TCF Financial 10-K 2009
Documents found in this filing:
Washington, D.C. 20549
Commission File No. 001-10253
TCF Financial Corporation
(Exact name of registrant as specified in its charter)
200 Lake Street East, Mail Code EX0-03-A,
Registrants telephone number, including area code: 952-745-2760
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 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. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of accelerated filer, large accelerated filer and smaller reporting company 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 Act).
Yes o No x
As of June 30, 2008, 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 registrants most recently completed second fiscal quarter as reported by the New York Stock Exchange, was $1,356,638,538.
As of January 31, 2009, there were 127,698,045 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 11, 2009 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 (TCF Bank), are headquartered in Minnesota and Arizona, respectively. TCF Bank operates bank branches in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana and Arizona (TCFs primary banking markets). TCFs focus is on the delivery of retail and commercial banking products in markets served by TCF Bank and commercial equipment loans and leases, and inventory finance loans throughout the United States and Canada.
At December 31, 2008, TCF had total assets of $17 billion and was the 38th largest publicly traded bank holding company in the United States based on total assets as of September 30, 2008. 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 and small business banking, commercial banking, consumer lending, leasing and equipment finance and inventory finance. The retail banking business includes traditional and supermarket branches, campus banking, EXPRESS TELLER® ATMs and Visa® cards. See Managements Discussion and Analysis of Financial Condition and Results of Operations Consolidated Financial Condition Analysis Operating Segment Results and Note 23 of Notes to Consolidated Financial Statements for information regarding TCFs reportable operating segments.
At December 31, 2008, TCF had 448 retail banking branches, consisting of 197 traditional branches, 236 supermarket branches and 15 campus branches. TCF operates 206 branches in Illinois, 111 in Minnesota, 56 in Michigan, 36 in Colorado, 27 in Wisconsin, seven in Arizona and five in Indiana.
In 2008, TCF focused on optimizing existing branches in target market areas. Targeted new branch expansion has been part of TCFs growth strategy. 115 new branches have been opened since January 1, 2003. During 2008, TCF opened 11 branches, consisting of five traditional branches and six supermarket branches. In 2007, TCF opened 20 branches, consisting of 10 traditional branches, seven supermarket branches and three campus branches.
TCF anticipates opening three new branches in 2009, consisting of one new traditional branch and two new supermarket branches and remodeling 28 supermarket branches. TCFs 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 TCFs 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, 2008, there were $218 million in campus deposits. TCF has a 25-year naming rights agreement with the University of Minnesota and will sponsor their new football stadium to be called TCF Bank Stadium. The new stadium is scheduled to open in September, 2009.
Non-interest income is a significant source of revenue for TCF and an important factor in TCFs results of operations. Increasing fee and service charge revenue has been challenging as a result of changing customer behavior and slower growth in deposit accounts. 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. TCF is also engaged in leasing and equipment finance and recently began inventory finance activities throughout the United States and Canada. 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.
TCFs consumer lending origination activity primarily consists of home equity real estate secured lending. It also includes originating 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 nor has it originated 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 which includes, to a lesser extent, commercial real estate construction loans, mainly 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. Substantially all of TCFs commercial business loans outstanding at December 31, 2008, 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. TCFs 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 with significant diversity in the types of underlying equipment. Winthrop Resources focuses on providing customized lease financing to meet the special needs of mid-size and large companies and health care facilities that procure high-tech equipment such as computers, servers, telecommunication and other technology equipment.
Inventory Finance In 2008, TCF created TCF Inventory Finance, Inc. (TCF Inventory Finance) to provide commercial inventory financing to retail businesses in the United States and Canada, initially focusing on the electronics and appliance markets. TCFs Inventory Finance business originates commercial variable rate loans which are secured by the underlying floorplanned equipment and supported by repurchase agreements from Original Equipment Manufacturers. TCF Inventory Finance commenced lending operations in December, 2008.
TCF Bank has authority to invest in various types of liquid assets, including United States Department of the Treasury (U.S. Treasury) obligations and securities of various federal agencies and U.S. Government sponsored enterprises, deposits of insured banks, bankers acceptances and federal funds. TCF Banks investments do not include commercial paper, asset-backed commercial paper, asset-backed securities secured by credit cards or car loans, trust preferred securities or preferred stock of Fannie Mae or Freddie Mac. TCF Bank also does not participate in structured investment vehicles and does not have any bank-owned life insurance. 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, 2008, interest-bearing deposits comprised 78% of total deposits, as compared with 77% at December 31, 2007.
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, advances from the Federal Reserve Discount Window 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 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. 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, junior subordinated notes (trust preferred) 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 business.
Inventory Finance See Item 1. Business-Lending Activities for information on TCFs inventory finance business.
Insurance and Investment Services Historically, TCF Investments sold a variety of investment products to its retail banking clients. TCF no longer sells investment and insurance products but will continue to service its existing customer base.
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 companies and commercial banks in the financing of equipment and inventory. Expanded use of the Internet has increased competition affecting TCF and its loan, lease and deposit products. Additionally, in 2008, several non-banking institutions became bank holding companies and began offering deposit products. The impact of this increased competition has not yet been determined.
Employees As of December 31, 2008, TCF had 7,802 employees, including 2,577 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, 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 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 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 TCF Financials ability to pay dividends is subject to limitations that may be imposed by the FRB. 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 and preferred stock, to make payments on TCF Financials borrowings, or for its other cash needs. The ability of TCF Financial and TCF Bank 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.
On November 14, 2008, TCF entered into a definitive agreement (the Agreement) with the U.S. Treasury to participate in the Capital Purchase Program (CPP). Due to TCFs participation in the CPP, TCF may not repurchase common shares or increase its dividend for three years from the date of the Agreement unless the preferred shares sold to the U.S. Treasury have been redeemed in whole or transferred to a third party which is not an affiliate of TCF. See Note 13 of Notes to Consolidated Financial Statements for additional CPP information.
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 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 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 Managements 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 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 Board of Directors must cause the sale of the shareholders stock at public auction 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), 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 contains 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 The deposits of TCF Bank have historically been 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. On October 3, 2008, the maximum amount insured under FDIC deposit insurance was temporarily increased from $100,000 to $250,000 per insured depositor through December 31, 2009. This increase was part of the Emergency Economic Stabilization Act of 2008. Additionally, TCF has elected to participate in the FDICs Temporary Liquidity Guarantee Program. Under this program, all non-interest bearing deposit transaction accounts at TCF with balances over $250,000 will also be fully insured through December 31, 2009 at an additional cost to TCF of 10 basis points per dollar over $250,000 on a per account basis.
The FDIC has set a designated reserve ratio of 1.25% ($1.25 against $100 of insured deposits) for the Deposit Insurance Fund (DIF). The Federal Deposit Insurance Act of 2005 (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, 2008. The DIF reserve ratio calculated by the FDIC that was in effect at December 31, 2008 was .76%.
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 and 2008, 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.
The FDIC Act required the FDIC to establish a one-time historical assessment credit that provides banks a credit that could be used to offset insurance assessments. This one-time historical assessment credit was established to benefit banks that had funded 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. TCF Banks 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 was completely used in 2008 and only partially offset 2008 assessments. As a result, TCFs Federal deposit insurance expense increased in 2008 and will increase further in 2009.
As required by law, in October 2008, the FDIC Board adopted a restoration plan that would increase the reserve ratio to the 1.15% threshold within five years. As part of that plan, in December, 2008, the FDIC Board of Directors voted to increase risk-based assessment rates uniformly by seven cents, on an annual basis, for the first quarter of 2009 due to deteriorating financial conditions in the banking industry.
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 2008 ranged from $.0110 to $.0114 per $100 of deposits. Financing Corporation assessments of $1.1 million were paid by TCF Bank for 2008, 2007 and 2006, respectively, and are included in other expense.
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. Under the Bank Secrecy Act, USA Patriot Act and other statutes, 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 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.
Federal Taxation The statute of limitations on TCFs consolidated federal income tax return is closed through 2004.
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, 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 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 the 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 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 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. 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 Companys enterprise risk management governance process.
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 and counterparties 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 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 Companys 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 issued and guaranteed by Fannie Mae or 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, 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 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 to estimate probable impact on payment performance under various expected or unexpected scenarios.
With deteriorating economic conditions throughout 2008 and into 2009, credit risk may continue to increase. A weakening economy, increasing unemployment or further deterioration of housing markets could result in increased credit losses.
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 (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 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, 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, 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. 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.
TCF maintains diverse sources of funding, which include $2.3 billion in secured borrowings capacity at the Federal Home Loan Bank (FHLB) of Des Moines, $616 million of secured borrowing capacity at the Federal Reserve Discount Window and $1 billion in unsecured and uncommitted available lines. TCF has developed and maintains a contingency funding plan should certain liquidity needs arise.
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. 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. Recently, the FHLB system has experienced financial stress, and some of the regional banks within the FHLB system have suspended or reduced their dividends, or eliminated the ability of members to redeem capital stock. The ultimate impact of these developments on the FHLB system or its programs for advances to members is not clear. TCFs investments in the FHLB and ability to obtain FHLB funds could be adversely impacted if the financial health of the FHLB system worsens.
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 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 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.
Declines in Home Values Declines in home values in TCFs markets have adversely impacted results of operations. Like all banks, TCF is subject to the effects of any economic downturn, and in particular, a continued decline in home values in TCFs markets could have a further 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.
Economic Conditions In addition to the declines in home values, the slowing economy has also adversely impacted TCFs results of operations. Continued slowing of the economy coupled with increased unemployment and decreased consumer spending could have a further negative effect on results of TCFs operations through higher credit losses, lower transaction related revenues and lower average deposit balances.
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 deposit account customers.
Card Revenue Future card revenues may be impacted by class action litigation against Visa USA Inc. (Visa USA) and MasterCard®. Under Visa USAs Bylaws, TCF has a contingent obligation to indemnify Visa USA for certain litigation unrelated to TCF. See page 26 under Managements Discussion and Analysis for details of TCFs 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 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.
New Branch Expansion 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 adequate new branch sites is significant.
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. In the third quarter of 2008, TCF entered into agreements with SUPERVALU INC. to extend the terms of master and license agreements for its supermarket branches in Minnesota, Illinois, Wisconsin and Indiana to December 31, 2018. At December 31, 2008, TCF had 236 supermarket 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, or financial or labor difficulties in the supermarket industry may reduce activity in TCFs supermarket branches.
Leasing and Equipment Finance Activities TCFs leasing and equipment finance activities are subject to 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. TCF seeks to mitigate its overall exposure to lessors 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.
Inventory Finance TCF has strategic and execution risk associated with starting the new inventory finance business as the ability to attract and retain manufacturers and dealers may not achieve expectations. The core operating risks of this business are similar to other existing TCF businesses.
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 TCFs results of operations. If TCFs Real Estate Investment Trust (REIT) affiliate fails to qualify as a REIT, or should states enact legislation taxing REITs or related entities, TCFs tax expense would increase. 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. Additional unfavorable law changes or unfavorable audit results could increase TCFs income taxes. See Managements Discussion and Analysis of Financial Condition and Results of Operations Consolidated Income Statement Analysis Income Taxes and Note 12 of Notes to Consolidated Financial Statements 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 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 TCFs 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. 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. Financial institutions have also 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. Treasurys 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 accounts. Failure to comply with these regulations could result in fines and/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 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, 2008, TCF owned the buildings and land for 139 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 285 bank branch offices, all of which are well maintained. Bank branch properties owned by TCF had an aggregate net book value of approximately $277.6 million at December 31, 2008. At December 31, 2008, the aggregate net book value of leasehold improvements associated with leased bank branch office facilities was $34.7 million. In addition to the branch offices, TCF owned and leased other facilities with an aggregate net book value of $42.8 million at December 31, 2008. 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 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, 2009, there were 7,795 holders of record of TCFs common stock.
The Board of Directors of TCF Financial has adopted a Capital Plan and Dividend Policy. The policy defines how enterprise risk related to capital will be managed, how the adequacy of capital will be measured and the process by which capital strategy, management and common stock dividend recommendations will be presented to TCFs Board of Directors. TCFs management is charged with ensuring that capital strategy actions, including the declaration of common stock dividends, are prudent, efficient and provide value to TCFs shareholders, while ensuring that past and prospective earnings retention is consistent with TCFs capital needs, asset quality and overall financial condition. 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. On November 14, 2008, TCF entered into a definitive agreement with the U.S. Treasury to participate in the CPP. Due to TCFs participation in the CPP, TCF may not increase its dividend for three years from the date of the Agreement unless the preferred shares sold to the U.S. Treasury have been redeemed in whole or transferred to a third party which is not an affiliate of TCF. See Note 13 of Notes to Consolidated Financial Statements for additional CPP information. The declaration and amount of future dividends will depend on circumstances existing at the time, including TCFs earnings, level of internally generated common capital excluding 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 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, 2003 and reinvestment of all dividends).
TCF Stock Performance Chart
(1) Includes every bank and thrift in the U.S. traded on a major public exchange, a total of 562 companies as of December 31, 2008.
(2) Consists of the 30 publicly-traded banks and thrifts, 15 of which are immediately larger than and 15 of which are immediately smaller than TCF Financial Corporation in total assets as of September 30, 2008, as follows: Zions Bancorporation; Hudson City Bancorp, Inc.; Popular, Inc.; Synovus Financial Corp.; First Horizon National Corporation; New York Community Bancorp, Inc.; Colonial BancGroup, Inc.; Associated Banc-Corp; BOK Financial Corporation; Astoria Financial Corporation; Peoples United Financial Corporation; First BanCorp.; Webster Financial Corporation; Commerce Bancshares, Inc.; First Citizens BancShares, Inc.; City National Corporation; Fulton Financial Corporation; Guaranty Financial Group, Inc.; Valley National Bancorp; Flagstar Bancorp, Inc.; Cullen/Frost Bankers, Inc.; South Financial Group, Inc.; Susquehanna Bancshares, Inc.; BancorpSouth, Inc.; Citizens Republic Bancorp, Inc.; UCBH Holdings, Inc.; Sterling Financial Corporation; Wilmington Trust Corporation; Washington Federal, Inc.; and East West Bancorp, Inc. Five of the companies, which were in the 2007 TCF Peer Group, are not in the 2008 TCF Peer Group due to the failure of the company or changes in asset size. Those five companies are: IndyMac Bancorp, Inc.; BankUnited Financial Corporation; Downey Financial Corp.; International Bancshares Corporation; and Whitney Holding Corporation.
Source: SNL Financial LC and Standard & Poors © 2009
Due to TCFs participation in the CPP, TCF may not repurchase shares of common stock for three years from the date of the Agreement unless the preferred shares sold to the U.S. Treasury have been redeemed in whole or transferred to a third party which is not an affiliate of TCF.
The following table summarizes share repurchase activity for the quarter ended December 31, 2008.
N.A. Not Applicable.
(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 TCFs common stock outstanding at the time of the authorization, or 6.5 million shares. This authorization does not have an expiration date.
(2) 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.
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.
N.M. Not Meaningful.
Managements discussion and analysis of the consolidated financial condition and results of operations of TCF Financial Corporation should be read in conjunction with the consolidated financial statements in Item 8 and selected financial data in Item 6.
TCF Financial Corporation, a Delaware corporation, is a financial holding company based in Wayzata, Minnesota. Its principal subsidiaries, TCF National Bank and TCF National Bank Arizona, are headquartered in Minnesota and Arizona, respectively. TCF had 448 banking offices in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana and Arizona at December 31, 2008.
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, acquisitions 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 and small business banking, commercial banking, consumer lending, leasing and equipment finance and inventory finance. The retail banking business includes traditional and supermarket branches, campus banking, EXPRESS TELLER® ATMs and Visa® cards.
TCFs lending strategy is to originate high credit quality, primarily secured, loans and leases. 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. 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. TCFs leasing and equipment finance businesses have equipment installations in all 50 states and, to a limited extent, in foreign countries. In December, 2008, TCF Inventory Finance commenced lending operations to provide inventory financing to businesses in the United States and Canada.
Historically TCF originated education loans for resale. As a result of Federal law changes and general market conditions, TCF no longer originates education loans.
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 54.4% of TCFs total revenue in 2008. 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. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk for further discussions.
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 the number of deposit accounts and related transaction activity. Increasing fee and service charge revenue has been challenging as a result of slower growth in deposit accounts and changing customer behaviors. 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 12th largest issuer of Visa Classic debit cards in the United States, based on sales volume for the three months ended September 30, 2008 as published by Visa. TCF earns interchange revenue from customer card transactions paid primarily by merchants, not TCFs customers. These products represent 23.9% of banking fee revenue for the year ended December 31, 2008, and change based on customer payment trends and the number of deposit accounts using the cards. Visa has significant litigation against it regarding interchange pricing and there is a risk this revenue could be impacted by any settlement or adverse rulings in such litigation. See Item 1A. Risk Factors Card Revenue for further discussion.
The following portions of Managements Discussion and Analysis of Financial Condition and Results of Operations focus in more detail on the results of operations for 2008, 2007 and 2006 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 $1.01 for 2008, compared with $2.12 for 2007 and $1.90 for 2006. Net income was $129 million for 2008, compared with $266.8 million for 2007 and $244.9 million for 2006. Net income for 2007 included $37.9 million in pre-tax gains on sales of branches and real estate. TCF recorded $192 million in the provision for credit losses for 2008, compared with $57 million for 2007 and $20.7 million for 2006.
Return on average assets was .79% in 2008, compared with 1.76% in 2007 and 1.74% in 2006. Return on average common equity was 11.46% in 2008, compared with 25.82% in 2007 and 24.37% in 2006. The effective income tax rate for 2008 was 37.3%, compared with 28.4% in 2007 and 31.4% in 2006.
Operating Segment Results BANKING Consisting of deposits, investment products, commercial banking, small business banking, consumer lending and treasury services, reported net income of $105.3 million for 2008, down 54.6% from $232.1 million in 2007. Banking net interest income for 2008 was $514.6 million, up 6% from $485.5 million for 2007.
The banking provision for credit losses totaled $174.9 million in 2008, up from $51.7 million in 2007. This increase was primarily due to higher consumer home equity net charge-offs and the resulting portfolio reserve rate increases and higher reserves and charge-offs for certain commercial loans, primarily in Michigan. Refer to the Consolidated Income Statement Analysis Provision for Credit Losses section for further discussion.
Banking non-interest income totaled $434 million in 2008, down from $443.5 million in 2007, excluding the 2008 gain on Visa share redemption and the 2007 gains on sales of branches and real estate. Fees and service charges were $270.7 million for 2008, down 2.6% from $278 million in 2007, primarily due to lower activity in deposit service fees. Card revenues were $103.1 million for 2008, up 4.2% from $98.9 million in 2007. The increase in card revenues was primarily attributable to increases in transactions per active card. See Consolidated Income Statement Analysis Non-Interest Income for further discussion.
Banking non-interest expense totaled $619 million in 2008, up 4.1% from $594.7 million in 2007. The increase was primarily due to a $12 million increase in deposit account premium expenses from new marketing campaigns which resulted in increased checking account production along with an increase in foreclosed real estate expense due to increased property taxes and higher real estate disposition losses in 2008.
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 $30.3 million for 2008, down 12.4% from $34.6 million in 2007. Net interest income for 2008 was $79.8 million, up 22.1% from $65.4 million in 2007.
The provision for credit losses for this operating segment totaled $17.2 million in 2008, up from $5.3 million in 2007. The increase in the provision for credit losses from 2007 to 2008 was primarily due to increased net charge-offs, which included a $2.1 million one-time recovery of a previously charged-off lease in 2007, and increased delinquency and non-accrual loans and leases.
Leasing and equipment finance non-interest income totaled $55.5 million in 2008, down $3.6 million from $59.2 million in 2007. The decrease in leasing and equipment finance revenues for 2008, compared with 2007, was primarily due to a decrease in sales-type lease and operating lease revenues.
Leasing and equipment finance non-interest expense totaled $68.5 million in 2008, up $3.2 million from $65.4 million in 2007, primarily related to a $1.2 million net effect of foreign exchange losses in 2008 on foreign denominated loans compared with foreign exchange gains in 2007 and an increase of $1.3 million in expenses associated with repossessed assets.
OTHER Other includes the holding company and corporate functions that provide data processing, bank operations and other professional services to the operating segments and beginning in 2008 includes $5.2 million of costs for TCFs new inventory finance business. 2008 also included a $1.5 million charge recorded to income tax expense related to the distributions from the companys deferred compensation plans.
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 54.4% of TCFs total revenue in 2008, 50.4% in 2007 and 52.3% in 2006. 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 prevaling short and long-term 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 $1,679,000 and $1,933,000 was recognized during the years ended December 31, 2008 and 2007, respectively.
(2) Average balance and yield of securities available for sale are based upon the historical amortized cost.
(3) Certain variable-rate loans have contractural interest rate floors.
(4) Average balance of loans and leases includes non-accrual loans and leases, and is presented net of unearned income.
(5) Includes operating leases