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SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K
ý Annual
Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of
1934
For the fiscal year ended
December 31, 2004
or
o
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of
1934
Commission File
No. 001-10253
TCF FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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41-1591444
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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200 Lake Street East, Mail Code EX0-03-A, Wayzata,
Minnesota 55391-1693
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(Address
and Zip Code of principal executive offices)
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Registrant’s
telephone number, including area code: 612-661-6500
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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)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes ý No o
Indicate
by check mark 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. ý
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes ý No o
As of January 31,
2005 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 $3,288,734,727.
As of January 31,
2005, there were outstanding 136,486,506 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,
2004 are incorporated by reference into Parts I, II and IV hereof.
Specific
portions of the registrant’s definitive proxy statement dated March 16,
2005 are incorporated by reference into Part III hereof.
ITEM 1.
BUSINESS
GENERAL
TCF Financial Corporation (“TCF” or the “Company”), a
Delaware corporation based in Wayzata, Minnesota, is the holding company of TCF
National Bank which operates in Minnesota, Illinois, Michigan, Wisconsin,
Colorado and Indiana. At December 31,
2004, TCF had total assets of $12.3 billion and was the 44th largest
publicly traded bank holding company in the United States based on total assets
as of September 30, 2004. Unless
otherwise indicated, references herein to “TCF” include its direct and indirect
subsidiaries. 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 2004 Annual Report, only
those portions specifically identified are so incorporated.
TCF’s products include commercial, small business,
consumer and residential mortgage loans and deposit products, leasing and
equipment finance, securities brokerage and investment and insurance services.
TCF’s primary focus is on the delivery of retail and commercial banking
products in markets served by TCF National Bank. Some of its products, such as its commercial
equipment loans and leases, are offered in markets outside areas served by TCF
National Bank. See “Overview” on page 18 of TCF’s 2004 Annual Report,
incorporated herein by reference, for additional information concerning TCF’s
business and strategies.
TCF has significantly expanded its retail banking
franchise in recent periods and had 430 retail banking branches at December 31,
2004. This expansion includes TCF’s January 1998 acquisition of 76
branches and 178 automated teller machines (“ATMs”) in Jewel-Osco stores in the
Chicago, Illinois area. During 2004, TCF opened 30 new branches, consisting of
19 new traditional bank branches and 11 new supermarket bank branches. TCF anticipates opening 29 new branches,
consisting of 22 new traditional branches, five new supermarket branches and
two campus branches, during 2005. The
success of TCF’s branch expansion is dependent on the continued long-term
success of branch banking. Success in
the supermarket branches is also dependent on the success and viability of the
supermarket branch locations. Economic
slowdown, financial or labor difficulties in the supermarket industry may
reduce customer activity and therefore reduce activity in TCF’s supermarket
branches.
Non-interest income is a significant source of revenue
for TCF and an important factor in TCF’s results of operations. A key driver of non-interest income growth is
growth in checking accounts. In addition
to low or non-interest-bearing deposit balances, these accounts generate
significant fee revenue for TCF. Fee
revenue per retail checking account was $232 for 2004, up from $227 in
2003. 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. See “Management’s Discussion and Analysis — Consolidated
Income Statement Analysis – Non-Interest Income” on pages 26 through 30 and “Management’s
Discussion and Analysis — Forward-Looking Information” on page 47 of TCF’s 2004
Annual Report, incorporated herein by reference, for additional information.
At December 31, 2004, TCF operated 101 bank
branches in Minnesota, 197 in Illinois, 34 in Wisconsin, 60 in Michigan, 32 in
Colorado and six in Indiana. TCF strives
to develop innovative banking products and services. Of TCF’s 430 bank branches, 248 were
supermarket bank branches at December 31, 2004. Supermarket bank branches provide TCF with
additional locations for the sale of its consumer products and services,
including deposits and loans, at a relatively low entry cost. TCF’s “Totally Free”SM checking
accounts and other deposit products provide it with a significant source of
low-interest cost funds and fee income.
During 2000, TCF introduced TCFExpress.com, its online banking service
for customers. In 2001, TCF expanded
online banking services by offering “Totally Free Online” services through
TCFExpress.com. In 2003, TCF introduced “TCF
Check Cashing” a convenient, economical, and full service check cashing service
for non-bank customers. In addition to providing
a valuable customer service, the product also gives TCF an opportunity to
introduce these customers to its checking account products. In 2004, TCF created the “TCF Miles PlusSM
Card”, a free non-revolving credit card that is attached to a checking
account. This free card offers points
that may be redeemed for airline travel on virtually any airline, anytime,
anywhere with the option to use points to purchase merchandise from a leading
internet retailer. At December 31, 2004, TCF had 1,141 machines in its ATM
network generally located in areas served by TCF National Bank and, also offers
its customers an automated telephone banking system.
Federal legislation imposes numerous legal and
regulatory requirements on financial institutions. Among the most significant of these
requirements are minimum regulatory capital levels. TCF and TCF National Bank exceed all current
minimum regulatory capital requirements and are considered “well-capitalized”
under guidelines established by the Federal Reserve Board (“FRB”) and the
Office of the Comptroller of the Currency (“OCC”). See “REGULATION.”
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As a federally chartered national bank, TCF National
Bank is subject to regulation and examination by the OCC and, in certain cases,
by the Federal Deposit Insurance Corporation (“FDIC”). TCF National Bank’s deposits are insured to
$100,000 by the FDIC and, as such, is subject to regulations promulgated by the
FDIC. TCF National Bank is a member of
the Federal Home Loan Bank (“FHLB”) of Des Moines, and is also a member bank
within its Federal Reserve district. TCF
Financial is a financial holding company and is subject to regulation and
examination by the FRB. See “SOURCES OF
FUNDS – Borrowings” and “REGULATION — Regulation of TCF Financial and Affiliate
and Insider Transactions.”
LENDING ACTIVITIES
General
TCF’s lending activities reflect its community banking
philosophy, emphasizing loans to individuals and businesses in its primary
market areas in Minnesota, Illinois, Wisconsin, Michigan and Colorado. Because of the concentration of loans and
leases in these states, adverse economic conditions in these states could
result in higher rates of loan and lease losses and delinquencies than if TCF’s
lending operations were more geographically diversified. TCF is also engaged in leasing and equipment
finance activities and has a substantial consumer lending operation.
See “Management’s Discussion and Analysis — Consolidated
Financial Condition Analysis – Loans and Leases” on pages 32 through 36 and
Note 6 of Notes to Consolidated Financial Statements on pages 57 and 58 of TCF’s
2004 Annual Report, incorporated herein by reference, for additional
information regarding TCF’s loan and lease portfolios.
Consumer
Lending
TCF makes consumer loans for personal, family or
household purposes, such as debt consolidation or the financing of home
improvements, automobiles, vacations and education. Consumer loans totaled $4.4 billion at December 31,
2004, with $1.7 billion, or 38%, having fixed interest rates and $2.7 billion,
or 62%, having variable interest rates tied to the prime rate.
TCF’s consumer lending activities include primarily
home equity real estate secured loans as well as loans secured by personal
property. To a limited extent, TCF may
also make unsecured personal loans. Each
of these loan types can be made on a revolving credit or fixed term basis. Consumer loan customers generally have higher
debt-to-income ratios, and therefore, these loans pose a higher risk of loss
than residential mortgage loans. Unlike
conventional first mortgage loans, consumer home equity loans also tend to have
a higher loan-to-value ratio and do not carry private mortgage insurance. Consumer loans having floating interest rates
also present a credit risk as a result of increased costs to borrowers in the
event of a rise in interest rates.
Consumer loans secured by real estate may present additional credit risk
in the event of a decline in the value of real estate collateral. Higher loan-to-value ratio consumer loans may
carry a higher level of credit risk than loans with a lower loan-to-value
ratio. Many of these loans are secured
by a first lien on the home and include an advance to pay off an existing first
lien mortgage loan. A decline in home
values may have an adverse impact on TCF’s results by increasing credit risk
and the risk of potential loss. For
additional information on consumer lending, see “Management’s Discussion and
Analysis — Consolidated Financial Condition Analysis – Loans and Leases” on
pages 32 through 36 of TCF’s 2004 Annual Report, incorporated herein by
reference.
TCF originates education loans for resale. TCF had $154.3 million of education loans
held for sale at December 31, 2004, compared with $234.3 million at December 31,
2003. TCF generally retains the
education loans it originates until they are fully disbursed. Under an 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 education loans to SLMA before they
go into repayment status. These loans
are originated in accordance with designated guarantor and U.S. Department of
Education guidelines and do not involve any independent credit underwriting by
TCF. TCF’s future education 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.
Federal legislation has limited the role of private lenders in
originating education loans and has reduced the profitability of this activity,
and future legislation could further reduce the profitability or volume of TCF’s
education loan originations.
Commercial Real Estate Lending
TCF originates loans secured by commercial real estate
including, to a lesser extent, commercial real estate construction loans,
generally to borrowers based in its primary markets. At December 31, 2004, variable and
adjustable-rate loans represented 83.2% of commercial real estate loans
outstanding. See “Management’s
Discussion and Analysis — Consolidated Financial Condition Analysis – Loans and
Leases” on pages 32 through 36 of TCF’s 2004 Annual Report,
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incorporated herein by
reference, for additional information regarding the types of properties
securing TCF’s commercial real estate loans.
At December 31,
2004, TCF’s commercial construction and development loan portfolio totaled
$196.7 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 can be less predictable
and more difficult to evaluate and monitor.
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. Commercial
business loans may be secured by various types of business assets, including
commercial real estate, and in some cases may be made on an unsecured
basis. TCF is seeking to expand its
commercial business lending activity.
TCF’s commercial business lending activities encompass loans with a
broad variety of purposes, including working capital loans and loans to finance
the purchase of equipment or other acquisitions. As part of its commercial business and
commercial real estate lending activities, TCF also issues standby letters of
credit. At December 31, 2004, TCF
had 149 such standby letters of credit outstanding in the aggregate amount of
$45.2 million.
Although commercial business lending can pose the same
increased risks posed by commercial real estate lending activity, TCF
concentrates on originating commercial business loans primarily to
middle-market companies based in its primary markets with borrowing
requirements of less than $15 million.
Substantially all of TCF’s commercial business loans outstanding at December 31,
2004 were to borrowers based in its primary markets.
Leasing
and Equipment Finance
TCF provides a broad range of comprehensive lease and
equipment finance products addressing the financing needs of diverse types of
small to large companies. At December 31,
2004, TCF’s leasing and equipment finance portfolio totaled $1.4 billion,
including $334.4 million of loans and $1.1 billion of leases. TCF’s leasing and equipment finance
businesses, Winthrop Resources Corporation (“Winthrop”) and TCF Leasing, Inc. (“TCF
Leasing”), operate in all 50 states.
Winthrop primarily leases technology and data processing equipment to
companies nationwide. Technology spending has slowed during the past few years
due to a variety of issues, including general economic uncertainty. In addition, the low interest rate
environment and temporary tax law changes have led many companies to consider
the viability of purchasing technology versus Winthrop’s value-added lease
alternative. These factors have
contributed to reduced levels of new lease originations at Winthrop. TCF continues to focus attention on
increasing sales efforts at Winthrop to increase overall portfolio
balances. In 1999, TCF expanded its
leasing operations with the launch of TCF Leasing, Inc. (“TCF Leasing”), a de
novo leasing and equipment finance business. In March 2004, TCF Leasing
acquired VGM Financial Services (“VGM”), a company specializing in home medical
equipment financing.
TCF funds most of its leases internally, and
consequently retains the credit risk on such leases. TCF also may arrange permanent financing of
certain leases through non-recourse discounting of lease rentals with various
other financial institutions at fixed interest rates. At December 31, 2004, $48.5 million, or
4.4%, of TCF’s lease portfolio was discounted on a non-recourse basis with
other financial institutions, compared with $66.4 million, or 7.4%, at December 31,
2003. Discounted proceeds from
assignment of lease rentals are equal to the present value of the remaining
lease payments due under the lease, at an interest rate charged by the other
financial institutions. Interest rates for
this type of financing are negotiated on a transaction-by-transaction basis and
reflect the financial strength of the lease customer, the terms of the lease
and the prevailing interest rates. For a
lease discounted on a non-recourse basis, the other financial institution has
no recourse against TCF unless TCF is in default under the terms of the
agreement under which the lease and the leased equipment are assigned to the
other financial institution as collateral.
The other financial institution may, however, take title to the
collateral in the event the customer fails to make lease payments or if certain
other defaults by the lease customer occur under the terms of the lease. For additional information on leasing and
equipment finance, see “Management’s Discussion and Analysis — Consolidated
Financial Condition Analysis – Loans and Leases” on pages 32 through 36 of TCF’s
2004 Annual Report, incorporated herein by reference.
Included in the investment in leveraged leases, at December 31,
2004 is a 100% equity interest in a Boeing 767-300 aircraft leased to Delta
Airlines, Inc. (“Delta”). The investment in leveraged leases represents
net unpaid rentals and estimated unguaranteed residual values of the leased
assets less related unearned income. TCF has no obligation for principal
and interest on the notes representing the third-party participation related to
this leveraged lease. However, these noteholders have a security interest
in the aircraft which is superior to TCF’s equity interest. Such notes,
which totaled $19.2 million at December 31, 2004, down from $22.6 million
at December 31, 2003, are recorded as an offset against the
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related rental receivable. In January 2005, these notes were
further reduced to $15.6 million after Delta made its scheduled payment. During the second quarter of 2004, TCF
completed its annual review of the lease residual value assumption for this
aircraft and reduced the estimated residual value by $4.4 million. As required
under Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting
for Leases,” TCF recognized an impairment charge of $1.6 million which was
recorded in other non-interest expense. The remaining reduction will be
amortized through reduced yield on the investment over the remaining years of
the lease. In 2004, TCF downgraded its credit rating on the aircraft
leveraged lease, classified its investment as substandard and placed the lease
on non-accrual status. Although Delta is
current on its payments related to this transaction, if Delta declares
bankruptcy, it would likely result in the charge-off of TCF’s $18.8 million
investment in the leveraged lease and the current payment of previously
deferred income tax obligations. This
lease represents TCF’s only material direct exposure to the commercial airline
industry. Reduced airline travel, higher oil prices, changes in airline
fare structures and other factors have adversely impacted the airline industry
and could have an adverse impact on Delta’s ability to meet its lease
obligations and on the residual value of the aircraft.
TCF’s leasing and equipment finance businesses invest
in limited partnerships that are formed to operate or invest in qualified
affordable housing projects. Leasing and equipment finance had $49 million and
$41.8 million invested in affordable housing limited partnerships at December 31,
2004 and 2003, respectively. Leasing and
equipment finance invests in these partnerships for tax credits and tax losses
that are guaranteed by a AAA-rated company. For more information on investments
in affordable housing limited partnerships, see Note 1 of the Notes to
Consolidated Financial Statements on pages 53 through 56 of TCF’s 2004 Annual
Report, incorporated herein by reference.
Residential
Mortgage Lending
TCF’s residential mortgage loan originations (first
mortgage loans for financing one- to four-family homes) are predominantly
secured by properties in Minnesota, Illinois, Wisconsin, Michigan and
Colorado. TCF engaged in both fixed-rate
and adjustable-rate residential mortgage lending. Adjustable-rate residential mortgage loans
held in TCF’s portfolio totaled $226.9 million, or 22.4%, of residential loans
at December 31, 2004, compared with $312.4 million, or 25.8%, of
residential loans at December 31, 2003.
During the third quarter of 2004, TCF announced a
restructuring of its mortgage banking business and ceased wholesale
originations. The retail origination
function was downsized and integrated with TCF’s consumer lending business in
the fourth quarter of 2004. TCF’s
mortgage banking business no longer originates any new loans. TCF continues to service the remaining
portfolio of mortgage loans for third party investors. TCF may also from time to time purchase or
sell servicing rights on residential mortgage loans. In 2004, TCF sold $125.1
million of servicing rights and recorded a gain of $706 thousand. No bulk servicing purchases or sales occurred
in 2003 or 2002. At December 31,
2004, 2003 and 2002, TCF serviced residential mortgage loans for others
totaling $4.5 billion, $5.1 billion and $5.6 billion, respectively.
Adjustable-rate residential mortgage loans retained 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
interest rate sensitive, it may not be as interest 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. Such adjustments depend upon the magnitude and frequency of shifts in
market interest rates, and some adjustable-rate residential real estate loans
originated by TCF in prior periods do not provide for limitations on rate
adjustments. Credit risk may also result
from declines in the value of underlying real estate collateral. See discussion below under “— Classified
Assets, Loan and Lease Delinquencies and Defaults.”
Classified
Assets, Loan and Lease Delinquencies and Defaults
TCF has established a classification system for
individual commercial loans, leases or other assets based on OCC regulations
under which all or part of a loan or other asset may be classified as “special
mention,” “substandard,” “doubtful,” or “loss.”
It has also established overall ratings for various credit
portfolios. A loan, lease or other asset
is placed in the substandard category when it is considered to have a
well-defined weakness. A loan, lease or
other asset is placed in the doubtful category when some loss is likely to
occur. All or a portion of a loan, lease
or other asset is classified as loss when it is considered uncollectible, in
which case it is charged off. A loan,
lease or other asset for which some possible exposure to credit loss is
perceived is classified as special mention.
Loans, leases and other assets that are classified are subject to
periodic review of the appropriateness of their ratings and regulatory
classifications.
The allowance for loan and lease losses involves
estimates and management’s judgment regarding a number of factors such as net
charge-offs, delinquencies in the loan and lease portfolio and general economic
conditions. The Company
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considers the allowance for loan and lease losses
adequate to cover losses inherent in the loan and lease portfolios. However, no assurance can be given that TCF
will not, in any particular period, sustain loan and lease losses that are
sizeable in relation to the amount reserved, or that subsequent evaluations of
the loan and lease portfolio, in light of factors then prevailing, including
economic conditions and TCF’s on-going credit review process, will not require
significant increases in the allowance for loan and lease losses. Expansion of the Company’s consumer lending
and other lending and leasing operations creates increased exposure to
increases in delinquencies, repossessions, foreclosures and losses that
generally occur during economic downturns or recessions, or that may result
from decreased profits affecting particular industry segments.
Adverse economic developments are also likely to
adversely affect commercial lending and leasing operations and increase the
risk of loan defaults and credit losses on such loans and leases. Carrying values of foreclosed commercial real
estate properties are generally based on appraisals prepared by certified or
licensed appraisers. Although TCF
conducts a review of external commercial real estate appraisals it receives,
weaknesses in real estate markets may result in declines in property values and
the sale of properties at less than previously estimated values, resulting in
additional charge-offs. TCF recognizes
the effect of such events in the periods in which they occur.
Additional information concerning TCF’s allowance for
loan and lease losses is set forth in “Management’s Discussion and Analysis — Consolidated
Financial Condition Analysis – Allowance for Loan and Lease Losses” on pages 36
through 38, in Note 1 of Notes to Consolidated Financial Statements on pages 53
through 56 and in Note 7 of Notes to Consolidated Financial Statements on page
59 of TCF’s 2004 Annual Report, incorporated herein by reference. Additional information regarding non-accrual
loans and leases, accruing loans and leases 90 days or more past due and
potential problem loans is set forth in “Management’s Discussion and Analysis —
Consolidated Financial Condition Analysis – Non-Performing Assets” on pages 38
and 39, “Management’s Discussion and Analysis — Consolidated Financial
Condition Analysis – Past Due Loans and Leases” on page 39 and “Management’s
Discussion and Analysis — Consolidated Financial Condition Analysis – Potential
Problem Loans and Leases” on page 40 of TCF’s 2004 Annual Report, incorporated
herein by reference.
INVESTMENT ACTIVITIES
TCF National Bank has authority to invest in various
types of liquid assets, including United States Treasury obligations and
securities of various federal agencies and U.S. Government sponsored
enterprises, deposits of insured banks, bankers’ acceptances and federal
funds. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the returns on loans and leases. TCF National Bank must also meet reserve
requirements of the FRB, which are imposed based on amounts on deposit in various
deposit categories.
Information regarding the carrying values and fair
values of TCF’s investments and securities available for sale is set forth in
Notes 3 and 4 of Notes to Consolidated Financial Statements on pages 56 and 57
of TCF’s 2004 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 and competitive conditions, interest
rates, money market conditions and other factors. Consumer, small business 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, small business and commercial demand deposit accounts,
interest-bearing checking accounts, money market accounts, regular savings
accounts, certificates of deposit and retirement savings plans. Since deposits are concentrated in Minnesota,
Illinois, Wisconsin, Michigan and Colorado, adverse economic conditions within
these states could result in greater difficulty in attracting deposit account
customers and balances.
TCF’s marketing strategy emphasizes attracting core
deposits held in checking, savings, money market and certificate of deposit
accounts. These accounts are a source of
low-interest cost funds and provide significant fee income. The composition of
TCF’s deposits has a significant impact on the overall cost of funds. Checking, savings and money market accounts
comprised 81.6% of total deposits at December 31, 2004. There were over 2.1 million retail checking,
savings and money market accounts at December 31, 2004, compared with
approximately 2 million and 1.9 million such accounts at December 31, 2003
and 2002, respectively.
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Information concerning TCF’s deposits is set forth in “Management’s
Discussion and Analysis — Consolidated Financial Condition Analysis – Deposits”
on page 41 and in Note 11 of Notes to Consolidated Financial Statements on
pages 61 and 62 of TCF’s 2004 Annual Report, incorporated herein by reference.
Borrowings
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. These borrowings include FHLB advances,
repurchase agreements, subordinated bank notes and other borrowings.
The FHLB System functions as a central reserve bank
providing credit for financial institutions through a regional bank located
within a particular financial institution’s assigned region. TCF National Bank is a member of the FHLB
system, is required to own a minimum level of FHLB capital stock and is
authorized to apply for advances on the security of such stock, mortgage-backed
securities, loans secured by real estate 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 $1.6
billion at December 31, 2004, compared with $870.5 million at December 31,
2003. 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 include
meeting short-term liquidity needs. In
addition to the program limitations, the amounts of advances for which an
institution may be eligible are generally based on the FHLB’s assessment of the
institution’s creditworthiness.
As an additional source of funds, TCF may sell
securities subject to its obligation to repurchase these securities under
repurchase agreements with major investment banks or the FHLB utilizing
government securities or mortgage-backed securities as collateral. Repurchase agreements totaled $1.2 billion at
December 31, 2004, unchanged from December 31, 2003. Generally, securities with a value in excess
of the amount borrowed are required to be deposited as collateral with the
counterparty to a repurchase agreement.
The creditworthiness of the counterparty is important in establishing
that the overcollateralized amount of securities delivered by TCF is protected
and TCF enters into repurchase agreements only with institutions with a
satisfactory credit history.
The use of repurchase agreements may expose TCF to
certain risks not associated with other sources of funds, including possible
requirements to provide additional collateral and the possibility that such
agreements may not be renewed. If TCF
were no longer able to obtain repurchase agreement financing, it would be
necessary to obtain alternative sources of short-term funds. Such alternative sources of funds, if
available, may be higher-cost substitutes for the repurchase agreement funds.
During the second quarter of 2004, TCF National Bank (“TCF
Bank”), a wholly-owned subsidiary of TCF, issued $75 million of subordinated
notes due in 2014. These notes qualify
as Tier 2 or supplemental capital for regulatory purposes, subject to certain
limitations. TCF Bank paid the proceeds
from the offering to TCF to be used for general corporate purposes, which may
include repurchases in the open market of TCF common stock.
Information concerning TCF’s FHLB advances, repurchase
agreements, subordinated bank notes and other borrowings is set forth in “Management’s
Discussion and Analysis — Consolidated Financial Condition Analysis –
Borrowings” on page 42 and in Notes 12 and 13 of Notes to Consolidated
Financial Statements on pages 62 through 64 of TCF’s 2004 Annual Report,
incorporated herein by reference.
BUSINESS RISKS
Like all financial companies, TCF’s business and
results of operations are subject to a number of risks, many of which are
outside of TCF’s control. In addition to the other information in this report,
readers should carefully consider that the following important factors, among
others, could materially impact TCF’s business and future results of
operations.
Changes
in interest rates could negatively impact TCF’s financial condition and results
of operations.
TCF’s results of operations depend substantially on
net interest income, which results from the difference between interest earned
on interest-earning assets, such as investments, loans, and leases, and
interest paid on interest-bearing liabilities, such as deposits and borrowings.
Interest rates are highly sensitive to many factors, including Federal Reserve
monetary policies and domestic and international economic and political
conditions. Conditions such as inflation, recession, unemployment, money
supply, government borrowing and other factors beyond management’s control may
also affect interest rates. If TCF’s interest-earning assets mature, reprice or
prepay more quickly than interest-bearing liabilities in a
6
given period, a decrease in market interest rates
could adversely affect net interest income. Likewise, if interest-bearing
liabilities mature or reprice, or, in the case of deposits, are withdrawn by
the accountholder, more quickly than interest-earning assets in a given period,
an increase in market interest rates could adversely affect net interest
income.
TCF’s consumer and commercial loans tied to a floating
interest rate (prime or LIBOR) have increased $669 million in 2004. This is primarily due to TCF meeting customer
demand by offering variable-rate loans.
TCF also provides fixed- and adjustable-rate commercial and consumer
loans, which increased by $320 million in 2004.
Fixed-rate loans increase TCF’s exposure to interest rate risk in a
rising rate environment because interest-bearing liabilities would be subject
to repricing before assets become subject to repricing. Floating-rate loans
decrease the risks to a lender associated with changes in interest rates but
involve other risks. As interest rates rise, the payment by the borrower rises
to the extent permitted by the terms of the loan, and the increased payment
increases the potential for default. At the same time, for secured loans, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. In a declining interest rate environment, there is likely to be
an increase in prepayment activity on loans as the borrowers refinance their
loans at lower interest rates. Under these circumstances, TCF’s results of operations
could be negatively impacted.
TCF’s one-year adjusted interest rate gap was a
positive $585.3 million, or 4.7%, of total assets at December 31, 2004,
compared with a positive $161.3 million, or 1%, of total assets at December 31,
2003. A positive interest rate gap
position exists when the amount of interest-earning assets maturing or
repricing, including assumed prepayments, within a particular time period
exceeds the amount of interest-bearing liabilities maturing or repricing. TCF has managed the change in interest rates
by taking certain steps to reposition the balance sheet for a rising short-term
interest rate environment, but there can be no assurance that short-term
interest rates will indeed rise. If
interest rates remain at current levels or decrease, the net interest margin
may compress and net interest income may decline.
Changes in interest rates also can affect the value of
loans and other interest-rate sensitive assets, including retained interests in
mortgage servicing rights, and TCF’s ability to realize gains on the sale of
assets. This type of income can vary
significantly from quarter-to-quarter and year-to-year based on a number of
different factors, including the interest rate environment. An increase in
interest rates that adversely affects the ability of borrowers to pay the
principal or interest on loans may lead to an increase in non-performing assets
and increased loan loss reserve requirements which could have a material
adverse effect on TCF’s results of operations.
Although fluctuations in market interest rates are
neither completely predictable nor controllable, TCF’s Asset/ Liability
Committee regularly monitors TCF’s interest rate risk position and oversees its
financial risk management by establishing policies and operating limits.
Changes in interest rates or prepayment speeds
could negatively impact TCF’s residential mortgage servicing portfolio and
related mortgage servicing rights.
The capitalization, amortization and impairment of
mortgage servicing rights are subject to significant estimates. These estimates are based upon loan types,
note rates and prepayment speed assumptions.
Changes in interest rates or prepayment speeds may have a material
effect on the net carrying value of mortgage servicing rights. In a declining interest rate environment,
prepayment speed assumptions will increase and result in an acceleration in the
amortization of the mortgage servicing rights as the assumed underlying
portfolio declines and also may result in impairment as the value of the
mortgage servicing rights declines. During 2004, TCF experienced a decline in
refinance activity, driven by an increase in mortgage interest rates. At December 31, 2004, TCF’s capitalized
mortgage servicing rights, net of valuation allowance, totaled $46.4 million
with an estimated fair value of $55.9 million.
In 2004, TCF recorded amortization and provision for impairment of
mortgage servicing rights of $13.1 million and $1.5 million, respectively.
Declines in home values in TCF’s markets could
adversely impact results from operations.
Like all banks, TCF is subject to the effects of any
economic downturn, and in particular, a significant decline in home values in
TCF’s markets could have a negative effect on results of operations. At December 31, 2004, TCF had $4.4
billion of consumer home equity loans with a weighted average loan-to-value
ratio for the portfolio of 75%. In
addition, at December 31, 2004, TCF had $1 billion in residential real
estate loans with a weighted average loan-to-value ratio of 53%. A significant decline in home values would
likely lead to increased delinquencies and defaults in both the consumer home
equity loan and residential real estate loan portfolios and result in increased
losses in these portfolios.
7
TCF’s
leasing and equipment finance activities.
TCF’s leasing activity is subject to risk of cyclical
downturns and other adverse economic developments. TCF’s ability to increase its lease portfolio
is dependent upon its ability to place new equipment in service. In an adverse economic environment, there may
be a decline in the demand for some types of equipment which TCF leases,
resulting in a decline in the amount of new equipment being placed in service
as well as the decline in equipment values for equipment previously placed in
service. In addition, the majority of
TCF’s leasing and equipment finance portfolio has been originated during recent
years, and consequently the performance of this portfolio may not be reflective
of future results and credit quality. A
portion of TCF’s equipment leasing portfolio consists of titled motor
vehicles. Like all lessors of motor
vehicles, TCF is exposed to certain state statutes which impose vicarious
liability on owners of motor vehicles for accidents related to those
vehicles. TCF attempts to mitigate this
risk by requiring its lessees to furnish proof of underlying motor vehicle
liability insurance prior to commencement of the lease and throughout the term
of the lease and through its own insurance coverages.
As previously discussed in the “Leasing and Equipment
Finance” section of “Lending Activities,” the investment in leveraged
leases at December 31, 2004 consists of a 100% equity interest in a Boeing
767-300 aircraft leased to Delta Airlines.
The investment in leveraged leases represents net unpaid rentals and
estimated unguaranteed residual values of the leased assets less related
unearned income. TCF has no obligation for principal and interest on the
notes representing the non-recourse debt related to this leveraged lease.
However, these noteholders have a security interest in the aircraft which is
superior to TCF’s equity interest. Such notes, which totaled $19.2
million at December 31, 2004, down from $22.6 million at December 31,
2003, are recorded as an offset against the related rental receivable. In January 2005, these notes were
further reduced to $15.6 million after Delta made its scheduled payment.
During the second quarter of 2004, TCF completed its annual review of the lease
residual value assumption for this aircraft and reduced the estimated residual
value by $4.4 million. As required under Statement of Financial
Accounting Standards (“SFAS”) No. 13, “Accounting for Leases,” TCF
recognized an impairment charge of $1.6 million which was recorded in other
non-interest expense. The remaining reduction will be amortized through
reduced yield on the investment over the remaining years of the lease as
prescribed by SFAS No. 13. In 2004, TCF downgraded its credit rating on
the aircraft leveraged lease and classified its investment as substandard and
placed the lease on non-accrual status. Although Delta is current on its
payments related to this transaction, if Delta declares bankruptcy, it would
likely result in the charge-off of TCF’s $18.8 million investment in the
leveraged lease and the current payment of previously deferred income tax
obligations. This lease represents TCF’s
only material direct exposure to the commercial airline industry. Reduced
airline travel, higher oil prices, changes in airline fare structures, and
other factors have adversely impacted the airline industry and could have an
adverse impact on Delta’s ability to meet its lease obligations and on the
residual value of the aircraft.