TCF Financial Corporation
Annual Report 2004

Plain-text annual report

132406_TCF AR 04 Cover_C 2/15/05 4:27 PM Page 1 TCF Financial Corporation 200 Lake Street East Wayzata, MN 55391-1693 www.TCFExpress.com High Performance Banking TCF Financial Corporation 2004 Annual Report 2690-AR-05 TCFIR9328 132406_TCF AR 04 Cover_F 2/18/05 8:48 AM Page 2 Financial Highlights (Dollars in thousands, except per-share data) Operating Results: 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 revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains (losses) on termination of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price to book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Ratios: Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs as a percentage of average loans and leases . . . . . . . . . . . . . . . . . . Total equity to total assets at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Dollars in thousands) Selected Balance Sheet Data: Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and leases excluding residential real estate loans . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Checking, savings and money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TCF Financial Corporation and Subsidiaries TCF Financial Corporation and Subsidiaries – 2004 Annual Report At or For the Year Ended December 31, 2004 2003 % Change $ $ $ 622,809 130,918 491,891 10,947 480,944 467,866 22,600 – 490,466 586,934 384,476 129,483 254,993 1.87 1.86 .75 32.62 23.92 32.14 6.99 4.60X 2.15% 27.02 4.54 .11 7.77 $ $ $ 641,519 160,374 481,145 12,532 468,613 430,792 32,832 (44,345) 419,279 560,109 327,783 111,905 215,878 1.53 1.53 .65 27.13 18.25 25.68 6.53 3.93X 1.85% 23.05 4.54 .16 8.14 (2.9)% (18.4) 2.2 (12.6) 2.6 8.6 (31.2) 100.0 17.0 4.8 17.3 15.7 18.1 22.2 21.6 15.4 25.2 7.0 17.0 16.2 17.2 – (31.3) (4.5) At December 31, 2004 2003 % Change $ 1,619,941 1,014,166 2,634,107 8,372,491 152,599 46,442 12,340,567 6,493,545 1,468,650 7,962,195 1,056,111 2,048,492 958,418 137,186,160 $ 1,533,288 1,212,643 2,745,931 7,135,135 145,462 52,036 11,319,015 5,999,626 1,612,123 7,611,749 878,412 1,536,413 920,858 140,952,660 5.7% (16.4) (4.1) 17.3 4.9 (10.8) 9.0 8.2 (8.9) 4.6 20.2 33.3 4.1 (2.7) • TCF banks a large and diverse customer base. TCF emphasizes con- • TCF encourages stock ownership by our officers, directors and venience in banking; we’re open 12 hours a day, seven days a week, employees. We have a mutuality of interest with our shareholders, 364 days per year. We provide customers innovative products through and our goal is to earn above-average returns for our shareholders. Corporate Philosophy multiple banking channels, including traditional and supermarket branches, TCF EXPRESS TELLER® ATMs, debit cards, phone banking, and Internet banking. • TCF operates like a partnership. We’re organized geographically and by function, with profit center goals and objectives. TCF emphasizes return on average assets, return on average equity and earnings per share growth. We know which products are profitable and contribute to these goals. Local geographic managers are responsible 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 checking 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 a significant portion 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 busi- ness, we can minimize credit risk on the asset side. • TCF strives to place The Customer First. We believe providing great service to our many customers creates value for shareholders. • TCF utilizes conservative accounting and reporting principles that accurately and honestly report our financial condition and results of operations. m o c . l l e v i k e c n a n . w w w , p u o r G l l e v i k e c n a N e h T • TCF is currently growing primarily through de novo expansion rather than acquisition. We are growing by starting new businesses, opening new branches and offering new products and services. • TCF believes interest-rate risk should be minimized. Interest-rate speculation does not generate consistent profits and is high risk. • 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 banking process. • TCF encourages open employee communication and promotes from within whenever possible. TCF places the highest priority on honesty, integrity and ethical behavior. • TCF believes in community participation, both financially and through volunteerism. We feel a responsibility to help those less fortunate. • 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. 132406_TCF AR 04 Guts_B 2/14/05 10:30 AM Page 1 Leadership in Action TCF’s banking philosophies are centered on bringing value straightforward and enduring strategies, based on a well- to our shareholders and customers. These philosophies have grounded philosophy coupled with successful execution and guided TCF’s business strategies, which have become the solid management, have made TCF an institution recognized principles by which TCF conducts its business. Simple, nationally for its High Performance Banking. Corporate Profile Table of Contents TCF Financial Corporation is a Wayzata, Minnesota-based national financial holding company with $12.3 billion in assets. TCF has 430 banking offices in Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana. Other TCF affiliates provide leasing and equipment finance, securities brokerage, and investments and insurance sales. 3 9 18 48 53 77 78 80 81 83 85 Letter to Our Shareholders Business Highlights Management’s Discussion and Analysis Consolidated Financial Statements Notes to Consolidated Financial Statements Management’s Report on Internal Control Over Financial Reporting Reports of Independent Registered Public Accounting Firm Other Financial Data Corporate Information Shareholder Information Corporate Philosophy 2004 Annual Report 1 132406_TCF AR 04 Guts_B 2/14/05 10:30 AM Page 2 William Cooper, Chairman of the Board and Chief Executive Officer; Lynn Nagorske, President and Chief Operating Officer. 2 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_B 2/14/05 10:30 AM Page 3 Leadership in Action Dear Shareholders: • Our dividend increased from $.65 per share in 2003 to $.75 per share We are pleased to report that 2004 was a record year for TCF. Our in 2004. In 2005, our dividend increased again and will be $.85 per disciplined focus on long-term strategies for growth produced some share. This is the fourteenth consecutive year we have increased the of the best performance ratios in the banking industry. TCF is clearly dividend. We are proud that TCF has a ten-year compounded dividend a high performance bank. growth rate of 19.6 percent, the fifth highest dividend growth rate Summarizing the year: • TCF earned a record $255 million in 2004 compared to $215.9 million in 2003. An increase of 18.1 percent. • Diluted earnings per share (EPS) were $1.86 for 2004 compared to $1.53 in 2003. An increase of 21.6 percent. among the 50 largest banks in the country. The major factors impacting TCF’s performance in 2004 were as follows: 1. TCF’s net interest income resumed its growth in 2004. Net interest income in 2004 was $491.9 million, up 2 percent from 2003. Most of this improvement was due to balance sheet growth. TCF’s net inter- est margin remained unchanged for 2004 at 4.54 percent. Short- • TCF’s 2004 return on average assets (ROA) of 2.15 percent and term interest rates rose over the year as a result of Federal Reserve return on average equity (ROE) of 27.02 percent improved over the Board interest rate hikes. This rise in short-term rates helped TCF’s previous year. • TCF’s stock price closed at $32.14 on December 31, 2004, up 25 percent from $25.68 per share on December 31, 2003. Our annualized total return to investors over the past ten years was over 22 percent. net interest margin because interest rate sensitive assets exceed variable-rate sensitive liabilities. The ten-year treasury rates started and ended the year at about 4.25 percent. This resulted in 2004 Annual Report 3 132406_TCF AR 04 Guts_B 2/14/05 10:30 AM Page 4 a flattening of the yield curve, which hurt our net interest margin. more ACH transactions. This change in behavior impacts TCF’s fee TCF’s longer-term mortgage backed securities (MBSs) and fixed-rate income. Some of our customers have abused their debit card spend- loans were originated or purchased at lower yields than the loans ing privileges and, as a result, their accounts have been closed. This and MBSs that were repaid or sold. has negatively impacted TCF’s fees and service charges. We are work- 2. Credit quality improved in 2004 and remained very strong. TCF’s $18.8 million leveraged lease to Delta Airlines remains a possible dark cloud on the horizon. This situation improved in the fourth quarter of 2004 as Delta averted bankruptcy, but we are not yet out of ing to address this situation, but its impact will continue into 2005. TCF’s card revenue grew 19.5 percent in 2004 to $63.3 million. The debit card is now an integral part of the checking account with many customers using their cards more frequently than they write checks. the woods. 4. During 2004, TCF restructured its mortgage banking business. 3. TCF’s checking account growth slowed in 2004. The number of checking accounts grew in 2004 by 91,000 accounts (up 6.3 per- cent) compared to 106,000 (up 8 percent) in 2003. While our new account openings were fairly close to our expectations, despite increased competition, we were hurt by higher than anticipated attrition. Checking account customers are changing their behavior. Debit card transactions continue to replace checks and there are Wholesale loan origination activities were eliminated and the retail loan origination function was downsized and integrated into our consumer lending area. We believe these actions will improve future profitability, lower TCF’s prepayment risk and lower future earn- ings volatility from this cyclical business. We continue to evaluate our options as it relates to the remaining $4.5 billion mortgage servicing portfolio. 5. TCF realized $22.6 million of gains on MBS sales in 2004 versus $32.8 million of gains in 2003. In 2003, TCF incurred $44.3 million of debt prepayment penalties to cancel high cost fixed-rate borrowings. We sold MBSs in 2004 when longer-term interest rates hovered near Diluted EPS (dollars) $1.35 $1.17 40 year lows. $1.86 $1.58 $1.53 Power Assets® and Power Liabilities® TCF continued to experience strong growth in its core businesses in 2004. Power Assets grew 17.3 percent. Consumer loans increased 21.7 per- cent, which is an excellent performance. Commercial loans increased 10 percent, which was a good performance. Leasing and equipment finance showed a strong increase of 18.5 percent which was aided 00 01 02 03 04 4 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_B 2/14/05 10:30 AM Page 5 since 1998 now have $1.5 billion in deposits with an average interest cost of .53 percent and 576,000 checking accounts. Checking account growth in new branches was approximately 16 percent. Our new tradi- tional branches are generally performing close to our expectations and financial models. However, we have had traditional branch opening delays due to government approval difficulties, construction delays and poor weather, which has negatively impacted growth in new check- ing accounts. We have continued to improve our internal capabilities to identify and select the best sites for future growth. During 2004, we entered into a new supermarket banking relationship in Colorado with King Soopers®, an affiliate of Kroger®. We are encour- aged by the early results. We believe TCF’s de novo strategy is a better use of our capital than paying the high premiums of a bank acquisition. We intend to stick to this disciplined approach in 2005. Net Income (millions of dollars) $255 $233 $216 $207 $186 “TCF continued to experience strong growth in its core businesses in 2004.” by the 2004 acquisition of VGM Financial Services, a company spe- cializing in home medical equipment financing. We are pleased with this acquisition and our leasing operation results. Average balances for TCF’s core deposits increased $249.4 million, or 4 percent. Certificates of deposit continued to decline in 2004, as other lower cost funding sources were available to TCF. The weighted-average interest rate on deposits at December 31, 2004 was .69 percent, one of the lowest rates in the country. This low cost is directly attributa- ble to our convenience banking strategy and the large amount of TCF’s non-interest bearing deposits. We look to grow deposits faster in 2005 to fund a larger portion of TCF’s Power Asset growth. New Branch Expansion A good portion of TCF’s growth comes from our new branch expansion. This strategy has provided TCF an ever-growing customer base with a very low cost of funds. TCF opened 30 new branches during 2004, including 19 new traditional branches and 11 new supermarket branches. New branches opened 00 01 02 03 04 2004 Annual Report 5 132406_TCF AR 04 Guts_B 2/14/05 10:30 AM Page 6 Risks 2004 and will continue to be a challenge in 2005. We are also relying We think it is appropriate to discuss what we consider to be the major on the continued long-term success of branch banking. Our de novo risks to our continued success. First, as demonstrated over the last two banking expansion is staked on this premise. years, the management of interest rate risk is a major challenge. The measurements of interest rate risk are assumption laden and results can quickly change. Changes in interest rates may also adversely impact the value of TCF’s mortgage servicing rights. Second, TCF, like all banks, is subject to the effects of economic activity. In particular, a significant decline in home values in our markets could have a neg- Regulatory issues and the related compliance burden continue to increase. The Bank Secrecy Act, the Patriot Act and the Sarbanes-Oxley Act have increased our compliance risk. We are also subject to the risks of new regulations. Legal and tax issues are always a risk (the 2003 Visa debit card lawsuit is a good example of this legal risk). ative effect on our results. A bad economy can result in increased loan None of these risks are new. Our consistent results over a long period and lease charge-offs. The third risk is our ability to attract and retain have proven that we have prudently managed these risks in the past new customers. Competition has stiffened and customer behavior is and we believe we are adequately prepared to manage them in the changing. Debit card transactions now outnumber checks. Other future. Our philosophy at TCF is to run a highly profitable bank and to electronic transactions (ACH, ARC, Check 21, etc.) are all changing minimize risk. customer behavior in checking. Our overall growth is dependent on our ability to grow checking accounts and related fee income, while con- In Closing trolling fraud losses and attrition. This area became more difficult in A careful reading of this annual report will tell you everything about our company. We try to keep our financial reporting simple, but as complete as possible. In our opinion, TCF’s accounting is conservative. We continue to have a mutuality of interest with our shareholders. Our senior management and board of directors own approximately 12 mil- lion shares, or 8.8 percent of TCF stock. Seventy-nine percent of our eligible employees participate in TCF’s Employees Stock Purchase Plan, which at year-end held over 8.1 million shares. Our stock plans for senior management continue to be performance-based restricted stock grants which vest based on long-term growth in earnings per share. These stock grants are expensed in the income statement just like all the rest of TCF’s expenses. Net Interest Income (millions of dollars) $481 $499 $481 $492 $439 00 01 02 03 04 6 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_C 2/15/05 4:48 PM Page 7 “Our philosophy at TCF is to run a highly profitable bank and to minimize risk.” In January of 2005, approximately 1.1 million shares of performance- based restricted stock vested for senior management. Since the issuance We once again would like to thank our hardworking, responsive and dedicated Board of Directors. Our Board of Directors consists largely of entrepreneurial business people who also own TCF stock. We appreciate their valuable insights and support. During 2004, Doug Scovanner joined TCF’s Board of Directors. Doug’s retailing perspectives provide a valuable contribution. We would also like to recognize and thank our outstanding employees for being part of the TCF Team. Their exceptional abilities, commitment and energy make everything happen. We are proud of the TCF Team and their accomplishments. of this grant in 2000, TCF’s diluted EPS has increased 86 percent, or a 13 Thank you for your continued support and investment in TCF. 2005 percent compound annualized growth rate. Over the same time period, promises to be another interesting and challenging year. We remain TCF’s stock price has increased 158 percent, or a 21 percent compound optimistic about TCF’s future prospects. annualized return to shareholders plus dividends. The cost of this stock grant was largely offset by the related income tax benefit for the market value of the grant when it vested. We believe this performance-based restricted stock plan has helped produce superior financial results for our shareholders and has retained and motivated our talented man- agement team. We are true owners as we face the downside risks of decisions as well as the upside potential. TCF repurchased 4 million shares of its stock in 2004 at an average cost of $29.14 per share. TCF has repurchased a total of 54.2 million shares (29 percent) since the beginning of 1998, at an average cost of $17.58 per share. We will repurchase fewer shares in 2005 since we will be required to retain more capital to fund our balance sheet growth. We consider the return from repurchasing TCF stock as a hurdle rate for acquisitions. William A. Cooper Chairman of the Board and Chief Executive Officer Lynn A. Nagorske President and Chief Operating Officer 2004 Annual Report 7 132406_TCF AR 04 Guts_D 2/17/05 6:46 AM Page 8 Holding Company Senior Management Seated, from left: Lynn Nagorske; Craig Dahl. Standing, from left: Paul Brawner; William Cooper; Earl Stratton; Barry Winslow; Neil Brown; Gregory Pulles; Barbara Shaw. 8 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_B 2/14/05 10:31 AM Page 9 Leading the Way Structure One of TCF’s most important assets is its management bench strength TCF’s flagship state of Minnesota, which began over 80 years ago in and depth. TCF is organized geographically and by function. Each of 1923, operates 101 full service branches, including 51 branches located the bank presidents is responsible for the operational goals of their inside Cub® Foods stores. TCF Minnesota’s experienced management is state as well as a functional operation such as consumer lending, com- focused on retaining and cultivating its large and profitable customer mercial lending, branches, or marketing. We believe strongly that local base by strategically growing our branch network and building additional management teams make the best decisions regarding local issues. relationships with our customers through our higher-yielding consumer Each of our bank management teams are responsible for local business and commercial loan products. Minnesota’s consumer lending division decisions, business development, customer relations, and community originates home equity loans and lines of credit. The Minnesota con- involvement. As firmly as TCF believes that local, geographically- sumer lending division is approaching $2 billion in loans outstanding. based management is best suited to run our businesses, we also believe functional product line management benefits from a more centralized approach. Centralized functional management facilitates efficient product development, effective communication, consistent implemen- tation, and close monitoring of our strategic initiatives, as well as cen- tral accountability for the success of each of our major product areas. By organizing management teams to most efficiently and effectively manage our local banks and our strategic product areas, TCF has the best of both worlds. We enjoy informed, timely local decision-making that allows us to compete in our markets on a daily basis and long- term strategic product management positioning us for the future. Campus banking is an excellent example of TCF’s innovative product development. The Minnesota bank is proud to have added Minnesota State University-Mankato in 2004 to an impressive list of state schools, including the University of Minnesota, that offer this special program to students and faculty. TCF Lakeshore, comprised of our Illinois, Wisconsin and Indiana opera- tions, has our largest branch system, our largest supermarket-banking network and our largest employee team with over 4,000 helpful members. Since 1998, Lakeshore has added 178 branches and now has 237 branches including 179 supermarket branches. 2004 Annual Report 9 132406_TCF AR 04 Guts_C 2/15/05 4:48 PM Page 10 TCF Lakeshore’s supermarket division reached the billion-dollar mark in 20 traditional branches and 12 supermarket branches. By the end of total deposits early in 2004. This division has branches inside Jewel-Osco® 2005, TCF Colorado plans to incorporate a business banking division stores, the leading grocery chain by market share in Chicago, and in and open ten new branches. certain Cub Foods stores. Not content to be the “most convenient bank” with seven-day-a-week banking and long hours (84 hours a week in the supermarkets), TCF has begun remodeling and upgrading many of its supermarket branches. Certain branches will have a new plasma- screen merchandising system installed, allowing TCF to combine prod- uct messages, current promotions, news, weather, and sports information for the consideration and enjoyment of our customers. In addition to our banking franchise, we have a separate leasing and equipment finance group headquartered in Minnetonka, Minnesota. TCF has developed an experienced team of equipment finance pro- fessionals that provide a variety of unique finance solutions to a diverse group of small to large commercial customers. TCF’s leasing and equipment finance operations is national in scope with a broad range of equipment types financed in all 50 states. During 2004, our In Michigan, TCF has focused its expansion efforts in the Detroit metro leasing and equipment finance portfolio increased 19 percent and new area with five offices opened in 2004 and eight planned for 2005. business volume rose more than 27 percent. Michigan’s consumer lending division and commercial lending group achieved double-digit growth in 2004 and plan to expand its number of lenders in 2005. Also, TCF Michigan recently added 11 business bankers with plans to add several more to meet its aggressive 2005 goals. TCF’s holding company and corporate functions provide capital and centralized management services such as data processing, bank operations, product development and marketing, finance, treasury services, employee benefits, legal, compliance, credit review, and The Colorado franchise in Denver and Colorado Springs is TCF’s fastest internal audit. This structure gives locally managed banks the flexi- growing market and continues to represent an area of great poten- bility to share, compare and refine new products and services while tial for future expansion. TCF Colorado now has 32 total branches: enjoying the economies of scale of a much larger organization. Retail Distribution Growth (number of branches) Strategies TCF’s banking philosophy is based on carefully planned and consistently executed business strategies. These strategies have become the prin- Traditional Branches Supermarket Branches ciples by which TCF conducts its business. TCF’s long-term strategies 395 401 430 for growth are somewhat unique among our competitors and have served, and will continue to serve, our customers and shareholders well. 375 352 TCF’s strategies begin with the premise that every customer is valu- able. We bank a large and diverse customer base. We do not believe in focusing only on one “profitable” customer segment. Every customer is potentially profitable and may become more so over time through cross-sell initiatives. Each of our many customers contributes incre- mentally to our revenue. 00 01 02 03 04 10 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_B 2/14/05 10:31 AM Page 11 “We listen to our customers and as a result, put emphasis on convenience in banking.” We listen to our customers and as a result, put emphasis on conven- ience in banking. TCF is “The Leader in Convenience Banking,” and we use our premier convenience services to attract a large, economically diverse and growing customer base. We provide convenience by being open longer hours, seven days a week and open on most holidays. TCF offers a large supermarket branch network, complemented by tradi- tional branches, providing customers with alternative locations to of the balance sheet. By earning at least one percent on each side of the balance sheet, we can generate a total return on assets greater than two percent. TCF’s superior earnings performance allows us to regularly buy back our own stock. In evaluating potential acquisitions, we look at the stock buy back opportunity as an acquisition alternative that may provide superior returns. Investing in our own stock has been good for TCF and its shareholders. Simple, straightforward, and enduring strategies, which are based on a well-grounded philosophy coupled with successful execution and solid management, have made TCF one of the top performing banks in the United States. De Novo Expansion TCF continues to be committed to de novo expansion in both our branch conduct their banking. TCF’s free online banking services, extensive network and in our development of new products and services. Each ATM network, automated telephone service, and Internet banking pro- of these components play a fundamental and complementary role – vide even more convenient options – meeting customers needs. to add new branches supporting our growing customer base and to Strategically adding new branches where they can best support and increase our customer base, introducing new products and services, and enhancing our existing products and services, are strategies that have worked well for TCF over the last decade. TCF places emphasis on what it defines as Power Assets (higher-yielding consumer loans, commercial loans and leasing assets) and Power Liabilities (lower-cost checking, savings, money market and certificate of deposit accounts). A principal strategy of TCF’s Power Assets is to lend on a secured basis. Our strong credit quality is evidence that this Card Revenue (millions of dollars) important strategy is working; TCF has one of the lowest charge-off $37.6 ratios in the banking industry. TCF’s Power Liabilities are the founda- $28.8 tion of our business and are proven profit drivers at TCF. By focusing on both Power Assets and Power Liabilities, we recognize the important contributions to overall profitability by both the liability and asset side $63.3 $53.0 $47.2 00 01 02 03 04 2004 Annual Report 11 132406_TCF AR 04 Guts_D 2/17/05 6:46 AM Page 12 Bank Senior Management Seated: Barry Winslow. Standing, from left: Robert Scott; Timothy Bailey; Wayne Marty; Mark Jeter. Not pictured: Thomas Wagner. 12 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_B 2/14/05 10:31 AM Page 13 provide new products and services, allowing us to attract new cus- In 2004, TCF launched the “TCF Miles PlusSM Card”, a free non-revolving tomers and deepen our customer relationships. credit card that is attached to a checking account. This free card Since January of 1998, TCF has added 258 new branches to our rapidly growing branch network – nearly 60 percent of our existing branches. offers points that may be redeemed for airline travel on virtually any airline, anytime, anywhere with the option to use points to purchase merchandise from a leading Internet retailer. The TCF Miles Plus Card In some of our markets, TCF has taken the opportunity to support and attracts a new group of customers to TCF, providing us an opportunity compliment existing supermarket branches with new traditional branches. to introduce them to our many other products and services. Traditional branches act as a visible anchor in our communities, provid- ing convenient, full-service banking to both our retail customers and our growing commercial and small business customers. In 2005, TCF plans to open 22 new traditional branches and two campus branches. TCF’s de novo strategy of branch expansion and product line improve- ments continues to complement each other. New products and serv- ices with convenient locations attract new customers to our branch network, which support and grow these relationships by providing the Supermarket banking continues to play a key role in TCF’s ability to most convenient banking services in our markets. TCF plans to continue provide the most convenient banking services in the markets we serve. this successful strategy. Our customers enjoy the convenience of one-stop shopping and bank- ing, causing these lower-cost, high-volume branches to become profitable more quickly than traditional branches. Our supermarket branches in Cub Foods, King Soopers and Jewel-Osco play an important role in our expansion strategy. In 2005, TCF plans to open five new supermarket branches. Convenience Everything we do at TCF revolves around the idea of convenience; our fundamental banking strategy is to provide premier convenience products and services to our customers. We deliver convenience based on knowing what our customers want, and we continue to expand and The other key element of TCF’s de novo expansion strategy is the evolu- enhance our offerings based on their needs. tion of our convenient products and services. New products attract new customers and allow us to develop additional relationships with our exist- ing customers. TCF’s innovative culture fuels the strategic initiatives that have led to the introduction of many of our products and services. Totally Free Checking remains the best example of a successful inno- vative product brought to market by TCF. We listened to our customers, and what they wanted was a very low-cost checking account. We gave them a free account, which remains our most popular product. As most of our competitors are attempting to copy this product, we success- fully introduced several new checking account products in 2004. We had similar success with our home equity loan products. We have been able to add several enhancements to this product over the years including tiered pricing, Visa credit line access, payment protection products, and this year, a fast-close service. New Branch1 Banking Fees & Other Revenue2 (millions of dollars) $154 $126 $108 $85 $61 $39 $14 98 99 00 01 02 03 04 1 Branches opened since January 1, 1998. 2 Consisting of fees and service charges, card revenue, ATM revenue, and investment and insurance revenue. 2004 Annual Report 13 132406_TCF AR 04 Guts_C 2/15/05 4:48 PM Page 14 TCF’s extensive branch network is at the core of our convenience strat- moved, consolidated and remodeled targeted branches. We have also egy. Spanning six states, TCF’s 430 branches are conveniently located added more traditional branch drive-through lanes, which is another where our customers live, shop and do business. We’re open seven days easy one-stop banking option for TCF customers. Drive-throughs will a week, with extended hours in both our supermarket and traditional become even more readily available as we continue to expand our branches, to ensure that our customers can do business when it’s con- traditional branch network. venient for them. Even on most holidays, TCF customers know that per- sonal service is available to open new accounts, make deposits and withdrawals, obtain loans, make investments, and have access to other banking products and services. For customers who prefer the convenience of electronic banking, TCF provides a host of products and services. These include an automated phone system, an extensive network of TCF® EXPRESS TELLER® ATMs and online banking products such as TCF® Totally Free Online, TCF® Preferred Supermarket branches continue to play an important role in TCF’s con- Online and TCF® Online Bill Pay. During 2004, TCF’s call center opera- venience strategy. These full-service branches allow customers to sim- tions embarked on an initiative to centralize its retail call centers and plify their schedules by handling their banking needs while shopping. implement a new state-of-the-art phone system simplifying phone During 2004, TCF began remodeling and upgrading its supermarket menu options and incorporating skill-based routing functionality for branches. By the end of 2005, certain supermarket branches will have improved customer service. Our commitment to convenience banking installed new plasma-screen merchandising systems, allowing TCF to pro- was also evidenced during 2004 by enhancements to our online bill mote its products while displaying news, weather, and sports information. payment service, a complete redesign of the TCFExpress.com website TCF’s customers have also enjoyed the enhancements made to some of and printable check images available to all online customers. our traditional branches. During 2004, we evaluated customer’s ease Online at TCF® Express Trade®, customers can buy and sell stocks, mutual of access to some of our traditional branch locations and, as a result, funds and other securities. Access to investment holdings, account history, stock research, and order placement are available 24 hours a day, seven days a week, 365 days a year. Customers preferring personal service can contact a personal trading representative. Small business customers may also take advantage of TCF’s Internet banking services. TCF® Totally Free Online Banking for Business provides basic Internet banking services with no access fee. TCF® Preferred Online Business Banking provides expanded account history and the ability to download transaction detail into financial software applications, helping small business owners manage their businesses. TCF continues to expand its customer base by offering services like TCF Check CashingSM and on-site coin counting through TCF® Express Coin Service. New products attract new customers to TCF, such as newly launched TCF Premier Checking PlusSM with TCF Miles PlusSM Card, TCF New Branch1 Total Deposits (millions of dollars) $1,503 $1,225 $1,088 $744 $594 $344 $190 12/98 12/99 12/00 12/01 12/02 12/03 12/04 1 Branches opened since January 1, 1998. 14 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_B 2/14/05 10:31 AM Page 15 Premier CheckingSM, TCF Premier SavingsSM, and TCF PLUS e CheckingSM. banks in the country. Additionally, TCF once again had one of the low- Additionally, in 2004, TCF’s consumer lending and home loan divisions est net charge-off ratios in the banking industry at .11 percent. merged offering new home purchase customers quicker access to their funds through TCF’s fast-close loan program. Consumer lending had another exceptional year, comprising over 52 percent of Power Assets at year end. Consumer loans, which are 99 Our customers’ lives and business needs are evolving and we will continue percent home equity loans, increased by $788.2 million, or 22 percent, to develop and enhance products and services to meet their needs. At during 2004, and ended the year with $4.4 billion in loans outstand- TCF, we remain committed to being “The Leader in Convenience Banking.” ing. This was accomplished by adding new lenders, plus developing and maintaining our staff of the best consumer lenders in the marketplace. Power Assets and Power Liabilities In 2004, TCF continued its focus on building Power Assets and Power TCF’s leasing and equipment finance operations delivered double-digit growth in 2004, gaining $215 million in loans and leases outstanding, Liabilities. TCF defines Power Assets as higher-yielding commercial or 19 percent. This increase included the purchase of VGM Financial loans, commercial real estate loans, leasing and equipment finance, Services, a home medical equipment leasing company that TCF Leasing and consumer home equity loans. Power Liabilities include checking, acquired early in 2004. Overall, TCF’s leasing operations continued to savings, money market accounts, and certificates of deposits. Power improve credit quality by reducing net charge-offs and delinquencies Assets and Power Liabilities now comprise approximately 66 percent from year-end 2003. of TCF’s balance sheet and in 2004 contributed over 92 percent of net income. TCF’s commercial lending group also performed well in 2004, increasing loans outstanding by $234.1 million, or 10 percent. The addition of TCF was one of the very first banks in America to offer “Totally Free commercial real estate lending in the Colorado market and the Checking” – which continues to be our most popular and most prof- increased number of commercial lenders in our other banking states itable deposit product. We now have over 1,500,000 checking accounts. TCF uses the checking account as the starting point with our customers, then builds that relationship by offering the most convenient banking environment featuring innovative products and exceptional services. Total New Branches1 (number of branches) By year-end 2004, this resulted in $3.9 billion in checking deposits (an Traditional Branches Supermarket Branches increase of more than $657.6 million), $1.9 billion in savings deposits and $659.7 million in money market accounts. TCF’s Power Asset and Power Liability business strategies are inter- related. Because Power Liabilities are a significant contributor to net income, we can afford to be very conservative in underwriting our Power Assets and still generate relatively high earnings performance results. In 2004, TCF’s return on average assets was 2.15 percent and return on average equity was 27.02 percent – one of the top performing 287 258 228 212 190 163 140 105 12/98 12/99 12/00 12/01 12/02 12/03 12/04 2005 Plan 1 Branches opened since January 1, 1998. 2004 Annual Report 15 132406_TCF AR 04 Guts_B 2/14/05 10:31 AM Page 16 contributed to this growth. With a focus on secured lending, this port- There are a variety of ways local nonprofit organizations receive finan- folio continues to have strong credit quality and low net charge-offs, cial support from the TCF Foundation, TCF Bank and its employees: ending the year at .03 percent. • Branch Funds – Contributions or grants awarded to organizations Power Assets and Power Liabilities remain the cornerstone of TCF’s located near TCF branches. growth, profitability and success. Community Giving TCF is dedicated to improving quality of life within the communities we serve. We believe that we have a special obligation to local com- munities that goes beyond simply providing financial services. TCF and its employees support many local organizations through generous gifts of time, talent and resources. TCF reflects its commitment to the community by supporting a vari- • Employee Matching Gifts – Donations contributed by employees, matched dollar-for-dollar by TCF, to nonprofit organizations of their choice. • Employee’s Fund – Funds contributed by employees through pay- roll deduction; contributions are matched 100 percent by the TCF Foundation. • TCF Foundation and Corporate Giving – Larger grants and multi-year commitments awarded to many local and some national organizations. ety of nonprofit organizations through volunteer time, management During the past ten years, TCF has contributed more than $21 million counsel and grants. This support is concentrated into four categories: in grants to charitable organizations. We have also supported local human services, community development, education, and arts & cul- affordable housing efforts and assisted with the capitalization of ture. Additionally, we provide assistance to many local organizations several affordable housing loan funds. supported by TCF employees through their active volunteerism or service on boards and committees. Checking Accounts (thousands) 1,535 1,444 1,338 1,249 1,131 In June of 2004, TCF received the National Business Partner of the Year Award from Goodwill Easter Seals. Seven years ago, TCF joined forces with Goodwill/Easter Seals to develop a program to help give people with barriers to employment a chance to learn skills for entry-level work in the banking industry. TCF has since provided more than $300,000 to support Goodwill’s campaigns and its Bank Skills Training Program. TCF and its employees are dedicated to making a difference to those in need. We are proud of our investment and will continue to support numerous programs vital towards improving the well-being of our communities. 12/00 12/01 12/02 12/03 12/04 16 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 17 page Management’s Discussion and Analysis The Financials 18 20 20 20 21 21 21 25 26 30 31 32 32 32 32 36 38 39 40 40 41 41 42 42 43 43 46 46 46 46 46 47 47 48 53 77 78 80 Overview Results of Operations Five Year Financial Summary Performance Summary Operating Segment Results Consolidated Income Statement Analysis Net Interest Income Provision for Credit Losses Non-Interest Income Non-Interest Expense Income Taxes Consolidated Financial Condition Analysis Securities Available for Sale Loans Held for Sale Loans and Leases Allowance for Loan and Lease Losses Non-Performing Assets Past Due Loans and Leases Potential Problem Loans and Leases Liquidity Management Deposits New Branch Expansion Borrowings Contractual Obligations and Commitments Stockholders’ Equity Market Risk – Interest-Rate Risk Summary of Critical Accounting Estimates Recent Accounting Developments Fourth Quarter Summary Earnings Teleconference and Website Information Legislative, Legal and Regulatory Developments Forward-Looking Information Controls and Procedures Consolidated Financial Statements Notes to Consolidated Financial Statements Management’s Report on Internal Control Over Financial Reporting Reports of Independent Registered Public Accounting Firm Other Financial Data – Selected Quarterly Financial Data 2004 Annual Report 17 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 18 Management’s Discussion and Analysis Management’s discussion and analysis of the consolidated financial condition and results of operations of TCF Financial Corporation (“TCF” or the “Company”) should be read in conjunction with the consolidated financial statements and other financial data beginning on page 48. OVERVIEW TCF is a national financial holding company located in Wayzata, Minnesota. Its principal subsidiary, TCF National Bank, is headquartered in Minnesota and had 430 banking offices in Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana at December 31, 2004. TCF provides convenient financial services through multiple channels to customers located primarily in the Midwest. TCF has developed products and services designed to meet the needs of all consumers. The Company focuses on attracting and retaining customers through service and convenience, including branches that are open seven days a week and on most holidays, extensive full-service supermarket branches and automated teller machine (“ATM”) networks, and telephone and Internet banking. TCF’s philos- ophy is to generate net interest income and fees and other revenue growth through business lines that emphasize higher yielding assets and lower or no interest-cost deposits. The Company’s growth strategies include new branch expansion and the development of new products and services. New products and services are designed to build on existing businesses and expand into complementary products and services through strategic initiatives. TCF’s core businesses are comprised of traditional and super- market bank branches, campus banking, EXPRESS TELLER® ATM’s, Visa U.S.A. Inc. (“Visa”) debit cards, commercial banking, small business banking, consumer lending, leasing and equipment finance and investment, securities brokerage and insurance services. TCF emphasizes the checking account as its anchor account, which provides opportunities to cross-sell other convenience products and services and generate additional fee income. During 2004, TCF generated 504,310 new checking accounts and closed 412,979 accounts, or 28.6%, of the checking accounts existing at the begin- ning of the year, up from 27% in 2003. TCF’s management monitors the opening and closing of accounts and is pursuing opportunities to reduce account attrition to further increase the growth in checking accounts. The continued growth in checking accounts is a significant part of TCF’s growth strategy. At December 31, 2004, 258, or 60%, of TCF’s 430 branches were opened since January 1, 1998 and consist of 197 supermarket branches and 61 traditional branches. Opening new branches is an integral part of TCF’s growth strategy for generating new deposit accounts and the related revenue that is associated with the accounts and other products. New branches typically produce net losses during the first 24-36 months of operations before they become profitable, and therefore the level and timing of new branch expansion can have a significant impact on TCF’s profitability. TCF’s growth in checking accounts is primarily occurring in new branches with growth in older, mature branches being slower. The success of TCF’s branch expansion is dependent on the continued long-term success and viability of branch banking. Success in the supermarket branches is also dependent on the success and viability of the supermarket branch locations. Economic slowdowns, financial or labor difficulties and competitive pressures may have an adverse impact on the supermarket industry and therefore reduce customer activity in TCF’s supermarket branches. TCF is subject to the risk, among others, that its license for its supermarket branches will terminate in connection with the sale or closure of a store by a supermarket chain. TCF’s lending strategy is to originate high credit quality, primarily secured, loans and leases. Commercial loans are generally made on local properties or to local customers. TCF’s largest core lending business is its consumer home equity loan operation, which offers fixed- and variable-rate loans and lines of credit secured by resi- dential real estate properties. The leasing and equipment finance businesses consist of Winthrop Resources Corporation (“Winthrop”), a leasing company that primarily leases technology and data pro- cessing equipment, and TCF Leasing, Inc. (“TCF Leasing”), a company that delivers equipment finance solutions to businesses in select markets. TCF’s leasing and equipment finance businesses operate in all 50 states. As a primarily secured lender, TCF emphasizes credit quality over asset growth. As a result, TCF’s credit losses are generally lower than those experienced by other banks. The allowance for loan and lease losses, while generally lower as a percent of loans and leases than the average in the banking industry, reflects the lower historical charge-offs and management’s expectation of the risk of loss inher- ent in the loan and lease portfolio. See “Consolidated Financial Condition Analysis – Allowance for Loan and Lease Losses.” 18 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 19 Net interest income, the difference between interest income earned on loans and leases and on investments, and interest expense paid on deposits and short-term and long-term borrowings, repre- sents 50.1% of TCF’s total revenue. Net interest income can change significantly from period to period based on general levels of inter- est rates, customer prepayment patterns, the mix of interest earning assets and the mix of interest bearing and non-interest bearing deposits and borrowings. TCF manages the risk of changes in interest rates on its net interest income through an Asset/Liability Committee and through related interest rate risk monitoring and management policies. See “Market Risk – Interest-Rate Risk” for further discus- sion of TCF’s interest rate risk position. The historically low interest rates in 2003 and 2004 were a significant challenge to asset/liability risk and management made several key decisions that impacted TCF’s results. These very low interest rates caused a high level of prepayment in the residential loan and mortgage-backed securities portfolio, which declined a combined $111.8 million during 2004 and $1.5 billion during 2003. The Company’s Visa debit card program has grown significantly since its inception in 1996. TCF is one of the largest issuers of Visa Classic debit cards in the United States. TCF earns interchange rev- enue from customer debit card transactions. During 2004, 88.7% of TCF’s debit card sales volume was generated from off-line (signature- based) transactions. The average interchange rate on these off-line transactions was 1.40% in 2004 compared with 1.43% in 2003. The decrease in the average off-line interchange rate was the result of Visa establishing new interchange rates, as part of the settlement of its class action lawsuits, which took effect in August 2003 and were revised in February 2004. Class action litigation against Visa brought by certain merchants who chose not to participate in the 2003 settlements remains pending. In October 2004, the United States Supreme Court decided not to hear an appeal of a ruling that Visa and MasterCard may not bar member banks from issuing cards on rival networks. Rival card networks, such as Discover and American Express, have brought or are considering bringing private legal action against Visa and MasterCard. Visa is a defendant in several other legal actions. The ultimate impact of any such litiga- tion cannot be predicted at this time. The continued success of TCF’s debit card program is dependent on the success and viability of Visa and the continued use by customers and acceptance by merchants of its debit cards. TCF’s mortgage banking business originated residential mortgage loans and sold them to investors, primarily retaining the servicing rights and related servicing revenue. During 2004, TCF restructured its mortgage banking business by eliminating the wholesale loan origination activities and downsizing and integrating its retail loan origination function with TCF’s consumer lending business. TCF’s mortgage banking business no longer originates any new loans and continues to service the remaining $4.5 billion portfolio of mortgage loans for third party investors. Generally accepted accounting prin- ciples require TCF to record the value of the servicing rights on the balance sheet at the time the loans are sold. Capitalized mortgage servicing rights are amortized in proportion to, and over the period of, estimated related servicing revenues and are also evaluated quarterly for impairment. As interest rates fall, there is a higher probability of prepayment as the customer can generally refinance the loan with relative ease. In addition, as property values increase, customers’ home equity increases, enabling customers to engage in “cash-out” refinance transactions where the customer refinances an existing mortgage into a higher balance loan in order to draw out the increased home equity. TCF does not utilize derivatives to man- age the impairment risk in its capitalized mortgage servicing rights. The following portions of the Management’s Discussion and Analysis focus in more detail on the results of operations for 2004, 2003 and 2002 and on information about TCF’s balance sheet, credit quality, liquidity and funding resources, capital, critical accounting estimates and other matters. 2004 Annual Report 19 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 20 RESULTS OF OPERATIONS Five Year Financial Summary Consolidated Income: (Dollars in thousands, except per-share data) Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . Fees & other revenue . . . . . . . . . . . . . . . . . . . . . Other non-interest income . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . . . Income before income tax expense . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . Per common share: Basic earnings . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings . . . . . . . . . . . . . . . . . . . . . Dividends declared . . . . . . . . . . . . . . . . . . . N.M. Not Meaningful. Consolidated Financial Condition: Year Ended December 31, 2004 982,357 491,891 10,947 467,866 22,600 586,934 384,476 129,483 254,993 1.87 1.86 .75 $ $ $ $ $ $ 2003 900,424 481,145 12,532 430,792 (11,513) 560,109 327,783 111,905 215,878 1.53 1.53 .65 $ $ $ $ $ $ 2002 918,987 499,225 22,006 406,264 13,498 539,288 357,693 124,762 232,931 1.58 1.58 .575 $ $ $ $ $ $ 2001 852,708 481,222 20,878 367,307 4,179 501,996 329,834 122,512 207,322 1.37 1.35 .50 $ $ $ $ $ $ 2000 774,812 438,536 14,772 323,463 12,813 457,202 302,838 116,593 186,245 1.18 1.17 .4125 $ $ $ $ $ $ At December 31, (Dollars in thousands, except per-share data) 2004 2003 2002 2001 2000 Securities available for sale . . . . . . . . . . . . . . . . $ 1,619,941 $ 1,533,288 $ 2,426,794 $ 1,584,661 $ 1,403,888 Residential real estate loans . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,014,166 2,634,107 1,212,643 2,745,931 1,800,344 4,227,138 2,733,290 4,317,951 3,673,831 5,077,719 Loans and leases excluding residential real estate loans . . . . . . . . . . . . . . . . . . . . . 8,372,491 7,135,135 6,320,784 5,510,912 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,340,567 11,319,015 12,202,069 11,358,715 Checking, savings and money market deposits . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . Book value per common share . . . . . . . . . . . . . . 6,493,545 1,468,650 7,962,195 3,104,603 958,418 6.99 5,999,626 1,612,123 7,611,749 2,414,825 920,858 6.53 5,791,233 1,918,755 7,709,988 3,110,295 977,020 6.61 4,778,714 2,320,244 7,098,958 3,023,025 917,033 5.96 4,872,868 11,197,462 4,086,219 2,805,605 6,891,824 3,184,245 910,220 5.67 Key Ratios and Other Data: Compound Annual Growth Rate 1-Year 2004/2003 5-Year 2004/1999 9.1% 2.2 (12.6) 8.6 N.M. 4.8 17.3 15.7 18.1 22.2 21.6 15.4 5.9% 3.0 (8.3) 11.3 (10.5) 5.6 7.1 3.9 9.0 13.1 13.2 15.7 Compound Annual Growth Rate 1-Year 2004/2003 5-Year 2004/1999 5.7% (16.4) (4.1) 17.3 9.0 8.2 (8.9) 4.6 28.6 4.1 7.0 1.3% (23.7) (13.5) 16.1 3.0 11.8 (12.6) 3.9 0.1 3.4 7.2 2000 1.72% 22.64 7.58 4.35 35.26% 352 1,131 Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average total equity to average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest margin (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common dividend payout ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of banking locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of checking accounts (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Net interest income divided by average interest-earning assets. 2004 2.15% 27.02 7.94 4.54 40.32% 430 1,535 At or For the Year Ended December 31, 2003 1.85% 23.05 8.03 4.54 42.48% 401 1,444 2002 2.01% 25.38 7.91 4.71 36.39% 395 1,338 2001 1.79% 23.06 7.78 4.51 37.04% 375 1,249 Performance Summary TCF reported diluted earnings per com- mon share of $1.86 for 2004, compared with $1.53 for 2003 and $1.58 for 2002. Net income was $255 million for 2004, compared with $215.9 million for 2003 and $232.9 million for 2002. Return on average assets was 2.15% in 2004, compared with 1.85% in 2003 and 2.01% in 2002. Return on average equity was 27.02% in 2004, compared with 23.05% in 2003 and 25.38% in 2002. During 2003, TCF prepaid $954 million of high cost FHLB borrowings, incurring early termination fees of $44.3 million ($29.2 million after-tax) which reduced diluted earnings per share by 21 cents. There were no debt terminations in 2004 or 2002. 20 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 21 Operating Segment Results BANKING, comprised of deposits and investment products, commercial banking, small business bank- ing, consumer lending, residential lending and treasury services, reported net income of $219.9 million for 2004, up 22% from $180.2 million in 2003. Banking net interest income for 2004 was $427.5 mil- lion, compared with $415.2 million for 2003. The provision for credit losses totaled $4.1 million in 2004, down slightly from $4.4 million in 2003. Non-interest income totaled $426.9 million, up 20.2% from $355.1 million in 2003. During 2003, TCF prepaid $954 million of FHLB advances and recorded losses on terminations of debt totaling $44.3 million. There were no debt terminations during 2004. During 2004, TCF sold mortgage-backed securities and realized gains of $22.6 million, compared with similar gains of $32.8 million for 2003. See “Consolidated Income Statement Analysis – Consolidated Net Interest Income” for further discussion on debt terminations and on the sales of mortgage-backed securities. Fees and other revenues were $404.3 million for 2004, up $37.7 million, or 10.3%, from 2003. These increases resulted from TCF’s expanding branch network and customer base, new products and services, and increased fees. Banking non-interest expense totaled $516.6 million, up 5.6% from $489.2 million in 2003. The increases were primarily due to costs associated with new branch expansion. TCF had 430 branches, including 248 full service supermarket branches at December 31, 2004. During 2004, TCF opened 30 new branches, of which 11 were supermarket branches. TCF remains focused on a long-term strategy of expanding its franchise with the planned opening of 29 new branches in 2005, consisting of 22 new traditional branches, five new supermarket branches and two campus branches. See “Consolidated Financial Condition Analysis – New Branch Expansion” for further information. LEASING AND EQUIPMENT FINANCE, an operating segment com- prised of TCF’s wholly-owned subsidiaries Winthrop and TCF Leasing, which includes TCF Leasing’s newly acquired business VGM Financial Services (“VGM”), provides a broad range of comprehensive lease and equipment finance products. During the first quarter of 2004, TCF Leasing acquired VGM, a company specializing in financing of home medical equipment. Leasing and Equipment Finance reported net income of $35.9 million for 2004, up 22.6% from $29.3 million in 2003. Net interest income for 2004 was $55.7 million, up 22.8% from $45.4 million in 2003. The provision for credit losses for this operat- ing segment totaled $6.8 million in 2004, down from $8.2 million in 2003, primarily as a result of a decrease in net charge-offs. Non- interest income totaled $50.7 million in 2004, down $391 thousand from $51.1 million in 2003. Leasing and Equipment Finance revenues may fluctuate from period to period based on customer driven factors not entirely within the control of TCF. Non-interest expense totaled $43.7 million in 2004, up $1.7 million from $42 mil- lion in 2003. Included in non-interest expenses for 2004 was an impairment charge of $1.6 million related to a reduction in the estimated residual value of an aircraft leveraged lease investment. MORTGAGE BANKING activities included the origination of residen- tial mortgage loans, generally for sale to third parties with servicing retained and the servicing of loans for third party investors. This operating segment reported a net loss of $3.2 million for 2004, com- pared with net income of $2.9 million for 2003. TCF’s mortgage bank- ing operations funded $856.7 million in loans during 2004, down from $3 billion in 2003, primarily reflecting a decline in refinance activity as well as the restructuring of this business operation. Non-interest income totaled $14.3 million, up from $13.1 million in 2003. The increase in non-interest income was primarily due to a $28.1 million increase in net servicing income partially offset by a $26.9 million decline in gains on sales of loans and other income. See Note 10 of Notes to the Consolidated Financial Statements for further dis- cussion. The prepayment rate on the third party servicing portfolio was 21.4% in 2004, down from 51.8% in 2003. Mortgage Banking’s non-interest expense totaled $27.4 million for 2004, down 8.7% from $30 million for 2003. Contributing to the decrease in non- interest expense during 2004 were decreased expenses resulting from the decline in refinance activity and the elimination of whole- sale loan origination activities and downsizing and integrating of the retail origination function with the consumer lending business. The Mortgage Banking operations recorded $2.3 million of expense related to the restructuring of its operations in 2004. CONSOLIDATED INCOME STATEMENT ANALYSIS Net Interest Income Net interest income, which is the difference between interest earned on loans and leases, securities available for sale, investments and other interest-earning assets (interest income), and interest paid on deposits and borrowings (interest expense), represented 50.1% of TCF’s revenue in 2004. 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, by loan and deposit pricing strategies and competitive con- ditions, the volume and the mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. 2004 Annual Report 21 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 22 The following tables present TCF’s average balance sheets, interest and dividends earned or paid, and the related yields and rates on major categories of TCF’s interest-earning assets and interest-bearing liabilities: Year Ended December 31, 2004 Year Ended December 31, 2003 Change Average Yields and Interest(1) Rates Average Balance Average Balance Interest(1) Average Yields and Rates Average Balance Interest (1) Average Yields and Rates (bps) 2.77% $ 5.25 101,455 $ 4,511 1,891,062 103,821 4.45% $ 5.49 3.48 488,634 20,016 4.10 23,378 $ (1,056) (168) (354,389) (157,105) (23,178) (8,483) $ 124,833 $ 1,536,673 331,529 4,005,558 2,008,943 431,793 1,285,925 7,732,219 1,104,814 8,837,033 10,830,068 1,052,679 3,455 80,643 11,533 245,439 110,446 18,569 89,364 463,818 63,360 527,178 622,809 6.13 5.50 4.30 6.95 6.00 5.73 5.97 5.75 3,288,040 1,854,452 445,634 1,094,532 6,682,658 1,440,688 8,123,346 10,604,497 1,053,073 $11,657,570 $ 2,355,000 $ 2,232,883 1,338,893 1,823,852 763,925 3,926,670 1,493,938 5,420,608 7,775,608 809,106 1,984,069 2,793,175 8,213,783 3,820 7,490 2,992 14,302 28,279 42,581 42,581 12,664 75,673 88,337 130,918 130,918 .29 .41 .39 .36 1.89 .79 .55 1.57 3.81 3.16 1.59 1.24 1,064,380 1,847,775 887,273 3,799,428 1,743,533 5,542,961 7,775,844 757,128 1,778,671 2,535,799 8,078,760 10,311,643 409,539 10,721,182 936,388 $11,657,570 214,971 108,867 19,020 81,912 424,770 88,401 513,171 641,519 948 9,298 4,447 14,693 42,102 56,795 56,795 9,451 94,128 103,579 160,374 160,374 6.54 5.87 4.27 7.48 6.36 6.14 6.32 6.05 .09 .50 .50 .39 2.41 1.02 .73 1.25 5.29 4.08 1.99 1.56 $ $ 717,518 154,491 (13,841) 191,393 1,049,561 (335,874) 713,687 225,571 (394) 225,177 122,117 274,513 (23,923) (123,348) 127,242 (249,595) (122,353) (236) 51,978 205,398 257,376 135,023 257,140 (39,355) 217,785 7,392 $ 225,177 (24) (62) (41) (37) 3 (53) (36) (41) (35) (30) 20 (9) (11) (3) (52) (23) (18) 30,468 1,579 (451) 7,452 39,048 (25,041) 14,007 (18,710) 2,872 (1,808) (1,455) (391) (13,823) (14,214) (14,214) 3,213 32 (18,455) (148) (15,242) (29,456) (29,456) (92) (40) (32) (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) . . . . . . . . . . . . . . . Total interest-earning assets . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities and Stockholders’ Equity: Non-interest bearing deposits . . . . . . . . . . . . . . . . . Interest-bearing deposits: Checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . Total interest-bearing deposits . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . Borrowings: Short-term borrowings . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . Total borrowings . . . . . . . . . . . . . . . . . . . . . . Total interest-bearing liabilities . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $11,882,747 Total deposits and borrowings . . . . . . . . . . . 10,568,783 Other liabilities (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity (4) . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and stockholders’ equity . . . . . . 370,184 10,938,967 943,780 $11,882,747 Net interest income and margin . . . . . . . . . . . . . . . $ 491,891 4.54% $ 481,145 4.54% $ 10,746 – bps = basis points. (1) Tax-exempt income was not significant and thus interest income and related yields have not been presented on a tax equivalent basis. Tax-exempt income of $638,000 and $523,000 was recognized during the years ended December 31, 2004 and 2003, 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. 22 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 23 Year Ended December 31, 2003 Year Ended December 31, 2002 Change Average Balance Interest(1) Average Yields and Rates Average Balance Interest(1) Average Yields and Rates Average Balance Interest(1) $ 101,455 $ 4,511 4.45% $ 154,862 $ 6,934 4.48% $ (53,407) $ (2,423) (Dollars in thousands) Assets: Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale (2) . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,891,062 488,634 103,821 20,016 5.49 4.10 1,879,674 437,702 118,272 22,464 6.29 5.13 11,388 50,932 Loans and leases: Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . Total loans and leases (3) . . . . . . . . . . . . . . . . . . . 3,288,040 1,854,452 445,634 1,094,532 6,682,658 1,440,688 8,123,346 Total interest-earning assets . . . . . . . . . . . 10,604,497 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,053,073 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,657,570 214,971 108,867 19,020 81,912 424,770 88,401 513,171 641,519 6.54 5.87 4.27 7.48 6.36 6.14 6.32 6.05 2,712,812 1,746,207 435,488 995,672 5,890,179 2,227,537 8,117,716 10,589,954 1,020,550 $11,610,504 207,492 118,355 22,699 85,447 433,993 151,700 585,693 733,363 7.65 6.78 5.21 8.58 7.37 6.81 7.21 6.93 575,228 108,245 10,146 98,860 792,479 (786,849) 5,630 14,543 32,523 47,066 $ $ 2,232,883 $ 1,893,916 $ 338,967 Liabilities and Stockholders’ Equity: Non-interest bearing deposits . . . . . . . . . . . . . . . . . . . . Interest-bearing deposits: Checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . Total interest-bearing deposits . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . Borrowings: Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . Total borrowings . . . . . . . . . . . . . . . . . . . . . . . . . Total interest-bearing liabilities . . . . . . . . 1,064,380 1,847,775 887,273 3,799,428 1,743,533 5,542,961 7,775,844 757,128 1,778,671 2,535,799 8,078,760 Total deposits and borrowings . . . . . . . . . . . . . . 10,311,643 Other liabilities (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity (4) . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and stockholders’ equity . . . . . . . . . 409,539 10,721,182 936,388 $11,657,570 948 9,298 4,447 14,693 42,102 56,795 56,795 9,451 94,128 103,579 160,374 160,374 .09 .50 .50 .39 2.41 1.02 .73 1.25 5.29 4.08 1.99 1.56 915,720 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 8,356,269 10,250,185 442,404 10,692,589 917,915 $11,610,504 1,479 15,924 9,737 27,140 68,246 95,386 95,386 9,903 128,849 138,752 234,138 234,138 .16 1.02 1.06 .80 3.24 1.73 1.29 1.73 5.66 4.87 2.80 2.28 148,660 287,236 (32,120) 403,776 (365,175) 38,601 377,568 183,193 (499,303) (316,110) (277,509) 61,458 (32,865) 28,593 18,473 47,066 $ Average Yields and Rates (bps) (3) (80) (14,451) (2,448) (103) 7,479 (111) (9,488) (3,679) (3,535) (9,223) (63,299) (72,522) (91,844) (91) (94) (110) (101) (67) (89) (88) (531) (6,626) (5,290) (12,447) (26,144) (38,591) (38,591) (452) (34,721) (35,173) (73,764) (73,764) (7) (52) (56) (41) (83) (71) (56) (48) (37) (79) (81) (72) Net interest income and margin . . . . . . . . . . . . . . . . . . . $ 481,145 4.54% $ 499,225 4.71% $ (18,080) (17) bps = basis points. (1) Tax-exempt income was not significant and thus interest income and related yields have not been presented on a tax equivalent basis. Tax-exempt income of $523,000 and $354,000 was recognized during the years ended December 31, 2003 and 2002, 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. 2004 Annual Report 23 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 24 The following table presents the components of the changes in net interest income by volume and rate: (In thousands) Interest income: Investments . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . Loans and leases: Consumer . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . Leasing and equipment finance . . . . . Residential real estate . . . . . . . . . . . . Total interest income . . . . . . . . . . . . . . . . . . . . Interest expense: Checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2004 Versus Same Period in 2003 Increase (Decrease) Due to Year Ended December 31, 2003 Versus Same Period in 2002 Increase (Decrease) Due to Volume (1) Rate(1) Total Volume (1) Rate (1) Total $ 890 (18,761) (5,775) $ (1,946) (4,417) (2,708) $ (1,056) (23,178) (8,483) $ (2,375) 713 2,421 $ (48) (15,164) (4,869) $ (2,423) (14,451) (2,448) 44,623 8,743 (594) 13,597 (19,557) 13,444 189 (119) (566) (5,508) 684 9,982 3,911 10,247 (14,155) (7,164) 143 (6,145) (5,484) (32,154) 2,683 (1,689) (889) (8,315) 2,529 (28,437) (33,367) 499 30,468 1,579 (451) 7,452 (25,041) (18,710) 2,872 (1,808) (1,455) (13,823) 3,213 (18,455) (29,456) 10,746 40,204 7,026 518 8,009 (49,442) 1,006 209 2,535 (329) (10,602) 2,693 (26,838) 1,396 685 (32,725) (16,514) (4,197) (11,544) (13,857) (92,850) (740) (9,161) (4,961) (15,542) (3,145) (7,883) (75,160) (18,765) 7,479 (9,488) (3,679) (3,535) (63,299) (91,844) (531) (6,626) (5,290) (26,144) (452) (34,721) (73,764) (18,080) (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. Achieving net interest margin growth over time is dependent on TCF’s ability to generate higher-yielding assets and lower-cost retail deposits. The net impact of the changes in interest-bearing assets and deposits and borrowings has positioned TCF to be asset sensitive (i.e. more assets than liabilities will be maturing, repricing, or prepaying during the next twelve months). Although this positive gap position may benefit TCF in a rising rate environment, if interest rates remain at current levels or fall further, the net interest margin may compress and net interest income may decline. An increase in interest rates would affect TCF’s fixed-rate/variable-rate product origination mix and would extend the estimated life of its residen- tial real estate loan and mortgage-backed securities portfolios. A change in origination mix and/or the extending of the estimated life of mortgage-related assets may have an adverse impact on future net interest income or net interest margin as fixed-rate assets are funded with interest-bearing liabilities with increasing rates. Competition for checking, savings and money market deposits, important sources of lower-cost funds for TCF, is intense. A decline in these low-cost deposits may have an adverse impact on future net interest income or net interest margin as TCF would need to replace these funds with short- or long-term borrowings which may have a higher interest cost. See “Consolidated Financial Condition Analysis – Market Risk – Interest-Rate Risk” and “Consolidated Financial Condition Analysis – Deposits” for further discussion on TCF’s interest rate risk position. 24 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 25 The increase in 2004 in net interest income primarily reflects the growth in average consumer, commercial and leasing and equipment finance balances, up $1 billion over 2003, partially offset by the reductions in residential real estate loans and mortgage-backed securities, down $690.3 million from 2003, and residential mortgage loans held for sale down $179.9 million during the same period. The decrease in average residential real estate loans and mortgage- backed securities reflects management’s decision to delay investing in long-term fixed-rate residential real estate loans and mortgage- backed securities to replace prepayments and sales of such assets during the very low interest rate environment coupled with the growth in higher yielding consumer, commercial and lease equipment finance loans and leases. The decrease in 2003, from 2002, in both net interest income and net interest margin was primarily the result of a decline in the over- all yield on interest-earning assets during 2003, partially offset by a decline in the overall cost of funds on interest-bearing liabilities. The yield on interest-earning assets declined 88 basis points from 6.93% for 2002 to 6.05% for 2003, while the overall cost of funds on interest-bearing liabilities declined 72 basis points to 1.56% for 2003. Interest income decreased $91.8 million in 2003, reflecting decreases of $92.9 million due to the decline in rates partially offset by a $1 million increase due to volume. Interest expense decreased $73.8 million in 2003, reflecting decreases of $75.2 mil- lion due to lower cost of funds, partially offset by a $1.4 million increase due to volume. Net interest income and net interest margin in 2002 increased from 2001 primarily as a result of growth in average low-cost deposits (checking, savings and money market), up $997.8 million, or 23.2%, coupled with growth in higher-yielding loans and leases (commercial, consumer and lease equipment finance) of $724.6 million, or 14%, and lower borrowing costs. These increases were partially offset by a decrease of $850 million, or 17.1%, for 2002 in lower-yielding residential mortgages and mortgage-backed securities. Provision for Credit Losses TCF provided $10.9 million for credit losses in 2004, compared with $12.5 million in 2003 and $22 million in 2002. The decrease in the provision from 2003 primarily reflects declines in net charge-offs. Net loan and lease charge-offs were $9.5 million, or .11% of average loans and leases in 2004, down from $12.9 million, or .16% of average loans and leases in 2003 and $20 million, or .25% of average loans and leases in 2002. Leasing and equipment finance net charge-offs were $5.5 million, or .43% of related average loans and leases during 2004, down from $7.5 million, or .69% of related average loans and leases in 2003. The determination of the allowance for loan and lease losses and the related provision for credit losses is a critical accounting estimate 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 assessment of credit risk in the current loan and lease portfolio. Also see “Consolidated Financial Condition Analysis – Allowance for Loan and Lease Losses.” 2004 Annual Report 25 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 26 Non-Interest Income Non-interest income is a significant source of revenue for TCF, representing 49.9% of total revenues in 2004, and is an important factor in TCF’s results of operations. Providing a wide range of retail banking services is an integral component of TCF’s business philosophy and a major strategy for generating additional non-interest income. Total non-interest income was $490.5 million for 2004, up $71.2 million from $419.3 million in 2003. Non-interest income totaled $419.8 million in 2002. Significantly impacting non-interest income during 2003 were losses on terminations of debt of $44.3 million, which were part of the strat- egy to restructure the balance sheet and reduce funding costs in future periods. There were no terminations of debt in either 2004 or 2002. Fees and other revenue increased $37.1 million, or 8.6%, during 2004. This increase in 2004 was driven by increased fees, service charges and card revenue generated by TCF’s expanding branch network and customer base. The increases in fees and service charges and card revenue primarily reflect an increase in the num- ber of checking accounts, which totaled 1,535,152 accounts at December 31, 2004, up from 1,443,821 accounts at December 31, 2003 and 1,338,313 accounts at December 31, 2002. The average annual fee revenue per retail checking account was $232 for 2004, compared with $227 for 2003 and $218 for 2002. The following table presents the components of non-interest income: Year Ended December 31, (Dollars in thousands) 2004 2003 2002 2001 Fees and service charges . . . . . . . . . . . . . . . . . . . $271,664 $247,456 $226,051 $195,162 Card revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . ATM revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments and insurance revenue . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . Mortgage banking . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees and other revenue . . . . . . . . . . . . . Gains on sales of: 63,312 42,935 12,558 390,469 50,323 12,960 14,114 467,866 Securities available for sale . . . . . . . . . . . . . 22,600 Branches . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains (losses) on termination of debt . . . . . . . . . – – Other non-interest income . . . . . . . . . . Total non-interest income . . . . . . . 22,600 $490,466 Fee revenue per retail checking 52,991 43,623 13,901 357,971 51,088 12,719 9,014 430,792 32,832 – (44,345) (11,513) $419,279 47,190 45,296 15,848 334,385 51,628 6,979 13,272 406,264 11,536 1,962 – 13,498 $419,762 40,525 45,768 11,554 293,009 45,730 12,042 16,526 367,307 863 3,316 – 4,179 $371,486 2000 $166,394 30,613 47,334 12,266 256,607 38,442 10,519 17,895 323,463 – 12,813 – 12,813 $336,276 account (in dollars) . . . . . . . . . . . . . . . . . . . $ 232 $ 227 $ 218 $ 209 $ 190 Fees and other revenue as a: percentage of total revenue . . . . . . . . . . . . . percentage of average assets . . . . . . . . . . . 47.63% 3.94 47.84% 3.70 44.21% 3.50 43.08% 3.18 41.75% 2.98 Compound Annual Growth Rate 1-Year 2004/2003 5-Year 2004/1999 9.8% 19.5 (1.6) (9.7) 9.1 (1.5) 1.9 56.6 8.6 14.5% 25.0 (1.5) (3.3) 12.1 12.0 .3 1.9 11.3 17.0 2.2 9.4 6.7 26 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 27 Fees and Service Charges Fees and service charges increased $24.2 million, or 9.8%, in 2004 and $21.4 million, or 9.5%, in 2003. This increase primarily reflects the impact of TCF’s expanding branch network and customer base, new products and services, and increased fees. Card Revenue During 2004, card revenue, primarily interchange fees, totaled $63.3 million, up 19.5%, from $53 million in 2003. The increase in card revenue in 2004 was primarily attributed to a 21.4% increase in sales volumes generated by increases in both active accounts and the number of transactions per active account, par- tially offset by a 3 basis point decline in average off-line interchange rates from 2003. Interchange fees have been impacted as a result of the settlement of certain merchant litigation against Visa in 2003. As part of the settlement, interchange rates on debit cards for certain merchants were reduced from August 2003 through February 2004. Additionally, as part of the settlement, Visa established new interchange rates for debit cards, which took effect in February 2004, and these rates increased from the rate established August 1, 2003; however, overall these new rates remained below the rates which were in effect prior to August 2003. ATM Revenue ATM revenue totaled $42.9 million for 2004, down 1.6% from $43.6 million for 2003. The declines in ATM revenue were attributable to the continued decline in utilization of non-owned ATM machines by TCF customers and declines in utilization of TCF’s ATM machines by non-customers partially offset by the increased number of TCF customers with cards. These declines resulted from increased use of debit cards as well as the increased competition from other ATM machine networks. Additionally, as ATM site contracts are renewed, merchants have generally required a larger percentage of the fee charged to non-customers for use of TCF’s ATM’s. At December 31, 2004, TCF had 1,141 EXPRESS TELLER® ATM machines, compared with 1,166 machines at December 31, 2003. The following table sets forth information about TCF’s card business: (Dollars in thousands) Average number of checking accounts with a TCF card . . . . . . . . . . . . Active card users . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average number of transactions per month . . . . . . . . . . . . . . . . . . . . Sales volume for the year ended: Off-line (Signature) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . On-line (PIN) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percentage off-line . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average off-line interchange rate . . . . . . . . . . . . . . . . . . . . . . . . . . . At or For the Year Ended December 31, 2004 1,323,877 710,893 13.5 $4,197,678 537,124 $4,734,802 88.66% 1.40% 2003 1,193,936 647,407 12.5 $3,543,657 355,045 $3,898,702 90.89% 1.43% 2002 1,087,592 578,347 11.8 $2,958,633 257,560 $3,216,193 91.99% 1.55% Percentage Increase (Decrease) 2004/2003 2003/2002 10.9% 9.8 8.0 18.5 51.3 21.4 (2.5) (2.1) 9.8% 11.9 5.9 19.8 37.8 21.2 (1.2) (7.7) 2004 Annual Report 27 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 28 Investments and Insurance Revenue Investments and insurance revenue, consisting principally of commissions on sales of annuities and mutual funds, decreased $1.3 million in 2004, compared with a decrease of $1.9 million in 2003. Annuity and mutual fund sales volumes totaled $212.2 million for the year ended December 31, 2004, compared with $239.5 million during 2003. The decreased sales volumes during 2004 were the result of the continuation of low interest rates which reduced the rate of return on annuity products offered by insurance companies. Sales of insur- ance and investment products may fluctuate from period to period, and future sales levels will depend upon general economic conditions and investor preferences. Sales of annuities will also depend upon their continued tax advantage and may be negatively impacted by the level of interest rates and alternative investment products. Leasing and Equipment Finance Revenue Leasing and equipment finance revenues decreased $765 thousand, or 1.5%, in 2004, following a decrease of $540 thousand or 1%, in 2003. The decrease in leasing revenues for 2004 was primarily driven by a decline in operating lease revenues of $6.1 million, partially offset by a $3.3 million increase in sales-type lease revenues and a $2 million increase in other leasing revenues during 2004. Sales-type revenues generally occur at or near the end of the lease term as customers extend the lease or purchase the underlying equipment. As Winthrop’s outstanding lease receivables have declined and coupled with the period new leases take to reach the end of term, it is antici- pated that sales-type revenues in 2005 will be lower than those achieved in 2004 and 2003. The decrease in leasing revenues for 2003 was primarily driven by a decline in sales-type revenues of $3 million in 2003, partially offset by a $2 million increase in operating lease revenues during 2003. Leasing and equipment finance revenues may fluctuate from period to period based on customer-driven factors not entirely within the control of TCF. Mortgage Banking Revenue During 2004, TCF restructured its mortgage banking business by eliminating the wholesale loan origina- tion activities and downsizing and integrating its retail loan origination function with TCF’s consumer lending business. TCF’s mortgage banking business no longer originates any new loans and continues to service the remaining $4.5 billion portfolio of mortgage loans for third party investors. As a result, gains on sales of loans declined as origination volumes declined in 2004, and there will be no gains on sales of loans in 2005. The increase in mortgage banking revenues during 2003 was primarily due to increased gains on sales of loans, up $15.4 million over 2002, partially offset by a $9.5 million increase in amortization and provision for impairment of mortgage servicing rights related to the sustained high level of prepayments in 2003. The following table sets forth information about mortgage banking revenues: (Dollars in thousands) Servicing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less mortgage servicing: Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net servicing income (loss) . . . . . . . . . . . . . . . . . . . . . . Gains on sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 $ 17,349 13,091 1,500 14,591 2,758 8,107 2,095 Total mortgage banking revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,960 Year Ended December 31, 2003 $ 20,533 23,680 21,153 44,833 (24,300) 33,505 3,514 $ 12,719 2002 $ 20,443 22,874 12,500 35,374 (14,931) 18,110 3,800 $ 6,979 2001 $ 16,932 2000 $ 12,642 16,564 4,400 20,964 (4,032) 11,795 4,279 5,326 – 5,326 7,316 1,347 1,856 $ 12,042 $ 10,519 The following table sets forth information about the mortgage servicing portfolio: (Dollars in thousands) Third party servicing portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average note rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized mortgage servicing rights, net . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights as a percentage of servicing portfolio . . . . Average servicing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights as a multiple of average servicing fee . . . . bps = basis points. 2004 $4,503,564 At December 31, 2003 $5,122,741 2002 $5,576,066 5.78% 5.97% 6.64% $ 46,442 $ 52,036 $ 62,644 1.03% 31.0bps 3.3X 1.02% 31.7bps 3.2 X 1.12% 32.9bps 3.4 X Percentage Increase (Decrease) 2003/2002 2004/2003 (12.1)% (3.2) (10.8) 1.0 (2.2) 3.1 (8.1)% (10.1) (16.9) (8.9) (3.6) (5.9) 28 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 29 Mortgage servicing revenues can be significantly impacted by the amount of amortization and provision for impairment of mortgage servicing rights. The valuation of mortgage servicing rights is a criti- cal accounting estimate for TCF. This estimate is based upon loan types, note rates and prepayment assumptions. Changes in the mix of loans, interest rates, defaults or prepayment speeds may have a material effect on the amortization amount and possible impairment in valuation. In a declining interest rate environment, prepayment speed assumptions will increase and result in an acceleration in the amortization of the mortgage servicing rights as the assumed underlying portfolio declines and also may result in impairment as the value of the mortgage servicing rights decline. TCF periodically evaluates its capitalized mortgage servicing rights for impairment. 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 estimates. See Notes 1 and 10 of Notes to Consolidated Financial Statements for additional information concerning TCF’s mortgage servicing rights. The following tables summarize the servicing portfolio by interest rate tranche, the prepayment speed assumptions and the weighted average remaining life of the loans by interest rate tranche used in the determination of the value and amortization of mortgage servicing rights as of December 31, 2004 and 2003: (Dollars in thousands) Interest Rate Tranche 0 to 5.50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.51 to 6.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.01 to 6.50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.51 to 7.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.01% and higher . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2004 Prepayment Speed Assumption Weighted Average Life (in Years) 11.3% 16.1 23.2 25.6 27.6 15.8 7.5 5.8 4.0 3.4 3.0 5.8 2003 Prepayment Speed Assumption Weighted Average Life (in Years) 13.3% 17.9 25.4 31.8 35.5 19.0 7.2 5.6 3.8 2.7 2.3 5.1 Unpaid Balance $1,648,918 1,407,315 830,161 740,675 495,672 $5,122,741 Unpaid Balance $1,707,934 1,409,983 691,148 453,017 241,482 $4,503,564 At December 31, 2004 and 2003, the sensitivities of the current fair value of mortgage servicing rights to a hypothetical immediate 10% and 25% adverse change in prepayment speed assumptions and discount rate are 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact on fair value of 25% adverse change in discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2004 $55.9 5.8 15.8% 7.5% $(3.1) $(7.1) $(1.5) $(3.4) 2003 $58.0 5.1 19.0% 7.5% $(3.2) $(7.4) $(1.3) $(3.3) These sensitivities are theoretical and should be used with cau- tion. As the figures indicate, changes in fair value based on a given variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the above table, the effect of a variation in a particular assumption on the fair value of the mortgage servicing rights is calculated independently without changing any other assumptions. In reality, changes in one factor may result in changes in another (for example, changes in prepayment speed estimates could result in changes in discount rates or market interest rates), which might either magnify or counteract the sensitivities. TCF does not use derivatives to hedge its mortgage servicing rights asset. 2004 Annual Report 29 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 30 Other Non-interest Income Other non-interest income con- sists of gains on sales of securities available for sale, gains on sales of education loans, losses on termination of debt and gains on sales of branches. Gains on securities available for sale of $22.6 million, $32.8 million and $11.5 million were recognized on the sales of $1.4 billion, $816.5 million and $473.9 million in mortgage-backed securities in 2004, 2003 and 2002, respectively. Gains of $7.8 million, $3.1 million and $2.7 million were recognized on the sales of education loans in 2004, 2003 and 2002, respectively. Also, as previously discussed, TCF prepaid $954 million of fixed-rate FHLB advances during 2003, and recorded losses on terminations of debt of $44.3 million in 2003. There were no prepayments of debt during 2004 or 2002. There were no branch sales during 2004 or 2003. During 2002, TCF recognized a gain of $2 million on the sale of a branch with $17.1 million in deposits. TCF may periodically sell branches that it considers underperforming or have limited growth potential. Non-Interest Expense Non-interest expense increased $26.8 million, or 4.8%, in 2004, and $20.8 million, or 3.9%, in 2003, and $37.3 million, or 7.4%, in 2002, compared with the respective prior years. The following table presents the components of non-interest expense: (Dollars in thousands) Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee benefits . . . . . . . . . . . . . . . . . . . . . . . Total compensation and employee benefits . . . . . . . . . . . . . . . . . Occupancy and equipment . . . . . . . . . . . . . . . . . Advertising and promotions . . . . . . . . . . . . . . . . Deposit account losses . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of goodwill . . . . . . . . . . . . . . . . . . . 2004 $273,083 49,741 322,824 95,617 26,353 22,624 119,516 586,934 – Year Ended December 31, 2003 $256,447 46,357 302,804 88,423 25,536 18,820 124,526 560,109 – 2002 $254,341 39,954 294,295 83,131 21,894 19,206 120,762 539,288 – 2001 $234,029 32,789 266,818 78,774 20,909 19,236 108,482 494,219 7,777 Total non-interest expense . . . . . . . . . . . . . $586,934 $560,109 $539,288 $501,996 Compound Annual Growth Rate 1-Year 2004/2003 5-Year 2004/1999 6.5% 7.3 6.6 8.1 3.2 20.2 (4.0) 4.8 – 4.8 5.7% 9.9 6.2 5.4 9.2 5.7 4.9 5.9 – 5.6 2000 $209,479 29,455 238,934 74,938 19,181 19,534 96,909 449,496 7,706 $457,202 Compensation and employee benefits, representing 55%, 54.1% and 54.6% of total non-interest expense in 2004, 2003 and 2002, respectively, increased $20 million, or 6.6%, in 2004, $8.5 million, or 2.9%, in 2003 and $27.5 million, or 10.3%, in 2002. The 2004 increase in compensation expense of 6.5% was driven by a $9.5 million increase in retail banking operations driven by TCF’s continued new branch expansion, a $6.7 million increase in incentive compensation result- ing from improved performance in 2004 and a $2.1 million increase related to the 2004 acquisition of VGM, partially offset by a $2.9 million decrease in stock compensation expense. Compensation expense increased $2.1 million, or .8%, in 2003 and was primarily due to higher levels of mortgage banking production and costs associated with branches opened during 2003 and 2002, partially offset by a $1.7 million decline in stock compensation expense. The 2002 increase of 8.7% in compensation expense was primarily due to costs associated with new branch expansion and the addition of lenders and sales representatives. In 2004, employee benefits totaled $49.7 million, up 7.3%, from 2003, and resulted from an increase in retirement, payroll taxes and medical expenses of $3.8 million. The 2003 and 2002 increases in employee benefits expense of $6.4 million, and $7.2 million, respectively, were primarily driven by increases in retirement and medical expenses. See Note 18 of Notes to Consolidated Financial Statements for further information on postretirement plans. 30 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 31 Occupancy and equipment expenses increased $7.2 million in 2004, $5.3 million in 2003 and $4.4 million in 2002. The increases were primarily due to TCF’s new branch expansion and retail banking and leasing activities. Advertising and promotion expenses increased $817 thousand in 2004 following increases of $3.6 million in 2003 and $985 thousand in 2002. The increases were attributable to additional advertising and promotions expenses focused on the acquisition and retention of TCF’s deposit customer base. Deposit account losses totaled $22.6 million in 2004, up $3.8 million from 2003 as a result of increased customer transaction activity. Deposit account losses declined in 2003 and 2002 by $386 thousand and $30 thousand, respectively. Other non-interest expense decreased $5 million, or 4%, in 2004, primarily attributable to real estate expense, which decreased $3.1 million to a negative $175 thousand in 2004 driven by $3.4 mil- lion of net recoveries on sales and redemptions of properties and a decrease in mortgage banking expenses of $2 million due to the decline in refinance activity and the previously discussed restructur- ing of the mortgage banking business. In 2003, other non-interest expense increased $3.8 million, or 3.1%, primarily the result of higher levels of mortgage banking production and prepayment activity. In 2002, other non-interest expense increased $12.3 million, or 11.3%, primarily the result of increased expenses associated with expanded retail banking and leasing operations, card processing expense result- ing from increased utilization and higher levels of production and prepayment activity in the mortgage banking business. A summary of other expense is presented in Note 24 of Notes to Consolidated Financial Statements. Income Taxes Income tax expense represented 33.68% of income before income tax expense during 2004, compared with 34.14% and 34.88% in 2003 and 2002, respectively. The lower effective tax rate in 2004 and 2003 primarily reflects increases in investments in tax- advantaged affordable housing limited partnerships and lower state and local income taxes. TCF has a Real Estate Investment Trust (“REIT”) and a related foreign operating company 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 REIT and related companies must meet specific provisions of the Internal Revenue Code (“IRC”) and state tax laws. If these companies fail to meet any of the required provisions of Federal and state tax laws, TCF’s tax expense could increase. TCF’s related companies have included companies that operate under pro- visions of the laws in certain states in which TCF operates (including Minnesota and Illinois) that allow deductions for income derived from foreign operating companies. Use of these companies has been the subject of administrative audit reviews, and proposed legisla- tive change. Unfavorable developments in any of these areas could substantially increase TCF’s state tax liability. The determination of current and deferred income taxes is a critical accounting estimate which is based on complex analyses of many factors including interpretation of Federal and state income tax laws, the differences between the tax and financial reporting bases of assets and liabilities (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 assurances that estimates and interpretations used in determining income tax liabilities may not be challenged by Federal and state taxing authorities. Actual results could differ significantly from the estimates and tax law interpretations used in determining the current and deferred income tax liabilities. In addition, under generally accepted accounting principles, deferred income tax assets and liabilities are recorded at the current prevail- ing 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 to the Consolidated Statements of Income. Further detail on income taxes is provided in Note 14 of Notes to Consolidated Financial Statements. 2004 Annual Report 31 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 32 CONSOLIDATED FINANCIAL CONDITION ANALYSIS Securities Available for Sale Securities available for sale increased $86.7 million during 2004 to $1.6 billion at December 31, 2004. This increase reflects purchases of $1.9 billion of mortgage- backed securities during 2004, partially offset by sales of $1.4 billion of mortgage-backed securities, in which the company recognized $22.6 million in gains on sales of securities available for sale, and normal payment and prepayment activity. TCF’s securities available for sale portfolio included $1.6 billion and $10.2 million of fixed- rate and adjustable-rate mortgage-backed securities, respectively. Net unrealized losses on securities available for sale totaled $2.2 million at December 31, 2004, compared with net unrealized gains of $8.9 million at December 31, 2003. TCF may, from time to time, sell additional mortgage-backed securities and utilize the proceeds to either reduce borrowings or to fund growth in loans and leases. Loans Held for Sale Loans held for sale includes education and residential mortgage loans. Education loans held for sale were $154.3 million and $234.3 million at December 31, 2004 and 2003, respectively. Education loans are generally sold when the student graduates or drops below half-time status. Residential mortgage loans held for sale were part of TCF’s mortgage banking business that was restructured in 2004. At December 31, 2004, TCF had no residential mortgage loans held for sale, compared with $101 mil- lion in residential mortgage loans held for sale at December 31, 2003. TCF does not anticipate selling residential loans in the secondary market in the future. 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) At December 31, Portfolio Distribution: 2004 2003 2002 Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,418,588 $3,630,341 $3,005,882 Commercial real estate . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . 2,154,396 424,135 1,375,372 8,372,491 1,014,166 1,916,701 427,696 1,160,397 7,135,135 1,212,643 1,835,788 440,074 1,039,040 6,320,784 1,800,344 2001 $2,509,333 1,622,461 422,381 956,737 5,510,912 2,733,290 2000 $2,234,134 1,371,841 410,422 856,471 4,872,868 3,673,831 Total loans and leases . . . . . . . . . . . . . . . . . $9,386,657 $8,347,778 $8,121,128 $8,244,202 $8,546,699 Compound Annual Growth Rate 1-Year 2004/2003 5-Year 2004/1999 21.7% 12.4 (.8) 18.5 17.3 (16.4) 12.4 16.5% 14.9 3.8 22.8 16.1 (23.7) 3.5 (In thousands) At December 31, 2004 Geographic Distribution: Minnesota . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wisconsin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Colorado . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer $1,789,382 776,654 1,151,067 429,725 227,630 645 9,350 474 4,698 28,963 $4,418,588 Commercial $ 733,203 770,265 430,477 369,669 33,521 22,794 23,245 1,339 20,488 173,530 $2,578,531 Leasing and Equipment Finance $ 63,624 89,694 47,926 35,361 30,284 175,154 94,891 88,919 54,019 695,500 Residential Real Estate $ 517,854 261,678 173,103 28,104 6,459 – 744 1,200 5,760 19,264 Total $3,104,063 1,898,291 1,802,573 862,859 297,894 198,593 128,230 91,932 84,965 917,257 $1,375,372 $1,014,166 $9,386,657 32 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 33 Loans and leases increased $1 billion from year-end 2003 to $9.4 billion at December 31, 2004, reflecting increases of $788.2 million in consumer loans, $237.7 million in commercial real estate loans and $215 million in leasing and equipment finance, partially offset by decreases of $198.5 million in residential real estate loans and $3.6 million in commercial business loans. The decline in residential real estate loans during 2004 was due to prepayments. Management expects that the residential loan portfolio will continue to decline, which will provide funding for anticipated growth in other loan or investment categories. At December 31, 2004, TCF’s residential real estate loan portfolio was comprised of $782.1 million of fixed-rate loans and $226.9 million of adjustable-rate loans. Consumer loans increased $788.2 million from year-end 2003 to $4.4 billion at December 31, 2004, driven by an increase of $794 million in home equity loans. Approximately 66% of the home equity portfolio at December 31, 2004 consisted of closed end loans, compared with 70% at December 31, 2003. In addition, at December 31, 2004, 62% of this portfolio carries a variable interest rate tied to the prime rate, compared with 60% at December 31, 2003. Outstanding balances on home equity lines of credit were 49.6% of total lines of credit balances at December 31, 2004, compared with 45.4% at December 31, 2003. At December 31, 2004, the weighted average loan-to-value ratio for the home equity portfolio was 75%, compared with 74% at December 31, 2003. TCF’s credit standards limit higher loan-to-value ratio loans to more creditworthy customers, generally based on credit scoring models. The average FICO (Fair Isaac Company) credit score for the home equity portfolio was 716 and 711 at December 31, 2004 and 2003, respectively. The following table sets forth additional information about the loan-to-value ratios for TCF’s home equity loan portfolio: (Dollars in thousands) Loan-to-Value Ratios (1) Over 100% (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . Over 90% to 100% . . . . . . . . . . . . . . . . . . . . . . . Over 80% to 90% . . . . . . . . . . . . . . . . . . . . . . . . 80% or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance $ 32,825 449,291 1,750,531 2,149,369 $4,382,016 At December 31, 2004 Percent of Total .7% 10.3 39.9 49.1 100.0% Over 30-Day Delinquency as a Percentage of Balance 3.02% .38 .32 .32 .35% Balance $ 39,452 361,374 1,370,523 1,816,678 $3,588,027 2003 Percent of Total 1.1% 10.1 38.2 50.6 100.0% Over 30-Day Delinquency as a Percentage of Balance 4.81% .78 .40 .39 .48% (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 tables summarize 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2004 Construction and Development $ 2,795 35,865 28,142 1,729 15,700 9,308 103,181 Permanent $ 524,253 420,874 382,068 258,561 122,236 44,344 205,340 Total $ 527,048 456,739 410,210 260,290 137,936 53,652 308,521 $1,957,676 $ 196,720 $2,154,396 2003 Construction and Development $ 28,983 33,262 10,139 1,253 19,270 17,664 60,695 $ 171,266 Permanent $ 519,622 399,112 304,295 189,635 131,367 32,157 169,247 $1,745,435 Total $ 548,605 432,374 314,434 190,888 150,637 49,821 229,942 $1,916,701 2004 Annual Report 33 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 34 (Dollars in thousands) Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office buildings . . . . . . . . . . . . . . . . . . . . . . . . . Retail services . . . . . . . . . . . . . . . . . . . . . . . . . Warehouse/industrial buildings . . . . . . . . . . . . Hotels and motels . . . . . . . . . . . . . . . . . . . . . . Health care facilities . . . . . . . . . . . . . . . . . . . . Balance $ 527,048 456,739 410,210 260,290 137,936 53,652 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308,521 $2,154,396 2004 Number of Loans 650 241 375 243 35 26 292 1,862 At December 31, Over 30-Day Delinquency as a Percentage of Balance Balance –% $ 548,605 – – – – – 432,374 314,434 190,888 150,637 49,821 .01 –% 229,942 $1,916,701 2003 Number of Loans 730 304 282 172 35 17 200 1,740 Over 30-Day Delinquency as a Percentage of Balance –% – – – – – .03 –% Commercial real estate loans increased $237.7 million from year-end 2003 to $2.2 billion at December 31, 2004. Commercial business loans decreased $3.6 million in 2004 to $424.1 million at December 31, 2004. TCF continues to expand its commercial business and commercial real estate lending activity generally to borrowers located in its primary markets. With a focus on secured lending, at December 31, 2004, approximately 98% of TCF’s commercial real estate and commercial business loans were secured either by properties or underlying business assets. At December 31, 2004 and 2003, the construction and development portfolio had no loans over 30-days delinquent. At December 31, 2004, approximately 92% of TCF’s commercial real estate loans outstanding were secured by properties located in its primary markets. 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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Small ticket(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . Winthrop(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wholesale (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance $ 747,964 258,094 200,819 83,913 18,786 65,796 2004 Percent of Total 54.3% 18.8 14.6 6.1 1.4 4.8 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,375,372 100.0% At December 31, Over 30-Day Delinquency as a Percentage of Balance Balance .51% $ 595,812 .75 1.10 – – 1.68 .67% 124,178 229,441 80,983 22,728 107,255 2003 Percent of Total 51.3% 10.7 19.8 7.0 2.0 9.2 Over 30-Day Delinquency as a Percentage of Balance .88% .56 1.14 .37 – 1.78 .93% $1,160,397 100.0% (1) Middle market consists primarily of loan and lease financing of construction and manufacturing equipment and speciality vehicles. (2) Small ticket includes loan and lease financings to small- and mid-size companies through programs with vendors, manufacturers, distributors, buying groups, and franchise organizations, which as of December 31, 2004 includes the portfolio of VGM. Individual contracts generally range from $25 thousand to $250 thousand. (3) Winthrop’s portfolio consists primarily of technology and data processing equipment. (4) Wholesale includes the discounting of lease receivables sourced by third party lessors. 34 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 35 (Dollars in thousands) Equipment Type Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Specialty vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Technology and data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trucks and trailers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Printing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Material handling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2004 2003 Percent of Total Balance Percent of Total 18.2% $ 198,321 17.2 16.7 13.3 11.5 5.4 3.7 3.3 2.5 1.6 6.6 225,073 249,515 133,104 33,462 89,262 54,052 38,977 27,111 23,965 87,555 17.1% 19.4 21.5 11.5 2.9 7.7 4.7 3.3 2.3 2.1 7.5 Balance $ 251,157 236,582 229,160 182,612 157,745 74,870 51,192 45,394 33,810 22,556 90,294 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,375,372 100.0% $1,160,397 100.0% The leasing and equipment finance portfolio increased $215 million from December 31, 2003 to $1.4 billion at December 31, 2004. This increase in the leasing and equipment finance portfolio was impacted by TCF Leasing’s acquisition of VGM in 2004 which added $103.2 million of portfolio balances to the small ticket marketing segment and the medical equipment type and was net of a $28.6 million decline in the Winthrop lease portfolio. Winthrop primarily leases technology and data processing equipment to companies nationwide. Technology spending has slowed during the past few years due to a variety of issues, including general economic uncer- tainty. In addition, the low interest rate environment and temporary tax law changes have led many companies to consider the viability of purchasing technology versus Winthrop’s value-added lease alternative. These factors have contributed to reduced levels of new lease originations at Winthrop. TCF continues to focus attention on increasing sales efforts at Winthrop to increase overall portfolio balances. At December 31, 2004 and 2003, $48.5 million, and $66.4 million, respectively, of TCF’s lease portfolio, were discounted on a non-recourse basis with other third-party financial institutions and consequently TCF retains no credit risk on such amounts. The leasing and equipment finance portfolio tables above include lease residu- als. Lease residuals represent the estimated fair value of the leased equipment at the expiration of the initial term of the transaction and are reviewed on an ongoing basis. Any downward revisions are recorded in the periods in which they become known. At December 31, 2004, lease residuals, excluding leveraged lease residuals, totaled $35.2 million, up from $34.2 million at December 31, 2003. The lease residuals on leveraged leases are included in invest- ments in leveraged leases and represent a 100% equity interest in a Boeing 767-300 aircraft leased to Delta Airlines, Inc. (“Delta”). The investment in leveraged leases represents net unpaid rentals and estimated unguaranteed residual values of the leased assets less related unearned income. TCF has no obligation for principal and interest on the notes representing the third-party participation related to this leveraged lease. However, these noteholders have a security interest in the aircraft which is superior to TCF’s equity inter- est. Such notes, which totaled $19.2 million at December 31, 2004, down from $22.6 million at December 31, 2003, are recorded as an offset against the related rental receivable. In January 2005, these notes were further reduced to $15.6 million after Delta made its scheduled payment. During the second quarter of 2004, TCF completed its annual review of the lease residual value assumption for this aircraft and reduced the estimated residual value by $4.4 million. As required under Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases,” TCF recognized an impair- ment charge of $1.6 million which was recorded in other non-interest expense. The remaining reduction will be amortized through reduced yield on the investment over the remaining years of the lease as prescribed by SFAS No. 13. In 2004, TCF downgraded its credit rating on the aircraft leveraged lease and classified its investment as substandard and placed the lease on non-accrual status. Although Delta is current on its payments related to this transaction, if Delta declares bankruptcy, it would likely result in the charge-off of TCF’s $18.8 million investment in the leveraged lease and the current payment of previously deferred income tax obligations. This lease represents TCF’s only material direct exposure to the commercial airline industry. Reduced airline travel, higher oil prices, changes in airline fare structures, and other factors have adversely impacted the airline industry and could have an adverse impact on Delta’s ability to meet its lease obligations and on the residual value of the aircraft. 2004 Annual Report 35 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 36 Total loan and lease originations and purchases for TCF’s leasing businesses were $717.8 million at December 31, 2004, compared with $618.3 million during 2003. The backlog of approved transactions increased to $195.3 million at December 31, 2004, from $155.2 million at December 31, 2003. TCF’s expanded leasing activity is subject to risk of cyclical downturns and other adverse economic developments. TCF’s ability to increase its leasing and equipment finance portfolio is dependent upon its ability to place new equipment in service. In an adverse economic environment, there may be a decline in the demand for some types of equipment which TCF leases, resulting in a decline in the amount of new equipment being placed into service as well as a decline in equipment values for equipment previously placed in service. Loan and leases outstanding at December 31, 2004 are shown in the following table by maturity: (In thousands) Amounts due: At December 31, 2004 (1) Consumer Commercial Real Estate Commercial Business Leasing and Equipment Finance Residential Real Estate Total Loans and Leases Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . $ 218,537 $ 339,974 $ 206,658 $ 548,749 $ 44,390 $1,358,308 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 . . . . . . . . . . . . . . 213,561 240,324 451,705 1,105,021 1,007,075 1,181,627 4,199,313 Total . . . . . . . . . . . . . . . . . . . . $4,417,850 Amounts due after 1 year on: Fixed-rate loans and leases . . . . . . . . . . . . Variable and adjustable-rate loans(2) . . . . . Total after 1 year . . . . . . . . . . . . . . . . . $1,678,920 2,520,393 $4,199,313 254,168 276,953 498,899 703,562 58,724 24,875 1,817,181 $2,157,155 $ 342,111 1,475,070 $1,817,181 106,279 47,552 33,923 17,971 2,750 8,317 366,559 257,653 250,525 56,604 – – 216,792 931,341 45,976 46,728 83,857 197,913 163,283 426,873 964,630 986,543 869,210 1,318,909 2,081,071 1,231,832 1,641,692 8,129,257 $ 423,450 $1,480,090 $1,009,020 $9,487,565 $ 63,161 $ 931,341 153,631 – $ 216,792 $ 931,341 $ 743,816 220,814 $ 964,630 $3,759,349 4,369,908 $8,129,257 (1) Gross of deferred fees and costs. 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 the loans remain outstanding for significantly shorter periods than their contractual terms. (2) Includes $189 million of consumer loans and $13.4 million of commercial real estate and commercial business loans at their interest rate floors. 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 a process to identify and manage its credit risk. The process includes initial credit review and approval, periodic monitoring to measure compliance with credit agreements and internal credit policies, monitoring changes in the risk ratings of loans and leases, identifi- cation of problem loans and leases and procedures for the collection of problem loans and leases. The risk of loss is difficult to quantify and is subject to fluctuations in values, general economic conditions and other factors. The determination of the allowance for loan and lease losses is a critical accounting estimate which involves manage- ment’s judgment on a number of factors such as net charge-offs, delinquencies in the loan and lease portfolio, general economic con- ditions and management’s assessment of credit risk in the current loan and lease portfolio. The Company considers the allowance for loan and lease losses of $79.9 million appropriate to cover losses inherent in the loan and lease portfolios as of December 31, 2004. However, no assurance can be given that TCF will not, in any particular period, sustain loan and lease losses that are sizable in relation to the amount reserved, or that subsequent evaluations of the loan and lease portfolio, in light of factors then prevailing, including economic conditions and TCF’s on-going credit review process, will not require significant changes in the allowance for loan and lease losses. Among other factors, a protracted economic slowdown and/or a decline in commercial or residential real estate values in TCF’s markets may have an adverse impact on the adequacy of the allowance for loan and lease losses by increasing credit risk and the risk of potential loss. See “Forward-Looking Information” and Notes 1 and 7 of Notes to Consolidated Financial Statements for additional information concerning TCF’s allowance for loan and lease losses. The next several pages include detailed information regarding TCF’s allowance for loan and lease losses, net charge-offs, non- performing assets, past due loans and leases and potential problem loans and leases. Included in this data are numerous portfolio ratios that must be carefully reviewed and related to the nature of the underlying loan and lease portfolios before appropriate conclusions 36 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 37 can be reached regarding TCF or for purposes of making comparisons to other companies. Most of TCF’s non-performing assets and past due loans and leases are secured by residential real estate. Given the nature of these assets and the related mortgage foreclosure, property sale and, if applicable, mortgage insurance claims processes, it can take 18 months or longer for a loan to migrate from initial delinquency to final disposition. This resolution process generally takes much longer for loans secured by real estate than for unsecured loans or loans secured by other property primarily due to state foreclosure laws. The key indicators of TCF’s credit quality and reserve coverage for 2004 include the ratio of net charge-offs to average loans and leases of .11%, the year-end allowance as a multiple of net charge- offs of 8.4X, and income before income taxes and provision for loan losses as a multiple of net charge-offs of 41.7X. The following table sets forth information detailing the allowance for loan and lease losses and selected key indicators: (Dollars in thousands) Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 $ 76,619 2003 $ 77,008 2002 $ 75,028 2001 $ 66,669 2000 $ 55,755 Year Ended December 31, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,821) (602) (235) (8,508) (81) (14,247) 1,589 126 82 2,963 8 4,768 (9,479) 10,947 1,791 Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79,878 Key Indicators: Ratio of net loan and lease charge-offs to average loans and leases outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year-end allowance as a multiple of net charge-offs . . . . . . . . . . . . . Income before income taxes and provision for loan losses as a multiple of net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . .11% 8.4X 41.7X The allocation of TCF’s allowance for loan and lease losses is as follows: (5,362) (1,381) (920) (8,620) (86) (6,939) (2,181) (5,952) (9,230) (59) (16,369) (24,361) 2,173 45 138 1,083 9 3,448 (12,921) 12,532 – $ 76,619 .16% 5.9X 26.3X 2,965 43 54 1,264 9 4,335 (20,026) 22,006 – $ 77,008 .25% 3.8X 19.0X (Dollars in thousands) Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . Unallocated . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . Total allowance balance . . . . . . . . . . . . . N.A. Not Applicable. 2004 $ 9,939 20,742 7,696 24,566 16,139 79,082 796 $79,878 At December 31, 2002 $ 8,532 22,176 15,910 12,881 16,139 75,638 1,370 $77,008 2001 $ 8,355 24,459 12,117 11,774 16,139 72,844 2,184 $75,028 2003 $ 9,084 25,142 11,797 13,515 16,139 75,677 942 $76,619 2000 $ 9,764 20,753 9,668 7,583 16,139 63,907 2,762 $66,669 2004 .22% .96 1.81 1.79 N.A. .94 .08 .85 Allocations as a Percentage of Total Loans and Leases Outstanding by Type At December 31, 2002 2003 2001 .25% 1.31 2.76 1.16 N.A. 1.06 .08 .92 .28% 1.21 3.62 1.24 N.A. 1.20 .08 .95 .33% 1.51 2.87 1.23 N.A. 1.32 .08 .91 (6,605) (122) (429) (9,794) (1) (16,951) 3,487 103 193 649 – 4,432 (12,519) 20,878 – (7,041) (76) (143) (2,426) (15) (9,701) 4,576 295 690 254 28 5,843 (3,858) 14,772 – $ 75,028 $ 66,669 .15% 6.0X 28.0X .05% 17.3X 82.3X 2000 .44% 1.51 2.36 .89 N.A. 1.31 .08 .78 2004 Annual Report 37 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 38 The allocated allowance balances for TCF’s residential and con- sumer loan portfolios, at December 31, 2004, reflect the Company’s credit quality and related low level of net charge-offs for these portfolios. The increase in the allocated allowance for leasing and equipment finance includes coverage related to TCF’s investment in the Delta leveraged lease. The allocated allowance for the loan and lease portfolios do not reflect any significant changes in estimation methods or assumptions. The decrease in TCF’s allowance for loan and lease losses as a percentage of total loans and leases, at December 31, 2004, reflects the impact of the reduction in commercial and commercial real estate and leasing and equipment finance charge-offs. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Small ticket . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Winthrop . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total leasing and equipment finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Performing Assets Non-performing assets consist of non- accrual loans and leases and other real estate owned. The decrease in total non-performing assets reflects decreases of $8.9 million, $8.5 million and $692 thousand, respectively, in commercial real estate, consumer and residential real estate non-performing assets, partially offset by increases of $11.7 million and $1.6 million, respectively, in leasing and equipment finance and commercial business non-performing assets. Year Ended December 31, 2004 2003 Net Charge-offs (Recoveries) $ 3,232 476 153 2,574 2,787 462 (782) – 504 5,545 73 $ 9,479 % of Average Loans and Leases .08% .02 .04 .39 1.29 .21 (0.98) – .59 .43 .01 .11 Net Charge-offs (Recoveries) $ 3,189 1,336 782 1,883 1,422 (32) 1,677 – 2,587 7,537 77 $12,921 % of Average Loans and Leases .10% .07 .18 .40 1.28 – 1.85 – 1.79 .69 .01 .16 Approximately 43% of non-performing assets at December 31, 2004 consisted of, or were secured by, residential real estate. Leasing and equipment finance non-accrual leases at December 31, 2004, included the previously discussed $18.8 million investment in an aircraft leveraged lease. The accrual of interest income is generally discontinued when loans and leases become 90 days or more past due with respect to either principal or interest (150 days or six payments past due for loans secured by residential real estate) unless such loans and leases are adequately secured and in the process of collection. 38 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 39 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 . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-accrual loans and leases . . . . . . . . . . . . . . . . . . . Other real estate owned: Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . Total non-performing assets . . . . . . . . . . . . . . . . . . . . . . . . Non-performing assets as a percentage of net loans and leases . . . . Non-performing assets as a percentage of total assets . . . . . . . . . . 2004 2003 2002 2001 2000 At December 31, $12,187 1,093 4,533 25,678 3,387 46,878 11,726 5,465 17,191 $64,069 .69% .52 $12,052 2,490 2,931 13,940 3,993 35,406 20,462 12,992 33,454 $68,860 .83% .61 $11,163 3,213 4,777 18,689 5,798 43,640 16,479 10,093 26,572 $70,212 .87% .58 $16,473 11,135 3,550 13,857 6,959 51,974 12,830 1,825 14,655 $66,629 .82% .59 $13,027 5,820 236 11,286 4,829 35,198 10,422 447 10,869 $46,067 .54% .41 Included in non-performing assets are loans that are considered impaired. Impaired loans totaled $8.1 million and $9.1 million at December 31, 2004 and December 31, 2003, respectively. The related allowance for credit losses was $3.7 million at December 31, 2004, compared with $4.5 million at December 31, 2003. All of the impaired loans were on non-accrual status. There were no impaired loans at December 31, 2004 and 2003 which did not have a related allowance for loan losses. The average balance of impaired loans was $9.8 million for 2004, compared with $10.8 million for 2003. 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. (Dollars in thousands) Accruing loans and leases delinquent for: 30-59 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60-89 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 days or more . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2004 2003 Principal Balances $20,776 8,659 4,950 $34,385 Percentage of Loans and Leases .23% .09 .05 .37% Principal Balances $24,187 8,953 5,604 $38,744 Percentage of Loans and Leases .29% .11 .07 .47% 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, 2004 Percentage of Portfolio .35 % – .10 .67 .94 .37% Principal Balances $15,436 32 404 8,997 9,516 $34,385 Principal Balances $17,673 58 282 10,619 10,112 $38,744 2003 Percentage of Portfolio .49% – .07 .93 .84 .47% 2004 Annual Report 39 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 40 Potential Problem Loans and Leases In addition to non- performing assets, there were $71.1 million of loans and leases at December 31, 2004, for which management has concerns regarding the ability of the borrowers to meet existing repayment terms, com- pared with $48.1 million at December 31, 2003. These loans and leases are primarily classified for regulatory purposes as substandard and reflect the distinct possibility, but not the probability, that the Company will not be able to collect all amounts due according to the contractual terms of the loan or lease agreement. Although these loans and leases have been identified as potential problem loans and leases, they may never become non-performing. Additionally, these loans and leases are generally secured by commercial real Potential problem loans and leases are summarized as follows: estate or assets, thus reducing the potential for 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. At December 31, 2004, commercial busi- ness potential problem loans were up $5.4 million from December 31, 2003. Commercial real estate potential problem loans totaled $34.1 million at December 31, 2004, and were up $13.9 million from December 31, 2003, primarily due to the addition of two large proper- ties. Leasing and equipment finance potential problem loans include $1.2 million and $1.1 million funded on a non-recourse basis at December 31, 2004 and 2003, respectively. (Dollars in thousands) Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, Change 2004 $34,138 18,112 18,816 $71,066 2003 $20,279 12,721 15,094 $48,094 $ $13,859 5,391 3,722 $22,972 % 68.3% 42.4 24.7 47.8 Liquidity Management TCF manages its liquidity position to ensure that the funding needs of depositors and borrowers are met promptly and in a cost-effective manner. Asset liquidity arises from the ability to convert assets to cash as well as from the maturity of assets. Liability liquidity results from the ability of TCF to attract a diversity of funding sources to promptly meet funding requirements. Deposits are the primary source of TCF’s funds for use in lending and for other general business purposes. In addition to deposits, TCF derives funds primarily from loan and lease repayments, proceeds from the discounting of leases and borrowings. Deposit inflows and outflows are significantly influenced by general interest rates, money market conditions, competition for funds, customer service and other factors. TCF’s deposit inflows and outflows have been and will con- tinue to be affected by these factors. Borrowings may be used to compensate for reductions in normal sources of funds, such as deposit inflows at less than projected levels, net deposit outflows or to support expanded activities. Historically, TCF has borrowed primarily from the FHLB, from institutional sources under repurchase agreements and, to a lesser extent, from other sources. At December 31, 2004, TCF had over $2.2 billion in unused capacity under these funding sources, which could be used to meet future liquidity needs. See “Borrowings.” Potential sources of liquidity for TCF Financial Corporation (par- ent company only) include cash dividends from TCF’s wholly owned bank subsidiary, issuance of equity securities and borrowings under a $105 million line of credit. TCF’s National Bank’s ability to pay divi- dends or make other capital distributions to TCF is restricted by reg- ulation and may require regulatory approval. Undistributed earnings and profits at December 31, 2004 includes approximately $134.4 million for which no provision for federal income tax has been made. This amount represents earnings appropriated to bad debt reserves and deducted for federal income tax purposes, and is generally not available for payment of cash dividends or other distributions to shareholders without incurring an income tax liability based on the amount of earnings removed and current tax rates. 40 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 41 Deposits Checking, savings and money market deposits are an important source of low cost funds and fee income for TCF. Deposits totaled $8 billion at December 31, 2004, up $350.4 million from December 31, 2003. Lower interest-cost checking, savings and money market deposits totaled $6.5 billion, up $493.9 million from December 31, 2003, and comprised 81.6% of total deposits at December 31, 2004, compared with 78.8% of total deposits at December 31, 2003. The average balance of these deposits for 2004 was $6.3 billion, an increase of $249.4 million over the $6 billion average balance for 2003. Higher interest-cost certificates of deposit decreased $143.5 million from December 31, 2003 as other lower-cost funding sources were available to TCF. TCF had no brokered deposits at December 31, 2004 or 2003. TCF’s weighted- average rate for deposits, including non-interest-bearing deposits, was .69% at December 31, 2004, up from .58% at December 31, 2003. New Branch Expansion Key to TCF’s growth is its continued investment in new branch expansion. New branches are an important source of new customers in both deposit products and consumer lending products. While supermarket branches continue to play an important role in TCF’s expansion strategy, the opportunity to add new supermarket branches within TCF’s markets will slow in future years. Therefore, TCF will continue new branch expansion by opening more traditional branches. Although traditional branches require a higher initial investment than supermarket branches, they ultimately attract more customers and become more profitable. During 2004, TCF opened 30 new branches. The focus on opening new branches will continue in 2005 with the planned opening of 29 branches, including 22 new traditional branches, five new supermarket branches and two campus branches. At December 31, 2004, 258, or 60% of TCF’s 430 branches were opened since January 1, 1998. Additional information regarding TCF’s branches opened since January 1, 1998 is displayed in the table below: (Dollars in thousands) 2004 2003 2002 2001 2000 At or For the Year Ended December 31, Compound Annual Growth Rate 1-Year 2004/2003 5-Year 2004/1999 Number of new branches opened during the year: Traditional and campus . . . . . . . . . . . . . . . . Supermarket . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of new branches* at year end: Traditional and campus . . . . . . . . . . . . . . . . Supermarket . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 11 30 61 197 258 Percent of total branches . . . . . . . . 60.0% 14 5 19 42 186 228 56.9% 12 15 27 28 184 212 53.7% 6 21 27 16 174 190 50.7% 3 22 25 10 153 163 46.3% N.M. N.M. N.M. N.M. N.M. N.M. N.M. N.M. N.M. N.M. N.M. N.M. N.M. N.M. Number of checking accounts . . . . . . . . . . . . . . . 575,537 495,211 411,456 342,493 252,469 16.2% 24.5% Deposits: Checking . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 868,164 $ 616,539 $ 447,914 $ 335,198 $ 236,633 Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . Total fees and other revenue for the year . . . . . . 423,165 54,542 1,345,871 156,958 $1,502,829 $ 153,788 390,253 66,604 1,073,396 152,050 $1,225,446 $ 126,123 407,088 70,476 925,478 162,655 133,987 91,092 560,277 184,020 63,764 68,504 368,901 225,401 $1,088,133 $ 107,769 $ 744,297 $ 85,333 $ 594,302 $ 60,750 40.8 8.4 (18.1) 25.4 3.2 22.6 21.9 43.9 53.4 31.8 45.8 2.4 34.3 31.5 N.M. Not Meaningful. * New branches opened since January 1, 1998. 2004 Annual Report 41 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 42 Borrowings Borrowings totaled $3.1 billion at December 31, 2004, up $689.8 million from December 31, 2003. The increase was prima- rily attributable to the loans and leases increasing $1 billion during 2004 while deposit balances grew only $350.5 million which increases TCF’s reliance on borrowings. During the second quarter of 2004, TCF National Bank, a subsidiary of TCF Financial Corporation issued $75 million of subordinated notes due in 2014. These notes qualify as Tier 2 or supplemental capital for regulatory purposes, subject to certain limitations. TCF Bank paid the proceeds from the offering to TCF to be used for general corporate purposes, which may include repurchases in the open market of TCF common stock. See Notes 12 and 13 of Notes to Consolidated Financial Statements for detailed information on TCF’s borrowings. Included in long-term borrowings at December 31, 2004 are $767.5 million of fixed-rate FHLB advances and repurchase agreements with other financial institutions which are callable quarterly at par until maturity. If called, replacement funding will be provided by the counterparties at the then-prevailing short-term market rate of interest for the remaining term-to-maturity of the advances and repurchase agreements, subject to standard terms and conditions. The weighted-average rate on borrowings increased to 3.37% at December 31, 2004, from 3.24% at December 31, 2003. TCF does not utilize unconsolidated subsidiaries or special purpose entities to provide off-balance-sheet borrowings. See Note 20 of Notes to Consolidated Financial Statements for information relating to off-balance-sheet instruments. Contractual Obligations and 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, 2004, the aggregate contractual obligations (excluding bank deposits) and commitments are as follows: (In thousands) Contractual Obligations Payments Due by Period Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years Total borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,104,603 $2,277,682 $ 327,663 $ 125,049 $ 374,209 Annual rental commitments under non-cancelable operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,441 Purchase obligations (construction contracts and land purchase commitments for future branch sites) . . . . . . . . . 20,315 23,894 20,315 40,631 33,823 72,093 – – – $3,295,359 $2,321,891 $ 368,294 $ 158,872 $ 446,302 (In thousands) Other Commitments Commitments to lend: Amount of Commitment – Expiration by Period Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,576,381 $ 8,217 Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total commitments to lend . . . . . . . . . . . . . . . . . . . . . . . . . . Loans serviced with recourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standby letters of credit and guarantees on industrial 684,029 72,614 55,343 2,388,367 97,568 443,267 72,614 55,343 579,441 2,288 $ 22,311 204,625 – – 226,936 4,772 revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,957 46,650 18,677 $ 38,240 $1,507,613 25,003 11,134 – – 63,243 4,329 10,630 – – 1,518,747 86,179 – $2,561,892 $ 628,379 $ 250,385 $ 78,202 $1,604,926 42 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 43 Commitments to lend are agreements to lend to a customer pro- vided there is no violation of any condition in the contract. These commitments generally have fixed expiration dates or other termi- nation clauses and may require payment of a fee. 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. Loans serviced with recourse represent a contingent guarantee based upon the failure to perform by another party. These loans consist of $94.9 million of Veterans Administration (“VA”) loans. As is typical of a servicer of VA loans, TCF must cover any principal loss in excess of the VA’s guarantee if the VA elects its “no-bid” option upon the foreclosure of a loan. Since conditions under which TCF would be required either to cover any principal loss in excess of the VA’s guarantee may not materialize, the actual cash requirements are expected to be significantly less than the amount provided in the table above. Standby letters of credit and guarantees on industrial revenue bonds are conditional commitments issued by TCF guaranteeing the performance of a customer to a third party. These conditional commitments expire in various years through the year 2009. Since the conditions under which TCF is required to fund these commitments may not materialize, the cash requirements are expected to be less than the total outstanding commitments. Collateral held on these commitments primarily consists of commercial real estate mortgages. Stockholders’ Equity Stockholders’ equity at December 31, 2004 was $958.4 million, or 7.8% of total assets, up from $920.9 mil- lion, or 8.1% of total assets, at December 31, 2003. The increase in stockholders’ equity was primarily due to the net income of $255 million partially offset by the repurchase of 4 million shares of TCF’s common stock at a cost of $116.1 million, the payment of $104 mil- lion in dividends on common stock and a $7.1 million decrease in accumulated comprehensive income for the year ended December 31, 2004. On July 21, 2003, TCF’s Board of Directors authorized the repurchase of up to an additional 5% of TCF’s common stock, or 7.2 million shares. At December 31, 2004, 3.5 million shares remain available under this authorization from the Board of Directors. Since January 1, 1998, the Company has repurchased 54.2 million shares of its common stock at an average cost of $17.58 per share. For the year ended December 31, 2004, average total equity to average assets was 7.94% compared with 8.03% for the year ended December 31, 2003. Dividends paid to common shareholders on a per share basis totaled 75 cents in 2004, an increase of 15.4% from 65 cents in 2003. TCF’s dividend payout ratio was 40.3% in 2004 and 42.6% in 2003. The Company’s primary funding sources for common dividends are dividends received from its subsidiary bank. At December 31, 2004, TCF and TCF National Bank exceeded their regulatory capital requirements and are considered “well- capitalized” under guidelines established by the Federal Reserve Board and the Office of the Comptroller of the Currency. See Notes 15 and 16 of Notes to Consolidated Financial Statements. TCF has used stock options as a form of employee compensation to a lim- ited extent in prior years. At December 31, 2004, the number of incentive stock options outstanding was 325,864, or.18%, of total shares outstanding. Market Risk – Interest-Rate Risk TCF’s results of operations 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 prepayment characteristics of assets and liabilities results in inter- est rate risk. TCF, like most financial institutions, has material inter- est 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 Committee manages TCF’s interest rate risk based on interest rate expectations and other factors. 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. 2004 Annual Report 43 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 44 Although the interest rate gap measure (difference between interest-earning assets and interest-bearing liabilities repricing within a given period) is subject to a number of assumptions and is only one of a number of interest rate risk measurements, manage- ment believes the interest rate gap is an important indication of TCF’s exposure to interest rate risk and the related volatility of net interest income in a changing interest rate environment. While the interest rate gap measurement has some limitations, including no assumptions regarding future asset or liability production and a static interest rate assumption (large quarterly changes may occur related to these items), the interest rate gap represents the net asset or liability sensitivity at a point in time. In addition to the interest rate gap analysis, management also utilizes a net interest income simulation model to measure and manage TCF’s interest rate risk, relative to a base case scenario. TCF has positioned its balance sheet to benefit from a rising interest rate environment. TCF’s one-year interest rate gap was a positive $585.3 million, or 4.7% of total assets, at December 31, 2004, compared with a positive $161.3 million, or 1% of total assets at December 31, 2003. A positive interest rate gap position exists when the amount of interest-earning assets maturing or repricing, including assumed prepayments, within a particular time period exceeds the amount of interest-bearing liabilities maturing or repricing. However, the benefit of a positive interest rate gap in a rising interest rate environment may be reduced by future asset and liability mix changes including possibly lower yields on newly originated fixed-rate assets and higher rates on new deposits and borrowings. The increase in the one-year interest rate gap is primarily due to consumer and commercial variable rate loans previously at their floor rates, and therefore treated as fixed-rate loans for inter- est rate gap analysis purposes, becoming floating-rate loans due to the 1.25% increase in the prime interest rate during 2004, partially offset by the impact of $742 million of borrowings maturing in 2005 moving into the one-year interest rate gap analysis during 2004. TCF would also likely benefit from an increase in interest rates as this might signify that economic conditions are improving. The favor- able impact of an increase in interest rates on net interest income would be partially diminished by an adverse impact on TCF’s checking account balances, if customers transfer some of these funds to higher interest rate deposit products or other investments, resulting in an increase in the cost of interest-bearing deposits. Additionally, an increase in interest rates may affect TCF’s fixed-rate/variable-rate loan mix and volumes and would also likely result in slower fixed- rate loan prepayments. TCF believes this positive interest rate gap to be warranted because current rates are still below historical averages and, con- sequently, there is a greater possibility over time of higher interest rates versus lower interest rates. However, if interest rates fall, TCF could experience an increase in prepayments of residential loans, mortgage-backed securities and fixed-rate consumer and commer- cial real estate loans and could experience compression of its net interest income. The one-year interest rate gap could be significantly affected by external factors such as prepayment rates other than those assumed, early withdrawals of deposits, changes in the correlation of various interest-bearing instruments, competition, a general rise or decline in interest rates, and the possibility that TCF’s counterparties will exercise their option to call certain of TCF’s longer-term callable borrowings. Decisions by management to purchase or sell assets or to retire debt could change the maturity/repricing and spread rela- tionships. In addition, TCF’s interest-rate risk may increase during periods of rising interest rates due to slower prepayments on fixed- rate loans and mortgage-backed securities. TCF estimates that an immediate 100 basis point increase in current mortgage loan inter- est rates would reduce prepayments during 2005 on the $4.1 billion of fixed-rate mortgage-backed securities, residential real estate loans and consumer first-mortgage loans at December 31, 2004 by approximately $362 million. A slowing in prepayments would increase the estimated life of the portfolios and may adversely impact net interest income or net interest margin in the future. 44 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 45 The following table summarizes TCF’s interest-rate gap position at December 31, 2004: (Dollars in thousands) Interest-earning assets: Within 30 Days 30 Days to 6 Months 6 Months to 1 Year 1 to 3 Years 3+ Years Total Maturity/Rate Sensitivity Loans held for sale . . . . . . . . . . . . . . . . . . . $ 154,270 $ – $ – $ – $ – $ 154,270 Securities available for sale (1) . . . . . . . . . . Real estate loans (1) . . . . . . . . . . . . . . . . . . Leasing and equipment finance (1) . . . . . . . 17,709 36,767 63,171 Other loans (1) . . . . . . . . . . . . . . . . . . . . . . . 3,788,957 Investments . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing liabilities: Checking deposits (2) . . . . . . . . . . . . . . . . . . Savings deposits (2) . . . . . . . . . . . . . . . . . . . . Money market deposits (2) . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . Long-term borrowings (3) . . . . . . . . . . . . . . . Interest-earning assets over (under) 521 4,061,395 724,031 844,935 293,540 172,694 706,191 353,509 91,190 170,376 252,394 319,189 80,841 913,990 – – – 576,976 102,119 412,265 128,065 176,872 252,155 356,208 – 435,015 293,028 567,548 1,164,679 – 913,300 2,460,270 947,963 337,134 240,103 1,368,085 21,865 2,915,150 – – – 313,371 – 803,729 1,117,100 – 3,182,115 121,899 – 343,758 4,400 222,583 692,640 960,460 366,145 61,858 76,409 423,393 5,070,380 1,619,942 1,014,177 1,375,371 6,997,118 103,227 11,264,105 3,906,146 1,927,294 659,685 1,468,657 889,119 2,215,479 11,066,380 3,094,900 1,091,360 interest-bearing liabilities . . . . . . . . . . . . . 966,495 (177,370) (203,800) 1,767,630 (2,155,230) 197,725 Cumulative gap . . . . . . . . . . . . . . . . . . . . . . . . . $ 966,495 $ 789,125 $ 585,325 $ 2,352,955 $ 197,725 $ 197,725 Cumulative gap as a percentage of total assets: At December 31, 2004 . . . . . . . . . . . . . At December 31, 2003 . . . . . . . . . . . . . 8 % (6)% 6 % (2)% 5% 1% 19% 22% 2% 2% 2% 2% (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) Includes non-interest bearing deposits. At December 31, 2004, 19% of checking deposits, 44% of savings deposits, and 45% of money market deposits are included in amounts repricing within one year. 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, 2003, 6% of checking deposits, 49% of savings deposits, and 48% of money market deposits were included in amounts repricing within one year. (3) Includes $767.5 million of callable borrowings. At December 31, 2004, the contract rates on all callable borrowings exceeded current market rates. As previously noted, TCF also utilizes net interest income simula- tion models to estimate the near-term effects (next twelve months) of changing interest rates on its net interest income. Net interest income simulation involves forecasting net interest income under a variety of scenarios, including the level of interest rates, the shape of the yield curve, and spreads between market interest rates. At December 31, 2004, net interest income is estimated to increase by 3%, compared with the base case scenario, over the next twelve months if interest rates were to sustain an immediate increase of 100 basis points. In the event interest rates were to decline by 100 basis points, net interest income is estimated to decrease by 3.7%, compared with the base case scenario, over the next twelve months. Management exercises its best judgment in making assumptions regarding loan prepayments, early deposit withdrawals, and other non-controllable events in estimating TCF’s exposure to changes in interest rates. These assumptions are inherently uncertain and, as a result, the simulation models cannot precisely estimate net interest income or precisely predict the impact of a change in interest rates on net interest income. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. 2004 Annual Report 45 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 46 Summary of Critical Accounting Estimates Critical accounting estimates occur in certain accounting policies and procedures and are particularly susceptible to significant change. Policies that contain critical accounting estimates include the determination of the allowance for loan and lease losses, mortgage servicing rights, income taxes, lease financings and pension liability and expenses. See Note 1 of Notes to Consolidated Financial Statements for further discussion of critical accounting estimates. Recent Accounting Developments In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 123R, Share-Based Payment which revised SFAS No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and related implementation guidance and amends SFAS No. 95, Statement of Cashflows. It requires that all stock-based compensation now be measured at fair value and rec- ognized as expense in the income statement. This Statement also clarifies and expands guidance on measuring fair value, requires estimation of forfeitures when determining expense, and requires that excess tax benefits be shown as financing cash inflows versus a reduction of taxes paid in the statement of cashflows. Various other changes are also required. This statement is effective begin- ning July 1, 2005. TCF adopted the recognition provisions of SFAS 123 in January 2000. TCF expects no significant effect on TCF’s financial statements upon adoption of this Statement. Fourth Quarter Summary In the fourth quarter of 2004, TCF reported net income of $67.4 million, compared with $59.5 million in the fourth quarter of 2003. Diluted earnings per common share was 50 cents for the fourth quarter of 2004, compared with 43 cents for the fourth quarter of 2003. TCF opened 12 new branches in the fourth quarter of 2004, of which four were supermarket branches. Net interest income was $126.5 million and $119.1 million for the quarter ended December 31, 2004 and 2003 respectively. The net interest margin was 4.56% and 4.68% for the fourth quarter of 2004 and 2003, respectively. TCF’s net interest income increased by $7.4 million, or 6.2% over the fourth quarter of 2003. Of this increase in net interest income, $10.5 million was due to volume changes, partially offset by a decrease of $3.1 million due to interest rate changes. TCF provided $4.1 million for credit losses in the fourth quarter of 2004, compared with $4 million in the fourth quarter of 2003. Net loan and lease charge-offs were $3.2 million, or .14% of average loans and leases outstanding, compared with $6.1 million, or .30% of average loans and leases outstanding during the same 2003 period. Non-interest income increased $17.7 million, or 15.4%, during the fourth quarter of 2004 to $132.5 million. Banking fees and other rev- enue increased $7.9 million, or 8.8%, over the fourth quarter of 2003. Card revenues, included in banking fees and other revenue, totaled $17.5 million for the fourth quarter of 2004, up $5.4 million, or 44.7% over the same quarter in 2003. The increase was attributable to a 21.2% increase in sales volume coupled with an 18 basis point increase in the average off-line interchange rate. Leasing and equipment finance revenues were up $5.7 million, or 36.9%, over the fourth quarter of 2003 due to increases in sales-type lease revenues. Non-interest expense increased $12.2 million, or 8.5%, in the fourth quarter of 2004 to $154.4 million. Compensation and employee benefits increased $9.6 million, or 12.5%, from the fourth quarter of 2003, primarily driven by a $4.2 million increase in incentive compen- sation resulting from improved performance in 2004 and a $1.9 million increase related to new branches opened during the past 12 months. Occupancy and equipment expenses increased $2.1 million, or 9%, from the fourth quarter of 2003, with $1.4 million relating to costs associated with new branch expansion. In the fourth quarter of 2004, the effective income tax rate was 32.96% of income before tax expense compared with 32.14% for the fourth quarter of 2003. 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 website at www.tcfexpress.com or by contacting TCF’s Corporate Communications Department at (952) 745-2760. The website also includes free access to company news releases, TCF’s annual report, quarterly reports, investor presentations and Securities and Exchange Commission (“SEC”) filings. Replays of prior quarterly conference calls discussing financial results may also be accessed at the investor relations sec- tion within TCF’s website. Legislative, Legal and Regulatory Developments Federal and state legislation imposes numerous legal and regulatory requirements on financial institutions. Future legislative or regula- tory change, or changes in enforcement practices or court rulings, may have a dramatic and potentially adverse impact on TCF and its bank and other subsidiaries. The Federal Deposit Insurance Corporation (“FDIC”) and members of the United States Congress have proposed new legislation that would reform the bank deposit insurance system. This reform could merge the Bank Insurance Fund (“BIF”) and Savings Association Insurance Fund (“SAIF”), increase the deposit insurance coverage limits and index future coverage limitations, among other changes. Most significantly, reform proposals could allow the FDIC to raise or lower (within certain limits) the currently mandated designated reserve ratio requiring the FDIC to maintain a 1.25% reserve ratio ($1.25 against $100 of insured deposits), and require certain changes in the calculation methodology. Although it is too early to predict the ultimate impact of such proposals, they could, if adopted, result in the imposition of additional deposit insurance premium costs on TCF. 46 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 47 On July 30, 2002, the Sarbanes-Oxley Act of 2002 (“the Act”) was signed into law by the President of the United States. The Act provides for sweeping changes dealing with corporate governance, account- ing practices and disclosure requirements for public companies, and also for their directors and officers. Section 302 of the Act, entitled “Corporate Responsibility for Financial Reports,” required the SEC to adopt rules to implement certain requirements noted in the Act and it did so effective August 29, 2002. The new rules require a company’s chief executive and chief financial officers to certify the financial and other information included in the company’s quarterly and annual reports. The rules also require these officers to certify that they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the company’s disclosure controls 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 evaluation and whether there have been significant changes in disclosure controls or internal controls over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. TCF has filed Chief Executive Officer and Chief Financial Officer certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibit 31 to its 2004 Form 10-K. TCF has also furnished as an exhibit to Form 10-K certificates called for under Section 906 of the Act. On June 5, 2003, the SEC published its final rules on Section 404 of the Act, requiring public companies to complete an annual assess- ment of the effectiveness of internal control over financial reporting. The rules are effective in 2004 and a management report is included in this 2004 Annual Report describing management’s responsibility for establishing and maintaining adequate internal control over financial reporting and its assessment of the effectiveness of such controls as of year-end. The Company’s independent auditors also completed an attestation report on management’s assessment. In September 2002, the SEC issued its final ruling covering the acceleration of periodic report filing dates. The rule, as amended in November 2004, applies to certain companies, including TCF, and will reduce the annual report filing deadline from 90 days after year-end to 60 days after year-end for TCF’s 2005 Annual Report. The quarterly report on Form 10-Q will also be accelerated from 45 days after quarter-end to 35 days after quarter-end for the quarterly Form 10-Q filings in 2006. TCF has taken steps to modify its financial reporting process to meet these accelerated filing deadlines. Pursuant to Section 303A.12 of the New York Stock Exchange (NYSE) Listed Company Manual, TCF’s Chief Executive Officer submitted a certification to the NYSE on May 18, 2004 indicating that he was not aware of any violation by TCF of the NYSE’s Corporate Governance listing standards. Forward-Looking Information This Annual Report and other reports issued by the Company, including reports filed with the SEC, may contain “forward-looking” statements that deal with future results, plans or performance. In addition, TCF’s management may make such statements orally to the media, or to securities analysts, investors or others. Forward-looking statements deal with matters that do not relate strictly to historical facts. TCF’s future results may differ materially from historical performance and forward-looking statements about TCF’s expected financial results or other plans are subject to a number of risks and uncertainties. These include but are not limited to possible legislative changes and adverse economic, business and competitive developments such as shrinking interest margins; deposit outflows; ability to increase the number of checking accounts and the possibility that deposit account losses (fraudulent checks, etc.) may increase; reduced demand for financial services and loan and lease products; adverse developments affecting TCF’s supermarket banking relationships or any of the supermarket chains in which TCF maintains supermarket branches; changes in accounting policies and guidelines, or monetary, fiscal or tax policies of the federal or state governments; changes in credit and other risks posed by TCF’s loan, lease and investment portfolios, including declines in commercial or residential real estate values or a bankruptcy filing by Delta Airlines, the lessee under a leveraged lease in which TCF holds an equity interest; denial of insurance coverage for claims made by TCF; technological, computer-related or operational difficulties; adverse changes in securities markets; the risk that TCF could be unable to effectively manage the volatility of its mortgage servicing portfolio, which could adversely affect earnings; and results of litigation or other significant uncertainties. Investors should consult TCF’s Annual Report to Shareholders and reports on Forms 10-K, 10-Q and 8-K for additional important information about the Company. Controls and Procedures The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, Chief Financial Officer (Principal Financial Officer) and Controller and Assistant Treasurer (Principal Accounting Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (“Exchange Act”). Based upon that evaluation, management concluded that the Company’s disclosure controls and procedures are effective as of December 31, 2004. Also, there were no significant changes in the Company’s disclosure controls or internal controls over financial reporting during 2004. See “Management’s Report on Internal Control Over Financial Reporting.” 2004 Annual Report 47 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 48 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 of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity: At December 31, 2004 2003 $ 359,798 103,226 1,619,941 154,279 4,418,588 2,154,396 424,135 1,375,372 8,372,491 1,014,166 9,386,657 (79,878) 9,306,779 326,667 152,599 4,245 46,442 266,591 $12,340,567 $ 3,905,987 1,927,872 659,686 6,493,545 1,468,650 7,962,195 1,056,111 2,048,492 3,104,603 315,351 11,382,149 $ 370,054 75,223 1,533,288 335,372 3,630,341 1,916,701 427,696 1,160,397 7,135,135 1,212,643 8,347,778 (76,619) 8,271,159 282,193 145,462 5,907 52,036 248,321 $11,319,015 $ 3,248,412 1,905,923 845,291 5,999,626 1,612,123 7,611,749 878,412 1,536,413 2,414,825 371,583 10,398,157 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; 184,939,094 and 185,026,710 shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings, subject to certain restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock at cost, 47,752,934 and 44,074,050 shares, and other . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,849 518,741 1,385,760 (1,415) (946,517) 958,418 $12,340,567 925 518,878 1,234,804 5,652 (839,401) 920,858 $11,319,015 See accompanying notes to consolidated financial statements. 48 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 49 Consolidated Statements of Income (In thousands, except per-share data) Interest income: Loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Card revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ATM revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments and insurance revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fees and other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains (losses) on termination of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per common share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See accompanying notes to consolidated financial statements. Year Ended December 31, 2004 2003 2002 $527,178 80,643 11,533 3,455 622,809 42,581 88,337 130,918 491,891 10,947 480,944 271,664 63,312 42,935 12,558 390,469 50,323 12,960 14,114 467,866 22,600 – – 22,600 490,466 322,824 95,617 26,353 142,140 586,934 384,476 129,483 $254,993 $ $ $ 1.87 1.86 .75 $513,171 103,821 20,016 4,511 641,519 56,795 103,579 160,374 481,145 12,532 468,613 247,456 52,991 43,623 13,901 357,971 51,088 12,719 9,014 430,792 32,832 (44,345) – (11,513) 419,279 302,804 88,423 25,536 143,346 560,109 327,783 111,905 $215,878 $ $ $ 1.53 1.53 .65 $585,693 118,272 22,464 6,934 733,363 95,386 138,752 234,138 499,225 22,006 477,219 226,051 47,190 45,296 15,848 334,385 51,628 6,979 13,272 406,264 11,536 – 1,962 13,498 419,762 294,295 83,131 21,894 139,968 539,288 357,693 124,762 $232,931 $ $ $ 1.58 1.58 .58 2004 Annual Report 49 132406_TCF AR 04 Guts_F 2/18/05 11:18 AM Page 50 Consolidated Statements of Stockholders’ Equity (Dollars in thousands) Balance, December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of 6,216,862 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of 122,880 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancellation of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise of stock options, 103,312 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in shares held in trust for deferred compensation plans, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of loans to deferred compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income (loss): Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of 6,918,980 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of 285,474 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancellation of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise of stock options, 125,558 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in shares held in trust for deferred compensation plans, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income (loss): Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock split . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of 3,984,890 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of 150,174 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancellation of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercise of stock options, 155,832 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in shares held in trust for deferred compensation plans, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See accompanying notes to consolidated financial statements. 50 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 51 Number of Common Shares Issued 185,439,088 – – – – – – (161,214) – – – – 185,277,874 – – – – – – (251,164) – – – 185,026,710 – – – – – – – (87,616) – – – 184,939,094 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock and Other Total $ 927 $ 520,940 $ 965,454 $ 6,229 $ (576,517) $ 917,033 – – – – – – (1) – – – – 926 – – – – – – (1) – – – 925 – – – – 925 – – (1) – – – 1,849 $ – – – – – 1,139 (3,586) 28 1,536 (1,244) – 518,813 – – – – – 1,704 (3,598) – 1,264 695 518,878 – – – – (925) – 1,618 (2,055) – 1,553 (328) $ 518,741 232,931 – 232,931 (86,430) – – – – – – – 1,111,955 215,878 – 215,878 (93,029) – – – – – – 1,234,804 254,993 – 254,993 (104,037) – – – – – – – $1,385,760 – 39,873 39,873 – – – – – – – – 46,102 – (40,450) (40,450) – – – – – – – 5,652 – (7,067) (7,067) – – – – – – – – (1,415) $ – – – – (148,030) (1,139) 742 11,590 1,551 1,244 9,783 (700,776) – – – – (150,356) (1,704) 2,371 9,701 2,058 (695) (839,401) – – – – – (116,134) (1,618) 835 6,905 2,685 211 $ (946,517) 232,931 39,873 272,804 (86,430) (148,030) – (2,845) 11,618 3,087 – 9,783 977,020 215,878 (40,450) 175,428 (93,029) (150,356) – (1,228) 9,701 3,322 – 920,858 254,993 (7,067) 247,926 (104,037) – (116,134) – (1,221) 6,905 4,238 (117) $ 958,418 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 Annual Report 51 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 52 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Losses on termination of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 lease financing receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . Proceeds from sales of real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of deposits, net of cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of loans to deferred compensation plans . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash (used) provided by investing activities . . . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities: Net increase (decrease) in deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (decrease) increase in short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments on long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided (used) by financing activities . . . . . . . . . . . . . . . . . . . . . . Net (decrease) increase in cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . Cash and due from banks at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and due from banks at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplemental disclosures of cash flow information: Cash paid for: Year Ended December 31, 2004 2003 2002 $ 254,993 $ 215,878 $ 232,931 39,996 14,591 10,947 1,051,276 8,090 (879,450) (31,265) (23,306) – (3,299) 187,580 442,573 3,833,653 (4,183,611) – (703,712) 1,437,066 347,304 (1,911,905) (30,142) 40,654 (4,326) (77,788) – – 2,278 (1,250,529) 350,446 (629,510) 2,800,614 (1,505,847) (116,134) (104,037) 2,168 797,700 (10,256) 370,054 359,798 $ 39,478 44,833 12,532 2,944,298 8,913 (2,816,960) (14,913) (32,832) 44,345 (8,655) 221,039 436,917 4,343,655 (4,108,727) (58,421) (510,140) 849,333 881,885 (871,559) 79,307 26,186 – (69,782) – – (18,538) 543,199 (98,239) 36,361 425,469 (1,147,876) (150,356) (93,029) 1,211 (1,026,459) (46,343) 416,397 370,054 $ 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 21,926 – (60,279) (15,206) 9,783 (21,834) (853,953) 628,142 122,192 52,462 (11,665) (148,030) (86,430) 2,029 558,700 29,697 386,700 416,397 234,046 87,899 51,713 $ $ $ $ Interest on deposits and borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfer of loans and leases to other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ 126,228 145,716 23,963 $ $ $ 157,751 139,120 44,292 See accompanying notes to consolidated financial statements. 52 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 53 Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of TCF Financial Corporation and its wholly owned subsidiaries. TCF Financial Corporation (“TCF” or the “Company”) is a national financial holding company engaged primarily in community banking, mortgage banking and leasing and equipment finance through its wholly owned subsidiary, TCF National Bank. TCF National Bank owns leasing and equipment finance, mortgage banking, securities brokerage and investment and insur- ance sales, and real estate investment trust (“REIT”) subsidiaries. These subsidiaries are consolidated with TCF National Bank and are therefore included in the consolidated financial statements of TCF Financial Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior years’ finan- cial statements to conform to the current year presentation. For Consolidated Statements of Cash Flows purposes, cash and cash equivalents include cash and due from banks. The preparation of financial statements in conformity with 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 liabilities 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. POLICIES RELATED TO CRITICAL ACCOUNTING ESTIMATES Summary of Critical Accounting Estimates Critical accounting estimates occur in certain accounting policies and proce- dures and are particularly susceptible to significant change. Policies that contain critical accounting estimates include the determination of the allowance for loan and lease losses, mortgage servicing rights, income taxes, lease financings and pension liability and expenses. 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 inher- ent 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 charac- teristics 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 restructured commercial real estate and commercial business loans and equipment finance loans. Consumer loans, resi- dential real estate loans and leases are excluded from the definition of an impaired loan. Loan impairment is measured as the present value of the expected future cash flows discounted at the loan’s initial effective interest rate or the fair value of the collateral for collateral- dependent loans. Consumer loans, residential loans, smaller-balance commercial loans and leases and equipment finance loans are segre- gated by loan type and sub-type, and are evaluated on a group basis. Loans and leases are charged off to the extent they are deemed to be uncollectible. The amount of the allowance for loan and lease losses is highly dependent upon management’s estimates of vari- ables affecting valuation, appraisals of collateral, evaluations of performance and status, and the amounts and timing of future cash flows expected to be received on impaired loans. Such estimates, appraisals, evaluations and cash flows may be subject to frequent adjustments due to changing economic prospects of borrowers, lessees or properties. These estimates are reviewed periodically and adjustments, if necessary, are recorded in the provision for credit losses in the periods in which they become known. 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 servicing rights are amortized in proportion to, and over the period of, estimated net servicing income. TCF periodically evaluates its capitalized mortgage servicing rights 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 calculating the present value of estimated future net servicing cash flows, taking 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 allowance for other than permanent impairment are recorded in mortgage banking revenues. Permanent impairment is recognized as a reduc- tion in the capitalized mortgage servicing rights and a charge to the related valuation allowance. 2004 Annual Report 53 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 54 Lease Financing TCF provides various types of lease financing that are classified for accounting purposes as either direct financing, sales-type, leveraged or operating leases. Leases that transfer sub- stantially 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 combined present value of the future minimum lease payments and the lease residual value. Investments in leveraged leases are the sum of all lease payments (less non-recourse debt payments) plus estimated residual values, less unearned income. The determination of the lease classification requires various judg- ments and estimates by management including the fair value of the equipment at lease inception, useful life of the equipment under lease, and collectibility of minimum lease payments. Sales-type leases generate dealer profit which is recognized at lease inception by recording lease revenue net of the lease cost. Lease revenue consists of the present value of the future minimum lease payments discounted at the rate implicit in the lease. Lease cost consists of the leased equipment’s book value, less the present value of its residual. The revenues associated with other types of leases are recognized over the term of the underlying leases. Interest income on direct financing and sales-type leases is recognized using methods which approximate a level yield over the term of the leases. Income from leveraged leases is recognized using a method which approximates a level yield over the term of the leases based on the unrecovered equity investment. Management has policies and proce- dures in place for the determination of lease classification and review of the related judgments and estimates for all lease financings. Additionally, some lease financings include a residual value component, which represents the estimated fair value of the leased equipment at the expiration of the initial term of the transaction. The estimation of residual values involves judgments regarding product and technology changes, customer behavior, shifts in supply and demand and other economic assumptions. These estimates are reviewed at least annually and downward adjustments, if necessary, are charged to non-interest expense in the periods in which they become known. Pension Plan As summarized in Note 18, TCF provides pension benefits to eligible employees in the TCF Cash Balance Pension Plan. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 87 “Employers’ Accounting for Pensions,” the Company does not consolidate the assets and liabilities associated with the pension plan. The measurement of the projected benefit obligation, prepaid pension asset and annual pension expense involves complex actuarial valuation methods and the use of actuarial and economic assump- tions. Due to the long-term nature of the pension plan obligation, actual results may differ significantly from the actuarial-based estimates. Differences between estimates and actual experience are required to be deferred and under certain circumstances amortized over the future expected working lifetime of plan participants. As a result, these differences are not recognized when they occur. TCF closely monitors all assumptions and updates them annually. Income Taxes Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabili- ties are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those tem- porary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is rec- ognized 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 bases of assets and liabilities (temporary differ- ences), estimates of amounts due or owed, the timing of reversals of temporary differences and current financial accounting standards. Actual results could differ significantly from the estimates and tax law interpretations used in determining the current and deferred income tax liabilities. Additionally, there can be no assurances that estimates and interpretations used in determining income tax liabil- ities may not be challenged by federal and state taxing authorities. OTHER SIGNIFICANT ACCOUNTING POLICIES 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 of related deferred income taxes, reported as accumulated other comprehensive income (loss), which is a separate component of stockholders’ equity. Cost of securities sold is determined on a specific identification basis and gains or losses on sales of securities available for sale are recognized at trade dates. Declines in the value of securities available for sale that are considered other than temporary are recorded in noninterest income as a loss on securities available for sale. Discounts and premiums on securities available for sale are amortized using methods which approximate a level yield over the life of the security. Loans Held for Sale Loans held for sale include education loans and prior to December 31, 2004 residential mortgage loans. Education loans held for sale are carried at the lower of cost or market. Residential mortgage loans held for sale are carried at the lower of cost or market as adjusted for the effects of fair value 54 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 55 hedges using quoted market prices. See Note 19 for additional information concerning derivative instruments and hedging activi- ties. Net fees and costs associated with originating and acquiring loans held for sale are deferred and are included in the basis for determining the gain or loss on sales of loans held for sale. Gains on sales are recorded at the settlement date and cost is determined on a specific identification basis. 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. The net fees and costs for sales-type leases are offset against revenues recorded at the commencement of sales-type leases. 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. 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 six payments or more past due for loans secured by residential real estate), unless the loan or lease is adequately secured and in the process of collection. When a loan or lease is placed on non-accrual status, 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 financial institutions, the related debt is also placed on non-accrual status. Interest payments received on non-accrual loans and leases are generally applied to principal unless the remaining principal balance has been determined to be fully collectible. Premises and Equipment Premises and equipment, including leasehold improvements, are carried at cost and are depreciated or amortized on a straight-line basis over their estimated useful lives of owned assets and for leasehold improvements over the estimated useful life of the related asset or the lease term, whichever is shorter. Maintenance and repairs are charged to expense as incurred. Other Real Estate Owned Other real estate owned is recorded at the lower of cost or fair value less estimated costs to sell at the date of transfer to other real estate owned. At the time a loan is transferred to other real estate owned, any carrying amount in excess of the fair value less estimated costs to sell the property is charged off to the allowance for loan and lease losses. Subsequently, should the fair value of an asset less the estimated costs to sell decline to less than the carrying amount of the asset, the deficiency is recog- nized in the period in which it becomes known and is included in other non-interest expense. Net operating expenses of properties and recoveries and losses on sales of other real estate owned are also recorded in other non-interest expense. Investments in Affordable Housing Limited Partnerships Investments in affordable housing consist of investments in limited partnerships that operate qualified affordable housing projects or that invest in other limited partnerships formed to operate affordable housing projects. TCF generally utilizes the effective yield method to account for these investments with the tax credits net of the amor- tization of the investment reflected in the Consolidated Statements of Income as a reduction of income tax expense. However, depending on circumstances, the equity or cost methods may be utilized. The amount of the investment along with any unfunded equity contri- butions 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, 2004, TCF’s investments in affordable housing limited partnerships were $49 million, com- pared with $41.8 million at December 31, 2003 and were recorded in other assets. Four of these investments in affordable housing limited partnerships are considered variable interest entities under the Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities” as revised (FIN 46). These partnerships are not required to be consolidated with TCF under FIN 46. As of December 31, 2004, the carrying amount of these four investments, which were made in May and October 2002, November 2003 and July 2004, was $46.7 million. This amount included $13.9 million of unconditional unfunded equity contributions which are recorded in other liabilities. Thus, the maximum exposure to loss on these four investments was $46.7 million at December 31, 2004; however, the general partner of these partnerships provides various guarantees to TCF including guaran- teed minimum returns. These guarantees are backed by a AAA credit-rated company and significantly limit any risk of loss. Intangible Assets On January 1, 2002, TCF adopted 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. Deposit base intan- gibles are amortized over 10 years on an accelerated basis. The Company reviews the recoverability of the carrying values of these assets whenever an event occurs indicating that they may be impaired. See Note 9 for additional information concerning intan- gible assets and goodwill. Stock-Based Compensation TCF utilizes the recognition provi- sions of SFAS No. 123, “Accounting for Stock-Based Compensation,” for stock-based grants. 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 2004 Annual Report 55 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 56 intrinsic 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. No compensation expense has been recognized for any stock option grants made prior to 2000. Had the recognition provisions of SFAS No. 123 been applied to the pre-2000 stock option grants, the related pro-forma impact on net income and earnings per share during 2003 and 2002 would have been immaterial. Compensation expense for restricted stock is recorded as unearned compensation in stockholders’ equity and amortized to compensa- tion expense over the vesting periods. See Note 17 for additional information concerning stock-based compensation. Derivative Financial Instruments TCF utilizes derivative financial instruments to meet the ongoing credit needs of its cus- tomers and used derivatives 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. See Notes 19 and 20 for additional information concerning these derivative financial instruments. Note 2. Cash and Due from Banks At December 31, 2004, TCF was required by Federal Reserve Board regulations to maintain reserve balances of $70.1 million in cash on hand or at the Federal Reserve Bank. Note 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The carrying values and yields on investments at December 31, 2004, by contractual maturity, are shown below: (Dollars in thousands) Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . No stated maturity (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Balance represents FRB and Federal Home Loan Bank (“FHLB”) stock, required regulatory investments. At December 31, 2004 $ 80,841 21,865 520 $103,226 Carrying Value $ 520 102,706 $103,226 2003 $ 50,411 24,045 767 $ 75,223 Yield 1.71% 3.77 3.76 Note 4. Securities Available for Sale Securities available for sale consist of the following: (Dollars in thousands) Mortgage-backed securities: Federal agencies . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other securities . . . . . . . . . . . . . . . . . . . . . Weighted-average yield . . . . . . . . . . . . . . . 5.13% At December 31, 2004 Gross Unrealized Gains Gross Unrealized Losses Amortized Cost 2003 Gross Unrealized Gains Gross Unrealized Losses Fair Value Fair Value Amortized Cost $1,614,513 $2,045 $(4,034) $1,612,524 6,639 1,000 – – (222) – 6,417 1,000 $1,622,152 $2,045 $(4,256) $1,619,941 $1,514,400 9,272 750 $1,524,422 5.33% $13,744 – – $13,744 $(4,677) $1,523,467 9,071 750 $(4,878) $1,533,288 (201) – Gross gains of $22.6 million, $32.8 million and $11.5 million were recognized on sales of securities available for sale during 2004, 2003 and 2002, respectively. Mortgage-backed securities aggregating $1.4 billion and $1.3 billion were pledged as collateral to secure certain deposits and borrowings at December 31, 2004 and 2003, respectively. See Notes 12 and 13 for additional information regarding securities pledged as collateral to secure certain borrowings. 56 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 57 The following table shows the securities available for sale portfolio’s gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2004. TCF has reviewed these securities and has concluded that the unrealized losses are temporary and no impairment has occurred at December 31, 2004. Less than 12 months 12 months or more Total (In thousands) Mortgage-backed securities: Fair Value Unrealized Losses Federal agencies . . . . . . . . . . . . . . . . . . . . $994,892 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – Total temporarily impaired securities . . . . . $994,892 $(2,658) – $(2,658) Fair Value $80,659 5,324 $85,983 Unrealized Losses $(1,376) (222) $(1,598) Fair Value $1,075,551 5,324 $1,080,875 Unrealized Losses $(4,034) (222) $(4,256) Note 5. Loans Held for Sale Loans held for sale consist of the following: (In thousands) Education loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 $154,279 – Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $154,279 2003 $234,337 101,035 $335,372 At December 31, Note 6. Loans and Leases Loans and leases consist of the following: (Dollars in thousands) Consumer: Real estate secured: At December 31, 2004 2003 Percentage Change First mortgage lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Junior lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total real estate secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,894,538 1,487,478 4,382,016 22,585 13,987 $2,446,841 1,141,186 3,588,027 27,265 15,049 Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,418,588 3,630,341 Commercial: Commercial real estate: Permanent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,957,676 196,720 2,154,396 424,135 2,578,531 1,745,435 171,266 1,916,701 427,696 2,344,397 Leasing and equipment finance: Equipment finance loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease financings: 334,352 309,740 Direct financing leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales-type leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease residuals, excluding leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned income and deferred lease costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total lease financings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total leasing and equipment finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total consumer, commercial and leasing and equipment finance . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,067,845 22,742 35,163 (103,516) 18,786 1,041,020 1,375,372 8,372,491 1,014,166 853,395 33,073 34,171 (92,710) 22,728 850,657 1,160,397 7,135,135 1,212,643 Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,386,657 $8,347,778 18.3% 30.3 22.1 (17.2) (7.1) 21.7 12.2 14.9 12.4 (.8) 10.0 7.9 25.1 (31.2) 2.9 11.7 (17.3) 22.4 18.5 17.3 (16.4) 12.4 2004 Annual Report 57 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 58 The aggregate amount of loans to non-management directors of TCF and their related interests was $56.5 million and $60.9 mil- lion at December 31, 2004 and 2003, respectively. During 2004, $22.8 million of new loans were made, repayments of loans totaled $27.1 million and there were no changes due to the composition of outside directors and their related interests. All loans to outside directors and their related interests were made in the ordinary course of business on normal credit terms, including interest rates and col- lateral, as those prevailing at the time for comparable transactions with unrelated persons. The aggregate amount of loans to executive officers of TCF was $115 thousand and $25 thousand at December 31, 2004 and 2003, respectively. In the opinion of management the above mentioned loans to outside directors and their related inter- ests and executive officers do not represent more than a normal credit risk of collection. The investment in leveraged leases represents net unpaid rentals and estimated unguaranteed residual values of the leased assets less related unearned income. TCF has no obligation for principal and interest on notes representing third-party participation related to leveraged leases. Such notes, which totaled $19.2 million at December 31, 2004, down from $30.2 million at December 31, 2003, are recorded as an offset against the related rental receivable. At December 31, 2004, lease residuals, excluding leveraged lease residuals, totaled $35.2 million, up from $34.2 million at December 31, 2003. Included in the investment in leveraged leases, at December 31, 2004 is a 100% equity interest in a Boeing 767-300 aircraft leased to Delta Airlines, Inc. (“Delta”). The third party noteholders have a security interest in the aircraft which is superior to TCF’s equity interest. Such notes, which totaled $19.2 million at December 31, 2004, down from $22.6 million at December 31, 2003, are recorded as an offset against the related rental receivable. During 2004, TCF completed its annual review of the lease residual value assumption for this aircraft and reduced the estimated residual value by $4.4 million. As required under SFAS No. 13, “Accounting for Leases”, TCF recognized an impairment charge of $1.6 million which was recorded in other non-interest expense. The remaining reduction will be amortized through reduced yield on the investment over the remaining years of the lease as prescribed by SFAS No. 13. In 2004, TCF downgraded its credit rating on the aircraft leveraged lease and classified its invest- ment as substandard and placed the lease on non-accrual status. Although Delta is current on its payments related to this transaction, if Delta declares bankruptcy, it would likely result in the charge-off of TCF’s $18.8 million investment in the leveraged lease and the current payment of previously deferred income tax obligations. TCF’s net investment in leveraged leases is comprised of the following: (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 income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment in leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2004 $10,064 13,660 (4,938) 18,786 (9,039) $ 9,747 2003 $ 12,758 18,679 (8,709) 22,728 (11,813) $ 10,915 Future minimum lease payments for direct financing and sales-type leases as of December 31, 2004 are as follows: (In thousands) 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments to be Received by TCF $ 379,557 271,260 181,254 106,949 47,138 15,046 $1,001,204 Payments to be Received by other Financial Institutions 29,610 $ 15,628 5,313 315 45 – 50,911 $ Total $ 409,167 286,888 186,567 107,264 47,183 15,046 $1,052,115 58 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 59 Note 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquired allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2004 $ 76,619 10,947 (14,247) 4,768 (9,479) 1,791 2003 $ 77,008 12,532 (16,369) 3,448 (12,921) – 2002 $ 75,028 22,006 (24,361) 4,335 (20,026) – Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79,878 $ 76,619 $ 77,008 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 loan and lease balances at year end . . . . . . . . . . . . .11% .85 .16% .92 .25% .95 Information relating to impaired loans and non-accrual loans and leases is as follows: (In thousands) Impaired loans: At or For the Year Ended December 31, 2004 2003 2002 Balance, at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,092 Related allowance for loan losses, at year-end(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average recorded investment in impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income recognized on impaired loans (cash basis) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-accrual loans and leases: Balance, at year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income recognized on other non-accrual loans and leases (cash basis) . . . . . . . . . . . . . . . . . . . . . . Contractual interest on non-accrual loans and leases(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,668 9,840 108 38,786 1,409 3,881 $ 9,133 4,456 10,770 27 26,273 756 3,271 $12,090 5,512 14,686 92 31,550 1,133 4,301 (1) There were no impaired loans at December 31, 2004, 2003 and 2002 which did not have a related allowance for loan losses. (2) Represents interest which would have been recorded had the loans and leases performed in accordance with their original terms. At December 31, 2004, 2003 and 2002, TCF had no loans outstanding with terms that had been modified in troubled debt restructurings. There were no material commitments to lend additional funds to customers whose loans or leases were classified as non-accrual at December 31, 2004. Note 8. Premises and Equipment Premises and equipment are summarized as follows: (In thousands) Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2004 $ 88,227 201,373 46,062 242,389 578,051 251,384 $326,667 2003 $ 76,902 169,098 40,927 242,958 529,885 247,692 $282,193 TCF leases certain premises and equipment under operating leases. Net lease expense was $25.4 million, $23.5 million and $20.8 million in 2004, 2003 and 2002, respectively. At December 31, 2004, the total annual minimum lease commitments for operating leases were as follows: (In thousands) 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,894 20,998 19,633 17,378 16,445 72,093 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $170,441 2004 Annual Report 59 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 60 Note 9. Goodwill and Other Intangible Assets Goodwill and other intangible assets are summarized as follows: (In thousands) Amortizable intangible assets: Mortgage servicing rights . . . . . . . . . . . . . . Deposit base intangibles . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . Unamortizable intangible assets: Goodwill included in Banking Segment . . . . Goodwill included in Leasing Segment . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 Accumulated Amortization $ 37,226 16,935 $ 54,161 Gross Amount $ 83,668 21,180 $104,848 $145,462 7,137 $152,599 At December 31, Net Amount $ 46,442 4,245 $ 50,687 $145,462 7,137 $152,599 Gross Amount $ 76,306 21,180 $ 97,486 $145,462 – $145,462 2003 Accumulated Amortization $ 24,270 15,273 $ 39,543 Net Amount $ 52,036 5,907 $ 57,943 $145,462 – $145,462 Amortization expense for intangible assets was $14.8 million, $25.3 million and $24.5 million for the years ended December 31, 2004, 2003 and 2002, respectively. The following table shows the estimated future amortization expense for amortized intangible assets based on existing asset balances and the interest rate environment as of December 31, 2004. 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, prepayment rates and other market conditions. (In thousands) Estimated Amortization Expense for the Year Ended December 31,: Mortgage Servicing Rights Deposit Base Intangibles 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,693 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,387 7,317 5,687 4,440 $ 1,659 1,631 955 – – Note 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wholesale originations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retail 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, 2004 $ 54,036 4,038 4,959 (13,091) – 49,942 (2,000) (1,500) – (3,500) $ 46,442 2003 $ 71,990 21,385 12,840 (23,679) (28,500) 54,036 (9,346) (21,154) 28,500 (2,000) $ 52,036 Total $13,352 11,018 8,272 5,687 4,440 2002 $ 63,607 30,781 8,976 (22,874) (8,500) 71,990 (5,346) (12,500) 8,500 (9,346) $ 62,644 60 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 61 The following table represents the components of mortgage banking revenue: (In thousands) Servicing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less mortgage servicing: Year Ended December 31, 2004 $ 17,349 2003 $ 20,533 2002 $ 20,443 Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net servicing income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,091 1,500 14,591 2,758 8,107 2,095 23,679 21,154 44,833 (24,300) 33,505 3,514 22,874 12,500 35,374 (14,931) 18,110 3,800 Total mortgage banking revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,960 $ 12,719 $ 6,979 Gains on sales of loans includes the changes in fair value of residential mortgage loans held for sale, loan applications in process and related forward sales contracts. At December 31, 2004, there were no residential mortgage loans held for sale or related forward sales contracts. At December 31, 2004, 2003 and 2002, TCF was servicing real estate loans for others with aggregate unpaid principal balances of approximately $4.5 billion, $5.1 billion and $5.6 billion, respectively. At December 31, 2004 and 2003, TCF had custodial funds of $106.1 million and $128.5 mil- lion, respectively, relating to the servicing of residential real estate loans, which are included in deposits in the Consolidated Statements of Financial Condition. These custodial deposits relate primarily to mortgage servicing operations and represent funds due to investors on mortgage loans serviced by TCF and customer funds held for real estate taxes and insurance. The estimated fair value of mortgage servicing rights included in the Consolidated Statements of Financial Condition at December 31, 2004 was approximately $55.9 million. The estimated fair value is based on estimated cash flows discounted using rates management believes are commensurate with the risks involved. Assumptions regarding prepayments, defaults and interest rates are determined using available market information. Note 11. Deposits Deposits are summarized as follows: (Dollars in thousands) Checking: Rate at Year End 2004 Amount Non-interest bearing . . . . . . . . . . . . . . . . . –% $2,378,697 Interest bearing . . . . . . . . . . . . . . . . . . . . . Total checking . . . . . . . . . . . . . . . . . . . Savings: Non-interest bearing . . . . . . . . . . . . . . . . . Interest bearing . . . . . . . . . . . . . . . . . . . . . Total savings . . . . . . . . . . . . . . . . . . . . Money market Total checking, savings, and money market . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . .55 .22 – .62 .59 .59 .37 2.11 .69 1,527,290 3,905,987 89,578 1,838,294 1,927,872 659,686 6,493,545 1,468,650 $7,962,195 At December 31, % of Total 29.9% 19.2 49.1 1.1 23.1 24.2 8.3 81.6 18.4 100.0% Rate at Year End 2003 Amount –% $2,113,572 .08 .03 – .43 .41 .37 .20 2.01 .58 1,134,840 3,248,412 104,104 1,801,819 1,905,923 845,291 5,999,626 1,612,123 $7,611,749 % of Total 27.8% 14.9 42.7 1.3 23.7 25.0 11.1 78.8 21.2 100.0% 2004 Annual Report 61 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 62 Certificates of deposit had the following remaining maturities at December 31, 2004: (In thousands) Maturity $100,000 Minimum Other Total 0-3 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 101,399 $ 340,345 $ 441,744 4-6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7-12 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-24 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25-36 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37-48 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49-60 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over 60 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,633 41,327 34,964 12,496 1,784 10,211 888 258,289 272,040 230,450 65,848 16,730 27,168 5,078 307,922 313,367 265,414 78,344 18,514 37,379 5,966 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 252,702 $1,215,948 $1,468,650 Note 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, 2004: (Dollars in thousands) At December 31, 2004 2003 2002 Amount Rate Amount Rate Amount Rate Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . $ 219,000 Securities sold under repurchase agreements . . . . . . . . Treasury, tax and loan note payable . . . . . . . . . . . . . . . . Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . Line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568,319 4,792 250,000 14,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,056,111 Year ended December 31, Average daily balance Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . Securities sold under repurchase agreements . . . . . . . . Treasury, tax and loan note payable . . . . . . . . . . . . . . . . Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . Line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 203,216 528,942 4,119 57,513 15,316 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 809,106 Maximum month-end balance Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . $ 336,000 Securities sold under repurchase agreements . . . . . . . . Treasury, tax and loan note payable . . . . . . . . . . . . . . . . Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . Line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 614,641 30,438 300,000 43,000 N.A. Not Applicable. 2.29% 2.38 1.92 2.41 3.18 2.37 1.45% 1.53 1.02 2.02 2.78 1.57 N.A. N.A. N.A. N.A. N.A. $219,000 607,631 14,781 – 37,000 $878,412 $231,060 504,328 5,103 – 16,637 $757,128 $321,000 896,752 31,903 – 47,000 .95% 1.30 .73 – 1.95 1.23 1.12% 1.26 .86 – 2.63 1.25 N.A. N.A. N.A. N.A. N.A. $265,000 547,743 15,808 – 13,500 $842,051 $188,559 340,311 29,348 – 15,717 $573,935 $271,000 766,511 200,000 – 42,500 1.20% 1.37 1.12 – 2.20 1.32 1.67% 1.70 1.50 – 3.23 1.72 N.A. N.A. N.A. N.A. N.A. The securities underlying the repurchase agreements are book entry securities. During the borrowing period, book entry securities were deliv- ered by appropriate entry into the counterparties’ accounts through the Federal Reserve System. The dealers may sell, loan or otherwise dispose of such securities to other parties in the normal course of their operations, but have agreed to resell to TCF identical or substantially the same securities upon the maturities of the agreements. At December 31, 2004, all of the securities sold under repurchase agreements provided for the repurchase of identical securities and were collateralized by mortgage-backed securities having a fair value of $584.8 million. TCF Financial Corporation (parent company only) has a $105 million line of credit maturing in April 2005 which is unsecured and contains cer- tain covenants common to such agreements. TCF is not in default with respect to any of its covenants under the credit agreement. The interest rate on the line of credit is based on either the prime rate or LIBOR. TCF has the option to select the interest rate index and term for advances on the line of credit. The line of credit may be used for appropriate corporate purposes. 62 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 63 Note 13. Long-term Borrowings Long-term borrowings consist of the following: (Dollars in thousands) Federal Home Loan Bank advances and securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Federal Home Loan Bank advances and securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . Discounted lease rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total discounted lease rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year of Maturity 2004 2005 2006 2009 2010 2011 2004 2005 2006 2007 2008 2009 2014 2005 2006 2007 2008 Amount $ – 1,191,500 303,000 122,500 100,000 200,000 1,917,000 – 27,871 15,080 5,183 305 44 48,483 74,209 2,200 2,200 2,200 2,200 8,800 Total long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,048,492 At December 31, 2004 2003 Weighted- Average Rate Weighted- Average Rate Amount –% $ 3,000 4.76% 3.04 4.64 5.25 6.02 4.86 3.78 – 5.63 5.75 5.91 6.41 6.59 5.70 5.27 4.50 4.50 4.50 4.50 4.50 3.88 741,500 303,000 122,500 100,000 200,000 1,470,000 43,607 18,097 4,134 522 53 – 66,413 – – – – – – 3.82 4.20 5.25 6.02 4.85 4.31 6.24 5.68 5.55 5.30 5.54 – 6.04 – – – – – – $1,536,413 4.38 At December 31, 2004, $599.5 million of securities sold under repurchase agreements maturing in 2005 were collateralized by mortgage- backed securities having a fair value of $634.5 million. For certain equipment leases, TCF utilizes its lease rentals and underlying equipment as collateral to borrow from other financial institutions at fixed rates on either a partial recourse or non-recourse basis. In the event of a default by the customer on these financings, the other financial institution has a first lien on the underlying leased equipment. In the case of non-recourse financings, the other financial institution has no further recourse against TCF. At December 31, 2004, TCF has pledged residential real estate loans, consumer loans, commercial real estate loans, mortgage-backed securities and FHLB stock with an aggregate carrying value of $4.4 billion as collateral for FHLB advances. Included in FHLB advances and repurchase agreements at December 31, 2004 are $767.5 million of fixed-rate FHLB advances and repurchase agreements with other financial institutions which are callable quarterly at par until maturity. If called, replacement funding will be provided by the counterparties at the then- prevailing short-term market interest rates. The probability that these advances and repurchase agreements will be called depends primarily on the level of related interest rates during the call period. The stated maturity dates for the callable advances and repurchase agreements outstanding at December 31, 2004 were as follows (dollars in thousands): Year 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stated Maturity $342,000 3,000 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,500 100,000 200,000 $767,500 Weighted- Average Rate 6.20% 5.46 5.25 6.02 4.85 5.67 2004 Annual Report 63 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 64 In 2004, TCF National Bank (“TCF Bank”), a wholly-owned subsidiary of TCF, issued $75 million of subordinated notes due 2014. The notes bear interest at a fixed rate of 5.00% for the first five years and will reprice quarterly thereafter at the three-month LIBOR rate plus 1.63%. The notes may be redeemed by TCF Bank at par after five years. These notes qualify as Tier 2 or supplemental capital for regulatory purposes, subject to certain limitations. TCF Bank paid the proceeds from the offering to TCF to be used for general corporate purposes, which may include repurchases in the open market of TCF common stock. Note 14. Income Taxes Income tax expense consists of: (In thousands) Year ended December 31, 2004: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year ended December 31, 2003: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year ended December 31, 2002: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current Deferred Total $148,043 3,918 $151,961 $ 111,922 4,830 $ 116,752 $ 31,830 1,810 $ 33,640 $ (21,765) (713) $ (22,478) $ (4,649) (198) $ (4,847) $ 86,288 4,834 $ 91,122 $126,278 3,205 $129,483 $ 107,273 4,632 $ 111,905 $ 118,118 6,644 $ 124,762 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 (decrease) in income tax expense resulting from: State income tax, net of federal income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deductible stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in affordable housing limited partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2004 $134,567 2,083 (3,897) (2,518) (752) $129,483 33.68% 2003 $114,724 3,011 (3,291) (1,419) (1,120) $111,905 34.14% 2002 $125,192 4,319 (3,682) (489) (578) $124,762 34.88% The significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows: (In thousands) Deferred tax assets: Restricted stock and deferred compensation plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: Lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subsidiary tax year-end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan fees and discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2004 2003 $ 37,819 35,265 796 9,427 83,307 122,528 – 19,339 14,090 9,464 8,188 – 10,901 184,510 $101,203 $ 34,325 35,820 – 11,136 81,281 117,991 28,931 18,428 15,061 9,066 6,249 3,214 10,032 208,972 $127,691 The company has determined that a valuation allowance for deferred tax assets is not necessary. 64 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 65 Note 15. Stockholders’ Equity Restricted Retained Earnings Retained earnings at December 31, 2004 includes approximately $134.4 million for which no provision for federal income taxes has been made. This amount represents earnings legally appropriated to bad debt reserves and deducted for federal income tax purposes and is generally not avail- able for payment of cash dividends or other distributions to share- holders. Future payments or distributions of these appropriated earnings could invoke a tax liability for TCF based on the amount of the distributions removed and the tax rates in effect at that time. Shareholder Rights Plan Each share of TCF common stock out- standing includes one preferred share purchase right. TCF’s preferred share purchase rights will become exercisable only if a person or group acquires or 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-hundredth of a share of a new series of junior participating preferred stock at a price of $200. In addition, upon the occurrence of certain events, holders of the rights will be enti- tled to purchase either TCF’s common stock or shares in an “acquir- ing entity” at half of the market value. TCF’s Board of Directors (the “Board”) is generally entitled to redeem the rights at $.001 per right at any time before they become exercisable. The rights will expire on June 9, 2009, if not previously redeemed or exercised. Stock Split During the third quarter of 2004, TCF announced and completed a two-for-one stock split of its common stock in the form of a 100% stock dividend. The stock split resulted in an increase in issued common stock of 92,485,601 shares and was accounted for by a transfer of $925 thousand to common stock from additional paid- in capital. All prior period common shares and per share disclosures have been restated to reflect the split. Treasury Stock and Other Treasury stock and other consists of the following: (In thousands) At December 31, 2004 2003 Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(862,543) $(751,586) Shares held in trust for deferred compensation plans, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unamortized stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (70,775) (13,199) (71,103) (16,712) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(946,517) $(839,401) TCF purchased 3,984,890; 6,918,980 and 6,216,862 shares of its common stock during the years ended December 31, 2004, 2003 and 2002 respectively. On July 21, 2003, TCF’s Board of Directors authorized the repurchase of up to an additional 5% of TCF’s common stock, or 7.2 million shares. At December 31, 2004, TCF had 3.5 million shares remaining in its stock repurchase program authorized by the Board of Directors. Shares Held in Trust for Deferred Compensation Plans TCF has deferred compensation plans that allow eligible executives, senior officers and certain other employees to defer payment of up to 100% of their base salary and bonus as well as grants of restricted stock. There are no company contributions to these plans, other than payment of administrative expenses. The amounts deferred are invested in TCF stock or other publicly traded stocks, bonds or mutual funds. At December 31, 2004 the fair value of the assets in the plans totaled $253.3 million and included $246.3 million invested in TCF common stock. The cost of TCF common stock held by TCF’s deferred compensation plans is reported separately in a manner similar to treasury stock (that is, changes in fair value are not recognized) with a corresponding deferred compensation obligation reflected in additional paid-in capital. Note 16. Regulatory Capital Requirements TCF is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by the federal banking agencies that could have a direct material effect on TCF’s financial statements. Also, in general, TCF National Bank may not declare or pay a dividend to TCF in excess of 100% of its net profits for that year combined with its retained net profits for the preceding two calendar years without prior approval of the Office of the Comptroller of the Currency (“OCC”). 2004 Annual Report 65 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 66 The following table sets 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) As of December 31, 2004: Tier 1 leverage capital Actual Minimum Capital Requirement Excess Amount Ratio Amount Ratio Amount Ratio TCF Financial Corporation . . . . . . . . . . . . . . TCF National Bank . . . . . . . . . . . . . . . . . . . . $803,870 775,100 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, 2003: Tier 1 leverage capital 803,870 775,100 958,900 930,130 6.63% 6.41 9.12 8.81 10.88 10.57 $363,940 362,911 352,592 351,865 705,185 703,730 TCF Financial Corporation . . . . . . . . . . . . . . TCF National Bank . . . . . . . . . . . . . . . . . . . $ 765,271 754,599 6.87% 6.83 $ 334,402 331,649 Tier 1 risk-based capital TCF Financial Corporation . . . . . . . . . . . . . . TCF National Bank . . . . . . . . . . . . . . . . . . . Total risk-based capital TCF Financial Corporation . . . . . . . . . . . . . . TCF National Bank . . . . . . . . . . . . . . . . . . . 765,271 754,599 841,982 831,310 9.75 9.64 10.73 10.62 313,825 313,143 627,650 626,286 3.00% 3.00 4.00 4.00 8.00 8.00 3.00% 3.00 4.00 4.00 8.00 8.00 $439,930 412,189 451,278 423,235 253,715 226,400 $ 430,869 422,950 451,446 441,456 214,332 205,024 3.63% 3.41 5.12 4.81 2.88 2.57 3.87% 3.83 5.75 5.64 2.73 2.62 At December 31, 2004, 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. Note 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, 2004, there were 5,173,282 shares reserved for issuance under the Program, including 325,864 shares related to outstanding stock options. At December 31, 2004, there were 2,142,246 shares of performance-based restricted stock that will vest only if certain earnings per share goals are achieved by 2008. On January 6, 2005, 1,085,570 shares of performance-based restricted stock vested due to the achievement of an earnings per share goal in 2004. 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 seven years. The weighted-average grant date fair value of restricted stock was $28.14, $22.50 and $24.46 in 2004, 2003 and 2002, respectively. Compensation expense for restricted stock totaled $6.9 million, $9.7 million and $11.6 million in 2004, 2003 and 2002, respectively. TCF has also issued stock options under the Program that gener- ally become exercisable over a period of one to 10 years from the date of the grant and expire after 10 years. All outstanding options have a fixed exercise price equal to the market price of TCF common stock on the date of grant. As of December 31, 2004, all outstanding stock options are vested. 66 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 67 The following table reflects TCF’s stock option and restricted stock transactions under the Program since December 31, 2001: Restricted Stock Stock Options Exercise Price Range Weighted- Average $ 2.66-16.64 $ 12.33 Shares 740,250 – (103,596) (28,900) – – 2.66-16.64 11.78-16.09 – Price Range $ 9.87-24.10 20.71-26.39 – 11.05-26.39 10.44-25.17 9.87-26.39 18.73-25.32 Outstanding at December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding at December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares 4,918,822 122,800 – (46,490) (1,724,500) 3,270,632 255,900 – (214,480) (250,898) 3,061,154 149,120 – (62,980) (115,068) 607,754 3.44-16.64 – – – (125,558) 10.91-16.09 9.87-26.39 11.05-20.38 9.87-20.38 24.33-30.28 (500) – 10.91 – 481,696 3.44-16.64 – – – (155,832) 3.44-16.64 11.05-30.13 11.05-24.10 – – – – Outstanding at December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . Exercisable at December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,032,226 9.87-30.28 N.A. N.A. 325,864 325,864 3.44-16.64 3.44-16.64 N.A. Not Applicable. The following table summarizes information about stock options outstanding at December 31, 2004: – 9.86 12.95 – 12.72 – 12.11 10.91 – 12.88 – 12.81 – – 12.91 12.91 Exercise Price Range $ 3.44 to $10.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10.01 to $12.50 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12.51 to $15.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15.01 to $16.64 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock Options Outstanding and Exercisable Weighted- Average Exercise Price $ 5.71 11.80 14.47 16.12 12.91 Shares 31,064 122,800 116,000 56,000 325,864 Weighted- Average Remaining Contractual Life in Years .8 4.0 4.4 3.0 3.7 Note 18. Employee Benefit Plans Employee Stock Purchase Plan The TCF Employees Stock Purchase Plan generally allows participants to make contributions by salary deduction of up to 50% of their salary on a tax-deferred basis. TCF matches the contributions of all employees in TCF common stock at the rate of 50 cents per dollar, with a maximum company contribution of 3% of the employee’s salary. Employee contributions vest immediately while the Company’s matching contributions are subject to a graduated vesting schedule based on an employee’s years of vesting service over five years. In December 2004, TCF modi- fied this plan to allow all employees the opportunity to diversify and invest their vested account balance in various mutual funds or TCF common stock. At December 31, 2004, the fair value of the assets in the plan totaled $267.8 million and included $262.2 million invested in TCF common stock. The Company’s matching contributions are expensed when made. TCF’s contributions to the plan were $4 million, $3.9 million and $3.6 million in 2004, 2003 and 2002, respectively. Pension Plan The TCF Cash Balance Pension Plan (the “Pension Plan”) is a qualified defined benefit plan covering eligible employees who are at least 21 years old and have completed a year of eligibility service with TCF. Employees hired after June 30, 2004 are not eligible to participate in the Pension Plan. TCF makes a monthly allocation to the participant’s account based on a percentage of the participant’s compensation. The percentage is based on the sum of the partici- pant’s age and years of employment with TCF and includes interest on the account balance based on the five-year Treasury rate plus 25 basis points for 2004 and based on the ten-year Treasury rate for 2003 and 2002. Participants are fully vested after five years of qualifying service. 2004 Annual Report 67 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 68 Postretirement Plan TCF provides health care benefits for eligible retired employees (the “Postretirement Plan”). Effective January 1, 2000, TCF modified the Postretirement Plan for employees not yet eligible for benefits under the Postretirement Plan by eliminating the Company subsidy. The plan provisions for full-time and retired employees then eligible for these benefits were not changed. The Postretirement Plan is not funded. The following table sets forth the status of the Pension Plan and the Postretirement Plan at the dates indicated: (In thousands) Benefit obligation: Accrued participant balance – vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued participant balance – unvested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Present value of future service and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in benefit obligation: Pension Plan Postretirement Plan Year Ended December 31, Year Ended December 31, 2004 2003 $ 47,646 5,217 52,863 2,351 $ 55,214 $ 48,296 $ 42,958 3,621 46,579 4,251 $ 50,830 $ 43,230 2004 N.A. N.A. N.A. N.A. N.A. N.A. 2003 N.A. N.A. N.A. N.A. N.A. N.A. Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,830 $ 42,324 $ 12,386 $ 11,837 Service cost – benefits earned during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost on projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Projected 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TCF contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Funded status of plans: Funded status at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unamortized transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unamortized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid (accrued) benefit cost at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . N.A. Not Applicable. 4,632 3,164 (451) 258 (3,219) 55,214 53,855 5,350 (3,219) 2,575 58,561 3,347 – (670) 24,207 $ 26,884 3,950 2,950 – 3,907 (2,301) 50,830 49,486 6,670 (2,301) – 53,855 3,025 – (452) 23,344 53 672 (629) (1,793) (1,014) 9,675 – – (1,014) 1,014 – (9,675) 1,044 – 2,732 60 740 – 891 (1,142) 12,386 – – (1,142) 1,142 – (12,386) 1,883 – 4,742 $ 25,917 $ (5,899) $ (5,761) On December 8, 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the “Act”) was signed into law. This Act includes a prescription drug benefit and a federal subsidy for sponsors of retiree healthcare plans with qualifying prescription drug benefits, beginning in 2006. TCF offers prescription drug benefits to retirees in the Postretirement Plan. In the second quarter of 2004, TCF re-measured its postretirement benefit obligation as of December 31, 2003 to include the effects of the federal subsidy provided under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. As a result of this remeasurement, TCF’s postretirement benefit obligation decreased $989 thousand and the postretirement benefit cost decreased $103 thousand in 2004. The measurement date used for determining the Pension Plan and the Postretirement Plan projected and accumulated benefit obligations above and the date used to value plan assets disclosed above was September 30, 2004 and 2003. The discount rate and rate of increase in future compensation used to measure the benefit obligation were as follows: Assumptions used to determine benefit obligations Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . N.A. Not Applicable. Pension Plan Year Ended December 31, Postretirement Plan Year Ended December 31, 2004 6.0% 4.0 2003 6.0% 4.5 2002 6.5% 4.5 2004 6.0% N.A. 2003 6.0% N.A. 2002 6.5% N.A. 68 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 69 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) loss . . . . . . . . . . . 2004 $ 4,632 3,164 (5,955) – (233) – 2003 $ 3,950 2,950 (6,374) – (361) – Net periodic benefit cost (credit) . . . . . . . $ 1,608 $ 165 2002 $ 3,547 2,857 (7,683) – (1,056) (387) $(2,722) $ 2004 53 672 – 210 – 215 $ 2003 60 740 – 210 – 226 $ 2002 48 685 – 210 – 38 $ 1,150 $ 1,236 $ 981 The discount rate, the expected long-term rate of return on plan assets and the rate of increase in future compensation used to determine the net benefit cost (credit) were as follows: Assumptions used to determine benefit cost (credit) Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . Expected long-term rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . . N.A. Not Applicable. Pension Plan Year Ended December 31, Postretirement Plan Year Ended December 31, 2004 6.0% 8.5 4.5 2003 6.5% 8.5 4.5 2002 7.5% 10.0 4.5 2004 6.0% N.A. N.A. 2003 6.5% N.A. N.A. 2002 7.5% N.A. N.A. TCF’s pension plan asset allocation is summarized as follows: Pension Plan Percentage of Plan Assets at December 31, Asset Category Equity securities, excluding TCF Financial Corporation common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TCF Financial Corporation common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed-income securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 100% – – – Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% 2003 75% 2 21 2 100% Beginning in December 2004, the assets of TCF’s pension plan are invested in passively managed index mutual funds that are designed to track the performance of the Standard and Poor’s 500 and the Morgan Stanley Capital International U.S. Mid-Cap 450 indexes, at targeted weightings of 75% and 25% respectively. Prior to this, the assets were managed by external investment managers on a discretionary basis subject to certain restrictions and limitations. The actuarial assumptions used in the pension plan valuation are reviewed annually. The expected long-term rate of return on plan assets is determined by reference to historical market returns and future expectations. The weighted average 10-year return of the indexes underlying the Plan’s current investment strategy was 12.7%. Although past performance is no guarantee of the future results, TCF is not aware of any reasons why it should not be able to achieve the assumed future average annual returns of 8.5% on plan assets over complete market cycles. A 1% difference in the expected return on plan assets would result in a $655 thousand change in net periodic pension expense. TCF currently does not expect to contribute to the Pension Plan in 2005. TCF expects to contribute approximately $1 million to the Postretirement Plan in 2005. TCF currently has no plans to pre-fund the Postretirement Plan in 2005. The following are expected future benefit payments used to determine projected benefit obligations: (In thousands) Pension Plan Postretirement Plan 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,721 $ 1,004 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,431 5,787 6,105 6,356 2010-2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,325 934 934 926 911 4,078 2004 Annual Report 69 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 70 The following table presents assumed health care cost trend rates for the Postretirement Plan at December 31, 2004 and 2003: Health care cost trend rate assumed for next year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Final health care cost trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year that final health care trend rate is reached . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 10% 5% 2009 2003 11% 5% 2009 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) Effect on total of service and interest cost components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect on postretirement benefits obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1-Percentage- Point Increase 1-Percentage- Point Decrease $ 26 551 $ (39) (338) Note 19. Derivative Instruments and Hedging Activities All derivative instruments as defined, including derivatives embed- ded 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. TCF had no derivatives outstanding as of December 31, 2004. Prior to the restructuring of the residential mortgage banking operation in 2004, TCF’s pipeline of locked residential mortgage loan commitments, adjusted for loans not expected to close, and forward sales contracts were considered derivatives and recorded at fair value, with the changes in fair value recognized in gains on sales of loans under mortgage banking revenue in the Consolidated Statements of Income. TCF also utilized forward sales contracts to hedge its risk of changes in the fair value, due to changes in interest rates, of both its locked residential mortgage loan commitments and its residential loans held for sale. Residential mortgage loans held for sale were carried at the lower of cost or market as adjusted for the effects of fair value hedges using quoted market prices. Because the fair value of the residential loans held for sale were hedged with forward sales contracts of the same loan types, or substantially the same loan types, the hedges were highly effective at managing the risk of changing fair values of such loans. Any differences between the changes in fair value of the hedged residential loans held for sale and in the fair value of the forward sales contracts were not material due to the nature of the hedging instruments and were recorded in gains on sales of loans. Forward mortgage loan sales commitments totaled $149.1 million at December 31, 2003. Note 20. Financial Instruments with Off-Balance-Sheet Risk TCF is a party to financial instruments with off-balance-sheet risk, primarily to meet the financing needs of its customers. These finan- cial instruments, which are issued or held by TCF for purposes other than trading, involve elements of credit and interest-rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. TCF’s exposure to credit loss in the event of non-performance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of the commitments. TCF uses the same credit policies in making these commitments as it does for on-balance- sheet instruments. TCF evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Financial instruments with off-balance sheet risk are summarized as follows: (In thousands) Commitments to extend credit: At December 31, 2004 2003 Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasing and equipment finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,576,381 684,029 72,614 55,343 Total commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,388,367 Loans serviced with recourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standby letters of credit and guarantees on industrial revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97,568 75,957 $1,382,348 624,664 57,485 56,007 2,120,504 130,765 40,796 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,561,892 $2,292,065 70 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 71 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. 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. Loans Serviced with Recourse Loans serviced with recourse represent a contingent guarantee based upon failure to perform by another party. These loans consist of $94.9 million of Veterans Administration (“VA”) loans and $2.7 million of loans sold with recourse to the Federal National Mortgage Association (“FNMA”). As is typical of a servicer of VA loans, TCF must cover any principal loss in excess of the VA’s guarantee if the VA elects its “no-bid” option upon the foreclosure of a loan. TCF has established a liability of $100 thousand relating to this VA “no-bid” exposure on VA loans serviced with partial recourse at December 31, 2004 and 2003, respectively, which was recorded in other liabilities. No significant claims have been made under the “no-bid” option during 2004 or 2003. Loans sold with recourse to FNMA represent residential real estate loans sold to FNMA prior to 1982. 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 2034. All loans sold with recourse are collateralized by residential real estate. Since conditions under which TCF would be required to cover any principal loss in excess of the VA’s guarantee or repurchase the loan sold to FNMA may not materialize, the actual cash requirements are expected to be less than the outstanding commitments. Standby Letters of Credit Standby letters of credit and guarantees on industrial revenue bonds are conditional commitments issued by TCF guaranteeing the performance of a customer to a third party. These conditional commitments expire in various years through the year 2009. Collateral held primarily consists of commercial real estate mortgages. Since the conditions under which TCF is required to fund these commitments may not materialize, the cash requirements are expected to be less than the total outstanding commitments. Note 21. Fair Values of Financial Instruments TCF is required to disclose the estimated fair value of financial instruments, 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 infor- mation and information about the financial instruments. Fair value estimates are subjective in nature, involving uncertainties and mat- ters of significant 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 realiza- tion. Securities available for sale are carried at fair value, which is based on quoted market prices. Certain financial instruments, including lease financings and discounted lease rentals, and all non-financial instruments are excluded from fair value of financial instrument disclosure requirements. The following methods and assumptions are used by the Company in estimating fair value disclosures for its remaining financial instru- ments, all of which are issued or held for purposes other than trading. Loans The fair value of residential loans is estimated based on quoted market prices of loans with similar characteristics. For certain variable-rate loans that reprice frequently and that have experienced no significant change in credit risk, fair values are based on carrying values. The fair values of other loans are estimated by discounting contractual cash flows adjusted for prepayment estimates, using interest rates currently being offered for loans with similar terms to borrowers with similar credit risk characteristics. 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 of deposit is estimated based on discounted cash flow analyses using interest rates offered by TCF for certificates of deposit with similar remaining maturities. The intangible value of long-term relationships with depositors is not taken into account in the fair values disclosed. 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. 2004 Annual Report 71 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 72 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. 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: At December 31, 2004 2003 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 154,279 $ 155,611 $ 335,372 $ 340,189 Forward mortgage loan sales commitments (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . – – (1,105) (1,105) Loans: Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment finance loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for loan losses(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,418,588 2,154,396 424,135 334,352 1,014,166 (58,966) 4,415,340 2,171,409 424,354 332,734 1,022,328 – 3,630,341 1,916,701 427,696 309,740 1,212,643 (67,654) 3,649,810 1,947,267 429,727 312,948 1,247,610 – Total financial instrument assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,440,950 $ 8,521,776 $ 7,763,734 $ 7,926,446 Financial instrument liabilities: Checking, savings and money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,493,545 $ 6,493,545 $ 5,999,626 $ 5,999,626 Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,468,650 1,056,111 2,048,492 1,483,190 1,056,111 2,091,412 1,612,123 878,412 1,536,413 1,630,511 878,412 1,627,253 Total financial instrument liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,066,798 $11,124,258 $10,026,574 $10,135,802 Financial instruments with off-balance-sheet risk:(3) Commitments to extend credit (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standby letters of credit (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans serviced with recourse (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total financial instruments with off-balance-sheet risk . . . . . . . . . . . . . . $ $ 28,551 8 (100) 28,459 $ $ 28,551 8 (100) 28,459 $ $ 22,773 43 (100) 22,716 $ $ 22,773 43 (100) 22,716 (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. 72 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 73 Note 22. 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) Year Ended December 31, 2004 2003 2002 Basic Earnings Per Common Share Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 254,993 $ 215,878 $ 232,931 Weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,656,829 Unvested restricted stock grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,040,397) Weighted average common shares outstanding for basic earnings per common share . . . . . . . . . . . . . . . . . . 136,616,432 Basic earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted Earnings Per Common Share Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average number of common shares outstanding adjusted for effect of dilutive securities: $ $ 1.87 254,993 $ $ 144,028,040 (3,041,506) 140,986,534 1.53 215,878 150,480,642 (3,289,758) 147,190,884 1.58 232,931 $ $ Weighted average common shares outstanding used in basic earnings per common share calculation . . . . . 136,616,432 140,986,534 147,190,884 Net dilutive effect of: Stock option plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,577 375,631 187,346 366,848 248,444 442,560 Weighted average common shares outstanding for diluted earnings per common share . . . . . . . . . . 137,174,640 141,540,728 147,881,888 Diluted earnings per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.86 $ 1.53 $ 1.58 All shares of restricted stock are deducted from weighted average shares outstanding used for the computation of basic earnings per com- mon share. All shares of restricted stock which vest over specified time periods are included in the calculation of diluted earnings per common share using the treasury stock method. Shares of performance-based restricted stock are included in the calculation of diluted earnings per common share, using the treasury stock method, at the beginning of the quarter in which the performance goals have been achieved. During the third quarter of 2004, TCF announced and completed a two-for-one stock split of its common stock in the form of a 100% stock dividend. As a result of the two-for-one stock split, all prior period share and per share data have been restated. Note 23. 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 investment securities available for sale. The following table summarizes the components of comprehensive income: (In thousands) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive (loss) income: Unrealized holding gains (losses) arising during the period on securities available for sale . . . . . . . . . . . . . Reclassification adjustment for gains included in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note 24. Other Expense Other expense consists of the following: (In thousands) Deposit account losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Postage and courier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Telecommunication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Card processing and issuance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ATM processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal deposit insurance and OCC assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit base intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing liquidation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2003 $215,878 (30,619) (32,832) (23,001) (40,450) $175,428 Year Ended December 31, 2003 $ 18,820 14,358 12,634 12,213 9,316 9,545 2,796 1,666 4,352 57,646 $143,346 2004 $254,993 11,522 (22,600) (4,011) (7,067) $247,926 2004 $ 22,624 14,002 12,459 12,446 9,891 9,171 2,682 1,662 1,460 55,743 $142,140 2002 $232,931 74,044 (11,536) 22,635 39,873 $272,804 2002 $ 19,206 13,579 12,738 11,095 9,023 10,071 2,761 1,671 2,394 57,431 $139,969 2004 Annual Report 73 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 74 Note 25. 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 customers: deposits and investment products, commercial lend- ing, consumer lending, residential lending and treasury services. Management of TCF’s banking area is organized by state. The sepa- rate 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 address- ing the financing needs of diverse companies. Mortgage banking activities represent the mortgage servicing business and previously included 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 company (“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 segments’ net income. The business segments follow generally accepted accounting principles as described in the Summary of Significant Accounting Policies. TCF generally accounts for inter- segment sales and transfers at cost. 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. (In thousands) At or For the Year Ended December 31, 2004: Revenues from external customers: Interest income . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . At or For the Year Ended December 31, 2003: Revenues from external customers: Interest income . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . At or For the Year Ended December 31, 2002: Revenues from external customers: Interest income . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ Banking 529,281 426,867 956,148 427,483 4,141 426,867 516,629 113,644 $ 219,936 $11,903,232 $ $ $ 545,764 355,088 900,852 415,163 4,361 355,088 489,212 96,449 $ 180,229 $ 10,915,010 $ $ $ 632,804 359,895 992,699 437,049 12,778 359,895 473,467 109,959 $ 200,740 $ 11,784,981 Leasing and Equipment Finance $ $ $ $ 89,364 50,697 140,061 55,699 6,806 50,697 43,718 20,000 35,872 $ 1,449,424 $ $ $ 81,912 51,088 133,000 45,358 8,171 51,088 41,977 17,031 $ 29,267 $ 1,216,854 $ $ $ $ 85,447 51,806 137,253 41,374 9,228 51,806 40,983 15,497 27,472 $ 1,100,744 Mortgage Banking Eliminations and Reclassifications Other $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 4,164 12,946 17,110 8,204 – 14,282 27,371 (1,727) (3,158) 76,468 13,843 12,761 26,604 21,357 – 13,102 29,963 1,590 2,906 173,867 15,112 6,980 22,092 20,676 – 8,316 24,796 1,511 2,685 447,840 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ – (44) (44) (831) – 95,682 94,942 (2,434) 2,343 $ $ $ $ – – – 1,336 – (97,062) (95,726) – – 135,615 $(1,224,172) – 342 342 (1,074) – 89,059 87,674 (3,165) 3,476 126,478 – 1,081 1,081 (1,210) – 95,272 94,233 (2,205) 2,034 96,300 $ $ $ – – – 341 – (89,058) (88,717) - $ - $ (1,113,194) $ $ $ $ – – – 1,336 – (95,527) (94,191) – – $ (1,227,796) Consolidated $ 622,809 490,466 $ 1,113,275 $ 491,891 10,947 490,466 586,934 129,483 $ 254,993 $12,340,567 $ 641,519 419,279 $ 1,060,798 $ 481,145 12,532 419,279 560,109 111,905 $ 215,878 $ 11,319,015 $ 733,363 419,762 $ 1,153,125 499,225 $ 22,006 419,762 539,288 124,762 $ 232,931 $ 12,202,069 74 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 75 Note 26. Parent Company Financial Information TCF Financial Corporation’s (parent company only) condensed statements of financial condition as of December 31, 2004 and 2003, and the condensed statements of income and cash flows for the years ended December 31, 2004, 2003 and 2002 are as follows: Condensed Statements of Financial Condition (In thousands) Assets: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest-bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in TCF National Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends receivable from TCF National Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable from affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities and Stockholders’ Equity: Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2004 2003 $ 370 2,587 929,648 266 4,591 26,923 21,931 $ 397 2,457 910,186 228 11,400 21,867 20,179 $986,316 $966,714 $ 14,000 13,898 27,898 958,418 $986,316 $ 37,000 8,856 45,856 920,858 $966,714 Condensed Statements of Income (In thousands) Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2004 87 426 (339) $ 2003 40 438 (398) $ 2002 323 508 (185) Dividends from TCF National Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,955 219,653 206,566 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 subsidiary . . . . . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before equity in undistributed earnings of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in undistributed earnings of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,859 69 11,928 10,742 1,137 1,578 13,457 159,087 3,382 162,469 92,524 $254,993 8,643 1,338 9,981 7,184 631 2,158 9,973 219,263 907 220,170 (4,292) $215,878 14,342 (322) 14,020 12,965 847 1,935 15,747 204,654 1,852 206,506 26,425 $232,931 2004 Annual Report 75 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 76 Condensed Statements of Cash Flows (In thousands) Cash flows from operating activities: Year Ended December 31, 2004 2003 2002 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 254,993 $ 215,878 $ 232,931 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash flows from investing activities: Net (increase) decrease in interest-bearing deposits with banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital distribution from TCF National Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan to deferred compensation plans, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of premises and equipment, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (92,524) 3,964 (88,560) 166,433 (130) 75,000 – (155) 74,715 (104,037) (116,134) (23,000) 1,996 (241,175) (27) 397 370 4,292 (1,102) 3,190 219,068 (661) – – – (661) (93,029) (150,356) 23,500 1,523 (26,425) 5,323 (21,102) 211,829 861 – 9,783 (112) 10,532 (86,430) (148,030) 11,500 914 (218,362) (222,046) 45 352 397 $ 315 37 352 $ Note 27. Litigation and Contingent Liabilities From time to time, TCF is a party to legal proceedings arising out of its lending, leasing and deposit operations. TCF is and expects to become engaged in a number of foreclosure proceedings and other collection actions as part of its lending and leasing collection activities. From time to time, borrowers and other customers have also brought actions against TCF, in some cases claiming substantial amounts of damages. Financial services companies are subject to the risk of class action litigation, and TCF has had such actions brought against it from time to time. Litigation is often unpredictable and the actual results of litigation cannot be determined with certainty. In April 2004, TCF was served with a complaint in the United States District Court, District of Minnesota, by John Matthew Saxe, individually and on behalf of other similarly situated employees. The plaintiff, a former consumer loan officer for TCF National Bank, alleges that he and other consumer lender employees were not paid overtime compensation in violation of the Federal Fair Labor Standards Act and the Minnesota Fair Labor Standards Act, and seeks as damages unpaid back wages, an additional amount equal to unpaid back wages as liquidated damages, costs and attorneys’ fees. TCF has filed an answer to the complaint denying that the plaintiff or any similarly situated employee is entitled to any relief or that the plaintiff is similarly situated to other employees. Discovery in this case is pending. 76 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 77 Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting for TCF Financial Corporation (“TCF Financial” or “the Company”). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are only being made in accordance with authoriza- tions of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Management completed an assessment of TCF Financial’s inter- nal control over financial reporting as of December 31, 2004. This assessment was based on criteria for evaluating internal control over financial reporting established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, TCF Financial’s internal control over financial reporting was effective as of December 31, 2004. KPMG LLP, TCF Financial’s registered public accounting firm that audited the consolidated financial statements included in this annual report, has issued an unqualified attestation report on management’s assessment of the Company’s internal controls over financial reporting. Any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system inherently has limitations, and the benefits of controls must be weighed against their costs. Additionally, controls can be circum- vented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Therefore, no assessment of a cost-effective system of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected. William A. Cooper Chairman of the Board and Chief Executive Officer Neil W. Brown Executive Vice President and Chief Financial Officer David M. Stautz Senior Vice President, Controller and Assistant Treasurer February 17, 2005 2004 Annual Report 77 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 78 Reports of Independent Registered Public Accounting Firm The Board of Directors and Stockholders TCF Financial Corporation: We have audited the accompanying consolidated statements of financial condition of TCF Financial Corporation and subsidiaries as of December 31, 2004 and 2003, 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, 2004. These consolidated 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain rea- sonable assurance about whether the financial statements are free of material misstatement. 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 princi- ples 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of TCF Financial Corporation’s internal control over financial reporting as of December 31, 2004, based on Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 17, 2005 expressed an unqualified opinion on man- agement’s assessment of, and the effective operation of, internal control over financial reporting. Minneapolis, Minnesota February 17, 2005 78 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 79 The Board of Directors and Stockholders TCF Financial Corporation: We have audited management’s assessment, included in the accompanying Management Report, that TCF Financial Corporation maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). TCF Financial Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal con- trol over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal con- trol over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we con- sidered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that TCF Financial Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, TCF Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of TCF Financial Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated February 17, 2005 expressed an unqualified opinion on those consolidated financial statements. Minneapolis, Minnesota February 17, 2005 2004 Annual Report 79 132406_TCF AR 04 Guts_F 2/18/05 11:19 AM Page 80 Other Financial Data Selected Quarterly Financial Data (Unaudited) (Dollars in thousands, except per-share data) Selected Financial Condition Data: Securities available for sale . . . . . . . . . . . . Dec. 31, 2004 Sept. 30, 2004 June 30, 2004 At March 31, 2004 Dec. 31, 2003 Sept. 30, 2003 June 30, 2003 March 31, 2003 $ 1,619,941 $ 1,330,708 $ 1,588,372 $ 1,269,293 $ 1,533,288 $ 1,604,282 $ 1,980,830 $ 2,442,724 Residential real estate loans . . . . . . . . . . . 1,014,166 1,047,079 Subtotal . . . . . . . . . . . . . . . . . . . . . . . 2,634,107 2,377,787 1,091,678 2,680,050 1,152,357 2,421,650 1,212,643 2,745,931 1,283,640 2,887,922 1,393,183 3,374,013 1,568,430 4,011,154 Loans and leases excluding residential real estate loans . . . . . . . . 8,372,491 8,025,804 7,776,921 7,470,428 7,135,135 6,863,683 6,705,169 6,485,179 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . 152,599 46,442 152,599 51,474 152,599 51,290 152,599 50,726 145,462 52,036 145,462 49,119 145,462 41,379 145,462 52,953 Total assets . . . . . . . . . . . . . . . . . . . . . . . . 12,340,567 11,997,949 11,942,863 11,724,319 11,319,015 11,253,906 11,807,764 12,127,272 Checking, savings and money market deposits . . . . . . . . . . . . . . . . . . . 6,493,545 6,323,659 Certificates of deposit . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . 1,468,650 7,962,195 1,056,111 2,048,492 958,418 1,471,164 7,794,823 845,499 6,321,761 1,439,896 7,761,657 869,576 6,328,757 1,540,371 7,869,128 469,663 5,999,626 1,612,123 7,611,749 878,412 6,115,863 1,596,740 7,712,603 900,835 6,234,447 1,745,290 7,979,737 546,118 6,068,095 1,897,243 7,965,338 774,603 2,057,608 2,065,870 2,037,424 1,536,413 1,342,890 1,959,921 1,993,287 965,266 939,152 965,950 920,858 931,968 952,069 971,413 (Dollars in thousands, except per-share data) Selected Operations Data: Interest income . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . Net interest income after provision Dec. 31, 2004 Sept. 30, 2004 June 30, 2004 March 31, 2004 Dec. 31, 2003 Sept. 30, 2003 June 30, 2003 March 31, 2003 Three Months Ended $ 163,388 $ 157,413 $ 152,789 $ 149,219 $ 148,919 $ 156,482 $ 164,004 $ 172,114 36,899 126,489 4,073 32,923 124,490 2,644 30,370 122,419 3,070 30,726 118,493 1,160 29,827 119,092 4,037 36,605 119,877 2,658 44,240 119,764 3,127 49,702 122,412 2,710 for credit losses . . . . . . . . . . . . . . 122,416 121,846 119,349 117,333 115,055 117,219 116,637 119,702 Non-interest income: Fees and other revenues . . . . . . . . . . . 126,311 115,803 123,293 102,459 114,865 118,089 101,003 96,835 $ $ $ $ $ $ $ $ 6,204 – 132,515 154,396 100,535 33,133 67,402 .50 .50 .1875 2.22% 28.35 4.56 .14 7.81 $ $ $ $ 3,679 – 119,482 147,926 93,402 31,690 61,712 .45 .45 .1875 2.06% 25.96 4.56 .17 7.94 $ $ $ $ – – 123,293 143,906 98,736 33,518 65,218 .47 .47 .1875 2.20% 27.68 4.53 .10 7.95 $ $ $ $ 12,717 – 115,176 140,706 91,803 31,142 60,661 .44 .44 .1875 2.11% 25.90 4.52 .02 8.13 $ $ $ $ – – 114,865 142,244 87,676 28,180 59,496 .43 .43 .1625 2.13% 26.18 4.68 .30 8.13 – 11,695 $ $ $ $ (37,769) 80,320 142,382 55,157 19,193 35,964 .26 .26 .1625 1.24% 15.77 4.57 .08 7.89 $ $ $ $ – 112,698 136,733 92,602 32,311 60,291 .43 .42 .1625 2.04% 25.17 4.45 .16 8.11 21,137 (6,576) 111,396 138,750 92,348 32,221 60,127 .42 .42 .1625 1.99% 24.70 4.45 .09 8.06 Gains on sales of securities available for sale . . . . . . . . . . . . . Gains (losses) on termination of debt Total non-interest income . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . Income before income tax expense . . . Income tax expense . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . Per common share: Basic earnings . . . . . . . . . . . . . . . . . . . Diluted earnings . . . . . . . . . . . . . . . . . . Dividends declared . . . . . . . . . . . . . . . Financial Ratios: Return on average assets (1) . . . . . . . . . . . . Return on average common equity (1) . . . . . Net interest margin(1) . . . . . . . . . . . . . . . . . Net charge-offs as a percentage of average loans and leases (1) . . . . . . . . . Average total equity to average assets . . . (1) Annualized. 80 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_B 2/14/05 10:31 AM Page 81 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 WILLIAM A. COOPER President and Chief Operating Officer LYNN A. NAGORSKE Vice Chairman, General Counsel and Secretary GREGORY J. PULLES Executive Vice President and Chief Financial Officer NEIL W. BROWN Executive Vice President and Chief Information Officer EARL D. STRATTON Executive Vice Presidents CRAIG R. DAHL RONALD J. PALMER MARY E. SARLES Senior Vice Presidents JAMES S. BROUCEK TIMOTHY G. DOYLE DANIEL P. ENGEL JASON E. KORSTANGE MARK R. LUND NORMAN G. MORRISSON CAROL B. SCHIRMERS BARBARA E. SHAW DAVID M. STAUTZ DIANE O. STOCKMAN 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 BARRY N. WINSLOW Executive Vice Presidents PAUL B. BRAWNER WALLACE A. FUDOLD GREGG R. GOUDY BRIAN J. HURD JAMES C. LAPLANTE Senior Vice Presidents BEVERLY M. CRAIG DANIEL R. EDWARD SHELLEY A. FITZMAURICE JOSEPH T. GREEN KENNETH W. GRENIER DOUGLASS B. HIATT CHARLES P. HOFFMAN, JR. KATHERINE D. JOHNSON SCOTT W. JOHNSON GLORIA J. KARSKY JAMES M. MATHEIS DAVID B. MCCULLOUGH ANTON J. NEGRINI ELIZABETH A. ROCHON ROGER W. STARR LEONARD D. STEELE Senior Vice Presidents ROBERT J. BRUEGGEMAN LUIGI COSENTINO DAVID R. CREEL PETER R. DAUGHERTY JEFFREY T. DOERING SUSAN T. DOYLE GINA L. GALANTE R. ELIZABETH TOPOLUK EDWARD J. GALLAGHER 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 MARK L. JETER Executive Vice Presidents JOHN E. BESSE SARA L. EVERS TIMOTHY B. MEYER JOHN F. SCHROEDER Senior Vice Presidents JEFFREY R. ARNOLD ROBERT C. BORGSTROM RONALD L. BRITZ TIMOTHY J. DONNEGAN JAMES T. DOWIAK KURT D. EGERTSON SCOTT A. FEDIE MARK L. FOSTER CLAIRE M. GRAUPMANN KATHERINE L. LANDON MICHAEL J. OLSON DANIEL M. REYELTS STEVEN E. RYKKELI STEPHEN D. STEEN DANIEL G. THORBERG 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 TIMOTHY P. BAILEY Executive Vice Presidents MARK B. DILLON JOSEPH W. DOYLE MICHAEL B. JOHNSTONE MICHAEL R. KLEMZ JAMES L. KOON MARK W. ROHDE DAVID J. VEURINK C. HUNTER WESTBROOK MARK W. GAULT THOMAS R. GOINS JAMES D. HUGHES EILEEN P. KOWALSKI RUSSELL P. MCMINN LUKE K. OOSTEROUSE DOUGLAS A. ORTYN TODD A. PALMER MARY POTTER MICHAEL ROIDT WENDY D. RYEE-SMITH STEPHEN W. SINNER SUZANNE M. STUEBE DENNIS J. VENA KATHLEEN M. WACKER T C F N A T I O N A L B A N K M I C H I G A N President THOMAS J. WAGNER ROBERT H. SCOTT* Executive Vice Presidents LUIS J. CAMPOS CHARLES L. HAYNE Senior Vice Presidents JERRY E. COVIAK LARRY M. CZEKAJ GARY L. FINEMAN DENNIS J. GISTINGER NATALIE A. GLASS DONALD J. HAWKINS LANCE N. KRAJACIC JOHN J. OWENS TERRENCE B. PRYOR ERSKINE J. UNDERWOOD DAVID F. WIBLE T C F N A T I O N A L B A N K C O L O R A D O President WAYNE A. MARTY Senior Vice Presidents JAMES W. HAGEN MATTHEW G. LAMB T C F I N V E S T M E N T S A N D I N S U R A N C E Chief Executive Officer PETER O. TORVIK President MARY E. SARLES Executive Vice President STEPHEN M. MAGISTAD Senior Vice Presidents BUFFIE A. BLESI DAMON J. BRINSON SZABLIS M. KRUGER TIMOTHY J. O’KEEFE JAMES R. SCATTERGOOD T C F L E A S I N G , I N C . President CRAIG R. DAHL Executive Vice Presidents WILLIAM S. HENAK MARK D. NYQUIST Senior Vice Presidents PETER C. DARIN WALTER E. DZIELSKY BRADLEY C. GUNSTAD THOMAS F. JASPER JAMES L. PHILLIPS CHARLES A. SELL, JR. ROBERT J. STARK MARK H. VALENTINE 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 CRAIG R. DAHL President RONALD J. PALMER Senior Vice Presidents GARY W. ANDERSON PAUL L. GENDLER JOHN G. MCMANIGAL RICHARD J. PIEPER DEAN J. STINCHFIELD T C F M O R T G A G E C O R P O R A T I O N President DOUGLAS L. DINNDORF * Effective 2005 2004 Annual Report 81 132406_TCF AR 04 Guts_B 2/14/05 10:31 AM Page 82 Board of Directors Offices WILLIAM A. COOPER 5 Chairman of the Board LYNN A. NAGORSKE President and and Chief Executive Officer Chief Operating Officer PETER L. SCHERER 1,4 President and Chief Executive Officer, Scherer Bros. Lumber Co. GERALD A. SCHWALBACH 1,2,3,4 Chairman, Superior Storage LLC DOUGLAS A. SCOVANNER 1,4 Executive Vice President and Chief Financial Officer Target Corporation RALPH STRANGIS 4,5 Senior Partner, Kaplan, Strangis and Kaplan, P.A. 1 Audit Committee 2 Compensation/Nominating/ Corporate Governance Committee 3 Advisory Committee – TCF Employees Stock Purchase Plan 4 Shareholder Relations/ De Novo Banking Committee 5 Executive Committee WILLIAM F. BIEBER 2,3,4 Chairman, Acrometal Companies, Inc. RODNEY P. BURWELL 2,3,4 Chairman, Xerxes Corporation THOMAS A. CUSICK 4 Retired Vice Chairman JOHN M. EGGEMEYER III 2,3,4 President, Castle Creek Capital LLC ROBERT E. EVANS 1 Retired Vice Chairman LUELLA G. GOLDBERG 1,2,3,4,5 Past Chair, University of Minnesota Foundation, Former Acting President, Wellesley College GEORGE G. JOHNSON 1 CPA/Managing Director, George Johnson & Company THOMAS J. MCGOUGH 2,3,4,5 President and Chief Executive Officer McGough Companies 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 Headquarters 200 LAKE STREET EAST MAIL CODE EX0-03-A 6400 SOUTH FIDDLER’S GREEN CIRCLE SUITE 800 WAYZATA, MN 55391-1693 ENGLEWOOD, CO 80111 (612) 661-6500 (720) 200-2400 M I N N E S O T A Headquarters 801 MARQUETTE AVENUE MAIL CODE 001-03-P MINNEAPOLIS, MN 55402 (612) 661-6500 Traditional Branches MINNEAPOLIS/ST. PAUL AREA (45) GREATER MINNESOTA (5) Supermarket Branches MINNEAPOLIS/ST. PAUL AREA (47) GREATER MINNESOTA (4) Traditional Branches METRO DENVER AREA (15) COLORADO SPRINGS (5) Supermarket Branches METRO DENVER AREA (10) COLORADO SPRINGS (2) T C F M O R T G A G E C O R P O R A T I O N Headquarters 801 MARQUETTE AVENUE MINNEAPOLIS, MN 55402 (612) 661-7500 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 T C F L E A S I N G , I N C . Headquarters 11100 WAYZATA BOULEVARD 800 BURR RIDGE PARKWAY SUITE 801 MINNETONKA, MN 55305 (952) 656-5080 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 11100 WAYZATA BOULEVARD SUITE 800 MINNETONKA, MN 55305 (952) 936-0226 BURR RIDGE, IL 60527 (630) 986-4900 Traditional Branches CHICAGOLAND (40) MILWAUKEE AREA (11) KENOSHA/RACINE AREA (7) Supermarket Branches CHICAGOLAND (157) MILWAUKEE AREA (8) KENOSHA/RACINE AREA (8) INDIANA (6) M I C H I G A N Headquarters 401 EAST LIBERTY STREET ANN ARBOR, MI 48104 (734) 769-8300 Traditional Branches METRO DETROIT AREA (44) GREATER MICHIGAN (10) Supermarket Branches METRO DETROIT AREA (4) GREATER MICHIGAN (2) 82 TCF Financial Corporation and Subsidiaries 132406_TCF AR 04 Guts_B 2/14/05 10:31 AM Page 83 Shareholder Information S T O C K D A T A 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 Year Close High Low 2004 Fourth Quarter Third Quarter Second Quarter First Quarter 2003 Fourth Quarter Third Quarter Second Quarter First Quarter 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 $32.14 30.29 29.03 25.54 $25.68 23.98 19.92 20.02 $21.85 21.17 24.55 26.31 $23.99 23.03 23.16 18.90 $22.28 18.81 12.85 11.91 $32.36 32.62 29.03 26.37 $27.13 24.86 21.27 22.89 $22.38 25.15 27.04 27.30 $24.13 25.56 23.28 22.19 $22.78 18.94 14.53 12.44 $29.46 28.01 24.35 23.92 $23.91 19.76 18.45 18.25 $17.55 19.95 23.33 23.44 $19.70 19.73 17.45 16.41 $16.91 12.88 11.00 9.00 Dividends Paid Per Share $ .1875 .1875 .1875 .1875 $ .1625 .1625 .1625 .1625 $.14375 .14375 .14375 .14375 $ .125 .125 .125 .125 $.10625 .10625 .10625 .09375 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, 2004, TCF had approximately 137.2 million shares of common stock outstanding. 2 0 0 5 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 4 May 6 August 5 November 4 Expected Payment: February 28 May 31 August 31 November 30 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. 250 Royall Street Canton, MA 02021 (800) 730-4001 www.equiserve.com Approximately 60% of TCF’s 9,893 registered 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 Jason Korstange Senior Vice President Corporate Communications (952) 745-2755 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 27, 2005 at 10:00 a.m. at the Sheraton Minneapolis West, 12201 Ridgedale Drive, Minnetonka, Minnesota. 2004 Annual Report 83 132406_TCF AR 04 Guts_B 2/14/05 10:32 AM Page 84 T O T A L R E T U R N P E R F O R M A N C E TCF Financial Corporation SNL All Bank & Thrift Index S&P 500* (In Dollars) $900 800 700 600 500 400 300 200 100 0 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 12/31/03 12/31/04 * Source: CRSP, Center for Research in Security Prices, Graduate School of Business, The University of Chicago 2005. Used with permission. All rights reserved. crsp.com. C R E D I T R A T I N G S Last Rating Action Moody’s TCF National Bank: Outlook Issuer Long-term deposits Short-term deposits Bank financial strength Last Review September 2004 Last Rating Action Last Review August 2004 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 Stable BBB+ A-2 A- A-2 FITCH Outlook Issuer rating TCF Financial Corporation: Long-term senior Short-term TCF National Bank: Long-term deposits Short-term deposits S T O C K P R I C E P E R F O R M A N C E (In Dollars) $35 Stock Price Dividend 30 25 20 15 10 5 0 7 9 / 8 2 / 1 1 t i l p S k c o t S 5 9 / 0 3 / 1 1 t i l p S k c o t S Year Ending Stock Price 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 12-03 12-04 $1.50 $1.52 $0.86 $1.11 $1.69 $0.96 $2.42 $3.63 $4.25 $5.16 $8.28 $10.88 $16.97 $12.09 $12.44 $22.28 $23.99 $21.85 $25.68 $32.14 Dividend Paid N/A N/A N/A $0.03 $0.05 $0.05 $0.05 $0.06 $0.09 $0.13 $0.15 $0.18 $0.23 $0.31 $0.36 $0.41 $0.50 $0.58 $0.65 $0.75 84 TCF Financial Corporation and Subsidiaries Stable B A- F1 A F1 $1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 4 0 / 3 / 9 t i l p S k c o t S 132406_TCF AR 04 Cover_F 2/18/05 8:48 AM Page 2 TCF Financial Corporation and Subsidiaries – 2004 Annual Report At or For the Year Ended December 31, 2004 2003 % Change Financial Highlights (Dollars in thousands, except per-share data) Operating Results: 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 revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sales of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains (losses) on termination of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price to book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Ratios: Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average common equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net charge-offs as a percentage of average loans and leases . . . . . . . . . . . . . . . . . . Total equity to total assets at year end . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Dollars in thousands) Selected Balance Sheet Data: Residential real estate loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and leases excluding residential real estate loans . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Checking, savings and money market deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TCF Financial Corporation and Subsidiaries $ $ 622,809 130,918 491,891 10,947 480,944 467,866 22,600 – 490,466 586,934 384,476 129,483 254,993 1.87 1.86 .75 32.62 23.92 32.14 6.99 4.60X 2.15% 27.02 4.54 .11 7.77 2004 1,014,166 2,634,107 8,372,491 152,599 46,442 6,493,545 1,468,650 7,962,195 1,056,111 2,048,492 958,418 $ $ $ 641,519 160,374 481,145 12,532 468,613 430,792 32,832 (44,345) 419,279 560,109 327,783 111,905 215,878 1.53 1.53 .65 27.13 18.25 25.68 6.53 3.93X 1.85% 23.05 4.54 .16 8.14 1,212,643 2,745,931 7,135,135 145,462 52,036 5,999,626 1,612,123 7,611,749 878,412 1,536,413 920,858 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,340,567 11,319,015 Common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,186,160 140,952,660 Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,619,941 $ 1,533,288 At December 31, 2003 % Change (2.9)% (18.4) 2.2 (12.6) 2.6 8.6 (31.2) 100.0 17.0 4.8 17.3 15.7 18.1 22.2 21.6 15.4 25.2 7.0 17.0 16.2 17.2 – (31.3) (4.5) 5.7% (16.4) (4.1) 17.3 4.9 (10.8) 9.0 8.2 (8.9) 4.6 20.2 33.3 4.1 (2.7) Corporate Philosophy • TCF banks a large and diverse customer base. TCF emphasizes con- venience in banking; we’re open 12 hours a day, seven days a week, 364 days per year. We provide customers innovative products through multiple banking channels, including traditional and supermarket branches, TCF EXPRESS TELLER® ATMs, debit cards, phone banking, and Internet banking. • TCF operates like a partnership. We’re organized geographically and by function, with profit center goals and objectives. TCF emphasizes return on average assets, return on average equity and earnings per share growth. We know which products are profitable and contribute to these goals. Local geographic managers are responsible 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 checking 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 a significant portion 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 busi- ness, we can minimize credit risk on the asset side. • TCF strives to place The Customer First. We believe providing great service to our many customers creates value for shareholders. • TCF utilizes conservative accounting and reporting principles that accurately and honestly report our financial condition and results of operations. m o c . l l e v i k e c n a n . w w w , p u o r G l l e v i k e c n a N e h T • 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. • TCF is currently growing primarily through de novo expansion rather than acquisition. We are growing by starting new businesses, opening new branches and offering new products and services. • TCF believes interest-rate risk should be minimized. Interest-rate speculation does not generate consistent profits and is high risk. • 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 banking process. • TCF encourages open employee communication and promotes from within whenever possible. TCF places the highest priority on honesty, integrity and ethical behavior. • TCF believes in community participation, both financially and through volunteerism. We feel a responsibility to help those less fortunate. • 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. 132406_TCF AR 04 Cover_C 2/15/05 4:27 PM Page 1 TCF Financial Corporation 200 Lake Street East Wayzata, MN 55391-1693 www.TCFExpress.com High Performance Banking TCF Financial Corporation 2004 Annual Report 2690-AR-05 TCFIR9328 

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