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, 2011

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 $2,013,384,593.

 

As of January 31, 2012, there were 161,737,391 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 2012 Annual Meeting of Stockholders to be held on April 25, 2012 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	15
Item 4.	Mine Safety Disclosures	15
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	18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	51
Item 8.	Financial Statements and Supplementary Data	55
	Report of Independent Registered Public Accounting Firm	55
	Consolidated Financial Statements	56
	Notes to Consolidated Financial Statements	60
	Other Financial Data	103
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	104
Item 9A.	Controls and Procedures	104
	Management’s Report on Internal Control Over Financial Reporting	105
	Report of Independent Registered Public Accounting Firm	106
Item 9B.	Other Information	107
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	107
Item 11.	Executive Compensation	107
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	108
Item 13.	Certain Relationships and Related Transactions, and Director Independence	108
Item 14.	Principal Accounting Fees and Services	108
Part IV
Item 15.	Exhibits, Financial Statement Schedules	109
Signatures		110
Index to Exhibits		111

 

 

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. TCF also conducts commercial leasing and equipment finance business in all 50 states and, to a limited extent, in foreign countries, commercial inventory finance in the U.S. and Canada, and indirect auto finance business in over 30 states.

 

At December 31, 2011, TCF had total assets of $19 billion and was the 34th largest publicly traded bank holding company in the United States based on total assets as of September 30, 2011. 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, inventory finance and auto finance. TCF refers to its combined leasing and equipment finance, inventory finance and auto 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 25 of Notes to Consolidated Financial Statements for information regarding TCF’s reportable operating segments.

 

Retail Banking

 

At December 31, 2011, TCF had 434 retail banking branches, consisting of 195 traditional branches, 231 supermarket branches and 8 campus branches. TCF operates 196 branches in Illinois, 110 in Minnesota, 53 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, autos, 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 markets through the offering of a broad selection of deposit products 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 deposits, primarily in checking and savings accounts. These accounts are a source of low-interest cost funds and provide 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 2 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, 2011, there were $274.3 million in campus deposits. TCF has a 25-year naming rights

 

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agreement with the University of Minnesota to sponsor its on-campus football stadium called “TCF Bank Stadium®” which opened in 2009.

 

Non-interest income is a significant source of revenue for TCF and an important factor in TCF’s results of operations. Maintaining fee and service charge revenue has been challenging as a result of economic conditions, changing customer behavior and the impact of regulations. 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. TCF’s debit card programs are supported by interchange fees charged to retailers. Key drivers of non-interest income are the number of deposit accounts and related transaction activity.

 

TCF’s card revenues have been impacted by the Durbin Amendment (the “Amendment”) to the Dodd-Frank Wall Street and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), which regulated debit-card interchange fees. The final rule, which became effective on October 1, 2011, sets a base interchange fee limit of 21 cents, plus a per transaction component of 5 basis points, and a one cent charge if issuers comply with certain fraud protection provisions. The impact of the rule resulted in a $14.7 million, or slightly more than 50%, decrease in TCF’s card revenue in the fourth quarter of 2011. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement and 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.

 

Wholesale Banking

 

Commercial Real Estate Lending  Commercial real estate loans are loans originated by TCF that are secured by commercial real estate including 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 or 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, 2011 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.

 

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 primarily 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 business essential 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 equipment financing through leasing solutions similar to those provided by Winthrop, which broadened its market diversification.

 

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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. The operation is focused on establishing relationships with distributors, dealer buying groups and manufacturers, giving access to thousands of independent lawn and garden, electronics and appliance, powersports, recreation vehicle, marine, and specialty vehicle retailers. TCF Inventory Finance operates in the U.S. and 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.

 

Auto Finance  On November 30, 2011, TCF entered the auto lending market with the acquisition of Gateway One Lending & Finance, LLC (“Gateway One”). Headquartered in Anaheim, California, Gateway One originates and services loans on new and used autos to customers through relationships established with over 3,400 independent dealers in 30 states. While auto finance is considered a component of TCF’s specialty finance business, which is included in wholesale banking, the loans in this business are either a component of consumer loans or loans held for sale.

 

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

 

Deposits  Deposits from customers are a primary source of TCF’s funds for use in lending and for other general business purposes. Consumer, small business and commercial deposits are a source of low-interest cost funds attracted from within TCF’s primary banking markets through the offering of a broad selection of deposit instruments including consumer interest-bearing checking accounts, regular savings accounts, money market accounts and certificates of deposits.

 

Borrowings  Borrowings may be used to compensate for reductions in deposit inflows or net deposit outflows, or to support expanded lending, leasing and other expansion activities. These borrowings may include Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, federal funds, other borrowings and advances from the Federal Reserve Discount Window. 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 U.S. 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 maintained as collateral with the counter-party to a repurchase agreement. The creditworthiness of the counterparty is important in establishing that the overcollateralized amount of securities delivered by TCF is protected. TCF only enters into repurchase agreements with institutions 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

 

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in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Financial Condition Analysis – Borrowings” and in Notes 11 and 12 of Notes to Consolidated Financial Statements.

 

Other Information

 

Activities of Subsidiaries of TCF Financial Corporation  TCF’s  business operations include those conducted by direct and indirect subsidiaries of TCF Financial, all of which are consolidated for purposes of preparing TCF’s consolidated financial statements. TCF does not utilize unconsolidated subsidiaries or special purpose entities to provide off-balance sheet borrowings. TCF Bank’s subsidiaries principally engage in leasing and equipment finance, inventory finance and auto 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 primary banking market areas and nationally, 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, commercial and auto finance companies, credit unions, insurance companies and savings institutions. TCF also competes nationwide with other companies and banks in the financing of autos, 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, 2011, TCF had 7,143 employees, including 2,172 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 Office of the Comptroller of the Currency (“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 undercapitalized institutions be subjected 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.

 

Additionally, the Federal Reserve and the OCC have adopted rules that could permit them to quantify and account for interest-rate risk exposure and market risk from trading activity and to potentially 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.

 

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 require the board of directors of a bank holding company to consider a number of factors when considering the payment of dividends, including the quality and level of current and future earnings.

 

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 to meet

 

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its other cash needs. The ability of TCF Financial and TCF Bank to pay dividends depends on regulatory policies and regulatory capital requirements and may be subject to regulatory approval.

 

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 future capital distributions will depend on its earnings and ability to meet minimum regulatory capital requirements in effect during current and future periods. These capital adequacy standards may be higher in the future than existing minimum regulatory capital requirements, including the potential effects of any U.S. regulatory rule-making relating 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. Annual dividend distributions in excess of earnings and profits could result in a tax liability based on the amount of excess earnings distributed and current tax rates.

 

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 of 1956 (“BHCA”), Federal Reserve approval is required before acquiring more than 5% control, or substantially all of the assets, of another bank, or bank holding company, or merging or consolidating with such a bank or bank 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 Acquisitions and Changes in Control  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 if the law of the state in which the branches are located permits such acquisitions for a state bank chartered in such state. Interstate mergers and branch acquisitions may also be subject to certain nationwide and statewide insured deposit maximum concentration levels or other limitations. In addition, 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.

 

Insurance of Accounts  As a result of the FDIC issuing a Final Rule implementing section 343 of the Dodd-Frank Act in 2010, all non-interest bearing transaction accounts at all FDIC-insured institutions are fully insured through December 31, 2012, regardless of the balance of the account. 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

 

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provided to a depositor’s other deposit accounts held at an FDIC-insured institution.

 

The FDIC reserve ratio will be increased to 1.35% ($1.35 for each $100 of insured deposits) by September 30, 2020 for the Deposit Insurance Fund (“DIF”), pursuant to the requirements of the Dodd-Frank Act. The Federal Deposit Insurance Reform Act of 2005 provides the FDIC Board of Directors the authority to set the designated reserve ratio and it cannot be less than 1.35% . The FDIC must adopt a restoration plan when the reserve ratio falls below 1.35% and may begin paying dividends when the reserve ratio exceeds 1.50% . The DIF reserve ratio calculated by the FDIC at September 30, 2011 was .12%. In 2011, the annual insurance premiums on bank deposits insured by the DIF for banks with at least $10 billion in total assets ranged from $.025 to $.45 per $100 of deposits.

 

On April 1, 2011, the FDIC adopted a final rule requiring changes in the FDIC insurance rate calculations for banks over $10 billion in total assets. 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 2011 ranged from $.0066 to $.0100 for each $100 of deposits. Financing Corporation assessments of $1.2 million in each of 2011, 2010 and 2009 were paid by TCF Bank.

 

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, the OCC, the FDIC, and the Consumer Financial Protection Bureau (“CFPB”). Bank regulatory authorities may impose a number of restrictions or new requirements on institutions, including, but not limited to, growth limitations, dividend restrictions, 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 of 1970 (the “BSA” or “Bank Secrecy Act”), 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 Consent Order (the “Order”) by the OCC, TCF Bank’s primary banking regulator, addressing certain matters related to the BSA. The Order requires TCF Bank to address deficiencies in TCF Bank’s BSA program identified by the OCC, including review and revision of TCF 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. TCF Bank is also required to address performing appropriate due diligence when an account is opened, and to review transactions since November 2008 for compliance. TCF 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. While the Order does not call for the payment of a civil money penalty, material failure to comply with the Order could result in additional enforcement actions by the OCC, including payment of a civil money penalty. Such penalties could be required for identified program violations, for violating the Order, or for other deficiencies in TCF's compliance with the BSA in past or future periods, and TCF believes the OCC will be issuing a written notice to TCF related to TCF's BSA compliance deficiencies. Under this notice, TCF will be provided the opportunity to respond to the OCC and its findings outlined in this notice. After the OCC's review of TCF's response to the notice, the OCC may impose a penalty related to these findings.

 

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

 

National Bank Investment Limitations  Permissible investments by national banks are limited by the National Bank Act of 1864 and by rules of the OCC. Non-traditional bank activities permitted by the Gramm-Leach-Bliley Act of 1999 will subject a bank to additional regulatory limitations

 

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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  Congress enacted the Dodd-Frank Act in July 2010. The Dodd-Frank Act created the CFPB and gave it broad rulemaking authority to administer and carry out the purposes and objectives of the federal consumer financial laws, with respect to all financial institutions that offer financial products and services to consumers. The CFPB is authorized to prescribe rules identifying and prohibiting acts or practices that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets, which includes TCF Bank.

 

Additionally, the Dodd-Frank Act:

 

· Directed the Federal Reserve to issue rules limiting debit-card interchange fees;

 

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

 

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

 

· Changes standards for federal preemption that have been applicable for national banks and federal savings associations;

 

· Provided for new disclosure and other requirements relating to executive compensation and corporate governance, including requiring an advisory vote on executive compensation (“Say on Pay”);

 

· 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, and makes more loans subject to requirements for higher cost loans, new disclosures and certain other restrictions;

 

· Permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, provided that non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012 and allows depository institutions to pay interest on business checking accounts; and

 

· Required 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 2007.

 

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 “Item 1A. 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 13 of Notes to Consolidated Financial Statements for additional information regarding TCF’s income taxes.

 

Available Information

 

TCF’s website, http://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 United States 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.

 

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Item 1A. Risk Factors

 

Various risks and uncertainties may affect TCF’s business. Any of the risks described below or elsewhere in this Annual Report on Form 10-K or TCF’s other SEC filings may have a material impact on TCF’s financial condition or results of operations.

 

TCF’s earnings are significantly affected by general economic conditions.

 

TCF’s operations and profitability are impacted by general business and economic conditions in the local markets in which TCF operates, the U.S. generally and abroad. Economic conditions have a significant impact on the demand for TCF’s products and services, as well as the ability of its customers to repay loans, the value of the collateral securing loans and the stability of its deposit funding sources. A significant decline in general economic conditions caused by inflation, recession, unemployment, changes in securities markets, changes in housing market prices or other factors could impact economic conditions and, in turn, could have a material adverse effect on TCF’s financial condition and results of operations.

 

Additionally, adverse economic conditions may result in a decline in demand for some types of equipment that TCF leases or finances, which could result in a decline in the amount of new equipment being placed in service, as well as declines in equipment values for equipment already in service. Adverse economic conditions may also hinder TCF from expanding the specialty finance businesses by limiting its ability to attract and retain customers as expected. Any such difficulties in TCF’s specialty finance businesses could have a material adverse effect on its financial condition and results of operations.

 

Proposed and future legislative and regulatory initiatives may substantially increase compliance burdens, which could have a material adverse effect on TCF’s financial condition and results of operations.

 

Future legislative and regulatory initiatives cannot be fully or accurately predicted. Such proposals may impose more stringent standards than currently applicable or anticipated with respect to capital and liquidity requirements for depository institutions. For example, Congress enacted the Dodd-Frank Act in July 2010. Uncertainty remains as to its ultimate impact, which could have a material adverse effect on the financial services industry as a whole and, specifically, on TCF’s financial condition and results of operations.

 

In addition, the Dodd-Frank Act created the Consumer Financial Protection Bureau (the “CFPB”) and gave the CFPB broad rulemaking authority to administer and carry out the purposes and objectives of the federal consumer financial laws, with respect to all financial institutions that offer financial products and services to consumers. The CFPB is authorized to prescribe rules identifying and prohibiting acts or practices that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The term “abusive” is new and untested, and TCF cannot predict how it will be enforced. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets, which includes TCF Bank.

 

Based on the provisions of the Dodd-Frank Act and anticipated implementing regulations, it is highly likely that banks and bank holding companies will be subject to significantly increased regulation and compliance obligations that expose TCF to noncompliance risk and consequences, which could have a material adverse effect on TCF’s financial condition and results of operations.

 

An inability to obtain needed liquidity could have a material adverse effect on TCF’s financial condition and results of operations.

 

TCF’s liquidity could be limited by an inability to access the capital markets or unforeseen outflows of cash, which could arise due to circumstances outside of its control such as a general market disruption or an operational problem that affects TCF or third parties. TCF’s credit rating is important to its liquidity. A reduction or anticipated reduction in TCF’s credit ratings could adversely affect its liquidity and competitive position, increase its borrowing costs, limit its access to the capital markets, affect its ability to hedge foreign currency exposure or trigger unfavorable contractual obligations. An inability to meet its funding needs on a timely basis could have a material adverse effect on TCF’s financial condition and results of operations.

 

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Loss of customer deposits could increase TCF’s funding costs.

 

TCF relies on bank deposits to be a low cost and stable source of funding. TCF competes with banks and other financial institutions for deposits. If TCF’s competitors raise the rates they pay on deposits, TCF’s funding costs may increase through either a loss of deposits or an increase in rates paid by TCF to avoid losing deposits. Increased funding costs could reduce TCF’s net interest margin and net interest income, which could have a material adverse effect on TCF’s financial condition and results of operations.

 

TCF is subject to interest-rate risk.

 

TCF’s earnings and cash flows largely depend upon its net interest income. Interest rates are highly sensitive to many factors that are beyond TCF’s control, including general economic conditions and policies of various governmental and regulatory agencies, including the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest TCF receives on loans and other investments and the amount of interest TCF pays on deposits and other borrowings, but such changes could also affect: (i) TCF’s ability to originate loans and obtain deposits; (ii) the fair value of TCF’s financial assets and liabilities; and (iii) the average duration of TCF’s interest-earning assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, then TCF’s net interest income and earnings could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Although management believes it has implemented effective asset and liability management strategies, any substantial, unexpected and prolonged change in market interest rates could have a material adverse effect on its financial condition and results of operations.

 

The soundness of other financial institutions could adversely affect TCF.

 

TCF’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. TCF routinely executes transactions with counterparties in the financial industry, including brokers and dealers, commercial banks and other institutional clients. As a result, defaults by, or even rumors regarding, any financial institutions, or the financial services industry generally, could lead to losses or defaults by TCF. Many of these transactions expose TCF to credit risk in the event of default of the counterparty or client. In addition, TCF’s credit risk may be exacerbated when the collateral held by TCF cannot be realized or is liquidated at prices not sufficient to recover the full amount of the financial exposure. Any such losses could have a material adverse effect on TCF’s financial condition and results of operations.

 

TCF’s framework for managing risks may not be effective in mitigating risk and any resulting loss.

 

TCF’s risk management framework seeks to mitigate risk and any resulting loss. TCF has established processes intended to identify, measure, monitor, report and analyze the types of risk to which TCF is subject, including liquidity, credit, market, interest rate, operational, legal and compliance and reputational risk. However, as with any risk management framework, there are inherent limitations to TCF’s risk management strategies. There may exist, or develop in the future, risks that TCF has not appropriately anticipated or identified. Any future breakdowns in TCF’s risk management framework could have a material adverse effect on its financial condition and results of operations.

 

TCF is subject to extensive government regulation and supervision.

 

TCF, its subsidiary TCF Bank and certain indirect subsidiaries are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not stockholders. These regulations affect TCF’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. While TCF has policies and procedures designed to prevent violations of the extensive federal and state regulation it is subject to, there can be no assurance that such violations will not occur and failure to comply with these statutes, regulations or policies could result in sanctions against TCF by regulatory agencies, civil money penalties and reputational damage, any of which could have a material adverse effect on its financial condition and results of operations.

 

Further, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “Patriot Act”) and the Bank Secrecy Act require financial institutions to develop

 

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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 July 2010, TCF Bank agreed to the issuance of a Consent Order (the “Order”) by the OCC requiring TCF Bank to address deficiencies in its BSA program. The Order does not call for the payment of a civil money penalty, however such penalties could be required for identified program violations, for violating the Order, or for other deficiencies in TCF Bank's compliance with the BSA in past or future periods. TCF believes the OCC will be issuing a written notice to TCF related to TCF’s BSA deficiencies. Under this notice, TCF will be provided the opportunity to respond to the OCC and its findings outlined in this notice. After the OCC’s review of TCF’s Response to the Notice, the OCC may impose a penalty related to these findings.

 

Increased competition in an already highly competitive financial services industry could have a material adverse effect on TCF’s financial condition and results of operations.

 

The financial services industry is highly competitive and could become even more competitive as a result of legislative, regulatory and technological changes, as well as continued industry consolidation which may increase in connection with current economic and market conditions. TCF competes with other commercial banks, savings and loan associations, mutual savings banks, finance companies, mortgage banking companies, credit unions and investment companies. In addition, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally only provided by banks. Some of TCF’s competitors have fewer regulatory constraints or lower cost structures. Also, the potential need to adapt to industry changes in information technology systems, on which TCF and the financial services industry generally are highly dependent, could present operational issues and require considerable capital spending. As a result, any increased competition in the already highly competitive financial services industry could have a material adverse effect on TCF’s financial condition and results of operations.

 

The allowance for loan and lease losses maintained by TCF may not be sufficient.

 

All borrowers carry the potential to default and TCF’s remedies to recover may not fully satisfy the obligations owed to TCF. TCF maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable credit losses that have been incurred within the existing portfolio of loans. The level of the allowance for loan losses reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses involves a high degree of subjectivity and requires management to make significant estimates of current credit risks using qualitative and quantitative factors, each of which is subject to significant change. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review TCF’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of additional loan charge-offs, based on judgments different than those of management. An increase in the allowance for loan losses would result in a decrease in net income, and possibly risk-based capital, and could have a material adverse effect on TCF’s financial condition and results of operations.

 

TCF’s earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies.

 

The policies of the Federal Reserve impact TCF significantly. The Federal Reserve regulates the supply of money and credit in the U.S. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and also affect the value of financial instruments that TCF holds. Those policies determine to a significant extent the cost of funds for lending and investing. Changes in those policies are beyond TCF’s control and are difficult to predict. Federal Reserve policies can also affect TCF’s borrowers, potentially increasing the risk that they may fail to repay their loans.

 

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For example, a tightening of the money supply by the Federal Reserve could reduce the demand for a borrower’s products and services. This could adversely affect the borrower’s earnings and ability to repay its loan. As a result, changes to the fiscal and monetary policies by the Federal Reserve could have a material adverse effect on TCF’s financial condition and results of operations.

 

The success of TCF’s supermarket branches depends 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 TCF’s supermarket partners could result in the loss of supermarket branches or could increase costs to operate the supermarket branches. At December 31, 2011, TCF had 231 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, continued difficult economic conditions, or financial or labor difficulties in the supermarket industry, may reduce activity in TCF’s supermarket branches. As a result, economic difficulties for any of TCF’s supermarket partners could have a material adverse effect on its financial condition and results of operations.

 

New lines of business or new products and services may subject TCF to additional risk.

 

From time to time, TCF may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and new products or services, TCF may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business or new product or service could have a significant impact on the effectiveness of TCF’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and new products or services could have a material adverse effect on TCF’s financial condition and results of operations.

 

Consumers may decide not to use banks to complete their financial transactions.

 

Technology and other changes are allowing consumers to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on TCF’s financial condition and results of operations.

 

Failure to keep pace with technological change could adversely affect TCF’s business.

 

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. TCF’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in its operations. Many of TCF’s competitors have substantially greater resources to invest in technological improvements. TCF may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse effect on TCF’s financial condition and results of operations.

 

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TCF relies on its systems and counterparties, and any failures could have a material adverse effect on its financial condition and results of operations.

 

TCF settles funds on behalf of financial institutions, other businesses and consumers and receives funds from payment networks, consumers and other paying agents. TCF’s businesses depend on their ability to process, record and monitor a large number of complex transactions. If any of TCF’s financial, accounting or other data processing systems fail or are otherwise compromised, or if personal information of TCF’s customers or clients were mishandled, misused (whether by employees, counterparties or hackers), TCF could suffer regulatory consequences, reputational damage and financial losses, any of which could have a material adverse effect on its financial condition and results of operations.

 

Additionally, TCF may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control, which may include, for example, computer viruses, electrical or telecommunications outages, natural disasters, terrorist acts or other damage to property or physical assets. Such disruptions may give rise to loss of services to customers and loss or liability to TCF. Any system failure could have a material adverse effect on TCF’s financial condition and results of operations.

 

Financial institutions depend on the accuracy and completeness of information about customers and counterparties.

 

In deciding whether to extend credit or enter into other transactions, TCF may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. TCF may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial information could cause TCF to enter into unfavorable transactions, which could have a material adverse effect on TCF’s financial condition and results of operations.

 

Negative publicity could damage TCF’s reputation.

 

Reputation risk, or the risk to earnings and capital from negative public opinion, is inherent in TCF’s business. Negative public opinion could adversely affect TCF’s ability to keep and attract customers and expose it to adverse legal and regulatory consequences. Negative public opinion could result from TCF’s actual or alleged conduct in any number of activities, including lending practices, corporate governance, regulatory compliance, mergers and acquisitions, disclosure, sharing or inadequate protection of customer information or from actions taken by government regulators and community organizations in response to that conduct. Because TCF conducts most of its businesses under the “TCF” brand, negative public opinion about one business could affect its other businesses.

 

TCF’s internal controls may be ineffective.

 

Management regularly reviews and updates the internal controls, disclosure controls and procedures and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of TCF’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on its financial condition and results of operations.

 

Failure to attract and retain key personnel could have a material adverse effect on TCF’s financial condition and results of operations.

 

TCF’s success depends to a large extent upon its ability to attract and retain key personnel. The loss of key personnel could have a material adverse impact on TCF’s business because of their skills, market knowledge, industry experience and the difficulty of promptly finding a qualified replacement. Additionally, portions of TCF’s business are relationship driven, and many of its key personnel have extensive customer relationships. Loss of such key personnel to a competitor could result in the loss of some of TCF’s customers. As a result, a failure to attract and retain key personnel could have a material adverse effect on TCF’s financial condition and results of operations.

 

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TCF relies on other companies to provide key components of its business infrastructure.

 

Third party vendors provide key components of TCF’s business infrastructure, such as internet connections, network access and transaction and other processing services. While TCF has selected these third party vendors carefully, it does not control their actions. Any problems caused by these third parties, including as a result of inadequate or interrupted service, could adversely affect TCF’s ability to deliver products and services to its customers and otherwise to conduct its business. Replacing these third party vendors could also entail significant delay and expense.

 

TCF relies on dividends from TCF Bank for most of its revenue.

 

TCF is a separate and distinct legal entity from its banking and other subsidiaries. A substantial portion of TCF’s revenue comes from dividends from TCF Bank. These dividends are the principal source of funds to pay dividends and interest and principal on its debt. Various federal and state laws and regulations limit the amount of dividends that TCF Bank may pay to it. In the event TCF Bank is unable to pay dividends to it, TCF may not be able to pay obligations or pay dividends, which would have a material adverse effect on TCF’s financial condition and results of operations.

 

Changes in accounting policies or in accounting standards could materially affect how TCF reports its financial condition and results of operation.

 

TCF’s accounting policies are fundamental to the understanding its financial condition and results of operations. Some of these policies require the use of estimates and assumptions that may affect the value of TCF’s assets or liabilities and results of operations. Some of TCF’s accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because materially different amounts would be reported if different estimates or assumptions were used. If such estimates or assumptions underlying the financial statements are incorrect, TCF could experience material losses. From time to time, the Financial Accounting Standards Board (“FASB”) and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of TCF’s external financial statements. These changes are beyond TCF’s control, can be difficult to predict and could materially impact how TCF reports its financial condition and results of operations. Additionally, TCF could be required to apply a new or revised standard retrospectively, resulting in the restatement of prior period financial statements in material amounts.

 

TCF is subject to examinations and challenges by tax authorities.

 

TCF is subject to federal and state income tax regulations, which often require interpretation due to their complexity. Changes in income tax regulations or in how the regulations are interpreted could have a material adverse effect on TCF’s results of operations. In the normal course of business, TCF is routinely subject to examinations and challenges from federal and state taxing authorities regarding the amount of taxes due in connection with investments TCF has made and the businesses in which it has engaged. Recently, federal and state taxing authorities have become increasingly aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning. The challenges made by taxing authorities may result in adjustments to the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in TCF’s favor, they could have a material adverse effect on its financial condition and results of operations.

 

Additionally, 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 of 1986, as amended, 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.

 

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Significant legal actions could subject TCF to substantial uninsured liabilities.

 

TCF is subject to various claims related to its operations. These claims and legal actions, including supervisory actions by its regulators, could involve large monetary claims or monetary penalties, as well as significant defense costs. To protect itself from the cost of these claims, TCF maintains insurance coverage in amounts and with deductibles that it believes are appropriate for its operations. However, TCF’s insurance coverage only covers certain types of liability, and such insurance may not continue to be available to TCF at a reasonable cost, or at all. As a result, TCF may be exposed to substantial uninsured liabilities, which could have a material adverse effect on TCF’s financial condition and results of operations.

 

In addition, customers may make claims and take legal action pertaining to the performance by TCF of its fiduciary responsibilities. Whether customer claims and legal action related to the performance of TCF’s fiduciary responsibilities are founded or unfounded, such claims and legal actions may result in significant financial liability and could adversely affect the market perception of TCF and its products and services, as well as impact customer demand for those products and services. Any financial liability or reputational damage could have a material adverse effect on TCF’s financial condition and results of operations.

 

TCF is subject to environmental liability risk associated with lending activities.

 

A significant portion of TCF’s loan portfolio is secured by real property. In the ordinary course of business, TCF may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, TCF may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require TCF to incur substantial expenses and may materially reduce the affected property’s value or limit TCF’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase TCF’s exposure to environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on TCF’s financial condition and results of operations.

 

Acquisitions may disrupt TCF’s business and dilute stockholder value.

 

TCF regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with banks or other financial institutions. As a result, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. TCF seeks merger or acquisition partners that are culturally similar, have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Acquiring other banks, businesses or branches involves potential adverse impact to TCF’s results of operations and various other risks commonly associated with acquisitions, such as: difficulty in estimating the value of the target company; payment of a premium over book and market values that may dilute TCF’s tangible book value and earnings per share in the short and long term; potential exposure to unknown or contingent liabilities of the target company; exposure to potential asset quality issues of the target company; volatility in reported income as goodwill impairment losses could occur irregularly and in varying amounts; difficulty and expense of integrating the operations and personnel of the target company; inability to realize the expected revenue increases, cost savings, increases in geographic or product presence or other projected benefits; potential disruption to TCF’s business; potential diversion of TCF management’s time and attention; potential loss of key employees and customers of the target company; and potential changes in banking or tax laws or regulations that may affect the target company.

 

Item 1B. Unresolved Staff Comments

 

None.

 

Item 2. Properties

 

Offices  At December 31, 2011, TCF owned the buildings and land for 144 of its bank branch offices, owned the buildings but leased the land for 23 of its bank branch offices and leased or licensed the remaining 266 bank branch offices, all of which are functional and appropriately maintained. Bank branch properties owned by TCF had an

 

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aggregate net book value of approximately $281.2 million at December 31, 2011. At December 31, 2011, the aggregate net book value of leasehold improvements associated with leased bank branch office facilities was $20.3 million. In addition to the branch offices, TCF owned and leased other facilities with an aggregate net book value of $49.5 million at December 31, 2011. For more information on premises and equipment, see Note 8 of Notes to Consolidated Financial Statements.

 

Item 3. Legal Proceedings

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

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, 2012, there were 7,016 holders of record of TCF’s common stock.

 

						Dividends
		High		Low		Declared
2011
Fourth Quarter		$11.68		$  8.61		$.05
Third Quarter		17.37		8.66		.05
Second Quarter		16.04		13.37		.05
First Quarter		17.37		14.60		.05
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

 

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 stockholders, while ensuring that past and prospective earnings retention is consistent with TCF’s capital needs, asset quality, risk profile 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 15 of Notes to Consolidated Financial Statements.

 

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Total Return Performance

 

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, 2006 and reinvestment of all dividends).

 

The New TCF Peer Group for 2012 consists of the publicly-traded banks and thrifts with total assets ranging from $10 billion to $50 billion as of December 31, 2011. This is a change from TCF’s previously defined peer group which consisted of 30 publicly-traded banks and thrifts, 15 immediately larger than and 15 immediately smaller than TCF. TCF changed its peer group to align itself with financial institutions that are similarly impacted by recent regulatory and legislative changes because TCF believes that the New Peer Group represents a more relevant group of companies in the financial services industry. The New and Old TCF Peer Groups are shown below for comparison purposes.

 

TCF Stock Performance Chart

 

 

		Period Ending
Index		12/31/06		12/31/07		12/31/08		12/31/09		12/31/10		12/31/11
TCF Financial Corporation		100.00		67.96		55.03		56.49		62.23		44.01
SNL Bank and Thrift (1)		100.00		76.26		43.85		43.27		48.30		37.56
S&P 500 Index		100.00		105.49		66.46		84.05		96.71		98.76
New TCF Peer Group (2)		100.00		84.38		77.39		71.04		78.72		65.64
Old TCF Peer Group (3)		100.00		80.30		71.95		64.65		71.79		61.86

 

(1)    Includes all major exchange (NYSE, NYSE Amex, NASDAQ) banks and thrifts in SNL’s coverage universe (476 companies as of December 31, 2011).

(2)    The New TCF Peer Group consists of the publicly-traded banks and thrifts with total assets ranging from $10 billion to $50 billion as of December 31, 2011. The New TCF Peer Group includes: Hudson City Bancorp, Inc.; New York Community Bancorp, Inc.; Popular, Inc.; First Niagara Financial Group, Inc.; First Republic Bank; People’s United Financial, Inc.; Synovus Financial Corp.; BOK Financial Corporation; First Horizon National Corporation; City National Corporation; East West Bancorp, Inc.; Associated Banc-Corp; First Citizens BancShares, Inc.; Commerce Bancshares, Inc.; Cullen/Frost Bankers, Inc.; SVB Financial Group; Hancock Holding Company; Webster Financial Corporation; Astoria Financial Corporation; Fulton Financial Corporation; Wintrust Financial Corporation; Susquehanna Bancshares, Inc.; Signature Bank; First Merit Corporation; Valley National Bancorp; Bank of Hawaii Corporation; Washington Federal, Inc.; Flagstar Bancorp, Inc.; UMB Financial Corporation; First BanCorp.; BancorpSouth, Inc.; PrivateBancorp, Inc.; IBERIABANK Corporation; International Bancshares Corporation; Umpqua Holdings Corporation; BankUnited, Inc.; TFS Financial Corporation (MHC); Investors Bancorp, Inc. (MHC); and Cathay General Bancorp.

(3)    The Old TCF Peer Group consisted of 30 publicly-traded banks and thrifts, 15 immediately larger than and 15 immediately smaller than TCF Financial Corporation in total assets as of September 30, 2011. The Old Peer Group included: Popular, Inc.; First Niagara Financial Group, Inc.; Synovus Financial Corporation; People’s United Financial, Inc.; First Republic Bank; First Horizon National Corporation; BOK Financial Corporation; City National Corporation; Associated Banc-Corp; East West Bancorp, Inc.; First Citizens BancShares, Inc.; Commerce Bancshares, Inc.; Cullen/Frost Bankers, Inc.; Hancock Holding Company; SVB Financial Group; Webster Financial Corporation; Astoria Financial Corporation; Fulton Financial Corporation; Wintrust Financial Corporation; FirstMerit Corporation; Susquehanna Bancshares, Inc.; Valley National Bancorp; Signature Bank; Flagstar Bancorp, Inc.; First BanCorp.; Washington Federal, Inc.; Bank of Hawaii Corporation; BancorpSouth, Inc.; UMB Financial Corporation; and PrivateBancorp, Inc.

 

Source: SNL Financial LC and Standard & Poor’s ©2012

 

16

 

Repurchases of TCF Stock

 

The following table summarizes common stock share repurchase activity for the quarter ended December 31, 2011.

 

		Total Number		Average		Total Number of Shares		Maximum Number of
		of Shares		Price Paid		Purchased as Part of		Shares that May Yet be
Period		Purchased		Per Share		Publicly Announced Plan		Purchased Under the Plan
October 1 to October 31, 2011
Share repurchase program (1)		–		$     –		–		5,384,130
Employee transactions (2)		6,564		$9.45		N.A.		N.A.
November 1 to November 30, 2011
Share repurchase program (1)		–		$     –		–		5,384,130
Employee transactions (2)		–		$     –		N.A.		N.A.
December 1 to December 31, 2011
Share repurchase program (1)		–		$     –		–		5,384,130
Employee transactions (2)		–		$     –		N.A.		N.A.
Total
Share repurchase program (1)		–		$     –		–
Employee transactions (2)		6,564		$9.45		N.A.

N.A. Not Applicable.

(1)    The current share repurchase authorization was approved by the Board of Directors on April 14, 2007 and was announced in a press release dated April 16, 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.

 

17

 

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. Prior period financial data has been revised, as applicable, for a retrospective change in accounting principle. See Note 28 of Notes to Consolidated Financial Statements for additional information.

 

Five-Year Financial Summary

Consolidated Income:

 

												Compound Annual
		Year Ended December 31,										Growth Rate
												1-Year		5-Year
(Dollars in thousands, except per-share data)		2011		2010		2009		2008		2007		2011/2010		2011/2006
Total revenue		$  1,144,122		$  1,237,187		$  1,158,861		$  1,092,108		$  1,091,634		(7.5	)%	2.2	%
Net interest income		$     699,688		$     699,202		$     633,006		$     593,673		$     550,177		.1		5.4
Provision for credit losses		200,843		236,437		258,536		192,045		56,992		(15.1	)	57.6
Fees and other revenue		436,038		508,862		496,468		474,061		490,285		(14.3	)	(2.1	)
Gains on securities, net		7,263		29,123		29,387		16,066		13,278		(75.1	)	N.M.
Gains on auto loans held for sale, net		1,133		–		–		–		–		N.M.		N.M.
Visa share redemption		–		–		–		8,308		–		–		–
Gains on sales of branches and real estate		–		–		–		–		37,894		–		(100.0	)
Non-interest expense		764,451		756,335		756,655		718,853		653,887		1.1		3.5
Income before income tax expense		178,828		244,415		143,670		181,210		380,755		(26.8	)	(13.2	)
Income tax expense		64,441		90,171		49,811		68,096		108,535		(28.5	)	(9.3	)
Income after income tax expense		114,387		154,244		93,859		113,114		272,220		(25.8	)	(15.0	)
Income (loss) attributable to non-controlling interest		4,993		3,297		(410	)	–		–		51.4		N.M.
Net Income		109,394		150,947		94,269		113,114		272,220		(27.5	)	(15.8	)
Preferred stock dividends		–		–		18,403		2,540		–		–		–
Net income available to common stockholders		$     109,394		$     150,947		$       75,866		$     110,574		$     272,220		(27.5	)	(15.8	)
Per common share:
Basic earnings		$             .71		$           1.08		$             .60		$             .88		$           2.13		(34.3	)	(18.4	)
Diluted earnings		$             .71		$           1.08		$             .60		$             .88		$           2.13		(34.3	)	(18.4	)
Dividends declared		$             .20		$             .20		$             .40		$           1.00		$             .97		–		(26.3	)
Consolidated Financial Condition:
		At December 31,										Compound Annual Growth Rate
												1-Year		5-Year
(Dollars in thousands, except per-share data)		2011		2010		2009		2008		2007		2011/2010		2011/2006
Loans and leases		$14,150,255		$14,788,304		$14,590,744		$13,345,889		$12,494,370		(4.3	)%	4.3	%
Securities available for sale		2,324,038		1,931,174		1,910,476		1,966,104		1,963,681		20.3		5.1
Total assets		18,979,388		18,465,025		17,885,175		16,740,357		15,977,054		2.8		5.3
Checking, savings and money market deposits		11,136,389		10,556,788		10,380,814		7,647,069		7,322,014		5.5		8.9
Certificates of deposit		1,065,615		1,028,327		1,187,505		2,596,283		2,254,535		3.6		(15.6	)
Total deposits		12,202,004		11,585,115		11,568,319		10,243,352		9,576,549		5.3		4.5
Borrowings		4,388,080		4,985,611		4,755,499		4,660,774		4,973,448		(12.0	)	4.1
Stockholders’ equity		1,868,133		1,471,663		1,175,362		1,493,776		1,099,012		26.9		12.6
Book value per common share		$         11.65		$         10.30		$           9.10		$           8.99		$           8.68		13.1		8.0
Key Ratios and Other Data:
						At or For the Year Ended December 31,
						2011		2010		2009		2008		2007
Return on average assets						.61	%	.85	%	.54	%	.69	%	1.80	%
Return on average common equity						6.32		10.67		6.57		10.03		26.34
Net interest margin						3.99		4.15		3.87		3.91		3.94
Net charge-offs as a percentage of average loans and leases						1.45		1.47		1.34		.78		.29
Average total equity to average assets						9.24		7.83		7.20		7.04		6.82
N.M. Not Meaningful.

 

18

 

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

 

Table of Contents	Page
Overview	19
Results of Operations	20
Performance Summary	20
Operating Segment Results	21
Consolidated Income Statement Analysis	21
Net Interest Income	21
Provision for Credit Losses	25
Non-Interest Income	25
Non-Interest Expense	28
Income Taxes	29
Consolidated Financial Condition Analysis	30
Securities Available for Sale	30
Loans and Leases	30
Credit Quality	34
Other Real Estate Owned and Repossessed and Returned Equipment	42
Liquidity Management	44
Deposits	44
Borrowings	44
Contractual Obligations and Commitments	45
Equity	45
Summary of Critical Accounting Estimates	47
Recent Accounting Pronouncements	48
Fourth Quarter Summary	48
Legislative, Legal and Regulatory Developments	49
Forward-Looking Information	49

 

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 (“TCF” or the “Company”), is a national bank holding company based in Wayzata, Minnesota. Its principal subsidiary, TCF National Bank (“TCF Bank”), is headquartered in South Dakota. TCF had 434 branches in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana, Arizona and South Dakota (TCF’s primary banking markets) at December 31, 2011.

 

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, inventory finance and auto finance. TCF refers to its combined leasing and equipment finance, inventory finance and auto 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, Inc., which delivers equipment finance solutions to businesses in select markets, and Winthrop Resources Corporation, which 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. TCF Inventory Finance originates 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. In November 2011, TCF entered into the auto finance business with its acquisition of Gateway One Lending & Finance, LLC (“Gateway One”). Gateway One currently originates and services loans on new and used autos in 30 states and is expected to expand into a nationwide business.

 

19

 

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 61.2% of TCF’s total revenue in 2011. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest-earning assets and the mix of interest-bearing and non-interest bearing deposits and borrowings. TCF manages the risk of changes in interest rates on its net interest income through an Asset/Liability Committee and through related interest-rate risk monitoring and management policies. See “Item 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 economic conditions, 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.

 

In response to 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. In addition, the success of the Michigan pilot of TCF’s daily overdraft product did not transfer well to other markets. As a result, TCF introduced additional overdraft product options in 2012.

 

The Company’s Visa® debit card program has grown significantly since its inception in 1996. TCF is the 15th largest issuer of Visa consumer debit cards in the United States, based on payments volume for the three months ended September 30, 2011, as published by Visa. TCF earns interchange revenue from customer card transactions paid primarily by merchants, not TCF’s customers. Card products represent 27.1% of banking fee revenue for the year ended December 31, 2011. 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.

 

TCF’s card revenues have been impacted by the Durbin Amendment to the Dodd-Frank Wall Street and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), which directed the Board of Governors of the Federal Reserve System (“Federal Reserve”) to establish rules related to debit-card interchange fees. The final rule, which became effective on October 1, 2011, sets a base interchange fee limit of 21 cents, plus a per transaction component of 5 basis points, and a one cent charge if issuers comply with certain fraud protection provisions. This rule resulted in a $14.7 million, or slightly more than 50%, reduction in TCF’s card interchange revenue during the fourth quarter of 2011. See “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis” for more information.

 

On November 30, 2011, TCF’s wholly-owned subsidiary, TCF Bank, completed the acquisition of Gateway One. Headquartered in Anaheim, California, Gateway One utilizes its more than 3,400 active dealer relationships to originate loans and services to consumers in 30 states on new and used autos. As part of the acquisition, TCF is retaining Gateway One’s seasoned executive management team. The addition of Gateway One further diversifies TCF’s lending business and provides ample growth opportunities within the U.S. auto lending marketplace, the second largest consumer finance market in the U.S.

 

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 2011, 2010 and 2009 and on information about TCF’s balance sheet, loan and lease portfolio, liquidity, funding resources, capital and other matters.

 

Results of Operations

 

Performance Summary  TCF reported diluted earnings per common share of $.71 for 2011, compared with $1.08 for 2010 and $.60 for 2009. Net income was $109.4 million for 2011, compared with $150.9 million for 2010 and $94.3 million for 2009. Net income available to common stockholders for 2009 includes a non-cash deemed preferred stock dividend of $12 million, or 9 cents per common share.

 

Return on average assets was .61% in 2011, compared with .85% in 2010 and .54% in 2009. Return on average common equity was 6.32% in 2011, compared with 10.67% in 2010 and 6.57% in 2009. The effective income tax rate for 2011 was 36%, compared with 36.9% in 2010 and 34.7% in 2009.

 

20

 

Operating Segment Results  RETAIL BANKING – Retail Banking, consisting of branch banking and retail lending, reported net income of $49.6 million for 2011, down from $93 million in 2010 primarily due to decreased fee income in branch banking. Retail Banking net interest income for 2011 was $448.1 million, up 1.2% from $443 million for 2010.

 

The Retail Banking provision for credit losses totaled $162.2 million in 2011, up 15.3% from $140.6 million in 2010. This increase was primarily due to higher net charge-offs and troubled debt restructuring (“TDR”) reserves for consumer real estate loans. Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Provision for Credit Losses” for further discussion.

 

Retail Banking non-interest income totaled $337.7 million in 2011, compared with $409.6 million in 2010. Fees and service charges were $213 million for 2011, down 20.4% from $267.5 million in 2010. Card revenues were $96.1 million for 2011, down 13.4% from $111 million in 2010. The decrease in card revenues was primarily attributable to debit card interchange regulation which took effect on October 1, 2011. 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 $545.3 million in 2011, down 3.1% from $562.8 million in 2010. The decrease was primarily due to decreases in compensation and employee benefit expenses and occupancy expenses as a result of certain branch closures during 2011.

 

WHOLESALE BANKING – Wholesale Banking, consisting of commercial banking, leasing and equipment finance, inventory finance and auto finance, reported net income of $76.5 million for 2011, up 93.4% from $39.5 million in 2010. Net interest income for 2011 was $274.7 million, up 8.5% from $253.1 million in 2010, as a result of increased income from inventory finance loans primarily due to average balance growth of $179 million, partially offset by decreases in leasing and equipment finance and commercial real estate portfolio balances and average yields.

 

The provision for credit losses for Wholesale Banking totaled $36.1 million in 2011, down from $94 million in 2010. The decrease in the provision for credit losses from 2010 was primarily due to decreased net charge-offs and decreased non-accrual loans in commercial lending and leasing and equipment finance.

 

Wholesale Banking non-interest income totaled $98.7 million in 2011, essentially flat from 2010. Decreases in operating lease revenues and floorplan inventory inspection fees were offset by increases resulting from gains on sales-type lease activity, gains on sales of auto loans and increases in commercial loan prepayment fees.

 

Wholesale Banking non-interest expense totaled $208.7 million in 2011, up $17.4 million from $191.3 million in 2010, primarily as a result of increased FDIC insurance premiums resulting from changes in the FDIC insurance rate calculations for banks over $10 billion in total assets, increased valuation write-downs of commercial real estate properties owned, and the ramp-up of expenses related to the exclusive financing program for Bombardier Recreational Products (“BRP”) that will begin funding early in 2012, partially offset by decreased operating lease depreciation due to the reduction in the operating lease portion of the portfolio.

 

TREASURY SERVICES – Treasury Services reported a net loss of $17 million in 2011, down from net income of $16.2 million in 2010. The $33.2 million change was primarily due to gains on sales of securities of $31.5 million in 2010 compared with gains of $8 million in 2011, along with the impact of increased asset liquidity and increased asset sensitivity, partially offset by a lower average cost of borrowing.

 

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 61.2% of TCF’s total revenue in 2011, 56.5% in 2010 and 54.6% in 2009. 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.

 

21

 

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 on a fully tax equivalent basis.

 

		Year Ended								Year Ended
		December 31, 2011								December 31, 2010								Change
								Average								Average								Average
								Yields								Yields								Yields and
		Average						and		Average						and		Average						Rates
(Dollars in thousands)		Balance			Interest			Rates		Balance			Interest			Rates		Balance			Interest			(bps)
Assets:
Investments and other		$     820,981			$    7,836			.95	%	$     337,279			$    5,509			1.63	%	$ 483,702			$    2,327			(68)
U.S. Government sponsored entities:
Mortgage-backed securities		2,198,188			85,138			3.87		1,817,413			80,332			4.42		380,775			4,806			(55)
U.S. Treasury securities		48,178			34			.07		71,233			93			.13		(23,055	)		(59	)		(6)
Other securities		329			16			4.86		454			20			4.41		(125	)		(4	)		45
Total securities available for sale (1)		2,246,695			85,188			3.79		1,889,100			80,445			4.26		357,595			4,743			(47)
Loans and leases held for sale		1,215			131			10.78		–			–			–		1,215			131			1,078
Loans and leases:
Consumer real estate:
Fixed-rate		4,627,047			281,427			6.08		5,082,487			313,573			6.17		(455,440	)		(32,146	)		(9)
Variable-rate		2,386,234			122,532			5.13		2,148,171			116,436			5.42		238,063			6,096			(29)
Consumer – other		19,687			1,715			8.71		26,576			2,303			8.67		(6,889	)		(588	)		4
Total consumer real estate and other		7,032,968			405,674			5.77		7,257,234			432,312			5.96		(224,266	)		(26,638	)		(19)
Commercial:
Fixed- and adjustable-rate		2,854,327			164,368			5.76		2,956,699			176,018			5.95		(102,372	)		(11,650	)		(19)
Variable-rate		710,758			30,742			4.33		730,325			30,604			4.19		(19,567	)		138			14
Total commercial		3,565,085			195,110			5.47		3,687,024			206,622			5.60		(121,939	)		(11,512	)		(13)
Leasing and equipment finance		3,074,207			184,575			6.00		3,056,006			196,570			6.43		18,201			(11,995	)		(43)
Inventory finance		856,271			61,583			7.19		677,214			49,881			7.37		179,057			11,702			(18)
Total loans and leases (2)		14,528,531			846,942			5.83		14,677,478			885,385			6.03		(148,947	)		(38,443	)		(20)
Total interest-earning assets		17,597,422			940,097			5.34		16,903,857			971,339			5.75		693,565			(31,242	)		(41)
Other assets (3)		1,194,550								1,286,683								(92,133	)
Total assets		$18,791,972								$18,190,540								$ 601,432
Liabilities and Equity:
Non-interest bearing deposits:
Retail		$  1,414,659								$  1,429,436								$  (14,777	)
Small business		698,903								641,412								57,491
Commercial and custodial		291,986								284,750								7,236
Total non-interest bearing deposits		2,405,548								2,355,598								49,950
Interest-bearing deposits:
Checking		2,114,098			4,451			.21		2,071,990			6,466			.31		42,108			(2,015	)		(10)
Savings		5,671,889			28,942			.51		5,410,681			40,023			.74		261,208			(11,081	)		(23)
Money market		658,693			2,951			.45		656,691			4,532			.69		2,002			(1,581	)		(24)
Subtotal		8,444,680			36,344			.43		8,139,362			51,021			.63		305,318			(14,677	)		(20)
Certificates of deposit		1,103,231			8,764			.79		1,054,179			10,208			.97		49,052			(1,444	)		(18)
Total interest-bearing deposits		9,547,911			45,108			.47		9,193,541			61,229			.67		354,370			(16,121	)		(20)
Total deposits		11,953,459			45,108			.38		11,549,139			61,229			.53		404,320			(16,121	)		(15)
Borrowings:
Short-term borrowings		49,442			171			.35		124,891			474			.38		(75,449	)		(303	)		(3)
Long-term borrowings		4,500,564			192,984			4.29		4,580,786			208,972			4.56		(80,222	)		(15,988	)		(27)
Total borrowings		4,550,006			193,155			4.24		4,705,677			209,446			4.45		(155,671	)		(16,291	)		(21)
Total interest-bearing liabilities		14,097,917			238,263			1.69		13,899,218			270,675			1.95		198,699			(32,412	)		(26)
Total deposits and borrowings		16,503,465			238,263			1.44		16,254,816			270,675			1.66		248,649			(32,412	)		(22)
Other liabilities		551,206								511,589								39,617
Total liabilities		17,054,671								16,766,405								288,266
Total TCF Financial Corp. stockholders’ equity		1,729,660								1,415,161								314,499
Non-controlling interest in subsidiaries		7,641								8,974								(1,333	)
Total equity		1,737,301								1,424,135								313,166
Total liabilities and equity		$18,791,972								$18,190,540								$ 601,432
Net interest income and margin					$701,834			3.99	%				$700,664			4.15	%				$    1,170			(16)

(1)  Average balances and yields of securities available for sale are based upon the historical amortized cost and exclude equity securities.

(2)  Average balances of loans and leases include non-accrual loans and leases, and are presented net of unearned income.

(3)  Includes operating leases.

 

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