Fair Value Measurements

9 Months Ended

Sep. 30, 2020

The Corporation 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 available-for-sale, 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 the Corporation 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 securitization receivables. These non-recurring fair value adjustments typically involve application of lower of cost or fair value accounting or write-downs of individual assets.

The Corporation 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 model-based techniques that use at least one significant unobservable input. 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 Available-for-Sale: The fair value of investment securities available-for-sale, categorized primarily 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: The Corporation 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, they are 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 the Corporation on certain assets. The Corporation 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 the Corporation 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. Unobservable inputs used to value the interest-only strips include a discount rate of 14% (weighted average) and prepayment rates of 4% (weighted average).

Derivative Instruments:

Interest Rate Contracts: The Corporation executes interest rate contracts as described in "Note 15. Derivative Instruments." 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.

Risk Participation Agreements: The fair value of risk participation agreements, 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 nonperformance risk.

Forward Foreign Exchange Contracts: The Corporation'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: The Corporation'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, the Corporation categorized these instruments 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 derivative instruments.

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

Forward Loan Sales Commitments: The Corporation enters into forward loan sales commitments to sell certain mortgage loans which are recorded at fair value based on valuation models. The Corporation’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 the commitments are 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 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, 2020
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Investment securities available-for-sale	$	—	$	7,445,696	$	467	$	7,446,163
Loans held-for-sale	—		460,172		—		460,172
Interest-only strips	—		—		9,555		9,555
Derivative assets:⁽¹⁾
Interest rate contracts	—		279,710		—		279,710
Risk participation agreements	—		163		—		163
Forward foreign exchange contracts	—		2,774		—		2,774
Interest rate lock commitments	—		18,596		—		18,596
Forward loan sales commitments	—		117		—		117
Power Equity CDs	—		442		—		442
Total derivative assets	—		301,802		—		301,802
Assets held in trust for deferred compensation plans	46,210		—		—		46,210
Total assets at fair value	$	46,210	$	8,207,670	$	10,022	$	8,263,902
Liabilities
Derivative liabilities:⁽¹⁾
Interest rate contracts	$	—	$	14,085	$	—	$	14,085
Risk participation agreements	—		171		—		171
Forward foreign exchange contracts	—		210		—		210
Interest rate lock commitments	—		4		—		4
Forward loan sales commitments	—		786		—		786
Power Equity CDs	—		443		—		443
Swap agreement	—		—		141		141
Total derivative liabilities	—		15,699		141		15,840
Liabilities held in trust for deferred compensation plans	46,210		—		—		46,210
Total liabilities at fair value	$	46,210	$	15,699	$	141	$	62,050


(1)	As permitted under GAAP, the Corporation 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, 2019
(In thousands)	Level 1		Level 2		Level 3		Total
Assets
Investment securities available-for-sale	$	—	$	6,719,568	$	433	$	6,720,001
Loans held-for-sale	—		91,202		—		91,202
Interest-only strips	—		—		12,813		12,813
Derivative assets:⁽¹⁾
Interest rate contracts	—		102,893		—		102,893
Risk participation agreements	—		202		—		202
Interest rate lock commitments	—		2,772		—		2,772
Forward loan sales commitments	—		41		—		41
Power Equity CDs	—		734		—		734
Total derivative assets	—		106,642		—		106,642
Forward loan sales commitments, non-derivative	—		46		—		46
Assets held in trust for deferred compensation plans	43,743		—		—		43,743
Total assets at fair value	$	43,743	$	6,917,458	$	13,246	$	6,974,447
Liabilities
Derivative liabilities:⁽¹⁾
Interest rate contracts	$	—	$	6,040	$	—	$	6,040
Risk participation agreements	—		354		—		354
Forward foreign exchange contracts	—		6,519		—		6,519
Interest rate lock commitments	—		20		—		20
Forward loan sales commitments	—		289		—		289
Power Equity CDs	—		734		—		734
Swap agreement	—		—		356		356
Total derivative liabilities	—		13,956		356		14,312
Liabilities held in trust for deferred compensation plans	43,743		—		—		43,743
Total liabilities at fair value	$	43,743	$	13,956	$	356	$	58,055


(1)	As permitted under GAAP, the Corporation 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 the 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 available-for-sale			Loans held-for-sale			Interest-only strips			Interest rate lock commitments			Swap agreement			Forward loan sales commitments
At or For the Three Months Ended September 30, 2020
Asset (liability) balance, beginning of period	$	441		$	—		$	11,811		$	—		$	(213	)	$	—
Total net gains (losses) included in:
Net income	1			—			277			—			—			—
Other comprehensive income (loss)	25			—			(1,211		)	—			—			—
Principal paydowns / settlements	—			—			(1,322		)	—			72			—
Asset (liability) balance, end of period	$	467		$	—		$	9,555		$	—		$	(141	)	$	—
Unrealized gains (losses) included in other comprehensive income for assets held at the end of the period	$	25		$	—		$	(1,211	)	$	—		$	—		$	—
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
Total net gains (losses) included in:
Net income	—			—			610			—			—			—
Other comprehensive income (loss)	(25		)	—			(65		)	—			—			—
Acquired	450			—			—			—			—			—
Originations	—			—			628			—			—			—
Principal paydowns / settlements	—			—			(2,332		)	—			79			—
Asset (liability) balance, end of period	$	428		$	—		$	14,077		$	—		$	(356	)	$	—
Unrealized gains (losses) included in other comprehensive income for assets held at the end of the period	$	(25	)	$	—		$	(65	)	$	—		$	—		$	—
At or For the Nine Months Ended September 30, 2020
Asset (liability) balance, beginning of period	$	433		$	—		$	12,813		$	—		$	(356	)	$	—
Total net gains (losses) included in:
Net income	3			—			763			—			(1		)	—
Other comprehensive income (loss)	31			—			430			—			—			—
Principal paydowns / settlements	—			—			(4,451		)	—			216			—
Asset (liability) balance, end of period	$	467		$	—		$	9,555		$	—		$	(141	)	$	—
Unrealized gains (losses) included in other comprehensive income for assets held at the end of the period	$	31		$	—		$	430		$	—		$	—		$	—
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:
Net income	—			534			1,975			778			—			(119		)
Other comprehensive income (loss)	(25		)	—			246			—			—			—
Acquired	450
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		$	—		$	14,077		$	—		$	(356	)	$	—
Unrealized gains (losses) included in other comprehensive income for assets held at the end of the period	$	(25	)	$	—		$	246		$	—		$	—		$	—


(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: 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% to 15%.

Loan servicing rights: The fair value of loan servicing rights, categorized as Level 3, is based on a third party valuation model utilizing a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management. The valuation relies on discount rates ranging from 10% to 15% and prepayment speeds ranging from 9% to 25%. Loan servicing rights are recorded at the lower of cost or fair value.

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 10%. 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, are based on available pricing guides, auction results or price opinions, less estimated selling costs. 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, 2020 and December 31, 2019.



(In thousands)	Level 1		Level 2		Level 3		Total
At September 30, 2020
Loans and leases	$	—	$	—	$	261,885	$	261,885
Loan servicing rights	—		—		38,253		38,253
Other real estate owned	—		—		15,730		15,730
Repossessed and returned assets	—		10,077		—		10,077
Total non-recurring fair value measurements	$	—	$	10,077	$	315,868	$	325,945
At December 31, 2019
Loans and leases	$	—	$	—	$	141,199	$	141,199
Loan servicing rights	—		—		56,298		56,298
Other real estate owned	—		—		17,577		17,577
Repossessed and returned assets	—		6,968		—		6,968
Total non-recurring fair value measurements	$	—	$	6,968	$	215,074	$	222,042

Fair Value Option

The Corporation has elected the fair value option for residential mortgage 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, 2020		December 31, 2019
Fair value carrying amount	$	460,172	$	91,202
Aggregate unpaid principal amount	436,216		88,192
Fair value carrying amount less aggregate unpaid principal	$	23,956	$	3,010

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, 2020 and December 31, 2019. 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 $31.4 million and $79.0 million for the three and nine months ended September 30, 2020 and $12.4 million and $18.3 million for the same periods in 2019, and are included in net 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 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, 2020 and December 31, 2019 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 the financial instruments, excluding short-term financial assets and liabilities as their carrying amounts approximate fair value and financial instruments recorded at fair value on a recurring basis, are included below. This information represents only a portion of the Consolidated Statements of Financial Condition not recorded in their entirety on a recurring basis and not the estimated value of the Corporation as a whole. Non-financial instruments such as the intangible value of the Corporation's banking centers and core deposits, leasing operations, goodwill, premises and equipment and the future revenues from the Corporation's customers are not reflected in this disclosure. Therefore, this information is of limited use in assessing the value of the Corporation.



	At September 30, 2020
	Carrying		Estimated Fair Value
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial instrument assets
FHLB and FRB stocks	$	300,444	$	—	$	300,444	$	—	$	300,444
Investment securities held-to-maturity	170,309		—		176,649		3,715		180,364
Loans and leases held-for-sale	255		—		—		262		262
Net loans⁽¹⁾	31,140,162		—		—		31,323,032		31,323,032
Securitization receivable⁽²⁾	—		—		—		19,802		19,802
Deferred fees on commitments to extend credit⁽²⁾	21,222		—		21,222		—		21,222
Total financial instrument assets	$	31,632,392	$	—	$	498,315	$	31,346,811	$	31,845,126
Financial instrument liabilities
Certificates of deposits	$	6,334,760	$	—	$	6,355,057	$	—	$	6,355,057
Long-term borrowings	871,845		—		901,221		—		901,221
Total financial instrument liabilities	$	7,206,605	$	—	$	7,256,278	$	—	$	7,256,278


(1)	Expected credit losses are included in the carrying amount and estimated fair value.


(2)	Carrying amounts are included in other assets.


(3)	Carrying amounts are included in other liabilities.



	At December 31, 2019
	Carrying		Estimated Fair Value
(In thousands)	Amount		Level 1		Level 2		Level 3		Total
Financial instrument assets
FHLB and FRB stocks	$	442,440	$	—	$	442,440	$	—	$	442,440
Investment securities held-to-maturity	139,445		—		141,168		3,676		144,844
Loans held-for-sale	108,584		—		110,252		2,273		112,525
Net loans⁽¹⁾	31,699,285		—		—		31,804,513		31,804,513
Securitization receivable⁽²⁾	19,689		—		—		19,466		19,466
Deferred fees on commitments to extend credit⁽²⁾	19,300		—		19,300		—		19,300
Total financial instrument assets	$	32,428,743	$	—	$	713,160	$	31,829,928	$	32,543,088
Financial instrument liabilities
Certificates of deposits	$	7,455,556	$	—	$	7,460,577	$	—	$	7,460,577
Long-term borrowings	2,354,448		—		2,368,469		—		2,368,469
Deferred fees on standby letters of credit⁽³⁾	56		—		56		—		56
Total financial instrument liabilities	$	9,810,060	$	—	$	9,829,102	$	—	$	9,829,102


(1)	Expected credit losses are included in the carrying amount and estimated fair value.


(2)	Carrying amounts are included in other assets.

(3)

Carrying amounts are included in other liabilities.

- 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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