Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of TCF Financial Corporation and its wholly owned subsidiaries. TCF Financial Corporation (“TCF” or the “Company”) is a national financial holding company engaged pri- marily in community banking, mortgage banking and leasing and equipment finance through its wholly owned subsidiary, TCF National Bank. TCF National Bank owns leasing and equipment finance, mortgage banking, brokerage and investment and insurance sales, and real estate investment trusts (“REIT”) subsidiaries. These sub- sidiaries are consolidated with TCF National Bank and are therefore included in the consolidated financial statements of TCF Financial Corporation. All significant intercompany accounts and transactions have been eliminated in consolidation.  Certain reclassifications have been made to prior years’ financial statements to conform to the current year presentation. For Con- solidated Statements of Cash Flows purposes, cash and cash equiva- lents include cash and due from banks.  The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabili- ties at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Critical accounting policies are dependent on estimates that are par- ticularly susceptible to significant change. TCF’s critical accounting policies include the determination of the allowance for loan and lease losses, mortgage servicing rights and income taxes. Allowance for Loan and Lease Losses The allowance for loan and lease losses is maintained at a level believed to be appropriate by management to provide for probable loan and lease losses inherent in the portfolio as of the balance sheet date, including known or anticipated problem loans and leases, as well as for loans and leases which are not currently known to require specific allowances. Management’s judgment as to the amount of the allowance, includ- ing the allocated and unallocated elements, is a result of ongoing review of larger individual loans and leases, the overall risk characteristics of the portfolios, changes in the character or size of the portfolios, the level of impaired and non-performing assets, historical net charge- off amounts, geographic location, prevailing economic conditions and other relevant factors. Impaired loans include all non-accrual and Adjustments to the mortgage servicing rights valuation allow- ance for other than permanent impairment are recorded in mort- gage banking revenues. Permanent impairment is recognized  as a write-down of the mortgage servicing rights and the related val- uation allowance. TCF periodically evaluates its capitalized mortgage servicing rights for impairment. Loan type and note rate are the predominant risk characteristics of the underlying loans used to stratify capitalized mortgage servicing rights for purposes of measuring impairment. The fair value of mortgage servicing rights is estimated by calculat- ing the present value of estimated future net servicing cash flows, tak- ing into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors. The expected and actual rate of mortgage loan prepayments are the most significant factors driving the value of mortgage servicing rights. Mortgage Servicing Rights TCF records a mortgage servicing rights asset for its right to service mortgage loans it has sold to third parties but continues to service for a fee. The total cost of loans sold is allocated between the loans sold and the servicing rights retained based on the relative fair values of each. Mortgage servicing rights are initially recorded at cost and are subsequently carried at the lower of cost, adjusted for amortization, or estimated fair value. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income. restructured commercial real estate and commercial business loans and equipment financings. Consumer and residential real estate loans and lease financings are excluded from the definition of an impaired loan. Loan impairment is measured as the present value of the expected future cash flows discounted at the loan’s initial effective interest rate or the fair value of the collateral for collateral-dependent loans. Residential loans, consumer loans, and smaller-balance com- mercial loans and lease and equipment financings are segregated by loan type and sub-type, and are evaluated on a group basis. Loans and leases are charged off to the extent they are deemed to be uncol- lectible. The amount of the allowance for loan and lease losses is highly dependent upon management’s estimates of variables affect- ing 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, evalu- ations and cash flows may be subject to frequent adjustments due to changing economic prospects of borrowers, lessees or properties. These estimates are reviewed periodically and adjustments, if neces- sary, are recorded in the provision for credit losses in the periods in which they become known. page 51 CRITICAL ACCOUNTING POLICIES