TCF Bank 2006 Annual Report Download - page 47

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272006 Form10-K
a $1.4 million increase in foreclosed real estate expense
primarily due to net losses on sales in 2006 versus net
recoveries in 2005. In 2005, other non-interest expense
increased $11.4 million, or 8.7%, primarily due to 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 fore-
closed properties in 2004.
Income Taxes Income tax expense represented 31.41% of
income before income tax expense during 2006, compared
with 30.30% and 33.68% in 2005 and 2004, respectively.
The 2006 effective income tax rate increased over the 2005
rate primarily due to $6.1 million of reductions in income tax
expense in 2006 for favorable developments involving uncer-
tain tax positions, compared with $14 million of reductions
in income tax expense of 2005. Favorable developments
included the closing of certain previous years’ tax returns,
clarification of existing state tax legislation and favorable
developments in income tax audits. The lower effective
income tax rate in 2005, compared with 2004, was the result
of reductions of income tax expense of $14 million related
to favorable developments involving uncertain tax positions
including the closing of certain previous years’ tax returns,
clarification of existing state legislation and favorable
developments in income tax audits.
TCF has a Real Estate Investment Trust (“REIT”) and a
related foreign operating company (“FOC”) that acquire,
hold and manage real estate loans and other assets. These
companies are consolidated with TCF Bank and are included
in the consolidated financial statements of TCF Financial
Corporation. The REIT and related companies must meet
specific provisions of the Internal Revenue Code 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. TCF’s FOC operates under laws in certain
states (including Minnesota and Illinois) that allow FOCs.
Use of REITs and FOCs is and has been the subject of federal
and state audits and tax policy debates by various state
legislatures.
The determination of current and deferred income taxes is
a critical accounting estimate which is based on complex
analyses of many factors including interpretation of federal
and state income tax laws, the differences between the tax
and financial reporting bases of assets and liabilities (tem-
porary differences), estimates of amounts due or owed such
as the timing of reversal of temporary differences and current
financial accounting standards. Additionally, there can be
no assurance that estimates and interpretations used in
determining income tax liabilities may not be challenged by
federal and state taxing authorities. Actual results could
differ significantly from the estimates and tax law interpre-
tations used in determining the current and deferred income
tax liabilities.
In addition, under generally accepted accounting princi-
ples, deferred income tax assets and liabilities are recorded
at the federal and state income tax rates expected to apply
to taxable income in the periods in which the deferred
income tax assets or liabilities are expected to be realized.
If such rates change, deferred income tax assets and liabili-
ties must be adjusted in the period of change through a
charge or credit to income tax expense. Further detail on
income taxes is provided in Note 12 of Notes to Consolidated
Financial Statements.
Consolidated Financial Condition Analysis
Securities Available for Sale Securities available for
sale increased $167.5 million to $1.8 billion at December
31, 2006. This increase reflects purchases of $397.5 million
of mortgage-backed securities, and normal payment and
prepayment activity. At December 31, 2006, the increase
in mortgage-backed securities partially offsets the declines
in residential loans in the treasury services portfolio. TCF’s
securities available for sale portfolio primarily included
fixed-rate mortgage-backed securities. Net unrealized pre-
tax losses on securities available for sale totaled $33.3 mil-
lion at December 31, 2006, compared with net unrealized
pre-tax losses of $33.2 million at December 31, 2005. TCF
may, from time to time, sell mortgage-backed securities
and utilize the proceeds to reduce borrowings, fund growth
in loans and leases and for other corporate purposes.