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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

June 30, 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
July 15, 2005

Common Stock, $.01 par value

 

134,157,994 shares

 

 



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

 

INDEX

 

 

 

 

 

 

 

Pages

Part I. Financial Information

 

 

 

 

 

 

 

 

 

Item 1.    Financial Statements

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition

 

 

 

 

 

at June 30, 2005 and December 31, 2004

 

 

3

 

 

 

 

 

 

 

 

Consolidated Statements of Income for the Three and

 

 

 

 

 

Six Months ended June 30, 2005 and 2004

 

 

4

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the

 

 

 

 

 

Six Months Ended June 30, 2005 and 2004

 

 

5

 

 

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the

 

 

 

 

 

Six Months Ended June 30, 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 and Six

 

 

 

 

 

Months Ended June 30, 2005 and 2004

 

 

19

 

 

 

 

 

 

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

41

 

 

 

 

 

 

 

Item 4.    Controls and Procedures

 

 

44

 

 

 

 

 

 

 

Supplementary Information

 

 

45

 

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

 

 

 

 

Items 1-6

 

 

47

 

 

 

 

 

 

Signatures

 

 

49

 

 

 

 

 

 

Index to Exhibits

 

 

50

 

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2005

 

2004

 

ASSETS

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

361,158

 

$

359,798

 

Investments

 

104,127

 

103,226

 

Securities available for sale

 

1,406,575

 

1,619,941

 

Loans held for sale

 

213,227

 

154,279

 

Loans and leases:

 

 

 

 

 

Consumer home equity and other

 

4,808,003

 

4,418,588

 

Commercial real estate

 

2,202,752

 

2,154,396

 

Commercial business

 

447,958

 

424,135

 

Leasing and equipment finance

 

1,419,868

 

1,375,372

 

Subtotal

 

8,878,581

 

8,372,491

 

Residential real estate

 

884,141

 

1,014,166

 

Total loans and leases

 

9,762,722

 

9,386,657

 

Allowance for loan and lease losses

 

(76,406

)

(79,878

)

Net loans and leases

 

9,686,316

 

9,306,779

 

Premises and equipment

 

339,619

 

326,667

 

Goodwill

 

152,599

 

152,599

 

Mortgage servicing rights

 

39,936

 

46,442

 

Other assets

 

303,659

 

270,836

 

 

 

$

12,607,216

 

$

12,340,567

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

Checking

 

$

4,019,685

 

$

3,905,987

 

Savings

 

2,046,068

 

1,927,872

 

Money market

 

629,731

 

659,686

 

Subtotal

 

6,695,484

 

6,493,545

 

Certificates of deposit

 

1,728,842

 

1,468,650

 

Total deposits

 

8,424,326

 

7,962,195

 

Short-term borrowings

 

1,045,582

 

1,056,111

 

Long-term borrowings

 

1,899,047

 

2,048,492

 

Total borrowings

 

2,944,629

 

3,104,603

 

Accrued expenses and other liabilities

 

283,704

 

315,351

 

Total liabilities

 

11,652,659

 

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; 184,425,478 and 184,939,094 shares issued

 

1,844

 

1,849

 

Additional paid-in capital

 

496,910

 

518,741

 

Retained earnings, subject to certain restrictions

 

1,462,393

 

1,385,760

 

Accumulated other comprehensive income (loss)

 

1,601

 

(1,415

)

Treasury stock at cost, 50,301,984 and 47,752,934 shares, and other

 

(1,008,191

)

(946,517

)

Total stockholders' equity

 

954,557

 

958,418

 

 

 

$

12,607,216

 

$

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

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

155,014

 

$

128,141

 

$

301,558

 

$

253,414

 

Securities available for sale

 

21,325

 

20,413

 

42,820

 

40,745

 

Loans held for sale

 

2,566

 

3,340

 

4,820

 

6,181

 

Investments

 

1,094

 

895

 

2,146

 

1,668

 

Total interest income

 

179,999

 

152,789

 

351,344

 

302,008

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

20,646

 

9,474

 

36,584

 

20,013

 

Borrowings

 

28,068

 

20,896

 

54,422

 

41,083

 

Total interest expense

 

48,714

 

30,370

 

91,006

 

61,096

 

Net interest income

 

131,285

 

122,419

 

260,338

 

240,912

 

Provision for credit losses

 

1,427

 

3,070

 

(2,009

)

4,230

 

Net interest income after provision for credit losses

 

129,858

 

119,349

 

262,347

 

236,682

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Fees and service charges

 

65,824

 

73,116

 

122,855

 

132,775

 

Card revenue

 

19,717

 

16,024

 

37,359

 

29,515

 

ATM revenue

 

10,795

 

11,138

 

20,527

 

21,135

 

Investments and insurance revenue

 

2,791

 

3,430

 

5,644

 

6,892

 

Subtotal

 

99,127

 

103,708

 

186,385

 

190,317

 

Leasing and equipment finance

 

11,092

 

12,245

 

21,785

 

22,412

 

Mortgage banking

 

216

 

5,495

 

1,358

 

8,950

 

Other

 

2,833

 

1,845

 

10,649

 

4,073

 

Fees and other revenue

 

113,268

 

123,293

 

220,177

 

225,752

 

Gains on sales of securities available for sale

 

4,437

 

-

 

9,676

 

12,717

 

Total non-interest income

 

117,705

 

123,293

 

229,853

 

238,469

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

81,973

 

79,597

 

163,424

 

158,476

 

Occupancy and equipment

 

24,771

 

23,397

 

50,150

 

46,887

 

Advertising and promotions

 

6,778

 

6,498

 

13,025

 

12,408

 

Deposit account losses

 

3,775

 

5,350

 

7,436

 

9,528

 

Other

 

32,950

 

29,064

 

64,323

 

57,313

 

Total non-interest expense

 

150,247

 

143,906

 

298,358

 

284,612

 

Income before income tax expense

 

97,316

 

98,736

 

193,842

 

190,539

 

Income tax expense

 

26,675

 

33,518

 

59,736

 

64,660

 

Net income

 

$

70,641

 

$

65,218

 

$

134,106

 

$

125,879

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

.53

 

$

.47

 

$

1.01

 

$

.91

 

Diluted

 

$

.53

 

$

.47

 

$

1.00

 

$

.91

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

.2125

 

$

.1875

 

$

.425

 

$

.375

 

 

See accompanying notes to consolidated financial statements.

 

 

 

4



 

 

 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2005

 

2004

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

134,106

 

$

125,879

 

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

 

 

 

 

 

Depreciation and amortization

 

22,488

 

20,326

 

Mortgage servicing rights amortization and impairment

 

6,506

 

6,918

 

Provision for credit losses

 

(2,009

)

4,230

 

Proceeds from sales of loans held for sale

 

34,645

 

563,229

 

Principal collected on loans held for sale

 

3,099

 

3,578

 

Originations and purchases of loans held for sale

 

(96,515

)

(591,880

)

Net increase in other assets and accrued expenses and other liabilities

 

(63,384

)

(8,793

)

Gains on sales of assets

 

(15,793

)

(13,252

)

Other, net

 

888

 

(3,016

)

 

 

 

 

 

 

Total adjustments

 

(110,075

)

(18,660

)

 

 

 

 

 

 

Net cash provided by operating activities

 

24,031

 

107,219

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Principal collected on loans and leases

 

2,068,488

 

1,878,228

 

Originations and purchases of loans

 

(2,133,869

)

(2,040,610

)

Purchases of equipment for lease financing

 

(368,254

)

(332,837

)

Proceeds from sales of securities available for sale

 

917,209

 

866,692

 

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

 

117,401

 

221,334

 

Purchases of securities available for sale

 

(807,328

)

(1,213,660

)

Net increase in Federal Home Loan Bank stock

 

(2,122

)

(19,465

)

Proceeds from sales of real estate owned

 

12,351

 

24,690

 

Acquisitions, net of cash acquired

 

-

 

(4,326

)

Purchases of premises and equipment

 

(37,431

)

(38,212

)

Proceeds from sale of building

 

17,000

 

-

 

Other, net

 

2,458

 

(1,551

)

 

 

 

 

 

 

Net cash used by investing activities

 

(214,097

)

(659,717

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

462,131

 

149,908

 

Net decrease in short-term borrowings

 

(10,529

)

(19,689

)

Proceeds from long-term borrowings

 

269,422

 

537,020

 

Payments on long-term borrowings

 

(394,997

)

(40,621

)

Purchases of common stock

 

(82,382

)

(40,897

)

Dividends on common stock

 

(57,606

)

(52,418

)

Other, net

 

5,387

 

6,368

 

 

 

 

 

 

 

Net cash provided by financing activities

 

191,426

 

539,671

 

 

 

 

 

 

 

Net increase (decrease) in cash and due from banks

 

1,360

 

(12,827

)

Cash and due from banks at beginning of period

 

359,798

 

370,054

 

Cash and due from banks at end of period

 

$

361,158

 

$

357,227

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest on deposits and borrowings

 

$

 89,066

 

$

55,805

 

Income taxes

 

$

 74,003

 

$

69,916

 

Transfer of loans and leases to other assets

 

$

16,924

 

$

10,746

 

 

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 (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

-

 

-

 

-

 

125,879

 

-

 

-

 

125,879

 

Other comprehensive loss

 

-

 

-

 

-

 

-

 

(20,315

)

-

 

(20,315

)

Comprehensive income (loss)

 

-

 

-

 

-

 

125,879

 

(20,315

)

-

 

105,564

 

Dividends on common stock

 

-

 

-

 

-

 

(52,418

)

-

 

-

 

(52,418

)

Repurchase of 1,506,890 shares

 

-

 

-

 

-

 

-

 

-

 

(40,897

)

(40,897

)

Issuance of 65,600 shares

 

-

 

-

 

552

 

-

 

-

 

(552

)

-

 

Cancellation of shares

 

(34,762

)

-

 

(781

)

-

 

-

 

381

 

(400

)

Amortization of stock compensation

 

-

 

-

 

-

 

-

 

-

 

3,458

 

3,458

 

Exercise of stock options,
98,700 shares

 

-

 

-

 

(247

)

-

 

-

 

1,684

 

1,437

 

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

 

-

 

-

 

1,550

 

-

 

-

 

-

 

1,550

 

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

 

-

 

-

 

(2,414

)

-

 

-

 

2,414

 

-

 

Balance, June 30, 2004

 

184,991,948

 

$

925

 

$

517,538

 

$

1,308,265

 

$

(14,663

)

$

(872,913

)

$

939,152

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2004

 

184,939,094

 

$

1,849

 

$

518,741

 

$

1,385,760

 

$

(1,415

)

$

(946,517

)

$

958,418

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

-

 

-

 

-

 

134,106

 

-

 

-

 

134,106

 

Other comprehensive income

 

-

 

-

 

-

 

-

 

3,016

 

-

 

3,016

 

Comprehensive income

 

-

 

-

 

-

 

134,106

 

3,016

 

-

 

137,122

 

Dividends on common stock

 

-

 

-

 

-

 

(57,606

)

-

 

-

 

(57,606

)

Repurchase of 3,050,000 shares

 

-

 

-

 

-

 

-

 

-

 

(82,382

)

(82,382

)

Issuance of 482,950 shares

 

-

 

-

 

4,632

 

-

 

-

 

(4,632

)

-

 

Cancellation of shares

 

(74,719

)

(1

)

(1,779

)

133

 

-

 

1,174

 

(473

)

Cancellation of shares for tax withholding

 

(438,897

)

(4

)

(13,479

)

-

 

-

 

-

 

(13,483

)

Amortization of stock compensation

 

-

 

-

 

-

 

-

 

-

 

2,857

 

2,857

 

Exercise of stock options,
18,000 shares

 

-

 

-

 

(164

)

-

 

-

 

329

 

165

 

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

 

-

 

-

 

9,939

 

-

 

-

 

-

 

9,939

 

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

 

-

 

-

 

(20,980

)

-

 

-

 

20,980

 

-

 

Balance, June 30, 2005

 

184,425,478

 

$

1,844

 

$

496,910

 

$

1,462,393

 

$

1,601

 

$

(1,008,191

)

$

954,557

 

 

 

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, 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)

 

June 30,

 

December 31,

 

 

 

2005

 

2004

 

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

 

 

 

 

 

Des Moines

 

$

78,212

 

$

76,090

 

Chicago

 

4,600

 

4,600

 

Topeka

 

151

 

151

 

Subtotal

 

82,963

 

80,841

 

Federal Reserve Bank stock, at cost

 

20,635

 

21,865

 

Interest-bearing deposits with banks

 

529

 

520

 

Total investments

 

$

104,127

 

$

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 June 30, 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

 

$

1,396,918

 

$

5,404

 

$

(2,686

)

$

1,399,636

 

$

1,614,513

 

$

2,045

 

$

(4,034

)

$

1,612,524

 

Other

 

6,148

 

-

 

(209

)

5,939

 

6,639

 

-

 

(222

)

6,417

 

Other securities

 

1,000

 

-

 

-

 

1,000

 

1,000

 

-

 

-

 

1,000

 

Total

 

$

1,404,066

 

$

5,404

 

$

(2,895

)

$

1,406,575

 

$

1,622,152

 

$

2,045

 

$

(4,256

)

$

1,619,941

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average yield

 

5.12

%

 

 

 

 

 

 

5.13

%

 

 

 

 

 

 

 

 

The following table shows the gross unrealized losses and fair value in the securities available for sale portfolio, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2005. TCF has reviewed these securities and has concluded that the unrealized losses are temporary and no impairment has occurred at June 30, 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

 

$

402,956

 

$

(2,066

)

$

68,116

 

$

(620

)

$

471,072

 

$

(2,686

)

Other

 

-

 

-

 

5,018

 

(209

)

5,018

 

(209

)

Total

 

$

402,956

 

$

(2,066

)

$

73,134

 

$

(829

)

$

476,090

 

$

(2,895

)

 

 

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 and operating leases:

 

 

 

At

 

At

 

 

 

(Dollars in thousands)

 

June 30,

 

December 31,

 

Percentage

 

 

 

2005

 

2004

 

Change

 

Consumer home equity and other:

 

 

 

 

 

 

 

Home Equity:

 

 

 

 

 

 

 

First mortgage lien

 

$

3,155,799

 

$

2,894,174

 

9.0

%

Junior lien

 

1,613,893

 

1,487,583

 

8.5

 

Total consumer home equity

 

4,769,692

 

4,381,757

 

8.9

 

Other

 

38,311

 

36,831

 

4.0

 

Total consumer home equity and other

 

4,808,003

 

4,418,588

 

8.8

 

Commercial:

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

Permanent

 

1,994,478

 

1,958,377

 

1.8

 

Construction and development

 

208,274

 

196,019

 

6.3

 

Total commercial real estate

 

2,202,752

 

2,154,396

 

2.2

 

Commercial business

 

447,958

 

424,135

 

5.6

 

Total commercial

 

2,650,710

 

2,578,531

 

2.8

 

Leasing and equipment finance:

 

 

 

 

 

 

 

Equipment finance loans

 

352,573

 

334,352

 

5.4

 

Lease financings:

 

 

 

 

 

 

 

Direct financing leases

 

1,101,901

 

1,067,845

 

3.2

 

Sales-type leases

 

18,127

 

22,742

 

(20.3

)

Lease residuals, excluding leveraged lease

 

33,743

 

35,163

 

(4.0

)

Unearned income and deferred lease costs

 

(105,262

)

(103,516

)

1.7

 

Investment in leveraged lease

 

18,786

 

18,786

 

-

 

Total lease financings

 

1,067,295

 

1,041,020

 

2.5

 

Total leasing and equipment finance

 

1,419,868

 

1,375,372

 

3.2

 

Total consumer, commercial and leasing and equipment finance

 

8,878,581

 

8,372,491

 

6.0

 

Residential real estate

 

884,141

 

1,014,166

 

(12.8

)

Total loans and leases

 

$

9,762,722

 

$

9,386,657

 

4.0

 

 

 

Included in the direct financing leases are $­­38.0 million and $38.5 million at June 30, 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 June 30, 2005, lease residuals, excluding the leveraged lease residual, totaled $33.7 million, and were $35.2 million at December 31, 2004. The lease residual on the leveraged lease is included in the investment in leveraged lease and represents 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 asset 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 June 30, 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 Delta 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 could result in the charge-off of all or part 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 74% of the investment in the Delta leveraged lease. This reserve was increased from 50% at March 31, 2005 through an allocation of the previously unallocated allowance for loan and lease losses. The Delta lease represents TCF’s only material direct exposure to the commercial airline industry. Reduced airline travel, higher fuel costs, changes in

 

 

9



 

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 the leveraged lease is comprised of the following:

 

 

 

At

 

At

 

 

 

June 30,

 

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 asset

 

13,660

 

13,660

 

Less: Unearned income

 

(4,938

)

(4,938

)

Investment in leveraged lease

 

18,786

 

18,786

 

Less: Deferred income taxes

 

(9,924

)

(9,039

)

Net investment in leveraged lease

 

$

8,862

 

$

9,747

 

 

(5)          Goodwill and Intangible Assets

 

Goodwill and intangible assets as of June 30, 2005 are summarized as follows:

 

 

 

At June 30, 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

 

$

81,062

 

$

41,126

 

$

39,936

 

$

83,668

 

$

37,226

 

$

46,442

 

Deposit base intangibles

 

21,180

 

17,764

 

3,416

 

21,180

 

16,935

 

4,245

 

Total

 

$

102,242

 

$

58,890

 

$

43,352

 

$

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

 

 

Amortization expense for intangible assets was $3.0 million for the second quarter of 2005, compared with $3.7 million for the same 2004 period. Amortization expense for intangible assets was $6.3 million and $7.7 million for the six months ended June 30, 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 June 30, 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 six months ending
December 31, 2005

 

$

5,484

 

$

828

 

$

6,312

 

 

 

 

 

 

 

 

 

2006

 

8,741

 

1,630

 

10,371

 

2007

 

7,091

 

958

 

8,049

 

2008

 

5,593

 

-

 

5,593

 

2009

 

4,418

 

-

 

4,418

 

2010

 

3,497

 

-

 

3,497

 

 

 

10



 

(6)          Mortgage Banking

 

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

 

 

 

Three Months

 

Six Months

 

 

 

Ended June 30,

 

Ended June 30,

 

(In thousands)

 

2005

 

2004

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights at beginning of period

 

$

46,501

 

$

52,726

 

$

49,942

 

$

54,036

 

Amortization

 

(2,565

)

(3,242

)

(5,506

)

(6,918

)

Impairment write-down

 

(500

)

-

 

(1,000

)

-

 

Loan originations

 

-

 

3,806

 

-

 

6,172

 

Mortgage servicing rights at end of period

 

43,436

 

53,290

 

43,436

 

53,290

 

Valuation allowance at beginning of period

 

(3,000

)

(2,000

)

(3,500

)

(2,000

)

Provision for impairment

 

(1,000

)

-

 

(1,000

)

-

 

Impairment write-down

 

500

 

-

 

1,000

 

-

 

Valuation allowance at end of period

 

(3,500

)

(2,000

)

(3,500

)

(2,000

)

Mortgage servicing rights, net

 

$

39,936

 

$

51,290

 

$

39,936

 

$

51,290

 

 

The estimated fair value of mortgage servicing rights at June 30, 2005 was approximately $45 million. The estimated fair value of 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

 

 

 

 

 

Six Months

 

 

 

 

 

 

 

Ended June 30,

 

Change

 

Ended June 30,

 

Change

 

(Dollars in thousands)

 

2005

 

2004

 

$

 

%

 

2005

 

2004

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing income

 

$

3,604

 

$

4,339

 

$

(735

)

(16.9

)%

$

7,498

 

$

8,964

 

$

(1,466

)

(16.4

)%

Less mortgage servicing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization

 

2,565

 

3,242

 

(677

)

(20.9

)

5,506

 

6,918

 

(1,412

)

(20.4

)

Provision for impairment

 

1,000

 

-

 

1,000

 

100.0

 

1,000

 

-

 

1,000

 

100.0

 

Net servicing income

 

39

 

1,097

 

(1,058

)

(96.4

)

992

 

2,046

 

(1,054

)

(51.5

)

Gains on sales of loans (1)

 

-

 

3,168

 

(3,168

)

(100.0

)

-

 

5,304

 

(5,304

)

(100.0

)

Other income

 

177

 

1,230

 

(1,053

)

(85.6

)

366

 

1,600

 

(1,234

)

(77.1

)

Total mortgage banking revenue

 

$

216

 

$

5,495

 

$

(5,279

)

(96.1

)

$

1,358

 

$

8,950

 

$

(7,592

)

(84.8

)

 

(1) Beginning in 2005, TCF’s mortgage banking business no longer originates or sells loans.

 

At June 30, 2005 and 2004, TCF was servicing real estate loans for others with aggregate unpaid principal balances of approximately $3.8 billion and $4.8 billion, respectively. During the second quarter of 2005, TCF transferred $212.8 million of loans to another third-party servicer. No gain or loss was recorded related to this transaction. At June 30, 2005 and 2004, TCF had custodial funds of $111.2 million and $116.4 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.

 

 

11



 

(7)          Long-term Borrowings

 

 

 

 

 

At June 30, 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

 

$

792,000

 

3.66

%

$

1,191,500

 

3.04

%

 

 

2006

 

303,000

 

4.93

 

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

 

 

 

1,717,500

 

4.27

 

1,917,000

 

3.78

 

 

 

 

 

 

 

 

 

 

 

 

 

Subordinated bank notes

 

2014

 

74,290

 

5.27

 

74,209

 

5.27

 

 

 

2015

 

49,232

 

5.37

 

-

 

-

 

Total subordinated bank notes

 

 

 

123,522

 

5.31

 

74,209

 

5.27

 

 

 

 

 

 

 

 

 

 

 

 

 

Discounted lease rentals

 

2005

 

15,122

 

6.02

 

27,871

 

5.63

 

 

 

2006

 

21,979

 

6.17

 

15,080

 

5.75

 

 

 

2007

 

11,480

 

6.43

 

5,183

 

5.91

 

 

 

2008

 

2,172

 

6.72

 

305

 

6.41

 

 

 

2009

 

581

 

6.78

 

44

 

6.59

 

 

 

2010

 

91

 

6.80

 

-

 

-

 

Total discounted lease rentals

 

 

 

51,425

 

6.22

 

48,483

 

5.70

 

 

 

 

 

 

 

 

 

 

 

 

 

Other borrowings

 

2005

 

-

 

-

 

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

 

 

 

6,600

 

4.50

 

8,800

 

4.50

 

 

 

 

 

 

 

 

 

 

 

 

 

Total long-term borrowings

 

 

 

$

1,899,047

 

4.39

 

$

2,048,492

 

3.88

 

 

Included in long-term borrowings at June 30, 2005 were $­­­567.5 million of fixed-rate Federal Home Loan Bank (“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 June 30, 2005, the contract rate exceeded the market rate on all of the fixed-rate callable advances and repurchase agreements.

 

TCF National Bank (“TCF Bank”), a wholly-owned subsidiary of TCF, has $50 million of subordinated notes due 2015 and $75 million of subordinated notes due 2014. The $50 million notes bear interest at a fixed rate of 5.00% through March 14, 2010, and will reprice quarterly thereafter at the three-month LIBOR rate plus 1.56%. The $75 million notes bear interest at a fixed rate of 5.00% through June 14, 2009, and will reprice quarterly thereafter at the three-month LIBOR rate plus 1.63%. These subordinated notes may be redeemed by TCF Bank at par after March 14, 2010 and June 14, 2009, respectively, and qualify as Tier 2 or supplementary capital for regulatory purposes, subject to certain limitations. TCF Bank paid the proceeds from these offerings to TCF.

 

 

12



 

(8)   Stockholders’ Equity

 

Treasury stock and other consists of the following:

 

 

 

At

 

At

 

 

 

June 30,

 

December 31,

 

(In thousands)

 

2005

 

2004

 

 

 

 

 

 

 

Treasury stock, at cost

 

$

(935,758

)

$

(862,543

)

Shares held in trust for deferred compensation plans, at cost

 

(49,795

)

(70,775

)

Unamortized stock compensation

 

(22,638

)

(13,199

)

 

 

$

(1,008,191

)

$

(946,517

)

 

During the second quarter of 2005, TCF’s Board of Directors authorized another program for the repurchase of up to five percent of the Company’s outstanding common stock, or 6.7 million shares. This program is in addition to the existing program for repurchasing shares announced in July 2003. TCF purchased 3,050,000 shares of its common stock during the first six months of 2005, compared with 1,506,890 shares for the same 2004 period. At June 30, 2005, TCF had 7.1 million shares remaining in its stock repurchase programs authorized by the Board of Directors. The decrease in shares held in trust for deferred compensation plans from December 31, 2004 to June 30, 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.

 

(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 June 30, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

$

796,712

 

6.29

%

$

380,285

 

3.00

%

$

416,427

 

3.29

%

TCF National Bank

 

786,157

 

6.21

 

379,992

 

3.00

 

406,165

 

3.21