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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, 2004

 

or

 

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

 


 

Commission File

No.  001-10253

 


 

 

TCF FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

41-1591444

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S.  Employer Identification No.)

 

 

 

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

(Address and Zip Code of principal executive offices)

 

Registrant’s telephone number, including area code:  (612) 661-6500

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes    ý

 

No    o

 

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

 

Yes    ý

 

No    o

 

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

 

Class

 

Outstanding at April 16, 2004

Common Stock, $.01 par value

 

70,508,012 shares

 



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES
 
INDEX
 

 

 

Pages

Part I.

Financial Information

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

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

3

 

 

 

 

 

 

Consolidated Statements of Income for the Three Months Ended March 31, 2004 and 2003

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003

5

 

 

 

 

 

 

Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2004 and 2003

6

 

 

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations for the Three Months Ended March 31, 2004 and 2003

16

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37

 

 

 

 

 

Item 4.

Controls and Procedures

40

 

 

 

 

Supplementary Information

42

 

 

Part II.

Other Information

 

 

 

 

Items 1-6

44

 

 

Signatures

46

 

 

Index to Exhibits

47

 

2



 

PART 1 - FINANCIAL STATEMENTS

 

ITEM 1. Financial Statements

 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(Dollars in thousands, except per-share data)

(Unaudited)

 

 

 

At
March 31,
2004

 

At
December 31,
2003

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

368,409

 

$

370,054

 

Investments

 

411,934

 

75,223

 

Securities available for sale

 

1,269,293

 

1,533,288

 

Loans held for sale

 

377,926

 

335,372

 

Loans and leases:

 

 

 

 

 

Consumer

 

3,821,648

 

3,630,341

 

Commercial real estate

 

1,963,815

 

1,916,701

 

Commercial business

 

428,588

 

427,696

 

Leasing and equipment finance

 

1,256,377

 

1,160,397

 

Subtotal

 

7,470,428

 

7,135,135

 

Residential real estate

 

1,152,357

 

1,212,643

 

Total loans and leases

 

8,622,785

 

8,347,778

 

Allowance for loan and lease losses

 

(79,054

)

(76,619

)

Net loans and leases

 

8,543,731

 

8,271,159

 

Premises and equipment

 

290,478

 

282,193

 

Goodwill

 

152,599

 

145,462

 

Deposit base intangibles

 

5,491

 

5,907

 

Mortgage servicing rights

 

50,726

 

52,036

 

Other assets

 

253,732

 

248,321

 

 

 

$

11,724,319

 

$

11,319,015

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

Checking

 

$

3,527,674

 

$

3,248,412

 

Savings

 

1,979,170

 

1,905,923

 

Money market

 

821,913

 

845,291

 

Subtotal

 

6,328,757

 

5,999,626

 

Certificates of deposit

 

1,540,371

 

1,612,123

 

Total deposits

 

7,869,128

 

7,611,749

 

Short-term borrowings

 

469,663

 

878,412

 

Long-term borrowings

 

2,037,424

 

1,536,413

 

Total borrowings

 

2,507,087

 

2,414,825

 

Accrued expenses and other liabilities

 

382,154

 

371,583

 

Total liabilities

 

10,758,369

 

10,398,157

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, par value $.01 per share, 280,000,000 shares authorized; 92,504,082 and 92,513,355 shares issued

 

925

 

925

 

Additional paid-in capital

 

516,902

 

518,878

 

Retained earnings, subject to certain restrictions

 

1,269,229

 

1,234,804

 

Accumulated other comprehensive income

 

12,827

 

5,652

 

Treasury stock at cost, 21,996,070 and 22,037,025 shares, and other

 

(833,933

)

(839,401

)

Total stockholders’ equity

 

965,950

 

920,858

 

 

 

$

11,724,319

 

$

11,319,015

 

 

See accompanying notes to consolidated financial statements.

 

3



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except per-share data)

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

 

 

2004

 

2003

 

Interest income:

 

 

 

 

 

Loans and leases

 

$

125,273

 

$

131,721

 

Securities available for sale

 

20,332

 

33,764

 

Loans held for sale

 

2,841

 

5,226

 

Investments

 

773

 

1,403

 

Total interest income

 

149,219

 

172,114

 

Interest expense:

 

 

 

 

 

Deposits

 

10,539

 

18,477

 

Borrowings

 

20,187

 

31,225

 

Total interest expense

 

30,726

 

49,702

 

Net interest income

 

118,493

 

122,412

 

Provision for credit losses

 

1,160

 

2,710

 

Net interest income after provision for credit losses

 

117,333

 

119,702

 

Non-interest income:

 

 

 

 

 

Fees and service charges

 

59,659

 

54,414

 

Debit card revenue

 

13,491

 

13,233

 

ATM revenue

 

9,997

 

10,415

 

Investments and insurance commissions

 

3,462

 

3,520

 

Subtotal

 

86,609

 

81,582

 

Leasing and equipment finance

 

10,167

 

13,607

 

Mortgage banking

 

3,455

 

(430

)

Other

 

2,228

 

2,076

 

Fees and other revenue

 

102,459

 

96,835

 

Gains on sales of securities available for sale

 

12,717

 

21,137

 

Gains (losses) on termination of debt

 

 

(6,576

)

Other non-interest income

 

12,717

 

14,561

 

Total non-interest income

 

115,176

 

111,396

 

Non-interest expense:

 

 

 

 

 

Compensation and employee benefits

 

78,879

 

76,599

 

Occupancy and equipment

 

23,490

 

21,599

 

Advertising and promotions

 

5,910

 

6,353

 

Other

 

32,427

 

34,199

 

Total non-interest expense

 

140,706

 

138,750

 

Income before income tax expense

 

91,803

 

92,348

 

Income tax expense

 

31,142

 

32,221

 

Net income

 

$

60,661

 

$

60,127

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

Basic

 

$

.88

 

$

.83

 

Diluted

 

$

.88

 

$

.83

 

 

 

 

 

 

 

Dividends declared per common share

 

$

.375

 

$

.325

 

 

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,

 

 

 

2004

 

2003

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

60,661

 

$

60,127

 

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

 

 

 

 

 

Depreciation and amortization

 

9,572

 

9,361

 

Mortgage servicing rights amortization and impairment

 

3,676

 

17,301

 

Provision for credit losses

 

1,160

 

2,710

 

Proceeds from sales of loans held for sale

 

242,795

 

747,647

 

Principal collected on loans held for sale

 

1,387

 

7,121

 

Originations of loans held for sale

 

(286,785

)

(744,668

)

Net decrease in other assets and accrued expenses and other liabilities

 

49,820

 

24,918

 

Gains on sales of assets

 

(12,717

)

(21,137

)

Losses on termination of debt

 

 

6,576

 

Other, net

 

(184

)

(2,034

)

 

 

 

 

 

 

Total adjustments

 

8,724

 

47,795

 

 

 

 

 

 

 

Net cash provided by operating activities

 

69,385

 

107,922

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Principal collected on loans and leases

 

852,198

 

997,358

 

Originations and purchases of loans

 

(937,732

)

(844,007

)

Purchases of equipment for lease financing

 

(139,842

)

(107,120

)

Proceeds from sales of securities available for sale

 

866,691

 

484,705

 

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

 

88,730

 

240,481

 

Purchases of securities available for sale

 

(718,734

)

(812,165

)

Net increase in Federal Funds sold

 

(314,000

)

 

Net (increase) decrease in Federal Home Loan Bank stock

 

(19,629

)

30,767

 

Acquisitions, net of cash acquired

 

(4,326

)

 

Purchases of premises and equipment

 

(15,709

)

(12,591

)

Other, net

 

2,975

 

(19

)

 

 

 

 

 

 

Net cash used by investing activities

 

(339,378

)

(22,591

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

257,379

 

255,350

 

Net decrease in short-term borrowings

 

(419,602

)

(67,448

)

Proceeds from long-term borrowings

 

454,215

 

4,911

 

Payments on long-term borrowings

 

(2,063

)

(272,552

)

Purchases of common stock

 

(694

)

(31,587

)

Dividends on common stock

 

(26,236

)

(23,721

)

Other, net

 

5,349

 

4,808

 

 

 

 

 

 

 

Net cash provided (used) by financing activities

 

268,348

 

(130,239

)

 

 

 

 

 

 

Net decrease in cash and due from banks

 

(1,645

)

(44,908

)

Cash and due from banks at beginning of period

 

370,054

 

416,397

 

Cash and due from banks at end of period

 

$

368,409

 

$

371,489

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest on deposits and borrowings

 

$

28,280

 

$

48,775

 

Income taxes

 

$

482

 

$

9,565

 

Transfer of loans and leases to other assets

 

$

4,557

 

$

6,905

 

 

See accompanying notes to consolidated financial statements.

 

5



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

 

Consolidated Statements of Stockholders’ Equity

(Dollars in thousands)

(Unaudited)

 

 

 

Number of
Common
Shares Issued

 

Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Treasury Stock
and Other

 

Total

 

Balance, December 31, 2002

 

92,638,937

 

$

926

 

$

518,813

 

$

1,111,955

 

$

46,102

 

$

(700,776

)

$

977,020

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

60,127

 

 

 

60,127

 

Other comprehensive income (loss)

 

 

 

 

 

(14,640

)

 

(14,640

)

Comprehensive income (loss)

 

 

 

 

60,127

 

(14,640

)

 

45,487

 

Dividends on common stock

 

 

 

 

(23,721

)

 

 

(23,721

)

Repurchase of 757,097 shares

 

 

 

 

 

 

(31,587

)

(31,587

)

Issuance of 76,890 shares

 

 

 

816

 

 

 

(816

)

 

Cancellation of shares

 

(99,294

)

(1

)

(2,533

)

 

 

1,687

 

(847

)

Amortization of stock compensation

 

 

 

 

 

 

2,393

 

2,393

 

Exercise of stock options, 43,029 shares

 

 

 

1,267

 

 

 

1,401

 

2,668

 

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

 

 

 

(2,204

)

 

 

2,204

 

 

Balance, March 31, 2003

 

92,539,643

 

$

925

 

$

516,159

 

$

1,148,361

 

$

31,462

 

$

(725,494

)

$

971,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2003

 

92,513,355

 

$

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 13,445 shares

 

 

 

 

 

 

(694

)

(694

)

Issuance of 11,400 shares

 

 

 

166

 

 

 

(166

)

 

Cancellation of shares

 

(9,273

)

 

(433

)

 

 

156

 

(277

)

Amortization of stock compensation

 

 

 

 

 

 

1,721

 

1,721

 

Exercise of stock options, 43,000 shares

 

 

 

1,276

 

 

 

1,466

 

2,742

 

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

 

 

 

(2,985

)

 

 

2,985

 

 

Balance, March 31, 2004

 

92,504,082

 

$

925

 

$

516,902

 

$

1,269,229

 

$

12,827

 

$

(833,933

)

$

965,950

 

 

See accompanying notes to consolidated financial statements.

 

6



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

(Unaudited)

 

(1)          Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for complete financial statements in conformity with generally accepted accounting principles.  The information in this Quarterly Report on Form 10-Q is written with the presumption that the users of the interim financial statements have read or have access to the most recent Annual Report on Form 10-K of TCF Financial Corporation (“TCF” or the “Company”), which contains the latest audited financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2003 and for the year then ended.  All significant intercompany accounts and transactions have been eliminated in consolidation.  Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.  For Consolidated Statements of Cash Flow purposes, cash and cash equivalents include cash and due from banks.

 

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.

 

(2)          Investments

 

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

 

(In thousands)

 

At
March 31,
2004

 

At
December 31,
2003

 

Federal funds sold

 

$

314,000

 

$

 

Federal Home Loan Bank stock, at cost

 

70,117

 

50,411

 

Federal Reserve Bank stock, at cost

 

24,050

 

24,045

 

Interest-bearing deposits with banks

 

3,767

 

767

 

Total investments

 

$

411,934

 

$

75,223

 

 

(3)          Securities Available for Sale

 

Securities available for sale consist of the following:

 

 

 

At March 31, 2004

 

At December 31, 2003

 

(Dollars in thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Fair
Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal agencies

 

$

1,239,807

 

$

20,693

 

$

(455

)

$

1,260,045

 

$

1,514,400

 

$

13,744

 

$

(4,677

)

$

1,523,467

 

Private issuer and collateralized mortgage obligations

 

8,694

 

 

(196

)

8,498

 

9,272

 

 

(201

)

9,071

 

Other securities

 

750

 

 

 

750

 

750

 

 

 

750

 

 

 

$

1,249,251

 

$

20,693

 

$

(651

)

$

1,269,293

 

$

1,524,422

 

$

13,744

 

$

(4,878

)

$

1,533,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average yield

 

5.29

%

 

 

 

 

 

 

5.33

%

 

 

 

 

 

 

 

7



 

The following table shows the securities available for sale portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2004.  TCF has reviewed these securities and has concluded that the unrealized losses are temporary and no permanent impairment has occurred at March 31, 2004.

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

(In thousands)

 

Fair value

 

Unrealized
losses

 

Fair value

 

Unrealized
losses

 

Fair value

 

Unrealized
losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal agencies

 

$

95,155

 

$

(446

)

$

1,661

 

$

(9

)

$

96,816

 

$

(455

)

Private issuer and collateralized mortgage obligations

 

 

 

7,714

 

(196

)

7,714

 

(196

)

Total temporarily impaired securities

 

$

95,155

 

$

(446

)

$

9,375

 

$

(205

)

$

104,530

 

$

(651

)

 

(4)          Goodwill and Intangible Assets

 

Goodwill and intangible assets as of March 31, 2004 are summarized as follows:

 

 

 

At March 31, 2004

 

At December 31, 2003

 

(In thousands)

 

Gross
Amount

 

Accumulated
Amortization

 

Net
Amount

 

Gross
Amount

 

Accumulated
Amortization

 

Net
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights, net

 

$

78,649

 

$

27,923

 

$

50,726

 

$

76,306

 

$

24,270

 

$

52,036

 

Deposit base intangibles

 

21,180

 

15,689

 

5,491

 

21,180

 

15,273

 

5,907

 

Total

 

$

99,829

 

$

43,612

 

$

56,217

 

$

97,486

 

$

39,543

 

$

57,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unamortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill (included in Banking Segment)

 

$

145,462

 

 

 

$

145,462

 

$

145,462

 

 

 

$

145,462

 

Goodwill (included in Leasing Segment)

 

7,137

 

 

 

7,137

 

 

 

 

 

Total

 

$

152,599

 

 

 

$

152,599

 

$

145,462

 

 

 

$

145,462

 

 

Amortization expense for intangible assets was $4.1 million and $8.2 million for the quarters ended March 31, 2004 and 2003, respectively.  The following table shows the estimated future amortization expense for amortized intangible assets based on existing asset balances and the interest rate environment as of March 31, 2004.  The Company’s actual amortization expense in any given period may be significantly different from the estimated amounts depending upon the addition of new intangible assets, changes in mortgage interest rates, prepayment rates and market conditions.

 

(In thousands)

 

Mortgage
Servicing Rights

 

Deposit Base
Intangibles

 

Total

 

 

 

 

 

 

 

 

 

Estimated Amortization Expense:

 

 

 

 

 

 

 

For the remaining nine months ending December 31, 2004

 

$

10,637

 

$

1,247

 

$

11,884

 

 

 

 

 

 

 

 

 

For the year ended December 31, 2005

 

11,140

 

1,659

 

12,799

 

For the year ended December 31, 2006

 

8,611

 

1,630

 

10,241

 

For the year ended December 31, 2007

 

6,367

 

913

 

7,280

 

For the year ended December 31, 2008

 

4,723

 

17

 

4,740

 

For the year ended December 31, 2009

 

3,539

 

17

 

3,556

 

 

8



 

(5)          Mortgage Banking

 

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

 

 

 

Three Months
Ended March 31,

 

(In thousands)

 

2004

 

2003

 

 

 

 

 

 

 

Mortgage servicing rights at beginning of period

 

$

54,036

 

$

71,990

 

Wholesale originations

 

1,299

 

4,315

 

Retail originations

 

1,067

 

3,295

 

Amortization

 

(3,676

)

(7,801

)

Impairment write-down

 

 

(6,500

)

Mortgage servicing rights at end of period

 

52,726

 

65,299

 

Valuation allowance at beginning of period

 

(2,000

)

(9,346

)

Provision for impairment

 

 

(9,500

)

Impairment write-down

 

 

6,500

 

Valuation allowance at end of period

 

(2,000

)

(12,346

)

Mortgage servicing rights, net

 

$

50,726

 

$

52,953

 

 

The estimated fair value of mortgage servicing rights included in the Consolidated Statements of Financial Condition at March 31, 2004 was approximately $50.7 million.  The estimated fair value of capitalized mortgage servicing rights is based on estimated cash flows discounted using rates management believes are commensurate with the risks involved.  Assumptions regarding prepayments, defaults and interest rates are determined using available market information.

 

The following table represents the components of mortgage banking revenue:

 

 

 

Three Months
Ended March 31,

 

Change

 

(Dollars in thousands)

 

2004

 

2003

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

Servicing income

 

$

4,625

 

$

5,433

 

$

(808

)

(14.9

)%

Less mortgage servicing rights:

 

 

 

 

 

 

 

 

 

Amortization

 

3,676

 

7,801

 

(4,125

)

(52.9

)

Provision for impairment

 

 

9,500

 

(9,500

)

(100.0

)

Subtotal

 

3,676

 

17,301

 

(13,625

)

(78.8

)

Net servicing income (loss)

 

949

 

(11,868

)

12,817

 

N.M.

 

Gains on sales of loans

 

2,136

 

10,626

 

(8,490

)

(79.9

)

Other income

 

370

 

812

 

(442

)

(54.4

)

Total mortgage banking revenue

 

$

3,455

 

$

(430

)

$

3,885

 

N.M.

 

 


N.M. Not meaningful

 

9



 

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

 

 

 

At
March 31,

 

At
December 31,

 

Change

 

(Dollars in thousands)

 

2004

 

2003

 

$

 

%

 

Unrealized Gains (Losses):

 

 

 

 

 

 

 

 

 

Residential loans held for sale

 

$

1,009

 

$

1,092

 

$

(83

)

(7.6

)%

Loan applications in process

 

(148

)

195

 

(343

)

(175.9

)

Subtotal

 

861

 

1,287

 

(426

)

(33.1

)

Forward sales contracts

 

(534

)

(1,105

)

571

 

51.7

 

Net unrealized gains

 

$

327

 

$

182

 

$

145

 

79.7

 

 

At March 31, 2004 and 2003, TCF was servicing real estate loans for others with aggregate unpaid principal balances of approximately $5 billion and $5.4 billion, respectively.  At March 31, 2004 and 2003, TCF had custodial funds of $173.4 million and $262.8 million, respectively, relating to the servicing of residential real estate loans, 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.

 

(6)          Long-term Borrowings

 

 

 

 

 

At March 31, 2004

 

At December 31, 2003

 

(Dollars in thousands)

 

Year of
Maturity

 

Amount

 

Weighted-
Average
Rate

 

Amount

 

Weighted-
Average
Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

2004

 

$

 

%

$

3,000

 

4.76

%

 

 

2005

 

1,191,500

 

3.04

 

741,500

 

3.82

 

 

 

2006

 

303,000

 

4.20

 

303,000

 

4.20

 

 

 

2009

 

122,500

 

5.25

 

122,500

 

5.25

 

 

 

2010

 

100,000

 

6.02

 

100,000

 

6.02

 

 

 

2011

 

200,000

 

4.85

 

200,000

 

4.85

 

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

 

 

 

1,917,000

 

3.71

 

1,470,000

 

4.31

 

 

 

 

 

 

 

 

 

 

 

 

 

Discounted lease rentals

 

2004

 

67,195

 

5.90

 

43,607

 

6.24

 

 

 

2005

 

29,845

 

5.59

 

18,097

 

5.68

 

 

 

2006

 

10,828

 

5.55

 

4,134

 

5.55

 

 

 

2007

 

2,811

 

5.60

 

522

 

5.30

 

 

 

2008

 

936

 

5.56

 

53

 

5.54

 

 

 

2009

 

9

 

5.55

 

 

 

Total discounted lease rentals

 

 

 

111,624

 

5.77

 

66,413

 

6.04

 

 

 

 

 

 

 

 

 

 

 

 

 

Other borrowings

 

2005

 

2,200

 

4.50

 

 

 

 

 

2006

 

2,200

 

4.50

 

 

 

 

 

2007

 

2,200

 

4.50

 

 

 

 

 

2008

 

2,200

 

4.50

 

 

 

Total other borrowings

 

 

 

8,800

 

4.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total long-term borrowings

 

 

 

$

2,037,424

 

3.83

 

$

1,536,413

 

4.38

 

 

Included in long-term borrowings at March 31, 2004 were $767.5 million of fixed-rate Federal Home Loan Bank (“FHLB”) advances and repurchase agreements with other financial institutions, which are callable at par on certain anniversary dates and, for most, quarterly thereafter until maturity.  If called, replacement funding will be provided by the counterparties at the then-prevailing market interest rates.  The probability that these advances and repurchase agreements will be called depends primarily on the level of related interest rates during the call period.  At March 31, 2004, the contract rate exceeded the market rate on all of the fixed-rate callable advances and repurchase agreements.

 

10



 

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

 

(7)          Stockholders’ Equity

 

Treasury stock and other consists of the following:

 

(In thousands)

 

At
March 31,
2004

 

At
December 31,
2003

 

 

 

 

 

 

 

Treasury stock, at cost

 

$

(750,425

)

$

(751,586

)

Shares held in trust for deferred compensation plans, at cost

 

(68,118

)

(71,103

)

Unamortized stock compensation

 

(15,390

)

(16,712

)

 

 

$

(833,933

)

$

(839,401

)

 

TCF purchased 13,445 shares of its common stock during the first quarter of 2004, compared with 757,097 shares for the same 2003 period.  At March 31, 2004, TCF had 3.7 million shares remaining in its stock repurchase program authorized by the Board of Directors.

 

(8)          Regulatory Capital Requirements

 

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

 

 

 

Actual

 

Minimum Capital
Requirement

 

Excess

 

(Dollars in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

As of March 31, 2004:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

$

791,245

 

6.91

%

$

343,723

 

3.00

%

$

447,522

 

3.91

%

TCF National Bank

 

787,369

 

6.89

 

342,665

 

3.00

 

444,704

 

3.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

791,245

 

9.78

 

323,527

 

4.00

 

467,718

 

5.78

 

TCF National Bank

 

787,369

 

9.75

 

322,865

 

4.00

 

464,504

 

5.75

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

870,330

 

10.76

 

647,054

 

8.00

 

223,276

 

2.76

 

TCF National Bank

 

866,454

 

10.73

 

645,730

 

8.00

 

220,724

 

2.73

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2003:

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 leverage capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

$

765,271

 

6.87

%

$

334,402

 

3.00

%

$

430,869

 

3.87

%

TCF National Bank

 

754,599

 

6.83

 

331,649

 

3.00

 

422,950

 

3.83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

765,271

 

9.75

 

313,825

 

4.00

 

451,446

 

5.75

 

TCF National Bank

 

754,599

 

9.64

 

313,143

 

4.00

 

441,456

 

5.64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital

 

 

 

 

 

 

 

 

 

 

 

 

 

TCF Financial Corporation

 

841,982

 

10.73

 

627,650

 

8.00

 

214,332

 

2.73

 

TCF National Bank

 

831,310

 

10.62

 

626,286

 

8.00

 

205,024

 

2.62

 

 

11



 

At March 31, 2004, TCF and TCF National 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.

 

(9)          Employee Benefit Plans

 

The following table sets forth the net benefit cost (credit) included in compensation and employee benefits expense for TCF’s Pension Plan and Postretirement Plan for the three months ended March 31, 2004 and 2003:

 

 

 

Pension Plan

 

Postretirement Plan

 

 

 

Three Months Ended March 31,

 

Three Months Ended March 31,

 

(In thousands)

 

2004

 

2003

 

2004

 

2003

 

Service cost

 

$

1,158

 

$

987

 

$

14

 

$

15

 

Interest cost

 

791

 

737

 

179

 

185

 

Expected return on plan assets

 

(1,489

)

(1,593

)

 

 

Amortization of transition obligation

 

 

 

52

 

52

 

Amortization of prior service cost

 

(58

)

(90

)

 

 

Recognized actuarial gain

 

 

 

68

 

57

 

Net periodic benefit cost

 

$

402

 

$

41

 

$

313

 

$

309

 

 

TCF currently does not have any minimum contribution requirement for the Pension Plan in 2004 and may contribute up to $2.6 million under the maximum contributions formulas for 2003.  During the first quarter of 2004, TCF contributed $260 thousand to the Postretirement Plan.

 

(10) Derivative Instruments and Hedging Activities

 

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

 

TCF’s pipeline of locked residential mortgage loan commitments, adjusted for loans not expected to close, and forward sales contracts are considered derivatives and are recorded at fair value, with the changes in fair value recognized in gains on sales of loans under mortgage banking revenue in the Consolidated Statements of Income.  TCF utilizes forward sales contracts to hedge its risk of changes in the fair value, due to changes in interest rates, of both locked residential mortgage loan commitments and its residential loans held for sale.  Residential mortgage loans held for sale are carried at the lower of cost or market as adjusted for the effects of fair value hedges using quoted market prices.  Because the fair value of the residential loans held for sale is hedged with forward sales contracts of the same loan types, or substantially the same loan types, the hedges are highly effective at managing the risk of changing fair values of such loans.  Any differences between the changes in fair value of the hedged residential loans held for sale and in the fair value of the forward sales contracts are not expected to be and were not material due to the nature of the hedging instruments and were recorded in gains on sales of loans.  Forward mortgage loan sales commitments totaled $227.4 million at March 31, 2004 and $149.1 million at December 31, 2003.

 

12



 

(11) Business Segments

 

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

 

(In thousands)

 

Banking

 

Leasing and
Equipment
Finance

 

Mortgage
Banking

 

Other

 

Eliminations
and
Reclassifications

 

Consolidated

 

At or For the Three Months Ended March 31, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

127,028

 

$

20,868

 

$

1,120

 

$

203

 

$

 

$

149,219

 

Non-interest income

 

101,318

 

10,395

 

3,455

 

8

 

 

115,176

 

Total

 

$

228,346

 

$

31,263

 

$

4,575

 

$

211

 

$

 

$

264,395

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

103,763

 

$

12,459

 

$

2,169

 

$

(212

)

$

314

 

$

118,493

 

Provision for credit losses

 

776

 

384

 

 

 

 

1,160

 

Non-interest income

 

101,318

 

10,395

 

3,769

 

24,464

 

(24,770

)

115,176

 

Non-interest expense

 

125,789

 

9,380

 

6,609

 

23,384

 

(24,456

)

140,706

 

Income tax expense (benefit)

 

26,732

 

4,678

 

(238

)

(30

)

 

31,142

 

Net income (loss)

 

$

51,784

 

$

8,412

 

$

(433

)

$

898

 

$

 

$

60,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

11,252,459

 

$

1,325,736

 

$

179,370

 

$

119,510

 

$

(1,152,756

)

$

11,724,319

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At or For the Three Months Ended March 31, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

148,336

 

$

20,279

 

$

3,500

 

$

(1

)

$

 

$

172,114

 

Non-interest income

 

98,207

 

13,607

 

(430

)

12

 

 

111,396

 

Total

 

$

246,543

 

$

33,886

 

$

3,070

 

$

11

 

$

 

$

283,510

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

106,670

 

$

10,452

 

$

5,465

 

$

(278

)

$

103

 

$

122,412

 

Provision for credit losses

 

984

 

1,726

 

 

 

 

2,710

 

Non-interest income

 

98,207

 

13,607

 

(327

)

23,339

 

(23,430

)

111,396

 

Non-interest expense

 

121,334

 

10,366

 

6,585

 

23,792

 

(23,327

)

138,750

 

Income tax expense (benefit)

 

28,658

 

4,444

 

(511

)

(370

)

 

32,221

 

Net income (loss)

 

$

53,901

 

$

7,523

 

$

(936

)

$

(361

)

$

 

$

60,127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

11,709,029

 

$

1,089,997

 

$

312,733

 

$

89,800

 

$

(1,074,287

)

$

12,127,272

 

 

13



 

(12) Earnings Per Common Share

 

The computation of basic and diluted earnings per share is presented in the following table:

 

 

 

Three Months Ended
March 31,

 

(Dollars in thousands, except per-share data)

 

2004

 

2003

 

 

 

 

 

 

 

Basic Earnings Per Common Share

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

60,661

 

$

60,127

 

 

 

 

 

 

 

Weighted average shares outstanding

 

70,501,098

 

73,527,939

 

Unvested restricted stock grants (1)

 

(1,510,155

)

(1,506,887

)

Weighted average common shares outstanding for basic earnings per common share

 

68,990,943

 

72,021,052

 

 

 

 

 

 

 

Basic earnings per common share

 

$

.88

 

$

.83

 

 

 

 

 

 

 

Diluted Earnings Per Common Share

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

60,661

 

$

60,127

 

 

 

 

 

 

 

Weighted average number of common shares outstanding adjusted for effect of dilutive securities:

 

 

 

 

 

Weighted average common shares outstanding used in basic earnings per common share calculation

 

68,990,943

 

72,021,052

 

Net dilutive effect of:

 

 

 

 

 

Stock option grants

 

90,544

 

96,741

 

Restricted stock grants (1)

 

195,525

 

169,876

 

 

 

69,277,012

 

72,287,669

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

.88

 

$

.83

 

 


(1)          At March 31, 2004 and March 31, 2003, there were 1,071,123 shares of performance-based restricted stock granted to certain executive officers which will vest only if certain earnings per share goals are achieved by 2008. Failure to achieve the goals will result in all or a portion of the shares being forfeited.  In accordance with SFAS No. 128, “Earnings per Share,” these shares have been deducted from weighted average shares outstanding used for the computation of basic and diluted earnings per common share, as all necessary conditions for inclusion have not been satisfied.  The remaining unvested restricted stock grants vest over specified time periods, and are included in the computation of diluted earnings per common share in accordance with the treasury stock method prescribed in SFAS No. 128.

 

14



 

(13) Comprehensive Income

 

Comprehensive income is the total of net income and other comprehensive income (loss), which for TCF is comprised entirely of unrealized gains and losses on investment securities available for sale.  The following table summarizes the components of comprehensive income:

 

 

 

Three Months Ended
March 31,

 

(In thousands)

 

2004

 

2003

 

Net income

 

$

60,661

 

$

60,127

 

 

 

 

 

 

 

Other comprehensive income (loss) before tax:

 

 

 

 

 

Unrealized holding gains (losses) arising during the period on securities available for sale

 

23,893

 

(1,829

)

 

 

 

 

 

 

Reclassification adjustment for gains included in net income

 

(12,717

)

(21,137

)

 

 

 

 

 

 

Income tax expense (benefit)

 

4,001

 

(8,326

)

 

 

 

 

 

 

Total other comprehensive income (loss)

 

7,175

 

(14,640

)

 

 

 

 

 

 

Comprehensive income

 

$

67,836

 

$

45,487

 

 

15


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

 

Item 2. –  Management’s Discussion and Analysis of Financial

Condition and Results of Operations

 

OVERVIEW

 

TCF is a national financial holding company located in Wayzata, Minnesota.  Its principal subsidiary, TCF National Bank, is headquartered in Minnesota and had 406 banking offices in Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana at March 31, 2004.

 

TCF provides convenient financial services through multiple channels to customers located primarily in the Midwest.  TCF has developed products and services designed to meet the needs of all consumers.  The Company focuses on attracting and retaining customers through service and convenience, including branches that are open seven days a week and on most holidays, extensive full-service supermarket branch and automated teller machine (“ATM”) networks, and telephone and Internet banking.  TCF’s philosophy is to generate net interest income and fees and other revenue growth through business lines that emphasize higher yielding assets and lower or no interest-cost deposits.  The Company’s growth strategies include new branch expansion and the development of new products and services.  New products and services are designed to build on existing businesses and expand into complementary products and services through strategic initiatives.

 

TCF’s core businesses are comprised of traditional and supermarket bank branches, campus banking, EXPRESS TELLER® ATMs, VISA® debit cards, commercial lending, small business banking, consumer lending, mortgage banking, leasing and equipment finance and investment, brokerage and insurance services.  TCF emphasizes the “Totally Free” checking account as its anchor account, which provides opportunities to cross sell other convenience products and services and generate additional fee income.

 

At March 31, 2004, 232, or 57%, of TCF’s 406 branches were newly opened since January 1, 1998 and consist of 188 supermarket branches and 44 traditional branches.  Opening new branches is an integral part of TCF’s growth strategy for generating new deposit accounts and the related revenue that is associated with the accounts and other products.  New branches typically produce net losses during the first 24-30 months of operations before they become profitable, and therefore the level and timing of new branch expansion can have a significant impact on TCF’s  profitability.  TCF’s growth in checking accounts is primarily occurring in new branches with growth in older, mature branches being slower and more difficult to generate.  The success of TCF’s branch expansion is dependent on the continued long-term success and viability of branch banking.  Success in supermarket branches is also dependent on the success and viability of the supermarket branch locations.  Economic slowdowns, financial or labor difficulties and competitive pressures from new grocery retailers may have an adverse impact on the supermarket industry and therefore reduce customer activity in TCF’s supermarket branches.  TCF is subject to the risk, among others, that its license for supermarket branches will terminate in connection with the sale or closure of a store by a supermarket chain.

 

TCF’s lending strategy is to originate high credit quality, primarily secured, loans and leases.  Commercial loans are generally made on local properties or to local customers, and are virtually all secured.  TCF’s largest core lending business is its consumer home equity loan operation, which offers fixed- and variable-rate loans and lines of credit secured by residential real estate properties.  The leasing and equipment finance businesses consist of Winthrop Resources Corporation (“Winthrop”), a leasing company that leases technology and data processing equipment to companies nationwide, TCF Leasing, Inc. (“TCF Leasing”), a general leasing and equipment finance business and VGM Leasing, Inc. (“VGM”), a wholly-owned subsidiary of TCF Leasing, acquired in March 2004, specializing in home medical equipment financing.  TCF’s leasing and equipment finance businesses operate in all 50 states.

 

As a primarily secured lender, TCF emphasizes credit quality over asset growth.  As a result, TCF’s credit losses are generally lower than those experienced by other banks.  The allowance for loan and lease losses, while generally lower as a percent of loans and leases than the average in the banking industry, reflects the lower historical charge-

 

16



 

offs and management’s expectation of the risk of loss inherent in the loan and lease portfolio.  See “Consolidated Financial Condition Analysis-Allowance for Loan and Lease Losses.”

 

Net interest income, the difference between interest income earned on loans and leases and on investments and interest expense paid on deposits and short-term and long-term borrowings, represents 50.7% of TCF’s total revenue. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest earning assets and the mix of interest bearing and non-interest bearing deposits and borrowings.  TCF manages the risk of changes in interest rates on its net interest income through an Asset/Liability Committee and through related interest rate risk monitoring and management policies.  TCF does not utilize any unconsolidated subsidiaries or special purpose entities to provide off-balance sheet borrowings.  See “Interest – Rate Risk” for further discussion of TCF’s interest rate risk position.

 

The Company’s VISAÒ debit card program has grown significantly since its inception in 1996.  TCF was the 13th largest VISAÒ Classic debit card issuer in the United States based on sales volume of $1.1 billion for the 2003 fourth quarter, according to VISAâ, USA.  TCF earns interchange revenue from customer debit card transactions.  During the first quarter of 2004, 89.5% of TCF’s debit card sales volume was generated from off-line (signature-based) transactions.  The average interchange rate on these off-line transactions declined from 1.59% for the first quarter of 2003 to 1.32% for the first quarter of 2004.  The decline in the average off-line interchange rate was the result of VISAÒ USA lowering interchange rates for many merchants effective August 1, 2003, as part of the settlement of class action lawsuits brought by these merchants against VISA challenging rules imposed by VISA governing the acceptance of debit cards by merchants.  Additionally, as part of the settlement, VISA established new interchange rates which took effect in February 2004, and these rates increased slightly from the rates established August 1, 2003.  The average off-line interchange rate since February 1, 2004 has been 1.38%.  In late 2003, TCF renegotiated its contract with VISA and agreed to an extension through 2013.  The effect of this new contract is to lower various costs that TCF pays for processing and marketing of the VISA debit cards.  The continued success of TCF’s debit card program is dependent on the success and viability of VISA and the continued use by customers and acceptance by merchants of debit cards.

 

TCF’s mortgage banking business originates residential mortgage loans and sells them to investors, primarily retaining the servicing rights and related servicing revenue.  Generally accepted accounting principles require TCF to record the value of the servicing rights on the balance sheet at the time the loans are sold.  Capitalized servicing rights are amortized based on the expected pattern and life of related servicing revenues and are also evaluated quarterly for impairment.  As interest rates fall, there is a higher probability of prepayment as the customer can generally refinance the loan with relative ease.  In addition, as property values increase, customers’ home equity increases, enabling customers to engage in “cash-out” refinance transactions where the customer refinances an existing mortgage into a higher balance loan in order to draw out the increased home equity.  At March 31, 2004, 63% of TCF’s third party servicing portfolio consisted of loans with interest rates below 6%.  If interest rates remain at current levels or increase in 2004, there should be reduced refinance activity and reduced related amortization and provision for impairment as compared with 2003.  TCF does not utilize derivatives to manage the impairment risk in its capitalized mortgage servicing rights.

 

The following portions of the Management’s Discussion and Analysis focus in more detail on the results of operations for the first quarter of 2004 and 2003 and on information about TCF’s balance sheet, credit quality, liquidity and funding resources, capital and other matters.

 

17



 

RESULTS OF OPERATIONS

 

Performance Summary

 

TCF reported diluted earnings per common share of 88 cents for the first quarter of 2004, compared with 83 cents for the first quarter of 2003.  Net income was $60.7 million for the first quarter of 2004, compared with $60.1 million for the same 2003 period.  For the first quarter of 2004, return on average assets and return on average common equity were 2.11% and 25.90%, respectively, up from 1.99% and 24.70% for the same 2003 period.

 

Operating Segment Results

 

BANKING, comprised of deposits and investment products, commercial banking, small business banking, consumer lending, residential lending and treasury services, reported net income of $51.8 million for the first quarter of 2004, down 4% from $53.9 million for the same 2003 period.  Banking net interest income for the first quarter of 2004 was $103.8 million, compared with $106.7 million for the same 2003 period.  The provision for credit losses totaled $776 thousand for the first quarter of 2004, compared with $984 thousand for the same 2003 period.  Non-interest income totaled $101.3 million for the first quarter of 2004, up 3.2% from $98.2 million for the same 2003 period.  During the first quarter of 2004, TCF sold mortgage-backed securities and realized gains of $12.7 million, compared with gains on sale of securities of $21.1 million in the first quarter of 2003.  Also in the first quarter of 2003, TCF prepaid $150 million of Federal Home Loan Bank (“FHLB”) advances and recorded losses on termination of debt of $6.6 million.  There were no similar debt terminations during the first quarter of 2004.  See “Results of Operations – Consolidated Net Interest Income” for further discussion of the sales of mortgage-backed securities during the first quarter of 2004.  In addition to the gains and losses discussed above, fees, service charges, debit card and other revenues were $86.6 million for the first quarter of 2004, up $5 million, or 6.2%, from the first quarter of 2003.  These increases resulted primarily from TCF’s expanding branch network and customer base.  Non-interest expense totaled $125.8 million for the first quarter of 2004, up 3.7% from $121.3 million for the same 2003 period.  The increase was primarily due to costs associated with new branches.

 

TCF had 406 branches, including 240 full service branches in supermarkets at March 31, 2004.  During the first quarter of 2004, TCF opened four new branches, including two new traditional branches and two new supermarket branches.  TCF has opened 232 new branches since January 1, 1998.  TCF plans to open 24 more new branches in the remainder of 2004, consisting of 20 traditional branches and four supermarket branches.  See “Consolidated Financial Condition Analysis – New Branch Expansion” for further information.

 

LEASING AND EQUIPMENT FINANCE, an operating segment comprised of TCF’s wholly-owned subsidiaries Winthrop and TCF Leasing, which includes TCF Leasing’s newly acquired subsidiary VGM, provides a broad range of comprehensive lease and equipment finance products.  Effective March 1, 2004, TCF Leasing acquired VGM, a company specializing in home medical equipment financing.  This acquisition added 40 leasing professionals in Waterloo, Iowa and $80 million of portfolio balances.

 

This operating segment reported net income of $8.4 million for the first quarter of 2004, up 11.8% from $7.5 million for the same 2003 period.  Net interest income for the first quarter of 2004 was $12.5 million, up 19.2% from $10.5 million for the same 2003 period.  The provision for credit losses for this operating segment totaled $384 thousand for the first quarter of 2004, down from $1.7 million for the same 2003 period, primarily as a result of a $1.1 million recovery on a single credit during the first quarter of 2004.  Non-interest income totaled $10.4 million for the first quarter of 2004, down from $13.6 million for the same 2003 period due primarily to lower sales-type and operating lease revenues in Winthrop.  Leasing and Equipment Finance revenues may fluctuate from quarter to quarter based on customer driven factors not entirely within the control of TCF.  Non-interest expense totaled $9.4 million for the first quarter of 2004, down $986 thousand from $10.4 million for the same 2003 period.

 

18



 

MORTGAGE BANKING activities include the origination of residential mortgage loans, generally for sale to third parties with servicing retained.  This operating segment reported a net loss of $433 thousand for the first quarter of 2004, compared with a net loss of $936 thousand for the same 2003 period.  TCF’s mortgage banking operations funded $241.8 million in loans during the first quarter of 2004, down 67% from $729.6 million in the same 2003 period.  Non-interest income totaled $3.8 million for the first quarter of 2004, up $4.1 million from a negative $327 thousand for the same 2003 period.  The increase in non-interest income was primarily due to a decline in amortization and provision for impairment of mortgage servicing rights compared with the first quarter of 2003, related to lower levels of prepayments, partially offset by declines in gains on sales of loans.  Mortgage applications in process (mortgage pipeline) increased $203 million from December 31, 2003 to $444.1 million at March 31, 2004.  See Note 5 of Notes to the Consolidated Financial Statements for further discussion.  Mortgage Banking’s non-interest expense totaled $6.6 million for the first quarter of 2004, unchanged from $6.6 million for the first quarter of 2003.

 

Consolidated Net Interest Income

 

Net interest income for the first quarter of 2004 was $118.5 million, down from $122.4 million for the first quarter of 2003 and $119.1 million for the 2003 fourth quarter.  The net interest margin for the first quarter 2004 was 4.52%, compared with 4.45% for the same 2003 period and 4.68% for the fourth quarter of 2003.  The change in net interest income from the first quarter of 2003 primarily reflects the $517.5 million decrease in average interest earning assets partially offset by the 7 basis point increase in net interest margin.  The decrease in asset balances reflects an $896.8 million increase in consumer and commercial loans and leasing and equipment finance balances offset by a $1.3 billion decrease in residential real estate loans and mortgage-backed securities (“MBS’s”).  The decrease in residential real estate loans and MBS’s reflects management’s decision to delay investing in long-term fixed-rate residential real estate loans and MBS’s in the very low interest rate environment over the course of the last 12 months.  The increase in the net interest margin in the first quarter 2004 over the same period in 2003 reflects a 59 basis point reduction in asset yields due to significant refinancing of fixed-rate assets and an increase in variable-rate assets as a percentage of total assets offset by a 68 basis point reduction in funding costs due to the 2003 prepayment of $954 million higher cost borrowings and the continued decline in the average rate paid on deposits.  The decrease in the net interest margin in the first quarter of 2004 of 16 basis points from the fourth quarter of 2003 was driven by a 16 basis point decline in asset yields as TCF continued to experience refinancings of fixed-rate consumer and commercial loans coupled with customer preference for lower cost variable rate loans.  TCF’s funding costs remained relatively unchanged from the fourth quarter at 1.20%.

 

19



 

The following table summarizes the average balances and the related yields and rates on interest-earning assets and deposits and borrowings for the three months ended March 31, 2004 and 2003:

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2004

 

2003

 

Change

 

(Dollars in thousands)

 

Average
Balance

 

Yields
and
Rates (1)

 

Average
Balance

 

Yields
and
Rates (1)

 

Average
Balance

 

Yields
and
Rates

 

Interest-earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

141,770

 

2.18

%

$

118,828

 

4.72

%

$

22,942

 

(254

) bps

Securities available for sale (2)

 

1,519,374

 

5.35

 

2,341,002

 

5.77

 

(821,628

)

(42

)

Loans held for sale

 

359,238

 

3.16

 

488,110

 

4.28

 

(128,872

)

(112

)

Loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

3,706,061

 

6.08

 

3,047,799

 

6.78

 

658,262

 

(70

)

Commercial real estate

 

1,942,494

 

5.46

 

1,848,125

 

6.07

 

94,369

 

(61

)

Commercial business

 

427,824

 

4.06

 

438,681

 

4.35

 

(10,857

)

(29

)

Leasing and equipment finance

 

1,194,235

 

6.99

 

1,039,213

 

7.81

 

155,022

 

(82

)

Subtotal

 

7,270,614

 

5.94

 

6,373,818

 

6.57

 

896,796

 

(63

)

Residential real estate

 

1,193,435

 

5.78

 

1,680,170

 

6.42

 

(486,735

)

(64

)

Total loans and leases (3)

 

8,464,049

 

5.92

 

8,053,988

 

6.54

 

410,061

 

(62

)

Total interest-earning assets

 

$

10,484,431

 

5.69

 

$

11,001,928

 

6.26

 

$

(517,497

)

(57

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits and Borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking

 

$

3,329,383

 

.05

%

$

2,858,113

 

.04

%

$

471,270

 

1

 bps

Savings

 

1,923,295

 

.36

 

2,057,542

 

.70

 

(134,247

)

(34

)

Money market

 

832,695

 

.37

 

886,552

 

.70

 

(53,857

)

(33

)

Subtotal

 

6,085,373

 

.19

 

5,802,207

 

.38

 

283,166

 

(19

)

Certificates of deposit

 

1,580,107

 

1.93

 

1,901,136

 

2.74

 

(321,029

)

(81

)

Total deposits

 

7,665,480

 

.55

 

7,703,343

 

.96

 

(37,863

)

(41

)

Borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

735,475

 

1.28

 

869,735

 

1.30

 

(134,260

)

(2

)

Long-term borrowings

 

1,812,508

 

3.94

 

2,080,713

 

5.46

 

(268,205

)

(152

)

Total borrowings

 

2,547,983

 

3.17

 

2,950,448

 

4.23

 

(402,465

)

(106

)

Total deposits and borrowings

 

$

10,213,463

 

1.20

 

$

10,653,791

 

1.87

 

$

(440,328

)

(67

)

 


(1)   Annualized.

(2)   Average balance and yield of securities available for sale are based upon the historical amortized cost.

(3)   Average balance of loans and leases includes non-accrual loans and leases, and is presented net of unearned income.

 

20



 

The following table presents the components of the changes in net interest income by volume and rate:

 

 

 

Three Months Ended
March 31, 2004
Versus Same Period in 2003

 

(In thousands)

 

Increase (Decrease) Due to

 

 

 

Volume(1)

 

Rate(1)

 

Total

 

Interest income:

 

 

 

 

 

 

 

Investments

 

$

232

 

$

(862

)

$

(630

)

Securities available for sale

 

(11,141

)

(2,291

)

(13,432

)

Loans held for sale

 

(1,199

)

(1,186

)

(2,385

)

Loans and leases:

 

 

 

 

 

 

 

Consumer

 

10,375

 

(5,722

)

4,653

 

Commercial real estate

 

1,384

 

(2,915

)

(1,531

)

Commercial business

 

(116

)

(318

)

(434

)

Leasing and equipment finance

 

2,839

 

(2,250

)

589

 

Residential real estate

 

(7,235

)

(2,490

)

(9,725

)

Total interest income

 

(7,869

)

(15,026

)

(22,895

)

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Checking

 

63

 

42

 

105

 

Savings

 

(223

)

(1,661

)

(1,884

)

Money market

 

(89

)

(687

)

(776

)

Certificates of deposit

 

(1,961

)

(3,422

)

(5,383

)

Short-term borrowings

 

(430

)

(50

)

(480

)

Long-term borrowings

 

(3,376

)

(7,182

)

(10,558

)

Total interest expense

 

(1,990

)

(16,986

)

(18,976

)

Net interest income

 

(5,825

)

1,906

 

(3,919

)

 


(1)   Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to volume and the change due to rate.

 

Changes in net interest income are dependent upon the movement of interest rates, the volume and mix of interest-earning assets and deposits and borrowings and the level of non-performing assets.  Achieving net interest margin growth over time is dependent on TCF’s ability to generate higher-yielding assets and lower-cost retail deposits.  The net impact of the changes in interest-bearing assets and deposits and borrowings has positioned TCF to be more asset sensitive (i.e. more assets than liabilities will be maturing, repricing, or prepaying during the next twelve months).  Although this positive gap position will benefit TCF in a rising rate environment, if interest rates remain at current levels or fall further, the net interest margin may continue to compress and net interest income may decline.  An increase in interest rates would affect TCF’s fixed-rate/variable-rate product origination mix and would extend the estimated life of its residential real estate loan and mortgage-backed securities portfolios.  A change in origination mix and/or the extending of the estimated life of mortgage-related assets may have an adverse impact on future net interest income or net interest margin.  Competition for checking, savings and money market deposits, important sources of lower-cost funds for TCF, is intense.  A decline in these low-cost deposits may have an adverse impact on future net interest income or net interest margin as TCF would need to replace these funds with short- or long-term borrowings which may have a higher interest cost.  See “Interest-Rate Risk” and “Consolidated Financial Condition Analysis – Deposits” for further discussion on TCF’s interest rate risk position.

 

Consolidated Provision for Credit Losses

 

TCF provided $1.2 million for credit losses in the first quarter of 2004, down from $2.7 million for the same period in 2003.  Net loan and lease charge-offs were $516 thousand, or .02% (annualized) of average loans and leases, in the first quarter of 2004, down from $1.9 million, or .09% (annualized) of average loans and leases, for the same 2003 period.  Leasing and equipment finance had net recoveries of $106 thousand during the first quarter of 2004, compared with net charge-offs of $971 thousand for the same period in 2003.  The provision for credit losses is calculated as part of the determination of the allowance for loan and lease losses.

 

21



 

The determination of the allowance for loan and lease losses, and the related provision for credit losses is a critical accounting estimate which involves a number of factors such as net charge-offs, delinquencies in the loan and lease portfolio, value of collateral, general economic conditions and management’s assessment of credit risk in the current loan and lease portfolio.  Also see “Consolidated Financial Condition Analysis – Allowance for Loan and Lease Losses.”

 

Consolidated Non-Interest Income

 

Non-interest income is a significant source of revenue for TCF and is an important factor in TCF’s results of operations.  Providing a wide range of retail banking services is an integral component of TCF’s business philosophy and a major strategy for generating additional non-interest income.  Total non-interest income was $115.2 million for the first quarter of 2004, compared with $111.4 million for the same period in 2003.  Significantly contributing to the increase in non-interest income during the first quarter of 2004 were gains on securities available for sale and losses on termination of debt in 2003.

 

Fees and Service Charges

 

Fees and service charges increased $5.2 million, or 9.6%, to $59.7 million for the first quarter of 2004, compared with $54.4 million for the first quarter of 2003. This increase primarily reflects the impact of the investment in new branch expansion and the increase in the number of checking accounts, which totaled 1,472,615 accounts at March 31, 2004, up from 1,358,594 accounts at March 31, 2003.

 

Debit Card Revenue

 

For the first quarter of 2004, debit card revenue totaled $13.5 million, up $258 thousand, or 1.9%, from the first quarter of 2003.  Debit card revenue includes interchange fees on the TCF Check Card.  Interchange fees have been adversely impacted as a result of the settlement of litigation against VISAÒ USA in the second quarter of 2003.  As part of the settlement, VISA lowered interchange rates for certain merchants from August 2003 through February 2004.  Additionally, as part of the settlement, VISA established new interchange rates, which took effect in February 2004, and these rates increased slightly from the rate established August 1, 2003.  The average off-line interchange rate of 1.32% for the first quarter of 2004 was up 12 basis points from the fourth quarter of 2003 rate of 1.20%.  The average off-line interchange rate since February 1, 2004 has been 1.38%.

 

The following table sets forth information about TCF’s debit cards:

 

 

 

At March 31,

 

Change

 

(Dollars in thousands)

 

2004

 

2003

 

Amount

 

%

 

 

 

 

 

 

 

 

 

 

 

Average number of checking accounts with debit cards

 

1,258,593

 

1,148,926

 

109,667

 

9.5

%

 

 

 

 

 

 

 

 

 

 

Percentage of customers with debit cards who were active users

 

54.3

%

53.7

%

 

 

60

bps 

 

 

 

 

 

 

 

 

 

 

Average number of transactions per month on active debit cards for the quarter ended

 

12.6

 

11.9

 

0.7

 

5.9

%

 

 

 

 

 

 

 

 

 

 

Sales volume for the quarter ended:

 

 

 

 

 

 

 

 

 

Off-line (Signature)

 

$

964,168

 

$

809,908

 

$

154,260

 

19.0

 

On-line (PIN)

 

112,775

 

74,697

 

38,078

 

51.0

 

Total

 

$

1,076,943

 

$

884,605

 

$

192,338

 

21.7

 

 

 

 

 

 

 

 

 

 

 

Off-line sales volume as a percentage of total

 

89.5

%

91.6

%

 

 

(210

)bps

 

 

 

 

 

 

 

 

 

 

Average off-line interchange rate

 

1.32

%

1.59

%

 

 

(27

)

 

22



 

ATM Revenue

 

For the first quarter of 2004, ATM revenue was $10 million, down slightly from $10.4 million for the first quarter of 2003.  The decline in ATM revenue in the first quarter of 2004 was attributable to a decline in utilization of non-owned ATM machines by TCF customers and declines in utilization of TCF’s ATM machines by non-customers.  At March 31, 2004, TCF had 1,147 EXPRESS TELLERÒ ATM machines, compared with 1,167 machines at March 31, 2003.

 

Leasing and Equipment Finance Revenue

 

Leasing and equipment finance revenues totaled $10.2 million for the first quarter of 2004, compared with $13.6 million for the same 2003 period, primarily due to lower sales-type and operating lease revenues in Winthrop.  Leasing and equipment finance revenues may fluctuate from quarter to quarter based on customer-driven factors not entirely within the control of TCF.

 

Mortgage Banking Revenue

 

Mortgage banking revenue increased $3.9 million, to $3.5 million in the first quarter of 2004, compared with a negative $430 thousand for the same 2003 period.  The increase in mortgage banking revenue was primarily due to a $13.6 million decrease in amortization and provision for impairment of mortgage servicing rights, partially offset by an $8.5 million decline in gains on sales of loans due to lower volumes and increased pricing competition.

 

The following table sets forth information about mortgage banking revenues:

 

 

 

Three Months Ended March 31,

 

Change

 

(Dollars in thousands)

 

2004

 

2003

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

Servicing income

 

$

4,625

 

$

5,433

 

$

(808

)

(14.9

)%

Less mortgage servicing rights:

 

 

 

 

 

 

 

 

 

Amortization

 

3,676

 

7,801

 

(4,125

)

(52.9

)

Provision for impairment

 

 

9,500

 

(9,500

)

(100.0

)

Subtotal

 

3,676

 

17,301

 

(13,625

)

(78.8

)

Net servicing income (loss)

 

949

 

(11,868

)

12,817

 

N.M.

 

Gains on sales of loans

 

2,136

 

10,626

 

(8,490

)

(79.9

)

Other income

 

370

 

812

 

(442

)

(54.4

)

Total mortgage banking revenue

 

$

3,455

 

$

(430

)

$

3,885

 

N.M.

 

 


N.M. Not meaningful

 

23



 

The following table sets forth further information about mortgage banking:

 

 

 

At
March 31,
2004

 

At
December 31,
2003

 

Change

 

(Dollars in thousands)

 

 

 

$

 

%

 

 

 

 

 

 

 

 

 

 

 

Third party servicing portfolio

 

$

5,005,082

 

$

5,122,741

 

$

(117,659

)

(2.3

) %

Weighted average note rate

 

5.92

%

5.97

%

(5

) bps

N.A.

 

 

 

 

 

 

 

 

 

 

 

Mortgage applications in process

 

$

444,124

 

$

241,126

 

$

202,998

 

84.2

 

 

 

 

 

 

 

 

 

 

 

Capitalized mortgage servicing rights, net

 

$

50,726

 

$

52,036

 

$

(1,310

)

(2.5

)

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights as a percentage of servicing portfolio

 

1.01

%

1.02

%

(1

) bps

N.A.

 

 

 

 

 

 

 

 

 

 

 

Average service fee (basis points)

 

31.6

 bps

31.7

bps

(.1

) bps

N.A.

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights as a multiple of average service fee

 

3.2

X

3.2

X

X

N.A.

 

 


N.A. Not applicable.

 

Mortgage banking revenues can be significantly impacted by the amount of amortization and provision for impairment of mortgage servicing rights.  The valuation of mortgage servicing rights is a critical accounting estimate for TCF.  This estimate is based upon loan types, note rates and prepayment assumptions.  Changes in the mix of loans, interest rates, defaults or prepayment speeds may have a material effect on the amortization amount and possible impairment in valuation.  In a declining interest rate environment, prepayment speed assumptions will increase and result in an acceleration in the amortization of the mortgage servicing rights as the assumed underlying portfolio declines and also may result in impairment as the value of the mortgage servicing rights decline.  TCF periodically evaluates its capitalized mortgage servicing rights for impairment.  During the first quarter of 2003, TCF recorded $9.5 million in provision for impairment on its capitalized mortgage serving rights as a result of strong refinance activity and high prepayments in the servicing portfolio during the first quarter of 2003.  No similar provision for impairment was recorded in the first quarter of 2004.  A key component in determining the fair value of mortgage servicing rights is the projected cash flows of the underlying loan portfolio.  TCF uses projected cash flows and related prepayment assumptions based on management’s best estimates.  The range in prepayment assumptions at March 31, 2004 and December 31, 2003 reflects management’s assumption of higher initial prepayments in early periods that decline over time and level off to a constant prepayment speed.  See Note 5 of Notes to the Consolidated Financial Statements for additional information concerning TCF’s mortgage servicing rights.

 

The following tables summarize the servicing portfolio by interest rate tranche, the range of prepayment speed assumptions and the weighted average remaining life of the loans by interest tranche used in the determination of the valuation and amortization of mortgage servicing rights as of March 31, 2004 and December 31, 2003:

 

 

 

March 31, 2004

 

(Dollars in thousands)

 

 

 

Prepayment Speed Assumption

 

Weighted
Average Life
(in Years)

 

 

 

 

 

 

 

 

 

Weighted
Average

 

 

Interest Rate Tranche

 

Unpaid Balance

 

High

 

Low

 

 

 

0 to 5.50%

 

$

1,699,516

 

17.2

%

14.6

%

15.0

%

6.3

 

5.51 to 6.00%

 

1,447,536

 

26.9

 

22.9

 

23.5

 

4.3

 

6.01 to 6.50%

 

776,703

 

38.9

 

33.1

 

34.3

 

2.7

 

6.51 to 7.00%

 

647,749

 

41.9

 

35.6

 

37.2

 

2.3

 

7.01 and higher

 

433,578

 

40.7

 

34.6

 

36.1

 

2.2

 

 

 

$

5,005,082

 

25.4

 

21.6

 

22.4

 

4.3

 

 

24



 

 

 

December 31, 2003

 

(Dollars in thousands)

 

 

 

Prepayment Speed Assumption

 

Weighted
Average Life
(in Years)

 

 

 

 

 

 

 

 

 

Weighted
Average

 

 

Interest Rate Tranche

 

Unpaid Balance

 

High

 

Low

 

 

 

0 to 5.50%

 

$

1,648,918

 

15.1

%

13.0

%

13.3

%

7.2

 

6.51 to 6.00%

 

1,407,315

 

20.5

 

17.7

 

17.9

 

5.6

 

6.01 to 6.50%

 

830,161

 

28.8

 

24.9

 

25.4

 

3.8

 

6.51 to 7.00%

 

740,675

 

35.9

 

31.0

 

31.8

 

2.7

 

7.01 and higher

 

495,672

 

39.8

 

34.4

 

35.5

 

2.3

 

 

 

$

5,122,741

 

21.6

 

18.6

 

19.0

 

5.1

 

 

At March 31, 2004 and December 31, 2003, the sensitivity of the current fair value of mortgage servicing rights to a hypothetical immediate 10% and 25% adverse change in prepayment speed assumptions and discount rate are as follows:

 

(Dollars in millions)

 

At
March 31,
2004

 

At
December 31,
2003

 

 

 

 

 

 

 

Fair value of mortgage servicing rights

 

$

50.7

 

$

58.0

 

Weighted-average life (in years)

 

4.3

 

5.1

 

Weighted-average prepayment speed assumption (annual rate)

 

22.4

%

19.0

%

Weighted-average discount rate

 

7.5

%

7.5

%

Impact on fair value of 10% adverse change in prepayment speed assumptions

 

$

(3.0

)

$

(3.2

)

Impact on fair value of 25% adverse change in prepayment speed assumptions

 

$

(6.8

)

$

(7.4

)

Impact on fair value of 10% adverse change in discount rate

 

$

(1.1

)

$

(1.3

)

Impact on fair value of 25% adverse change in discount rate

 

$

(2.6

)

$

(3.3

)

 

These sensitivities are theoretical and should be used with caution.  As the figures indicate, changes in fair value based on a given variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear.  Also, in the above table, the effect of a variation in a particular assumption on the fair value of the mortgage servicing rights is calculated independently without changing any other assumptions.  In reality, changes in one factor may result in changes in another (for example, changes in prepayment speed estimates could result in changes in discount rates or market interest rates), which might either magnify or counteract the sensitivities.  As reflected above, a significant increase in future prepayment speeds can have a significant impact on the impairment of the mortgage servicing rights.  TCF does not use derivatives to hedge its mortgage servicing rights asset.

 

Other Non-Interest Income

 

Gains on sales of securities available for sale of $12.7 million and $21.1 million were recognized, on the sales of $854 million and $532.2 million in mortgage-backed securities in the first quarter of 2004 and 2003, respectively. During the first quarter of 2003, TCF prepaid $150 million of higher cost FHLB advances and recorded losses on termination of debt of $6.6 million.  There were no similar prepayments of debt during the first quarter of 2004.

 

Consolidated Non-Interest Expense

 

Non-interest expense totaled $140.7 million for the first quarter 2004, up 1.4% from $138.8 million for the same 2003 period.  Compensation and employee benefits expense totaled $78.9 million for the 2004 first quarter, compared with $76.6 million, or an increase of 3%, from the comparable period in 2003 and was driven by a $1.4 million increase related to new branches opened in the past 12 months.  Occupancy and equipment expense totaled $23.5 million for the first quarter 2004, up $1.9 million from the same 2003 period with $862 thousand relating to costs associated with new branch expansion.  Advertising and promotions totaled $5.9 million for the first quarter of 2004, down 7.0% from $6.4 million for the same 2003 period.  Other non-interest expense totaled $32.4 million for the first quarter of 2004, reflecting a decrease of 5.2% from $34.2 million for the same 2003 period, primarily attributable to the lower mortgage banking volumes and declines in operating lease depreciation and other expenses

 

25



 

in the leasing and equipment finance segment.  Included in other non-interest expense are deposit account losses of $4.2 million for the first quarter of 2004, compared with $3.7 million for the same 2003 period.

 

Income Taxes

 

TCF recorded income tax expense of $31.1 million for the first quarter, or 33.92% of income before income tax expense, compared with $32.2 million, or 34.89% of income before income tax expense, for the comparable 2003 period.  The lower effective tax rate in 2004 primarily reflects the benefits from increased investments in affordable housing partnerships.

 

TCF has a Real Estate Investment Trust (“REIT”) and related companies, that acquire, hold and manage mortgage assets and other authorized investments to generate income.  These companies are consolidated with TCF National Bank and are therefore included in the consolidated financial statements of TCF Financial Corporation.  The REIT must meet specific provisions of the Internal Revenue Code (“IRC”) to continue to qualify as a REIT.  Two specific provisions applicable to the REIT are an income test and an asset test.  At least 75% of the REIT’s gross income, excluding gross income from prohibited transactions, for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property.  Additionally, at least 75% of the REIT’s assets must be represented by real estate assets.  At March 31, 2004, TCF’s REIT met the applicable provisions of the IRC to qualify as a REIT.  State laws may also impose limitations or restrictions on operations of the REIT and the related companies.  These laws are subject to change and are currently under review in Minnesota and Illinois.    If these companies fail to meet any of the required provisions of Federal and state tax laws or if the state tax laws change unfavorably, TCF’s tax expense would increase.

 

The determination of current and deferred income taxes is a critical accounting estimate which is based on complex analyses of many factors including interpretation of Federal and state income tax laws, the differences between the tax and financial reporting bases of assets and liabilities (temporary differences), estimates of amounts due or owed such as the timing of reversal of temporary differences and current financial accounting standards.  Additionally, there can be no assurances that estimates and interpretations used in determining income tax liabilities may not be challenged by Federal and state taxing authorities.  Actual results could differ significantly from the estimates and tax law interpretations used in determining the current and deferred income tax liabilities.  In addition, under generally accepted accounting principles, deferred income tax assets and liabilities are recorded at the current prevailing Federal and state income tax rates.  If such rates change, deferred income tax assets and liabilities must be adjusted in the period of change through a charge or credit to the Consolidated Statements of Income.

 

26



 

CONSOLIDATED FINANCIAL CONDITION ANALYSIS

 

Investments

 

Total investments, which include interest-bearing deposits with banks, federal funds sold, FHLB stock, Federal Reserve Bank stock and other investments, were $411.9 million at March 31, 2004, up $336.7 million from December 31, 2003.  The increase was primarily the result of a temporary increase of $314 million in federal funds sold due to securities sales.  In April 2004, the $314 million in federal funds sold was used to purchase mortgage-backed securities discussed below.

 

Securities Available for Sale

 

The Company purchased $668.1 million and $812.2 million of mortgage-backed securities during the first quarter of 2004 and 2003, respectively, to replace the prepayments of residential real estate loans and mortgage-backed securities.  TCF sold $854 million and $532.2 million of mortgage-backed securities during the first quarter of 2004 and 2003, respectively.  At March 31, 2004, the unrealized gain on TCF’s mortgage-backed securities available for sale portfolio was $20 million.  TCF may, from time to time, sell additional mortgage-backed securities, capture the gains before these securities prepay and utilize the proceeds to either reduce borrowings or to fund growth in loans and leases.  In April 2004, TCF purchased $400 million of mortgage-backed securities with a weighted average yield of 5.23%.

 

Loans and Leases

 

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

 

 

 

At
March 31,
2004

 

At
December 31,
2003

 

 

 

 

 

 

 

 

 

Change

 

(Dollars in thousands)

 

 

 

$

 

%

 

Consumer:

 

 

 

 

 

 

 

 

 

Home equity

 

$

3,782,820

 

$

3,588,027

 

$

194,793

 

5.4

%

Other secured

 

24,676

 

27,265

 

(2,589

)

(9.5

)

Unsecured

 

14,152

 

15,049

 

(897

)

(6.0

)

Total consumer

 

3,821,648

 

3,630,341

 

191,307

 

5.3

 

Commercial:

 

 

 

 

 

 

 

 

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

Permanent

 

1,797,838

 

1,745,435

 

52,403

 

3.0

 

Construction and development

 

165,977

 

171,266

 

(5,289

)

(3.1

)

Total commercial real estate

 

1,963,815

 

1,916,701

 

47,114

 

2.5

 

Commercial business

 

428,588

 

427,696

 

892

 

.2

 

Total commercial

 

2,392,403

 

2,344,397

 

48,006

 

2.0

 

 

 

 

 

 

 

 

 

 

 

Leasing and equipment finance:

 

 

 

 

 

 

 

 

 

Equipment finance loans

 

292,019

 

309,740

 

(17,721

)

(5.7

)

Lease financings:

 

 

 

 

 

 

 

 

 

Direct financing leases

 

981,781

 

853,395

 

128,386

 

15.0

 

Sales-type leases

 

30,917

 

33,073

 

(2,156

)

(6.5

)

Lease residuals, excluding leveraged leases

 

34,450

 

34,171

 

279

 

.8

 

Unearned income and deferred lease costs

 

(102,896

)

(92,710

)

(10,186

)

11.0

 

Investment in leveraged leases

 

20,106

 

22,728

 

(2,622

)

(11.5

)

Total lease financings

 

964,358

 

850,657

 

113,701

 

13.4

 

Total leasing and equipment finance

 

1,256,377

 

1,160,397

 

95,980

 

8.3

 

Total consumer, commercial and leasing and equipment finance

 

7,470,428

 

7,135,135

 

335,293

 

4.7

 

Residential real estate

 

1,152,357

 

1,212,643

 

(60,286

)

(5.0

)

Total loans and leases

 

$

8,622,785

 

$

8,347,778

 

$

275,007

 

3.3

 

 

27



 

The following table sets forth information about loans and leases by state, excluding loans held for sale:

 

(Dollars in thousands)

 

At March 31, 2004

 

 

 

Consumer

 

Commercial

 

Leasing and
Equipment
Finance

 

Residential
Real Estate

 

Total

 

Minnesota

 

$

1,514,011

 

$

690,235

 

$

61,225

 

$

563,470

 

$

2,828,941

 

Michigan

 

681,336

 

714,795

 

85,670

 

301,136

 

1,782,937

 

Illinois

 

999,978

 

399,837

 

46,077

 

216,151

 

1,662,043

 

Wisconsin

 

389,293

 

323,217

 

31,668

 

34,086

 

778,264

 

Colorado

 

186,324

 

11,436

 

28,883

 

4,587

 

231,230

 

California

 

657

 

27,186

 

149,864

 

 

177,707

 

Florida

 

12,107

 

21,197

 

77,196

 

753

 

111,253

 

Ohio

 

6,253

 

23,813

 

48,622

 

7,621

 

86,309

 

Texas

 

797

 

1,362

 

78,608

 

1,425

 

82,192

 

Other

 

30,892

 

179,325

 

648,564

 

23,128

 

881,909

 

Total

 

$

3,821,648

 

$

2,392,403

 

$

1,256,377

 

$

1,152,357

 

$

8,622,785

 

 

At March 31, 2004, 55% of TCF’s consumer and commercial loans consist of variable-rate loans.  The variable-rate consumer loans have their interest rates tied to TCF’s base interest rate, while variable-rate commercial loans (consisting of commercial business and commercial real estate loans) may have their interest rates tied to either TCF’s base rate or LIBOR. In addition, to the extent these loans have interest rate floors, a change in interest rates may not result in a change in the interest rate on the variable-rate loan.  The following table provides additional information relating to TCF’s consumer and commercial loan balances at March 31, 2004:

 

(Dollars in millions)

 

At March 31, 2004

 

 

 

Consumer

 

Commercial

 

Total

 

Variable-rate loans:

 

 

 

 

 

 

 

Loans without an interest rate floor

 

$

47

 

$

602

 

$

649

 

Loans with a variable rate greater than the interest rate floor

 

415

 

86

 

501

 

Loans with a variable rate equal to the interest rate floor

 

938

 

53

 

991

 

Subtotal (1)

 

1,400

 

741

 

2,141

 

Loans with a variable rate less than the interest rate floor

 

 

 

 

 

 

 

1 - 25 basis points (bps)  (2)

 

484

 

119

 

603

 

26 bps or more  (2)

 

419

 

247

 

666

 

 

 

 

 

 

 

 

 

Total variable-rate loans

 

2,303

 

1,107

 

3,410

 

Fixed-rate loans

 

1,519

 

387

 

1,906

 

Adjustable-rate loans (3)

 

 

898

 

898

 

Total loans

 

$

3,822

 

$

2,392

 

$

6,214

 

 

 

 

 

 

 

 

 

Variable-rate loans as a percentage of total loans

 

60

%

46

%

55

%

 


(1)   Loans subject to an immediate increase in interest rate if there is an increase in TCF’s base rate or LIBOR.

(2)   The base rate or LIBOR would need to increase by these basis points, before the loan rate would change from the floor interest rate.

(3)   These loans reprice at periodic intervals, generally 3-5 years, at which time the fixed rate adjusts to a new rate based on a specified spread to the applicable U.S. Treasury rate.

 

28



 

Approximately 69% of the home equity loan portfolio at March 31, 2004 consisted of closed-end loans, compared with 70% at December 31, 2003.   In addition, 61% of this portfolio at March 31, 2004 carries a variable interest rate tied to the prime rate, compared with 60% at December 31, 2003.   At March 31, 2004, the weighted average loan-to-value ratio for the home equity portfolio was 74%, unchanged from December 31, 2003.

 

The following table sets forth additional information about the loan-to-value ratios for TCF’s home equity loan portfolio:

 

(Dollars in thousands)

 

At March 31, 2004

 

At December 31, 2003

 

Loan-to-Value Ratios (1):

 

Balance

 

Percent
of Total

 

Over 30-Day
Delinquency as
a Percentage
of Balance

 

Balance

 

Percent
of Total

 

Over 30-Day
Delinquency as
a Percentage
of Balance

 

Over 100% (2)

 

$

37,948

 

1.0

%

6.55

%

$

39,452

 

1.1

%

4.81

%

Over 90% to 100%

 

366,440

 

9.7

 

.51

 

361,374

 

10.1

 

.78

 

Over 80% to 90%

 

1,471,429

 

38.9

 

.29

 

1,370,523

 

38.2

 

.40

 

80% or less

 

1,907,003

 

50.4

 

.33

 

1,816,678

 

50.6

 

.39

 

Total

 

$

3,782,820

 

100.0

%

.37

 

$

3,588,027

 

100.0

%

.48

 

 


(1)   Loan-to-value is based on the loan amount (current outstanding balance on closed-end loans and the total commitment on lines of credit) plus deferred loan origination costs net of fees and refundable insurance premiums, if any, plus the amount of senior liens, if any.  Property values represent the most recent market value or property tax assessment value known to TCF.

(2)   Amount reflects the total outstanding loan balance.  The portion of the loan balance in excess of 100% of the property value is substantially less than the amount included above.

 

The following tables summarize TCF’s commercial real estate loan portfolio by property type:

 

 

 

At March 31, 2004

 

At December 31, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Permanent

 

Construction
and
Development

 

Total

 

Permanent

 

Construction
and
Development

 

Total

 

Apartments

 

$

523,449

 

$

4,380

 

$

527,829

 

$

519,622

 

$

28,983

 

$

548,605

 

Office buildings

 

397,268

 

36,242

 

433,510

 

399,112

 

33,262

 

432,374

 

Retail services

 

308,361

 

14,594

 

322,955

 

304,295

 

10,139

 

314,434

 

Warehouse/industrial buildings

 

189,388

 

1,790

 

191,178

 

189,635

 

1,253

 

190,888

 

Hotel and motels

 

128,825

 

19,220

 

148,045

 

131,367

 

19,270

 

150,637

 

Health care facilities

 

39,444

 

9,195

 

48,639

 

32,157

 

17,664

 

49,821

 

Other

 

211,103

 

80,556

 

291,659

 

169,247

 

60,695

 

229,942

 

Total

 

$

1,797,838

 

$

165,977

 

$

1,963,815

 

$

1,745,435

 

$

171,266

 

$

1,916,701

 

 

 

 

At March 31, 2004

 

At December 31, 2003

 

(Dollars in thousands)

 

Balance

 

Over 30-Day
Delinquency as
a Percentage
of Balance

 

Balance

 

Over 30-Day
Delinquency as
a Percentage
of Balance

 

Apartments

 

$

527,829

 

.02

%

$

548,605

 

%

Office buildings

 

433,510

 

 

432,374

 

 

Retail services

 

322,955

 

 

314,434

 

 

Warehouse/industrial buildings

 

191,178

 

 

190,888

 

 

Hotel and motels

 

148,045

 

 

150,637

 

 

Health care facilities

 

48,639

 

 

49,821

 

 

Other

 

291,659

 

.07

 

229,942

 

.03

 

Total

 

$

1,963,815

 

.02

 

$

1,916,701

 

 

 

29


TCF continues to expand its commercial business and commercial real estate lending activity to borrowers located in its primary midwestern markets.  With a focus on secured lending, at March 31, 2004, approximately 99% of TCF’s commercial real estate and commercial business loans were secured either by real estate properties or underlying business assets.  At March 31, 2004 and December 31, 2003, the construction and development portfolio had no loans over 30-days delinquent.  At March 31, 2004, approximately 91% of TCF’s commercial real estate loans outstanding were secured by properties located in its primary markets.

 

The following tables summarize TCF’s leasing and equipment finance portfolio by marketing segment and by equipment type:

 

(Dollars in thousands)

 

At March 31, 2004

 

At December 31, 2003

 

 

 

 

 

 

 

Over 30-Day

 

 

 

 

 

Over 30-Day

 

 

 

 

 

 

 

Delinquency as

 

 

 

 

 

Delinquency as

 

 

 

 

 

Percent

 

a Percentage

 

 

 

Percent

 

a Percentage

 

Marketing Segment

 

Balance

 

of Total

 

of Balance

 

Balance

 

of Total

 

of Balance

 

Middle market (1)

 

$

626,949

 

49.9

%

.68

%

$

595,812

 

51.3

%

.88

%

Winthrop (2)

 

220,251

 

17.5

 

1.44

 

229,441

 

19.8

 

1.14

 

Wholesale (3)

 

128,837

 

10.3

 

.66

 

137,062

 

11.8

 

.29

 

Small ticket (4)

 

215,521

 

17.2

 

1.38

 

124,178

 

10.7

 

.56

 

Leveraged leases

 

20,106

 

1.6

 

 

22,728

 

2.0

 

 

Subtotal

 

1,211,664

 

96.5

 

.93

 

1,109,221

 

95.6

 

.81

 

Truck and trailer (5)

 

44,713

 

3.5

 

3.67

 

51,176

 

4.4

 

3.66

 

Total

 

$

1,256,377

 

100.0

%

1.02

 

$

1,160,397

 

100.0

%

.93

 

 


(1)          Middle market consists primarily of lease financing of construction and manufacturing equipment and specialty vehicles.

(2)          Winthrop’s portfolio consists primarily of technology and data processing equipment.

(3)          Wholesale includes the discounting and purchasing of lease receivables sourced by third party lessors.

(4)          Small ticket includes lease financings to small- and mid-size companies through programs with vendors, manufacturers, distributors, buying groups, and franchise organizations, which as of March 31, 2004 includes the portfolio of VGM.  Individual contracts generally range from $25 thousand to $250 thousand.

(5)          TCF discontinued originations in the truck and trailer marketing segment during 2001.  TCF will continue to provide financing on trucks and trailers to customers in the middle market segment for use in their businesses which are unrelated to the over-the-road trucking industry.  See the portfolio summary by equipment type below for TCF’s total financing of trucks and trailers.

 

(Dollars in thousands)

 

At March 31, 2004

 

At December 31, 2003

 

Equipment Type

 

Balance

 

Percent
of Total

 

Balance

 

Percent
of Total

 

Technology and data processing

 

$

239,640

 

19.1

%

$

249,515

 

21.5

%

Specialty vehicles

 

225,365

 

17.9

 

225,073

 

19.4

 

Manufacturing

 

212,541

 

16.9

 

198,321

 

17.1

 

Construction

 

140,227

 

11.2

 

133,104

 

11.5

 

Medical

 

125,425

 

10.0

 

33,462

 

2.9

 

Trucks and trailers

 

84,113

 

6.7

 

89,262

 

7.7

 

Furniture and fixtures

 

51,674

 

4.1

 

54,052

 

4.7

 

Printing

 

39,715

 

3.2

 

38,977

 

3.3

 

Material handling

 

26,809

 

2.1

 

27,111

 

2.3

 

Aircraft

 

24,152

 

1.9

 

23,965

 

2.1

 

Other

 

86,716

 

6.9

 

87,555

 

7.5

 

Total

 

$

1,256,377

 

100.0

%

$

1,160,397

 

100.0

%

 

The leasing and equipment finance portfolio increased $96 million from December 31, 2003. TCF Leasing’s acquisition of VGM, in March 2004, added $80 million of portfolio balances to the small ticket marketing segment and is medical type equipment. This was the combined effect of the addition of $111.4 million of leasing and equipment finance portfolio at VGM, of which $31.4 million had been financed on a non-recourse basis with TCF Leasing.  This financial arrangement was terminated upon the acquisition and replaced with intercompany debt.  The

 

30



 

leasing and equipment finance portfolio tables above include lease residuals.  Lease residuals represent the estimated fair value of the leased equipment at the expiration of the initial term of the transaction.  At March 31, 2004, lease residuals, excluding leveraged lease residuals, totaled $34.5 million, up from $34.2 million at December 31, 2003.  The lease residuals on leveraged leases are included in investments in leveraged leases and totaled $18.1 million at March 31, 2004, down from $18.7 million at December 31, 2003.  Lease residual values are initially determined at the inception of the lease and reviewed on an ongoing basis.  Any downward revisions are recorded in the periods in which they become known.  Included in the investment in leveraged leases, at March 31, 2004, is $20.1 million for a 100% equity interest in a Boeing 767-300 aircraft on lease to Delta Airlines in the United States.  The investment in leveraged leases 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 note representing the third-party participation related to this leveraged lease; such note, which totaled $19.2 million at March 31, 2004, down from $22.6 million at December 31, 2003, is recorded as an offset against the related rental receivable. An economic slowdown and other factors have adversely impacted the airline industry and could have an adverse impact on the lessee’s ability to meet its lease obligations and the residual value of the aircraft.  The lessee is current on the lease payments and the lease expires in 2010.  This lease represents TCF’s only material direct exposure to the commercial airline industry.

 

Total loan and lease originations for TCF’s leasing businesses were $137.8 million for the first quarter of 2004, compared with $121.1 million for the same 2003 period.  The backlog of approved transactions increased to $209.3 million at March 31, 2004, from $155.2 million at December 31, 2003.  TCF’s leasing activity is subject to risk of cyclical downturns and other adverse economic developments.  TCF’s ability to increase its lease portfolio is dependent upon its ability to place new equipment in service.  In an adverse economic environment, there may be a decline in the demand for some types of equipment which TCF leases, resulting in a decline in the amount of new equipment being placed into service as well as a decline in equipment values for equipment previously placed in service.

 

Allowance for Loan and Lease Losses

 

Credit risk is the risk of loss from a customer default on a loan or lease.  TCF has in place a process to identify and manage its credit risk.  The process includes initial credit review and approval, periodic monitoring to measure compliance with credit agreements and internal credit policies, monitoring changes in the risk ratings of loans and leases, identification of problem loans and leases and procedures for the collection of problem loans and leases.  The risk of loss is difficult to quantify and is subject to fluctuations in values, general economic conditions and other factors.  The determination of the allowance for loan and lease losses is a critical accounting policy which involves management’s judgment on a number of factors such as net charge-offs, delinquencies in the loan and lease portfolio, general economic conditions and management’s assessment of credit risk in the current loan and lease portfolio.  The Company considers the allowance for loan and lease losses of $79.1 million appropriate to cover losses inherent in the loan and lease portfolios as of March 31, 2004.  However, no assurance can be given that TCF will not, in any particular period, sustain loan and lease losses that are sizable in relation to the amount reserved, or that subsequent evaluations of the loan and lease portfolio, in light of factors then prevailing, including economic conditions and TCF’s on-going credit review process, will not require significant changes in the allowance for loan and lease losses.  Among other factors, a protracted economic slowdown and/or a decline in commercial or residential real estate values in TCF’s markets may have an adverse impact on the adequacy of the allowance for loan and lease losses by increasing credit risk and the risk of potential loss.  See “Forward-Looking Information.”

 

The next several pages include detail information regarding TCF’s allowance for loan and lease losses, net charge-offs, non-performing assets, past due loans and leases and potential problem loans and leases.  Included in this data are numerous portfolio ratios that must be carefully reviewed and related to the nature of the underlying loans and lease portfolios before appropriate conclusions can be reached regarding TCF or for purposes of making comparisons to other companies.  Most of TCF’s non-performing assets and past due loans and leases are secured by residential real estate.  Given the nature of these assets and the related mortgage foreclosure, property sale and, if applicable, mortgage insurance claims processes, it can take 18 months or longer for a loan to migrate from initial delinquency to final disposition.  This resolution process generally takes much longer for loans secured by real estate than for unsecured loans or loans secured by other property primarily due to state foreclosure laws.

 

31



 

The key indicators of TCF’s credit quality and allowance coverage at March 31, 2004, include the ratio of annualized net charge-offs to average loans and leases, the allowance as a multiple of annualized net charge-offs, and income before income taxes and provision for loan losses as a multiple of annualized net charge-offs.

 

The following table sets forth information detailing the allowance for loan and lease losses and selected key indicators:

 

 

 

Three Months
Ended March 31,

 

(Dollars in thousands)

 

2004

 

2003

 

Balance at beginning of period

 

$

76,619

 

$

77,008

 

Charge-offs

 

(2,499

)

(2,732

)

Recoveries

 

1,983

 

827

 

Net charge-offs

 

(516

)

(1,905

)

Provision charged to operations

 

1,160

 

2,710

 

Acquired allowance

 

1,791

 

-

 

Balance at end of period

 

$

79,054

 

$

77,813

 

 

Key Indicators:

 

 

 

 

 

Ratio of annualized net loan and lease charge-offs to average loans and leases outstanding

 

.02

%

.09

%

Period end allowance as a multiple of annualized net charge-offs

 

38.3

X

10.2

X

Income before income taxes and provision for loan losses as a multiple of net charge-offs

 

180.2

49.9

X

 

The allocation of TCF’s allowance for loan and lease losses, including general and specific loss allocations, is as follows:

 

 

 

 

At or For the Quarter
Ended March 31, 2004

 

At or For the Year
Ended December 31, 2003

 

(Dollars in thousands)

 

Allowance for
Loan and
Lease Losses

 

Total Loans
and Leases

 

Allowance
as a % of
Balance

 

Allowance for
Loan and
Lease Losses

 

Total Loans
and Leases

 

Allowance
as a % of
Balance

 

Consumer

 

$

9,285

 

$

3,821,648

 

.24

%

$

9,084

 

$

3,630,341

 

.25

%

Commercial real estate

 

25,831

 

1,963,815

 

1.32

 

25,142

 

1,916,701

 

1.31

 

Commercial business

 

11,117

 

428,588

 

2.59

 

11,797

 

427,696

 

2.76

 

Leasing and equipment finance

 

15,795

 

1,256,377

 

1.26

 

13,515

 

1,160,397

 

1.16

 

Unallocated

 

16,139

 

 

N.A.

 

16,139

 

 

N.A.

 

Subtotal

 

78,167

 

7,470,428

 

1.05

 

75,677

 

7,135,135

 

1.06

 

Residential real estate

 

887

 

1,152,357

 

.08

 

942

 

1,212,643

 

.08

 

Total

 

$

79,054

 

$

8,622,785

 

.92

 

$

76,619

 

$

8,347,778

 

.92

 

 

The allocated allowance balances for TCF’s residential and consumer loan portfolios, at March 31, 2004, reflect the Company’s credit quality and related low level of net loan charge-offs for these portfolios.  The allocated allowances for the loan and lease portfolios do not reflect any significant changes in estimation methods or assumptions.

 

Net loan and lease charge-offs were $516 thousand, or .02% (annualized), of average loans and leases outstanding in the first quarter of 2004, down from $1.9 million, or .09% (annualized), of average loans and leases for the same period of 2003.  During the first quarter of 2004, TCF recognized a $1.1 million recovery on a single credit in leasing and equipment finance that was charged-off in late 2003.

 

32



 

The following table sets forth additional information regarding net charge-offs:

 

 

 

Three Months Ended

 

 

 

March 31, 2004

 

March 31, 2003

 

(Dollars in thousands)

 

Net Charge-offs
(Recoveries)

 

% of Average
Loans and
Leases (1)

 

Net Charge-offs
(Recoveries)

 

% of Average
Loans and
Leases (1)

 

Consumer

 

$

574

 

.06

%

$

1,045

 

.14

%

Commercial real estate

 

(33

)

(.01

)

2

 

 

Commercial business

 

73

 

.07

 

(84

)

(.08

)

Leasing and equipment finance:

 

 

 

 

 

 

 

 

 

Middle market

 

425

 

.28

 

374

 

.41

 

Winthrop

 

16

 

.03

 

68

 

.11

 

Wholesale

 

(1,226

)

(3.71

)

186

 

.43

 

Small ticket

 

707

 

1.90

 

161

 

.61

 

Leveraged leases

 

 

 

 

 

Subtotal

 

(78

)

(.03

)

789

 

.33

 

Truck and trailer

 

(28

)

(.21

)

182

 

.76

 

Total leasing and equipment finance

 

(106

)

(.04

)

971

 

.37

 

Subtotal

 

508

 

.03

 

1,934

 

.12

 

Residential real estate

 

8

 

 

(29

)

(.01

)

Total

 

$

516

 

.02

 

$

1,905

 

.09

 

 


(1) Annualized.

 

Non-Performing Assets

 

Non-performing assets consist of non-accrual loans and leases and other real estate owned.  Approximately 56% of non-performing assets at March 31, 2004 consisted of, or were secured by, residential real estate.  Non-performing assets are summarized in the following table:

 

 

(Dollars in thousands)

 

At
March 31,
2004

 

At
December 31,
2003

 

$ Change

 

Non-accrual loans and leases:

 

 

 

 

 

 

 

Consumer

 

$

14,428

 

$

12,052

 

$

2,376

 

Commercial real estate

 

3,120

 

2,490

 

630

 

Commercial business

 

3,102

 

2,931

 

171

 

Leasing and equipment finance, net

 

11,219

 

13,241

 

(2,022

)

Residential real estate

 

4,473

 

3,993

 

480

 

Total non-accrual loans and leases, net

 

36,342

 

34,707

 

1,635

 

Non-recourse discounted lease rentals

 

644

 

699

 

(55

)

Total non-accrual loans and leases, gross

 

36,986

 

35,406

 

1,580

 

Other real estate owned:

 

 

 

 

 

 

 

Residential

 

18,960

 

20,462

 

(1,502

)

Commercial

 

11,549

 

12,992

 

(1,443

)

Total other real estate owned

 

30,509

 

33,454

 

(2,945

)

Total non-performing assets, gross

 

$

67,495

 

$

68,860

 

$

(1,365

)

Total non-performing assets, net

 

$

66,851

 

$

68,161

 

$

(1,310

)

 

 

 

 

 

 

 

 

Gross non-performing assets as a percentage of net loans and leases

 

.79

%

.83

%

 

 

Gross non-performing assets as a percentage of total assets

 

.58

%

.61

%

 

 

 

Included in non-performing assets are loans that are considered impaired. The recorded investment in impaired loans was $10.1 million at March 31, 2004, up from $9.1 million at December 31, 2003.  The related allowance for credit losses was $4.5 million at March 31, 2004, and December 31, 2003.  All of the impaired loans were on non-accrual status.  There were no impaired loans at March 31, 2004 or December 31, 2003 which did not have a related allowance for loan losses.  The average recorded investment in impaired loans during the three months ended March 31, 2004 was $9.4 million, compared with $10.3 million during the three months ended December 31, 2003.

 

33



 

Past Due Loans and Leases

 

The following table sets forth information regarding TCF’s delinquent loan and lease portfolio, excluding loans held for sale and non-accrual loans and leases.  TCF’s delinquency rates are determined using the contractual method.

 

 

 

At March 31, 2004

 

At December 31, 2003

 

(Dollars in thousands)

 

Principal
Balances

 

Percentage of
Loans and Leases

 

Principal
Balances

 

Percentage of
Loans and Leases

 

Accruing loans and leases delinquent for:

 

 

 

 

 

 

 

 

 

30-59 days

 

$

20,424

 

.24

%

$

24,187

 

.29

%

60-89 days

 

7,095

 

.08

 

8,953

 

.11

 

90 days or more

 

6,405

 

.08

 

5,604

 

.07

 

Total

 

$

33,924

 

.40

%

$

38,744

 

.47

%

 

The following table summarizes TCF’s over 30-day delinquent loan and lease portfolio by loan type:

 

 

 

At March 31, 2004

 

At December 31, 2003

 

(Dollars in thousands)

 

Principal
Balances

 

Percentage of
Portfolio

 

Principal
Balances

 

Percentage of
Portfolio

 

Consumer

 

$

14,262

 

.37

%

$

17,673

 

.49

%

Commercial real estate

 

319

 

.02

 

58

 

 

Commercial business

 

128

 

.03

 

282

 

.07

 

Leasing and equipment finance

 

12,716

 

1.02

 

10,619

 

.93

 

Residential real estate

 

6,499

 

.57

 

10,112

 

.84

 

Total

 

$

33,924

 

.40

 

$

38,744

 

.47

 

 

TCF’s over 30-day delinquency on consumer loans was .37% of total consumer loans at March 31, 2004, down from .49% at December 31, 2003.  Included in leasing and equipment finance delinquencies at March 31, 2004 are approximately $1.7 million of delinquent accounts acquired in the VGM acquisition.

 

Potential Problem Loans and Leases

 

In addition to the non-performing assets, there were $58.4 million of loans and leases at March 31, 2004, for which management has concerns regarding the ability of the borrowers to meet existing repayment terms, compared with $48.1 million at December 31, 2003.  These loans and leases are primarily classified for regulatory purposes as substandard and reflect the distinct possibility, but not probability, that the Company will not be able to collect all amounts due according to the contractual terms of the loan or lease agreement.  Although these loans and leases have been identified as potential problem loans and leases, they may never become non-performing.  Additionally, these loans and leases are generally secured by commercial real estate or assets, thus reducing the potential for loss should they become non-performing.  Potential problem loans and leases are considered in the determination of the allowance for loan and lease losses.

 

Potential problem loans and leases are summarized as follows:

 

 

 

At March 31,

 

At December 31,

 

Change

 

(Dollars in thousands)

 

2004

 

2003

 

$

 

%

 

Commercial real estate

 

$

30,316

 

$

20,279

 

$

10,037

 

49.5

%

Commercial business

 

13,072

 

12,721

 

351

 

2.8

 

Leasing and equipment finance

 

15,043

 

15,094

 

(51

)

(.3

)

Total

 

$

58,431

 

$

48,094

 

$

10,337

 

21.5

 

 

34



 

Leasing and equipment finance potential problem loans and leases include $724 thousand and $1.1 million funded on a non-recourse basis at March 31, 2004 and December 31, 2003, respectively.  Commercial real estate potential problem loans increased $10 million due primarily to the addition of one customer’s $10 million loan.

 

Deposits

 

Checking, savings and money market deposits are an important source of low cost funds and fee income for TCF.   Deposits totaled $7.9 billion at March 31, 2004, up $257.4 million from December 31, 2003.  Lower interest-cost checking, savings and money market deposits totaled $6.3 billion, up $329.1 million from December 31, 2003, and comprised 80.4% of total deposits at March 31, 2004, compared with 78.8% of total deposits at December 31, 2003.  Average annualized fee revenue per retail checking account for the twelve months ended March 31, 2004 was $225, compared with $226 for the comparable period ended March 31, 2003.  Higher interest-cost certificates of deposit decreased $71.8 million from December 31, 2003, as other lower-cost funding sources were available to TCF.  TCF’s weighted-average rate for deposits, including non-interest-bearing deposits, was .52% at March 31, 2004, down from .58% at December 31, 2003.

 

New Branch Expansion

 

Key to TCF’s growth is its continued investment in new branch expansion.  New branches are an important source of new customers in both deposit products and consumer lending products.  While supermarket branches continue to play an important role in TCF’s expansion strategy, the opportunity to add new supermarket branches within TCF’s markets has slowed from prior years.  Therefore, TCF has continued new branch expansion by opening more traditional branches.  Although traditional branches require a higher initial investment than supermarket branches, they ultimately attract more customers and become more profitable.  During the first quarter of 2004, TCF opened four new branches, including two new traditional branches and two new supermarket branches.  TCF now has 232 new branches opened since January 1, 1998.  TCF plans to open 24 more new branches during the remainder of 2004, consisting of 20 new traditional branches and four new supermarket branches.

 

Additional information regarding the results of TCF’s new branches opened since January 1, 1998 is displayed in the table below:

 

 

 

At or For the Quarter Ended

 

 

 

 

 

 

 

March 31,

 

Increase

 

 

 

(Dollars in thousands)

 

2004

 

2003

 

(Decrease)

 

% Change

 

Number of new branches* at March 31,

 

 

 

 

 

 

 

 

 

Traditional

 

44

 

28

 

16

 

57.1

%

Supermarket

 

188

 

185

 

3

 

1.6

 

Total

 

232

 

213

 

19

 

8.9

 

Percentage of total branches

 

57

%

54

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of checking accounts

 

518,105

 

416,460

 

101,645

 

24.4

 

Deposits:

 

 

 

 

 

 

 

 

 

Checking

 

$

715,530

 

$

517,209

 

$

198,321

 

38.3

 

Savings

 

418,604

 

424,641

 

(6,037

)

(1.4

)

Money market

 

67,246

 

71,912

 

(4,666

)

(6.5

)

Subtotal

 

1,201,380

 

1,013,762

 

187,618

 

18.5

 

Certificates of deposits

 

149,582

 

160,118

 

(10,536

)

(6.6

)

Total deposits

 

$

1,350,962

 

$

1,173,880

 

$

177,082

 

15.1

 

 

 

 

 

 

 

 

 

 

 

Total fees and other revenue (quarter ended)

 

$

32,176

 

$

27,017

 

$

5,159

 

19.1

 

 


* New branches opened since January 1, 1998.

 

Borrowings

 

Borrowings totaled $2.5 billion at March 31, 2004, up $92.3 million from year-end 2003. Included in long-term borrowings at March 31, 2004, are $767.5 million of fixed-rate FHLB advances and repurchase agreements with other financial institutions, which are callable by the counterparty at par on certain anniversary dates and, for most,

 

35



 

quarterly thereafter until maturity.  If called, replacement funding will be provided by the counterparties at the then-prevailing market rate of interest for the remaining term-to-maturity of the advances and repurchase agreements, subject to standard terms and conditions.  The weighted-average rate on borrowings increased to 3.36% at March 31, 2004, from 3.24% at December 31, 2003 as a result of a reduction in short term borrowings as a percentage of total borrowings.  During the first quarter of 2004, TCF entered into $450 million of 18-month FHLB advances at a weighted average interest rate of 1.70%.  TCF Financial Corporation has a $105 million bank line of credit agreement maturing in April 2004, which is unsecured and contains certain covenants common to such agreements. At March 31, 2004, TCF had $34 million outstanding on this bank line of credit, which was included in short-term borrowings.  Subsequent to March 31, 2004, TCF Financial Corporation entered into a $105 million bank line of credit agreement with a new banking group which matures in April 2005.  This new credit facility is also unsecured and contains similar covenants to the previous agreement.  Proceeds from this new credit facility were used to pay-off the outstanding balance on the previous agreement.

 

Contractual Obligations And Commercial Commitments

 

TCF has certain obligations and commitments to make future payments under contracts.  At March 31, 2004, the aggregate contractual obligations (excluding bank deposits) and commercial commitments are as follows:

 

(Dollars in thousands)

 

Payments Due by Period

 

Contractual Obligations

 

Total

 

Less than
1 year

 

1-3
Years

 

4-5
Years

 

After 5
Years

 

Total borrowings

 

$

2,507,087

 

$

546,940

 

$

1,527,902

 

$

132,245

 

$

300,000

 

Annual rental commitments under non-cancelable operating leases

 

162,168

 

22,903

 

39,180

 

32,615

 

67,470

 

Purchase obligations (construction contracts and land purchase commitments for future branch sites)

 

11,046

 

11,046

 

 

 

 

 

 

$

2,680,301

 

$

580,889

 

$

1,567,082

 

$

164,860

 

$

367,470

 

 

(Dollars in thousands)

 

Amount of Commitment - Expiration by Period

 

Other Commercial Commitments

 

Total

 

Less than
1 year

 

1-3
Years

 

4-5
Years

 

After 5
Years

 

Commitments to lend:

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

$

1,442,985

 

$

19,812

 

$

14,903

 

$

22,137

 

$

1,386,133

 

Commercial

 

863,830

 

685,714

 

156,940

 

2,494

 

18,682

 

Leasing and equipment finance

 

65,627

 

65,627

 

 

 

 

Other

 

5,289

 

5,289

 

 

 

 

Total commitments to lend

 

2,377,731

 

776,442

 

171,843

 

24,631

 

1,404,815

 

Loans serviced with recourse

 

123,300

 

2,838

 

6,294

 

6,090

 

108,078

 

Standby letters of credit and guarantees on industrial revenue bonds

 

38,768

 

19,418

 

18,865

 

485

 

 

 

 

$

2,539,799

 

$

798,698

 

$

197,002

 

$

31,206

 

$

1,512,893

 

 

Commitments to lend are agreements to lend to a customer provided there is no violation of any condition in the contract.  These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  Collateral predominantly consists of residential and commercial real estate.

 

Loans serviced with recourse represent a contingent guarantee based upon the failure to perform by another party.  These loans consist of $119.1 million of Veterans Administration (“VA”) loans and $4.2 million of loans sold with recourse to the Federal National Mortgage Association (“FNMA”).  As is typical of a servicer of VA loans, TCF must cover any principal loss in excess of the VA’s guarantee if the VA elects its “no-bid” option upon the foreclosure of a loan.  Since conditions under which TCF would be required either to cover any principal loss in excess of the VA’s guarantee or repurchase the loan sold to FNMA may not materialize, the actual cash requirements are expected to be less than the amount provided in the table above.

 

36



 

Standby letters of credit and guarantees on industrial revenue bonds are conditional commitments issued by TCF guaranteeing the performance of a customer to a third party.  These conditional commitments expire in various years through the year 2009.  Since the conditions under which TCF is required to fund these commitments may not materialize, the cash requirements are expected to be less than the total outstanding commitments.  Collateral held on these commitments primarily consists of commercial real estate mortgages.

 

Stockholders’ Equity

 

Stockholders’ equity at March 31, 2004 was $966 million, or 8.2% of total assets, up from $920.9 million, or 8.1% of total assets, at December 31, 2003.  TCF repurchased 13,445 shares of its common stock during the first quarter of 2004 at an average cost of $51.66 per share.  At March 31, 2004, TCF had 3.7 million shares remaining in its stock repurchase program authorized by its Board of Directors.  Since January 1, 1998, the Company has repurchased 25.1 million shares of its common stock at an average cost of $33.34 per share.  For the first quarter of 2004, average total equity to average assets was 8.13% compared with 8.03% for the year ended December 31, 2003.  On April 27, 2004, TCF declared a regular quarterly dividend of 37.5 cents per common share, payable on May 28, 2004, to shareholders of record as of May 7, 2004.  TCF does not have any trust preferred securities or other quasi-equity instruments.

 

INTEREST-RATE RISK

 

TCF’s results of operations are dependent to a large degree on its net interest income and its ability to manage its interest rate risk.  Although TCF manages other risks, such as credit and liquidity risk, in the normal course of its business, the Company considers interest rate risk to be its most significant market risk. Since TCF does not hold a trading portfolio, the Company is not exposed to market risk from trading activities. The mismatch between maturities, interest rate sensitivities and prepayment characteristics of assets and liabilities results in interest rate risk.  TCF, like most financial institutions, has material interest rate risk exposure to changes in both short-term and long-term interest rates as well as variable interest rate indices (e.g., prime).

 

TCF’s Asset/Liability Committee manages TCF’s interest-rate risk based on interest rate expectations and other factors.  The principal objective of TCF’s asset/liability management activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest rate risk and liquidity risk and facilitating the funding needs of the Company.

 

Although the measure is subject to a number of assumptions and is only one of a number of measurements, management believes that the interest rate gap (difference between interest-earning assets and interest-bearing liabilities repricing within a given period) is an important indication of TCF’s exposure to interest rate risk and the related volatility of net interest income in a changing interest rate environment.  While the interest rate gap measurement has some limitations, which include no assumptions regarding future asset or liability production and the possibility of a static interest rate environment which can result in large quarterly changes due to changes of the above items, interest rate gap calculates the net asset or liability sensitivity at a point in time.  In addition to the interest rate gap analysis, management also utilizes a simulation model to measure and manage TCF’s interest rate risk, relative to a base case scenario.

 

TCF has positioned its balance sheet to benefit from a rising interest rate environment.  TCF’s one-year interest rate gap (the difference between interest-earning assets and interest-bearing liabilities repricing or maturing within the next twelve months), assuming no change in interest rates, was a positive $1.2 billion, or 10% of total assets, at March 31, 2004, compared with a positive $161.3 million, or 1% of total assets, at December 31, 2003.  As a result of variable-rate consumer and commercial loans at or near their interest rate floors and after taking into consideration other factors such as changes in prepayment rates, TCF becomes more asset sensitive in a rising interest rate environment.  In a falling interest rate environment TCF’s asset sensitivity remains relatively unchanged as the assumed increase in fixed-rate asset runoff is offset by the increase in variable-rate consumer and commercial loans at their floors.  The sensitivity of TCF’s one-year interest rate gap is summarized as follows:

 

37



 

 

 

One-Year Interest Rate GAP

 

(Dollars in millions)

 

$

 

% of Total Assets

 

 

 

 

 

 

 

Assumed Interest Rates

 

 

 

 

 

Increase 50 basis points *

 

$

1,861

 

15.9

%

Flat rates as of March 31, 2004

 

1,167

 

10.0

 

Decrease 50 basis points *

 

1,303

 

11.1

 

 


* Assumes an immediate parallel change in interest rates as of March 31, 2004.

 

The one-year interest rate gap is subject to a number of assumptions and is only one of a number of interest rate risk measurements and is best used as a general measure of the effect on the net interest income of rising or falling interest rates.  In general, TCF’s net interest income would increase with rising interest rates and decrease to a somewhat lesser degree with falling interest rates.

 

As stated above, TCF’s balance sheet is generally positioned to benefit from rising interest rates due to a positive interest rate gap position.  TCF would also likely benefit from an increase in interest rates as this might signify that economic conditions are improving.  The favorable impact of an increase in interest rates on net interest income would be partially diminished by the fact that at March 31, 2004, $1.8 billion of variable-rate consumer loans and $419.2 million of variable-rate commercial loans were at their interest rate floors.  These loans will remain at their interest rate floors until interest rates rise above the floor rates.  See “Consolidated Financial Condition Analysis – Loans and Leases” for additional information regarding TCF’s consumer and commercial variable-rate loans. Additionally, increases in interest rates could have an adverse impact on TCF’s checking account balances, if customers transfer some of these funds to higher interest rate deposit products or other investments and would likely result in an increase in the cost of interest-bearing deposits.  An increase in interest rates would affect TCF’s fixed-rate/variable-rate product origination mix and origination volumes and would likely slow loan prepayments.

 

While this positive interest rate gap may compress net interest income in the short-term, TCF believes this positive interest rate gap to be warranted because current rates are well below historical averages, and consequently, there is a greater possibility over time of higher interest rates versus lower interest rates.  However, if interest rates remain at current levels or fall further, TCF could continue to experience an increase in prepayments of residential loans, mortgage-backed securities and fixed-rate consumer and commercial real estate loans and may continue to experience further compression of its net interest income.

 

The one-year interest rate gap could be significantly affected by external factors such as prepayment rates other than those assumed, early withdrawals of deposits, changes in the correlation of various interest-bearing instruments, competition, a general rise or decline in interest rates, and the possibility that TCF’s counterparties will exercise their option to call certain of TCF’s longer-term callable borrowings.  Decisions by management to purchase or sell assets or to retire debt could change the maturity/repricing and spread relationships.  In addition, TCF’s interest-rate risk may increase during periods of rising interest rates due to slower prepayments on fixed-rate loans and mortgage-backed securities.

 

TCF estimates that an immediate 100 basis point increase in current mortgage loan interest rates would slow prepayments on the $2.4 billion of mortgage-backed securities and residential real estate loans at March 31, 2004 by approximately $360 million, or 45% in the first year.  A slowing in prepayments would increase the estimated life of the mortgage-backed securities and residential real estate loan portfolios and may adversely impact net interest income or net interest margin in the future.

 

Recent Accounting Developments

 

In December 2003, the Financial Accounting Standards Board (“FASB”) issued a revised version of Interpretation (“FIN”) No. 46 “Consolidation of Variable Interest Entities.”  The revised FIN 46 clarifies some of the provisions of the original Interpretation and adds new scope exceptions.  There was no impact on TCF’s financial statements from adoption of the revised Interpretation.

 

38



 

On December 8, 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “Act”) was signed into law.  This Act includes a prescription drug benefit for enrollees and a federal subsidy for sponsors of retiree healthcare plans beginning in 2006.  TCF offers a prescription drug benefit to retirees in its postretirement medical plan.

 

In January 2004, the FASB issued Staff Position (“FSP”) 106-1 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.”  This FSP provided limited guidance regarding the effects of the Act on the estimated costs of providing this retirement benefit under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions” with various implementation options.

 

In accordance with this FSP, TCF has not included the impact of the Act in the determination of its postretirement benefit obligation and expense.  TCF is currently reviewing the Act and considering its options.  Specific authoritative guidance on the federal subsidy is pending and, when issued, could require TCF to change previously reported information.  The effects of this Act are not expected to be significant.

 

Earnings Teleconference and Website Information

 

TCF hosts quarterly conference calls to discuss its financial results.   Additional information regarding TCF’s conference calls can be obtained from the investor relations section within TCF’s website at www.tcfexpress.com or by contacting TCF’s Corporate Communications Department at (952) 745-2760.  The website also includes free access to company news releases, TCF’s annual report, quarterly reports, investor presentations and Securities and Exchange Commission (“SEC”) filings. Replays of prior quarterly conference calls webcasts discussing financial results may also be accessed at the investor relations section within TCF’s website.

 

Legislative, Legal and Regulatory Developments

 

Federal and state legislation imposes numerous legal and regulatory requirements on financial institutions.   Future legislative or regulatory change, or changes in enforcement practices or court rulings, may have a dramatic and potentially adverse impact on TCF and its bank and other subsidiaries.

 

The Federal Deposit Insurance Corporation (“FDIC”) and members of the United States Congress have proposed new legislation that would reform the bank deposit insurance system.  This reform could merge the Bank Insurance Fund (“BIF”) and Savings Association Insurance Fund (“SAIF”), increase the deposit insurance coverage limits and index future coverage limitations, among other changes.  Most significantly, reform proposals could allow the FDIC to raise or lower (within certain limits) the currently mandated designated reserve ratio of 1.25% ($1.25 against $100 of insured deposits), and require certain changes in the calculation methodology. The ultimate impact of these proposals cannot be predicted at this time, but if adopted, they could result in the imposition of additional deposit insurance premium costs on TCF.

 

On July 30, 2002, the Sarbanes-Oxley Act of 2002 (“the Act”) was signed into law by the President of the United States.  The Act provides for sweeping changes dealing with corporate governance, accounting practices and disclosure requirements for public companies, and also for their directors and officers.  Section 302 of the Act, entitled “Corporate Responsibility for Financial Reports,” required the SEC to adopt rules to implement certain requirements noted in the Act and it did so effective August 29, 2002.  The new rules require a company’s chief executive and chief financial officers to certify the financial and other information included in the company’s quarterly and annual reports.  The rules also require these officers to certify that they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the company’s disclosure controls and procedures; that they have made certain disclosures to the auditors and to the audit committee of the board of directors about the company’s controls and procedures; and that they have included information in their quarterly and annual filings about their evaluation and whether there have been significant changes in disclosure controls or internal controls over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect internal control over financial reporting.  These certificates called for under Section 302 of the Act are filed as an exhibit to this document.  See “Controls and Procedures” for TCF’s evaluation of disclosure controls and procedures.  TCF is also filing as an exhibit to this report certificates called for under Section 906 of the Act.

 

39



 

On June 5, 2003, the SEC published its final rules on Section 404 of the Act, requiring public companies to complete an annual assessment of the effectiveness of internal control over financial reporting.  The rules are effective in 2004 and a management report must be included in the 2004 Form 10-K describing management’s responsibility for establishing and maintaining adequate internal control over financial reporting and its assessment of the effectiveness of such controls as of year-end.  The Company’s independent auditors will also be required to complete an attestation report on management’s assessment.

 

In September 2002, the SEC issued its final ruling covering the acceleration of periodic report filing dates.  The rule applies to certain companies, including TCF, and will reduce the annual report filing deadline from 90 days after year-end to 60 days after year-end for TCF’s 2004 Annual Report.  The quarterly report on Form 10-Q will also be accelerated from 45 days after quarter-end to 35 days after quarter-end for the quarterly Form 10-Q filings in 2005.  TCF has taken steps to modify its financial reporting process to meet these accelerated filing deadlines.

 

Forward-Looking Information

 

This report and other reports issued by the Company, including reports filed with the SEC, may contain “forward-looking” statements that deal with future results, plans or performance.   In addition, TCF’s management may make such statements orally to the media, or to securities analysts, investors or others.   Forward-looking statements deal with matters that do not relate strictly to historical facts.   TCF’s future results may differ materially from historical performance and forward-looking statements about TCF’s expected financial results or other plans are subject to a number of risks and uncertainties.  These include but are not limited to possible legislative changes and adverse economic, business and competitive developments such as shrinking interest margins; deposit outflows; ability to increase the number of checking accounts and the possibility that deposit account losses (fraudulent checks, etc.) may increase; reduced demand for financial services and loan and lease products; adverse developments affecting TCF’s supermarket banking relationships or any of the supermarket chains in which TCF maintains supermarket branches; changes in accounting policies and guidelines, or monetary, fiscal or tax policies of the federal or state governments; changes in credit and other risks posed by TCF’s loan, lease and investment portfolios, including declines in commercial or residential real estate values; technological, computer-related or operational difficulties; adverse changes in securities markets; the risk that TCF could be unable to effectively manage the volatility of its mortgage banking business, which could adversely affect earnings; and results of litigation or other significant uncertainties.  Investors should consult TCF’s Annual Report to Shareholders and reports on Forms 10-K, 10-Q and 8-K for additional important information about the Company.

 

CONTROLS AND PROCEDURES

 

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, the Company’s Chief Financial Officer and Treasurer (Principal Financial Officer) and its Controller and Assistant Treasurer (Principal Accounting Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (“Exchange Act”).  Based upon that evaluation, the Company’s Chief Executive Officer, the Company’s Chief Financial Officer and Treasurer and its Controller and Assistant Treasurer concluded that the Company’s disclosure controls and procedures are effective, as of March 31, 2004,  in alerting them in a timely manner to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.  There were no significant changes in the Company’s disclosure controls or internal controls over financial reporting during the first quarter of 2004.

 

Disclosure controls and procedures are designed to ensure information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer, the Chief Financial Officer and Treasurer and the Controller and Assistant Treasurer, as appropriate, to allow timely decisions regarding required disclosure.  Disclosure controls include internal controls that are designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use and that transactions are properly recorded and reported.

 

40



 

Any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  The design of a control system inherently has limitations, and the benefits of controls must be weighed against their costs.  Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.  Therefore, no evaluation of a cost-effective system of controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.

 

41



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Supplementary Information

 

SELECTED QUARTERLY FINANCIAL DATA (Unaudited)

 

(Dollars in thousands,
except per-share data)

 

At March 31,
2004

 

At Dec. 31,
2003

 

At Sept. 30,
2003

 

At June 30,
2003

 

At March 31,
2003

 

 

 

 

 

 

 

 

 

 

 

 

 

SELECTED FINANCIAL CONDITION DATA:

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

$

1,269,293

 

$

1,533,288

 

$

1,604,282

 

$

1,980,830

 

$

2,442,724

 

Residential real estate loans

 

1,152,357

 

1,212,643

 

1,283,640

 

1,393,183

 

1,568,430

 

Subtotal

 

2,421,650

 

2,745,931

 

2,887,922

 

3,374,013

 

4,011,154

 

Loans and leases excluding real estate loans

 

7,470,428

 

7,135,135

 

6,863,683

 

6,705,169

 

6,485,179

 

Total assets

 

11,724,319

 

11,319,015

 

11,253,906

 

11,807,764

 

12,127,272

 

Deposits

 

7,869,128

 

7,611,749

 

7,712,603

 

7,979,737

 

7,965,338

 

Borrowings

 

2,507,087

 

2,414,825

 

2,243,725

 

2,506,039

 

2,767,890

 

Stockholders’ equity

 

965,950

 

920,858

 

931,968

 

952,069

 

971,413

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31,
2004

 

Dec. 31,
2003

 

Sept. 30,
2003

 

June 30,
2003

 

March 31,
2003

 

 

 

 

 

 

 

 

 

 

 

 

 

SELECTED OPERATIONS DATA:

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$

149,219

 

$

148,919

 

$

156,482

 

$

164,004

 

$

172,114

 

Interest expense

 

30,726

 

29,827

 

36,605

 

44,240

 

49,702

 

Net interest income

 

118,493

 

119,092

 

119,877

 

119,764

 

122,412

 

Provision for credit losses

 

1,160

 

4,037

 

2,658

 

3,127

 

2,710

 

Net interest income after provision for credit losses

 

117,333

 

115,055

 

117,219

 

116,637

 

119,702

 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

Fees and other revenues

 

102,459

 

114,865

 

118,089

 

101,003

 

96,835

 

Gains on sales of securities available for sale

 

12,717

 

 

 

11,695

 

21,137

 

Gains (losses) on termination of debt

 

 

 

(37,769

)

 

(6,576

)

Total non-interest income

 

115,176

 

114,865

 

80,320

 

112,698

 

111,396

 

Non-interest expense

 

140,706

 

142,244

 

142,382

 

136,733

 

138,750

 

Income before income tax expense

 

91,803

 

87,676

 

55,157

 

92,602

 

92,348

 

Income tax expense

 

31,142

 

28,180

 

19,193

 

32,311

 

32,221

 

Net income

 

$

60,661

 

$

59,496

 

$

35,964

 

$

60,291

 

$

60,127

 

 

 

 

 

 

 

 

 

 

 

 

 

Per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

.88

 

$

.86

 

$

.51

 

$

.85

 

$

.83

 

Diluted earnings

 

$

.88

 

$

.86

 

$

.51

 

$

.85

 

$

.83

 

Dividends declared

 

$

.375

 

$

.325

 

$

.325

 

$

.325

 

$

.325

 

 

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL RATIOS:

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (1)

 

2.11

%

2.13

%

1.24

%

2.04

%

1.99

%

Return on average common equity (1)

 

25.90

 

26.18

 

15.77

 

25.17

 

24.70

 

Net interest margin (1)

 

4.52

 

4.68

 

4.57

 

4.45

 

4.45

 

Average total equity to average assets

 

8.13

 

8.13

 

7.89

 

8.11

 

8.06

 

 


(1)  Annualized.

 

42



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Supplementary Information (Continued)

 

Consolidated Average Balance Sheets, Interest and Dividends

Earned or Paid, and Related Interest Yields and Rates

 

 

 

Three Months Ended March 31,

 

 

 

2004

 

2003

 

(Dollars in thousands)

 

Average
Balance

 

Interest (1)

 

Average
Yields
and
Rates (2)

 

Average
Balance

 

Interest (1)

 

Average
Yields
and
Rates (2)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

141,770

 

$

773

 

2.18

%

$

118,828

 

$

1,403

 

4.72

%

Securities available for sale (3)

 

1,519,374

 

20,332

 

5.35

 

2,341,002

 

33,764

 

5.77

 

Loans held for sale

 

359,238

 

2,841

 

3.16

 

488,110

 

5,226

 

4.28

 

Loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

3,706,061

 

56,306

 

6.08

 

3,047,799

 

51,653

 

6.78

 

Commercial real estate

 

1,942,494

 

26,523

 

5.46

 

1,848,125

 

28,054

 

6.07

 

Commercial business

 

427,824

 

4,341

 

4.06

 

438,681

 

4,775

 

4.35

 

Leasing and equipment finance

 

1,194,235

 

20,868

 

6.99

 

1,039,213

 

20,279

 

7.81

 

Subtotal

 

7,270,614

 

108,038

 

5.94

 

6,373,818

 

104,761

 

6.57

 

Residential real estate

 

1,193,435

 

17,235

 

5.78

 

1,680,170

 

26,960

 

6.42

 

Total loans and leases (4)

 

8,464,049

 

125,273

 

5.92

 

8,053,988

 

131,721

 

6.54

 

Total interest-earning assets

 

10,484,431

 

149,219

 

5.69

 

11,001,928

 

172,114

 

6.26

 

Other assets (5)

 

1,041,213

 

 

 

 

 

1,075,990

 

 

 

 

 

Total assets

 

$

11,525,644

 

 

 

 

 

$

12,077,918

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

$

2,255,675

 

 

 

 

 

$

2,083,099

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

Checking

 

1,187,865

 

409

 

.14

 

990,411

 

304

 

.12

 

Savings

 

1,809,138

 

1,734

 

.38

 

1,842,145

 

3,618

 

.79

 

Money market

 

832,695

 

768

 

.37

 

886,552

 

1,544

 

.70

 

Subtotal

 

3,829,698

 

2,911

 

.30

 

3,719,108

 

5,466

 

.59

 

Certificates of deposit

 

1,580,107

 

7,628

 

1.93

 

1,901,136

 

13,011

 

2.74

 

Total interest-bearing deposits

 

5,409,805

 

10,539

 

.78

 

5,620,244

 

18,477

 

1.32

 

Total deposits

 

7,665,480

 

10,539

 

.55

 

7,703,343

 

18,477

 

.96

 

Borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

735,475

 

2,350

 

1.28

 

869,735

 

2,830

 

1.30

 

Long-term borrowings

 

1,812,508

 

17,837

 

3.94

 

2,080,713

 

28,395

 

5.46

 

Total borrowings

 

2,547,983

 

20,187

 

3.17

 

2,950,448

 

31,225

 

4.23

 

Total interest-bearing liabilities

 

7,957,788

 

30,726

 

1.54

 

8,570,692

 

49,702

 

2.32

 

Total deposits and borrowings

 

10,213,463

 

30,726

 

1.20

 

10,653,791

 

49,702

 

1.87

 

Other liabilities (5)

 

375,192

 

 

 

 

 

450,534

 

 

 

 

 

Total liabilities

 

10,588,655

 

 

 

 

 

11,104,325

 

 

 

 

 

Stockholders’ equity (5)

 

936,989

 

 

 

 

 

973,593

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

11,525,644

 

 

 

 

 

$

12,077,918

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and margin

 

 

 

$

118,493

 

4.52

%

 

 

$

122,412

 

4.45

%

 


(1)   Tax-exempt income was not significant and thus has not been presented on a tax equivalent basis. Tax-exempt income of $138,000 and $133,000 was recognized during the quarter ended March 31, 2004 and 2003, respectively.

(2)   Annualized.

(3)   Average balance and yield of securities available for sale are based upon the historical amortized cost.

(4)   Average balance of loans and leases includes non-accrual loans and leases, and is presented net of unearned income.

(5)   Average balance is based upon month-end balances.

 

43



 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

From time to time, TCF is a party to legal proceedings arising out of its lending, leasing and deposit operations.  TCF is and expects to become engaged in a number of foreclosure proceedings and other collection actions as part of its loan and leasing collection activities.  From time to time, customers or others have also brought actions against TCF, in some cases claiming substantial amounts of damages.  Financial services companies are frequently the subject of class action litigation involving a wide variety of causes of action, and TCF has had such actions brought against it from time to time.  After review with its legal counsel, management believes that the ultimate disposition of existing litigation will not have a material effect on TCF’s financial condition, but litigation is often unpredictable and the actual results of litigation cannot be determined with certainty.

 

Item 2. Changes in Securities.

 

The following table summarizes share repurchase activity for the quarter ended March 31, 2004:

 

 

 

Shares Repurchased

 

Share Repurchase Authorizations (1)

 

(Dollars in thousands)

 

Number

 

Average Price
Per Share

 

October 22,
2001

 

July 21,
2003

 

Balance, December 31, 2003

 

 

 

 

 

143,871

 

3,574,984

 

January 2004

 

13,445

 

$51.66

 

(13,445

)

 

February 2004

 

 

 

 

 

March 2004

 

 

 

 

 

Balance, March 31, 2004

 

13,445

 

$51.66

 

130,426

 

3,574,984

 

 


(1)          The current share repurchase authorizations were approved by Board of Directors on October 22, 2001 and July 21, 2003. Each authorization was for a repurchase of up to an additional 5% of TCF’s common stock outstanding at the time of the authorization, or 3.8 million shares and 3.6 million shares, respectively.  These authorizations do not have expiration dates.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

None.

 

Item 5. Other Information.

 

None.

 

44



 

Item 6. Exhibits and Reports on Form 8-K.

 

(a)                                  Exhibits.

 

See Index to Exhibits on page 47 of this report.

 

(b)                                 Reports on Form 8-K.

 

A Current Report on Form 8-K, dated January 15, 2004, was submitted furnishing a press release dated January 15, 2004, announcing results of operations for the quarter and year ended December 31, 2003, under Item 12, filed under Item 7 of Form 8-K.

 

A Current Report on Form 8-K, dated January 23, 2004, was submitted furnishing certain investor presentation materials under Item 12, filed under Item 7 and 9 of Form 8-K.

 

A Current Report on Form 8-K, dated March 9, 2004, was submitted filing an announcement dated March 9, 2004, relating to a temporary suspension of trading related to a blackout period under the employee benefit plans under Item 11, filed under Item 7 of Form 8-K.

 

A Current Report on Form 8-K, dated March 23, 2004, was submitted furnishing a press release dated March 23, 2004, announcing the acquisition of VGM Leasing, Inc. of Waterloo, Iowa by TCF Leasing, Inc. under Item 5, filed under Item 7 of Form 8-K.

 

45



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

TCF FINANCIAL CORPORATION

 

 

 

 

 

/s/ William A. Cooper

 

William A. Cooper, Chairman of the Board,
Chief Executive Officer and Director

 

 

 

/s/ Neil W. Brown

 

Neil W. Brown, Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer)

 

 

 

/s/ David M. Stautz

 

David M. Stautz, Senior Vice President,
Controller and Assistant Treasurer
(Principal Accounting Officer)

 

 

 

 

Dated:   April 28, 2004

 

 

46



 

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

 

INDEX TO EXHIBITS

FOR FORM 10-Q

 

Exhibit
Number

 

Description

 

Sequentially
Numbered Page

4(a)

 

Copies of instruments with respect to long-term debt will be furnished to the Securities and Exchange Commission upon request.

 

 

 

 

 

 

 

10(o)#

 

Management Incentive Plan-Executive [incorporated by reference to Plan filed with registrant’s definitive proxy statement dated March 16, 1994, No. 001-10253]; and 1995 Plan Acknowledgment [incorporated by reference to Exhibit 10(s) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, No. 001-10253]; 1996 Management Incentive Plan-Executive [incorporated by reference to Exhibit 10(t) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, No. 001-10253]; 1997 Management Incentive Plan-Executive [incorporated by reference to Exhibit 10(t) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, No. 001-10253]; and 1998 Management Incentive Plan-Executive [incorporated by reference to Exhibit 10(s) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, No. 001-10253]; 1999 Management Incentive Plan-Executive [incorporated by reference to Exhibit 10(r) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, No. 001-10253]; and 2000 Management Incentive Plan-Executive [incorporated by reference to Exhibit 10(q) to TCF Financial Corporation’s quarterly report on Form 10-Q for the quarter ended March 31, 2000, No. 001-10253]; and 2001 Management Incentive Plan-Executive [incorporated by reference from TCF Financial Corporation’s Report on Form 10-Q for the quarter ended March 31, 2001, No. 001-10253]; and 2002 Management Incentive Plan-Executive [incorporated by reference from TCF Financial Corporation’s Report on Form 10-Q for the quarter ended March 31, 2002, No. 001-10253]; and 2004 Management Incentive Plan – Executive

 

 

 

 

 

 

 

31#

 

Rule 13a-14(a)/15d-14(a) Certifications (Section 302 Certifications).

 

 

 

 

 

 

 

32#

 

Statement Furnished Pursuant to Title 18 United States Code Section 1350 (Section 906 Certifications)

 

 

 


# Filed herein

 

47