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Section 1: 10-Q (QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D))

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

x Quarterly Report Pursuant to Section 13 or 15 (d)

of the Securities Exchange Act of 1934

 

For the quarterly period ended

September 30, 2006

 

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 x

 

No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of  “accelerated filer and large accelerated filer “ in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

Yes o

 

No x

 

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

 

 

 

Outstanding at

Class

 

October 20, 2006

Common Stock, $.01 par value

 

130,932,493 shares

 

 


 


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

 

INDEX

 

Part I.  Financial Information

 

Pages

 

 

 

 

 

Item 1.  Financial Statements

 

 

 

 

 

 

 

Consolidated Statements of Financial Condition

 

 

 

at September 30, 2006 and December 31, 2005

 

3

 

 

 

 

 

Consolidated Statements of Income for the Three

 

 

 

and Nine Months Ended September 30, 2006 and 2005

 

4

 

 

 

 

 

Consolidated Statements of Cash Flows for the

 

 

 

Nine Months Ended September 30, 2006 and 2005

 

5

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the

 

 

 

Nine Months Ended September 30, 2006 and 2005

 

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, 2006 and 2005

 

19

 

 

 

 

 

 

 

 

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

 

 

Item 4.  Controls and Procedures

 

38

 

 

 

 

 

Supplementary Information

 

39

 

 

 

 

 

Part II. Other Information

 

 

 

 

 

 

 

Items 1- 6

 

40

 

 

 

 

 

Signatures

 

41

 

 

 

 

 

Index to Exhibits

 

42

 

 

 

2


 


 

 

PART 1 - FINANCIAL INFORMATION

Item 1.  Financial Statements

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition

 

 

 

 

At

 

At

 

 

 

September 30,

 

December 31,

 

(Dollars in thousands, except per-share data)

 

2006

 

2005

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

323,505

 

$

374,701

 

Investments

 

82,801

 

79,943

 

Securities available for sale

 

1,770,427

 

1,648,615

 

Education loans held for sale

 

140,240

 

229,820

 

Loans and leases:

 

 

 

 

 

Consumer home equity and other

 

5,780,953

 

5,187,584

 

Commercial real estate

 

2,414,058

 

2,297,500

 

Commercial business

 

546,517

 

435,233

 

Leasing and equipment finance

 

1,736,801

 

1,503,794

 

Subtotal

 

10,478,329

 

9,424,111

 

Residential real estate

 

659,476

 

770,441

 

Total loans and leases

 

11,137,805

 

10,194,552

 

Allowance for loan and lease losses

 

(59,671

)

(60,396

)

Net loans and leases

 

11,078,134

 

10,134,156

 

Premises and equipment

 

393,283

 

365,146

 

Goodwill

 

152,599

 

152,599

 

Other assets

 

356,122

 

380,380

 

Total assets

 

$

14,297,111

 

$

13,365,360

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

Checking

 

$

4,299,646

 

$

4,279,853

 

Savings

 

2,314,740

 

2,238,204

 

Money market

 

592,134

 

677,017

 

Certificates of deposit

 

2,454,469

 

1,915,620

 

Total deposits

 

9,660,989

 

9,110,694

 

Short-term borrowings

 

376,397

 

472,126

 

Long-term borrowings

 

2,976,133

 

2,511,010

 

Total borrowings

 

3,352,530

 

2,983,136

 

Accrued expenses and other liabilities

 

252,403

 

273,058

 

Total liabilities

 

13,265,922

 

12,366,888

 

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; 184,180,118 and 184,386,193 shares issued

 

1,842

 

1,844

 

Additional paid-in capital

 

469,642

 

476,884

 

Retained earnings, subject to certain restrictions

 

1,636,805

 

1,536,611

 

Accumulated other comprehensive loss

 

(25,857

)

(21,215

)

Treasury stock at cost, 53,269,813 and 50,609,970 shares, and other

 

(1,051,243

)

(995,652

)

Total stockholders’ equity

 

1,031,189

 

998,472

 

Total liabilities and stockholders’ equity

 

$

14,297,111

 

$

13,365,360

 

See accompanying notes to consolidated financial statements.

 

3



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(In thousands, except per-share data)

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans and leases

 

$

199,469

 

$

163,178

 

$

565,440

 

$

464,736

 

Securities available for sale

 

24,481

 

17,893

 

73,336

 

60,713

 

Education loans held for sale

 

3,438

 

2,759

 

11,990

 

7,579

 

Investments

 

862

 

463

 

2,331

 

2,609

 

Total interest income

 

228,250

 

184,293

 

653,097

 

535,637

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

53,234

 

26,539

 

139,328

 

63,123

 

Borrowings

 

39,983

 

29,684

 

112,126

 

84,106

 

Total interest expense

 

93,217

 

56,223

 

251,454

 

147,229

 

Net interest income

 

135,033

 

128,070

 

401,643

 

388,408

 

Provision for credit losses

 

2,917

 

3,394

 

7,521

 

1,385

 

Net interest income after provision for credit losses

 

132,116

 

124,676

 

394,122

 

387,023

 

Non-interest income:

 

 

 

 

 

 

 

 

 

Fees and service charges

 

70,777

 

70,315

 

203,431

 

195,008

 

Card revenue

 

24,353

 

21,025

 

68,599

 

58,384

 

ATM revenue

 

9,880

 

10,646

 

28,741

 

31,173

 

Investments and insurance revenue

 

3,226

 

2,682

 

8,608

 

8,326

 

Subtotal

 

108,236

 

104,668

 

309,379

 

292,891

 

Leasing and equipment finance

 

13,372

 

10,197

 

37,839

 

31,982

 

Other

 

7,904

 

7,752

 

23,415

 

17,760

 

Fees and other revenue

 

129,512

 

122,617

 

370,633

 

342,633

 

Gains on sales of securities available for sale

 

 

995

 

 

10,671

 

Total non-interest income

 

129,512

 

123,612

 

370,633

 

353,304

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

Compensation and employee benefits

 

84,795

 

80,402

 

256,046

 

243,826

 

Occupancy and equipment

 

28,664

 

25,931

 

84,713

 

76,081

 

Advertising and promotions

 

8,220

 

6,578

 

20,691

 

19,603

 

Deposit account losses

 

6,633

 

6,591

 

16,319

 

13,866

 

Operating lease depreciation

 

3,779

 

2,008

 

10,347

 

5,171

 

Other

 

32,669

 

32,403

 

98,614

 

93,563

 

Total non-interest expense

 

164,760

 

153,913

 

486,730

 

452,110

 

Income before income tax expense

 

96,868

 

94,375

 

278,025

 

288,217

 

Income tax expense

 

30,941

 

28,889

 

86,815

 

88,625

 

Net income

 

$

65,927

 

$

65,486

 

$

191,210

 

$

199,592

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

.51

 

$

.50

 

$

1.48

 

$

1.50

 

Diluted

 

$

.51

 

$

.50

 

$

1.48

 

$

1.50

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

.23

 

$

.2125

 

$

.69

 

$

.6375

 

See accompanying notes to consolidated financial statements.

 

4



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

(In thousands)

 

2006

 

2005

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

191,210

 

$

199,592

 

Adjustments to reconcile net income to net cash provided (used) by operating activities:

 

 

 

 

 

Depreciation and amortization

 

43,913

 

34,351

 

Provision for credit losses

 

7,521

 

1,385

 

Proceeds from sales of education loans held for sale

 

266,388

 

75,380

 

Principal collected on education loans held for sale

 

16,170

 

10,748

 

Originations and purchases of education loans held for sale

 

(192,822

)

(162,289

)

Net increase in other assets and accrued expenses and other liabilities

 

(28,580

)

(72,727

)

Gains on sales of assets, net

 

(7,086

)

(20,605

)

Other, net

 

(402

)

10,300

 

Total adjustments

 

105,102

 

(123,457

)

Net cash provided by operating activities

 

296,312

 

76,135

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Principal collected on loans and leases

 

2,879,457

 

3,293,322

 

Originations and purchases of loans

 

(3,121,499

)

(3,379,197

)

Purchases of equipment for lease financing

 

(765,490

)

(563,352

)

Proceeds from sales of securities available for sale

 

 

1,017,711

 

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

 

168,393

 

188,621

 

Purchases of securities available for sale

 

(297,550

)

(914,277

)

Purchases of Federal Home Loan Bank stock

 

(46,698

)

(44,574

)

Proceeds from redemptions of Federal Home Loan Bank stock

 

44,981

 

66,994

 

Proceeds from sales of real estate owned

 

19,596

 

17,518

 

Purchases of premises and equipment

 

(55,361

)

(58,903

)

Proceeds from sales of premises and equipment

 

6,541

 

19,769

 

Proceeds from sale of mortgage servicing rights

 

40,813

 

 

Other, net

 

(1,109

)

4,947

 

Net cash used by investing activities

 

(1,127,926

)

(351,421

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

550,295

 

896,073

 

Net (decrease) increase in short-term borrowings

 

(95,729

)

28,822

 

Proceeds from long-term borrowings

 

700,012

 

574,833

 

Payments on long-term borrowings

 

(218,849

)

(1,059,470

)

Purchases of common stock

 

(87,415

)

(93,499

)

Dividends paid on common stock

 

(91,291

)

(86,118

)

Stock compensation tax benefits

 

20,683

 

10,266

 

Other, net

 

2,712

 

6,176

 

Net cash provided by financing activities

 

780,418

 

277,083

 

Net (decrease) increase in cash and due from banks

 

(51,196

)

1,797

 

Cash and due from banks at beginning of period

 

374,701

 

359,798

 

Cash and due from banks at end of period

 

$

323,505

 

$

361,595

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest on deposits and borrowings

 

$

237,902

 

$

140,978

 

Income taxes

 

$

68,659

 

$

114,500

 

Transfer of loans and leases to other assets

 

$

32,707

 

$

20,455

 

See accompanying notes to consolidated financial statements.

 

5



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Number of

 

 

 

Additional

 

 

 

Other

 

Treasury

 

 

 

 

 

Common

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Stock

 

 

 

(Dollars in thousands)

 

Shares Issued

 

Stock

 

Capital

 

Earnings

 

Loss

 

and Other

 

Total

 

Balance, December 31, 2004

 

184,939,094

 

$

1,849

 

$

505,542

 

$

1,385,760

 

$

(1,415

)

$

 (933,318

)

$

 958,418

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

199,592

 

 

 

199,592

 

Other comprehensive loss

 

 

 

 

 

(12,181

)

 

(12,181

)

Comprehensive income (loss)

 

 

 

 

199,592

 

(12,181

)

 

187,411

 

Dividends on common stock

 

 

 

 

(86,118

)

 

 

(86,118

)

Repurchase of 3,450,000 shares

 

 

 

 

 

 

(93,499

)

(93,499

)

Issuance of 505,350 shares

 

 

 

(9,256

)

 

 

9,256

 

 

Cancellation of shares

 

(104,604

)

(1

)

(860

)

193

 

 

 

(668

)

Cancellation of shares for tax withholding

 

(438,897

)

(4

)

(13,479

)

 

 

 

(13,483

)

Amortization of stock compensation

 

 

 

4,355

 

 

 

 

4,355

 

Exercise of stock options, 52,064 shares

 

 

 

(576

)

 

 

963

 

387

 

Stock compensation tax benefits

 

 

 

10,266

 

 

 

 

10,266

 

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

 

 

 

(20,645

)

 

 

20,645

 

 

Balance, September 30, 2005

 

184,395,593

 

$

1,844

 

$

475,347

 

$

1,499,427

 

$

(13,596

)

$

 (995,953

)

$

 967,069

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2005

 

184,386,193

 

$

1,844

 

$

476,884

 

$

1,536,611

 

$

(21,215

)

$

 (995,652

)

$

 998,472

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

191,210

 

 

 

191,210

 

Other comprehensive loss

 

 

 

 

 

(4,642

)

 

(4,642

)

Comprehensive income (loss)

 

 

 

 

191,210

 

(4,642

)

 

186,568

 

Dividends on common stock

 

 

 

 

(91,291

)

 

 

(91,291

)

Repurchase of 3,400,000 shares

 

 

 

 

 

 

(87,415

)

(87,415

)

Issuance of 711,490 shares

 

 

 

(13,350

)

 

 

13,350

 

 

Cancellation of shares

 

(121,185

)

(1

)

(338

)

275

 

 

 

(64

)

Cancellation of shares for tax withholding

 

(84,890

)

(1

)

(2,295

)

 

 

 

(2,296

)

Amortization of stock compensation

 

 

 

6,178

 

 

 

 

6,178

 

Exercise of stock options, 28,667 shares

 

 

 

(192

)

 

 

546

 

354

 

Stock compensation tax benefits

 

 

 

20,683

 

 

 

 

20,683

 

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

 

 

 

(17,928

)

 

 

17,928

 

 

Balance, September 30, 2006

 

184,180,118

 

$

1,842

 

$

469,642

 

$

1,636,805

 

$

(25,857

)

$

 (1,051,243

)

$

 1,031,189

 

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 the 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, 2005 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.

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.  These estimates are based on information available to management at the time the estimates are made.  Actual results could differ from those estimates. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring items, 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

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2006

 

2005

 

Federal Home Loan Bank stock, at cost:

 

 

 

 

 

Des Moines

 

$

55,856

 

$

53,970

 

Chicago and Topeka

 

4,626

 

4,795

 

Subtotal

 

60,482

 

58,765

 

Federal Reserve Bank stock, at cost

 

18,973

 

20,646

 

Interest-bearing deposits with banks

 

3,346

 

532

 

Total investments

 

$

82,801

 

$

79,943

 

 

The investments in FHLB stock are required investments related to TCF’s borrowings from these banks.  All new FHLB borrowing activity since 2000 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 generally jointly and severally liable for repayment of each other’s 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 September 30, 2006

 

At December 31, 2005

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Gross

 

Gross

 

 

 

(Dollars in thousands)

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair
Value

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal agencies

 

$

1,804,439

 

$

537

 

$

(40,287

)

$

1,764,689

 

$

1,675,203

 

$

874

 

$

(33,921

)

$

1,642,156

 

Other

 

4,915

 

 

(177

)

4,738

 

5,655

 

 

(196

)

5,459

 

Other securities

 

1,000

 

 

 

1,000

 

1,000

 

 

 

1,000

 

Total

 

$

1,810,354

 

$

537

 

$

(40,464

)

$

1,770,427

 

$

1,681,858

 

$

874

 

$

(34,117

)

$

1,648,615

 

Weighted-average yield

 

5.35

%

 

 

 

 

 

 

5.26

%

 

 

 

 

 

 

 

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, as of September 30, 2006.  Unrealized losses on securities available for sale are due to changes in interest rates and not due to credit quality issues.  TCF has the ability and intent to hold these investments until a recovery of fair value.  Accordingly, TCF has concluded that the unrealized losses are temporary, and no other than temporary impairment has occurred at September 30, 2006.

 

 

 

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

 

$

353,813

 

$

(1,167

)

$

1,307,276

 

$

(39,120

)

$

1,661,089

 

$

(40,287

)

Other

 

 

 

4,253

 

(177

)

4,253

 

(177

)

Total

 

$

353,813

 

$

(1,167

)

$

1,311,529

 

$

(39,297

)

$

1,665,342

 

$

(40,464

)

 

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

 

 

 

 

 

September 30,

 

December 31,

 

Percentage

 

(Dollars in thousands)

 

2006

 

2005

 

Change

 

Consumer home equity and other:

 

 

 

 

 

 

 

Home Equity:

 

 

 

 

 

 

 

First mortgage lien

 

$

3,682,117

 

$

3,375,380

 

9.1

%

Junior lien

 

2,056,498

 

1,773,308

 

16.0

 

Total consumer home equity

 

5,738,615

 

5,148,688

 

11.5

 

Other

 

42,338

 

38,896

 

8.8

 

Total consumer home equity and other

 

5,780,953

 

5,187,584

 

11.4

 

Commercial:

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

Permanent

 

2,231,510

 

2,117,953

 

5.4

 

Construction and development

 

182,548

 

179,547

 

1.7

 

Total commercial real estate

 

2,414,058

 

2,297,500

 

5.1

 

Commercial business

 

546,517

 

435,233

 

25.6

 

Total commercial

 

2,960,575

 

2,732,733

 

8.3

 

Leasing and equipment finance (1):

 

 

 

 

 

 

 

Equipment finance loans

 

470,540

 

387,171

 

21.5

 

Lease financings:

 

 

 

 

 

 

 

Direct financing leases (2)

 

1,351,526

 

1,180,370

 

14.5

 

Sales-type leases

 

21,984

 

18,495

 

18.9

 

Lease residuals

 

35,193

 

32,882

 

7.0

 

Unearned income and deferred lease costs

 

(142,442

)

(115,124

)

(23.7

)

Total lease financings

 

1,266,261

 

1,116,623

 

13.4

 

Total leasing and equipment finance

 

1,736,801

 

1,503,794

 

15.5

 

Total consumer, commercial and leasing and equipment finance

 

10,478,329

 

9,424,111

 

11.2

 

Residential real estate

 

659,476

 

770,441

 

(14.4

)

Total loans and leases

 

$

11,137,805

 

$

10,194,552

 

9.3

 

 

(1)

Operating leases of $71.3 million at September 30, 2006 and $56.7 million at December 31, 2005 are included as a component of Other Assets on the Consolidated Statements of Financial Condition.

(2)

Included in the direct financing leases are $69.7 million and $52.7 million at September 30, 2006 and December 31, 2005, respectively, of installed equipment under lease contracts that have not yet commenced due to pending equipment installations.

 

9



 

 

(5)         Long-term Borrowings

 

 

 

 

 

At September 30, 2006

 

At December 31, 2005

 

 

 

 

 

 

 

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

 

2006

 

$

100,000

 

5.55

%

$

303,000

 

5.22

%

 

 

2007

 

200,000

 

3.65

 

200,000

 

3.65

 

 

 

2009

 

117,000

 

5.26

 

122,500

 

5.25

 

 

 

2010

 

100,000

 

6.02

 

100,000

 

6.02

 

 

 

2011

 

200,000

 

4.85

 

200,000

 

4.85

 

 

 

2015

 

1,400,000

 

4.16

 

1,400,000

 

4.16

 

 

 

2016

 

600,000

 

4.60

 

 

 

Sub-total

 

 

 

2,717,000

 

4.44

 

2,325,500

 

4.45

 

Subordinated bank notes

 

2014

 

74,501

 

5.27

 

74,373

 

5.27

 

 

 

2015

 

49,419

 

5.37

 

49,305

 

5.37

 

 

 

2016

 

74,323

 

5.63

 

 

 

Sub-total

 

 

 

198,243

 

5.43

 

123,678

 

5.31

 

Discounted lease rentals

 

2006

 

7,817

 

6.97

 

28,193

 

6.49

 

 

 

2007

 

25,454

 

7.10

 

18,323

 

6.79

 

 

 

2008

 

14,048

 

7.27

 

6,569

 

7.03

 

 

 

2009

 

5,942

 

7.24

 

1,811

 

7.02

 

 

 

2010

 

1,962

 

7.09

 

336

 

7.18

 

 

 

2011

 

245

 

6.98

 

 

 

Sub-total

 

 

 

55,468

 

7.14

 

55,232

 

6.68

 

Other borrowings

 

2006

 

6

 

5.00

 

2,200

 

4.50

 

 

 

2007

 

2,224

 

4.51

 

2,200

 

4.50

 

 

 

2008

 

2,226

 

4.51

 

2,200

 

4.50

 

 

 

2009

 

966

 

5.00

 

 

 

Sub-total

 

 

 

5,422

 

4.59

 

6,600

 

4.50

 

Total long-term borrowings

 

 

 

$

2,976,133

 

4.55

 

$

2,511,010

 

4.54

 

 

Included in Federal Home Loan Bank (“FHLB”) advances and repurchase agreements at September 30, 2006 were $417 million of fixed-rate FHLB advances, which are callable quarterly by the counterparties at par until maturity.  In addition, TCF has $1.6 billion of repurchase agreements and $400 million of FHLB advances which are callable during various years from 2008 through 2011.  The probability that these advances and repurchase agreements will be called depends primarily on the level of related interest rates during the call period.

 

The next call year and stated maturity year for the callable advances and repurchase agreements outstanding at September 30, 2006 were as follows:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Year

 

Next Call
Date

 

Weighted-
Average Rate

 

Stated Maturity
Date

 

Weighted-
Average Rate

 

 

 

 

 

 

 

 

 

 

 

2006

 

$

417,000

 

5.24

%

$

 

 

2008

 

1,100,000

 

4.11

 

 

 

2009

 

500,000

 

4.56

 

117,000

 

5.26

%

2010

 

300,000

 

4.33

 

100,000

 

6.02

 

2011

 

100,000

 

4.82

 

200,000

 

4.85

 

2015

 

 

 

1,400,000

 

4.16

 

2016

 

 

 

600,000

 

4.60

 

Total

 

$

2,417,000

 

4.45

 

$

2,417,000

 

4.45

 

 

10



 

(6)         Stockholders’ Equity

Treasury stock and other consists of the following:

 

 

 

At

 

At

 

 

 

September 30,

 

December 31,

 

(In thousands)

 

2006

 

2005

 

 

 

 

 

 

 

Treasury stock, at cost

 

$

1,018,678

 

$

945,159

 

Shares held in trust for deferred compensation plans, at cost

 

32,565

 

50,493

 

Total

 

$

1,051,243

 

$

995,652

 

 

TCF repurchased 3.4 million shares of its common stock during the first nine months of 2006 and 3.5 million shares for the same 2005 period.  At September 30, 2006, TCF had 3.3 million shares remaining in its stock repurchase program authorized by its Board of Directors.

 

(7)         Stock Compensation

 

Effective January 1, 2006, TCF adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment, for the accounting for stock compensation.  The adoption of this Statement had no material impact on TCF’s financial statements as TCF was previously accounting for stock compensation under Statement of Financial Accounting Standards No. 123.  Both Statements utilize the fair value method at grant date for stock compensation and expense such cost.  With the adoption of SFAS 123R, TCF eliminated its unamortized stock compensation from Treasury Stock and Other against Additional Paid-in Capital in its Consolidated Statements of Financial Condition.  Also, TCF now reports cash retained from excess tax benefits on stock compensation (“stock compensation tax benefits”) as cash flows from financing activities in its Consolidated Statements of Cash Flows.  Unamortized stock compensation and stock compensation tax benefits were reclassified in prior periods to conform to the current period presentation.

 

The fair value of restricted stock is determined on the date of grant and amortized to compensation expense over the longer of the service period or performance period, but in no event beyond an employee’s retirement date.  For performance-based restricted stock, TCF estimates the degree to which performance conditions will be met to determine the number of shares which will vest and the related compensation expense prior to the vesting date.  Compensation expense is adjusted in the period such estimates change.  Non-forfeitable dividends are recorded to retained earnings for shares of restricted stock which are expected to vest and to compensation expense for shares of restricted stock which are not expected to vest.

 

Income tax benefits related to stock compensation in excess of grant date fair value are recognized as an increase to additional paid-in capital upon vesting and delivery of the stock.  Any income tax benefits that are less than grant date fair value would be recognized as a reduction of additional paid-in capital to the extent of previously recognized income tax benefits and then as compensation expense for the remaining amount.

 

The TCF Financial Incentive Stock Program (the “Program”) was adopted to enable TCF to attract and retain key personnel.  Under the Program, no more than 5% of the shares of TCF common stock outstanding on the date of initial shareholder approval may be awarded.  At September 30, 2006, there were 4,096,921 shares reserved for issuance under the Program, including 231,133 shares related to outstanding stock options that are fully vested.

 

At September 30, 2006, there were 1,500,541 shares of performance-based restricted stock that will vest only if certain earnings per share goals and service conditions are achieved.  Failure to achieve the goals and service conditions will result in all or a portion of the shares being forfeited.  Other restricted stock grants vest over periods from three to seven years.  The weighted-average grant date fair value of restricted stock granted for the third quarter and first nine months of 2006 was $25.69 and $25.25, respectively, compared with $26.77 and $27.86 for the same 2005 periods.  Compensation expense for restricted stock was $2 million and $5.8 million for the third quarter and first nine months of 2006, respectively, compared with $1.2 million and $3.5 million for the same 2005 periods.  The recognized tax benefit for stock compensation expense was $662 thousand and $1.9 million for the third quarter and first nine months of 2006, respectively, compared with $380 thousand and $1.1

 

11



 

million for the same 2005 periods.  Unrecognized stock compensation for restricted stock awards was $23.5 million with a weighted-average remaining amortization period of 2.3 years at September 30, 2006, compared with $21.3 million with a weighted-average remaining amortization period of 1.9 years at September 30, 2005.

 

The following table reflects TCF’s restricted stock transactions under the Program since December 31, 2005:

 

 

 

Restricted Stock

 

 

 

Shares

 

Price Range

 

Outstanding at December 31, 2005

 

2,309,276

 

$

9.87-$ 30.28

 

Granted

 

588,850

 

25.18

 

Forfeited

 

(89,335

)

9.87-30.28

 

Vested

 

(224,900

)

18.03-24.10

 

Outstanding at March 31, 2006

 

2,583,891

 

$

9.87-$ 30.28

 

Granted

 

63,800

 

$

25.66

 

Forfeited

 

(16,450

)

21.24 - 30.13

 

Vested

 

(4,000

)

19.14

 

Outstanding at June 30, 2006

 

2,627,241

 

$

9.87-$ 30.28

 

Granted

 

34,450

 

$ 25.69

 

Forfeited

 

(14,900

)

22.03-30.28

 

Vested

 

(23,700

)

20.38-24.10

 

Outstanding at September 30, 2006

 

2,623,091

 

$

9.87-$ 30.28

 

 

Prior to 2000, TCF had also issued stock options under the Program that generally become exercisable over a period of one to ten years from the date of the grant and expire after ten years.  All outstanding options have a fixed exercise price equal to the market price of TCF common stock on the date of grant.  As of September 30, 2006, all 231,133 outstanding stock options are fully vested.  Stock options outstanding and exercisable at September 30, 2006 had exercise prices ranging from $11.78 to $16.64, a weighted-average price of $13.93 and a weighted-average remaining exercise period of 2.3 years.

 

(8)         Regulatory Capital Requirements

 

TCF is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by the federal banking agencies that could have a direct material effect on TCF’s financial statements.  Also, in general, TCF Bank may not declare or pay a dividend to TCF in excess of 100% of its net profits for the current year combined with its retained net profits for the preceding two calendar years without prior approval of the Office of the Comptroller of the Currency (“OCC”).

 

12



 

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 minimum and well-capitalized capital requirements:

 

 

 

 

 

Minimum

 

Well-Capitalized

 

 

 

Actual

 

Capital Requirement

 

Capital Requirement

 

(Dollars in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

As of September 30, 2006:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF

 

$

902,588

 

6.34

%

$

427,040

 

3.00

%

N.A.

 

N.A.

 

TCF Bank

 

830,045

 

5.84

 

426,430

 

3.00

 

$

710,716

 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF

 

902,588

 

8.69

 

415,287

 

4.00

 

622,930

 

6.00

 

TCF Bank

 

830,045

 

8.01

 

414,559

 

4.00

 

621,838

 

6.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF

 

1,162,634

 

11.20

 

830,573

 

8.00

 

1,038,216

 

10.00

 

TCF Bank

 

1,090,091

 

10.52

 

829,117

 

8.00

 

1,036,397

 

10.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2005:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF

 

$

863,955

 

6.61

%

$

392,306

 

3.00

%

N.A.

 

N.A.

 

TCF Bank

 

835,121

 

6.39

 

392,000

 

3.00

 

$

653,333

 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF

 

863,955

 

8.79

 

393,128

 

4.00

 

589,693

 

6.00

 

TCF Bank

 

835,121

 

8.52

 

392,275

 

4.00

 

588,413

 

6.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF

 

1,049,615

 

10.68

 

786,257

 

8.00

 

982,821

 

10.00

 

TCF Bank

 

1,020,781

 

10.41

 

784,551

 

8.00

 

980,688

 

10.00

 

N.A. Not Applicable.

 

At September 30, 2006, 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 OCC pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991.

 

(9)   Employee Benefit Plans

 

TCF amended the TCF Cash Balance Pension Plan (the “Pension Plan”) to discontinue compensation credits for all participants effective March 31, 2006.  Interest credits will continue to be paid until participants’ accounts are distributed from the Pension Plan.  All unvested participant accounts became vested on March 31, 2006.  As a result of this amendment, TCF recorded a $400 thousand curtailment gain in the first quarter of 2006.  The projected benefit obligation was remeasured at February 1, 2006 and was reduced from $62.1 million at December 31, 2005 to $58.5 million.  As part of the remeasurement, TCF increased its discount rate assumption to 5.50% from 5.25% at December 31, 2005. The long-term rate of return on plan assets assumption of 8.75% was unchanged from December 31, 2005.

 

Effective April 1, 2006, TCF amended the TCF Employees Stock Purchase Plan to increase the employer match to 75 cents per dollar for employees with five through nine years of service, up to a maximum company contribution of 4.5% of the employee’s salary and bonus, and to $1 per dollar for employees with ten or more years of service, up to a maximum company contribution of 6% of the employee’s salary and bonus.  Employee contributions vest immediately while the Company’s matching contributions are subject to a graduated vesting schedule based on an employee’s years of vesting service with full vesting after five years.

 

13



 

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, 2006 and 2005:

 

 

 

Pension Plan

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(In thousands)

 

2006

 

2005

 

2006

 

2005

 

Service cost

 

$

 

$

1,326

 

$

1,421

 

$

3,978

 

Interest cost

 

787

 

857

 

2,322

 

2,571

 

Expected return on plan assets

 

(1,254

)

(1,432

)

(3,770

)

(4,295

)

Amortization of prior service cost

 

 

(62

)

(21

)

(186

)

Recognized actuarial loss

 

1,471

 

262

 

2,631

 

786

 

Plan amendment/curtailment gain

 

 

 

(400

)

 

Net periodic benefit cost

 

$

1,004

 

$

951

 

$

2,183

 

$

2,854

 

 

 

 

 

 

 

 

 

 

 

 

 

Postretirement Plan

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

(In thousands)

 

2006

 

2005

 

2006

 

2005

 

Service cost

 

$

6

 

$

9

 

$

19

 

$

26

 

Interest cost

 

108

 

138

 

325

 

414

 

Amortization of transition obligation

 

26

 

33

 

76

 

99

 

Recognized actuarial loss

 

30

 

34

 

90

 

104

 

Net periodic benefit cost

 

$

170

 

$

214

 

$

510

 

$

643

 

 

During the third quarter and first nine months of 2006, TCF made contributions to the Pension Plan totaling $4 million.  For 2006, TCF is eligible to contribute an additional $4.5 million to the Pension Plan until September 15, 2007 under various IRS funding methods, but is not required to make any minimum contributions.  TCF did not make any contributions to the Pension Plan in the third quarter and first nine months of 2005.  During the third quarter and first nine months of 2006, TCF paid $284 thousand and $780 thousand, respectively, for the Postretirement Plan, compared with $270 thousand and $884 thousand for the same 2005 periods.

 

(10) Business Segments

 

Banking and leasing and equipment finance have been identified as reportable operating segments.  Banking includes the following operating units that provide financial services to customers: deposits and investments products, commercial banking, consumer lending and treasury services.  Management of TCF’s banking area is organized by state.  The separate state operations have been aggregated for purposes of segment disclosures.  Leasing and equipment finance provides a broad range of comprehensive leasing and equipment finance products addressing the financing needs of diverse businesses.  In addition, TCF’s bank holding company (“parent company”) and corporate functions provide data processing, bank operations and other professional services to the operating segments.

 

TCF evaluates performance and allocates resources based on the segments’ net income.  The business segments follow generally accepted accounting principles as described in the Summary of Significant Accounting Policies.  TCF generally accounts for inter-segment sales and transfers at cost.

 

14



 

The following tables set forth certain information about the reported profit or loss and assets of each of TCF’s reportable segments, including a reconciliation of TCF’s consolidated totals.  The “other” category in the table below includes TCF’s parent company, corporate functions and mortgage banking.

 

 

 

 

 

Leasing and

 

 

 

Eliminations

 

 

 

 

 

 

 

Equipment

 

 

 

and

 

 

 

(In thousands)

 

Banking

 

Finance

 

Other

 

Reclassifications

 

Consolidated

 

At or For the Three Months Ended September 30, 2006:

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers:

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

196,076

 

$

32,174

 

$

 

$

 

$

228,250

 

Non-interest income

 

115,834

 

13,372

 

306

 

 

129,512

 

Total

 

$

311,910

 

$

45,546

 

$

306

 

$

 

$

357,762

 

Net interest income

 

$

120,058

 

$

15,190

 

$

(215

)

$

 

$

135,033

 

Provision for credit losses

 

2,501

 

416

 

 

 

2,917

 

Non-interest income

 

115,834

 

13,372

 

33,033

 

(32,727

)

129,512

 

Non-interest expense

 

152,713

 

14,959

 

29,815

 

(32,727

)

164,760

 

Income tax expense

 

25,580

 

4,749

 

612

 

 

30,941

 

Net income

 

$

55,098

 

$

8,438

 

$

2,391

 

$

 

$

65,927

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

141,245

 

$

11,354

 

$

 

$

 

$

152,599

 

Total assets

 

$

3,859,449

 

$

1,889,249

 

$

131,166

 

$

(1,582,753

)

$

14,297,111