TCF Financial Corporation
Annual Report 2002

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TCF Financial Corporation 200 Lake Street East Wayzata, MN 55391-1693 www.tcfexpress.com E In an effort to help save our natural resources, the cover and inside pages of this annual report are printed on paper stock made from 30% post-consumer waste and a total 50% recycled fiber content. This report is printed with vegetable-based inks. 2690-AR-03 TCFIR9317 TCF FINANCIAL CORPORATION 2002 Annual Report INVESTING IN THE FUTURE C O R P O R AT E P R O F I L E TCF Financial Corporation is a Wayzata, Minnesota-based national financial holding company with $12.2 billion in assets. TCF has 395 banking offices in Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana. Other TCF affiliates provide leasing and equipment finance, mortgage banking, brokerage, and investments and insurance sales. TA B L E O F C O N T E N T S page 1 Financial Highlights page 2 Letter to Our Shareholders page 9 Business Highlights page 18 Corporate Philosophy page 20 Financial Review page 46 Consolidated Financial Statements page 51 Notes to Consolidated Financial Statements page 76 Independent Auditors’ Report page 77 Other Financial Data page 78 Corporate Information page 80 Shareholder Information I N V E S T I NG I N T H E F U T U R E The title “Investing in the Future” and the artwork in our 2002 annual report reflect TCF’s strategy of investing in our franchise. We plant the seeds of growth by investing in new banking facilities and convenient products and services. These investments may reduce our profits in the short term, but they are proven providers of long-term growth and profitability. Like an orchard, TCF is subject to changes in the environment. We use our experience to buffer elements such as a challenging business climate, unfriendly economy and changing laws and regulations. We have confidence in our proven strategies and the patience to continue investing for the future. Like apple trees in an orchard, we expect our invest- ments to bear fruit for many, many years. Total Return to Shareholders(cid:1) (In Dollars) TCF Financial Corporation(cid:1) SNL All Bank & Thrift Index(cid:1) S&P 500(cid:1) $900(cid:1) 800(cid:1) 700(cid:1) 600(cid:1) 500(cid:1) 400(cid:1) 300(cid:1) 200(cid:1) 100(cid:1) 0 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 Assumes $100 invested December 31, 1992 with dividends reinvested. Credit Ratings(cid:1) Last Rating Action Moody’s TCF National Bank: Outlook Issuer Long-term deposits Short-term deposits Bank financial strength Last Review October 2001 Last Rating Action Last Review June 2002 Last Rating Action Last Review January 2003 Stable A2 A2 Prime-1 C+ Standard & Poor’s Outlook TCF Financial Corporation: Long-term counterparty Short-term counterparty TCF National Bank: Long-term counterparty Short-term counterparty Positive BBB A-2 BBB+ A-2 FITCH Outlook Issuer rating TCF Financial Corporation: Long-term senior Short-term TCF National Bank: Long-term deposits Short-term deposits Stable B A- F1 A F1 Stock Price Performance(cid:1) (In Dollars) Stock Price(cid:2) Dividend $54(cid:1) 51(cid:1) 48(cid:1) 45(cid:1) 42(cid:1) 39(cid:1) 36(cid:1) 33(cid:1) 30(cid:1) 27(cid:1) 24(cid:1) 21(cid:1) 18(cid:1) 15(cid:1) 12(cid:1) 9(cid:1) 6(cid:1) 3(cid:1) 0 $1.25(cid:1) 1.00(cid:1) 0.75(cid:1) 0.50(cid:1) 0.25(cid:2) 0(cid:1) Year Ending(cid:2) Stock Price(cid:2) 6-86 12-86 12-87 12-88 12-89 12-90 12-91 12-92 12-93 12-94 12-95 12-96 12-97 12-98 12-99 12-00 12-01 12-02 $3.00 $3.03 $1.72 $2.22 $3.38 $1.91 $4.84 $7.25 $8.50 $10.31 $16.56 $21.75 $33.94 $24.19 $24.88 $44.56 $47.98 $43.69 Dividend Paid N/A N/A N/A $0.05 $0.10 $0.10 $0.10 $0.13 $0.19 $0.25 $0.31 $0.38 $0.50 $0.65 $0.75 $0.85 $1.00 $1.15 (cid:1) ■ (cid:2) (cid:1) ■ (cid:1) ■ (cid:2) (cid:2) (cid:1) (cid:1) Financial Highlights TCF Financial Corporation and Subsidiaries _ 2002 Annual Report At or For the Year Ended December 31, (Dollars in thousands, except per-share data) 2002 2001 % Change OPERATING RESULTS: Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees and other revenue (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Top-line revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of securities and branches . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax expense . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PER COMMON SHARE INFORMATION: Basic earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock price: High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Close . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price to book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price to tangible book value . . . . . . . . . . . . . . . . . . . . . . . . . . FINANCIAL RATIOS: Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average realized common equity . . . . . . . . . . . . . . . . Return on average common equity . . . . . . . . . . . . . . . . . . . . . . Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity to total assets at year end . . . . . . . . . . . . . . . . . . . . Tangible equity to total assets at year end . . . . . . . . . . . . . . . . . (1) Excludes gains on sales of securities and branches. N.M. Not meaningful. $ 499,225 $ 481,222 3.7% 405,344 904,569 22,006 13,498 538,369 357,692 124,761 367,307 848,529 20,878 4,179 501,996 329,834 122,512 $ 232,931 $ 207,322 $ 3.17 3.15 1.15 54.60 35.10 43.69 13.23 11.16 330% 391 2.01% 25.82 25.38 4.71 8.01 6.75 $ 2.73 2.70 1.00 51.12 32.81 47.98 11.92 9.91 403% 484 1.79% 23.18 23.06 4.51 8.07 6.71 10.4 6.6 5.4 N.M. 7.2 8.4 1.8 12.4 16.1 16.7 15.0 (8.9) 11.0 12.6 (18.1) (19.2) 12.3 11.4 10.1 4.4 (.7) .6 (Dollars in thousands) 2002 2001 % Change At December 31, SELECTED BALANCE SHEET DATA: Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . page 1 $ 2,426,794 $ 1,584,661 1,800,344 4,227,138 6,320,784 145,462 62,644 12,202,069 7,709,988 842,051 2,268,244 977,020 823,985 73,855,886 2,733,290 4,317,951 5,510,912 145,462 58,261 11,358,715 7,098,958 719,859 2,303,166 917,033 762,327 76,931,828 53.1% (34.1) (2.1) 14.7 – 7.5 7.4 8.6 17.0 (1.5) 6.5 8.1 (4.0) “Our basic philosophy of banking has not changed. We must continue planting seeds for the future by finding and nurturing good management and staff, and grow by taking reasonable and measured risks in the process.” Wi l l i a m A . C o o p e r , C h a i r m a n o f t h e B o a r d a n d C E O 2002 Annual Report _ Investing in the Future D E A R S H A R E H O L D E R S , TCF had another outstanding year. We earned a record $232.9 million in 2002, our 12th consecutive year of record results. Our diluted earn- ings per share increased 17 percent to $3.15. Return on average assets (ROA) was 2.01 percent, and our return on average realized common equity (ROE) was 25.82 percent. These impressive numbers rank us in the top 10 percent of the 50 largest banks in the country. Our stock closed at $43.69 per share at December 31, 2002, down from $47.98 per share at year-end 2001. Our annualized total return to investors over the past ten years was almost 23 percent. We are proud that TCF now ranks second in ten-year compounded dividend growth rate among the top 50 banks in the country. Our dividend increased from $1.00 per share in 2001 to $1.15 in 2002. Our dividend in 2003 will be $1.30. TCF’s 2002 financial results were highlighted by solid top-line rev- enue growth, good credit quality, increased POWER ASSETS® (consumer, commercial and leasing credits), increased POWER LIABILITIES® (core deposits) and moderate non-interest expense growth. At TCF, we put the customer first; we believe in convenient banking for our customers, de novo expansion, new product development, and maintaining focus on core banking activities. This is a proven strategy that has produced strong and consistently improving results for us in the past and we believe will continue to work well for us in the future. Top-Line Revenue Top-line revenue is an important number for us. Top- line revenue, which consists of net interest income and fee income, was up $56 million for 2002, an increase of seven percent. TCF is one of the page 2 2002 Annual Report _ Investing in the Future few banks that has shown consistent top-line revenue growth, which demonstrates that we are growing our core businesses, not just cutting expenses as many of our competitors are doing. Growing businesses should generate premium price-to-earnings ratios. Growth in top-line revenue results from the increase of Power Assets and Power Liabilities. Net interest income growth is driven by a changed balance sheet. Expanding the number of fee income producing products and services while growing the overall customer base fuels fee income growth. TCF added over 89,000 new checking accounts in 2002, bring- ing our total to over 1.3 million accounts. We have an 81 percent debit card penetration rate, one of the highest in the country, and we are now the 11th largest VISA® debit card issuer in the United States with 1.4 mil- lion debit cards outstanding. TCF’s convenience strategy successfully attracts a large number of cus- tomers who represent varied economic levels. Each of these customers contributes incrementally to our profitability. We do not believe in the old 80/20 rule, which suggests that banks earn 80 percent of their prof- its from the wealthiest 20 percent of the customer base. Diluted EPS Growth 2002 Annual Growth Rate of +17%(cid:1) $3.15 $2.70 $2.35 $2.00 $1.76 98 99 00 01 02 Net Income 2002 Annual Growth Rate of +12%(cid:1) (millions of dollars) $233 Power Assets and Power Liabilities Despite a challenging year of economic uncertainty, economic slowdown and interest rate reductions, TCF enjoyed $207 $186 substantial growth in our Power Assets, up $809.9 million for the year, a 15 percent increase from year-end 2001. Commercial real estate lend- $166 $156 ing and consumer lending produced at record levels in 2002, while com- mercial lending and leasing and equipment finance also had good years. We increased our checking account balances by over $328 million for the year, an increase of 13 percent. Higher-cost certificates of deposit decreased by $401.5 million during the year as TCF generally declined to pay rates above our institutional borrowing costs in the falling rate environment. Credit Quality Our credit quality remained strong in 2002. Net charge- offs were $20 million in 2002 or .25 percent of average loans and leases. We provided $22 million for credit losses in 2002 and, as a result, we page 3 98 99 00 01 02 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Fees and Other Revenue 2002 Annual Growth Rate of +10%(cid:1) (millions of dollars) $405 $367 $323 $274 $236 2002 Annual Report _ Investing in the Future increased our loan and lease loss reserves by $2 million. Delinquency and non-performing assets were at very low levels. Good credit quality is related not only to the type of loans on the balance sheet, but also the type of funding. TCF’s very profitable and growing deposit function allows us to operate our loan portfolio with relatively low credit risk. New Branch Expansion TCF believes in a de novo style of new branch expansion and we continue to invest in this important strategy. Our new branches are like seeds planted in an orchard. We plant them strategically, tend to them carefully and patiently as they grow, and harvest the rewards of our investment as they mature. While de novo expansion has been unusual in the banking industry, most successful retailers such as Wal-Mart®, Target®, and our supermarket partners, Cub® Foods and Jewel-Osco®, grow through 98 99 00 01 02 de novo expansion. This strategy has provided TCF an ever-growing cus- Net Interest Income 2002 Annual Growth Rate of +4%(cid:1) (millions of dollars) $426 $424 $439 $499 $481 tomer base with a low cost of funds. As of December 31, 2002, TCF had $2.1 billion of non-interest bearing deposits. We opened 15 new supermarket branches and 12 traditional branches in 2002. We have opened 220 branches in the last five years, bringing our overall branch network to 395. Many of these new branches are now becoming profitable. The increasing profits from our past branch expan- sion funds continued future new branch expansion. What we really like about the de novo model is that you can pick the places you want to go, determine the pace of expansion and control the culture. The cost of this new branch expansion flows through the income state- ment faster than the dilution created through acquisition, but is ultimately more profitable. We believe we can bring these new branches to prof- itability quickly enough that expansion is a better use of our capital than paying the premiums of acquisition. The internal rate of return on expan- sion is one of the “hurdle rates” we use to measure acquisitions. Although we would not rule out an acquisition in the future, we believe the de novo 98 99 00 01 02 strategy is best for us right now. Given our current de novo expansion opportunities, we would issue new shares for an acquisition grudgingly. page 4 (cid:1) (cid:1) (cid:1) (cid:1) Retail Distribution Growth Traditional Branches ■ Supermarket Branches(cid:1) 395 375 352 338 311 2002 Annual Report _ Investing in the Future We plan to open another 24 branches in 2003, and have plans for even more new branch expansion in the years ahead. As we build out the avail- able supermarket sites, more of our expansion will be in traditional branches in 2003 and in the future. Innovative Products and Services In addition to our de novo branch expansion strategy, innovative products and services continue to contribute to our success. “Totally Free Checking,” “Free Small Business Checking,” home equity loans, debit cards, investment sales and, of course, super- market branch banking have been our most successful innovations. Over the last few years we have introduced TCFExpress.com® (our online banking service), TCF Express Trade (our securities brokerage service), TCF Leasing (one of our equipment leasing subsidiaries), TCF Express CoinSM Service (offering free self-service coin counting to TCF customers), system-wide 98 99 00 01 02 open seven days-a-week branch banking, and the TCF Express Phone CardSM (free long-distance phone minutes for debit card use). TCF has success- fully used innovation to increase profits and grow our customer base. Supermarket Banking TCF has the fourth largest supermarket branch system in the United States, with 244 supermarket branches. In 2002, supermarket deposits totaled $1.5 billion, an increase of 25 percent over the prior year. Our average interest rate on deposits in supermarket branches is .90 percent. We continue to attract customers through these convenient, full-service branches. Our supermarket branches added over 53,000 new checking accounts during 2002. As the supermarket branches TCF Express Card (cid:1) Interchange Revenue 2002 Annual Growth Rate of +23%(cid:1) (millions of dollars) $46.2 $37.6 $28.8 mature, we are selling customers additional products. Our fee income in $19.5 these branches totaled $160.2 million for the year (up 17 percent from last year). We have consumer lenders in many of our supermarket branches $11.1 and have proven to many doubters that you can make loans in these branches. We now have over $369.4 million in consumer loans that were originated in supermarket branches, up 21 percent from 2001. 98 99 00 01 02 page 5 (cid:1) (cid:1) ■ (cid:1) (cid:1) (cid:1) 2002 Annual Report _ Investing in the Future Supermarket Fee Income 2002 Annual Growth Rate of +17%(cid:1) (millions of dollars) $160 Many of our competitors are reducing or eliminating their supermar- ket branch networks. However, it is clear to us that we have a winning $137 supermarket banking strategy and it is a major factor in making TCF the $112 $87 most convenient bank in our markets. We plan to open approximately six new supermarket branches in 2003 and more in the future. TCF competes against financial institutions that are, in many cases, much larger and have far greater resources. This has both good and bad ramifications. The consolidation that we’ve seen in the banking industry $53 has in many cases created huge, lethargic organizations that cannot react 98 99 00 01 02 Supermarket Consumer Loans 2002 Annual Growth Rate of +21%(cid:1) (millions of dollars) $369 $305 $233 $193 $108 98 99 00 01 02 quickly to changing competition. On the other hand, when you walk with elephants, you sometimes get stepped on. We are competing in an industry that in many cases is still in a consol- idation cost-take-out mode, a strategy that over time has proven to decrease customer service and slow down revenue growth. However, we have recently seen some banks come to realize the value of top-line revenue growth and core earnings, and we believe they may become more competitive in the future. Several of our large competitors have announced plans for future de novo branch expansion. In order to succeed, TCF must be swifter than they are to create, design and implement innovative and customized prod- ucts. We must continue to focus on giving great, convenient service. Our basic philosophy of banking has not changed. We must continue planting seeds for the future by finding and nurturing good management and staff, and grow by taking reasonable and measured risks in the process. TCF has been very successful over the past fifteen years of extensive change in the banking industry, and in a strong U.S. economy. We are still in an economic slowdown with very low interest rates. These very low interest rates had a major impact on TCF in 2002. Low rates caused increased prepayments on loans and mortgage-backed securities and accel- erated the write-off of mortgage servicing rights. Many banks are report- ing “restructuring charges” resulting from increased loan charge-offs or other losses. We believe that we are more insulated from these risks than most of the industry, but we are not immune. page 6 (cid:1) (cid:1) (cid:1) (cid:1) 2002 Annual Report _ Investing in the Future Risks We think it is appropriate to mention here what we consider to be (millions of dollars) $1,518 Supermarket Deposit Growth 2002 Annual Growth Rate of +25%(cid:1) the major risks to our continued success. First is the success of our de novo branch expansion. We are relying on the continued, long-term success of branch banking. Second, TCF, like all banks, is subject to the effects of any economic downturn. In particular, a significant decline in home val- ues in our markets could have a negative effect on our results. A bad econ- omy can create increased loan and lease losses. The third risk is our ability to attract and retain new customers. Our overall growth is dependent on $618 $1,213 $1,074 $826 our ability to grow our checking accounts. Deposit losses (fraudulent checks, etc.) have risen and combating them is a continuing challenge. Technological change is a risk. Additionally, rising and falling interest rates affect our results. Legal, regulatory and tax issues are always a risk (the pending Visa® and Mastercard® debit card merchant lawsuit is a good example of this legal risk). Over the long term, the success and viability of our supermarket part- ners are important to TCF. If our partners sell or contract their stores, we are at risk; though over time, as we build out our traditional branch system, this risk is mitigated somewhat. We continue to work closely with our partners to optimize our businesses and to be aware of and address any potential risks. New competitors, many of whom have significantly more resources than TCF, are entering the financial services business. We must remain aware of these competitors and be ready to address the challenges they present. None of these risks are new. Our consistent results have proven that we have managed these risks in the past and we believe we are adequately prepared to manage them in the future. Our philosophy at TCF is to run a highly profitable bank and to minimize risk. TCF does not utilize uncon- solidated subsidiaries and has no exotic derivatives, foreign loans, bank owned life insurance, etc. In our opinion, TCF’s accounting is conser- vative. A careful reading of this Annual Report will tell you generally everything about our company. We try to keep our financial reporting simple, but as complete as possible. We have a lot to be proud of and nothing to hide. page 7 98 99 00 01 02 Supermarket Branch Expansion 2002 Annual Growth Rate of +4%(cid:1) 244 234 213 195 160 98 99 00 01 02 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) Checking Accounts 2002 Annual Growth Rate of +7%(cid:1) (thousands) 1,338 1,249 1,131 1,032 913 98 99 00 01 02 Fee Revenue Per Retail(cid:1) Checking Account 2002 Annual Growth Rate of +4%(cid:1) $218 $209 $190 $168 $143 2002 Annual Report _ Investing in the Future We continue to have a mutuality of interest with our shareholders. Our senior management and board of directors own approximately 6.2 mil- lion shares of TCF stock. Seventy-seven percent of our eligible employees participate in TCF’s employee stock ownership plan, which at year-end held over 4.1 million shares. Our stock plans for senior management continue to be restricted stock grants based on long-term growth in earn- ings per share. We are true owners as we face the downside risk of our decisions as well as the upside potential. We remain very optimistic about TCF’s future. TCF repurchased 3.1 million shares (4 percent) of its stock in 2002 and a total of 21.7 million shares (23 percent) since the beginning of 1998. While the number of shares we buy remains subject to the availability of capital, we plan to continue repurchasing shares as long as TCF stock remains our most attractive investment opportunity. We consider the return from repurchasing TCF stock as another hurdle rate for acquisi- tions. Potential changes in the taxability of dividends may change our strategy on stock buybacks vs. dividends. Again this year, we give special thanks to our hardworking, responsive and dedicated Board of Directors. Our Board consists largely of entre- preneurial business people who also own TCF stock. We appreciate their continued guidance and support. We also thank our outstanding team of employees who truly do put the customer first every day. The ability, dedication and energy of our employees are extraordinary. Thank you for your continued support and investment in TCF. 98 99 00 01 02 William A. Cooper Chairman of the Board and Chief Executive Officer Lynn A. Nagorske President and Chief Operating Officer page 8 (cid:1) (cid:1) (cid:1) (cid:1) (cid:1) 2002 Annual Report _ Investing in the Future (cid:1) S T R AT E G I E S (cid:1) TCF’s two powerhouse product lines are our Power Assets (higher- TCF’s 2002 annual report has a new look, but it tells a familiar story. yielding consumer loans, commercial loans and leasing assets) and The TCF story is simple – and it is focused on carefully thought out and Power Liabilities (lower-cost checking, savings, money market and consistently executed strategies. Simply put, TCF is in the business of certificate of deposit accounts). We depend on these consistent pro- banking and we know our business well. Our long-term strategies for ducers to increase our margins and generate fee income. One of the growth are somewhat unique among our competitors and they have tenets of TCF’s Power Assets strategy is to lend to customers we know, served and continue to serve TCF, our customers and shareholders well. on a secured basis. Our strong credit quality is evidence that this TCF’s strategies begin with the premise that every customer is valuable. We are “The Leader in Convenience Banking,” and we use our premier convenience services to attract a large and economically diverse cus- tomer base. Being open seven days a week, longer hours, convenient supermarket branch network, free TCF Check cards, free online banking – all of these services make banking easier and more convenient. TCF provides convenience to our large and growing customer base through de novo expansion – we add new branches where they best sup- port and grow our customer base. At the same time, we are constantly expanding our product lines and cross-selling our customers new prod- ucts and services such as TCF Express Coin Service, Command ProtectionSM important strategy is working. TCF has one of the lowest charge-off ratios in the banking industry. Power Liabilities are proven profit drivers at TCF. Unlike many of our competitors, we focus as much on the liability side of the balance sheet as we do on the asset side. Earning one percent on each side of the balance sheet can provide synergistic earnings of greater than two percent in total. TCF’s superior earnings performance allows us to regularly buy back our own stock. In evaluating potential acquisitions, we look at the stock buyback opportunity as an acquisition alternative that can provide superior results. Investing in our own stock has been good for TCF – and a better investment than many other opportunities. and TCF Express Trade. Each of our many customers contributes incre- Simple, straightforward and enduring strategies have made TCF one mentally to our revenue and in that way, a little number of the top performing banks in the United States. We will continue to focus on these effective strategies in 2003. times a big number of customers is a big number. We don’t believe in focusing only on one “profitable” customer segment. Every customer is profitable and may become more so over time. P l a n n i n g f o r G r o w t h THE TCF STORY IS SIMPLE – AND IT IS FOCUSED ON CAREFULLY THOUGHT OUT AND CONSISTENTLY EXECUTED STRATEGIES. THESE STRATEGIES HAVE MADE TCF ONE OF THE TOP PERFORMING BANKS IN THE COUNTRY. 2002 Annual Report _ Investing in the Future TCF’S INVESTMENTS IN DE NOVO EXPANSION OF OUR BRANCH NETWORK AND PRODUCT LINES COMPLEMENT EACH OTHER. OUR CONVENIENT LOCATIONS, PRODUCTS AND SERVICES MAKE TCF THE LEADER IN CONVENIENCE BANKING IN OUR MARKETS. B u i l d i n g f o r t h e Fu t u r e D E NOVO (cid:1) E X PA N S I O N (cid:1) Key to TCF’s growth is our investment in de novo and these lower-cost, high-volume branches become profitable more quickly than traditional branches. Our supermarket branches in Cub Foods expansion, both in our branch network and in our development of new and Jewel-Osco continue to play an important role in our expansion products and services. Each of these components plays a fundamental strategy, and many customers regularly use both supermarket and and complementary role – adding new branches supports our growing traditional branches. customer base and providing new products and services allows us to attract new customers and deepen our customer relationships. The opportunity to add new supermarket locations with our partners has slowed and TCF now has heightened opportunity to support and Since 1998, TCF has added 220 new branch locations to our rapidly complement these branches with more new traditional branches. growing branch network – over 50 percent of our existing branches. In Traditional branches require a higher initial investment, but they act 1998 we invested in our Chicago market by partnering with Jewel-Osco as a visible anchor in our communities, providing convenient, full- to put TCF supermarket branches in their grocery stores. Jewel-Osco’s service banking not only to our retail customers, but also to our grow- commanding Chicago market share enabled us to quickly establish ing commercial and small business customers. In 2003, TCF will focus presence and visibility in this important market. Since 1998, we have on traditional branch expansion by adding 18 new traditional branches expanded our relationship with Jewel-Osco and now have branches in including eight in Colorado, six in Michigan and four in Illinois. most of their stores in the Chicago and Milwaukee areas. We are now reaping the benefits of this investment, as these branches have become profitable and are contributing to future expansion. The other key component of TCF’s de novo expansion strategy is the evolution of our convenience products and services. New products attract new customers and allow us to develop additional relation- Supermarket banking has played a key role in TCF’s ability to provide ships with our existing customers. TCF’s innovative culture fuels our the most convenient banking services in the markets we serve. Our growth in this area. customers love the convenience of one-stop shopping and banking – page 10 2002 Annual Report _ Investing in the Future TCF has a rich history of introducing new products and services. Totally TCF customers enjoy the flexibility of branch banking 363 days a year. Free Checking, our most popular checking account, is now being rec- TCF was a pioneer in its branches being open seven days a week with ognized and emulated by our competitors. TCF has built a suite of extended hours; and in 2002, this successful “more open” strategy was services around Totally Free Checking, including the TCF Check Card, expanded to include being open most holidays, not only in our super- TCF Express Phone Card, Totally Free Online Banking and free coin count- market locations, but also in our traditional branches. For customers ing. Our home equity loan products offer unequaled flexibility for cus- with busy work and personal lives, our supermarket locations are the tomers seeking a convenient way to access the equity in their homes. ultimate in one-stop shopping and full-service banking convenience. TCF Express Trade provides brokerage services at a competitive cost. Customers also enjoy free self-service coin counting at TCF Express Coin TCF Small Business banking provides small business customers with a convenient, economical way to manage their deposit funds. Our com- mercial product line was greatly enhanced in 2002 with the addition of TCF Express BusinessSM, providing Internet banking services to our Service machines in most of our branches, a service that has proven very popular with both children and adults. TCF plans to continue our aggressive branch expansion strategy in 2003 and will open 24 new branches in our markets during the year. commercial customer base. TCF Express Leasing (a division of TCF TCF also provides a robust suite of products and services for customers Leasing) through the addition of a sophisticated front-end origina- who prefer the convenience of banking electronically. Customers may tion and documentation system enhanced their ability to quickly and access their accounts for balance information, transfers and other conveniently originate and approve lease transactions. services by calling our Automated Phone System. Our extensive, conve- De novo expansion in TCF’s branch network and product lines continue to complement each other, as new products and services and conve- niently located network of TCF EXPRESS TELLERSM ATMs provides easy access to getting cash, making deposits and obtaining account information. nient locations attract new customers and our branch network supports Electronic banking has changed over the last few years, as the Internet and grows these relationships by providing the most convenient bank- has brought new meaning to the word “convenience.” TCF began offer- ing services in our markets. TCF plans to continue our investment ing Internet banking several years ago and now many of our customers in this successful core strategy in 2003 and beyond. regularly log on to bank with us. TCF Totally Free OnlineSM Banking is free (cid:1) C O N V E N I E NC E (cid:1) Convenience is a hallmark of TCF’s banking strategy and we continue to lead the financial services industry in providing convenient services and products. At TCF, we listen to our customers and then provide convenience the way they define it, whether at our branches, via the telephone, ATM or online. – and signing up for the service is quick and easy. In 2002, usage of this popular service increased dramatically and in 2003 it will be enhanced to provide customers with expanded history and transaction capabil- ity. TCF Express Trade online brokerage adds yet another dimension to our Internet banking services, as customers can easily and securely buy or sell investments online at a very competitive cost. page 11 2002 Annual Report _ Investing in the Future TCF has proven over time that we are “The Leader In Convenience TCF has offered “Totally Free Checking” since 1986 – and the Banking” for retail customers in the markets we serve. In 2002, this checking account continues to be our most popular and profitable strategy was expanded as TCF began development of a new conve- product. In 2002, our 395-branch system added over 89,000 checking nience product for our commercial business customers. TCF Express accounts and ended 2002 with 1,338,313 checking accounts. Checking Business allows commercial customers to access complete balance account growth is a demonstrated strength of TCF and 1.3 million reporting, initiate transfers, stop payments, and ACH transactions accounts is a customer base generally found in much larger banks. We from any personal computer worldwide, 24 hours a day, 365 days a use the checking account as the starting point with the customer and year. This important new product positions TCF to become a leader in then build the relationship by cross-selling additional products and providing commercial banking convenience services. services. In 2002, this resulted in $2.9 billion in checking deposits, an At TCF, we are firmly committed to being the most convenient bank in each of our markets, by continuing to provide innovative new banking solutions for our customers. increase of 13 percent, $2 billion in savings deposits, an increase of 58 percent; and $884.6 million in money market accounts. Certificates of deposit declined $401.5 million this year, due to TCF’s disciplined pricing and availability of other lower-cost funding sources. P OW E R A S S E T S A N D (cid:1) P OW E R L I A B I L I T I E S (cid:1) These low-cost liabilities have additional benefits. As the balance and percentage of Power Liabilities on the balance sheet increases, we can Power Assets and Power Liabilities, TCF’s “Power Businesses,” were the continue to underwrite Power Assets without taking inappropriate primary drivers of TCF’s impressive double-digit earnings growth in 2002. credit risk. In 2002, TCF once again had one of the lowest charge-off TCF defines Power Assets as higher-yielding commercial loans, com- ratios of the top 50 banks in the country. mercial real estate loans, leases, and consumer home equity loans. Power Liabilities include checking, savings, and money market accounts, and certificates of deposit. Power Assets and Power Liabilities comprise less than 60 percent of TCF’s balance sheet, yet in 2002, they contributed over 83 percent of net income. In Power Assets, both Consumer and Commercial Real Estate banking operations had an outstanding year of double-digit growth. Consumer Loans, which are 99 percent home equity loans, increased $496.5 mil- lion, nearly 20 percent, during 2002 to end the year at $3 billion. Many factors contributed to this increase. Tiered-pricing, which we introduced Changes in net interest income are dependent upon the movement of in 1999, allowed us to offer products with attractive loan rates and flex- interest rates, level of non-performing assets and other factors. In ible loan-to-value options while maintaining our credit quality, which 2002, TCF was able to increase net interest income from $481.2 mil- remains at a level well above the national average for banks our size. lion to $499.2 million, up 4 percent, despite very low interest rates. The primary reason for this increase was the impact on the income statement of the change in the mix of our balance sheet in both Power Assets and Power Liabilities. Also, in another year of consumer refinancing, TCF generated $2 billion in loan originations. This was accomplished in part by adding new lenders in our growing supermarket network as well as in our new tra- ditional branches. We also continued our proven strategy of proactively page 12 2002 Annual Report _ Investing in the Future identifying customers with high loan refinancing potential and con- (cid:1) S T RUC T U R E (cid:1) tacting them to refinance with one of TCF’s loan products. This strat- One key to TCF’s long-term success is that our strong, seasoned egy has worked well for us during almost two years of low rates and management team is structured to optimize strategies for geograph- increased refinancing activity. Also experiencing high refinance activ- ically based marketing and centralized product line management ities, TCF Mortgage Corporation funded $2.9 billion in mortgage loans and operations. during 2002. TCF believes that the day-to-day “business of banking” is best managed TCF’s Commercial Real Estate group also performed well in 2002, at the local level in each of our markets. Our local bank management increasing outstandings by $213.3 million, or 13 percent. An increase teams are constantly in touch with their customers, competitors and in lenders in 2002, especially in our Chicago market, contributed to communities, and we believe they are able to make the best decisions $517 million in Commercial Real Estate loan originations. This port- regarding local business issues, business development initiatives, cus- folio continues to have strong credit quality and low charge-off rates tomer relations, and community involvement. and ended the year with .37 percent delinquencies. In our flagship state of Minnesota, TCF is one of the top three banks One challenge in 2002 was the slowing economy, which prompted many in checking account market share. TCF Minnesota management is companies to move cautiously on borrowings and purchases; this trend focused on retaining and cultivating its large and profitable customer was reflected in both our Commercial Loan and Leasing and Equipment base by strategically growing our branch network and building addi- Financing portfolios. However, both portfolios gained in outstandings, tional relationships with our customers through our higher-yielding with Commercial Loans up $17.7 million, or 4 percent, and Leasing and consumer and commercial loan products. Equipment Financing up $82.3 million, or 9 percent. Leasing demon- strated noticeable improvement in credit quality with both delinquen- cies and non-performing loans and leases down from year-end 2001. TCF’s Leasing and Equipment Finance operations are well positioned for future growth. TCF’s Lakeshore region, comprised of our Illinois, Wisconsin and Indiana operations, has our largest branch system and largest supermarket- banking network. Since 1998, Lakeshore has added 172 branches and now has 227. TCF now has 178 supermarket branches throughout the Lakeshore region. This growing C u l t i v a t i n g O u r B u s i n e s s POWER ASSETS AND POWER LIABILITIES, TCF’S “POWER BUSINESSES,” ARE THE PRIMARY DRIVERS OF OUR IMPRESSIVE EARNINGS GROWTH. 2002 Annual Report _ Investing in the Future TCF’S MANAGEMENT STRUCTURE PROVIDES THE BEST OF BOTH WORLDS – INFORMED, TIMELY LOCAL DECISION-MAKING AND LONG-TERM STRATEGIC PRODUCT MANAGEMENT, POSITIONING US FOR THE FUTURE. M a n a g i n g f o r E x c e l l e n c e TCF franchise still has significant opportunity for expansion in the huge Chicago market. We As firmly as TCF believes that local, geographi- cally-based management is best suited to run believe that our firmly entrenched presence in Chicago will assist us our banks, we also believe that functional product line management in competing with the increasing number of financial institutions benefits from a more centralized approach. Centralized functional attempting to enter this attractive market. With this strong network management facilitates efficient product development, effective in place, TCF Lakeshore continues to develop its growing Power Assets communication, consistent implementation and close monitoring of area. That focus will continue in 2003. our strategic initiatives, as well as central accountability for the suc- The Detroit metro area in Michigan has perhaps the largest potential for TCF’s future expansion. While TCF is a market leader in Ann Arbor, there are many areas of Detroit where we do not yet have a presence. To bolster our presence, TCF Michigan added five branches in Detroit in 2002 and plans to add another six in 2003. TCF has a strong, estab- lished commercial business team in Michigan and will continue devel- cess of each of our major product areas. To that end, TCF has appointed bank presidents and other key management who were chosen for their strong expertise to be “Functional Heads,” managing traditional branch development, supermarket branch development, consumer lending and commercial lending. We are very pleased with the results we have achieved in these areas since implementing this strategy in 1999. oping that Power Asset area in 2003. TCF’s experience has proven that there are some product lines and Colorado is our newest market and also represents a significant oppor- tunity for future expansion both in Denver and Colorado Springs. TCF Colorado grew to 16 branches in 2002 and has purchased land to add eight more branches in 2003. We are complementing our supermarket network by focusing on adding traditional branches in strategic loca- tions. TCF’s convenience products are a great fit for this growing market and we anticipate strong results over time in Colorado. administrative services that are best managed centrally in Minnesota. TCF’s Leasing & Equipment Finance business, which includes subsidiaries Winthrop Resources and TCF Leasing, is managed in Minnesota and has 57 sales representatives in ten states. Sales representatives cultivate leads and attract new customers throughout the United States without worry of administrative responsibilities, which are handled centrally. TCF Mortgage Corporation, also managed in Minnesota, has 101 sales representatives in five states, many of whom office in TCF branches. page 14 2002 Annual Report _ Investing in the Future In addition, when we merged our banks, it became evident that man- Evidence of TCF’s innovative culture exists in virtually all areas of our aging our money would be much more efficient and profitable done business. The TCF Express Phone Card was the first debit card loyalty centrally. Our Treasury Services Division is now managed out of our program to reward customers for card usage by giving them free long- corporate headquarters. distance phone minutes. TCF Express Coin Service machines offer free By organizing our management teams to most efficiently and effec- tively manage our local banks and our strategic product areas, TCF has the best of both worlds – informed, timely local decision-making that allows us to compete in our markets on a daily basis and long- self-service coin counting to TCF customers and incent non-customers to open TCF accounts. TCF Small Business Banking, built around our unique “Free Small Business Checking” account, has matured into a full-ser- vice small business resource and our customer base has grown rapidly. term strategic product management positioning us for the future. In 2002, TCF continued to expand the scope of our innovations. TCF (cid:1) I N NOVAT I O N S (cid:1) TCF believes that innovation and continuous improvement are key to an organization’s success and competitiveness and we have created a process to encourage and recognize innovation and innovators. We believe the best innovators are those who are constantly searching for new ways to use old ideas, taking a concept that was successful in one area and transplanting it in another, or taking an idea from another industry and molding it to fit TCF’s strategies. TCF has created a culture and an environment that supports innovation, and our long list of innovative products and services speaks to its effectiveness. We continuously plant the seeds of innovation and harvest the rewards of our innova- tive products and services. P l a n t i n g t h e S e e d s Express Business, our Internet-based commercial banking system, was introduced to address the cash management needs of our commer- cial customers. In our Consumer Lending division, we launched TCF Command Protection, an industry-leading service providing waiver or deferral of debt for TCF loan customers under a number of personal or financial need scenarios. TCF Express Leasing (a division of TCF Leasing) introduced an online front-end leasing application system to facilitate the efficient processing of lease applications and stream- line documentation. The result – in 2002, 97 percent of TCF Express Leasing’s applications were processed using this system. Long widely recognized for innovative marketing programs, TCF last year enlisted “Spongebob Squarepants™,” a popular Nickelodeon® cartoon character, as a mascot for our very successful checking and savings account promotion aimed at children, parents and “Spongebob” fans in the Chicago area. TCF HAS CREATED A CULTURE THAT SUPPORTS INNOVATION. WE CONTINUOUSLY PLANT THE SEEDS OF INNOVATION AND HARVEST THE REWARDS OF OUR INNOVATIVE PRODUCTS AND SERVICES. 2002 Annual Report _ Investing in the Future Innovation at TCF is not just an “off and on” program. TCF innovations the big-picture objectives. Third, we insist on accountability in our occur continuously because the innovative spirit is a pervasive, ongo- incentive programs. Once objectives are set and the process is man- ing part of our culture. We will continue to cultivate the innovative aged, the results are measured and employees are held accountable spirit at TCF in 2003. for their results. R E WA R D S A N D (cid:1) R E C O G N I T I O N (cid:1) At TCF, we work every day for our shareholders and we reward employee performance that is directly linked to tangible drivers of shareholder value. From our frontline employees to executive management, TCF Long-term incentives such as stock compensation and TCF’s Employees Stock Purchase Plan take our incentive programs to another level by encouraging employees to become TCF owners. We believe owners act differently than employees – and our employee owners receive value for making decisions that create long-term value for our sharehold- ers. In this way, TCF ensures that everyone is focused on what drives employee incentives are tied to overall performance and earnings growth. shareholder value. TCF’s incentive programs are designed to educate employees about the things that drive company performance and reward them for their contributions in those areas. Unlike some of our competitors, we are goal-driven and we reward for ultimate results, not just for activities that may or may not directly drive performance. TCF has structured its incentive programs to meet three important cri- teria. First, the objective must be measurable. This is facilitated by our profit center reporting structure, which essentially “divides up the bank” into measurable profit center units. Second, the incentive program must be tightly managed – in this way we retain focus on individual employee and program performance as well as TCF also recognizes that our long-term performance is linked to the deep- rooted commitment of our employees to provide excellent customer service. In addition to rewarding employees for tangible performance, we also recognize them for exhibiting the behaviors that create the customer service culture known as TCF, The Customer First. In 2001, TCF implemented an employee service recognition initiative that rewards employees for doing just that. The initial concept was simple – provide employees with simple, basic customer service stan- dards and behaviors, then immediately and consistently recognize and reward those behaviors anytime, anywhere, as they are observed by co-workers, supervisors and customers. Recognizing and rewarding these R e c o g n i z i n g Pe o p l e f o r L o n g - Te r m S u c c e s s AT TCF, WE WORK EVERY DAY FOR OUR SHAREHOLDERS. FROM OUR FRONTLINE EMPLOYEES TO EXECUTIVE MANAGEMENT, TCF EMPLOYEE INCENTIVES ARE TIED TO OVERALL PERFORMANCE AND EARNINGS GROWTH. 2002 Annual Report _ Investing in the Future customer-centered behaviors result in increased employee satisfac- There are a variety of ways local nonprofit organizations receive finan- tion and retention – and both mean an increased level of service to cial support from TCF: our customers and value to our shareholders. • Branch Funds – Contributions or grants awarded to impact organi- Throughout 2002, TCF employees across all divisions and geographies zations located near TCF branches; gifts typically range between embraced this initiative and made it part of their day-to-day activities. $100 - $1,500 and are usually supported by branch personnel. Over 25,000 “on the spot” recognition awards were given to employees, who through their actions, confirm that at TCF, The Customer is First. In 2003, in addition to monthly and quarterly awards, celebrations will be held all across TCF to recognize “the best of the best” – those employees who raise the bar for the organization on what it means to • Employee Matching Gifts – Donations contributed by employees, matched dollar-for-dollar by TCF, to the nonprofit organization of their choice. TCF donated more than $250,000 by matching the gifts made by employees to their favorite charities during 2002. deliver great customer service. • Employee’s Fund – Employees contributed to this fund through pay- The Customer First has become more than a program at TCF. It’s a way of life being nurtured daily by employees who understand the importance of delivering great service to all customers, every day. TCF will continue to promote our performance-based rewards and to enhance customer service through The Customer First initiative. (cid:1) C O M M U N I T Y G I V I NG (cid:1) roll deduction; the TCF Foundation matched their contributions 100%. A committee, consisting of TCF employees, selected organizations to receive grants based on active employee involvement. Over $257,000 was awarded to charities by the Employee’s Fund during 2002. • Foundation and Corporate Giving – The TCF Foundation and Corporate Giving awarded larger grants, including multi-year commitments. Some of the grants awarded in 2002 were to Neighborhood Housing Services of Chicago and CommonBond Communities, providing for At TCF, we believe we have a special obligation to our communities that affordable housing; Courage Center and Goodwill/Easter Seals, in sup- goes beyond simply providing financial services. Through generous gifts port of human services; Friends of Ascension, supporting education; of time, talent and resources, TCF and its employees support many local and the Minneapolis Institute of Arts, sustaining arts and culture. organizations, making a difference in the neighborhoods we serve. During 2002, TCF contributed more than $3 million in grants to char- TCF reflects our commitment to the community by supporting a variety itable organizations. In addition to the numerous grants awarded, we of nonprofit organizations through volunteer time, management coun- also enriched the community by supporting affordable housing efforts, sel and grants. This support is concentrated into four categories: and assisting with the capitalization of several affordable housing human services, community development, education, and arts and loan funds. culture. Additionally, we provide assistance to local organizations supported by TCF employees, through active volunteerism or service on boards and committees. TCF is proud of its employees who are striving to make a difference to those in need and supporting numerous programs vital to the well- being of our communities. page 17 2002 Annual Report _ Investing in the Future C O R P O R AT E (cid:1) P H I L O S O P H Y (cid:1) • TCF utilizes conservative accounting and reporting principles that accurately and honestly report our financial condition and results • TCF banks a large and diverse customer base. TCF emphasizes con- of operations. venience in banking; we’re open 12 hours a day, seven days a week, 363 days per year. We provide customers innovative products through multiple banking channels, including traditional and supermarket branches, TCF EXPRESS TELLER® ATMs, TCF Express Cards, phone bank- • TCF encourages stock ownership by our officers, directors and employees. We have a mutuality of interest with our shareholders, and our goal is to earn above-average returns for our shareholders. ing and Internet banking. • TCF is currently growing primarily through de novo expansion rather • TCF operates like a partnership. We’re organized geographically and by function, with profit center goals and objectives. TCF emphasizes than acquisition. We are growing by starting new businesses, opening new branches and offering new products and services. return on average assets, return on average realized equity, and earn- • TCF believes interest-rate risk should be minimized. Interest-rate ings per share growth. We know which products are profitable and speculation does not generate consistent profits and is high risk. contribute to these goals. Local geographic managers are responsi- ble for local business decisions, business development initiatives, customer relations and community involvement. Managers are incented to achieve these goals. • TCF focuses on growing its large number of low-interest cost check- ing accounts by offering convenient products, such as “Totally Free Checking”. TCF uses the checking account as its core deposit account to build additional customer relationships. • TCF earns most of its profits from the deposit side of the bank. We accumulate a large number of low cost accounts through convenient services and products targeted to a broad range of customers. As a result of the profits we earn from the deposit business, we can min- • TCF is primarily a secured lender and emphasizes credit quality over asset growth. The costs of poor credit far outweigh the benefits of unwise asset growth. • TCF places a high priority on the development of technology to enhance productivity, customer service and new products. Properly applied technology increases revenue, reduces costs and enhances service. We centralize paper processing and decentralize the bank- ing process. • TCF encourages open employee communication and promotes from within whenever possible. TCF places the highest priority on honesty, integrity and ethical behavior. imize credit risk on the asset side. • TCF believes in community participation, both financially and through • TCF strives to place The Customer First. We believe providing great volunteerism. We feel a responsibility to help those less fortunate. service to our many customers creates value for our shareholders. • TCF does not discriminate against anyone in employment or the extension of credit. As a result of TCF’s community banking philos- ophy, we market to everyone in the communities we service. page 18 The Financials I N V E S T I NG I N T H E F U T U R E page 20 page 46 page 51 page 76 page 77 page 78 page 80 Financial Review Consolidated Financial Statements Notes to Consolidated Financial Statements Independent Auditors’ Report Other Financial Data Corporate Information Shareholder Information Financial Review TCF Financial Corporation and Subsidiaries _ 2002 Annual Report This financial review presents management’s discussion and analysis first supermarket branch in 1988, and now has 244 supermarket of the consolidated financial condition and results of operations of branches, with $1.5 billion in deposits. TCF has the nation’s 4th TCF Financial Corporation (“TCF” or the “Company”) and should largest supermarket banking branch system. The success of TCF’s be read in conjunction with the consolidated financial statements branch expansion is dependent on the continued long-term success and other financial data beginning on page 46. of branch banking as well as the continued success and viability of Corporate Profile TCF is a national financial holding company. Its principal sub- sidiary,TCF National Bank, is headquartered in Minnesota and had 395 banking offices in Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana at December 31, 2002. Other affiliates pro- vide leasing and equipment finance, mortgage banking, brokerage and investment and insurance sales. TCF provides convenient financial services through multiple channels to customers located primarily in the Midwest. TCF has developed products and services designed to meet the needs of all consumers. The Company focuses on attracting and retaining cus- tomers through service and convenience, including branches that are open seven days a week and on most holidays, extensive full-service supermarket branch and automated teller machine (“ATM”) net- works, and telephone and Internet banking. TCF’s philosophy is to generate top-line revenue growth (net interest income and fees and other revenue) through business lines that emphasize higher yield- ing assets and lower or no interest-cost deposits. The Company’s growth strategies include new branch expansion and the development of new products and services designed to build on its core businesses and expand into complementary products and services through emerging businesses and strategic initiatives. TCF’s core businesses are comprised of mature traditional bank branches, EXPRESS TELLER® ATMs, and commercial, consumer and mortgage lending. TCF emphasizes the “Totally Free” checking account as its anchor account, which provides opportunities to cross sell other convenience products and services and generate additional fee income. TCF’s strategy is to originate high credit quality, pri- marily secured loans and earn profits through lower or no interest- cost deposits. Commercial loans are generally made on local properties or to local customers, and are virtually all secured. TCF’s largest core lending business is its consumer home equity loan operation, which offers fixed- and variable-rate closed-end loans and lines of credit secured by residential real estate properties. TCF’s emerging businesses and products are comprised of super- market bank branches, including supermarket consumer lending, leasing and equipment finance, VISA® debit cards, and Internet and college campus banking. TCF’s most significant de novo strategy has been its supermarket branch expansion. The Company opened its TCF’s supermarket partners and TCF’s ability to maintain leases or license agreements for its supermarket branch locations. TCF is sub- ject to the risk, among others, that its license for a location or loca- tions will terminate upon the sale or closure of that location or locations by its supermarket partner. TCF entered the leasing busi- ness through its 1997 acquisition of Winthrop Resources Corporation (“Winthrop”), a leasing company that leases computers and other equipment or software to companies nationwide. The Company expanded its leasing operations in September 1999 through TCF Leasing, Inc. (“TCF Leasing”), a de novo general leasing and equip- ment finance leasing business. TCF’s leasing and equipment finance businesses finance equipment in all 50 states. The Company’s VISA® debit card program has also grown significantly since its inception in 1996. According to a September 30, 2002 statistical report issued by VISA®, TCF, with approximately 1.4 million cards outstanding, was the 11th largest VISA® debit card issuer in the United States, based on the number of cards outstanding, and the 11th largest based on sales volume of $732.1 million for the 2002 third quarter. TCF’s strategic initiatives complement the Company’s core and emerging businesses. TCF’s new products have been significant contributors to the growth in fees and other revenues generated by checking accounts and loan products. Currently, TCF’s strategic ini- tiatives include continued investment in new branch expansion and new loan and deposit products, including card products designed to provide additional convenience to deposit and loan customers. The Company operates a securities brokerage operation, TCF Express Trade, and plans to continue to provide new insurance and invest- ment products during the upcoming year. TCF does not utilize unconsolidated subsidiaries or special pur- pose entities to provide off-balance-sheet borrowings. The Company does not use derivatives to manage its interest rate risk position. TCF has not issued trust preferred or other quasi-equity instru- ments. The Company does not report “pro forma earnings.” TCF does not have foreign loans and has not purchased any bank owned life insurance (BOLI). The Company adopted the fair value method of accounting for stock compensation pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-Based Compensation” in 2000. TCF has used stock options as a form of employee compensation only to a limited extent, and the number of stock options outstanding as a percentage of total shares outstanding is less than one-half of 1%. page 20 Five Year Financial Summary Consolidated Income: (Dollars in thousands, except per-share data) Top-line revenue(1) . . . . . . . . . . $ Net interest income . . . . . . . . . $ Provision for credit losses . . . . . Non-interest income . . . . . . . . Non-interest expense . . . . . . . . Income before income tax expense . . . . . . . . . . Income tax expense . . . . . . . . . . Net income . . . . . . . . . . . . . $ Per common share: 2002 904,569 499,225 22,006 418,842 538,369 357,692 124,761 232,931 Basic earnings . . . . . . . . . . . $ Diluted earnings . . . . . . . . . $ Dividends declared . . . . . . . $ 3.17 3.15 1.15 Consolidated Financial Condition: Year Ended December 31, 2001 848,529 481,222 20,878 371,486 501,996 329,834 122,512 207,322 2.73 2.70 1.00 $ $ $ $ $ $ 2000 761,999 438,536 14,772 336,276 457,202 302,838 116,593 186,245 2.37 2.35 .825 $ $ $ $ $ $ 1999 698,533 424,213 16,923 313,693 447,892 273,091 107,052 166,039 2.01 2.00 .725 $ $ $ $ $ $ 1998 661,429 425,734 23,280 284,681 421,886 265,249 109,070 156,179 1.77 1.76 .6125 $ $ $ $ $ $ At December 31, (Dollars in thousands, except per-share data) 2002 2001 2000 1999 1998 Compound Annual Growth Rate 1-Year 2002/2001 5-Year 2002/1997 6.6% 3.7 5.4 12.7 7.2 8.4 1.8 12.4 16.1 16.7 15.0 9.4% 4.9 4.1 13.6 8.6 8.2 5.4 9.9 13.0 13.3 19.7 Compound Annual Growth Rate 1-Year 2002/2001 5-Year 2002/1997 Securities available for sale . . . . . $ 2,426,794 Residential real estate loans . . . . 1,800,344 Subtotal . . . . . . . . . . . . . . . Other loans and leases . . . . . . . Total assets . . . . . . . . . . . . . . . Checking, savings and money 12,202,069 4,227,138 6,320,784 $ 1,584,661 $ 1,403,888 $ 1,521,661 $ 1,677,919 2,733,290 4,317,951 5,510,912 3,673,831 5,077,719 4,872,868 3,919,678 5,441,339 3,976,065 3,765,280 5,443,199 3,375,898 11,358,715 11,197,462 10,661,716 10,164,594 market deposits . . . . . . . . . Certificates . . . . . . . . . . . . . . . Borrowings . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . Tangible equity(2) . . . . . . . . . . . Per common share: Book value . . . . . . . . . . . . . Tangible equity . . . . . . . . . . Key Ratios and Other Data: 5,791,233 1,918,755 3,110,295 977,020 823,985 4,778,714 2,320,244 3,023,025 917,033 762,327 4,086,219 2,805,605 3,184,245 910,220 745,798 3,712,988 2,871,847 3,083,888 808,982 637,252 3,756,558 2,958,588 2,461,046 845,502 662,619 13.23 11.16 11.92 9.91 11.34 9.29 9.87 7.78 9.88 7.74 53.1% (34.1) (2.1) 14.7 7.4 21.2 (17.3) 2.9 6.5 8.1 11.0 12.6 Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average realized common equity . . . . . . . . . . . . . . Return on average common equity . . . . . . . . . . . . . . . . . . . . Average total equity to average assets . . . . . . . . . . . . . . . . . . . Average tangible equity to average assets . . . . . . . . . . . . . . . . . Net interest margin(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . Number of banking locations . . . . . . . . . . . . . . . . . . . . . . . . Number of checking accounts (in thousands) . . . . . . . . . . . . . At or For the Year Ended December 31, 2002 2.01% 25.82 25.38 7.91 6.58 4.71 36.51% 395 1,338 2001 1.79% 23.18 23.06 7.78 6.40 4.51 37.04% 375 1,249 2000 1.72% 21.53 22.64 7.58 6.04 4.35 35.11% 352 1,131 1999 1.61% 19.83 20.34 7.93 6.21 4.47 36.25% 338 1,032 11.2% (13.1) (3.5) 12.9 4.6 11.9 (11.9) 12.5 .5 1.7 5.2 6.5 1998 1.62% 17.51 17.34 9.35 7.38 4.84 34.80% 311 913 (1) Top-line revenue consists of net interest income plus fees and other revenue excluding gains on sales of branches, securities available for sale, loan servicing and subsidiaries and title insurance revenues. (2) Tangible equity represents total stockholders’ equity less goodwill and deposit based intangibles. (3) Net interest income divided by average interest-earning assets. page 21 Results of Operations Performance Summary TCF reported diluted earnings per common share of $3.15 for 2002, compared with $2.70 for 2001 and $2.35 for 2000. Net income was $232.9 million for 2002, up from $207.3 million for 2001 and $186.2 million for 2000. The 2002 results included a $1.3 million after-tax gain on sale of a branch, or 2 cents per common share, compared with a $2.1 million after- tax gain on sale of a branch, or 3 cents per common share in 2001 and a $7.9 million after-tax gain on sales six of branches, or 10 cents per common share in 2000. Return on average assets was 2.01% in 2002, compared with 1.79% in 2001 and 1.72% in 2000. Return on average realized common equity was 25.82% in 2002, compared with 23.18% in 2001 and 21.53% in 2000. In 2002, new account- ing rules under generally accepted accounting principles (“GAAP”) eliminated the amortization of goodwill. Goodwill amortization reduced net income by $7.6 million and $7.5 million, or 10 cents and 9 cents per diluted common share in 2001 and 2000, respectively. Operating Segment Results Banking, comprised of deposits and investment products, commercial banking, small business banking, consumer lending, residential lending and treasury services, reported net income of $201.1 million for 2002, up 11.4% from $180.5 mil- lion in 2001. Banking net interest income for 2002 was $435.9 mil- lion, compared with $423 million for 2001. The provision for credit losses totaled $12.8 million in 2002, up from $7.4 million in 2001. The increase in provision for credit losses is primarily a result of increased net charge-offs and growth in the loan portfolio. Non- interest income (excluding gains on sales of branches and securities available for sale) totaled $345.5 million, up 11.7% from $309.3 million in 2001. This improvement was driven by increased fees, ser- vice charges and debit card and ATM revenues generated by TCF’s expanding branch network and customer base. Non-interest expense (excluding the amortization of goodwill) totaled $470.8 million, up 8.9% from $432.3 million in 2001. The increase was primarily due to the costs associated with new branch expansion, and the addi- tion of lenders and sales representatives in the banking operations. Beginning in 1998, TCF significantly expanded its retail bank- ing franchise and had 395 retail banking branches at December 31, 2002. Since January 1, 1998, TCF has opened 220 new branches, of which 191 were supermarket branches. TCF continued expanding its retail banking franchise by opening 27 new branches during 2002. TCF anticipates opening 24 new branches during 2003 consisting of 18 new traditional branches, including eight in Colorado, six in Michigan and four in Illinois, and six new supermarket branches, including four in Minnesota and two in Illinois, and plans to con- tinue expanding in future years. In 2002, one Colorado super- market branch was closed involuntarily when TCF’s supermarket partner in Colorado sold a store and discontinued TCF’s license agreement for this location. Subsequent to December 31, 2002, TCF has been notified by its supermarket partners that seven addi- tional supermarket branches will be closed involuntarily when TCF’s supermarket partners in Michigan, Colorado and Wisconsin close stores and discontinue TCF’s license agreements for these loca- tions. At December 31, 2002, these seven branches had total deposits of $36.3 million which will transfer to other TCF branches. TCF is subject to the risk, among others, that in addition to the seven branches mentioned above, its license for additional loca- tions may be terminated in the future, upon the sale or closure of a location by its supermarket partners. Leasing And Equipment Finance, an operating segment comprised of TCF’s wholly-owned subsidiaries Winthrop and TCF Leasing, pro- vides a broad range of comprehensive lease and equipment finance products. This operating segment reported net income of $27.5 mil- lion for 2002, up 34.4% from $20.4 million in 2001. Net interest income for 2002 was $41.4 million, up 4.9% from $39.4 million in 2001. The provision for credit losses for this operating segment totaled $9.2 million in 2002, down from $13.5 million in 2001, primarily as a result of decreased delinquencies and net charge-offs. Non- interest income totaled $51.8 million in 2002, up 13.3% from $45.7 million in 2001, primarily due to high levels of sales-type lease trans- actions. The volume of sales-type lease transactions and resulting revenues fluctuate from period to period based on customer-driven factors not within the control of TCF. Non-interest expense (exclud- ing the amortization of goodwill) totaled $41 million in 2002, up 6.8% from $38.4 million in 2001, primarily a result of the growth experienced in TCF Leasing. Mortgage Banking activities include the origination and purchase of residential mortgage loans, generally for sale to third parties with servicing retained. This operating segment reported net income of $2.7 million for 2002, compared with $5.9 million for 2001. Non- interest income totaled $8.3 million, down 46.1% from $15.4 mil- lion in 2001. TCF’s mortgage banking operations funded $2.9 billion in loans during 2002, up from $2.6 billion in 2001, primarily as a result of a resurgence in refinancing activity driven by lower mort- gage interest rates. Mortgage applications in process (mortgage pipeline) decreased $74.7 million from December 31, 2001, to $532 million at December 31, 2002. The lower mortgage interest rates led to sharply higher prepayments and assumed future prepayments in TCF’s servicing portfolio and led to impairment and amortization expense on mortgage servicing rights of $35.4 million for 2002, up from $21 million during 2001. The increased amortization and impairment were partially offset by the increased loan production activity and the related increase in gains on sales of loans. Mortgage Banking’s non-interest expense totaled $24.8 million for 2002, up 18.7% from $20.9 million for 2001. Contributing to the increase in non-interest expense during 2002 were increased expenses result- ing from higher levels of production and prepayment activity and increased compensation. page 22 Consolidated Income Statement Analysis Net Interest Income Net interest income, which is the difference between interest earned on loans and leases, securities available for sale and other interest-earning assets (interest income), and interest paid on deposits and borrowings (interest expense), represented 54.4% of TCF’s revenue in 2002. Net interest income divided by average interest-earning assets is referred to as the net interest margin, expressed as a percentage. Net interest income and net interest margin are affected by changes in interest rates, loan pric- ing strategies and competitive conditions, the volume and the mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. Net interest income was $499.2 million for the year ended December 31, 2002, compared with $481.2 million in 2001 and $438.5 million in 2000. This represents an increase of 3.7% in 2002, compared with an increase of 9.7% in 2001 and an increase of 3.4% in 2000. Total average interest-earning assets decreased .7% in 2002, following increases of 5.9% in 2001 and 6.1% in 2000. The net interest margin for 2002 was 4.71%, compared with 4.51% in 2001 and 4.35% in 2000. The following table presents TCF’s average balance sheets, interest and dividends earned or paid, and the related yields and rates on major categories of TCF’s interest-earning assets and interest-bearing liabilities: Year Ended December 31, 2002 Year Ended December 31, 2001 Year Ended December 31, 2000 Average Balance Yields and Interest(1) Rates Average Balance Yields and Interest(1) Rates Average Balance Yields and Interest(1) Rates 154,862 $ 6,934 4.48% $ 164,362 $ 1,879,893 437,702 118,272 6.29 22,464 5.13 1,706,093 379,045 8,966 112,267 24,266 5.46% $ 6.58 6.40 139,840 $ 1,500,225 220,560 10,041 99,185 17,130 7.18% 6.61 7.77 (Dollars in thousands) Assets: Investments . . . . . . . . . . . . . . . . . . . $ Securities available for sale(2) . . . . . . Loans held for sale . . . . . . . . . . . . . . Loans and leases: Consumer . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . Commercial business . . . . . . . . . Leasing and equipment finance . . Subtotal . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . Total loans and leases (3) . . . . . 2,712,812 1,746,207 435,488 995,672 5,890,179 2,227,537 8,117,716 Total interest-earning assets . 10,590,173 1,020,331 Total assets . . . . . . . . . . . . . . $11,610,504 Other assets (4) . . . . . . . . . . . . . . . . . Liabilities and Stockholders’ Equity: Non-interest bearing deposits . . . . . $ 1,893,916 Interest-bearing deposits: 207,492 7.65 118,355 6.78 22,699 5.21 85,447 8.58 433,993 7.37 151,700 6.81 585,693 7.21 733,363 6.92 Checking . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . Certificates . . . . . . . . . . . . . . . . Total interest-bearing deposits . . Total deposits . . . . . . . . . . Borrowings: Short-term borrowings . . . . . . . Long-term borrowings . . . . . . . . Total borrowings . . . . . . . . . . Total interest-bearing liabilities . . . . . . . . . . 915,720 1,560,539 919,393 3,395,652 2,108,708 5,504,360 7,398,276 573,935 2,277,974 2,851,909 1,479 .16 15,924 1.02 9,737 1.06 27,140 .80 68,246 3.24 95,386 1.73 95,386 1.29 9,874 1.72 128,878 5.66 138,752 4.87 2,346,349 1,490,616 409,685 918,915 5,165,565 3,251,328 8,416,893 10,666,393 886,713 $11,553,106 $ 1,580,907 790,023 1,018,730 902,091 2,710,844 2,607,009 5,317,853 6,898,760 1,097,688 2,345,742 3,443,430 215,438 116,128 29,893 89,131 450,590 230,520 681,110 826,609 9.18 7.79 7.30 9.70 8.72 7.09 8.09 7.75 3,549 7,472 21,144 32,165 130,562 162,727 162,727 44,800 137,860 182,660 .45 .73 2.34 1.19 5.01 3.06 2.36 4.08 5.88 5.30 2,139,135 1,195,985 367,072 650,616 4,352,808 3,860,025 8,212,833 10,073,458 773,799 $10,847,257 $ 1,328,932 739,429 1,036,861 758,240 2,534,530 2,824,456 5,358,986 6,687,918 767,302 2,331,400 3,098,702 218,577 10.22 8.63 103,181 33,483 9.12 69,960 10.75 9.77 425,201 7.13 275,124 8.53 700,325 8.21 826,681 4,391 11,571 25,139 41,101 155,993 197,094 197,094 49,218 141,833 191,051 .59 1.12 3.32 1.62 5.52 3.68 2.95 6.41 6.08 6.17 8,356,269 234,138 2.80 8,761,283 345,387 3.94 8,457,688 388,145 4.59 Total deposits and Other liabilities(4) . . . . . . . . . . . . . . . borrowings . . . . . . . . . . . 10,250,185 442,404 Total liabilities . . . . . . . . . . . . . . 10,692,589 917,915 Stockholders’ equity (4) . . . . . . . . . . . Total liabilities and stockholders’ equity . . . . . . . . $11,610,504 234,138 2.28 10,342,190 311,871 10,654,061 899,045 $11,553,106 345,387 3.34 9,786,620 238,047 10,024,667 822,590 $10,847,257 388,145 3.97 Net interest income and margin . . $ 499,225 4.71% $ 481,222 4.51% $ 438,536 4.35% (1) Tax-exempt income was not significant and thus interest income and related yields have not been presented on a tax equivalent basis. Tax-exempt income of $354,000, $156,000 and $181,000 was recognized during the years ended December 31, 2002, 2001 and 2000, respectively. (2) Average balance and yield of securities available for sale are based upon the historical amortized cost. (3) Average balance of loans and leases includes non-accrual loans and leases, and is presented net of unearned income. (4) Average balance is based upon month-end balances. page 23 The following table presents the components of the changes in net interest income by volume and rate: (In thousands) Investments . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . Loans held for sale . . . . . . . . . . . . . Loans and leases: Consumer . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . Commercial business . . . . . . . . . Leasing and equipment finance . . Subtotal . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . Total loans and leases . . . . . . Total interest income . . . . Deposits: Checking . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . Certificates . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . Borrowings: Short-term borrowings . . . . . . . Long-term borrowings . . . . . . . . Total borrowings . . . . . . . . . . Total interest expense . . . . Net interest income . . . . . . . . . . . . . Year Ended December 31, 2002 Versus Same Period in 2001 Increase (Decrease) Due to Year Ended December 31, 2001 Versus Same Period in 2000 Increase (Decrease) Due to Volume(1) Rate (1) Total Volume (1) Rate (1) Total $ (495) $ (1,537) $ (2,032) $ 1,579 $ (2,654) $ (1,075) 11,099 3,429 (5,094) (5,231) 6,005 (1,802) 30,889 18,414 1,791 7,094 58,188 (70,036) (11,848) 2,185 498 4,838 396 5,732 (21,878) (16,146) (38,835) (16,187) (8,985) (10,778) (74,785) (8,784) (83,569) (95,431) (2,568) 3,614 (11,803) (10,757) (40,438) (51,195) (7,946) 2,227 (7,194) (3,684) (16,597) (78,820) (95,417) (93,246) (2,070) 8,452 (11,407) (5,025) (62,316) (67,341) (15,787) (19,139) (34,926) (3,914) (19,701) (35,847) (5,068) (8,982) (24,207) (43,908) (75,402) (111,249) 13,534 10,583 20,168 23,682 3,594 26,546 73,990 (43,072) 30,918 56,614 275 (196) 4,252 4,331 (11,559) (7,228) 16,993 843 17,836 10,608 (452) (3,447) (23,307) (10,735) (7,184) (7,375) (48,601) (1,532) (50,133) (56,686) (1,117) (3,903) (8,247) (13,267) (13,872) (27,139) (21,411) (4,816) (26,227) (53,366) $ 38,032 $ (20,029) $ 18,003 $ 46,006 $ (3,320) 13,082 7,136 (3,139) 12,947 (3,590) 19,171 25,389 (44,604) (19,215) (72) (842) (4,099) (3,995) (8,936) (25,431) (34,367) (4,418) (3,973) (8,391) (42,758) $ 42,686 (1) Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to volume and the change due to rate. Changes in net interest income are dependent upon the move- will benefit TCF in a rising rate environment, if interest rates remain ment of interest rates, the volume and mix of interest-earning assets at current levels or fall further, net interest income may decline and interest-bearing liabilities and the level of non-performing assets. and the net interest margin may compress. Competition for check- Achieving net interest margin growth is dependent on TCF’s ability ing, savings and money market deposits, important sources of lower to generate higher-yielding assets and lower-cost retail deposits. cost funds for TCF, is intense. See “Consolidated Financial As a result of customer demand for variable-rate products, TCF’s Condition Analysis – Market Risk – Interest-Rate Risk” on page 41 variable-rate commercial and consumer loans (excluding loans at for further discussion of TCF’s interest rate risk position. their floor rate) increased $703 million since December 31, 2001 In 2002, TCF’s net interest income increased $18 million, compared with a decline in TCF’s fixed-rate and adjustable-rate or 3.7%, and total average interest-earning assets decreased by $76.2 commercial and consumer loans of $70 million since December 31, million, or .7%, compared with 2001 levels. TCF’s net interest 2001. The net impact of these changes in interest-bearing assets and income improved by $38 million due to volume changes, partially liabilities has positioned TCF to be more asset sensitive (i.e. more offset by a decrease of $20 million due to rate changes. The improve- assets than liabilities will be maturing, repricing or prepaying dur- ment in net interest income and net interest margin was primarily ing the next twelve months). Although this positive gap position due to growth in average low-cost deposits (checking, savings and page 24 money market), up $997.8 million, or 23.2%, coupled with growth equipment finance volumes, and commercial real estate volumes and in higher-yielding loans and leases (commercial, consumer and leas- rates was partially offset by decreased consumer finance automobile ing and equipment finance) of $724.6 million, or 14%, and lower loans and securities available for sale balances and increased bor- borrowing costs. These increases were partially offset by a decrease rowings volumes. Interest income increased $74.6 million in 2000, of $850 million, or 17.1%, for 2002 in lower-yielding residential reflecting increases of $55.2 million due to volume and $19.4 mil- mortgages and mortgage-backed securities. Interest income decreased lion due to rate changes. Interest expense increased $60.3 million by $93.2 million in 2002, reflecting a decrease of $95.4 million due in 2000, reflecting increases of $37.8 million due to a higher cost to rate changes, partially offset by an increase of $2.2 million due to of funds and $22.4 million due to volume. The increase in net inter- volume changes. Interest expense decreased $111.2 million in 2002, est income due to volume changes in 2000 reflects the increase in reflecting decreases of $75.4 million due to lower cost of funds and total average interest-earning assets and an increase in the balance of $35.8 million due to volume changes. The increase in net interest non-interest-bearing deposits. The decrease in net interest income income due to volume changes reflects decreases in high-cost cer- due to rate changes reflects a higher cost of funds in 2000 compared tificates and short-term borrowings. The decrease in net interest with 1999. income due to rate changes reflects the impact of declining rates on interest-earning assets greater than the impact of declining rates on interest-bearing liabilities. In 2001, TCF’s net interest income increased $42.7 million, or 9.7%, and total average interest-earning assets increased by $592.9 million, or 5.9%, compared with 2000 levels. TCF’s net interest income improved by $46 million due to volume changes and decreased $3.3 million due to rate changes. The increases in 2001, in net interest income and net interest margin were primarily due to the growth in higher yielding commercial and consumer loans and leasing and equipment finance along with the strong growth in low- cost checking, savings and money market deposits, as well as the decrease in interest rates resulting in lower interest paid on certifi- cates and borrowings. These favorable trends were partially offset by the managed reduction in residential real estate loans. Interest income decreased by $72,000 in 2001, reflecting a decrease of $56.7 million due to rate changes, substantially offset by an increase of $56.6 million due to volume changes. Interest expense decreased $42.8 million in 2001, reflecting a decrease of $53.4 million due to a lower cost of funds, partially offset by a $10.6 million increase due to volume changes. The increase in net interest income due to volume changes reflects the increase in total average interest-earning assets and an increase in the balance of non-interest-bearing deposits. The decrease in net interest income due to rate changes in 2001 reflects the impact of declining rates on interest-earning assets greater than the impact of declining rates on interest-bearing liabilities. In 2000, TCF’s net interest income increased $14.3 million, or 3.4%, and total average interest-earning assets increased by $578.7 million, or 6.1%, compared with 1999 levels. TCF’s net interest income improved by $32.8 million due to volume changes and decreased $18.4 million due to rate changes. The favorable impact of the growth in consumer lending volumes and rates, leasing and Provision for Credit Losses TCF provided $22 million for credit losses in 2002, compared with $20.9 million in 2001 and $14.8 million in 2000. Net loan and lease charge-offs were $20 mil- lion, or .25% of average loans and leases in 2002, compared with $12.5 million, or .15% of average loans and leases in 2001 and $3.9 million, or .05% of average loans and leases in 2000. The increase in the provision from 2001 reflects the impact of the growth in the consumer, commercial business, commercial real estate and leasing and equipment finance portfolios, coupled with increased charge- offs in these portfolios. Commercial lending net charge-offs were $5.9 million in 2002, compared with net charge-offs of $236,000 for 2001. Included in the commercial lending charge-offs for 2002 was $4.3 million related to $7.4 million of loans to a banking cus- tomer who is dependent on the transportation industry, which has been severely impacted by the economic slowdown. Leasing and equip- ment finance net charge-offs were $8 million, or .80% of related average loans and leases during 2002, compared with $9.1 million, or 1% of average loans and leases in 2001. The provision for credit losses is calculated as part of the determination of the allowance for loan and lease losses. The determination of the allowance for loan and lease losses and the related provision for credit losses is a criti- cal accounting policy which involves a number of factors such as net charge-offs, delinquencies in the loan and lease portfolio, value of collateral, general economic conditions and management’s assess- ment of credit risk in the current loan and lease portfolio. The allowance for loan and lease losses totaled $77 million at December 31, 2002, compared with $75 million at December 31, 2001, and was 176% of non-accrual loans and leases compared with 144% at December 31, 2001. See “Consolidated Financial Condition Analysis – Allowance for Loan and Lease Losses” on page 35. page 25 Non-Interest Income Non-interest income is a significant source of revenue for TCF, representing 45.6% of total revenues in This increase in 2002 was driven by increased fees, service charges, debit card revenue, ATM revenue and investment and insurance com- 2002, and is an important factor in TCF’s results of operations. missions generated by TCF’s expanding branch network and cus- Providing a wide range of retail banking services is an integral com- tomer base. The increase in fees and service charges, debit card ponent of TCF’s business philosophy and a major strategy for gen- revenue and ATM revenue primarily reflect the increase in the num- erating additional non-interest income. Excluding gains on sales of ber of retail checking accounts, which totaled 1,338,000 accounts at securities available for sale and branches, non-interest income December 31, 2002, up from 1,249,000 accounts at December 31, increased $38 million, or 10.4%, during 2002 to $405.3 million. 2001. The average annual fee revenue per retail checking account was $218 for 2002, compared with $209 for 2001. The following table presents the components of non-interest income: Year Ended December 31, (Dollars in thousands) 2002 2001 2000 1999 1998 Compound Annual Growth Rate 1-Year 2002/2001 5-Year 2002/1997 Fees and service charges . . . . . . . Debit card revenue . . . . . . . . . . ATM revenue . . . . . . . . . . . . . . Investments and insurance commissions . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . Leasing and equipment finance . . Mortgage banking . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . Fees and other revenue . . Gains on sales of: Securities available for sale . . Branches . . . . . . . . . . . . . . . Loan servicing . . . . . . . . . . . Subsidiaries and joint venture interest . . . . . . . Title insurance revenues (1) . . . . . Other non-interest income . . Total non-interest $226,051 $195,162 $166,394 $138,198 $109,934 46,224 45,342 15,781 333,398 51,628 6,979 13,339 40,525 45,768 11,535 292,990 45,730 12,042 16,545 30,614 47,333 12,266 256,607 38,442 10,519 17,895 20,746 46,398 14,849 220,191 28,505 12,770 12,854 11,639 38,917 13,926 174,416 31,344 16,877 13,058 405,344 367,307 323,463 274,320 235,695 15.8% 14.1 (.9) 36.8 13.8 12.9 (42.0) (19.4) 10.4 21.9% 64.9 10.9 5.8 21.4 10.0 (12.7) 3.4 17.1 11,536 1,962 – – – 863 3,316 – – – – 12,813 – – – 13,498 4,179 12,813 3,194 12,160 3,076 5,522 15,421 39,373 2,246 18,585 2,414 5,580 20,161 48,986 income . . . . . . . . . . . $418,842 $371,486 $336,276 $313,693 $284,681 12.7 13.6 Fees and other revenue as a: percentage of top-line revenue . . . . . . . . . . . . . percentage of average assets . . (1) Title insurance business was sold in 1999. 44.81% 3.49 43.29% 3.18 42.45% 2.98 39.27% 2.67 35.63% 2.45 Fees and service charges increased $30.9 million, or 15.8%, to Debit card revenue includes interchange fees on the TCF Express $226.1 million in 2002 and $28.8 million, or 17.3%, to $195.2 mil- Card which were $46.2 million, $37.6 million and $28.8 million lion in 2001. This increase reflects the impact of the investment in for 2002, 2001 and 2000, respectively. The significant increase in new branch expansion and the increase in the number of retail these fees since 2000 reflects an increase in the distribution checking accounts. of TCF Express Cards, and an increase in utilization which is page 26 promoted by TCF’s phone card program rewarding customers with interchange fees. TCF has experienced some shifting in sales volumes long-distance minutes based on usage. Debit card revenue consists from off-line transactions toward on-line transactions. TCF’s effort primarily of TCF Express Card interchange fees received for handling to increase the number of cards outstanding and the number of cus- off-line customer transactions (signature based) processed through tomer transactions should lessen the impact on future debit card rev- the VISA® association system. The ATM interchange fees received for enue of a continued change in mix of transactions. While TCF is not handling on-line customer transactions (PIN based), which are pro- party to the pending debit card class action litigation against VISA®, cessed through various regional ATM networks, are included in ATM USA and Mastercard®, a ruling against VISA® and Mastercard®could revenue. TCF Express Card interchange fees are higher than ATM also have an adverse impact on future debit card revenue for TCF. The following table sets forth information about TCF’s ATM network and related cards: (Dollars in thousands) TCF Express Cards . . . . . . . . . . . . . . . . . . . . . . . . . Other ATM Cards . . . . . . . . . . . . . . . . . . . . . . . . . . Total EXPRESS TELLER® ATM cards outstanding . . Number of EXPRESS TELLER® ATM’s (1) . . . . . . . . . Percentage of customers with Express Cards who were active users . . . . . . . . . . . . . . . . . . . . . Average number of transactions per month 2002 1,381,000 144,000 1,525,000 1,143 53.2% on active Express Cards for the year ended . . . . . . 11.8 TCF Express Card off-line sales volume At December 31, 2001 1,196,000 158,000 1,354,000 1,341 51.3% 10.9 Percentage Increase (Decrease) 2000 2002/2001 2001/2000 1,057,000 163,000 1,220,000 1,384 49.3% 10.0 15.5% (8.9) 12.6 (14.8) 8.3 23.1 13.2% (3.1) 11.0 (3.1) 9.0 28.2 for the year ended . . . . . . . . . . . . . . . . . . . . . . . $2,958,633 $2,404,299 $1,875,836 (1) In 2002, the contracts covering 256 EXPRESS TELLER® ATM’s expired and were not renewed. ATM revenue was $45.3 million, $45.8 million and $47.3 mil- period to period, and future sales levels will depend upon general lion for 2002, 2001, and 2000, respectively. The decline in ATM economic conditions and investor preferences. Sales of annuities revenue in 2002 was attributable to fewer ATM machines coupled will also depend upon their continued tax advantage and may be with a decline in utilization of machines by non-customers, as the negatively impacted by the level of interest rates and alternative invest- number of alternative ATM machines has increased and as increased ment products. check card usage has reduced the need for cash by customers. Leasing and equipment finance revenues increased $5.9 million, Additionally, as ATM site contracts are renewed, merchants have gen- or 12.9%, in 2002 to $51.6 million, following an increase of $7.3 erally required a larger percentage of the fee charged to non-cus- million or 19%, in 2001 to $45.7 million. The increase in leasing tomers for use of TCF’s ATM’s. revenues for 2002 was driven by an increase of $5.3 million in sales- Investments and insurance commissions consisting principally type lease revenues. The increase in total leasing and equipment of commissions on sales of annuities and mutual funds, increased finance revenues for 2001 was primarily due to increases of $3.6 mil- $4.2 million to $15.8 million in 2002, following a decrease of lion from sales-type lease transactions, $3.1 million from operating $731,000 to $11.5 million in 2001. Annuity and mutual fund sales lease transactions and $644,000 in other revenues. The volume of volumes totaled $242.7 million for the year ended December 31, sales-type lease transactions and resulting revenues fluctuate from 2002, compared with $165 million during 2001. The increased sales period to period based on customer-driven factors not within the volumes during 2002 reflect the impact of a new array of compet- control of TCF. TCF’s ability to increase its lease portfolio is depen- itively priced fixed annuity products offered by insurance compa- dent upon its ability to place new equipment in service. In an adverse nies, partially offset by the volatility of the stock market which economic environment, there may be a decline in the demand for negatively impacted sales of mutual funds and variable annuities. some types of equipment which TCF leases, resulting in a decline Sales of insurance and investment products may fluctuate from in the amount of new equipment being placed into service. page 27 The following table sets forth information about mortgage banking revenues: (Dollars in thousands) Servicing income . . . . . . . . . . . . . . . . . . . . . . . . . . . Less mortgage servicing: Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net servicing income (loss) . . . . . . . . . . . . Gains on sales of loans . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total mortgage banking revenue . . . . . . . . . . . . . Year Ended December 31, 2002 $ 20,443 2001 $ 16,932 2000 $ 12,642 1999 $ 12,981 22,874 12,500 35,374 (14,931) 18,110 3,800 16,564 4,400 20,964 (4,032) 11,795 4,279 5,326 – 5,326 7,316 1,347 1,856 4,737 169 4,906 8,075 3,194 1,501 1998 $ 17,146 5,267 1,547 6,814 10,332 4,536 2,009 $ 6,979 $ 12,042 $ 10,519 $ 12,770 $ 16,877 Mortgage banking revenues decreased $5.1 million, or 42%, and mortgage banking revenues during 2001 was attributable to increased totaled $7 million in 2002, following an increase of $1.5 million, loan origination and sale activity, partially offset by increased amor- or 14.5%, to $12 million in 2001. The decrease in mortgage bank- tization and impairment of mortgage servicing rights due to high ing revenues during 2002 was primarily due to increased impair- levels of actual and assumed prepayments and increased volumes. ment and amortization expense on mortgage servicing rights resulting At December 31, 2002, 2001 and 2000, TCF was servicing mort- from increased refinance activity and sharply higher actual and gage loans for others with aggregate unpaid principal balances of assumed prepayments in TCF’s servicing portfolio. The increase in $5.6 billion, $4.7 billion and $4 billion, respectively. (Dollars in thousands) Third party servicing portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average note rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage applications in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized mortgage servicing rights, net . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights as a percentage of servicing portfolio . . . . . . Average servicing fee (basis points) . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights as a multiple of average servicing fee . . . . . . N.A. Not applicable. At December 31, Change 2002 2001 $ $5,576,066 $4,679,355 $ 896,711 6.64% 7.13% (49) bps $ 532,012 $ 62,644 $ 606,676 $ 58,261 $ (74,664) $ 4,383 1.12% 32.9 bps 3.4 X 1.25% 32.6 bps 3.8 X (13) bps .3 bps (.4) X % 19.2% N.A. (12.3) 7.5 N.A. N.A. N.A. As noted above, mortgage banking revenues are impacted by the the value of the mortgage servicing rights decline. TCF periodically amount of amortization and impairment of mortgage servicing rights. evaluates its capitalized mortgage servicing rights for impairment. The capitalization, amortization and impairment of mortgage servic- TCF experienced a resurgence in refinance activity during 2002 ing rights are critical accounting policies for TCF and are subject to driven by lower mortgage interest rates, which led to sharply higher significant estimates. These estimates are based upon loan types, note prepayments in TCF’s servicing portfolio and increased amortiza- rates and prepayment assumptions for the overall portfolio. Changes tion and impairment of mortgage servicing rights. The increased in the mix of loans, interest rates, defaults or prepayment speeds may amortization and impairment were partially offset by the increased have a material effect on the amortization amount and possible impair- mortgage loan production activity and the related increase in gains ment in valuation. In a declining interest rate environment, prepay- on sales of loans. See Notes 1 and 10 of Notes to Consolidated ment speed assumptions will increase and result in an acceleration Financial Statements for additional information concerning TCF’s in the amortization of the mortgage servicing rights as the assumed mortgage servicing rights. underlying portfolio declines and also may result in impairment as page 28 The following table summarizes the prepayment speed assumptions used in the estimation of fair value of mortgage servicing rights as of December 31, 2002 and 2001: (Dollars in thousands) Interest Rate Tranche 0 to 6.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.01 to 6.50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.51 to 7.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 to 7.50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.51 to 8.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.01% and higher . . . . . . . . . . . . . . . . . . . . . . . . . . Unpaid Balance $1,121,794 1,183,572 1,944,477 865,452 313,128 147,643 $5,576,066 (Dollars in thousands) Interest Rate Tranche 0 to 6.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.01 to 6.50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.51 to 7.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01 to 7.50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.51 to 8.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.01% and higher . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2002 Prepayment Speed Assumption High 33.0% 44.8 57.8 62.3 60.1 58.0 48.9 Low 11.9% 16.2 20.9 22.5 21.7 21.0 17.7 Weighted Average 15.3% 20.8 26.8 28.9 27.9 26.9 22.7 Weighted Average Life (in Years) 6.5 4.8 3.5 3.1 3.0 3.0 4.3 December 31, 2001 Weighted Average Prepayment Speed Assumption Weighted Average Life (in Years) 6.9% 10.1 11.8 13.0 16.2 23.3 27.8 14.9 7.5 7.2 5.8 3.8 3.1 6.2 Unpaid Balance $ 129,030 445,322 1,812,050 1,352,877 640,633 299,443 $4,679,355 A key component in determining the fair value of mortgage servicing rights is the projected cash flows of the underlying loan portfolio. TCF uses projected cash flows and related prepayment assumptions based on management’s best estimate for the estimated life of the loans. The range in prepayment assumptions at December 31, 2002 reflects management’s assumption of higher initial prepayments that decline over time and level off to a constant prepayment speed. The table above summarizes, by interest rate tranche, the range of prepayment speed assump- tions and also includes the weighted average remaining life of the loans by tranche. In 2001, TCF used constant prepayment speed assumptions. At December 31, 2002, the sensitivity of the fair value of mortgage servicing rights to a hypothetical immediate 10% and 25% adverse change in prepayment speed and discount rate assumptions is as follows: (Dollars in millions) Fair value of mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average prepayment speed assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact on fair value of 10% adverse change in prepayment speed assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact on fair value of 25% adverse change in prepayment speed assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact on fair value of 10% adverse change in discount rate assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact on fair value of 25% adverse change in discount rate assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 $62.6 4.3 22.7% 8.0% $(3.8) $(8.4) $(1.5) $(3.5) At December 31, These sensitivities are theoretical and should be used with cau- changes in another (for example, changes in prepayment speed tion. As the figures indicate, changes in fair value based on a given estimates could result in changes in discount rates or market inter- variation in assumptions generally cannot be extrapolated because est rates), which might either magnify or counteract the sensitivities. the relationship of the change in assumption to the change in fair During 2002, TCF recognized a gain of $2 million on the sale value may not be linear. Also, in the above table, the effect of a vari- of a branch with $17.1 million in deposits, compared with a gain ation in a particular assumption on the fair value of the mortgage of $3.3 million on the sale of a branch with $30 million in deposits servicing rights is calculated independently without changing any during 2001. TCF recognized gains of $12.8 million on the sales other assumptions. In reality, changes in one factor may result in of six branches with $95.7 million in deposits during 2000. TCF page 29 periodically sells branches that it considers to be underperforming or have limited growth potential and branches may also be subject to involuntary closure under certain circumstances, such as the termination of a license agreement by one of the supermarket chains in which TCF operates branches. Gains on sales of securities available for sale of $11.5 million and $863,000 were recognized on the sales of $473.9 million and $33.6 million in mortgage-backed securities in 2002 and 2001, respectively. There were no sales of securities available for sale during 2000. Non-Interest Expense Non-interest expense increased $36.4 million, or 7.2%, in 2002, and $44.8 million, or 9.8%, in 2001, compared with the respective prior years. The following table presents the components of non-interest expense: (Dollars in thousands) Compensation and employee benefits . . . . . . . . Occupancy and equipment . . . . Advertising and promotions . . . Other . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . Amortization of goodwill . . . . . Total . . . . . . . . . . . . . . . Year Ended December 31, 2002 2001 2000 1999 1998 Compound Annual Growth Rate 5-Year 2002/1997 1-Year 2002/2001 $295,787 $267,716 $239,544 $239,053 $217,401 10.5% 10.4% 83,131 21,894 137,557 538,369 – 78,774 20,909 126,820 494,219 7,777 74,938 19,181 115,833 449,496 7,706 73,613 16,981 110,532 440,179 7,713 71,323 19,544 105,802 414,070 7,816 $538,369 $501,996 $457,202 $447,892 $421,886 5.5 4.7 8.5 8.9 7.3 2.7 7.8 8.8 (100.0) 7.2 (100.0) 8.6 Compensation and employee benefits, representing 54.9% and 53.3% of total non-interest expense in 2002 and 2001, respec- tively, increased $28.1 million, or 10.5%, in 2002, and $28.2 mil- lion, or 11.8%, in 2001. The 2002 increase of 10.5% was primarily due to costs associated with new branch expansion and the addition of lenders and sales representatives. The 2001 increase of 11.8% was primarily due to costs associated with expanded retail banking and leasing activities, along with the significant increase in mortgage banking activities. Occupancy and equipment expenses increased $4.4 million in 2002 and $3.8 million in 2001. The increases were primarily due to TCF’s new branch expansion and retail banking and leasing activ- ities, partially offset by branch sales. Advertising and promotion expenses increased $985,000 in 2002 following an increase of $1.7 million in 2001. The increase in 2002 was primarily due to increases in retail banking media advertising. The 2001 increase was primarily due to retail banking activities and promotional expenses associated with the TCF Express Phone Card, where customers earn free long-distance minutes for use of their TCF Express Cards. TCF awarded 71 million minutes and 67 million min- utes during 2002 and 2001, respectively, under this promotion. Other non-interest expense increased $10.7 million, or 8.5%, in 2002, primarily the result of increased expenses associated with expanded retail banking and leasing operations, Express Card inter- change expense resulting from increased utilization and the higher levels of production and prepayment activity in the mortgage bank- ing area. In 2001, other non-interest expense increased $11 million, or 9.5%, primarily the result of increased expenses associated with higher levels of activity in mortgage banking and expanded retail bank- ing and leasing operations. A summary of other expense is presented in Note 25 of Notes to Consolidated Financial Statements. On January 1, 2002, TCF adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and other page 30 intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Further detail on goodwill amortization is provided in Note 22 of Notes to Consolidated Financial Statements. Income Taxes TCF recorded income tax expense of $124.8 mil- lion in 2002, compared with $122.5 million in 2001 and $116.6 million in 2000. Income tax expense represented 34.88% of income before income tax expense during 2002, compared with 37.14% and 38.5% in 2001 and 2000, respectively. The lower effective tax rate in 2002 primarily reflects the effect of the change in accounting for goodwill, lower state income taxes, a favorable resolution of uncer- tainties during tax examinations and the reduced effect of non- deductible expenses as a percentage of pre-tax net income. TCF has Real Estate Investment Trusts (“REITs”) and related companies, that acquire, hold and manage mortgage assets and other authorized investments to generate income. These companies are consolidated with TCF National Bank and are therefore included in the consolidated financial statements of TCF Financial Corporation. The REITs must meet specific provisions of the Internal Revenue Code (“IRC”) to continue to qualify as a REIT. Two specific provi- sions applicable to REITs are an income test and an asset test. At least 75% of each REIT’s gross income, excluding gross income from pro- hibited transactions, for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property. Additionally, at least 75% of each REIT’s assets must be represented by real estate assets. At December 31, 2002, TCF’s REITs met the applicable provisions of the IRC to qualify as REITs. State laws may also impose limitations or restrictions on oper- ations of these companies. These laws are subject to change. If these companies fail to meet any of the required provisions of Federal and state tax laws, the resulting tax consequences would increase TCF’s effective tax rate. The determination of current and deferred income taxes is a crit- ical accounting policy which is based on complex analyses of many factors including interpretation of Federal and state income tax laws, the differences between tax and financial reporting basis of assets and liabilities (temporary differences), estimates of amounts due or owed such as the timing of reversal of temporary differences and current financial accounting standards. Additionally, there can be no assur- ances that estimates and interpretations used in determining income tax liabilities may not be challenged by Federal and state taxing author- ities. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities. In addition, under generally accepted accounting prin- ciples, deferred income tax assets and liabilities are recorded at the current prevailing Federal and state income tax rates. If such rates change, deferred income tax assets and liabilities must be adjusted in the period of change through a charge or credit through the Consolidated Statement of Income. Further detail on income taxes is provided in Note 14 of Notes to Consolidated Financial Statements. Consolidated Financial Condition Analysis Investments Total investments, which include interest-bearing deposits with banks, federal funds sold, Federal Home Loan Bank (“FHLB”) stock, Federal Reserve Bank stock and other investments, decreased $2.2 million to $153.7 million at December 31, 2002. The decrease primarily reflects a decrease of $2.3 million in FHLB stock. TCF is required to invest in FHLB stock in proportion to its level of mortgage assets (defined as mortgage-backed securities and residential and consumer 1-4 family and multi-family loans) and the level of borrowings from the FHLB. TCF had no non-investment grade debt securities (junk bonds) and there were no open trading account or investment option positions as of December 31, 2002 or 2001. Securities Available for Sale Securities available for sale increased $842.1 million during 2002 to $2.4 billion at December 31, 2002. This increase reflects purchases of $2 billion of mortgage- backed securities, partially offset by sales of $473.9 million in which the Company recognized $11.5 million in gains on sales of securi- ties available for sale, and normal payment and prepayment activity. At December 31, 2002, TCF’s securities available-for-sale port- folio included $2.4 billion and $18.3 million of fixed-rate and adjustable-rate mortgage-backed securities, respectively. Net unre- alized pre-tax gains on securities available for sale totaled $72.3 mil- lion at December 31, 2002, compared with $9.8 million at December 31, 2001. Loans Held for Sale Loans held for sale included residential mortgage and education loans. Residential mortgage loans held for sale were $277.4 million and $286.6 million at December 31, 2002 and 2001, respectively. Education loans held for sale were $199.1 mil- lion and $165.1 million at December 31, 2002 and 2001, respectively. Loans and Leases The following tables set forth information about loans and leases held in TCF’s portfolio, excluding loans held for sale: (Dollars in thousands) 2002 2001 2000 1999 1998 At December 31, Compound Annual Growth Rate 1-Year 2002/2001 5-Year 2002/1997 Consumer . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . Commercial business . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . Residential real estate . . . . . . . . Total loans and leases . . . $3,005,882 $2,509,333 $2,234,134 $2,058,584 $1,876,554 19.8% 8.7% 1,835,788 1,622,461 1,371,841 1,073,472 440,074 422,381 410,422 351,353 1,039,040 6,320,784 1,800,344 956,737 5,510,912 2,733,290 856,471 4,872,868 3,673,831 492,656 3,976,065 3,919,678 811,428 289,104 398,812 3,375,898 3,765,280 $8,121,128 $8,244,202 $8,546,699 $7,895,743 $7,141,178 13.1 4.2 8.6 14.7 (34.1) (1.5) 16.4 12.9 23.0 12.9 (13.1) 2.8 (Dollars in thousands) Consumer Commercial At December 31, 2002 Leasing and Equipment Finance Residential Total Minnesota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,136,678 $ 646,609 $ 72,926 $ 747,512 $2,603,725 560,344 760,417 339,727 139,478 1,051 9,269 14,713 706 43,499 738,427 289,084 307,684 - 38,732 21,147 9,825 1,449 222,905 86,496 36,656 25,087 27,226 111,136 38,196 47,086 65,556 528,675 501,707 457,900 46,076 703 - 13,714 769 2,085 29,878 1,886,974 1,544,057 718,574 167,407 150,919 82,326 72,393 69,796 824,957 $3,005,882 $2,275,862 $1,039,040 $1,800,344 $8,121,128 page 31 Loans and leases decreased $123.1 million from year-end 2001 portfolio at December 31, 2002, carries a variable interest rate, to $8.1 billion at December 31, 2002. Increases of $496.5 million, compared with 51% at December 31, 2001. As of December 31, 2002, or 19.8%, in consumer loans, $213.3 million, or 13.1%, in com- $1 billion of the variable rate consumer loans were at their inter- mercial real estate loans and $82.3 million, or 8.6%, in leasing and est rate floors. These loans will remain at their interest rate floor equipment finance were more than offset by a $932.9 million reduc- until interest rates rise above the floor rate. An increase in the TCF tion in residential real estate loans. The decline in the residential base rate of 100 basis points would result in the repricing of $521.9 real estate loan portfolio during 2002 was due to accelerating pre- million of variable rate consumer loans currently at their floor. A payments brought on by the continued decline, throughout 2002, 200 basis point increase in the TCF base rate would result in a total in interest rates and was partially offset by the increase in mortgage- of $833.2 million of these loans repricing at interest rates above their backed securities. At December 31, 2002, TCF’s residential real estate current floor rate. loan portfolio was comprised of $1.2 billion of fixed-rate loans and At December 31, 2002, the weighted average loan-to-value ratio $610.3 million of adjustable-rate loans. for the home equity portfolio was 72%, unchanged from December Consumer loans increased $496.5 million from year-end 2001 31, 2001. Many of these loans are secured by a first lien on the home to $3 billion at December 31, 2002, driven by an increase of $511.9 and include an advance to pay off an existing first lien mortgage loan. million in home equity loans. Approximately 69% of the home equity These loans may carry a higher level of credit risk than loans with loan portfolio at December 31, 2002 consisted of closed-end loans, lower loan-to-value ratios. Higher loan-to-value ratio loans are made compared with 70% at December 31, 2001. In addition, 62% of this to more creditworthy customers based on credit scoring models. The following table sets forth additional information about the loan-to-value ratios for TCF’s home equity loan portfolio: (Dollars in thousands) 2002 2001 At December 31, Loan-to-Value Ratios (1) Over 100%(2) . . . . . . . . . . . . . . . . . Over 90% to 100% . . . . . . . . . . . . . Over 80% to 90% . . . . . . . . . . . . . . 80% or less . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . Balance $ 53,916 384,988 1,028,207 1,488,533 $2,955,644 100.0% Over 30-Day Delinquency as a Percentage of Balance Percentage of Total Balance Percentage of Total Over 30-Day Delinquency as a Percentage of Balance 1.8% 2.17% $ 66,578 13.0 34.8 50.4 .80 .62 .52 .62 396,333 802,094 1,178,783 $2,443,788 2.7% 16.2 32.8 48.3 100.0% 1.62% .69 .64 .69 .70 (1) Loan-to-value is based on the loan amount (current outstanding balance on closed-end loans and the total commitment on lines of credit) plus deferred loan origination costs net of fees and refundable insurance premiums, if any, plus the amount of senior liens, if any. Property values represent the most recent market value or property tax assessment value known to TCF. (2) Amount reflects the total outstanding loan balance. The portion of the loan balance in excess of 100% of the property value is substantially less than the amount included above. The following table summarizes TCF’s commercial real estate loan portfolio by property type: (Dollars in thousands) Apartments . . . . . . . . . . . . . . . . . . Office buildings . . . . . . . . . . . . . . . Retail services . . . . . . . . . . . . . . . . . Warehouse/industrial buildings . . . . Hotels and motels . . . . . . . . . . . . . . Health care facilities . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . Balance $ 484,755 368,402 284,701 185,529 149,023 45,125 318,253 $1,835,788 At December 31, 2001 Over 30-Day Delinquency Rate as a Percentage of Balance Balance Number of Loans .07% $ 431,679 .44 .02 2.61 – – – 364,357 217,408 159,090 144,424 24,698 280,805 586 283 243 165 34 15 448 .37 $1,622,461 1,774 Over 30-Day Delinquency Rate as a Percentage of Balance .03% .08 – – – – .04 .03 2002 Number of Loans 562 289 264 173 32 17 392 1,729 page 32 Commercial real estate loans increased $213.3 million from year- properties or underlying business assets. At December 31, 2002 and end 2001 to $1.8 billion at December 31, 2002. Commercial busi- December 31, 2001, the construction and development portfolio ness loans increased $17.7 million in 2002 to $440.1 million at included hotel and motel loans of $41.1 million and $31.5 million, December 31, 2002. TCF continues to expand its commercial busi- respectively, and apartment loans of $5.1 million and $2.5 million, ness and commercial real estate lending activity to borrowers located respectively. At December 31, 2002, approximately 88% of TCF’s in its primary midwestern markets. With a focus on secured lending, commercial real estate loans outstanding were secured by properties at December 31, 2002, approximately 98% of TCF’s commercial located in its primary markets. real estate and commercial business loans were secured either by The following tables summarize TCF’s leasing and equipment finance portfolio by marketing segment and by equipment type: (Dollars in thousands) Marketing Segment Middle market(1) . . . . . . . . . . . . . . . Winthrop(2) . . . . . . . . . . . . . . . . . . Wholesale(3) . . . . . . . . . . . . . . . . . . . Small ticket(4) . . . . . . . . . . . . . . . . . . Leveraged leases . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . Truck and trailer(5) . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . Balance $ 337,668 266,709 181,038 131,389 21,519 938,323 100,717 At December 31, 2002 Over 30-Day Delinquency as Percent a Percentage of Balance of Total Balance 32.5% 1.30% $ 181,826 25.7 17.4 12.6 2.1 90.3 9.7 – .42 .47 – .61 4.72 1.00 307,335 204,792 100,691 17,608 812,252 144,485 2001 Percent of Total 19.0% 32.1 21.4 10.5 1.9 84.9 15.1 Over 30-Day Delinquency as a Percentage of Balance 2.14% .24 .28 1.17 – .79 7.59 1.84 $1,039,040 100.0% $ 956,737 100.0% (1) Middle market consists primarily of lease financings on manufacturing and construction equipment, as well as specialty vehicles, to companies nationwide. (2) Winthrop’s portfolio consists primarily of technology and data processing equipment. (3) Wholesale includes the discounting, purchase and originating of lease receivables sourced by third party lessors. (4) Small ticket includes lease financings to small- and mid-size companies through programs with vendors, manufacturers, distributors and franchise organizations. Individual contracts generally range from $25,000 to $250,000. (5) TCF discontinued originations in the truck and trailer marketing segment during 2001. TCF will continue to provide financing on trucks and trailers to customers in the middle market segment for use in their businesses which are unrelated to the over-the-road trucking industry. See the portfolio summary by equipment type below for TCF’s total financing of trucks and trailers. (Dollars in thousands) Equipment Type Technology and data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . Specialty vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trucks and trailers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Printing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Material handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2002 2001 Balance $ 291,091 Percent of Total Balance 28.0% $ 323,439 149,997 140,014 113,587 87,857 62,153 31,181 24,749 23,420 23,378 91,613 14.4 13.5 10.9 8.5 6.0 3.0 2.4 2.3 2.2 8.8 105,367 82,699 149,441 65,081 80,330 23,450 14,537 20,585 7,978 83,830 Percent of Total 33.8% 11.0 8.6 15.6 6.8 8.4 2.5 1.5 2.2 .8 8.8 $1,039,040 100.0% $ 956,737 100.0% page 33 Leasing and equipment finance increased $82.3 million from payments and the lease expires in 2010. This lease represents TCF’s year-end 2001 to $1 billion at December 31, 2002. At December only material direct exposure to the commercial airline industry. 31, 2002, $108.7 million, or 13.9%, of TCF’s lease portfolio was TCF’s expanded leasing activity is subject to risk of cyclical down- discounted on a non-recourse basis with other third-party financial turns and other adverse economic developments. TCF’s ability to institutions and consequently TCF retains no credit risk on such increase its lease portfolio is dependent upon its ability to place new amounts. This compares with non-recourse fundings of $143.7 mil- equipment in service. In an adverse economic environment, there lion, or 20.6%, at December 31, 2001. Total loan and lease origi- may be a decline in the demand for some types of equipment which nations for TCF’s leasing businesses were $518.1 million during TCF leases, resulting in a decline in the amount of new equipment 2002, compared with $492.3 million in 2001 and $648.1 million being placed into service as well as a decline in equipment values for in 2000. The backlog of approved transactions increased to $140.8 equipment previously placed in service. TCF Leasing has originated million, at December 31, 2002, compared with $126.1 million at most of its portfolio during recent periods, and consequently the December 31, 2001. Included in the investment in leveraged leases, performance of this portfolio may not be reflective of future results at December 31, 2002, is $18.7 million for a 100% equity interest and credit quality. During 2001, TCF discontinued originations in in a Boeing 767-300 aircraft on lease to Delta Airlines in the United the truck and trailer marketing segment and in the first quarter of States. The aircraft is in service, the lessee is current on the lease 2002, completed the shutdown of this segment. Loans and leases outstanding at December 31, 2002 are shown in the following table by maturity: (In thousands) Amounts due: Within 1 year . . . . . . . . . . . . . . . After 1 year: 1 to 2 years . . . . . . . . . . . . . . 2 to 3 years . . . . . . . . . . . . . . 3 to 5 years . . . . . . . . . . . . . . 5 to 10 years . . . . . . . . . . . . . 10 to 15 years . . . . . . . . . . . . . Over 15 years . . . . . . . . . . . . . Total after 1 year . . . . . . . . Total . . . . . . . . . . . . . . Amounts due after 1 year on: Fixed-rate loans and leases . . . . . . Variable and adjustable-rate loans (2) . . . . . Total after 1 year . . . . . . . . . . At December 31, 2002 (1) Consumer Commercial Real Estate Commercial Business Leasing and Equipment Finance Residential Real Estate Total Loans and Leases $ 108,147 $ 299,728 $ 238,084 $ 401,078 $ 74,491 $1,121,528 104,595 93,474 186,693 661,177 1,222,122 634,615 2,902,676 $3,010,823 172,004 127,098 316,134 745,935 136,816 41,662 93,577 48,068 38,464 14,039 415 6,777 302,434 197,675 209,701 31,437 – – 73,721 76,040 154,642 345,772 284,556 787,160 1,539,649 $1,839,377 201,340 741,247 $ 439,424 $1,142,325 1,721,891 $1,796,382 746,331 542,355 905,634 1,798,360 1,643,909 1,470,214 7,106,803 $8,228,331 $1,116,389 $ 273,496 $ 54,974 $ 741,247 $1,129,740 $3,315,846 1,786,287 $2,902,676 1,266,153 $1,539,649 146,366 – 592,151 $ 201,340 $ 741,247 $1,721,891 3,790,957 $7,106,803 (1) Gross of unearned discounts and deferred fees. This table does not include the effect of prepayments, which is an important consideration in management’s interest rate risk analysis. Company experience indicates that loans remain outstanding for significantly shorter periods than their contractual terms. (2) Includes $1 billion of consumer loans and $196.5 million of variable-rate commercial real estate and commercial business loans at their interest rate floor. page 34 Allowance for Loan and Lease Losses Credit risk is the risk of loss from a customer default on a loan or lease. TCF has in place loan and lease losses of $77 million adequate to cover losses inher- ent in the loan and lease portfolios as of December 31, 2002. a process to identify and manage its credit risk. The process includes However, no assurance can be given that TCF will not, in any par- initial credit review and approval, periodic monitoring to measure ticular period, sustain loan and lease losses that are sizable in rela- compliance with credit agreements and internal credit policies, mon- tion to the amount reserved, or that subsequent evaluations of the itoring changes in the risk ratings of loans and leases, identification loan and lease portfolio, in light of factors then prevailing, includ- of problem loans and leases and procedures for the collection of ing economic conditions and TCF’s on-going credit review process, problem loans and leases. The risk of loss is difficult to quantify and will not require significant increases in the allowance for loan and is subject to fluctuations in values, general economic conditions and lease losses. Among other factors, a protracted economic slowdown other factors. The determination of the allowance for loan and lease and/or a decline in commercial or residential real estate values in losses is a critical accounting policy which involves estimates and man- TCF’s markets may have an adverse impact on the adequacy of the agement’s judgment on a number of factors such as net charge-offs, allowance for loan and lease losses by increasing credit risk and the delinquencies in the loan and lease portfolio, general economic con- risk of potential loss. See “Forward-Looking Information” and Notes ditions and management’s assessment of credit risk in the current 1 and 7 of Notes to Consolidated Financial Statements for additional loan and lease portfolio. The Company considers the allowance for information concerning TCF’s allowance for loan and lease losses. The following table sets forth information detailing the allowance for loan and lease losses and selected statistics: Year Ended December 31, (Dollars in thousands) Balance at beginning of year . . . . . . . . . . . . . . . . . . . Transfers to loans held for sale . . . . . . . . . . . . . . . . . Charge-offs: Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . Recoveries: Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . Net charge-offs . . . . . . . . . . . . . . . . . . . . . . Provision charged to operations . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . Ratio of net loan and lease charge-offs to average loans and leases outstanding . . . . . . . . . . . . . . . . Year-end allowance as a percentage of year-end total loans and leases . . . . . . . . . . . . . . . . . . . . . Year-end allowance as a percentage of year-end loans and leases excluding residential real estate loans . . Year-end allowance as a multiple of net charge-offs . . . 2002 $ 75,028 – (6,939) (2,181) (5,952) (9,230) (59) (24,361) 2,965 43 54 1,264 9 4,335 (20,026) 22,006 $ 77,008 2001 $ 66,669 – (6,605) (122) (429) (9,794) (1) (16,951) 3,487 103 193 649 – 4,432 (12,519) 20,878 $ 75,028 .25% .15% .95 1.20 3.8X .91 1.32 6.0X 2000 $ 55,755 – (7,041) (76) (143) (2,426) (15) (9,701) 4,576 295 690 254 28 5,843 (3,858) 14,772 $ 66,669 .05% .78 1.31 17.3X 1999 $ 80,013 (14,793) (31,509) (674) (52) (2,008) (155) (34,398) 5,831 1,381 329 398 71 8,010 (26,388) 16,923 $ 55,755 1998 $ 82,583 – (30,108) (1,294) (42) (979) (291) (32,714) 5,222 559 635 345 103 6,864 (25,850) 23,280 $ 80,013 .35% .36% .71 1.33 2.1X 1.12 2.27 3.1X page 35 The allocation of TCF’s allowance for loan and lease losses, including general and specific loss allocations, is as follows: At December 31, Allocations as a Percentage of Total Loans and Leases Outstanding by Type At December 31, (Dollars in thousands) 2002 2001 2000 1999 1998 2002 2001 2000 1999 1998 Consumer . . . . . . . . . . . . . . Commercial real estate . . . . . Commercial business . . . . . . Leasing and equipment finance . . . . . . . . . . . . . . Unallocated . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . Residential real estate . . . . . . Total allowance balance . . . $ 8,532 $ 8,355 $ 9,764 $10,701 $32,011 .28% .33% .44% .52% 1.71% 22,176 15,910 12,881 16,139 75,638 1,370 24,459 12,117 11,774 16,139 72,844 2,184 20,753 9,668 7,583 16,139 63,907 2,762 12,708 8,256 4,237 16,839 52,741 3,014 12,525 5,756 2,955 23,295 76,542 3,471 $77,008 $75,028 $66,669 $55,755 $80,013 1.21 3.62 1.24 N.A. 1.20 .08 .95 1.51 2.87 1.23 N.A. 1.32 .08 .91 1.51 2.36 .89 N.A. 1.31 .08 .78 1.18 2.35 .86 N.A. 1.33 .08 .71 1.54 1.99 .74 N.A. 2.27 .09 1.12 N.A. Not applicable. The allocated allowance balances for TCF’s residential and con- were $20 million, or .25% of average loans and leases outstanding sumer loan portfolios, at December 31, 2002, reflect the Company’s in 2002, compared with $12.5 million, or .15% of average loans and credit quality and related low level of net loan charge-offs for these leases in 2001 and $3.9 million, or .05% of average loans and leases portfolios. The increase in the allocated allowance for the commer- in 2000. Commercial real estate net charge-offs were $2.1 million cial business portfolio reflects the growth in the portfolio and the for 2002, compared with $19,000 for 2001. Commercial real estate increase in charge-offs in the commercial business portfolio. The net charge-offs for 2002 included a $1.6 million charge-off on a increase in the allocated allowance for leasing and equipment finance commercial real estate property transferred to other real estate owned losses reflects the continued growth in the portfolio. The allocated in the second quarter of 2002. Commercial business net charge-offs allowances for these portfolios do not reflect any significant changes were $5.9 million during 2002, compared with net charge-offs of in estimation methods or assumptions. $236,000 in 2001, and included a $4.3 million charge-off related The increase in TCF’s allowance for loan and lease losses as a per- to $7.4 million of loans to a banking customer who is dependent on centage of total loans and leases, at December 31, 2002, reflects the the transportation industry, which has been severely impacted by the impact of the continued growth in the commercial loan and leasing economic slowdown. Leasing and equipment finance net charge-offs and equipment finance portfolios coupled with increased charge- were $8 million during 2002, compared with net charge-offs of $9.1 offs in the commercial loan portfolio. Net loan and lease charge-offs million for 2001. The following table sets forth additional information regarding net charge-offs: (Dollars in thousands) Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance: Middle market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Winthrop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Small ticket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Truck and trailer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total leasing and equipment finance . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . page 36 Year Ended December 31, 2002 2001 Net Charge-offs $ 3,974 % of Average Loans and Leases Net Charge-offs % of Average Loans and Leases .15% $ 3,118 .13% 2,138 5,898 901 113 2,998 875 – 4,887 3,079 7,966 19,976 50 $20,026 .12 1.35 .35 .04 1.57 .77 – .56 2.50 .80 .34 – .25 19 236 513 2,182 1,621 1,242 – 5,558 3,587 9,145 12,518 1 $12,519 – .06 .39 .64 .85 1.37 _ .73 2.31 1.00 .24 – .15 Non-Performing Assets Non-performing assets consisting of non-accrual loans and leases and other real estate owned totaled $70.2 accrual of interest income is generally discontinued when loans and leases become 90 days or more past due with respect to either prin- million at December 31, 2002, or .87%, of net loans and leases, up cipal or interest (150 days for loans secured by residential real estate) $3.6 million from $66.6 million, or .82%, at December 31, 2001. unless such loans and leases are adequately secured and in the pro- The increase in total non-performing assets reflects increases of $4.8 cess of collection. Included in non-performing assets are loans that million and $2.4 million in non-performing leasing and equipment are considered impaired. The recorded investment in impaired loans finance and commercial business assets, respectively, partially offset was $12.1 million and $18.8 million at December 31, 2002 and by decreases of $2.9 million and $862,000, respectively, in December 31, 2001, respectively. The related allowance for credit consumer and commercial real estate non-performing assets. Approx- losses was $5.5 million at December 31, 2002, compared with $5 imately 49% of non-performing assets at December 31, 2002 con- million at December 31, 2001. All of the impaired loans were on sisted of, or were secured by, residential real estate. Non-accrual loans non-accrual status. Management monitors the performance and and leases in the truck and trailer marketing segment of the leasing classification of such loans and leases and the financial condition of and equipment finance portfolio totaled $7.5 million at December these borrowers. 31, 2002, compared with $6.9 million at December 31, 2001. The Non-performing assets are summarized in the following table: (Dollars in thousands) Non-accrual loans and leases: Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance, net . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . Total non-accrual loans and leases, net . . . . . . Non-recourse discounted lease rentals . . . . . . . . . . . Total non-accrual loans and leases, gross . . . . Other real estate owned: Residential real estate . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . Total other real estate owned . . . . . . . . . . . . . Total non-performing assets, gross . . . . . . . . . Total non-performing assets, net . . . . . . . . . . Gross non-performing assets as a percentage of net loans and leases . . . . . . . . . . . . . . . . . . . . Gross non-performing assets as a percentage of total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 2001 2000 1999 1998 At December 31, $11,163 $16,473 $13,027 $12,178 $17,745 3,213 4,777 17,127 5,798 42,078 1,562 43,640 16,479 10,093 26,572 $70,212 $68,650 11,135 3,550 11,723 6,959 49,840 2,134 51,974 12,830 1,825 14,655 $66,629 $64,495 5,820 236 7,376 4,829 31,288 3,910 35,198 10,422 447 10,869 $46,067 $42,157 1,576 2,960 1,310 5,431 23,455 619 24,074 9,454 1,458 10,912 $34,986 $34,367 4,352 2,797 290 8,078 33,262 435 33,697 11,823 1,779 13,602 $47,299 $46,864 .87% .58 .82% .59 .54% .41 .45% .33 .67% .47 Past Due Loans and Leases The following table sets forth information regarding TCF’s delinquent loan and lease portfolio, excluding loans held for sale and non-accrual loans and leases. TCF’s delinquency rates are determined using the contractual method. At December 31, 2002 2001 (Dollars in thousands) Accruing loans and leases delinquent for: Principal Balances Percentage of Loans and Leases 30-59 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60-89 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 days or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,683 16,557 5,084 $46,324 .31% .20 .06 .57% Principal Balances $25,998 15,646 5,129 $46,773 Percentage of Loans and Leases .32% .19 .06 .57% page 37 The following table summarizes TCF’s over 30-day delinquent loan and lease portfolio by loan type: (Dollars in thousands) Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2002 2001 Principal Balances $19,067 6,835 555 10,159 9,708 $46,324 Percentage of Portfolio .64% .37 .13 1.00 .54 .57 Principal Balances $17,939 538 526 17,393 10,377 $46,773 Percentage of Portfolio .72% .03 .13 1.84 .38 .57 TCF’s over 30-day delinquency on total leasing and equipment December 31, 2002, for which management has concerns regarding finance decreased to 1% at December 31, 2002 from 1.84% at the ability of the borrowers to meet existing repayment terms. These December 31, 2001. At December 31, 2002 there were no delin- loans and leases are less than 90 days past due, were classified for reg- quent leases that have been funded on a non-recourse basis by third- ulatory purposes as substandard and reflect the distinct possibility, party financial institutions, compared with $754,000 at December but not probability, that the Company will not be able to collect all 31, 2001. The decline in delinquencies in the leasing and equipment amounts due according to the contractual terms of the loan or lease finance portfolio during 2002 was primarily in the discontinued agreement. Although these loans and leases have been identified as truck and trailer marketing segment. Delinquencies in this segment potential problem loans and leases, they may never become non- of the leasing and equipment finance portfolio were $4.4 million, performing. Additionally, these loans and leases are generally secured or 4.7%, at December 31, 2002, compared with $11 million, or 7.6%, by commercial real estate or assets, thus reducing the potential for at December 31, 2001. Potential Problem Loans and Leases In addition to the non- performing assets, there were $83.4 million of loans and leases at loss should they become non-performing. Potential problem loans and leases are considered in the determination of the adequacy of the allowance for loan and lease losses. Potential problem loans and leases are summarized as follows: (Dollars in thousands) Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 $ 4,500 30,132 33,408 15,314 $83,354 2001 $ 567 15,004 41,217 15,083 $71,871 $ $ 3,933 15,128 (7,809) 231 $11,483 % N.M. N.M. (18.9)% 1.5 16.0 At December 31, Change N.M. Not meaningful. Liquidity Management TCF manages its liquidity position to ensure that the funding needs of depositors and borrowers are met continue to be affected by these factors. Borrowings may be used to compensate for reductions in normal sources of funds, such as deposit promptly and in a cost-effective manner. Asset liquidity arises from inflows at less than projected levels, net deposit outflows or to sup- the ability to convert assets to cash as well as from the maturity of port expanded activities. Historically, TCF has borrowed primar- assets. Liability liquidity results from the ability of TCF to attract a ily from the FHLB, from institutional sources under reverse diversity of funding sources to promptly meet funding requirements. repurchase agreements and, to a lesser extent, from other sources. Deposits are the primary source of TCF’s funds for use in lend- At December 31, 2002, TCF had over $2.5 billion in unused ing and for other general business purposes. In addition to deposits, capacity under these funding sources, which could be used to meet TCF derives funds primarily from loan and lease payments, proceeds future liquidity needs. See “Borrowings.” from the discounting of leases and borrowings. Deposit inflows and Potential sources of liquidity for TCF Financial Corporation outflows are significantly influenced by general interest rates, money (parent company only) include cash dividends from TCF’s wholly market conditions, competition for funds, customer service and owned bank subsidiary, issuance of equity securities and borrowings other factors. TCF’s deposit inflows and outflows have been and will under the Company’s $105 million bank line of credit and page 38 commercial paper program. TCF National Bank’s ability to pay div- average balance of these deposits for 2002 was $5.3 billion, an idends or make other capital distributions to TCF is restricted by increase of $997.8 million over the $4.3 billion average balance for regulation and may require regulatory approval. Undistributed earn- 2001. Higher interest-cost certificates of deposit decreased $401.5 ings and profits at December 31, 2002 includes approximately $134.4 million from December 31, 2001 as a result of TCF’s disciplined million for which no provision for federal income tax has been made. pricing and availability of other lower-cost funding sources. TCF’s This amount represents earnings appropriated to bad debt reserves weighted-average rate for deposits, including non-interest-bearing and deducted for federal income tax purposes, and is generally not deposits, was 1.02% at December 31, 2002, down from 1.49% at available for payment of cash dividends or other distributions to December 31, 2001. shareholders without incurring an income tax liability based on the amount of earnings removed and current tax rates. Deposits Checking, savings and money market deposits are an important source of low cost funds and fee income for TCF. Deposits Supermarket Banking As previously noted, TCF continued to expand its supermarket banking franchise by opening 15 new branches during 2002. TCF now has 244 supermarket branches, up from 234 such branches a year ago. Supermarket banking con- totaled $7.7 billion at December 31, 2002, up $611 million from tinues to play an important role in TCF’s growth, as these branches December 31, 2001. The increase in deposits is net of the impact have been consistent generators of account growth in both deposit of the previously noted branch sale with $17.1 million of deposits and lending products. During the past year, the number of deposit during 2002. Lower interest-cost checking, savings and money mar- accounts in TCF’s supermarket branches increased 8.9% to over ket deposits totaled $5.8 billion, up $1 billion from December 31, 806,000 accounts and the balances increased 25.1% to $1.5 bil- 2001, and comprised 75.1% of total deposits at December 31, 2002, lion. The average rate on these deposits decreased from 1.23% at compared with 67.3% of total deposits at December 31, 2001. The December 31, 2001 to .90% at December 31, 2002. Additional information regarding TCF’s supermarket branches is displayed in the table below: (Dollars in thousands) Number of branches . . . . . . . . . . . . . . . . . . . . . . . . Number of deposit accounts . . . . . . . . . . . . . . . . . . Deposits: Checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . Average rate on deposits . . . . . . . . . . . . . . . . . . . . . Total fees and other revenue for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer loans outstanding . . . . . . . . . . . . . . . . . . 2002 244 At December 31, 2001 234 2000 213 1999 195 1998 160 806,276 740,457 646,084 551,536 406,146 $ 694,472 $ 591,000 $ 475,162 $ 354,074 $ 272,194 492,278 107,848 1,294,598 223,073 211,190 130,758 932,948 279,777 135,000 108,557 718,719 354,891 120,876 60,169 535,119 290,579 96,496 55,070 423,760 194,456 $1,517,671 $1,212,725 $1,073,610 $ 825,698 $ 618,216 .90% 1.23% 2.73% 2.24% 2.16% $ 160,204 $ 369,393 $ 136,709 $ 305,081 $ 112,043 $ 233,393 $ 86,665 $ 192,931 $ 53,482 $ 108,213 Borrowings Borrowings totaled $3.1 billion at December 31, 2002, up $87.3 million from year-end 2001. The increase was pri- If called, replacement funding will be provided by the counterpar- ties at the then-prevailing market rate of interest for the remaining marily due to increases in consumer loans, commercial loans, leas- term-to-maturity of the advances, subject to standard terms and con- ing and equipment finance and securities available for sale in excess ditions. The weighted-average rate on borrowings decreased to 4.43% of the increase in deposits and a decrease in residential real estate at December 31, 2002, from 4.85% at December 31, 2001. At loans which increases reliance on borrowings. See Notes 12 and 13 December 31, 2002, borrowings with a maturity of one year or less of Notes to Consolidated Financial Statements for detailed infor- totaled $977.1 million. mation on TCF’s borrowings. Included in long-term borrowings at TCF does not utilize unconsolidated subsidiaries or special December 31, 2002 are $1.1 billion of fixed-rate FHLB advances and purpose entities to provide off-balance-sheet borrowings. See Note reverse repurchase agreements which are callable at par on certain 20 of Notes to Consolidated Financial Statements for information anniversary dates and, for most, quarterly thereafter until maturity. relating to off-balance-sheet instruments. page 39 Contractual Obligations and Commercial Commitments As disclosed in the Notes to Consolidated Financial Statements, TCF has certain obligations and commitments to make future payments under contracts. At December 31, 2002, the aggregate contractual obligations (excluding bank deposits) and commercial commitments are as follows: Contractual Obligations (Dollars in thousands) Total borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual rental commitments under non-cancelable operating leases . . . . . . . . . . . Other Commercial Commitments (Dollars in thousands) Commitments to lend: Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total commitments to lend . . . . . . . . . . . . . . . Loans serviced with recourse . . . . . . . . . . . . . . . . . . . Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . Payments Due by Period Total Less than 1 year 1-3 Years 4-5 Years After 5 Years $3,110,295 $ 842,051 $1,542,021 $ 303,723 $ 422,500 138,856 20,236 35,585 30,068 52,967 $3,249,151 $ 862,287 $1,577,606 $ 333,791 $ 475,467 Amount of Commitment – Expiration by Period Total Less than 1 year 1-3 Years 4-5 Years After 5 Years $1,154,133 $1,153,901 $ 111 $ 121 $ – 576,568 67,006 32,419 385,069 67,006 32,419 1,830,126 1,638,395 180,285 20,869 4,120 13,317 157,527 17,836 16,136 – – 157,638 8,852 2,862 – – 17,957 8,350 4,690 – – 16,136 158,963 – $2,031,280 $1,655,832 $ 169,352 $ 30,997 $ 175,099 Commitments to lend are agreements to lend a customer pro- tingent guarantee related to both types of recourse remains in effect vided there is no violation of any condition in the contract. These for the duration of the loans and thus expires in various years through commitments generally have fixed expiration dates or other termi- the year 2032. All loans sold with recourse are collateralized by nation clauses and may require payment of a fee. Since certain of the residential real estate. Since conditions under which TCF would be commitments are expected to expire without being drawn upon, the required either to cover any principal loss in excess of the VA’s guar- total commitment amounts do not necessarily represent future cash antee or repurchase the loan sold to FNMA may not materialize, the requirements. Collateral predominantly consists of residential and actual cash requirements are expected to be less than the amount commercial real estate and personal property. provided in the table above. Loans serviced with recourse represent a contingent guarantee Standby letters of credit are conditional commitments issued by based upon the failure to perform by another party. These loans con- TCF guaranteeing the performance of a customer to a third party. sist of Veterans Administration (“VA”) loans and loans sold with The standby letters of credit expire in various years through the year recourse to the Federal National Mortgage Association (“FNMA”). 2007. Since the conditions under which TCF is required to fund As is typical of a servicer of VA loans, TCF must cover any principal the standby letters of credit may not materialize, the cash require- loss in excess of the VA’s guarantee if the VA elects its “no-bid” option ments are expected to be less than the total outstanding commitments. upon the foreclosure of a loan. TCF has established a liability of Collateral held on standby letters of credit primarily consists of com- $100,000 relating to the VA “no-bid” exposure on VA loans ser- mercial real estate mortgages. viced with partial recourse at December 31, 2002 which was recorded in other liabilities. No claims have been made under the “no-bid” option during 2002 or 2001. Loans sold with recourse to FNMA represent residential real estate loans sold to FNMA prior to 1982. TCF no longer sells loans on a recourse basis, and thus has limited the amount of loans subject to this contingent guarantee. The con- Stockholders’ Equity Stockholders’ equity at December 31, 2002 was $977 million, or 8% of total assets, up from $917 million, or 8.1% of total assets, at December 31, 2001. The increase in stock- holders’ equity was primarily due to net income of $232.9 million for the year ended December 31, 2002, a $39.9 million increase in page 40 accumulated other comprehensive income and the $9.8 million repay- interest-bearing liabilities repricing within a given period) is an ment of all outstanding loans to the officers’ and directors’ deferred important indication of TCF’s exposure to interest rate risk and the compensation plans, partially offset by the repurchase of 3.1 million related volatility of net interest income in a changing interest rate shares of TCF’s common stock at a cost of $148 million and the pay- environment. While the interest rate gap measurement has some lim- ment of $86.4 million in dividends on common stock. Since January itations, which include no assumptions regarding future asset or 1, 1998, the Company has repurchased 21.7 million shares of TCF’s liability production and the possibility of a static interest rate envi- common stock at an average cost of $31.71 per share. For the year ronment which can result in large quarterly changes due to changes ended December 31, 2002, average total equity to average assets was of the above items, interest rate gap calculates the net asset or liabil- 7.91% compared to 7.78% for the year ended December 31, 2001. ity sensitivity at a point in time. In addition to the interest rate gap Dividends paid to common shareholders on a per share basis totaled analysis, management also utilizes a simulation model to measure and $1.15 in 2002, an increase of 15% from $1.00 in 2001. TCF’s div- manage TCF’s interest rate risk, relative to a base case scenario. idend payout ratio was 36.51% in 2002 and 37.04% in 2001. The The amounts in the maturity/rate sensitivity table on page 42 Company’s primary funding sources for common dividends are represent management’s estimates and assumptions. The amounts dividends received from its subsidiary bank. At December 31, 2002, could be significantly affected by external factors such as prepay- TCF and TCF National Bank exceeded their regulatory capital ment rates other than those assumed, early withdrawals of deposits, requirements and are considered “well-capitalized” under guidelines changes in the correlation of various interest-bearing instruments, established by the Federal Reserve Board and the Office of the competition, a general rise or decline in interest rates, and the pos- Comptroller of the Currency. See Notes 15 and 16 of Notes to sibility that TCF’s counterparties will exercise its option to call Consolidated Financial Statements. TCF does not have any trust pre- certain of TCF’s longer-term callable borrowings. Decisions by ferred securities or other quasi-equity instruments. management to purchase or sell assets, or retire debt could change TCF has used stock options as a form of employee compensation the maturity/repricing and spread relationships. In addition, TCF’s only to a limited extent. At December 31, 2002, the amount of stock interest-rate risk will increase during periods of rising interest rates options outstanding was .41% of total shares outstanding. due to slower prepayments on loans and mortgage-backed securi- Market Risk – Interest-Rate Risk TCF’s results of opera- tions are dependent to a large degree on its net interest income and its ability to manage its interest rate risk. Although TCF manages other risks, such as credit and liquidity risk, in the normal course of its business, the Company considers interest rate risk to be its most significant market risk. Since TCF does not hold a trading portfolio, the Company is not exposed to market risk from trading activities. The mismatch between maturities, interest rate sensitivities and pre- payment characteristics of assets and liabilities results in interest rate risk. TCF, like most financial institutions, has a material interest rate risk exposure to changes in both short-term and long-term interest rates as well as variable interest rate indices (e.g., prime). TCF’s Asset/Liability Management Committee manages TCF’s interest-rate risk based on interest rate expectations and other fac- tors. The principal objective of TCF’s asset/liability management activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest rate risk and liquidity risk and facilitating the funding needs of the Company. Although the measure is subject to a number of assumptions and is only one of a number of measurements, management believes that interest rate gap (difference between interest-earning assets and ties. TCF’s one-year adjusted interest rate gap was a positive $1.1 billion, or 9% of total assets, at December 31, 2002, compared with a positive $241.8 million, or 2% of total assets, at December 31, 2001. A positive interest rate gap position exists when the amount of inter- est-earning assets maturing or repricing, including assumed pre- payments, within a particular time period exceeds the amount of interest-bearing liabilities maturing or repricing. The increase in the one-year gap reflects the current low interest rate environment in which TCF, and the banking industry as a whole, has experienced sharp increases in actual and forecasted prepayments of mortgage- backed securities, residential real estate loans, fixed-rate consumer and commercial real estate loans. Also impacting the gap is signifi- cant customer demand for variable-rate consumer and commercial loan products, in addition to the growth in deposits. TCF has man- aged this change by repositioning the balance sheet for a rising short- term interest rate environment. If interest rates remain at current levels or fall further, the net interest margin may compress and net interest income may decline. TCF’s consumer and commercial loans (excluding loans at their floor rate) tied to a floating interest rate (prime or LIBOR) have increased $703 million in 2002. This is primarily due to TCF page 41 meeting customer demand by offering variable-rate loans. TCF has While this positive gap may compress net interest income in the experienced growth in non-rate sensitive checking accounts and has short-term or if the current interest rate environment continues for experienced a lengthening of the maturity of certificates of deposit. an extended period of time, TCF believes this positive gap to be TCF’s net interest income is positioned to benefit from rising warranted because current rates are well below historical averages and, short-term rates due to a positive gap position. TCF would also likely consequently, there is a greater possibility over time of higher inter- benefit from an increase in short-term interest rates as this might est rates versus lower interest rates. However, if long-term interest signify that economic conditions are improving. An increase in rates remain stable or decrease, TCF could continue to experience an short-term interest rates would affect TCF’s fixed-rate/variable-rate increase in prepayments of residential loans, mortgage-backed secu- product origination mix and origination volumes and would likely rities and mortgage servicing rights and may experience further com- slow prepayments. pression of net interest margin or net interest income. The following table summarizes TCF’s interest-rate gap position at December 31, 2002: (Dollars in thousands) Interest-earning assets: Loans held for sale . . . . . . . . . . . Securities available for sale(1) . . . . Real estate loans (1) . . . . . . . . . . . . Leasing and equipment finance(1) Other loans (1)(2) . . . . . . . . . . . . . . Investments . . . . . . . . . . . . . . . . Interest-bearing liabilities: Checking deposits (3) . . . . . . . . . . Savings deposits (3) . . . . . . . . . . . . Money market deposits (3) . . . . . . Certificate deposits . . . . . . . . . . . Short-term borrowings . . . . . . . Long-term borrowings (4) . . . . . . Interest-earning assets over (under) interest-bearing liabilities . . . Cumulative gap . . . . . . . . . . . . . . . . Cumulative gap as a percentage of total assets: At December 31, 2002 . . . . . . At December 31, 2001 . . . . . . Maturity/Rate Sensitivity Within 30 Days 30 Days to 6 Months 6 Months to 1 Year 1 to 3 Years 3+ Years Total $ 346,341 $ 120,210 $ 9,924 $ – $ – $ 476,475 91,387 44,330 41,543 1,872,051 868 409,120 479,118 177,544 493,522 128,855 395,087 403,702 189,985 368,941 – 728,409 512,546 455,467 1,581,347 – 802,791 360,648 174,501 965,883 23,999 2,426,794 1,800,344 1,039,040 5,281,744 153,722 2,396,520 1,808,369 1,367,639 3,277,769 2,327,822 11,178,119 213,612 950,693 465,687 151,137 842,051 217,193 2,840,373 – 123,245 – 642,122 – 54,995 820,362 – 129,659 – 642,940 – 29,091 801,690 – 2,651,284 366,680 – 407,787 – 1,340,906 2,115,373 471,446 418,927 74,769 – 626,059 4,242,485 $ (443,853) $ (443,853) $ $ 988,007 544,154 $ 565,949 $ 1,162,396 $(1,914,663) $ 1,110,103 $ 2,272,499 $ 357,836 2,864,896 2,041,723 884,614 1,918,755 842,051 2,268,244 10,820,283 $ $ 357,836 357,836 (4)% (4)% 4 % (1)% 9% 2% 19% 14% 3% 3% 3% 3% (1) Based upon contractual maturity, repricing date, if applicable, scheduled repayments of principal and projected prepayments of principal based upon experience and third party projections. (2) At December 31, 2002, $1 billion of consumer variable rate loans were at their floor rate and were treated as fixed-rate for gap reporting purposes. At December 31, 2001, $892 million of consumer variable rate loans were at their floor rate and were treated as fixed-rate. (3) Includes non-interest bearing deposits. At December 31, 2002, 7% of checking deposits, 59% of savings deposits, and 53% of money market deposits are included in amounts repricing within one year. 18% of savings deposits are included in the “1 to 3 Years” category. All remaining checking, savings and money market deposits are assumed to mature in the “3+ Years” category. While management believes that these assumptions are reasonable, no assurance can be given that amounts on deposit in checking, savings, and money market accounts will not significantly change or be repriced in the event of a general change in interest rates. At December 31, 2001, 8% of checking deposits, 34% of savings deposits, and 59% of money market deposits were included in amounts repricing within one year. 29% of savings deposits were included in the “1 to 3 Years” category. (4) Includes $1.1 billion of callable borrowings. At December 31, 2002, the contract rates on all callable borrowings exceeded current market rates. page 42 As previously noted, TCF also utilizes simulation models to esti- to an exit plan. SFAS No. 146 is effective for exit or disposal activi- mate the near-term effects (next twelve months) of changing interest ties that are initiated after December 31, 2002, with early applica- rates on its net interest income. Net interest income simulation tion permitted. Management is currently evaluating the impact of involves forecasting net interest income under a variety of scenarios, the adoption of SFAS No. 146 on its financial statements. including the level of interest rates, the shape of the yield curve, and In October 2002, the FASB issued SFAS No. 147, “Acquisitions spreads between market interest rates. At December 31, 2002, net of Certain Financial Institutions, an amendment of FASB Statements interest income is estimated to increase by 2.6%, compared with the No. 72 and 144 and FASB Interpretation No. 9,” which addresses base case scenario, over the next twelve months if interest rates were accounting for purchases of certain financial institutions. SFAS No. to sustain an immediate increase of 100 basis points. At December 147 is effective October 1, 2002, with early application permitted. 31, 2001, net interest income was estimated to increase by .7%, com- TCF does not have any goodwill that was subject to Statement No. 72 pared with the base case scenario, assuming a similar change in inter- and therefore the provisions of Statement No. 147 required no change est rates. If interest rates were to decline by 100 basis points, net interest in classification or treatment of recorded goodwill. income is estimated to decrease by 2.8%, compared with the base case In December 2002, the FASB issued SFAS No. 148, “Accounting scenario, over the next twelve months. Simulations at December 31, for Stock-Based Compensation – Transition and Disclosure – an 2001 projected a decrease in net interest income of 2%, compared amendment of FASB Statement No. 123,” which provides alterna- with the base case scenario, assuming a similar change in interest rates. tive methods of transition for a voluntary change to the fair value Management exercises its best judgment in making assumptions based method of accounting for stock-based employee compensa- regarding loan prepayments, early deposit withdrawals, and other tion. In addition, this Statement amends the disclosure require- non-controllable events in estimating TCF’s exposure to changes in ments of SFAS No. 123 to require prominent disclosure in both interest rates. These assumptions are inherently uncertain and, as a annual and interim financial statements about the method of result, the simulation models cannot precisely estimate net interest accounting for stock-based employee compensation and the effect income or precisely predict the impact of a change in interest rates of the method used on reported results. The Company has adopted on net interest income. Actual results will differ from simulated results the requirements of SFAS No. 123 in January 2000 and SFAS No. due to the timing, magnitude and frequency of interest rate changes 148 effective December 31, 2002 with no material effect on its and changes in market conditions and management strategies, financial statements. among other factors. Recent Accounting Developments In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Account- Fourth Quarter Summary In the fourth quarter of 2002, TCF had net income of $59.8 million, up 10.3% from $54.2 million in the fourth quarter of 2001. Diluted earnings per common share was ing for Asset Retirement Obligations,” which addresses the recogni- 82 cents for the fourth quarter of 2002, compared to 72 cents for tion and measurement of obligations associated with the retirement the fourth quarter of 2001. TCF opened 12 new branches in the of tangible long-lived assets. SFAS No. 143 is effective January 1, 2003, fourth quarter of 2002, of which four were supermarket branches. with early adoption permitted. The Company plans to adopt SFAS Net interest income was $126.6 million and $125.7 million for No. 143 effective January 1, 2003 and does not expect the adoption the quarter ended December 31, 2002 and 2001 respectively. The of the statement to have a material effect on the financial statements. net interest margin was 4.59% and 4.74% for the fourth quarter of In June 2002, the FASB issued SFAS No. 146, “Accounting for 2002 and 2001, respectively. TCF’s net interest income improved Costs Associated with Exit or Disposal Activities,” which addresses by $877,000, or .7% over the fourth quarter of 2001. TCF’s net financial accounting and reporting for costs associated with exit or interest income improvement was due to an increase of $12.3 mil- disposal activities. Under SFAS No. 146, such costs will be recognized lion due to volume changes, partially offset by a decrease of $11.4 when the liability is incurred, rather than at the date of commitment million due to lower interest rates over the 2001 fourth quarter. page 43 TCF provided $4.1 million for credit losses in the fourth quar- deposit insurance coverage limits and index future coverage limita- ter of 2002, compared with $7 million in the fourth quarter of 2001. tions, among other changes. Most significantly, reform proposals Net loan and lease charge-offs were $3.2 million, or .16% of aver- could allow the FDIC to raise or lower (within certain limits) the age loans and leases outstanding, compared with $5.6 million, or currently mandated designated reserve ratio requiring the FDIC .27% of average loans and leases outstanding during the same 2001 to maintain a 1.25% reserve ratio ($1.25 against $100 of insured period. The decrease in the provision and net loan and lease charge- deposits), and require certain changes in the calculation methodol- offs from 2001 reflects the impact of decreased charge-offs in the ogy. Although it is too early to predict the ultimate impact of such leasing and equipment finance portfolio. proposals, they could, if adopted, result in the imposition of addi- Non-interest income, excluding gains on sales of securities avail- tional deposit insurance premium costs on TCF. able for sale, increased $10.4 million, or 10.9%, during the fourth On July 30, 2002, the Sarbanes-Oxley Act of 2002 (“the Act”) quarter of 2002 to $106.1 million. The increase was primarily due was signed into law by the President of the United States. The Act to increased fees and service charges, investments and insurance provides for sweeping changes dealing with corporate governance, commissions and debit card and ATM revenue, reflecting TCF’s accounting practices and disclosure requirements for public compa- expanding retail banking and customer base. nies, and also for their directors and officers. Section 302 of the Act, Non-interest expense increased $9.5 million, or 7.3%, in the entitled “Corporate Responsibility for Financial Reports,” required fourth quarter of 2001 to $141 million. The increases were primar- the SEC to adopt rules to implement certain requirements noted in ily due to costs associated with expanded retail banking and mortgage the Act and it did so effective August 29, 2002. The new rules require banking activities. a company’s chief executive and chief financial officers to certify the In the fourth quarter of 2002, the effective income tax rate was financial and other information included in the company’s quar- reduced to 33.93% of income before tax expense for the quarter due terly and annual reports. The rules also require these officers to to the favorable resolution of uncertainties during tax examinations. certify that they are responsible for establishing, maintaining and Earnings Teleconference and Website Information TCF hosts quarterly conference calls to discuss its financial results. Additional information regarding TCF’s conference calls can be obtained from the investor relations section within TCF’s web site at www.tcfexpress.com or by contacting TCF’s Corporate Communica- tions Department at (952) 745-2760. The website also includes free access to company news releases, TCF’s annual report, quarterly reports, investor presentations and SEC filings. Legislative, Legal and Regulatory Developments regularly evaluating the effectiveness of the company’s disclosure con- trols and procedures; that they have made certain disclosures to the auditors and to the audit committee of the board of directors about the company’s controls and procedures; and that they have included information in their quarterly and annual filings about their evalu- ation and whether there have been significant changes to the controls and procedures or other factors which would significantly impact these controls subsequent to their evaluation. In September 2002, the Securities and Exchange Commission (“SEC”) issued its final ruling covering the acceleration of periodic report filing dates. The rule applies to all companies, including TCF, Federal and state legislation imposes numerous legal and regulatory that have a public float of at least $75 million that have been subject requirements on financial institutions. Future legislative or regula- to the SEC’s reporting requirements for at least 12 calendar months tory change, or changes in enforcement practices or court rulings, and that have previously filed at least one annual report. For com- may have a dramatic and potentially adverse impact on TCF and its panies meeting the definition of accelerated filer as of the end of their bank and other subsidiaries. first fiscal year ending on or after December 15, 2002, the annual The Federal Deposit Insurance Corporation (“FDIC”) and report deadline will remain 90 days for year one and will then be members of the United States Congress have recently proposed new reduced 15 days per year over two years to 60 days. The quarterly report legislation that would reform the bank deposit insurance system. This on Form 10-Q will remain due 45 days after quarter end for year one reform could merge BIF and SAIF insurance funds, increase the and will then be reduced five days per year over two years to 35 days. page 44 Non-GAAP Financial Measures Forward-Looking Information In analyzing results, TCF may utilize or make reference to various This Annual Report and other reports issued by the Company, non-GAAP financial measures. The use of these non-GAAP finan- including reports filed with the Securities and Exchange Commission, cial measures is intended to provide more meaningful informa- may contain “forward-looking” statements that deal with future results, tion related to TCF’s consolidated financial condition and results plans or performance. In addition, TCF’s management may make of operations and is summarized as follows: such statements orally to the media, or to securities analysts, investors “Top-line revenue” Top-line revenue consists of net interest income or others. Forward-looking statements deal with matters that do not plus fees and other revenues. These amounts are reported separately relate strictly to historical facts. TCF’s future results may differ mate- in the consolidated statements of income. This measure is intended rially from historical performance and forward-looking statements to represent revenues from core operations for TCF and exclude cer- about TCF’s expected financial results or other plans are subject to tain components of non-interest income which generally occur less a number of risks and uncertainties. These include but are not lim- frequently and are not derived from ongoing customer transactions ited to possible legislative changes and adverse economic, business including: gains on sales of securities available for sale, branches, and competitive developments such as shrinking interest margins; loan servicing and subsidiaries and title insurance revenues. TCF deposit outflows; ability to increase the number of checking accounts believes “Top-line revenue” is a meaningful measurement of core and the possibility that deposit account losses (fraudulent checks, business revenues. etc.) may increase; reduced demand for financial services and loan “Power Assets® and Power Liabilities®” Power Assets and Power Liabilities and lease products; adverse developments affecting TCF’s super- are names associated with certain subtotals already present on the market banking relationships or any of the supermarket chains in consolidated statements of financial condition. Power Assets repre- which TCF maintains supermarket branches; changes in accounting sent the subtotal of all consumer, commercial real estate, commer- policies or guidelines, or monetary and fiscal policies of the federal cial business, and leasing and equipment finance loans and leases. government; changes in credit and other risks posed by TCF’s loan, Power Liabilities is synonymous with total deposits and thus includes lease and investment portfolios; technological, computer-related or all checking, savings, money market, and certificate deposits. Growth operational difficulties; adverse changes in securities markets; the in Power Assets leads to improved net interest income as the margin risk that TCF could be unable to effectively manage the volatility of on such loans is greater than other investment alternatives. Growth its mortgage banking business, which could adversely affect earnings; in Power Liabilities will benefit net interest income by allowing TCF results of litigation or other significant uncertainties. to reduce higher cost borrowings and generally is the starting point to a customer’s use of other TCF products and services. “Return on average realized common equity” Return on average realized common equity (“RORE”) is computed by taking annualized net income from the consolidated statements of income and dividing it by average common stockholders’ equity, excluding accumulated other comprehensive income (loss), for the period. The comparable GAAP financial measure is return on average common equity (“ROE”) which is reported along with RORE. TCF believes the use of RORE more accurately reflects the return on the common equity of the Company, and removes the volatility that is present in the ROE computation resulting from the inclusion of net unrealized gains (losses) on secu- rities available for sale which can fluctuate significantly from period- to-period due to changes in the fair value of such securities. page 45 Consolidated Statements of Financial Condition (Dollars in thousands, except per-share data) ASSETS Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and leases: Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit base intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIABILITIES AND STOCKHOLDERS’ EQUITY Deposits: Checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity: Preferred stock, par value $.01 per share, 30,000,000 shares authorized; none issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock, par value $.01 per share, 280,000,000 shares authorized; 92,638,937 and 92,719,544 shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings, subject to certain restrictions . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock at cost, 18,783,051 and 15,787,716 shares, and other . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See accompanying notes to consolidated financial statements. At December 31, 2002 2001 $ 416,397 $ 386,700 153,722 2,426,794 476,475 3,005,882 1,835,788 440,074 1,039,040 6,320,784 1,800,344 8,121,128 (77,008) 8,044,120 243,452 145,462 7,573 62,644 225,430 155,942 1,584,661 451,609 2,509,333 1,622,461 422,381 956,737 5,510,912 2,733,290 8,244,202 (75,028) 8,169,174 215,237 145,462 9,244 58,261 182,425 $12,202,069 $11,358,715 $ 2,864,896 $ 2,536,865 2,041,723 884,614 5,791,233 1,918,755 7,709,988 842,051 2,268,244 3,110,295 404,766 1,290,816 951,033 4,778,714 2,320,244 7,098,958 719,859 2,303,166 3,023,025 319,699 11,225,049 10,441,682 – 926 518,813 1,111,955 46,102 (700,776) 977,020 – 927 520,940 965,454 6,229 (576,517) 917,033 $12,202,069 $11,358,715 page 46 Consolidated Statements of Income (In thousands, except per-share data) INTEREST INCOME: Year Ended December 31, 2002 2001 2000 Loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . $585,693 118,272 22,464 6,934 733,363 INTEREST EXPENSE: Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income after provision for credit losses . . NON-INTEREST INCOME: Fees and service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . Debit card revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ATM revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments and insurance commissions . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . . . . . . . . . Mortgage banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees and other revenue . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of securities available for sale . . . . . . . . . . . . . Gains on sales of branches . . . . . . . . . . . . . . . . . . . . . . . . . Other non-interest income . . . . . . . . . . . . . . . . . . . . . Total non-interest income . . . . . . . . . . . . . . . . . . . . NON-INTEREST EXPENSE: Compensation and employee benefits . . . . . . . . . . . . . . . . . Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . Advertising and promotions . . . . . . . . . . . . . . . . . . . . . . . Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . Income before income tax expense . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EARNINGS PER COMMON SHARE: 95,386 138,752 234,138 499,225 22,006 477,219 226,051 46,224 45,342 15,781 333,398 51,628 6,979 13,339 405,344 11,536 1,962 13,498 418,842 295,787 83,131 21,894 – 137,557 538,369 357,692 124,761 $681,110 112,267 24,266 8,966 826,609 162,727 182,660 345,387 481,222 20,878 460,344 195,162 40,525 45,768 11,535 292,990 45,730 12,042 16,545 367,307 863 3,316 4,179 371,486 267,716 78,774 20,909 7,777 126,820 501,996 329,834 122,512 $700,325 99,185 17,130 10,041 826,681 197,094 191,051 388,145 438,536 14,772 423,764 166,394 30,614 47,333 12,266 256,607 38,442 10,519 17,895 323,463 – 12,813 12,813 336,276 239,544 74,938 19,181 7,706 115,833 457,202 302,838 116,593 $232,931 $207,322 $186,245 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DIVIDENDS DECLARED PER COMMON SHARE . . . . $ $ $ 3.17 3.15 1.15 $ 2.73 $ 2.70 $ 1.00 $ 2.37 $ 2.35 $ .825 See accompanying notes to consolidated financial statements. page 47 Consolidated Statements of Stockholders’ Equity (Dollars in thousands) BALANCE, DECEMBER 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of 37,259 shares to effect purchase acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of 3,243,800 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of 1,319,896 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancellation of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise of stock options, 283,036 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in shares held in trust for deferred compensation plans, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of TCF stock to fund the Employees Stock Purchase Plan, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan to deferred compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BALANCE, DECEMBER 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of 3,670,107 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of 262,340 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancellation of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise of stock options, 86,677 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in shares held in trust for deferred compensation plans, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of TCF stock to fund the Employees Stock Purchase Plan, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan to deferred compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BALANCE, DECEMBER 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of 3,108,341 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of 61,440 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancellation of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise of stock options, 51,656 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in shares held in trust for deferred compensation plans, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of loans to deferred compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BALANCE, DECEMBER 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See accompanying notes to consolidated financial statements. page 48 Number of Common Shares Issued Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock and Other Total 92,804,205 $ 928 $ 500,797 $ 715,461 $ (47,382) $ (360,822) $ 808,982 – – – – – – – (48,546) – – – – – – – – – – – – – – – – – – – – 92,755,659 928 – – – – – – (36,115) – – – – – – – – – – - (1) – – – – – – – – – 417 – (7,716) (1,262) – (81) 1 15,842 684 – 508,682 – – – – – 3,057 (1,484) 15 885 9,744 41 – 186,245 – 186,245 (66,101) – – – – – – – – – – – 37,514 37,514 – – – – – – – – – – – 835,605 (9,868) 207,322 – 207,322 (77,473) – – – – – – – – – 16,097 16,097 – – – – – – – – – 92,719,544 927 520,940 965,454 6,229 – – – – – – (80,607) – – – – – – – – – – (1) – – – – – – – – – 1,139 (3,586) 28 1,536 (1,244) – 232,931 – 232,931 (86,430) – – – – – – – – 39,873 39,873 – – – – – – – – – – – – 963 (73,824) 7,716 386 9,375 7,337 – (15,842) – (416) (425,127) – – – – (148,043) (3,057) 646 11,049 2,405 (9,744) – (4,646) (576,517) – – – – (148,030) (1,139) 742 11,590 1,551 1,244 9,783 186,245 37,514 223,759 (66,101) 1,380 (73,824) – (876) 9,375 7,256 1 – 684 (416) 910,220 207,322 16,097 223,419 (77,473) (148,043) – (839) 11,064 3,290 – 41 (4,646) 917,033 232,931 39,873 272,804 (86,430) (148,030) – (2,845) 11,618 3,087 – 9,783 92,638,937 $ 926 $ 518,813 $1,111,955 $ 46,102 $ (700,776) $ 977,020 page 49 Consolidated Statements of Cash Flows (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . Mortgage servicing rights amortization and impairment . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . Proceeds from sales of loans held for sale . . . . . . . . . . Principal collected on loans held for sale . . . . . . . . . . Originations and purchases of loans held for sale . . . . Net (increase) decrease in other assets and accrued expenses and other liabilities . . . . . . . . . . Gains on sales of assets . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . CASH FLOWS FROM INVESTING ACTIVITIES: Principal collected on loans and leases . . . . . . . . . . . . . . . . Originations and purchases of loans . . . . . . . . . . . . . . . . . . Purchases of equipment for lease financing . . . . . . . . . . . . . Proceeds from sales of securities available for sale . . . . . . . . . Proceeds from maturities of and principal collected on securities available for sale . . . . . . . . . . . . . . . . . . . . Purchases of securities available for sale . . . . . . . . . . . . . . . . Net (increase) decrease in Federal Home Loan Bank stock . . Purchases of premises and equipment . . . . . . . . . . . . . . . . . Sales of deposits, net of cash paid . . . . . . . . . . . . . . . . . . . . Loans to deferred compensation plans, net . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used by investing activities . . . . . . . . . . . . . . . . CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in short-term borrowings . . . . . . . . Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . Payments on long-term borrowings . . . . . . . . . . . . . . . . . . Purchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . Dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided (used) by financing activities . . . . . . . . Net increase (decrease) in cash and due from banks . . . . . . . . . . Cash and due from banks at beginning of year . . . . . . . . . . . . . Cash and due from banks at end of year . . . . . . . . . . . . . . . . . . Year Ended December 31, 2002 2001 2000 $ 232,931 $ 207,322 $ 186,245 40,772 35,374 22,006 2,703,744 15,814 (2,734,741) 43,091 (13,900) (20,141) 92,019 324,950 3,434,153 (2,984,568) (470,917) 485,406 718,431 (1,973,974) 3,126 (60,279) (15,206) 9,783 92 (853,953) 628,142 122,192 52,462 (11,665) (148,030) (86,430) 2,029 558,700 29,697 386,700 46,599 20,964 20,878 2,135,218 12,469 (2,375,396) 91,612 (4,393) (9,885) (61,934) 145,388 3,352,341 (2,719,682) (449,231) 33,645 398,316 (587,324) (18,927) (44,682) (26,958) (4,646) (15,544) (82,692) 237,180 (178,836) 677,334 (579,529) (148,043) (77,473) 1,364 (68,003) (5,307) 392,007 44,419 5,326 14,772 611,123 9,885 (649,750) (1,854) (12,813) (5,250) 15,858 202,103 2,162,839 (2,320,239) (579,595) – 176,905 (314) (4,671) (50,973) (82,097) (416) 23,047 (675,514) 402,731 (168,287) 954,252 (619,250) (73,824) (66,101) 6,635 436,156 (37,255) 429,262 $ 416,397 $ 386,700 $ 392,007 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for: Interest on deposits and borrowings . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfer of loans and leases to other assets . . . . . . . . . . . . . . $ 234,046 $ $ 87,899 51,713 $ $ $ 352,903 24,128 33,447 $ 377,430 $ 89,852 $ 16,580 See accompanying notes to consolidated financial statements. page 50 Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of TCF Financial Corporation and its wholly restructured commercial real estate and commercial business loans and equipment financings. Consumer and residential real estate loans and lease financings are excluded from the definition of an impaired loan. Loan impairment is measured as the present value of the owned subsidiaries. TCF Financial Corporation (“TCF” or the expected future cash flows discounted at the loan’s initial effective “Company”) is a national financial holding company engaged pri- interest rate or the fair value of the collateral for collateral-dependent marily in community banking, mortgage banking and leasing and loans. Residential loans, consumer loans, and smaller-balance com- equipment finance through its wholly owned subsidiary, TCF National mercial loans and lease and equipment financings are segregated by Bank. TCF National Bank owns leasing and equipment finance, loan type and sub-type, and are evaluated on a group basis. Loans mortgage banking, brokerage and investment and insurance sales, and leases are charged off to the extent they are deemed to be uncol- and real estate investment trusts (“REIT”) subsidiaries. These sub- lectible. The amount of the allowance for loan and lease losses is sidiaries are consolidated with TCF National Bank and are therefore highly dependent upon management’s estimates of variables affect- included in the consolidated financial statements of TCF Financial ing valuation, appraisals of collateral, evaluations of performance Corporation. All significant intercompany accounts and transactions and status, and the amounts and timing of future cash flows expected have been eliminated in consolidation. to be received on impaired loans. Such estimates, appraisals, evalu- Certain reclassifications have been made to prior years’ financial ations and cash flows may be subject to frequent adjustments due to statements to conform to the current year presentation. For Con- changing economic prospects of borrowers, lessees or properties. solidated Statements of Cash Flows purposes, cash and cash equiva- These estimates are reviewed periodically and adjustments, if neces- lents include cash and due from banks. sary, are recorded in the provision for credit losses in the periods in The preparation of the financial statements in conformity with which they become known. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabili- ties at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. C R I T I C A L A C C O U N T I N G P O L I C I E S Mortgage Servicing Rights TCF records a mortgage servicing rights asset for its right to service mortgage loans it has sold to third parties but continues to service for a fee. The total cost of loans sold is allocated between the loans sold and the servicing rights retained based on the relative fair values of each. Mortgage servicing rights are initially recorded at cost and are subsequently carried at the lower of cost, adjusted for amortization, or estimated fair value. Mortgage Critical accounting policies are dependent on estimates that are par- servicing rights are amortized in proportion to, and over the period ticularly susceptible to significant change. TCF’s critical accounting of, estimated net servicing income. policies include the determination of the allowance for loan and lease TCF periodically evaluates its capitalized mortgage servicing rights losses, mortgage servicing rights and income taxes. Allowance for Loan and Lease Losses The allowance for loan and lease losses is maintained at a level believed to be appropriate by management to provide for probable loan and lease losses inherent in the portfolio as of the balance sheet date, including known or anticipated problem loans and leases, as well as for loans and leases which are not currently known to require specific allowances. Management’s judgment as to the amount of the allowance, includ- ing the allocated and unallocated elements, is a result of ongoing review of larger individual loans and leases, the overall risk characteristics of the portfolios, changes in the character or size of the portfolios, the level of impaired and non-performing assets, historical net charge- off amounts, geographic location, prevailing economic conditions and other relevant factors. Impaired loans include all non-accrual and for impairment. Loan type and note rate are the predominant risk characteristics of the underlying loans used to stratify capitalized mortgage servicing rights for purposes of measuring impairment. The fair value of mortgage servicing rights is estimated by calculat- ing the present value of estimated future net servicing cash flows, tak- ing into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors. The expected and actual rate of mortgage loan prepayments are the most significant factors driving the value of mortgage servicing rights. Adjustments to the mortgage servicing rights valuation allow- ance for other than permanent impairment are recorded in mort- gage banking revenues. Permanent impairment is recognized as a write-down of the mortgage servicing rights and the related val- uation allowance. page 51 Income Taxes Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and lia- additional information concerning derivative instruments and hedg- ing activities. Education loans held for sale are carried at the lower bilities are recognized for the future tax consequences attributable of cost or market. Net fees and costs associated with originating and to differences between the financial statement carrying amounts of acquiring loans held for sale are deferred and are included in the existing assets and liabilities and their respective tax bases. Deferred basis for determining the gain or loss on sales of loans held for sale. tax assets and liabilities are measured using enacted tax rates expected Gains on sales are recorded at the settlement date and cost is deter- to apply to taxable income in the years in which those temporary mined on a specific identification basis. differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The determination of current and deferred income taxes is based on complex analyses of many factors including interpretation of Federal and state income tax laws, the difference between tax and financial reporting basis of assets and liabilities (temporary differ- ences), estimates of amounts due or owed such as the timing of rever- sals of temporary differences and current financial accounting standards. Actual results could differ significantly from the estimates and interpretations used in determining the current and deferred income tax liabilities. O T H E R S I G N I F I C A N T A C C O U N T I N G P O L I C I E S Investments Investments are carried at cost, adjusted for amor- tization of premiums or accretion of discounts using methods which approximate a level yield. Securities Available for Sale Securities available for sale are carried at fair value with the unrealized holding gains or losses, net Loans and Leases Net fees and costs associated with originating and acquiring loans and leases are deferred and amortized over the lives of the assets. Discounts and premiums on loans purchased, net deferred fees and costs, unearned discounts and finance charges, and unearned lease income are amortized using methods which approximate a level yield over the estimated remaining lives of the loans and leases. Lease financings include direct financing and sales-type leases as well as leveraged leases. Leases that transfer substantially all of the benefits and risks of equipment ownership to the lessee are classified as direct financing or sales-type leases and are included in loans and leases. Direct financing and sales-type leases are carried at the com- bined present value of the future minimum lease payments and the lease residual value. The lease residual value represents the estimated fair value of the leased equipment at the termination of the lease. Lease residual values are reviewed on an ongoing basis and any downward revisions are recorded in the periods in which they become known. Interest income on direct financing and sales-type leases is recognized using methods which approximate a level yield over the of related deferred income taxes, reported as accumulated other term of the leases. Sales-type leases generate dealer profit which is comprehensive income (loss), which is a separate component of recognized at lease inception by recording lease revenue net of the stockholders’ equity. Cost of securities sold is determined on a spe- lease cost. Lease revenue consists of the present value of the future cific identification basis and gains or losses on sales of securities minimum lease payments discounted at the rate implicit in the lease. available for sale are recognized at trade dates. Declines in the value Lease cost consists of the leased equipment’s book value, less the pre- of securities available for sale that are considered other than tem- sent value of its residual. Investments in leveraged leases are the sum porary are recorded in non-interest income as a loss on securities of all lease payments (less nonrecourse debt payments) plus estimated available for sale. Discounts and premiums on securities available residual values, less unearned income. Income from leveraged leases for sale are amortized using methods which approximate a level is recognized using a method which approximates a level yield over yield over the life of the security. Loans Held for Sale Loans held for sale include residential mort- gage and education loans. Residential mortgage loans held for sale are carried at the lower of cost or market as adjusted for the effects of fair value hedges using quoted market prices. See Note 19 for the term of the leases based on the unrecovered equity investment. Loans and leases, including loans that are considered to be impaired, are reviewed regularly by management and are placed on non-accrual status when the collection of interest or principal is 90 days or more past due (150 days or more past due for loans secured by residential real estate), unless the loan or lease is adequately secured page 52 and in the process of collection. When a loan or lease is placed on non-accrual status, unless collection of all principal and interest is considered to be assured, uncollected interest accrued in prior years is charged off against the allowance for loan and lease losses. Interest accrued in the current year is reversed. For those non-accrual leases that have been funded on a non-recourse basis by third-party finan- cial institutions, the related debt is also placed on non-accrual status. Interest payments received on non-accrual loans and leases are gen- erally applied to principal unless the remaining principal balance has been determined to be fully collectible. Premises and Equipment Premises and equipment are carried at cost and are depreciated or amortized on a straight-line basis over their estimated useful lives. Other Real Estate Owned Other real estate owned is recorded at the lower of cost or fair value minus estimated costs to sell at the date of transfer to other real estate owned. If the fair value of an asset minus the estimated costs to sell should decline to less than the carry- ing amount of the asset, the deficiency is recognized in the period in which it becomes known and is included in other non-interest expense. Investments in Affordable Housing Investments in afford- able housing consist of investments in limited partnerships that operate qualified affordable housing projects or that invest in other impaired. Deposit based intangibles are amortized over 10 years on an accelerated basis. The Company reviews the recoverability of the carrying values of these assets annually or whenever an event occurs indicating that they may be impaired. See Note 9 for additional information concerning intangible assets and goodwill. Stock-Based Compensation Effective January 1, 2000, TCF adopted prospectively the recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” for stock-based grants beginning in 2000. Under SFAS No. 123, the fair value of an option or similar equity instrument on the date of grant is amortized to expense over the vesting period of the grant. TCF applied the intrin- sic value based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” as amended, for stock-based transactions through December 31, 1999. Accordingly, no compensation expense has been recognized for any stock option grants made prior to 2000. Compensation expense for restricted stock under SFAS No. 123 and APB Opinion No. 25 is recorded over the vesting periods. The amount of stock option grants accounted for under APB Opinion No. 25 and the related pro-forma impact on net income and earn- ings per share had the recognition provisions of SFAS No. 123 been applied to such grants during 2002, 2001 and 2000 is not mate- rial. See Note 17 for additional information concerning stock- limited partnerships formed to operate affordable housing pro- based compensation. jects. TCF generally utilizes the effective yield method to account for these investments with the tax credits net of the amortization of the investment reflected in the Consolidated Statements of Income as a reduction of income tax expense, however, depend- ing on circumstances, the equity or cost methods may be utilized. The amount of the investment along with any unfunded equity con- tributions which are unconditional and legally binding are recorded in other assets. A liability for the unfunded equity contributions is recorded in other liabilities. At December 31, 2002, TCF’s investments in affordable housing were $27.2 million, compared with $2.1 million at December 31, 2001. Intangible Assets On January 1, 2002, TCF adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and intangible assets with indefinite lives no longer be amortized, but instead tested for impairment annually. Upon adoption of SFAS No. 142, TCF performed impairment testing and concluded that goodwill was not Derivative Financial Instruments TCF utilizes derivative finan- cial instruments to meet the ongoing credit needs of its customers and in order to manage the market exposure of its residential loans held for sale and its commitments to extend credit for residential loans. Derivative financial instruments include commitments to extend credit and forward mortgage loan sales commitments. TCF does not use derivatives to manage its interest rate risk position. See Notes 19 and 20 for additional information concerning these derivative financial instruments. 2. Cash and Due from Banks At December 31, 2002, TCF was required by Federal Reserve Board (“FRB”) regulations to maintain reserve balances of $43.7 million in cash on hand or at various Federal Reserve Banks. page 53 3. Investments The carrying values of investments, which approximate their fair values, consist of the following: (In thousands) Federal Home Loan Bank stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Reserve Bank stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2002 $128,855 23,999 868 2001 $131,181 23,847 914 $153,722 $155,942 The carrying values and yields on investments at December 31, 2002, by contractual maturity, are shown below: (Dollars in thousands) Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . No stated maturity(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Balance represents FRB and Federal Home Loan Bank (“FHLB”) stock, required regulatory investments. Carrying Value $ 868 152,854 $153,722 Yield 1.57% 4.49 4.47 4. Securities Available for Sale Securities available for sale consist of the following: (Dollars in thousands) Mortgage-backed securities: Federal agencies . . . . . . . . Private issuer and collateralized mortgage obligations . . Other securities . . . . . . . . . . At December 31, 2002 2001 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $2,341,549 $ 73,225 $ (35) $2,414,739 $1,547,374 $ 11,691 $ (979) $1,558,086 12,178 750 4 – (877) 11,305 – 750 26,828 650 90 – (993) 25,925 – 650 $2,354,477 $ 73,229 $ (912) $2,426,794 $1,574,852 $ 11,781 $ (1,972) $1,584,661 Weighted-average yield . . . . . 5.96% 6.55% Gross gains of $11.5 million and $863,000 were recognized on sales of securities available for sale during 2002 and 2001, respectively. There were no sales of securities available for sale in 2000. Mortgage-backed securities aggregating $867.7 million were pledged as collateral to secure certain deposits and borrowings at December 31, 2002. See Notes 12 and 13 for additional information regarding securities pledged as collateral to secure certain borrowings. 5. Loans Held for Sale Loans held for sale consist of the following: (In thousands) Residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Education loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2002 $277,395 199,080 $476,475 2001 $286,552 165,057 $451,609 page 54 6. Loans and Leases Loans and leases consist of the following: (Dollars in thousands) Consumer: At December 31, 2002 2001 Percentage Change Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial: Commercial real estate: Permanent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,955,644 $2,443,788 33,411 16,827 43,433 22,112 3,005,882 2,509,333 1,639,860 195,928 1,835,788 440,074 2,275,862 1,444,484 177,977 1,622,461 422,381 2,044,842 Leasing and equipment finance: Equipment finance loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease financings: 289,558 271,398 Direct financing leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales-type leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease residuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned income and deferred lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer, commercial and leasing and equipment finance . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 758,169 30,346 35,375 (95,927) 21,519 749,482 1,039,040 6,320,784 1,800,344 $8,121,128 691,899 36,272 33,860 (94,300) 17,608 685,339 956,737 5,510,912 2,733,290 $8,244,202 20.9% (23.1) (23.9) 19.8 13.5 10.1 13.1 4.2 11.3 6.7 9.6 (16.3) 4.5 1.7 22.2 9.4 8.6 14.7 (34.1) (1.5) At December 31, 2002 and 2001, the recorded investment in with their original terms for 2002, 2001 and 2000, TCF would have loans that were considered to be impaired was $12.1 million and $18.8 recorded gross interest income of $4.3 million, $5.4 million and million, respectively. The related allowance for loan losses at those $3.9 million, respectively, for these loans and leases. Interest income dates was $5.5 and $5 million, respectively. All of the impaired loans of $1.2 million, $1.7 million and $1.6 million has been recorded were on non-accrual status. There were no impaired loans at on these loans and leases for the years ended December 31, 2002, December 31, 2002 or 2001 which did not have a related allowance 2001 and 2000, respectively. for loan losses. The average recorded investment in impaired loans At December 31, 2002 and 2001, TCF had no loans out- during the years ended December 31, 2002, 2001 and 2000 was standing with terms that had been modified in troubled debt $14.7 million, $9.9 million and $4.5 million, respectively. For the restructurings. There were no material commitments to lend addi- year ended December 31, 2002, 2001 and 2000, TCF tional funds to customers whose loans or leases were classified as recognized interest income on impaired loans of $92,000, $29,000 non-accrual at December 31, 2002. and $40,000, all of which was recognized using the cash basis method The aggregate amount of loans to non-management directors of of income recognition. TCF and their related interests was $35.3 million and $31.8 million At December 31, 2002, 2001 and 2000, loans and leases on non- at December 31, 2002 and 2001, respectively. During 2002, $5.1 accrual status totaled $43.6 million, $52 million and $35.2 mil- million of new loans were made and repayments of such loans totaled lion, respectively. Had the loans and leases performed in accordance $1.6 million. All loans to outside directors and their related page 55 interests were made in the ordinary course of business on normal The investment in leveraged leases represents net unpaid rentals credit terms, including interest rates and collateral, as those pre- and estimated unguaranteed residual values of the leased assets, less vailing at the time for comparable transactions with unrelated per- related unearned income. TCF has no general obligation for prin- sons. The aggregate amount of loans to executive officers of TCF cipal and interest on notes representing third-party participation was $25,000 and $9.1 million at December 31, 2002 and 2001, related to leveraged leases; such notes, which totaled $34.6 million respectively. Included in these amounts were loans made to the at December 31, 2002, are recorded as an offset against the related Executive Deferred Compensation Plan trustee on behalf of the rental receivable. As the equity owner in a leveraged lease, TCF is executive officers. During 2002, TCF’s Board of Directors decided taxed on total lease payments received and is entitled to tax deduc- to eliminate the loan feature from its officers’ and directors’ tions based on the cost of the leased assets and tax deductions for deferred compensation plans and requested and received repay- interest paid to third-party participants. A portion of the investment ment in full of all outstanding loans totaling $9.8 million. The in leveraged leases at December 31, 2002 included a 100% equity deferred compensation plans sold 166,665 shares of TCF common interest in a Boeing 767-300 aircraft on lease to Delta Airlines in stock owned by plan participants to repay the outstanding loans to the United States. This leveraged lease has renewal and purchase the plans. See Note 15 for additional information regarding loans options by the lessee at the end of the 9.75 year lease term. The air- to the deferred compensation plan. In the opinion of management, craft is in service, the lessee is current on the lease payments and the the above mentioned loans to outside directors and their related lease expires in 2010. This lease represents TCF’s only material direct interests and executive officers do not represent more than a exposure to the commercial airline industry. normal credit risk of collection. TCF’s net investment in leveraged leases is comprised of the following: At December 31, (In thousands) Rental receivable (net of principal and interest on non-recourse debt) . . . . . . . . . . . . . . . . . . . . . . . Estimated residual value of leased assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment in leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 $12,758 18,679 (9,918) 21,519 (9,005) $12,514 Future minimum lease payments for direct financing and sales-type leases as of December 31, 2002 are as follows: (In thousands) 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments to be Received by TCF $234,284 166,718 121,478 79,304 46,242 24,559 Payments to be Received by Other Financial Institutions $ 67,657 37,902 9,632 739 – – 2001 $ 10,134 18,056 (10,582) 17,608 (5,568) $ 12,040 Total $301,941 204,620 131,110 80,043 46,242 24,559 $672,585 $115,930 $788,515 page 56 7. Allowance for Loan and Lease Losses Following is a summary of the allowance for loan and lease losses and selected statistics: (Dollars in thousands) Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratio of net loan and lease charge-offs to average loans and leases outstanding . . . . . . Allowance for loan and lease losses as a percentage of total loans and leases at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2002 $ 75,028 22,006 (24,361) 4,335 (20,026) $ 77,008 .25% .95 2001 $ 66,669 20,878 (16,951) 4,432 (12,519) $ 75,028 .15% .91 2000 $ 55,755 14,772 (9,701) 5,843 (3,858) $ 66,669 .05% .78 8. Premises and Equipment Premises and equipment are summarized as follows: (In thousands) Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2002 $ 62,226 155,954 39,208 213,759 471,147 227,695 2001 $ 48,549 143,681 36,539 196,283 425,052 209,815 $243,452 $215,237 TCF leases certain premises and equipment under operating leases. Net lease expense was $20.8 million, $20.7 million and $20.3 mil- lion in 2002, 2001 and 2000, respectively. At December 31, 2002, the total annual minimum lease commitments for operating leases were as follows: (In thousands) 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,236 18,631 16,954 15,902 14,166 52,967 $138,856 page 57 9. Goodwill and Other Intangible Assets Goodwill and other intangible assets are summarized as follows: (In thousands) Amortizable intangible assets: As of December 31, 2002 2001 Gross Accumulated Amortization Amount Net Amount Gross Amount Accumulated Amortiziation Mortgage servicing rights, net . . . Deposit base intangibles . . . . . . . Total . . . . . . . . . . . . . . . . . . $ 92,525 $29,881 $ 62,644 21,180 13,607 7,573 $113,705 $43,488 $ 70,217 $ 76,782 21,180 $ 97,962 $18,521 11,936 $30,457 Unamortizable intangible assets: Goodwill (included in Banking Segment) . . . . . . . . . . $145,462 $145,462 $145,462 Net Amount $ 58,261 9,244 $ 67,505 $145,462 Amortization expense for intangible assets was $24.5 million and $26.3 million for the years ended December 31, 2002 and 2001, respec- tively. The following table shows the estimated future amortization expense for intangible assets based on existing asset balances and the inter- est rate environment as of December 31, 2002. The Company’s actual amortization expense in any given period may be significantly different from the estimated amounts depending upon the addition of new intangible assets, changes in mortgage interest rates, prepay- ment rates and market conditions. (In thousands) Estimated Amortization Expense: For the year ended December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the year ended December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the year ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the year ended December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the year ended December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage Servicing Rights Deposit Base Intangibles $ 16,899 13,519 10,815 8,652 6,922 $ 1,666 1,662 1,659 1,630 913 $ Total 18,565 15,181 12,474 10,282 7,835 10. Mortgage Banking The activity in mortgage servicing rights and the related valuation allowance is summarized as follows: (In thousands) Mortgage servicing rights at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases and originations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment write-down . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment write-down . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2002 $ 63,607 $ 39,757 (22,874) (8,500) 71,990 5,346 12,500 (8,500) 9,346 2001 41,032 39,139 (16,564) – 63,607 946 4,400 – 5,346 2000 $ 23,560 22,798 (5,326) – 41,032 946 – – 946 $ 62,644 $ 58,261 $ 40,086 page 58 Mortgage banking revenue consists of the following: (Dollars in thousands) Servicing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less mortgage servicing: Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net servicing income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total mortgage banking revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2002 $ 20,443 2001 $ 16,932 2000 $ 12,642 22,874 12,500 35,374 (14,931) 18,110 3,800 16,564 4,400 20,964 (4,032) 11,795 4,279 5,326 – 5,326 7,316 1,347 1,856 $ 6,979 $ 12,042 $ 10,519 At December 31, 2002, 2001 and 2000, TCF was servicing real deposits relate primarily to mortgage servicing operations and rep- estate loans for others with aggregate unpaid principal balances of resent customer funds for taxes and insurance and funds due investors approximately $5.6 billion, $4.7 billion and $4 billion, respectively. on mortgage loans serviced by TCF. During 2000, TCF purchased the bulk servicing rights on $933 mil- The estimated fair value of mortgage servicing rights included in lion of residential mortgage loans at a cost of $13.8 million. No bulk the Consolidated Statements of Financial Condition at December 31, servicing rights were purchased during 2002 or 2001. No bulk ser- 2002 was approximately $62.6 million. The estimated fair value of vicing rights were sold during 2002, 2001 or 2000. At December capitalized mortgage servicing rights is based on estimated cash flows 31, 2002, and 2001, TCF had custodial funds of $287.4 million discounted using rates management believes are commensurate with and $219.1 million, respectively, relating to the servicing of residen- the risks involved. Assumptions regarding prepayments, defaults and tial real estate loans, which are included in deposits in the interest rates are determined using available market information. Consolidated Statements of Financial Condition. These custodial 11. Deposits Deposits are summarized as follows: (Dollars in thousands) Checking: Non-interest bearing . . . . . . . . . . . . Interest bearing . . . . . . . . . . . . . . . . Savings: Non-interest bearing . . . . . . . . . . . . Interest bearing . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . . . . . . . Total checking, savings and money market . . . . . . . . . . . . . . . Certificates . . . . . . . . . . . . . . . . . . . . . . Weighted- Average Rate 2002 Amount –% $1,879,584 .12 985,312 .04 2,864,896 228,210 1,813,513 2,041,723 884,614 5,791,233 1,918,755 – .90 .80 .74 .42 2.85 1.02 At December 31, % of Total 24.4% 12.8 37.2 2.9 23.5 26.4 11.5 75.1 24.9 Weighted- Average Rate 2001 Amount –% $1,664,403 .20 .07 – .61 .53 1.20 .42 3.71 1.49 872,462 2,536,865 169,527 1,121,289 1,290,816 951,033 4,778,714 2,320,244 $7,098,958 % of Total 23.4% 12.3 35.7 2.4 15.8 18.2 13.4 67.3 32.7 100.0% $7,709,988 100.0% page 59 Certificates had the following remaining maturities at December 31, 2002: (In thousands) Maturity 0-3 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4-6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-24 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-36 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37-48 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49-60 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over 60 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 Minimum Other Total (1) $ 107,008 $ 337,239 $ 444,247 35,300 76,708 47,824 7,547 4,685 7,076 252 313,710 566,233 299,677 52,743 30,925 29,497 2,331 349,010 642,941 347,501 60,290 35,610 36,573 2,583 $ 286,400 $1,632,355 $1,918,755 (1) Includes no brokered deposits. 12. Short-term Borrowings The following table sets forth selected information for short-term borrowings (borrowings with an original maturity of less than one year) for each of the years in the three year period ended December 31, 2002: (Dollars in thousands) At December 31, Federal funds purchased . . . . . . . . . . . . . Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . Treasury, tax and loan note payable . . . . . Line of credit . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . Year ended December 31, Average daily balance Federal funds purchased . . . . . . . . . . . . . Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . Treasury, tax and loan note payable . . . . . Commercial paper . . . . . . . . . . . . . . . . . Line of credit . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . Maximum month-end balance Federal funds purchased . . . . . . . . . . . . . Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . Treasury, tax and loan note payable . . . . . Commercial paper . . . . . . . . . . . . . . . . . Line of credit . . . . . . . . . . . . . . . . . . . . N.A. Not applicable. 2002 2001 2000 Amount Rate Amount Rate Amount Rate $265,000 1.20% $ 48,000 1.73% $ 91,000 6.49% 547,743 15,808 13,500 $842,051 1.37 1.12 2.20 1.32 669,734 125 2,000 $ 719,859 1.83 1.40 2.41 1.82 794,320 13,375 – $ 898,695 6.61 5.73 – 6.58 $188,559 1.67% $ 120,812 3.77% $ 10,989 6.68% 340,311 29,348 – 15,717 $573,935 1.70 1.50 – 3.23 1.72 908,016 62,111 – 6,749 $1,097,688 $271,000 N.A. $ 304,000 766,511 200,000 – N.A. N.A. 42,500 N.A. 1,047,301 262,680 – 30,500 4.14 3.61 – 5.57 4.08 N.A. N.A. N.A. N.A. 664,015 68,631 4,843 18,824 $ 767,302 $ 91,000 1,070,790 250,000 19,039 79,000 6.41 6.14 6.18 7.58 6.41 N.A. N.A. N.A. N.A. N.A. page 60 The securities underlying the repurchase agreements are book TCF Financial Corporation has a $105 million bank line of credit entry securities. During the borrowing period, book entry securities maturing in April 2003 which is unsecured and contains certain were delivered by appropriate entry into the counterparties’ accounts covenants common to such agreements. TCF is not in default with through the Federal Reserve System. The dealers may sell, loan or respect to any of its covenants under the credit agreement. The inter- otherwise dispose of such securities to other parties in the normal est rate on the line of credit is based on either the prime rate or course of their operations, but have agreed to resell to TCF identi- LIBOR. TCF has the option to select the interest rate index and term cal or substantially the same securities upon the maturities of the for advances on the line of credit. The line of credit may be used for agreements. At December 31, 2002, all of the securities sold under appropriate corporate purposes, including serving as a back-up line repurchase agreements provided for the repurchase of identical secu- of credit to support the redemption of TCF’s commercial paper. rities. At December 31, 2002, $547.7 million of securities sold under TCF Financial Corporation has a $50 million commercial paper repurchase agreements with an interest rate of 1.37% maturing in program which is unsecured and contains certain covenants common 2003 were collateralized by mortgage-backed securities having a fair to such programs with which TCF is in compliance. Any usage under value of $559 million. 13. Long-term Borrowings Long-term borrowings consist of the following: (Dollars in thousands) Securities sold under repurchase agreements . . . . . . . . . . Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . Discounted lease rentals . . . . . . . . . . . . . . . . . . . . . . . . . the commercial paper program requires an equal amount of back-up support by the bank line of credit. Commercial paper generally matures within 90 days, although it may have a term of up to 270 days. At December 31, 2002 2001 Year of Maturity 2005 2003 2004 2005 2006 2009 2010 2011 2002 2003 2004 2005 2006 2007 Amount $ 200,000 135,000 853,000 246,000 303,000 122,500 100,000 200,000 1,959,500 – 62,461 36,101 9,459 723 – 108,744 $2,268,244 Weighted- Average Rate Weighted- Average Rate Amount 6.26% $ 200,000 6.26% 5.76 5.72 6.02 4.30 5.25 6.02 4.85 5.44 – 7.30 7.08 6.88 6.94 – 7.19 5.59 135,000 853,000 246,000 303,000 122,500 100,000 200,000 1,959,500 75,600 46,458 18,462 2,684 450 12 143,666 $2,303,166 5.76 5.72 6.02 5.26 5.25 6.02 4.85 5.58 8.01 8.00 8.33 8.50 7.68 8.53 8.06 5.79 At December 31, 2002, $200 million of securities sold under repurchase agreements with an interest rate of 6.26% maturing in 2005 were collateralized by mortgage-backed securities having a fair value of $214.6 million. These borrowings are callable quarterly by the counterparty. For certain equipment leases, TCF utilizes its lease rentals and underlying equipment as collateral to borrow from other financial insti- tutions at fixed rates on a non-recourse basis. In the event of a default by the customer in non-recourse financings, the other financial institution has a first lien on the underlying leased equipment with no further recourse against TCF. page 61 FHLB advances are collateralized by residential real estate loans, consumer loans and FHLB stock with an aggregate carrying value of $2.5 billion at December 31, 2002 and are generally fixed-rate advances. Included in FHLB advances at December 31, 2002 are $928.5 mil- lion of fixed-rate advances which are callable at par on certain dates. If called, the FHLB will provide replacement funding at the then-pre- vailing market interest rates. The probability that these advances will be called depends primarily on the level of related interest rates during the call period. At December 31, 2002, the contract rate exceeded the market rate on all of the fixed-rate callable advances. The stated maturity dates and the next call dates for the callable FHLB advances outstanding at December 31, 2002 were as follows (dollars in thousands): Year 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stated Maturity $ – 153,000 150,000 203,000 122,500 100,000 200,000 928,500 $ 14. Income Taxes Income tax expense consists of the following: (In thousands) Year ended December 31, 2002: Weighted- Average Rate Next Call Date –% $ 611,500 5.51 6.10 5.63 5.25 6.02 4.85 5.43 317,000 – – – – – $ 928,500 Weighted- Average Rate 5.69% 4.93 – – – – – 5.43 Current Deferred Total Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,829 $ 86,288 $118,117 1,810 4,834 6,644 Year ended December 31, 2001: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year ended December 31, 2000: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,639 $ 91,122 $124,761 $ $ $ $ 112,288 6,188 118,476 88,746 6,457 95,203 $ $ $ $ 3,707 329 4,036 18,862 2,528 21,390 $ $ $ $ 115,995 6,517 122,512 107,608 8,985 116,593 Income tax expense differs from the amounts computed by applying the federal income tax rate of 35% to income before income tax expense as a result of the following: (In thousands) Computed income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in income tax expense resulting from: Amortization of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State income tax, net of federal income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . Deductible stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax credits from investments in affordable housing . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2002 2001 2000 $125,192 $ 115,442 $ 105,993 – 4,319 (2,171) (489) (2,090) 2,553 4,236 (2,109) (331) 2,721 2,544 5,840 (1,969) (326) 4,511 $124,761 $ 122,512 $ 116,593 page 62 The significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows: (In thousands) Deferred tax assets: Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension and other compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: Lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subsidiary tax year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan fees and discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2002 2001 $ 28,811 $ 23,734 52,545 91,770 59,857 26,215 15,326 12,970 1,946 208,084 21,829 17,034 38,863 53,158 – 3,580 14,596 8,912 399 80,645 $(155,539) $ (41,782) 15. Stockholders’ Equity Restricted Retained Earnings Retained earnings at December 31, 2002 includes approximately $134.4 million for which no pro- announces an offer to acquire 15% or more of TCF’s common stock. When exercisable, each right will entitle the holder to buy one one- vision for federal income tax has been made. This amount represents hundredth of a share of a new series of junior participating preferred earnings appropriated to bad debt reserves and deducted for federal stock at a price of $100. In addition, upon the occurrence of certain income tax purposes and is generally not available for payment of cash events, holders of the rights will be entitled to purchase either TCF’s dividends or other distributions to shareholders. Payments or distri- common stock or shares in an “acquiring entity” at half of the market butions of these appropriated earnings could invoke a tax liability for value. TCF’s Board of Directors (the “Board”) is generally entitled to TCF based on the amount of earnings removed and current tax rates. redeem the rights at one cent per right at any time before they become Shareholder Rights Plan TCF’s preferred share purchase rights will become exercisable only if a person or group acquires or exercisable. The rights will expire on June 9, 2009, if not previously redeemed or exercised. Treasury Stock and Other Treasury stock and other consists of the following: (In thousands) Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares held in trust for deferred compensation plans, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unamortized deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to deferred compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2002 2001 $(608,007) $(463,394) (70,408) (22,361) – (71,652) (31,688) (9,783) $(700,776) $(576,517) page 63 TCF purchased 3,108,431, 3,670,107 and 3,243,800 shares of funds. At December 31, 2002 the assets in the plans totaled $174.3 its common stock during the years ended December 31, 2002, 2001 million and included $168.1 million invested in TCF common stock. and 2000, respectively. At December 31, 2002, TCF had 3.6 mil- The cost of TCF common stock held by TCF’s deferred compensa- lion shares remaining in its stock repurchase program authorized by tion plans is reported separately in a manner similar to treasury stock the Board of Directors. (that is, changes in fair value are not recognized) with a corre- During the 2002 second quarter, TCF’s Board of Directors sponding deferred compensation obligation reflected in additional decided to eliminate the loan feature from its officers’ and directors’ paid-in capital. deferred compensation plans and requested and received repayment in full of all outstanding loans totaling $9.8 million. The deferred compensation plans sold 166,665 shares of TCF common stock owned by plan participants to repay the outstanding loans to the plans. Shares Held in Trust for Deferred Compensation Plans 16. Regulatory Capital Requirements TCF is subject to various regulatory capital requirements admin- istered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly TCF has deferred compensation plans that allow eligible executives, additional discretionary, actions by the federal banking agencies that senior officers and certain other employees to defer payment of up could have a direct material effect on TCF’s financial statements. to 100% of their base salary and bonus as well as grants of restricted Also, in general, TCF National Bank may not declare or pay a div- stock. There are no company contributions to these plans, other than idend to TCF in excess of 100% of its net profits for that year com- payment of administrative expenses. The amounts deferred are bined with its retained net profits for the preceding two calendar years invested in TCF stock or other publicly traded stocks, bonds or mutual without prior approval of the Office of the Comptroller of the Currency (“OCC”). The following tables set forth TCF’s and TCF National Bank’s regulatory tier 1 leverage, tier 1 risk-based and total risk-based capital levels, and applicable percentages of adjusted assets, together with the excess over minimum capital requirements: (Dollars in thousands) Actual Minimum Capital Requirement Excess Amount Ratio Amount Ratio Amount Ratio As of December 31, 2002: Tier 1 leverage capital TCF Financial Corporation . . . . TCF National Bank . . . . . . . . . . $773,594 750,935 6.42% $361,435 3.00% $412,159 6.24 361,017 3.00 389,918 Tier 1 risk-based capital TCF Financial Corporation . . . . TCF National Bank . . . . . . . . . . Total risk-based capital TCF Financial Corporation . . . . TCF National Bank . . . . . . . . . . As of December 31, 2001: Tier 1 leverage capital 773,594 750,935 850,694 828,035 9.96 9.68 310,828 310,247 10.95 10.68 621,657 620,493 4.00 4.00 8.00 8.00 462,766 440,688 229,037 207,542 TCF Financial Corporation . . . . TCF National Bank . . . . . . . . . . $ 758,728 711,586 6.62% 6.26 $ 343,996 341,147 3.00% 3.00 $ 414,732 370,439 Tier 1 risk-based capital TCF Financial Corporation . . . . TCF National Bank . . . . . . . . . . Total risk-based capital TCF Financial Corporation . . . . TCF National Bank . . . . . . . . . . 758,728 711,586 833,821 786,305 10.24 9.72 11.26 10.74 296,260 292,781 592,520 585,562 4.00 4.00 8.00 8.00 462,468 418,805 241,301 200,743 3.42% 3.24 5.96 5.68 2.95 2.68 3.62% 3.26 6.24 5.72 3.26 2.74 At December 31, 2002, TCF and TCF National Bank exceeded their regulatory capital requirements and are considered “well- capitalized” under guidelines established by the FRB and the OCC pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991. page 64 17. Incentive Stock Program The TCF Financial 1995 Incentive Stock Program (the “Program”) was adopted to enable TCF to attract and retain key personnel. Under the Program, no more than 5% of the shares of TCF common stock outstanding on the date of initial shareholder approval may be awarded. At December 31, 2002, there were 2,791,116 shares reserved for issuance under the Program, including 303,877 shares related to outstanding stock options. At December 31, 2002, there were 1,145,000 shares of perfor- mance-based restricted stock that will vest only if certain earnings per share goals are achieved by 2008. Failure to achieve the goals will result in all or a portion of the shares being forfeited. Other restricted stock grants generally vest over periods from three to eight years. The weighted-average grant date fair value of restricted stock was $48.93, $39.53 and $24.60 per share in 2002, 2001 and 2000, respectively. Compensation expense for restricted stock is recorded over the vesting periods, and totaled $11.6 million, $11.1 million and $9.4 million in 2002, 2001 and 2000, respectively. TCF has also issued stock options under the Program that gen- erally become exercisable over a period of one to 10 years from the date of the grant and expire after 10 years. All outstanding stock options have a fixed exercise price equal to the market price of TCF common stock on the date of grant. The weighted-average grant date fair value of stock options granted in 2000 was $6.59. The following table reflects TCF’s restricted stock and stock option transactions under the Program since December 31, 1999: Outstanding at December 31, 1999 . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2000 . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2001 . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2002 . . . . . . . . . . . . . Exercisable at December 31, 2002 . . . . . . . . . . . . . . N.A. Not applicable. Restricted Stock Stock Options Exercise Price Shares Grant Date Fair Value Range Shares Range 1,121,135 $ 8.11-34.00 763,100 $ 2.63-33.28 1,300,080 22.10-43.70 1,000 21.81 – – (283,585) 2.63-28.88 (20,940) 20.88-34.00 (13,000) 23.56-32.19 (125,175) 2,275,100 262,340 – (18,850) (59,179) 2,459,411 61,400 – 8.11-28.59 16.56-43.70 27.98-48.20 – 27.98-48.20 16.56-40.75 20.88-48.20 41.42-52.78 – (23,245) 22.10-52.78 (862,250) 20.88-50.33 – – 467,515 3.46-33.28 – (86,832) (10,558) – – 3.46-32.19 23.56-32.19 – 370,125 5.33-33.28 – (51,798) (14,450) – – 5.33-33.28 23.56-32.19 – 1,635,316 22.10-52.78 303,877 6.88-33.28 N.A. N.A. 183,935 6.88-33.28 Weighted- Average $ 22.27 21.81 20.25 28.32 – 23.32 – 17.47 24.73 – 24.65 – 19.72 25.91 – 25.43 24.36 The following table summarizes information about stock options outstanding at December 31, 2002: Options Outstanding Options Exercisable Exercise Price Range $6.88 to $20.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . $20.01 to $25.00 . . . . . . . . . . . . . . . . . . . . . . . . . . $25.01 to $30.00 . . . . . . . . . . . . . . . . . . . . . . . . . . $30.01 to $33.28 . . . . . . . . . . . . . . . . . . . . . . . . . . Total options . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted- Average Remaining Contractual Life in Years 2.4 6.0 6.4 5.2 5.6 Weighted- Average Exercise Price $ 9.91 23.61 28.94 32.26 24.36 Shares 23,298 91,787 42,050 26,800 183,935 Weighted- Average Exercise Price $ 9.91 23.59 28.94 31.31 25.43 Shares 23,298 147,029 64,250 69,300 303,877 page 65 18. Employee Benefit Plans Pension Plan The TCF Cash Balance Pension Plan (the “Pension Plan”) is a qualified defined benefit plan covering all “regular stated Postretirement Plan TCF provides health care benefits for eli- gible retired employees (the “Postretirement Plan”). Effective salary” employees and certain part-time employees who are at least January 1, 2000, TCF modified the Postretirement Plan by elim- 21 years old and have completed a year of eligibility service with inating the Company subsidy for employees not yet eligible for ben- TCF. TCF makes a monthly allocation to the participant’s account efits under the Postretirement Plan. The plan provisions for based on a percentage of the participant’s compensation. The per- full-time and retired employees then eligible for these benefits were centage is based on the sum of the participant’s age and years of not changed. The Postretirement Plan is an unfunded plan. employment with TCF. Participants are fully vested after five years of qualifying service. The following table sets forth the status of the Pension Plan and the Postretirement Plan at the dates indicated: Pension Plan Postretirement Plan Year Ended December 31, Year Ended December 31, (In thousands) Benefit obligation: 2002 2001 2002 Accrued participant balances – vested . . . . . . . . . . . . . . . . . . . . . . Accrued participant balances – unvested . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Present value of future service and benefits . . . . . . . . . . . . . . . . . . Total benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,695 $ 28,068 4,123 37,818 4,506 3,461 31,529 4,524 $ 42,324 $ 36,053 N.A. N.A. N.A. N.A. N.A. 2001 N.A. N.A. N.A. N.A. N.A. Change in benefit obligation: Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . Service cost – benefits earned during the year . . . . . . . . . . . . . . . . Interest cost on benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . Change in fair value of plan assets: Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . Funded status of plans: Funded status at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized transition obligation . . . . . . . . . . . . . . . . . . . . . . . Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid (accrued) benefit expense at end of year . . . . . . . . . . . N.A. Not applicable. $ 36,053 $ 32,544 $ 9,578 $ 7,609 3,547 2,857 1,736 (1,869) 42,324 59,604 (8,249) (1,869) – 49,486 7,162 – (813) 19,733 2,969 2,480 323 (2,263) 36,053 87,064 (25,197) (2,263) – 59,604 23,551 – (1,869) 1,678 48 685 3,012 (1,486) 11,837 – – (1,486) 1,486 – (11,837) 2,093 – 4,362 49 547 2,182 (809) 9,578 – – (809) 809 – (9,578) 2,304 – 1,388 $ 26,082 $ 23,360 $ (5,382) $ (5,886) page 66 Net periodic benefit cost (credit) included in compensation and employee benefits expense consists of the following: Pension Plan Year Ended December 31, Postretirement Plan Year Ended December 31, (In thousands) Service cost . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . Amortization of transition obligation Amortization of prior service cost . . . Recognized actuarial gain . . . . . . . . . Net periodic benefit cost (credit) . . 2002 $ 3,547 2,857 (7,683) – (1,056) (387) $(2,722) 2001 $ 2,969 2,480 (7,156) – (1,057) (1,810) $(4,574) 2000 $ 3,248 2,431 (6,207) – (1,057) (915) $(2,500) 2002 $ 48 685 – 210 – 38 $ 2001 49 547 – 209 – (3) $ 2000 56 523 – 209 – (22) $981 $ 802 $ 766 The discount rate and rate of increase in future compensation used to measure the benefit obligation and the expected long-term rate of return on plan assets were as follows: Pension Plan Year Ended December 31, Postretirement Plan Year Ended December 31, Discount rate . . . . . . . . . . . . . . . . . . . . . Rate of increase in future compensation . . Expected long-term rate of return 2002 6.50% 4.50 2001 7.50% 4.50 2000 7.50% 5.00 2002 6.50% N.A. on plan assets . . . . . . . . . . . . . . . . . . 8.50 10.00 10.00 N.A. N.A. Not applicable. 2001 7.50% N.A. N.A. 2000 7.50% N.A. N.A. The Pension Plan’s assets consist primarily of listed stocks and bonds. At December 31, 2002 and 2001, the Pension Plan’s assets included 28,400 and 246,000 shares of TCF common stock with a market value of $1.2 million and $11.8 million, respectively. For active participants of the Postretirement Plan, a 12% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2003. This rate is assumed to decrease gradually to 5% by 2009 and remain at that level thereafter. Assumed health care cost trend rates have an effect on the amounts reported for the Postretirement Plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects: (In thousands) 1-Percentage- Point Increase 1-Percentage- Point Decrease Effect on total of service and interest cost components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect on postretirement benefits obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16 556 $ 15 503 Employee Stock Purchase Plan The TCF Employees Stock Purchase Plan generally allows participants to make contributions by invested in TCF stock. Employees age 50 and over may invest all or a portion of their account balance in various mutual funds. The salary deduction of up to 50% of their salary on a tax-deferred basis. Company’s matching contributions are expensed when made. At TCF matches the contributions of all employees at the rate of 50 December 31, 2002, the assets in the plan totaled $183.4 million cents per dollar, with a maximum employer contribution of 3% of and included $179.3 million invested in TCF common stock. the employee’s salary. Employee contributions vest immediately while Additionally, as of December 31, 2002, $69.7 million of plan assets the Company’s matching contributions are subject to a graduated were eligible for diversification under plan provisions. TCF’s con- vesting schedule based on an employee’s years of vesting service over tributions to the plan were $3.6 million, $3 million and $2.7 mil- five years. Employee contributions and matching contributions are lion in 2002, 2001 and 2000, respectively. page 67 19. Derivative Instruments and Hedging Activities All derivative instruments as defined, including derivatives embedded in other financial instruments or contracts, are recognized as either assets or liabilities in the Consolidated Statements of Financial Condition at fair value. Changes in the fair value of a derivative are recorded in the Consolidated Statements of Income. A derivative During 2002 and 2001, the ineffectiveness of the fair value hedges was recorded in gains on sales of loans and was not material. Forward mortgage loan sales commitments totaled $511 million and $490.9 million at December 31, 2002 and 2001, respectively. 20. Financial Instruments with Off-Balance-Sheet Risk may be designated as a hedge of an exposure to changes in fair value TCF is a party to financial instruments with off-balance-sheet risk, of an asset, liability or firm commitment or as a hedge of cash flows primarily to meet the financing needs of its customers. These finan- of forecasted transactions. The accounting for derivatives that are cial instruments, which are issued or held by TCF for purposes other used as hedges is dependent on the type of hedge and requires that a than trading, involve elements of credit and interest-rate risk in excess hedge be highly effective in offsetting changes in the hedged risk. of the amount recognized in the Consolidated Statements of Financial TCF’s pipeline of locked residential mortgage loan commitments Condition. are considered derivatives and are recorded at fair value, with the TCF’s exposure to credit loss in the event of non-performance changes in fair value recognized in gains on sales of loans under mort- by the counterparty to the financial instrument for commitments gage banking revenue in the Consolidated Statements of Income. to extend credit and standby letters of credit is represented by the TCF economically hedges its risk of changes in the fair value of locked contractual amount of the commitments. TCF uses the same credit residential mortgage loan commitments due to changes in interest policies in making these commitments as it does for on-balance-sheet rates through the use of forward sales contracts. Forward sales con- instruments. TCF evaluates each customer’s creditworthiness on a tracts require TCF to deliver qualifying residential mortgage loans case-by-case basis. The amount of collateral obtained is based on or pools of loans at a specified future date at a specified price or yield. management’s credit evaluation of the customer. Such forward sales contracts hedging the pipeline of locked residen- tial mortgage loan commitments are derivatives and are recorded at fair value, with changes in fair value recognized in gains on sales of loans. TCF also utilizes forward sales contracts to hedge its risk of changes in the fair value of its residential loans held for sale. The forward sales contracts hedging the residential loans held for sale are recorded at fair value, with changes in fair value recognized in gains on sales of loans as is the offsetting change in the fair value of hedged loans. Because the fair value of the residential loans held for sale are hedged with forward sales contracts of the same loan types, or substantially the same loan types, the hedges are highly effective at managing the risk of changing fair values of such loans. Any differ- ences between the changes in fair value of the hedged residential loans held for sale and in the fair value of the forward sales contracts (defined as ineffectiveness under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”) are not expected to be material due to the nature of the hedging instruments and are required to be recorded in the Consolidated Statements of Income. Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At December 31, 2002, the unused portion of these commitments totaled $1.8 billion and consisted of consumer com- mitments of $1.2 billion, commercial commitments of $576.6 mil- lion, leasing and equipment financing commitments of $67 million and other commitments of $38.4 million. At December 31, 2001, the unused portion of these commitments totaled $1.6 billion and consisted of consumer commitments of $955.7 million, commer- cial commitments of $496.4 million, leasing and equipment financing commitments of $71.6 million and other commitments of $30.6 million. Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral predominantly consists of residential and commercial real estate and personal property. page 68 Standby Letters of Credit Standby letters of credit are condi- tional commitments issued by TCF guaranteeing the performance Securities available for sale are carried at fair value, which is based on quoted market prices. Certain financial instruments, including lease of a customer to a third party. The standby letters of credit expire in financings and discounted lease rentals, and all non-financial instru- various years through the year 2007 and totaled $20.9 million and ments are excluded from fair value of financial instrument disclosure $12.7 million at December 31, 2002 and 2001, respectively. Collateral requirements. held primarily consists of commercial real estate mortgages. Since The following methods and assumptions are used by the Company the conditions under which TCF is required to fund standby letters in estimating fair value disclosures for its remaining financial instru- of credit may not materialize, the cash requirements are expected to ments, all of which are issued or held for purposes other than trading. be less than the total outstanding commitments. Loans Serviced with Recourse Loans serviced with recourse consist of Veterans Administration (“VA”) loans and loans sold with Loans The fair value of residential loans is estimated based on quoted market prices. For certain variable-rate loans that reprice frequently and that have experienced no significant change in credit risk, fair val- recourse to the Federal National Mortgage Association (“FNMA”). ues are based on carrying values. The fair values of other loans are As is typical of a servicer of VA loans, TCF must cover any principal estimated by discounting contractual cash flows adjusted for prepay- loss in excess of the VA’s guarantee if the VA elects its “no-bid” option ment estimates, using interest rates currently being offered for loans upon the foreclosure of a loan. The liability relating to this VA “no- with similar terms to borrowers with similar credit risk characteristics. bid” exposure on VA loans serviced with partial recourse was $100,000 at December 31, 2002 and 2001 and was recorded in other liabilities. No claims have been made under the “no-bid” option during 2002 or 2001. Loans sold with recourse to FNMA represent residential real estate loans sold to FNMA prior to 1982. TCF no longer sells loans on a recourse basis. The contingent guarantee related to both types of recourse remains in effect for the duration of the loans and thus expires in various years through the year 2032. All loans sold with recourse are collateralized by residential real estate. 21. Fair Values of Financial Instruments TCF is required to disclose the estimated fair value of financial instru- ments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. Fair value estimates are subjective in nature, involving uncertainties and matters of signifi- cant judgment, and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The carrying amounts of cash and due from banks, investments and accrued interest payable and receivable approximate their fair values due to the short period of time until their expected realization. Deposits The fair value of checking, savings and money market deposits is deemed equal to the amount payable on demand. The fair value of certificates is estimated based on discounted cash flow analyses using interest rates offered by TCF for certificates with similar remain- ing maturities. The intangible value of long-term relationships with depositors is not taken into account in the fair values disclosed in the table below. Borrowings The carrying amounts of short-term borrowings approximate their fair values. The fair values of TCF’s long-term borrowings are estimated based on quoted market prices or discounted cash flow analyses using interest rates for borrowings of similar remaining maturities. Financial Instruments with Off-Balance-Sheet Risk The fair values of TCF’s commitments to extend credit and standby letters of credit are estimated using fees currently charged to enter into similar agreements. For fixed-rate loan commitments and standby letters of credit issued in conjunction with fixed-rate loan agreements, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of loans serviced with recourse approximates the carrying value recorded in other liabilities. page 69 As discussed above, the carrying amounts of certain of the Company’s financial instruments approximate their fair value. The carrying amounts and fair values of the Company’s remaining financial instruments are set forth in the following table: (In thousands) Financial instrument assets: Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forward mortgage loan sales commitments(1) . . . . . . . . . . . . . . . . . Loans: At December 31, 2002 2001 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value $ 476,475 $ 480,409 $ 451,609 $ 454,536 (7,454) (7,454) 7,352 7,352 Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment finance loans . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan losses (2) . . . . . . . . . . . . . . . . . . . . . . . . . . 3,005,882 3,068,900 1,835,788 1,883,183 440,074 289,558 438,106 299,035 1,800,344 1,868,132 (68,143) – 2,509,333 1,622,461 422,381 271,398 2,733,290 (66,876) 2,548,617 1,644,263 417,896 275,148 2,795,894 – $ 7,772,524 $ 8,030,311 $ 7,950,948 $ 8,143,706 Financial instrument liabilities: Checking, savings and money market deposits . . . . . . . . . . . . . . . Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,791,233 $ 5,791,233 $ 4,778,714 $ 4,778,714 1,918,755 1,948,947 842,051 842,051 2,268,244 2,443,653 2,320,244 719,859 2,303,166 2,357,872 719,859 2,410,329 $10,820,283 $11,025,884 $10,121,983 $10,266,774 Financial instruments with off-balance-sheet risk:(3) Commitments to extend credit(4) . . . . . . . . . . . . . . . . . . . . . . . . . Standby letters of credit(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans serviced with recourse(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,569 $ 24,569 $ 13,767 $ 13,767 (5,382) (100) (5,382) (100) (2,409) (100) (2,409) (100) $ 19,087 $ 19,087 $ 11,258 $ 11,258 (1) Carrying amounts are included in accrued expenses and other liabilities. (2) Excludes the allowance for lease losses. (3) Positive amounts represent assets, negative amounts represent liabilities. (4) Carrying amounts are included in other assets. page 70 22. Net Income and Goodwill Amortization On January 1, 2002, TCF adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. The following table reconciles prior period net income and earnings per share to an adjusted basis, which excludes goodwill amortization, for comparison purposes: (In thousands, except per-share data) Net Income Year Ended December 31, 2002 2001 2000 Reported net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add back: Amortization of goodwill, net of applicable income taxes . . . . . . . . . . . Adjusted net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic Earnings Per Common Share Reported earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of goodwill, net of applicable income taxes . . . . . . . . . . . . . . . . . . . Adjusted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted Earnings Per Common Share Reported earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of goodwill, net of applicable income taxes . . . . . . . . . . . . . . . . . . . Adjusted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ $ $ 232,931 – 232,931 3.17 – 3.17 3.15 – 3.15 $ $ $ $ $ $ 207,322 7,600 214,922 2.73 .10 2.83 2.70 .10 2.80 $ $ $ $ $ $ 186,245 7,543 193,788 2.37 .09 2.46 2.35 .09 2.44 23. Earnings per Common Share The computation of basic and diluted earnings per share is presented in the following table: (Dollars in thousands, except per-share data) Basic Earnings Per Common Share Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unvested restricted stock grants (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average common shares outstanding Year Ended December 31, 2002 2001 2000 $ 232,931 $ 207,322 $ 186,245 75,240,321 (1,644,879) 78,233,471 (2,408,454) 80,881,499 (2,232,734) for basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,595,442 75,825,017 78,648,765 $ 3.17 $ 2.73 $ 2.37 Diluted Earnings Per Common Share Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average number of common shares outstanding adjusted for effect of dilutive securities: Weighted average common shares outstanding used $ 232,931 $ 207,322 $ 186,245 in basic earnings per common share calculation . . . . . . . . . . . . . . . . . . . . . 73,595,442 75,825,017 78,648,765 Net dilutive effect of: Stock option plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock plans (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124,222 221,280 149,711 868,209 113,338 626,572 73,940,944 76,842,937 79,388,675 Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.15 $ 2.70 $ 2.35 (1) At December 31, 2002, December 31, 2001 and December 31, 2000, there were 1,145,000, 1,145,000 and 1,135,000 shares, respectively, of performance-based restricted stock granted to certain executive officers which will vest only if certain earnings per share goals are achieved by 2008. Failure to achieve the goals will result in all or a portion of the shares being forfeited. In accordance with SFAS No. 128, “Earnings per Share,” these shares have been deducted from weighted average shares outstanding used for the computation of basic and diluted earnings per common share, as all necessary conditions for inclusion have not been satisfied. The remaining unvested restricted stock grants vest over specified time periods, and are included in the computation of diluted earnings per common share in accordance with the treasury stock method prescribed in SFAS No. 128. page 71 24. Comprehensive Income Comprehensive income is the total of net income and other comprehensive income (loss), which for TCF is comprised entirely of unrealized gains and losses on securities available for sale. The following table summarizes the components of comprehensive income: (In thousands) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income before tax: Unrealized holding gains arising during the period on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification adjustment for gains included in net income . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other comprehensive income, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2002 2001 2000 $232,931 $207,322 $186,245 74,044 (11,536) 22,635 39,873 $272,804 26,295 (863) 9,335 16,097 $223,419 59,726 – 22,212 37,514 $223,759 25. Other Expense Other expense consists of the following: (In thousands) Deposit account losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Postage and courier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Telecommunication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TCF Express Card interchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ATM interchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal deposit insurance and OCC assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing liquidation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit base intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2002 2001 2000 $ 19,750 $ 19,415 $ 19,479 13,579 12,738 10,047 9,848 9,374 2,761 2,394 1,671 13,150 11,541 6,901 9,881 9,723 2,757 1,440 1,939 55,395 $137,557 50,073 $126,820 11,442 13,345 4,882 9,216 11,735 2,837 313 2,295 40,289 $115,833 26. Business Segments Banking, leasing and equipment finance, and mortgage banking have been identified as reportable operating segments. Banking includes the following operating units that provide financial services to cus- tomers: deposits and investment products, commercial lending, consumer lending, residential lending and treasury services. Management of TCF’s banking business segment is organized by state. The separate state operations have been aggregated for purposes of segment disclosures. Leasing and equipment finance provides a broad range of comprehensive leasing and equipment finance products addressing the financing needs of diverse companies. Mortgage bank- ing activities include the origination and purchase of residential mortgage loans primarily for sale to third parties, generally with servicing retained. In addition, TCF operates a bank holding com- pany (“parent company”) and has corporate functions that provide data processing, bank operations and other professional services to the operating segments. TCF evaluates performance and allocates resources based on the business segments’ net income. The business segments follow generally accepted accounting principles as described in the Summary of Significant Accounting Policies. TCF generally accounts for intersegment sales and transfers at cost. page 72 The following table sets forth certain information about the reported profit or loss and assets of each of TCF’s reportable segments, including a reconciliation of TCF’s consolidated totals. The results of TCF’s parent company and corporate functions comprise the “other” category in the table below. Leasing and Equipment Finance Banking Mortgage Banking Eliminations and Reclassifications Other Consolidated (In thousands) At or For the Year Ended December 31, 2002(1): Revenues from external customers: Interest income . . . . . . . . . . . . . Non-interest income . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . Provision for credit losses . . . . . . . . Non-interest income . . . . . . . . . . . . Other non-interest expense . . . . . . . Income tax expense . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . At or For the Year Ended December 31, 2001(1): Revenues from external customers: Interest income . . . . . . . . . . . . . Non-interest income . . . . . . . . . Total . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . Provision for credit losses . . . . . . . . Non-interest income . . . . . . . . . . . . Amortization of goodwill . . . . . . . . . Other non-interest expense . . . . . . . Income tax expense . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . At or For the Year Ended December 31, 2000(1): Revenues from external customers: Interest income . . . . . . . . . . . . . Non-interest income . . . . . . . . . Total . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . Non-interest income . . . . . . . . . . . . Amortization of goodwill . . . . . . . . Other non-interest expense . . . . . . . Income tax expense . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . 15,112 $ 1 $ 1,259 1,260 $ – – – $ 733,363 418,842 $ 1,152,205 $ $ $ 632,803 $ 85,447 $ $ 358,976 991,779 435,883 12,778 358,976 470,820 110,157 51,628 137,075 41,374 9,228 51,806 40,983 15,497 $ 201,104 $ 27,472 $11,806,072 $ 1,100,744 $ $ $ $ $ $ $ $ $ $ 722,722 313,501 1,036,223 423,043 7,359 313,501 7,350 432,298 109,063 180,474 10,982,411 $ $ $ $ $ 751,103 $ 287,219 1,038,322 397,887 9,594 287,219 7,310 401,217 102,722 164,263 10,800,942 $ $ $ $ 89,131 45,730 134,861 39,429 13,519 45,730 427 38,369 12,410 20,434 988,387 69,960 38,451 108,411 30,405 5,178 38,451 396 25,813 14,420 23,049 876,540 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 6,979 22,091 20,676 – 8,316 24,796 1,511 2,685 447,840 14,334 12,042 26,376 14,919 – 15,439 – 20,893 3,577 5,888 374,263 5,192 10,519 15,711 5,609 – 15,711 – 19,432 717 1,171 130,477 $ $ $ $ $ $ $ $ $ $ $ $ $ $ (45) $ 1,337 $ 499,225 – 95,272 95,961 (2,404) 1,670 $ – (95,528) (94,191) – – 22,006 418,842 538,369 124,761 $ 232,931 3,090 $(1,155,677) $12,202,069 422 213 635 433 – 96,829 – 99,274 (2,538) 526 102,132 $ $ $ $ $ – – – 3,398 – (100,013) – (96,615) – – (1,088,478) 426 $ 87 513 (556) – 90,640 – 93,588 (1,266) (2,238) 112,309 $ $ $ $ – – – 5,191 – (95,745) – (90,554) – – (722,806) $ $ $ $ $ $ $ $ $ $ 826,609 371,486 1,198,095 481,222 20,878 371,486 7,777 494,219 122,512 207,322 11,358,715 826,681 336,276 1,162,957 438,536 14,772 336,276 7,706 449,496 116,593 186,245 11,197,462 (1) Results for 2001 reflect changes in methodologies of certain allocations. Leasing and equipment finance results for 2001 included an increase of $1.5 million, after-tax, in inter- company expense compared with 2000. The mortgage banking results for 2001 included a reduction of $1.2 million after-tax, in intercompany expense compared with 2000. The net offsets to these changes in intercompany expenses were included in banking results. There were no significant methodology changes for allocations in 2002 from 2001. page 73 27. Parent Company Financial Information TCF Financial Corporation’s (parent company only) condensed statements of financial condition as of December 31, 2002 and 2001, and the condensed statements of income and cash flows for the years ended December 31, 2002, 2001 and 2000 are as follows: Condensed Statements of Financial Condition (In thousands) Assets: At December 31, 2002 2001 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends receivable from bank subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 352 1,796 954,361 366 10,308 34,829 $ 37 2,657 880,200 388 16,100 32,221 Liabilities and Stockholders’ Equity: Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,002,012 $ 931,603 $ 13,500 $ 2,000 11,492 24,992 977,020 12,570 14,570 917,033 $1,002,012 $ 931,603 Condensed Statements of Income (In thousands) Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends received from consolidated bank subsidiaries . . . . . . . . . . . . . . . . . . . Other non-interest income: Affiliate service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest expense: Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax benefit and equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, $ $ 2002 323 508 (185) 2001 833 376 457 2000 $ 1,192 1,726 (534) 206,566 206,970 212,327 13,755 (322) 13,433 12,965 847 1,348 15,160 204,654 1,852 206,506 26,425 14,292 95 14,387 13,785 784 1,690 16,259 205,555 496 206,051 1,271 90,553 87 90,640 54,506 16,133 22,970 93,609 208,824 1,435 210,259 (24,014) $ 232,931 $ 207,322 $ 186,245 page 74 Condensed Statements of Cash Flows (In thousands) Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from investing activities: Net (increase) decrease in interest-bearing deposits with banks . . . . . . . . . . . . . . . Investments in subsidiaries, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan to deferred compensation plans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided (used) by investing activities . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities: Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2002 2001 2000 $ 232,931 $ 207,322 $ 186,245 (26,425) 5,323 (21,102) 211,829 861 – 9,783 (112) – 10,532 (86,430) (148,030) 11,500 914 (1,271) 5,381 4,110 211,432 21,339 (6,000) (4,646) (273) – 10,420 (77,473) (148,043) 2,000 1,510 24,014 13,381 37,395 223,640 (21,357) – (416) (4,300) 525 (25,548) (66,101) (73,824) (64,357) 5,708 (222,046) (222,006) (198,574) 315 37 352 $ (154) 191 37 $ (482) 673 191 $ Effective January 1, 2001, certain company-wide functions previously included in the parent company transferred, with related assets and liabilities, to TCF National Bank. 28. Litigation and Contingent Liabilities From time to time, TCF is a party to legal proceedings arising out of its lending, leasing, deposit operations or other activities. TCF engages in foreclosure proceedings and other collection actions as part of its loan and leasing collection activities. From time to time, borrowers and other customers have also brought actions against TCF, in some cases claiming substantial amounts of damages. Some financial services companies have been subjected to significant exposure in connection with litigation, including class action litigation and puni- tive damage claims, and it is possible that the Company could be sub- jected to such a claim in an amount which could be material. Based upon a review with its legal counsel, management believes that the ultimate disposition of pending litigation will not have a material effect on TCF’s financial condition. page 75 Independent Auditors’ Report The Board of Directors and Stockholders of TCF Financial Corporation: We have audited the accompanying consolidated statements of finan- cial condition of TCF Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the related consolidated state- ments of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These con- solidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assur- ance about whether the financial statements are free of material mis- statement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TCF Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, as of January 1, 2000 and Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002. Minneapolis, Minnesota January 15, 2003 page 76 Other Financial Data TCF Financial Corporation and Subsidiaries _ 2002 Annual Report Selected Quarterly Financial Data (Unaudited) (Dollars in thousands, except per-share data) Selected Financial Condition Data: Securities available for sale . . . . . Residential real estate loans . . . . . Subtotal . . . . . . . . . . . . . . . . Other loans and leases . . . . . . . . Total assets . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . Borrowings . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . Selected Operations Data: Interest income . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . Net interest income . . . . . . . . Provision for credit losses . . . . . . Net interest income after provision for credit losses . . Non-interest income: Fees and other revenue . . . . . . Gains on sales of securities available for sale . . . . . . . . Gains on sales of branches . . . Total . . . . . . . . . . . . . . Non-interest expense: Amortization of goodwill . . . . Other non-interest expense . . Total . . . . . . . . . . . . . . Income before income tax expense . . . . . . . . . . . . Income tax expense . . . . . . . . . . . Net income . . . . . . . . . . . . . . Per common share: At Dec. 31, 2002 At Sept. 30, 2002 At June 30, 2002 At March 31, 2002 At Dec. 31, 2001 At Sept. 30, 2001 At June 30, 2001 At March 31, 2001 $ 2,426,794 $ 2,252,786 $ 1,965,664 $ 1,556,798 $ 1,584,661 $ 1,794,136 $ 1,843,871 $ 1,928,338 1,800,344 1,975,481 2,249,365 2,458,431 2,733,290 3,122,970 3,251,813 3,450,311 4,227,138 4,228,267 4,215,029 4,015,229 4,317,951 4,917,106 5,095,684 5,378,649 6,320,784 6,106,818 5,879,607 5,693,330 5,510,912 5,334,359 5,181,260 5,010,256 12,202,069 11,970,331 11,527,351 11,170,583 11,358,715 11,723,353 11,628,663 11,845,124 7,709,988 7,660,497 7,556,626 7,293,972 7,098,958 7,057,945 6,916,145 7,030,818 3,110,295 2,955,295 2,702,133 2,610,712 3,023,025 3,459,286 3,571,501 3,675,428 977,020 950,290 920,088 921,847 917,033 898,486 890,369 895,066 Dec. 31, 2002 Sept. 30, 2002 June 30, 2002 March 31, 2002 Dec. 31, 2001 Sept. 30, 2001 June 30, 2001 March 31, 2001 Three Months Ended $ 182,352 $ 182,406 $ 184,234 $ 184,371 $ 195,777 $ 205,545 $ 212,726 $ 212,561 55,729 126,623 4,067 58,637 123,769 4,071 59,925 124,309 4,714 59,847 124,524 9,154 70,031 125,746 6,955 83,138 122,407 6,076 93,448 98,770 119,278 113,791 5,422 2,425 122,556 119,698 119,595 115,370 118,791 116,331 113,856 111,366 106,057 102,575 101,788 94,924 95,621 95,295 95,650 80,741 2,830 – 2,662 – – – 6,044 1,962 863 – – – – – 108,887 105,237 101,788 102,930 96,484 95,295 95,650 – 140,963 140,963 90,480 30,704 – 134,223 134,223 90,712 31,845 – 131,886 131,886 89,497 31,526 – 131,297 131,297 87,003 30,686 1,944 129,484 131,428 83,847 29,652 1,944 124,715 126,659 84,967 32,077 1,945 124,008 125,953 83,553 31,539 – 3,316 84,057 1,944 116,012 117,956 77,467 29,244 $ 59,776 $ 58,867 $ 57,971 $ 56,317 $ 54,195 $ 52,890 $ 52,014 $ 48,223 Basic earnings . . . . . . . . . . . . Diluted earnings . . . . . . . . . . Dividends declared . . . . . . . . . $ $ $ .83 $ .82 $ .81 .80 .2875 $ .2875 $ $ $ .78 .78 .2875 $ $ $ .75 .75 .2875 $ $ $ .73 .72 .25 $ $ $ .70 .69 .25 $ $ $ .68 .67 .25 $ $ $ .62 .62 .25 Financial Ratios:(1) Return on average assets . . . . . . . Return on average realized common equity . . . . . . . . . . . Return on average common equity Average total equity to average assets . . . . . . . . . . . Average tangible equity to average assets . . . . . . . . . . . Net interest margin . . . . . . . . . . . (1) Annualized. 1.97% 2.03% 2.04% 2.01% 1.88% 1.81% 1.78% 1.71% 26.22 25.17 7.82 6.56 4.59 26.19 25.53 7.96 6.64 4.68 25.75 25.36 8.03 6.68 4.76 24.86 24.68 8.15 6.77 4.83 24.44 23.92 7.85 6.50 4.74 23.68 23.48 7.72 6.36 4.55 23.22 23.37 7.61 6.23 4.40 21.47 21.54 7.93 6.48 4.35 page 77 Senior Officers T C F F I N A N C I A L C O R P O R A T I O N Chairman of the Board and Chief Executive Officer W I L L I A M A . C O O P E R President and Chief Operating Officer LY N N A . N A G O R S K E Vice Chairman, General Counsel and Secretary G R E G O RY J . P U L L E S Executive Vice President, Chief Financial Officer and Treasurer N E I L W . B R O W N Executive Vice President and Chief Information Officer E A R L D . S T R A T T O N Executive Vice Presidents C R A I G R . D A H L R O N A L D J . P A L M E R M A RY E . S A R L E S Senior Vice Presidents J A M E S S . B R O U C E K T I M O T H Y G . D OY L E D A N I E L P. E N G E L WA L L A C E A . F U D O L D A N T O I N E T T E M . J E L I N E K J A S O N E . KO R S TA N G E M A R K R . L U N D N O R M A N G . M O R R I S S O N B A R B A R A E . S H A W D AV I D M . S TA U T Z T C F N A T I O N A L B A N K C O R P O R A T E Chief Executive Officer and President B A R RY N . W I N S L O W Executive Vice President P A U L B . B R A W N E R Senior Vice Presidents P H I L I P M . B R O O M D A N I E L R . E D WA R D S H E L L E Y A . F I T Z M A U R I C E G R E G G R . G O U D Y J O S E P H T. G R E E N D O U G L A S S B . H I A T T C H A R L E S P. H O F F M A N , J R . K A T H E R I N E D . J O H N S O N S C O T T W . J O H N S O N G L O R I A J . K A R S K Y J A M E S C . L A P L A N T E J A M E S M . M A T H E I S Senior Vice Presidents R O B E R T J . B R U E G G E M A N M A U R E E N F. C I P R I A N O D AV I D R . C R E E L P E T E R R . D A U G H E R T Y J E F F R E Y T. D O E R I N G D AV I D B . M C C U L L O U G H G I N A L . G A L A N T E A N T O N J . N E G R I N I P A T R I C I A L . Q UA A L R O G E R W . S TA R R L E O N A R D D . S T E E L E D I A N E O . S T O C K M A N R . E L I Z A B E T H T O P O L U K T C F N A T I O N A L B A N K M I N N E S O T A President M A R K L . J E T E R Executive Vice Presidents S A R A L . E V E R S T I M O T H Y B . M E Y E R J O H N F. S C H R O E D E R R O B E R T H . S C O T T Senior Vice Presidents R O N A L D L . B R I T Z S C O T T A . F E D I E M A R K L . F O S T E R C L A I R E M . G R A U P M A N N K A T H E R I N E L . L A N D O N K . R O B E R T L E A E R I N E . R A D E N D A N I E L M . R E Y E L T S S T E V E N E . RY K K E L I K U R T A . S C H R U P P J A M E S T. S TA H L M A N D A N I E L G . T H O R B E R G T C F N A T I O N A L B A N K I L L I N O I S / W I S C O N S I N / I N D I A N A President T I M O T H Y P. B A I L E Y Chief Operating Officer, Retail M I C H A E L B . J O H N S T O N E Executive Vice Presidents M A R K B . D I L L O N M I C H A E L R . K L E M Z M A R K W . R O H D E C . H U N T E R W E S T B R O O K T C F S E C U R I T I E S , I N C . President B R I A N J . H U R D Chief Operating Officer F R A N K A . M C C A R T H Y T C F M O R T G A G E C O R P O R A T I O N President J O S E P H W . D OY L E Executive Vice President D O U G L A S L . D I N N D O R F Senior Vice Presidents P A U L A T. H U G H E S A R D I S M . KO L A R L U C Y L . R A U E N P A T R I C I A A . R OY C R A F T TA M A R A J . S A LV O C A R O L B . S C H I R M E R S T C F L E A S I N G , I N C . President C R A I G R . D A H L Executive Vice Presidents W I L L I A M S . H E N A K M A R K D . N YQ U I S T Senior Vice Presidents P E T E R C . D A R I N WA L T E R E . D Z I E L S K Y B R A D L E Y C . G U N S TA D T H O M A S F. J A S P E R C H A R L E S A . S E L L , J R . M A R K W . G A U L T J A M E S L . KO O N R U S S E L L P. M C M I N N T O D D A . P A L M E R M I C H A E L R O I D T S T E P H E N W . S I N N E R S U Z A N N E M . S T U E B E D E N N I S J . V E N A D AV I D J . V E U R I N K T C F N A T I O N A L B A N K M I C H I G A N President T H O M A S J . WA G N E R Executive Vice Presidents L U I S J . C A M P O S R O B E R T T. G R I F F O R E C H A R L E S L . H A Y N E T E R R E N C E K . M C H U G H Senior Vice Presidents J E R RY E . C O V I A K L A R RY M . C Z E K A J D E N N I S J . G I S T I N G E R N A TA L I E A . G L A S S D O N A L D J . H A W K I N S J O H N J . O W E N S D AV I D F. W I B L E T C F N A T I O N A L B A N K C O L O R A D O W I N T H R O P R E S O U R C E S C O R P O R A T I O N Chairman C R A I G R . D A H L President R O N A L D J . P A L M E R Senior Vice Presidents G A RY W . A N D E R S O N P A U L L . G E N D L E R J O H N G . M C M A N I G A L D E B O R A H L . M O G E N S E N R I C H A R D J . P I E P E R D E A N J . S T I N C H F I E L D President WA Y N E A . M A R T Y Senior Vice Presidents M A T T H E W G . L A M B E D WA R D F. T I E R N E Y T C F F I N A N C I A L I N S U R A N C E A G E N C Y, I N C . President M A RY E . S A R L E S Senior Vice Presidents D A M O N J . B R I N S O N W I L L I A M A . M I L L E R T I M O T H Y J . O ’ K E E F E page 78 Board of Directors Offices 5 W I L L I A M A . C O O P E R Chairman of the Board and Chief Executive Officer 2,3,4 W I L L I A M F. B I E B E R Chairman, Acrometal Management Corporation 2,3,4 R O D N E Y P. B U R W E L L Chairman, Xerxes Corporation T H O M A S A . C U S I C K Retired Vice Chairman 4 J O H N M . E G G E M E Y E R III 2,3,4 President, Castle Creek Capital LLC R O B E R T E . E VA N S Retired Vice Chairman 1 1,2,3,4,5 L U E L L A G . G O L D B E R G Past Chair, University of Minnesota Foundation, Former Acting President, Wellesley College 1 G E O R G E G . J O H N S O N CPA/Managing Director, George Johnson & Co. 2,3,4,5 T H O M A S J . M C G O U G H President, McGough Construction Company, Inc. 2,3,4 R I C H A R D F. M C N A M A R A Chief Executive Officer, Activar, Inc. E X E C U T I V E O F F I C E S C O L O R A D O TCF Financial Corporation 2 0 0 L A K E S T R E E T E A S T Headquarters 9 2 0 0 E A S T P A N O R A M A C I R C L E 1,2,3,4 WA Y Z A TA , M N 5 5 3 9 1 - 1 6 9 3 S U I T E 1 0 0 ( 6 1 2 ) 6 6 1 - 6 5 0 0 E N G L E W O O D , C O 8 0 1 1 2 LY N N A . N A G O R S K E President and Chief Operating Officer G E R A L D A . S C H WA L B A C H Chairman, Superior Storage LLC 4,5 R A L P H S T R A N G I S Senior Partner, Kaplan, Strangis and Kaplan, P.A. 1 Audit Committee 2 Compensation/Nominating/ Corporate Governance Committee M I N N E S O T A Headquarters 8 0 1 M A R Q U E T T E AV E N U E M I N N E A P O L I S , M N 5 5 4 0 2 ( 6 1 2 ) 6 6 1 - 6 5 0 0 Traditional Branches M I N N E A P O L I S / S T. P A U L A R E A ( 4 4 ) 3 Advisory Committee – TCF G R E A T E R M I N N E S O TA ( 6 ) Employees Stock Purchase Plan 4 Shareholder Relations/ De Novo Expansion Committee 5 Executive Committee Supermarket Branches M I N N E A P O L I S / S T. P A U L A R E A ( 4 0 ) G R E A T E R M I N N E S O TA ( 4 ) I L L I N O I S / W I S C O N S I N / I N D I A N A Headquarters 8 0 0 B U R R R I D G E P A R K WA Y B U R R R I D G E , I L 6 0 5 2 7 ( 3 0 3 ) 8 5 8 - 8 5 1 9 Traditional Branches M E T R O D E N V E R A R E A ( 3 ) C O L O R A D O S P R I N G S ( 2 ) Supermarket Branches M E T R O D E N V E R A R E A ( 7 ) C O L O R A D O S P R I N G S ( 4 ) T C F M O R T G A G E C O R P O R A T I O N Headquarters 8 0 1 M A R Q U E T T E AV E N U E M I N N E A P O L I S , M N 5 5 4 0 2 ( 6 1 2 ) 6 6 1 - 7 5 0 0 T C F L E A S I N G , I N C . Headquarters 1 1 1 0 0 WA Y Z A TA B O U L E VA R D ( 6 3 0 ) 9 8 6 - 4 9 0 0 S U I T E 8 0 1 Traditional Branches C H I C A G O L A N D ( 3 1 ) M I LWA U K E E A R E A ( 1 1 ) K E N O S H A / R A C I N E A R E A ( 7 ) Supermarket Branches C H I C A G O L A N D ( 1 5 6 ) M I LWA U K E E A R E A ( 1 4 ) M I N N E T O N K A , M N 5 5 3 0 5 ( 9 5 2 ) 6 5 6 - 5 0 8 0 W I N T H R O P R E S O U R C E S C O R P O R A T I O N Headquarters 1 1 1 0 0 WA Y Z A TA B O U L E VA R D S U I T E 8 0 0 K E N O S H A / R A C I N E A R E A ( 3 ) M I N N E T O N K A , M N 5 5 3 0 5 ( 9 5 2 ) 9 3 6 - 0 2 2 6 I N D I A N A ( 5 ) M I C H I G A N Headquarters 4 0 1 E A S T L I B E R T Y S T R E E T A N N A R B O R , M I 4 8 1 0 4 ( 7 3 4 ) 7 6 9 - 8 3 0 0 Traditional Branches M E T R O D E T R O I T A R E A ( 3 7 ) G R E A T E R M I C H I G A N ( 1 0 ) Supermarket Branches M E T R O D E T R O I T A R E A ( 1 0 ) G R E A T E R M I C H I G A N ( 1 ) page 79 Shareholder Information S T O C K D A T A Year Close High Low Dividends Paid Per Share 2002 Fourth Quarter Third Quarter Second Quarter First Quarter 2001 Fourth Quarter Third Quarter Second Quarter First Quarter 2000 Fourth Quarter Third Quarter Second Quarter First Quarter 1999 Fourth Quarter Third Quarter Second Quarter First Quarter 1998 Fourth Quarter Third Quarter Second Quarter First Quarter $43.69 42.33 49.10 52.61 $ 47.98 46.06 46.31 37.79 $ 44.56 37.63 25.69 23.81 $ 24.88 28.56 27.88 26.06 $ 24.19 19.88 29.50 33.94 $44.75 50.30 54.07 54.60 $ 48.25 51.12 46.55 44.38 $ 45.56 37.88 29.06 24.88 $ 30.56 29.38 30.69 27.25 $ 25.63 32.44 37.25 35.13 $35.10 39.90 46.65 46.87 $.2875 .2875 .2875 .2875 $ $ 39.40 39.45 34.90 32.81 .25 .25 .25 .25 $ 33.81 25.75 22.00 18.00 $ .2125 .2125 .2125 .1875 $ 23.75 26.63 25.13 21.69 $ .1875 .1875 .1875 .1625 $ 15.81 19.88 28.38 29.25 $ .1625 .1625 .1625 .125 T R A D I N G O F C O M M O N S T O C K The common stock of TCF Financial Corporation is listed on the New York Stock Exchange under the symbol TCB. At December 31, 2002, TCF had approximately 73.9 million shares of common stock outstanding. 2 0 0 3 C O M M O N S T O C K D I V I D E N D D A T E S Expected Record: February 7 May 2 August 1 November 7 Expected Payment: February 28 May 30 August 29 November 28 T R A N S F E R A G E N T A N D R E G I S T R A R EquiServe Trust Company, N.A. PO Box 43010 Providence, RI 02940-3010 (800) 730-4001 www.equiserve.com C O M M O N S T O C K D I V I D E N D R E I N V E S T M E N T P L A N Approximately 58% of TCF’s 11,042 shareholders of record participate in the Dividend Reinvestment Plan. Under the plan, common shareholders may purchase additional shares of common stock at market price without service charges or brokerage commissions through automatic reinvestment of cash dividends. Optional cash contributions may be made monthly with a minimum investment of $25 per month and limited to $25,000 per quarter. Information is available from: EquiServe Trust Company, N.A. PO Box 43010 Providence, RI 02940-3010 (800) 730-4001 www.equiserve.com I N V E S T O R / A N A L Y S T C O N T A C T S Jason Korstange Senior Vice President Corporate Communications (952) 745-2755 Patricia Quaal Senior Vice President Investor Relations (952) 745-2758 A D D I T I O N A L I N F O R M A T I O N TCF’s report on Form 10-K is filed with the Securities and Exchange Commission and is available to shareholders without charge. Information may also be obtained from: TCF Financial Corporation Corporate Communications 200 Lake Street East EX0-02-C Wayzata, MN 55391-1693 (952) 745-2760 C O R P O R A T E W E B S I T E Please visit our website at www.tcfexpress.com for free access to investor information, news, investor presentations, access to TCF’s quarterly conference calls, TCF’s annual report, quarterly reports and SEC filings. A N N U A L M E E T I N G The annual meeting of shareholders of TCF will be held on Wednesday, April 23, 2003 at 10:00 a.m. at the Sheraton Minneapolis West, 12201 Ridgedale Drive, Minnetonka, Minnesota. page 80 m o c . t r a i 2 i . w w w R E N T L E Z M I T © : N O I T A R T S U L L I C O R P O R AT E P R O F I L E TCF Financial Corporation is a Wayzata, Minnesota-based national financial holding company with $12.2 billion in assets. TCF has 395 banking offices in Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana. Other TCF affiliates provide leasing and equipment finance, mortgage banking, brokerage, and investments and insurance sales. TA B L E O F C O N T E N T S page 1 Financial Highlights page 2 Letter to Our Shareholders page 9 Business Highlights page 18 Corporate Philosophy page 20 Financial Review page 46 Consolidated Financial Statements page 51 Notes to Consolidated Financial Statements page 76 Independent Auditors’ Report page 77 Other Financial Data page 78 Corporate Information page 80 Shareholder Information I N V E S T I NG I N T H E F U T U R E The title “Investing in the Future” and the artwork in our 2002 annual report reflect TCF’s strategy of investing in our franchise. We plant the seeds of growth by investing in new banking facilities and convenient products and services. These investments may reduce our profits in the short term, but they are proven providers of long-term growth and profitability. Like an orchard, TCF is subject to changes in the environment. We use our experience to buffer elements such as a challenging business climate, unfriendly economy and changing laws and regulations. We have confidence in our proven strategies and the patience to continue investing for the future. Like apple trees in an orchard, we expect our invest- ments to bear fruit for many, many years. Total Return to Shareholders(cid:1) (In Dollars) TCF Financial Corporation(cid:1) SNL All Bank & Thrift Index(cid:1) S&P 500(cid:1) $900(cid:1) 800(cid:1) 700(cid:1) 600(cid:1) 500(cid:1) 400(cid:1) 300(cid:1) 200(cid:1) 100(cid:1) 0 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 Assumes $100 invested December 31, 1992 with dividends reinvested. Credit Ratings(cid:1) Last Rating Action Moody’s TCF National Bank: Outlook Issuer Long-term deposits Short-term deposits Bank financial strength Last Review October 2001 Last Rating Action Last Review June 2002 Last Rating Action Last Review January 2003 Stable A2 A2 Prime-1 C+ Standard & Poor’s Outlook TCF Financial Corporation: Long-term counterparty Short-term counterparty TCF National Bank: Long-term counterparty Short-term counterparty Positive BBB A-2 BBB+ A-2 FITCH Outlook Issuer rating TCF Financial Corporation: Long-term senior Short-term TCF National Bank: Long-term deposits Short-term deposits Stable B A- F1 A F1 Stock Price Performance(cid:1) (In Dollars) Stock Price(cid:2) Dividend $54(cid:1) 51(cid:1) 48(cid:1) 45(cid:1) 42(cid:1) 39(cid:1) 36(cid:1) 33(cid:1) 30(cid:1) 27(cid:1) 24(cid:1) 21(cid:1) 18(cid:1) 15(cid:1) 12(cid:1) 9(cid:1) 6(cid:1) 3(cid:1) 0 $1.25(cid:1) 1.00(cid:1) 0.75(cid:1) 0.50(cid:1) 0.25(cid:2) 0(cid:1) Year Ending(cid:2) Stock Price(cid:2) 6-86 12-86 12-87 12-88 12-89 12-90 12-91 12-92 12-93 12-94 12-95 12-96 12-97 12-98 12-99 12-00 12-01 12-02 $3.00 $3.03 $1.72 $2.22 $3.38 $1.91 $4.84 $7.25 $8.50 $10.31 $16.56 $21.75 $33.94 $24.19 $24.88 $44.56 $47.98 $43.69 Dividend Paid N/A N/A N/A $0.05 $0.10 $0.10 $0.10 $0.13 $0.19 $0.25 $0.31 $0.38 $0.50 $0.65 $0.75 $0.85 $1.00 $1.15 (cid:1) ■ (cid:2) (cid:1) ■ (cid:1) ■ (cid:2) (cid:2) (cid:1) (cid:1) TCF Financial Corporation 200 Lake Street East Wayzata, MN 55391-1693 www.tcfexpress.com E In an effort to help save our natural resources, the cover and inside pages of this annual report are printed on paper stock made from 30% post-consumer waste and a total 50% recycled fiber content. This report is printed with vegetable-based inks. 2690-AR-03 TCFIR9317 TCF FINANCIAL CORPORATION 2002 Annual Report INVESTING IN THE FUTURE

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