TCF Financial (TCB)

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 patterns, the mix of interest-earning assets and the mix of interest-bearing and non-interest bearing deposits and borrowings. TCF manages the risk of changes in interest rates on its net interest income through an Asset/Liability Committee and through related interest-rate risk monitoring and management policies. See “Item 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 significantly 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 significant litigation against it regarding interchange pricing and there is a risk this revenue could be impacted by any settlement or adverse rulings in such litigation. 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.

and equipment finance businesses have equipment installations in all 50 states and, to a limited extent, in foreign countries.

                As a primarily secured lender, TCF emphasizes credit quality over asset growth. As a result, TCF’s credit losses are generally lower than those experienced by other banks. The allowance for loan and lease losses, which is generally lower as a percent of loans and leases than the average in the banking industry, reflects the lower historical charge-offs and management’s expectation of the risk of loss incurred in the loan and lease portfolio. See “Consolidated Financial Condition Analysis – Allowance for Loan and Lease Losses.”

Net interest income, the difference between interest income earned on loans and leases, securities available for sale, investments and other interest-earning assets and interest paid on deposits and borrowings, represented 50.4% of TCF’s total revenue in 2007. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest-earning assets and the mix of interest-bearing and non-interest bearing deposits and borrowings. TCF manages the risk of changes in interest rates on its net interest income through an Asset/Liability Committee and through related interest-rate risk monitoring and management policies.

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 its number of deposit accounts and the related transaction activity. Increasing fee and service charge revenues 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 significantly 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, 2007 as published by Visa. TCF earns interchange revenue from customer debit card transactions.

The following portions of the Management’s Discussion and Analysis of Financial Condition and Results of Operations focus in more detail on the results of operations for 2007, 2006 and 2005 and on information about TCF’s balance sheet, credit quality, liquidity, funding resources, capital and other matters.

and equipment finance
businesses have equipment installations in all 50 states and, to a limited
extent, in foreign countries.

                As a primarily secured lender, TCF emphasizes credit
quality over asset growth. As a result, TCF’s credit losses are generally lower
than those experienced by other banks. The allowance for loan and lease losses,
which is generally lower as a percent of loans and leases than the average in
the banking industry, reflects the lower historical charge-offs and
management’s expectation of the risk of loss incurred in the loan and lease
portfolio. See “Consolidated Financial Condition Analysis – Allowance for Loan
and Lease Losses.”

Net interest income, the
difference between interest income earned on loans and leases, securities
available for sale, investments and other interest-earning assets and interest
paid on deposits and borrowings, represented 50.4% of TCF’s total revenue in
2007. Net interest income can change significantly from period to period based
on general levels of interest rates, customer prepayment patterns, the mix of
interest-earning assets and the mix of interest-bearing and non-interest
bearing deposits and borrowings. TCF manages the risk of changes in interest
rates on its net interest income through an Asset/Liability Committee and
through related interest-rate risk monitoring and management policies.

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 its number of deposit
accounts and the related transaction activity. Increasing fee and service
charge revenues 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 significantly 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, 2007 as published by Visa. TCF earns
interchange revenue from customer debit card transactions.

The following portions of
the Management’s Discussion and Analysis of Financial Condition and Results of
Operations focus in more detail on the results of operations for 2007, 2006 and
2005 and on information about TCF’s balance sheet, credit quality, liquidity,
funding resources, capital and other matters.

and lines of credit secured by residential real estate properties. The leasing and equipment finance businesses consist of TCF Equipment Finance, Inc. (“TCF Equipment Finance”), a company that delivers equipment finance solutions to businesses in select markets, and Winthrop Resources Corporation (“Winthrop Resources”), a leasing company that primarily leases technology and data processing equipment. TCF’s leasing and equipment finance businesses operate in all 50 states and have equipment installations domestically and, to a limited extent, in foreign countries.

As a primarily secured lender, TCF emphasizes credit quality over asset growth. As a result, TCF’s credit losses are generally lower than those experienced by other banks. The allowance for loan and lease losses, which is generally lower as a percent of loans and leases than the average in the banking industry, reflects the lower historical charge-offs and management’s expectation of the risk of loss inherent in the loan and lease portfolio. See “Consolidated Financial Condition Analysis – Allowance for Loan and Lease Losses.”

Net interest income, the difference between interest income earned on loans and leases, securities available for sale, investments and other interest-earning assets and interest paid on deposits and borrowings, represented 52.3% of TCF’s total revenue in 2006. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest-earning assets and the mix of interest-bearing and non-interest bearing deposits and borrowings. TCF manages the risk of changes in interest rates on its net interest income through an Asset/Liability Committee and through related interest-rate risk monitoring and management policies.

During 2006, TCF’s net interest margin declined to 4.16% from 4.46% in 2005 and 4.54% in 2004. The declines in 2006 and 2005 were primarily due to customer preference for lower-yielding fixed-rate loans and higher-cost market-rate deposits largely due to a flat or inverted yield curve and higher borrowing costs. In addition, intense price competition on loans and deposits has contributed to the compression of the net interest margin in 2006 and 2005. See “Quantitative and Qualitative Disclosures About Market Risk” for further discussion on TCF’s interest-rate risk position.

Non-interest income is a significant source of revenue for TCF and an important factor in TCF’s results of operations. A key driver of non-interest income is its number of checking accounts and the related transaction activity. Increasing fee and service charge revenues has been challenging as a result of slower growth in deposit accounts and changing customer behaviors. TCF is focusing on deposit account growth to increase future fee revenue. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Non-Interest Income” for additional information.

The Company’s Visa debit card program has grown significantly since its inception in 1996. TCF is the 13th largest issuer of Visa Classic debit cards in the United States, based on sales volume for the three months ended September 30, 2006 as published by Visa. TCF earns interchange revenue from customer debit card transactions.

The following portions of the Management’s Discussion and Analysis of Financial Condition and Results of Operations focus in more detail on the results of operations for 2006, 2005 and 2004 and on information about TCF’s balance sheet, credit quality, liquidity funding resources, capital and other matters.

Opening new branches is an integral part of TCF’s growth strategy for generating new deposit accounts and the related revenue that is associated with the accounts and other products. New branches typically produce net losses during the first 20-24 months of operations before they become profitable, and therefore the level and timing of new branch expansion can have a significant impact on TCF’s profitability. TCF’s growth in checking accounts is primarily occurring in new branches with growth in older, mature branches being slower. The success of TCF’s branch expansion is dependent on the continued long-term success and viability of branch banking.

TCF’s lending strategy is to originate high credit quality, primarily secured, loans and leases. Commercial loans are generally made on local properties or to local customers. TCF’s largest core lending business is its consumer home equity loan operation, which offers fixed- and variable-rate loans and lines of credit secured by residential real estate properties. The leasing and equipment finance businesses consist of TCF Equipment Finance, Inc. (“TCF Equipment Finance”), a company that delivers equipment finance solutions to businesses in select markets, and Winthrop Resources Corporation (“Winthrop”), a leasing company that primarily leases technology and data processing equipment. TCF’s leasing and equipment finance businesses operate in all 50 states and source equipment installations domestically and, to a limited extent, in foreign countries.

As a primarily secured lender, TCF emphasizes credit quality over asset growth. As a result, TCF’s credit losses are generally lower than those experienced by other banks. The allowance for loan and lease losses, while generally lower as a percent of loans and leases than the average in the banking industry, reflects the lower historical charge-offs and management’s expectation of the risk of loss inherent in the loan and lease portfolio. See “Consolidated Financial Condition Analysis – Allowance for Loan and Lease Losses.”

Net interest income, the difference between interest income earned on loans and leases and on investments, and interest expense paid on deposits and short-term and long-term borrowings, represented 52% of TCF’s total revenue in 2005. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest-earning assets and the mix of interest-bearing and non-interest bearing deposits and borrowings. TCF manages the risk of changes in interest rates on its net interest income through an Asset/Liability Committee and through related interest-rate risk monitoring and management policies.

During 2005, TCF’s net interest margin declined from 4.54% for 2004 to 4.46% for 2005. This decline was primarily due to growth in deposits with higher interest rates and increased fixed-rate loans with lower yields than variable-rate loans as a result of the flattening yield curve and changing customer preferences. See “Quantitative and Qualitative Disclosures About Market Risk” for further discussion on TCF’s interest-rate risk position.

Non-interest income is a significant source of revenue for TCF and an important factor in TCF’s results of operations. A key driver of non-interest income is checking accounts and their related activities. Increasing fee and service charge revenues has been challenging during 2005 as a result of slower growth in checking accounts and changing customer behaviors. Fee revenue per retail checking account was $217 for 2005, down from $232 in 2004. TCF is focusing on checking account growth to increase future fee revenue. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Income Statement Analysis – Non-Interest Income” for additional information.

The Company’s Visa debit card program has grown significantly since its inception in 1996. TCF is one of the largest issuers of Visa Classic debit cards in the United States. TCF earns interchange revenue from customer debit card transactions.

The following portions of the Management’s Discussion and Analysis of Financial Condition and Results of Operations focus in more detail on the results of operations for 2005, 2004 and 2003 and on information about TCF’s balance sheet, credit quality, liquidity and funding resources, capital and other matters.

Net interest income, the difference between interest income earned on loans and leases and on investments, and interest expense paid on deposits and short-term and long-term borrowings, represents 50.1% of TCF’s total revenue. Net interest income can change significantly from period to period based on general levels of interest rates, customer prepayment patterns, the mix of interest earning assets and the mix of interest bearing and non-interest bearing deposits and borrowings. TCF manages the risk of changes in interest rates on its net interest income through an Asset/Liability Committee and through related interest rate risk monitoring and management policies. See “Market Risk – Interest-Rate Risk” for further discussion of TCF’s interest rate risk position.

The historically low interest rates in 2003 and 2004 were a significant challenge to asset/liability risk and management made several key decisions that impacted TCF’s results. These very low interest rates caused a high level of prepayment in the residential loan and mortgage-backed securities portfolio, which declined a combined $111.8 million during 2004 and $1.5 billion during 2003.

The Company’s Visa debit card program has grown significantly since its inception in 1996. TCF is one of the largest issuers of Visa Classic debit cards in the United States. TCF earns interchange revenue from customer debit card transactions. During 2004, 88.7% of TCF’s debit card sales volume was generated from off-line (signature based) transactions. The average interchange rate on these off-line transactions was 1.40% in 2004 compared with 1.43% in 2003. The decrease in the average off-line interchange rate was the result of Visa establishing new interchange rates, as part of the settlement of its class action lawsuits, which took effect in August 2003 and were revised in February 2004. Class action litigation against Visa brought by certain merchants who chose not to participate in the 2003 settlements remains pending. In October 2004, the United States Supreme Court decided not to hear an appeal of a ruling that Visa and MasterCard may not bar member banks from issuing cards on rival networks. Rival card networks, such as Discover and American Express, have brought or are considering bringing private legal action against Visa and MasterCard. Visa is a defendant in several other legal actions. The ultimate impact of any such litigation cannot be predicted at this time. The continued success of TCF’s debit card program is dependent on the success and viability of Visa and the continued use by customers and acceptance by merchants of its debit cards.

TCF’s mortgage banking business originated residential mortgage loans and sold them to investors, primarily retaining the servicing rights and related servicing revenue. During 2004, TCF restructured its mortgage banking business by eliminating the wholesale loan origination activities and downsizing and integrating its retail loan origination function with TCF’s consumer lending business. TCF’s mortgage banking business no longer originates any new loans and continues to service the remaining $4.5 billion portfolio of mortgage loans for third party investors. Generally accepted accounting principles require TCF to record the value of the servicing rights on the balance sheet at the time the loans are sold. Capitalized mortgage servicing rights are amortized in proportion to, and over the period of, estimated related servicing revenues and are also evaluated quarterly for impairment. As interest rates fall, there is a higher probability of prepayment as the customer can generally refinance the loan with relative ease. In addition, as property values increase, customers’ home equity increases, enabling customers to engage in “cash-out” refinance transactions where the customer refinances an existing mortgage into a higher balance loan in order to draw out the increased home equity. TCF does not utilize derivatives to manage the impairment risk in its capitalized mortgage servicing rights.

The following portions of the Management’s Discussion and Analysis focus in more detail on the results of operations for 2004, 2003 and 2002 and on information about TCF’s balance sheet, credit quality, liquidity and funding resources, capital, critical accounting estimates and other matters.

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