TCF Bank 2004 Annual Report Download - page 55

2004 Annual Report 53
Notes to Consolidated Financial Statements
Note 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
primarily 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, securities brokerage and investment and insur-
ance sales, and real estate investment trust (“REIT”) subsidiaries.
These subsidiaries 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’ finan-
cial statements to conform to the current year presentation. 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 management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities 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.
POLICIES RELATED TO CRITICAL ACCOUNTING ESTIMATES
Summary of Critical Accounting Estimates Critical
accounting estimates occur in certain accounting policies and proce-
dures and are particularly susceptible to significant change. Policies
that contain critical accounting estimates include the determination
of the allowance for loan and lease losses, mortgage servicing rights,
income taxes, lease financings and pension liability and expenses.
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 inher-
ent 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 charac-
teristics 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 restructured commercial real estate and commercial
business loans and equipment finance loans. Consumer loans, resi-
dential real estate loans and leases 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. Consumer loans, residential loans, smaller-balance
commercial loans and leases and equipment finance loans are segre-
gated 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 uncollectible. The amount of the allowance for loan and lease
losses is highly dependent upon management’s estimates of vari-
ables 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 borrowers,
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.
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.
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 calculating the
present value of estimated future net servicing cash flows, taking 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.
Adjustments to the mortgage servicing rights valuation allowance
for other than permanent impairment are recorded in mortgage
banking revenues. Permanent impairment is recognized as a reduc-
tion in the capitalized mortgage servicing rights and a charge to the
related valuation allowance.