On July 3, 1995, TCF redeemed its 2.7 million shares of preferred
stock at $10 per share. As previously mentioned, TCF issued the preferred stock
in exchange for Great Lakes preferred stock.
On October 16, 1995, TCF's board of directors declared a two-for-one stock
split in the form of a 100% common stock dividend payable November 30, 1995
to stockholders of record as of November 10, 1995. The stock split will
increase TCF's outstanding common shares from 17.8 million to 35.6 million
shares. Effective October 1, 1995, TCF and First National Bank of Boston, as
Rights Agent, amended the Rights Agreement adopted effective May 23, 1989 to
provide that the purchase price for each one one-hundredth of a preferred
share pursuant to the exercise of a Right will be $360 until
29
<PAGE>
November 30, 1995. Following the stock split occurring on November 30, 1995,
the purchase price will adjust to $180 per share.
On October 24, 1995, TCF declared a quarterly dividend of 31.25 cents per common
share, on a pre-split basis, payable on November 30, 1995 to stockholders of
record as of November 10, 1995.
REGULATORY CAPITAL REQUIREMENTS
The following tables set forth the tangible, core and risk-based capital levels
and applicable percentages of adjusted assets together with the excess over the
minimum capital requirements for TCF's wholly owned savings bank subsidiaries,
TCF Minnesota and Great Lakes, at September 30, 1995 and December 31, 1994
(dollars in thousands):
<TABLE>
<CAPTION>
TCF Minnesota: September 30, 1995 December 31, 1994
--------------------- -------- ----------
Amount Percentage Amount Percentage
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Tangible capital $311,638 6.55% $292,825 5.81%
Tangible capital requirement 71,400 1.50 75,634 1.50
-------- ----- -------- -----
Excess $240,238 5.05% $217,191 4.31%
-------- ----- -------- -----
-------- ----- -------- -----
Core capital $313,111 6.58% $320,673 6.34%
Core capital requirement 142,844 3.00 151,704 3.00
-------- ----- -------- -----
Excess $170,267 3.58% $168,969 3.34%
-------- ----- -------- -----
-------- ----- -------- -----
Risk-based capital $349,365 12.05% $350,096 12.01%
Risk-based capital requirement 231,984 8.00 233,292 8.00
-------- ----- -------- -----
Excess $117,381 4.05% $116,804 4.01%
-------- ----- -------- -----
-------- ----- -------- -----
<CAPTION>
Great Lakes: September 30, 1995 December 31, 1994
--------------------- -------- ----------
Amount Percentage Amount Percentage
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Tangible capital $164,322 6.40% $148,482 5.35%
Tangible capital requirement 38,513 1.50 41,626 1.50
-------- ----- -------- -----
Excess $125,809 4.90% $106,856 3.85%
-------- ----- -------- -----
-------- ----- -------- -----
Core capital $175,827 6.82% $148,482 5.35%
Core capital requirement 77,370 3.00 83,252 3.00
-------- ----- -------- -----
Excess $ 98,457 3.82% $ 65,230 2.35%
-------- ----- -------- -----
-------- ----- -------- -----
Risk-based capital $208,889 13.10% $181,594 11.08%
Risk-based capital requirement 127,572 8.00 131,140 8.00
-------- ----- -------- -----
Excess $ 81,317 5.10% $ 50,454 3.08%
-------- ----- -------- -----
-------- ----- -------- -----
</TABLE>
At September 30, 1995, TCF Minnesota and its wholly owned savings bank
subsidiaries, TCF Illinois and TCF Wisconsin, and Great Lakes exceeded their
fully phased-in capital requirements and believe that they would be
considered well-capitalized under guidelines established pursuant to the
Federal Deposit Insurance Corporation Improvement Act of 1991.
30
<PAGE>
<TABLE>
<CAPTION>
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Supplementary Information
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, AT AT AT AT AT AT AT
EXCEPT PER-SHARE DATA) SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1995 1995 1995 1994 1994 1994 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets $7,331,962 $7,432,692 $7,369,061 $7,845,588 $7,830,976 $7,725,299 $7,725,961
Investments (1) 73,651 64,874 91,969 283,104 363,104 408,475 322,367
Securities available for sale 32,117 38,575 89,693 138,430 186,146 142,071 392,972
Mortgage-backed securities
held to maturity 1,199,231 1,251,705 1,291,370 1,601,200 1,670,848 1,715,841 1,590,669
Loans 5,323,912 5,329,880 5,237,533 5,118,381 4,961,496 4,794,255 4,687,941
Deposits 5,181,765 5,249,819 5,371,461 5,399,718 5,407,766 5,442,527 5,588,007
Federal Home Loan Bank advances 809,770 805,781 879,184 1,354,663 992,677 1,127,918 1,131,639
Subordinated debt 48,020 48,876 50,676 50,676 50,676 50,676 50,676
Other borrowings 695,903 735,204 515,467 479,656 828,012 564,832 417,268
Stockholders' equity 490,542 495,550 470,501 475,469 460,221 444,972 435,398
- ------------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
- ------------------------------------------------------------------------------------------------------------------------------------
SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1995 1995 1995 1994 1994 1994 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Interest income $154,036 $151,641 $148,791 $145,592 $141,308 $135,139 $130,443
Interest expense 72,549 72,349 73,143 71,978 68,408 66,629 66,315
-------- -------- -------- -------- -------- -------- --------
Net interest income 81,487 79,292 75,648 73,614 72,900 68,510 64,128
Provision for credit losses 2,951 2,924 6,688 3,556 3,262 1,344 2,640
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision
for credit losses 78,536 76,368 68,960 70,058 69,638 67,166 61,488
-------- -------- -------- -------- -------- -------- --------
Non-interest income:
Loss on sale of mortgage-backed
securities, net - - (21,037) - - - -
Gain on sale of loan servicing, net 3 1,006 523 581 518 693 561
Gain (loss) on sale of securities available
for sale, net - 60 (250) (1,689) (52) (36) 2,758
Gain on sale of branches, net - 1,061 42 - - - -
Other non-interest income 34,164 31,981 29,600 30,331 31,393 30,505 29,656
-------- -------- -------- -------- -------- -------- --------
Total non-interest income 34,167 34,108 8,878 29,223 31,859 31,162 32,975
-------- -------- -------- -------- -------- -------- --------
Non-interest expense:
Provision for real estate losses 195 378 163 713 682 1,828 799
Amortization of goodwill and other
intangibles 791 791 790 814 823 822 823
Merger-related expenses - - 21,733 - - - -
Cancellation cost on early termination of
interest-rate exchange agreements - - 4,423 - - - -
Other non-interest expense 71,554 70,465 70,051 69,769 67,641 66,224 66,046
-------- -------- -------- -------- -------- -------- --------
Total non-interest expense 72,540 71,634 97,160 71,296 69,146 68,874 67,668
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income tax expense
(benefit) and extraordinary item 40,163 38,842 (19,322) 27,985 32,351 29,454 26,795
Income tax expense (benefit) 15,750 15,448 (7,683) 11,230 12,917 11,692 10,563
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item 24,413 23,394 (11,639) 16,755 19,434 17,762 16,232
Extraordinary item:
Penalties on early repayment of FHLB
advances, net of tax benefit of $578 - - (963) - - - -
-------- -------- -------- -------- -------- -------- --------
Net income (loss) 24,413 23,394 (12,602) 16,755 19,434 17,762 16,232
Dividends on preferred stock - - 678 677 678 677 678
-------- -------- -------- -------- -------- -------- --------
Net income (loss) available to common
shareholders $ 24,413 $ 23,394 $(13,280) $ 16,078 $ 18,756 $ 17,085 $ 15,554
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Per common share:
Income (loss) before
extraordinary item $ 1.36 $ 1.31 $ (.72) $ .93 $ 1.09 $ .99 $ .90
Extraordinary item - - (.05) - - - -
-------- -------- -------- -------- -------- -------- --------
Net income (loss) $ 1.36 $ 1.31 $ (.77) $ .93 $ 1.09 $ .99 $ .90
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
Dividends declared $ .3125 $ .3125 $ .25 $ .25 $ .25 $ .25 $ .25
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
FINANCIAL RATIOS:
Return on average assets (2) 1.32% 1.27% (.67)% .89% 1.03% .94% .87%
Return on average common equity (2) 20.44 20.48 (11.86) 14.56 17.58 16.48 15.24
Average total equity to average assets 6.56 6.53 6.33 6.18 5.98 5.83 5.78
Net interest margin (2)(3) 4.71 4.58 4.31 4.16 4.11 3.88 3.67
</TABLE>
_______________________________
(1) Includes interest-bearing deposits with banks, federal funds sold, U.S.
Government and other marketable securities held to maturity, securities
purchased under resale agreements and FHLB stock.
(2) Annualized.
(3) Net interest income divided by average interest-earning assets.
31
<PAGE>
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Supplementary Information (Continued)
Consolidated Average Balance Sheets, Interest and Dividends
Earned or Paid, and Related Interest Yields and Rates
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------
1995 1994
-------------------------------------- --------------------------------------
INTEREST INTEREST
AVERAGE YIELDS AND AVERAGE YIELDS AND
(Dollars in Thousands) BALANCE INTEREST(1) RATES (2) BALANCE INTEREST(1) RATES (2)
----------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Securities available
for sale $ 64,746 $ 3,497 7.20% $ 263,785 $ 11,120 5.62%
---------- -------- ---------- --------
Loans held for sale 226,657 13,825 8.13 262,147 13,442 6.84
---------- -------- ---------- --------
Mortgage-backed
securities
held to maturity 1,312,909 70,216 7.13 1,551,618 80,448 6.91
---------- -------- ---------- --------
Loans:
Residential real
estate 2,700,100 157,999 7.80 2,409,661 135,180 7.48
Commercial real estate 985,785 65,897 8.91 1,013,619 64,206 8.45
Commercial business 190,282 13,509 9.47 181,931 11,046 8.10
Consumer 1,384,935 124,919 12.03 1,123,616 82,922 9.84
---------- -------- ---------- --------
Total loans(3) 5,261,102 362,324 9.18 4,728,827 293,354 8.27
---------- -------- ---------- --------
Investments:
Interest-bearing
deposits with banks 8,499 389 6.10 28,452 853 4.00
Federal funds sold 9,492 424 5.96 119,909 3,380 3.76
U.S. Government and
other marketable
securities
held to maturity 3,572 151 5.64 3,652 226 8.25
FHLB stock 66,559 3,642 7.30 85,075 4,067 6.37
---------- -------- ---------- --------
Total investments 88,122 4,606 6.97 237,088 8,526 4.79
---------- -------- ---------- --------
Total interest-
earning assets 6,953,536 454,468 8.71 7,043,465 406,890 7.70
-------- ----- -------- -----
Other assets(4) 453,721 488,761
---------- ----------
Total assets $7,407,257 $7,532,226
---------- ----------
---------- ----------
Liabilities and
Stockholders' Equity:
Noninterest-bearing
deposits $ 494,681 $ 429,869
---------- ----------
Interest-bearing
deposits:
Checking 535,099 5,161 1.29 575,818 6,121 1.42
Passbook and
statement 868,405 14,173 2.18 989,298 14,330 1.93
Money market 661,044 16,894 3.41 713,015 13,808 2.58
Certificates 2,671,858 109,218 5.45 2,788,622 102,997 4.92
---------- -------- ---------- --------
Total interest-
bearing
deposits 4,736,406 145,446 4.09 5,066,753 137,256 3.61
---------- -------- ---------- --------
Borrowings:
Securities sold
under repurchase
agreements 583,902 26,610 6.08 448,861 18,222 5.41
FHLB advances 880,644 39,189 5.93 929,428 39,568 5.68
Subordinated debt 49,809 3,987 10.67 50,676 4,270 11.23
Collateralized
obligations 41,662 2,186 7.00 42,783 1,756 5.47
Other borrowings 12,600 623 6.59 8,622 280 4.33
---------- -------- ---------- --------
Total borrowings 1,568,617 72,595 6.17 1,480,370 64,096 5.77
---------- -------- ---------- --------
Total interest-
bearing
liabilities(5) 6,305,023 218,041 4.61 6,547,123 201,352 4.10
-------- ---- -------- ----
Other liabilities(4) 128,753 113,386
---------- ----------
Total liabilities 6,928,457 7,090,378
---------- ----------
Stockholders' equity:(4)
Preferred equity 17,514 25,019
Common equity 461,286 416,829
---------- ----------
478,800 441,848
---------- ----------
Total liabilities
and stockholders'
equity $7,407,257 $7,532,226
---------- ----------
---------- ----------
Net interest income $236,427 $205,538
-------- --------
-------- --------
Net interest rate spread 4.10% 3.60%
---- ----
---- ----
Net interest margin 4.53% 3.89%
---- ----
---- ----
</TABLE>
(1) Tax-exempt income was not significant and thus has not been presented on a
tax equivalent basis. Tax-exempt income of $372,000 and $290,000 was
recognized during the nine months ended September 30, 1995 and 1994,
respectively.
(2) Annualized.
(3) Average balance of loans includes non-accrual loans and is presented net of
unearned income.
(4) Average balance is based upon month-end balances.
(5) Includes $667,000 and $5.9 million of interest expense on interest-rate
exchange agreements for the nine months ended September 30, 1995 and 1994,
respectively.
32
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time TCF is a party to legal proceedings arising out of its general
lending and operating activities. TCF is and expects to become engaged in a
number of foreclosure proceedings and other collection actions as part of its
loan collection activities. From time to time, borrowers have also brought
actions against TCF, in some cases claiming substantial amounts in damages. TCF
is also from time to time involved in litigation relating to its retail banking,
consumer credit and mortgage banking operations and related consumer financial
services, including class action litigation. Management, after review with its
legal counsel, believes that the ultimate disposition of its litigation will not
have a material affect on TCF's financial condition.
On November 2, 1993, TCF 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's claim is based on the government's breach of contract in
connection with TCF's acquisitions of certain savings institutions prior to the
enactment of FIRREA in 1989, which allowed TCF to treat the "supervisory
goodwill" created by the acquisition as an asset that could be counted toward
regulatory capital, and provided for other favorable regulatory accounting
treatment. Because TCF's suit was stayed pending final appellate resolution of
another case addressing the government's liability for breach of supervisory
goodwill contracts (the WINSTAR case, discussed below), the United States has
not yet answered TCF's complaint. TCF's complaint involves approximately $80.3
million in supervisory goodwill.
In August 1995, Great Lakes filed with the United States Court of Federal Claims
a complaint seeking monetary damages from the United States for breach of
contract, taking of property without just compensation and deprivation of
property without due process. Great Lakes' claim is based on the government's
breach of contract in connection with Great Lakes' acquisitions of certain
savings institutions prior to the enactment of FIRREA in 1989, which allowed
Great Lakes to treat the "supervisory goodwill" created by the acquisitions as
an asset that could be counted toward regulatory capital, and provided for other
favorable regulatory accounting treatment. The United States has not yet
answered Great Lakes' complaint, but has instead moved for a stay of proceedings
pending final resolution of the liability determination in the WINSTAR case,
discussed below. Great Lakes' complaint involves approximately $87.3 million in
supervisory goodwill.
On August 30, 1995, the United States Court of Appeals for the Federal Court
(the court of appeals which hears appeals from decisions of the Court of Federal
Claims), sitting EN BANC, issued a decision affirming the Court of Federal
Claims' liability determinations in three other "supervisory goodwill" cases,
WINSTAR CORP. V. UNITED STATES, 64F.3d 1531 (Fed. Cir. 1995). In rejecting the
United States' consolidated appeal from the Court of Federal Claims' decisions,
the Federal Circuit 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. The United States is expected to seek Supreme Court
review of the Federal Circuit's decision in WINSTAR.
There can be no assurance that the government will be determined to be liable in
connection with the loss of supervisory goodwill by either TCF or Great Lakes
or, even if a determination favorable to TCF or Great Lakes is made on the issue
of the government's liability, that a measure of damages will be employed that
will permit any recovery on TCF's or Great Lakes' claim.
33
<PAGE>
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.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
See Index to Exhibits on page 36 of this report.
(b) Reports on Form 8-K.
A Current Report on Form 8-K, dated October 16, 1995, was filed in
connection with TCF's declaration of a two-for-one stock split in the
form of a 100% common stock dividend payable November 30, 1995 to
stockholders of record as of November 10, 1995. A Current Report on Form
8-K, dated October 26, 1995, was filed in connection with TCF's
announcement that it will exercise its right of redemption on its $34.5
million of 10% Subordinated Capital Notes due 2002 on December 1, 1995.
34
<PAGE>
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/ Lynn A. Nagorske
--------------------------------------
Lynn A. Nagorske, President, Chief
Operating 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 13, 1995
35
<PAGE>
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
FOR FORM 10-Q
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------ ----------- -------------
4(a) Amendment effective October 1, 1995 37
to Rights Agreement, dated as of
May 23, 1989, between TCF Financial
Corporation and Manufacturers Hanover
Trust Company
4(b) Copies of instruments with respect N/A
to long-term debt will be furnished
to the Securities and Exchange
Commission upon request.
11 Computation of Earnings Per Common 38
Share
27 Financial Data Schedule 39
36
<PAGE>
EXHIBIT 4(a)
AMENDMENT TO
TCF FINANCIAL CORPORATION
AND
FIRST NATIONAL BANK OF BOSTON
RIGHTS AGENT
RIGHTS AGREEMENT
WHEREAS, the Rights Agreement was adopted effective May 23, 1989 and First
National Bank of Boston has been substituted as the Rights Agent thereunder,
with authority to enter into amendments pursuant to Section 27 thereof; and
WHEREAS, TCF Financial Corporation is the Company under the Rights
Agreement with authority to enter into amendents to the Rights Agreement
pursuant to Section 27 thereof; and
NOW THEREFORE, the Company and the Rights Agent hereby amend the Rights
Agreement, effective October 1, 1995, as follows:
Paragraph (b) of Section 7 ( EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION
DATE OF RIGHTS) is amended to read as follows
(b) The Purchase Price for each one one-hundreth of a Preferred Share
pursuant to the exercise of a Right shall be $360.00 until November
30, 1995, and thereafter shall be $180.00, subject to adjustment from
time to time as provided in Sections 11 and 13 hereof and shall be
payable in lawful money of the United States of America in accordance
with paragraph (c) below.
IN WITNESS WHEREOF, the Company and the Rights Agent have executed this
Amendment effective as of the date first above written.
TCF FINANCIAL CORPORATION
By: /s/ William A. Cooper
------------------------
William A. Cooper,
Chief Executive Officer
ATTEST:
By: /s/ Gregory J. Pulles
----------------------------------
Gregory J. Pulles, Secretary
FIRST NATIONAL BANK OF BOSTON
By: /s/ Colleen H. Shea
-----------------------
Title: Administration Manager
-------------------------
ATTEST:
By: /s/ Rosanna Garofalo
------------------------------
Title: Senior Account Manager
------------------------------
37
<PAGE>
Exhibit 11 - Computation of Earnings Per Common Share
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Computation of Earnings Per Common Share
(Dollars in thousands, except per-share data)
(Unaudited)
<TABLE>
<CAPTION>
Computation of Earnings Per Common Share Three Months Ended Nine Months Ended
for Statements of Operations: September 30, September 30,
- --------------------------------------------------- -------------------------- --------------------------
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income before extraordinary item $ 24,413 $ 19,434 $ 36,168 $ 53,428
Less: Dividends on preferred stock - 678 678 2,033
----------- ----------- ----------- -----------
Income applicable to common stock before
extraordinary item 24,413 18,756 35,490 51,395
Extraordinary item - - (963) -
----------- ----------- ----------- -----------
Income applicable to common stock $ 24,413 $ 18,756 $ 34,527 $ 51,395
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common and common
equivalent shares outstanding:
Weighted average common shares outstanding 17,748,964 16,693,135 17,504,939 16,735,813
Dilutive effect of stock option plans and
common stock warrants after application
of treasury stock method 197,950 560,482 287,062 508,675
----------- ----------- ----------- -----------
17,946,914 17,253,617 17,792,001 17,244,488
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per common share:
Income before extraordinary item $ 1.36 $ 1.09 $ 1.99 $ 2.98
Extraordinary item - - (.05) -
----------- ----------- ----------- -----------
Net income $ 1.36 $ 1.09 $ 1.94 $ 2.98
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Computation of Fully Diluted Earnings
Per Common Share (1):
- ---------------------------------------------------
Income before extraordinary item $ 24,413 $ 19,434 $ 36,168 $ 53,428
Add: Interest expense on 7 1/4% convertible
subordinated debentures 87 109 298 326
Less: Dividends on preferred stock - 678 678 2,033
----------- ----------- ----------- -----------
Income applicable to common stock before
extraordinary item 24,500 18,865 35,788 51,721
Extraordinary item - - (963) -
----------- ----------- ----------- -----------
Income applicable to common stock $ 24,500 $ 18,865 $ 34,825 $ 51,721
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of common and common
equivalent shares outstanding:
Weighted average common shares outstanding 17,748,964 16,693,135 17,504,939 16,735,813
Dilutive effect of stock option plans and
common stock warrants after application
of treasury stock method 203,941 628,203 322,507 641,896
Dilutive effect from assumed conversion of
7 1/4% convertible subordinated debentures 232,637 291,254 265,477 291,254
----------- ----------- ----------- -----------
18,185,542 17,612,592 18,092,923 17,668,963
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings per common share:
Income before extraordinary item $ 1.35 $ 1.07 $ 1.97 $ 2.93
Extraordinary item - - (.05) -
----------- ----------- ----------- -----------
Net income $ 1.35 $ 1.07 $ 1.92 $ 2.93
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- -------------------
(1) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
38
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 3RD
QUARTER 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 218,485
<INT-BEARING-DEPOSITS> 10,621
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 32,117
<INVESTMENTS-CARRYING> 1,202,862
<INVESTMENTS-MARKET> 1,212,149
<LOANS> 5,323,912
<ALLOWANCE> 63,754
<TOTAL-ASSETS> 7,331,962
<DEPOSITS> 5,181,765
<SHORT-TERM> 1,078,053
<LIABILITIES-OTHER> 105,962
<LONG-TERM> 475,640
<COMMON> 178
0
0
<OTHER-SE> 490,364
<TOTAL-LIABILITIES-AND-EQUITY> 7,331,962
<INTEREST-LOAN> 362,324
<INTEREST-INVEST> 78,319
<INTEREST-OTHER> 13,825
<INTEREST-TOTAL> 454,468
<INTEREST-DEPOSIT> 145,446
<INTEREST-EXPENSE> 218,041
<INTEREST-INCOME-NET> 236,427
<LOAN-LOSSES> 12,919
<SECURITIES-GAINS> (21,227)
<EXPENSE-OTHER> 241,334
<INCOME-PRETAX> 59,683
<INCOME-PRE-EXTRAORDINARY> 36,168
<EXTRAORDINARY> (963)
<CHANGES> 0
<NET-INCOME> 35,205
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.92
<YIELD-ACTUAL> 4.53
<LOANS-NON> 38,688
<LOANS-PAST> 2,194
<LOANS-TROUBLED> 1,619
<LOANS-PROBLEM> 57,301
<ALLOWANCE-OPEN> 56,343
<CHARGE-OFFS> 10,306
<RECOVERIES> 4,798
<ALLOWANCE-CLOSE> 63,754
<ALLOWANCE-DOMESTIC> 44,207
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 19,547
</TABLE>
