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2004 Annual Report 29
Mortgage servicing revenues can be significantly impacted by the
amount of amortization and provision for impairment of mortgage
servicing rights. The valuation of mortgage servicing rights is a criti-
cal accounting estimate for TCF. This estimate is based upon loan
types, note rates and prepayment assumptions. Changes in the mix
of loans, interest rates, defaults or prepayment speeds may have a
material effect on the amortization amount and possible impairment
in valuation. In a declining interest rate environment, prepayment
speed assumptions will increase and result in an acceleration in
the amortization of the mortgage servicing rights as the assumed
underlying portfolio declines and also may result in impairment as
the value of the mortgage servicing rights decline. TCF periodically
evaluates its capitalized mortgage servicing rights for impairment.
A key component in determining the fair value of mortgage servicing
rights is the projected cash flows of the underlying loan portfolio.
TCF uses projected cash flows and related prepayment assumptions
based on management’s best estimates. See Notes 1 and 10 of Notes
to Consolidated Financial Statements for additional information
concerning TCF’s mortgage servicing rights.
The following tables summarize the servicing portfolio by interest rate tranche, the prepayment speed assumptions and the weighted average
remaining life of the loans by interest rate tranche used in the determination of the value and amortization of mortgage servicing rights as of
December 31, 2004 and 2003:
At December 31,
(Dollars in thousands) 2004 2003
Prepayment Weighted Prepayment Weighted
Unpaid Speed Average Life Unpaid Speed Average Life
Interest Rate Tranche Balance Assumption (in Years) Balance Assumption (in Years)
0 to 5.50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,707,934 11.3% 7.5 $1,648,918 13.3% 7.2
5.51 to 6.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,409,983 16.1 5.8 1,407,315 17.9 5.6
6.01 to 6.50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . 691,148 23.2 4.0 830,161 25.4 3.8
6.51 to 7.00% . . . . . . . . . . . . . . . . . . . . . . . . . . . . 453,017 25.6 3.4 740,675 31.8 2.7
7.01% and higher . . . . . . . . . . . . . . . . . . . . . . . . . 241,482 27.6 3.0 495,672 35.5 2.3
$4,503,564 15.8 5.8 $5,122,741 19.0 5.1
At December 31, 2004 and 2003, the sensitivities of the current fair value of mortgage servicing rights to a hypothetical immediate 10% and
25% adverse change in prepayment speed assumptions and discount rate are as follows:
At December 31,
(Dollars in millions) 2004 2003
Fair value of mortgage servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55.9 $58.0
Weighted-average life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 5.1
Weighted average prepayment speed assumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.8% 19.0%
Weighted average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5% 7.5%
Impact on fair value of 10% adverse change in prepayment speed assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3.1) $(3.2)
Impact on fair value of 25% adverse change in prepayment speed assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(7.1) $(7.4)
Impact on fair value of 10% adverse change in discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1.5) $(1.3)
Impact on fair value of 25% adverse change in discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3.4) $(3.3)
These sensitivities are theoretical and should be used with cau-
tion. As the figures indicate, changes in fair value based on a given
variation in assumptions generally cannot be extrapolated because
the relationship of the change in assumption to the change in fair
value may not be linear. Also, in the above table, the effect of a
variation in a particular assumption on the fair value of the mortgage
servicing rights is calculated independently without changing any
other assumptions. In reality, changes in one factor may result in
changes in another (for example, changes in prepayment speed
estimates could result in changes in discount rates or market
interest rates), which might either magnify or counteract the
sensitivities. TCF does not use derivatives to hedge its mortgage
servicing rights asset.