TCF Financial Corporation
Annual Report 2005

Plain-text annual report

TCF Financial Corporation 2005 Annual Report The leader in convenience banking Table of Contents Letter to Our Stockholders Business Highlights A Tribute to William A. Cooper Annual Report on Form 10-K Business Selected Financial Data Management’s Discussion and Analysis Consolidated Financial Statements Notes to Consolidated Financial Statements Other Financial Data Corporate Information Stockholder Information Corporate Philosophy Financial Highlights 1 8 15 1 14 15 42 46 71 81 83 85 (Dollars in thousands, except per-share data) Operating Results: Net interest income Provision for credit losses Net interest income after provision for credit losses Non-interest income: Fees and other revenue Gains on sales of securities available for sale 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 TCF Financial Corporation and Subsidiaries At or For the Year Ended December 31, 2004 % Change 2005 $517,690 5,022 512,668 467,659 10,671 478,330 610,588 380,410 115,278 $265,132 $ 2.00 2.00 .85 32.03 24.55 27.14 7.46 3.64 X 2.08% 28.03 4.46 .25 7.47 $491,891 10,947 480,944 467,611 22,600 490,211 586,679 384,476 129,483 $254,993 $ 1.87 1.86 .75 32.62 23.92 32.14 6.99 4.60 X 2.15% 27.02 4.54 .11 7.77 5.2% (54.1) 6.6 – (52.8) (2.4) 4.1 (1.1) (11.0) 4.0 7.0% 7.5 13.3 (15.6) 6.7 (20.9) (3.3) 3.7 (1.8) 127.3 (3.9) Letter to Stockholders a recordyear for TCF • TCF’s stock price closed at $27.14 on December 31, 2005, down 16 percent from $32.14 per share on December 31, 2004. This was a disappointing result. • TCF recently increased its annual divi- dend rate eight percent to $.92 per share. This is the 15th consecutive year we have increased the dividend. TCF’s 10-year compounded annual dividend growth rate ranks sixth of the Top 50 Banks in the country. Major factors affecting TCF’s performance in 2005 were: 1. Interest Rates While short-term interest rates rose eight times in 2005, the 10-year Treasury rate remained approximately the same, resulting in a further flattening of the yield curve in 2005. In the early part of the year when long- term Treasury rates dipped, we held back 2005 Annual Report 1 Lynn Nagorske, Chief Executive Officer Lynn A. Nagorske, Chief Executive Officer Dear Stockholders: • TCF’s return on average assets (ROA) While 2005 was a challenging year for TCF, was 2.08 percent, return on average equity it was still a good year. (ROE) was 28.03 percent, and net interest Summarizing the year: margin was 4.46 percent. Based on these ratios, TCF remains one of the best per- • TCF earned record net income of $265 forming banks of the Top 50 Banks in the million and record diluted earnings per United States. share (EPS) of $2.00, up 7.5 percent from $1.86 in 2004. “Card revenues grew substantially in 2005, with an increase of 26 percent.” purchasing mortgage-backed securities Power Liability® growth occurred largely 2. Credit Quality (MBS) to replace run-off in our Treasury in our new premier products. While these TCF’s credit quality remains strong. portfolio due to the low level of interest products raise deposits at a lower cost Consumer home equity loan credit quality rates. Indeed, we sold MBS’s and took than wholesale borrowings, they are not remains very good, despite a slowing gains to offset the margin loss. Later in as profitable as zero-interest checking, housing market and changes in the the year, as long-term rates recovered, which grew more modestly during bankruptcy laws. However, there were we replaced the MBS’s sold earlier in the the year. Our costs of deposits and two unusual credit events in 2005. year at higher rates. borrowings grew more than the yields First, there was a large non-recurring We are actually now experiencing an inverted yield curve within our balance on earning assets; therefore, our net commercial loan recovery of $3.3 million. interest margin compressed. Second, we charged off our $18.8 million sheet as our variable-rate consumer Although TCF’s margin rate declined home equity loans have higher yields slightly to 4.46 percent compared to 4.54 than our fixed-rate consumer home percent in 2004, our net interest income equity loans. This has resulted in higher increased by $25.8 million due to a growing variable-rate consumer and commercial balance sheet. TCF’s net interest margin loans paying off or refinancing into fixed- is approximately 90 basis points higher airplane leveraged lease transaction with Delta Air Lines when it declared bankruptcy. TCF’s net charge-offs for 2005, excluding the leveraged lease, were .06 percent, one of the lowest of the Top 50 Banks. rate loans at lower rates, compressing than the average of the Top 50 Banks due 3. Fee Income and Checking Accounts TCF’s net interest margin. to our unique Power Asset® and Power Deposit service charge revenues were a Liability strategy. challenging area for TCF and the banking 2 TCF Financial Corporation and Subsidiaries 0 0 . 2 $ 6 8 . 1 $ 8 5 . 1 5 $ 3 . 1 $ 3 5 . 1 $ 01 02 03 04 05 Diluted EPS dollars industry in 2005. These revenues declined slower growth also adversely impacted 4. Power Assets and Power Liabilities in 2005 despite an increase in the number fee income. For a long time, TCF faced TCF’s Power Asset lending operations of checking accounts. Customers are more limited competition and owned the continued to generate strong growth. changing their checking account behavior. “free checking” market. This is no longer Power Assets totaled $9.4 billion at the Debit card transactions continue to the case as our strategies have been widely end of 2005 and increased 13 percent replace checks and there are more ACH- copied and we face stiff competition. We over the prior year. type transactions each month. We started expect to re-energize our marketing and out the year in a hole as we were hurt by promotion efforts in this area in 2006. Consumer home equity loans grew 18 percent and now top $5 billion. Due to the higher than anticipated checking account attrition. Some of our customers misused their debit cards and, as a result, we were forced to close their accounts. This hap- pened more than we anticipated. We have made many changes to remedy this situation and believe we made progress throughout 2005. Checking account growth slowed in 2005. We now have over 1.6 million checking accounts (up 4.4 percent in 2005). This Card revenues grew substantially in 2005, flat yield curve, there was a large change with an increase of 26 percent to $79.8 in the mix during 2005. Fixed-rate loans million. TCF is the tenth largest Visa® grew $1.5 billion and variable-rate loans Classic debit card issuer in the United shrank $759.3 million. States, based on sales volume. Commercial loans increased six percent Leasing and Equipment Finance fees and Leasing and Equipment Finance grew and other revenues totaled $47.4 million 12 percent (including operating leases). for 2005, down six percent. 2004 leasing Winthrop Resources Corporation outstand- revenues included several unusually large ings grew five percent in 2005. lease equipment buyout transactions that did not reoccur in 2005. 2005 Annual Report 3 “We strive to find the best sites available in the markets in which we wish to expand.” Power Liabilities totaled $9.1 billion as of 6. Expenses and Income Taxes in deposits and 267,000 checking December 31, 2005 and grew 14 percent in Expenses were well controlled, increasing accounts. Checking account growth in 2005. TCF’s new premier products totaled only four percent during 2005. Our man- new branches during 2005 was approx- $1.6 billion at year end and increased agement expense control initiatives in imately 29 percent. $973.9 million in 2005. For the first time this area made this happen. Competition for new branch sites has in many years, TCF’s Power Liability growth more than funded our Power Asset growth, which allowed us to decrease borrowings. 5. Asset Sale Gains Income taxes were lower than planned intensified and land costs have become due to the closing of certain previous more expensive in certain of our existing years’ tax returns, clarification of exist- markets. We strive to find the best sites ing state tax legislation and favorable available in the markets in which we wish developments in income tax audits. to expand. The importance of selecting TCF recorded $10.7 million in gains on sales of securities compared to $22.6 million New Branch Expansion an “A” location oftentimes requires resourcefulness and patience in high in 2004. We also recorded $13.6 million in A major portion of TCF’s growth comes from population urban areas. gains on sales of branch buildings, includ- our new branch expansion. This strategy ing the Michigan Bank headquarters, and has provided TCF an ever-growing customer the sale of one rural branch’s deposits. In base with a low cost of funds. general, these branch building sale gains resulted from relocating certain of our mature branches to improved facilities to enhance our growth prospects. These asset sale gains are real money but are non-recurring in nature. TCF opened 28 new branches during 2005, including 18 traditional branches, seven supermarket branches and three campus branches. New branches opened since January 1, 2000 now have $1.1 billion As a result, we announced plans to begin expansion into the Phoenix, Arizona market in 2006. Initially, TCF plans to open several consumer loan production offices during 2006 with construction of retail branches to begin later in 2006 or early 2007. The Arizona market has a growing population and excellent 4 TCF Financial Corporation and Subsidiaries 5 5 2 $ 5 6 2 $ 1 8 4 $ 9 9 4 $ 1 8 4 $ 2 9 4 $ 8 1 5 $ 3 3 2 7 $ 0 2 $ 6 1 2 $ 01 02 03 04 05 01 02 03 04 05 Net Income millions of dollars Net Interest Income millions of dollars demographics. We are excited about 2. We will continue to grow through de In order to continue our success, we must this expansion opportunity. novo expansion of branches, products move faster, innovate and customize our We believe TCF’s de novo strategy is a and lines of business. products, and give great service to our better use of capital than paying high 3. A large portion of our profits will be premiums for bank acquisitions. While earned through the liability side of the we always review acquisition opportuni- balance sheet (deposits). We will ties, we intend to stick to this disciplined continue to focus on growing both approach in 2006. accounts and deposits in the future. customers. All of these things are easy to say, hard to do. Execution is the key to success. Risks Major issues to focus on in 2006 are a Strategy Our formula for success over the coming years remains the same: 1. It’s all about convenience for our cus- tomers. We are “Open 7 Days” and longer hours in our branches. We have a large and growing number of branch locations 4. We will emphasize growing Power flat or inverted yield curve, our continu- Assets and Power Liabilities. This simple ing de novo expansion, and checking strategy has produced Power Profits account dynamics, including fee income. and made TCF an industry leader. A particular concern for TCF is the intense 5. We will continue to repurchase TCF stock; however, repurchases may slow in future years due to our balance sheet growth. competition for checking accounts. Almost all banks have now copied our Totally Free Checking product. This impact was felt in 2005 with a slowing growth in and ATMs conveniently located for our 6. We will continue to focus on the devel- checking accounts. We must find new many customers. This is still a major opment of management and employee and better ways to beat the competition competitive advantage for TCF. talent. People make the difference. in this area. Furthermore, checking account behavior is changing. How people 2005 Annual Report 5 “We have an experienced and disciplined management team focused on producing superior returns.” conduct their banking has shifted toward We are also subject to the risks of new These risks are not new and we believe greater use of debit cards, ACH trans- regulations. Legal and tax law issues are we are prepared to address them in the actions, Internet banking, etc., all always a risk. future. Our philosophy is to run a highly contributing to a significant reduction in check volumes. We must continue to innovate to stay ahead of this curve. Another area to watch in 2006 is card revenues. Major retailers are making big efforts to reduce their card interchange Economic conditions are always a major expenses through litigation with Visa or risk for all banks including TCF. A weak through technological changes in how economy could result in a decline in home customer card payments are processed. values in our markets and adversely The debit card is now an integral part of impact our results. A bad economy can the checking account and TCF has nearly result in increased loan and lease $80 million of card revenues at stake. charge-offs. The success and viability of our super- Industry regulatory issues and the related market partners are important to TCF. If compliance burden continue to increase. our partners sell or close their stores, we The Bank Secrecy Act is a good example are at risk; though over time, as we build of this burden. These burdens will continue out our traditional branch system, this to grow in 2006. risk is mitigated somewhat. We continue to work closely with our partners to opti- mize our businesses and to be aware of and address any potential risks. profitable bank and minimize risk. In Closing A careful reading of this annual report will tell you almost everything about our com- pany. We try to keep our financial reporting simple and our disclosures complete. We continue to have a mutuality of inter- est with our stockholders. Our senior management and board of directors own approximately 11 million shares, or 8.5 percent of TCF stock. Sixty-three percent of our eligible employees participate in TCF’s Employees Stock Purchase Plan, which at year-end held over eight million shares. Our stock plans for senior manage- ment continue to be performance-based, 6 TCF Financial Corporation and Subsidiaries emphasizing long-term growth in earnings I would like to take this opportunity to also to compete and win. Their exceptional per share. These stock grants are expensed recognize the retirement of Bill Cooper as abilities, commitment and energy make in the income statement just like all the CEO. Under Bill’s leadership, TCF went from everything happen. We are proud of the rest of TCF’s expenses. a near bankrupt savings and loan to one TCF Team and its accomplishments. TCF repurchased 3.5 million shares of its stock during 2005 at an average cost of $27.10 per share. We consider the return from repurchasing TCF stock as a hurdle rate for acquisitions. of the best-run banks in America. His unique skills, experience and personality have powered TCF to an 18 percent annu- alized return to stockholders over his 20-year tenure. I will always appreciate Bill’s plain speaking style, high integrity, Once again I would like to thank our ded- savvy intelligence and passion for the icated Board of Directors. Our Board of business. Bill will continue to serve as Directors is wise, strong and hard working. non-employee Chairman of the Board of We appreciate their counsel and advice. Directors. In that capacity, TCF will still On January 1, 2006, concurrent with Bill Cooper’s retirement, the torch was passed to a new generation of bankers at TCF. While the people in the chairs have changed, rest assured our philoso- phy of banking remains the same. We have an experienced and disciplined management team focused on producing superior returns. We would especially like to recognize have access to his innovative ideas and Thank you for your continued support and Tom McGough, who retired from our Board wealth of experience. I look forward to investment in TCF. I remain optimistic about of Directors in 2005 after 20 years of working with Bill as Chairman. TCF’s future prospects. distinguished service. Tom’s insights and counsel were always worth heeding. I would also like to recognize and thank our outstanding employees for being part of the TCF Team. We hire people who love Lynn A. Nagorske Chief Executive Officer 2005 Annual Report 7 Business Highlights looking forward Convenience Arizona metropolitan area, expanding TCF customers have enjoyed enhancements Everything we do at TCF revolves around our banking footprint to the Southwest. made to some of our traditional branches. the idea of convenience; our fundamental banking strategy is to provide premier TCF is open seven days a week, with extended hours in both our supermarket During 2005, we evaluated customer ease of access to some of our traditional branch convenience products and services to our and traditional branches, to ensure that locations and, as a result, moved, consol- customers. We deliver convenience based our customers can do business when it’s idated and remodeled targeted branches. on knowing what our customers want, convenient for them. Even on most holi- and we continue to expand and enhance days, TCF customers know that personal our offerings based on their needs. TCF’s extensive branch network is at the service is available to open new accounts, make deposits and withdrawals, obtain loans, make investments, and have access Campus banking is the cornerstone of TCF Affinity Banking. The campus card, offered to students, faculty and staff, is a multi- purpose convenience card that serves as core of our convenience strategy. Currently to other banking products and services. a school identification card, ATM card, spanning six states, TCF’s 453 branches are conveniently located where our customers live, shop and do business. In 2006, TCF plans to open 24 branches: 17 traditional branches, five supermarket branches and two campus branches. In the 2005 fourth quarter, we announced plans to do business in the Phoenix, Supermarket branches continue to play an important role in TCF’s convenience strategy. These full-service branches allow customers to simplify their sched- ules by handling their banking needs at the same time while shopping. library card, security card, phone card, stored value card for vending machines, etc. Many campus card users sign up for their first checking account with TCF, become accustomed to the many conven- iences offered by TCF, as well as maintain the checking account, and most often open other accounts, after graduation. 8 TCF Financial Corporation and Subsidiaries “Our customers’ lives and business needs are evolving and we will continue to develop and enhance products and services to meet their needs.” For customers who prefer the convenience Small business customers may also take attract new customers to TCF, such as the of electronic banking, TCF provides a host advantage of TCF’s Internet banking successful Premier checking and Premier of products and services. These include services. TCF Totally Free Online Banking savings products, and TCF PLUS e CheckingSM. an automated phone system, an exten- for BusinessSM provides basic Internet sive network of TCF EXPRESS TELLER® ATMs banking services with no access fee. and online banking products such as TCF TCF Preferred Online Business BankingSM Totally Free OnlineSM and TCF Online Bill provides expanded account history and PaySM. During 2005, TCF’s call center opera- the ability to download transaction detail tions completed an initiative to centralize into financial software applications, help- retail call centers and implement a new ing small business owners manage their state-of-the-art phone system simplify- businesses. In 2005, TCF introduced TCF ing phone menu options and incorporating Miles Plus Business Check CardSM, a loyalty skill-based routing functionality for program for our small business customers. TCF’s strategy of new branch expansion and product line improvements continue to complement each other. New products and services with convenient locations attract new customers to our branch net- work, which supports and grows customer relationships by providing the most con- venient banking services in our markets. Our customers’ lives and business needs are evolving and we will continue to improved customer service. Also in 2005, TCF installed “Express Service”, a user- friendly teller platform system designed to improve work production efficiencies and enhance the customer experience. TCF continues to expand its customer develop and enhance products and base by offering services like TCF Check services to meet their needs. At TCF, we CashingSM, free on-site coin counting remain committed to being “The Leader through TCF Express Coin ServiceSM, free in Convenience Banking.” Visa® gift cards, and pre-paid American Express® travel cards. New products 2005 Annual Report 9 ■ Supermarket Branches ■ Traditional and Campus Branches 5 9 3 5 7 3 0 3 1 4 0 4 3 5 4 8 . 9 7 $ 5 . 3 6 0 $ . 3 5 $ 2 . 7 4 $ 5 . 0 4 $ 12/01 12/02 12/03 12/04 12/05 01 02 03 04 05 Retail Distribution Growth number of branches Card Revenue millions of dollars Structure to run our businesses, we also believe banking seeks to earn new account One of TCF’s most important assets is its functional product line management relationships of group members while management bench strength and depth. benefits from a more centralized approach. providing value to their organizations. TCF is organized geographically and by Centralized functional management The cornerstone of affinity banking is our function. Our bank presidents are facilitates efficient product development, campus card checking account offered to responsible for the operational goals effective communication, consistent students, faculty and staff of 11 partici- of their state as well as a functional implementation, and close monitoring of pating colleges and universities. During operation such as consumer lending, our strategic initiatives, as well as central 2005, TCF proudly added DePaul University commercial banking, retail branches, accountability for the success of each of (Illinois) and Milwaukee Area Technical or affinity banking. We strongly believe our major product areas. College (Wisconsin) to its impressive list local management teams make the best decisions regarding local issues. Each of our bank management teams is responsible for local business decisions, business development, customer relations, and community involvement. TCF’s newest functional operation, TCF of schools. Affinity Banking, was developed out By organizing management teams to of the success of our campus banking most efficiently and effectively manage program. Affinity banking encompasses our local banks and our strategic product building relationships and providing areas, TCF has the best of both worlds. specialized banking services and products We enjoy informed, timely local decision- As firmly as TCF believes local, geograph- to a number of unique groups including making that allows us to compete in our ically-based management is best suited colleges, employers, property managers, markets on a daily basis while long-term and youth sports associations. Affinity 10 3 5 1 5 2 1 ■ Supermarket Branches ■ Traditional and Campus Branches 5 9 6 7 9 4 4 2 12/00 12/01 12/02 12/03 12/04 12/05 Total New Branches1 number of branches 1 Branches opened since January 1, 2000. strategic product management positions TCF’s holding company and corporate Consumer lending had an exceptional year us for future growth. functions provide capital and centralized in the face of fierce competition and a In addition to our banking franchise, we have a separate leasing and equip- ment finance group headquartered in Minnetonka, Minnesota. TCF has devel- oped an experienced team of equipment finance professionals providing a variety of unique finance solutions to a diverse group of small to large commercial customers. TCF’s leasing and equipment finance operations are national in scope management services such as data yield curve that by year-end had become processing, bank operations, product inverted, with fixed-rate loans carrying development and marketing, finance, a lower interest rate than variable-rate treasury services, employee benefits, loans. For the fourth consecutive year, legal, compliance, credit review, and our consumer loan home equity portfolio internal audit. This structure gives locally increased over 18 percent or nearly $767 managed banks the flexibility to share, million. This type of success can only compare and refine new products and be achieved with an efficient and time- services while enjoying the economies tested system. We have been in the home of scale of a much larger organization. equity lending business since 1986 and with a broad range of equipment types financed in all 50 states. During 2005, our Power Asset Generation In 2005, TCF continued its focus on leasing and equipment finance portfolio building Power Assets, increasing its increased 12 percent (including operat- outstandings by $1.1 billion. The ability ing leases) and new business volume rose to grow these assets is a cornerstone more than 18 percent. to the success of TCF. have built a team of hard working, well-trained and properly incented lending staff. In 2005, we added nearly 50 consumer lenders to our traditional branches, loan production offices and call centers. 2005 Annual Report 11 8 6 $ 1 5 $ 8 3 1 , 1 $ 9 2 $ 7 1 $ 0 7 5 $ 3 5 3 $ 2 5 $ 7 9 $ 0 5 2 $ 02 03 04 05 12/00 12/01 12/02 12/03 12/04 12/05 2 $ 00 7 $ 01 New Branch1,2 Banking Fees & Other Revenue millions of dollars New Branch1 Total Deposits millions of dollars 1 Branches opened since January 1, 2000. 2 Consisting of fees and services charges, card revenue, ATM revenue, and investments and insurance revenue. 1 Branches opened since January 1, 2000. Commercial lending, despite a high volume outstanding, or 12 percent, at December strategies have become the principles of prepayments in 2005, was able to grow 31, 2005. As our only nationwide business, by which TCF conducts its business. six percent. Several of our regions have leasing and equipment finance is TCF’s long-term strategies for growth realized excellent portfolio growth; fun- concerned with the economy in all sec- are somewhat unique among our com- damental to this growth is their ability to tions of the United States. Hiring and petitors and have served our customers retain a dedicated lending staff and build retaining experienced sales representa- and stockholders well. depth of knowledge through specialized tives, with local knowledge and specialized training. A stable management team, a leasing expertise, are vital to the success consistent philosophy of secured, conser- of the business. TCF’s leasing and equip- vative lending, attractive incentives, ment finance operations are now the effectively managed backroom functions, 38th largest equipment finance/leasing and management advancement opportu- business and 18th largest bank-owned nities, are all factors we strive for at TCF, equipment finance/leasing business in and are the basis for steady growth and the United States. great credit quality over the years. Business Strategies TCF’s strategies begin with the premise that every customer is valuable. 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 incrementally to An excellent 2005 fourth quarter high- TCF’s banking philosophy is based on our revenue. lighted a very good year for TCF’s leasing and equipment finance operations, up $171.6 million in loans and leases carefully planned and consistently executed business strategies. These TCF listens to its customers and, as a result, puts emphasis on convenience 12 TCF Financial Corporation and Subsidiaries “Fundamental to our business strategy is providing consistent, superior service to our customers.” in banking. TCF is “The Leader in Power Assets and Power Liabilities, we look at the stock buy back opportunity Convenience Banking,” and we use our recognize the important contributions to as an acquisition alternative that may convenient service channels to attract overall profitability by both the liability provide exceptional returns. Investing a large, economically diverse and and asset side of the balance sheet. This in our own stock has been good for TCF growing customer base. focus allows TCF to earn superior returns. and its stockholders. TCF places emphasis on what it defines as Fundamental to our business strategy Simple, straightforward, and enduring Power Assets (higher-yielding consumer is providing consistent, superior service strategies, which are based on a well- loans, commercial loans and leasing to our customers. TCF strives to place grounded philosophy coupled with assets) and Power Liabilities (lower-cost The Customer First. We believe providing successful execution and solid manage- checking, savings, money market and quality and innovative service to our ment, have made TCF one of the banking certificate of deposit accounts). A prin- many customers creates loyalty to TCF industry’s performance leaders. cipal strategy of TCF’s Power Assets is to and value for our stockholders. Our goal lend on a secured basis. Our strong credit is to earn trust by satisfying all our quality is evidence that this important customers’ financial needs, giving them strategy is working; TCF has one of the great service and helping them be finan- lowest charge-off ratios in the banking cially successful. industry. TCF’s Power Liabilities are the foundation of our business and are proven profit drivers at TCF. By focusing on both TCF’s earnings performance allows us to regularly buy back our own stock. In evaluating potential acquisitions, we 2005 Annual Report 13 “TCF continues to make a difference for people in need, and over the past ten years, has contributed more than $23 million in grants to deserving organizations.” Community Relations There are a variety of ways local nonprofit TCF Bank is pleased to recognize the gen- We believe TCF has a special obligation organizations receive financial support erosity of its employees who supported to its communities. This commitment to from the TCF Foundation, TCF Bank® and the victims of the Indian Ocean Tsunami community is demonstrated by supporting its employees: and Hurricane Katrina. TCF employees a variety of nonprofit organizations through volunteer time, counsel, board representation and grant making, as well as supporting key projects through finan- cial contributions. During 2005, TCF contributed $3 million to charitable organizations in human services, education, community develop- ment, and the arts. In addition, numerous • Branch Funds – Contributions or grants are awarded to organizations located near TCF branches. • Employee Matching Gifts – Donations contributed by employees to nonprofit organizations of their choice are matched dollar-for-dollar by TCF. • Employee’s Fund – Funds contributed and TCF customers, along with the TCF Foundation, donated over $40,000 for the Tsunami Relief effort, and then again generously donated over $110,000 to assist in the Hurricane Katrina relief effort. Each year, TCF employees create and organize an internal March of Dimes® campaign, raising money to prevent birth defects and infant mortality. In 2005, TCF TCF employees generously gave their time by employees through payroll deduction; employees raised over $400,000, by volunteering and/or providing leader- contributions are matched 100 percent supporting the mission of the March of ship to local nonprofit organizations. by the TCF Foundation. Dimes. TCF continues to make a difference for • TCF Foundation and Corporate Giving – people in need, and over the past ten Larger grants and multi-year commitments years, has contributed more than $23 mil- awarded to local and some national lion in grants to deserving organizations. organizations. TCF would like to take this opportunity to give a special thank you to all our employees who are serving, or who have recently served, in the armed forces. 14 TCF Financial Corporation and Subsidiaries excellence in service A Tribute to William A. Cooper TCF Chief Executive Officer 1985-2005 Whereas, Bill Cooper retired on December 31, 2005, after more than 20 years of service to TCF as its Chief Executive Officer; and Whereas, during that period and under his leadership TCF, which had limited financial capacity and prospects when he joined TCF in 1985, has become one of the best performing banks in the United States, with branches in Minnesota, Michigan, Illinois, Wisconsin, Colorado and Indiana; and Whereas, Bill Cooper has developed a management team that will allow TCF to continue its successful growth and achievements; and Whereas, BIll Cooper will continue to serve as non-executive Chairman and in that capacity will make available to the TCF Board his talents, experience and expertise; and Whereas, the Board wishes to record, acknowledge and recognize Bill Cooper’s contribution to TCF’s success, Now, therefore, on behalf of TCF’s employees, customers and stockholders, the Board of Directors of TCF Financial Corporation hereby recognizes and acknowledges with the greatest appreciation the contribution of Bill Cooper as its Chief Executive Officer. His vision, energy, integrity, passionate commitment to excellence, dedicated service to the community, high ethical standards and leadership have been central to the success and prosperity of TCF both financially and as a respected institution in the communities which it serves. 2005 Annual Report 15 16 TCF Financial Corporation and Subsidiaries UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2005 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 001-10253 TCF Financial Corporation (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 41-1591444 (I.R.S. Employer Identification No.) 200 Lake Street East, Mail Code EX0-03-A, Wayzata, Minnesota 55391-1693 (Address and zip code of principal executive offices) Registrant’s telephone number, including area code: 612-661-6500 Securities registered pursuant to Section 12(b) of the Act (all registered on the New York Stock Exchange): Common Stock (par value $.01 per share) Preferred Share Purchase Rights (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x As of January 31, 2006, the aggregate market value of the voting stock held by nonaffiliates of the registrant, computed by reference to the average of the high and low prices on such date as reported by the New York Stock Exchange, was $2,833,244,430 As of January 31, 2006, there were 133,350,930 shares outstanding of the registrant’s common stock, par value $.01 per share, its only outstanding class of common stock. Specific portions of the registrant’s definitive proxy statement dated March 8, 2006 are incorporated by reference into Part III hereof. DOCUMENTS INCORPORATED BY REFERENCE Table of Contents Description Part I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Part II Item 5. Item 6. Item 7. Item 7A. Item 8. Business Risk Factors Unresolved SEC Staff Comments Properties Legal Proceedings Submission of Matters to a Vote of Security Holders Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm Consolidated Financial Statements Notes to Consolidated Financial Statements Other Financial Data Item 9. Item 9A. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Management’s Report on Internal Control over Financial Reporting Report of Independent Registered Public Accounting Firm Item 9B. Other Information Part III Item 10. Item 11. Item 12. Item 13. Item 14. Part IV Item 15. Signatures Index to Exhibits Directors and Executive Officers of the Registrant Executive Compensation Security Ownership of Certain Beneficial Owners and Management Certain Relationships and Related Transactions Principal Accounting Fees and Services Exhibits and Financial Statement Schedules Page 1 8 12 12 12 12 13 14 15 39 41 41 42 46 71 72 72 72 73 73 74 74 74 74 74 75 76 77 Part I Item 1. Business General TCF Financial Corporation (“TCF” or the “Company”) is a Delaware national financial holding company based in Wayzata, Minnesota. Its principal subsidiary, TCF Bank®, is headquartered in Minnesota and operates in Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana. At December 31, 2005, TCF had total assets of $13.4 billion and was the 48th largest publicly traded bank holding company in the United States based on total assets as of September 30, 2005. Unless otherwise indicated, references herein to “TCF” include its direct and indirect subsidiaries. References herein to the “Holding Company” or “TCF Financial” refer to TCF Financial Corporation on an unconsolidated basis. TCF’s core businesses include retail banking; commercial banking; small business banking; consumer lending; leasing and equipment finance; and investments, securities brokerage and insurance services. The retail banking business includes tradi- tional and supermarket branches, campus banking, Express Teller® ATMs and Visa U.S.A. Inc. (“Visa”) cards. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Financial Condition Analysis – Operating Segment Results” and Note 24 of Notes to Consolidated Financial Statements for information regarding TCF’s reportable operating segments. Retail Banking TCF’s primary focus is on the delivery of retail and commercial banking products in markets served by TCF Bank. Some of its products, such as its commercial equipment loans and leases, are offered in markets outside areas served by TCF Bank. At December 31, 2005, TCF had 453 retail banking branches, comprised of 190 traditional branches, 254 supermarket branches and nine campus branches. TCF operated 105 branches in Minnesota, 202 in Illinois, 63 in Michigan, 35 in Wisconsin, 42 in Colorado and six in Indiana. Targeted new branch expansion is a key strategy for TCF. TCF has significantly expanded its banking franchise in recent years. 153 new branches have been opened since January 1, 2000. During 2005, TCF opened 28 new branches, consisting of 18 new traditional branches, seven new supermarket branches and three new campus branches. TCF anticipates opening 24 new branches in 2006, consisting of 17 new traditional branches, five new supermarket branches and two new campus branches. During the fourth quarter of 2005, TCF announced plans to enter the Phoenix, Arizona metropolitan area market. Initially, TCF plans to open several consumer loan production offices during 2006 with construction of retail branches to begin later in 2006 or early 2007. The success of TCF’s branch expansion is dependent on the continued long-term success of branch banking. Campus banking represents an important part of TCF’s retail banking business. TCF has alliances with the University of Minnesota, the University of Michigan and nine other colleges. These alliances consist of exclusive marketing and naming rights agreements. Branches have been opened on many of these college campuses. TCF provides multi-purpose campus cards for these colleges. These cards serve as a school identification card, ATM card, library card, security card, and stored value card for vending machines or simi- lar uses. In 2005, TCF entered into a naming rights agreement to sponsor a new University of Minnesota football stadium to be called “TCF Bank StadiumSM.” Non-interest income is a significant source of revenue for TCF and an important factor in TCF’s results of operations. A key driver of non-interest income growth is growth in checking accounts. In addition to low or non-interest bearing deposit balances, these accounts generate significant fee revenue for TCF. 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement and Analysis – Non-Interest Income” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Information” for additional information. TCF strives to develop innovative banking products and serv- ices. In 2003, TCF introduced TCF Check CashingSM, a convenient, economical and full-service check cashing service for non-bank customers. In addition to providing a valuable customer service, the product also gives TCF an opportunity to introduce these customers to its checking account products. In 2004, TCF created Premier checking and Premier savings accounts with high interest rates and other valuable features. Also in 2004, TCF created the TCF Miles PlusSM card, a free non-revolving credit card that is attached to a Premier checking account. This free card 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. In 2004, 2005 Form 10-K 1 TCF began selling Visa gift cards in its branches. These cards can be used at all merchants that accept Visa. In 2005, TCF began selling gift cards on its TCFEXPRESS® website and added the TCF Miles Plus Business Check CardSM to small business checking accounts. Also in 2005, TCF began selling TCF Index Investment Strategies™, a series of low-cost domestic index funds developed for our investment customers. Lending Activities General TCF’s lending activities reflect its community banking philosophy, emphasizing secured loans to individuals and businesses in its primary market areas in Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana. TCF is also engaged in leasing and equipment finance activities nationwide. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consolidated Financial Condition Analysis – Loans and Leases” and Note 5 of Notes to Consolidated Financial Statements for additional information regarding TCF’s loan and lease portfolios. Consumer Lending TCF makes consumer loans for personal, family or household purposes, such as home purchases, debt con- solidation or the financing of home improvements, automobiles, vacations and education. Consumer loans totaled $5.2 billion at December 31, 2005, with $3.2 billion, or 62%, having fixed interest rates and $2 billion, or 38%, having variable interest rates tied to the prime rate. TCF’s consumer lending activities primarily include home equity real estate secured loans. They also include loans secured by personal property and to a limited extent, unsecured personal loans. Consumer loans may be made on a revolving line of credit or fixed-term basis. Education Lending TCF originates education loans for resale. TCF had $229.8 million of education loans held for sale at December 31, 2005, compared with $154.3 million at December 31, 2004. TCF generally retains the education loans it originates until they are fully disbursed. Under an agreement with SLM Corporation (“SLM”), TCF can sell the education loans to SLM once they are fully disbursed, but must sell the education loans to SLM before they go into repayment status. These loans are originated in accordance with designated guarantor and U.S. Department of Education guidelines and do not involve any independent credit underwriting by TCF. Commercial Real Estate Lending TCF originates loans secured by commercial real estate including, to a lesser extent, commercial real estate construction loans, generally to borrowers based in its primary markets. At December 31, 2005, commercial real estate loans totaled $2.3 billion. At December 31, 2005, variable- and adjustable-rate loans represented 78% of commercial real estate loans outstanding. At December 31, 2005, TCF’s commercial con- struction and development loan portfolio totaled $179.5 million. Commercial Business Lending Commercial business loans are generally secured by various types of business assets, including commercial real estate, and in some cases may be made on an unsecured basis. TCF’s commercial business lending activities encompass loans with a broad variety of purposes, including working capital loans and loans to finance the purchase of equip- ment or other acquisitions. TCF concentrates on originating commercial business loans to middle-market companies based in its primary markets with borrowing requirements of less than $25 million. Substantially all of TCF’s commercial business loans outstanding at December 31, 2005 were to borrowers based in its primary markets. Leasing and Equipment Finance TCF provides a broad range of comprehensive lease and equipment finance products address- ing the financing needs of diverse types of small to large compa- nies. At December 31, 2005, TCF’s leasing and equipment finance portfolio was $1.5 billion, including $387.2 million of loans and $1.1 billion of leases. TCF’s leasing and equipment finance businesses, TCF Equipment Finance, Inc. (“TCF Equipment Finance”) and Winthrop Resources Corporation (“Winthrop”), operate in all 50 states and source equipment installations domestically and to a limited extent in foreign countries. TCF Equipment Finance delivers equipment finance solutions to small and mid-size com- panies, including emerging growth companies, vendor partnerships and franchise organizations. Winthrop primarily leases technology and data processing equipment to larger companies nationwide. In March 2004, TCF Equipment Finance acquired VGM Financial Services (“VGM”), a company specializing in home medical equip- ment financing. TCF funds most of its leases internally, and consequently retains the credit risk on such leases. TCF also may arrange financ- ing of certain leases through non-recourse discounting of lease rentals with various other financial institutions at fixed interest rates. At December 31, 2005, $55.2 million, or 4.7%, of TCF’s lease portfolio, including operating leases, was discounted on a non- recourse basis with other financial institutions. 2 TCF Financial Corporation and Subsidiaries TCF’s leasing and equipment finance businesses also invest in limited partnerships that are formed to invest in qualified affordable housing projects. Leasing and equipment finance had $43.7 million and $46.7 million invested in affordable housing limited partnerships at December 31, 2005 and 2004, respectively. For more information on investments in affordable housing limited partnerships, see Note 1 of the Notes to Consolidated Financial Statements. Residential Mortgage Lending In 2004, TCF restructured its mortgage banking business by ceasing wholesale originations and downsizing and integrating its retail origination function with TCF’s consumer lending business. TCF’s mortgage banking subsidiary no longer originates new loans. TCF continues to service a remaining portfolio of mortgage loans for third-party investors. At December 31, 2005, 2004 and 2003, TCF serviced residential mortgage loans for others totaling $3.4 billion, $4.5 billion and $5.1 billion, respectively. In January 2006, TCF entered into an agreement to sell its third-party mortgage servicing rights for an amount in excess of carrying value. Investment Activities TCF Bank has authority to invest in various types of liquid assets, including United States Treasury obligations and securities of various federal agencies and U.S. Government sponsored enter- prises, deposits of insured banks, bankers’ acceptances and fed- eral funds. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the returns on loans and leases. TCF Bank must also meet reserve requirements of the Federal Reserve Board (“FRB”), which are imposed based on amounts on deposit in various deposit categories. Sources of Funds Deposits Deposits are the primary source of TCF’s funds for use in lending and for other general business purposes. Deposit inflows and outflows are significantly influenced by economic and com- petitive conditions, interest rates, money market conditions and other factors. Consumer, small business and commercial deposits are attracted principally from within TCF’s primary market areas through the offering of a broad selection of deposit instruments including consumer, small business and commercial demand deposit accounts, interest-bearing checking accounts, money market accounts, regular savings accounts, certificates of deposit and retirement savings plans. TCF’s marketing strategy emphasizes attracting core deposits held in checking, savings, money market and certificate of deposit accounts. These accounts are a source of low-interest cost funds and provide significant fee income. The composition of TCF’s deposits has a significant impact on the overall cost of funds. At December 31, 2005, interest-bearing deposits comprised 73% of total deposits, as compared with 70% at December 31, 2004. Information concerning TCF’s deposits is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consolidated Financial Condition Analysis – Deposits” and in Note 10 of Notes to Consolidated Financial Statements. Borrowings Borrowings may be used to compensate for reductions in normal sources of funds, such as deposit inflows at less than projected levels or net deposit outflows, or to support expanded lending activities. These borrowings include Federal Home Loan Bank (“FHLB”) advances, repurchase agreements, subordinated bank notes and other borrowings. TCF Bank, as a member of the FHLB system, is required to own a minimum level of FHLB stock and is authorized to apply for advances on the security of such stock, mortgage-backed securi- ties, loans secured by real estate and other assets (principally securities which are obligations of, or guaranteed by, the United States Government), provided certain standards related to credit- worthiness have been met. TCF’s FHLB advances totaled $1.1 billion at December 31, 2005, compared with $1.6 billion at December 31, 2004. FHLB advances are made pursuant to several different credit programs. Each credit program has its own interest rates and range of maturities. The FHLB prescribes the acceptable uses to which the advances pursuant to each program may be made as well as limitations on the size of advances. Acceptable uses pre- scribed by the FHLB include meeting short-term liquidity needs. In addition to the program limitations, the amounts of advances for which an institution may be eligible are generally based on the FHLB’s assessment of the institution’s creditworthiness. As an additional source of funds, TCF may sell securities subject to its obligation to repurchase these securities under repurchase agreements with major investment banks or the FHLB utilizing government securities or mortgage-backed securities as collateral. Repurchase agreements totaled $1.4 billion at December 31, 2005, compared with $1.2 billion at December 31, 2004. Generally, securities with a value in excess of the amount borrowed are required to be deposited as collateral with the counterparty to a repurchase agreement. The creditworthiness 2005 Form 10-K 3 of the counterparty is important in establishing that the overcol- lateralized amount of securities delivered by TCF is protected and TCF enters into repurchase agreements only with institutions with a satisfactory credit history. During 2005, TCF Bank issued $50 million of subordinated notes due in 2015. During 2004, TCF Bank issued $75 million of subordi- nated notes due in 2014. In February 2006, TCF Bank issued $75 million of subordinated notes due in 2016. These notes qualify as Tier 2 or supplemental capital for regulatory purposes, subject to certain limitations. Information concerning TCF’s FHLB advances, repurchase agreements, subordinated notes and other borrowings is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consolidated Financial Condition Analysis – Borrowings” and in Notes 11 and 12 of Notes to Consolidated Financial Statements. Other Information Activities of Subsidiaries of TCF Financial Corporation TCF’s business operations include those conducted by direct and indirect subsidiaries of TCF Financial, all of which are consolidated for purposes of preparing TCF’s consolidated financial statements. TCF does not utilize unconsolidated subsidiaries or special purpose entities to provide off-balance sheet borrowings. TCF’s only direct subsidiary is TCF Bank. Subsidiaries of TCF Bank are principally engaged in the following activities. Leasing and Equipment Finance See “Item 1. Business- Lending Activities” for information on TCF’s leasing and equipment finance businesses. Insurance and Investment Services TCF Financial Insurance Agency, Inc. is an insurance agency engaging in the sale of fixed-rate, single premium tax-deferred annuities and life insurance products. TCF Investments, Inc. engages in the sale of non-proprietary mutual fund products; in the sale of variable- rate, single premium tax-deferred annuities; and online and broker-assisted securities sales activity. Mortgage Servicing TCF Mortgage Corporation services a portfolio of residential mortgage loans for third-party investors. Real Estate Investment Trust TCF has a Real Estate Investment Trust (“REIT”) and a related foreign operating company (“FOC”) that acquire, hold and manage real estate loans and other assets. These companies are consolidated with TCF Bank and are therefore included in the consolidated financial statements of TCF Financial Corporation. TCF’s FOC operates under laws in certain states (including Minnesota and Illinois) that allow deductions for income derived from FOCs. Competition TCF competes with a number of depository insti- tutions and financial service providers in its market areas, and experiences significant competition in attracting and retaining deposits and in lending funds. Direct competition for deposits comes primarily from other commercial banks, investment banks, credit unions and savings institutions. Additional significant competition for deposits comes from institutions selling money market mutual funds and corporate and government securities. TCF competes for the origination of loans with commercial banks, mortgage bankers, mortgage brokers, consumer and commercial finance companies, credit unions, insurance companies and sav- ings institutions. TCF also competes nationwide with other leasing and equipment finance companies and commercial banks in the financing of high-technology and other equipment. Expanded use of the internet has increased potential competition affecting TCF and its loan, lease and deposit products. Employees As of December 31, 2005, TCF had 8,572 employees, including 2,835 part-time employees. TCF provides its employees with a comprehensive program of benefits, some of which are provided on a contributory basis, including comprehensive medical and dental plans, a 401(k) savings plan with a company matching contribution, life insurance and short- and long-term disability coverage. Regulation The banking industry is generally subject to extensive regulatory oversight. TCF Financial, as a publicly held financial holding company, and TCF Bank, as a national bank with deposits insured by the Federal Deposit Insurance Corporation (“FDIC”), are subject to a number of laws and regulations. Many of these laws and regulations have undergone significant change in recent years. These laws and regulations impose restrictions on activities, minimum capital requirements, lending and deposit restrictions and numerous other requirements. Future changes to these laws and regulations, and other new financial services laws and regulations, are likely and cannot be predicted with certainty. TCF Financial’s primary regulator is the FRB and TCF Bank’s primary regulator is the Office of the Comptroller of the Currency (“OCC”). 4 TCF Financial Corporation and Subsidiaries Regulatory Capital Requirements TCF Financial and TCF Bank are subject to regulatory capital requirements of the FRB and the OCC, respectively. These requirements are described below. In addition, these regulatory agencies are required by law to take prompt action when institutions do not meet certain minimum capital standards. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) defines five levels of capital condition, the highest of which is “well-capitalized.” It requires that regulatory authorities subject undercapitalized institutions to various restrictions such as limitations on dividends or other capi- tal distributions, limitations on growth or activity restrictions. Undercapitalized banks must also develop a capital restoration plan and the parent financial holding company is required to guarantee compliance with the plan. TCF Financial and TCF Bank are “well-capitalized” under the FDICIA capital standards. The FRB and the OCC also have adopted rules that could permit them to quantify and account for interest-rate risk exposure and market risk from trading activity and reflect these risks in higher capital requirements. New legislation, additional rulemaking, or changes in regulatory policies may affect future regulatory capital requirements applicable to TCF Financial and TCF Bank. The ability of TCF Financial and TCF Bank to comply with regulatory capital requirements may be adversely affected by legislative changes or future rulemaking or policies of their regulatory authorities or by unanticipated losses or lower levels of earnings. Restrictions on Distributions Dividends or other capital distributions from TCF Bank to TCF Financial are an important source of funds to enable TCF Financial to pay dividends on its common stock, to make payments on TCF Financial’s borrowings, or for its other cash needs. TCF Bank’s ability to pay dividends is dependent on regulatory policies and regulatory capital require- ments. The ability to pay such dividends in the future may be adversely affected by new legislation or regulations, or by changes in regulatory policies. In general, TCF Bank may not declare or pay a dividend to TCF Financial in excess of 100% of its net profits during a year combined with its retained net profits for the pre- ceding two years without prior approval of the OCC. TCF Bank’s ability to make capital distributions in the future may require regulatory approval and may be restricted by its regulatory author- ities. TCF Bank’s ability to make any such distributions may also depend on its earnings and ability to meet minimum regulatory capital requirements in effect during future periods. These capital adequacy standards may be higher than existing minimum capital requirements. The OCC also has the authority to prohibit the payment of dividends by a national bank when it determines such payments would constitute an unsafe and unsound banking prac- tice. In addition, income tax considerations may limit the ability of TCF Bank to make dividend payments in excess of its current and accumulated tax “earnings and profits” (“E&P”). Annual div- idend distributions in excess of E&P could result in a tax liability based on the amount of excess earnings distributed and current tax rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consolidated Financial Condition Analysis – Liquidity Management” and Note 14 of Notes to Consolidated Financial Statements. Regulation of TCF Financial and Affiliates and Insider Transactions TCF Financial is subject to FRB regulations, exami- nations and reporting requirements relating to bank or financial holding companies. As a subsidiary of a financial holding company, TCF Bank is subject to certain restrictions in its dealings with TCF Financial and with companies affiliated with TCF Financial. A holding company must serve as a source of strength for its subsidiary banks, and the FRB may require a holding company to contribute additional capital to an undercapitalized subsidiary bank. In addition, Section 55 of the National Bank Act may permit the OCC to order the pro rata assessment of shareholders of a national bank where the capital of the bank has become impaired. If a shareholder fails to pay such an assessment within three months, the OCC may order the sale of the shareholder’s stock to cover a deficiency in the capital of a subsidiary bank. In the event of a holding company’s bankruptcy, any commitment by the hold- ing company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and may be entitled to priority over other creditors. Under the Bank Holding Company Act (“BHCA”), a bank hold- ing company must obtain FRB approval before acquiring more than 5% control, or substantially all of the assets, of another bank, or bank or financial holding company, or merging or con- solidating with such a holding company. The BHCA also generally prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, providing services for its subsidiaries, or conducting activities permitted by the FRB as being closely related and proper incidents to the business of banking. 2005 Form 10-K 5 Restrictions on Change in Control Federal and state laws and regulations contain a number of provisions which impose restrictions on changes in control of financial institutions such as TCF Bank, and which require regulatory approval prior to any such changes in control. The Restated Certificate of Incorporation of TCF Financial and a Shareholder Rights Plan adopted by TCF Financial contain, among other items, features which may inhibit a change in control of TCF Financial. Acquisitions and Interstate Operations Under federal law, interstate merger transactions may be approved by federal bank regulators without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks opted out of the Riegle-Neal Interstate Banking and Branching Act of 1994 by adopting a law after the date of enactment of such act, and prior to June 1, 1997, which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches by banks are permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions may also be subject to certain nationwide and statewide insured deposit maximum concentra- tion levels or other limitations. Insurance of Accounts; Depositor Preference The deposits of TCF Bank are insured by the FDIC up to $100,000 per insured depositor. Substantially all of TCF’s deposits are Savings Association Insurance Fund (“SAIF”) insured, but TCF also has deposits insured by the Bank Insurance Fund (“BIF”). The FDIC establishes deposit insurance rates to maintain a mandated designated reserve ratio of 1.25% ($1.25 against $100 of insured deposits). The reserve ratio calculated by the FDIC that was in effect at December 31, 2005 was 1.26% for BIF and 1.32% for SAIF. The FDIC has established a risk-based deposit insurance assess- ment under which deposit insurance assessments are based upon an institution’s capital strength and supervisory condition, as determined by the institution’s primary regulator. The annual insurance premiums on bank deposits insured by the BIF and SAIF may vary between $0 per $100 of deposits for banks classified in the highest capital and supervisory evaluation categories to $.27 per $100 of deposits for banks classified in the lowest capital and supervisory evaluation categories. Annual insurance premi- ums have not been required for TCF for 2005, 2004, and 2003. If the designated reserve ratio falls below the ratio set by the FDIC, the FDIC may be required to increase deposit insurance rates sufficient to maintain the designated level. An increase in deposit insurance rates could have a material adverse effect on TCF, depending on the amount and duration of the increase. In addition to risk-based deposit insurance assessments, assessments may be imposed on deposits insured by either the BIF or the SAIF to pay for the cost of Financing Corporation (“FICO”) funding. FICO assessment rates for 2005 ranged from $.0134 to $.0144 per $100 of deposits annually for both BIF-assessable and SAIF-assessable deposits. FICO assessments of $1.1 million, $1.1 million and $1.2 million were paid by TCF Bank and recorded in other expense for 2005, 2004 and 2003, respectively. In addition, the FDIC is authorized to terminate a depository institution’s deposit insurance if it finds that the institution is being operated in an unsafe and unsound manner or has violated any rule, regulation, order or condition administered by the insti- tution’s regulatory authorities. Any such termination of deposit insurance is likely to have a material adverse effect on TCF, the severity of which would depend on the amount of deposits affected by such a termination. Under federal law, deposits and certain claims for administra- tive expenses and employee compensation against an insured depository institution are afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any receiver appointed by regulatory authorities. Such priority creditors would include the FDIC. In February 2006, the President signed legislation reforming the bank deposit insurance system. This reform merges the BIF and SAIF, increases the deposit insurance coverage limits for retirement accounts and indexes future coverage limitations, among other changes. Most significantly, the legislation could allow the FDIC to raise or lower the designated reserve ratio between 1.15% and 1.50%. It also allows for a one-time credit to be used against premiums due, awards dividends when the desig- nated reserve ratio goes above 1.35%, and requires certain changes in the calculation methodology. It is too early to predict the ultimate impact of the legislation until regulations are issued, but it could result in the imposition of additional deposit insur- ance premium costs for TCF. Examinations and Regulatory Sanctions TCF is subject to periodic examination by the FRB, OCC and the FDIC. Bank regula- tory authorities may impose on institutions found to be operating in an unsafe or unsound manner a number of restrictions or new requirements, including but not limited to growth limitations, dividend restrictions, individual increased regulatory capital requirements, increased loan, lease and real estate loss reserve requirements, increased supervisory assessments, activity limi- tations or other restrictions that could have an adverse effect on such institutions, their holding companies or holders of their debt 6 TCF Financial Corporation and Subsidiaries and equity securities. Various enforcement remedies, including civil money penalties, may be assessed against an institution or an institution’s directors, officers, employees, agents or independent contractors. To the extent not subject to preemption by the OCC, subsidiaries of TCF may also be subject to state and/or self-regulatory organ- ization licensing, regulation and examination requirements in connection with certain insurance, mortgage banking and securities brokerage activities. National Bank Investment Limitations Permissible invest- ments by national banks are limited by the National Bank Act, as amended, and by rules of the OCC. Non-traditional bank activities permitted by the Gramm-Leach-Bliley Act will subject a bank to additional regulatory limitations or requirements, including a required regulatory capital deduction and application of transac- tions with affiliates limitations in connection with such activities. Future Legislative and Regulatory Change; Litigation and Enforcement Activity There are a number of respects in which future legislative or regulatory change, or changes in enforcement practices or court rulings, could adversely affect TCF, and it is generally not possible to predict when or if such changes may have an impact on TCF. TCF’s non-interest income in future periods may be negatively impacted by pending state and federal legislative proposals which, if enacted, could limit loan, deposit or other fees and service charges. Financial institutions have increasingly been the subject of class action lawsuits or in some cases regulatory actions challenging a variety of practices involving consumer lending and retail deposit-taking activity. The Community Reinvestment Act (“CRA”) and fair lending laws and regulations impose nondiscriminatory lending require- ments on financial institutions. The Department of Justice (“DOJ”) and other federal agencies are responsible for enforcing these laws and regulations. A successful challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity, and restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Other Laws and Regulations TCF is subject to a wide array of other laws and regulations, including, but not limited to, usury laws, the CRA and related regulations, the Equal Credit Opportunity Act and Regulation B, Regulation D reserve requirements, Electronic Funds Transfer Act and Regulation E, the Truth-in-Lending Act and Regulation Z, the Real Estate Settlement Procedures Act and Regulation X, the Expedited Funds Availability Act and Regulation CC, and the Truth-in-Savings Act and Regulation DD. TCF is also subject to laws and regulations that may impose liability on lenders and owners for clean-up costs and other costs stemming from hazardous waste located on property securing real estate loans. Taxation Federal Taxation The 3-year statute of limitations on TCF’s consolidated Federal income tax return is closed through 2001, with the exception of certain filed refund claims. State Taxation TCF and/or its subsidiaries currently file tax returns in all states which impose corporate income and franchise taxes and local tax returns in certain cities and other taxing jurisdictions. TCF’s primary banking activities are in the states of Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana. The tax rates in those jurisdictions are 9.8%, 7.3%, 1.9%, 7.9%, 4.6% and 8.5%, respectively. The methods of filing, and the methods for calculating taxable and apportionable income, vary depending upon the laws of the taxing jurisdiction. See “Risk Factors.” See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consolidated Income Statement Analysis – Income Taxes” and Notes 1 and 13 of Notes to Consolidated Financial Statements for additional information regarding TCF’s income taxes. Available Information TCF’s website, www.tcfexpress.com, includes free access to Comp- any news releases, investor presentations, conference calls to discuss quarterly financial results, TCF’s Annual Report and peri- odic filings required by the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports. TCF’s Compensation/Nominating/Corporate Governance Committee and Audit Committee charters, Corporate Governance Guidelines, Codes of Ethics and changes to Codes of Ethics are also available on this website. Shareholders may request these documents in print by contacting the Corporate Secretary at TCF Financial Corporation, 200 Lake Street East, Mail Code EX0-03-A, Wayzata, MN 55391-1693. 2005 Form 10-K 7 Item 1A. Risk Factors Enterprise Risk Management In the normal course of business, TCF is exposed to various risks. Management balances the Company’s strategic goals, including revenue and profitability objectives, with their associated risks. In defining the Company’s risk profile, management organizes risks into three main categories: Credit Risk, Market Risk (which includes interest-rate risk, liquidity risk, and price risk) and Operational Risk (which includes transaction risk and compliance risk). Policies, systems and procedures have been adopted to iden- tify, assess, control, monitor, and manage risk in each of these areas. Primary responsibility for risk management lies with the heads of various business lines within the Company. Each business line within the Company maintains policies, systems and procedures to identify, assess, control, monitor, and manage risk within their respective areas. Management continually reviews the adequacy and effectiveness of these policies, systems and procedures. As an integral part of the risk management process, manage- ment has established various committees consisting of senior executives and others within the Company. These committees closely monitor risks and ensure that adequate risk management practices exist within their respective areas of authority. Some of the principal committees include the Credit Policy Committee, Asset/Liability Management Committee (“ALCO”), Investment Committee, Capital Planning Committee and various financial reporting and compliance-related committees. Overlapping membership of these committees by senior executives and others provides a unified view of risk on an enterprise-wide basis. To provide an enterprise-wide view of the Company’s risk pro- file, an enterprise risk management governance process has been established. This includes appointment of an Enterprise Risk Management Officer, who oversees the process and reports on the Company’s risk profile. Additionally, risk officers are assigned to each significant line of business and corporate function. The risk officers, while reporting directly to their respective line or function, help facilitate implementation of the enterprise risk management and governance process. An Enterprise Risk Management Committee has been established consisting of senior executives and others within the Company, which oversees and supports the Enterprise Risk Management Officer. The enterprise risk management governance process includes a process for providing an enterprise-wide view of the identification, assessment, measurement, monitoring, and reporting of significant risk-related events. The Board of Directors, through its Audit Committee, has overall responsibility for oversight of the Company’s enterprise risk management governance process. Credit Risk Management Credit risk is defined as the risk to earnings or capital of an obligor’s failure to meet the terms of any contract with the Company or otherwise fails to perform as agreed. This includes failure of customers to meet their contractual obligations, and contingent exposures from unfunded loan com- mitments and letters of credit. Credit risk also includes failure of a counterparty to settle a securities transaction on agreed-upon terms (such as the counterparty in a repurchase transaction), or failure of an issuer in connection with mortgage-backed securi- ties held in the Company’s investment portfolio. To manage credit risk arising from lending and leasing activities, management has adopted and maintains what it believes are sound underwriting policies and procedures, and periodically reviews the appropriateness of these policies and procedures. Customers are evaluated as part of the initial underwriting processes and through periodic reviews. For consumer loans and small business banking loans, credit scoring models are used to determine eligibility for credit and terms of credit. These models are periodically reviewed to verify they are predictive of borrower performance. Limits are established on the exposure to a single customer (including their affiliates) and on concentrations for certain categories of customers. Loan and lease credit approval levels are established so that larger credit exposures receive managerial review at the appropriate level through various credit approval committees. Management continuously monitors asset quality in order to manage the Company’s credit risk and determine the appro- priateness of valuation allowances. This includes, in the case of commercial loans and leases, a risk rating methodology under which a rating (1 through 9) is assigned to every loan and lease. The rating reflects management’s assessment of the level of the customer’s financial stress which may impact repayment. Asset quality is monitored separately based on the type or category of loan or lease. This allows management to better define the Company’s loan and lease portfolio risk profile. Management also uses various risk models – called stress tests – to estimate probable impact on payment performance under various expected or unexpected scenarios. Market Risk Management (Including Interest-Rate Risk, Liquidity Risk, and Price Risk) Market risk is defined as the potential for losses arising from changes in interest rates, equity prices, and other relevant market rates or prices, and includes interest-rate risk, liquidity risk and price risk. Interest-rate risk and associated liquidity risk are the Company’s primary market risks. Interest-Rate Risk Interest-rate risk is defined as the expo- sure of net interest income and fair value of financial instruments to adverse movements in interest rates. Interest-rate risk arises 8 TCF Financial Corporation and Subsidiaries mainly from the structure of the balance sheet. The primary goal of interest-rate risk management is to control exposure to interest-rate risk within acceptable tolerances established by ALCO and the Board of Directors. The major sources of the Company’s interest-rate risk are timing differences in the maturity and repricing characteristics of assets and liabilities, changes in relationships between rate indices (basis risk) and changes in the shape of the yield curve. Management measures these risks and their impact in various ways, including use of simulation analysis and valuation analysis. Simulation analysis is used to model net interest income from asset and liability positions over a specified time period (gener- ally one year), and the sensitivity of net interest income, under various interest rate scenarios. The interest rate scenarios may include gradual or rapid changes in interest rates, rate shocks, spread narrowing and widening, yield curve twists, and changes in assumptions about customer behavior in various interest rate scenarios. The simulation analysis is based on various key assumptions which relate to the behavior of interest rates and spreads, changes in product balances, the repricing characteris- tics of products, and the behavior of loan and deposit customers in different rate environments. The simulation analysis does not necessarily take into account actions management may undertake in response to anticipated changes in interest rates. In addition to the valuation analysis, management utilizes an interest rate gap measure (difference between interest-earning assets and interest-bearing liabilities repricing within a given period). While the interest rate gap measurement has some limitations, including no assumptions regarding future asset or liability production and a static interest rate assumption (large changes may occur related to those items), the interest rate gap represents the net asset or liability sensitivity at a point in time. An interest rate gap measure could be significantly affected by external factors such as loan prepayments, early withdrawals of deposits, changes in the correlation of various interest-bearing instruments, competition or a rise or decline in interest rates. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for further information about TCF’s interest-rate risk, gap analysis and simulation analysis. Management also uses valuation analysis to measure risk in the balance sheet that might not be taken into account in the net interest income simulation analysis. Whereas net interest income simulation highlights exposure over a relatively short time period (12 months), valuation analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the discounted value of liability cash flows. Valuation analysis addresses only the current balance sheet and does not incorporate the growth assumptions that are used in the net interest income simulation model. As with the net interest income simulation model, valuation analysis is based on key assumptions about the timing and variabil- ity of balance sheet cash flows. It also does not necessarily take into account actions management may undertake in response to anticipated changes in interest rates. ALCO meets regularly and is responsible for reviewing the Company’s interest rate sensitivity position and establishing policies to monitor and limit exposure to interest-rate risk. Liquidity Risk Liquidity risk is defined as the risk to earnings or capital arising from the Company’s inability to meet its obligations when they come due without incurring unacceptable losses. The primary goal of liquidity risk management is to ensure that the Company’s entire funding needs are met promptly, in a cost- efficient and reliable manner. ALCO and the Board of Directors have adopted a Liquidity Management Policy to direct management of the Company’s liq- uidity risk. Under the Liquidity Management Policy, the Treasurer reviews current and forecasted funding needs for the Company on a daily basis, and periodically reviews market conditions for issuing debt securities to wholesale investors. Key liquidity ratios and the amount available from alternative funding sources are reported to ALCO on a monthly basis. The Treasurer maintains diverse and reliable sources of fund- ing. This includes federal funds lines totaling at least $500 million, repurchase agreement lines totaling at least 150% of the amount of the Company’s financeable collateral (defined as any piece or pool of collateral that is greater than $5 million in current par), access to Federal Home Loan Bank (“FHLB”) advances and the Federal Reserve Bank discount window, “treasury, tax and loan notes,” commercial repurchase sweeps, and wholesale deposits. The Treasurer ensures that liability maturities are staggered to limit forecasted daily funding needs. The daily funding guideline is $500 million, which may be met with a mix of approved borrowing types. Cash flow variances may cause minor day-to-day excesses over this guideline. A contingency funding plan is in place should certain liquidity triggers occur. Other Market Risks Other sources of market risk include the Company’s investment in mortgage servicing rights and FHLB stock. Mortgage servicing rights are the discounted present value of future net cash flows that are expected to be received from the mortgage servicing portfolio. The value of the mortgage servicing rights asset is dependent on the assumed prepayment speed of the mortgage servicing portfolio. Future expected net cash flows from servicing a loan in the mortgage serving portfolio would 2005 Form 10-K 9 not be realized if the loan pays off earlier than anticipated. Accordingly, prepayment risk subjects the mortgage servicing rights to impairment risk. The Company does not specifically hedge the mortgage servicing rights asset for the potential impairment risk. In addition, competition from other financial institutions could result in higher numbers of closed accounts and increased account acquisition costs. TCF actively monitors customer behav- ior and adjusts policies and marketing efforts accordingly to attract new and retain existing checking account customers. Operational Risk Management Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems, or external events. This definition includes transaction risk, which includes losses from fraud, error, the inability to deliver products or services, and loss or theft of information. Transaction risk encompasses product development and delivery, transaction processing, information technology systems, and the internal control environment. The definition of operational risk also includes compliance risk, which is the risk of loss from violations of, or nonconformance with laws, rules, regu- lations, prescribed practices, or ethical standards. The Company’s Internal Audit Department periodically assesses the adequacy and effectiveness of the Company’s processes for controlling and managing risks in all the core areas of operations. This includes determining whether internal controls and informa- tion systems are properly designed and adequately tested and reviewed. This also includes determining whether the system of internal controls over financial reporting is appropriate for the type and level of risks posed by the nature and scope of the com- pany’s activities. Audit plans are prepared using a risk-based methodology as well as any concerns identified by management, the Audit Committee, regulators or the Company’s independent registered public accounting firm. Significant issues related to the adequacy of controls, together with recommendations for improvements to those controls, are reported to management and the Audit Committee. The Company’s Compliance Department periodically assesses the adequacy and effectiveness of the Company’s processes for controlling and managing its principal compliance risks. Audit plans are prepared using a risk-based methodology as well as any concerns identified by management, the Audit Committee, or regulators. Significant issues related to the adequacy of controls, together with recommendations for improvements to those con- trols, are reported to management and the Audit Committee. Other Risks Customer Behavior Changes in customers’ behavior regarding use of checking accounts could result in lower fee revenue, higher borrowing costs, and higher operational costs for TCF. TCF obtains a large portion of its revenue from checking accounts and depends on low-cost checking accounts as a significant source of funds. New Branch Expansion Opening new branches is an integral part of TCF’s growth strategy for generating new customers, deposit accounts and loans and the related revenue. The success of TCF’s branch expansion is dependent on the continued success of branch banking in attracting new customers and business. Many other financial institutions are also opening new branches, and the competition from them and other retailers for new branch sites is significant. Also, in certain of our specific target markets there is no suitable space currently available for our new branch expan- sion. We are patient and opportunistic for new branch sites in these target markets. Opening new branches is a long-term investment strategy whereby a new branch produces net losses during the first 20-24 months of operations before it becomes profitable. Achieving expected returns from new branch expansion is dependent on the continued growth in business over many years. Supermarket Branches The success of TCF’s supermarket branch expansion is dependent on the continued long-term suc- cess and viability of TCF’s supermarket partners. At December 31, 2005, TCF had 254 supermarket branches, representing 56% of all retail branches. Supermarket banking continues to play an important role in TCF’s growth, as these branches have been con- sistent generators of account growth in both deposits and lending products. The success of TCF’s supermarket branches is depend- ent on the continued success and viability of TCF’s supermarket partners and TCF’s ability to maintain licenses or lease agreements for its supermarket locations. TCF is subject to the risk, among others, that its license or lease for a location or locations will terminate upon the sale or closure of that location or locations by the supermarket partner. Also, an economic slowdown, finan- cial or labor difficulties in the supermarket industry may reduce activity in TCF’s supermarket branches. One of TCF’s supermarket partners, Albertson’s, has recently announced pending transactions involving the sale of its Jewel supermarkets and other properties. Based on initial published reports, TCF does not believe these trans- actions will have a significant adverse impact on its operations. Card Revenue Future card revenues may be impacted by class action litigation against Visa U.S.A. Inc. (“Visa”) and MasterCard®. Visa is a defendant in many other legal actions, including litiga- tion recently brought by merchants and merchant organizations 10 TCF Financial Corporation and Subsidiaries against Visa concerning its card interchange fees challenging the level of interchange fees and prohibitions on merchants imposing surcharges on customers using cards to purchase goods and services. The ultimate impact of any such litigation cannot be predicted at this time. Merchants are also seeking to develop independent card products or payment systems that would serve as alternatives to TCF Visa card products. The continued success of TCF’s various card programs is dependent on the success and viability of Visa and the continued use by customers and acceptance by merchants of its cards. Declines in Home Values Declines in home values in TCF’s markets could adversely impact results from operations. Like all banks, TCF is subject to the effects of any economic downturn, and in particular, a significant decline in home values in TCF’s markets could have a negative effect on results of operations. At December 31, 2005, TCF had $5.1 billion of consumer home equity loans with a weighted-average loan-to-value ratio for the portfolio of 73%. In addition, at December 31, 2005, TCF had $770.4 million in residential real estate loans with a weighted-average loan- to-value ratio of 51%. A significant decline in home values would likely lead to a decrease in new home equity loan originations and increased delinquencies and defaults in both the consumer home equity loan and residential real estate loan portfolios and result in increased losses in these portfolios. Leasing and Equipment Finance Activities TCF’s leasing activity is subject to risk of cyclical downturns and other adverse economic developments. In an adverse economic environment, there may be a decline in the demand for some types of equipment which TCF leases, resulting in a decline in the amount of new equipment being placed in service as well as the decline in equip- ment values for equipment previously placed in service. TCF, like all owners and lessors of commercial equipment, may be exposed to liability claims resulting from injuries or accidents involving that equipment. Such liability has been most acute in states that have adopted laws imposing statutory vicarious liability on leas- ing companies for any injuries or property damage caused by motor vehicles they owned and leased. In 2005, a federal statute was enacted that significantly reduced a leasing company’s exposure to that risk. TCF seeks to mitigate its overall exposure to lessor’s liability risk by requiring all lessees to furnish evidence of liability insurance prior to lease inception and to maintain that insurance throughout the term of the lease, and through its own insurance programs. Income Taxes TCF is subject to federal and state income tax regulations. Income tax regulations are often complex and require interpretation. Changes in income tax regulations could negatively impact TCF’s results of operations. If TCF’s REIT affiliate fails to qualify as a REIT, or should states enact legislation taxing these or related entities, TCF will be subject to a higher consolidated effective tax rate. 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 pro- visions of federal and state tax laws, TCF’s tax expense could increase. Use of these companies is and has been the subject of federal and state audits. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Income Taxes” for additional information. Rules and Regulations New or revised tax, accounting, and other laws, regulations, rules and standards could significantly impact strategic initiatives, results of operations, and financial condition. The financial services industry is extensively regulated. Federal and state laws and regulations are designed primarily to protect the deposit insurance funds and consumers, and not nec- essarily to benefit a financial company’s shareholders. These laws and regulations may sometimes impose significant limitations on operations. These limitations, and sources of potential liability for the violation of such laws and regulations, are described in “Regulation.” These regulations, along with the currently existing tax and accounting laws, regulations, rules, and standards, con- trol the methods by which financial institutions conduct business; implement strategic initiatives, as well as past, present, and con- templated tax planning; and govern financial disclosures. These laws, regulations, rules, and standards are constantly evolving and may change significantly over time. Current events that may not have a direct impact on TCF, such as accounting improprieties, may result in the adoption of substantive revisions to laws, reg- ulations, rules, and standards. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on TCF’s business, results of operations, and financial condition, the effect of which is impossible to predict at this time. USA Patriot and Bank Secrecy Acts The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury Department’s Office of 2005 Form 10-K 11 Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. During the last year, several banking institutions have received large fines for non-compliance with these laws and regu- lations. TCF has developed policies and procedures designed to ensure compliance. Disruption to Infrastructure The extended disruption of vital infrastructure could negatively impact TCF’s business, results of operations, and financial condition. TCF’s operations depend upon, among other things, its technological and physical infrastructure, including its equipment and facilities. Extended disruption of its vital infrastructure by fire, power loss, natural disaster, telecommunications failure, computer hacking and viruses, terrorist activity or the domestic and foreign response to such activity, or other events outside of TCF’s control, could have a material adverse impact either on the financial services industry as a whole, or on TCF’s business, results of operations, and financial condition. Estimates and Assumptions TCF’s consolidated financial statements conform with accounting principles generally accepted in the United States, which require management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. These estimates are based on information available to management at the time the estimates are made. Actual results could differ from those estimates. For further information relating to critical accounting estimates, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates.” Item 1B. Unresolved SEC Staff Comments None. Item 2. Properties Offices At December 31, 2005, TCF owned the buildings and land for 139 of its bank branch offices, owned the buildings but leased the land for 14 of its bank branch offices and leased or licensed the remaining 300 bank branch offices, all of which are well main- tained. The properties related to the bank branch offices owned by TCF had a depreciated cost of approximately $198.6 million at December 31, 2005. At December 31, 2005, the aggregate net book value of leasehold improvements associated with leased bank branch office facilities was $25.9 million. In addition to the above-referenced branch offices, TCF owned and leased other facilities with an aggregate net book value of $35.7 million at December 31, 2005. For more information on premises and equip- ment, see Note 7 of Notes to Consolidated Financial Statements. Item 3. Legal Proceedings 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 collec- tion activities. From time to time, borrowers and other customers, or employees or former employees, have also brought actions against TCF, in some cases claiming substantial amounts of dam- ages. 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. Item 4. Submission of Matters to a Vote of Security Holders None. 12 TCF Financial Corporation and Subsidiaries Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities TCF’s common stock trades on the New York Stock Exchange under the symbol “TCB.” The following table sets forth the high and low prices and dividends declared for TCF’s common stock. The stock prices represent the high and low sale prices for the common stock on the New York Stock Exchange Composite Tape, as reported by Bloomberg. 2005 First Quarter Second Quarter Third Quarter Fourth Quarter 2004 First Quarter Second Quarter Third Quarter Fourth Quarter High Low Dividends Declared $32.03 28.56 28.82 28.78 $26.37 29.03 32.62 32.36 $26.42 24.55 25.81 25.02 $23.92 24.35 28.01 29.46 $.2125 .2125 .2125 .2125 $.1875 .1875 .1875 .1875 As of January 31, 2006, there were approximately 9,571 record holders of TCF’s common stock. The Board of Directors of TCF Financial has not adopted a for- mal dividend policy. The Board of Directors intends to continue its present practice of paying quarterly cash dividends on TCF’s common stock as justified by the financial condition of TCF. The declaration and amount of future dividends will depend on circumstances existing at the time, including TCF’s earnings, financial condition and capital requirements, the cash available to pay such dividends (derived mainly from dividends and distri- butions from TCF Bank), as well as regulatory and contractual limitations and such other factors as the Board of Directors may deem relevant. In general, TCF Bank may not declare or pay a dividend to TCF in excess of 100% of its net profits for that year combined with its retained net profits for the preceding two cal- endar years without prior approval of the OCC. Restrictions on the ability of TCF Bank to pay cash dividends or possible diminished earnings of the indirect subsidiaries of TCF Financial may limit the ability of TCF Financial to pay dividends in the future to holders of its common stock. See “Regulation — Regulatory Capital Requirements,” “Regulation — Restrictions on Distributions” and Note 15 of Notes to Consolidated Financial Statements. For the quarter ended December 31, 2005, there was no share repurchase activity, as summarized in the following table: (Dollars in thousands) Balance, September 30, 2005 October 1-31, 2005 November 1-30, 2005 December 1-31, 2005 Balance, December 31, 2005 Shares Repurchased Number Average Price Per Share – – – – $ $ – – – – Share Repurchase Authorizations(1) July 21, 2003 2,820 – – – 2,820 May 21, 2005 6,725,487 – – – 6,725,487 (1) The current share repurchase authorizations were approved by the Board of Directors on July 21, 2003 and May 21, 2005. Each authorization was for a repurchase of up to an additional 5% of TCF’s common stock outstanding at the time of the authorization, or 7.1 million shares and 6.7 million shares, respectively. These authorizations do not have expiration dates. 2005 Form 10-K 13 Item 6. Selected Financial Data The selected five-year financial summary presented below should be read in conjunction with the Consolidated Financial Statements and related notes. Five-Year Financial Summary Consolidated Income: Year Ended December 31, (Dollars in thousands, except per-share data) Total revenue Net interest income Provision for credit losses Fees and 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 2005 $ 996,020 517,690 $ 5,022 467,659 10,671 610,588 380,410 115,278 265,132 $ 2004 982,102 $ 491,891 $ 10,947 467,611 22,600 586,679 384,476 129,483 254,993 $ 2003 900,424 $ 481,145 $ 12,532 430,792 (11,513) 560,109 327,783 111,905 215,878 $ 2002 918,987 $ 499,225 $ 22,006 408,226 11,536 539,288 357,693 124,762 232,931 $ 2001 852,708 481,222 20,878 370,623 863 501,996 329,834 122,512 207,322 2.00 2.00 .85 $ $ $ 1.87 $ 1.86 $ .75 $ 1.53 $ 1.53 $ .65 $ 1.58 $ 1.58 $ .575 $ 1.37 1.35 .50 $ $ $ $ $ $ Consolidated Financial Condition: (Dollars in thousands, except per share data) Securities available for sale Residential real estate loans Subtotal Loans and leases excluding residential real estate loans Total assets Checking, savings and money market deposits Certificates of deposit Total deposits Borrowings Stockholders’ equity Book value per common share Key Ratios and Other Data: At December 31, 2005 $ 1,648,615 770,441 2,419,056 2004 2003 2001 $ 1,619,941 $ 1,533,288 $ 2,426,794 $ 1,584,661 2,733,290 4,317,951 1,014,166 2,634,107 1,800,344 4,227,138 1,212,643 2,745,931 2002 9,424,111 13,365,360 8,372,491 12,340,567 7,135,135 11,319,015 6,320,784 12,202,069 5,510,912 11,358,715 7,195,074 1,915,620 9,110,694 2,983,136 998,472 7.46 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 12.6 8.3 10.8 30.4 14.4 (3.9) 4.2 6.7 Compound Annual Growth Rate 1-Year 2005/2004 5-Year 2005/2000 1.4% 5.2 (54.1) – (52.8) 4.1 (1.1) (11.0) 4.0 7.0 7.5 13.3 5.2% 3.4 (19.4) 6.8 N.M. 6.0 4.7 (.2) 7.3 11.1 11.3 15.6 Compound Annual Growth Rate 1-Year 2005/2004 5-Year 2005/2000 1.8% (24.0) (8.2) 3.3% (26.8) (13.8) 2005 2.08% 28.03 7.43 4.46 .25 42.50% 453 1,603 At or For the Year Ended December 31, 2003 2004 1.85% 2.15% 23.05 27.02 8.03 7.94 4.54 4.54 .16 .11 42.48% 40.32% 2002 2.01% 25.38 7.91 4.71 .25 36.39% 430 1,535 401 1,444 395 1,338 Return on average assets Return on average equity Average total equity to average assets Net interest margin (1) Net charge-offs as a percentage of average loans and leases Common dividend payout ratio Number of: Banking locations Checking accounts (in thousands) N.M. Not Meaningful. (1) Net interest income divided by average interest-earning assets. 14 TCF Financial Corporation and Subsidiaries 14.1 3.6 12.0 (7.3) 5.7 (1.3) 1.9 5.6 2001 1.79% 23.06 7.78 4.51 .15 37.04% 375 1,249 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Table of Contents Overview Results of Operations 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 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 Summary of Critical Accounting Estimates Recent Accounting Developments Fourth Quarter Summary Legislative, Legal and Regulatory Developments Forward-Looking Information Page 15 16 16 17 17 17 21 21 25 26 26 26 27 30 33 33 34 34 35 35 36 36 37 37 37 38 38 38 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 in Item 8 and selected financial data in Item 6. Overview TCF is a Delaware national financial holding company based in Wayzata, Minnesota. Its principal subsidiary, TCF Bank, is head- quartered in Minnesota and had 453 banking offices in Minnesota, Illinois, Michigan, Wisconsin, Colorado and Indiana at December 31, 2005. 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 philosophy 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 include retail banking; commercial banking; small business banking; consumer lending; leasing and equipment finance; and investments, securities brokerage and insurance services. The retail banking business includes tradi- tional and supermarket branches, campus banking, Express Teller ATMs and Visa U.S.A. Inc. (“Visa”) cards. 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. The continued growth of checking accounts is a significant part of TCF’s growth strategy. Total checking accounts were 1,603,173 at December 31, 2005, and increased 68,021 accounts from December 31, 2004. The number of ATMs that are free to TCF cus- tomers increased from 1,141 at December 31, 2004, to 1,735 at December 31, 2005. The increase was primarily the result of an ATM branding agreement with 7-Eleven®, Inc., which added 583 TCF branded ATMs during the third quarter of 2005, that are owned and operated by 7-Eleven, Inc. 2005 Form 10-K 15 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 20-24 months of operations before they become profitable, and there- fore 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. TCF’s lending strategy is to originate high credit quality, pri- marily 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 residential real estate properties. The leasing and equipment finance businesses consist of TCF Equipment Finance, Inc. (“TCF Equipment Finance”), a company that delivers equipment finance solutions to businesses in select markets, and Winthrop Resources Corporation (“Winthrop”), a leasing company that primarily leases technology and data processing equipment. TCF’s leasing and equipment finance businesses operate in all 50 states and source equipment installations domestically and, to a limited extent, in foreign countries. 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 inherent in the loan and lease portfolio. See “Consolidated Financial Condition Analysis – Allowance for Loan and Lease Losses.” 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 borrow- ings, represented 52% of TCF’s total revenue in 2005. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest-earning assets and the mix of interest-bearing and non-interest bearing deposits and borrowings. TCF manages the risk of changes in interest rates on its net interest income through an Asset/Liability Committee and through related interest- rate risk monitoring and management policies. During 2005, TCF’s net interest margin declined from 4.54% for 2004 to 4.46% for 2005. This decline was primarily due to growth in deposits with higher interest rates and increased fixed- rate loans with lower yields than variable-rate loans as a result of the flattening yield curve and changing customer preferences. See “Quantitative and Qualitative Disclosures About Market Risk” for further discussion on TCF’s interest-rate risk position. Non-interest income is a significant source of revenue for TCF and an important factor in TCF’s results of operations. A key driver of non-interest income is checking accounts and their related activities. Increasing fee and service charge revenues has been challenging during 2005 as a result of slower growth in checking accounts and changing customer behaviors. Fee revenue per retail checking account was $217 for 2005, down from $232 in 2004. TCF is focusing on checking account growth to increase future fee revenue. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Non-Interest Income” for additional information. 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 revenue from customer debit card transactions. The following portions of the Management’s Discussion and Analysis of Financial Condition and Results of Operations focus in more detail on the results of operations for 2005, 2004 and 2003 and on information about TCF’s balance sheet, credit quality, liquidity and funding resources, capital and other matters. Results of Operations Performance Summary TCF reported diluted earnings per com- mon share of $2.00 for 2005, compared with $1.86 for 2004 and $1.53 for 2003. Net income was $265.1 million for 2005, compared with $255 million for 2004 and $215.9 million for 2003. Return on average assets was 2.08% in 2005, compared with 2.15% in 2004 and 1.85% in 2003. Return on average common equity was 28.03% in 2005, compared with 27.02% in 2004 and 23.05% in 2003. 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 2005 or 2004. The effective income tax rate for 2005 was 30.30%, compared with 33.68% in 2004 and 34.14% in 2003. 16 TCF Financial Corporation and Subsidiaries losses. The decrease in the provision for credit losses from 2004 was primarily related to improved credit quality of the portfolio excluding leveraged leases. Non-interest income totaled $47.5 million in 2005, down $3.2 million from $50.7 million in 2004. The decrease in leasing and equipment finance revenues for 2005, compared with 2004, was primarily due to lower sales-type lease revenues, partially offset by higher operating lease revenues and other transaction fees. 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 $48.6 million in 2005, up $4.9 million from $43.7 million in 2004, primarily related to an increase in operating lease depre- ciation expense. Consolidated Income Statement Analysis Net Interest Income Net interest income, which is the differ- ence 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 52% of TCF’s revenue in 2005. Net interest income divided by average interest-earning assets is referred to as the net interest margin, expressed as a percentage. Net interest income and net interest margin are affected by changes in interest rates, loan and deposit pricing strategies and competitive conditions, the volume and the mix of interest- earning assets and interest-bearing liabilities, and the level of non-performing assets. Operating Segment Results BANKING, comprised of deposits and investment products, commercial banking, small business banking, consumer lending and treasury services, reported net income of $229.9 million for 2005, up 4.6% from $219.9 million in 2004. Banking net interest income for 2005 was $455.5 million, up 6.6% from $427.5 million for 2004. The provision for credit losses totaled $1 million in 2005, down from $4.1 million in 2004. The provision for credit losses for 2005 reflects improved credit quality, primarily in the consumer and commercial portfolios, including a $3.3 million commercial business loan recovery in the first quarter of 2005. Non-interest income totaled $425.1 million, compared with $426.6 million in 2004. Card revenues, primarily interchange fees, increased 25.7% in 2005, which was primarily attributable to a 19.8% increase in sales volume compared with 2004. Fees and service charges were $258.7 million for 2005, down 4.6% from $271.2 million in 2004, as a result of changing customer behaviors. During 2005, TCF sold several buildings and one branch including its deposits resulting in total gains of $13.6 million. There were no branch sales in 2004 or 2003. During 2005, TCF sold mortgage-backed securities and realized gains of $10.7 million, compared with gains of $22.6 million for 2004 and $32.8 million for 2003. See “Consolidated Income Statement Analysis – Non- Interest Income” for further discussion on the sales of mortgage- backed securities. Banking non-interest expense totaled $553.2 million, up 7.1% from $516.4 million in 2004. The increases were primarily due to compensation and benefits and occupancy costs associated with new branch expansion, increases in card processing and issuance expenses related to the overall increase in card volumes, and increases in net real estate expense as a result of net recov- eries on sales of foreclosed properties in 2004, partially offset by a decrease in deposit account losses. LEASING AND EQUIPMENT FINANCE, an operating segment comprised of TCF’s wholly-owned subsidiaries TCF Equipment Finance and Winthrop, provides a broad range of comprehensive lease and equipment finance products. Leasing and Equipment Finance reported net income of $33.4 million for 2005, down 6.9% from $35.9 million in 2004. Net interest income for 2005 was $57 million, up 2.4% from $55.7 million in 2004. The provision for credit losses for this operating segment totaled $4 million in 2005, down from $6.8 million in 2004. Delta Airlines, Inc., (“Delta”), declared bankruptcy on September 14, 2005, and TCF charged off its $18.8 million investment in the related leveraged lease through a reduction in the allowance for loan and lease 2005 Form 10-K 17 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, 2005 Year Ended December 31, 2004 Average Yields and Interest(1) Rates Average Balance Average Yields and Interest (1) Rates Average Balance Average Balance Change Average Yields and Rates Interest(1) (bps) $ 95,349 1,569,808 214,588 $ 3,450 81,479 10,921 3.62% 5.19 5.09 $ 124,833 1,536,673 331,529 3,455 80,643 11,533 2.77% 5.25 3.48 $ (29,484) 33,135 (116,941) $ (5) 836 (612) 154,241 171,133 3,213 328,587 85,214 49,561 134,775 4,959 19,575 24,534 97,596 585,492 50,680 636,172 732,022 15,910 2,067 17,977 13,246 9,419 22,665 7,640 48,282 49,124 97,406 97,406 29,830 87,096 116,926 214,332 214,332 6.69 6.98 9.24 6.86 6.15 5.99 6.09 5.81 5.75 5.76 6.86 6.61 5.72 6.53 6.30 2.48 .20 1.08 3.10 .60 1.14 1.19 1.12 2.82 1.61 1.15 3.25 4.27 3.96 2.38 1.87 2,304,340 2,450,634 34,763 4,789,737 1,385,905 826,934 2,212,839 85,390 340,314 425,704 1,423,264 8,851,544 885,735 9,737,279 11,617,024 1,108,510 $12,725,534 $ 1,548,027 585,860 311,497 2,445,384 641,672 1,026,017 1,667,689 427,070 1,558,423 1,985,493 640,576 4,293,758 1,740,440 6,034,198 8,479,582 917,665 2,038,561 2,956,226 8,990,424 11,435,808 343,876 11,779,684 945,850 $12,725,534 104,494 137,735 3,210 245,439 77,187 33,259 110,446 4,754 13,815 18,569 89,364 463,818 63,360 527,178 622,809 2,892 928 3,820 1,705 5,785 7,490 2,992 14,302 28,279 42,581 42,581 12,664 75,673 88,337 130,918 130,918 6.92 5.61 8.20 6.13 6.24 4.31 5.50 5.57 3.99 4.30 6.95 6.00 5.73 5.97 5.75 1.46 .08 .29 1.99 .33 .41 .39 .36 1.89 .79 .55 1.57 3.81 3.16 1.59 1.24 1,509,055 2,457,342 39,161 4,005,558 1,237,633 771,310 2,008,943 85,382 346,411 431,793 1,285,925 7,732,219 1,104,814 8,837,033 10,830,068 1,052,679 $11,882,747 $ 1,504,392 508,162 342,446 2,355,000 198,651 1,140,242 1,338,893 85,478 1,738,374 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 10,568,783 370,184 10,938,967 943,780 $11,882,747 49,747 33,398 3 83,148 8,027 16,302 24,329 205 5,760 5,965 8,232 121,674 (12,680) 108,994 109,213 13,018 1,139 14,157 11,541 3,634 15,175 4,648 33,980 20,845 54,825 54,825 17,166 11,423 28,589 83,414 83,414 795,285 (6,708) (4,398) 784,179 148,272 55,624 203,896 8 (6,097) (6,089) 137,339 1,119,325 (219,079) 900,246 786,956 55,831 $ 842,787 $ 43,635 77,698 (30,949) 90,384 443,021 (114,225) 328,796 341,592 (179,951) 161,641 (123,349) 367,088 246,502 613,590 703,974 108,559 54,492 163,051 776,641 867,025 (26,308) 840,717 2,070 $ 842,787 85 (6) 161 (23) 137 104 73 (9) 168 59 24 176 146 (9) 61 (1) 56 55 102 12 79 111 27 73 80 76 93 82 60 168 46 80 79 63 $517,690 4.46% $491,891 4.54% $ 25,799 (8) (Dollars in thousands) Assets: Investments Securities available for sale (2) Loans held for sale Loans and leases: Consumer home equity: Fixed- and adjustable-rate Variable-rate Consumer – other Total consumer home equity and other Commercial real estate: Fixed- and adjustable-rate Variable-rate Total commercial real estate Commercial business: Fixed- and adjustable-rate Variable-rate Total commercial business Leasing and equipment finance (3) Subtotal Residential real estate Total loans and leases (4) Total interest-earning assets Other assets Total assets Liabilities and Stockholders’ Equity: Non-interest bearing deposits: Retail Small business Commercial and custodial Total non-interest bearing deposits Interest-bearing deposits: Premier checking Other checking Subtotal Premier savings Other savings Subtotal 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 deposits and borrowings Other liabilities (5) Total liabilities Stockholders’ equity (5) Total liabilities and stockholders’ equity Net interest income and margin 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 $954,000 and $638,000 was recognized during the years ended December 31, 2005 and 2004, respectively. (2) Average balance and yield of securities available for sale are based upon the historical amortized cost. (3) Substantially all leasing and equipment finance loans and leases have fixed rates. (4) Average balance of loans and leases includes non-accrual loans and leases, and is presented net of unearned income. (5) Average balance is based upon month-end balances. 18 TCF Financial Corporation and Subsidiaries Year Ended December 31, 2004 Year Ended December 31, 2003 Average Yields and Interest (1) Rates Average Balance Average Yields and Interest (1) Rates Average Balance Average Balance Change Average Yields and Rates Interest(1) (bps) $ 124,833 1,536,673 331,529 $ 3,455 80,643 11,533 2.77% 5.25 3.48 $ 101,455 1,891,062 488,634 $ 4,511 103,821 20,016 4.45% 5.49 4.10 $ 23,378 (354,389) (157,105) $ (1,056) (23,178) (8,483) (168) (24) (62) 104,494 137,735 3,210 245,439 77,187 33,259 110,446 4,754 13,815 18,569 89,364 463,818 63,360 527,178 622,809 2,892 928 3,820 1,705 5,785 7,490 2,992 14,302 28,279 42,581 42,581 12,664 75,673 88,337 130,918 130,918 6.92 5.61 8.20 6.13 6.24 4.31 5.50 5.57 3.99 4.30 6.95 6.00 5.73 5.97 5.75 1.46 .08 .29 1.99 .33 .41 .39 .36 1.89 .79 .55 1.57 3.81 3.16 1.59 1.24 1,509,055 2,457,342 39,161 4,005,558 1,237,633 771,310 2,008,943 85,382 346,411 431,793 1,285,925 7,732,219 1,104,814 8,837,033 10,830,068 1,052,679 $11,882,747 $ 1,504,392 508,162 342,446 2,355,000 198,651 1,140,242 1,338,893 85,478 1,738,374 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 10,568,783 370,184 10,938,967 943,780 $11,882,747 99,031 112,067 3,873 214,971 78,686 30,181 108,867 5,363 13,657 19,020 81,912 424,770 88,401 513,171 641,519 23 925 948 – 9,298 9,298 4,447 14,693 42,102 56,795 56,795 9,451 94,128 103,579 160,374 160,374 7.68 5.74 8.51 6.54 6.84 4.28 5.87 5.77 3.87 4.27 7.48 6.36 6.14 6.32 6.05 1.77 .09 .09 – .50 .50 .50 .39 2.41 1.02 .73 1.25 5.29 4.08 1.99 1.56 1,289,144 1,953,386 45,510 3,288,040 1,149,937 704,515 1,854,452 92,931 352,703 445,634 1,094,532 6,682,658 1,440,688 8,123,346 10,604,497 1,053,073 $11,657,570 $ 1,370,451 418,256 444,176 2,232,883 1,302 1,063,078 1,064,380 – 1,847,775 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 $11,657,570 219,911 503,956 (6,349) 717,518 87,696 66,795 154,491 (7,549) (6,292) (13,841) 191,393 1,049,561 (335,874) 713,687 225,571 (394) $ 225,177 $ 133,941 89,906 (101,730) 122,117 197,349 77,164 274,513 85,478 (109,401) (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 5,463 25,668 (663) 30,468 (1,499) 3,078 1,579 (609) 158 (451) 7,452 39,048 (25,041) 14,007 (18,710) (76) (13) (31) (41) (60) 3 (37) (20) 12 3 (53) (36) (41) (35) (30) 2,869 3 2,872 1,705 (3,513) (1,808) (1,455) (391) (13,823) (14,214) (14,214) 3,213 (18,455) (15,242) (29,456) (29,456) (31) (1) 20 N.M. (17) (9) (11) (3) (52) (23) (18) 32 (148) (92) (40) (32) $491,891 4.54% $481,145 4.54% $ 10,746 – (Dollars in thousands) Assets: Investments Securities available for sale (2) Loans held for sale Loans and leases: Consumer home equity: Fixed- and adjustable-rate Variable-rate Consumer – other Total consumer home equity and other Commercial real estate: Fixed- and adjustable-rate Variable-rate Total commercial real estate Commercial business: Fixed- and adjustable-rate Variable-rate Total commercial business Leasing and equipment finance (3) Subtotal Residential real estate Total loans and leases (4) Total interest-earning assets Other assets Total assets Liabilities and Stockholders’ Equity: Non-interest bearing deposits: Retail Small business Commercial and custodial Total non-interest bearing deposits Interest-bearing deposits: Premier checking Other checking Subtotal Premier savings Other savings Subtotal 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 deposits and borrowings Other liabilities (5) Total liabilities Stockholders’ equity (5) Total liabilities and stockholders’ equity Net interest income and margin N.M. Not Meaningful. 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) Substantially all leasing and equipment finance loans and leases have fixed rates. (4) Average balance of loans and leases includes non-accrual loans and leases, and is presented net of unearned income. (5) Average balance is based upon month-end balances. 2005 Form 10-K 19 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 home equity: Fixed- and adjustable-rate Variable-rate Consumer – other Commercial real estate: Fixed- and adjustable-rate Variable-rate Commercial business: Fixed- and adjustable-rate Variable-rate Leasing and equipment finance Residential real estate Total loans and leases Total interest income Interest expense: Premier checking Other checking Premier savings Other savings Money market Certificates of deposit Borrowings: Short-term borrowings Long-term borrowings Total borrowings Total interest expense Net interest income Year Ended December 31, 2005 Versus Same Period in 2004 Increase (Decrease) Due to Year Ended December 31, 2004 Versus Same Period in 2003 Increase (Decrease) Due to Volume (1) Rate (1) $ (925) 1,726 (4,883) $ 920 (890) 4,271 $ Total (5) 836 (612) Volume (1) Rate (1) Total $ 890 (18,761) (5,775) $ (1,946) (4,417) (2,708) $ (1,056) (23,178) (8,483) 53,342 (377) (382) 9,131 2,545 – (247) 9,432 (12,535) 56,353 47,122 9,897 (102) 10,134 (654) (555) 5,242 1,902 2,125 5,401 11,499 35,209 (3,595) 33,775 385 (1,104) 13,757 205 6,007 (1,200) (145) 52,641 62,091 3,121 1,241 1,407 4,288 5,203 15,603 15,264 9,298 23,188 71,915 (9,410) 49,747 33,398 3 8,027 16,302 205 5,760 8,232 (12,680) 108,994 109,213 13,018 1,139 11,541 3,634 4,648 20,845 17,166 11,423 28,589 83,414 25,799 15,837 28,302 (524) 5,754 2,879 (425) (247) 13,597 (19,557) 43,545 13,444 2,874 65 1,705 (523) (566) (5,508) 684 9,981 9,777 3,911 10,247 (10,374) (2,634) (139) (7,253) 199 (184) 405 (6,145) (5,484) (29,538) (32,154) (5) (62) – (2,990) (889) (8,315) 2,529 (28,436) (25,019) (33,367) 499 5,463 25,668 (663) (1,499) 3,078 (609) 158 7,452 (25,041) 14,007 (18,710) 2,869 3 1,705 (3,513) (1,455) (13,823) 3,213 (18,455) (15,242) (29,456) 10,746 (1) Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to volume and the change due to rate. Changes due to volume and rate are calculated independently for each line item presented. Achieving net interest income growth over time is dependent on TCF’s ability to generate higher-yielding assets and lower-cost retail deposits. While interest rates and consumer preferences continue to change over time, TCF is relatively balanced from an interest rate gap measure (difference between interest-earning assets and interest-bearing liabilities maturing, repricing, or prepaying during the next twelve months). If interest rates remain at current levels or decrease, TCF could experience continued compression of its net interest margin primarily due to the ongo- ing shift of higher yielding variable-rate loans to lower yielding 20 TCF Financial Corporation and Subsidiaries fixed-rate loans and lower-cost deposits to higher-cost deposits. If interest rates increase, TCF’s net interest income is likely to increase, but could be partially offset by an adverse impact on deposit account balances and rates, as competition for checking, savings and money market deposits, important sources of lower- cost funds for TCF, is intense. See “Consolidated Financial Condition Analysis – Deposits” and “Quantitative and Qualitative Disclosures about Market Risk” for further discussion on TCF’s interest-rate risk position. Net interest income was $517.7 million for 2005, up 5.2% from $491.9 million in 2004. The increase in 2005 in net interest income primarily reflects the growth in average consumer, commercial and leasing and equipment finance balances, up $1.1 billion over 2004, partially offset by higher funding costs. The decrease in the net interest margin, from 4.54% in 2004 to 4.46% in 2005, is primarily due to the rates on interest-bearing liabilities increasing more than the yields on interest-earning assets, as a result of increased deposits with higher rates and increased fixed-rate consumer loans with yields lower than variable-rate loans. TCF’s benefit from the rising short-term interest rates, and the related increase in yields on variable-rate loans, has been more than off- set by the impact of a flattening yield curve making fixed-rate loans more attractive to customers and changes in the funding mix as the majority of deposit growth has been in higher interest cost products. Net interest income was $491.9 million in 2004, up from $481.1 million in 2003. The increase in 2004 from 2003 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 reflected 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. Provision for Credit Losses TCF provided $5 million for credit losses in 2005, compared with $10.9 million in 2004 and $12.5 million in 2003. The decrease in the provision from 2004 was primarily due to improved credit quality, including a $3.3 million commercial business loan recovery in 2005. Net loan and lease charge-offs were $24.5 million, or .25% of average loans and leases in 2005, up from $9.5 million, or .11% of average loans and leases in 2004 and $12.9 million, or .16% of average loans and leases in 2003. Delta declared bankruptcy on September 14,2005, and TCF charged off its $18.8 million investment in the related leveraged lease. Net loan and lease charge-offs excluding the charge-off related to the leveraged lease were $5.7 million, or .06% of average loans and leases in 2005. The provision for credit losses is calculated as part of the determination of the allowance for loan and lease losses. The determination of the allowance for loan and lease losses and the related provision for credit losses is a critical accounting estimate which involves a number of factors such as historical trends in 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.” Non-Interest Income Non-interest income is a significant source of revenue for TCF, representing 48% of total revenues in 2005, 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 $478.3 million for 2005, compared with $490.2 million in 2004 and $419.3 million in 2003. The number of checking accounts totaled 1,603,173 accounts at December 31, 2005, up 4.4% from 1,535,152 accounts at December 31, 2004 which were up 6.3% from 1,443,821 accounts at December 31, 2003. 2005 Form 10-K 21 The following table presents the components of non-interest income: (Dollars in thousands) 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 Losses on termination of debt Total non-interest income Fees and other revenue as a percentage of: Total revenue Average assets N.M. Not Meaningful. Year Ended December 31, 2005 $258,779 79,803 40,730 10,665 389,977 47,387 5,578 24,717 467,659 10,671 – $478,330 2004 $271,259 63,463 42,935 12,558 390,215 50,323 12,960 14,113 467,611 22,600 – $490,211 2003 $247,456 52,991 43,623 13,901 357,971 51,088 12,719 9,014 430,792 32,832 (44,345) $419,279 2002 $226,051 47,190 45,296 15,848 334,385 51,628 6,979 15,234 408,226 11,536 – $419,762 2001 $195,162 40,525 45,768 11,554 293,009 45,730 12,042 19,842 370,623 863 – $371,486 Compound Annual Growth Rate 1-Year 2005/2004 5-Year 2005/2000 (4.6)% 25.7 (5.1) (15.1) (.1) (5.8) (57.0) 75.1 – (52.8) – (2.4) 9.2% 21.1 (3.0) (2.8) 8.7 4.3 (11.9) (4.2) 6.8 N.M. N.M. 7.3 46.95% 3.67 47.61% 3.94 47.84% 3.70 44.42% 3.52 43.46% 3.21 Fees and Service Charges Fees and service charges decreased $12.5 million, or 4.6%, to $258.8 million for 2005, compared with $271.3 million for 2004. This decrease primarily reflects a decrease in deposit account service fees, attributable to changing customer behavior and payment trends. Card Revenue During 2005, card revenue, primarily interchange fees, totaled $79.8 million, up 25.7%, from $63.5 million in 2004. The increase in card revenue in 2005 was primarily attributed to increased customer transaction volumes and related fees. 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 and credit cards. See “Item 1A. Risk Factors – Operational Risk Management” for further discussion of Visa litigation. ATM Revenue ATM revenue totaled $40.7 million for 2005, down 5.1% from $42.9 million in 2004. The decline in ATM revenue was attributable to the continued decline in utilization of TCF’s ATM machines by non-customers, TCF customers’ use of non-TCF ATM machines and lower ATM revenues from TCF customers due to deliberate TCF checking product modifications, 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 networks. Additionally, as ATM site contracts have been renewed, merchants have generally required a larger percentage of the fee charged to non-customers for the use of TCF’s ATM’s. 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, Percentage Increase (Decrease) 2005 1,406,728 763,157 15.2 2004 1,323,877 710,893 13.5 2003 1,193,936 647,407 12.5 $5,030,619 642,446 $5,673,065 $4,197,678 537,124 $4,734,802 $3,543,657 355,045 $3,898,702 88.68% 1.43% 88.66% 1.40% 90.89% 1.43% 2005/2004 2004/2003 6.3% 7.4 12.6 19.8 19.6 19.8 – 2.1 10.9% 9.8 8.0 18.5 51.3 21.4 (2.5) (2.1) 22 TCF Financial Corporation and Subsidiaries Investments and Insurance Revenue Investments and insurance revenue, consisting principally of commissions on sales of annuities and mutual funds, decreased $1.9 million in 2005, compared with a decrease of $1.3 million in 2004. Annuity and mutual fund sales volumes totaled $188.2 million for the year ended December 31, 2005, compared with $212.2 million during 2004. The decreased sales volumes during 2005 were the result of the continuation of low interest rates which reduced the rate of return on annuity products offered by insurance companies to TCF’s customers. Sales of insurance and investment products may fluc- tuate 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 $2.9 million, or 5.8%, in 2005, following a decrease of $765 thousand, or 1.5%, in 2004. The decrease in leasing revenues for 2005 was primarily driven by a decline in sales-type lease revenues of $10 million, partially offset by a $6.5 million increase in operating lease revenues. Sales-type revenues generally occur at or near the end of the lease term as customers extend the lease or purchase the underly- ing equipment. The increase in operating lease revenues was primarily driven by a $25.1 million increase in average operating lease balances. 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 Mortgage banking revenue decreased $7.4 million to $5.6 million in 2005, compared with $13 million for 2004. The decrease in mortgage banking revenue for 2005, compared with 2004 was primarily due to a $8.1 million decrease in gains on sales of loans and $1 million of mortgage servicing rights recovery recorded in 2005, compared with $1.5 million of impairment recorded in 2004. The following table sets forth information about mortgage banking revenues: (Dollars in thousands) Servicing income Less mortgage servicing: Amortization (Recovery) impairment Net servicing income (loss) Gains on sales of loans (1) Other income Total mortgage banking revenue 2005 $13,998 10,108 (1,000) 4,890 – 688 $ 5,578 2004 $17,349 13,091 1,500 2,758 8,107 2,095 $12,960 Year Ended December 31, 2003 $ 20,533 2002 $ 20,443 23,680 21,153 (24,300) 33,505 3,514 $ 12,719 22,874 12,500 (14,931) 18,110 3,800 $ 6,979 2001 $16,932 16,564 4,400 (4,032) 11,795 4,279 $12,042 (1) Beginning in 2005, TCF’s mortgage banking business no longer originates or sells loans. 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 At December 31, 2005 $3,362,339 2004 $4,503,564 2003 $5,122,741 5.79% 5.78% 5.97% $ 37,334 $ 46,442 $ 52,036 1.11% 31.4 bps 1.03% 31.0bps 1.02% 31.7bps 3.5 X 3.3X 3.2X Percentage Increase (Decrease) 2005/2004 2004/2003 (25.3)% .2 (19.6) 7.8 1.3 6.1 (12.1)% (3.2) (10.8) 1.0 (2.2) 3.1 2005 Form 10-K 23 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 critical 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 underlying loan 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. The prepayment rate on the third-party servicing portfolio was 16.4% in 2005, compared with 21.4% in 2004. In January 2006, TCF entered into an agreement to sell its third-party mortgage servicing rights for an amount in excess of carrying value. See Notes 1 and 9 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, 2005 and 2004: (Dollars in thousands) Interest Rate Tranche 0 to 5.50% 5.51 to 6.00% 6.01 to 6.50% 6.51% and higher At December 31, 2005 Prepayment Speed Assumption 11.6% 12.6 16.0 26.1 13.4 Weighted- Average Life (in Years) 6.8 7.1 5.6 3.3 6.4 Unpaid Balance $1,320,426 1,102,057 488,572 451,284 $3,362,339 2004 Prepayment Speed Assumption 11.3% 16.1 23.2 26.3 15.8 Weighted- Average Life (in Years) 7.5 5.8 4.0 3.3 5.8 Unpaid Balance $1,707,934 1,409,983 691,148 694,499 $4,503,564 At December 31, 2005 and 2004, 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 2005 $45.7 6.4 13.4% 8.5% 15.8% 7.5% $(2.3) $(3.1) $(5.3) $(7.1) $(1.3) $(1.5) $(3.1) $(3.4) These sensitivities are theoretical and should be used with caution. 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. Other Non-interest Income Other Non-interest Income primarily consists of gains on sales of education loans, gains on sales of buildings and branches, and other miscellaneous income. Gains of $2.1 million, $7.8 million and $3.1 million were recognized on the sales of education loans in 2005, 2004 and 2003, respec- tively. During 2005, TCF sold several buildings and one rural branch, including its deposits, resulting in total gains of $13.6 million. There were no branch sales in 2004 and 2003. 24 TCF Financial Corporation and Subsidiaries Gains on Sales of Securities Available for Sale and Losses on Termination of Debt Gains on securities available for sale of $10.7 million, $22.6 million and $32.8 million were rec- ognized on the sales of $1 billion, $1.4 billion and $816.5 million in mortgage-backed securities in 2005, 2004 and 2003, respectively. In 2003, TCF prepaid $954 million of fixed-rate FHLB advances and recorded losses on terminations of debt of $44.3 million. There were no prepayments of debt during 2005 or 2004. Non-Interest Expense Non-interest expense increased $23.9 million, or 4.1%, in 2005, and $26.8 million, or 4.8%, in 2004, and $20.8 million, or 3.9%, in 2003, compared with the respective prior year. The following table presents the components of non-interest expense: Year Ended December 31, 2005 $274,523 52,003 326,526 103,900 25,691 20,473 133,998 610,588 – $610,588 2004 $273,083 49,741 322,824 95,617 26,353 22,369 119,516 586,679 – $586,679 2003 $256,447 46,357 302,804 88,423 25,536 18,820 124,526 560,109 – $560,109 2002 $254,341 39,954 294,295 83,131 21,894 19,206 120,762 539,288 – $539,288 2001 $234,029 32,789 266,818 78,774 20,909 19,236 108,482 494,219 7,777 $501,996 Compound Annual Growth Rate 1-Year 2005/2004 5-Year 2005/2000 .5% 4.5 1.1 8.7 (2.5) (8.5) 12.1 4.1 – 4.1 5.6% 12.0 6.4 6.8 6.0 .9 6.7 6.3 N.M. 6.0 (Dollars in thousands) Compensation Employee benefits and payroll taxes Total compensation and employee benefits Occupancy and equipment Advertising and promotions Deposit account losses Other Subtotal Amortization of goodwill Total non-interest expense N.M. Not Meaningful. Compensation and Employee Benefits Compensation and employee benefits, representing 53%, 55% and 54% of total non- interest expense in 2005, 2004 and 2003, respectively, increased $3.7 million, or 1.1%, in 2005, $20 million, or 6.6%, in 2004 and $8.5 million, or 2.9%, in 2003. The $1.4 million increase in compensation expense from 2004 was primarily due to continued new branch expansion, partially offset by decreases in mortgage banking and commissions and incentives. The 2004 increase in compensation expense of $16.6 million was driven by a $9.5 mil- lion increase in retail banking operations driven by TCF’s contin- ued new branch expansion, a $6.7 million increase in incentive compensation resulting from improved performance in 2004 and a $2.1 million increase related to the 2004 acquisition of VGM Financial Services, partially offset by a $2.9 million decrease in stock compensation expense. Employee benefits and payroll expense totaled $52 million in 2005, up $2.3 million from 2004, primarily due to an increase of $1.9 million in retirement benefits expense and an increase of $1.5 million in payroll taxes, partially offset by a $1.8 million decrease in healthcare plan expenses. In 2004, employee benefits and payroll expense increased $3.4 million primarily due to an increase in retirement expense of $1.4 million and an increase in payroll taxes of $2.2 million. Employee benefits and payroll expense increased $6.4 million in 2003, pri- marily due to a $3.1 million increase in retirement expense, a $1.3 million increase in medical expenses and a $1.3 million increase in payroll taxes. See Note 17 of Notes to Consolidated Financial Statements for further information on postretirement plans. Occupancy and Equipment Occupancy and equipment expenses increased $8.3 million in 2005, $7.2 million in 2004 and $5.3 million in 2003. The increases were primarily due to TCF’s new branch expansion and retail banking and leasing activities. Advertising and Promotions Advertising and promotions expense decreased $662 thousand in 2005 following increases of $817 thousand and $3.6 million in 2004 and 2003, respectively. The decrease in 2005 was primarily due to a $3.7 million decrease in marketing and promotions, partially offset by an increase of $2.1 million in loyalty program expenses. The increases in 2004 and 2003 were attributable to additional advertising and promotions expenses focused on the acquisition and retention of TCF’s deposit customer base. Deposit Account Losses Deposit account losses totaled $20.5 million in 2005, down $1.9 million from 2004, primarily due to lower net uncollectible overdraft losses, partially offset by higher external fraud losses. Deposit account losses increased 2005 Form 10-K 25 $3.8 million in 2004 as a result of increased customer transaction activity. See Note 1 of Notes to Consolidated Financial Statements for additional information concerning deposit account losses. Other Non-Interest Expense Other non-interest expense increased $14.4 million, or 12.1%, in 2005, primarily due to increases in card processing and issuance expenses related to the overall increase in card volumes and increases in net real estate expense as a result of net recoveries on sales of foreclosed properties in 2004. In 2004, non-interest expense decreased $5 million, or 4%, primarily attributable to net real estate expense, which decreased $3.1 million, driven by $3.4 million of net recoveries on sales of foreclosed properties and a decrease in mortgage banking expenses of $2 million due to the decline in refinance activity and the previously discussed restructuring of the mortgage banking business. In 2003, other non-interest expense increased $3.8 million, or 3.1%, primarily due to higher levels of mortgage banking production and prepayment activity. Income Taxes Income tax expense represented 30.30% of income before income tax expense during 2005, compared with 33.68% and 34.14% in 2004 and 2003, respectively. The lower effective income tax rate in 2005 was primarily due to the closing of certain previous years’ tax returns, clarification of existing state tax legislation and developments in income tax audits. The lower effective tax rate in 2004 compared with 2003 primarily reflects increases in investments in tax-advantaged affordable housing limited partnerships and lower state income taxes. TCF has a Real Estate Investment Trust (“REIT”) and a related foreign operating company (“FOC”) that acquire, hold and man- age real estate loans and other assets. These companies are consolidated with TCF 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 and state tax laws. If these companies fail to meet any of the required provisions of federal and state tax laws, TCF’s tax expense could increase. TCF’s FOC operates under laws in certain states (including Minnesota and Illinois) that allow deductions for income derived from FOCs. Use of these companies is and has been the subject of federal and state audits. 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 stan- dards. 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 income 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 prevailing federal and state income tax rates. If such rates change, deferred income tax assets and liabilities must be adjusted in the period of change through a charge or credit to income tax expense. Further detail on income taxes is provided in Note 13 of Notes to Consolidated Financial Statements. Consolidated Financial Condition Analysis Securities Available for Sale Securities available for sale increased $28.7 million to $1.6 billion at December 31, 2005. This increase reflects purchases of $1.3 billion of mortgage-backed securities, partially offset by sales of $1 billion of mortgage-backed securities, in which the company recognized $10.7 million in gains, and normal payment and prepayment activity. At December 31, 2005, the increase in mortgage-backed securities partially offsets the declines in residential loans in the treasury services portfolio. TCF’s securities available for sale portfolio included $1.6 billion and $5.3 million of fixed-rate and adjustable-rate mortgage- backed securities, respectively. Net unrealized losses on securities available for sale totaled $33.2 million at December 31, 2005, compared with net unrealized losses of $2.2 million at December 31, 2004. TCF may, from time to time, sell mortgage-backed securities and utilize the proceeds to either reduce borrowings or fund growth in loans and leases. 26 TCF Financial Corporation and Subsidiaries 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, 2005 2004 2003 2002 2001 Portfolio Distribution: Consumer home equity and other: Home equity: Lines of credit Closed-end loans Total consumer home equity Other Total consumer home equity and other Commercial real estate Commercial business Total commercial $ 1,389,741 3,758,947 $1,472,165 2,909,592 $1,093,945 2,493,715 $ 923,773 2,031,531 $ 743,983 1,699,414 (5.6)% 29.2 5,148,688 38,896 4,381,757 36,831 3,587,660 42,681 2,955,304 50,578 2,443,397 65,936 5,187,584 4,418,588 3,630,341 3,005,882 2,509,333 2,297,500 435,233 2,732,733 2,154,396 424,135 2,578,531 1,916,701 427,696 2,344,397 1,835,788 440,074 2,275,862 1,622,461 422,381 2,044,842 Compound Annual Growth Rate 1-Year 2005/2004 5-Year 2005/2000 15.2% 20.7 19.1 (13.9) 18.4 10.9 1.2 8.9 11.9 (26.8) 3.6 17.5 5.6 17.4 6.6 2.6 6.0 9.3 (24.0) 8.6 Leasing and equipment finance (1) Residential real estate Total loans and leases 1,503,794 770,441 $10,194,552 1,375,372 1,014,166 $9,386,657 1,160,397 1,212,643 $8,347,778 1,039,040 1,800,344 $8,121,128 956,737 2,733,290 $8,244,202 (1) Excludes operating leases included in other assets. (In thousands) At December 31, 2005 Geographic Distribution: Minnesota Illinois Michigan Wisconsin Colorado California Florida Ohio Texas Indiana Other Total Consumer Home Equity and Other $2,072,538 1,446,076 926,737 466,707 227,925 1,992 8,003 3,863 703 11,443 21,597 $5,187,584 Commercial Real Estate and Commercial Business $ 725,913 572,725 804,487 394,661 33,792 9,344 2,665 40,850 2,649 28,995 116,652 $2,732,733 $ Leasing and Equipment Finance 66,051 51,073 86,413 37,347 34,082 192,774 121,848 62,237 94,128 34,306 723,535 $1,503,794 Residential Real Estate $402,257 118,611 201,683 22,588 4,625 – 734 4,427 965 932 13,619 $770,441 Total $ 3,266,759 2,188,485 2,019,320 921,303 300,424 204,110 133,250 111,377 98,445 75,676 875,403 $10,194,552 Consumer loans increased $769 million from December 31, 2004 to $5.2 billion at December 31, 2005, driven by an increase of $766.9 million in home equity loans. TCF’s home equity lines of credit only require regular payments of interest and do not require regular payments of principal. TCF’s home equity portfolio does not contain any loans with multiple payment options or loans with “teaser” rates. At December 31, 2005, 38% of the home equity portfolio carries a variable interest rate tied to the prime rate, compared with 62% at December 31, 2004. This decrease is related to a shift in customer preferences for fixed-rate loans with lower yields than current variable-rate loans. Outstanding balances on home equity lines of credit were 51.8% of total lines of credit balances at December 31, 2005, compared with 49.6% at December 31, 2004. At December 31, 2005, the weighted-average loan-to-value ratio for the home equity portfolio was 73%, compared with 75% at December 31, 2004. 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 720 and 716 at December 31, 2005 and 2004, respectively. 2005 Form 10-K 27 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 At December 31, 2005 Percent of Total 1.0% 11.1 33.5 54.4 100.0% Over 30-Day Delinquency as a Percentage of Balance .60% .37 .35 .35 .36% $ Balance 32,825 449,291 1,750,531 2,149,110 $4,381,757 2004 Percent of Total .7% 10.3 40.0 49.0 100.0% Over 30-Day Delinquency as a Percentage of Balance 3.02% .38 .32 .32 .35% $ Balance 51,004 571,469 1,725,049 2,801,166 $5,148,688 (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, 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: (In thousands) Apartments Retail services Office buildings Warehouse/industrial buildings Hotels and motels Health care facilities Other Total Permanent $ 517,989 490,100 411,128 268,562 110,975 53,650 265,549 $2,117,953 (Dollars in thousands) Apartments Retail services Office buildings Warehouse/industrial buildings Hotels and motels Health care facilities Other Total Balance $ 528,054 523,691 414,793 271,197 125,815 53,650 380,300 $2,297,500 At December 31, 2005 Construction and Development $ 10,065 33,591 3,665 2,635 14,840 – 114,751 $179,547 Total $ 528,054 523,691 414,793 271,197 125,815 53,650 380,300 $2,297,500 2004 Construction and Development $ 2,795 28,142 35,865 1,729 15,700 9,308 102,479 $196,018 Permanent $ 524,253 382,068 420,874 258,561 122,236 44,344 206,042 $1,958,378 At December 31, 2005 Number of Loans 636 426 260 259 35 17 300 1,933 Over 30-Day Delinquency Rate as a Percentage of Balance 1.32% – .68 – – – .07 .44% Balance $ 527,048 410,210 456,739 260,290 137,936 53,652 308,521 $2,154,396 2004 Number of Loans 650 375 241 243 35 26 292 1,862 Total $ 527,048 410,210 456,739 260,290 137,936 53,652 308,521 $2,154,396 Over 30-Day Delinquency Rate as a Percentage of Balance –% – – – – – .01 –% 28 TCF Financial Corporation and Subsidiaries Commercial real estate loans increased $143.1 million from December 31, 2004 to $2.3 billion at December 31, 2005. Commercial business loans increased $11.1 million in 2005 to $435.2 million at December 31, 2005. 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, 2005, approximately 99% of TCF’s commercial real estate and commercial business loans were secured either by properties or underlying business assets. At December 31, 2005 and 2004, the construction and development portfolio had no loans over 30-days delinquent. At December 31, 2005, approximately 93% 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) Other Total At December 31, 2005 Percent of Total Over 30-Day Delinquency as a Percentage of Balance 58.4% 20.2 14.1 5.2 2.1 100.0% .26% .53 .98 – .60 .41% Balance $ 747,964 258,094 200,819 83,913 84,582 $1,375,372 2004 Percent of Total Over 30-Day Delinquency as a Percentage of Balance 54.4% 18.8 14.6 6.1 6.1 100.0% .51% .75 1.10 – 1.68 .67% Balance $ 878,414 303,778 211,741 78,338 31,523 $1,503,794 (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. Transaction sizes 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. (Dollars in thousands) Equipment Type Manufacturing Specialty vehicles Construction Technology and data processing Medical Furniture and fixtures Printing Trucks and trailers Material handling Other Total At December 31, 2005 Balance $ 277,895 257,497 236,939 222,623 199,729 60,278 58,600 56,824 39,814 93,595 $1,503,794 Percent of Total 18.5% 17.1 15.8 14.8 13.3 4.0 3.9 3.8 2.6 6.2 100.0% Balance $ 251,157 236,582 182,612 229,160 157,745 51,192 45,394 74,870 33,810 112,850 $1,375,372 2004 Percent of Total 18.2% 17.2 13.3 16.7 11.5 3.7 3.3 5.4 2.5 8.2 100.0% 2005 Form 10-K 29 The leasing and equipment finance portfolio increased $128.4 million from December 31, 2004 to $1.5 billion at December 31, 2005. Winthrop primarily leases technology and data processing equipment to companies nationwide. Total loan and lease origina- tions and purchases for TCF Equipment Finance and Winthrop were $728 million and $117.8 million, respectively, for 2005, compared with $616 million and $101.8 million, respectively, for 2004. The backlog of approved transactions increased to $249.2 million at December 31, 2005, from $195.3 million at December 31, 2004. TCF’s leasing activity is subject to risk of cyclical downturns and other adverse economic developments. In an adverse economic environment, there may be a decline in the demand for some types of equipment, resulting in a decline in the amount of new equipment being placed into service as well as a decline in equip- ment values for equipment previously placed in service. At December 31, 2005 and 2004, $55.2 million, and $48.5 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 residuals. 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, 2005, lease residuals totaled $32.8 million, down from $35.2 million, excluding the leveraged lease residual, at December 31, 2004. The decline in residential real estate loans during 2005 was due to normal amortization of loan balances and loan 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, 2005, TCF’s resi- dential real estate loan portfolio was comprised of $616.8 million of fixed-rate loans and $153.6 million of adjustable-rate loans. Loan and leases outstanding at December 31, 2005 are shown in the following table by maturity: (In thousands) Amounts due: Within 1 year After 1 year: 1 to 2 years 2 to 3 years 3 to 5 years 5 to 10 years 10 to 15 years Over 15 years Total after 1 year Total Amounts due after 1 year on: Fixed-rate loans and leases Variable- and adjustable-rate loans Total after 1 year Consumer Home Equity and Other Commercial Real Estate At December 31, 2005 (1) Leasing and Equipment Finance Commercial Business Residential Real Estate Total Loans and Leases $ 277,363 $ 295,257 $215,325 $ 557,442 $ 37,117 $ 1,382,504 284,566 328,047 563,126 1,362,725 785,104 1,566,787 4,890,355 $5,167,718 288,520 213,268 429,162 896,283 147,314 29,227 2,003,774 $2,299,031 $3,112,570 1,777,785 $4,890,355 $ 452,654 1,551,120 $2,003,774 122,264 30,031 44,322 19,981 14 – 216,612 $431,937 $ 68,951 147,661 $216,612 375,050 262,042 259,846 44,442 – – 941,380 $1,498,822 $ 941,380 – $ 941,380 38,046 35,922 65,299 157,622 126,995 302,601 726,485 $763,602 1,108,446 869,310 1,361,755 2,481,053 1,059,427 1,898,615 8,778,606 $10,161,110 $579,813 146,672 $726,485 $ 5,155,368 3,623,238 $ 8,778,606 (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. Allowance for Loan and Lease Losses The determination of the allowance for loan and lease losses is a critical accounting estimate which involves management’s judgment on a number of factors such as historical trends in net charge-offs, delinquencies in the loan and lease portfolio, values of underlying loan and lease collateral, impaired loan analysis, general economic condi- tions and management’s assessment of credit risk in the current loan and lease portfolio. The allowance for loan and lease losses is increased by the provision for credit losses charged to expense and reduced by loan and lease charge-offs, net of recoveries. 30 TCF Financial Corporation and Subsidiaries The Company considers the allowance for loan and lease losses of $60.4 million appropriate to cover losses inherent in the loan and lease portfolios as of December 31, 2005. 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 ongoing credit review process, will not require significant changes (increases or decreases) in the allowance for loan and lease losses and the associated provisions for credit 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 ade- quacy 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 6 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 appro- priate conclusions 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 2005 include the ratio of net charge-offs to average loans and leases of .25%, the year-end allowance as a multiple of net charge-offs of 2.5X, and income before income taxes and provi- sion for loan losses as a multiple of net charge-offs of 15.7X. 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 Charge-offs: Consumer home equity and other Commercial real estate Commercial business Leasing and equipment finance Residential real estate Total charge-offs Recoveries: Consumer home equity and other Commercial real estate Commercial business Leasing and equipment finance Residential real estate Total recoveries Net charge-offs Provision charged to operations Acquired allowance Balance at end of year 2005 $ 79,878 (6,359) (74) (704) (23,137) (110) (30,384) 1,149 82 2,986 1,644 19 5,880 (24,504) 5,022 – $ 60,396 Year Ended December 31, 2003 $ 77,008 2002 $ 75,028 2004 $ 76,619 (4,821) (602) (235) (8,508) (81) (14,247) 1,589 126 82 2,963 8 4,768 (9,479) 10,947 1,791 $ 79,878 (5,362) (1,381) (920) (8,620) (86) (16,369) 2,173 45 138 1,083 9 3,448 (12,921) 12,532 – $ 76,619 (6,939) (2,181) (5,952) (9,230) (59) (24,361) 2,965 43 54 1,264 9 4,335 (20,026) 22,006 – $ 77,008 2001 $ 66,669 (6,605) (122) (429) (9,794) (1) (16,951) 3,487 103 193 649 - 4,432 (12,519) 20,878 – $ 75,028 Key Indicators: Net charge-offs as a percentage of average loans and leases 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 .25% 2.5X 15.7X .11% 8.4 X .16% 5.9 X .25% 3.8 X 41.7 X 26.3 X 19.0 X .15% 6.0 X 28.0 X 2005 Form 10-K 31 TCF’s methodologies for determining and allocating the allowance for loan and lease losses focus on ongoing reviews of larger individual loans and leases, historical net charge-offs, the level of impaired and non-performing assets, the overall risk characteristics of the portfolios, changes in character or size of the portfolios, geographic location, prevailing economic condi- tions and other relevant factors. The various factors used in the methodologies are reviewed on a periodic basis. The total allowance for loan and lease losses is generally available to absorb losses from any segment of the portfolio. The allocation of TCF’s allowance for loan and lease losses is disclosed in the following table and is subject to change based on the changes in criteria used to evaluate the allowance and is not necessarily indicative of the trend of future losses in any particular portfolio. In 2005, TCF refined its allowance for loan and lease losses allocation methodology resulting in an allocation of the entire allowance for loan and lease losses to the individual loan and lease portfolios. This change resulted in the allocation of the previous unallocated portion of the allowance for loan and lease losses. The allocation of TCF’s allowance for loan and lease losses is as follows: (Dollars in thousands) Consumer home equity and other Commercial real estate Commercial business Leasing and equipment finance Residential real estate Unallocated Total allowance balance N.A. Not Applicable. At December 31, 2003 2002 2004 2005 2001 $16,643 $ 9,939 $ 9,084 $ 8,532 $ 8,355 24,459 25,142 21,222 12,117 11,797 6,602 11,774 13,515 15,313 2,184 942 616 16,139 16,139 – $60,396 $79,878 $76,619 $77,008 $75,028 22,176 15,910 12,881 1,370 16,139 20,742 7,696 24,566 796 16,139 Allocations as a Percentage of Total Loans and Leases Outstanding by Type At December 31, 2005 2004 2003 2002 2001 .32% .92 1.52 1.02 .08 N.A. .59 .22% .96 1.81 1.79 .08 N.A. .85 .25% 1.31 2.76 1.16 .08 N.A. .92 .28% 1.21 3.62 1.24 .08 N.A. .95 .33% 1.51 2.87 1.23 .08 N.A. .91 The allocated allowance balances for TCF’s residential and consumer loan portfolios, at December 31, 2005 reflect the Company’s credit quality and related low level of historical net charge-offs for these portfolios. The decrease in the allocated allowance for leasing and equipment finance in 2005 is primarily related to the charge-off of the investment in the leveraged lease. TCF has no other leveraged leases or exposure to the airline industry. The following table sets forth additional information regarding net charge-offs: (Dollars in thousands) Consumer home equity and other Commercial real estate Commercial business Leasing and equipment finance (1) Residential real estate Total Year Ended December 31, 2005 2004 Net Charge-offs (Recoveries) $ 5,210 (8) (2,173) 21,384 91 $24,504 % of Average Loans and Leases .11% – (.51) 1.50 .01 .25% Net Charge-offs $3,232 476 153 5,545 73 $9,479 % of Average Loans and Leases .08% .02 .04 .43 .01 .11% (1) For the year ended December 31, 2005, leasing and equipment finance net charge-offs excluding the leveraged lease were $2.6 million, or .18% of average loans and leases. 32 TCF Financial Corporation and Subsidiaries 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 from 2004 to 2005 was primarily due to the $18.8 million charge-off of the investment in the leveraged lease and the sale of several foreclosed commer- cial real estate properties. Approximately 75% of non-performing assets at December 31, 2005 consisted of, or were secured by, residential real estate. 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 well secured and in the process of collection. Non-performing assets are summarized in the following table: (Dollars in thousands) Non-accrual loans and leases: Consumer home equity and other 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 Total assets 2005 2004 At December 31, 2003 2002 2001 $18,410 188 2,207 6,434 2,409 29,648 14,877 2,834 17,711 $47,359 $12,187 1,093 4,533 25,678 3,387 46,878 11,726 5,465 17,191 $64,069 $12,052 2,490 2,931 13,940 3,993 35,406 20,462 12,992 33,454 $68,860 $11,163 3,213 4,777 18,689 5,798 43,640 16,479 10,093 26,572 $70,212 $16,473 11,135 3,550 13,857 6,959 51,974 12,830 1,825 14,655 $66,629 .47% .35 .69% .52 .83% .61 .87% .58 .82% .59 Included in non-performing assets are loans that are considered impaired. Impaired loans totaled $3.8 million and $8.1 million at December 31, 2005 and December 31, 2004, respectively. The related allowance for credit losses on impaired loans was $1.6 million at December 31, 2005, compared with $3.7 million at December 31, 2004. All of the impaired loans were on non-accrual status. There were no impaired loans at December 31, 2005 and 2004 which did not have a related allowance for loan losses. The average balance of impaired loans was $5.3 million for 2005, compared with $9.8 million for 2004. The increase in non-accrual consumer loans is primarily due to increased bankruptcies resulting from a change in bankruptcy laws in October, 2005. 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, 2005 Percentage of Loans and Leases .26% .11 .06 .43% Principal Balances $26,383 10,746 6,475 $43,604 2004 Percentage of Loans and Leases .23% .09 .05 .37% Principal Balances $20,776 8,659 4,950 $34,385 2005 Form 10-K 33 The following table summarizes TCF’s over 30-day delinquent loan and lease portfolio, by loan type: (Dollars in thousands) Consumer home equity and other Commercial real estate Commercial business Leasing and equipment finance Residential real estate Total At December 31, 2005 Percentage of Portfolio .36% .44 .19 .41 1.04 .43% Principal Balances $18,556 10,038 819 6,182 8,009 $43,604 Principal Balances $15,436 32 404 8,997 9,516 $34,385 2004 Percentage of Portfolio .35% – .10 .67 .94 .37% Potential Problem Loans and Leases In addition to non- performing assets, there were $54.8 million of loans and leases at December 31, 2005, for which management has concerns regarding the ability of the borrowers to meet existing repayment terms, compared with $71.1 million at December 31, 2004. These loans and leases are primarily classified for regulatory purposes as substan- dard 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 com- mercial real estate or other 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. Leasing and equipment finance had no potential problem loans funded on a non-recourse basis at December 31, 2005, compared with $1.2 million at December 31, 2004. Potential problem loans and leases are summarized as follows: (Dollars in thousands) Commercial real estate Commercial business Leasing and equipment finance Total At December 31, 2005 $35,341 11,793 7,648 $54,782 2004 $34,138 18,112 18,816 $71,066 Change $ $ 1,203 (6,319) (11,168) $(16,284) % 3.5% (34.9) (59.4) (22.9) 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 continue 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, 2005, TCF had over $2.5 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 (parent company only) include cash dividends from TCF’s wholly owned bank subsidiary, issuance of equity securities and borrow- ings under a $105 million line of credit. TCF Bank’s ability to pay dividends or make other capital distributions to TCF is restricted by regulation and may require regulatory approval. 34 TCF Financial Corporation and Subsidiaries Deposits Checking, savings and money market deposits are an important source of low-cost funds and fee income for TCF. Deposits totaled $9.1 billion at December 31, 2005, up $1.1 billion from December 31, 2004. Checking, savings and money market deposits totaled $7.2 billion, up $702 million from December 31, 2004, and comprised 79% of total deposits at December 31, 2005, compared with 81.6% of total deposits at December 31, 2004. The average balance of these deposits for 2005 was $6.7 billion, an increase of $457 million over the $6.3 billion average balance for 2004. At December 31, 2005, certificates of deposit increased $447 million from December 31, 2004. TCF had no brokered deposits at December 31, 2005 or 2004. TCF’s weighted-average rate for deposits, including non-interest bearing deposits, was 1.64% at December 31, 2005, up from .69% at December 31, 2004, primarily reflecting increases in Premier checking and Premier savings average balances and overall increases in interest rates. New Branch Expansion Key to TCF’s growth is its continued investment in new branch expansion. New branches are an impor- tant source of new customers in both deposit products and con- sumer 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 has slowed. 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 larger and more profitable. During 2005, TCF opened 28 new branches. The focus on opening new branches will continue in 2006 with the planned opening of 24 branches, including 17 new traditional branches, five new supermarket branches and two new campus branches. During the fourth quarter of 2005, TCF announced plans to enter the Phoenix, Arizona metropolitan area market. Initially, TCF plans to open several consumer loan production offices during 2006 with con- struction of retail branches to begin later in 2006 or early 2007. At December 31, 2005, 153, or 34%, of TCF’s 453 branches were opened since January 1, 2000. Additional information regarding TCF’s branches opened since January 1, 2000 is displayed in the table below: (Dollars in thousands) Number of new branches opened during the year: Traditional Supermarket Campus Total Number of new branches at year end: Traditional Supermarket Campus Total Percent of total branches Number of checking accounts Deposits: Checking Savings Money market Subtotal Certificates of deposit Total deposits Total fees and other revenue for the year N.M. Not Meaningful. 2005 18 7 3 28 71 79 3 153 33.8% 266,512 $ 437,074 319,816 30,294 787,184 351,295 $1,138,479 68,220 $ At or For the Year Ended December 31, 2003 2002 2004 Percentage Increase 2005/2004 2001 19 11 – 30 14 5 – 19 53 72 – 125 29.1% 206,229 34 61 – 95 23.7% 142,467 12 15 – 27 20 56 – 76 19.2% 82,604 $322,347 156,480 20,466 499,293 70,832 $570,125 $ 50,969 $173,091 110,372 20,245 303,708 49,081 $352,789 $ 28,915 $ 89,836 102,279 15,711 207,826 42,165 $249,991 $ 16,747 6 21 – 27 8 41 – 49 13.1% 41,870 $36,693 16,396 15,998 69,087 27,621 $96,708 $ 7,191 N.M. N.M. N.M. N.M. N.M. N.M. N.M. N.M. N.M. 29.2% 35.6 104.4 48.0 57.7 N.M. 99.7 33.8 2005 Form 10-K 35 Borrowings Borrowings totaled $3 billion at December 31, 2005, down $121.5 million from December 31, 2004. The decrease was primarily due to the overall increase in deposits exceeding the growth in assets. During 2005, TCF Bank issued $50 million of subordinated notes due in 2015. 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 1.56%. 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 as a permanent capital distribution. See Notes 11 and 12 of Notes to Consolidated Financial Statements for detailed information on TCF’s borrowings. The weighted-average rate on borrowings increased to 4.49% at December 31, 2005, from 3.37% at December 31, 2004 primarily due to the impact of rising short- term interest rates. TCF does not utilize unconsolidated subsidiaries or special purpose entities to provide off-balance sheet borrowings. See Note 19 of Notes to Consolidated Financial Statements for further information relating to off-balance sheet instruments. TCF Financial (parent company only) has a $105 million line of credit maturing in April 2006, which is unsecured and contains certain 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. At December 31, 2005, TCF had $16.5 million outstanding on this bank line of credit at an average interest rate of 5.15%, compared with $14 million outstanding at December 31, 2004 at an average interest rate of 3.18%. Contractual Obligations and Commitments As disclosed in the Notes to Consolidated Financial Statements, TCF has certain obliga- tions and commitments to make future payments under contracts. At December 31, 2005, the aggregate contractual obligations (excluding bank deposits) and commitments are as follows: (In thousands) Contractual Obligations Total borrowings Annual rental commitments under non-cancelable operating leases Campus marketing agreements Construction contracts and land purchase commitments for future branch sites Payments Due by Period Less than 1 Year $805,519 26,891 1,623 1-3 Years $229,292 42,889 2,770 4-5 Years $224,647 After 5 Years $1,723,678 34,187 5,103 83,737 41,572 Total $2,983,136 187,704 51,068 13,996 $3,235,904 13,996 $848,029 – $274,951 – $263,937 – $1,848,987 (In thousands) Commitments Commitments to lend: Consumer home equity and other Commercial Leasing and equipment finance Other Total commitments to lend Loans serviced with recourse Standby letters of credit and guarantees on industrial revenue bonds Total $1,750,738 811,652 74,418 77,766 2,714,574 71,332 100,892 $2,886,798 Amount of Commitment – Expiration by Period Less than 1 Year 4-5 Years 1-3 Years $ 8,470 494,514 74,418 77,766 655,168 1,548 76,436 $733,152 $ 15,239 230,646 – – 245,885 3,237 5,735 $254,857 After 5 Years $1,691,864 19,531 – – 1,711,395 63,584 $ 35,165 66,961 – – 102,126 2,963 18,071 $123,160 650 $1,775,629 Commitments to lend 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 necessar- ily represent future cash requirements. Collateral predominantly consists of residential and commercial real estate. 36 TCF Financial Corporation and Subsidiaries Campus marketing agreements consist of fixed or minimum obligations for exclusive marketing and naming rights with 11 campuses. TCF is obligated to make various annual payments for these rights in the form of royalties and scholarships through 2023. TCF also has various renewal options which may extend the terms of these agreements. On April 21, 2005, TCF’s Board of Directors and the University of Minnesota Board of Regents ratified contracts for TCF’s sponsorship of a new on-campus football stadium to be called “TCF Bank Stadium” and an extension of TCF’s sponsorship of the U Card. The U Card serves as a key for access to a variety of university services. TCF also sponsors similar cards for other campuses. These obligations are included in the table above. The naming rights agreement with the University of Minnesota is dependent upon several contingen- cies, including receipt of necessary state and private funding and completion of stadium construction. On December 22, 2005, TCF and the University of Minnesota announced an extension of the funding contingency period under the stadium naming rights agreement to June 30, 2006. The extension was necessary because the Minnesota Legislature has not taken action on a bill to finance the state’s portion of the stadium’s cost. Campus marketing agree- ments are an important element of TCF’s campus banking strategy. See Note 19 of Notes to Consolidated Financial Statements for information on loans serviced with recourse and standby letters of credit and guarantees. Stockholders’ Equity Stockholders’ equity at December 31, 2005 was $998.5 million, or 7.5% of total assets, up from $958.4 million, or 7.8% of total assets, at December 31, 2004. The increase in stockholders’ equity was primarily due to net income of $265.1 million, partially offset by the repurchase of 3.5 million shares of TCF’s common stock at a cost of $93.5 million, the payment of $114.5 million in dividends on common stock and a $19.8 million decrease in accumulated comprehensive income for the year ended December 31, 2005. On May 21, 2005, TCF’s Board of Directors authorized the repurchase of up to an additional 5% of TCF’s common stock, or 6.7 million shares. At December 31, 2005, TCF had 6.7 million shares remaining in its stock repurchase programs authorized by its Board of Directors. For the year ended December 31, 2005, average total equity to average assets was 7.43%, compared with 7.94% for the year ended December 31, 2004. Dividends paid to common shareholders on a per share basis totaled 85 cents in 2005, an increase of 13.3% from 75 cents in 2004. TCF’s dividend payout ratio was 42.5% in 2005 and 40.3% in 2004. The Company’s primary funding sources for common dividends are dividends received from its subsidiary bank. At December 31, 2005, TCF Financial and TCF Bank exceeded their regulatory capital requirements and are considered “well-capitalized” under guide- lines established by the Federal Reserve Board and the Office of the Comptroller of the Currency. See Notes 14 and 15 of Notes to Consolidated Financial Statements. TCF has used stock options as a form of employee compensation to a limited extent in prior years. At December 31, 2005, the number of incentive stock options out- standing was 259,800, or .19%, of total shares outstanding. 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 May 2005, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 154, Accounting Changes and Error Corrections. This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 carries forward the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. However, SFAS 154 changes the requirements for the accounting and reporting of a change in accounting principle. Under this Statement, every voluntary change in accounting principle requires retrospective application to prior periods’ financial statements, unless it is impracticable. It also applies to changes required by an accounting pronounce- ment in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, although earlier application is permitted for changes and corrections made in fiscal years beginning after June 1, 2005. TCF expects no significant effect on TCF financial statements as a result of the adoption of this statement. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard 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, 2005 Form 10-K 37 Statement of Cash Flows. It requires that all stock-based compen- sation now be measured at fair value and recognized as expense in the income statement. This Statement also clarifies and expands guidance on measuring fair value of stock compensation, 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 Cash Flows. Various other changes are also required. This Statement is effective for TCF beginning January 1, 2006. TCF adopted the recognition provisions of SFAS 123 in January 2000. TCF expects no significant effect on TCF financial statements as a result of the adoption of this Statement. Fourth Quarter Summary In the fourth quarter of 2005, TCF reported net income of $65.5 million, compared with $67.4 million in the fourth quarter of 2004. Diluted earnings per common share was 50 cents for the fourth quarter of 2005, unchanged from the same 2004 period. TCF opened 13 new branches in the fourth quarter of 2005, consisting of nine traditional branches, three supermar- ket branches and one campus branch. Net interest income was $129.3 million and $126.5 million for the quarter ended December 31, 2005 and 2004, respectively. The net interest margin was 4.31% and 4.56% for the fourth quarter of 2005 and 2004, respectively. TCF’s net interest income increased by $2.8 million, or 2.2% over the fourth quarter of 2004. Of this increase in net interest income, $9.5 million was due to volume changes, partially offset by a decrease of $6.7 million due to interest rate changes. TCF provided $3.6 million for credit losses in the fourth quarter of 2005, compared with $4.1 million in the fourth quarter of 2004. Net loan and lease charge-offs were $2.3 million, or .09% of average loans and leases outstanding, compared with $3.2 million, or .14% of average loans and leases outstanding during the same 2004 period. Non-interest income decreased $7.4 million, or 5.6%, during the fourth quarter of 2005 to $125 million. Banking fees and other revenue increased $2.2 million, or 2.3%, over the fourth quarter of 2004. Card revenues, included in banking fees and other revenue, totaled $21.4 million for the fourth quarter of 2005, up $3.8 mil- lion, or 21.6% over the same quarter in 2004. The increase was pri- marily due to increased customer transaction volumes and related fees. Leasing and equipment finance revenues were down $5.6 million, or 26.8%, over the fourth quarter of 2004, primarily due to decreases in sales-type lease revenues. Non-interest expense increased $4.2 million, or 2.7%, in the fourth quarter of 2005 to $158.5 million. Compensation and employee benefits decreased $3.6 million, or 4.2%, from the fourth quarter of 2004, primarily driven by a $3.8 million decrease in incentive compensation. Occupancy and equipment expenses increased $2.8 million, or 11%, from the fourth quarter of 2004, with $936 thousand relating to costs associated with new branch expansion. In the fourth quarter of 2005, the effective income tax rate was 28.91% of income before tax expense compared with 32.96% for the fourth quarter of 2004. The lower effective tax rate for the fourth quarter of 2005, compared with the fourth quarter of 2004, was primarily due to the closing of certain previous years’ tax returns, clarification of existing state tax legislation and devel- opments in income tax audits. Legislative, Legal and Regulatory Developments Federal and state legislation imposes numerous legal and regula- tory requirements on financial institutions. Future legislative or regulatory 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. 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, 2005 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 on Form 10-K 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 dif- fer materially from historical performance and forward-looking statements about TCF’s expected financial results or other plans and 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; an inability 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 rela- tionships or any of the supermarket chains in which TCF maintains supermarket branches; changes in accounting standards or inter- pretations of existing standards or monetary, fiscal or tax policies of the federal or state governments; adverse findings in tax audits or regulatory examinations; changes in credit and other risks posed by TCF’s loan, lease and investment portfolios, including 38 TCF Financial Corporation and Subsidiaries declines in commercial or residential real estate values; imposition of vicarious liability on TCF as lessor in its leasing operations; denial of insurance coverage for claims made by TCF; technological, computer-related or operational difficulties or loss or theft of information; 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 earn- ings; and results of litigation, including reductions in card revenues resulting from litigation brought by various merchants or merchant organizations against Visa; 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk TCF’s results of operations are dependent to a large degree on its net interest income and its ability to manage interest-rate risk. Although TCF manages other risks, such as credit risk, liquidity risk, operational and other risks, the Company considers interest-rate risk to be its most significant market risk. See “Item 1A. Risk Factors – Operational Risk Management” for further discussion. 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 interest-rate risk. TCF, like most financial institutions, has material interest-rate risk exposure to changes in both short-term and long-term interest rates as well as variable interest rate indices (e.g., the prime rate). 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 main- taining acceptable levels of interest-rate risk and liquidity risk and facilitating the funding needs of the Company. TCF utilizes net interest income simulation models to estimate the near-term effects (next twelve months) of changing interest rates on its net interest income, relative to a base case scenario. Net interest income simulation involves forecasting 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, 2005, net interest income is estimated to increase by 1.4%, compared with the base case scenario, over the next twelve months if short- and long-term interest rates were to sustain an immediate increase of 100 basis points. In the event short- and long-term interest rates were to decline by 100 basis points, net interest income is estimated to decrease by 2.4%, compared with the base case scenario, over the next twelve months. Management exercises its best judgment in making assump- tions regarding loan prepayments, deposit withdrawals, calls on wholesale borrowings 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. In addition to the net interest income simulation model, man- agement utilizes an interest rate gap measure (difference between interest-earning assets and interest-bearing liabilities repricing within a given period). While the interest rate gap measurement has some limitations, including no assumptions regarding future asset or liability production and a static interest rate assumption (large changes may occur related to these items), the interest rate gap represents the net asset or liability sensitivity at a point in time. An interest rate gap measure could be significantly affected by external factors such as loan prepayments, early withdrawals of deposits, changes in the correlation of various interest-bearing instruments, competition, or a rise or decline in interest rates. TCF’s one-year interest rate gap was a positive $318.4 million, or 2.4% of total assets at December 31, 2005, compared with a positive $585.3 million, or 4.7% of total assets at December 31, 2004. 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. The decrease in the gap position compared with December 31, 2004 was primarily due to a decrease in variable-rate loans, a decrease in assumed prepayments on fixed- and adjustable-rate loans and investments, and an increase in rate-sensitive deposits, partially offset by the extensions of long-term borrowings. Since December 31, 2004, short-term interest rates have increased approximately 200 basis points, while the 10-year Treasury rate has increased only about 15 basis points. This flattening of the yield curve has resulted in a change in TCF loan 2005 Form 10-K 39 customer preference toward fixed-rate loans versus variable-rate loans, including both new loan originations and refinancing of existing variable-rate loans to fixed-rate loans. As a result, fixed-rate loans have increased and variable-rate loans have decreased. In response to this changing mix of assets, manage- ment extended $200 million of borrowings in the first quarter of 2005, $300 million in the third quarter and $1.1 billion in the fourth quarter. If interest rates remain at current levels, TCF could experience continued compression of its net interest mar- gin due primarily to the ongoing shift of higher yielding variable- rate loans to lower yielding fixed-rate loans and lower-cost deposits to higher-cost deposits. If interest rates fall, TCF could experience an increase in prepayments of fixed-rate mortgage- backed securities, residential real estate loans, consumer loans and commercial real estate loans, causing further compression of its net interest margin. An increase in long-term interest rates would likely have a favorable impact on TCF’s net interest income, but may be partially diminished by an adverse impact on TCF’s deposit account balances, if customers transfer some of their funds to higher interest rate deposit products or other investments, resulting in an increase in the total cost of funds for TCF. TCF estimates that an immediate 100 basis point decrease in current mortgage loan interest rates would increase prepayments on the $5.4 billion of fixed-rate mortgage-backed securities, residential real estate loans and consumer loans at December 31, 2005, by approximately $903 million, or 128.8%, in the first year. An increase in prepayments would decrease the estimated life of the portfolios and may adversely impact net interest income or net interest margin in the future. Although prepayments on fixed-rate portfolios are currently at a relatively low level, TCF estimates that an immediate 100 basis point increase in current mortgage loan interest rates would reduce prepayments on the fixed-rate mortgage-backed securities, residential real estate loans and consumer loans at December 31, 2005, by approximately $235 million, or 33.5%, in the first year. The following table summarizes TCF’s interest-rate gap position at December 31, 2005: (Dollars in thousands) Interest-earning assets: Loans held for sale Securities available for sale (1) Real estate loans (1) Leasing and equipment finance (1) Other loans (1) Investments Total Interest-bearing liabilities: Checking deposits (2) Savings deposits (2) Money market deposits (2) Certificates of deposit Short-term borrowings Long-term borrowings (3) Total Interest-earning assets over (under) interest-bearing liabilities Cumulative gap Cumulative gap as a percentage of total assets: At December 31, 2005 Within 30 Days 30 Days to 6 Months 6 Months to 1 Year 1 to 3 Years 3+ Years Total Maturity/Rate Sensitivity $ 228,933 9,807 17,948 64,412 3,136,356 532 3,457,988 665,615 751,246 214,801 194,928 472,126 302,722 2,601,438 $ – 56,274 94,168 275,551 367,208 58,764 851,965 238,358 138,088 93,228 739,779 – 17,973 1,227,426 $ – 81,639 109,929 283,196 453,718 – 928,482 250,353 143,365 87,258 597,635 – 12,596 1,091,207 $ – 338,180 197,327 633,341 1,567,823 – 2,736,671 739,419 436,557 171,971 326,576 – 227,561 1,902,084 $ 887 1,162,715 351,069 247,294 2,395,212 20,647 4,177,824 2,386,108 768,948 109,759 56,702 – 1,950,158 5,271,675 $ 229,820 1,648,615 770,441 1,503,794 7,920,317 79,943 12,152,930 4,279,853 2,238,204 677,017 1,915,620 472,126 2,511,010 12,093,830 856,550 $ 856,550 (375,461) $ 481,089 (162,725) $ 318,364 834,587 $1,152,951 (1,093,851) 59,100 $ $ 59,100 59,100 6% 4% 2% 9% –% 1% (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. While management believes that the deposit runoff and repricing 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. (3) Includes $1.8 billion of callable borrowings. At December 31, 2005, the contract rates on all callable borrowings exceeded current market rates. 40 TCF Financial Corporation and Subsidiaries Item 8. Financial Statements and Supplementary Data Report 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, 2005 and 2004, 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, 2005. These consolidated financial statements are the responsi- bility 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 reasonable 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 principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TCF Financial Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. gener- ally 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, 2005, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 16, 2006 expressed an unqualified opinion on management’s assess- ment of, and the effective operation of, internal control over financial reporting. Minneapolis, Minnesota February 16, 2006 2005 Form 10-K 41 Consolidated Statements of Financial Condition At December 31, 2005 2004 $ 374,701 79,943 1,648,615 229,820 5,187,584 2,297,500 435,233 1,503,794 9,424,111 770,441 10,194,552 (60,396) 10,134,156 365,146 152,599 37,334 343,046 $13,365,360 $ 4,279,853 2,238,204 677,017 1,915,620 9,110,694 472,126 2,511,010 2,983,136 273,058 12,366,888 $ 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 46,442 270,836 $12,340,567 $ 3,905,987 1,927,872 659,686 1,468,650 7,962,195 1,056,111 2,048,492 3,104,603 315,351 11,382,149 – – 1,844 497,270 1,536,611 (21,215) (1,016,038) 998,472 $13,365,360 1,849 518,741 1,385,760 (1,415) (946,517) 958,418 $12,340,567 (Dollars in thousands, except share data) Assets Cash and due from banks Investments Securities available for sale Loans held for sale Loans and leases: Consumer home equity and other 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 Mortgage servicing rights Other assets Total assets Liabilities and Stockholders’ Equity Deposits: Checking Savings Money market Certificates of deposit Total deposits Short-term borrowings Long-term borrowings Total borrowings Accrued expenses and other liabilities Total liabilities Stockholders’ equity: Preferred stock, par value $.01 per share, 30,000,000 shares authorized; none issued and outstanding Common stock, par value $.01 per share, 280,000,000 shares authorized; 184,386,193 and 184,939,094 shares issued Additional paid-in capital Retained earnings, subject to certain restrictions Accumulated other comprehensive loss Treasury stock at cost, 50,609,970 and 47,752,934 shares, and other Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes to consolidated financial statements. 42 TCF Financial Corporation and Subsidiaries 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 Losses on termination of debt Total non-interest income Non-interest expense: Compensation and employee benefits Occupancy and equipment Advertising and promotions Deposit account losses 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, 2005 2004 2003 $636,172 81,479 10,921 3,450 732,022 97,406 116,926 214,332 517,690 5,022 512,668 258,779 79,803 40,730 10,665 389,977 47,387 5,578 24,717 467,659 10,671 – 478,330 326,526 103,900 25,691 20,473 133,998 610,588 380,410 115,278 $265,132 $ $ $ 2.00 2.00 .85 $527,178 80,643 11,533 3,455 622,809 42,581 88,337 130,918 491,891 10,947 480,944 271,259 63,463 42,935 12,558 390,215 50,323 12,960 14,113 467,611 22,600 – 490,211 322,824 95,617 26,353 22,369 119,516 586,679 384,476 129,483 $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) 419,279 302,804 88,423 25,536 18,820 124,526 560,109 327,783 111,905 $215,878 $ $ $ 1.53 1.53 .65 2005 Form 10-K 43 Consolidated Statements of Stockholders’ Equity (Dollars in thousands) 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 Cancellation of shares for tax withholding Amortization of stock compensation Exercise of stock options, 125,558 shares Stock compensation tax benefits 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 Cancellation of shares for tax withholding Amortization of stock compensation Exercise of stock options, 155,832 shares Stock compensation tax benefits Change in shares held in trust for deferred compensation plans, at cost Balance, December 31, 2004 Comprehensive income (loss): Net income Other comprehensive loss Comprehensive income (loss) Dividends on common stock Repurchase of 3,450,000 shares Issuance of 526,900 shares Cancellation of shares Cancellation of shares for tax withholding Amortization of stock compensation Exercise of stock options, 66,064 shares Stock compensation tax benefits Change in shares held in trust for deferred compensation plans, at cost Balance, December 31, 2005 Number of Common Shares Issued Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock and Other Total 185,277,874 $ 926 $518,813 $1,111,955 $ 46,102 $ (700,776) $ 977,020 – – – – – – (214,540) (36,624) – – – – – – – – – – (1) – – – – – – – – – – 1,704 (2,803) (795) – (538) 1,802 215,878 – 215,878 (93,029) – – – – – – – – (40,450) (40,450) – – – – – – – – – – – – (150,356) (1,704) 2,371 – 9,701 2,058 – 215,878 (40,450) 175,428 (93,029) (150,356) – (433) (795) 9,701 1,520 1,802 695 – – (695) – 185,026,710 925 518,878 1,234,804 5,652 (839,401) 920,858 – – – – – – – (62,980) (24,636) – – – – – – – – 925 – – (1) – – – – – – – – – (925) – 1,618 (1,380) (675) – (689) 2,242 (328) 254,993 – 254,993 (104,037) – – – – – – – – – (7,067) (7,067) – – – – – – – – – – – – – – (116,134) (1,618) 835 – 6,905 2,685 – 254,993 (7,067) 247,926 (104,037) – (116,134) – (546) (675) 6,905 1,996 2,242 – – 211 (117) 184,939,094 1,849 518,741 1,385,760 (1,415) (946,517) 958,418 – – – – – – (114,004) (438,897) – – – – – – – – – (1) (4) – – – – – – – – 4,981 (2,759) (13,479) – (648) 10,716 265,132 – 265,132 (114,543) – – 262 – – – – – (19,800) (19,800) – – – – – – – – – – – – (93,499) (4,981) 1,622 – 5,830 1,225 – 265,132 (19,800) 245,332 (114,543) (93,499) – (876) (13,483) 5,830 577 10,716 – 184,386,193 – $1,844 (20,282) – $497,270 $1,536,611 – – $(21,215) $(1,016,038) $ 998,472 20,282 See accompanying notes to consolidated financial statements. 44 TCF Financial Corporation and Subsidiaries 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 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 and principal collected on securities available for sale Purchases of securities available for sale Purchases of Federal Home Loan Bank stock Proceeds from redemptions of Federal Home Loan Bank stock Proceeds from sales of real estate owned Acquisitions, net of cash acquired Purchases of premises and equipment Proceeds from sales of premises and equipment Sales of deposits, net of cash paid 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 increase (decrease) in cash and due from banks Cash and due from banks at beginning of year Cash and due from banks at end of year Supplemental disclosures of cash flow information: Cash paid for: Interest on deposits and borrowings Income taxes Transfer of loans and leases to other assets See accompanying notes to consolidated financial statements. Year Ended December 31, 2005 2004 2003 $ 265,132 $ 254,993 $ 215,878 47,039 9,108 5,022 102,491 13,152 (191,061) (75,573) (24,061) – 1,791 (112,092) 153,040 4,438,169 (4,532,671) – (828,304) 1,017,711 247,152 (1,314,638) (53,876) 75,952 22,496 – (86,900) 28,250 (16,542) 5,292 (997,909) 1,166,379 (583,985) 1,687,308 (1,203,086) (93,499) (114,543) 1,198 859,772 14,903 359,798 374,701 $ 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) (53,344) 23,202 40,654 (4,326) (77,788) 1,915 – 363 (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) (5,237) 84,544 26,186 – (69,782) 4,018 – (22,556) 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 $ $ $ $ 200,246 151,161 26,574 $ $ $ 126,228 145,716 23,963 $ $ $ 157,751 139,120 44,292 2005 Form 10-K 45 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 Delaware national financial holding company engaged primarily in community banking and leasing and equip- ment finance through its wholly owned subsidiary, TCF Bank. TCF Bank owns leasing and equipment finance, mortgage banking, securities brokerage and investment and insurance sales, and Real Estate Investment Trust (“REIT”) subsidiaries. These subsidiaries are consolidated with TCF Bank and are therefore included in the consolidated financial statements of TCF Financial Corporation. All significant intercompany accounts and transac- tions have been eliminated in consolidation. Certain reclassifications have been made to prior years’ financial 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 report- ing period. These estimates are based on information available to management at the time the estimates are made. Actual results could differ from those estimates. Policies Related to Critical Accounting Estimates Summary of Critical Accounting Estimates Critical account- ing 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, lease financings, pension liability and expenses and income taxes. Critical accounting policies are discussed with and reviewed by TCF’s Audit Committee. Allowance for Loan and Lease Losses The allowance for loan and lease losses is maintained at a level believed to be appropriate by management to provide for probable loan and lease losses inherent in the portfolio as of the balance sheet date, including known or anticipated problem loans and leases, as well as for loans and leases which are not currently known to require specific allowances. Management’s judgement as to the amount of the allowance is a result of ongoing review of larger individual loans and leases, the overall risk characteristics of the portfolios, changes in the character or size of the portfolios, geographic location and prevailing economic conditions. Additionally, the level of impaired and non-performing assets, historical net charge-off amounts, delinquencies in the loan and lease portfo- lios, values of underlying loan and lease collateral and other relevant factors are reviewed to determine the amount of the allowance. In 2005, TCF refined its allowance for loan and lease losses allocation methodology resulting in an allocation of the entire allowance for loan and lease losses to the individual loan and lease portfolios. This change resulted in the allocation of the previous unallocated portion of the allowance for loan and lease losses. Impaired loans include all non-accrual and restructured commercial real estate and commercial business loans and equipment finance loans. Consumer loans, residential 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 segregated by loan type and sub-type, and are evaluated on a pool 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 variables 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. 46 TCF Financial Corporation and Subsidiaries TCF periodically evaluates its capitalized mortgage servicing rights for impairment. Loan type and note rate are the predomi- nant 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, serv- icing 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 reduction in the capitalized mortgage servicing rights and a charge to the related valuation allowance. 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 substantially all of the benefits and risks of equipment ownership to the lessee are classified as direct financing or sales- type leases and are included in loans and leases. Direct financing and sales-type leases are carried at the 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 classifica- tion requires various judgments and estimates by management including the fair value of the equipment at lease inception, useful life of the equipment under lease, and collectability 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 pres- ent 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 rec- ognized using methods which approximate a level yield over the fixed, non-cancelable term of the leases. TCF receives pro-rata rent payments for the variable interim period until the lease contract commences and the fixed, non-cancelable, lease term begins. TCF recognizes these interim payments in the month they are earned and records the income in interest income on direct finance 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 procedures 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. Leases which do not transfer substantially all benefits and risks of ownership are classified as operating leases. Operating leases represent a rental agreement where ownership of the underlying equipment resides with the lessor. Such leased equipment and related initial direct costs are included in other assets on the balance sheet and is depreciated on a straight-line basis over the term of the lease to estimated salvage value. Depreciation expense is recorded as operating lease expense in other non-interest expense. Operating lease rental income is recognized when it is due according to the provisions of the lease and is recorded as a component of non-interest income. No reserves for lease losses are carried on operating leases. Pension Plan As summarized in Note 17, TCF provides pension benefits to eligible employees in the TCF Cash Balance Pension Plan. In accordance with Statement of Financial Accounting Standard (“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, pre- paid pension asset and annual pension expense involves complex actuarial valuation methods and the use of actuarial and economic assumptions. 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 life- time 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 liabilities are recognized for the future tax consequences attrib- utable 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 2005 Form 10-K 47 in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The determination of current and deferred income taxes is based on complex analyses of many factors including interpretation of Federal and state income tax laws, the difference between tax and financial reporting bases of assets and liabilities (temporary differences), estimates of amounts due or owed, the timing of reversals of temporary differences and current financial account- ing 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 liabilities may not be challenged by federal and state taxing authorities. In the preparation of income tax returns, tax positions are taken based on interpretation of federal and state income tax laws for which the outcome of such positions is uncertain. Management periodically reviews and evaluates the status of uncertain tax positions and makes estimates of amounts ulti- mately due or owed. The benefit of tax positions are recorded in income tax expense in the consolidated financial statements net of the estimates of ultimate amounts due or owed including any applicable interest and penalties. Changes in the estimated amounts due or owed may result from closing of tax returns, new legislation or clarification of existing legislation, through government pronouncements or the courts, and through the examination process. Other Significant Accounting Policies Investments Investments are carried at cost, adjusted for amortization of premiums or accretion of discounts, using meth- ods which approximate a level yield. TCF periodically evaluates investments for other than temporary impairment. 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. The cost of securities sold is determined on a specific identification basis and gains or losses on sales of securities available for sale are recognized on trade dates. Declines in the value of securities available for sale that are con- sidered other than temporary are recorded in non-interest 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 includes 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 hedges using quoted market prices. See Note 18 for additional information concerning derivative instruments and hedging activ- ities. 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 originat- ing 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. For borrowers with loans secured by residential real estate that have declared bankruptcy, loans are placed on non-accrual status at 90 days or four payments or more past due or after a partial charge-off. 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 sta- tus. 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. Rent expense for leased land with facilities is 48 TCF Financial Corporation and Subsidiaries recognized in occupancy and equipment expense. Rent expense for leases with free rent periods or scheduled rent increases is recog- nized on a straight-line basis over the lease term. 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. The fair value of other real estate is determined through independent third-party appraisals, automated valuation methods or broker opinions. At the time a loan is transferred to other real estate owned, any car- rying 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 recognized in the period in which it becomes known and is included in other non-interest expense. Net operating expenses of properties and recoveries, and gains 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 amortization 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 contributions 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, 2005, TCF’s investments in affordable housing limited partnerships were $47 million, compared with $49 million at December 31, 2004 and were recorded in other assets. Four of these investments in affordable housing limited partnerships are considered variable interest entities. These partnerships are not consolidated with TCF. As of December 31, 2005 and 2004, the carrying amount of these four investments was $43.7 million and $46.7 million, respectively. These amounts included $2.3 million and $13.9 million of unconditional unfunded equity contributions as of December 31, 2005 and 2004, respec- tively, which are recorded in other liabilities. Thus, the maximum exposure to loss on these four investments was $43.7 million at December 31, 2005; however, the general partner of these part- nerships provides various guarantees to TCF including guaranteed minimum returns. These guarantees are backed by a AA credit- rated company and significantly limit any risk of loss. Intangible Assets Goodwill is tested for impairment annually. Deposit base intangibles are amortized over 10 years on an accel- erated basis. The Company reviews the recoverability of the carry- ing values of these assets whenever an event occurs indicating that they may be impaired. Stock-Based Compensation The fair value of restricted stock is recorded as unearned compensation in stockholders’ equity on the date of grant and amortized to compensation expense over the longer of the service period or performance period, but in no event beyond an employee’s retirement date. For performance-based restricted stock, TCF estimates the degree to which performance conditions will be met to determine the number of shares which will vest and the related compensation expense prior to the vest- ing date. Compensation expense is adjusted in the period such estimates change. Non-forfeitable dividends are recorded to retained earnings for shares of restricted stock which are expected to vest and to compensation expense for shares of restricted stock which are not expected to vest. Income tax benefits related to stock compensation in excess of grant date fair value are recognized as an increase to additional paid in capital upon vesting and delivery of the stock. Any income tax benefits that are less than grant date fair value would be recognized as a reduction of additional paid in capital to the extent of previously recognized income tax benefits and then as compensation expense for the remaining amount. See Note 16 for additional information concerning stock-based compensation. Deposit Account Losses Deposit account losses include a variety of losses related to deposit taking activities including overdrafts, external fraud and forgery and other deposit processing losses. Deposit account losses also include restitution received from customers, net of any related outside collection agency fees. Losses on uncollectible overdrafts are reported as deposit account losses in non-interest expense within 60 days from the date of overdraft. Uncollectible deposit fees are reversed against fees and service charges. Note 2. Cash and Due from Banks At December 31, 2005, TCF was required by Federal Reserve Board regulations to maintain reserve balances of $77.7 million in cash on hand or at the Federal Reserve Bank. 2005 Form 10-K 49 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: Des Moines Chicago Topeka Subtotal Federal Reserve Bank stock, at cost Interest-bearing deposits with banks Total investments At December 31, 2004 2005 $53,970 4,644 151 58,765 20,646 532 $79,943 $ 76,090 4,600 151 80,841 21,865 520 $103,226 obtain their funding primarily through issuance of consolidated obligations of the Federal Home Loan Bank System. The U.S. Government does not guarantee these obligations, and each of the 12 FHLBs are jointly and severally liable for repayment of each others debt. Therefore, TCF’s investments in these banks could be adversely impacted by the operations of the other FHLBs. The carrying values and yields on investments at December 31, 2005, by contractual maturity, are shown below: (Dollars in thousands) Due in one year or less No stated maturity (1) Total Carrying Value $ 532 79,411 $79,943 Yield 2.12% 3.69 3.68 The investments in FHLB stock are required investments related stock, required regulatory investments. (1) Balance represents Federal Reserve Bank and Federal Home Loan Bank (“FHLB”) to TCF’s borrowings from these banks. All new FHLB borrowing activity since 2000 is done with the FHLB of Des Moines. FHLBs Note 4. Securities Available for Sale Securities available for sale consist of the following: 2005 2004 At December 31, Gross Amortized Unrealized Unrealized Losses Gains Gross Cost Fair Value Gross Amortized Unrealized Unrealized Losses Gains Gross Cost Fair Value (Dollars in thousands) Mortgage-backed securities: Federal agencies Other Other securities Total Weighted-average yield 5.26% $1,675,203 5,655 1,000 $1,681,858 $874 – – $874 $(33,921) $1,642,156 5,459 1,000 $(34,117) $1,648,615 (196) – $1,614,513 6,639 1,000 $1,622,152 5.13% $2,045 – – $2,045 $(4,034) $1,612,524 6,417 1,000 $(4,256) $1,619,941 (222) – Gross gains of $10.7 million, $22.6 million and $32.8 million were recognized on sales of securities available for sale during 2005, 2004 and 2003, respectively. Mortgage-backed securities aggregating $1.5 billion and $1.4 billion were pledged as collateral to secure certain deposits and borrowings at December 31, 2005 and 2004, respectively (see Notes 11 and 12 for additional information). 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, 2005. Unrealized losses on securities available for sale are due to interest rates and not due to credit quality issues. TCF has the ability and intent to hold these investments until a recovery of fair value. Accordingly, TCF has concluded that the unrealized losses are temporary and no impairment has occurred at December 31, 2005. (In thousands) Mortgage-backed securities: Federal agencies Other Total Less than 12 months 12 months or more Total Fair Value $1,375,282 – $1,375,282 Unrealized Losses $(31,250) – $(31,250) Fair Value $64,769 4,712 $69,481 Unrealized Losses Fair Value Unrealized Losses $(2,671) (196) $(2,867) $1,440,051 4,712 $1,444,763 $(33,921) (196) $(34,117) 50 TCF Financial Corporation and Subsidiaries Note 5. Loans and Leases Loans and leases consist of the following: (Dollars in thousands) Consumer home equity and other: Home equity: First mortgage lien Junior lien Total consumer home equity Other Total consumer home equity and other Commercial: Commercial real estate: Permanent Construction and development Total commercial real estate Commercial business Total commercial Leasing and equipment finance: Equipment finance loans Lease financings: Direct financing leases Sales-type leases Lease residuals, excluding leveraged lease Unearned income and deferred lease costs Investment in leveraged lease Total lease financings Total leasing and equipment finance Total consumer, commercial and leasing and equipment finance Residential real estate Total loans and leases At December 31, 2005 2004 Percentage Change $ 3,375,378 1,773,310 5,148,688 38,896 5,187,584 $2,894,174 1,487,583 4,381,757 36,831 4,418,588 2,117,953 179,547 2,297,500 435,233 2,732,733 1,958,378 196,018 2,154,396 424,135 2,578,531 387,171 334,352 1,180,370 18,495 32,882 (115,124) – 1,116,623 1,503,794 9,424,111 770,441 $10,194,552 1,067,845 22,742 35,163 (103,516) 18,786 1,041,020 1,375,372 8,372,491 1,014,166 $9,386,657 16.6% 19.2 17.5 5.6 17.4 8.1 (8.4) 6.6 2.6 6.0 15.8 10.5 (18.7) (6.5) (11.2) (100.0) 7.3 9.3 12.6 (24.0) 8.6 The aggregate amount of loans to non-management directors of TCF and their related interests was $55.4 million and $56.5 mil- lion at December 31, 2005 and 2004, respectively. During 2005, $6.3 million of new loans were made, repayments of loans totaled $7.4 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 collateral, 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 at December 31, 2005 and 2004. In the opinion of management, the above mentioned loans to outside directors and their related interests and executive officers do not represent more than a normal risk of collection. At December 31, 2004, TCF had an investment in a leveraged lease of a Boeing 767-300 aircraft leased to Delta Airlines, Inc. (“Delta”). Delta declared bankruptcy on September 14, 2005, and TCF charged off its $18.8 million investment in the related leveraged lease in the third quarter of 2005. Future minimum lease payments for direct financing and sales-type leases as of December 31, 2005 are as follows: (In thousands) 2006 2007 2008 2009 2010 Thereafter Total Total $ 448,501 316,195 202,037 112,964 49,899 16,596 $1,146,192 2005 Form 10-K 51 Note 6. 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 Balance at end of year Net charge-offs as a percentage of average loans and leases Allowance for loan and lease losses as a percentage of total loans and leases at year end Information relating to impaired loans and non-accrual loans and leases is as follows: Year Ended December 31, 2004 $ 76,619 10,947 (14,247) 4,768 (9,479) 1,791 $ 79,878 .11% .85 2005 $ 79,878 5,022 (30,384) 5,880 (24,504) – $ 60,396 .25% .59 2003 $ 77,008 12,532 (16,369) 3,448 (12,921) – $ 76,619 .16% .92 (In thousands) Impaired loans: Balance, at year-end Related allowance for loan losses, at year-end (1) Average impaired loans Interest income recognized on impaired loans (cash basis) Other non-accrual loans and leases: Balance, at year-end Interest income recognized on non-accrual loans and leases (cash basis) Contractual interest on non-accrual loans and leases (2) At or For the Year Ended December 31, 2004 2005 2003 $ 3,791 1,642 5,345 76 25,857 960 2,900 $ 8,092 3,668 9,840 108 38,786 1,409 3,881 $ 9,133 4,456 10,770 27 26,273 756 3,271 (1) There were no impaired loans at December 31, 2005, 2004 and 2003 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, 2005, 2004 and 2003, TCF had no material 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, 2005. At December 31, 2005, accruing loans and leases delinquent for 90 days or more was $6.5 million, compared with $5 million at December 31, 2004. Note 7. 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, 2005 $100,605 194,078 50,537 254,450 599,670 2004 $ 88,227 201,373 46,062 242,389 578,051 234,524 $365,146 251,384 $326,667 TCF leases certain premises and equipment under operating leases. Net lease expense including utilities and other operating expenses was $30.2 million, $25.4 million and $23.5 million in 2005, 2004 and 2003, respectively. At December 31, 2005, the total minimum lease commitments for operating leases were as follows: (In thousands) 2006 2007 2008 2009 2010 Thereafter Total $ 26,891 22,935 19,953 17,832 16,355 83,738 $187,704 52 TCF Financial Corporation and Subsidiaries Note 8. 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 related to the banking segment Goodwill related to the leasing segment Total At December 31, 2005 Gross Amount Accumulated Amortization $45,055 18,594 $63,649 $ 82,389 21,180 $103,569 $141,245 11,354 $152,599 Net Amount $ 37,334 2,586 $ 39,920 $141,245 11,354 $152,599 2004 Accumulated Amortization $37,226 16,935 $54,161 Gross Amount $ 83,668 21,180 $104,848 $141,245 11,354 $152,599 Net Amount $ 46,442 4,245 $ 50,687 $141,245 11,354 $152,599 Amortization expense for intangible assets was $11.8 million, $14.8 million and $25.3 million for the years ended December 31, 2005, 2004 and 2003, 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, 2005. 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,: 2006 2007 2008 2009 2010 Mortgage Servicing Rights $7,917 6,249 5,096 4,298 3,624 Deposit Base Intangibles $1,630 956 – – – Total $9,547 7,205 5,096 4,298 3,624 Note 9. 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 Amortization Impairment write-down Loan originations Mortgage servicing rights at end of year Valuation allowance at beginning of year Recovery (impairment) Impairment write-down Valuation allowance at end of year Mortgage servicing rights, net Year Ended December 31, 2004 $ 54,036 (13,091) – 8,997 49,942 (2,000) (1,500) – (3,500) $ 46,442 2003 $ 71,990 (23,679) (28,500) 34,225 54,036 (9,346) (21,154) 28,500 (2,000) $ 52,036 2005 $ 49,942 (10,108) (1,500) – 38,334 (3,500) 1,000 1,500 (1,000) $ 37,334 2005 Form 10-K 53 The following table represents the components of mortgage banking revenue: (In thousands) Servicing income Less mortgage servicing: Amortization (Recovery) provision for impairment Subtotal Net servicing income (loss) Gains on sales of loans (1) Other income Total mortgage Year Ended December 31, 2004 $17,349 2003 $ 20,533 2005 $13,998 10,108 13,091 23,679 (1,000) 9,108 1,500 14,591 21,154 44,833 4,890 – 688 2,758 8,107 2,095 (24,300) 33,505 3,514 banking revenue $ 5,578 $12,960 $ 12,719 (1) Beginning in 2005, TCF’s mortgage banking business no longer originates or sells loans. Gains on sales of loans include 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 and 2005, there were no residential mortgage loans held for sale or related forward sales contracts. At December 31, 2005, 2004 and 2003, TCF was servicing real estate loans for others with aggregate unpaid principal balances of approximately $3.4 billion, $4.5 billion and $5.1 billion, respectively. At December 31, 2005 and 2004, TCF had custodial funds of $74.1 million and $106.1 million, respectively, related 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, 2005 was approximately $45.7 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 10. Deposits Deposits are summarized as follows: (Dollars in thousands) Checking: Non-interest bearing Interest bearing Total checking Savings Money market Total checking, savings, and money market Certificates of deposit Total deposits At December 31, Rate at Year End –% 1.60 .69 1.77 1.97 1.14 3.51 1.64 2005 Amount $2,445,411 1,834,442 4,279,853 2,238,204 677,017 7,195,074 1,915,620 $9,110,694 % of Total 26.9% 20.1 47.0 24.6 7.4 79.0 21.0 100.0% Rate at Year End –% .55 .22 .59 .59 .37 2.11 .69 2004 Amount $2,378,697 1,527,290 3,905,987 1,927,872 659,686 6,493,545 1,468,650 $7,962,195 % of Total 29.9% 19.2 49.1 24.2 8.3 81.6 18.4 100.0% 54 TCF Financial Corporation and Subsidiaries Certificates of deposit had the following remaining maturities at December 31, 2005: (In thousands) Maturity 0-3 months 4-6 months 7-12 months 13-24 months 25-36 months 37-48 months 49-60 months Over 60 months Total $100,000 Minimum $177,658 116,097 102,933 47,910 5,721 8,214 3,096 902 $462,531 Other $ 320,190 320,759 494,703 237,201 35,745 27,520 12,730 4,241 $1,453,089 Total $ 497,848 436,856 597,636 285,111 41,466 35,734 15,826 5,143 $1,915,620 Note 11. 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, 2005: (Dollars in thousands) At December 31, Federal funds purchased Securities sold under repurchase agreements Federal Home Loan Bank advances Line of credit Treasury, tax and loan note payable Total Year ended December 31, Average daily balance Federal funds purchased Securities sold under repurchase agreements Federal Home Loan Bank advances Line of credit Treasury, tax and loan note payable Total Maximum month-end balance Federal funds purchased Securities sold under repurchase agreements Federal Home Loan Bank advances Line of credit Treasury, tax and loan note payable N.A. Not Applicable. 2005 2004 2003 Amount Rate Amount Rate Amount Rate $270,000 29,101 150,000 16,500 6,525 $472,126 $308,062 518,953 68,630 18,075 3,945 $917,665 $583,000 828,378 350,000 56,000 10,949 4.30% $ 219,000 2.29% $219,000 .95% 3.86 4.03 5.15 3.89 4.21 568,319 250,000 14,000 4,792 $1,056,111 2.38 2.41 3.18 1.92 2.37 607,631 – 37,000 14,781 $878,412 1.30 – 1.95 .73 1.23 3.46% $ 203,216 1.45% $231,060 1.12% 3.13 2.84 4.52 3.06 3.25 N.A. N.A. N.A. N.A. N.A. 528,942 57,513 15,316 4,119 $ 809,106 $ 336,000 614,641 300,000 43,000 30,438 1.53 2.02 2.78 1.02 1.57 N.A. N.A. N.A. N.A. N.A. 504,328 – 16,637 5,103 $757,128 $321,000 896,752 – 47,000 31,903 1.26 – 2.63 .86 1.25 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 securi- ties were delivered 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 maturi- ties of the agreements. At December 31, 2005, all of the securities 2005 Form 10-K 55 sold under repurchase agreements provided for the repurchase of identical securities and were collateralized by mortgage-backed securities having a fair value of $38.6 million. TCF Financial Corporation (parent company only) has a $105 million line of credit maturing in April 2006 which is unsecured and contains certain 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. Note 12. 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 Subordinated bank notes Total subordinated bank notes Discounted lease rentals Total discounted lease rentals Other borrowings Total other borrowings Total long-term borrowings At December 31, 2005 Year of Maturity 2005 2006 2007 2009 2010 2011 2015 2014 2015 2005 2006 2007 2008 2009 2010 2005 2006 2007 2008 Amount $ – 303,000 200,000 122,500 100,000 200,000 1,400,000 2,325,500 74,373 49,305 123,678 – 28,193 18,323 6,569 1,811 336 55,232 – 2,200 2,200 2,200 6,600 $2,511,010 Weighted- Average Rate –% 5.22 3.65 5.25 6.02 4.85 4.16 4.45 5.27 5.37 5.31 – 6.49 6.79 7.03 7.02 7.18 6.68 – 4.50 4.50 4.50 4.50 4.54 Amount $1,191,500 303,000 – 122,500 100,000 200,000 – 1,917,000 74,209 – 74,209 27,871 15,080 5,183 305 44 – 48,483 2,200 2,200 2,200 2,200 8,800 $2,048,492 2004 Weighted- Average Rate 3.04% 4.64 – 5.25 6.02 4.85 – 3.78 5.27 – 5.27 5.63 5.75 5.91 6.41 6.59 – 5.70 4.50 4.50 4.50 4.50 4.50 3.88 At December 31, 2005, 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 $3.2 billion as collateral for FHLB advances. Included in FHLB advances and repurchase agreements at December 31, 2005 are $425.5 million of fixed-rate FHLB advances, which are callable quarterly by our counterparties at par until maturity. In addition, TCF has $200 million of repurchase agreements which are callable quarterly by our counterparties beginning in 2008, $900 million of repurchase agreements which can be called by our counterparties once in 2008 and $300 million of repurchase agreements which can be called by our counterparties once in 2010. If $330.5 million of FHLB Des Moines advances are called, replacement funding will be provided by the FHLB Des Moines at the then-prevailing market 56 TCF Financial Corporation and Subsidiaries rate of interest for the remaining term-to-maturity, subject to standard terms and conditions. The probability that these advances and repurchase agreements will be called depends pri- marily on the level of related interest rates during the call period. At December 31, 2005, the contract rate exceeded the market rate on all of the fixed-rate callable advances and repurchase agreements. The next call year and stated maturity year for the callable advances and repurchase agreements outstanding at December 31, 2005 were as follows: (Dollars in thousands) Next Call $ 425,500 1,100,000 – 300,000 – – $1,825,500 Weighted- Average Rate 5.23% $ 4.11 – 4.33 – – 4.41 Stated Maturity 3,000 – 122,500 100,000 200,000 1,400,000 $1,825,500 Weighted- Average Rate 5.46% – 5.24 6.00 4.85 4.16 4.41 Year 2006 2008 2009 2010 2011 2015 Total TCF Bank has $75 million of subordinated notes due 2014 and $50 million of subordinated notes due 2015. The $75 million notes bear interest at a fixed rate of 5.00% through June 14, 2009, and will reprice quarterly thereafter at the three-month LIBOR rate plus 1.63%. The $50 million notes bear interest at a fixed rate of 5.00% through March 14, 2010, and will reprice quarterly thereafter at the three-month LIBOR rate plus 1.56%. These subordinated notes may be redeemed by TCF Bank at par after June 14, 2009, and March 14, 2010, respectively. In February 2006, TCF Bank issued $75 million of subordinated notes with a fixed-rate of 5.50% until maturity in 2016. These notes qualify as Tier 2 or supplementary capital for regulatory purposes, subject to certain limitations. 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. Note 13. Income Taxes Income tax expense consists of: (In thousands) Year ended December 31, 2005: Current Deferred Total Federal State Total Year ended December 31, 2004: Federal State Total Year ended December 31, 2003: Federal State Total $120,793 1,788 $122,581 $ (7,241) (62) $ (7,303) $113,552 1,726 $115,278 $ 148,043 3,918 $ 151,961 $(21,765) $ 126,278 3,205 $(22,478) $ 129,483 (713) $ 111,922 4,830 $ 116,752 $ (4,649) $ 107,273 4,632 $ (4,847) $ 111,905 (198) The effective income tax rate differs from the federal income tax rate of 35% as a result of the following: (In thousands) Federal income tax rate 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 Changes in uncertain tax positions Other, net Effective income tax rate Year Ended December 31, 2005 35.00% .29 (1.17) (.64) (3.67) .49 30.30% 2004 35.00% .80 (1.01) (.65) (.68) .22 33.68% 2003 35.00% .92 (1.00) (.43) – (.35) 34.14% 2005 Form 10-K 57 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 Loan fees and discounts Mortgage servicing rights Pension plan Premises and equipment Investments in FHLB Stock Investments in affordable housing Other Total deferred tax liabilities Net deferred tax liabilities At December 31, 2005 2004 $ 33,225 20,780 12,028 6,196 72,229 95,541 22,466 10,996 8,124 5,429 3,116 3,021 6,205 154,898 $ 82,669 $ 37,819 27,422 796 9,427 75,464 114,619 19,339 14,090 9,464 8,273 3,066 2,101 5,715 176,667 $101,203 The company has determined that a valuation allowance for deferred tax assets is not necessary. Note 14. Stockholders’ Equity Restricted Retained Earnings Retained earnings at December 31, 2005 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 available for payment of cash dividends or other distributions to shareholders. Future payments or dis- tributions of these appropriated earnings could invoke a tax liability for TCF based on the amount of the distributions and the tax rates in effect at that time. Shareholder Rights Plan Each share of TCF common stock outstanding 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 entitled to purchase either TCF’s common stock or shares in an “acquiring 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. Treasury Stock and Other Treasury stock and other consists of the following: (In thousands) Treasury stock, at cost Shares held in trust for deferred compensation plans, at cost Unamortized stock compensation Total At December 31, 2005 2004 $ (945,159) $(862,543) (50,493) (20,386) (70,775) (13,199) $(1,016,038) $(946,517) TCF purchased 3.5 million, 4 million and 6.9 million shares of its common stock during the years ended December 31, 2005, 2004 and 2003, respectively. On May 21, 2005, TCF’s Board authorized the repurchase of up to an additional 5% of TCF’s common stock, or 6.7 million shares. At December 31, 2005, TCF had 6.7 million shares remaining in its stock repurchase programs authorized by the Board. The increase in unamortized stock compensation is pri- marily due to a performance-based restricted stock grant to TCF’s Chairman of 300,000 shares of TCF common stock. This grant was made on January 25, 2005. The performance period for this grant begins January 1, 2006 and ends December 31, 2008. Shares Held in Trust for Deferred Compensation Plans TCF has deferred compensation plans that allowed eligible execu- tives, senior officers and certain other employees and Directors to defer payment of up to 100% of their base salary and bonus as well as grants of restricted stock. There are no company con- tributions 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, 2005, the fair value of the assets in the plans totaled $179.8 mil- lion and included $172.9 million invested in TCF common stock. The cost of TCF common stock held by TCF’s deferred compensa- tion 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. The decrease in shares held in trust for deferred compensation plans from December 31, 2004 to December 31, 2005 was due to elections by certain executives and senior management to un-defer previously deferred unvested stock grants, as allowed under the new Section 409A of the Internal Revenue Code. 58 TCF Financial Corporation and Subsidiaries Note 15. Regulatory Capital Requirements TCF is subject to various regulatory capital requirements adminis- tered 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 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 cal- endar years without prior approval of the Office of the Comptroller of the Currency (“OCC”). The following table sets forth TCF’s and TCF 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 minimum and well-capitalized capital requirements: (Dollars in thousands) As of December 31, 2005: Tier 1 leverage capital TCF TCF Bank Tier 1 risk-based capital TCF TCF Bank Total risk-based capital TCF TCF Bank As of December 31, 2004: Tier 1 leverage capital TCF TCF Bank Tier 1 risk-based capital TCF TCF Bank Total risk-based capital TCF TCF Bank N.A. Not Applicable. Actual Minimum Capital Requirement Well-Capitalized Capital Requirement Amount Ratio Amount Ratio Amount Ratio $ 863,955 835,121 863,955 835,121 1,049,615 1,020,781 6.61% 6.39 8.79 8.52 10.68 10.41 $392,306 392,000 393,128 392,275 786,257 784,551 $ 803,870 775,100 6.63% 6.41 $363,940 362,911 803,870 775,100 958,900 930,130 9.12 8.81 10.88 10.57 352,592 351,865 705,185 703,730 3.00% 3.00 4.00 4.00 8.00 8.00 3.00% 3.00 4.00 4.00 8.00 8.00 N.A. 653,333 589,693 588,413 982,821 980,688 N.A. 604,852 528,888 527,798 881,481 879,663 N.A. 5.00% 6.00 6.00 10.00 10.00 N.A. 5.00% 6.00 6.00 10.00 10.00 At December 31, 2005, TCF and TCF Bank exceeded their regu- latory 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 16. 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, 2005, there were 4,692,003 shares reserved for issuance under the Program, including 259,800 shares related to outstanding stock options. At December 31, 2005, there were 1,074,676 shares of performance-based restricted stock that will vest only if certain earnings per share goals are achieved by 2008. Failure to achieve the goals will result in all or a portion of the shares being forfeited. Other restricted stock grants vest over periods from three to seven years. The weighted-average grant date fair value of restricted stock was $27.78, $28.14 and $22.50 for shares granted in 2005, 2004 and 2003, respectively. Compensation expense for restricted stock totaled $5.8 million, $6.9 million and $9.7 million in 2005, 2004 and 2003, respectively. TCF has also issued stock options under the Program that generally 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, 2005 and 2004, all outstanding stock options are vested. 2005 Form 10-K 59 The following table reflects TCF’s stock option and restricted stock transactions under the Program since December 31, 2002: Outstanding at December 31, 2002 Granted Exercised Forfeited Vested Outstanding at December 31, 2003 Granted Exercised Forfeited Vested Outstanding at December 31, 2004 Granted Exercised Forfeited Vested Outstanding at December 31, 2005 Exercisable at December 31, 2005 N.A. Not Applicable. Restricted Stock Stock Options Exercise Price Shares 3,270,632 255,900 – (214,480) (250,898) 3,061,154 149,120 – (62,980) (115,068) 3,032,226 526,400 – (111,185) (1,138,165) 2,309,276 N.A. Price Range $ 9.87-$26.39 18.73- 25.32 – 9.87- 26.39 11.05- 20.38 9.87- 20.38 24.33- 30.28 – 11.05- 30.13 11.05- 24.10 9.87- 30.28 25.97- 28.71 – 11.05- 30.28 9.87- 21.85 9.87- 30.28 N.A. Shares 607,754 – (125,558) (500) – 481,696 – (155,832) – – 325,864 – (66,064) – – 259,800 259,800 Range $ 3.44-$16.64 – 10.91- 16.09 10.91 – 3.44- 16.64 – 3.44- 16.64 – – 5.71- 16.64 – 5.71- 16.64 – – 11.78- 16.64 11.78- 16.64 Weighted- Average $12.72 – 12.11 10.91 – 12.88 – 12.81 – – 12.91 – 9.60 – – 13.76 13.76 Stock options outstanding and exercisable at December 31, 2005 had exercise prices ranging from $11.78 to $16.64, a weighted-average exercise price of $13.76 and a weighted-average contractual life of three years. Note 17. 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 participants with TCF common stock at the rate of 50 cents per dollar, with a maximum company contribution of 3% of the employee’s salary. Effective April 1, 2006, TCF has amended the TCF Employees Stock Purchase Plan to increase the employer match to 75 cents per dollar for employees with five to ten years of service, up to a maximum company contribution of 4.5% of the employee’s salary, and to $1 per dollar for employees with over ten years of service, up to a maximum company contribution of 6% 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. Employees have the opportunity to diversify and invest their vested account balance in various mutual funds or TCF common stock. At December 31, 2005, the fair value of the assets in the plan totaled $230.7 million and included $218.8 million invested in TCF common stock. The Company’s matching contri- butions are expensed when made. TCF’s contributions to the plan were $4.3 million, $4 million and $3.9 million in 2005, 2004 and 2003, respectively. Pension Plan The TCF Cash Balance Pension Plan (the “Pension Plan”) is a qualified defined benefit plan covering eligible employ- ees 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 participant’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 2005 and 2004 and based on the ten-year Treasury rate for 2003. Participants are fully vested after five years of qualifying service. In February 2006, TCF amended the Pension Plan to discontinue compensation credits for all participants effective March 31, 2006. Interest credits will continue to be paid until participants withdraw their money from the Pension Plan. All unvested participant accounts will be vested on March 31, 2006. No significant gain or loss will be recognized as a result of these changes. The projected benefit obligation is expected to be reduced by $2.8 million from the amounts presented below as a result of this plan change. 60 TCF Financial Corporation and Subsidiaries Postretirement Plan TCF provides health care benefits for eligible retired employees (the “Postretirement Plan”). Effective January 1, 2000, TCF modified the Postretirement Plan for employ- ees 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: Benefit obligation at beginning of year 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. Pension Plan Year Ended December 31, 2004 2005 Postretirement Plan Year Ended December 31, 2004 2005 $56,436 3,038 59,474 2,602 $62,076 $55,611 $55,214 5,303 3,428 – 1,678 (3,547) 62,076 58,561 6,936 (3,547) – 61,950 (126) – (421) 23,626 $23,079 $47,646 5,217 52,863 2,351 $55,214 $48,296 $50,830 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 N.A. N.A. N.A. N.A. N.A. N.A. $ 9,675 35 552 (207) (249) (1,150) 8,656 – – (1,150) 1,150 – (8,656) 706 – 2,344 $(5,606) N.A. N.A. N.A. N.A. N.A. N.A. $12,386 53 672 (629) (1,793) (1,014) 9,675 – – (1,014) 1,014 – (9,675) 1,044 – 2,732 $(5,899) The measurement date used for determining the Pension Plan and the Postretirement Plan projected and accumulated benefit obliga- tions above and the date used to value plan assets disclosed above was September 30, 2005 and 2004. 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 At December 31, 2004 6.0% 4.0 2005 5.25% 4.0 2003 6.0% 4.5 2005 5.25% N.A. Postretirement Plan At December 31, 2004 6.0% N.A. 2003 6.0% N.A. 2005 Form 10-K 61 Net periodic benefit cost included in compensation and employee benefits expense consists of the following: (In thousands) Service cost Interest cost Expected return on plan assets Amortization of transition obligation Amortization of prior service cost Recognized actuarial loss Net periodic benefit cost Pension Plan Year Ended December 31, 2005 $ 5,303 3,428 (5,727) – (249) 1,050 $ 3,805 2004 $ 4,632 3,164 (5,955) – (233) – $ 1,608 2003 $ 3,950 2,950 (6,374) – (361) – 165 $ $ Postretirement Plan Year Ended December 31, 2004 53 672 – 210 – 215 $1,150 2005 $ 35 552 – 131 – 139 $857 $ 2003 60 740 – 210 – 226 $1,236 The discount rate, the expected long-term rate of return on plan assets and the rate of increase in future compensation used to deter- mine the net benefit cost were as follows: Assumptions used to determine net benefit cost Discount rate Expected long-term rate of return on plan assets (1) Rate of compensation increase (1) Net of administrative expenses for 2004 and 2003. N.A. Not Applicable. 2005 6.0% 8.75 4.0 Pension Plan Year Ended December 31, 2004 6.0% 8.5 4.5 2003 6.5% 8.5 4.5 2005 6.0% N.A. N.A. Postretirement Plan Year Ended December 31, 2004 6.0% N.A. N.A. 2003 6.5% N.A. N.A. The assets of TCF’s pension plan assets are invested in passively managed index mutual funds that are designed to track the per- formance 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 December 2004, 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 9.3%, net of administrative expenses. 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 8.75%, net of adminis- trative expenses, on plan assets over complete market cycles. A 1% difference in the expected return on plan assets would result in a $596 thousand change in net periodic pension expense. The discount rate used to determine TCF’s pension and post- retirement benefit obligations as of December 31, 2005 was determined by matching estimated benefit cash flows to a yield curve composed of corporate bonds rated AA by Moody’s. Bonds which are callable and putable were excluded. The average esti- mated duration of TCF’s pension and postretirement plans was approximately eight years. In prior years, the discount rate was determined based on the Moody’s AA and Citigroup Pension Liability long-term bond indexes. The actual return on plan assets, net of administrative expenses, was 11.5% for 2005 and 9.3% for 2004. These results decreased the actuarial loss by $1.7 million in 2005 and increased the actuarial loss by $90 thousand in 2004. The decrease in the discount rate assumption to 5.25% at December 31, 2005 from 6.0% at December 31, 2004 resulted in a $3.1 million increase in the actuarial loss in 2005. These changes had no impact on net income for 2005. The increase in the actuarial loss in 2004 was primarily due to various plan participant census changes, partially offset by a decrease in the compensation increase assumption to 4.0% from 4.5%. TCF currently does not expect to contribute to the Pension Plan in 2006. TCF expects to contribute approximately $863 thousand to the Postretirement Plan in 2006. TCF currently has no plans to pre- fund the Postretirement Plan in 2006. 62 TCF Financial Corporation and Subsidiaries The following are expected future benefit payments used to determine projected benefit obligations: (In thousands) 2006 2007 2008 2009 2010 2011-2015 Pension Plan $ 6,562 5,863 6,182 6,310 6,576 36,796 Postretirement Plan $ 863 841 826 806 762 3,360 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. The following table presents assumed health care cost trend rates for the Postretirement Plan at December 31, 2005 and 2004: Health care cost trend rate assumed for next year Final health care cost trend rate Year that final health care trend rate is reached 2005 2004 8.6% 5% 10% 5% 2009 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 Decrease Increase $ 33 $ (20) 364 (298) Note 18. Derivative Instruments and Hedging Activities TCF had no derivatives outstanding as of December 31, 2005 and 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 Note 19. 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 financial 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 summa- rized as follows: (In thousands) Commitments to extend credit: At December 31, 2005 2004 Consumer home equity and other Commercial Leasing and equipment finance Other $1,750,738 811,652 74,418 77,766 $1,576,381 684,029 72,614 55,343 Total commitments to extend credit Loans serviced with recourse Standby letters of credit and guarantees on industrial revenue bonds Total 2,714,574 71,332 2,388,367 97,568 100,892 $2,886,798 75,957 $2,561,892 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 2005 Form 10-K 63 expected to expire without being drawn upon, the total commit- ment amounts do not necessarily represent future cash require- ments. 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. At December 31, 2005, these loans consist of $69.9 million of Veterans Administration (“VA”) loans and $1.4 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 foreclo- sure of a loan. TCF has established a liability of $75 thousand relating to this VA “no-bid” exposure on VA loans serviced with partial recourse at December 31, 2005, which was recorded in other liabilities. No significant claims have been made under the “no-bid” option during 2005. 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 and Guarantees on Industrial Revenue Bonds 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 2018. 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 20. 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 information and information about the financial instru- ments. Fair value estimates are subjective in nature, involving uncertainties and matters 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 realization. Securities available for sale are carried at fair value, which is based on quoted market prices. Certain financial instru- ments, 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 instruments, 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 actual rates offered for FHLB advances, which represents TCF’s alternative source of funds. 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 dis- counted cash flow analyses using interest rates for borrowings of similar remaining maturities. Financial Instruments with Off-Balance Sheet Risk The fair values of TCF’s commitments to extend credit and standby letters of credit are estimated using fees currently charged to enter into similar agreements. For fixed-rate loan commitments and standby letters of credit issued in conjunction with fixed-rate loan agreements, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of loans serviced with recourse approximates the carrying value recorded in other liabilities. 64 TCF Financial Corporation and Subsidiaries 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: At December 31, 2005 2004 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value $ 229,820 $ 233,192 $ 154,279 $ 155,611 1,389,741 3,797,843 5,187,584 2,297,500 435,233 387,171 770,441 (48,429) $ 9,259,320 1,389,741 3,749,317 5,139,058 2,296,035 432,955 381,668 760,545 – $ 9,243,453 $ 7,195,074 1,915,620 472,126 2,511,010 $12,093,830 $ 7,195,074 1,899,994 472,126 2,525,867 $12,093,061 1,472,165 2,946,423 4,418,588 2,154,396 424,135 334,352 1,014,166 (58,966) $ 8,440,950 $ 6,493,545 1,468,650 1,056,111 2,048,492 $11,066,798 1,472,165 2,943,175 4,415,340 2,171,409 424,354 332,734 1,022,328 – $ 8,521,776 $ 6,493,545 1,459,943 1,056,111 2,091,412 $11,101,011 $ $ 33,274 (126) (75) 33,073 $ $ 33,274 (126) (75) 33,073 $ $ 28,551 (8) (100) 28,443 $ $ 28,551 (8) (100) 28,443 (In thousands) Financial instrument assets: Loans held for sale Loans: Consumer home equity and other: Home equity lines of credit Closed-end loans and other Total consumer home equity and other Commercial real estate Commercial business Equipment finance loans Residential real estate Allowance for loan losses (1) Total financial instrument assets Financial instrument liabilities: Checking, savings and money market deposits Certificates of deposit Short-term borrowings Long-term borrowings Total financial instrument liabilities Financial instruments with off-balance sheet risk: (2) Commitments to extend credit (3) Standby letters of credit (4) Loans serviced with recourse (4) Total financial instruments with off-balance sheet risk (1) Excludes the allowance for lease losses. (2) Positive amounts represent assets, negative amounts represent liabilities. (3) Carrying amounts are included in other assets. (4) Carrying amounts are included in accrued expenses and other liabilities. 2005 Form 10-K 65 Note 21. Earnings Per Common Share The computation of basic and diluted earnings per share is presented in the following table: (Dollars in thousands, except per-share data) Basic Earnings Per Common Share Net income Weighted-average shares outstanding Restricted stock Weighted-average common shares outstanding for basic earnings per common share 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: Weighted-average common shares outstanding used in basic earnings per common share calculation Net dilutive effect of: Restricted stock Stock options Weighted-average common shares outstanding for diluted earnings per common share Diluted earnings per common share Year Ended December 31, 2005 2004 2003 265,132 $ 134,652,568 (2,274,032) 254,993 $ 139,656,829 (3,040,397) 215,878 $ 144,028,040 (3,041,506) 132,378,536 2.00 $ 136,616,432 1.87 $ 140,986,534 1.53 $ $ 265,132 $ 254,993 $ 215,878 132,378,536 136,616,432 140,986,534 226,179 137,144 375,631 182,577 366,848 187,346 132,741,859 2.00 $ 137,174,640 1.86 $ 141,540,728 1.53 $ All shares of restricted stock are deducted from weighted-average shares outstanding used for the computation of basic earnings per common share. 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. All other 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. Note 22. 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: Unrealized holding (losses) gains arising during the period on securities available for sale Reclassification adjustment for gains included in net income Income tax benefit Total other comprehensive loss Comprehensive income Year Ended December 31, 2004 $254,993 2003 $215,878 2005 $265,132 (20,360) (10,671) (11,231) (19,800) $245,332 11,522 (22,600) (4,011) (7,067) $247,926 (30,619) (32,832) (23,001) (40,450) $175,428 66 TCF Financial Corporation and Subsidiaries Note 23. Other Expense Other expense consists of the following: (In thousands) Card processing and issuance Postage and courier Telecommunications Office supplies ATM processing Operating lease depreciation Federal deposit insurance and OCC assessments Other real estate owned, net Deposit base intangible amortization Other Total other expense Note 24. Business Segments 2005 $ 15,588 14,303 12,305 10,009 8,935 7,335 2,777 2,253 1,659 58,834 $133,998 Year Ended December 31, 2004 $ 12,446 14,002 12,459 9,891 9,171 1,843 2,682 (174) 1,662 55,534 $119,516 2003 $ 12,213 14,358 12,634 9,316 9,545 3,320 2,796 2,970 1,666 55,708 $124,526 Banking and leasing and equipment finance have been identified as reportable operating segments. Banking includes the following operating units that provide financial services to customers: deposits and investment products, commercial banking, consumer lending and treasury services. Management of TCF’s banking area is organized by state. The separate state operations have been aggregated for purposes of segment disclosures. Leasing and equipment finance provides a broad range of comprehensive leasing and equipment finance products addressing the financing needs of diverse companies. In addition, TCF’s bank holding company (“parent company”) and corpo- rate functions 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. 2005 Form 10-K 67 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. Beginning in 2005, TCF’s mortgage banking business no longer originates or sells loans to the secondary market. As a result, mortgage banking is now included in the “other” category in the table below, in addition to TCF’s parent company and corporate functions. (In thousands) At or For the Year Ended December 31, 2005: 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 Net income Total assets 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 Banking Leasing and Equipment Finance Eliminations and Reclassifications Other Consolidated $ 634,312 425,105 $ 1,059,417 455,550 $ 1,029 425,105 553,161 96,532 229,933 $ $12,908,059 $ 97,596 47,465 $ 145,061 57,014 $ 3,993 47,465 48,596 18,493 33,397 $ $1,635,528 $ $ $ 529,281 426,580 955,861 427,521 4,141 426,580 516,426 113,628 219,906 $ $ 11,891,260 $ $ $ 545,764 355,039 900,803 415,202 4,361 355,039 489,287 96,421 180,172 $ $ 10,902,749 $ $ $ 89,364 50,697 140,061 55,699 6,806 50,697 43,718 20,000 $ 35,872 $ 1,460,778 $ $ $ 81,912 51,088 133,000 45,358 8,171 51,088 41,977 17,031 $ 29,267 $ 1,228,208 $ 114 5,760 $ 5,874 $ 2,780 – 125,337 126,062 253 1,802 $ $195,447 $ 4,164 12,934 $ 17,098 7,336 $ – 109,996 122,262 (4,145) $ (785) $ 212,701 $ 13,843 13,152 $ 26,995 $ 20,244 – 102,210 117,562 (1,547) $ 6,439 $ 301,252 $ $ $ – – – 2,346 – (119,577) (117,231) – – $ $(1,373,674) $ $ $ – – – 1,335 – (97,062) (95,727) – $ – $ (1,224,172) $ $ $ – – – 341 – (89,058) (88,717) – $ – $ (1,113,194) $ 732,022 478,330 $ 1,210,352 $517,690 5,022 478,330 610,588 115,278 265,132 $ $13,365,360 $ 622,809 490,211 $ 1,113,020 491,891 $ 10,947 490,211 586,679 129,483 $ 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 68 TCF Financial Corporation and Subsidiaries Note 25. Parent Company Financial Information TCF Financial Corporation’s (parent company only) condensed statements of financial condition as of December 31, 2005 and 2004, and the condensed statements of income and cash flows for the years ended December 31, 2005, 2004 and 2003 are as follows: Condensed Statements of Financial Condition (In thousands) Assets: Cash Investment in TCF Bank Dividends receivable from TCF Bank Accounts receivable from affiliates Other assets Total assets Liabilities and Stockholders’ Equity: Short-term borrowings Other liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity Condensed Statements of Income (In thousands) Interest income Interest expense Net interest expense Dividends from TCF Bank 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 $ 2005 38 818 (780) 157,616 10,067 746 10,813 8,618 403 2,386 11,407 156,242 1,342 157,584 107,548 $265,132 At December 31, 2005 2004 $ 2,670 969,638 12,000 20,152 22,026 $1,026,486 $ 16,500 11,514 28,014 998,472 $1,026,486 $ 2,957 929,648 4,591 26,923 22,197 $986,316 $ 14,000 13,898 27,898 958,418 $986,316 $ Year Ended December 31, 2004 87 426 (339) 160,955 $ 2003 40 438 (398) 219,653 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 2005 Form 10-K 69 Condensed Statements of Cash Flows (In thousands) Cash flows from operating activities: Year Ended December 31, 2005 2004 2003 Net income Adjustments to reconcile net income to net cash provided by operating activities: $ 265,132 $ 254,993 $ 215,878 Equity in undistributed earnings of subsidiary Other, net Total adjustments Net cash provided by operating activities Cash flows from investing activities: Capital distribution from TCF Bank Purchases of premises and equipment, net Net cash provided 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 (decrease) increase in cash Cash at beginning of year Cash at end of year (107,548) (2,878) (110,426) 154,706 50,000 (28) 49,972 (114,543) (93,499) 2,500 577 (204,965) (287) 2,957 2,670 $ (92,524) 3,964 (88,560) 166,433 75,000 (155) 74,845 (104,037) (116,134) (23,000) 1,996 (241,175) 103 2,854 2,957 $ 4,292 (1,102) 3,190 219,068 – – – (93,029) (150,356) 23,500 1,523 (218,362) 706 2,148 2,854 $ Note 26. 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 collec- tion activities. From time to time, borrowers and other customers, or employees or former employees, have also brought actions against TCF, in some cases claiming substantial amounts of dam- ages. 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. 70 TCF Financial Corporation and Subsidiaries Other Financial Data The selected quarterly financial data presented below should be read in conjunction with the Consolidated Financial Statements and related notes. Selected Quarterly Financial Data (Unaudited) At (Dollars in thousands, except per-share data) Dec. 31, 2005 Sept. 30, 2005 June 30, 2005 March 31, 2005 Dec. 31, 2004 Sept. 30, 2004 June 30, 2004 March 31, 2004 Selected Financial Condition 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 Selected Operations Data: 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 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 (recoveries) as a percentage of average loans and leases (1) (2) Average total equity to average assets (1) Annualized. $ 1,648,615 $ 1,318,787 $ 1,406,575 $ 1,785,520 $ 1,619,941 1,014,166 2,634,107 884,141 2,290,716 950,469 2,735,989 815,893 2,134,680 770,441 2,419,056 $ 1,330,708 1,047,079 2,377,787 $ 1,588,372 $ 1,269,293 1,152,357 2,421,650 1,091,678 2,680,050 9,424,111 152,599 37,334 13,365,360 9,139,075 152,599 37,420 12,737,089 8,878,581 152,599 39,936 12,607,216 8,602,109 152,599 43,501 12,733,208 8,372,491 152,599 46,442 12,340,567 8,025,804 152,599 51,474 11,997,949 7,776,921 152,599 51,290 11,942,863 7,470,428 152,599 50,726 11,724,319 7,195,074 1,915,620 9,110,694 472,126 2,511,010 998,472 6,991,843 1,866,425 8,858,268 1,084,933 1,547,690 967,069 6,695,484 1,728,842 8,424,326 1,045,582 1,899,047 954,557 6,709,527 1,685,486 8,395,013 878,390 2,098,878 926,343 6,493,545 1,468,650 7,962,195 1,056,111 2,048,492 958,418 6,323,659 1,471,164 7,794,823 845,499 2,057,608 965,266 6,321,761 1,439,896 7,761,657 869,576 2,065,870 939,152 6,328,757 1,540,371 7,869,128 469,663 2,037,424 965,950 Dec. 31, 2005 Sept. 30, 2005 June 30, 2005 March 31, 2005 Dec. 31, 2004 Sept. 30, 2004 June 30, 2004 March 31, 2004 Three Months Ended $ 129,282 3,637 $ $ 128,070 3,394 $ 131,285 1,427 $ 129,053 (3,436) 126,489 4,073 $ 124,490 2,644 $ 122,419 3,070 $ 118,493 1,160 125,645 124,676 129,858 132,489 122,416 121,846 119,349 117,333 125,026 122,617 113,201 106,815 126,215 115,693 123,244 102,459 – 125,026 158,478 92,193 26,653 65,540 .50 .50 .2125 2.01% 27.09 4.31 $ $ $ $ 995 123,612 153,913 94,375 28,889 65,486 .50 .50 .2125 2.07% 27.41 4.43 $ $ $ $ 4,437 117,638 150,180 97,316 26,675 70,641 .53 .53 .2125 2.22% 30.23 4.53 $ $ $ $ 5,239 112,054 148,017 96,526 33,061 63,465 .47 .47 .2125 2.03% 27.18 4.56 $ $ $ $ 6,204 132,419 154,301 100,534 33,132 67,402 .50 .50 .1875 2.22% 28.35 4.56 $ $ $ $ 3,679 119,372 147,815 93,403 31,691 61,712 .45 .45 .1875 2.06% 25.96 4.56 $ $ $ $ – 123,244 143,857 98,736 33,518 65,218 .47 .47 .1875 2.20% 27.68 4.53 $ $ $ $ 12,717 115,176 140,706 91,803 31,142 60,661 .44 .44 .1875 2.11% 25.90 4.52 $ $ $ $ .09 7.40 .85 7.56 .08 7.36 (.02) 7.48 .14 7.81 .17 7.94 .10 7.95 .02 8.13 (2) For the three months ended September 30, 2005, net charge-offs excluding the leveraged lease as a percentage of average loans and leases was .08% (annualized). 2005 Form 10-K 71 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. 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, the Company’s Chief Financial Officer (Principal Financial Officer) and its 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 Exchange Act 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, 2005. Also, there were no significant changes in the Company’s disclosure controls or internal controls over financial reporting during 2005. Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining ade- quate internal control over financial reporting for TCF Financial Corporation. 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 expendi- tures of the Company are only being made in accordance with authorizations 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’s internal control over financial reporting as of December 31, 2005. 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’s internal control over financial reporting was effective as of December 31, 2005. KPMG LLP, TCF’s registered public accounting firm that audited the consolidated financial statements included in this annual report, has issued an unqualified attestation report on manage- ment’s assessment of the Company’s internal control 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 circumvented 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. /s/ Lynn A. Nagorske Lynn A. Nagorske Chief Executive Officer and Director /s/ Neil W. Brown Neil W. Brown President and Chief Financial Officer /s/ David M. Stautz David M. Stautz Senior Vice President, Controller and Assistant Treasurer February 16, 2006 72 TCF Financial Corporation and Subsidiaries Report of Independent Registered Public Accounting Firm 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, 2005, 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 main- taining 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 control 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 control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of inter- nal 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 considered 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 dispo- sitions 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 author- izations 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 inade- quate 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, 2005, 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, 2005, 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, 2005 and 2004, and the related consolidated statements of income, stockhold- ers’ equity, and cash flows for each of the years in the three-year period ended December 31, 2005, and our report dated February 16, 2006 expressed an unqualified opinion on those consolidated financial statements. Minneapolis, Minnesota February 16, 2006 Item 9B. Other Information None. 2005 Form 10-K 73 Part III Item 10. Directors and Executive Officers of the Registrant Information regarding directors and executive officers of TCF is set forth in the following sections of Proposal 1 of TCF’s definitive proxy statement dated March 8, 2006 and incorporated herein by reference: Election of Directors; Background of the Nominees and Other Directors; Committee Memberships; Director Attendance; How Does the Board Determine Which Directors are Independent?; Compensation of Directors; TCF Stock Ownership of Directors, Officers and 5% Owners; Were All Stock Ownership Reports Timely Filed by TCF Financial Insiders?; Background of Executives Who are Not Directors; Report of Compensation/Nominating/ Corporate Governance Committee; Summary Compensation Table; Option Grants and Exercises; and Benefits for Executives. Determination of Audit Committee Financial Expert TCF’s Board of Directors is required to determine whether it has at least one audit committee financial expert and that the expert is independent. An audit committee financial expert is a committee member who has an understanding of generally accepted account- ing principles and financial statements and has the ability to assess the general application of these principles in connection with the accounting for estimates, accruals and reserves. Additionally, this individual should have experience preparing, auditing, analyzing or evaluating financial statements that pres- ent the breadth and level of complexity of accounting issues present in TCF’s financial statements. The member should also have an understanding of internal control over financial reporting as well as an understanding of audit committee functions. The Board has determined that Gerald A. Schwalbach, the Audit Committee Chairman, George G. Johnson and Douglas A. Scovanner meet the requirements of an audit committee financial expert. The Board has also determined that Mr. Schwalbach, Mr. Johnson and Mr. Scovanner are independent. Additional information regarding Mr. Schwalbach, Mr. Johnson, Mr. Scovanner and other directors is set forth in the section Background of the Nominees and Other Directors of Proposal 1 of TCF’s definitive proxy state- ment dated March 8, 2006 and incorporated herein by reference. Code of Ethics for Senior Financial Management TCF adopted a code of ethics for senior financial management in March 2003. This code of ethics is available for review at the Company’s web- site at www.tcfexpress.com under the “Corporate Governance” sec- tion. Any changes to or waivers of violations of the code of ethics for senior financial management will be posted to the Company’s website. 74 TCF Financial Corporation and Subsidiaries Item 11. Executive Compensation Information regarding compensation of directors and executive officers of TCF is set forth in the following sections of Proposal 1 of TCF’s definitive proxy statement dated March 8, 2006 and incorporated herein by reference: Compensation of Directors, Report of Compensation/Nominating/Corporate Governance Committee, Summary Compensation Table, Option Grants and Exercises and Benefits for Executives. Item 12. Security Ownership of Certain Beneficial Owners and Management Information regarding ownership of TCF’s common stock by TCF’s directors, executive officers, and certain other shareholders is set forth in the sections entitled TCF Stock Ownership of Directors, Officers and 5% Owners and Were All Stock Ownership Reports Timely Filed by TCF Insiders? under Proposal 1 of TCF’s definitive proxy statement dated March 8, 2006 and incorporated herein by reference. Item 13. Certain Relationships and Related Transactions Information regarding certain relationships and transactions between TCF and management is set forth in the section entitled Certain Relationships and Related Transactions – What Related Party Transactions Included Directors? under Proposal 1 of TCF’s definitive proxy statement dated March 8, 2006 and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services Information regarding principal accounting fees and services and the audit committee’s pre-approval policies and procedures relating to audit and non-audit services provided by the Company’s independent public accounting firm is set forth in the section entitled Audit Committee Report under Proposal 3 of TCF’s defini- tive proxy statement dated March 8, 2006 and is incorporated herein by reference. Part IV Item 15. Exhibits and Financial Statement Schedules (a) Financial Statements, Financial Statement Schedules and Exhibits 1. Financial Statements The following consolidated financial statements of TCF and its subsidiaries, are filed as part of this report: Description Selected Financial Data Consolidated Statements of Financial Condition at December 31, 2005 and 2004 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2005 Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended December 31, 2005 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2005 Notes to Consolidated Financial Statements Other Financial Data Management’s Report on Internal Control Over Financial Reporting Page 14 42 43 44 45 46 71 72 Reports of Independent Registered Public Accounting Firm 41, 73 2. Financial Statement Schedules All schedules to the Consolidated Financial Statements normally required by the applicable accounting regulations are included in the Consolidated Financial Statements or the Notes thereto. 3. Exhibits See Index to Exhibits on page 77 of this report. 2005 Form 10-K 75 Signatures Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. TCF Financial Corporation Registrant By /s/Lynn A. Nagorske Lynn A. Nagorske Chief Executive Officer and Director Dated: February 16, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Title Chairman of the Board and Director Date February 16, 2006 Chief Executive Officer and Director February 16, 2006 President and Chief Financial Officer (Principal Financial Officer) Senior Vice President, Controller and Assistant Treasurer (Principal Accounting Officer) Director Director Director Director Director Director Director Director Director Director Director February 16, 2006 February 16, 2006 February 16, 2006 February 16, 2006 February 16, 2006 February 16, 2006 February 16, 2006 February 16, 2006 February 16, 2006 February 16, 2006 February 16, 2006 February 16, 2006 February 16, 2006 Name /s/ William A. Cooper William A. Cooper /s/ Lynn A. Nagorske Lynn A. Nagorske /s/ Neil W. Brown Neil W. Brown /s/ David M. Stautz David M. Stautz /s/ William F. Bieber William F. Bieber /s/ Rodney P. Burwell Rodney P. Burwell /s/ Thomas A. Cusick Thomas A. Cusick /s/ John M. Eggemeyer III John M. Eggemeyer III /s/ Robert E. Evans Robert E. Evans /s/ Luella G. Goldberg Luella G. Goldberg /s/ George G. Johnson George G. Johnson /s/ Peter L. Scherer Peter L. Scherer /s/ Gerald A. Schwalbach Gerald A. Schwalbach /s/ Douglas A. Scovanner Douglas A. Scovanner /s/ Ralph Strangis Ralph Strangis 76 TCF Financial Corporation and Subsidiaries Index to Exhibits Exhibit No. 3(a) 3(b) 4(a) 4(b) 10(a) 10(b) 10(b)-1 10(b)-2# 10(b)-3# 10(c) Description Restated Certificate of Incorporation of TCF Financial Corporation, as amended and restated through April 29, 1998 [incorporated by reference to Exhibit 3(a) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999, No. 001-10253] Restated Bylaws of TCF Financial Corporation, as amended and restated through October 25, 1999; and as amended by amendment adopted April 28, 2000 [incorporated by reference to Exhibit 3(b) to TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, No. 001-10253]; and as amended by amendment adopted January 22, 2001 [incorporated by reference to Exhibit 3(b) to TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, No. 001-10253]; and as amended through May 21, 2005 [incorporated by reference to Exhibit 3(b)(1) to TCF Financial Corporation’s Current Report on Form 8-K filed May 26, 2005] Rights Agreement, dated as of May 12, 1999, between TCF Financial Corporation and BankBoston, N.A. [incorporated by reference to Exhibit 1 to TCF Financial Corporation’s Registration Statement on Form 8-A, No. 001-10253 (filed May 24, 1999)] and as amended January 24, 2005 [incorporated by reference to Exhibit 4(a) to TCF Financial Corporation’s Current Report on Form 8-K (filed January 27, 2005)] Copies of instruments with respect to long-term debt will be furnished to the Securities and Exchange Commission upon request. Stock Option and Incentive Plan of TCF Financial Corporation, as amended [incorporated by reference to Exhibit 10.1 to TCF Financial Corporation’s Registration Statement on Form S-4, No. 33-14203 (filed May 12, 1987)]; Second Amendment, Third Amendment and Fourth Amendment to the Plan [incorporated by reference to Exhibit 10(a) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1987, No. 0-16431]; Fifth Amendment to the Plan [incorporated by reference to Exhibit 10(a) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989, No. 001-10253]; amendment dated January 21, 1991 [incorporated by reference to Exhibit 10(a) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990, No. 001-10253]; and as further amended by amendment dated January 28, 1992 and amendment dated March 23, 1992 (effective April 15, 1992) [incorporated by reference to Exhibit 10(a) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1991, No. 001-10253] TCF Financial Incentive Stock Program as amended and restated on March 5, 2004, and approved by Shareholders of TCF Financial Corporation at the Annual Meeting on April 28, 2004 [incorporated by reference to Appendix B to TCF Financial Corporation’s Definitive Proxy Statement filed with the SEC on March 17, 2004] Form of TCF Financial Corporation Incentive Stock Program Performance-Based Restricted Stock Agreement [incorpo- rated by reference to Exhibit 10(b)-1 of TCF Financial Corporation’s Current Report on Form 8-K filed April 29, 2005] Form of TCF Financial Corporation Restricted Stock Agreement and Non-solicitation/Confidentiality Agreement Summary of Stock Award Program for Consumer Lending and Business Banker Divisions TCF Financial Corporation Executive Deferred Compensation Plan as amended and restated through January 24, 2005 [incorporated by reference to Exhibit 10(a) to TCF Financial Corporation’s Current Report on Form 8-K (filed January 27, 2005)] 2005 Form 10-K 77 Exhibit Exhibit No. No. 10(d) 10(e)* 10(e)-1* 10(e)-2* 10(e)-3* 10(e)-4* 10(e)-5* 10(g)* 10(g)-1* 10(g)-2* 10(g)-3* Description Description Amended and Restated Trust Agreement for TCF Financial Corporation Executive Deferred Compensation Plan effective September 1, 1998; amendment adopted effective November 1, 1998 [incorporated by reference to Exhibit 10(d) to TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, No. 001-10253]; Restated Trust Agreement as executed with First National Bank in Sioux Falls as trustee effective as of October 1, 2000 [incorporated by reference to Exhibit 10(d) of TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000, No. 001-10253]; as amended by amendment adopted April 30, 2001 [incorporated by reference to Exhibit 10(d) of TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, No. 001-10253]; and as amended by amendments adopted May 3, 2002 [incorporated by reference to Exhibit 10(d) of TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, No. 001-10253]; and as amended by amendments effective as of June 30, 2003 [incorporated by reference to Exhibit 10(d) of TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, No. 001-10253] Employment Agreement of William A. Cooper, dated July 1, 1996 [incorporated by reference to Exhibit 10(a) to TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, No. 001-10253]; as amended March 1, 1997 [incorporated by reference to Exhibit 10(e) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1996, No. 001-10253] Agreement between William A. Cooper and TCF Financial Corporation and TCF Bank dated January 25, 2005 [incorporated by reference to Exhibit 10(e)-1 to TCF Financial Corporation’s Current Report on Form 8-K (filed January 27, 2005)]; as amended December 15, 2005 [incorporated by reference to Exhibit 10(e)-2 to TCF Financial Corporation’s Report on Form 8-K filed December 19, 2005] Restricted Stock Agreement between William A. Cooper and TCF Financial Corporation dated January 25, 2005 [incorporated by reference to Exhibit 10(e)-1 to TCF Financial Corporation’s Current Report on Form 8-K (filed January 27, 2005)] Employment Agreement between Lynn A. Nagorske and TCF Financial Corporation dated December 15, 2005 [incorporated by reference to Exhibit 10 (e)-2 of TCF Financial Corporation’s Current Report on Form 8-K filed December 19, 2005] Employment Agreement between Neil W. Brown and TCF Financial Corporation dated December 15, 2005 [incorporated by reference to Exhibit 10(i)-1 of TCF Financial Corporation’s Report on Form 8-K filed December 19, 2005] Form of Employment Agreement as executed by certain executives dated December 15, 2005 [incorporated by reference to Exhibit 10(i)-2 of TCF Financial Corporation’s Current Report on Form 8-K filed December 19, 2005] Change in Control Agreement of Lynn A. Nagorske, dated December 15, 2005 [incorporated by reference to Exhibit 10(f) to TCF Financial Corporation’s Report on Form 8-K filed December 19, 2005] Change in Control Agreement of Neil W. Brown dated December 15, 2005 [incorporated by reference to Exhibit 10(g)-1 of TCF Financial Corporation’s Report Form 8-K filed December 19, 2005] Form of Change in Control Agreement as executed by certain executives and dated December 15, 2005 [incorporated by reference to Exhibit 10(g)-2 of TCF Financial Corporation’s Report Form 8-K filed December 19, 2005] Form of Non-solicitation Agreement and Change in Control Contract as executed by certain Senior Officers dated December 15, 2005 [incorporated by reference to Exhibit 10(i)-3 of TCF Financial Corporation’s Report 8-K filed December 19, 2005] 78 TCF Financial Corporation and Subsidiaries Exhibit No. 10(j)-1 10(j)-2 10(k) 10(l) 10(m) 10(n) 10(o) 10(p) Description Supplemental Employee Retirement Plan – ESPP Plan as amended and restated through January 24, 2005 [incorporated by reference to Exhibit 10(j) of TCF Financial Corporation’s Current Report on Form 8-K (filed January 27, 2005) 2005 ESPP SERP (a/k/a TCF Employees Stock Purchase Plan-Supplemental Plan) as amended and restated effective April 1, 2006 [incorporated by reference to Exhibit 10(j)-2 of TCF Financial Corporation’s Current Report on Form 8-K filed February 9, 2006] Trust Agreement for TCF Financial Corporation Supplemental Employee Retirement Plan, dated August 21, 1991 [incorporated by reference to Exhibit 10.16 to TCF Financial Corporation’s Registration Statement on Form S-2, filed November 15, 1991, No. 33-43988]; as amended on October 20, 1997 [incorporated by reference to Exhibit 10(n) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997, No. 001-10253]; as amended by amendment adopted April 30, 2001 [incorporated by reference to Exhibit 10(k) of TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, No. 001-10253] TCF Financial Corporation Senior Officer Deferred Compensation Plan as amended and restated through January 24, 2005 [incorporated by reference to Exhibit 10(l) to TCF Financial Corporation’s Current Report on Form 8-K (filed January 27, 2005)] Amended and Restated Trust Agreement for TCF Financial Corporation Senior Officer Deferred Compensation Plan effective September 1, 1998; amendment adopted effective November 1, 1998 [incorporated by reference to Exhibit 10(p) to TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, No. 00110253]; Restated Trust Agreement as executed with First National Bank in Sioux Falls as trustee effective as of October 1, 2000 [incorporated by reference to Exhibit 10(m) of TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31] 2000, No. 001-10253]; as amended by amendment adopted April 30, 2001 [incorporated by reference to Exhibit 10(m) of TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, No. 001-10253]; and as amended by amendments effective as of June 30, 2003 [incor- porated by reference to Exhibit 10(m) of TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, No. 001-10253] and 2006 Management Incentive Plan – Executive Agreement [incorporated by reference to TCF Financial Corporation’s current report on Form 8-K (filed January 23, 2006)] Directors Stock Program [incorporated by reference to Program filed as Appendix A with TCF Financial Corporation’s Definitive 14A filing of its proxy statement on March 16, 2005, No. 001-10253 and as filed as Exhibit 10(n) of TCF Financial Corporation’s Current Report on Form 8-K filed April 29, 2005] 2003 Management Incentive Plan-Executive [incorporated by reference from TCF Financial Corporation’s Report on Form 10-Q for the quarter ended March 31, 2003, No. 001-10253];and 2004 Management Incentive Plan – Executive [incorporated by reference from TCF Financial Corporation’s Report on Form 10-Q for the quarter ended March 31, 2004, No. 001-10253] and 2005 Management Incentive Plan – Executive [incorporated by reference to TCF Financial Corporation’s Current Report on Form 8-K (filed January 27, 2005)] TCF Performance-Based Compensation Policy for Covered Executive Officers as amended and restated effective January 1, 2004, and approved by Shareholders of TCF Financial Corporation at the Annual Meeting on April 28, 2004 [incorporated by reference to Appendix A to TCF Financial Corporation’s Definitive 14A filing of its Proxy Statement (filed March 17, 2004) 2005 Form 10-K 79 Description Supplemental Pension Agreement with Robert E. Evans, dated July 9, 1991 [incorporated by reference to Exhibit 10.22 to TCF Financial Corporation’s Registration Statement on Form S-4, No. 33-57290 (filed January 22, 1993)] TCF Financial Corporation 2005 Directors Deferred Compensation Plan as amended and restated through January 24, 2005 [incorporated by reference to Exhibit 10(r) of TCF Financial Corporation’s Current Report on Form 8-K (filed January 27, 2005)] TCF Directors 2005 Deferred Compensation Plan, adopted effective as of January 6, 2005, as amended and restated through January 24, 2005 [incorporated by reference to Exhibit 10(r)-1 of TCF Financial Corporation’s Current Report on Form 8-K (filed January 27, 2005)] Trust Agreement for TCF Directors Deferred Compensation Plan; as amended by amendment adopted April 30, 2001 [incorporated by reference to Exhibit 10(s) of TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, No. 001-10253]; as amended by amendment adopted October 10, 2001 [incorporated by reference to Exhibit 10(s) of TCF Financial Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001, No. 001-10253]; and as amended by amendments adopted May 3, 2002 [incorporated by reference to Exhibit 10(s) of TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, No. 001-10253]; and as amended by amendments effective as of June 30, 2003 [incorporated by reference to Exhibit 10(s) of TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, No. 001-10253] TCF Directors Retirement Plan dated October 24, 1995 [incorporated by reference to Exhibit 10(y) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 1995, No. 001-10253] Supplemental Employee Retirement Plan for TCF Cash Balance Pension Plan, as amended and restated through January 24, 2005 [incorporated by reference to Exhibit 10(u) of TCF Financial Corporation’s Current Report on Form 8-K (filed January 27, 2005)] TCF Financial Corporation 2005 Cash Balance Pension Plan SERP, adopted effective January 1, 2005, as amended and restated through January 27, 2005 [incorporated by reference to Exhibit 10(u)-1 of TCF Financial Corporation’s Current Report on Form 8-K (filed January 27, 2005)]; as amended effective April 1, 2006 [incorporated by reference to Exhibit 10(u)-1 of TCF Financial Corporation’s Current Report on Form 8-K filed February 9, 2006] Subsidiaries of TCF Financial Corporation (as of December 31, 2005) Consent of KPMG LLP dated February 28, 2006 Rule 13a-14(a)/15d-14(a) Certifications (Section 302 Certifications) Statement Furnished Pursuant to Title 18 United States Code Section 1350 (Section 906 Certifications) Exhibit No. 10(q) 10(r) 10(r)-1 10(s) 10(t) 10(u) 10(u)-1 21# 23# 31# 32# * Executive Contract # Filed herein 80 TCF Financial Corporation and Subsidiaries Senior Officers TCF Financial Corporation Chairman of the Board William A. Cooper Chief Executive Officer Lynn A. Nagorske President and Chief Financial Officer Neil W. Brown Chief Operating Officer Barry N. Winslow Vice Chairman, General Counsel and Secretary Gregory J. Pulles Executive Vice President and Chief Information Officer Earl D. Stratton Executive Vice President and Chief Marketing Officer Candace H. Lex Executive Vice President Craig R. Dahl Senior Vice Presidents James S. Broucek Daniel P. Engel David R. Hinkemeyer Jason E. Korstange Mark R. Lund Norman G. Morrisson Barbara E. Shaw David M. Stautz Diane O. Stockman TCF Bank Corporate Chief Executive Officer and President Timothy P. Bailey Executive Vice Presidents Paul B. Brawner Gregg R. Goudy Brian J. Hurd Michael B. Johnstone James C. LaPlante Thomas J. Wagner Senior Vice Presidents Ronald L. Britz Beverly M. Craig Peter R. Daugherty Timothy J. Donnegan James T. Dowiak Timothy G. Doyle Daniel R. Edward Brian P. Engels Shelley A. Fitzmaurice Mark L. Foster Thomas R. Goins Joseph T. Green Kenneth W. Grenier Douglass B. Hiatt Charles P. Hoffman, Jr. Katherine D. Johnson Scott W. Johnson Gloria J. Karsky David B. McCullough James M. Matheis Anton J. Negrini Elizabeth A. Rochon Carol B. Schirmers Roger W. Starr Leonard D. Steele R. Elizabeth Topoluk TCF Bank Minnesota President Mark L. Jeter Executive Vice Presidents Douglas W. Benner Sara L. Evers Claire M. Graupmann John F. Schroeder Senior Vice Presidents Jeffrey R. Arnold Robert C. Borgstrom Scott A. Fedie Matthew J. Helling Katherine L. Landon Robert A. Larkin John V. Nelson Michael J. Olson Daniel M. Reyelts Steven E. Rykkeli Steven D. Steen TCF Bank Illinois/Wisconsin/Indiana Chief Operating Officer James L. Koon Executive Vice Presidents Mark B. Dillon Mark W. Gault Michael R. Klemz Mark W. Rohde David J. Veurink Senior Vice Presidents Robert J. Brueggeman Jeffrey T. Doering Susan T. Doyle Edward J. Gallagher James D. Hughes Eileen P. Kowalski William A. Lockett Russell P. McMinn Joseph E. Miltimore Luke K. Oosterouse Douglas A. Ortyn Todd A. Palmer Mary Potter Michael Roidt Stephen W. Sinner Wendy D. Ryee-Smith Thomas K. Tarossian Kristin E. Utzinger Dennis J. Vena Kathleen M. Wacker Matthew R. WIley TCF Bank Michigan President Robert H. Scott Senior Vice Presidents Timothy J. Bosiacki James W. Hagen Stephanie R. Zelenak TCF Bank Arizona* President Timothy B. Meyer TCF Equipment Finance, Inc. President Craig R. Dahl Executive Vice Presidents William S. Henak Thomas F. Jasper Mark D. Nyquist Senior Vice Presidents Peter C. Darin Walter E. Dzielsky Bradley C. Gunstad Jodie L. Palmer James L. Phillips Charles A. Sell, Jr. Robert J. Stark Mark H. Valentine Winthrop Resources Corporation Executive Vice Presidents Chairman and Chief Executive Officer Luis J. Campos Joseph W. Doyle Robert F. Grant Senior Vice Presidents Jerry E. Coviak Larry M. Czekaj Gary L. Fineman Dennis J. Gistinger Natalie A. Glass Donald J. Hawkins Terrence B. Pryor Erskine J. Underwood David F. Wible TCF Bank Colorado President Wayne A. Marty Executive Vice President Mathew G. Lamb Craig R. Dahl Executive Vice President Richard J. Pieper Senior Vice Presidents Gary W. Anderson Paul L. Gendler John G. McManigal Dean J. Stinchfield TCF Investments and Insurance President and Chief Executive Officer Peter O. Torvik Senior Vice Presidents Damon J. Brinson Timothy J. O’Keefe James R. Scattergood TCF Mortgage Corporation President Douglas L. Dinndorf * Charter pending 2005 Form 10-K 81 and Chief Financial Officer (612) 661-6500 Board of Directors William A. Cooper 5 Chairman of the Board Lynn A. Nagorske Chief Executive Officer 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 George G. Johnson1 CPA/Managing Director, George Johnson & Company Peter L. Scherer 1,4 President and Chief Executive Officer, Scherer Bros. Lumber Co. Gerald A. Schwalbach 1,2,3,4 Chairman, Spensa Development Group, LLC Douglas A. Scovanner 1,4 Executive Vice President John M. Eggemeyer III 2,3,4 Target Corporation President, Castle Creek Capital LLC Robert E. Evans 1 Retired Vice Chairman Luella G. Goldberg 2,3,4,5 Past Chair, University of Minnesota Foundation, Former Acting President, Wellesley College Ralph Strangis 2,3,4,5 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 82 TCF Financial Corporation and Subsidiaries Offices Executive Offices Michigan TCF Financial Corporation Headquarters 200 Lake Street East Mail Code EX0-03-A Wayzata, MN 55391-1693 (612) 661-6500 Minnesota Headquarters 801 Marquette Avenue Mail Code 001-03-P Minneapolis, MN 55402 Traditional Branches Minneapolis/St. Paul Area (45) Greater Minnesota (2) Supermarket Branches Minneapolis/St. Paul Area (49) Greater Minnesota (4) 401 East Liberty Street Ann Arbor, MI 48104 (734) 769-8300 Traditional Branches Metro Detroit Area (46) Greater Michigan (9) Supermarket Branches Metro Detroit Area (4) Greater Michigan (2) Campus Branches Metro Detroit Area (1) Greater Michigan (1) Colorado Headquarters 6400 South Fiddler’s Green Circle Suite 800 Campus Branches Greenwood Village, CO 80111 Minneapolis/St. Paul Area (2) (720) 200-2400 Greater Minnesota (3) Illinois/Wisconsin/Indiana Headquarters 800 Burr Ridge Parkway Burr Ridge, IL 60527 (630) 986-4900 Traditional Branches Chicagoland (43) Milwaukee Area (12) Kenosha/Racine Area (7) Supermarket Branches Chicagoland (157) Milwaukee Area (13) Kenosha/Racine Area (3) Indiana (6) Campus Branches Chicagoland (2) Traditional Branches Metro Denver Area (20) Colorado Springs (6) Supermarket Branches Metro Denver Area (14) Colorado Springs (2) TCF Equipment Finance, Inc. Headquarters 11100 Wayzata Boulevard Suite 801 Minnetonka, MN 55305 (952) 656-5080 Winthrop Resources Corporation Headquarters 11100 Wayzata Boulevard Suite 800 Minnetonka, MN 55305 (952) 936-0226 TCF Mortgage Corporation Headquarters 801 Marquette Avenue Minneapolis, MN 55402 (612) 661-7500 Stockholder Information Stock Data Common Stock Dividend Reinvestment Plan Year Close High Dividends Paid Low Per Share 2005 Fourth Quarter Third Quarter Second Quarter First Quarter 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 $27.14 26.75 25.88 27.15 $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 $28.78 28.82 28.56 32.03 $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 $25.02 25.81 24.55 26.42 $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 $ .2125 .2125 .2125 .2125 $ .1875 .1875 .1875 .1875 $ .1625 .1625 .1625 .1625 $.14375 .14375 .14375 .14375 $ .125 .125 .125 .125 Trading of Common Stock The common stock of TCF Financial Corporation is listed on the New York Stock Exchange under the symbol TCB. At December 31, 2005, TCF had approximately 133.8 million shares of common stock outstanding. 2006 Common Stock Dividend Dates Expected Record Date: January 27 April 28 July 28 October 27 Expected Payment Date: February 28 May 31 August 31 November 30 Transfer Agent and Registrar Computershare Trust Company, N.A. c/o Computershare Investor Services 250 Royall Street Canton, MA 02021 (800) 443-6852 www.computershare.com/equiserve Approximately 60% of TCF’s 9,576 registered stockholders of record participate in the Dividend Reinvestment Plan. Under the plan, common stockholders may purchase additional shares of common stock at market price 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: Computershare Trust Company, N.A. c/o Computershare Investor Services PO Box 43010 Providence, RI 02940-3010 (800) 443-6852 www.computershare.com/equiserve Investor/Analyst Contact Jason Korstange Senior Vice President Corporate Communications (952) 745-2755 Stacey Juola Assistant Vice President Investor Relations (952) 745-2762 Available Information Please visit our website at www.tcfexpress.com for free access to investor information, news releases, investor presentations, access to TCF’s quarterly conference calls, TCF’s annual report,and SEC filings. Information may also be obtained, free of charge, from: TCF Financial Corporation Corporate Communications 200 Lake Street East EX0-02-C Wayzata, MN 55391-1693 (952) 745-2760 Annual Meeting The annual meeting of stockholders of TCF will be held on Wednesday, April 26, 2006, 3:00 p.m. (local time) at the Sheraton Minneapolis West, 12201 Ridgedale Drive, Minnetonka, Minnesota. 2005 Form 10-K 83 Total Return Performance (In Dollars) $3,500 3,000 2,500 2,000 1,500 1,000 500 Year Ending TCF Financial Corporation SNL All Bank & Thrift Index S&P 500 Index 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 12-05 SNL Financial LC © 2006 www.snl.com Standard & Poor’s Compustat® www.standardandpoors.com Last Review September 2004 Last Rating Action Last Review January 2006 Credit Ratings Last Rating Action Moody’s TCF Bank: Outlook Issuer Long-term deposits Short-term deposits Bank financial strength Stable A2 A2 Prime-1 C+ Stock Price Performance Stock Price Dividends (In Dollars) $35 30 25 20 15 10 5 CreditWatch Positive BBB+ A-2 A- A-2 Standard & Poor’s Outlook TCF Financial Corporation: Long-term counterparty Short-term counterparty TCF Bank: Long-term counterparty Short-term counterparty 5 9 / 0 3 / 1 1 t i l p S k c o t S 7 9 / 8 2 / 1 1 t i l p S k c o t S Last Rating Action FITCH Outlook TCF Financial Corporation: Long-term senior Short-term TCF Bank: Long-term deposits Short-term deposits Last Review January 2003 Stable A- F1 A F1 $1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 4 0 / 3 / 9 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 12-05 $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 $27.14 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 $0.85 *Stock split adjusted 84 TCF Financial Corporation and Subsidiaries Corporate Philosophy • TCF emphasizes convenience in banking; we’re open 12 hours a day, seven days a week, 364 days per year. TCF banks a large and diverse customer base. We provide customers innovative products through multiple banking channels, including traditional, super- market and campus branches, TCF EXPRESS TELLER® and other 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 prof- itable 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 and retaining its large number of low- interest cost checking accounts by offering convenient products with free features, such as “Totally Free Checking” and e-Checking. TCF uses the checking account as the anchor 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 business, we can minimize credit risk on the asset side. • 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 strives to place The Customer First. We believe providing great service helps to retain existing customers, attract new customers, creates value for our stockholders, and pride in our employees. • 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 encourages stock ownership by our officers, directors and employees. We have a mutuality of interest with our stockholders, and our goal is to earn above-average returns for our stockholders. • TCF believes interest-rate risk should be minimized. Interest-rate speculation does not generate consistent profits and is high risk. • 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 customer service. We centralize back office activities and decentralize the banking process. • TCF utilizes conservative accounting and financial reporting principles that accurately and honestly report our financial con- dition and results of operations. We believe good accounting drives good business decision-making. • 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 philosophy, we market our products and services to everyone in the communities we serve. 2005 Annual Report 85 TCF Financial Corporation 200 Lake Street East Wayzata, MN 55391-1693 www.tcfexpress.com 002CS-10279 TCFIR9332 

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