-----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, RhZdfwcSIwXB92nqAg9ryWT5j+trOzAvRff+K35n+bQHtGYFlax5VAUuKuAPpo02 a0l/gT4Akv0tzZtuNSSVXg== 0000912057-97-010819.txt : 19970329 0000912057-97-010819.hdr.sgml : 19970329 ACCESSION NUMBER: 0000912057-97-010819 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10253 FILM NUMBER: 97567782 BUSINESS ADDRESS: STREET 1: 801 MARQUETTE AVE STE 302 CITY: MINNEAPOLIS STATE: MN ZIP: 55402 BUSINESS PHONE: 6123707000 10-K405 1 FORM 10-K405 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, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------------------- COMMISSION FILE NO. 0-16431 ----------------------- TCF FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 41-1591444 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 801 MARQUETTE AVENUE, SUITE 302, MINNEAPOLIS, MINNESOTA 55402 (Address and Zip Code of principal executive offices) Registrant's telephone number, including area code: 612-661-6500 ----------------------- Securities registered pursuant to Section 12(b) of the Act (all registered on the New York Stock Exchange): COMMON STOCK (PAR VALUE $.01 PER SHARE) PREFERRED SHARE PURCHASE RIGHTS (Title of class) Securities registered pursuant to Section 12(g) of the Act: 7 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2011 ----------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 7, 1997, 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 $1,320,773,055. As of March 7, 1997, there were outstanding 34,585,254 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, 1996 are incorporated by reference into Parts I, II and IV hereof. Specific portions of the registrant's definitive proxy statement dated March 17, 1997 are incorporated by reference into Part III hereof. TABLE OF CONTENTS PART I PAGE ---- Item 1. Business...................................................... 1 General.................................................... 1 Lending Activities......................................... 3 Investment Activities...................................... 8 Sources of Funds........................................... 10 Other Information.......................................... 12 Activities of Subsidiaries of TCF Financial............. 12 Recent Accounting Developments.......................... 13 Competition............................................. 14 Employees............................................... 14 Regulation................................................. 14 Taxation................................................... 25 Item 2. Properties.................................................... 27 Item 3. Legal Proceedings............................................. 28 Item 4. Submission of Matters to a Vote of Security Holders........... 29 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters.............................. 29 Item 6. Selected Financial Data....................................... 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 31 Item 8. Financial Statements and Supplementary Data................... 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 32 PART III Item 10. Directors and Executive Officers of the Registrant............ 32 Item 11. Executive Compensation........................................ 32 Item 12. Security Ownership of Certain Beneficial Owners and Management 32 Item 13. Certain Relationships and Related Transactions................ 32 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 32 Signatures.............................................................. 34 Index to Consolidated Financial Statements.............................. 36 Index to Exhibits....................................................... 36 PART I ITEM 1. BUSINESS GENERAL TCF Financial Corporation ("TCF Financial", "TCF" or the "Company"), a Delaware corporation based in Minneapolis, Minnesota, with $7.1 billion in assets, is the holding company of four federally chartered savings banks, TCF Bank Minnesota fsb ("TCF Minnesota"), TCF Bank Illinois fsb ("TCF Illinois"), TCF Bank Wisconsin fsb ("TCF Wisconsin") and Great Lakes Bancorp, A Federal Savings Bank ("Great Lakes"), and one state chartered savings bank, Bank of Chicago, s.b. ("BOC"). TCF Wisconsin and TCF Illinois are wholly owned subsidiaries of TCF Minnesota, the largest savings bank and third largest depository institution headquartered in Minnesota. BOC is a wholly owned subsidiary of TCF Illinois. Unless otherwise indicated, references herein to TCF include its direct and indirect subsidiaries. TCF Minnesota, TCF Illinois, TCF Wisconsin and Great Lakes 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 1996 Annual Report, only those portions specifically identified are so incorporated. TCF Financial was organized in 1987 as a thrift holding company, and its common stock has been listed on the New York Stock Exchange since 1989. The TCF Banks are in the process of converting to national banks and TCF Financial has filed an application to become a bank holding company. See "REGULATION -- Recent Developments." TCF has positioned the TCF Banks as "community banks" focusing on lending, deposit products and other services offered in their local markets and has significantly expanded their consumer lending activities, including home equity lending. TCF's strategic emphasis on retail banking has allowed it to fund its assets primarily with retail core deposits, significantly reduce wholesale borrowings and lower its interest-rate risk. TCF Minnesota is also engaged in consumer finance lending through its consumer finance subsidiaries. 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, 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. TCF's lending activities emphasize consumer and residential mortgage loans. 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. BOC Financial Corporation is the parent company of BOC which operates three branch offices in the Chicago area. TCF accounted for the acquisition using the purchase method of accounting. On February 8, 1995, TCF completed its acquisition of Great Lakes, a Michigan-based savings bank with $2.8 billion in assets, $1.6 billion in deposits, 39 offices in Michigan and five offices in western Ohio. As a result of the acquisition, Great Lakes was merged into TCF's existing Michigan-based wholly owned savings bank subsidiary, TCF Bank Michigan fsb ("TCF Michigan"). The resulting savings bank is operated as a direct subsidiary of TCF Financial and retained the Great Lakes name and headquarters in Ann Arbor, Michigan. In connection with its acquisition of Great Lakes, TCF issued approximately 9.7 million shares of its common stock for all of the outstanding common shares of Great Lakes. In addition, each outstanding share of Great Lakes preferred stock was exchanged for one share of TCF preferred stock with substantially identical terms. On July 3, 1995, TCF exercised its right of redemption on its 2.7 million shares of preferred stock at $10 per share. TCF also assumed the obligation to issue common stock upon the exercise or conversion of the outstanding warrants to purchase Great Lakes common stock (which expired on July 1, 1995), the outstanding employee and director options to purchase Great Lakes common stock and the outstanding 7 1/4% Convertible Subordinated Debentures due 2011 of Great Lakes. This acquisition was accounted for as a pooling-of-interests combination and, accordingly, TCF's consolidated financial statements have been restated to include the accounts and results of operations of Great Lakes for all periods presented, except for dividends declared per-share. There were no material intercompany transactions prior to the acquisition. In connection with the acquisition, an after-tax merger-related charge of $32.8 million was incurred during the 1995 first quarter. Additional information concerning the Great Lakes acquisition is set forth in Note 2 of Notes to Consolidated Financial Statements on page 40 of TCF's 1996 Annual Report, incorporated herein by reference. 1 TCF operated 73 bank branches in Minnesota at December 31, 1996. The Company also operated 31 bank branches in Illinois, 27 in Wisconsin, 57 in Michigan and eight in Ohio at December 31, 1996. TCF strives to develop innovative banking products and services. Of TCF's 196 bank branches, 47 were "in-store" bank branches at December 31, 1996. These in-store bank branches provide TCF with the opportunity to sell its consumer products and services, including deposits and loans, at a relatively low entry cost and feature extended hours, including Saturdays and Sundays. TCF's "Totally Free"SM checking accounts and other deposit products provide it with a significant source of low-cost funds and fee income. TCF has expanded its automated teller machine ("ATM") network to 917 machines and offers its customers a telephone accessible voice communication system. On February 28, 1997, TCF and Winthrop Resources Corporation ("Winthrop") signed a definitive merger agreement for TCF to acquire Winthrop in a tax-free stock-for-stock exchange. Winthrop, with leased assets of $327 million, specializes in leasing high-tech and business equipment. The merger is subject to approval by TCF's and Winthrop's stockholders and by various regulatory agencies, and treatment of the transaction as a pooling of interests for accounting purposes. The merger is expected to be completed in the first half of 1997. TCF has filed a Current Report on Form 8-K relating to this transaction which is incorporated by reference. See Part IV Item 14(b). On March 17, 1997, TCF and Standard Financial, Inc. ("Standard") announced the signing of a definitive merger agreement for TCF to acquire Standard. Standard is a community-oriented thrift institution with $2.4 billion in assets and 14 full-service offices on the southwest side of Chicago and in the nearby southwestern and western suburbs. For Standard's stockholders, the transaction will be structured as a cash election merger in which holders of Standard's common stock will have the right to choose either cash or TCF common stock, or a combination of the two. The transaction will be a tax-free exchange for Standard's stockholders to the extent they receive shares of TCF common stock. The merger is subject to approval by Standard's stockholders, and required regulatory filings and approvals. The merger is expected to close in the third quarter of 1997 and be accounted for as a purchase transaction. TCF has filed a Current Report on Form 8-K relating to this transaction which is incorporated by reference. See Part IV Item 14(b). In recent years, significant new federal legislation has imposed numerous new legal and regulatory requirements on thrift institutions. Among the most significant of these requirements are new minimum regulatory capital levels and enforcement actions that can be taken by regulators when an institution's regulatory capital is deemed to be inadequate. Each of the TCF Banks currently exceeds all of the current and fully phased-in regulatory capital requirements. See "REGULATION." In addition to the uncertainties posed by possible legislative change, there are many other uncertainties that may make TCF's historical performance an unreliable indicator of its future performance, and forward-looking information, including projections of future performance, is subject to numerous possible adverse developments, including but not limited to the possibility of adverse economic developments which may increase default and delinquency risks in TCF's loan portfolios; shifts in interest rates which may result in shrinking interest margins; deposit outflows; interest rates on competing investments; demand for financial services and loan products; increases generally in competitive pressure in the banking and financial services industry; changes in accounting policies or guidelines, or monetary and fiscal policies of the Federal government; changes in the quality or composition of TCF's loan and investment portfolios; or other significant uncertainties. TCF's pending acquisitions are subject to additional uncertainties, including the possibility that the transactions may not be completed or, if completed, the possible failure to fully realize or realize within the expected time frame expected cost savings from the transactions; lower than expected income or revenues following the transactions, or higher than expected operating costs; business disruption relating to the transactions (both before and after completion); greater than expected costs or difficulties related to the integration of the management of the acquired companies with that of TCF; litigation costs and delays caused by litigation; higher than expected costs in completing the acquisitions or unanticipated regulatory delays or constraints or changes in the proposed transactions imposed by regulatory authorities; declines in TCF's common stock price which permit the acquired company to elect not to proceed with the transaction; and other unanticipated occurrences which may delay consummation of the transactions, increase in the costs related to the transactions or decrease the expected financial benefits of the transactions. As federally chartered savings banks, the TCF Banks are subject to regulation and examination by the Office of Thrift Supervision ("OTS"). 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 variously members of the Federal Home Loan Bank ("FHLB") of Des Moines, Chicago and/or Indianapolis. TCF Financial is a thrift holding company under the Home Owners' Loan Act ("HOLA") and is subject to regulation and examination by the OTS and, in certain cases, by the FDIC. See "REGULATION -- Regulation of TCF Financial and Affiliate and Insider Transactions." The executive 2 offices of TCF Financial are located at 801 Marquette Avenue, Suite 302, Minneapolis, Minnesota 55402. Its telephone number is (612) 661-6500. The following description includes detailed information regarding the business of TCF and its subsidiaries. LENDING ACTIVITIES GENERAL TCF's lending activities reflect its community banking philosophy, emphasizing loans to individuals and small to medium-sized businesses in its primary market areas in Minnesota, Illinois, Wisconsin and Michigan. In recent years, TCF has expanded its consumer lending and consumer finance operations. The following table sets forth the contractual amortization of TCF's loan portfolios at December 31, 1996, excluding loans held for sale. Commercial business demand loans are reported due within one year. This table does not include the effect of prepayments, which is an important consideration in management's interest-rate risk analysis. Industry experience indicates that loans remain outstanding for significantly shorter periods than their contractual terms.
AT DECEMBER 31, 1996 (1) -------------------------------------------------------------------------------------- REAL ESTATE --------------------------------------- TOTAL REAL COMMERCIAL TOTAL RESIDENTIAL COMMERCIAL ESTATE BUSINESS CONSUMER LOANS ----------- ---------- -------- ---------- ---------- ----------- (IN THOUSANDS) Amounts due: Within 1 year $ 102,868 $141,452 $ 244,320 $ 80,095 $ 195,390 $ 519,805 After 1 year: 1 to 2 years 130,974 126,368 257,342 38,567 190,150 486,059 2 to 3 years 134,941 77,592 212,533 18,272 191,676 422,481 3 to 5 years 268,327 150,252 418,579 15,278 289,977 723,834 5 to 10 years 502,657 299,980 802,637 4,350 489,580 1,296,567 10 to 15 years 343,634 53,119 396,753 150 440,485 837,388 Over 15 years 777,836 12,293 790,129 - 3,808 793,937 ---------- ---------- ---------- ---------- ---------- ---------- Total after 1 year 2,158,369 719,604 2,877,973 76,617 1,605,676 4,560,266 ---------- ---------- ---------- ---------- ---------- ---------- Total $2,261,237 $861,056 $3,122,293 $156,712 $1,801,066 $5,080,071 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Amounts due after 1 year on: Fixed-rate loans $1,194,869 $132,079 $1,326,948 $ 17,376 $ 477,306 $1,821,630 Adjustable-rate loans 963,500 587,525 1,551,025 59,241 1,128,370 2,738,636 ---------- ---------- ---------- ---------- ---------- ---------- Total after 1 year $2,158,369 $719,604 $2,877,973 $ 76,617 $1,605,676 $4,560,266 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- - ------------------------- (1) Amounts presented are the gross balances before adjustment for net discounts, premiums, deferred fees, and unearned discounts and finance charges.
RESIDENTIAL REAL ESTATE LENDING TCF's residential real estate lending activities (first mortgage loans for the financing of one- to four-family homes) are conducted through certain of the TCF Banks and through TCF Mortgage Corporation ("TCF Mortgage"), a wholly owned subsidiary of TCF Minnesota. Residential mortgage loan originations 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 $987.6 million at December 31, 1996, compared with $1.1 billion at December 31, 1995. Loan originations by TCF Mortgage include loans purchased from loan correspondents and also loans purchased from Burnet Home Loans (previously known as "Great Lakes Mortgage"), a mortgage origination joint venture between a subsidiary of TCF Mortgage and Burnet Mortgage Corporation, an affiliate of Burnet Realty Inc. Burnet Home Loans loan officers originate loans from certain offices of Burnet Realty Inc. Burnet Home Loans continues to operate and do business as Great Lakes Mortgage. 3 TCF sells 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 loan portfolios. At December 31, 1996 and 1995, TCF serviced for others $4.5 billion in residential real estate loans and loan participations. There were no sales of servicing rights on loans serviced for others during 1996. During 1995 and 1994, TCF sold servicing rights on $146.3 million and $169 million of loans serviced for others at net gains of $1.5 million and $2.4 million, respectively. TCF serviced residential real estate loans for its own account, including loans held for sale, of $2.3 billion at December 31, 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 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 real estate loans with loan-to-value ratios in excess of 80% carry private mortgage insurance. CONSUMER LENDING GENERAL TCF makes consumer loans for personal, family or household purposes, such as debt consolidation or the financing of home improvements, automobiles, vacations and education. All of TCF's consumer loans are originated in markets in which the TCF Banks or TCF's three consumer finance subsidiaries (TCF Financial Services, Inc., TCF Consumer Financial Services, Inc. and TCF Real Estate Financial Services, Inc., which are collectively referred to herein as the "Consumer Finance Subsidiaries") have their offices. Total consumer loans for the TCF Banks and the Consumer Finance Subsidiaries totaled $1.8 billion at December 31, 1996, with $582 million, or 32% having fixed interest rates and $1.2 billion, or 68% having adjustable interest rates. The following discussion provides additional information on TCF's consumer lending operations. BANK CONSUMER DIVISION LENDING 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. TCF also engages in the origination of consumer loans through the use of loan brokers. Consumer loans having adjustable interest rates present a credit risk similar to that posed by residential real estate loans as a result of increased costs to borrowers in the event of a rise in rates (see discussion above under "-- Residential Real Estate Lending"). Consumer loans secured by real estate may present additional credit risk in the event of a decline in the value of real estate collateral. TCF originates student loans for resale. TCF had $145.8 million of education loans held for sale at December 31, 1996, compared with $163.2 million at December 31, 1995. 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. During the years ended December 31, 1996, 1995 and 1994, TCF sold $102.8 million, $91 million and $80.3 million of its student loans, respectively. TCF subcontracts for the servicing of student loans in its portfolio. TCF's future student loan origination activity will be dependent on continued support of guaranteed student loan programs by the U.S. Government and TCF's ability to continue to sell such loans to SLMA or other parties. Recent federal legislation has limited the role 4 of private lenders in originating student loans, and this may reduce the volume of TCF's student loan originations in future periods. CONSUMER FINANCE LENDING TCF engages in consumer finance lending through the Consumer Finance Subsidiaries. TCF has significantly expanded its consumer finance operations in recent periods and had 61 consumer finance offices in 16 states as of December 31, 1996. Additional information concerning the geographic locations of TCF's consumer finance loan portfolio is set forth in Note 6 of Notes to Consolidated Financial Statements on pages 43 and 44 of TCF's 1996 Annual Report, incorporated herein by reference. TCF's consumer finance loan portfolio totaled $496.3 million at December 31, 1996, compared with $374.4 million at December 31, 1995. The Company intends to concentrate on increasing the total outstanding loan balances at its existing consumer finance offices and improving the profitability of its Consumer Finance Subsidiaries before considering any further office expansion of this operation. See "Financial Review -- Financial Condition - Loans" on pages 24 through 26 of TCF's 1996 Annual Report, incorporated herein by reference for additional information regarding the operations of the Consumer Finance Subsidiaries. COMMERCIAL REAL ESTATE LENDING TCF currently originates longer-term loans on commercial real estate and, to a lesser extent, shorter-term construction loans. Although TCF's commercial real estate lending activity has declined in recent years, primarily as a result of more stringent underwriting standards and competition from other lenders, TCF is endeavoring to increase its originations of commercial real estate loans to creditworthy borrowers. TCF's commercial real estate loans are generally originated with adjustable interest rates, but TCF also offers shorter-term loans at fixed rates. At December 31, 1996, adjustable-rate loans represented 80% of commercial real estate loans outstanding. At December 31, 1996, TCF had a total of 1,505 outstanding commercial real estate loans secured by properties located in its primary markets. Of this total, 212 loans totaling $479.9 million had balances exceeding $1 million. At December 31, 1996, the average individual balance of commercial real estate loans was $556,000. See "Financial Review -- Financial Condition - Loans" on pages 24 through 26 of TCF's 1996 Annual Report, incorporated herein by reference, for information regarding the types of properties securing TCF's commercial real estate loans. TCF's current strategy, consistent with its credit quality standards, is to focus its commercial lending activities on borrowers based in its primary markets. Due to TCF's increasing emphasis on lending to small to medium-sized businesses in its market areas, the portion of its commercial real estate loan portfolio secured by properties located in its primary markets had increased to 93% at December 31, 1996. At December 31, 1996, TCF's commercial construction and development loan portfolio totaled $58.4 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. Construction and permanent commercial real estate lending is also highly dependent on economic conditions, which in certain markets are not favorable for this type of lending activity. TCF's risk of loss on a construction and development loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of the project and the estimated cost (including interest) of the project. If the estimate of construction or development cost proves to be inaccurate or if economic conditions change, TCF may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves to be inaccurate at any time before or after maturity, TCF's loan may be secured by a project having a value which is insufficient to assure full repayment. Borrowers, which are often limited partnerships formed to purchase a specific property, may receive limited cash flow from the property, be unable to service the total debt, and as a result fail to make required loan payments. 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. At December 31, 1996, TCF had $156.7 million in commercial business loans outstanding, with an average individual balance of $228,000. 5 TCF is seeking to expand its commercial business lending activity by lending to small and medium-sized businesses and professionals through the TCF Banks. TCF's commercial business lending activities encompass loans with a broad variety of purposes, including corporate working capital loans and loans to finance the purchase of equipment or other acquisitions. TCF also makes loans to individuals who use the funds for business or personal purposes. As part of its commercial business and commercial real estate lending activities, TCF also issues standby letters of credit. At December 31, 1996, TCF had 75 such standby letters of credit outstanding in the aggregate amount of $24.1 million. Recognizing the generally increased risks associated with commercial business lending, TCF originates commercial business loans in order to increase its short-term, variable-rate asset base and to contribute to its profitability through the higher rates earned on these loans 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. Approximately 97% of TCF's commercial business loans outstanding at December 31, 1996 were to borrowers based in its primary markets. CLASSIFIED ASSETS, LOAN DELINQUENCIES AND DEFAULTS TCF has established a classification system for individual commercial loans or other assets based on OTS regulations under which all or part of a loan or other asset may be classified as "substandard," "doubtful," "loss" or "special mention." It has also established overall ratings for various credit portfolios. A loan or other asset is placed in the substandard category when it is considered to have a well-defined weakness. A loan or other asset is placed in the doubtful category when some loss is likely but there is still sufficient uncertainty to permit the asset to remain on the books at its full value. All or a portion of a loan or other asset is classified as loss when it is considered uncollectible, in which case it is generally charged off. In some cases, loans or other assets for which there is perceived some possible exposure to credit loss are classified as special mention. Loans and other assets that are classified are subject to periodic review of their appropriate regulatory classifications. See "REGULATION -- Classification of Assets." The following table summarizes information about TCF's non-accrual, restructured and past due loans:
AT DECEMBER 31, ---------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (IN MILLIONS) Non-accrual loans $26.2 $44.3 $33.8 $88.3 $79.7 Restructured loans 3.0 1.6 4.3 10.8 58.7 ----- ----- ----- ----- ----- Total non-accrual and restructured loans $29.2 $45.9 $38.1 $99.1 $138.4 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Accruing loans 90 days or more past due $ - $ .7 $2.4 $5.2 $4.6 ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
The accrual of interest income is generally discontinued when loans become 90 days or more past due with respect to either principal or interest unless such loans are adequately secured and in the process of collection. See "Financial Review -- Financial Condition - Non-Performing Assets" on pages 27 and 28 of TCF's 1996 Annual Report, incorporated herein by reference, for information regarding other problem loans in TCF's portfolio. 6 TCF has established loan loss reserves for known and anticipated problem loans as well as for loans which are not currently known to require a specific reserve. Total loan loss reserves at December 31, 1996 were $70.7 million, which amounts to 1.39% of gross loans outstanding. The following table summarizes the allocation of the allowance for loan losses (includes general and specific loss allocations):
ALLOCATIONS AS A PERCENTAGE OF GROSS LOANS OUTSTANDING BY TYPE(1) AT DECEMBER 31, AT DECEMBER 31, ---------------------------------------------- ---------------------------------------------- 1996 1995 1994 1993 1992 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Residential real estate $ 2,379 $ 3,238 $ 2,493 $ 2,449 $ 2,696 .11% .12% .09% .11% .14% Commercial real estate 16,213 20,701 22,006 24,869 22,616 1.88 2.13 2.21 2.28 1.81 Commercial business 3,072 7,261 5,603 13,605 14,097 1.96 4.33 2.93 6.33 5.97 Consumer 26,700 16,667 10,757 7,797 8,425 1.48 1.05 .83 .72 .77 Unallocated 22,385 17,828 15,484 5,724 - N.A. N.A. N.A. N.A. - ------- ------- ------- ------- ------- Total allowance balance $70,749 $65,695 $56,343 $54,444 $47,834 1.39 1.23 1.09 1.16 1.05 ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
----------------------------------- (1) Excluding loans held for sale. N.A. - Not applicable. The following table summarizes the percentage of the outstanding balance of gross loans in each category to total gross loans, excluding loans held for sale:
AT DECEMBER 31, ----------------------------------------------------------------- 1996 1995 1994 1993 1992 ----- ----- ----- ----- ----- Residential real estate 44.5% 48.9% 51.7% 49.1% 43.1% Commercial real estate 16.9 18.2 19.4 23.3 27.5 Commercial business 3.1 3.1 3.7 4.6 5.2 Consumer 35.5 29.8 25.2 23.0 24.2 ----- ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% 100.0% ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
The following table summarizes additional information about TCF's allowance for loan losses:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Balance at beginning of year $65,695 $56,343 $54,444 $47,834 $56,939 Adjustments for pooling-of-interests - - - (56) - Charge-offs: Residential real estate (333) (472) (1,070) (896) (1,259) Commercial real estate (1,944) (4,189) (8,039) (18,942) (30,762) Commercial business (2,786) (1,695) (2,804) (8,473) (16,963) Consumer (18,317) (8,414) (4,081) (4,483) (5,886) ------- ------- ------- ------- ------- (23,380) (14,770) (15,994) (32,794) (54,870) ------- ------- ------- ------- ------- Recoveries: Residential real estate 131 157 222 274 315 Commercial real estate 3,690 1,080 2,475 2,132 1,044 Commercial business 2,675 4,862 3,132 2,309 3,067 Consumer 1,918 1,892 1,262 1,353 1,443 ------- ------- ------- ------- ------- 8,414 7,991 7,091 6,068 5,869 ------- ------- ------- ------- ------- Net charge-offs (14,966) (6,779) (8,903) (26,726) (49,001) Provision charged to operations 20,020 16,131 10,802 33,392 39,896 ------- ------- ------- ------- ------- Balance at end of year $70,749 $65,695 $56,343 $54,444 $47,834 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Ratio of net loan charge-offs to average loans outstanding (1) .29% .13% .19% .60% 1.05% Year-end allowance as a percentage of year-end gross loan balances (1) 1.39 1.23 1.09 1.16 1.05
- -------------------------------- (1) Excluding loans held for sale. 7 In addition to its allowance for loan losses, TCF had an allowance for real estate losses of $1.1 million and an industrial revenue bond reserve of $1.7 million at December 31, 1996. A summary of the industrial revenue bond reserves follows:
YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ----- (IN THOUSANDS) Balance at beginning of year $1,960 $2,759 $2,689 $1,463 $2,881 Adjustments for pooling-of-interests - - - 225 - Provision for losses (200) (919) - 1,726 767 Net (charge-offs) recoveries (100) 120 70 (725) (2,185) ------ ------ ------ ------ ------ Balance at end of year $1,660 $1,960 $2,759 $2,689 $1,463 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
The allowances for loan and real estate losses and industrial revenue bond reserves are based upon management's periodic analysis of TCF's loan portfolio, industrial revenue bond financial guarantees and real estate holdings. 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 in the Company's consumer finance operation, and in particular the emphasis on sub-prime automobile lending, creates 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 allowances for loan and real estate losses and industrial revenue bond reserves is set forth in "Financial Review -- Financial Condition - Allowances for Loan and Real Estate Losses and Industrial Revenue Bond Reserves" on pages 26 and 27, in Note 1 of Notes to Consolidated Financial Statements on pages 38 through 40 of TCF's 1996 Annual Report and in Note 7 of Notes to Consolidated Financial Statements on page 45 of TCF's 1996 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, certificates of deposit at insured banks, bankers' acceptances and federal funds. The TCF Banks must maintain minimum levels of liquid assets specified by the OTS. These minimum levels are subject to change. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. The TCF Banks must also meet reserve requirements of the Federal Reserve Board ("FRB"), which are imposed based on amounts on deposit in various types of deposit categories. See "REGULATION -- Liquidity and Reserve Requirements." 8 Following is a table indicating the investments comprising TCF's portfolio, excluding securities available for sale:
AT DECEMBER 31, ------------------------------------ 1996 1995 1994 ------- ------- ------- (IN THOUSANDS) Interest-bearing deposits with banks $372,132 $ 533 $193,751 Federal funds sold - - 6,900 U.S. Government and other marketable securities held to maturity: U.S. Government and agency obligations - 50 50 Commercial paper 3,910 3,666 3,478 -------- -------- -------- 3,910 3,716 3,528 Federal Home Loan Bank stock, at cost 66,061 60,096 78,925 -------- -------- -------- $442,103 $ 64,345 $283,104 -------- -------- -------- -------- -------- --------
Information regarding the carrying values and fair values of TCF's investments is set forth in Note 3 of Notes to Consolidated Financial Statements on page 41 of TCF's 1996 Annual Report, incorporated herein by reference. Following is a table summarizing yields by scheduled maturities for indicated investment securities:
U.S. GOVERNMENT AND AGENCY SECURITIES OBLIGATIONS ALL OTHER TOTAL AVAILABLE HELD TO MATURITY INVESTMENTS INVESTMENTS FOR SALE ------------------ ------------------- -------------------- ------------------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD ------ ----- ------ ----- ------ ----- ------ ----- (DOLLARS IN THOUSANDS) AT DECEMBER 31, 1996: Due in one year or less $ - - % $376,042 5.20% $376,042 5.20% $ - - No stated maturity - - 66,061(1) 7.24 66,061 7.24 999,554(2) 7.15 ----- -------- -------- -------- Total $ - - $442,103 5.50 $442,103 5.50 $999,554 7.15 ----- -------- -------- -------- ----- -------- -------- -------- Weighted average life (in years) - .1 .1 - AT DECEMBER 31, 1995: Due in one year or less $ 50 4.30% $ 4,199 5.57% $ 4,249 5.56% $ 1,005 8.06% No stated maturity - - 60,096(1) 7.82 60,096 7.82 1,200,485(2) 7.13 ----- -------- -------- -------- Total $ 50 4.30 $64,295 7.68 $64,345 7.67 $1,201,490 7.13 ----- -------- -------- -------- ----- -------- -------- -------- Weighted average life (in years) .4 .1 .1 .1 - ----------------------
(1) Balance represents FHLB stock, a required regulatory investment at adjustable rates having no stated maturity. FHLB stock has been excluded from the weighted average life calculation. (2) Balance represents mortgage-backed securities and marketable equity securities which have been excluded from the weighted average life calculation. In November 1995, the Financial Accounting Standards Board ("FASB") issued a Special Report entitled "A Guide to Implementation of Statement No. 115 on Accounting for Certain Investments in Debt and Equity Securities." In conjunction with the issuance of the Guide, the FASB provided entities with a one-time opportunity to reassess the classification of their held-to-maturity debt securities without calling into question the entities' intent to hold to maturity their remaining portfolio of such securities. During the 1995 fourth quarter, TCF reassessed the balance sheet classifications of its mortgage-backed securities. As a result, TCF reclassified its remaining $1.1 billion in mortgage-backed securities from "held to maturity" to "available for sale" effective December 31, 1995. This reclassification allowed for increased asset/liability management flexibility. Unrealized gains on securities available for sale, reported net of taxes as a separate component of stockholders' equity, increased by $12.8 million as a result of this reclassification. 9 Following is a table indicating the investments comprising TCF's securities available for sale:
AT DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (IN THOUSANDS) U.S. Government and other marketable securities: U.S. Government and agency obligations $ - $ 1,005 $ 54,298 Commercial paper - - 14,843 Corporate bonds - - 14,918 Other - 57 30 --------- ---------- --------- - 1,062 84,089 --------- ---------- --------- Mortgage-backed securities: FHLMC 317,177 360,631 23,379 FNMA 542,147 655,568 4,345 GNMA 116,388 138,723 3,002 Private issuer 22,531 26,903 13,971 Collateralized mortgage obligations 1,311 18,603 9,644 --------- ---------- --------- 999,554 1,200,428 54,341 --------- ---------- --------- $ 999,554 $1,201,490 $ 138,430 --------- ---------- --------- --------- ---------- ---------
Information regarding the amortized cost and fair values of TCF's securities available for sale is set forth in Note 4 of Notes to Consolidated Financial Statements on page 42 of TCF's 1996 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. Demand for certain types of deposit products, such as certificates of deposit, has declined in recent periods. Higher-cost borrowings may be used to compensate for reductions in normal sources of funds, such as deposit inflows at less than projected levels or net deposit outflows, or to support expanded activities. Consumer and commercial deposits are attracted principally from within TCF's primary market areas through the offering of a broad selection of deposit instruments including consumer and commercial demand deposit accounts, Negotiable Order of Withdrawal or "NOW" (interest-bearing checking) accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans. The composition of TCF's deposits has a significant impact on its cost of funds. In recent years, TCF's marketing strategy has emphasized attracting deposits held in checking, 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 53% of total deposits at December 31, 1996, up from 49% of total deposits at both December 31, 1995 and December 31, 1994. In addition, there were approximately 1.1 million retail checking, savings and money market accounts at December 31, 1996, compared with approximately 1 million and 985,000 such accounts at December 31, 1995 and 1994, respectively. Total deposits at TCF as of December 31, 1996 were $5 billion, down $213.9 million from total deposits at December 31, 1995. The decrease in deposits partially reflects the sale of five branches, and run-off of certificates of deposit. 10 The following table sets forth the deposit flows for each of the years in the three-year period ended December 31, 1996:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (IN THOUSANDS) Net withdrawal of deposits $(324,310) $(332,632) $(468,547) Deposits purchased - 6,464 - Deposits sold (60,232) (59,926) - Interest credited 170,620 177,928 172,337 --------- --------- --------- Net decrease in deposits $(213,922) $(208,166) $(296,210) --------- --------- --------- --------- --------- ---------
The following table shows rate and maturity information as of December 31, 1996, and rate information as of December 31, 1995, for TCF's certificates of deposit:
INTEREST CATEGORY -------------------------------------------------------- 2.00- 4.00- 5.00- 6.00- 8.00- % OF MATURITY WITHIN THE YEAR ENDING 3.99% 4.99% 5.99% 7.99% 12.99% TOTAL TOTAL ------ ------ ------ ------ ------ ------ ------- (DOLLARS IN THOUSANDS) December 31, 1997 $180,027 $226,325 $1,071,869 $168,062 $ 2,513 $1,648,796 70.2 December 31, 1998 28,210 49,322 285,042 98,927 4,962 466,463 19.9 December 31, 1999 2,275 25,156 58,157 43,983 843 130,414 5.5 Thereafter 933 13,050 27,359 62,728 168 104,238 4.4 -------- -------- ---------- -------- -------- ---------- ----- Total at December 31, 1996 $211,445 $313,853 $1,442,427 $373,700 $ 8,486 $2,349,911 100.0% -------- -------- ---------- -------- -------- ---------- ----- -------- -------- ---------- -------- -------- ---------- ----- Total at December 31, 1995 $ 87,053 $470,720 $1,339,646 $712,395 $20,684 $2,630,498 -------- -------- ---------- -------- -------- ---------- -------- -------- ---------- -------- -------- ----------
Information concerning TCF's deposits is set forth in "Financial Review -- Financial Condition - Deposits" on page 29 and in Note 11 of Notes to Consolidated Financial Statements on pages 47 and 48 of TCF's 1996 Annual Report, incorporated herein by reference. BORROWINGS The FHLB System functions as a central reserve bank providing credit for thrift institutions through a regional bank located within a particular thrift's assigned region. As members of the FHLB System, the TCF Banks are required to own a minimum level of FHLB capital stock and are authorized to apply for advances on the security of such stock and certain of their loans and other assets (principally securities which are obligations of, or guaranteed by, the United States Government), provided certain standards related to creditworthiness have been met. TCF's FHLB advances totaled $1.1 billion at December 31, 1996, compared with $893.6 million at December 31, 1995. FHLB advances are made pursuant to several different credit programs. Each credit program has its own interest rates and range of maturities. The FHLB prescribes the acceptable uses to which the advances pursuant to each program may be made as well as limitations on the size of advances. Acceptable uses prescribed by the FHLB have included expansion of residential mortgage lending and meeting short-term liquidity needs. In addition to the program limitations, the amounts of advances for which an institution may be eligible are generally based on the FHLB's assessment of the institution's creditworthiness. See "REGULATION -- Federal Home Loan Bank System." As an additional source of funds, TCF may sell securities subject to its obligation to repurchase these securities under repurchase agreements ("reverse repurchase agreements") with the FHLMC or major investment bankers utilizing government securities or mortgage-backed securities as collateral. Reverse repurchase agreements totaled $293.7 million at December 31, 1996, compared with $438.4 million at December 31, 1995. 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 11 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 pages 29 and 30 and in Note 12 of Notes to Consolidated Financial Statements on pages 49 and 50 of TCF's 1996 Annual Report, incorporated herein by reference. The following tables set forth TCF's maximum and average borrowing levels for each of the years in the three-year period ended December 31, 1996:
YEAR ENDED DECEMBER 31, ----------------------------------------- 1996 1995 1994 ---- ---- ---- (IN THOUSANDS) Maximum Balances (1): FHLB advances $1,141,040 $1,089,993 $1,354,663 Securities sold under repurchase agreements 647,707 718,425 778,473 Subordinated debt 13,520 50,676 50,676 Collateralized obligations 41,170 41,817 43,427 Other borrowings 42,808 54,520 20,903 - ------------------------------------------------
(1) Maximum month-end balances.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1996 1995 1994 ---------------- ---------------- ------------------ BALANCE RATE BALANCE RATE BALANCE RATE ------- ---- ------- ---- ------- ----- (DOLLARS IN THOUSANDS) Average Balances and Rates: FHLB advances $674,703 5.52% $860,948 5.89% $975,937 5.80% Securities sold under repurchase agreements 498,363 5.65 591,367 6.05 443,972 5.66 Subordinated debt 13,430 13.96 46,429 10.74 50,676 11.06 Collateralized obligations 40,831 6.33 41,586 6.93 42,588 5.73 Other borrowings 23,764 6.07 13,486 6.67 8,971 4.59
OTHER INFORMATION ACTIVITIES OF SUBSIDIARIES OF TCF FINANCIAL TCF's business operations include those conducted by direct and indirect subsidiaries of TCF Financial. The TCF Banks are permitted to invest an amount equal to 2% of their assets (excluding those of its subsidiaries) in subsidiaries called service corporations. Up to an additional 1% of assets may be invested in certain types of community development projects. Under OTS regulations, the ability of thrift institutions to invest an additional amount up to 50% of their risk-based capital in conforming loans to service corporations is tied to an institution's compliance with regulatory capital requirements. Service corporations are authorized by regulation to engage in various activities reasonably related to the activities of federal savings associations as approved by the OTS. See "REGULATION -- Limitations on Certain Investments." In addition to investments in service corporations, the TCF Banks are also permitted to form subsidiaries known as operating subsidiaries. Operating subsidiaries are permitted to engage in activities permitted for federal savings associations and are not subject to the service corporation investment limitations. See "REGULATION -- Limitations on Certain Investments." 12 During the year ended December 31, 1996, TCF's subsidiaries were principally engaged in the following activities: Mortgage Banking TCF Mortgage Corporation, a subsidiary of TCF Minnesota, and Great Lakes originate, sell and service residential mortgage loans. A subsidiary of TCF Mortgage Corporation is 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. Annuities and Investment Services TCF Financial Insurance Agency, Inc., TCF Financial Insurance Agency Illinois, Inc., TCF Financial Insurance Agency Wisconsin, Inc. and TCF Financial Insurance Agency Michigan, Inc. are insurance agencies engaging in the sale of single premium tax-deferred annuities. TCF Securities, Inc. engages in the sale of mutual fund products of Putnam Investments. See "REGULATION -- Recent Developments." Insurance, Title Insurance and Appraisal Services TCF Agency Minnesota, Inc., TCF Agency Wisconsin, Inc., TCF Agency Illinois, Inc. and Lakeland Group Insurance Agency, Inc. provide various types of insurance, principally credit-related insurance, 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 and Indiana and providing title insurance, real estate abstracting, and closing services to affiliates and third parties. North Star Real Estate Services, Inc. provides real estate appraisal services to its affiliates and to third parties. See "REGULATION -- Recent Developments." Consumer Finance TCF Financial Services, Inc., TCF Consumer Financial Services, Inc. and TCF Real Estate Financial Services, Inc. make loans to consumers for personal, family or household purposes such as debt consolidation or the financing of home improvements and automobiles. RECENT ACCOUNTING DEVELOPMENTS During the past several years, there has been an ongoing review of the accounting principles and practices used by financial institutions for certain types of transactions. This review is expected to continue by thrift and banking regulators, the Securities and Exchange Commission ("SEC"), the FASB, the American Institute of Certified Public Accountants ("AICPA") and other organizations. As a result of this process, there have been new accounting pronouncements which have had an impact on TCF. Further developments may be forthcoming in light of this ongoing review process. In June 1996, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Additional information on SFAS No. 125 is set forth in "Financial Review -- Financial Condition - Borrowings" on pages 29 and 30 of TCF's 1996 Annual Report, incorporated herein by reference. In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." SFAS No. 128 establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. SFAS No. 128 simplifies the standards for computing EPS previously found in Accounting Principles Board ("APB") Opinion No. 15, "Earnings per Share," and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS 13 is computed similarly to (although not the same as) fully diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. SFAS No. 128 requires restatement of all prior-period EPS data presented. It is too early to predict what effect SFAS No. 128 will have on TCF's results of operations. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation." Additional information on SFAS No. 123 is set forth in Note 1 of Notes to Consolidated Financial Statements on pages 38 through 40 and Note 18 of Notes to Consolidated Financial Statements on pages 58 and 59 of TCF's 1996 Annual Report, incorporated herein by reference. In October 1996, the AICPA issued Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities." SOP 96-1 provides authoritative guidance on specific accounting issues that are present in the recognition, measurement, display and disclosure on environmental remediation liabilities. Financial institutions are among the industries with potential exposure to environmental remediation liabilities. Certain transactions, including acquisitions of real property by a creditor pursuant to default by a debtor, may expose an entity to such liabilities. The provisions of SOP 96-1 are effective for fiscal years beginning after December 15, 1996. Earlier application is encouraged. The effect of initially applying this SOP shall be reported as a change in accounting estimate. Restatement of previously issued financial statements is not permitted. Management does not believe that SOP 96-1 will have a significant impact on TCF's financial condition or results of operations. COMPETITION TCF Minnesota is the largest savings bank and third largest depository institution headquartered in Minnesota. TCF Illinois, TCF Wisconsin and Great Lakes 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 commercial banks and credit unions, and from other savings institutions. Additional significant competition for deposits comes from institutions selling money market mutual funds and corporate and government securities. The primary factors in competing for loans are interest rates, loan origination fees and the range of services offered. TCF competes for origination of loans with commercial banks, mortgage bankers, mortgage brokers, consumer finance companies, credit unions, insurance companies and other savings institutions. EMPLOYEES As of December 31, 1996, TCF had approximately 4,800 employees, including 1,200 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 thrift holding company, and the TCF Banks, as federally chartered savings 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 banks insured by the Bank Insurance Fund ("BIF") and thrifts insured by the Savings Association Insurance Fund ("SAIF"). This new legislation imposed a one-time special assessment on thrift institutions such as the TCF Banks and provided a reduction in deposit insurance premiums in subsequent periods and other regulatory reforms. For additional information on the one-time special assessment, see "Financial Review -- 14 Financial Condition - Recent Legislative and Regulatory Developments" on page 30 and Note 22 of Notes to Consolidated Financial Statements on page 64 of TCF's 1996 Annual Report, incorporated herein by reference. 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, TCF's management elected to seek the conversion of the TCF Banks to national banks. In November 1996, the TCF Banks filed applications with the Office of the Comptroller of the Currency ("OCC") to convert to national banks, and also to charter new national banks in Colorado and Ohio. These applications were approved by the OCC in February 1997. In February 1997, TCF filed an application with the FRB to become a bank holding company in connection with the pending conversion of the TCF Banks to national banks. Applications are also now pending with the FDIC for deposit insurance coverage for the new national banks to be chartered by TCF. Subject to completion of the regulatory review and approval process, TCF is seeking to consummate the conversion of the TCF Banks to national banks and approval of TCF Financial as a bank holding company as early as the second quarter of 1997. Following the consummation of the conversions and other transactions contemplated by the applications filed by TCF and the TCF Banks (referred to as the "Bank Conversion"), these institutions will no longer be subject to regulations of the OTS. The Bank Conversion will result in significant changes in statutory and regulatory authority for various operations of these institutions, including but not limited to laws and regulations governing branching authority, insurance agency activities, dividend payment authority and the operation of loan production offices. In some cases, these new authorities will result in significant changes in the operations of TCF and the TCF Banks. Among other changes following the Bank Conversion, TCF Illinois and TCF Wisconsin will be operated as direct subsidiaries of TCF Financial as opposed to TCF Minnesota, and TCF's annuity sales operations will become subsidiaries of the TCF Banks as opposed to TCF Financial. The ultimate effect of these changes cannot be predicted with complete certainty at this time. The following discussion reviews certain significant statutory and regulatory restrictions on the operations of TCF and the TCF Banks prior to the Bank Conversion (primarily regulations applicable to federal and state savings banks and to savings and loan holding companies) and also certain restrictions following the Bank Conversion (primarily regulations applicable to national banks and bank holding companies). The manner in which laws and regulations relating to national banks and bank holding companies will be applied to TCF and the TCF Banks is subject to a number of uncertainties, including completion of the regulatory review and approval process and the fact that TCF and the TCF Banks have not undergone an examination by either the FRB or the OCC. REGULATORY CAPITAL REQUIREMENTS Under significant new regulatory capital requirements for thrift institutions mandated by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), thrift institutions are required to have "core capital" equal to no less than 3% of adjusted total assets and "tangible capital" equal to no less than 1.5% of adjusted total assets. In addition, thrift institutions are required to maintain "risk-based capital" equal to 8% of risk-weighted assets. Under the Federal Deposit Insurance Corporation Improvement Act ("FDICIA"), enacted in 1991, banking and thrift regulators are required to take prompt regulatory action against institutions which are undercapitalized. FDICIA requires banking and thrift regulators to categorize institutions as "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." A savings institution will be deemed to be well-capitalized if it: (i) has a total risk-based capital ratio of 10% or greater; (ii) has a Tier 1 (core) risk-based capital ratio of 6% or greater; (iii) has a leverage (core) ratio of 5% or greater; and (iv) is not subject to any order or written directive by the OTS to meet and maintain a specific capital level for any capital measure. The TCF Banks believe they would be considered well-capitalized. In addition to the regulatory action required to be taken with respect to undercapitalized institutions, FDICIA also calls upon each financial institution regulatory agency, in consultation with other federal banking agencies, to review its capital standards at least once every two years to ensure that the standards are sufficient to prevent or minimize loss to the deposit insurance funds. In addition, the regulatory agencies are required to revise their risk-based capital standards to make sure that they take adequate account of interest-rate risk, concentration of credit risk, and the risks of non-traditional activities. OTS regulations take into account an institution's exposure to concentrations of credit risk and risks of non-traditional activities in assessing the institution's overall capital adequacy. The OTS may establish higher 15 individual capital requirements for savings associations with high degrees of exposure to interest rate risk, prepayment risk, credit risk, concentration of credit risk, risks arising from nontraditional activities or off-balance sheet risks, and that have demonstrated a poor record of monitoring and controlling such risks. Tangible capital is generally defined as core capital (see discussion below) less intangible assets except that savings institutions may include the same dollar amount of mortgage servicing rights in tangible capital that they include in core capital. Core capital generally includes par value of common stock, additional paid-in capital, retained earnings, non-cumulative perpetual preferred stock and minority interests in the equity accounts of fully consolidated subsidiaries, less any "unidentifiable" intangible assets. Mortgage servicing rights are exempted from the general requirement that unidentifiable intangible assets be excluded from capital, but the amount of servicing rights includible in capital is limited to the lower of 90% of fair market value to the extent determinable or the current amortized book value determined under generally accepted accounting principles ("GAAP"). In addition, as a matter of OTS policy, the amount of such mortgage servicing rights included in core capital may not exceed the amount that would be included if the savings association were an insured state non-member bank governed by the FDIC's capital regulation. Under the risk-based capital requirement, risk-weighted assets are determined by multiplying each of an institution's assets by specified risk weights. Certain off-balance sheet items must be converted into on-balance sheet equivalent amounts and then multiplied by specified risk weights. Applicable risk weights range from 0% to 100%. Cash, certain obligations of the federal government and similar items have a 0% risk weight. Certain government or agency insured or guaranteed loans or securities backed by these loans are risk-weighted at 20%. Loans secured by a first mortgage on a borrower's principal residence and certain qualifying commercial real estate loans are risk-weighted at 50%. Other consumer and commercial loans and other assets generally are risk-weighted at 100%. An institution may use "supplementary capital" to satisfy the risk-based capital requirement in an amount up to 100% of its core capital. Supplementary capital includes certain permanent capital instruments such as cumulative perpetual preferred stock and certain maturing capital instruments issued pursuant to OTS regulations. The following table sets forth the TCF Banks' calculation of their tangible, core and risk-based capital and applicable percentages of adjusted assets, together with the excess over the minimum capital requirements at December 31, 1996:
TCF MINNESOTA TCF ILLINOIS TCF WISCONSIN GREAT LAKES ---------------------- --------------------- -------------------- --------------------- AMOUNT % AMOUNT % AMOUNT % AMOUNT % ------- ------- ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Tangible capital $321,043 6.52% $59,025 8.62% $45,359 7.32% $177,565 8.21% Tangible capital requirement 73,886 1.50 10,275 1.50 9,297 1.50 32,458 1.50 -------- ------ ------- ------ ------- ------ -------- ------ Excess $247,157 5.02% $48,750 7.12% $36,062 5.82% $145,107 6.71% -------- ------ ------- ------ ------- ------ -------- ------ -------- ------ ------- ------ ------- ------ -------- ------ Core capital $321,808 6.53% $59,790 8.72% $45,359 7.32% $187,255 8.62% Core capital requirement 147,795 3.00 20,573 3.00 18,595 3.00 65,206 3.00 -------- ------ ------- ------ ------- ------ -------- ------ Excess $174,013 3.53% $39,217 5.72% $26,764 4.32% $122,049 5.62% -------- ------ ------- ------ ------- ------ -------- ------ -------- ------ ------- ------ ------- ------ -------- ------ Risk-based capital $359,950 11.81% $63,933 15.20% $49,799 14.04% $217,015 16.23% Risk-based capital requirement 243,784 8.00 33,657 8.00 28,375 8.00 106,970 8.00 -------- ------ ------- ------ ------- ------ -------- ------ Excess $116,166 3.81% $30,276 7.20% $21,424 6.04% $110,045 8.23% -------- ------ ------- ------ ------- ------ -------- ------ -------- ------ ------- ------ ------- ------ -------- ------
The OTS has adopted an amendment to its risk-based capital requirements that requires institutions with more than a "normal" level of interest-rate risk to maintain additional risk-based capital. A savings institution's interest-rate risk is measured in terms of the sensitivity of its "net portfolio value." Net portfolio value is defined generally as the present value of expected cash inflows from existing assets and off-balance sheet contracts less the present value of expected cash outflows from existing liabilities. The interest-rate risk component creates a capital requirement based upon the decline in an institution's net portfolio value that would result from an immediate 200 basis point increase or decrease (whichever results in the greater decline) in prevailing interest rates. The OTS has defined as "above normal" any decline in an institution's net portfolio value that exceeds 2% of the present value of its assets. A savings institution with a greater 16 than normal interest-rate risk is required to deduct from total capital, for purposes of calculating its risk-based capital requirement, an amount (the "interest-rate risk component") equal to one-half the difference between the institution's measured interest-rate risk and the normal level of interest-rate risk, multiplied by the present value of its total assets. Management does not believe the interest-rate risk component will have a significant impact on the TCF Banks' risk-based capital requirements. For the present time, the OTS has delayed implementation of the automatic deduction of the interest-rate risk component. In the event a savings institution fails to comply with any of its existing or future minimum regulatory capital requirements or applicable capital adequacy standards, it would be required to file and implement a capital plan with the appropriate regulatory agencies, would be subjected to restrictions on growth and the payment of dividends, could have restrictions imposed on its ability to form new branches, invest in service corporations or operating subsidiaries and make equity risk investments, or be precluded from issuing securities as a means of raising additional capital, among other negative effects. Such failure could also permit the OTS to require that the institution subject itself to a restrictive business plan or supervisory agreement that could impose limits on dividends or compensation of officers and employees or impose other restrictions. Such failure could also permit the FDIC to initiate action resulting in the termination of deposit insurance. Following the Bank Conversion, the TCF Banks would become subject to the OCC's capital regulations instead of those of the OTS. The OCC has established three capital standards for national banks: a leverage requirement, a Tier 1 risk-based capital requirement and a total risk-based capital requirement. In addition, the OCC may also, on a case-by-case basis, establish individual minimum capital requirements for a national bank that may vary from these requirements. The leverage ratio adopted by the OCC requires a minimum ratio of "Tier 1 capital" to adjusted total assets of 3% for national banks rated composite 1 under the supervisory rating system for banks. National banks not rated composite 1 under this rating system are required to maintain a minimum ratio of Tier 1 capital to adjusted total assets of 4% to 5%, depending upon the level and nature of risks in their operations. OCC Tier 1 capital generally consists of the same components as core capital under the OTS' capital regulations, except that includible intangible assets are more restricted. The risk-based capital requirements established by the OCC's regulations require national banks to maintain "total capital" equal to at least 8% of total risk-weighted assets and Tier 1 capital equal to at least 4% of total risk-weighted assets. For purposes of the risk-based capital requirement, "total capital" means OCC Tier 1 capital plus "Tier 2 capital" (as described below), provided that the amount of Tier 2 capital may not exceed the amount of Tier 1 capital, less certain assets. The components of Tier 2 capital under the OCC's regulations generally correspond to the components of supplementary capital under OTS regulations. Total risk-weighted assets generally are determined under the OCC's regulations in the same manner as under the OTS' regulations. The OCC has modified its risk-based capital requirements to permit it to require higher levels of capital as a result of an institution's interest-rate risk and has proposed to quantify and account for interest-rate risk exposure in determining the required level of a bank's regulatory capital. The ability of the TCF Banks to maintain compliance with regulatory capital requirements may be adversely affected by unanticipated losses or lower levels of earnings, by new or increased regulatory capital requirements or by other factors. RESTRICTIONS ON DISTRIBUTIONS Dividends or other capital distributions from TCF Minnesota or Great Lakes to TCF Financial, especially in the event of diminished earnings from other direct subsidiaries of TCF Financial, may be necessary in order for TCF Financial to pay dividends on its common stock, to make payments on TCF Financial's other borrowings, or for other cash needs. 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 depends on their earnings and ability to meet minimum regulatory capital requirements in effect during future periods. These capital adequacy standards may be higher than existing minimum capital requirements. In addition, the TCF Banks' ability to make dividend payments may be limited by the level of their current and accumulated tax earnings and profits ("E&P"). Annual dividend distributions in excess of E&P could invoke a tax liability based on the amount of excess earnings distributed and current tax rates. 17 Capital distributions by institutions such as the TCF Banks, including dividends, stock repurchases, redemptions of securities and cash-out mergers, are subject to restrictions tied to the institutions' capital levels after giving effect to such a transaction. Under OTS regulations, institutions identified as "Tier 1" institutions (see definitions below) generally are authorized to make capital distributions during a calendar year up to the higher of 100% of their net income to date during the calendar year plus the amount that would reduce by one-half their surplus capital ratio at the beginning of the calendar year or 75% of their net income over the most recent four-quarter period. "Surplus capital ratio" refers to the percentage by which an association's capital-to-assets ratio exceeds the ratio of its fully phased-in capital requirement to its assets. Institutions identified as "Tier 2" institutions may make capital distributions up to 75% of their net income over the most recent four-quarter period. For purposes of computing the foregoing amount, a Tier 2 institution must deduct the amount of capital distributions it has previously made during the most recent four-quarter period. "Tier 3" institutions would not be permitted to make capital distributions unless they receive prior written approval from the OTS or unless such a distribution is made in accordance with an approved capital plan. "Tier 1" institutions are those which would have capital, immediately prior to and on a pro forma basis after giving effect to a proposed capital distribution, that is equal to or greater than the amount of their fully phased-in capital requirements. "Tier 2" institutions have capital, immediately prior to and on a pro forma basis after giving effect to a proposed capital distribution, that is equal to or in excess of their minimum regulatory capital requirements, but is less than the amount of applicable fully phased-in capital requirements. "Tier 3" institutions have capital, immediately prior to or on a pro forma basis after giving effect to a proposed capital distribution, that is less than the amount of their minimum regulatory capital requirements. The capital distribution rule would also reflect any individual minimum capital requirement and if such a requirement is imposed, general minimum capital requirements would need to be adjusted accordingly. The OTS may also prohibit any capital distribution that would otherwise be permitted if it determines that such a distribution would constitute an unsafe and unsound practice. Among the circumstances deemed to pose such a risk would be a capital distribution by a Tier 1 or Tier 2 institution whose capital is decreasing because of substantial losses. If an institution has been notified that it is in need of more than normal supervision, the OTS has the discretion to treat an institution otherwise considered a Tier 1 institution as a Tier 2 or Tier 3 institution if it is deemed necessary to ensure the association's safe and sound operation. As of December 31, 1996, none of the TCF Banks had an individual minimum capital requirement and all of these institutions met their fully phased-in capital requirements, and therefore would expect to be eligible for treatment as Tier 1 institutions. As a result, as of such date the TCF Banks would be limited to capital distributions up to the higher of 100% of their net income during the calendar year plus the amount that would reduce by one-half their surplus capital ratio at the beginning of the calendar year, or 75% of their net income over the most recent four-quarter period, assuming the OTS did not determine that such a distribution would be contrary to the safe and sound operation of the institutions. In December 1994, the OTS issued a notice of proposed rulemaking which would modify the capital distribution regulations to incorporate the prompt corrective action capital standards promulgated by FDICIA, and which would permit savings associations with a supervisory rating of "1" or "2" which are not held by a holding company to make capital distributions without providing prior notice to the OTS. TCF does not believe that the proposed rule, if adopted, would materially change the capital distribution restrictions applicable to it or to the TCF Banks. During 1986, TCF Minnesota converted from a federally chartered mutual association to a federally chartered stock savings and loan association. At that time, TCF Minnesota established a liquidation account in an amount equal to its regulatory net worth as of April 30, 1986. Liquidation accounts have also been established in the conversions of TCF Wisconsin, TCF Illinois and Great Lakes. A liquidation account is maintained for the benefit of eligible depositors who have continued to maintain their deposits in an institution since the conversion to a stock form of ownership. In the event of a liquidation, each eligible depositor will be entitled to receive a liquidation distribution from the liquidation account in the proportionate amount of the then current adjusted balance for deposits held before any liquidation distribution may be made with respect to the stockholders. The balance attributable to the liquidation account is decreased by a proportionate amount as each accountholder closes an account or reduces the balance in such account as of any subsequent fiscal year-end. Except for the repurchase of stock and payment of dividends, the existence of the liquidation account will not restrict the use or application of a savings institution's net worth. A savings institution may not declare or pay a cash dividend or repurchase any of its capital stock if it would cause its regulatory capital to be reduced below the amount required for the liquidation account. Following the Bank Conversion, the TCF Banks' ability to pay dividends would become subject to restrictions under the National Bank Act and regulations of the OCC rather than requirements administered by the OTS. Dividends paid by a national bank must be paid out of current or retained net profits, after deducting reserves for losses and bad debts. 18 The National Bank Act further restricts the payment of dividends out of net profits by prohibiting a national bank from declaring a dividend on its shares of common stock until the surplus fund equals the amount of capital stock or, if the surplus fund does not equal the amount of capital stock, until one-tenth of the bank's profits for the preceding half year (in case of quarterly or semi-annual dividends), or the preceding two half-year periods (in the case of annual dividends), are transferred to the surplus fund. In addition, the prior approval of the OCC is required for the payment of a dividend if the total of all dividends declared by a national bank in any calendar year would exceed the total of its net profits for the year combined with its retained net profits for the two preceding years, less any required transfers to surplus or a fund for the retirement of any preferred stock. The OCC has the authority to prohibit the payment of dividends by a national bank when it determines such payments to be an unsafe and unsound banking practice. In addition, national banks also would be subject to the effect of regulations governing the minimum level of capital to be maintained under regulations relating to minimum capital and prompt corrective action as discussed above. SAFETY AND SOUNDNESS STANDARDS In July 1995, the OTS and other federal banking regulatory agencies (including the OCC) jointly issued final safety and soundness standards. These standards were issued in the form of guidelines addressing such factors as internal controls and audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits. In the event of a failure to meet any of these safety and soundness standards, the OTS could require the filing of a compliance plan. There is virtually no limit on the authority of the OTS or FDIC to take any appropriate action with respect to conditions or activities it considers unsafe or unsound. REGULATION OF TCF FINANCIAL AND AFFILIATE AND INSIDER TRANSACTIONS TCF Financial and TCF Minnesota are subject to regulation as savings and loan holding companies. They are required to register with the OTS and are subject to OTS regulations, examinations and reporting requirements relating to savings and loan holding companies. As subsidiaries of savings and loan holding companies, the TCF Banks are subject to certain restrictions in their dealings with TCF Financial and with other companies affiliated with TCF Financial, and also with each other. Under FDICIA, the TCF Banks are required to conform to regulatory standards promulgated by the OTS relating to operations and management, asset quality, earnings, stock valuation, and compensation of officers, employees or directors. In connection with the reorganization of TCF Minnesota into a holding company structure in 1987, TCF Financial was required to undertake that, as long as it controls TCF Minnesota, it will cause the regulatory capital of TCF Minnesota to be maintained at a level consistent with that required by applicable regulations and, as necessary or appropriate, TCF Financial will infuse sufficient additional equity capital to comply with such requirement. As a result of FDICIA, TCF Financial may also be required to make up certain capital deficiencies of the other TCF Banks. As amended by FIRREA, HOLA provides generally that an insured savings institution subsidiary of a holding company is subject to the restrictions on affiliate transactions set forth in Federal Reserve Act Sections 23A and 23B. In addition, an insured institution may not buy securities from an affiliate, except for shares of stock of a subsidiary, and it may not make loans to an affiliate engaged in a non-banking activity. As a result of FIRREA and FDICIA, thrift institutions are subject to Sections 22(g) and 22(h) of the Federal Reserve Act, which restrict a financial institution's ability to make loans to "insiders" (executive officers, directors and certain shareholders). The OTS has also adopted the FRB's Regulation O, which implements legislative restrictions on insider loan transactions. Following consummation of the Bank Conversion, affiliate transactions and insider lending restrictions will continue to apply to TCF and the TCF Banks. HOLA authorizes the OTS or the FDIC to identify holding company activities that present excessive risk to insured institutions, and to restrict, among other things, dividends to TCF Financial (or to TCF Minnesota by TCF Illinois or TCF Wisconsin) and other affiliate transactions. If one or more of the TCF Banks were to lose their status as a Qualified Thrift Lender, TCF Financial and/or TCF Minnesota would possibly be treated as a bank holding company, resulting in additional restrictions on its activities and other possible negative effects. Under HOLA, multiple savings and loan 19 holding companies such as TCF Financial may engage only in the following activities: furnishing or performing management services for a savings association subsidiary; conducting an insurance agency or escrow business; holding, managing or liquidating assets owned or acquired from a savings association subsidiary; holding or managing properties used or occupied by a savings association subsidiary; acting as trustee under a deed of trust; any activity approved as an activity under Section 4(c)(8) of the Bank Holding Company Act ("BHCA") by the FRB (unless prohibited by the Director of the OTS) or in which multiple savings and loan holding companies were authorized to engage on March 5, 1987; or purchasing of stock in certain qualified stock issuances which have been approved by the Director of the OTS. Upon consummation of the Bank Conversion, TCF Financial will become regulated by the FRB as a bank holding company instead of by the OTS as a savings and loan holding company. Bank holding companies are subject to extensive regulation under the BHCA. As a bank holding company, TCF Financial would be required to file reports with the FRB and would be subject to FRB examination and enforcement authority. 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. The FRB has also established capital requirements for bank holding companies that generally parallel requirements for national banks. Under 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 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, or providing services for its subsidiaries. Exceptions are available for certain activities permitted by the FRB under Regulation Y, which are generally more limited than the activities that may be engaged in by savings and loan holding companies. The FRB does not currently permit annuity sales activities by bank holding companies and as a result, TCF Financial will contribute its annuity sales subsidiaries to the TCF Banks in consummating the Bank Conversion. Annuity sales activities are permitted by the OCC for a subsidiary of a national bank. 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. With the passage of FIRREA in 1989, these laws and regulations became less restrictive, especially with respect to the acquisition of thrifts by bank holding companies which became permissible under FIRREA. The Certificate of Incorporation of TCF Financial and a Shareholder Rights Plan adopted by TCF Financial in 1989, among other items, contain features which may inhibit a change in control of TCF Financial. ACQUISITIONS AND INTERSTATE OPERATIONS HOLA prohibits a savings and loan holding company, directly or indirectly, from (i) acquiring control of another savings institution (or a holding company thereof) without the prior approval of the OTS, (ii) acquiring 5% or more of the voting shares of another savings institution (or a holding company thereof) which is not a subsidiary; or (iii) acquiring control of a savings institution not insured by the FDIC. Under HOLA, the OTS is prohibited from approving an acquisition that would result in the formation of a multiple savings and loan holding company controlling insured institutions in more than one state unless (i) such company, or an insured institution subsidiary thereof, is authorized to acquire an institution, or operate a home or branch office, in an additional state pursuant to an emergency acquisition, (ii) such company controls an insured institution subsidiary which operated a home or branch office in the additional state on March 5, 1987, or (iii) state law in the state of the institution to be acquired specifically authorizes such an acquisition. In connection with changes in control, savings institutions may, depending on the circumstances, also be subject to the Bank Merger Act or Change in Bank Control Act. In April 1992, the OTS issued a statement of policy, effective May 11, 1992, amending its then-existing statement of policy on branching by federal savings associations. The new statement of policy deletes restrictions on the branching 20 of federal associations to permit nationwide branching to the extent permitted by federal statutes, provided the institution meets certain tests (domestic building and loan test, minimum capital requirements and satisfactory Community Reinvestment Act record). Under the new policy statement, it is believed that the TCF Banks may branch into any state with the approval of the OTS. Interstate branching authority for banks is more limited than the authority for thrift institutions. Under the Riegle-Neal Interstate Banking and Branching Act of 1994 ("Riegle-Neal Act"), the OCC and FDIC are authorized to approve interstate branching de novo by national and state banks only in states that specifically allow such branching. The Riegle-Neal Act also requires that the appropriate federal banking agencies prescribe regulations by June 1, 1997 which prohibit any out-of-state bank from using the interstate branching authority primarily for the purpose of deposit production. These regulations must include guidelines to ensure that interstate branches operated by an out-of-state bank in a host state are reasonably helping to meet the credit needs of the communities which they serve. The Riegle-Neal Act also sets forth rules for interstate banking, as opposed to interstate branching. The Riegle-Neal Act allows the FRB to approve an application of an adequately capitalized and managed bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than such holding company's home state, without regard to whether the transaction is prohibited by the laws of any state. The FRB may not approve the acquisition of a bank that has not been in existence for the minimum time period (not to exceed five years) specified by the law of the host state. The Riegle-Neal Act also prohibits the FRB from approving an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. The Riegle-Neal Act does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the Riegle-Neal Act. Beginning June 1, 1997, the Riegle-Neal Act authorizes the federal banking agencies to approve interstate merger transactions without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks opts out of 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 will be permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions will also be subject to the nationwide and statewide insured deposit concentration amounts described above. REGULATORY SUPERVISION The TCF Banks are subject to examination and supervision by the OTS and the FDIC. The TCF Banks are also subject to regulations governing such matters as mergers, establishment of branch offices and subsidiary investments and activities, and to general investment authority under regulations applicable to federally chartered savings banks. As a result of its insurance, mortgage banking and consumer finance activities, TCF is also subject to state regulation and examination authority in various states. As described above, the TCF Banks will become subject to the regulatory authority of the FRB and OCC instead of the OTS following the Bank Conversion. TCF and the TCF Banks would then become subject to supervision, examination and regulation by these agencies. In January 1997, TCF Illinois acquired all of the outstanding stock of BOC Financial Corporation ("BOC Financial"), which, in turn, owns all of the outstanding stock of Banks of Chicago Bancorp, Inc. ("Banks of Chicago"), which, in turn, owns all of the outstanding stock of BOC which is a BIF-insured state chartered savings bank. Immediately following the Bank Conversion, TCF Illinois (as a national bank) will cause BOC Financial to dissolve and then cause Banks of Chicago to dissolve, and then BOC to merge with and into TCF Illinois with TCF Illinois as the surviving entity. Prior to the Bank Conversion, BOC will be an Illinois state savings bank regulated by the State of Illinois Office of Banks and Real Estate and the FDIC, and these two agencies have general supervisory, examination and regulatory authority over BOC. Following the Bank Conversion and the merger described above, TCF Illinois will be subject to the regulatory authority of the OCC. 21 FEDERAL HOME LOAN BANK SYSTEM The TCF Banks are members of the FHLB System, consisting of twelve regional FHLBs. The FHLB System functions as a central reserve credit facility for member institutions. As members of the FHLB System, the TCF Banks are entitled to borrow funds from their respective FHLBs. As a result of FIRREA, the FHLB System is now administered by the Federal Housing Finance Board ("FHFB") rather than the Federal Home Loan Bank Board ("FHLBB"). As a result of the failure of a number of savings institutions and reductions in outstanding loans to its members, the FHLB System has become less profitable and its continued viability may depend upon its ability to attract new members. The TCF Banks are required to own capital stock of their respective FHLBs in an amount at least equal to the greater of 1% of the aggregate outstanding balance of home mortgage loans and similar obligations, 1/20th of advances and letters of credit from the FHLB or .3% of assets. The TCF Banks are in compliance with this requirement. At December 31, 1996, TCF's outstanding FHLB advances totaled $1.1 billion. These advances were secured by shares of FHLB stock and by a pledge of all notes and related mortgages and certain other assets held by TCF. The maximum amount of credit which a FHLB will advance for purposes other than meeting withdrawals varies from time to time in accordance with changes in policies of the FHFB and the FHLB. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB, and the purpose of the borrowing. The TCF Banks currently intend to remain members of their respective FHLB following the Bank Conversion. LIQUIDITY AND RESERVE REQUIREMENTS FIRREA amended HOLA to require that the Director of the OTS adopt regulations providing for a minimum liquidity requirement for thrift institutions. The minimum liquidity requirement must be in a range of 4% to 10% of an institution's withdrawable accounts and borrowings payable on demand or with maturities of one year or less. Current OTS regulations, which may be modified by the Director of the OTS in accordance with FIRREA, provide that each thrift institution must maintain an average daily balance for each calendar month of liquid assets (cash, certain time deposits, certain bankers' acceptances, specified corporate obligations and specified United States government, state or federal agency obligations) equal to at least 5% of the sum of its average daily balance of net withdrawable deposit accounts (the amount of all withdrawable accounts less the unpaid balance of all loans on the security of such accounts) plus borrowings payable in one year or less. These regulations also provide that each thrift institution must maintain an average daily balance for each calendar month of short-term liquid assets (generally those having maturities of six months or less or twelve months or less, depending on the asset) equal to at least 1% of its average daily balance of net withdrawable deposit accounts plus short-term debt. The TCF Banks have maintained liquidity ratios in excess of these requirements. As a result of FDICIA, institutions with liquidity shortages may be restricted in their ability to borrow from the Federal Reserve "discount window." National banks are not subject to any prescribed liquidity requirements. The TCF Banks are also subject to FRB reserve requirements imposed under Regulation D. These requirements, which are subject to change from time to time, call for minimum levels of reserves based on amounts held in transaction accounts. The TCF Banks are in compliance with these reserve requirements. INSURANCE OF ACCOUNTS Under FIRREA, the deposits of the TCF Banks are insured by the FDIC up to $100,000 per insured depositor. The TCF Banks other than BOC are insured by the SAIF of the FDIC and will continue to be SAIF insured following the Bank Conversion. BOC is insured by the BIF and following its merger with TCF Illinois, TCF Illinois' deposits will be proportionately allocated between the BIF and SAIF. Pursuant to FDICIA, the FDIC was required to assess deposit premiums based on assessed risk in an institution's asset portfolio no later than January 1, 1994. In October 1992, the FDIC issued a rule implementing a transitional risk-based premium system effective January 1, 1993 that raised deposit insurance premiums for institutions that pose greater risk to the deposit insurance system. Under the transitional risk-based system, the FDIC placed each insured institution in one of nine risk categories based on capital ratios and the FDIC's assessment of supervisory risk posed by an institution. These initial risk-based premiums ranged from .23% to .31% of total insured deposits. On June 17, 1993, 22 the FDIC adopted a final rule establishing a permanent risk-based assessment system effective with the semi-annual assessment period commencing January 1, 1994. The permanent system is substantially the same as the transitional system previously in effect. See "-- Recent Developments." QUALIFIED THRIFT LENDER Savings institutions are subject to restrictions on permissible investments that are generally known as Qualified Thrift Lender ("QTL") requirements. These requirements were relaxed by FDICIA, but the new legislation retained FIRREA's penalties for failing to meet the QTL test. An institution failing the QTL test is required to become a commercial bank or is subject to a number of restrictions, including: (i) a requirement that the institution not make any new investment or engage in any new activity unless such investment or activity would be permissible for a national bank; (ii) a requirement that the institution not establish any new branch office at any location at which a national bank located in the institution's home state may not establish a branch; (iii) ineligibility for new FHLB advances; and (iv) any restrictions on the payment of dividends to which a national bank would be subject. Where an institution still does not meet QTL requirements three years from the date on which it should have and failed to do so, the institution will be required to divest any investment or discontinue any activity which is impermissible for a national bank and will be required to repay any outstanding FHLB advances. Any savings and loan holding company which holds a thrift that fails to meet the QTL test will, within one year after the date on which the thrift should have become or ceases to be a QTL, be deemed to be a bank holding company subject to all the provisions of the BHCA and other statutes applicable to bank holding companies. Such a development would impose a number of additional activity, capital and other restrictions on any such thrift holding company. The TCF Banks are in compliance with all QTL requirements. Following the Bank Conversion, the TCF Banks are not expected to be subject to QTL requirements. EXAMINATIONS AND REGULATORY SANCTIONS The TCF Banks are subject to periodic examination by the OTS and the FDIC. Thrift regulatory authorities may impose on criticized institutions and, in certain cases, their holding companies, a number of restrictions or new requirements, including but not limited to growth limitations, dividend restrictions, individual increased regulatory capital requirements, increased loan and real estate loss reserve requirements, increased supervisory assessments, activity limitations or other restrictions that could have an adverse effect on such institutions, their holding companies or holders of their debt and equity securities. Similar restrictions or requirements may be imposed on the TCF Banks by national bank regulatory authorities, including the FRB and OCC, following the Bank Conversion. Any insured institution which does not operate in accordance with or conform to OTS or FDIC regulations, policies and directives may also be sanctioned for noncompliance. Subsidiaries of TCF are also subject to state and/or self-regulatory organization licensing, regulation and examination requirements in connection with certain insurance, mortgage banking, securities brokerage and consumer finance activities. Proceedings may be instituted against any insured institution or any director, officer, employee or person participating in the conduct of the affairs of such institution who engages in unsafe or unsound practices, including the violation of applicable laws, regulations, orders, agreements or similar items. If the assets of an institution are overvalued on its books, it may be ordered to establish and maintain a specific reserve in an amount equal to the determined overvaluation, which may result in a charge against operations to the extent of the overvaluation. FDIC insurance may be terminated, after notice and hearing, upon a finding that an insured institution is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operating, does not meet minimum regulatory capital requirements, or has violated any applicable law, rule, regulation or order of or condition imposed by the FDIC. Upon termination, funds then on deposit continue to be insured for at least six months and for up to two years, and due notice of such termination must be provided to the institution's accountholders. FIRREA substantially increased enforcement remedies, including civil money penalties, that may be assessed against an institution or an institution's directors, officers, employees, agents or independent contractors. For knowing violations and under certain other aggravated circumstances, penalties up to $1 million per day may be assessed. For lesser violations where there is a pattern of misconduct, or under certain other circumstances, a penalty of up to $25,000 per day may be imposed. Other violations may result in penalties of up to $5,000 per day. Violations of laws and regulations may also subject an institution's officers and directors to removal and to criminal penalties. 23 LIMITATIONS ON CERTAIN INVESTMENTS As federally chartered institutions, the TCF Banks are generally prohibited from investing directly in equity securities and real estate (other than that used for offices and related facilities or acquired through, or in lieu of, foreclosure or on which a contract purchaser has defaulted). In addition, their authority to invest directly in service corporations is limited to a maximum of 2% of their assets, plus an additional 1% of assets if the amount over 2% is used for specified community or inner-city development purposes. The TCF Banks are also permitted, if their risk-based capital is in compliance with the then-applicable minimum requirements, to make additional loans in an amount not exceeding 50% of their risk-based capital to service corporations of which they own more than 10% of the stock. Any failure to meet their minimum capital requirements may disallow any such additional investment authority. The TCF Banks are in compliance with all limitations on certain investments requirements. In October 1992, the OTS issued a final rule under which savings associations are authorized to establish and acquire "operating subsidiaries" which may engage only in activities savings associations are authorized to engage in directly. Operating subsidiaries are generally excluded from the scope of the service corporation regulations, including limitations on investments in service corporations. Savings associations generally must provide a 30-day notice to the FDIC and the OTS prior to acquiring or forming a new subsidiary or prior to engaging in a new activity through a subsidiary. If the OTS or FDIC determine that any such subsidiary or activity poses a threat to the safety and soundness of the institution or is inconsistent with existing law or sound banking practices, they may issue an order directing the institution not to proceed with such plans. Permissible investments by national banks are limited by the National Bank Act and by rules of the OCC. The OCC adopted new 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 new 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, application of Federal Reserve Act Sections 23A and 23B transactions with affiliates rules and a requirement that the bank be well-capitalized. LOANS-TO-ONE BORROWER RESTRICTION Under FIRREA, all loans to a single borrower or to related borrowers are generally limited to 15% of an institution's unimpaired capital and unimpaired surplus, plus an additional 10% for loans fully secured by readily marketable collateral. In addition, institutions which meet their fully phased-in capital requirements are permitted under FIRREA to make loans to develop domestic residential housing units, not to exceed the lesser of $30 million or 30% of the institution's unimpaired capital and unimpaired surplus, subject to certain conditions and other limitations. The OTS applies a definition of unimpaired capital and unimpaired surplus in determining the maximum loans-to-one borrower permitted for thrift institutions which is generally the same as the definition employed by the OCC. All of the TCF Banks are in compliance with applicable loans-to-one borrower limitations. Such limitations are not expected to have a material effect on TCF's lending activities. CLASSIFICATION OF ASSETS Under OTS rules, an asset is classified substandard when it has a well-defined weakness or weaknesses. A substandard asset is one that is inadequately protected by the net worth or paying capacity of the obligor or by the collateral, if any. An asset is classified doubtful where some loss seems very likely but there is still sufficient uncertainty to permit the asset to remain on the books at its full value. The possibility of a loss on an asset classified doubtful is high, but because of important and reasonably specific pending factors which may work to the strengthening of the asset, its classification as loss is deferred until its more exact status may be determined. An asset, or a portion thereof, is classified as loss when it is considered uncollectible and of such little value that continuance as an asset without establishment of a specific reserve is not warranted. Assets that do not warrant classification as substandard, doubtful or loss, but possess credit deficiencies or potential weaknesses deserving management's close attention are classified as special mention. Classification of assets rules are similar for institutions regulated by the OCC. 24 Assets may be classified in whole or in part, and part of an asset may be classified in one category, and part in a different category. Insured institutions are required to self-classify their assets. These classifications are reviewed as part of the regulatory examination process. An institution is required to have general valuation allowances that are adequate in light of its level of classified assets. When an asset or portion of an asset has been classified as loss, the institution must either charge off 100% of the portion classified as loss or establish a specific valuation allowance in a like amount. Specific allowances may not be included in regulatory capital, while general loan loss reserves are included in risk-based capital, subject to certain limitations. 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 has limited the role of private lenders in education loans. 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, and TCF expects this trend will continue. The Community Reinvestment Act ("CRA") and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. In recent periods, federal regulatory agencies, including the FRB, the OTS 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 regulations thereunder, the Equal Credit Opportunity Act and Regulation B, Regulation E Electronic Funds transfer requirements, the Truth-in-Lending Act and Regulation Z, the Real Estate Settlement Procedures Act and Regulation X. TCF is also subject to laws and regulations that may impose liability on lenders and owners for clean-up costs and other costs stemming from hazardous waste located on property securing real estate loans made by lenders or on real estate that is owned by lenders following a foreclosure or otherwise. Although TCF's lending procedures include measures designed to limit lender liability for hazardous waste clean-up or other related liability, TCF has engaged in significant commercial lending activity, and lenders may be held liable for clean up costs relating to hazardous wastes under certain circumstances. TAXATION FEDERAL TAXATION Bad Debt Reserves TCF files consolidated federal income tax returns. TCF has been an accrual basis taxpayer since January 1, 1987. Thrift institutions, such as the TCF Banks, are subject to federal income tax under the Internal Revenue Code of 1986 25 (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. All of the TCF Banks were in compliance with this requirement. A qualifying thrift institution could elect annually to compute its allowable additions to bad debt reserves under either the percentage of taxable income method or the experience method. The percentage of taxable income method of calculating bad debt reserves limited the applicable percentage deduction to 8% of taxable income and could not cause the reserves to exceed 6% of qualifying loans at the end of the taxable year. TCF Minnesota and TCF Illinois used the percentage of taxable income method to calculate additions to the tax bad debt reserves in 1995. Great Lakes and TCF Wisconsin used the experience method to calculate additions to tax bad debt reserves in 1995. 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 The consolidated tax returns for the years ended 1992 through 1994 have been reviewed by the IRS. See "Financial Review -- Results of Operations - Income Taxes" on page 24, Note 1 of Notes to Consolidated Financial Statements on pages 38 through 40 and Note 13 of Notes to Consolidated Financial Statements on pages 51 and 52 of TCF's 1996 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, payroll and property of all corporations in the unitary group. The corporate tax rate in Minnesota is 9.8%. The Minnesota Alternative Minimum Tax rate is 5.8%. TCF and its subsidiaries that operate in Illinois are subject to Illinois state taxation. The Illinois corporate tax rate is 7.3%. Illinois corporate income or loss is apportioned in a similar manner to Minnesota. For all TCF entities operating in Illinois, except the TCF Banks and Consumer Finance Subsidiaries, the three-factor apportionment method is used. For the TCF Banks and Consumer Finance Subsidiaries, 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 Arizona, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Mexico, New York, North Carolina, North Dakota, Ohio, Pennsylvania, South Carolina, Tennessee, Texas, Utah and Wisconsin, and local tax returns in certain cities. 26 ITEM 2. PROPERTIES OFFICES At December 31, 1996, TCF owned the buildings and land for 108 of its bank branch offices, owned the buildings but leased the land for 6 of its bank branch offices and leased the remaining 82 bank branch offices. The properties related to the bank branch offices owned by TCF, including vacant land upon which permanent offices may be constructed, had a depreciated cost of approximately $80.7 million at December 31, 1996. At December 31, 1996, the aggregate net book value of leasehold improvements associated with leased bank branch office facilities was $8.7 million. See Note 8 of Notes to Consolidated Financial Statements on page 46 of TCF's 1996 Annual Report, incorporated herein by reference. Leases for TCF's offices expire at various dates, with most leases expiring during the period from 1997 through 2005. The following table sets forth the net book value of the bank branch offices owned and leasehold improvements on bank branch properties leased by TCF at December 31, 1996: AT DECEMBER 31, 1996 -------------------- (DOLLARS IN THOUSANDS) Offices in Minnesota: Minneapolis (home office) $ 8,978 Minneapolis/St. Paul area (57 offices) 22,474 Greater Minnesota area (15 offices) 3,133 ------- Total Minnesota (73 offices) 34,585 ------- Offices in Illinois: Chicago area (22 offices) 7,520 Rockford area (6 offices) 1,195 Joliet area (3 offices) 557 ------- Total Illinois (31 offices) 9,272 ------- Offices in Wisconsin: Milwaukee area (14 offices) 7,163 Southeast area (8 offices) 5,958 Fox Valley area (3 offices) 1,898 Madison area (2 offices) 321 ------- Total Wisconsin (27 offices) 15,340 ------- Offices in Michigan: Ann Arbor (home office) 8,761 Macomb/Oakland region (18 offices) 4,954 Northeast region (13 offices) 3,561 Southeast region (14 offices) 3,462 West region (11 offices) 3,339 ------- Total Michigan (57 offices) 24,077 ------- Offices in Ohio (8 offices) 6,089 ------- Total $89,363 ------- ------- In addition to the above-referenced branch offices, TCF owned and leased other facilities with an aggregate net book value of $3.9 million at December 31, 1996. COMPUTER EQUIPMENT TCF maintains depositor and borrower customer files on a batch and/or on-line basis, utilizing an IBM computer system. TCF's general ledger accounting and information reporting systems are generally maintained on the mainframe 27 computer. The net book value of all computer equipment was $17.3 million at December 31, 1996. TCF also leases a variety of data processing equipment at a total annual rental of $1.7 million. ITEM 3. LEGAL PROCEEDINGS From time to time, TCF is a party to legal proceedings arising out of its general lending and operating activities. TCF is and expects to become engaged in a number of foreclosure proceedings and other collection actions as part of its loan collection activities. From time to time, borrowers have also brought actions against TCF, in some cases claiming substantial amounts in damages. TCF is also from time to time involved in litigation relating to its retail banking, consumer credit and mortgage banking operations and related consumer financial services, including class action litigation. 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 FIRREA in 1989, 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. Because TCF Minnesota's suit has been stayed pending final appellate resolution of another case addressing the government's liability for breach of supervisory goodwill contracts (the WINSTAR case, discussed below) 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 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' claim is based on the government's breach of contract in connection with Great Lakes' acquisitions of certain savings institutions prior to the enactment of FIRREA in 1989, which contracts allowed Great Lakes 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' complaint, as the Court has entered a stay of proceedings pending final appellate resolution of the WINSTAR case, discussed below. Great Lakes' 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 U.S. Court of Appeals for the Federal Circuit, which decision had affirmed Court of Federal Claims' liability determinations in three other "supervisory goodwill" cases, consolidated for review under the title WINSTAR CORP. V. UNITED STATES, 64 U.S.L.W. 4739 (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 are now proceeding to trials before the Court of Federal Claims on the issue of damages. One of these trials commenced on February 24, 1997, and the other is currently scheduled to begin on June 2, 1997. In connection with the trials in those cases, the Court of Federal Claims in December of 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. There are a variety of contracts and contract provisions in the TCF Minnesota and Great Lakes transactions. The government has indicated that it will have a number of affirmative defenses in goodwill litigation filed against it. There can be no assurance that the U.S. Supreme Court decision in WINSTAR will mean that a similar result would be obtained in the actions filed by TCF Minnesota and Great Lakes. There can also 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 or, even if a determination favorable to TCF Minnesota or Great Lakes 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' claim. Because of the complexity of the issues involved in both the liability and damages phases of this litigation, and the usual 28 risks associated with litigation, the Company cannot predict the outcome of TCF Minnesota's or Great Lakes' 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 -------- -------- --------- 1996: First Quarter $38 $29 5/8 $.15625 Second Quarter 37 3/4 32 .1875 Third Quarter 38 5/8 31 1/8 .1875 Fourth Quarter 45 3/8 37 1/2 .1875 1995: First Quarter $21 5/8 $18 9/16 $.125 Second Quarter 24 1/16 21 1/4 .15625 Third Quarter 29 7/8 23 1/2 .15625 Fourth Quarter 33 3/8 28 1/2 .15625 As of March 7, 1997, there were approximately 9,000 record holders of TCF's common stock. The Board of Directors of TCF has not adopted a formal dividend policy. The Board of Directors intends to continue its present practice of paying quarterly cash dividends on TCF's common stock as justified by the financial condition of TCF. The declaration and amount of future dividends will depend on circumstances existing at the time, including TCF's earnings, financial condition and capital requirements, the cash available to pay such dividends (derived mainly from dividends and distributions from its direct subsidiaries, including TCF Minnesota and Great Lakes), as well as regulatory and contractual limitations and such other factors as the Board of Directors may deem relevant. OTS regulations limit the amount of dividends TCF Minnesota and Great Lakes may pay on its capital stock. OCC regulations will limit the amount of dividends the TCF Banks pay on their capital stock following the Bank Conversion. Restrictions on the ability of TCF Minnesota and Great Lakes to pay cash dividends or possible diminished earnings of the other direct and indirect subsidiaries of the Holding Company may limit the ability of the Holding Company to pay dividends in the future to holders of its common stock. See "REGULATION - -- Regulatory Capital Requirements," "REGULATION -- Restrictions on Distributions" and Note 14 of Notes to Consolidated Financial Statements on pages 52 and 53 of TCF's 1996 Annual Report, incorporated herein by reference. Federal income tax rules may also limit dividend payments under certain circumstances. See "TAXATION," and Note 14 of Notes to Consolidated Financial Statements on pages 52 and 53 of TCF's 1996 Annual Report, incorporated herein by reference. 29 ITEM 6. SELECTED FINANCIAL DATA The following table summarizes selected consolidated financial data of TCF and its subsidiaries, and should be read in conjunction with the Consolidated Financial Statements and related notes appearing on pages 32 through 65 of TCF's 1996 Annual Report, incorporated herein by reference.
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- -------- OPERATING DATA: (IN THOUSANDS, EXCEPT PER-SHARE DATA) Interest income $582,861 $607,690 $552,482 $558,645 $630,442 Interest expense 242,721 288,492 273,330 297,449 383,170 -------- -------- -------- -------- -------- Net interest income 340,140 319,198 279,152 261,196 247,272 Provision for credit losses 19,820 15,212 10,802 35,118 40,663 -------- -------- -------- -------- -------- Net interest income after provision for credit losses 320,320 303,986 268,350 226,078 206,609 Gain on sale of loans 5,443 - - - - Gain (loss) on sale of mortgage- backed securities and investments - (21,037) - - 832 Gain (loss) on sale of securities available for sale 85 (190) 981 10,182 6,395 Gain on sale of loan servicing - 1,535 2,353 137 - Gain on sale of branches 2,747 1,103 - - 5,199 Other non-interest income 149,522 131,365 121,885 128,686 113,098 Provision for real estate losses 433 1,804 4,022 10,308 21,881 Amortization of goodwill and other intangibles 3,167 3,163 3,282 2,981 3,854 FDIC special assessment 34,803 - - - - Merger-related expenses - 21,733 - 5,494 - Cancellation cost on early termination of interest-rate exchange contracts - 4,423 - - - Other non-interest expense 302,667 286,210 269,680 254,175 238,504 -------- -------- -------- -------- -------- Income before income tax expense and extraordinary items 137,047 99,429 116,585 92,125 67,894 Income tax expense 51,384 37,778 46,402 36,797 15,906 -------- -------- -------- -------- -------- Income before extraordinary items 85,663 61,651 70,183 55,328 51,988 Extraordinary items, net - (963) - (157) 339 -------- -------- -------- -------- -------- Net income 85,663 60,688 70,183 55,171 52,327 Dividends on preferred stock - 678 2,710 2,769 2,911 -------- -------- -------- -------- -------- Net income available to common shareholders $ 85,663 $ 60,010 $ 67,473 $ 52,402 $ 49,416 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Per common share: Income before extraordinary items $ 2.42 $ 1.71 $ 1.95 $ 1.53 $ 1.51 Extraordinary items - (.03) - - .01 -------- -------- -------- -------- -------- Net income $ 2.42 $ 1.68 $ 1.95 $ 1.53 $ 1.52 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Dividends declared $ .71875 $ .59375 $ .50 $ .34375 $ .2375 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Average common and common equivalent shares outstanding: Primary 35,342 35,686 34,527 34,150 32,571 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Fully diluted 35,773 36,260 35,347 34,795 33,400 -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
30
AT DECEMBER 31, -------------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER-SHARE DATA) FINANCIAL CONDITION DATA: Total assets $7,090,862 $7,239,911 $7,845,588 $7,630,654 $7,774,537 Investments (1) 442,103 64,345 283,104 299,432 356,918 Securities available for sale 999,554 1,201,490 138,430 10,003 399,006 Loans held for sale 203,869 242,413 201,511 444,780 308,651 Mortgage-backed securities held to maturity - - 1,601,200 1,751,916 1,670,164 Loans 4,995,962 5,277,101 5,118,381 4,665,567 4,516,982 Goodwill 9,897 11,503 13,355 14,549 16,446 Deposits 4,977,630 5,191,552 5,399,718 5,695,928 5,683,130 Federal Home Loan Bank advances 1,141,040 893,587 1,354,663 945,492 1,018,725 Other borrowings 352,778 547,857 530,332 467,875 599,900 Stockholders' equity 549,506 527,675 475,469 428,065 375,495 Tangible net worth 539,609 516,172 462,114 413,516 359,049 Book value per common share 15.81 14.82 13.44 12.10 11.03 Tangible book value per common share 15.53 14.50 13.04 11.67 10.51
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------ ------ ------ ------ ------ KEY RATIOS AND OTHER DATA: Net interest margin 5.26% 4.61% 3.96% 3.69% 3.43% Net interest rate spread during the period 4.71 4.16 3.65 3.44 3.25 Return on average assets 1.24 .82 .93 .73 .68 Return on average realized common equity 16.13 12.70 15.94 13.95 15.67 Average total equity to average assets 7.70 6.59 5.95 5.28 4.39 Average interest-earning assets to average interest-bearing liabilities 114.55 110.76 107.85 105.98 103.24 Common dividend payout ratio 29.70% 35.34% 25.64% 22.47% 15.63% Number of full service bank offices 196 185 177 177 156 - ------------------------------------
(1) Includes interest-bearing deposits with banks, federal funds sold, U.S. Government and other marketable securities held to maturity, securities purchased under resale agreements and FHLB stock. For additional information concerning yields earned on interest-earning assets, rates paid on interest-bearing liabilities, and changes in net interest income, see "Financial Review -- Results of Operations - Net Interest Income" on pages 17 through 21 of TCF's 1996 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 17 through 31 of TCF's 1996 Annual Report, presenting management's discussion and analysis of TCF's financial condition and results of operations, is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, Notes to Consolidated Financial Statements, Independent Auditors' Report and Selected Quarterly Financial Data set forth on pages 32 through 67 of TCF's 1996 Annual Report are incorporated herein by reference. See Index to Consolidated Financial Statements on page 36 of this report. 31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors and executive officers of TCF is set forth on pages 4 through 24 of TCF's definitive proxy statement dated March 17, 1997 and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information regarding compensation of directors and executive officers of TCF is set forth on pages 14 through 22 of TCF's definitive proxy statement dated March 17, 1997 and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information regarding ownership of TCF's common stock by TCF's directors, executive officers, and certain other shareholders is set forth on pages 11 through 13 of TCF's definitive proxy statement dated March 17, 1997 and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information regarding certain relationships and transactions between TCF and management is set forth on pages 18 and 24 of TCF's definitive proxy statement dated March 17, 1997 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 36 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 36 of this report. 32 (b) REPORTS ON FORM 8-K A Current Report on Form 8-K, dated October 14, 1996, was filed in connection with the announcement of the impact on TCF of a one-time special assessment from the FDIC to recapitalize the SAIF. A Current Report on Form 8-K, dated January 27, 1997, was filed in connection with TCF's announcement that it has authorized the repurchase of up to 5% of the Company's outstanding shares through open market or privately negotiated transactions. A Current Report on Form 8-K, dated February 19, 1997, was filed in connection with TCF's execution of a letter of intent for the acquisition of Winthrop in a merger transaction structured as a tax-free stock-for-stock exchange. A Current Report on Form 8-K, dated March 5, 1997, was filed in connection with TCF's execution of a definitive agreement relating to its pending acquisition of Winthrop, and the formal rescission of TCF's stock repurchase program in connection with the pending acquisition of Winthrop. A Current Report on Form 8-K, dated March 21, 1997, was filed in connection with TCF's execution of a definitive agreement relating to its pending acquisition of Standard. 33 SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. TCF FINANCIAL CORPORATION Registrant By /s/ WILLIAM A. COOPER ------------------------- William A. Cooper Chairman of the Board and Chief Executive Officer Dated: March 28, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. NAME TITLE DATE /s/ WILLIAM A. COOPER Chairman of the Board, - ------------------------------ Chief Executive March 28, 1997 William A. Cooper Officer and Director /s/ THOMAS A. CUSICK Vice Chairman of the Board, - ------------------------------ Chief Operating March 28, 1997 Thomas A. Cusick Officer and Director /s/ ROBERT E. EVANS Vice Chairman of the - ------------------------------ Board and Director March 28, 1997 Robert E. Evans /s/ LYNN A. NAGORSKE President and Director March 28, 1997 - ------------------------------ Lynn A. Nagorske /s/ ROBERT J. DELONIS Chairman of the Board of Great Lakes - ------------------------------ Bancorp and Director March 28, 1997 Robert J. Delonis /s/ RONALD J. PALMER Executive Vice President, Chief - ------------------------------ Financial Officer and March 28, 1997 Ronald J. Palmer Treasurer (Principal Financial Officer) /s/ MARK R. LUND Senior Vice President, Assistant - ------------------------------ Treasurer and Controller March 28, 1997 Mark R. Lund (Principal Accounting Officer) /s/ BRUCE G. ALLBRIGHT Director March 28, 1997 - ------------------------------ Bruce G. Allbright /s/ RUDY E. BOSCHWITZ Director March 28, 1997 - ------------------------------ Rudy E. Boschwitz /s/ JOHN M. EGGEMEYER, III Director March 28, 1997 - ------------------------------ John M. Eggemeyer, III /s/ LUELLA G. GOLDBERG Director March 28, 1997 - ------------------------------ Luella G. Goldberg /s/ DANIEL F. MAY Director March 26, 1997 - ------------------------------ Daniel F. May /s/ THOMAS J. MCGOUGH Director March 28, 1997 - ------------------------------ Thomas J. McGough /s/ MARK K. ROSENFELD Director March 28, 1997 - ------------------------------ Mark K. Rosenfeld 34 /s/ RALPH STRANGIS Director March 28, 1997 - ------------------------------- Ralph Strangis /s/ RONALD A. WARD Director March 28, 1997 - ------------------------------- Ronald A. Ward /s/ ROY E. WEBER Director March 27, 1997 - ------------------------------- Roy E. Weber 35 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS The following consolidated financial statements of TCF and its subsidiaries, included in TCF's 1996 Annual Report, are incorporated herein by reference in this report: PAGE IN 1996 DESCRIPTION ANNUAL REPORT Independent Auditors' Report 65 Consolidated Statements of Financial Condition at December 31, 1996 and 1995 32 Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 1996 33 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1996 34 Consolidated Statements of Stockholders' Equity for each of the years in the three-year period ended December 31, 1996 36 Notes to Consolidated Financial Statements 38 Selected Quarterly Financial Data (unaudited) 66 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] 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)] 4(b) Indenture dated March 1, 1986 between Great Lakes Federal Savings Association and J. Henry Schroder Bank & Trust Company [incorporated by reference to Exhibit 4.4 to TCF Financial Corporation's Registration Statement on Form S-4, No. 33-56137 (filed December 12, 1994)], as amended by First Supplemental Indenture dated February 8, 1995 [incorporated by reference to Exhibit 4(b) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, No. 0-16431] 36 EXHIBIT PAGE NO. DESCRIPTION NO. 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 [the Plan and First Amendment to the Plan incorporated by reference to Exhibit 10.1 to TCF Financial Corporation's Registration Statement on Form S-4, No. 33-14203 (filed May 12, 1987), Second Amendment, Third Amendment and Fourth Amendment to the Plan incorporated by reference to Exhibit 10(a) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, No. 0- 16431; Fifth Amendment to the Plan incorporated by reference to Exhibit 10(a) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, No. 0-16431; amendment dated January 21, 1991, incorporated by reference to Exhibit 10(a) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431, and as further amended by amendment dated January 28, 1992 and amendment dated March 23, 1992 (effective April 15, 1992), incorporated by reference to Exhibit 10(a) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, No. 0- 16431] 10(b) 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.............................................. 10(c) Amended and Restated TCF Financial Corporation Executive Deferred Compensation Plan [incorporated by reference to Plan filed with registrant's definitive proxy statement dated March 16, 1994, No. 0-16431], as amended July 23, 1996 and October 22, 1996...................................................... 10(d) Trust Agreement for TCF Financial Corporation Executive Deferred Compensation Plan, as amended [the Trust Agreement incorporated by reference to Exhibit 10(c) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, No. 0-16431; amendment effective April 1, 1991, incorporated by reference to Exhibit 10(c) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431, and as further amended by amendment dated March 23, 1992, incorporated by reference to Exhibit 10(c) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, No. 0-16431], as amended July 23, 1996.......................................................... 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.......................................................... 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] 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] 37 EXHIBIT PAGE NO. DESCRIPTION NO. 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(i) Severance Agreement of Robert E. Evans, dated August 23, 1988 [incorporated by reference to Exhibit 19(e) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, No. 0-16431], amendment thereto dated December 4, 1990 [incorporated by reference to Exhibit 10(h) to TCF Financial Corporation's Annual Report on Form 10- K for the fiscal year ended December 31, 1990, No. 0-16431], and amendment thereto dated October 24, 1995 [incorporated by reference to Exhibit 10(h) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 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 James E. Tuite, dated August 23, 1988 [incorporated by reference to Exhibit 19(i) to TCF Financial Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 1988, No. 0-16431], amendment thereto dated December 4, 1990 [incorporated by reference to Exhibit 10(l) to TCF Financial Corporation's Annual Report on Form 10- K for the fiscal year ended December 31, 1990, No. 0-16431], and amendment thereto dated October 24, 1995 [incorporated by reference to Exhibit 10(k) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, No. 0-16431] 10(m) Severance Agreement of Barry N. Winslow, dated December 30, 1988 and amendment thereto dated December 4, 1990 [incorporated by reference to Exhibit 10(n) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431], 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] 38 EXHIBIT PAGE NO. DESCRIPTION NO. 10(n) Supplemental Employee Retirement Plan, as amended [the Plan, as amended by amendment dated September 21, 1989 (effective January 1, 1990) incorporated by reference to Exhibit 10(n) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, No. 0-16431; amendment dated July 31, 1990 (effective August 31, 1990) incorporated by reference to Exhibit 10(o) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431; amendment dated June 26, 1994 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, 1994, No. 0-16431], as amended October 22, 1996.......................................................... 10(o) Trust Agreement for TCF Financial Corporation Supplemental Employee Retirement Plan, dated August 21, 1991 [incorporated by reference to Exhibit 10.16 to TCF Financial Corporation's Registration Statement on Form S-2, filed November 15, 1991, No. 33-43988] 10(p) TCF Financial Corporation Senior Officer Deferred Compensation Plan [the Plan incorporated by reference to Exhibit 10(o) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, No. 0-16431; amendment effective April 1, 1991, incorporated by reference to Exhibit 10(p) to TCF Financial Corporation's Annual Report on Form 10- K for the fiscal year ended December 31, 1990, No. 0-16431; amendments dated June 26, 1994, December 18, 1994 and January 23, 1995 incorporated by reference to Exhibit 10(p) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, No. 0-16431], as amended July 23, 1996 and October 22, 1996............................ 10(q) Trust Agreement for TCF Financial Corporation Senior Officer Deferred Compensation Plan [incorporated by reference to Exhibit 10(p) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, No. 0- 16431; amendment effective April 1, 1991, incorporated by reference to Exhibit 10(q) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 0-16431; amendment dated December 18, 1994 incorporated by reference to Exhibit 10(q) to TCF Financial Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, No. 0-16431], as amended July 23, 1996.......................................................... 10(r) Directors Stock Program [incorporated by reference to Program filed with registrant's definitive proxy statement dated March 22, 1996, No. 0-16431] 10(s) Management Incentive Plan-Executive [incorporated by reference to Plan filed with registrant's definitive proxy statement dated March 16, 1994, No. 0-16431] 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] 10(t) 1996 Performance-Based Incentive Policy [incorporated by reference to Policy filed with registrant's definitive proxy statement dated March 22, 1996, 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] Incentive Compensation 1997 Plan [incorporated by reference to Plan filed with registrant's definitive proxy statement dated March 17, 1997, No. 0-16431] and 1997 Management Incentive Plan-Executive.......... 10(u) Supplemental Pension Agreement with James E. Tuite, dated June 27, 1991 [incorporated by reference to Exhibit 10.21 to TCF Financial Corporation's Registration Statement on Form S-4, No. 33-57290 (filed January 22, 1993)] 39 EXHIBIT PAGE NO. DESCRIPTION NO. 10(v) 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(w) 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, No. 0- 16431 (filed March 30, 1995)], 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] 10(x) 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.............................................. 10(y) 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] 11 Statement regarding computation of earnings per common share.. 12 TCF Financial Corporation 1996 Annual Report.................. 21 Subsidiaries of TCF Financial Corporation (as of March 14, 1997)......................................................... 24 Consent of KPMG Peat Marwick LLP dated March 28, 1997......... 40 EX-10.B 2 EXHIBIT 10(B) EXHIBIT10(b) SECRETARIAL CERTIFICATION PERSONNEL/AFFIRMATIVE ACTION COMMITTEE TCF FINANCIAL CORPORATION OCTOBER 22, 1996 16b-3 CHANGES TO PLANS - -------------------------------------------------------------------------------- Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, the Board has authority to amend the TCF Financial Executive Deferred Plan (under Section 12 thereof), the Senior Officer Deferred Plan (under section 11 thereof) and the TCF Directors Deferred Compensation Plan (under Section 13 thereof) and a sub-committee consisting of the non-employee members (as defined under Rule 16b-3 of the Securities and Exchange Commission (the "SEC")) of the Personnel/Affirmative Action Committee has the authority to amend the TCF Financial 1995 Incentive Stock Program and the Supplemental Employee Retirement Plan (the "SERP"); and WHEREAS, the SEC has adopted revised rules under Section 16b-3 of the Securities Exchange Act of 1934 relating to the requirements which benefits plans must satisfy in order for transactions in company stock occurring in connection with such plans to be exempt from "short swing profits" liability under Section 16 of that Act; and WHEREAS, legal counsel has proposed amendments to various employee plans of this corporation in order to comply with the new Rule 16b-3 and the sub-committee has recommended and approved such amendments to be in the best interests of the corporation and this Board wishes to approve the amendments to the Executive Deferred and Director Plans effective as of November 1, 1996; NOW, THEREFORE, IT IS HEREBY RESOLVED, that the TCF Financial 1995 Incentive Stock Program is hereby amended effective as of November 1, 1996, by the sub-committee of this Committee consisting of those members of the Committee which are non-employee directors as defined under Rule 16b-3, to add the following at the end of Section 11 (Nontransferability): Notwithstanding the foregoing, effective on and after November 1, 1996 the Committee may in its discretion award Non-qualified Stock Options and Restricted Stock Awards which are transferable at the discretion of the participant to whom they are awarded. FURTHER RESOLVED, that all stock and option awards made under the TCF Financial 1995 Incentive Stock Program and its predecessor plan, the Stock Option and Incentive Plan of TCF Financial Corporation, are hereby ratified and confirmed for purposes of Rule 16b-3 by such sub-committee; I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Personnel \Affirmative Action Committee of TCF Financial Corporation held on October 22, 1996, and that the minutes have not been modified or rescinded as of the date hereof. (Corporate Seal) Dated: March 21, 1997 /s/ Gregory J. Pulles -------------------------------- Gregory J. Pulles EX-10.C1 3 EXHIBIT 10(C)-1 EXHIBIT 10 (c) - #1 SECRETARIAL CERTIFICATION BOARD OF DIRECTORS MEETING TCF FINANCIAL CORPORATION JULY 23, 1996 RATIFICATION OF NEW TRUSTEE FOR TCF FINANCIAL EXECUTIVE DEFERRED, SENIOR OFFICER AND DIRECTORS DEFERRED COMPENSATION PLANS; REMOVE 30% SALARY DEFERRAL LIMIT - -------------------------------------------------------------------------------- Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, this Board has authority under the Trust Agreement for the TCF Financial Executive Deferred Compensation Plan, the Trust Agreement for the TCF Financial Senior Officer Deferred Compensation Plan and the TCF Directors Deferred Compensation Trust to remove trustees and approve new trustees thereunder, subject to written consent of the participants in the Plan with respect to their own accounts, and WHEREAS, First Trust National Association has been recommended as a new trustee and has accepted its appointment as such and whereas the consent of the plan participants has been obtained for this change; WHEREAS, Section 4.2 of the Trust Agreement and Section 4.a. of the Executive Deferred and Senior Officer Deferred Compensation Plans provide that the trust will be invested in such assets as shall be permitted by the Personnel Committee of this Board and directed by an employee for his or her account and the Personnel Committee has determined that the trust should permit investments in any publicly traded stock, bond or mutual fund, as directed by the Employee; and WHEREAS, the Executive Deferred and Senior Officer Plans currently allow deferral of 100% of incentive compensation (including bonuses, stock grants and other incentives) but limit deferrals of salary to a maximum of 30% and it is proposed to remove the maximum deferral limit with respect to salary; NOW, THEREFORE, IT IS HEREBY RESOLVED, that the appointment of First Trust National Association as trustee of the Trust for the TCF Financial Executive Deferred Compensation Plan, the Trust for the Senior Officer Deferred Compensation Plan and of the TCF Directors Deferred Compensation Trust is hereby ratified and approved effective as of July 1, 1996 and that the removal of the prior trustee, Piper Trust Company, is also ratified and approved as of the same date; FURTHER RESOLVED, that the actions of the officers and employees of this corporation in transferring the assets of the trusts to the new trustee, effective as of July 1, 1996, are hereby ratified and approved; FURTHER RESOLVED, that Section 4.1 of the Trust Agreement for the TCF Financial Executive Deferred Compensation Plan and of the Trust Agreement for the TCF Financial Senior Officer Deferred Compensation Plan is hereby amended to substitute the following for the fourth sentence thereof: In addition, the Trustee may, for reasonable periods of time, hold any part or all of the Trust Fund uninvested or in cash without liability for interest thereon, pending the investment of such funds or the payment of costs, expenses, or benefits payable under the Plan in the banking department of any corporate Trustee serving hereunder or of any other bank, trust company or other financial institution including those affiliated in ownership with the Trustee; and FURTHER RESOLVED, that Section 1.a. of the TCF Financial Executive Deferred Compensation Plan and of the TCF Financial Senior Officer Deferred Compensation Plan are hereby amended to DELETE the following phrase where it appears in the last sentence thereof: "no deferral of salary may exceed 30% of the Employee's salary". I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Board of Directors meeting of TCF Financial Corporation held on July 23, 1996, and that the minutes have not been modified or rescinded as of the date hereof. (Corporate Seal) Dated: March 21, 1997 /s/ Gregory J. Pulles ----------------------------------- Gregory J. Pulles EX-10.C2 4 EXHIBIT 10(C)-2 EXHIBIT 10 (c) - #2 SECRETARIAL CERTIFICATION BOARD OF DIRECTORS MEETING TCF FINANCIAL CORPORATION OCTOBER 22, 1996 16b-3 CHANGES TO PLANS - -------------------------------------------------------------------------------- Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, the Board has authority to amend the TCF Financial Executive Deferred Plan (under Section 12 thereof), the Senior Officer Deferred Plan (under section 11 thereof) and the TCF Directors Deferred Compensation Plan (under Section 13 thereof) and a sub-committee consisting of the non-employee members (as defined under Rule 16b-3 of the Securities and Exchange Commission (the "SEC")) of the Personnel/Affirmative Action Committee has the authority to amend the TCF Financial 1995 Incentive Stock Program and the Supplemental Employee Retirement Plan (the "SERP"); and WHEREAS, the SEC has adopted revised rules under Section 16b-3 of the Securities Exchange Act of 1934 relating to the requirements which benefits plans must satisfy in order for transactions in company stock occurring in connection with such plans to be exempt from "short swing profits" liability under Section 16 of that Act; and WHEREAS, legal counsel has proposed amendments to various employee plans of this corporation in order to comply with the new Rule 16b-3 and the sub-committee has recommended and approved such amendments to be in the best interests of the corporation and this Board wishes to approve the amendments to the Executive Deferred and Director Plans effective as of November 1, 1996; NOW, THEREFORE, IT IS HEREBY RESOLVED, that the TCF Financial Executive Deferred Compensation Plan be and hereby is amended effective on and after November 1, 1996 to restate Section 10 thereof to read as follows in full: 2. PERSONNEL COMMITTEE. The Committee shall consist of such members of the Personnel Committee of the Board of Directors of TCF Financial Corporation who qualify as non-employee directors from time to time under Rule 16b-3 of the Securities and Exchange Commission. 10. SPECIAL PROVISIONS FOR EMPLOYEES SUBJECT TO SECTION 16 OF THE SECURITIES AND EXCHANGE ACT OF 1934. Notwithstanding anything in this Plan to the contrary, for an Employee who is subject to liability under Section 16 of the Securities and Exchange Act of 1934, the following special provisions apply: a. Any election of Deferred Amounts of salary or incentive compensation under paragraph l.b. shall be exercised in writing by the Employee and filed with the Committee no later than the date prior to the date the first salary or incentive compensation, part or all of which is to become a Deferred Amount, is earned. b. Any investment election under paragraph 3 or 4 relating to initial or periodic investment of Deferred Amounts in stock of TCF Financial, whether as a result of an initial or yearly election to participate in the Plan or a change in the level of participation in the Plan, shall be exercised in writing by the Employee and filed with the Committee no later than the date prior to the date the first salary or incentive compensation, part or all of which is to become a Deferred Amount, is earned. Deferred Amounts of salary or incentive compensation, to the extent they are forwarded to the trustee, shall be so forwarded on or immediately after the payroll date of the salary or incentive compensation which is being deferred and shall be deemed to be invested on the same date on which the Trustee purchases the designated investments. The Trustee shall purchase such investments as soon as practicable after the payroll date for which the Deferred Amount is received, and in the case of investments consisting of equity securities of TCF Financial, no later than two weeks after such payroll date with the exact date and purchase terms to be determined by a stock broker or other investment professional on the basis of such person's judgment as to the best available purchase price for the Plan and Trust. If Deferred Amounts are not forwarded to the Trustee, investments in equity securities of TCF Financial shall be deemed to occur at average of the high and low trading price for such securities on the payroll date. c. Any investment election under paragraph 3 or 4 relating to liquidation of existing investments and reinvestment or reapplication of proceeds within the Plan or Trust shall be exercised in writing and filed with the Committee by the Employee on any date, provided that any such election relating to equity securities of TCF Financial is at least six months after the date of the Employee's last such discretionary election of an opposite type (buy-sell or sell-buy) relating to equity securities of TCF Financial under this or any other benefit plan of the Company. Liquidation and/or reinvestment of funds within the Plan or Trust under Section 3 or 4 shall occur as soon as practicable after the Employee's election is filed with the Committee, provided that the Committee determines it is a valid election and in the case of liquidation or reinvestment in equity securities of TCF Financial such election is implemented by the Trustee no later than two weeks after the date such election is filed with the Committee and determined to be valid, with the exact date(s) and terms of any such transaction involving equity securities of TCF Financial to be determined by a stock broker or other investment professional on the basis of such person's judgment as to the then best available purchase or sale price for the Plan and Trust. If Deferred Amounts have not been forwarded to the Trustee, to the extent there are no actual funds to implement the Employee's election such election shall be deemed to be implemented at the average of the high and low sales prices for the equity securities of TCF Financial on the date the election was filed with the Committee and determined to be valid and for other investments on such basis as the Trustee reasonably determines. d. In the event of one or more distributions to an Employee subject to this Section under Section 5 of this Plan, the Committee shall specify whether such distributions will be in cash or in kind and, to the extent the account to be liquidated is invested in equity securities of TCF Financial, the value of such securities shall be equal to their value on or about the third business day prior to the date of distribution. e. In the case of an Employee subject to this Section, an election under Section 6 for an emergency payout resulting in liquidation of equity securities of TCF Financial shall be exercised by such Employee no sooner than six months after any election by such Employee to purchase equity securities of TCF Financial under this plan or any other plan of the Company. The value of equity securities of TCF Financial for purposes of such distribution shall be their value on or about the third business day prior to the date of the distribution. I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Board of Directors meeting of TCF Financial Corporation held on October 22, 1996, and that the minutes have not been modified or rescinded as of the date hereof. (Corporate Seal) Dated: March 21, 1997 /s/ Gregory J. Pulles -------------------------------- Gregory J. Pulles EX-10.D 5 EXHIBIT 10(D) EXHIBIT 10 (d) SECRETARIAL CERTIFICATION BOARD OF DIRECTORS MEETING TCF FINANCIAL CORPORATION JULY 23, 1996 RATIFICATION OF NEW TRUSTEE FOR TCF FINANCIAL EXECUTIVE DEFERRED, SENIOR OFFICER AND DIRECTORS DEFERRED COMPENSATION PLANS; REMOVE 30% SALARY DEFERRAL LIMIT - -------------------------------------------------------------------------------- Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, this Board has authority under the Trust Agreement for the TCF Financial Executive Deferred Compensation Plan, the Trust Agreement for the TCF Financial Senior Officer Deferred Compensation Plan and the TCF Directors Deferred Compensation Trust to remove trustees and approve new trustees thereunder, subject to written consent of the participants in the Plan with respect to their own accounts, and WHEREAS, First Trust National Association has been recommended as a new trustee and has accepted its appointment as such and whereas the consent of the plan participants has been obtained for this change; WHEREAS, Section 4.2 of the Trust Agreement and Section 4.a. of the Executive Deferred and Senior Officer Deferred Compensation Plans provide that the trust will be invested in such assets as shall be permitted by the Personnel Committee of this Board and directed by an employee for his or her account and the Personnel Committee has determined that the trust should permit investments in any publicly traded stock, bond or mutual fund, as directed by the Employee; and WHEREAS, the Executive Deferred and Senior Officer Plans currently allow deferral of 100% of incentive compensation (including bonuses, stock grants and other incentives) but limit deferrals of salary to a maximum of 30% and it is proposed to remove the maximum deferral limit with respect to salary; NOW, THEREFORE, IT IS HEREBY RESOLVED, that the appointment of First Trust National Association as trustee of the Trust for the TCF Financial Executive Deferred Compensation Plan, the Trust for the Senior Officer Deferred Compensation Plan and of the TCF Directors Deferred Compensation Trust is hereby ratified and approved effective as of July 1, 1996 and that the removal of the prior trustee, Piper Trust Company, is also ratified and approved as of the same date; FURTHER RESOLVED, that the actions of the officers and employees of this corporation in transferring the assets of the trusts to the new trustee, effective as of July 1, 1996, are hereby ratified and approved; FURTHER RESOLVED, that Section 4.1 of the Trust Agreement for the TCF Financial Executive Deferred Compensation Plan and of the Trust Agreement for the TCF Financial Senior Officer Deferred Compensation Plan is hereby amended to substitute the following for the fourth sentence thereof: In addition, the Trustee may, for reasonable periods of time, hold any part or all of the Trust Fund uninvested or in cash without liability for interest thereon, pending the investment of such funds or the payment of costs, expenses, or benefits payable under the Plan in the banking department of any corporate Trustee serving hereunder or of any other bank, trust company or other financial institution including those affiliated in ownership with the Trustee; and FURTHER RESOLVED, that Section 1.a. of the TCF Financial Executive Deferred Compensation Plan and of the TCF Financial Senior Officer Deferred Compensation Plan are hereby amended to DELETE the following phrase where it appears in the last sentence thereof: "no deferral of salary may exceed 30% of the Employee's salary". I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Board of Directors meeting of TCF Financial Corporation held on July 23, 1996, and that the minutes have not been modified or rescinded as of the date hereof. (Corporate Seal) Dated: March 21, 1997 /s/ Gregory J. Pulles ------------------------------- Gregory J. Pulles EX-10.E 6 EXHIBIT 10(E) EXHIBIT 10 (e) AMENDMENT TO EMPLOYMENT AGREEMENT THIS AMENDMENT, modifies that certain Employment Agreement (the "Agreement") made and entered into as of July 1, 1996, between TCF FINANCIAL CORPORATION, a Delaware corporation (the "Company"), and WILLIAM A COOPER (the "Executive") and shall become effective as of the date the Company becomes a bank holding company. WHEREAS, the Company and the Executive have entered into the aforementioned Agreement; and WHEREAS, the Company desires to gain approval from the Federal Reserve Board to become a bank holding company; and WHEREAS, the Federal Reserve Board has requested that the Agreement be revised as follows: 1. To limit the scope and prohibitions against the Executive engaging, on behalf of a competing entity, in the types of business conducted by a commercial bank, thrift institution, or consumer finance company in which the Company or the TCF Subsidiaries are currently engaged; and 2. To limit the geographic scope of the Agreement to an area within a 50-mile radius of the offices of the Company or any TCF subsidiary. NOW, THEREFORE, in consideration of the mutual premises and agreements set forth herein, the parties hereby agree that Paragraph 5(a) of the Agreement is amended to provide as follows: COVENANT NOT TO COMPETE. While Executive is actively employed by the Company and, in the event of a termination of employment other than (i) a termination by the Company without Cause, (ii) a termination by the Executive for Good Reason or (iii) a termination for any reason after a Change in Control, for a period of one year after such termination of the Executive's employment, the Executive agrees that he will not directly or indirectly substantially compete with the Company or the TCF Subsidiaries. The Executive shall be deemed to be substantially competing with the Company and the TCF Subsidiaries if, without the prior written approval of the Board of Directors of the Company, he becomes an officer, employee, agent, partner or director of any bank, savings institution or consumer finance company which engages in the types of business in which the Company or the TCF Subsidiaries are currently engaged and such competing entity operates within a 50 mile radius of any bank, savings institution or finance company office operated by the Company or any TCF Subsidiary. IN WITNESS WHEREOF, the parties have duly executed this Amendment as of this first day of March, 1997. ATTEST: TCF FINANCIAL CORPORATION By - ---------------------------------- --------------------------------- Vice Chairman, General Counsel Its and Secretary -------------------------------- WITNESS: /s/ William A. Cooper - ---------------------------------- ------------------------------------ William A. Cooper EX-10.N 7 EXHIBIT 10(N) EXHIBIT 10 (n) SECRETARIAL CERTIFICATION PERSONNEL/AFFIRMATIVE ACTION COMMITTEE TCF FINANCIAL CORPORATION OCTOBER 22, 1996 16b-3 CHANGES TO PLANS - -------------------------------------------------------------------------------- Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, the Board has authority to amend the TCF Financial Executive Deferred Plan (under Section 12 thereof), the Senior Officer Deferred Plan (under section 11 thereof) and the TCF Directors Deferred Compensation Plan (under Section 13 thereof) and a sub-committee consisting of the non-employee members (as defined under Rule 16b-3 of the Securities and Exchange Commission (the "SEC")) of the Personnel/Affirmative Action Committee has the authority to amend the TCF Financial 1995 Incentive Stock Program and the Supplemental Employee Retirement Plan (the "SERP"); and WHEREAS, the SEC has adopted revised rules under Section 16b-3 of the Securities Exchange Act of 1934 relating to the requirements which benefits plans must satisfy in order for transactions in company stock occurring in connection with such plans to be exempt from "short swing profits" liability under Section 16 of that Act; and WHEREAS, legal counsel has proposed amendments to various employee plans of this corporation in order to comply with the new Rule 16b-3 and the sub-committee has recommended and approved such amendments to be in the best interests of the corporation and this Board wishes to approve the amendments to the Executive Deferred and Director Plans effective as of November 1, 1996; NOW, THEREFORE, IT IS HEREBY RESOLVED, that the TCF Financial Supplemental Employee Retirement Plan ("SERP") is hereby amended effective on and after November 1, 1996 to add the following at the end of Article III: II (a) COMMITTEE. Such members of the Personnel Committee of the Board of Directors of TCF Financial Corporation who qualify from time to time as non-employee directors under Rule 16b-3 of the Securities and Exchange Commission. In the event of one or more distributions to an Eligible Employee under this Article III, the Committee shall specify whether such distributions will be in cash or in TCF Stock and for purposes of the distribution the value of such Stock shall be equal to its value on or about the first day of the calendar month in which a distribution occurs. I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Personnel \Affirmative Action Committee of TCF Financial Corporation held on October 22, 1996, and that the minutes have not been modified or rescinded as of the date hereof. (Corporate Seal) Dated: March 21, 1997 /s/ Gregory J. Pulles ------------------------------- Gregory J. Pulles EX-10.P1 8 EXHIBIT 10(P)-1 EXHIBIT 10 (p) #1 SECRETARIAL CERTIFICATION BOARD OF DIRECTORS MEETING TCF FINANCIAL CORPORATION JULY 23, 1996 RATIFICATION OF NEW TRUSTEE FOR TCF FINANCIAL EXECUTIVE DEFERRED, SENIOR OFFICER AND DIRECTORS DEFERRED COMPENSATION PLANS; REMOVE 30% SALARY DEFERRAL LIMIT ************************************************************************* Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, this Board has authority under the Trust Agreement for the TCF Financial Executive Deferred Compensation Plan, the Trust Agreement for the TCF Financial Senior Officer Deferred Compensation Plan and the TCF Directors Deferred Compensation Trust to remove trustees and approve new trustees thereunder, subject to written consent of the participants in the Plan with respect to their own accounts, and WHEREAS, First Trust National Association has been recommended as a new trustee and has accepted its appointment as such and whereas the consent of the plan participants has been obtained for this change; WHEREAS, Section 4.2 of the Trust Agreement and Section 4.a. of the Executive Deferred and Senior Officer Deferred Compensation Plans provide that the trust will be invested in such assets as shall be permitted by the Personnel Committee of this Board and directed by an employee for his or her account and the Personnel Committee has determined that the trust should permit investments in any publicly traded stock, bond or mutual fund, as directed by the Employee; and WHEREAS, the Executive Deferred and Senior Officer Plans currently allow deferral of 100% of incentive compensation (including bonuses, stock grants and other incentives) but limit deferrals of salary to a maximum of 30% and it is proposed to remove the maximum deferral limit with respect to salary; NOW, THEREFORE, IT IS HEREBY RESOLVED, that the appointment of First Trust National Association as trustee of the Trust for the TCF Financial Executive Deferred Compensation Plan, the Trust for the Senior Officer Deferred Compensation Plan and of the TCF Directors Deferred Compensation Trust is hereby ratified and approved effective as of July 1, 1996 and that the removal of the prior trustee, Piper Trust Company, is also ratified and approved as of the same date; FURTHER RESOLVED, that the actions of the officers and employees of this corporation in transferring the assets of the trusts to the new trustee, effective as of July 1, 1996, are hereby ratified and approved; FURTHER RESOLVED, that Section 4.1 of the Trust Agreement for the TCF Financial Executive Deferred Compensation Plan and of the Trust Agreement for the TCF Financial Senior Officer Deferred Compensation Plan is hereby amended to substitute the following for the fourth sentence thereof: In addition, the Trustee may, for reasonable periods of time, hold any part or all of the Trust Fund uninvested or in cash without liability for interest thereon, pending the investment of such funds or the payment of costs, expenses, or benefits payable under the Plan in the banking department of any corporate Trustee serving hereunder or of any other bank, trust company or other financial institution including those affiliated in ownership with the Trustee; and FURTHER RESOLVED, that Section 1.a. of the TCF Financial Executive Deferred Compensation Plan and of the TCF Financial Senior Officer Deferred Compensation Plan are hereby amended to DELETE the following phrase where it appears in the last sentence thereof: "no deferral of salary may exceed 30% of the Employee's salary". I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Board of Directors meeting of TCF Financial Corporation held on July 23, 1996, and that the minutes have not been modified or rescinded as of the date hereof. (Corporate Seal) Dated: March 21, 1997 /s/ Gregory J. Pulles -------------------------------- Gregory J. Pulles EX-10.P2 9 EXHIBIT 10(P)2 EXHIBIT 10 (p) #2 SECRETARIAL CERTIFICATION BOARD OF DIRECTORS MEETING TCF FINANCIAL CORPORATION OCTOBER 22, 1996 16b-3 CHANGES TO PLANS - -------------------------------------------------------------------------------- Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, the Board has authority to amend the TCF Financial Executive Deferred Plan (under Section 12 thereof), the Senior Officer Deferred Plan (under section 11 thereof) and the TCF Directors Deferred Compensation Plan (under Section 13 thereof) and a sub-committee consisting of the non-employee members (as defined under Rule 16b-3 of the Securities and Exchange Commission (the "SEC")) of the Personnel/Affirmative Action Committee has the authority to amend the TCF Financial 1995 Incentive Stock Program and the Supplemental Employee Retirement Plan (the "SERP"); and WHEREAS, the SEC has adopted revised rules under Section 16b-3 of the Securities Exchange Act of 1934 relating to the requirements which benefits plans must satisfy in order for transactions in company stock occurring in connection with such plans to be exempt from "short swing profits" liability under Section 16 of that Act; and WHEREAS, legal counsel has proposed amendments to various employee plans of this corporation in order to comply with the new Rule 16b-3 and the sub-committee has recommended and approved such amendments to be in the best interests of the corporation and this Board wishes to approve the amendments to the Executive Deferred and Director Plans effective as of November 1, 1996; NOW, THEREFORE, IT IS HEREBY RESOLVED, that the Senior Officers' Deferred Plan be amended as follows: 2. PERSONNEL COMMITTEE. The Committee shall consist of such members of the Personnel Committee of the Board of Directors of TCF Financial Corporation who qualify as non-employee directors from time to time under Rule 16b-3 of the Securities and Exchange Commission. 10. ELECTIONS BY EMPLOYEES TO TRANSFER BETWEEN FUNDS restated to read as follows: Employees may elect to liquidate funds in their Deferred Compensation Accounts under Paragraph 3 and reinvest them as directed provided that any investment election shall be exercised in writing by the Employee and approved by the Committee or its approved representative under such terms and conditions as the Committee deems appropriate. I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Board of Directors of TCF Financial Corporation held on October 22, 1996, and that the minutes have not been modified or rescinded as of the date hereof. (Corporate Seal) Dated: March 21, 1997 /s/ Gregory J. Pulles ---------------------------------- Gregory J. Pulles EX-10.Q 10 EXHIBIT 10(Q) EXHIBIT 10 (q) SECRETARIAL CERTIFICATION BOARD OF DIRECTORS MEETING TCF FINANCIAL CORPORATION JULY 23, 1996 RATIFICATION OF NEW TRUSTEE FOR TCF FINANCIAL EXECUTIVE DEFERRED, SENIOR OFFICER AND DIRECTORS DEFERRED COMPENSATION PLANS; REMOVE 30% SALARY DEFERRAL LIMIT - -------------------------------------------------------------------------------- Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, this Board has authority under the Trust Agreement for the TCF Financial Executive Deferred Compensation Plan, the Trust Agreement for the TCF Financial Senior Officer Deferred Compensation Plan and the TCF Directors Deferred Compensation Trust to remove trustees and approve new trustees thereunder, subject to written consent of the participants in the Plan with respect to their own accounts, and WHEREAS, First Trust National Association has been recommended as a new trustee and has accepted its appointment as such and whereas the consent of the plan participants has been obtained for this change; WHEREAS, Section 4.2 of the Trust Agreement and Section 4.a. of the Executive Deferred and Senior Officer Deferred Compensation Plans provide that the trust will be invested in such assets as shall be permitted by the Personnel Committee of this Board and directed by an employee for his or her account and the Personnel Committee has determined that the trust should permit investments in any publicly traded stock, bond or mutual fund, as directed by the Employee; and WHEREAS, the Executive Deferred and Senior Officer Plans currently allow deferral of 100% of incentive compensation (including bonuses, stock grants and other incentives) but limit deferrals of salary to a maximum of 30% and it is proposed to remove the maximum deferral limit with respect to salary; NOW, THEREFORE, IT IS HEREBY RESOLVED, that the appointment of First Trust National Association as trustee of the Trust for the TCF Financial Executive Deferred Compensation Plan, the Trust for the Senior Officer Deferred Compensation Plan and of the TCF Directors Deferred Compensation Trust is hereby ratified and approved effective as of July 1, 1996 and that the removal of the prior trustee, Piper Trust Company, is also ratified and approved as of the same date; FURTHER RESOLVED, that the actions of the officers and employees of this corporation in transferring the assets of the trusts to the new trustee, effective as of July 1, 1996, are hereby ratified and approved; FURTHER RESOLVED, that Section 4.1 of the Trust Agreement for the TCF Financial Executive Deferred Compensation Plan and of the Trust Agreement for the TCF Financial Senior Officer Deferred Compensation Plan is hereby amended to substitute the following for the fourth sentence thereof: In addition, the Trustee may, for reasonable periods of time, hold any part or all of the Trust Fund uninvested or in cash without liability for interest thereon, pending the investment of such funds or the payment of costs, expenses, or benefits payable under the Plan in the banking department of any corporate Trustee serving hereunder or of any other bank, trust company or other financial institution including those affiliated in ownership with the Trustee; and FURTHER RESOLVED, that Section 1.a. of the TCF Financial Executive Deferred Compensation Plan and of the TCF Financial Senior Officer Deferred Compensation Plan are hereby amended to DELETE the following phrase where it appears in the last sentence thereof: "no deferral of salary may exceed 30% of the Employee's salary". I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Board of Directors meeting of TCF Financial Corporation held on July 23, 1996, and that the minutes have not been modified or rescinded as of the date hereof. (Corporate Seal) Dated: March 21, 1997 /s/ Gregory J. Pulles ---------------------------------- Gregory J. Pulles EX-10.T 11 EXHIBIT 10(T) EXHIBIT 10(t) TCF FINANCIAL CORPORATION 1997 MANAGEMENT INCENTIVE PLAN - EXECUTIVE 1. ELIGIBILITY - Each Participant shall be given a copy of this 1997 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"): the Chairman, Vice Chairs, President and Executive Vice Presidents of TCF Financial, and the CEO of each subsidiary bank. 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 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 Officer (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 ROA financial goals on Exhibit A attached. ROA will be calculated as provided in the Performance-Based Plan rounded to the nearest one-hundredth. The bonus percentage shall be calculated, in the case of ROA achievement which falls between goals, by interpolation as follows: The amount by which the ROA achievement exceeds the goal shall be divided by the amount between the ROA goal exceeded and the next ROA goal. The result shall be stated in the form of a percentage which shall be multiplied by the total percentage points between ROA goals. The result shall be added to the bonus percentage corresponding to the ROA goal that was exceeded. 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 calculation 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 Acknowledgement) 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, 1997 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, the employer (if other than TCF Financial) and the executive. ACKNOWLEDGEMENT I have received, read, and acknowledge the terms of the foregoing plan. - ----------------- ------------------------ Date Signature EX-10.X 12 EXHIBIT 10(X) EXHIBIT 10 (x) SECRETARIAL CERTIFICATION BOARD OF DIRECTORS MEETING TCF FINANCIAL CORPORATION OCTOBER 22, 1996 16b-3 CHANGES TO PLANS - -------------------------------------------------------------------------------- Following discussion, and upon motion duly made, seconded and carried, the following resolutions were adopted: WHEREAS, the Board has authority to amend the TCF Financial Executive Deferred Plan (under Section 12 thereof), the Senior Officer Deferred Plan (under section 11 thereof) and the TCF Directors Deferred Compensation Plan (under Section 13 thereof) and a sub-committee consisting of the non-employee members (as defined under Rule 16b-3 of the Securities and Exchange Commission (the "SEC")) of the Personnel/Affirmative Action Committee has the authority to amend the TCF Financial 1995 Incentive Stock Program and the Supplemental Employee Retirement Plan (the "SERP"); and WHEREAS, the SEC has adopted revised rules under Section 16b-3 of the Securities Exchange Act of 1934 relating to the requirements which benefits plans must satisfy in order for transactions in company stock occurring in connection with such plans to be exempt from "short swing profits" liability under Section 16 of that Act; and WHEREAS, legal counsel has proposed amendments to various employee plans of this corporation in order to comply with the new Rule 16b-3 and the sub-committee has recommended and approved such amendments to be in the best interests of the corporation and this Board wishes to approve the amendments to the Executive Deferred and Director Plans effective as of November 1, 1996; NOW, THEREFORE, IT IS HEREBY FURTHER RESOLVED, that the TCF Directors Deferred Compensation Plan be amended effective on and after November 1, 1996 to restate Section 10 thereof to read as follows in full: 2. ADMINISTRATIVE COMMITTEE. The Committee shall consist of such members of the Personnel Committee of the Board of Directors of TCF Financial Corporation who qualify as non-employee directors from time to time under Rule 16b-3 of the Securities and Exchange Commission. 10. RULE 16b-3.. This Plan is intended to qualify for the exemption from short swing profits liability under Section 16(b) of the Securities Exchange Act of 1934 provided by Rule 16b-3 of the Securities and Exchange Commission. Notwithstanding anything in this Plan to the contrary, for a director who is subject to liability under Section 16 of the Securities and Exchange Act of 1934, the following special provisions apply: a. Any election of Deferred Amounts of stock or fees under paragraph l.b. shall be exercised in writing by the Director and filed with the Committee no later than the date prior to the date the stock grant is awarded or the first date on which fees, part or all of which is to become a Deferred Amount, begin to be earned. Deferred Amounts of fees, to the extent they are forwarded to the trustee, shall be so forwarded on or immediately after the date on which the fees would otherwise be paid and shall be deemed to be invested in TCF Stock on the same date and for the same purchase price as the Trustee actually purchases such Stock. The Trustee shall purchase such the Stock as soon as practicable after the fees payment date for which the Deferred Amount is received, and in any event no later than two weeks after such date, with the exact date and purchase terms to be determined by a stock broker or other investment professional on the basis of such person's judgment as to the best available purchase price for the Plan and Trust. If Deferred Amounts are not forwarded to the Trustee, the deferred fees shall be deemed to be invested in TCF Stock at the average of the high and low sales prices for such Stock on the date the fees would otherwise be paid. b. In the event of one or more distributions to a Director subject to this Section under Section 5 of this Plan, the Committee shall specify whether such distributions will be in cash or in TCF Stock and for purposes of the distribution the value of such Stock shall be equal to its value on or about the third business day prior to the date of distribution. c. In the case of a Director subject to this Section, for purposes of an emergency payout resulting in liquidation of TCF Stock the value of TCF Stock shall be equal to its value on or about the third business day prior to the distribution. I, Gregory J. Pulles, Secretary of TCF Financial Corporation do hereby certify that the foregoing is a true and correct copy of excerpt of minutes of the Board of Directors of TCF Financial Corporation held on October 22, 1996, and that the minutes have not been modified or rescinded as of the date hereof. (Corporate Seal) Dated: March 21, 1997 /s/ Gregory J. Pulles ------------------------------ Gregory J. Pulles EX-11 13 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)
Computation of Earnings Per Common Share for Statements of Operations: YEAR ENDED DECEMBER 31, - ------------------------------------ ----------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Income before extraordinary item $ 85,663 $ 61,651 $ 70,183 Less: Dividends on preferred stock - 678 2,710 ----------- ----------- ----------- Income applicable to common stock before extraordinary item 85,663 60,973 67,473 Extraordinary item - (963) - ----------- ----------- ----------- Income applicable to common stock $ 85,663 $ 60,010 $ 67,473 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average number of common and common equivalent shares outstanding: Weighted average common shares outstanding 35,208,852 35,155,410 33,479,246 Dilutive effect of stock option plans and common stock warrants after application of treasury stock method 133,399 530,558 1,047,356 ----------- ----------- ----------- 35,342,251 35,685,968 34,526,602 ----------- ----------- ----------- ----------- ----------- ----------- Earnings per common share: Income before extraordinary item $ 2.42 $ 1.71 $ 1.95 Extraordinary item - (.03) - ----------- ----------- ----------- Net income $ 2.42 $ 1.68 $ 1.95 ----------- ----------- ----------- ----------- ----------- ----------- Computation of Fully Diluted Earnings Per Common Share (1): - ------------------------------------- Income before extraordinary item $ 85,663 $ 61,651 $ 70,183 Add: Interest expense on 7 1/4% convertible subordinated debentures 325 387 433 Less: Dividends on preferred stock - 678 2,710 ----------- ----------- ----------- Income applicable to common stock before extraordinary item 85,988 61,360 67,906 Extraordinary item - (963) - ----------- ----------- ----------- Income applicable to common stock $85,988 $60,397 $67,906 ----------- ----------- ----------- ----------- ----------- ----------- Weighted average number of common and common equivalent shares outstanding: Weighted average common shares outstanding 35,208,852 35,155,410 33,479,246 Dilutive effect of stock option plans and common stock warrants after application of treasury stock method 142,388 599,582 1,285,578 Dilutive effect from assumed conversion of 7 1/4% convertible subordinated debentures 421,415 504,661 582,508 ----------- ----------- ----------- 35,772,655 36,259,653 35,347,332 ----------- ----------- ----------- ----------- ----------- ----------- Earnings per common share: Income before extraordinary item $2.40 $1.70 $1.92 Extraordinary item - (.03) - ----------- ----------- ----------- Net income $2.40 $1.67 $1.92 ----------- ----------- ----------- ----------- ----------- -----------
- -------------------------------- (1) This calculation is submitted in accordance with Regulation S-K Item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%. EX-13.1 14 ANNUAL REPORT EXHIBIT 13 DESCRIPTION OF BUSINESS TCF Financial Corporation is a stock savings bank holding company with more than $7 billion in assets. TCF has a community banking philosophy focused on creating franchise and shareholder value, with record operating earnings and a 38 percent compounded annual total return since 1991. TCF's banks operate in Minnesota, Illinois and Wisconsin as TCF Bank, and in Michigan and Ohio as Great Lakes Bancorp. Other TCF affiliates include consumer finance, mortgage banking, title insurance, annuity, and mutual fund sales companies. TCF's common stock is listed on the New York Stock Exchange under the symbol TCB. TABLE OF CONTENTS Financial Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 32 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 38 Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . 65 Selected Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . 66 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 32. RESULTS OF OPERATIONS PERFORMANCE SUMMARY TCF reported net income of $85.7 million for 1996, compared with $60.7 million for 1995 and $70.2 million for 1994. Net income per common share was $2.42 for 1996, compared with $1.68 for 1995 and $1.95 for 1994. Return on average assets was 1.24% in 1996, compared with .82% in 1995 and .93% in 1994. Return on average realized common equity was 16.13% in 1996, compared with 12.70% in 1995 and 15.94% in 1994. TCF's 1996 results include 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 62 cents per common share. TCF's 1995 results included certain merger-related charges incurred in connection with TCF's acquisition of Great Lakes Bancorp, A Federal Savings Bank ("Great Lakes"), which is described in Note 2 of Notes to Consolidated Financial Statements. On an after-tax basis, these merger-related charges totaled $32.8 million, or 92 cents per common share for 1995. Net income, excluding the FDIC special assessment and the merger-related charges, totaled $107.4 million, or $3.04 per common share, for 1996, an increase of 14.8% from $93.5 million, or $2.60 per common share for 1995. Net income totaled $70.2 million, or $1.95 per common share, for 1994. On the same basis, return on average assets was a record 1.56% for 1996, compared with 1.27% in 1995 and .93% in 1994 and return on average realized common equity was a record 20.22% in 1996, compared with 19.64% in 1995 and 15.94% in 1994. The 1996 results of operations show continued improvement in TCF's core operating earnings. TCF's net interest income was a record $340.1 million and net interest margin was a record 5.26% for 1996, representing increases of 6.6% and 14.1%, respectively, over 1995 results. Non-interest income, excluding gains on sales of branches and loans and the 1995 losses from merger-related asset-sales, increased $16.6 million, or 12.5%, to $149.6 million for 1996, compared with $133 million for 1995. Operating expenses (non-interest expense excluding the FDIC special assessment, provision for real estate losses and 1995 merger-related charges) totaled $305.8 million for 1996, up 5.7% from $289.4 million for 1995. Provisions for credit and real estate losses totaled $20.3 million in 1996, compared with $17 million in 1995 and $14.8 million in 1994. The 1995 provision for credit losses included $5 million in Great Lakes merger-related provisions. TCF's net interest income of $319.2 million and net interest margin of 4.61% for 1995 increased 14.3% and 16.4%, respectively, over 1994 results. Non-interest income, excluding gains on sales of branches and losses from merger-related asset sales at Great Lakes, increased $7.8 million, or 6.2%, to $133 million for 1995, compared with $125.2 million for 1994. Operating expenses (non-interest expense excluding the provision for real estate losses and 1995 merger-related charges) totaled $289.4 million for 1995, up 6% from $273 million for 1994. TCF's net interest income of $279.2 million and net interest margin of 3.96% for 1994 increased 6.9% and 7.3%, respectively, over 1993 results. Non-interest income totaled $125.2 million for 1994, compared with $139 million for 1993. Operating expenses (non-interest expense excluding the provision for real estate losses and 1993 merger-related charges) totaled $273 million for 1994, up 6.1% from $257.2 million for 1993. NET INTEREST INCOME A significant component of TCF's earnings is net interest income, which is the difference between interest earned on loans, mortgage-backed securities held to maturity, investments, securities available for sale 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. The arithmetic difference between the yield on interest-earning assets and the cost of interest-bearing liabilities expressed as a percentage is referred to as the net interest rate spread. Net interest income was a record $340.1 million for the year ended December 31, 1996, up from $319.2 million in 1995 and $279.2 million in 1994. This represents an increase of 6.6% in 1996, following increases of 14.3% in 1995 and 6.9% in 1994. Total average interest-earning assets decreased 6.5% in 1996, 1.9% in 1995 and .4% in 1994. The net interest margin for 1996 was a record 5.26%, compared with 4.61% in 1995 and 3.96% in 1994. In addition, TCF's net interest-rate spread was 4.71% in 1996, compared with 4.16% and 3.65% in 1995 and 1994, respectively. 17 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued) The following table presents TCF's average balance sheets, interest and dividends earned or paid, and the related yields and rates on major categories of TCF's interest-earning assets and interest-bearing liabilities:
Year Ended Year Ended Year Ended December 31, 1996 December 31, 1995 December 31, 1994 -------------------------------- -------------------------------- --------------------------------- Interest Interest Interest Yields Yields Yields (Dollars in thousands) Average and Average and Average and Balance Interest(1) Rates Balance Interest(1) Rates Balance Interest(1) Rates ---------- ---------- ------- ---------- ---------- ------- ------------ ---------- -------- ASSETS: Securities available for sale $1,054,365 $ 75,303 7.14% $ 56,935 $ 4,021 7.06% $ 231,066 $ 13,325 5.77% ---------- -------- ---------- -------- ---------- -------- Loans held for sale 227,226 17,080 7.52 226,922 18,253 8.04 243,819 16,917 6.94 ---------- -------- ---------- -------- ---------- -------- Mortgage-backed securities held to maturity - - - 1,275,073 91,037 7.14 1,568,593 108,669 6.93 ---------- -------- ---------- -------- ---------- -------- Loans: Residential real estate 2,416,865 191,348 7.92 2,690,667 211,128 7.85 2,458,003 184,949 7.52 Commercial real estate 923,838 82,971 8.98 980,074 87,764 8.95 1,006,911 85,884 8.53 Commercial business 157,400 13,905 8.83 186,928 17,568 9.40 182,900 15,370 8.40 Consumer 1,624,449 197,916 12.18 1,417,189 171,973 12.13 1,155,557 116,892 10.12 ---------- -------- ---------- -------- ---------- -------- Total loans (2) 5,122,552 486,140 9.49 5,274,858 488,433 9.26 4,803,371 403,095 8.39 ---------- -------- ---------- -------- ---------- -------- Investments: Interest-bearing deposits with banks 3,149 173 5.49 6,842 426 6.23 24,418 1,020 4.18 Federal funds sold 2,448 135 5.51 8,484 506 5.96 95,238 3,670 3.85 U.S. Government and other marketable securities held to maturity 3,817 199 5.21 3,595 200 5.56 3,614 271 7.50 FHLB stock 52,642 3,831 7.28 64,757 4,814 7.43 82,951 5,515 6.65 ---------- -------- ---------- -------- ---------- -------- Total investments 62,056 4,338 6.99 83,678 5,946 7.11 206,221 10,476 5.08 ---------- -------- ---------- -------- ---------- -------- Total interest- earning assets 6,466,199 582,861 9.01 6,917,466 607,690 8.78 7,053,070 552,482 7.83 -------- ----- -------- ----- -------- ----- Other assets (3) 433,076 451,907 480,382 ---------- ---------- ---------- Total assets $6,899,275 $7,369,373 $7,533,452 ---------- ---------- ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY: Non-interest bearing deposits $ 608,213 $ 507,550 $ 433,465 ---------- ---------- ---------- Interest-bearing deposits: Checking 510,979 5,571 1.09 529,329 6,606 1.25 572,591 8,205 1.43 Passbook and statement 793,975 14,389 1.81 855,492 18,507 2.16 974,944 19,292 1.98 Money market 630,382 19,256 3.05 649,189 21,878 3.37 701,317 18,834 2.69 Certificates 2,458,291 132,159 5.38 2,657,859 146,253 5.50 2,768,839 136,848 4.94 ---------- -------- ---------- -------- ---------- -------- Total interest-bearing deposits 4,393,627 171,375 3.90 4,691,869 193,244 4.12 5,017,691 183,179 3.65 ---------- -------- ---------- -------- ---------- -------- Borrowings: Securities sold under repurchase agreements 498,363 28,165 5.65 591,367 35,753 6.05 443,972 25,107 5.66 FHLB advances 674,703 37,277 5.52 860,948 50,729 5.89 975,937 56,587 5.80 Subordinated debt 13,430 1,875 13.96 46,429 4,986 10.74 50,676 5,603 11.06 Collateralized obligations 40,831 2,586 6.33 41,586 2,880 6.93 42,588 2,442 5.73 Other borrowings 23,764 1,443 6.07 13,486 900 6.67 8,971 412 4.59 ---------- -------- ---------- -------- ---------- -------- Total borrowings 1,251,091 71,346 5.70 1,553,816 95,248 6.13 1,522,144 90,151 5.92 ---------- -------- ---------- -------- ---------- -------- Total interest-bearing liabilities 5,644,718 242,721 4.30 6,245,685 288,492 4.62 6,539,835 273,330 4.18 -------- ----- -------- ----- -------- ----- Other liabilities (3) 115,114 130,375 112,042 ---------- ---------- ---------- Total liabilities 6,368,045 6,883,610 7,085,342 ---------- ---------- ---------- Stockholders' equity: (3) Preferred equity - 13,472 25,019 Common equity 531,230 472,291 423,091 ---------- ---------- ---------- Total stockholders' equity 531,230 485,763 448,110 ---------- ---------- ---------- Total liabilities and stockholders' equity $6,899,275 $7,369,373 $7,533,452 ---------- ---------- ---------- ---------- ---------- ---------- Net interest income $340,140 $319,198 $279,152 -------- -------- -------- -------- -------- -------- Net interest-rate spread 4.71% 4.16% 3.65% ----- ----- ----- ----- ----- ----- Net interest margin 5.26% 4.61% 3.96% ----- ----- ----- ----- ----- -----
- ---------------------- (1) Tax-exempt income was not significant and thus has not been presented on a tax equivalent basis. Tax-exempt income of $363,000, $511,000 and $439,000 was recognized during the years ended December 31, 1996, 1995 and 1994, respectively. (2) Average balance of loans includes non-accrual loans, and is presented net of unearned income. (3) Average balance is based upon month-end balances. 18 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued) The following table presents the components of the changes in net interest income by volume and rate:
Year Ended Year Ended December 31, 1996 December 31, 1995 Versus Same Period in 1995 Versus Same Period in 1994 -------------------------------------- -------------------------------------- Increase (Decrease) Due to Increase (Decrease) Due to -------------------------------------- -------------------------------------- (In thousands) Volume(1) Rate(1) Total Volume(1) Rate(1) Total -------- -------- -------- -------- ------- -------- Securities available for sale $ 71,235 $ 47 $ 71,282 $(11,773) $ 2,469 $ (9,304) -------- -------- -------- -------- ------- -------- Loans held for sale 24 (1,197) (1,173) (1,226) 2,562 1,336 -------- -------- -------- -------- ------- -------- Mortgage-backed securities held to maturity (91,037) - (91,037) (20,844) 3,212 (17,632) -------- -------- -------- -------- ------- -------- Loans: Residential real estate (21,649) 1,869 (19,780) 17,887 8,292 26,179 Commercial real estate (5,084) 291 (4,793) (2,310) 4,190 1,880 Commercial business (2,647) (1,016) (3,663) 343 1,855 2,198 Consumer 25,231 712 25,943 29,341 25,740 55,081 -------- -------- -------- -------- ------- -------- Total loans (4,149) 1,856 (2,293) 45,261 40,077 85,338 -------- -------- -------- -------- ------- -------- Investments: Interest-bearing deposits with banks (207) (46) (253) (949) 355 (594) Federal funds sold (336) (35) (371) (4,485) 1,321 (3,164) U.S. Government and other marketable securities held to maturity 12 (13) (1) (1) (70) (71) FHLB stock (887) (96) (983) (1,300) 599 (701) -------- -------- -------- -------- ------- -------- Total investments (1,418) (190) (1,608) (6,735) 2,205 (4,530) -------- -------- -------- -------- ------- -------- Total interest income (25,345) 516 (24,829) 4,683 50,525 55,208 -------- -------- -------- -------- ------- -------- Deposits: Checking (220) (815) (1,035) (600) (999) (1,599) Passbook and statement (1,266) (2,852) (4,118) (2,465) 1,680 (785) Money market (613) (2,009) (2,622) (1,475) 4,519 3,044 Certificates (10,921) (3,173) (14,094) (5,643) 15,048 9,405 -------- -------- -------- -------- ------- -------- Total deposits (13,020) (8,849) (21,869) (10,183) 20,248 10,065 -------- -------- -------- -------- ------- -------- Borrowings: Securities sold under repurchase agree- ments (5,343) (2,245) (7,588) 8,817 1,829 10,646 FHLB advances (10,424) (3,028) (13,452) (6,728) 870 (5,858) Subordinated debt (4,291) 1,180 (3,111) (459) (158) (617) Collateralized obligations (51) (243) (294) (59) 497 438 Other borrowings 631 (88) 543 256 232 488 -------- -------- -------- -------- ------- -------- Total borrowings (19,478) (4,424) (23,902) 1,827 3,270 5,097 -------- -------- -------- -------- ------- -------- Total interest expense (32,498) (13,273) (45,771) (8,356) 23,518 15,162 -------- -------- -------- -------- ------- -------- Net interest income $ 7,153 $ 13,789 $ 20,942 $ 13,039 $27,007 $ 40,046 -------- -------- -------- -------- ------- -------- -------- -------- -------- -------- ------- --------
- ----------------------- (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. 19 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued) In 1996, TCF's net interest income, net interest margin and interest-rate spread increased primarily due to the growth of higher-yielding consumer loans, the favorable impact of the 1995 merger-related restructuring activities, 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 $20.9 million, or 6.6%, even though total average interest-earning assets decreased by $451.3 million, or 6.5% from 1995 levels. TCF's net interest income improved by $7.2 million due to volume changes and by $13.8 million due to rate changes. The favorable impact of the lower cost of funds and growth in consumer loan and securities available for sale volumes was partially offset by decreased volumes in mortgage-backed securities and residential real estate loans. Growth in TCF's net interest margin has slowed in recent periods. TCF's net interest margin for the fourth quarter of 1996 was 5.36%, unchanged from the third quarter of 1996. Maintaining this margin growth is dependent on TCF's ability to generate higher yielding assets. Interest income decreased $24.8 million in 1996, reflecting a decrease of $25.3 million due to volume. Interest expense decreased $45.8 million in 1996, reflecting decreases of $32.5 million due to volume and $13.3 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, with greater emphasis on higher-yielding consumer loans and less emphasis on mortgage-backed securities. If variable index rates (e.g., prime) were to decline, TCF may experience 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 - Asset/Liability Management - Interest-Rate Risk." In 1995, TCF's net interest income, net interest margin and interest-rate spread increased primarily due to increased yields and growth of consumer loans, the favorable impact of the Great Lakes merger-related restructuring activities, lower average levels of non-performing assets, and increased capital. Net interest income increased $40 million, or 14.3%, even though total average interest-earning assets decreased by $135.6 million, or 1.9% from 1994 levels. TCF's net interest income improved by $13 million due to volume changes and by $27 million due to rate changes. The favorable impact of growth in higher- yielding consumer loans was partially offset by the negative impact of a higher cost of funds and decreased volumes in mortgage-backed securities held to maturity and securities available for sale. Interest income increased $55.2 million in 1995, reflecting an increase of $50.5 million due to higher yields on interest-earning assets. Interest expense increased $15.2 million in 1995, reflecting a $23.5 million increase due to a higher cost of funds. The increase in net interest income due to the favorable impact of rate changes reflects in part the benefit from TCF's changing asset/liability mix. In 1994, TCF's net interest income, net interest margin and interest-rate spread increased primarily due to increased yields and growth of consumer loans, lower average levels of non-performing assets, a lower cost of funds and the retention of earnings. Net interest income increased $18 million, or 6.9%, even though total average interest-earning assets decreased by $26 million, or .4% from 1993 levels. TCF's net interest income improved by $7.5 million due to volume changes and by $10.4 million due to rate changes. The favorable impact of the lower cost of funds and growth in lower interest cost deposits and higher-yielding consumer and residential real estate loans was partially offset by the negative impact of decreased volumes in commercial real estate loans, loans held for sale and mortgage- backed securities held to maturity. Interest income decreased $6.2 million in 1994 reflecting a decrease of $5.7 million due to lower yields on interest-earning assets. Interest expense decreased $24.1 million in 1994, of which $16.1 million was due to a lower cost of funds. The increase in net interest income due to the favorable impact of rate changes reflects in part the benefit from TCF's changing asset/liability mix. TCF also benefitted from increases in both short- and long-term market interest rates as its interest-rate-sensitive assets tied to a variable index rate (e.g., prime) repriced at a faster rate than its retail deposits in 1994. 20 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued) The following table sets forth the spread between TCF's interest-earning assets and interest-bearing liabilities at December 31, 1996 and 1995. The net interest-rate spreads below represent the differences between the yield on interest-earning assets and the cost of interest-bearing liabilities at those dates: At December 31, --------------- 1996 1995 ---- ---- Weighted average yield: Loans 9.52% 9.48% Loans held for sale 7.40 7.89 Investments 5.50 7.67 Securities available for sale 7.15 7.13 Total interest-earning assets 8.83 8.99 ---- ---- Weighted average cost: Deposits (1) 3.86 4.08 FHLB advances 5.66 5.89 Other borrowings 6.25 6.17 Total interest-bearing liabilities 4.36 4.54 ---- ---- Net interest-rate spread 4.47% 4.45% ---- ---- ---- ---- - ------------------------------------- (1) Excludes non-interest bearing deposits. The net interest-rate spread increased 2 basis points to 4.47% at December 31, 1996 from 4.45% at December 31, 1995. The 4 basis point increase in the loan portfolio yield to 9.52% at December 31, 1996 reflects a shift to higher- yielding consumer loans. The commercial base lending rate at TCF was 8.50% at December 31, 1996, unchanged from December 31, 1995. The 49 basis point decrease in the loans held-for-sale portfolio yield to 7.40% at December 31, 1996 reflects the origination of education loans at lower rates. The 217 basis point decrease in the investments portfolio yield to 5.50% at December 31, 1996 reflects an increase in the balance of lower yielding interest-bearing deposits. The weighted average cost of deposits, excluding non-interest bearing deposits, decreased 22 basis points to 3.86% at December 31, 1996 due to lower market interest rates. The weighted average cost of FHLB advances decreased to 5.66% at December 31, 1996 due to lower short-term market interest rates. The weighted average cost of other borrowings increased 8 basis points to 6.25% at December 31, 1996. This increase reflects a decrease in lower cost federal funds purchased. TCF's net interest-rate spread at December 31, 1996 may not be indicative of net interest-rate spreads in future periods. 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 branches and loans and the 1995 losses from merger-related asset sales at Great Lakes, non-interest income increased $16.6 million, or 12.5%, during 1996 to $149.6 million, reflecting increases in fee and service charge revenues, gains on sales of loans held for sale, title insurance revenues, and automated teller machine ("ATM") network revenue. These increases were partially offset by a decrease in gains on sales of loan servicing. The following table presents the components of non-interest income:
Percentage Year Ended December 31, Increase (Decrease) ---------------------------------- -------------------- (Dollars in thousands) 1996 1995 1994 1996/95 1995/94 ---- ---- ---- ------- ------- Fee and service charge revenues $100,422 $ 89,712 $ 83,744 11.9% 7.1% ATM network revenues 11,480 10,568 8,988 8.6 17.6 Title insurance revenues 13,492 11,509 10,274 17.2 12.0 Commissions on sales of annuities 9,134 8,557 11,310 6.7 (24.3) Gain on sale of loans held for sale 5,038 3,735 2,124 34.9 75.8 Gain on sale of securities available for sale 85 120 981 (29.2) (87.8) Gain on sale of loan servicing - 1,535 2,353 (100.0) (34.8) Other 9,956 7,284 5,445 36.7 33.8 -------- -------- -------- 149,607 133,020 125,219 12.5 6.2 Gain on sale of loans 5,443 - - 100.0 - Gain on sale of branches 2,747 1,103 - 149.0 100.0 Merger-related charges: Loss on sale of mortgage- backed securities - (21,037) - N.M. N.M. Loss on sale of securities available for sale - (310) - N.M. N.M. -------- -------- -------- Total non-interest income $157,797 $112,776 $125,219 39.9 (9.9) -------- -------- -------- -------- -------- --------
- ----------------------------- N.M. Not meaningful. 21 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued) Fee and service charge revenues increased $10.7 million in 1996 and $6 million in 1995 primarily as a result of expanded retail and mortgage banking activities. Included in fee and service charge revenues are fees of $15.3 million, $15.1 million and $14.5 million received for the servicing of loans owned by others during 1996, 1995 and 1994, respectively. At December 31, 1996, 1995 and 1994, TCF was servicing real estate loans for others with aggregate unpaid principal balances of $4.5 billion, $4.5 billion and $4.4 billion, respectively. ATM network revenues increased $912,000, or 8.6%, in 1996 and $1.6 million, or 17.6%, in 1995. These increases reflect TCF's efforts to provide banking services through its ATM network. TCF expanded its network of ATM's to 917 at December 31, 1996 by installing 160 ATM's during 1996. The Company anticipates installing additional ATM's during 1997. Title insurance revenues increased $2 million in 1996 to $13.5 million, following an increase of $1.2 million in 1995 to $11.5 million. Title insurance revenues for 1996 and 1995 were positively affected by industry-wide increases in residential real estate loan originations and refinancing activity. Title insurance revenues are cyclical in nature and are largely dependent on the level of residential real estate loan originations and refinancings. Commissions on sales of annuities increased $577,000 to $9.1 million in 1996, following a decrease of $2.8 million to $8.6 million in 1995. Sales of annuities may fluctuate from period to period, and future sales levels will depend upon continued favorable tax treatment, the level of interest rates, general economic conditions and investor preferences. Gains on sales of loans held for sale increased $1.3 million in 1996 following an increase of $1.6 million in 1995. Gains on sales of securities available for sale, excluding merger-related sales, totaled $85,000 in 1996, a decrease of $35,000 from the $120,000 recognized in 1995. Gains or losses on sales of loans held for sale and securities available for sale may fluctuate significantly from period to period due to changes in interest rates and volumes, and results in any period related to these transactions may not be indicative of results which will be obtained in future periods. Gains on sales of third-party loan servicing rights totaled $1.5 million in 1995, compared with $2.4 million in 1994. These gains were recognized on the sale of third-party servicing rights on approximately $146.3 million and $169 million of loans, respectively. TCF periodically sells loan servicing rights depending on market conditions. Other non-interest income increased $2.7 million in 1996 to $10 million, and $1.8 million in 1995 to $7.3 million. The increases were primarily due to increased commission revenue earned on sales of insurance and mutual fund products. During 1996, TCF recognized gains of $2.7 million on the sales of two Minnesota branches, two Michigan branches and one Wisconsin branch, compared with gains of $1.1 million on the sales of three Minnesota branches during 1995. During 1996, TCF recognized a $4.6 million gain on the sale of $39.6 million of credit card loans. The Company now provides credit card products on behalf of a third party through a marketing agreement. Also during 1996, TCF recognized a gain of $810,000 on the sale of $7.2 million of loans related to the previously described sale of two Minnesota branches. During 1995, Great Lakes sold $232.2 million of collateralized mortgage obligations from its held-to-maturity portfolio at a pretax loss of $21 million. Also in 1995, Great Lakes sold $17.3 million of securities available for sale at a pretax loss of $310,000. These merger-related asset sales were completed as part of TCF's strategy to reduce Great Lakes' interest-rate and credit risk to levels consistent with TCF's existing interest-rate risk position and credit risk policy. NON-INTEREST EXPENSE Non-interest expense, excluding the FDIC special assessment, provision for real estate losses, and 1995 merger-related charges, increased $16.5 million, or 5.7%, in 1996, and $16.4 million, or 6%, in 1995, as compared with the respective prior years. 22 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued)
The following table presents the components of non-interest expense: Percentage Year Ended December 31, Increase (Decrease) ----------------------------------------- --------------------- (Dollars in thousands) 1996 1995 1994 1996/95 1995/94 -------- -------- -------- ------- ------- Compensation and employee benefits $151,745 $139,548 $129,794 8.7% 7.5% Occupancy and equipment 51,136 50,554 48,217 1.2 4.8 Advertising and promotions 16,711 16,651 14,119 .4 17.9 Federal deposit insurance premiums and assessments 12,019 13,540 14,779 (11.2) (8.4) Amortization of goodwill and other intangibles 3,167 3,163 3,282 .1 (3.6) Other 71,056 65,917 62,771 7.8 5.0 -------- -------- -------- 305,834 289,373 272,962 5.7 6.0 Provision for real estate losses 433 1,804 4,022 (76.0) (55.1) FDIC special assessment 34,803 - - 100.0 - Merger-related charges: Merger-related expenses - 21,733 - (100.0) 100.0 Cancellation cost on early termination of interest rate exchange contracts - 4,423 - (100.0) 100.0 -------- -------- -------- Total non-interest expense $341,070 $317,333 $276,984 7.5 14.6 -------- -------- -------- -------- -------- --------
Compensation and employee benefits, representing 44.5% and 44% of total non-interest expense in 1996 and 1995, respectively, increased $12.2 million, or 8.7%, in 1996, and $9.8 million, or 7.5%, in 1995. The 1996 increase was primarily due to the expansion of consumer lending operations and other retail banking activities. The 1995 increase was primarily due to the expansion of consumer lending and consumer finance operations and other retail banking activities, partially offset by compensation and benefit cost savings associated with the reduction in residential mortgage originations. Residential mortgage originations at TCF were $981.5 million in 1996, $989.7 million in 1995, and $1.5 billion in 1994. Occupancy and equipment expenses increased $582,000 in 1996 and $2.3 million in 1995. The increase in 1996 reflects the opening of 12 savings bank branch offices. The 1995 increase was largely due to expanded consumer finance activities, including the opening of 24 new consumer finance offices. Advertising and promotion expenses increased $60,000 in 1996 and $2.5 million in 1995. 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 totaled $12 million for 1996, a decrease of $1.5 million from 1995. The decrease in 1996 was primarily due to lower deposit levels and a decrease in the 1996 fourth quarter deposit insurance premium rates as a result of the recapitalization of the SAIF. Other non-interest expense increased $5.1 million, or 7.8%, in 1996 and $3.1 million, or 5%, in 1995. The increase in 1996 was primarily due to costs associated with the relocation and consolidation of certain back-office operations, the expansion of TCF's consumer lending operations, and other retail banking activities. In addition, the increase reflects an increase in Michigan state business taxes due to improved profitability. The increase in 1995 reflects fourth quarter severance payments related to Great Lakes and an increase in telecommunications expense resulting from TCF's expansion of its banking operations. The provision for real estate losses decreased $1.4 million, or 76%, to $433,000 in 1996, following a decrease of $2.2 million, or 55.1%, to $1.8 million in 1995. The amounts provided for real estate losses in each of the three years were considered prudent by management in light of all factors affecting reserve adequacy. See "Financial Condition - Allowances for Loan and Real Estate Losses and Industrial Revenue Bond Reserves" for further detail on the provision for real estate losses. TCF's 1996 results include a one-time special assessment of $34.8 million from the FDIC to recapitalize the SAIF under federal legislation enacted on September 30, 1996. As a result, the rate charged to TCF by the FDIC for federal deposit insurance premiums declined from 23 basis points to 6.48 basis points beginning in January 1997. See "Financial Condition - Recent Legislative and Regulatory Developments." 23 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued) Merger-related expenses for 1995 included $13.9 million of equipment charges associated with the integration of Great Lakes' data processing system into TCF's, $4.7 million of employment contract, severance and employment benefit costs reflecting the consolidation of certain Great Lakes functions, and $2.2 million of professional fees and $864,000 of other expenses which were incurred by Great Lakes as a direct result of the merger. During 1995, Great Lakes prepaid $112.3 million of Federal Home Loan Bank ("FHLB") advances at a pretax loss of $1.5 million. This amount, net of a $578,000 income tax benefit, was recorded as an extraordinary item. Interest- rate exchange contracts with notional principal amounts totaling $544.5 million were terminated by Great Lakes at a pretax loss of $4.4 million. These actions were taken in order to reduce Great Lakes' level of higher-cost wholesale borrowings and to reduce interest-rate risk. INCOME TAXES TCF recorded income tax expense of $51.4 million in 1996, compared with $37.8 million in 1995 and $46.4 million in 1994. Income tax expense represented 37.5% of income before income tax expense and extraordinary item during 1996, compared with 38% and 39.8% in 1995 and 1994, respectively. The lower rate in 1996 reflects the impact of relatively lower non-deductible expenses, including merger-related expenses. TCF expects that its effective tax rate will increase during 1997. Further detail on income taxes is provided in Note 13 of Notes to Consolidated Financial Statements. FINANCIAL CONDITION INVESTMENTS Total investments increased $377.8 million in 1996 to $442.1 million at December 31, 1996. Interest-bearing deposits with banks increased $371.6 million during 1996 to $372.1 million at December 31, 1996. In addition, FHLB stock increased $6 million in 1996 to $66.1 million at December 31, 1996. 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, 1996. 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 a separate component of stockholders' equity. Securities available for sale decreased $201.9 million during 1996 to $999.6 million at December 31, 1996, primarily due to repayment and prepayment activity. At December 31, 1996, TCF's securities available-for- sale portfolio included $106 million and $893.6 million of adjustable-rate and fixed-rate mortgage-backed securities, respectively. Securities available for sale totaled $1.2 billion at December 31, 1995. LOANS HELD FOR SALE Residential real estate and education loans held for sale are carried at the lower of cost or market. Education and residential real estate loans held for sale decreased $17.4 million and $21.1 million, respectively, from year-end 1995 and totaled $146.3 million and $57.6 million, respectively, at December 31, 1996. Under a forward commitment agreement with the Student Loan Marketing Association ("SLMA"), TCF can sell the education loans to SLMA once they are fully disbursed, but must sell the loans to SLMA before they go into repayment status. LOANS The following table sets forth information about loans held in TCF's portfolio, excluding loans held for sale:
At December 31, ---------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (In thousands) Residential real estate $2,261,237 $2,618,725 $2,662,707 $2,305,844 $1,961,739 Consumer 1,801,066 1,593,439 1,299,458 1,080,499 1,099,823 Commercial real estate 861,056 970,763 997,632 1,091,084 1,250,969 Commercial business 156,712 167,663 190,975 214,774 236,142 Deferred fees and unearned discounts and finance charges, net (84,109) (73,489) (32,391) (26,634) (31,691) ---------- ---------- ---------- ---------- ---------- Total loans $4,995,962 $5,277,101 $5,118,381 $4,665,567 $4,516,982 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
24 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued) Residential real estate loans totaled $2.3 billion at December 31, 1996, a decrease of $357.5 million from December 31, 1995. This decrease largely reflects an increase in loan repayment activity, partially offset by the origination and retention of $270.1 million of residential real estate loans. At December 31, 1996, TCF's residential real estate loan portfolio was comprised of $1.3 billion of fixed-rate loans and $987.6 million of adjustable-rate loans. Consumer loans totaled $1.8 billion at December 31, 1996, an increase of $207.6 million from December 31, 1995. This change was primarily due to a $180.9 million increase in TCF's home equity loan portfolio and a $93.5 million increase in automobile and marine loans, partially offset by a $44.5 million decrease in credit card loans primarily due to the previously mentioned sale of $39.6 million in outstanding balances. The growth in automobile and marine and home equity loans reflects TCF's expanded consumer lending and consumer finance operations. Consumer loan growth in recent years reflects TCF's emphasis on expanding its portfolio of these higher-yielding, shorter-term loans, including home equity loans. TCF has significantly expanded its consumer finance operations in recent periods and had 61 consumer finance offices in 16 states as of December 31, 1996. TCF's consumer finance loan portfolio totaled $496.3 million at December 31, 1996, compared with $374.4 million at December 31, 1995. In the 1996 fourth quarter, TCF combined 13 consumer offices into existing locations. The Company intends to concentrate on increasing the outstanding loan balances of its existing consumer finance offices and improving the profitability of its consumer finance subsidiaries before considering any further expansion of this operation. TCF's consumer finance subsidiaries primarily originate automobile and home equity loans and purchase automobile loans, and also engage in the origination of loans through loan brokers to a limited extent. The average individual balance of consumer finance automobile and marine loans, and home equity loans were $8,000 and $30,000, respectively, at December 31, 1996. At December 31, 1996 and 1995, automobile and marine loans comprised $299.6 million, or 60.4%, and $207.8 million, or 55.5%, respectively, of total consumer finance loans outstanding. At December 31, 1996 and 1995, home equity loans comprised $185.2 million, or 37.3%, and $154.8 million, or 41.3%, respectively, of total consumer finance loans. TCF's consumer finance subsidiaries are seeking to increase the percentage of home equity loans to total consumer finance loans over time. Home equity loans originated by the Company's consumer finance subsidiaries are generally closed end. Through their purchases of automobile loans, TCF's consumer finance subsidiaries provide indirect financing. The Company's consumer finance subsidiaries serve as an alternative source of financing to customers who might otherwise not be able to obtain financing from more traditional sources. Included in the consumer finance loans at December 31, 1996 are $252.6 million of sub-prime automobile and marine loans which carry a higher level of credit risk and higher interest rates. 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. Loans classified as sub-prime are to borrowers that because of significant past credit problems or limited credit histories are unable to obtain credit from traditional sources. Although competition in the sub-prime lending market has increased, the Company believes that sub-prime borrowers represent a substantial market and their demand for financing has not been adequately served by traditional lending sources. The underwriting criteria for loans originated by TCF's consumer finance subsidiaries generally have been less stringent than those historically adhered to by TCF's savings bank subsidiaries and, as a result, carry a higher level of credit risk and higher interest rates. The rapid expansion of the higher-risk lending engaged in by the Company's consumer finance subsidiaries is expected, as these portfolios mature, to result in increases in consumer loan loss and delinquency ratios. These portfolios also represent an increased risk of loss in the event of adverse economic developments such as a recession. TCF believes that important determinants of success in sub-prime automobile financing include the ability to control borrower and dealer misrepresentations at the point of origination; the evaluation of the creditworthiness of sub-prime borrowers; and the maintenance of an active program to monitor performance and collect payments. 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. 25 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued) Many of the consumer finance offices are new and are outside TCF's traditional market areas. The geographic location of consumer finance loans may change significantly in future periods. See Note 6 of Notes to Consolidated Financial Statements for additional information concerning the geographic locations of TCF's consumer finance loan portfolio. TCF's savings bank and consumer finance subsidiaries have 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 carry a higher level of credit risk and higher interest rates. The following table summarizes TCF's commercial real estate loan portfolio by property type: At December 31, ----------------------------------------------- 1996 1995 ----------------------- ---------------------- Number Number (Dollars in thousands) Balance (1) of Loans Balance (1) of Loans ------------ -------- ------------ -------- Apartments $339,809 638 $405,975 784 Office buildings 144,642 234 168,487 259 Retail services 127,312 187 145,772 202 Warehouse/industrial buildings 87,486 130 84,489 131 Hospitality facilities 78,746 37 84,861 44 Health care facilities 17,181 14 24,478 15 Other 65,880 308 56,701 245 -------- ----- -------- ----- $861,056 1,548 $970,763 1,680 -------- ----- -------- ----- -------- ----- -------- ----- Average balance $556 $578 ---- ---- ---- ---- - ----------------------------- (1) Includes construction and development loans. Commercial real estate loans decreased $109.7 million in 1996 to $861.1 million at December 31, 1996. Commercial business loans decreased $11 million to $156.7 million at December 31, 1996. TCF is seeking to expand its commercial real estate and commercial business 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. These loans generally have larger individual balances and a greater inherent risk of loss. The risk of loss is difficult to quantify and is subject to fluctuations in real estate values. At December 31, 1996, approximately 93% 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 $556,000 at December 31, 1996. Apartment loans comprised $339.8 million, or 39.5%, of total commercial real estate loans outstanding at December 31, 1996. The average individual balance of commercial business loans was $228,000 at December 31, 1996. Included in performing loans at December 31, 1996 are commercial real estate loans aggregating $3 million with terms that have been modified in troubled debt restructurings, compared with $1.6 million of such loans at December 31, 1995. The results of hotel and motel operations are susceptible to changes in prevailing economic conditions. Included in commercial real estate loans at December 31, 1996 are $78.7 million of loans secured by hotel or motel properties. Ten loans comprise $52.7 million, or 67%, of the total hotel and motel portfolio. Of the total hotel and motel portfolio balance, one loan totaling $1.5 million is included in loans subject to management concern and one loan totaling $272,000 is included in non-accrual loans. TCF continues to closely monitor the performance of these loans and properties. ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES AND INDUSTRIAL REVENUE BOND RESERVES Credit risk is the risk of loss from a customer default. TCF has in place a process to identify and manage its credit risks. The process includes initial credit review and approval, periodic monitoring to measure compliance with credit agreements and internal credit policies, identification of problem loans and special procedures for collection of problem loans. See Note 1 of Notes to Consolidated Financial Statements for additional information concerning TCF's allowances for loan and real estate losses. While TCF's investments in commercial real estate loans, commercial business loans and related properties acquired through foreclosure or by other means have significantly decreased in recent years, such loans and investments have larger individual balances and a substantially greater inherent risk of loss. The risk of loss on such loans and properties is 26 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued) difficult to quantify and is subject to fluctuations in real estate values. In addition, concerns remain over the future course of the economy and particularly the related impact on the real estate values associated with these loans and properties. A weakness in commercial real estate markets may result in further declines in the values of TCF's real estate or the sale of individual properties at less than previously estimated values, resulting in additional charge-offs. TCF recognizes the effect of such events in the periods in which they occur. The provisions for credit and real estate losses included in the consolidated statements of operations totaled $20.3 million in 1996, compared with $17 million in 1995 and $14.8 million in 1994. Included in the provision for credit losses in 1995 are $5 million of merger-related provisions. The merger-related provisions were established to conform Great Lakes' credit loss reserve practices and methods to those of TCF and to allow for the accelerated disposition of Great Lakes' remaining problem assets. At December 31, 1996, the allowances for loan and real estate losses and industrial revenue bond reserves totaled $73.5 million, compared with $69.2 million at December 31, 1995. The increase in TCF's allowance for loan losses reflects the growth in the balances of higher-risk categories of loans, which carry greater guideline reserve requirements. Net loan, real estate and industrial revenue bond charge-offs were $15.9 million in 1996, compared with $9.5 million in 1995. TCF has experienced an increase in the level of net loan charge-offs related to its consumer finance portfolio. As a result, net loan charge-offs as a percentage of average loans outstanding for TCF's consumer finance portfolio increased to 2.42% for the year ended December 31, 1996, compared with 1.06% for the same period in 1995. In addition, the net loan charge-offs as a percentage of average loans outstanding for TCF's automobile and marine consumer finance portfolio increased to 3.51% for the year ended December 31, 1996, compared with 1.72% for the same period in 1995. The unallocated portion of TCF's allowance for loan losses totaled $22.4 million at December 31, 1996, compared with $17.8 million at December 31, 1995. A summary of the allowances for loan and real estate losses and industrial revenue bond reserves and selected statistics is presented in Note 7 of Notes to Consolidated Financial Statements. NON-PERFORMING ASSETS Non-performing assets (principally non-accrual loans and real estate acquired through foreclosure) totaled $46.2 million at December 31, 1996, down $24.6 million, or 34.7%, from the December 31, 1995 total of $70.7 million. The decrease in non-performing assets reflects the accelerated disposition of certain of Great Lakes' remaining problem assets, partially offset by a $6 million increase in consumer finance non-accrual loans. Properties acquired are being actively marketed. Approximately 72% of non-performing assets consist of, or are secured by, real estate. The accrual of interest income is generally discontinued when loans become 90 days or more past due with respect to either principal or interest unless such loans are adequately secured and in the process of collection. Non-performing assets are summarized in the following table: At December 31, ------------------------------------------------- (Dollars in thousands) 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Non-accrual loans (1): Consumer: Savings bank lending $ 1,746 $ 1,799 $ 1,295 $ 1,264 $ 1,868 Consumer finance lending 11,726 5,688 832 58 129 ------- ------- ------- -------- -------- 13,472 7,487 2,127 1,322 1,997 Residential real estate 3,996 7,045 7,211 9,705 12,747 Commercial real estate 7,604 22,255 18,452 52,463 42,321 Commercial business 1,149 7,541 5,972 24,770 22,642 ------- ------- ------- -------- -------- 26,221 44,328 33,762 88,260 79,707 Real estate and other assets 19,937 26,402 23,849 25,062 50,472 ------- ------- ------- -------- -------- Total non-performing assets $46,158 $70,730 $57,611 $113,322 $130,179 ------- ------- ------- -------- -------- ------- ------- ------- -------- -------- Non-performing assets as a percentage of net loans .94% 1.36% 1.14% 2.46% 2.91% Non-performing assets as a percentage of total assets .65 .98 .73 1.49 1.67 - --------------------------- (1) Included in total loans in the Consolidated Statements of Financial Condition. 27 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued) The following table sets forth information regarding TCF's delinquent loan portfolio, excluding loans held for sale and non-accrual loans: At December 31, ----------------------------------------------------- 1996 1995 ------------------------- ------------------------ (Dollars in thousands) Principal Percentage of Principal Percentage of Balances Gross Loans Balances Gross Loans --------- ------------- --------- ------------- Loans delinquent for: 30-59 days $35,172 .70% $32,519 .62% 60-89 days 7,269 .14 8,159 .15 90 days or more - - 678 .01 ------- --- ------- --- Total $42,441 .84% $41,356 .78% ------- --- ------- --- ------- --- ------- --- The over 30-day delinquency rate on TCF's loans (excluding loans held for sale and non-accrual loans) was .84% of gross loans outstanding at December 31, 1996, compared with .78% at year-end 1995. The increase in the over 30-day delinquency rate reflects an increase in consumer finance delinquencies. TCF's delinquency rates are determined using the contractual method. The following table sets forth information regarding TCF's over 30-day delinquent loan portfolio, excluding loans held for sale and non-accrual loans: At December 31, ------------------------------------------------ 1996 1995 ---------------------- ----------------------- Percentage Percentage Principal of Gross Principal of Gross (Dollars in thousands) Balances Loans Balances Loans --------- ---------- --------- ---------- Consumer: Savings bank lending $ 7,473 .61% $11,110 .96% Consumer finance lending 21,515 3.86 16,188 3.77 ------- ------- 28,988 1.62 27,298 1.72 Residential real estate 8,330 .37 12,056 .46 Commercial real estate 5,114 .60 1,411 .15 Commercial business 9 .01 591 .37 ------- ------- Total $42,441 .84 $41,356 .78 ------- ------- ------- ------- TCF's over 30-day delinquency rate on gross consumer loans was 1.62% at December 31, 1996, down from 1.72% at year-end 1995. Management continues to monitor the consumer loan portfolio, which will generally have higher delinquencies, especially consumer finance loans. TCF's over 30-day delinquency rate on gross consumer finance loans was 3.86% at December 31, 1996, compared with 3.77% at December 31, 1995. TCF's over 30-day delinquency rate on gross automobile and marine and home equity consumer finance loans was 4.24% and 3.09%, respectively, at December 31, 1996, compared with 4.36% and 2.64% at December 31, 1995. Consumer finance lending is generally considered to involve a higher level of credit risk. TCF believes that it has in place experienced personnel and acceptable standards for maintaining credit quality that are consistent with its goals for expanding its portfolio of these higher-yielding loans, but no assurance can be given as to the level of future delinquencies and loan charge-offs. In addition to the non-accrual, restructured and accruing loans 90 days or more past due, there were commercial real estate and commercial business loans with an aggregate principal balance of $16 million outstanding at December 31, 1996 for which management has concerns regarding the ability of the borrowers to meet existing repayment terms. This amount consists of loans that were classified for regulatory purposes as substandard, doubtful or loss, or were to borrowers that currently are experiencing financial difficulties or that management believes may experience financial difficulties in the future. This compares with $56.5 million of such loans at December 31, 1995. Although these loans are secured by commercial real estate or other corporate assets, they may be subject to future modifications of their terms or may become non-performing. Management is monitoring the performance and classification of such loans and the financial condition of these borrowers. 28 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued) LIQUIDITY MANAGEMENT TCF manages its liquidity position to ensure that the funding needs of depositors and borrowers are met promptly and in a cost-effective manner. Asset liquidity arises from the ability to convert assets to cash as well as from the maturity of assets. Liability liquidity results from the ability of TCF to attract a diversity of funding sources to meet funding requirements promptly. TCF's wholly owned savings bank subsidiaries are required by federal regulations to maintain a monthly average minimum asset liquidity ratio of 5%. These subsidiaries have maintained average monthly liquidity ratios in excess of this requirement. Deposits are the primary source of TCF's funds for use in lending and for other general business purposes. In addition to deposits, TCF derives funds primarily from loan repayments, advances from the FHLB and proceeds from reverse repurchase borrowing agreements. Deposit inflows and outflows are significantly influenced by general interest rates, money market conditions, competition for funds and other factors. TCF's deposit inflows and outflows have been affected by these factors and may continue to be affected in future periods. Borrowings may be used to compensate for reductions in normal sources of funds, such as deposit inflows at less than projected levels, net deposit outflows or to support expanded activities. Historically, TCF has borrowed primarily from the FHLB, from institutional sources under reverse repurchase agreements and, to a lesser extent, from other sources. See "Borrowings." Potential sources of liquidity for TCF Financial Corporation (parent company only) include cash dividends from TCF Minnesota and Great Lakes, TCF's wholly owned savings bank subsidiaries, cash flows from other direct subsidiaries, issuance of equity securities, borrowings under the Company's $70 million bank line of credit, and interest income. TCF Minnesota's and Great Lakes' ability to pay dividends or make other capital distributions to TCF is restricted by regulation and may require regulatory approval. Retained earnings at December 31, 1996 includes approximately $109.9 million for which no provision for federal income tax has been made. This amount represents earnings appropriated to bad debt reserves and deducted for federal income tax purposes and is not available for payment of cash dividends or other distributions to shareholders. Payments or distributions of these appropriated earnings could invoke a tax liability for TCF based on the amount of earnings removed and current tax rates. At December 31, 1996, in addition to TCF Minnesota and Great Lakes, TCF Financial Corporation directly owned four insurance agency subsidiaries engaging in the sale of single premium tax-deferred annuities, and mutual funds. Dividends from these subsidiaries to TCF were $4.1 million and $2.8 million for the years ended December 31, 1996 and 1995, respectively. Future dividends from these subsidiaries are dependent upon continued favorable tax treatment for single premium annuities, and legislative proposals have sought to limit or eliminate these tax benefits. Cash flows received by TCF Financial Corporation on the exercise of stock options under the TCF Financial 1995 Incentive Stock Program and common stock warrants were $1.6 million and $12.5 million for the years ended December 31, 1996 and 1995, respectively. DEPOSITS Deposits totaled $5 billion at December 31, 1996, down $213.9 million from December 31, 1995. The decrease includes the effects of the previously described branch sales, and run-off of certificates of deposit. Lower interest-cost checking, savings and money market deposits totaled $2.6 billion, up $66.7 million from year-end 1995, and comprised 52.8% of total deposits at December 31, 1996. Checking, savings and money market deposits are an important source of lower cost funds and fee income for TCF. The Company's weighted average rate for deposits, including non-interest bearing deposits, decreased to 3.29% at December 31, 1996, from 3.60% at December 31, 1995. BORROWINGS Borrowings are used primarily to fund the purchases of investments and securities available for sale. These borrowings totaled $1.5 billion as of December 31, 1996, up $52.4 million from $1.4 billion at year-end 1995. The increase was primarily due to a $247.5 million increase in FHLB advances, partially offset by decreases of $144.7 million in securities sold under repurchase agreements and $40 million on TCF's bank line of credit. The weighted average rate on borrowings decreased to 5.78% at December 31, 1996, from 5.98% at December 31, 1995. In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings, among other things. It requires that a transfer of a financial asset in which the transferor surrenders control over the financial asset shall generally be 29 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued) accounted for as a sale, with appropriate recognition of gain or loss. The statement provides that the transferor has surrendered control if and only if certain conditions are met. The statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and will be applied prospectively. Earlier or retroactive application is not permitted. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." The statement defers for one year certain provisions of SFAS No. 125 regarding the reclassification of financial assets pledged as collateral and the provision regarding potential sales treatment for certain repurchase agreements and similar transactions. Management believes the adoption of these statements will not significantly impact TCF's financial condition or results of operations. STOCKHOLDERS' EQUITY Stockholders' equity at December 31, 1996 was $549.5 million, or 7.7% of total assets, up from $527.7 million, or 7.3% of total assets, at December 31, 1995. The increase in stockholders' equity is primarily due to net income of $85.7 million for the year ended December 31, 1996, partially offset by the repurchase of 1,190,068 shares of TCF's common stock at a cost of $41.4 million, the payment of $25.3 million in dividends on TCF's common stock and a decrease of $9.3 million in unrealized gains on securities available for sale. On January 20, 1997, TCF's Board of Directors (the "Board") authorized the repurchase of up to 5% of TCF common stock, or approximately 1.7 million shares. On February 25, 1997, the Board rescinded TCF's common stock repurchase program. On January 20, 1997, TCF declared a quarterly dividend of 18.75 cents per common share, payable on February 28, 1997 to stockholders of record as of February 7, 1997. RECENT LEGISLATIVE AND REGULATORY DEVELOPMENTS 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 new 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 savings bank subsidiaries. The legislation also provides for a reduction in deposit insurance premiums in subsequent periods and other regulatory reforms. Other recently enacted federal legislation 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. As a result of both the BIF/SAIF legislation and repeal of the reserve method of accounting for bad debts, TCF is pursuing the conversion of its existing savings bank subsidiaries into national bank subsidiaries. Such a conversion would require the approval of applications filed with the Office of the Comptroller of the Currency, and would also require the approval of applications filed with the Federal Reserve Board. ASSET/LIABILITY MANAGEMENT - INTEREST-RATE RISK TCF's results of operations are dependent to a large degree on its net interest income, which is the difference between interest income and interest expense. Like most financial institutions, TCF's interest income and cost of funds are significantly affected by general economic conditions and by policies of regulatory authorities. The mismatch between maturities and interest-rate sensitivities of assets and liabilities results in interest-rate risk. Although the measure is subject to a number of assumptions and is only one of a number of measurements, management believes the interest-rate gap (difference between interest-earning assets and interest-bearing liabilities repricing within a given period) is an important indication of TCF's exposure to interest-rate risk and the related volatility of net interest income in a changing interest rate environment. In addition to the interest-rate gap analysis, management also utilizes a simulation model to measure and manage TCF's interest-rate risk. 30 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Financial Review - (Continued) For an institution with a positive interest-rate gap for a given period, the amount of its interest-earning assets maturing or otherwise repricing within such period exceeds the amount of interest-bearing liabilities repricing within the same period. In a rising interest-rate environment, institutions with positive interest-rate gaps will generally experience more immediate increases in the yield on their assets than in the cost of their liabilities. Conversely, the cost of funds for institutions with positive interest-rate gaps will generally decrease more slowly than the yield on their assets 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 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 and competition. Decisions by management to purchase or sell assets, or retire debt could change the maturity/repricing and spread relationships. TCF's one-year interest-rate gap was a positive $60.6 million, or 1% of total assets, at December 31, 1996, compared with a negative $189.5 million, or (3)% of total assets, at December 31, 1995. The following table summarizes TCF's interest-rate gap position at December 31, 1996:
Maturity/Rate Sensitivity ------------------------------------------------------- Within (Dollars in thousands) 1 Year 1-3 Years 3+ Years Total ----------- ----------- ----------- ------------ Interest-earning assets: Loans held for sale $ 203,869 $ - $ - $ 203,869 Securities available for sale 279,328 333,552 386,674 999,554 Real estate loans (1) 1,303,842 861,640 945,053 3,110,535 Other loans (1) 1,555,872 204,293 125,262 1,885,427 Investments (2) 442,103 - - 442,103 ----------- ----------- ----------- ------------ 3,785,014 1,399,485 1,456,989 6,641,488 ----------- ----------- ----------- ------------ Interest-bearing liabilities: Deposits (3) 2,618,943 817,952 1,540,735 4,977,630 Federal Home Loan Bank advances 836,514 281,301 23,225 1,141,040 Other borrowings 268,945 68,876 14,957 352,778 ----------- ----------- ----------- ------------ 3,724,402 1,168,129 1,578,917 6,471,448 ----------- ----------- ----------- ------------ Interest-earning assets over (under) interest-bearing liabilities $ 60,612 $ 231,356 $ (121,928) $ 170,040 ----------- ----------- ----------- ------------ ----------- ----------- ----------- ------------ Cumulative gap $ 60,612 $ 291,968 $ 170,040 $ 170,040 ----------- ----------- ----------- ------------ ----------- ----------- ----------- ------------ Cumulative gap as a percentage of total assets: At December 31, 1996 1% 4% 2% 2% ----------- ----------- ----------- ------------ ----------- ----------- ----------- ------------ At December 31, 1995 (3)% 2% 2% 2% ----------- ----------- ----------- ------------ ----------- ----------- ----------- ------------
___________________________________ (1) Based upon contractual maturity, repricing date, if applicable, scheduled repayments of principal and projected prepayments of principal based upon experience. (2) Includes interest-bearing deposits with banks, U.S. Government and other marketable securities held to maturity and FHLB stock. (3) Includes non-interest bearing deposits. Money market accounts and 13% of checking accounts are included in amounts repricing within one year. In addition, 23% and 28% of passbook and statement accounts are included in the "Within 1 Year" and "1-3 Years" categories, respectively. All remaining passbook and statement and checking accounts are assumed to mature in the "3+ Years" category. While management believes these assumptions are well based, no assurance can be given that amounts on deposit in checking, passbook and statement accounts will not significantly decrease or be repriced in the event of a general rise in interest rates. 31 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (In thousands, except per-share data) ASSETS
At December 31, -------------------------- 1996 1995 ---- ---- Cash and due from banks $ 238,670 $ 233,619 Interest-bearing deposits with banks 372,132 533 U.S. Government and other marketable securities held to maturity (fair value of $3,910 and $3,716) 3,910 3,716 Federal Home Loan Bank stock, at cost 66,061 60,096 Securities available for sale (amortized cost of $995,352 and $1,182,240) 999,554 1,201,490 Loans held for sale 203,869 242,413 Loans: Residential real estate 2,261,237 2,618,725 Commercial real estate 861,056 970,763 Commercial business 156,712 167,663 Consumer 1,801,066 1,593,439 Unearned discounts and deferred fees (84,109) (73,489) ---------- ---------- Total loans 4,995,962 5,277,101 Allowance for loan losses (70,749) (65,695) ---------- ---------- Net loans 4,925,213 5,211,406 Premises and equipment 128,743 120,763 Real estate: Total real estate 16,898 24,466 Allowance for real estate losses (1,127) (1,526) ---------- ---------- Net real estate 15,771 22,940 Accrued interest receivable 42,173 49,120 Goodwill 9,897 11,503 Deposit base intangibles 10,843 12,918 Mortgage servicing rights 17,360 16,286 Other assets 56,666 53,108 ---------- ---------- $7,090,862 $7,239,911 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Checking $1,212,771 $1,103,272 Passbook and statement 783,026 841,115 Money market 631,922 616,667 Certificates 2,349,911 2,630,498 ---------- ---------- Total deposits 4,977,630 5,191,552 ---------- ---------- Securities sold under repurchase agreements 293,732 438,426 Federal Home Loan Bank advances 1,141,040 893,587 Subordinated debt 13,397 13,520 Collateralized obligations 40,505 41,391 Other borrowings 5,144 54,520 ---------- ---------- Total borrowings 1,493,818 1,441,444 Accrued interest payable 18,943 14,905 Accrued expenses and other liabilities 50,965 64,335 ---------- ---------- Total liabilities 6,541,356 6,712,236 ---------- ---------- Stockholders' equity: Preferred stock, par value $.01 per share, 30,000,000 shares authorized; none issued and outstanding - - Common stock, par value $.01 per share, 70,000,000 shares authorized; 35,942,123 and 35,604,531 shares issued 359 356 Additional paid-in capital 251,536 243,122 Unamortized deferred compensation (7,693) (11,195) Retained earnings, subject to certain restrictions 344,205 283,821 Loan to Executive Deferred Compensation Plan (68) (131) Unrealized gain on securities available for sale, net 2,376 11,702 Treasury stock, at cost, 1,185,018 shares in 1996 (41,209) - ---------- ---------- Total stockholders' equity 549,506 527,675 ---------- ---------- $7,090,862 $7,239,911 ---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements. 32 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Financial Operations (In thousands, except per-share data)
Year Ended December 31, -------------------------------------------------- 1996 1995 1994 ---- ---- ---- Interest income: Interest on loans $486,140 $488,433 $403,095 Interest on loans held for sale 17,080 18,253 16,917 Interest on securities available for sale 75,303 4,021 13,325 Interest on investments 4,338 5,946 10,476 Interest on mortgage-backed securities held to maturity - 91,037 108,669 -------- -------- -------- Total interest income 582,861 607,690 552,482 -------- -------- -------- Interest expense: Interest on deposits 171,375 193,244 183,179 Interest on borrowings 71,346 95,248 90,151 -------- -------- -------- Total interest expense 242,721 288,492 273,330 -------- -------- -------- Net interest income 340,140 319,198 279,152 Provision for credit losses 19,820 15,212 10,802 -------- -------- -------- Net interest income after provision for credit losses 320,320 303,986 268,350 -------- -------- -------- Non-interest income: Fee and service charge revenues 100,422 89,712 83,744 ATM network revenues 11,480 10,568 8,988 Title insurance revenues 13,492 11,509 10,274 Commissions on sales of annuities 9,134 8,557 11,310 Gain on sale of loans held for sale 5,038 3,735 2,124 Gain (loss) on sale of securities available for sale 85 (190) 981 Gain on sale of loans 5,443 - - Loss on sale of mortgage-backed securities - (21,037) - Gain on sale of loan servicing - 1,535 2,353 Gain on sale of branches 2,747 1,103 - Other 9,956 7,284 5,445 -------- -------- -------- Total non-interest income 157,797 112,776 125,219 -------- -------- -------- Non-interest expense: Compensation and employee benefits 151,745 139,548 129,794 Occupancy and equipment 51,136 50,554 48,217 Advertising and promotions 16,711 16,651 14,119 Federal deposit insurance premiums and assessments 12,019 13,540 14,779 Amortization of goodwill and other intangibles 3,167 3,163 3,282 Provision for real estate losses 433 1,804 4,022 FDIC special assessment 34,803 - - Merger-related expenses - 21,733 - Cancellation cost on early termination of interest-rate exchange contracts - 4,423 - Other 71,056 65,917 62,771 -------- -------- -------- Total non-interest expense 341,070 317,333 276,984 -------- -------- -------- Income before income tax expense and extraordinary item 137,047 99,429 116,585 Income tax expense 51,384 37,778 46,402 -------- -------- -------- Income before extraordinary item 85,663 61,651 70,183 Extraordinary item: Penalties on early repayment of FHLB advances, net of tax benefit of $578 - (963) - -------- -------- -------- Net income 85,663 60,688 70,183 Dividends on preferred stock - 678 2,710 -------- -------- -------- Net income available to common shareholders $ 85,663 $ 60,010 $ 67,473 -------- -------- -------- -------- -------- -------- Per common share: Income before extraordinary item $ 2.42 $ 1.71 $ 1.95 Extraordinary item - (.03) - -------- -------- -------- Net income $ 2.42 $ 1.68 $ 1.95 -------- -------- -------- -------- -------- -------- Dividends declared $ .71875 $ .59375 $ .50 -------- -------- -------- -------- -------- --------
See accompanying notes to consolidated financial statements. 33 TCF FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------------------- (In thousands) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 85,663 $ 60,688 $ 70,183 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,504 18,165 17,884 Amortization of goodwill and other intangibles 3,167 3,163 3,282 Amortization of fees, discounts and premiums (529) (2,028) (1,768) Proceeds from sales of loans held for sale 857,050 652,964 1,065,818 Principal collected on loans held for sale 10,225 12,100 9,508 Originations and purchases of loans held for sale (802,777) (706,243) (843,925) Net decrease in other assets and liabilities, and accrued interest 12,139 9,251 4,738 Provisions for credit and real estate losses 20,253 17,016 14,824 (Gain) loss on sale of securities available for sale (85) 190 (981) Gain on sale of loans (5,443) - - Loss on sale of mortgage-backed securities - 21,037 - Gain on sale of branches (2,747) (1,103) - Gain on sale of loan servicing - (1,535) (2,353) Penalties on early repayment of FHLB advances - 1,541 - Cancellation cost on early termination of interest-rate exchange contracts - 4,423 - Write-off of equipment - 13,435 - Other, net (192) (5,673) 2,694 ----------------------------------------- Total adjustments 110,565 36,703 269,721 ----------------------------------------- Net cash provided by operating activities 196,228 97,391 339,904 ----------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of mortgage-backed securities - 211,117 - Principal collected on mortgage-backed securities - 180,112 408,988 Purchases of mortgage-backed securities - - (544,447) Principal collected on loans 1,844,888 1,392,384 1,220,688 Loan originations (1,684,466) (1,583,915) (1,727,471) Proceeds from sales of loans 61,302 - - Net (increase) decrease in interest-bearing deposits with banks (371,599) 193,218 (183,238) Proceeds from sales of securities available for sale 16,630 90,218 177,996 Proceeds from maturities of and principal collected on securities available for sale 201,914 128,167 713,876 Purchases of securities available for sale (32,993) (45,805) (651,039) Proceeds from redemption of FHLB stock 19,055 24,119 10,000 Purchases of FHLB stock (25,020) (4,848) (4,676) Purchases of term federal funds sold - - (76,000) Proceeds from maturities of term federal funds sold - - 91,000 Net decrease in short-term federal funds sold - 6,900 83,641 Proceeds from sales of real estate 26,095 19,043 28,233 Payments for acquisition and improvement of real estate (2,206) (3,003) (2,291) Proceeds from sales of loan servicing - 1,750 2,807 Purchases of premises and equipment (24,776) (19,329) (18,116) Acquisitions of deposits, net of cash acquired - 5,752 - Sale of deposits, net of cash paid (60,550) (57,007) - Other, net 9,900 9,343 9,699 ----------------------------------------- Net cash provided (used) by investing activities (21,826) 548,216 (460,350) -----------------------------------------
Continued on following page. 34 TCF FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
Year Ended December 31, ------------------------------------------- (In thousands) 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in deposits (150,667) (155,401) (296,210) Proceeds from securities sold under repurchase agreements and federal funds purchased 11,398,478 10,473,013 4,804,505 Payments on securities sold under repurchase agreements and federal funds purchased (11,557,672) (10,451,056) (4,738,927) Payments on subordinated debt - (34,500) - Proceeds from FHLB advances 1,778,292 1,839,390 2,060,663 Payments on FHLB advances (1,530,839) (2,302,007) (1,651,492) Payments for termination of interest-rate exchange contracts - (4,581) - Proceeds from other borrowings 307,292 65,285 - Payments on collateralized obligations and other borrowings (343,239) (30,978) (3,399) Proceeds from exercise of stock warrants and stock options 1,639 15,309 4,032 Repurchases of common stock (41,382) (824) (17,524) Payments for redemption of preferred stock - (27,100) - Payments for dividends on common stock (25,279) (20,968) (12,257) Other, net (5,974) (1,836) (3,003) ----------------------------------------- Net cash provided (used) by financing activities (169,351) (636,254) 146,388 ----------------------------------------- Net increase in cash and due from banks 5,051 9,353 25,942 Cash and due from banks at beginning of year 233,619 224,266 198,324 ----------------------------------------- Cash and due from banks at end of year $ 238,670 $ 233,619 $ 224,266 ----------------------------------------- ----------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest on deposits and borrowings $ 238,180 $ 291,724 $ 274,815 ----------------------------------------- ----------------------------------------- Income taxes $ 68,231 $ 23,806 $ 43,250 ----------------------------------------- ----------------------------------------- SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES: Transfer of loans to real estate and other assets $ 37,417 $ 28,015 $ 49,727 ----------------------------------------- ----------------------------------------- Transfer of U.S. Government and other marketable securities to securities available for sale $ - $ - $ 95,166 ----------------------------------------- ----------------------------------------- Transfer of mortgage-backed securities to securities available for sale $ - $ 1,187,394 $ 294,611 ----------------------------------------- -----------------------------------------
See accompanying notes to consolidated financial statements. 35 TCF FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Number of Common Preferred (Dollars in thousands) Shares Issued Stock - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1993 33,297,104 $ 27 Cumulative effect of change in accounting for securities available for sale at January 1, 1994, net of tax - - Net income - - Dividends on preferred stock - - Dividends on common stock 348,822 - Purchase of 1,070,000 shares to be held in treasury - - Issuance of 424,490 shares of restricted stock, of which 366,400 shares were from treasury 58,090 - Grant of 57,000 shares of restricted stock to outside directors from treasury - - Issuance of 840 shares to employee benefit plans from treasury - - Issuance of shares to Dividend Reinvestment Plan 8,060 - Cancellation of shares of restricted stock (3,000) - Amortization of deferred compensation - - Exercise of stock options and stock warrants 463,270 - Payments on Loan to Executive Deferred Compensation Plan and ESOP debt - - Change in unrealized gain (loss) on securities available for sale, net - - ----------------------- BALANCE, DECEMBER 31, 1994 34,172,346 27 Net income - - Dividends on preferred stock - - Dividends on common stock - - Purchase of 32,400 shares to be held in treasury - - Issuance of 308,400 shares of restricted stock, of which 304,400 shares were from treasury 4,000 - Grant of 45,000 shares of restricted stock to outside directors - - Issuance of 373,760 shares from treasury to effect merger with Great Lakes (373,760) - Issuance of shares to Dividend Reinvestment Plan 600 - Redemption of preferred stock - (27) Repurchase and cancellation of shares and restricted stock (11,765) - Amortization of deferred compensation - - Exercise of stock options and stock warrants 1,657,292 - Issuance of common stock on conversion of convertible debentures 155,818 - Payments on Loan to Executive Deferred Compensation Plan and ESOP debt - - Change in unrealized gain (loss) on securities available for sale, net - - ----------------------- BALANCE, DECEMBER 31, 1995 35,604,531 - Net income - - Dividends on common stock - - Purchase of 1,190,068 shares to be held in treasury - - Issuance of 36,400 shares of restricted stock, of which 3,000 shares were from treasury 33,400 - Grant of 2,050 shares of restricted stock to outside directors from treasury - - Cancellation of shares of restricted stock (23,200) - Amortization of deferred compensation - - Exercise of stock options 320,176 - Issuance of common stock of conversion of convertible debentures 7,216 - Payments on loan to Executive Deferred Compensation Plan - - Change in unrealized gain (loss) on securities available for sale, net - - ----------------------- BALANCE, DECEMBER 31, 1996 35,942,123 $ - - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 36 TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Loan to Executive Unrealized Deferred Gain (Loss) Unamortized Compensation on Securities Common Additional Deferred Retained Plan and Available Treasury Stock Paid-in Capital Compensation Earnings ESOP Debt for Sale, Net Stock Total - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, DECEMBER 31, 1993 $333 $238,394 $ (1,272) $194,831 $(4,248) $ - $ - $428,065 Cumulative effect of change in accounting for securities available for sale at January 1, 1994, net of tax - - - - - 3,276 - 3,276 Net income - - - 70,183 - - - 70,183 Dividends on preferred stock - - - (2,710) - - - (2,710) Dividends on common stock 4 5,264 - (17,525) - - - (12,257) Purchase of 1,070,000 shares to be held in treasury - - - - - - (17,524) (17,524) Issuance of 424,490 shares of restricted stock, of which 366,400 shares were from treasury 1 2,711 (7,541) - - - 5,550 721 Grant of 57,000 shares of restricted stock to outside directors from treasury - 117 (1,065) - - - 948 - Issuance of 840 shares to employee benefit plans from treasury - 4 - - - - 14 18 Issuance of shares to Dividend Reinvestment Plan - 122 - - - - - 122 Cancellation of shares of restricted stock - (56) 40 - - - - (16) Amortization of deferred compensation - - 2,852 - - - - 2,852 Exercise of stock options and stock warrants 4 4,618 - - - - - 4,622 Payments on Loan to Executive Deferred Compensation Plan and ESOP debt - - - - 2,553 - - 2,553 Change in unrealized gain (loss) on securities available for sale, net - - - - - (4,436) - (4,436) ------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 342 251,174 (6,986) 244,779 (1,695) (1,160) (11,012) 475,469 Net income - - - 60,688 - - - 60,688 Dividends on preferred stock - - - (678) - - - (678) Dividends on common stock - - - (20,968) - - - (20,968) Purchase of 32,400 shares to be held in treasury - - - - - - (824) (824) Issuance of 308,400 shares of restricted stock, of which 304,400 shares were from treasury - 5,166 (10,628) - - - 5,462 - Grant of 45,000 shares of restricted stock to outside directors - 369 (1,431) - - - - (1,062) Issuance of 373,760 shares from treasury to effect merger with Great Lakes (4) (6,370) - - - - 6,374 - Issuance of shares to Dividend Reinvestment Plan - 11 - - - - - 11 Redemption of preferred stock - (27,073) - - - - - (27,100) Repurchase and cancellation of shares and restricted stock - (227) 175 - - - - (52) Amortization of deferred compensation - - 7,675 - - - - 7,675 Exercise of stock options and stock warrants 16 17,418 - - - - - 17,434 Issuance of common stock on conversion of convertible debentures 2 2,654 - - - - - 2,656 Payments on Loan to Executive Deferred Compensation Plan and ESOP debt - - - - 1,564 - - 1,564 Change in unrealized gain (loss) on securities available for sale, net - - - - - 12,862 - 12,862 ------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 356 243,122 (11,195) 283,821 (131) 11,702 - 527,675 Net income - - - 85,663 - - - 85,663 Dividends on common stock - - - (25,279) - - - (25,279) Purchase of 1,190,068 shares to be held in treasury - - - - - - (41,382) (41,382) Issuance of 36,400 shares of restricted stock, of which 3,000 shares were from treasury - 4,520 (4,609) - - - 102 13 Grant of 2,050 shares of restricted stock to outside directors from treasury - 295 (366) - - - 71 - Cancellation of shares of restricted stock - (636) 574 - - - - (62) Amortization of deferred compensation - - 7,903 - - - - 7,903 Exercise of stock options 3 4,112 - - - - - 4,115 Issuance of common stock on conversion of convertible debentures - 123 - - - - - 123 Payments on loan to Executive Deferred Compensation Plan - - - - 63 - - 63 Change in unrealized gain (loss) on securities available for sale, net - - - - - (9,326) - (9,326) ------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 $359 $251,536 $ (7,693) $344,205 $ (68) $ 2,376 $(41,209) $549,506 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 37 TCF FINANCIAL CORPORATION AND SUBSIDIARIES 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 holding company engaged primarily in retail community banking and consumer finance lending through its wholly owned subsidiaries, TCF Bank Minnesota fsb ("TCF Minnesota") and Great Lakes Bancorp, A Federal Savings Bank ("Great Lakes"). TCF Bank Illinois fsb ("TCF Illinois") and TCF Bank Wisconsin fsb ("TCF Wisconsin") are wholly owned subsidiaries of TCF Minnesota. 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. CHANGE IN METHOD OF ACCOUNTING FOR LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF Effective January 1, 1996, TCF adopted Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The adoption of SFAS No. 121 did not impact TCF's financial condition or results of operations for 1996 or any prior period. ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 establishes financial accounting and reporting standards for stock-based employee compensation plans. SFAS No. 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to retain the accounting under APB Opinion No. 25 must make pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting under SFAS No. 123 had been applied. TCF has elected to retain the intrinsic value based method of accounting. See Note 18 for additional information concerning SFAS No. 123. 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 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 Residential real estate and education loans held for sale are carried at the lower of cost or market determined on an aggregate basis. Cost of loans sold is determined on a specific identification basis and gains or losses on sales of loans held for sale are recognized at settlement dates. Net fees and costs associated with originating and acquiring loans held for sale are deferred and are included in the basis for determining the gain or loss on sales of loans held for sale. LOANS Net fees and costs associated with originating and acquiring loans are deferred and amortized over the lives of the loans. Net fees and costs associated with loan commitments are deferred in other assets or other liabilities until the loan is advanced. Discounts and premiums on loans purchased, net deferred fees and unearned discounts and finance charges, which are considered yield adjustments, are amortized using methods which approximate a level yield over the estimated remaining lives of the loans. The allowance for loan losses is maintained at a level believed to be adequate by management to provide for estimated loan losses. Management's judgment as to the adequacy of the allowance is a result of ongoing review of larger individual loans, the overall risk characteristics of the portfolio, changes in the character or size of the portfolio, the levels of non-performing assets, net charge-offs, geographic location and prevailing economic conditions. The allowance for loan losses is established for known or anticipated problem loans, as well as for loans which are not currently known to require specific allowances. Loans are charged off to the 38 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) extent they are deemed to be uncollectible. The adequacy of the allowance for loan 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 or properties. These estimates are reviewed periodically and adjustments, if necessary, are reported in the provision for credit losses in the periods in which they become known. Interest income is accrued on loan balances outstanding. Loans, including those 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 is adequately secured and in the process of collection. When a loan is placed on non-accrual status, unless collection of all principal and interest is considered to be assured, uncollected interest accrued in prior years is charged off against the allowance for loan losses. Interest accrued in the current year is reversed. Interest payments received on non-accrual loans are generally applied to principal unless the remaining loan principal balance has been determined to be fully collectible. Cost of loans sold is determined on a specific identification basis and gains or losses on sales of loans are recognized at trade dates. PREMISES AND EQUIPMENT Premises and equipment are carried at cost and are depreciated or amortized on a straight-line basis over their estimated useful lives. REAL ESTATE Real estate in judgment and real estate acquired through foreclosure are recorded at the lower of cost or fair value minus estimated costs to sell at the date of transfer to real estate. If the fair value of an asset minus the estimated costs to sell should decline to less than the carrying amount of the asset, the deficiency is recognized through the allowance for real estate losses. The allowance for real estate losses is based on management's periodic analysis of real estate holdings and is maintained at a level believed to be adequate by management to provide for estimated real estate losses. In this analysis, management considers factors including, but not limited to, general economic and market conditions, geographic location, composition and appraisals of the real estate holdings and property conditions. The allowance for real estate losses is established to reduce the carrying value of real estate to fair value less disposition costs. The adequacy of the allowance for real estate losses is highly dependent upon management's estimates of variables affecting valuation, appraisals of real estate and evaluations of performance and status. Such estimates, appraisals and evaluations may be subject to frequent adjustments due to changing economic prospects of borrowers or properties and it is possible that ultimate losses may vary from current estimates. These estimates are reviewed periodically and adjustments, if necessary, are reported in the provision for real estate losses in the periods in which they become known. MORTGAGE SERVICING RIGHTS Mortgage servicing rights are acquired by purchasing or originating mortgage loans and selling those loans with servicing rights retained, or by purchasing the servicing rights separately. The cost of mortgage loans purchased or originated is allocated to mortgage servicing rights and mortgage loans (without the mortgage servicing rights) based on their relative fair values. The costs allocated to 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. TCF adopted SFAS No. 122, "Accounting for Mortgage Servicing Rights," on a prospective basis effective April 1, 1995. In accordance with SFAS No. 122, prior period financial statements have not been restated to reflect the change in accounting method. INTANGIBLE ASSETS Goodwill resulting from acquisitions is amortized over 25 years on a straight-line basis. For acquisitions in which the fair value of liabilities assumed exceeds the fair value of tangible and intangible assets acquired, goodwill is amortized by the level-yield method based upon the outstanding balances, and over the estimated remaining lives, of the long-term assets acquired. Deposit base intangibles are amortized over 10 years on a straight-line basis. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS TCF enters into sales of securities under repurchase agreements (reverse repurchase agreements). Such agreements are treated as financings, and the obligations to repurchase securities sold are reflected as liabilities in the Consolidated Statements of Financial Condition. The securities underlying the agreements remain in the asset accounts in the Consolidated Statements of Financial Condition. ADVERTISING AND PROMOTIONS Expenditures for advertising costs are expensed as incurred. 39 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) 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 weighted average number of common and common equivalent shares outstanding used to compute earnings per common share were 35,342,251, 35,685,968 and 34,526,602 for the years ended December 31, 1996, 1995 and 1994, respectively. (2) BUSINESS COMBINATIONS AND ACQUISITIONS GREAT LAKES BANCORP, A FEDERAL SAVINGS BANK On February 8, 1995, TCF completed its acquisition of Great Lakes, a Michigan-based savings bank with $2.8 billion in assets and $1.6 billion in deposits. In connection with the acquisition, TCF issued approximately 9.7 million shares of its common stock for all of the outstanding common shares of Great Lakes. In addition, each outstanding share of Great Lakes preferred stock was exchanged for one share of TCF preferred stock with substantially identical terms. 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 Great Lakes for all periods presented, except for dividends declared per share. In connection with the acquisition, an after-tax merger-related charge of $32.8 million was incurred during the 1995 first quarter. The following table summarizes the major components of the merger-related charges (in thousands): Loss on sale of mortgage-backed securities $21,037 Loss on sale of securities available for sale 310 Loss on prepayment of FHLB advances 1,541(1) Interest-rate exchange contract termination costs 4,423 Provision for credit losses 5,000 Merger-related expenses Equipment charges 13,933 Severance and employee benefits 4,721 Professional fees 2,215 Other 864 ------- Total merger-related expenses 21,733 ------- Total pretax merger-related charges $54,044 ------- ------- _________________________________ (1) Reflected in the Consolidated Statements of Operations as an extraordinary item, net of tax benefit of $578. During 1995, Great Lakes sold $232.2 million of collateralized mortgage obligations from its held-to-maturity portfolio at a pretax loss of $21 million. Proceeds from the sale of the collateralized mortgage obligations totaled $211.1 million. Gross losses of $21 million and gross gains of $8,000 were recognized in 1995. Also in 1995, Great Lakes sold $17.3 million of securities available for sale at a pretax loss of $310,000. These merger-related asset sales were completed as part of TCF's strategy to reduce Great Lakes' interest-rate and credit risk to levels consistent with TCF's existing interest-rate risk position and credit risk policy. In addition to these asset sales, Great Lakes prepaid $112.3 million of Federal Home Loan Bank ("FHLB") advances at a pretax loss of $1.5 million during 1995. This amount, net of a $578,000 income tax benefit, was recorded as an extraordinary item. Interest-rate exchange contracts with notional principal amounts totaling $544.5 million were terminated by Great Lakes at a pretax loss of $4.4 million. These actions were taken in order to reduce Great Lakes' level of higher-cost wholesale borrowings and to reduce interest-rate risk. Great Lakes recorded $5 million in provisions for credit losses in 1995 to conform its credit loss reserve practices and methods to those of TCF and to allow for the accelerated disposition of its remaining problem assets. In connection with its acquisition of Great Lakes, TCF committed to restructure certain existing business activities of Great Lakes and to integrate Great Lakes' data processing system into TCF's. These actions were also designed to reduce staff by consolidating certain functions such as data processing, investments and certain other back office operations. Subsequent to its merger with TCF, Great Lakes recognized a pretax charge of $21.7 million for these restructuring and merger-related expenses. ACQUISITION 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. BOC Financial Corporation is the parent company of the Bank of Chicago, s.b. which operates three branch offices in the Chicago area. TCF accounted for the acquisition using the purchase method of accounting. 40 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) (3) INVESTMENTS Investments consist of the following:
AT DECEMBER 31, -------------------------------------------------------------------------------------- (Dollars in thousands) 1996 1995 ----------------------------------------- ---------------------------------------- Gross Gross Gross Gross Carrying Unrealized Unrealized Fair Carrying Unrealized Unrealized Fair Value Gains Losses Value Value Gains Losses Value -------- ---------- ----------- -------- -------- ---------- ---------- ------- Interest-bearing deposits with banks $372,132 $- $- $372,132 $ 533 $- $- $ 533 U.S. Government and other marketable securities held to maturity 3,910 - - 3,910 3,716 - - 3,716 Federal Home Loan Bank stock, at cost 66,061 - - 66,061 60,096 - - 60,096 -------- --- --- -------- ------- --- --- ------- $442,103 $- $- $442,103 $64,345 $- $- $64,345 -------- --- --- -------- ------- --- --- ------- -------- --- --- -------- ------- --- --- ------- Weighted average yield 5.50% 7.67% ---- ---- ---- ----
The carrying value and fair value of investments at December 31, 1996, by contractual maturity, are shown below: Carrying Fair (In thousands) Value Value -------- -------- Due in one year or less $376,042 $376,042 No stated maturity 66,061 66,061 -------- -------- $442,103 $442,103 -------- -------- -------- -------- Interest and dividend income on investments consist of the following: Year Ended December 31, ------------------------------ (In thousands) 1996 1995 1994 ---- ---- ---- Interest-bearing deposits with banks $ 173 $ 426 $ 1,020 Federal funds sold 135 506 3,670 U.S. Government and other marketable securities held to maturity 199 200 271 Federal Home Loan Bank stock 3,831 4,814 5,515 ------ ------ ------- $4,338 $5,946 $10,476 ------ ------ ------- ------ ------ ------- Accrued interest receivable on investments totaled $18,000 and $20,000 at December 31, 1996 and 1995, respectively. There were no sales of U.S. Government and other marketable securities held to maturity during 1996, 1995 or 1994. 41 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) (4) SECURITIES AVAILABLE FOR SALE Securities available for sale consist of the following:
AT DECEMBER 31, -------------------------------------------------------------------------------------------------- (Dollars in thousands) 1996 1995 --------------------------------------------- ------------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value --------- ---------- ---------- ------- ---------- ---------- ---------- -------- U.S. Government and other marketable securities $ - $ - $ - $ - $ 1,004 $ 58 $ - $ 1,062 -------- ------- ------- -------- ---------- ------- ------- ---------- Mortgage-backed securities: FHLMC 318,441 2,710 (3,974) 317,177 356,021 5,753 (1,143) 360,631 FNMA 539,475 5,906 (3,234) 542,147 643,572 13,105 (1,109) 655,568 GNMA 112,732 3,766 (110) 116,388 134,550 4,243 (70) 138,723 Private issuer 23,272 28 (769) 22,531 28,148 77 (1,322) 26,903 Collateralized mortgage obligations 1,432 - (121) 1,311 18,945 - (342) 18,603 -------- ------- ------- -------- ---------- ------- ------- ---------- 995,352 12,410 (8,208) 999,554 1,181,236 23,178 (3,986) 1,200,428 -------- ------- ------- -------- ---------- ------- ------- ---------- $995,352 $12,410 $(8,208) $999,554 $1,182,240 $23,236 $(3,986) $1,201,490 -------- ------- ------- -------- ---------- ------- ------- ---------- -------- ------- ------- -------- ---------- ------- ------- ---------- Weighted average yield 7.15% 7.13% ---- ---- ---- ----
Included in securities available for sale at December 31, 1996 are $49 million of first mortgage loans which TCF has pooled and formed FNMA mortgage-backed securities. TCF has retained the credit risk on these securities. Accrued interest receivable on securities available for sale was $6.5 million and $7.8 million at December 31, 1996 and 1995, respectively. Proceeds from sales of securities available for sale totaled $16.6 million, $90.2 million and $178 million during 1996, 1995 and 1994, respectively. Gross gains of $100,000, $400,000 and $3.1 million and gross losses of $15,000, $590,000 and $2.1 million were recognized during 1996, 1995 and 1994, respectively. (5) LOANS HELD FOR SALE Loans held for sale consist of the following: AT DECEMBER 31, ---------------------- (In thousands) 1996 1995 ---- ---- Residential real estate $ 57,657 $ 80,089 Education 145,835 163,168 -------- -------- 203,492 243,257 Less: Deferred loan costs, net (502) (564) Unearned discounts, net 125 1,408 -------- -------- $203,869 $242,413 -------- -------- -------- -------- Accrued interest receivable on loans held for sale was $5.7 million and $8.3 million at December 31, 1996 and 1995, respectively. 42 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) (6) LOANS Loans consist of the following: At December 31, ----------------------- (In thousands) 1996 1995 ---- ---- Residential real estate $2,261,237 $2,618,725 ---------- ---------- Commercial real estate: Apartments 336,038 394,263 Other permanent 466,624 504,861 Construction and development 58,394 71,639 ---------- ---------- 861,056 970,763 ---------- ---------- Total real estate 3,122,293 3,589,488 ---------- ---------- Commercial business 156,712 167,663 ---------- ---------- Consumer: Home equity 1,293,871 1,112,996 Automobile and marine 416,535 323,074 Credit card 651 45,123 Loans secured by deposits 8,230 10,034 Other secured 19,106 18,364 Unsecured 62,673 83,848 ---------- ---------- 1,801,066 1,593,439 ---------- ---------- 5,080,071 5,350,590 Less: Unearned discounts on loans purchased 2,441 3,126 Deferred loan fees, net 6,129 8,390 Unearned discounts and finance charges, net 75,539 61,973 ---------- ---------- $4,995,962 $5,277,101 ---------- ---------- ---------- ---------- Accrued interest receivable on loans was $30 million and $33 million at December 31, 1996 and 1995, respectively. At December 31, 1996, the recorded investment in loans that are considered to be impaired was $10.4 million for which the related allowance for credit losses was $2.8 million. The balance of impaired loans on non-accrual status was $8.8 million at December 31, 1996. The average recorded investment in impaired loans during the year ended December 31, 1996 was $22.1 million. For the year ended December 31, 1996, TCF recognized interest income on impaired loans of $926,000, of which $878,000 was recognized using the cash basis method of income recognition. At December 31, 1995, the recorded investment in loans that are considered to be impaired was $29.8 million. All of these loans were on non-accrual status. Included in this amount are $29.3 million of impaired loans for which the related allowance for credit losses is $5.8 million and $500,000 of impaired loans that, as a result of write-downs, do not have a specific allowance for credit losses. The average recorded investment in impaired loans during the year ended December 31, 1995 was $28 million. For the year ended December 31, 1995, TCF recognized interest income on impaired loans of $293,000, all of which was recognized using the cash basis method of income recognition. At December 31, 1996, 1995 and 1994, loans on non-accrual status totaled $26.2 million, $44.3 million and $33.8 million, respectively. Had the loans performed in accordance with their original terms throughout 1996, TCF would have recorded gross interest income of $3.2 million for these loans. Interest income of $1.3 million has been recorded on these loans for the year ended December 31, 1996. Included in loans at December 31, 1996 and 1995, are commercial real estate loans aggregating $3 million and $1.6 million, respectively, with terms that have been modified in troubled debt restructurings. Had the loans performed in accordance with their original terms throughout 1996, TCF would have recorded gross interest income of $340,000 for these loans. Interest income of $294,000 has been recorded on these loans for the year ended December 31, 1996. There were no material commitments to lend additional funds to customers whose loans were classified as restructured or non-accrual at December 31, 1996. Included in commercial real estate loans at December 31, 1996 and 1995, are $35.8 million and $49.9 million, respectively, of loans to facilitate the sale of real estate accounted for by the installment method. The installment method of accounting was applied because the borrower's initial and continuing investment was not adequate for full accrual profit recognition. 43 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) TCF has significantly expanded its consumer finance operations in recent periods and had 61 consumer finance offices in 16 states as of December 31, 1996. TCF's consumer finance loan portfolio totaled $496.3 million at December 31, 1996, compared with $374.4 million at December 31, 1995. The underwriting criteria for loans originated by TCF's consumer finance offices are generally less stringent than those historically adhered to by TCF and, as a result, these loans have a higher level of credit risk. TCF generally requires collateral for such loans consisting primarily of residential properties, automobiles and boats. The following table sets forth the geographic locations (based on the location of the office originating or purchasing the loan) of TCF's consumer finance loan portfolio: At December 31, ------------------------------------------ 1996 1995 -------------------- -------------------- Loan Loan (Dollars in thousands) Balance Percent Balance Percent ------- ------- ------- ------- Illinois $132,474 26.7% $116,866 31.2% Minnesota 99,279 20.0 96,533 25.7 Florida 33,458 6.7 19,925 5.3 Wisconsin 33,328 6.7 27,911 7.4 Georgia 32,270 6.5 23,044 6.2 Missouri 26,185 5.3 19,295 5.2 North Carolina 24,137 4.9 8,053 2.2 Michigan 23,214 4.7 2,837 .7 Tennessee 17,313 3.5 11,474 3.1 Kentucky 17,198 3.5 13,017 3.5 Mississippi 15,579 3.1 9,187 2.4 Ohio 15,503 3.1 11,459 3.1 Other 26,398 5.3 14,793 4.0 -------- ----- -------- ----- Total consumer finance loans $496,336 100.0% $374,394 100.0% -------- ----- -------- ----- -------- ----- -------- ----- At December 31, 1996, 1995 and 1994, TCF was servicing real estate loans for others with aggregate unpaid principal balances of approximately $4.5 billion, $4.5 billion and $4.4 billion, respectively. During 1995 and 1994, TCF sold servicing rights on $146.3 million and $169 million of loans serviced for others at net gains of $1.5 million and $2.4 million, respectively. There were no sales of servicing rights on loans serviced for others during 1996. 44 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) (7) ALLOWANCES FOR LOAN AND REAL ESTATE LOSSES AND INDUSTRIAL REVENUE BOND RESERVES Following is a summary of the allowances for loan and real estate losses, industrial revenue bond reserves and selected statistics:
Industrial Allowance Allowance Revenue for Real for Loan Bond Estate (In thousands) Losses Reserves Total Losses Total ----------- ---------- -------- --------- -------- Balance, December 31, 1993 $ 54,444 $2,689 $ 57,133 $ 2,439 $ 59,572 Provision for losses 10,802 - 10,802 4,022 14,824 Charge-offs (15,994) - (15,994) (3,885) (19,879) Recoveries 7,091 70 7,161 - 7,161 -------- ------ -------- ------- -------- Net charge-offs (8,903) 70 (8,833) (3,885) (12,718) -------- ------ -------- ------- -------- Balance, December 31, 1994 56,343 2,759 59,102 2,576 61,678 Provision for losses 16,131 (919) 15,212 1,804 17,016 Charge-offs (14,770) (158) (14,928) (2,854) (17,782) Recoveries 7,991 278 8,269 - 8,269 -------- ------ -------- ------- -------- Net charge-offs (6,779) 120 (6,659) (2,854) (9,513) -------- ------ -------- ------- -------- Balance, December 31, 1995 65,695 1,960 67,655 1,526 69,181 Provision for losses 20,020 (200) 19,820 433 20,253 Charge-offs (23,380) (100) (23,480) (832) (24,312) Recoveries 8,414 - 8,414 - 8,414 -------- ------ -------- ------- -------- Net charge-offs (14,966) (100) (15,066) (832) (15,898) -------- ------ -------- ------- -------- Balance, December 31, 1996 $ 70,749 $1,660 $ 72,409 $ 1,127 $ 73,536 -------- ------ -------- ------- -------- -------- ------ -------- ------- --------
Year Ended December 31, ------------------------------ 1996 1995 1994 ---- ---- ---- Ratio of net loan charge-offs to average loans outstanding (1) .29% .13% .19% Allowance for loan losses as a percentage of gross loan balances at year end (1) 1.39 1.23 1.09 _____________________________________________ (1) Excluding loans held for sale.
TCF guarantees certain industrial development and housing revenue bonds issued by municipalities to finance commercial and multi-family real estate owned by third parties. The balance of such financial guarantees totaled $12.2 million and $13.5 million at December 31, 1996 and 1995, respectively. The provision for credit losses on industrial revenue bond financial guarantees for the years ended December 31, 1996 and 1995 reflects a reduction in the balance of the financial guarantees. Management has considered these guarantees in its review of the adequacy of the industrial revenue bond reserves, which are included in accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. 45 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) (8) PREMISES AND EQUIPMENT Premises and equipment are summarized as follows: At December 31, ---------------------- (In thousands) 1996 1995 ---- ---- Land $ 25,876 $ 23,339 Office buildings 100,940 99,567 Leasehold improvements 18,284 16,738 Furniture and equipment 106,343 97,756 -------- -------- 251,443 237,400 Less accumulated depreciation and amortization 122,700 116,637 -------- -------- $128,743 $120,763 -------- -------- -------- -------- TCF leases certain premises and equipment under operating leases. Net lease expense was $14.1 million, $13.6 million and $12.3 million in 1996, 1995 and 1994, respectively. At December 31, 1996, the total annual minimum lease commitments for operating leases were as follows: (In thousands) --------------------------------------- 1997 $11,786 1998 9,669 1999 6,899 2000 4,628 2001 2,414 Thereafter 9,769 ------- $45,165 ------- ------- (9) REAL ESTATE Real estate is summarized as follows: At December 31, -------------------- (In thousands) 1996 1995 ---- ---- Real estate held for development $ 213 $ 713 Real estate in judgment, subject to redemption 11,989 8,313 Real estate acquired through foreclosure 4,696 15,440 ------- ------- $16,898 $24,466 ------- ------- ------- ------- The net costs of operation of real estate are as follows: Year Ended December 31, --------------------------------- (In thousands) 1996 1995 1994 ---- ---- ---- Gain on sales $(2,719) $(2,311) $(3,444) Provision for losses 433 1,804 4,022 Net operations (71) (152) 1,843 ------- ------- ------- $(2,357) $ (659) $ 2,421 ------- ------- ------- ------- ------- ------- 46 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) (10) MORTGAGE SERVICING RIGHTS Mortgage servicing rights, net of valuation allowance, are summarized as follows: Year Ended December 31, --------------------------------- (In thousands) 1996 1995 1994 ------- ------- ------- Balance at beginning of year, net $16,286 $12,247 $12,381 Mortgage servicing rights capitalized 5,822 7,904 3,516 Amortization (4,648) (3,805) (3,394) Sale of servicing - (60) (256) Valuation adjustments due to accelerated prepayments (100) - - ------- ------- ------- Balance at end of year, net $17,360 $16,286 $12,247 ------- ------- ------- ------- ------- ------- The valuation allowance for mortgage servicing rights is summarized as follows: Year Ended December 31, --------------------------------- (In thousands) 1996 1995 1994 ---- ---- ---- Balance at beginning of year $1,394 $1,394 $2,451 Provisions 100 - - Charge-offs - - (1,057) ------- ------- ------- Balance at end of year $1,494 $1,394 $1,394 ------- ------- ------- ------- ------- ------- (11) DEPOSITS Deposits are summarized as follows:
At December 31, ------------------------------------------------------------------------ 1996 1995 -------------------------------- -------------------------------- Weighted Weighted Average % of Average % of (Dollars in thousands) Rate Amount Total Rate Amount Total -------- ---------- ----- -------- ---------- ----- Checking: Non-interest bearing 0.00% $ 694,824 14.0% 0.00% $ 573,004 11.0% Interest bearing 1.04 517,947 10.4 1.06 530,268 10.2 ---------- ----- ---------- ----- .45 1,212,771 24.4 .51 1,103,272 21.2 ---------- ----- ---------- ----- Passbook and statement 1.75 783,026 15.7 1.88 841,115 16.2 Money market 3.10 631,922 12.7 3.12 616,667 11.9 Certificates: 6 months and less 4.48 191,785 3.9 5.05 335,247 6.5 over 6 to 18 months 5.18 1,152,827 23.2 5.59 1,195,206 23.0 over 18 to 30 months 5.68 410,273 8.2 5.43 364,573 7.0 over 30 months 5.79 479,197 9.6 5.90 559,084 10.8 Negotiable rate 5.18 115,829 2.3 5.50 176,388 3.4 ---------- ----- ---------- ----- 5.33 2,349,911 47.2 5.56 2,630,498 50.7 ---------- ----- ---------- ----- 3.29 $4,977,630 100.0% 3.60 $5,191,552 100.0% ---------- ----- ---------- ----- ---------- ----- ---------- -----
47 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) Certificates had the following remaining maturities:
(Dollars in At December 31, millions) ------------------------------------------------------------------------------------------ 1996 1995 -------------------------------------------- ------------------------------------------ Weighted Weighted Negotiable Average Negotiable Average Maturity Rate Other Total Rate Rate Other Total Rate - -------- ----------- -------- -------- -------- --------- -------- -------- -------- 0-3 months $ 81.2 $ 539.7 $ 620.9 5.16% $141.0 $ 617.4 $ 758.4 5.45% 4-6 months 26.1 452.0 478.1 5.17 26.7 474.8 501.5 5.50 7-12 months 6.6 543.2 549.8 5.28 5.5 575.4 580.9 5.52 13-24 months 1.7 464.8 466.5 5.54 1.3 472.5 473.8 5.62 25-36 months .1 130.3 130.4 5.68 1.8 158.8 160.6 5.77 37-48 months .1 48.1 48.2 5.86 .1 82.2 82.3 5.74 49-60 months - 42.8 42.8 6.35 - 26.5 26.5 5.64 Over 60 months - 13.2 13.2 5.66 - 46.5 46.5 6.46 ------ -------- -------- ------ -------- -------- $115.8 $2,234.1 $2,349.9 5.33 $176.4 $2,454.1 $2,630.5 5.56 ------ -------- -------- ------ -------- -------- ------ -------- -------- ------ -------- --------
Interest expense on deposits is summarized as follows: Year Ended December 31, ------------------------------ (In thousands) 1996 1995 1994 ---- ---- ---- Checking $ 5,571 $ 6,606 $ 8,205 Passbook and statement 14,389 18,507 19,292 Money market 19,256 21,878 18,834 Certificates 132,861 147,086 137,502 -------- -------- -------- 172,077 194,077 183,833 Less early withdrawal penalties 702 833 654 -------- -------- -------- $171,375 $193,244 $183,179 -------- -------- -------- -------- -------- -------- Accrued interest on deposits totaled $11.2 million and $10.3 million at December 31, 1996 and 1995, respectively. Mortgage-backed securities aggregating $43.7 million were pledged as collateral to secure certain deposits at December 31, 1996. At December 31, 1996, TCF was required by Federal Reserve Board regulations to maintain reserve balances of approximately $105.5 million in cash on hand or at the Federal Reserve Bank. 48 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) (12) BORROWINGS Borrowings consist of the following:
At December 31, --------------------------------------------- (Dollars in thousands) 1996 1995 ------------------- ------------------- Weighted Weighted Year of Average Average Maturity Amount Rate Amount Rate -------- ------ -------- ------ --------- Securities sold under repurchase agreements 1996 $ - - % $ 363,426 5.91% 1997 225,732 5.88 75,000 6.12 1998 68,000 6.18 - - ---------- ---------- 293,732 5.95 438,426 5.94 ---------- ---------- Federal Home Loan Bank advances 1996 - - 589,339 5.79 1997 766,514 5.51 90,014 5.90 1998 310,300 5.88 128,000 5.76 1999 41,000 5.98 63,000 6.38 2000 8,074 7.24 8,074 7.24 2001 15,000 6.97 15,000 6.97 2008 152 6.17 160 6.15 ---------- ---------- 1,141,040 5.66 893,587 5.87 ---------- ---------- Subordinated debt: Senior subordinated debentures 2006 6,248 18.00 6,248 18.00 Convertible subordinated debentures 2011 7,149 7.25 7,272 7.25 ---------- ---------- 13,397 12.26 13,520 12.22 ---------- ---------- Collateralized obligations: Collateralized notes 1997 37,500 5.94 37,500 6.19 Less unamortized discount 28 - 59 - ---------- ---------- 37,472 5.94 37,441 6.20 ---------- ---------- Collateralized mortgage obligations 2008 1,555 6.50 2,627 6.50 2010 1,622 5.90 1,530 5.90 ---------- ---------- 3,177 6.19 4,157 6.28 Less unamortized discount 144 - 207 - ---------- ---------- 3,033 6.44 3,950 6.61 ---------- ---------- 40,505 5.98 41,391 6.24 ---------- ---------- Other borrowings: Federal funds purchased 1996 - - 14,500 5.58 Bank line of credit 1996 - - 40,000 6.53 Treasury tax and loan note 1997 5,131 5.21 - - Other 1998 13 7.60 20 7.60 ---------- ---------- 5,144 5.21 54,520 6.28 ---------- ---------- $1,493,818 5.78 $1,441,444 5.98 ---------- ---------- ---------- ----------
At December 31, 1996, borrowings with a maturity of one year or less consisted of the following: Weighted Average (Dollars in thousands) Amount Rate -------- -------- Securities sold under repurchase agreements $ 225,732 5.88% Federal Home Loan Bank advances 766,514 5.51 Collateralized notes 37,472 5.94 Treasury tax and loan note 5,131 5.21 ---------- $1,034,849 5.61 ---------- ---------- Accrued interest on borrowings totaled $7.7 million and $4.6 million at December 31, 1996 and 1995, respectively. 49 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) At December 31, 1996, securities sold under repurchase agreements were collateralized by mortgage-backed securities and had the following maturities: Repurchase Borrowing Collateral Securities -------------------- ------------------------ Interest Carrying Market (Dollars in thousands) Amount Rate Amount (1) Value (1) ---------- -------- ---------- --------- Maturity: January 1997 $ 99,993 5.78% $104,648 $104,648 April 1997 50,739 5.69 52,295 52,295 May 1997 25,000 6.40 23,479 23,479 June 1997 50,000 6.00 54,632 54,632 August 1998 68,000 6.18 73,823 73,823 -------- -------- -------- $293,732 5.95 $308,877 $308,877 -------- -------- -------- -------- -------- -------- _____________________________ (1) Includes accrued interest. The securities underlying the repurchase agreements are book entry securities. During the period, book entry securities were delivered by appropriate entry into the counterparties' accounts through the Federal Reserve System. The dealers may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations, but have agreed to resell to TCF identical or substantially the same securities upon the maturities of the agreements. At December 31, 1996, all of the securities sold under repurchase agreements provided for the repurchase of identical securities. Securities sold under repurchase agreements averaged $498.4 million and $591.4 million during 1996 and 1995, respectively, and the maximum amount outstanding at any month-end during 1996 and 1995 was $647.7 million and $718.4 million, respectively. Great Lakes prepaid $112.3 million of FHLB advances at a pretax loss of $1.5 million during 1995. This amount, net of a $578,000 income tax benefit, was recorded as an extraordinary item in the Consolidated Statements of Operations. The $7.1 million of 7 1/4% Convertible Subordinated Debentures due 2011 was convertible into 419,542 shares of TCF common stock at December 31, 1996. The number of shares and the exercise price of the debentures are adjusted upon the occurrence of certain events, including changes in the capitalization associated with stock splits and stock dividends. The convertible subordinated debentures provide for annual sinking fund payments of $1.8 million commencing on March 1, 2001, intended to retire 50% of the principal amount prior to maturity. At December 31, 1996, the convertible subordinated debentures are callable at 100% of par. The debentures are subordinated to all present and future senior indebtedness of TCF. The $6.2 million of 18% Senior Subordinated Debentures due 2006 are senior to the convertible subordinated debentures and will be redeemable at par beginning March 1, 1998. The $37.5 million of collateralized notes mature in December 1997. Interest paid on the collateralized notes adjusts quarterly to .375% over the three-month London Interbank Offered Rate ("LIBOR"), subject to a maximum rate of 13.25%. At December 31, 1996, loans collateralizing the collateralized notes had a carrying value of $72.6 million and a market value of $70.9 million. At December 31, 1996, mortgage-backed securities collateralizing TCF's collateralized mortgage obligations had a market value of $3 million. The bank line of credit, amounting to a $70 million line, 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 and term for the line of credit. The line of credit expires in October 1997. FHLB advances are collateralized by interest-bearing deposits, FHLB stock, residential real estate loans and mortgage-backed securities with an aggregate carrying value of $1.7 billion at December 31, 1996. Interest expense on borrowings is summarized as follows: Year Ended December 31, ------------------------------- (In thousands) 1996 1995 1994 ---- ---- ---- FHLB advances $37,277 $50,729 $56,587 Securities sold under repurchase agreements 28,165 35,753 25,107 Subordinated debt 1,875 4,986 5,603 Collateralized obligations 2,586 2,880 2,442 Other borrowings 1,443 900 412 ------- ------- ------- $71,346 $95,248 $90,151 ------- ------- ------- ------- ------- ------- 50 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) (13) INCOME TAXES Income tax expense (benefit) consists of: (In thousands) Current Deferred Total ------- -------- ----- YEAR ENDED DECEMBER 31, 1996: FEDERAL $45,961 $(3,441) $42,520 STATE 10,108 (1,244) 8,864 ------- ------- ------- $56,069 $(4,685) $51,384 ------- ------- ------- ------- ------- ------- Year ended December 31, 1995: Federal $29,381 $3,234 $32,615 State 4,476 687 5,163 ------- ------- ------- $33,857 $3,921 $37,778 ------- ------- ------- ------- ------- ------- Year ended December 31, 1994: Federal $34,137 $3,036 $37,173 State 9,670 (441) 9,229 ------- ------- ------- $43,807 $2,595 $46,402 ------- ------- ------- ------- ------- ------- Total income tax expense of $51.4 million, $37.8 million and $46.4 million for the years ended December 31, 1996, 1995 and 1994, 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 $2.5 million, $2.1 million and $590,000 for the years ended December 31, 1996, 1995 and 1994, respectively. No tax valuation allowance was required as of December 31, 1996 or 1995 since TCF paid taxes, which are available for carryback, in excess of its 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 and extraordinary item as a result of the following: Year Ended December 31, -------------------------------------- (In thousands) 1996 1995 1994 ---- ---- ---- Computed income tax expense $47,966 $34,800 $40,805 Increase (reduction) in income tax expense resulting from: Merger-related expenses - 832 - ESOP dividend deduction (649) (553) (305) Amortization of goodwill 562 648 418 State income tax, net of federal income tax benefit 5,762 3,356 5,999 Other, net (2,257) (1,305) (515) ------- ------- ------- $51,384 $37,778 $46,402 ------- ------- ------- ------- ------- ------- 51 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) 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) 1996 1995 ---- ---- Deferred tax assets: Allowance for loan and real estate losses $22,142 $19,577 Discounts on loans arising from acquisitions 825 1,111 Pension and other compensation plans 4,444 1,885 Insurance premiums 2,832 2,175 Mortgage servicing rights - 551 Other 439 - ------- ------- Total deferred tax assets 30,682 25,299 ------- ------- Deferred tax liabilities: Securities available for sale 1,826 7,548 FHLB stock 4,027 4,121 Loan basis differences 2,166 4,505 Premises and equipment 3,318 3,463 Loan fees and discounts 6,314 5,324 Mortgage servicing rights 2,546 - Other - 261 ------- ------- Total deferred tax liabilities 20,197 25,222 ------- ------- Net deferred tax assets $10,485 $ 77 ------- ------- ------- ------- (14) STOCKHOLDERS' EQUITY RESTRICTED RETAINED EARNINGS - TCF Minnesota and Great Lakes may not declare or pay a dividend to TCF in excess of 100% of their annual net income plus the amount that would reduce by one-half their surplus capital ratio at the beginning of the calendar year without prior Office of Thrift Supervision ("OTS") approval. Based on their surplus capital ratios as of January 1, 1997, TCF Minnesota and Great Lakes currently would be permitted to make additional capital distributions under OTS regulations of approximately $58.1 million and $55 million, respectively. Additional limitations on dividends declared or paid on, or repurchases of, TCF Minnesota's and Great Lakes' capital stock are tied to the savings banks' level of compliance with their regulatory capital requirements. TCF is pursuing the conversion of its existing savings bank subsidiaries into national bank subsidiaries. Such a conversion would require the approval of applications filed with the Office of the Comptroller of the Currency ("OCC"), and would also require the approval of applications filed with the Federal Reserve Board. A national bank must obtain the approval of the OCC if the total of all dividends declared in any calendar year exceeds that bank's net profits for that year combined with its retained net profits for the preceding two calendar years. Retained earnings at December 31, 1996 includes approximately $109.9 million for which no provision for federal income tax has been made. This amount represents earnings appropriated to bad debt reserves and deducted for federal income tax purposes and is not available for payment of cash dividends or other distributions to shareholders. Payments or distributions of these appropriated earnings could invoke a tax liability for TCF based on the amount of earnings removed and current tax rates. In August 1996, federal legislation was enacted which repealed the favorable bad debt method for savings and loan associations. Subsequent to this repeal, TCF continues to be subject to this potential tax liability to the extent payments or distributions of these appropriated earnings occur. 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 $180 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. 52 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) TREASURY STOCK - On December 19, 1995, the Board authorized the repurchase of up to 5% of TCF common stock, or 1.8 million shares, of which 727,688 shares remained unpurchased at December 31, 1996. TCF purchased 1,190,068 and 32,400 shares of stock during the years ended December 31, 1996 and 1995, respectively. On January 20, 1997, the Board authorized the repurchase of up to 5% of TCF common stock, or approximately 1.7 million shares. PREFERRED STOCK - On July 3, 1995, TCF exercised its right of redemption on its 2.7 million shares of preferred stock at $10 per share. STOCK WARRANTS - In connection with TCF's acquisition of Great Lakes, TCF assumed the obligation to issue common stock upon the exercise of the outstanding warrants to purchase Great Lakes common stock. The warrants to purchase common stock expired on July 1, 1995. (15) REGULATORY CAPITAL REQUIREMENTS The following tables set forth the tangible, core and risk-based capital levels and applicable percentages of adjusted assets, together with the excess over the minimum capital requirements for TCF Minnesota and Great Lakes at December 31, 1996 and 1995 (dollars in thousands):
TCF MINNESOTA: At December 31, ----------------------------------------------------- 1996 1995 ----------------------- ----------------------- (Dollars in thousands) Amount Percentage Amount Percentage ------ ---------- ------ ---------- Tangible capital $321,043 6.52% $333,254 7.03% Tangible capital requirement 73,886 1.50 71,076 1.50 -------- ----- -------- ----- Excess $247,157 5.02% $262,178 5.53% -------- ----- -------- ----- -------- ----- -------- ----- Core capital $321,808 6.53% $334,586 7.06% Core capital requirement 147,795 3.00 142,193 3.00 -------- ----- -------- ----- Excess $174,013 3.53% $192,393 4.06% -------- ----- -------- ----- -------- ----- -------- ----- Risk-based capital $359,950 11.81% $370,892 12.78% Risk-based capital requirement 243,784 8.00 232,224 8.00 -------- ----- -------- ----- Excess $116,166 3.81% $138,668 4.78% -------- ----- -------- ----- -------- ----- -------- -----
GREAT LAKES: At December 31, ----------------------------------------------------- 1996 1995 ----------------------- ----------------------- (Dollars in thousands) Amount Percentage Amount Percentage ------ ---------- ------ ---------- Tangible capital $177,565 8.21% $171,126 6.81% Tangible capital requirement 32,458 1.50 37,667 1.50 -------- ----- -------- ----- Excess $145,107 6.71% $133,459 5.31% -------- ----- -------- ----- -------- ----- -------- ----- Core capital $187,255 8.62% $182,268 7.23% Core capital requirement 65,206 3.00 75,669 3.00 -------- ----- -------- ----- Excess $122,049 5.62% $106,599 4.23% -------- ----- -------- ----- -------- ----- -------- ----- Risk-based capital $217,015 16.23% $215,132 13.63% Risk-based capital requirement 106,970 8.00 126,293 8.00 -------- ----- -------- ----- Excess $110,045 8.23% $ 88,839 5.63% -------- ----- -------- ----- -------- ----- -------- -----
At December 31, 1996, TCF's savings bank subsidiaries exceeded their fully phased-in capital requirements and believe they would be considered "well-capitalized" under guidelines established pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991. 53 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) (16) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK TCF is a party to financial instruments with off-balance-sheet risk in the normal course of business, primarily to meet the financing needs of its customers. These financial instruments, which are issued or held by TCF for purposes other than trading, include commitments to extend credit, standby letters of credit, financial guarantees written, forward mortgage loan sales commitments, and financial guarantees on certain loans sold with recourse and on other contingent obligations. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. The contract or notional amounts of those instruments reflect the extent of involvement TCF has in particular classes of financial instruments. TCF's exposure to credit loss in the event of non-performance by the counterparty to the financial instrument for commitments to extend credit, standby letters of credit, financial guarantees written and financial guarantees on certain loans sold with recourse is represented by the contractual amount of the commitments. TCF uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For Veterans Administration ("VA") loans serviced with partial recourse 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. Unless noted otherwise, TCF does not require collateral or other security to support financial instruments with credit risk. The contract or notional amounts of these financial instruments are as follows: At December 31, ------------------ (In thousands) 1996 1995 ---- ---- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $1,014,053 $1,109,949 Standby letters of credit 24,055 26,796 Financial guarantees written 12,165 13,506 Loans sold with recourse 23,311 29,776 Financial instruments whose credit risk is less than the notional or contract amount: VA loans serviced with partial recourse 383,806 388,072 Forward mortgage loan sales commitments 91,132 116,068 COMMITMENTS TO EXTEND CREDIT - As part of its normal business operations, and in order to meet the ongoing credit needs of its customers, TCF has outstanding at any time a significant number of commitments to extend credit. Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the contract. These commitments take the form of mortgage loan applications, approved loans, consumer credit line products and credit card limits. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. TCF evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by TCF upon extension of credit, is based on management's credit evaluation of the borrower. Collateral predominantly consists of residential and commercial real estate and personal property. Included in the total commitments to extend credit at December 31, 1996 were mortgage loan commitments and loans in process aggregating $783.5 million, including commercial and residential construction and development commitments totaling $72.5 million. Of the total mortgage loan commitments and loans in process at December 31, 1996, $168.2 million were for fixed-rate loans. Also included in the total commitments to extend credit were various consumer credit line products aggregating $515.4 million, of which $59 million were unsecured and $450.8 million were mortgage loan commitments. 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 are primarily issued to support public and private borrowing arrangements including bond financing, and expire in various years through the year 2005. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in making commercial loans to customers. The amount of collateral TCF obtains to support standby letters of credit is based on management's credit evaluation of the borrower. Collateral held primarily consists of commercial real estate mortgages. Since the conditions 54 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) 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, 1996 were collateralized by $23.8 million of TCF's mortgage-backed securities. FINANCIAL GUARANTEES WRITTEN - Financial guarantees written represent agreements whereby, for a fee, certain of TCF's mortgage-backed securities are pledged as collateral for Housing Revenue Bonds and Industrial Development Revenue Bonds which were issued by municipalities to finance commercial and multi-family real estate owned by third parties. In the event the third party borrowers default on principal or interest payments on the bonds, TCF is required to either pay the amount in default or acquire the then outstanding bonds. TCF may foreclose on the underlying real estate to recover amounts in default. At December 31, 1996, the financial guarantees totaled $12.2 million and mortgage-backed securities aggregating approximately $24.3 million were held by the trustees as collateral for these financial guarantees. Further, in order to protect TCF's ability to recover losses in the event of default by the third party borrowers, TCF may also be required to pay real estate taxes and other liabilities of the underlying collateral. The collateral agreements expire on various dates from 2004 through 2011. LOANS SOLD WITH RECOURSE AND VA LOANS SERVICED WITH PARTIAL RECOURSE - During the normal course of business, TCF may sell certain loans with limited recourse provisions. In addition, TCF services VA loans on which it must cover any principal loss in excess of the VA's guarantee if the VA elects its "no-bid" option upon the foreclosure of a loan. A significant portion of the loans are partially supported by government-sponsored insurance, private mortgage insurance or the VA partial guarantee, and all of the loans are collateralized by residential real estate. FORWARD MORTGAGE LOAN SALES COMMITMENTS - As part of its residential mortgage banking operation, TCF enters into forward mortgage loan sales commitments in order to manage the market exposure on its residential loans held for sale and its commitments to extend credit for residential loans. Because gains or losses to be realized on the sale of residential loans held for sale are dependent on interest rates, forward mortgage loan sales commitments are used to reduce the impact of changes in interest rates on TCF's mortgage banking operation. Forward mortgage loan sales commitments are contracts for the delivery of mortgage loans or pools of loans in which TCF agrees to make delivery at a specified future date of a specified instrument, at a specified price or yield. Risks arise from the possible inability of the counterparties to meet the terms of their contracts and from movements in mortgage loan values and interest rates. Included in the total at December 31, 1996 and 1995 were $14 million and $16 million, respectively, of standby forward mortgage loan sales commitments for which TCF has the option to deliver the mortgage loans. Premiums paid for standby forward mortgage loan sales commitments are amortized to gain on sale of loans held for sale over the terms of the agreements. The fair value of the forward mortgage loan sales commitments is not recognized in the financial statements. (17) FAIR VALUES OF FINANCIAL INSTRUMENTS TCF is required to disclose the estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time TCF's entire holdings of a particular financial instrument. Because no market exists for a significant portion of TCF's financial instruments, fair value estimates are subjective in nature, involving uncertainties and matters of significant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, TCF has established customer relationships that contribute significant fee income annually. These customer relationships are not considered financial instruments, and their values have not been incorporated into the fair value estimates. Certain financial instruments and all non-financial instruments are excluded from fair value of financial instrument disclosure requirements. In addition, the tax effects of unrealized gains and losses have not been considered in the estimates, nor have costs necessary to execute a sale been considered. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of TCF, or the value TCF would realize in a negotiated sale of these instruments. 55 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) Fair value estimates, methods and assumptions are set forth below for TCF's financial instruments. These financial instruments are issued or held by TCF for purposes other than trading. The carrying amounts disclosed below are included in the Consolidated Statements of Financial Condition under the indicated captions, except where noted otherwise. The estimated fair value of TCF's financial instruments are set forth in the following table and explained below:
At December 31, ------------------------------------------------------- 1996 1995 ------------------------- ------------------------- (In thousands) CARRYING ESTIMATED Carrying Estimated AMOUNT FAIR VALUE Amount Fair Value -------- ---------- -------- ---------- Financial instrument assets: Cash and due from banks $ 238,670 $ 238,670 $ 233,619 $ 233,619 Investments 442,103 442,103 64,345 64,345 Securities available for sale 999,554 999,554 1,201,490 1,201,490 Residential loans held for sale (1) 57,566 58,276 78,687 80,139 Education loans held for sale (1) 146,303 149,448 163,726 166,529 Loans: (1) Residential real estate 2,252,311 2,274,098 2,607,202 2,654,302 Commercial real estate 858,224 862,244 967,766 980,585 Commercial business 157,057 153,499 167,920 162,849 Consumer (2) 1,725,635 1,946,955 1,530,205 1,679,855 Allowance for loan losses (70,749) - (65,695) - ---------- ---------- ---------- ---------- 4,922,478 5,236,796 5,207,398 5,477,591 Accrued interest receivable 42,173 42,173 49,120 49,120 ---------- ---------- ---------- ---------- Total financial instrument assets $6,848,847 $7,167,020 $6,998,385 $7,272,833 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Financial instrument liabilities: Deposits with no stated maturity $2,627,719 $2,627,719 $2,561,054 $2,561,054 Certificates of deposit 2,349,911 2,379,526 2,630,498 2,663,541 Securities sold under repurchase agreements 293,732 293,823 438,426 438,995 Federal Home Loan Bank advances 1,141,040 1,140,394 893,587 895,812 Subordinated debt 13,397 25,057 13,520 20,856 Collateralized obligations 40,505 40,566 41,391 41,311 Other borrowings 5,144 5,144 54,520 54,520 Accrued interest payable 18,943 18,943 14,905 14,905 ---------- ---------- ---------- ---------- Total financial instrument liabilities $6,490,391 $6,531,172 $6,647,901 $6,690,994 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Financial instruments with off-balance-sheet risk: (3) Commitments to extend credit $ 4,860 $ (978) $ 4,088 $ (250) Standby letters of credit (56) (67) (5) (11) Forward mortgage loan sales commitments 53 154 60 (731) Financial guarantees written (1,778) (1,778) (2,089) (2,089) ---------- ---------- ---------- ---------- Total off-balance-sheet financial instruments $ 3,079 $ (2,669) $ 2,054 $ (3,081) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(1) Net of unearned discounts, premiums and deferred fees. (2) Excludes lease receivables not subject to fair value disclosure of $2.7 million and $4 million at December 31, 1996 and 1995, respectively. (3) Positive amounts represent assets, negative amounts represent liabilities. CASH AND DUE FROM BANKS - The carrying amount of cash and due from banks approximates its fair value. INVESTMENTS - The carrying amounts of short-term investments approximate their fair values since they mature in 90 days or less and do not present unanticipated credit concerns. The fair values of U.S. Government and other marketable securities held to maturity are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying amount of FHLB stock approximates its fair value. SECURITIES AVAILABLE FOR SALE - The fair values of U.S. Government and other marketable securities available for sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The fair values of mortgage-backed securities available for sale are based on quoted market prices. 56 LOANS HELD FOR SALE - The fair value of residential mortgage loans held for sale is estimated based on quoted market prices. The fair value of education loans held for sale is estimated based on an existing forward sale agreement TCF has with the Student Loan Marketing Association, or on sales of comparable loans. The estimated fair value of capitalized mortgage servicing rights totaled $30.9 million at December 31, 1996, compared with a carrying amount of $17.4 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 loans are estimated for portfolios of loans with similar characteristics. Loans are segregated by type, and include residential, commercial real estate, commercial business and consumer, and by sub-type within these categories. Each of these categories is further segmented into fixed- and adjustable-rate interest terms, and by performing and non-performing status. For certain variable-rate loans that reprice frequently and that have experienced no significant change in credit risk, fair values are based on carrying values. For certain homogeneous categories of loans, such as certain residential and consumer loans, fair values are estimated using quoted market prices. The fair values of other performing loans are estimated by discounting contractual cash flows adjusted for prepayment estimates, using interest rates currently being offered for loans with similar terms to borrowers with similar credit risk characteristics. The fair values of significant non-performing loans are based on recent internal or external appraisals, or estimated cash flows discounted using rates commensurate with the risks associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information. DEPOSITS - The fair value of deposits with no stated maturity, such as checking, passbook and statement, and money market accounts, is deemed equal to the amount payable on demand. The fair value of certificates is estimated based on discounted cash flow analyses using interest rates offered by TCF at December 31, 1996 and 1995 for certificates of similar remaining maturities. The fair value estimates do not include the benefit that results from the lower-cost funding provided by deposits compared with the cost of wholesale borrowings. That benefit is commonly referred to as a deposit base intangible. BORROWINGS - The carrying amounts of short-term borrowings approximate their fair values. The fair values of TCF's long-term borrowings are estimated based on quoted market prices or discounted cash flow analyses using interest rates offered at December 31, 1996 and 1995 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, standby letters of credit and financial guarantees written are estimated using fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and standby letters of credit issued in conjunction with fixed-rate loan agreements, fair value also considers the difference between current levels of interest rates and the committed rates. For financial guarantees written, fair value also considers reserves established relating to TCF's potential obligation on the outstanding guarantees. The carrying amounts for commitments to extend credit and forward mortgage loan sales commitments are included in other assets in the Consolidated Statements of Financial Condition. The carrying amounts for standby letters of credit and financial guarantees written are included in accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. In addition to the financial instruments with off-balance-sheet risk noted above, TCF had $23.3 million and $29.8 million of loans sold with recourse and serviced $383.8 million and $388.1 million of VA loans with partial recourse at December 31, 1996 and 1995, respectively. TCF has not incurred, and does not anticipate, significant losses as a result of the recourse provisions associated with these financial instruments. As a result, the carrying amounts and related estimated fair values of these financial instruments were not material at December 31, 1996 and 1995. 57 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) (18) STOCK OPTION AND INCENTIVE PLAN The TCF Financial 1995 Incentive Stock Program (the "Program") was adopted as a continuation and replacement of a prior program 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 five 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 1994 generally vests within five years, but may vest more rapidly or be subject to forfeiture in accordance with a vesting schedule based on TCF's return on average common equity. Other restricted stock grants generally vest over periods from three to eight years. Of the outstanding restricted stock as of December 31, 1996, 318,400 shares vest only if TCF meets certain return on equity goals. Vesting of the remaining restricted stock is based on additional service requirements. As disclosed in Note 1, TCF has elected to follow APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its stock option and restricted stock grants. 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 $7.9 million, $6.3 million and $2.7 million in 1996, 1995 and 1994, respectively. 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," net income and earnings per share would not differ materially from amounts reported under APB Opinion No. 25. Since the pro forma disclosures of results under SFAS No. 123 are only required to consider grants awarded in 1995 and 1996, the pro forma effects of applying SFAS No. 123 during this initial phase-in period may not be representative of the effects on reported results for future years. The following table reflects TCF's restricted stock and stock option transactions under the Program since December 31, 1993:
Stock Options Restricted Stock ------------------------------------------- ------------------------ Exercise Price ------------------------------ Shares Range Weighted-Average Shares Price Range ------ ----- ---------------- ------ ----------- December 31, 1993 1,111,338 $ 3.88-18.57 $ 7.71 410,312 $ 4.44-17.50 Granted 9,394 13.84 13.84 424,490 15.31-19.28 Exercised (218,222) 4.44-11.81 7.08 - - Forfeited (370) 11.81 11.81 - - Vested - - - (250,228) 4.44-19.28 --------- -------- December 31, 1994 902,140 3.88-18.57 7.93 584,574 4.44-17.50 Granted - - - 308,400 18.81-29.66 Exercised (423,434) 4.44-15.47 7.97 - - Forfeited (7,504) 13.57-15.47 15.14 (5,089) 19.78 Vested - - - (223,453) 4.44-19.78 --------- -------- December 31, 1995 471,202 3.88-18.57 7.77 664,432 15.31-29.66 Granted - - - 36,400 33.13-37.81 Exercised (337,816) 3.88-18.57 6.63 - - Expired (416) 6.00 6.00 - - Forfeited (2,800) 10.66-18.57 16.31 (21,200) 16.19-19.78 Vested - - - (83,699) 15.31-33.13 --------- -------- December 31, 1996 130,170 4.44-18.57 10.56 595,933 15.31-37.81 --------- -------- --------- -------- Exercisable at December 31, 1996 98,970 4.44-15.47 9.11 --------- ---------
The weighted-average grant-date fair value of restricted stock was $33.51, $20.28 and $16.15 in 1996, 1995 and 1994, respectively. 58 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) The following table summarizes information about stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable -------------------------------------------------- -------------------------- Weighted-Average Weighted-Average Remaining Contractual Weighted-Average Exercise Price Range Shares Exercise Price Life in Years Shares Exercise Price - -------------------- ------ ---------------- --------------------- ------ ---------------- $4.44 to $10.00 48,186 $ 5.89 3.1 48,186 $ 5.89 $10.01 to $15.00 45,984 11.06 5.4 38,784 11.13 $15.01 to $18.57 36,000 16.16 6.4 12,000 15.47 ------- ------ Total Options 130,170 10.56 4.8 98,970 9.11 ------- ------ ------- ------
At December 31, 1996, there were 1,836,278 shares reserved for issuance under the Program, including 130,170 shares for which options had been granted but had not yet been exercised. (19) EMPLOYEE BENEFIT PLANS PENSION PLANS The TCF Cash Balance Pension Plan (the "Plan") is a defined benefit qualified plan covering all "regular stated salary" employees who are at least 21 years old and have completed a year of 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. The projected unit credit method is the actuarial cost method used to compute the pension cost. Net pension cost (credit) included the following components:
Year Ended December 31, ---------------------------- (In thousands) 1996 1995 1994 ---- ---- ---- Service cost - benefits earned during the year $ 2,107 $ 1,762 $ 1,750 Interest cost on projected benefit obligation 945 762 529 Gain on plan assets (5,325) (7,266) (23) Net amortization and deferral 2,047 4,806 (2,418) -------- -------- -------- Net pension cost (credit) $ (226) $ 64 $ (162) -------- -------- -------- -------- -------- --------
The following tables set forth the Plan's funded status at the dates indicated:
At October 1, ------------------ (In thousands) 1996 1995 ---- ---- Actuarial present value of accumulated benefit obligations: Vested benefits $10,489 $ 8,569 Non-vested benefits 1,115 820 ------- ------- Total accumulated benefits $11,604 $ 9,389 ------- ------- ------- -------
At December 31, ------------------ (In thousands) 1996 1995 ---- ---- Projected benefit obligation for service rendered to date $13,551 $10,406 Plan assets at fair value 38,657 30,142 ------- ------- Plan assets in excess of projected benefit obligation 25,106 19,736 Unrecognized prior service cost (3,200) (356) Unrecognized net gain (7,689) (5,390) ------- ------- Prepaid pension cost included in other assets $14,217 $13,990 ------- ------- ------- -------
The Plan's assets consist primarily of listed stocks and government bonds. At December 31, 1996 and 1995, the Plan's assets included TCF common stock with a market value of $7.8 million and $6 million, respectively. 59 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) The weighted average discount rate and rate of increase in future compensation used to measure the projected benefit obligation and the expected long-term rate of return on plan assets were as follows: At December 31, -------------------- 1996 1995 1994 ---- ---- ---- Weighted average discount rate 8.00% 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 9.00 Great Lakes was a participant in the multi-employer Financial Institutions Retirement Fund ("FIRF"). Great Lakes withdrew from the FIRF effective December 31, 1995 and commenced participation in the Plan effective January 1, 1996. The FIRF does not segregate the assets, liabilities or costs by participating employer. As a result, disclosures required by SFAS No. 87, "Employers' Accounting for Pensions," cannot be made. Contributions for plan years beginning July 1, 1988 have not been required due to plan performance. As a result, Great Lakes did not record pension expense during the two-year period ended December 31, 1995. POSTRETIREMENT PLANS In addition to providing retirement income benefits, TCF currently provides health care benefits for eligible retired employees, and in some cases life insurance benefits. 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. TCF's postretirement benefit plan is currently unfunded. The following table reconciles the status of the plan with the amounts recognized in TCF's Consolidated Statements of Financial Condition at the dates indicated: At December 31, ------------------ (In thousands) 1996 1995 ---- ---- Accumulated postretirement benefit obligation: Retirees and beneficiaries $ (6,005) $ (8,624) Fully eligible active plan participants (745) (1,195) Other active plan participants (1,121) (1,844) -------- -------- Total accumulated postretirement benefit obligation (7,871) (11,663) Unrecognized prior service cost 1,097 1,206 Unrecognized net (gain) loss (2,184) 1,914 Unrecognized transition obligation 5,459 5,801 -------- -------- Accrued postretirement benefit cost included in other liabilities $ (3,499) $ (2,742) -------- -------- -------- -------- Net periodic postretirement benefit cost included the following components: (In thousands) Year Ended December 31, ------------------------- 1996 1995 1994 ---- ---- ---- Service cost - benefits earned during the year $ 177 $ 285 $ 182 Interest cost on accumulated postretirement benefit obligation 778 772 559 Amortization of unrecognized transition obligation 342 342 331 Amortization of unrecognized net loss - 138 18 Amortization of unrecognized prior service cost 109 - - ------ ------ ------ Net periodic postretirement benefit cost $1,406 $1,537 $1,090 ------ ------ ------ ------ ------ ------ 60 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) In connection with TCF's acquisition of Great Lakes, a $329,000 curtailment loss and $168,000 in special termination benefits were recognized in 1995 associated with benefits provided under Great Lakes' postretirement benefit plan. These costs are included in merger-related expenses in the Consolidated Statements of Operations. The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 8.0%, 7.75% and 8.0% at December 31, 1996, 1995 and 1994, respectively. For active participants, an 8.8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1997. This rate is assumed to decrease gradually to 6% for the year 2004 and remain at that level thereafter. For retired participants, other than certain Great Lakes' retirees, 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. The health care cost trend rate assumption does not have a significant effect on the amounts reported. EMPLOYEE STOCK OWNERSHIP PLANS TCF's Employees Stock Ownership Plan-401(k) generally allows participants to make contributions by salary deduction of up to 12% of their salary on a tax-deferred basis pursuant to section 401(k) of the Internal Revenue Code. Through December 31, 1994, TCF matched the contributions for tax-favored deposits of employees who are non-highly compensated (as defined in the Internal Revenue Code) at the rate of 75 cents per dollar, with a maximum employer contribution of 4.5% of the employee's salary. TCF matched the contributions of remaining employees at the rate of 50 cents per dollar with a maximum employer contribution of 3% of the employee's salary. Beginning January 1, 1995, TCF matched the contributions of all employees at the rate of 50 cents per dollar, with a maximum employer contribution of 3% of the employee's salary. TCF, at its discretion, may make additional contributions. Employee contributions vest immediately while the Company's matching contributions are subject to a graduated vesting schedule based on an employee's years of vesting service. The Company's matching contributions are expensed when made. TCF's contribution to the plan was $1.8 million, $1.4 million and $1.8 million in 1996, 1995 and 1994, respectively. (20) PARENT COMPANY FINANCIAL INFORMATION TCF Financial Corporation's (parent company only) condensed statements of financial condition as of December 31, 1996 and 1995, and the condensed statements of operations and cash flows for the years ended December 31, 1996, 1995 and 1994 are as follows: Condensed Statements of Financial Condition
At December 31, ------------------------- (In thousands) 1996 1995 ---- ---- Assets: Cash $ 117 $ 70 Interest-bearing deposits with banks 5,438 11,711 Investment in subsidiaries: Savings bank subsidiaries 527,606 545,958 Other subsidiaries 1,544 1,237 Premises and equipment 4,471 3,452 Loan to unconsolidated subsidiary 2,014 965 Other assets 17,221 10,995 -------- -------- $558,411 $574,388 -------- -------- -------- -------- Liabilities and Stockholders' Equity: Bank line of credit $ - $ 40,000 Notes payable to non-savings bank subsidiaries 957 1,042 Other liabilities 7,948 5,671 -------- -------- Total liabilities 8,905 46,713 Stockholders' equity 549,506 527,675 -------- -------- $558,411 $574,388 -------- -------- -------- --------
61 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) Condensed Statements of Operations
Year Ended December 31, ---------------------------- (In thousands) 1996 1995 1994 ---- ---- ---- Interest income $ 352 $ 1,412 $ 620 Interest expense 923 3,680 4,090 -------- ------- ------- Net interest expense (571) (2,268) (3,470) -------- ------- ------- Cash dividends received from subsidiaries: Savings bank subsidiaries 103,500 27,500 56,380 Other subsidiaries 4,102 2,832 4,562 -------- ------- ------- Total cash dividends received from subsidiaries 107,602 30,332 60,942 -------- ------- ------- Other non-interest income: Affiliate service fee revenues 44,369 36,427 25,942 Other 7 (4) 4 -------- ------- ------- Total other non-interest income 44,376 36,423 25,946 -------- ------- ------- Non-interest expense: Compensation and employee benefits 34,174 27,189 22,630 Occupancy and equipment 10,958 8,435 7,515 Other 16,414 13,508 12,254 -------- ------- ------- Total non-interest expense 61,546 49,132 42,399 -------- ------- ------- Income before income tax benefit and equity in undistributed earnings of subsidiaries 89,861 15,355 41,019 Income tax benefit 6,879 5,991 8,169 -------- ------- ------- Income before equity in undistributed earnings of subsidiaries 96,740 21,346 49,188 Equity in undistributed earnings of subsidiaries (11,077) 39,342 20,995 -------- ------- ------- Net income $ 85,663 $60,688 $70,183 -------- ------- ------- -------- ------- -------
All dividends were received from consolidated subsidiaries during the three-year period ended December 31, 1996. 62 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------------- (In thousands) 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income $ 85,663 $ 60,688 $ 70,183 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries 11,077 (39,342) (20,995) Net (increase) decrease in other assets and liabilities (3,702) (3,604) 179 Other, net 9,501 8,849 4,871 --------- -------- -------- Total adjustments 16,876 (34,097) (15,945) --------- -------- -------- Net cash provided by operating activities 102,539 26,591 54,238 --------- -------- -------- Cash flows from investing activities: Net (increase) decrease in interest-bearing deposits with banks 6,273 24,467 (20,817) Investments in and advances to subsidiaries, net (117) (16,001) - Loan to Executive Deferred Compensation Plan 63 64 153 Loan originations, net (1,049) 381 51 Purchases of premises and equipment, net (2,678) (2,457) (3,135) --------- -------- -------- Net cash provided (used) by investing activities 2,492 6,454 (23,748) --------- -------- -------- Cash flows from financing activities: Dividends paid on preferred stock - (678) - Dividends paid on common stock (25,279) (20,968) (12,257) Proceeds from exercise of stock options and stock warrants 1,639 12,455 272 Proceeds from conversion of convertible debentures 123 2,656 - Repurchases of common stock (41,382) (824) (17,524) Redemption of preferred stock - (27,100) - Proceeds from bank line of credit 52,275 40,000 - Repayment of commercial bank notes and bank line of credit (92,275) (3,500) (1,000) Repayment of subordinated capital notes - (34,500) - Other, net (85) (581) 79 --------- -------- -------- Net cash used by financing activities (104,984) (33,040) (30,430) --------- -------- -------- Net increase in cash 47 5 60 Cash at beginning of year 70 65 5 --------- -------- -------- Cash at end of year $ 117 $ 70 $ 65 --------- -------- -------- --------- -------- --------
63 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) (21) BUSINESS SEGMENTS
The following summarizes financial data for TCF's business segments: Year Ended December 31, -------------------------------------- (In thousands) 1996 1995 1994 ---- ---- ---- Revenues: Financial institution $629,777 $632,837 $604,487 Consumer finance 74,930 48,279 22,579 Mortgage banking operations 33,498 32,881 37,254 Insurance operations 32,797 27,809 27,073 Real estate development 437 288 427 Eliminations (30,350) (21,341) (13,692) -------- -------- -------- $741,089 $720,753 $678,128 -------- -------- -------- -------- -------- -------- Earnings (loss) from continuing operations before income tax expense and extraordinary item: Financial institution $115,448 $76,443 $ 93,953 Consumer finance (3,846) 2,368 1,534 Mortgage banking operations 10,427 7,585 6,067 Insurance operations 14,398 12,448 13,895 Real estate development 303 169 311 Eliminations 317 416 825 -------- -------- -------- $137,047 $99,429 $116,585 -------- -------- -------- -------- -------- --------
At December 31, ------------------------ (In thousands) 1996 1995 ---------- ---------- Identifiable assets: Financial institution $7,045,604 $7,174,184 Consumer finance 497,619 383,892 Mortgage banking operations 83,607 104,465 Insurance operations 18,303 16,206 Real estate development 293 1,459 Eliminations (554,564) (440,295) ---------- ---------- $7,090,862 $7,239,911 ---------- ---------- ---------- ----------
Real estate development revenues in the Consolidated Statements of Operations are presented net of costs of operations of real estate and are included in other non-interest expense. (22) 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 new 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 savings bank subsidiaries. The legislation also provides for a reduction in deposit insurance premiums in subsequent periods and other regulatory reforms. (23) LITIGATION AND CONTINGENT LIABILITIES TCF is involved in certain lawsuits in the course of its general lending business and other operations. Management, after review with its legal counsel, is of the opinion that the ultimate disposition of its litigation will not have a material adverse effect on TCF's financial condition or results of operations. 64 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements - (Continued) (24) SUBSEQUENT EVENTS On February 25, 1997, TCF announced that it had formally rescinded its stock repurchase program in connection with its pending merger with Winthrop Resources Corporation ("Winthrop"). On February 28, 1997, TCF and Winthrop signed a definitive merger agreement for TCF to acquire Winthrop in a tax-free stock-for-stock exchange. Winthrop, with leased assets of $327 million, specializes in leasing high-tech and business equipment. The merger is subject to approval by TCF's and Winthrop's stockholders and by various regulatory agencies, and treatment of the transaction as a pooling of interests for accounting purposes. The merger is expected to be completed in the first half of 1997. 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, 1996 and 1995, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, TCF Financial Corporation and Subsidiaries adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, as of April 1, 1995. /s/ KPMG Peat Marwick LLP Minneapolis, Minnesota January 15, 1997 except for Note 24, which is as of February 28, 1997 65 TCF FINANCIAL CORPORATION AND SUBSIDIARIES Supplementary Information
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, At At At At At At At At except per-share data) Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, 1996 1996 1996 1996 1995 1995 1995 1995 - ---------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL CONDITION DATA: Total assets $7,090,862 $7,114,466 $7,000,871 $7,039,282 $7,239,911 $7,331,962 $7,432,692 $7,369,061 Investments (1) 442,103 400,799 157,368 59,202 64,345 73,651 64,874 91,969 Securities available for sale 999,554 997,964 1,049,183 1,117,439 1,201,490 32,117 38,575 89,693 Mortgage-backed securities held to maturity - - - - - 1,199,231 1,251,705 1,291,370 Loans 4,995,962 5,049,508 5,124,106 5,174,923 5,277,101 5,323,912 5,329,880 5,237,533 Deposits 4,977,630 5,018,672 5,052,557 5,150,023 5,191,552 5,181,765 5,249,819 5,371,461 Borrowings 1,493,818 1,468,714 1,359,145 1,268,887 1,441,444 1,553,693 1,589,861 1,445,327 Stockholders' equity 549,506 522,515 523,788 541,019 527,675 490,542 495,550 470,501 - ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended - ---------------------------------------------------------------------------------------------------------------------------------- Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31, 1996 1996 1996 1996 1995 1995 1995 1995 - ---------------------------------------------------------------------------------------------------------------------------------- SELECTED OPERATIONS DATA: Interest income $ 142,194 $ 145,380 $ 146,394 $ 148,893 $ 153,222 $ 154,036 $ 151,641 $ 148,791 Interest expense 58,178 59,586 60,518 64,439 70,451 72,549 72,349 73,143 ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- Net interest income 84,016 85,794 85,876 84,454 82,771 81,487 79,292 75,648 Provision for credit losses 3,631 6,564 6,823 2,802 2,649 2,951 2,924 6,688 ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- Net interest income after provision for credit losses 80,385 79,230 79,053 81,652 80,122 78,536 76,368 68,960 ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- Non-interest income: Gain on sale of loans 810 4,633 - - - - - - Loss on sale of mortgage-backed securities - - - - - - - (21,037) Gain on sale of loan servicing - - - - 3 3 1,006 523 Gain (loss) on sale of securities available for sale - - - 85 - - 60 (250) Gain on sale of branches 1,022 - 480 1,245 - - 1,061 42 Other non-interest income 39,821 38,050 37,152 34,499 35,620 34,164 31,981 29,600 ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- Total non-interest income 41,653 42,683 37,632 35,829 35,623 34,167 34,108 8,878 ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- Non-interest expense: Provision for real estate losses 15 121 (151) 448 1,068 195 378 163 Amortization of goodwill and other intangibles 783 795 794 795 791 791 791 790 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 77,414 78,020 72,670 74,563 74,140 71,554 70,465 70,051 ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- Total non-interest expense 78,212 113,739 73,313 75,806 75,999 72,540 71,634 97,160 ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- Income (loss) before income tax expense (benefit) and extraordinary item 43,826 8,174 43,372 41,675 39,746 40,163 38,842 (19,322) Income tax expense (benefit) 16,397 2,878 16,721 15,388 14,263 15,750 15,448 (7,683) ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary item 27,429 5,296 26,651 26,287 25,483 24,413 23,394 (11,639) Extraordinary item: Penalties on early repayment of FHLB advances, net of tax benefit of $578 - - - - - - - (963) ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- Net income (loss) 27,429 5,296 26,651 26,287 25,483 24,413 23,394 (12,602) Dividends on preferred stock - - - - - - - 678 ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- Net income (loss) available to common shareholders $ 27,429 $ 5,296 $ 26,651 $ 26,287 $ 25,483 $ 24,413 $ 23,394 $ (13,280) ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- Per common share: Income (loss) before extraordinary item $ .79 $ .15 $ .75 $ .73 $ .71 $ .68 $ .66 $ (.36) Extraordinary item - - - - - - - (.03) ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- Net income (loss) $ .79 $ .15 $ .75 $ .73 $ .71 $ .68 $ .66 $ (.39) ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- Dividends declared $ .1875 $ .1875 $ .1875 $ .15625 $ .15625 $ .15625 $ .15625 $ .125 ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- ----------- ---------- --------- ----------- ---------- ---------- ---------- ---------- FINANCIAL RATIOS: Return on average assets (2) 1.64% .31% 1.54% 1.48% 1.40% 1.32% 1.27% (.67)% Return on average realized common equity (2) 20.53 3.97 20.04 19.97 20.29 20.38 20.41 (11.83) Return on average common equity (2) 20.49 4.03 20.22 19.67 20.21 20.44 20.48 (11.86) Average total equity to average assets 7.98 7.70 7.60 7.51 6.95 6.56 6.53 6.33 Net interest margin (2)(3) 5.36 5.36 5.27 5.06 4.86 4.71 4.58 4.31
_______________________________ (1) Includes interest-bearing deposits with banks, federal funds sold, U.S. Government and other marketable securities held to maturity and FHLB stock. (2) Annualized. (3) Net interest income divided by average interest-earning assets. 66 EX-21 15 SUBSIDIARIES OF COMPANY EXHIBIT 21 TCF FINANCIAL CORPORATION EXHIBIT 21 Subsidiaries of Registrant (As of March 14, 1997)
NAMES UNDER WHICH SUBSIDIARY SUBSIDIARY STATE OF INCORPORATION DOES BUSINESS TCF Financial Insurance Illinois TCF Financial Insurance Agency Agency Illinois, Inc. Illinois, Inc. TCF Insurance TCF Financial Insurance Minnesota TCF Financial Insurance Agency Agency Wisconsin, Inc. Wisconsin, Inc. TCF Insurance TCF Financial Insurance Agency Minnesota TCF Financial Insurance Agency Michigan, Inc. Michigan, Inc. TCF Insurance GLB Agency TCF Financial Insurance Agency, Inc. Minnesota TCF Financial Insurance Agency, Inc. TCF Insurance 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. Twin City/Burnet, Inc. Minnesota Twin City/Burnet, Inc. Asset Quality Consultants, Inc. Minnesota Asset Quality Consultants, Inc. TCF Bank Minnesota fsb United States TCF Bank Minnesota fsb TCF Consumer Financial Services, Inc. Minnesota TCF Consumer Financial Services, Inc. TCF 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. TCF Management Corporation Minnesota TCF Management Corporation MKP, Inc. Minnesota MKP, Inc. NUM, Inc. Minnesota NUM, Inc. North Star Title, Inc. Minnesota North Star Title, Inc. NAMES UNDER WHICH SUBSIDIARY SUBSIDIARY STATE OF INCORPORATION DOES BUSINESS 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 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. TCF Bank Wisconsin fsb United States TCF Bank Wisconsin fsb Republic Capital Funding Corp. I Wisconsin Republic Capital Funding Corp. I TCF Agency Wisconsin, Inc. Wisconsin TCF Agency Wisconsin, Inc. Great Lakes Financial, Inc. Wisconsin Great Lakes Financial, Inc. TCF Bank Illinois fsb United States TCF Bank Illinois fsb TCF Agency Illinois, Inc. Illinois TCF Agency Illinois, Inc. BOC Financial Corporation Illinois BOC Financial Corporation Bancs of Chicago Bancorp, Inc. Illinois Bancs of Chicago Bancorp, Inc. Bank of Chicago, s.b. United States Bank of Chicago, s.b. Great Lakes Bancorp, A Federal United States Great Lakes Bancorp Savings Bank GLB Service Corporation II Michigan GLB Service Corporation II Lakeland Group Insurance Agency, Inc. Michigan Lakeland Group Insurance Agency, Inc. 401 Service Corporation Michigan 401 Service Corporation GLB Properties, Inc. Michigan GLB Properties, Inc. Great Lakes Mortgage Company Michigan Great Lakes Mortgage Company GLB Management Company Michigan GLB Management Company NAMES UNDER WHICH SUBSIDIARY SUBSIDIARY STATE OF INCORPORATION DOES BUSINESS TCF Colorado Corporation Colorado TCF Colorado Corporation
EX-24 16 EXHIBIT 24 [Letterhead] EXHIBIT 24 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors TCF Financial Corporation: We consent to incorporation by reference of our report dated January 15, 1997, except for note 24, which is as of February 28, 1997, relating to the consolidated statements of financial condition of TCF Financial Corporation and Subsidiaries as of December 31, 1996 and 1995, 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, 1996, which report appears in the December 31, 1996 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. KPMG Peat Marwick LLP Minneapolis, Minnesota March 28, 1997 EX-27 17 FINANCIAL DATA SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1996 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 DEC-31-1996 238,670 372,132 0 0 999,554 3,910 3,910 4,995,962 70,749 7,090,862 4,977,630 1,034,849 69,908 458,969 0 0 359 549,147 7,090,862 468,140 79,641 17,080 582,861 171,375 242,721 340,140 20,020 85 341,070 137,047 85,663 0 0 85,663 2.42 2.40 5.26 26,221 0 3,028 15,981 65,695 23,380 8,414 70,749 48,364 0 22,385
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