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Section 1: 10-K (10-K)

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2007

 

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: 952-745-2760

 

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

Common Stock (par value $.01 per share)

 

New York Stock Exchange

(Title of class)

 

(Name of exchange on which registered)

 

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

Yes  x    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 Act.

Yes  o    No  x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the  Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required  to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,  and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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  x

 

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 Act).

Yes  o    No  x

 

As of June 30, 2007, 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 asked 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 $3,065,051,630.

 

As of January 31, 2008, there were 126,318,946 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 5, 2008 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 Stockholder 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

42

Item 8.

Financial Statements and Supplementary Data

44

 

Report of Independent Registered Public Accounting Firm

44

 

Consolidated Financial Statements

45

 

Notes to Consolidated Financial Statements

49

 

Other Financial Data

76

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

77

Item 9A.

Controls and Procedures

77

 

Management’s Report on Internal Control Over Financial Reporting

77

 

Report of Independent Registered Public Accounting Firm

78

Item 9B.

Other Information

78

 

 

 

Part III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

79

Item 11.

Executive Compensation

80

Item 12.

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

80

Item 13.

Certain Relationships and Related Transactions, and Director Independence

80

Item 14.

Principal Accounting Fees and Services

80

 

 

 

Part IV

 

 

Item 15.

Exhibits and Financial Statement Schedules

81

Signatures

 

82

Index to Exhibits

 

83

 


 


 

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 (“TCF Bank”), are headquartered in Minnesota and Arizona, respectively. TCF National Bank operates bank branches in Minnesota, Illinois, Michigan, Colorado, Wisconsin and Indiana. TCF National Bank Arizona operates bank branches in Arizona. TCF’s primary focus is on the delivery of retail and commercial banking products in markets served by TCF Bank. TCF’s products, such as its commercial equipment loans and leases, are offered in markets outside areas served by TCF Bank.

 

                At December 31, 2007, TCF had total assets of $16 billion and was the 36th largest publicly traded bank holding company in the United States based on total assets as of September 30, 2007. 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 and small business banking; commercial 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® 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

 

At December 31, 2007, TCF had 453 retail banking branches, consisting of 194 traditional branches, 244 supermarket branches and 15 campus branches. TCF operated 109 branches in Minnesota, 202 in Illinois, 56 in Michigan, 46 in Colorado, 31 in Wisconsin, five in Indiana and four in Arizona.

 

                Targeted new branch expansion is a key strategy for TCF. TCF has significantly expanded its banking franchise in recent years. 141 new branches have been opened since January 1, 2002. During 2007, TCF opened 20 branches, consisting of 10 traditional branches, seven supermarket branches and three campus branches.

 

                In order to improve the customer experience and enhance deposit and loan growth, TCF relocated six traditional branches to improved locations and facilities and remodeled one traditional branch and 14 supermarket branches in 2007. TCF intends to relocate three branches to improved locations and facilities, including two traditional branches and one supermarket branch, and to remodel 19 supermarket branches and one campus branch in 2008.

 

                TCF anticipates opening 10 new branches in 2008, consisting of five new traditional branches and five new supermarket branches. TCF plans on opening fewer branches in 2008, compared with 2007, in an effort to optimize existing branches in target market areas. TCF’s expansion is largely dependent on the continued long-term success of branch banking and the expansion and success of its supermarket partners.

 

                Campus banking represents an important part of TCF’s retail banking business. TCF has alliances with the University of Minnesota, the University of Michigan, the University of Illinois plus seven other colleges. These alliances include exclusive marketing, naming rights and other 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 care 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, 2007, there were $206 million in campus deposits. TCF has a $35 million 25-year naming rights agreement with the University of Minnesota and will sponsor their new football stadium to be called “TCF Bank Stadium”. Construction of this stadium should be complete in 2009.

 

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                Non-interest income is a significant source of revenue for TCF and an important factor in TCF’s results of operations. Increasing fee and service charge revenue has been challenging as a result of slower growth in deposit 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 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.

 

                TCF’s consumer lending origination activities primarily consist of home equity real estate secured lending. 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. TCF does not have any subprime lending programs or originate 2/28 adjustable-rate mortgages (ARM) or option ARM loans.

 

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.

 

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, 2007, 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. TCF’s leasing and equipment finance businesses, TCF Equipment Finance, Inc. (“TCF Equipment Finance”) and Winthrop Resources Corporation (“Winthrop Resources”), finance equipment in all 50 states 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 focuses on providing customized, high technology lease financing to meet the special needs of mid-size and large companies and health care facilities that procure computers, servers, telecommunication and other technology equipment.

 

                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.

 

Education Lending TCF originates education loans for resale. TCF sells certain education loans once they are 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.

 

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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. TCF Bank’s portfolio does not include commercial paper, asset-backed commercial paper or asset-backed securities secured by credit cards or car loans. TCF Bank also does not participate in structured investment vehicles. 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, 2007, interest-bearing deposits comprised 77% of total deposits, as compared with 75% at December 31, 2006.

 

                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. 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. Generally, securities with a value in excess of the amount borrowed are required to be deposited as collateral with the counterparty to a repurchase agreement. The creditworthiness of the counterparty is important in establishing that the overcollateralized amount of securities delivered by TCF is protected. 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.

 

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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 sells 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. 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 would increase significantly. TCF’s FOC operates under income tax laws in certain states (including Minnesota and Illinois) that recognize FOCs. The taxation of REITs and FOCs is and has been the subject of federal and state audits, litigation with state taxing authorities and tax policy debates by various state legislatures. Illinois passed legislation in 2007 that will reduce or eliminate TCF’s REIT and FOC tax benefits in the future. Other states may revise their tax laws applicable to REITs or FOCs and such changes would increase TCF’s income 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, savings institutions, credit unions and investment banks. 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, 2007, TCF had 8,183 employees, including 2,755 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, which has 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 activities. 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; 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 retained profits for the current year combined with its net retained profits for the preceding two calendar 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 will 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 regulatory 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 Notes 13 and 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. Bank subsidiaries of financial holding companies like TCF Bank are subject to certain restrictions in their dealings with holding company affiliates.

 

                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 under-capitalized 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”), FRB approval is required 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 provisions of the FDIC Act were fully implemented January 1, 2007.

 

                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, 2007. The DIF reserve ratio calculated by the FDIC that was in effect at December 31, 2007 was 1.22%.

 

                In 2007, 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.

 

                In 2007, the annual insurance premiums on bank deposits insured by the DIF varied between $.05 per $100 of deposits for banks classified in the highest capital and supervisory evaluation categories to $.43 per $100 of deposits for banks classified in the lowest capital and supervisory evaluation categories. TCF Bank was classified in the highest capital and supervisory evaluation category.

 

                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 were not required for TCF Bank for 2006 and 2005.

 

                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 in 2007 and 2008. This one-time historical assessment credit was established to benefit banks that had funded deposit

 

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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. TCF Bank’s one-time historical assessment credit was $9.6 million when it was established in 2006. During 2007, TCF utilized this credit to entirely offset $5.8 million of Federal deposit insurance assessments. The remaining credit of $3.8 million will be completely used in 2008 and only partially offset 2008 assessments. As such, TCF’s Federal deposit insurance expense will increase in 2008.

 

                In addition to risk-based deposit insurance assessments, additional assessments may be imposed by the 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 2007 ranged from $.0114 to $.0122 per $100 of deposits. Financing Corporation assessments of $1.1 million each year for 2007, 2006 and 2005 were paid by TCF Bank and are included in other expense.

 

                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. Under the Bank Secrecy Act and USA Patriot Act, the OCC may, and in some cases is obligated to, take enforcement action where it finds a statutory or regulatory violation.

 

                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 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 Community Reinvestment Act 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.

 

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Taxation

 

Federal Taxation The statute of limitations on TCF’s consolidated Federal income tax return is closed through 2003.

 

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, Indiana 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 each area. 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. The risk officers, while reporting directly to their respective line, 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 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 if an obligor fails 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 securities available for sale portfolio. The Company manages securities transaction risk by monitoring all unsettled transactions. All counterparties and transaction limits are reviewed and approved annually by both ALCO and the Company’s senior credit committee. To further manage credit risk in the securities available for sale portfolio, over 99% of the securities held in the securities available for sale portfolio are guaranteed by Fannie Mae and Freddie Mac.

 

                To manage credit risk arising from lending and leasing activities, management has adopted and maintains 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 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 (interest-earning assets, deposits and borrowings) 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, 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.

 

9



 

                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 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.

 

                TCF maintains diverse and reliable sources of funding. They include 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. 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 financial operations of the FHLBs and actions by the Federal Housing Finance Board’s Office of Supervision.

 

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

 

10



 

includes determining whether the system of internal controls over financial reporting is appropriate for the type and level 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 consumer 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-interest 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 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 adequate 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, 2007, 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 USA Inc. (Visa USA) and MasterCard®. TCF Financial Corporation’s bank subsidiaries have membership interests in Visa USA. Under Visa USA’s Bylaws, TCF has a contingent obligation to indemnify Visa USA for certain litigation unrelated to TCF. See page 38 under Management’s Discussion and Analysis for details of TCF’s contingent obligation to indemnify Visa USA for certain litigation.

 

                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. 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.

 

Leasing and Equipment Finance Activities TCF’s leasing and equipment finance activities are subject to

 

11



 

the 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 also 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 certain 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 laws and 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 REITs or related entities, TCF’s tax expense would increase significantly. The REIT and related companies must meet specific provisions of the Internal Revenue Code and state tax laws. Use of REITs is and has been the subject of federal and state audits, litigation with state taxing authorities and tax policy debates by various state legislatures. Any unfavorable law changes and unfavorable audit results in 2008 would increase TCF’s income taxes. 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 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 tax and accounting laws, regulations, rules, and standards, have a significant impact on the ways that financial institutions conduct business, implement strategic initiatives, engage in tax planning and make financial disclosures. These laws, regulations, rules, and standards are constantly evolving and may change significantly over time. 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. Violations of these laws can result in enforcement actions which can impact operations.

 

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 enacted federal legislation will 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 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.

 

12


 


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. Although TCF has developed policies and procedures designed to ensure compliance, regulators may take enforcement action against TCF in the event of noncompliance.

 

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, 2007, TCF owned the buildings and land for 134 of its bank branch offices, owned the buildings but leased the land for 24 of its bank branch offices and leased or licensed the remaining 295 bank branch offices, all of which are well maintained. Bank branch properties owned by TCF had an aggregate net book value of approximately $254.3 million at December 31, 2007. At December 31, 2007, the aggregate net book value of leasehold improvements associated with leased bank branch office facilities was $33.7 million. In addition to the branch offices, TCF owned and leased other facilities with an aggregate net book value of $43.9 million at December 31, 2007. 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 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.

 

 

 

 

 

 

 

Dividends

 

 

 

High

 

Low

 

Declared

 

2007

 

 

 

 

 

 

 

First Quarter

 

$

27.91

 

$

24.93

 

$

.2425

 

Second Quarter

 

28.99

 

25.39

 

.2425

 

Third Quarter

 

28.25

 

22.69

 

.2425

 

Fourth Quarter

 

27.95

 

17.17

 

.2425

 

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

 

 

As of January 31, 2008, there were 8,098 holders of record 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 retained profits for that year combined with its net retained 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, 2002 and reinvestment of all dividends).

 

TCF Stock Performance Chart

 

 

 

Period Ending

 

Index

 

12/31/02

 

12/31/03

 

12/31/04

 

12/31/05

 

12/31/06

 

12/31/07

 

TCF Financial Corporation

 

100.00

 

120.98

 

155.57

 

135.53

 

141.87

 

96.41

 

S&P 500*

 

100.00

 

128.68

 

142.69

 

149.70

 

173.34

 

182.86

 

SNL All Bank & Thrift Index(1)

 

100.00

 

135.57

 

151.82

 

154.20

 

180.17

 

137.40

 

2007 TCF Peer Group(2)

 

100.00

 

146.44

 

161.86

 

159.39

 

178.95

 

139.07

 

 

(1) Includes every bank and thrift institution in the U.S. traded on a major public exchange, a total of 599 companies as of December 31, 2007.

 

(2) Consists of the 30 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, 2007, as follows: Hudson City Bancorp, Inc.; First Horizon National Corporation; IndyMac Bancorp, Inc.; Synovus Financial Corp.; New York Community Bancorp, Inc.; Colonial BancGroup, Inc.; Astoria Financial Corporation; Associated Banc-Corp; BOK Financial Corporation; First BanCorp.; Webster Financial Corporation; Flagstar Bancorp, Inc.; First Citizens Bancshares, Inc.; Commerce Bancshares, Inc.; City National Corporation; Fulton Financial Corporation; BankUnited Financial Corporation; Downey Financial Corp.; South Financial Group, Inc.; People’s United Financial, Inc.; Citizens Republic Bancorp, Inc.; Cullen/Frost Bankers, Inc.; BancorpSouth, Inc.; Valley National Bancorp; Sterling Financial Corporation; East West Bancorp, Inc.; Wilmington Trust Corporation; UCBH Holdings, Inc.; International Bancshares Corporation; and Whitney Holding Corporation. Ten of the companies, which were in the 2006 TCF Peer Group, are not in the 2007 TCF Peer Group due to merger and acquisition activity or changes in asset size. Those 10 companies are: Mercantile Bankshares Corporation; W Holding Company, Inc.(September 30, 2007 data not available); Sky Financial Group, Inc.; Fremont General Corporation; Investors Financial Services Corp.; MAF Bancorp, Inc.; First Republic Bank; People’s Bank (MHC); Bank of Hawaii Corporation; FirstMerit Corporation.

 

*   Source: SNL Financial LC and Standard & Poor’s © 2008

 

The following table summarizes share repurchase activity for the quarter ended December 31, 2007.

 

 

 

 

 

 

 

Total shares

 

Number of

 

 

 

Total number

 

Average

 

purchased as a

 

shares that may

 

 

 

of shares

 

price paid

 

part of publicly

 

yet be purchased

 

Period

 

purchased

 

per share

 

announced plan

 

under the plan

 

October 1 to October 31, 2007

 

 

 

 

 

 

 

 

 

Share repurchase program(1)

 

100,000

 

$ 22.91

 

100,000

 

5,384,130

 

Employee transactions(2)

 

1,611

 

$ 26.56

 

N.A.

 

N.A.

 

November 1 to November 30, 2007

 

 

 

 

 

 

 

 

 

Share repurchase program(1)

 

 

$      —

 

 

5,384,130

 

Employee transactions(2)

 

 

$      —

 

N.A.

 

N.A.

 

December 1 to December 31, 2007

 

 

 

 

 

 

 

 

 

Share repurchase program(1)

 

 

$      —

 

 

5,384,130

 

Employee transactions(2)

 

 

$      —

 

N.A.

 

N.A.

 

 

(1) The current share repurchase authorization was approved by the Board of Directors on April 14, 2007. 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 6.5 million shares. This authorization does not have an expiration date.

 

(2) Restricted shares withheld pursuant to the terms of awards under the TCF Financial Incentive Stock Program to offset tax withholding obligations that occur upon vesting and release of restricted shares. The TCF Financial Incentive Stock Program provides that the value of shares withheld shall be the average of the high and low prices of common stock of TCF Financial Corporation on the date the relevant transaction occurs.

 

N.A. Not Applicable.

 

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)

 

2007

 

2006

 

2005

 

2004

 

2003

 

2007/2006

 

2007/2002

 

Total revenue

 

$

1,091,634

 

$

1,026,994

 

$

995,932

 

$

981,777

 

$

900,256 

 

6.3

%

3.5

%

Net interest income

 

$

550,177

 

$

537,530

 

$

517,690

 

$

491,891

 

$

481,145 

 

2.4

 

2.0

 

Provision for credit losses

 

56,992

 

20,689

 

8,586

 

18,627

 

19,048

 

175.5

 

15.0

 

Fees and other revenue

 

490,285

 

485,276

 

453,965

 

467,027

 

429,899

 

1.0

 

3.8

 

Gains on sales of securities available for sale

 

13,278 

 

 

10,671

 

22,600

 

32,832

 

N.M.

 

2.9

 

Losses on termination of debt

 

 

 

 

 

(44,345

)

 

 

Gains on sales of branches and real estate

 

37,894

 

4,188

 

13,606

 

259

 

725

 

N.M.

 

80.8

 

Non-interest expense

 

662,124

 

649,197

 

606,936

 

578,674

 

553,425

 

2.0

 

4.4

 

Income before income tax expense

 

372,518

 

357,108

 

380,410

 

384,476

 

327,783

 

4.3

 

.8

 

Income tax expense

 

105,710

 

112,165

 

115,278

 

129,483

 

111,905

 

(5.8

)

(3.3

)

Net income

 

$

266,808

 

$

244,943

 

$

265,132

 

$

254,993

 

$

215,878

 

 8.9

 

2.8

 

Per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings

 

$

2.13

 

$

1.90

 

$

2.00

 

$

1.87

 

$

1.53

 

12.1

 

6.2

 

Diluted earnings

 

$

2.12

 

$

1.90

 

$

2.00

 

$

1.86

 

$

1.53

 

11.6

 

6.1

 

Dividends declared

 

$

.97

 

$

.92

 

$

.85

 

$

.75

 

$

.65

 

5.4

 

11.0

 

 

Consolidated Financial Condition:

 

 

 

 

 

 

 

 

 

 

 

 

 

Compound Annual

 

 

At December 31,

Growth Rate

 

 

 

 

 

 

 

 

 

 

 

 

1-Year

 

5-Year

 

(Dollars in thousands, except per share data)

 

2007

 

2006

 

2005

 

2004

 

2003

 

2007/2006

 

2007/2002

 

Loans and leases excluding residential real estate loans

 

$

11,810,629

 

$

10,705,890

 

$

9,442,772

 

$

8,404,404

 

$

7,156,697

 

10.3

%

13.2

%

Securities available for sale

 

1,963,681

 

1,816,126

 

1,648,615

 

1,619,941

 

1,533,288

 

8.1

 

(4.1

)

Residential real estate loans

 

527,607

 

627,790

 

770,441

 

1,014,166

 

1,212,643

 

(16.0

)

(21.8

)

Subtotal

 

2,491,288

 

2,443,916

 

2,419,056

 

2,634,107

 

2,745,931

 

1.9

 

(10.0

)

Total assets

 

15,977,054

 

14,669,734

 

13,388,594

 

12,376,965

 

11,344,737

 

8.9

 

5.5

 

Checking, savings and money market deposits

 

7,322,014

 

7,285,615

 

7,213,735

 

6,525,458

 

6,021,189

 

.5

 

4.7

 

Certificates of deposit

 

2,254,535

 

2,483,635

 

1,915,620

 

1,468,650

 

1,612,123

 

(9.2

)

3.3

 

Total deposits

 

9,576,549

 

9,769,250

 

9,129,355

 

7,994,108

 

7,633,312

 

(2.0

)

4.4

 

Borrowings

 

4,973,448

 

3,588,540

 

2,983,136

 

3,104,603

 

2,414,825

 

38.6

 

9.8

 

Stockholders’ equity

 

1,099,012

 

1,033,374

 

998,472

 

958,418

 

920,858

 

6.4

 

2.4

 

Book value per common share

 

$

8.68

 

$

7.92  

 

$

7.46

 

$

6.99

 

$

6.53

 

9.6

 

5.6

 

 

Key Ratios and Other Data:

 

 

 

At or For the Year Ended December 31,

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

Return on average assets

 

1.76

%

1.74

%

2.08

%

2.15

%

1.85

%

Return on average equity

 

25.82

 

24.37

 

28.03

 

27.02

 

23.05

 

Average total equity to average assets

 

6.82

 

7.15

 

7.43

 

7.94

 

8.03

 

Net interest margin(1)

 

3.94

 

4.16

 

4.46

 

4.54

 

4.54

 

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

 

.30

 

.17

 

.29

 

.20

 

.24

 

Common dividend payout ratio

 

45.75

%

48.42

%

42.50

%

40.32

%

42.48

%

Number of bank branches

 

453

 

453

 

453

 

430

 

401

 

 

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

 

N.M. Not Meaningful.

 

16



 

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

 

Table of Contents Page

 

Page

Overview

 

17

Results of Operations

 

18

Performance Summary

 

18

Operating Segment Results

 

18

Consolidated Income Statement Analysis

 

19

Net Interest Income

 

19

Provision for Credit Losses

 

23

Non-Interest Income

 

23

Non-Interest Expense

 

25

Income Taxes

 

26

Consolidated Financial Condition Analysis

 

27

Securities Available for Sale

 

27

Loans and Leases

 

27

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

 

36

Borrowings

 

37

Contractual Obligations and Commitments

 

38

Stockholders’ Equity

 

39

Summary of Critical Accounting Estimates

 

39

Recent Accounting Developments

 

39

Fourth Quarter Summary

 

40

Legislative, Legal and Regulatory Developments

 

41

Forward-Looking Information

 

41

 

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 (“TCF Bank”), are headquartered in Minnesota and Arizona, respectively, and had 453 banking offices in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana and Arizona at December 31, 2007.

 

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 and small business banking, commercial 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® cards.

 

Targeted new branch expansion 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 lending strategy is to originate high credit quality, primarily secured, loans and leases. TCF’s largest core lending business is its consumer home equity loan operation, which offers fixed- and variable-rate loans and lines of credit secured by residential real estate properties. Commercial loans are generally made on local properties or to local customers. The leasing and equipment finance businesses consist of TCF Equipment Finance, a company that delivers equipment finance solutions to businesses in select markets, and Winthrop Resources, a company that primarily leases technology and data processing equipment. TCF’s leasing

 

17



and equipment finance businesses have equipment installations in all 50 states 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 incurred 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 50.4% of TCF’s total revenue in 2007. 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.

 

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 deposit 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. 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 12th largest issuer of Visa Classic debit cards in the United States, based on sales volume for the three months ended September 30, 2007 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 2007, 2006 and 2005 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 $2.12 for 2007, compared with $1.90 for 2006 and $2.00 for 2005. Net income was $266.8 million for 2007, compared with $244.9 million for 2006 and $265.1 million for 2005. Net income for 2007 included a $31.2 million pre-tax gain on the sale of 10 out-state Michigan branches, $6.7 million in pre-tax gains on sales of real estate, $13.3 million in pre-tax gains on sales of securities, a $7.7 million pre-tax charge for TCF’s estimated contingent obligation related to Visa USA litigation indemnification and $18.4 million of favorable income tax settlements and adjustments for a combined after-tax impact of 37 cents per diluted share. Net income for 2006 included $4.2 million in pre-tax gains on sales of real estate, a $1.6 million net pre-tax gain on the sale of mortgage servicing rights and a $6.1 million reduction of income tax expense for a combined after-tax impact of eight cents per diluted share. Return on average assets was 1.76% in 2007, compared with 1.74% in 2006 and 2.08% in 2005. Return on average common equity was 25.82% in 2007, compared with 24.37% in 2006 and 28.03% in 2005. The effective income tax rate for 2007 was 28.4%, compared with 31.4% in 2006 and 30.3% in 2005.

 

Operating Segment Results BANKING, consisting of deposits, investment products, commercial banking, small business banking, consumer lending and treasury services, reported net income of $232.1 million for 2007, up 11.3% from $208.4 million in 2006. Banking net interest income for 2007 was $485.5 million, up 1.7% from $477.5 million for 2006.

 

18



 

The provision for credit losses totaled $51.7 million in 2007, up from $18.1 million in 2006. The increase in the provision for credit losses from 2006 is primarily due to higher consumer home equity net charge-offs and the resulting portfolio reserve rate increases and increased reserves for certain commercial loans. Refer to the “Consolidated Income Statement Analysis – Provision for Credit Losses” section for further discussion.

 

Non-interest income totaled $481.3 million in 2007, up from $428.4 million in 2006. Fees and service charges were $278 million for 2007, up 2.9% from $270.2 million in 2006. In 2006 there were $5.3 million in fees and service charges related to the Michigan sold branches. Card revenues were $98.9 million for 2007, up 7.4% from $92.1 million in 2006. This increase was primarily attributable to an increased sales volume as a result of increases in transactions per account and the number of active accounts. During 2007, TCF sold 10 out-state branches and recognized gains of $31.2 million and sold five branch buildings and five parcels of land and recognized gains of $6.7 million. During 2006, TCF sold two branch buildings and one land parcel and recognized gains of $4.2 million. Also, during 2007 TCF recognized $13.3 million of gains on sales of $1.2 billion of mortgage-backed securities. There were no sales of securities in 2006. See “Consolidated Income Statement Analysis – Non-Interest Income” for further discussion.

 

Non-interest expense totaled $594.7 million in 2007, up 1.6% from $585.5 million in 2006. The increase was primarily due to a $7.7 million charge for TCF’s estimated contingent liability related to Visa USA litigation indemnification. See page 38 under Management’s Discussion and Analysis for details of TCF’s obligations to indemnify Visa for certain litigation.

 

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 $34.6 million for 2007, up 3.6% from $33.4 million in 2006. Net interest income for 2007 was $65.4 million, up 11.4% from $58.7 million in 2006.

 

The provision for credit losses for this operating segment totaled $5.3 million in 2007, up from $2.6 million in 2006. The increase in the provision for credit losses from 2006 to 2007 was primarily due to increases in reserves for certain loans and leases, partially offset by a recovery in 2007 of a previously charged-off lease. In addition, 2006 included a reduction of reserves in certain marketing segments due to lower levels of historical charge-offs and one large non-accrual lease that was settled in the second quarter of 2006 for less than the amount reserved.

 

Non-interest income totaled $59.2 million in 2007, up $6.1 million from $53 million in 2006. The increase in leasing and equipment finance revenues for 2007, compared with 2006, was primarily due to higher operating lease and sales-type lease revenues.

 

Non-interest expense totaled $65.4 million in 2007, up $8.4 million from $56.9 million in 2006 primarily related to an increase of $4 million in compensation and benefits which included an increase in commissions resulting from a larger volume of sales-type leases and other commissioned events, increased salaries related to headcount expansion and an increase of $3.2 million in operating lease depreciation.

 

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 50.4% of TCF’s total revenue in 2007, 52.3% in 2006 and 52% in 2005. 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, 2007

 

December 31, 2006

 

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

 

$

178,012

 

$

8,237

 

4.63

%

$

78,511

 

$

3,504

 

4.46

%

$

99,501

 

$

4,733

 

17

 

Securities available for sale(2)

 

2,024,563

 

109,581

 

5.41

 

1,833,359

 

98,035

 

5.35

 

191,204

 

11,546

 

6

 

Education loans held for sale

 

154,516

 

13,252

 

8.58

 

210,992

 

15,009

 

7.11

 

(56,476

)

(1,757

)

147

 

Loans and leases:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer home equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate

 

4,683,745

 

326,516

 

6.97

 

3,851,117

 

263,157

 

6.83

 

832,628

 

63,359

 

14

 

Variable-rate

 

1,460,685

 

124,992

 

8.56

 

1,659,544

 

143,576

 

8.65

 

(198,859

)

(18,584

)

(9

)

Consumer — other

 

43,589

 

4,307

 

9.88

 

36,711

 

3,717

 

10.13

 

6,878

 

590

 

(25

)

Total consumer home equity and other

 

6,188,019

 

455,815

 

7.37

 

5,547,372

 

410,450

 

7.40

 

640,647

 

45,365

 

(3

)

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed- and adjustable-rate

 

1,777,813

 

114,140

 

6.42

 

1,665,531

 

105,089

 

6.31

 

112,282

 

9,051

 

11

 

Variable-rate

 

608,209

 

46,363

 

7.62

 

721,871

 

55,239

 

7.65

 

(113,662

)

(8,876

)

(3

)

Total commercial real estate

 

2,386,022

 

160,503

 

6.73

 

2,387,402

 

160,328

 

6.72

 

(1,380

)

175

 

1

 

Commercial business:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed- and adjustable-rate

 

169,776

 

10,853

 

6.39

 

134,560

 

8,471

 

6.30

 

35,216

 

2,382

 

9

 

Variable-rate

 

393,442

 

28,947

 

7.36

 

373,690

 

27,619

 

7.39

 

19,752

 

1,328

 

(3

)

Total commercial business

 

563,218

 

39,800

 

7.07

 

508,250

 

36,090

 

7.10

 

54,968

 

3,710

 

(3

)

Leasing and equipment finance

 

1,915,790

 

147,507

 

7.70

 

1,659,807

 

122,292

 

7.37

 

255,983

 

25,215

 

33

 

Subtotal

 

11,053,049

 

803,625

 

7.27

 

10,102,831

 

729,160

 

7.22

 

950,218

 

74,465

 

5

 

Residential real estate

 

574,554

 

33,328

 

5.80

 

696,086

 

40,430

 

5.81

 

(121,532

)

(7,102

)

(1

)

Total loans and leases(3)

 

11,627,603

 

836,953

 

7.20

 

10,798,917

 

769,590

 

7.13

 

828,686

 

67,363

 

7

 

Total interest-earning assets

 

13,984,694

 

968,023

 

6.92

 

12,921,779

 

886,138

 

6.86

 

1,062,915

 

81,885

 

6

 

Other assets(4)

 

1,161,106

 

 

 

 

 

1,141,934

 

 

 

 

 

19,172

 

 

 

 

 

Total assets

 

$

15,145,800

 

 

 

 

 

$

14,063,713

 

 

 

 

 

$

1,082,087

 

 

 

 

 

Liabilities and Stockholders’ Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail

 

$

1,444,125

 

 

 

 

 

$

1,513,121

 

 

 

 

 

$

(68,996

)

 

 

 

 

Small business

 

594,979

 

 

 

 

 

609,907

 

 

 

 

 

(14,928

)

 

 

 

 

Commercial and custodial

 

199,432

 

 

 

 

 

232,725

 

 

 

 

 

(33,293

)

 

 

 

 

Total non-interest bearing deposits

 

2,238,536

 

 

 

 

 

2,355,753

 

 

 

 

 

(117,217

)

 

 

 

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premier checking

 

1,054,542

 

30,650

 

2.91

 

1,001,024

 

31,539

 

3.15

 

53,518

 

(889

)

(24

)

Other checking

 

824,791

 

2,994

 

.36

 

864,316

 

2,017

 

.23

 

(39,525

)

977

 

13

 

Subtotal

 

1,879,333

 

33,644

 

1.79

 

1,865,340

 

33,556

 

1.80

 

13,993

 

88

 

(1

)

Premier savings

 

1,184,756

 

49,994

 

4.22

 

899,067

 

37,275

 

4.15

 

285,689

 

12,719

 

7

 

Other savings

 

1,279,577

 

14,976

 

1.17

 

1,376,182

 

12,797

 

.93

 

(96,605

)

2,179

 

24

 

Subtotal

 

2,464,333

 

64,970

 

2.64

 

2,275,249

 

50,072

 

2.20

 

189,084

 

14,898

 

44

 

Money market

 

604,767

 

17,481

 

2.89

 

620,844

 

15,216

 

2.45

 

(16,077

)

2,265

 

44

 

Subtotal

 

4,948,433

 

116,095

 

2.35

 

4,761,433

 

98,844

 

2.08

 

187,000

 

17,251

 

27

 

Certificates of deposit

 

2,461,055

 

114,530

 

4.65

 

2,291,002

 

96,480

 

4.21

 

170,053

 

18,050

 

44

 

Total interest-bearing deposits

 

7,409,488

 

230,625

 

3.11

 

7,052,435

 

195,324

 

2.77

 

357,053

 

35,301

 

34

 

Total deposits

 

9,648,024

 

230,625

 

2.39

 

9,408,188

 

195,324

 

2.08

 

239,836

 

35,301

 

31

 

Borrowings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

230,293

 

11,369

 

4.94

 

596,852

 

30,041

 

5.03

 

(366,559

)

(18,672

)

(9

)

Long-term borrowings

 

3,890,054

 

175,852

 

4.52

 

2,752,847

 

123,243

 

4.48

 

1,137,207

 

52,609

 

4

 

Total borrowings

 

4,120,347

 

187,221

 

4.54

 

3,349,699

 

153,284

 

4.58

 

770,648

 

33,937

 

(4

)

Total interest-bearing liabilities

 

11,529,835

 

417,846

 

3.62

 

10,402,134

 

348,608

 

3.35

 

1,127,701

 

69,238

 

27

 

Total deposits and borrowings

 

13,768,371

 

417,846

 

3.03

 

12,757,887

 

348,608

 

2.73

 

1,010,484

 

69,238

 

30

 

Other liabilities

 

343,978

 

 

 

 

 

300,930

 

 

 

 

 

43,048

 

 

 

 

 

Total liabilities

 

14,112,349

 

 

 

 

 

13,058,817

 

 

 

 

 

1,053,532

 

 

 

 

 

Stockholders’ equity

 

1,033,451

 

 

 

 

 

1,004,896

 

 

 

 

 

28,555

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

15,145,800

 

 

 

 

 

$

14,063,713

 

 

 

 

 

$

1,082,087

 

 

 

 

 

Net interest income and margin

 

 

 

$

550,177

 

3.94

%

 

 

$

537,530

 

4.16

%

 

 

$

12,647

 

(22

)

 

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 $1,933,000 and $1,209,000 was recognized during the years ended December 31, 2007 and 2006, 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

 

20



 

 

 

 

 

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)

 

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

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