## 19. Derivative Instruments and Hedging Activities 

All derivative instruments as defined, including derivatives embedded in other financial instruments or contracts, are recognized as either assets or liabilities in the Consolidated Statements of Financial Condition at fair value. Changes in the fair value of a derivative are recorded in the Consolidated Statements of Income. A derivative may be designated as a hedge of an exposure to changes in fair value of an asset, liability or firm commitment or as a hedge of cash flows of forecasted transactions. The accounting for derivatives that are used as hedges is dependent on the type of hedge and requires that a hedge be highly effective in offsetting changes in the hedged risk. 

TCF’s pipeline of locked residential mortgage loan commitments are considered derivatives and are recorded at fair value, with the changes in fair value recognized in gains on sales of loans under mort- gage banking revenue in the Consolidated Statements of Income. TCF economically hedges its risk of changes in the fair value of locked residential mortgage loan commitments due to changes in interest rates through the use of forward sales contracts. Forward sales con- tracts require TCF to deliver qualifying residential mortgage loans or pools of loans at a specified future date at a specified price or yield. Such forward sales contracts hedging the pipeline of locked residen- tial mortgage loan commitments are derivatives and are recorded at fair value, with changes in fair value recognized in gains on sales of loans. TCF also utilizes forward sales contracts to hedge its risk of changes in the fair value of its residential loans held for sale. The forward sales contracts hedging the residential loans held for sale are recorded at fair value, with changes in fair value recognized in gains on sales of loans as is the offsetting change in the fair value of hedged loans. Because the fair value of the residential loans held for sale are hedged with forward sales contracts of the same loan types, or substantially the same loan types, the hedges are highly effective at managing the risk of changing fair values of such loans. Any differ- ences between the changes in fair value of the hedged residential loans held for sale and in the fair value of the forward sales contracts (defined as ineffectiveness under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”) are not expected to be material due to the nature of the hedging instruments and are required to be recorded in the Consolidated Statements of Income. 

During 2002 and 2001, the ineffectiveness of the fair value hedges was recorded in gains on sales of loans and was not material. Forward mortgage loan sales commitments totaled $511 million and $490.9 million at December 31, 2002 and 2001, respectively. 

## 20. Financial Instruments with Off-Balance-Sheet Risk 

TCF is a party to financial instruments with off-balance-sheet risk, primarily to meet the financing needs of its customers. These finan- cial instruments, which are issued or held by TCF for purposes other than trading, involve elements of credit and interest-rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. 

TCF’s exposure to credit loss in the event of non-performance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of the commitments. TCF uses the same credit policies in making these commitments as it does for on-balance-sheet instruments. TCF evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation of the customer. 

Commitments to Extend Credit Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At December 31, 2002, the unused portion of these commitments totaled $1.8 billion and consisted of consumer com- mitments of $1.2 billion, commercial commitments of $576.6 mil- lion, leasing and equipment financing commitments of $67 million and other commitments of $38.4 million. At December 31, 2001, the unused portion of these commitments totaled $1.6 billion and consisted of consumer commitments of $955.7 million, commer- cial commitments of $496.4 million, leasing and equipment financing commitments of $71.6 million and other commitments of $30.6 million. Since certain of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral predominantly consists of residential and commercial real estate and personal property. 

