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Section 1: 10-Q (10-Q)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

 

ý Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934

 

For the quarterly period ended
September 30, 2004

 

or

 

o Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

 


 

Commission File
No.  001-10253

 


 

 

TCF FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

41-1591444

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S.  Employer Identification No.)

 

200 Lake Street East, Mail Code EX0-03-A, Wayzata, Minnesota 55391-1693

(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 ý

 

No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ý

 

No  o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at
October 15, 2004

Common Stock, $.01 par value

 

138,759,148 shares

 

 



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES
 
INDEX
 

Part I.  Financial Information

Pages

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition
at September 30, 2004 and December 31, 2003

3

 

 

 

 

Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 2004 and 2003

4

 

 

 

 

Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2004 and 2003

5

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the
Nine Months Ended September 30, 2004 and 2003

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Consolidated Financial
Condition and Results of Operations for the Three and Nine
Months Ended September 30, 2004 and 2003

20

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

 

 

 

 

 

 

 

Item 4.

Controls and Procedures

49

 

 

 

 

 

 

 

Supplementary Information

50

 

 

 

 

 

 

Part II.  Other Information

 

 

 

 

 

 

 

 

Items 1-6

52

 

 

 

 

 

 

Signatures

54

 

 

 

 

 

 

Index to Exhibits

55

 

2



 

PART 1 - FINANCIAL STATEMENTS

 

ITEM 1.  Financial Statements

 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(Dollars in thousands, except per-share data)

(Unaudited)

 

 

 

At
September 30,
2004

 

At
December 31,
2003

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

354,651

 

$

370,054

 

Investments

 

92,177

 

75,223

 

Securities available for sale

 

1,330,708

 

1,533,288

 

Loans held for sale

 

330,647

 

335,372

 

Loans and leases:

 

 

 

 

 

Consumer

 

4,222,025

 

3,630,341

 

Commercial real estate

 

2,031,031

 

1,916,701

 

Commercial business

 

444,632

 

427,696

 

Leasing and equipment finance

 

1,328,116

 

1,160,397

 

Subtotal

 

8,025,804

 

7,135,135

 

Residential real estate

 

1,047,079

 

1,212,643

 

Total loans and leases

 

9,072,883

 

8,347,778

 

Allowance for loan and lease losses

 

(78,976

)

(76,619

)

Net loans and leases

 

8,993,907

 

8,271,159

 

Premises and equipment

 

316,833

 

282,193

 

Goodwill

 

152,599

 

145,462

 

Deposit base intangibles

 

4,660

 

5,907

 

Mortgage servicing rights

 

51,474

 

52,036

 

Other assets

 

370,293

 

248,321

 

 

 

$

11,997,949

 

$

11,319,015

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

Checking

 

$

3,692,132

 

$

3,248,412

 

Savings

 

1,924,481

 

1,905,923

 

Money market

 

707,046

 

845,291

 

Subtotal

 

6,323,659

 

5,999,626

 

Certificates of deposit

 

1,471,164

 

1,612,123

 

Total deposits

 

7,794,823

 

7,611,749

 

Short-term borrowings

 

845,499

 

878,412

 

Long-term borrowings

 

2,057,608

 

1,536,413

 

Total borrowings

 

2,903,107

 

2,414,825

 

Accrued expenses and other liabilities

 

334,753

 

371,583

 

Total liabilities

 

11,032,683

 

10,398,157

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $.01 per share, 30,000,000 shares authorized; none issued and outstanding

 

 

 

Common stock, par value $.01 per share, 560,000,000 shares authorized; 184,964,602 and 185,026,710 shares issued

 

1,850

 

925

 

Additional paid-in capital

 

517,537

 

518,878

 

Retained earnings, subject to certain restrictions

 

1,344,036

 

1,234,804

 

Accumulated other comprehensive income

 

1,471

 

5,652

 

Treasury stock at cost, 46,200,454 and 44,074,050 shares, and other

 

(899,628

)

(839,401

)

Total stockholders’ equity

 

965,266

 

920,858

 

 

 

$

11,997,949

 

$

11,319,015

 

 

See accompanying notes to consolidated financial statements.

 

3



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per-share data)

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

133,295

 

$

126,854

 

$

386,709

 

$

388,129

 

Securities available for sale

 

20,414

 

22,579

 

61,159

 

83,826

 

Loans held for sale

 

2,931

 

5,905

 

9,112

 

16,919

 

Investments

 

773

 

1,144

 

2,441

 

3,726

 

Total interest income

 

157,413

 

156,482

 

459,421

 

492,600

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

10,318

 

11,816

 

30,331

 

45,805

 

Borrowings

 

22,605

 

24,789

 

63,688

 

84,742

 

Total interest expense

 

32,923

 

36,605

 

94,019

 

130,547

 

Net interest income

 

124,490

 

119,877

 

365,402

 

362,053

 

Provision for credit losses

 

2,644

 

2,658

 

6,874

 

8,495

 

Net interest income after provision for credit losses

 

121,846

 

117,219

 

358,528

 

353,558

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Fees and service charges

 

71,353

 

65,757

 

204,128

 

182,970

 

Card revenue

 

16,339

 

12,923

 

45,854

 

40,922

 

ATM revenue

 

11,474

 

11,566

 

32,609

 

33,223

 

Investments and insurance commissions

 

3,057

 

3,584

 

9,949

 

10,864

 

Subtotal

 

102,223

 

93,830

 

292,540

 

267,979

 

Leasing and equipment finance

 

6,864

 

10,652

 

29,276

 

35,716

 

Mortgage banking

 

4,131

 

11,304

 

12,376

 

6,146

 

Other

 

2,585

 

2,303

 

6,657

 

6,086

 

Fees and other revenue

 

115,803

 

118,089

 

340,849

 

315,927

 

Gains on sales of securities available for sale

 

3,679

 

 

16,396

 

32,832

 

Gains (losses) on termination of debt

 

 

(37,769

)

 

(44,345

)

Gain on sale of loan servicing

 

 

 

706

 

 

Other non-interest income

 

3,679

 

(37,769

)

17,102

 

(11,513

)

Total non-interest income

 

119,482

 

80,320

 

357,951

 

304,414

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

78,010

 

75,646

 

236,486

 

226,052

 

Occupancy and equipment

 

23,673

 

22,309

 

70,560

 

65,439

 

Advertising and promotions

 

7,377

 

6,536

 

19,785

 

19,332

 

Other

 

38,866

 

37,891

 

105,707

 

107,042

 

Total non-interest expense

 

147,926

 

142,382

 

432,538

 

417,865

 

Income before income tax expense

 

93,402

 

55,157

 

283,941

 

240,107

 

Income tax expense

 

31,690

 

19,193

 

96,350

 

83,725

 

Net income

 

$

61,712

 

$

35,964

 

$

187,591

 

$

156,382

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

.45

 

$

.26

 

$

1.37

 

$

1.10

 

Diluted

 

$

.45

 

$

.26

 

$

1.36

 

$

1.10

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

.1875

 

$

.1625

 

$

.5625

 

$

.4875

 

 

See accompanying notes to consolidated financial statements.

 

4



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2004

 

2003

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

187,591

 

$

156,382

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

28,294

 

29,214

 

Mortgage servicing rights amortization and impairment

 

8,725

 

43,793

 

Provision for credit losses

 

6,874

 

8,495

 

Proceeds from sales of loans held for sale

 

812,638

 

2,558,450

 

Principal collected on loans held for sale

 

7,071

 

7,118

 

Originations and purchases of loans held for sale

 

(815,659

)

(2,523,143

)

Net increase in other assets and accrued expenses and other liabilities

 

(1,133

)

(12,752

)

Gains on sales of assets

 

(17,102

)

(32,832

)

Losses on termination of debt

 

 

44,345

 

Other, net

 

(4,006

)

(8,254

)

 

 

 

 

 

 

Total adjustments

 

25,702

 

114,434

 

 

 

 

 

 

 

Net cash provided by operating activities

 

213,293

 

270,816

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Principal collected on loans and leases

 

2,823,395

 

3,391,172

 

Originations and purchases of loans

 

(3,055,828

)

(3,060,312

)

Purchase of lease financing receivables

 

 

(58,706

)

Purchases of equipment for lease financing

 

(492,742

)

(367,132

)

Proceeds from sales of securities available for sale

 

970,249

 

849,333

 

Proceeds from maturities of and principal collected on securities available for sale

 

287,662

 

772,697

 

Purchases of securities available for sale

 

(1,213,660

)

(820,456

)

Net (increase) decrease in Federal Home Loan Bank stock

 

(19,254

)

79,029

 

Proceeds from sales of real estate owned

 

30,660

 

18,755

 

Acquisitions, net of cash acquired

 

(4,326

)

 

Purchases of premises and equipment

 

(57,801

)

(46,261

)

Other, net

 

173

 

(17,314

)

 

 

 

 

 

 

Net cash (used) provided by investing activities

 

(731,472

)

740,805

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

183,074

 

2,615

 

Net (decrease) increase in short-term borrowings

 

(43,765

)

58,784

 

Proceeds from long-term borrowings

 

542,768

 

17,482

 

Payments on long-term borrowings

 

(41,664

)

(944,764

)

Purchases of common stock

 

(67,900

)

(107,905

)

Dividends on common stock

 

(78,359

)

(70,173

)

Other, net

 

8,622

 

5,180

 

 

 

 

 

 

 

Net cash provided (used) by financing activities

 

502,776

 

(1,038,781

)

 

 

 

 

 

 

Net decrease in cash and due from banks

 

(15,403

)

(27,160

)

Cash and due from banks at beginning of period

 

370,054

 

416,397

 

Cash and due from banks at end of period

 

$

354,651

 

$

389,237

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest on deposits and borrowings

 

$

90,359

 

$

130,335

 

Income taxes

 

$

98,341

 

$

93,922

 

Transfer of loans and leases to other assets

 

$

20,103

 

$

21,779

 

 

See accompanying notes to consolidated financial statements.

 

5



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands)

(Unaudited)

 

 

 

Number of
Common
Shares Issued

 

Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Treasury
Stock
and Other

 

Total

 

Balance, December 31, 2002

 

185,277,874

 

$

926

 

$

518,813

 

$

1,111,955

 

$

46,102

 

$

(700,776

)

$

977,020

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

156,382

 

 

 

156,382

 

Other comprehensive loss

 

 

 

 

 

(32,717

)

 

(32,717

)

Comprehensive income (loss)

 

 

 

 

156,382

 

(32,717

)

 

123,665

 

Dividends on common stock

 

 

 

 

(70,173

)

 

 

(70,173

)

Repurchase of 5,287,102 shares

 

 

 

 

 

 

(107,905

)

(107,905

)

Issuance of 198,314 shares

 

 

 

977

 

 

 

(977

)

 

Cancellation of shares

 

(228,600

)

(1

)

(3,144

)

 

 

2,075

 

(1,070

)

Amortization of stock compensation

 

 

 

 

 

 

7,201

 

7,201

 

Exercise of stock options, 120,558 shares

 

 

 

1,257

 

 

 

1,973

 

3,230

 

Change in shares held in trust for deferred compensation plans, at cost

 

 

 

(298

)

 

 

298

 

 

Balance, September 30, 2003

 

185,049,274

 

$

925

 

$

517,605

 

$

1,198,164

 

$

13,385

 

$

(798,111

)

$

931,968

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2003

 

185,026,710

 

$

925

 

$

518,878

 

$

1,234,804

 

$

5,652

 

$

(839,401

)

$

920,858

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

187,591

 

 

 

187,591

 

Other comprehensive loss

 

 

 

 

 

(4,181

)

 

(4,181

)

Comprehensive income (loss)

 

 

 

 

187,591

 

(4,181

)

 

183,410

 

Dividends on common stock

 

 

 

 

(78,359

)

 

 

(78,359

)

Stock split

 

 

925

 

(925

)

 

 

 

 

Repurchase of 2,414,890 shares

 

 

 

 

 

 

(67,900

)

(67,900

)

Issuance of 132,654 shares

 

 

 

1,400

 

 

 

(1,400

)

 

Cancellation of shares

 

(62,108

)

 

(1,504

)

 

 

544

 

(960

)

Amortization of stock compensation

 

 

 

 

 

 

3,999

 

3,999

 

Exercise of stock options, 155,832 shares

 

 

 

1,533

 

 

 

2,685

 

4,218

 

Change in shares held in trust for deferred compensation plans, at cost

 

 

 

(1,845

)

 

 

1,845

 

 

Balance, September 30, 2004

 

184,964,602

 

$

1,850

 

$

517,537

 

$

1,344,036

 

$

1,471

 

$

(899,628

)

$

965,266

 

 

See accompanying notes to consolidated financial statements.

 

6



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)          Basis of Presentation

 

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 information in this Quarterly Report on Form 10-Q is written with the presumption that the users of the interim financial statements have read or have access to the most recent Annual Report on Form 10-K of TCF Financial Corporation (“TCF” or the “Company”), which contains the latest audited financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2003 and for the year then ended.  All significant intercompany accounts and transactions have been eliminated in consolidation.  Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.  For Consolidated Statements of Cash Flow purposes, cash and cash equivalents include cash and due from banks.

 

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.

 

(2)          Investments

 

The carrying values of investments, which approximate their fair values, consist of the following:

 

(In thousands)

 

At
September 30,
2004

 

At
December 31,
2003

 

Federal Home Loan Bank stock, at cost

 

$

69,812

 

$

50,411

 

Federal Reserve Bank stock, at cost

 

21,845

 

24,045

 

Interest-bearing deposits with banks

 

520

 

767

 

Total investments

 

$

92,177

 

$

75,223

 

 

(3)          Securities Available for Sale

 

Securities available for sale consist of the following:

 

 

 

At September 30, 2004

 

At December 31, 2003

 

(Dollars in thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal agencies

 

$

1,320,736

 

$

6,164

 

$

(3,637

)

$

1,323,263

 

$

1,514,400

 

$

13,744

 

$

(4,677

)

$

1,523,467

 

Other

 

6,923

 

 

(228

)

6,695

 

9,272

 

 

(201

)

9,071

 

Other securities

 

750

 

 

 

750

 

750

 

 

 

750

 

 

 

$

1,328,409

 

$

6,164

 

$

(3,865

)

$

1,330,708

 

$

1,524,422

 

$

13,744

 

$

(4,878

)

$

1,533,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average yield

 

5.23

%

 

 

 

 

 

 

5.33

%

 

 

 

 

 

 

 

7



 

The following table shows the securities available for sale portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2004.  TCF has reviewed these securities and has concluded that the unrealized losses are temporary and no impairment has occurred at September 30, 2004.

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

(In thousands)

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal agencies

 

$

367,597

 

$

(2,070

)

$

83,431

 

$

(1,567

)

$

451,028

 

$

(3,637

)

Other

 

 

 

5,477

 

(228

)

5,477

 

(228

)

Total

 

$

367,597

 

$

(2,070

)

$

88,908

 

$

(1,795

)

$

456,505

 

$

(3,865

)

 

(4)          Goodwill and Intangible Assets

 

Goodwill and intangible assets as of September 30, 2004 are summarized as follows:

 

 

 

At September 30, 2004

 

At December 31, 2003

 

(In thousands)

 

Gross
Amount

 

Accumulated
Amortization

 

Net
Amount

 

Gross
Amount

 

Accumulated
Amortization

 

Net
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights, net

 

$

85,356

 

$

33,882

 

$

51,474

 

$

76,306

 

$

24,270

 

$

52,036

 

Deposit base intangibles

 

21,180

 

16,520

 

4,660

 

21,180

 

15,273

 

5,907

 

Total

 

$

106,536

 

$

50,402

 

$

56,134

 

$

97,486

 

$

39,543

 

$

57,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill included in Banking Segment

 

$

145,462

 

 

 

$

145,462

 

$

145,462

 

 

 

$

145,462

 

Goodwill included in Leasing Segment

 

7,137

 

 

 

7,137

 

 

 

 

 

Total

 

$

152,599

 

 

 

$

152,599

 

$

145,462

 

 

 

$

145,462

 

 

Amortization expense for intangible assets was $11 million and $21.5 million for the nine months ended September 30, 2004 and 2003, respectively.  The following table shows the estimated future amortization expense for amortized intangible assets based on existing asset balances and the interest rate environment as of September 30, 2004.  The Company’s actual amortization expense in any given period may be significantly different from the estimated amounts depending upon the addition of new intangible assets, changes in mortgage interest rates, prepayment rates and market conditions.

 

(In thousands)

 

Mortgage
Servicing Rights

 

Deposit Base
Intangibles

 

Total

 

 

 

 

 

 

 

 

 

Estimated Amortization Expense:

 

 

 

 

 

 

 

For the remaining three months ending December 31, 2004

 

$

3,078

 

$

416

 

$

3,494

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2005

 

10,828

 

1,659

 

12,487

 

For the year ended December 31, 2006

 

9,024

 

1,630

 

10,654

 

For the year ended December 31, 2007

 

7,201

 

955

 

8,156

 

For the year ended December 31, 2008

 

5,725

 

 

5,725

 

For the year ended December 31, 2009

 

4,569

 

 

4,569

 

 

8



 

(5)          Mortgage Banking

 

The activity in mortgage servicing rights and the related valuation allowance is summarized as follows:

 

 

 

Three Months
Ended September 30,

 

Nine Months
Ended September 30,

 

(In thousands)

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights at beginning of period

 

$

53,290

 

$

47,725

 

$

54,036

 

$

71,990

 

Wholesale originations

 

818

 

7,300

 

4,021

 

19,041

 

Retail originations

 

1,174

 

4,587

 

4,142

 

11,227

 

Amortization

 

(2,808

)

(4,147

)

(9,725

)

(20,293

)

Impairment write-down

 

 

 

 

(26,500

)

Mortgage servicing rights at end of period

 

52,474

 

55,465

 

52,474

 

55,465

 

Valuation allowance at beginning of period

 

(2,000

)

(6,346

)

(2,000

)

(9,346

)

Provision for (impairment) recovery

 

1,000

 

 

1,000

 

(23,500

)

Impairment write-down

 

 

 

 

26,500

 

Valuation allowance at end of period

 

(1,000

)

(6,346

)

(1,000

)

(6,346

)

Mortgage servicing rights, net

 

$

51,474

 

$

49,119

 

$

51,474

 

$

49,119

 

 

The estimated fair value of mortgage servicing rights included at September 30, 2004 was approximately $57.8 million.  The estimated fair value of capitalized mortgage servicing rights is based on estimated cash flows discounted using rates management believes are commensurate with the risks involved. Assumptions regarding prepayments, defaults and interest rates are determined using available market information.

 

The following table represents the components of mortgage banking revenue:

 

 

 

Three Months
Ended September 30,

 

Change

 

Nine Months
Ended September 30,

 

Change

 

(Dollars in thousands)

 

2004

 

2003

 

$

 

%

 

2004

 

2003

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing income

 

$

4,215

 

$

4,946

 

$

(731

)

(14.8

)%

$

13,179

 

$

15,742

 

$

(2,563

)

(16.3

)%

Less mortgage servicing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

2,807

 

4,147

 

(1,340

)

(32.3

)

9,725

 

20,293

 

(10,568

)

(52.1

)

Impairment (recovery)

 

(1,000

)

 

(1,000

)

N.M.

 

(1,000

)

23,500

 

(24,500

)

N.M.

 

Subtotal

 

1,807

 

4,147

 

(2,340

)

(56.4

)

8,725

 

43,793

 

(35,068

)

(80.1

)

Net servicing income (loss)

 

2,408

 

799

 

1,609

 

N.M.

 

4,454

 

(28,051

)

32,505

 

N.M.

 

Gains on sales of loans

 

1,442

 

9,524

 

(8,082

)

(84.9

)

6,746

 

31,113

 

(24,367

)

(78.3

)

Other income

 

281

 

981

 

(700

)

(71.4

)

1,176

 

3,084

 

(1,908

)

(61.9

)

Total mortgage banking revenue

 

$

4,131

 

$

11,304

 

$

(7,173

)

(63.5

)

$

12,376

 

$

6,146

 

$

6,230

 

101.4

 

 


N.M. Not meaningful

 

9



 

Gains on sales of loans include the changes in fair value of residential mortgage loans held for sale, loan applications in process with locked rate commitments and related forward sales contracts.  The net unrealized gains related to these items are summarized as follows:

 

 

 

At

 

At

 

 

 

 

 

 

 

September 30,

 

December 31,

 

Change

 

(Dollars in thousands)

 

2004

 

2003

 

$

 

%

 

Unrealized Gains (Losses):

 

 

 

 

 

 

 

 

 

Residential loans held for sale

 

$

575

 

$

1,092

 

$

(517

)

(47.3

)%

Loan applications in process

 

40

 

195

 

(155

)

(79.5

)

Subtotal

 

615

 

1,287

 

(672

)

(52.2

)

Forward sales contracts

 

(708

)

(1,105

)

397

 

35.9

 

Net unrealized (losses) gains

 

$

(93

)

$

182

 

$

(275

)

N.M.

 

 


N.M. Not meaningful

 

At September 30, 2004 and 2003, TCF was servicing real estate loans for others with aggregate unpaid principal balances of approximately $4.7 billion and $5.2 billion, respectively. At September 30, 2004 and 2003, TCF had custodial funds of $116.2 million and $201.9 million, respectively, which are included in deposits in the Consolidated Statements of Financial Condition. These custodial deposits relate primarily to mortgage servicing operations and represent funds due to investors on mortgage loans serviced by TCF and customer funds held for real estate taxes and insurance.  The decline in custodial balances is the result of a decline in refinance activity during the past twelve months.

 

10



 

(6)          Long-term Borrowings

 

 

 

 

 

At September 30, 2004

 

At December 31, 2003

 

(Dollars in thousands)

 

Year of
Maturity

 

Amount

 

Weighted-
Average
Rate

 

Amount

 

Weighted-
Average
Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank (“FHLB”) advances and securities sold under repurchase agreements

 

2004

 

$

 

%

$

3,000

 

4.76

%

 

 

2005

 

1,191,500

 

3.04

 

741,500

 

3.82

 

 

 

2006

 

303,000

 

4.45

 

303,000

 

4.20

 

 

 

2009

 

122,500

 

5.25

 

122,500

 

5.25

 

 

 

2010

 

100,000

 

6.02

 

100,000

 

6.02

 

 

 

2011

 

200,000

 

4.85

 

200,000

 

4.85

 

Total Federal Home Loan Bank advances and securities sold under repurchase agreements

 

 

 

1,917,000

 

3.75

 

1,470,000

 

4.31

 

 

 

 

 

 

 

 

 

 

 

 

 

Discounted lease rentals

 

2004

 

11,952

 

5.82

 

43,607

 

6.24

 

 

 

2005

 

29,410

 

5.67

 

18,097

 

5.68

 

 

 

2006

 

12,857

 

5.70

 

4,134

 

5.55

 

 

 

2007

 

2,822

 

5.89

 

522

 

5.30

 

 

 

2008

 

546

 

5.99

 

53

 

5.54

 

 

 

2009

 

51

 

6.45

 

 

 

Total discounted lease rentals

 

 

 

57,638

 

5.72

 

66,413

 

6.04

 

 

 

 

 

 

 

 

 

 

 

 

 

Subordinated bank notes

 

2014

 

74,170

 

5.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other borrowings

 

2005

 

2,200

 

4.50

 

 

 

 

 

2006

 

2,200

 

4.50

 

 

 

 

 

2007

 

2,200

 

4.50

 

 

 

 

 

2008

 

2,200

 

4.50

 

 

 

Total other borrowings

 

 

 

8,800

 

4.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total long-term borrowings

 

 

 

$

2,057,608

 

3.86

 

$

1,536,413

 

4.38

 

 

Included in long-term borrowings at September 30, 2004 were $767.5 million of fixed-rate FHLB advances and repurchase agreements with other institutions, which are callable at par on certain anniversary dates and, for most, quarterly thereafter until maturity.  If called, replacement funding will be provided by the counterparties at the then-prevailing market interest rates.  The probability that these advances and repurchase agreements will be called depends primarily on the level of related interest rates during the call period.  At September 30, 2004, the contract rate exceeded the market rate on all of the fixed-rate callable advances and repurchase agreements.

 

For certain equipment leases, TCF discounts its lease rentals at fixed rates on either a partial recourse or non-recourse basis with other financial institutions and uses the respective underlying equipment as collateral.  In the event of default by the customer on these financings, the other financial institution has a first lien on the underlying leased equipment.  In the case of non-recourse financings, the other financial institution has no further recourse against TCF.

 

During the second quarter of 2004, TCF National Bank (“TCF Bank”), a wholly-owned subsidiary of TCF, issued $75 million of subordinated notes due 2014.  The notes bear interest at a fixed rate of 5.00% for the first five years and will reprice quarterly thereafter at the three-month LIBOR rate plus 1.63%.  The notes may be redeemed by TCF Bank at par after five years.  These notes qualify as Tier 2 or supplemental capital for regulatory purposes, subject to certain limitations.  TCF Bank paid the proceeds from the offering to TCF to be used for general corporate purposes, which may include repurchases in the open market of TCF common stock.

 

11



 

(7)          Stockholders’ Equity

 

During the third quarter of 2004, TCF announced and completed a two-for-one stock split of its common stock in the form of a 100% stock dividend.  The stock split resulted in an increase in issued common stock of 92,485,601 shares and was accounted for by a transfer of $925 thousand to common stock from additional paid-in capital.  All prior period common shares and per share disclosures have been restated to reflect the split.

 

Treasury stock and other consists of the following:

 

(In thousands)

 

At
September 30,
2004

 

At
December 31,
2003

 

 

 

 

 

 

 

Treasury stock, at cost

 

$

(814,504

)

$

(751,586

)

Shares held in trust for deferred compensation plans, at cost

 

(69,258

)

(71,103

)

Unamortized stock compensation

 

(15,866

)

(16,712

)

 

 

$

(899,628

)

$

(839,401

)

 

TCF purchased 2.4 million shares of its common stock during the first nine months of 2004, compared with 5.3 million shares for the same 2003 period.  At September 30, 2004, TCF had 5 million shares remaining in its stock repurchase program authorized by the Board of Directors.

 

12



 

(8)          Regulatory Capital Requirements

 

The following table sets forth TCF’s and TCF National Bank’s regulatory tier 1 leverage, tier 1 risk-based and total risk-based capital levels, and applicable percentages of adjusted assets, together with the excess over minimum capital requirements:

 

 

 

Actual

 

Well-capitalized
Capital Requirement

 

Excess

 

(Dollars in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

As of September 30, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

N/A

 

%

N/A

 

%

N/A

 

%

TCF National Bank

 

$

769,816

 

6.46

 

$

595,546

 

5.00

 

$

174,270

 

1.46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

807,549

 

9.43

 

513,850

 

6.00

 

293,699

 

3.43

 

TCF National Bank

 

769,816

 

9.01

 

512,774

 

6.00

 

257,042

 

3.01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

961,539

 

11.23

 

856,416

 

10.00

 

105,123

 

1.23

 

TCF National Bank

 

923,806

 

10.81

 

854,623

 

10.00

 

69,183

 

0.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2003:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

N/A

 

%

N/A

 

%

N/A

 

%

TCF National Bank

 

$

754,599

 

6.83

 

$

552,748

 

5.00

 

$

201,851

 

1.83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

765,271

 

9.75

 

470,737

 

6.00

 

294,534

 

3.75

 

TCF National Bank

 

754,599

 

9.64

 

469,715

 

6.00

 

284,884

 

3.64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

841,982

 

10.73

 

784,562

 

10.00

 

57,420

 

0.73

 

TCF National Bank

 

831,310

 

10.62

 

782,858

 

10.00

 

48,452

 

0.62

 

 

At September 30, 2004, TCF and TCF National Bank (“TCF Bank”) exceeded their regulatory capital requirements and are considered “well-capitalized” under guidelines established by the Federal Reserve Board (“FRB”) and the Office of the Comptroller of the Currency (“OCC”) pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991.

 

13



 

(9)          Employee Benefit Plans

 

The following table sets forth the net benefit cost included in compensation and employee benefits expense for TCF’s Pension Plan and Postretirement Plan for the three and nine months ended September 30, 2004 and 2003:

 

 

 

Pension Plan

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(In thousands)

 

2004

 

2003

 

2004

 

2003

 

Service cost

 

$

1,158

 

$

987

 

$

3,474

 

$

2,961

 

Interest cost

 

791

 

737

 

2,373

 

2,211

 

Expected return on plan assets

 

(1,489

)

(1,593

)

(4,467

)

(4,779

)

Amortization of prior service cost

 

(58

)

(90

)

(174

)

(270

)

Net periodic benefit cost

 

$

402

 

$

41

 

$

1,206

 

$

123

 

 

 

 

Postretirement Plan

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(In thousands)

 

2004

 

2003

 

2004

 

2003

 

Service cost

 

$

13

 

$

15

 

$

40

 

$

45

 

Interest cost

 

164

 

185

 

507

 

555

 

Amortization of transition obligation

 

53

 

52

 

158

 

156

 

Recognized actuarial loss

 

49

 

57

 

166

 

171

 

Net periodic benefit cost

 

$

279

 

$

309

 

$

871

 

$

927

 

 

During the second quarter of 2004, TCF contributed $2.6 million to the Pension Plan under the maximum contribution formula for 2003. TCF does not anticipate making any additional contributions in 2004 to the Pension Plan.  During the third quarter and first nine months of 2004, TCF paid $250 thousand and $790 thousand, respectively, to the Postretirement Plan.

 

In the second quarter of 2004, TCF re-measured its postretirement benefit obligation as of December 31, 2003 to include the effects of the federal subsidy provided under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.  As a result of this remeasurement, TCF’s postretirement benefit obligation decreased $989 thousand and the postretirement benefit cost decreased $34 thousand and $69 thousand for the third quarter and first nine months of 2004, respectively.

 

14



 

(10) Derivative Instruments and Hedging Activities

 

All derivative instruments, including derivatives embedded in other financial instruments or contracts, are recognized as either assets or liabilities in the Consolidated Statements of Financial Condition at fair value.  Changes in the fair value of a derivative are recorded in the Consolidated Statements of Income.

 

TCF’s pipeline of locked residential mortgage loan commitments, adjusted for loans not expected to close, and forward sales contracts are considered derivatives and are recorded at fair value, with the changes in fair value recognized in gains on sales of loans under mortgage banking revenue in the Consolidated Statements of Income.  TCF utilizes forward sales contracts to hedge its risk of changes in the fair value, due to changes in interest rates, of both locked residential mortgage loan commitments and its residential loans held for sale.  Residential mortgage loans held for sale are carried at the lower of cost or market as adjusted for the effects of fair value hedges using quoted market prices.  Because the fair value of the residential loans held for sale is hedged with forward sales contracts of the same loan types, or substantially the same loan types, the hedges are highly effective at managing the risk of changing fair values of such loans.  Any differences between the changes in fair value of the hedged residential loans held for sale and in the fair value of the forward sales contracts are not expected to be and were not material due to the nature of the hedging instruments and were recorded in gains on sales of loans.  Forward mortgage loan sales commitments totaled $62 million at September 30, 2004 and $149.1 million at December 31, 2003.

 

15



 

(11) Business Segments

 

The following table sets forth certain information about the reported profit or loss and assets for each of TCF’s reportable segments, including a reconciliation of TCF’s consolidated totals.

 

(In thousands)

 

Banking

 

Leasing and
Equipment
Finance

 

Mortgage
Banking

 

Other

 

Eliminations
and
Reclassifications

 

Consolidated

 

At or For the Three Months Ended September 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

133,537

 

$

22,855

 

$

1,021

 

$

 

$

 

$

157,413

 

Non-interest income

 

108,482

 

6,863

 

4,132

 

5

 

 

119,482

 

Total

 

$

242,019

 

$

29,718

 

$

5,153

 

$

5

 

$

 

$

276,895