TCF Bank 2003 Annual Report Download - page 72

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70 TCF Financial Corporation and Subsidiaries
Note 19. Derivative Instruments and Hedging Activities
All derivative instruments as defined, including derivatives embedded
in other financial instruments or contracts, are recognized as either
assets or liabilities in the Consolidated Statements of Financial
Condition at fair value. Changes in the fair value of a derivative are
recorded in the Consolidated Statements of Income.
TCF’s pipeline of locked residential mortgage loan commitments,
adjusted for loans not expected to close, and forward sales contracts
are considered derivatives and are recorded at fair value, with the
changes in fair value recognized in gains on sales of loans under
mortgage banking revenue in the Consolidated Statements of
Income. TCF utilizes forward sales contracts to hedge its risk of
changes in the fair value, due to changes in interest rates, of both
its locked residential mortgage loan commitments and its residen-
tial loans held for sale. Residential mortgage loans held for sale are
carried at the lower of cost or market as adjusted for the effects of
fair value hedges using quoted market prices. Because the fair value
of the residential loans held for sale are hedged with forward sales
contracts of the same loan types, or substantially the same loan
types, the hedges are highly effective at managing the risk of chang-
ing fair values of such loans. Any differences between the changes
in fair value of the hedged residential loans held for sale and in the
fair value of the forward sales contracts are not expected to be
and were not material due to the nature of the hedging instruments
and were recorded in gains on sales of loans and was not material.
Forward mortgage loan sales commitments totaled $149.1 million
and $511 million at December 31, 2003 and 2002, respectively.
Note 20. Financial Instruments with
Off-Balance-Sheet Risk
TCF is a party to financial instruments with off-balance-sheet risk,
primarily to meet the financing needs of its customers. These finan-
cial instruments, which are issued or held by TCF for purposes other
than trading, involve elements of credit and interest-rate risk in
excess of the amount recognized in the Consolidated Statements
of Financial Condition.
TCF’s exposure to credit loss in the event of non-performance
by the counterparty to the financial instrument for commitments
to extend credit and standby letters of credit is represented by the
contractual amount of the commitments. TCF uses the same credit
policies in making these commitments as it does for on-balance-
sheet instruments. TCF evaluates each customer’s creditworthiness
on a case-by-case basis. The amount of collateral obtained is based
on management’s credit evaluation of the customer.
Assumed health care cost trend rates have an effect on the amounts reported for the Postretirement Plan. A one-percentage-point change
in assumed health care cost trend rates would have the following effects:
1-Percentage- 1-Percentage-
(In thousands) Point Increase Point Decrease
Effect on total of service and interest cost components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38 $ (35)
Effect on postretirement benefits obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 610 (545)
TCF currently has no plans to pre-fund the Postretirement Plan in 2004.
Financial instruments with off-balance sheet risk are summarized as follows:
At December 31,
(In thousands) 2003 2002
Commitments to extend credit:
Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,382,348 $1,154,133
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624,664 576,568
Leasing and equipment finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,485 67,006
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,007 32,419
Total commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,120,504 1,830,126
Loans serviced with recourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,765 180,285
Standby letters of credit and guarantees on industrial revenue bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,796 27,094
$2,292,065 $2,037,505