TCF Financial 10-K 2007
Documents found in this filing:
Washington, D.C. 20549
ý Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2006
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)
200 Lake Street East, Mail Code
(Address of principal executive offices and zip code)
Registrants telephone number, including area code: 612-661-6500
Securities registered pursuant to Section 12(b) of the Act:
Common Stock (par value $.01 per share)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act from their obligation under those Sections.
Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of the chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
As of June 30, 2006, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter as reported by the New York Stock Exchange, was $2,989,446,440.
As of January 31, 2007, there were 130,443,404 shares outstanding of the registrants common stock, par value $.01 per share, its only outstanding class of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Specific portions of the Registrants definitive Proxy Statement dated March 7, 2007 are incorporated by reference into Part III hereof.
Table of Contents
TCF Financial Corporation (TCF or the Company), a Delaware Corporation, is a financial holding company based in Wayzata, Minnesota. Its principal subsidiaries, TCF National Bank and TCF National Bank Arizona, collectively, (TCF Bank), are headquartered in Minnesota and Arizona and operate bank branches in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana and Arizona.
At December 31, 2006, TCF had total assets of $14.7 billion and was the 43rd largest publicly traded bank holding company in the United States based on total assets as of September 30, 2006. Unless otherwise indicated, references herein to TCF include its direct and indirect subsidiaries. References herein to the Holding Company or TCF Financial refer to TCF Financial Corporation on an unconsolidated basis.
TCFs core businesses include retail banking; commercial banking; small business banking; consumer lending; leasing and equipment finance and investments and insurance services. The retail banking business includes traditional and supermarket branches, campus banking, EXPRESS TELLER® ATMs and Visa U.S.A. Inc. (Visa) cards. See Managements 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 TCFs reportable operating segments.
TCFs primary focus is on the delivery of retail and commercial banking products in markets served by TCF Bank. Some of its products, such as its commercial equipment loans and leases, are offered in markets outside areas served by TCF Bank.
At December 31, 2006, TCF had 453 retail banking branches, consisting of 196 traditional branches, 244 supermarket branches and 13 campus branches. TCF operated 107 branches in Minnesota, 195 in Illinois, 64 in Michigan, 44 in Colorado, 36 in Wisconsin, six in Indiana and one in Arizona.
Targeted new branch expansion is a key strategy for TCF. TCF has significantly expanded its banking franchise in recent years. 148 new branches have been opened since January 1, 2001. During 2006, TCF opened 19 new branches, consisting of 10 new traditional branches, five new supermarket branches and four new campus branches. TCF anticipates opening 20 new branches in 2007, consisting of 11 new traditional branches, six new supermarket branches and three campus branches. During the fourth quarter of 2006, TCF opened its first branch in Arizona. TCFs expansion is largely dependent on the continued long-term success of branch banking.
Campus banking represents an important part of TCFs retail banking business. TCF has alliances with the University of Minnesota, the University of Michigan plus twelve other colleges, including DePaul University in Chicago, Milwaukee Area Technical College, Northern Michigan University and Eastern Michigan University. These alliances include exclusive marketing and naming rights agreements. Branches have been opened on many of these college campuses. TCF provides multi-purpose campus cards for many of these colleges. These cards serve as a school identification card, ATM card, library card, security card, health card, phone card and stored value card for vending machines or similar uses. TCF is ranked 6th largest in number of campus card banking relationships in the U.S. At December 31, 2006, there were 110,309 total campus deposit accounts and $187.7 million in campus deposits. In 2005, TCF entered into a $35 million 25-year naming rights agreement for sponsorship of a new University of Minnesota football stadium to be called TCF Bank Stadium. Construction of this stadium began in September 2006.
Non-interest income is a significant source of revenue for TCF and an important factor in TCFs results of operations. A key driver of non-interest income is in checking accounts and their related activities. Increasing fee and service charge revenue has been challenging as a result of slower growth in checking accounts and changing customer behavior. Providing a wide range of retail banking services is an integral component of TCFs business philosophy and a major
strategy for generating additional non-interest income. See Managements Discussion and Analysis of Financial Condition and Results of Operations Consolidated Income Statement and Analysis Non-Interest Income and Managements Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Information for additional information.
General TCFs 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 Managements 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 TCFs loan and lease portfolios.
Consumer Lending TCF makes consumer loans for personal, family or household purposes, such as home purchases, debt consolidation, financing of home improvements, automobiles, vacations and education. Consumer loans totaled $5.9 billion at December 31, 2006, with $4.4 billion, or 75%, having fixed interest rates and $1.5 billion, or 25%, having variable interest rates tied to the prime rate.
TCFs consumer lending activities are primarily home equity real estate secured loans. They also include loans secured by personal property and to a limited extent, unsecured personal loans. Consumer loans may be made on a revolving line of credit or fixed-term basis.
Education Lending TCF originates education loans for resale. TCF had $144.6 million of education loans held for sale at December 31, 2006, compared with $229.8 million at December 31, 2005. Due to legislative changes to student loan programs in 2006, TCF accelerated the timing of certain education loan sales. In the past, TCF generally sold the education loans it originated just before the loans entered repayment status. Beginning in the third quarter of 2006, TCF began selling certain education loans once they were fully disbursed. These loans are originated in accordance with designated guarantor and U.S. Department of Education guidelines and do not involve any independent credit underwriting by TCF.
Commercial Real Estate Lending Commercial real estate loans are loans originated by TCF that are secured by commercial real estate including, to a lesser extent, commercial real estate construction loans, generally to borrowers based in its primary markets. At December 31, 2006, commercial real estate loans totaled $2.4 billion. At December 31, 2006, variable- and adjustable-rate loans represented 72% of commercial real estate loans outstanding. At December 31, 2006, TCFs commercial construction and development loan portfolio totaled $188.7 million.
Commercial Business Lending Commercial business loans are loans originated by TCF that are generally secured by various types of business assets including inventory, receivables, equipment, financial instruments and commercial real estate. In limited cases, loans may be made on an unsecured basis. Commercial business loans are used for a variety of purposes including working capital and financing the purchase of equipment.
TCF concentrates on originating commercial business loans to middle-market companies with borrowing requirements of less than $25 million based in its primary markets. Substantially all of TCFs commercial business loans outstanding at December 31, 2006, were to borrowers based in its primary markets.
Leasing and Equipment Finance TCF provides a broad range of comprehensive lease and equipment finance products addressing the financing needs of diverse types of small to large companies. At December 31, 2006, TCFs leasing and equipment finance portfolio (including operating leases) was $1.9 billion, consisting of $492.1 million of loans and $1.4 billion of leases. TCFs leasing and equipment finance businesses, TCF Equipment Finance, Inc. (TCF Equipment Finance) and Winthrop Resources Corporation (Winthrop Resources), operate in all 50 states and have equipment installations domestically and to a limited extent in foreign countries. TCF Equipment Finance delivers equipment finance solutions to small and mid-size companies in various industries. Winthrop Resources primarily leases technology and data processing equipment to companies nationwide.
TCF funds most of its leases internally, and consequently retains the credit risk on such leases. TCF may arrange financing of certain leases through non-recourse discounting of lease rentals with various other financial institutions at fixed interest rates. At December 31, 2006, $53.7 million, or 3.7%, of TCFs lease portfolio, including operating leases, was discounted on a non-recourse basis with other financial institutions.
TCFs leasing and equipment finance businesses also invests in limited partnerships that are formed to invest in qualified affordable housing projects. Leasing and equipment finance had $39.7 million and $43.7 million invested in affordable housing limited partnerships at December 31, 2006 and 2005, respectively. For more information on investments in affordable housing limited partnerships, see Note 1 of the Notes to Consolidated Financial Statements.
TCF Bank has authority to invest in various types of liquid assets, including United States Treasury obligations and securities of various federal agencies and U.S. Government sponsored enterprises, deposits of insured banks, bankers acceptances and federal funds. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the returns on loans and leases. TCF Bank must also meet reserve requirements of the Federal Reserve Board, which are imposed based on amounts on deposit in various deposit categories.
Sources of Funds
Deposits Deposits are the primary source of TCFs 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 TCFs 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.
TCFs 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 TCFs deposits has a significant impact on the overall cost of funds. At December 31, 2006, interest-bearing deposits comprised 75% of total deposits, as compared with 73% at December 31, 2005.
Information concerning TCFs deposits is set forth in Managements 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. TCFs FHLB advances totaled $1.5 billion at December 31, 2006, compared with $1.1 billion at December 31, 2005. FHLB advances are made pursuant to several different credit programs. Each credit program has its own interest rates and range of maturities. The FHLB prescribes the acceptable uses to which the advances pursuant to each program may be made as well as limitations on the size of advances. In addition to the program limitations, the amounts of advances for which an institution may be eligible are generally based on the FHLBs assessment of the institutions creditworthiness.
As an additional source of funds, TCF may sell securities subject to its obligation to repurchase these securities (repurchase agreements) with major investment banks or the FHLB utilizing government securities or mortgage-backed securities as collateral. Repurchase agreements totaled $1.6 billion at December 31, 2006, compared with $1.4 billion at December 31, 2005. Generally, securities with
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 TCFs FHLB advances, repurchase agreements, subordinated notes and other borrowings is set forth in Managements 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.
Activities of Subsidiaries of TCF Financial Corporation TCFs business operations include those conducted by direct and indirect subsidiaries of TCF Financial, all of which are consolidated for purposes of preparing TCFs consolidated financial statements. TCF does not utilize unconsolidated subsidiaries or special purpose entities to provide off-balance sheet borrowings. TCFs 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 TCFs leasing and equipment finance businesses.
Insurance and Investment Services TCF Investments sell a variety of investment products to its retail banking clients. These products include fixed and variable rate, single premium tax-deferred annuities, mutual funds, life insurance and broker-assisted securities.
Real Estate Investment Trust TCF has a Real Estate Investment Trust (REIT) and a related foreign operating company (FOC) that acquire, hold and manage real estate loans and other assets. These companies are consolidated with TCF Bank and are included in the consolidated financial statements of TCF Financial Corporation. TCFs FOC operates under laws in certain states (including Minnesota and Illinois) that allow FOCs. It is possible that state legislatures may revise their tax laws applicable to REITs or FOCs and such changes could increase TCFs tax expense.
Competition TCF competes with a number of depository institutions and financial service providers in its market areas, and experiences significant competition in attracting and retaining deposits and in lending funds. Direct competition for deposits comes primarily from retail banks, commercial banks, investment banks, credit unions and savings institutions. Additional significant competition for deposits comes from institutions selling money market mutual funds and corporate and government securities. TCF competes for the origination of loans with commercial banks, mortgage bankers, mortgage brokers, consumer and commercial finance companies, credit unions, insurance companies and savings institutions. TCF also competes nationwide with other leasing and equipment finance companies and commercial banks in the financing of equipment. Expanded use of the Internet has increased competition affecting TCF and its loan, lease and deposit products.
Employees As of December 31, 2006, TCF had 8,547 employees, including 2,902 part-time employees. TCF provides its employees with a comprehensive program of benefits, some of which are provided on a contributory basis, including comprehensive medical and dental plans, a 401(k) savings plan with a company matching contribution, life insurance and short- and long-term disability coverage.
The banking industry is generally subject to extensive regulatory oversight. TCF Financial, as a publicly held financial holding company, and TCF Bank, as a national bank with deposits insured by the Federal Deposit Insurance Corporation (FDIC), are subject to a number of laws and regulations. Many of these laws and regulations have undergone significant change in recent years. These laws and regulations impose restrictions on activities, minimum capital requirements, lending and deposit restrictions and numerous other requirements. Future changes to these laws and regulations, and other new financial services laws and regulations, are likely and cannot be predicted with certainty. TCF Financials primary regulator is the Federal Reserve Bank (FRB) and TCF Banks primary regulator is the Office of the Comptroller of the Currency (OCC).
Regulatory Capital Requirements TCF Financial and TCF Bank are subject to regulatory capital requirements of the FRB and the OCC, respectively, as described below. In addition, these regulatory agencies are required by law to take prompt action when institutions do not meet certain minimum capital standards. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) defines five levels of capital condition, the highest of which is well-capitalized. It requires that regulatory authorities subject undercapitalized institutions to various restrictions such as limitations on dividends or other capital distributions, limitations on growth or restrictions on an activity. Undercapitalized banks must develop a capital restoration plan and the parent financial holding company is required to guarantee compliance with the plan. TCF Financial and TCF Bank are well-capitalized under the FDICIA capital standards.
The FRB and the OCC also have adopted rules that could permit them to quantify and account for interest-rate risk exposure and market risk from trading activity and reflect these risks in higher capital requirements. New legislation, additional rulemaking, or changes in regulatory policies may affect future regulatory capital requirements applicable to TCF Financial and TCF Bank. The ability of TCF Financial and TCF Bank to comply with regulatory capital requirements may be adversely affected by legislative changes, future rulemaking or policies of regulatory authorities, by unanticipated losses or lower levels of earnings.
Restrictions on Distributions Dividends or other capital distributions from TCF Bank to TCF Financial are an important source of funds to enable TCF Financial to pay dividends on its common stock, to make payments on TCF Financials borrowings, or for its other cash needs. TCF Banks ability to pay dividends is dependent on regulatory policies and regulatory capital requirements. The ability to pay such dividends in the future may be adversely affected by new legislation or regulations, or by changes in regulatory policies. In general, TCF Bank may not declare or pay a dividend to TCF Financial in excess of 100% of its net profits during a year, combined with its retained net profits for the preceding two years, without prior approval of the OCC. TCF Banks ability to make capital distributions in the future may require regulatory approval and may be restricted by its regulatory authorities. TCF Banks ability to make any such distributions may also depend on its earnings and ability to meet minimum regulatory capital requirements in effect during future periods. These capital adequacy standards may be higher in the future than existing minimum capital requirements. The OCC also has the authority to prohibit the payment of dividends by a national bank when it determines such payments would constitute an unsafe and unsound banking practice. In addition, income tax considerations may limit the ability of TCF Bank to make dividend payments in excess of its current and accumulated tax earnings and profits (E&P). Annual dividend distributions in excess of E&P could result in a tax liability based on the amount of excess earnings distributed and current tax rates. See Managements Discussion and Analysis of Financial Condition and Results of Operations Consolidated Financial Condition Analysis Liquidity Management and Note 13 and Note 14 of Notes to Consolidated Financial Statements.
Regulation of TCF and Affiliates and Insider Transactions TCF Financial is subject to FRB regulations, examinations and reporting requirements relating to bank or financial holding companies. As subsidiaries of a financial holding company, TCF Bank is subject to certain restrictions in its dealings with TCF Financial and with companies affiliated with TCF.
A holding company must serve as a source of strength for its subsidiary banks, and the FRB may require a holding company to contribute additional capital to an undercapitalized subsidiary bank. In addition, Section 55 of the National Bank Act may permit the OCC to order the pro rata assessment of shareholders of a national bank where the capital of the bank has become impaired. If a shareholder fails to pay such an assessment within three months, the OCC may order the sale of the shareholders stock to cover a deficiency in the capital of a subsidiary bank. In the event of a holding companys 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.
Under the Bank Holding Company Act (BHCA), a bank holding company must obtain FRB approval before acquiring more than 5% control, or substantially all of the assets, of another bank, or bank or financial holding company, or merging or consolidating with such a bank or holding company. The BHCA also generally prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, providing services for its subsidiaries, or conducting activities permitted by the FRB as being closely related to the business of banking.
Restrictions on Change in Control Federal and state laws and regulations contain a number of provisions which impose restrictions on changes in control of financial institutions such as TCF Bank, and which require regulatory approval prior to any such changes in control. The Restated Certificate of Incorporation of TCF Financial and a Shareholder Rights Plan adopted by TCF Financial contain, among other items, features which may inhibit a change in control of TCF Financial.
Acquisitions and Interstate Operations Under federal law, interstate merger transactions may be approved by federal bank regulators without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks opted out of the Riegle-Neal Interstate Banking and Branching Act of 1994 by adopting a law after the date of enactment of such act, and prior to June 1, 1997, which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches by banks are permitted only if the law of the state in which the branches are located permits such acquisitions. Interstate mergers and branch acquisitions may also be subject to certain nationwide and statewide insured deposit maximum concentration levels or other limitations.
Insurance of Accounts; Depositor Preference In February 2006, the Federal Deposit Insurance Act of 2005 (FDIC Act) was enacted into law reforming the bank deposit insurance system. The FDIC has finalized regulations or has drafted proposed regulations to implement many of the FDIC Act provisions.
The deposits of TCF Bank are insured by the FDIC up to $100,000 per insured depositor, except certain types of retirement accounts, which are insured up to $250,000 per insured depositor. During 2006, FDIC regulations merged the former Saving Association Insurance Fund (SAIF) and Bank Insurance Fund (BIF) into the Deposit Insurance Fund (DIF).
The FDIC has set a designated reserve ratio of 1.25% ($1.25 against $100 of insured deposits) for the DIF. The FDIC Act provides the FDIC Board of Directors the authority to set the designated reserve ratio between 1.15% and 1.50%. The FDIC must adopt a restoration plan when the reserve ratio falls below 1.15% and begin paying dividends when the reserve ratio exceeds 1.35%. There is no requirement to achieve a specific ratio within a given time frame. The FDIC Board of Directors has not declared any dividends as of December 31, 2006. The DIF reserve ratio calculated by the FDIC that was in effect at December 31, 2006 was 1.22%.
In 2006, the annual insurance premiums on bank deposits insured by the DIF varied between $0 per $100 of deposits for banks classified in the highest capital and supervisory evaluation categories to $.27 per $100 of deposits for banks classified in the lowest capital and supervisory evaluation categories. Annual insurance premiums have not been required for TCF Bank for 2006, 2005, and 2004.
In 2006, FDIC regulations established a new risk-based assessment system under which deposit insurance assessments are based upon supervisory ratings for all insured institutions, financial ratios for most institutions, and long-term debt issuer ratings for large institutions that have them. Starting in the second quarter of 2007, under new FDIC regulations, annual insurance premiums on bank deposits insured by the DIF may vary between $.05 per $100 of deposits for banks assigned in the lowest risk category to $.43 per $100 of deposits for banks assigned in the highest risk category. As of December 31, 2006, TCF Bank has not been assigned to a new risk category by the FDIC.
The FDIC Act required the FDIC to establish a one-time historical assessment credit that provides banks a credit that can be used to offset insurance assessments starting
in 2007. This one-time historical assessment credit was established to benefit banks that had funded the deposit insurance funds prior to December 31, 1996. This one-time historical assessment credit is based upon TCF Banks insured deposits as of December 31, 1996. The FDIC has estimated TCF Banks one-time historical assessment credit at $9.6 million, which can be used to offset future FDIC insurance premiums. This one-time historical assessment credit may be transferred to another insured institution with FDIC approval.
In addition to risk-based deposit insurance assessments, additional assessments may be imposed by Financing Corporation, a separate U.S. government agency affiliated with the FDIC, on insured deposits to pay for the interest cost of Financing Corporation bonds. Financing Corporation assessment rates for 2006 ranged from $.0124 to $.0132 per $100 of deposits. Financing Corporation assessments of $1.1 million each year for 2006, 2005 and 2004 were paid by TCF Bank and are included in other expense. Financing Corporation assessments and collections were largely unaffected by the FDIC Act.
In addition, the FDIC is authorized to terminate a depository institutions 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 institutions 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 institutions directors, officers, employees, agents or independent contractors.
To the extent not subject to preemption by the OCC, subsidiaries of TCF may also be subject to state and/or self-regulatory organization licensing, regulation and examination requirements in connection with certain insurance and securities brokerage activities.
National Bank Investment Limitations Permissible investments by national banks are limited by the National Bank Act, as amended, and by rules of the OCC. Non-traditional bank activities permitted by the Gramm-Leach-Bliley Act will subject a bank to additional regulatory limitations or requirements, including a required regulatory capital deduction and application of transactions with affiliates limitations in connection with such activities.
Laws and Regulations TCF is subject to a wide array of other laws and regulations, including, but not limited to, usury laws, USA Patriot and Bank Secrecy Acts, the CRA and related regulations, the Equal Credit Opportunity Act and Regulation B, Regulation D reserve requirements, Electronic Funds Transfer Act and Regulation E, the Truth-in-Lending Act and Regulation Z, the Real Estate Settlement Procedures Act and Regulation X, the Expedited Funds Availability Act and Regulation CC, and the Truth-in-Savings Act and Regulation DD. TCF is also subject to laws and regulations that may impose liability on lenders and owners for clean-up costs and other costs stemming from hazardous waste located on property securing real estate loans.
Federal Taxation The statute of limitations on TCFs consolidated Federal income tax return is closed through 2002.
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. TCFs primary banking activities are in the states of Minnesota, Illinois, Michigan, Colorado, Wisconsin and Arizona. The methods of filing, and the methods for calculating taxable and apportionable income, vary depending upon the laws of the taxing jurisdiction. See Risk Factors.
See Managements 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 TCFs income taxes.
TCFs website, www.tcfbank.com, includes free access to Company news releases, investor presentations, conference calls to discuss published financial results, TCFs 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.
TCFs 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.
Enterprise Risk Management
In the normal course of business, TCF is exposed to various risks. Management balances the Companys strategic goals, including revenue and profitability objectives, with their associated risks.
In defining the Companys risk profile, management organizes risks into three main categories: Credit Risk, Market Risk (which includes interest-rate risk, liquidity risk, and price risk) and Operational Risk (which includes transaction risk and compliance risk). Policies, systems and procedures have been adopted which are intended to identify, assess, control, monitor, and manage risk in each of these areas.
Primary responsibility for risk management lies with the heads of various business lines within the Company. Each business line within the Company maintains policies, systems and procedures which are intended to identify, assess, control, monitor, and manage risk within their respective areas. Management continually reviews the adequacy and effectiveness of these policies, systems and procedures.
As an integral part of the risk management process, management has established various committees consisting of senior executives and others within the Company. The purpose of these committees is to closely monitor risks and ensure that adequate risk management practices exist within their respective areas of authority. Some of the principal committees include the Credit Policy Committee, Asset/Liability Management Committee (ALCO), Investment Committee, Capital Planning Committee and various financial reporting and compliance-related committees. Overlapping membership of these committees by senior executives and others helps provide a unified view of risk on an enterprise-wide basis.
To provide an enterprise-wide view of the Companys 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 Companys risk profile. Additionally, risk officers are assigned to each significant line of business and corporate function. The risk officers, while reporting directly to their respective line or function, facilitate implementation of the enterprise risk management and governance process. An Enterprise Risk Management Committee has been established consisting of senior executives and others within the Company, which oversees and supports the Enterprise Risk Management Officer.
The enterprise risk management governance process includes a process for providing an enterprise-wide view of the identification, assessment, measurement, monitoring, and reporting of significant risk-related events. The Board of Directors, through its Audit Committee, has overall responsibility for oversight of the Companys enterprise risk management governance process.
Credit Risk Management Credit risk is defined as the risk to earnings or capital of an obligors failure to meet the terms of any contract with the Company or otherwise fails to perform as agreed. This includes failure of customers to meet their contractual obligations, and contingent exposures from unfunded loan commitments and letters of credit. Credit risk also includes failure of a counterparty to settle a securities transaction on agreed-upon terms (such as the counterparty in a repurchase transaction), or failure of an issuer in connection with mortgage-backed securities held in the Companys investment portfolio.
To manage credit risk arising from lending and leasing activities, management has adopted and maintains what it believes are sound underwriting policies and procedures, and periodically reviews the appropriateness of these policies and procedures. Customers are evaluated as part of the initial underwriting processes and through periodic reviews. For consumer loans and small business banking loans, credit scoring models are used to help determine eligibility for credit and terms of credit. These models are periodically reviewed to verify they are predictive of borrower performance. Limits are established on the exposure to a single customer (including their affiliates) and on concentrations for certain categories of customers. Loan and lease credit approval levels are established so that larger credit exposures receive managerial review at the appropriate level through various credit approval committees.
Management continuously monitors asset quality in order to manage the Companys 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 managements assessment of the level of the customers 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 Companys loan and lease portfolio risk profile. Management also uses various risk models called stress tests to estimate probable impact on payment performance under various expected or unexpected scenarios.
Market Risk Management (Including Interest-Rate Risk and Liquidity Risk) Market risk is defined as the potential for losses arising from changes in interest rates, equity prices, and other relevant market rates or prices, and includes interest-rate risk, liquidity risk and price risk. Interest-rate risk and associated liquidity risk are the Companys primary market risks.
Interest-Rate Risk Interest-rate risk is defined as the exposure of net interest income and fair value of financial instruments to adverse movements in interest rates. Interest-rate risk arises mainly from the structure of the balance sheet. The primary goal of interest-rate risk management is to control exposure to interest-rate risk within acceptable tolerances established by ALCO and the Board of Directors.
The major sources of the Companys interest-rate risk are timing differences in the maturity and repricing characteristics of assets and liabilities, changes in relationships between rate indices (basis risk), changes in customer behavior and changes in the shape of the yield curve. Management measures these risks and their impact in various ways, including use of simulation analysis and valuation analysis.
Simulation analysis is used to model net interest income from asset and liability positions over a specified time period (generally one year), and the sensitivity of net interest income, under various interest rate scenarios. The interest rate scenarios may include gradual or rapid changes in interest rates, rate shocks, spread narrowing and widening, yield curve twists, and changes in assumptions about customer behavior in various interest rate scenarios. The simulation analysis is based on various key assumptions which relate to the behavior of interest rates and spreads, changes in product balances, the repricing characteristics of products, and the behavior of loan and deposit customers in different rate environments. The simulation analysis does not necessarily take into account actions management may undertake in response to anticipated changes in interest rates.
In addition to the valuation analysis, management utilizes an interest rate gap measure (difference between interest-earning assets and interest-bearing liabilities repricing within a given period). While the interest rate gap measurement has some limitations, including no assumptions regarding future asset or liability production and a static interest rate assumption (large changes may occur related to those items), the interest rate gap represents the net asset or liability sensitivity at a point in time. An interest rate gap measure could be significantly affected by external
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 TCFs 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 Companys 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 Companys 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 Companys 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 Companys liquidity risk. Under the Liquidity Management Policy, the Treasurer reviews current and forecasted funding needs for the Company and periodically reviews market conditions for issuing debt securities to wholesale investors. Key liquidity ratios and the amount available from alternative funding sources are reported to ALCO on a monthly basis.
The Treasurer maintains diverse and reliable sources of funding. This includes federal funds lines totaling at least $500 million, repurchase agreement lines totaling at least 150% of the amount of the Companys financeable collateral (defined as any piece or pool of collateral that is greater than $5 million in current par), access to Federal Home Loan Bank (FHLB) advances and the Federal Reserve Bank discount window, treasury, tax and loan notes, commercial repurchase sweeps, and wholesale deposits.
The Treasurer ensures that liability maturities are staggered to limit forecasted daily funding needs. The daily funding guideline is $500 million, which may be met with a mix of approved borrowing types. Cash flow variances may cause minor day-to-day excesses over this guideline. A contingency funding plan is in place should certain liquidity triggers occur.
Other Market Risks Another source of market risk is the Companys investment in FHLB stock. The investments in FHLB stock are required investments related to TCFs 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 others debt. Therefore, TCFs investments in these banks could be adversely impacted by the operations of the other FHLBs.
Operational Risk Management Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems, or external events. This definition includes transaction risk, which includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Transaction risk encompasses product development and delivery, transaction processing, information technology systems, and the internal control environment. The definition of operational risk also includes compliance risk, which is the risk of loss from violations of, or nonconformance with laws, rules, regulations, prescribed practices, or ethical standards.
The Companys Internal Audit Department periodically assesses the adequacy and effectiveness of the Companys processes for controlling and managing risks in all the core areas of operations. This includes determining whether internal controls and information systems are properly designed and adequately tested and reviewed. This also includes determining whether the system of internal controls over financial reporting is appropriate for the type and level
of risks posed by the nature and scope of the companys activities. Audit plans are prepared using a risk-based methodology as well as any concerns identified by management, the Audit Committee, regulators or the Companys 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 Companys Compliance Department and others charged with compliance responsibilities periodically assess the adequacy and effectiveness of the Companys processes for controlling and managing its principal compliance risks. Compliance Department audit plans are prepared using a risk-based methodology as well as any concerns identified by management, the Audit Committee, or regulators. Significant issues related to the adequacy of controls, together with recommendations for improvements to those controls, are reported to management and the Audit Committee.
Customer Behavior Changes in customers behavior regarding use of deposit accounts could result in lower fee revenue, higher borrowing costs, and higher operational costs for TCF. TCF obtains a large portion of its revenue from its deposit accounts and depends on low-cost deposits as a significant source of funds.
In addition, competition from other financial institutions could result in higher numbers of closed accounts and increased account acquisition costs. TCF actively monitors customer behavior and adjusts policies and marketing efforts accordingly to attract new and retain existing checking account customers.
New Branch Expansion Opening new branches is an integral part of TCFs growth strategy for generating new customers, deposit accounts and loans and the related revenue. The success of TCFs branch expansion is dependent on the continued success of branch banking in attracting new customers and business. Many other financial institutions are also opening new branches, and the competition from them and other retailers for new branch sites is significant.
New branches typically produce net losses during the first two to three years of operations before they become profitable, and therefore the level and timing of new branch expansion can have a significant impact on TCFs profitability.
Supermarket Branches The success of TCFs supermarket branch expansion is dependent on the continued long-term success and viability of TCFs supermarket partners and TCFs ability to maintain licenses or lease agreements for its supermarket locations. At December 31, 2006, TCF had 244 supermarket branches, representing 54% of all retail branches. Supermarket banking continues to play an important role in TCFs 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 TCFs supermarket branches.
Card Revenue Future card revenues may be impacted by class action litigation against Visa U.S.A. Inc. (Visa) and MasterCard®. Visa is a defendant in many other legal actions, including litigation brought by merchants and merchant organizations against Visa concerning its card interchange fees challenging the level of interchange fees and prohibitions on merchants imposing surcharges on customers using cards to purchase goods and services. The ultimate impact of any such litigation cannot be predicted at this time.
Merchants are also seeking to develop independent card products or payment systems that would serve as alternatives to TCF Visa card products. The continued success of TCFs 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 TCFs 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 TCFs markets could have a negative effect on results of operations. At December 31, 2006, TCF had $6.5 billion of consumer home equity and residential real estate loans with a weighted-average loan-to-value ratio for the portfolio of 78%. A significant decline in home values would likely lead to a decrease in new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and residential real estate loan portfolios and result in increased losses in these portfolios.
Leasing and Equipment Finance Activities TCFs leasing and equipment finance activity is subject to risk of cyclical downturns and other adverse economic developments. In an adverse economic environment, there may be a decline in the demand for some types of equipment which TCF leases and/or finances, resulting in a decline in the amount of new equipment being placed in service as well as the decline in equipment values for equipment previously placed in service. TCF, like all owners and lessors of commercial equipment, may be exposed to liability claims resulting from injuries or accidents involving that equipment. Such liability has been most acute in states that have adopted laws imposing statutory vicarious liability on leasing companies for any injuries or property damage caused by motor vehicles they owned and leased. In 2005, a federal statute was enacted that significantly reduced a leasing companys exposure to that risk. TCF seeks to mitigate its overall exposure to lessors liability risk by requiring all lessees to furnish evidence of liability insurance prior to lease inception and to maintain that insurance throughout the term of the lease, and through its own insurance programs.
Income Taxes TCF is subject to federal and state income tax regulations. Income tax regulations are often complex and require interpretation. Changes in income tax regulations could negatively impact TCFs results of operations. If TCFs REIT affiliate fails to qualify as a REIT, or should states enact legislation taxing these or related entities, TCF will be subject to a higher consolidated effective tax rate. The REIT and related companies must meet specific provisions of the Internal Revenue Code (IRC) and state tax laws. If these companies fail to meet any of the required provisions of federal and state tax laws, TCFs tax expense could increase. Use of REITs is and has been the subject of federal and state audits and tax policy debates by various state legislatures. See Managements 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 companys shareholders. These laws and regulations may sometimes impose significant limitations on operations. These limitations, and sources of potential liability for the violation of such laws and regulations, are described in Regulation. These regulations, along with the currently existing tax and accounting laws, regulations, rules, and standards, control the methods by which financial institutions conduct business; implement strategic initiatives, as well as past, present, and contemplated tax planning; and govern financial disclosures. These laws, regulations, rules, and standards are constantly evolving and may change significantly over time. Current events that may not have a direct impact on TCF, such as accounting improprieties, may result in the adoption of substantive revisions to laws, regulations, rules, and standards. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on TCFs business, results of operations, and financial condition, the effect of which is impossible to predict at this time.
Future Legislative and Regulatory Change; Litigation and Enforcement Activity There are a number of respects in which future legislative or regulatory change, or changes in enforcement practices or court rulings, could adversely affect TCF, and it is generally not possible to predict when or if such changes may have an impact on TCF. TCFs income in future periods may be negatively impacted by pending state and federal legislative proposals which, if enacted, could limit interest rates or loan, deposit or other fees and service charges. For example, recently proposed federal legislation could reduce interest subsidies and other benefits available to financial institutions that make education loans. Financial institutions have increasingly been the subject of class action lawsuits or in some cases regulatory actions challenging a variety of practices involving consumer lending and retail deposit-taking activity.
The Community Reinvestment Act (CRA) and fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice (DOJ) and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institutions 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 institutions performance under fair lending laws in private class action litigation.
USA Patriot and Bank Secrecy Acts The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury Departments Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. TCF has developed policies and procedures designed to ensure compliance.
Disruption to Infrastructure The extended disruption of vital infrastructure could negatively impact TCFs business, results of operations, and financial condition. TCFs 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 TCFs control, could have a material adverse impact either on the financial services industry as a whole, or on TCFs business, results of operations, and financial condition.
Estimates and Assumptions TCFs 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 Managements Discussion and Analysis of Financial Condition and Results of Operations Summary of Critical Accounting Estimates.
Offices At December 31, 2006, TCF owned the buildings and land for 139 of its bank branch offices, owned the buildings but leased the land for 14 of its bank branch offices and leased or licensed the remaining 300 bank branch offices, all of which are well maintained. The properties related to the bank branch offices owned by TCF had a depreciated cost of approximately $230.8 million at December 31, 2006. At December 31, 2006, the aggregate net book value of leasehold improvements associated with leased bank branch office facilities was $29.4 million. In addition to the above-referenced branch offices, TCF owned and leased other facilities with an aggregate net book value of $41.2 million at December 31, 2006. For more information on premises and equipment, see Note 7 of Notes to Consolidated Financial Statements.
From time to time, TCF is a party to legal proceedings arising out of its lending, leasing and deposit operations. TCF is and expects to become engaged in a number of foreclosure proceedings and other collection actions as part of its lending and leasing collection activities. From time to time, borrowers and other customers, or employees or former employees have also brought actions against TCF, in some cases claiming substantial amounts of damages. Financial services companies are subject to the risk of class action litigation, and TCF has had such actions brought against it from time to time. Litigation is often unpredictable and the actual results of litigation cannot be determined with certainty.
TCFs 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 TCFs 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.
As of January 31, 2007, there were 8,451 record holders of TCFs 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 TCFs 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 TCFs earnings, financial condition and capital requirements, the cash available to pay such dividends (derived mainly from dividends and distributions from TCF Bank), as well as regulatory and contractual limitations and such other factors as the Board of Directors may deem relevant. In general, TCF Bank may not declare or pay a dividend to TCF in excess of 100% of its net profits for that year combined with its retained net profits for the preceding two calendar years, without prior approval of the OCC. Restrictions on the ability of TCF Bank to pay cash dividends or possible diminished earnings of the indirect subsidiaries of TCF may limit the ability of TCF to pay dividends in the future to holders of its common stock. See Regulation Regulatory Capital Requirements, Regulation Restrictions on Distributions and Note 14 of Notes to Consolidated Financial Statements.
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 Poors 500 Stock Index, the SNL All Bank and Thrift Index, and a TCF Financial selected group of peer institutions over the same period (assuming the investment of $100 in each index on December 31, 2001 and reinvestment of all dividends).
TCF Stock Performance Chart
(1) Includes every bank and thrift institution in the U.S. traded on a major public exchange, a total of 624 companies as of December 31, 2006.
(2) Consists of 30 publicly traded banks and thrifts, 15 of which are immediately larger than and 15 of which are immediately smaller than TCF Financial in total assets as of September 30, 2006, as follows: IndyMac Bancorp Inc.; Colonial BancGroup; Astoria Financial Corporation; Associated Banc-Corp; Webster Financial Corporation; Mercantile Bankshares Corporation; BOK Financial Corporation; Downey Financial Corp.; W Holding Company Inc.; Sky Financial Group, Inc.; First Citizens BancShares, Inc.; Commerce Bancshares, Inc.; Flagstar Bancorp, Inc.; Fulton Financial Corporation; City National Corporation; South Financial Group, Inc.; BankUnited Financial Corporation; Fremount General Corporation; Valley National Bankcorp; BancorpSouth, Inc.; Cullen/Frost Bankers, Inc.; Investors Financial Services Corp.; MAF Bancorp, Inc.; East West Bancorp. Inc.; First Republic Bank; Wilmington Trust Corporation; International Bancshares Corporation; Peoples Bank (MHC); Bank of Hawaii Corporation; FirstMerit Corporation. Five of the companies, which were in the 2005 TCF Peer Group are not in the 2006 TCF Peer Group due to merger and acquisition activity or changes in asset size. Those five companies are: Independence Community Bank Corp.; Westcorp; FirstFed Financial Corp.; Whitney Holding Corporation; Hudson United Bancorp.
* Source: SNL Financial LC and Standard & Poors © 2006
The following table summarizes share repurchase activity for the quarter ended December 31, 2006.
(1) The current share repurchase authorization was approved by the Board of Directors on May 21, 2005. The authorization was for a repurchase of up to an additional 5% of TCFs common stock outstanding at the time of the authorization, or 6.7 million shares. This authorization does not have an expiration date.
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 Financial Condition:
Key Ratios and Other Data:
(1) Net interest income divided by average interest-earning assets.
Managements 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.
TCF, a Delaware corporation, is a financial holding company based in Wayzata, Minnesota. Its principal subsidiaries, TCF National Bank and TCF National Bank Arizona, collectively TCF Bank, are headquartered in Minnesota and Arizona and had 453 banking offices in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana and Arizona at December 31, 2006.
TCF provides convenient financial services through multiple channels in its primary banking markets. TCF has developed products and services designed to meet the needs of all consumers. The Company focuses on attracting and retaining customers through service and convenience, including branches that are open seven days a week and on most holidays, extensive full-service supermarket branches, automated teller machine (ATM) networks and telephone and internet banking. TCFs 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 Companys 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.
TCFs core businesses include retail banking; commercial banking; small business banking; consumer lending; leasing and equipment finance; and investments and insurance services. The retail banking business includes traditional and supermarket branches, campus banking, EXPRESS TELLER ATMs and Visa U.S.A. Inc. (Visa) cards.
TCF emphasizes the checking account as its anchor account, which provides opportunities to cross-sell other convenient products and services and generate additional fee income. The continued growth of deposit accounts is a significant part of TCFs growth strategy. Total deposit accounts were 2,426,616, 2,296,199 and 2,216,013 at December 31, 2006, December 31, 2005 and December 31, 2004, respectively.
Opening new branches is an integral part of TCFs 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 TCFs profitability. TCFs growth in checking accounts is primarily occurring in new branches with growth in mature branches being slower. TCFs expansion is dependent on the continued long-term success and viability of branch banking.
TCFs lending strategy is to originate high credit quality, primarily secured, loans and leases. Commercial loans are generally made on local properties or to local customers. TCFs 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. The leasing and equipment finance businesses consist of TCF Equipment Finance, Inc. (TCF Equipment Finance), a company that delivers equipment finance solutions to businesses in select markets, and Winthrop Resources Corporation (Winthrop Resources), a leasing company that primarily leases technology and data processing equipment. TCFs leasing and equipment finance businesses operate in all 50 states and have equipment installations domestically and, to a limited extent, in foreign countries.
As a primarily secured lender, TCF emphasizes credit quality over asset growth. As a result, TCFs 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 managements expectation of the risk of loss inherent in the loan and lease portfolio. See Consolidated Financial Condition Analysis Allowance for Loan and Lease Losses.
Net interest income, the difference between interest income earned on loans and leases, securities available for sale, investments and other interest-earning assets and interest paid on deposits and borrowings, represented 52.3% of TCFs total revenue in 2006. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest-earning assets and the mix of interest-bearing and non-interest bearing deposits and borrowings. TCF manages the risk of changes in interest rates on its net interest income through an Asset/Liability Committee and through related interest-rate risk monitoring and management policies.
During 2006, TCFs net interest margin declined to 4.16% from 4.46% in 2005 and 4.54% in 2004. The declines in 2006 and 2005 were primarily due to customer preference for lower-yielding fixed-rate loans and higher-cost market-rate deposits largely due to a flat or inverted yield curve and higher borrowing costs. In addition, intense price competition on loans and deposits has contributed to the compression of the net interest margin in 2006 and 2005. See Quantitative and Qualitative Disclosures About Market Risk for further discussion on TCFs interest-rate risk position.
Non-interest income is a significant source of revenue for TCF and an important factor in TCFs results of operations. A key driver of non-interest income is its number of checking accounts and the related transaction activity. Increasing fee and service charge revenues has been challenging as a result of slower growth in deposit accounts and changing customer behaviors. TCF is focusing on deposit account growth to increase future fee revenue. See Managements Discussion and Analysis of Financial Condition and Results of Operations Consolidated Income Statement Analysis Non-Interest Income for additional information.
The Companys Visa debit card program has grown significantly since its inception in 1996. TCF is the 13th largest issuer of Visa Classic debit cards in the United States, based on sales volume for the three months ended September 30, 2006 as published by Visa. TCF earns interchange revenue from customer debit card transactions.
The following portions of the Managements Discussion and Analysis of Financial Condition and Results of Operations focus in more detail on the results of operations for 2006, 2005 and 2004 and on information about TCFs balance sheet, credit quality, liquidity funding resources, capital and other matters.
Performance Summary TCF reported diluted earnings per common share of $1.90 for 2006, compared with $2.00 for 2005 and $1.86 for 2004. Net income was $244.9 million for 2006, compared with $265.1 million for 2005 and $255 million for 2004. For 2006, net income included $5.8 million in pre-tax gains on sales of buildings and mortgage servicing rights and $6.1 million of reductions of income tax expense for a combined after-tax impact of eight cents per diluted share. For 2005, net income included $24.3 million in pre-tax gains on sales of buildings and mortgage-backed securities, a $3.3 million pre-tax commercial loan recovery and $14 million of reductions in income tax expense for a combined after-tax impact of 25 cents per diluted share. Return on average assets was 1.74% in 2006, compared with 2.08% in 2005 and 2.15% in 2004. Return on average common equity was 24.37% in 2006, compared with 28.03% in 2005 and 27.02% in 2004. The effective income tax rate for 2006 was 31.41%, compared with 30.30% in 2005 and 33.68% in 2004.
Operating Segment Results BANKING, consisting of deposits and investment products, commercial banking, small business banking, consumer lending and treasury services, reported net income of $208.4 million for 2006, down 9.3% from $229.9 million in 2005. Banking net interest income for 2006 was $477.5 million, up 4.8% from $455.5 million for 2005. The provision for credit losses totaled $18.1 million in 2006, up from $4.6 million in 2005. This increase was primarily due to a $3.3 million recovery in 2005 and higher levels of consumer lending net charge-offs in 2006.
Non-interest income totaled $428.4 million in 2006, up from $425 million in 2005. Fees and service charges were $270.2 million for 2006, up 2.9% from $262.6 million in 2005, primarily due to the growth in deposit accounts, partially offset by lower customer check volumes. Card revenues, primarily interchange fees, increased 15.4% in 2006 and 25.7% in 2005, which was primarily attributable to an increase in active accounts and customer transaction volumes. During 2006, TCF sold two branch buildings and one land parcel and recognized gains of $4.2 million. During 2005, TCF sold several buildings and one branch including its deposits resulting in total gains of $13.6 million. During 2005, TCF sold mortgage-backed securities and realized gains of $10.7 million. There were no such sales in 2006. See Consolidated Income Statement Analysis Non-Interest Income for further discussion on the sales of mortgage-backed securities.
Non-interest expense totaled $585.5 million in 2006, up 6.5% from $549.6 million in 2005. The increase was primarily due to compensation and benefits and occupancy costs associated with branch expansion and increases in card processing and issuance expenses related to the overall increase in card volumes. Also contributing to the increase was an increase in net real estate expense due to increased losses on foreclosed properties.
LEASING AND EQUIPMENT FINANCE, an operating segment composed of TCFs wholly-owned subsidiaries TCF Equipment Finance and Winthrop Resources, provides a broad range of comprehensive lease and equipment finance products. Leasing and Equipment Finance reported net income of $33.4 million for 2006, unchanged from 2005. Net interest income for 2006 was $58.7 million, up 2.9% from $57 million in 2005. The provision for credit losses for this operating segment totaled $2.6 million in 2006, down from $4 million in 2005 and $6.8 million in 2004. The decrease in the provision for credit losses from 2005 to 2006 was primarily related to lower levels of net charge-offs, lower trends in historical net charge-offs as well as lower specific reserves for individual credits in certain marketing segments being reflected in the estimate of inherent losses in the portfolio. Non-interest income, primarily leasing revenues, totaled $53 million in 2006, up $5.5 million from $47.5 million in 2005. The increase in leasing and equipment finance revenues for 2006, compared with 2005, was primarily due to higher operating lease revenues, partially offset by lower sales-type lease revenues. Leasing and equipment finance revenues may fluctuate from period to period based on customer-driven factors not entirely within the control of TCF. Non-interest expense totaled $56.9 million in 2006, up $8.3 million from $48.6 million in 2005 primarily related to an increase in operating lease depreciation from 2005.
Net Interest Income Net interest income, the difference between interest earned on loans and leases, securities available for sale, investments and other interest-earning assets (interest income), and interest paid on deposits and borrowings (interest expense), represented 52.3% of TCFs total revenue in 2006, 52% in 2005 and 50.1% in 2004. Net interest income divided by average interest-earning assets is referred to as the net interest margin, expressed as a percentage. Net interest income and net interest margin are affected by changes in interest rates, loan and deposit pricing strategies and competitive conditions, the volume and the mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets.
The following tables summarize TCFs average balances, interest, dividends and yields and rates on major categories of TCFs interest-earning assets and interest-bearing liabilities.
bps = basis points.
(1) Tax-exempt income was not significant and thus yields on interest-earning assets and net interest margin have not been presented on a tax equivalent basis. Tax-exempt income of $1,209,000 and $954,000 was recognized during the years ended December 31, 2006 and 2005, respectively.
(2) Average balance and yield of securities available for sale are based upon the historical amortized cost.
(3) Average balance of loans and leases includes non-accrual loans and leases, and is presented net of unearned income.
(4) Includes operating leases.
(5) Average balance is a simple average of month-end balances.