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Section 1: 10-K (10-K)

 

UNITED STATES
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, 2006

 

or

 

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

 

For the transition period from                            to                         

 

Commission File No. 001-10253

 

TCF Financial Corporation

(Exact name of registrant as specified in its charter)

 

DELAWARE

41-1591444

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification No.)

 

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

(Address of principal executive offices and zip code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

Common Stock (par value $.01 per share)
Preferred Share Purchase Rights (Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ý    No  o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act from their obligation under those Sections.

Yes  o    No  ý

 

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 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 (§229.405 of the chapter) 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ý

Accelerated filer  o

Non-accelerated filer  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  ý

 

As of June 30, 2006, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter as reported by the New York Stock Exchange, was $2,989,446,440.

 

As of January 31, 2007, there were 130,443,404 shares outstanding 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 definitive Proxy Statement dated March 7, 2007 are incorporated by reference into Part III hereof.

 



 

Table of Contents

 

 

Description

Page

Part I

 

 

Item 1.

Business

1

Item 1A.

Risk Factors

8

Item 1B.

Unresolved Staff Comments

13

Item 2.

Properties

13

Item 3.

Legal Proceedings

13

Item 4.

Submission of Matters to a Vote of Security Holders

13

 

 

 

Part II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities

14

Item 6.

Selected Financial Data

16

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 8.

Financial Statements and Supplementary Data

43

 

Report of Independent Registered Public Accounting Firm

43

 

Consolidated Financial Statements

44

 

Notes to Consolidated Financial Statements

48

 

Other Financial Data

75

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

76

Item 9A.

Controls and Procedures

76

 

Management’s Report on Internal Control over Financial Reporting

76

 

Report of Independent Registered Public Accounting Firm

77

Item 9B.

Other Information

77

 

 

 

Part III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

78

Item 11.

Executive Compensation

78

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

79

Item 13.

Certain Relationships and Related Transactions, and Director Independence

79

Item 14.

Principal Accountant Fees and Services

79

 

 

 

Part IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

80

Signatures

 

81

Index to Exhibits

 

82

 



 

Part I

 

Item 1. Business

 

General

 

TCF Financial Corporation (“TCF” or the “Company”), a Delaware Corporation, is a financial holding company based in Wayzata, Minnesota. Its principal subsidiaries, TCF National Bank and TCF National Bank Arizona, collectively, (“TCF Bank”), are headquartered in Minnesota and Arizona and operate bank branches in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana and Arizona.

 

At December 31, 2006, TCF had total assets of $14.7 billion and was the 43rd largest publicly traded bank holding company in the United States based on total assets as of September 30, 2006. 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.

 

TCF’s core businesses include retail banking; commercial banking; small business banking; consumer lending; leasing and equipment finance and investments and insurance services. The retail banking business includes traditional and supermarket branches, campus banking, EXPRESS TELLER® ATMs and Visa U.S.A. Inc. (“Visa”) cards. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Financial Condition Analysis – Operating Segment Results” and Note 22 of Notes to Consolidated Financial Statements for information regarding TCF’s reportable operating segments.

 

Retail Banking

 

TCF’s primary focus is on the delivery of retail and commercial banking products in markets served by TCF Bank. Some of its products, such as its commercial equipment loans and leases, are offered in markets outside areas served by TCF Bank.

 

At December 31, 2006, TCF had 453 retail banking branches, consisting of 196 traditional branches, 244 supermarket branches and 13 campus branches. TCF operated 107 branches in Minnesota, 195 in Illinois, 64 in Michigan, 44 in Colorado, 36 in Wisconsin, six in Indiana and one in Arizona.

 

Targeted new branch expansion is a key strategy for TCF. TCF has significantly expanded its banking franchise in recent years. 148 new branches have been opened since January 1, 2001. During 2006, TCF opened 19 new branches, consisting of 10 new traditional branches, five new supermarket branches and four new campus branches. TCF anticipates opening 20 new branches in 2007, consisting of 11 new traditional branches, six new supermarket branches and three campus branches. During the fourth quarter of 2006, TCF opened its first branch in Arizona. TCF’s expansion is largely dependent on the continued long-term success of branch banking.

 

Campus banking represents an important part of TCF’s retail banking business. TCF has alliances with the University of Minnesota, the University of Michigan plus twelve other colleges, including DePaul University in Chicago, Milwaukee Area Technical College, Northern Michigan University and Eastern Michigan University. These alliances include exclusive marketing and naming rights agreements. Branches have been opened on many of these college campuses. TCF provides multi-purpose campus cards for many of these colleges. These cards serve as a school identification card, ATM card, library card, security card, health card, phone card and stored value card for vending machines or similar uses. TCF is ranked 6th largest in number of campus card banking relationships in the U.S. At December 31, 2006, there were 110,309 total campus deposit accounts and $187.7 million in campus deposits. In 2005, TCF entered into a $35 million 25-year naming rights agreement for sponsorship of a new University of Minnesota football stadium to be called “TCF Bank Stadium”. Construction of this stadium began in September 2006.

 

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 is in checking accounts and their related activities. Increasing fee and service charge revenue has been challenging as a result of slower growth in checking accounts and changing customer behavior. Providing a wide range of retail banking services is an integral component of TCF’s business philosophy and a major

 

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strategy for generating additional non-interest income. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement and Analysis – Non-Interest Income” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Information” for additional information.

 

Lending Activities

 

General TCF’s lending activities reflect its community banking philosophy, emphasizing secured loans to individuals and businesses in its primary market areas in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana and Arizona. TCF is also engaged in leasing and equipment finance activities nationwide. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Financial Condition Analysis – Loans and Leases” and Note 5 of Notes to Consolidated Financial Statements for additional information regarding TCF’s loan and lease portfolios.

 

Consumer Lending TCF makes consumer loans for personal, family or household purposes, such as home purchases, debt consolidation, financing of home improvements, automobiles, vacations and education. Consumer loans totaled $5.9 billion at December 31, 2006, with $4.4 billion, or 75%, having fixed interest rates and $1.5 billion, or 25%, having variable interest rates tied to the prime rate.

 

TCF’s consumer lending activities are primarily home equity real estate secured loans. They also include loans secured by personal property and to a limited extent, unsecured personal loans. Consumer loans may be made on a revolving line of credit or fixed-term basis.

 

Education Lending TCF originates education loans for resale. TCF had $144.6 million of education loans held for sale at December 31, 2006, compared with $229.8 million at December 31, 2005. Due to legislative changes to student loan programs in 2006, TCF accelerated the timing of certain education loan sales. In the past, TCF generally sold the education loans it originated just before the loans entered repayment status. Beginning in the third quarter of 2006, TCF began selling certain education loans once they were fully disbursed. 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.

 

Commercial Real Estate Lending Commercial real estate loans are loans originated by TCF that are 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, 2006, commercial real estate loans totaled $2.4 billion. At December 31, 2006, variable- and adjustable-rate loans represented 72% of commercial real estate loans outstanding. At December 31, 2006, TCF’s commercial construction and development loan portfolio totaled $188.7 million.

 

Commercial Business Lending Commercial business loans are loans originated by TCF that are generally secured by various types of business assets including inventory, receivables, equipment, financial instruments and commercial real estate. In limited cases, loans may be made on an unsecured basis. Commercial business loans are used for a variety of purposes including working capital and financing the purchase of equipment.

 

TCF concentrates on originating commercial business loans to middle-market companies with borrowing requirements of less than $25 million based in its primary markets. Substantially all of TCF’s commercial business loans outstanding at December 31, 2006, 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, 2006, TCF’s leasing and equipment finance portfolio (including operating leases) was $1.9 billion, consisting of $492.1 million of loans and $1.4 billion of leases. TCF’s leasing and equipment finance businesses, TCF Equipment Finance, Inc. (“TCF Equipment Finance”) and Winthrop Resources Corporation (“Winthrop Resources”), operate in all 50 states and have equipment installations domestically and to a limited extent in foreign countries. TCF Equipment Finance delivers equipment finance solutions to small and mid-size companies in various industries. Winthrop Resources primarily leases technology and data processing equipment to companies nationwide.

 

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TCF funds most of its leases internally, and consequently retains the credit risk on such leases. TCF may arrange financing of certain leases through non-recourse discounting of lease rentals with various other financial institutions at fixed interest rates. At December 31, 2006, $53.7 million, or 3.7%, of TCF’s lease portfolio, including operating leases, was discounted on a non-recourse basis with other financial institutions.

 

TCF’s leasing and equipment finance businesses also invests in limited partnerships that are formed to invest in qualified affordable housing projects. Leasing and equipment finance had $39.7 million and $43.7 million invested in affordable housing limited partnerships at December 31, 2006 and 2005, respectively. For more information on investments in affordable housing limited partnerships, see Note 1 of the Notes to Consolidated Financial Statements.

 

Investment Activities

 

TCF 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 Bank must also meet reserve requirements of the Federal Reserve Board, which are imposed based on amounts on deposit in various deposit categories.

 

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.

 

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. At December 31, 2006, interest-bearing deposits comprised 75% of total deposits, as compared with 73% at December 31, 2005.

 

Information concerning TCF’s deposits is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Financial Condition Analysis – Deposits” and in Note 9 of Notes to Consolidated Financial Statements.

 

Borrowings Borrowings may be used to compensate for reductions in deposit inflows or net deposit outflows, or to support expanded lending activities. These borrowings include Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, federal funds and other borrowings.

 

TCF Bank, as a member of the FHLB system, is required to own a minimum level of FHLB 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 $1.5 billion at December 31, 2006, compared with $1.1 billion at December 31, 2005. 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. 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 (repurchase agreements) with major investment banks or the FHLB utilizing government securities or mortgage-backed securities as collateral. Repurchase agreements totaled $1.6 billion at December 31, 2006, compared with $1.4 billion at December 31, 2005. Generally, securities with

 

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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. TCF only enters into repurchase agreements with institutions with a satisfactory credit history.

 

Information concerning TCF’s FHLB advances, repurchase agreements, subordinated notes and other borrowings is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Financial Condition Analysis – Borrowings” and in Notes 10 and 11 of Notes to Consolidated Financial Statements.

 

Other Information

 

Activities of Subsidiaries of TCF Financial Corporation TCF’s business operations include those conducted by direct and indirect subsidiaries of TCF Financial, all of which are consolidated for purposes of preparing TCF’s consolidated financial statements. TCF does not utilize unconsolidated subsidiaries or special purpose entities to provide off-balance sheet borrowings. TCF’s primary direct subsidiaries are TCF National Bank and TCF National Bank Arizona, collectively, (“TCF Bank”). Subsidiaries of TCF Bank are principally engaged in the following activities.

 

Leasing and Equipment Finance See “Item 1. Business-Lending Activities” for information on TCF’s leasing and equipment finance businesses.

 

Insurance and Investment Services TCF Investments sell a variety of investment products to its retail banking clients. These products include fixed and variable rate, single premium tax-deferred annuities, mutual funds, life insurance and broker-assisted securities.

 

Real Estate Investment Trust TCF has a Real Estate Investment Trust (“REIT”) and a related foreign operating company (“FOC”) that acquire, hold and manage real estate loans and other assets. These companies are consolidated with TCF Bank and are included in the consolidated financial statements of TCF Financial Corporation. TCF’s FOC operates under laws in certain states (including Minnesota and Illinois) that allow FOCs. It is possible that state legislatures may revise their tax laws applicable to REITs or FOCs and such changes could increase TCF’s tax expense.

 

Competition TCF competes with a number of depository institutions and financial service providers in its market areas, and experiences significant competition in attracting and retaining deposits and in lending funds. Direct competition for deposits comes primarily from retail banks, commercial banks, investment banks, credit unions and savings institutions. Additional significant competition for deposits comes from institutions selling money market mutual funds and corporate and government securities. TCF competes for the origination of loans with commercial banks, mortgage bankers, mortgage brokers, consumer and commercial finance companies, credit unions, insurance companies and savings institutions. TCF also competes nationwide with other leasing and equipment finance companies and commercial banks in the financing of equipment. Expanded use of the Internet has increased competition affecting TCF and its loan, lease and deposit products.

 

Employees As of December 31, 2006, TCF had 8,547 employees, including 2,902 part-time employees. TCF provides its employees with a comprehensive program of benefits, some of which are provided on a contributory basis, including comprehensive medical and dental plans, a 401(k) savings plan with a company matching contribution, life insurance and short- and long-term disability coverage.

 

Regulation

 

The banking industry is generally subject to extensive regulatory oversight. TCF Financial, as a publicly held financial holding company, and TCF Bank, as a national bank with deposits insured by the Federal Deposit Insurance Corporation (“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, and other new financial services laws and regulations, are likely and cannot be predicted with certainty. TCF Financial’s primary regulator is the Federal Reserve Bank (“FRB”) and TCF Bank’s primary regulator is the Office of the Comptroller of the Currency (“OCC”).

 

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Regulatory Capital Requirements TCF Financial and TCF Bank are subject to regulatory capital requirements of the FRB and the OCC, respectively, as described below. In addition, these regulatory agencies are required by law to take prompt action when institutions do not meet certain minimum capital standards. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) defines five levels of capital condition, the highest of which is “well-capitalized.” It requires that regulatory authorities subject undercapitalized institutions to various restrictions such as limitations on dividends or other capital distributions, limitations on growth or restrictions on an activity. Undercapitalized banks must develop a capital restoration plan and the parent financial holding company is required to guarantee compliance with the plan. TCF Financial and TCF Bank are “well-capitalized” under the FDICIA capital standards.

 

The FRB and the OCC also have adopted rules that could permit them to quantify and account for interest-rate risk exposure and market risk from trading activity and reflect these risks in higher capital requirements. New legislation, additional rulemaking, or changes in regulatory policies may affect future regulatory capital requirements applicable to TCF Financial and TCF Bank. The ability of TCF Financial and TCF Bank to comply with regulatory capital requirements may be adversely affected by legislative changes, future rulemaking or policies of regulatory authorities, by unanticipated losses or lower levels of earnings.

 

Restrictions on Distributions Dividends or other capital distributions from TCF Bank to TCF Financial are an important source of funds to enable TCF Financial to pay dividends on its common stock, to make payments on TCF Financial’s borrowings, or for its other cash needs. TCF Bank’s ability to pay dividends is dependent on regulatory policies and regulatory capital requirements. The ability to pay such dividends in the future may be adversely affected by new legislation or regulations, or by changes in regulatory policies. In general, TCF Bank may not declare or pay a dividend to TCF Financial in excess of 100% of its net profits during a year, combined with its retained net profits for the preceding two years, without prior approval of the OCC. TCF Bank’s ability to make capital distributions in the future may require regulatory approval and may be restricted by its regulatory authorities. TCF Bank’s ability to make any such distributions may also depend on its earnings and ability to meet minimum regulatory capital requirements in effect during future periods. These capital adequacy standards may be higher in the future than existing minimum capital requirements. The OCC also has the authority to prohibit the payment of dividends by a national bank when it determines such payments would constitute an unsafe and unsound banking practice. In addition, income tax considerations may limit the ability of TCF Bank to make dividend payments in excess of its current and accumulated tax “earnings and profits” (“E&P”). Annual dividend distributions in excess of E&P could result in a tax liability based on the amount of excess earnings distributed and current tax rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Financial Condition Analysis – Liquidity Management” and Note 13 and Note 14 of Notes to Consolidated Financial Statements.

 

Regulation of TCF and Affiliates and Insider Transactions TCF Financial is subject to FRB regulations, examinations and reporting requirements relating to bank or financial holding companies. As subsidiaries of a financial holding company, TCF Bank is subject to certain restrictions in its dealings with TCF Financial and with companies affiliated with TCF.

 

A holding company must serve as a source of strength for its subsidiary banks, and the FRB may require a holding company to contribute additional capital to an undercapitalized subsidiary bank. In addition, Section 55 of the National Bank Act may permit the OCC to order the pro rata assessment of shareholders of a national bank where the capital of the bank has become impaired. If a shareholder fails to pay such an assessment within three months, the OCC may order the sale of the shareholder’s stock to cover a deficiency in the capital of a subsidiary bank. In the event of a holding company’s bankruptcy, any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and may be entitled to priority over other creditors.

 

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Under the Bank Holding Company Act (“BHCA”), a bank holding company must obtain FRB approval before acquiring more than 5% control, or substantially all of the assets, of another bank, or bank or financial holding company, or merging or consolidating with such a bank or holding company. The BHCA also generally prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, providing services for its subsidiaries, or conducting activities permitted by the FRB as being closely related to the business of banking.

 

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 TCF Bank, and which require regulatory approval prior to any such changes in control. The Restated Certificate of Incorporation of TCF Financial and a Shareholder Rights Plan adopted by TCF Financial contain, among other items, features which may inhibit a change in control of TCF Financial.

 

Acquisitions and Interstate Operations Under federal law, interstate merger transactions may be approved by federal bank regulators without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks opted out of the Riegle-Neal Interstate Banking and Branching Act of 1994 by adopting a law after the date of enactment of such act, and prior to June 1, 1997, which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches by banks are permitted only if the law of the state in which the branches are located permits such acquisitions. Interstate mergers and branch acquisitions may also be subject to certain nationwide and statewide insured deposit maximum concentration levels or other limitations.

 

Insurance of Accounts; Depositor Preference In February 2006, the Federal Deposit Insurance Act of 2005 (“FDIC Act”) was enacted into law reforming the bank deposit insurance system. The FDIC has finalized regulations or has drafted proposed regulations to implement many of the FDIC Act provisions.

 

The deposits of TCF Bank are insured by the FDIC up to $100,000 per insured depositor, except certain types of retirement accounts, which are insured up to $250,000 per insured depositor. During 2006, FDIC regulations merged the former Saving Association Insurance Fund (“SAIF”) and Bank Insurance Fund (“BIF”) into the Deposit Insurance Fund (“DIF”).

 

The FDIC has set a designated reserve ratio of 1.25% ($1.25 against $100 of insured deposits) for the DIF. The FDIC Act provides the FDIC Board of Directors the authority to set the designated reserve ratio between 1.15% and 1.50%. The FDIC must adopt a restoration plan when the reserve ratio falls below 1.15% and begin paying dividends when the reserve ratio exceeds 1.35%. There is no requirement to achieve a specific ratio within a given time frame. The FDIC Board of Directors has not declared any dividends as of December 31, 2006. The DIF reserve ratio calculated by the FDIC that was in effect at December 31, 2006 was 1.22%.

 

In 2006, the annual insurance premiums on bank deposits insured by the DIF varied between $0 per $100 of deposits for banks classified in the highest capital and supervisory evaluation categories to $.27 per $100 of deposits for banks classified in the lowest capital and supervisory evaluation categories. Annual insurance premiums have not been required for TCF Bank for 2006, 2005, and 2004.

 

In 2006, FDIC regulations established a new risk-based assessment system under which deposit insurance assessments are based upon supervisory ratings for all insured institutions, financial ratios for most institutions, and long-term debt issuer ratings for large institutions that have them. Starting in the second quarter of 2007, under new FDIC regulations, annual insurance premiums on bank deposits insured by the DIF may vary between $.05 per $100 of deposits for banks assigned in the lowest risk category to $.43 per $100 of deposits for banks assigned in the highest risk category. As of December 31, 2006, TCF Bank has not been assigned to a new risk category by the FDIC.

 

The FDIC Act required the FDIC to establish a one-time historical assessment credit that provides banks a credit that can be used to offset insurance assessments starting

 

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in 2007. This one-time historical assessment credit was established to benefit banks that had funded the deposit insurance funds prior to December 31, 1996. This one-time historical assessment credit is based upon TCF Bank’s insured deposits as of December 31, 1996. The FDIC has estimated TCF Bank’s one-time historical assessment credit at $9.6 million, which can be used to offset future FDIC insurance premiums. This one-time historical assessment credit may be transferred to another insured institution with FDIC approval.

 

In addition to risk-based deposit insurance assessments, additional assessments may be imposed by Financing Corporation, a separate U.S. government agency affiliated with the FDIC, on insured deposits to pay for the interest cost of Financing Corporation bonds. Financing Corporation assessment rates for 2006 ranged from $.0124 to $.0132 per $100 of deposits. Financing Corporation assessments of $1.1 million each year for 2006, 2005 and 2004 were paid by TCF Bank and are included in other expense. Financing Corporation assessments and collections were largely unaffected by the FDIC Act.

 

In addition, the FDIC is authorized to terminate a depository institution’s deposit insurance if it finds that the institution is being operated in an unsafe and unsound manner or has violated any rule, regulation, order or condition administered by the institution’s regulatory authorities. Any such termination of deposit insurance would likely have a material adverse effect on TCF, the severity of which would depend on the amount of deposits affected by such a termination.

 

Under federal law, deposits and certain claims for administrative expenses and employee compensation against an insured depository institution are afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any receiver appointed by regulatory authorities. Such priority creditors would include the FDIC.

 

Examinations and Regulatory Sanctions TCF is subject to periodic examination by the FRB, OCC and the FDIC. Bank regulatory authorities may impose a number of restrictions or new requirements on institutions found to be operating in an unsafe or unsound manner, including but not limited to growth limitations, dividend restrictions, individual increased regulatory capital requirements, increased loan, lease and real estate loss reserve requirements, increased supervisory assessments, activity limitations or other restrictions that could have an adverse effect on such institutions, their holding companies or holders of their debt and equity securities. Various enforcement remedies, including civil money penalties, may be assessed against an institution or an institution’s directors, officers, employees, agents or independent contractors.

 

To the extent not subject to preemption by the OCC, subsidiaries of TCF may also be subject to state and/or self-regulatory organization licensing, regulation and examination requirements in connection with certain insurance and securities brokerage activities.

 

National Bank Investment Limitations Permissible investments by national banks are limited by the National Bank Act, as amended, and by rules of the OCC. Non-traditional bank activities permitted by the Gramm-Leach-Bliley Act will subject a bank to additional regulatory limitations or requirements, including a required regulatory capital deduction and application of transactions with affiliates limitations in connection with such activities.

 

Laws and Regulations TCF is subject to a wide array of other laws and regulations, including, but not limited to, usury laws, USA Patriot and Bank Secrecy Acts, the CRA and related regulations, the Equal Credit Opportunity Act and Regulation B, Regulation D reserve requirements, Electronic Funds Transfer Act and Regulation E, the Truth-in-Lending Act and Regulation Z, the Real Estate Settlement Procedures Act and Regulation X, the Expedited Funds Availability Act and Regulation CC, and the Truth-in-Savings Act and Regulation DD. TCF is also subject to laws and regulations that may impose liability on lenders and owners for clean-up costs and other costs stemming from hazardous waste located on property securing real estate loans.

 

Taxation

 

Federal Taxation The statute of limitations on TCF’s consolidated Federal income tax return is closed through 2002.

 

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State Taxation TCF and/or its subsidiaries currently file tax returns in all states which impose corporate income and franchise taxes and local tax returns in certain cities and other taxing jurisdictions. TCF’s primary banking activities are in the states of Minnesota, Illinois, Michigan, Colorado, Wisconsin and Arizona. The methods of filing, and the methods for calculating taxable and apportionable income, vary depending upon the laws of the taxing jurisdiction. See “Risk Factors.”

 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Income Taxes” and Notes 1 and 12 of Notes to Consolidated Financial Statements for additional information regarding TCF’s income taxes.

 

Available Information

 

TCF’s website, www.tcfbank.com, includes free access to Company news releases, investor presentations, conference calls to discuss published financial results, TCF’s Annual Report and periodic filings required by the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports.

 

TCF’s Compensation/Nominating/Corporate Governance Committee and Audit Committee charters, Corporate Governance Guidelines, Codes of Ethics and changes to Codes of Ethics are also available on this website. Shareholders may request these documents in print by contacting the Corporate Secretary at TCF Financial Corporation, 200 Lake Street East, Mail Code EX0-03-A, Wayzata, MN 55391-1693.

 

 

 

Item 1A. Risk Factors

 

Enterprise Risk Management

 

In the normal course of business, TCF is exposed to various risks. Management balances the Company’s strategic goals, including revenue and profitability objectives, with their associated risks.

 

In defining the Company’s risk profile, management organizes risks into three main categories: Credit Risk, Market Risk (which includes interest-rate risk, liquidity risk, and price risk) and Operational Risk (which includes transaction risk and compliance risk). Policies, systems and procedures have been adopted which are intended to identify, assess, control, monitor, and manage risk in each of these areas.

 

Primary responsibility for risk management lies with the heads of various business lines within the Company. Each business line within the Company maintains policies, systems and procedures which are intended to identify, assess, control, monitor, and manage risk within their respective areas. Management continually reviews the adequacy and effectiveness of these policies, systems and procedures.

 

As an integral part of the risk management process, management has established various committees consisting of senior executives and others within the Company. The purpose of these committees is to closely monitor risks and ensure that adequate risk management practices exist within their respective areas of authority. Some of the principal committees include the Credit Policy Committee, Asset/Liability Management Committee (“ALCO”), Investment Committee, Capital Planning Committee and various financial reporting and compliance-related committees. Overlapping membership of these committees by senior executives and others helps provide a unified view of risk on an enterprise-wide basis.

 

To provide an enterprise-wide view of the Company’s risk profile, an enterprise risk management governance process has been established. This includes appointment of an Enterprise Risk Management Officer, who oversees the process and reports on the Company’s risk profile. Additionally, risk officers are assigned to each significant line of business and corporate function. The risk officers, while reporting directly to their respective line or function, facilitate implementation of the enterprise risk management and governance process. An Enterprise Risk Management Committee has been established consisting of senior executives and others within the Company, which oversees and supports the Enterprise Risk Management Officer.

 

The enterprise risk management governance process includes a process for providing an enterprise-wide view of the identification, assessment, measurement, monitoring, and reporting of significant risk-related events. The Board of Directors, through its Audit Committee, has overall responsibility for oversight of the Company’s enterprise risk management governance process.

 

8



 

Credit Risk Management Credit risk is defined as the risk to earnings or capital of an obligor’s failure to meet the terms of any contract with the Company or otherwise fails to perform as agreed. This includes failure of customers to meet their contractual obligations, and contingent exposures from unfunded loan commitments and letters of credit. Credit risk also includes failure of a counterparty to settle a securities transaction on agreed-upon terms (such as the counterparty in a repurchase transaction), or failure of an issuer in connection with mortgage-backed securities held in the Company’s investment portfolio.

 

To manage credit risk arising from lending and leasing activities, management has adopted and maintains what it believes are sound underwriting policies and procedures, and periodically reviews the appropriateness of these policies and procedures. Customers are evaluated as part of the initial underwriting processes and through periodic reviews. For consumer loans and small business banking loans, credit scoring models are used to help determine eligibility for credit and terms of credit. These models are periodically reviewed to verify they are predictive of borrower performance. Limits are established on the exposure to a single customer (including their affiliates) and on concentrations for certain categories of customers. Loan and lease credit approval levels are established so that larger credit exposures receive managerial review at the appropriate level through various credit approval committees.

 

Management continuously monitors asset quality in order to manage the Company’s credit risk and determine the appropriateness of valuation allowances. This includes, in the case of commercial loans and leases, a risk rating methodology under which a rating (1 through 9) is assigned to every loan and lease. The rating reflects management’s assessment of the level of the customer’s financial stress which may impact repayment. Asset quality is monitored separately based on the type or category of loan or lease. This allows management to better define the Company’s loan and lease portfolio risk profile. Management also uses various risk models – called stress tests – to estimate probable impact on payment performance under various expected or unexpected scenarios.

 

Market Risk Management (Including Interest-Rate Risk and Liquidity Risk) Market risk is defined as the potential for losses arising from changes in interest rates, equity prices, and other relevant market rates or prices, and includes interest-rate risk, liquidity risk and price risk. Interest-rate risk and associated liquidity risk are the Company’s primary market risks.

 

Interest-Rate Risk Interest-rate risk is defined as the exposure of net interest income and fair value of financial instruments to adverse movements in interest rates. Interest-rate risk arises mainly from the structure of the balance sheet. The primary goal of interest-rate risk management is to control exposure to interest-rate risk within acceptable tolerances established by ALCO and the Board of Directors.

 

The major sources of the Company’s interest-rate risk are timing differences in the maturity and repricing characteristics of assets and liabilities, changes in relationships between rate indices (basis risk), changes in customer behavior and changes in the shape of the yield curve. Management measures these risks and their impact in various ways, including use of simulation analysis and valuation analysis.

 

Simulation analysis is used to model net interest income from asset and liability positions over a specified time period (generally one year), and the sensitivity of net interest income, under various interest rate scenarios. The interest rate scenarios may include gradual or rapid changes in interest rates, rate shocks, spread narrowing and widening, yield curve twists, and changes in assumptions about customer behavior in various interest rate scenarios. The simulation analysis is based on various key assumptions which relate to the behavior of interest rates and spreads, changes in product balances, the repricing characteristics of products, and the behavior of loan and deposit customers in different rate environments. The simulation analysis does not necessarily take into account actions management may undertake in response to anticipated changes in interest rates.

 

In addition to the valuation analysis, management utilizes an interest rate gap measure (difference between interest-earning assets and interest-bearing liabilities repricing within a given period). While the interest rate gap measurement has some limitations, including no assumptions regarding future asset or liability production and a static interest rate assumption (large changes may occur related to those items), the interest rate gap represents the net asset or liability sensitivity at a point in time. An interest rate gap measure could be significantly affected by external

 

9



 

factors such as loan prepayments, early withdrawals of deposits, changes in the correlation of various interest-bearing instruments, competition or a rise or decline in interest rates. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for further information about TCF’s interest-rate risk, gap analysis and simulation analysis.

 

Management also uses valuation analysis to measure risk in the balance sheet that might not be taken into account in the net interest income simulation analysis. Whereas net interest income simulation highlights exposure over a relatively short time period (12 months), valuation analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the discounted value of liability cash flows. Valuation analysis addresses only the current balance sheet and does not incorporate the growth assumptions that are used in the net interest income simulation model. As with the net interest income simulation model, valuation analysis is based on key assumptions about the timing and variability of balance sheet cash flows. It also does not take into account actions management may undertake in response to anticipated changes in interest rates.

 

ALCO meets regularly and is responsible for reviewing the Company’s interest rate sensitivity position and establishing policies to monitor and limit exposure to interest-rate risk.

 

Liquidity Risk Liquidity risk is defined as the risk to earnings or capital arising from the Company’s inability to meet its obligations when they come due without incurring unacceptable losses. The primary goal of liquidity risk management is to ensure that the Company’s entire funding needs are met promptly, in a cost-efficient and reliable manner.

 

ALCO and the Board of Directors have adopted a Liquidity Management Policy to direct management of the Company’s liquidity risk. Under the Liquidity Management Policy, the Treasurer reviews current and forecasted funding needs for the Company and periodically reviews market conditions for issuing debt securities to wholesale investors. Key liquidity ratios and the amount available from alternative funding sources are reported to ALCO on a monthly basis.

 

The Treasurer maintains diverse and reliable sources of funding. This includes federal funds lines totaling at least $500 million, repurchase agreement lines totaling at least 150% of the amount of the Company’s financeable collateral (defined as any piece or pool of collateral that is greater than $5 million in current par), access to Federal Home Loan Bank (“FHLB”) advances and the Federal Reserve Bank discount window, “treasury, tax and loan notes,” commercial repurchase sweeps, and wholesale deposits.

 

The Treasurer ensures that liability maturities are staggered to limit forecasted daily funding needs. The daily funding guideline is $500 million, which may be met with a mix of approved borrowing types. Cash flow variances may cause minor day-to-day excesses over this guideline. A contingency funding plan is in place should certain liquidity triggers occur.

 

Other Market Risks Another source of market risk is the Company’s investment in FHLB stock. The investments in FHLB stock are required investments related to TCF’s borrowings from these banks. All new FHLB borrowing activity since 2000 is done with the FHLB of Des Moines. FHLBs obtain their funding primarily through issuance of consolidated obligations of the Federal Home Loan Bank System. The U.S. Government does not guarantee these obligations, and each of the 12 FHLBs are generally jointly and severally liable for repayment of each other’s debt. Therefore, TCF’s investments in these banks could be adversely impacted by the operations of the other FHLBs.

 

Operational Risk Management Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems, or external events. This definition includes transaction risk, which includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Transaction risk encompasses product development and delivery, transaction processing, information technology systems, and the internal control environment. The definition of operational risk also includes compliance risk, which is the risk of loss from violations of, or nonconformance with laws, rules, regulations, prescribed practices, or ethical standards.

 

The Company’s Internal Audit Department periodically assesses the adequacy and effectiveness of the Company’s processes for controlling and managing risks in all the core areas of operations. This includes determining whether internal controls and information systems are properly designed and adequately tested and reviewed. This also includes determining whether the system of internal controls over financial reporting is appropriate for the type and level

 

10



 

of risks posed by the nature and scope of the company’s activities. Audit plans are prepared using a risk-based methodology as well as any concerns identified by management, the Audit Committee, regulators or the Company’s independent registered public accounting firm. Significant issues related to the adequacy of controls, together with recommendations for improvements to those controls, are reported to management and the Audit Committee.

 

The Company’s Compliance Department and others charged with compliance responsibilities periodically assess the adequacy and effectiveness of the Company’s processes for controlling and managing its principal compliance risks. Compliance Department audit plans are prepared using a risk-based methodology as well as any concerns identified by management, the Audit Committee, or regulators. Significant issues related to the adequacy of controls, together with recommendations for improvements to those controls, are reported to management and the Audit Committee.

 

Other Risks

 

Customer Behavior Changes in customers’ behavior regarding use of deposit accounts could result in lower fee revenue, higher borrowing costs, and higher operational costs for TCF. TCF obtains a large portion of its revenue from its deposit accounts and depends on low-cost deposits as a significant source of funds.

 

In addition, competition from other financial institutions could result in higher numbers of closed accounts and increased account acquisition costs. TCF actively monitors customer behavior and adjusts policies and marketing efforts accordingly to attract new and retain existing checking account customers.

 

New Branch Expansion Opening new branches is an integral part of TCF’s growth strategy for generating new customers, deposit accounts and loans and the related revenue. The success of TCF’s branch expansion is dependent on the continued success of branch banking in attracting new customers and business. Many other financial institutions are also opening new branches, and the competition from them and other retailers for new branch sites is significant.

 

New branches typically produce net losses during the first two to three years of operations before they become profitable, and therefore the level and timing of new branch expansion can have a significant impact on TCF’s profitability.

 

Supermarket Branches The success of TCF’s supermarket branch expansion is dependent on the continued long-term success and viability of TCF’s supermarket partners and TCF’s ability to maintain licenses or lease agreements for its supermarket locations. At December 31, 2006, TCF had 244 supermarket branches, representing 54% of all retail branches. Supermarket banking continues to play an important role in TCF’s growth, as these branches have been consistent generators of account growth and deposits. TCF is subject to the risk, among others, that its license or lease for a location or locations will terminate upon the sale or closure of that location or locations by the supermarket partner. Also, an economic slowdown, financial or labor difficulties in the supermarket industry may reduce activity in TCF’s supermarket branches.

 

Card Revenue Future card revenues may be impacted by class action litigation against Visa U.S.A. Inc. (“Visa”) and MasterCard®. Visa is a defendant in many other legal actions, including litigation brought by merchants and merchant organizations against Visa concerning its card interchange fees challenging the level of interchange fees and prohibitions on merchants imposing surcharges on customers using cards to purchase goods and services. The ultimate impact of any such litigation cannot be predicted at this time.

 

Merchants are also seeking to develop independent card products or payment systems that would serve as alternatives to TCF Visa card products. The continued success of TCF’s various card programs is dependent on the success and viability of Visa and the continued use by customers and acceptance by merchants of its cards.

 

Declines in Home Values 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, 2006, TCF had $6.5 billion of consumer home equity and residential real estate loans with a weighted-average loan-to-value ratio for the portfolio of 78%. A significant decline in home values would likely lead to a decrease in new home equity loan originations and 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.

 

11



 

Leasing and Equipment Finance Activities TCF’s leasing and equipment finance activity is subject to risk of cyclical downturns and other adverse economic developments. In an adverse economic environment, there may be a decline in the demand for some types of equipment which TCF leases and/or finances, 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. TCF, like all owners and lessors of commercial equipment, may be exposed to liability claims resulting from injuries or accidents involving that equipment. Such liability has been most acute in states that have adopted laws imposing statutory vicarious liability on leasing companies for any injuries or property damage caused by motor vehicles they owned and leased. In 2005, a federal statute was enacted that significantly reduced a leasing company’s exposure to that risk. TCF seeks to mitigate its overall exposure to lessor’s liability risk by requiring all lessees to furnish evidence of liability insurance prior to lease inception and to maintain that insurance throughout the term of the lease, and through its own insurance programs.

 

Income Taxes TCF is subject to federal and state income tax regulations. Income tax regulations are often complex and require interpretation. Changes in income tax regulations could negatively impact TCF’s results of operations. If TCF’s REIT affiliate fails to qualify as a REIT, or should states enact legislation taxing these or related entities, TCF will be subject to a higher consolidated effective tax rate. The REIT and related companies must meet specific provisions of the Internal Revenue Code (“IRC”) and state tax laws. If these companies fail to meet any of the required provisions of federal and state tax laws, TCF’s tax expense could increase. Use of REITs is and has been the subject of federal and state audits and tax policy debates by various state legislatures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Income Taxes” for additional information.

 

Rules and Regulations New or revised tax, accounting, and other laws, regulations, rules and standards could significantly impact strategic initiatives, results of operations, and financial condition. The financial services industry is extensively regulated. Federal and state laws and regulations are designed primarily to protect the deposit insurance funds and consumers, and not necessarily to benefit a financial company’s shareholders. These laws and regulations may sometimes impose significant limitations on operations. These limitations, and sources of potential liability for the violation of such laws and regulations, are described in “Regulation.” These regulations, along with the currently existing tax and accounting laws, regulations, rules, and standards, control the methods by which financial institutions conduct business; implement strategic initiatives, as well as past, present, and contemplated tax planning; and govern financial disclosures. These laws, regulations, rules, and standards are constantly evolving and may change significantly over time. Current events that may not have a direct impact on TCF, such as accounting improprieties, may result in the adoption of substantive revisions to laws, regulations, rules, and standards. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on TCF’s business, results of operations, and financial condition, the effect of which is impossible to predict at this time.

 

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. TCF’s income in future periods may be negatively impacted by pending state and federal legislative proposals which, if enacted, could limit interest rates or loan, deposit or other fees and service charges. For example, recently proposed federal legislation could reduce interest subsidies and other benefits available to financial institutions that make education loans. Financial institutions have increasingly been the subject of class action lawsuits or in some cases regulatory actions challenging a variety of practices involving consumer lending and retail deposit-taking activity.

 

The Community Reinvestment Act (“CRA”) and fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice (“DOJ”) and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages

 

12



 

and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.

 

USA Patriot and Bank Secrecy Acts The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury Department’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. TCF has developed policies and procedures designed to ensure compliance.

 

Disruption to Infrastructure The extended disruption of vital infrastructure could negatively impact TCF’s business, results of operations, and financial condition. TCF’s operations depend upon, among other things, its technological and physical infrastructure, including its equipment and facilities. Extended disruption of its vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of TCF’s control, could have a material adverse impact either on the financial services industry as a whole, or on TCF’s business, results of operations, and financial condition.

 

Estimates and Assumptions TCF’s consolidated financial statements conform with generally accepted accounting principles, which require management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. These estimates are based on information available to management at the time the estimates are made. Actual results could differ from those estimates. For further information relating to critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Summary of Critical Accounting Estimates.”

 

 

Item 1B. Unresolved Staff Comments

 

None.

 

 

Item 2. Properties

 

Offices At December 31, 2006, TCF owned the buildings and land for 139 of its bank branch offices, owned the buildings but leased the land for 14 of its bank branch offices and leased or licensed the remaining 300 bank branch offices, all of which are well maintained. The properties related to the bank branch offices owned by TCF had a depreciated cost of approximately $230.8 million at December 31, 2006. At December 31, 2006, the aggregate net book value of leasehold improvements associated with leased bank branch office facilities was $29.4 million. In addition to the above-referenced branch offices, TCF owned and leased other facilities with an aggregate net book value of $41.2 million at December 31, 2006. For more information on premises and equipment, see Note 7 of Notes to Consolidated Financial Statements.

 

 

Item 3. Legal Proceedings

 

From time to time, TCF is a party to legal proceedings arising out of its lending, leasing and deposit operations. TCF is and expects to become engaged in a number of foreclosure proceedings and other collection actions as part of its lending and leasing collection activities. From time to time, borrowers and other customers, or employees or former employees have also brought actions against TCF, in some cases claiming substantial amounts of damages. Financial services companies are subject to the risk of class action litigation, and TCF has had such actions brought against it from time to time. Litigation is often unpredictable and the actual results of litigation cannot be determined with certainty.

 

 

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

 

None.

 

13



 

Part II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

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 Bloomberg.

 

 

 

High

 

Low

 

Dividends
Declared

 

2006

 

 

 

 

 

 

 

First Quarter

 

$

28.41

 

$

24.23

 

$

.23

 

Second Quarter

 

27.70

 

24.91

 

.23

 

Third Quarter

 

28.10

 

24.94

 

.23

 

Fourth Quarter

 

27.89

 

25.16

 

.23

 

2005

 

 

 

 

 

 

 

First Quarter

 

$

32.03

 

$

26.42

 

$

.2125

 

Second Quarter

 

28.56

 

24.55

 

.2125

 

Third Quarter

 

28.82

 

25.81

 

.2125

 

Fourth Quarter

 

28.78

 

25.02

 

.2125

 

 

As of January 31, 2007, there were 8,451 record holders of TCF’s common stock.

 

The Board of Directors of TCF Financial has not adopted a formal dividend policy. The Board of Directors intends to continue its 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 TCF Bank), as well as regulatory and contractual limitations and such other factors as the Board of Directors may deem relevant. In general, TCF Bank may not declare or pay a dividend to TCF in excess of 100% of its net profits for that year combined with its retained net profits for the preceding two calendar years, without prior approval of the OCC. Restrictions on the ability of TCF Bank to pay cash dividends or possible diminished earnings of the indirect subsidiaries of TCF may limit the ability of TCF 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.

 

14



 

The following graph compares the cumulative total stockholder return on TCF Stock over the last five fiscal years with the cumulative total return of the Standard and Poor’s 500 Stock Index, the SNL All Bank and Thrift Index, and a TCF Financial selected group of peer institutions over the same period (assuming the investment of $100 in each index on December 31, 2001 and reinvestment of all dividends).

 

TCF Stock Performance Chart

 

GRAPHIC

 

 

 

 

 

 

 

Period Ending

 

 

 

 

 

Index

 

12/31/01

 

12/31/02

 

12/31/03

 

12/31/04

 

12/31/05

 

12/31/06

 

TCF Financial Corporation

 

100.00

 

93.29

 

112.86

 

145.13

 

126.44

 

132.34

 

S&P 500*

 

100.00

 

77.90

 

100.25

 

111.15

 

116.61

 

135.03

 

SNL All Bank & Thrift Index(1)

 

100.00

 

93.96

 

127.39

 

142.66

 

144.89

 

169.30

 

2006 TCF Peer Group (2)

 

100.00

 

103.58

 

143.52

 

172.55

 

173.01

 

191.36

 

 

(1) Includes every bank and thrift institution in the U.S. traded on a major public exchange, a total of 624 companies as of December 31, 2006.

 

(2) Consists of 30 publicly traded banks and thrifts, 15 of which are immediately larger than and 15 of which are immediately smaller than TCF Financial in total assets as of September 30, 2006, as follows: IndyMac Bancorp Inc.; Colonial BancGroup; Astoria Financial Corporation; Associated Banc-Corp; Webster Financial Corporation; Mercantile Bankshares Corporation; BOK Financial Corporation; Downey Financial Corp.; W Holding Company Inc.; Sky Financial Group, Inc.; First Citizens BancShares, Inc.; Commerce Bancshares, Inc.; Flagstar Bancorp, Inc.; Fulton Financial Corporation; City National Corporation; South Financial Group, Inc.; BankUnited Financial Corporation; Fremount General Corporation; Valley National Bankcorp; BancorpSouth, Inc.; Cullen/Frost Bankers, Inc.; Investors Financial Services Corp.; MAF Bancorp, Inc.; East West Bancorp. Inc.; First Republic Bank; Wilmington Trust Corporation; International Bancshares Corporation; People’s Bank (MHC); Bank of Hawaii Corporation; FirstMerit Corporation. Five of the companies, which were in the 2005 TCF Peer Group are not in the 2006 TCF Peer Group due to merger and acquisition activity or changes in asset size. Those five companies are: Independence Community Bank Corp.; Westcorp; FirstFed Financial Corp.; Whitney Holding Corporation; Hudson United Bancorp.

 

*   Source: SNL Financial LC and Standard & Poor’s © 2006

 

 

The following table summarizes share repurchase activity for the quarter ended December 31, 2006.

 

 

 

Shares

 

Remaining

 

 

Repurchased

 

Share Repurchase

 

 

 

 

Average Price

 

Authorization(1)

 

 

Number

 

Per Share

 

May 21, 2005

 

Balance, September 30, 2006

 

 

 

 

 

3,328,307

 

October 1-31, 2006

 

 

$

 

3,328,307

 

November 1-30, 2006

 

 

 

3,328,307

 

December 1-31, 2006

 

500,000

 

27.26

 

2,828,307

 

Balance, December 31, 2006

 

500,000

 

$

27.26

 

2,828,307

 

 

(1) The current share repurchase authorization was approved by the Board of Directors on May 21, 2005. The authorization was for a repurchase of up to an additional 5% of TCF’s common stock outstanding at the time of the authorization, or 6.7 million shares. This authorization does not have an expiration date.

 

15



 

Item 6. Selected Financial Data

 

The selected five-year financial summary presented below should be read in conjunction with the Consolidated Financial Statements and related notes.

 

Five-Year Financial Summary

 

Consolidated Income:

 

 

 

 

 

Compound Annual

 

 

 

Year Ended December 31,

 

Growth Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

1-Year

 

5-Year

 

(Dollars in thousands, except per-share data)

 

2006

 

2005

 

2004

 

2003

 

2002

 

2006/2005

 

2006/2001

 

Total revenue

 

$

1,026,994

 

$

995,932

 

$

981,777

 

$

900,256

 

$

918,987

 

3.1

%

3.8

%

Net interest income

 

$

537,530

 

$

517,690

 

$

491,891

 

$

481,145

 

$

499,225

 

3.8

 

2.2

 

Provision for credit losses

 

20,689

 

8,586

 

18,627

 

19,048

 

28,318

 

141.0

 

(.2

)

Fees and other revenue

 

489,464

 

467,571

 

467,286

 

430,624

 

408,226

 

4.7

 

5.7

 

Gains on sales of securities available for sale and other

 

 

10,671

 

22,600

 

(11,513

)

11,536

 

(100.0

)

(100.0

)

Non-interest expense

 

649,197

 

606,936

 

578,674

 

553,425

 

532,976

 

7.0

 

5.3

 

Income before income tax expense

 

357,108

 

380,410

 

384,476

 

327,783

 

357,693

 

(6.1

)

1.6

 

Income tax expense

 

112,165

 

115,278

 

129,483

 

111,905

 

124,762

 

(2.7

)

(1.7

)

Net income

 

$

244,943

 

$

265,132

 

$

254,993

 

$

215,878

 

$

232,931

 

(7.6

)

3.4

 

Per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

1.90

 

$

2.00

 

$

1.87

 

$

1.53

 

$

1.58

 

(5.0

)

6.8

 

Diluted earnings

 

$

1.90

 

$

2.00

 

$

1.86

 

$

1.53

 

$

1.58

 

(5.0

)

7.1

 

Dividends declared

 

$

.92

 

$

.85

 

$

.75

 

$

.65

 

$

.575

 

8.2

 

13.0

 

 

Consolidated Financial Condition:

 

 

 

 

 

Compound Annual

 

 

 

At December 31,

 

Growth Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

1-Year

 

5-Year

 

(Dollars in thousands, except per share data)

 

2006

 

2005

 

2004

 

2003

 

2002

 

2006/2005

 

2006/2001

 

Loans and leases excluding residential real estate loans

 

$

10,705,890

 

$

9,442,772

 

$

8,404,404

 

$

7,156,697

 

$

6,340,482

 

13.4

%

14.2

%

Securities available for sale

 

1,816,126

 

1,648,615

 

1,619,941

 

1,533,288

 

2,426,794

 

10.2

 

2.8

 

Residential real estate loans

 

627,790

 

770,441

 

1,014,166

 

1,212,643

 

1,800,344

 

(18.5

)

(25.5

)

Subtotal

 

2,443,916

 

2,419,056

 

2,634,107

 

2,745,931

 

4,227,138

 

1.0

 

(10.8

)

Total assets

 

14,669,734

 

13,388,594

 

12,376,965

 

11,344,737

 

12,225,758

 

9.6

 

5.2

 

Checking, savings and money market deposits

 

7,285,615

 

7,213,735

 

6,525,458

 

6,021,189

 

5,810,930

 

1.0

 

8.8

 

Certificates of deposit

 

2,483,635

 

1,915,620

 

1,468,650

 

1,612,123

 

1,918,755

 

29.7

 

1.4

 

Total deposits

 

9,769,250

 

9,129,355

 

7,994,108

 

7,633,312

 

7,729,685

 

7.0

 

6.6

 

Borrowings

 

3,588,540

 

2,983,136

 

3,104,603

 

2,414,825

 

3,110,295

 

20.3

 

3.5

 

Stockholders’ equity

 

1,033,374

 

998,472

 

958,418

 

920,858

 

977,020

 

3.5

 

2.4

 

Book value per common share

 

$

7.92

 

$

7.46

 

$

6.99

 

$

6.53

 

$

6.61

 

6.2

 

5.9

 

 

Key Ratios and Other Data:

 

 

 

At or For the Year Ended December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

Return on average assets

 

1.74

%

2.08

%

2.15

%

1.85

%

2.01

%

Return on average equity

 

24.37

 

28.03

 

27.02

 

23.05

 

25.38

 

Average total equity to average assets

 

7.15

 

7.43

 

7.94

 

8.03

 

7.91

 

Net interest margin(1)

 

4.16

 

4.46

 

4.54

 

4.54

 

4.71

 

Net charge-offs as a percentage of average loans and leases:

 

.17

 

.29

 

.20

 

.24

 

.32

 

Common dividend payout ratio

 

48.42

%

42.50

%

40.32

%

42.48

%

36.39

%

Number of:

 

 

 

 

 

 

 

 

 

 

 

Banking locations

 

453

 

453

 

430

 

401

 

395

 

Deposit accounts (in thousands)

 

2,427

 

2,296

 

2,216

 

2,150

 

2,067

 

 

(1) Net interest income divided by average interest-earning assets.

 

16



 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Table of Contents

 

Page

Overview

 

17

Results of Operations

 

18

Performance Summary

 

18

Operating Segment Results

 

19

Consolidated Income Statement Analysis

 

19

Net Interest Income

 

19

Provision for Credit Losses

 

23

Non-Interest Income

 

23

Non-Interest Expense

 

26

Income Taxes

 

27

Consolidated Financial Condition Analysis

 

27

Securities Available for Sale

 

27

Loans and Leases

 

28

Allowance for Loan and Lease Losses

 

31

Non-Performing Assets

 

34

Past Due Loans and Leases

 

35

Potential Problem Loans and Leases

 

35

Liquidity Management

 

36

Deposits

 

36

Branches

 

37

Borrowings

 

37

Contractual Obligations and Commitments

 

38

Stockholders’ Equity

 

39

Summary of Critical Accounting Estimates

 

39

Recent Accounting Developments

 

39

Fourth Quarter Summary

 

39

Legislative, Legal and Regulatory Developments

 

40

Forward-Looking Information

 

40

 

Management’s discussion and analysis of the consolidated financial condition and results of operations of TCF Financial Corporation (“TCF” or the “Company”) should be read in conjunction with the consolidated financial statements in Item 8 and selected financial data in Item 6.

 

Overview

 

TCF, a Delaware corporation, is a financial holding company based in Wayzata, Minnesota. Its principal subsidiaries, TCF National Bank and TCF National Bank Arizona, collectively “TCF Bank,” are headquartered in Minnesota and Arizona and had 453 banking offices in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana and Arizona at December 31, 2006.

 

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

 

TCF’s core businesses include retail banking; commercial banking; small business banking; consumer lending; leasing and equipment finance; and investments and insurance services. The retail banking business includes traditional and supermarket branches, campus banking, EXPRESS TELLER ATMs and Visa U.S.A. Inc. (“Visa”) cards.

 

TCF emphasizes the checking account as its anchor account, which provides opportunities to cross-sell other convenient products and services and generate additional fee income. The continued growth of deposit accounts is a significant part of TCF’s growth strategy. Total deposit accounts were 2,426,616, 2,296,199 and 2,216,013 at December 31, 2006, December 31, 2005 and December 31, 2004, respectively.

 

Opening new branches is an integral part of TCF’s growth strategy for generating new deposit accounts and the related revenue that is associated with the accounts and other products. New branches typically produce net losses during the first two to three years of operations before they become profitable, and therefore the level and timing of new branch expansion can have a significant impact on TCF’s profitability. TCF’s growth in checking accounts is primarily occurring in new branches with growth in mature branches being slower. TCF’s expansion is dependent on the continued long-term success and viability of branch banking.

 

TCF’s lending strategy is to originate high credit quality, primarily secured, loans and leases. Commercial loans are generally made on local properties or to local customers. TCF’s largest core lending business is its consumer home equity loan operation, which offers fixed- and variable-rate loans

 

17



 

and lines of credit secured by residential real estate properties. The leasing and equipment finance businesses consist of TCF Equipment Finance, Inc. (“TCF Equipment Finance”), a company that delivers equipment finance solutions to businesses in select markets, and Winthrop Resources Corporation (“Winthrop Resources”), a leasing company that primarily leases technology and data processing equipment. TCF’s leasing and equipment finance businesses operate in all 50 states and have equipment installations domestically and, to a limited extent, in foreign countries.

 

As a primarily secured lender, TCF emphasizes credit quality over asset growth. As a result, TCF’s credit losses are generally lower than those experienced by other banks. The allowance for loan and lease losses, which is generally lower as a percent of loans and leases than the average in the banking industry, reflects the lower historical charge-offs and management’s expectation of the risk of loss inherent in the loan and lease portfolio. See “Consolidated Financial Condition Analysis – Allowance for Loan and Lease Losses.”

 

Net interest income, the difference between interest income earned on loans and leases, securities available for sale, investments and other interest-earning assets and interest paid on deposits and borrowings, represented 52.3% of TCF’s total revenue in 2006. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest-earning assets and the mix of interest-bearing and non-interest bearing deposits and borrowings. TCF manages the risk of changes in interest rates on its net interest income through an Asset/Liability Committee and through related interest-rate risk monitoring and management policies.

 

During 2006, TCF’s net interest margin declined to 4.16% from 4.46% in 2005 and 4.54% in 2004. The declines in 2006 and 2005 were primarily due to customer preference for lower-yielding fixed-rate loans and higher-cost market-rate deposits largely due to a flat or inverted yield curve and higher borrowing costs. In addition, intense price competition on loans and deposits has contributed to the compression of the net interest margin in 2006 and 2005. See “Quantitative and Qualitative Disclosures About Market Risk” for further discussion on TCF’s interest-rate risk position.

 

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 is its number of checking accounts and the related transaction activity. Increasing fee and service charge revenues has been challenging as a result of slower growth in deposit accounts and changing customer behaviors. TCF is focusing on deposit account growth to increase future fee revenue. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Non-Interest Income” for additional information.

 

The Company’s Visa debit card program has grown significantly since its inception in 1996. TCF is the 13th largest issuer of Visa Classic debit cards in the United States, based on sales volume for the three months ended September 30, 2006 as published by Visa. TCF earns interchange revenue from customer debit card transactions.

 

The following portions of the Management’s Discussion and Analysis of Financial Condition and Results of Operations focus in more detail on the results of operations for 2006, 2005 and 2004 and on information about TCF’s balance sheet, credit quality, liquidity funding resources, capital and other matters.

 

Results of Operations

 

Performance Summary TCF reported diluted earnings per common share of $1.90 for 2006, compared with $2.00 for 2005 and $1.86 for 2004. Net income was $244.9 million for 2006, compared with $265.1 million for 2005 and $255 million for 2004. For 2006, net income included $5.8 million in pre-tax gains on sales of buildings and mortgage servicing rights and $6.1 million of reductions of income tax expense for a combined after-tax impact of eight cents per diluted share. For 2005, net income included $24.3 million in pre-tax gains on sales of buildings and mortgage-backed securities, a $3.3 million pre-tax commercial loan recovery and $14 million of reductions in income tax expense for a combined after-tax impact of 25 cents per diluted share. Return on average assets was 1.74% in 2006, compared with 2.08% in 2005 and 2.15% in 2004. Return on average common equity was 24.37% in 2006, compared with 28.03% in 2005 and 27.02% in 2004. The effective income tax rate for 2006 was 31.41%, compared with 30.30% in 2005 and 33.68% in 2004.

 

18



 

Operating Segment Results BANKING, consisting of deposits and investment products, commercial banking, small business banking, consumer lending and treasury services, reported net income of $208.4 million for 2006, down 9.3% from $229.9 million in 2005. Banking net interest income for 2006 was $477.5 million, up 4.8% from $455.5 million for 2005. The provision for credit losses totaled $18.1 million in 2006, up from $4.6 million in 2005. This increase was primarily due to a $3.3 million recovery in 2005 and higher levels of consumer lending net charge-offs in 2006.

 

Non-interest income totaled $428.4 million in 2006, up from $425 million in 2005. Fees and service charges were $270.2 million for 2006, up 2.9% from $262.6 million in 2005, primarily due to the growth in deposit accounts, partially offset by lower customer check volumes. Card revenues, primarily interchange fees, increased 15.4% in 2006 and 25.7% in 2005, which was primarily attributable to an increase in active accounts and customer transaction volumes. During 2006, TCF sold two branch buildings and one land parcel and recognized gains of $4.2 million. During 2005, TCF sold several buildings and one branch including its deposits resulting in total gains of $13.6 million. During 2005, TCF sold mortgage-backed securities and realized gains of $10.7 million. There were no such sales in 2006. See “Consolidated Income Statement Analysis – Non-Interest Income” for further discussion on the sales of mortgage-backed securities.

 

Non-interest expense totaled $585.5 million in 2006, up 6.5% from $549.6 million in 2005. The increase was primarily due to compensation and benefits and occupancy costs associated with branch expansion and increases in card processing and issuance expenses related to the overall increase in card volumes. Also contributing to the increase was an increase in net real estate expense due to increased losses on foreclosed properties.

 

LEASING AND EQUIPMENT FINANCE, an operating segment composed of TCF’s wholly-owned subsidiaries TCF Equipment Finance and Winthrop Resources, provides a broad range of comprehensive lease and equipment finance products. Leasing and Equipment Finance reported net income of $33.4 million for 2006, unchanged from 2005. Net interest income for 2006 was $58.7 million, up 2.9% from $57 million in 2005. The provision for credit losses for this operating segment totaled $2.6 million in 2006, down from $4 million in 2005 and $6.8 million in 2004. The decrease in the provision for credit losses from 2005 to 2006 was primarily related to lower levels of net charge-offs, lower trends in historical net charge-offs as well as lower specific reserves for individual credits in certain marketing segments being reflected in the estimate of inherent losses in the portfolio. Non-interest income, primarily leasing revenues, totaled $53 million in 2006, up $5.5 million from $47.5 million in 2005. The increase in leasing and equipment finance revenues for 2006, compared with 2005, was primarily due to higher operating lease revenues, partially offset by lower sales-type lease revenues. Leasing and equipment finance revenues may fluctuate from period to period based on customer-driven factors not entirely within the control of TCF. Non-interest expense totaled $56.9 million in 2006, up $8.3 million from $48.6 million in 2005 primarily related to an increase in operating lease depreciation from 2005.

 

Consolidated Income Statement Analysis

 

Net Interest Income Net interest income, the difference between interest earned on loans and leases, securities available for sale, investments and other interest-earning assets (interest income), and interest paid on deposits and borrowings (interest expense), represented 52.3% of TCF’s total revenue in 2006, 52% in 2005 and 50.1% in 2004. Net interest income 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, loan and deposit pricing strategies and competitive conditions, the volume and the mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets.

 

19



The following tables summarize TCF’s average balances, interest, dividends and yields and rates on major categories of TCF’s interest-earning assets and interest-bearing liabilities.

 

 

 

Year Ended

 

Year Ended

 

 

 

 

 

December 31, 2006

 

December 31, 2005

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

Yields

 

 

 

 

 

 

 

Yields

 

 

 

 

 

Yields

 

 

 

 

 

and

 

 

 

Average

 

 

 

and

 

Average

 

 

 

and

 

Average

 

 

 

Rates

 

(Dollars in thousands)

 

Balance

 

Interest(1)

 

Rates

 

Balance

 

Interest(1)

 

Rates

 

Balance

 

Interest(1)

 

(bps)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

78,511

 

$

3,504

 

4.46

$

95,349

 

$

3,450

 

3.62

$

(16,838

)

$

54

 

84

 

Securities available for sale (2)

 

1,833,359

 

98,035

 

5.35

 

1,569,808

 

81,479

 

5.19

 

263,551

 

16,556

 

16

 

Education loans held for sale

 

210,992

 

15,009

 

7.11

 

214,588

 

10,921

 

5.09

 

(3,596

)

4,088

 

202

 

Loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer home equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate

 

3,851,117

 

263,157

 

6.83

 

2,304,340

 

154,241

 

6.69

 

1,546,777

 

108,916

 

14

 

Variable-rate

 

1,659,544

 

143,576

 

8.65

 

2,450,634

 

171,133

 

6.98

 

(791,090

)

(27,557

)

167

 

Consumer – other

 

36,711

 

3,717

 

10.13

 

34,763

 

3,213

 

9.24

 

1,948

 

504

 

89

 

Total consumer home equity and other

 

5,547,372

 

410,450

 

7.40

 

4,789,737

 

328,587

 

6.86

 

757,635

 

81,863

 

54

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed- and adjustable-rate

 

1,665,531

 

105,089

 

6.31

 

1,385,905

 

85,214

 

6.15

 

279,626

 

19,875

 

16

 

Variable-rate

 

721,871

 

55,239

 

7.65

 

826,934

 

49,561

 

5.99

 

(105,063

)

5,678

 

166

 

Total commercial real estate

 

2,387,402

 

160,328

 

6.72

 

2,212,839

 

134,775

 

6.09

 

174,563

 

25,553

 

63

 

Commercial business:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed- and adjustable-rate

 

134,560

 

8,471

 

6.30

 

85,390

 

4,959

 

5.81

 

49,170

 

3,512

 

49

 

Variable-rate

 

373,690

 

27,619

 

7.39

 

340,314

 

19,575

 

5.75

 

33,376

 

8,044

 

164

 

Total commercial business

 

508,250

 

36,090

 

7.10

 

425,704

 

24,534

 

5.76

 

82,546

 

11,556

 

134

 

Leasing and equipment finance

 

1,659,807

 

122,292

 

7.37

 

1,423,264

 

97,596

 

6.86

 

236,543

 

24,696

 

51

 

Subtotal

 

10,102,831

 

729,160

 

7.22

 

8,851,544

 

585,492

 

6.61

 

1,251,287

 

143,668

 

61

 

Residential real estate

 

696,086

 

40,430

 

5.81

 

885,735

 

50,680

 

5.72

 

(189,649

)

(10,250

)

9

 

Total loans and leases (3)

 

10,798,917

 

769,590

 

7.13

 

9,737,279

 

636,172

 

6.53

 

1,061,638

 

133,418

 

60

 

Total interest-earning assets

 

12,921,779

 

886,138

 

6.86

 

11,617,024

 

732,022

 

6.30

 

1,304,755

 

154,116

 

56

 

Other assets (4) (5)

 

1,141,934

 

 

 

 

 

1,113,850

 

 

 

 

 

28,084

 

 

 

 

 

Total assets

 

$

14,063,713

 

 

 

 

 

$

12,730,874

 

 

 

 

 

$

1,332,839

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

1,513,121

 

 

 

 

 

$

1,548,027

 

 

 

 

 

$

(34,906

)

 

 

 

 

Small business

 

609,907

 

 

 

 

 

585,860

 

 

 

 

 

24,047

 

 

 

 

 

Commercial and custodial

 

232,725

 

 

 

 

 

311,497

 

 

 

 

 

(78,772

)

 

 

 

 

Total non-interest bearing deposits

 

2,355,753

 

 

 

 

 

2,445,384

 

 

 

 

 

(89,631

)

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premier checking

 

1,001,024

 

31,539

 

3.15

 

641,672

 

15,910

 

2.48

 

359,352

 

15,629

 

67

 

Other checking

 

864,316

 

2,017

 

.23

 

1,026,017

 

2,067

 

.20

 

(161,701

)

(50

)

3

 

Subtotal

 

1,865,340

 

33,556

 

1.80

 

1,667,689

 

17,977

 

1.08

 

197,651

 

15,579

 

72

 

Premier savings

 

899,067

 

37,275

 

4.15

 

427,070

 

13,246

 

3.10

 

471,997

 

24,029

 

105

 

Other savings

 

1,376,182

 

12,797

 

.93

 

1,558,423

 

9,419

 

.60

 

(182,241

)

3,378

 

33

 

Subtotal

 

2,275,249

 

50,072

 

2.20

 

1,985,493

 

22,665

 

1.14

 

289,756

 

27,407

 

106

 

Money market

 

620,844

 

15,216

 

2.45

 

640,576

 

7,640

 

1.19

 

(19,732

)

7,576

 

126

 

Subtotal

 

4,761,433

 

98,844

 

2.08

 

4,293,758

 

48,282

 

1.12

 

467,675

 

50,562

 

96

 

Certificates of deposit

 

2,291,002

 

96,480

 

4.21

 

1,740,440

 

49,124

 

2.82

 

550,562

 

47,356

 

139

 

Total interest-bearing deposits

 

7,052,435

 

195,324

 

2.77

 

6,034,198

 

97,406

 

1.61

 

1,018,237

 

97,918

 

116

 

Total deposits

 

9,408,188

 

195,324

 

2.08

 

8,479,582

 

97,406

 

1.15

 

928,606

 

97,918

 

93

 

Borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

596,852

 

30,041

 

5.03

 

917,665

 

29,830

 

3.25

 

(320,813

)

211

 

178

 

Long-term borrowings

 

2,752,847

 

123,243

 

4.48

 

2,038,561

 

87,096

 

4.27

 

714,286

 

36,147

 

21

 

Total borrowings

 

3,349,699

 

153,284

 

4.58

 

2,956,226

 

116,926

 

3.96

 

393,473

 

36,358

 

62

 

Total interest-bearing liabilities

 

10,402,134

 

348,608

 

3.35

 

8,990,424

 

214,332

 

2.38

 

1,411,710

 

134,276

 

97

 

Total deposits and borrowings

 

12,757,887

 

348,608

 

2.73

 

11,435,808

 

214,332

 

1.87

 

1,322,079

 

134,276

 

86

 

Other liabilities(5)

 

300,930

 

 

 

 

 

349,216

 

 

 

 

 

(48,286

)

 

 

 

 

Total liabilities

 

13,058,817

 

 

 

 

 

11,785,024

 

 

 

 

 

1,273,793

 

 

 

 

 

Stockholders’ equity (5)

 

1,004,896

 

 

 

 

 

945,850

 

 

 

 

 

59,046

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

14,063,713

 

 

 

 

 

$

12,730,874

 

 

 

 

 

$

1,332,839

 

 

 

 

 

Net interest income and margin

 

 

 

$

537,530

 

4.16

%

 

 

$

517,690

 

4.46

%

 

 

$

19,840

 

(30

)

 

bps = basis points.

(1) Tax-exempt income was not significant and thus yields on interest-earning assets and net interest margin have not been presented on a tax equivalent basis. Tax-exempt income of $1,209,000 and $954,000 was recognized during the years ended December 31, 2006 and 2005, respectively.

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

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

(4) Includes operating leases.

(5) Average balance is a simple average of month-end balances.

 

20



 

 

 

 

Year Ended

 

Year Ended

 

 

 

 

 

December 31, 2005

 

December 31, 2004

 

Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Average

 

 

 

 

 

Average

 

 

 

 

 

Yields

 

 

 

 

 

 

 

Yields

 

 

 

 

 

Yields

 

 

 

 

 

and

 

 

 

Average

 

 

 

and

 

Average

 

 

 

and

 

Average

 

 

 

Rates

 

(Dollars in thousands)

 

Balance

 

Interest(1)

 

Rates

 

Balance

 

Interest(1)

 

Rates

 

Balance

 

Interest(1)

 

(bps)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

95,349

 

$

3,450

 

3.62

$

124,833

 

$

3,455

 

2.77

$

(29,484

$

(5

)

85

 

Securities available for sale (2)

 

1,569,808

 

81,479

 

5.19

 

1,536,673

 

80,643

 

5.25

 

33,135

 

836

 

(6

)

Education loans held for sale

 

214,588

 

10,921

 

5.09

 

331,529

 

11,533

 

3.48

 

(116,941

)

(612

)

161

 

Loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer home equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate

 

2,304,340

 

154,241

 

6.69

 

1,509,055

 

104,494

 

6.92

 

795,285

 

49,747

 

(23

)

Variable-rate

 

2,450,634

 

171,133

 

6.98

 

2,457,343

 

137,735

 

5.61

 

(6,709

)

33,398

 

137

 

Consumer – other

 

34,763

 

3,213

 

9.24

 

39,161

 

3,210

 

8.20

 

(4,398

)

3

 

104

 

Total consumer home equity and other

 

4,789,737

 

328,587

 

6.86

 

4,005,559

 

245,439

 

6.13

 

784,178

 

83,148

 

73

 

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed- and adjustable-rate

 

1,385,905

 

85,214

 

6.15

 

1,237,634

 

77,187

 

6.24

 

148,271

 

8,027

 

(9

)

Variable-rate

 

826,934

 

49,561

 

5.99

 

771,309

 

33,259

 

4.31

 

55,625

 

16,302

 

168

 

Total commercial real estate

 

2,212,839

 

134,775

 

6.09

 

2,008,943

 

110,446

 

5.50

 

203,896

 

24,329

 

59

 

Commercial business:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed- and adjustable-rate

 

85,390

 

4,959

 

5.81

 

85,382

 

4,754

 

5.57

 

8

 

205

 

24

 

Variable-rate

 

340,314

 

19,575

 

5.75

 

346,411

 

13,815

 

3.99

 

(6,097

)

5,760

 

176

 

Total commercial business

 

425,704

 

24,534

 

5.76

 

431,793

 

18,569

 

4.30

 

(6,089

)

5,965

 

146

 

Leasing and equipment finance

 

1,423,264

 

97,596

 

6.86

 

1,285,925

 

89,364

 

6.95

 

137,339

 

8,232

 

(9

)

Subtotal

 

8,851,544

 

585,492

 

6.61

 

7,732,220

 

463,818

 

6.00

 

1,119,324

 

121,674

 

61

 

Residential real estate

 

885,735

 

50,680

 

5.72

 

1,104,814

 

63,360

 

5.73

 

(219,079

)

(12,680

)

(1

)

Total loans and leases(3)

 

9,737,279

 

636,172

 

6.53

 

8,837,034

 

527,178

 

5.97

 

900,245

 

108,994

 

56

 

Total interest-earning assets

 

11,617,024

 

732,022

 

6.30

 

10,830,069

 

622,809

 

5.75

 

786,955

 

109,213

 

55

 

Other assets(4) (5)

 

1,113,850

 

 

 

 

 

1,056,903

 

 

 

 

 

56,947

 

 

 

 

 

Total assets

 

$

12,730,874

 

 

 

 

 

$

11,886,972

 

 

 

 

 

$

843,902

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

1,548,027

 

 

 

 

 

$

1,504,392

 

 

 

 

 

$

43,635

 

 

 

 

 

Small business

 

585,860

 

 

 

 

 

508,162

 

 

 

 

 

77,698

 

 

 

 

 

Commercial and custodial

 

311,497

 

 

 

 

 

342,446

 

 

 

 

 

(30,949

)

 

 

 

 

Total non-interest bearing deposits

 

2,445,384

 

 

 

 

 

2,355,000

 

 

 

 

 

90,384

 

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premier checking

 

641,672

 

15,910

 

2.48

 

198,651

 

2,892

 

1.46

 

443,021

 

13,018

 

102

 

Other checking

 

1,026,017

 

2,067

 

.20

 

1,140,242

 

928

 

.08

 

(114,225

)

1,139

 

12

 

Subtotal

 

1,667,689

 

17,977

 

1.08

 

1,338,893

 

3,820

 

.29

 

328,796

 

14,157

 

79

 

Premier savings

 

427,070

 

13,246

 

3.10

 

85,478

 

1,705

 

1.99

 

341,592

 

11,541

 

111

 

Other savings

 

1,558,423

 

9,419

 

.60

 

1,738,374

 

5,785

 

.33

 

(179,951

)

3,634

 

27

 

Subtotal

 

1,985,493

 

22,665

 

1.14

 

1,823,852

 

7,490

 

.41

 

161,641

 

15,175

 

73

 

Money market

 

640,576

 

7,640

 

1.19

 

763,925

 

2,992

 

.39

 

(123,349

)

4,648

 

80

 

Subtotal

 

4,293,758

 

48,282

 

1.12

 

3,926,670

 

14,302

 

.36

 

367,088

 

33,980

 

76

 

Certificates of deposit

 

1,740,440

 

49,124

 

2.82

 

1,493,938

 

28,279

 

1.89

 

246,502

 

20,845

 

93

 

Total interest-bearing deposits

 

6,034,198

 

97,406

 

1.61

 

5,420,608

 

42,581

 

.79

 

613,590

 

54,825

 

82

 

Total deposits

 

8,479,582

 

97,406

 

1.15

 

7,775,608

 

42,581

 

.55

 

703,974

 

54,825

 

60

 

Borrowings: