-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JS3/vBD9cA20BnRToJq4qq472JxkiJvt2vj7cpzkiv3L9oNfFrYOAfAnbJT+en2K t8piFhXVGY7Lv2CaZMehTg== 0001047469-99-012725.txt : 19990402 0001047469-99-012725.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012725 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TCF FINANCIAL CORP CENTRAL INDEX KEY: 0000814184 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 411591444 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10253 FILM NUMBER: 99580874 BUSINESS ADDRESS: STREET 1: 801 MARQUETTE AVE STREET 2: MAIL CODE 100-01-A CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6126616500 MAIL ADDRESS: STREET 1: 801 MARQUETTE AVENUE STREET 2: SUITE 302 CITY: MINNEAPOLIS STATE: MN ZIP: 55402 10-K 1 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, 1998 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, MAIL CODE 100-01-A, 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: 9.50% WINTHROP RESOURCES CORPORATION SENIOR NOTES DUE 2003 (Title of class) ________________________ 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. [ ] As of March 17, 1999, 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 $1,962,929,304. As of March 17, 1999, there were outstanding 84,287,203 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, 1998 are incorporated by reference into Parts I, II and IV hereof. Specific portions of the registrant's definitive proxy statement dated March 31, 1999 are incorporated by reference into Part III hereof. TABLE OF CONTENTS
PART I PAGE ---- Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Forward-Looking Information. . . . . . . . . . . . . . . . . . 1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Lending Activities . . . . . . . . . . . . . . . . . . . . . . 2 Investment Activities. . . . . . . . . . . . . . . . . . . . . 6 Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . 6 Other Information. . . . . . . . . . . . . . . . . . . . . . . 8 Activities of Subsidiaries of TCF Financial . . . . . . . . 8 Recent Accounting Developments. . . . . . . . . . . . . . . 8 Competition . . . . . . . . . . . . . . . . . . . . . . . . 9 Employees . . . . . . . . . . . . . . . . . . . . . . . . . 9 Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 15 Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . 16 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters. . . . . . . . . . . . . . . . 16 Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . 17 Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 17 PART III Item 10. Directors and Executive Officers of the Registrant . . . . . . . 17 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . 17 Item 12. Security Ownership of Certain Beneficial Owners and Management . 18 Item 13. Certain Relationships and Related Transactions . . . . . . . . . 18 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 18 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Index to Consolidated Financial Statements . . . . . . . . . . . . . . . . 20 Index to Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PART I ITEM 1. BUSINESS FORWARD-LOOKING INFORMATION There are a number of important factors which could cause TCF Financial Corporation's ("TCF" or the "Company") future results to differ materially from historical performance and which make any forward-looking statements about TCF's financial results subject to a number of risks and uncertainties. These include but are not limited to possible legislative changes; adverse economic developments which may increase default and delinquency risks in TCF's loan and lease portfolios or lead to other adverse developments; increases in bankruptcy filings by TCF's loan and lease customers; adverse credit losses or other unfavorable developments in the liquidation or other disposition of TCF's consumer finance automobile loan portfolio; shifts in interest rates which may result in shrinking interest margins, increased borrowing costs or other adverse developments; deposit outflows; interest rates on competing investments; demand for financial services and loan and lease products; increases in competition in the banking and financial services industry; changes in accounting policies or guidelines, or monetary and fiscal policies of the federal government; inflation; changes in the quality or composition of TCF's loan, lease and investment portfolios; adverse changes in securities markets; results of litigation or other significant uncertainties. TCF's Year 2000 compliance initiatives or other required technological changes are subject to certain uncertainties which may delay or increase the cost of implementation. To some extent, TCF's operations will be dependent on the Year 2000 compliance achieved by outside vendors, borrowers and government agencies or instrumentalities such as the Federal Reserve System, and also on the cooperation of such parties in testing the effectiveness of compliance initiatives. TCF's 1997 and 1998 acquisitions (and its commitment to construct additional Jewel-Osco branches in future periods) are subject to additional uncertainties, including the possible failure to fully realize anticipated benefits from the transactions. Significant uncertainties in such transactions include lower than expected income or revenue or higher than expected operating costs; greater than expected costs or difficulties related to the integration and retention of employees of the acquired business operations; and other unanticipated occurrences which may increase the costs related to the transactions or decrease the expected financial benefits of the transactions. GENERAL TCF, a Delaware corporation based in Minneapolis, Minnesota, with $10.2 billion in assets, is the holding company of four federally chartered national banks, TCF National Bank Minnesota ("TCF Minnesota"), TCF National Bank Illinois ("TCF Illinois"), TCF National Bank Wisconsin ("TCF Wisconsin") and Great Lakes National Bank Michigan ("Great Lakes Michigan"), and one bank holding company, TCF Colorado Corporation, which is the holding company of a federally chartered national bank, TCF National Bank Colorado ("TCF Colorado"). Unless otherwise indicated, references herein to TCF include its direct and indirect subsidiaries. TCF Minnesota, TCF Illinois, TCF Wisconsin, Great Lakes Michigan, and TCF Colorado are collectively referred to herein as the "TCF 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 1998 Annual Report, only those portions specifically identified are so incorporated. TCF has positioned the TCF Banks as "community banks" focusing on lending, deposit products and other services offered in their local markets. TCF's strategic emphasis on retail banking has allowed it to fund its assets primarily with retail core deposits, minimize wholesale borrowings and lower its interest-rate risk. In its local market and elsewhere, TCF Minnesota is also engaged in commercial leasing. TCF significantly expanded its retail banking franchise in recent periods and had 311 retail banking branches at December 31, 1998. In the past three years, TCF opened 147 new branches, of which 128 were supermarket branches. This expansion includes TCF's January 30, 1998 acquisition of 76 branches and 178 automated teller machines ("ATM") in Jewel-Osco stores in the Chicago area previously operated by Bank of America. TCF anticipates opening approximately 40 new branches in 1999, and additional branches in subsequent years, including approximately 25 Jewel-Osco supermarket branches per year in subsequent years until branches have been installed in all targeted stores, including newly constructed stores. 1 TCF's marketing strategy emphasizes attracting deposits held in checking, passbook and statement savings, and money market accounts, which also provide TCF with a significant source of fee income. TCF engages in commercial, residential and consumer lending activities, lease financing and in the insurance services business, including the sale of single premium tax-deferred annuities. It also has a broker dealer selling non-proprietary mutual funds. 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. TCF's non-interest income in future periods may be negatively impacted by pending state and federal legislative proposals, which, if enacted, could limit loan, deposit or other fees and service charges. See "FORWARD-LOOKING INFORMATION," and "Financial Review -- Financial Condition - Legislative and Regulatory Developments" on page 26 of TCF's 1998 Annual Report, incorporated herein by reference, for additional information. On January 30, 1998, TCF Illinois completed its acquisition of 76 branches in Jewel-Osco stores in the Chicago area previously operated by Bank of America. TCF Illinois converted existing deposits by offering TCF Illinois products to Bank of America customers and acquired the related fixed assets and 178 ATMs located in Jewel-Osco stores. TCF accounted for the acquisition using the purchase method of accounting. Additional information concerning this and other acquisitions is set forth in "Financial Review -- Results of Operations - Performance Summary" on page 14 and in Note 2 of Notes to Consolidated Financial Statements on page 37 of TCF's 1998 Annual Report, incorporated herein by reference. TCF operated 79 bank branches in Minnesota at December 31, 1998. The Company also operated 128 bank branches in Illinois, 31 in Wisconsin, 64 in Michigan and 9 in Colorado at December 31, 1998. TCF strives to develop innovative banking products and services. Of TCF's 311 bank branches, 160 were "in-store" bank branches at December 31, 1998. 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-interest cost funds and fee income. TCF has expanded its ATM network to 1,431 machines at December 31, 1998, and offers its customers an automated telephone banking system. Federal legislation imposes numerous legal and regulatory requirements on financial institutions. Among the most significant of these requirements are minimum regulatory capital levels and enforcement actions that can be taken by regulators when an institution's regulatory capital is deemed to be inadequate. TCF and each of the TCF Banks currently exceed all of the current minimum and well-capitalized regulatory capital requirements. See "REGULATION." As federally chartered national banks, the TCF Banks are subject to regulation and examination by the Office of the Comptroller of the Currency ("OCC") and, in certain cases, by the Federal Deposit Insurance Corporation ("FDIC"). The TCF 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 Banks are members of the Federal Home Loan Bank ("FHLB") of Des Moines, Chicago, Topeka and/or Indianapolis, and are also member banks within their respective Federal Reserve districts. TCF Financial is a bank holding company and is subject to regulation and examination by the Federal Reserve Board ("FRB"). See "REGULATION -- Regulation of TCF Financial and Affiliate and Insider Transactions." The executive offices of TCF Financial are located at 801 Marquette Avenue, Minneapolis, Minnesota 55402. 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. TCF is also engaged in lease financing and has expanded its consumer lending operations in recent years. 2 See "Financial Review -- Financial Condition - Loans and Leases" on pages 21 and 22, Note 7 of Notes to Consolidated Financial Statements on pages 39 and 40 and "Other Financial Data" on pages 58 through 61 of TCF's 1998 Annual Report, incorporated herein by reference, for additional information regarding TCF's loan and lease portfolios. RESIDENTIAL REAL ESTATE LENDING TCF's residential mortgage loan originations (first mortgage loans for the financing of one- to four-family homes) are predominantly secured by properties in Minnesota, Illinois, Wisconsin and Michigan. TCF engages in both adjustable-rate and fixed-rate residential real estate lending. Adjustable-rate residential real estate loans held in TCF's portfolio totaled $2.1 billion at December 31, 1998, compared with $2.2 billion at December 31, 1997. Loan originations by TCF Mortgage Corporation ("TCF Mortgage"), a wholly owned subsidiary of TCF Minnesota, include loans purchased from loan correspondents. TCF sells certain residential real estate loans in the secondary market, primarily on a nonrecourse basis. TCF 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 loans. At December 31, 1998 and 1997, TCF serviced for others $3.7 billion and $4.4 billion, respectively, in residential real estate loans. During 1998 and 1997, TCF sold servicing rights on $200.4 million and $144.7 million of loans serviced for others at net gains of $2.4 million and $1.6 million, respectively. There were no sales of servicing rights on loans serviced for others during 1996. 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. See "-- Classified Assets, Loan and Lease Delinquencies and Defaults." TCF Mortgage and the TCF Banks generally adhere to Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), Veterans Administration ("VA") or Federal Housing Administration ("FHA") guidelines in originating residential real estate loans. TCF generally requires that all conventional first mortgage 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 debt consolidation or the financing of home improvements, automobiles, vacations and education. Total consumer loans for the TCF Banks totaled $1.9 billion at December 31, 1998, with $903.2 Million, or 48%, having fixed interest rates and $973.4 million, or 52%, having adjustable interest rates. The following discussion provides additional information on TCF's consumer lending operations. The consumer lending activities of the TCF 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. 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 may present additional credit risk in the event of a decline in the value of real estate collateral. In December 1998, TCF restructured its consumer finance company operations, including the discontinuation of indirect automobile lending, the consolidation of offices and a renewed focus on home equity lending. TCF recorded a pretax charge of $1.8 million for the reorganization and increased the provision for credit losses by $3.9 million from the 1997 fourth quarter, primarily in connection with the finance company automobile loan portfolio. In the states where the Company's banks operate (Minnesota, Illinois, Wisconsin, Michigan and Colorado), the finance company operations were combined with the banks, and 25 of the 30 finance company offices were closed. Of the 23 offices in other states, 3 17 remain open as loan production offices of TCF Minnesota and the remainder were closed. Additionally, TCF reorganized its loan collection operations related to the remaining consumer finance automobile loan portfolio. Previously such collection activities were handled centrally in Pensacola, Florida for loans up to 30-days delinquent and by the branch from which the loans were originated for loans over 30-days delinquent. Beginning in December 1998, all collection operations for these loans were centralized in Minneapolis, Minnesota and Pensacola, Florida. At December 31, 1998, consumer finance automobile loans totaled $233.9 million, compared with $292.6 million at December 31, 1997. For additional information on consumer lending, including TCF's consumer finance company operations, see "Financial Review -- Financial Condition - Loans and Leases" on pages 21 and 22 of TCF's 1998 Annual Report, incorporated herein by reference. TCF originates student loans for resale. TCF had $138.3 million of education loans held for sale at December 31, 1998, compared with $135.3 million at December 31, 1997. 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 do not involve any independent credit underwriting by TCF. 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 is endeavoring to increase its originations of commercial real estate loans to creditworthy borrowers based in its primary markets. TCF may also engage in commercial real estate loan brokerage activity. At December 31, 1998, adjustable-rate loans represented 83% of commercial real estate loans outstanding. At December 31, 1998, TCF had a total of 1,549 outstanding commercial real estate loans secured by properties located in its primary markets. Of this total, 219 loans totaling $474.1 million had balances exceeding $1 million. See "Financial Review -- Financial Condition - Loans and Leases" on pages 21 and 22 of TCF's 1998 Annual Report, incorporated herein by reference, for information regarding the types of properties securing TCF's commercial real estate loans. At December 31, 1998, TCF's commercial construction and development loan portfolio totaled $92.4 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 addition, the nature of these loans is such that they are generally less predictable and more difficult to evaluate and monitor. COMMERCIAL BUSINESS LENDING TCF engages in general commercial business lending. 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. TCF is seeking to expand its commercial business lending activity by lending to small and medium-sized businesses. 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, 1998, TCF had 81 such standby letters of credit outstanding in the aggregate amount of $45.3 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 and the marketing of other bank products. TCF concentrates on originating commercial business loans primarily to middle-market companies based in its primary markets with borrowing requirements of less than $15 million. Substantially all of TCF's commercial business loans outstanding at December 31, 1998 were to borrowers based in its primary markets. 4 LEASE FINANCING TCF provides a range of comprehensive lease finance products addressing the financing needs of diverse companies through three product groups. The Value Added Lease, which has been TCF's primary focus, generally has a term from two to five years and is entered into with large organizations (generally corporations with revenue of $50 million or more). Such leases typically range from $250,000 to $20 million and cover high-technology and other business-essential equipment. These leases are flexible in structure to accommodate equipment additions and upgrades to meet customers' changing needs. Small Ticket Leases are typically less than $250,000, have lease terms of between two and five years, and cover business-essential equipment. Leasing to small, growing businesses is inherently more risky than leasing to large, established corporations. The Enterprise Lease is designed to meet the needs of large corporations with influence over multiple business entities (for example, franchise operations). The Enterprise Lease integrates the Value Added Lease and the Small Ticket Lease for organizations in need of enterprise-wide equipment and systems solutions. TCF enters into standard lease agreements with each customer. TCF's leases are noncancelable "net" leases which contain provisions under which the customer, upon acceptance of the equipment, must make all lease payments regardless of any defects in the equipment and which require the customer to maintain and service the equipment, insure the equipment against casualty loss and pay all property, sales and other taxes related to the equipment. TCF typically retains ownership of the equipment it leases and, in the event of default by the customer, TCF, or the financial institution that has provided non-recourse financing for a particular lease, may declare the customer in default, accelerate all lease payments due under the lease and pursue other available remedies, including repossession of the equipment. Upon completion of the initial term of the lease, the customer may return the equipment to TCF, renew the lease for an additional term, or in certain circumstances purchase the equipment. If the equipment is returned to TCF, it is either re-leased to another customer or sold into the secondary-user marketplace. TCF internally funds certain leases, and consequently retains the credit risk on such leases. At December 31, 1998, TCF internally funded 53.7% of its lease portfolio, compared with 37.6% at December 31, 1997. TCF may arrange permanent financing of Value Added Leases through non-recourse discounting of lease rentals with various other financial institutions at fixed interest rates. The proceeds from the assignment of the lease rentals are equal to the present value of the remaining lease payments due under the lease, discounted at the interest rate charged by the other financial institutions. Interest rates obtained under this type of financing are negotiated on a transaction-by-transaction basis and reflect the financial strength of the lease customer, the term of the lease and the prevailing interest rates. For a lease discounted on a non-recourse basis, the other financial institution has no recourse against TCF unless TCF is in default of the terms of the agreement under which the lease and the leased equipment are assigned to the other financial institution as collateral. The other financial institution may, however, take title to the collateral in the event the customer fails to make lease payments or certain other defaults by the lease customer occur under the terms of the lease. TCF believes that it has in place experienced personnel and acceptable standards for maintaining the credit quality of its lease portfolio, but no assurance can be given as to the level of future delinquencies and lease charge-offs. CLASSIFIED ASSETS, LOAN AND LEASE DELINQUENCIES AND DEFAULTS TCF has established a classification system for individual commercial loans or other assets based on OCC 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. 5 The following table summarizes information about TCF's non-accrual, restructured and past due loans and leases:
AT DECEMBER 31, ------------------------------------------------------------------ 1998 1997 1996 1995 1994 ------ ------ ------ ------ ------ (IN MILLIONS) Non-accrual loans and leases $33.7 $36.8 $26.4 $44.3 $33.8 Restructured loans - 1.3 3.0 1.6 4.3 ------ ------ ------ ------ ------ Total non-accrual and restructured loans and leases $33.7 $38.1 $29.4 $45.9 $38.1 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Accruing loans and leases 90 days or more past due $ - $ - $ - $ .7 $ 2.4 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
The allowance for loan and lease losses is based upon management's periodic analysis of TCF's loan and lease portfolios. Although appropriate levels of reserves have been estimated based upon factors and trends identified by management, there can be no assurance that the levels are adequate. Economic stagnation or reversals in the economy could give rise to increasing risk of credit losses and necessitate an increase in the required level of reserves. The expansion of the Company's consumer lending operation, and the December 1998 reorganization of its consumer finance company operations, create increased exposure to increases in delinquencies, repossessions, foreclosures and losses that generally occur during economic downturns or recessions. Adverse economic developments are also likely to adversely affect commercial lending operations and increase the risk of loan defaults and credit losses on such loans. Carrying values of foreclosed commercial real estate properties 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. Renewed weaknesses in real estate markets may result in further declines in property values and the sale of 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. Additional information concerning TCF's allowance for loan and lease losses is set forth in "Financial Review -- Financial Condition - Allowance for Loan and Lease Losses" on pages 22 and 23, in Note 1 of Notes to Consolidated Financial Statements on pages 35 through 37 of TCF's 1998 Annual Report and in Note 8 of Notes to Consolidated Financial Statements on page 40 of TCF's 1998 Annual Report, incorporated herein by reference. INVESTMENT ACTIVITIES The TCF Banks have authority to invest in various types of liquid assets, including United States Treasury obligations and securities of various federal agencies, deposits of insured banks, bankers' acceptances and federal funds. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans and leases. The TCF Banks must also meet reserve requirements of the FRB, which are imposed based on amounts on deposit in various types of deposit categories. Information regarding the carrying values and fair values of TCF's investments and securities available for sale is set forth in Notes 4 and 5 of Notes to Consolidated Financial Statements on page 38 of TCF's 1998 Annual Report, incorporated herein by reference. Additional information regarding investments and securities available for sale is set forth in "Other Financial Data" on pages 58 through 61 of TCF's 1998 Annual Report, incorporated herein by reference. 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. 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. 6 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. TCF's marketing strategy emphasizes attracting deposits held in checking, regular savings and money market accounts. These accounts provide significant fee income and are a source of low-interest cost funds. Checking, savings and money market accounts comprised 56% of total deposits at December 31, 1998, up from 48% of total deposits at December 31, 1997. The increase reflects the impact of the Company's significant expansion of its retail banking franchise, including the acquisition of the Jewel-Osco branches. In addition, there were approximately 1.4 million retail checking, savings and money market accounts at December 31, 1998, compared with approximately 1.3 million and 1.1 million such accounts at December 31, 1997 and 1996, respectively. Information concerning TCF's deposits is set forth in "Financial Review -- Financial Condition - Deposits" on page 25 and in Note 10 of Notes to Consolidated Financial Statements on page 42 of TCF's 1998 Annual Report, incorporated herein by reference. BORROWINGS The FHLB System functions as a central reserve bank providing credit for financial institutions through a regional bank located within a particular financial institution's assigned region. TCF Banks are members of the FHLB System, and 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 $1.8 billion at December 31, 1998, compared with $1.3 billion at December 31, 1997. 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. 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. 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 $367.3 million at December 31, 1998, compared with $112.2 million at December 31, 1997. 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 is set forth in "Financial Review -- Financial Condition - Borrowings" on page 25 and in Note 11 of Notes to Consolidated Financial Statements on pages 43 and 44 TCF's 1998 Annual Report, incorporated herein by reference. 7 OTHER INFORMATION ACTIVITIES OF SUBSIDIARIES OF TCF FINANCIAL TCF's business operations include those conducted by direct and indirect subsidiaries of TCF Financial. During the year ended December 31, 1998, TCF's subsidiaries were principally engaged in the following activities: Mortgage Banking TCF Mortgage and Standard Financial Mortgage Corporation, a subsidiary of TCF Illinois, originate, purchase, sell and service residential mortgage loans. A subsidiary of TCF Mortgage was involved in a joint venture known as Burnet Home Loans with Burnet Mortgage Corporation, an affiliate of Burnet Realty Inc., for the origination of residential mortgage loans from offices of Burnet Realty. TCF sold its interest in the joint venture on February 13, 1998. Leasing Winthrop Resources Corporation ("Winthrop"), a subsidiary of TCF Minnesota, provides a range of comprehensive lease finance products. Winthrop leases high-technology and other business-essential equipment to customers ranging from large corporations to small, growing businesses. Annuities and Investment Services TCF Financial Insurance Agency, Inc., TCF Financial Insurance Agency Illinois, Inc., TCF Financial Insurance Agency Wisconsin, Inc., TCF Financial Insurance Agency Michigan, Inc., and TCF Financial Insurance Agency, Colorado, Inc. are insurance agencies engaging in the sale of fixed-rate, single premium tax-deferred annuities. TCF Securities, Inc. engages in the sale of non-proprietary mutual fund products, and in the sale of variable-rate, single premium tax-deferred annuities. Insurance, Title Insurance and Appraisal Services TCF Agency Minnesota, Inc., TCF Agency Wisconsin, Inc., TCF Agency Illinois, Inc., TCF Agency Colorado, Inc., TCF Agency Insurance Services, Inc. and Lakeland Group Insurance Agency, Inc. provide various types of insurance, principally credit-related, marketed primarily to TCF's customers. North Star Title, Inc. is a title insurance agent for several title insurance underwriters, operating primarily in Minnesota, Illinois, Wisconsin and Michigan, 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. RECENT ACCOUNTING DEVELOPMENTS There has been an ongoing review over many years of the accounting principles and practices used by financial institutions. This review is expected to continue by banking regulators, the Securities and Exchange Commission ("SEC"), the Financial Accounting Standards Board ("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. In June 1997, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." Additional information on SFAS No. 130 is set forth in Note 1 of Notes to Consolidated Financial Statements on pages 35 through 37 of TCF's 1998 Annual Report, incorporated herein by reference. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Additional information on SFAS No. 131 is set forth in Note 1 of Notes to Consolidated Financial Statements on pages 35 through 37 and Note 20 of Notes to Consolidated Financial Statements on pages 54 through 56 of TCF's 1998 Annual Report, incorporated herein by reference. 8 In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." Additional information on SFAS No. 132 is set forth in Note 1 of Notes to Consolidated Financial Statements on pages 35 through 37 and Note 18 of Notes to Consolidated Financial Statements on pages 51 and 52 of TCF's 1998 Annual Report, incorporated herein by reference. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Additional information on SFAS No. 133 is set forth in "Financial Review -- Financial Condition - Recent Accounting Developments" on page 25 of TCF's 1998 Annual Report, incorporated herein by reference. In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise - an amendment of SFAS No. 65." Additional information on SFAS No. 134 is set forth in "Financial Review -- Financial Condition - Recent Accounting Developments" on page 25 of TCF's 1998 Annual Report, incorporated herein by reference. COMPETITION TCF Minnesota is the third largest depository institution headquartered in Minnesota. TCF Illinois, TCF Wisconsin, TCF Colorado and Great Lakes Michigan compete with a number of larger depository institutions in their market areas. The TCF 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 other commercial banks, credit unions and 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 savings institutions. TCF also competes nationwide with other leasing companies in the financing of high-technology and business-essential equipment. EMPLOYEES As of December 31, 1998, TCF had approximately 7,000 employees, including 2,100 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 The banking industry is generally subject to extensive regulatory oversight. TCF Financial, as a publicly held bank holding company, and the TCF Banks, as national banks with deposits insured by the FDIC, are subject to a number of laws and regulations. Many of these laws and regulations have undergone significant change in recent years. These laws and regulations impose restrictions on activities, minimum capital requirements, lending and deposit restrictions and numerous other requirements. Future changes to these laws and regulations are likely and cannot be predicted with certainty. RECENT DEVELOPMENTS Federal legislation enacted in September 1996 addressed a funding shortfall that had resulted in a significant deposit insurance premium disparity between deposits insured under the Bank Insurance Fund ("BIF") and deposits insured under the Savings Association Insurance Fund ("SAIF"). This new legislation imposed a one-time special assessment on SAIF-insured institutions and provided a reduction in deposit insurance premiums in subsequent periods and other regulatory reforms. In other federal legislation enacted in 1996, the reserve method of accounting for thrift bad debt reserves was repealed, eliminating the recapture of a thrift's bad debt reserve under certain circumstances, including a thrift institution's conversion to a bank or similar charter changes. As a result of these legislative changes and to reflect TCF's community banking strategies, TCF's management elected to seek the conversion of the TCF Banks from federal savings banks to national banks. 9 In April 1997, the TCF Banks became national banks (collectively, the "Bank Conversion") regulated by the OCC and TCF Financial became a bank holding company regulated by the FRB. As a result of these changes, TCF Financial and the TCF Banks ceased to be regulated by the Office of Thrift Supervision ("OTS"). Among other changes that took place in connection with the Bank Conversion, TCF Illinois and TCF Wisconsin became direct subsidiaries of TCF Financial as opposed to TCF Minnesota, and TCF's annuity and mutual fund sales operations became subsidiaries of the TCF Banks as opposed to TCF Financial. REGULATORY CAPITAL REQUIREMENTS TCF Financial and the TCF Banks are subject to risk-based and leverage capital requirements of the FRB and the OCC, respectively. These requirements are described below. In addition, these regulatory agencies are required by law to take prompt action when institutions do not meet certain other minimum capital standards. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") defines five levels of capital condition, the highest of which is "well-capitalized," and requires that regulatory authorities subject undercapitalized institutions to various restrictions such as limitations on dividends or other capital distributions, limitations on growth or activity restrictions. Undercapitalized banks must also develop a capital restoration plan and the parent bank holding company is required to guarantee compliance with the plan. TCF Financial and the TCF Banks believe they would be considered "well-capitalized" under the FDICIA capital standards. The FRB's risk-based capital guidelines include among their objectives making regulatory capital requirements more sensitive to differences in risk profiles of banking organizations, factoring off-balance-sheet exposures into the assessment of capital adequacy and minimizing disincentives to holding liquid, low-risk assets. Under these guidelines, a bank holding company's assets and certain off-balance sheet items are assigned to one of four risk categories, each weighted differently in accordance with the perceived level of risk posed by such assets or off-balance-sheet items. FRB guidelines also prescribe two "tiers" of capital. "Tier 1" capital includes common stockholders' equity; qualifying noncumulative perpetual preferred stock (including related surplus); qualifying cumulative perpetual preferred stock (including related surplus), subject to certain limitations; and minority interests in the equity accounts of consolidated subsidiaries. Tier 1 capital excludes goodwill and certain other intangible and other assets. "Supplementary" or "Tier 2" capital consists of the allowance for loan and lease losses, subject to certain limitations; perpetual preferred stock and related surplus, subject to certain conditions; hybrid capital instruments (i.e., those with characteristics of both equity and debt), perpetual debt and mandatory convertible debt securities; and term subordinated debt and intermediate-term preferred stock (including related surplus), subject to certain limitations. The maximum amount of Tier 2 capital that is allowed to be included in an institution's qualifying total capital is 100% of Tier 1 capital, net of goodwill and other intangible assets required to be deducted. TCF Financial is currently required to maintain (i) Tier 1 capital equal to at least four percent of its risk-weighted assets and (ii) total capital (the sum of Tier 1 and Tier 2 capital) equal to eight percent of risk-weighted assets. The FRB also requires bank holding companies to maintain a minimum Tier 1 "leverage ratio" (measuring Tier 1 capital as a percentage of adjusted total assets) of at least three percent. Higher leverage ratio requirements (minimum additional capital of 100 to 200 basis points) are imposed for institutions that do not have the highest regulatory rating or that fail to meet certain other criteria. At December 31, 1998, TCF believes it met all these requirements. See Note 14 of Notes to Consolidated Financial Statements on page 47 of TCF's 1998 Annual Report, incorporated herein by reference. The FRB has not advised TCF of any specific minimum Tier 1 leverage ratio applicable to it. The FRB's guidelines indicate that the FRB expects that bank holding companies experiencing internal growth or making acquisitions should maintain stronger capital positions, substantially above the minimum supervisory levels, without significant reliance on intangible assets. In addition, the guidelines provide that the FRB will use Tier 1 leverage guidelines in its inspection and supervisory process and as part of its analysis of applications to be approved by the FRB (this would include applications relating to bank holding company activities, acquisitions or other matters). The guidelines also indicate that the FRB will review the Tier 1 leverage measure periodically and will consider adjustments needed to reflect significant changes in the economy, financial markets and banking practices. 10 The OCC also imposes on the TCF Banks regulatory capital requirements that are substantially similar to those imposed by the FRB, and TCF believes each of the TCF Banks complied with OCC regulatory capital requirements at December 31, 1998. The FRB and the OCC also have adopted rules that could permit them to quantify and account for interest-rate risk exposure and market risk from trading activity and reflect these risks in higher capital requirements. New legislation, additional rulemaking, or changes in regulatory policies may affect future regulatory capital requirements applicable to TCF Financial and the TCF Banks. The ability of TCF Financial and the TCF Banks to comply with regulatory capital requirements may be adversely affected by legislative changes or future rulemaking or policies of their regulatory authorities, or by unanticipated losses or lower levels of earnings. RESTRICTIONS ON DISTRIBUTIONS Dividends or other capital distributions from the TCF Banks to TCF Financial are an important source of funds to enable TCF Financial to pay dividends on its common stock, to make payments on TCF Financial's other borrowings, or for its other cash needs. The TCF Banks' ability to pay dividends is heavily dependent on regulatory policies and regulatory capital requirements. The ability to pay such dividends in the future may be adversely affected by new legislation or regulations, or by changes in regulatory policies. In general, the TCF Banks may not declare or pay a dividend to TCF Financial in excess of 100% of their net profits during a year combined with their retained net profits for the preceding two years without prior approval of the OCC. The TCF Banks' ability to make any capital distributions in the future may require regulatory approval and may be restricted by their regulatory authorities. The TCF Banks' ability to make any such distributions may also depend 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. The OCC also has the authority to prohibit the payment of dividends by a national bank when it determines such payments would constitute an unsafe and unsound banking practice. In addition, tax considerations may limit the ability of the TCF Banks to make dividend payments in excess of their current and accumulated tax "earnings and profits" ("E&P"). Annual dividend distributions in excess of E&P could result in a tax liability based on the amount of excess earnings distributed and current tax rates. REGULATION OF TCF FINANCIAL AND AFFILIATE AND INSIDER TRANSACTIONS TCF Financial is subject to regulation as a bank holding company. It is required to register with the FRB and is subject to FRB regulations, examinations and reporting requirements relating to bank holding companies. As subsidiaries of a bank holding company, the TCF 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. As a result of FDICIA, TCF Financial may be required to make up certain capital deficiencies of the TCF Banks. Under FRB policy, a bank holding company must serve as a source of strength for its subsidiary banks. Under this policy, the FRB may require a holding company to contribute additional capital to an undercapitalized subsidiary bank. In addition, Section 55 of the National Bank Act may permit the OCC to order the pro rata assessment of shareholders of a national bank where the capital of the bank has become impaired. If a shareholder fails to pay such an assessment within three months, the OCC may order the sale of the shareholder's stock to cover a deficiency in the capital of a subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and may be entitled to priority over other creditors. Under the Bank Holding Company Act ("BHCA"), a bank holding company must obtain FRB approval before acquiring more than 5% control, or substantially all of the assets, of another bank or bank holding company, or merging or consolidating with another bank holding company. The BHCA also generally prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, providing services for its subsidiaries, or conducting activities permitted by the FRB as being closely related and proper incidents to the business of banking. 11 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 Banks, and which require regulatory approval prior to any such changes in control. The Restated 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. ACQUISITIONS AND INTERSTATE OPERATIONS Under federal law, interstate merger transactions may be approved by federal bank regulators without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks opted out of the Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Act") by adopting a law after the date of enactment of the Act and prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches by banks are permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions may also be subject to certain nationwide and statewide insured deposit maximum concentration levels. INSURANCE OF ACCOUNTS; DEPOSITOR PREFERENCE The deposits of the TCF Banks are insured by the FDIC up to $100,000 per insured depositor. Substantially all of TCF's deposits are SAIF-insured, but TCF also has deposits insured by the BIF. The FDIC has established a risk-based deposit insurance assessment under which deposit insurance assessments are based upon an institution's capital strength and supervisory condition, as determined by the institution's primary regulator. The annual insurance premiums on bank deposits insured by the BIF and SAIF may vary between $0 per $100 of deposits for banks classified in the highest capital and supervisory evaluation categories to $.27 per $100 of deposits for banks classified in the lowest capital and supervisory evaluation categories. In addition to risk-based deposit insurance assessments, assessments may be imposed on deposits insured by either the BIF or the SAIF to pay for the cost of Financing Corporation ("FICO") funding. FICO assessment rates for 1998 ranged from $.0116 to $.0124 per $100 of deposits annually for BIF-assessable deposits and from $.0582 to $.0622 per $100 of deposits annually for SAIF-assessable deposits. An increase in deposit insurance rates assessed against one of the TCF Banks could have a material adverse effect on TCF, depending on the amount and duration of the increase. In addition, the FDIC is authorized to terminate a depository institution's deposit insurance if it finds that the institution is being operated in an unsafe and unsound manner or has violated any rule, regulation, order or condition administered by the institution's regulatory authorities. Any such termination of deposit insurance is likely to have a material adverse effect on TCF, the severity of which would depend on the amount of deposits affected by such a termination. Under federal law, deposits and certain claims for administrative expenses and employee compensation against an insured depository institution are afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any receiver appointed by regulatory authorities. Such priority creditors would include the FDIC. EXAMINATIONS AND REGULATORY SANCTIONS TCF is subject to periodic examination by the FRB, OCC and the FDIC. Bank regulatory authorities may impose on institutions found to operating in an unsafe or unsound manner 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. Various enforcement remedies, including civil money penalties, may be assessed against an institution or an institution's directors, officers, employees, agents or independent contractors. 12 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. NATIONAL BANK INVESTMENT LIMITATIONS Permissible investments by national banks are limited by the National Bank Act and by rules of the OCC. The OCC adopted regulations in December 1996 that permit national banks to establish operating subsidiaries engaged in any activity that the OCC determines is incidental to banking. This rule would permit national bank subsidiaries to engage in activities that are traditionally associated with the business of banking, and would also permit certain activities not traditionally associated with banking. The OCC's operating subsidiary rule imposes certain supervisory limitations on subsidiaries engaged in activities that are not permitted for the parent bank, including notice and comment procedures for activities not previously approved, corporate governance requirements and certain supervisory requirements, including a regulatory capital deduction requirement and application of transactions with affiliates limitations. FUTURE LEGISLATIVE AND REGULATORY CHANGE; LITIGATION AND ENFORCEMENT ACTIVITY There are a number of respects in which future legislative or regulatory change, or changes in enforcement practices or court rulings, could adversely affect TCF, and it is generally not possible to predict when or if such changes may have an impact on TCF. 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 and administrative action has limited the role of private lenders in education loans and has adversely affected the profitablilty of student lending activity. TCF's non-interest income in future periods may be negatively impacted by pending state and federal legislative proposals which, if enacted, could limit loan, deposit or other fees and service charges. Financial institutions have also increasingly been the subject of private class action lawsuits challenging escrow account practices, private mortgage insurance requirements, the use of loan brokers and other practices. 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, including the FRB and the Department of Justice ("DOJ"), have sought a more rigorous enforcement of the CRA and other fair lending laws and regulations. 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. 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 related regulations, the Equal Credit Opportunity Act and Regulation B, Regulation D reserve requirements, Regulation E Electronic Funds transfer requirements, the Truth-in-Lending Act and Regulation Z, the Real Estate Settlement Procedures Act and Regulation X, and the Truth-in-Savings Act and Regulation DD. 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 lenders may be held liable for clean up costs relating to hazardous wastes under certain circumstances. 13 TAXATION FEDERAL TAXATION Bad Debt Reserves TCF files consolidated federal income tax returns and is an accrual basis taxpayer. The TCF Banks are subject to federal income tax under the Internal Revenue Code of 1986 (the "Code") in the same general manner as other corporations. Prior to 1996, savings institutions were subject to special bad debt reserve rules and certain other rules. During this period of time, a savings institution that held 60% or more of its assets in "qualifying assets" (as defined in the Code) was permitted to maintain reserves for bad debts and to make annual additions to such reserves that qualified as deductions from taxable income. Beginning in 1996, the favorable bad debt method described above was repealed putting savings institutions on the same tax bad debt method as commercial banks. This legislation requires recapture of the amount of the tax bad debt reserves to the extent that they exceed the adjusted base year reserve ("the applicable excess reserves"). The applicable excess reserves are recaptured over a six-year period. This recapture period can be deferred for a period of up to two years to the extent that a certain residential lending test is met. TCF has previously provided taxes for the applicable excess reserves. IRS Audit History TCF's consolidated tax returns are closed through 1994. See "Financial Review -- Results of Operations - Income Taxes" on page 20, Note 1 of Notes to Consolidated Financial Statements on pages 35 through 37 and Note 12 of Notes to Consolidated Financial Statements on pages 45 and 46 of TCF's 1998 Annual Report, incorporated herein by reference, for additional information regarding TCF's income taxes. 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, and 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%. All TCF entities are included in a single unitary return and 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 Banks, the three-factor apportionment method is used. For the TCF 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 2.3% and is computed on taxable business activity in Michigan. For all TCF entities operating in Michigan, except for the TCF Banks, the three-factor apportionment method is used. For the TCF Banks, taxable business activity is allocated using only the sales factor in accordance with Michigan financial organization tax law. Currently, TCF and its subsidiaries file state tax returns in all 50 states, and local tax returns in certain cities. 14 ITEM 2. PROPERTIES OFFICES At December 31, 1998, TCF owned the buildings and land for 113 of its bank branch offices, owned the buildings but leased the land for 5 of its bank branch offices and leased the remaining 193 bank branch offices, all of which are well maintained. The properties related to the bank branch offices owned by TCF had a depreciated cost of approximately $90.5 million at December 31, 1998. At December 31, 1998, the aggregate net book value of leasehold improvements associated with leased bank branch office facilities was $13.6 million. In addition to the above-referenced branch offices, TCF owned and leased other facilities with an aggregate net book value of $16.9 million at December 31, 1998. See Note 9 of Notes to Consolidated Financial Statements on pages 40 and 41 of TCF's 1998 Annual Report, incorporated herein by reference. 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. Some financial services companies have recently been subjected to significant exposure in connection with class actions and/or suits seeking punitive damages. While the Company is not aware of any actions or allegations which should reasonably give rise to any material adverse effect, it is possible that the Company could be subjected to such a claim in an amount which could be material. 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. On November 2, 1993, TCF Minnesota filed a complaint in the United States Court of Federal Claims seeking monetary damages from the United States for breach of contract, taking of property without just compensation and deprivation of property without due process. TCF Minnesota's claim is based on the government's breach of contract in connection with TCF Minnesota's acquisitions of certain savings institutions prior to the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), which contracts allowed TCF Minnesota to treat the "supervisory goodwill" created by the acquisitions as an asset that could be counted toward regulatory capital, and provided for other favorable regulatory accounting treatment. The United States has not yet answered TCF Minnesota's complaint. TCF Minnesota's complaint involves approximately $80.3 million in supervisory goodwill. In August 1995, Great Lakes Michigan filed with the United States Court of Federal Claims a complaint seeking monetary damages from the United States for breach of contract, taking of property without just compensation and deprivation of property without due process. Great Lakes Michigan's claim is based on the government's breach of contract in connection with Great Lakes Michigan's acquisitions of certain savings institutions prior to the enactment of FIRREA in 1989, which contracts allowed Great Lakes Michigan to treat the "supervisory goodwill" created by the acquisitions as an asset that could be counted toward regulatory capital, and provided for other favorable regulatory accounting treatment. The United States has not yet answered Great Lakes Michigan's complaint. Great Lakes Michigan's complaint involves approximately $87.3 million in supervisory goodwill. On July 1, 1996, the United States Supreme Court issued a decision affirming the August 30, 1995 decision of the United States Court of Appeals for the Federal Circuit, which decision had affirmed the Court of Federal Claims' liability determinations in three other "supervisory goodwill" cases, consolidated for review under the title WINSTAR CORP. V. UNITED STATES, 116 S.Ct. 2432 (1996). In rejecting the United States' consolidated appeal from the Court of Federal Claims' decisions, the Supreme Court held in WINSTAR that the United States had breached contracts it had entered into with the plaintiffs which provided for the treatment of supervisory goodwill, created through the plaintiffs' acquisitions of failed or failing savings institutions, as an asset that could be counted toward regulatory capital. Two of the three cases consolidated in the Supreme Court proceedings have since been tried before the Court of Federal Claims on the issue of damages, and the third was settled without trial. One of these trials commenced on February 24, 1997, the submission of evidence at trial was completed in April 1998, post-trial briefing was completed in the summer of 1998, and final arguments were heard in September of 1998. The Court of Federal Claims has not yet determined the amount, if any, that the plaintiff may recover in damages from the government's breach of contract. The other case which went to trial was settled in June 1998. In connection with the trials in those cases, the Court of Federal Claims in December 15 1996 denied the government's motion seeking to preclude the plaintiffs in these cases from offering evidence regarding the scope and extent of any lost profits they suffered as a result of the government's breach. On December 22, 1997, the Court of Federal Claims issued a decision finding the existence of contracts and governmental breaches of those contracts in four other "supervisory goodwill" cases, consolidated for purposes of that decision only under the title CALIFORNIA FEDERAL BANK V. UNITED STATES, 39 Fed Cl. 753 (1997). In reaching its decision, the Court of Federal Claims rejected a number of "common issue" defenses that the government has raised in a number of "supervisory goodwill" cases. In November 1998, the Court of Federal Claims issued another decision in the CALIFORNIA FEDERAL case prohibiting the plaintiff in that case from offering evidence as to a lost profits theory of damages. A two-month trial regarding the plaintiff's other damages theories in that case was concluded in early March 1999. No damages decision in that case has yet been rendered. In addition, the Court of Federal Claims has issued favorable liability decisions to the plaintiffs in several other "supervisory goodwill" cases, and a number of such cases are currently engaged in or about to commence trials on damages issues. The government has indicated that it will have a number of affirmative defenses against goodwill litigation filed against it. The TCF Minnesota and Great Lakes Michigan actions involve a variety of different types of transactions, contracts and contract provisions. There can be no assurance that the U.S. Supreme Court decision in WINSTAR or the Court of Federal Claims' recent decisions in CALIFORNIA FEDERAL and other cases will mean that a similar result would be obtained in the actions filed by TCF Minnesota and Great Lakes Michigan. There also can be no assurance that the government will be determined liable in connection with the loss of supervisory goodwill by either TCF Minnesota or Great Lakes Michigan or, even if a determination favorable to TCF Minnesota or Great Lakes Michigan is made on the issue of the government's liability, that a measure of damages will be employed that will permit any recovery on TCF Minnesota's or Great Lakes Michigan's claim. Because of the complexity of the issues involved in both the liability and damages phases of this litigation, and the usual risks associated with litigation, the Company cannot predict the outcome of TCF Minnesota's or Great Lakes Michigan's cases, and investors should not anticipate any recovery. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 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 ---- --- --------- 1998: First Quarter $35 1/8 $29 1/4 $.1250 Second Quarter 37 1/4 28 3/8 .1625 Third Quarter 32 7/16 19 7/8 .1625 Fourth Quarter 25 5/8 15 13/16 .1625 1997: First Quarter $23 3/4 $19 1/2 $.09375 Second Quarter 25 3/16 18 3/4 .125 Third Quarter 29 11/16 24 1/8 .125 Fourth Quarter 34 3/8 27 .125
As of March 17, 1999, there were approximately 11,000 record holders of TCF's common stock. 16 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 the TCF Banks), as well as regulatory and contractual limitations and such other factors as the Board of Directors may deem relevant. In general, the TCF Banks may not declare or pay a dividend to TCF in excess of 100% of their net profits for that year combined with their retained net profits for the preceding two calendar years without prior approval of the OCC. Restrictions on the ability of the TCF Banks to pay cash dividends or possible diminished earnings of the 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. See "REGULATION --Regulatory Capital Requirements," "REGULATION -- Restrictions on Distributions" and Note 13 of Notes to Consolidated Financial Statements on pages 46 and 47 of TCF's 1998 Annual Report, incorporated herein by reference. Federal income tax rules may also limit dividend payments under certain circumstances. See "TAXATION," and Note 12 of Notes to Consolidated Financial Statements on pages 45 and 46 of TCF's 1998 Annual Report, incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The Other Financial Data on pages 58 through 61 of TCF's 1998 Annual Report, presenting selected financial data, is incorporated herein by reference and should be read in conjunction with the Consolidated Financial Statements and related notes appearing on pages 30 through 57 of TCF's 1998 Annual Report, incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Financial Review on pages 14 through 29 of TCF's 1998 Annual Report, presenting management's discussion and analysis of TCF's financial condition and results of operations, is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The quantitative and qualitative disclosures about market risk set forth on pages 26 through 29 of TCF's 1998 Annual Report are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report and Other Financial Data set forth on pages 30 through 61 of TCF's 1998 Annual Report are incorporated herein by reference. See Index to Consolidated Financial Statements on page 20 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 3 through 15 and pages 17 through 21 of TCF's definitive proxy statement dated March 31, 1999 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding compensation of directors and executive officers of TCF is set forth on page 7, pages 12 through 15 and pages 17 through 21 of TCF's definitive proxy statement dated March 31, 1999 and is incorporated herein by reference. 17 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 8 and 9 of TCF's definitive proxy statement dated March 31, 1999 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 page 6 of TCF's definitive proxy statement dated March 31, 1999 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 20 of this report. 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 20 of this report. (b) REPORTS ON FORM 8-K A Current Report on Form 8-K, dated June 23, 1998, was filed in connection with TCF's announcement that it had authorized the repurchase of up to an additional 5% of the Company's outstanding shares through open market or privately negotiated transactions. A Current Report on Form 8-K, dated December 15, 1998, was filed in connection with TCF's announcement that it had authorized the repurchase of up to an additional 5% of the Company's outstanding shares through open market or privately negotiated transactions. 18 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 30, 1999 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 30, 1999 - ---------------------------- Officer and Director William A. Cooper /s/ THOMAS A. CUSICK Vice Chairman of the Board, Chief Operating March 30, 1999 - ---------------------------- Officer and Director Thomas A. Cusick /s/ LYNN A. NAGORSKE President and Director March 30, 1999 - ---------------------------- Lynn A. Nagorske /s/ NEIL W. BROWN Executive Vice President, Chief Financial March 30, 1999 - ---------------------------- Officer and Treasurer (Principal Neil W. Brown Financial Officer) /s/ MARK R. LUND Senior Vice President, Assistant Treasurer March 30, 1999 - ---------------------------- and Controller (Principal Accounting Officer) Mark R. Lund /s/ WILLIAM F. BIEBER Director March 30, 1999 - ---------------------------- William F. Bieber /s/ RUDY BOSCHWITZ Director March 30, 1999 - ---------------------------- Rudy Boschwitz /s/ JOHN M. EGGEMEYER III Director March 30, 1999 - ---------------------------- John M. Eggemeyer III /s/ ROBERT E. EVANS Director March 30, 1999 - ---------------------------- Robert E. Evans /s/ LUELLA G. GOLDBERG Director March 30, 1999 - ---------------------------- Luella G. Goldberg /s/ GEORGE G. JOHNSON Director March 30, 1999 - ---------------------------- George G. Johnson /s/ DANIEL F. MAY Director March 30, 1999 - ---------------------------- Daniel F. May /s/ THOMAS J. McGOUGH Director March 30, 1999 - ---------------------------- Thomas J. McGough /s/ RALPH STRANGIS Director March 30, 1999 - ---------------------------- Ralph Strangis /s/ RONALD A. WARD Director March 30, 1999 - ---------------------------- Ronald A. Ward
19 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following consolidated financial statements of TCF and its subsidiaries, included in TCF's 1998 Annual Report, are incorporated herein by reference in this report:
PAGE IN 1998 DESCRIPTION ANNUAL REPORT ----------- ------------- Independent Auditors' Report 57 Consolidated Statements of Financial Condition at December 31, 1998 and 1997 30 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1998 31 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 1998 32 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1998 34 Notes to Consolidated Financial Statements 35 Other Financial Data 58
INDEX TO EXHIBITS
EXHIBIT PAGE NO. DESCRIPTION NO. ---- ----------- ----- 3(a) Restated Certificate of Incorporation of TCF Financial Corporation, as amended [incorporated by reference to Exhibit 3(a) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, No. 0-16431], as amended June 5, 1997 [incorporated by reference to Exhibit 3(a) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, No. 0-16431] 3(b) Bylaws of TCF Financial Corporation, as amended [incorporated by reference to Exhibit 3(b) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, No. 0-16431] 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)], as amended October 1, 1995 [incorporated by reference to Exhibit 4(a) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, No. 0-16431 (filed November 14, 1995)], as amended October 20, 1997 [incorporated by reference to Exhibit 4(a) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, No. 0-16431] 20 EXHIBIT PAGE NO. DESCRIPTION NO. ---- ----------- ----- 4(b) Indenture dated July 1, 1996 relating to 9.50% Senior Notes due 2003 between Winthrop Resources Corporation ("Winthrop") and Norwest Bank Minnesota, National Association, as Trustee [incorporated by reference to Exhibit 4.5 to Winthrop's Registration Statement on Form S-2, File No. 333-04539 (filed May 24, 1996)], as amended by First Supplemental Indenture dated as of June 20, 1997 by and among Winthrop, TCF Financial Corporation and Norwest Bank Minnesota, National Association, as Trustee [incorporated by reference to Exhibit 4(d) to TCF Financial Corporation's Amendment No. 1 to Registration Statement on Form S-4, File No. 333-25905 (filed May 21, 1997)] 4(c) 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 [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) TCF Financial 1995 Incentive Stock Program, as amended October 1, 1995 [incorporated by reference to Exhibit 10(b) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, No. 0-16431], as amended October 22, 1996 [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, 1996, No. 0-16431] 10(c) Amended and Restated TCF Financial Corporation Executive Deferred Compensation Plan as amended and restated effective November 1, 1998 [incorporated by reference to Exhibit 10(c) to the TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, No. 0-16431] 10(d) Amended and Restated Trust Agreement for TCF Financial Corporation Executive Deferred Compensation Plan effective September 1, 1998; amendment adopted effective November 1, 1998 [incorporated by reference to Exhibit 10(d) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, No. 0-16431] 10(e) Employment Agreement of William A. Cooper, dated July 1, 1996 [incorporated by reference to Exhibit 10(a) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, No. 0-16431], as amended March 1, 1997 [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, 1996, No. 0-16431] 10(f) Change in Control Agreement of William A. Cooper, dated July 1, 1996 [incorporated by reference to Exhibit 10(b) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, No. 0-16431] 21 EXHIBIT PAGE NO. DESCRIPTION NO. ---- ----------- ----- 10(g) 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], 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], and amendment dated October 24, 1995 [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, 1995, No. 0-16431] 10(h) 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], 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], and amendment thereto dated October 24, 1995 [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, 1995, No. 0-16431] 10(j) 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], 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], and amendment thereto dated October 24, 1995 [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, 1995, No. 0-16431] 10(k) 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], 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], and amendment thereto dated October 24, 1995 [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, 1995, No. 0-16431] 10(l) 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], and amendment thereto dated October 24, 1995 [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, 1995, No. 0-16431] 10(m) Supplemental Employee Retirement Plan, as amended and restated effective July 21, 1997 [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, 1997, No. 0-16431]; as amended effective September 30, 1998 [incorporated by reference to Exhibit 10(m) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, No. 0-16431] 10(n) 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]; as amended on October 20, 1997 [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, 1997, No. 0-16431] 22 EXHIBIT PAGE NO. DESCRIPTION NO. ---- ----------- ----- 10(o) TCF Financial Corporation Senior Officer Deferred Compensation Plan as amended and restated effective July 21, 1997, and as amended effective January 1, 1998 [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, 1997, No. 0-16431] 10(p) Amended and Restated Trust Agreement for TCF Financial Corporation Senior Officer Deferred Compensation Plan effective September 1, 1998; amendment adopted effective November 1, 1998 [incorporated by reference to Exhibit 10(p) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, No. 0-16431] 10(q) Directors Stock Program [incorporated by reference to Program filed with registrant's definitive proxy statement dated March 22, 1996, No. 0-16431]; amendment adopted June 20, 1998 [incorporated by reference to Exhibit 10(q) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, No. 0-16431] 10(r) Management Incentive Plan-Executive [incorporated by reference to Plan filed with registrant's definitive proxy statement dated March 16, 1994, No. 0-16431] and 1995 Plan Acknowledgment [incorporated by reference to Exhibit 10(s) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, No. 0-16431]; 1996 Management Incentive Plan-Executive [incorporated by reference to Exhibit 10(t) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, No. 0-16431]; 1997 Management Incentive Plan-Executive [incorporated by reference to Exhibit 10(t) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, No. 0-16431]; and 1998 Management Incentive Plan-Executive [incorporated by reference to Exhibit 10(s) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, No. 0-16431]; and 1999 Management Incentive Plan-Executive . . . . . . . . . . . . . . . . . . 10(s) 1996 Performance-Based Incentive Policy [incorporated by reference to Policy filed with registrant's definitive proxy statement dated March 22, 1996, No. 0-16431]; Incentive Compensation 1997 Plan [incorporated by reference to Plan filed with registrant's definitive proxy statement dated March 17, 1997, No. 0-16431]; and 1999 Performance-Based Incentive Policy (to be presented to shareholders for approval at the Annual Meeting on May 11, 1999) . . . . . . 10(t) 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(u) Employment Agreement of Robert J. Delonis, dated February 9, 1995 [incorporated by reference to Exhibit 10(v) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, No. 0-16431, as amended December 18, 1995 [incorporated by reference to Exhibit 10(w) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, No. 0-16431], as amended January 23, 1998 [incorporated by reference to Exhibit 10(u) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, No. 0-16431] 23 EXHIBIT PAGE NO. DESCRIPTION NO. ---- ----------- ----- 10(v) TCF Directors Deferred Compensation Plan [incorporated by reference to Plan filed with registrant's definitive proxy statement dated March 15, 1995, No. 0-16431], as amended October 22, 1996 [incorporated by reference to Exhibit 10(x) to TCF Financial Corporation's Annual Report on Form 10-K for the year ended December 31, 1996, No. 0-16431]; amendment adopted effective September 30, 1998 [incorporated by reference to Exhibit 10(v) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, No. 0-16431] 10(w) TCF Directors Retirement Plan dated October 24, 1995 [incorporated by reference to Exhibit 10(y) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, No. 0-16431] 10(x) Employment Agreement of John L. Morgan, dated November 6, 1996 [incorporated by reference to Exhibit 10.8 to Winthrop Resources Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, No. 0-20123], as amended on February 28, 1997 [incorporated by reference to Exhibit 10(x) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, No. 0-16431]; as amended on November 23, 1998 . . . . . . . 10(y) Employment Agreement of David Mackiewich dated September 5, 1997 [incorporated by reference to Exhibit 10(y) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, No. 0-16431]; as amended on August 18, 1998 . . . . . . . . . . . . . . . . . 11 Statement regarding computation of earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 TCF Financial Corporation 1998 Annual Report (portions incorporated by reference) . . . . . . . . . . . . . . . . . 21 Subsidiaries of TCF Financial Corporation (as of March 17, 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Consent of KPMG Peat Marwick LLP dated March 29, 1999 . . .
24 EX-10.R 2 EXHIBIT 10(R) EXHIBIT 10(r) TCF FINANCIAL CORPORATION 1999 MANAGEMENT INCENTIVE PLAN - EXECUTIVE 1. ELIGIBILITY - Each Participant shall be given a copy of this 1999 Management Incentive Plan for Executives (the "Plan") and required to sign an acknowledgment of its terms. The participants in the Plan are those approved by the Personnel/Affirmative Action Committee (the "Committee"). 2. All participants will be initially evaluated by the Chairman of TCF Financial (the "Chairman") who will forward all recommendations to the Committee for approval. The Committee evaluates the performance of the Chairman. The Committee will consider the Earnings per Share ("EPS") and Return on Average Assets ("ROA") performance and shall also evaluate all other matters it deems appropriate in its sole discretion, subject to limits imposed on such discretion under the Performance-Based Plan. Evaluations will be performed pursuant to the terms of the TCF Performance-Based Compensation Policy for Covered Executive Officers (the "Performance-Based Plan") in the case of Covered Executive Officers (as defined in that Plan). 3. The criteria for awards (subject to paragraph 4) is as follows: a. The amount of incentive payable to a participant shall be determined by the achievement of EPS financial goals on Exhibit A attached. EPS will be calculated as provided in the Performance-Based Plan, using diluted EPS, rounded to the nearest cent. The bonus percentage shall be calculated, in the case of EPS achievement which falls between goals, by interpolation as follows: The amount by which the EPS achievement exceeds the goal shall be divided by the amount between the EPS goal exceeded and the next EPS goal. The result shall be stated in the form of a percentage which shall be multiplied by the total bonus percentage points between EPS goals. The result shall be added to the bonus percentage corresponding to the EPS goal that was exceeded. In addition, the Committee will determine the ROA of the Company under the Performance-Based Plan and will determine if it is in the top one-third of the Company's peer group, as required by Exhibit A. 4. The committee may in its discretion, reduce, defer or eliminate the amount of the incentive determined under paragraph 3.a. of this Agreement for a Covered Executive Officer in the Performance-Based Plan. In addition, for participants who are not subject to the Performance-Based Plan, the Committee may in its discretion increase the amount of the incentive calculated under paragraph 3.a. of this Agreement. The Committee has authority to make interpretations under this Plan and to approve the calculations under Paragraph 3.a. Incentive compensation will be paid in cash as soon as possible following approval of awards by the Personnel Committee. Except for Covered Executive Officers, the participant must be employed by TCF Financial (or the same subsidiary as employed by on the date of this Acknowledgment) on the date the incentive is paid in the same job position as the position for which the incentive was earned in order to receive the incentive payment. However, where the participant has transferred to another position within TCF, the Committee may in its discretion determine to pay part, none, or all of the incentive based on any factors the Committee considers to be relevant. 5. The committee may amend this Plan from time to time as it deems appropriate, except that no provision of the Performance-Based Plan may be amended except in accordance with its terms. This Plan shall not be construed as a contract of employment, nor shall it be considered a term of employment, nor as a binding contract to pay awards. The undersigned acknowledges he/she is employed "at will". 6. This Plan is effective for service on or after January 1, 1999, and supersedes and replaces the prior Management Incentive Compensation Plan and any other prior incentive arrangements with respect to executives in this Plan. The Plan may not be amended except in writing signed by TCF Financial and the executive. ACKNOWLEDGMENT I have received, read, and acknowledge the terms of the foregoing plan. - -------------------- --------------------------------- Date Signature EX-10.S 3 EXHIBIT 10(S) EXHIBIT 10(s) TCF PERFORMANCE-BASED COMPENSATION POLICY FOR COVERED EXECUTIVE OFFICERS 1. PURPOSE. The purpose of the TCF Performance-Based Compensation Policy for Covered Executive Officers (the "Policy") is to establish one or more performance goals for payment of incentive compensation other than stock options and the maximum amount of such incentive compensation that may be paid to certain executive officers. It is the intention of TCF Financial Corporation (the "Corporation") that incentive compensation awarded to each covered Executive Officer (as defined below) pursuant to the Policy for the taxable year commencing January 1, 1996 and each taxable year thereafter be deductible by the Corporation for federal income tax purposes in accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), and regulations published relating thereto (the "Regulations"). 2. COVERED EXECUTIVE OFFICERS. This Policy shall apply to the Chief Executive Officer of the Corporation. In addition, a committee (the "Committee") consisting solely of independent directors, as defined in section 162(m) of the Code and in the Regulations, may select each year additional individuals to be covered by the Policy in that year. Any individual so selected must be an individual who, on the last day of the previous taxable year, commencing with the taxable year beginning January 1, 1995, was among the four highest compensated executive officers (other than the Chief Executive Officer) of the Corporation. Whether an individual is among the four highest compensated executive officers shall be determined pursuant to the executive compensation disclosure rules under the Securities Exchange Act of 1934. The Chief Executive Officer and any other individual selected for participation in this Policy shall be considered the "Covered Executive Officers" and are the only individuals subject to this Policy. 3. INCENTIVE COMPENSATION AWARD/ESTABLISHMENT OF PERFORMANCE GOALS. An incentive compensation award to a Covered Executive Officer pursuant to this Policy may be paid in the form of cash, stock, or restricted stock, or any combination thereof. Payment of incentive compensation awards to a Covered Executive Officer under this Policy will be contingent upon the attainment of the performance goal or goals in the Performance Period established for such Covered Executive Officer by the Committee as provided herein. The Committee shall approve such awards and shall retain the discretion to reduce, defer or eliminate the incentive compensation award payable to a Covered Executive Officer, notwithstanding attainment of any performance goal. Each year the Committee shall select the individuals, if any, to be Covered Executive Officers for that year in addition to the Chief Executive Officer and shall establish in writing one or more performance goals to be attained (which performance goals may be stated as alternative performance goals) for a Performance Period for each Covered Executive Officer on or before the latest date permitted under Section 162(m) of the Code (currently the last day of the first quarter of the calendar year), the Regulations or in ruling or advisory opinions published by the Internal Revenue Service (the "IRS"). Performance goals may be based on any one or more of the following business criteria (as defined in paragraph 4 below) as the Committee may select: - Net Income - Return on Average Assets ("ROA") - Business Unit ROA - Return on Average Equity ("ROE") - Business Unit ROE - Return on Tangible Equity ("ROTE") - Business Unit ROTE - Earnings Per Share ("EPS") The maximum amount or value of an incentive compensation award for any Performance Period to the Chief Executive Officer shall not exceed two percent (2%) of the Corporation's Net Income. The maximum amount or value of an incentive compensation award for any Performance Period to any other Covered Executive Officer shall not exceed one percent (1%) of the Corporation's Net Income. 4. DEFINITIONS. For purposes of this Policy and for determining whether a particular goal was attained, the following terms shall have the meanings given them below: (a) The term "Net Income" shall mean the Corporation's or Business Unit's after-tax net income for the applicable Performance Period as reported in the Corporation's or Business Unit's consolidated financial statements, adjusted to eliminate the effect of the following: (1) in the event an acquisition is made effective during the Performance Period and is accounted for as a pooling of interests, restatements of financial results for the portion of the Performance Period preceding the effective date of such acquisition; (2) in the event an acquisition is made effective during the Performance Period, regardless of the method of accounting used, the effect on operations attributable to such acquisition with respect to the portion of the Performance Period following the effective date of such acquisition; (3) losses resulting from discontinued operations; (4) extraordinary gains or losses; (5) the cumulative effect of changes in generally accepted accounting principles; and (6) any other unusual, non-recurring gain or loss which is separately identified and quantified in the Corporation's or Business Unit's financial statements in accordance with Generally Accepted Accounting Principles ("GAAP") (any reference herein to the Corporation's financial statements shall be deemed to include any footnotes thereto as well as management's discussion and analysis). Notwithstanding the foregoing, in determining the Corporation's Net Income for a Performance Period the Committee may from time to time in its discretion disregard any one or more, or all, of the foregoing adjustments (1) - (6) provided that the effect of doing so would be to reduce the amount of incentive payable to a Covered Executive Officer for such Performance Period. (b) The term "Performance Period" shall mean a calendar year, commencing January 1 and ending December 31. (c) The term "Return on Average Equity" shall mean the Net Income of the Corporation, less dividends on preferred stock held by an unaffiliated third party, on an annualized basis, divided by the Corporation's Average Total Common Equity (adjusted to eliminate net unrealized gains or losses on assets available for sale resulting from SFAS 115) for the Performance Period. (d) The term "Return on Average Assets" shall mean the Net Income of the Corporation on an annualized basis, divided by the Corporation's average total assets (adjusted to eliminate unrealized gains or losses on assets available for sale resulting from SFAS 115) for the Performance Period. (e) The term "Business Unit ROA" means the Net Income of a business unit or subsidiary managed by a Covered Executive Officer on an annualized basis, divided by the business unit's or subsidiary's average total assets (adjusted to eliminate unrealized gains or losses on assets available for sale resulting from SFAS 115) for the Performance Period. In determining the Business Unit ROA of TCF Bank Minnesota there shall be subtracted the assets, equity and income of any insured institution subsidiary thereof. (f) The term "Business Unit ROE" means the Net Income of a business unit or subsidiary managed by a Covered Executive Officer, less dividends on preferred stock held by an unaffiliated third party, on an annualized basis, divided by the business unit's or subsidiary's Average Total Common Equity including preferred stock held by an affiliated entity (adjusted to eliminate net unrealized gains or losses on assets available for sale resulting from SFAS 115) for the Performance Period. In determining the Business Unit ROE of TCF Bank Minnesota there shall be subtracted the assets, equity and income of any insured institution subsidiary thereof. (g) The term "Return on Tangible Equity" shall mean the Net Income of the Corporation plus amortization of goodwill, both on an annualized basis, tax effected at the Corporation's statutory state and federal corporate tax rate, less dividends on preferred stock held by an unaffiliated third party on an annualized basis, divided by beginning of the year tangible common equity (adjusted to eliminate net unrealized gains or losses on assets available for sale resulting from SFAS 115) for the Performance Period. (h) The term "Business Unit Return on Tangible Equity" means the Net Income of a business unit or subsidiary managed by a Covered Executive Officer, plus amortization of goodwill of the business unit or subsidiary, both on an annualized basis, tax effected at the Corporation's statutory state and federal corporate tax rate, and less dividends on preferred stock held by an unaffiliated third party, divided by the business unit's or subsidiary's beginning of the year tangible common equity including preferred stock held by an affiliated entity (adjusted to eliminate net unrealized gains or losses on assets available for sale resulting from SFAS 115) for the Performance Period. In determining the Business Unit ROTE of TCF Bank Minnesota there shall be subtracted the assets, equity and income of any insured institution subsidiary thereof. (i) The term "Earnings Per Share" shall mean the Net Income of the Corporation divided by the Corporation's weighted average common and common equivalent shares outstanding, as determined for purposes of calculating the Corporation's basic or diluted (whichever the Committee shall designate at the time it establishes the goal) earnings per share under GAAP (as adjusted to eliminate the effect of shares issued for mergers or acquisitions identified in Sections 4.(a)(1) and (2) above where those Sections also resulted in adjustments to Net Income) for the Performance Period. (j) The term "Average Total Common Equity" shall mean the common equity of the Corporation or Business Unit, adjusted to eliminate the effect of mergers or acquisitions completed during the Performance Period where those mergers or acquisitions resulted in adjustments to Net Income under Sections 4.(a)(1), (2) or (3) above. 5. CALCULATIONS. Calculations made pursuant to this Policy shall be made in accordance with procedures reasonably designed to implement its terms. 6. APPLICABILITY OF CERTAIN PROVISIONS OF OTHER PLANS. An incentive compensation award paid in stock or restricted stock pursuant to this Policy shall be governed by the provisions (other than provisions with respect to the computation of such award) of the plan under which the award was made. Deferral of an incentive compensation award paid in cash under this Policy may be made pursuant to the provisions of the Corporation's Executive or Senior Officer Deferred Compensation Plan. 7. EFFECTIVE DATE; AMENDMENT AND TERMINATION. This Policy shall be effective as of January 1, 1996; provided, however, that no incentive compensation award shall be paid pursuant to this Policy unless this Policy has been approved by the stockholders of the Corporation. This Policy was amended effective January 1, 1999 to revise the definition of earnings per share. The Committee may at any time terminate or suspend this Policy, or amend or modify this Policy to include any provision that, in the opinion of counsel, would be required by Section 162(m) of the Code, the Regulations, or any other regulations promulgated under the Code, or rulings or advisory opinions published by the IRS. EX-10.X 4 EXHIBIT 10(X) EXHIBIT 10(x) AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT is dated as of ________________ , 1998, and is between WINTHROP RESOURCES CORPORATION, a Minnesota corporation (the "Company") and John L. Morgan, an individual residing in the State of Minnesota (the "Employee"). RECITALS A. Company and Employee are parties to an employment contract dated November 6, 1996 and amended as of February 28, 1997 (the "Employment Agreement"); B. The amendment dated as of February 28, 1997 was entered into in connection with the merger of the Company with a subsidiary of the current shareholder of the Company; C. Pursuant to the Employment Agreement, as amended, in the absence of having Good Reason to terminate his employment Employee is obligated to continue employment with the Company through December 31, 1999; D. Employee desires to terminate his employment with Company effective as of March 31, 1999 (which he believes to be in the best interests of the Company) and Company has agreed to such termination, but only upon the terms and conditions stated herein; E. In exchange for agreeing to early termination of Employee's employment prior to the end of the scheduled term of the Employment Agreement, and in order to preserve the protections negotiated in connection with the merger of the Company with a subsidiary of the current shareholder of the Company, as much as practicable after Employee's termination of employment, Company desires assurance of the continued protections of Section 6.01 of the Employment Agreement for five years after Employee's termination of employment and, after due consideration, Employee agrees that this is a fair and reasonable protection for the Company; NOW, THEREFORE, in consideration of the parties' agreement to be bound by the terms contained herein, the parties to the Employment Agreement agree as follows: 1. Employee's employment with Company is hereby terminated effective March 31, 1999 (the "Employment Termination Date"). Employee's termination of employment shall be deemed to be a voluntary termination of employment by Employee effective on the Employment Termination Date. Employee shall continue to perform his employment duties pursuant to the Employment Agreement through this Employment Termination Date and the Company shall continue to pay Employee his compensation and benefits due pursuant to the Employment Agreement through the Employment Termination Date. Effective immediately after Employee's Employment Termination Date, all compensation to Employee shall cease and all obligations of Employee under the Employment Agreement shall cease, except for the obligations identified in paragraphs 2-6 following, which shall survive termination of the Employment Agreement and Employee's employment. 2. Employee hereby agrees to extend the term of Section 6.01 of the Agreement (NonCompetition and NonSolicitation) and the term of Section 5.01 of the Agreement (Confidentiality) to be in effect for a period of five years after March 31, 1999, expiring on March 31, 2004, and the provisions of Article VIII shall continue to apply with respect to these continuing obligations. Employee also agrees that the NonCompetition obligations under Section 6.01 will extend to all leasing activity of any nature within the United States, but this shall not include real estate investment or leasing. 3. Employee hereby resigns his position as a member of the board of directors of the Company and as a member of the board of directors of TCF Financial Corporation, effective upon the date of this Amendment first set forth above. Employee hereby states that his resignation from the board of TCF Financial Corporation is not the result of a disagreement over operations, policies, or practices. 4. Employee agrees to assist the Company and to reasonably cooperate with the Company in connection with any pending or future litigation involving the Company in which the Company reasonably determines that Employee's assistance or cooperation would be beneficial to the Company or would aid in resolving the litigation. Any expenses incurred by Employee in such assistance shall be promptly reimbursed by the Company. 5. Company and Employee, in consideration of the commitments made herein, hereby fully release each other from any and all claims of any kind which either party may have against the other, except for violations, after the date hereof, of the Employment Agreement as amended by this Amendment. 6. The Company and Employee agree not to disparage or take any action which would damage the business or reputation of Employee or the Company or any of its affiliates. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the day and year first above written. EMPLOYEE WINTHROP RESOURCES CORPORATION By - ----------------------- -------------------------------------- Address: Its ------------------------------------- TCF FINANCIAL CORPORATION - ----------------------- By - ----------------------- -------------------------------------- Its - ----------------------- ------------------------------------- EX-10.Y 5 EXHIBIT 10(Y) EXHIBIT 10(y) 8-20-98 TCF NATIONAL BANK ILLINOIS AMENDMENT TO EMPLOYMENT AGREEMENT This Amendment (the "Amendment") to that certain Employment Agreement entered into effective as of September 5, 1997 (the "Agreement") is entered into as of AUGUST 18, 1998 (the "Effective Date"), by and among TCF National Bank Illinois ("TCF Illinois"), TCF Financial Corporation ("TCF Financial") and David H. Mackiewich ("Executive"). WHEREAS, TCF Illinois is a wholly owned subsidiary of TCF Financial; WHEREAS, Executive has been elected to and has agreed to serve in the position of Executive Chairman for TCF Illinois, a position of substantial responsibility which includes advising on potential merger and acquisition opportunities; WHEREAS, subsequent to the execution of the Agreement, TCF Illinois has completed an acquisition of a substantial number of branches which was not anticipated at the time the Agreement was executed; WHEREAS, Executive, TCF Illinois and TCF Financial wish to amend the Agreement to take into account the changed circumstances by substantially reducing Executive's responsibilities and compensation, by providing for his employment term to continue through January 2, 2002, the day after his grant of restricted stock will vest and by providing for payment at this time of the change in control payment which he would otherwise be entitled to receive at termination of employment as a result of the acquisition of Standard Financial, Inc., effective September 5, 1997; and WHEREAS, contemporaneously with the signing of this Amendment the parties are terminating the Change in Control Agreement between TCF Illinois, TCF Financial and Executive; TCF Illinois is making payment in full to Executive of the lump sum that would be due thereunder if Executive had a termination of employment effective as of the date of this Amendment; and the parties are amending the restricted stock award agreement with Executive to provide for full vesting on January 1, 2002 regardless of whether the ROE goals previously related to his shares are met; NOW, THEREFORE, in consideration of the terms and conditions hereinafter provided, the parties hereto agree as amend the Agreement follows: 1. Section 1.1 ("Change in Control") is deleted. 2. Section 1.5 ("Good Reason") is amended to read as follows in full: (a) without Executive's express written consent: (1) Executive is assigned any duties inconsistent in any material respect with Executive's employment positions, duties, responsibilities and status with TCF Illinois or TCF Financial as provided under this Amendment; (2) Executive's reporting responsibilities, titles or offices as provided in this Amendment are changed in any material respect; (3) the Term of this Agreement is reduced from that set forth in Section 3.3, as amended by this Amendment; (4) Executive is removed from or is not re-elected to the position of Executive Chairman of TCF Illinois, except in connection with the termination of Executive's employment for Cause, on account of Disability, as a result of Executive's death, or by Executive other than for Good Reason; (b) without Executive's express written consent: (1) TCF Illinois or TCF Financial reduces in any material respect the base salary of Executive provided for by this Amendment; (2) TCF Illinois or TCF Financial discontinues Executive's participation in the TCF Stockshare Plan, the TCF Cash Balance Pension Plan, the TCF Medical Plan, TCF Group Term Life Insurance Plan or TCF Disability Plan other than through an amendment or other action applicable to all employees generally; or (3) TCF Illinois' principal executive offices are relocated to a location at least fifty miles from their current location; (c) without Executive's express written consent, TCF Illinois or TCF Financial fail to obtain the assumption of all obligations under the Agreement by any successor as contemplated in Section 8.5 of the Agreement; or (d) without Executive's express written consent, Executive's employment is purported to be terminated in a manner which is not pursuant to a Notice of Termination satisfying the requirements of Section 7.4 of this Agreement. 3. Section 2 (EMPLOYMENT AND TERM) is amended to read as follows in full: 2.1 EMPLOYMENT. TCF Illinois agrees to continue to employ Executive and Executive agrees to continue to serve as Executive Chairman of TCF Illinois. Executive agrees to accept Employment on the terms and conditions set forth in the Agreement, as amended by this Amendment. 2.2 TERM. The term of the Agreement (the "Term") shall be the period beginning on September 5, 1997 (the "Effective Date") and ending on January 2, 2002 or such earlier time as provided by Article 7. 4. Section 3 (DUTIES OF EXECUTIVE) is amended to read as follows in full: 3.1 TIME DEVOTED; DUTIES. Executive's duties shall consist of presiding over board meetings and advising the management of TCF Illinois and/or TCF Financial from time to time of merger or acquisition opportunities of which Executive becomes aware.. Executive shall also promote, by entertainment or otherwise, as and to the extent permitted by law, the business of TCF Illinois and TCF Financial. Executive shall perform his duties under this Agreement in accordance with such reasonable standards expected of employees with comparable positions in comparable organizations and as may be established from time to time by the TCF Illinois and TCF Financial Boards. Executive shall also conduct his personal affairs, including his personal financial affairs, in a manner appropriate for his position. 3.2 COVENANT NOT TO COMPETE. In consideration of the continued employment of Executive pursuant to this Amendment, as well as the payment to Executive, contemporaneously with the execution of this Amendment, of the change in control payment which Executive would otherwise be entitled to receive only upon termination of employment, Executive covenants and agrees that Executive shall not during the term of this Agreement: (a) without the prior written consent of TCF Financial or TCF Illinois, engage or become interested in any capacity, directly or indirectly (whether as proprietor, principal stockholder, director, partner, employee, trustee, beneficiary, or in any other capacity) in any business selling, providing or developing products or services competitive with products or services sold or maintained by TCF Financial or TCF Illinois within a 5-mile radius of the Chicago Metropolitan Statistical Area; or (b) recruit or solicit for employment by any other business any current or future employee of TCF Financial or TCF Illinois or any of its respective successors or any entities related to it. The provisions of this Section 3.2 shall expire on the earlier of: (i) January 1, 2002 and (ii) the date one year after Executive's termination of employment. 5. Section 4 (COMPENSATION) is amended to read as follows in full: 4.1 . Executive shall receive for his services the following Base Compensation: (a) Effective starting as of July 1, 1998, TCF Illinois shall pay Executive a salary at an annual rate of $60,000.00 ("Base Compensation") payable in 26 equal bi-weekly installments per year (resulting in a total of $30,000 in salary for the months of July through December, 1998); (b) Any increase in Executive's Base Compensation shall be left to the sole discretion of the TCF Illinois Board. The Executive's Base Compensation shall not be subject to reduction during the Term of this Agreement except as otherwise provided in this Agreement. 4.2 BONUS COMPENSATION. Executive will not be eligible for a bonus. 4.3 ADDITIONAL COMPENSATION. As further compensation Executive shall be eligible to continue to participate for the remaining term of the Agreement in the TCF Stockshare Plan, the TCF Cash Balance Pension Plan, the TCF Medical Plan, the TCF Group Term Insurance Plan and other benefit plans for which executives of TCF Illinois are generally eligible subject to the terms and conditions of each respective plan concerning participation. TCF Illinois will not make any further payment of premiums for Executive's Term Life Insurance policy with Pacific Mutual Life, Policy No. 1A22101880 or the premiums for Executive's personal disability policy with UNUM, Policy No. 1AD290740 after the date of this Amendment. Effective as of July 1, 1998, Executive shall not accrue any additional benefits under the STEP supplemental pension plan and no further contributions shall be made to that plan by TCF Illinois or TCF Financial. As soon as practicable after this Amendment is signed, TCF Illinois shall assign to Executive all of its interest in the Pacific Mutual Life Insurance Policy No. 1A22661680 pertaining to the STEP Plan. Notwithstanding the foregoing, Executive's rights to medical coverage shall continue under the TCF Medical Plan or a comparable plan, upon payment of the same premium as active TCF Illinois employees pay, until Executive becomes eligible for other comparable medical coverage elsewhere or until Executive becomes eligible for Medicare, whichever occurs first. Nothing in this amended section 4.3 shall prohibit TCF Illinois or TCF Financial from amending, replacing or terminating any of the plans in which Executive currently participates, provided that the terms of any such action apply to employees generally. 6. Section 5.2 is amended to read as follows in full: 5.2 FRINGE BENEFITS. In addition to benefits in Section 4.3, as amended by this Amendment, Executive shall be entitled to receive from TCF Financial or TCF Illinois the use of a company car. Executive also has a grant of restricted stock in the amount of 60,000 shares (the "Restricted Stock Grant") which is expected to vest on January 1, 2002. 7. Section 6.1 (COVENANT NOT TO COMPETE) is moved to Section 3.2 as amended by this Amendment. 8. Section 7.3 (VOLUNTARY TERMINATION) is amended to read as follows in full: Executive may terminate his employment (i) for Good Reason or (ii) if the Term of the Agreement is changed without Executive's consent from that set forth in Section 2.2 of this Amendment. 9. Section 8.4 is amended to read as follows in full: 8.4 COMPENSATION UPON TERMINATION OTHER THAN FOR CAUSE. If Executive's employment is terminated other than for Cause or Disability or the Executive terminates employment pursuant to Section 7.3, Executive shall be entitled to the compensation Executive would have been entitled to under this Agreement as and when payable hereunder for the remainder of the Term, except that participation under the TCF Cash Balance Pension Plan, TCF Stockshare Plan, TCF Group Term Life Plan and TCF Disability Plan shall cease in accordance with the terms of those plans. If Executive's employment is terminated by TCF Illinois or TCF Financial for any reason other than for Cause, or Executive terminates employment pursuant to Section 7.3, then Executive shall be entitled to continuing coverage under the TCF Medical Plan, or other comparable medical coverage, for payment of the same premium as active TCF Illinois employees pay, until he becomes eligible for comparable coverage elsewhere or becomes eligible for Medicare, whichever comes first. Upon termination of Executive's employment by TCF Illinois or TCF Financial, regardless of whether for Cause, Disability or any other reason, or pursuant to Section 7.1, or upon termination of employment by Executive pursuant to Section 7.3 of the Agreement, Executive shall become fully vested in his Restricted Stock Grant. Upon Executive's termination of employment other than pursuant to Section 7.3, Executive's Restricted Stock Grant shall vest to the extent of the vesting percentage earned through the last January 1 preceding such termination of employment. 10. .Section 9.3 is amended to read as follows in full: 9.3 ENTIRE AGREEMENT; TERMINATION OF AND RELEASE UNDER CHANGE IN CONTROL AGREEMENT. This instrument contains the entire agreement between the parties with respect to the subject matter hereof, and shall supersede all prior agreements and understandings with respect to the subject matter hereof, including, without limitation, any and all employment agreements or Change in Control Agreements with Standard Financial, Inc. and/or Standard Federal Bank for savings. In connection with this Amendment, the parties hereby terminate that certain Change in Control Agreement by and between Executive and TCF Illinois and TCF Financial, executed as of September 5, 1997 (the "Change in Control Agreement") and no further payments or other compensation of any nature are due in the future under that Agreement (except that TCF Illinois' indemnification obligations as to fees and expenses under Sec. 2.2(b) and as to excise taxes under Sec. 2.4 of the Change in Control Agreement shall survive the termination of that Agreement). Executive hereby acknowledges full payment under said Change in Control Agreement and hereby releases TCF Illinois and TCF Financial from any further performance thereunder. In connection with the restricted stock grant made to Executive, there is an award agreement outstanding between Executive and TCF Financial which, subject to the terms and conditions of this Agreement, governs the vesting and other terms and conditions of that award. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. No modification or addition to this Agreement shall be enforceable unless in writing and signed by the party against whom enforcement is sought. IN WITNESS WHEREOF, the parties hereto have executed this Agreement, as of the day and year first above written. TCF NATIONAL BANK ILLINOIS By: ------------------------------------- Title: ---------------------------------- TCF FINANCIAL CORPORATION By: ------------------------------------- Title: ---------------------------------- DAVID H. MACKIEWICH ---------------------------------------- EX-11 6 EXHIBIT 11 Exhibit 11 - Computation of Earnings Per Common Share TCF FINANCIAL CORPORATION AND SUBSIDIARIES Computation of Earnings Per Common Share (Dollars in thousands, except per-share data)
Year Ended December 31, Computation of Basic Earnings Per Common ------------------------------------------------- Share for Statements of Operations: 1998 1997 1996 - ---------------------------------------- ----------- ----------- ----------- Net income $ 156,179 $ 145,061 $ 100,377 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average common shares outstanding 88,092,895 84,477,536 81,903,690 ----------- ----------- ----------- ----------- ----------- ----------- Basic earnings per common share $ 1.77 $ 1.72 $ 1.23 ----------- ----------- ----------- ----------- ----------- ----------- Computation of Diluted Earnings Per Common Share for Statements of Operations: - ---------------------------------------- Net income $ 156,179 $ 145,061 $ 100,377 Add: Interest expense on 7 1/4% convertible subordinated debentures, net of tax - 132 328 ----------- ----------- ----------- Income applicable to common shareholders including effect of dilutive securities $ 156,179 $ 145,193 $ 100,705 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average number of common shares outstanding adjusted for effect of dilutive securities: Weighted average common shares outstanding used in basic earnings per common share calculation 88,092,895 84,477,536 81,903,690 Net dilutive effect of: Stock option plans 346,434 468,275 537,900 Restricted stock plans 476,486 838,189 654,918 Assumed conversion of 7 1/4% convertible subordinated debentures - 349,936 842,850 ----------- ----------- ----------- 88,915,815 86,133,936 83,939,358 ----------- ----------- ----------- ----------- ----------- ----------- Diluted earnings per common share $ 1.76 $ 1.69 $ 1.20 ----------- ----------- ----------- ----------- ----------- -----------
EX-13 7 EXHIBIT 13 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review 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" or the "Company"). This review should be read in conjunction with the consolidated financial statements and other financial data beginning on page 30. RESULTS OF OPERATIONS PERFORMANCE SUMMARY -- TCF reported net income of $156.2 million for 1998, up from $145.1 million for 1997 and $100.4 million for 1996. Diluted earnings per common share was $1.76 for 1998, compared with $1.69 for 1997 and $1.20 for 1996. Return on average assets was 1.62% in 1998, compared with 1.77% in 1997 and 1.39% in 1996. Return on average realized common equity was 17.51% in 1998, compared with 19.57% in 1997 and 16.77% in 1996. Diluted cash earnings per common share, which excludes amortization and reduction of goodwill and deposit base intangibles, was $1.91 for 1998, compared with $1.81 for 1997 and $1.24 for 1996. On the same basis, cash return on average assets was 1.76% for 1998, compared with 1.91% for 1997 and 1.44% for 1996, and cash return on average tangible equity was 23.83% for 1998, compared with 23.96% for 1997 and 18.08% for 1996. As TCF's September 4, 1997 acquisition of Standard Financial, Inc. ("Standard") was accounted for as a purchase transaction, TCF's results for periods prior to the acquisition have not been restated. Since Standard's performance ratios were lower than TCF's, the Company's performance ratios for 1998 were negatively impacted by the acquisition of Standard due to the inclusion of Standard for the entire year. TCF significantly expanded its retail banking franchise in recent periods and had 311 retail banking branches at December 31, 1998. In the past three years, TCF opened 147 new branches, of which 128 were supermarket branches. This expansion includes TCF's January 30, 1998 acquisition of 76 branches and 178 automated teller machines ("ATM") in Jewel-Osco stores in the Chicago area previously operated by Bank of America. TCF anticipates opening approximately 40 new branches in 1999, and additional branches in subsequent years, including approximately 25 Jewel-Osco supermarket branches per year in subsequent years until branches have been installed in all targeted stores, including newly constructed stores. See "Financial Condition -- Forward-Looking Information." Further detail on the acquisitions of Standard and the Jewel-Osco branches is provided in Note 2 of Notes to Consolidated Financial Statements. In December 1998, TCF restructured its consumer finance company operations, including the discontinuation of indirect automobile lending, the consolidation of offices and a renewed focus on home equity lending. TCF recorded a pretax charge of $1.8 million for the reorganization, and increased the provision for credit losses by $3.9 million from the 1997 fourth quarter, primarily in connection with the finance company automobile loan portfolio. TCF's 1997 results reflect a branch reorganization at Great Lakes National Bank Michigan ("Great Lakes Michigan") and Great Lakes National Bank Ohio ("Great Lakes Ohio"), including the sale of all eight Great Lakes Ohio branches and related deposits for a net gain of $10.6 million, the accelerated amortization of Great Lakes Michigan's remaining $8.7 million of deposit base intangibles, and the write-off of $1.5 million of Great Lakes Michigan's teller equipment. TCF's 1996 results included a one-time special assessment of $34.8 million from the Federal Deposit Insurance Corporation ("FDIC") to recapitalize the Savings Association Insurance Fund ("SAIF") under federal legislation enacted on September 30, 1996. On an after-tax basis, the FDIC special assessment totaled $21.7 million, or 26 cents per diluted common share. Net income totaled $122.1 million for 1996 before the FDIC special assessment. On the same basis, diluted earnings per common share was $1.46, diluted cash earnings per common share was $1.50, return on average assets was 1.70%, return on average realized common equity was 20.40%, cash return on average assets was 1.74% and cash return on average tangible equity was 21.87%. NET INTEREST INCOME -- A significant component of TCF's earnings is net interest income, which is the difference between interest earned on loans and leases, securities available for sale, investments and other interest-earning assets (interest income), and interest paid on deposits and borrowings (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. Net interest income was $425.7 million for the year ended December 31, 1998, up from $393.6 million in 1997 and $354.6 million in 1996. This represents an increase of 8.2% in 1998, following increases of 11% in 1997 and 7.7% in 1996. Total average interest-earning assets increased 16.2% in 1998, compared with an increase of 12.5% in 1997 and a decrease of 5.6% in 1996. The net interest margin for 1998 was 4.84%, compared with 5.20% in 1997 and 5.27% in 1996. The increase in net interest income for 1998 was primarily due to the 1997 acquisition of Standard and the growth of lower interest-cost retail deposits. TCF's net interest margin for 1998 was negatively impacted due to the impact of Standard's lower net interest margin, loan prepayments and the purchase of $822.4 million of mortgage-backed securities in the second half of 1998 yielding approximately 6.5%. Although these mortgage-backed securities are expected to contribute to future earnings, they will continue to negatively impact TCF's net interest margin. 14 TCF 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 DECEMBER 31, 1998 DECEMBER 31, 1997 - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST INTEREST YIELDS YIELDS AVERAGE AND AVERAGE AND (DOLLARS IN THOUSANDS) BALANCE INTEREST(1) RATES BALANCE INTEREST(1) RATES - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS: Investments ......................... $ 161,239 $ 10,356 6.42% $ 96,146 $ 7,192 7.48% ---------- ---------- ---------- ---------- Securities available for sale(2) .... 1,359,698 93,124 6.85 1,338,295 95,701 7.15 ---------- ---------- ---------- ---------- Loans held for sale ................. 197,969 14,072 7.11 211,192 15,755 7.46 ---------- ---------- ---------- ---------- Loans and leases: Residential real estate ........... 3,687,579 267,916 7.27 2,674,107 206,853 7.74 Commercial real estate ............ 831,287 73,546 8.85 856,712 77,829 9.08 Commercial business ............... 263,257 22,169 8.42 205,402 18,068 8.80 Consumer ........................ 1,922,943 218,837 11.38 1,856,299 221,758 11.95 Lease financing ................... 378,824 48,874 12.90 335,534 39,458 11.76 ---------- ---------- ---------- ---------- Total loans and leases(3) ....... 7,083,890 631,342 8.91 5,928,054 563,966 9.51 ---------- ---------- ---------- ---------- Total interest- earning assets .............. 8,802,796 748,894 8.51 7,573,687 682,614 9.01 ---------- ----- ---------- ----- Other assets(4) ..................... 826,741 600,083 ---------- ---------- Total assets ...................... $9,629,537 $8,173,770 ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY: Non-interest bearing deposits ....... $1,017,245 $ 782,836 ---------- ---------- Interest-bearing deposits: Checking .......................... 666,956 6,207 .93 551,501 6,133 1.11 Passbook and statement ............ 1,130,067 18,305 1.62 901,576 17,653 1.96 Money market ...................... 700,400 20,496 2.93 658,894 20,533 3.12 Certificates ...................... 3,249,742 167,484 5.15 2,868,833 150,863 5.26 ---------- ---------- ---------- ---------- Total interest-bearing deposits ...................... 5,747,165 212,492 3.70 4,980,804 195,182 3.92 ---------- ---------- ---------- ---------- Borrowings: Securities sold under repurchase agreements and federal funds purchased ......... 140,414 7,863 5.60 346,339 19,892 5.74 FHLB advances ..................... 1,367,104 79,237 5.80 817,464 48,142 5.89 Discounted lease rentals .......... 205,393 16,744 8.15 222,558 18,430 8.28 Other borrowings .................. 92,467 6,824 7.38 97,547 7,372 7.56 ---------- ---------- ---------- ---------- Total borrowings ................. 1,805,378 110,668 6.13 1,483,908 93,836 6.32 ---------- ---------- ---------- ---------- Total interest-bearing liabilities ................. 7,552,543 323,160 4.28 6,464,712 289,018 4.47 ---------- ----- ---------- ------ Other liabilities(4) ................ 159,292 180,585 ---------- ---------- Total liabilities ................. 8,729,080 7,428,133 Stockholders' equity(4) ............. 900,457 745,637 ---------- ---------- Total liabilities and stockholders' equity ........ $9,629,537 $8,173,770 ---------- ---------- Net interest income .................... $ 425,734 $ 393,596 ---------- ---------- Net interest-rate spread ............... 4.23% 4.54% ----- ----- Net interest margin .................... 4.84% 5.20% - ---------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 - ------------------------------------------------------------------------------------ INTEREST YIELDS AVERAGE AND (DOLLARS IN THOUSANDS) BALANCE INTEREST(1) RATES - ------------------------------------------------------------------------------------ ASSETS: Investments ......................... $ 65,853 $ 4,447 6.75% ---------- ---------- Securities available for sale(2) .... 1,054,434 75,303 7.14 ---------- ---------- Loans held for sale ................. 227,226 17,080 7.52 ---------- ---------- Loans and leases: Residential real estate ........... 2,416,865 191,348 7.92 Commercial real estate ............ 923,838 82,971 8.98 Commercial business ............... 157,400 13,905 8.83 Consumer .......................... 1,624,449 197,916 12.18 Lease financing ................... 263,709 29,914 11.34 ---------- ---------- Total loans and leases(3) ....... 5,386,261 516,054 9.58 ---------- ---------- Total interest- earning assets .............. 6,733,774 612,884 9.10 ---------- ----- Other assets(4) ..................... 467,328 ---------- Total assets ...................... $7,201,102 ---------- LIABILITIES AND STOCKHOLDERS' EQUITY: Non-interest bearing deposits ....... $ 608,213 ---------- Interest-bearing deposits: Checking .......................... 510,979 5,571 1.09 Passbook and statement ............ 793,975 14,389 1.81 Money market ...................... 630,382 19,256 3.05 Certificates ...................... 2,458,291 132,159 5.38 ---------- ---------- Total interest-bearing deposits ...................... 4,393,627 171,375 3.90 ---------- ---------- Borrowings: Securities sold under repurchase agreements and federal funds purchased ......... 506,298 28,597 5.65 FHLB advances ..................... 674,703 37,277 5.52 Discounted lease rentals .......... 180,586 14,906 8.25 Other borrowings .................. 85,571 6,161 7.20 ---------- ---------- Total borrowings ................ 1,447,158 86,941 6.01 ---------- ---------- Total interest-bearing liabilities ................. 5,840,785 258,316 4.42 ---------- ----- Other liabilities(4) ................ 153,373 ---------- Total liabilities ................. 6,602,371 Stockholders' equity(4) ............. 598,731 ---------- Total liabilities and stockholders' equity ........ $7,201,102 ---------- Net interest income .................... $ 354,568 ---------- Net interest-rate spread ............... 4.68% ----- Net interest margin .................... 5.27% - ------------------------------------------------------------------------------------
(1) Tax-exempt income was not significant and thus has not been presented on a tax equivalent basis. Tax-exempt income of $147,000, $201,000 and $363,000 was recognized during the years ended December 31, 1998, 1997 and 1996, respectively. (2) Average balance and yield of securities available for sale is based upon the historical amortized cost balance. (3) Average balance of loans and leases includes non-accrual loans and leases, and is presented net of unearned income. (4) Average balance is based upon month-end balances. TCF 15 The following table presents the components of the changes in net interest income by volume and rate:
YEAR ENDED YEAR ENDED DECEMBER 31, 1998 DECEMBER 31, 1997 VERSUS SAME PERIOD IN 1997 VERSUS SAME PERIOD IN 1996 - ---------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO - ---------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) VOLUME(1) RATE(1) TOTAL VOLUME(1) RATE(1) TOTAL - ---------------------------------------------------------------------------------------------------------------------------- INVESTMENTS ...................... $ 4,302 $ (1,138) $ 3,164 $ 2,222 $ 523 $ 2,745 -------- -------- -------- -------- -------- -------- SECURITIES AVAILABLE FOR SALE .... 1,505 (4,082) (2,577) 20,293 105 20,398 -------- -------- -------- -------- -------- -------- LOANS HELD FOR SALE .............. (962) (721) (1,683) (1,191) (134) (1,325) -------- -------- -------- -------- -------- -------- LOANS AND LEASES: Residential real estate ...... 74,296 (13,233) 61,063 19,946 (4,441) 15,505 Commercial real estate ....... (2,311) (1,972) (4,283) (6,061) 919 (5,142) Commercial business .......... 4,910 (809) 4,101 4,210 (47) 4,163 Consumer ..................... 7,833 (10,754) (2,921) 27,655 (3,813) 23,842 Lease financing .............. 5,376 4,040 9,416 8,401 1,143 9,544 -------- -------- -------- -------- -------- -------- Total loans and leases .... 90,104 (22,728) 67,376 54,151 (6,239) 47,912 -------- -------- -------- -------- -------- -------- Total interest income .............. 94,949 (28,669) 66,280 75,475 (5,745) 69,730 -------- -------- -------- -------- -------- -------- DEPOSITS: Checking ..................... 1,161 (1,087) 74 457 105 562 Passbook and statement ....... 4,026 (3,374) 652 2,026 1,238 3,264 Money market ................. 1,254 (1,291) (37) 847 430 1,277 Certificates ................. 19,812 (3,191) 16,621 21,705 (3,001) 18,704 -------- -------- -------- -------- -------- -------- Total deposits ............ 26,253 (8,943) 17,310 25,035 (1,228) 23,807 -------- -------- -------- -------- -------- -------- BORROWINGS: Securities sold under repurchase agree- ments and federal funds purchased ........... (11,555) (474) (12,029) (9,155) 450 (8,705) FHLB advances ................ 31,843 (748) 31,095 8,251 2,614 10,865 Discounted lease rentals ..... (1,401) (285) (1,686) 3,470 54 3,524 Other borrowings ............. (376) (172) (548) 675 536 1,211 -------- -------- -------- -------- -------- -------- Total borrowings .......... 18,511 (1,679) 16,832 3,241 3,654 6,895 -------- -------- -------- -------- -------- -------- Total interest expense ............. 44,764 (10,622) 34,142 28,276 2,426 30,702 -------- -------- -------- -------- -------- -------- Net interest income .............. $ 50,185 $(18,047) $ 32,138 $ 47,199 $ (8,171) $ 39,028 - ----------------------------------------------------------------------------------------------------------------------------
(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. In 1998, TCF's net interest income increased primarily due to the acquisition of Standard and the growth of lower interest-cost retail deposits. Net interest income increased $32.1 million, or 8.2%, and total average interest-earning assets increased by $1.2 billion, or 16.2%, from 1997 levels. TCF's net interest income improved by $50.2 million due to volume changes and decreased $18 million due to rate changes. The favorable impact of the growth in residential real estate, consumer and commercial business loan and lease financing volumes, decreased volumes of securities sold under repurchase agreements and federal funds purchased and decreased rates paid on interest-bearing liabilities was partially offset by decreased yields on securities available for sale and consumer and residential real estate loans, and increased certificate of deposit and Federal Home Loan Bank ("FHLB") advance volumes. TCF's net interest margin for the fourth quarter of 1998 was 4.65%, compared with 4.82% for the third quarter of 1998 and 4.93% for the fourth quarter of 1997. As previously noted, TCF's net interest margin for 1998 was negatively impacted by Standard's lower net interest margin, loan prepayments and purchases of mortgage-backed securities. Achieving net interest margin growth is dependent on TCF's ability to generate higher-yielding assets. The current interest rate environment and resulting increase in prepayment activity has made it more difficult for TCF to increase the balance of such higher-yielding assets. Interest income increased $66.3 million in 1998, reflecting an increase of $94.9 million due to volume, partially offset by a decrease of $28.7 million due to rate changes. Interest 16 TCF expense increased $34.1 million in 1998, reflecting an increase of $44.8 million due to volume, partially offset by a decrease of $10.6 million due to a lower cost of funds. The increase in net interest income due to volume was primarily due to the acquisition of Standard. The decrease in net interest income due to rate changes reflects the impact of Standard's lower net interest margin, and loan prepayments, partially offset by TCF's changing asset/liability mix, with greater emphasis on higher-yielding consumer loans and lease financings. As a result of recent declines in variable index rates (e.g., prime), or if such rates were to decline further, TCF may experience additional compression of its net interest margin depending on the timing and amount of any reductions, as it is possible that 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 such as home equity loans. In addition, competition for checking, savings and money market deposits, an important source of lower cost funds for TCF, has intensified among depository and other financial institutions. TCF may also experience compression in its net interest margin if the rates paid on deposits increase. See "Financial Condition -- Deposits" and "Financial Condition - Market Risk -- Interest-Rate Risk." In 1997, TCF's net interest income increased primarily due to the acquisition of Standard, the growth of higher-yielding consumer loans, commercial business loans, lease financings and lower interest-cost retail deposits, and increased capital. Net interest income increased $39 million, or 11%, and total average interest-earning assets increased by $839.9 million, or 12.5%, from 1996 levels. TCF's net interest income improved by $47.2 million due to volume changes and decreased $8.2 million due to rate changes. The favorable impact of the growth in consumer loan, securities available for sale, residential real estate loan and lease financing volumes was partially offset by decreased yields on consumer and residential real estate loans, decreased volumes in commercial real estate loans, and increased certificate of deposit volumes. Interest income increased $69.7 million in 1997, reflecting an increase of $75.5 million due to volume, partially offset by a decrease of $5.7 million due to rate changes. Interest expense increased $30.7 million in 1997, primarily due to the acquisition of Standard, reflecting increases of $28.3 million due to volume and $2.4 million due to a higher cost of funds. The decrease in net interest income due to rate changes reflects the acquisition of Standard, partially offset by TCF's changing asset/liability mix. In 1996, TCF's net interest income and net interest margin increased primarily due to the growth of higher-yielding consumer loans and lease financings, the favorable impact of merger-related restructuring activities related to TCF's 1995 acquisition of Great Lakes Bancorp, A Federal Savings Bank, the November 30, 1995 redemption of $34.5 million of 10% subordinated capital notes, lower average levels of non-performing assets, and increased capital. Net interest income increased $25.5 million, or 7.7%, even though total average interest-earning assets decreased by $400.4 million, or 5.6%, from 1995 levels. TCF's net interest income improved by $8.9 million due to volume changes and by $16.6 million due to rate changes. The favorable impact of the lower cost of funds and growth in consumer loan, lease financing and securities available for sale volumes was partially offset by decreased volumes in mortgage-backed securities and residential real estate loans. Interest income decreased $18.3 million in 1996, reflecting a decrease of $19.6 million due to volume and an increase of $1.3 million due to rate changes. Interest expense decreased $43.8 million in 1996, reflecting decreases of $28.5 million due to volume and $15.3 million due to a lower cost of funds. The increase in net interest income due to the favorable impact of rate changes reflects in part TCF's changing asset/liability mix. PROVISION FOR CREDIT LOSSES -- TCF provided $23.3 million for credit losses in 1998, compared with $18 million in 1997 and $21.4 million in 1996. The allowance for loan and lease losses totaled $80 million at December 31, 1998, compared with $82.6 million at December 31, 1997, and was 237% of non-accrual loans and leases. See "Financial Condition -- Allowance for Loan and Lease Losses." 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. Excluding gains on sales of securities available for sale, loan servicing, branches, loans and a joint venture interest, non-interest income increased $60.3 million, or 29.8%, during 1998 to $262.7 million. The increase was primarily due to increased fee and service charge revenues, electronic funds transfer revenues and title insurance revenues, and reflects TCF's expanded retail banking activities. TCF 17 The following table presents the components of non-interest income:
PERCENTAGE YEAR ENDED DECEMBER 31, INCREASE (DECREASE) - --------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 1997 1996 1998/97 1997/96 - --------------------------------------------------------------------------------------------------------------- Fee and service charge revenues ........... $127,952 $101,329 $ 90,424 26.3% 12.1% Electronic funds transfer revenues ........ 50,556 30,808 21,478 64.1 43.4 Leasing revenues .......................... 31,344 32,025 23,814 (2.1) 34.5 Title insurance revenues .................. 20,161 13,730 13,492 46.8 1.8 Commissions on sales of annuities ......... 8,413 7,894 9,134 6.6 (13.6) Commissions on sales of mutual funds ...... 5,513 3,998 3,372 37.9 18.6 Gain on sale of loans held for sale ....... 7,575 4,777 5,038 58.6 (5.2) Other ..................................... 11,156 7,789 6,584 43.2 18.3 -------- --------- -------- 262,670 202,350 173,336 29.8 16.7 -------- --------- -------- Gain on sale of securities available for sale .................... 2,246 8,509 86 (73.6) N.M. Gain on sale of loan servicing ............ 2,414 1,622 -- 48.8 100.0 Gain on sale of branches .................. 18,585 14,187 2,747 31.0 416.5 Gain on sale of joint venture interest .... 5,580 -- -- 100.0 -- Gain on sale of loans ..................... -- -- 5,443 -- (100.0) -------- --------- -------- 28,825 24,318 8,276 18.5 193.8 -------- --------- -------- Total non-interest income ....... $291,495 $226,668 $181,612 28.6 24.8 - ---------------------------------------------------------------------------------------------------------------
N.M. Not meaningful. Fee and service charge revenues increased $26.6 million in 1998, or 26.3%, and $10.9 million in 1997, or 12.1%, primarily as a result of expanded retail banking activities. Included in fee and service charge revenues are fees of $13.7 million, $14.6 million and $15.3 million received for the servicing of loans owned by others during 1998, 1997 and 1996, respectively. At December 31, 1998, 1997 and 1996, TCF was servicing real estate loans for others with aggregate unpaid principal balances of $3.7 billion, $4.4 billion and $4.5 billion, respectively. Electronic funds transfer revenues increased $19.7 million, or 64.1%, in 1998 and $9.3 million, or 43.4%, in 1997. These increases reflect TCF's efforts to provide banking services through its ATM network. TCF expanded its network to 1,431 ATMs at December 31, 1998, an increase of 275 ATMs during 1998. As previously noted, on January 30, 1998, TCF acquired 178 ATMs in connection with its acquisition of 76 branches in Jewel-Osco stores. The Company anticipates installing additional ATMs during 1999. Included in electronic funds transfer revenues are debit card interchange fees of $11.1 million, $3.7 million and $20,000 for 1998, 1997 and 1996, respectively. The significant increase in these fees during 1998 reflects an increase in the distribution of debit cards, and a significant increase in their utilization by TCF's customers. TCF initiated its debit card program at the end of 1996. TCF had 774,000 debit cards outstanding at December 31, 1998. Leasing revenues decreased $681,000 in 1998 to $31.3 million, following an increase of $8.2 million in 1997 to $32 million. Leasing revenues can fluctuate as a result of changes in the mix of leases classified as sales-type, direct financing or operating leases in accordance with generally accepted accounting principles. In addition, leasing revenues may be negatively impacted by a decline in economic activity and a resulting decrease in demand for leased equipment. Title insurance revenues increased $6.4 million in 1998 to $20.2 million, following an increase of $238,000 in 1997 to $13.7 million. Title insurance revenues are cyclical in nature and are largely dependent on industry levels of residential real estate loan originations and refinancings. Commissions on sales of annuities increased $519,000 to $8.4 million in 1998, following a decrease of $1.2 million to $7.9 million in 1997. Commissions on sales of mutual funds increased $1.5 million to $5.5 million in 1998, following an increase of $626,000 in 1997. Sales of annuities and mutual funds may fluctuate from period to period, and future sales levels will depend upon general economic conditions and investor preferences. Sales of annuities will also depend upon continued favorable tax treatment and may be negatively impacted by the current interest rate environment. Gains on sales of loans held for sale increased $2.8 million in 1998 following a decrease of $261,000 in 1997. Gains or losses on sales of loans held 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. Gains on sales of securities available for sale totaled $2.2 million in 1998, a decrease of $6.3 million from the $8.5 million recognized in 1997. Gains on sales of third-party loan servicing rights totaled $2.4 million in 1998 on the sale of $200.4 million of third-party loan servicing rights. Gains of $1.6 million were recognized in 1997 on the sale of $144.7 million of third-party loan servicing rights. TCF periodically sells securities available for sale and loan servicing rights depending on market conditions. 18 TCF During 1998, TCF recognized gains of $5.6 million on the sale of its joint venture interest in Burnet Home Loans and $18.6 million on the sales of 14 branches, compared with gains of $14.2 million on the sales of 11 branches during 1997 and gains of $2.7 million on the sales of five branches during 1996. During 1996, TCF recognized a $5.4 million gain on the sale of $46.8 million of credit card and other loans. The Company now provides credit card products on behalf of a third party through a marketing agreement. NON-INTEREST EXPENSE -- Non-interest expense increased $67.3 million, or 18.6%, in 1998, and $8 million, or 2.3%, in 1997, 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) 1998 1997 1996 1998/97 1997/96 - ----------------------------------------------------------------------------------------------------- Compensation and employee benefits .................... $217,401 $180,482 $157,554 20.5% 14.6% Occupancy and equipment .......... 71,323 58,352 51,958 22.2 12.3 Advertising and promotions ....... 19,544 19,157 17,014 2.0 12.6 Federal deposit insurance premiums and assessments .... 5,439 4,689 12,019 16.0 (61.0) Amortization of goodwill and other intangibles ........... 11,399 15,757 3,540 (27.7) 345.1 FDIC special assessment .......... -- -- 34,803 -- (100.0) Other ............................ 103,594 82,925 76,438 24.9 8.5 -------- -------- -------- Total non-interest expense ........... $428,700 $361,362 $353,326 18.6 2.3 - -----------------------------------------------------------------------------------------------------
Compensation and employee benefits, representing 50.7% and 49.9% of total non-interest expense in 1998 and 1997, respectively, increased $36.9 million, or 20.5%, in 1998, and $22.9 million, or 14.6%, in 1997. The increases were primarily due to costs associated with expanded retail banking activities, including the acquisition of Standard and the opening of 106 new branches in 1998. Occupancy and equipment expenses increased $13 million in 1998 and $6.4 million in 1997. The 1998 increase reflects the costs associated with expanded retail banking activities. The increase in 1997 reflected the addition of 25 bank branch offices. Advertising and promotion expenses increased $387,000 in 1998 and $2.1 million in 1997. The increases reflect the increase in direct mail and other marketing expenses relating to the promotion of TCF's consumer lending and deposit products. Federal deposit insurance premiums and assessments increased $750,000 in 1998 following a decrease of $7.3 million in 1997. The increase in 1998 reflects higher deposit levels as a result of expanded retail banking activities. The decrease in 1997 reflected a reduction in the rate charged to TCF by the FDIC for federal deposit insurance premiums from 23 basis points to approximately 6.50 basis points as a result of federal legislation enacted on September 30, 1996 to recapitalize the SAIF, partially offset by higher deposit levels. Amortization of goodwill and other intangibles decreased $4.4 million in 1998 and increased $12.2 million in 1997. The decrease in 1998 was primarily due to the previously mentioned 1997 accelerated amortization of $8.7 million of deposit base intangibles, partially offset by an increase in the amortization of goodwill and deposit base intangibles resulting from the acquisition of Standard. Reductions of goodwill associated with branch sales, which are reported as a component of gains on sales of branches, totaled $3.3 million in 1998 and $514,000 in 1996. TCF's 1996 results included a one-time special assessment of $34.8 million from the FDIC to recapitalize the SAIF under federal legislation enacted on September 30, 1996. See "Financial Condition -- Legislative and Regulatory Developments." Other non-interest expense increased $20.7 million, or 24.9%, in 1998 and $6.5 million, or 8.5%, in 1997. The increase for 1998 primarily reflects costs associated with expanded retail banking activities and increases in deposit account losses. A summary of other expense is presented in Note 21 of Notes to Consolidated Financial Statements. The increase for 1998 also reflects the recognition of $1.8 million of non-recurring costs in connection with TCF's reorganization of its consumer finance company operations. The increase for 1997 reflected the write-off of $1.5 million of teller equipment in connection with the previously mentioned Great Lakes Michigan branch reorganization and the recognition of $1.5 million of non-recurring merger-related costs in connection with TCF's acquisition of Winthrop Resources Corporation. The increase in 1997 also reflected costs associated with expanded retail banking activities. YEAR 2000 -- During 1998, TCF continued to address the "Year 2000" computer issue. The Year 2000 issue relates to the use of two digits rather than four by computer systems to define the applicable year and whether such systems will properly process information when the year changes to 2000. Failure of computer systems to properly recognize the Year 2000 could potentially result in the production of erroneous data, miscalculations of financial information such as interest, system failures, business disruption and other operational problems. TCF has established a Year 2000 Task Force and has evaluated its data processing and other systems with imbedded technologies, such as ATMs, vaults and security systems, to determine whether they are Year 2000 compliant. Remediation of software is substantially complete, leaving 1999 for testing. Such testing includes testing of individual applica- TCF 19 tion systems and "integration testing," which tests the way multiple systems work together. Many of TCF's data processing applications are supplied by third-party vendors. TCF has also evaluated whether such vendor- supplied applications are or will be Year 2000 compliant. Additionally, federal banking regulators are conducting special examinations of FDIC-insured banks and savings associations to determine whether they are taking necessary steps to prepare for the Year 2000, and are closely monitoring the progress made by these institutions in completing key steps required by their individual Year 2000 plans. TCF has incurred $4.4 million of internal and external costs for replacement, renovation and testing of its critical internal computer hardware and software and imbedded technologies through December 31, 1998, and expects such costs to total $10.1 million over the three-year period ending December 31, 1999. Of the $4.4 million of Year 2000 costs incurred through December 31, 1998, $1.6 million have been capitalized. Approximately $1.9 million of future Year 2000 costs are expected to be capitalized. TCF's Year 2000 Task Force is also developing contingency plans to mitigate potential delays or other problems. TCF's contingency plans include back-up solutions for mission-critical applications and business continuation plans for significant vendors and other business partners. Alternative courses of action for dealing with non-compliant systems are difficult to identify in general terms because they depend on the nature of the system, whether internal or external personnel are responsible for the system, and the cost and availability of replacement systems, among other factors. Although TCF believes its plans address significant contingencies over which it is able to exercise some control, there may be contingencies which cannot be readily identified or contingencies over which it has little or no control and for which few, if any, alternatives are available (for example, system failures that affect government agencies and instrumentalities such as the Federal Reserve System). The effect of the Year 2000 issue on TCF will also depend on the way the Year 2000 issue is addressed by TCF's customers, including significant borrowers, vendors, service providers, counterparties, competitors, utilities, government agencies and instrumentalities and other entities with which TCF does business. TCF has surveyed and continues to monitor parties with which it does business to determine how they are addressing the Year 2000 issue and whether computer hardware and software and other services provided to TCF will be, or are, Year 2000 compliant. Additionally, TCF's applicable lending and investment units have implemented procedures for identifying, managing, and underwriting Year 2000 credit risk. TCF is also monitoring the Year 2000 preparation of entities such as the Federal Reserve System, which provides services for processing and settling payments and securities transactions between banks. The Year 2000 efforts of third parties are ultimately not within TCF's control, and their failure to remediate Year 2000 issues successfully could result in a disruption in the services TCF provides, including deposit and loan services, and could increase TCF's operating costs and credit, investment or other risks. At the present time, it is not possible to determine with certainty whether any such events are likely to occur, or to quantify any potential negative impact they may have on TCF's future results of operations and financial condition. The foregoing discussion regarding Year 2000, including the discussion of the timing and effectiveness of implementation and costs of TCF's Year 2000 efforts, contains forward-looking statements which are based on management's best estimates derived using assumptions considered reasonable. These forward-looking statements involve inherent risks and uncertainties, and actual results could differ materially from those contemplated by such statements. Factors that might cause material differences include, but are not limited to, availability and cost of programmers and other systems personnel, TCF's ability to locate and correct all relevant Year 2000 computer code, including imbedded technologies, and the ability of TCF's customers, including significant borrowers, vendors, competitors, counterparties and government agencies and instrumentalities to effectively address the Year 2000 issue. Such material differences could result in, among other things, business disruption, operational problems, financial loss, legal liability and similar risks. See "Financial Condition -- Forward-Looking Information." INCOME TAXES -- TCF recorded income tax expense of $109.1 million in 1998, compared with $95.8 million in 1997 and $61 million in 1996. Income tax expense represented 41.1% of income before income tax expense during 1998, compared with 39.8% and 37.8% in 1997 and 1996, respectively. The higher tax rates in 1998 and 1997 reflect the impact of relatively higher non-deductible expenses, including an increase in goodwill amortization resulting from the acquisition of Standard, and higher state tax rates due to business expansion. Further detail on income taxes is provided in Note 12 of Notes to Consolidated Financial Statements. FINANCIAL CONDITION INVESTMENTS -- Total investments increased $148.1 million in 1998 to $277.7 million at December 31, 1998. The increase primarily reflects increases of $95.3 million in interest-bearing deposits with banks, $41 million in federal funds sold and $11.5 million in FHLB stock. 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, 1998. SECURITIES AVAILABLE FOR SALE -- Securities available for sale are carried at fair value with the unrealized gains or losses, net of deferred income taxes, reported as accumulated other comprehensive income, which is a separate component of stockholders' equity. Securities available for sale increased $251.8 million during 1998 to $1.7 billion at December 31, 1998. The increase reflects purchases of $957.6 million of securities available for sale, partially offset by sales of $229.2 million and payment and prepayment activity. At December 31, 1998, TCF's securities available-for-sale portfolio included $1.4 billion and $289.1 million of fixed-rate and adjustable-rate mortgage-backed securities, respectively. Securities available for sale totaled $1.4 billion at December 31, 1997. 20 TCF LOANS HELD FOR SALE -- Residential real estate and education loans held for sale are carried at the lower of cost or market. Education loans held for sale increased $3 million and residential real estate loans held for sale decreased $34.5 million from year-end 1997, and totaled $138.3 million and $74.8 million, respectively, at December 31, 1998. LOANS AND LEASES -- The following table sets forth information about loans and leases held in TCF's portfolio, excluding loans held for sale:
AT DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- Residential real estate ................ $3,765,280 $3,623,845 $2,252,312 $2,607,202 $2,646,644 Consumer ............................... 1,876,554 1,976,699 1,728,368 1,534,213 1,286,143 Commercial real estate ................. 811,428 859,916 858,225 967,766 994,452 Commercial business .................... 289,104 240,207 157,057 167,920 191,142 Lease financing ........................ 398,812 368,521 296,958 239,247 194,379 ---------- ---------- ---------- ---------- ---------- Total loans and leases ............ $7,141,178 $7,069,188 $5,292,920 $5,516,348 $5,312,760 - -------------------------------------------------------------------------------------------------------------------------------
Loans and leases increased $72 million from year-end 1997 to $7.1 billion at December 31, 1998, reflecting increases of $141.4 million, $48.9 million and $30.3 million in residential real estate and commercial business loans and lease financings, respectively, offset by decreases of $100.1 million and $48.5 million in consumer and commercial real estate loans, respectively. At December 31, 1998, TCF's residential real estate loan portfolio was comprised of $1.7 billion of fixed-rate loans and $2.1 billion of adjustable-rate loans. Consumer loans decreased $100.1 million from year-end 1997 to $1.9 billion at December 31, 1998, reflecting decreases of $107 million in automobile loans and $9.3 million in unsecured loans, partially offset by an increase of $6.5 million in home equity loans. TCF continues its emphasis on expanding its home equity portfolio. As previously mentioned, TCF restructured its consumer finance company operations in December 1998, including the discontinuation of indirect automobile lending, the consolidation of offices and a renewed focus on home equity lending. In the states where the Company's banks operate (Minnesota, Illinois, Wisconsin, Michigan and Colorado), the finance company home equity operations were combined with the banks, and 25 of the 30 finance company offices were closed. Of the 23 offices in other states, 17 remain open as real estate loan production offices of TCF National Bank Minnesota ("TCF Minnesota") and the remainder were closed. Additionally, TCF reorganized its loan collection operations related to the remaining consumer finance automobile loan portfolio. Previously such collection activities were handled centrally in Pensacola, Florida for loans up to 30-days delinquent and by the branch from which the loans were originated for loans over 30-days delinquent. Beginning in December 1998, all collection operations for these loans were centralized in facilities in Minneapolis, Minnesota and Pensacola, Florida. At December 31, 1998, consumer finance automobile loans totaled $233.9 million, compared with $292.6 million at December 31, 1997. Prior to the restructuring, TCF provided financing through the purchase of automobile loans from dealers, an activity referred to as "indirect" automobile lending. Included in consumer finance automobile loans at December 31, 1998 are $211.4 million of sub-prime automobile loans which carry a higher level of credit risk and higher interest rates. Loans classified as sub-prime are owed by borrowers who historically have been unable to obtain credit from traditional sources because of significant past credit problems or limited credit histories. The term sub-prime refers to the Company's assessment of credit risk and bears no relationship to the prime rate of interest or persons who are able to borrow at that rate. There can be no assurances that the Company's sub-prime lending criteria are the same as those utilized by other lenders. The underwriting criteria for sub-prime loans originated by TCF generally have been less stringent than those historically adhered to by TCF and, as a result, these loans carry a higher level of credit risk and higher interest rates. The indirect loan portfolio also carries an increased risk of loss in the event of adverse economic developments such as a recession. The risks posed by this portfolio could also be exacerbated by TCF's discontinuation of this lending activity, which has involved the closing of its indirect lending offices and the centralization of its loan collection operations, among other changes. Sub-prime lending is inherently more risky than traditional lending and there can be no assurance that all appropriate underwriting criteria have been identified or weighted properly in the assessment of credit risk, or will afford adequate protection against the higher risks inherent in lending to sub-prime borrowers. In recent years, TCF has also initiated the origination of home equity loans with loan-to-value ratios in excess of 80%, and up to 100%, that carry no private mortgage insurance. These loans may carry a higher level of credit risk than loans with a lower loan-to-value ratio. TCF 21 The following table summarizes TCF's commercial real estate loan portfolio by property type:
AT DECEMBER 31, - ------------------------------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------------------------------ NUMBER NUMBER (DOLLARS IN THOUSANDS) BALANCE (1) OF LOANS BALANCE (1) OF LOANS - ------------------------------------------------------------------------------------------------ Apartments ......................... $ 269,791 608 $ 304,866 675 Office buildings ................... 155,780 243 167,607 241 Retail services .................... 130,790 236 148,985 232 Warehouse/industrial buildings ..... 86,902 135 79,980 143 Hospitality facilities ............. 41,338 19 60,544 29 Health care facilities ............. 24,280 14 12,494 10 Other .............................. 105,530 317 87,688 393 Unearned discounts and deferred loan fees ............ (2,983) N.A. (2,248) N.A. --------- ------ --------- ----- $ 811,428 1,572 $ 859,916 1,723 --------- ------ --------- ----- Average balance .................... $516 $499 - ------------------------------------------------------------------------------------------------
(1) Includes construction and development loans N.A. Not applicable. Commercial real estate loans decreased $48.5 million from year-end 1997 to $811.4 million at December 31, 1998. Commercial business loans increased $48.9 million in 1998 to $289.1 million at December 31, 1998. TCF is seeking to expand its commercial business lending activity and, to a lesser extent, its commercial real estate lending activity to borrowers located in its primary midwestern 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. At December 31, 1998, approximately 95% 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 $516,000 at December 31, 1998. Apartment loans comprised $269.8 million, or 33.2%, of total commercial real estate loans outstanding at December 31, 1998. The average individual balance of commercial business loans was $336,000 at December 31, 1998. Lease financings increased $30.3 million from year-end 1997 to $398.8 million at December 31, 1998, reflecting a $32.3 million increase in direct financing leases, partially offset by a $4.9 million decrease in sales-type leases. At December 31, 1998, TCF internally funded 53.7% of its lease portfolio and consequently retained the credit risk on such leases, compared with 37.6% at December 31, 1997. ALLOWANCE FOR LOAN AND LEASE LOSSES -- 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 leases and special procedures for collection of problem loans and leases. The risk of loss is difficult to quantify and is subject to fluctuations in values and general economic conditions and other factors. See Note 1 of Notes to Consolidated Financial Statements for additional information concerning TCF's allowance for loan and lease losses. At December 31, 1998, the allowance for loan and lease losses totaled $80 million, compared with $82.6 million at December 31, 1997. The allocation of TCF's allowance for loan and lease losses, including general and specific loss allocations, is as follows:
ALLOCATIONS AS A PERCENTAGE OF TOTAL LOANS AND LEASES OUTSTANDING BY TYPE AT DECEMBER 31, AT DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- Residential real estate ..... $ 3,471 $ 3,501 $ 2,379 $ 3,238 $ 2,493 .09% .10% .11% .12% .09% Commercial real estate ...... 12,525 15,065 16,213 20,701 22,006 1.54 1.75 1.89 2.14 2.21 Commercial business ......... 5,756 4,520 3,072 7,261 5,603 1.99 1.88 1.96 4.32 2.93 Consumer .................... 32,011 28,129 26,700 16,667 10,757 1.71 1.42 1.54 1.09 .84 Lease financing ............. 2,955 2,004 1,116 595 -- .74 .54 .38 .25 -- Unallocated ................. 23,295 29,364 22,385 17,828 15,484 N.A. N.A. N.A. N.A. N.A. ------- ------- ------- ------- ------- Total allowance balance ..... $80,013 $82,583 $71,865 $66,290 $56,343 1.12 1.17 1.36 1.20 1.06 - -------------------------------------------------------------------------------------------------------------------------------
N.A. Not applicable. 22 TCF During 1998, TCF did not experience any material changes in loan concentrations or loan terms that affected the December 31, 1998 balance of the allowance for loan and lease losses. The allocated allowance balances for TCF's residential, commercial real estate and commercial business loan portfolios reflect the Company's continued strengthening of its credit quality and related level of net loan charge-offs for these portfolios. The increase in the allocated allowance for lease losses reflects the previously mentioned increase in the percentage of leases that are internally funded. The allocated allowances for these portfolios do not reflect any material changes in estimation methods or assumptions. TCF has experienced an increase in the level of net loan charge-offs related to its consumer finance automobile portfolio. As a result, net loan charge-offs as a percentage of average loans outstanding for TCF's consumer portfolio increased to 1.29% for the year ended December 31, 1998, compared with 1.00% for 1997. In addition, the net loan charge-offs as a percentage of average loans outstanding for TCF's consumer finance automobile portfolio increased to 10.76% and 7.16% for the three months and year ended December 31, 1998, respectively, compared with 4.79% and 4.50% for the three months and year ended December 31, 1997. As a result, TCF adjusted its guideline reserve percentages on its consumer finance automobile loans. This change contributed to the increase in the December 31, 1998 balance of the allowance for loan and lease losses allocated to the consumer loan portfolio. The unallocated portion of TCF's allowance for loan and lease losses totaled $23.3 million at December 31, 1998, compared with $29.4 million at December 31, 1997. The decrease in the unallocated allowance for loan and lease losses reflects the reduction in non-accrual loans and leases, and a decrease in the balance of consumer and commercial real estate loans outstanding. Net loan and lease charge-offs were $25.9 million in 1998, compared with $17.9 million in 1997 and $15.9 million in 1996. The allowance for loan and lease losses as a percentage of net loan and lease charge-offs was 310% at December 31, 1998, compared with 462% at December 31, 1997 and 453% at December 31, 1996. The decrease in TCF's allowance for loan and lease losses as a percentage of net loan and lease charge-offs at December 31, 1998 reflects the impact of the significant consumer finance automobile loan charge-off activity during 1998, and a decrease in consumer finance automobile loans outstanding. A summary of the allowance for loan and lease losses and selected statistics is presented in Note 8 of Notes to Consolidated Financial Statements. NON-PERFORMING ASSETS--Non-performing assets (principally non-accrual loans and leases and other real estate owned) totaled $48.7 million at December 31, 1998, down $10.1 million from the December 31, 1997 total of $58.7 million. The decrease in total non-performing assets reflects decreases of $3.3 million in consumer non-accrual loans and $7 million in other real estate owned and other assets. Approximately 75% of non-performing assets consist of, or are secured by, real estate. The accrual of interest income is generally discontinued when loans and leases become 90 days or more past due with respect to either principal or interest unless such loans and leases are adequately secured and in the process of collection. Non-performing assets are summarized in the following table:
AT DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------- Non-accrual loans and leases: Consumer ...................................... $17,745 $21,037 $13,472 $ 7,487 $ 2,127 Residential real estate ....................... 8,078 8,451 3,996 7,045 7,211 Commercial real estate ........................ 4,352 3,818 7,604 22,255 18,452 Commercial business ........................... 2,797 3,370 1,149 7,541 5,972 Lease financing ............................... 725 117 176 -- -- ------- ------- -------- -------- -------- 33,697 36,793 26,397 44,328 33,762 Other real estate owned and other assets .......... 14,972 21,953 19,937 26,402 23,849 ------- ------- -------- -------- -------- Total non-performing assets ................... $48,669 $58,746 $46,334 $70,730 $57,611 ------- ------- -------- -------- -------- Non-performing assets as a percentage of net loans and leases .................................... .69% .84% .89% 1.30% 1.10% Non-performing assets as a percentage of total assets ........................................ .48 .60 .62 .94 .71 - -------------------------------------------------------------------------------------------------------------------------
TCF 23 The following table sets forth information regarding TCF's delinquent loan and lease portfolio, excluding loans held for sale and non-accrual loans and leases:
AT DECEMBER 31, - ----------------------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------------------- PERCENTAGE OF PERCENTAGE OF PRINCIPAL LOANS AND PRINCIPAL LOANS AND (DOLLARS IN THOUSANDS) BALANCES LEASES BALANCES LEASES - ----------------------------------------------------------------------------------------- Loans and leases delinquent for: 30-59 days .................... $51,768 .72% $38,902 .54% 60-89 days .................... 15,373 .22 12,730 .18 90 days or more ............... -- -- -- -- ------- ---- ------- ---- Total ..................... $67,141 .94% $51,632 .72% - -----------------------------------------------------------------------------------------
The over 30-day delinquency rate on TCF's loans and leases (excluding loans held for sale and non-accrual loans and leases) was .94% of loans and leases outstanding at December 31, 1998, compared with .72% at year-end 1997. TCF's delinquency rates are determined using the contractual method. The following table sets forth information regarding TCF's over 30-day delinquent loan and lease portfolio, excluding loans held for sale and non-accrual loans and leases:
AT DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------ 1998 1997 - ------------------------------------------------------------------------------------------------------------------------ PRINCIPAL PERCENTAGE PRINCIPAL PERCENTAGE (DOLLARS IN THOUSANDS) BALANCES OF PORTFOLIO BALANCES OF PORTFOLIO - ------------------------------------------------------------------------------------------------------------------------ Consumer .................................... $52,588 2.83% $38,610 1.91% Residential real estate ..................... 9,151 .24 10,567 .29 Commercial real estate ...................... 1,787 .22 1,173 .14 Commercial business ......................... 1,984 .69 396 .17 Lease financing ............................. 1,631 .41 886 .21 ------- ------- Total ............................. $67,141 .94 $51,632 .72 - ------------------------------------------------------------------------------------------------------------------------
TCF's over 30-day delinquency rate on total consumer loans was 2.83% at December 31, 1998, up from 1.91% at year-end 1997. Management continues to monitor the consumer loan portfolio, which will generally have higher delinquencies, especially indirect automobile loans. TCF's over 60-day delinquency rate on consumer finance automobile loans was 3.23% at December 31, 1998, compared with 1.65% at December 31, 1997. Indirect automobile lending is generally considered to involve a higher level of credit risk and the management of delinquencies and liquidation of this portfolio will be a key challenge. See "Loans and Leases." In addition to non-accrual loans and leases, there were commercial real estate and commercial business loans and lease financings with an aggregate principal balance of $23.1 million outstanding at December 31, 1998 for which management has concerns regarding the ability of the borrowers to meet existing repayment terms. This amount consists of loans and leases 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. This compares with $23.6 million of such loans and leases at December 31, 1997. Although these loans and leases 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 leases and the financial condition of these borrowers. 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. 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 and lease repayments, proceeds from the discounting of leases, 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. TCF's deposit inflows and outflows have been and will continue to be affected by these factors. See "Forward-Looking Information." 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. See "Borrowings." 24 TCF Potential sources of liquidity for TCF Financial Corporation (parent company only) include cash dividends from TCF's wholly owned bank subsidiaries, issuance of equity securities, borrowings under the Company's $135 million bank line of credit, and interest income. TCF's subsidiary banks' ability to pay dividends or make other capital distributions to TCF is restricted by regulation and may require regulatory approval. Undistributed earnings and profits at December 31, 1998 includes approximately $134.4 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 generally 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 TCF based on the amount of earnings removed and current tax rates. DEPOSITS -- Deposits totaled $6.7 billion at December 31, 1998, down $192.2 million from December 31, 1997. The decrease reflects the previously mentioned branch sales with deposits totaling $234 million. Lower interest-cost checking, savings and money market deposits totaled $3.8 billion, up $454.9 million from year-end 1997, and comprised 55.9% of total deposits at December 31, 1998. Checking, savings and money market deposits are an important source of lower cost funds and fee income for TCF. Higher interest-cost certificates of deposit decreased $647.1 million from December 31, 1997. The Company's weighted-average rate for deposits, including non-interest bearing deposits, decreased to 2.73% at December 31, 1998, from 3.42% at December 31, 1997. This decrease reflects growth in lower interest-cost checking, savings and money market deposits, decreases in rates paid on such deposits and a lower proportion of higher-rate certificates at December 31, 1998 than at December 31, 1997. BORROWINGS -- Borrowings are used primarily to fund the purchases of investments and securities available for sale. These borrowings totaled $2.5 billion at December 31, 1998, up $733.9 million from year-end 1997. The increase was primarily due to increases of $464.6 million in FHLB advances, $255 million in securities sold under repurchase agreements and $74 million in TCF's bank line of credit, partially offset by a decrease of $44.9 million in discounted lease rentals. The increase in FHLB advances and securities sold under repurchase agreements reflects the previously mentioned purchases of securities available for sale in 1998. The weighted-average rate on borrowings decreased to 6.00% at December 31, 1998, from 6.43% at December 31, 1997. STOCKHOLDERS' EQUITY -- Stockholders' equity at December 31, 1998 was $845.5 million, or 8.3% of total assets, down from $953.7 million, or 9.8% of total assets, at December 31, 1997. The decrease in stockholders' equity is primarily due to the repurchase of 7,549,300 shares of TCF's common stock at a cost of $210.9 million and the payment of $55 million in common stock dividends, partially offset by net income of $156.2 million for the year ended December 31, 1998. RECENT ACCOUNTING DEVELOPMENTS -- In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires recognition of all derivative instruments as either assets or liabilities in the statement of financial condition and measurement of those instruments at fair value. A derivative may be designated as a hedge of an exposure to changes in the fair value of a recognized asset or liability, an exposure to variable cash flows of a forecasted transaction, or a foreign currency exposure. The accounting for gains and losses associated with changes in the fair value of a derivative and the impact on TCF's consolidated statements will depend on its hedge designation and whether the hedge is highly effective in offsetting changes in the fair value or cash flows of the underlying hedged item. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. It is too early to predict what effect, if any, the statement will have on TCF. In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise -- an amendment of SFAS No. 65." The statement is effective for the first fiscal quarter beginning after December 15, 1998. The adoption of SFAS No. 134 will not affect TCF's results of operations or financial condition. FORWARD-LOOKING INFORMATION -- There are a number of important factors which could cause TCF's future results to differ materially from historical performance and which make any forward-looking statements about TCF's financial results subject to a number of risks and uncertainties. These include but are not limited to possible legislative changes; adverse economic developments which may increase default and delinquency risks in TCF's loan and lease portfolios or lead to other adverse developments; increases in bankruptcy filings by TCF's loan and lease customers; adverse credit losses or other unfavorable developments in the liquidation or other disposition of TCF's consumer finance automobile loan portfolio; shifts in interest rates which may result in shrinking interest margins, increased borrowing costs or other adverse developments; deposit outflows; interest rates on competing investments; demand for financial services and loan and lease products; increases in competition in the banking and financial services industry; changes in accounting policies or guidelines, or monetary and fiscal policies of the federal government; inflation; changes in the quality or composition of TCF's loan, lease and investment portfolios; adverse changes in securities markets; results of litigation or other significant uncertainties. TCF's Year 2000 compliance initiatives or other required technological changes are subject to certain uncertainties which may delay or increase the cost of implementation. To some extent, TCF's operations will be dependent on the Year 2000 compliance achieved by outside vendors, borrowers and government agencies or instrumentalities such as the Federal Reserve System, and also on the cooperation of such parties in testing the effectiveness of compliance initiatives. TCF's 1997 and 1998 acquisitions (and its commitment to construct additional Jewel-Osco branches in future periods) TCF 25 are subject to additional uncertainties, including the possible failure to fully realize anticipated benefits from the transactions. Significant uncertainties in such transactions include lower than expected income or revenue or higher than expected operating costs; greater than expected costs or difficulties related to the integration and retention of employees of the acquired business operations; and other unanticipated occurrences which may increase the costs related to the transactions or decrease the expected financial benefits of the transactions. LEGISLATIVE AND REGULATORY DEVELOPMENTS -- Federal and state legislation imposes numerous legal and regulatory requirements on financial institutions. Future legislative or regulatory change, or changes in enforcement practices or court rulings, may have a dramatic and potentially adverse impact on TCF and its bank and other subsidiaries. Federal legislation enacted on September 30, 1996 addressed inadequate funding of the SAIF, which had resulted in a large deposit insurance premium disparity between banks insured by the Bank Insurance Fund ("BIF") and SAIF-insured thrifts. As a result of this legislation, a one-time special assessment was imposed on thrift institutions, and TCF recognized a $34.8 million pretax charge for assessments imposed on its bank subsidiaries during the third quarter of 1996. The legislation also provided for a reduction in deposit insurance premiums in subsequent periods and other regulatory reforms. Federal legislation was enacted in 1996 that repealed the reserve method of accounting for thrift bad debt reserves. This legislation eliminated the recapture of a thrift institution's bad debt reserve under certain circumstances, including the institution's conversion to a bank or as a result of similar charter changes. After passage of both the BIF/SAIF legislation and the repeal of the reserve method of accounting for bad debts, TCF completed the conversion of its savings bank subsidiaries to national banks and TCF became a national bank holding company on April 7, 1997. In connection with the national bank conversions, TCF chartered two new national bank subsidiaries, Great Lakes Ohio and TCF National Bank Colorado ("TCF Colorado"). As previously mentioned, TCF sold all eight branches and related deposits of Great Lakes Ohio in 1997. TCF now operates five national bank subsidiaries: TCF Minnesota, TCF National Bank Illinois, TCF National Bank Wisconsin, TCF Colorado and Great Lakes Michigan. MARKET RISK -- 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, and the Company's ability to manage its interest-rate risk. Although TCF manages other risks, such as credit and liquidity risk, in the normal course of its business, the Company considers interest-rate risk to be its most significant market risk. TCF, like most financial institutions, has a material interest-rate risk exposure to changes in both short-term and long-term interest rates as well as variable index interest rates (e.g., prime). Since TCF does not hold a trading portfolio, the Company is not exposed to significant market risk from trading activities. 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 for 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 Asset/Liability Management Committee manages TCF's interest-rate risk based on interest rate expectations and other factors. The principal objective of TCF's asset/liability management activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest-rate risk and liquidity risk and facilitating the funding needs of the Company. The amounts in the maturity/rate sensitivity table below represent management's estimates and 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, competition and a general rise or decline in interest rates. Decisions by management to purchase or sell assets, or retire debt could change the maturity/repricing and spread relationships. In addition, TCF's interest-rate risk will increase during periods of rising interest rates due to resulting slower prepayments on loans and mortgage-backed securities, and the increased likelihood that the FHLB will exercise its option to call certain of TCF's longer-term FHLB advances. See Note 11 of Notes to Consolidated Financial Statements for additional information on FHLB advances. TCF's one-year interest-rate gap was a negative $263.9 million, or (3)% of total assets, at December 31, 1998, compared with a negative $184.7 million, or (2)% of total assets, at December 31, 1997. 26 TCF The following table summarizes TCF's interest-rate gap position at December 31, 1998:
MATURITY/RATE SENSITIVITY ----------------------------------------------------------------------------------- WITHIN 30 DAYS TO 6 MONTHS (DOLLARS IN THOUSANDS) 30 DAYS 6 MONTHS TO 1 YEAR 1 TO 3 YEARS 3+ YEARS TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets: Loans held for sale ........................ $ 29,515 $ 89,481 $ 94,077 $ -- $ -- $ 213,073 Securities available for sale .............. 67,266 273,157 258,274 395,766 683,456 1,677,919 Real estate loans(1) ....................... 301,915 694,853 749,200 1,517,542 1,313,198 4,576,708 Lease financings ........................... 15,792 75,467 71,704 201,893 33,956 398,812 Other loans(1) ............................. 1,244,145 141,277 139,590 337,515 303,131 2,165,658 Investments ................................ 254,603 -- -- -- 23,112 277,715 ---------- ----------- ---------- ---------- ---------- ---------- 1,913,236 1,274,235 1,312,845 2,452,716 2,356,853 9,309,885 ---------- ----------- ---------- ---------- ---------- ---------- Interest-bearing liabilities: Checking deposits(2) ....................... 180,912 -- -- -- 1,698,711 1,879,623 Passbook and statement deposits(2) ......... 66,933 124,060 131,258 355,972 498,708 1,176,931 Money market deposits ...................... 700,004 -- -- -- -- 700,004 Certificate deposits ....................... 336,455 1,328,160 793,167 459,342 41,464 2,958,588 Federal Home Loan Bank advances ............ 200,000 35,000 335,207 1,184,001 50,000 1,804,208 Discounted lease rentals ................... 8,586 39,862 41,702 86,141 7,393 183,684 Other borrowings ........................... 442,585 161 174 530 29,704 473,154 ---------- ----------- ---------- ---------- ---------- ---------- 1,935,475 1,527,243 1,301,508 2,085,986 2,325,980 9,176,192 ---------- ----------- ---------- ---------- ---------- ---------- Interest-earning assets over (under) interest-bearing liabilities ............... $ (22,239) $ (253,008) $ 11,337 $ 366,730 $ 30,873 $ 133,693 ---------- ----------- ---------- ---------- ---------- ---------- Cumulative gap ................................ $ (22,239) $ (275,247) $ (263,910) $ 102,820 $ 133,693 $ 133,693 ---------- ----------- ---------- ---------- ---------- ---------- Cumulative gap as a percentage of total assets: At December 31, 1998 ....................... --% (3)% (3)% 1% 1% 1% ---------- ----------- ---------- ---------- ---------- ---------- At December 31, 1997 ....................... 7% --% (2)% 4% 4% 4% - -----------------------------------------------------------------------------------------------------------------------------------
(1) Based upon contractual maturity, repricing date, if applicable, scheduled repayments of principal and projected prepayments of principal based upon experience. (2) Includes non-interest bearing deposits. The following tables provide information about TCF's financial instruments and derivative financial instruments, all of which are held for purposes other than trading and are sensitive to changes in interest rates. For loans held for sale, securities available for sale, loans, and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturities as modified by the Company's historical experience of the impact of interest rate fluctuations on the prepayment of the assets. For deposits that have no contractual maturity, the table presents principal cash flows and, as applicable, related weighted-average interest rates based on the Company's historical experience, management's judgment, and statistical analysis, with respect to customer account retention. For forward mortgage loan sales commitments, the table presents notional amounts and, as applicable, weighted-average interest rates by contractual maturity date. Notional amounts are used to calculate the contractual payments to be exchanged under the commitments. For commitments to extend credit, the balance represents the notional amount of the off-balance-sheet item and the average interest rate represents the weighted-average interest rate of the underlying loans. This table does not include the effect of repricings, which is an important consideration in management's interest-rate risk analysis. The expected principal/notional maturity amounts at December 31, 1998 and December 31, 1997 are as follows: TCF 27
AT DECEMBER 31, 1998 - --------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1999 2000 2001 2002 - --------------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVE ASSETS: Fixed-rate loans held for sale .................... $ 54,659 $ -- $ -- $ -- Average interest rate .......................... 6.56% --% --% --% Variable-rate loans held for sale ................. 158,414 -- -- -- Average interest rate .......................... 6.50% --% --% --% Fixed-rate securities available for sale .......... 318,645 239,782 155,753 123,331 Average interest rate .......................... 6.75% 6.79% 6.82% 6.78% Variable-rate securities available for sale ....... 107,343 68,652 38,765 24,491 Average interest rate .......................... 6.14% 6.20% 6.22% 6.23% Fixed-rate loans .................................. 778,886 541,290 392,492 281,057 Average interest rate ........................... 10.25% 9.25% 8.55% 8.09% Variable-rate loans ............................... 1,136,629 683,244 437,978 315,395 Average interest rate ........................... 7.76% 7.86% 7.95% 8.08% Fixed-rate investments ............................ 161,121 -- -- -- Average interest rate ........................... 4.85% --% --% --% Variable-rate investments ......................... -- -- -- -- Average interest rate ........................... --% --% --% --% RATE SENSITIVE LIABILITIES: Deposits with no stated maturity .................. 416,463 204,418 151,814 113,860 Average interest rate ........................... .88% 1.07% 1.07% 1.07% Certificate deposits .............................. 2,459,050 345,232 112,920 22,366 Average interest rate ........................... 4.94% 5.32% 5.55% 5.29% Fixed-rate borrowings ............................. 941,487 297,399 936,602 -- Average interest rate .......................... 6.21% 6.16% 5.22% --% Variable-rate borrowings .......................... 21,271 -- -- -- Average interest rate .......................... 5.23% --% --% --% RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS: Forward mortgage loan sales commitments ........... 106,676 -- -- -- Average interest rate .......................... 6.17% --% --% --% Commitments to extend credit(1) ................... 208,699 -- -- -- Average interest rate .......................... 6.63% --% --% --% - --------------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1998 - -------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 2003 THEREAFTER TOTAL FAIR VALUE - -------------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVE ASSETS: Fixed-rate loans held for sale .................... $ -- $ -- $ 54,659 $ 54,994 Average interest rate .......................... --% --% 6.56% Variable-rate loans held for sale ................. -- -- 158,414 160,915 Average interest rate .......................... --% --% 6.50% Fixed-rate securities available for sale .......... 99,145 436,763 1,373,419 1,388,841 Average interest rate .......................... 6.75% 6.61% 6.72% Variable-rate securities available for sale ....... 15,793 37,108 292,152 289,078 Average interest rate .......................... 6.24% 5.99% 6.16% Fixed-rate loans .................................. 218,066 633,391 2,845,182 2,859,691 Average interest rate ........................... 7.89% 8.05% 8.94% Variable-rate loans ............................... 245,998 1,122,003 3,941,247 4,060,036 Average interest rate ........................... 8.24% 9.24% 8.27% Fixed-rate investments ............................ -- 23,112 184,233 184,233 Average interest rate ........................... --% 6.00% 4.99% Variable-rate investments ......................... -- 93,482 93,482 93,482 Average interest rate ........................... --% 7.06% 7.06% RATE SENSITIVE LIABILITIES: Deposits with no stated maturity .................. 85,395 2,784,608 3,756,558 3,756,558 Average interest rate ........................... 1.07% .92% .94% Certificate deposits .............................. 14,020 5,000 2,958,588 2,994,231 Average interest rate ........................... 4.10% 4.80% 5.01% Fixed-rate borrowings ............................. 78,750 1,853 2,256,091 2,270,043 Average interest rate .......................... 7.14% 5.95% 5.81% Variable-rate borrowings .......................... -- -- 21,271 21,271 Average interest rate .......................... --% --% 5.23% RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS: Forward mortgage loan sales commitments ........... -- -- 106,676 113(1) Average interest rate .......................... --% --% 6.17% Commitments to extend credit(1) ................... -- -- 208,699 (264)(2) Average interest rate .......................... --% --% 6.63% - --------------------------------------------------------------------------------------------------------------------------------
(1) Excludes commitments to extend credit with floating interest rates and repricing terms of one year or less. (2) Positive amounts represent assets, negative amounts represent liabilities. 28 TCF
AT DECEMBER 31, 1997 - -------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 1999 2000 2001 - -------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVE ASSETS: Fixed-rate loans held for sale ................... $ 47,131 $ -- $ -- $ -- Average interest rate ......................... 7.31% --% --% --% Variable-rate loans held for sale ................ 197,481 -- -- -- Average interest rate ......................... 7.17% --% --% --% Fixed-rate securities available for sale ......... 185,051 190,019 126,549 73,863 Average interest rate ......................... 7.20% 7.20% 7.20% 7.20% Variable-rate securities available for sale ...... 128,274 94,775 70,064 51,839 Average interest rate ......................... 7.46% 7.46% 7.46% 7.46% Fixed-rate loans ................................. 678,823 478,268 348,516 306,888 Average interest rate ......................... 11.33% 10.50% 9.59% 8.71% Variable-rate loans .............................. 997,028 684,049 527,458 367,889 Average interest rate ......................... 8.38% 8.41% 8.59% 8.57% Fixed-rate investments ........................... 24,633 -- -- -- Average interest rate ......................... 6.09% --% --% --% Variable-rate investments ........................ -- -- -- -- Average interest rate ......................... --% --% --% --% Due from brokers ................................. 126,662 -- -- -- Average interest rate ......................... 6.86% --% --% --% RATE SENSITIVE LIABILITIES: Deposits with no stated maturity ................. 333,654 202,542 151,905 113,930 Average interest rate ......................... 1.87% 2.04% 2.04% 2.04% Certificate deposits ............................. 2,931,999 400,893 177,899 68,895 Average interest rate ......................... 5.04% 5.46% 5.54% 5.78% Fixed-rate borrowings ............................ 421,548 375,510 297,758 25,132 Average interest rate ......................... 6.14% 6.04% 6.16% 6.09% Variable-rate borrowings ......................... 228,441 93,735 -- -- Average interest rate ......................... 5.88% 5.69% --% --% RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS: Forward mortgage loan sales commitments .......... 81,575 -- -- -- Average interest rate ......................... 6.77% --% --% --% Commitments to extend credit(1) .................. 158,452 -- -- -- Average interest rate ......................... 7.12% --% --% --% - -------------------------------------------------------------------------------------------------------------------------- AT DECEMBER 31, 1997 - ------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 2002 THEREAFTER TOTAL FAIR VALUE - ------------------------------------------------------------------------------------------------------------------------- RATE SENSITIVE ASSETS: Fixed-rate loans held for sale ................... $ -- $ -- $ 47,131 $ 48,786 Average interest rate ......................... --% --% 7.31% Variable-rate loans held for sale ................ -- -- 197,481 199,555 Average interest rate ......................... --% --% 7.17% Fixed-rate securities available for sale ......... 60,620 280,299 916,401 930,070 Average interest rate ......................... 7.20% 7.20% 7.20% Variable-rate securities available for sale ...... 38,398 112,228 495,578 496,061 Average interest rate ......................... 7.46% 7.46% 7.46% Fixed-rate loans ................................. 158,156 387,880 2,358,531 2,357,476 Average interest rate ......................... 8.51% 8.19% 9.86% Variable-rate loans .............................. 316,027 1,509,658 4,402,109 4,594,839 Average interest rate ......................... 8.74% 9.79% 8.93% Fixed-rate investments ........................... -- 22,977 47,610 47,610 Average interest rate ......................... --% 6.00% 6.05% Variable-rate investments ........................ -- 82,002 82,002 82,002 Average interest rate ......................... --% 7.34% 7.34% Due from brokers ................................. -- -- 126,662 126,662 Average interest rate ......................... --% --% 6.86% RATE SENSITIVE LIABILITIES: Deposits with no stated maturity ................. 85,447 2,414,169 3,301,647 3,301,647 Average interest rate ......................... 2.04% 2.04% 1.39% 1.55% Certificate deposits ............................. 18,778 7,199 3,605,663 3,637,981 Average interest rate ......................... 5.19% 5.40% 5.13% Fixed-rate borrowings ............................ -- 56,432 1,176,380 1,175,251 Average interest rate ......................... --% 7.70% 6.19% Variable-rate borrowings ......................... -- -- 322,176 322,176 Average interest rate ......................... --% --% 5.82% RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS: Forward mortgage loan sales commitments .......... -- -- 81,575 (326)(2) Average interest rate ......................... --% --% 6.77% Commitments to extend credit(1) .................. -- -- 158,452 (209)(2) Average interest rate ......................... --% --% 7.12% - -------------------------------------------------------------------------------------------------------------------------
(1) Excludes commitments to extend credit with floating interest rates and repricing terms of one year or less. (2) Negative amounts represent liabilities. TCF 29 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31, - --------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA) 1998 1997 - --------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks .............................................. $ 420,477 $ 297,010 Investments .......................................................... 277,715 129,612 Securities available for sale ........................................ 1,677,919 1,426,131 Loans held for sale .................................................. 213,073 244,612 Loans and leases: Residential real estate ...................................... 3,765,280 3,623,845 Commercial real estate ....................................... 811,428 859,916 Commercial business .......................................... 289,104 240,207 Consumer ..................................................... 1,876,554 1,976,699 Lease financing .............................................. 398,812 368,521 ------------ ------------ Total loans and leases ................................. 7,141,178 7,069,188 Allowance for loan and lease losses .................... (80,013) (82,583) ------------ ------------ Net loans and leases ............................ 7,061,165 6,986,605 Goodwill ............................................................. 166,645 177,700 Deposit base intangibles ............................................. 16,238 19,821 Other assets ......................................................... 331,362 463,169 ------------ ------------ $ 10,164,594 $ 9,744,660 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Checking ..................................................... $ 1,879,623 $ 1,468,657 Passbook and statement ....................................... 1,176,931 1,134,678 Money market ................................................. 700,004 698,312 Certificates ................................................. 2,958,588 3,605,663 ------------ ------------ Total deposits ......................................... 6,715,146 6,907,310 ------------ ------------ Securities sold under repurchase agreements and federal funds purchased .............................................. 367,280 112,444 Federal Home Loan Bank advances ...................................... 1,804,208 1,339,578 Discounted lease rentals ............................................. 183,684 228,596 Other borrowings ..................................................... 105,874 46,534 ------------ ------------ Total borrowings ....................................... 2,461,046 1,727,152 Accrued interest payable ............................................. 27,601 23,510 Accrued expenses and other liabilities ............................... 115,299 133,008 ------------ ------------ Total liabilities ...................................... 9,319,092 8,790,980 ------------ ------------ Stockholders' equity: Preferred stock, par value $.01 per share, 30,000,000 shares authorized; none issued and outstanding ......... -- -- Common stock, par value $.01 per share, 280,000,000 shares authorized; 92,912,246 and 92,821,529 shares issued .... 929 928 Additional paid-in capital ................................... 507,534 460,684 Retained earnings, subject to certain restrictions ........... 610,177 508,969 Unamortized deferred compensation ............................ (24,217) (25,457) Loan to Executive Deferred Compensation Plan ................. (6,111) -- Shares held in trust for deferred compensation plans, at cost ......................................... (45,740) -- Accumulated other comprehensive income ....................... 7,591 8,556 Treasury stock, at cost, 7,343,117 shares in 1998 ............ (204,661) -- ------------ ------------ Total stockholders' equity ............................. 845,502 953,680 ------------ ------------ $ 10,164,594 $ 9,744,660 - ---------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 30 TCF CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER-SHARE DATA) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- INTEREST INCOME: Loans and leases ............................................... $631,342 $563,966 $516,054 Securities available for sale .................................. 93,124 95,701 75,303 Loans held for sale ............................................ 14,072 15,755 17,080 Investments .................................................... 10,356 7,192 4,447 -------- --------- -------- Total interest income .................................... 748,894 682,614 612,884 -------- --------- -------- INTEREST EXPENSE: Deposits ....................................................... 212,492 195,182 171,375 Borrowings ..................................................... 110,668 93,836 86,941 -------- --------- -------- Total interest expense ................................... 323,160 289,018 258,316 -------- --------- -------- Net interest income .............................. 425,734 393,596 354,568 Provision for credit losses .................................... 23,280 17,995 21,446 -------- --------- -------- Net interest income after provision for credit losses ..................................... 402,454 375,601 333,122 -------- --------- -------- NON-INTEREST INCOME: Fee and service charge revenues ................................ 127,952 101,329 90,424 Electronic funds transfer revenues ............................. 50,556 30,808 21,478 Leasing revenues ............................................... 31,344 32,025 23,814 Title insurance revenues ....................................... 20,161 13,730 13,492 Commissions on sales of annuities .............................. 8,413 7,894 9,134 Commissions on sales of mutual funds ........................... 5,513 3,998 3,372 Gain on sale of loans held for sale ............................ 7,575 4,777 5,038 Other .......................................................... 11,156 7,789 6,584 -------- --------- -------- 262,670 202,350 173,336 -------- --------- -------- Gain on sale of securities available for sale .................. 2,246 8,509 86 Gain on sale of loan servicing ................................. 2,414 1,622 -- Gain on sale of branches ....................................... 18,585 14,187 2,747 Gain on sale of joint venture interest ......................... 5,580 -- -- Gain on sale of loans .......................................... -- -- 5,443 -------- --------- -------- 28,825 24,318 8,276 -------- --------- -------- Total non-interest income ................................ 291,495 226,668 181,612 -------- --------- -------- NON-INTEREST EXPENSE: Compensation and employee benefits ............................. 217,401 180,482 157,554 Occupancy and equipment ........................................ 71,323 58,352 51,958 Advertising and promotions ..................................... 19,544 19,157 17,014 Federal deposit insurance premiums and assessments ............. 5,439 4,689 12,019 Amortization of goodwill and other intangibles ................. 11,399 15,757 3,540 FDIC special assessment ........................................ -- -- 34,803 Other .......................................................... 103,594 82,925 76,438 -------- --------- -------- Total non-interest expense ............................... 428,700 361,362 353,326 -------- --------- -------- Income before income tax expense ................. 265,249 240,907 161,408 Income tax expense ............................................. 109,070 95,846 61,031 -------- --------- -------- Net income ....................................... $156,179 $145,061 $100,377 -------- --------- -------- NET INCOME PER COMMON SHARE: Basic .................................................... $ 1.77 $ 1.72 $ 1.23 -------- --------- -------- Diluted .................................................. $ 1.76 $ 1.69 $ 1.20 -------- --------- -------- DIVIDENDS DECLARED PER COMMON SHARE ............................ $ .6125 $ .46875 $.359375 - -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. TCF 31 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NUMBER OF COMMON ADDITIONAL RETAINED (DOLLARS IN THOUSANDS) SHARES ISSUED COMMON STOCK PAID-IN CAPITAL EARNINGS - ----------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 .......... 83,452,782 $ 835 $ 252,187 $ 329,001 Comprehensive income: Net income ....................... -- -- -- 100,377 Unrealized loss on securities available for sale, net of tax and reclassification adjustment .................... -- -- -- -- ---------- ----------- ----------- ----------- Comprehensive income ............. -- -- -- 100,377 Dividends on common stock ........... -- -- -- (26,595) Purchase of 2,380,136 shares to be held in treasury ........... -- -- -- -- Issuance of 1,256,232 shares, of which 10,100 shares were from treasury .................... 1,246,132 13 18,651 -- Repurchase and cancellation of shares ........................ (113,342) (2) (686) (674) Amortization of deferred compensation ..................... -- -- -- -- Exercise of stock options ........... 656,660 6 4,168 -- Payments on Loan to Executive Deferred Compensation Plan . ..... -- -- -- -- ---------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1996 .......... 85,242,232 852 274,320 402,109 Comprehensive income: Net income ....................... -- -- -- 145,061 Unrealized gain on securities available for sale, net of tax and reclassification adjustment .................... -- -- -- -- ---------- ----------- ----------- ----------- Comprehensive income ............. -- -- -- 145,061 Dividends on common stock ........... -- -- -- (38,201) Issuance of 7,700,000 shares to effect purchase acquisition, of which 1,194,268 were from treasury ......................... 6,505,732 65 162,937 -- Purchase of 1,295,800 shares to be held in treasury ........... -- -- -- -- Issuance of 3,326,034 shares, of which 2,426,968 shares were from treasury ............... 899,066 9 20,570 -- Repurchase and cancellation of shares ........................ (2,086) -- (60) -- Amortization of deferred compensation ..................... -- -- -- -- Exercise of stock options, of which 44,600 were from treasury ......................... 176,585 2 2,917 -- Payments on Loan to Executive Deferred Compensation Plan . ..... -- -- -- -- ---------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1997 .......... 92,821,529 928 460,684 508,969 Comprehensive income: Net income ....................... -- -- -- 156,179 Unrealized loss on securities available for sale, net of tax and reclassification adjustment .................... -- -- -- -- ---------- ----------- ----------- ----------- Comprehensive income ............. -- -- -- 156,179 Dividends on common stock ........... -- -- -- (54,971) Purchase of 7,549,300 shares to be held in treasury ......................... -- -- -- -- Issuance of 108,200 shares, of which 61,000 shares were from treasury .................... 47,200 1 2,518 -- Cancellation of shares .............. (18,170) -- (375) -- Amortization of deferred compensation ..................... -- -- -- -- Exercise of stock options, of which 145,183 shares were from treasury ............... 61,687 -- (1,033) -- Shares held in trust for deferred compensation plans ............................ -- -- 45,740 -- Loan to Executive Deferred Compensation Plan, net ........... -- -- -- -- ---------- ----------- ----------- ----------- BALANCE, DECEMBER 31, 1998 .......... 92,912,246 $ 929 $ 507,534 $ 610,177 - -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 32 TCF
LOAN TO SHARES HELD EXECUTIVE IN TRUST FOR ACCUMULATED UNAMORTIZED DEFERRED DEFERRED OTHER DEFERRED COMPENSATION COMPREHENSIVE COMPENSATION TREASURY (DOLLARS IN THOUSANDS COMPENSATION PLAN PLANS INCOME STOCK TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 .......... $ (11,195) $ (131) $-- $ 11,702 $-- $ 582,399 Comprehensive income: Net income ....................... -- -- -- -- -- 100,377 Unrealized loss on securities available for sale, net of tax and reclassification adjustment .................... -- -- -- (9,326) -- (9,326) ----------- ----------- -------- ------------ ------- ----------- Comprehensive income ............. -- -- -- (9,326) -- 91,051 Dividends on common stock ........... -- -- -- -- -- (26,595) Purchase of 2,380,136 shares to be held in treasury ........... -- -- -- -- (41,382) (41,382) Issuance of 1,256,232 shares, of which 10,100 shares were from treasury .................... (4,975) -- -- -- 173 13,862 Repurchase and cancellation of shares ........................ 574 -- -- -- -- (788) Amortization of deferred compensation ..................... 7,903 -- -- -- -- 7,903 Exercise of stock options ........... -- -- -- -- -- 4,174 Payments on Loan to Executive Deferred Compensation Plan . ..... -- 63 -- -- -- 63 ----------- ----------- -------- ------------ ------- ----------- BALANCE, DECEMBER 31, 1996 .......... (7,693) (68) -- 2,376 (41,209) 630,687 Comprehensive income: Net income ....................... -- -- -- -- -- 145,061 Unrealized gain on securities available for sale, net of tax and reclassification adjustment .................... -- -- -- 6,180 -- 6,180 ----------- ----------- -------- ------------ ------- ----------- Comprehensive income ............. -- -- -- 6,180 -- 151,241 Dividends on common stock ........... -- -- -- -- -- (38,201) Issuance of 7,700,000 shares to effect purchase acquisition, of which 1,194,268 were from treasury ......................... -- -- -- -- 22,805 185,807 Purchase of 1,295,800 shares to be held in treasury ........... -- -- -- -- (27,316) (27,316) Issuance of 3,326,034 shares, of which 2,426,968 shares were from treasury ............... (26,110) -- -- -- 44,876 39,345 Repurchase and cancellation of shares ........................ 15 -- -- -- -- (45) Amortization of deferred compensation ..................... 8,331 -- -- -- -- 8,331 Exercise of stock options, of which 44,600 were from treasury ......................... -- -- -- -- 844 3,763 Payments on Loan to Executive Deferred Compensation Plan . ..... -- 68 -- -- -- 68 ----------- ----------- -------- ------------ ------- ----------- BALANCE, DECEMBER 31, 1997 .......... (25,457) -- -- 8,556 -- 953,680 Comprehensive income: Net income ....................... -- -- -- -- -- 156,179 Unrealized loss on securities available for sale, net of tax and reclassification adjustment .................... -- -- -- (965) -- (965) ----------- ----------- -------- ------------ ------- ----------- Comprehensive income ............. -- -- -- (965) -- 155,214 Dividends on common stock ........... -- -- -- -- -- (54,971) Purchase of 7,549,300 shares to be held in treasury ......................... -- -- -- -- (210,939) (210,939) Issuance of 108,200 shares, of which 61,000 shares were from treasury .................... (4,815) -- -- -- 1,933 (363) Cancellation of shares .............. 192 -- -- -- -- (183) Amortization of deferred compensation ..................... 5,863 -- -- -- -- 5,863 Exercise of stock options, of which 145,183 shares were from treasury ............... -- -- -- -- 4,345 3,312 Shares held in trust for deferred compensation plans ............................ -- -- (45,740) -- -- -- Loan to Executive Deferred Compensation Plan, net ........... -- (6,111) -- -- -- (6,111) ----------- ----------- -------- ------------ ------- ----------- BALANCE, DECEMBER 31, 1998 .......... $ (24,217) $ (6,111) $ (45,740) $ 7,591 $ (204,661) $ 845,502 - ----------------------------------------------------------------------------------------------------------------------------------
TCF 33 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ................................................. $ 156,179 $ 145,061 $ 100,377 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization ........................... 27,914 23,185 19,724 Amortization of goodwill and other intangibles .......... 11,399 15,757 3,540 Provision for credit losses ............................. 23,280 17,995 21,446 Proceeds from sales of loans held for sale .............. 577,808 624,192 857,050 Principal collected on loans held for sale .............. 9,083 9,174 10,225 Originations and purchases of loans held for sale ................................................. (603,567) (799,319) (802,777) Net (increase) decrease in other assets and liabilities, and accrued interest .................... 14,339 (15,067) 29,231 Gains on sales of assets ................................ (28,825) (24,318) (8,276) Other, net .............................................. 8,395 (4,707) (488) ---------- ----------- ----------- Total adjustments ...................................... 39,826 (153,108) 129,675 ---------- ----------- ----------- Net cash provided (used) by operating activities .... 196,005 (8,047) 230,052 ---------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Principal collected on loans and leases .................... 3,111,218 1,952,057 1,868,774 Originations and purchases of loans ........................ (3,119,924) (1,952,261) (1,687,214) Purchases of equipment for lease financing ................. (186,009) (179,165) (175,608) Proceeds from sales of loans ............................... 20,330 15,910 61,302 Net (increase) decrease in interest-bearing deposits with banks ..................................... (95,322) 453,895 (374,630) Proceeds from sales of securities available for sale .......................................... 231,438 476,218 16,636 Proceeds from maturities of and principal collected on securities available for sale .............. 606,603 445,145 201,914 Purchases of securities available for sale ................. (967,585) (506,970) (32,993) Net (increase) decrease in short-term federal funds sold ...................................... (41,000) 45,000 -- Acquisitions, net of cash acquired ......................... -- (218,896) -- Sales of deposits, net of cash paid ........................ (235,742) (184,917) (60,550) Other, net ................................................. (19,956) (12,971) (2,361) ---------- ----------- ----------- Net cash provided (used) by investing activities .......................................... (695,949) 333,045 (184,730) ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits ........................ 64,399 79,819 (150,667) Net increase (decrease) in securities sold under repurchase agreements and federal funds purchased ......................................... 254,836 (181,288) (159,194) Proceeds from borrowings ................................... 3,502,311 1,835,104 2,235,289 Payments on borrowings ..................................... (2,911,853) (1,960,675) (1,902,246) Proceeds from issuance of common stock ..................... -- 29,266 13,726 Purchases of common stock to be held in treasury ................................................ (210,939) (27,316) (41,382) Payments for dividends on common stock ..................... (54,971) (38,201) (26,487) Other, net ................................................. (20,372) (1,143) (10,707) ---------- ----------- ----------- Net cash provided (used) by financing activities .......................................... 623,411 (264,434) (41,668) ---------- ----------- ----------- Net increase in cash and due from banks .................... 123,467 60,564 3,654 Cash and due from banks at beginning of year ............... 297,010 236,446 232,792 ---------- ----------- ----------- Cash and due from banks at end of year ..................... $ 420,477 $ 297,010 $ 236,446 ---------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: CASH PAID FOR: Interest on deposits and borrowings ..................... $ 306,299 $ 285,722 $ 239,653 ---------- ----------- ----------- Income taxes ............................................ $ 105,207 $ 97,319 $ 73,309 ---------- ----------- ----------- Transfer of loans to other real estate owned and other assets ..................................... $ 36,750 $ 40,837 $ 37,417 - ---------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 34 TCF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION -- 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 national bank holding company engaged primarily in community banking and lease financing through its wholly owned subsidiaries, TCF National Bank Minnesota ("TCF Minnesota"), TCF National Bank Illinois ("TCF Illinois"), TCF National Bank Wisconsin ("TCF Wisconsin"), TCF National Bank Colorado ("TCF Colorado"), and Great Lakes National Bank Michigan ("Great Lakes Michigan"). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. COMPREHENSIVE INCOME -- Effective January 1, 1998, TCF adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is the total of net income and other comprehensive income, which for TCF is comprised entirely of unrealized gains and losses on securities available for sale. As permitted by SFAS No. 130, TCF has elected to disclose the components of comprehensive income in the Consolidated Statements of Stockholders' Equity. In accordance with SFAS No. 130, reclassification adjustments have been determined for all components of other comprehensive income reported in the Consolidated Statements of Stockholders' Equity. The following table summarizes the components of other comprehensive income:
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Unrealized holding gains (losses) on securities available for sale (net of tax expense (benefit) of $206, $6,994 and $(5,689), respectively) ......................................................... $ 236 $11,465 $(9,273) Reclassification adjustment for gains included in net income (net of tax expense of $1,045, $3,224 and $33, respectively) ......................................................... (1,201) (5,285) (53) ------- ------- ------- Total other comprehensive income, net of tax .......................................................... $ (965) $ 6,180 $(9,326) - ------------------------------------------------------------------------------------------------------------------
SEGMENT INFORMATION -- Effective January 1, 1998, TCF adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 superseded SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports. The adoption of SFAS No. 131 did not impact TCF's results of operations or financial condition, but did affect the disclosure of segment information. In accordance with SFAS No. 131, prior period financial information has been restated. See Note 20 for TCF's disclosures in accordance with SFAS No. 131. EMPLOYEE BENEFIT PLANS -- Effective January 1, 1998, TCF adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans. The adoption of SFAS No. 132 did not impact TCF's results of operations or financial condition. In accordance with SFAS No. 132, prior period financial information has been restated. See Note 18 for TCF's disclosures in accordance with SFAS No. 132. INVESTMENTS -- Investments are carried at cost, adjusted for amortization of premiums or accretion of discounts using methods which approximate a level yield. 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 accumulated other comprehensive income, which is 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. LOANS HELD FOR SALE -- Loans held for sale are carried at the lower of cost or market determined on an aggregate basis, including related forward mortgage loan sales commitments. 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. TCF 35 LOANS AND LEASES -- Net fees and costs associated with originating and acquiring loans and leases are deferred and amortized over the lives of the assets. 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 costs, unearned discounts and finance charges, and unearned lease income are amortized using methods which approximate a level yield over the estimated remaining lives of the loans and leases. Leases that transfer substantially all of the benefits and risks of equipment ownership to the lessee are classified as direct financing or sales-type leases and are included in loans and leases. Direct financing and sales-type leases are carried at the combined present value of the future minimum lease payments and the lease residual value, which represents the estimated fair value of the leased equipment at the termination of the lease based on management's experience and judgment. Lease residual values are reviewed on an ongoing basis and any downward revisions are recorded in the periods in which they become known. Interest income on direct financing and sales-type leases is recognized using methods which approximate a level yield over the term of the leases. Sales-type leases generate dealer profit which is recognized at lease inception by recording lease revenue net of the lease cost. Revenue consists of the present value of the future minimum lease payments discounted at the rate implicit in the lease. Cost consists of the leased equipment's book value, less the present value of its residual. Impaired loans include all non-accrual and restructured commercial real estate and commercial business loans. Consumer and residential real estate loans and lease financings are excluded from the definition of an impaired loan. Loan impairment is measured as the present value of expected future cash flows discounted at the loan's initial effective interest rate, the fair value of the collateral of an impaired collateral-dependent loan or an observable market price. The allowance for loan and lease losses is maintained at a level believed to be adequate by management to provide for estimated loan and lease losses. Management's judgment as to the adequacy of the allowance, including the allocated and unallocated elements, is a result of ongoing review of larger individual loans and leases, the overall risk characteristics of the portfolios, changes in the character or size of the portfolios, the level of non-performing assets, historical net charge-off amounts, geographic location and prevailing economic conditions. Residential loans, consumer loans, and smaller-balance commercial loans and lease financings are segregated by lease type and sub-type, and are evaluated on a group basis. The allowance for loan and lease losses is established for known or anticipated problem loans and leases, as well as for loans and leases which are not currently known to require specific allowances. Loans and leases are charged off to the extent they are deemed to be uncollectible. The adequacy of the allowance for loan and lease losses is highly dependent upon management's estimates of variables affecting valuation, appraisals of collateral, evaluations of performance and status, and the amounts and timing of future cash flows expected to be received on impaired loans. Such estimates, appraisals, evaluations and cash flows may be subject to frequent adjustments due to changing economic prospects of borrowers, lessees or properties. These estimates are reviewed periodically and adjustments, if necessary, are recorded in the provision for credit losses in the periods in which they become known. Interest income is accrued on loan and lease balances outstanding. Loans and leases, including loans that are considered to be impaired, are reviewed regularly by management and are placed on non-accrual status when the collection of interest or principal is 90 days or more past due, unless the loan or lease is adequately secured and in the process of collection. When a loan or lease 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 off against the allowance for loan and lease losses. Interest accrued in the current year is reversed. Interest payments received on non-accrual loans and leases are generally applied to principal unless the remaining 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. 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. OTHER REAL ESTATE OWNED -- Other real estate owned is recorded at the lower of cost or fair value minus estimated costs to sell at the date of transfer to other real estate owned. 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 in the period in which it becomes known and is included in other non-interest expense. MORTGAGE SERVICING RIGHTS -- Mortgage servicing rights are capitalized and amortized in proportion to, and over the period of, estimated net servicing income. TCF periodically evaluates its capitalized mortgage servicing rights for impairment. Loan type and note rate are the predominant risk characteristics of the underlying loans used to stratify capitalized mortgage servicing rights for purposes of measuring impairment. Any impairment is recognized through a valuation allowance. INTANGIBLE ASSETS -- Goodwill resulting from acquisitions is amortized over 25 years on a straight-line basis. Deposit base intangibles are amortized over 10 years on an accelerated basis. The Company periodically reviews the recoverability of the carrying values of these assets. DERIVATIVE FINANCIAL INSTRUMENTS -- TCF utilizes derivative financial instruments in order to meet the ongoing credit needs of its customers and in order to manage the market exposure of its residential loans held for sale portfolio and its commitments to extend credit for residential loans. Derivative financial instruments include commitments to extend credit and forward mortgage loan sales commitments. See Note 15 for additional information concerning these derivative financial instruments. 36 TCF ADVERTISING AND PROMOTIONS -- Expenditures for advertising costs are expensed as 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 COMMON SHARE -- The following table reconciles the weighted average shares outstanding and the income applicable to common shareholders used for basic and diluted earnings per share:
YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA) 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------- Weighted average number of common shares outstanding used in basic earnings per common share calculation ............... 88,092,895 84,477,536 81,903,690 Net dilutive effect of: Stock option plans ................................................ 346,434 468,275 537,900 Restricted stock plans ............................................ 476,486 838,189 654,918 Assumed conversion of 7 1/4% convertible subordinated debentures .. -- 349,936 842,850 ----------- ---------- ----------- Weighted average number of shares outstanding adjusted for effect of dilutive securities ................................. 88,915,815 86,133,936 83,939,358 ----------- ---------- ----------- Net income .......................................................... $ 156,179 $ 145,061 $ 100,377 Add: Interest expense on 7 1/4% convertible subordinated debentures, net of tax ............................................ -- 132 328 ----------- ---------- ----------- Income applicable to common shareholders including effect of dilutive securities ............................................ $ 156,179 $ 145,193 $ 100,705 ----------- ---------- ----------- Basic earnings per common share ..................................... $ 1.77 $ 1.72 $ 1.23 ----------- ---------- ----------- Diluted earnings per common share ................................... $ 1.76 $ 1.69 $ 1.20 - -----------------------------------------------------------------------------------------------------------------------
2. BUSINESS COMBINATIONS AND ACQUISITIONS JEWEL-OSCO BRANCHES -- On January 30, 1998, TCF Illinois completed its acquisition of 76 branches in Jewel-Osco stores in the Chicago area previously operated by Bank of America. TCF Illinois converted existing deposits by offering TCF Illinois products to Bank of America customers and acquired the related fixed assets and 178 automated teller machines ("ATM") located in Jewel-Osco stores. TCF accounted for the acquisition using the purchase method of accounting. STANDARD FINANCIAL, INC. -- On September 4, 1997, TCF acquired all of the outstanding common stock of Standard Financial, Inc. ("Standard"), a community-oriented thrift institution with $2.6 billion in assets, $1.9 billion in deposits, and 14 full-service offices in Chicago, Illinois, for a purchase price of $423.7 million, which consisted of $237.9 million in cash and 7,700,000 shares of TCF common stock. The acquisition has been accounted for by the purchase method of accounting and, accordingly, the results of operations of Standard have been included in TCF's consolidated financial statements since September 4, 1997. WINTHROP RESOURCES CORPORATION -- On June 24, 1997, TCF completed its acquisition of Winthrop Resources Corporation ("Winthrop"), a leasing company with $363 million in assets. Winthrop leases computers, telecommunications equipment, point-of-sale systems and other business-essential equipment to companies nationwide. In connection with the acquisition, TCF issued approximately 13.4 million shares of its common stock for all of the outstanding common shares of Winthrop. The consolidated financial statements of TCF give effect to the acquisition, 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 Winthrop for all periods presented, except for dividends declared per share. There were no material intercompany transactions prior to the acquisition and no material differences in the accounting and reporting policies of TCF and Winthrop. BOC FINANCIAL CORPORATION -- On January 16, 1997, TCF completed its purchase of BOC Financial Corporation, an Illinois-based bank holding company with $183.1 million in assets and $168 million in deposits. TCF accounted for the acquisition using the purchase method of accounting. 3. CASH AND DUE FROM BANKS At December 31, 1998, TCF was required by Federal Reserve Board regulations to maintain reserve balances of $159 million in cash on hand or at various Federal Reserve Banks. TCF 37 4. INVESTMENTS Investments consist of the following:
AT DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------------- 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- GROSS GROSS GROSS GROSS CARRYING UNREALIZED UNREALIZED FAIR CARRYING UNREALIZED UNREALIZED FAIR (IN THOUSANDS) VALUE GAINS LOSSES VALUE VALUE GAINS LOSSES VALUE - ----------------------------------------------------------------------------------------------------------------------------------- Interest-bearing deposits with banks ..... $115,894 $-- $-- $115,894 $ 20,572 $-- $-- $ 20,572 Federal funds sold ....................... 41,000 -- -- 41,000 -- -- -- -- Federal Home Loan Bank stock, at cost .... 93,482 -- -- 93,482 82,002 -- -- 82,002 Federal Reserve Bank stock, at cost ...... 23,112 -- -- 23,112 22,977 -- -- 22,977 Other .................................... 4,227 -- -- 4,227 4,061 -- -- 4,061 -------- ---- ---- -------- -------- ---- ---- -------- $277,715 $-- $-- $277,715 $129,612 $-- $-- $129,612 - -----------------------------------------------------------------------------------------------------------------------------------
The carrying value, fair value and yield of investments at December 31, 1998, by contractual maturity, are shown below:
CARRYING FAIR (DOLLARS IN THOUSANDS) VALUE VALUE YIELD - ------------------------------------------------------------------------------- Due in one year or less ........... $161,121 $161,121 4.85% No stated maturity(1) ............ 116,594 116,594 6.85 -------- -------- $277,715 $277,715 5.69 - -------------------------------------------------------------------------------
(1) Balance represents FRB and FHLB stock, required regulatory investments. 5. SECURITIES AVAILABLE FOR SALE Securities available for sale consist of the following:
AT DECEMBER 31, - -------------------------------------------------------------------------------------------------------------------------------- 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- GROSS GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR (DOLLARS IN THOUSANDS) COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE - -------------------------------------------------------------------------------------------------------------------------------- Mortgage-backed securities: FHLMC ..................... $ 989,681 $ 9,966 $ (960) $ 998,687 $ 701,195 $10,280 $ (676) $ 710,799 FNMA ...................... 537,197 5,567 (1,336) 541,428 466,820 4,083 (1,003) 469,900 GNMA ...................... 33,721 510 (113) 34,118 43,079 932 (18) 43,993 Private issuer ............ 104,099 311 (1,597) 102,813 199,738 1,381 (794) 200,325 Collateralized mortgage obligations .... 873 -- -- 873 1,147 -- (33) 1,114 ----------- ------- ------ ---------- ---------- ------- ------- ---------- $ 1,665,571 $16,354 $(4,006) $1,677,919 $1,411,979 $16,676 $(2,524) $1,426,131 ----------- ------- ------ ---------- ---------- ------- ------- ---------- Weighted-average yield ........ 6.63% 7.04% - --------------------------------------------------------------------------------------------------------------------------------
Gross gains of $2.3 million, $9.1 million and $102,000 and gross losses of $57,000, $602,000 and $16,000 were recognized on sales of securities available for sale during 1998, 1997 and 1996, respectively. Mortgage-backed securities aggregating $3.6 million were pledged as collateral to secure certain deposits at December 31, 1998. 6. LOANS HELD FOR SALE Loans held for sale consist of the following:
AT DECEMBER 31, --------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 --------------------------------------------------------------------------- Residential real estate ...................... $ 74,814 $109,315 Education .................................... 138,259 135,297 --------------------------------------------------------------------------- $213,073 $244,612 ---------------------------------------------------------------------------
38 TCF 7. LOANS AND LEASES Loans and leases consist of the following:
AT DECEMBER 31, - ------------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------------------------- Residential real estate ............................ $ 3,757,416 $ 3,619,527 Unearned premiums and deferred loan fees ........... 7,864 4,318 ------------------------------ 3,765,280 3,623,845 ------------------------------ Commercial real estate: Apartments...................................... 257,195 294,231 Other permanent ................................ 464,817 481,759 Construction and development ................... 92,399 86,174 Unearned discounts and deferred loan fees ...... (2,983) (2,248) ------------------------------ 811,428 859,916 ------------------------------ Total real estate ............................ 4,576,708 4,483,761 ------------------------------ Commercial business ................................ 288,676 239,728 Deferred loan costs ................................ 428 479 ------------------------------ 289,104 240,207 ------------------------------ Consumer: Home equity..................................... 1,526,129 1,519,644 Automobile...................................... 337,893 444,903 Loans secured by deposits ...................... 7,581 10,112 Other secured .................................. 19,033 19,955 Unsecured ...................................... 35,290 44,607 Unearned discounts and deferred loan fees ...... (49,372) (62,522) ------------------------------ 1,876,554 1,976,699 ------------------------------ Lease financing: Direct financing leases ........................ 377,157 344,889 Sales-type leases............................... 35,695 40,592 Lease residuals ................................ 29,340 28,789 Unearned income and deferred lease costs ....... (43,380) (45,749) ------------------------------ 398,812 368,521 ------------------------------ $ 7,141,178 $ 7,069,188 - -------------------------------------------------------------------------------------
At December 31, 1998, the recorded investment in loans that were considered to be impaired was $7.1 million for which the related allowance for loan losses was $1.7 million. All of the impaired loans were on non-accrual status. The average recorded investment in impaired loans during the year ended December 31, 1998 was $8.7 million. For the year ended December 31, 1998, TCF recognized interest income on impaired loans of $90,000, none of which was recognized using the cash basis method of income recognition. At December 31, 1997, the recorded investment in loans that were considered to be impaired was $7.2 million for which the related allowance for loan losses was $1.7 million. All of the impaired loans were on non-accrual status. The average recorded investment in impaired loans during the year ended December 31, 1997 was $13.5 million. For the year ended December 31, 1997, TCF recognized interest income on impaired loans of $417,000, of which $208,000 was recognized using the cash basis method of income recognition. At December 31, 1998, 1997 and 1996, loans and leases on non-accrual status totaled $33.7 million, $36.8 million and $26.4 million, respectively. Had the loans and leases performed in accordance with their original terms throughout 1998, TCF would have recorded gross interest income of $3.7 million for these loans and leases. Interest income of $1.6 million has been recorded on these loans and leases for the year ended December 31, 1998. At December 31, 1998, TCF had no loans or leases outstanding with terms that had been modified in troubled debt restructurings, compared with $1.3 million of such commercial real estate loans at December 31, 1997. There were no material commitments to lend additional funds to customers whose loans or leases were classified as restructured or non-accrual at December 31, 1998. TCF 39 Future minimum lease payments for direct financing and sales-type leases as of December 31, 1998 are as follows:
PAYMENTS TO PAYMENTS TO BE RECEIVED BY BE RECEIVED OTHER FINANCIAL (IN THOUSANDS) BY TCF INSTITUTIONS TOTAL - ----------------------------------------------------------------------------------------------------- 1999 .............................. $ 76,791 $ 98,330 $175,121 2000 .............................. 53,133 64,139 117,272 2001 .............................. 26,760 30,694 57,454 2002 .............................. 9,010 7,084 16,094 2003 .............................. 3,495 1,234 4,729 Thereafter ........................ 89 -- 89 ------------------------------------------------------------ $169,278 $201,481 $370,759 - -----------------------------------------------------------------------------------------------------
At December 31, 1998, 1997 and 1996, TCF was servicing real estate loans for others with aggregate unpaid principal balances of approximately $3.7 billion, $4.4 billion and $4.5 billion, respectively. During 1998 and 1997, TCF sold servicing rights on $200.4 million and $144.7 million of loans serviced for others at net gains of $2.4 million and $1.6 million, respectively. There were no sales of servicing rights on loans serviced for others in 1996. 8. ALLOWANCE FOR LOAN AND LEASE LOSSES Following is a summary of the allowance for loan and lease losses and selected statistics:
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- Balance at beginning of year ...................... $ 82,583 $ 71,865 $ 66,290 Acquired balance ............................... -- 10,592 -- Provision for credit losses .................... 23,280 17,995 21,446 Charge-offs .................................... (32,714) (26,813) (24,294) Recoveries ..................................... 6,864 8,944 8,423 --------------------------------------------------- Net charge-offs ............................. (25,850) (17,869) (15,871) --------------------------------------------------- Balance at end of year ............................ $ 80,013 $ 82,583 $ 71,865 --------------------------------------------------- Ratio of net loan and lease charge-offs to average loans and leases outstanding ........... .36% .30% .29% Allowance for loan and lease losses as a percentage of total loan and lease balances at year-end ....................................... 1.12 1.17 1.36 - -------------------------------------------------------------------------------------------------------
9. OTHER ASSETS Other assets consist of the following:
AT DECEMBER 31, - ------------------------------------------------------------------------------------------ (IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------------------------------ Premises and equipment .............................. $173,688 $165,790 Accrued interest receivable ......................... 52,197 54,336 Mortgage servicing rights ........................... 21,566 19,512 Other real estate owned ............................. 13,602 18,353 Due from brokers .................................... -- 126,662 Other ............................................... 70,309 78,516 ----------------------------------- $331,362 $463,169 - ------------------------------------------------------------------------------------------
40 TCF Premises and equipment are summarized as follows:
AT DECEMBER 31, - -------------------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 - -------------------------------------------------------------------------------------------- Land.................................................. $ 33,619 $ 32,664 Office buildings...................................... 130,932 131,720 Leasehold improvements................................ 27,084 23,266 Furniture and equipment............................... 145,835 128,845 ----------------------------------- 337,470 316,495 Less accumulated depreciation and amortization........ 163,782 150,705 ----------------------------------- $173,688 $165,790 - --------------------------------------------------------------------------------------------
TCF leases certain premises and equipment under operating leases. Net lease expense was $19.6 million, $15 million and $14.7 million in 1998, 1997 and 1996, respectively. At December 31, 1998, the total annual minimum lease commitments for operating leases were as follows:
(IN THOUSANDS) - ----------------------------------------------------------- 1999 ............................................ $ 16,647 2000 ............................................ 14,392 2001 ............................................ 11,483 2002 ............................................ 10,176 2003 ............................................ 10,149 Thereafter ...................................... 58,408 -------- $121,255 - -----------------------------------------------------------
Mortgage servicing rights, net of valuation allowance, are summarized as follows:
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------- Balance at beginning of year, net ......... $19,512 $17,360 $16,286 Acquired balance ....................... -- 2,177 -- Mortgage servicing rights capitalized .. 8,966 5,229 5,822 Amortization ........................... (5,268) (4,753) (4,648) Sale of servicing ...................... (97) (401) -- Valuation adjustments .................. (1,547) (100) (100) ----------------------------------- Balance at end of year, net ............... $21,566 $19,512 $17,360 - -------------------------------------------------------------------------------
The valuation allowance for mortgage servicing rights is summarized as follows:
YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 - ----------------------------------------------------------------------------------- Balance at beginning of year ................. $1,594 $1,494 $1,394 Provisions ................................ 1,547 100 100 Charge-offs ............................... (403) -- -- ----------------------------------- Balance at end of year ....................... $2,738 $1,594 $1,494 - -----------------------------------------------------------------------------------
TCF 41 10. DEPOSITS Deposits are summarized as follows:
AT DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE (DOLLARS IN THOUSANDS) RATE AMOUNT TOTAL RATE AMOUNT TOTAL - ---------------------------------------------------------------------------------------------------------------------------- Checking: Non-interest bearing ................ 0.00% $1,158,685 17.3% 0.00% $840,714 12.2% Interest bearing .................... .57 720,938 10.7 1.05 627,943 9.1 ---------------------- ------------------- .22 1,879,623 28.0 .45 1,468,657 21.3 ---------------------- ------------------- Passbook and statement: Non-interest bearing ................ 0.00 63,024 .9 0.00 33,387 .5 Interest bearing .................... 1.13 1,113,907 16.6 2.10 1,101,291 15.9 ---------------------- ------------------- 1.07 1,176,931 17.5 2.04 1,134,678 16.4 ---------------------- ------------------- Money market ............................ 2.64 700,004 10.4 3.07 698,312 10.1 ---------------------- ------------------- .94 3,756,558 55.9 1.55 3,301,647 47.8 Certificates ............................ 5.01 2,958,588 44.1 5.13 3,605,663 52.2 ---------------------- 2.73 $6,715,146 100.0% 3.42 $6,907,310 100.0% - ----------------------------------------------------------------------------------------------------------------------------
Certificates had the following remaining maturities at December 31, 1998:
(IN MILLIONS) $100,000 MATURITY MINIMUM OTHER TOTAL - -------------------------------------------------------------------------------------- 0-3 months ............................. $268.6 $ 724.5 $ 993.1 4-6 months ............................. 63.1 626.3 689.4 7-12 months ............................ 69.1 707.5 776.6 13-24 months ........................... 32.4 312.8 345.2 25-36 months ........................... 12.7 100.2 112.9 37-48 months ........................... 2.1 20.3 22.4 49-60 months ........................... 2.0 12.0 14.0 Over 60 months ......................... .1 4.9 5.0 --------------------------------------------- $450.1 $2,508.5 $2,958.6 - --------------------------------------------------------------------------------------
42 TCF 11. BORROWINGS Borrowings consist of the following:
AT DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1998 1997 - ------------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED YEAR OF AVERAGE AVERAGE MATURITY AMOUNT RATE AMOUNT RATE - ------------------------------------------------------------------------------------------------------------------- Securities sold under repurchase agreements and federal funds purchased: Securities sold under repurchase agreements............ 1998 $ -- --% $ 112,244 5.99% 1999 317,280 6.81 -- -- 2001 50,000 5.71 -- -- ---------- ---------- 367,280 6.66 112,244 5.99 Federal funds purchased............. 1998 -- -- 200 6.84 ---------- ---------- 367,280 6.66 112,444 5.99 ---------- ---------- Federal Home Loan Bank advances........... 1998 -- -- 522,300 5.93 1999 570,207 5.85 469,245 5.97 2000 297,399 6.16 297,758 6.16 2001 886,602 5.19 25,132 6.09 2003 50,000 5.78 25,000 5.78 2008 -- -- 143 6.15 ---------- ---------- 1,804,208 5.58 1,339,578 6.00 ---------- ---------- Discounted lease rentals.................. 1998 -- -- 95,142 8.57 1999 87,791 8.28 70,438 8.56 2000 58,917 8.18 38,922 8.55 2001 29,009 8.21 20,151 8.59 2002 6,772 7.99 3,943 8.43 2003 1,195 7.65 -- -- ---------- ---------- 183,684 8.22 228,596 8.56 ---------- ---------- Other borrowings: Senior subordinated debentures......... 1998 -- -- 6,248 18.00 2003 28,750 9.50 28,750 9.50 ---------- ---------- 28,750 9.50 34,998 11.02 ---------- ---------- Collateralized mortgage obligations.... 2008 44 6.50 868 6.69 2010 1,809 5.95 1,671 6.07 ---------- ---------- 1,853 5.95 2,539 6.26 ---------- ---------- Bank line of credit................... 1999 74,000 6.19 -- -- Treasury, tax and loan note............ 1998 -- -- 8,997 5.26 1999 1,271 4.11 -- -- ---------- ---------- 105,874 7.06 46,534 9.65 ---------- ---------- $2,461,046 6.00 $1,727,152 6.43 - -------------------------------------------------------------------------------------------------------------------
At December 31, 1998, borrowings with a remaining contractual maturity of one year or less consisted of the following:
- ---------------------------------------------------------------------------------------- WEIGHTED- AVERAGE (DOLLARS IN THOUSANDS) AMOUNT RATE - ---------------------------------------------------------------------------------------- Securities sold under repurchase agreements and federal funds purchased ............................... $ 317,280 6.81% Federal Home Loan Bank advances .......................... 570,207 5.85 Discounted lease rentals ................................. 87,791 8.28 Bank line of credit ...................................... 74,000 6.19 Treasury, tax and loan note .............................. 1,271 4.11 ---------- $1,050,549 6.36 - ----------------------------------------------------------------------------------------
TCF 43 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, 1998, all of the securities sold under repurchase agreements provided for the repurchase of identical securities. At December 31, 1998, 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 VALUE - ------------------------------------------------------------------------------------ Maturity: January 1999 ......... $317,280 6.81% $327,479 $327,479 November 2001 ........ 50,000 5.71 53,174 53,174 -------- -------------------- $367,280 6.66 $380,653 $380,653 - ------------------------------------------------------------------------------------
Included in Federal Home Loan Bank ("FHLB") advances are $705 million of callable advances maturing in 2001 which are callable at par beginning in 1999 on their first anniversary date and quarterly thereafter until maturity. If called, the FHLB will provide replacement funding at the then-prevailing market rate of interest for the remaining term-to-maturity of the advances, subject to standard terms and conditions. TCF has a $135 million bank line of credit which is unsecured and contains certain covenants common to such agreements with which TCF is in compliance. The interest rate on the line of credit is based on either the prime rate or LIBOR. TCF has the option to select the interest rate index and term for advances on the line of credit. The line of credit expires in October 1999. During 1998, TCF redeemed the $6.2 million of senior subordinated debentures at par plus accrued and unpaid interest to the date of redemption. The $28.8 million of senior subordinated debentures mature in July 2003. These debentures will be redeemable at par plus accrued interest to the date of redemption beginning July 1, 2001. During 1997, TCF redeemed $7.1 million of convertible subordinated debentures (the "Debentures") at par plus accrued and unpaid interest to the date of redemption. The Debentures were convertible into TCF common stock at a conversion price of $8.52 per common share. TCF issued approximately 839,000 shares of common stock in connection with the conversion of the Debentures. At December 31, 1998, mortgage-backed securities collateralizing TCF's collateralized mortgage obligations had a market value of $1.7 million. FHLB advances are collateralized by residential real estate loans, FHLB stock and mortgage-backed securities with an aggregate carrying value of $2.8 billion at December 31, 1998. The following table sets forth TCF's maximum and average borrowing levels for each of the years in the three-year period ended December 31, 1998:
SECURITIES SOLD UNDER REPURCHASE DISCOUNTED AGREEMENTS AND FHLB LEASE OTHER (DOLLARS IN THOUSANDS) FEDERAL FUNDS PURCHASED ADVANCES RENTALS BORROWINGS - --------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1998: Average balance .......................... $140,414 $1,367,104 $205,393 $ 92,467 Maximum month-end balance ................ 367,280 1,804,208 222,018 214,087 Average rate for period .................. 5.60% 5.80% 8.15% 7.38% Year ended December 31, 1997: Average balance .......................... $346,339 $ 817,464 $222,558 $ 97,547 Maximum month-end balance ................ 482,231 1,339,578 241,895 136,259 Average rate for period .................. 5.74% 5.89% 8.28% 7.56% Year ended December 31, 1996: Average balance .......................... $506,298 $ 674,703 $180,586 $ 85,571 Maximum month-end balance ................ 647,707 1,141,040 189,105 139,658 Average rate for period .................. 5.65% 5.52% 8.25% 7.20% - ---------------------------------------------------------------------------------------------------------------------------
44 TCF 12. INCOME TAXES Income tax expense (benefit) consists of:
(IN THOUSANDS) CURRENT DEFERRED TOTAL - -------------------------------------------------------------------------------------------------------- Year ended December 31, 1998: Federal................................................. $ 91,102 $ (994) $ 90,108 State................................................... 19,325 (363) 18,962 ------------------------------------------- $110,427 $(1,357) $109,070 ------------------------------------------- Year ended December 31, 1997: Federal................................................. $ 77,465 $ 1,395 $ 78,860 State................................................... 16,464 522 16,986 ------------------------------------------- $ 93,929 $ 1,917 $ 95,846 ------------------------------------------- Year ended December 31, 1996: Federal................................................. $ 49,446 $ 934 $ 50,380 State................................................... 11,300 (649) 10,651 ------------------------------------------- $ 60,746 $ 285 $ 61,031 - --------------------------------------------------------------------------------------------------------
Total income tax expense of $109.1 million, $95.8 million and $61 million for the years ended December 31, 1998, 1997 and 1996, respectively, did not include tax benefits specifically allocated to stockholders' equity. 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 $2.4 million, $2.3 million and $2.5 million for the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, TCF has net operating loss ("NOL") carryforwards for federal income tax purposes of $3.7 million, which are available to offset future federal taxable income through 2008. The realization of the NOLs is subject to certain Internal Revenue Code ("IRC") limitations. In addition, TCF has certain alternative minimum tax ("AMT") credit carryforwards of approximately $1 million, which are available to reduce future federal income taxes over an indefinite period. The realization of the AMT credits is subject to certain IRC limitations. TCF has, in its judgment, made certain reasonable assumptions relating to the realizability of the deferred tax assets. Based upon these assumptions, the Company has determined that no valuation allowance is required with respect to the deferred tax assets. Income tax expense differs from the amounts computed by applying the federal income tax rate of 35% to income before income tax expense as a result of the following:
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Computed income tax expense.................................. $ 92,837 $84,317 $56,493 Increase (reduction) in income tax expense resulting from: ESOP dividend deduction............................. (1,104) (792) (649) Amortization of goodwill............................ 3,741 1,287 562 State income tax, net of federal income tax benefit........................................... 12,325 11,041 6,980 Other, net.......................................... 1,271 (7) (2,355) -------------------------------------------- $109,070 $95,846 $61,031 - -------------------------------------------------------------------------------------------------------------
TCF 45 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) 1998 1997 - ------------------------------------------------------------------------------------------------------------ Deferred tax assets: Allowance for loan and lease losses ................................... $22,011 $24,434 Pension and other compensation plans .................................. 11,058 9,117 Insurance premiums .................................................... 4,253 3,750 Net operating loss carryforward ....................................... 1,301 1,326 Alternative minimum tax credit carryforward ........................... 1,028 992 Other ................................................................. 817 1,044 ------------------------------- Total deferred tax assets .......................................... 40,468 40,663 ------------------------------- Deferred tax liabilities: Securities available for sale ......................................... 4,757 5,596 FHLB stock ............................................................ 4,648 4,711 Loan basis differences ................................................ 469 1,536 Premises and equipment ................................................ 1,279 2,632 Loan fees and discounts ............................................... 8,697 6,715 Mortgage servicing rights ............................................. 4,105 3,926 Lease financing ....................................................... 28,883 29,305 Intangible assets ..................................................... 1,507 2,316 ------------------------------- Total deferred tax liabilities ..................................... 54,345 56,737 ------------------------------- Net deferred tax liabilities .................................... $13,877 $16,074 - ------------------------------------------------------------------------------------------------------------
13. STOCKHOLDERS' EQUITY RESTRICTED RETAINED EARNINGS -- In general, TCF's subsidiary banks may not declare or pay a dividend to TCF in excess of 100% of their net profits for that year combined with their retained net profits for the preceding two calendar years without prior approval of the Office of the Comptroller of the Currency ("OCC"). Additional limitations on dividends declared or paid on, or repurchases of, TCF's subsidiary banks' capital stock are tied to the national banks' regulatory capital levels. Undistributed earnings and profits at December 31, 1998 includes approximately $134.4 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 generally 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 TCF based on the amount of earnings removed and current tax rates. SHAREHOLDER RIGHTS PLAN -- TCF's preferred share purchase 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 TCF's Board of Directors (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 $90 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. SHARES HELD IN TRUST FOR DEFERRED COMPENSATION PLANS -- During the third quarter of 1998, TCF applied the consensus reached in the Emerging Issues Task Force ("EITF") Issue No. 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Are Held in a Rabbi Trust and Invested." As a result, the assets of TCF's deferred compensation plans were consolidated with those of TCF. The cost of TCF common stock held by the deferred compensation plans is reported separately in a manner similar to treasury stock (that is, changes in fair value are not recognized) with a corresponding deferred compensation obligation reflected in additional paid-in capital. The application of EITF 97-14 did not impact TCF's total stockholders' equity or results of operations for 1998 or any prior period. LOAN TO EXECUTIVE DEFERRED COMPENSATION PLAN -- During 1998, loans totaling $6.4 million were made by TCF to the Executive Deferred Compensation Plan trustee on a nonrecourse basis to purchase shares of TCF common stock for the accounts of participants. The loans are repayable over five years, bear interest of 7.41% and are secured by the shares of TCF common stock purchased with the loan proceeds. These loans, totaling $6.1 million at December 31, 1998, are reflected as a reduction of stockholders' equity as required by generally accepted accounting principles. 46 TCF STOCK OFFERING -- On June 3, 1997, TCF completed a public offering of 1,400,000 shares of its common stock at a price of $21.6875 per share. The purpose of the offering was to meet one of the criteria for TCF's merger with Winthrop to be accounted for as a pooling of interests. The net proceeds of $29.3 million were used as a portion of the cash consideration paid in connection with the acquisition of Standard. TREASURY STOCK -- On January 20, 1997, the Board authorized the repurchase of up to 5% of TCF common stock, or 3.5 million shares. On February 25, 1997, the Board formally rescinded TCF's common stock repurchase program in connection with the Company's merger with Winthrop. On January 19, 1998, the Board authorized the repurchase of up to 5% of TCF common stock, or 4.6 million shares. On June 22, 1998, the Board authorized the repurchase of up to an additional 5% of TCF common stock, or 4.5 million shares. On December 15, 1998, the Board authorized the repurchase of up to an additional 5% of TCF common stock, or 4.3 million shares. TCF purchased 7,549,300, 1,295,800 and 2,380,136 shares of common stock during the years ended December 31, 1998, 1997 and 1996, respectively. At December 31, 1998, TCF has remaining authorization of 1.6 million shares under its June 22, 1998 5% stock repurchase program, which the Company expects to repurchase before initiating the December 15, 1998 program. 14. REGULATORY CAPITAL REQUIREMENTS TCF is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by the federal banking agencies, that, if undertaken, could have a direct material effect on TCF's financial statements. Under capital adequacy guidelines and the regulatory framework for "prompt corrective action," TCF must meet specific capital guidelines that involve quantitative measures of the Company's assets, stockholders' equity, and certain off-balance-sheet items as calculated under regulatory accounting practices. The following table sets forth TCF's tier 1 leverage, tier 1 risk-based and total risk-based capital levels, and applicable percentages of adjusted assets, together with the excess over the minimum capital requirements:
AT DECEMBER 31, - --------------------------------------------------------------------------------------------------- 1998 1997 - --------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) AMOUNT PERCENTAGE AMOUNT PERCENTAGE - --------------------------------------------------------------------------------------------------- Tier 1 leverage capital ......................... $659,661 6.75% $752,091 7.80% Tier 1 leverage capital requirement ............. 293,024 3.00 289,132 3.00 ------------------------------------------------ Excess ................................... $366,637 3.75% $462,959 4.80% ------------------------------------------------ Tier 1 risk-based capital ....................... $659,661 10.45% $752,091 11.97% Tier 1 risk-based capital requirement ........... 252,458 4.00 251,273 4.00 ------------------------------------------------ Excess ................................... $407,203 6.45% $500,818 7.97% ------------------------------------------------ Total risk-based capital ........................ $738,239 11.70% $830,639 13.22% Total risk-based capital requirement ............ 504,916 8.00 502,547 8.00 ------------------------------------------------ Excess ................................... $233,323 3.70% $328,092 5.22% - ---------------------------------------------------------------------------------------------------
At December 31, 1998, TCF and its bank subsidiaries exceeded their regulatory capital requirements and are considered "well-capitalized" under guidelines established by the Federal Reserve Board and the Federal Deposit Insurance Corporation Improvement Act of 1991. 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK TCF is a party to financial instruments with off-balance-sheet risk, primarily to meet the financing needs of its customers. These financial instruments, which are issued or held by TCF for purposes other than trading, involve elements of credit and interest-rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. TCF's exposure to credit loss in the event of non-performance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of the commitments. TCF uses the same credit policies in making these commitments as it does for on-balance-sheet instruments. TCF evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management's credit evaluation of the customer. For Veterans Administration ("VA") loans serviced with partial recourse and forward mortgage loan sales commitments, 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. TCF 47 COMMITMENTS TO EXTEND CREDIT -- Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. These commitments totaled $1.1 billion and $1.2 billion at December 31, 1998 and 1997, respectively. Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral predominantly consists of residential and commercial real estate and personal property. Included in the total commitments to extend credit at December 31, 1998 were fixed-rate mortgage loan commitments and loans in process aggregating $153.3 million. STANDBY LETTERS OF CREDIT -- 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 expire in various years through the year 2005 and totaled $45.3 million and $30.7 million at December 31, 1998 and 1997, respectively. 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, 1998 were collateralized by $30.3 million of TCF's mortgage-backed securities. VA LOANS SERVICED WITH PARTIAL RECOURSE -- 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. The serviced loans are collateralized by residential real estate and totaled $273.2 million and $335.9 million at December 31, 1998 and 1997, respectively. FORWARD MORTGAGE LOAN SALES COMMITMENTS -- 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. 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. Forward mortgage loan sales commitments totaled $106.7 million and $81.6 million at December 31, 1998 and 1997, respectively. 16. 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. 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. The carrying amounts of cash and due from banks, investments, accrued interest payable and receivable, and due from brokers approximate their fair values due to the short period of time until their expected realization. Securities available for sale are carried at fair value, which is based on quoted market prices. Certain financial instruments, including lease financings and discounted lease rentals, and all non-financial instruments are excluded from fair value of financial instrument disclosure requirements. The following methods and assumptions are used by the Company in estimating its fair value disclosures for its remaining financial instruments, all of which are issued or held for purposes other than trading. LOANS HELD FOR SALE -- The fair value of loans held for sale is estimated based on quoted market prices. The estimated fair value of capitalized mortgage servicing rights totaled $27.8 million at December 31, 1998, compared with a carrying amount of $21.6 million. The estimated fair value of capitalized mortgage servicing rights is based on estimated cash flows discounted using rates commensurate with the risks involved. Assumptions regarding prepayments, defaults and interest rates are determined using available market information. LOANS -- The fair values of residential and consumer loans are estimated using quoted market prices. 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. The fair values of other 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. DEPOSITS -- The fair value of checking, passbook and statement and money market deposits 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 for certificates of similar remaining maturities. BORROWINGS -- The carrying amounts of short-term borrowings approximate their fair values. The fair values of TCF's long-term borrowings are estimated based on quoted market prices or discounted cash flow analyses using interest rates for borrowings of similar remaining maturities. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK -- The fair values of residential commitments to extend credit and forward mortgage loan sales commitments associated with residential loans held for sale are based upon quoted market prices. The fair values of TCF's remaining commitments to extend credit and standby letters of credit are estimated using fees currently charged to enter into similar agreements. 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. 48 TCF TCF has not incurred, and does not anticipate, significant losses as a result of the recourse provisions associated with its balance of VA loans serviced with partial recourse. As a result, the carrying amounts and related estimated fair values of these financial instruments were not material at December 31, 1998 and 1997. As discussed above, the carrying amounts of certain of the Company's financial instruments approximate their fair value. The carrying amounts disclosed below are included in the Consolidated Financial Statements of Financial Condition under the indicated captions, except where noted otherwise. The carrying amounts and fair values of the Company's remaining financial instruments are set forth in the following table:
AT DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1998 1997 - --------------------------------------------------------------------------------------------------------------------- ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - --------------------------------------------------------------------------------------------------------------------- Financial instrument assets: Loans held for sale ................................. $ 213,073 $ 215,909 $ 244,612 $ 248,341 Loans: Residential real estate ........................... $3,765,280 $3,813,684 $3,623,845 $3,686,635 Commercial real estate ............................ 811,428 824,358 859,916 866,851 Commercial business ............................... 289,104 288,443 240,207 239,611 Consumer .......................................... 1,876,554 1,993,242 1,976,699 2,159,218 Allowance for loan losses(1) ...................... (76,024) -- (79,166) -- ----------------------------------------------------------- $6,666,342 $6,919,727 $6,621,501 $6,952,315 ----------------------------------------------------------- Financial instrument liabilities: Certificates of deposit ............................. $2,958,588 $2,994,231 $3,605,663 $3,637,981 Federal Home Loan Bank advances ..................... 1,804,208 1,817,563 1,339,578 1,337,014 Other borrowings .................................... 105,874 106,471 46,534 47,878 Financial instruments with off-balance-sheet risk:(2) Commitments to extend credit(3) .................... $ 3,085 $ (264) $ 3,463 $ (209) Standby letters of credit(4) ....................... -- (21) (17) (58) Forward mortgage loan sales commitments(3) ......... 87 113 56 (326) ----------------------------------------------------------- Total off-balance-sheet financial instruments .... $ 3,172 $ (172) $ 3,502 $ (593) - ---------------------------------------------------------------------------------------------------------------------
(1) Excludes the allowance for lease losses. (2) Positive amounts represent assets, negative amounts represent liabilities. (3) Carrying amounts are included in other assets. (4) Carrying amounts are included in accrued expenses and other liabilities. 17. STOCK OPTION AND INCENTIVE PLAN The TCF Financial 1995 Incentive Stock Program (the "Program") was adopted to enable TCF to attract and retain key personnel. Under the program, no more than 5% of the shares of TCF common stock outstanding on the date of initial shareholder approval may be awarded. Options generally become exercisable over a period of one to 10 years from the date of the grant and expire after 10 years. All outstanding options have a fixed exercise price equal to the market price of TCF common stock on the date of grant. Restricted stock granted in 1998 generally vests within five years, but may be subject to a delayed vesting schedule if certain return on equity goals are not met. Other restricted stock grants generally vest over periods from three to eight years. ACCOUNTING FOR STOCK-BASED COMPENSATION -- TCF has elected to retain the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," for its stock-based employee compensation plans. Accordingly, no compensation expense has been recognized for TCF's stock option grants. Compensation expense for restricted stock under APB Opinion No. 25 is recorded over the vesting periods, and totaled $5.9 million, $8.3 million and $7.9 million in 1998, 1997 and 1996, respectively. TCF 49 Had compensation expense been determined based on the fair value at the grant dates for awards under the Program consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," TCF's pro forma net income and earnings per common share would have been as follows:
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------ (IN THOUSANDS, EXCEPT PER-SHARE DATA) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Net income: As reported........................................... $156,179 $145,061 $100,377 ---------------------------------------------- Pro forma............................................. $156,271 $146,155 $100,553 ---------------------------------------------- Basic earnings per common share: As reported........................................... $ 1.77 $ 1.72 $ 1.23 ---------------------------------------------- Pro forma............................................. $ 1.77 $ 1.73 $ 1.23 ---------------------------------------------- Diluted earnings per common share: As reported........................................... $ 1.76 $ 1.69 $ 1.20 ---------------------------------------------- Pro forma............................................. $ 1.76 $ 1.70 $ 1.20 - ------------------------------------------------------------------------------------------------------------
Since the pro forma disclosures of results under SFAS No. 123 are only required to consider grants awarded since 1995, the pro forma effects of applying SFAS No. 123 during this period may not be representative of the effects on reported results for future years. The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model, with the following weighted-average assumptions used for 1998, 1997 and 1996, respectively: risk-free interest rates of 4.78%, 5.95% and 6.50%; dividend yield of 2.6%, 1.7% and 2.1%; expected lives of 5.25, 10 and 5 years; and volatility of 27.2%, 26.4% and 19.6%. The weighted-average grant-date fair value of options granted was $6.49, $11.98 and $3.32 in 1998, 1997 and 1996, respectively. The weighted-average grant-date fair value of restricted stock was $31.19, $22.23 and $16.75 in 1998, 1997 and 1996, respectively.
STOCK OPTIONS RESTRICTED STOCK --------------------------------------------------------------------------------------- EXERCISE PRICE ------------------------------- WEIGHTED- SHARES RANGE AVERAGE SHARES PRICE RANGE - ------------------------------------------------------------------------------------------------------------------------ Outstanding at December 31, 1995........................... 1,532,619 $ 1.94-11.43 $ 4.33 1,328,864 $ 7.66-14.83 Granted...................... 108,722 11.19-17.54 13.59 72,800 16.56-18.91 Exercised.................... (691,941) 1.94- 9.28 3.32 -- -- Expired...................... (832) 3.00 3.00 -- -- Forfeited.................... (5,600) 5.33- 9.28 8.15 (42,400) 8.10- 9.89 Vested....................... -- -- -- (167,398) 7.66-16.56 --------- --------- Outstanding at December 31, 1996........................... 942,968 2.22-17.54 6.12 1,191,866 7.66-18.91 Granted...................... 123,032 20.40-33.28 31.66 929,200 20.88-27.34 Exercised.................... (224,955) 2.22-17.54 7.06 -- -- Forfeited.................... (4,000) 7.74 7.74 -- -- Vested....................... -- -- -- (172,138) 8.10- 9.89 --------- --------- Outstanding at December 31, 1997.......................... 837,045 2.22-33.28 9.61 1,948,928 7.66-27.34 Granted...................... 551,500 23.69-32.19 25.04 108,200 28.97-34.00 Exercised.................... (208,388) 2.44-17.54 4.69 -- -- Forfeited.................... (1,500) 32.19 32.19 (5,400) 16.56-34.00 Vested....................... -- -- -- (607,994) 7.66-21.91 --------- --------- OUTSTANDING AT DECEMBER 31, 1998........................... 1,178,657 2.22-33.28 17.67 1,443,734 7.66-34.00 --------- --------- EXERCISABLE AT DECEMBER 31, 1998........................... 517,157 2.22-20.40 6.68 - ------------------------------------------------------------------------------------------------------------------------
50 TCF The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ----------------------- WEIGHTED- WEIGHTED- AVERAGE WEIGHTED- AVERAGE REMAINING AVERAGE EXERCISE CONTRACTUAL EXERCISE EXERCISE PRICE RANGE SHARES PRICE LIFE IN YEARS SHARES PRICE - ------------------------------------------------------------------------------------------------------------------ $2.22 to $5.00.................. 224,637 $ 3.38 3.1 224,637 $ 3.38 $5.01 to $10.00................. 188,796 6.77 4.6 184,796 6.72 $10.01 to $15.00................ 77,660 11.33 6.9 77,660 11.33 $15.01 to $33.28................ 687,564 26.05 9.6 30,064 19.02 ---------- -------- Total Options................. 1,178,657 17.67 7.4 517,157 6.68 - ------------------------------------------------------------------------------------------------------------------
At December 31, 1998, there were 2,179,073 shares reserved for issuance under the Program, including 1,178,657 shares for which options had been granted but had not yet been exercised. 18. EMPLOYEE BENEFIT PLANS The TCF Cash Balance Pension Plan (the "Pension Plan") is a defined benefit qualified plan covering all "regular stated salary" employees and certain part-time employees who are at least 21 years old and have completed a year of eligibility 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. In addition to providing retirement income benefits, TCF provides health care benefits for eligible retired employees, and in some cases life insurance benefits (the "Postretirement Plan"). 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, with certain exceptions. These and similar benefits for active employees are provided through insurance companies or through self-funded programs. The Postretirement Plan is an unfunded plan. The following tables set forth the status of the Pension Plan and the Postretirement Plan at the dates indicated:
PENSION PLAN POSTRETIREMENT PLAN ----------------------- ------------------------ YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ----------------------- ------------------------ (IN THOUSANDS) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year ................................ $ 17,027 $ 13,551 $ 8,603 $ 7,871 Service cost -- benefits earned during the year ......................... 2,967 2,091 299 236 Interest cost on benefit obligation .................................... 1,454 1,207 641 604 Acquisition/merger ..................................................... 5,006 -- -- -- Actuarial loss ......................................................... 3,647 1,151 358 573 Benefits paid .......................................................... (1,134) (973) (687) (681) -------- -------- -------- -------- Benefit obligation at end of year .................................... 28,967 17,027 9,214 8,603 -------- -------- -------- -------- Change in fair value of plan assets: Fair value of plan assets at beginning of year ......................... 53,374 38,657 -- -- Actual return on plan assets ........................................... 916 13,365 -- -- Benefits paid .......................................................... (1,134) (973) (687) (681) Acquisition/merger ..................................................... 4,182 2,325 -- -- Employer contributions ................................................. -- -- 687 681 -------- -------- -------- -------- Fair value of plan assets at end of year .............................. 57,338 53,374 -- -- -------- -------- -------- -------- Funded status of plans: Funded status at end of year ........................................... 28,371 36,347 (9,214) (8,603) Unrecognized transition obligation ..................................... -- -- 4,775 5,117 Unrecognized prior service cost ........................................ (5,040) (4,782) 879 988 Unrecognized net gain .................................................. (7,901) (17,063) (1,079) (1,495) -------- -------- -------- -------- Prepaid (accrued) benefit cost at end of year ........................ $ 15,430 $ 14,502 $ (4,639) $ (3,993) - ----------------------------------------------------------------------------------------------------------------------------
TCF 51 Net periodic benefit cost (credit) included the following components:
PENSION PLAN POSTRETIREMENT PLAN ---------------------------- ----------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ---------------------------- ----------------------------- (IN THOUSANDS) 1998 1997 1996 1998 1997 1996 - --------------------------------------------------------------------------------------------------------- Service cost .......................... $ 2,967 $ 2,091 $ 2,107 $ 299 $ 236 $ 177 Interest cost ......................... 1,454 1,207 945 641 604 778 Expected return on plan assets ........ (3,745) (2,841) (2,536) -- -- -- Amortization of transition obligation.. -- -- -- 342 342 342 Amortization of prior service cost .... (876) (742) (742) 109 109 109 Recognized actuarial gain ............. (728) -- -- (58) (116) -- ------- ------- ------- ------- ------- ------- Net periodic benefit cost (credit)... $ (928) $ (285) $ (226) $ 1,333 $ 1,175 $ 1,406 - ---------------------------------------------------------------------------------------------------------
The discount rate and rate of increase in future compensation used to measure the benefit obligation and the expected long-term rate of return on plan assets were as follows:
PENSION PLAN POSTRETIREMENT PLAN -------------------------- ------------------------- YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, --------------------------- ------------------------- 1998 1997 1996 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------- Discount rate......................................... 6.75% 7.75% 8.00% 6.75% 7.75% 8.00% Rate of increase in future compensation............... 5.00 5.00 5.00 -- -- -- Expected long-term rate of return on plan assets...... 9.50 9.50 9.50 -- -- -- - ---------------------------------------------------------------------------------------------------------------
The Pension Plan's assets consist primarily of listed stocks and government bonds. At December 31, 1998 and 1997, the Plan's assets included TCF common stock with a market value of $7.3 million and $12.2 million, respectively. For active participants of the Postretirement Plan, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1999. This rate is assumed to decrease gradually to 6% for the year 2004 and remain at that level thereafter. For most retired participants, the annual rate of increase is assumed to be 4% for all future years, which represents the Plan's annual limit on increases in TCF's contributions for retirees. Assumed health care cost trend rates have an effect on the amounts reported for the Postretirement Plan. A one-percentage point change in assumed health care cost trend rates would have the following effects:
1-PERCENTAGE- 1-PERCENTAGE- (IN THOUSANDS) POINT INCREASE POINT DECREASE - ---------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 65 $ (55) Effect on postretirement benefit obligation 416 (358) - ----------------------------------------------------------------------------------------------------------
EMPLOYEE STOCK PURCHASE PLAN -- The TCF Employees Stock Purchase 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 IRC. TCF matches 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. 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 $2.7 million, $2.2 million and $1.8 million in 1998, 1997 and 1996, respectively. 52 TCF 19. PARENT COMPANY FINANCIAL INFORMATION TCF Financial Corporation's (parent company only) condensed statements of financial condition as of December 31, 1998 and 1997, and the condensed statements of operations and cash flows for the years ended December 31, 1998, 1997 and 1996 are as follows: CONDENSED STATEMENTS OF FINANCIAL CONDITION
AT DECEMBER 31, ------------------------ (IN THOUSANDS) 1998 1997 - ---------------------------------------------------------------------------------------------------------- Assets: Cash........................................................................ $ 178 $ 16 Interest-bearing deposits with banks........................................ 2,401 19,821 Investment in subsidiaries: Bank subsidiaries......................................................... 879,887 895,527 Other subsidiaries........................................................ 586 586 Premises and equipment...................................................... 8,009 6,330 Other assets................................................................ 41,656 42,884 -------- ---------- $932,717 $965,164 -------- ---------- Liabilities and Stockholders' Equity: Bank line of credit......................................................... $ 74,000 $ -- Other liabilities........................................................... 13,215 11,484 -------- ---------- Total liabilities........................................................ 87,215 11,484 Stockholders' equity......................................................... 845,502 953,680 -------- ---------- $932,717 $965,164 - ----------------------------------------------------------------------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ----------------------------------- (IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------- Interest income .................................. $ 581 $ 1,099 $ 352 Interest expense ................................. 2,219 758 923 --------- --------- --------- Net interest income (expense) ................ (1,638) 341 (571) Provision for credit losses ...................... (49) 679 -- --------- --------- --------- Net interest expense after provision for credit losses .......................... (1,589) (338) (571) --------- --------- --------- Cash dividends received from consolidated subsidiaries: Bank subsidiaries ............................ 184,569 109,791 103,500 Other subsidiaries ........................... -- 1,549 4,102 --------- --------- --------- Total cash dividends received from consolidated subsidiaries ............... 184,569 111,340 107,602 --------- --------- --------- Other non-interest income: Affiliate service fee revenues ............... 72,483 53,671 44,022 Other ........................................ 35 (4) 7 --------- --------- --------- Total other non-interest income ............ 72,518 53,667 44,029 --------- --------- --------- Non-interest expense: Compensation and employee benefits ........... 41,379 42,828 34,174 Occupancy and equipment ...................... 14,672 12,217 10,958 Other ........................................ 19,294 17,813 16,067 --------- --------- --------- Total non-interest expense ................. 75,345 72,858 61,199 --------- --------- --------- Income before income tax benefit and equity in undistributed earnings of subsidiaries .. 180,153 91,811 89,861 Income tax benefit ............................... 1,588 7,518 6,879 --------- --------- --------- Income before equity in undistributed earnings of subsidiaries ............................ 181,741 99,329 96,740 Equity in undistributed earnings of subsidiaries . (25,562) 45,732 3,637 --------- --------- --------- Net income ....................................... $ 156,179 $ 145,061 $ 100,377 --------- --------- ----------
TCF 53 CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------------------- (IN THOUSANDS) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income............................................................................ $ 156,179 $145,061 $100,377 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries.................................... 25,562 (45,732) (3,637) Other, net.......................................................................... 1,802 8,625 5,799 -------------------------------------- Total adjustments................................................................ 27,364 (37,107) 2,162 -------------------------------------- Net cash provided by operating activities.......................................... 183,543 107,954 102,539 -------------------------------------- Cash flows from investing activities: Net (increase) decrease in interest-bearing deposits with banks....................... 17,420 (14,383) 6,273 Investments in and advances to subsidiaries, net...................................... -- (66,265) (117) Loan to Executive Deferred Compensation Plan, net..................................... (6,111) 68 63 Purchases of premises and equipment, net.............................................. (4,174) (3,913) (2,678) Other, net............................................................................ 765 1,201 (1,049) -------------------------------------- Net cash provided (used) by investing activities................................... 7,900 (83,292) 2,492 -------------------------------------- Cash flows from financing activities: Dividends paid on common stock........................................................ (54,971) (37,341) (25,279) Proceeds from issuance of common stock, net........................................... -- 29,266 -- Proceeds from conversion of convertible debentures.................................... -- 7,149 123 Purchases of common stock to be held in treasury...................................... (210,939) (27,318) (41,382) Net increase (decrease) in bank line of credit........................................ 74,000 -- (40,000) Other, net............................................................................ 629 3,481 1,554 -------------------------------------- Net cash used by financing activities.............................................. (191,281) (24,763) (104,984) -------------------------------------- Net increase (decrease) in cash......................................................... 162 (101) 47 Cash at beginning of year............................................................... 16 117 70 -------------------------------------- Cash at end of year..................................................................... $ 178 $ 16 $ 117 - ----------------------------------------------------------------------------------------------------------------------------------
20. BUSINESS SEGMENTS TCF's wholly owned bank subsidiaries, TCF Minnesota, TCF Illinois, TCF Wisconsin, and Great Lakes Michigan (collectively "the banks"), have been identified as reportable operating segments in accordance with the provisions of SFAS No. 131. The banks have the following operating units that provide financial services to customers: deposits and investment products, commercial lending, consumer lending, lease financing, mortgage banking and residential lending, and investments and mortgage-backed securities. In addition, TCF operates a bank holding company ("parent company") that provides data processing, bank operations and other professional services to the banks. The results of the parent company and TCF Colorado, a wholly owned bank subsidiary of TCF, comprise the "other" category in the tables below. TCF evaluates performance and allocates resources based on the banks' net income, net interest margin, return on average assets and return on average realized common equity. The banks follow generally accepted accounting principles as described in the Summary of Significant Accounting Policies. TCF generally accounts for intersegment sales and transfers at cost. Certain asset sales between the banks were accounted for at current market prices, resulting in intercompany profit. Each bank is managed separately with its own president, who reports directly to TCF's chief operating decision maker, and board of directors. TCF 54 The following table sets forth certain information about the reported profit or loss and assets for each of TCF's reportable segments, including reconciliations to TCF's consolidated totals:
GREAT TCF TCF TCF LAKES (DOLLARS IN THOUSANDS) MINNESOTA ILLINOIS WISCONSIN MICHIGAN - ----------------------------------------------------------------------------------------------------------------- At or For the Year Ended December 31, 1998: Interest income -- external customers........ $ 323,056 $ 206,139 $ 45,094 $ 173,045 Non-interest income -- external customers.... 169,431 69,589 17,794 31,954 Intersegment interest income................. 615 1,207 274 (22) Intersegment non-interest income............. 6,365 96 51 170 Interest expense............................. 114,736 103,795 18,525 87,532 Amortization of goodwill and other intangibles.............................. 1,165 10,204 30 -- Income tax expense (benefit)................. 63,988 22,418 4,934 20,245 Net income (loss)............................ 89,977 25,512 8,289 37,681 Total assets................................. 3,798,433 3,400,172 619,201 2,350,532 Net interest margin.......................... 6.37% 3.61% 4.92% 4.01% Return on average assets..................... 2.50 .79 1.39 1.70 Return on average realized common equity..... 32.72 6.54 17.52 21.13 At or For the Year Ended December 31, 1997: Interest income -- external customers........ $ 341,337 $ 121,332 $ 46,536 $ 173,058 Non-interest income -- external customers... 151,410 26,834 13,124 34,690 Intersegment interest income................. 47 980 (266) (1,094) Intersegment non-interest income............. 6,831 74 27 66 Interest expense............................. 127,576 55,523 20,751 87,344 Amortization of goodwill and other intangibles.............................. 1,435 4,484 30 9,808 Income tax expense (benefit)................. 64,476 16,360 4,667 17,449 Net income (loss)............................ 93,475 22,630 7,216 32,967 Total assets................................. 3,687,023 3,334,399 613,485 2,214,651 Net interest margin.......................... 6.32% 4.29% 4.51% 4.03% Return on average assets..................... 2.54 1.30 1.18 1.51 Return on average realized common equity..... 32.50 12.08 15.22 17.65 At or For the Year Ended December 31, 1996: Interest income -- external customers........ $ 331,955 $ 56,641 $ 44,215 $ 179,937 Non-interest income -- external customers.... 126,679 18,269 16,238 20,419 Intersegment interest income................. 168 (721) (270) (717) Intersegment non-interest income............. 6,101 59 936 175 Interest expense............................. 121,957 20,860 21,057 94,317 FDIC special assessment...................... 16,111 4,030 3,347 11,315 Amortization of goodwill and other intangibles.............................. 1,465 567 30 1,478 Income tax expense (benefit)................. 45,146 5,470 3,650 10,719 Net income (loss)............................ 71,086 8,876 6,315 20,349 Total assets................................. 3,982,712 683,764 620,233 2,167,447 Net interest margin.......................... 6.33 5.51% 4.07% 3.82% Return on average assets..................... 1.97 1.29 1.04 .88 Return on average realized common equity..... 22.99 15.60 14.07 11.06 TOTAL REPORTABLE CONSOLIDATED (DOLLARS IN THOUSANDS) SEGMENTS OTHER ELIMINATIONS TOTAL - ------------------------------------------------ ---------------------------------------------------------------- At or For the Year Ended December 31, 1998: Interest income -- external customers........ $ 747,334 $ 1,560 $ -- $ 748,894 Non-interest income -- external customer..... 288,768 2,727 -- 291,495 Intersegment interest income................. 2,074 405 (2,479) -- Intersegment non-interest income............. 6,682 72,483 (79,165) -- Interest expense............................. 324,588 2,870 (4,298) 323,160 Amortization of goodwill and other intangibles.............................. 11,399 -- -- 11,399 Income tax expense (benefit)................. 111,585 (2,515) -- 109,070 Net income (loss)............................ 161,459 (4,173) (1,107) 156,179 Total assets................................. 10,168,338 86,769 (90,513) 10,164,594 Net interest margin.......................... N.M. N.M. N.M. 4.84% Return on average assets..................... N.M. N.M. N.M. 1.62 Return on average realized common equity..... N.M. N.M. N.M. 17.51 At or For the Year Ended December 31, 1997: Interest income -- external customers........ $ 682,263 $ 351 $ -- $ 682,614 Non-interest income -- external customers... 226,058 610 -- 226,668 Intersegment interest income................. (333) 997 (664) -- Intersegment non-interest income............. 6,998 55,983 (62,981) -- Interest expense............................. 291,194 834 (3,010) 289,018 Amortization of goodwill and other intangibles.............................. 15,757 -- -- 15,757 Income tax expense (benefit)................. 102,952 (7,106) -- 95,846 Net income (loss)............................ 156,288 (11,633) 406 145,061 Total assets................................. 9,849,558 84,079 (188,977) 9,744,660 Net interest margin.......................... N.M. N.M. N.M. 5.20% Return on average assets..................... N.M. N.M. N.M. 1.77 Return on average realized common equity..... N.M. N.M. N.M. 19.57 At or For the Year Ended December 31, 1996: Interest income -- external customers........ $ 612,748 $ 136 $ -- $ 612,884 Non-interest income -- external customers.... 181,605 7 -- 181,612 Intersegment interest income................. (1,540) 216 1,324 -- Intersegment non-interest income............. 7,271 51,442 (58,713) -- Interest expense............................. 258,191 923 (798) 258,316 FDIC special assessment...................... 34,803 -- -- 34,803 Amortization of goodwill and other intangibles.............................. 3,540 -- -- 3,540 Income tax expense (benefit)................. 64,985 (3,954) -- 61,031 Net income (loss)............................ 106,626 (6,714) 465 100,377 Total assets................................. 7,454,156 28,919 (52,588) 7,430,487 Net interest margin.......................... N.M. N.M. N.M. 5.27% Return on average assets..................... N.M. N.M. N.M. 1.39 Return on average realized common equity..... N.M. N.M. N.M. 16.77 - --------------------------------------------------------------------------------------------------------------------- N.M. Not meaningful.
TCF 55 Revenues from external customers, comprised of total interest income and non-interest income, for TCF's operating units are as follows:
YEAR ENDED DECEMBER 31, ------------------------------------------- (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Deposits and investment products................................ $ 194,948 $143,714 $106,091 Commercial lending.............................................. 99,383 98,090 100,646 Consumer lending................................................ 236,538 241,390 226,125 Lease financing................................................. 80,201 72,610 53,838 Mortgage banking and residential lending........................ 322,014 244,078 228,405 Investments and mortgage-backed securities...................... 107,305 109,400 79,391 ---------- -------- -------- $1,040,389 $909,282 $794,496 - -------------------------------------------------------------------------------------------------------------
21. OTHER EXPENSE Other expense consists of the following:
YEAR ENDED DECEMBER 31, ---------------------------------------- (IN THOUSANDS) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Deposit account losses............................................ $ 14,335 $ 4,738 $ 3,455 Telecommunication................................................. 13,049 9,398 8,384 Office supplies................................................... 10,006 8,349 7,173 Postage and courier............................................... 9,926 9,012 7,857 ATM interchange................................................... 9,107 7,005 6,670 Loan and lease.................................................... 6,917 5,751 7,403 Mortgage servicing amortization and valuation adjustments......... 6,815 4,853 4,748 Other............................................................. 33,439 33,819 30,748 -------- ------- ------- $103,594 $82,925 $76,438 - ------------------------------------------------------------------------------------------------------------
22. FEDERAL DEPOSIT INSURANCE CORPORATION SPECIAL ASSESSMENT Federal legislation enacted on September 30, 1996 addressed inadequate funding of the Savings Association Insurance Fund ("SAIF"), which had resulted in a large deposit insurance premium disparity between banks insured by the Bank Insurance Fund ("BIF") and SAIF-insured thrifts. As a result of this legislation, a one-time special assessment was imposed on thrift institutions, and TCF recognized a $34.8 million pretax charge for assessments imposed on its bank subsidiaries. The legislation also provided for a reduction in deposit insurance premiums in subsequent periods and other regulatory reforms. 23. LITIGATION AND CONTINGENT LIABILITIES 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 of damages. Some financial services companies have recently been subjected to significant exposure in connection with class actions and/or suits seeking punitive damages. While the Company is not aware of any actions or allegations which should reasonably give rise to any material adverse effect, it is possible that the Company could be subjected to such a claim in an amount which could be material. 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. 56 TCF INDEPENDENT AUDITOR'S REPORT [LOGO] 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Minneapolis, Minnesota January 19, 1999 TCF 57 OTHER FINANCIAL DATA
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - -------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS EXCEPT PER-SHARE DATA) AT DECEMBER 31, 1998 AT SEPTEMBER 30, 1998 - -------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL CONDITION DATA: Total assets.......................................... $10,164,594 $9,900,439 Investments........................................... 277,715 135,491 Securities available for sale......................... 1,677,919 1,673,722 Loans and leases...................................... 7,141,178 7,092,639 Deposits.............................................. 6,715,146 6,733,368 Borrowings............................................ 2,461,046 2,159,948 Stockholders' equity.................................. 845,502 869,426 - -------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- DECEMBER 31, 1998 SEPTEMBER 30, 1998 - -------------------------------------------------------------------------------------------------------- SELECTED OPERATIONS DATA: Interest income................................................... $185,286 $185,229 Interest expense.................................................. 80,625 80,605 ----------------------------------- Net interest income............................................ 104,661 104,624 Provision for credit losses....................................... 9,761 4,544 ----------------------------------- Net interest income after provision for credit losses................................ 94,900 100,080 ----------------------------------- Non-interest income: Gain (loss) on sale of securities available for sale........... -- (43) Gain on sale of loan servicing................................. -- 2,414 Gain on sale of branches....................................... 12,051 226 Gain on sale of joint venture interest......................... -- -- Other non-interest income...................................... 70,066 71,263 ----------------------------------- Total non-interest income.................................. 82,117 73,860 ----------------------------------- Non-interest expense: Amortization of goodwill and other intangibles.................................................. 2,829 2,828 Other non-interest expense..................................... 107,096 109,054 ----------------------------------- Total non-interest expense................................. 109,925 111,882 ----------------------------------- Income before income tax expense............................... 67,092 62,058 Income tax expense................................................ 27,588 25,477 ----------------------------------- Net income..................................................... $ 39,504 $ 36,581 ----------------------------------- Per common share: Basic earnings................................................. $ .47 $ .42 ----------------------------------- Diluted earnings............................................... $ .46 $ .42 ----------------------------------- Diluted cash earnings (1)...................................... $ .49 $ .44 ----------------------------------- Dividends declared............................................. $ .1625 $ .1625 ----------------------------------- FINANCIAL RATIOS (2): Return on average assets.......................................... 1.60% 1.54% Cash return on average assets (1)................................. 1.70 1.64 Return on average realized common equity.......................... 18.77 16.75 Return on average common equity................................... 18.56 16.58 Cash return on average tangible equity (1)........................ 25.18 22.48 Average total equity to average assets............................ 8.63 9.28 Net interest margin (3)........................................... 4.65 4.82 - --------------------------------------------------------------------------------------------------------
(1) Excludes amortization and reduction of goodwill and deposit base intangibles. (2) Annualized. (3) Net interest income divided by average interest-earning assets. 58 TCF
- ---------------------------------------------------------------------------------------------------------------------------------- AT JUNE 30, 1998 AT MARCH 31, 1998 AT DECEMBER 31, 1997 AT SEPTEMBER 30, 1997 AT JUNE 30, 1997 AT MARCH 31, 1997 - ---------------------------------------------------------------------------------------------------------------------------------- $9,393,060 $9,664,849 $9,744,660 $9,796,154 $7,403,760 $7,317,584 122,888 246,364 129,612 130,261 82,098 60,458 1,122,490 1,306,853 1,426,131 1,628,126 1,181,126 1,242,457 7,103,686 7,036,646 7,069,188 7,052,032 5,382,356 5,354,941 6,741,288 6,925,024 6,907,310 6,976,687 5,243,574 5,291,894 1,617,240 1,631,021 1,727,152 1,754,445 1,349,369 1,273,411 906,485 948,070 953,680 919,952 701,063 626,716 - ---------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED - ---------------------------------------------------------------------------------------------------------------------------------- JUNE 30, 1998 MARCH 31, 1998 DECEMBER 31, 1997 SEPTEMBER 30, 1997 JUNE 30, 1997 MARCH 31, 1997 - ---------------------------------------------------------------------------------------------------------------------------------- $186,903 $191,476 $198,739 $173,253 $157,242 $153,380 79,606 82,324 87,725 73,399 64,605 63,289 - ---------------------------------------------------------------------------------------------------------------------------------- 107,297 109,152 111,014 99,854 92,637 90,091 2,991 5,984 5,909 6,391 4,147 1,548 - ---------------------------------------------------------------------------------------------------------------------------------- 104,306 103,168 105,105 93,463 88,490 88,543 - ---------------------------------------------------------------------------------------------------------------------------------- 1,787 502 3,179 2,852 1,093 1,385 -- -- -- -- -- 1,622 4,260 2,048 742 10,635 2,810 -- -- 5,580 -- -- -- -- 63,531 57,810 55,634 53,917 49,051 43,748 - ---------------------------------------------------------------------------------------------------------------------------------- 69,578 65,940 59,555 67,404 52,954 46,755 - ---------------------------------------------------------------------------------------------------------------------------------- 2,826 2,916 2,844 10,559 1,161 1,193 102,748 98,403 95,032 87,744 82,932 79,897 - ---------------------------------------------------------------------------------------------------------------------------------- 105,574 101,319 97,876 98,303 84,093 81,090 - ---------------------------------------------------------------------------------------------------------------------------------- 68,310 67,789 66,784 62,564 57,351 54,208 28,110 27,895 26,895 25,354 22,416 21,181 - ---------------------------------------------------------------------------------------------------------------------------------- $ 40,200 $ 39,894 $ 39,889 $ 37,210 $ 34,935 $ 33,027 - ---------------------------------------------------------------------------------------------------------------------------------- $ .45 $ .44 $ .44 $ .44 $ .43 $ .41 - ---------------------------------------------------------------------------------------------------------------------------------- $ .45 $ .43 $ .43 $ .43 $ .42 $ .40 - ---------------------------------------------------------------------------------------------------------------------------------- $ .48 $ .49 $ .46 $ .51 $ .43 $ .41 - ---------------------------------------------------------------------------------------------------------------------------------- $ .1625 $ .125 $ .125 $ .125 $ .125 $ .09375 - ---------------------------------------------------------------------------------------------------------------------------------- 1.69% 1.66% 1.63% 1.80% 1.90% 1.82% 1.84 1.86 1.73 2.13 1.95 1.87 17.52 16.99 17.28 19.37 21.35 21.26 17.37 16.83 17.10 19.20 21.37 21.26 23.73 23.78 23.09 25.94 23.48 23.35 9.75 9.83 9.53 9.38 8.91 8.56 4.94 4.94 4.93 5.24 5.41 5.31 - ----------------------------------------------------------------------------------------------------------------------------------
TCF 59 OTHER FINANCIAL DATA
FIVE-YEAR CONSOLIDATED FINANCIAL HIGHLIGHTS YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER-SHARE DATA) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED SUMMARY OF OPERATIONS Interest income............................................ $748,894 $682,614 $612,884 $631,198 $568,864 Interest expense........................................... 323,160 289,018 258,316 302,106 283,421 ---------------------------------------------------------------------- Net interest income..................................... 425,734 393,596 354,568 329,092 285,443 Provision for credit losses................................ 23,280 17,995 21,446 16,973(1) 10,911 ---------------------------------------------------------------------- Net interest income after provision for credit losses... 402,454 375,601 333,122 312,119 274,532 Loss on sale of mortgage-backed securities................. -- -- -- (21,037) -- Gain (loss) on sale of securities available for sale....... 2,246 8,509 86 (152) 981 Gain on sale of loan servicing............................. 2,414 1,622 -- 1,535 2,353 Gain on sale of branches................................... 18,585 14,187 2,747 1,103 -- Gain on sale of joint venture interest..................... 5,580 -- -- -- -- Gain on sale of loans...................................... -- -- 5,443 -- -- Other non-interest income.................................. 262,670 202,350 173,336 151,104 139,981 Amortization of goodwill and other intangibles............. 11,399 15,757 3,540 3,163 3,282 FDIC special assessment.................................... -- -- 34,803 -- -- Merger-related expenses.................................... -- -- -- 21,733 -- Cancellation cost on early termination of interest-rate exchange contracts.................... -- -- -- 4,423 -- Other non-interest expense................................. 417,301 345,605 314,983 296,664 282,378 ---------------------------------------------------------------------- Income before income tax expense and extraordinary item. 265,249 240,907 161,408 118,689 132,187 Income tax expense......................................... 109,070 95,846 61,031 45,482 52,643 ---------------------------------------------------------------------- Income before extraordinary item........................ 156,179 145,061 100,377 73,207 79,544 Extraordinary item, net.................................... -- -- -- (963) -- ---------------------------------------------------------------------- Net income.............................................. 156,179 145,061 100,377 72,244 79,544 Dividends on preferred stock............................... -- -- -- 678 2,710 ---------------------------------------------------------------------- Net income available to common shareholders....... $156,179 $145,061 $100,377 $ 71,566 $ 76,834 ---------------------------------------------------------------------- Basic earnings per common share: Income before extraordinary item........................ $ 1.77 $ 1.72 $ 1.23 $ .89 $ .98 Extraordinary item...................................... -- -- -- (.01) - ---------------------------------------------------------------------- Net income.............................................. $ 1.77 $ 1.72 $ 1.23 $ .88 $ .98 ---------------------------------------------------------------------- Diluted earnings per common share: Income before extraordinary item........................ $ 1.76 $ 1.69 $ 1.20 $ .87 $ .94 Extraordinary item...................................... -- -- -- (.01) - ---------------------------------------------------------------------- Net income.............................................. $ 1.76 $ 1.69 $ 1.20 $ .86 $ .94 ---------------------------------------------------------------------- Dividends declared per common share........................ $ .6125 $ .46875 $.359375 $.296875 $ .25 ---------------------------------------------------------------------- Average common and common equivalent shares outstanding: Basic................................................... 88,093 84,478 81,904 81,115 78,419 ----------------------------------------------------------------------- Diluted................................................. 88,916 86,134 83,939 83,560 81,803 ----------------------------------------------------------------------
(1) Includes $5,000 in merger-related provisions.
AT DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER-SHARE DATA) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED SUMMARY OF FINANCIAL CONDITION Total assets......................................... $10,164,594 $9,744,660 $7,430,487 $7,507,856 $8,072,299 Interest-bearing deposits with banks................. 115,894 20,572 386,224 11,594 202,084 Federal funds sold................................... 41,000 -- -- -- 6,900 Other investments.................................... 4,227 4,061 3,910 3,716 3,528 Federal Reserve Bank stock, at cost.................. 23,112 22,977 -- -- -- Federal Home Loan Bank stock, at cost................ 93,482 82,002 66,061 60,096 78,925 Securities available for sale........................ 1,677,919 1,426,131 999,586 1,201,525 138,742 Loans held for sale.................................. 213,073 244,612 203,869 242,413 201,511 Mortgage-backed securities held to maturity.......... -- -- -- -- 1,601,200 Loans and leases..................................... 7,141,178 7,069,188 5,292,920 5,516,348 5,312,760 Goodwill............................................. 166,645 177,700 15,431 11,569 13,355 Deposit base intangibles............................. 16,238 19,821 10,843 12,918 14,662 Deposits............................................. 6,715,146 6,907,310 4,977,630 5,191,552 5,399,718 Federal Home Loan Bank advances...................... 1,804,208 1,339,578 1,141,040 893,587 1,354,663 Other borrowings..................................... 656,838 387,574 567,132 726,314 684,125 Stockholders' equity................................. 845,502 953,680 630,687 582,399 520,786 Tangible net worth................................... 662,619 756,159 604,413 557,912 492,769 Book value per common share.......................... 9.88 10.27 7.61 6.98 6.24 Tangible book value per common share................. 7.74 8.15 7.29 6.69 5.89 - ----------------------------------------------------------------------------------------------------------------------------------
60 TCF
FIVE-YEAR CONSOLIDATED FINANCIAL HIGHLIGHTS (CONTINUED) AT OR FOR THE YEAR ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------------- KEY RATIOS AND OTHER DATA: Net interest margin.................................. 4.84% 5.20% 5.27% 4.61% 3.95% Return on average assets............................. 1.62 1.77 1.39 .95 1.03 Return on average realized common equity............. 17.51 19.57 16.77 13.69 16.55 Average total equity to average assets............... 9.35 9.12 8.31 7.04 6.33 Average interest-earning assets to average interest-bearing liabilities.............. 116.55 117.15 115.29 111.30 108.35 Common dividend payout ratio......................... 34.80% 27.74% 29.95% 34.52% 26.60% Number of full service bank offices.................. 311 221 196 185 177 - ---------------------------------------------------------------------------------------------------------------------------------- ALLOWANCE FOR LOAN AND LEASE LOSS INFORMATION YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ Balance at beginning of year........................ $ 82,583 $ 71,865 $ 66,290 $ 56,343 $ 54,444 Acquired balance.................................... -- 10,592 -- -- -- Charge-offs: Residential real estate.......................... (291) (444) (333) (472) (1,070) Commercial real estate........................... (1,294) (927) (1,944) (4,189) (8,039) Commercial business.............................. (42) (1,485) (2,786) (1,695) (2,804) Consumer......................................... (30,108) (21,660) (18,317) (8,414) (4,081) Lease financing.................................. (979) (2,297) (914) (247) (109) --------------------------------------------------------------------- (32,714) (26,813) (24,294) (15,017) (16,103) --------------------------------------------------------------------- Recoveries: Residential real estate.......................... 103 167 131 157 222 Commercial real estate........................... 559 2,530 3,690 1,080 2,475 Commercial business.............................. 635 2,488 2,675 4,862 3,132 Consumer......................................... 5,222 3,141 1,918 1,892 1,262 Lease financing.................................. 345 618 9 -- -- --------------------------------------------------------------------- 6,864 8,944 8,423 7,991 7,091 --------------------------------------------------------------------- Net charge-offs (25,850) (17,869) (15,871) (7,026) (9,012) Provision charged to operations..................... 23,280 17,995 21,446 16,973 10,911 --------------------------------------------------------------------- Balance at end of year.............................. $ 80,013 $ 82,583 $ 71,865 $ 66,290 $ 56,343 --------------------------------------------------------------------- Ratio of net loan and lease charge-offs to average loans and leases outstanding..................... .36% .30% .29% .13% .18% Year-end allowance as a percentage of year-end total loan and lease balances.................... 1.12 1.17 1.36 1.20 1.06 - ------------------------------------------------------------------------------------------------------------------------------ CONTRACTUAL AMORTIZATION OF LOAN AND LEASE PORTFOLIOS AT DECEMBER 31, 1998 (1) - -------------------------------------------------------------------------------------------------------------------------- RESIDENTIAL COMMERCIAL COMMERCIAL LEASE TOTAL LOANS (IN THOUSANDS) REAL ESTATE REAL ESTATE BUSINESS CONSUMER FINANCING AND LEASES - -------------------------------------------------------------------------------------------------------------------------- Amounts due: Within 1 year.................... $ 137,690 $ 120,808 $ 171,513 $ 194,399 $ 206,647 $ 831,057 After 1 year: 1 to 2 years.................. 148,766 82,218 51,029 183,158 140,521 605,692 2 to 3 years.................. 140,473 74,137 23,188 156,871 69,620 464,289 3 to 5 years.................. 279,751 147,447 31,318 258,404 25,314 742,234 5 to 10 years................. 703,022 286,711 11,433 472,417 90 1,473,673 10 to 15 years................ 607,763 86,296 195 544,248 -- 1,238,502 Over 15 years................. 1,739,951 16,794 -- 116,429 -- 1,873,174 ------------------------------------------------------------------------------------ Total after 1 year......... 3,619,726 693,603 117,163 1,731,527 235,545 6,397,564 ------------------------------------------------------------------------------------ Total................. $ 3,757,416 $ 814,411 $ 288,676 $ 1,925,926 $ 442,192 $ 7,228,621 ------------------------------------------------------------------------------------ Amounts due after 1 year on: Fixed-rate loans and leases...... $ 1,574,211 $ 125,031 $ 46,823 $ 824,167 $ 235,545 $ 2,805,777 Adjustable-rate loans............ 2,045,515 568,572 70,340 907,360 -- 3,591,787 ------------------------------------------------------------------------------------ Total after 1 year......... $ 3,619,726 $ 693,603 $ 117,163 $ 1,731,527 $ 235,545 $ 6,397,564 - --------------------------------------------------------------------------------------------------------------------------
(1) Gross of unearned discounts and deferred fees. 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 the loans remain outstanding for significantly shorter periods than their contractual terms. TCF 61 EX-21 8 EXHIBIT 21 TCF FINANCIAL CORPORATION EXHIBIT 21 Subsidiaries of Registrant (As of March 17, 1999)
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 Minnesota TCF Financial Insurance Agency Colorado, Inc. Colorado, Inc. TCF Financial Insurance Agency, Inc. Minnesota TCF Financial Insurance Agency, Inc. TCF Insurance GLB Financial Insurance Agency Ohio GLB Financial Insurance Agency Ohio, Inc. Ohio, Inc. (fka: WNL Insurance Agency of Ohio) TCF Securities, Inc. Minnesota TCF Securities, Inc. GLB Securities (MI) TCF Foundation Minnesota TCF Foundation TCF Minnesota Financial Services, Inc. Minnesota TCF Minnesota Financial Services, Inc. TCB Air, Inc. Minnesota TCB Air, Inc. (fka: Twin City/Burnet, Inc.) TCF National Bank Minnesota United States TCF National Bank Minnesota TCF Consumer Financial Services, Inc. Minnesota TCF Consumer Financial Services, Inc. TCF Financial Services TCF Mortgage Corporation Minnesota TCF Mortgage Corporation TCFMC Holding Co. Minnesota TCFMC Holding Co. TCF Financial Services, Inc. Minnesota TCF Financial Services, Inc. NAMES UNDER WHICH SUBSIDIARY SUBSIDIARY STATE OF INCORPORATION DOES BUSINESS TCF Management Corporation Minnesota TCF Management Corporation 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 TCF Insurance Agency Minnesota, Inc. (UT) TCF Agency Mississippi, Inc. Mississippi TCF Agency Mississippi, Inc. TCF Agency Mississippi TCF Agency Insurance Services, Inc. Minnesota TCF Agency Insurance Services, Inc. TCF National Properties, Inc. Minnesota TCF National Properties, Inc. TCF New York Investment, Inc. Minnesota TCF New York Investments, Inc. TCF Qwik, Inc. New York TCF Qwik, Inc. TCF Wisk, Inc. New York TCF Wisk, Inc. TCF Bolt, Inc. New York TCF Bolt, Inc. TCF Jump, Inc. New York TCF Jump, Inc. TCF Sped, Inc. New York TCF Sped, Inc. TCF Real Estate Financial Services, Inc. Minnesota TCF Real Estate Financial Services, Inc. Winthrop Resources Corporation Minnesota Winthrop Resources Corporation WINR Business Credit TCF Small Business Leasing TCF National Bank Wisconsin United States TCF National Bank Wisconsin Republic Capital Funding Corp. I Wisconsin Republic Capital Funding Corp. I TCF Agency Wisconsin, Inc. Wisconsin TCF Agency Wisconsin, Inc. TCF Portfolio Strategies, Inc. Minnesota TCF Portfolio Strategies, Inc. TCF National Bank Illinois United States TCF National Bank Illinois Capitol Equities Corporation Illinois Capitol Equities Corporation SFB Insurance Agency, Inc. Illinois SFB Insurance Agency, Inc. NAMES UNDER WHICH SUBSIDIARY SUBSIDIARY STATE OF INCORPORATION DOES BUSINESS Standard Financial Mortgage Illinois Standard Financial Mortgage Corporation Corporation TCF Agency Illinois, Inc. Illinois TCF Agency Illinois, Inc. Great Lakes National Bank United States Great Lakes National Bank Michigan Michigan GLB Service Corporation II Michigan GLB Service Corporation II GLB Properties, Inc. Michigan GLB Properties, Inc. Great Lakes Mortgage LLC Michigan Great Lakes Mortgage LLC Lakeland Group Insurance Agency, Inc. Michigan Lakeland Group Insurance Agency, Inc. 401 Service Corporation Michigan 401 Service Corporation TCF Colorado Corporation Colorado TCF Colorado Corporation TCF National Bank Colorado United States TCF National Bank Colorado TCF Agency Colorado, Inc. Colorado TCF Agency Colorado, Inc.
EX-23 9 EXHIBIT 23 [Letterhead] EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors TCF Financial Corporation: We consent to incorporation by reference of our report dated January 19, 1999, relating to the consolidated statements of financial condition of TCF Financial Corporation and Subsidiaries as of December 31, 1998 and 1997, 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, 1998, which report appears in the December 31, 1998 Form 10-K of TCF Financial Corporation, in the following Registration Statements of TCF Financial Corporation: Nos. 33-43030, 33-57633, 33-14203, 33-22375, 33-40403, 33-53986, and 33-63767 on Form S-8. /s/ KPMG PEAT MARWICK LLP Minneapolis, Minnesota March 29, 1999 [LOGO] EX-27 10 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 1998 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 DEC-31-1998 420,477 115,894 41,000 0 1,677,919 4,227 4,227 7,141,178 80,013 10,164,594 6,715,146 1,050,549 142,900 1,410,497 0 0 929 844,573 10,164,594 631,342 103,480 14,072 748,894 212,492 323,160 425,734 23,280 2,246 428,700 265,249 265,249 0 0 156,179 1.77 1.76 4.84 33,697 0 0 23,107 82,583 32,714 6,864 80,013 56,718 0 23,295
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