Fair Values Measurements

9 Months Ended

Sep. 30, 2019

TCF uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair values are based on the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Investment securities carried at fair value, certain loans held for sale, interest-only strips, derivative instruments, forward loan sales commitments and assets and liabilities held in trust for deferred compensation plans are recorded at fair value on a recurring basis. From time to time we may be required to record at fair value other assets on a non-recurring basis, such as certain investment securities held to maturity, loans and leases, goodwill, loan servicing rights, other intangible assets, other real estate owned, repossessed and returned assets or the securitization receivable. These non-recurring fair value adjustments typically involve application of lower of cost or fair value accounting or write-downs of individual assets.

TCF groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the degree and reliability of estimates and assumptions used to determine fair value. The levels are as follows:


Level 1	Valuations that are based on prices obtained from independent pricing sources for the same instruments traded in active markets.


Level 2	Valuations that are based on prices obtained from independent pricing sources that are based on observable transactions of similar instruments, but not quoted markets.


Level 3	Valuations generated from Corporation model-based techniques that use at least one significant unobservable inputs. Such unobservable inputs reflect estimates of assumptions that market participants would use in pricing the asset or liability.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Investment Securities Carried at Fair Value: The fair value of investment securities carried at fair value, categorized as Level 2, is recorded using prices obtained from independent asset pricing services that are based on observable transactions, but not quoted markets. Management reviews the prices obtained from independent asset pricing services for unusual fluctuations and comparisons to current market trading activity.

Loans Held-for-Sale: TCF has elected the fair value option for residential mortgage loans held-for-sale. Accordingly, the fair values of residential mortgage loans held-for-sale are based on valuation models that use the market price for similar loans sold in the secondary market. As these prices are derived from market observable inputs, TCF categorized as Level 2.

Interest-only Strips: The fair value of interest-only strips, categorized as Level 3, represents the present value of future cash flows expected to be received by TCF on certain assets. TCF uses available market data, along with its own empirical data and discounted cash flow models, to arrive at the fair value of its interest-only strips. The present value of the estimated expected future cash flows to be received is determined by using discount, loss and prepayment rates that TCF believes are commensurate with the risks associated with the cash flows and what a market participant would use. These assumptions are inherently subject to volatility and uncertainty and, as a result, the fair value of the interest-only strips may fluctuate significantly from period to period.

Derivative Instruments:

Interest Rate Contracts: TCF executes interest rate contracts as described in Note 18. The fair value of these interest rate contracts, categorized as Level 2, is determined using a cash flow model which may consider the forward curve, the discount curve, option volatilities and credit valuation adjustments related to counterparty and/or borrower non-performance risk.

Forward Foreign Exchange Contracts: TCF's forward foreign exchange contracts are recorded at fair value using a cash flow model that includes key inputs such as foreign exchange rates and an assessment of the risk of counterparty non-performance. The risk of counterparty non-performance is based on external assessments of credit risk. The fair value of these contracts, categorized as Level 2, is based on observable transactions, but not quoted markets.

Interest Rate Lock Commitments: TCF's interest rate lock commitments are derivative instruments that are recorded at fair value based on valuation models that use the market price for similar loans sold in the secondary market. The interest rate lock commitments are adjusted for expectations of exercise and funding. As the prices are derived from market observable inputs, TCF categorized as Level 2.

Power Equity CDs: Power Equity CDs are categorized as Level 2, and determined using quoted prices of underlying stocks, along with other terms and features of the derivate instruments.

Swap Agreement: TCF's swap agreement, categorized as Level 3, is related to the sale of TCF's Visa Class B stock. The fair value of the swap agreement is based on TCF's estimated exposure related to the Visa covered litigation through a probability analysis of the funding and estimated settlement amounts.

Forward Loan Sales Commitments: TCF enters into forward loan sales commitments to sell certain mortgage loans which are recorded at fair value based on valuation models. TCF’s expectation of the amount of its interest rate lock commitments that will ultimately close is a factor in determining the position. The valuation models utilize the fair value of related mortgage loans determined using observable market data and therefore categorized as Level 2.

Assets and Liabilities Held in Trust for Deferred Compensation Plans: Assets held in trust for deferred compensation plans include investments in publicly traded securities, excluding TCF Financial common stock reported in treasury stock and other equity, and U.S. Treasury notes. The fair value of these assets, categorized as Level 1, is based on prices obtained from independent asset pricing services based on active markets. The fair value of the liabilities equals the fair value of the assets.

The balances of assets and liabilities measured at fair value on a recurring basis were as follows:



	September 30, 2019
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Investment securities carried at fair value	$	—	$	5,579,407	$	428	$	5,579,835
Loans held-for-sale	—		114,831		—		114,831
Interest-only strips	—		—		14,078		14,078
Derivative assets:⁽¹⁾
Interest rate contracts	—		130,391		—		130,391
Forward foreign exchange contracts	—		1,666		—		1,666
Interest rate lock commitments	—		4,554		—		4,554
Forward loan sales commitments	—		166		—		166
Power Equity CDs	—		617		—		617
Total derivative assets	—		137,394		—		137,394
Forward loan sales commitments	—		404		—		404
Assets held in trust for deferred compensation plans	40,784		—		—		40,784
Total assets at fair value	$	40,784	$	5,832,036	$	14,506	$	5,887,326
Liabilities
Derivative liabilities:⁽¹⁾
Interest rate contracts	$	—	$	101,910	$	—	$	101,910
Forward foreign exchange contracts	—		315		—		315
Interest rate lock commitments	—		113		—		113
Forward loan sales commitments	—		253		—		253
Power Equity CDs	—		617		—		617
Swap agreement	—		—		356		356
Total derivative liabilities	—		103,208		356		103,564
Forward loan sales commitments	—		284		—		284
Liabilities held in trust for deferred compensation plans	40,784		—		—		40,784
Total liabilities at fair value	$	40,784	$	103,492	$	356	$	144,632


(1)	As permitted under GAAP, TCF has elected to net derivative assets and derivative liabilities when a legally enforceable master netting agreement exists as well as the related cash collateral received and paid. For purposes of this table, the derivative assets and derivative liabilities are presented gross of this netting adjustment.



	December 31, 2018
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Investment securities carried at fair value	$	—	$	2,470,061	$	4	$	2,470,065
Loans held-for-sale	—		—		18,070		18,070
Interest-only strips	—		—		16,835		16,835
Derivative assets:⁽¹⁾
Interest rate contracts	—		7,909		—		7,909
Forward foreign exchange contracts	—		6,689		—		6,689
Interest rate lock commitments	—		—		652		652
Total derivative assets	—		14,598		652		15,250
Forward loan sales commitments	—		—		152		152
Assets held in trust for deferred compensation plans	33,217		—		—		33,217
Total assets at fair value	$	33,217	$	2,484,659	$	35,713	$	2,553,589
Liabilities
Derivative liabilities:⁽¹⁾
Interest rate contracts	$	—	$	3,732	$	—	$	3,732
Forward foreign exchange contracts	—		13		—		13
Interest rate lock commitments	—		—		28		28
Swap agreement	—		—		583		583
Total derivative liabilities	—		3,745		611		4,356
Forward loan sales commitments	—		—		178		178
Liabilities held in trust for deferred compensation plans	33,217		—		—		33,217
Total liabilities at fair value	$	33,217	$	3,745	$	789	$	37,751


(1)	As permitted under GAAP, TCF has elected to net derivative assets and derivative liabilities when a legally enforceable master netting agreement exists as well as the related cash collateral received and paid. For purposes of this table, the derivative assets and derivative liabilities are presented gross of this netting adjustment.

Management assesses the appropriate classification of financial assets and liabilities within the fair value hierarchy by monitoring the level of available observable market information. Changes in markets or economic conditions, as well as changes to our valuation models, may require the transfer of financial instruments from one fair value level to another. Such transfers, if any, are recorded at the fair values as of the beginning of the quarter in which the transfers occurred.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:



(In thousands)	Investment securities carried at fair value			Loans held-for-sale			Interest-only strips			Interest rate lock commitments			Other derivative contracts			Forward loan sales commitments
At or For the Three Months Ended September 30, 2019
Asset (liability) balance, beginning of period	$	3		$	29,211		$	15,236		$	1,402		$	(435	)	$	(145	)
Transfers out of Level 3⁽¹⁾	—			(29,211		)	—			(1,402		)	—			145
Acquired through the Merger	450			—			—			—			—			—
Total net gains (losses) included in:
Net income	—			—			611			—			—			—
Other comprehensive income (loss)	(25		)	—			(65		)	—			—			—
Acquired	—			—			—			—			—			—
Originations	—			—			628			—			—			—
Principal paydowns / settlements	—			—			(2,332		)	—			79			—
Asset (liability) balance, end of period	$	428		$	—		$	14,078		$	—		$	(356	)	$	—
At or For the Three Months Ended September 30, 2018
Asset (liability) balance, beginning of period	$	4		$	18,554		$	19,887		$	858		$	(441	)	$	110
Total net gains (losses) included in:
Net income	—			(184		)	732			(242		)	(292		)	359
Other comprehensive income (loss)	—			—			246			—			—			—
Sales	—			(97,866		)	—			—			—			—
Originations	—			98,018			—			—			—			—
Principal paydowns / settlements	—			(3		)	(3,153		)	—			75			—
Asset (liability) balance, end of period	$	4		$	18,519		$	17,712		$	616		$	(658	)	$	469
At or For the Nine Months Ended September 30, 2019
Asset (liability) balance, beginning of period	$	4		$	18,070		$	16,835		$	624		$	(583	)	$	(26	)
Total net gains (losses) included in:
Acquired through the Merger	450			—			—			—			—			—
Net income	—			534			1,976			778			—			(119		)
Other comprehensive income (loss)	(25		)	—			246			—			—			—
Sales	—			(164,693		)	—			—			—			—
Originations	—			175,304			2,180			—			—			—
Principal paydowns / settlements	(1		)	(4		)	(7,159		)	—			227			—
Transfers out of Level 3⁽¹⁾	—			(29,211		)	—			(1,402		)	—			145
Asset (liability) balance, end of period	$	428		$	—		$	14,078		$	—		$	(356	)	$	—
At or For the Nine Months Ended September 30, 2018
Asset (liability) balance, beginning of period	$	6		$	3,356		$	21,386		$	223		$	(615	)	$	63
Total net gains (losses) included in:
Net income	—			254			1,913			393			(274		)	406
Other comprehensive income (loss)	—			—			1,015			—			—			—
Sales	—			(232,747		)	—			—			—			—
Originations	—			247,667			3,849			—			—			—
Principal paydowns / settlements	(2		)	(11		)	(10,451		)	—			231			—
Asset (liability) balance, end of period	$	4		$	18,519		$	17,712		$	616		$	(658	)	$	469


(1)	Certain assets (liabilities) previously classified as Level 3 were transferred to Level 2 because current period prices are derived from Level 2 observable market data.

Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis

The following is a discussion of the valuation methodologies used to record assets and liabilities at fair value on a non-recurring basis.

Loans and Leases Held-for-sale: Auto loans held-for-sale, which were previously classified as held-for-investment were transferred to held-for-sale and recorded at the lower of the loan carrying amount or fair value. The fair value is determined based on internal estimates and/or assessments.

Loans and Leases: Loans and leases for which repayment is expected to be provided solely by the value of the underlying collateral, categorized as Level 3 and recorded at fair value on a non-recurring basis, are valued based on the fair value of that collateral less estimated selling costs. The fair value of the collateral is determined based on internal estimates and/or assessments provided by third-party appraisers and the valuation relies on discount rates ranging from 10.00% to 54.00%. Effective January 1, 2019, in conjunction with the adoption of ASU No. 2016-02, Leases (Topic 842) and the related ASUs, such loans and leases include nonaccrual impaired loans and leases as well as certain delinquent nonaccrual consumer loans. Previously, TCF did not include nonaccrual impaired leases. The fair value of the collateral is determined based on internal estimates and/or assessments provided by third-party appraisers.

Other Real Estate Owned: The fair value of other real estate owned, categorized as Level 3, is based on independent appraisals, real estate brokers' price opinions or automated valuation methods, less estimated selling costs. Certain properties require assumptions that are not observable in an active market in the determination of fair value and include a discount rate of 8.00%. Assets acquired through foreclosure are initially recorded at the lower of the loan or lease carrying amount or fair value less estimated selling costs at the time of transfer to other real estate owned.

Repossessed and Returned Assets: The fair value of repossessed and returned assets, categorized as Level 2 or Level 3 depending on the underlying asset type, is based on available pricing guides, auction results or price opinions, less estimated selling costs. Unobservable inputs used to value repossessed and returned assets categorized as Level 3 include discount rates ranging from 20.00% to 30.00%. Assets acquired through repossession or returned to TCF are initially recorded at the lower of the loan or lease carrying amount or fair value less estimated selling costs at the time of transfer to repossessed and returned assets.

The balances of assets measured at fair value on a non-recurring basis were as follows. There were no liabilities measured at fair value on a non-recurring basis at September 30, 2019 and December 31, 2018.



(In thousands)	Level 1		Level 2		Level 3		Total
At September 30, 2019
Loans held-for-sale	$	—	$	136	$	1,220,621	$	1,220,757
Loans and leases	—		—		130,991		130,991
Other real estate owned	—		—		17,924		17,924
Repossessed and returned assets	—		6,841		5,762		12,603
Total non-recurring fair value measurements	$	—	$	6,977	$	1,375,298	$	1,382,275
At December 31, 2018
Loans	$	—	$	—	$	57,663	$	57,663
Other real estate owned	—		—		9,397		9,397
Repossessed and returned assets	—		4,358		5,165		9,523
Total non-recurring fair value measurements	$	—	$	4,358	$	72,225	$	76,583

Fair Value Option

TCF has elected the fair value option for residential loans held-for-sale. This election facilitates the offsetting of changes in fair value of the loans held-for-sale and the derivative financial instruments used to economically hedge them. The difference between the aggregate fair value and aggregate unpaid principal balance of these loans held-for-sale was as follows:



(In thousands)	September 30, 2019		December 31, 2018
Fair value carrying amount	$	114,831	$	18,070
Aggregate unpaid principal amount	111,540		17,517
Fair value carrying amount less aggregate unpaid principal	$	3,291	$	553

Differences between the fair value carrying amount and the aggregate unpaid principal balance include changes in fair value recorded at and subsequent to funding and gains and losses on the related loan commitment prior to funding. No loans recorded under the fair value option were delinquent or on nonaccrual status at September 30, 2019 and December 31, 2018. The net gain from initial measurement of the loans held-for-sale, any subsequent changes in fair value while the loans are outstanding and any actual adjustment to the gains realized upon sales of the loans totaled $12.4 million and $18.3 million for the three and nine months ended September 30, 2019, respectively, and $2.7 million and $6.9 million for the same periods in 2018, and are included in net (losses) gains on sales of loans and leases. These amounts exclude the impacts from the interest rate lock commitments and forward loan sales commitments which are also included in net (losses) gains on sales of loans and leases.

Disclosures about Fair Value of Financial Instruments

Management discloses the estimated fair value of financial instruments, including assets and liabilities on and off the Consolidated Statements of Financial Condition, for which it is practicable to estimate fair value. These fair value estimates were made at September 30, 2019 and December 31, 2018 based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price at which an asset could be sold or a liability could be settled. However, given there is no active market or observable market transactions for many of TCF's financial instruments, the estimates of fair value are subjective in nature, involve uncertainties and include matters of significant judgment. Changes in assumptions could significantly affect the estimated values.

The carrying amounts and estimated fair values of TCF's financial instruments, excluding short-term financial assets and liabilities as their carrying amounts approximate fair value and excluding financial instruments recorded at fair value on a recurring basis, were as follows. This information represents only a portion of TCF's Consolidated Statements of Financial Condition not recorded in their entirety on a recurring basis and not the estimated value of TCF as a whole. Non-financial instruments such as the intangible value of TCF's branches and core deposits, leasing operations, goodwill, premises and equipment and the future revenues from TCF's customers are not reflected in this disclosure. Therefore, this information is of limited use in assessing the value of TCF.



	At September 30, 2019
	Carrying		Estimated Fair Value
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial instrument assets
FHLB and FRB stocks	$	290,238	$	—	$	290,238	$	—	$	290,238
Investment securities held-to-maturity	144,000		—		146,252		3,676		149,928
Loans and leases held-for-sale	100,216		—		84,959		18,331		103,290
Net loans⁽¹⁾	30,916,379		—		—		30,897,046		30,897,046
Loan servicing rights	55,301		—		—		55,301		55,301
Securitization receivable⁽²⁾	19,624		—		—		19,355		19,355
Deferred fees on commitments to extend credit	18,485		—		18,485		—		18,485
Total financial instrument assets	$	31,544,243	$	—	$	539,934	$	30,993,709	$	31,533,643
Financial instrument liabilities
Certificates of deposits	$	8,385,972	$	—	$	8,385,496	$	—	$	8,385,496
Long-term borrowings	860,482		—		875,864		—		875,864
Deferred fees on standby letters of credit	38		—		38		—		38
Total financial instrument liabilities	$	9,246,492	$	—	$	9,261,398	$	—	$	9,261,398



	At December 31, 2018
	Carrying		Estimated Fair Value
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial instrument assets
FHLB and FRB stocks	$	91,654	$	—	$	91,654	$	—	$	91,654
Investment securities held-to-maturity	148,852		—		146,467		2,800		149,267
Loans held-for-sale	72,594		—		—		74,078		74,078
Net loans⁽¹⁾	16,384,702		—		—		16,399,551		16,399,551
Securitization receivable⁽²⁾	19,432		—		—		19,025		19,025
Deferred fees on commitments to extend credit	18,555		—		18,555		—		18,555
Total financial instrument assets	$	16,735,789	$	—	$	256,676	$	16,495,454	$	16,752,130
Financial instrument liabilities
Certificates of deposits	$	4,790,680	$	—	$	4,820,442	$	—	$	4,820,442
Long-term borrowings	1,449,472		—		1,451,550		—		1,451,550
Deferred fees on standby letters of credit	77		—		77		—		77
Total financial instrument liabilities	$	6,240,229	$	—	$	6,272,069	$	—	$	6,272,069


(1)	Expected credit losses are included in the estimated fair values.

(2)

Carrying amounts are included in other assets.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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