10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 _______________________ COMMISSION FILE NO. 0-16431 _______________________ TCF FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 41-1591444 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 801 MARQUETTE AVENUE, SUITE 302, MINNEAPOLIS, MINNESOTA 55402 (Address and Zip Code of principal executive offices) Registrant's telephone number, including area code: 612-661-6500 ________________________ Securities registered pursuant to Section 12(b) of the Act (all registered on the New York Stock Exchange): COMMON STOCK (PAR VALUE $.01 PER SHARE) PREFERRED SHARE PURCHASE RIGHTS (Title of class) Securities registered pursuant to Section 12(g) of the Act: NONCUMULATIVE PERPETUAL PREFERRED STOCK, SERIES A, PAR VALUE $.01 PER SHARE WARRANTS TO PURCHASE SHARES OF COMMON STOCK 7 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011 ________________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 1, 1995, the aggregate market value of the voting stock held by nonaffiliates of the registrant, computed by reference to the average of the high and low prices on such date as reported by the New York Stock Exchange, was $583,277,561. As of March 1, 1995, there were outstanding 17,410,911 shares of the registrant's common stock, par value $.01 per share, its only outstanding class of common stock. DOCUMENTS INCORPORATED BY REFERENCE Specific portions of the registrant's annual report to shareholders for the year ended December 31, 1994 are incorporated by reference into Parts I, II and IV hereof. Specific portions of the registrant's definitive proxy statement dated March 15, 1995 are incorporated by reference into Part III hereof. TABLE OF CONTENTS PART I PAGE Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 General . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Lending Activities. . . . . . . . . . . . . . . . . . . . . 3 Investment Activities . . . . . . . . . . . . . . . . . . . 9 Sources of Funds. . . . . . . . . . . . . . . . . . . . . . 11 Other Information . . . . . . . . . . . . . . . . . . . . . 12 Activities of Subsidiaries of TCF Financial . . . . . . . 12 Recent Accounting Developments. . . . . . . . . . . . . . 13 Competition . . . . . . . . . . . . . . . . . . . . . . . 14 Acquisitions. . . . . . . . . . . . . . . . . . . . . . . 14 Employees . . . . . . . . . . . . . . . . . . . . . . . . 17 Regulation. . . . . . . . . . . . . . . . . . . . . . . . . 17 Taxation. . . . . . . . . . . . . . . . . . . . . . . . . . 28 Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . 29 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 30 Item 4. Submission of Matters to a Vote of Security Holders . . . . . 30 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 32 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . 34 Item 8. Financial Statements and Supplementary Data . . . . . . . . . 34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. . . . . . . . . . . . . . . . . . . . 34 PART III Item 10. Directors and Executive Officers of the Registrant. . . . . . 34 Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . 34 Item 12. Security Ownership of Certain Beneficial Owners and Management 34 Item 13. Certain Relationships and Related Transactions. . . . . . . . 34 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 34 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Index to Consolidated Financial Statements . . . . . . . . . . . . . . 38 Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . 38 PART I ITEM 1. BUSINESS GENERAL At December 31, 1994, TCF Financial Corporation ("TCF Financial", "TCF" or the "Company"), a Delaware corporation based in Minneapolis, Minnesota, was the holding company of four federally chartered savings banks, TCF Bank Minnesota fsb ("TCF Minnesota"), TCF Bank Illinois fsb ("TCF Illinois"), TCF Bank Wisconsin fsb ("TCF Wisconsin") and TCF Bank Michigan fsb ("TCF Michigan"). At such date, TCF Wisconsin, TCF Illinois and TCF Michigan were wholly owned subsidiaries of TCF Minnesota, the largest savings bank and third largest depository institution headquartered in Minnesota, with $5.1 billion in assets. With the completion of TCF's acquisition of Great Lakes Bancorp, A Federal Savings Bank ("Great Lakes"), on February 8, 1995, Great Lakes was merged into TCF Michigan, TCF Michigan became a direct wholly owned subsidiary of TCF Financial and TCF Michigan was renamed "Great Lakes Bancorp, A Federal Savings Bank." Unless otherwise indicated, references herein to TCF include its direct and indirect subsidiaries. TCF Minnesota, TCF Illinois, TCF Wisconsin and TCF Michigan are collectively referred to herein as the "TCF Savings Banks." References herein to the "Holding Company" or "TCF Financial" refer to TCF Financial Corporation on an unconsolidated basis. Where information is incorporated in this report by reference to TCF's 1994 Annual Report, only those portions specifically identified are so incorporated. TCF Financial was organized in 1987 as the holding company for TCF Minnesota, and its common stock has been listed on the New York Stock Exchange since 1989. Prior to 1986 TCF Minnesota operated as a mutual savings and loan association known as Twin City Federal Savings and Loan Association. In 1986, TCF Minnesota converted from a mutual to a stock form of organization, and in 1989, it became a federal savings bank. From its founding in 1923 until 1979, TCF Minnesota operated profitably, engaging in traditional savings institution activities such as residential real estate lending. In the early 1980's, in order to counter the effects of rising interest rates and deregulation, TCF initiated several new lending and investment activities, including commercial real estate lending outside the Midwest. These activities ultimately proved unprofitable. TCF has since positioned the TCF Savings Banks as "community banks" focusing on lending, deposit products and other services offered in their local markets and has significantly expanded their residential real estate and consumer lending activities, including home equity lending. TCF's strategic emphasis on retail banking has allowed it to fund its assets primarily with retail core deposits, significantly reduce wholesale borrowings and lower its interest rate risk. TCF's marketing strategy emphasizes attracting deposits held in checking and passbook and statement savings accounts, which also provide TCF with a significant source of fee income. TCF engages in commercial, residential and consumer lending activities, and in the insurance services business, including the sale of single premium tax-deferred annuities. TCF's lending activities emphasize consumer (primarily home equity) and residential mortgage loans. TCF's residential mortgage banking operations have grown significantly in recent periods, and its residential loan servicing portfolio totaled $5.4 billion as of December 31, 1994. On February 8, 1995, TCF completed its acquisition of Great Lakes, a Michigan-based savings bank with $2.8 billion in assets, $1.6 billion in deposits, 39 offices in Michigan and five offices in western Ohio as of December 31, 1994. In connection with the acquisition, TCF issued approximately 4.8 million shares of its common stock for all of the outstanding common shares of Great Lakes. In addition, each outstanding share of Great Lakes preferred stock was exchanged for one share of TCF preferred stock with substantially identical terms. TCF intends to redeem the 2.7 million shares of preferred stock as soon as practicable after July 1, 1995, the date the preferred stock first becomes redeemable at the option of the issuer. TCF also assumed the obligation to issue common stock upon the exercise or conversion of the outstanding warrants to purchase Great Lakes common stock, the outstanding employee and director options to purchase Great Lakes common stock, and the outstanding 7 1/4% convertible subordinated debentures due 2011 of Great Lakes. This acquisition was accounted for as a pooling-of-interests and, accordingly, TCF's historical financial statements presented in future reports will be restated to include the accounts and results of operations of Great Lakes. In connection with the acquisition, it is expected that a pretax merger-related charge of approximately $51.4 million will be incurred during the 1995 first quarter, primarily to accrue for specific, identified costs related to the merger. The savings bank resulting from the merger of Great Lakes and TCF Michigan, referred to herein as "Great Lakes Bank", retained certain members of Great Lakes' board of directors and Great Lakes' headquarters in Ann Arbor, Michigan. Great Lakes Bank now operates 54 offices in Michigan and five offices in western Ohio. Additional information concerning the Great Lakes 1 acquisition is set forth in Note 2 of Notes to Consolidated Financial Statements on pages 44 and 45 of TCF's 1994 Annual Report, incorporated herein by reference. On April 21, 1993, TCF issued approximately 2.2 million shares of its common stock for all of the outstanding common stock of Republic Capital Group, Inc. ("RCG"), a Milwaukee-based thrift holding company with approximately $1 billion in assets. TCF's consolidated financial statements give effect to the merger, which has been accounted for as a pooling-of-interests combination. Accordingly, TCF's consolidated financial statements for periods prior to the combination have been restated to include the accounts and results of operations of RCG for all periods presented. As a result of the merger, TCF acquired RCG's two wholly owned subsidiaries, Republic Capital Bank, F.S.B. (now TCF Wisconsin), which had 24 branch offices in eastern Wisconsin, and Peerless Federal Savings Bank (now TCF Illinois), which had six branch offices in the Chicago area. Subsequent to the merger, TCF Minnesota's Illinois Division, which had 22 branch offices, was merged into TCF Illinois. On August 27, 1993, TCF Michigan, a newly formed subsidiary of TCF Minnesota, acquired from the Resolution Trust Corporation ("RTC") $220.8 million of insured deposits and 15 branch offices of First Federal Savings and Loan Association, Pontiac, Michigan. TCF has accounted for this acquisition using the purchase method of accounting. Located in most significant markets in the state, TCF operated 66 bank branches in Minnesota at December 31, 1994. It also operated 28 bank branches in Illinois, 24 in Wisconsin, and 15 in Michigan at December 31, 1994. TCF strives to develop innovative banking products and services. From 1988 through December 31, 1994, TCF has established in Minnesota and Illinois 27 bank branches in supermarkets operated by Cub Foods, a regional chain. These "in- store" bank branches provide TCF with the opportunity to sell its consumer products and services, including deposits and loans, at a relatively low entry cost and feature extended hours, including Saturdays and Sundays. TCF's "Totally Free"(SM) checking accounts and other deposit products provide it with a significant source of low-cost funds and fee income. TCF has expanded its automated teller machine ("ATM") network to 634 machines processing approximately 2.2 million transactions monthly, and offers its customers a telephone accessible voice communication system that has enabled TCF to respond to approximately 4.1 million inquiries each month. In recent years, significant new federal legislation has imposed numerous new legal and regulatory requirements on thrift institutions. Among the most significant of these requirements are new minimum regulatory capital levels and enforcement actions that can be taken by regulators when an institution's regulatory capital is deemed to be inadequate. Each of the TCF Savings Banks currently exceeds all of the current and fully phased-in regulatory capital requirements. As a result of the failure of a number of thrift institutions in recent years and the obligation of the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") to fund debt obligations of the Financing Corporation ("FICO"), the thrift industry faces the prospect of significantly higher deposit insurance premiums than those paid by banks, and/or other charges necessary to meet the obligations of the SAIF. In the event the thrift industry is required to pay significantly higher deposit insurance premiums than those paid by banks, this may have an adverse effect on TCF's ability to attract and retain deposits in the TCF Savings Banks or in Great Lakes Bank. Proposals recently made by the FDIC would result in deposit insurance rates for thrift institutions that are significantly higher that those required to be paid by banks. As a result, TCF recently filed applications with the Office of the Comptroller of the Currency, and anticipates filing applications with the FDIC and the Federal Reserve Board, seeking the formation of national bank charters for proposed new national bank subsidiaries of TCF that would operate in branch locations in which the TCF Savings Banks and Great Lakes Bank now operate. The new national banks, if approved, would be insured by the Bank Insurance Fund ("BIF") of the FDIC, which is expected to be able to provide for significantly lower deposit insurance premiums than those to be charged to institutions that are part of the SAIF. See "REGULATION." As federally chartered savings banks, the TCF Savings Banks are subject to regulation and examination by the Office of Thrift Supervision ("OTS"). The TCF Savings Banks' deposits are insured to $100,000 by the FDIC, and as such these institutions are subject to regulations promulgated by the FDIC. The TCF Savings Banks are variously members of the Federal Home Loan Bank ("FHLB") of Des Moines, Chicago and/or Indianapolis. TCF Financial is a savings and loan holding company under the Home Owner's Loan Act ("HOLA") and is subject to regulation and examination by the OTS and, in certain cases, by the FDIC. See "REGULATION -- Regulation of TCF Financial." The executive offices of TCF Financial are located at 801 Marquette Avenue, Suite 302, Minneapolis, Minnesota 55402. Its telephone number is (612) 661-6500. 2 The following description includes detailed information regarding the business of TCF and its subsidiaries. LENDING ACTIVITIES GENERAL TCF's lending activities reflect its community banking philosophy, emphasizing loans to individuals and small- to medium-sized businesses in its primary market areas in Minnesota, Illinois, Wisconsin and Michigan. In recent years, TCF has expanded its residential real estate and consumer lending operations and placed relatively less emphasis on new commercial real estate lending. TCF also emphasizes credit quality over asset growth. TCF is expanding its consumer lending and consumer finance operations and anticipates opening more than 20 new consumer finance offices during 1995, 13 of which had been opened as of March 15, 1995. Most of these new offices will be in areas outside TCF's traditional market areas. TCF opened 27 such offices in 1994 and as of December 31, 1994 had 46 consumer finance offices in 11 states. TCF has also recently expanded its commercial business and commercial real estate lending activity in its primary markets in an attempt to maintain the size of these lending portfolios and, where feasible under local economic conditions, achieve some growth in these lending categories over time. The following table sets forth the contractual amortization of TCF's loan and mortgage-backed securities held to maturity portfolios at December 31, 1994, excluding loans held for sale. Commercial business demand loans are reported due within one year. This table does not include the effect of prepayments, which is an important consideration in management's interest rate risk analysis. Industry experience indicates that loans and mortgage-backed securities remain outstanding for significantly shorter periods than their contractual terms.
AT DECEMBER 31, 1994 (1) ------------------------------------------------------------------------------------------ REAL ESTATE ------------------------------------ TOTAL MORTGAGE- REAL COMMERCIAL TOTAL BACKED RESIDENTIAL COMMERCIAL ESTATE BUSINESS CONSUMER LOANS SECURITIES ----------- ---------- ------ ---------- -------- ----- ---------- (IN THOUSANDS) Amounts due: Within 1 year $ 48,795 $ 79,122 $ 127,917 $ 46,146 $ 120,271 $ 294,334 $ 48,045 ---------- --------- ---------- --------- ---------- ---------- --------- After 1 year: 1 to 2 years 41,080 89,722 130,802 13,457 88,168 232,427 54,818 2 to 3 years 62,233 101,108 163,341 11,205 96,937 271,483 109,496 3 to 5 years 170,797 161,339 332,136 10,887 158,769 501,792 297,496 5 to 10 years 327,773 176,580 504,353 2,528 349,175 856,056 288,928 10 to 15 years 230,076 19,134 249,210 1,346 290,064 540,620 180,075 Over 15 years 380,936 7,765 388,701 14,828 2,587 406,116 132,012 ---------- --------- ---------- --------- ---------- ---------- --------- Total after 1 year 1,212,895 555,648 1,768,543 54,251 985,700 2,808,494 1,062,825 ---------- --------- ---------- --------- ---------- ---------- --------- Total $1,261,690 $ 634,770 $ 1,896,460 $100,397 $ 1,105,971 $ 3,102,828 $ 1,110,870 ---------- --------- ---------- --------- ---------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------- --------- Amounts due after 1 year on: Fixed-rate loans $ 688,631 $ 167,957 $ 856,588 $ 4,982 $ 75,015 $ 936,585 $ 935,209 Adjustable-rate loans 524,264 387,691 911,955 49,269 910,685 1,871,909 127,616 ---------- --------- ---------- --------- ---------- ---------- --------- Total after 1 year $1,212,895 $ 555,648 $ 1,768,543 $ 54,251 $ 985,700 $ 2,808,494 $ 1,062,825 ---------- --------- ---------- --------- ---------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------- --------- ___________________________ (1) Amounts presented are the gross balances before adjustment for net discounts, premiums, deferred fees, and unearned discounts and finance charges.
RESIDENTIAL REAL ESTATE LENDING TCF's residential real estate lending activities (first mortgage loans for the financing of one- to four-family homes) are conducted through certain of the TCF Savings Banks and through TCF Mortgage Corporation ("TCF Mortgage"), a wholly owned subsidiary of TCF Minnesota. TCF Mortgage is headquartered in Minneapolis, Minnesota and has 13 offices in Minnesota. Loan originations by TCF Mortgage and certain of the TCF Savings Banks are predominantly secured by properties in Minnesota, Illinois and Wisconsin. TCF engages in both adjustable-rate and fixed-rate residential real estate lending. Although TCF generally has retained conventional adjustable-rate loans in its portfolio and sold fixed- 3 rate loans and adjustable-rate Federal Housing Administration ("FHA") and Veterans Administration ("VA") loans in the secondary market, during 1994 TCF retained a greater portion of its fixed-rate residential real estate originations than in past periods. Adjustable-rate residential real estate loans held in TCF's portfolio totaled $533.1 million at December 31, 1994, compared with $390.2 million at December 31, 1993. Loan originations by TCF Mortgage include loans purchased from loan correspondents and also loans purchased from Great Lakes Mortgage, a mortgage origination joint venture formed in October 1990 between a subsidiary of TCF Mortgage and Burnet Mortgage Corporation, an affiliate of Burnet Realty Inc. Great Lakes Mortgage loan officers originate loans from certain offices of Burnet Realty Inc. TCF may from time to time engage in the purchase of interests in various types of loans in the form of loan participations or mortgage-backed securities. Servicing of these purchased assets generally is performed by others with a portion of the interest paid by the borrower being retained by the seller to cover servicing fees and costs. As of December 31, 1994, approximately $29.6 million, or 2.3%, of TCF's residential real estate loans receivable and residential loans held for sale were serviced by others. In addition, $901.3 million of mortgage-backed securities held to maturity were serviced by others. TCF sells residential real estate loans and loan participations in the secondary market, primarily on a nonrecourse basis. TCF Mortgage retains servicing rights for the majority of the loans it sells into the secondary market. These sales provide additional funds for loan originations and also generate fee income. TCF may also from time to time purchase or sell servicing rights on residential real estate loan portfolios. At December 31, 1994, TCF serviced for others $3.9 billion in residential real estate loans and loan participations, compared with $3.6 billion at December 31, 1993. During 1994 and 1993, TCF sold servicing rights on $169 million and $44 million of loans serviced for others at net gains of $2.4 million and $137,000, respectively. TCF did not sell any servicing rights during 1992. At December 31, 1994, TCF's capitalized purchased mortgage servicing rights from bulk servicing purchases and other wholesale loan purchases totaled $12.2 million. TCF serviced residential real estate loans for its own account, including loans held for sale, of $1.5 billion at December 31, 1994. Adjustable-rate residential real estate loans originated by TCF have various adjustment periods and generally provide for limitations on the amount the rate may adjust on each adjustment date, as well as the total amount of adjustments over the lives of the loans. Accordingly, while this portfolio of loans is rate sensitive, it may not be as rate sensitive as TCF's cost of funds. In addition to such interest rate risk, TCF faces credit risks resulting from potential increased costs to borrowers as a result of rate adjustments on adjustable-rate loans in its portfolio, which will depend upon the magnitude and frequency of shifts in market interest rates. Some adjustable-rate residential real estate loans originated by TCF in prior periods did not provide for limitations on rate adjustments. Credit risk may also result from declines in the values of underlying real estate collateral. TCF Mortgage and the TCF Savings Banks generally adhere to Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), VA or FHA guidelines in originating residential real estate loans. TCF generally requires that all conventional real estate loans with loan-to-value ratios in excess of 80% carry private mortgage insurance. CONSUMER LENDING TCF makes consumer loans for personal, family or household purposes, such as the financing of home improvements, automobiles, vacations and education. Most of TCF's consumer loans are originated in markets in which the TCF Savings Banks or finance company subsidiaries have their offices. As previously mentioned, TCF is expanding its finance company operations and anticipates opening more than 20 new finance company offices during 1995, most of which will be in areas outside its traditional market areas. TCF opened 27 such offices in 1994 and as of December 31, 1994 had 46 finance company offices in 11 states. As a result of this expansion, TCF's finance company loan portfolio totaled $201 million at December 31, 1994, compared with $136.5 million at December 31, 1993. Consumer lending, including finance company lending, is generally considered to involve a higher level of risk than single-family residential lending due to the higher level of credit risk and interest rates associated with these loans. The underwriting criteria for loans originated by these finance company offices are generally less stringent than those historically adhered to by the TCF Savings Banks and as a result carry a higher level of credit risk and higher interest rates. Although credit quality 4 cannot be guaranteed and increased losses are expected in an economic downturn, TCF believes that it has in place experienced personnel and acceptable standards for maintaining credit quality that are consistent with its goals for expanding its portfolio of these higher-yielding loans. Total consumer loans for the TCF Savings Banks and finance company subsidiaries totaled $1.1 billion at December 31, 1994, with $136.5 million, or 12%, having fixed interest rates and $969.5 million, or 88%, having adjustable interest rates. The consumer lending activities of the TCF Savings Banks include a full range of consumer-oriented products including real estate secured loans, loans secured by personal property and unsecured personal loans. Each of these loan types can be made on an open- or closed-end basis. Closed-end loans are available on either a variable- or fixed-rate basis. TCF also originates student loans for resale. TCF Wisconsin is an issuer of credit cards which it offers to customers of the TCF Savings Banks. TCF also engages to a limited extent in the origination of consumer loans through the use of loan brokers. Consumer loans having adjustable interest rates present a credit risk similar to that posed by residential real estate loans as a result of increased costs to borrowers in the event of a rise in rates (see discussion above under "-- Residential Real Estate Lending"). Consumer loans secured by real estate will present additional credit risk in the event of a decline in the value of real estate collateral. TCF had $155.5 million of education loans held for sale at December 31, 1994, compared with $123.2 million at December 31, 1993. TCF generally retains the student loans it originates until they are fully disbursed. Under a forward commitment agreement with the Student Loan Marketing Association ("SLMA"), TCF can sell the student loans to SLMA once they are fully disbursed, but must sell the student loans to SLMA before they go into repayment status. These loans are originated in accordance with designated guarantor and U.S. Department of Education guidelines and may not involve any independent credit underwriting by TCF. During the years ended December 31, 1994, 1993 and 1992, TCF sold $80.3 million, $65.3 million and $36.6 million of its student loans, respectively. TCF subcontracts for the servicing of student loans in its portfolio. TCF's future student loan origination activity will be dependent on continued support of guaranteed student loan programs by the U.S. Government and TCF's ability to continue to sell such loans to SLMA or other parties. Recent federal legislation has limited the role of private lenders in originating student loans, and this may reduce the volume of TCF's student loan originations in future periods. COMMERCIAL REAL ESTATE LENDING TCF currently originates longer-term loans on commercial real estate and, to a lesser extent, shorter-term construction loans. TCF's commercial lending activity has declined in recent years, primarily as a result of more stringent underwriting standards, unfavorable economic conditions and competition from other lenders. Deterioration in the value and collectibility of commercial real estate loans and the value of commercial real estate in certain markets, and the effect of these developments on the performance of TCF's loan portfolio or TCF's ability to market real estate assets, has been a significant concern to TCF management. See "Financial Review -- Financial Condition - Non-Performing Assets" on pages 33 and 34 of TCF's 1994 Annual Report, incorporated herein by reference. TCF's current strategy is to focus its commercial lending activities on borrowers based in its primary markets and, at a minimum, to generate enough new commercial lending activity to maintain the size of its commercial lending portfolios. Due to TCF's increasing emphasis on lending to small- to medium- sized businesses in its market areas, the portion of its commercial real estate loan portfolio secured by properties located in its primary markets had increased to 84% at December 31, 1994. TCF's commercial real estate loans are generally originated with adjustable interest rates or fixed interest rates for terms of up to five years. At December 31, 1994, adjustable-rate loans represented 69% of commercial real estate loans outstanding. At December 31, 1994, TCF had a total of 1,074 commercial real estate loans outstanding secured by properties located in its primary markets. Of this total, 140 loans totaling $311.9 million had balances exceeding $1 million. At December 31, 1994, the average individual balance of commercial real estate loans was $562,000. Information regarding the types of properties securing TCF's commercial real estate loans is set forth on page 69 of TCF's 1994 Annual Report, incorporated herein by reference. At December 31, 1994, TCF's commercial construction and development loan portfolio totaled $13.5 million. Construction and permanent commercial real estate lending is generally considered to involve a higher level of risk than single-family residential lending due to the concentration of principal in a limited number of loans and borrowers. In 5 addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. Construction and permanent commercial real estate lending is also highly dependent on economic conditions, which in certain markets are not favorable for this type of lending activity. TCF's risk of loss on a construction and development loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of the project and the estimated cost (including interest) of the project. If the estimate of construction or development cost proves to be inaccurate or if economic conditions change, TCF may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves to be inaccurate at any time before or after maturity, TCF's loan may be secured by a project having a value which is insufficient to assure full repayment. Borrowers, which are often limited partnerships formed to purchase a specific property, may receive limited cash flow from the property, be unable to service the total debt, and as a result fail to make required loan payments. At times prior to its acquisition by TCF, RCG had engaged in the business of guaranteeing certain industrial development and housing revenue bonds issued by government authorities to finance commercial and multi-family real estate projects for private owners/developers. In the event of a default by the borrowers, TCF, as acquiring entity, may be required to fund the amount of its guarantee or acquire the then outstanding bonds, and in order to recover these amounts may be forced to foreclose on the underlying real estate. In such an event, TCF would be subject to the risk of market declines in the values of such properties. Management has considered these guarantees in its review of the adequacy of industrial revenue bond reserves. The balance of such financial guarantees at December 31, 1994 and 1993 was $18.6 million and $20.8 million, respectively. TCF no longer engages in the business of issuing such guarantees. Additional information concerning such guarantees is set forth in Note 16 of Notes to Consolidated Financial Statements on pages 54 through 56 of TCF's 1994 Annual Report, incorporated herein by reference. COMMERCIAL BUSINESS LENDING TCF has engaged in general commercial business lending operations since 1983. Commercial business loans may be secured by various types of business assets, including commercial real estate, and in some cases may be made on an unsecured basis. At December 31, 1994, TCF had $100.4 million in commercial business loans outstanding, with an average individual balance of $431,000. Prior to 1993, TCF experienced a reduction in its commercial business lending activities. TCF attributed this reduction to more stringent underwriting standards as well as to uncertain economic conditions. In 1993 and 1994, TCF has sought to expand its commercial business lending activity by lending to small and medium-sized businesses and professionals through the TCF Savings Banks. TCF's commercial business lending activities encompass loans with a broad variety of purposes, including corporate working capital loans and loans to finance the purchase of equipment or other acquisitions. TCF also makes loans to individuals who use the funds for business or personal purposes. As part of its commercial business and commercial real estate lending activities, TCF also issues standby letters of credit. At December 31, 1994, TCF had 37 such standby letters of credit outstanding in the aggregate amount of $18.1 million. Recognizing the generally increased risks associated with commercial business lending, TCF originates commercial business loans in order to increase its short-term, variable-rate asset base and to contribute to its profitability through the higher rates earned on these loans. TCF concentrates on originating commercial business loans primarily to middle-market companies based in its primary markets with borrowing requirements of less than $10 million. Approximately 86% of TCF's commercial business loans outstanding at December 31, 1994 were to borrowers based in its primary markets. CLASSIFIED ASSETS, LOAN DELINQUENCIES AND DEFAULTS TCF has established a classification system for individual commercial loans or other assets based on OTS regulations under which all or part of a loan or other asset may be classified as "substandard," "doubtful," "loss" or "special mention." It has also established overall ratings for various credit portfolios. A loan or other asset is placed in the substandard category when it is considered to have a well-defined weakness. A loan or other asset is placed in the doubtful category when some loss is likely but there is still sufficient uncertainty to permit the asset to remain on the books at its full value. All or a portion of a loan or other asset is classified as loss when it is considered uncollectible, in which case it is generally charged off. In some cases, loans or other assets for which there is perceived some possible exposure to credit loss are classified as special mention. Loans and other assets that are classified are subject to periodic review of their appropriate regulatory classifications. See "REGULATION -- Classification of Assets." 6 The following table summarizes information about TCF's non-accrual, restructured and past due loans:
AT DECEMBER 31, ---------------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- (IN MILLIONS) Non-accrual loans $ 9.5 $ 17.4 $ 16.1 $ 20.7 $ 27.8 Restructured loans 3.0 7.4 48.6 29.0 20.2 ------ ------ ------ ------ ------ Total non-accrual and restructured loans $ 12.5 $ 24.8 $ 64.7 $ 49.7 $ 48.0 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Accruing loans 90 days or more past due $ 2.0 $ 2.9 $ 1.3 $ 2.6 $ 2.8 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
The accrual of interest income is generally discontinued when loans become 90 days past due with respect to either principal or interest unless such loans are adequately secured and in the process of collection. See "Financial Review -- Financial Condition - Non-Performing Assets" on pages 33 and 34 of TCF's 1994 Annual Report, incorporated herein by reference, for information regarding other problem loans in TCF's portfolio. TCF has established loan loss reserves for known and anticipated problem loans as well as for loans which are not currently known to require a specific reserve allocation. Total loan loss reserves at December 31, 1994 were $31.6 million, which amounts to 1.02% of gross loans outstanding. The following table summarizes the allocation of the allowance for loan losses (includes general and specific loss allocations):
ALLOCATIONS AS A PERCENTAGE OF GROSS LOANS OUTSTANDING BY TYPE(1) AT DECEMBER 31, AT DECEMBER 31, ------------------------------------------------------- ----------------------------------- 1994 1993 1992 1991 1990 1994 1993 1992 1991 1990 --------- -------- ------- -------- ------- ----- ---- ---- ---- ---- (DOLLARS IN THOUSANDS) Residential real estate $ 1,671 $ 1,789 $ 1,932 $ 1,930 $ 2,553 .13% .17% .22% .27% .35% Commercial real estate 8,916 10,209 9,151 15,371 16,660 1.40 1.49 1.10 1.70 1.74 Commercial business 1,563 1,556 900 1,406 1,770 1.56 1.74 1.12 1.57 1.76 Consumer 10,027 6,777 7,266 6,713 7,615 .91 .74 .80 .75 .78 Unallocated 9,471 5,724 -- -- -- N.A N.A -- -- -- --------- --------- --------- --------- --------- Total allowance balance $ 31,648 $ 26,055 $ 19,249 $ 25,420 $ 28,598 1.02 .94 .72 .98 1.04 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ___________________________ (1) Excluding loans held for sale. N.A. - Not applicable.
The following table summarizes the percentage of the outstanding balance of gross loans in each category to total gross loans, excluding loans held for sale:
AT DECEMBER 31, --------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Residential real estate 40.7% 38.5% 32.1% 27.3% 26.2% Commercial real estate 20.5 24.9 31.0 34.8 34.7 Commercial business 3.2 3.3 3.0 3.5 3.6 Consumer 35.6 33.3 33.9 34.4 35.5 ----- ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
7 The following table summarizes additional information about TCF's allowance for loan losses:
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1994 1993 1992 1991 1990 -------- -------- -------- --------- --------- (DOLLARS IN THOUSANDS) Balance at beginning of year $ 26,055 $ 19,249 $ 25,420 $ 28,598 $ 16,552 Adjustments for pooling-of-interests -- (56) -- -- -- Charge-offs: Residential real estate (860) (728) (1,117) (843) (1,915) Commercial real estate (2,699) (11,754) (15,043) (15,841) (7,166) Commercial business (633) (59) (978) (1,519) (1,354) Consumer (3,548) (3,491) (4,381) (6,275) (6,924) -------- -------- -------- -------- -------- (7,740) (16,032) (21,519) (24,478) (17,359) -------- -------- -------- -------- -------- Recoveries: Residential real estate 222 260 290 403 963 Commercial real estate 1,250 1,372 885 933 300 Commercial business 34 101 740 95 257 Consumer 926 954 1,010 1,279 1,040 -------- -------- -------- -------- -------- 2,432 2,687 2,925 2,710 2,560 -------- -------- -------- -------- -------- Net charge-offs (5,308) (13,345) (18,594) (21,768) (14,799) Provision charged to operations 10,901 20,207 12,423 18,590 23,858 Acquired allowance -- -- -- -- 2,987 -------- -------- -------- -------- -------- Balance at end of year $ 31,648 $ 26,055 $ 19,249 $ 25,420 $ 28,598 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Ratio of net loan charge-offs to average loans outstanding (1) .18% .50% .69% .83% .53% Year-end allowance as a percentage of year-end gross loan balance (1) 1.02 .94 .72 .98 1.04 _________________________________ (1) Excluding loans held for sale.
In addition to its allowance for loan losses, TCF had an allowance for real estate losses of $730,000 and an industrial revenue bond reserve of $2.8 million at December 31, 1994. Additional information concerning TCF's allowances for loan and real estate losses and industrial revenue bond reserves is set forth in "Financial Review -- Financial Condition - Allowances for Loan and Real Estate Losses and Industrial Revenue Bond Reserves" on pages 31 to 33 and in Note 8 of Notes to Consolidated Financial Statements on pages 48 and 49 of TCF's 1994 Annual Report, incorporated herein by reference. A summary of the industrial revenue bond reserves follows:
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1994 1993 1992 1991 1990 -------- --------- ------- ------ ------- (IN THOUSANDS) Balance at beginning of year $ 2,689 $ 1,463 $ 2,881 $ 408 $ -- Adjustments for pooling-of-interests -- 225 -- -- -- Provisions for losses -- 1,726 767 2,473 2,008 Net (charge-offs) recoveries 70 (725) (2,185) -- (1,600) -------- -------- -------- -------- -------- Balance at end of year $ 2,759 $ 2,689 $ 1,463 $ 2,881 $ 408 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Prior to being acquired by TCF, RCG had entered into agreements guaranteeing certain industrial development and housing revenue bonds issued by municipalities to finance commercial and multi-family real estate owned by third parties. In the event a third-party borrower defaults on principal or interest payments on the bonds, TCF, as acquiring entity, is required to either fund the amount in default or acquire the then outstanding bonds. TCF may foreclose on the underlying real estate to recover amounts in default. The balance of such financial guarantees at December 31, 1994 and 1993 was $18.6 million and $20.8 million, respectively. Management has considered these guarantees in its review of the adequacy of the industrial revenue bond reserves. 8 A summary of the allowance for real estate losses follows:
YEAR ENDED DECEMBER 31, -------------------------------------- 1994 1993 1992 -------- ------- -------- (IN THOUSANDS) Balance at beginning of year $ 1,968 $ 2,291 $ 7,603 Adjustments for pooling-of-interests - (513) - Provision for losses 2,373 11,743 22,054 Charge-offs (3,611) (11,553) (27,366) -------- -------- --------- Balance at end of year $ 730 $ 1,968 $ 2,291 -------- -------- --------- -------- -------- ---------
Real estate acquired through foreclosure (including real estate in judgment and in-substance foreclosures) is carried at the lower of cost or fair value minus estimated costs to sell the properties. See "OTHER INFORMATION--Recent Accounting Developments." Real estate charge-offs in 1993 reflect $4.2 million in charge-offs of TCF's investment in New York City cooperative apartment units, and sales of commercial real estate properties at less than previously estimated fair values. TCF's remaining investment in the cooperative units (excluding loans to purchasers of cooperative units and loans to the cooperative apartment corporations secured by underlying real estate) totaled $528,000 and $1.8 million at December 31, 1994 and 1993, respectively. Real estate charge-offs in 1992 exceeded the allowance for real estate losses at December 31, 1991 primarily due to a decline in the market value of cooperative units and other commercial real estate properties and sales of commercial real estate properties at less than previously estimated fair values. The presence of various factors added a degree of uncertainty to management's determination of the estimated fair values of certain foreclosed commercial real estate properties at December 31, 1991. These factors included the existence of a number of large out-of-territory properties which have a substantially greater risk of loss, the inability to gain access and obtain updated appraisals for certain in-substance foreclosed properties, the limited market for certain of the properties, and environmental concerns for one property which was subsequently sold. TCF disposed of a number of foreclosed commercial real estate properties in 1992 at lower prices in order to reduce future legal and other expenses, minimize future holding costs and reduce TCF's exposure to further declines in market values. Reducing non-performing assets in 1992 enabled TCF to improve its financial performance and regulatory ratings. The allowance for real estate losses is based on management's periodic analysis of real estate holdings. In this analysis, management considers factors including, but not limited to, general economic and market conditions, geographic location, composition and appraisals of the real estate holdings and property conditions. The carrying values of foreclosed real estate are based on appraisals, prepared by certified appraisers, whenever possible. TCF reviews each external commercial real estate appraisal it receives for accuracy, completeness and reasonableness of assumptions used. A renewed weakness in commercial real estate markets may result in further declines in values of the properties or the sale of individual properties at less than previously estimated values, resulting in additional charge-offs. TCF recognizes the effect of such events in the periods in which they occur. When property acquired in settlement of loans is sold, TCF may also provide financing for the sale and, in some cases, may provide a "loan to facilitate," which is a loan that may be made at below market rates or feature other terms not normally offered to other borrowers. If a loan to facilitate is made at a rate below market, TCF records a loan discount in order to bring the yield on the loan to a market interest rate. INVESTMENT ACTIVITIES Federal savings banks such as the TCF Savings Banks have authority to invest in various types of liquid assets, including United States Treasury obligations and securities of various federal agencies, certificates of deposit at insured banks, bankers' acceptances and federal funds. The TCF Savings Banks must maintain minimum levels of liquid assets specified by the OTS. These minimum levels are subject to change. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. The TCF Savings Banks 9 must also meet reserve requirements of the Federal Reserve Board ("FRB"), which are imposed based on amounts on deposit in various types of deposit categories. See "REGULATION -- Liquidity and Reserve Requirements." In May, 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." TCF adopted SFAS No. 115 effective January 1, 1994. Information on TCF's adoption of SFAS No. 115 is provided in Note 1 of Notes to Consolidated Financial Statements on pages 43 and 44 of TCF's 1994 Annual Report, incorporated herein by reference. Following is a table indicating the investments comprising TCF's portfolio, excluding securities available for sale:
AT DECEMBER 31, ------------------------------------------- 1994 1993 1992 ----------- ---------- --------- (IN THOUSANDS) Interest-bearing deposits with banks $ 190,698 $ 10,512 $ 26,534 ---------- --------- --------- Federal funds sold 6,900 105,500 100,000 ---------- --------- --------- U.S. Government and other marketable securities held to maturity: U.S. Government and agency obligations 50 66,961 51,428 Corporate bonds -- 3,000 12,981 Bankers' acceptances -- 6,997 24,842 Commercial paper 3,478 3,244 17,817 Other -- 1,058 26,561 ---------- --------- --------- 3,528 81,260 133,629 ---------- --------- --------- Federal Home Loan Bank stock 42,525 37,849 33,601 ---------- --------- --------- $ 243,651 $ 235,121 $ 293,764 ---------- --------- --------- ---------- --------- ---------
Information regarding the carrying values and fair values of TCF's investment securities portfolio is set forth in Note 3 of Notes to Consolidated Financial Statements on page 46 of TCF's 1994 Annual Report, incorporated herein by reference. A summary of yields by scheduled maturities for indicated investment securities at December 31, 1994 and December 31, 1993 is set forth on page 68 of TCF's 1994 Annual Report, incorporated herein by reference. Following is a table indicating the investments comprising TCF's securities available for sale portfolio:
AT DECEMBER 31, --------------------------------------- 1994 1993 1992 --------- ---------- --------- (IN THOUSANDS) U.S. Government and other marketable securities: U.S. Government and agency obligations $ 50,912 $ -- $ 1,000 Commercial paper 14,843 -- -- Other 30 10,236 -- --------- --------- --------- 65,785 10,236 1,000 --------- --------- --------- Mortgage-backed securities -- -- 255,624 --------- --------- --------- $ 65,785 $ 10,236 $ 256,624 --------- --------- --------- --------- --------- ---------
Information regarding the carrying values and fair values of TCF's securities available for sale portfolio is set forth in Note 4 of Notes to Consolidated Financial Statements on page 47 of TCF's 1994 Annual Report, incorporated herein by reference. A summary of yields by scheduled maturities for securities available for sale at December 31, 1994 and December 31, 1993 is set forth on page 68 of TCF's 1994 Annual Report, incorporated herein by reference. 10 SOURCES OF FUNDS DEPOSITS Deposits are the primary source of TCF's funds for use in lending and for other general business purposes. Deposit inflows and outflows are significantly influenced by economic conditions, interest rates, money market conditions and other factors. Although TCF's overall levels of deposits have recently stabilized, demand for certain types of deposit products, such as certificates of deposit, has declined in recent periods. Higher-cost borrowings may be used to compensate for reductions in normal sources of funds, such as deposit inflows at less than projected levels or net deposit outflows, or to support expanded activities. Consumer and commercial deposits are attracted principally from within TCF's primary market areas through the offering of a broad selection of deposit instruments including consumer and commercial demand deposit accounts, Negotiable Order of Withdrawal or "NOW" (interest-bearing checking) accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans. The composition of TCF's deposits has a significant impact on its cost of funds. In recent years, TCF's marketing strategy has emphasized attracting deposits held in checking and regular savings accounts. These accounts provide significant fee income and are a source of low-interest cost funds. Checking and savings accounts comprised 41% of total deposits at December 31, 1994, up from 40% of total deposits at December 31, 1993, and 36% at December 31, 1992. In addition, there were approximately 826,000 retail checking and savings accounts at December 31, 1994, compared with approximately 805,000 and 750,000 such accounts at December 31, 1993 and 1992, respectively. The acquisition of deposits by TCF Michigan contributed to the increase in such accounts in 1993. Total deposits at TCF as of December 31, 1994 were $3.8 billion, down $282.9 million from total deposits at December 31, 1993. The following table sets forth the deposit flows for each of the years in the three-year period ended December 31, 1994:
YEAR ENDED DECEMBER 31, ---------------------------------------------------- 1994 1993 1992 ----------- ----------- ------------ (IN THOUSANDS) Net withdrawal of deposits $ (407,349) $ (275,816) $ (233,836) Adjustments for pooling-of-interests -- (7,529) -- Deposits purchased -- 246,040 -- Interest credited 124,405 135,155 181,554 ----------- ---------- ------------ Net increase (decrease) in deposits $ (282,944) $ 97,850 $ (52,282) ----------- ---------- ------------ ----------- ---------- ------------
The following table shows rate and maturity information as of December 31, 1994, and rate information as of December 31, 1993, for TCF's certificates of deposit:
INTEREST CATEGORY ----------------------------------------------------------------- 1.00 - 3.00- 4.00- 6.00- 8.00- % OF MATURITY WITHIN THE YEAR ENDING 2.99% 3.99% 5.99% 7.99% 13.99% TOTAL TOTAL ------------------------------- --------- ---------- ---------- -------- -------- ----------- ----- (DOLLARS IN THOUSANDS) December 31, 1995 $ 87,706 $ 225,476 $ 796,485 $ 178,705 $ 25,853 $ 1,314,225 72.1% December 31, 1996 15 35,768 160,631 104,592 5,638 306,644 16.8 December 31, 1997 1 11,310 60,500 35,076 595 107,482 5.9 Thereafter -- 29 61,426 32,361 1,769 95,585 5.2 --------- ---------- ---------- --------- --------- ----------- ----- Total at December 31, 1994 $ 87,722 $ 272,583 $1,079,042 $ 350,734 $ 33,855 $ 1,823,936 100.0% --------- ---------- ---------- --------- --------- ----------- ----- --------- ---------- ---------- --------- --------- ----------- ----- Total at December 31, 1993 $ 158,517 $ 707,886 $ 608,909 $ 367,300 $ 134,348 $ 1,976,960 --------- ---------- ---------- --------- --------- ----------- --------- ---------- ---------- --------- --------- -----------
Information concerning TCF's deposits is set forth in "Financial Review -- Financial Condition - Deposits" on page 35 and in Note 12 of Notes to Consolidated Financial Statements on pages 50 and 51 of TCF's 1994 Annual Report, incorporated herein by reference. 11 BORROWINGS The FHLB System functions as a central reserve bank providing credit for thrift institutions through a regional bank located within a particular thrift's assigned region. As members of the FHLB System, the TCF Savings Banks are required to own a minimum level of FHLB capital stock and are authorized to apply for advances on the security of such stock and certain of their loans and other assets (principally securities which are obligations of, or guaranteed by, the United States Government), provided certain standards related to creditworthiness have been met. TCF's FHLB advances totaled $650.9 million at December 31, 1994, compared with $396.7 million at December 31, 1993. FHLB advances are made pursuant to several different credit programs. Each credit program has its own interest rates and range of maturities. The FHLB prescribes the acceptable uses to which the advances pursuant to each program may be made as well as limitations on the size of advances. Acceptable uses prescribed by the FHLB have included expansion of residential mortgage lending and meeting short-term liquidity needs. In addition to the program limitations, the amounts of advances for which an institution may be eligible are generally based on the FHLB's assessment of the institution's creditworthiness. See "REGULATION -- Federal Home Loan Bank System." As an additional source of funds, TCF may sell securities subject to its obligation to repurchase these securities under repurchase agreements ("reverse repurchase agreements") with the FHLMC or major investment bankers utilizing government securities or mortgage-backed securities as collateral. Reverse repurchase agreements totaled $170.1 million at December 31, 1994, compared with $129.8 million at December 31, 1993. Generally, securities with a value in excess of the amount borrowed are required to be deposited as collateral with the counterparty to a reverse repurchase agreement. The creditworthiness of the counterparty is important in establishing that the overcollateralized amount of securities delivered by TCF is protected and it is TCF's policy to enter into reverse repurchase agreements only with institutions with a satisfactory credit history. The use of reverse repurchase agreements may expose TCF to certain risks not associated with other sources of funds, including possible requirements to provide additional collateral and the possibility that such agreements may not be renewed. If for some reason TCF were no longer able to obtain reverse repurchase agreement financing, it would be necessary for TCF to obtain alternative sources of short-term funds. Such alternative sources of funds, if available, may be higher- cost substitutes for the reverse repurchase agreement funds. Information concerning TCF's FHLB advances, reverse repurchase agreements and other borrowings, and exposure to interest rate risk is set forth in "Financial Review -- Financial Condition - Asset/ Liability Management - Interest Rate Risk," on pages 36 and 37, in Note 13 of Notes to Consolidated Financial Statements on pages 51 and 52, and in the tables which set forth maximum and average borrowing levels on page 68 of TCF's 1994 Annual Report, incorporated herein by reference. OTHER INFORMATION ACTIVITIES OF SUBSIDIARIES OF TCF FINANCIAL TCF's business operations include those conducted by direct and indirect subsidiaries of TCF Financial. The TCF Savings Banks are permitted to invest an amount equal to 2% of their assets (excluding those of its subsidiaries) in subsidiaries called service corporations. Up to an additional 1% of assets may be invested in certain types of community development projects. Under OTS regulations, the ability of thrift institutions to invest an additional amount up to 50% of their risk-based capital in conforming loans to service corporations is tied to an institution's compliance with regulatory capital requirements. Service corporations are authorized by regulation to engage in various activities reasonably related to the activities of federal savings associations as approved by the OTS. See "REGULATION -- Limitations on Certain Investments." In addition to investments in service corporations, the TCF Savings Banks are also permitted to form subsidiaries known as operating subsidiaries. Operating subsidiaries are permitted to engage in activities permitted for federal savings associations and are not subject to the service corporation investment limitations. See "REGULATION -- Limitations on Certain Investments." During the year ended December 31, 1994, TCF subsidiaries were principally engaged in the following activities: 12 Mortgage Banking TCF Mortgage Corporation, a subsidiary of TCF Minnesota, originates, sells and services residential mortgage loans. At December 31, 1994, it operated 10 offices in the Minneapolis-St. Paul metropolitan area, and an office each in Rochester, Faribault and St. Cloud, Minnesota. A subsidiary of TCF Mortgage Corporation is involved in a joint venture, known as Great Lakes Mortgage, with Burnet Mortgage Corporation, an affiliate of Burnet Realty Inc., for the origination of residential mortgage loans from offices of Burnet Realty. Annuities and Investment Services TCF Financial Insurance Agency, Inc., TCF Financial Insurance Agency Illinois, Inc., TCF Financial Insurance Agency Wisconsin, Inc. and TCF Financial Insurance Agency Michigan, Inc. are insurance agencies engaging in the sale of single premium tax-deferred annuities. TCF Securities, Inc., which commenced business in November 1993, engages in the sale of mutual fund products of Putnam Investments. Insurance, Title Insurance and Appraisal Services TCF Agency Minnesota, Inc., TCF Agency Wisconsin, Inc. and TCF Agency Illinois, Inc. provide various types of insurance, principally credit-related insurance, marketed primarily to TCF's customers. In the event TCF becomes a bank holding company, it could be required to discontinue insurance operations which are not credit related. North Star Title, Inc. is a title insurance agent for several title insurance underwriters, operating primarily in Minnesota and Illinois and providing title insurance, real estate abstracting, and closing services to affiliates and third parties. North Star Real Estate Services, Inc. provides real estate appraisal services to its affiliates and to third parties. In the event TCF becomes a bank holding company, it could be required to divest its title insurance operations, or to restrict its title insurance and related activities. See "REGULATION -- Regulation of TCF Financial and Affiliate and Insider Transactions." Consumer Finance TCF Financial Services, Inc. and TCF Consumer Financial Services, Inc., make loans to consumers for personal, family or household purposes such as the financing of home improvements, automobiles and vacations. RECENT ACCOUNTING DEVELOPMENTS During the past several years, there has been an ongoing review of the accounting principles and practices used by financial institutions for certain types of transactions. This review is expected to continue by thrift and banking regulators, the Securities and Exchange Commission ("SEC"), the FASB, the American Institute of Certified Public Accountants ("AICPA") and other organizations. As a result of this process, there have been new accounting pronouncements which have had an impact on TCF. Further developments may be forthcoming in light of this ongoing review process. See "REGULATION -- Accounting and Investments." In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." In October 1994, the FASB issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." Additional information on SFAS No. 114 and SFAS No. 118 is set forth in "Financial Review--Financial Condition - Non-Performing Assets" on pages 33 and 34 of TCF's 1994 Annual Report, incorporated herein by reference. In June 1994, the FASB issued an Exposure Draft of a Proposed Statement of Financial Accounting Standards, "Accounting for Mortgage Servicing Rights and Excess Servicing Receivables and for Securitization of Mortgage Loans." Additional information on this proposed statement is set forth in "Financial Review--Results of Operations - Non-Interest Expense" on pages 27 and 28 of TCF's Annual Report, incorporated herein by reference. In November 1993, the FASB issued an Exposure Draft of a Proposed Statement of Financial Accounting Standards, "Accounting for the Impairment of Long-Lived Assets." This proposed statement addresses the accounting for the impairment of long-lived assets, identifiable intangibles, and goodwill related to those assets. It would establish guidance for recognizing and measuring impairment losses and would require that the carrying amount of impaired assets be reduced to fair value. This proposed statement would require long-lived assets and identifiable intangibles to be held and 13 used by an entity to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In performing the review for recoverability, the entity would estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future net cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss would be recognized. Otherwise, an impairment loss would not be recognized. The proposed statement would be effective for financial statements issued for fiscal years beginning after June 15, 1995. It is too early to predict whether the proposed statement will be adopted in its current form, or what effect, if any, it will have on TCF's results of operations. In October 1993, the Accounting Standards Executive Committee of the AICPA issued a proposed SOP, "Identifying and Accounting for Real Estate Loans that Qualify as Real Estate Investments." This proposed SOP applies to all entities that make or acquire real estate loans. It provides guidance on identifying and accounting for real estate loans that qualify as real estate investments for financial reporting purposes. Such loans may include real estate acquisition, development, and construction ("ADC") loans, loans on operating real estate, convertible mortgages, and shared appreciation (participating) mortgages. It requires real estate loans that do not meet certain criteria to be classified and accounted for as real estate investments. For purposes of applying the proposed SOP, a loan classified and accounted for as a real estate investment is considered the equivalent of an investment by the lender in a hypothetical partnership, the assets of which include the subject real estate. The proposed SOP does not apply to (1) troubled debt restructurings, foreclosures, or in- substance foreclosures relating to real estate loans accounted for as loans using the criteria set forth in the proposed SOP, (2) debtors, (3) real estate loans resulting from the lender's sale of real estate, (4) permanent mortgage real estate loans on one- to four-family residential properties, or (5) small real estate loans evaluated for impairment by the lender in the aggregate. The proposed SOP would apply to real estate loans entered into or purchased after December 31, 1994. Earlier application is encouraged. It is too early to predict whether the proposed SOP will be adopted in its current form, or what effect, if any, it will have on TCF's results of operations or regulatory capital. COMPETITION TCF Minnesota is the largest savings bank and third largest depository institution headquartered in Minnesota. TCF Illinois, TCF Wisconsin and TCF Michigan compete with a number of larger depository institutions in their market areas. The TCF Savings Banks experience significant competition in attracting and retaining deposits and in lending funds. TCF believes the primary factors in competing for deposits are the ability to offer attractive rates and products, convenient office locations and supporting data processing systems and services. Direct competition for deposits comes primarily from commercial banks and credit unions, and from other savings institutions. Additional significant competition for deposits comes from institutions selling money market mutual funds and corporate and government securities. The primary factors in competing for loans are interest rates, loan origination fees and the range of services offered. TCF competes for origination of loans with commercial banks, mortgage bankers, mortgage brokers, consumer finance companies, credit unions, insurance companies and other savings institutions. ACQUISITIONS Since 1992, TCF has been actively exploring a number of possible acquisition opportunities in the Midwest. As previously noted, during 1995 TCF completed its acquisition of Great Lakes and during 1993 TCF acquired RCG and certain deposit liabilities and assets of First Federal Savings and Loan Association, Pontiac, Michigan. In addition, in 1993, TCF acquired from Prospect Federal Savings Bank its Lombard, Illinois branch, with more than $24 million in deposits. Prior to 1990, TCF expanded its operations through the acquisition of a number of savings and loan associations. In accordance with generally accepted accounting principles, certain of these acquisitions were accounted for using the purchase method of accounting. All assets acquired and liabilities assumed were adjusted to fair market value as of the dates of acquisition. In accordance with SFAS No. 109, a deferred tax asset was recorded for the tax benefits resulting from the difference in value assigned to various acquired assets under the purchase method of accounting and their tax basis. To the extent required under SFAS No. 109, a tax valuation allowance was also recorded. The fair market value of the liabilities assumed exceeded the fair market value of the assets acquired in each of the acquisitions. The difference, goodwill and deposit base intangibles, has been recorded in TCF's consolidated financial statements as an asset. For acquisitions initiated or completed prior to September 30, 1982, goodwill is being amortized over 25 years on a straight-line basis. For acquisitions initiated or completed after September 30, 1982, goodwill is being amortized by the level- 14 yield method based upon the outstanding balances, and over the estimated remaining lives, of the long-term assets acquired. Deposit base intangibles are amortized over 10 years on a straight-line basis. TCF periodically re-evaluates the periods of amortization to determine whether current conditions warrant revised estimates of useful lives. Following these acquisitions, numerous legal and regulatory restrictions were imposed on the TCF Savings Banks' ability to include such goodwill and deposit base intangibles as part of regulatory capital. See "REGULATION -- Regulatory Capital Requirements." The fair market value of the assets acquired and liabilities assumed in acquisitions accounted for using the purchase method of accounting generally differed from the face amount of such assets and liabilities. The resultant premiums and discounts are being amortized over the expected remaining lives of such assets and liabilities. The fair market value of acquired loans and mortgage-backed securities for these acquisitions was generally determined to be less than the unpaid principal balance. The difference, loan discount, results primarily from the fact that the acquired loans had contractual interest rates lower than prevailing market rates at the date of acquisition. The loan discount, for loans not subsequently sold, is being amortized into income using the level-yield method over the remaining contractual lives of the loans, adjusted for anticipated prepayments. The following table sets forth the actual effect on results of operations for the years since acquisition through 1994 and the proforma effect on future years' results of operations of the amortization of the valuation adjustments recorded in connection with TCF's acquisitions. The proforma amortizations have been calculated on the basis of the assumptions explained above. If these assumptions are not realized, the actual amortization of these valuation adjustments will vary. The category in the table entitled "Amortization of Other Discounts and Premiums" includes discounts and premiums equal to the difference between the fair market values of the assets (other than loans) acquired and the liabilities assumed and the recorded values of such assets and liabilities on the books of the acquired entities at the dates of acquisition. Such discounts and premiums are being amortized, where applicable, using the straight-line method over periods of up to 40 years with respect to depreciable premises and equipment, and using the level-yield method with respect to interest-earning assets and interest-bearing liabilities. 15
AMORTIZA- EFFECT ON GOODWILL TION AMORTIZATION NET INCOME REDUCTION AMORTIZA- OF OTHER OF GOODWILL (LOSS) BEFORE DUE TO TION DISCOUNTS AND DEPOSIT WRITE-OFF/ INCOME THE RECOGNITION OF LOAN AND BASE REDUCTION OF TAX OF ACQUIRED DISCOUNTS PREMIUMS INTANGIBLES GOODWILL EXPENSE TAX BENEFITS(3) ---------- -------- ----------- ------------ ------------ ---------------- (IN THOUSANDS) Year Ended December 31, ----------------------- Actual: Prior to 1990 $ 50,850 $ (701) $ (47,768) $ (6,898)(1) $ (4,517) $ (74,427) 1990 5,177 89 (4,723) (10,169)(2) (9,626) -- 1991 3,266 622 (3,853) -- 35 (6,975) 1992 2,585 122 (3,830) -- (1,123) (1,884) Adjustments for pooling- of-interests (69) 164 (104) -- (9) -- 1993 1,756 106 (2,957) -- (1,095) -- 1994 1,051 86 (3,257) -- (2,120) -- --------- ------ --------- --------- --------- ---------- 64,616 488 (66,492) (17,067) (18,455) (83,286) --------- ------ --------- --------- --------- ---------- Proforma: 1995 358 20 (3,198) -- (2,820) -- 1996 217 23 (3,182) -- (2,942) -- 1997 124 19 (2,953) -- (2,810) -- 1998 106 13 (2,799) -- (2,680) -- 1999 102 10 (2,794) -- (2,682) -- 2000-2004 302 2 (10,927) -- (10,623) -- 2005-2029 -- 17 (1,995) -- (1,978) -- --------- ------ --------- --------- --------- ---------- 1,209 104 (27,848) - (26,535) -- --------- ------ --------- --------- --------- ---------- Total $ 65,825 $ 592 $ (94,340) $ (17,067) $ (44,990) $ (83,286) --------- ------ --------- --------- --------- ---------- --------- ------ --------- --------- --------- ---------- _______________________ (1) The premium received on the sale of seven branches of TCF's Texas thrift subsidiary in 1987 was applied to reduce goodwill. (2) Represents the write-off of all remaining goodwill associated with TCF's Texas thrift subsidiary in connection with restructuring activities undertaken by TCF during the second quarter of 1990. (3) Represents the reduction of goodwill due to the realization of acquired tax benefits resulting from the reduction of tax valuation allowances as required by SFAS No. 109. These benefits were not recorded at the time of acquisition because of the uncertainty of realization.
The following summarizes TCF's acquisitions since 1988 that were accounted for using the purchase method of accounting:
AT ACQUISITION DATE -------------------------------------------- FAIR VALUE OF FAIR VALUE DEPOSIT LIABILITIES OF ASSETS BASE DATE ACQUIRED ASSUMED ACQUIRED INTANGIBLES ------------- ------------- ---------- ----------- (IN MILLIONS) Peerless Federal Savings Bank, Chicago, Illinois (1) December 30, 1989 $ 209.2 $ 207.1 $ 2.1 Lombard branch office of Prospect Federal Savings Bank, Lombard, Illinois August 16, 1993 25.3 25.3 -- First Federal Savings and Loan Association, Pontiac, Michigan (2) August 27, 1993 223.7 209.1 14.6 -------- -------- ------- $ 458.2 $ 441.5 $ 16.7 -------- -------- ------- -------- -------- ------- -------------------------------- (1) Acquisition was entered into by RCG prior to its acquisition by TCF. (2) TCF acquired $220.8 million of insured deposits and 15 branch offices of First Federal Savings and Loan Association, Pontiac, Michigan from the RTC.
16 EMPLOYEES As of December 31, 1994, TCF had approximately 3,600 employees, including 850 part-time employees. TCF provides its employees with a comprehensive program of benefits, some of which are on a contributory basis, including comprehensive medical and dental plans, life insurance, accident insurance, short- and long-term disability coverage, a pension plan and a shared contribution stock ownership-401(k) plan. REGULATION LEGISLATIVE AND REGULATORY DEVELOPMENTS TCF Financial, as a publicly-held thrift holding company, and the TCF Savings Banks, as federally chartered savings banks with deposits insured by the FDIC, are subject to a number of laws and regulations that have undergone change in recent years. These laws and regulations impose restrictions on activities, minimum capital requirements, lending and deposit restrictions, and numerous other requirements. In 1989, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") was signed into law. A number of significant changes resulted from this legislation, including more stringent capital requirements, limitations on thrift activities, expanded regulatory enforcement measures and changes to the deposit insurance system. The TCF Savings Banks (other than TCF Michigan, which was newly chartered by the OTS in August 1993) were chartered by the Federal Home Loan Bank Board ("FHLBB"). Under FIRREA, the FHLBB was abolished and its thrift chartering and certain regulatory functions passed to the newly created OTS, under the Treasury Department. All of the TCF Savings Banks are members of the FHLB System. FIRREA created a new independent agency known as the Federal Housing Finance Board ("FHFB"), which is the governing authority for the FHLB System. Under FIRREA, the Federal Savings and Loan Insurance Corporation ("FSLIC") was abolished and the role of the FSLIC as the insurer of thrift deposits passed to the FDIC through its SAIF. The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), enacted by Congress in late 1991, requires federal regulators to impose a conservator or receivership on undercapitalized institutions and generally requires such early intervention when an institution's tangible capital falls below 2% of total assets, provides for the assessment of deposit insurance premiums based on assessed risk in the institution's asset portfolio, allows for charges for FDIC examinations, authorizes federal regulators to establish operating and other standards for insured institutions and their holding companies, requires certain disclosures for savings accounts and imposes liability on TCF Financial for capital deficiencies of the TCF Savings Banks under certain circumstances, among other significant changes. The Resolution Trust Corporation Completion Act, enacted in late 1993 accelerated the closing of the RTC to December 31, 1995 and reduced the maximum authorization for the SAIF to $8 billion from $32 billion through 1998, or until the SAIF reserve ratio reaches 1.25% of estimated insured deposits, whichever occurs earlier. Among a number of provisions dealing with the management and operation of the RTC and transitional issues relating to the transfer of the RTC's operations to the FDIC, the legislation restricts the use of SAIF funds to pay losses of the SAIF by requiring the Chairperson of the FDIC to certify that SAIF members are unable to pay additional premiums to cover such losses. It is not clear at this time what effect this legislation might have on future deposit insurance premiums to be paid by the TCF Savings Banks, but it could result in a premium increase or a competitive disadvantage to savings associations generally as a result of their failure to realize the benefits of lower deposit insurance premiums which may become available to commercial banks. In September 1994, the Riegle Community Development and Regulatory Improvement Act ("RCDRIA") was enacted. This legislation created a new federal program to assist community development banks serving economically distressed communities, and also made several changes to FDICIA designed to make certain regulatory requirements less burdensome, among other changes. Also in September 1994, the Riegle-Neal Interstate Banking Efficiency Act of 1994 ("RNIBEA") was enacted. Under this legislation, provisions of the Federal Deposit Insurance Act ("FDIA") and the Bank Holding Company Act of 1956 were amended, effective September 29, 1995, to permit bank holding company acquisitions of banks in any state, subject to certain requirements, and also to permit depository institutions with the same depository holding company parent to enter into arrangements under which a depository institution may act as agent for an affiliated depository institution. Among other changes, RNIBEA also amended HOLA and the FDIA to permit 17 interstate bank mergers and acquisitions of out-of-state branches, effective June 1, 1997, in states that do not prohibit such transactions, provided that certain conditions are met. In recent years the legislative and regulatory environment has changed significantly for savings institutions, and future significant legislative and regulatory change is possible which will have an uncertain and possibly negative effect on TCF. The Clinton Administration has recently proposed consolidating all of the federal bank and thrift regulatory agencies. Legislative proposals for tax reform have sought the elimination of certain tax benefits for single premium annuities, which, if adopted, could impair TCF's ability to market annuity products. Recent legislation has limited the role of private lenders in education loans, and recent tax legislation has raised corporate tax rates, among other changes. Financial institutions have also increasingly been the subject of private class action lawsuits challenging escrow account practices, private mortgage insurance requirements and other practices, and TCF expects this trend will continue. The Community Reinvestment Act ("CRA") and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. In recent periods, federal regulatory agencies involved in the enforcement of the CRA, including the FRB, the OTS and the Department of Justice ("DOJ"), have indicated they will be seeking a more rigorous enforcement of the CRA. The DOJ is authorized to use the full range of its enforcement authority under the fair lending laws. The DOJ has authority to commence pattern or practice investigations of possible lending discrimination on its own initiative or through referrals from the federal financial institutions regulatory agencies, and to file lawsuits in federal court where there is reasonable cause to believe that such violations have occurred. The DOJ is also authorized to bring suit based on individual complaints filed with the Department of Housing and Urban Development where one of the parties to the complaint elects to have the case heard in federal court. A successful challenge to an institution's performance under the CRA and related laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, prospective and retrospective injunctive relief and the imposition of restrictions on mergers and acquisitions activity. Private parties may also have the ability to challenge an institution's performance under fair lending laws in private class action litigation. The ultimate effects of the foregoing or other possible legal and regulatory developments cannot be predicted but may have an adverse impact on TCF. The TCF Savings Banks are subject to periodic examination by the OTS and the FDIC. Thrift regulatory authorities may impose on criticized institutions and, in certain cases, their holding companies, a number of restrictions or new requirements, including but not limited to growth limitations, dividend restrictions, individual increased regulatory capital requirements, increased loan and real estate loss reserve requirements, increased supervisory assessments, activity limitations or other restrictions that could have an adverse effect on such institutions, their holding companies or holders of their debt and equity securities. SECURITIES AND EXCHANGE COMMISSION INVESTIGATION As previously disclosed, the Securities and Exchange Commission ("SEC") has conducted an investigation, in which the Company fully cooperated, concerning the appropriateness of the timing of loan and real estate provisions taken by TCF in the second quarter of 1990. In 1994, the SEC staff at its Midwestern Regional Office indicated that the SEC had approved its recommendation that administrative proceedings be instituted, naming the Company as the sole respondent, and alleging that certain real estate assets were overvalued prior to the second quarter of 1990 and that losses or reserves recognized or taken on these assets during the second quarter of 1990 should have been recognized or taken at various times during the preceding three quarters. Subsequently, TCF instituted discussions with the SEC staff to ascertain whether the proceedings could be settled on a mutually acceptable basis, and these discussions were ongoing as of late March 1995. The staff's allegations do not concern any matters occurring later than the second quarter of 1990. TCF is of the view that the ultimate resolution of the matter will not have a material effect on TCF's overall financial condition, operations or profitability. REGULATORY CAPITAL REQUIREMENTS FIRREA mandated significant new regulatory capital requirements for thrift institutions. Under minimum regulatory capital regulations issued pursuant to FIRREA by the Director of the OTS, thrift institutions are required to have "core capital" equal to no less than 3% of adjusted total assets and "tangible capital" equal to no less than 1.5% of adjusted total assets. In addition, thrift institutions are required to maintain "risk-based capital" equal to 8% of risk-weighted assets. 18 Under FDICIA, banking and thrift regulators are required to take prompt regulatory action against institutions which are undercapitalized. FDICIA requires banking and thrift regulators to categorize institutions as "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." A savings institution will be deemed to be well-capitalized if it: (i) has a total risk-based capital ratio of 10% or greater; (ii) has a Tier 1 (core) risk-based capital ratio of 6% or greater; (iii) has a leverage (core) ratio of 5% or greater; and (iv) is not subject to any order or written directive by the OTS to meet and maintain a specific capital level for any capital measure. The TCF Savings Banks are considered to be well-capitalized. In addition to the regulatory action required to be taken with respect to undercapitalized institutions, FDICIA also calls upon each financial institution regulatory agency, in consultation with other federal banking agencies, to review its capital standards at least once every two years to ensure that the standards are sufficient to prevent or minimize loss to the deposit insurance funds. In addition, the regulatory agencies are required to revise their risk- based capital standards to make sure that they take adequate account of interest-rate risk, concentration of credit risk, and the risks of non- traditional activities. Tangible capital is generally defined as core capital (see discussion below) less intangible assets except that savings institutions may include the same dollar amount of purchased mortgage servicing rights in tangible capital that they include in core capital. Core capital generally includes common stockholder's equity, retained earnings, non-cumulative perpetual preferred stock and minority interests in the equity accounts of fully consolidated subsidiaries, less any "unidentifiable" intangible assets. Purchased mortgage servicing rights are exempted from the general requirement that unidentifiable intangible assets be excluded from capital, but the amount of servicing rights includible in capital is limited to the lower of 90% of fair market value to the extent determinable or the current amortized book value determined under generally accepted accounting principles ("GAAP"). In addition, as a matter of OTS policy, the amount of such purchased mortgage servicing rights included in core capital may not exceed the amount that would be included if the savings association were an insured state non- member bank governed by the FDIC's capital regulation. The OTS published a final rule on intangible assets in February 1994, effective March 4, 1994. The final rule implements Section 475 of FDICIA, which requires banking regulators to determine the amount of purchased mortgage servicing rights that may be includible in capital. The final rule defines "qualifying intangible assets" as purchased mortgage servicing rights and purchased credit card relationships, but excludes core deposit intangibles arising after March 4, 1994. Such assets may be included in core capital calculations up to 50% of core capital, subject to a sublimit of 25% of core capital in the case of purchased credit card relationships. Under the rule, these assets must be valued at the lower of 90% of fair market value or 100% of remaining unamortized book value. In May 1994, the OTS, along with other federal banking agencies, published a joint notice of proposed rulemaking relating to risk-based capital requirements for recourse and direct credit substitutes designed to result in more consistent treatments of recourse and similar transactions among the banking agencies. The OTS has proposed to change capital requirements for the treatment of guarantee-type arrangements (such as standby letters of credit) that provide for the absorption of first-dollar losses and has proposed to make certain other changes for clarity and to include language codifying agency regulatory guidance. TCF does not believe that the proposed rule, if adopted, will have a material effect on the risk-based capital requirements of the TCF Savings Banks. Prior to January 1, 1995, eligible savings institutions were permitted to include in core capital "qualifying supervisory goodwill" consisting of "supervisory goodwill" up to the following percentages of adjusted total assets for the periods indicated:
Period Applicable Percentage Prior to January 1, 1992 . . . . . . . . . . . . . . 1.5% January 1, 1992 to December 31, 1992 . . . . . . . . 1.0% January 1, 1993 to December 31, 1993 . . . . . . . . 0.75% January 1, 1994 to December 31, 1994 . . . . . . . . 0.375% Thereafter . . . . . . . . . . . . . . . . . . . . . 0.0%
"Supervisory goodwill" includes goodwill resulting from the acquisition, merger, consolidation, purchase of assets or other business combination occurring before April 12, 1989, of: (i) a savings association where the fair market value 19 of assets was less than the fair market value of liabilities at the acquisition date or (ii) a "problem institution." TCF believes that all of its goodwill is qualifying supervisory goodwill. Under the risk-based capital requirement, risk-weighted assets are determined by multiplying each of an institution's assets by specified risk weights. Certain off-balance sheet items must be converted into on-balance sheet equivalent amounts and then multiplied by specified risk weights. Applicable risk weights range from 0% to 100%. Cash, certain obligations of the federal government and similar items have a 0% risk weight. Certain government or agency insured or guaranteed loans or securities backed by these loans are risk-weighted at 20%. Loans secured by a first mortgage on a borrower's principal residence and certain qualifying commercial real estate loans are risk-weighted at 50%. Other consumer and commercial loans and other assets generally are risk-weighted at 100%. An institution may use "supplementary capital" to satisfy the risk-based capital requirement in an amount up to 100% of its core capital. Supplementary capital includes certain permanent capital instruments such as cumulative perpetual preferred stock and certain maturing capital instruments issued pursuant to OTS regulations. In determining their compliance with capital standards, institutions are precluded under FIRREA and related capital rules from including in capital their investment in subsidiaries engaged in activities which are impermissible for a national bank (subject, with certain exceptions, to a five-year "phase-out" period which expired on July 1, 1994). Institutions are also required, subject to the same phase-out period, to deduct from risk-based capital investments that would be considered equity investments under GAAP, that portion of land loans and nonresidential construction loans which have a loan-to-value ratio in excess of 80% and the amount of their investment in certain real estate assets acquired in satisfaction of debts previously contracted if the investment is to be held for a period longer than five years (or such longer period approved by the OTS). The TCF Savings Banks are required to exclude certain of their investments under the foregoing rules. The following table sets forth the TCF Savings Banks' calculation of their tangible, core and risk-based capital and applicable percentages of adjusted assets, together with the excess over the minimum capital requirements at December 31, 1994:
TCF MINNESOTA TCF ILLINOIS TCF WISCONSIN TCF MICHIGAN ---------------- ---------------- ---------------- ---------------- (DOLLARS IN THOUSANDS) Tangible capital $ 292,825 5.81% $ 44,819 6.30% $ 39,502 6.05% $ 16,003 7.20% Tangible capital requirement 75,634 1.50 10,670 1.50 9,800 1.50 3,332 1.50 --------- ---- --------- ---- --------- ---- --------- ---- Excess $ 217,191 4.31% $ 34,149 4.80% $ 29,702 4.55% $ 12,671 5.70% --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- Core capital $ 320,673 6.34% $ 46,717 6.55% $ 39,502 6.05% $ 20,004 8.85% Core capital requirement 151,704 3.00 21,397 3.00 19,600 3.00 6,784 3.00 --------- ---- --------- ---- --------- ---- --------- ---- Excess $ 168,969 3.34% $25,320 3.55% $ 19,902 3.05% $ 13,220 5.85% --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- Risk-based capital $ 350,096 12.01% $ 51,441 12.55% $ 43,820 12.78% $ 20,169 20.90% Risk-based capital requirement 233,292 8.00 32,786 8.00 27,430 8.00 7,720 8.00 --------- ---- --------- ---- --------- ---- --------- ---- Excess $ 116,804 4.01% $ 18,655 4.55% $ 16,390 4.78% $ 12,449 12.90% --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- --------- ---- --------- ----
On January 1, 1995, the amount of qualifying supervisory goodwill includible in core and risk-based capital decreased from .375% to 0% of tangible assets. Although it will not impact the TCF Savings Banks' results of operations or their ability to meet the minimum regulatory capital requirements, this scheduled phase-out of supervisory goodwill reduced TCF Minnesota's computed core and risk-based capital levels by approximately $13.4 million on January 31, 1995. The OTS has adopted an amendment to its risk-based capital requirements that requires institutions with more than a "normal" level of interest rate risk to maintain additional risk-based capital. A savings institution's interest rate risk is measured in terms of the sensitivity of its "net portfolio value." Net portfolio value is defined generally as the present value of expected cash inflows from existing assets and off-balance sheet contracts less the present value of expected cash outflows from existing liabilities. The interest rate risk component creates a capital requirement based upon the decline in an institution's net portfolio value that would result from an immediate 200 basis point increase or decrease (whichever results in the greater decline) in prevailing interest rates. The OTS has defined as "above normal" any decline in an institution's net portfolio value that exceeds 2% of the present value of its assets. A savings institution with a greater than normal interest rate risk is required to deduct from total capital, for purposes of calculating its risk- based capital 20 requirement, an amount (the "interest rate risk component") equal to one-half the difference between the institution's measured interest rate risk and the normal level of interest rate risk, multiplied by the present value of its total assets. Management does not believe the interest rate risk component will have a significant impact on the TCF Savings Banks' risk-based capital requirements. In the event a savings institution fails to comply with any of its existing or future minimum regulatory capital requirements or applicable capital adequacy standards, it would be required to file and implement a capital plan with the appropriate regulatory agencies, would be subjected to restrictions on growth and the payment of dividends, could have restrictions imposed on its ability to form new branches, invest in service corporations or operating subsidiaries and make equity risk investments, or be precluded from issuing securities as a means of raising additional capital, among other negative effects. Such failure could also permit the OTS to require that the institution subject itself to a restrictive business plan or supervisory agreement that could impose limits on dividends or compensation of officers and employees or impose other restrictions. Such failure could also permit the FDIC to initiate action resulting in the termination of deposit insurance. The ability of the TCF Savings Banks to maintain compliance with regulatory capital requirements may be adversely affected by unanticipated losses or lower levels of earnings, by new or increased regulatory capital requirements or by other factors. There is virtually no limit on the authority of the OTS or FDIC to take any appropriate action with respect to conditions or activities it considers unsafe or unsound, including failure to comply with minimum regulatory capital requirements. Great Lakes Bank's regulatory capital position is not as favorable as that of the TCF Savings Banks. Management believes that the regulatory capital of Great Lakes Bank will meet the requirements of a "well-capitalized" institution following the restructuring actions contemplated during the first quarter of 1995. In the event that there is a shortfall in Great Lakes Bank's regulatory capital necessary to attain "well-capitalized" status, TCF Financial intends to infuse additional capital into Great Lakes Bank so that it will be considered "well-capitalized". RESTRICTIONS ON DISTRIBUTIONS Dividends or other capital distributions from TCF Minnesota to TCF Financial, especially in the event of diminished earnings from other direct subsidiaries of TCF Financial, may be necessary in order for TCF Financial to pay dividends on its common stock, to make payments on the subordinated debt issued by TCF Financial, or for other cash needs. The TCF Savings Banks' ability to make any capital distributions in the future may require regulatory approval and may be restricted by their regulatory authorities. The TCF Savings Banks' ability to make any such distributions depends on their earnings and ability to meet minimum regulatory capital requirements in effect during future periods. These capital adequacy standards may be higher than existing minimum capital requirements. Capital distributions by institutions such as the TCF Savings Banks, including dividends, stock repurchases, redemptions of securities and cash-out mergers, are subject to restrictions tied to the institutions' capital levels after giving effect to such a transaction. Under OTS regulations, institutions identified as "Tier 1" institutions (see definitions below) generally are authorized to make capital distributions during a calendar year up to the higher of 100% of their net income to date during the calendar year plus the amount that would reduce by one-half their surplus capital ratio at the beginning of the calendar year or 75% of their net income over the most recent four-quarter period. "Surplus capital ratio" refers to the percentage by which an association's capital-to-assets ratio exceeds the ratio of its fully phased-in capital requirement to its assets. Institutions identified as "Tier 2" institutions may make capital distributions up to 75% of their net income over the most recent four-quarter period. For purposes of computing the foregoing amount, a Tier 2 institution must deduct the amount of capital distributions it has previously made during the most recent four-quarter period. "Tier 3" institutions would not be permitted to make capital distributions unless they receive prior written approval from the OTS or unless such a distribution is made in accordance with an approved capital plan. "Tier 1" institutions are those which would have capital, immediately prior to and on a pro forma basis after giving effect to a proposed capital distribution, that is equal to or greater than the amount of their fully phased- in capital requirements. "Tier 2" institutions have capital, immediately prior to and on a pro forma basis after giving effect to a proposed capital distribution, that is equal to or in excess of their minimum regulatory capital requirements, but is less than the amount of applicable fully phased-in capital requirements. "Tier 3" institutions have capital, immediately prior to or on a pro forma basis after giving effect to a proposed capital distribution, that is less than the amount of their 21 minimum regulatory capital requirements. The capital distribution rule would also reflect any individual minimum capital requirement and if such a requirement is imposed, general minimum capital requirements would need to be adjusted accordingly. The OTS may also prohibit any capital distribution that would otherwise be permitted if it determines that such a distribution would constitute an unsafe and unsound practice. Among the circumstances deemed to pose such a risk would be a capital distribution by a Tier 1 or Tier 2 institution whose capital is decreasing because of substantial losses. If an institution has been notified that it is in need of more than normal supervision, the OTS has the discretion to treat an institution otherwise meeting the criteria considered a Tier 1 institution as a Tier 2 or Tier 3 institution if it is deemed necessary to ensure the association's safe and sound operation. As of December 31, 1994, none of the TCF Savings Banks had an individual minimum capital requirement and all of these institutions met their fully phased-in capital requirements, and therefore would expect to be eligible for treatment as Tier 1 institutions. As a result, as of such date the TCF Savings Banks would be limited to capital distributions up to the higher of 100% of their net income during the calendar year plus the amount that would reduce by one-half their surplus capital ratio at the beginning of the calendar year, or 75% of their net income over the most recent four-quarter period, assuming the OTS did not determine that such a distribution would be contrary to the safe and sound operation of the institutions. In December 1994, the OTS issued a notice of proposed rulemaking which would modify the capital distribution regulations to incorporate the prompt corrective action capital standards promulgated by FDICIA, and which would permit savings associations with a CAMEL rating of "1" or "2" which are not held by a holding company to make capital distributions without providing prior notice to the OTS. TCF does not believe that the proposed rule, if adopted, would materially change the capital distribution restrictions applicable to it or to the TCF Savings Banks. During 1986, TCF Minnesota converted from a federally chartered mutual association to a federally chartered stock savings and loan association. At that time, TCF Minnesota established a liquidation account in an amount equal to its regulatory net worth as of April 30, 1986. Liquidation accounts have also been established in the conversions of TCF Wisconsin, TCF Illinois and Great Lakes. A liquidation account is maintained for the benefit of eligible depositors who have continued to maintain their deposits in an institution since the conversion. In the event of a liquidation, each eligible depositor will be entitled to receive a liquidation distribution from the liquidation account in the proportionate amount of the then current adjusted balance for deposits held before any liquidation distribution may be made with respect to the stockholders. The balance attributable to the liquidation account is decreased by a proportionate amount as each accountholder closes an account or reduces the balance in such account as of any subsequent fiscal year-end. Except for the repurchase of stock and payment of dividends, the existence of the liquidation account will not restrict the use or application of a savings institution's net worth. A savings institution may not declare or pay a cash dividend or repurchase any of its capital stock if it would cause its regulatory capital to be reduced below the amount required for the liquidation account. SAFETY AND SOUNDNESS STANDARDS On November 18, 1993, the OTS and various banking regulatory agencies jointly published a notice of proposed rulemaking dealing with standards for the safe and sound operation of financial institutions, the adoption of which is required by FDICIA. The proposed regulations would require savings institutions to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the institution's business. The proposed rule would also require certain basic standards to be observed in loan documentation, credit underwriting, interest rate risk exposure, and asset growth. Among other new requirements, savings institutions would also be called upon to maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and to take into account factors such as compensation practices at comparable institutions. In late 1994, RCDRIA amended the FDICIA safety and soundness requirements on which the proposed safety and soundness rule was based and it is now unclear what new safety and soundness standards will be adopted by the banking agencies. Under RCDRIA, safety and soundness standards relating to asset quality, earnings and stock valuation are left to the discretion of the agencies. In addition, the new law permits the safety and soundness standards of FDICIA to be adopted in the form of guidelines rather than regulations and removes depository institution holding companies from the required safety and soundness standards. 22 REGULATION OF TCF FINANCIAL AND AFFILIATE AND INSIDER TRANSACTIONS TCF Financial and TCF Minnesota are subject to regulation as savings and loan holding companies. They are required to register with the OTS and are subject to OTS regulations, examinations and reporting requirements relating to savings and loan holding companies. As subsidiaries of savings and loan holding companies, the TCF Savings Banks are subject to certain restrictions in their dealings with TCF Financial and with other companies affiliated with TCF Financial, and also with each other. Under FDICIA, the TCF Savings Banks are required to conform to regulatory standards promulgated by the OTS relating to operations and management, asset quality, earnings, stock valuation, and compensation of officers, employees or directors. In connection with the reorganization of TCF Minnesota into a holding company structure in 1987, TCF Financial was required to undertake that, as long as it controls TCF Minnesota, it will cause the regulatory capital of TCF Minnesota to be maintained at a level consistent with that required by applicable regulations and, as necessary or appropriate, TCF Financial will infuse sufficient additional equity capital to comply with such requirement. As a result of FDICIA, TCF Financial may also be required to make up certain capital deficiencies of the TCF Savings Banks. HOLA prohibits a savings and loan holding company, directly or indirectly, from (i) acquiring control of another savings institution (or a holding company thereof) without the prior approval of the OTS, (ii) acquiring 5% or more of the voting shares of another savings institution (or a holding company thereof) which is not a subsidiary; or (iii) acquiring control of a savings institution not insured by the FDIC. Under HOLA, the OTS is prohibited from approving an acquisition that would result in the formation of a multiple savings and loan holding company controlling insured institutions in more than one state unless (i) such company, or an insured institution subsidiary thereof, is authorized to acquire an institution, or operate a home or branch office, in an additional state pursuant to an emergency acquisition, (ii) such company controls an insured institution subsidiary which operated a home or branch office in the additional state on March 5, 1987, or (iii) state law in the state of the institution to be acquired specifically authorizes such an acquisition. In connection with changes in control, savings institutions may, depending on the circumstances, also be subject to the Bank Merger Act or Change in Bank Control Act. As amended by FIRREA, HOLA provides generally that an insured savings institution subsidiary of a holding company is subject to the restrictions on affiliate transactions set forth in Federal Reserve Act Sections 23A and 23B. In addition, an insured institution may not buy securities from an affiliate, except for shares of stock of a subsidiary, and it may not make loans to an affiliate engaged in a non-banking activity. As a result of FIRREA and FDICIA, thrift institutions are subject to Sections 22(g) and 22(h) of the Federal Reserve Act, which restrict a financial institution's ability to make loans to "insiders" (executive officers, directors and certain shareholders). The OTS has also adopted the FRB's Regulation O, which implements legislative restrictions on insider loan transactions. HOLA authorizes the OTS or the FDIC to identify holding company activities that present excessive risk to insured institutions, and to restrict, among other things, dividends to TCF Financial (or to TCF Minnesota by the other TCF Savings Banks) and other affiliate transactions. If one or more of the TCF Savings Banks were to lose their status as a Qualified Thrift Lender, TCF Financial and/or TCF Minnesota would possibly be treated as a bank holding company, resulting in additional restrictions on its activities and other possible negative effects. Under HOLA, multiple savings and loan holding companies such as TCF Financial may engage only in the following activities: furnishing or performing management services for a savings association subsidiary; conducting an insurance agency or escrow business; holding, managing or liquidating assets owned or acquired from a savings association subsidiary; holding or managing properties used or occupied by a savings association subsidiary; acting as trustee under a deed of trust; any activity approved as an activity under Section 4(c)(8) of the Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"), by the FRB (unless prohibited by the Director of the OTS) or in which multiple savings and loan holding companies were authorized to engage on March 5, 1987; or purchasing of stock in certain qualified stock issuances which have been approved by the Director of the OTS. As discussed above, TCF has recently filed with appropriate banking agencies applications for the formation of new national bank subsidiaries. In the event these applications are approved and these banks are formed, TCF would become a bank holding company subject to the regulatory authority of the Federal Reserve System and its activities would become limited to those permitted for bank holding companies under Regulation Y. In such event, TCF may be required to divest its title insurance operations, or to restrict its title insurance operations and related activities. In addition, it could be 23 required to discontinue insurance operations which are not credit-related and to transfer annuity operations to its depository institution subsidiaries. RESTRICTIONS ON CHANGE IN CONTROL Federal and state laws and regulations contain a number of provisions which impose restrictions on changes in control of financial institutions such as the TCF Savings Banks, and which require regulatory approval prior to any such changes in control. With the passage of FIRREA in 1989, these laws and regulations became less restrictive, especially with respect to the acquisition of thrifts by bank holding companies which became permissible under FIRREA. The Certificate of Incorporation of TCF Financial and a Shareholder Rights Plan adopted by TCF Financial in 1989, among other items, contain features which may inhibit a change in control of TCF Financial. INTERSTATE OPERATIONS In April 1992, the OTS issued a statement of policy, effective May 11, 1992, amending its then-existing statement of policy on branching by federal savings associations. The new statement of policy deletes restrictions on the branching of federal associations to permit nationwide branching to the extent permitted by federal statutes, provided the institution meets certain tests (domestic building and loan test, minimum capital requirements and satisfactory Community Reinvestment Act record). Under the new policy statement, it is believed that the TCF Savings Banks may branch into any state with the approval of the OTS. REGULATORY SUPERVISION The TCF Savings Banks are subject to examination and supervision by the OTS and the FDIC. The TCF Savings Banks are also subject to regulations governing such matters as mergers, establishment of branch offices and subsidiary investments and activities, and to general investment authority under regulations applicable to federally chartered savings banks. As a result of its insurance, mortgage banking and consumer finance activities, TCF is also subject to state regulation and examination authority in various states. Recent federal legislation, including both FIRREA and FDICIA, has resulted in increased costs for the TCF Savings Banks including examination fees, supervisory assessments, application fees and deposit insurance premiums. In addition, the TCF Savings Banks expect reduced dividends from FHLB stock due to substantial contributions which will be required from the FHLBs to fund FICO bonds or due to other adverse developments in the FHLB System. Increased financial pressure on the FHLB System may also result in higher FHLB advance rates in the future. FEDERAL HOME LOAN BANK SYSTEM The TCF Savings Banks are members of the FHLB System, consisting of twelve regional FHLBs. The FHLB System functions as a central reserve credit facility for member institutions. As members of the FHLB System, the TCF Savings Banks are entitled to borrow funds from their respective FHLBs. As a result of FIRREA, the FHLB System is now administered by the FHFB rather than the FHLBB. As a result of the failure of a number of savings institutions and reductions in outstanding loans to its members, the FHLB System has become less profitable and its continued viability may depend upon its ability to attract new members. The TCF Savings Banks are required to own capital stock of their respective FHLBs in an amount at least equal to the greater of 1% of the aggregate outstanding balance of home mortgage loans and similar obligations, 1/20th of advances and letters of credit from the FHLB or .3% of assets. The TCF Savings Banks are in compliance with this requirement. At December 31, 1994, TCF's outstanding FHLB advances totaled $650.9 million. These advances were secured by shares of FHLB stock and by a pledge of all notes and related mortgages and certain other assets held by TCF. The maximum amount of credit which a FHLB will advance for purposes other than meeting withdrawals varies from time to time in accordance with changes in policies of the FHFB and the FHLB. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB, and the purpose of the borrowing. 24 LIQUIDITY AND RESERVE REQUIREMENTS FIRREA amended HOLA to require that the Director of the OTS adopt regulations providing for a minimum liquidity requirement for thrift institutions. The minimum liquidity requirement must be in a range of 4% to 10% of an institution's withdrawable accounts and borrowings payable on demand or with maturities of one year or less. Current OTS regulations, which may be modified by the Director of the OTS in accordance with FIRREA, provide that each thrift institution must maintain an average daily balance for each calendar month of liquid assets (cash, certain time deposits, certain bankers' acceptances, specified corporate obligations and specified United States government, state or federal agency obligations) equal to at least 5% of the sum of its average daily balance of net withdrawable deposit accounts (the amount of all withdrawable accounts less the unpaid balance of all loans on the security of such accounts) plus borrowings payable in one year or less. These regulations also provide that each thrift institution must maintain an average daily balance for each calendar month of short-term liquid assets (generally those having maturities of six months or less or twelve months or less, depending on the asset) equal to at least 1% of its average daily balance of net withdrawable deposit accounts plus short-term debt. The TCF Savings Banks have maintained liquidity ratios in excess of these requirements. As a result of FDICIA, institutions with liquidity shortages may be restricted in their ability to borrow from the Federal Reserve "discount window." The TCF Savings Banks are also subject to Federal Reserve Board ("FRB") reserve requirements imposed under Regulation D. These requirements, which are subject to change from time to time, call for minimum levels of reserves based on amounts held in transaction accounts. The TCF Savings Banks are in compliance with these reserve requirements. INSURANCE OF ACCOUNTS Under FIRREA, the deposits of the TCF Savings Banks are insured by the FDIC up to $100,000 per insured depositor. Pursuant to FDICIA, the FDIC was required to assess deposit premiums based on assessed risk in an institution's asset portfolio no later than January 1, 1994. In October 1992, the FDIC issued a rule implementing a transitional risk-based premium system effective January 1, 1993 that raised deposit insurance premiums for institutions that pose greater risk to the deposit insurance system. Under the transitional risk-based system, the FDIC placed each insured institution in one of nine risk categories based on capital ratios and the FDIC's assessment of supervisory risk posed by an institution. These initial risk-based premiums ranged from .23% to .31% of total insured deposits. On June 17, 1993, the FDIC adopted a final rule establishing a permanent risk-based assessment system effective with the semi- annual assessment period commencing January 1, 1994. Except for limited changes, the permanent system is substantially the same as the transitional system previously in effect. As a result of the failure of a number of thrift institutions in recent years and the obligation of the SAIF to fund debt obligations of FICO, the thrift industry faces the prospect of significantly higher deposit insurance premiums than those paid by banks, and/or other charges necessary to meet the obligations of the SAIF. As a result, TCF recently filed applications with the Office of the Comptroller of the Currency, and anticipates filing applications with the FDIC and the FRB, seeking the formation of national bank charters for proposed new national bank subsidiaries of TCF that would operate in branch locations in which the TCF Savings Banks and Great Lakes Bank now operate. The new national banks, if approved, would be insured by the BIF of the FDIC, which is expected to be able to provide for significantly lower deposit insurance premiums than those to be charged to institutions that are part of the SAIF. The TCF Savings Banks currently pay risk-based insurance premiums to the SAIF at the lowest-risk rate of .23%. Current proposals by the FDIC relating to deposit insurance premium rates for banks call for reductions in deposit insurance premiums for banks from the current lowest-risk weight of .23% for members insured by BIF to .04%. See "--Regulation of TCF Financial and Affiliate and Insider Transactions." QUALIFIED THRIFT LENDER Savings institutions are subject to restrictions on permissible investments that are generally known as Qualified Thrift Lender ("QTL") requirements. These requirements were relaxed by FDICIA, but the new legislation retained FIRREA's penalties for failing to meet the QTL test. An institution failing the QTL test is required to become a commercial bank or is subject to a number of restrictions, including: (i) a requirement that the institution not make any new investment or engage in any new activity unless such investment or activity would be permissible for a national bank; (ii) a requirement that the institution not establish any new branch office at any location at which a national bank located in 25 the institution's home state may not establish a branch; (iii) ineligibility for new FHLB advances; and (iv) any restrictions on the payment of dividends to which a national bank would be subject. Where an institution still does not meet QTL requirements three years from the date on which it should have and failed to do so, the institution will be required to divest any investment or discontinue any activity which is impermissible for a national bank and will be required to repay any outstanding FHLB advances. Any savings and loan holding company which holds a thrift that fails to meet the QTL test will, within one year after the date on which the thrift should have become or ceases to be a QTL, be deemed to be a bank holding company subject to all the provisions of the Bank Holding Company Act and other statutes applicable to bank holding companies. Such a development would impose a number of additional activity, capital and other restrictions on any such thrift holding company. The TCF Savings Banks are in compliance with all QTL requirements. ACCOUNTING AND INVESTMENTS During the past several years, there has been an ongoing review by thrift and banking regulators, the SEC, the FASB, the AICPA and other organizations of the accounting principles and practices used by financial institutions for certain types of transactions. As a result of this process, there have been new accounting pronouncements which have had an impact on TCF. This review is expected to continue, and further developments may be forthcoming. For information regarding new accounting pronouncements issued as a result of this review, see "BUSINESS -- Other Information - Recent Accounting Developments." EXAMINATIONS AND REGULATORY SANCTIONS Institutions regulated by the OTS are subject to examination by the OTS and the FDIC. Any insured institution which does not operate in accordance with or conform to OTS or FDIC regulations, policies and directives may be sanctioned for noncompliance. Subsidiaries of TCF are also subject to state and/or self- regulatory organization licensing, regulation and examination requirements in connection with certain insurance, mortgage banking, securities brokerage and consumer finance activities. Proceedings may be instituted against any insured institution or any director, officer, employee or person participating in the conduct of the affairs of such institution who engages in unsafe or unsound practices, including the violation of applicable laws, regulations, orders, agreements or similar items. If the assets of an institution are overvalued on its books, it may be ordered to establish and maintain a specific reserve in an amount equal to the determined overvaluation, which may result in a charge against operations to the extent of the overvaluation. FDIC insurance may be terminated, after notice and hearing, upon a finding that an insured institution is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operating, does not meet minimum regulatory capital requirements, or has violated any applicable law, rule, regulation or order of or condition imposed by the FDIC. Upon termination, funds then on deposit continue to be insured for at least six months and for up to two years, and due notice of such termination must be provided to the institution's accountholders. Under FIRREA, the FDIC, in addition to the OTS, has examination authority over savings associations. OTS rules finalized in 1990 include, among other costs and fees, new fees to cover the daily costs of examination and supervision of specific institutions. See "--Regulatory Supervision" above. FIRREA also substantially increased enforcement remedies, including civil money penalties, that may be assessed against an institution or an institution's directors, officers, employees, agents or independent contractors. For knowing violations and under certain other aggravated circumstances, penalties up to $1 million per day may be assessed. For lesser violations where there is a pattern of misconduct, or under certain other circumstances, a penalty of up to $25,000 per day may be imposed. Other violations may result in penalties of up to $5,000 per day. Violations of laws and regulations may also subject an institution's officers and directors to removal and to criminal penalties. LIMITATIONS ON CERTAIN INVESTMENTS As federally chartered institutions, the TCF Savings Banks are generally prohibited from investing directly in equity securities and real estate (other than that used for offices and related facilities or acquired through, or in lieu of, foreclosure or on which a contract purchaser has defaulted). In addition, their authority to invest directly in service corporations is limited to a maximum of 2% of their assets, plus an additional 1% of assets if the amount over 2% is used for specified community or inner-city development purposes. The TCF Savings Banks are also permitted, if their risk-based capital is in compliance with the then-applicable minimum requirements, to make additional loans in an amount not exceeding 50% of their risk-based capital to service corporations of which they own more than 10% of the stock. 26 Any failure to meet their minimum capital requirements may disallow any such additional investment authority. At December 31, 1994, TCF Minnesota was authorized to have investments in and loans to service corporations and joint ventures of up to $246.8 million. TCF Minnesota's investments in and loans to its service corporations and joint ventures totaled $90.2 million at that date. In October 1992, the OTS issued a final rule under which savings associations are authorized to establish and acquire "operating subsidiaries" which may engage only in activities savings associations are authorized to engage in directly. Operating subsidiaries are generally excluded from the scope of the service corporation regulations, including limitations on investments in service corporations. Savings associations generally must provide a 30-day notice to the FDIC and the OTS prior to acquiring or forming a new subsidiary or prior to engaging in a new activity through a subsidiary. If the OTS or FDIC determine that any such subsidiary or activity poses a threat to the safety and soundness of the institution or is inconsistent with existing law or sound banking practices, they may issue an order directing the institution not to proceed with such plans. LOANS-TO-ONE BORROWER RESTRICTION Under FIRREA, all loans to a single borrower or to related borrowers are generally limited to 15% of an institution's unimpaired capital and unimpaired surplus, plus an additional 10% for loans fully secured by readily marketable collateral. In addition, institutions which meet their fully phased-in capital requirements are permitted under FIRREA to make loans to develop domestic residential housing units, not to exceed the lesser of $30 million or 30% of the institution's unimpaired capital and unimpaired surplus, subject to certain conditions and other limitations. The OTS applies a definition of unimpaired capital and unimpaired surplus in determining the maximum loans-to-one borrower permitted for thrift institutions which is generally the same as the definition employed by the Comptroller of the Currency. All of the TCF Savings Banks are in compliance with applicable loans-to-one borrower limitations. Such limitations are not expected to have a material effect on TCF's lending activities. CLASSIFICATION OF ASSETS Under OTS rules, an asset is classified substandard when it has a well- defined weakness or weaknesses. A substandard asset is one that is inadequately protected by the net worth or paying capacity of the obligor or by the collateral, if any. An asset is classified doubtful where some loss seems very likely but there is still sufficient uncertainty to permit the asset to remain on the books at its full value. The possibility of a loss on an asset classified doubtful is high, but because of important and reasonably specific pending factors which may work to the strengthening of the asset, its classification as loss is deferred until its more exact status may be determined. An asset, or a portion thereof, is classified as loss when it is considered uncollectible and of such little value that continuance as an asset without establishment of a specific reserve is not warranted. Assets that do not warrant classification as substandard, doubtful or loss, but possess credit deficiencies or potential weaknesses deserving management's close attention are classified as special mention. Assets may be classified in whole or in part, and part of an asset may be classified in one category, and part in a different category. Insured institutions are required to self-classify their assets. These classifications are reviewed as part of the regulatory examination process. An institution is required to have general valuation allowances that are adequate in light of its level of classified assets. When an asset or portion of an asset has been classified as loss, the institution must either charge off 100% of the portion classified as loss or establish a specific valuation allowance in a like amount. Specific allowances may not be included in regulatory capital, while general loan loss reserves are included in risk-based capital, subject to certain limitations. OTHER EFFECTS OF RECENT LEGISLATION Insured institutions failing after 1989 are to be resolved by the RTC, which receives funding from a newly created Resolution Funding Corporation ("REFCORP"). REFCORP receives funds from the United States Treasury, the thrift industry (through deposit insurance premiums) and from the FHLBs. In addition, FIRREA, FDICIA and other recent legislation has or is expected to result in other increased costs for TCF, including the cost of examinations, application fees and deposit insurance premiums, and higher advance rates on FHLB borrowings. 27 OTHER LAWS AND REGULATIONS TCF is subject to a wide array of other laws and regulations, both federal and state, including, but not limited to, usury laws, the CRA and regulations thereunder, the Equal Credit Opportunity Act and Regulation B, Regulation E Electronic Funds transfer requirements, the Truth-in-Lending Act and Regulation Z, the Real Estate Settlement Procedures Act and Regulation X. TCF is also subject to laws and regulations that may impose liability on lenders and owners for clean-up costs and other costs stemming from hazardous waste located on property securing real estate loans made by lenders or on real estate that is owned by lenders following a foreclosure or otherwise. Although TCF's lending procedures include measures designed to limit lender liability for hazardous waste clean-up or other related liability, TCF has engaged in significant commercial lending activity, and recent court decisions have expanded the circumstances under which lenders have been held liable for clean up costs relating to hazardous wastes. TAXATION FEDERAL TAXATION Permissible Bad Debt Reserves and Net Operating Losses TCF files consolidated federal income tax returns. TCF has been an accrual basis taxpayer since January 1, 1987. Thrift institutions, such as the TCF Savings Banks, are subject to federal income tax under the Internal Revenue Code of 1986 (the "Code") in the same general manner as other corporations except for the application of special bad debt reserve rules discussed below and certain other provisions. Under applicable provisions of the Code, a savings institution that holds 60% or more of its assets in "qualifying assets" (as defined in the Code) is permitted to maintain reserves for bad debts and to make annual additions to such reserves which qualify as deductions from taxable income. All of the TCF Savings Banks are in compliance with this requirement. A qualifying savings institution may elect annually to compute its allowable additions to bad debt reserves under either the percentage of taxable income method or the experience method. The percentage of taxable income method of calculating bad debt reserves limits the applicable percentage deduction to 8% of taxable income and cannot cause the reserves to exceed 6% of qualifying loans at the end of the taxable year. TCF originally utilized the percentage of taxable income method to compute its annual addition to bad debt reserves. As a result of the carryback of net operating losses ("NOLs") to 1970, TCF's taxable income for 1970 through 1982 was determined to be zero. Because of these NOLs, the recalculation of net income, and settlement of an Internal Revenue Service ("IRS") examination, TCF recomputed its qualifying additions to the bad debt reserve from 1970 through 1982 using a method agreed to with the IRS as part of the settlement discussed below. TCF currently uses the experience method to calculate its additions to tax bad debt reserves. Alternative Minimum Tax The federal tax law imposes an alternative minimum tax based on alternative minimum taxable income of corporations. The computation of alternative minimum taxable income more closely reflects earnings and profits. For the year ended December 31, 1994 TCF was not subject to the alternative minimum tax. IRS Audit History The consolidated tax returns for the years ended 1979 through 1982 have been reviewed by the IRS. The IRS had proposed certain adjustments. In October 1992, the Joint Committee of Congress approved a settlement agreement between TCF and the IRS. The settlement allowed a loss deduction on the sale of mortgage loans which the IRS had contended should be disallowed. The settlement also allowed, based on a tax court ruling, certain tax bad debt losses that were not previously deducted in TCF's tax returns. The allowance of the bad debt deductions created a $2.8 million NOL benefit during 1992. The IRS has recently commenced an examination of TCF's federal income tax returns for 1992 and 1993. 28 See "Financial Review -- Results of Operations - Income Taxes" on pages 28 and 29, Note 1 of Notes to Consolidated Financial Statements on pages 43 and 44 and Note 14 of Notes to Consolidated Financial Statements on pages 52 and 53 of TCF's 1994 Annual Report, incorporated herein by reference, for additional information regarding income taxes of TCF. STATE TAXATION TCF and its subsidiaries that operate in Minnesota are subject to Minnesota state taxation. A Minnesota corporation's income or loss is allocated based on a three-factor apportionment of the corporation's Minnesota gross receipts, payroll and property over the total gross receipts, payroll and property of all corporations in the unitary group. The corporate tax rate in Minnesota is 9.8%. The Minnesota Alternative Minimum Tax rate is 5.8%. TCF and its subsidiaries that operate in Illinois are subject to Illinois state taxation. The Illinois corporate tax rate is 7.3%. Illinois corporate income or loss is apportioned in a similar manner to Minnesota. For all TCF entities operating in Illinois, except the TCF Savings Banks, the three factor apportionment method is used. For the TCF Savings Banks, income is allocated using only the sales factor in accordance with Illinois financial organization tax law. TCF and its subsidiaries that operate in Wisconsin are subject to Wisconsin state taxation. The Wisconsin state tax rate is 7.9%, and is computed on a separate company basis. For all TCF entities operating in Wisconsin, except the TCF Savings Banks, the three factor apportionment method is used. For the TCF Savings Banks, income is allocated using only the sales and payroll factors in accordance with Wisconsin financial organization tax law. TCF and its subsidiaries that operate in Michigan are subject to Michigan state taxation. The corporate tax rate in Michigan is 2.30% and is computed on taxable business activity in Michigan. For all TCF entities operating in Michigan, except for the TCF Savings Banks, the three factor apportionment method is used. For the TCF Savings Banks, income is allocated using only the sales factor in accordance with Michigan financial organization tax law. Currently, TCF and its subsidiaries file state income tax returns in Alabama, Arizona, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Mexico, New York, North Carolina, North Dakota, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah and Wisconsin, and local income tax returns in certain cities. ITEM 2. PROPERTIES OFFICES At December 31, 1994, TCF owned the buildings and land for 71 of its bank branch offices, owned the buildings but leased the land for 5 of its bank branch offices and leased the remaining 57 bank branch offices. The properties related to the bank branch offices owned by TCF, including vacant land upon which permanent offices may be constructed, had a depreciated cost of approximately $50.1 million at December 31, 1994. At December 31, 1994, the aggregate net book value of leasehold improvements associated with leased bank branch office facilities was $5.9 million. See Note 9 of Notes to Consolidated Financial Statements on page 49 of TCF's 1994 Annual Report, incorporated herein by reference. Leases for TCF's offices expire at various dates, with most leases expiring during the period from 1995 through 2005. 29 The following table sets forth the net book value of the branch offices owned and leasehold improvements on properties leased by TCF at December 31, 1994:
DECEMBER 31, 1994 ---------------------- (DOLLARS IN THOUSANDS) Offices in Minnesota: Minneapolis (home office) $ 7,772 Minneapolis/St. Paul area (50 offices) 18,761 Rochester area (5 offices) 976 Crookston area (3 offices) 493 Mankato area (4 offices) 1,489 Pipestone area (3 offices) 623 ------- Total Minnesota (66 offices) 30,114 ------- Offices in Illinois: Chicago area (17 offices) 6,140 Rockford area (5 offices) 1,085 Joliet area (6 offices) 795 ------- Total Illinois (28 offices) 8,020 ------- Offices in Wisconsin: Milwaukee area (10 offices) 6,491 Southeast area (8 offices) 5,909 Fox Valley area (4 offices) 1,278 Madison area (2 offices) 323 ------- Total Wisconsin (24 offices) 14,001 ------- Offices in Michigan: Pontiac area (15 offices) 3,799 ------- Total $55,934 ------- -------
In addition to the above-referenced branch offices, TCF owned and leased other facilities with an aggregate net book value of $9.3 million at December 31, 1994. COMPUTER EQUIPMENT TCF maintains depositor and borrower customer files on a batch and/or on- line basis, utilizing an IBM computer system. TCF's general ledger accounting and information reporting systems are generally maintained on the mainframe computer. The net book value of all computer equipment was $8.1 million at December 31, 1994. TCF also leases a variety of data processing equipment at a total annual rental of $2 million. ITEM 3. LEGAL PROCEEDINGS From time to time, TCF is a party to legal proceedings arising out of its general lending and operating activities. TCF is and expects to become engaged in a number of foreclosure proceedings and other collection actions as part of its loan collection activities. From time to time, borrowers have also brought actions against TCF, in some cases claiming substantial amounts in damages. Management, after review with its legal counsel, believes that the ultimate disposition of its litigation will not have a material effect on TCF's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 30 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS TCF's common stock trades on the New York Stock Exchange under the symbol "TCB." The following table sets forth the high and low prices and dividends declared for TCF's common stock. The stock prices represent the high and low sale prices for the common stock on the New York Stock Exchange Composite Tape, as reported by THE WALL STREET JOURNAL.
DIVIDENDS HIGH LOW DECLARED 1994: First Quarter $34 1/4 $28 1/2 $.25 Second Quarter 35 7/8 30 .25 Third Quarter 43 1/8 34 .25 Fourth Quarter 42 1/2 35 3/8 .25 1993: First Quarter $35 $28 $.125 Second Quarter 34 1/8 27 3/4 .1875 Third Quarter 40 30 3/4 .1875 Fourth Quarter 39 7/8 30 7/8 .1875
As of March 1, 1995, there were 9,590 record holders of TCF's common stock. The Board of Directors of TCF has not adopted a formal dividend policy. The Board of Directors intends to continue its present practice of paying quarterly cash dividends on TCF's common stock as justified by the financial condition of TCF. The declaration and amount of future dividends will depend on circumstances existing at the time, including TCF's earnings, financial condition and capital requirements, the cash available to pay such dividends (derived mainly from dividends and distributions from its direct subsidiaries, including TCF Minnesota), as well as regulatory and contractual limitations and such other factors as the Board of Directors may deem relevant. OTS regulations limit the amount of dividends TCF Minnesota may pay on its capital stock. Restrictions on the ability of TCF Minnesota to pay cash dividends or possible diminished earnings of the other direct and indirect subsidiaries of the Holding Company may limit the ability of the Holding Company to pay dividends in the future to holders of its common stock and interest on the subordinated debt sold by the Holding Company in 1992. See "REGULATION -- Legislative and Regulatory Developments," "REGULATION -- Regulatory Capital Requirements," "REGULATION -- Restrictions on Distributions" and Note 15 of Notes to Consolidated Financial Statements on page 54 of TCF's 1994 Annual Report, incorporated herein by reference. Federal income tax rules may also limit dividend payments under certain circumstances. See "TAXATION," and Note 15 of Notes to Consolidated Financial Statements on page 54 of TCF's 1994 Annual Report, incorporated herein by reference. 31 ITEM 6. SELECTED FINANCIAL DATA The following table summarizes selected consolidated financial data of TCF and its subsidiaries, and should be read in conjunction with the Consolidated Financial Statements and related notes appearing on pages 38 through 64 TCF's 1993 Annual Report, incorporated herein by reference.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1994 1993 1992 1991 1990 ---------- ----------- ---------- ---------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA) OPERATING DATA: Interest income $ 357,641 $ 357,601 $ 398,431 $ 436,309 $ 478,738 Interest expense 152,512 173,177 231,225 293,385 357,421 ---------- ----------- ---------- ---------- ---------- Net interest income 205,129 184,424 167,206 142,924 121,317 Provision for credit losses 10,901 21,933(1) 13,190 21,063 25,866 ---------- ----------- ---------- ---------- ---------- Net interest income after provision for credit losses 194,228 162,491 154,016 121,861 95,451 Gain (loss) on sale of loans, mortgage- backed securities and investments, net -- -- 832 1,041 (2,585) Gain on sale of securities available for sale, net 2,035 649 3,362 498 -- Gain on sale of loan servicing, net 2,353 137 -- 4,732 5,582 Gain from pension settlement -- -- -- -- 5,978 Other non-interest income 112,906 118,829 103,150 89,256 80,314 Provision for real estate losses 2,373 11,743(2) 22,054 20,898 20,274 Write-off of goodwill -- -- -- -- 10,169 Amortization of goodwill and other intangibles 3,257 2,957 3,830 3,853 4,723 Merger-related expense -- 5,494 -- -- -- Other non-interest expense 208,227 195,294 177,261 170,001 160,588 ---------- ----------- ---------- ---------- ---------- Income (loss) before income tax expense 97,665 66,618 58,215 22,636 (11,014) Income tax expense 40,302 28,647 12,956 8,385 1,448 ---------- ----------- ---------- ---------- ---------- Net income (loss) $ 57,363 $ 37,971 $ 45,259 $ 14,251 $ (12,462)(3) ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- Per common share: Net income (loss) $ 4.63 $ 3.04 $ 3.74 $ 1.45 $ (1.34)(4) ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- Dividends declared $ 1.00 $ .6875 $ .475 $ .40 $ .40 ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- Average common and common equivalent shares outstanding 12,383 12,504 12,112 9,813 9,320 ---------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
AT DECEMBER 31, ------------------------------------------------------------------------ 1994 1993 1992 1991 1990 ----------- ------------ ----------- ------------ ------------ (IN THOUSANDS, EXCEPT PER-SHARE DATA) FINANCIAL CONDITION DATA: Total assets $ 5,068,269 $ 5,025,530 $ 5,021,596 $ 4,987,966 $ 5,108,419 Investments (5) 243,651 235,121 293,764 426,392 368,784 Securities available for sale 65,785 10,003 256,624 42,048 -- Loans held for sale 200,509 421,893 285,524 223,616 173,507 Mortgage-backed securities held to maturity 1,114,613 1,237,202 1,139,583 1,340,905 1,412,198 Loans 3,081,808 2,745,146 2,656,926 2,566,084 2,706,428 Goodwill 13,355 14,549 16,446 21,593 31,831 Deposits 3,819,614 4,102,558 4,004,708 4,056,990 4,168,109 Federal Home Loan Bank advances 650,863 396,692 516,337 525,039 497,976 Other borrowings 217,420 178,740 185,595 155,862 211,718 Stockholders' equity 327,191 295,608 261,785 180,635 166,889 Tangible net worth 313,836 281,059 245,339 159,042 135,058 Book value per share 27.06 23.91 21.62 18.46 17.76 Tangible book value per share 25.96 22.74 20.26 16.25 14.37
32
AT OR FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- KEY RATIOS AND OTHER DATA: Net interest margin 4.59% 4.04% 3.60% 3.14% 2.53% Net interest rate spread during the period 4.22 3.73 3.35 3.00 2.44 Return on average assets 1.19 .77 .91 .29 (.24)(3) Return on average equity 18.65 13.73 19.53 8.27 (7.20)(3) Average equity to average assets 6.39 5.64 4.63 3.47 3.29 Average interest-earning assets to average interest-bearing liabilities 110.57 108.30 105.19 102.14 101.27% Dividend payout ratio 21.60% 22.62% 12.70% 27.59% N.A. Number of full service bank offices 133 133 110 108 107 _______________________ N.A. - not applicable (1) Includes $7,000 in merger-related provisions. (2) Includes $700 in merger-related provisions. (3) Amounts reflect a net loss of $12.5 million due to certain second quarter 1990 balance sheet restructuring activities undertaken to strengthen TCF's balance sheet, increase reserves for loan and real estate losses, improve future profitability and reduce exposure to interest rate risk. These restructuring activities included provisions for credit and real estate losses of $25 million, the closing of TCF's Texas thrift subsidiary and the associated write-off of $10.2 million of goodwill, and sales of mortgage- backed securities, collateralized mortgage obligation residuals and loan servicing rights for a combined net gain of $224,000. (4) Assumes that the shares of RCG common stock issued in conjunction with RCG's acquisition and conversion to stock ownership of certain subsidiaries had been outstanding for all periods presented. (5) Includes interest-bearing deposits with banks, federal funds sold, U.S. Government and other marketable securities held to maturity and FHLB stock.
For additional information concerning yields earned on interest-earning assets, rates paid on interest-bearing liabilities, and changes in net interest income, see "Financial Review -- Results of Operations - Net Interest Income" on pages 21 through 25 of TCF's 1994 Annual Report, incorporated herein by reference. 33 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Financial Review on pages 21 through 37 of TCF's 1994 Annual Report, presenting management's discussion and analysis of TCF's financial condition and results of operations, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report, Selected Quarterly Financial Data and Other Financial Data set forth on pages 38 through 69 of TCF's 1994 Annual Report are incorporated herein by reference. See Index to Consolidated Financial Statements on page 38 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors and executive officers of TCF is set forth on pages 4 through 21 of TCF's definitive proxy statement dated March 15, 1995 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding compensation of directors and executive officers of TCF is set forth on pages 12 through 20 of TCF's definitive proxy statement dated March 15, 1995 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding ownership of TCF's common stock by TCF's directors, executive officers, and certain other shareholders is set forth on pages 10 through 12 of TCF's definitive proxy statement dated March 15, 1995 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and transactions between TCF and management is set forth on pages 17 and 21 of TCF's definitive proxy statement dated March 15, 1995 and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS 1. Financial Statements See Index to Consolidated Financial Statements on page 38 of this report. 34 2. Financial Statement Schedules All schedules to the Consolidated Financial Statements normally required by the applicable accounting regulations are omitted since the required information is included in the Consolidated Financial Statements or the Notes thereto or is not applicable. 3. Exhibits See Index to Exhibits on page 38 of this report. (B) REPORTS ON FORM 8-K A Current Report on Form 8-K, dated September 12, 1994 (amended September 23, 1994) was filed in connection with TCF's execution of an Agreement and Plan of Reorganization, dated September 8, 1994 relating to its acquisition of Great Lakes Bancorp, A Federal Savings Bank. A Current Report on Form 8-K, dated February 8, 1995 was filed in connection with the completion of the acquisition of Great Lakes Bancorp, A Federal Savings Bank. 35 SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) 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 Registrant By /s/ WILLIAM A. COOPER --------------------------- William A. Cooper Chairman of the Board and Chief Executive Officer Dated: March 28, 1995 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ WILLIAM A. COOPER Chairman of the Board, Chief Executive March 28, 1995 ----------------------------------- Officer and Director William A. Cooper /s/ JOSEPH P. CLIFFORD Vice Chairman of the Board and Director March 28, 1995 ----------------------------------- Joseph P. Clifford /s/ THOMAS A. CUSICK Vice Chairman of the Board and Director March 28, 1995 ----------------------------------- Thomas A. Cusick /s/ ROBERT E. EVANS Vice Chairman of the Board and Director March 28, 1995 ----------------------------------- Robert E. Evans /s/ ROBERT J. DELONIS Chairman and Chief Executive Officer of March 28, 1995 ----------------------------------- Great Lakes Bancorp and Director Robert J. Delonis /s/ LYNN A. NAGORSKE President, Chief Operating Officer and March 28, 1995 ----------------------------------- Treasurer (Principal Financial Officer) Lynn A. Nagorske /s/ MARK R. LUND Senior Vice President, Assistant Treasurer March 28, 1995 ----------------------------------- and Controller (Principal Accounting Mark R. Lund Officer) /s/ BRUCE G. ALLBRIGHT Director March 28, 1995 ----------------------------------- Bruce G. Allbright /s/ RUDY E. BOSCHWITZ Director March 28, 1995 ----------------------------------- Rudy E. Boschwitz /s/ JOHN M. EGGEMEYER, III Director March 28, 1995 ----------------------------------- John M. Eggemeyer, III /s/ LUELLA G. GOLDBERG Director March 28, 1995 ----------------------------------- Luella G. Goldberg /s/ DANIEL F. MAY Director March 28, 1995 ----------------------------------- Daniel F. May /s/ THOMAS J. MCGOUGH Director March 28, 1995 ----------------------------------- Thomas J. McGough /s/ MARK K. ROSENFELD Director March 28, 1995 ----------------------------------- Mark K. Rosenfeld /s/ RALPH STRANGIS Director March 28, 1995 ----------------------------------- Ralph Strangis 36 /s/ RONALD A. WARD Director March 28, 1995 ----------------------------------- Ronald A. Ward /s/ ROY E. WEBER Director March 28, 1995 ----------------------------------- Roy E. Weber
37 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following consolidated financial statements of TCF and its subsidiaries, included in TCF's 1994 Annual Report, are incorporated herein by reference in this report: PAGE IN 1994 DESCRIPTION ANNUAL REPORT ----------- ------------- Independent Auditors' Report 65 Consolidated Statements of Financial Condition at December 31, 1994 and 1993 38 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1994 39 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1994 40 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 1994 42 Notes to Consolidated Financial Statements 43 Selected Quarterly Financial Data (unaudited) 66 Other Financial Data 68 INDEX TO EXHIBITS EXHIBIT PAGE NO. DESCRIPTION NO. --- ----------- --- 2 Agreement and Plan of Reorganization and Plan of Merger [incorporated by reference to Exhibit 2 to TCF Financial Corporation's Current Report on Form 8-K and Form 8-K/A Amendment No.1 to Current Report on Form 8-K, dated September 8, 1994, No. 0-16431 (filed September 12, 1994 and September 26, 1994, respectively)] 3(a) Restated Certificate of Incorporation of TCF Financial Corporation, as amended [incorporated by reference to Exhibit 3(a) to Amendment No. 2 on Form 8, dated May 6, 1988, to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, No. 0-16431 (filed May 7, 1988)] 3(b) Bylaws of TCF Financial Corporation, as amended [incorporated by reference to Exhibit 3(b) to Amendment No. 2 on Form 8, dated May 6, 1988, to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, No. 0-16431 (filed May 7, 1988)] 4(a) Rights Agreement, dated as of May 23, 1989, between TCF Financial Corporation and Manufacturers Hanover Trust Company [incorporated by reference to Exhibit 1 to TCF Financial Corporation's Registration Statement on Form 8-A, No. 0-16431 (filed May 25, 1989)] 38 EXHIBIT PAGE NO. DESCRIPTION NO. 4(b) Certificate of Designation for Noncumulative Perpetual Preferred Stock [incorporated by reference to Exhibit B of the Agreement and Plan of Reorganization filed as Exhibit 2 to TCF Financial Corporation's Current Report on Form 8-K and Form 8K/A Amendment No. 1 to Current Report on Form 8-K, dated September 8, 1994, No. 0-16431 (filed September 12, 1994 and September 26, 1994, respectively)] 4(c) Indenture dated March 1, 1986 between Great Lakes Federal Savings Association and J. Henry Schroder Bank & Trust Company [incorporated by reference to Exhibit 4.4 to TCF Financial Corporation's Registration Statement on Form S-4, No. 33-56137 (filed December 12, 1994)] 4(d) Warrant Agreement dated as of June 29, 1990 between Great Lakes Bancorp, A Federal Savings Bank, and the Bank of New York [incorporated by reference to Exhibit 4.5 to TCF Financial Corporation's Registration Statement on Form S-4, No. 33-56137 (filed December 12, 1994)] 4(e) Supplement to Warrant Agreement dated as of September 1, 1994 between Great Lakes Bancorp, A Federal Savings Bank, and the Bank of New York [incorporated by reference to Exhibit 4.6 to TCF Financial Corporation's Registration Statement on Form S-4, No. 33-56137 (filed December 12, 1994)] 4(f) Copies of instruments with respect to long-term debt will be furnished to the Securities and Exchange Commission upon request. 10(a) Stock Option and Incentive Plan of TCF Financial Corporation, as amended [the Plan and First Amendment to the Plan incorporated by reference to Exhibit 10.1 to TCF Financial Corporation's Registration Statement on Form S-4, No. 33-14203 (filed May 12, 1987), Second Amendment, Third Amendment and Fourth Amendment to the Plan incorporated by reference to Exhibit 10(a) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, No. 0- 16431; Fifth Amendment to the Plan incorporated by reference to Exhibit 10(a) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, No. 0- 16431; amendment dated January 21, 1991, incorporated by reference to Exhibit 10(a) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431, and as further amended by amendment dated January 28, 1992 and amendment dated March 23, 1992 (effective April 15, 1992), incorporated by reference to Exhibit 10(a) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, No. 0- 16431] 10(b) Amended and Restated TCF Financial Corporation Executive Deferred Compensation Plan [incorporated by reference to Plan filed with registrant's definitive proxy statement dated March 16, 1994, No. 0-16431] 10(c) Trust Agreement for TCF Financial Corporation Executive Deferred Compensation Plan, as amended [the Trust Agreement incorporated by reference to Exhibit 10(c) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, No. 0-16431; amendment effective April 1, 1991, incorporated by reference to Exhibit 10(c) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431, and as further amended by amendment dated March 23, 1992, incorporated by reference to Exhibit 10(c) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, No. 0-16431] 39 EXHIBIT PAGE NO. DESCRIPTION NO. 10(d) Amended and Restated Employment Agreement of William A. Cooper, dated July 1, 1993 [incorporated by reference to Exhibit 10(d) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, No. 0-16431] 10(e) Severance Agreement of Joseph P. Clifford, dated August 22, 1988 [incorporated by reference to Exhibit 19(b) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, No. 0-16431] and amendment thereto dated December 4, 1990 [incorporated by reference to Exhibit 10(e) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431] 10(f) Severance Agreement of Thomas A. Cusick, dated August 22, 1988 [incorporated by reference to Exhibit 19(c) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, No. 0-16431] and amendment thereto dated December 4, 1990 [incorporated by reference to Exhibit 10(f) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431] 10(g) Severance Agreement of William E. Dove, dated August 22, 1988 [incorporated by reference to Exhibit 19(d) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, No. 0-16431] and amendment thereto dated December 4, 1990 [incorporated by reference to Exhibit 10(g) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431] 10(h) Severance Agreement of Robert E. Evans, dated August 23, 1988 [incorporated by reference to Exhibit 19(e) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, No. 0-16431] and amendment thereto dated December 4, 1990 [incorporated by reference to Exhibit 10(h) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431] 10(i) Severance Agreement of Lynn A. Nagorske, dated August 22, 1988 [incorporated by reference to Exhibit 19(f) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, No. 0-16431] and amendment thereto dated December 4, 1990 [incorporated by reference to Exhibit 10(i) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431] 10(j) Severance Agreement of Gregory J. Pulles, dated August 23, 1988 [incorporated by reference to Exhibit 19(g) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, No. 0-16431] and amendment thereto dated December 4, 1990 [incorporated by reference to Exhibit 10(j) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431] 10(k) Severance Agreement of James E. Tuite, dated August 23, 1988 [incorporated by reference to Exhibit 19(i) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, No. 0-16431] and amendment thereto dated December 4, 1990 [incorporated by reference to Exhibit 10(l) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431] 10(l) Severance Agreement of Neil I. Whitehouse, dated August 23, 1988 [incorporated by reference to Exhibit 19(j) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, No. 0-16431] and amendment thereto dated December 4, 1990 [incorporated by reference to Exhibit 10(m) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431] 40 EXHIBIT PAGE NO. DESCRIPTION NO. 10(m) Severance Agreement of Barry N. Winslow, dated December 30, 1988 and amendment thereto dated December 4, 1990 [incorporated by reference to Exhibit 10(n) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431] 10(n) Supplemental Employee Retirement Plan, as amended [the Plan, as amended by amendment dated September 21, 1989 (effective January 1, 1990) incorporated by reference to Exhibit 10(n) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, No. 0-16431; amendment dated July 31, 1990 (effective August 31, 1990) incorporated by reference to Exhibit 10(o) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431]; as amended by amendment dated June 26, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10(o) Trust Agreement for TCF Financial Corporation Supplemental Employee Retirement Plan, dated August 21, 1991 [incorporated by reference to Exhibit 10.16 to TCF Financial Corporation's Registration Statement on Form S-2, filed November 15, 1991, No. 33-43988] 10(p) TCF Financial Corporation Senior Officer Deferred Compensation Plan [the Plan incorporated by reference to Exhibit 10(o) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, No. 0-16431; amendment effective April 1, 1991, incorporated by reference to Exhibit 10(p) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431]; as amended by amendments dated June 26, 1994, December 18, 1994 and January 23, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 10(q) Trust Agreement for TCF Financial Corporation Senior Officer Deferred Compensation Plan [incorporated by reference to Exhibit 10(p) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, No. 0- 16431; amendment effective April 1, 1991, incorporated by reference to Exhibit 10(q) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431]; as amended by amendment dated December 18, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10(r) TCF Stock Award Program for Outside Directors [incorporated by reference to Exhibit 10.19 to TCF Financial Corporation's Registration Statement on Form S-2, filed November 15, 1991, No. 33-43988]; as renewed by Directors Stock Grant Program adopted June 26, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10(s) Management Incentive Plan-Executive [incorporated by reference to Plan filed with registrant's definitive proxy statement dated March 16, 1994, No. 0-16431] 10(t) Supplemental Pension Agreement with James E. Tuite, dated June 27, 1991 [incorporated by reference to Exhibit 10.21 to TCF Financial Corporation's Registration Statement on Form S-4, No. 33-57290 (filed January 22, 1993)] 10(u) Supplemental Pension Agreement with Robert E. Evans, dated July 9, 1991 [incorporated by reference to Exhibit 10.22 to TCF Financial Corporation's Registration Statement on Form S-4, No. 33-57290 (filed January 22, 1993)] 10(v) Employment Agreement of Robert J. Delonis, dated February 9, 1995 . . 10(w) TCF Directors Deferred Compensation Plan [incorporated by refernce to plan filed with registrant's definitive proxy statement dated March 15, 1995, No. 0-16431] 11 Statement regarding computation of per share earnings . . . . . . . . 13 TCF Financial Corporation 1994 Annual Report . . . . . . . . . . . . 21 Subsidiaries of TCF Financial Corporation (as of March 23, 1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Consent of KPMG Peat Marwick LLP dated March 29, 1995 . . . . . . . . 27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . 41 EX-10 2 EX-10(N) EXHIBIT 10(n) EXCERPT FROM MINUTES PERSONNEL COMMITTEE MEETING TCF FINANCIAL CORPORATION JUNE 26, 1994 --------------------------------------------------------------------------- RE: SERP & SENIOR OFFICER DEFERRED COMPENSATION PLAN Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, this Committee has the authority to amend the Senior Officer Deferred Compensation Plan and the Supplemental Employee Retirement Plan ("SERP") and desires to do so to provide that Executive Vice Presidents of insured institution subsidiaries are eligible for both plans; NOW, THEREFORE, IT IS HEREBY RESOLVED, that section 1.d. of the Senior Officers Deferred Compensation Plan is amended to read as follows: Employees eligible to participate in this Plan are Employees of a Company who hold the office of Senior Vice President of TCF Financial Corporation or TCF Bank Minnesota fsb or President or Executive Vice President of an insured institution subsidiary of TCF Financial or President of a direct or indirect subsidiary of TCF Financial; PROVIDED, that an Employee who is eligible to participate in the TCF Financial Executive Deferred Compensation Plan shall not be eligible to participate in this Plan. FURTHER RESOLVED, that Section II(b) of the SERP is amended to read as follows: ELIGIBLE EMPLOYEE. Employees of TCF Financial Corporation ("TCF Financial") or any of its direct or indirect subsidiaries, including TCF Bank Minnesota fsb ("TCF Bank" or "TCF Banking"), are eligible for this Plan if they are eligible to participate in either the TCF Financial Executive Deferred Compensation Plan or the TCF Financial Senior Officer Deferred Compensation Plan. FURTHER RESOLVED, that the appropriate officers are authorized and directed to implement these resolutions and amendments and these amendments shall be effective for the 1994 plan year of both plans. I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Personnel Committee of the Corporation meeting held on June 26, 1994, and that the minutes have not been modified or rescinded as of the date hereof. /s/ Gregory J. Pulles -------------------------------------- Gregory J. Pulles (Corporate Seal) Dated: March 28, 1995 EX-10 3 EX-10(P).1 EXHIBIT 10(p).1 EXCERPT FROM MINUTES PERSONNEL COMMITTEE MEETING TCF FINANCIAL CORPORATION JUNE 26, 1994 --------------------------------------------------------------------------- RE: SERP & SENIOR OFFICER DEFERRED COMPENSATION PLAN Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, this Committee has the authority to amend the Senior Officer Deferred Compensation Plan and the Supplemental Employee Retirement Plan ("SERP") and desires to do so to provide that Executive Vice Presidents of insured institution subsidiaries are eligible for both plans; NOW, THEREFORE, IT IS HEREBY RESOLVED, that section 1.d. of the Senior Officers Deferred Compensation Plan is amended to read as follows: Employees eligible to participate in this Plan are Employees of a Company who hold the office of Senior Vice President of TCF Financial Corporation or TCF Bank Minnesota fsb or President or Executive Vice President of an insured institution subsidiary of TCF Financial or President of a direct or indirect subsidiary of TCF Financial; PROVIDED, that an Employee who is eligible to participate in the TCF Financial Executive Deferred Compensation Plan shall not be eligible to participate in this Plan. FURTHER RESOLVED, that Section II(b) of the SERP is amended to read as follows: ELIGIBLE EMPLOYEE. Employees of TCF Financial Corporation ("TCF Financial") or any of its direct or indirect subsidiaries, including TCF Bank Minnesota fsb ("TCF Bank" or "TCF Banking"), are eligible for this Plan if they are eligible to participate in either the TCF Financial Executive Deferred Compensation Plan or the TCF Financial Senior Officer Deferred Compensation Plan. FURTHER RESOLVED, that the appropriate officers are authorized and directed to implement these resolutions and amendments and these amendments shall be effective for the 1994 plan year of both plans. I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Personnel Committee of the Corporation meeting held on June 26, 1994, and that the minutes have not been modified or rescinded as of the date hereof. /s/ Gregory J. Pulles -------------------------------------- Gregory J. Pulles (Corporate Seal) Dated: March 28, 1995 EX-10 4 EX-10(P).2 EXHIBIT 10(p).2 EXCERPT FROM MINUTES PERSONNEL COMMITTEE MEETING TCF FINANCIAL CORPORATION DECEMBER 18, 1994 ---------------------------------------------------------------------------- RE: Senior Officer Deferred Compensation Plan Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, this Committee has authority to recommend amendments to the Senior Officer Deferred Compensation Program for adoption by the board; and WHEREAS, an amendment (the "Amendment") has been proposed to change the payout schedule, effective for distributions commencing on or after 1/1/97 for those participants who consent to this change pursuant to the plan, to an installment payout method over 15 years in all cases, subject to potential negotiation with this Committee of a faster payment schedule in consideration of such things as possible execution of a non-competition agreement which is reasonable in scope (however, this 15-year installment payment period shall apply to terminations due to disability or death on or after 1/1/95 of participants who consent to the amendment in accordance with the terms of this Amendment); NOW, THEREFORE, IT IS HEREBY RESOLVED, that this Committee hereby recommends for board approval the following Amendment revising Section 4 of the Senior Officer Deferred Plan and Section 4.3 of the Senior Officer Trust to allow investment in TCF common stock (and other investments) during any period after leaving the company when the senior officer continues to have an account in the plan and restating Section 5 of the Senior Officer Deferred Compensation Plan to read as follows, effective for terminations of employment on or after January 1, 1997, except as otherwise provided in this Amendment: AMENDMENTS TO TCF FINANCIAL SENIOR OFFICER DEFERRED COMPENSATION PLAN Sections 4.c. and 5 of the Plan document are amended to read as follows: 4. TRUST. ... c. An Employee's right to direct the investment of the Employee's separate account shall continue during any period of distribution subsequent to the Employee's termination of employment in the same manner as if the Employee had continued as an active Employee, although the Committee may, in its discretion, add additional registered mutual funds or collective or common trustee funds which are available only for the accounts of terminated Employees if the Committee deems such funds to be particularly appropriate or suitable for such accounts. 5. PAYMENT OF DEFERRED AMOUNTS. Not later than 30 days following the first day of the calendar month next following the termination of an Employee's employment or disability (as defined herein), the Committee shall direct the Trustee to commence distribution of the amounts credited to such Employee's Account. Commencing within such 30 day period, the balance credited to the Employees Account shall be paid as follows: a. For distributions commencing on or after January 1, 1997 (or distributions commencing on or after January 1, 1995 after a termination of employment due to death or disability), payment shall be in fifteen annual installments except that the Committee may determine on a case by case basis to approve a different payment schedule for an Employee after taking into account whether such a schedule would be in the best interests of TCF Financial, including whether the Employee has executed a non-competition agreement in form and scope reasonably acceptable to the Committee, and such other factors as the Committee considers appropriate in each case. Any alternative payment schedule approved by the Committee under this paragraph 5.a. may be in the form of installments over such period as the Committee selects, in the form of a lump sum, or any combination of installments and lump sum payments as the Committee determines to be in TCF Financial's best interests. For distributions commencing prior to January 1, 1997 and not after a termination of employment due to death or disability, and for distributions from the Accounts of Employees who did not consent to the terms of this paragraph 5.a., the balance in the Account shall be paid as provided in paragraph h of this section. b. The first payment under paragraph 5.a. shall be paid on a date selected by the Committee which is no later than 30 days after the Committee's direction as to the form and timing of distributions is made. Succeeding installments (if any) shall be paid on January 31 of each calendar year following the calendar year in which the first payment was made. c. Each payment shall be made in cash or in kind as the Committee, in its discretion, shall determine, and each annual installment payment shall have a value equal to the amount credited to Employee's Account as of the first day of the calendar month in which the installment is paid multiplied by a fraction, the numerator of which is one and the denominator of which is the number of installments remaining to be paid, including the current installment. d. For purposes of this section, an Employee's employment is considered to terminate as of the date which is the later of (i) Employee's last date of service for the Company, or (ii) the last date on which there is an employment relationship between the Employee and a Company. e. For purposes of this section, an Employee is disabled as of the date the Employee is eligible for payments under the long term disability plan of a Company. f. In the event installment payments commence and any installments are unpaid at the time of Employee's death, the payments shall be made at the times and in such amounts as if Employee were living to the persons specified in paragraph 7.a. g. For purposes of this section, an Employee's termination of employment is considered a retirement if it occurs on or after the date the employee has attained age 55. h. For distributions to Employees who did not consent to the terms of paragraph 5.a. or distributions otherwise not subject to the terms of Paragraph 5.a., distribution shall occur or commence within 30 days after the Employee's termination of employment and shall consist of a single lump sum equal to the total value of the Employee's Account as of the first day of the calendar month in which the distribution is made unless the termination of employment was due to retirement or disability (as defined herein), in which case the distribution shall be in five annual installments PROVIDED THAT the Committee shall reduce the number of installments as necessary to provide for annual payments of at least $15,000 or, if the value of the Employee's Account is less than $15,000 as of any annual installment payment date, the Account shall be paid in full as of such installment payment date. i. Notwithstanding any other provision of this Section 5 or any payment schedule approved by the Committee pursuant to this Section 5 and regardless of whether payments have commenced under this Section 5, in the event that the Internal Revenue Service should finally determine with respect to an Employee who has terminated employment with the Company that part or all of the value of the Employee's Deferred Amounts or Plan Account which have not actually been distributed to the Employee, or that part or all of a related Trust Account which has not actually been distributed to the Employee, is nevertheless required to be included in the Employee's gross income for federal and/or State income tax purposes, then the Deferred Amounts or the Account or the part thereof that was determined to be includible in gross income shall be distributed to the Employee in a lump sum as soon as practicable after such determination without any action or approval by the Committee. A "final determination" of the Internal Revenue Service for purposes of this paragraph 5.i. is a determination in writing by said Service ordering the payment of additional tax, reporting of additional gross income or otherwise requiring Plan amounts to be included in gross income, which is not appealable or which the Employee does not appeal within the time prescribed for appeals. I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Personnel Committee of the Corporation meeting held on December 18, 1994, and that the minutes have not been modified or rescinded as of the date hereof. /s/ Gregory J. Pulles -------------------------------- Gregory J. Pulles (Corporate Seal) Dated: March 28, 1995 EX-10 5 EX-10(P).3 EXHIBIT 10(p).3 EXCERPT FROM MINUTES PERSONNEL COMMITTEE MEETING TCF FINANCIAL CORPORATION JANUARY 23, 1995 ------------------------------------------------------------------------ [PROVIDE DEFERRED COMPENSATION PLAN COVERAGE TO GLBC EXECUTIVES] Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, this board of directors is authorized to adopt amendments to the executive deferred compensation plans and the Chairman of Great Lakes has requested an amendment to the Senior Officer Deferred Compensation Plan in order to provide deferral compensation opportunities to select executives of Great Lakes after the consummation of the merger; NOW, THEREFORE, IT IS HEREBY RESOLVED, that this Board hereby amends section 1.d of the Senior Officers Deferred Compensation Plan to add the following sentence at the end thereof: Effective on and after February 9, 1995, employees of Great Lakes Bancorp, A Federal Savings Bank ("Great Lakes") are eligible for this plan if they hold the officer position of Senior Vice President or above and are selected for eligibility in the plan by the Chairman and President of Great Lakes. I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Personnel Committee of the Corporation meeting held on January 23, 1995, and that the minutes have not been modified or rescinded as of the date hereof. /s/ Gregory J. Pulles ------------------------------------- Gregory J. Pulles (Corporate Seal) Dated: March 28, 1995 EX-10 6 EX-10(Q) EXHIBIT 10(q) EXCERPT FROM MINUTES PERSONNEL COMMITTEE MEETING TCF FINANCIAL CORPORATION DECEMBER 18, 1994 --------------------------------------------------------------------------- RE: Trust Agreement -- Senior Officer Deferred Compensation Plan Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: Section 4.3 of the Trust Agreement is amended to read as follows: SECTION 4.3. An Employee's right to direct the investment of the Employee's separate account shall continue during any period of distribution subsequent to the Employee's termination of employment in the same manner as if the Employee had continued as an active Employee, although the Committee may, in its discretion, add additional registered mutual funds or collective or common trustee funds which are available only for the accounts of terminated Employees if the Committee deems such funds to be particularly appropriate or suitable for such accounts. FURTHER RESOLVED, that the appropriate officers of the corporation are authorized and directed, upon approval of the Amendment by the board of this corporation, to take all actions necessary or appropriate to implement the provisions of the Amendment. I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Personnel Committee of the Corporation meeting held on December 18, 1994, and that the minutes have not been modified or rescinded as of the date hereof. /s/ Gregory J. Pulles -------------------------------- Gregory J. Pulles (Corporate Seal) Dated: March 28, 1995 EX-10 7 EX-10(R) EXHIBIT 10(r) EXCERPT FROM MINUTES PERSONNEL COMMITTEE MEETING TCF FINANCIAL CORPORATION JUNE 26, 1994 -------------------------------------------------------------------------- RE: Directors Stock Grant Program Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, this board has previously maintained a stock program for directors whereby each director receives 1500 shares, with 500 shares to vest for each year that TCF Financial achieves at least 13.5% ROTE and currently maintains a directors fees deferral program which allows directors to defer payment of their fees to their retirement from service with the Board and beyond; and WHEREAS, the shares initially issued in connection with the directors stock grant program have all vested (except for shares issued to Dr. Ronald A. Ward in 1993, the year he joined the board) and the Board desires to renew the directors stock grant program as well as to expand the existing deferred fees program to allow investment of deferred fees in TCF Stock; NOW, THEREFORE, IT IS HEREBY RESOLVED, that a directors stock grant program is hereby established for 1994 under the following terms and conditions: The award will be 1500 shares per eligible director with 500 shares vesting for each fiscal year in which the return on equity ("ROE") of TCF Financial Corporation exceeds 15%, or upon retirement from the board pursuant to board retirement policy, or in any event on the ten year anniversary date of the grant; Eligible directors are Bruce G. Allbright, Daniel F. May, Preston Townley, Luella G. Goldberg, Ralph Strangis, Rudy Boschwitz and Thomas J. McGough. Vesting of shares shall occur only for a director who remains on the board as of December 31 of the fiscal year on which the vesting is based; All shares awarded will come from treasury shares or shall be purchased in the market, at TCF's discretion; Vested shares will be distributed as soon as practicable after final ROE is calculated for the fiscal year; ROE will be calculated the same as under the 1994-96 annual incentive program for executives; The company will make a deferral option available to directors, in the form of a nontaxable trust, to enable them to defer the receipt of vested shares until retirement from the board in substantially, with the trust to be in substantially the same form as the trust for the Executive Deferred Compensation Plan. Questions of interpretation will be resolved by the Chief Executive Officer, who may at his discretion consult with the Personnel Committee of the Board prior to making a decision. I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Personnel Committee of the Corporation meeting held on June 26, 1994, and that the minutes have not been modified or rescinded as of the date hereof. /s/ Gregory J. Pulles -------------------------------------- Gregory J. Pulles (Corporate Seal) Dated: March 28, 1995 EX-10 8 EX-10(V) EXHIBIT 10(v) [CEO AGREEMENT] EMPLOYMENT AGREEMENT This Agreement is made and entered into this 9th day of February, 1995, by and among Great Lakes Bancorp, a Federal Savings Bank, a federal savings bank (the "Bank"), TCF Financial Corporation, a Delaware corporation ("TCF")(and, as to each, any successor by operation of law or Section 10 hereof), and Robert J. Delonis (the "Employee"). WHEREAS, Employee and Bank were previously parties to an employment agreement and Employee wishes to relinquish all rights thereunder, pursuant to Section 17 hereof, in order to enter into this new employment agreement with Bank and TCF; WHEREAS, the Board of Directors of the Bank and TCF believe it is in the best interests of the Bank and TCF to enter into this Employment Agreement ("Agreement") with the Employee in order to assure management continuity of the Bank consistent with TCF's goals and philosophies as sole shareholder of the Bank, to reinforce and encourage the continued attention and dedication of the Employee to his assigned duties following the acquisition of the Bank by TCF and to provide assurance that the Employee will not be distracted by the potentially disruptive circumstances which may arise from a change in control of the Bank; WHEREAS, the Boards believe that entering into this type of Agreement with key employees will contribute significantly to the safety and soundness of the Bank, will enhance the orderly operation of the Bank in conjunction with TCF's other banks and subsidiaries and will encourage its orderly adoption of TCF's established regulatory compliance procedures, business practices and operating systems; WHEREAS, the Boards of Directors of the Bank and TCF have approved and authorized the execution of this Agreement with the Employee to take effect upon the date stated in Section 4 below; and WHEREAS, the Employee serves as a Director, as Chairman of the Board of Directors and Chief Executive Officer of the Bank; NOW, THEREFORE, in consideration of the respective terms and conditions in this Agreement, it is agreed as follows: 1. EMPLOYMENT. The Employee is employed as Chairman and Chief Executive Officer of the Bank and shall continue to render administrative and management services to the Bank such as are customarily performed by persons employed in this capacity. The Employee shall continue to devote his best efforts and substantially all his business time and 1 attention to the business of the Bank and its subsidiaries and affiliated companies according to such reasonable standards as the Board shall establish. 2. COMPENSATION. The Bank agrees to pay the Employee during the term of this Agreement an annual salary established by the Board of Directors at the time this Agreement is signed (the "Commencement Date") of $260,000. The Employee's salary shall be payable not less frequently than monthly and not later than the tenth day of the following month. The amount of the Employee's salary shall be reviewed not less often than annually by the Bank's Board of Directors at the same time the salaries of other officers of comparable rank at the Bank are customarily reviewed and may be increased or decreased (but not decreased below the Employee's salary as of the Commencement Date) as the Board in its absolute discretion may decide, subject to the customary withholding tax and other employee taxes as required. The Employee shall also be entitled to receive prompt reimbursement of all reasonable expenses incurred in accordance with the polices applicable to comparable officers of the Bank. 3. BENEFITS. (a) PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS. The Employee shall be entitled to participate in and receive benefits or awards under all plans of the Bank relating to stock options, stock awards, stock purchases, pension, thrift, profit-sharing, group life insurance, medical coverage, education, cash or stock bonuses, and other retirement or employee benefits that are now or later maintained by the Bank for the benefit of its officers of comparable rank or for employees generally, upon the same terms and conditions as are applicable to other participants in such plans. Contemporaneously with the execution of this Agreement an award of restricted stock is being made to Employee by TCF. Nothing contained in this Agreement shall modify or affect the terms or provisions of any stock option or restricted stock award made to Employee; Employee's rights pursuant to any such awards shall be governed by the award agreement signed by Employee and the plan under which the award was granted, rather than this Agreement. (b) FRINGE BENEFITS. The Employee shall be eligible to participate in and receive benefits under any other fringe benefits programs which may be or become applicable to the Bank's or TCF's officers of comparable rank (Employee shall be deemed for purposes of this subsection 3(b) to be the equivalent of an Executive Vice President of TCF) or for Bank employees generally, including use of an automobile, a reasonable expense account, the payment of reasonable expenses for attending annual and periodic meetings of trade associations, and any other benefits which are commensurate with the responsibilities and functions to be performed by the Employee under this Agreement. 4. TERM. 2 (a) INITIAL TERM. The term of employment under this Agreement shall be for a period of three years commencing on the Commencement Date subject to earlier termination as provided herein and further subject to extension as provided in Section 4(b). (b) OPTION FOR TWO ONE-YEAR EXTENSIONS OF TERM. Employee may elect to extend the term of this Agreement after the expiration of its initial term for an additional term of one year, and thereafter for another additional term of one year, provided that no such extension shall occur unless such extension is approved in advance by the Board of the Bank following its review of a formal performance evaluation of the Employee conducted by the Board or a committee thereof and such approval (and the justification for it) is reflected in the minutes of the Board and PROVIDED FURTHER, in the event the Board of Directors of the Bank does not act to extend the term of this Agreement pursuant to this Section 4(b), TCF hereby agrees to employ Employee as an Executive Vice President under the terms of this Agreement at his current location for the remainder of any such extended terms elected by Employee. Reference to the term of this Agreement shall refer both to the initial term and any such extensions thereof. 5. VACATIONS. The Employee shall be entitled, without loss of pay, to be absent voluntarily from the performance of his employment under this Agreement, all such voluntary absences to count as vacation time, provided that: (a) The Employee shall be entitled to an annual vacation in accordance with the Bank's policies. (b) The timing of the vacations shall be scheduled in a reasonable manner by the Employee and in compliance with the Bank's policies on taking consecutive days of vacation. (c) In addition to the aforesaid paid vacations, the Employee shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment with the Bank for such additional periods of time and for such valid and legitimate reasons as the Board of Directors in its discretion may determine. Further, the Board of Directors shall, solely at the Employee's request, be entitled to grant to the Employee a leave or leaves of absence with or without pay and such time or times and upon such terms and conditions as the Board, in its discretion, may determine. 6. TERMINATION OF EMPLOYMENT. (a) The Board of Directors of Bank or TCF may terminate the Employee's employment at any time with or without cause and upon such action by either such board the Employee's services shall terminate with respect to both Bank and TCF. If the employment of the Employee is involuntarily terminated other than (i) for "cause" (as defined in the next Section) under this section 6(a), (ii) pursuant to Section 9 or (iii) by reason of death or disability as provided in Sections 6(c) or 7 of this Agreement, the Bank shall: (1) pay the 3 Employee's salary through the remaining term of this Agreement, at the time such payments are due under Section 2 of this Agreement, reduced by the amounts earned by the Employee from other employment during the remaining term of this Agreement; (2) provide the Employee with health insurance benefits maintained by the Bank for its senior officers or for its employees generally during the remaining term of this Agreement or a period of eighteen (18) months from the Termination Date whichever is less, and (3) thereafter permit the Employee to purchase health insurance benefits, at the Bank's group rate (or pay the employee the difference between that rate and any higher rate he is required to pay because he cannot be included in the group rate) until the Employee confirms that he has obtained comparable health insurance at comparable cost to the Employee through another employer, dies or reaches age 65, whichever comes first. The Employee shall have no right to receive compensation or other benefits for any period after termination for cause. Termination for cause shall include termination for any reason set forth in Section 9 hereof, personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. A termination shall not be for cause unless it occurs after a board meeting at which the termination is reviewed, with reasonable advance notice to the Employee of the meeting and the purpose thereof and at which the Employee and his counsel (if any) has an opportunity to present information and arguments concerning whether there is cause for termination. The Employee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to the Employee a copy of a resolution, duly adopted by not less than a disinterested majority of the entire membership of the board stating that in the good faith opinion of such board the Employee was guilty of conduct constituting cause (as defined earlier in this paragraph) and stating the specific factual basis for the board's opinion. In reaching its conclusions, such board shall be entitled to conclusively rely upon any information presented or reviewed at the meeting which the Employee has the opportunity to rebut and does not do so, or with respect to which the board determines in good faith that the Employee's rebuttal is not convincing, without any requirement to personally interview witnesses or independently verify the information presented to it (it being acknowledged that a meeting conducted in accordance with the foregoing procedures constitutes a reasonable investigation) and the board shall be absolutely protected against liability to Employee for its dissemination of such information and its conclusions in compliance with the requirements of this paragraph. (b) This Agreement may be voluntarily terminated by the Employee at any time upon 90 days written notice to the Bank or upon such shorter period as may be agreed upon between the Employee and the Board of Directors of the Bank. In the event of such voluntary termination, the Bank shall be obligated only to pay the Employee's salary through the 90 days (or fewer) remaining in the term of this Agreement. In the event, however, the OTS prohibits such payment by the Bank, TCF shall be obligated to make such payments. 4 (c) In the event of death of the Employee during the term of this Agreement, the Employee's estate, or such person as the Employee may have previously designated in writing, shall be entitled to receive the salary due the Employee through the last day of the calendar month in which the death occurs. (d) In the event the Bank purports to terminate the Employee for cause, but it is determined by a court of competent jurisdiction or by an arbitrator under Section 16 that the Employee was improperly terminated, the Employee shall be entitled to reimbursement for all reasonable cost, including attorney's fees, in challenging such termination or collecting such amounts. Such reimbursement shall be in addition to all rights which the Employee is otherwise entitled to under this Agreement. (e) For purposes of this Agreement, the term "Date of Termination" or "Termination Date" means the earlier of (i) the date upon which the Bank or TCF gives notice to the Employee of the termination of his employment or (ii) the date upon which the Employee ceases to serve as an employee of the Bank or TCF. 7. DISABILITY. If the Employee shall become disabled or incapacitated to the extent of being unable to perform the duties anticipated by this Agreement, the Employee shall be entitled to receive disability benefits of the type provided for other comparable officers of the Bank. In such event, the rights of the Employee to receive the salary stated in Section 2 hereof shall be suspended until the Employee is able to fully perform his duties. In the event of Employee's termination of employment due to ongoing inability to perform his duties, any benefits payable to Employee from the long term disability plan of Bank or TCF on account of such disability shall be in lieu of any other payments that would otherwise be payable under this Agreement after a termination of employment. 8. CHANGE IN CONTROL COMPENSATION. (a) ELIGIBILITY. In lieu of amounts the Employee might otherwise receive under Section 6 or other Sections of this Agreement, in the event of a termination of employment after a "change in control" (as herein defined) the Employee shall be eligible to receive compensation, in the amounts and at the times described in Section 8 (c), if: (1) his employment with the Bank and all of its affiliates is terminated within 18 months after there has been a change in control, and (2) the Employee's termination of employment is involuntary and is not on account of death, a physical or mental disability such that the Employee qualifies for benefits under any long term disability plan maintained by the Bank or its affiliates, or cause, as defined in Section 6 of this Agreement. For purposes of Section 6 and this Section 8 an "involuntary termination" or "involuntarily terminated" means termination of the Employee's employment without the Employee's express written 5 consent or material diminution of or interference with the Employee's duties, responsibilities and benefits as Chairman and Chief Executive Officer of the Bank. By way of example and not by way of limitation, any of the following actions, if unreasonable or materially adverse to the employee, shall constitute such diminution or interference unless consented to in writing by the Employee: (a) a significant reduction in the size or a material change in the location of the Employee's office; (b) a reduction or adverse change in the scope or nature of the secretarial or other administrative support of the Employee; (c) a reduction or adverse change in the Employee's title and decision-making responsibilities; (d) a reduction in the number or seniority of other Bank personnel reporting to the Employee, other than as part of a Bank-wide reduction in staff, or a reduction in the frequency with which, or in the nature of the matters with respect to which, such personnel are to report to the Employee; (e) an increase in the number of, or a decrease in the seniority of, the persons (other than the Board of Directors) to whom the Employee must report, other than is normal and customary for an executive officer of a similarly situated financial institution; or an increase in the frequency of, or in the nature of matters with respect to which, such reports by the Employee shall be required; (f) a reduction or adverse change in the salary, perquisites, benefits, contingent benefits or vacation time which had theretofore been provided to the Employee, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Bank; and (g) a material increase in the required hours of work or the workload of the Employee. (b) CHANGE IN CONTROL. For the purposes of this Agreement, a "change in control" shall be deemed to have occurred if: (1) the shareholders of TCF shall adopt a resolution providing for its dissolution or liquidation, or for a merger, consolidation, or other corporate reorganization of TCF under circumstances in which TCF will not be the surviving party; or (2) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934) (other than TCF or any of its subsidiaries or any employee benefit plan of TCF or any of its subsidiaries) becomes a beneficial owner, directly or indirectly, of securities of TCF representing 25% or more of the voting power of all of TCF's then outstanding securities; or (3) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board of Directors of TCF ceased for any reason to constitute at least a majority thereof (unless the nomination of each new director was approved by a vote of at least two thirds of the directors then still in office who were directors at the beginning of such period); or 6 (4) the Board of Directors of TCF shall approve the sale of all, or substantially all, of the business or assets of TCF. (5) the acquisition of control of the Bank (but not including the acquisition of the Bank by TCF pursuant to the Agreement and Plan of Reorganization dated September 8, 1994) as defined in 12 C.F.R. [Section] 574.4, or any successor regulation, which would require the filing of an application for acquisition of control or a notice of change in control under 12 C.F.R. [Section] 574.3 or any successor regulation. (c) AMOUNT AND PAYMENT OF SEVERANCE PAY. The Employee shall receive: (1) a lump sum cash payment, no later than 30 days after the Termination Date, in an amount equal to three times the Employee's annual rate of salary as of the Termination Date; (2) continuation of coverage under the employer's group medical, group life, and group long-term disability plans, if any, and under any individual policy or policies of life insurance maintained by his employer, with the same rate of employer contributions as for active employees, until the earliest to occur of: (i) the expiration of 24 months from the Employee's Termination Date or, in the case of medical benefits only, if longer, until the Employee confirms that he has obtained comparable health insurance coverage at comparable cost to the Employee through another employer, dies or reaches age 65, whichever occurs first; or (ii) the date on which the Employee obtains comparable coverage at comparable cost provided by a new employer. (3) a lump sum cash payment, payable no later than 30 days after the Termination Date, in an amount equal to the sum of: (i) the amount by which the fair market value of that number of shares of stock subject to any stock option which is forfeited or which otherwise becomes nonexercisable by the Employee by reason of termination of employment (determined as of such Termination Date) exceeds the option price for such shares; (ii) such additional amounts (or the fair market value of such additional property) in excess of the amount determined pursuant to subSection (i) that would have been paid or distributed to Employee upon exercise of any such forfeited stock options, had such options been exercisable, and exercised, by Employee as of his Termination Date; (iii) an amount equal to the fair market value of any shares of restricted stock forfeited by the Employee by reason of such termination of employment, determined as of such Termination Date; and (iv) an amount equal to the amount that Employee would have received if any stock appreciation right which is forfeited or which otherwise becomes nonexercisable by 7 such termination of employment had been exercisable, and exercised, by Employee as of the Termination Date. It is understood and agreed that this payment is to occur only to the extent Employee is not entitled to exercise options or stock appreciation rights, or to retain restricted stock, after the termination of employment under the provisions of Employee's stock option, restricted stock, or stock appreciation rights agreements. (4) LIMITATIONS. If any part of the amounts to be paid to or for the benefit of the Employee pursuant to this Section 8, as determined by TCF's auditors, constitute "parachute payments" within the meaning of section 280G of the Internal Revenue Code of 1986, as from time to time amended (the "Code"), such amounts shall be reduced as provided below so that the aggregate present value of all parachute payments to the Employee will be equal to 299% of the Employee's "annualized includible compensation for the base period," as such term is defined in section 280G(d)(1) of the Code. Such reduction shall be made in the benefits provided pursuant to subparagraph 8(c)(2), in the inverse order of their anticipated payment, before any reductions are made in the amounts payable pursuant to subSection 8(c)(1) or (3). For the purpose of this subsection, present value shall be determined in accordance with section 1274(b)(2) of the Code. (5) FUNDING OF CHANGE IN CONTROL COMPENSATION. Nothing herein contained shall require or be deemed to require the Bank or a subsidiary to segregate, earmark, or otherwise set aside any funds or other assets to provide for any payments required to be made hereunder, and the rights of the terminating Employee to compensation hereunder shall be solely those of a general, unsecured creditor of the Bank. However, the Bank may, in its discretion, deposit cash or property, or both, equal in value to all or a portion of the amounts anticipated to be payable hereunder for any or all Employees into a trust, the assets of which are to be distributed at such times as determined by the trustee of such trust; PROVIDED that such assets shall be subject at all times to the rights of the Bank's general creditors. 9. OBLIGATIONS OF THE BANK SUBJECT TO FEDERAL BANKING LAW. The obligations of the Bank (which includes TCF for these purposes) under this Agreement shall be suspended or terminated in the circumstances stated below and are further subject to any other applicable federal banking statutes, regulations, orders and directives. (a) If the Employee is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 9(e) of the Federal Deposit Insurance Act ("FDIC") (12 U.S.C. 1818(e)(3) or (g)(1)), the Bank's obligations under this Agreement shall be suspended as of the date of service unless stayed by appropriate proceedings. If the charges in the notice are dismissed the Bank may in its discretion (i) pay the Employee all or part of the compensation withheld which its obligations 8 under this Agreement were suspended and (ii) reinstate in whole or in part any of the obligations which were suspended. (b) If the Employee is removed from office and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIC (12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement shall terminate, as of the effective date of the order, but vested rights of the parties shall not be affected. (c) If the Bank becomes in default (as defined in Section 3(x)(1) of the FDIC (12 U.S.C. 1818(x)(1)), all obligations under this Agreement shall terminate as of the date of default, but any vested rights of the parties shall not be affected. (d) All obligations under this Agreement may be terminated: (i) by the Director of the Office of Thrift Supervision ("OTS") at the time the Federal Deposit Insurance Corporation or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the FDIC (12 U.S.C. 1823(c)); and (ii) by the Director of the OTS or his designee at the time the Director of the OTS or his designee approves a supervisory merger to resolve problems related to operations of the Bank or when the Bank is determined by the Director of the OTS to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (e) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. [Section] 1828(k) and any regulations promulgated thereunder. Notwithstanding any other limitations in this Agreement, the total payments to Employee under this Agreement by the Bank may not exceed three times the Employee's five year average compensation, as determined in accordance with RB#27a of the OTS. 10. NO ASSIGNMENTS. This Agreement is personal to all of the parties hereto, and no party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other parties. (a) The Bank and TCF agree to require any successor to substantially all of the business or assets of the Bank (other than a holding company of the Bank in connection with a holding company reorganization) or TCF, as the case may be, to assume and agree to perform this Agreement as written. Failure of the Bank and TCF to do so will be a breach by the Bank and TCF which entitles the Employee to compensation pursuant to Section 8(c). (b) The rights of the Employee under this Agreement shall be enforceable by his personal and legal representatives, heirs, devisees and beneficiaries. 9 11. NOTICE. For the purposes of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when personally delivered or sent by certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth below in this Agreement (provided that all notices to the Bank shall be directed to the attention of the Board of Directors of the Bank with a copy to the Secretary of the Bank), or to such other address as either party may have furnished to the other in writing in accordance herewith. 12. AMENDMENTS. No amendments or additions to this Agreement shall be binding unless in writing and signed by all parties, except herein otherwise provided. 13. SECTION HEADING. The Section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 14. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 15. GOVERNING LAW. This Agreement shall be governed by the laws of the United States and the State of Michigan. 16. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. 17. PRIOR CONTRACT. This Agreement supersedes any prior employment contract between Employee and Bank or TCF and, upon execution of this Agreement, any such prior contract shall be null and void. 18. JOINT BENEFITS AND OBLIGATIONS. Unless otherwise provided in this Agreement, the benefits and obligations of the Bank hereunder are the joint and several benefits and obligations of the Bank and TCF. Notwithstanding the foregoing, Employee's compensation hereunder shall be charged solely to the Bank unless a corporate allocation is duly agreed to by and between TCF and the Bank or Employee's compensation is payable solely by TCF under subsection 4(b) or subsection 6(b) hereof. IN WITNESS WHEREOF, the parties have executed this agreement on the day and year first hereinabove written. 10 GREAT LAKES BANCORP, A Federal Savings Bank 401 East Liberty Street Ann Arbor, MI 48104 By: /s/ Barry N. Winslow ------------------------- Title: President ---------------------- EMPLOYEE /s/ Robert J. Delonis ---------------------------- TCF FINANCIAL CORPORATION 801 Marquette Avenue Minneapolis, MN 55402 By: /s/ Thomas A. Cusick ------------------------- Title: Vice Chairman ---------------------- EX-11 9 EXHIBIT 11 Exhibit 11 - Computation of Earnings Per Share TCF FINANCIAL CORPORATION AND SUBSIDIARIES Computation of Earnings Per Share (Dollars in thousands, except per-share data)
Computation of Earnings Per Share for Statements of Operations: Year Ended December 31, --------------------------------- ------------------------------------------ 1994 1993 1992 ------------ ------------ ------------ Income applicable to common stock $ 57,363 $ 37,971 $ 45,259 ------------ ------------ ------------ ------------ ------------ ------------ Weighted average number of common and common equivalent shares outstanding: Weighted average common shares outstanding 12,219,209 12,312,197 11,741,307 Dilutive effect of stock option plans after application of treasury stock method 163,468 191,792 370,633 ------------ ------------ ------------ 12,382,677 12,503,989 12,111,940 ------------ ------------ ------------ ------------ ------------ ------------ Net income per common share $ 4.63 $ 3.04 $ 3.74 ------------ ------------ ------------ ------------ ------------ ------------ Computation of Fully Diluted Earnings Per Share (1): ------------------------- Income applicable to common stock $ 57,363 $ 37,971 $ 45,259 ------------ ------------ ------------ ------------ ------------ ------------ Weighted average number of common and common equivalent shares outstanding: Weighted average common shares outstanding 12,219,209 12,312,197 11,741,307 Dilutive effect of stock option plans after application of treasury stock method 179,735 197,820 427,089 ------------ ------------ ------------ 12,398,944 12,510,017 12,168,396 ------------ ------------ ------------ ------------ ------------ ------------ Net income per common share $ 4.63 $ 3.04 $ 3.72 ------------ ------------ ------------ ------------ ------------ ------------ -------------------------------- (1) This calculation is submitted in accordance with Regulation S-K Item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%.
EX.11 EX-13 10 EXHIBIT 13 EXHIBIT 13 ---------- DESCRIPTION OF BUSINESS TCF Financial Corporation is a stock savings bank holding company with more than $7 billion in assets and 250 retail financial service offices at March 1, 1995. Its bank subsidiaries operate in Minnesota, Illinois, Wisconsin, Michigan and Ohio. Other TCF affiliates included mortgage banking, consumer finance, title insurance, annuity, and mutual fund companies. TCF's common stock is listed on the New York Stock Exchange under the symbol TCB. TABLE OF CONTENTS Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . 38 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 43 Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . 65 Selected Quarterly Financial Data. . . . . . . . . . . . . . . . . . . 66 Other Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . 68 FINANCIAL REVIEW The financial review presents management's discussion and analysis of the consolidated financial condition and results of operations of TCF Financial Corporation ("TCF"). This review should be read in conjunction with the consolidated financial statements and other financial data beginning on page 38. RESULTS OF OPERATIONS PERFORMANCE SUMMARY -- TCF reported net income of $57.4 million for 1994, compared with $38 million for 1993 and $45.3 million for 1992. Net income per common share was $4.63 for 1994, compared with $3.04 for 1993 and $3.74 for 1992. Net income for 1994 represented an increase of 25.1% from the $45.9 million, or $3.67 per share, before merger-related charges for 1993. During 1993, TCF acquired Republic Capital Group, Inc. ("RCG") and recorded after-tax merger-related charges totaling $7.9 million. The 1994 results of operations show continued improvement in TCF's core operating earnings. TCF's net interest income of $205.1 million and net interest margin of 4.59% for 1994 were both record levels, representing increases of 11.2% and 13.6%, respectively, over 1993 results. Non-interest income totaled $117.3 million for 1994, compared with $119.6 million for 1993. Operating expenses (non-interest expense excluding the provision for real estate losses and 1993 merger-related expenses) totaled $211.5 million for 1994, up 6.7% from $198.3 million for 1993. Provisions for credit and real estate losses totaled $13.3 million in 1994, compared with $33.7 million in 1993 and $35.2 million in 1992. Included in the provisions for credit and real estate losses in 1993 are $7.7 million in merger-related provisions related to TCF's acquisition of RCG. TCF's net interest income of $184.4 million and net interest margin of 4.04% for 1993 increased 10.3% and 12.2%, respectively, over 1992 results. Non- interest income, excluding gains on sales of investments and mortgage-backed securities, increased 12.3% over 1992 to $119.6 million. Operating expenses increased 9.5% over 1992 to $198.3 million. TCF's net interest income of $167.2 million and net interest margin of 3.60% for 1992 increased 17% and 14.6%, respectively, over 1991 results. Non- interest income, excluding gains on sales of investments, loans and mortgage- backed securities, increased 12.7% over 1991 to $106.5 million. Operating expenses increased 4.2% over 1991 to $181.1 million. TCF's 1992 results reflected a 22% effective tax rate as a result of the recognition of non- recurring tax benefits. Return on average assets was a record 1.19% in 1994, compared with .77% in 1993 and .91% in 1992. Return on average equity was 18.65% in 1994, compared with 13.73% in 1993 and 19.53% in 1992. Excluding merger-related charges, return on average assets and return on average equity for 1993 were .94% and 16.59%, respectively. NET INTEREST INCOME -- A significant component of TCF's earnings is net interest income, which is the difference between interest earned on loans, mortgage- backed securities held to maturity, investments and other interest-earning assets (interest income) and interest paid on deposits, borrowings and other interest-bearing liabilities (interest expense). This amount, when divided by average interest-earning assets, is referred to as the net interest margin, expressed as a percentage. Net interest income and net interest margin are affected by changes in interest rates, the volume and the mix of interest- earning assets and interest-bearing liabilities, and the level of non-performing assets. The arithmetic difference between the yield on interest-earning assets and the cost of interest-bearing liabilities expressed as a percentage is referred to as the net interest rate spread. Net interest income was a record $205.1 million for the year ended December 31, 1994, up from $184.4 million in 1993 and $167.2 million in 1992. This represents an increase of 11.2% in 1994, following increases of 10.3% in 1993 and 17% in 1992. Total average interest-earning assets decreased 1.9% in 1994 and 1.7% in 1993, after increasing 2% in 1992. The net interest margin for 1994 was a record 4.59%, compared with 4.04% in 1993 and 3.60% in 1992. In addition, TCF's net interest rate spread was 4.22% in 1994, compared with 3.73% and 3.35% in 1993 and 1992, respectively. [Chart] -- Net Interest Income TCF Financial Corporation and Subsidiaries 21 -- The following table presents TCF's average balance sheets, interest and dividends earned or paid, and the related yields and rates on major categories of TCF's interest-earning assets and interest-bearing liabilities:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992 ------------------------------- ------------------------------- -------------------------------- INTEREST INTEREST INTEREST YIELDS YIELDS YIELDS (DOLLARS IN THOUSANDS) AVERAGE AND AVERAGE AND AVERAGE AND BALANCE INTEREST(1) RATES BALANCE INTEREST(1) RATES BALANCE INTEREST(1) RATES ----------------------------------------------------------------------------------------------------------------------------------- ASSETS: Securities available for sale. . . $ 84,072 $ 3,673 4.37% $ 27,952 $ 1,471 5.26% $ 28,936 $ 2,406 8.31% -------------------- --------------------- --------------------- Loans held for sale. . . . . . . . 238,779 16,486 6.90 308,634 21,986 7.12 242,147 19,685 8.13 -------------------- --------------------- --------------------- Mortgage-backed securities held to maturity. . . . . . . . . . . 1,115,274 79,219 7.10 1,303,467 93,254 7.15 1,319,143 106,424 8.07 -------------------- --------------------- --------------------- Loans: Residential real estate . . . . 1,152,405 85,238 7.40 937,426 73,152 7.80 850,604 78,103 9.18 Commercial real estate . . . . . 653,709 55,323 8.46 753,882 65,472 8.68 862,398 81,744 9.48 Commercial business . . . . . . 84,101 7,150 8.50 79,964 6,059 7.58 82,822 6,869 8.29 Consumer . . . . . . . . . . . 983,208 102,575 10.43 907,564 85,923 9.47 884,825 83,181 9.40 -------------------- --------------------- --------------------- Total loans (2). . . . . . . 2,873,423 250,286 8.71 2,678,836 230,606 8.61 2,680,649 249,897 9.32 -------------------- --------------------- --------------------- Investments: Interest-bearing deposits with banks. . . . . . . . . . 23,383 979 4.19 26,467 917 3.46 38,835 1,808 4.66 Federal funds sold. . . . . . . 95,197 3,670 3.86 76,543 2,449 3.20 125,249 4,676 3.73 U.S. Government and other marketable securities held to maturity . . . . . . 3,614 271 7.50 103,765 4,267 4.11 172,090 10,792 6.27 FHLB stock. . . . . . . . . . . 39,718 3,057 7.70 34,900 2,651 7.60 32,521 2,743 8.43 -------------------- --------------------- --------------------- Total investments. . . . . . 161,912 7,977 4.93 241,675 10,284 4.26 368,695 20,019 5.43 -------------------- --------------------- --------------------- Total interest- earning assets . . . . . 4,473,460 357,641 7.99 4,560,564 357,601 7.84 4,639,570 398,431 8.59 ----------------- ---------------- ---------------- Other assets (3). . . . . . . . . 338,803 339,371 361,255 ---------- ---------- ---------- Total assets. . . . . . . . . . $4,812,263 $4,899,935 $5,000,825 ---------- ---------- ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY: Non-interest bearing deposits. . . $ 392,682 $ 365,678 $ 287,807 ---------- ---------- ---------- Interest-bearing deposits: Checking . . . . . . . . . . . 417,840 5,259 1.26 378,285 4,989 1.32 359,726 9,820 2.73 Passbook and statement. . . . . 762,576 14,384 1.89 732,800 16,359 2.23 675,208 21,725 3.22 Money market. . . . . . . . . . 460,286 11,644 2.53 492,128 12,436 2.53 465,716 16,258 3.49 Certificates. . . . . . . . . . 1,865,537 89,327 4.79 1,994,722 102,469 5.14 2,225,620 137,736 6.19 -------------------- --------------------- --------------------- Total interest-bearing deposits. . . . . . . . . 3,506,239 120,614 3.44 3,597,935 136,253 3.79 3,726,270 185,539 4.98 -------------------- --------------------- --------------------- Borrowings: Securities sold under repurchase agreements . . . 122,216 6,441 5.27 123,119 6,184 5.02 103,285 7,763 7.52 FHLB advances . . . . . . . . . 369,780 20,781 5.62 435,693 25,085 5.76 500,495 28,471 5.69 Subordinated capital notes. . . 34,500 3,718 10.78 39,147 4,418 11.29 62,401 7,470 11.97 Other borrowings. . . . . . . . 13,059 958 7.34 15,239 1,237 8.12 18,120 1,982 10.94 -------------------- --------------------- --------------------- Total borrowings . . . . . . 539,555 31,898 5.91 613,198 36,924 6.02 684,301 45,686 6.68 -------------------- --------------------- --------------------- Total interest-bearing liabilities . . . . . . 4,045,794 152,512 3.77 4,211,133 173,177 4.11 4,410,571 231,225 5.24 ----------------- ---------------- ---------------- Other liabilities (3). . . . . . . 66,197 46,643 70,667 ---------- ---------- ---------- Total liabilities . . . . . . . 4,504,673 4,623,454 4,769,045 Stockholders' equity (3) . . . . . 307,590 276,481 231,780 ---------- ---------- ---------- Total liabilities and stockholders' equity . . . . . . . . . . . $4,812,263 $4,899,935 $5,000,825 ---------- ---------- ---------- ---------- ---------- ---------- Net interest income. . . . . . . . $205,129 $184,424 $167,206 -------- -------- -------- -------- -------- -------- Net interest rate spread . . . . . 4.22% 3.73% 3.35% ----- ----- ----- ----- ----- ----- Net interest margin . . . . . . . 4.59% 4.04% 3.60% ----- ----- ----- ----- ----- ----- ____________________________ (1) TAX-EXEMPT INCOME WAS NOT SIGNIFICANT AND THUS HAS NOT BEEN PRESENTED ON A TAX EQUIVALENT BASIS. TAX-EXEMPT INCOME OF $329,000, $382,000 AND $609,000 WAS RECOGNIZED DURING THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992, RESPECTIVELY. (2) AVERAGE BALANCE OF LOANS INCLUDES NON-ACCRUAL LOANS, AND IS PRESENTED NET OF UNEARNED INCOME. (3) AVERAGE BALANCE IS BASED UPON MONTH-END BALANCES.
22 TCF Financial Corporation and Subsidiaries -- In 1994, TCF's net interest income, net interest margin and interest rate spread increased primarily due to increased yields and growth of consumer loans, lower levels of non-performing assets, a lower cost of funds and the retention of earnings. Net interest income increased $20.7 million, or 11.2%, even though total average interest-earning assets decreased by $87.1 million, or 1.9% from 1993 levels. TCF's net interest margin improved by $5 million due to volume changes and by $15.7 million due to rate changes. The favorable impact of the lower cost of funds and increased residential and consumer loan volumes was partially offset by the negative impact of decreased volumes in commercial real estate loans, loans held for sale and mortgage-backed securities held to maturity. Interest income was relatively unchanged in 1994 as a $5.5 million increase due to higher yields on interest-earning assets was offset by a decrease of $5.4 million due to declining volumes. Interest expense decreased $20.7 million in 1994, of which $10.2 million was due to a lower cost of funds. The increase in net interest income due to the lower cost of funds and higher yields on interest-earning assets reflects in part the benefit from TCF's changing asset/liability mix. TCF has also benefitted from increases in both short- and long-term market interest rates as its interest rate-sensitive assets tied to a variable index rate (e.g., prime) repriced at a faster rate than its retail deposits. If market interest rates should decline, TCF may experience compression in its interest margin as it is likely that the interest rates paid on retail deposits will not decline as quickly, or to the same extent, as the decline in the yield on interest-rate sensitive assets. In addition, competition for checking and savings deposits, an important source of lower cost funds for TCF, has intensified among depository and other financial institutions. As a result of this and the general increase in market interest rates, TCF has experienced an increase in the rates paid on its deposits. TCF may experience compression in its net interest margin if these rates continue to increase. See "Financial Condition - Deposits" and "Financial Condition - Asset/Liability Management - Interest Rate Risk." In 1993, the net interest income, net interest margin and interest rate spread increased primarily due to a lower cost of funds, growth in lower interest-cost deposits and higher-yielding consumer loans, lower average levels of non-earning assets, the retention of earnings and the favorable impact of TCF's March 1993 redemption of $28.8 million of 12 5/8% subordinated capital notes. Net interest income increased by $17.2 million, or 10.3%, even though total average interest-earning assets decreased by $79 million, or 1.7%. The favorable impact of the lower cost of funds and increased residential and consumer loan volumes was partially offset by the downward repricing of assets tied to a variable index rate, the negative impact of the significant increase in loan and mortgage-backed securities prepayment activity due to declining market interest rates, and higher liquidity levels resulting from the August 1993 acquisition from the Resolution Trust Corporation of $220.8 million of insured deposits by TCF Bank Michigan fsb ("TCF Michigan"), a wholly owned subsidiary of TCF. Interest expense decreased $58 million in 1993, of which $42.4 million was due to a lower cost of funds. Interest income decreased by $40.8 million, reflecting a decrease of $38.7 million due to lower yields on interest-earning assets. TCF's net interest income was positively impacted by $13.5 million due to net volume changes. In 1992, the increase in net interest income, net interest margin and interest rate spread was primarily due to a lower cost of funds, growth in lower interest-cost deposits and higher-yielding consumer and residential real estate loans, lower levels of non-earning assets, the retention of earnings and the favorable impact of TCF's January 1992 public offering. Net interest income increased by $24.3 million, or 17%, even though total average interest-earning assets increased only $90 million, or 2%. The favorable impact of the lower cost of funds and increased loan volumes was partially offset by the downward repricing of assets tied to a variable index rate, and the negative impact of volume reductions in TCF's mortgage-backed securities portfolio. Interest expense decreased $62.2 million in 1992, of which $57.6 million was due to a lower cost of funds. Interest income decreased by $37.9 million, reflecting a decrease of $45.4 million due to lower yields on interest-earning assets. TCF's net interest income was positively impacted by $12.1 million due to net volume changes. TCF Financial Corporation and Subsidiaries 23 -- The following table sets forth the spread between TCF's interest-earning assets and interest-bearing liabilities at December 31, 1994 and 1993. The net interest rate spreads below represent the differences between the yield on interest-earning assets and the cost of interest-bearing liabilities at those dates:
At December 31, ----------------- 1994 1993 ---- ---- Weighted average yield: Loans 9.24% 8.42% Loans held for sale 7.49 6.42 Mortgage-backed securities held to maturity 7.17 6.85 Investments 6.27 3.97 Securities available for sale 5.95 4.66 ---- ---- Total interest-earning assets 8.48 7.59 ---- ---- Weighted average cost: Deposits (1) 3.76 3.54 FHLB advances 5.88 6.43 Other borrowings 6.64 5.71 ---- ---- Total interest-bearing liabilities 4.24 3.90 ---- ---- Net interest rate spread 4.24% 3.69% ---- ---- ---- ---- ______________________________________ (1) EXCLUDES NON-INTEREST BEARING DEPOSITS.
The net interest rate spread increased 55 basis points to 4.24% at December 31, 1994 from 3.69% at December 31, 1993. The 82 basis point increase in the loan portfolio yield to 9.24% at December 31, 1994 reflects the upward repricing of adjustable-rate loans and loans tied to a variable index rate, growth in higher-yielding consumer loans, originations of other residential and commercial loans at higher rates and reductions in non-accrual loans. The commercial base lending rate at TCF was 8.50% at December 31, 1994, compared with 6.00% at December 31, 1993. The 107 basis point increase in the loans held for sale portfolio yield to 7.49% at December 31, 1994 reflects the origination of residential and education loans at higher rates. The 32 basis point increase in the yield on mortgage-backed securities held to maturity to 7.17% at December 31, 1994 reflects the upward repricing of adjustable-rate mortgage-backed securities held to maturity and the purchase of fixed-rate mortgage-backed securities at higher rates. The 230 basis point increase in the investments held to maturity portfolio yield to 6.27% and the 129 basis point increase in the securities available for sale portfolio yield to 5.95% at December 31, 1994 reflect the general increase in short- and long-term market interest rates. The weighted average cost of deposits, excluding non-interest bearing deposits, increased 22 basis points to 3.76% at December 31, 1994 due to higher market interest rates. The decrease in the weighted average cost of Federal Home Loan Bank ("FHLB") advances to 5.88% at December 31, 1994 reflects the maturity of $115 million of higher rate FHLB advances which were subsequently replaced at a lower weighted average rate. The weighted average cost of other borrowings increased 93 basis points to 6.64% at December 31, 1994. This increase reflects the maturity of $129.8 million of lower rate short-term reverse repurchase agreements and the addition of $170.1 million of higher rate reverse repurchase agreements during 1994. TCF's net interest rate spread at December 31, 1994 may not be indicative of net interest rate spreads in future periods. 24 TCF Financial Corporation and Subsidiaries -- The following table presents the components of the changes in net interest income by volume and rate:
YEAR ENDED YEAR ENDED DECEMBER 31, 1994 DECEMBER 31, 1993 VERSUS SAME PERIOD IN 1993 VERSUS SAME PERIOD IN 1992 --------------------------------- ---------------------------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO --------------------------------- ---------------------------------- (IN THOUSANDS) VOLUME (1) RATE (1) TOTAL VOLUME (1) RATE (1) TOTAL -------------------------------------------------------------------------------------------------------------- SECURITIES AVAILABLE FOR SALE . . . . . . . . . . . . . . . . $ 2,490 $ (288) $ 2,202 $ (79) $ (856) $ (935) --------------------------------------------------------------------- LOANS HELD FOR SALE. . . . . . . . . . (4,839) (661) (5,500) 4,952 (2,651) 2,301 --------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES HELD TO MATURITY . . . . . . . . . . (13,386) (649) (14,035) (1,243) (11,927) (13,170) --------------------------------------------------------------------- LOANS: Residential real estate . . . . . . 16,006 (3,920) 12,086 7,492 (12,443) (4,951) Commercial real estate . . . . . . . (8,523) (1,626) (10,149) (9,740) (6,532) (16,272) Commercial business. . . . . . . . . 326 765 1,091 (233) (577) (810) Consumer . . . . . . . . . . . . . . 7,513 9,139 16,652 2,126 616 2,742 --------------------------------------------------------------------- Total loans . . . . . . . . . . . 15,322 4,358 19,680 (355) (18,936) (19,291) --------------------------------------------------------------------- INVESTMENTS: Interest-bearing deposits with banks. . . . . . . . . . . . (116) 178 62 (493) (398) (891) Federal funds sold . . . . . . . . . 661 560 1,221 (1,631) (596) (2,227) U.S. Government and other marketable securities held to maturity . . . . . . . . (5,948) 1,952 (3,996) (3,494) (3,031) (6,525) FHLB stock . . . . . . . . . . . . . 371 35 406 191 (283) (92) --------------------------------------------------------------------- Total investments . . . . . . . . (5,032) 2,725 (2,307) (5,427) (4,308) (9,735) --------------------------------------------------------------------- Total interest income. . . . . . . . . . . . (5,445) 5,485 40 (2,152) (38,678) (40,830) --------------------------------------------------------------------- DEPOSITS: Checking . . . . . . . . . . . . . . 505 (235) 270 483 (5,314) (4,831) Passbook and statement . . . . . . . 633 (2,608) (1,975) 1,738 (7,104) (5,366) Money market . . . . . . . . . . . . (792) - (792) 875 (4,697) (3,822) Certificates . . . . . . . . . . . . (6,406) (6,736) (13,142) (13,384) (21,883) (35,267) --------------------------------------------------------------------- Total deposits. . . . . . . . . . (6,060) (9,579) (15,639) (10,288) (38,998) (49,286) --------------------------------------------------------------------- BORROWINGS: Securities sold under repurchase agree- ments . . . . . . . . . . . . . (46) 303 257 1,313 (2,892) (1,579) FHLB advances. . . . . . . . . . . . (3,708) (596) (4,304) (3,732) 346 (3,386) Subordinated capital notes . . . . . (507) (193) (700) (2,649) (403) (3,052) Other borrowings . . . . . . . . . . (167) (112) (279) (284) (461) (745) --------------------------------------------------------------------- Total borrowings. . . . . . . . . (4,428) (598) (5,026) (5,352) (3,410) (8,762) --------------------------------------------------------------------- Total interest expense . . . . . . . . . . . (10,488) (10,177) (20,665) (15,640) (42,408) (58,048) --------------------------------------------------------------------- Net interest income. . . . . . . . . . $ 5,043 $ 15,662 $ 20,705 $ 13,488 $ 3,730 $ 17,218 --------------------------------------------------------------------- --------------------------------------------------------------------- ___________________________ (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.
For 1994, interest income remained relatively unchanged at $357.6 million, while interest expense decreased $20.7 million to $152.5 million. For 1993, interest income decreased $40.8 million to $357.6 million, while interest expense decreased $58 million to $173.2 million. As illustrated by the table above, the increase in net interest income during 1994 reflects the significant decrease in TCF's cost of funds and growth in higher-yielding consumer loans and residential real estate loans, partially offset by the negative impact of volume changes in the mortgage-backed securities and commercial real estate loan portfolios. Net interest income increased in 1993 due to the decrease in TCF's cost of funds and the positive impact of volume changes, partially offset by the downward repricing of loans and investments tied to variable index rates. Changes in net interest income are dependent upon the movement of interest rates, the volume and the mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. TCF's exposure to changing interest rates has been significantly reduced during recent years. See "Financial Condition - Asset/Liability Management - Interest Rate Risk." TCF Financial Corporation and Subsidiaries 25 -- NON-INTEREST INCOME -- Non-interest income is a significant source of revenues for TCF and 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. During 1994, non-interest income decreased $2.3 million, or 1.9%, to $117.3 million, reflecting decreases in title insurance revenues and gains on sales of loans held for sale due to the impact on demand of rising market interest rates. These decreases were partially offset by increases in commissions on sales of annuities, gains on sales of securities available for sale and gains on sales of loan servicing. The following table presents the components of non-interest income:
Percentage YEAR ENDED DECEMBER 31, INCREASE (DECREASE) ------------------------------ ------------------- (DOLLARS IN THOUSANDS) 1994 1993 1992 1994/93 1993/92 ----------------------------------------------------------------------------------------------------- Fee and service charge revenues. . . . . $ 75,449 $ 72,130 $ 66,582 4.6% 8.3% Data processing revenue. . . . . . . . . 8,988 8,120 7,310 10.7 11.1 Commissions on sales of annuities . . . 10,818 9,446 9,327 14.5 1.3 Title insurance revenues . . . . . . . . 10,274 15,229 9,984 (32.5) 52.5 Gain on sale of loans held for sale, net. . . . . . . . . . . . . . . 2,367 10,059 6,889 (76.5) 46.0 Gain on sale of securities available for sale, net. . . . . . . . 2,035 649 3,362 213.6 (80.7) Gain on sale of loan servicing, net. . . 2,353 137 - 1,617.5 100.0 Other. . . . . . . . . . . . . . . . . . 5,010 3,845 3,058 30.3 25.7 ------------------------------ 117,294 119,615 106,512 (1.9) 12.3 Gain on sale of mortgage-backed securities, net. . . . . . . . . . . . - - 718 - (100.0) Gain on sale of investments, net . . . . - - 114 - (100.0) ------------------------------ Total non-interest income. . . . . . . $117,294 $119,615 $107,344 (1.9) 11.4 ------------------------------ ------------------------------
[Graph] -- Sources of Non-Interest Income for 1994 Fee and service charge revenues increased $3.3 million in 1994 and $5.5 million in 1993 primarily as a result of expanded retail and mortgage banking activities. Included in fee and service charge revenues are fees of $13.2 million, $12.3 million and $10.6 million received for the servicing of loans owned by others during 1994, 1993 and 1992, respectively. The increase in servicing fees during this period reflects an increase in the size of TCF's servicing portfolio resulting from loan originations and purchases of loan servicing rights. At December 31, 1994, 1993 and 1992, TCF was servicing real estate loans for others with aggregate unpaid principal balances of $3.9 billion, $3.6 billion and $3.3 billion, respectively. Data processing revenue increased $868,000 in 1994 and $810,000 in 1993. These increases reflect TCF's efforts to provide electronic banking transaction services through its automated teller machine ("ATM") network consisting of 634 ATMs. These revenues are generated principally through the use of TCF's ATM network by depositors of other financial institutions. Commissions on sales of annuities increased $1.4 million to a record $10.8 million in 1994, following an increase of $119,000 to $9.4 million in 1993. Sales of annuities may fluctuate from period to period, and future sales levels will depend upon continued favorable tax treatment, the level of interest rates, general economic conditions and investor preferences. 26 TCF Financial Corporation and Subsidiaries -- Title insurance revenues decreased $5 million in 1994 to $10.3 million, following an increase of $5.2 million in 1993 to $15.2 million. Title insurance revenues for 1994 were negatively affected by decreases in loan originations and refinancing activity associated with the rise in market interest rates during the year. Title insurance revenues are cyclical in nature and are largely dependent on the level of loan originations and refinancings in the industry. Gains on sales of loans held for sale decreased $7.7 million in 1994 following an increase of $3.2 million in 1993. Gains on sales of securities available for sale totaled $2 million in 1994, an increase of $1.4 million from the $649,000 recognized in 1993. Gains or losses on sales of loans held for sale and securities available for sale may fluctuate significantly from period to period due to changes in interest rates and volumes, and results in any period related to these transactions may not be indicative of results which will be obtained in future periods. See "Financial Condition - Loans Held for Sale" and "Financial Condition - Securities Available for Sale." [Graph] -- Residential Mortgage Servicing Portfolio at period-end Gains on sales of third-party loan servicing rights totaled $2.4 million in 1994, compared with $137,000 in 1993. These gains were recognized on the sale of third-party servicing rights on approximately $169 million and $44 million of loans, respectively. TCF periodically sells loan servicing rights depending on market conditions. Other non-interest income increased $1.2 million in 1994 to $5 million, and $787,000 in 1993 to $3.8 million. The increases in 1994 and 1993 were primarily due to increased commissions earned on sales of insurance and mutual fund products. TCF commenced sales of mutual funds in the fourth quarter of 1993. Gains on sales of mortgage-backed securities and investments totaled $832,000 in 1992. There were no such gains in 1994 or 1993. TCF's results for 1992 included a pretax gain of $718,000 on the sale of $23 million of Federal Home Loan Mortgage Corporation ("FHLMC") adjustable-rate mortgage-backed securities. Management decided to sell these high-coupon adjustable-rate mortgage-backed securities primarily due to growing concerns over expected increased prepayments on such securities. In addition, prior to its merger with TCF, RCG realized a gain of $118,000 on the sale of $4,200 of Federal National Mortgage Association ("FNMA") stock. NON-INTEREST EXPENSE -- Total non-interest expense decreased $1.6 million in 1994, following an increase of $12.3 million, or 6.1%, in 1993, as compared with the respective prior years. The following table presents the components of non- interest expense:
PERCENTAGE YEAR ENDED DECEMBER 31, INCREASE (DECREASE) ------------------------------ ------------------- (DOLLARS IN THOUSANDS) 1994 1993 1992 1994/93 1993/92 ----------------------------------------------------------------------------------------------------- Compensation and employee benefits . . . . . . . . . . . . . . . $ 99,071 $ 90,045 $ 82,388 10.0% 9.3% Occupancy and equipment, net . . . . . . 35,357 32,834 29,542 7.7 11.1 Advertising and promotions . . . . . . . 11,666 11,254 9,423 3.7 19.4 Federal deposit insurance premiums and assessments. . . . . . . . . . . . 9,871 8,979 9,606 9.9 (6.5) Amortization of goodwill and other intangibles. . . . . . . . . . . 3,257 2,957 3,830 10.1 (22.8) Provision for real estate losses . . . . 2,373 11,743 (1) 22,054 (79.8) (46.8) Other. . . . . . . . . . . . . . . . . . 52,262 52,182 46,302 .2 12.7 -------- -------- -------- 213,857 209,994 203,145 1.8 3.4 Merger-related expense . . . . . . . . . - 5,494 - (100.0) 100.0 Total non-interest expense . . . . . . $213,857 $215,488 $203,145 (.8) 6.1 -------- -------- -------- -------- -------- -------- (1) INCLUDES $700 OF MERGER-RELATED PROVISIONS.
Compensation and employee benefits, representing 46.3% of total non- interest expense in 1994, increased $9 million, or 10%, in 1994, following an increase of $7.7 million, or 9.3%, in 1993. The 1994 increase was largely due to compensation and benefit costs associated with TCF's expanded consumer finance activities, TCF Michigan, which TCF purchased in the third quarter of 1993, and normal salary increases. These increases were offset by compensation and benefit cost savings associated with the reduction in residential mortgage origination and title company operations. Residential mortgage origination at TCF were $1.1 billion in 1994, down from $2.3 billion in 1993. Occupancy and equipment expenses increased $2.5 million in 1994 and $3.3 million in 1993. The increase in 1994 was a result of expanded consumer finance activities, which included the opening of 27 new consumer finance offices, and costs associated with TCF Michigan. The 1993 increase was largely due to costs associated with TCF Michigan, expanded mortgage banking and consumer finance activities and the opening of seven new Cub Food branch offices. TCF Financial Corporation and Subsidiaries 27 -- Advertising and promotion expenses increased $412,000 in 1994 and $1.8 million in 1993. The increases in 1994 and 1993 reflect the increase in direct mail and other marketing expenses relating to the promotion of TCF's consumer finance and deposit products in TCF's new market locations. Federal deposit insurance premiums and assessments totaled $9.9 million for 1994, an increase of $892,000 from 1993. The increase in 1994 reflects TCF's recognition of its remaining $1.5 million Federal Savings and Loan Insurance Corporation ("FSLIC") secondary reserve credit during the six-month assessment period ended June 30, 1993. This credit represented the final recovery of the 1987 federally mandated write-off of TCF's investment in the FSLIC secondary reserve. In February 1995, the U.S. Department of the Treasury disclosed that it is considering a plan to recapitalize the Savings Association Insurance Fund ("SAIF") that would entail charging a one-time special assessment of approximately $6 billion. The special assessment, estimated to be .80% of TCF's total insured deposits or approximately $28 million, would be in addition to TCF's annual deposit insurance premium of .23% of total insured deposits. It is too early to predict whether the proposed special assessment will be approved, or, if approved, when it will be charged. Amortization of goodwill and other intangibles increased $300,000 to $3.3 million in 1994, following a decrease of $873,000 to $3 million in 1993. The increase in amortization of goodwill and other intangibles in 1994 was primarily due to the amortization of deposit base intangibles associated with TCF Michigan. For acquisitions initiated or completed prior to September 30, 1982, goodwill is being amortized over 25 years on a straight-line basis. For acquisitions initiated or completed subsequent to September 30, 1982, goodwill is being amortized by the level-yield method based upon the outstanding balances, and over the estimated remaining lives, of the long-term assets acquired. This amortization method, referred to as "lock-step," is required by generally accepted accounting principles and results in a declining rate of amortization. TCF periodically re-evaluates the periods of amortization to determine whether current conditions warrant revised estimates of useful lives. The provision for real estate losses decreased $9.4 million, or 79.8%, to $2.4 million in 1994, following a decrease of $10.3 million, or 46.8%, to $11.7 million in 1993. Included in the provision for real estate losses in 1993 are $700,000 in merger-related provisions related to TCF's acquisition of RCG. The amounts provided for real estate losses in each of the three years were considered prudent by management in light of all factors affecting reserve adequacy. See "Financial Condition - Allowances for Loan and Real Estate Losses and Industrial Revenue Bond Reserves" for further detail on the provision for real estate losses. Other non-interest expense increased $80,000 in 1994 and $5.9 million, or 12.7%, in 1993. Included in other non-interest expense in 1994 are costs totaling approximately $1 million associated with TCF's February 1995 merger with Great Lakes Bancorp. See "Subsequent Business Combination." The increase in 1994 also reflects an increase of $1.5 million in outside processing expense due to an expansion of TCF's ATM network. Other non-interest expense for 1993 reflects $3.6 million in write-offs of purchased mortgage servicing rights ("PMSRs"), an increase of $2.5 million over similar write-offs recorded in 1992. No such write-offs occurred in 1994 as loan prepayments slowed significantly due to the general increase in interest rates. Other non-interest expense in 1993 also reflects an increase of $1.6 million in loan expense resulting from significantly increased loan origination activity. During 1993, TCF recorded $5.5 million of merger-related expenses associated with the RCG merger. These expenses consisted primarily of $2.7 million for severance expense, $830,000 associated with the write-off of premises and equipment rendered redundant or obsolete as a result of the merger and $2 million in other expenses. In June 1994, the Financial Accounting Standards Board ("FASB") issued an Exposure Draft of a Proposed Statement of Financial Accounting Standards, "Accounting for Mortgage Servicing Rights and Excess Servicing Receivables and for Securitization of Mortgage Loans." The proposed statement amends the accounting for mortgage servicing rights prescribed under Statement of Financial Accounting Standards ("SFAS") No. 65, "Accounting for Certain Mortgage Banking Activities." SFAS No. 65 presently prescribes different treatment for the recognition of originated mortgage servicing rights and PMSRs. Subject to limitations, presently only PMSRs are capitalized and amortized in accordance with SFAS No. 65. The proposed statement would require that an entity recognize as separate assets rights to service mortgage loans for others, however those servicing rights are acquired. An entity that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained would allocate a portion of the cost of the loans to the mortgage servicing rights. The proposed statement would also require that capitalized mortgage servicing rights be assessed for impairment, based on fair value. The proposed statement would be applied prospectively in fiscal years beginning after December 15, 1995 to transactions in which an entity acquires mortgage servicing rights and to impairment evaluations of all capitalized mortgage servicing rights whenever acquired. Earlier application is permitted but not required. Retroactive application would be prohibited. It is too early to predict whether the proposed statement will be adopted in its present form or what effect the proposed statement will have on TCF's financial condition or results of operations. INCOME TAXES -- TCF recorded income tax expense of $40.3 million in 1994, compared with $28.6 million in 1993 and $13 million in 1992. Income tax expense represented 41% of pretax income during 1994, compared with 43% and 22% for 1993 and 1992, respectively. TCF's 1992 tax rate reflected benefits obtained from the reversal of a valuation allowance established against deferred tax assets in years prior to 1992 under the provisions of SFAS No. 109, "Accounting for Income 28 TCF Financial Corporation and Subsidiaries -- Taxes." The reversal of the valuation allowance resulted in the recognition of deferred tax assets. No tax valuation allowance was required as of December 31, 1994 or 1993 since TCF had paid taxes, which are available for carryback, in excess of its deferred tax assets. As a result, TCF's income tax expense returned to a more normal rate in 1994 and 1993. The tax expense in 1992 also included the recognition of $2.8 million in tax benefits from the utilization of net operating loss ("NOL") carryovers TCF obtained as a result of its settlement of issues raised by the Internal Revenue Service in their review of the consolidated tax returns for the years ended 1979 through 1982. As part of the settlement, TCF paid interest and minimum tax relating to certain of the examined years, which had been fully accrued in prior periods. The Revenue Reconciliation Act of 1993 increased the federal income tax rate from 34% to 35% effective January 1, 1993. TCF's 1993 tax expense was not significantly impacted by the tax rate change since the resulting increase in federal income taxes was partially offset by the recognition of additional deferred tax assets. At December 31, 1994, TCF had no remaining federal NOL or tax credit carryovers. Further detail on income taxes is provided in Note 14 of Notes to Consolidated Financial Statements. SUBSEQUENT BUSINESS COMBINATION On February 8, 1995, TCF completed its acquisition of Great Lakes Bancorp, A Federal Savings Bank ("Great Lakes"), a Michigan-based savings bank with $2.8 billion in assets, $1.6 billion in deposits, 39 offices in Michigan and five offices in western Ohio. In connection with the acquisition, TCF issued approximately 4.8 million shares of its common stock for all of the outstanding common shares of Great Lakes. In addition, each outstanding share of Great Lakes preferred stock was exchanged for one share of TCF preferred stock with substantially identical terms. TCF intends to redeem the 2.7 million shares of preferred stock as soon as practicable after July 1, 1995, the date the preferred stock first becomes redeemable at the option of the issuer. TCF also assumed the obligation to issue common stock upon the exercise or conversion of the outstanding warrants to purchase Great Lakes common stock, the outstanding employee and director options to purchase Great Lakes common stock, and the outstanding 7-1/4% convertible subordinated debentures due 2011 of Great Lakes. This acquisition was accounted for as a pooling-of-interests and, accordingly, TCF's historical financial statements presented in future reports will be restated to include the accounts and results of operations of Great Lakes. In connection with the acquisition, it is expected that a pretax merger-related charge of approximately $51.4 million will be incurred during the 1995 first quarter, primarily to accrue for specific, identified costs related to the merger. As a result of the acquisition, Great Lakes merged into TCF's existing Michigan-based wholly owned savings bank subsidiary, TCF Michigan. The resulting savings bank is operated as a direct subsidiary of TCF and retained the Great Lakes name, certain members of its board of directors, and headquarters in Ann Arbor, Michigan. The resulting savings bank operates 54 offices in Michigan and five offices in western Ohio. Further detail on the business combination is provided in Note 2 of Notes to Consolidated Financial Statements. FINANCIAL CONDITION INVESTMENTS -- Total investments increased $8.5 million in 1994 to $243.7 million at December 31, 1994. Interest-bearing deposits with banks increased $180.2 million during 1994 to $190.7 million at December 31, 1994. Federal funds sold decreased $98.6 million in 1994, totaling $6.9 million at December 31, 1994. U.S. Government and other marketable securities held to maturity decreased $77.7 million in 1994 to $3.5 million at December 31, 1994, reflecting decreases of $66.9 million in U.S. Government and agency obligations, $7 million in bankers' acceptances and $3 million in corporate bonds. TCF had no non- investment grade debt securities (junk bonds) and there were no open trading account or investment option positions as of December 31, 1994. In May 1993, the FASB issued SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. SFAS No. 115 does not apply to unsecuritized loans. SFAS No. 115 requires investments in equity and debt securities to be classified in one of three categories and accounted for as follows: 1. Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held to maturity securities and reported at amortized cost. 2. Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. 3. Debt and equity securities not classified in the first two categories are classified as available for sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity. TCF Financial Corporation and Subsidiaries 29 -- TCF adopted SFAS No. 115 effective January 1, 1994. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting method. As permitted by SFAS No. 115, TCF reclassified $77.3 million of its debt securities from U.S. Government and other marketable securities and $156.8 million of its mortgage-backed securities to securities available for sale on January 1, 1994. Additional information on TCF's adoption of SFAS No. 115 is provided in Note 1 of Notes to Consolidated Financial Statements. SECURITIES AVAILABLE FOR SALE -- Securities available for sale are carried at fair value with the unrealized holding gains or losses, net of deferred income taxes, reported as a separate component of stockholders' equity. Such securities were carried at the lower of cost or market prior to 1994. Securities available for sale increased $55.8 million during 1994 to $65.8 million at December 31, 1994. Securities available for sale totaled $10 million at December 31, 1993, a decrease of $246.6 million from $256.6 million at December 31, 1992. LOANS HELD FOR SALE -- Residential real estate and education loans held for sale are carried at the lower of cost or market. Loans held for sale decreased $221.4 million during 1994, totaling $200.5 million at December 31, 1994. The change in 1994 was due to a decrease of $252.6 million in residential real estate loans held for sale partially offset by a $32.3 million increase in education loans held for sale. The decrease in residential real estate loans held for sale reflects a decrease in origination and refinancing demand due to rising market interest rates. In addition, loan sales activity exceeded production levels during 1994. The increase in education loans held for sale reflects management's intention to hold a larger portfolio of these loans due to the higher yields received on these loans as compared with alternative short- term investments. Under a forward commitment agreement with the Student Loan Marketing Association ("SLMA"), TCF can sell the education loans to SLMA once they are fully disbursed, but must sell the loans to SLMA before they go into repayment status. Loans held for sale totaled $421.9 million at December 31, 1993, an increase of $136.4 million from $285.5 million at December 31, 1992. MORTGAGE-BACKED SECURITIES HELD TO MATURITY -- Mortgage-backed securities held to maturity totaled $1.1 billion at December 31, 1994, a decrease of $122.6 million from the December 31, 1993 balance of $1.2 billion. The decrease reflects the previously mentioned reclassification of $156.8 million of mortgage-backed securities to securities available for sale on January 1, 1994, principal paydowns and prepayments, partially offset by purchases of $262.8 million of 15-year fixed-rate FNMA mortgage-backed securities and $25.2 million of 30-year fixed-rate FNMA mortgage-backed securities. At December 31, 1994, TCF's mortgage-backed securities held to maturity portfolio was comprised of $130.1 million of adjustable-rate mortgage-backed securities and $980.8 million of fixed-rate mortgage-backed securities, and had gross unrealized gains of $2.9 million and gross unrealized losses of $51.2 million. Mortgage-backed securities held to maturity totaled $1.1 billion at December 31, 1992. LOANS -- The following table sets forth information about loans held in TCF's portfolio, excluding loans held for sale:
AT DECEMBER 31, ----------------------------------------------------------- (IN THOUSANDS) 1994 1993 1992 1991 1990 ---------------------------------------------------------------------------------------------------- Residential real estate. . . . . . . . $1,261,690 $1,063,158 $ 858,685 $ 707,590 $ 721,129 Consumer . . . . . . . . . . . . . . . 1,105,971 919,027 906,661 892,166 977,037 Commercial real estate . . . . . . . . 634,770 687,202 828,995 902,330 955,884 Commercial business. . . . . . . . . . 100,397 89,368 80,312 89,496 100,468 Deferred fees and unearned discounts and finance charges . . . . . . . . (21,020) (13,609) (17,727) (25,498) (48,090) ----------------------------------------------------------- Total loans. . . . . . . . . . . . $3,081,808 $2,745,146 $2,656,926 $2,566,084 $2,706,428 ----------------------------------------------------------- -----------------------------------------------------------
Residential real estate loans totaled $1.3 billion at December 31, 1994, an increase of $198.5 million from December 31, 1993. This increase reflects the origination and retention of $378 million of residential loans, partially offset by loan repayments. During 1994, TCF retained a greater proportion of residential real estate loans originated than in recent years. At December 31, 1994, TCF's residential real estate loan portfolio was comprised of $728.6 million of fixed-rate loans and $533.1 million of adjustable-rate loans. Consumer loans totaled $1.1 billion at December 31, 1994, an increase of $186.9 million from December 31, 1993. This change was primarily due to a $116 million increase in TCF's home equity loan portfolio, a $40.6 million increase in automobile and recreational vehicle loans and a $15.7 million increase in credit card loans. The growth in home equity loans is primarily due to the expanded operations of TCF's consumer finance subsidiaries and the slowdown of refinancings. The growth in automobile and recreational vehicle loans also reflects the expanded operations of TCF's consumer finance subsidiaries. 30 TCF Financial Corporation and Subsidiaries -- TCF is expanding its consumer lending and consumer finance operations and anticipates opening more than 20 new consumer finance offices during 1995, most of which will be in areas outside its traditional market areas. TCF opened 27 such offices in 1994 and now has 46 consumer finance offices in 11 states. As a result of this expansion, TCF's consumer finance loan portfolio totaled $201 million at December 31, 1994, compared with $136.5 million at December 31, 1993. Consumer finance lending is generally considered to involve a higher level of risk than single-family residential lending due to the higher level of credit risk and interest rates associated with these loans. The underwriting criteria for loans originated by these consumer finance offices are generally less stringent than those historically adhered to by TCF and as a result carry a higher level of credit risk and higher interest rates. TCF believes that it has in place experienced personnel and acceptable standards for maintaining credit quality that are consistent with its goals for expanding its portfolio of these higher-yielding loans. Consumer loan growth in recent years reflects TCF's emphasis on expanding its portfolio of these higher-yielding, shorter-term loans, including home equity lines of credit. At December 31, 1994, TCF's average home equity line of credit was approximately $36,000 and the average loan balance outstanding was approximately $21,000, or 58% of the available line. The average combined loan to value ratio for TCF's home equity credit line portfolio, based on the combined total of any first mortgage lien and the maximum amount of the credit line available, was approximately 70%. At December 31, 1994, TCF's consumer loan delinquency rate was .68% (defined as accruing loans, including education loans held for sale, greater than 30 days past due). Commercial real estate loans decreased $52.4 million in 1994 to $634.8 million at December 31, 1994. Commercial business loans increased $11 million to $100.4 million at December 31, 1994. TCF is seeking to expand its commercial real estate and commercial business lending activity to borrowers located in its primary markets of Minnesota, Illinois, Wisconsin, Michigan and other Midwestern states in an attempt to maintain the size of these lending portfolios and, where feasible under local economic conditions, achieve some growth in these lending categories over time. These loans generally have larger individual balances and a substantially greater inherent risk of loss. The risk of loss is difficult to quantify and is subject to fluctuations in real estate values. At December 31, 1994, approximately 84% of TCF's commercial real estate loans outstanding were secured by properties located in its primary markets. The average individual balance of commercial real estate loans was $562,000 at December 31, 1994. Apartment loans comprised $265.6 million, or 42%, of total commercial real estate loans outstanding at December 31, 1994. Included in performing loans at December 31, 1994 are commercial real estate loans aggregating $3 million with terms that have been modified in troubled debt restructurings, compared with $7.4 million of such loans at December 31, 1993. The results of hotel and motel operations have suffered in recent years. Included in commercial real estate loans at December 31, 1994 are $73.9 million of loans secured by hotel or motel properties. Of this amount, one loan totaling $11.6 million is included in loans subject to management concern. TCF continues to closely monitor the performance of these loans and properties. TCF does not make highly leveraged corporate loans or agricultural, energy- related or foreign loans. ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES AND INDUSTRIAL REVENUE BOND RESERVES -- Credit risk is the risk of loss from a customer default. TCF has in place a process to identify and manage its credit risks. The process includes initial credit review and approval, periodic monitoring to measure compliance with credit agreements and internal credit policies, identification of problem loans and special procedures for collection of problem loans. On an ongoing basis, TCF's loan and real estate portfolios are carefully reviewed and thoroughly analyzed as to credit risk, performance, collateral value and quality. The allowances for loan and real estate losses are maintained at levels considered by management to be necessary to provide for estimated loan and real estate losses. Management's judgment as to the adequacy of the allowances is a result of ongoing review of individual loans greater than $100,000, the overall risk characteristics of the portfolio, changes in the character or size of the portfolio, the level of non-performing assets, net charge-offs, geographic location and prevailing economic conditions. The allowance for loan losses is established for known or anticipated problem loans, as well as for loans which are not currently known to require specific allowances for loss. The allowance for real estate losses is established to reduce the carrying value of real estate to fair value less disposition costs. Estimates of costs to complete or ready a project for sale, costs of disposal and costs to carry real estate until estimated disposition are considered in establishing the initial recorded investment in real estate. Prior to being acquired by TCF, RCG had entered into agreements guaranteeing certain industrial development and housing revenue bonds issued by municipalities to finance commercial and multifamily real estate owned by third parties. In the event a third-party borrower defaults on principal or interest payments on the bonds, TCF, as acquiring entity, is required to either fund the amount in default or acquire the then outstanding bonds. TCF may foreclose on the underlying real estate to recover amounts in default. The balance of such financial guarantees at December 31, 1994 was $18.6 million. Management has considered these guarantees in its review of the adequacy of the industrial revenue bond reserves. The adequacy of the allowances for loan and real estate losses and industrial revenue bond reserves is highly dependent upon management's estimates of variables affecting valuation, appraisals of collateral, and evaluations of performance and status. Such estimates, appraisals and evaluations may be subject to frequent adjustments due to changing economic conditions and the economic prospects of borrowers or properties. Management believes the allowances for loan and real estate losses and industrial revenue bond reserves are adequate. TCF Financial Corporation and Subsidiaries 31 -- The provisions for credit and real estate losses included in the consolidated statements of operations totaled $13.3 million in 1994, compared with $33.7 million in 1993 and $35.2 million in 1992. Included in the provision for credit losses and the provision for real estate losses in 1993 are $7 million and $700,000, respectively, in merger-related provisions related to TCF's acquisition of RCG. The merger-related provisions were established to conform RCG's accounting and credit loss reserve practices and methods to those of TCF and to accelerate the disposition of RCG's problem assets. While TCF's investments in commercial real estate loans, commercial business loans and related properties acquired through foreclosure or by other means have significantly decreased in recent years, such loans and investments have larger individual balances and a substantially greater inherent risk of loss. The risk of loss on such loans and properties is difficult to quantify and is subject to fluctuations in real estate values. In addition, concerns remain over the future course of the economy and particularly the related impact on the real estate values associated with these loans and properties. At December 31, 1994, the allowances for loan and real estate losses and industrial revenue bond reserves totaled $35.1 million, compared with $30.7 million at December 31, 1993. Net loan, real estate and industrial revenue bond charge-offs were $8.8 million in 1994 compared with $25.6 million in 1993. As indicated by the significant reduction in loss provisions and net charge-offs during 1994, TCF has experienced continued improvement in credit quality. A summary of the allowance for loan losses and industrial revenue bond reserves and selected statistics follows:
INDUSTRIAL ALLOWANCE REVENUE FOR LOAN BOND (IN THOUSANDS) LOSSES RESERVES TOTAL --------------------------------------------------------------------------- Balance, December 31, 1991 . . . . . $25,420 $2,881 $28,301 Provision for losses . . . . . . . 12,423 767 13,190 Charge-offs. . . . . . . . . . . . (21,519) (2,185) (23,704) Recoveries . . . . . . . . . . . . 2,925 - 2,925 ----------------------------------- Net charge-offs. . . . . . . . . (18,594) (2,185) (20,779) ----------------------------------- Balance, December 31, 1992 . . . . . 19,249 1,463 20,712 Adjustments for pooling-of- interests. . . . . . . . . . . . (56) 225 169 Provision for losses . . . . . . . 20,207 1,726 21,933 Charge-offs. . . . . . . . . . . . (16,032) (725) (16,757) Recoveries . . . . . . . . . . . . 2,687 - 2,687 ----------------------------------- Net charge-offs. . . . . . . . . (13,345) (725) (14,070) ----------------------------------- Balance, December 31, 1993 . . . . . 26,055 2,689 28,744 Provision for losses . . . . . . . 10,901 - 10,901 Charge-offs. . . . . . . . . . . . (7,740) - (7,740) Recoveries . . . . . . . . . . . . 2,432 70 2,502 ----------------------------------- Net charge-offs. . . . . . . . . (5,308) 70 (5,238) ----------------------------------- BALANCE, DECEMBER 31, 1994 . . . . . $31,648 $2,759 $34,407 ----------------------------------- ----------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------- 1994 1993 1992 --------------------------------------------------------------------------- Ratio of net loan charge-offs to average loans outstanding (1). . . .18% .50% .69% Year-end allowance for loan losses as a percentage of year-end gross loan balances (1). . . . . . . . . 1.02 .94 .72 ___________________________________ (1) EXCLUDING LOANS HELD FOR SALE.
A summary of the allowance for real estate losses follows:
YEAR ENDED DECEMBER 31, ----------------------------------- (IN THOUSANDS) 1994 1993 1992 --------------------------------------------------------------------------- Balance at beginning of year . . . . $1,968 $ 2,291 $ 7,603 Adjustments for pooling-of- interests. . . . . . . . . . . . - (513) - Provision for losses . . . . . . . 2,373 11,743 22,054 Charge-offs. . . . . . . . . . . . (3,611) (11,553) (27,366) ----------------------------------- Balance at end of year . . . . . . . $ 730 $ 1,968 $ 2,291 ----------------------------------- -----------------------------------
Real estate acquired through foreclosure is carried at the lower of cost or fair value minus estimated costs to sell the properties. Fair value represents the amount that would be received in a current sale between a willing buyer and a willing seller - that is, in other than a forced or liquidation sale. Real estate charge-offs in 1993 reflect $4.2 million in charge-offs of TCF's investment in New York City cooperative apartment units, and sales of commercial real estate properties at less than previously estimated fair values. TCF's remaining investment in the cooperative units (excluding loans to purchasers of cooperative units and loans to the cooperative apartment corporations secured by underlying real estate) totaled $528,000 and $1.8 million at December 31, 1994 and 1993, respectively. Real estate charge-offs in 1992 exceeded the allowance for real estate losses at December 31, 1991 primarily due to a decline in the market value of cooperative units and other commercial real estate properties and sales of commercial real estate properties at less than previously estimated fair values. The presence of various factors added a degree of uncertainty to management's determination of the estimated fair values of certain foreclosed commercial real estate properties at December 31, 1991. These factors included the existence of a number of large out-of-territory properties which have a substantially greater risk of loss, the inability to gain access and obtain appraisals for certain in- substance foreclosed properties, the limited market for certain of the properties, and environmental concerns for one property which was subsequently sold. TCF disposed of a number of foreclosed commercial real estate properties in 1992 at lower prices in order to reduce future legal and other expenses, minimize future holding costs and reduce TCF's exposure to further declines in market values. 32 TCF Financial Corporation and Subsidiaries -- The allowance for real estate losses is based on management's periodic analysis of real estate holdings. In this analysis, management considers factors including, but not limited to, general economic and market conditions, geographic location, composition and appraisals of the real estate holdings and property conditions. The carrying values of foreclosed real estate are based on appraisals, prepared by certified appraisers, whenever possible. TCF reviews each external commercial real estate appraisal it receives for accuracy, completeness and reasonableness of assumptions used. A renewed weakness in commercial real estate markets may result in further declines in values of the properties or the sale of individual properties at less than previously estimated values, resulting in additional charge-offs. TCF recognizes the effect of such events in the periods in which they occur. NON-PERFORMING ASSETS -- Non-performing assets (principally non-accrual loans and real estate acquired through foreclosure) totaled $26.1 million at December 31, 1994, down $18.9 million, or 42%, from the December 31, 1993 total of $45 million. As indicated by the reduction in non-performing assets in 1994, TCF has experienced continued improvement in credit quality. At December 31, 1994, six commercial real estate loans or properties comprised $11.5 million, or 44%, of total non-performing assets. These loans or properties had been written down by $7.8 million as of year-end 1994. Properties acquired are being actively marketed. Approximately 95% of non-performing assets consist of, or are secured by, real estate. At December 31, 1994, TCF's real estate and other non- performing assets of $16.6 million included commercial real estate of $10.5 million. The accrual of interest income is generally discontinued when loans become 90 days past due with respect to either principal or interest unless such loans are adequately secured and in the process of collection. Non-performing assets are summarized in the following table:
AT DECEMBER 31, ------------------------------------------------ (DOLLARS IN THOUSANDS) 1994 1993 1992 1991 1990 -------------------------------------------------------------------------------- Loans (1): Residential real estate. . . $ 4,203 $ 5,956 $ 8,418 $ 9,663 $ 4,915 Commercial real estate . . . 2,624 8,368 3,663 7,261 18,190 Commercial business. . . . . 562 1,842 1,978 580 1,193 Consumer . . . . . . . . . . 2,127 1,258 1,997 3,149 3,512 ------------------------------------------------ 9,516 17,424 16,056 20,653 27,810 Real estate and other assets. . . . . . . . . . . . 16,604 27,598 36,605 80,009 67,869 ------------------------------------------------ Total non-performing assets. . . . . . . . . . $26,120 $45,022 $52,661 $100,662 $95,679 ------------------------------------------------ ------------------------------------------------ Non-performing assets as a percentage of net loans. . . .86% 1.66% 2.00% 3.96% 3.57% Non-performing assets as a percentage of total assets . .52 .90 1.05 2.02 1.87 ---------------------------- (1) INCLUDED IN TOTAL LOANS IN THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION.
The following table sets forth information regarding TCF's delinquent loan portfolio, excluding non-accrual loans:
AT DECEMBER 31, ----------------------------------------------------- 1994 1993 -------------------------- -------------------------- (DOLLARS IN THOUSANDS) PRINCIPAL PERCENTAGE OF PRINCIPAL PERCENTAGE OF BALANCES(1) GROSS LOANS(1) BALANCES(1) GROSS LOANS(1) -------------------------------------------------------------------------------- Loans delinquent for: 30-59 days . . . . . . $ 6,925 .21% $ 6,481 .21% 60-89 days . . . . . . 4,847 .15 4,462 .14 90 days or more. . . . 2,017 .06 2,916 .09 ---------------------------------------------------- Total . . . . . . . $13,789 .42% $13,859 .44% ---------------------------------------------------- ---------------------------------------------------- ----------------------- (1) INCLUDES LOANS HELD FOR SALE.
TCF had accruing loans 90 days or more past due totaling $2 million at December 31, 1994 compared with $2.9 million at December 31, 1993. These loans are in the process of collection and management believes they are adequately secured. In addition to the non-accrual, restructured and accruing loans 90 days or more past due, there were commercial real estate and commercial business loans with an aggregate principal balance of $23.8 million outstanding at December 31, 1994 for which management has concerns regarding the ability of the borrowers to meet existing repayment terms. This amount consists of loans that were classified for regulatory purposes as substandard, doubtful or loss, or were to borrowers that currently are experiencing financial difficulties or that management believes may experience financial difficulties in the future. Although these loans TCF Financial Corporation and Subsidiaries 33 -- are secured by commercial real estate or other corporate assets, they may be subject to future modifications of their terms or may become non-performing. Management is monitoring the performance and classification of such loans and the financial condition of these borrowers. In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 is applicable to all creditors and to all loans, uncollateralized as well as collateralized, except large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value or at the lower of cost or fair value, leases, and debt securities. SFAS No. 114 requires that impaired loans be measured at the present value of expected future cash flows by discounting those cash flows at the loan's effective interest rate. The fair value of the collateral of an impaired collateral-dependent loan or an observable market price, if one exists, may be used as an alternative to discounting. As defined by SFAS No. 114, a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. SFAS No. 114 applies to all loans that are restructured in a troubled debt restructuring involving a modification of terms. In October 1994, the FASB issued SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." SFAS No. 118 amends SFAS No. 114 to allow a creditor to use existing methods for recognizing interest income on impaired loans, and to clarify disclosure requirements. SFAS No. 114 and SFAS No. 118 apply to financial statements issued for fiscal years beginning after December 15, 1994, with earlier application encouraged. Management has not yet determined what effect, if any, these pronouncements will have on TCF's results of operations. LIQUIDITY MANAGEMENT -- TCF manages its liquidity position to ensure that the funding needs of depositors and borrowers are met promptly and in a cost- effective manner. Asset liquidity arises from the ability to convert assets to cash as well as from the maturity of assets. Liability liquidity results from the ability of TCF to attract a diversity of funding sources to meet funding requirements promptly. TCF's wholly owned savings bank subsidiaries are required by federal regulations to maintain a monthly average minimum asset liquidity ratio of 5%. These subsidiaries have maintained average monthly liquidity ratios in excess of this requirement. Deposits are the primary source of TCF's funds for use in lending and for other general business purposes. In addition to deposits, TCF derives funds primarily from loan repayments, advances from the FHLB and proceeds from reverse repurchase borrowing agreements. Deposit inflows and outflows are significantly influenced by general interest rates, money market conditions, competition for funds, and other factors. Although TCF's levels of deposits have recently stabilized, its deposit inflows and outflows have been affected by these factors and may continue to be affected in future periods. Borrowings may be used to compensate for reductions in normal sources of funds, such as deposit inflows at less than projected levels, net deposit outflows, or to support expanded activities. Historically, TCF has borrowed primarily from the FHLB, from institutional sources under reverse repurchase agreements and, to a lesser extent, from other sources. Cash and due from banks increased $4.8 million during the year ended December 31, 1994 to $170.7 million. Cash of $307.2 million was provided by operating activities as proceeds from sales of loans held for sale of $1 billion were partially offset by originations and purchases of loans held for sale of $802.4 million. Cash of $282.2 million was used by investing activities reflecting loan originations of $1.2 billion, and purchases of loans, mortgage- backed securities and securities available for sale of $915.7 million. These cash outflows were partially offset by principal collections on loans and mortgage-backed securities of $1.1 billion and proceeds from the sales and maturities of securities available for sale of $808.9 million. Cash of $20.3 million was used by financing activities primarily due to net cash outflows on deposits and repurchases of common stock of $17.5 million, offset by net cash inflows on FHLB advances. Cash and due from banks increased $25.1 million during the year ended December 31, 1993 to $165.9 million. Cash of $60.6 million was used by operating activities, as originations and purchases of loans held for sale of $1.9 billion were substantially offset by proceeds from sales of loans held for sale of $1.8 billion. Cash of $357.1 million was provided by investing activities, reflecting proceeds from maturities of U.S. Government and other marketable securities of $1.2 billion and principal collections on loans and mortgage-backed securities of $1.3 billion. Also included in total cash provided by investing activities is $154.3 million of cash acquired as part of deposit acquisitions. These cash flows were substantially offset by loan originations of $1.1 billion, purchases of loans and mortgage-backed securities of $378 million and purchases of U.S. Government and other marketable securities of $1.2 billion. Cash of $285.1 million was used by financing activities primarily due to net cash outflows on deposits, FHLB advances, and other borrowings and the repayment of $28.8 million of subordinated capital notes. [Chart] -- Non-performing Assets at period-end 34 TCF Financial Corporation and Subsidiaries -- Potential sources of liquidity for TCF Financial Corporation include cash dividends from TCF Bank Minnesota fsb ("TCF Minnesota"), TCF's wholly owned subsidiary, cash flows from other direct subsidiaries, issuance of equity securities to employee benefit plans and interest income. TCF Minnesota's ability to pay dividends or make other capital distributions to TCF Financial Corporation is restricted by regulation and may require regulatory approval. At December 31, 1994, in addition to TCF Minnesota, TCF Financial Corporation directly owned four insurance agency subsidiaries engaging in the sale of single premium tax-deferred annuities. Dividends from these and other non-bank subsidiaries to TCF Financial Corporation were $4.6 million and $3.3 million for the years ended December 31, 1994 and 1993, respectively. Future dividends from these subsidiaries are dependent upon continued favorable tax treatment for single premium annuities, and legislative proposals have sought to limit or eliminate these tax benefits. Cash flows from the exercise of stock options under the Stock Option and Incentive Plan of TCF Financial were $272,000 and $1.1 million for the years ended December 31, 1994 and 1993, respectively. [Graph] -- Number of Checking Accounts at period-end DEPOSITS -- Deposits totaled $3.8 billion at December 31, 1994, down $282.9 million from December 31, 1993. Lower interest-cost checking and savings deposits totaled $1.6 billion, down $91.5 million from year-end 1993, and comprised 41% of total deposits at December 31, 1994. Checking and savings deposits are an important source of lower cost funds and fee income for TCF. TCF's weighted average rate for deposits, including non-interest bearing deposits, increased to 3.34% at December 31, 1994 from 3.15% at December 31, 1993, reflecting higher market rates. BORROWINGS -- Borrowings are used primarily to fund the purchases of investments and mortgage-backed securities held to maturity. These borrowings totaled $868.3 million as of December 31, 1994, compared with $575.4 million at year-end 1993. Securities sold under repurchase agreements totaled $170.1 million at December 31, 1994, an increase of $40.3 million from December 31, 1993. Advances from the FHLB increased $254.2 million from December 31, 1993 and totaled $650.9 million at December 31, 1994. TCF's weighted average rate on borrowings decreased to 6.07% at December 31, 1994, from 6.18% at December 31, 1993, and reflects the maturity of $115 million of higher rate FHLB advances which were subsequently replaced at a lower weighted average rate. STOCKHOLDERS' EQUITY -- Stockholders' equity at December 31, 1994 was $327.2 million, or 6.5% of total assets, up from $295.6 million, or 5.9% of total assets, at December 31, 1993. The increase in stockholders' equity is primarily due to net income of $57.4 million for the year ended December 31, 1994, partially offset by purchases of 535,000 shares of treasury stock at a cost of $17.5 million and the declaration of $12.3 million in common stock dividends. On January 25, 1994, TCF's board of directors authorized the repurchase of up to 5 percent of TCF common stock, or approximately 620,000 shares. The repurchased shares will be used for employee benefit plans and other corporate purposes. As previously mentioned, TCF purchased 535,000 shares of stock under this plan during the year ended December 31, 1994. During this period, 212,120 shares were issued out of treasury stock for restricted stock grants and employee benefit plans. REGULATORY CAPITAL REQUIREMENTS -- The following table sets forth TCF Minnesota's calculation of its tangible, core and risk-based capital and applicable percentages of adjusted assets at December 31, 1994 and 1993, together with the excess over the minimum capital requirements:
AT DECEMBER 31, ------------------------------------------ 1994 1993 ------------------- -------------------- (DOLLARS IN THOUSANDS) AMOUNT PERCENTAGE AMOUNT PERCENTAGE ----------------------------------------------------------------------------- Tangible capital . . . . . . . . $292,825 5.81% $282,295 5.65% Tangible capital requirement . . 75,634 1.50 75,000 1.50 ----------------------------------------- Excess . . . . . . . . . . . . $217,191 4.31% $207,295 4.15% ----------------------------------------- ----------------------------------------- Core capital . . . . . . . . . . $320,673 6.34% $313,400 6.25% Core capital requirement . . . . 151,704 3.00 150,496 3.00 ----------------------------------------- Excess . . . . . . . . . . . . $168,969 3.34% $162,904 3.25% ----------------------------------------- ----------------------------------------- Risk-based capital . . . . . . . $350,096 12.01% $341,188 12.25% Risk-based capital requirement . 233,292 8.00 222,906 8.00 ----------------------------------------- Excess . . . . . . . . . . . . $116,804 4.01% $118,282 4.25% ----------------------------------------- -----------------------------------------
TCF Financial Corporation and Subsidiaries 35 -- At December 31, 1994, TCF Minnesota and its wholly owned savings bank subsidiaries, TCF Bank Wisconsin fsb, TCF Bank Illinois fsb and TCF Michigan, exceeded their fully phased-in capital requirements. TCF Minnesota and its wholly owned savings bank subsidiaries believe that at December 31, 1994 they would be considered well-capitalized under guidelines established pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991. On January 1, 1995, the amount of qualifying supervisory goodwill includable in core and risk-based capital decreased from .375% to 0% of tangible assets. Although it will not impact TCF Minnesota's results of operations or its ability to meet the minimum regulatory capital requirements, this scheduled phase-out of supervisory goodwill reduced TCF Minnesota's computed core and risk-based capital levels by approximately $13.4 million on January 1, 1995. On January 1, 1994, the Office of Thrift Supervision ("OTS") adopted an amendment to its risk-based capital requirements that requires institutions with more than a normal level of interest rate risk to maintain additional risk-based capital. On October 13, 1994, the OTS issued a memorandum stating that the interest-rate risk capital deduction will be waived until the OTS publishes the process under which institutions may appeal such deductions. The revised anticipated effective date of this amendment is expected to be March 31, 1995. Management does not believe the interest rate risk component will have a significant impact on the risk-based capital requirements of TCF's wholly owned savings bank subsidiaries. ASSET/LIABILITY MANAGEMENT - INTEREST RATE RISK -- TCF's results of operations are dependent to a large degree on its net interest income, which is the difference between interest income and interest expense. Like most financial institutions, TCF's interest income and cost of funds are significantly affected by general economic conditions and by policies of regulatory authorities. The mismatch between maturities and interest rate sensitivities of assets and liabilities results in interest rate risk. Although the measure is subject to a number of assumptions and is only one of a number of measurements, management believes 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. In addition to the interest rate gap analysis, management also utilizes a simulation model to measure and manage TCF's interest rate risk. For an institution with a negative interest rate gap for a given period, the amount of its interest-bearing liabilities maturing or otherwise repricing within such period exceeds the amount of interest-earning assets repricing within the same period. In a rising interest rate environment, institutions with negative interest rate gaps will generally experience more immediate increases in the cost of their liabilities than in the yield on their assets. Conversely, the yield on assets of institutions with negative interest rate gaps will generally decrease more slowly than the cost of their funds in a falling interest rate environment. TCF's one-year adjusted interest rate gap was a negative $212.9 million, or (4)% of total assets, at December 31, 1994, compared with a positive $434.4 million, or 9% of total assets, at December 31, 1993. This reflects the decline in loan prepayment activity during 1994 as a result of the general increase in interest rates. Certain of TCF's assets and liabilities have repricing characteristics that are dependent on the direction of market interest rate changes, including consumer loans with interest rate floors and certificates of deposit that allow depositors to exercise a one-time option to reprice their certificates at the then current interest rates. As a result, although TCF's one-year adjusted interest rate gap was (4)% at December 31, 1994, TCF's interest rate gap calculated under rising or falling interest rate scenarios would be based on repricing assumptions different from those utilized to calculate the interest rate gap at December 31, 1994. TCF's Asset/Liability Management Committee manages TCF's interest rate risk based on interest rate expectations and other factors. The amounts in the maturity/rate sensitivity table below represent management's estimates and assumptions, which in some cases may differ from regulatory assumptions. Also, the amounts 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 and competition. Decisions by management to purchase or sell assets, or retire debt could change the maturity/repricing and spread relationships. 36 TCF Financial Corporation and Subsidiaries -- The following table summarizes TCF's interest rate gap position at December 31, 1994:
MATURITY/RATE SENSITIVITY ------------------------------------------------ WITHIN (DOLLARS IN THOUSANDS) 1 YEAR 1-3 YEARS 3+ YEARS TOTAL ---------------------------------------------------------------------------------------- Interest-earning assets: Loans held for sale. . . . . . . . $ 200,509 $ - $ - $ 200,509 Securities available for sale. . . 64,771 1,014 - 65,785 Mortgage-backed securities held to maturity (1). . . . . . . . . . 266,895 267,587 580,131 1,114,613 Real estate loans (1). . . . . . . 699,731 542,950 647,509 1,890,190 Other loans (1). . . . . . . . . . 1,133,765 38,087 19,766 1,191,618 Investments (2) . . . . . . . . . 243,651 - - 243,651 ------------------------------------------------ 2,609,322 849,638 1,247,406 4,706,366 ------------------------------------------------ Interest-bearing liabilities: Deposits (3) . . . . . . . . . . . 2,259,579 621,081 938,954 3,819,614 Federal Home Loan Bank advances. . 388,405 261,114 1,344 650,863 Other borrowings . . . . . . . . . 179,198 1,340 2,382 182,920 Subordinated capital notes . . . . - - 34,500 34,500 ------------------------------------------------ 2,827,182 883,535 977,180 4,687,897 ------------------------------------------------ Interest-earning assets over (under) interest-bearing liabilities . . . (217,860) (33,897) 270,226 18,469 Impact of interest rate exchange agreement. . . . . . . . . . . . . 5,000 (5,000) - - ------------------------------------------------ Adjusted gap . . . . . . . . . . . . $ (212,860) $ (38,897) $ 270,226 $ 18,469 ------------------------------------------------ ------------------------------------------------ Adjusted cumulative gap. . . . . . . $ (212,860) $(251,757) $ 18,469 $ 18,469 ------------------------------------------------ ------------------------------------------------ Adjusted cumulative gap as a percentage of total assets: At December 31, 1994 . . . . . . (4)% (5)% - % - % ------------------------------------------------ ------------------------------------------------ At December 31, 1993. . . . . . 9 % 3 % (1)% (1)% ------------------------------------------------ ------------------------------------------------ ___________________________________ (1) BASED UPON A) CONTRACTUAL MATURITY, B) REPRICING DATE, IF APPLICABLE, C) SCHEDULED REPAYMENTS OF PRINCIPAL AND D) PROJECTED PREPAYMENTS OF PRINCIPAL BASED UPON EXPERIENCE. (2) INCLUDES INTEREST-BEARING DEPOSITS WITH BANKS, FEDERAL FUNDS SOLD, U.S. GOVERNMENT AND OTHER MARKETABLE SECURITIES HELD TO MATURITY AND FHLB STOCK. (3) INCLUDES NON-INTEREST BEARING DEPOSITS. MONEY MARKET ACCOUNTS AND 11% OF CHECKING ACCOUNTS ARE INCLUDED IN AMOUNTS REPRICING WITHIN ONE YEAR. IN ADDITION, 51% AND 34% OF PASSBOOK AND STATEMENT ACCOUNTS ARE INCLUDED IN THE "WITHIN 1 YEAR" AND "1-3 YEARS" CATEGORIES, RESPECTIVELY. ALL REMAINING PASSBOOK AND STATEMENT AND CHECKING ACCOUNTS ARE ASSUMED TO MATURE IN THE "3+ YEARS" CATEGORY. WHILE MANAGEMENT BELIEVES THESE ASSUMPTIONS ARE WELL BASED, NO ASSURANCE CAN BE GIVEN THAT AMOUNTS ON DEPOSIT IN CHECKING, PASSBOOK AND STATEMENT ACCOUNTS WILL NOT SIGNIFICANTLY DECREASE OR BE REPRICED IN THE EVENT OF A GENERAL RISE IN INTEREST RATES. AT DECEMBER 31, 1993, 10% OF CHECKING ACCOUNTS WERE INCLUDED IN AMOUNTS REPRICING WITHIN ONE YEAR, AND 46% AND 35% OF PASSBOOK AND STATEMENT ACCOUNTS WERE INCLUDED IN THE "WITHIN 1 YEAR" AND "1-3 YEARS" CATEGORIES, RESPECTIVELY.
TCF Financial Corporation and Subsidiaries 37 -- CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands, except per-share data)
AT DECEMBER 31, ----------------------- 1994 1993 ----------------------------------------------------------------------------- ASSETS Cash and due from banks. . . . . . . . . . . . . . $ 170,687 $ 165,905 Interest-bearing deposits with banks . . . . . . . 190,698 10,512 Federal funds sold . . . . . . . . . . . . . . . . 6,900 105,500 U.S. Government and other marketable securities held to maturity (fair value of $3,526 and $81,344) . . . . . . . . . . . . . . . . . . 3,528 81,260 Federal Home Loan Bank stock, at cost. . . . . . . 42,525 37,849 Securities available for sale (amortized cost of $65,935 in 1994 and fair value of $10,236 in 1993). . . . . . . . . . . . . . . 65,785 10,003 Loans held for sale. . . . . . . . . . . . . . . . 200,509 421,893 Mortgage-backed securities held to maturity (fair value of $1,066,390 and $1,270,743) . . . 1,114,613 1,237,202 Loans: Residential real estate. . . . . . . . . . . . . 1,261,690 1,063,158 Commercial real estate . . . . . . . . . . . . . 634,770 687,202 Commercial business. . . . . . . . . . . . . . . 100,397 89,368 Consumer . . . . . . . . . . . . . . . . . . . . 1,105,971 919,027 Unearned discounts and deferred fees . . . . . . (21,020) (13,609) ----------------------- Total loans . . . . . . . . . . . . . . . . . 3,081,808 2,745,146 Allowance for loan losses . . . . . . . . . . (31,648) (26,055) ----------------------- Net loans . . . . . . . . . . . . . . . . . 3,050,160 2,719,091 Premises and equipment . . . . . . . . . . . . . . 85,083 79,654 Real estate: Total real estate. . . . . . . . . . . . . . . . 16,286 27,521 Allowance for real estate losses . . . . . . . . (730) (1,968) ----------------------- Net real estate . . . . . . . . . . . . . . . 15,556 25,553 Accrued interest receivable. . . . . . . . . . . . 33,076 29,418 Goodwill . . . . . . . . . . . . . . . . . . . . . 13,355 14,549 Deposit base intangibles . . . . . . . . . . . . . 14,493 16,556 Other assets . . . . . . . . . . . . . . . . . . . 61,301 70,585 ----------------------- $5,068,269 $5,025,530 ----------------------- ----------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Checking . . . . . . . . . . . . . . . . . . . . $ 818,823 $ 800,123 Passbook and statement . . . . . . . . . . . . . 745,546 855,781 Money market . . . . . . . . . . . . . . . . . . 431,309 469,694 Certificates . . . . . . . . . . . . . . . . . . 1,823,936 1,976,960 ----------------------- Total deposits. . . . . . . . . . . . . . . . 3,819,614 4,102,558 ----------------------- Securities sold under repurchase agreements. . . . 170,143 129,812 Federal Home Loan Bank advances. . . . . . . . . . 650,863 396,692 Subordinated capital notes . . . . . . . . . . . . 34,500 34,500 Other borrowings . . . . . . . . . . . . . . . . . 12,777 14,428 ----------------------- Total borrowings . . . . . . . . . . . . . . 868,283 575,432 Accrued interest payable . . . . . . . . . . . . . 7,603 10,248 Accrued expenses and other liabilities . . . . . . 45,578 41,684 ----------------------- Total liabilities . . . . . . . . . . . . . . 4,741,078 4,729,922 ----------------------- 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, 70,000,000 shares authorized; 12,412,071 and 12,361,569 shares issued . . . . . . . . 124 124 Additional paid-in capital . . . . . . . . . . . 153,740 150,602 Unamortized deferred compensation. . . . . . . . (6,986) (1,272) Retained earnings, subject to certain restrictions. . . . . . . . . . . . . . . . . 191,608 146,502 Loan to Executive Deferred Compensation Plan . . (195) (348) Unrealized loss on securities available for sale, net . . . . . . . . . . . . . . . . (88) - Treasury stock, at cost, 322,880 shares in 1994. (11,012) - ----------------------- Total stockholders' equity. . . . . . . . . . 327,191 295,608 ----------------------- $5,068,269 $5,025,530 ----------------------- -----------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 38 TCF Financial Corporation and Subsidiaries -- CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, --------------------------------- (IN THOUSANDS, EXCEPT PER-SHARE DATA) 1994 1993 1992 ------------------------------------------------------------------------------ INTEREST INCOME: Interest on loans. . . . . . . . . . . . $250,286 $230,606 $249,897 Interest on loans held for sale. . . . . 16,486 21,986 19,685 Interest on mortgage-backed securities held to maturity. . . . . . 79,219 93,254 106,424 Interest on investments. . . . . . . . . 7,977 10,284 20,019 Interest on securities available for sale . . . . . . . . . . . . . . . 3,673 1,471 2,406 -------- -------- -------- Total interest income. . . . . . . . . 357,641 357,601 398,431 -------- -------- -------- INTEREST EXPENSE: Interest on deposits . . . . . . . . . . 120,614 136,253 185,539 Interest on borrowings . . . . . . . . . 31,898 36,924 45,686 -------- -------- -------- Total interest expense . . . . . . . . 152,512 173,177 231,225 -------- -------- -------- Net interest income . . . . . . . . 205,129 184,424 167,206 Provision for credit losses. . . . . . . 10,901 21,933 13,190 -------- -------- -------- Net interest income after provision for credit losses . . . . . . . . . 194,228 162,491 154,016 -------- -------- -------- NON-INTEREST INCOME: Fee and service charge revenues. . . . . 75,449 72,130 66,582 Data processing revenue. . . . . . . . . 8,988 8,120 7,310 Commissions on sales of annuities. . . . 10,818 9,446 9,327 Title insurance revenues . . . . . . . . 10,274 15,229 9,984 Gain on sale of mortgage-backed securities, net. . . . . . . . . . . . - - 718 Gain on sale of investments, net . . . . - - 114 Gain on sale of loans held for sale, net. . . . . . . . . . . . . . . 2,367 10,059 6,889 Gain on sale of securities available for sale, net. . . . . . . . . . . . . 2,035 649 3,362 Gain on sale of loan servicing, net. . . 2,353 137 - Other . . . . . . . . . . . . . . . . . 5,010 3,845 3,058 -------- -------- -------- Total non-interest income. . . . . . . 117,294 119,615 107,344 -------- -------- -------- NON-INTEREST EXPENSE: Compensation and employee benefits . . . 99,071 90,045 82,388 Occupancy and equipment, net . . . . . . 35,357 32,834 29,542 Advertising and promotions . . . . . . . 11,666 11,254 9,423 Federal deposit insurance premiums and assessments. . . . . . . . . . . . 9,871 8,979 9,606 Amortization of goodwill and other intangibles. . . . . . . . . . . 3,257 2,957 3,830 Provision for real estate losses . . . . 2,373 11,743 22,054 Merger-related expense . . . . . . . . . - 5,494 - Other . . . . . . . . . . . . . . . . . 52,262 52,182 46,302 -------- -------- -------- Total non-interest expense . . . . . . 213,857 215,488 203,145 -------- -------- -------- Income before income tax expense. . 97,665 66,618 58,215 Income tax expense . . . . . . . . . . . 40,302 28,647 12,956 -------- -------- -------- Net income . . . . . . . . . . . . $ 57,363 $ 37,971 $ 45,259 -------- -------- -------- -------- -------- -------- PER COMMON SHARE: Net income . . . . . . . . . . . . . . . $ 4.63 $ 3.04 $ 3.74 -------- -------- -------- -------- -------- -------- Dividends declared . . . . . . . . . . . $ 1.00 $ .6875 $ .475 -------- -------- -------- -------- -------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. TCF Financial Corporation and Subsidiaries 39 -- CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, --------------------------------------- (In Thousands) 1994 1993 1992 ---------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,363 $ 37,971 $ 45,259 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 9,299 7,304 7,559 Amortization of goodwill and other intangibles. . . . . . . . . . . . . . . 3,257 2,957 3,830 Amortization of fees, discounts and premiums. . . . . . . . . . . . . . . . (2,149) (7,672) (7,718) Proceeds from sales of loans held for sale. . . . . . . . . . . . . . . . . 1,013,475 1,781,103 1,584,988 Principal collected on loans held for sale. . . . . . . . . . . . . . . . . 9,508 18,373 11,588 Originations and purchases of loans held for sale . . . . . . . . . . . . . (802,364) (1,932,202) (1,639,234) Net (increase) decrease in other assets and liabilities, and accrued interest . . . . . . . . . . . . . . . . . . . . 7,487 1,719 (21,237) Provisions for credit and real estate losses. . . . . . . . . . . . . . . . 13,274 33,676 35,244 Gain on sale of securities available for sale, net. . . . . . . . . . . . . (2,035) (649) (3,362) Gain on sale of mortgage-backed securities and investments, net . . . . . . - - (832) Gain on sale of loan servicing, net . . . . . . . . . . . . . . . . . . . . (2,353) (137) - Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,451 (3,055) 1,692 --------------------------------------- Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249,850 (98,583) (27,482) --------------------------------------- Net cash provided (used) by operating activities . . . . . . . . . . . 307,213 (60,612) 17,777 --------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of mortgage-backed securities . . . . . . . . . . . . . - - 23,752 Principal collected on mortgage-backed securities . . . . . . . . . . . . . 252,129 404,569 322,549 Purchases of mortgage-backed securities . . . . . . . . . . . . . . . . . . (288,229) (376,615) (356,760) Principal collected on loans . . . . . . . . . . . . . . . . . . . . . . . 821,035 887,846 727,160 Loan originations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,174,244) (1,051,272) (857,135) Purchases of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . (426) (1,411) (12,123) Net (increase) decrease in interest-bearing deposits with banks . . . . . . (180,186) 115,965 2,030 Proceeds from sales of securities available for sale. . . . . . . . . . . . 155,217 146,884 91,723 Proceeds from maturities of securities available for sale . . . . . . . . . 653,731 34,455 1,009 Purchases of securities available for sale. . . . . . . . . . . . . . . . . (627,059) - (37,828) Proceeds from sales of U.S. Government and other marketable securities . . - - 4,048 Proceeds from maturities of U.S. Government and other marketable securities . . . . . . . . . . . . . . . . . . . . . . . 667 1,195,348 611,236 Purchases of U.S. Government and other marketable securities . . . . . . . - (1,158,945) (554,110) Proceeds from redemption of FHLB stock. . . . . . . . . . . . . . . . . . . - 1,121 2,953 Purchases of term federal funds sold. . . . . . . . . . . . . . . . . . . . (76,000) (80,800) (160,000) Proceeds from maturities of term federal funds sold . . . . . . . . . . . . 91,000 115,800 180,000 Net decrease (increase) in short-term federal funds sold. . . . . . . . . . 83,600 (39,500) (20,000) Proceeds from sales of real estate. . . . . . . . . . . . . . . . . . . . . 22,613 30,302 37,073 Payments for acquisition and improvement of real estate . . . . . . . . . . (2,291) (3,591) (7,039) Proceeds from sale of loan servicing. . . . . . . . . . . . . . . . . . . . 2,807 137 - Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . (14,806) (17,341) (8,652) Acquisitions of deposits, net of cash acquired. . . . . . . . . . . . . . . - 154,257 - Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,723) (143) 4,605 --------------------------------------- Net cash provided (used) by investing activities. . . . . . . . . . . . . (282,165) 357,066 (5,509) --------------------------------------- CONTINUED ON FOLLOWING PAGE. 40 TCF Financial Corporation and Subsidiaries -- CONSOLIDATED STATEMENTS OF CASH FLOWS ( CONTINUED ) YEAR ENDED DECEMBER 31, ------------------------------------------ (IN THOUSANDS) 1994 1993 1992 ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (282,944) $ (140,661) $ (52,282) Proceeds from securities sold under repurchase agreements. . . . . . . . . . . . 2,241,212 1,158,036 414,702 Payments on securities sold under repurchase agreements. . . . . . . . . . . . . (2,200,881) (1,128,224) (414,702) Proceeds from subordinated capital notes . . . . . . . . . . . . . . . . . . . . - - 34,500 Payments on subordinated capital notes . . . . . . . . . . . . . . . . . . . . . - (28,750) - Proceeds from FHLB advances. . . . . . . . . . . . . . . . . . . . . . . . . . . 924,663 733,291 441,409 Payments on FHLB advances. . . . . . . . . . . . . . . . . . . . . . . . . . . . (670,492) (862,930) (450,120) Proceeds from other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . 148,350 5,000 - Payments on other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . (150,249) (9,612) (5,120) Proceeds from issuance of common stock, net. . . . . . . . . . . . . . . . . . . - - 32,019 Repurchases of common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . (17,524) - - Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,401) (11,285) (1,330) --------------------------------------- Net cash used by financing activities. . . . . . . . . . . . . . . . . . . . . (20,266) (285,135) (924) --------------------------------------- Net increase in cash and due from banks. . . . . . . . . . . . . . . . . . . . . 4,782 11,319 11,344 RCG cash flows for six months ended December 31, 1992. . . . . . . . . . . . . . - 13,807 - Cash and due from banks at beginning of year . . . . . . . . . . . . . . . . . . 165,905 140,779 129,435 --------------------------------------- Cash and due from banks at end of year . . . . . . . . . . . . . . . . . . . . . $ 170,687 $ 165,905 $ 140,779 --------------------------------------- --------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest on deposits and borrowings. . . . . . . . . . . . . . . . . . . . . . $ 154,859 $ 173,715 $ 235,677 --------------------------------------- --------------------------------------- Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,750 $ 23,126 $ 14,249 --------------------------------------- --------------------------------------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES: Transfer of loans to real estate acquired through foreclosure and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,771 $ 36,102 $ 32,069 --------------------------------------- --------------------------------------- Loans to facilitate sale of real estate acquired through foreclosure . . . . . . $ 1,764 $ 9,680 $ 25,526 --------------------------------------- --------------------------------------- Transfer of loans to loans held for sale . . . . . . . . . . . . . . . . . . . . $ - $ 2,325 $ 48,917 --------------------------------------- --------------------------------------- Transfer of U.S. Government and other marketable securities to securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . $ 77,297 $ 33,258 $ 73,858 --------------------------------------- --------------------------------------- Transfer of mortgage-backed securities to securities available for sale. . . . . $ 156,755 $ - $ 215,473 --------------------------------------- ---------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. TCF Financial Corporation and Subsidiaries 41 -- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
LOANS TO UNREALIZED EXECUTIVE GAIN COMMON STOCK DEFERRED (LOSS) ON ----------------- UNAMORTIZED COMPEN- SECURITIES NUMBER ADDITIONAL DEFERRED SATION AVAILABLE OF SHARES PAID-IN COMPEN- RETAINED PLAN FOR SALE, TREASURY (DOLLARS IN THOUSANDS) ISSUED AMOUNT CAPITAL SATION EARNINGS AND ESOP NET STOCK TOTAL ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1991.......... 9,786,381 $ 98 $106,809 $(1,917) $ 76,952 $(1,307) $ - $ - $180,635 Net income.......................... - - - - 45,259 - - - 45,259 Dividends on common stock........... - - - - (5,642) - - - (5,642) Issuance of shares of common stock, net................. 1,840,000 18 32,001 - - - - - 32,019 Cancellation of shares of restricted stock and compensatory stock option grants............................ (2,400) - (43) 21 - - - - (22) Amortization of deferred compensation...................... - - - 737 - - - - 737 Exercise of stock options........... 360,761 4 5,266 - - - - - 5,270 Issuance of stock to employee benefit plans............ 121,873 1 2,857 - - - - - 2,858 Payments on Loan to Executive Deferred Compensation Plan........ - - - - - 613 - - 613 Payments on Loan to Employee Stock Ownership Plan.............. - - - - - 58 - - 58 ---------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1992.......... 12,106,615 121 146,890 (1,159) 116,569 (636) - - 261,785 RCG activity for six months ended December 31, 1992: Net income...................... - - - - 946 - - - 946 Dividends on common stock....... - - - - (525) - - - (525) Exercise of stock options....... 43,076 - 223 - - - - - 223 Payments on Loan to Employee Stock Ownership Plan.......... - - - - - 32 - - 32 Pooled operations for year ended December 31, 1993: Net income.......................... - - - - 37,971 - - - 37,971 Dividends on common stock........... - - - - (8,459) - - - (8,459) Issuance of shares of restricted stock.................. 21,000 - 689 (689) - - - - - Issuance of shares under Officers' Stock Performance Investment Plan................... 29,961 1 971 (322) - - - - 650 Repurchase and cancellation of shares............................ (464) - (15) - - - - - (15) Grant of shares of restricted stock to outside directors........ - - - (49) - - - - (49) Cancellation of shares of restricted stock ................. (500) - (9) (2) - - - - (11) Amortization of deferred compensation...................... - - - 949 - - - - 949 Exercise of stock options........... 161,881 2 1,853 - - - - - 1,855 Payments on Loan to Executive Deferred Compensation Plan........ - - - - - 253 - - 253 Payments on Loan to Employee Stock Ownership Plan.............. - - - - - 3 - - 3 ---------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1993.......... 12,361,569 124 150,602 (1,272) 146,502 (348) - - 295,608 Cumulative effect of change in accounting for securities available for sale at January 1, 1994, net of tax....... - - - - - - 1,331 - 1,331 Net income.......................... - - - - 57,363 - - - 57,363 Dividends on common stock........... - - - - (12,257) - - - (12,257) Purchase of 535,000 shares to be held in treasury............... - - - - - - - (17,524) (17,524) Issuance of 189,200 shares of restricted stock, of which 183,200 shares were from treasury..................... 6,000 - 2,007 (7,541) - - - 5,550 16 Grant of 28,500 shares of restricted stock to outside directors from treasury........... - - 117 (1,065) - - - 948 - Issuance of 420 shares to employee benefit plans from treasury....... - - 4 - - - - 14 18 Issuance of shares under Officers' Stock Performance Investment Plan.............................. 23,045 - 705 - - - - - 705 Cancellation of shares of restricted stock.................. (1,500) - (56) 40 - - - - (16) Amortization of deferred compensation...................... - - - 2,852 - - - - 2,852 Exercise of stock options........... 22,957 - 361 - - - - - 361 Payments on Loan to Executive Deferred Compensation Plan........ - - - - - 153 - - 153 Change in unrealized gain (loss) on securities available for sale, net......................... - - - - - - (1,419) - (1,419) ---------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994.......... 12,412,071 $124 $153,740 $(6,986) $191,608 $ (195) $ (88) $(11,012) $327,191 ---------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 42 TCF Financial Corporation and Subsidiaries -- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of TCF Financial Corporation and its wholly owned subsidiaries. TCF Financial Corporation ("TCF" or the "Company") is a holding company engaged primarily in retail community banking through its wholly owned subsidiary, TCF Bank Minnesota fsb ("TCF Minnesota" or the "Bank"). All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior years' financial statements to conform to the current year presentation. For consolidated statements of cash flows purposes, cash and cash equivalents include cash and due from banks. CHANGE IN METHOD OF ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES -- In May 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." TCF adopted SFAS No. 115 effective January 1, 1994. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting method. Under the provisions of SFAS No. 115, debt securities that TCF has both the positive intent and ability to hold to maturity are classified as held to maturity and carried at amortized cost. Debt securities that TCF does not have the positive intent and ability to hold to maturity and all marketable equity securities are classified as available for sale and carried at fair value. Unrealized holding gains and losses on securities classified as available for sale are reported as a separate component of TCF's stockholders' equity, net of deferred income taxes. Prior to 1994, debt and equity securities were either classified as U.S. Government and other marketable securities or mortgage-backed securities and were carried at amortized cost, or as securities held for sale and carried at the lower of cost or market. As permitted by SFAS No. 115, TCF reclassified $77.3 million of its debt securities from U.S. Government and other marketable securities and $156.8 million of its mortgage-backed securities to securities available for sale on January 1, 1994. The cumulative effect of adopting SFAS No. 115 at January 1, 1994 increased TCF's beginning stockholders' equity by $1.3 million, net of deferred income taxes of $925,000. INVESTMENTS AND MORTGAGE-BACKED SECURITIES HELD TO MATURITY -- Investments and mortgage-backed securities classified as held to maturity are carried at cost, adjusted for amortization of premiums or accretion of discounts using methods which approximate a level yield. SECURITIES AVAILABLE FOR SALE -- Investments and mortgage-backed securities classified as available for sale are carried at fair value with the unrealized holding gains or losses, net of deferred income taxes, reported as a separate component of stockholders' equity. Cost of securities sold is determined on a specific identification basis and gains or losses on sales of securities available for sale are recognized at trade dates. Securities classified as available for sale at December 31, 1993 were carried at the lower of cost or market. LOANS HELD FOR SALE -- Residential real estate and education loans held for sale are carried at the lower of cost or market determined on an aggregate basis. Cost of loans sold is determined on a specific identification basis and gains or losses on sales of loans held for sale are recognized at settlement dates. Net fees and costs associated with originating and acquiring loans held for sale are deferred and are included in the basis for determining the gain or loss on sales of loans held for sale. LOANS -- Net fees and costs associated with originating and acquiring loans are deferred and amortized over the lives of the loans. Net fees and costs associated with loan commitments are deferred in other assets or other liabilities until the loan is advanced. Discounts and premiums on loans purchased, net deferred fees and unearned discounts and finance charges, which are considered yield adjustments, are amortized using methods which approximate a level yield over the estimated remaining lives of the loans. The provision for credit losses is based on management's periodic analysis of the loan portfolio and off-balance-sheet financial guarantees. In this analysis, management considers factors including, but not limited to, general economic conditions, loan portfolio composition, appraisals of collateral, financial guarantee exposure and historical experience. Loans are charged off to the extent they are deemed to be uncollectible. The provision for credit losses is based on estimates and ultimate losses may vary from current estimates. These estimates are reviewed periodically and, as adjustments become necessary, are reported in earnings in the periods in which they become known. Interest income is accrued on loan balances outstanding. Loans are reviewed regularly by management and are placed on non-accrual status when the collection of interest or principal is more than 90 days past due, unless the loan is adequately secured and in the process of collection. When a loan is placed on non-accrual status, unless collection of all principal and interest is considered to be assured, uncollected interest accrued in prior years is charged against the allowance for loan losses. Interest accrued in the current year is reversed. Interest payments received on non-accrual loans are generally applied to principal unless the remaining loan principal balance has been determined to be fully collectible. Cost of loans sold is determined on a specific identification basis and gains or losses on sales of loans are recognized at trade dates. TCF Financial Corporation and Subsidiaries 43 -- PREMISES AND EQUIPMENT -- Premises and equipment are carried at cost and are depreciated or amortized on a straight-line basis over their estimated useful lives. REAL ESTATE -- Real estate in judgment, real estate acquired through foreclosure and in-substance foreclosures are recorded at the lower of cost or fair value minus estimated costs to sell at the date of transfer to real estate. If the fair value of an asset minus the estimated costs to sell should decline to less than the carrying amount of the asset, the deficiency is recognized through the allowance for real estate losses. In-substance foreclosures consist of loans accounted for as foreclosed property even though actual foreclosure has not occurred. Although the collateral underlying these loans has not been repossessed, the borrower has little or no equity in the collateral at its current estimated fair value, proceeds for repayment are expected to come only from the operation or sale of the collateral, and either the borrower has abandoned control of the property or it is doubtful that the borrower will rebuild equity in the collateral or repay the loan by other means in the foreseeable future. The provision for real estate losses is based on management's periodic analysis of real estate holdings. In this analysis, management considers factors including, but not limited to, general economic and market conditions, geographic location, the composition and appraisals of the real estate holdings and property conditions. PURCHASED MORTGAGE SERVICING RIGHTS -- The costs of purchased mortgage servicing rights are capitalized and are amortized over the estimated remaining lives of the underlying loans using methods which approximate a level yield. The carrying value of purchased mortgage servicing rights is periodically evaluated in relation to estimated future servicing net revenues. INVESTMENT IN JOINT VENTURE -- TCF participates in a joint venture engaged in the origination of residential real estate loans. The investment, which is 50% owned by TCF, is accounted for using the equity method of accounting. TCF's investment in the joint venture is included in other assets in the Consolidated Statements of Financial Condition and totaled $335,000 and $288,000 at December 31, 1994 and 1993, respectively. INTANGIBLE ASSETS -- Goodwill resulting from acquisitions initiated or completed prior to September 30, 1982 is amortized over 25 years on a straight-line basis. For acquisitions initiated or completed after September 30, 1982, goodwill is amortized by the level-yield method based upon the outstanding balances, and over the estimated remaining lives, of the long-term assets acquired. Deposit base intangibles are amortized over 10 years on a straight-line basis. The accumulated reduction, write-off and amortization of goodwill and deposit base intangibles totaled $166.8 million and $163.6 million at December 31, 1994 and 1993, respectively. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS -- TCF enters into sales of securities under repurchase agreements (reverse repurchase agreements). Such agreements are treated as financings, and the obligations to repurchase securities sold are reflected as liabilities in the Consolidated Statements of Financial Condition. The securities underlying the agreements remain in the asset accounts in the Consolidated Statements of Financial Condition. ADVERTISING AND PROMOTIONS -- Expenditures for advertising costs are expensed in the year incurred. INCOME TAXES -- Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. EARNINGS PER SHARE -- The weighted average number of common and common equivalent shares outstanding used to compute earnings per share were 12,382,677, 12,503,989 and 12,111,940 for the years ended December 31, 1994, 1993 and 1992, respectively. 2) BUSINESS COMBINATIONS AND ACQUISITIONS GREAT LAKES BANCORP, A FEDERAL SAVINGS BANK -- On February 8, 1995, TCF completed its acquisition of Great Lakes Bancorp, A Federal Savings Bank ("Great Lakes"), a Michigan-based savings bank with $2.8 billion in assets, $1.6 billion in deposits, 39 offices in Michigan and five offices in western Ohio. In connection with the acquisition, TCF issued approximately 4.8 million shares of its common stock for all of the outstanding common shares of Great Lakes. In addition, each outstanding share of Great Lakes preferred stock was exchanged for one share of TCF preferred stock with substantially identical terms. TCF intends to redeem the 2.7 million shares of preferred stock as soon as practicable after July 1, 1995, the date the preferred stock first becomes redeemable at the option of the issuer. TCF also assumed the obligation to issue common stock upon the exercise or conversion of the outstanding warrants to purchase Great Lakes common stock, the outstanding employee and director options to purchase Great Lakes common stock, and the outstanding 7-1/4% convertible subordinated debentures due 2011 of Great Lakes. This acquisition was accounted for as a pooling-of-interests and, accordingly, TCF's historical financial statements presented in future reports will be restated to include the accounts and results of operations of Great Lakes. In connection with the acquisition, it is expected that a pretax merger-related charge of approximately $51.4 million will be incurred during the 1995 first quarter, primarily to accrue for specific, identified costs related to the merger. 44 TCF Financial Corporation and Subsidiaries -- As a result of the acquisition, Great Lakes merged into TCF's existing Michigan-based wholly owned savings bank subsidiary, TCF Bank Michigan fsb ("TCF Michigan"). The resulting savings bank is operated as a direct subsidiary of TCF and retained the Great Lakes name, certain members of its board of directors, and headquarters in Ann Arbor, Michigan. The resulting savings bank operates 54 offices in Michigan and five offices in western Ohio. The following unaudited pro forma data summarizes the combined results of operations and financial condition of TCF and Great Lakes as if the acquisition had been consummated at the beginning of each period presented. SELECTED OPERATIONS DATA:
YEAR ENDED DECEMBER 31, ------------------------------- (IN THOUSANDS, EXCEPT PER-SHARE DATA) 1994 1993 1992 ----------------------------------------------------------------------------- Interest income............................ $552,482 $558,645 $630,442 Interest expense........................... 273,330 297,449 383,170 ------------------------------- Net interest income...................... 279,152 261,196 247,272 Provision for credit losses................ 11,951 31,933 34,790 ------------------------------- Net interest income after provision for credit losses...................... 267,201 229,263 212,482 Non-interest income........................ 125,219 139,005 125,524 Non-interest expense....................... 275,835 276,143 270,112 ------------------------------- Income before income tax expense and extraordinary item..................... 116,585 92,125 67,894 Income tax expense......................... 46,402 36,797 15,906 ------------------------------- Income before extraordinary item......... 70,183 55,328 51,988 Extraordinary item, net.................... - (157) 339 ------------------------------- Net income............................... 70,183 55,171 52,327 Dividends on preferred stock............... 2,710 2,769 2,911 ------------------------------- Net income available to common stockholders........................... $ 67,473 $ 52,402 $ 49,416 ------------------------------- ------------------------------- Earnings per common share.................. $ 3.91 $ 3.07 $ 3.03 ------------------------------- ------------------------------- SELECTED FINANCIAL CONDITION DATA: AT DECEMBER 31, --------------------- (IN THOUSANDS) 1994 1993 ----------------------------------------------------------------------------- Total assets.......................................... $7,845,588 $7,630,654 --------------------- --------------------- Total loans........................................... $5,104,686 $4,628,858 --------------------- --------------------- Total mortgage-backed securities held to maturity..... $1,601,200 $1,751,916 --------------------- --------------------- Total deposits........................................ $5,399,718 $5,695,928 --------------------- --------------------- Total borrowings...................................... $1,884,995 $1,413,367 --------------------- --------------------- Total stockholders' equity............................ $ 475,469 $ 428,065 --------------------- ---------------------
The significant accounting and reporting policies of TCF and Great Lakes differ in certain respects. As required in a pooling-of-interests business combination, the unaudited pro forma data above reflects certain adjustments to conform Great Lakes' accounting methods to those of TCF. REPUBLIC CAPITAL GROUP, INC. -- On April 21, 1993, TCF issued approximately 2.2 million shares of its common stock for all of the outstanding common stock of Republic Capital Group, Inc. ("RCG"), a Milwaukee-based thrift holding company with approximately $1 billion in assets. As a result of the merger, TCF acquired RCG's two wholly owned subsidiaries, Republic Capital Bank, F.S.B. (now TCF Bank Wisconsin fsb), and Peerless Federal Savings Bank (now TCF Bank Illinois fsb). Both TCF Bank Wisconsin fsb ("TCF Wisconsin") and TCF Bank Illinois fsb ("TCF Illinois") are wholly owned subsidiaries of TCF Minnesota. Subsequent to the merger, TCF Minnesota's Illinois Division was merged into TCF Illinois. The consolidated financial statements of TCF give effect to the merger, which has been accounted for as a pooling-of-interests combination. Accordingly, TCF's consolidated financial statements for periods prior to the combination have been restated to include the accounts and the results of operations of RCG for all periods presented, except for dividends declared per share. Prior to the merger, RCG's fiscal year ended June 30. RCG's results of operations for the six months ended December 31, 1992 are not reflected in the Consolidated Statements of Operations or the Consolidated Statements of Cash Flows. An adjustment has been made to stockholders' equity as of January 1, 1993 to adjust for the effect of excluding RCG's results of operations for the six months ended December 31, 1992. ACQUISITIONS ACCOUNTED FOR AS PURCHASES -- On August 27, 1993, TCF Michigan, a newly formed subsidiary of TCF Minnesota, acquired from the Resolution Trust Corporation ("RTC") $220.8 million of insured deposits and 15 branch offices of First Federal Savings and Loan Association, Pontiac, Michigan, for which TCF Michigan received approximately $129.1 million in cash and $79.6 million in short-term investments. TCF has accounted for this acquisition using the purchase method of accounting. TCF Michigan paid the RTC a premium of approximately $14.6 million which has been classified as deposit base intangibles in the accompanying Consolidated Statements of Financial Condition. The amortization and accretion of discounts, premiums, goodwill and deposit base intangibles related to TCF's acquisition of certain associations and deposits which were accounted for as purchases decreased TCF's income before taxes by $2.1 million for 1994 and $1.1 million for both 1993 and 1992. The unamortized discount related to acquired loans was $1.2 million and $2.3 million at December 31, 1994 and 1993, respectively. TCF Financial Corporation and Subsidiaries 45 -- 3) INVESTMENTS Investments consist of the following:
AT DECEMBER 31, ----------------------------------------------------------------------------------------- 1994 1993 ----------------------------------------- -------------------------------------------- GROSS GROSS GROSS GROSS CARRYING UNREALIZED UNREALIZED FAIR CARRYING UNREALIZED UNREALIZED FAIR (DOLLARS IN THOUSANDS) VALUE GAINS LOSSES VALUE VALUE GAINS LOSSES VALUE ---------------------------------------------------------------------------------------------------------------------------------- Interest-bearing deposits with banks.. $190,698 $- $ - $190,698 $ 10,512 $ - $ - $ 10,512 Federal funds sold.................... 6,900 - - 6,900 105,500 - - 105,500 U.S. Government and other marketable securities held to maturity: U.S. Government and agency obligations..................... 50 - (2) 48 66,961 77 - 67,038 Corporate bonds................... - - - - 3,000 6 - 3,006 Bankers' acceptances.............. - - - - 6,997 2 - 6,999 Commercial paper.................. 3,478 - - 3,478 3,244 - - 3,244 Other............................. - - - - 1,058 - (1) 1,057 ------------------------------------------------------------------------------------------ 3,528 - (2) 3,526 81,260 85 (1) 81,344 Federal Home Loan Bank stock, at cost. 42,525 - - 42,525 37,849 - - 37,849 ------------------------------------------------------------------------------------------ $243,651 $- $(2) $243,649 $235,121 $85 $(1) $235,205 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Weighted average yield................ 6.27% 3.97% ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------
The carrying value and fair value of investments at December 31, 1994, by contractual maturity, are shown below:
CARRYING FAIR (IN THOUSANDS) VALUE VALUE --------------------------------------------------------------------- Due in one year or less............... $201,076 $201,076 Due after one year through five years. 50 48 No stated maturity.................... 42,525 42,525 ----------------------- $243,651 $243,649 ----------------------- -----------------------
Interest income on investments consists of the following:
YEAR ENDED DECEMBER 31, ----------------------------- (IN THOUSANDS) 1994 1993 1992 ----------------------------------------------------------------------------- Interest-bearing deposits with banks.......... $ 979 $ 917 $ 1,808 Federal funds sold............................ 3,670 2,449 4,676 U.S. Government and other marketable securities held to maturity................. 271 4,267 10,792 Federal Home Loan Bank stock.................. 3,057 2,651 2,743 ----------------------------- $7,977 $10,284 $20,019 ----------------------------- -----------------------------
Accrued interest receivable on investments totaled $51,000 and $268,000 at December 31, 1994 and 1993, respectively. There were no sales of U.S. Government and other marketable securities held to maturity during 1994 or 1993. Proceeds from sales of U.S. Government and other marketable securities held to maturity totaled $4 million during 1992. Gross gains of $127,000 and gross losses of $13,000 were recognized during 1992. 46 TCF Financial Corporation and Subsidiaries -- 4) SECURITIES AVAILABLE FOR SALE Securities available for sale consist of the following:
AT DECEMBER 31, --------------------------------------------------------------------------------------------- 1994 1993 --------------------------------------------- --------------------------------------------- GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE --------------------------------------------------------------------------------------------------------------------------- U.S. Government and agency obligations........ $50,977 $ 6 $ (71) $50,912 $ - $ - $- $ - Commercial paper............ 14,955 - (112) 14,843 - - - - Other....................... 3 27 - 30 10,003 233 - 10,236 --------------------------------------------------------------------------------------------- $65,935 $33 $(183) $65,785 $10,003 $233 $- $10,236 --------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------- Weighted average yield...... 5.95% 4.66% --------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------
The fair value and amortized cost of securities available for sale at December 31, 1994, by contractual maturity, is shown below:
FAIR AMORTIZED (IN THOUSANDS) VALUE COST ---------------------------------------------------------------- Due in one year or less................... $64,740 $64,923 Due after one year through five years..... 1,015 1,009 ------------------- 65,755 65,932 Marketable equity securities.............. 30 3 ------------------- $65,785 $65,935 ------------------- -------------------
Accrued interest receivable on securities available for sale was $33,000 and $40,000 at December 31, 1994 and 1993, respectively. Proceeds from sales of securities available for sale totaled $155.2 million, $146.9 million and $91.7 million during 1994, 1993 and 1992, respectively. Gross gains of $2 million were recognized during 1994. No gross losses were recognized during 1994. Gross gains of $1.4 million and $3.4 million and gross losses of $747,000 and $69,000 were recognized during 1993 and 1992, respectively. 5) LOANS HELD FOR SALE Loans held for sale consist of the following:
AT DECEMBER 31, ------------------- (IN THOUSANDS) 1994 1993 ---------------------------------------------------------------- Residential real estate................... $ 44,742 $297,334 Education................................. 155,524 123,233 ------------------- 200,266 420,567 Less: Deferred loan fees (costs), net...... (489) 282 Unearned discounts (premiums), net... 246 (1,608) ------------------- $200,509 $421,893 ------------------- -------------------
Accrued interest receivable on loans held for sale was $5.7 million and $4.4 million at December 31, 1994 and 1993, respectively. 6) MORTGAGE-BACKED SECURITIES HELD TO MATURITY Mortgage-backed securities held to maturity consist of the following:
AT DECEMBER 31, ------------------------------------------------------- 1994 1993 ------------------------- ------------------------- CARRYING FAIR CARRYING FAIR (IN THOUSANDS) VALUE VALUE VALUE VALUE --------------------------------------------------------------------------- FHLMC.............. $ 297,268 $ 285,451 $ 510,855 $ 525,212 FNMA............... 641,648 610,822 499,499 515,657 GNMA............... 154,513 152,928 198,520 208,623 Private issuers.... 17,441 17,189 21,028 21,251 -------------------------------------------------------- 1,110,870 1,066,390 1,229,902 1,270,743 Net premiums....... 3,743 - 7,300 - -------------------------------------------------------- $1,114,613 $1,066,390 $1,237,202 $1,270,743 -------------------------------------------------------- --------------------------------------------------------
Included in mortgage-backed securities held to maturity at December 31, 1994 are $68.1 million of first mortgage loans which TCF has pooled and formed FNMA certificates. TCF has retained the credit risk on these certificates. Accrued interest receivable on mortgage-backed securities held to maturity totaled $7.6 million and $8.9 million at December 31, 1994 and 1993, respectively. At December 31, 1994 and 1993, TCF's mortgage-backed securities held to maturity portfolio had gross unrealized gains of $2.9 million and $35 million and gross unrealized losses of $51.2 million and $1.5 million, respectively. There were no sales of mortgage-backed securities held to maturity during 1994 or 1993. Proceeds from sales of mortgage-backed securities held to maturity totaled $23.8 million during 1992. Gross gains of $718,000 were recognized during 1992. No gross losses were recognized during 1992. TCF Financial Corporation and Subsidiaries 47 -- 7) LOANS Loans consist of the following:
AT DECEMBER 31, ------------------------- (IN THOUSANDS) 1994 1993 ---------------------------------------------------------------------- Residential real estate.................... $1,261,690 $1,063,158 ------------------------- Commercial real estate: Apartments............................... 265,557 329,575 Other permanent.......................... 355,666 353,819 Construction and development............. 13,547 3,808 ------------------------- 634,770 687,202 ------------------------- Total real estate...................... 1,896,460 1,750,360 ------------------------- Commercial business........................ 100,397 89,368 ------------------------- Consumer: Home equity.............................. 875,395 759,390 Automobile and recreational vehicle...... 95,375 54,762 Credit card.............................. 34,698 18,989 Loans secured by deposits................ 9,676 11,411 Other.................................... 90,827 74,475 ------------------------- 1,105,971 919,027 ------------------------- 3,102,828 2,758,755 Less: Unearned discounts on loans purchased.... 1,280 2,262 Deferred loan fees, net.................. 2,606 2,419 Unearned discounts and finance charges, net........................... 17,134 8,928 ------------------------- $3,081,808 $2,745,146 ------------------------- -------------------------
Accrued interest receivable on loans was $19.7 million and $15.8 million at December 31, 1994 and 1993, respectively. At December 31, 1994, 1993 and 1992, loans on non-accrual status totaled $9.5 million, $17.4 million and $16.1 million, respectively. Had the loans performed in accordance with their original terms throughout 1994, TCF would have recorded gross interest income of $1.3 million for these loans. Interest income of $594,000 has been recorded on these loans for the year ended December 31, 1994. Included in loans at December 31, 1994 and 1993, are commercial real estate loans aggregating $3 million and $7.4 million, respectively, with terms that have been modified in troubled debt restructurings. Had the loans performed in accordance with their original terms throughout 1994, TCF would have recorded gross interest income of $312,000 for these loans. Interest income of $280,000 has been recorded on these loans for the year ended December 31, 1994. There were no material commitments to lend additional funds to customers whose loans were classified as restructured or non-accrual at December 31, 1994. Included in commercial real estate loans at December 31, 1994 and 1993, are $52.2 million and $57.1 million, respectively, of loans to facilitate the sale of real estate accounted for by the installment method. The installment method of accounting was applied because the borrower's initial and continuing investment was not adequate for full accrual profit recognition under SFAS No. 66, "Accounting for Sales of Real Estate." At December 31, 1994, 1993 and 1992, TCF was servicing real estate loans for others with aggregate unpaid principal balances of approximately $3.9 billion, $3.6 billion and $3.3 billion, respectively. During 1994 and 1993, TCF sold servicing rights on $169 million and $44 million of loans serviced for others at net gains of $2.4 million and $137,000, respectively. No sales of servicing rights occurred in 1992. 8) ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES AND INDUSTRIAL REVENUE BOND RESERVES Following is a summary of the allowances for loan and real estate losses and industrial revenue bond reserves:
INDUSTRIAL ALLOWANCE ALLOWANCE REVENUE FOR REAL FOR LOAN BOND ESTATE (IN THOUSANDS) LOSSES RESERVES TOTAL LOSSES TOTAL ------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1991................. $25,420 $2,881 $28,301 $ 7,603 $35,904 Provision for losses..................... 12,423 767 13,190 22,054 35,244 Charge-offs.............................. (21,519) (2,185) (23,704) (27,366) (51,070) Recoveries............................... 2,925 - 2,925 - 2,925 --------------------------------------------------------------------- Balance, December 31, 1992................. 19,249 1,463 20,712 2,291 23,003 Adjustments for pooling-of-interests..... (56) 225 169 (513) (344) Provision for losses..................... 20,207 1,726 21,933 11,743 33,676 Charge-offs.............................. (16,032) (725) (16,757) (11,553) (28,310) Recoveries............................... 2,687 - 2,687 - 2,687 --------------------------------------------------------------------- Balance, December 31, 1993................. 26,055 2,689 28,744 1,968 30,712 Provision for losses..................... 10,901 - 10,901 2,373 13,274 Charge-offs.............................. (7,740) - (7,740) (3,611) (11,351) Recoveries............................... 2,432 70 2,502 - 2,502 --------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994................. $31,648 $2,759 $34,407 $ 730 $35,137 --------------------------------------------------------------------- ---------------------------------------------------------------------
48 TCF Financial Corporation and Subsidiaries -- Prior to being acquired by TCF, RCG had entered into agreements guaranteeing certain industrial development and housing revenue bonds issued by municipalities to finance commercial and multi-family real estate owned by third parties. In the event a third-party borrower defaults on principal or interest payments on the bonds, TCF, as acquiring entity, is required to either fund the amount in default or acquire the then outstanding bonds. TCF may foreclose on the underlying real estate to recover amounts in default. The balance of such financial guarantees totaled $18.6 million and $20.8 million at December 31, 1994 and 1993, respectively. Management has considered these guarantees in its review of the adequacy of the industrial revenue bond reserves, which are included in other liabilities in the Consolidated Statements of Financial Condition. 9) PREMISES AND EQUIPMENT Premises and equipment are summarized as follows:
AT DECEMBER 31, ------------------ (IN THOUSANDS) 1994 1993 ----------------------------------------------------- Land............................. $ 15,962 $ 15,153 Office buildings................. 66,986 63,423 Leasehold improvements........... 13,449 12,366 Furniture and equipment.......... 64,319 56,165 ------------------ 160,716 147,107 Less accumulated depreciation and amortization............... 75,633 67,453 ------------------ $ 85,083 $ 79,654 ------------------ ------------------
TCF leases certain premises and equipment under operating leases. Net lease expense was $11.5 million, $11.2 million and $9.9 million in 1994, 1993 and 1992, respectively. At December 31, 1994, the total annual minimum lease commitments for operating leases were as follows:
(IN THOUSANDS) -------------------------------------- 1995........................ $ 9,256 1996........................ 7,223 1997........................ 6,538 1998........................ 5,531 1999........................ 4,230 Thereafter.................. 9,237 ------- $42,015 ------- -------
10) REAL ESTATE Real estate is summarized as follows:
AT DECEMBER 31, ----------------- (IN THOUSANDS) 1994 1993 ------------------------------------------------------------------------ In-substance foreclosures........................... $ 8,560 $15,257 Real estate in judgment, subject to redemption...... 3,663 3,792 Real estate acquired through foreclosure............ 4,063 8,472 ----------------- $16,286 $27,521 ----------------- -----------------
The net costs of operation of real estate are as follows:
YEAR ENDED DECEMBER 31, ---------------------------- (IN THOUSANDS) 1994 1993 1992 ------------------------------------------------------------------------- Gain on sales............................ $(1,140) $ (640) $ (382) Provision for losses..................... 2,373 11,743 22,054 Net operations........................... 818 1,687 2,837 ---------------------------- $ 2,051 $12,790 $24,509 ---------------------------- ----------------------------
11) PURCHASED MORTGAGE SERVICING RIGHTS Purchased mortgage servicing rights are included in other assets and are summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------- (IN THOUSANDS) 1994 1993 1992 ------------------------------------------------------------------------ Balance at beginning of year............. $12,381 $15,180 $17,762 Adjustments for pooling-of-interests... - (565) - Purchased mortgage servicing rights capitalized.......................... 3,516 5,026 2,015 Amortization........................... (3,394) (3,633) (3,464) Sale of servicing...................... (256) - - Valuation adjustments due to accelerated prepayments.............. - (3,627) (1,133) --------------------------- Balance at end of year................... $12,247 $12,381 $15,180 --------------------------- ---------------------------
TCF Financial Corporation and Subsidiaries 49 -- 12) DEPOSITS Deposits are summarized as follows:
AT DECEMBER 31, ------------------------------------------------------------------- 1994 1993 ------------------------------- -------------------------------- WEIGHTED WEIGHTED AVERAGE % OF AVERAGE % OF (DOLLARS IN THOUSANDS) RATE AMOUNT TOTAL RATE AMOUNT TOTAL ----------------------------------------------------------------------------------------------------------- Checking: Non-interest bearing................. 0.00% $ 402,368 10.5% 0.00% $ 369,692 9.0% Interest bearing..................... 1.28 416,455 10.9 1.21 430,431 10.5 ----------------- ----------------- .65 818,823 21.4 .65 800,123 19.5 ----------------- ----------------- Passbook and statement................. 2.09 745,546 19.5 1.77 855,781 20.9 Money market........................... 3.39 431,309 11.3 2.31 469,694 11.4 Certificates: 6 months and less.................... 3.90 139,604 3.7 3.07 217,788 5.3 over 6 to 18 months.................. 4.80 878,795 23.0 3.64 677,092 16.5 over 18 to 30 months................. 4.53 267,497 7.0 4.65 381,264 9.3 over 30 months....................... 6.10 467,859 12.3 7.19 654,942 16.0 Negotiable rate...................... 5.28 70,181 1.8 3.74 45,874 1.1 ----------------- ----------------- 5.04 1,823,936 47.8 4.95 1,976,960 48.2 ----------------- ----------------- 3.34 $3,819,614 100.0% 3.15 $4,102,558 100.0% ----------------- ----------------- ----------------- -----------------
Certificates had the following remaining maturities:
AT DECEMBER 31, ------------------------------------------------------------------------------------------ (DOLLARS IN MILLIONS) 1994 1993 ------------------------------------------ --------------------------------------------- WEIGHTED WEIGHTED NEGOTIABLE AVERAGE NEGOTIABLE AVERAGE MATURITY RATE OTHER TOTAL RATE RATE OTHER TOTAL RATE ------------------------------------------------------------------------------------------------------------ 0-3 months...... $48.7 $ 331.8 $ 380.5 4.59% $26.8 $ 401.9 $ 428.7 4.14% 4-6 months...... 10.0 408.9 418.9 4.87 3.3 420.7 424.0 4.86 7-12 months..... 8.6 506.3 514.9 5.03 5.4 498.2 503.6 5.12 13-24 months.... 1.1 305.6 306.7 5.48 7.7 420.3 428.0 5.30 25-36 months.... 1.0 106.3 107.3 5.40 1.0 88.9 89.9 5.66 37-48 months.... .8 65.5 66.3 5.82 1.0 51.0 52.0 5.69 49-60 months.... - 12.8 12.8 5.47 .7 33.0 33.7 5.62 Over 60 months.. - 16.5 16.5 5.94 - 17.1 17.1 6.16 ------------------------------ ---------------------------------------- $70.2 $1,753.7 $1,823.9 5.04 $45.9 $1,931.1 $1,977.0 4.95 ------------------------------ ---------------------------------------- ------------------------------ ----------------------------------------
50 TCF Financial Corporation and Subsidiaries -- Interest expense on deposits is summarized as follows:
YEAR ENDED DECEMBER 31, ---------------------------- (IN THOUSANDS) 1994 1993 1992 -------------------------------------------------------------------- Checking.............................. $ 5,259 $ 4,989 $ 9,820 Passbook and statement................ 14,384 16,359 21,725 Money market.......................... 11,644 12,436 16,258 Certificates.......................... 89,799 102,979 138,341 ---------------------------- 121,086 136,763 186,144 Less early withdrawal penalties....... 472 510 605 ---------------------------- $120,614 $136,253 $185,539 ---------------------------- ----------------------------
Accrued interest on deposits totaled $4.7 million and $8.9 million at December 31, 1994 and 1993, respectively. Mortgage-backed securities aggregating $52.7 million were pledged as collateral to secure certain deposits at December 31, 1994. At December 31, 1994, TCF was required by Federal Reserve regulations to maintain reserve balances of approximately $67.3 million in cash on hand or at the Federal Reserve Bank. 13) BORROWINGS Borrowings consist of the following:
AT DECEMBER 31, ------------------------------------------------------ 1994 1993 ----------------------- ------------------------ WEIGHTED WEIGHTED YEAR OF AVERAGE AVERAGE (DOLLARS IN THOUSANDS) MATURITY AMOUNT RATE AMOUNT RATE --------------------------------------------------------------------------------------------------------------- Securities sold under repurchase agreements................ 1994-1995 $170,143 5.94% $129,812 4.53% -------- -------- Federal Home Loan Bank advances........ 1994 - - 115,000 7.61 1995 388,405 5.83 20,000 5.18 1996 251,100 5.94 251,100 5.94 1997 10,014 6.24 10,014 6.24 2000 74 7.10 74 7.10 2006 - - 144 8.42 2008 345 6.27 360 6.27 2009 925 6.86 - - -------- -------- 650,863 5.88 396,692 6.40 -------- -------- Subordinated capital notes of TCF Financial Corporation, callable beginning January 1, 1995............ 2002 34,500 10.00 34,500 10.00 -------- -------- Other borrowings: Collateralized mortgage obligations.. 2006 488 6.50 2,880 6.50 2008 3,000 6.50 3,000 6.50 2010 1,443 5.90 1,361 5.90 -------- -------- 4,931 6.32 7,241 6.39 Less unamortized discount.......... 306 - 522 - -------- -------- 4,625 6.74 6,719 6.88 -------- -------- Industrial development revenue bonds...................... 2015 3,125 4.65 3,175 3.05 -------- -------- Bank loan, maturing serially through 1998.............. 1998 3,500 9.50 4,500 7.00 -------- -------- Other................................ 1995 1,500 6.13 - - 1998 27 7.60 34 7.60 -------- -------- 1,527 6.16 34 7.60 -------- -------- 12,777 6.92 14,428 6.08 -------- -------- $868,283 6.07 $575,432 6.18 -------- -------- -------- --------
TCF Financial Corporation and Subsidiaries 51 -- At December 31, 1994, borrowings with a maturity of one year or less consisted of the following:
WEIGHTED AVERAGE (DOLLARS IN THOUSANDS) AMOUNT RATE ------------------------------------------------------------------------ Securities sold under repurchase agreements..... $170,143 5.94% Federal Home Loan Bank advances................. 388,405 5.83 Bank loan....................................... 1,000 9.50 Other........................................... 1,500 6.13 -------- $561,048 5.87 -------- --------
Accrued interest on borrowings totaled $2.9 million and $1.4 million at December 31, 1994 and 1993, respectively. At December 31, 1994, securities sold under repurchase agreements were collateralized by mortgage-backed securities and had the following maturities:
REPURCHASE BORROWING COLLATERAL SECURITIES -------------------- --------------------- INTEREST CARRYING MARKET (DOLLARS IN THOUSANDS) AMOUNT RATE AMOUNT (1) VALUE (1) ------------------------------------------------------------------------------- Maturity: January 1995............... $170,143 5.94% $188,947 $178,270 -------- --------------------- -------- --------------------- _____________________________ (1) INCLUDES ACCRUED INTEREST.
The securities underlying the repurchase agreements are book entry securities. During the period, book entry securities were delivered by appropriate entry into the counterparties' accounts through the Federal Reserve System. The dealers may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations, but have agreed to resell to TCF identical or substantially the same securities upon the maturities of the agreements. At December 31, 1994, all of the securities sold under repurchase agreements provided for the repurchase of identical securities. Securities sold under repurchase agreements averaged $122.2 million and $123.1 million during 1994 and 1993, respectively, and the maximum amount outstanding at any month-end during 1994 and 1993 was $403.5 million and $218.5 million, respectively. At December 31, 1994, mortgage-backed securities collateralizing the collateralized mortgage obligations had a carrying amount of $4.7 million and a market value of $4.4 million. The bank loan is unsecured and contains certain covenants common to such agreements with which TCF is in compliance. In December 1994, TCF negotiated a $7.5 million unsecured bank line of credit which bears interest at the prime rate and matures on April 30, 1996. There were no borrowings under this line of credit in 1994. TCF has recorded its obligations to pay the amount in default on Industrial Development Revenue Bond issues for which RCG had entered into financial guarantee agreements. As permitted under the agreements, TCF has commenced foreclosure proceedings relative to the underlying real estate and has also recorded the fair value of such real estate as in-substance foreclosures at December 31, 1994. FHLB advances are collateralized by FHLB stock, interest-bearing deposits with banks, residential real estate loans and mortgage-backed securities with an aggregate carrying value of approximately $803.3 million at December 31, 1994. Interest expense on borrowings is summarized as follows:
YEAR ENDED DECEMBER 31, --------------------------- (IN THOUSANDS) 1994 1993 1992 ------------------------------------------------------------------- FHLB advances........................ $20,781 $25,085 $28,471 Securities sold under repurchase agreements...................... 6,441 6,184 7,763 Subordinated capital notes........... 3,718 4,418 7,470 Other borrowings..................... 958 1,237 1,982 --------------------------- $31,898 $36,924 $45,686 --------------------------- ---------------------------
14) INCOME TAXES Income tax expense (benefit) consists of:
(IN THOUSANDS) CURRENT DEFERRED TOTAL ------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1994: FEDERAL....................... $32,562 $(1,489) $31,073 STATE......................... 9,670 (441) 9,229 --------------------------- $42,232 $(1,930) $40,302 --------------------------- --------------------------- Year ended December 31, 1993: Federal....................... $22,201 $ (15) $22,186 State......................... 6,466 (5) 6,461 --------------------------- $28,667 $ (20) $28,647 --------------------------- --------------------------- Year ended December 31, 1992: Federal....................... $12,912 $(2,349) $10,563 State......................... 2,684 (291) 2,393 --------------------------- $15,596 $(2,640) $12,956 --------------------------- ---------------------------
52 TCF Financial Corporation and Subsidiaries -- The significant components of deferred income tax expense (benefit) are summarized as follows:
YEAR ENDED DECEMBER 31, ---------------------------- (IN THOUSANDS) 1994 1993 1992 ------------------------------------------------------------------------- Deferred tax expense (benefit) (exclusive of the effects of other components listed below)........ $(1,930) $(20) $ 5,708 Charge in lieu of taxes resulting from the recognition of acquired tax benefits that are allocated to reduce goodwill related to the acquired entity....................... - - 1,884 Decrease in the valuation allowance for deferred tax assets............... - - (10,232) ---------------------------- $(1,930) $(20) $(2,640) ---------------------------- ----------------------------
Total income tax expense of $40.3 million, $28.6 million and $13 million for the years ended December 31, 1994, 1993 and 1992, respectively, did not include tax benefits specifically allocated to goodwill and stockholders' equity. The amounts allocated to goodwill for the initial recognition of acquired tax benefits that were previously included in the tax valuation allowance totaled $1.9 million for the year ended December 31, 1992. No suchamounts were allocated during 1994 or 1993. No tax valuation allowance was required as of December 31, 1994 or 1993 since TCF paid taxes, which are available for carryback, in excess of its deferred tax assets. The tax benefit allocated to additional paid-in capital for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes totaled $90,000, $728,000 and $1.5 million for the years ended December 31, 1994, 1993 and 1992, respectively. Income tax expense differs from the amounts computed by applying the federal income tax rate of 35% for both 1994 and 1993 and 34% for 1992 to income before income tax expense as a result of the following:
YEAR ENDED DECEMBER 31, ---------------------------- (IN THOUSANDS) 1994 1993 1992 ------------------------------------------------------------------------- Computed "expected" tax expense............ $34,183 $23,316 $19,793 Increase (reduction) in income tax expense resulting from: Change in the valuation allowance for federal income tax deferred assets allocated to income tax expense......................... - - (6,011) Change in the valuation allowance for state income tax deferred assets allocated to income tax expense, net of federal income tax impact................... - - (2,337) Benefit of net operating loss carryovers.......................... - - (2,800) Amortization of goodwill.............. 418 664 1,109 Tax exempt income..................... (115) (134) (207) State income tax, exclusive of valuation allowance change, net of federal income tax benefit....... 5,999 4,200 3,703 Other, net............................ (183) 601 (294) ---------------------------- $40,302 $28,647 $12,956 ---------------------------- ----------------------------
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are as follows:
AT DECEMBER 31, ------------------ (IN THOUSANDS) 1994 1993 ------------------------------------------------------------------------- Deferred tax assets: Allowance for loan and real estate losses....... $17,910 $14,739 Discounts on loans arising from acquisitions.... 513 1,006 Other........................................... 3,643 3,677 ------------------ Total deferred tax assets.................... 22,066 19,422 ------------------ Deferred tax liabilities: FHLB stock...................................... 3,757 4,135 Pension and other compensation plans............ 2,378 3,214 Loan basis differences.......................... 5,002 5,535 Loan fees and discounts......................... 2,660 260 ------------------ Total deferred tax liabilities............... 13,797 13,144 ------------------ Net deferred tax assets.................... $ 8,269 $ 6,278 ------------------ ------------------
At December 31, 1994, TCF had no remaining federal net operating loss ("NOL") or tax credit carryovers. The consolidated tax returns for the years ended 1979 through 1982 have been reviewed by the Internal Revenue Service ("IRS"). The IRS had proposed certain adjustments. In October 1992, the Joint Committee of Congress approved a settlement agreement between TCF and the IRS. The settlement allowed a loss deduction on the sale of mortgage loans which the IRS had contended should be disallowed. The settlement also allowed, based on a tax court ruling, certain tax bad debt losses that were not previously deducted in TCF's tax returns. The allowance of the bad debt deductions created a $2.8 million NOL benefit during 1992. TCF Financial Corporation and Subsidiaries 53 -- 15) STOCKHOLDERS' EQUITY RESTRICTED RETAINED EARNINGS -- TCF Minnesota may not declare or pay a dividend to TCF in excess of 100% of its annual net income plus the amount that would reduce by one-half TCF Minnesota's surplus capital ratio at the beginning of the calendar year without prior Office of Thrift Supervision ("OTS") approval. Additional limitations on dividends declared or paid on, or repurchases of, TCF Minnesota's capital stock are tied to TCF Minnesota's level of compliance with its regulatory capital requirements. Retained earnings at December 31, 1994 includes approximately $76.6 million for which no provision for federal income tax has been made. This amount represents earnings appropriated to bad debt reserves and deducted for federal income tax purposes and is not available for payment of cash dividends or other distributions to shareholders. Payments or distributions of these appropriated earnings could invoke a tax liability for the Bank based on the amount of earnings removed and current tax rates. At December 31, 1994, TCF's savings bank subsidiaries, TCF Minnesota, TCF Illinois, TCF Wisconsin and TCF Michigan, exceeded their fully phased-in capital requirements. SHAREHOLDER RIGHTS PLAN -- On May 23, 1989, TCF's Board of Directors (the "Board") declared a dividend of one preferred share purchase right for each share of common stock, payable on June 9, 1989, to holders of record on that date. The rights will become exercisable only if a person or group acquires or announces an offer to acquire 15% or more of TCF's common stock. This triggering percentage may be reduced to no less than 10% by the Board under certain circumstances. When exercisable, each right will entitle the holder to buy one one-hundredth of a share of a new series of junior participating preferred stock at a price of $60 per share. In addition, upon the occurrence of certain events, holders of the rights will be entitled to purchase either TCF's common stock or shares in an "acquiring entity" at half of the market value. The Board is generally entitled to redeem the rights at 1 cent per right at any time before they become exercisable. The rights will expire on June 9, 1999, if not previously redeemed or exercised. TREASURY STOCK -- On January 25, 1994, the Board authorized the repurchase of up to 5% of TCF common stock, or approximately 620,000 shares. The repurchased shares will be used for employee benefit plans and other general corporate purposes. TCF purchased 535,000 shares of stock under this plan during the year ended December 31, 1994. During this period, 212,120 shares were issued out of treasury stock for restricted stock grants and employee benefit plans. 16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK TCF is a party to financial instruments with off-balance-sheet risk in the normal course of business, primarily to meet the financing needs of its customers. These financial instruments, which are issued or held by TCF for purposes other than trading, include commitments to extend credit, standby letters of credit, financial guarantees written, forward mortgage loan sales commitments, an interest rate swap agreement and financial guarantees on certain loans sold with recourse and on other contingent obligations. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. The contract or notional amounts of those instruments reflect the extent of involvement TCF has in particular classes of financial instruments. TCF's exposure to credit loss in the event of non-performance by the counterparty to the financial instrument for commitments to extend credit, standby letters of credit, financial guarantees written and financial guarantees on certain loans sold with recourse is represented by the contractual amount of the commitments. TCF uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For Veterans Administration ("VA") loans serviced with partial recourse, forward mortgage loan sales commitments and interest rate swap agreements, the contract or notional amount exceeds TCF's exposure to credit loss. TCF controls the credit risk of forward mortgage loan sales commitments through credit approvals, credit limits and monitoring procedures. Unless noted otherwise, TCF does not require collateral or other security to support financial instruments with credit risk. The contract or notional amounts of these financial instruments are as follows:
AT DECEMBER 31, ------------------ (IN THOUSANDS) 1994 1993 -------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit............... $783,921 $782,584 Standby letters of credit.................. 18,098 18,033 Financial guarantees written............... 18,595 20,756 Loans sold with recourse................... 36,368 48,979 Financial instruments whose credit risk is less than the notional or contract amount: VA loans serviced with partial recourse.... 398,261 365,517 Forward mortgage loan sales commitments.... 51,030 444,789 Interest rate swap agreement............... 5,000 5,000
As part of its normal business operations, and in order to meet the ongoing credit needs of its customers, TCF has outstanding at any time a significant number of commitments to extend credit. Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. These commitments take the form of mortgage loan 54 TCF Financial Corporation and Subsidiaries -- applications, approved loans, consumer credit line products and credit card limits. 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. TCF evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by TCF upon extension of credit, is based on management's credit evaluation of the borrower. Collateral predominantly consists of residential and commercial real estate and personal property. Included in the total commitments to extend credit at December 31, 1994 were mortgage loan commitments and loans in process aggregating $504.7 million, including commercial and residential construction and development commitments totaling $34.3 million. Of the total mortgage loan commitments and loans in process at December 31, 1994, $106.4 million were for fixed-rate loans. Also included in the total commitments to extend credit were various consumer credit line products aggregating $457.7 million, of which $163.5 million were unsecured. Standby letters of credit are conditional commitments issued by TCF guaranteeing the performance of a customer to a third party. The standby letters of credit are primarily issued to support public and private borrowing arrangements including bond financing, and expire in various years through the year 1999. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in making commercial loans to customers. The amount of collateral TCF obtains to support standby letters of credit is based on management's credit evaluation of the borrower. Collateral held primarily consists of commercial real estate mortgages. Since the conditions under which TCF is required to fund standby letters of credit may not materialize, the cash requirements are expected to be less than the total outstanding commitments. TCF's commitments to the beneficiaries under its outstanding standby letters of credit at December 31, 1994 were collateralized by $24.5 million of TCF's mortgage-backed securities. Financial guarantees written represent agreements whereby, for a fee, certain of TCF's investment and mortgage-backed securities are pledged as collateral for Housing Revenue Bonds and Industrial Development Revenue Bonds which were issued by municipalities to finance commercial and multi-family real estate owned by third parties. In the event the third party borrowers default on principal or interest payments on the bonds, TCF is required to either pay the amount in default or acquire the then outstanding bonds. TCF may foreclose on the underlying real estate to recover amounts in default. At December 31, 1994, mortgage-backed securities aggregating approximately $43 million were held by the trustees as collateral for these financial guarantees. Further, in order to protect TCF's ability to recover losses in the event of default by the third party borrowers, TCF may also be required to pay real estate taxes and other liabilities of the underlying collateral. The collateral agreements expire in 1995 through 2005. During the normal course of business, TCF may sell certain loans with limited recourse provisions. In addition, TCF services VA loans on which it 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. A significant portion of the loans is partially supported by government-sponsored insurance, private mortgage insurance or the VA partial guarantee, and all of the loans are collateralized by residential real estate. As part of its residential mortgage banking operation, TCF enters into forward mortgage loan sales commitments in order to manage the market exposure on its residential loans held for sale and its commitments to extend credit for residential loans. Because gains or losses to be realized on the sale of residential loans held for sale are dependent on interest rates, forward mortgage loan sales commitments are used to reduce the impact of changes in interest rates on TCF's mortgage banking operation. Forward mortgage loan sales commitments are contracts for the delivery of mortgage loans or pools of loans in which TCF agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of the counterparties to meet the terms of their contracts and from movements in mortgage loan values and interest rates. Included in the total at December 31, 1994 and 1993 were $1 million and $49 million, respectively, of standby forward mortgage loan sales commitments for which TCF has the option to deliver the mortgage loans. Also included in the total at December 31, 1994 and 1993 were $2 million and $28.5 million, respectively, of standby forward mortgage loan sales commitments for which the third parties have the option to purchase the mortgage loans. Premiums paid for standby forward mortgage loan sales commitments are amortized to gain on sale of loans held for sale over the terms of the agreements. The fair value of the forward mortgage loan sales commitments is not recognized in the financial statements. Interest rate swap agreements generally involve the exchange of fixed and floating rate interest payments without the exchange of the underlying notional amount on which the interest payments are calculated. Prior to being acquired by TCF, RCG entered into an interest rate swap agreement to manage the impact of fluctuating interest rates. The credit risk associated with interest rate swap agreements revolves around the ability of the counterparty to perform its TCF Financial Corporation and Subsidiaries 55 -- obligation under the agreement. Under the terms of the agreement with the FHLB, which expires in March 1997, TCF makes periodic interest payments based on a fixed interest rate of 8.55% and receives periodic interest payments based on the six-month London Interbank Offered Rate ("LIBOR"). The net amount payable or receivable from the interest rate swap agreement is accrued and recognized as an adjustment to interest income on loans. The related amount payable to or receivable from the counterparty is included in accrued interest payable or receivable. The fair value of the interest rate swap agreement is not recognized in the financial statements. 17) FAIR VALUES OF FINANCIAL INSTRUMENTS TCF is required to disclose the estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time TCF's entire holdings of a particular financial instrument. Because no market exists for a significant portion of TCF's financial instruments, fair value estimates are subjective in nature, involving uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-and-off balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, TCF has established customer relationships that contribute significant fee income annually. These customer relationships are not considered financial instruments, and their values have not been incorporated into the fair value estimates. Certain financial instruments and all nonfinancial instruments are excluded from fair value of financial instrument disclosure requirements. In addition, the tax effects of unrealized gains and losses have not been considered in the estimates, nor have costs necessary to execute a sale been considered. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of TCF, or the value TCF would realize in a negotiated sale of these instruments. Fair value estimates, methods and assumptions are set forth below for TCF's financial instruments. These financial instruments are issued or held by TCF for purposes other than trading. The carrying amounts disclosed below are included in the Consolidated Statements of Financial Condition under the indicated captions, except where noted otherwise. The carrying amount of accrued interest approximates its fair value. CASH AND DUE FROM BANKS -- The carrying amount of cash and due from banks approximates its fair value and totaled $170.7 million and $165.9 million at December 31, 1994 and 1993, respectively. INVESTMENTS -- The carrying amounts of short-term investments approximate their fair values since they mature in 90 days or less and do not present unanticipated credit concerns. The fair values of longer-term interest-bearing deposits with banks and federal funds sold are based on quoted market prices, where available. If quoted market prices are not available, fair values are estimated based on discounted cash flow analyses using interest rates currently being offered for investments with similar terms. The fair values of U.S. Government and other marketable securities held to maturity are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying amount of FHLB stock approximates its fair value. The carrying amounts and fair values of TCF's investment portfolio are as follows:
AT DECEMBER 31, --------------------------------------- 1994 1993 ------------------- ------------------ ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR (IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE ------------------------------------------------------------------------------- Interest-bearing deposits with banks.......................... $190,698 $190,698 $ 10,512 $ 10,512 Federal Funds sold.................... 6,900 6,900 105,500 105,500 U.S. Government and other marketable securities held to maturity: U.S. Government and agency obligations.................... 50 48 66,961 67,038 Corporate bonds.................. - - 3,000 3,006 Bankers' acceptances............. - - 6,997 6,999 Commercial paper................. 3,478 3,478 3,244 3,244 Other............................ - - 1,058 1,057 --------------------------------------- 3,528 3,526 81,260 81,344 Federal Home Loan Bank stock, at cost............................. 42,525 42,525 37,849 37,849 --------------------------------------- $243,651 $243,649 $235,121 $235,205 --------------------------------------- ---------------------------------------
56 TCF Financial Corporation and Subsidiaries -- SECURITIES AVAILABLE FOR SALE -- The fair values of U.S. Government and other marketable securities available for sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The amortized cost and fair values of TCF's securities available for sale portfolio are as follows:
AT DECEMBER 31, ------------------------------------------- 1994 1993 ------------------- ---------------------- ESTIMATED ESTIMATED AMORTIZED FAIR AMORTIZED FAIR (IN THOUSANDS) COST VALUE COST VALUE ------------------------------------------------------------------------------ U.S. Government and agency obligations..................... $50,977 $50,912 $ - $ - Commercial paper.................. 14,955 14,843 - - Other............................. 3 30 10,003 10,236 ------------------------------------------- $65,935 $65,785 $10,003 $10,236 ------------------------------------------- -------------------------------------------
LOANS HELD FOR SALE -- Financial instruments associated with TCF's residential mortgage banking operation include residential loans held for sale, commitments to extend credit and forward mortgage loan sales commitments. The estimated fair values of these financial instruments are based on quoted market prices. The carrying amounts for commitments to extend credit and forward mortgage loan sales commitments are included in other assets in the Consolidated Statements of Financial Condition. The contract amounts, carrying amounts and fair values of the financial instruments associated with TCF's residential loans held for sale are as follows:
AT DECEMBER 31, ------------------------------------------------------------------------------------ 1994 1993 --------------------------------------- --------------------------------------- ESTIMATED ESTIMATED CONTRACT CARRYING FAIR CONTRACT CARRYING FAIR (IN THOUSANDS) AMOUNT AMOUNT VALUE AMOUNT AMOUNT VALUE --------------------------------------------------------------------------------------------------------------------------------- Residential loans held for sale (1)....... $ 44,461 $44,461 $45,233 $298,660 $298,660 $297,968 Commitments to extend credit.............. 166,942 155 54 329,385 - (275) Forward mortgage loan sales commitments... 51,030 12 114 444,789 126 2,923 ------------------------ ------------------------ $44,628 $45,401 $298,786 $300,616 ------------------------ ------------------------ ------------------------ ------------------------ --------------------------------------- (1) NET OF UNEARNED DISCOUNTS, PREMIUMS AND DEFERRED FEES.
The fair value estimates above do not include the value of residential mortgage loan servicing rights on TCF's residential loan servicing portfolio which totaled $5.4 billion and $5.2 billion at December 31, 1994 and 1993, respectively. The gross fair value of these rights is estimated to be $90.9 million and $56.7 million at December 31, 1994 and 1993, respectively. Purchased mortgage servicing rights totaling $12.2 million and $12.4 million related to TCF's residential loan servicing portfolio are included as other assets in TCF's Consolidated Statements of Financial Condition at December 31, 1994 and 1993, respectively. The fair value of education loans held for sale is estimated based on an existing forward sale agreement TCF has with the Student Loan Marketing Association, or on sales of comparable loans. The estimated fair value of education loans held for sale of $159.5 million and $126.5 million compares with carrying amounts of $156 million and $123.2 million at December 31, 1994 and 1993, respectively. TCF Financial Corporation and Subsidiaries 57 -- MORTGAGE-BACKED SECURITIES HELD TO MATURITY -- The fair values of mortgage- backed securities held to maturity are based on quoted market prices. The carrying amounts and fair values of TCF's mortgage-backed securities held to maturity portfolio are as follows:
AT DECEMBER 31, ------------------------------------------------------ 1994 1993 -------------------------- ------------------------ ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR (IN THOUSANDS) AMOUNT VALUE AMOUNT VALUE ------------------------------------------------------------------------------- FHLMC.................. $ 297,268 $ 285,451 $ 510,855 $ 525,212 FNMA................... 641,648 610,822 499,499 515,657 GNMA................... 154,513 152,928 198,520 208,623 Private Issuers........ 17,441 17,189 21,028 21,251 ------------------------------------------------------ 1,110,870 1,066,390 1,229,902 1,270,743 Net premiums........... 3,743 - 7,300 - ------------------------------------------------------ $1,114,613 $1,066,390 $1,237,202 $1,270,743 ------------------------------------------------------ ------------------------------------------------------
LOANS -- The fair values of loans are estimated for portfolios of loans with similar characteristics. Loans are segregated by type, and include residential, commercial real estate, commercial business and consumer, and by sub-type within these categories. Each of these categories is further segmented into fixed- and adjustable-rate interest terms, and by performing and non-performing status. For certain variable-rate loans that reprice frequently and that have experienced no significant change in credit risk, fair values are based on carrying values. For certain homogeneous categories of loans, such as certain residential and consumer loans, fair values are estimated using quoted market prices. The fair values of other performing loans are estimated by discounting contractual cash flows adjusted for prepayment estimates, using interest rates currently being offered for loans with similar terms to borrowers with similar credit risk characteristics. The fair values of significant non-performing loans are based on recent internal or external appraisals, or estimated cash flows discounted using rates commensurate with the risks associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. The carrying amounts and fair values of TCF's loan portfolio are as follows:
AT DECEMBER 31, ------------------------------------------------------ 1994 1993 -------------------------- ------------------------ CARRYING ESTIMATED CARRYING ESTIMATED (IN THOUSANDS) AMOUNT(1) FAIR VALUE AMOUNT(1) FAIR VALUE ------------------------------------------------------------------------------- Residential real estate............... $1,257,263 $1,191,918 $1,057,474 $1,072,766 Commercial real estate............... 632,927 620,423 685,460 659,259 Commercial business.... 100,560 99,745 89,432 89,494 Consumer (2)........... 1,087,298 1,129,170 911,614 943,585 ------------------------------------------------------ 3,078,048 3,041,256 2,743,980 2,765,104 Less: Allowance for loan losses.......... 31,648 - 26,055 - ------------------------------------------------------ $3,046,400 $3,041,256 $2,717,925 $2,765,104 ------------------------------------------------------ ------------------------------------------------------ _______________________________ (1) NET OF UNEARNED DISCOUNTS AND DEFERRED FEES. (2) EXCLUDES LEASE RECEIVABLES NOT SUBJECT TO FAIR VALUE DISCLOSURE OF $3.8 MILLION AND $1.2 MILLION AT DECEMBER 31, 1994 AND 1993, RESPECTIVELY.
DEPOSITS -- The fair value of deposits with no stated maturity, such as checking, passbook and statement, and money market accounts, is deemed equal to the amount payable on demand. The fair value of certificates is estimated based on discounted cash flow analyses using interest rates offered by TCF at December 31, 1994 and 1993 for certificates of similar remaining maturities. 58 TCF Financial Corporation and Subsidiaries -- The carrying amounts and fair values of TCF's deposit liabilities are as follows:
AT DECEMBER 31, ------------------------------------------------------- 1994 1993 ------------------------- ------------------------- CARRYING ESTIMATED CARRYING ESTIMATED (IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------------------------------------------------------------------------------- Checking............... $ 818,823 $ 818,823 $ 800,123 $ 800,123 Passbook and statement. 745,546 745,546 855,781 855,781 Money market........... 431,309 431,309 469,694 469,694 Certificates........... 1,823,936 1,830,176 1,976,960 2,010,984 ------------------------------------------------------- $3,819,614 $3,825,854 $4,102,558 $4,136,582 ------------------------------------------------------- -------------------------------------------------------
The fair value estimates above do not include the benefit that results from the lower-cost funding provided by deposits compared with the cost of wholesale borrowings. That benefit is commonly referred to as a deposit base intangible. BORROWINGS -- The carrying amounts of short-term borrowings approximate their fair values. The fair values of TCF's long-term borrowings (other than subordinated capital notes) are estimated based on discounted cash flow analyses using interest rates offered at December 31, 1994 and 1993 for borrowings of similar remaining maturities. The fair values of subordinated capital notes are based on quoted market prices. The carrying amounts and fair values of TCF's borrowings are as follows:
AT DECEMBER 31, ---------------------------------------- 1994 1993 ------------------- ------------------- CARRYING ESTIMATED CARRYING ESTIMATED (IN THOUSANDS) AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------------------------------------------------------------------------- Securities sold under repurchase agreements...................... $170,143 $170,143 $129,812 $130,829 Federal Home Loan Bank advances... 650,863 641,356 396,692 404,722 Subordinated capital notes........ 34,500 34,414 34,500 35,363 Other borrowings.................. 12,777 12,879 14,428 15,216 ---------------------------------------- $868,283 $858,792 $575,432 $586,130 ---------------------------------------- ----------------------------------------
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK -- The fair values of residential commitments to extend credit and forward mortgage loan sales commitments are included in the estimated fair value disclosures of TCF's residential loans held for sale portfolio. The fair values of TCF's remaining commitments to extend credit, standby letters of credit and financial guarantees written are estimated using fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and standby letters of credit issued in conjunction with fixed-rate loan agreements, fair value also considers the difference between current levels of interest rates and the committed rates. For financial guarantees written, fair value also considers reserves established relating to TCF's potential obligation on the outstanding guarantees. The fair value of the interest rate swap agreement is based on the estimated cost to terminate the agreement at the reporting date, taking into account current interest rates and the current creditworthiness of the counterparty. The carrying amounts for commitments to extend credit are included in other assets in the Consolidated Statements of Financial Condition. The carrying amounts for standby letters of credit and financial guarantees written are included in accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. The contract amounts, carrying amounts and estimated fair values of TCF's financial instruments with off-balance-sheet risk are as follows:
AT DECEMBER 31, --------------------------------------------------------------------------------- 1994 1993 --------------------------------------- --------------------------------------- CONTRACT CARRYING ESTIMATED CONTRACT CARRYING ESTIMATED (IN THOUSANDS) AMOUNT AMOUNT(1) FAIR VALUE(1) AMOUNT AMOUNT(1) FAIR VALUE(1) ------------------------------------------------------------------------------------------------------------------------- Commitments to extend credit(2)....... $616,979 $1,823 $ (540) $453,199 $2,024 $ (537) Standby letters of credit............. 18,098 - (8) 18,033 (34) (44) Financial guarantees written.......... 18,595 (3,064) (3,064) 20,756 (2,689) (2,689) Interest rate swap agreement.......... 5,000 - (55) 5,000 - (600) ________________________ (1) POSITIVE AMOUNTS REPRESENT ASSETS, NEGATIVE AMOUNTS REPRESENT LIABILITIES. (2) EXCLUDES COMMITMENTS TO EXTEND CREDIT FOR RESIDENTIAL REAL ESTATE LOANS HELD FOR SALE.
TCF Financial Corporation and Subsidiaries 59 -- In addition to the financial instruments with off-balance-sheet risk noted above, TCF had $36.4 million and $49 million of loans sold with recourse and serviced $398.3 million and $365.5 million of VA loans with partial recourse at December 31, 1994 and 1993, respectively. TCF has not incurred, and does not anticipate, significant losses as a result of the recourse provisions associated with these financial instruments. As a result, the carrying amounts and related estimated fair values of these financial instruments were not material at December 31, 1994 and 1993. 18) STOCK OPTION AND INCENTIVE PLAN The Stock Option and Incentive Plan of TCF Financial was adopted to enable TCF to attract and retain key personnel. Options generally become exercisable over a period of three to five years from the date of the grant and expire after 10 years. Restricted stock granted in 1991 under the Stock Option and Incentive Plan of TCF Financial vested over four years in accordance with a vesting formula based on TCF's return on tangible equity. Restricted stock granted in 1994 under the Stock Option and Incentive Plan of TCF Financial generally vests within five years, but may vest more rapidly or be subject to forfeiture in accordance with a vesting schedule based on TCF's return on average equity. Other restricted stock grants generally vest over periods from three to eight years. Compensation expense for restricted stock is recorded over the vesting periods, and totaled $2.7 million, $707,000 and $718,000 in 1994, 1993 and 1992, respectively. The following table summarizes TCF's restricted stock and stock option transactions since December 31, 1991:
OPTIONS RESTRICTED STOCK ------------------------ ---------------------- SHARES PRICE RANGE SHARES PRICE RANGE ------------------------------------------------------------------------------ December 31, 1991............ 873,240 $ 7.75-15.50 362,340 $ 8.19-16.81 Granted................. 57,123 16.64-21.31 - - Exercised............... (360,761) 7.75-15.50 - - Cancelled............... (32,885) 8.19-16.64 (2,400) 8.19-12.56 -------- -------- December 31, 1992............ 536,717 7.75-21.31 359,940 8.19-16.81 Adjustments for pooling-of- interests............. (61,791) 11.34-14.49 - - Granted................. 35,000 30.94-37.13 50,961 31.50-35.00 Exercised............... (161,881) 7.75-21.31 - - Cancelled............... (52,062) 10.27-17.46 - - -------- -------- December 31, 1993............ 295,983 7.75-37.13 410,901 8.19-35.00 Granted................. - - 212,245 30.63-38.56 Exercised............... (22,957) 8.88-21.31 - - -------- -------- DECEMBER 31, 1994............ 273,026 7.75-37.13 623,146 8.19-38.56 -------- -------- -------- -------- EXERCISABLE AT DECEMBER 31, 1994.......... 208,066 $7.75-37.13 -------- -------- VESTED AT DECEMBER 31, 1994.. 330,859 $8.19-38.56 -------- --------
At December 31, 1994, there were 461,002 shares reserved for issuance under the Stock Option and Incentive Plan of TCF Financial, including 273,026 shares for which options had been granted but had not yet been exercised. 19) EMPLOYEE BENEFIT PLANS PENSION PLAN -- The TCF Cash Balance Pension Plan (the "Plan") is a defined benefit qualified plan covering all "regular stated salary" employees who are at least 21 years old and have completed a year of service with TCF. TCF makes a monthly allocation to the participant's account based on a percentage of the participant's compensation. The percentage is based on the sum of the participant's age and years of employment with TCF. Participants are fully vested after five years of vesting service. The projected unit credit method is the actuarial cost method used to compute the pension credit. Net pension credits included the following components:
YEAR ENDED DECEMBER 31, -------------------------- (IN THOUSANDS) 1994 1993 1992 ---------------------------------------------------------------------------- Service cost - benefits earned during the year.. $ 1,750 $1,527 $1,268 Interest cost on projected benefit obligation... 529 378 209 Gain on plan assets............................. (23) (3,130) (2,429) Net amortization and deferral................... (2,418) 836 310 -------------------------- Net pension credit......................... $ (162) $ (389) $ (642) -------------------------- --------------------------
60 TCF Financial Corporation and Subsidiaries -- The following tables set forth the Plan's funded status at the dates indicated:
AT OCTOBER 1, ------------------ (IN THOUSANDS) 1994 1993 ------------------------------------------------------------------------- Actuarial present value of accumulated benefit obligations: Vested benefits............................ $ 6,163 $ 4,805 Non-vested benefits........................ 859 382 ------------------ Total accumulated benefits............ $ 7,022 $ 5,187 ------------------ ------------------ AT DECEMBER 31, ------------------ (IN THOUSANDS) 1994 1993 ------------------------------------------------------------------------- Projected benefit obligation for service rendered to date................................... $ 8,008 $ 5,699 Plan assets at fair value............................ 23,211 23,477 ------------------ Plan assets in excess of projected benefit obligation......................................... 15,203 17,778 Unrecognized prior service cost...................... (600) (843) Unrecognized net gain................................ (549) (3,043) ------------------ Prepaid pension cost included in other assets... $14,054 $13,892 ------------------ ------------------
The Plan's assets consist primarily of listed stocks and government bonds. At December 31, 1994 and 1993, the Plan's assets included TCF common stock with a market value of $3.7 million and $3.4 million, respectively. The weighted average discount rate and rate of increase in future compensation used to measure the projected benefit obligation and the expected long-term rate of return on plan assets were as follows:
AT DECEMBER 31, ------------------------- 1994 1993 1992 ------------------------------------------------------------------------------- Weighted average discount rate..................... 8.00% 7.50% 7.75% Rate of increase in future compensation............ 5.00 5.00 5.50 Expected long-term rate of return on plan assets... 9.00 9.00 9.75
POSTRETIREMENT PLANS -- In addition to providing retirement income benefits, TCF currently provides health care benefits for eligible retired employees, and in some cases life insurance benefits which were offered under prior plans. Substantially all full-time employees may become eligible for health care benefits if they reach retirement age and have completed 10 years of service with the Company. These and similar benefits for active employees are provided through insurance companies or through self-funded programs. In December 1990, the FASB issued SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Although it applies to all forms of postretirement benefits, SFAS No. 106 focuses principally on postretirement health care benefits. TCF adopted SFAS No. 106 on a prospective basis effective January 1, 1993. SFAS No. 106 significantly changed TCF's method of accounting for postretirement benefits by requiring accrual, during the years that the employee renders the necessary service, of the expected cost of providing those benefits to an employee and the employee's beneficiaries and covered dependents. TCF's transition obligation of $5.5 million at January 1, 1993 is being amortized over 20 years as permitted by SFAS No. 106. TCF's postretirement benefit plan is currently unfunded. The following table reconciles the status of the plan with the amounts recognized in TCF's Consolidated Statements of Financial Condition at the dates indicated:
AT DECEMBER 31, (IN THOUSANDS) 1994 1993 ------------------------------------------------------------------------------ Accumulated postretirement benefit obligation: Retirees and beneficiaries............................... $(5,640) $(4,800) Fully eligible active plan participants.................. (849) (702) Other active plan participants........................... (780) (944) ------ ------ Total accumulated postretirement benefit obligation.... (7,269) (6,446) Unrecognized net loss...................................... 1,399 760 Unrecognized transition obligation......................... 4,954 5,229 ------ ------ Accrued postretirement benefit cost included in other liabilities...................................... $ (916) $ (457) ------ ------ ------ ------
Net periodic postretirement benefit cost included the following components:
YEAR ENDED DECEMBER 31, --------------- (IN THOUSANDS) 1994 1993 --------------------------------------------------------------------------- Service cost - benefits earned during the year............ $160 $124 Interest cost on accumulated postretirement benefit obligation.............................................. 466 423 Amortization of unrecognized transition obligation........ 275 275 Other..................................................... 16 - --------------- Net periodic postretirement benefit cost............. $917 $822 --------------- ---------------
Prior to 1993, the cost of providing these benefits was recognized by expensing the insurance company assessments, or as claims were paid in the case of the self-funded programs, and totaled $344,000 in 1992. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8.0% and 7.5% at December 31, 1994 and 1993, respectively. For active participants, a 9.6% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1995. This rate is assumed to decrease gradually to 6% for the year 2004 and remain at that level thereafter. For retired participants, the annual rate of increase is assumed to be TCF Financial Corporation and Subsidiaries 61 -- 4% for all future years, which represents the plan's annual limit on increases in TCF's contributions for retirees. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1994 by $104,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1994 by $29,000. EMPLOYEE STOCK OWNERSHIP PLAN -- TCF's Employee Stock Ownership Plan generally allows participants to make contributions by salary deduction of up to 12% of their salary on a tax-deferred basis pursuant to section 401(k) of the Internal Revenue Code. Through December 31, 1994, TCF matched the contributions for tax- favored deposits of employees who are non-highly compensated (as defined in the Internal Revenue Code) at the rate of 75 cents per dollar, with a maximum employer contribution of 4.5% of the employee's salary. TCF matched the contributions of remaining employees at the rate of 50 cents per dollar with a maximum employer contribution of 3% of the employee's salary. Beginning January 1, 1995, TCF will match the contributions of all employees at the rate of 50 cents per dollar with a maximum employer contribution of 3% of the employee's salary. TCF, at its discretion, may make additional contributions. Employee contributions vest immediately while the Company's matching contributions are subject to a graduated vesting schedule based on an employee's years of vesting service. The Company's matching contributions are expensed when made. TCF's contribution to the plan was $1.8 million, $1.6 million and $1.3 million in 1994, 1993 and 1992, respectively. EMPLOYEES' SAVINGS PLAN -- Prior to being acquired by TCF, RCG established an Employees' Savings Plan that covered substantially all employees over 21 years of age who had met certain minimum service requirements. This plan was terminated on October 1, 1993. Participants were generally allowed to make contributions by salary deduction of up to 12% of their salary on a tax-deferred basis. RCG made profit-sharing contributions to the plan based on a percentage of participants' compensation as determined each plan year by the board of directors. In addition, participant contributions of up to 2% of compensation could be matched by RCG at its discretion. RCG's matching contributions and participant contributions to the plan vested immediately. RCG's profit-sharing contributions vested over seven years. Expenses recognized for the plan totaled $423,000 and $470,000 for the years ended December 31, 1993 and 1992, respectively. 20) PARENT COMPANY FINANCIAL INFORMATION TCF Financial Corporation's (parent company only) condensed statements of financial condition as of December 31, 1994 and 1993, and the condensed statements of operations and cash flows for the years ended December 31, 1994, 1993 and 1992 are as follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION AT DECEMBER 31, ---------------------- (IN THOUSANDS) 1994 1993 ------------------------------------------------------------------------------- Assets: Cash . . . . . . . . . . . . . . . . . . . . . . . . $ 65 $ 5 Interest-bearing deposits with banks . . . . . . . . 36,178 15,361 Investment in subsidiaries: Savings bank subsidiary. . . . . . . . . . . . . . 324,175 316,225 Other subsidiaries . . . . . . . . . . . . . . . . 697 471 Premises and equipment . . . . . . . . . . . . . . . 2,169 - Loan to unconsolidated subsidiary . . . . . . . . . 1,346 1,397 Other assets . . . . . . . . . . . . . . . . . . . . 6,003 2,958 ---------------------- $370,633 $336,417 ---------------------- ---------------------- Liabilities and Stockholders' Equity: Subordinated capital notes . . . . . . . . . . . . . $ 34,500 $ 34,500 Note payable to commercial bank . . . . . . . . . . 3,500 4,500 Notes payable to non-savings bank subsidiaries . . . 509 464 Other liabilities . . . . . . . . . . . . . . . . . 4,933 1,345 ---------------------- Total liabilities . . . . . . . . . . . . . . . . 43,442 40,809 ---------------------- Stockholders' equity: Common stock . . . . . . . . . . . . . . . . . . . 124 124 Additional paid-in capital . . . . . . . . . . . . 153,740 150,602 Unamortized deferred compensation . . . . . . . . (6,986) (1,272) Retained earnings, subject to certain restrictions . . . . . . . . . . . . . . . . . . 191,608 146,502 Loan to Executive Deferred Compensation Plan . . . (195) (348) Unrealized loss on securities available for sale, net . . . . . . . . . . . . . . . . . . . (88) - Treasury stock, at cost . . . . . . . . . . . . . (11,012) - ---------------------- Total stockholders' equity . . . . . . . . . . . 327,191 295,608 ---------------------- $370,633 $336,417 ---------------------- ----------------------
62 TCF Financial Corporation and Subsidiaries --
CONDENSED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, ------------------------------- (IN THOUSANDS) 1994 1993 1992 ------------------------------------------------------------------------------ Interest income ............................ $ 620 $ 394 $ 474 Interest expense ........................... 4,090 4,013 4,377 ------------------------------- Net interest expense...................... (3,470) (3,619) (3,903) Dividends received from subsidiaries: Dividends received from savings bank subsidiary ............................. 56,380 15,947 11,304 Dividends received from other subsidiaries ........................... 4,562 3,327 3,806 ------------------------------- Total dividends received from subsidiaries........................ 60,942 19,274 15,110 ------------------------------- Other non-interest income: Affiliate service fee revenues............ 25,942 15 16 Other..................................... 4 326 1 ------------------------------- Total other non-interest income ...... 25,946 341 17 ------------------------------- Non-interest expense: Compensation and employee benefits........ 22,630 2,607 4,627 Occupancy and equipment, net.............. 7,515 152 3 Other..................................... 12,254 1,832 1,155 ------------------------------- Total non-interest expense ........... 42,399 4,591 5,785 ------------------------------- Income before income tax benefit and equity in undistributed earnings of subsidiaries .......................... 41,019 11,405 5,439 Income tax benefit ...................... 8,169 2,857 3,727 ------------------------------- Income before equity in undistributed earnings of subsidiaries............... 49,188 14,262 9,166 Equity in undistributed earnings of subsidiaries ............................ 8,175 23,709 36,093 ------------------------------- Net income ................................ $57,363 $37,971 $45,259 ------------------------------- -------------------------------
All dividends were received from consolidated subsidiaries during the three-year period ended December 31, 1994. Effective January 1, 1994, TCF Minnesota completed the transfer of certain support service functions and certain related assets and liabilities to TCF Financial Corporation. Also effective January 1, 1994, TCF Financial Corporation commenced allocating a portion of the operating costs of these service functions to its subsidiaries.
CONDENSED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, ---------------------------- (IN THOUSANDS) 1994 1993 1992 ------------------------------------------------------------------------------ Cash flows from operating activities: Net income.................................... $57,363 $37,971 $45,259 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries............................. (8,175) (23,709) (36,093) (Increase) decrease in other assets and liabilities, net..................... 179 (435) (3,840) Other, net................................. 4,871 949 737 ---------------------------- Total adjustments........................ (3,125) (23,195) (39,196) ---------------------------- Net cash provided by operating activities... 54,238 14,776 6,063 ---------------------------- Cash flows from investing activities: Net increase in interest-bearing deposits with banks.................................. (20,817) (6,720) (2,416) Investments in and advances to subsidiaries, net........................... - (1) (70,022) Loan to Executive Deferred Compensation Plan.. 153 253 613 Loan to Employee Stock Ownership Plan......... - 3 58 Loan originations, net........................ 51 (1,397) - Purchases of premises and equipment, net...... (3,135) - - ---------------------------- Net cash used by investing activities....... (23,748) (7,862) (71,767) ---------------------------- Cash flows from financing activities: Dividends paid on common stock................ (12,257) (8,724) (5,642) Proceeds from issuance of common stock, net... - - 32,019 Repurchases of common stock................... (17,524) - - Proceeds from subordinated capital notes...... - - 34,500 Proceeds from commercial bank note............ - 5,000 - Repayment of commercial bank notes............ (1,000) (5,503) (1,058) Issuance of stock to employee benefit plans... 18 - 2,858 Net increase (decrease) in notes payable to subsidiaries ............................... 45 (137) (19) Other, net.................................... 288 1,052 3,722 ---------------------------- Net cash provided (used) by financing activities................................. (30,430) (8,312) 66,380 ---------------------------- Net increase (decrease) in cash................. 60 (1,398) 676 RCG cash flows for six months ended December 31, 1992............................. - 196 - Cash at beginning of year....................... 5 1,207 531 ---------------------------- Cash at end of year............................. $ 65 $ 5 $ 1,207 ---------------------------- ----------------------------
TCF Financial Corporation and Subsidiaries 63 -- 21) BUSINESS SEGMENTS The following summarizes financial data for TCF's business segments:
YEAR ENDED DECEMBER 31, ----------------------------- (IN THOUSANDS) 1994 1993 1992 ------------------------------------------------------------------------------- Revenues: Financial institution...................... $418,168 $407,874 $449,434 Mortgage banking operations................ 35,163 49,984 47,470 Insurance operations....................... 26,316 28,366 22,027 Real estate development.................... - 5,205 6,212 Eliminations............................... (4,712) (9,036) (13,156) ----------------------------- $474,935 $482,393 $511,987 ----------------------------- ----------------------------- Earnings (loss) from continuing operations before income tax expense: Financial institution...................... $77,940 $45,319 $42,981 Mortgage banking operations................ 5,725 13,560 12,245 Insurance operations....................... 13,175 14,476 11,453 Real estate development.................... - (5,163) (6,936) Eliminations............................... 825 (1,574) (1,528) ----------------------------- $97,665 $66,618 $58,215 ----------------------------- ----------------------------- AT DECEMBER 31, -------------------------- (IN THOUSANDS) 1994 1993 ---------------------------------------------------------------------------- Identifiable assets: Financial institution...................... $5,045,127 $4,994,378 Mortgage banking operations................ 70,838 331,041 Insurance operations....................... 11,401 9,224 Real estate development.................... - 212 Eliminations............................... (59,097) (309,325) -------------------------- $5,068,269 $5,025,530 -------------------------- --------------------------
Real estate development revenues in the Consolidated Statements of Operations are presented net of costs of operations of real estate and are included in other non-interest expense. 22) LITIGATION AND CONTINGENT LIABILITIES TCF is involved in certain lawsuits in the course of its general lending business and other operations. Management, after review with its legal counsel, is of the opinion that the ultimate disposition of its litigation will not have a material adverse effect on TCF's financial condition or results of operations. 64 TCF Financial Corporation and Subsidiaries -- INDEPENDENT AUDITORS' REPORT KPMG PEAT MARWICK LLP To the Board of Directors and Stockholders of TCF Financial Corporation: We have audited the accompanying consolidated statements of financial condition of TCF Financial Corporation and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1994. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TCF Financial Corporation and Subsidiaries at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, TCF Financial Corporation changed its method of accounting for certain investments in debt and equity securities as of January 1, 1994 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. /s/ KPMG Peat Marwick LLP Minneapolis, Minnesota January 12, 1995 except for note 2, which is as of February 8, 1995 TCF Financial Corporation and Subsidiaries 65 -- TCF FINANCIAL CORPORATION AND SUBSIDIARIES Supplementary Information SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA) AT DECEMBER 31, 1994 AT SEPTEMBER 30, 1994 ------------------------------------------------------------------------------------------------ SELECTED FINANCIAL CONDITION DATA: Total assets . . . . . . . . . . . . . . . . . $5,068,269 $5,041,018 Investments (1) . . . . . . . . . . . . . . . 243,651 326,597 Securities available for sale. . . . . . . . . 65,785 63,806 Mortgage-backed securities held to maturity. . 1,114,613 1,152,918 Loans . . . . . . . . . . . . . . . . . . . . 3,081,808 2,949,690 Deposits . . . . . . . . . . . . . . . . . . . 3,819,614 3,869,993 Federal Home Loan Bank advances. . . . . . . . 650,863 357,877 Subordinated capital notes . . . . . . . . . . 34,500 34,500 Other borrowings . . . . . . . . . . . . . . . 182,920 415,657 Stockholders' equity . . . . . . . . . . . . . 327,191 316,700 ------------------------------------------ THREE MONTHS ENDED ------------------------------------------ DECEMBER 31, 1994 SEPTEMBER 30, 1994 ------------------------------------------------------------------------------------------------- SELECTED OPERATIONS DATA: Interest income. . . . . . . . . . . . . . . . $94,294 $91,481 Interest expense . . . . . . . . . . . . . . . 38,977 36,947 ------------------------------------------ Net interest income. . . . . . . . . . . . . 55,317 54,534 Provision for credit losses. . . . . . . . . . 3,986 2,891 ------------------------------------------ Net interest income after provision for credit losses . . . . . . . 51,331 51,643 ------------------------------------------ Non-interest income: Gain on sale of loan servicing, net. . . . . 581 518 Gain on sale of securities available for sale, net . . . . . . . . . 8 - Other non-interest income. . . . . . . . . . 28,476 29,119 ------------------------------------------ Total non-interest income . . . . . . . . 29,065 29,637 ------------------------------------------ Non-interest expense: Provision for real estate losses . . . . . . 283 853 Amortization of goodwill and other intangibles . . . . . . . . . . . . 807 817 Merger-related expense . . . . . . . . . . . - - Other non-interest expense . . . . . . . . . 52,773 53,184 ------------------------------------------ Total non-interest expense. . . . . . . . 53,863 54,854 ------------------------------------------ Income before income tax expense . . . . . 26,533 26,426 Income tax expense . . . . . . . . . . . . . . 10,780 10,967 ------------------------------------------ Net income . . . . . . . . . . . . . . . . . $15,753 $15,459 ------------------------------------------ ------------------------------------------ Per common share: Net income . . . . . . . . . . . . . . . . . $ 1.28 $ 1.25 ------------------------------------------ ------------------------------------------ Dividends declared . . . . . . . . . . . . . $ .25 $ .25 ------------------------------------------ ------------------------------------------ FINANCIAL RATIOS: Return on average assets (2) . . . . . . . . . 1.32% 1.29% Return on average equity (2) . . . . . . . . . 19.63 19.96 Average equity to average assets . . . . . . . 6.73 6.48 Net interest margin (2)(3) . . . . . . . . . . 4.98 4.90 --------------------------- (1) INCLUDES INTEREST-BEARING DEPOSITS WITH BANKS, FEDERAL FUNDS SOLD, U.S. GOVERNMENT AND OTHER MARKETABLE SECURITIES HELD TO MATURITY AND FHLB STOCK. (2) ANNUALIZED. (3) NET INTEREST INCOME DIVIDED BY AVERAGE INTEREST-EARNING ASSETS.
66 TCF Financial Corporation and Subsidiaries -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
AT AT AT AT AT AT (DOLLARS IN THOUSANDS, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, EXCEPT PER-SHARE DATA) 1994 1994 1993 1993 1993 1993 ---------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL CONDITION DATA: Total assets . . . . . . . . . . . . . . . $4,986,127 $5,044,620 $5,025,530 $5,009,367 $4,874,598 $4,840,649 Investments (1) . . . . . . . . . . . . . 362,000 275,897 235,121 242,971 169,973 203,434 Securities available for sale. . . . . . . 27,441 260,961 10,003 10,003 10,127 12,241 Mortgage-backed securities held to maturity . . . . . . . . . . . . 1,202,277 1,134,373 1,237,202 1,360,944 1,354,113 1,407,306 Loans . . . . . . . . . . . . . . . . . . 2,834,177 2,760,647 2,745,146 2,715,036 2,629,784 2,626,344 Deposits . . . . . . . . . . . . . . . . . 3,900,028 4,024,575 4,102,558 4,068,007 3,905,569 3,961,360 Federal Home Loan Bank advances. . . . . . 527,618 562,339 396,692 396,332 461,332 448,343 Subordinated capital notes . . . . . . . . 34,500 34,500 34,500 34,500 34,500 34,500 Other borrowings . . . . . . . . . . . . . 173,460 63,748 144,240 164,426 152,087 65,031 Stockholders' equity . . . . . . . . . . . 305,108 298,825 295,608 285,510 274,446 272,164 -------------------------------------------------------------------------------------- THREE MONTHS ENDED -------------------------------------------------------------------------------------- JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, 1994 1994 1993 1993 1993 1993 ---------------------------------------------------------------------------------------------------------------------------------- SELECTED OPERATIONS DATA: Interest income. . . . . . . . . . . . . . $87,177 $84,689 $88,310 $89,198 $89,854 $90,239 Interest expense . . . . . . . . . . . . . 37,628 38,960 41,976 42,539 42,753 45,909 -------------------------------------------------------------------------------------- Net interest income. . . . . . . . . . . 49,549 45,729 46,334 46,659 47,101 44,330 Provision for credit losses. . . . . . . . 1,880 2,144 2,140 4,282 9,810 5,701 -------------------------------------------------------------------------------------- Net interest income after provision for credit losses . . . . . 47,669 43,585 44,194 42,377 37,291 38,629 -------------------------------------------------------------------------------------- Non-interest income: Gain on sale of loan servicing, net. . . . . . . . . . . . 693 561 - 137 - - Gain on sale of securities available for sale, net . . . . . . . - 2,027 - - 40 609 Other non-interest income. . . . . . . . 28,013 27,298 31,818 31,642 29,611 25,758 -------------------------------------------------------------------------------------- Total non-interest income . . . . . . 28,706 29,886 31,818 31,779 29,651 26,367 -------------------------------------------------------------------------------------- Non-interest expense: Provision for real estate losses. . . . . . . . . . . . . . . . 942 295 1,100 1,849 5,638 3,156 Amortization of goodwill and other intangibles . . . . . . . . . . 816 817 988 737 616 616 Merger-related expense . . . . . . . . . - - - - 5,386 108 Other non-interest expense . . . . . . . 50,786 51,484 52,633 50,413 48,123 44,125 -------------------------------------------------------------------------------------- Total non-interest expense. . . . . . 52,544 52,596 54,721 52,999 59,763 48,005 -------------------------------------------------------------------------------------- Income before income tax expense . . . . . . . . . . . . . . 23,831 20,875 21,291 21,157 7,179 16,991 Income tax expense . . . . . . . . . . . . 9,892 8,663 9,156 9,098 3,195 7,198 -------------------------------------------------------------------------------------- Net income . . . . . . . . . . . . . . . $13,939 $12,212 $12,135 $12,059 $ 3,984 $ 9,793 -------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------- Per common share: Net income . . . . . . . . . . . . . . . $ 1.12 $ .98 $ .97 $ .96 $ .32 $ .78 -------------------------------------------------------------------------------------- Dividends declared . . . . . . . . . . . $ .25 $ .25 $ .1875 $ .1875 $ .1875 $ .125 -------------------------------------------------------------------------------------- FINANCIAL RATIOS: Return on average assets (2) . . . . . . . 1.16% 1.00% .97% .98% .33% .81% Return on average equity (2) . . . . . . . 18.49 16.43 16.76 17.29 5.88 14.66 Average equity to average assets . . . . . 6.25 6.10 5.81 5.69 5.60 5.49 Net interest margin (2)(3) . . . . . . . . 4.42 4.05 4.00 4.09 4.18 3.91
67 TCF Financial Corporation and Subsidiaries -- OTHER FINANCIAL DATA SUMMARY OF INVESTMENT YIELDS BY SCHEDULED MATURITIES
U.S. GOVERNMENT AND AGENCY SECURITIES OBLIGATIONS ALL OTHER TOTAL AVAILABLE HELD TO MATURITY INVESTMENTS INVESTMENTS FOR SALE ---------------- ------------------- --------------- -------------------- (DOLLARS IN THOUSANDS) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------------------------------------------------------------------------------------------------------------------ AT DECEMBER 31, 1994: Due in one year or less..... $ - -% $201,076 5.91% $201,076 5.91% $64,740 5.91% Due after one year through five years........ 50 4.30 - - 50 4.30 1,015 8.06 No stated maturity.......... - - 42,525(1) 7.97 42,525 7.97 30(2) - ------- -------- -------- -------- Total....................... $ 50 4.30 $243,601 6.27 $243,651 6.27 $65,785 5.95 ------- -------- -------- -------- ------- -------- -------- -------- Weighted average life (in years)............... .1 .1 .1 .1 AT DECEMBER 31, 1993: Due in one year or less.... $65,895 3.25% $126,921 3.20% $192,816 3.22% $10,000 4.66% Due after one year through five years....... 1,066 7.88 3,000 3.57 4,066 4.70 - - Due after 10 years......... - - 390 8.90 390 8.90 - - No stated maturity......... - - 37,849(1) 7.67 37,849 7.67 3(2) - ------- -------- -------- -------- Total...................... $66,961 3.32 $168,160 4.23 $235,121 3.97 $10,003 4.66 ------- -------- -------- -------- ------- -------- -------- -------- Weighted average life (in years)............... .1 .1 .1 .1 ____________________ (1) BALANCE REPRESENTS FHLB STOCK, A REQUIRED REGULATORY INVESTMENT AT ADJUSTABLE RATES HAVING NO STATED MATURITY. FHLB STOCK HAS BEEN EXCLUDED FROM THE WEIGHTED AVERAGE LIFE CALCULATION. (2) BALANCE REPRESENTS MARKETABLE EQUITY SECURITIES WHICH HAVE BEEN EXCLUDED FROM THE WEIGHTED AVERAGE LIFE CALCULATION.
MAXIMUM AND AVERAGE BORROWING LEVELS YEAR ENDED DECEMBER 31, ----------------------------- (IN THOUSANDS) 1994 1993 1992 ------------------------------------------------------------------------------- MAXIMUM BALANCES (1): FHLB advances................................... $650,863 $525,343 $585,334 Securities sold under repurchase agreements..... 403,521 218,452 100,000 Subordinated capital notes...................... 34,500 63,250 63,250 Other borrowings................................ 15,513 17,884 27,019 _____________________________ (1) MAXIMUM MONTH-END BALANCES.
YEAR ENDED DECEMBER 31, -------------------------------------------------------- 1994 1993 1992 ----------------- ----------------- ---------------- (DOLLARS IN THOUSANDS) BALANCE RATE BALANCE RATE BALANCE RATE ---------------------------------------------------------------------------------------------------------- AVERAGE BALANCES AND RATES: FHLB advances.................................. $369,780 5.62% $435,693 5.76% $500,495 5.69% Securities sold under repurchase agreements.... 122,216 5.27 123,119 5.02 103,285 7.52 Subordinated capital notes..................... 34,500 10.78 39,147 11.29 62,401 11.97 Other borrowings............................... 13,059 7.34 15,239 8.12 18,120 10.94
68 TCF Financial Corporation and Subsidiaries -- LOAN AND MORTGAGE-BACKED SECURITIES ACTIVITY
(IN THOUSANDS) YEAR ENDED DECEMBER 31, --------------------------------------- 1994 1993 1992 ------------------------------------------------------------------------------- ORIGINATIONS: Residential (1)........................ $ 452,601 $1,221,773 $1,047,080 Commercial real estate................. 75,452 33,624 38,349 Commercial business.................... 54,607 27,235 19,168 Consumer (1)........................... 787,550 605,846 540,201 --------------------------------------- Total originations................... 1,370,210 1,888,478 1,644,798 --------------------------------------- PURCHASES: Mortgage-backed securities............. 288,030 376,615 356,760 Residential (1)........................ 608,588 1,113,619 879,336 Consumer............................... - 680 1,409 --------------------------------------- Total purchases...................... 896,618 1,490,914 1,237,505 --------------------------------------- Total additions.................... 2,266,828 3,379,392 2,882,303 --------------------------------------- SALES: Mortgage-backed securities............. - - 23,034 Residential (1)........................ 933,137 1,700,275 1,561,222 Commercial real estate (1)............. - 2,066 - Consumer (1)........................... 80,338 65,310 36,626 --------------------------------------- Total sales.......................... 1,013,475 1,767,651 1,620,882 Principal payments and other reductions........................... 1,099,180 1,358,477 1,084,521 --------------------------------------- Total reductions..................... 2,112,655 3,126,128 2,705,403 --------------------------------------- Decrease in other items, net........... (10,322) (12,132) (3,828) Transfer of mortgage-backed securities to securities available for sale............................. (156,755) - (215,473) Adjustments for pooling-of-interests... - 74,270 - --------------------------------------- Net increase (decrease).............. $ (12,904) $ 315,402 $ (42,401) --------------------------------------- --------------------------------------- --------------------------------- (1) INCLUDES LOANS HELD FOR SALE.
COMMERCIAL REAL ESTATE LOANS BY PROPERTY TYPE
AT DECEMBER 31, ---------------------------------------- 1994 1993 ------------------- ------------------ NUMBER NUMBER (DOLLARS IN THOUSANDS) BALANCE OF LOANS BALANCE OF LOANS ------------------------------------------------------------------------------ Apartments........................... $265,557 565 $329,575 709 Office buildings..................... 109,242 161 94,364 177 Retail services...................... 89,050 152 90,693 169 Hospitality facilities............... 73,903 30 75,521 26 Warehouse/industrial buildings....... 52,409 92 55,828 95 Health care facilities............... 20,321 17 24,468 19 Other................................ 24,288 113 16,753 109 ---------------------------------------- $634,770 1,130 $687,202 1,304 ---------------------------------------- ---------------------------------------- Average balance...................... $562 $527 ----------------------------------------
TCF Financial Corporation and Subsidiaries 69 -- EX-21 11 EXHIBIT 21 TCF FINANCIAL CORPORATION Exhibit 21 Subsidiaries of Registrant (As of March 23, 1995)
NAMES UNDER WHICH SUBSIDIARY SUBSIDIARY STATE OF INCORPORATION DOES BUSINESS TCF Financial Insurance Illinois TCF Financial Insurance Agency Agency Illinois, Inc. Illinois, Inc. TCF Insurance TCF Financial Insurance Minnesota TCF Financial Insurance Agency Agency Wisconsin, Inc. Wisconsin, Inc. TCF Insurance TCF Financial Insurance Agency Minnesota TCF Financial Insurance Agency Michigan, Inc. Michigan, Inc. TCF Insurance GLB Agency TCF Financial Insurance Agency, Inc. Minnesota TCF Financial Insurance Agency, Inc. TCF Insurance TCF Securities, Inc. Minnesota TCF Securities, Inc. TCF Foundation Minnesota TCF Foundation TCF Minnesota Financial Services, Inc. Minnesota TCF Minnesota Financial Services, Inc. Twin City/Burnet, Inc. Minnesota Twin City/Burnet, Inc. Asset Quality Consultants, Inc. Minnesota Asset Quality Consultants, Inc. TCF Bank Minnesota fsb United States TCF Bank Minnesota fsb TCF Consumer Financial Services, Inc. Minnesota TCF Consumer Financial Services, Inc. TCF Mortgage Corporation Minnesota TCF Mortgage Corporation TCFMC Holding Co. Minnesota TCFMC Holding Co. TCF Financial Services, Inc. Minnesota TCF Financial Services, Inc. TCF Management Corporation Minnesota TCF Management Corporation MKP, Inc. Minnesota MKP, Inc. TCF Finance, Inc. Texas TCF Finance, Inc. NUM, Inc. Minnesota NUM, Inc. North Star Title, Inc. Minnesota North Star Title, Inc. North Star Real Estate Services, Inc. Minnesota North Star Real Estate Services, Inc. TCF Agency Minnesota, Inc. Minnesota TCF Agency Minnesota, Inc. TCF Agency Minnesota NAMES UNDER WHICH SUBSIDIARY SUBSIDIARY STATE OF INCORPORATION DOES BUSINESS TCF National Properties, Inc. Minnesota TCF National Properties, Inc. TCF New York Investment, Inc. Minnesota TCF New York Investments, Inc. TCF Florida Investments, Inc. Minnesota TCF Florida Investments, Inc. TCF Qwik, Inc. Minnesota TCF Qwik, Inc. TCF Wisk, Inc. Minnesota TCF Wisk, Inc. TCF Bolt, Inc. Minnesota TCF Bolt, Inc. TCF Jump, Inc. Minnesota TCF Jump, Inc. TCF Sped, Inc. Minnesota TCF Sped, Inc. Vangaard Financial Services, Inc. Minnesota Vangaard Financial Services, Inc. TCF Bank Wisconsin fsb United States TCF Bank Wisconsin fsb Republic Capital Funding Corp. I Wisconsin Republic Capital Funding Corp. I TCF Agency Wisconsin, Inc. Wisconsin TCF Agency Wisconsin, Inc. TCF Bank Illinois fsb United States TCF Bank Illinois fsb TCF Agency Illinois, Inc. Illinois TCF Agency Illinois, Inc. Great Lakes Bancorp, A Federal United States Great Lakes Bancorp Savings Bank GLB Service Corporation II Michigan GLB Service Corporation II 401 Service Corporation Michigan 401 Service Corporation GLB Properties, Inc. Michigan GLB Properties, Inc. Great Lakes Mortgage Company Michigan Great Lakes Mortgage Company GLB Management Company Michigan GLB Management Company
EX-24 12 CONSENT OF KPMG PEAT MARWICK LLP EXHIBIT 24 [KPMG PEAT MARWICK LLP LETTERHEAD] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors TCF Financial Corporation: We consent to incorporation by reference of our report dated January 12, 1995, except for note 2, which is as of February 8, 1995, relating to the consolidated statements of financial condition of TCF Financial Corporation and Subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1994, which report appears in the December 31, 1994, Form 10-K of TCF Financial Corporation, and in the following Registration Statements of TCF Financial Corporation: Nos. 33-43030, 33-57633, 33-14203, 33-22375, 33-40403 and 33-53986 on Form S-8 and No. 33-56137 on Form S-4. /s/ KPMG Peat Marwick LLP Minneapolis, Minnesota March 29, 1995 EX-27 13 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1994 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000 YEAR DEC-31-1994 DEC-31-1994 170,687 190,698 6,900 0 65,785 1,118,141 1,069,916 3,081,808 31,648 5,068,269 3,819,614 561,048 53,181 307,235 124 0 0 327,067 5,068,269 250,286 90,869 16,486 357,641 120,614 152,512 205,129 10,901 2,035 213,857 97,665 57,363 0 0 57,363 4.63 4.63 4.59 9,516 2,017 3,005 23,813 26,055 7,740 2,432 31,648 22,177 0 9,471