UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

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

For the fiscal year ended December 31, 2010

or

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

For the transition period from _____________ to _____________

 

Commission File No. 001-10253

 

TCF Financial Corporation

(Exact name of registrant as specified in its charter)

 

 

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

Wayzata, Minnesota 55391-1693

(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code: 952-745-2760

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

 

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

Yes  x         No  o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  o         No  x

 

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

Yes  x         No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x         No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) 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.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes  o         No  x

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter as reported by the New York Stock Exchange, was $2,154,546,434.

 

As of January 31, 2011, there were 142,946,021 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 for the 2011 Annual Meeting of Stockholders to be held on April 27, 2011 are incorporated by reference into Part III hereof.

 

 

 

Table of Contents

 

	Description	Page
Part I
Item 1.	Business	1
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	14
Item 2.	Properties	14
Item 3.	Legal Proceedings	14
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
Item 6.	Selected Financial Data	17
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 8.	Financial Statements and Supplementary Data	51
	Report of Independent Registered Public Accounting Firm	51
	Consolidated Financial Statements	52
	Notes to Consolidated Financial Statements	56
	Other Financial Data	95
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	96
Item 9A.	Controls and Procedures	96
	Management’s Report on Internal Control Over Financial Reporting	97
	Report of Independent Registered Public Accounting Firm	98
Item 9B.	Other Information	98
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	99
Item 11.	Executive Compensation	100
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	100
Item 13.	Certain Relationships and Related Transactions, and Director Independence	100
Item 14.	Principal Accounting Fees and Services	100
Part IV
Item 15.	Exhibits, Financial Statement Schedules	101
Signatures		102
Index to Exhibits		103

 

 

Part I

 

Item 1. Business

 

General

 

TCF Financial Corporation (“TCF” or the “Company”), a Delaware Corporation incorporated on April 28, 1987, is a national bank holding company based in Wayzata, Minnesota. Its principal subsidiary is TCF National Bank (“TCF Bank”), which is headquartered in Sioux Falls, South Dakota. TCF Bank operates bank branches in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana, Arizona and South Dakota (TCF’s primary banking markets). TCF’s focus is on the delivery of retail and commercial banking products in markets served by TCF Bank, and commercial equipment loans and leases and inventory finance loans throughout the United States and Canada.

 

At December 31, 2010, TCF had total assets of $18.5 billion and was the 35th largest publicly traded bank holding company in the United States based on total assets as of September 30, 2010. 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, Wholesale Banking and Treasury Services. Retail Banking includes branch banking and retail lending. Wholesale Banking includes commercial banking, leasing and equipment finance and inventory finance. TCF refers to its combined leasing and equipment finance and inventory finance businesses as Specialty Finance. Treasury Services includes the Company’s investment and borrowing portfolios and management of capital, debt and market risks, including interest-rate and liquidity risks. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Operating Segment Results” and Note 24 of Notes to Consolidated Financial Statements for information regarding TCF’s reportable operating segments.

 

Retail Banking

 

At December 31, 2010, TCF had 442 retail banking branches, consisting of 198 traditional branches, 234 supermarket branches and 10 campus branches. TCF operates 201 branches in Illinois, 111 in Minnesota, 55 in Michigan, 36 in Colorado, 26 in Wisconsin, 7 in Arizona, 5 in Indiana and 1 in South Dakota.

 

TCF makes consumer loans for personal, family or household purposes, such as home purchases, debt consolidation, financing of home improvements, automobiles, vacations and education.

 

TCF’s retail lending origination activity primarily consists of consumer real estate secured lending. It also includes originating loans secured by personal property and, to a limited extent, unsecured personal loans. Consumer loans are made on a fixed-term basis or revolving line of credit. TCF does not have any subprime lending programs nor did it ever originate 2/28 adjustable-rate mortgages (ARM) or option ARM loans.

 

Deposits from consumers and small businesses are a 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 from within TCF’s primary banking market areas through the offering of a broad selection of deposit instruments including consumer 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, including banking fees and service charges.

 

Campus banking represents an important part of TCF’s Retail Banking business. TCF has alliances with the University of Minnesota, the University of Michigan, the University of Illinois and four other colleges. These alliances include exclusive marketing, naming rights and other agreements. Branches have been opened on many of these college campuses. TCF provides multi-purpose campus cards for many of these colleges. These cards serve as a school identification card, ATM card, library card, security card, health care card, phone card and stored value card for vending machines or similar uses. TCF is ranked 5th largest in number of campus card banking relationships in the U.S. At December 31, 2010, there were $264.8 million in campus deposits. TCF has a 25-year naming rights agreement with the University of Minnesota to sponsor its on-campus football stadium called “TCF Bank Stadium®” which opened in 2009.

 

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Non-interest income is a significant source of revenue for TCF and an important factor in TCF’s results of operations. Increasing fee and service charge revenue has been challenging as a result of the slowing of the economy and changing customer behavior. Providing a wide range of retail banking services is an integral component of TCF’s business philosophy and a major strategy for generating additional non-interest income. TCF offers retail checking account customers inexpensive, convenient access to funds at local merchants and ATMs through its debit card programs. Costs associated with TCF’s debit card programs are offset by interchange fees charged to retailers and recorded as non-interest income. Key drivers of non-interest income are the number of deposit accounts and related transaction activity. New regulations that became fully effective on August 15, 2010 require consumer checking account customers to elect if they want TCF to authorize debit card and ATM transactions if, at the time of authorization, there are insufficient funds in the account to cover the transaction (“opt-in”). TCF has had a process in place to discuss this service with new and existing consumer checking account customers since early 2010. Under the new regulation, any account that has not elected to opt-in is deemed by regulation to have declined the service. The opt-in election is revocable by customers at any time. Customers who have not elected to opt-in may see an increase in the number of denied transactions on their ATM or debit card transactions. These denied transactions may impact consumer payment behavior and reduce fees and service charges and card revenue. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Information – Other Risks Relating to Fee Income”.

 

Card revenues are anticipated to be further impacted by the Durbin Amendment (the “Amendment”) to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Act” or “Dodd-Frank Act”), which directs the Board of Governors of the Federal Reserve System to establish rules by April 21, 2011, required to take effect by July 21, 2011, related to debit-card interchange fees. Federal Reserve is defined as Federal Reserve Board or Federal Reserve Bank. The proposed rule released by the Federal Reserve on December 16, 2010 precludes the recovery of costs other than those permitted by the Amendment, and the resulting reduction in TCF’s average interchange rate after July 21, 2011 could approach 85%. TCF Bank has filed a lawsuit against the Federal Reserve and the Office of the Comptroller of the Currency (“OCC”) challenging the constitutionality of the Amendment on the grounds that it violates TCF’s due process rights as it requires TCF to offer the debit card product below its cost, denies TCF equal protection under the law by exempting a large number of institutions with assets less than $10 billion and violates TCF’s rights under the takings clause of the Constitution of the United States by causing TCF to bear a substantial competitive and financial burden without just compensation. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Non-Interest Income” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Information” for additional information.

 

TCF does not engage in loan sales to securitizers of asset-backed securities and as a result, is not subject to any representations, warranties or other enforcement mechanisms by investors in an asset-backed securities offering.

 

Wholesale Banking

 

Commercial Real Estate Lending  Commercial real estate loans are loans originated by TCF that are secured by commercial real estate which includes retail centers, multi-family housing, office buildings and, to a lesser extent, commercial real estate construction loans, mainly to borrowers based in its primary banking markets.

 

Commercial Business Lending  Commercial business loans are loans originated by TCF that are generally secured by various types of business assets including inventory, receivables, equipment and financial instruments. In very limited cases, loans may be originated on an unsecured basis. Commercial business loans are used for a variety of purposes including working capital and financing the purchase of equipment.

 

TCF concentrates on originating commercial business loans to middle-market companies with borrowing requirements of less than $25 million. Substantially all of TCF’s commercial business loans outstanding at December 31, 2010 were to borrowers based in its primary banking markets.

 

Commercial Banking  Small business and commercial deposits are attracted from within TCF’s primary banking market areas through the offering of a broad selection of deposit instruments including small business and commercial demand deposit accounts, interest-bearing checking accounts, money market accounts, regular savings accounts and certificates of deposit.

 

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Leasing and Equipment Finance TCF provides a broad range of comprehensive lease and equipment finance products addressing the financing needs of diverse types of small to large companies. TCF’s leasing and equipment finance businesses, TCF Equipment Finance, Inc. (“TCF Equipment Finance”) and Winthrop Resources Corporation (“Winthrop Resources”), finance equipment in all 50 states and, to a limited extent, in foreign countries. TCF Equipment Finance delivers equipment finance solutions to small and mid-size companies in various industries with significant diversity in the types of underlying equipment. Winthrop Resources focuses on providing customized lease financing to meet the special needs of mid-size and large companies and health care facilities that procure high-tech equipment such as computers, servers, telecommunication and other technology equipment. During 2009, Winthrop Resources acquired all of the outstanding shares of Fidelity National Capital, Inc. (“FNCI”), which provided technology financing through leasing solutions similar to those provided by Winthrop, which broadened its market diversification.

 

Inventory Finance  TCF’s Inventory Finance business originates commercial variable-rate loans which are secured by the underlying floorplan equipment and supported by repurchase agreements from original equipment manufacturers, with a focus on consumer electronics, household appliances, lawn and garden products and power sports products. TCF Inventory Finance operates primarily in the U.S. with a presence in Canada. TCF Inventory Finance commenced lending operations in December of 2008. In 2009, TCF Inventory Finance formed a joint venture with The Toro Company (“Toro®”) called Red Iron Acceptance, LLC (“Red Iron”). Red Iron provides U.S. distributors and dealers and select Canadian distributors of the Toro and Exmark® brands with reliable, cost-effective sources of financing. TCF and Toro maintain a 55% and 45% ownership interest, respectively, in Red Iron.

 

Treasury Services

 

TCF Bank has authority to invest in various types of liquid assets, including United States Department of the Treasury (“U.S. Treasury”) obligations and securities of various federal agencies and U.S. Government sponsored enterprises, deposits of insured banks, bankers’ acceptances and federal funds. TCF Bank’s investments do not include commercial paper, asset-backed commercial paper, asset-backed securities secured by credit cards or auto loans, trust preferred securities or preferred stock of Fannie Mae or Freddie Mac. TCF Bank also has not participated in structured investment vehicles and does not have any bank-owned life insurance. TCF Bank must also meet reserve requirements of the Federal Reserve, which are imposed based on amounts on deposit in various deposit categories. TCF’s reserve requirements are largely met through TCF’s vault cash levels.

 

Sources of Funds

 

Borrowings  Borrowings may be used to compensate for reductions in deposit inflows or net deposit outflows, or to support expanded lending and leasing activities. These borrowings may include Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, federal funds, advances from the Federal Reserve Discount Window and other borrowings.

 

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

 

As an additional source of funds, TCF may sell securities subject to its obligation to repurchase these securities (repurchase agreements) with major investment banks or the FHLB utilizing government securities or mortgage-backed securities as collateral. Generally, securities with a market value in excess of the amount borrowed are required to be deposited as collateral with the counterparty to a repurchase agreement. The creditworthiness of the counterparty is important in establishing the overcollateralized amount of securities delivered by TCF is protected. TCF only enters into repurchase agreements with institutions having a satisfactory credit profile.

 

Information concerning TCF’s FHLB advances, repurchase agreements, subordinated notes, junior subordinated notes (trust preferred securities) and other borrowings is set forth in “Item 7. Management’s Discussion and Analysis of

 

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Financial Condition and Results of Operations – Consolidated Financial Condition Analysis – Borrowings” and in Notes 10 and 11 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 Bank’s subsidiaries principally engage in Leasing and Equipment Finance and Inventory Finance activities. See “Item 1.  Business – Wholesale Banking” for more information.

 

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 banks, savings institutions, credit unions and investment banks. Additional significant competition for deposits comes from institutions selling money market mutual funds and corporate and government securities. TCF competes for the origination of loans with banks, mortgage bankers, mortgage brokers, consumer and commercial finance companies, credit unions, insurance companies and savings institutions. TCF also competes nationwide with other companies and banks in the financing of equipment and inventory. Expanded use of the Internet has increased competition affecting TCF and its loan, lease and deposit products.

 

Employees  As of December 31, 2010, TCF had 7,363 employees, including 2,385 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 bank holding company, and TCF Bank, which has deposits insured by the Federal Deposit Insurance Corporation (“FDIC”), are subject to a number of laws and regulations. Many of these laws and regulations have undergone significant change in recent years. These laws and regulations impose restrictions on activities, minimum capital requirements, lending and deposit restrictions and numerous other requirements. Future changes to these laws and regulations, and other new financial services laws and regulations, are likely and cannot be predicted with certainty. TCF Financial’s primary regulator is the Federal Reserve and TCF Bank’s primary regulator is the OCC.

 

Regulatory Capital Requirements  TCF Financial and TCF Bank are subject to regulatory capital requirements of the Federal Reserve and the OCC, respectively, as described below. These regulatory agencies are required by law to take prompt action when institutions are viewed to be unsafe or unsound or do not meet certain minimum capital standards. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) defines five levels of capital condition, the highest of which is “well-capitalized”. It requires that regulatory authorities subject undercapitalized institutions to various restrictions such as limitations on dividends or other capital distributions, limitations on growth or restrictions on activities. Undercapitalized banks must develop a capital restoration plan and the parent bank holding company is required to guarantee compliance with the plan. TCF Financial and TCF Bank are “well-capitalized” under the FDICIA capital standards.

 

The Federal Reserve and the OCC also have adopted rules that could permit them to quantify and account for interest-rate risk exposure and market risk from trading activity and reflect these risks in higher capital requirements. New legislation, additional rulemaking, or changes in regulatory policies may affect future regulatory capital requirements applicable to TCF Financial and TCF Bank. The ability of TCF Financial and TCF Bank to comply with regulatory capital requirements may be adversely affected by legislative changes, future rulemaking or policies of regulatory authorities, unanticipated losses or lower levels of earnings.

 

Restrictions on Distributions  TCF Financial’s ability to pay dividends is subject to limitations imposed by the Federal Reserve. In general, Federal Reserve regulatory guidelines call upon a bank holding company’s board of directors to take a number of factors into account when considering the payment of dividends, including the quality and level of current and future earnings.

 

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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. The ability of TCF Financial and TCF Bank to pay dividends is dependent on regulatory policies and regulatory capital requirements. Payment of dividends may be subject to regulatory approval. The ability to pay such dividends in the future may be adversely affected by new legislation or regulations, or by changes in regulatory policies.

 

In general, TCF Bank may not declare or pay a dividend to TCF Financial in excess of 100% of its net retained profits for the current year combined with its net retained profits for the preceding two calendar years without prior approval of the OCC. TCF Bank’s ability to make capital distributions in the future may require regulatory approval and may be restricted by its regulatory authorities. TCF Bank’s ability to make any such distributions will also depend on its earnings and ability to meet minimum regulatory capital requirements in effect during future periods. These capital adequacy standards may be higher in the future than existing minimum regulatory capital requirements, including the U.S. regulatory rule-making relative to the implementation of the capital and liquidity standards under Basel III, the international regulatory framework for banks. 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 “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Financial Condition Analysis – Liquidity Management” and Notes 13 and 14 of Notes to Consolidated Financial Statements.

 

Regulation of TCF and Affiliates and Insider Transactions  TCF Financial is subject to Federal Reserve regulations, examinations and reporting requirements relating to bank holding companies. Subsidiaries of bank holding companies like TCF Bank are subject to certain restrictions in their dealings with holding company affiliates.

 

A holding company must serve as a source of strength for its subsidiary banks, and the Federal Reserve may require a holding company to contribute additional capital to an under-capitalized subsidiary bank. In addition, the OCC may assess TCF if it believes the capital of TCF Bank has become impaired. If TCF were to fail to pay such an assessment within three months, the Board of Directors must cause the sale of TCF Bank’s stock to cover a deficiency in the capital. In the event of a bank holding company’s bankruptcy, any commitment by the bank 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”), Federal Reserve approval is required before acquiring more than 5% control, or substantially all of the assets, of another bank, or bank or bank holding company, or merging or consolidating with such a bank or holding company. The BHCA also generally prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, providing services for its subsidiaries, or conducting activities permitted by the Federal Reserve as being closely related to the business of banking. Further restrictions or limitations on acquisitions or establishing financial subsidiaries may also be imposed by TCF’s regulators or examiners.

 

Restrictions on Change in Control  Federal and state laws and regulations contain a number of provisions which impose restrictions on changes in control of financial institutions such as TCF Bank, and which require regulatory approval prior to any such changes in control. The Restated Certificate of Incorporation of TCF Financial contains features which may inhibit a change in control of TCF Financial.

 

Acquisitions and Interstate Operations  Under federal law, interstate merger transactions may be approved by federal bank regulators without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks opted out of the Riegle-Neal Interstate Banking and Branching Act of 1994 by adopting a law after the date of enactment of such act, and prior to June 1, 1997, which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches by banks are permitted only if the law of the state in which the branches are located permits such acquisitions. Interstate mergers and branch acquisitions may also

 

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be subject to certain nationwide and statewide insured deposit maximum concentration levels or other limitations.

 

Insurance of Accounts  On November 9, 2010, the FDIC issued a Final Rule implementing section 343 of the Dodd-Frank Act that provides for unlimited insurance coverage of certain non-interest bearing accounts. Beginning December 31, 2010, through December 31, 2012, all non-interest bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC-insured institutions. The unlimited insurance coverage is available to all depositors, including consumers, businesses, and government entities. This unlimited insurance coverage is separate from, and in addition to, the insurance coverage provided to a depositor’s other deposit accounts held at an FDIC-insured institution.

 

The FDIC has set a designated reserve ratio of 1.35% ($1.35 for each $100 of insured deposits) for the Deposit Insurance Fund (“DIF”). The Federal Deposit Insurance Act of 2005 (“FDIC Act”) provides the FDIC Board of Directors the authority to set the designated reserve ratio between 1.15% and 1.50% . The FDIC must adopt a restoration plan when the reserve ratio falls below 1.15% and begin paying dividends when the reserve ratio exceeds 1.35% . There is no requirement to achieve a specific ratio within a given timeframe. The DIF reserve ratio calculated by the FDIC at September 30, 2010 was a negative .15% and therefore, the FDIC needs to increase premiums charged to banks.

 

In 2010, the annual insurance premiums on bank deposits insured by the DIF varied between $.07 per $100 of deposits for banks classified in the highest capital and supervisory evaluation categories to $.78 per $100 of deposits for banks classified in the lowest capital and supervisory evaluation categories.

 

On November 12, 2009, the FDIC adopted a final rule requiring depository institutions to prepay their estimated quarterly insurance premium for fourth quarter 2009 and all of 2010, 2011 and 2012. TCF Bank prepaid $77.6 million of such premium on December 30, 2009 and $50.5 million remained as a prepaid balance at December 31, 2010. The expense related to this prepayment is anticipated to be recognized over the next two years based on actual calculations of quarterly premiums.

 

The Dodd-Frank Act requires changes to a number of components of the FDIC insurance assessment, with an implementation date of April 1, 2011. The changes amend the current methodology used to determine the assessments paid by institutions with assets greater than $10 billion, including changing the assessment base from deposits to total average assets less tier 1 capital. Additionally, the FDIC has developed a scorecard approach to determine a separate assessment rate for each institution with assets greater than $10 billion. As a result of these changes, TCF’s FDIC insurance expense is expected to increase by approximately $15 million in 2011.

 

In addition to risk-based deposit insurance premiums, additional assessments may be imposed by the Financing Corporation, a separate U.S. government agency affiliated with the FDIC, on insured deposits to pay for the interest cost of Financing Corporation bonds. Financing Corporation assessment rates for 2010 ranged from $.0102 to $.0104 for each $100 of deposits. Financing Corporation assessments of $1.2 million, $1.2 million and $1.1 million were paid by TCF Bank for 2010, 2009 and 2008, respectively.

 

Under federal law, deposits and certain claims for administrative expenses and employee compensation against an insured depository institution are afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any receiver appointed by regulatory authorities. Such priority creditors would include the FDIC.

 

Examinations and Regulatory Sanctions  TCF is subject to periodic examination by the Federal Reserve, OCC and the FDIC. Bank regulatory authorities may impose a number of restrictions or new requirements on institutions, including, but not limited to, growth limitations, dividend restrictions, individual increased regulatory capital requirements, increased loan, lease and real estate loss reserve requirements, increased supervisory assessments, activity limitations or other restrictions that could have an adverse effect on such institutions, their holding companies or holders of their debt and equity securities. Certain enforcement actions may not be publicly disclosed by TCF or its regulatory authorities. Various enforcement remedies, including civil money penalties, may be assessed against an institution or an institution’s directors, officers, employees, agents or independent contractors. Under the Bank Secrecy Act (“BSA”), the OCC is obligated to take enforcement action where it finds a statutory or regulatory violation that would constitute a program violation.

 

In its 2009 examinations of TCF’s compliance with the BSA, the OCC identified instances of non-compliance that constitute a program violation. On July 20, 2010, TCF National Bank agreed to the issuance of a

 

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Consent Order (the “Order”) by the OCC, the Bank’s primary banking regulator, addressing certain matters related to the BSA. The Order requires the Bank to address deficiencies in the Bank’s BSA program identified by the OCC, including review and revision of the Bank’s BSA risk assessment, BSA Compliance Program, and Suspicious Activity Report filing procedures and processes. The OCC did not identify any systemic undetected criminal activity or money laundering. The Bank is also required to address performing appropriate due diligence when an account is opened, and to review transactions since November 2008 for compliance. The Bank is implementing or has implemented corrective action for each deficiency and expects to satisfy all of the requirements of the Order in a timely fashion. The Order does not call for the payment of a civil money penalty. Material failure to comply with the Order could result in enforcement actions by the OCC.

 

Subsidiaries of TCF may also be subject to state and/or self-regulatory organization licensing, regulation and examination requirements in connection with certain insurance activities.

 

National Bank Investment Limitations  Permissible investments by national banks are limited by the National Bank Act and by rules of the OCC. Non-traditional bank activities permitted by the Gramm-Leach-Bliley Act will subject a bank to additional regulatory limitations or requirements, including a required regulatory capital deduction and application of transactions with affiliates limitations in connection with such activities.

 

Dodd-Frank Wall Street Reform and Consumer Protection Act  The Act was signed into law on July 21, 2010. Generally, the Act is effective the day after it was signed into law, but different effective dates apply to specific provisions of the Act. Uncertainty remains as to the ultimate impact of the Act, which 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.

 

The Act, among other things:

 

·     Directs the Federal Reserve to issue rules which are expected to limit debit-card interchange fees (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Non-Interest Income – Card Revenue”);

 

·     After a three-year phase-in period which begins January 1, 2013, removes trust preferred securities as a permitted component of a holding company’s tier 1 capital;

 

·     Provides for an increase in the FDIC assessment for depository institutions with assets of $10 billion or more, increases in the minimum reserve ratio for the deposit insurance fund from 1.15% to 1.35% and changes in the basis for determining FDIC premiums from deposits to assets;

 

·     Creates a new consumer financial protection bureau that will have rulemaking authority for a wide range of consumer protection laws that would apply to all banks and have broad powers to supervise and enforce consumer protection laws;

 

·     Provides for new disclosure and other requirements relating to executive compensation and corporate governance;

 

·     Changes standards for Federal preemption of state laws related to federally chartered institutions and their subsidiaries;

 

·     Provides for mortgage reform addressing a customer’s ability to repay, restricts variable-rate lending by requiring the ability to repay to be determined for variable-rate loans by using the maximum rate that will apply during the first five years of a variable-rate loan term, and makes more loans subject to requirements for higher-cost loans, new disclosures, and certain other restrictions;

 

·     Creates a financial stability oversight council that will recommend to the Federal Reserve increasingly strict rules for capital, leverage, liquidity, risk management and other requirements as companies grow in size and complexity;

 

·     Permanently increases the deposit insurance coverage to $250 thousand and allows depository institutions to pay interest on business checking accounts starting July 2011; and

 

·     Requires publicly-traded bank holding companies with assets of $10 billion or more to establish a risk committee of the Board of Directors responsible for enterprise-wide risk management practices.

 

Taxation

 

Federal Taxation  The statute of limitations on TCF’s consolidated federal income tax return is closed through 2006.

 

7

 

State Taxation  TCF and/or its subsidiaries currently file tax returns in all states which impose corporate income and franchise taxes and local tax returns in certain cities and other taxing jurisdictions. TCF’s primary banking activities are in the states of Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana, Arizona and South Dakota. 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 “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Income Taxes” and Notes 1 and 12 of Notes to Consolidated Financial Statements for additional information regarding TCF’s income taxes.

 

Available Information

 

TCF’s website, ir.tcfbank.com, includes free access to Company news releases, investor presentations, conference calls to discuss published financial results, TCF’s Annual Report and periodic filings required by the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after electronic filing or furnishing of such material to the SEC.

 

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

 

Item 1A. Risk Factors

 

Enterprise Risk Management

 

In the normal course of business, TCF is exposed to various risks. Management balances the Company’s strategic goals, including revenue and profitability objectives, with the 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, foreign currency risk and price risk) and Operational Risk (which includes transaction risk and compliance risk). Policies, systems and procedures have been adopted which are intended to identify, assess, control, monitor, and manage risk in each of these areas.

 

TCF appointed a dedicated Chief Risk Officer (“CRO”) in 2010 to further enhance its enterprise risk management governance process. The CRO is a senior executive, reporting directly to both the Company’s Chief Executive Officer and Audit Committee Chairman. The CRO has primary responsibility for enterprise wide risk management and Integrated Risk Control Services (formerly referred to as Internal Audit) department across all lines of business at TCF. Additionally, the heads of the various business lines within the company are responsible for identifying the most significant risks in their respective areas. Risk officers are assigned to key business units. The risk officers, while reporting directly to their respective line of business, facilitate implementation of the enterprise risk management and governance process. Each business line within the Company maintains policies, systems and procedures which are intended to identify, assess, control, monitor, and manage risk within each area. Management continually reviews the adequacy and effectiveness of these policies, systems and procedures. An Enterprise Risk Management Committee consisting of senior executives within the Company supports the CRO.

 

As an integral part of the risk management process, management has established various committees consisting of senior executives and others within the Company. The purpose of these committees is to closely monitor risks and ensure that adequate risk management practices exist within their respective areas of authority. Some of the principal committees include the Credit Policy Committee, Concentration Credit Risk Management Committee, Asset/Liability Management Committee (“ALCO”), Investment Committee, Capital Planning Committee and various financial reporting and compliance-related committees. Overlapping membership of these committees helps provide a unified view of risk on an enterprise-wide basis.

 

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 if an obligor fails to meet the terms of any contract with the Company or otherwise fails to perform as agreed. This includes failure of customers and counterparties to meet their contractual obligations, and contingent exposures from unfunded loan commitments and letters of credit. Credit risk also includes failure of a

 

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counterparty to settle a securities transaction on agreed-upon terms (such as the counterparty in a repurchase transaction) or failure of an issuer in connection with mortgage-backed securities held in the Company’s securities available for sale portfolio.

 

TCF has a Concentration Credit Risk Management Committee that meets regularly and is responsible for monitoring the loan and lease portfolio composition and risk tolerance within the various segments of the portfolio. The Concentration Credit Risk Management Committee and the Board of Directors have adopted a Concentration Policy to direct management of the Company’s concentration risk. To manage credit risk arising from lending and leasing activities, management has adopted and maintains underwriting policies and procedures, and periodically reviews the appropriateness of these policies and procedures. Customers and guarantors or recourse providers are evaluated as part of the initial underwriting processes and through periodic reviews. For consumer loans, credit scoring models are used to help determine eligibility for credit and terms of credit. These models are periodically reviewed to verify they are predictive of borrower performance. Limits are established on the exposure to a single customer (including their affiliates) and on concentrations for certain categories of customers. Loan and lease credit approval levels are established so that larger credit exposures receive managerial review at the appropriate level through various credit committees.

 

Management continuously monitors asset quality in order to manage the Company’s credit risk and to 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 and operational condition which may impact repayment. Asset quality is monitored separately based on the type or category of loan or lease. This allows management to better define the Company’s loan and lease portfolio risk profile. Management also uses various risk models to estimate probable impact on payment performance under various expected or unexpected scenarios.

 

If the weak economic conditions continue to prevail throughout 2011 and beyond, credit risk will continue to be elevated. A weakening economy, increasing unemployment or further deterioration of housing markets could result in increased credit losses.

 

The Company manages securities transaction risk by monitoring all unsettled transactions. All counterparties and transaction limits are reviewed and approved annually by both ALCO and the Company’s senior credit committee. To further manage credit risk in the securities portfolio, over 99% of the securities held in the securities available for sale portfolio are issued and guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae.

 

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

 

Interest-Rate Risk  Interest-rate risk is defined as the exposure of net interest income and fair value of financial instruments (interest-earning assets, deposits and borrowings) to adverse movements in interest rates. Interest-rate risk arises mainly from the structure of the balance sheet. The primary goal of interest-rate risk management is to control exposure to changes in market interest-rates 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 the shape of the yield curve, changes in customer behavior and changes in relationships between rate indices (basis risk). Management measures these risks and their impact in various ways, including use of simulation analyses and valuation analyses.

 

Simulation analyses are used to model net interest income from asset and liability positions over a specified time period (generally one and two years), and the sensitivity of net interest income under various interest rate scenarios. The interest rate scenarios may include gradual or rapid changes in interest rates, spread narrowing and widening, yield curve twists, and changes in assumptions about customer behavior in various interest rate scenarios. The simulation analyses are 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 analyses do not necessarily take into account all actions management may undertake in response to anticipated changes in interest rates.

 

9

 

In addition to valuation analyses, management utilizes an interest rate gap measure (difference between interest-earning assets and interest-bearing liabilities repricing within a given period). While the interest rate gap measurement has some limitations, including no assumptions regarding future asset or liability production and a static interest rate assumption, the interest rate gap represents the net asset or liability sensitivity at a point in time. An interest rate gap measure could be significantly affected by external factors such as loan prepayments, early withdrawals of deposits, changes in the correlation of various interest-bearing instruments, competition or a rise or decline in interest rates. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for further information about TCF’s interest-rate risk, gap analysis and simulation analyses.

 

Management also uses valuation analyses to measure risk in the balance sheet that might not be taken into account in the net interest income simulation analyses. Net interest income simulation highlights exposure over a relatively short time period (12 or 24 months), and 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 and does not take into account actions management may undertake in response to anticipated changes in interest rates.

 

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

 

Liquidity Risk  Liquidity risk is defined as the risk to earnings or capital arising from the Company’s inability to meet its obligations when they come due without incurring unacceptable losses.

 

ALCO and the Board of Directors have adopted a Liquidity Management Policy to direct management of the Company’s liquidity risk. The objective of the liquidity management policy is to ensure that TCF meets its cash and collateral obligations promptly, in a cost-effective manner and with the highest degree of reliability. The maintenance of adequate levels of asset and liability liquidity will provide TCF with the ability to meet both expected and unexpected cash flows and collateral needs. Key liquidity ratios, level of asset liquidity, and the amount available from available funding sources are reported to ALCO on a monthly basis. At year end, TCF’s Liquidity Management Policy and current operating practices established a minimum on-balance sheet asset liquidity target of $350 million, a maximum unsecured short-term daily borrowing limit of $225 million, and collateral pledged at the Federal Reserve Discount Window having a borrowing capacity of $500 million.

 

TCF’s asset liquidity may be held in the form of on-balance sheet cash invested with the Federal Reserve or the use of overnight Federal Funds Sold to highly rated counterparties or short-term U.S. Treasury Bills or Notes. Other asset liquidity can be provided by unpledged, AAA rated securities which could be sold or pledged to various counterparties under established TCF lines. At December 31, 2010, TCF had asset liquidity of $507 million.

 

Deposits are TCF’s primary source of funding. In addition, TCF maintains secured sources of funding, which include $1.7 billion in secured borrowing capacity at the FHLB of Des Moines and $529 million of secured borrowing capacity at the Federal Reserve Discount Window. TCF’s secured borrowing capacity with the FHLB is dependent upon the maintenance by TCF of a Borrowing Base Certificate which pledges consumer and commercial real estate loans to the FHLB under a blanket lien. In addition, the FHLB relies upon its own internal credit analysis of TCF’s financial results when determining TCF’s secured borrowing capacity. Should the FHLB lower its internal issuer credit rating on TCF, TCF’s secured borrowing capacity could be reduced, TCF could be required to change collateral from a blanket lien to physically delivering loan files which would be held at the FHLB, or both.

 

Additionally, diminished borrowing capacity could result from TCF credit rating downgrades and unfavorable conditions in the credit markets that restrict or limit various funding sources.

 

TCF has developed and maintains a contingency funding plan should certain liquidity needs arise.

 

Other Market Risks  The Company is also exposed to foreign currency risk as changes in foreign exchange rates may impact the Company’s investment in TCF Commercial Finance Canada, Inc. (“TCFCFC”) or results of other transactions in countries outside of the United States. During 2010, TCF entered into forward foreign exchange contracts in order to minimize the risk of changes in foreign exchange rates on its investment in and loans to TCFCFC and on certain other foreign lease transactions. The value of

 

10

 

forward foreign exchange contracts vary over their contractual lives as the related currency exchange rates fluctuate. TCF may also experience realized and unrealized gains or losses on forward foreign exchange contracts as a result of changes in foreign exchange rates.

 

The investments in FHLB stock are required investments related to TCF’s borrowings from these banks. FHLBs obtain their funding primarily through issuance of consolidated obligations of the FHLB system. The U.S. Government does not guarantee these obligations, and each of the 12 FHLBs are generally jointly and severally liable for repayment of each other’s debt. The FHLB system has experienced financial stress in recent years, and some of the regional banks within the FHLB system have suspended or reduced their dividends, or eliminated the ability of members to redeem capital stock. The ultimate impact of these developments on the FHLB system or its programs for advances to members is not clear. TCF’s investments in the FHLB and ability to obtain FHLB funds could be adversely impacted if the financial health of the FHLB system worsens.

 

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

 

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

 

In July 2010, TCF National Bank entered into a consent order with the OCC directing the Bank to address certain deficiencies relating to the BSA. See “Item 1. Business – Regulation – Examinations and Regulatory Sanctions”.

 

Other Risks

 

Declines in Real Estate Values  Declines in home and real estate values in TCF’s markets have adversely impacted results of operations. Like all banks, TCF is subject to the effects of any economic downturn, and in particular, a continued decline in real estate values in TCF’s markets could have a further negative effect on results of operations. A significant further decline in home values would likely lead to an additional decrease in new consumer real estate loan originations, increased delinquencies, defaults, non-accrual and accruing modified loans, as well as increased losses in this portfolio. A significant further decline in commercial real estate values would likely lead to an additional reduction of TCF’s secured interest levels and potentially increase accruing modified loans or non-accrual loans.

 

Economic Conditions  In addition to the declines in home values, the weak economy has also adversely impacted TCF’s results of operations. Continued weakness of the economy coupled with high unemployment and decreased consumer spending could have a further negative effect on results of TCF’s operations through higher credit losses, lower transaction-related revenues and lower average deposit balances.

 

Soundness of other financial institutions  Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. TCF has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and

 

11

 

dealers, commercial banks, investment banks, and other institutional clients. Many of these transactions expose TCF to credit risk in the event of default of a counterparty or client. In addition, TCF’s credit risk may be exacerbated when collateral held cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due. Any such losses could have a material and adverse effect on TCF’s financial condition and results of operations.

 

Customer Behavior  Changes in customers’ behavior regarding use of deposit accounts could result in lower fee revenue, higher borrowing costs, and higher operational costs for TCF. TCF obtains a large portion of its revenue from its deposit accounts and depends on low-interest cost deposits as a significant source of funds.

 

In addition, competition from other financial institutions or adverse customer reaction to changes in TCF’s products, in response to new regulations, could result in higher numbers of closed accounts and increased account acquisition costs.

 

New Products  In 2010, TCF introduced a new anchor retail deposit account product that replaced TCF Totally Free Checking, and that calls for a monthly maintenance fee on accounts not meeting certain requirements. After gauging the impact and response from customers and competition, TCF amended the fee waiver criteria in early 2011 to be more customer-friendly and to generate and retain accounts. TCF also implemented new regulatory requirements that prohibit financial institutions from charging NSF fees on point-of-sale and ATM transactions unless customers opt-in. The opt-in election is revocable by customers at any time. In 2011, TCF is considering retail checking account changes that include charging a daily negative balance fee in lieu of a per item NSF fee. This is a unique product that TCF hopes will simplify this process for customers by eliminating fees for each item presented and assessing a single fee for each day an account is overdrawn. TCF continually seeks to react to changes in competitive conditions and customer behavior, but uncertainties relating to customer acceptance of new products and competitive conditions could adversely impact TCF’s new account origination activity and fee income.

 

Card Revenue  Future card revenues may be impacted by class action litigation against Visa USA Inc. (Visa USA) and MasterCard®. Under Visa USA’s Bylaws, TCF has a contingent obligation to indemnify Visa USA for certain litigation unrelated to TCF. See page 28 under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for details of TCF’s contingent obligation to indemnify Visa USA for certain litigation.

 

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

 

Card revenues are anticipated to be further impacted by the Durbin Amendment to the Dodd-Frank Act, which directs the Federal Reserve to establish rules by April 21, 2011, required to take effect by July 21, 2011, related to debit-card interchange fees which preclude the recovery of costs other than those permitted by the Amendment. The Federal Reserve issued proposed regulations implementing the Durbin Amendment in December 2010. If the proposed regulations are adopted, the reduction in TCF’s average interchange rate after July 21, 2011 could approach 85%. TCF has filed a lawsuit against the Federal Reserve and OCC challenging the constitutionality of the Amendment on the grounds that it violates TCF’s due process rights as it requires TCF to offer the debit card product below cost and thus not earn a full return on invested capital, denies TCF equal protection under the law by exempting institutions with assets less than $10 billion and violates TCF’s rights under the takings clause of the Constitution of the United States by causing TCF to bear a substantial competitive and financial burden without just compensation.

 

Supermarket Branches  The success of TCF’s supermarket branches is dependent on the continued long-term success and viability of TCF’s supermarket partners and TCF’s ability to maintain licenses or lease agreements for its supermarket locations. A significant financial decline of one of our supermarket partners could result in the loss of supermarket branches or increase costs to operate the supermarket branches. At December 31, 2010, TCF had 234 supermarket branches. Supermarket banking continues to play an important role in TCF’s growth, as these branches have been consistent generators of account growth and deposits. TCF is subject to the risk, among others, that its license or lease for a location or locations will terminate upon the sale or closure of that location or locations by the supermarket partner. Also, an economic slowdown, or financial or labor difficulties in the supermarket industry, may reduce activity in TCF’s supermarket branches.

 

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Leasing and Equipment Finance Activities  TCF’s leasing and equipment finance activities are subject to the risk of cyclical downturns and other adverse economic developments. In an adverse economic environment, there may be a decline in the demand for some types of equipment which TCF leases and/or finances, resulting in a decline in the amount of new equipment being placed in service as well as the decline in equipment values for equipment previously placed in service. TCF, like all owners and lessors of commercial equipment, may also be exposed to liability claims resulting from injuries or accidents involving that equipment. TCF seeks to mitigate its overall exposure to lessor’s liability risk by requiring certain lessees to furnish evidence of liability insurance prior to lease inception and to maintain that insurance throughout the term of the lease and through its own insurance programs.

 

Inventory Finance  TCF has strategic and execution risk associated with expanding the inventory finance business as the ability to attract and retain manufacturers and dealers may not achieve expectations. The core operating risks of this business, except for foreign currency risk, are similar to other existing TCF businesses but also include the risk that inventory could be sold without the dealer remitting payment to TCF as required.

 

FDIC Insurance  The FDIC is authorized to terminate a depository institution’s deposit insurance if it finds that the institution is being operated in an unsafe and unsound manner or has violated any rule, regulation, order or condition administered by the institution’s regulatory authorities. Any such termination of deposit insurance would likely have a material adverse effect on TCF, the severity of which would depend on the amount of deposits affected by such a termination.

 

Income Taxes  TCF is subject to income tax laws which are often complex and require interpretation. Changes in income tax laws could negatively impact TCF’s results of operations. If TCF’s Real Estate Investment Trust (“REIT”) affiliate fails to qualify as a REIT, or should states enact legislation taxing REITs or related entities, TCF’s tax expense would increase. The REIT and related companies must meet specific provisions of the Internal Revenue Code and state tax laws. Use of REITs is and has been the subject of federal and state audits, litigation with state taxing authorities and tax policy debates by various state legislatures. Additional unfavorable tax law changes or unfavorable audit results could increase TCF’s income taxes. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Income Taxes” and Note 12 of Notes to Consolidated Financial Statements for additional information.

 

Rules and Regulations  Uncertainty remains as to the ultimate impact of the Dodd-Frank Act, which was signed into law on July 21, 2010. Significant regulatory and legal consequences may arise as provisions of the Act are interpreted and implemented by designated regulatory agencies. Along with the Act, 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 stockholders. These laws and regulations may impose significant limitations on operations. These limitations, and sources of potential liability for the violation of such laws and regulations, are described in “Item 1. Business – Regulation”. These regulations, along with tax and accounting laws, regulations, rules and standards, have a significant impact on the ways that financial institutions conduct business, implement strategic initiatives, engage in tax planning and make financial disclosures. These laws, regulations, rules and standards are constantly evolving and may change significantly over time. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on TCF’s business, results of operations, and financial condition, the effect of which is impossible to predict. Violations of these laws can result in enforcement actions which can impact operations.

 

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

 

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consumer lending and retail deposit-taking activity. Increased litigation brought on the basis of state law, including litigation brought by state attorneys general, or enforcement actions by the new Consumer Financial Protection Bureau, are possible as a result of the enactment of the Act. See Business – Regulation – Dodd-Frank Wall Street Reform and Consumer Protection Act.

 

The Community Reinvestment Act (“CRA”) and fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The Department of Justice 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.

 

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’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new accounts. Failure to comply with these regulations could result in sanctions and possibly fines. In recent years, several banking institutions have received sanctions and some have incurred large fines for non-compliance with these laws and regulations.

 

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

 

Estimates and Assumptions  TCF’s consolidated financial statements conform with generally accepted accounting principles, which require management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. These estimates are based on information available to management at the time the estimates are made. Actual results could differ from those estimates. For further information relating to critical accounting estimates, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Summary of Critical Accounting Estimates”.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Offices  At December 31, 2010, TCF owned the buildings and land for 144 of its bank branch offices, owned the buildings but leased the land for 25 of its bank branch offices and leased or licensed the remaining 273 bank branch offices, all of which are functional and appropriately maintained. Bank branch properties owned by TCF had an aggregate net book value of approximately $282.7 million at December 31, 2010. At December 31, 2010, the aggregate net book value of leasehold improvements associated with leased bank branch office facilities was $26 million. In addition to the branch offices, TCF owned and leased other facilities with an aggregate net book value of $46.2 million at December 31, 2010. For more information on premises and equipment, see Note 7 of Notes to Consolidated Financial Statements.

 

Item 3. Legal Proceedings

 

In August 2010, TCF was named in a putative class action challenging TCF’s checking account posting practices. The plaintiffs seek damages and other relief, including restitution. TCF’s account agreement with the customer contains an arbitration provision under which the named plaintiffs agreed to arbitrate disputes such as this in an individual arbitration, as opposed to class action. On November 24, 2010, the United States District Court of Minnesota granted TCF’s motion to compel individual arbitration of all claims by plaintiffs and stayed further proceedings in the legal action. TCF believes its arbitration provision is valid and enforceable and that in

 

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any event it has meritorious defenses to the claims brought by the plaintiffs. At this stage of the litigation, it is not possible for management of TCF to determine the probability of a material adverse outcome or reasonably estimate the amount of any potential loss.

 

From time to time, TCF is also a party to other 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 collections activities. TCF may also be subject to enforcement action by federal regulators, including the Securities and Exchange Commission, the Federal Reserve and the OCC. From time to time, borrowers and other customers, or employees or former employees, have also brought actions against TCF, in some cases claiming substantial damages. Financial services companies are subject to the risk of class action litigation, and TCF is subject to such actions brought against it from time to time. Litigation is often unpredictable and the actual results of litigation cannot be determined with certainty, and therefore the ultimate resolution of a matter and the possible range of loss associated with certain potential outcomes cannot be established with confidence. Based on our current understanding of these pending legal proceedings, management does not believe that judgments or settlements arising from pending or threatened legal matters, individually or in the aggregate, would have a material adverse effect on the consolidated financial position, operating results or cash flows of TCF.

 

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.

 

As of January 31, 2011, there were 7,299 holders of record of TCF’s common stock.

 

						Dividends
		High		Low		Declared
2010
Fourth Quarter		$16.63		$12.90		$.05
Third Quarter		17.66		13.87		.05
Second Quarter		18.89		14.95		.05
First Quarter		16.83		13.40		.05
2009
Fourth Quarter		$14.72		$11.36		$.05
Third Quarter		15.83		12.71		.05
Second Quarter		16.67		11.37		.05
First Quarter		14.31		8.74		.25

 

The Board of Directors of TCF Financial and TCF Bank have adopted a Capital Plan and Dividend Policy. The policies define how enterprise risk related to capital will be managed, how the adequacy of capital will be measured and the process by which capital strategy, capital management and common stock dividend recommendations will be presented to TCF’s Board of Directors. TCF’s management is charged with ensuring that capital strategy actions, including the declaration of common stock dividends, are prudent, efficient and provide value to TCF’s shareholders, while ensuring that past and prospective earnings retention is consistent with TCF’s capital needs, asset quality and overall financial condition. The Board of Directors intends to continue its practice of paying quarterly cash dividends on TCF’s common stock as justified by the financial condition of TCF. The declaration and amount of future dividends will depend on circumstances existing at the time, including TCF’s earnings, level of internally generated common capital excluding earnings, financial condition and capital requirements, the cash available to pay such dividends (derived mainly from dividends and distributions from TCF Bank), as well as regulatory and contractual limitations and such other factors as the Board of Directors may deem relevant. In general, TCF Bank may not declare or pay a dividend to TCF in excess of 100% of its net retained profits for that year combined with its net retained profits for the preceding two calendar years without prior approval of the OCC. Restrictions on the ability of TCF Bank to pay cash dividends or possible diminished earnings of TCF may limit the ability of TCF Financial to pay dividends in the future to holders of its common stock. In addition, the ability of TCF Financial and TCF Bank to pay dividends is dependent on regulatory policies and capital requirements and may be subject to regulatory approval. See “Item 1. Business – Regulation – Regulatory Capital Requirements”, “Item 1. Business – Regulation – Restrictions on Distributions” and Note 14 of Notes to Consolidated Financial Statements.

 

15

 

The following graph compares the cumulative total stockholder return on TCF Stock over the last five fiscal years with the cumulative total return of the Standard and Poor’s 500 Stock Index, the SNL All Bank and Thrift Index, and a TCF Financial-selected group of peer institutions over the same period (assuming the investment of $100 in each index on December 31, 2005 and reinvestment of all dividends).

 

TCF Stock Performance Chart

 

 

		Period Ending
Index		12/31/05		12/31/06		12/31/07		12/31/08		12/31/09		12/31/10
TCF Financial Corporation		100.00		104.67		71.14		57.60		59.13		65.13
SNL Bank and Thrift (1)		100.00		116.85		89.10		51.24		50.55		56.44
S&P 500 Index		100.00		115.79		122.16		76.96		97.33		111.99
TCF 2010 Peer Group (2)		100.00		109.80		86.03		70.45		61.42		71.52

 

(1)                Includes all major exchange (NYSE, NYSE Amex, NASDAQ) banks and thrifts in SNL’s converage universe (503 companies as of December 31, 2010).

 

(2)                Consists of the 30 publicly-traded banks and thrifts, 15 of which are immediately larger than and 15 of which are immediately smaller than TCF Financial Corporation in total assets as of September 30, 2010. The 2010 Peer Group includes: Marshall & Ilsley Corporation; Zions Bancorporation; New York Community Bancorp, Inc.; Popular, Inc.; Synovus Financial Corporation; First Horizon National Corporation; BOK Financial Corporation; Associated Banc-Corp; People’s United Financial, Inc.; City National Corporation; First Citizens BancShares, Inc.; First Niagara Financial Group, Inc.; East West Bancorp, Inc.; Astoria Financial Corporation; Commerce Bancshares, Inc.; Webster Financial Corporation; Cullen/Frost Bankers, Inc.; First BanCorp.; Fulton Financial Corporation; SVB Financial Group; FirstMerit Corporation; Wintrust Financial Corporation; Valley National Bancorp; Susquehanna Bancshares, Inc.; Flagstar Bancorp, Inc.; BancorpSouth, Inc.; Washington Federal, Inc.; Bank of Hawaii Corporation; PrivateBancorp, Inc.; and International Bancshares Corporation. Five of the companies which were in the 2009 Peer Group are not in the 2010 Peer Group due to the failure of the company or changes in asset size. Those five companies are: Huntington Bancshares, Inc.; CapitalSource, Inc.; MB Financial, Inc.; W Holding Company, Inc.; and South Financial Group, Inc.

Source: SNL Financial LC and Standard & Poor’s © 2011

 

The following table summarizes share repurchase activity for the quarter ended December 31, 2010.

 

						Total Number of		Maximum Number
		Total Number		Average		Shares Purchased		of Shares that May
		of Shares		Price Paid		as Part of Publicly		Yet be Purchased
Period		Purchased		Per Share		Announced Plan		Under the Plan
October 1 to October 31, 2010
Share repurchase program (1)		–		$       –		–		5,384,130
Employee transactions (2)		3,332		$16.37		N.A.		N.A.
November 1 to November 30, 2010
Share repurchase program (1)		–		$       –		–		5,384,130
Employee transactions (2)		–		$       –		N.A.		N.A.
December 1 to December 31, 2010
Share repurchase program(1)		–		$       –		–		5,384,130
Employee transactions (2)		–		$       –		N.A.		N.A.
Total
Share repurchase program (1)		–		$       –		–
Employee transactions (2)		3,332		$16.37		N.A.

 

N.A. Not Applicable.

 

(1)                The current share repurchase authorization was approved by the Board of Directors on April 14, 2007. The authorization was for a repurchase of up to an additional 5% of TCF’s common stock outstanding at the time of the authorization, or 6.5 million shares. This authorization does not have an expiration date.

 

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

 

16

 

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:

		Year Ended December 31,																	Compound Annual Growth Rate
																			1-Year		5-Year
(Dollars in thousands, except per-share data)		2010				2009			2008				2007			2006			2010/2009		2010/2005
Total revenue		$		1,237,187		$1,158,861			$1,092,108				$1,091,634			$1,026,994			6.8	%	4.4	%
Net interest income		$		699,202		$   633,006			$   593,673				$   550,177			$   537,530			10.5		6.2
Provision for credit losses		236,437				258,536			192,045				56,992			20,689			(8.5	)	94.1
Fees and other revenue		508,862				496,468			474,061				490,285			485,276			2.5		2.3
Gains on securities, net		29,123				29,387			16,066				13,278			–			(.9	)	22.2
Visa share redemption		–				–			8,308				–			–			–		–
Gains on sales of branches and real estate		–				–			–				37,894			4,188			–		(100.0	)
Non-interest expense		763,124				767,784			694,403				662,124			649,197			(.6	)	4.7
Income before income tax expense		237,626				132,541			205,660				372,518			357,108			79.3		(9.0	)
Income tax expense		87,765				45,854			76,702				105,710			112,165			91.4		(5.3	)
Income after income tax expense		149,861				86,687			128,958				266,808			244,943			72.9		(10.8	)
Income (loss) attributable to non-controlling interest		3,297				(410		)	–				–			–			N.M.		N.M.
Net income		146,564				87,097			128,958				266,808			244,943			68.3		(11.2	)
Preferred stock dividends		–				18,403			2,540				–			–			(100.0	)	–
Net income available to common stockholders		$		146,564		$     68,694			$   126,418				$   266,808			$   244,943			113.4		(11.2	)
Per common share:
Basic earnings		$		1.05		$           .54			$         1.01				$         2.09			$         1.90			94.4		(12.1	)
Diluted earnings		$		1.05		$           .54			$         1.01				$         2.09			$         1.90			94.4		(12.1	)
Dividends declared		$		.20		$           .40			$         1.00				$           .97			$           .92			(50.0	)	(25.1	)
Consolidated Financial Condition:
		At December 31,																	Compound Annual Growth Rate
(Dollars in thousands, except per-share data)		2010				2009			2008				2007			2006			1-Year 2010/2009		5-Year 2010/2005
Loans and leases		$	14,788,304			$14,590,744			$13,345,889				$12,494,370			$11,478,255			1.4	%	7.2	%
Securities available for sale		1,931,174				1,910,476			1,966,104				1,963,681			1,816,126			1.1		3.2
Total assets		18,465,025				17,885,175			16,740,357				15,977,054			14,669,734			3.2		6.6
Checking, savings and money market deposits		10,556,788				10,380,814			7,647,069				7,322,014			7,285,615			1.7		7.9
Certificates of deposit		1,028,327				1,187,505			2,596,283				2,254,535			2,483,635			(13.4	)	(11.7	)
Total deposits		11,585,115				11,568,319			10,243,352				9,576,549			9,769,250			.1		4.9
Borrowings		4,985,611				4,755,499			4,660,774				4,973,448			3,588,540			4.8		10.8
Equity		1,471,663				1,175,362			1,493,776				1,099,012			1,033,374			25.2		8.1
Book value per common share		$		10.30		$           9.10			$           8.99				$           8.68			$           7.92			13.2		6.7
Key Ratios and Other Data:
											At or For the Year Ended December 31,
											2010			2009			2008		2007		2006
Return on average assets										.82		%		.49	%		.79	%	1.76	%	1.74	%
Return on average common equity										10.36				5.95			11.46		25.82		24.37
Net interest margin(1)										4.14				3.87			3.91		3.94		4.16
Net charge-offs as a percentage of average loans and leases										1.47				1.34			.78		.29		.16
Average total equity to average assets										7.83				7.20			7.04		6.82		7.15
Number of bank branches										442				443			448		453		453

 

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

 

N.M. Not Meaningful.

 

17

 

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

 

Table of Contents	Page
Overview	18
Results of Operations	20
Performance Summary	20
Operating Segment Results	20
Consolidated Income Statement Analysis	20
Net Interest Income	20
Provision for Credit Losses	24
Non-Interest Income	24
Non-Interest Expense	26
Income Taxes	28
Consolidated Financial Condition Analysis	29
Securities Available for Sale	29
Loans and Leases	29
Allowance for Loan and Lease Losses	39
Other Real Estate Owned and Repossessed and Returned Equipment	40
Liquidity Management	42
Deposits	42
Borrowings	42
Contractual Obligations and Commitments	43
Stockholders’ Equity	43
Summary of Critical Accounting Estimates	45
Recent Accounting Developments	46
Fourth Quarter Summary	46
Legislative, Legal and Regulatory Developments	47
Forward-Looking Information	47

 

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

 

Overview

 

TCF Financial Corporation, a Delaware corporation, is a national bank holding company based in Wayzata, Minnesota. Its principal subsidiary, TCF National Bank, is headquartered in South Dakota. TCF had 442 branches in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana, Arizona and South Dakota (TCF’s primary banking markets) at December 31, 2010.

 

TCF provides convenient financial services through multiple channels in its primary banking markets. TCF has developed products and services designed to meet the needs of all consumers. The Company focuses on attracting and retaining customers through service and convenience, including branches that are open seven days a week and on most holidays, extensive full-service supermarket branches, automated teller machine (“ATM”) networks and internet, mobile and telephone banking. TCF’s philosophy is to generate interest income, fees and other revenue growth through business lines that emphasize higher yielding assets and low or no interest-cost deposits. The Company’s growth strategies include the development of new products and services, new branch expansion and acquisitions. 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, Wholesale Banking and Treasury Services. Retail Banking includes branch banking and retail lending. Wholesale Banking includes commercial banking, leasing and equipment finance and inventory finance. TCF refers to its combined leasing and equipment finance and inventory finance businesses as Specialty Finance. Treasury Services includes the Company’s investment and borrowing portfolios and management of capital, debt and market risks, including interest-rate and liquidity risks.

 

TCF’s lending strategy is to originate high credit quality and primarily secured loans and leases. TCF’s retail lending operation offers fixed- and variable-rate loans and lines of credit secured by residential real estate properties. Commercial loans are generally made on properties or to customers located within TCF’s primary banking markets. The leasing and equipment finance businesses consist of TCF Equipment Finance, a company that delivers equipment finance solutions to businesses in select markets, and Winthrop Resources, a company that primarily leases technology and data processing equipment. TCF’s leasing and equipment finance businesses have equipment installations in all 50 states and, to a limited extent, in foreign countries. In December 2008, TCF Inventory Finance commenced lending operations to originate commercial variable-rate loans which are secured by equipment under a floorplan arrangement and supported by repurchase agreements from original equipment manufacturers to businesses in the United States and Canada.

 

18

 

Net interest income, the difference between interest income earned on loans and leases, securities available for sale, investments and other interest-earning assets and interest paid on deposits and borrowings, represented 56.5% of TCF’s total revenue in 2010. 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 Management Committee and through related interest-rate risk monitoring and management policies. See “Item 1A. Risk Factors” and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” for further discussion.

 

Non-interest income is a significant source of revenue for TCF and an important factor in TCF’s results of operations. Increasing fee and service charge revenue has been challenging as a result of the slowing of the economy, changing customer behavior and the impact of the implementation of new regulation. 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. Key drivers of non-interest income are the number of deposit accounts and related transaction activity.

 

New regulations that became fully effective on August 15, 2010 require consumer checking account customers to elect if they want TCF to authorize debit card and ATM transactions if, at the time of authorization, there are insufficient funds in the account to cover the transaction (“opt-in”). TCF has had a process in place to discuss this service with new and existing consumer checking account customers since early 2010. Under the new regulations, any account that has not elected to opt-in is deemed by regulation to have declined the service. The opt-in election is revocable by customers at any time. Customers who have not elected to opt-in may see an increase in the number of denied transactions on their debit card or ATM transactions. These denied transactions may impact consumer payment behavior and reduce fees and service charges and card revenue.

 

In response to these new regulations, TCF introduced a new anchor checking account product that replaced the TCF Totally Free Checking product. The new product carries a monthly maintenance fee on accounts not meeting certain specific requirements. TCF is considering future retail deposit account changes that could include charging a daily negative balance fee in lieu of per item NSF fees or other significant charges. The impact of such changes on TCF’s fee revenues is uncertain. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Non-Interest Income” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Information” for additional information.

 

The Company’s Visa debit card program has grown significantly since its inception in 1996. TCF is the 11th largest issuer of Visa Classic debit cards in the United States, based on sales volume for the three months ended September 30, 2010, as published by Visa. TCF earns interchange revenue from customer card transactions paid primarily by merchants, not TCF’s customers. Card products represent 25.3% of banking fee revenue for the year ended December 31, 2010. Visa has significant litigation against it regarding interchange pricing and there is a risk this revenue could be impacted by any settlement or adverse rulings in such litigation.

 

Card revenues are anticipated to be impacted by the Durbin Amendment to the Dodd-Frank Act, which directs the Federal Reserve to establish rules by April 21, 2011, required to take effect by July 21, 2011, related to debit-card interchange fees which preclude the recovery of costs other than those permitted by the Amendment. The Federal Reserve issued proposed regulations implementing the Durbin Amendment in December 2010. If the proposed regulations are adopted, the reduction in TCF’s average interchange rate after July 21, 2011 could approach 85%. TCF has filed a lawsuit against the Federal Reserve and OCC challenging the constitutionality of the Durbin Amendment on the grounds that it violates TCF’s due process rights as it requires TCF to offer the debit card product below cost and thus not earn a full return on invested capital, denies TCF equal protection under the law by exempting institutions with assets less than $10 billion and violates TCF’s rights under the takings clause of the Constitution of the United States by causing TCF to bear a substantial competitive and financial burden without just compensation. See “Item 1A. Risk Factors – Other Risks – Card Revenue” for further discussion.

 

The following portions of Management’s Discussion and Analysis of Financial Condition and Results of Operations focus in more detail on the results of operations for 2010, 2009 and 2008 and on information about TCF’s balance sheet, loan and lease portfolio, liquidity, funding resources, capital and other matters.

 

19

 

Results of Operations

 

Performance Summary  TCF reported diluted earnings per common share of $1.05 for 2010, compared with $.54 for 2009 and $1.01 for 2008. Net income was $146.6 million for 2010, compared with $87.1 million for 2009 and $129 million for 2008. Net income for 2009 includes a non-cash deemed preferred stock dividend of $12 million, or 10 cents per common share.

 

Return on average assets was .82% in 2010, compared with .49% in 2009 and .79% in 2008. Return on average common equity was 10.36% in 2010, compared with 5.95% in 2009 and 11.46% in 2008. The effective income tax rate for 2010 was 36.9%, compared with 34.6% in 2009 and 37.3% in 2008.

 

Operating Segment Results  RETAIL BANKING – Consisting of branch banking and retail lending, reported net income of $93 million for 2010, up from $26.6 million in 2009 as a result of lower costs of deposits in branch banking and lower operating expenses. Retail Banking net interest income for 2010 was $443 million, up 9.9% from $403.2 million for 2009.

 

The Retail Banking provision for credit losses totaled $140.6 million in 2010, down 21% from $178 million in 2009. This decrease was primarily due to decreased levels of provision in excess of net charge-offs in the consumer real estate portfolio. Refer to the “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Provision for Credit Losses” section for further discussion.

 

Retail Banking non-interest income totaled $409.6 million in 2010, compared with $418 million in 2009. Fees and service charges were $267.5 million for 2010, down 5.2% from $282.3 million in 2009, primarily due to changes in customer banking and spending behavior resulting in less fee income and to a lesser extent, the implementation of “opt-in” regulations. Card revenues were $111 million for 2010, up 6% from $104.7 million in 2009. The increase in card revenues was primarily attributable to an increase in spending per active account. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Non-Interest Income” for further discussion.

 

Retail Banking non-interest expense totaled $562.8 million in 2010, down 6% from $599 million in 2009. The decrease was primarily due to decreased compensation and employee benefit expense due to headcount reductions, decreased deposit account premiums and the 2009 FDIC special assessment.

 

WHOLESALE BANKING – Consisting of commercial banking, leasing and equipment finance and inventory finance, reported net income of $39.5 million for 2010, up 25.2% from $31.6 million in 2009. Net interest income for 2010 was $251.7 million, up 22% from $206.3 million in 2009, as a result of an $801 million, or 12.1%, increase in average interest-earning assets, primarily within the specialty finance businesses.

 

The provision for credit losses for this operating segment totaled $94 million in 2010, up from $78.7 million in 2009. The increase in the provision for credit losses from 2009 was primarily due to increased net charge-offs and increased non-accrual loans in commercial lending.

 

Wholesale Banking non-interest income totaled $98.7 million in 2010, up $21.5 million from $77.2 million in 2009. The increase in Wholesale Banking revenues in 2010, was primarily due to an increase in operating lease revenues resulting from the acquisition of FNCI in 2009.

 

Wholesale Banking non-interest expense totaled $191.3 million in 2010, up $35.1 million from $156.2 million in 2009, primarily as a result of increased compensation expense and operating lease depreciation related to the FNCI acquisition in 2009 and increased expense for foreclosed real estate and repossessed assets.

 

TREASURY SERVICES – Treasury services reported net income of $16.2 million in 2010, down from $27.4 million in 2009. The $11.2 million decrease was primarily due to the impact of TCF becoming more asset sensitive, and lower balances of securities available for sale.

 

Consolidated Income Statement Analysis

 

Net Interest Income  Net interest income, the difference between interest earned on loans and leases, investments and other interest-earning assets (interest income), and interest paid on deposits and borrowings (interest expense), represented 56.5% of TCF’s total revenue in 2010, 54.6% in 2009 and 54.4% in 2008. 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 prevailing short and long-term interest rates, loan and deposit pricing strategies and competitive conditions, the volume and the mix of interest-earning assets and interest-bearing liabilities, the level of non-performing assets, and the impact of modified loans and leases.

 

20

 

The following tables summarize TCF’s average balances, interest, dividends and yields and rates on major categories of TCF’s interest-earning assets and interest-bearing liabilities.

 

		Year Ended								Year Ended
		December 31, 2010								December 31, 2009								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 and other		$    337,279			$    5,509			1.63	%	$     375,396			$   4,370			1.16	%	$  (38,117	)		$  1,139			47
U.S. Government sponsored entities:
Mortgage-backed securities		1,817,413			80,332			4.42		1,645,544			80,902			4.92		171,869			(570	)		(50	)
Debentures		–			–			–		389,245			8,487			2.18		(389,245	)		(8,487	)		(218	)
U.S. Treasury Bills		71,233			93			.13		17,123			12			.07		54,110			81			6
Other securities		454			20			4.41		494			26			5.26		(40	)		(6	)		(85	)
Total securities available for sale (2)		1,889,100			80,445			4.26		2,052,406			89,427			4.36		(163,306	)		(8,982	)		(10	)
Loans and leases:
Consumer real estate:
Fixed-rate		5,082,487			313,573			6.17		5,421,081			348,400			6.43		(338,594	)		(34,827	)		(26	)
Variable-rate		2,148,171			116,437			5.42		1,862,267			106,988			5.75		285,904			9,449			(33	)
Consumer – other		26,576			2,303			8.67		35,849			3,061			8.54		(9,273	)		(758	)		13
Total consumer real estate and other		7,257,234			432,313			5.96		7,319,197			458,449			6.26		(61,963	)		(26,136	)		(30	)
Commercial real estate:
Fixed- and adjustable-rate		2,816,201			167,757			5.96		2,574,818			155,812			6.05		241,383			11,945			(9	)
Variable-rate		495,433			21,559			4.35		561,881			22,544			4.01		(66,448	)		(985	)		34
Total commercial real estate		3,311,634			189,316			5.72		3,136,699			178,356			5.69		174,935			10,960			3
Commercial business:
Fixed- and adjustable-rate		140,498			7,447			5.30		166,745			9,581			5.75		(26,247	)		(2,134	)		(45	)
Variable-rate		234,892			8,521			3.63		308,929			10,644			3.45		(74,037	)		(2,123	)		18
Total commercial business		375,390			15,968			4.25		475,674			20,225			4.25		(100,284	)		(4,257	)		–
Total commercial		3,687,024			205,284			5.57		3,612,373			198,581			5.50		74,651			6,703			7
Leasing and equipment finance		3,056,006			196,445			6.43		2,826,835			192,557			6.81		229,171			3,888			(38	)
Inventory finance		677,214			49,881			7.37		179,990			14,797			8.22		497,224			35,084			(85	)
Total loans and leases (3)		14,677,478			883,923			6.02		13,938,395			864,384			6.20		739,083			19,539			(18	)
Total interest-earning assets		16,903,857			969,877			5.74		16,366,197			958,181			5.85		537,660			11,696			(11	)
Other assets (4)		1,286,683								1,157,314								129,369
Total assets		$18,190,540								$17,523,511								$ 667,029
Liabilities and Equity:
Non-interest bearing deposits:
Retail		$  1,429,436								$  1,402,442								$  26,994
Small business		641,412								584,605								56,807
Commercial and custodial		284,750								265,681								19,069
Total non-interest bearing deposits		2,355,598								2,252,728								102,870
Interest-bearing deposits:
Checking		2,071,990			6,466			.31		1,802,694			8,137			.45		269,296			(1,671	)		(14	)
Savings		5,410,681			40,023			.74		4,732,316			58,556			1.24		678,365			(18,533	)		(50	)
Money market		656,691			4,532			.69		683,030			7,006			1.03		(26,339	)		(2,474	)		(34	)
Subtotal		8,139,362			51,021			.63		7,218,040			73,699			1.02		921,322			(22,678	)		(39	)
Certificates of deposit		1,054,179			10,208			.97		1,915,467			48,413			2.53		(861,288	)		(38,205	)		(156	)
Total interest-bearing deposits		9,193,541			61,229			.67		9,133,507			122,112			1.34		60,034			(60,883	)		(67	)
Total deposits		11,549,139			61,229			.53		11,386,235			122,112			1.07		162,904			(60,883	)		(54	)
Borrowings:
Short-term borrowings		124,891			474			.38		85,228			233			.27		39,663			241			11
Long-term borrowings		4,580,786			208,972			4.56		4,373,182			202,830			4.64		207,604			6,142			(8	)
Total borrowings		4,705,677			209,446			4.45		4,458,410			203,063			4.55		247,267			6,383			(10	)
Total interest-bearing liabilities		13,899,218			270,675			1.95		13,591,917			325,175			2.39		307,301			(54,500	)		(44	)
Total deposits and borrowings		16,254,816			270,675			1.66		15,844,645			325,175			2.05		410,171			(54,500	)		(39	)
Other liabilities		511,589								416,555								95,034
Total liabilities		16,766,405								16,261,200								505,205
Total TCF Financial Corp. stockholders’ equity		1,415,161								1,261,219								153,942
Non-controlling interest in subsidiaries		8,974								1,092								7,882
Total equity		1,424,135								1,262,311								161,824
Total liabilities and equity		$18,190,540								$17,523,511								$ 667,029
Net interest income and margin					$699,202			4.14	%				$633,006			3.87	%				$66,196			27

 

bps = basis points.

(1)                Interest income excludes the taxable equivalent adjustments (based on the U.S. federal statutory rate of 35%) of $1.6 million and $494 thousand during the years ended December 31, 2010 and 2009, respectively.

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

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

(4)                Includes operating leases.

 

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