Fair Value Disclosures

TCF uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company's 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. Debt securities available for sale, certain loans held for sale, interest-only strips, interest rate contracts, forward foreign exchange contracts, interest rate lock commitments, other contracts, 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 debt securities held to maturity, loans, goodwill, 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, which includes valuations that are based on prices obtained from independent pricing sources for the same instruments traded in active markets; Level 2, which includes valuations that are based on prices obtained from independent pricing sources that are based on observable transactions of similar instruments, but not quoted markets and Level 3, which includes valuations generated from Company model-based techniques that use significant unobservable inputs. Such unobservable inputs reflect estimates of assumptions that market participants would use in pricing the asset or liability.

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

Debt Securities Available for Sale Debt securities available for sale consist primarily of securities of U.S. Government sponsored enterprises and federal agencies, and obligations of states and political subdivisions. The fair value of these securities, 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 Loans held for sale for which the fair value option has been elected are categorized as Level 3. The fair value of these loans is recorded utilizing internal valuation models which use quoted investor prices to estimate the fair value.

Loans Loans 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. Such loans include non-accrual impaired loans as well as certain delinquent non-accrual consumer real estate and auto finance loans. The fair value of the collateral is determined based on internal estimates and assessments provided by third-party appraisers.

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 with commercial banking customers to facilitate their respective risk management strategies. Certain of these interest rate contracts are simultaneously hedged by offsetting interest rate contracts TCF executes with a third party, minimizing TCF's net interest rate risk exposure resulting from such transactions. TCF also has an interest rate swap agreement to convert its $150.0 million of fixed-rate subordinated notes to floating rate debt. These derivative instruments are recorded at fair value. 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 and credit valuation adjustments related to counterparty and/or borrower non-performance risk.

Forward Foreign Exchange Contracts TCF's forward foreign exchange contracts are currency contracts executed in over-the-counter markets and 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 using an internal valuation model that utilizes estimated rates of successful loan closings and quoted investor prices. While this model uses both Level 2 and Level 3 inputs, TCF has determined that the significant inputs used in the valuation of these commitments fall within Level 3 and therefore the interest rate lock commitments are categorized as Level 3.

Other Contracts 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 consumer real estate loans. The resulting loans held for sale are recorded at fair value under the elected fair value option. TCF relies on internal valuation models to estimate the fair value of these instruments. The valuation models utilize estimated rates of successful loan closings and quoted investor prices. While these models use both Level 2 and Level 3 inputs, TCF has determined that the significant inputs used in the valuation of these commitments fall within Level 3 and therefore the forward loan sales commitments are categorized as Level 3.

Other Real Estate Owned and Repossessed and Returned Assets 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. The fair value of repossessed and returned assets is based on available pricing guides, auction results or price opinions, less estimated selling costs. Assets acquired through foreclosure, 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 other real estate owned or repossessed and returned assets.

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 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 and non-recurring basis were as follows:



	At December 31, 2018
(In thousands)	Level 1		Level 2		Level 3		Total
Recurring fair value measurements through net income:
Assets:
Loans held for sale	$	—	$	—	$	18,070	$	18,070
Interest rate contracts⁽¹⁾	—		7,909		—		7,909
Forward foreign exchange contracts⁽¹⁾	—		3,709		—		3,709
Interest rate lock commitments⁽¹⁾	—		—		652		652
Forward loan sales commitments	—		—		152		152
Assets held in trust for deferred compensation plans	33,217		—		—		33,217
Total assets	$	33,217	$	11,618	$	18,874	$	63,709
Liabilities:
Interest rate contracts⁽¹⁾	$	—	$	3,732	$	—	$	3,732
Forward foreign exchange contracts⁽¹⁾	—		13		—		13
Interest rate lock commitments⁽¹⁾	—		—		28		28
Other contracts⁽¹⁾	—		—		583		583
Forward loan sales commitments	—		—		178		178
Liabilities held in trust for deferred compensation plans	33,217		—		—		33,217
Total liabilities	$	33,217	$	3,745	$	789	$	37,751
Recurring fair value measurements through other comprehensive income:
Assets:
Debt securities available for sale:
Mortgage-backed securities:
U.S. Government sponsored enterprises and federal agencies	$	—	$	1,913,190	$	—	$	1,913,190
Other	—		—		4		4
Obligations of states and political subdivisions	—		556,871		—		556,871
Interest-only strips	—		—		16,835		16,835
Forward foreign exchange contracts⁽¹⁾	—		2,980		—		2,980
Total assets	$	—	$	2,473,041	$	16,839	$	2,489,880
Non-recurring fair value measurements:
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


(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.



	At December 31, 2017
(In thousands)	Level 1		Level 2		Level 3		Total
Recurring fair value measurements through net income:
Assets:
Loans held for sale	$	—	$	—	$	3,356	$	3,356
Interest rate contracts⁽¹⁾	—		1,797		—		1,797
Interest rate lock commitments⁽¹⁾	—		—		223		223
Forward loan sales commitments	—		—		68		68
Assets held in trust for deferred compensation plans	29,962		—		—		29,962
Total assets	$	29,962	$	1,797	$	3,647	$	35,406
Liabilities:
Interest rate contracts⁽¹⁾	$	—	$	1,688	$	—	$	1,688
Forward foreign exchange contracts⁽¹⁾	—		4,619		—		4,619
Other contracts⁽¹⁾	—		—		615		615
Forward loan sales commitments	—		—		5		5
Liabilities held in trust for deferred compensation plans	29,962		—		—		29,962
Total liabilities	$	29,962	$	6,307	$	620	$	36,889
Recurring fair value measurements through other comprehensive income:
Assets:
Debt securities available for sale:
Mortgage-backed securities:
U.S. Government sponsored enterprises and federal agencies	$	—	$	894,685	$	—	$	894,685
Other	—		—		6		6
Obligations of states and political subdivisions	—		814,327		—		814,327
Interest-only strips	—		—		21,386		21,386
Total assets	$	—	$	1,709,012	$	21,392	$	1,730,404
Liabilities:
Forward foreign exchange contracts⁽¹⁾	$	—	$	1,744	$	—	$	1,744
Total liabilities	$	—	$	1,744	$	—	$	1,744
Non-recurring fair value measurements:
Loans	$	—	$	—	$	72,287	$	72,287
Other real estate owned	—		—		14,036		14,036
Repossessed and returned assets	—		3,669		4,388		8,057
Total non-recurring fair value measurements	$	—	$	3,669	$	90,711	$	94,380


(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 Company 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. TCF had no transfers in 2018, 2017 and 2016.

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



(In thousands)	Debt Securities Available for Sale			Loans Held for Sale			Interest-only Strips			Interest Rate Lock Commitments			Other Contracts			Forward Loan Sales Commitments
Asset (liability) balance, December 31, 2015	$	34		$	10,568		$	44,332		$	716		$	(305	)	$	265
Total net gains (losses) included in:
Net income	—			(48		)	2,980			(419		)	(629		)	96
Other comprehensive income (loss)	—			—			159			—			—			—
Sales	—			(343,949		)	—			—			—			—
Originations	—			339,930			22,620			—			—			—
Principal paydowns / settlements	(16		)	(3		)	(29,939		)	—			315			—
Asset (liability) balance, December 31, 2016	18			6,498			40,152			297			(619		)	361
Total net gains (losses) included in:
Net income	—			129			3,939			(74		)	(310		)	(298		)
Other comprehensive income (loss)	—			—			(452		)	—			—			—
Sales	—			(215,381		)	—			—			—			—
Originations	—			212,509			3,377			—			—			—
Principal paydowns / settlements	(12		)	(399		)	(25,630		)	—			314			—
Asset (liability) balance, December 31, 2017	6			3,356			21,386			223			(615		)	63
Total net gains (losses) included in:
Net income	—			454			2,616			401			(274		)	(89		)
Other comprehensive income (loss)	—			—			1,195			—			—			—
Sales	—			(332,288		)	—			—			—			—
Originations	—			346,560			4,797			—			—			—
Principal paydowns / settlements	(2		)	(12		)	(13,159		)	—			306			—
Asset (liability) balance, December 31, 2018	$	4		$	18,070		$	16,835		$	624		$	(583	)	$	(26	)

Fair Value Option

TCF Bank originates first mortgage lien loans in its primary banking markets and sells the loans through correspondent relationships. TCF elected the fair value option for these loans. 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:



	At December 31,
(In thousands)	2018		2017
Fair value carrying amount	$	18,070	$	3,356
Aggregate unpaid principal amount	17,517		3,268
Fair value carrying amount less aggregate unpaid principal	$	553	$	88

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 non-accrual status at December 31, 2018 and 2017. The net gain from initial measurement of the correspondent lending 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 $10.0 million, $4.9 million and $7.6 million for 2018, 2017 and 2016, respectively, and are included in net gains on sales of loans. 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.

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 December 31, 2018 and 2017 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 the Company's financial instruments, the estimates of fair values 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 Company'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 balance sheet and not the estimated value of the Company 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 December 31, 2018
	Carrying			Estimated Fair Value
(In thousands)	Amount			Level 1		Level 2			Level 3		Total
Financial instrument assets:
Investments	$	91,654		$	—	$	91,654		$	—	$	91,654
Debt securities held to maturity	148,852			—		146,467			2,800		149,267
Loans held for sale	72,594			—		—			74,078		74,078
Loans:
Consumer real estate	5,410,340			—		—			5,461,209		5,461,209
Commercial real estate	2,908,147			—		—			2,872,829		2,872,829
Commercial business	943,156			—		—			890,828		890,828
Equipment finance	2,169,577			—		—			2,131,147		2,131,147
Inventory finance	3,107,356			—		—			3,091,593		3,091,593
Auto finance	1,982,277			—		—			1,935,017		1,935,017
Other	21,295			—		—			16,928		16,928
Allowance for loan losses⁽¹⁾	(157,446		)	—		—			—		—
Securitization receivable⁽²⁾	19,432			—		—			19,025		19,025
Total financial instrument assets	$	16,717,234		$	—	$	238,121		$	16,495,454	$	16,733,575
Financial instrument liabilities:
Deposits	$	18,903,686		$	14,113,006	$	4,820,442		$	—	$	18,933,448
Long-term borrowings	1,449,472			—		1,451,550			—		1,451,550
Total financial instrument liabilities	$	20,353,158		$	14,113,006	$	6,271,992		$	—	$	20,384,998
Financial instruments with off-balance sheet risk:⁽³⁾
Commitments to extend credit	$	18,555		$	—	$	18,555		$	—	$	18,555
Standby letters of credit	(77		)	—		(77		)	—		(77		)
Total financial instruments with off-balance sheet risk	$	18,478		$	—	$	18,478		$	—	$	18,478


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


(2)	Carrying amounts are included in other assets.


(3)	Positive amounts represent assets, negative amounts represent liabilities.



	At December 31, 2017
	Carrying			Estimated Fair Value
(In thousands)	Amount			Level 1		Level 2			Level 3		Total
Financial instrument assets:
Investments	$	82,644		$	—	$	82,644		$	—	$	82,644
Debt securities held to maturity	161,576			—		162,826			2,800		165,626
Loans held for sale	134,752			—		—			139,458		139,458
Loans:
Consumer real estate	4,819,696			—		—			4,916,475		4,916,475
Commercial real estate	2,751,285			—		—			2,710,237		2,710,237
Commercial business	809,908			—		—			776,989		776,989
Equipment finance	2,300,479			—		—			2,260,692		2,260,692
Inventory finance	2,739,754			—		—			2,723,045		2,723,045
Auto finance	3,199,639			—		—			3,197,794		3,197,794
Other	22,517			—		—			21,129		21,129
Allowance for loan losses⁽¹⁾	(171,041		)	—		—			—		—
Securitization receivable⁽²⁾	19,179			—		—			18,595		18,595
Total financial instrument assets	$	16,870,388		$	—	$	245,470		$	16,767,214	$	17,012,684
Financial instrument liabilities:
Deposits	$	18,335,002		$	13,352,731	$	5,023,526		$	—	$	18,376,257
Long-term borrowings	1,249,449			—		1,255,333			—		1,255,333
Total financial instrument liabilities	$	19,584,451		$	13,352,731	$	6,278,859		$	—	$	19,631,590
Financial instruments with off-balance sheet risk:⁽³⁾
Commitments to extend credit	$	19,423		$	—	$	19,423		$	—	$	19,423
Standby letters of credit	(83		)	—		(83		)	—		(83		)
Total financial instruments with off-balance sheet risk	$	19,340		$	—	$	19,340		$	—	$	19,340


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


(2)	Carrying amounts are included in other assets.


(3)	Positive amounts represent assets, negative amounts represent liabilities.