TCF Financial Corporation 200 Lake Street East Wayzata, MN 55391-1693 www.tcfbank.com T C F F i n a n c i a l C o r p o r a t i o n 2 0 0 8 A n n u a l R e p o r t TCF Financial Corporation 2008 Annual Report moving forward safe sound stable strong solid smart successful secure TCFIR9341 TCF® The Convenience Franchise Table of Contents 1 Letter to Our Stockholders Annual Report on Form 10-K 1 Business 16 Selected Financial Data 17 Management’s Discussion and Analysis 46 Consolidated Financial Statements 50 Notes to Consolidated Financial Statements 78 Other Financial Data 91 Corporate Information 93 Stockholder Information 95 Corporate Philosophy Financial Highlights (Dollars in thousands, except per-share data) 2008 2007 % Change At or For the Year Ended December 31, 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 securities Visa share redemption Gains on sales of branches and real estate Total non-interest income Non-interest expense Income before income tax expense Income tax expense Net income Preferred stock dividends Net income available to common stockholders 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 N.M. Not Meaningful. $593,673 192,045 401,628 474,061 16,066 8,308 – 498,435 694,403 205,660 76,702 128,958 2,540 $126,418 $ 1.01 1.01 1.00 28.00 9.25 13.66 8.99 1.52 X .79% 11.46 3.91 .78 8.92 $550,177 56,992 493,185 490,285 13,278 – 37,894 541,457 662,124 372,518 105,710 266,808 – $266,808 $ 2.13 2.12 .97 28.99 17.17 17.93 8.68 2.07 X 1.76% 25.82 3.94 .30 6.88 7.9% N.M. (18.6) (3.3) 21.0 N.M. (100.0) (7.9) 4.9 (44.8) (27.4) (51.7) N.M. (52.6) (52.6)% (52.4) 3.1 (23.8) 3.6 (26.6) (55.1) (55.6) (0.8) 160.0 29.7 2008 Annual Report : 1 Dear Stockholders: Once again, I find myself writing this letter to you as Chief Executive Officer of TCF Financial Corporation. As you know, I retired from this role on December 31, 2005; however, with the unprecedented financial crisis and the retirement of Lynn Nagorske, the Board of Directors asked me to return on July 26, 2008 as your CEO. It is an honor to be back. The 2008 year for the financial services sector was highlighted with news of subprime lending, multi-billion dollar credit losses, collateralized debt obligations and financial derivatives which negatively impacted the industry as a whole. In addition, many recent mergers and acquisitions rapidly deteriorated in value for the purchaser and their stockholders. TCF did not engage in the activities that have created so many problems in the financial industry. TCF has not made subprime, teaser rate, Option ARM, broker-purchased, out of market, low documentation and other risky mortgages. TCF has not partici- pated in junk bonds, collateralized debt obligations, asset-backed commercial paper, structured investment vehicles, or other off-balance-sheet programs. TCF has no auto or credit card port- folios, and does not have any deriva- tive contracts. TCF has never owned Fannie Mae or Freddie Mac preferred stock, trust preferred securities or bank owned life insurance. Over 99 percent of TCF loans and leases are secured. While TCF did not participate in any of these types of activities, we were not immune to the effects of these devastating headlines, the reduction in home values and the general state of the economy, as evidenced by a 24 percent decline in our stock price. Let me assure you, TCF’s fundamentals remain strong with conservative and secured loan growth, well-managed expense control, and an excellent, large and growing customer base. We continue to stand by our conservative philosophy of banking which has produced high performance measures for many years. In fact, our banking model has proven to be far superior to the failed models of our larger competitors. With the commitment of our dedicated employees, I expect to see continued growth and success. William A. Cooper, Chairman of the Board & Chief Executive Officer “TCF’sfundamentalsremainstrongwith conservativeandsecuredloangrowth,well- managedexpensecontrol,andanexcellent, largeandgrowingcustomerbase.” 2 : TCF Financial Corporation and Subsidiaries A look at 2008: n TCF earned $129 million and diluted earnings per common share was $1.01. Although we were disappointed in these results, we remained profitable during an economic crisis not seen for several decades — a proclamation many financial institutions today cannot make. n TCF’s return on average assets was .79 percent and return on average common equity was 11.46 percent. TCF continues to rank as one of the highest performing banks in the country, topping U.S. Banker’s Best of the Biggest list in 2008. n TCF’s net interest margin was 3.91 percent, a decrease of only 3 basis points. We continue to be better than the average of the Top 50 Banks by approximately 50 basis points, despite competitive deposit pricing pressure. n TCF was able to increase its dividend to $1.00 per share in 2008, which was the 17th consecutive year we increased the dividend. Due to TCF’s participation in the U.S. Treasury’s Capital Purchase Program (more on this later), TCF will not be able to increase its dividend without regulatory approval and other regulatory limits on TCF’s ability to pay dividends are possible. However, TCF intends to continue to pay its dividend in future periods subject to maintaining solid profits and strong capital. n TCF’s Tier 1 risk-based capital was $1.5 billion, or 11.79 percent of risk-weighted assets and total risk- based capital was $1.8 billion, or 14.65 percent of risk-weighted assets. TCF’s tangible common equity ratio was 5.93 percent. The main concern of regulators, stock analysts and stockholders in 2008 was capital and liquidity. TCF remains a solidly capitalized bank. At December 31, 2008, TCF was $577 million over the stated regulatory well-capitalized requirement due in part to $115 million of trust preferred securities issued on August 19 — which naysayers said we could not accomplish — and proceeds of a $361.2 million investment in TCF by the U.S. Department of the Treasury on November 14. TCF has a strong retail deposit franchise with $10.2 billion in deposits (none of our deposits are brokered deposits), an increase of 7 percent for the year, which provides ample liquidity for the bank. In addition to deposits, TCF has a Convenience banking — Open 7 days TCF is open seven days a week and most holidays with extended hours in our traditional, supermarket and campus branches to ensure our customers can bank when it is convenient for them. 2008 Annual Report : 3 Tangible Common Equity1 Percent 08 07 06 05 04 5.93% 5.92% 6.00% 6.30% 6.48% 1 As a percent of consolidated assets Tier 1 Capital Percent 08 07 06 05 04 11.79% 8.28% 8.65% 8.79% 9.12% variety of borrowing sources available for overnight and long-term funding, including $2.3 billion in secured borrowing capacity at the Federal Home Loan Bank of Des Moines for short- and long-term funding, $1 billion in unsecured and uncommitted available lines for overnight and short-term (up to six months) funding, and $616 million of secured borrowing capacity at the Federal Reserve discount window for overnight and short-term (up to three months) funding. In addition, TCF can issue up to $329 million of FDIC guaranteed senior unsecured debt until October 31, 2009. Over the past year, much has been written about credit losses and write- downs of home equity and residential mortgage portfolios due to subprime lending and other nontraditional mortgage-related programs. Again, TCF has not engaged in the activities that have created so many problems in the financial industry, such as subprime lending or offering loans originated with teaser rates. Any change in payments on TCF’s variable-rate consumer home equity portfolio (27 percent of the total portfolio) is tied to the prime rate and not to any arbitrary provisions in mortgage documents. In 2008, TCF’s consumer home equity delinquencies and net charge-offs increased significantly from the prior year. Most of the increase was TCF remained profitable during an economic crisis not seen for several decades — a proclamation many financial institutions today cannot make. attributable to the industry’s subprime lending crisis that led to record foreclo- sures and an oversupply of homes held for sale led by a housing bubble created by mistakes in monetary policy. This, in turn, led to lower home values and increased credit losses for TCF. It is important to recognize, however, that at year-end, 98 percent of our consumer loan customers were current on their loan payments to TCF. The vast depre- ciation in home values across the country — a direct link to the subprime market — in combination with adverse life events such as divorce, sickness, and especially loss of job have increased the frequency and the severity of delinquency incidents. As a result, TCF is now taking greater losses on these loans, although our losses remain less than most of TCF’s peers and are still manageable. TCF has also seen increases in delin- quencies and charge-offs in our other portfolios. Commercial non-performing 4 : TCF Financial Corporation and Subsidiaries Total Loans and Leases Billions of Dollars 08 07 06 05 04 $13.3 $12.3 $11.3 $10.2 $9.4 In a year when many of our competitors and outside producers discontinued lending, we felt it was an opportunity for growth in our loans, leases and deposits. Total Deposits Billions of Dollars 08 07 06 05 04 $10.2 $9.6 $9.8 $9.1 $8.0 assets (mostly residential development related) increased 131 percent and net charge-offs increased. In a proactive move to manage this growing concern, we incorporated some management changes and expanded the credit quality functional group now headed by Tim Bailey, Vice Chairman of TCF Bank® and a longtime employee with consider- able expertise in commercial workouts. TCF’s leasing and equipment finance business also experienced a modest increase in net charge-offs in 2008. However, this portfolio continues to be very profitable, well-diversified and well-managed. The provision for credit losses in total for 2008 was $192 million compared to $57 million last year. At December 31, 2008, TCF’s allowance for loan and lease losses totaled $172.4 million, or 1.29 percent of loans and leases, an increase of $91.5 million from $80.9 million, or .66 percent of loans and leases, at December 31, 2007. To paraphrase one of the greatest businessmen and philosophers of our time, Warren Buffet, “We simply attempt to be fearful when others are bold and to be bold when others are fearful.” In a year when many of our competitors and outside producers such as brokers and other financial service companies discontinued lending, we felt it was an opportunity for growth in our loans, leases and deposits. TCF’s loan and lease portfolio experi- enced strong growth in 2008, totaling $13.3 billion at the end of the year, up 8 percent over the prior year. Consumer home equity loans grew 5 percent and totaled $6.8 billion at year-end despite continued declines in home values. During 2008, TCF funded $1.1 billion of new home equity loans. These new loans have thus far recorded low delinquencies and minimal charge- offs of less than 3 basis points. We are pleased with these results and attribute the good performance to our conservative underwriting standards in addition to the mitigated risk of lower home values. Commercial loans increased 12 percent in 2008 and totaled $3.5 billion at year-end. During the year we saw REITs, conduits and other non-bank sources leave our markets, which led to a substantial decline in prepayments. 2008 Annual Report : 5 This also allowed us to further strengthen our credit underwriting guidelines and improve yields and terms on all of our commercial lending products. Commercial business loans decreased 9.2 percent for the year as we saw a slowdown in retail, manufacturing and construction concurrent with the slowing economy. the United States, and is the 17th largest bank-affiliated leasing company in the United States. Winthrop Resources Corporation grew its portfolio $52.8 million, or 19 percent, in 2008 — a positive trend which will favorably impact future periods. Leasing and Equipment Finance continues to be one of the largest profit centers at TCF. TCF’s leasing and equipment finance business grew 18.1 percent. This $2.5 billion portfolio is well-diversified by equipment type and geography, and grew nicely in all active segments. Our leasing and equipment finance operation is now the 34th largest in Leasing and equipment finance In 2008, TCF created a new subsidiary called TCF Inventory Finance, Inc., specializing in the inventory floorplan finance business in the United States and Canada with an initial focus on the consumer electronics and household appliance industries. We have hired 38 employees, established policies and procedures, implemented a core operating system and commenced operations in December 2008. On the other side of the balance sheet, TCF’s deposits totaled a record $10.2 billion as of December 31, 2008. During the year, as competition for certificates of deposits and higher cost deposits intensified, TCF introduced Power Savings and TCF Power Money MarketSM products to cross-sell and retain customers. As of December 31, 2008, Power Savings totaled $281.9 million and TCF Power Money Market totaled $118.7 million. In the last half of the year, TCF successfully promoted three high value new checking account premium campaigns to attract new customers: free gas card, free grocery card and free cash card. As a result, TCF’s gross new checking accounts grew by 21 percent in the last two quarters of 2008. Our emphasis in 2009 will be to grow deposits and look for new products and premiums to introduce into the market. In 2008, TCF opened 11 branches including five traditional branches and six supermarket branches. We also closed and consolidated 16 branches, TCF’s leasing and equipment finance business grew over 18 percent in 2008, and continues to be one of the largest profit centers at TCF. 6 : TCF Financial Corporation and Subsidiaries including 12 Colorado supermarket branches, into nearby branches to improve operating efficiencies. TCF relocated three branches and remodeled 23 branches during the year. TCF has minimal plans for branch expansion in 2009, unless additional opportunities arise with our two super- market partners. We intend to continue our relocation and remodel programs during the year, and will look for good values on land for future branch growth. One of the challenging areas for TCF in 2008 was deposit fee income, which I attribute to the slowing economy. Banking fees and service charges decreased 2.6 percent from 2007 primarily due to a decline in volume as customers have become especially care ful in managing their personal accounts via online and telephone banking. $103.1 million in 2008. TCF continues to be the 12th largest Visa® debit card issuer in the United States. Leasing and equipment finance revenues totaled $55.5 million, down 6.2 percent, from 2007. In 2008, we saw a decrease in operating lease revenues as a result of maturing leases as well as a decrease in sales-type lease revenue as more lessees chose to continue leasing their equipment. During the first quarter of 2008, Visa completed its initial public offering (IPO) and as part of the IPO, Visa redeemed a portion of the shares held by Visa U.S.A. members for cash. TCF received $8.3 million from this redemption and recorded a gain. TCF had 308,219 shares of Visa Class B at year-end. However, these shares are subject to dilution as Visa concludes certain litigation. Card revenues continued their growth momentum and increased 4.2 percent to TCF’s income tax expense was $76.7 million for 2008, or 37.3 percent of pre-tax income, which included a $2.2 million increase in income tax expense and a $2.8 million increase in deferred income taxes related to changes in state tax laws, primarily in Minnesota. TCF was very efficient in managing expenses in 2008. While I look at 2008 as one of the most difficult and chal- lenging times for the financial industry, I also saw an opportunity for TCF to place a stronger emphasis on its core businesses of deposit gathering and loan production. As a result, necessary actions were made to improve efficien- cies including discontinued sales of investments and insurance products, Convenience banking — Branches 448TCF is located in seven Midwest and Mountain West states with a total of 448 branches. 2008 Annual Report : 7 closure of Education Finance, refocus on the consumer home equity loan business, scaling back of our non- branch based consumer lending unit and reorganization of Business Banking under our retail division. Unfortunately, these decisions were made at the cost of a number of long-term and loyal employees. I applaud those employees that have assumed additional duties as a result of the restructuring and look to all employees to continue to find ways to contribute to the bottom line while carefully monitoring expenses. My senior management team did not receive a bonus for the year 2008 and I did not take a salary or a bonus in 2008. Even during these difficult times, TCF is committed to the ongoing professional development of its employees and continues to recognize and motivate hard working individuals through job promotions, incentive compensation, tuition reimbursement and other reward programs. We strongly believe that maintaining an experienced and motivated team creates a competitive advantage and is crucial to enhancing stockholder value. In the last half of the year, TCF successfully promoted three premium campaigns to attract new customers and gross new checking accounts grew by 21 percent. Card Revenue Millions of Dollars 08 07 06 05 04 $103.1 $98.9 $92.1 $79.8 $63.5 and the arts. In addition, numerous TCF employees generously gave their time by volunteering and providing leadership to local nonprofit organizations. Also in 2008, TCF’s performance under the Community Reinvestment Act over the last several years was evaluated which resulted in TCF receiving the highest possible rating of “Outstanding” on overall performance. We are very proud of the outstanding rating. TCF and its employees continue to express a commitment to make a difference for people in need and for the communities we serve, and we have an ongoing focus on organizations that have TCF employee involvement. Consumer Home Equity Lending Millions of Dollars +5% Annual growth rate (’08 vs. ’07) 12/08 12/07 12/06 12/05 12/04 $6,846 $6,523 $5,883 $5,149 $4,382 In 2008, TCF continued to support the communities in which we serve, both financially and through volunteerism. During 2008, TCF and its employees contributed over $3 million to chari- table organizations in human services, education, community development, I am happy to close the 2008 chapter of this book and am optimistic about TCF’s future. As I look forward to 2009, I am confident I have the right staff in the right positions to weather the financial storm, which may get worse before it gets better. The nature 8 : TCF Financial Corporation and Subsidiaries Commercial Lending Millions of Dollars +12% Annual growth rate (’08 vs. ’07) 12/08 12/07 12/06 12/05 12/04 $3,491 $3,116 $2,943 $2,733 $2,591 Leasing and Equipment Finance1 Millions of Dollars +17% Annual growth rate (’08 vs. ’07) 12/08 12/07 12/06 12/05 12/04 $2,545 $2,175 $1,899 $1,560 $1,389 1 Includes operating leases During 2008, TCF and its employees contributed over $3 million to charitable organizations in human services, education, community development, and the arts. of the economy is one we have never before experienced; however, I believe we can endure and tackle the challenges that lie ahead. To be successful in 2009, we must: n Continue growth momentum in loans, leases and deposits. With fewer competitors in the market on both the deposit side and the lending side, now is an opportune time to capture deposit customers through premium campaigns, new products and cross-sell initiatives while lending to creditwor- thy customers. Deposit gathering and loan production are the bread and butter of TCF, and a high priority for our entire management team in 2009. Checking account growth is the key to deposit fee income growth. n Carefully monitor credit quality and proactively work with customers to remedy delinquencies and mitigate foreclosures and charge-offs. I expect delinquencies and charge-offs to stabilize during the year as a good portion of the loans on our books will have been originated in 2008 and 2009 — when home values have tended to stabilize and industry credit standards have been further tightened. Credit quality will largely depend on the viability of the U.S. economy. n Use capital wisely. In 2008, TCF participated in the U.S. Treasury Department’s Capital Purchase Program under the Emergency Economic Stabilization Act of 2008 and received proceeds of $361.2 million in exchange for 361,172 shares of senior perpetual preferred stock of TCF and a warrant to purchase 3.2 million shares of TCF common stock. The investment by the U.S. Treasury requires TCF to pay non-tax deduct- ible cumulative dividends equal to 5 percent for the first five years and 9 percent thereafter. We felt the transac- tion was an inexpensive form of raising capital, even though TCF was already solidly capitalized. In order to fulfill the intent — as we now see it — of the government investment, we will need to lever this capital into good loans to creditworthy customers. In the first 45 days following receipt of these funds, TCF originated over $490 million of loans and leases, and completed 762 loan modifications and extensions on over $117 million of consumer home equity loans to 2008 Annual Report : 9 help these customers avoid home foreclosures. In 2009, we intend to continue these activities. Additionally, this capital will allow us to fund the new inventory finance business. n Continue to review and control expenses. In this difficult operating environment, it is important to focus on expense control and in 2009, it will be a team effort of all TCF employees. We will continue to identify areas within our states and backroom offices to improve processes and efficiencies. We must focus on the areas we can control and comply with regulations and tax laws in the most cost-effective manner. Convenience banking — Online n Continue our longstanding commit- ment to strong corporate governance. In 2008, TCF eliminated the classified board structure and all directors will stand annually for election by stock- holders once their current term expires. In addition, because our customers and stockholders entrust us with their money and confidential information, our management practices demand high standards of ethics. Reputation for honesty and integrity continues to rank at the top of our priorities. TCF’s management and staff did not engage in the activities driven by the imprudence and greed so commonly shown by Wall Street and many of our banking competitors. From my perspective, the significant risks to our business strategy are as follows: n Economic conditions, including the value of residential and commercial real estate, increasing bankruptcies with the potential negative consequences of pending “cramdown” provisions, and rising unemployment, are major risks for all banks, including TCF. n In the current state of the economy, the Federal and most state govern- ments cannot fund their spending initiatives. Increasing taxes on busi- nesses, including TCF, or individuals to fill the spending gaps in an attempt to balance their budgets is a risk on multiple fronts to TCF. n Managing interest rate risk due to the changing yield curve and overall levels of interest rates continues to be very challenging. n Potential reductions in our borrowing capacity at the Federal Home Loan Bank or the Federal discount window for any reason would reduce our liquidity and could prohibit growth or force higher deposit costs. Growing deposits reduces this risk. TCF provides a host of products and services for customers who prefer the convenience of electronic banking from the comfort of their homes. 10 : TCF Financial Corporation and Subsidiaries n Changes in customer behavior from the slowing economy and advances in technology could further impact fee revenue. increase and impact expense. To keep abreast and in compliance with all of the laws and regulations, a growing amount of time and dollars are being spent. n New banks in the market, such as n The political impact of the outrageous former brokerage firms and other large financial service conglomerates, have shown some irrational behavior in their certificate of deposit pricing. Continued competitive deposit pressure could impact deposit costs. behavior of many of our largest competitors and of Wall Street, and the public’s perception concerning TARP (Trouble Asset Relief Program) funds raises the risks of future Congressional actions. n Pending litigation against Visa could further impact card revenues as merchants seek to reduce or eliminate their card interchange expenses. TCF has prudently managed these types of risks in the past and we believe we are adequately prepared to manage them in the future. n Growth expectations of our new inventory finance business may not be achieved. This new line of business for TCF must be able to solidify business relationships with manufacturers and dealers — a key part to its success. n Regulatory issues and the related compliance burden continue to In closing, I would like to reaffirm our commitment to TCF’s conservative corporate philosophy that was devel- oped during the savings and loan crisis in the late 1980s. Today our corporate philosophy is being tested like never before as consumer confidence and spending are down and unemployment is on the rise. I am proud we have held tight to our principles and I believe TCF can remain profitable even during these very difficult times. In fact, these difficult times may bring new growth opportunities to TCF. We continue to have a mutuality of interest with our stockholders and will always evaluate opportunities to deliver stockholder value. Our senior manage- ment and board of directors own over 9 million shares, or 7 percent of TCF stock. Eighty-four percent of our match- eligible employees participate in TCF’s Employees Stock Purchase Plan, which at year-end held over 7.7 million shares. Community TCF strives to help build strong communities in which we serve, such as our partnership with the University of Minnesota. We look forward to the opening of TCF Bank Stadium™ in the fall of 2009. 2008 Annual Report : 11 I would like to thank the board of directors for their continued dedication, wise counsel and support of TCF. It was very much appreciated in 2008. Recently, director Peter Scherer notified the board that he has chosen not to continue to serve. In addition, director Rodney Burwell has reached retirement age and is leaving the board. We appreciate the exceptional leadership and guidance they provided us over the years. With these changes come oppor- tunities to welcome new members to the board and I take great pleasure in introducing Barry Winslow and Theodore Bigos as our newest board members. Barry brings a long history of banking experience and we welcome his insights to assist TCF in our contin- ued growth and success. Ted has an entrepreneurial drive and spirit that closely matches ours and brings a history of successful business manage- ment experience to the board. I would also like to take this time to recognize Lynn Nagorske for the tremendous contributions he has made to TCF. Lynn joined TCF in 1986 and held many high-level positions. His analytical approach to opportunities was invaluable and led us in creating new and profitable businesses while developing cost-effective processes within the organization. Thank you, I am happy to close the 2008 chapter of this book and am optimistic about TCF’s future. Lynn, for all that you have done. I, along with members of the TCF Team, wish you happiness. During these tumultuous times, TCF remains a safe and sound financial institution due in large part to our dedicated staff of nearly 8,000 employ- ees. I would like to give a special thanks to our employees for their hard work and efforts during the year. Their exceptional abilities, commitment and energy make everything happen at TCF. I am proud of the TCF Team and its accomplishments. Thank you for your continued support and investment in TCF. William A. Cooper Chairman and Chief Executive Officer Diluted Earnings Per Common Share Dollars 08 07 06 05 04 $1.01 $2.12 $1.90 $2.00 $1.86 Net Interest Margin Percent 08 07 06 05 04 "12/04" "12/05" "12/06" "12/07" 3.91% 3.94% 4.16% 1389 1560 1899 2175 4.46% 4.54% 12 : TCF Financial Corporation and Subsidiaries Board of Directors From left: Thomas A. Cusick, Douglas A. Scovanner, Gregory J. Pulles, George G. Johnson, William A. Cooper, William F. Bieber, Barry N. Winslow, Luella G. Goldberg, Gerald A. Schwalbach, Ralph Strangis, Theodore J. Bigos (not pictured: Rodney P. Burwell). 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, 2008 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to ____________ Commission File No. 001-10253 TCF Financial Corporation (Exact name of registrant as specified in its charter) 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 of principal executive offices and zip code) Registrant’s telephone number, including area code: 952-745-2760 Securities registered pursuant to Section 12(b) of the Act: Common Stock (par value $.01 per share) Preferred Stock (par value $.01 per share) (Title of class) New York Stock Exchange New York Stock Exchange (Name of exchange on which registered) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No x Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes No x 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. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer,” large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): x Large accelerated filer x Accelerated filer Non-accelerated filer Smaller Reporting Company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No x As of June 30, 2008, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter as reported by the New York Stock Exchange, was $1,356,638,538. As of January 31, 2009, there were 127,698,045 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 11, 2009 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 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, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services Exhibits and Financial Statement Schedules Page 1 8 13 13 13 13 14 16 17 42 45 45 46 50 78 79 79 79 80 80 81 82 82 82 82 83 84 85 Part I Item 1. Business General TCF Financial Corporation (“TCF” or the “Company”), a Delaware Corporation, is a financial holding company based in Wayzata, Minnesota. Its principal subsidiaries, TCF National Bank and TCF National Bank Arizona (“TCF Bank”), are headquartered in Minnesota and Arizona, respectively. TCF Bank operates bank branches in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana and Arizona (TCF’s primary banking markets). TCF’s focus is on the delivery of retail and commercial banking products in markets served by TCF Bank and commercial equipment loans and leases, and inventory finance loans throughout the United States and Canada. At December 31, 2008, TCF had total assets of $17 bil- lion and was the 38th largest publicly traded bank holding company in the United States based on total assets as of September 30, 2008. 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 and small business banking, commercial banking, consumer lending, leasing and equipment finance and inventory finance. The retail banking business includes traditional and supermarket branches, campus banking, EXPRESS TELLER® ATMs and Visa® cards. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consolidated Financial Condition Analysis — Operating Segment Results” and Note 23 of Notes to Consolidated Financial Statements for information regarding TCF’s reportable operating segments. 2008 Form 10-K : 1 Retail Banking At December 31, 2008, TCF had 448 retail banking branches, consisting of 197 traditional branches, 236 supermarket branches and 15 campus branches. TCF operates 206 branches in Illinois, 111 in Minnesota, 56 in Michigan, 36 in Colorado, 27 in Wisconsin, seven in Arizona and five in Indiana. In 2008, TCF focused on optimizing existing branches in target market areas. Targeted new branch expansion has been part of TCF’s growth strategy. 115 new branches have been opened since January 1, 2003. During 2008, TCF opened 11 branches, consisting of five traditional branches and six supermarket branches. In 2007, TCF opened 20 branches, consisting of 10 traditional branches, seven supermarket branches and three campus branches. TCF anticipates opening three new branches in 2009, consisting of one new traditional branch and two new super- market branches and remodeling 28 supermarket branches. TCF’s expansion is largely dependent on the continued long-term success of branch banking and the expansion and success of its supermarket partners. Campus banking represents an important part of TCF’s retail banking business. TCF has alliances with the University of Minnesota, the University of Michigan, the University of Illinois plus seven other colleges. These alliances include exclusive marketing, naming rights and other agreements. Branches have been opened on many of these college cam- puses. TCF provides multi-purpose campus cards for many of these colleges. These cards serve as a school identification card, ATM card, library card, security card, health care card, phone card and stored value card for vending machines or similar uses. TCF is ranked 6th largest in number of campus card banking relationships in the U.S. At December 31, 2008, there were $218 million in campus deposits. TCF has a 25-year naming rights agreement with the University of Minnesota and will sponsor their new football stadium to be called “TCF Bank Stadium™”. The new stadium is scheduled to open in September, 2009. 2 : TCF Financial Corporation and Subsidiaries Non-interest income is a significant source of revenue for TCF and an important factor in TCF’s results of operations. Increasing fee and service charge revenue has been challeng- ing as a result of changing customer behavior and slower growth in deposit accounts. 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. Lending Activities General TCF’s lending activities reflect its community banking philosophy, emphasizing secured loans to individu- als and businesses in its primary market areas. TCF is also engaged in leasing and equipment finance and recently began inventory finance activities throughout the United States and Canada. 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 consolidation, financing of home improvements, automobiles, vacations and education. TCF’s consumer lending origination activity primarily consists of home equity real estate secured lending. It also includes originating 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. TCF does not have any subprime lending programs nor has it originated 2/28 adjustable-rate mortgages (ARM) or option ARM loans. Commercial Real Estate Lending Commercial real estate loans are loans originated by TCF that are secured by commercial real estate which includes, to a lesser extent, commercial real estate construction loans, mainly to borrowers based in its primary markets. Commercial Business Lending Commercial business loans are loans originated by TCF that are generally secured by various types of business assets including inventory, receivables, equipment, financial instruments and commer- cial real estate. In limited cases, loans may be made on an unsecured basis. Commercial business loans are used for a variety of purposes including working capital and financing the purchase of equipment. TCF concentrates on originating commercial business loans to middle-market companies with borrowing require- ments of less than $25 million. Substantially all of TCF’s commercial business loans outstanding at December 31, 2008, were to borrowers based in its primary markets. Leasing and Equipment Finance TCF provides a broad range of comprehensive lease and equipment finance products addressing the financing needs of diverse types of small to large companies. TCF’s leasing and equipment finance businesses, TCF Equipment Finance, Inc. (“TCF Equipment Finance”) and Winthrop Resources Corporation (“Winthrop Resources”), finance equipment in all 50 states and, to a limited extent, in foreign countries. TCF Equipment Finance delivers equipment finance solutions to small and mid-size companies in various industries with significant diversity in the types of underlying equipment. Winthrop Resources focuses on providing customized lease financing to meet the special needs of mid-size and large companies and health care facilities that procure high-tech equipment such as computers, servers, telecommunication and other technology equipment. Inventory Finance In 2008, TCF created TCF Inventory Finance, Inc. (“TCF Inventory Finance”) to provide commercial inventory financing to retail businesses in the United States and Canada, initially focusing on the electronics and appliance markets. TCF’s Inventory Finance business originates commercial variable rate loans which are secured by the underlying floorplanned equipment and supported by repurchase agreements from Original Equipment Manufacturers. TCF Inventory Finance commenced lending operations in December, 2008. 2008 Form 10-K : 3 Borrowings Borrowings may be used to compensate for reductions in deposit inflows or net deposit outflows, or to support expanded lending activities. These borrowings include Federal Home Loan Bank (“FHLB”) advances, repur- chase agreements, federal funds, advances from the Federal Reserve Discount Window and other borrowings. TCF Bank, as a member of the FHLB system, is required to own a minimum level of FHLB stock and is authorized to apply for advances on the security of such stock, mortgage- backed securities, loans secured by real estate and other assets (principally securities which are obligations of, or guaranteed by, the United States Government), provided certain standards related to creditworthiness have been met. FHLB advances are made pursuant to several different credit programs. Each credit program has its own interest rates and range of maturities. The FHLB prescribes the acceptable uses to which the advances pursuant to each program may be made as well as limitations on the size of advances. In addition to the program limitations, the amounts of advances for which an institution may be eligi- ble are generally based on the FHLB’s assessment of the institution’s creditworthiness. As an additional source of funds, TCF may sell securities subject to its obligation to repurchase these securities (repurchase agreements) with major investment banks or the FHLB utilizing government securities or mortgage-backed securities as collateral. Generally, securities with a value in excess of the amount borrowed are required to be deposited as collateral with the counterparty to a repurchase agree- ment. The creditworthiness of the counterparty is important in establishing that the overcollateralized amount of secu- rities delivered by TCF is protected. TCF only enters into repurchase agreements with institutions with a satisfactory credit history. Information concerning TCF’s FHLB advances, repurchase agreements, subordinated notes, junior subordinated notes (trust preferred) 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 10 and 11 of Notes to Consolidated Financial Statements. Investment Activities TCF Bank has authority to invest in various types of liquid assets, including United States Department of the Treasury (“U.S. Treasury”) obligations and securities of various fed- eral agencies and U.S. Government sponsored enterprises, deposits of insured banks, bankers’ acceptances and federal funds. TCF Bank’s investments do not include commercial paper, asset-backed commercial paper, asset-backed securities secured by credit cards or car loans, trust preferred securities or preferred stock of Fannie Mae or Freddie Mac. TCF Bank also does not participate in structured investment vehicles and does not have any bank-owned life insurance. 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, 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 competitive 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, certifi- cates of deposit and retirement savings plans. TCF’s marketing strategy emphasizes attracting core deposits held in checking, savings, money market and cer- tificate 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, 2008, interest- bearing deposits comprised 78% of total deposits, as com- pared with 77% at December 31, 2007. 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 9 of Notes to Consolidated Financial Statements. 4 : TCF Financial Corporation and Subsidiaries Other Information Activities of Subsidiaries of TCF Financial Corporation TCF’s business operations include those con- ducted 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 uti- lize unconsolidated subsidiaries or special purpose entities to provide off-balance sheet borrowings. TCF’s primary direct subsidiaries are TCF National Bank and TCF National Bank Arizona (collectively, “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 business. Inventory Finance See “Item 1. Business-Lending Activities” for information on TCF’s inventory finance business. Insurance and Investment Services Historically, TCF Investments sold a variety of investment products to its retail banking clients. TCF no longer sells investment and insurance products but will continue to service its existing customer base. Competition TCF competes with a number of depository institutions and financial service providers in its market areas, and experiences significant competition in attract- ing and retaining deposits and in lending funds. Direct competition for deposits comes primarily from retail banks, commercial banks, savings institutions, credit unions and investment banks. Additional significant competition for deposits comes from institutions selling money market mutual funds and corporate and government securities. TCF competes for the origination of loans with commercial banks, mortgage bankers, mortgage brokers, consumer and commercial finance companies, credit unions, insurance companies and savings institutions. TCF also competes nationwide with other companies and commercial banks in the financing of equipment and inventory. Expanded use of the Internet has increased competition affecting TCF and its loan, lease and deposit products. Additionally, in 2008, several non-banking institutions became bank holding companies and began offering deposit products. The impact of this increased competition has not yet been determined. Employees As of December 31, 2008, TCF had 7,802 employees, including 2,577 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 regu- latory oversight. TCF Financial, as a publicly held financial holding company, and TCF Bank, which has deposits insured by the Federal Deposit Insurance Corporation (“FDIC”), are subject to a number of laws and regulations. Many of these laws and regulations have undergone significant change in recent years. These laws and regulations impose restrictions on activities, minimum capital requirements, lending and deposit restrictions and numerous other requirements. Future changes to these laws and regulations, and other new financial services laws and regulations, are likely and cannot be predicted with certainty. TCF Financial’s primary regulator is the Federal Reserve Bank (“FRB”) and TCF Bank’s primary regulator is the Office of the Comptroller of the Currency (“OCC”). Regulatory Capital Requirements TCF Financial and TCF Bank are subject to regulatory capital requirements of the FRB and the OCC, respectively, as 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 capital distribu- tions, limitations on growth or restrictions on activities. Undercapitalized banks must 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. 2008 Form 10-K : 5 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; future rulemak- ing or policies of regulatory authorities; unanticipated losses or lower levels of earnings. Restrictions on Distributions TCF Financial’s ability to pay dividends is subject to limitations that may be imposed by the FRB. 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 and preferred stock, to make payments on TCF Financial’s borrowings, or for its other cash needs. The ability of TCF Financial and TCF Bank to pay dividends is dependent on regulatory policies and regulatory capital requirements. The ability to pay such dividends in the future may be adversely affected by new legislation or regulations, or by changes in regulatory policies. On November 14, 2008, TCF entered into a definitive agreement (the “Agreement”) with the U.S. Treasury to participate in the Capital Purchase Program (“CPP”). Due to TCF’s participation in the CPP, TCF may not repurchase common shares or increase its dividend for three years from the date of the Agreement unless the preferred shares sold to the U.S. Treasury have been redeemed in whole or trans- ferred to a third party which is not an affiliate of TCF. See Note 13 of Notes to Consolidated Financial Statements for additional CPP information. In general, TCF Bank may not declare or pay a dividend to TCF Financial in excess of 100% of its net retained profits for the current year combined with its net retained profits for the preceding two calendar years without prior approval of the OCC. TCF Bank’s ability to make capital distributions in the future may require regulatory approval and may be restricted by its regulatory authorities. TCF Bank’s ability to make any such distributions will also depend on its earnings and ability to meet minimum regulatory capital requirements in effect during future periods. These capital adequacy standards may be higher in the future than existing minimum regulatory capital requirements. The OCC also has the authority to prohibit the payment of dividends by a national bank when it determines such payments would constitute an unsafe and unsound banking practice. In addition, income tax considerations may limit the ability of TCF Bank to make dividend payments in excess of its current and accumulated tax “earnings and profits” (“E&P”). Annual dividend distributions in excess of E&P could result in a tax liability based on the amount of excess earnings distributed and current tax rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consolidated Financial Condition Analysis — Liquidity Management” and Notes 13 and 14 of Notes to Consolidated Financial Statements. Regulation of TCF and Affiliates and Insider Transactions TCF Financial is subject to FRB regulations, examinations and reporting requirements relating to bank or financial holding companies. Bank subsidiaries of finan- cial holding companies like TCF Bank are subject to certain restrictions in their dealings with holding company affiliates. A holding company must serve as a source of strength for its subsidiary banks, and the FRB may require a holding company to contribute additional capital to an under- capitalized 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 Board of Directors must cause the sale of the shareholder’s stock at public auction to cover a deficiency in the capital of a subsidiary bank. In the event of a holding company’s bankruptcy, any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and may be entitled to priority over other creditors. Under the Bank Holding Company Act (“BHCA”), FRB approval is required before acquiring more than 5% control, or substantially all of the assets, of another bank, or bank or financial holding company, or merging or consolidating with such a bank or holding company. The BHCA also generally 6 : TCF Financial Corporation and Subsidiaries 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 bank- ing, managing or controlling banks, providing services for its subsidiaries, or conducting activities permitted by the FRB as being closely related to the business of banking. 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 insti- tutions such as TCF Bank, and which require regulatory approval prior to any such changes in control. The Restated Certificate of Incorporation of TCF Financial contains fea- tures which may inhibit a change in control of TCF Financial. Acquisitions and Interstate Operations Under fed- eral law, interstate merger transactions may be approved by federal bank regulators without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks opted out of the Riegle- Neal Interstate Banking and Branching Act of 1994 by adopting a law after the date of enactment of such act, and prior to June 1, 1997, which applies equally to all out- of-state banks and expressly prohibits merger transactions involving out-of-state banks. Interstate acquisitions of branches by banks are permitted only if the law of the state in which the branches are located permits such acquisitions. Interstate mergers and branch acquisitions may also be subject to certain nationwide and statewide insured deposit maximum concentration levels or other limitations. Insurance of Accounts; Depositor Preference The deposits of TCF Bank have historically been insured by the FDIC up to $100,000 per insured depositor, except certain types of retirement accounts, which are insured up to $250,000 per insured depositor. On October 3, 2008, the maximum amount insured under FDIC deposit insurance was temporarily increased from $100,000 to $250,000 per insured depositor through December 31, 2009. This increase was part of the Emergency Economic Stabilization Act of 2008. Additionally, TCF has elected to participate in the FDIC’s Temporary Liquidity Guarantee Program. Under this program, all non-interest bearing deposit transaction accounts at TCF with balances over $250,000 will also be fully insured through December 31, 2009 at an additional cost to TCF of 10 basis points per dollar over $250,000 on a per account basis. The FDIC has set a designated reserve ratio of 1.25% ($1.25 against $100 of insured deposits) for the Deposit Insurance Fund (“DIF”). The Federal Deposit Insurance Act of 2005 (“FDIC Act”) provides the FDIC Board of Directors the authority to set the designated reserve ratio between 1.15% and 1.50%. The FDIC must adopt a restoration plan when the reserve ratio falls below 1.15% and begin paying dividends when the reserve ratio exceeds 1.35%. There is no requirement to achieve a specific ratio within a given time frame. The FDIC Board of Directors has not declared any dividends as of December 31, 2008. The DIF reserve ratio calculated by the FDIC that was in effect at December 31, 2008 was .76%. In 2007, FDIC regulations established a new risk-based assessment system under which deposit insurance assess- ments are based upon supervisory ratings for all insured institutions, financial ratios for most institutions, and long-term debt issuer ratings for large institutions that have them. In 2007 and 2008, the annual insurance premiums on bank deposits insured by the DIF varied between $.05 per $100 of deposits for banks classified in the highest capital and supervisory evaluation categories to $.43 per $100 of deposits for banks classified in the lowest capital and supervisory evaluation categories. TCF Bank was classified in the highest capital and supervisory evaluation category. In 2006, the annual insurance premiums on bank deposits insured by the DIF varied 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 premiums were not required for TCF Bank for 2006. The FDIC Act required the FDIC to establish a one-time historical assessment credit that provides banks a credit that could be used to offset insurance assessments. This one-time historical assessment credit was established to benefit banks that had funded deposit insurance funds prior to December 31, 1996. This one-time historical assessment credit is based upon TCF Bank’s insured deposits as of December 31, 1996. TCF Bank’s one-time historical assessment credit was $9.6 million when it was established in 2006. During 2007, TCF utilized this credit to entirely offset $5.8 million of Federal deposit insurance assessments. The remaining credit of $3.8 million was completely used in 2008 and only partially offset 2008 assessments. As a result, TCF’s Federal deposit insurance expense increased in 2008 and will increase further in 2009. As required by law, in October 2008, the FDIC Board adopted a restoration plan that would increase the reserve ratio to the 1.15% threshold within five years. As part of that plan, in December, 2008, the FDIC Board of Directors voted to increase risk-based assessment rates uniformly by seven cents, on an annual basis, for the first quarter of 2009 due to deteriorating financial conditions in the banking industry. In addition to risk-based deposit insurance assessments, additional assessments may be imposed by the Financing Corporation, a separate U.S. government agency affiliated with the FDIC, on insured deposits to pay for the interest cost of Financing Corporation bonds. Financing Corporation assessment rates for 2008 ranged from $.0110 to $.0114 per $100 of deposits. Financing Corporation assessments of $1.1 million were paid by TCF Bank for 2008, 2007 and 2006, respectively, and are included in other expense. The FDIC is authorized to terminate a depository institu- tion’s deposit insurance if it finds that the institution is being operated in an unsafe and unsound manner or has vio- lated any rule, regulation, order or condition administered by the institution’s regulatory authorities. Any such termi- nation of deposit insurance would likely have a material adverse effect on TCF, the severity of which would depend on the amount of deposits affected by such a termination. Under federal law, deposits and certain claims for administrative expenses and employee compensation against an insured depository institution are afforded a priority over other general unsecured claims against such an institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by any receiver appointed by regulatory authorities. Such priority creditors would include the FDIC. 2008 Form 10-K : 7 Examinations and Regulatory Sanctions TCF is sub- ject to periodic examination by the FRB, OCC and the FDIC. Bank regulatory authorities may impose a number of restrictions or new requirements on institutions found to be operating in an unsafe or unsound manner, including but not limited to growth limitations, dividend restrictions, individual increased regulatory capital requirements, increased loan, lease and real estate loss reserve require- ments, increased supervisory assessments, activity limita- tions or other restrictions that could have an adverse effect on such institutions, their holding companies or holders of their debt 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. Under the Bank Secrecy Act, USA Patriot Act and other statutes, the OCC may, and in some cases is obligated to, take enforcement action where it finds a statutory or regulatory violation. To the extent not subject to preemption by the OCC, subsidiaries of TCF may also be subject to state and/or self-regulatory organization licensing, regulation and examination requirements in connection with certain insurance activities. National Bank Investment Limitations Permissible investments by national banks are limited by the National Bank Act and by rules of the OCC. Non-traditional bank activities permitted by the Gramm-Leach-Bliley Act will subject a bank to additional regulatory limitations or requirements, including a required regulatory capital deduction and application of transactions with affiliates limitations in connection with such activities. Laws and Regulations TCF is subject to a wide array of other laws and regulations, including, but not limited to, usury laws, USA Patriot and Bank Secrecy Acts, the Community Reinvestment Act 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. 8 : TCF Financial Corporation and Subsidiaries Taxation Federal Taxation The statute of limitations on TCF’s con- solidated federal income tax return is closed through 2004. State Taxation TCF and/or its subsidiaries currently file tax returns in all states which impose corporate income and franchise taxes and local tax returns in certain cities and other taxing jurisdictions. TCF’s primary banking activities are in the states of Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana and Arizona. 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 12 of Notes to Consolidated Financial Statements for additional information regarding TCF’s income taxes. Available Information TCF’s website, www.tcfbank.com, includes free access to Company news releases, investor presentations, conference calls to discuss published financial results, TCF’s Annual Report and periodic filings required by the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports. 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. Item 1A. Risk Factors Enterprise Risk Management In the normal course of business, TCF is exposed to various risks. Management balances the Company’s strategic goals, including revenue and profitability objectives, with the associated risks. In defining the Company’s risk profile, management organizes risks into three main categories: Credit Risk, Market Risk (which includes interest-rate risk, liquidity risk and price risk) and Operational Risk (which includes transaction risk and compliance risk). Policies, systems and procedures have been adopted which are intended to identify, assess, control, monitor, and manage risk in each of these areas. 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 which are intended to identify, assess, con- trol, monitor, and manage risk within each area. Management continually reviews the adequacy and effectiveness of these policies, systems and procedures. As an integral part of the risk management process, management has established various committees consisting of senior executives and others within the Company. The purpose of these committees is to closely monitor risks and ensure that adequate risk management practices exist within their respective areas of authority. Some of the principal committees include the Credit Policy Committee, 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 helps provide a unified view of risk on an enterprise- wide basis. To provide an enterprise-wide view of the Company’s risk profile, 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. The risk officers, while reporting directly to their respective line, facilitate implementation of the enterprise risk man- agement and governance process. An Enterprise Risk Management Committee has been established consisting of senior executives and others within the Company, which over- sees and supports the Enterprise Risk Management Officer. The Board of Directors, through its Audit Committee, has overall responsibility for oversight of the Company’s enterprise risk management governance process. 2008 Form 10-K : 9 Credit Risk Management Credit risk is defined as the risk to earnings or capital if an obligor fails to meet the terms of any contract with the Company or otherwise fails to perform as agreed. This includes failure of customers and counterparties to meet their contractual obligations, and contingent exposures from unfunded loan commitments and letters of credit. Credit risk also includes failure of a counterparty to settle a securities transaction on agreed- upon terms (such as the counterparty in a repurchase transaction) or failure of an issuer in connection with mortgage-backed securities held in the Company’s securities available for sale portfolio. The Company manages securities transaction risk by monitoring all unsettled transactions. All counterparties and transaction limits are reviewed and approved annually by both ALCO and the Company’s senior credit committee. To further manage credit risk in the securities available for sale portfolio, over 99% of the securities held in the securities available for sale portfolio are issued and guaranteed by Fannie Mae or Freddie Mac. To manage credit risk arising from lending and leasing activities, management has adopted and maintains 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, credit scoring models are used to help determine eligibility for credit and terms of credit. These models are periodically reviewed to verify they are predictive of borrower perform- ance. 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 expo- sures receive managerial review at the appropriate level through various credit committees. Management continuously monitors asset quality in order to manage the Company’s credit risk and determine the appropriateness of valuation allowances. This includes, in the case of commercial loans and leases, a risk rating methodology under which a rating (1 through 9) is assigned to every loan and lease. The rating reflects management’s assessment of the level of the customer’s financial 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 to estimate probable impact on payment perform- ance under various expected or unexpected scenarios. With deteriorating economic conditions throughout 2008 and into 2009, credit risk may continue to increase. A weakening economy, increasing unemployment or further deterioration of housing markets could result in increased credit losses. Market Risk Management (Including Interest-Rate Risk and Liquidity Risk) Market risk is defined as the potential for losses arising from changes in interest rates, equity prices, and other relevant market rates or prices, and includes interest-rate risk, liquidity risk 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 exposure of net interest income and fair value of financial instruments (interest-earning assets, deposits and borrow- ings) to adverse movements in interest rates. Interest-rate risk arises mainly from the structure of the balance sheet. The primary goal of interest-rate risk management is to control exposure to 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 characteris- tics of assets and liabilities, changes in relationships between rate indices (basis risk), changes in customer behavior and changes in the shape of the yield curve. Management meas- ures 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 (generally 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, 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 characteristics 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. 10 : TCF Financial Corporation and Subsidiaries 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, 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. Net interest income simulation highlights exposure over a relatively short time period (12 months), valuation analysis incorpo- rates 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 pres- ent 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 simu- lation model. As with the net interest income simulation model, valuation analysis is based on key assumptions about the timing and variability of balance sheet cash flows. It also does not take into account actions management may under- take 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 earn- ings or capital arising from the Company’s inability to meet its obligations when they come due without incurring unaccept- able 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 liquidity risk. Under the Liquidity Management Policy, the Treasurer reviews current and forecasted funding needs for the Company 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. TCF maintains diverse sources of funding, which include $2.3 billion in secured borrowings capacity at the Federal Home Loan Bank (“FHLB”) of Des Moines, $616 million of secured borrowing capacity at the Federal Reserve Discount Window and $1 billion in unsecured and uncommitted available lines. TCF has developed and maintains a contin- gency funding plan should certain liquidity needs arise. Other Market Risks Another source of market risk is the Company’s investment in FHLB stock. The investments in FHLB stock are required investments related to TCF’s borrow- ings from these banks. FHLBs 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 generally jointly and severally liable for repayment of each other’s debt. Recently, the FHLB system has experienced financial stress, and some of the regional banks within the FHLB system have suspended or reduced their dividends, or eliminated the ability of members to redeem capital stock. The ultimate impact of these developments on the FHLB system or its programs for advances to members is not clear. TCF’s investments in the FHLB and ability to obtain FHLB funds could be adversely impacted if the financial health of the FHLB system worsens. Operational Risk Management Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, 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 inter- nal 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, regula- tions, 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 core areas of operations. This includes determining whether internal controls and information systems are properly designed and adequately tested and reviewed. This also includes determining whether the system of internal controls 2008 Form 10-K : 11 over financial reporting is appropriate for the type and level of risks posed by the nature and scope of the Company’s activities. Audit plans are prepared using a risk-based methodology as well as any concerns identified by manage- ment, the Audit Committee, regulators or the Company’s independent registered public accounting firm. Significant issues related to the adequacy of controls, together with recommendations for improvements to those controls, are reported to management and the Audit Committee. The Company’s Compliance Department and others charged with compliance responsibilities periodically assess the adequacy and effectiveness of the Company’s processes for controlling and managing its principal consumer compliance risks. Compliance Department audit plans are prepared using a risk-based methodology as well as any concerns identified by management, the Audit Committee, or regulators. Significant issues related to the adequacy of controls, together with recommendations for improvements to those controls, are reported to man- agement and the Audit Committee. Other Risks Declines in Home Values Declines in home values in TCF’s markets have adversely impacted results of operations. Like all banks, TCF is subject to the effects of any economic downturn, and in particular, a continued decline in home values in TCF’s markets could have a further negative effect on results of operations. 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. Economic Conditions In addition to the declines in home values, the slowing economy has also adversely impacted TCF’s results of operations. Continued slowing of the econ- omy coupled with increased unemployment and decreased consumer spending could have a further negative effect on results of TCF’s operations through higher credit losses, lower transaction related revenues and lower average deposit balances. Customer Behavior Changes in customers’ behavior regarding use of deposit accounts could result in lower fee revenue, higher borrowing costs, and higher operational costs for TCF. TCF obtains a large portion of its revenue from its deposit accounts and depends on low-interest cost deposits as a significant source of funds. In addition, competition from other financial institutions could result in higher numbers of closed accounts and increased account acquisition costs. TCF actively monitors customer behavior and adjusts policies and marketing efforts accordingly to attract new and retain existing deposit account customers. Card Revenue Future card revenues may be impacted by class action litigation against Visa USA Inc. (Visa USA) and MasterCard®. Under Visa USA’s Bylaws, TCF has a contingent obligation to indemnify Visa USA for certain litigation unre- lated to TCF. See page 26 under Management’s Discussion and Analysis for details of TCF’s contingent obligation to indemnify Visa USA for certain litigation. Merchants are also seeking to develop independent card products or payment systems that would serve as alternatives to TCF Visa card products. The continued success of TCF’s various card programs is dependent on the success and viability of Visa and the continued use by customers and acceptance by merchants of its cards. New Branch Expansion 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 adequate new branch sites is significant. Supermarket Branches The success of TCF’s supermarket branch expansion is dependent on the continued long-term success and viability of TCF’s supermarket partners and TCF’s ability to maintain licenses or lease agreements for its supermarket locations. In the third quarter of 2008, TCF entered into agreements with SUPERVALU INC. to extend the terms of master and license agreements for its supermarket branches in Minnesota, Illinois, Wisconsin and Indiana to December 31, 2018. At December 31, 2008, TCF had 236 supermarket branches. Supermarket banking continues to play an important role in TCF’s growth, as these branches have been consistent generators of account growth and deposits. TCF is subject to the risk, among others, that its license or lease for a location or locations will terminate upon the sale or closure of that location or locations by the supermarket partner. Also, an economic slowdown, or financial or labor difficulties in the supermarket industry may reduce activity in TCF’s supermarket branches. 12 : TCF Financial Corporation and Subsidiaries Leasing and Equipment Finance Activities TCF’s leasing and equipment finance activities are subject to the risk of cyclical downturns and other adverse economic developments. In an adverse economic environment, there may be a decline in the demand for some types of equipment which TCF leases and/or finances, resulting in a decline in the amount of new equipment being placed in service as well as the decline in equipment values for equipment pre- viously placed in service. TCF, like all owners and lessors of commercial equipment, may also be exposed to liability claims resulting from injuries or accidents involving that equipment. TCF seeks to mitigate its overall exposure to lessor’s liability risk by requiring certain lessees to furnish evidence of liability insurance prior to lease inception and to maintain that insurance throughout the term of the lease and through its own insurance programs. Inventory Finance TCF has strategic and execution risk associated with starting the new inventory finance business as the ability to attract and retain manufacturers and deal- ers may not achieve expectations. The core operating risks of this business are similar to other existing TCF businesses. Income Taxes TCF is subject to federal and state income tax laws and 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 Real Estate Investment Trust (“REIT”) affiliate fails to qualify as a REIT, or should states enact legislation taxing REITs or related entities, TCF’s tax expense would increase. The REIT and related companies must meet specific provisions of the Internal Revenue Code and state tax laws. Use of REITs is and has been the subject of federal and state audits, litigation with state taxing authorities and tax policy debates by various state legisla- tures. Additional unfavorable law changes or unfavorable audit results could increase TCF’s income taxes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Income Taxes” and Note 12 of Notes to Consolidated Financial Statements for additional information. Rules and Regulations New or revised tax, accounting, and other laws, regulations, rules and standards could sig- nificantly impact strategic initiatives, results of operations, and financial condition. The financial services industry is extensively regulated. Federal and state laws and regulations are designed primarily to protect the deposit insurance funds and consumers, and not necessarily to benefit a financial company’s shareholders. These laws and regulations may impose significant limitations on operations. These limita- tions, and sources of potential liability for the violation of such laws and regulations, are described in “Regulation.” These regulations, along with tax and accounting laws, regulations, rules and standards, have a significant impact on the ways that financial institutions conduct business, implement strategic initiatives, engage in tax planning and make financial disclosures. These laws, regulations, rules and standards are constantly evolving and may change significantly over time. The nature, extent, and timing of the adoption of significant new laws, changes in existing laws, or repeal of existing laws may have a material impact on TCF’s business, results of operations, and financial con- dition, the effect of which is impossible to predict. Violations of these laws can result in enforcement actions which can impact operations. Future Legislative and Regulatory Change; Litigation and Enforcement Activity There are a number of respects in which future legislative or regulatory change, or changes in enforcement practices or court rulings, could adversely affect TCF, and it is generally not possible to predict when or if such changes may have an impact on TCF. TCF’s income in future periods may be negatively impacted by pending state and federal legislative propos- als which, if enacted, could limit interest rates or loan, deposit or other fees and service charges. Financial institu- tions have also 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 requirements on financial institutions. The Department of Justice (“DOJ”) and other federal agencies are responsible for enforcing these laws and regulations. A successful chal- lenge 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 2008 Form 10-K : 13 restrictions on expansion activity. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. USA Patriot and Bank Secrecy Acts The USA Patriot and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish proce- dures for identifying and verifying the identity of customers seeking to open new accounts. Failure to comply with these regulations could result in fines and/or sanctions. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. Although TCF has developed policies and procedures designed to ensure compliance, regulators may take enforcement action against TCF in the event of noncompliance. Disruption to Infrastructure The extended disruption of vital infrastructure could negatively impact TCF’s busi- ness, results of operations, and financial condition. TCF’s operations depend upon, among other things, its technolog- ical 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 finan- cial statements conform with generally accepted accounting principles, which require management to make estimates and assumptions that affect amounts reported in the con- solidated 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 Staff Comments None. Item 2. Properties Offices At December 31, 2008, TCF owned the buildings and land for 139 of its bank branch offices, owned the buildings but leased the land for 24 of its bank branch offices and leased or licensed the remaining 285 bank branch offices, all of which are well maintained. Bank branch properties owned by TCF had an aggregate net book value of approximately $277.6 million at December 31, 2008. At December 31, 2008, the aggregate net book value of leasehold improvements associated with leased bank branch office facilities was $34.7 million. In addition to the branch offices, TCF owned and leased other facilities with an aggregate net book value of $42.8 million at December 31, 2008. For more information on premises and equipment, 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 collection 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 damages. Financial services companies are subject to the risk of class action litigation, and TCF has had such actions brought against it from time to time. Litigation is often unpredictable and the actual results of litigation cannot be determined with certainty. Item 4. Submission of Matters to a Vote of Security Holders None. 14 : 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 com- mon 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. 2008 First Quarter Second Quarter Third Quarter Fourth Quarter 2007 First Quarter Second Quarter Third Quarter Fourth Quarter High Low Dividends Declared $22.04 19.31 28.00 20.00 $27.91 28.99 28.25 27.95 $14.65 11.91 9.25 11.22 $24.93 25.39 22.69 17.17 $ .25 .25 .25 .25 $.2425 .2425 .2425 .2425 As of January 31, 2009, there were 7,795 holders of record of TCF’s common stock. The Board of Directors of TCF Financial has adopted a Capital Plan and Dividend Policy. The policy defines how enterprise risk related to capital will be managed, how the adequacy of capital will be measured and the process by which capital strategy, management and common stock dividend recommendations will be presented to TCF’s Board of Directors. TCF’s management is charged with ensuring that capital strategy actions, including the declaration of common stock dividends, are prudent, efficient and provide value to TCF’s shareholders, while ensuring that past and prospective earnings retention is consistent with TCF’s capital needs, asset quality and overall financial condition. The Board of Directors intends to continue its practice of paying quarterly cash dividends on TCF’s common stock as justified by the financial condition of TCF. On November 14, 2008, TCF entered into a definitive agreement with the U.S. Treasury to participate in the CPP. Due to TCF’s participation in the CPP, TCF may not increase its dividend for three years from the date of the Agreement unless the preferred shares sold to the U.S. Treasury have been redeemed in whole or transferred to a third party which is not an affiliate of TCF. See Note 13 of Notes to Consolidated Financial Statements for additional CPP information. The declaration and amount of future divi- dends will depend on circumstances existing at the time, including TCF’s earnings, level of internally generated common capital excluding earnings, financial condition and capital requirements, the cash available to pay such dividends (derived mainly from dividends and distributions from TCF Bank), as well as regulatory and contractual limi- tations and such other factors as the Board of Directors may deem relevant. In general, TCF Bank may not declare or pay a dividend to TCF in excess of 100% of its net retained profits for that year combined with its net retained profits for the preceding two calendar years without prior approval of the OCC. Restrictions on the ability of TCF Bank to pay cash div- idends or possible diminished earnings of TCF may limit the ability of TCF to pay dividends in the future to holders of its common stock. See “Regulation – Regulatory Capital Requirements,” “Regulation – Restrictions on Distributions” and Note 14 of Notes to Consolidated Financial Statements. 2008 Form 10-K : 15 The following graph compares the cumulative total stockholder return on TCF Stock over the last five fiscal years with the cumulative total return of the Standard and Poor’s 500 Stock Index, the SNL All Bank and Thrift Index, and a TCF Financial- selected group of peer institutions over the same period (assuming the investment of $100 in each index on December 31, 2003 and reinvestment of all dividends). TCF Stock Performance Chart TCF Financial Corporation SNL All Bank & Thrift Index(1) S&P 500 Index TCF 2008 Peer Group(2) $160 140 120 100 80 60 e u l a V x e d n I 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 Period Ending Index TCF Financial Corporation SNL All Bank & Thrift Index (1) S&P 500 Index TCF 2008 Peer Group (2) 12/31/03 100.00 100.00 100.00 100.00 12/31/04 128.60 111.98 110.88 111.62 12/31/05 112.03 113.74 116.33 108.35 12/31/06 117.27 132.90 134.70 119.69 12/31/07 79.69 101.34 142.10 94.12 12/31/08 64.53 58.28 89.53 74.90 (1) Includes every bank and thrift in the U.S. traded on a major public exchange, a total of 562 companies as of December 31, 2008. (2) Consists of the 30 publicly-traded banks and thrifts, 15 of which are immediately larger than and 15 of which are immediately smaller than TCF Financial Corporation in total assets as of September 30, 2008, as follows: Zions Bancorporation; Hudson City Bancorp, Inc.; Popular, Inc.; Synovus Financial Corp.; First Horizon National Corporation; New York Community Bancorp, Inc.; Colonial BancGroup, Inc.; Associated Banc-Corp; BOK Financial Corporation; Astoria Financial Corporation; People’s United Financial Corporation; First BanCorp.; Webster Financial Corporation; Commerce Bancshares, Inc.; First Citizens BancShares, Inc.; City National Corporation; Fulton Financial Corporation; Guaranty Financial Group, Inc.; Valley National Bancorp; Flagstar Bancorp, Inc.; Cullen/Frost Bankers, Inc.; South Financial Group, Inc.; Susquehanna Bancshares, Inc.; BancorpSouth, Inc.; Citizens Republic Bancorp, Inc.; UCBH Holdings, Inc.; Sterling Financial Corporation; Wilmington Trust Corporation; Washington Federal, Inc.; and East West Bancorp, Inc. Five of the companies, which were in the 2007 TCF Peer Group, are not in the 2008 TCF Peer Group due to the failure of the company or changes in asset size. Those five companies are: IndyMac Bancorp, Inc.; BankUnited Financial Corporation; Downey Financial Corp.; International Bancshares Corporation; and Whitney Holding Corporation. Source: SNL Financial LC and Standard & Poor’s © 2009 Due to TCF’s participation in the CPP, TCF may not repurchase shares of common stock for three years from the date of the Agreement unless the preferred shares sold to the U.S. Treasury have been redeemed in whole or transferred to a third party which is not an affiliate of TCF. The following table summarizes share repurchase activity for the quarter ended December 31, 2008. Period October 1 to October 31, 2008 Share repurchase program (1) Employee transactions (2) November 1 to November 30, 2008 Share repurchase program (1) Employee transactions (2) December 1 to December 31, 2008 Share repurchase program (1) Employee transactions (2) Total number of shares purchased – 12,369 – – – – Average price paid per share Total shares purchased as a part of publicly announced plan Number of shares that may yet be purchased under the plan $ – $18.80 $ $ – – $ – $ – – N.A. – N.A. – N.A. 5,384,130 N.A. 5,384,130 N.A. 5,384,130 N.A. N.A. Not Applicable. (1) The current share repurchase authorization was approved by the Board of Directors on April 14, 2007. The authorization was for a repurchase of up to an additional 5% of TCF's common stock outstanding at the time of the authorization, or 6.5 million shares. This authorization does not have an expiration date. (2) Shares withheld pursuant to the terms of awards under the TCF Financial Incentive Stock Program to offset tax withholding obligations that occur upon vesting and release of restricted shares. The TCF Financial Incentive Stock Program provides that the value of shares withheld shall be the average of the high and low prices of common stock of TCF Financial Corporation on the date the relevant transaction occurs. 16 : TCF Financial Corporation and Subsidiaries 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: (Dollars in thousands, except per-share data) Total revenue Net interest income Provision for credit losses Fees and other revenue Gains on securities Visa share redemption Gains on sales of branches and real estate Non-interest expense Income before income tax expense Income tax expense Net income Preferred stock dividends Net income available to common stockholders Per common share: Basic earnings Diluted earnings Dividends declared Consolidated Financial Condition: (Dollars in thousands, except per-share data) Loans and leases, excluding residential real estate loans Securities available for sale Residential real estate loans Subtotal 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: Year Ended December 31, 2006 2005 2007 2008 2004 $ 1,092,108 $ 1,091,634 $ 1,026,994 $ 995,932 $ 981,777 550,177 $ 537,530 $ 517,690 $ 491,891 $ 18,627 56,992 467,027 490,285 22,600 13,278 – – 593,673 $ 192,045 474,061 16,066 8,308 20,689 485,276 – – 8,586 453,965 10,671 – – 694,403 205,660 76,702 128,958 2,540 37,894 662,124 372,518 105,710 266,808 – 4,188 649,197 357,108 112,165 244,943 – 13,606 606,936 380,410 115,278 265,132 – 259 578,674 384,476 129,483 254,993 – Compound Annual Growth Rate 1-Year 2008/2007 5-Year 2008/2003 —% 7.9 N.M. (3.3) 21.0 N.M. (100.0) 4.9 (44.8) (27.4) (51.7) N.M. 3.9% 4.3 58.7 2.0 (13.3) N.M. (100.0) 4.6 8.9 (7.3) (9.8) N.M. $ $ $ $ 126,418 $ 266,808 $ 244,943 $ 265,132 $ 254,993 (52.6) (10.1) 1.01 $ 1.01 $ 1.00 $ 2.13 $ 2.12 $ .97 $ 1.90 $ 1.90 $ .92 $ 1.87 2.00 $ 2.00 $ 1.86 .85 $ .75 (52.6) (52.4) 3.1 (8.0) (8.0) 9.0 At December 31, 2008 2007 2006 2005 2004 Compound Annual Growth Rate 1-Year 2008/2007 5-Year 2008/2003 $12,889,690 $11,810,629 $10,705,890 $ 9,442,772 $ 8,404,404 1,619,941 1,014,166 2,634,107 12,376,965 1,966,104 455,443 2,421,547 16,740,357 1,648,615 770,441 2,419,056 13,388,594 1,963,681 527,607 2,491,288 15,977,054 1,816,126 627,790 2,443,916 14,669,734 7,647,069 2,596,283 10,243,352 4,660,774 1,493,776 $ 8.99 $ 7,322,014 2,254,535 9,576,549 4,973,448 1,099,012 7,285,615 2,483,635 9,769,250 3,588,540 1,033,374 8.68 $ 7.92 $ 7,213,735 1,915,620 9,129,355 2,983,136 998,472 6,525,458 1,468,650 7,994,108 3,104,603 958,418 6.99 7.46 $ 9.1% .1 (13.7) (2.8) 4.8 4.4 15.2 7.0 (6.3) 35.9 3.5 Return on average assets Return on average common equity Average total equity to average assets Net interest margin (1) Net charge-offs as a percentage of average loans and leases Number of bank branches (1) Net interest income divided by average interest-earning assets. N.M. Not Meaningful. 2008 .79% 11.46 7.04 3.91 .78 448 At or For the Year Ended December 31, 2006 2007 1.74% 1.76% 24.37 25.82 6.82 7.15 4.16 3.94 .17 .30 453 453 2005 2.08% 28.03 7.43 4.46 .29 453 12.5% 5.1 (17.8) (2.5) 8.1 4.9 10.0 6.1 14.1 10.2 6.6 2004 2.15% 27.02 7.94 4.54 .20 430 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 Impaired Loans Past Due Loans and Leases Potential Problem Loans and Leases Liquidity Management Deposits Branches Borrowings Contractual Obligations and Commitments Stockholders’ Equity Summary of Critical Accounting Estimates Recent Accounting Developments Fourth Quarter Summary Forward-Looking Information Page 17 18 18 19 19 19 22 23 25 26 27 27 27 31 34 34 35 36 36 37 37 37 38 38 39 39 40 41 2008 Form 10-K : 17 Management’s discussion and analysis of the consolidated financial condition and results of operations of TCF Financial Corporation should be read in conjunction with the consoli- dated financial statements in Item 8 and selected financial data in Item 6. Overview TCF Financial Corporation, a Delaware corporation, is a financial holding company based in Wayzata, Minnesota. Its principal subsidiaries, TCF National Bank and TCF National Bank Arizona, are headquartered in Minnesota and Arizona, respectively. TCF had 448 banking offices in Minnesota, Illinois, Michigan, Colorado, Wisconsin, Indiana and Arizona at December 31, 2008. TCF provides convenient financial services through multiple channels in its primary banking markets. TCF has developed products and services designed to meet the needs of all consumers. The Company focuses on attracting and retaining customers through service and convenience, including branches that are open seven days a week and on most holidays, extensive full-service supermarket branches, automated teller machine (“ATM”) networks and telephone and internet banking. TCF’s philosophy is to generate inter- est income, fees and other revenue growth through business lines that emphasize higher yielding assets and low or no interest-cost deposits. The Company’s growth strategies include new branch expansion, acquisitions and the devel- opment 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 and small business banking, commercial banking, consumer lending, leasing and equipment finance and inventory finance. The retail banking business includes traditional and supermarket branches, campus banking, EXPRESS TELLER® ATMs and Visa® cards. 18 : TCF Financial Corporation and Subsidiaries TCF’s lending strategy is to originate high credit quality, primarily secured, loans and leases. 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. Commercial loans are generally made on local properties or to local customers. The leasing and equipment finance businesses consist of TCF Equipment Finance, a company that delivers equipment finance solutions to businesses in select markets, and Winthrop Resources, a company that primarily leases technology and data processing equipment. TCF’s leasing and equipment finance businesses have equipment installations in all 50 states and, to a limited extent, in foreign countries. In December, 2008, TCF Inventory Finance commenced lending operations to provide inventory financing to businesses in the United States and Canada. Historically TCF originated education loans for resale. As a result of Federal law changes and general market conditions, TCF no longer originates education loans. Net interest income, the difference between interest income earned on loans and leases, securities available for sale, investments and other interest-earning assets and interest paid on deposits and borrowings, represented 54.4% of TCF’s total revenue in 2008. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment pat- terns, 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 monitor- ing and management policies. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” for further discussions. 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 the number of deposit accounts and related transaction activity. Increasing fee and service charge revenue has been challenging as a result of slower growth in deposit accounts and changing customer behaviors. 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 signif- icantly since its inception in 1996. TCF is the 12th largest issuer of Visa Classic debit cards in the United States, based on sales volume for the three months ended September 30, 2008 as published by Visa. TCF earns interchange revenue from customer card transactions paid primarily by merchants, not TCF’s customers. These products represent 23.9% of banking fee revenue for the year ended December 31, 2008, and change based on customer payment trends and the number of deposit accounts using the cards. Visa has sig- nificant litigation against it regarding interchange pricing and there is a risk this revenue could be impacted by any settlement or adverse rulings in such litigation. See “Item 1A. Risk Factors – Card Revenue” for further discussion. The following portions of Management’s Discussion and Analysis of Financial Condition and Results of Operations focus in more detail on the results of operations for 2008, 2007 and 2006 and on information about TCF’s balance sheet, credit quality, liquidity, funding resources, capital and other matters. Results of Operations Performance Summary TCF reported diluted earnings per common share of $1.01 for 2008, compared with $2.12 for 2007 and $1.90 for 2006. Net income was $129 million for 2008, compared with $266.8 million for 2007 and $244.9 million for 2006. Net income for 2007 included $37.9 million in pre-tax gains on sales of branches and real estate. TCF recorded $192 million in the provision for credit losses for 2008, compared with $57 million for 2007 and $20.7 million for 2006. Return on average assets was .79% in 2008, compared with 1.76% in 2007 and 1.74% in 2006. Return on average common equity was 11.46% in 2008, compared with 25.82% in 2007 and 24.37% in 2006. The effective income tax rate for 2008 was 37.3%, compared with 28.4% in 2007 and 31.4% in 2006. 2008 Form 10-K : 19 Leasing and equipment finance non-interest income totaled $55.5 million in 2008, down $3.6 million from $59.2 million in 2007. The decrease in leasing and equipment finance revenues for 2008, compared with 2007, was prima- rily due to a decrease in sales-type lease and operating lease revenues. Leasing and equipment finance non-interest expense totaled $68.5 million in 2008, up $3.2 million from $65.4 million in 2007, primarily related to a $1.2 million net effect of foreign exchange losses in 2008 on foreign denominated loans compared with foreign exchange gains in 2007 and an increase of $1.3 million in expenses associated with repossessed assets. OTHER – Other includes the holding company and corporate functions that provide data processing, bank operations and other professional services to the operating segments and beginning in 2008 includes $5.2 million of costs for TCF’s new inventory finance business. 2008 also included a $1.5 million charge recorded to income tax expense related to the distributions from the company’s deferred compensation plans. Consolidated Income Statement Analysis Net Interest Income Net interest income, the difference between interest earned on loans and leases, securities available for sale, investments and other interest-earning assets (interest income), and interest paid on deposits and borrowings (interest expense), represented 54.4% of TCF’s total revenue in 2008, 50.4% in 2007 and 52.3% in 2006. 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 prevaling short and long-term interest rates, loan and deposit pricing strategies and competitive conditions, the volume and the mix of interest- earning assets and interest-bearing liabilities, and the level of non-performing assets. Operating Segment Results BANKING — Consisting of deposits, investment products, commercial banking, small business banking, consumer lending and treasury services, reported net income of $105.3 million for 2008, down 54.6% from $232.1 million in 2007. Banking net interest income for 2008 was $514.6 million, up 6% from $485.5 million for 2007. The banking provision for credit losses totaled $174.9 million in 2008, up from $51.7 million in 2007. This increase was primarily due to higher consumer home equity net charge-offs and the resulting portfolio reserve rate increases and higher reserves and charge-offs for certain commercial loans, primarily in Michigan. Refer to the “Consolidated Income Statement Analysis – Provision for Credit Losses” section for further discussion. Banking non-interest income totaled $434 million in 2008, down from $443.5 million in 2007, excluding the 2008 gain on Visa share redemption and the 2007 gains on sales of branches and real estate. Fees and service charges were $270.7 million for 2008, down 2.6% from $278 million in 2007, primarily due to lower activity in deposit service fees. Card revenues were $103.1 million for 2008, up 4.2% from $98.9 million in 2007. The increase in card revenues was primarily attributable to increases in transactions per active card. See “Consolidated Income Statement Analysis – Non-Interest Income” for further discussion. Banking non-interest expense totaled $619 million in 2008, up 4.1% from $594.7 million in 2007. The increase was prima- rily due to a $12 million increase in deposit account premium expenses from new marketing campaigns which resulted in increased checking account production along with an increase in foreclosed real estate expense due to increased property taxes and higher real estate disposition losses in 2008. LEASING AND EQUIPMENT FINANCE — An operating seg- ment composed of TCF’s wholly-owned subsidiaries TCF Equipment Finance and Winthrop Resources, provides a broad range of comprehensive lease and equipment finance products. Leasing and equipment finance reported net income of $30.3 million for 2008, down 12.4% from $34.6 million in 2007. Net interest income for 2008 was $79.8 million, up 22.1% from $65.4 million in 2007. The provision for credit losses for this operating segment totaled $17.2 million in 2008, up from $5.3 million in 2007. The increase in the provision for credit losses from 2007 to 2008 was primarily due to increased net charge-offs, which included a $2.1 million one-time recovery of a previously charged-off lease in 2007, and increased delinquency and non-accrual loans and leases. 20 : TCF Financial Corporation and Subsidiaries The following tables summarize TCF’s average balances, interest, dividends and yields and rates on major categories of TCF’s interest-earning assets and interest-bearing liabilities. Year Ended December 31, 2008 Year Ended December 31, 2007 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) $ 155,839 2,112,974 87,877 $ 5,937 110,946 5,355 3.81% 5.25 6.09 $ 178,012 2,024,563 154,516 $ 8,237 109,581 13,252 4.63% 5.41 8.58 $ (22,173) 88,411 (66,639) $ (2,300) 1,365 (7,897) (82) (16) (249) 5,043,699 1,714,828 45,013 343,739 109,115 3,877 6.82 6.36 8.61 4,683,745 1,460,685 43,589 326,516 124,992 4,307 6.97 8.56 9.88 359,954 254,143 1,424 17,223 (15,877) (430) (15) (220) (127) 6,803,540 456,731 6.71 6,188,019 455,815 7.37 615,521 916 (66) 132,014 31,110 163,124 9,988 18,143 28,131 165,838 4 813,828 28,329 842,157 964,395 6.21 5.21 5.99 5.93 4.95 5.26 7.32 10.00 6.60 5.80 6.57 6.36 12,933 48,601 10,099 71,633 85,141 156,774 156,774 8,990 204,958 213,948 370,722 370,722 .71 1.68 1.65 1.34 3.44 2.01 1.58 2.18 4.60 4.39 2.92 2.50 2,127,436 597,071 2,724,507 168,554 366,593 535,147 2,265,391 40 12,328,625 488,499 12,817,124 15,173,814 1,158,536 $16,332,350 $ 1,320,951 583,611 231,903 2,136,465 1,830,361 2,899,821 613,543 5,343,725 2,472,357 7,816,082 9,952,547 411,763 4,459,703 4,871,466 12,687,548 14,824,013 359,223 15,183,236 1,149,114 $16,332,350 1,777,813 608,209 2,386,022 169,776 393,442 563,218 1,915,790 – 11,053,049 574,554 11,627,603 13,984,694 1,161,106 $15,145,800 $ 1,444,125 594,979 199,432 2,238,536 1,879,333 2,464,333 604,767 4,948,433 2,461,055 7,409,488 9,648,024 230,293 3,890,054 4,120,347 11,529,835 13,768,371 343,978 14,112,349 1,033,451 $15,145,800 114,140 46,363 160,503 10,853 28,947 39,800 147,507 – 803,625 33,328 836,953 968,023 33,643 65,056 17,396 116,095 114,530 230,625 230,625 11,369 175,852 187,221 417,846 417,846 6.42 7.62 6.73 6.39 7.36 7.07 7.70 – 7.27 5.80 7.20 6.92 1.79 2.64 2.88 2.35 4.65 3.11 2.39 4.94 4.52 4.54 3.62 3.03 349,623 (11,138) 338,485 17,874 (15,253) 2,621 (21) (241) (74) (865) (10,804) (11,669) 18,331 4 10,203 (4,999) 5,204 (3,628) (46) (241) (181) (38) 1,000 (67) — (63) (56) (20,710) (16,455) (7,297) (44,462) (29,389) (73,851) (73,851) (2,379) 29,106 26,727 (47,124) (47,124) (108) (96) (123) (101) (121) (110) (81) (276) 8 (15) (70) (53) (1,222) (26,849) (28,071) 349,601 40 1,275,576 (86,055) 1,189,521 1,189,120 (2,570) $1,186,550 $ (123,174) (11,368) 32,471 (102,071) (48,972) 435,488 8,776 395,292 11,302 406,594 304,523 181,470 569,649 751,119 1,157,713 1,055,642 15,245 1,070,887 115,663 $1,186,550 $593,673 3.91% $550,177 3.94% $ 43,496 (3) (Dollars in thousands) Assets: Investments and other Securities available for sale (2) Education loans held for sale Loans and leases: Consumer home equity: Fixed-rate Variable-rate (3) Consumer – other Total consumer home equity and other Commercial real estate: Fixed- and adjustable-rate Variable-rate (3) Total commercial real estate Commercial business: Fixed- and adjustable-rate Variable-rate Total commercial business Leasing and equipment finance Inventory finance Subtotal Residential real estate Total loans and leases (4) Total interest-earning assets Other assets (5) Total assets Liabilities and Stockholders’ Equity: Non-interest bearing deposits: Retail Small business Commercial and custodial Total non-interest bearing deposits Interest-bearing deposits: Checking Savings Money market Subtotal Certificates of deposit Total interest-bearing deposits Total deposits Borrowings: Short-term borrowings Long-term borrowings Total borrowings Total interest-bearing liabilities Total deposits and borrowings Other liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity Net interest income and margin bps = basis points. (1) Tax-exempt income was not significant and thus yields on interest-earning assets and net interest margin have not been presented on a tax equivalent basis. Tax-exempt income of $1,679,000 and $1,933,000 was recognized during the years ended December 31, 2008 and 2007, respectively. (2) Average balance and yield of securities available for sale are based upon the historical amortized cost. (3) Certain variable-rate loans have contractual interest rate floors. (4) Average balance of loans and leases includes non-accrual loans and leases, and is presented net of unearned income. (5) Includes operating leases. 2008 Form 10-K : 21 Year Ended December 31, 2007 Year Ended December 31, 2006 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) $ 178,012 2,024,563 154,516 $ 8,237 109,581 13,252 4.63% 5.41 8.58 $ 78,511 1,833,359 210,992 $ 3,504 98,035 15,009 4.46% 5.35 7.11 $ 99,501 191,204 (56,476) $ 4,733 11,546 (1,757) 4,683,745 1,460,685 43,589 326,516 124,992 4,307 6.97 8.56 9.88 3,851,117 1,659,544 36,711 263,157 143,576 3,717 6.83 8.65 10.13 832,628 (198,859) 6,878 63,359 (18,584) 590 6,188,019 455,815 7.37 5,547,372 410,450 7.40 640,647 45,365 114,140 46,363 160,503 10,853 28,947 39,800 147,507 – 803,625 33,328 836,953 968,023 33,643 65,056 17,396 116,095 114,530 230,625 230,625 11,369 175,852 187,221 417,846 417,846 6.42 7.62 6.73 6.39 7.36 7.07 7.70 – 7.27 5.80 7.20 6.92 1.79 2.64 2.88 2.35 4.65 3.11 2.39 4.94 4.52 4.54 3.62 3.03 1,777,813 608,209 2,386,022 169,776 393,442 563,218 1,915,790 – 11,053,049 574,554 11,627,603 13,984,694 1,161,106 $15,145,800 $ 1,444,125 594,979 199,432 2,238,536 1,879,333 2,464,333 604,767 4,948,433 2,461,055 7,409,488 9,648,024 230,293 3,890,054 4,120,347 11,529,835 13,768,371 343,978 14,112,349 1,033,451 $15,145,800 1,665,531 721,871 2,387,402 134,560 373,690 508,250 1,659,807 – 10,102,831 696,086 10,798,917 12,921,779 1,141,934 $14,063,713 $ 1,513,121 609,907 232,725 2,355,753 1,865,340 2,275,249 620,844 4,761,433 2,291,002 7,052,435 9,408,188 596,852 2,752,847 3,349,699 10,402,134 12,757,887 300,930 13,058,817 1,004,896 $14,063,713 105,089 55,239 160,328 8,471 27,619 36,090 122,292 – 729,160 40,430 769,590 886,138 33,557 50,114 15,173 98,844 96,480 195,324 195,324 30,041 123,243 153,284 348,608 348,608 6.31 7.65 6.72 6.30 7.39 7.10 7.37 – 7.22 5.81 7.13 6.86 1.80 2.20 2.44 2.08 4.21 2.77 2.08 5.03 4.48 4.58 3.35 2.73 9,051 (8,876) 175 2,382 1,328 3,710 25,215 – 74,465 (7,102) 67,363 81,885 86 14,942 2,223 17,251 18,050 35,301 35,301 (18,672) 52,609 33,937 69,238 69,238 112,282 (113,662) (1,380) 35,216 19,752 54,968 255,983 – 950,218 (121,532) 828,686 1,062,915 19,172 $1,082,087 $ (68,996) (14,928) (33,293) (117,217) 13,993 189,084 (16,077) 187,000 170,053 357,053 239,836 (366,559) 1,137,207 770,648 1,127,701 1,010,484 43,048 1,053,532 28,555 $1,082,087 17 6 147 14 (9) (25) (3) 11 (3) 1 9 (3) (3) 33 – 5 (1) 7 6 (1) 44 44 27 44 34 31 (9) 4 (4) 27 30 $550,177 3.94% $537,530 4.16% $ 12,647 (22) (Dollars in thousands) Assets: Investments and other Securities available for sale (2) Education loans held for sale Loans and leases: Consumer home equity: Fixed-rate Variable-rate (3) Consumer – other Total consumer home equity and other Commercial real estate: Fixed- and adjustable-rate Variable-rate (3) Total commercial real estate Commercial business: Fixed- and adjustable-rate Variable-rate Total commercial business Leasing and equipment finance Inventory finance Subtotal Residential real estate Total loans and leases (4) Total interest-earning assets Other assets (5) Total assets Liabilities and Stockholders’ Equity: Non-interest bearing deposits: Retail Small business Commercial and custodial Total non-interest bearing deposits Interest-bearing deposits: Checking Savings Money market Subtotal Certificates of deposit Total interest-bearing deposits Total deposits Borrowings: Short-term borrowings Long-term borrowings Total borrowings Total interest-bearing liabilities Total deposits and borrowings Other liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity Net interest income and margin bps = basis points. (1) Tax-exempt income was not significant and thus yields on interest-earning assets and net interest margin have not been presented on a tax equivalent basis. Tax-exempt income of $1,933,000 and $1,209,000 was recognized during the years ended December 31, 2007 and 2006, respectively. (2) Average balance and yield of securities available for sale are based upon the historical amortized cost. (3) Certain variable-rate loans have contractual interest rate floors. (4) Average balance of loans and leases includes non-accrual loans and leases, and is presented net of unearned income. (5) Includes operating leases. 22 : TCF Financial Corporation and Subsidiaries 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 Education loans held for sale Loans and leases: Consumer home equity: Fixed-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 Inventory finance Residential real estate Total loans and leases Total interest income Interest expense: Checking 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, 2008 Versus Same Period in 2007 Increase (Decrease) Due to Year Ended December 31, 2007 Versus Same Period in 2006 Increase (Decrease) Due to Volume (1) Rate (1) # Days Total Volume (1) Rate (1) Total $ (957) 4,700 (4,734) $ (1,356) (3,336) (3,178) 13 1 15 $ (2,300) 1,365 (7,897) $ 4,599 10,336 (4,485) $ 134 1,210 2,728 $ 4,733 11,546 (1,757) 23,931 19,372 135 (7,647) (35,547) (576) 21,496 (839) (3,983) (14,499) (80) (1,872) 25,875 4 (5,006) 80,629 77,953 (857) 10,082 248 518 6,019 25,677 32,713 30,007 45,796 (812) (8,982) (7,544) – (9) (77,212) (83,397) (19,888) (26,676) (7,573) (30,139) (8,422) 2,918 (6,521) (78,100) (3,147) 939 298 11 361 85 27 50 — – 16 1,787 1,816 35 139 28 232 24 511 535 969 847 17,223 (15,877) (430) 17,874 (15,253) (865) (10,804) 18,331 4 (4,999) 5,204 (3,628) (20,710) (16,455) (7,297) (29,389) (2,379) 29,106 26,727 (47,124) 43,496 57,947 (17,033) 682 5,412 (1,551) (92) 63,359 (18,584) 590 7,183 (8,665) 2,249 1,454 19,518 – (7,050) 59,581 73,505 251 4,409 (402) 7,472 (18,107) 51,397 35,024 28,884 42,768 1,868 (211) 133 (126) 5,697 – (52) 7,782 8,380 (165) 10,533 2,625 10,578 (565) 1,212 (1,087) 40,354 (30,121) 9,051 (8,876) 2,382 1,328 25,215 – (7,102) 67,363 81,885 86 14,942 2,223 18,050 (18,672) 52,609 33,937 69,238 12,647 (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. Net interest income was $593.7 million for 2008, up 7.9% from $550.2 million in 2007. The increase in net interest income in 2008 primarily reflects the growth in average inter- est-earning assets, up $1.2 billion over 2007, partially offset by a 3 basis point reduction in net interest margin. The decrease in the net interest margin, from 3.94% in 2007 to 3.91% in 2008, is primarily due to the average cost of inter- est-bearing liabilities not decreasing as much as yields on interest earning assets as a result of deposit pricing strate- gies and the issuance of trust preferred securities in 2008. Net interest income was $550.2 million in 2007, up from $537.5 million in 2006. The increase in net interest income in 2007 primarily reflected the growth in average interest earning assets, up $1.1 billion over 2006, partially offset by a 22 basis point reduction in net interest margin. The decrease in the net interest margin, from 4.16% in 2006 to 3.94% in 2007, is primarily due to partially funding the growth in interest earning assets with borrowings and higher-cost deposits and continued customer preference for lower-yielding fixed-rate loans. Provision for Credit Losses TCF provided $192 million for credit losses in 2008, compared with $57 million in 2007 and $20.7 million in 2006. The increase in provision from 2007 to 2008 was primarily due to higher consumer home equity net charge-offs and the resulting portfolio reserve rate increases and higher reserves and net charge-offs for commercial loans, primarily in Michigan. 2008 Form 10-K : 23 Consumer home equity charge-off rates increased throughout 2008. As a result, TCF increased consumer home equity allowance levels. Higher home equity charge-offs are primarily due to depressed residential real estate mar- ket conditions, primarily in Minnesota and Michigan. The increase in provision from 2006 to 2007 was due to higher consumer home equity net charge-offs, the resulting port- folio reserve rate increases and higher reserves for certain commercial loans, primarily in Michigan, and equipment finance loans and leases. Net loan and lease charge-offs were $100.5 million, or .78%, of average loans and leases in 2008, compared with $34.6 million, or .30%, of average loans and leases in 2007 and $18 million, or .17%, of average loans and leases in 2006. The provision for credit losses is calculated as part of the determination of the allowance for loan and lease losses. The determination of the allowance for loan and lease losses and the related provision for credit losses is a criti- cal accounting estimate which involves a number of factors such as historical trends in net charge-offs, delinquencies in the loan and lease portfolio, year of loan origination, value of collateral, general economic conditions and man- agement’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 signifi- cant source of revenue for TCF, representing 45.6% of total revenues in 2008, 49.6% in 2007 and 47.7% in 2006, and is an important factor in TCF’s results of operations. Providing a wide range of retail banking services is an integral com- ponent of TCF’s business philosophy and a major strategy for generating additional non-interest income. Total fees and other revenue was $474.1 million for 2008, down from $490.3 million in 2007 and $485.3 million in 2006. The following table presents the components of non-interest income. Year Ended December 31, 2007 $278,046 98,880 35,620 10,318 422,864 59,151 8,270 490,285 13,278 – 2006 $270,166 92,084 37,760 10,695 410,705 53,004 21,567 485,276 – – 2005 $262,636 79,803 40,730 10,665 393,834 47,387 12,744 453,965 10,671 – 2004 $275,120 63,463 42,935 12,558 394,076 50,323 22,628 467,027 22,600 – Compound Annual Growth Rate 1-Year 2008/2007 5-Year 2008/2003 (2.6)% 4.2 (8.4) (8.8) (1.7) (6.2) (67.3) (3.3) 21.0 N.M. 1.7% 14.2 (5.6) (7.5) (2.9) (1.7) (32.3) 2.0 (13.3) N.M. 37,894 $541,457 4,188 $489,464 13,606 $478,242 259 $489,886 (100.0) (7.9) (100.0) 3.5 2008 $270,739 103,082 32,645 9,405 415,871 55,488 2,702 474,061 16,066 8,308 – $498,435 43.41% 44.91% 47.25% 45.58% 47.57% (Dollars in thousands) Fees and service charges Card revenue ATM revenue Investments and insurance revenue Subtotal Leasing and equipment finance Other Fees and other revenue Gains on securities Visa share redemption Gains on sales of branches and real estate Total non-interest income Fees and other revenue as a percentage of: Total revenue N.M. Not Meaningful. Fees and Service Charges Fees and service charges decreased $7.3 million, or 2.6%, to $270.7 million for 2008, compared with $278 million for 2007 primarily due to lower activity in deposit service fees. During 2007, fees and service charges increased $7.9 million, or 2.9%, to $278 million, compared with $270.2 million for 2006, primarily due to higher activity in deposit service fees. Fees and service charges related to the Michigan branches that were sold in the first quarter of 2007, were $5.3 million in 2006 and $945 thousand in 2007, respectively. Card Revenue During 2008, card revenue, primarily inter- change fees, totaled $103.1 million, up from $98.9 million in 2007 and $92.1 million in 2006. The increases in card revenue in 2008 and 2007 were primarily attributable to increased transactions per active card. The continued success of TCF’s 24 : TCF Financial Corporation and Subsidiaries debit card program is highly dependent on the success and viability of Visa and the continued use by customers and acceptance by merchants of its cards. ATM Revenue ATM revenue totaled $32.6 million for 2008, down from $35.6 million in 2007 and $37.8 million in 2006. The declines in ATM revenue were primarily attributable to continued declines in fees charged to TCF customers for use of non-TCF ATM machines due to growth in TCF’s fee free checking products and changes in customer ATM usage behavior. The following table sets forth information about TCF’s card business. (Dollars in thousands) Average number of checking accounts with a TCF card Average active card users Average number of transactions per card per month Sales volume for the year ended: Off-line (Signature) On-line (PIN) Total Average transaction size (in dollars) Percentage off-line Average interchange rate At or For the Year Ended December 31, Percentage Increase (Decrease) 2008 1,449,501 812,385 20.3 2007 1,455,540 811,961 19.4 2006 1,463,456 804,194 18.2 $6,429,265 850,719 $7,279,984 36 $ 88.31% 1.34% $6,146,036 802,735 $6,948,771 36 $ 88.45% 1.35% $5,711,751 752,770 $6,464,521 36 $ 88.36% 1.36% 2008/2007 2007/2006 (.4)% .1 4.6 4.6 6.0 4.8 – (.2) (.7) (.5)% 1.0 6.6 7.6 6.6 7.5 – .1 (.7) Investments and Insurance Revenue Investments and insurance revenue, consisting principally of commissions on sales of annuities and mutual funds, decreased $913 thousand in 2008 from 2007. As of October 1, 2008, TCF no longer sells investment and insurance products. TCF will, however, continue to service its existing investment and insurance customer base. Leasing and Equipment Finance Revenue Leasing and equipment finance revenues in 2008 decreased $3.7 million, or 6.2%, from 2007. The decrease in leasing and equipment finance revenues for 2008 was primarily driven by a $1.9 million decrease in sales-type lease revenues and a decrease of $2.1 million in operating lease revenues. The decrease in operating lease revenues was primarily the result of fewer operating lease transactions being generated. Leasing and equipment finance revenues increased $6.1 mil- lion, or 11.6%, in 2007 compared with 2006. The increase in leasing and equipment finance revenues for 2007 was primarily driven by a $2.9 million increase in operating lease revenues and an increase of $1.8 million in sales-type lease revenues. The increase in operating lease revenues was primarily driven by a $6.6 million increase in average operating lease balances. Sales-type lease revenues generally occur at or near the end of the lease term as customers extend the lease or pur- chase the underlying equipment. Leasing and equipment finance revenues may fluctuate from period to period based on customer-driven factors not within TCF’s control. Other Non-Interest Income Other non-interest income has historically consisted of gains on sales of education loans and other miscellaneous income. As a result of Federal law changes and general market conditions, TCF no longer originates education loans for sale. Total other non-interest income in 2008 decreased $5.6 million from 2007 compared with a decrease in 2007 of $13.3 million from 2006. These decreases were primarily due to a decrease in gains on the sales of education loans in 2007 and 2008 due to accelerated sales of education loans in 2006 as a result of Federal law changes and a decrease in mortgage banking revenue due to TCF exiting the business in 2006. 2008 Form 10-K : 25 The following table presents the components of other non-interest income. (Dollars in thousands) Gains on sales of education loans Mortgage banking Other Total other earnings 2008 $1,456 – 1,246 $2,702 Year Ended December 31, 2007 $2,011 – 6,259 $8,270 2006 $ 7,224 4,734 9,609 $21,567 2005 $ 2,078 5,578 5,088 $12,744 Compound Annual Growth Rate 2008/2007 2008/2003 (27.6)% – (80.1) (67.3) (14.0)% (100.0) (16.9) (32.3) 2004 $ 7,789 12,960 1,879 $22,628 Gains on Securities Gains of $16.1 million were recog- nized on sales of $1.5 billion in mortgage-backed securities and $174.9 million in treasury bills in 2008. In 2007, gains of $13.3 million were recognized on the sales of $1.2 billion in mortgage-backed securities. There were no sales of securi- ties in 2006. Visa Share Redemption During the first quarter of 2008, Visa completed its Initial Public Offering (IPO). As part of the IPO, Visa redeemed a portion of the shares held by Visa U.S.A. members for cash. TCF received $8.3 million from this redemption and recorded a gain. As of December 31, 2008, TCF holds 308,219 shares of Visa Inc. Class B shares with no book value that are generally restricted from sale, other than to other Class B shareholders, and are subject to dilution as a result of TCF’s indemnification obligation. TCF remains obligated to indemnify Visa under its bylaws and a retrospective responsibility plan for losses in connection with certain covered litigation. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other Expense” for further discussion. Gains on Sales of Branches and Real Estate There were no gains on sales of branches and real estate in 2008. Gains on sales of branches and real estate were $37.9 mil- lion for 2007, up from $4.2 million in 2006. During the first quarter of 2007, TCF sold the deposits and facilities of 10 out-state branches in Michigan and recognized a $31.2 million gain. Non-Interest Expense Non-interest expense increased $43.9 million, or 6.9%, in 2008, and $2 million, or .3%, in 2007, excluding the Visa indemnification expense and operating lease depreciation. The following table presents the components of non-interest expense. Year Ended December 31, 2008 $341,203 127,953 19,150 16,888 175,517 680,711 17,458 (3,766) $694,403 2007 $346,468 120,824 16,830 4,849 147,869 636,840 17,588 7,696 $662,124 2006 $341,857 114,618 21,879 5,047 151,449 634,850 14,347 – $649,197 2005 $326,526 103,900 19,869 5,822 143,484 599,601 7,335 – $606,936 2004 $322,824 95,617 17,381 8,972 132,037 576,831 1,843 – $578,674 Compound Annual Growth Rate 1-Year 2008/2007 5-Year 2008/2003 (1.5)% 5.9 13.8 N.M. 18.7 6.9 (.7) N.M. 4.9 2.4% 7.7 (.2) 22.2 5.7 4.4 39.4 N.M. 4.6 (Dollars in thousands) Compensation and employee benefits Occupancy and equipment Advertising and promotions Deposit account premiums Other Subtotal Operating lease depreciation Visa indemnification expense Total non-interest expense N.M. Not Meaningful. Compensation and Employee Benefits Compensation and employee benefits, representing 49.1%, 52.3% and 52.7% of total non-interest expense in 2008, 2007 and 2006, respectively, were well controlled and decreased $5.3 million, or 1.5%, in 2008, compared with an increase of $4.6 million, or 1.4%, in 2007. The decreases in compensation and bene- fits in 2008 was primarily due to headcount reductions, decreased performance based compensation as no execu- tive bonuses were paid in 2008 and lower benefit related costs, partially offset by expenses from branch expansion 26 : TCF Financial Corporation and Subsidiaries and the new inventory finance business. The increase in compensation and employee benefits in 2007 was primarily due to costs associated with branch expansion partially offset by decreases resulting from branches sold, closed branches and other efficiency initiatives. Occupancy and Equipment Occupancy and equipment expenses increased $7.1 million in 2008 and $6.2 million in 2007. These increases were primarily due to costs associated with branch expansion and increased real estate taxes. Advertising and Promotions Advertising and promo- tions expense increased $2.3 million in 2008 following a decrease of $5 million in 2007. The increase in 2008 was primarily due to increased spending on media and promotions related to increased checking account and new deposit prod- uct initiatives. The decrease from 2006 to 2007 was primarily due to spending reductions on media and promotions. Deposit Account Premiums Deposit account premium expense increased $12 million to $16.9 million in 2008. Deposit account premium expense was $4.8 million in 2007, essentially flat with 2006. The increase in deposit account premium expenses in 2008 was primarily due to new market- ing campaigns which resulted in increased checking account production during the second half of 2008. Other Non-Interest Expense Other non-interest expense totaled $175.5 million in 2008, up $27.6 million from 2007, primarily due to a $12.2 million increase in foreclosed real estate expense resulting from increased property taxes and real estate disposition losses in 2008 as well as an $8.6 million increase in severance and separation costs related to exiting the investments and education lending businesses, lender reductions and several other management changes and a $1.8 million increase in deposit insurance premiums. Deposit insurance premiums will increase significantly in 2009 due to rate increases and previously available credits being fully utilized in 2008. In 2007, other non-interest expense decreased $3.6 million from 2006, primarily due to expense control initiatives, partially offset by a $3 million increase in loan and lease related costs mainly driven by higher private mortgage insurance expense, a $1.3 million increase in foreclosed real estate expense resulting from increased property taxes and real estate disposition losses in 2007 and a $1.1 million increase in card processing and issuance costs due to increased transactions. Operating Lease Depreciation Operating lease depreciation decreased slightly and totaled $17.5 million in 2008. Operating lease depreciation increased $3.2 million from 2006 to 2007. The increase in 2007 was primarily due to an increase in average operating lease balances. Visa Indemnification Expense TCF is a member of Visa U.S.A. for issuance and processing of its card transac- tions. On October 3, 2007, Visa, Inc. (Visa) completed a restructuring including Visa U.S.A. in preparation for its planned IPO. As a member of Visa, TCF has an obligation to indemnify Visa U.S.A. under its bylaws and Visa under a retrospective responsibility plan, approved as part of Visa’s restructuring, for contingent losses in connection with certain covered litigation (“the Visa indemnification”) disclosed in Visa’s public filings with the Securities and Exchange Commission (SEC) based on its membership pro- portion. TCF is not a party to the lawsuits brought against Visa U.S.A. TCF’s membership proportion in Visa U.S.A. is .12554%. The SEC accounting staff has concluded that Visa U.S.A. member institutions are required to recognize their portion of the Visa indemnification at the estimated fair value of such obligation in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. As part of Visa’s IPO in the first quarter of 2008, Visa set aside a cash escrow fund for future settlement of covered litigation. As a result, TCF recorded a $3.8 million reduction in its contingent indemnification obligation in the first quarter of 2008. At December 31, 2008, TCF’s estimated remaining Visa contingent indemnification obligation was $3.9 million. On October 27, 2008, Visa notified its U.S.A. members that it had reached a settlement on covered litiga- tion with Discover Financial Services, Inc. This obligation was covered by the litigation escrow fund through an additional dilution of Visa Class B shares in the fourth quarter of 2008. The remaining covered litigation against Visa is primarily with card retailers and merchants, mostly related to fees and interchange rates. TCF’s remaining indemnification obliga- tion for Visa’s covered litigation is a highly judgmental estimate. TCF must rely on disclosures made by Visa to the public about the covered litigation in making estimates of this contingent indemnification obligation. Income Taxes Income tax expense represented 37.30% of income before income tax expense during 2008, compared with 28.38% and 31.41% in 2007 and 2006, respectively. The higher effective income tax rate in 2008 compared with 2007 and 2006 was primarily due to a $4.3 million increase in income tax expense and $2.8 million increase in deferred 2008 Form 10-K : 27 income taxes related to changes in state income tax laws, primarily in Minnesota. This compares with $18.4 million of reductions in income tax expense comprised of a favorable settlement with the Internal Revenue Service of an isolated tax deduction from a prior year, the effects of state tax law changes, and other favorable developments involving uncertain tax positions in 2007. 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 evaluation of uncertain tax positions, differences between the tax and financial reporting bases of assets and liabilities (temporary differ- ences), estimates of amounts due or owed such as the timing of reversal of temporary differences and current financial accounting standards. Additionally, there can be no assurance that estimates and interpretations used in determining income tax liabilities may not be challenged by federal and state taxing authorities. Actual results could differ significantly from the estimates and tax law interpre- tations used in determining the current and deferred income tax liabilities. In addition, under generally accepted accounting princi- ples, deferred income tax assets and liabilities are recorded at the federal and state income tax rates expected to apply to taxable income in the periods in which the deferred income tax assets or liabilities are expected to be realized. If such rates change, deferred income tax assets and liabil- ities must be adjusted in the period of change through a charge or credit to the Consolidated Statements of Income. Consolidated Financial Condition Analysis Securities Available for Sale Securities available for sale were $2 billion, or 11.7% of total assets, at December 31, 2008. In 2008, TCF purchased $1.7 billion and sold $1.5 billion of mortgage-backed securities due to opportunistic actions taken during volatile market conditions. TCF’s securities available for sale portfolio primarily includes fixed-rate mortgage-backed securities issued by Fannie Mae and Freddie Mac. Net unrealized pre-tax gains on securities available for sale totaled $37.3 million at December 31, 2008, compared with net unrealized pre-tax losses of $16.4 million at December 31, 2007. TCF may, from time to time, sell mortgage-backed securities and utilize the proceeds to reduce borrowings, fund growth in loans and leases or for other corporate purposes. TCF’s securities portfolio does not contain commercial paper, asset-backed commercial paper or asset-backed securities secured by credit cards or car loans. TCF also does not participate in structured investment vehicles. 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, 2008 2007 2006 2005 2004 Compound Annual Growth Rate 1-Year 2008/2007 5-Year 2008/2003 Portfolio Distribution: Consumer home equity and other: Home equity: Closed-end loans Line of credit (1) Total consumer home equity Other Total consumer home equity and other Commercial real estate Commercial business Total commercial Leasing and equipment finance (2) Residential real estate Inventory finance Total loans and leases $ 5,190,136 $ 5,093,441 $ 4,650,353 $ 3,758,947 1,389,741 5,148,688 57,587 1,232,315 5,882,668 62,409 1,429,633 6,523,074 67,557 1,656,199 6,846,335 61,805 6,908,140 2,984,156 506,887 3,491,043 2,486,082 455,443 4,425 5,206,275 2,297,500 435,203 2,732,703 1,503,794 770,441 – $13,345,133 $12,338,236 $11,333,680 $10,213,213 5,945,077 2,390,653 551,995 2,942,648 1,818,165 627,790 – 6,590,631 2,557,330 558,325 3,115,655 2,104,343 527,607 – $2,909,592 1,472,165 4,381,757 56,183 4,437,940 2,154,396 436,696 2,591,092 1,375,372 1,014,166 – $9,418,570 1.9% 15.8 5.0 (8.5) 4.8 16.7 (9.2) 12.0 18.1 (13.7) N.M. 8.2 15.8% 8.7 13.8 (.2) 13.6 9.3 3.4 8.3 16.5 (17.8) N.M. 9.8 (1) Excludes fixed-term amounts under lines of credit which are included in closed-end loans. (2) Excludes operating leases included in other assets. N.M. Not Meaningful. 28 : TCF Financial Corporation and Subsidiaries (In thousands) At December 31, 2008 Geographic Distribution: Minnesota Illinois Michigan Wisconsin Colorado California Florida Texas Ohio Arizona New York Indiana Other Total Consumer Home Equity and Other (1) $2,594,245 2,144,917 1,132,622 507,463 427,520 7,408 5,410 1,324 2,664 34,966 3,616 24,542 21,443 $6,908,140 Commercial Real Estate and Commercial Business $ 864,678 786,717 915,308 514,719 102,711 19,249 58,645 3,025 49,948 31,238 530 53,592 90,683 $3,491,043 Leasing and Equipment $ Finance(2) 71,552 88,245 99,998 49,223 39,745 325,621 139,210 171,814 99,533 85,407 124,109 45,606 1,146,019 $2,486,082 Residential Real Estate $252,032 59,227 120,758 13,532 1,644 207 294 538 1,841 22 56 896 4,396 $455,443 Inventory Finance $ 74 305 89 129 105 115 271 238 330 28 640 79 2,022 $4,425 Total $ 3,782,581 3,079,411 2,268,775 1,085,066 571,725 352,600 203,830 176,939 154,316 151,661 128,951 124,715 1,264,563 $13,345,133 Loans and leases outstanding at December 31, 2008 are shown by contractual maturity in the following table. (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 Commercial and Other(1) Real Estate Commercial Business Leasing and Equipment Residential Finance(2) Real Estate Inventory Finance Total Loans and Leases At December 31, 2008(3) $ 443,038 $ 160,936 $276,097 $ 855,366 $ 28,683 $4,425 $ 1,768,545 335,685 330,866 754,644 1,513,967 1,279,565 2,250,375 6,465,102 $6,908,140 215,097 268,698 872,202 720,038 121,181 626,004 2,823,220 $2,984,156 103,198 44,914 73,723 8,955 – – 230,790 $506,887 596,275 459,885 476,863 89,825 – 7,868 1,630,716 $2,486,082 23,285 23,747 46,275 94,399 89,170 149,884 426,760 $455,443 – – – – – – – 1,273,540 1,128,110 2,223,707 2,427,184 1,489,916 3,034,131 11,576,588 $4,425 $13,345,133 $4,793,680 $1,203,695 $110,578 $1,624,313 $367,859 $ – $ 8,100,125 1,671,422 $6,465,102 1,619,525 $2,823,220 120,212 $230,790 6,403 $1,630,716 58,901 $426,760 – 3,476,463 – $11,576,588 $ (1) Excludes fixed-term amounts under lines of credit which are included in closed-end loans. (2) Excludes operating leases included in other assets. (3) 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 loans and leases remain outstanding for significantly shorter periods than their contractual terms. 2008 Form 10-K : 29 Consumer Lending TCF’s consumer home equity loan portfolio represents over half of its total loan and lease port- folio. The consumer home equity portfolio increased 5% in 2008 and 10.9% in 2007. TCF’s consumer home equity portfolio is secured by mortgages filed on residential real estate. At December 31, 2008, 65% of loan balances were secured by first mortgages. The average loan size secured by a first mortgage was $116 thousand and the average balance of loans secured by a junior lien position was $36 thousand at December 31, 2008. At December 31, 2008, 27% of the home equity portfolio carried a variable interest rate tied to the prime rate, compared with 24% at December 31, 2007. At January 1, 2009, $1.8 billion or 98% of variable-rate consumer home equity loans were at their contractual interest rate floor, compared with $276 million or 17% at January 1, 2008. At December 31, 2008, 76% of TCF’s consumer home equity loans consisted of closed-end loans, compared with 78% at December 31, 2007. TCF’s closed-end home equity loans require payments of principal and interest over a fixed term. The average home value based on most recent values known to TCF securing the loans and lines of credit in this portfolio was $254 thousand as of December 31, 2008. TCF’s home equity lines of credit require regular payments of interest and do not require regular payments of principal. The average FICO (Fair Isaac Company) credit score at loan origination for the home equity portfolio was 723 as of December 31, 2008 and 721 as of December 31, 2007. TCF’s consumer home equity underwriting standards produce adequately secured loans to customers with good credit scores. Loans with loan-to-value (LTV) ratios in excess of 90% are only made to very creditworthy customers based on risk scoring models and other credit underwriting criteria. TCF does not have any subprime lending programs and does not originate 2/28 adjustable-rate mortgages (ARM) or Option ARM loans. TCF also does not originate home equity loans with multiple payment options or loans with “teaser” interest rates. Although TCF does not have any programs that target subprime borrowers, in the normal course of lending to customers, loans have been originated with FICO scores below 620 at lower LTV ratios. Approximately 6% of the consumer home equity portfolio, as of December 31, 2008, was originated at FICO scores below 620. During 2008, $1.1 billion of new home equity loans were funded. Of these loans, the net charge-offs totaled $273 thousand, or .03%. At December 31, 2008, total home equity line of credit outstandings were $2.2 billion, compared with $2 billion at December 31, 2007. Outstanding balances on home equity lines of credit were 55% of total lines of credit at December 31, 2008, compared with 52% at December 31, 2007. Commercial Lending Commercial real estate loans increased $426.8 million from December 31, 2007 to $3 billion at December 31, 2008. Variable- and adjustable-rate loans represented 56% of commercial real estate loans outstanding at December 31, 2008. Commercial business loans decreased $51.4 million in 2008 to $506.9 million at December 31, 2008. TCF continues to expand its commercial lending activities generally to borrowers located in its primary markets. With a focus on secured lending, approximately 99% of TCF’s commercial real estate and commercial business loans were secured either by proper- ties or other business assets at December 31, 2008. At December 31, 2008, approximately 93% of TCF’s commercial real estate loans outstanding were secured by properties located in its primary markets. Included in TCF’s commer- cial loan portfolio as of December 31, 2008, are $93.5 mil- lion of loans to residential home builders, with $37 million of that amount to customers in Michigan. At December 31, 2008, the construction and development portfolio had $223 thousand in loans over 30-days delinquent compared with $1.4 million at December 31, 2007. 30 : TCF Financial Corporation and Subsidiaries The following tables summarize TCF’s commercial real estate loan portfolio by property type. (In thousands) Retail services (1) Apartments Office buildings Warehouse/industrial buildings Hotels and motels Residential home builders Health care facilities Other Total Permanent $ 792,312 572,545 443,509 405,284 148,502 36,495 24,390 270,048 $2,693,085 (Dollars in thousands) Retail services (1) Apartments Office buildings Warehouse/industrial buildings Hotels and motels Residential home builders Health care facilities Other Total Balance $ 841,429 585,755 477,922 423,867 211,216 77,454 26,316 340,197 $2,984,156 2008 Construction and Development $ 49,117 13,210 34,413 18,583 62,714 40,959 1,926 70,149 $291,071 2008 Number of Loans 532 597 260 282 49 75 12 223 2,030 At December 31, 2007 Construction and Development $ 56,585 8,773 27,110 19,115 27,962 58,952 – 78,633 $277,130 Permanent $ 634,331 464,283 350,807 343,050 125,654 41,750 30,035 290,290 $2,280,200 Total $ 841,429 585,755 477,922 423,867 211,216 77,454 26,316 340,197 $2,984,156 At December 31, Over 30-Day Delinquency Rate as a Percentage of Balance –% .04 .53 – – .43 .50 .02 .11% Balance $ 690,916 473,056 377,917 362,165 153,616 100,702 30,035 368,923 $2,557,330 2007 Number of Loans 490 551 248 283 51 87 11 242 1,963 Total $ 690,916 473,056 377,917 362,165 153,616 100,702 30,035 368,923 $2,557,330 Over 30-Day Delinquency Rate as a Percentage of Balance .67% .08 .65 .13 – 1.81 – .50 .45% (1) Primarily retail shopping centers and stores, convenience stores, gas stations and restaurants. Leasing and Equipment Finance The following tables summarize TCF’s leasing and equipment finance portfolio by mar- keting segment and by equipment type, excluding operating leases. (Dollars in thousands) Marketing Segment Middle market (1) Small ticket (2) Winthrop Wholesale (3) Other Total At December 31, 2008 Percent of Total 59.8% 21.1 13.2 5.7 .2 100.0% Over 30-Day Delinquency as a Percentage of Balance 1.45% 1.35 .08 .17 – 1.17% Balance $1,290,923 426,436 275,799 107,195 3,990 $2,104,343 2007 Percent of Total Over 30-Day Delinquency as a Percentage of Balance 61.3% 20.3 13.1 5.1 .2 100.0% .77% 1.01 .49 .04 3.28 .75% Balance $1,487,749 525,686 328,553 142,586 1,508 $2,486,082 (1) Middle market consists primarily of loan and lease financing of construction and manufacturing equipment and specialty 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. (3) Wholesale includes the discounting of lease receivables originated by third party lessors. (Dollars in thousands) Equipment Type Specialty vehicles Construction Manufacturing Medical Technology and data processing Furniture and fixtures Printing Trucks and trailers Material handling Other Total The leasing and equipment finance portfolio increased 18.1% from December 31, 2007 to $2.5 billion at December 31, 2008, consisting of $789.9 million of loans and $1.7 billion of leases. Total loan and lease originations and purchases for TCF Equipment Finance and Winthrop Resources were $1.4 billion for 2008, an increase of 21.3% from $1.1 billion in 2007. The backlog of approved transactions increased to $328 million at December 31, 2008, from $292.5 million at December 31, 2007. The average size of transaction origi- nated during 2008 was $92.3 thousand, compared with $82.7 thousand during 2007. 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 equipment values for equipment previously placed in service. Declines in value of equipment under lease increase the potential for impairment losses and credit losses due to diminished collateral value, and may result in lower sales-type revenue at the end of the contractual lease term. See Note 1 to Consolidated Financial Statements – Policies Related to Critical Accounting Estimates for information on lease accounting. At December 31, 2008 and 2007, $56.3 million, and $48.4 million, respectively, of TCF’s lease portfolio were discounted on a non-recourse basis with 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 repre- sent 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 2008 Form 10-K : 31 At December 31, 2008 Percent of Total 20.1% 18.2 16.4 14.4 10.5 4.5 3.1 2.4 2.0 8.4 100.0% Balance $ 423,893 384,689 365,650 279,939 239,921 84,990 64,796 57,569 53,096 149,800 $2,104,343 2007 Percent of Total 20.1% 18.3 17.4 13.3 11.4 4.0 3.1 2.7 2.5 7.2 100.0% Balance $ 499,519 453,542 406,532 356,706 259,696 112,657 77,939 60,082 50,134 209,275 $2,486,082 in estimated fair value are recorded in the periods in which they become known. At December 31, 2008, lease residuals totaled $52.9 million, or 6.3% of original equipment value, compared with $41.7 million, or 6% of original equipment value, at December 31, 2007. Residential Real Estate Residential real estate loans were $455.4 million at December 31, 2008, down $72.2 mil- lion from December 31, 2007. The decline in residential real estate loans during 2008 was due to normal amortization of loan balances and loan prepayments. Since TCF is not originating conforming residential real estate loans in the portfolio, management expects that the residential loan portfolio will continue to decline, which will provide funding for anticipated growth in other loan, lease or investment categories. At December 31, 2008, TCF’s residential real estate loan portfolio was $392.2 million in fixed-rate loans and $63.2 million in adjustable-rate loans. Results of CPP Participation Since TCF’s participation in the CPP on November 14, 2008, TCF originated $490.4 million of loans and leases and has completed 762 loan modifications and extensions on $117.1 million of consumer home equity loans to help these customers avoid home foreclosures. Only a small portion of these loan modifications and extensions are considered troubled debt restructurings as they typically only entail delaying payments on which contractual interest is still charged. Allowance for Loan and Lease Losses The determina- tion of the allowance for loan and lease losses is a critical accounting estimate. 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, delinquencies in the loan 32 : TCF Financial Corporation and Subsidiaries and lease portfolio, the level of impaired and non-performing assets, values of underlying loan and lease collateral, the overall risk characteristics of the portfolios, changes in character or size of the portfolios, geographic location, year of origination, prevailing economic conditions and other relevant factors. The various factors used in the methodologies are reviewed on a periodic basis. The Company considers the allowance for loan and lease losses of $172.4 million appropriate to cover losses incurred in the loan and lease portfolios as of December 31, 2008. 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 fac- tors then prevailing, including economic conditions, TCF’s ongoing credit review process or regulatory requirements, will not require significant changes in the allowance for loan and lease losses. Among other factors, a continued economic slowdown and/or a decline in commercial or residential real estate values in TCF’s markets may have an adverse impact on the current adequacy of the allowance for loan and lease losses by increasing credit risk and the risk of potential loss. 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 disclosed in the following table 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. 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 care- fully reviewed in relation to the nature of the underlying loan and lease portfolios before appropriate conclusions can be reached regarding TCF or for purposes of making comparisons to other banks. Most of TCF’s non-performing assets and past due loans are secured by 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 dis- position. 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 real estate foreclosure laws. The allocation of TCF’s allowance for loan and lease losses is as follows. (Dollars in thousands) Consumer home equity Consumer other Total consumer Commercial real estate Commercial business Total commercial Leasing and equipment finance Inventory finance Residential real estate Unallocated Total allowance balance N.A. Not Applicable. At December 31, 2006 2007 2005 2008 2004 $ 96,479 $30,951 $12,615 $10,017 $ 9,213 1,694 10,907 20,742 7,696 28,438 24,566 – 796 10,686 $172,442 $80,942 $58,543 $55,823 $75,393 2,664 99,143 39,386 11,865 51,251 20,058 33 1,957 – 2,059 33,010 25,891 7,077 32,968 14,319 – 645 – 2,211 14,826 22,662 7,503 30,165 12,990 – 562 – 2,053 12,070 21,222 6,602 27,824 15,313 – 616 – Allocations as a Percentage of Total Loans and Leases Outstanding by Type At December 31, 2008 1.41% 4.31 1.44 1.32 2.34 1.47 .81 .75 .43 N.A. 1.29 2007 2006 2005 2004 .47% 3.05 .50 1.01 1.27 1.06 .68 – .12 N.A. .66 .21% 3.54 .25 .95 1.36 1.03 .71 – .09 N.A. .52 .19% 3.57 .23 .92 1.52 1.02 1.02 – .08 N.A. .55 .21% 3.02 .25 .96 1.76 1.10 1.79 – .08 N.A. .80 The increase in the consumer home equity and residen- tial real estate allowances from December 31, 2007, to December 31, 2008, is primarily due to increased actual and estimated home equity loan charge-offs due to depressed residential real estate market conditions, primarily in Minnesota and Michigan. The increase in the commercial real estate allowance was primarily due to an increase in actual and estimated commercial real estate net charge- offs, primarily in Michigan. The following table sets forth information detailing the allowance for loan and lease losses. 2008 Form 10-K : 33 (In thousands) Balance at beginning of year Charge-offs: Consumer home equity First mortgage lien Junior lien Total home equity Consumer other Total consumer Commercial real estate Commercial business Leasing and equipment finance Residential real estate Total charge-offs Recoveries: Consumer home equity First mortgage lien Junior lien Total home equity Consumer other Total consumer 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 2008 $ 80,942 (29,009) (32,937) (61,946) (20,830) (82,776) (11,884) (5,731) (13,156) (1,253) (114,800) 202 625 827 11,525 12,352 30 130 1,735 8 14,255 (100,545) 192,045 – $ 172,442 Year Ended December 31, 2006 $ 55,823 2005 $ 75,393 2007 $ 58,543 2004 $ 72,460 (9,589) (11,977) (21,566) (19,455) (41,021) (2,409) (1,264) (7,507) (220) (52,421) 253 948 1,201 13,019 14,220 – 16 3,585 7 17,828 (34,593) 56,992 – $ 80,942 (3,142) (4,479) (7,621) (18,423) (26,044) (228) (555) (6,117) (277) (33,221) 108 167 275 13,621 13,896 39 86 1,225 6 15,252 (17,969) 20,689 – $ 58,543 (2,363) (2,841) (5,204) (18,675) (23,879) (74) (454) (23,387) (110) (47,904) 135 177 312 14,705 15,017 82 2,627 2,003 19 19,748 (28,156) 8,586 – $ 55,823 (2,051) (1,919) (3,970) (21,199) (25,169) (602) (235) (8,508) (81) (34,595) 42 266 308 13,623 13,931 126 82 2,963 8 17,110 (17,485) 18,627 1,791 $ 75,393 The following table sets forth additional information regarding net charge-offs. (Dollars in thousands) Consumer home equity First mortgage lien Junior lien Total home equity Consumer other Total consumer Commercial real estate Commercial business Total commercial Leasing and equipment finance Residential real estate Total N.M. Not Meaningful. Year Ended December 31, 2008 2007 Net Charge-offs (Recoveries) % of Average Loans and Leases Net Charge-offs (Recoveries) % of Average Loans and Leases $ 28,807 32,312 61,119 9,305 70,424 11,854 5,601 17,455 11,421 1,245 $100,545 .66% 1.34 .90 N.M. 1.04 .44 1.05 .54 .50 .25 .78 $ 9,336 11,029 20,365 6,436 26,801 2,409 1,248 3,657 3,922 213 $34,593 .24% .50 .33 N.M. .43 .10 .22 .12 .20 .04 .30 34 : TCF Financial Corporation and Subsidiaries Non-Performing Assets Non-performing assets consist of non-accrual loans and leases and other real estate owned. The increase in non-accrual loans and leases from 2007 to 2008 was primarily due to an increase in consumer home equity non-accruals. The increase in other real estate owned was primarily due to increased residential real estate properties. Non-performing assets are summarized in the following table. (Dollars in thousands) Non-accrual loans and leases: Consumer home equity First mortgage lien Junior lien Total home equity Consumer other Total consumer Commercial real estate Commercial business Total commercial 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 2008 2007 At December 31, 2006 2005 2004 $ 65,908 11,793 77,701 65 77,766 54,615 14,088 68,703 20,879 5,170 172,518 38,632 23,033 61,665 $234,183 $ 20,776 5,391 26,167 6 26,173 19,999 2,658 22,657 8,050 2,974 59,854 28,752 17,013 45,765 $105,619 $11,202 5,291 16,493 27 16,520 12,849 3,421 16,270 7,596 2,799 43,185 19,899 2,554 22,453 $65,638 $12,510 5,872 18,382 28 18,410 188 2,207 2,395 6,434 2,409 29,648 14,877 2,834 17,711 $47,359 $ 9,162 2,914 12,076 111 12,187 1,093 4,533 5,626 25,678 3,387 46,878 11,726 5,465 17,191 $64,069 1.78% 1.40 .86% .66 .58% .45 .47% .35 .69% .52 Non-performing assets secured by residential real estate as a percentage of total non-performing assets 51.88 54.81 59.71 75.31 42.44 The consumer home equity portfolio is secured by a total of 85,508 properties of which 306, or .36%, were in other real estate owned as of December 31, 2008. This compares with 240 other real estate owned properties, or .28%, as of December 31, 2007. Impaired Loans Impaired loans are summarized in the following table. (In thousands) Non-accrual loans: Consumer home equity Commercial real estate Commercial business Total commercial Leasing and equipment finance Subtotal Accruing restructured consumer home equity loans Total impaired loans 2008 $ 9,216 54,615 14,088 68,703 5,552 83,471 27,423 $110,894 At December 31, 2007 $ 967 19,999 2,658 22,657 2,113 25,737 4,861 $30,598 Change $ 8,249 34,616 11,430 46,046 3,439 57,734 22,562 $80,296 2008 Form 10-K : 35 Impaired loans totaled $110.9 million and $30.6 million at December 31, 2008, and December 31, 2007, respectively. The increase in impaired loans from December 31, 2007 was primarily due to a $34.6 million increase in commercial real estate non-accrual loans and an increase of $22.6 million of restructured consumer home equity loans that are accruing (troubled debt restructurings). There were $25.3 million and $4.6 million of accruing restructured loans less than 90 days past due as of December 31, 2008 and 2007, respectively. The related allowance for credit losses on impaired loans was $24.6 million at December 31, 2008, compared with $2.7 million at December 31, 2007. There were no impaired loans which, if required, did not have a related allowance for loan losses at December 31, 2008 and December 31, 2007. The average balance of impaired loans was $68.3 million for 2008 compared with $21.5 million for 2007. 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 based on the contractual terms of the loan or lease. (Dollars in thousands) Accruing loans and leases delinquent for: 30-59 days 60-89 days 90 days or more Total At December 31, 2008 Percentage of Loans and Leases .53% .32 .28 1.13% Principal Balances $ 69,814 41,851 37,619 $149,284 2007 Percentage of Loans and Leases .38% .17 .12 .67% Principal Balances $46,748 20,445 15,384 $82,577 The following table summarizes TCF’s over 30-day delinquent loan and lease portfolio by loan type, excluding loans held for sale and non-accrual loans and leases. (Dollars in thousands) Consumer home equity First mortgage lien Junior lien Total home equity Consumer other Total consumer Commercial real estate Commercial business Total commercial Leasing and equipment finance Residential real estate Total At December 31, 2008 Percentage of Portfolio Principal Balances 2007 Percentage of Portfolio 1.87% 1.00 1.56 1.08 1.56 .11 .18 .12 1.17 2.20 1.13% $31,784 12,289 44,073 377 44,450 11,382 1,071 12,453 15,691 9,983 $82,577 .76% .53 .68 .56 .68 .45 .19 .40 .75 1.90 .67% Principal Balances $ 81,654 24,086 105,740 666 106,406 3,199 874 4,073 28,901 9,904 $149,284 36 : TCF Financial Corporation and Subsidiaries Potential Problem Loans and Leases In addition to non-performing assets, there were $212.9 million of loans and leases at December 31, 2008, for which management has concerns regarding the ability of the borrowers to meet existing repayment terms, compared with $60.1 million at December 31, 2007. The increase in potential problem loans and leases is primarily due to an increase in commercial loans that were downgraded due to the borrower’s exposure to the housing market. Potential problem loans and leases are primarily classified as substandard for regulatory purposes 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 Potential problem loans and leases are summarized as follows. (Dollars in thousands) Consumer Commercial real estate Commercial business Leasing and equipment finance Total loan or lease agreement. Although these loans and leases have been identified as potential problem loans and leases, they may never become delinquent, non-performing or impaired. Additionally, these loans and leases are generally secured by commercial real estate or other assets, thus reducing the potential for loss should they become non- performing. Potential problem loans and leases are consid- ered in the determination of the adequacy of the allowance for loan and lease losses. There were no material leasing and equipment finance potential problem loans funded on a non-recourse basis at December 31, 2008, and 2007. At December 31, Principal Balances $ 27,423 137,332 27,127 20,994 $212,876 2008 Percentage of Portfolio .41% 4.60 5.35 .84 1.60 Principal Balances $ 4,861 31,511 8,695 15,015 $60,082 2007 Percentage of Portfolio .07% 1.23 1.56 .71 .49 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 maintain a diverse set 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 from loan and lease repay- ments 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 fund bal- ance sheet growth. Historically, TCF has borrowed primarily from the FHLB, from institutional sources under repurchase agreements and from other sources. At December 31, 2008, TCF had over $4.1 billion in unused capacity under these funding sources. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Consolidated Financial Condition Analysis — Borrowings.” Potential sources of liquidity for TCF include borrowings from FHLB of Des Moines, the Federal Reserve Discount Window or other unsecured and uncommitted lines and issuance of debt and equity securities. TCF Bank’s ability to pay dividends or make other capital distributions to TCF is restricted by regulation and may require regulatory approval. 2008 Form 10-K : 37 Deposits Deposits totaled $10.2 billion at December 31, 2008, up $666.8 million from December 31, 2007. Checking, savings and money market deposits are an important source of low-cost funds and fee income for TCF. Checking, savings and money market deposits totaled $7.6 billion, up $325.1 million from December 31, 2007, and comprised 75% of total deposits at December 31, 2008, compared with 76% of total deposits at December 31, 2007. The average balance of these deposits for 2008 was $7.5 billion, an increase of $293.2 mil- lion over the $7.2 billion average balance for 2007. Certificates of deposit totaled $2.6 billion at December 31, 2008, up $341.7 million from December 31, 2007. TCF had no brokered deposits at December 31, 2008 or 2007. Non-interest bearing deposits represented 22% and 23% of total deposits as of December 31, 2008 and 2007, respectively. TCF’s weighted- average cost for deposits, including non-interest bearing deposits, was 1.61% at December 31, 2008, compared with 2.18% at December 31, 2007. The decrease in the weighted average rate for deposits was due to pricing decisions made by management as a result of declining interest rates during 2008. Branches During 2008, TCF opened 11 branches including five traditional branches and six supermarket branches. TCF anticipates opening three new branches in 2009, consisting of one new traditional branch and two new supermarket branches. TCF also closed and consolidated two traditional branches and 14 supermarket branches in 2008. In order to improve the customer experience and enhance deposit and loan growth, TCF relocated three traditional branches to improved locations and facilities and remod- eled 23 supermarket branches in 2008. In 2009, TCF plans to relocate three branches to improved locations and new facilities, including one traditional branch and two super- market branches, to close and consolidate one traditional branch into a nearby branch and to remodel 28 supermarket branches. Additional information regarding TCF’s branches opened since January 1, 2003 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 deposit accounts Deposits: Checking Savings Money market Subtotal Certificates of deposit Total deposits Total fees and other revenue for the year At or For the Year Ended December 31, 2008 2007 2006 2005 2004 5 6 – 11 76 29 10 115 25.7% 10 5 3 18 71 34 10 115 25.4% 324,595 282,484 10 5 4 19 18 7 3 28 61 28 7 96 21.2% 200,433 51 23 3 77 17.0% 124,648 $ 318,207 395,876 49,410 763,493 321,634 $1,085,127 63,465 $ $284,254 323,392 37,844 645,490 279,112 $924,602 $ 53,593 $199,567 201,561 24,582 425,710 325,013 $750,723 $ 37,463 $135,170 140,944 11,134 287,248 229,567 $516,815 $ 23,927 19 11 – 30 33 16 – 49 11.4% 63,568 $ 70,904 42,872 2,285 116,061 25,252 $141,313 $ 10,865 Percentage Increase 2008/2007 (50.0)% 20.0 (100.0) (38.9) 7.0 (14.7) — — 1.2 14.9 11.9 22.4 30.6 18.3 15.2 17.4 18.4 Borrowings Borrowings totaled $4.7 billion at December 31, 2008, down $312.7 million from December 31, 2007. See Notes 10 and 11 of Notes to Consolidated Financial Statements for detailed information on TCF’s borrowings. The weighted-average rate on borrowings was 4.48% at December 31, 2008, and 4.51% at December 31, 2007. TCF does not utilize unconsolidated subsidiaries or special purpose entities to provide off-balance sheet borrowings. 38 : TCF Financial Corporation and Subsidiaries Contractual Obligations and Commitments As disclosed in the Notes to Consolidated Financial Statements, TCF has certain obligations and commitments to make future payments under contracts. At December 31, 2008, the aggregate contractual obligations (excluding bank deposits) and commitments are as follows. (In thousands) Payments Due by Period Contractual Obligations Total borrowings (1) Annual rental commitments under non-cancelable operating leases Campus marketing agreements Construction contracts and land purchase commitments for future branch sites Visa indemnification expense (2) (In thousands) Commitments Commitments to lend: Consumer home equity and other Commercial Leasing and equipment finance Other Total commitments to lend Standby letters of credit and guarantees on industrial revenue bonds Total $4,660,774 242,856 47,271 1,177 3,930 $4,956,008 Total $1,800,782 393,187 86,909 108 2,280,986 58,697 $2,339,683 Less than 1 Year $369,931 26,858 2,496 1,177 3,930 $404,392 1-3 Years $430,112 48,703 5,645 – – $484,460 4-5 Years $ 76,044 After 5 Years $3,784,687 41,621 5,135 – – $122,800 125,674 33,995 – – $3,944,356 Amount of Commitment – Expiration by Period 4-5 Less than Years 1 Year 1-3 Years $ 15,452 226,457 86,909 108 328,926 42,782 $371,708 $ 40,204 144,323 – – 184,527 15,856 $200,383 $230,935 13,600 – – 244,535 59 $244,594 After 5 Years $1,514,191 8,807 – – 1,522,998 — $1,522,998 (1) Total borrowings excludes interest. (2) The payment time is estimated to be less than one year; however, the exact date of the payment can not be determined. Commitments to lend are agreements to lend to a cus- tomer provided there is no violation of any condition in the contract. These commitments generally have fixed expira- tion dates or other termination clauses and may require payment of a fee. Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral predominantly consists of residential and commercial real estate. Campus marketing agreements consist of fixed or mini- mum obligations for exclusive marketing and naming rights with 10 campuses. TCF is obligated to make various annual payments for these rights in the form of royalties and scholarships through 2029. TCF also has various renewal options, which may extend the terms of these agreements. Campus marketing agreements are an important element of TCF’s campus banking strategy. See Note 17 of Notes to Consolidated Financial Statements for information on standby letters of credit and guarantees on industrial revenue bonds. Stockholders’ Equity Stockholders’ equity at December 31, 2008 was $1.5 billion, or 8.92% of total assets, up from $1.1 billion, or 6.88% of total assets, at December 31, 2007. The increase in stockholders’ equity was primarily due to net income of $129 million and the issuance of $361.2 mil- lion in preferred stock, partially offset by the payment of $126.4 million in dividends on common stock and accrued dividends of $2.5 million on preferred stock. Dividends to common shareholders on a per share basis totaled $1 in 2008, an increase of 3% from 97 cents in 2007. TCF’s dividend payout ratio was 99% in 2008. The Company’s primary fund- ing sources for dividends are earnings and dividends received from TCF Bank. 2008 Form 10-K : 39 At December 31, 2008, TCF had 5.4 million shares remain- ing in its stock repurchase program authorized by its Board of Directors. On November 14, 2008, TCF entered into a definitive agreement with the U.S. Treasury to participate in the CPP and as a result, TCF may not repurchase common shares. Also as a result of restrictions imposed by the CPP, TCF may not increase its dividend for three years from the date of the Agreement unless the preferred shares sold to the U.S. Treasury have been redeemed in whole or transferred to a third party which is not an affiliate of TCF. See Note 13 of Notes to Consolidated Financial Statements for additional CPP information. For the year ended December 31, 2008, average total equity to average assets was 7.04%, compared with 6.82% for the year ended December 31, 2007. At December 31, 2008, TCF Financial and TCF Bank exceeded their regulatory capital requirements and are considered “well-capitalized” under guidelines established by the Federal Reserve Board and the Office of the Comptroller of the Currency. See Notes 13 and 14 of Notes to Consolidated Financial Statements. One factor considered in TCF’s capital planning process is the amount of dividends paid to common stockholders as a component of common capital generated. TCF’s common capital generated for the year ended December 31, 2008 is as follows. (Dollars in thousands) Net income Preferred stock dividends Net income available to common stockholders Treasury shares sold to TCF employee benefit plans Amortization of stock compensation Cancellation of shares of restricted stock Cancellation of shares for tax withholding Stock compensation tax benefits Issuance of common stock warrant Other Subtotal Total common capital generated Common dividend as a percentage of total common capital generated 2008 $128,958 (2,540) 126,418 10,177 8,344 (3,238) (6,478) 10,110 12,850 228 31,993 $158,411 79.8% 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, lease financing and income taxes. See Note 1 of Notes to Consolidated Financial Statements for further discussion of critical accounting estimates. Recent Accounting Developments In June, 2008, the FASB issued FASB Staff Position (FSP) EITF 03-6-1, Determining Whether Instruments Granted in Share- Based Payment Transactions Are Participating Securities. This FSP defines participating securities as those that are expected to vest and are entitled to receive nonforfeitable dividends or dividend equivalents. Unvested share-based payment awards that have a right to receive dividends on common stock (restricted stock) will be considered partici- pating securities and included in earnings per share using the two-class method. The two-class method requires net income to be reduced for dividends declared and paid in the period on such shares. Remaining net income is then allocated to each class of stock (proportionately based on unrestricted and restricted shares which pay dividends) for calculation of basic earnings per share. Diluted earnings per share would then be calculated based on basic shares outstanding plus any additional potentially dilutive shares, such as options and restricted stock that do not pay divi- dends or are not expected to vest. This FSP is effective in the first quarter of 2009. Basic earnings per share may decline slightly as a result of this FSP. On October 10, 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset in a Market That Is Not Active. The FSP was effective upon issuance, including periods for which financial statements have not been issued. The FSP clarified the application of SFAS 157 in an inactive market and provided an illustrative example to demonstrate how the fair value of a financial asset is determined when the market for that financial asset is inactive. The adoption of this FSP did not have a material impact on the Company’s consolidated financial statements. 40 : TCF Financial Corporation and Subsidiaries On December 30, 2008, the FASB issued FSP No.132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets. This FSP amends FASB Statement No. 132(R), Employers’ Disclosures about Pensions and Other Post- retirement Benefits, to provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan, including disclosures of investment policies and strategies, categories of plan assets, fair value measurements of plan assets, and significant concentrations of risk. The disclosure requirements of this FSP are effective for fiscal years ending after December 15, 2009. Upon initial application, the provisions of this FSP are not required for earlier periods that are presented for com- parative purposes. Earlier application of the provisions of this FSP is permitted. The adoption of this FSP will not have a material impact on the Company’s consolidated financial statements. Fourth Quarter Summary In the fourth quarter of 2008, TCF reported net income of $27.7 million, compared with $62.8 million in the fourth quarter of 2007. Diluted earnings per common share was 20 cents for the fourth quarter of 2008, compared with 50 cents for the same 2007 period. Net interest income was $147.1 million for the quarter ended December 31, 2008, up $7.5 million, or 5.4%, from the quarter ended December 31, 2007. The increase in net interest income was primarily due to the growth in average interest-earning assets, up $769.4 million over the fourth quarter of 2007. The net interest margin was 3.84% and 3.83% for the fourth quarter of 2008 and 2007, respectively. TCF provided $47.1 million for credit losses in the fourth quarter of 2008, compared with $20.1 million in the fourth quarter of 2007, primarily due to higher consumer home equity net charge-offs and the resulting portfolio reserve rate increases. For the fourth quarter of 2008, net loan and lease charge-offs were $33.6 million, or 1.02% of average loans and leases outstanding, compared with $13.8 million, or .46% of average loans and leases outstanding during the same 2007 period primarily due to higher consumer home equity and commercial real estate loan net charge-offs. Total non-interest income in the fourth quarter of 2008 was $125 million, compared with $138.9 million in the fourth quarter of 2007. The decrease in non-interest income was primarily due to a decrease in gains on securities and decreases in investments and insurance revenues as TCF stopped selling these products in the branches in the fourth quarter of 2008. Fees and service charges were $67.4 million, down 6.8% from the fourth quarter of 2007, primarily due to lower activity in deposit service fees. Card revenues totaled $25.2 million for the fourth quarter of 2008, up .7% over the same 2007 period. Leasing and equipment finance revenues were $16.3 million for the fourth quarter of 2008, up $1.5 million from the fourth quarter of 2007 primarily due to an increase in sales-type lease revenues. Non-interest expense totaled $175.5 million for the 2008 fourth quarter, an increase of $15.1 million, or 9.4%, from $160.4 million for the 2007 fourth quarter, excluding Visa indemnification and operating lease depreciation. Compensation and employee benefits decreased $3.2 million, or 3.7%, from the fourth quarter of 2007, primarily due to exiting the investment business and lender reductions. Occupancy and equipment expenses increased $1.7 million, or 5.5%, from the fourth quarter of 2007, primarily due to costs associated with branch expansion, relocation and remodels. Deposit account premium expense increased $5.1 million from the fourth quarter of 2007, due to new marketing campaigns which resulted in increased checking account production. The fourth quarter of 2007 included a $7.7 million charge for TCF’s estimated contingent obliga- tion related to Visa litigation indemnification. Other expense in the fourth quarter of 2008 increased $11 million, or 28.7%, primarily due to a $4.2 million increase in foreclosed real estate expense, increased deposit insurance premiums and a $3.7 million increase in severance and separation costs. In the fourth quarter of 2008, the effective income tax rate was 38.8% of income before tax expense, up from 26.7% for the fourth quarter of 2007. The higher effective tax rate for the fourth quarter of 2008, compared with the fourth quarter of 2007, was primarily due to a $1.5 million charge recorded to income tax expense for distributions from the Company’s deferred compensation plans, compared with $5.4 million of favorable adjustments involving uncer- tain tax positions in the fourth quarter of 2007. 2008 Form 10-K : 41 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 man- agement may make such statements orally to the media, or to securities analysts, investors or others. Forward-looking statements deal with matters that do not relate strictly to historical facts. TCF’s future results may differ materially from historical performance and forward-looking statements about TCF’s expected financial results or other plans and are subject to a number of risks and uncertainties. These include, but are not limited to, continued or deepening deterioration in general economic and banking industry conditions; continued increases in unemployment in TCF’s primary banking markets; limitations on TCF’s ability to pay dividends at current levels or to increase dividends in the future because of financial performance deterioration, regulatory restrictions, or limitations imposed as a result of TCF’s participation in the U.S. Treasury Department’s Capital Purchase Program (“CPP”); increased deposit insurance premiums or other costs related to deteriorating conditions in the banking industry and the economic impact on banks of the Emergency Economic Stabilization Act (“EESA”) or other related legislative and regulatory devel- opments; the imposition of requirements with an adverse financial impact relating to TCF’s lending, loan collection and other business activities as a result of the EESA, TCF’s participation in the CPP, or other legislative or regulatory developments such as mortgage foreclosure moratorium laws; possible legislative changes and adverse economic, business and competitive developments such as shrinking interest margins, deposit outflows, an inability to increase the number of deposit accounts and the possibility that deposit account losses (fraudulent checks, etc.) may increase; impact of legislative, regulatory or other changes affecting customer account charges and fee income; legislative changes to bankruptcy laws which would result in the loss of all or part of TCF’s security interest due to col- lateral value declines (so-called “cramdown” provisions); reduced demand for financial services and loan and lease products; adverse developments affecting TCF’s supermar- ket banking relationships or any of the supermarket chains in which TCF maintains supermarket branches; changes in accounting standards or interpretations of existing standards; monetary, fiscal or tax policies of the federal or state governments; including adoption of state legislation that would increase state taxes; adverse findings in tax audits or regulatory examinations and resulting enforcement actions; changes in credit and other risks posed by TCF’s loan, lease, investment, and securities available for sale portfolios, including continuing declines in commercial or residential real estate values or changes in allowance for loan and lease losses methodology dictated by new market conditions or regulatory requirements; lack of or inadequate insurance coverage for claims against TCF; technological, computer related or operational difficulties or loss or theft of information; adverse changes in securities markets directly or indirectly affecting TCF’s ability to sell assets or to fund its operations; results of litigation, including potential class action litigation concerning TCF’s lending or deposit activities or employment practices and possible increases in indemnifi- cation obligations for certain litigation against Visa U.S.A. (“covered litigation”) and potential reductions in card revenues resulting from covered litigation or other litigation against Visa; heightened regulatory practices, requirements or expectations, including but not limited to requirements related to the Bank Secrecy Act and anti-money laundering compliance activity; or other significant uncertainties. 42 : TCF Financial Corporation and Subsidiaries 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 inter- est-rate risk. Although TCF manages other risks, such as credit risk, liquidity risk, operational and other risks, in the normal course of its business, the Company considers interest-rate risk to be one of its most significant market risks. 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. A 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 (ALCO) manages TCF’s interest-rate risk based on interest rate expectations and other factors. The principal objective of TCF’s asset/liability management activities is to provide maximum levels of net interest income while maintaining acceptable levels of interest-rate risk and liquidity risk and facilitating the funding needs of the Company. 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. Net interest income simulation involves forecasting net interest income under a variety of scenarios, including the level of interest rates, the shape of the yield curve, and spreads between market interest rates. The base net interest income simulation performed as of December 31, 2008, assumes interest rates are unchanged for the next twelve months. The net interest income simulation shows that if short-term and long-term interest rates were to sustain an immediate increase of 100 basis points in the next twelve months that net interest income would not significantly change from the base case. Management exercises its best judgment in making assumptions regarding events that management can influ- ence such as non-contractual deposit repricings and events outside management’s control such as customer behavior on loan and deposit activity, counterparty decisions on callable borrowings and the effect that competition has on both loan and deposit pricing. These assumptions are inherently uncertain and, as a result, net interest income simulation results will differ from actual results due the timing, mag- nitude and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors. In addition to the net interest income simulation model, management utilizes an interest rate gap measure (differ- ence between interest-earning assets and interest-bearing liabilities re-pricing 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 quarterly 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 vari- ous interest-bearing instruments, competition, or a rise or decline in interest rates. 2008 Form 10-K : 43 TCF’s one-year interest rate gap was a negative $631 million, or 3.8% of total assets at December 31, 2008, com- pared with a negative $1 billion, or 6.4% of total assets at December 31, 2007. A negative interest rate gap position exists when the amount of interest-bearing liabilities maturing or re-pricing exceeds the amount of interest- earning assets maturing or re-pricing, including assumed prepayments, within a particular time period. TCF estimates that an immediate 25 basis point decrease in current mortgage loan interest rates would increase pre- payments on the $7.4 billion of fixed-rate mortgage-backed securities, residential real estate loans and consumer loans at December 31, 2008, by approximately $325 million, or 16.5%, 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, 2008, by approx- imately $937 million, or 47.5%, in the first year. A slowing in prepayments would increase the estimated life of the portfolios and may favorably impact net interest income or net interest margin in the future. The level of prepayments that would actually occur in any scenario will be impacted by factors other than interest rates. Such factors include lenders’ willingness to lend funds, which itself can be impacted by the value of assets underlying loans and leases. 44 : TCF Financial Corporation and Subsidiaries The following table summarizes TCF’s interest-rate gap position at December 31, 2008. (Dollars in thousands) Interest-earning assets: Consumer loans (1) Commercial loans (1) Leasing and equipment finance (1) Securities available for sale (1) Real estate loans (1) Investments Inventory finance Education loans held for sale 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 Unsettled transactions Cumulative gap Cumulative gap as a percentage of total assets: At December 31, 2008 At December 31, 2007 Within 30 Days 30 Days to 6 Months 6 Months to 1 Year 1 to 3 Years 3+ Years Total Maturity/Rate Sensitivity $ 181,118 657,432 164,637 41,249 14,491 2 4,425 749 1,064,103 503,034 1,460,500 303,919 285,608 226,861 2,842 2,782,764 $ 700,273 291,495 403,676 358,444 83,526 124,880 – – 1,962,294 52,369 187,035 21,692 1,186,125 – 204,170 1,651,391 $ 731,534 258,061 405,123 415,076 90,308 – – – 1,900,102 57,947 184,671 20,614 978,895 – 11,495 1,253,622 $2,936,596 961,634 1,050,739 683,375 149,319 – – – 5,781,663 792,251 784,659 243,316 135,680 – 473,847 2,429,753 $ 2,358,619 1,322,421 461,907 467,960 117,799 30,843 – 8 4,759,557 2,564,167 440,758 30,137 9,975 – 3,741,559 6,786,596 $ 6,908,140 3,491,043 2,486,082 1,966,104 455,443 155,725 4,425 757 15,467,719 3,969,768 3,057,623 619,678 2,596,283 226,861 4,433,913 14,904,126 (1,718,661) 130,182 $(1,588,479) 310,903 – $(1,277,576) 646,480 – $ (631,096) 3,351,910 – $2,720,814 (2,027,039) (130,182) 563,593 $ 563,593 – $ 563,593 (9.5)% (1.3)% (7.6)% (8.0)% (3.8)% (6.4)% 16.3% 3.4% 3.4% 1.0% 3.4% 1.0% (1) Based upon contractual maturity, repricing date, if applicable, scheduled repayments of principal and projected prepayments of principal based upon experience and third-party projections. (2) Includes non-interest bearing deposits. At December 31, 2008, 15% of checking deposits, 60% of savings deposits, and 56% of money market deposits are included in amounts repricing within one year. At December 31, 2007, 34% of checking deposits, 64% of savings deposits, and 68% of money market deposits are included in amounts repricing within one year. (3) Includes $3.6 billion of callable borrowings. Item 8. Financial Statements and Supplementary Data 2008 Form 10-K : 45 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 sub- sidiaries (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of income, stock- holders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2008. These consoli- dated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain 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 manage- ment, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reason- able 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 sub- sidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in con- formity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), TCF Financial Corporation’s internal control over financial reporting as of December 31, 2008, based on crite- ria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 16, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Minneapolis, Minnesota February 16, 2009 46 : TCF Financial Corporation and Subsidiaries Consolidated Statements of Financial Condition (Dollars in thousands, except per-share data) Assets Cash and due from banks Investments Securities available for sale Education loans held for sale Loans and leases: Consumer home equity and other Commercial real estate Commercial business Leasing and equipment finance Inventory finance Subtotal Residential real estate Total loans and leases Allowance for loan and lease losses Net loans and leases Premises and equipment Goodwill 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; 361,172 and 0 shares issued and outstanding Common stock, par value $.01 per share, 280,000,000 shares authorized; 130,839,378 and 131,468,699 shares issued Additional paid-in capital Retained earnings, subject to certain restrictions Accumulated other comprehensive loss Treasury stock at cost, 3,413,855 and 4,866,480 shares, and other Total stockholders’ equity Total liabilities and stockholders’ equity See accompanying notes to consolidated financial statements. At December 31, 2008 2007 $ 342,380 155,725 1,966,104 757 6,908,140 2,984,156 506,887 2,486,082 4,425 12,889,690 455,443 13,345,133 (172,442) 13,172,691 447,826 152,599 502,275 $16,740,357 $ 3,969,768 3,057,623 619,678 2,596,283 10,243,352 226,861 4,433,913 4,660,774 342,455 15,246,581 $ 358,188 148,253 1,963,681 156,135 6,590,631 2,557,330 558,325 2,104,343 – 11,810,629 527,607 12,338,236 (80,942) 12,257,294 438,452 152,599 502,452 $15,977,054 $ 4,108,527 2,636,820 576,667 2,254,535 9,576,549 556,070 4,417,378 4,973,448 328,045 14,878,042 348,437 – 1,308 330,474 927,893 (3,692) (110,644) 1,493,776 $16,740,357 1,315 354,563 926,875 (18,055) (165,686) 1,099,012 $15,977,054 Consolidated Statements of Income (In thousands, except per-share data) Interest income: Loans and leases Securities available for sale Education 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 Other Fees and other revenue Gains on securities Visa share redemption Gains on sales of branches and real estate Total non-interest income Non-interest expense: Compensation and employee benefits Occupancy and equipment Advertising and promotions Deposit account premiums Operating lease depreciation Other Total non-interest expense Income before income tax expense Income tax expense Net income Preferred stock dividends Net income available to common stockholders Net income per common share: Basic Diluted Dividends declared per common share See accompanying notes to consolidated financial statements. 2008 Form 10-K : 47 Year Ended December 31, 2008 2007 2006 $842,157 110,946 5,355 5,937 964,395 156,774 213,948 370,722 593,673 192,045 401,628 270,739 103,082 32,645 9,405 415,871 55,488 2,702 474,061 16,066 8,308 – 498,435 341,203 127,953 19,150 16,888 17,458 171,751 694,403 205,660 76,702 128,958 2,540 $126,418 $ $ $ 1.01 1.01 1.00 $836,953 109,581 13,252 8,237 968,023 230,625 187,221 417,846 550,177 56,992 493,185 278,046 98,880 35,620 10,318 422,864 59,151 8,270 490,285 13,278 – 37,894 541,457 346,468 120,824 16,830 4,849 17,588 155,565 662,124 372,518 105,710 266,808 – $266,808 $ $ $ 2.13 2.12 .97 $769,590 98,035 15,009 3,504 886,138 195,324 153,284 348,608 537,530 20,689 516,841 270,166 92,084 37,760 10,695 410,705 53,004 21,567 485,276 – – 4,188 489,464 341,857 114,618 21,879 5,047 14,347 151,449 649,197 357,108 112,165 244,943 – $244,943 1.90 $ $ 1.90 $ .92 48 : TCF Financial Corporation and Subsidiaries Consolidated Statements of Stockholders’ Equity Preferred Stock – $ Common Stock $1,844 Additional Paid-in Capital $ 476,884 Retained Earnings $1,536,611 Treasury Stock Total and Other $(21,215) $ (995,652) $ 998,472 Accumulated Other Comprehensive (Loss)/ Income Number of Common Shares Issued 184,386,193 – – – – – – – (52,500,000) (134,635) (90,809) – – – – 131,660,749 $ – – – – – – (140,775) (51,275) – – – – 131,468,699 $ – 131,468,699 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 283 – – – – – – – – – (223,647) (405,674) – – – 348,154 – – – – – – – (Dollars in thousands) Balance, December 31, 2005 Comprehensive income (loss): Net income Other comprehensive loss Comprehensive income (loss) Adjustment to initially apply FASB Statement No. 158, net of tax Dividends on common stock Repurchase of 3,900,000 common shares Issuance of 738,890 common shares Treasury stock retired Cancellation of common shares Cancellation of common shares for employee tax withholding Amortization of stock compensation Exercise of stock options, 28,667 shares Stock compensation tax benefits Change in shares held in trust for deferred compensation plans, at cost Balance, December 31, 2006 Comprehensive income: Net income Other comprehensive income Comprehensive income Dividends on common stock Repurchase of 3,910,000 common shares Issuance of 198,850 common shares Cancellation of common shares Cancellation of common shares for employee tax withholding Amortization of stock compensation Exercise of stock options, 87,083 shares Stock compensation tax benefits Change in shares held in trust for deferred compensation plans, at cost Balance, December 31, 2007 Pension and postretirement measurement date change Subtotal Comprehensive income: Net income Other comprehensive income Comprehensive income Dividends on preferred stock Dividends on common stock Issuance of preferred shares and common warrant Issuance of 755,838 common shares Treasury shares sold to TCF employee benefit plans, 683,787 shares Cancellation of common shares Cancellation of common shares for employee tax withholding Amortization of stock compensation Exercise of stock options, 13,000 shares Stock compensation tax benefits Change in shares held in trust for deferred compensation plans, at cost Balance, December 31, 2008 – – – – – – – (525) (1) (1) – – – – – – – – – (13,874) (126,765) (490) (2,451) 7,499 (192) 20,681 244,943 – 244,943 – (121,405) – – (876,667) 529 – – – – – (374) (374) (13,337) – – – – – – – – – – – – – – (101,045) 13,874 1,003,957 – – – 546 – 244,943 (374) 244,569 (13,337) (121,405) (101,045) – – 38 (2,452) 7,499 354 20,681 – $1,317 (17,548) $ 343,744 – $ 784,011 – – 17,548 $(34,926) $ (60,772) $ 1,033,374 – – – – – – (1) (1) – – – – – – – – (4,850) (615) (1,409) 7,430 (992) 4,534 266,808 – 266,808 (124,513) – – 569 – – – – – 16,871 16,871 – – – – – – – – – – – – (105,251) 4,850 – – – 2,208 – 266,808 16,871 283,679 (124,513) (105,251) – (47) (1,410) 7,430 1,216 4,534 – $1,315 6,721 $ 354,563 – $ 926,875 – – $(18,055) $ (165,686) $ 1,099,012 (6,721) – 1,315 – 354,563 65 926,940 – (18,055) – (165,686) 65 1,099,077 – – – – – – – – (3) (4) – – – – – – – – 128,958 – 128,958 (2,540) (126,447) – 14,363 14,363 – – 12,850 (19,573) (7,530) (4,217) (6,474) 8,344 (173) 10,110 – – – 982 – – – – – – – – – – – – – – – – – – 19,573 17,707 – – – 336 – 128,958 14,363 143,321 (2,257) (126,447) 361,004 – 10,177 (3,238) (6,478) 8,344 163 10,110 See accompanying notes to consolidated financial statements. – 130,839,378 – $348,437 – $1,308 (17,426) $ 330,474 – $ 927,893 – – 17,426 $ (3,692) $ (110,644) $1,493,776 Consolidated Statements of Cash Flows 2008 Form 10-K : 49 (In thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Provision for credit losses Proceeds from sales of education loans held for sale Principal collected on education loans held for sale Originations of education loans held for sale Net increase in other assets and accrued expenses and other liabilities Gains on sales of assets and deposits, net Other, net Total adjustments Net cash provided by operating activities Cash flows from investing activities: Principal collected on loans and leases Originations and purchases of loans Purchases of equipment for lease financing Proceeds from sales of securities available for sale Proceeds from maturities of and principal collected on securities available for sale Purchases of securities available for sale Net increase (decrease) in federal funds sold Purchases of Federal Home Loan Bank stock Proceeds from redemptions of Federal Home Loan Bank stock Proceeds from sales of real estate owned Purchases of premises and equipment Proceeds from sales of premises and equipment Proceeds from sale of mortgage servicing rights Other, net Net cash used by investing activities Cash flows from financing activities: Net increase in deposits Sales of deposits, net Net (decrease) increase in short-term borrowings Proceeds from long-term borrowings Payments on long-term borrowings Purchases of common stock Proceeds from issuance of preferred stock and common warrant Dividends paid on common stock Stock compensation tax benefits Other, net Net cash provided by financing activities Net (decrease) increase in cash and due from banks Cash and due from banks at beginning of year Cash and due from banks at end of year Supplemental disclosures of cash flow information: Cash paid for: 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, 2008 2007 2006 $ 128,958 $ 266,808 $ 244,943 64,813 192,045 245,884 1,679 (95,318) 14,397 (16,679) 12,161 418,982 547,940 3,040,078 (3,414,652) (850,459) 1,707,821 219,017 (1,888,527) – (144,611) 140,196 43,324 (49,556) 1,546 – 16,751 (1,179,072) 666,803 – (329,209) 344,258 (323,348) – 361,004 (126,447) 10,110 12,153 615,324 (15,808) 358,188 342,380 378,132 42,957 103,359 $ $ $ $ 64,169 56,992 187,967 3,989 (206,752) 28,292 (51,172) 6,751 90,236 357,044 3,337,230 (3,711,353) (776,716) 1,916,424 234,215 (2,369,452) 71,000 (95,226) 53,008 33,635 (76,637) 9,743 - 14,653 (1,359,476) 48,707 (213,294) 341,957 1,275,329 (217,406) (105,251) – (124,513) 4,534 718 1,010,781 8,349 349,839 358,188 59,807 20,689 284,455 17,235 (216,468) 2,815 (5,790) 34 162,777 407,720 3,621,344 (4,110,463) (767,932) – 229,014 (397,504) (71,000) (68,948) 49,466 31,060 (79,614) 7,714 41,160 16,858 (1,498,845) 639,895 – (258,014) 1,206,403 (321,830) (101,045) – (121,405) 20,681 1,046 1,065,731 (25,394) 375,233 $ 349,839 408,248 93,634 73,733 $ 331,345 $ 96,324 $ 41,088 $ $ $ $ 50 : TCF Financial Corporation and Subsidiaries Notes to Consolidated Financial Statements Note 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial state- ments include the accounts of TCF Financial Corporation and its wholly owned subsidiaries. TCF Financial Corporation, a Delaware corporation, is a financial holding company engaged primarily in community banking and leasing and equipment finance through its primary subsidiary, TCF Bank. TCF Bank owns leasing and equipment finance, inventory finance and REIT subsidiaries. These subsidiaries are consol- idated with TCF Bank and are included in the consolidated financial statements of TCF Financial Corporation. All signif- icant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior years’ financial statements to conform to the current year presen- tation. 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 man- agement to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting 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 accounting estimates occur in certain accounting policies and procedures and are particularly susceptible to signifi- cant change. Policies that contain critical accounting esti- mates include the determination of the allowance for loan and lease losses, lease financings 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 by management to be appropriate to provide for probable loan and lease losses incurred in the portfolio as of the balance sheet date, including known or anticipated prob- lem loans and leases, as well as for loans and leases which are not currently known to require specific allowances. Management’s judgment as to the amount of the allowance 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 portfolios, values of underlying loan and lease collat- eral and other relevant factors are reviewed to determine the amount of the allowance. Impaired loans include non- accrual and restructured commercial real estate and commercial business loans, equipment finance loans and certain modified consumer loans. Loan impairment is meas- ured 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. Most consumer loans and residential real estate loans and all leases are excluded from the definition of an impaired loan 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 manage- ment’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 borrow- ers, 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. 2008 Form 10-K : 51 Lease Financing TCF provides various types of lease financing that are classified for accounting purposes as direct financing, sales-type or operating leases. Leases that transfer substantially all of the benefits and risks of 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 pay- ments and the lease residual values. The determination of the lease classification requires various judgments and estimates by management including the fair value of the equipment at lease inception, useful life of the equipment under lease, estimate of the lease residual value and collectibility of minimum lease payments. Sales-type leases generate dealer profit which is recog- nized 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. Lease cost consists of the leased equipment’s book value, less the present value of its residual. The revenues associated with other types of leases are recognized over the term of the underly- ing leases. Interest income on direct financing and sales- type leases is recognized using methods which approximate a level yield over the fixed, non-cancelable term of the lease. TCF receives pro-rata rent payments for the 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. 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. Some lease financings include a residual value compo- nent, 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 to the lessee are classified as oper- ating leases. Operating leases represent a rental agreement where ownership of the underlying equipment resides with TCF. Such leased equipment and related initial direct costs are included in other assets on the balance sheet and are depreciated on a straight-line basis over the term of the lease to its estimated salvage value. Depreciation expense is recorded as operating lease expense and included in non-interest expense. Operating lease rental income is recognized when it is due according to the provisions of the lease and is reflected as a component of non-interest income. An allowance for lease losses is not provided on operating leases. 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 con- sequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax-basis carrying amounts. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years 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 in which the enactment date occurs. 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 evaluation of uncertain tax positions, differences between the tax and financial report- ing bases of assets and liabilities (temporary differences), estimates of amounts due or owed such as the timing of reversal of temporary differences and current financial accounting standards. Additionally, there can be no assurance that estimates and interpretations used in determining income tax liabilities will not be challenged by federal and state taxing authorities. Actual results could differ significantly from the estimates and tax law interpretations used in determining the current and deferred income tax liabilities. 52 : TCF Financial Corporation and Subsidiaries 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 is uncertain. Management periodically reviews and evaluates the status of uncertain tax positions and makes estimates of amounts ultimately due or owed. The benefits of tax positions is 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 the statute of limitations on tax returns, new legislation, clarification of existing legislation through government pronouncements, the courts and through the examination process. TCF’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense in the Consolidated Statements of Income. Other Significant Accounting Policies Investments Investments are carried at cost, adjusted for amortization of premiums or accretion of discounts, using methods which approximate a level yield. TCF periodi- cally evaluates investments for “other than temporary” impairment with losses, if any, recorded in non-interest income as a loss on securities. 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), a separate component of stockholders’ equity. The cost of securities sold is determined on a specific identifica- tion 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 considered other than temporary are recorded in non-interest income as a loss on securities. TCF periodically evaluates securities available for sale for “other than temporary” impairment. Discounts and premiums on securities available for sale are amortized using methods which approximate a level yield over the life of the security. Loans and Leases Loans and leases are reported at his- torical cost including net direct fees and costs associated with originating and acquiring loans and leases. The net direct 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 direct fees and costs, unearned discounts and finance charges, and unearned lease income are amortized to interest income using methods which approximate a level yield over the estimated remaining lives of the loans and leases. Net direct fees and costs on lines of credit are amortized on a straight line basis over the contractual life of the line of credit and adjusted for payoffs. Net deferred fees and costs on home equity lines of credit are amortized to service fee income. Loans and leases, including loans or leases that are considered to be impaired, are reviewed regularly by man- agement and are generally placed on non-accrual status when the collection of interest or principal is 90 days or more past due (150 days or more past due or six payments are owed for loans secured by residential real estate), unless the loan or lease is adequately secured and in the process of collection. A loan secured by residential real estate is placed on non-accrual status if, upon notifi- cation of bankruptcy, the loan is 60 days or more past due. If the loan is current at notification, the loan is placed on non-accrual status at 90 days or when four payments are owed, 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 and interest accrued in the current year is reversed. For non-accrual leases that have been funded on a non-recourse basis by third-party financial institutions, the related debt is also placed on non-accrual status. Interest payments received on loans and leases in non-accrual status 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 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 recognized in occupancy and equipment expense. Rent expense for leases with free rent periods or scheduled rent increases is recognized on a straight-line basis over the lease term. 2008 Form 10-K : 53 Other Real Estate Owned Other real estate owned is recorded at the lower of cost or fair value less estimated costs to sell the property 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 carrying amount in excess of the fair value less estimated costs to sell the property is charged off to the allowance for loan and lease losses. Subsequently, if the fair value of an asset, less the estimated costs to sell, declines to less than the carry- ing amount of the asset, the deficiency is recognized in the period in which it becomes known and is included in other non-interest expense. Net operating expenses of properties and recoveries on sales of other real estate owned are also recorded in other non-interest expense. Investments in Affordable Housing Limited Partnerships Investments in affordable housing consist of investments in limited partnerships that operate qualified affordable housing projects or that invest in other limited partnerships formed to operate affordable housing projects. TCF generally utilizes the effective yield method to account for these investments with the tax credits net of the amor- tization of the investment reflected in the Consolidated Statements of Income as a reduction of income tax expense. However, depending on circumstances, the equity or cost methods may be utilized. The amount of the investment along with any unfunded equity 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, 2008, TCF’s investments in affordable housing limited partnerships were $44.1 million, compared with $51 million at December 31, 2007 and were recorded in other assets. Five of these investments in affordable housing limited partnerships are considered variable interest entities. These partnerships are not consolidated with TCF. As of December 31, 2008 and 2007, the carrying amount of these five investments was $43.1 million and $49.8 million, respectively. These amounts included $651 thousand and $12.3 million of unconditional unfunded equity contributions as of December 31, 2008 and 2007, respectively, which are recorded in other liabilities. The maximum exposure to loss on these five investments was $43.1 million at December 31, 2008; however, the general partner of these partnerships provides various guarantees to TCF including guaranteed minimum returns. These guarantees are backed by an A credit-rated company and significantly limit any risk of loss. In addition to the guarantees, the investments are supported by the performance of the underlying real estate properties which also mitigates the risk of loss. Intangible Assets Goodwill is tested for impairment annually or earlier whenever an event occurs indicating that goodwill may be impaired. Stock-Based Compensation The fair value of restricted stock and stock options is determined on the date of grant and amortized to compensation expense, with a correspon- ding increase in additional paid-in capital, 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 per- formance conditions will be met to determine the number of shares that will vest and the related compensation expense. Compensation expense is adjusted in the period such esti- mates change. Non-forfeitable dividends, if any, paid on shares of restricted stock are recorded to retained earnings for shares that are expected to vest and to compensation expense for shares that are not expected to vest. Income tax benefits related to stock compensation in excess of grant date fair value less any proceeds on exercise are recognized as an increase to additional paid-in capital upon vesting or exercising and delivery of the stock. Any income tax benefits that are less than grant date fair value less any proceeds on exercise would be recognized as a reduc- tion 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 15 for additional information concerning stock-based compensation. Deposit Account Overdrafts Deposit account overdrafts are reported in consumer or commercial loans. Net losses on uncollectible overdrafts are reported as net charge-offs in the allowance for loan and lease losses within 60 days from the date of overdraft. Uncollectible deposit fees are reversed against fees and service charges and a related reserve for uncollectible deposit fees is maintained in other liabilities. Other deposit account losses are reported in other non-interest expense. 54 : TCF Financial Corporation and Subsidiaries Note 2. Cash and Due from Banks At December 31, 2008, TCF was required by Federal Reserve Board regulations to maintain reserves of $124.3 million in cash on hand or at the Federal Reserve Bank. Note 3. Investments The carrying values of investments, which approximate their fair values, consist of the following. (In thousands) Federal Home Loan Bank stock, at cost: Des Moines Chicago Subtotal Federal Reserve Bank stock, at cost Other Total investments At December 31, 2007 2008 $120,263 4,617 124,880 22,706 8,139 $155,725 $115,848 4,617 120,465 20,423 7,365 $148,253 Note 4. Securities Available for Sale Securities available for sale consist of the following. The investments in FHLB stock are required investments related to TCF’s borrowings from these banks. FHLBs obtain their funding primarily through issuance of consolidated obligations of the Federal Home Loan Bank system. The U.S. Government does not guarantee these obligations, and each of the 12 FHLBs are generally jointly and severally liable for repayment of each other’s debt. Therefore, TCF’s investments in these banks could be adversely impacted by the financial operations of the FHLBs and actions by the Federal Housing Finance Agency. The carrying values and yields on investments at December 31, 2008, by contractual maturity, are shown below. (Dollars in thousands) Due in one year or less Due in 1-5 years Due in 5-10 years Due after 10 years No stated maturity Total Carrying Value – $ – 200 7,939 147,586 $155,725 Yield –% – 2.00 9.17 2.96 3.28 2008 2007 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: U.S. Government sponsored enterprises and federal agencies Other Other securities Total $1,928,245 299 250 $1,928,794 $37,310 – – $37,310 $ – – – $ – $1,965,555 299 250 $1,966,104 $1,975,817 3,992 250 $1,980,059 5.27% $2,493 – – $2,493 $(18,681) $1,959,629 3,802 250 $(18,871) $1,963,681 (190) – Weighted-average yield 5.17% Gross gains of $17.7 million and $13.3 million were rec- ognized on securities during 2008 and 2007, respectively. There were no gains on securities during 2006. $1.8 billion and $2 billion of mortgage-backed securities were pledged as collateral to secure certain deposits and borrowings at December 31, 2008 and 2007, respectively (see Notes 10 and 11 for additional information). 2008 Form 10-K : 55 The amortized cost and fair value of securities available for sale at December 31, 2008, by contractual maturity, are shown below. (In thousands) Due in one year or less Due in 1-5 years Due in 5-10 years Due after 10 years No stated maturity Total At December 31, 2008 $ Amortized Cost – 432 488 1,927,874 – $1,928,794 $ Fair Value – 437 504 1,965,163 – $1,966,104 At December 31, 2008, TCF had no securities in an unrealized loss position within the available for sale portfolio. The following table shows the securities available for sale portfolio’s gross unrealized losses and fair value at December 31, 2007, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position. Unrealized losses on securities available for sale are due to changes in interest rates and not due to credit quality issues. TCF has the ability and intent to hold securities available for sale until a recovery of fair value. Accordingly, TCF concluded that no other-than-temporary impairment occurred at December 31, 2007. (In thousands) Mortgage-backed securities: U.S. Government sponsored enterprises and federal agencies Other Total Less than 12 months At December 31, 2007 12 months or more Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $286,063 – $286,063 $(190) – $(190) $977,511 3,443 $980,954 $(18,491) (190) $(18,681) $1,263,574 3,443 $1,267,017 $(18,681) (190) $(18,871) 56 : TCF Financial Corporation and Subsidiaries Note 5. Loans and Leases The following table sets forth information about loans and leases, excluding loans held for sale. (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 (1): Equipment finance loans Lease financings: Direct financing leases Sales-type leases Lease residuals Unearned income and deferred lease costs Total lease financings Total leasing and equipment finance Total consumer, commercial and leasing and equipment finance Inventory finance Residential real estate Total loans and leases At December 31, 2008 2007 Percentage Change $ 4,426,219 2,420,116 6,846,335 61,805 6,908,140 $ 4,178,961 2,344,113 6,523,074 67,557 6,590,631 2,693,085 291,071 2,984,156 506,887 3,491,043 2,280,204 277,126 2,557,330 558,325 3,115,655 789,869 604,185 1,813,254 22,095 52,906 (192,042) 1,696,213 2,486,082 12,885,265 4,425 455,443 $13,345,133 1,611,881 26,657 41,678 (180,058) 1,500,158 2,104,343 11,810,629 – 527,607 $12,338,236 5.9% 3.2 5.0 (8.5) 4.8 18.1 5.0 16.7 (9.2) 12.0 30.7 12.5 (17.1) 26.9 (6.7) 13.1 18.1 9.1 100.0 (13.7) 8.2 (1) Operating leases of $58.8 million and $71.1 million at December 31, 2008 and 2007, respectively, are included in Other Assets on the Consolidated Statements of Financial Condition. Future minimum lease payments for direct financing and sales-type leases as of December 31, 2008 are as follows. (In thousands) 2009 2010 2011 2012 2013 Thereafter Total Total $ 643,356 469,241 336,413 198,325 91,193 27,543 $1,766,071 The aggregate amount of loans to non-management directors of TCF and their related interests was $8.5 million and $24.4 million at December 31, 2008 and 2007, respec- tively. During 2008, no new loans were made and $142 thou- sand of loans were repaid. The remainder of the decrease from December 31, 2007 was primarily due to changes in non-management directors. 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 $57 thousand and $112 thousand at December 31, 2008 and 2007, respectively. 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. Note 6. Allowance for Loan and Lease Losses Following is a summary of the allowance for loan and lease losses and selected statistics. 2008 Form 10-K : 57 (Dollars in thousands) Balance at beginning of year Provision for credit losses Charge-offs Recoveries Net charge-offs 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 2008 $ 80,942 192,045 (114,800) 14,255 (100,545) $ 172,442 .78% 1.29 Year Ended December 31, 2007 $ 58,543 56,992 (52,421) 17,828 (34,593) $ 80,942 .30% .66 2006 $ 55,823 20,689 (33,221) 15,252 (17,969) $ 58,543 .17% .52 Information relating to impaired loans and non-accrual loans and leases is as follows. (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 Other non-accrual loans and leases: Balance, at year-end Interest income recognized on loans and leases on non-accrual status Contractual interest on non-accrual loans and leases (2) At or For the Year Ended December 31, 2006 2007 2008 $110,894 24,558 68,283 102 61,624 782 16,322 $30,598 2,718 21,490 91 35,084 676 7,006 $17,512 2,470 8,169 603 25,673 449 3,393 (1) There were no impaired loans at December 31, 2008, 2007 and 2006 which, if required, 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 contractual terms. TCF had $27.4 million and $4.9 million of troubled debt restructuring loans at December 31, 2008 and 2007, respec- tively. There were no such loans outstanding at December 31, 2006. There were no material commitments to lend additional funds to customers whose loans or leases were classified as non-accrual at December 31, 2008. At December 31, 2008, accruing loans and leases delinquent for 90 days or more were $37.6 million, compared with $15.4 million at December 31, 2007. 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, 2007 2008 $131,942 $140,656 236,893 257,807 57,639 60,509 288,876 294,790 715,350 753,762 305,936 $447,826 276,898 $438,452 58 : TCF Financial Corporation and Subsidiaries TCF leases certain premises and equipment under oper- ating leases. Net lease expense including utilities and other operating expenses was $35.5 million, $34 million and $32.9 million in 2008, 2007 and 2006, respectively. At December 31, 2008, the total minimum rental payments for operating leases were as follows. (In thousands) 2009 2010 2011 2012 2013 Thereafter Total $ 26,858 25,250 23,453 21,526 20,096 125,673 $242,856 Note 9. Deposits Deposits are summarized as follows. Note 8. Goodwill Goodwill is summarized as follows. (In thousands) Goodwill related to: Banking segment Leasing segment Total At December 31, 2007 2008 $141,245 11,354 $152,599 $141,245 11,354 $152,599 No impairment of goodwill was required at December 31, 2008 or 2007. (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 Rate at Year-End 2008 Amount –% $ 2,206,528 1,763,240 3,969,768 3,057,623 619,678 .73 .32 1.96 1.66 1.09 3.15 1.61 7,647,069 2,596,283 $10,243,352 At December 31, % of Total 21.5% 17.2 38.7 30.0 6.0 74.7 25.3 100.0% Rate at Year-End –% 1.40 .64 2.60 2.57 1.50 4.38 2.18 2007 Amount $2,228,598 1,879,929 4,108,527 2,636,820 576,667 7,322,014 2,254,535 $9,576,549 % of Total 23.3% 19.6 42.9 27.5 6.0 76.5 23.5 100.0% Certificates of deposit had the following remaining maturities at December 31, 2008. (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 2008 Form 10-K : 59 $100,000+ $363,631 210,993 339,546 32,030 1,912 208 529 221 $949,070 Other $ 500,554 401,234 634,678 91,209 10,530 3,615 3,635 1,758 $1,647,213 Total $ 864,185 612,227 974,224 123,239 12,442 3,823 4,164 1,979 $2,596,283 Note 10. 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, 2008. (Dollars in thousands) At December 31, Federal funds purchased Securities sold under repurchase agreements Federal Home Loan Bank advances Line of credit U.S. Treasury, tax and loan borrowings Total Year ended December 31, Average daily balance Federal funds purchased Securities sold under repurchase agreements Federal Home Loan Bank advances Line of credit U.S. Treasury, tax and loan borrowings Total Maximum month-end balance Federal funds purchased Securities sold under repurchase agreements Federal Home Loan Bank advances Line of credit U.S. Treasury, tax and loan borrowings N.A. Not Applicable. 2008 2007 2006 Amount Rate Amount Rate Amount Rate $200,000 .03% $150,000 3.68% $125,000 5.39% 24,980 – – 1,881 $226,861 2.75 – – – .33 43,297 100,000 9,500 253,273 $556,070 4.31 4.33 5.93 4.29 4.16 86,788 – – 2,324 $214,112 4.95 – – 4.99 5.20 $208,307 2.14% $131,551 4.98% $502,200 5.06% 36,666 133,538 5,997 27,255 $411,763 $395,000 57,485 400,000 17,500 255,715 2.47 1.97 5.17 2.55 2.18 N.A. N.A. N.A. N.A. N.A. 36,768 17,575 8,276 36,123 $230,293 $354,000 84,051 100,000 31,000 253,273 4.73 4.48 7.29 4.68 4.94 N.A. N.A. N.A. N.A. N.A. 53,087 24,657 1,893 15,015 $596,852 $645,000 188,162 200,000 27,000 145,493 4.63 4.57 5.38 5.31 5.03 N.A. N.A. N.A. N.A. N.A. Securities underlying repurchase agreements are book entry securities. During the borrowing period, book entry securities were delivered by 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 60 : TCF Financial Corporation and Subsidiaries identical or substantially identical securities upon the maturities of the agreements. At December 31, 2008, all of the securities sold under short-term repurchase agreements provided for the repurchase of identical securities and were collateralized by mortgage-backed securities having a fair value of $25.1 million. At December 31, 2008, TCF Financial (parent company) had a $50 million unsecured line of credit that would have matured in April 2009, and contained certain covenants common to such agreements. In January 2009, TCF Financial terminated this line of credit. As of December 31, 2008, TCF was not in default with respect to any of its covenants under the line of credit agreement. The interest rate on the line of credit was based on either the prime rate or LIBOR. TCF had the option to select the interest rate index and term for advances on the line of credit. The line of credit was used for appropriate corporate purposes. At December 31, 2008, TCF had no outstanding balance on its bank line of credit compared with $9.5 million at December 31, 2007. TCF has elected to participate in the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program. Under the program, on or before October 31, 2009, TCF could issue up to $329 million of qualifying senior unsecured debt that would be guaranteed by the FDIC and backed by the full faith and credit of the United States. Any debt issued under the program would be guaranteed until June 30, 2012 and TCF would be required to pay up to a 100 basis point fee on the outstanding balance during the guar- antee period. As of December 31, 2008, TCF has not issued any debt under the program. Note 11. Long-term Borrowings Long-term borrowings consist of the following. (Dollars in thousands) Federal Home Loan Bank advances and securities sold under repurchase agreements Subtotal Subordinated bank notes Subtotal Junior subordinated notes (trust preferred) Discounted lease rentals Subtotal Other borrowings Subtotal Total long-term borrowings At December 31, 2008 Weighted- Average Rate 5.26% 6.02 4.64 4.18 4.49 4.60 3.51 4.45 5.27 5.37 5.63 5.43 11.20 – 6.38 6.29 6.34 6.47 6.94 7.73 6.36 – 5.00 5.00 4.69 2007 Weighted- Average Rate 5.26% 6.02 4.85 4.16 4.49 4.60 – 4.49 5.27 5.37 5.63 5.43 – 7.13 7.10 6.98 7.00 6.98 – – 7.09 4.51 5.00 4.66 4.56 Amount $ 117,000 100,000 200,000 1,400,000 1,100,000 1,250,000 – 4,167,000 74,726 49,619 74,395 198,740 – 24,318 15,439 6,681 1,732 276 – – 48,446 2,226 966 3,192 $4,417,378 Year of Maturity 2009 2010 2011 2015 2016 2017 2018 2014 2015 2016 2068 2008 2009 2010 2011 2012 2013 2014 2008 2009 Amount $ 117,000 100,000 300,000 900,000 1,100,000 1,250,000 300,000 4,067,000 74,917 49,790 74,457 199,164 110,440 – 25,104 17,077 8,976 4,059 1,118 9 56,343 – 966 966 $4,433,913 2008 Form 10-K : 61 At December 31, 2008, TCF has pledged loans secured by residential real estate, commercial real estate loans and FHLB stock with an aggregate carrying value of $5.6 billion as collateral for FHLB advances. Included in FHLB advances and repurchase agreements at December 31, 2008 are $717 million of fixed-rate FHLB advances and repurchase agree- ments, which are callable quarterly by counterparties at par until maturity. In addition, TCF has $2 billion of FHLB advances and $900 million of repurchase agreements which contain one-time call provisions for various years from 2009 through 2011. The probability that the advances and repurchase agree- ments will be called by counterparties depends primarily on the level of related interest rates during the call period. If FHLB advances are called, replacement funding will be available from the FHLB at the then-prevailing market rate of interest for the term selected by TCF, subject to standard terms and conditions. The next call year and stated maturity year for the callable FHLB advances and repurchase agreements outstanding at December 31, 2008 were as follows. (Dollars in thousands) Next Call $1,717,000 1,450,000 400,000 – – – – $3,567,000 Weighted- Stated Average Rate Maturity 4.57% $ 117,000 100,000 4.56 200,000 3.84 500,000 – 1,100,000 – 1,250,000 – 300,000 – $3,567,000 4.48 Weighted- Average Rate 5.26% 6.02 4.85 4.15 4.49 4.60 3.51 4.48 Year 2009 2010 2011 2015 2016 2017 2018 Total The $75 million of subordinated notes due 2014 have a fixed-rate coupon of 5% through June 14, 2009, and will reprice quarterly thereafter at the three-month LIBOR rate plus 1.63%. The $50 million of subordinated notes due 2015 have a fixed-rate coupon of 5% 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. The $75 million of subordinated notes due 2016 have a fixed-rate coupon of 5.5% until February 1, 2016. All of these subordinated notes qualify as Tier 2 or supplementary capital for regulatory purposes, subject to certain limitations. In 2008, TCF formed TCF Capital I (the “Trust”), a statutory trust formed under the laws of the state of Delaware. The Trust is a wholly-owned finance subsidiary of TCF. The Trust issued 10.75% Capital Securities, Series I (the “Securities”), to the public, using the proceeds to purchase $115 million of 10.75% Junior Subordinated Notes, Series I (the “Notes”), from TCF. The Securities are fully and uncon- ditionally guaranteed by TCF. The Notes qualify as Tier 1 capital and are redeemable, at par, after August 14, 2013, with a final maturity of August 15, 2068. Net proceeds after issuance costs were $110.4 million, resulting in a weighted- average rate of 11.20%. For certain equipment leases, TCF utilizes its lease rentals and underlying equipment as collateral to borrow from other financial institutions at fixed rates on a 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 under- lying leased equipment and TCF is only entitled to residual proceeds in excess of the outstanding borrowing balance. In non-recourse financings, the other financial institution has no further recourse against TCF. Note 12. Income Taxes (In thousands) Year ended December 31, 2008: Current Deferred Total Federal State Total Year ended December 31, 2007: Federal State Total Year ended December 31, 2006: Federal State Total $ 46,627 1,715 $ 48,342 $ 91,170 3,100 $ 94,270 $112,465 1,830 $114,295 $24,191 4,169 $28,360 $ 70,818 5,884 $ 76,702 $13,900 (2,460) $11,440 $105,070 640 $105,710 $ (439) (1,691) $ (2,130) $112,026 139 $112,165 62 : TCF Financial Corporation and Subsidiaries The effective income tax rate differs from the federal income tax rate of 35% as a result of the following. Year Ended December 31, 2006 2007 35.00% 35.00% 2008 35.00% Federal income tax rate Increase (decrease) in income tax expense resulting from: State income tax, net of federal income tax benefit 1.86 Deductible stock dividends (1.60) Investments in affordable .11 (1.04) .03 (1.14) housing (.77) (.60) (.60) Changes in uncertain tax positions Deferred tax adjustments due to law changes Federal settlement of prior year issue Compensation deduction limitations Other, net Effective income tax rate .57 1.40 (2.39) (2.05) (.55) – (2.27) – – .77 .07 37.30% .04 .08 28.38% .11 .06 31.41% A reconciliation of the change in the gross amount, before related tax effects, of unrecognized tax benefits from January 1, 2008 to December 31, 2008 is as follows: (In thousands) Balance at January 1, 2008 Increases for tax positions related to the current year Increases for tax positions related to prior years Decreases for tax positions related to prior years Settlements with taxing authorities Decreases related to lapses of applicable statutes Balance at December 31, 2008 $13,040 2,414 181 (1,332) (3,230) (1,852) $ 9,221 The total amount of unrecognized tax benefits that, if recog- nized, would affect the tax provision and the effective income tax rate is $5.6 million, net of related tax benefit effects. TCF’s policy is to report interest and penalties, if any, related to unrecognized tax benefits in income tax expense in the Consolidated Statements of Income. The gross amount of accrued interest on unrecognized tax benefits was $791 thousand at December 31, 2008. TCF recorded a reduction of accrued interest of $572 thousand and $768 thousand during 2008 and 2007, respectively. TCF’s federal income tax returns are open and subject to examination from the 2005 tax return year and forward. TCF’s various state income tax returns are generally open from the 2004 and later tax return years based on individual state statutes of limitation. Changes in the amount of unrecognized tax benefits within the next twelve months from normal expirations of statutes of limitation are not expected to be material. TCF is under examination by the Internal Revenue Service and certain states. TCF does not currently expect to resolve these examinations within the next twelve months. Developments in these examinations or other events could cause management to change its judgment about the amount of unrecognized tax benefits. Due to the amount and nature of these possible events, an estimate of the range of reasonably possible changes in the amount of unrecognized tax benefits cannot be made. The significant components of the Company’s deferred tax assets and deferred tax liabilities are as follows. (In thousands) Deferred tax assets: Allowance for loan and lease losses Stock compensation and deferred compensation plans Net operating losses Pension and postretirement benefits Securities available for sale Valuation allowance Other Total deferred tax assets Deferred tax liabilities: Lease financing Loan fees and discounts Premises and equipment Securities available for sale Prepaid expenses Investments in affordable housing Investment in FHLB stock Pension and postretirement benefits Other Total deferred tax liabilities Net deferred tax liabilities At December 31, 2008 2007 $ 60,795 $ 30,968 18,599 7,811 4,870 – (1,499) 8,338 98,914 154,220 25,237 14,241 13,615 7,877 3,442 3,134 – 6,296 228,062 $129,148 30,766 7,065 – 5,868 (2,131) 6,531 79,067 108,825 25,412 13,143 – 7,907 4,455 3,169 5,078 3,186 171,175 $ 92,108 Note 13. Stockholders’ Equity Restricted Retained Earnings Retained earnings at December 31, 2008 includes approximately $134.4 million for which no provision for federal income taxes has been made. This amount represents earnings legally appropriated to thrift bad debt reserves and deducted for federal income tax purposes in prior years and is generally not available for payment of cash dividends or other distributions to shareholders. Future 2008 Form 10-K : 63 payments or distributions 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. 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 Total At December 31, 2008 2007 $ (88,404) $(126,020) (22,240) (39,666) $(110,644) $(165,686) No repurchases of common stock were made in 2008. TCF purchased 3.9 million shares of its common stock during each of the years ended December 31, 2007 and 2006. At December 31, 2008, TCF had 5.4 million shares remaining in its stock repurchase programs authorized by the Board. However, due to TCF’s participation in the CPP, TCF may not repurchase shares of common stock for three years from the date of the Agreement unless the preferred shares sold to the U.S. Treasury have been redeemed in whole or transferred to a third party which is not an affiliate of TCF. Shares Held in Trust for Deferred Compensation Plans TCF has maintained certain deferred compensation plans that previously allowed eligible executives, senior offi- cers and certain other employees to defer payment of up to 100% of their base salary and bonus as well as grants of restricted stock. Directors are allowed to defer up to 100% of their fees and restricted stock awards. TCF also has a supplemental nonqualified Employee Stock Purchase Plan in which certain employees can contribute from 0% to 50% of their salary and bonus. There were no company contributions to these plans, other than payment of administrative expenses. The amounts deferred were invested in TCF stock or other publicly traded stocks, bonds or mutual funds. In October, 2008, TCF terminated the executive and employee deferred compensation plans. At December 31, 2008, the fair value of the assets in the plans totaled $28.1 million and included $22.6 million invested in TCF common stock compared with a total fair value of $93.3 million, including $70.6 million invested in TCF common stock at December 31, 2007. The cost of TCF common stock held by TCF’s deferred compensation plans is reported separately in a manner similar to treasury stock (that is, changes in fair value are not recognized) with a corresponding deferred compensation obligation reflected in additional paid-in capital. Preferred Stock and Warrant On November 14, 2008, TCF Financial Corporation entered into a definitive agreement with the U.S. Treasury. Pursuant to the Agreement, TCF sold 361,172 shares of Senior Perpetual Preferred Stock, par value $.01 per share, having a liquidation amount equal to $1,000 per share, with an attached warrant (“The Warrant”) to pur- chase 3,199,988 shares of TCF’s common stock, par value $0.01 per share, for the aggregate price of $361.2 million, to the U.S. Treasury. The preferred stock qualifies as Tier 1 capital and will pay cumulative dividends at a rate of 5% per year, for the first five years, and 9% per year thereafter. Under the terms of the CPP, the preferred stock may be redeemed with the approval of the Federal Reserve in the first three years with the proceeds from the issuance of certain qualifying Tier 1 capital or after three years at par value plus accrued and unpaid dividends. The Warrant has a 10-year term with 50% vesting imme- diately upon issuance and the remaining 50% vesting on January 1, 2010 if certain qualified equity offerings are not satisfied. The Warrant has an exercise price, subject to anti-dilution adjustments, equal to $16.93 per share of common stock. Note 14. Regulatory Capital Requirements TCF is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by the federal banking agencies that could have a material adverse effect on TCF. In general, TCF Bank may not declare or pay a dividend to TCF in excess of 100% of its net retained profits for the current year combined with its retained net profits for the preceding two calendar years, which was $132.1 million at December 31, 2008, without prior approval of the OCC. TCF Bank’s ability to make capital distributions in the future may require regulatory approval and may be restricted by its regulatory authorities. TCF Bank’s ability to make any such distributions will also depend on its earnings and ability to meet minimum regulatory capital requirements in effect during future periods. These capital adequacy standards may be higher in the future than existing minimum regulatory capital requirements. 64 : TCF Financial Corporation and Subsidiaries The following table sets forth TCF’s and TCF National Bank’s regulatory tier 1 leverage, tier 1 risk-based and total risk- based capital levels, and applicable percentages of adjusted assets, together with the stated minimum and well-capitalized capital ratio requirements. (Dollars in thousands) As of December 31, 2008: Tier 1 leverage capital TCF TCF National Bank Tier 1 risk-based capital TCF TCF National Bank Total risk-based capital TCF TCF National Bank As of December 31, 2007: Tier 1 leverage capital TCF TCF National Bank Tier 1 risk-based capital TCF TCF National Bank Total risk-based capital TCF TCF National Bank N.A. Not Applicable. Actual Minimum Capital Requirement Well-Capitalized Capital Requirement Amount Ratio Amount Ratio Amount Ratio $1,461,973 1,364,053 1,461,973 1,364,053 1,817,225 1,718,476 $ 964,467 900,864 964,467 900,864 1,245,808 1,182,196 8.97% 8.41 $488,950 486,552 3.00% 3.00 N.A. $ 810,920 11.79 11.06 14.65 13.93 496,059 493,388 992,117 986,776 4.00 4.00 8.00 8.00 744,088 740,082 1,240,147 1,233,470 6.16% 5.76 $ 469,914 468,806 3.00% 3.00 N.A. $ 781,343 8.28 7.75 10.70 10.17 465,931 464,934 931,863 929,869 4.00 4.00 8.00 8.00 698,897 697,402 1,164,829 1,162,336 N.A. 5.00% 6.00 6.00 10.00 10.00 N.A. 5.00% 6.00 6.00 10.00 10.00 The minimum and well capitalized requirements are determined by the FRB for TCF and by the OCC for TCF National Bank pursuant to the FDIC Improvement Act of 1991. At December 31, 2008, TCF, TCF National Bank and TCF National Bank Arizona exceeded their regulatory capital requirements and are considered “well-capitalized”. Note 15. Stock Compensation The TCF Financial Incentive Stock Program (the “Program”) was adopted to enable TCF to attract and retain key person- nel. Under the Program, no more than 5% of the shares of TCF common stock outstanding on the date of initial share- holder approval may be awarded. At December 31, 2008, there were 3,394,013 shares reserved for issuance under the Program, including 126,800 shares related to outstanding stock options that are fully vested. At December 31, 2008, there were 885,550 shares of performance-based restricted stock that will vest only if certain return on equity goals or service conditions, as defined in the Program, are achieved. Failure to achieve the goals and service conditions will result in all or a portion of the shares being forfeited. Subsequent to December 31, 2008, 283,050 shares were forfeited due to performance goals not being met and modifications were made on 550,000 shares to remove the performance criteria. Other restricted stock grants vest over periods from ten months to seven years. The weighted-average grant date fair value of restricted stock was $12.50, $26.81 and $25.31 for shares granted in 2008, 2007 and 2006, respectively. Compensation expense for restricted stock and stock options totaled $5.7 million, $7.1 million and $7 million in 2008, 2007 and 2006, respectively. The recognized tax benefit for stock compensation expense was $2 million, $2.4 million and $2.3 million in 2008, 2007 and 2006, respectively. Unrecognized stock compensation expense for restricted stock awards was $20.8 million with a weighted-average remaining amortization period of 2.4 years at December 31, 2008, compared with $13.8 million with a weighted-average remaining amortization period of 1.4 years at December 31, 2007 and $19.6 million with a weighted-average remaining amortization period of 2 years at December 31, 2006. 2008 Form 10-K : 65 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. The following table reflects TCF’s stock option and restricted stock transactions under the Program since December 31, 2005. Restricted Stock Stock Options Exercise Price Outstanding at December 31, 2005 Granted Exercised Forfeited Vested Outstanding at December 31, 2006 Granted Exercised Forfeited Vested Outstanding at December 31, 2007 Granted Exercised Forfeited Vested Outstanding at December 31, 2008 Exercisable at December 31, 2008 N.A. Not Applicable. Shares 713,900 – (133,535) (270,300) 2,619,341 198,850 – (140,775) (152,200) 2,525,216 753,650 – Price Range 2,309,276 $ 9.87 -$30.28 25.18 - 26.69 – 9.87 - 30.28 18.03 - 24.10 9.87 - 30.28 24.26 - 28.64 – 9.87 - 30.13 20.38 - 26.39 9.87 - 30.28 9.41 - 17.37 – (222,850) 17.37 - 30.28 9.87 - 28.02 9.41 - 30.28 N.A. (1,168,499) 1,887,517 N.A. Shares 259,800 – (28,667) – – 231,133 – (87,083) – – 144,050 2,626,000 (13,000) (383,631) – 2,373,419 126,800 Range $11.78 -$16.64 – 11.78 - 16.09 – – 11.78 - 16.64 – 11.78 - 16.64 – – 11.78 - 16.09 12.85 - 15.75 11.78 - 14.30 15.03 - 16.09 – 11.78 - 15.75 11.78 - 14.52 Weighted- Average $13.76 – 12.33 – – 13.93 – 13.96 – – 13.91 14.65 12.56 15.74 – 14.44 14.01 The following table summarizes information about stock options outstanding at December 31, 2008. Exercise price range $11.78 - $14.52 $12.85 - $15.75 Stock Options Outstanding Stock Options Exercisable Weighted- Average Exercise Price $14.01 $14.46 Weighted- Average Remaining Contractual Life in Years 0.34 9.26 Shares 126,800 2,246,619 Weighted- Average Exercise Price $14.01 – $ Shares 126,800 – Additional valuation and related assumption informa- tion for TCF’s stock option plans is presented below. Expected volatility Weighted-average volatility Expected dividend yield Expected term (in years) Risk-free interest rate 28.5% 28.5% 3.5% 6.25 - 6.75 2.58 - 2.91% Note 16. Employee Benefit Plans Employee Stock Purchase Plan The TCF Employees Stock Purchase Plan generally allows participants to make contributions of up to 50% of their salary and bonus on a tax-deferred basis. TCF matches the contributions of all participants with TCF common stock at the rate of 50 cents per dollar for employees with one through four years of 66 : TCF Financial Corporation and Subsidiaries service, up to a maximum company contribution of 3% of the employee’s salary and bonus, 75 cents per dollar for employees with five through nine years of service, up to a maximum company contribution of 4.5% of the employee’s salary and bonus, and $1 per dollar for employees with 10 or more years of service, up to a maximum company contri- bution of 6% of the employee’s salary and bonus. Employee contributions vest immediately while the Company’s matching contributions are subject to a graduated vesting schedule based on an employee’s years of service with full vesting after five years. Employees have the opportunity to diversify and invest their account balance, including matching contributions, in various mutual funds or TCF common stock. At December 31, 2008, the fair value of the assets in the plan totaled $127.7 million and included $105.8 million invested in TCF common stock. The Company’s matching contributions are expensed when made. TCF’s contributions to the plan were $6.9 million, $6.6 million and $5.1 million in 2008, 2007 and 2006, respectively. Pension Plan The TCF Cash Balance Pension Plan (the “Pension Plan”) is a qualified defined benefit plan covering eligible employees who are at least 21 years old and have completed a year of eligibility service with TCF. Employees hired after June 30, 2004 are not eligible to participate in the Pension Plan. Effective March 31, 2006, TCF amended the Pension Plan to discontinue compensation credits for all participants. Interest credits will continue to be paid until participants’ accounts are distributed from the Pension Plan. Each month TCF credits participant accounts with interest on the account balance based on the five-year Treasury rate plus 25 basis points. All participant accounts are vested. The measurement of the projected benefit obligation, prepaid pension asset, pension liability 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 lifetime of plan participants. As a result, these differences are not recognized when they occur. TCF closely monitors all assumptions and updates them annually. TCF accounts for the Pension Plan in accordance with Statement of Financial Accounting Standard (SFAS) No. 87 “Employers’ Accounting for Pensions,” and SFAS No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” as amended by SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans”. SFAS No. 158 requires companies to reflect each defined benefit and other postretirement benefits plan’s funded status on the company’s balance sheet. TCF implemented these provisions for the year ended December 31, 2006. TCF changed its measurement date to December 31 in 2008 as required by SFAS No. 158. TCF recorded a $65 thousand credit to January 1, 2008 retained earnings for adoption of SFAS No. 158 measurement date change. The Company does not consolidate the assets and liabilities associated with the Pension Plan. Postretirement Plan TCF provides health care benefits for eligible retired employees (the “Postretirement Plan”). Effective January 1, 2000, TCF modified the Postretirement Plan for employees not yet eligible for benefits under the Postretirement Plan by eliminating the Company subsidy. The plan provisions for full-time and retired employees then eligible for these benefits were not changed. The Postretirement Plan is not funded. The following table sets forth the status of the Pension Plan and the Postretirement Plan at the dates indicated. 2008 Form 10-K : 67 (In thousands) Benefit obligation: Accrued participant balance — vested 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 (gain) loss 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 at end of year Amounts recognized in Statements of Financial Condition: Prepaid (accrued) benefit cost at end of year Amounts not yet recognized in net periodic benefit cost and included in accumulated other comprehensive loss, before tax: Transition obligation Accumulated actuarial net loss Accumulated other comprehensive loss (AOCL), before tax Total prepaid (accrued) benefit cost and AOCL (1) 15 months in 2008 due to SFAS 158 measurement date change. N.A. Not Applicable. Pension Plan Year Ended December 31, 2007 2008 (1) Postretirement Plan Year Ended December 31, 2007 2008(1) $ 53,156 (4,107) $ 49,049 $ 49,049 $ 52,456 – 3,668 – (1,733) (5,342) 49,049 67,506 (28,540) (5,342) 5,000 38,624 (10,425) $55,467 (3,011) $52,456 $52,456 $56,765 – 2,930 – (1,101) (6,138) 52,456 64,277 9,367 (6,138) – 67,506 15,050 N.A. N.A. N.A. N.A. $ 9,491 15 670 – (492) (1,300) 8,384 – – (1,300) 1,300 – (8,384) N.A. N.A. N.A. N.A. $ 9,410 17 491 (484) 1,175 (1,118) 9,491 – – (1,118) 1,118 – (9,491) (10,425) 15,050 (8,384) (9,491) – 38,788 38,788 $ 28,363 – 7,221 7,221 $22,271 15 3,637 3,652 $(4,732) 20 4,518 4,538 $(4,953) The following table sets forth the changes recognized in accumulated other comprehensive loss at the dates indicated. (In thousands) Accumulated other comprehensive loss at the beginning of the year Impact of plan amendments on transition obligation Actuarial net loss (gain) arising during the period Amortizations (recognized in net periodic benefit cost): Transition obligation cost (credit) Actuarial loss Settlement expense Measurement date change Initial application of FAS 158 Total recognized in other comprehensive (income) loss Accumulated other comprehensive loss at end of year, before tax Pension Plan Year Ended December 31, 2008 2007 2006 2008 Postretirement Plan Year Ended December 31, 2007 2006 $ 7,221 $16,410 $ – – 33,130 (5,530) – – – – (859) (490) (214) – 31,567 – (1,997) (1,662) – – (9,189) – – – – 16,410 16,410 $4,538 $4,171 $ – – (492) (4) (311) – (79) – (886) (484) 1,175 (101) (223) – – – 367 – – – – – – 4,171 4,171 $38,788 $ 7,221 $16,410 $3,652 $4,538 $4,171 68 : TCF Financial Corporation and Subsidiaries The measurement dates used for determining the Pension Plan and the Postretirement Plan projected and accumulated benefit obligations and the dates used to value plan assets were December 31, 2008 and September 30, 2007. The discount rate used to measure the benefit obligation of the Pension Plan was 6.25% for the year ended December 31, 2008 and 6% for the year ended December 31, 2007. The discount rate used to measure the benefit obligation of the Postretirement Plan was 6.25% for the year ended December 31, 2008 and 6% for the year ended December 31, 2007. Net periodic benefit cost included in compensation and employee benefits expense consists of the following. Pension Plan Year Ended December 31, (In thousands) Interest cost Expected return on plan assets Service cost Recognized actuarial loss Settlement expense Amortization of transition obligation Amortization of prior service cost Plan amendment/curtailment gain Net periodic benefit (income) cost 2008 $ 2,934 (5,059) – 859 490 – – – $ (776) 2007 $ 2,930 (4,938) – 1,997 1,662 – – – $ 1,651 2006 $ 3,109 (5,023) 1,421 2,330 1,742 – (21) (400) $ 3,158 Postretirement Plan Year Ended December 31, 2007 $491 – 17 223 – 101 – – $832 2008 $537 – 12 310 – 4 – – $863 2006 $433 – 26 119 – 101 – – $679 The discount rate, the expected long-term rate of return on plan assets and the rate of increase in future compensation used to determine the net benefit cost were as follows. Assumptions used to determine net benefit cost Discount rate Expected long-term rate of return on plan assets Rate of compensation increase 2008 6.0% 8.50 N.A. Pension Plan Year Ended December 31, 2007 5.5% 8.50 N.A. 2006 5.25/5.5% (1) 8.75 4.0 Postretirement Plan Year Ended December 31, 2007 5.5% N.A. N.A. 2006 5.25% N.A. N.A. 2008 6.0% N.A. N.A. (1) Due to a curtailment and liability remeasurement as of February 1, 2006 for the Pension Plan, the discount rate used to determine net benefit cost was increased from 5.25% for the period ending February 1, 2006 to 5.5% for the period ended December 31, 2006. N.A. Not Applicable. The amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost during 2009 are as follows. (In thousands) Actuarial net loss Settlement expense Transition obligation Net loss Pension Plan $1,263 3,530 – $4,793 Postretirement Plan $252 – 4 $256 Total $1,515 3,530 4 $5,049 TCF’s Pension Plan assets are invested in index mutual funds that are designed to mirror the performance of the Standard and Poor’s 500 and the Morgan Stanley Capital International U.S. Mid-Cap 450 indexes, at targeted weightings of 75% and 25%, respectively. 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 10-year weighted-average return of the indexes consistent 2008 Form 10-K : 69 contribution of $800 thousand to be required. TCF expects to contribute $1 million to the Postretirement Plan in 2009. TCF contributed $1.3 million to the Postretirement Plan for the 15 months ended December 31, 2008. TCF currently has no plans to pre-fund the Postretirement Plan in 2009. The following are expected future benefit payments used to determine projected benefit obligations. (In thousands) 2009 2010 2011 2012 2013 2014-2018 Pension Plan $ 4,721 4,589 4,203 4,326 3,815 17,290 Postretirement Plan $ 960 933 906 881 849 3,712 The following table presents assumed health care cost trend rates for the Postretirement Plan at December 31, 2008 and 2007. Health care cost trend rate assumed for next year Final health care cost trend rate Year that final health care trend rate is reached 2008 2007 8% 5% 9% 5% 2012 2012 Assumed health care cost trend rates have an effect on the amounts reported for the Postretirement Plan. A 1% 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 $ 23 338 $ (21) (305) with the Plan’s current investment strategy was .2%, net of administrative expenses, and was significantly impacted by the market events of 2008. 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 long-term annual returns of 8.5%, net of administrative expenses, on plan assets over complete market cycles. A 1% difference in the expected return on plan assets would result in a $603 thousand change in net periodic pension expense. The discount rate used to determine TCF’s pension and postretirement benefit obligations as of December 31, 2008 and December 31, 2007 was determined by matching esti- mated benefit cash flows to a yield curve derived from corporate bonds rated AA by Moody’s. Bonds containing call or put provisions were excluded. The average estimated duration of TCF’s Pension and Postretirement Plans varied between seven and 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 (loss) on plan assets, net of adminis- trative expenses was (50.8)% for the 15 months ended December 31, 2008 and 14.4% for the 12 months ended September 30, 2007. The actual loss on plan assets for the 15 months ended December 31, 2008 increased the actuar- ial loss by $34.9 million. The increase in the discount rate from 6% at September 30, 2007 to 6.25% at December 31, 2008 decreased the actuarial loss by $746 thousand. Various plan participant census changes reduced the actu- arial loss by $988 thousand during the 15 months ended December 31, 2008. The accumulated other comprehensive loss in excess of 10% of the greater of the accumulated benefit obligation or fair value of the plan assets is amor- tized over approximately seven years. For 2008, TCF is eligible to contribute up to $8.1 million to the Pension Plan until the 2008 federal income tax return extension due date under various IRS funding methods. During 2008, TCF contributed $5 million to the Pension Plan. TCF plans to contribute to the Pension Plan in 2009 to main- tain a minimum 80% funded level and expects a minimum 70 : TCF Financial Corporation and Subsidiaries Note 17. 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 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 making direct loans. TCF evaluates each customer’s creditworthiness on a case-by- case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. Financial instruments with off-balance sheet risk are summarized as follows. (In thousands) Commitments to extend credit: At December 31, 2008 2007 Consumer home equity and other Commercial Leasing and equipment finance Other $1,800,782 393,187 86,909 108 $1,927,001 621,025 89,206 83,686 Total commitments to extend credit Standby letters of credit and guarantees on industrial revenue bonds Total 2,280,986 2,720,918 58,697 $2,339,683 76,357 $2,797,275 Commitments to Extend Credit Commitments to extend credit are agreements to lend provided there is no violation of any condition in the contract. These commitments generally have fixed expiration dates or termination clauses and may require payment of a fee. Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral to secure these commitments predominantly consists of residential and commercial real estate. 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 2012. 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 require- ments are expected to be less than the total outstanding commitments. Note 18. Fair Value Measurement Effective January 1, 2008, TCF adopted Statement of Financial Accounting Standards (SFAS) No.157, Fair Value Measurements. In accordance with the FASB Staff Position 157-2, Effective Date of SFAS No. 157, TCF has not applied the provisions of this statement to non-financial assets and liabilities such as real estate owned, repossessed assets and equipment held for sale. SFAS 157 defines fair value and establishes a consistent framework for measuring fair value and expands disclosure requirements for fair value measurements. Fair values represent the estimated price that would be received from selling an asset or paid to transfer a liability, otherwise known as an “exit price”. The following is a description of valuation methodologies used for assets recorded at fair value on a recurring basis at December 31, 2008. Securities Available for Sale At December 31, 2008, securities available for sale consisted primarily of U.S. Government Sponsored Enterprise securities. The fair value of available for sale securities is recorded using observable market prices from independent asset pricing services that are based on observable transactions, but not a quoted market. Assets Held in Trust for Deferred Compensation At December 31, 2008, assets held in trust for deferred com- pensation plans included investments in publicly traded stocks, other than TCF stock, and mutual funds. The fair value of these assets is based upon quotes from independ- ent asset pricing services based on active markets. 2008 Form 10-K : 71 At December 31, 2008, the fair value of assets measured on a recurring basis are: (In thousands) Securities available for sale: Mortgage-backed securities: U.S. Government sponsored enterprises and federal agencies Other Other securities Assets held in trust for deferred compensation plans (4) Total assets (1) Considered Level 1 under SFAS 157. (2) Considered Level 2 under SFAS 157. Readily Available Market Prices (1) Observable Market Prices(2) Company Determined Market Prices (3) Total at Fair Value $ – – – 5,516 $5,516 $1,965,555 – – – $1,965,555 $ – 299 250 – $549 $1,965,555 299 250 5,516 $1,971,620 (3) Considered Level 3 under SFAS 157 and is based on valuation models that use significant assumptions that are not observable in an active market. (4) A corresponding liability is recorded in other liabilities for TCF’s obligation to the participants in these plans. The change in the balance sheet carrying values associated with Company determined market priced financial assets carried at fair value during the year ended December 31, 2008 was not significant. Note 19. Fair Values of Financial Instruments TCF is required to disclose the estimated fair value of finan- cial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. These fair value estimates are made at December 31, based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of TCF’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. Beginning with the year ended December 31, 2008, the fair value estimates are determined in accordance with SFAS 157. 72 : TCF Financial Corporation and Subsidiaries The carrying amounts and fair values of the Company’s remaining financial instruments are set forth in the following table. This information represents only a portion of TCF’s balance sheet and the estimated value of the Company as a whole. Non- financial instruments such as the value of TCF’s branches and core deposits, leasing operations and the future revenues from TCF’s customers are not reflected in this disclosure. Therefore, use of this information to assess the value of TCF is limited. (In thousands) Financial instrument assets: Cash and due from banks Investments Education loans held for sale Securities available for sale Loans: Consumer home equity and other Commercial real estate Commercial business Equipment finance loans Inventory 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) Total financial instruments with off-balance-sheet risk (1) Expected credit losses are included in the estimated fair values. (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. The carrying amounts of cash and due from banks 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 and assets held in trust for deferred compensation plans are carried at fair value (see Note 18). Certain financial instru- ments, including lease financings, 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 for its remaining financial instruments, all of which are issued or held for purposes other than trading. At December 31, 2008 2007 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value $ 342,380 155,725 757 1,966,104 $ 342,380 155,725 757 1,966,104 6,908,140 2,984,156 506,887 789,869 4,425 455,443 (172,442) $13,941,444 $ 7,647,069 2,596,283 226,861 4,433,913 $14,904,126 6,744,372 2,860,293 488,821 790,970 4,425 454,555 – $13,808,402 $ 7,647,069 2,612,874 226,861 4,964,682 $15,451,486 $ 358,188 148,267 156,135 1,963,681 6,590,631 2,557,330 558,325 604,185 — 527,607 (69,796) $13,394,553 $ 7,322,014 2,254,535 556,070 4,417,378 $14,549,997 $ 358,188 148,270 157,083 1,963,681 6,543,580 2,587,342 560,020 616,886 — 518,313 – $13,453,363 $ 7,322,014 2,252,848 556,070 4,569,832 $14,700,764 $ $ 38,730 (105) 38,625 $ $ 38,730 (105) 38,625 $ $ 38,402 (215) 38,187 $ 38,402 (215) 38,187 $ Investments Short-term investments approximate their fair values due to the short period of time until their real- ization. The carrying value of investments in FHLB stock and FRB stock approximates fair value. The fair value of other investments is estimated based on discounting cash flows at current market rates and consideration of credit exposure. Loans The fair value of loans is estimated based on discounted expected cash flows. These cash flows include assumptions for prepayment estimates over the loans’ remaining life, considerations for the current interest rate environment compared to the weighted average rate of each portfolio, a credit risk component based on the historical 2008 Form 10-K : 73 and expected performance of each portfolio and a liquid- ity adjustment related to the current market environment. 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 offered mar- ket rates. 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 borrow- ings approximate their fair values. The fair values of TCF’s long-term borrowings are estimated based on observable market prices and discounted cash flow analyses using interest rates for borrowings of similar remaining maturi- ties and characteristics. Financial Instruments with Off-Balance Sheet Risk The fair value of TCF’s commitments to extend credit and standby letters of credit are estimated using fees currently charged to enter into similar agreements as commitments and standby letters of credit similar to TCF’s are not actively traded. Substantially all commitments to extend credit and standby letters of credit have floating rates and do not expose TCF to interest rate risk; therefore fair value is approximately equal to carrying value. Note 20. Earnings Per Common Share The computation of basic and diluted earnings per common share is presented in the following table. (Dollars in thousands, except per-share data) Basic Earnings Per Common Share Net income Preferred stock dividends Net income available to common stockholders 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 available to common stockholders 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 Warrant Weighted-average common shares outstanding for diluted earnings per common share Diluted earnings per common share Year Ended December 31, 2008 2007 2006 $ $ 128,958 2,540 126,418 126,762,952 (1,820,278) $ $ 266,808 – 266,808 127,919,997 (2,521,887) $ $ 244,943 – 244,943 131,614,386 (2,604,836) 124,942,674 1.01 $ 125,398,110 2.13 $ 129,009,550 $ 1.90 $ 126,418 $ 266,808 $ 244,943 124,942,674 125,398,110 129,009,550 347,139 18,872 – 356,316 76,340 – 110,455 105,480 – 125,308,685 1.01 $ 125,830,766 2.12 $ 129,225,485 1.90 $ All shares of restricted stock are deducted from weighted-average shares outstanding for the computation of basic earn- ings 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, stock options and warrant are included in the calculation of diluted earnings per common share, using the treasury stock method. 74 : TCF Financial Corporation and Subsidiaries Note 21. Comprehensive Income Comprehensive income is the total of net income and other comprehensive income. The following table summarizes the com- ponents of comprehensive income. (In thousands) Net income Other comprehensive income (loss): Unrealized holding gains (losses) arising during the period on securities available for sale Recognized pension and postretirement actuarial (loss) gain, settlement expense and transition obligation Pension and postretirement measurement date change Reclassification adjustment for securities gains included in net income Foreign currency translation adjustment Income tax expense Total other comprehensive income (loss) Comprehensive income Year Ended December 31, 2008 $128,958 2007 $266,808 2006 $244,943 69,754 30,237 (94) (30,974) 293 (16,066) 1 (8,645) 14,363 $143,321 8,822 – (13,278) – (8,910) 16,871 $283,679 – – – – (280) (374) $244,569 Note 22. Other Expense Other expense consists of the following. (In thousands) Card processing and issuance Foreclosed real estate, net Deposit account losses Postage and courier Telecommunications Office supplies ATM processing Federal deposit insurance and OCC assessments Deposit base intangible amortization Visa indemnification (recovery) expense Other Total other expense Year Ended December 31, 2008 $ 19,262 17,176 14,709 13,380 11,860 9,664 6,881 5,152 – (3,766) 77,433 $171,751 2007 $ 18,134 5,006 17,629 13,663 11,790 9,581 8,647 3,247 956 7,696 59,216 $155,565 2006 $ 16,986 3,684 17,455 14,532 12,702 10,255 8,956 3,033 1,629 – 62,217 $151,449 Note 23. Business Segments 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 investments products, commercial banking, consumer lending and treasury services. Management of TCF’s banking operations 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 leasing and equipment finance products addressing the financing needs of diverse businesses. Other includes the holding company (“Parent Company”) and corporate functions that provide data processing, bank operations and other professional serv- ices to the operating segments and in 2008 includes costs for TCF’s new inventory finance business. 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 gener- ally accounts for inter-segment sales and transfers at cost. The following table sets forth certain information of each of TCF’s reportable segments, including a reconciliation of TCF’s 2008 Form 10-K : 75 consolidated totals. (In thousands) At or For the Year Ended December 31, 2008: 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, 2007: Revenues from external customers: Interest income Non-interest income Total Net interest income Provision for credit losses Non-interest income Non-interest expense Income tax expense (benefit) Net income Total assets At or For the Year Ended December 31, 2006: 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 Leasing and Equipment Finance Eliminations and Reclassifications Other Banking Consolidated $ 798,553 442,268 $ 1,240,821 514,553 $ 174,852 442,268 619,028 57,675 $ 105,266 $16,222,486 $ 820,516 481,346 $ 1,301,862 485,535 $ 51,741 481,346 594,691 88,389 232,060 $ $ 15,478,259 $ 763,846 428,413 $ 1,192,259 477,453 $ 18,121 428,413 585,512 93,786 $ 208,447 $ 14,256,595 $ 165,838 55,531 $ 221,369 79,793 $ 17,160 55,531 68,502 19,386 $ 30,276 $2,659,358 $ 147,507 59,152 $ 206,659 65,356 $ 5,251 59,152 65,351 19,330 34,576 $ $ 2,281,781 $ 122,292 53,004 $ 175,296 58,659 $ 2,568 53,004 56,932 18,773 $ 33,390 $1,989,230 $ $ $ 4 636 640 (673) 33 142,725 148,962 (359) $ (6,584) $114,593 $ $ $ – – – – – (142,089) (142,089) – $ – $(2,256,080) $ $ $ – 959 959 (714) – 156,899 158,022 (2,009) 172 $ $ 144,582 $ – 8,047 $ 8,047 445 $ – 134,645 132,378 (394) $ 3,106 $131,509 $ $ $ – – – – – (155,940) (155,940) – – $ $ (1,927,568) $ $ $ – – – 973 – (126,598) (125,625) – $ – $ (1,707,600) $ 964,395 498,435 $ 1,462,830 593,673 $ 192,045 498,435 694,403 76,702 $ 128,958 $16,740,357 $ 968,023 541,457 $ 1,509,480 550,177 $ 56,992 541,457 662,124 105,710 266,808 $ $ 15,977,054 $ 886,138 489,464 $ 1,375,602 $ 537,530 20,689 489,464 649,197 112,165 $ 244,943 $ 14,669,734 76 : TCF Financial Corporation and Subsidiaries Note 24. Parent Company Financial Information TCF Financial Corporation’s (parent company only) condensed statements of financial condition as of December 31, 2008 and 2007, and the condensed statements of income and cash flows for the years ended December 31, 2008, 2007 and 2006 are as follows. Condensed Statements of Financial Condition (In thousands) Assets: Cash Investment in bank subsidiaries Accounts receivable from affiliates Other assets Total assets Liabilities and Stockholders’ Equity: Short-term borrowings Junior subordinated notes (trust preferred) 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 National 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 subsidiaries Income tax benefit Income before equity in undistributed earnings of subsidiaries Equity in undistributed earnings of bank subsidiaries Net income Preferred stock dividends Net income available to common stockholders $ 2008 – 4,826 (4,826) 122,797 6,922 85 7,007 5,833 362 6,279 12,474 112,504 2,282 114,786 14,172 128,958 2,540 $126,418 At December 31, 2008 2007 $ 33,557 1,541,371 16,272 20,442 $1,611,642 $ – 110,440 7,426 117,866 1,493,776 $1,611,642 $ 2,883 1,069,373 24,320 24,848 $1,121,424 $ 9,500 – 12,912 22,412 1,099,012 $1,121,424 $ Year Ended December 31, 2007 – 603 (603) 194,558 $ 2006 – 232 (232) 203,908 12,241 142 12,383 11,866 440 1,581 13,887 192,451 1,502 193,953 72,855 266,808 – $266,808 7,921 1,901 9,822 7,255 414 2,982 10,651 202,847 1,558 204,405 40,538 244,943 – $244,943 In December, 2008, TCF contributed $361 million of the proceeds of the preferred stock issuance to TCF National Bank. In August, 2008, TCF contributed $73 million of the proceeds of the trust preferred offering to TCF National Bank. In December 2006, TCF contributed $35 million in initial capital to TCF National Bank Arizona to meet regulatory requirements and to fund its operations. Condensed Statements of Cash Flows (In thousands) Cash flows from operating activities: 2008 Form 10-K : 77 Year Ended December 31, 2008 2007 2006 Net income Adjustments to reconcile net income to net cash provided by operating activities: $ 128,958 $ 266,808 $ 244,943 (14,172) (6,394) (20,566) 108,392 – – (40) (40) (126,447) – 361,004 111,378 (434,092) 10,178 (9,500) 9,638 163 (77,678) 30,674 2,883 $ 33,557 (68,163) 1,188 (66,975) 199,833 – – (88) (88) (124,513) (105,251) – – – – 9,500 4,534 1,216 (214,514) (14,769) 17,652 2,883 $ (33,229) (18,713) (51,942) 193,001 75,000 (35,000) (104) 39,896 (121,405) (101,045) – – – – (16,500) 20,681 354 (217,915) 14,982 2,670 $ 17,652 Equity in undistributed earnings of bank subsidiaries Other, net Total adjustments Net cash provided by operating activities Cash flows from investing activities: Capital distribution from TCF National Bank Investment in TCF National Bank Arizona Purchases of premises and equipment, net Net cash (used) provided by investing activities Cash flows from financing activities: Dividends paid on common stock Purchases of common stock Issuance of preferred stock Sale of trust preferred securities Capital infusions to TCF National Bank Treasury shares sold to Employees Stock Purchase Plans Net (decrease) increase in short-term borrowings Stock compensation tax benefits Other, net Net cash used by financing activities Net increase (decrease) in cash Cash at beginning of year Cash at end of year Note 25. Litigation Contingencies 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 pro- ceedings and other collection actions as part of its lending and leasing collection activities. From time to time, borrow- ers and other customers, or employees or former employees, have also brought actions against TCF, in some cases claim- ing substantial damages. Financial services companies are subject to the risk of class action litigation, and TCF has had such actions brought against it from time to time. Litigation is often unpredictable and the actual results of litigation cannot be determined with certainty. 78 : 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) (Dollars in thousands, except per-share data) Selected Financial Condition Data: Loans and leases excluding education and residential real estate loans Securities available for sale Residential real estate loans Subtotal Goodwill 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 revenue Gains on securities Visa share redemption Gains on sales of branches and real estate Total non-interest income Non-interest expense Income before income tax expense Income tax expense Net income Preferred stock dividends Net income available to common stockholders Per common share: Basic earnings Diluted earnings Dividends declared Financial Ratios: Return on average assets (1) Return on average common equity (1) Net interest margin (1) Net charge-offs as a percentage of average loans and leases (1) Average total equity to average assets (1) Annualized. Dec. 31, 2008 Sept. 30, 2008 June 30, 2008 March 31, 2008 Dec. 31, 2007 Sept. 30, 2007 June 30, 2007 March 31, 2007 At $12,889,690 $12,631,225 $12,466,751 $12,096,467 $11,810,629 $11,334,162 $11,038,605 $10,815,212 1,966,104 2,102,756 2,120,664 2,177,262 1,963,681 2,022,505 1,943,450 1,859,244 455,443 470,413 485,795 506,394 527,607 547,552 572,619 602,748 2,421,547 2,573,169 2,606,459 2,683,656 2,491,288 2,570,057 2,516,069 2,461,992 152,599 152,599 152,599 152,599 152,599 152,599 152,599 152,599 16,740,357 16,510,595 16,460,123 16,370,364 15,977,054 15,530,338 14,977,704 14,898,375 7,647,069 2,596,283 7,453,334 2,396,903 7,735,734 2,410,388 7,757,613 2,599,456 10,243,352 9,850,237 10,146,122 10,357,069 226,861 4,433,913 1,493,776 603,233 4,630,776 1,111,029 411,802 4,515,997 1,088,301 138,442 4,414,644 1,129,870 7,322,014 2,254,535 9,576,549 556,070 4,417,378 1,099,012 7,312,568 2,433,498 9,746,066 167,319 4,266,022 1,043,447 7,331,605 2,511,090 9,842,695 285,828 3,568,997 1,001,032 7,420,480 2,477,230 9,897,710 47,376 3,571,930 1,062,008 Dec. 31, 2008 Sept. 30, 2008 June 30, 2008 March 31, 2008 Dec. 31, 2007 Sept. 30, 2007 June 30, 2007 March 31, 2007 Three Months Ended $ 147,117 $ 152,165 $ 151,562 $ 142,829 $ 139,571 $ 137,704 $ 137,425 $ 135,477 47,050 52,105 62,895 29,995 20,124 18,883 13,329 4,656 100,067 100,060 88,667 112,834 119,447 118,821 124,096 130,821 116,807 8,167 123,045 498 121,504 1,115 – – 123,543 177,588 46,015 15,889 30,126 – – – 122,619 168,729 42,557 18,855 23,702 – 112,705 6,286 8,308 – 127,299 168,276 71,857 24,431 47,426 – 124,845 11,261 – 2,752 138,858 172,613 85,692 22,875 62,817 – 126,394 2,017 – 1,246 129,657 162,777 85,701 26,563 59,138 – 126,882 112,164 – – 2,723 129,605 162,534 91,167 29,038 62,129 – – – 31,173 143,337 164,200 109,958 27,234 82,724 – 30,126 $ 23,702 $ 47,426 $ 62,817 $ 59,138 $ 62,129 $ 82,724 .24 .24 .25 .73% 11.11 3.97 .82 6.61 $ .19 .19 $ $ .38 .38 $ $ .51 $ .50 $ .48 $ .48 $ .49 $ .49 $ .65 $ .65 $ .25 $ .25 $ .2425 $ .2425 $ .2425 $ .2425 .58% 8.57 4.00 .84 6.76 1.18% 17.08 3.84 .44 6.88 1.60% 23.55 3.83 .46 6.79 1.55% 23.39 3.90 .38 6.64 1.67% 24.16 4.02 .24 6.92 2.24% 31.81 4.00 .10 7.03 – – 124,974 179,810 45,231 17,527 27,704 2,540 25,164 .20 .20 .25 .68% 9.00 3.84 1.02 7.93 $ $ $ $ $ $ $ $ 2008 Form 10-K : 79 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 (Principal Executive Officer), the Company’s Chief Financial Officer (Principal Financial Officer) and its Controller and Assistant Treasurer (Principal Accounting Officer), of the effective- ness of the design and operation of the Company’s disclo- sure 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, 2008. Also, there were no significant changes in the Company’s disclosure controls or internal controls over financial reporting during the fourth quarter of 2008 that have materially affected or are reason- ably likely to materially affect TCF’s internal control over financial reporting. Management’s Report on Internal Control over Financial Reporting Management is responsible for establishing and maintain- ing adequate internal control over financial reporting for TCF Financial Corporation (the Company). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted account- ing principles, and that receipts and expenditures of the Company are only being made in accordance with authoriza- tions of management and directors of the Company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements. Management completed an assessment of TCF’s internal control over financial reporting as of December 31, 2008. This assessment was based on criteria for evaluating inter- nal 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, management concluded that TCF’s internal control over financial reporting was effective as of December 31, 2008. 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 the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. Any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assur- ance 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 controls. Therefore, no assessment of a cost-effective system of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected. William A. Cooper Chairman and Chief Executive Officer Thomas F. Jasper Executive Vice President and Chief Financial Officer David M. Stautz Senior Vice President, Controller and Assistant Treasurer February 16, 2009 80 : TCF Financial Corporation and Subsidiaries Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders TCF Financial Corporation: We have audited TCF Financial Corporation’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). TCF Financial Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report. Our responsibility is to express an opinion on TCF Financial Corporation’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 main- tained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included 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 dispositions of the assets of the company; (2) provide reasonable assurance that trans- actions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or dis- position of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, TCF Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria estab- lished 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, 2008 and 2007, 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, 2008, and our report dated February 16, 2009 expressed an unqual- ified opinion on those consolidated financial statements. Minneapolis, Minnesota February 16, 2009 Item 9B. Other Information None. 2008 Form 10-K : 81 Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding directors and executive officers of TCF is set forth in the following sections of TCF’s definitive Proxy Statement dated March 11, 2009 and incorporated herein by reference: Election of Directors: Background of the Nominees and Other Directors; TCF Stock Ownership of Directors, Officers and 5% Owners — Were All Stock Ownership Reports Timely Filed by TCF Financial Insiders? and Background of Executive Officers Who are Not Directors. Information regarding procedures for nominations of Directors is set forth in the section entitled Election of Directors: Corporate Governance — Director Nominations and Additional Information in TCF’s definitive Proxy Statement dated March 11, 2009, and is incorporated herein by reference. Audit Committee and Financial Expert Information regarding TCF’s separately standing Audit Committee, its members and financial experts is set forth in the section of TCF’s definitive proxy statement for the 2009 Annual Meeting entitled Election of Directors: Background of the Nominees and Other Directors and Election of Directors: Board Committee Memberships and Meetings in 2008 and is incorporated herein by reference. 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 accounting principles and financial statements and has the ability to assess the general appli- cation of these principles in connection with the accounting for estimates, accruals and reserves. Additionally, this indi- vidual should have experience preparing, auditing, analyzing or evaluating financial statements that present 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 audit committee financial experts. The Board has also determined that Mr. Schwalbach, Mr. Johnson and Mr. Scovanner are inde- pendent. Additional information regarding Mr. Schwalbach, Mr. Johnson, Mr. Scovanner and other directors is set forth in the section Election of Directors: Background of the Nominees and Other Directors in TCF’s definitive Proxy Statement dated March 11, 2009 and is 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 website at www.tcfbank.com under the “Corporate Governance” section. Any changes to or waivers of violations of the Code of Ethics for Senior Financial Management will be posted to the Company’s website. 82 : TCF Financial Corporation and Subsidiaries Item 11. Executive Compensation Information regarding compensation of directors and exec- utive officers of TCF is set forth in the following sections of TCF’s definitive Proxy Statement dated March 11, 2009 and is incorporated herein by reference: Election of Directors: Compensation of Directors; Compensation Discussion and Analysis; Compensation Committee Report; Summary Compensation Table; Grants of Plan-Based Awards in 2008; Outstanding Equity Awards at December 31, 2008; Option Exercises and Stock Vested in 2008; Pension Benefits in 2008; Nonqualified Deferred Compensation in 2008 and Potential Payments Upon Termination or Change in Control. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding ownership of TCF’s common stock by TCF’s directors, executive officers, and certain other share- holders and shares authorized under plans is set forth in the sections entitled Election of Directors: TCF Stock Ownership of Directors, Officers and 5% Owners and Equity Compensation Plans Approved by Stockholders of TCF’s definitive Proxy Statement dated March 11, 2009 and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships and transactions between TCF and management is set forth in the section entitled Election of Directors: Director Independence and Related Party Transactions of TCF’s definitive Proxy Statement dated March 11, 2009 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 pro- cedures relating to audit and non-audit services provided by the Company’s independent registered public accounting firm is set forth in the section entitled Audit Committee Report in TCF’s definitive Proxy Statement dated March 11, 2009 and is incorporated herein by reference. 2008 Form 10-K : 83 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, 2008 and 2007 Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2008 Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended December 31, 2008 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2008 Notes to Consolidated Financial Statements Other Financial Data Management’s Report on Internal Control Over Financial Reporting Page 16 46 47 48 49 50 78 79 Reports of Independent Registered Public Accounting Firm 45, 80 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 85 of this report. 84 : TCF Financial Corporation and Subsidiaries 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/ William A. Cooper William A. Cooper Chairman and Chief Executive Officer Dated: February 16, 2009 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. Name /s/ William A. Cooper William A. Cooper /s/ Thomas F. Jasper Thomas F. Jasper /s/ David M. Stautz David M. Stautz /s/ Gregory J. Pulles Gregory J. Pulles /s/ William F. Bieber William F. Bieber /s/ Theodore J. Bigos Theodore J. Bigos /s/ Rodney P. Burwell Rodney P. Burwell /s/ Thomas A. Cusick Thomas A. Cusick /s/ Luella G. Goldberg Luella G. Goldberg /s/ George G. Johnson George G. Johnson /s/ Gerald A. Schwalbach Gerald A. Schwalbach /s/ Douglas A. Scovanner Douglas A. Scovanner /s/ Ralph Strangis Ralph Strangis /s/ Barry N. Winslow Barry N. Winslow Title Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date February 16, 2009 February 16, 2009 Senior Vice President, Controller and Assistant Treasurer (Principal Accounting Officer) February 16, 2009 Director, Vice Chairman, General Counsel and Secretary Director Director Director Director Director Director Director Director Director Director February 16, 2009 February 16, 2009 February 16, 2009 February 16, 2009 February 16, 2009 February 16, 2009 February 16, 2009 February 16, 2009 February 16, 2009 February 16, 2009 February 16, 2009 Index to Exhibits 2008 Form 10-K : 85 Exhibit No. 3(a) 3(b) 4(a) 4(b) 4(c) 4(d) 4(e) 4(f) 4(g) 4(h) 4(i) 4(j) 4(k) Description Amended and Restated Certificate of Incorporation of TCF Financial Corporation, as amended through November 13, 2008 [incorporated by reference to Exhibit 3.1 to TCF Financial Corporation’s Registration Statement on Form S-3 filed December 11, 2008] Amended and Restated Bylaws of TCF Financial Corporation [incorporated by reference to Exhibit 3(b) to TCF Financial Corporation’s Current Report on Form 8-K filed April 28, 2008] Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A [incorporated by reference to Exhibit 4.1 to TCF Financial Corporation’s Current Report on Form 8-K filed November 14, 2008] Warrant for Purchase of Shares of Common Stock dated November 14, 2008 issued to the United States Department of the Treasury [incorporated by reference to Exhibit 4.2 to TCF Financial Corporation’s Current Report on Form 8-K filed November 14, 2008] Letter Agreement dated as of November 14, 2008, between TCF Financial Corporation and the United States Department of the Treasury [incorporated by reference to Exhibit 10.1 to TCF Financial Corporation’s Current Report on Form 8-K filed on November 14, 2008] Indenture dated August 19, 2008 between TCF Financial Corporation and Wilmington Trust Company, as Trustee [incorporated by reference to Exhibit 4.1 to TCF Financial Corporation’s Current Report on Form 8-K filed August 19, 2008] Supplemental Indenture dated August 19, 2008 between TCF Financial Corporation and Wilmington Trust Company, as Trustee [incorporated by reference to Exhibit 4.2 to TCF Financial Corporation’s Current Report on Form 8-K filed August 19, 2008] Form of 10.75% Junior Subordinated Note, Series I [incorporated by reference to Exhibit 4.3 to TCF Financial Corporation’s Current Report on Form 8-K filed August 19, 2008] Certificate of Trust of TCF Capital I [incorporated by reference to Exhibit 4.2 to TCF Financial Corporation’s Registration Statement on Form S-3, filed August 11, 2008] Amended and Restated Trust Agreement of TCF Capital I dated August 19, 2008 by and among TCF Financial Corporation, as Depositor, Wilmington Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee and the Administrative Trustees named therein and the Several Holders named therein [incorporated by reference to Exhibit 4.4 to TCF Financial Corporation’s Current Report on Form 8-K filed August 19, 2008] Form of 10.75% Capital Security, Series I for TCF Capital I [incorporated by reference to Exhibit 4.5 to TCF Financial Corporation’s Current Report on Form 8-K filed August 19, 2008] Guarantee Agreement for TCF Capital I dated August 19, 2008 by and between TCF Financial Corporation and Wilmington Trust Company, as Guarantee Trustee [incorporated by reference to Exhibit 4.6 to TCF Financial Corporation’s Current Report on Form 8-K filed August 19, 2008] Copies of instruments with respect to long-term debt will be furnished to the Securities and Exchange Commission upon request. 86 : TCF Financial Corporation and Subsidiaries Exhibit No. 10(a) 10(b) 10(b)-1* 10(b)-2 10(b)-3 10(b)-4* 10(b)-5* 10(b)-6* 10(b)-7* Description 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]; 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]; 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] Amended and Restated TCF Financial Incentive Stock Program [incorporated by reference to Exhibit 10(b) to TCF Financial Corporation’s Current Report on Form 8-K filed January 25, 2008] Form of TCF Financial Corporation Incentive Stock Program Performance-Based Restricted Stock Agreement [incorporated 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 [incorporated by reference to Exhibit 10(b)-2 to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005] Summary of Stock Award Program for Consumer Lending and Business Banker Divisions [incorporated by reference to Exhibit 10(b)-3 to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005] Form of Year 2006 Executive Stock Grant Award Agreement dated January 23, 2006 [incorporated by refer- ence to Exhibit 10(b)-4 to TCF Financial Corporation’s Current Report on Form 8-K filed January 25, 2006] TCF Financial Corporation Restricted Stock Agreement and Non-Solicitation/Confidentiality Agreement dated January 22, 2007 (“Performance-Based Stock Award”) [incorporated by reference to Exhibit 10(b)-5 to TCF Financial Corporation’s Current Report on Form 8-K filed January 25, 2007] TCF Financial Corporation Restricted Stock Agreement and Non-Solicitation/Confidentiality Agreement, dated January 22, 2007 [incorporated by reference to Exhibit 10(b)-6 to TCF Financial Corporation’s Current Report on Form 8-K filed January 25, 2007] TCF Financial 1995 Incentive Stock Program Incentive Stock Option Agreement of Craig R. Dahl dated May 11, 1999 [incorporated by reference to Exhibit 10(b)-7 to TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2007] 2008 Form 10-K : 87 Exhibit No. 10(b)-8* 10(b)-9* 10(b)-10* 10(b)-11* 10(b)-12* 10(b)-13* 10(b)-14* 10(c) 10(d) Description Nonqualified Stock Option Agreement of Craig R. Dahl dated May 11, 1999 [incorporated by reference to Exhibit 10(b)-8 to TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2007] Form of the 2008 Restricted Stock Agreement as executed by certain executives effective January 21, 2008 [incorporated by reference to Exhibit 10(b)-9 to TCF Financial Corporation’s Current Report on Form 8-K filed January 25, 2008] Form of the 2008 Nonqualified Stock Option Agreement as executed by certain executives effective January 21, 2008 [incorporated by reference to Exhibit 10(b)-10 to TCF Financial Corporation’s Current Report on Form 8-K filed January 25, 2008] Nonqualified Stock Option Agreement as executed by Mr. Cooper, effective July 31, 2008 [incorporated by reference to Exhibit 10(b)-11 to TCF Financial Corporation’s Current Report on Form 8-K filed August 6, 2008] Amended and Restated Restricted Stock Agreement as executed by Mr. Cooper, effective January 20, 2009 [incorporated by reference to Exhibit 10(b)-13 to TCF Financial Corporation’s Current Report on Form 8-K filed January 23, 2009] Form of Amended and Restated Restricted Stock Agreement as executed by certain executives, effective January 20, 2009 [incorporated by reference to Exhibit 10(b)-14 to TCF Financial Corporation’s Current Report on Form 8-K filed January 23, 2009] Form of Year 2009 Executive Stock Award as executed by certain executives, effective January 20, 2009 [incorporated by reference to Exhibit 10(b)-15 to TCF Financial Corporation’s Current Report on Form 8-K filed January 23, 2009] TCF Financial Corporation Executive Deferred Compensation Plan as amended and restated through January 24, 2005 [incorporated by reference to Exhibit 10(c) to TCF Financial Corporation’s Current Report on Form 8-K filed January 27, 2005] 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]; 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]; and as amended by amendments adopted May 3, 2002 [incor- porated by reference to Exhibit 10(d) of TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002]; and as amended by Third Amendment of Trust Agreement for TCF Executive Deferred Compensation Plan 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] 88 : TCF Financial Corporation and Subsidiaries Exhibit No. 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(j)-1 Description Restricted Stock Agreement between William A. Cooper and TCF Financial Corporation dated January 24, 2005 [incorporated by reference to Exhibit 10(e)-2 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 effective January 1, 2008 [incorporated by reference to Exhibit 10(e)-6 to TCF Financial Corporation’s Current Report on Form 8-K filed October 19, 2007], as supplemented by the letter agreement dated August 6, 2008 by and between Mr. Nagorske and TCF Financial Corporation [incorporated by reference to Exhibit 99.1 to TCF Financial Corporation’s Current Report on Form 8-K filed August 8, 2008] Employment Agreement between Neil W. Brown and TCF Financial Corporation effective January 1, 2008 [incorporated by reference to Exhibit 10(e)-7 to TCF Financial Corporation’s Current Report on Form 8-K filed October 19, 2007] Form of Employment Agreement as executed by certain executives effective January 1, 2008 [incorporated by reference to Exhibit 10(e)-8 to TCF Financial Corporation’s Current Report on Form 8-K filed October 19, 2007] Employment Agreement between Craig R. Dahl and TCF Financial Corporation effective January 1, 2008 [incorporated by reference to Exhibit 10(e)-9 to TCF Financial Corporation’s Current Report on Form 8-K filed October 19, 2007] Amended and Restated Employment Agreement between William A. Cooper and TCF Financial Corporation dated July 31, 2008 [incorporated by reference to Exhibit 10(e)-11 to TCF Financial Corporation’s Current Report on Form 8-K filed August 6, 2008] Change in Control Agreement between Neil W. Brown and TCF Financial Corporation effective January 1, 2008 [incorporated by reference to Exhibit 10(g)-5 to TCF Financial Corporation’s Current Report on Form 8-K filed October 19, 2007] Form of Change of Control Agreement as executed by certain executives effective January 1, 2008 [incorporated by reference to Exhibit 10(g)-6 to TCF Financial Corporation’s Current Report on Form 8-K filed October 19, 2007] Form of Change in Control and Non-Solicitation Agreement as executed by certain Senior Officers effective January 1, 2008 [incorporated by reference to Exhibit 10(g)-7 to TCF Financial Corporation’s Current Report on Form 8-K filed October 19, 2007] TCF Financial Corporation 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] 2008 Form 10-K : 89 Exhibit No. 10(j)-2 10(k)# 10(l) 10(m) 10(n) 10(n)-1 10(p) 10(r) 10(r)-1 Description TCF Employees Stock Purchase Plan - Supplemental Plan (as amended and restated effective January 1, 2008). [incorporated by reference to Exhibit 10(j)-2 to TCF Financial Corporation’s Current Report on Form 8-K filed October 24, 2008] Trust Agreement for TCF Employees Stock Purchase Plan Supplemental Executive Retirement Plan (“SERP”) effective January 1, 2009 and dated November 20, 2008 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] Trust Agreement for TCF Financial Senior Officer Deferred Compensation Plan 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]; 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]; and as amended by Second Amendment of Trust Agreement for TCF Financial Senior Officers Deferred Compensation Plan effective as of June 30, 2003 [incorporated by reference to Exhibit 10(m) of TCF Financial Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003] Directors Stock Grant Program [incorporated by reference to Exhibit 10(n) of TCF Financial Corporation’s Current Report on Form 8-K filed April 29, 2005] Resolution adopting Directors Stock Grant Program goal for fiscal year 2009 and after [incorporated by reference to Exhibit 10(n)-1 of TCF Financial Corporation’s Current Report on Form 8-K filed January 23, 2009] 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] TCF Financial Corporation TCF 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 Financial Corporation 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] 90 : TCF Financial Corporation and Subsidiaries Exhibit No. 10(s) 10(t) 10(u) 10(u)-1 10(u)-2 10(u)-3 12(a)# 12(b)# 21# 23# 31# 32# * Executive Contract # Filed herein Description Trust Agreement for TCF Directors Deferred Compensation Plan [incorporated by reference to Exhibit 10(d) to TCF Financial Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000]; 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]; as amended by amend- ment 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]; 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]; and as amended by Third Amendment of TCF Directors Deferred Compensation Trust 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] TCF Director Retirement Plan effective as of 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] 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 [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] Amendment dated October 20, 2008 to the 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)-2 to TCF Financial Corporation’s Current Report on Form 8-K filed October 24, 2008] Amendment dated October 20, 2008 to the TCF Financial Corporation Cash Balance Pension Plan SERP [incorporated by reference to Exhibit 10(u)-3 to TCF Financial Corporation’s Current Report on Form 8-K filed October 24, 2008] Computation of Ratios of Earnings to Fixed Charges for periods ended December 31, 2008, 2007, 2006, 2005 and 2004 Computation of Ratios of Earnings to Fixed Charges and Preferred Stock Dividends for periods ended December 31, 2008, 2007, 2006, 2005 and 2004 Subsidiaries of TCF Financial Corporation (as of December 31, 2008) Consent of KPMG LLP dated February 17, 2009 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) 2008 Annual Report : 91 Senior Officers TCF Financial Corporation Chairman of the Board and Chief Executive Officer William A. Cooper President and Chief Operating Officer Neil W. Brown Executive Vice President and Chief Financial Officer Thomas F. Jasper Vice Chairman, General Counsel and Secretary Gregory J. Pulles Vice Chairman Barry N. Winslow Executive Vice President and Chief Information Officer Earl D. Stratton Executive Vice President Craig R. Dahl Senior Vice Presidents James S. Broucek Steven D. Christensen Joseph T. Green Jason E. Korstange Barbara E. Shaw David M. Stautz TCF Bank Corporate Vice Chairman Timothy P. Bailey Executive Vice Presidents Paul B. Brawner Gregg R. Goudy Brian J. Hurd James C. LaPlante Senior Vice Presidents Michael Beier Ronald L. Britz Beverly L. Burman Scott D. Campbell Beverly M. Craig Daniel R. Edward Brian P. Engels Linda J. Firth Shelley A. Fitzmaurice Christopher N. Germann Douglass B. Hiatt Charles P. Hoffman, Jr. Katherine D. Johnson Scott W. Johnson Gloria J. Karsky James M. Matheis David B. McCullough Anton J. Negrini Richard J. Nelson Carol B. Schirmers Leonard D. Steele R. Elizabeth Topoluk Jason R. Voronyak Cathleen L. Wilkins Luke K. Oosterhouse Douglas A. Ortyn Michael Roidt Raymond J. Swidron Thomas K. Torossian Kristin E. Utzinger Dennis J. Vena Kathleen M. Wacker TCF Bank Minnesota TCF Bank Michigan President Mark L. Jeter Executive Vice Presidents Douglas W. Benner Timothy G. Doyle Claire M. Graupmann Senior Vice Presidents Wesley M. Anderson Jeffrey R. Arnold Michael A. Dill James T. Dowiak Gregory W. Drehmel Scott A. Fedie Viane R. Hoefs Katherine L. Landon Joseph C. Miller Michael J. Olson Todd A. Palmer Elisabeth A.Rojas Steven E. Rykkeli TCF Bank Illinois/Wisconsin/Indiana President Mark W. Rohde Executive Vice Presidents Luis J. Campos Michael R. Klemz James L. Koon David J. Veurink Matthew R. Wiley Senior Vice Presidents John E. Boyle Robert J. Brueggeman Michael Y. Chin Jennifer A. Daugherty Peter R. Daugherty Jeffrey T. Doering Edward J. Gallagher Mark W. Gault Daniel B. Hoffman Eileen P. Kowalski Vicki L. Makowka Dennis McClelland Russell P. McMinn President Joseph W. Doyle Executive Vice Presidents Robert C. Borgstrom Robert A. Henry Senior Vice Presidents Jerry E. Coviak Larry M. Czekaj Gary L. Fineman Natalie A. Glass Donald J. Hawkins Susan N. Kaminski Guy J. Rau Patrick P. Skiles Paul R. Tokarczyk Brian D. Wilson TCF Bank Colorado President Timothy B. Meyer Executive Vice President Matthew G. Lamb Senior Vice Presidents Timothy J. Bosiacki Barbara L. Buss James W. Hagen David L. Norwood Bernadette D. Slowey Stephanie R. Zelenak TCF Bank Arizona President Timothy B. Meyer Senior Vice President Delia M. Conrad TCF Equipment Finance, Inc. President and Chief Executive Officer Craig R. Dahl Executive Vice Presidents William S. Henak Michael S. Jones Mark D. Nyquist Bradley C. Gunstad Senior Vice Presidents Gloria J. Charley Peter C. Darin Walter E. Dzielsky Michael A. Kloos Jodie L. Palmer Gary A. Peterson Charles A. Sell, Jr. Robert J. Stark Mark H. Valentine Winthrop Resources Corporation Chairman and Chief Executive Officer Craig R. Dahl Executive Vice Presidents Paul L. Gendler Michael S. Jones Richard J. Pieper Senior Vice Presidents Gary W. Anderson Dean J. Stinchfield TCF Inventory Finance, Inc. Chairman Craig R. Dahl President and Chief Executive Officer Rosario A. Perrelli Executive Vice Presidents Howard J. Hentz Vincent E. Hillery Christopher C. Meals Senior Vice Presidents Peter J. Baranowski Larry M. Tagli Mark J. Wrend Dornett Y. Wright TCF Commercial Finance Canada, Inc. President Peter D. Kelley Winthrop Resources Corporation Headquarters 11100 Wayzata Boulevard Suite 800 Minnetonka, MN 55305 (952) 936-0226 TCF Inventory Finance, Inc. Headquarters 2300 Barrington Road Suite 600 Hoffman Estates, IL 60169 (847) 285-6000 TCF Commercial Finance Canada, Inc. Headquarters 700 Dorval Drive Suite 102 Oakville L6K3V3 Canada (905) 844-4430 92 : TCF Financial Corporation and Subsidiaries Offices Executive Offices Michigan TCF Financial Corporation 200 Lake Street East Mail Code EX0-03-A Wayzata, MN 55391-1693 (952) 745-2760 Minnesota Headquarters 801 Marquette Avenue Mail Code 001-03-P Minneapolis, MN 55402 (612) 661-6500 Traditional Branches Minneapolis/ St. Paul Area (45) Greater Minnesota (2) Supermarket Branches Minneapolis/ St. Paul Area (54) Greater Minnesota (5) Campus Branches Minneapolis/ St. Paul Area (2) Greater Minnesota (3) Illinois/Wisconsin/Indiana Headquarters 800 Burr Ridge Parkway Burr Ridge, IL 60527 (630) 986-4900 Traditional Branches Chicagoland (42) Milwaukee Area (10) Kenosha/Racine Area (6) Supermarket Branches Chicagoland (158) Milwaukee Area (8) Kenosha/Racine Area (2) Indiana (5) Campus Branches Chicagoland (5) Greater Illinois (1) Milwaukee (1) Headquarters 17440 College Parkway Livonia, MI 48152 (734) 542-2900 Traditional Branches Metro Detroit Area (51) Supermarket Branches Metro Detroit Area (1) Greater Michigan (1) Campus Branches Metro Detroit Area (2) Greater Michigan (1) Colorado Headquarters 6400 South Fiddler’s Green Circle Suite 800 Greenwood Village, CO 80111 (720) 200-2400 Traditional Branches Metro Denver Area (26) Colorado Springs (8) Supermarket Branches Metro Denver Area (2) Arizona Headquarters 4001 East Mountain Sky Avenue Suite 101 Phoenix, AZ 85044 (602) 716-8900 Traditional Branches Metro Phoenix Area (7) TCF Equipment Finance, Inc. Headquarters 11100 Wayzata Boulevard Suite 801 Minnetonka, MN 55305 (952) 656-5080 Board of Directors William A. Cooper 5 Chairman of the Board and Chief Executive Officer William F. Bieber 2,3,4 Chairman, Acrometal Companies, Inc. Theodore J. Bigos 2,3,4 Owner, Bigos Management, Inc. Rodney P. Burwell 2,3,4 Chairman, Xerxes Corporation Thomas A. Cusick 4 Retired Vice Chairman Luella G. Goldberg 1,2,3,4,5 Past Chair, University of Minnesota Foundation, Former Acting President, Wellesley College George G. Johnson 1,4 CPA/Managing Director, George Johnson & Company Gregory J. Pulles Vice Chairman, General Counsel and Secretary Gerald A. Schwalbach 1,2,3,4 Chairman, Spensa Development Group, LLC Douglas A. Scovanner 1,4 Executive Vice President and Chief Financial Officer, Target Corporation Ralph Strangis 2,3,4,5 Senior Partner, Kaplan, Strangis and Kaplan, P.A. Barry N. Winslow 4 Vice Chairman 1 Audit Committee 2 Compensation/Nominating/ Corporate Governance Committee 3 Advisory Committee – TCF Employees Stock Purchase Plan 4 Shareholder Relations/ Capital and Expansion Committee 5 Executive Committee 2008 Annual Report : 93 Direct Stock Purchase and Dividend Reinvestment Plan Computershare Trust Company, N.A. offers the Computershare Investment Plan, a direct stock purchase and dividend rein- vestment plan for TCF Financial Corporation common stock. This shareholder-paid program provides a low-cost alterna- tive to traditional retail brokerage methods of purchasing, holding and selling TCF common stock. The Plan is sponsored and administered by our Transfer Agent, Computershare, Inc. Information is available from: Computershare Investment Plan for TCF Financial Corporation c/o Computershare PO Box 43078 Providence, RI 02940-3078 (800) 443-6852 www.computershare.com Investor/Analyst Contact Jason Korstange Senior Vice President Corporate Communications (952) 745-2755 Stacey Ronshaugen Assistant Vice President Investor Relations (952) 745-2762 Available Information Please visit our website at www.tcfbank.com for free access to investor information, news releases, investor presenta- tions, 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 EX0-01-C Wayzata, MN 55391-1693 (952) 745-2760 Annual Meeting The annual meeting of stockholders of TCF will be held on Wednesday, April 29, 2009, 3:00 p.m. (local time) at the Marriott Minneapolis West, 9960 Wayzata Boulevard, St. Louis Park, Minnesota. Stockholder Information Stock Data Year Close High Dividends Paid Low Per Share 2008 Fourth Quarter Third Quarter Second Quarter First Quarter 2007 Fourth Quarter Third Quarter Second Quarter First Quarter 2006 Fourth Quarter Third Quarter Second Quarter First Quarter 2005 Fourth Quarter Third Quarter Second Quarter First Quarter 2004 Fourth Quarter Third Quarter Second Quarter First Quarter $13.66 18.00 12.03 17.92 $17.93 26.18 27.80 26.36 $27.42 26.29 26.45 25.75 $27.14 26.75 25.88 27.15 $32.14 30.29 29.03 25.54 $20.00 28.00 19.31 22.04 $27.95 28.25 28.99 27.91 $27.89 28.10 27.70 28.41 $28.78 28.82 28.56 32.03 $32.36 32.62 29.03 26.37 $11.22 9.25 11.91 14.65 $17.17 22.69 25.39 24.93 $25.16 24.94 24.91 24.23 $25.02 25.81 24.55 26.42 $29.46 28.01 24.35 23.92 $ .25 .25 .25 .25 $.2425 .2425 .2425 .2425 $ .23 .23 .23 .23 $.2125 .2125 .2125 .2125 $.1875 .1875 .1875 .1875 For more historical information on TCF’s stock price and dividend, visit www.tcfbank.com and click on About TCF/ Investor Relations. 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, 2008, TCF had approximately 127.4 million shares of common stock outstanding. 2009 Common Stock Dividend Dates Expected Record: January 30 May 1 July 31 October 30 Expected Payment: February 27 May 29 August 31 November 30 Transfer Agent and Registrar Computershare Trust Company, N.A. PO Box 43078 Providence, RI 02940-3078 (800) 443-6852 www.computershare.com 94 : TCF Financial Corporation and Subsidiaries Credit Ratings Last Review September 2007 Last Rating Action Moody’s TCF National Bank: Outlook Issuer Long-term deposits Short-term deposits Bank financial strength Stable A1 A1 Prime-1 B- Last Rating Action Standard & Poor’s Outlook TCF Financial Corporation: Long-term counterparty Short-term counterparty TCF National Bank: Long-term counterparty Short-term counterparty Last Review August 2008 Negative BBB+ A-2 A- A-2 Last Rating Action FITCH Outlook TCF Financial Corporation: Long-term IDR Short-term IDR TCF National Bank: Long-term IDR Short-term IDR Stock Price Performance (In Dollars) Stock Price* Dividends* 4 0 / 3 / 9 t i l p S k c o t S 5 9 / 0 3 / 1 1 t i l p S k c o t S 7 9 / 8 2 / 1 1 t i l p S k c o t S $35 30 25 20 15 10 5 Year Ending 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 12-06 12-07 12-08 *Stock split adjusted For more historical information on TCF’s stock price and dividend, visit www.tcfbank.com and click on About TCF /Investor Relations. Last Review July 2008 Negative A- F1 A- F1 $1.50 1.25 1.00 0.75 0.50 0.25 0.00 2008 Annual Report : 95 • TCF grows both through de novo expansion and 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 technol- ogy 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 condition 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. 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, supermarket and campus branches, TCF Express Teller® and other ATMs, debit cards, phone banking, and Internet banking. • TCF operates like a partnership. We’re organized geo- graphically and by function, with profit center goals and objectives. TCF emphasizes return on average assets, return on average equity and earnings per share growth. We know which products are profitable and contribute to these goals. Local geographic managers are responsible for local busi- ness decisions, business development initiatives, customer relations, and community involvement. • TCF focuses on growing and retaining its large number of low-interest cost checking accounts by offering conve- nient products with free features, such as TCF Totally Free Checking and TCF Power CheckingSM. 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, create value for our stockholders, and build pride in our employees. We also respect customers’ concern about privacy and know they place their trust in us. TCF is committed to protecting the private information of our customers and retaining that trust is our priority. TCF Financial Corporation 200 Lake Street East Wayzata, MN 55391-1693 www.tcfbank.com T C F F i n a n c i a l C o r p o r a t i o n 2 0 0 8 A n n u a l R e p o r t TCF Financial Corporation 2008 Annual Report moving forward safe sound stable strong solid smart successful secure TCFIR9341 TCF® The Convenience Franchise