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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

March 31, 2005

 

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

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

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
April 15, 2005

Common Stock, $.01 par value

 

135,269,063 shares

 

 



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

 

 

Pages

Part I. Financial Information

 

 

 

 

 

 

 

 

 

Item 1.    Financial Statements

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition

 

 

 

 

 

at March 31, 2005 and December 31, 2004

 

 

3

 

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three

 

 

 

 

 

Months ended March 31, 2005 and 2004

 

 

4

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the

 

 

 

 

 

Three Months Ended March 31, 2005 and 2004

 

 

5

 

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the

 

 

 

 

 

Three Months Ended March 31, 2005 and 2004

 

 

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

 

 

 

 

 

Months Ended March 31, 2005 and 2004

 

 

18

 

 

 

 

 

 

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

40

 

 

 

 

 

 

 

Item 4.    Controls and Procedures

 

 

43

 

 

 

 

 

 

 

Supplementary Information

 

 

45

 

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

 

 

 

 

Items 1-6

 

 

47

 

 

 

 

 

 

Signatures

 

 

48

 

 

 

 

 

 

Index to Exhibits

 

 

49

 

2



 

PART 1 - FINANCIAL INFORMATION

ITEM 1.  Financial Statements

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(Dollars in thousands, except per-share data)

(Unaudited)

 

 

 

At

 

At

 

 

 

March 31,

 

December 31,

 

 

 

2005

 

2004

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

323,996

 

$

359,798

 

Investments

 

105,404

 

103,226

 

Securities available for sale

 

1,785,520

 

1,619,941

 

Loans held for sale

 

215,991

 

154,279

 

Loans and leases:

 

 

 

 

 

Consumer home equity and other

 

4,601,418

 

4,418,588

 

Commercial real estate

 

2,193,513

 

2,154,396

 

Commercial business

 

409,219

 

424,135

 

Leasing and equipment finance

 

1,397,959

 

1,375,372

 

Subtotal

 

8,602,109

 

8,372,491

 

Residential real estate

 

950,469

 

1,014,166

 

Total loans and leases

 

9,552,578

 

9,386,657

 

Allowance for loan and lease losses

 

(76,883

)

(79,878

)

Net loans and leases

 

9,475,695

 

9,306,779

 

Premises and equipment

 

328,081

 

326,667

 

Goodwill

 

152,599

 

152,599

 

Mortgage servicing rights

 

43,501

 

46,442

 

Other assets

 

302,421

 

270,836

 

 

 

$

12,733,208

 

$

12,340,567

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

Checking

 

$

4,020,601

 

$

3,905,987

 

Savings

 

2,063,415

 

1,927,872

 

Money market

 

625,511

 

659,686

 

Subtotal

 

6,709,527

 

6,493,545

 

Certificates of deposit

 

1,685,486

 

1,468,650

 

Total deposits

 

8,395,013

 

7,962,195

 

Short-term borrowings

 

878,390

 

1,056,111

 

Long-term borrowings

 

2,098,878

 

2,048,492

 

Total borrowings

 

2,977,268

 

3,104,603

 

Accrued expenses and other liabilities

 

434,584

 

315,351

 

Total liabilities

 

11,806,865

 

11,382,149

 

Stockholders’ equity:

 

 

 

 

 

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

 

-

 

-

 

Common stock, par value $.01 per share, 280,000,000 shares authorized; 184,477,297 and 184,939,094 shares issued

 

1,845

 

1,849

 

Additional paid-in capital

 

497,736

 

518,741

 

Retained earnings, subject to certain restrictions

 

1,420,258

 

1,385,760

 

Accumulated other comprehensive loss

 

(14,756

)

(1,415

)

Treasury stock at cost, 49,208,234 and 47,752,934 shares, and other

 

(978,740

)

(946,517

)

Total stockholders’ equity

 

926,343

 

958,418

 

 

 

$

12,733,208

 

$

12,340,567

 

 

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

 

 

 

March 31,

 

 

 

2005

 

2004

 

Interest income:

 

 

 

 

 

Loans and leases

 

$

146,544

 

$

125,273

 

Securities available for sale

 

21,495

 

20,332

 

Loans held for sale

 

2,254

 

2,841

 

Investments

 

1,052

 

773

 

Total interest income

 

171,345

 

149,219

 

Interest expense:

 

 

 

 

 

Deposits

 

15,938

 

10,539

 

Borrowings

 

26,354

 

20,187

 

Total interest expense

 

42,292

 

30,726

 

Net interest income

 

129,053

 

118,493

 

Provision for credit losses

 

(3,436

)

1,160

 

Net interest income after provision for credit losses

 

132,489

 

117,333

 

Non-interest income:

 

 

 

 

 

Fees and service charges

 

57,031

 

59,659

 

Card revenue

 

17,642

 

13,491

 

ATM revenue

 

9,732

 

9,997

 

Investments and insurance revenue

 

2,853

 

3,462

 

Subtotal

 

87,258

 

86,609

 

Leasing and equipment finance

 

10,693

 

10,167

 

Mortgage banking

 

1,142

 

3,455

 

Other

 

7,816

 

2,228

 

Fees and other revenue

 

106,909

 

102,459

 

Gains on sales of securities available for sale

 

5,239

 

12,717

 

Total non-interest income

 

112,148

 

115,176

 

Non-interest expense:

 

 

 

 

 

Compensation and employee benefits

 

81,451

 

78,879

 

Occupancy and equipment

 

25,379

 

23,490

 

Advertising and promotions

 

6,247

 

5,910

 

Deposit losses

 

3,661

 

4,178

 

Other

 

31,373

 

28,249

 

Total non-interest expense

 

148,111

 

140,706

 

Income before income tax expense

 

96,526

 

91,803

 

Income tax expense

 

33,061

 

31,142

 

Net income

 

$

63,465

 

$

60,661

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

Basic

 

$

.47

 

$

.44

 

Diluted

 

$

.47

 

$

.44

 

 

 

 

 

 

 

Dividends declared per common share

 

$

.2125

 

$

.1875

 

 

See accompanying notes to consolidated financial statements.

 

4



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2005

 

2004

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

63,465

 

$

60,661

 

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

 

 

 

 

 

Depreciation and amortization

 

9,560

 

9,572

 

Mortgage servicing rights amortization and impairment

 

2,941

 

3,676

 

Provision for credit losses

 

(3,436

)

1,160

 

Proceeds from sales of loans held for sale

 

18,158

 

242,795

 

Principal collected on loans held for sale

 

1,560

 

1,387

 

Originations and purchases of loans held for sale

 

(81,226

)

(286,785

)

Net (increase) decrease in other assets and accrued expenses and other liabilities

 

(11,528

)

49,820

 

Gains on sales of assets

 

(10,939

)

(12,614

)

Other, net

 

526

 

(287

)

 

 

 

 

 

 

Total adjustments

 

(74,384

)

8,724

 

 

 

 

 

 

 

Net cash (used) provided by operating activities

 

(10,919

)

69,385

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Principal collected on loans and leases

 

967,766

 

852,198

 

Originations and purchases of loans

 

(969,689

)

(937,732

)

Purchases of equipment for lease financing

 

(176,975

)

(139,842

)

Proceeds from sales of securities available for sale

 

471,244

 

866,691

 

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

 

51,083

 

88,730

 

Purchases of securities available for sale

 

(603,618

)

(718,734

)

Net increase in Federal Funds sold

 

-

 

(314,000

)

Net increase in Federal Home Loan Bank stock

 

(2,178

)

(19,629

)

Proceeds from sales of real estate owned

 

5,286

 

6,864

 

Acquisitions, net of cash acquired

 

-

 

(4,326

)

Purchases of premises and equipment

 

(17,888

)

(15,709

)

Proceeds from sale of bank building

 

17,000

 

-

 

Other, net

 

247

 

(3,889

)

 

 

 

 

 

 

Net cash used by investing activities

 

(257,722

)

(339,378

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

432,818

 

257,379

 

Net decrease in short-term borrowings

 

(177,720

)

(419,602

)

Proceeds from long-term borrowings

 

258,810

 

454,215

 

Payments on long-term borrowings

 

(205,366

)

(2,063

)

Purchases of common stock

 

(50,586

)

(694

)

Dividends on common stock

 

(29,003

)

(26,236

)

Other, net

 

3,886

 

5,349

 

 

 

 

 

 

 

Net cash provided by financing activities

 

232,839

 

268,348

 

 

 

 

 

 

 

Net decrease in cash and due from banks

 

(35,802

)

(1,645

)

Cash and due from banks at beginning of period

 

359,798

 

370,054

 

Cash and due from banks at end of period

 

$

323,996

 

$

368,409

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest on deposits and borrowings

 

$

41,431

 

$

28,280

 

Income taxes

 

$

481

 

$

482

 

Transfer of loans and leases to other assets

 

$

7,566

 

$

4,557

 

 

See accompanying notes to consolidated financial statements.

 

5



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Number of

 

 

 

Additional

 

 

 

Other

 

Treasury

 

 

 

 

 

Common

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Stock

 

 

 

 

 

Shares Issued

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

and Other

 

Total

 

Balance, December 31, 2003

 

185,026,710

 

$

925

 

$

518,878

 

$

1,234,804

 

$

5,652

 

$

(839,401

)

$

920,858

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

-

 

-

 

-

 

60,661

 

-

 

-

 

60,661

 

Other comprehensive income

 

-

 

-

 

-

 

-

 

7,175

 

-

 

7,175

 

Comprehensive income

 

-

 

-

 

-

 

60,661

 

7,175

 

-

 

67,836

 

Dividends on common stock

 

-

 

-

 

-

 

(26,236

)

-

 

-

 

(26,236

)

Repurchase of 26,890 shares

 

-

 

-

 

-

 

-

 

-

 

(694

)

(694

)

Issuance of 22,800 shares

 

-

 

-

 

166

 

-

 

-

 

(166

)

-

 

Cancellation of shares

 

(18,546

)

-

 

(433

)

-

 

-

 

156

 

(277

)

Amortization of stock compensation

 

-

 

-

 

-

 

-

 

-

 

1,721

 

1,721

 

Exercise of stock options, 86,000 shares

 

-

 

- 

 

(217

)

- 

 

- 

 

1,466

 

1,249

 

Tax benefits realized on vesting of restricted stock grants and exercise of stock options

 

-

 

- 

 

1,493

 

-

 

- 

 

- 

 

1,493

 

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

 

-

 

- 

 

(2,985

)

- 

 

- 

 

2,985

 

- 

 

Balance, March 31, 2004

 

185,008,164

 

$

925

 

$

516,902

 

$

1,269,229

 

$

12,827

 

$

(833,933

)

$

965,950

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2004

 

184,939,094

 

$

1,849

 

$

518,741

 

$

1,385,760

 

$

(1,415

)

$

(946,517

)

$

958,418

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

-

 

-

 

-

 

63,465

 

-

 

-

 

63,465

 

Other comprehensive loss

 

-

 

-

 

-

 

-

 

(13,341

)

-

 

(13,341

)

Comprehensive income (loss)

 

-

 

-

 

-

 

63,465

 

(13,341

)

-

 

50,124

 

Dividends on common stock

 

-

 

-

 

-

 

(29,003

)

-

 

-

 

(29,003

)

Repurchase of 1,800,000 shares

 

-

 

-

 

-

 

-

 

-

 

(50,586

)

(50,586

)

Issuance of 334,700 shares

 

-

 

-

 

3,517

 

-

 

-

 

(3,517

)

-

 

Cancellation of shares

 

(22,900

)

-

 

(532

)

36

 

-

 

307

 

(189

)

Cancellation of shares for tax withholding

 

(438,897

)

(4

)

(13,479

)

- 

 

- 

 

- 

 

(13,483

)

Amortization of stock compensation

 

-

 

-

 

-

 

-

 

-

 

1,359

 

1,359

 

Exercise of stock options, 10,000 shares

 

-

 

-

 

(63

)

-

 

-

 

181

 

118

 

Tax benefits realized on vesting of restricted stock grants and exercise of stock options

 

-

 

- 

 

9,585

 

- 

 

- 

 

- 

 

9,585

 

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

 

-

 

- 

 

(20,033

)

- 

 

- 

 

20,033

 

-

 

Balance, March 31, 2005

 

184,477,297

 

$

1,845

 

$

497,736

 

$

1,420,258

 

$

(14,756

)

$

(978,740

)

$

926,343

 

 

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, 2004 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:

 

 

 

At

 

At

 

(In thousands)

 

March 31,

 

December 31,

 

 

 

2005

 

2004

 

Federal Home Loan Bank (FHLB) stock, at cost:

 

 

 

 

 

Des Moines

 

$

78,268

 

$

76,090

 

Chicago

 

4,600

 

4,600

 

Topeka

 

151

 

151

 

Subtotal

 

83,019

 

80,841

 

Federal Reserve Bank stock, at cost

 

21,866

 

21,865

 

Interest-bearing deposits with banks

 

519

 

520

 

Total investments

 

$

105,404

 

$

103,226

 

 

The investments in FHLB stock are required investments related to TCF’s borrowings from these banks.  All new FHLB borrowing activity is done with the FHLB of Des Moines. FHLBs obtain their funding primarily through issuance of consolidated obligations of the Federal Home Loan Bank System.  The U.S. Government does not guarantee these obligations, and each of the 12 FHLBs are jointly and severally liable for re-payment of each others debt.  Therefore, TCF’s investments in these banks could be adversely impacted by the operations of the other FHLBs.

 

7



 

(3)   Securities Available for Sale

 

Securities available for sale consist of the following:

 

 

 

At March 31, 2005

 

At December 31, 2004

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

(Dollars in thousands)

 

Cost

 

Gains

 

Losses

 

Value

 

Cost

 

Gains

 

Losses

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal agencies

 

$

1,801,228

 

$

510

 

$

(23,416

)

$

1,778,322

 

$

1,614,513

 

$

2,045

 

$

(4,034

)

$

1,612,524

 

Other

 

6,413

 

-

 

(215

)

6,198

 

6,639

 

-

 

(222

)

6,417

 

Other securities

 

1,000

 

-

 

-

 

1,000

 

1,000

 

-

 

-

 

1,000

 

Total

 

$

1,808,641

 

$

510

 

$

(23,631

)

$

1,785,520

 

$

1,622,152

 

$

2,045

 

$

(4,256

)

$

1,619,941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average yield

 

5.15

%

 

 

 

 

 

 

5.13

%

 

 

 

 

 

 

 

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 March 31, 2005.  TCF has reviewed these securities and has concluded that the unrealized losses are temporary and no impairment has occurred at March 31, 2005.

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

 

 

Unrealized

 

 

 

Unrealized

 

 

 

Unrealized

 

(In thousands)

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

Fair Value

 

Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal agencies

 

$

1,588,099

 

$

(21,106

)

$

76,612

 

$

(2,310

)

$

1,664,711

 

$

(23,416

)

Other

 

-

 

-

 

5,171

 

(215

)

5,171

 

(215

)

Total

 

$

1,588,099

 

$

(21,106

)

$

81,783

 

$

(2,525

)

$

1,669,882

 

$

(23,631

)

 

8



 

(4)   Loans and Leases

 

The following table sets forth information about loans and leases held in TCF’s portfolio, excluding loans held for sale:

 

 

 

At

 

At

 

 

 

(Dollars in thousands)

 

March 31,

 

December 31,

 

Percentage

 

 

 

2005

 

2004

 

Change

 

Consumer home equity and other:

 

 

 

 

 

 

 

Home Equity:

 

 

 

 

 

 

 

First mortgage lien

 

$

3,032,829

 

$

2,894,174

 

4.8

%

Junior lien

 

1,531,117

 

1,487,583

 

2.9

 

Total consumer home equity

 

4,563,946

 

4,381,757

 

4.2

 

Other

 

37,472

 

36,831

 

1.7

 

Total consumer home equity and other

 

4,601,418

 

4,418,588

 

4.1

 

Commercial:

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

Permanent

 

1,992,833

 

1,958,377

 

1.8

 

Construction and development

 

200,680

 

196,019

 

2.4

 

Total commercial real estate

 

2,193,513

 

2,154,396

 

1.8

 

Commercial business

 

409,219

 

424,135

 

(3.5

)

Total commercial

 

2,602,732

 

2,578,531

 

0.9

 

Leasing and equipment finance:

 

 

 

 

 

 

 

Equipment finance loans

 

343,521

 

334,352

 

2.7

 

Lease financings:

 

 

 

 

 

 

 

Direct financing leases

 

1,083,555

 

1,067,845

 

1.5

 

Sales-type leases

 

21,575

 

22,742

 

(5.1

)

Lease residuals, excluding leveraged lease

 

34,547

 

35,163

 

(1.8

)

Unearned income and deferred lease costs

 

(104,025

)

(103,516

)

0.5

 

Investment in leveraged lease

 

18,786

 

18,786

 

-

 

Total lease financings

 

1,054,438

 

1,041,020

 

1.3

 

Total leasing and equipment finance

 

1,397,959

 

1,375,372

 

1.6

 

Total consumer, commercial and leasing and equipment finance

 

8,602,109

 

8,372,491

 

2.7

 

Residential real estate

 

950,469

 

1,014,166

 

(6.3

)

Total loans and leases

 

$

9,552,578

 

$

9,386,657

 

1.8

 

 

Included in the direct financing leases are $40.3 million and $38.5 million at March 31, 2005 and December 31, 2004, respectively, of equipment that has been installed under lease contracts that have not yet commenced due to additional equipment pending installation under the lease.  TCF receives pro-rata rent payments for the interim period until the lease contract commences and the fixed, non-cancelable lease term begins.  TCF recognizes these interim payments in the month they are earned and records the income in interest income on direct finance leases.

 

Lease residuals represent the estimated fair value of the leased equipment at the expiration of the initial term of the transaction and are reviewed on an ongoing basis.  Any downward revisions are recorded in the periods in which they become known.  At March 31, 2005, lease residuals, excluding leveraged lease residuals, totaled $34.5 million, and were $35.2 million at December 31, 2004.  The lease residuals on the leveraged lease are included in the investment in leveraged lease and represent a 100% equity interest in a Boeing 767-300 aircraft leased to Delta Airlines, Inc. (“Delta”).  The investment in leveraged lease represents net unpaid rentals and estimated unguaranteed residual values of the leased assets less related unearned income.  TCF has no obligation for principal and interest on the notes representing the third-party participation related to this leveraged lease.  However, these noteholders have a security interest in the aircraft which is superior to TCF’s equity interest.  Such notes, which totaled $15.6 million at March 31, 2005, down from $19.2 million at December 31, 2004, are recorded as an offset against the related rental receivable.  In 2004, TCF downgraded its credit rating on the aircraft leveraged lease, classified its investment as substandard and placed the lease on non-accrual status.  Although Delta is current on its payments related to this transaction, if Delta declares bankruptcy, it would likely result in the charge-off of TCF’s $18.8 million investment in the leveraged lease and the current payment of previously deferred income tax obligations.  TCF has established a reserve for 50% of the investment in the leveraged lease related to Delta.  This lease represents TCF’s only material direct exposure to the commercial

 

9



 

airline industry.  Reduced airline travel, higher fuel costs, changes in airline fare structures, and other factors have adversely impacted the airline industry and could have an adverse impact on Delta’s ability to meet its lease obligations and on the residual value of the aircraft.

 

TCF’s net investment in a leveraged lease is comprised of the following:

 

 

 

At

 

At

 

 

 

March 31,

 

December 31,

 

(In thousands)

 

2005

 

2004

 

 

 

 

 

 

 

Rental receivable (net of principal and interest on non-recourse debt)

 

$

10,064

 

$

10,064

 

Estimated residual value of leased assets

 

13,660

 

13,660

 

Less: Unearned income

 

(4,938

)

(4,938

)

Investment in leveraged lease

 

18,786

 

18,786

 

Less: Deferred income taxes

 

(9,478

)

(9,039

)

Net investment in leveraged lease

 

$

9,308

 

$

9,747

 

 

(5)   Goodwill and Intangible Assets

 

Goodwill and intangible assets as of March 31, 2005 are summarized as follows:

 

 

 

At March 31, 2005

 

At December 31, 2004

 

 

 

Gross

 

Accumulated

 

Net

 

Gross

 

Accumulated

 

Net

 

(In thousands)

 

Amount

 

Amortization

 

Amount

 

Amount

 

Amortization

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

$

82,835

 

$

39,334

 

$

43,501

 

$

83,668

 

$

37,226

 

$

46,442

 

Deposit base intangibles

 

21,180

 

17,350

 

3,830

 

21,180

 

16,935

 

4,245

 

Total

 

$

104,015

 

$

56,684

 

$

47,331

 

$

104,848

 

$

54,161

 

$

50,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill related to the Banking Segment

 

$

141,245

 

 

 

$

141,245

 

$

141,245

 

 

 

$

141,245

 

Goodwill related to the Leasing Segment

 

11,354

 

 

 

11,354

 

11,354

 

 

 

11,354

 

Total

 

$

152,599

 

 

 

$

152,599

 

$

152,599

 

 

 

$

152,599

 

 

10



 

Amortization expense for intangible assets was $­­­3.4 million and $4.1 million for the quarters ended March 31, 2005 and 2004, respectively.  The following table shows the estimated future amortization expense for amortizable intangible assets based on existing asset balances and the interest rate environment as of March 31, 2005.  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.

 

 

 

Mortgage

 

Deposit Base

 

 

 

(In thousands)

 

Servicing Rights

 

Intangibles

 

Total

 

 

 

 

 

 

 

 

 

Estimated Amortization Expense:

 

 

 

 

 

 

 

For the remaining nine months ending

 

 

 

 

 

 

 

December 31, 2005

 

$

7,252

 

$

1,244

 

$

8,496

 

 

 

 

 

 

 

 

 

2006

 

8,052

 

1,630

 

9,682

 

2007

 

6,813

 

956

 

7,769

 

2008

 

5,634

 

-

 

5,634

 

2009

 

4,662

 

-

 

4,662

 

2010

 

3,864

 

-

 

3,864

 

 

(6)   Mortgage Banking

 

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

 

 

 

Three Months

 

 

 

Ended March 31,

 

(In thousands)

 

2005

 

2004

 

 

 

 

 

 

 

Mortgage servicing rights at beginning of period

 

$

49,942

 

$

54,036

 

Amortization

 

(2,941

)

(3,676

)

Impairment write-down

 

(500

)

-

 

Loan originations

 

-

 

2,366

 

Mortgage servicing rights at end of period

 

46,501

 

52,726

 

Valuation allowance at beginning of period

 

(3,500

)

(2,000

)

Impairment write-down

 

500

 

-

 

Valuation allowance at end of period

 

(3,000

)

(2,000

)

Mortgage servicing rights, net

 

$

43,501

 

$

50,726

 

 

The estimated fair value of mortgage servicing rights included at March 31, 2005 was approximately $­­55.8 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.

 

11



 

The following table represents the components of mortgage banking revenue:

 

 

 

Three Months

 

 

 

 

 

 

 

Ended March 31,

 

Change

 

(Dollars in thousands)

 

2005

 

2004

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

Servicing income

 

$

3,894

 

$

4,625

 

$

(731

)

(15.8

)%

Less mortgage servicing:

 

 

 

 

 

 

 

 

 

Amortization

 

2,941

 

3,676

 

(735

)

(20.0

)

Net servicing income

 

953

 

949

 

4

 

0.4

 

Gains on sales of loans (1)

 

-

 

2,136

 

(2,136

)

(100.0

)

Other income

 

189

 

370

 

(181

)

(48.9

)

Total mortgage banking revenue

 

$

1,142

 

$

3,455

 

$

(2,313

)

(66.9

)%


(1)

TCF’s mortgage banking business no longer originates or sells loans.

 

At March 31, 2005 and 2004, TCF was servicing real estate loans for others with aggregate unpaid principal balances of approximately $4.3 billion and $5 billion, respectively. At March 31, 2005 and 2004, TCF had custodial funds of $123.2 million and $173.4 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.

 

(7)   Long-term Borrowings

 

 

 

 

 

At March 31, 2005

 

At December 31, 2004

 

 

 

 

 

 

 

Weighted-

 

 

 

Weighted-

 

 

 

Year of

 

 

 

Average

 

 

 

Average

 

(Dollars in thousands)

 

Maturity

 

Amount

 

Rate

 

Amount

 

Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank advances and securities sold under repurchase agreements

 

2005

 

$

991,971

 

3.23

%

$

1,191,500

 

3.04

%

 

 

2006

 

303,000

 

4.77

 

303,000

 

4.64

 

 

 

2007

 

200,000

 

3.65

 

-

 

-

 

 

 

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

 

 

 

1,917,471

 

3.96

 

1,917,000

 

3.78

 

 

 

 

 

 

 

 

 

 

 

 

 

Discounted lease rentals

 

2005

 

21,490

 

5.85

 

27,871

 

5.63

 

 

 

2006

 

18,049

 

6.00

 

15,080

 

5.75

 

 

 

2007

 

7,903

 

6.30

 

5,183

 

5.91

 

 

 

2008

 

980

 

6.74

 

305

 

6.41

 

 

 

2009

 

570

 

6.78

 

44

 

6.59

 

 

 

2010

 

91

 

6.80

 

-

 

-

 

Total discounted lease rentals

 

 

 

49,083

 

6.01

 

48,483

 

5.70

 

 

 

 

 

 

 

 

 

 

 

 

 

Subordinated bank notes

 

2014

 

74,249

 

5.27

 

74,209

 

5.27

 

 

 

2015

 

49,275

 

5.40

 

-

 

-

 

Total subordinated bank notes

 

 

 

123,524

 

5.32

 

74,209

 

5.27

 

 

 

 

 

 

 

 

 

 

 

 

 

Other borrowings

 

2005

 

2,200

 

4.50

 

2,200

 

4.50

 

 

 

2006

 

2,200

 

4.50

 

2,200

 

4.50

 

 

 

2007

 

2,200

 

4.50

 

2,200

 

4.50

 

 

 

2008

 

2,200

 

4.50

 

2,200

 

4.50

 

Total other borrowings

 

 

 

8,800

 

4.50

 

8,800

 

4.50

 

 

 

 

 

 

 

 

 

 

 

 

 

Total long-term borrowings

 

 

 

$

2,098,878

 

4.09

 

$

2,048,492

 

3.88

 

 

12



 

Included in long-term borrowings at March 31, 2005 were $567.5 million of fixed-rate FHLB advances and $200 million of repurchase agreements with other institutions, which are callable quarterly at par until maturity.  If the FHLB advances are called, replacement funding will be provided by the FHLB at the then-prevailing market rate of interest for the remaining term-to-maturity, subject to standard terms and conditions.  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 March 31, 2005, the contract rate exceeded the market rate on all of the fixed-rate callable advances and repurchase agreements.

 

During the first quarter of 2005, TCF National Bank (“TCF Bank”), a wholly-owned subsidiary of TCF, issued $50 million of subordinated notes due 2015.  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 1.56%. These subordinated notes may be redeemed by TCF Bank at par after five years and qualify as Tier 2 or supplementary 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.

 

TCF Financial Corporation (parent company only) has a $105 million line of credit maturing in April 2005, which is unsecured and contains certain covenants common to such agreements.  TCF is not in default with respect to any of its covenants under the credit agreement.  The interest rate on the line of credit is based on either the prime rate or LIBOR.  TCF has the option to select the interest rate index and term for advances on the line of credit.  The line of credit may be used for appropriate corporate purposes.  At March 31, 2005, TCF had $26.5 million outstanding on this bank line of credit.  This line of credit was renewed with the existing terms for a period of 364 days on April 19, 2005.

 

(8)   Stockholders’ Equity

 

Treasury stock and other consists of the following:

 

 

 

At

 

At

 

 

 

March 31,

 

December 31,

 

(In thousands)

 

2005

 

2004

 

 

 

 

 

 

 

Treasury stock, at cost

 

$

(906,857

)

$

(862,543

)

Shares held in trust for deferred compensation plans, at cost

 

(50,742

)

(70,775

)

Unamortized stock compensation

 

(21,141

)

(13,199

)

Total

 

$

(978,740

)

$

(946,517

)

 

TCF purchased 1.8 million shares of its common stock during the first quarter of 2005, compared with 26,890 shares for the same 2004 period.  At March 31, 2005, TCF had 1.7 million shares remaining in its stock repurchase program authorized by the Board of Directors.  The decrease in shares held in trust for deferred compensation plans from December 31, 2004 to March 31, 2005 was due to elections by certain executives and senior management to un-defer previously deferred compensation, as allowed under the new Section 409A of the Internal Revenue Code.  The increase in unamortized stock compensation is primarily due to a one-time performance-based restricted stock award of 300,000 shares of TCF common stock to TCF’s Chairman.

 

13



 

(9)   Regulatory Capital Requirements

 

The following table sets forth TCF’s and TCF 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:

 

 

 

 

 

 

 

Minimum Capital

 

 

 

 

 

(Dollars in thousands)

 

Actual

 

Requirement

 

Excess

 

 

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

As of March 31, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

$

785,420

 

6.30

%

$

373,798

 

3.00

%

$

411,622

 

3.30

%

TCF National Bank

 

777,788

 

6.25

 

373,536

 

3.00

 

404,252

 

3.25

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

785,420

 

8.67

 

362,308

 

4.00

 

423,112

 

4.67

 

TCF National Bank

 

777,788

 

8.60

 

361,556

 

4.00

 

416,232

 

4.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

987,455

 

10.90

 

724,617

 

8.00

 

262,838

 

2.90

 

TCF National Bank

 

979,823

 

10.84

 

723,112

 

8.00

 

256,711

 

2.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

$

803,870

 

6.63

%

$

363,940

 

3.00

%

$

439,930

 

3.63

%

TCF National Bank

 

775,100

 

6.41

 

362,911

 

3.00

 

412,189

 

3.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

803,870

 

9.12

 

352,592

 

4.00

 

451,278

 

5.12

 

TCF National Bank

 

775,100

 

8.81

 

351,865

 

4.00

 

423,235

 

4.81

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

958,900

 

10.88

 

705,185

 

8.00

 

253,715

 

2.88

 

TCF National Bank

 

930,130

 

10.57

 

703,730

 

8.00

 

226,400

 

2.57

 

 

At March 31, 2005, TCF and 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.

 

(10) 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 months ended March 31, 2005 and 2004:

 

 

 

Pension Plan

 

Postretirement Plan

 

(In thousands)

 

Three Months Ended March 31,

 

Three Months Ended March 31,

 

 

 

2005

 

2004

 

2005

 

2004

 

Service cost

 

$

1,326

 

$

1,158

 

$

8

 

$

14

 

Interest cost

 

857

 

791

 

138

 

179

 

Expected return on plan assets

 

(1,432

)

(1,489

)

-

 

-

 

Amortization of transition obligation

 

-

 

-

 

33

 

52

 

Amortization of prior service cost

 

(62

)

(58

)