UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2005

 

or

 

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

 

Commission File No. 001-10253

 

 

TCF Financial Corporation

(Exact name of registrant as specified in its charter)

 

DELAWARE		41-1591444
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

 

200 Lake Street East, Mail Code EX0-03-A,

Wayzata, Minnesota 55391-1693

(Address and zip code of principal executive offices)

 

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

 

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

(all registered on the New York Stock Exchange):

Common Stock (par value $.01 per share)

Preferred Share Purchase Rights (Title of class)

 

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

Yes  ý  No  o

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ý  No  o

 

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 January 31, 2006, the aggregate market value of the voting stock held by nonaffiliates of the registrant, computed by reference to the average of the high and low prices on such date as reported by the New York Stock Exchange, was $2,833,244,430

 

As of January 31, 2006, there were 133,350,930 shares outstanding of the registrant’s common stock, par value $.01 per share, its only outstanding class of common stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Specific portions of the registrant’s definitive proxy statement dated March 8, 2006 are incorporated by reference into Part III hereof.

 

 

Table of Contents

 

	Description	Page
Part I
Item 1.	Business	1
Item 1A.	Risk Factors	8
Item 1B.	Unresolved SEC Staff Comments	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	12
Item 4.	Submission of Matters to a Vote of Security Holders	12
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13
Item 6.	Selected Financial Data	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 8.	Financial Statements and Supplementary Data	41
	Report of Independent Registered Public Accounting Firm	41
	Consolidated Financial Statements	42
	Notes to Consolidated Financial Statements	46
	Other Financial Data	71
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	72
Item 9A.	Controls and Procedures	72
	Management’s Report on Internal Control over Financial Reporting	72
	Report of Independent Registered Public Accounting Firm	73
Item 9B.	Other Information	73
Part III
Item 10.	Directors and Executive Officers of the Registrant	74
Item 11.	Executive Compensation	74
Item 12.	Security Ownership of Certain Beneficial Owners and Management	74
Item 13.	Certain Relationships and Related Transactions	74
Item 14.	Principal Accounting Fees and Services	74
Part IV
Item 15.	Exhibits and Financial Statement Schedules	75
Signatures		76
Index to Exhibits		77

 

 

Part I

 

Item 1. Business

 

General

 

TCF Financial Corporation (“TCF” or the “Company”) is a Delaware national financial holding company based in Wayzata, Minnesota. Its principal subsidiary, TCF Bank^®, is headquartered in Minnesota and operates in Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana. At December 31, 2005, TCF had total assets of $13.4 billion and was the 48th largest publicly traded bank holding company in the United States based on total assets as of September 30, 2005. Unless otherwise indicated, references herein to “TCF” include its direct and indirect subsidiaries. References herein to the “Holding Company” or “TCF Financial” refer to TCF Financial Corporation on an unconsolidated basis.

 

TCF’s core businesses include retail banking; commercial banking; small business banking; consumer lending; leasing and equipment finance; and investments, securities brokerage and insurance services. The retail banking business includes traditional and supermarket branches, campus banking, Express Teller^® ATMs and Visa U.S.A. Inc. (“Visa”) cards. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Financial Condition Analysis – Operating Segment Results” and Note 24 of Notes to Consolidated Financial Statements for information regarding TCF’s reportable operating segments.

 

Retail Banking

 

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

 

At December 31, 2005, TCF had 453 retail banking branches, comprised of 190 traditional branches, 254 supermarket branches and nine campus branches. TCF operated 105 branches in Minnesota, 202 in Illinois, 63 in Michigan, 35 in Wisconsin, 42 in Colorado and six in Indiana.

 

Targeted new branch expansion is a key strategy for TCF. TCF has significantly expanded its banking franchise in recent years. 153 new branches have been opened since January 1, 2000. During 2005, TCF opened 28 new branches, consisting of 18 new traditional branches, seven new supermarket branches and three new campus branches. TCF anticipates opening 24 new branches in 2006, consisting of 17 new traditional branches, five new supermarket branches and two new campus branches. During the fourth quarter of 2005, TCF announced plans to enter the Phoenix, Arizona metropolitan area market. Initially, TCF plans to open several consumer loan production offices during 2006 with construction of retail branches to begin later in 2006 or early 2007. The success of TCF’s branch expansion is dependent on the continued long-term success of branch banking.

 

Campus banking represents an important part of TCF’s retail banking business. TCF has alliances with the University of Minnesota, the University of Michigan and nine other colleges. These alliances consist of exclusive marketing and naming rights agreements. Branches have been opened on many of these college campuses. TCF provides multi-purpose campus cards for these colleges. These cards serve as a school identification card, ATM card, library card, security card, and stored value card for vending machines or similar uses. In 2005, TCF entered into a naming rights agreement to sponsor a new University of Minnesota football stadium to be called “TCF Bank Stadium^SM.”

 

Non-interest income is a significant source of revenue for TCF and an important factor in TCF’s results of operations. A key driver of non-interest income growth is growth in checking accounts. In addition to low or non-interest bearing deposit balances, these accounts generate significant fee revenue for TCF. Providing a wide range of retail banking services is an integral component of TCF’s business philosophy and a major strategy for generating additional non-interest income. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement and Analysis – Non-Interest Income” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Information” for additional information.

 

TCF strives to develop innovative banking products and services. In 2003, TCF introduced TCF Check Cashing^SM, a convenient, economical and full-service check cashing service for non-bank customers. In addition to providing a valuable customer service, the product also gives TCF an opportunity to introduce these customers to its checking account products. In 2004, TCF created Premier checking and Premier savings accounts with high interest rates and other valuable features. Also in 2004, TCF created the TCF Miles Plus^SM card, a free non-revolving credit card that is attached to a Premier checking account. This free card offers points that may be redeemed for airline travel on virtually any airline, anytime, anywhere with the option to use points to purchase merchandise from a leading internet retailer. In 2004,

 

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TCF began selling Visa gift cards in its branches. These cards can be used at all merchants that accept Visa. In 2005, TCF began selling gift cards on its TCFEXPRESS^® website and added the TCF Miles Plus Business Check Card^SM to small business checking accounts. Also in 2005, TCF began selling TCF Index Investment Strategies^™, a series of low-cost domestic index funds developed for our investment customers.

 

Lending Activities

 

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

 

Consumer Lending TCF makes consumer loans for personal, family or household purposes, such as home purchases, debt consolidation or the financing of home improvements, automobiles, vacations and education. Consumer loans totaled $5.2 billion at December 31, 2005, with $3.2 billion, or 62%, having fixed interest rates and $2 billion, or 38%, having variable interest rates tied to the prime rate.

 

TCF’s consumer lending activities primarily include 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 $229.8 million of education loans held for sale at December 31, 2005, compared with $154.3 million at December 31, 2004. TCF generally retains the education loans it originates until they are fully disbursed. Under an agreement with SLM Corporation (“SLM”), TCF can sell the education loans to SLM once they are fully disbursed, but must sell the education loans to SLM before they go into repayment status. These loans are originated in accordance with designated guarantor and U.S. Department of Education guidelines and do not involve any independent credit underwriting by TCF.

 

Commercial Real Estate Lending TCF originates loans secured by commercial real estate including, to a lesser extent, commercial real estate construction loans, generally to borrowers based in its primary markets. At December 31, 2005, commercial real estate loans totaled $2.3 billion. At December 31, 2005, variable- and adjustable-rate loans represented 78% of commercial real estate loans outstanding. At December 31, 2005, TCF’s commercial construction and development loan portfolio totaled $179.5 million.

 

Commercial Business Lending Commercial business loans are generally secured by various types of business assets, including commercial real estate, and in some cases may be made on an unsecured basis. TCF’s commercial business lending activities encompass loans with a broad variety of purposes, including working capital loans and loans to finance the purchase of equipment or other acquisitions.

 

TCF concentrates on originating commercial business loans to middle-market companies based in its primary markets with borrowing requirements of less than $25 million. Substantially all of TCF’s commercial business loans outstanding at December 31, 2005 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, 2005, TCF’s leasing and equipment finance portfolio was $1.5 billion, including $387.2 million of loans and $1.1 billion of leases. TCF’s leasing and equipment finance businesses, TCF Equipment Finance, Inc. (“TCF Equipment Finance”) and Winthrop Resources Corporation (“Winthrop”), operate in all 50 states and source equipment installations domestically and to a limited extent in foreign countries. TCF Equipment Finance delivers equipment finance solutions to small and mid-size companies, including emerging growth companies, vendor partnerships and franchise organizations. Winthrop primarily leases technology and data processing equipment to larger companies nationwide. In March 2004, TCF Equipment Finance acquired VGM Financial Services (“VGM”), a company specializing in home medical equipment financing.

 

TCF funds most of its leases internally, and consequently retains the credit risk on such leases. TCF also may arrange financing of certain leases through non-recourse discounting of lease rentals with various other financial institutions at fixed interest rates. At December 31, 2005, $55.2 million, or 4.7%, of TCF’s lease portfolio, including operating leases, was discounted on a non-recourse basis with other financial institutions.

 

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TCF’s leasing and equipment finance businesses also invest in limited partnerships that are formed to invest in qualified affordable housing projects. Leasing and equipment finance had $43.7 million and $46.7 million invested in affordable housing limited partnerships at December 31, 2005 and 2004, respectively. For more information on investments in affordable housing limited partnerships, see Note 1 of the Notes to Consolidated Financial Statements.

 

Residential Mortgage Lending In 2004, TCF restructured its mortgage banking business by ceasing wholesale originations and downsizing and integrating its retail origination function with TCF’s consumer lending business. TCF’s mortgage banking subsidiary no longer originates new loans. TCF continues to service a remaining portfolio of mortgage loans for third-party investors. At December 31, 2005, 2004 and 2003, TCF serviced residential mortgage loans for others totaling $3.4 billion, $4.5 billion and $5.1 billion, respectively. In January 2006, TCF entered into an agreement to sell its third-party mortgage servicing rights for an amount in excess of carrying value.

 

Investment Activities

 

TCF Bank has authority to invest in various types of liquid assets, including United States Treasury obligations and securities of various federal agencies and U.S. Government sponsored enterprises, deposits of insured banks, bankers’ acceptances and federal funds. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the returns on loans and leases. TCF Bank must also meet reserve requirements of the Federal Reserve Board (“FRB”), which are imposed based on amounts on deposit in various deposit categories.

 

Sources of Funds

 

Deposits Deposits are the primary source of TCF’s funds for use in lending and for other general business purposes. Deposit inflows and outflows are significantly influenced by economic and competitive conditions, interest rates, money market conditions and other factors. Consumer, small business and commercial deposits are attracted principally from within TCF’s primary market areas through the offering of a broad selection of deposit instruments including consumer, small business and commercial demand deposit accounts, interest-bearing checking accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans.

 

TCF’s marketing strategy emphasizes attracting core deposits held in checking, savings, money market and certificate of deposit accounts. These accounts are a source of low-interest cost funds and provide significant fee income. The composition of TCF’s deposits has a significant impact on the overall cost of funds. At December 31, 2005, interest-bearing deposits comprised 73% of total deposits, as compared with 70% at December 31, 2004.

 

Information concerning TCF’s deposits is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Financial Condition Analysis – Deposits” and in Note 10 of Notes to Consolidated Financial Statements.

 

Borrowings Borrowings may be used to compensate for reductions in normal sources of funds, such as deposit inflows at less than projected levels or net deposit outflows, or to support expanded lending activities. These borrowings include Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, subordinated bank notes and other borrowings.

 

TCF Bank, as a member of the FHLB system, is required to own a minimum level of FHLB stock and is authorized to apply for advances on the security of such stock, mortgage-backed securities, loans secured by real estate and other assets (principally securities which are obligations of, or guaranteed by, the United States Government), provided certain standards related to creditworthiness have been met. TCF’s FHLB advances totaled $1.1 billion at December 31, 2005, compared with $1.6 billion at December 31, 2004. FHLB advances are made pursuant to several different credit programs. Each credit program has its own interest rates and range of maturities. The FHLB prescribes the acceptable uses to which the advances pursuant to each program may be made as well as limitations on the size of advances. Acceptable uses prescribed by the FHLB include meeting short-term liquidity needs. In addition to the program limitations, the amounts of advances for which an institution may be eligible are generally based on the FHLB’s assessment of the institution’s creditworthiness.

 

As an additional source of funds, TCF may sell securities subject to its obligation to repurchase these securities under repurchase agreements with major investment banks or the FHLB utilizing government securities or mortgage-backed securities as collateral. Repurchase agreements totaled $1.4 billion at December 31, 2005, compared with $1.2 billion at December 31, 2004. 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

 

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of the counterparty is important in establishing that the overcollateralized amount of securities delivered by TCF is protected and TCF enters into repurchase agreements only with institutions with a satisfactory credit history.

 

During 2005, TCF Bank issued $50 million of subordinated notes due in 2015. During 2004, TCF Bank issued $75 million of subordinated notes due in 2014. In February 2006, TCF Bank issued $75 million of subordinated notes due in 2016. These notes qualify as Tier 2 or supplemental capital for regulatory purposes, subject to certain limitations.

 

Information concerning TCF’s FHLB advances, repurchase agreements, subordinated notes and other borrowings is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Financial Condition Analysis – Borrowings” and in Notes 11 and 12 of Notes to Consolidated Financial Statements.

 

Other Information

 

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

 

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

 

Insurance and Investment Services TCF Financial Insurance Agency, Inc. is an insurance agency engaging in the sale of fixed-rate, single premium tax-deferred annuities and life insurance products. TCF Investments, Inc. engages in the sale of non-proprietary mutual fund products; in the sale of variable-rate, single premium tax-deferred annuities; and online and broker-assisted securities sales activity.

 

Mortgage Servicing TCF Mortgage Corporation services a portfolio of residential mortgage loans for third-party investors.

 

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 therefore included in the consolidated financial statements of TCF Financial Corporation. TCF’s FOC operates under laws in certain states (including Minnesota and Illinois) that allow deductions for income derived from FOCs.

 

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 other 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 high-technology and other equipment. Expanded use of the internet has increased potential competition affecting TCF and its loan, lease and deposit products.

 

Employees As of December 31, 2005, TCF had 8,572 employees, including 2,835 part-time employees. TCF provides its employees with a comprehensive program of benefits, some of which are provided on a contributory basis, including comprehensive medical and dental plans, a 401(k) savings plan with a company matching contribution, life insurance and short- and long-term disability coverage.

 

Regulation

 

The banking industry is generally subject to extensive regulatory oversight. TCF Financial, as a publicly held financial holding company, and TCF Bank, as a national bank with deposits insured by the Federal Deposit Insurance Corporation (“FDIC”), are subject to a number of laws and regulations. Many of these laws and regulations have undergone significant change in recent years. These laws and regulations impose restrictions on activities, minimum capital requirements, lending and deposit restrictions and numerous other requirements. Future changes to these laws and regulations, and other new financial services laws and regulations, are likely and cannot be predicted with certainty. TCF Financial’s primary regulator is the FRB and TCF Bank’s primary regulator is the Office of the Comptroller of the Currency (“OCC”).

 

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Regulatory Capital Requirements TCF Financial and TCF Bank are subject to regulatory capital requirements of the FRB and the OCC, respectively. These requirements are 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 activity restrictions. Undercapitalized banks must also 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 or future rulemaking or policies of their regulatory authorities or by unanticipated losses or lower levels of earnings.

 

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

 

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

 

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

 

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 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 and proper incidents to the business of banking.

 

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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 branch is 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 are insured by the FDIC up to $100,000 per insured depositor. Substantially all of TCF’s deposits are Savings Association Insurance Fund (“SAIF”) insured, but TCF also has deposits insured by the Bank Insurance Fund (“BIF”). The FDIC establishes deposit insurance rates to maintain a mandated designated reserve ratio of 1.25% ($1.25 against $100 of insured deposits). The reserve ratio calculated by the FDIC that was in effect at December 31, 2005 was 1.26% for BIF and 1.32% for SAIF. The FDIC has established a risk-based deposit insurance assessment under which deposit insurance assessments are based upon an institution’s capital strength and supervisory condition, as determined by the institution’s primary regulator. The annual insurance premiums on bank deposits insured by the BIF and SAIF may vary 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 for 2005, 2004, and 2003. If the designated reserve ratio falls below the ratio set by the FDIC, the FDIC may be required to increase deposit insurance rates sufficient to maintain the designated level. An increase in deposit insurance rates could have a material adverse effect on TCF, depending on the amount and duration of the increase.

 

In addition to risk-based deposit insurance assessments, assessments may be imposed on deposits insured by either the BIF or the SAIF to pay for the cost of Financing Corporation (“FICO”) funding. FICO assessment rates for 2005 ranged from $.0134 to $.0144 per $100 of deposits annually for both BIF-assessable and SAIF-assessable deposits. FICO assessments of $1.1 million, $1.1 million and $1.2 million were paid by TCF Bank and recorded in other expense for 2005, 2004 and 2003, respectively.

 

In addition, the FDIC is authorized to terminate a depository institution’s deposit insurance if it finds that the institution is being operated in an unsafe and unsound manner or has violated any rule, regulation, order or condition administered by the institution’s regulatory authorities. Any such termination of deposit insurance is likely to 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.

 

In February 2006, the President signed legislation reforming the bank deposit insurance system. This reform merges the BIF and SAIF, increases the deposit insurance coverage limits for retirement accounts and indexes future coverage limitations, among other changes. Most significantly, the legislation could allow the FDIC to raise or lower the designated reserve ratio between 1.15% and 1.50%. It also allows for a one-time credit to be used against premiums due, awards dividends when the designated reserve ratio goes above 1.35%, and requires certain changes in the calculation methodology. It is too early to predict the ultimate impact of the legislation until regulations are issued, but it could result in the imposition of additional deposit insurance premium costs for TCF.

 

Examinations and Regulatory Sanctions TCF is subject to periodic examination by the FRB, OCC and the FDIC. Bank regulatory authorities may impose on institutions found to be operating in an unsafe or unsound manner a number of restrictions or new requirements, 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

 

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and equity securities. Various enforcement remedies, including civil money penalties, may be assessed against an institution or an institution’s directors, officers, employees, agents or independent contractors.

 

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

 

Future Legislative and Regulatory Change; Litigation and Enforcement Activity There are a number of respects in which future legislative or regulatory change, or changes in enforcement practices or court rulings, could adversely affect TCF, and it is generally not possible to predict when or if such changes may have an impact on TCF. TCF’s non-interest income in future periods may be negatively impacted by pending state and federal legislative proposals which, if enacted, could limit loan, deposit or other fees and service charges. Financial institutions have increasingly been the subject of class action lawsuits or in some cases regulatory actions challenging a variety of practices involving consumer lending and retail deposit-taking activity.

 

The Community Reinvestment Act (“CRA”) and fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice (“DOJ”) and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.

 

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

 

Taxation

 

Federal Taxation The 3-year statute of limitations on TCF’s consolidated Federal income tax return is closed through 2001, with the exception of certain filed refund claims.

 

State Taxation TCF and/or its subsidiaries currently file tax returns in all states which impose corporate income and franchise taxes and local tax returns in certain cities and other taxing jurisdictions. TCF’s primary banking activities are in the states of Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana. The tax rates in those jurisdictions are 9.8%, 7.3%, 1.9%, 7.9%, 4.6% and 8.5%, respectively. The methods of filing, and the methods for calculating taxable and apportionable income, vary depending upon the laws of the taxing jurisdiction. See “Risk Factors.”

 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Income Taxes” and Notes 1 and 13 of Notes to Consolidated Financial Statements for additional information regarding TCF’s income taxes.

 

Available Information

 

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

 

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

 

7

 

Item 1A. Risk Factors

 

Enterprise Risk Management

 

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

 

In defining the Company’s risk profile, management organizes risks into three main categories: Credit Risk, Market Risk (which includes interest-rate risk, liquidity risk, and price risk) and Operational Risk (which includes transaction risk and compliance risk). Policies, systems and procedures have been adopted 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 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. These committees 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 provides a unified view of risk on an enterprise-wide basis.

 

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

 

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

 

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

 

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

 

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

 

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

 

Interest-Rate Risk Interest-rate risk is defined as the exposure of net interest income and fair value of financial instruments to adverse movements in interest rates. Interest-rate risk arises

 

8

 

mainly from the structure of the balance sheet. The primary goal of interest-rate risk management is to control exposure to interest-rate risk within acceptable tolerances established by ALCO and the Board of Directors.

 

The major sources of the Company’s interest-rate risk are timing differences in the maturity and repricing characteristics of assets and liabilities, changes in relationships between rate indices (basis risk) 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 TCF’s interest-rate risk, gap analysis and simulation analysis.

 

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

 

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

 

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

 

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

 

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

 

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

 

Other Market Risks Other sources of market risk include the Company’s investment in mortgage servicing rights and FHLB stock. Mortgage servicing rights are the discounted present value of future net cash flows that are expected to be received from the mortgage servicing portfolio. The value of the mortgage servicing rights asset is dependent on the assumed prepayment speed of the mortgage servicing portfolio. Future expected net cash flows from servicing a loan in the mortgage serving portfolio would

 

9

 

not be realized if the loan pays off earlier than anticipated. Accordingly, prepayment risk subjects the mortgage servicing rights to impairment risk. The Company does not specifically hedge the mortgage servicing rights asset for the potential impairment risk.

 

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

 

The Company’s Internal Audit Department periodically assesses the adequacy and effectiveness of the Company’s processes for controlling and managing risks in all the core areas of operations. This includes determining whether internal controls and information systems are properly designed and adequately tested and reviewed. This also includes determining whether the system of internal controls over financial reporting is appropriate for the type and level of risks posed by the nature and scope of the company’s activities. Audit plans are prepared using a risk-based methodology as well as any concerns identified by management, the Audit Committee, regulators or the Company’s independent registered public accounting firm. Significant issues related to the adequacy of controls, together with recommendations for improvements to those controls, are reported to management and the Audit Committee.

 

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

 

Other Risks

 

Customer Behavior Changes in customers’ behavior regarding use of checking 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 checking accounts and depends on low-cost checking accounts as a significant source of funds. In addition, competition from other financial institutions could result in higher numbers of closed accounts and increased account acquisition costs. TCF actively monitors customer behavior and adjusts policies and marketing efforts accordingly to attract new and retain existing checking account customers.

 

New Branch Expansion Opening new branches is an integral part of TCF’s growth strategy for generating new customers, deposit accounts and loans and the related revenue. The success of TCF’s branch expansion is dependent on the continued success of branch banking in attracting new customers and business. Many other financial institutions are also opening new branches, and the competition from them and other retailers for new branch sites is significant. Also, in certain of our specific target markets there is no suitable space currently available for our new branch expansion. We are patient and opportunistic for new branch sites in these target markets.

 

Opening new branches is a long-term investment strategy whereby a new branch produces net losses during the first 20-24 months of operations before it becomes profitable. Achieving expected returns from new branch expansion is dependent on the continued growth in business over many years.

 

Supermarket Branches The success of TCF’s supermarket branch expansion is dependent on the continued long-term success and viability of TCF’s supermarket partners. At December 31, 2005, TCF had 254 supermarket branches, representing 56% of all retail branches. Supermarket banking continues to play an important role in TCF’s growth, as these branches have been consistent generators of account growth in both deposits and lending products. The success of TCF’s supermarket branches is dependent on the continued success and viability of TCF’s supermarket partners and TCF’s ability to maintain licenses or lease agreements for its supermarket locations. TCF is subject to the risk, among others, that its license or lease for a location or locations will terminate upon the sale or closure of that location or locations by the supermarket partner. Also, an economic slowdown, financial or labor difficulties in the supermarket industry may reduce activity in TCF’s supermarket branches. One of TCF’s supermarket partners, Albertson’s, has recently announced pending transactions involving the sale of its Jewel supermarkets and other properties. Based on initial published reports, TCF does not believe these transactions will have a significant adverse impact on its operations.

 

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 recently brought by merchants and merchant organizations

 

10

 

against Visa concerning its card interchange fees challenging the level of interchange fees and prohibitions on merchants imposing surcharges on customers using cards to purchase goods and services. The ultimate impact of any such litigation cannot be predicted at this time.

 

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

 

Declines in Home Values Declines in home values in TCF’s markets could adversely impact results from operations. Like all banks, TCF is subject to the effects of any economic downturn, and in particular, a significant decline in home values in TCF’s markets could have a negative effect on results of operations. At December 31, 2005, TCF had $5.1 billion of consumer home equity loans with a weighted-average loan-to-value ratio for the portfolio of 73%. In addition, at December 31, 2005, TCF had $770.4 million in residential real estate loans with a weighted-average loan-to-value ratio of 51%. A significant decline in home values would likely lead to a decrease in new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and residential real estate loan portfolios and result in increased losses in these portfolios.

 

Leasing and Equipment Finance Activities TCF’s leasing 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, resulting in a decline in the amount of new equipment being placed in service as well as the decline in equipment values for equipment previously placed in service. TCF, like all owners and lessors of commercial equipment, may be exposed to liability claims resulting from injuries or accidents involving that equipment. Such liability has been most acute in states that have adopted laws imposing statutory vicarious liability on leasing companies for any injuries or property damage caused by motor vehicles they owned and leased. In 2005, a federal statute was enacted that significantly reduced a leasing company’s exposure to that risk. TCF seeks to mitigate its overall exposure to lessor’s liability risk by requiring all lessees to furnish evidence of liability insurance prior to lease inception and to maintain that insurance throughout the term of the lease, and through its own insurance programs.

 

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

 

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

 

USA Patriot and Bank Secrecy Acts The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury Department’s Office of

 

11

 

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. During the last year, several banking institutions have received large fines for non-compliance with these laws and regulations. TCF has developed policies and procedures designed to ensure compliance.

 

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

 

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

 

 

Item 1B. Unresolved SEC Staff Comments

 

None.

 

 

Item 2. Properties

 

Offices At December 31, 2005, 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 $198.6 million at December 31, 2005. At December 31, 2005, the aggregate net book value of leasehold improvements associated with leased bank branch office facilities was $25.9 million. In addition to the above-referenced branch offices, TCF owned and leased other facilities with an aggregate net book value of $35.7 million at December 31, 2005. For more information on premises and equipment, see Note 7 of Notes to Consolidated Financial Statements.

 

 

Item 3. Legal Proceedings

 

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

 

 

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

 

None.

 

12

 

Part II

 

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

 

TCF’s common stock trades on the New York Stock Exchange under the symbol “TCB.” The following table sets forth the high and low prices and dividends declared for TCF’s common stock. The stock prices represent the high and low sale prices for the common stock on the New York Stock Exchange Composite Tape, as reported by Bloomberg.

 

								Dividends
		High			Low			Declared
2005
First Quarter		$	32.03		$	26.42		$	.2125
Second Quarter		28.56			24.55			.2125
Third Quarter		28.82			25.81			.2125
Fourth Quarter		28.78			25.02			.2125
2004
First Quarter		$	26.37		$	23.92		$	.1875
Second Quarter		29.03			24.35			.1875
Third Quarter		32.62			28.01			.1875
Fourth Quarter		32.36			29.46			.1875

 

As of January 31, 2006, there were approximately 9,571 record holders of TCF’s common stock.

 

The Board of Directors of TCF Financial has not adopted a formal dividend policy. The Board of Directors intends to continue its present practice of paying quarterly cash dividends on TCF’s common stock as justified by the financial condition of TCF. The declaration and amount of future dividends will depend on circumstances existing at the time, including TCF’s earnings, financial condition and capital requirements, the cash available to pay such dividends (derived mainly from dividends and distributions from TCF Bank), as well as regulatory and contractual limitations and such other factors as the Board of Directors may deem relevant. In general, TCF Bank may not declare or pay a dividend to TCF in excess of 100% of its net profits for that year combined with its retained net profits for the preceding two calendar years without prior approval of the OCC. Restrictions on the ability of TCF Bank to pay cash dividends or possible diminished earnings of the indirect subsidiaries of TCF Financial may limit the ability of TCF Financial to pay dividends in the future to holders of its common stock. See “Regulation – Regulatory Capital Requirements,” “Regulation – Restrictions on Distributions” and Note 15 of Notes to Consolidated Financial Statements.

 

For the quarter ended December 31, 2005, there was no share repurchase activity, as summarized in the following table:

 

								Share
		Shares						Repurchase
		Repurchased						Authorizations(1)
				Average Price				July 21,		May 21,
(Dollars in thousands)		Number		Per Share				2003		2005
Balance, September 30, 2005								2,820		6,725,487
October 1-31, 2005		—		$	—			—		—
November 1-30, 2005		—		—				—		—
December 1-31, 2005		—		—				—		—
Balance, December 31, 2005		—		$	—			2,820		6,725,487

 

⁽¹⁾ The current share repurchase authorizations were approved by the Board of Directors on July 21, 2003 and May 21, 2005. Each authorization was for a repurchase of up to an additional 5% of TCF’s common stock outstanding at the time of the authorization, or 7.1 million shares and 6.7 million shares, respectively. These authorizations do not have expiration dates.

 

13

 

Item 6. Selected Financial Data

 

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

 

Five-Year Financial Summary

 

Consolidated Income:

 

																	Compound Annual
		Year Ended December 31,															Growth Rate
																	1-Year		5-Year
(Dollars in thousands, except per-share data)		2005			2004			2003			2002			2001			2005/2004		2005/2000
Total revenue		$	996,020		$	982,102		$	900,424		$	918,987		$	852,708		1.4	%	5.2	%
Net interest income		$	517,690		$	491,891		$	481,145		$	499,225		$	481,222		5.2		3.4
Provision for credit losses		5,022			10,947			12,532			22,006			20,878			(54.1	)	(19.4	)
Fees and other revenue		467,659			467,611			430,792			408,226			370,623			—		6.8
Other non-interest income		10,671			22,600			(11,513		)	11,536			863			(52.8	)	N.M.
Non-interest expense		610,588			586,679			560,109			539,288			501,996			4.1		6.0
Income before income tax expense		380,410			384,476			327,783			357,693			329,834			(1.1	)	4.7
Income tax expense		115,278			129,483			111,905			124,762			122,512			(11.0	)	(.2	)
Net income		$	265,132		$	254,993		$	215,878		$	232,931		$	207,322		4.0		7.3
Per common share:
Basic earnings		$	2.00		$	1.87		$	1.53		$	1.58		$	1.37		7.0		11.1
Diluted earnings		$	2.00		$	1.86		$	1.53		$	1.58		$	1.35		7.5		11.3
Dividends declared		$	.85		$	.75		$	.65		$	.575		$	.50		13.3		15.6

 

Consolidated Financial Condition:

 

																	Compound Annual
		At December 31,															Growth Rate
																	1-Year		5-Year
(Dollars in thousands, except per share data)		2005			2004			2003			2002			2001			2005/2004		2005/2000
Securities available for sale		$	1,648,615		$	1,619,941		$	1,533,288		$	2,426,794		$	1,584,661		1.8	%	3.3	%
Residential real estate loans		770,441			1,014,166			1,212,643			1,800,344			2,733,290			(24.0	)	(26.8	)
Subtotal		2,419,056			2,634,107			2,745,931			4,227,138			4,317,951			(8.2	)	(13.8	)
Loans and leases excluding residential real estate loans		9,424,111			8,372,491			7,135,135			6,320,784			5,510,912			12.6		14.1
Total assets		13,365,360			12,340,567			11,319,015			12,202,069			11,358,715			8.3		3.6
Checking, savings and money market deposits		7,195,074			6,493,545			5,999,626			5,791,233			4,778,714			10.8		12.0
Certificates of deposit		1,915,620			1,468,650			1,612,123			1,918,755			2,320,244			30.4		(7.3	)
Total deposits		9,110,694			7,962,195			7,611,749			7,709,988			7,098,958			14.4		5.7
Borrowings		2,983,136			3,104,603			2,414,825			3,110,295			3,023,025			(3.9	)	(1.3	)
Stockholders’ equity		998,472			958,418			920,858			977,020			917,033			4.2		1.9
Book value per common share		7.46			6.99			6.53			6.61			5.96			6.7		5.6

 

Key Ratios and Other Data:

 

		At or For the Year Ended December 31,
		2005		2004		2003		2002		2001
Return on average assets		2.08	%	2.15	%	1.85	%	2.01	%	1.79	%
Return on average equity		28.03		27.02		23.05		25.38		23.06
Average total equity to average assets		7.43		7.94		8.03		7.91		7.78
Net interest margin(1)		4.46		4.54		4.54		4.71		4.51
Net charge-offs as a percentage of average loans and leases		.25		.11		.16		.25		.15
Common dividend payout ratio		42.50	%	40.32	%	42.48	%	36.39	%	37.04	%
Number of:
Banking locations		453		430		401		395		375
Checking accounts (in thousands)		1,603		1,535		1,444		1,338		1,249

 

N.M. Not Meaningful.

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

 

14

 

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

 

Table of Contents	Page
Overview	15
Results of Operations	16
Performance Summary	16
Operating Segment Results	17
Consolidated Income Statement Analysis	17
Net Interest Income	17
Provision for Credit Losses	21
Non-Interest Income	21
Non-Interest Expense	25
Income Taxes	26
Consolidated Financial Condition Analysis	26
Securities Available for Sale	26
Loans and Leases	27
Allowance for Loan and Lease Losses	30
Non-Performing Assets	33
Past Due Loans and Leases	33
Potential Problem Loans and Leases	34
Liquidity Management	34
Deposits	35
New Branch Expansion	35
Borrowings	36
Contractual Obligations and Commitments	36
Stockholders’ Equity	37
Summary of Critical Accounting Estimates	37
Recent Accounting Developments	37
Fourth Quarter Summary	38
Legislative, Legal and Regulatory Developments	38
Forward-Looking Information	38

 

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

 

Overview

 

TCF is a Delaware national financial holding company based in Wayzata, Minnesota. Its principal subsidiary, TCF Bank, is headquartered in Minnesota and had 453 banking offices in Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana at December 31, 2005.

 

TCF provides convenient financial services through multiple channels to customers located primarily in the Midwest. 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 and automated teller machine (“ATM”) networks, and telephone and internet banking. TCF’s philosophy is to generate net interest income and fees and other revenue growth through business lines that emphasize higher yielding assets and lower or no interest-cost deposits. The Company’s growth strategies include new branch expansion and the development of new products and services. New products and services are designed to build on existing businesses and expand into complementary products and services through strategic initiatives.

 

TCF’s core businesses include retail banking; commercial banking; small business banking; consumer lending; leasing and equipment finance; and investments, securities brokerage 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 convenience products and services and generate additional fee income. The continued growth of checking accounts is a significant part of TCF’s growth strategy. Total checking accounts were 1,603,173 at December 31, 2005, and increased 68,021 accounts from December 31, 2004. The number of ATMs that are free to TCF customers increased from 1,141 at December 31, 2004, to 1,735 at December 31, 2005. The increase was primarily the result of an ATM branding agreement with 7-Eleven^®, Inc., which added 583 TCF branded ATMs during the third quarter of 2005, that are owned and operated by 7-Eleven, Inc.

 

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Opening new branches is an integral part of TCF’s growth strategy for generating new deposit accounts and the related revenue that is associated with the accounts and other products. New branches typically produce net losses during the first 20-24 months of operations before they become profitable, and therefore the level and timing of new branch expansion can have a significant impact on TCF’s profitability. TCF’s growth in checking accounts is primarily occurring in new branches with growth in older, mature branches being slower. The success of TCF’s branch expansion is dependent on the continued long-term success and viability of branch banking.

 

TCF’s lending strategy is to originate high credit quality, primarily secured, loans and leases. Commercial loans are generally made on local properties or to local customers. TCF’s largest core lending business is its consumer home equity loan operation, which offers fixed- and variable-rate loans 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”), a leasing company that primarily leases technology and data processing equipment. TCF’s leasing and equipment finance businesses operate in all 50 states and source equipment installations domestically and, to a limited extent, in foreign countries.

 

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

 

Net interest income, the difference between interest income earned on loans and leases and on investments, and interest expense paid on deposits and short-term and long-term borrowings, represented 52% of TCF’s total revenue in 2005. 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 2005, TCF’s net interest margin declined from 4.54% for 2004 to 4.46% for 2005. This decline was primarily due to growth in deposits with higher interest rates and increased fixed-rate loans with lower yields than variable-rate loans as a result of the flattening yield curve and changing customer preferences. See “Quantitative and Qualitative Disclosures About Market Risk” for further discussion on TCF’s interest-rate risk position.

 

Non-interest income is a significant source of revenue for TCF and an important factor in TCF’s results of operations. A key driver of non-interest income is checking accounts and their related activities. Increasing fee and service charge revenues has been challenging during 2005 as a result of slower growth in checking accounts and changing customer behaviors. Fee revenue per retail checking account was $217 for 2005, down from $232 in 2004. TCF is focusing on checking account growth to increase future fee revenue. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Non-Interest Income” for additional information.

 

The Company’s Visa debit card program has grown significantly since its inception in 1996. TCF is one of the largest issuers of Visa Classic debit cards in the United States. TCF earns interchange revenue from customer debit card transactions.

 

The following portions of the Management’s Discussion and Analysis of Financial Condition and Results of Operations focus in more detail on the results of operations for 2005, 2004 and 2003 and on information about TCF’s balance sheet, credit quality, liquidity and funding resources, capital and other matters.

 

Results of Operations

 

Performance Summary TCF reported diluted earnings per common share of $2.00 for 2005, compared with $1.86 for 2004 and $1.53 for 2003. Net income was $265.1 million for 2005, compared with $255 million for 2004 and $215.9 million for 2003. Return on average assets was 2.08% in 2005, compared with 2.15% in 2004 and 1.85% in 2003. Return on average common equity was 28.03% in 2005, compared with 27.02% in 2004 and 23.05% in 2003. During 2003, TCF prepaid $954 million of high-cost FHLB borrowings, incurring early termination fees of $44.3 million ($29.2 million after-tax) which reduced diluted earnings per share by 21 cents. There were no debt terminations in 2005 or 2004. The effective income tax rate for 2005 was 30.30%, compared with 33.68% in 2004 and 34.14% in 2003.

 

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Operating Segment Results BANKING, comprised of deposits and investment products, commercial banking, small business banking, consumer lending and treasury services, reported net income of $229.9 million for 2005, up 4.6% from $219.9 million in 2004. Banking net interest income for 2005 was $455.5 million, up 6.6% from $427.5 million for 2004. The provision for credit losses totaled $1 million in 2005, down from $4.1 million in 2004. The provision for credit losses for 2005 reflects improved credit quality, primarily in the consumer and commercial portfolios, including a $3.3 million commercial business loan recovery in the first quarter of 2005. Non-interest income totaled $425.1 million, compared with $426.6 million in 2004. Card revenues, primarily interchange fees, increased 25.7% in 2005, which was primarily attributable to a 19.8% increase in sales volume compared with 2004. Fees and service charges were $258.7 million for 2005, down 4.6% from $271.2 million in 2004, as a result of changing customer behaviors. During 2005, TCF sold several buildings and one branch including its deposits resulting in total gains of $13.6 million. There were no branch sales in 2004 or 2003. During 2005, TCF sold mortgage-backed securities and realized gains of $10.7 million, compared with gains of $22.6 million for 2004 and $32.8 million for 2003. See “Consolidated Income Statement Analysis – Non-Interest Income” for further discussion on the sales of mortgage-backed securities.

 

Banking non-interest expense totaled $553.2 million, up 7.1% from $516.4 million in 2004. The increases were primarily due to compensation and benefits and occupancy costs associated with new branch expansion, increases in card processing and issuance expenses related to the overall increase in card volumes, and increases in net real estate expense as a result of net recoveries on sales of foreclosed properties in 2004, partially offset by a decrease in deposit account losses.

 

LEASING AND EQUIPMENT FINANCE, an operating segment comprised of TCF’s wholly-owned subsidiaries TCF Equipment Finance and Winthrop, provides a broad range of comprehensive lease and equipment finance products. Leasing and Equipment Finance reported net income of $33.4 million for 2005, down 6.9% from $35.9 million in 2004. Net interest income for 2005 was $57 million, up 2.4% from $55.7 million in 2004. The provision for credit losses for this operating segment totaled $4 million in 2005, down from $6.8 million in 2004. Delta Airlines, Inc., (“Delta”), declared bankruptcy on September 14, 2005, and TCF charged off its $18.8 million investment in the related leveraged lease through a reduction in the allowance for loan and lease losses. The decrease in the provision for credit losses from 2004 was primarily related to improved credit quality of the portfolio excluding leveraged leases. Non-interest income totaled $47.5 million in 2005, down $3.2 million from $50.7 million in 2004. The decrease in leasing and equipment finance revenues for 2005, compared with 2004, was primarily due to lower sales-type lease revenues, partially offset by higher operating lease revenues and other transaction fees. 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 $48.6 million in 2005, up $4.9 million from $43.7 million in 2004, primarily related to an increase in operating lease depreciation expense.

 

Consolidated Income Statement Analysis

 

Net Interest Income Net interest income, which is 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% of TCF’s revenue in 2005. Net interest income divided by average interest-earning assets is referred to as the net interest margin, expressed as a percentage. Net interest income and net interest margin are affected by changes in interest rates, loan and deposit pricing strategies and competitive conditions, the volume and the mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets.

 

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The following tables present TCF’s average balance sheets, interest and dividends earned or paid, and the related yields and rates on major categories of TCF’s interest-earning assets and interest-bearing liabilities:

 

		Year Ended								Year Ended
		December 31, 2005								December 31, 2004								Change
																								Average
								Average								Average								Yields
								Yields								Yields								and
		Average						and		Average						and		Average						Rates
(Dollars in thousands)		Balance			Interest(1)			Rates		Balance			Interest(1)			Rates		Balance			Interest(1)			(bps)
Assets:
Investments		$	95,349		$	3,450		3.62	%	$	124,833		3,455			2.77	%	$	(29,484	)	$	(5	)	85
Securities available for sale (2)		1,569,808			81,479			5.19		1,536,673			80,643			5.25		33,135			836			(6	)
Loans held for sale		214,588			10,921			5.09		331,529			11,533			3.48		(116,941		)	(612		)	161
Loans and leases:
Consumer home equity:
Fixed- and adjustable-rate		2,304,340			154,241			6.69		1,509,055			104,494			6.92		795,285			49,747			(23	)
Variable-rate		2,450,634			171,133			6.98		2,457,342			137,735			5.61		(6,708		)	33,398			137
Consumer – other		34,763			3,213			9.24		39,161			3,210			8.20		(4,398		)	3			104
Total consumer home equity and other		4,789,737			328,587			6.86		4,005,558			245,439			6.13		784,179			83,148			73
Commercial real estate:
Fixed- and adjustable-rate		1,385,905			85,214			6.15		1,237,633			77,187			6.24		148,272			8,027			(9	)
Variable-rate		826,934			49,561			5.99		771,310			33,259			4.31		55,624			16,302			168
Total commercial real estate		2,212,839			134,775			6.09		2,008,943			110,446			5.50		203,896			24,329			59
Commercial business:
Fixed- and adjustable-rate		85,390			4,959			5.81		85,382			4,754			5.57		8			205			24
Variable-rate		340,314			19,575			5.75		346,411			13,815			3.99		(6,097		)	5,760			176
Total commercial business		425,704			24,534			5.76		431,793			18,569			4.30		(6,089		)	5,965			146
Leasing and equipment finance (3)		1,423,264			97,596			6.86		1,285,925			89,364			6.95		137,339			8,232			(9	)
Subtotal		8,851,544			585,492			6.61		7,732,219			463,818			6.00		1,119,325			121,674			61
Residential real estate		885,735			50,680			5.72		1,104,814			63,360			5.73		(219,079		)	(12,680		)	(1	)
Total loans and leases (4)		9,737,279			636,172			6.53		8,837,033			527,178			5.97		900,246			108,994			56
Total interest-earning assets		11,617,024			732,022			6.30		10,830,068			622,809			5.75		786,956			109,213			55
Other assets		1,108,510								1,052,679								55,831
Total assets		$	12,725,534							$	11,882,747							$	842,787
Liabilities and Stockholders’ Equity:
Non-interest bearing deposits:
Retail		$	1,548,027							$	1,504,392							$	43,635
Small business		585,860								508,162								77,698
Commercial and custodial		311,497								342,446								(30,949		)
Total non-interest bearing deposits		2,445,384								2,355,000								90,384
Interest-bearing deposits:
Premier checking		641,672			15,910			2.48		198,651			2,892			1.46		443,021			13,018			102
Other checking		1,026,017			2,067			.20		1,140,242			928			.08		(114,225		)	1,139			12
Subtotal		1,667,689			17,977			1.08		1,338,893			3,820			.29		328,796			14,157			79
Premier savings		427,070			13,246			3.10		85,478			1,705			1.99		341,592			11,541			111
Other savings		1,558,423			9,419			.60		1,738,374			5,785			.33		(179,951		)	3,634			27
Subtotal		1,985,493			22,665			1.14		1,823,852			7,490			.41		161,641			15,175			73
Money market		640,576			7,640			1.19		763,925			2,992			.39		(123,349		)	4,648			80
Subtotal		4,293,758			48,282			1.12		3,926,670			14,302			.36		367,088			33,980			76
Certificates of deposit		1,740,440			49,124			2.82		1,493,938			28,279			1.89		246,502			20,845			93
Total interest-bearing deposits		6,034,198			97,406			1.61		5,420,608			42,581			.79		613,590			54,825			82
Total deposits		8,479,582			97,406			1.15		7,775,608			42,581			.55		703,974			54,825			60
Borrowings:
Short-term borrowings		917,665			29,830			3.25		809,106			12,664			1.57		108,559			17,166			168
Long-term borrowings		2,038,561			87,096			4.27		1,984,069			75,673			3.81		54,492			11,423			46
Total borrowings		2,956,226			116,926			3.96		2,793,175			88,337			3.16		163,051			28,589			80
Total interest-bearing liabilities		8,990,424			214,332			2.38		8,213,783			130,918			1.59		776,641			83,414			79
Total deposits and borrowings		11,435,808			214,332			1.87		10,568,783			130,918			1.24		867,025			83,414			63
Other liabilities (5)		343,876								370,184								(26,308		)
Total liabilities		11,779,684								10,938,967								840,717
Stockholders’ equity (5)		945,850								943,780								2,070
Total liabilities and stockholders’ equity		$	12,725,534							$	11,882,747							$	842,787
Net interest income and margin					$	517,690		4.46	%				$	491,891		4.54	%				$	25,799		(8	)

 

bps = basis points.

(1)  Tax-exempt income was not significant and thus interest income and related yields have not been presented on a tax equivalent basis. Tax-exempt income of $954,000 and $638,000 was recognized during the years ended December 31, 2005 and 2004, respectively.

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

(3)  Substantially all leasing and equipment finance loans and leases have fixed rates.

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

(5)  Average balance is based upon month-end balances.

 

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