UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 OR 15(d)

of The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) February 2, 2021

 

 

 

LOGO

Huntington Bancshares Incorporated

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   1-34073   31-0724920
(State or other jurisdiction of
incorporation or organization)
  (Commission
File Number)
  (I.R.S. Employer
Identification No.)

Registrant’s address: 41 South High Street, Columbus, Ohio 43287

Registrant’s telephone number, including area code: (614) 480-2265

Not Applicable

(Former name or former address, if changed since last report.)

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Act:

 

Title of class

 

Trading

Symbol(s)

 

Name of exchange

on which registered

Depositary Shares (each representing a 1/40th interest in a share of 5.875% Series C Non-Cumulative, perpetual preferred stock)   HBANN   NASDAQ
Depositary Shares (each representing a 1/40th interest in a share of 6.250% Series D Non- Cumulative, perpetual preferred stock)   HBANO   NASDAQ
Common Stock-Par Value $0.01 per Share   HBAN   NASDAQ

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2).

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

 

 


Item 8.01.

Other Events

As previously announced, on December 13, 2020, Huntington Bancshares Incorporated (“Huntington”) and TCF Financial Corporation (“TCF”) issued a joint press release announcing the execution of the Agreement and Plan of Merger, dated as of December 13, 2020, by and between Huntington and TCF pursuant to which, upon the terms and subject to the conditions set forth therein, TCF will merge with and into Huntington, with Huntington continuing as the surviving entity (the “Merger”).

Huntington is filing: (i) as Exhibit 99.1 to this Current Report on Form 8-K, TCF’s audited consolidated financial statements as of December 31, 2019 and 2018 and for each of the fiscal years ended December 31, 2019, 2018 and 2017; (ii) as Exhibit 99.2, TCF’s interim unaudited consolidated financial statements as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019; (iii) as Exhibit 99.3, the unaudited pro forma condensed combined financial statements of Huntington and TCF, including (a) the unaudited pro forma condensed combined consolidated statement of income of Huntington and TCF for the nine months ended September 30, 2020, giving effect to the Merger as if it had occurred on January 1, 2019, and the unaudited pro forma condensed combined consolidated balance sheet of Huntington and TCF as of September 30, 2020, giving effect to the Merger as if it had occurred on September 30, 2020, and (b) for the year ended December 31, 2019, the unaudited pro forma condensed combined consolidated statement of income of Huntington and TCF for the year ended December 31, 2019, giving effect to the Merger as if it had occurred on January 1, 2019; and (iv) as Exhibit 23.1, the consent of KPMG LLP, independent registered public accounting firm of TCF.

This Current Report on Form 8-K does not modify or update the consolidated financial statements of Huntington included in Huntington’s Annual Report on Form 10-K for the year ended December 31, 2019, nor does it reflect any subsequent information or events. The information referenced in items (i)–(ii) above was previously disclosed by TCF in its reports filed with the U.S. Securities and Exchange Commission (the “SEC”), including its Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and its Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2020.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This communication may contain certain forward-looking statements, including, but not limited to, certain plans, expectations, goals, projections, and statements about the benefits of the proposed transaction, the plans, objectives, expectations and intentions of Huntington and TCF, the expected timing of completion of the transaction, and other statements that are not historical facts. Such statements are subject to numerous assumptions, risks, and uncertainties. Statements that do not describe historical or current facts, including statements about beliefs and expectations, are forward-looking statements. Forward-looking statements may be identified by words such as expect, anticipate, believe, intend, estimate, plan, target, goal, or similar expressions, or future or conditional verbs such as will, may, might, should, would, could, or similar variations. The forward-looking statements are intended to be subject to the safe harbor provided by Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995.

While there is no assurance that any list of risks and uncertainties or risk factors is complete, below are certain factors which could cause actual results to differ materially from those contained or implied in the forward-looking statements: changes in general economic, political, or industry conditions; the magnitude and duration of the COVID-19 pandemic and its impact on the global economy and financial market conditions and our business, results of operations, and financial condition; uncertainty in U.S. fiscal and monetary policy, including the interest rate policies of the Federal Reserve Board; volatility and disruptions in global capital and credit markets; movements in interest rates; reform of LIBOR; competitive pressures on product pricing and services; success, impact, and timing of our business strategies, including market acceptance of any new products or services including those implementing our “Fair Play” banking philosophy; the nature, extent, timing, and results of governmental actions, examinations, reviews, reforms, regulations, and interpretations, including those related to the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Basel III regulatory capital reforms, as well as those involving the OCC, Federal Reserve, FDIC, and CFPB; the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the merger agreement between Huntington and TCF; the outcome of any legal proceedings that may be instituted against Huntington or TCF; delays in completing the transaction; the failure to obtain necessary regulatory approvals (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected


benefits of the transaction); the failure to obtain shareholder approvals or to satisfy any of the other conditions to the transaction on a timely basis or at all; the possibility that the anticipated benefits of the transaction are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where Huntington and TCF do business; the possibility that the transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of management’s attention from ongoing business operations and opportunities; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the transaction; the ability to complete the transaction and integration of Huntington and TCF successfully; the dilution caused by Huntington’s issuance of additional shares of its capital stock in connection with the transaction; and other factors that may affect the future results of Huntington and TCF. Additional factors that could cause results to differ materially from those described above can be found in Huntington’s Annual Report on Form 10-K for the year ended December 31, 2019 and in its subsequent Quarterly Reports on Form 10-Q, including for the quarter ended September 30, 2020, each of which is on file with the SEC and available in the “Investor Relations” section of Huntington’s website, http://www.huntington.com, under the heading “Publications and Filings” and in other documents Huntington files with the SEC, and in TCF’s Annual Report on Form 10-K for the year ended December 31, 2019 and in its subsequent Quarterly Reports on Form 10-Q, including for the quarter ended September 30, 2020, each of which is on file with the SEC and available on TCF’s investor relations website, ir.tcfbank.com, under the heading “Financial Information” and in other documents TCF files with the SEC.

All forward-looking statements speak only as of the date they are made and are based on information available at that time. Neither Huntington nor TCF assumes any obligation to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements were made or to reflect the occurrence of unanticipated events except as required by federal securities laws. As forward-looking statements involve significant risks and uncertainties, caution should be exercised against placing undue reliance on such statements.

IMPORTANT ADDITIONAL INFORMATION

In connection with the proposed transaction, on January 28, 2021, Huntington filed with the SEC a Registration Statement on Form S-4 that includes a Joint Proxy Statement of Huntington and TCF and a Prospectus of Huntington, and Huntington and TCF may file other relevant documents concerning the proposed transaction. The registration statement has not yet become effective. After the registration statement is effective, a definitive joint proxy statement/prospectus will be sent to TCF’s shareholders and Huntington’s shareholders seeking their approval of the proposed transaction. This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. INVESTORS AND SHAREHOLDERS OF HUNTINGTON AND SHAREHOLDERS OF TCF ARE URGED TO READ THE REGISTRATION STATEMENT AND THE JOINT PROXY STATEMENT/PROSPECTUS REGARDING THE TRANSACTION AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Shareholders will be able to obtain a free copy of the definitive joint proxy statement/prospectus, as well as other filings containing information about Huntington and TCF, without charge, at the SEC’s website (http://www.sec.gov). Copies of the joint proxy statement/prospectus and the filings with the SEC that will be incorporated by reference in the joint proxy statement/prospectus can also be obtained, without charge, by directing a request to Huntington Investor Relations, Huntington Bancshares Incorporated, Huntington Center, HC0935, 41 South High Street, Columbus, Ohio 43287, (800) 576-5007 or to TCF Investor Relations, TCF Financial Corporation, 333 W. Fort Street, Suite 1800, Detroit, Michigan 48226, (866) 258-180.

PARTICIPANTS IN THE SOLICITATION

Huntington, TCF, and certain of their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from the shareholders of Huntington and TCF in connection with the proposed transaction under the rules of the SEC. Information regarding Huntington’s directors and executive


officers is available in its definitive proxy statement relating to its 2020 Annual Meeting of Shareholders, which was filed with the SEC on March 12, 2020, and other documents filed by Huntington with the SEC. Information regarding TCF’s directors and executive officers is available in its definitive proxy statement relating to its 2020 Annual Meeting of Shareholders, which was filed with the SEC on March 25, 2020, and other documents filed by TCF with the SEC. Other information regarding the participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, is contained in the joint proxy statement/prospectus and other relevant materials filed with the SEC. Free copies of this document may be obtained as described in the preceding paragraph

 

Item 9.01.

Financial Statements and Exhibits.

(d) Exhibits.

 

Exhibit

    No.    

  

Description of Exhibit

23.1    Consent of KPMG LLP, independent registered public accounting firm (with respect to TCF Financial Corporation).
99.1    Audited consolidated financial statements of TCF Financial Corporation as of December 31, 2019 and 2018, and for each of the fiscal year ended December 31, 2019, 2018 and 2017.
99.2    Interim unaudited consolidated financial statements of TCF Financial Corporation as of September 30, 2020 and for the three and nine months ended September 30, 2020 and 2019.
99.3    Unaudited pro forma condensed combined financial statements of Huntington Bancshares Incorporated and TCF Financial Corporation (a) as of and for the nine months ended September 30, 2020 and (b) for the year ended December 31, 2019.
104    Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document.


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

HUNTINGTON BANCSHARES INCORPORATED
By:  

/s/ Jana J. Litsey

  Jana J. Litsey
  General Counsel

Date: February 2, 2021


Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors

TCF Financial Corporation:

We consent to the incorporation by reference in the registration statements on Form S-3 (No. 333-232886), Form S-4 (No. 333-252517) and Form S-8 (Nos. 33-10546, 33-41774, 33-44208, 333-136692, 333-140897, 333-144403, 333-153573, 333-158335, 333-161779, 333-161780, 333-168824, 333-173831, 333-183325, 333-187725, 333-192600, 333-202349, 333-206720, 333-209962, 333-224665 and 333-224666) of Huntington Bancshares Incorporated of our reports dated March 2, 2020, with respect to the consolidated statements of financial condition of TCF Financial Corporation as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes, and the effectiveness of internal control over financial reporting as of December 31, 2019, which reports are included in the Form 8-K of Huntington Bancshares Incorporated which is incorporated by reference in the prospectus supplement, and to the reference to our firm under the heading “Experts” in the prospectus supplement.

/s/ KPMG LLP

Detroit, Michigan

February 2, 2021


Exhibit 99.1

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

TCF Financial Corporation:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial condition of TCF Financial Corporation and subsidiaries (the Corporation) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Corporation’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 2, 2020 expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.


Assessment of the fair value measurements of acquired loans and leases and the core deposit intangible in the Merger

As discussed in Note 3 to the consolidated financial statements, on August 1, 2019 (the Merger Date), legacy TCF Financial Corporation (Legacy TCF) merged into Chemical Financial Corporation (Chemical) as legal acquirer and surviving company (the Merger). The merger was accounted for as a business combination using the acquisition method of accounting with Legacy TCF as the accounting acquirer. Accordingly, Legacy TCF acquired loans and leases with a fair value of $15.7 billion and established a core deposit intangible (CDI) with a fair value of $138.2 million. The fair value of acquired loans and leases was based on a discounted cash flow methodology that projected principal and interest payments using key assumptions of probability of default (PD), loss given default (LGD), discount rate, and prepayment rate. The fair value of the CDI was based on an income approach methodology whereby projected net cash flow benefits were derived from estimating costs to carry deposits compared to alternative funding costs, and included key assumptions related to discount rate, deposit interest rates, customer attrition rates, costs of alternative funding, and net maintenance costs.

We identified the assessment of the fair value measurements of acquired loans and leases and the CDI in the Merger as a critical audit matter. These fair value measurements involved a high degree of measurement uncertainty and subjectivity, which required industry knowledge and experience to evaluate the measurements. Specifically, the assessment of these fair value measurements encompassed the evaluation of the methodologies of acquired loans and leases and the CDI, including the key assumptions and the inputs used to develop the key assumptions. The fair value measurements of the loans and leases and the CDI also included an evaluation of the mathematical accuracy of certain calculations.

The following are the primary procedures we performed to address the critical audit matter. Tested certain internal controls over the (1) development of the overall fair value methodologies, (2) determination of the key assumptions, as listed above, (3) evaluating the inputs used to develop key assumptions, (4) calculation of the fair value measurements, and (5) analysis of the fair value measurements results. We evaluated the Corporation’s process to develop the fair value measurements and key assumptions by testing certain inputs used to develop the assumptions and considered the relevance and reliability of such inputs and assumptions. We involved valuation professionals with industry knowledge and experience who assisted in the evaluation of the:

 

   

overall fair value measurement methodologies for compliance with U.S. generally accepted accounting principles,

 

   

key assumptions, as listed above, and inputs used to develop those assumptions, that were used in the fair value measurements,

 

   

development and application of the PD and LGD assumptions used in the loan and leases fair value measurement,

 

   

individual risk ratings for acquired loans and leases, which are used in the selection of the PD assumption, for a selection of relationships within the commercial loan and leases portfolio, and

 

   

mathematical accuracy of certain calculations within the fair value measurements.

Assessment of the allowance for loan and lease losses related to loans and leases collectively evaluated for impairment

As discussed in Notes 3 and 8 to the consolidated financial statements, the Corporation’s allowance for loan and lease losses related to loans and leases collectively evaluated for impairment (the collective reserve) was $102.2 million of a total allowance of $113.1 million as of December 31, 2019. The Corporation estimated the collective reserve using methodologies that derive historical loss rates based on historical observation periods and loss emergence period assumptions. For the commercial loan and lease portfolio, such historical loss rates also incorporate risk ratings, and for certain commercial loans, the probability of default (PD) and loss given default (LGD). For the consumer loan portfolio, such historical loss rates also incorporate collateral fair values. The collective reserve includes adjustments for certain qualitative factors.


We identified the assessment of the collective reserve as a critical audit matter because it involved significant measurement uncertainty requiring subjective and complex auditor judgment, and knowledge and experience in the industry. Specifically, this assessment encompassed the evaluation of the collective reserve methodologies used to estimate the (1) historical loss rates, and their key inputs and assumptions, including the historical observation periods and loss emergence period assumptions for the commercial loan and lease portfolio and the consumer loan portfolio, risk ratings for the commercial loan and lease portfolio, PD and LGD for certain commercial loans, and collateral fair values for consumer loans; and (2) qualitative factors. The assessment included an evaluation of the mathematical accuracy of the collective reserve calculations. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.

The following are the primary procedures we performed to address the critical audit matter. Tested certain internal controls over the (1) development of the methodologies over the collective reserve and qualitative factors, (2) determination of the key inputs and assumptions used to estimate the historical loss rates, (3) determination of the qualitative factors, (4) calculation of the collective reserve, and (5) analysis of the collective reserve results compared to relevant trends and ratios. We evaluated the relevance and reliability of data, inputs, and assumptions used in the collective reserve. We involved credit risk professionals with industry knowledge and experience who assisted in the evaluation of the:

 

   

collective reserve methodologies, including the key inputs and assumptions, for compliance with U.S. generally accepted accounting principles,

 

   

length of the historical observation period assumptions used in (1) the historical loss rates for the commercial loan and lease portfolio, and the consumer loan portfolio, and (2) the PD and LGD for certain commercial loans,

 

   

methodologies used to develop the loss emergence period assumptions for the commercial loan and lease portfolio and the consumer loan portfolio,

 

   

individual risk ratings for a selection of relationships within the commercial loan and lease portfolio,

 

   

fair value of collateral for consumer loans,

 

   

qualitative factors and the effect of those factors on the collective reserve, and

 

   

mathematical accuracy of the collective reserve calculations for the commercial loan and lease portfolio and the consumer loan portfolio.

We evaluated the collective reserve by comparing current and historical reserve ratios and credit metrics. We also evaluated the results of the procedures performed to assess the sufficiency of the audit evidence obtained related to the collective reserve.

 

/s/ KPMG LLP

We have served as the Corporation’s auditor since 1991.

Detroit, Michigan

March 2, 2020


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition

 

(Dollars in thousands, except per share data)

   At December 31,
2019
    At December 31,
2018
 

ASSETS

    

Cash and cash equivalents:

    

Cash and due from banks

   $ 491,787     $ 279,267  

Interest-bearing deposits with other banks

     736,584       307,790  
  

 

 

   

 

 

 

Total cash and cash equivalents

     1,228,371       587,057  

Federal Home Loan Bank and Federal Reserve Bank stocks, at cost

     442,440       91,654  

Investment securities:

    

Available-for-sale, at fair value

     6,720,001       2,470,065  

Held-to-maturity, at amortized cost (fair value of $144,844 and $149,267)

     139,445       148,852  
  

 

 

   

 

 

 

Total investment securities

     6,859,446       2,618,917  

Loans and leases held-for-sale (includes $91,202 and $18,070 at fair value)

     199,786       90,664  

Loans and leases

     34,497,464       19,073,020  

Allowance for loan and lease losses

     (113,052     (157,446
  

 

 

   

 

 

 

Loans and leases, net

     34,384,412       18,915,574  

Premises and equipment, net

     533,138       427,534  

Goodwill

     1,299,878       154,757  

Other intangible assets, net

     168,368       20,496  

Loan servicing rights

     56,313       23  

Other assets

     1,479,401       792,936  
  

 

 

   

 

 

 

Total assets

   $ 46,651,553     $ 23,699,612  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Liabilities

    

Deposits:

    

Noninterest-bearing

   $ 7,970,590     $ 3,936,155  

Interest-bearing

     26,497,873       14,967,531  
  

 

 

   

 

 

 

Total deposits

     34,468,463       18,903,686  

Short-term borrowings

     2,669,145       —    

Long-term borrowings

     2,354,448       1,449,472  

Other liabilities

     1,432,256       790,194  
  

 

 

   

 

 

 

Total liabilities

     40,924,312       21,143,352  
  

 

 

   

 

 

 

Equity

    

Preferred stock, $0.01 par value

    

Authorized—2,000,000 shares at December 31, 2019 and 30,000,000 shares at December 31, 2018

    

Issued and outstanding—7,000 shares at both December 31, 2019 and December 31, 2018

     169,302       169,302  

Common stock, $1.00 par value at both December 31, 2019 and December 31, 2018

    

Authorized—220,000,000 shares at December 31, 2019 and 142,268,000 shares at December 31, 2018

    

Issued—152,965,571 shares at December 31, 2019 and 88,198,460 shares at December 31, 2018

     152,966       88,198  

Additional paid-in capital

     3,462,080       798,627  

Retained earnings

     1,896,427       1,766,994  

Accumulated other comprehensive income (loss)

     54,277       (33,138

Treasury stock at cost and other (4,909,069 Treasury shares at December 31, 2018)

     (28,037     (252,182
  

 

 

   

 

 

 

Total TCF Financial Corporation shareholders’ equity

     5,707,015       2,537,801  

Non-controlling interest

     20,226       18,459  
  

 

 

   

 

 

 

Total equity

     5,727,241       2,556,260  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 46,651,553     $ 23,699,612  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income

 

     Year Ended December 31,  
(Dollars in thousands, except per share data)    2019      2018      2017  

Interest income

        

Interest and fees on loans and leases

   $ 1,430,628      $ 1,082,135      $ 966,928  

Interest on investment securities:

        

Taxable

     106,027        41,406        22,818  

Tax-exempt

     11,651        17,138        14,896  

Interest on loans held-for-sale

     18,599        6,686        16,612  

Interest on other earning assets

     20,356        11,964        10,491  
  

 

 

    

 

 

    

 

 

 

Total interest income

     1,587,261        1,159,329        1,031,745  
  

 

 

    

 

 

    

 

 

 

Interest expense

        

Interest on deposits

     226,157        107,690        66,464  

Interest on borrowings

     72,072        43,144        27,807  
  

 

 

    

 

 

    

 

 

 

Total interest expense

     298,229        150,834        94,271  
  

 

 

    

 

 

    

 

 

 

Net interest income

     1,289,032        1,008,495        937,474  

Provision for credit losses

     65,282        46,768        68,443  
  

 

 

    

 

 

    

 

 

 

Net interest income after provision for credit losses

     1,223,750        961,727        869,031  
  

 

 

    

 

 

    

 

 

 

Noninterest income

        

Leasing revenue

     163,718        172,603        134,460  

Fees and service charges on deposit accounts

     127,860        113,242        115,567  

Card and ATM revenue

     87,221        78,406        75,165  

Net gains on sales of loans and leases

     26,308        33,695        45,318  

Servicing fee revenue

     20,776        27,334        41,347  

Wealth management revenue

     10,413        —          —    

Net gains on investment securities

     7,425        348        237  

Other

     21,811        28,769        23,969  
  

 

 

    

 

 

    

 

 

 

Total noninterest income

     465,532        454,397        436,063  
  

 

 

    

 

 

    

 

 

 

Noninterest expense

        

Compensation and employee benefits

     576,922        502,196        503,618  

Occupancy and equipment

     189,560        165,839        156,913  

Lease financing equipment depreciation

     76,426        73,829        55,901  

Net foreclosed real estate and repossessed assets

     13,523        17,050        17,756  

Merger-related expenses

     171,968        —          —    

Other

     303,716        255,486        325,746  
  

 

 

    

 

 

    

 

 

 

Total noninterest expense

     1,332,115        1,014,400        1,059,934  
  

 

 

    

 

 

    

 

 

 

Income before income tax expense

     357,167        401,724        245,160  

Income tax expense (benefit)

     50,241        86,096        (33,624
  

 

 

    

 

 

    

 

 

 

Income after income tax expense (benefit)

     306,926        315,628        278,784  

Income attributable to non-controlling interest

     11,458        11,270        10,147  
  

 

 

    

 

 

    

 

 

 

Net income attributable to TCF Financial Corporation

     295,468        304,358        268,637  

Preferred stock dividends

     9,975        11,588        19,904  

Impact of preferred stock redemption

     —          3,481        5,779  
  

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 285,493      $ 289,289      $ 242,954  
  

 

 

    

 

 

    

 

 

 

Earnings per common share

        

Basic

   $ 2.56      $ 3.44      $ 2.83  

Diluted

     2.55        3.43        2.83  

Weighted-average common shares outstanding

        

Basic

     111,604,094        84,133,983        85,706,054  

Diluted

     111,818,365        84,324,686        85,734,575  

See accompanying notes to consolidated financial statements.


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

 

     Year Ended December 31,  
(In thousands)    2019     2018     2017  

Net income attributable to TCF Financial Corporation

   $ 295,468     $ 304,358     $ 268,637  

Other comprehensive income (loss), net of tax:

      

Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips

     84,120       (11,669     16,454  

Net unrealized gains (losses) on net investment hedges

     (5,186     10,450       (2,746

Foreign currency translation adjustment

     8,514       (13,368     4,921  

Recognized postretirement prior service cost

     (33     (34     (29
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     87,415       (14,621     18,600  
  

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 382,883     $ 289,737     $ 287,237  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Equity

 

    TCF Financial Corporation              
    Number of
Shares Issued
    Preferred
Stock
    Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
and Other
    Total     Non-
controlling
Interest
    Total
Equity
 

(Dollars in thousands)

  Preferred     Common  

Balance, December 31, 2016

    4,006,900       86,902,632     $ 263,240     $ 86,903     $ 777,583     $ 1,382,901     $ (33,725   $ (49,419   $ 2,427,483     $ 17,162     $ 2,444,645  

Change in accounting principle

    —         —         —           1,319       (1,319     —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2017

    4,006,900       86,902,632       263,240       86,903       778,902       1,381,582       (33,725     (49,419     2,427,483       17,162       2,444,645  

Reclassification of stranded tax effects from AOCI to retained earnings

    —         —         —         —         —         3,392       (3,392     —         —         —         —    

Net income

    —         —         —         —         —         268,637       —         —         268,637       10,147       278,784  

Other comprehensive income (loss), net of tax

    —         —         —         —         —         —         18,600       —         18,600       —         18,600  

Net investment by (distribution to) non-controlling interest

    —         —         —         —         —         —         —         —         —         (9,482     (9,482

Public offering of Series C Preferred Stock

    7,000       —         169,302       —         —         —         —         —         169,302       —         169,302  

Redemption of Series A Preferred Stock

    (6,900     —         (166,721     —         —         (5,779     —         —         (172,500     —         (172,500

Repurchases of 226,848 shares of common stock

    —         —         —         —         —         —         —         (9,163     (9,163     —         (9,163

Dividends on 7.50% Series A Preferred Stock

    —         —         —         —         —         (11,320     —         —         (11,320     —         (11,320

Dividends on 6.45% Series B Preferred Stock

    —         —         —         —         —         (6,450     —         —         (6,450     —         (6,450

Dividends on 5.70% Series C Preferred Stock

    —         —         —         —         —         (2,134     —         —         (2,134     —         (2,134

Dividends on common stock of $0.59 per common share

    —         —         —         —         —         (50,617     —         —         (50,617     —         (50,617

Common shares purchased by TCF employee benefit plans

    —         701,914       —         702       22,552       —         —         —         23,254       —         23,254  

Stock compensation plans, net of tax

    —         (130,838     —         (131     7,796       —         —         —         7,665       —         7,665  

Change in shares held in trust for deferred compensation plans, at cost

    —         —         —         —         (17,785     —         —         17,785       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2017

    4,007,000       87,473,708     $ 265,821     $ 87,474     $ 791,465     $ 1,577,311     $ (18,517   $ (40,797   $ 2,662,757     $ 17,827     $ 2,680,584  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in accounting principle

    —         —         —         —         —         (116     —         —         (116     —         (116
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2018

    4,007,000       87,473,708       265,821       87,474       791,465       1,577,195       (18,517     (40,797     2,662,641       17,827       2,680,468  

Net income

    —         —         —         —         —         304,358       —         —         304,358       11,270       315,628  

Other comprehensive income (loss), net of tax

    —         —         —         —         —         —         (14,621     —         (14,621     —         (14,621

Net investment by (distribution to) non-controlling interest

    —         —         —         —         —         —         —         —         —         (10,638     (10,638

Redemption of Series B Preferred Stock

    (4,000,000     —         (96,519     —         —         (3,481     —         —         (100,000     —         (100,000

Repurchases of 4,668,722 shares of common stock

    —         —         —         —         —         —         —         (212,929     (212,929     —         (212,929

Dividends on 6.45% Series B Preferred Stock

    —         —         —         —         —         (1,613     —         —         (1,613     —         (1,613

Dividends on 5.70% Series C Preferred Stock

    —         —         —         —         —         (9,975     —         —         (9,975     —         (9,975

Dividends on common stock of $1.18 per common share

    —         —         —         —         —         (99,490     —         —         (99,490     —         (99,490

Common stock warrants exercised

    —         553,279       —         553       (553     —         —         —         —         —         —    

Common shares purchased by TCF employee benefit plans

    —         17,594       —         18       697       —         —         —         715       —         715  

Stock compensation plans, net of tax

    —         153,879       —         153       8,184       —         —         378       8,715       —         8,715  

Change in shares held in trust for deferred compensation plans, at cost

    —         —         —         —         (1,166     —         —         1,166       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2018

    7,000       88,198,460     $ 169,302     $ 88,198     $ 798,627     $ 1,766,994     $ (33,138   $ (252,182   $ 2,537,801     $ 18,459     $ 2,556,260  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Equity, Continued

 

    TCF Financial Corporation              
    Number of
Shares Issued
    Preferred
Stock
    Common
Stock
    Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Treasury
Stock
and Other
    Total     Non-
controlling
Interest
    Total
Equity
 

(Dollars in thousands)

  Preferred     Common  

Balance, December 31, 2018

    7,000       88,198,460     $ 169,302     $ 88,198     $ 798,627     $ 1,766,994     $ (33,138   $ (252,182   $ 2,537,801     $ 18,459     $ 2,556,260  

Net income

    —         —         —         —         —         295,468       —         —         295,468       11,458       306,926  

Other comprehensive income (loss), net of tax

    —         —         —         —         —         —         87,415       —         87,415       —         87,415  

Reverse merger with Chemical Financial Corporation

    —         65,539,678       —         65,540       2,687,153       —         —         265,863       3,018,556       —         3,018,556  

Net investment by (distribution to) non-controlling interest

    —         —         —         —         —         —         —         —         —         (9,691     (9,691

Repurchases of 2,111,725 shares of common stock

    —         (657,817     —         (658     (26,846     —         —         (58,805     (86,309     —         (86,309

Dividends on 5.70% Series C Preferred Stock

    —         —         —         —         —         (9,975     —         —         (9,975     —         (9,975

Dividends on common stock of $1.29 per common share

    —         —         —         —         —         (156,060     —         —         (156,060     —         (156,060

Stock compensation plans, net of tax

    —         (114,750     —         (114     4,474       —         —         15,759       20,119       —         20,119  

Change in shares held in trust for deferred compensation plans, at cost

    —         —         —         —         (1,328     —         —         1,328       —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2019

    7,000       152,965,571     $ 169,302     $ 152,966     $ 3,462,080     $ 1,896,427     $ 54,277     $ (28,037   $ 5,707,015     $ 20,226     $ 5,727,241  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

 

     Year Ended December 31,  
(In thousands)    2019     2018     2017  

Cash flows from operating activities

      

Net income

   $ 306,926     $ 315,628     $ 278,784  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

      

Provision for credit losses

     65,282       46,768       68,443  

Share-based compensation expense

     28,351       17,824       14,743  

Depreciation and amortization

     308,638       204,778       191,824  

Impairment of goodwill and other intangible assets

     —         —         73,409  

Provision (benefit) for deferred income taxes

     30,410       58,986       (53,729

Net gains on sales of assets

     (66,298     (39,881     (51,965

Proceeds from sales of loans and leases held-for-sale

     966,352       372,354       280,640  

Originations of loans and leases held-for-sale, net of repayments

     (835,047     (375,622     (430,121

Impairment of loan servicing rights

     3,882       —         —    

Net change in other assets

     (263,351     (35,154     (108,700

Net change in other liabilities

     162,533       39,898       17,826  

Other, net

     (65,921     (41,949     (36,196
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     641,757       563,630       244,958  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

Proceeds from sales of investment securities available-for-sale

     1,986,386       254,146       —    

Proceeds from maturities of and principal collected on investment securities available-for-sale

     735,861       169,622       116,358  

Purchases of investment securities available-for-sale

     (2,806,598     (1,230,430     (353,557

Proceeds from maturities of and principal collected on investment securities held-to-maturity

     17,632       15,407       21,186  

Purchases of investment securities held-to-maturity

     (6,844     (2,188     (1,051

Redemption of Federal Home Loan Bank stock

     256,021       269,002       246,002  

Purchases of Federal Home Loan Bank stock

     (370,000     (278,000     (254,000

Proceeds from sales of loans and leases

     1,985,093       903,606       1,618,791  

Loan and lease originations and purchases, net of principal collected

     (2,037,489     (957,672     (2,726,967

Proceeds from sales of other assets

     113,771       88,942       63,875  

Purchases of premises and equipment and lease equipment

     (154,540     (155,664     (168,272

Net cash acquired (paid) in business combinations

     975,014       —         (8,120

Other, net

     (27,431     20,935       26,103  
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     666,876       (902,294     (1,419,652
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Net change in deposits

     (901,522     549,157       1,094,612  

Net change in short-term borrowings

     45,584       160       (4,747

Proceeds from long-term borrowings

     5,957,492       9,380,950       9,990,967  

Payments on long-term borrowings

     (5,499,669     (9,182,536     (9,816,286

Payments on liabilities related to acquisition and portfolio purchase

     (1,000     (2,000     (3,000

Redemption of Series B preferred stock

     —         (100,000     —    

Net proceeds from public offering of Series C preferred stock

     —         —         169,302  

Redemption of Series A preferred stock

     —         —         (172,500

Repurchases of common stock

     (86,309     (212,929     (9,163

Common shares sold to TCF employee benefit plans

     —         715       23,254  

Dividends paid on preferred stock

     (9,975     (11,588     (19,904

Dividends paid on common stock

     (156,060     (99,490     (50,617

Exercise of stock options

     29       (997     (57

Payments related to tax-withholding upon conversion of share-based awards

     (6,198     (6,865     (5,506

Net investment by (distribution to) non-controlling interest

     (9,691     (10,638     (9,482
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (667,319     303,939       1,186,873  
  

 

 

   

 

 

   

 

 

 

Net change in cash and due from banks

     641,314       (34,725     12,179  

Cash and cash equivalents at beginning of period

     587,057       621,782       609,603  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,228,371     $ 587,057     $ 621,782  
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures of cash flow information

      

Cash paid (received) for:

      

Interest on deposits and borrowings

   $ 269,474     $ 139,026     $ 86,411  

Income taxes, net

     12,177       (26,308     62,115  

Noncash activities:

      

Transfer of loans and leases to other assets

     88,716       105,247       100,608  

Transfer of loans and leases from held for investment to held for sale, net

     2,184,134       848,941       1,320,210  

See accompanying notes to consolidated financial statements.


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1. Basis of Presentation

On August 1, 2019 (the “Merger Date”), TCF Financial Corporation, a Delaware corporation (“Legacy TCF”), merged with and into Chemical Financial Corporation, a Michigan corporation (“Chemical”), with Chemical continuing as the surviving legal corporation (the “Merger”). Immediately following the Merger, Chemical’s wholly owned bank subsidiary, Chemical Bank, a Michigan state-chartered bank, merged with and into Legacy TCF’s wholly owned bank subsidiary, TCF National Bank, a national banking association, with TCF National Bank surviving the merger (“TCF Bank”). Upon completion of the Merger, Chemical was renamed TCF Financial Corporation. TCF Financial Corporation (together with its direct and indirect subsidiaries, “we,” “us,” “our,” “TCF” or the “Corporation”), is a financial holding company, headquartered in Detroit, Michigan. TCF Bank has its main office in Sioux Falls, South Dakota. References herein to “TCF Financial” refer to TCF Financial Corporation on an unconsolidated basis.

The Merger was accounted for as a reverse merger using the acquisition method of accounting, therefore, Legacy TCF was deemed the acquirer for financial reporting purposes, even though Chemical was the legal acquirer. Accordingly, Legacy TCF’s historical financial statements are the historical financial statements of the combined company for all periods before the Merger Date. TCF’s results of operations for 2019 include the results of operations of Chemical on and after August 1, 2019. Results for periods before August 1, 2019 reflect only those of Legacy TCF and do not include the results of operations of Chemical. The number of shares issued and outstanding, earnings per share, additional paid-in-capital, dividends paid and all references to share quantities of TCF have been retrospectively restated to reflect the equivalent number of shares issued in the Merger as the Merger was treated as a reverse merger. See “Note 2. Merger” for further information. In addition, the assets and liabilities of Chemical as of the Merger Date have been recorded at their estimated fair value and added to those of Legacy TCF.

TCF Bank operates bank branches primarily located in Michigan, Illinois and Minnesota with additional locations in Arizona, Colorado, Ohio, South Dakota and Wisconsin (TCF’s “primary banking markets”). Through its direct subsidiaries, TCF Bank provides a full range of consumer-facing and commercial services, including consumer and commercial banking, trust and wealth management, and specialty leasing and lending products and services to consumers, small businesses and commercial customers.

The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. These estimates are based on information available to management at the time the estimates are made. Actual results could differ from those estimates. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.

In connection with the Merger, effective August 1, 2019, the Corporation renamed its Wholesale Banking segment to Commercial Banking to align with the way the Corporation is now managed. In addition, activity that was related to small business banking and private banking were moved from the Commercial Banking segment to the Consumer Banking segment. The Merger did not have any impact on Legacy TCF goodwill balances. The revised presentation of previously reported segment data has been applied retroactively for all periods presented in these financial statements. See “Note 25. Reportable Segments” for further information.


Note 2. Merger

As described in Note 1. Basis of Presentation, on August 1, 2019, the Corporation completed the Merger with Legacy TCF.

The Merger was an all-stock transaction. Pursuant to the merger agreement, on the Merger Date, each holder of Legacy TCF common stock received 0.5081 shares (the “Exchange Ratio”) of TCF’s common stock for each share of Legacy TCF common stock held. Each outstanding share of common stock of Chemical remained outstanding and was unaffected by the Merger other than by the change of the Corporation’s name from Chemical Financial Corporation to TCF Financial Corporation. As of the effective time of the Merger on August 1, 2019, TCF Financial had approximately 153.5 million shares of common stock outstanding. On the Merger Date, the shares of Legacy TCF common stock, which previously traded under the ticker symbol “TCF” on the New York Stock Exchange (the “NYSE”), ceased trading on, and were delisted from, the NYSE. Following the Merger, TCF Financial common stock continues to trade on the Nasdaq Stock Market (“NASDAQ”), but its ticker symbol changed from “CHFC” to “TCF” effective August 1, 2019.

Pursuant to the merger agreement, each outstanding share of Legacy TCF 5.70% Series C Non-Cumulative Perpetual Preferred Stock, with a liquidation preference of $25,000 per share (the “Legacy TCF Preferred Stock”) was converted into the right to receive one share of newly created 5.70% Series C Non-Cumulative Perpetual Preferred Stock of TCF, with a liquidation preference of $25,000 per share (the “New TCF Preferred Stock”), and each depository share representing 1/1000th of a share of Legacy TCF Preferred Stock was converted into one depositary share representing 1/1000th of a share of New TCF Preferred Stock. Immediately following the effective time of the Merger, as of August 1, 2019, TCF Financial had 7,000 shares of New TCF Preferred Stock outstanding and 7.0 million related depositary shares outstanding.

The Merger constituted a business combination and was accounted for as a reverse merger using the acquisition method of accounting, therefore, Legacy TCF was deemed the acquirer for financial reporting purposes even though Chemical was the legal acquirer. As a result, the historical financial statements of Legacy TCF became the historical financial statements of the combined company. In addition, the assets acquired, including the intangible assets identified, and assumed liabilities of Chemical as of the Merger Date, have been recorded at their estimated fair value and added to those of Legacy TCF. In many cases, the determination of fair value required management to make estimates about discount rates, expected future cash flows, market conditions and other future events that are highly subjective in nature and subject to change.

As the legal acquirer, Chemical (now TCF Financial Corporation) issued approximately 81.9 million shares of TCF Financial common stock in connection with the Merger, which represented approximately 53% of the voting interests in TCF Financial upon completion of the Merger. Guidance in Accounting Standards Codification (“ASC”) 805-40-30-2 explains that the purchase price in a reverse acquisition is determined based on “the number of equity interests the legal acquiree would have had to issue to give the owners of the legal acquirer the same percentage equity interest in the combined entity that results from the reverse acquisition.” The first step in calculating the purchase price in the Merger is to determine the ownership of the combined company following the Merger. The table below summarizes the ownership of the combined company (“TCF Financial”) following the Merger, as well as the market capitalization of the combined company using shares of Chemical and Legacy TCF common stock outstanding at July 31, 2019 and Chemical’s closing price on July 31, 2019.

 

(Dollars in thousands)

   TCF Financial Ownership and Market Value  
     Number of
Chemical
Outstanding
Shares
     Percentage
Ownership
    Market Value
at $42.04
Chemical
Share Price
 

Legacy TCF shareholders

     81,920,494        53.38   $ 3,443,938  

Chemical shareholders

     71,558,755        46.62       3,008,330  
  

 

 

    

 

 

   

 

 

 

Total

     153,479,249        100.00     $ 6,452,268  
  

 

 

    

 

 

   

 

 

 


Next, the hypothetical number of shares Legacy TCF would have to issue to give Chemical owners the same percentage ownership in the combined company is calculated in the table below (based on shares of Legacy TCF common stock outstanding at July 31, 2019):

 

     Hypothetical Legacy TCF Ownership  
     Number of Legacy TCF
Outstanding Shares
     Percentage Ownership  

Legacy TCF shareholders

     161,229,078        53.38

Chemical shareholders

     140,835,967        46.62  
  

 

 

    

 

 

 

Total

     302,065,045        100.00  
  

 

 

    

 

 

 

Finally, the purchase price is calculated based on the number of hypothetical shares of Legacy TCF common stock issued to Chemical shareholders multiplied by the share price as demonstrated in the table below.

 

(Dollars in thousands, except per share data)

      

Number of hypothetical Legacy TCF shares issued to Chemical shareholders

     140,835,967  

Legacy TCF market price per share as of July 31, 2019

   $ 21.38  

Purchase price determination of hypothetical Legacy TCF shares issued to Chemical shareholders

     3,011,073  

Value of Chemical stock options hypothetically converted to options to acquire shares of Legacy TCF common stock

     7,335  

Cash in lieu of fractional shares

     148  
  

 

 

 

Purchase price consideration

   $ 3,018,556  
  

 

 

 


The following table provides the purchase price allocation as of the Merger Date and the assets acquired and liabilities assumed at their estimated fair value as of the Merger Date as recorded by the Corporation. We recorded the estimate of fair value based on initial valuations available at the Merger Date and these estimates were considered preliminary as of September 30, 2019, and subject to adjustment for up to one year after the Merger Date. While we believe that the information available on the Merger Date provided a reasonable basis for estimating fair value, we expect that we may obtain additional information and evidence during the measurement period that would result in changes to the estimated fair value amounts. The measurement period ends on the earlier of one year after the Merger Date or the date we are able to determine that we have obtained all necessary information about the facts and circumstances that existed as of Merger Date. During the fourth quarter of 2019, we obtained additional information and evidence on certain acquired assets and assumed liabilities and adjusted the estimated fair value accordingly. We anticipate finalizing all valuations and recording final adjustments during the first quarter of 2020. These adjustments include: (i) changes in the estimated fair value of loans and leases acquired, (ii) changes in deferred tax assets related to fair value estimates and changes in the expected realization of items considered to be net operating loss carryforwards and (iii) changes in goodwill as a result of the net effect of any adjustments.

 

(In thousands)

      

Purchase price consideration:

  

Stock

   $ 3,018,556  

Fair value of assets acquired(1):

  

Cash and cash equivalents

     975,014  

Federal Home Loan Bank and Federal Reserve Bank stocks

     218,582  

Investment securities

     3,774,738  

Loans held-for-sale

     44,532  

Loans and leases

     15,730,605  

Premises and equipment

     140,219  

Loan servicing rights

     59,567  

Other intangible assets

     159,532  

Net deferred tax asset(2)

     61,647  

Other assets

     552,432  
  

 

 

 

Total assets acquired

     21,716,868  

Fair value of liabilities assumed(1):

  

Deposits

     16,418,215  

Short-term borrowings

     2,629,426  

Long-term borrowings

     442,323  

Other liabilities

     353,469  
  

 

 

 

Total liabilities assumed

     19,843,433  

Fair value of net identifiable assets

     1,873,435  
  

 

 

 

Goodwill resulting from Merger(1)

   $ 1,145,121  
  

 

 

 

 

(1)

All amounts were previously reported in the Corporation’s Quarterly Report on Form 10-Q for the three- and nine-month periods ended September 30, 2019, with the exception of the following adjustments to fair value based on additional information obtained in the the fourth quarter of 2019: (i) loans and leases ($4.4 million increase), (ii) other intangible assets ($42.0 million decrease), (iii) net deferred tax asset ($12.3 million increase), (iv) other assets ($1.4 million decrease), (v) deposits ($196 thousand increase), (vi) other liabilities ($7.9 million increase) and (vii) goodwill resulting from Merger ($34.8 million increase).

(2)

Net deferred tax asset includes acquisition-related fair value adjustments, loss and tax credit carry forwards, and deferred tax impacts of loan servicing rights and core deposit and customer intangibles.

As described in more detail in Note 3. Summary of Significant Accounting Policies below, all Chemical loans and leases were recorded at their estimated fair value as of the Merger Date with no carryover of the related allowance for loan and lease losses. The acquired loans and leases were segregated into two classifications at acquisition, purchased credit impaired (“PCI”) loans accounted for under the provisions of Accounting Standards Codification (“ASC”) Topic 310-30, and purchased nonimpaired loans and leases, also referred to as purchased loans and leases. The excess of cash flows expected to be collected over the estimated fair value of PCI loans is referred to as the accretable yield and is accreted into interest income over the estimated remaining life of the loan using the effective yield method. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayment and estimates of future credit losses expected to be incurred, is referred to the nonaccretable difference.


Information regarding acquired loans and leases included in loans and leases acquired at the Merger Date was as follows:

 

(In thousands)

      

PCI loans:

  

Contractually required payments receivable

   $ 413,176  

Nonaccretable difference

     (63,014
  

 

 

 

Expected cash flows

     350,162  

Accretable yield

     38,479  
  

 

 

 

Fair value of PCI loans

   $ 311,683  

Purchased nonimpaired loans and leases:

  

Unpaid principal balance

   $ 15,636,020  

Fair value discount

     (217,098
  

 

 

 

Fair value at acquisition

     15,418,922  
  

 

 

 

Total fair value at acquisition

   $ 15,730,605  
  

 

 

 

Supplemental disclosures of cash flow information related to investing and financing activities regarding the Merger are as follows for the year ended December 31, 2019:

 

(In thousands)

      

Business combination

  

Fair value of tangible assets acquired

   $ 21,497,769  

Goodwill, loan servicing rights and other identifiable intangible assets acquired

     1,364,220  

Liabilities assumed

     19,843,433  

Common stock and stock options converted

     3,018,556  

Other intangible assets consisted of core deposits and customer relationship intangibles with estimated fair values at the Merger Date of $138.2 million and $21.3 million, respectively. Core deposit intangibles are being amortized over a weighted-average life of ten years on an accelerated basis. Customer relationship intangibles are being amortized over a weighted-average life of 15.6 years based on expected economic benefits of the underlying intangible assets. The weighted-average life of amortizable intangibles acquired in the Merger was eleven years.

As a result of the Merger, we recorded $1.1 billion of goodwill. Of the $1.1 billion, $522.0 million was attributable to Consumer Banking and $623.1 million was attributable to Commercial Banking. The goodwill recorded is not deductible for income tax purposes.


Pro Forma Combined Results of Operations (Unaudited) The following pro forma financial information presents the consolidated results of operations of Legacy TCF and Chemical as if the Merger had occurred as of January 1, 2017 with pro forma adjustments. The pro forma adjustments give effect to any change in interest income due to the accretion of the discount (amortization of premium) associated with the fair value adjustments to acquired loans and leases, any change in interest expense due to estimated premium amortization/discount accretion associated with the fair value adjustments to acquired time deposits and borrowings and other debt and the amortization of the core deposit intangible that would have resulted had the deposits been acquired as of January 1, 2017. Merger-related expenses incurred by TCF during the year ended December 31, 2019 are not reflected in the pro forma amounts. The pro forma information does not necessarily reflect the results of operations that would have occurred had Legacy TCF merged with Chemical at the beginning of 2017. Anticipated cost savings that have not yet been realized are also not reflected in the pro forma amounts for the years ended December 31, 2019, 2018 and 2017.

 

     Year Ended December 31,  

(In thousands, except per share data)

   2019      2018      2017  

Net interest income and other noninterest income

   $ 2,225,244      $ 2,228,154      $ 2,086,745  

Net income

     587,335        590,594        432,128  

Net income available to common shareholders

     577,360        575,525        406,445  

Earnings per share:

        

Basic

   $ 3.77      $ 3.70      $ 2.61  

Diluted

     3.75        3.67        2.60  

Note 3. Summary of Significant Accounting Policies

Business Combinations Pursuant to the guidance of ASC Topic 805 (“ASC 805”), the Corporation recognized assets acquired, including identified intangible assets, and the liabilities assumed in mergers and acquisitions at their fair values as of the acquisition date, with the acquisition and merger-related transaction and restructuring costs expensed in the period incurred.

ASC 805 affords a measurement period beyond the acquisition date that allows the opportunity to finalize the acquisition accounting in the event that new information is identified that existed as of the acquisition date but was not known or available at that time. This measurement period ends on the earlier of one year after the acquisition or the date information about the facts and circumstances that existed at the acquisition are available. TCF anticipates that measurement period adjustments may arise from adjustments to the fair values of Chemical’s assets and liabilities recorded at the Merger Date, as additional information and evidence is obtained. In the event that a measurement period adjustment is identified, TCF will recognize the adjustment as part of its acquisition accounting, which may result in an adjustment to goodwill in the period the adjustment was identified.

In determining the estimated fair value of assets acquired as part of the Merger with Chemical, including the estimated fair value of acquired loans and leases and a core deposit intangible, management relied on a framework of internal controls in place to evaluate the relevance and reliability of key inputs and assumptions used in the fair value and to ensure the mathematical accuracy used to determine an appropriate fair value. Acquired loans and leases were valued using a discounted cash flow methodology with adjustments to contractual cash flows for probability of default, loss given default, discount rates and prepayments rates. Management based the assumptions used on historical data or available market information. The fair value of the core deposit intangible was estimated under the income approach based on discounted net cash flows. This estimate was determined by projecting net cash flow benefits derived from estimating costs to carry deposits compared to alternative funding costs, and includes key assumptions related to deposit interest rates, customer attrition rates, costs of alternative funding, discount rate, and net maintenance costs.

These assumptions were based on both internal data and available market information. Management reviewed the relevance and reliability of key valuation inputs used to support key assumptions. In cases where management utilized a third-party to assist with the valuation, management assessed the qualifications of the third-party and reviewed all outputs provided by the third-party for reasonableness. See “Note 2. Merger” for further information.


Fair Value Measurements Fair value for assets and liabilities measured at fair value on a recurring or nonrecurring basis refers to the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants in the market in which the reporting entity transacts such sales or transfers based on the assumptions market participants would use when pricing an asset or liability. Assumptions are developed based on prioritizing information within a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, such as the reporting entity’s own data.

The Corporation may choose to elect the fair value measurement option on eligible financial instruments. Unrealized gains and losses on items for which the fair value measurement option has been elected are reported in earnings at each subsequent reporting date. At December 31, 2019 and 2018, the Corporation had elected the fair value option on certain loans, primarily residential mortgage loans, it originates for the purpose of selling in secondary markets. The Corporation has not elected the fair value option for any other financial assets or liabilities as of December 31, 2019.

Allowance for Loan and Lease Losses The Corporation’s reserving methodology used to determine the appropriate level of the allowance for loan and lease losses is a critical accounting estimate. The allowance for loan and lease losses is maintained at a level believed to be appropriate to provide for probable loan and lease losses incurred 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. As discussed in the Loans and Leases Acquired in a Business Combination paragraph below, acquired loans and leases do not have an allowance for loan and lease losses recorded until there is a deterioration in credit subsequent to acquisition. Loans classified as troubled debt restructuring (“TDR”) loans are considered impaired loans, along with nonaccrual commercial loans and leases and certain consumer loans. The Corporation individually evaluates impairment on all impaired loans and leases. All other loans and leases are evaluated collectively for impairment. A reserve for unfunded credit commitments such as letters of credit, financial guarantees and binding unfunded loan commitments is recorded in other liabilities on the Consolidated Statements of Financial Condition.

Loan impairment on consumer residential mortgage and home equity TDR loans is a key component of the allowance for loan and lease losses. Impairment is generally based on the present value of the expected future cash flows discounted at the loan’s initial effective interest rate, unless the loans are collateral dependent, in which case loan impairment is based on the fair value of the collateral less estimated selling costs. Impairment on other consumer loans is generally based on the fair value of collateral less estimated selling costs.

Commercial TDR and impaired loans and leases are generally measured at the present value of the expected future cash flows discounted at the initial effective interest rate of the loan or lease, unless the loan or lease is collateral dependent, in which case impairment is based on the fair value of collateral less estimated selling costs; however, if payment or satisfaction of the loan or lease is dependent on the operation, rather than the sale of the collateral, the impairment does not include estimated selling costs.

The impairment for all other loans and leases is evaluated collectively by various characteristics. The collective evaluation of incurred losses in these portfolios is based on their historical loss rates multiplied by the respective loss emergence periods. Factors utilized in the determination of the amount of the allowance include historical trends in loss rates, a portfolio’s overall risk characteristics, changes in its character or size, risk rating migration, delinquencies, collateral values, economic outlook and prevailing economic conditions. The various quantitative and qualitative factors used in the methodologies are reviewed on a periodic basis.


Loans and leases are charged off to the extent they are deemed to be uncollectible. Charge-offs are utilized in the historical data in calculating the allowance for loan and lease losses. Consumer residential mortgage and home equity loans are charged off to the estimated fair value of the underlying collateral, less estimated selling costs, no later than 150 days past due. Additional review of the fair value, less estimated costs to sell, compared with the recorded value occurs upon foreclosure and additional charge-offs are recorded if necessary. Commercial loans and leases that are considered collateral dependent are charged off to estimated fair value, less estimated selling costs when it becomes probable, based on current information and events, that all principal and interest amounts will not be collectible in accordance with their contractual terms. Consumer installment loans will generally be charged off in full no later than 120 days past due, unless repossession is reasonably assured and in process, in which case the loan would be charged off to the fair value of the collateral, less estimated selling costs. Consumer loans in bankruptcy status may be charged down to the fair value of the collateral, less estimated selling costs, within 60 days past due based on specific criteria. Deposit account overdrafts are reported in other loans. Net losses on uncollectible overdrafts are reported as net charge-offs in the allowance for loan and lease losses within 60 days from the date of overdraft. Loans that are not collateral dependent are charged off when deemed uncollectible based on specific facts and circumstances.

The amount of the allowance for loan and lease losses significantly depends on management’s estimates of key factors and assumptions affecting valuation, appraisals of collateral, evaluations of performance and status and the amounts and timing of future cash flows expected to be received. 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 quarterly and adjustments, if necessary, are recorded in the provision for credit losses in the periods in which they become known.

Management maintains a framework of controls over the estimation process for the allowance of loan and lease losses, including review of collective reserve methodologies for compliance with GAAP. Management has a quarterly process to review the appropriateness of historical observation periods and loss emergence period assumptions, risk ratings assigned to commercial loans and leases, and discount rate assumptions used to estimate the fair value of consumer real estate. Management reviews its qualitative framework and the effect on the collective reserve compared with relevant credit risk factors and consistency with credit trends. Management also maintains controls over the information systems, models and spreadsheets used in the quantitative components of the reserve estimate. This includes the quality and accuracy of historical data used to derive loss rates, as well as the probability of default and loss given default used in certain commercial loan models. The results of this process are summarized and presented to management quarterly for their approval of the recorded allowance. See “Note 8. Allowance for Loan and Lease Losses and Credit Quality” for further information on the allowance for loan and lease losses.

Federal Home Loan Bank and Federal Reserve Bank Stocks The Corporation is required to hold nonmarketable equity securities, comprised of Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock, as a condition of membership. These securities are accounted for at cost, less any impairment. Impairment is assessed based on the ultimate recoverability of the investment. These securities do not have a readily determinable fair value as their ownership is restricted and there is no market for these securities. These securities can only be redeemed or sold at their par value and only to the respective issuing government supported institution or to another member institution. FHLB and FRB stock can only be redeemed upon giving notice to each issuing entity and may be subject to restrictions on the amount of stock that can be redeemed at any one time. The nonmarketable equity securities are periodically evaluated for impairment. Management considers these nonmarketable equity securities to be long-term investments. The Corporation recognizes dividend income from its FHLB stock holdings in the period that dividends are declared. See “Note 5. Federal Home Loan Bank and Federal Reserve Bank Stocks” for further information on nonmarketable equity securities.

Investment Securities Held-to-Maturity Investment securities held-to-maturity are carried at cost and adjusted for amortization of premiums or accretion of discounts using a level yield method; however, transfers of investment securities available-for-sale to investment securities held-to-maturity are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of each transfer is retained in accumulated other comprehensive income (loss) and in the carrying value of the held-to-maturity investment security. Such amounts are then amortized over the remaining life of the transferred investment security as an adjustment of the yield on those securities. The Corporation evaluates investment securities held-to-maturity for other than temporary impairment on a quarterly basis. Declines in value considered other than temporary, if any, would be recorded in noninterest income within net gains on investment securities. See “Note 6. Investment Securities” for further information on investment securities held-to-maturity.


Investment Securities Available-for-Sale Investment securities available-for-sale are carried at fair value with the unrealized gains or losses net of related deferred income taxes reported within accumulated other comprehensive income (loss). The cost of investment securities sold is determined on a specific identification basis and gains or losses on sales of investment securities available-for-sale are recognized on trade dates. Discounts and premiums on investment securities available-for-sale are amortized using a level yield method over the expected life of the security, or to the earliest call date for premiums on investment securities with call features. The Corporation evaluates investment securities available-for-sale for other than temporary impairment on a quarterly basis. Declines in value considered other than temporary, if any, would be recorded in noninterest income within net gains on investment securities. See “Note 6. Investment Securities” for further information on investment securities available-for-sale.

Loans and Leases Held-for-Sale Loans and leases designated as held-for-sale are generally carried at the lower of cost or fair value. Any amount by which cost exceeds fair value is initially recorded as a valuation allowance and subsequently recorded in net gains (losses) on sales of loans and leases when sold. Fair value calculations include the servicing value of loans as well as any accrued interest. From time to time, management identifies and designates, primarily consumer loans held in the loan portfolios, for sale. These loans are transferred to loans and leases held-for-sale at the lower of cost or fair value at the time of transfer net of any associated allowance for loan and lease losses.

Certain residential mortgage loans held-for-sale are recorded at fair value under the elected fair value option as prescribed by ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”). The Corporation generally sells conforming long-term fixed interest rate mortgage loans it originates in the secondary market. Gains on the sales of these loans are determined using the specific identification method. The Corporation sells residential mortgage loans in the secondary market on servicing retained and servicing released bases. The fair value election allows for a more effective offset of the changes in fair value of residential mortgage loans held-for-sale and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. Residential mortgage loans held-for-sale are carried at fair value, with changes in fair value recorded through earnings.

Loans and Leases Held-for-Investment Loans and leases designated as held-for-investment are reported at historical cost including net direct fees and costs associated with originating and acquiring loans and leases. The net direct fees and costs for sales-type leases are offset against revenues recorded at the commencement of sales-type leases. Discounts and premiums on acquired loans, net direct fees and costs, unearned discounts and finance charges, and unearned lease income are amortized to interest income using methods that approximate a level yield over the estimated remaining lives of the loans and leases. Net direct fees and costs on all lines of credit are amortized on a straight line basis to fees and service charges over the contractual life of the line of credit and adjusted for payoffs. See “Note 7. Loans and Leases” for further information on loans and leases.

Loans and Leases Acquired in a Business Combination The Corporation record loans and leases acquired in a business combination at fair value at the acquisition date and the fair value discount or premium is recognized as an adjustment to yield over the remaining life of each loan or lease. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Purchased and acquired loans and leases are evaluated at the acquisition date and classified as either (i) loans and leases purchased without evidence of deteriorated credit quality since origination, or (ii) loans purchased with evidence of deteriorated credit quality since origination for which it is probable that all contractually required payments will not be collected, referred to as purchase credit impaired (PCI) loans. PCI loans are considered to be impaired and are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). In determining whether an acquired loan should be classified as a PCI loan, the Corporation must make numerous assumptions, interpretations and judgments using internal and third-party credit quality information to determine whether or not it is probable that the Corporation will be able to collect all contractually required payments. This is a point in time assessment and is inherently subjective due to the nature of the available information and judgment involved. Evidence of credit quality deterioration as of the acquisition date may include statistics such as past due and nonaccrual status, recent borrower credit scores and loan-to-value percentages. The excess of cash flows expected to be collected over the estimated fair value of PCI loans is referred to as the accretable yield and is accreted into interest income over the estimated remaining life of the loan using the effective yield method. The Corporation estimates the expected cash flows based on the expected remaining life of the loans, which includes the effects of estimated prepayments and estimates of future credit losses. Cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, is referred to as the nonaccretable difference.


The Corporation does not classify PCI loans as nonaccrual loans subsequent to acquisition because the loans are recorded at net realizable value based on the principal and interest expected to be collected on the loan. Judgment is required to estimate the timing and amount of cash flows expected to be collected when the loans are not performing in accordance with the original contractual terms.

The Corporation re-estimate the cash flows expected to be collected over the life of PCI loans quarterly. These evaluations require the Corporation to use key assumptions and estimates, similar to the initial estimate of fair value. A decrease in estimated cash flows due to deterioration in credit quality will result in additional reserves recognized in the allowance for loan and lease losses in addition to a transfer from accretable yield to nonaccretable difference.

Purchased and acquired loans and leases outside the scope of ASC 310-30 are accounted for under ASC 310-20, Receivables—Nonrefundable Fees and Other Costs. For purchased and acquired loans and leases, credit discounts representing the expected losses on principal over the life of the loan are a component of the initial fair value. If there is additional credit deterioration after the purchase date additional reserves are recognized in the allowance for loan and lease losses. The net discount or premium is accreted or amortized to interest income over the life of the loan. See “Note 7. Loans and Leases” for further information on loans and leases.

Nonaccrual Loans and Leases Loans and leases are generally placed on nonaccrual status when the collection of interest or principal is 90 days or more past due, unless, in the case of commercial loans and leases, they are well secured and in the process of collection. Delinquent consumer home equity junior lien loans are placed on nonaccrual status when there is evidence that the related third-party first lien mortgage may be 90 days or more past due, or foreclosure, charge-off or collection action has been initiated. TDR loans are placed on nonaccrual status prior to the past due thresholds outlined above if repayment under the modified terms is not likely after performing a well-documented credit analysis.

Loans and leases on nonaccrual status are generally reported as nonaccrual loans until there is sustained repayment performance for six consecutive months, with the exception of loans not reaffirmed upon discharge under Chapter 7 bankruptcy, which remain on nonaccrual status until a well-documented credit analysis indicates full repayment of the remaining pre-discharged contractual principal and interest is likely. Income on these loans and leases is recognized on a cash basis when there is sustained repayment performance for nine or 12 consecutive months based on the credit evaluation and the loan is not more than 60 days delinquent.

Generally, when a loan or lease is placed on nonaccrual status, uncollected interest accrued in prior years is charged off against the allowance for loan and lease losses and interest accrued in the current year is reversed against interest income. For nonaccrual leases that have been discounted with third-party financial institutions on a non-recourse basis, the related liability is also placed on nonaccrual status. Interest payments received on loans and leases in nonaccrual status are generally applied to principal unless the remaining principal balance has been determined to be fully collectible, in which case interest income is recognized on a cash basis. See “Note 8. Allowance for Loan and Lease Losses and Credit Quality” for further information on nonaccrual loans and leases.

Leases The Corporation enters into lease contracts as both a lessor and a lessee. A contract, or part of a contract, is considered a lease if it conveys the right to obtain substantially all of the economic benefits from, and the right to direct and use, an identified asset for a period of time in exchange for consideration. The determination of lease classification requires various judgments and estimates by management which may include the fair value of the equipment at lease inception, useful life of the equipment under lease, estimate of the lease residual value and collectability of minimum lease payments. Management has policies and procedures in place for the determination of lease classification and review of the related judgments and estimates for all leases.

As a lessor, the Corporation provides various types of lease financing that are classified for accounting purposes as direct financing, sales-type or operating leases. Leases that transfer substantially all of the benefits and risks of ownership to the lessee are classified as direct financing or sales-type leases and are recorded in loans and leases. Direct financing and sales-type leases are carried at the combined present value of future minimum lease payments and lease residual values.


Interest income on net investment in direct financing and sales-type leases is recognized using methods that approximate a level yield over the fixed, non-cancelable term of the lease, including pro rata rent payments received for the interim period until the lease contract commences and the fixed, non-cancelable lease term begins. Sales-type leases generate selling profit (loss), which is recognized on the commencement date by recording lease revenue net of lease cost. Lease revenue consists of the present value of the future minimum lease payments and lease cost consists of the leased equipment’s net book value, less the present value of its residual.

Some lease financing contracts include a residual value component, which represents the estimated fair value of the leased equipment at the expiration of the initial term of the transaction. The estimation of residual values involves judgment regarding product and technology changes, customer behavior, shifts in supply and demand and other economic assumptions. The Corporation reviews residual assumptions when assessing potential impairment of the net investment in direct financing and sales-type leases each quarter. Decreases in the expected residual value are reflected through an increase in the provision for credit losses, which results in an increase to the allowance for loan and lease losses.

The Corporation may sell minimum lease payment receivables, primarily as a credit risk reduction tool, to third-party financial institutions at fixed rates, on a non-recourse basis, with its underlying equipment as collateral. For those transactions that qualify for sale accounting, the related lease cash flow stream and the non-recourse financing are derecognized. For those transactions that do not qualify for sale accounting, the underlying lease remains on the Consolidated Statements of Financial Condition and non-recourse debt is recorded in the amount of the proceeds received. The Corporation retains servicing of these leases and bills, collects and remits funds to the third-party financial institution. Upon default by the lessee, the third-party financial institutions may take control of the underlying collateral which the Corporation would otherwise retain as residual value.

Leases that do not transfer substantially all benefits and risks of ownership to the lessee are classified as operating leases. Such leased equipment and related initial direct costs are included in other assets and depreciated to their estimated salvage value on a straight-line basis over the term of the lease. Lease financing equipment depreciation is recorded in noninterest expense on the Consolidated Statements of Income. Operating lease payments received are recognized as lease income on the Consolidated Statements of Income when due and recorded as a component of leasing revenue in noninterest income. An allowance for lease losses is not provided on operating leases. See “Note 7. Loans and Leases” for further information on leases.

As a lessee, the Corporation enters into contracts to lease real estate, information technology equipment and various other types of equipment. Leases that transfer substantially all of the benefits and risks of ownership to the Corporation are classified as finance leases, while all others are classified as operating leases. At lease commencement, a lease liability and right-of-use asset are calculated and recognized for both types of leases. The lease liability is equal to the present value of future minimum lease payments. The right-of-use asset is equal to the lease liability, plus any initial direct costs and prepaid lease payments, less any lease incentives received. Operating lease right-of-use assets are recorded in other assets and finance lease right-of-use assets are recorded in premises and equipment, net. The Corporation uses the appropriate term FHLB rate to determine the discount rate for the present value calculation of future minimum payments when an implicit rate is not known for a given lease. The lease term used in the calculation includes any options to extend that the Corporation is reasonably certain to exercise.

Subsequent to lease commencement, lease liabilities recorded for finance leases are measured using the effective interest rate method and the related right-of-use assets are amortized on a straight-line basis over the lease term. Interest expense and amortization expense are recorded separately in the Consolidated Statements of Income in interest expense on borrowings and occupancy and equipment noninterest expense, respectively. For operating leases, total lease cost is comprised of lease expense, short-term lease cost, variable lease cost and sublease income. Lease expense includes future minimum lease payments, which are recognized on a straight-line basis over the lease term, as well as common area maintenance charges, real estate taxes, insurance and other expenses, where applicable, which are expensed as incurred. Total lease cost for operating leases is recorded in occupancy and equipment in noninterest expense. See “Note 12. Operating Lease Right-of-Use Assets and Liabilities” for further information.


Premises and Equipment Premises and equipment, including right-of-use assets for finance leases and leasehold improvements, are carried at cost and are depreciated or amortized on a straight-line basis over the estimated useful lives of owned assets (up to 39 years for buildings, and ranging from three to 15 years for all other depreciable owned assets), over the lease term for right-of-use assets and over the lesser of the estimated useful life of the related asset or the lease term for leasehold improvements. Maintenance and repairs are charged to expense as incurred. Rent expense for leased land with facilities is recognized in occupancy and equipment expense. Rent expense for leases with free rent periods or scheduled rent increases is recognized on a straight-line basis over the lease term. See “Note 9. Premises and Equipment, Net” for further information on premises and equipment.

Goodwill and Other Intangible Assets All assets and liabilities acquired in purchase acquisitions, including other intangibles, are initially recorded at fair value. Goodwill is recorded when the purchase price of an acquisition is greater than the fair value of net assets, including identifiable intangible assets. Goodwill is not amortized, but assessed for impairment annually at the reporting unit level. The Corporation has historically performed its annual assessment as of December 31st. As a result of its Merger, the Corporation has elected to perform its annual test in the fourth quarter utilizing September 30th financial data. The change in assessment date is not material to the financial statements and allows management more time to perform the analysis of the significant goodwill generated as a result of the Merger. Interim impairment analysis may be required if events occur or circumstances change that would more-likely-than-not reduce a reporting unit’s fair value below its carrying amount. Other intangible assets are amortized on a straight-line basis or accelerated method over their estimated useful lives and are subject to impairment if events or circumstances indicate a possible inability to realize their carrying amounts.

When testing for goodwill impairment, the Corporation has the option to perform a qualitative assessment of goodwill. The Corporation may also elect to perform a quantitative test without first performing a qualitative analysis. If the qualitative assessment is performed and the Corporation concludes it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount, a quantitative analysis is performed. Quantitative valuation methodologies primarily include a discounted cash flow analysis in determining the fair value of reporting units. If the fair value is less than the carrying amount, additional analysis is required to measure the amount of impairment. Impairment losses, if any, are recorded as a charge to other noninterest expense and an adjustment to the carrying value of goodwill.

Loan Servicing Rights Loan servicing rights (“LSRs”) are recognized as assets or liabilities as a result of selling residential mortgage and commercial real estate loans in the secondary market while retaining the right to service these loans and receive servicing income over the life of the loan, and from acquisitions of other banks that had LSRs. An LSR is recorded at estimated fair value when initially recognized. Fair value is determined by the present value of expected cash flows received in excess of a market servicing rate. If the amount earned to service assets is equal to the market rate, no value is recorded. Subsequently, LSRs are accounted for at the lower of amortized cost or fair value and amortized in proportion to and over the period of net servicing income. Unexpected prepayments of mortgage loans result in increased amortization of LSRs, as the remaining book value of the LSRs is expensed at the time of prepayment. LSRs are assessed quarterly for impairment. See “Note 11. Loan Servicing Rights” for further information.

Interest-only Strips The Corporation sells loans with or without interest-only strips to third party financial institutions. For those transactions that achieve sale treatment, the underlying loans are removed from the Consolidated Statements of Financial Condition. The Corporation may receive as part of the sale consideration an interest in the future cash flows of borrower loan payments, known as an interest-only strip. The interest-only strip is recorded at fair value in other assets with the unrealized gains or losses net of deferred income taxes reported within accumulated other comprehensive income (loss), similar to investment securities available-for-sale. The fair value of the interest-only strip represents the present value of future cash flows expected to be received by the Corporation. After initial recording of the interest-only strip, the accretable yield is measured as the difference between the initial investment, or fair value, and the cash flows expected to be collected. The accretable yield is amortized into interest income over the life of the interest-only strip using the effective yield method. The expected cash flows are evaluated quarterly to determine if they have changed from previous projections. Declines in the value of interest-only strips that are considered other than temporary are recorded in other noninterest expense, with amounts previously recorded within accumulated other comprehensive income (loss) being reclassified as appropriate. See “Note 7. Loans and Leases” for further information on interest-only strips.


Other Real Estate Owned and Repossessed and Returned Assets Other real estate owned and repossessed and returned assets is comprised of assets acquired through foreclosure, repossession or returned to the Corporation. These assets are initially recorded at the lower of the loan or lease carrying amount or fair value of the collateral less estimated selling costs at the time of transfer to real estate owned or repossessed and returned assets. The fair value of other real estate owned is based on independent appraisals, real estate brokers’ price opinions or automated valuation methods, less estimated selling costs. The fair value of repossessed and returned assets is based on available pricing guides, auction results or price opinions, less estimated selling costs. Any carrying amount in excess of the fair value less estimated selling costs is charged off to the allowance for loan and lease losses upon transfer. Subsequently, if the fair value of an asset, less the estimated costs to sell, declines to less than the carrying amount of the asset, the shortfall is recognized in the period in which it becomes known and is included in foreclosed real estate and repossessed assets, net expense. Operating expenses of properties and recoveries on sales of other real estate owned are also recorded in noninterest expense within net foreclosed real estate and repossessed assets. Operating revenue from foreclosed property is included in other noninterest income. See “Note 8. Allowance for Loan and Lease Losses and Credit Quality” for further information on other real estate owned and repossessed and returned assets.

Investments in Qualified Affordable Housing Projects, Federal Historic Projects and New Market Tax Credits The Corporation has investments in affordable housing limited liability entities that either operate qualified affordable housing projects or invest in other limited liability entities formed to operate affordable housing projects, which generally accounts for under the proportional amortization method. However, depending on circumstances, the effective yield, equity or cost methods may be utilized. The Corporation also has investments in federal historic projects and new market projects, which are accounted for under the equity method. The amount of the investments, along with any unfunded equity contributions that are unconditional and legally binding, are recorded in other assets on the Consolidated Statements of Financial Condition. A liability for the unfunded equity contributions is recorded in accrued expenses and other liabilities on the Consolidated Statements of Financial Condition. The tax credits and amortization of the investments are recorded as a component of income tax expense (benefit). Investments in affordable housing limited liability entities are considered VIEs because the Corporation, as a limited partner, lacks the power to direct the activities that most significantly impact the entities’ economic performance. The Corporation has concluded it is not the primary beneficiary of the investments in affordable housing limited liability entities and therefore, they are not consolidated. The maximum exposure to loss on the VIE investments is limited to the carrying amount of the investments and the potential recapture of any recognized tax credits. The Corporation believes the likelihood of the tax credits being recaptured is remote, as a loss would require the managing entity to fail to meet certain government compliance requirements. Further, certain of the Corporation’s investments in affordable housing limited liability entities include guaranteed minimum returns which are backed by an investment grade credit-rated company, which reduces the risk of loss. See “Note 13. Investments in Qualified Affordable Housing Projects, Federal Historic Projects and New Market Tax Credits” for further information on investments in affordable housing limited liability entities.

Derivative Instruments All derivative instruments are recognized at fair value within other assets and other liabilities. The Corporation’s derivative instruments may be subject to master netting arrangements and collateral arrangements and qualify for offset in the Consolidated Statements of Financial Condition. A master netting arrangement with a counterparty creates a right of offset for amounts due to and from that same counterparty that is enforceable in the event of a default or bankruptcy. The Corporation’s policy is to recognize amounts subject to master netting arrangements and collateral arrangements on a net basis in the Consolidated Statements of Financial Condition. The value of derivative instruments will vary over their contractual terms as the related underlying rates fluctuate. The accounting for changes in the fair value of a derivative instrument depends on whether or not the contract has been designated and qualifies as a hedge. To qualify as a hedge, a contract must be highly effective at reducing the risk associated with the exposure being hedged. In addition, for a contract to be designated as a hedge, the risk management objective and strategy must be documented at inception. Hedge documentation must also identify the hedging instrument, the asset or liability and type of risk to be hedged and how the effectiveness of the contract is assessed prospectively and retrospectively. To assess effectiveness, the Corporation uses statistical methods such as regression analysis. A contract that has been, and is expected to continue to be effective at offsetting changes in fair values or the net investment, must be assessed and documented at least quarterly. If it is determined that a contract is not highly effective at hedging the designated exposure, hedge accounting is discontinued.

Upon origination of a derivative instrument, the contract is designated either as a hedge of the exposure to changes in the fair value of an asset or liability due to changes in market risk (“fair value hedge”), a hedge of the volatility of an investment in foreign operations driven by changes in foreign currency exchange rates (“net investment hedge”) or is not designated as a hedge.


Fair Value Hedges TCF Bank entered into an interest rate swap agreement related to its contemporaneously issued subordinated debt, which settles through a central clearing house. The swap was designated as a fair value hedge and effectively converts the fixed interest rate to a floating rate based on the three-month London InterBank Offered Rate (“LIBOR”) plus a fixed number of basis points on the $150.0 million notional amount through February 27, 2025, the maturity date of the subordinated debt.

The interest rate swap substantially offsets the change in fair value of the hedged underlying subordinated debt that is attributable to the changes in market risk. The gains and losses related to changes in the fair value of the interest rate swap, as well as the offsetting changes in fair value of the hedged debt, are recorded in interest on borrowings effective January 1, 2018 and were previously recorded in other noninterest income.

Net Investment Hedges Forward foreign exchange contracts, which generally settle within 34 days, are used to manage the foreign exchange risk associated with the Corporation’s net investment in TCF Commercial Finance Canada, Inc. (“TCFCFC”), a wholly-owned indirect Canadian subsidiary of TCF Bank. Changes in net investment hedges recorded within other comprehensive income (loss) are subsequently reclassified to other noninterest expense during the period in which the foreign investment is substantially liquidated or when other elements of the currency translation adjustment are reclassified to income.

Derivatives Not Designated as Hedges The Corporation executes interest rate contracts with commercial banking customers to facilitate their respective risk management strategies. Those interest rate contracts are simultaneously hedged with offsetting interest rate contracts that the Corporation executes with a third party and generally settles through a central clearing house, minimizing the Corporation’s net risk exposure. As the interest rate contracts do not meet hedge accounting requirements, changes in the fair value of both the customer contracts and the offsetting contracts are recorded in other noninterest income. These contracts have original fixed maturity dates ranging from 3 to 10 years.

Portions of loans to commercial banking customers with associated interest rate contracts may be sold or purchased by TCF Bank. In such circumstances, the Corporation often executes risk participation agreements (“RPAs”) directly with the party that owns the remaining portion of the loan. These agreements require the party that has not originated the interest rate contract with the borrower to assume a portion of the risk that the borrower will default on the interest rate contract obligation. As the RPAs do not meet hedge accounting requirements, changes in the fair value of these contracts are recorded in other noninterest income. These contracts have original fixed maturity dates matching the associated interest rate contracts.

Certain of the Corporation’s forward foreign exchange contracts are not designated as hedges and are generally settled within 34 days. Changes in the fair value of these forward foreign exchange contracts are recorded in other noninterest expense.

The Corporation enters into interest rate lock commitments in conjunction with the sale of certain consumer real estate loans. These interest rate lock commitments are agreements to extend credit under certain specified terms and conditions at fixed rates with original lock expirations generally within 10 months. They are not designated as hedges and accordingly, changes in the valuation of these commitments are recorded in net gains on sales of loans and leases.

Mandatory forward loan sale commitments are accounted for as derivatives and recorded at fair value, with changes in fair value recorded through earnings. The Corporation recognizes revenue associated with the expected future cash flows of servicing loans for loans held-for-sale at the time a forward loan sale commitment is made to originate a held-for-sale loan.

The Corporation has written and purchased option derivatives consisting of instruments to facilitate an equity-linked time deposit product (the “Power Equity CD”). The Power Equity CD is a time deposit that provides the purchaser a guaranteed return of principal at maturity plus a potential equity return (a written option), while the Corporation receives a known stream of funds based on the equity return (a purchased option). The written and purchased options are mirror derivative instruments which are carried at fair value on the Consolidated Statements of Financial Condition.


During the second quarter of 2012, the Corporation sold its Visa® Class B stock. In conjunction with the sale, the Corporation and the purchaser entered into a derivative transaction whereby the Corporation may receive or be required to make cash payments whenever the conversion ratio of the Visa Class B stock into Visa Class A stock is adjusted. The fair value of this derivative has been determined using estimated future cash flows using probability weighted scenarios for multiple estimates of Visa’s aggregate exposure to covered litigation matters, which include consideration of amounts funded by Visa into its escrow account for the covered litigation matters. Changes, if any, in the valuation of this swap agreement, which has no determinable maturity date, are recorded in other noninterest expense. See “Note 23. Derivative Instruments” for further information on derivative instruments.

Bank-Owned Life Insurance The Corporation has life insurance policies on certain key officers of TCF Bank. The bank-owned life insurance policies of the Corporation were obtained through its merger with Chemical Bank in August 2019. Bank-owned life insurance is recorded at the cash surrender value, net of surrender charges, and is included within other assets on the Consolidated Statements of Financial Condition and tax-exempt income from the periodic changes in the cash surrender values are recorded as other noninterest income on the Consolidated Statements of Income. The total cash surrender value of the bank owned life insurance policies totaled $167.6 million at December 31, 2019. Bank owned life insurance income was $1.5 million for the year ended December 31, 2019.

Short-term Borrowings Short-term borrowings are comprised of short-term FHLB advances with original scheduled maturities of one year or less, and collateralized customer deposits, which represent funds deposited by customers that are collateralized by investment securities owned by the Corporation, as these deposits are not covered by Federal Deposit Insurance Corporation (“FDIC”) insurance and are reflected as a liability in the accompanying Consolidated Statements of Financial Condition. See “Note 15. Borrowings” for further information.

Long-term Borrowings Long-term borrowings are comprised of subordinated debentures, long-term FHLB advances, discounted lease rentals, and finance lease obligations. See Note 15. Borrowings for further information.

Advertising Costs Advertising costs are expensed as incurred. The Corporation has entered into long-term contracts for sponsorships or naming rights of certain events and buildings. Costs associated with these contracts are generally expensed ratable over the contract term.

Income Taxes The Corporation files consolidated and separate company U.S. federal income tax returns, combined and separate company state income tax returns and foreign income tax returns. Current and deferred tax assets and liabilities are measured based on the provisions of enacted tax law.

Income taxes are accounted for using the asset and liability method. Under this method, current income tax expense represents the estimated liability for the current period and includes income tax expense related to uncertain tax positions. When income and expenses are recognized in different periods for tax purposes than for book purposes, deferred tax assets and liabilities are recognized for the future tax consequences attributable to the temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Differences in the tax and book carrying amounts of assets and liabilities can also be generated when the Corporation acquires other businesses or bank branches. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recorded in income tax expense (benefit) in the period in which the enactment date occurs. If current period income tax rates change, the impact on the annual effective income tax rate is applied year to date in the period of enactment.

The determination of current and deferred income taxes is based on analyses of many factors, including interpretation of income tax laws, the evaluation of uncertain tax positions, temporary differences between the tax and financial reporting bases of assets and liabilities, estimates of amounts due or owed, the timing of reversals of temporary differences and current financial accounting standards. Additionally, there can be no assurance that estimates and interpretations used in determining income tax assets or liabilities will not be challenged by taxing authorities. Actual results could differ significantly from the estimates and tax law interpretations used in determining the current and deferred income tax assets and liabilities.


In the preparation of income tax returns, tax positions are taken based on interpretation of income tax laws for which the outcome is uncertain. At each balance sheet date, management reviews and evaluates the status of uncertain tax positions and makes estimates of amounts ultimately due or owed. The benefits of tax positions are recorded in income tax expense (benefit) net of the estimates of ultimate amounts due or owed, including any applicable interest and penalties. Changes in the estimated amounts due or owed may result from closing of the statute of limitations on tax returns, new legislation, clarification of existing legislation through government pronouncements, judicial action and through the examination process. The Corporation’s policy is to record interest and penalties, if any, related to unrecognized tax benefits in income tax expense (benefit). See “Note 16. Income Taxes” for further information on income taxes.

Share-based Compensation The fair value of restricted stock awards, stock options and restricted stock units is determined on the date of grant and amortized to compensation and employee benefits expense, with a corresponding increase to additional paid-in capital, over the longer of the service period or performance period, but in no event beyond an employee’s retirement date or date of employment termination. For performance-based restricted stock or stock units, the Corporation estimates the degree to which performance conditions will be met to determine the number of shares or units that will vest and the related expense. Compensation and employee benefits expense is adjusted in the period such estimates change. Non-forfeitable dividends, if any, paid on shares of restricted stock are recorded to retained earnings for shares that are expected to vest and to compensation and employee benefits expense for shares that are not expected to vest.

Income tax benefits (detriments) related to stock compensation, where the fair value on vesting or exercise of the award is greater than (less than) the grant date value less any proceeds on exercise, are recognized in income tax expense (benefit). See “Note 20. Share-based Compensation” for further information on stock-based compensation.

Earnings Per Common Share The Corporation’s restricted stock awards that pay non-forfeitable common stock dividends meet the criteria of a participating security. Accordingly, earnings per share is calculated using the two-class method under which earnings are allocated to both common shares and participating securities.

All shares of restricted stock are deducted from weighted-average shares outstanding for the computation of basic earnings per common share. Shares of performance-based restricted stock and restricted stock units are included in the calculation of diluted earnings per common share using the treasury stock method at the beginning of the quarter in which the performance goals have been achieved. All other shares of restricted stock, which vest over specified time periods, stock options and warrants are included in the calculation of diluted earnings per common share using the treasury stock method. See “Note 25. Earnings Per Common Share” for further information on earnings per share.

Accumulated Other Comprehensive Income (Loss) Comprehensive income of the Corporation includes net income and adjustments to shareholders’ equity for changes in unrealized gains and losses on investment securities available-for-sale, interest only strips, and net investment hedges, as well as foreign currency translation adjustments and recognized postretirement prior service cost. All items included in comprehensive income are net of income taxes. The Corporation presents “Comprehensive income” as a component in the Consolidated Statements of Equity and the components of other comprehensive income (loss) separately in the Consolidated Statements of Comprehensive Income. See “Note 29. Accumulated Other Comprehensive Income (Loss)” for further information on accumulated other comprehensive income (loss).

Recently Adopted Accounting Pronouncements

Effective January 1, 2019, the Corporation adopted ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes, which permits the use of the OIS Rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815 in addition to the interest rates on direct Treasury obligations of the U.S. government, the London Interbank Offered Rate (“LIBOR”) swap rate, the OIS Rate based on the Fed Funds Effective Rate and the Securities Industry and Financial Markets Association Municipal Swap Rate. The adoption of this ASU was on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after January 1, 2019. The adoption of this guidance did not have a material impact on the consolidated financial statements.


Effective January 1, 2019, the Corporation adopted ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force), which requires the decision to capitalize or expense implementation costs incurred in a cloud computing arrangement (i.e. a hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40. The Corporation’s policy had been to expense these costs as incurred. The adoption of this ASU was on a prospective basis. The adoption of this guidance did not have a material impact on the consolidated financial statements.

Effective January 1, 2019, the Corporation adopted ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it more consistently with the accounting for share-based payments to employees. The new guidance in ASC 718 supersedes the guidance in ASC 505-50. The adoption of this ASU was on a modified retrospective basis with no cumulative effect adjustment recorded. The adoption of this guidance did not have a material impact on the consolidated financial statements.

Effective January 1, 2019, the Corporation adopted ASU No. 2017-11, Earnings Per Share (Topic 260): Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, which simplifies the accounting for certain equity-linked financial instruments and embedded features with the down round features that reduce the exercise price when the pricing of a future round of financing is lower. The adoption of this ASU was on a modified retrospective basis. The adoption of this guidance did not have a material impact on the consolidated financial statements.

Effective January 1, 2019, the Corporation adopted ASU No. 2016-02, Leases (Topic 842), which, along with other amendments, requires lessees to recognize most leases on their balance sheet. Lessor accounting is largely unchanged. The ASU requires both quantitative and qualitative disclosure regarding key information about leasing arrangements from both lessees and lessors. Effective January 1, 2019, the Corporation also adopted the following ASUs, which further amend the original lease guidance in Topic 842: (i) ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840) and Leases (Topic 842): Amendments to SEC Paragraphs, which rescinds certain SEC Observer comments and staff announcements from the lease guidance and incorporates SEC staff announcements on the effect of a change in tax law on leveraged leases from ASC 840 into ASC 842; (ii) ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which amends the new lease guidance to add an optional transition practical expedient that permits an entity to continue applying its current accounting policy for land easements that existed or expired before January 1, 2019; (iii) ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which makes narrow scope improvements to the standard for specific issues; (iv) ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides an optional transition method allowing the standard to be applied at the adoption date and provides a practical expedient related to separating components of a contract for lessors; (v) ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, which allows lessors to elect to account for all sales taxes as lessee costs, instead of determining whether they are lessee or lessor costs in each individual jurisdiction. It requires lessor costs paid by lessees directly to third parties to be excluded from revenue, requires lessors to account for costs excluded from the consideration of a contract that are paid by the lessor as revenue and requires certain variable payments to be allocated (rather than recognized) to lease and nonlease components when changes occur in the facts and circumstances on which the variable payments are based; and (vi) ASU No. 2019-01, Leases (Topic 842): Codification Improvements, which allows lessors that are not manufacturers or dealers to calculate the fair value of an underlying asset as its cost less any volume or trade discount, requires lessors to classify principal payments received from direct financing and sales-type leases as investing activities in the statement of cash flows and clarifies that certain disclosure requirements that were explicitly excluded from annual reporting during the year of adoption are also excluded from interim reporting during the same year. These ASUs were adopted on a modified retrospective basis. Management elected the practical expedients and optional transition method, which allow for leases entered into prior to January 1, 2019 to be accounted for consistent with prior guidance. Management evaluated the Corporation’s leasing contracts and activities, and developed methodologies and processes to estimate and account for the right-of-use assets and lease liabilities based on the present value of future lease payments. On January 1, 2019, the Corporation recorded right-of-use assets and lease liabilities totaling $91.9 million and $112.8 million, respectively. The Corporation also recorded additional right-of-use assets and lease liabilities totaling $39.8 million and $41.6 million on August 1, 2019 as a result of the Merger. The impact to capital ratios as a result of increased risk-weighted assets is immaterial. The adoption of this guidance did not result in a material change to lessee expense recognition. The changes to lessor accounting, as well as changes in customer behavior driven by the adoption of these ASUs, impacts the results of the leasing and equipment financing businesses, including earlier recognition of expense due to a narrower definition of initial direct costs and the timing of revenue recognition for certain leases, resulting in more revenue being deferred over the lease term.


Recently Issued Accounting Pronouncements

In January 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force), which clarifies the interactions between Topic 321, Topic 323 and Topic 815, including accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The adoption of this ASU will be required beginning with the Corporation’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2021. Early adoption is allowed. Management is currently evaluating the impact of this guidance on the consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify the accounting for income taxes by removing certain exceptions to the general rules found in Topic 740—Income Taxes. The adoption of this ASU will be required beginning with the Corporation’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2021. Early adoption is allowed. Management is currently evaluating the impact of this guidance on the consolidated financial statements.

In November 2019, the FASB issued ASU No. 2019-08, Compensation-Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements-Share-Based Consideration Payable to a Customer, which requires entities to measure and classify share based payment awards granted to a customer by applying the guidance in Topic 718. The adoption of this ASU will be required beginning with the Corporation’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2020. Early adoption is allowed. The adoption of this guidance will not have a material impact on the consolidated financial statements.

In November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which makes targeted improvements to the accounting for collaborative arrangements in response to questions raised as a result of the issuance of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The adoption of this ASU will be required beginning with the Corporation’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2020. Early adoption is allowed. The adoption of this guidance will not have a material impact on the consolidated financial statements.

In October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, which provides an elective exemption to private companies from applying variable interest entities (“VIE”) guidance to all entities under common control if certain criteria are met. In addition, this ASU contains an amendment applicable to all entities which amends how a decision maker or service provider determines whether its fee is a variable interest in a VIE when a related party under common control also has an interest in the VIE. The adoption of this ASU will be required beginning with the Corporation’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2020. Early adoption is allowed. The adoption of this guidance will not have a material impact on the consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The adoption of this ASU will be required beginning with the Corporation’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2020. Certain of the amendments require prospective application, while the remainder require retrospective application. Early adoption is allowed either for the entire standard or only the provisions that eliminate or modify the requirements. Management is currently evaluating which adoption method will be selected as well as the related potential impact of this guidance on the consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Subsequent to adoption, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance largely remains unchanged. The adoption of this ASU will be required beginning with the Corporation’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2020 on a prospective basis. Early adoption is allowed. The adoption of this guidance will not have a material impact on the consolidated financial statements.


In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets (including off-balance sheet exposures), including trade and other receivables, debt securities held-to-maturity, loans, net investments in leases and purchased financial assets with credit deterioration. The ASU requires the use of a current expected credit loss (“CECL”) methodology to determine the allowance for credit losses for loans and debt securities held to maturity. CECL requires loss estimates for the remaining estimated life of the asset to be measured using historical loss data as well as adjustments for current conditions and reasonable and supportable forecasts of future economic conditions. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20 and should be accounted for in accordance with Topic 842. In April 2019, the FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which clarifies and corrects certain unintended applications of the guidance contained in each of the amended Topics. In May 2019, the FASB issued ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief, which provides an option to irrevocably elect the fair value option in Subtopic 825-10 to certain instruments within the scope of Subtopic 326-20 upon adoption of Topic 326. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarifies that expected recoveries of amounts previously written off or expected to be written off should be included in the estimate of allowance for credit losses for purchased financial assets with credit deterioration, provides certain transition relief for TDR accounting when the discounted cash flow method is used to estimate credit losses, allows entities to elect to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements, and clarifies that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing financial assets when electing a practical expedient to measure the estimate of expected credit losses by comparing the amortized cost basis of the financial asset and the fair value of collateral securing the financial asset as of the reporting date. The adoption of these ASUs will be reflected using a modified retrospective approach with a cumulative effect adjustment recorded as of January 1, 2020 in the Corporation’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2020. CECL represents a significant change in GAAP and is expected to result in a significant change to industry practice, which the Corporation expects will continue to evolve over time.

The Corporation has established a governance structure to implement these ASUs and has developed a methodology and set of models to be used upon adoption. At December 31, 2019, loan and lease portfolios totaled $34.5 billion with a corresponding allowance for loan and lease losses (“ALLL”) of $113.1 million under current GAAP. Based on parallel runs of the CECL process that the Corporation has performed alongside the current ALLL process, the Corporation estimates that the adoption of the standard will result in an allowance for credit losses (“ACL”) that is larger than the current ALLL levels by $200.0 million to $225.0 million in total for all portfolios. Approximately 20% of the anticipated increase from ALLL to ACL relates to originated loans and leases, with the largest impact on the consumer segment given the longer duration of the portfolios. A significant portion of the anticipated increase from ALLL to ACL is a result of new requirements to record ACL related to acquired loans and leases, regardless of any credit mark recorded. Approximately 80% of the anticipated increase from ALLL to ACL relates to acquired loans and leases, which were recorded at estimated fair value at their respective acquisition dates, the majority of which relate to loans and leases acquired in the Merger. Under current GAAP, credit marks are included in the determination of the fair value adjustments reflected as a discount to the carrying value of the loans, and an ALLL is not recorded on acquired loans and leases until there is evidence of credit deterioration post acquisition. However, upon adoption of CECL an ACL is recorded for all acquired loans and leases based on the lifetime loss concept. Further, for acquired loans and leases that do not meet the definition of purchase credit deteriorated (“PCD”), the credit and interest marks which remain from acquisition accounting as of December 31, 2019 will continue to accrete over the life of loan. For acquired loans that meet the definition of PCI and convert to PCD at adoption, the ACL recorded is recognized through a gross-up that increases the amortized cost basis of loans with a corresponding ACL, and therefore results in little to no impact to the cumulative effect adjustment to retained earnings. The adoption of CECL will also result in an increase in the liability for unfunded commitments of between $10.0 million and $15.0 million. For other assets within the scope of the standard such as debt securities held-to-maturity, trade and other receivables, management expects the impact from the standard to be inconsequential. The Corporation estimates a cumulative tax effected adjustment to record ACL and to increase the unfunded commitment liability results in a reduction to retained earnings of $160.0 million to $175.0 million. Management is finalizing its review of certain asset-specific risk characteristics and of the most recent model run related to acquired loans. Management is also evaluating financial statement and disclosure impacts, as well as determining whether to elect to utilize the three-year phase-in period for regulatory impact of CECL. As the Corporation finalizes the implementation of the standard in the first quarter of 2020, final decisions by management will result in the specific January 1, 2020 ACL impact being established.


The initial increase to the Corporation’s allowance for loan and lease losses and liability for unfunded commitments will be recorded as an adjustment to beginning of the year retained earnings. Post adoption, as loans and leases are added to the portfolio, the Corporation expects higher levels of allowance for credit losses determined by CECL assumptions, resulting in accelerated recognition of provision for credit losses, as compared to historical results.

Note 4. Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks and interest-bearing deposits in other banks.

At December 31, 2019 and 2018, TCF Bank was required by Federal Reserve regulations to maintain reserves of $177.0 million and $106.2 million, respectively, in cash on hand or at the Federal Reserve Bank. We maintain cash balances that are restricted as to their use in accordance with certain obligations. Cash payments received on loans serviced for third parties are generally held in separate accounts until remitted. We may also retain cash balances for collateral on certain borrowings and derivative contracts. We maintained restricted cash totaling $68.6 million and $38.3 million at December 31, 2019 and 2018, respectively.

Note 5. Federal Home Loan Bank and Federal Reserve Bank Stocks

Investments were as follows:

 

     At December 31,  

(In thousands)

   2019      2018  

Federal Home Loan Bank stock, at cost

   $ 318,473      $ 54,019  

Federal Reserve Bank stock, at cost

     123,967        37,635  
  

 

 

    

 

 

 

Total investments

   $ 442,440      $ 91,654  
  

 

 

    

 

 

 

The investments in FHLB stock are required investments related to the Corporation’s membership in and borrowings from the FHLB of Des Moines, and additional commitments from the FHLB of Indianapolis and Cincinnati. The Corporation’s investments in the FHLB of Des Moines, Indianapolis and Cincinnati could be adversely impacted by the financial operations of the Federal Home Loan Banks and actions of their regulator, the Federal Housing Finance Agency. The amount of FRB stock that TCF Bank is required to hold is based on TCF Bank’s capital structure. We periodically evaluate investments for other than temporary impairment. There was no impairment of these investments in 2019, 2018 and 2017.


Note 6. Investment Securities

The amortized cost and fair value of investment securities were as follows:

 

     Investment Securities Available-for-sale, At Fair Value  

(In thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

At December 31, 2019

           

Debt securities:

           

Government and government-sponsored enterprises

   $ 235,045      $ 18      $ 678      $ 234,385  

Obligations of states and political subdivisions

     852,096        12,446        687        863,855  

Mortgage-backed securities:

           

Residential agency

     4,492,427        68,797        6,103        4,555,121  

Residential non-agency

     374,046        1,166        616        374,596  

Commercial agency

     645,814        8,639        2,049        652,404  

Commercial non-agency

     39,398        17        205        39,210  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed debt securities

     5,551,685        78,619        8,973        5,621,331  

Corporate debt and trust preferred securities

     451        —          21        430  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 6,639,277      $ 91,083      $ 10,359      $ 6,720,001  
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2018

           

Debt securities:

           

Obligations of states and political subdivisions

   $ 566,304      $ 46      $ 9,479      $ 556,871  

Mortgage-backed securities:

           

Residential agency

     1,845,451        8,026        26,728        1,826,749  

Residential non-agency

     4        —          —          4  

Commercial agency

     85,245        1,196        —          86,441  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed debt securities

     1,930,700        9,222        26,728        1,913,194  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 2,497,004      $ 9,268      $ 36,207      $ 2,470,065  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Investment Securities Held-to-Maturity  

(In thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

At December 31, 2019

           

Residential agency mortgage-backed securities

   $ 135,769      $ 5,576      $ 177      $ 141,168  

Corporate debt and trust preferred securities

     3,676        —          —          3,676  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 139,445      $ 5,576      $ 177      $ 144,844  
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2018

           

Residential agency mortgage-backed securities

   $ 146,052      $ 1,460      $ 1,045      $ 146,467  

Corporate debt and trust preferred securities

     2,800        —          —          2,800  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 148,852      $ 1,460      $ 1,045      $ 149,267  
  

 

 

    

 

 

    

 

 

    

 

 

 


Gross unrealized losses and fair value of investment securities aggregated by investment category and the length of time the securities were in a continuous loss position were as follows:

 

     At December 31, 2019  
     Less than 12 months      12 months or more      Total  

(In thousands)

   Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Investment securities available-for-sale

                 

Debt securities:

                 

Government and government sponsored enterprises

   $ 226,177      $ 678      $ —        $ —        $ 226,177      $ 678  

Obligations of states and political subdivisions

     60,639        687        —          —          60,639        687  

Mortgage-backed securities:

                 

Residential agency

     667,511        3,586        200,534        2,517        868,045        6,103  

Residential non-agency

     140,403        616        —          —          140,403        616  

Commercial agency

     176,880        2,049        —          —          176,880        2,049  

Commercial non-agency

     25,560        205        —          —          25,560        205  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed debt securities

     1,010,354        6,456        200,534        2,517        1,210,888        8,973  

Corporate debt and trust preferred securities

     430        21        —          —          430        21  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 1,297,600      $ 7,842      $ 200,534      $ 2,517      $ 1,498,134      $ 10,359  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held-to-maturity

                 

Residential agency mortgage-backed securities

   $ 7,116      $ 72      $ 9,209      $ 105      $ 16,325      $ 177  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 7,116      $ 72      $ 9,209      $ 105      $ 16,325      $ 177  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31, 2018  
     Less than 12 months      12 months or more      Total  

(In thousands)

   Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Investment securities available-for-sale

                 

Debt securities:

                 

Obligations of states and political subdivisions

   $ 3,620      $ —        $ 526,817      $ 9,479      $ 530,437      $ 9,479  

Residential agency mortgage-backed securities

     102,709        184        838,482        26,544        941,191        26,728  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 106,329      $ 184      $ 1,365,299      $ 36,023      $ 1,471,628      $ 36,207  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held-to-maturity

                 

Residential agency mortgage-backed securities

   $ 3,074      $ 14      $ 31,738      $ 1,031      $ 34,812      $ 1,045  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 3,074      $ 14      $ 31,738      $ 1,031      $ 34,812      $ 1,045  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2019 there were 517 investment securities in an unrealized loss position. We have assessed each investment security with unrealized losses for credit impairment. As part of that assessment we evaluated and concluded that it is more-likely-than-not that we will not be required and do not intend to sell any of the investment securities prior to recovery of the amortized cost. Unrealized losses on investment securities were primarily due to changes in interest rates.

The gross gains and losses on sales of investment securities were as follows:

 

     Year Ended December 31,  

(In thousands)

   2019      2018      2017  

Gross realized gains

   $ 10,877      $ 1,148      $ —    

Gross realized losses

     3,491        1,021        —    

Recoveries on previously impaired investment securities held-to-maturity

     39        221        237  
  

 

 

    

 

 

    

 

 

 

Net gains on investment securities

   $ 7,425      $ 348      $ 237  
  

 

 

    

 

 

    

 

 

 


The amortized cost and fair value of investment securities by final contractual maturity were as follows. Securities with multiple maturity dates are classified in the period of final maturity. The final contractual maturities do not consider possible prepayments and therefore expected maturities may differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     At December 31, 2019      At December 31, 2018  

(In thousands)

   Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Investment Securities Available-for-Sale

           

Due in one year or less

   $ 66,124      $ 66,112      $ —        $ —    

Due in 1-5 years

     191,364        192,065        24,464        24,375  

Due in 5-10 years

     547,813        555,523        509,832        503,768  

Due after 10 years

     5,833,976        5,906,301        1,962,708        1,941,922  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 6,639,277      $ 6,720,001      $ 2,497,004      $ 2,470,065  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment Securities Held-to-Maturity

           

Due in 1-5 years

   $ 3,550      $ 3,550      $ 2,400      $ 2,400  

Due in 5-10 years

     58        64        430        432  

Due after 10 years

     135,837        141,230        146,022        146,435  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 139,445      $ 144,844      $ 148,852      $ 149,267  
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2019 and 2018, investment securities with a carrying value of $627.0 million and $1.6 million, respectively, were pledged as collateral to secure certain deposits and borrowings.

Note 7. Loans and Leases

Loans and leases were as follows:

 

     At December 31,  

(In thousands)

   2019      2018  

Commercial loan and lease portfolio:

     

Commercial and industrial

   $ 11,439,602      $ 6,298,240  

Commercial real estate

     9,136,870        2,830,705  

Lease financing

     2,699,869        2,530,163  
  

 

 

    

 

 

 

Total commercial loan and lease portfolio

     23,276,341        11,659,108  
  

 

 

    

 

 

 

Consumer loan portfolio:

     

Residential mortgage

     6,179,805        2,335,835  

Consumer installment

     1,542,411        2,003,572  

Home equity

     3,498,907        3,074,505  
  

 

 

    

 

 

 

Total consumer loan portfolio

     11,221,123        7,413,912  
  

 

 

    

 

 

 

Total loans and leases(1)

   $ 34,497,464      $ 19,073,020  
  

 

 

    

 

 

 

 

(1)

Loans and leases are reported at historical cost including net direct fees and costs associated with originating and acquiring loans and leases, lease residuals, unearned income and unamortized purchase premiums and discounts. The aggregate amount of these loan and lease adjustments was a net deferred cost of $201.5 million and $1.5 million at December 31, 2019 and 2018, respectively.

Acquired Loans and Leases The Corporation acquired loans and leases at fair value in the Merger and in previous acquisitions completed by Legacy TCF. Certain loans acquired were classified as PCI and are accounted for under ASC 310-30, which recognizes the expected shortfall of expected future cash flows, as compared to the contractual amount due, as nonaccretable difference. Any excess of the net present value of expected future cash flows over the acquisition date fair value is recognized as the accretable yield. The accretable yield is recognized over the expected remaining life of the acquired loan. In the event an acquired loan is renewed or extended, the loan continues to be accounted for as an acquired loan in accordance with ASC 310-30.


The carrying value and changes in accretable yield of all PCI loans were as follows:

 

     At or For Year Ended December 31,  

(In thousands)

   2019      2018  

Balance of PCI loans, beginning of period

   $ 3,817      $ 11,844  

Accretable Yield

     

Balance, beginning of period

   $ 961      $ 1,051  

Addition attributable to the Merger

     38,479        —    

Accretion recognized in interest income

     (11,453      (215

Net reclassification (to) from nonaccretable difference

     10,091        370  

Payments received

     (10,445      (245
  

 

 

    

 

 

 

Balance, end of period

   $ 27,633      $ 961  
  

 

 

    

 

 

 

Balance of PCI loans, end of period

   $ 246,786      $ 3,817  
  

 

 

    

 

 

 

Leases Effective January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842), and related ASUs on a modified retrospective basis, electing the practical expedients and optional transition method. As such, the following leasing disclosures include information at or for the year ended December 31, 2019.

The components of the net investment in direct financing and sales-type leases were as follows:

 

(In thousands)

   At December 31,
2019
 

Carrying amount

   $ 2,794,212  

Unguaranteed residual assets

     152,030  

Net direct fees and costs and unearned income

     (246,373
  

 

 

 

Total net investment in direct financing and sales-type leases

   $ 2,699,869  
  

 

 

 

The carrying amount of the sales-type and direct financing leases subject to residual value guarantees was $277.1 million at December 31, 2019.

The components of total lease income were as follows:

 

(In thousands)

   Year Ended
December 31, 2019
 

Interest income—loans and leases:

  

Interest income on net investment in direct financing and sales-type leases

   $ 131,547  

Leasing revenue (noninterest income):

  

Lease income from operating lease payments

     100,975  

Profit (loss) recorded on commencement date on sales-type

     35,694  

Gain (losses) on sales of leased equipment

     27,049  
  

 

 

 

Leasing Revenue

     163,718  
  

 

 

 

Total lease income

   $ 295,265  
  

 

 

 

Lease financing equipment depreciation on equipment leased to others was $76.4 million and the net book value of equipment leased to others and related initial direct costs under operating leases was $289.7 million at December 31, 2019.


Undiscounted future minimum lease payments receivable for direct financing and sales-type leases, and a reconciliation to the carrying amount recorded at December 31, 2019 were as follows:

 

(In thousands)

      

2020

   $ 298,172  

2021

     432,641  

2022

     553,109  

2023

     588,042  

2024

     528,749  

Thereafter

     257,911  

Equipment under leases not yet commenced

     47,141  
  

 

 

 

Total undiscounted future minimum lease payments receivable for direct financing and sales-type leases

     2,705,765  

Third-party residual value guarantees

     88,447  
  

 

 

 

Total carrying amount of direct financing and sales-type leases

   $ 2,794,212  
  

 

 

 

Undiscounted future minimum lease payments expected to be received for operating leases at December 31, 2019 were as follows:

 

(In thousands)

      

2020

   $ 75,507  

2021

     54,274  

2022

     31,494  

2023

     14,405  

2024

     5,283  

Thereafter

     3,674  
  

 

 

 

Total undiscounted future minimum lease payments

   $ 184,637  
  

 

 

 

Loan Sales The following table summarizes the net gains on sales of loans and leases. We retain servicing on a majority of loans sold. See “Note 11. Loan Servicing Rights” for further information.

 

     Year Ended December 31,  

(In millions)

   2019      2018      2017  

Sale proceeds, net

   $ 2,951,445      $ 1,275,960      $ 1,899,430  

Recorded investment in loans and leases sold, including accrued interest

     2,888,408        1,238,018        1,837,500  

Loss on transfer of loans to held-for-sale, interest-only strips at initial value and other

     (36,729      (4,247      (16,612
  

 

 

    

 

 

    

 

 

 

Net gains on sales of loans and leases

   $ 26,308      $ 33,695      $ 45,318  
  

 

 

    

 

 

    

 

 

 

During the fourth quarter of 2019, we completed the sale of the Legacy TCF auto finance portfolio of $1.1 billion, which had been included within loans held-for-sale at September 30, 2019, resulting in a $27.5 million loss for the year, included in net gains on sales of loans and leases.

The remaining interest-only strips on the balance sheet related to loan sales were as follows:

 

     At December 31,  

(In thousands)

   2019      2018  

Interest-only strips

   $ 12,813      $ 16,835  

We recorded $62 thousand, $661 thousand and $1.6 million of impairment charges on interest-only strips in 2019, 2018 and 2017, respectively.


The Corporation’s agreements to sell consumer loans typically contain certain representations, warranties and covenants regarding the loans sold or securitized. These representations, warranties and covenants generally relate to, among other things, the ownership of the loan, the validity, priority and perfection of the lien securing the loan, accuracy of information supplied to the buyer or investor, the loan’s compliance with the criteria set forth in the agreement, the manner in which the loans will be serviced, payment delinquency and compliance with applicable laws and regulations. These agreements generally require the repurchase of loans or indemnification in the event we breach these representations, warranties or covenants and such breaches are not cured. In addition, some agreements contain a requirement to repurchase loans as a result of early payoffs by the borrower, early payment default of the borrower or the failure to obtain valid title. Losses related to repurchases pursuant to such representations, warranties and covenants were immaterial for 2019, 2018 and 2017.

Note 8. Allowance for Loan and Lease Losses and Credit Quality

The rollforwards of the allowance for loan and lease losses were as follows:

 

     At or For the Year Ended December 31, 2019  

(In thousands)

   Consumer Loan
Portfolio
     Commercial Loan and
Lease Portfolio
     Total Loans
and Leases
 

Balance, beginning of period

   $ 80,017      $ 77,429      $ 157,446  

Charge-offs

     (50,480      (47,455      (97,935

Recoveries

     23,653        6,731        30,384  
  

 

 

    

 

 

    

 

 

 

Net (charge-offs) recoveries

     (26,827      (40,724      (67,551
  

 

 

    

 

 

    

 

 

 

Provision for credit losses

     17,492        47,790        65,282  

Other(1)

     (42,110      (15      (42,125
  

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 28,572      $ 84,480      $ 113,052  
  

 

 

    

 

 

    

 

 

 
     At or For the Year Ended December 31, 2018  

(In thousands)

   Consumer Loan
Portfolio
     Commercial Loan and
Lease Portfolio
     Total Loans
and Leases
 

Balance, beginning of period

   $ 98,085      $ 72,956      $ 171,041  

Charge-offs

     (64,520      (20,208      (84,728

Recoveries

     26,487        3,216        29,703  
  

 

 

    

 

 

    

 

 

 

Net (charge-offs) recoveries

     (38,033      (16,992      (55,025
  

 

 

    

 

 

    

 

 

 

Provision for credit losses

     24,851        21,917        46,768  

Other(1)

     (4,886      (452      (5,338
  

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 80,017      $ 77,429      $ 157,446  
  

 

 

    

 

 

    

 

 

 
     At or For the Year Ended December 31, 2017  

(In thousands)

   Consumer Loan
Portfolio
     Commercial Loan and
Lease Portfolio
     Total Loans
and Leases
 

Balance, beginning of period

   $ 92,292      $ 67,977      $ 160,269  

Charge-offs

     (59,831      (19,261      (79,092

Recoveries

     30,916        3,736        34,652  
  

 

 

    

 

 

    

 

 

 

Net (charge-offs) recoveries

     (28,915      (15,525      (44,440
  

 

 

    

 

 

    

 

 

 

Provision for credit losses

     47,911        20,532        68,443  

Other(1)

     (13,203      (28      (13,231
  

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 98,085      $ 72,956      $ 171,041  
  

 

 

    

 

 

    

 

 

 

 

(1)

Primarily includes the transfer of the allowance for loan and lease losses to loans and leases held-for-sale.


The allowance for loan and lease losses and loans and leases outstanding by type of allowance methodology were as follows:

 

     At December 31, 2019  

(In thousands)

   Consumer Loan
Portfolio
     Commercial Loan and
Lease Portfolio
     Total Loans and
Leases
 

Allowance for loan and lease losses:

        

Collectively evaluated for impairment

   $ 26,430      $ 75,756      $ 102,186  

Individually evaluated for impairment

     1,468        5,769        7,237  

Loans acquired with deteriorated credit quality

     674        2,955        3,629  
  

 

 

    

 

 

    

 

 

 

Total

   $ 28,572      $ 84,480      $ 113,052  
  

 

 

    

 

 

    

 

 

 

Loans and leases outstanding:

        

Collectively evaluated for impairment

   $ 11,087,534      $ 22,986,607      $ 34,074,141  

Individually evaluated for impairment

     60,694        115,843        176,537  

Loans acquired with deteriorated credit quality

     72,895        173,891        246,786  
  

 

 

    

 

 

    

 

 

 

Total

   $ 11,221,123      $ 23,276,341      $ 34,497,464  
  

 

 

    

 

 

    

 

 

 

 

     At December 31, 2018  

(In thousands)

   Consumer Loan
Portfolio
     Commercial Loan and
Lease Portfolio
     Total Loans and
Leases
 

Allowance for loan and lease losses:

        

Collectively evaluated for impairment

   $ 57,113      $ 68,140      $ 125,253  

Individually evaluated for impairment

     22,904        9,289        32,193  
  

 

 

    

 

 

    

 

 

 

Total

   $ 80,017      $ 77,429      $ 157,446  
  

 

 

    

 

 

    

 

 

 

Loans and leases outstanding:

        

Collectively evaluated for impairment

   $ 7,285,753      $ 11,587,372      $ 18,873,125  

Individually evaluated for impairment

     128,159        67,919        196,078  

Loans acquired with deteriorated credit quality

     —          3,817        3,817  
  

 

 

    

 

 

    

 

 

 

Total

   $ 7,413,912      $ 11,659,108      $ 19,073,020  
  

 

 

    

 

 

    

 

 

 

Accruing and Nonaccrual Loans and Leases The Corporation’s key credit quality indicator is the receivable’s payment performance status, defined as accruing or nonaccruing. Nonaccrual loans and leases are those which management believes have a higher risk of loss. Delinquent balances are determined based on the contractual terms of the loan or lease. Loans and leases that are over 60 days delinquent have a higher potential to become nonaccrual and generally are a leading indicator for future charge-off trends. The Corporation’s accruing and nonaccrual loans and leases were as follows:

 

     At December 31, 2019  

(In thousands)

   Current      30-89 Days
Delinquent
and Accruing
     90 Days or
More
Delinquent
and Accruing
     Total
Accruing
     Nonaccrual      Total  

Commercial loan and lease portfolio:

                 

Commercial and industrial

   $ 11,283,832      $ 29,780      $ 331      $ 11,313,943      $ 53,812      $ 11,367,755  

Commercial real estate

     8,993,360        10,291        1,440        9,005,091        29,735        9,034,826  

Lease financing

     2,662,354        24,657        1,901        2,688,912        10,957        2,699,869  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     22,939,546        64,728        3,672        23,007,946        94,504        23,102,450  

Consumer loan portfolio:

                 

Residential mortgage

     6,056,817        17,245        559        6,074,621        38,577        6,113,198  

Consumer installment

     1,536,714        4,292        108        1,541,114        714        1,541,828  

Home equity

     3,434,771        22,568        —          3,457,339        35,863        3,493,202  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     11,028,302        44,105        667        11,073,074        75,154        11,148,228  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PCI loans(1)

     217,206        3,843        25,737        246,786      $ —          246,786  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,185,054      $ 112,676      $ 30,076      $ 34,327,806      $ 169,658      $ 34,497,464  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

PCI loans that are not performing in accordance with contractual terms are not reported as nonaccrual because these loans were recorded at their net realizable value based on the principal and interest TCF expects to collect on these loans.


     At December 31, 2018  

(In thousands)

   Current      30-89 Days
Delinquent
and Accruing
     90 Days or
More
Delinquent
and Accruing
     Total
Accruing
     Nonaccrual      Total  

Commercial loan and lease portfolio:

                 

Commercial and industrial

   $ 6,253,949      $ 13,653      $ 760      $ 6,268,362      $ 26,061      $ 6,294,423  

Commercial real estate

     2,826,187        —          —          2,826,187        4,518        2,830,705  

Lease financing

     2,498,811        21,477        1,882        2,522,170        7,993        2,530,163  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     11,578,947        35,130        2,642        11,616,719        38,572        11,655,291  

Consumer loan portfolio:

                 

Residential mortgage

     2,291,435        10,014        1,275        2,302,724        33,111        2,335,835  

Consumer installment

     1,951,302        40,340        3,349        1,994,991        8,581        2,003,572  

Home equity

     3,042,968        5,883        —          3,048,851        25,654        3,074,505  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     7,285,705        56,237        4,624        7,346,566        67,346        7,413,912  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PCI loans(1)

     3,639        —          178        3,817      $ —          3,817  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,868,291      $ 91,367      $ 7,444      $ 18,967,102      $ 105,918      $ 19,073,020  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

PCI loans that are not performing in accordance with contractual terms are not reported as nonaccrual because these loans were recorded at their net realizable value based on the principal and interest TCF expects to collect on these loans.

In addition to the receivables payment performance status, credit quality is also analyzed using risk categories, which vary based on the size and type of credit risk exposure and additionally measure liquidity, debt capacity, coverage and payment behavior as shown in the borrower’s financial statements. The risk categories also measure the quality of the borrower’s management and the repayment support offered by any guarantors. Loan and lease credit classifications are derived from standard regulatory rating definitions, which include: pass, special mention, substandard, doubtful and loss. Substandard and doubtful loans and leases have well-defined weaknesses, but may never result in a loss.

The following schedule presents the recorded investment of loans and leases by credit risk categories.

 

(In thousands)

   Pass      Special Mention      Substandard      Total  

At December 31, 2019

           

Commercial loan and lease portfolio:

           

Commercial and industrial

   $ 10,930,939      $ 315,097      $ 193,566      $ 11,439,602  

Commercial real estate

     8,891,361        170,114        75,395        9,136,870  

Lease financing

     2,646,874        28,091        24,904        2,699,869  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     22,469,174        513,302        293,865        23,276,341  
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

           

Residential mortgage

     6,135,096        565        44,144        6,179,805  

Consumer installment

     1,541,524        —          887        1,542,411  

Home equity

     3,457,292        456        41,159        3,498,907  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     11,133,912        1,021        86,190        11,221,123  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases

   $ 33,603,086      $ 514,323      $ 380,055      $ 34,497,464  
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2018

           

Commercial loan and lease portfolio:

           

Commercial and industrial

   $ 6,033,321      $ 158,296      $ 106,623      $ 6,298,240  

Commercial real estate

     2,792,103        12,864        25,738        2,830,705  

Lease financing

     2,480,964        25,195        24,004        2,530,163  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     11,306,388        196,355        156,365        11,659,108  
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

           

Residential mortgage

     2,294,740        3,606        37,489        2,335,835  

Consumer installment

     1,981,844        1,302        20,426        2,003,572  

Home equity

     3,043,296        3,747        27,462        3,074,505  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     7,319,880        8,655        85,377        7,413,912  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases

   $ 18,626,268      $ 205,010      $ 241,742      $ 19,073,020  
  

 

 

    

 

 

    

 

 

    

 

 

 


Troubled Debt Restructurings In certain circumstances, the Corporation may consider modifying the terms of a loan for economic or legal reasons related to the customer’s financial difficulties. If the Corporation grants a concession, the modified loan is classified as a troubled debt restructuring (“TDR”). TDRs typically involve a deferral of the principal balance of the loan, a reduction of the stated interest rate of the loan or, in certain limited circumstances, a reduction of the principal balance of the loan or the loan’s accrued interest. All loans classified as TDR loans are considered to be impaired.

The following table presents the recorded investment of loan modifications first classified as TDRs during the periods presented:

 

     Year Ended December 31,  
     2019      2018      2017  

(In thousands)

   Pre-
modification
Investment
     Post-
modification
Investment
     Pre-
modification
Investment
     Post-
modification
Investment
     Pre-
modification
Investment
     Post-
modification
Investment
 

Commercial loan and lease portfolio:

                 

Commercial and industrial

   $ 5,347      $ 5,347      $ 7,253      $ 7,253      $ 10,266      $ 10,241  

Commercial real estate

     35,997        35,997        5,228        5,228        3,077        3,077  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     41,344        41,344        12,481        12,481        13,343        13,318  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

                 

Residential mortgage

     6,053        5,912        5,333        5,259        7,666        7,480  

Consumer installment

     217        183        1,052        1,052        892        892  

Home equity

     4,144        4,089        2,182        2,181        2,169        2,157  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     10,414        10,184        8,567        8,492        10,727        10,529  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 51,758      $ 51,528      $ 21,048      $ 20,973      $ 24,070      $ 23,847  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents TDR loans:

 

     At December 31, 2019      At December 31, 2018  

(In thousands)

   Accruing
TDR Loans
     Nonaccrual
TDR Loans
     Total
TDR Loans
     Accruing
TDR Loans
     Nonaccrual
TDR Loans
     Total
TDR Loans
 

Commercial loan and lease portfolio

   $ 12,986      $ 5,356      $ 18,342      $ 12,665      $ 6,153      $ 18,818  

Consumer loan portfolio

     12,403        14,875        27,278        85,794        22,554        108,348  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 25,389      $ 20,231      $ 45,620      $ 98,459      $ 28,707      $ 127,166  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commitments to lend additional funds to borrowers whose terms have been modified in TDRs were $638 thousand at both December 31, 2019 and December 31, 2018.

Loan modifications to troubled borrowers are no longer disclosed as TDR loans in the calendar years after modification if the loans were modified to an interest rate equal to or greater than the yields of new loan originations with comparable risk at the time of restructuring and if the loan is performing based on the restructured terms; however, these loans are still considered impaired and follow the Corporation’s impaired loan reserve policies.


The following table summarizes the TDR loans that defaulted during the periods presented that were modified during the respective reporting period or within one year of the beginning of the respective reporting period. The Corporation considers a loan to have defaulted when under the modified terms it becomes 90 or more days delinquent, has been transferred to nonaccrual status, has been charged down or has been transferred to other real estate owned or repossessed and returned assets.

 

     Year Ended December 31,  

(In thousands)

   2019      2018      2017  

Defaulted TDR loan balances modified during the applicable period

        

Commercial loan and lease portfolio:

        

Commercial and industrial

   $ 956      $ 4,697      $ 555  
  

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     956        4,697        555  
  

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

        

Residential mortgage

     1,325        3,258        2,819  

Consumer installment

     1,555        1,436        1,169  

Home equity

     401        558        841  
  

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     3,281        5,252        4,829  
  

 

 

    

 

 

    

 

 

 

Defaulted TDR loan balances

   $ 4,237      $ 9,949      $ 5,384  
  

 

 

    

 

 

    

 

 

 

Impaired Loans and Leases Effective January 1, 2019, in conjunction with the adoption of ASU No. 2016-02, Leases (Topic 842) and related ASUs, the Corporation considers impaired loans and leases to include nonaccrual commercial loans and leases, as well as all commercial and consumer TDR loans. Previously, the Corporation did not include impaired leases within the following tables. For purposes of this disclosure, PCI loans have been excluded. In the following table, the balance of impaired loans and leases represents the amount recorded within loans and leases on the Consolidated Statements of Financial Condition, whereas the unpaid contractual balance represents the balances legally owed by the borrowers.


Information on impaired loans and leases at December 31, 2019 and information on impaired loans at December 31, 2018 was as follows:

 

     At December 31, 2019      At December 31, 2018  

(In thousands)

   Unpaid
Contractual
Balance
     Loan
and Lease
Balance
     Related
Allowance
Recorded
     Unpaid
Contractual
Balance
     Loan
Balance
     Related
Allowance
Recorded
 

Impaired loans and leases with an allowance recorded:

 

Commercial loan and lease portfolio:

                 

Commercial and industrial

   $ 20,069      $ 20,090      $ 2,844      $ 35,444      $ 32,326      $ 6,354  

Commercial real estate

     4,225        3,962        333        4,905        4,474        1,108  

Lease financing

     10,956        10,956        2,592        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     35,250        35,008        5,769        40,349        36,800        7,462  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

                 

Residential mortgage

     24,297        22,250        1,030        63,004        60,172        17,216  

Consumer installment

     —          —          —          919        647        81  

Home equity

     9,418        8,791        438        27,386        25,836        5,288  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     33,715        31,041        1,468        91,309        86,655        22,585  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases with an allowance recorded

     68,965        66,049        7,237        131,658        123,455        30,047  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans and leases without an allowance recorded:

 

Commercial loan and lease portfolio:

                 

Commercial and industrial

     55,889        39,098        —          2,239        2,237        —    

Commercial real estate

     69,143        41,737        —          4,275        4,208        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     125,032        80,835        —          6,514        6,445        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

                 

Residential mortgage

     31,142        22,594        —          11,636        9,494        —    

Consumer installment

     2,095        880        —          15,400        10,770        —    

Home equity

     24,709        6,179        —          10,620        1,429        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     57,946        29,653        —          37,656        21,693        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases without an allowance recorded

     182,978        110,488        —          44,170        28,138        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases

   $ 251,943      $ 176,537      $ 7,237      $ 175,828      $ 151,593      $ 30,047  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 


The average balances of impaired loans and leases and interest income recognized on impaired loans and leases for the year ended December 31, 2019 and the average loan balance of impaired loans and interest income recognized on impaired loans for the years ended December 31, 2018 and December 31, 2017 were as follows:

 

     Year Ended December 31,  
     2019      2018      2017  

(In thousands)

   Average
Loan and
Lease
Balance
     Interest
Income
Recognized
     Average
Loan
Balance
     Interest
Income
Recognized
     Average
Loan
Balance
     Interest
Income
Recognized
 

Impaired loans and leases with an allowance recorded

                 

Commercial loan and lease portfolio:

                 

Commercial and industrial

   $ 26,208      $ 54      $ 29,285      $ 282      $ 20,260      $ 347  

Commercial real estate

     4,218        172        5,588        —          8,388        16  

Lease financing

     5,478        153        —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     35,904        379        34,873        282        28,648        363  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

                 

Residential mortgage

     41,211        1,942        68,850        1,653        89,247        2,125  

Consumer installment

     324        1        834        —          3,223        —    

Home equity

     17,313        849        29,327        1,609        43,932        2,111  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     58,848        2,792        99,011        3,262        136,402        4,236  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases with an allowance recorded

     94,752        3,171        133,884        3,544        165,050        4,599  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans and leases without an allowance recorded

                 

Commercial loan and lease portfolio:

                 

Commercial and industrial

     20,667        205        2,527        173        1,971        200  

Commercial real estate

     22,972        1,209        4,350        231        10,136        709  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     43,639        1,414        6,877        404        12,107        909  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

                 

Residential mortgage

     16,044        983        9,923        655        11,428        896  

Consumer installment

     5,825        256        9,284        302        5,103        209  

Home equity

     3,804        174        1,553        216        1,864        463  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     25,673        1,413        20,760        1,173        18,395        1,568  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases without an allowance recorded

     69,312        2,827        27,637        1,577        30,502        2,477  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans and leases

   $ 164,064      $ 5,998      $ 161,521      $ 5,121      $ 195,552      $ 7,076  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Real Estate Owned and Repossessed and Returned Assets Other real estate owned, repossessed and returned assets and consumer real estate loans in process of foreclosure were as follows:

 

     At December 31,  

(In thousands)

   2019      2018  

Other real estate owned

   $ 34,256      $ 17,403  

Repossessed and returned assets

     8,045        14,574  

Consumer real estate loans in process of foreclosure

     17,758        15,540  

On August 1, 2019, the Corporation acquired $14.6 million of other real estate owned and $338 thousand of repossessed and returned assets in connection with the Merger. Other real estate owned and repossessed and returned assets were written down $7.7 million, $3.4 million and $6.2 million in 2019, 2018 and 2017, respectively.


Note 9. Premises and Equipment, Net

Premises and equipment, net were as follows:

 

     At December 31,  

(In thousands)

   2019      2018  

Land

   $ 151,332      $ 144,754  

Office buildings

     334,673        268,495  

Leasehold improvements

     59,141        51,868  

Furniture, equipment and computer software

     440,678        404,743  

Premises and equipment leased under finance leases

     3,180        3,180  
  

 

 

    

 

 

 

Subtotal

     989,004        873,040  

Accumulated depreciation and amortization

     (455,866      (445,506
  

 

 

    

 

 

 

Premises and equipment, net

   $ 533,138      $ 427,534  
  

 

 

    

 

 

 

Depreciation and amortization expense related to premises and equipment was $75.3 million, $48.6 million and $45.9 million for 2019, 2018 and 2017, respectively.

Note 10. Goodwill and Other Intangible Assets

Goodwill was as follows:

 

     At December 31,  

(In thousands)

   2019      2018  

Goodwill related to consumer banking segment

   $ 764,389      $ 141,246  

Goodwill related to commercial banking segment

     535,489        13,511  
  

 

 

    

 

 

 

Goodwill, net

   $ 1,299,878      $ 154,757  
  

 

 

    

 

 

 

The Corporation recorded goodwill in the amount of $1.1 billion related to the merger with Legacy TCF and Chemical completed on August 1, 2019. Goodwill was allocated to the appropriate reporting unit based on the relative fair value of assets acquired and deposits held by the reporting unit. This methodology allocates goodwill in proportion to the assets held by each reporting unit as well as incorporating the value of the funding source provided by the in place deposits. The reporting units aggregate between the Consumer Banking and Commercial Banking segments. See “Note 2. Merger” for further information. There was an impairment charge to goodwill of $73.0 million in 2017 related to the acquisition of Gateway One as a result of the Corporation’s decision to discontinue auto finance loan originations effective December 31, 2017. Goodwill related to Gateway One was fully impaired at December 31, 2017. There was no impairment of goodwill in 2019 and 2018.

The following table sets forth the carrying amount and accumulated amortization of intangible assets that are amortizable and arose from business combinations or other acquisitions.

 

(In thousands)

   Core deposit
intangibles
    Program
agreements
    Non-compete
agreements
    Customer
relationships
    Total  

At December 31, 2019

          

Gross carrying value

   $ 141,232     $ 14,700     $ 9,000     $ 21,949     $ 186,881  

Accumulated amortization

     (11,016     (1,031     (5,618     (848     (18,513
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net carrying amount

   $ 130,216     $ 13,669     $ 3,382     $ 21,101     $ 168,368  

At December 31, 2018

          

Gross carrying value

   $ 3,049     $ 14,700     $ 9,250     $ 600     $ 27,599  

Accumulated amortization

     (2,502     (408     (3,643     (550     (7,103
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net carrying amount

   $ 547     $ 14,292     $ 5,607     $ 50     $ 20,496  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There was no impairment of other intangible assets in 2019 and 2018. There was an impairment charge of $368 thousand in 2017 related to the customer relationships intangible asset attributable to Gateway One as a result of the Corporation’s decision to discontinue auto finance loan originations effective December 31, 2017. The Gateway One customer relationships intangible asset was fully impaired at December 31, 2017 and written off in 2018.


Amortization expense for intangible assets was $11.7 million, $3.4 million and $2.0 million for 2019, 2018 and 2017, respectively.

The estimated future amortization expense on intangible assets for the next five years is as follows:

 

(In thousands)

   Total  

2020

   $ 21,992  

2021

     20,136  

2022

     18,180  

2023

     16,868  

2024

     16,161  

On August 1, 2019, the Corporation completed the merger with Chemical. As a result, the Corporation recorded $159.5 million in intangible assets consisting of core deposits and customer relationships intangibles. See “Note 2. Merger” for further information.

Note 11. Loan Servicing Rights

Information regarding LSRs was as follows:

 

     At December 31,  

(in thousands)

   2019      2018      2017  

Balance, beginning of period

   $ 23      $ 25      $ 30  

Acquired in the Merger

     59,567        —          —    

New servicing assets created

     4,969        7        4  

Impairment (charge) recovery

     (3,882      —          —    

Amortization

     (4,364      (9      (9
  

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 56,313      $ 23      $ 25  
  

 

 

    

 

 

    

 

 

 

Valuation allowance, end of period

   $ (3,882      —          —    
  

 

 

    

 

 

    

 

 

 

Loans serviced for others that have servicing rights capitalized, end of period

   $ 6,566,892        —          —    
  

 

 

    

 

 

    

 

 

 

Total loan servicing, late fee and other ancillary fee income, included in servicing fee income, related to loans serviced for others that have servicing rights capitalized was $7.0 million for December 31, 2019.

Note 12. Operating Lease Right-of-Use Assets and Liabilities

Operating lease right-of-use assets, included in other assets, were $118.7 million at December 31, 2019. Operating lease liabilities, included in other liabilities, were $138.4 million at December 31, 2019. In connection with the Merger, the Corporation recorded $39.8 million and $41.6 million of operating lease right-of-use assets and operating lease liabilities, respectively. Undiscounted future minimum operating lease payments and a reconciliation to the amount recorded as operating lease liabilities at December 31, 2019 were as follows:

 

(In thousands)

      

2020

   $ 32,819  

2021

     24,635  

2022

     19,707  

2023

     16,943  

2024

     15,332  

Thereafter

     43,958  
  

 

 

 

Total undiscounted future minimum operating lease payments

     153,394  

Discount

     (15,001
  

 

 

 

Total operating lease liabilities

   $ 138,393  
  

 

 

 


As of December 31, 2019, the Corporation had approximately $233.6 million in additional leases for real property that have not yet commenced and are excluded from the operating lease liability table above. Of this amount, $231.6 million was related to a lease agreement for the Corporation’s new headquarters building in Detroit, Michigan signed on May 31, 2019 by Legacy Chemical, with an organization 50% owned by indirect related parties. The new headquarter lease has a term of 22.5 years commencing January 1, 2022 with renewal options.

The weighted-average discount rate and remaining lease term for operating leases was as follows:

 

     At December 31,
2019
 

Weighted-average discount rate

     2.67

Weighted-average remaining lease term (years)

     6.8 years  

The components of total lease cost for operating leases, included in occupancy and equipment noninterest expense, were as follows:

 

(In thousands)

   Year Ended
December 31, 2019
 

Lease expense

   $ 39,724  

Short-term and variable lease cost

     732  

Sublease income

     (1,716
  

 

 

 

Total lease cost for operating leases

   $ 38,740  
  

 

 

 

Supplemental cash flow information related to operating leases was as follows:

 

(In thousands)

   Year Ended
December 31, 2019
 

Operating lease right-of-use assets obtained in exchange for operating lease liabilities

   $ 131,305  

Cash paid for amounts included in the measurement of lease liabilities—operating

     33,231  

Note 13. Investments in Qualified Affordable Housing Projects, Federal Historic Projects and New Market Tax Credits

The Corporation invests in qualified affordable housing projects, federal historic projects, and new market tax credits for the purposes of community reinvestment and to obtain tax credits. Return on the Corporation’s investment in these projects comes in the form of pass-through tax credits and tax losses. The carrying value of the investments is included in other assets. The Corporation primarily utilizes the proportional amortization method to account for investments in qualified affordable housing projects and the equity method to account for investments in other tax credit projects.

Under the proportional amortization method, the Corporation amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits. The Corporation recognized amortization expense of investments in qualified affordable housing projects of $13.3 million, $9.9 million and $9.6 million for the years ended December 31, 2019, 2018 and 2017, respectively. Amortization expense was offset by tax credits and other tax benefits of $16.6 million, $11.6 million and $12.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. The Corporation’s remaining investment in qualified affordable housing projects accounted for under the proportional amortization method totaled $195.8 million at December 31, 2019 and $90.9 million at December 31, 2018.

Under the equity method, the Corporation’s share of the earnings or losses is included in other noninterest expense. The Corporation’s remaining investment in federal historic projects, all of which were acquired in the Merger, totaled $43.6 million at December 31, 2019. During the year ended December 31, 2019, $4.6 million of income tax benefit was recognized due to the federal historic tax credits, which was partially offset by amortization expense, inclusive of impairment, of $4.0 million.

The Corporation’s unfunded equity contributions relating to investments in qualified affordable housing projects, federal historic projects and new market tax credits are included in other liabilities. The Corporation’s remaining unfunded equity contributions totaled $131.3 million at December 31, 2019 and $56.2 million at December 31, 2018.

Management analyzes these investments for potential impairment when events or changes in circumstances indicate that it is more-likely-than-not that the carrying amount of the investment will not be realized. An impairment loss is measured as the amount by which the carrying amount of an investment exceeds its fair value.


Note 14. Deposits

Deposits were as follows:

 

     At December 31,  
     2019     2018  

(Dollars in thousands)

   Amount      Year-to-Date
Weighted-average
Rate
    Amount      Year-to-Date
Weighted-average
Rate
 

Checking:

          

Noninterest bearing

   $ 7,948,637        —     $ 3,921,710        —  

Interest bearing

     5,966,178        0.36       2,459,617        0.03  
  

 

 

      

 

 

    

Total checking

     13,914,815        0.15       6,381,327        0.01  

Savings

     8,521,093        0.72       6,122,257        0.36  

Money market

     4,576,999        1.38       1,609,422        0.75  

Certificates of deposit

     7,455,556        2.01       4,790,680        1.54  
  

 

 

      

 

 

    

Total deposits

   $ 34,468,463        0.88   $ 18,903,686        0.59
  

 

 

      

 

 

    

Excluded from total deposits are account overdrafts which have been classified as loans. At December 31, 2019 and 2018, overdrafts totaled $19.0 million and $9.6 million, respectively.

Scheduled maturities for certificates of deposits, including Certificate of Deposit Account Registry Service (“CDARS”) deposits, IRA deposits and brokered deposits at December 31, 2019 were as follows:

 

(In thousands)

      

2020

   $ 6,503,237  

2021

     504,528  

2022

     326,592  

2023

     64,463  

2024

     46,723  

Thereafter

     10,013  
  

 

 

 

Total

   $ 7,455,556  
  

 

 

 

The aggregate amount of certificates of deposit with balances equal to or greater than the Federal Deposit Insurance Corporation insurance limit of $250,000 was $2.2 billion and $782.4 million at December 31, 2019 and 2018, respectively.

Note 15. Borrowings

TCF Bank is a member of the FHLB, which provides short- and long-term funding collateralized by mortgage related assets to its members.

Collateralized deposits include TCF Bank’s Repurchase Investment Sweep Agreement product collateralized by mortgage-backed securities, and funds deposited by customers that are collateralized by investment securities owned by TCF Bank, as these deposits are not covered by FDIC insurance.


Short-term borrowings (borrowings with an original maturity of less than one year) were as follows:

 

     At December 31, 2019     At December 31, 2018  

(Dollars in thousands)

   Amount      Weighted-
average Rate
    Amount      Weighted-
average Rate
 

FHLB advances

   $ 2,450,000        1.85   $ —          —  

Collateralized deposits

     219,145        0.64       —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total short-term borrowings

   $ 2,669,145        1.75   $ —          —  
  

 

 

    

 

 

   

 

 

    

 

 

 

On August 5, 2019, TCF Financial entered into a $50.0 million unsecured 364-day revolving credit facility bearing interest at the then applicable Eurocurrency Rate plus 150 basis points, available to be used, as needed, to fund growth, common stock repurchases or other general corporate purposes. The revolving credit facility contains covenants related to certain thresholds that must be maintained related to various capital adequacy levels, asset quality and profitability ratios, and certain restrictions on levels of indebtedness. TCF Financial had no outstanding balance under the revolving credit facility and was in compliance with all covenants at December 31, 2019.

Long-term borrowings were as follows:

 

           At December 31, 2019      At December 31, 2018  

(Dollars in thousands)

   Stated Rate     Amount      At Amount  

FHLB advances due 2020 to 2025 (1)(2)

     1.30% - 2.72%     $ 1,822,058      $ 1,100,000  

Subordinated debt:

       

Subordinated debt obligation due 2022

     6.25%       109,338        109,095  

Subordinated debt obligation due 2025

     4.60%       148,681        148,461  

Subordinated debt obligation due 2029

     4.13%       148,657        —    

Subordinated debt securities due 2032-2035 (3)(4)

     3.54% - 5.34%       19,021        —    

Hedge related adjustment

  

 

 

 

    2,773        (4,165
    

 

 

    

 

 

 

Total subordinated debt obligations

       428,470        253,391  
    

 

 

    

 

 

 

Discounted lease rentals due 2020 to 2024

     2.64% - 6.50%       100,882        92,976  

Finance lease obligation due 2038

     3.73%       3,038        3,105  
    

 

 

    

 

 

 

Total long-term borrowings

     $ 2,354,448      $ 1,449,472  
    

 

 

    

 

 

 

 

(1)

Includes the current portion of FHLB advances of $110.0 million at December 31, 2019.

(2)

The December 31, 2019 balance includes advances payable of $1.81 billion and purchase accounting premiums of $12.1 million.

(3)

The December 31, 2019 balance includes advances payable of $20.6 million and purchase accounting discounts of $1.6 million.

(4)

Floating-rate based on three-month LIBOR plus 1.45% - 3.25%.

FHLB Advances As a result of the Merger, the Corporation assumed long-term FHLB advances. These long-term FHLB advances have maturity dates ranging from 2020 to 2025 and carried interest rates ranging from 1.30% to 2.72% at December 31, 2019. FHLB advances are collateralized by residential mortgage and commercial real estate loans.

Subordinated Debt Obligations As a result of the Merger, the Corporation assumed subordinated debt securities totaling $19.0 million. Included in the obligations assumed in the Merger were $5.6 million of obligations due in 2032 with a carrying interest rate based on the three-month LIBOR plus 3.25% and $13.4 million of obligations due in 2034 and 2035 with carrying interest rates based on the three-month LIBOR plus 1.45% to 2.85%.

On July 2, 2019, TCF Bank issued $150.0 million of fixed-to-floating rate subordinated notes (the “2029 Notes”) at par. The fixed-to-floating rate subordinated notes, due July 2, 2029, bear an initial interest rate of 4.125% per annum, payable semi-annually in arrears on January 2 and July 2, commencing on January 2, 2020. The 2029 Notes are redeemable at TCF Bank’s option beginning on July 2, 2024. Effective July 2, 2024, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month LIBOR rate plus 237.5 basis points, payable quarterly in arrears on January 2, April 2, July 2 and October 2, commencing on October 2, 2024. TCF Bank incurred issuance costs of $1.5 million that are amortized as interest expense to the call date in 2024 using the effective interest method.

At December 31, 2019, TCF Bank had pledged loans secured by consumer and commercial real estate and FHLB stock with an aggregate carrying value of $10.5 billion. At December 31, 2019, $1.5 billion of the FHLB advances outstanding were prepayable at the Corporation’s option.


The contractual maturities of long-term borrowings at December 31, 2019 were as follows:

 

(In thousands)

      

2020

   $ 315,100  

2021

     1,321,934  

2022

     146,005  

2023

     26,308  

2024

     11,003  

Thereafter

     534,098  
  

 

 

 

Total long-term borrowings

   $ 2,354,448  
  

 

 

 

Note 16. Income Taxes

Applicable income taxes in the Consolidated Statements of Income were as follows:

 

(In thousands)

   Current      Deferred      Total  

Year Ended December 31, 2019:

        

Federal

   $ (8,471    $ 40,038      $ 31,567  

State

     23,154        (9,564      13,590  

Foreign

     5,148        (64      5,084  
  

 

 

    

 

 

    

 

 

 

Total

   $ 19,831      $ 30,410      $ 50,241  
  

 

 

    

 

 

    

 

 

 

Year Ended December 31, 2018:

        

Federal

   $ 9,424      $ 54,858      $ 64,282  

State

     13,251        3,722        16,973  

Foreign

     4,435        406        4,841  
  

 

 

    

 

 

    

 

 

 

Total

   $ 27,110      $ 58,986      $ 86,096  
  

 

 

    

 

 

    

 

 

 

Year Ended December 31, 2017:

        

Federal

   $ 14,384      $ (62,913    $ (48,529

State

     237        9,340        9,577  

Foreign

     5,484        (156      5,328  
  

 

 

    

 

 

    

 

 

 

Total

   $ 20,105      $ (53,729    $ (33,624
  

 

 

    

 

 

    

 

 

 

Reconciliations to the Corporation’s effective income tax rates from the statutory federal income tax rates were as follows:

 

     Year Ended December 31,  
     2019     2018     2017  

Federal income tax rate

     21.00     21.00     35.00

Increase (decrease) resulting from:

      

Tax basis adjustment

     (3.30     —         —    

State income tax, net of federal tax

     3.01       3.34       3.92  

Tax credit investments

     (1.94     (0.34     (0.89

Tax-exempt income

     (1.74     (1.64     (3.86

Merger deferred tax reprice

     (1.59     —         —    

State tax settlements, net of federal tax

     (1.40     —         (1.38

Non-controlling interest tax effect

     (0.67     (0.59     (1.45

Stock compensation

     (0.64     (0.64     (1.15

Tax reform effects, net

     —         (0.26     (53.29

Nondeductible goodwill impairment effect

     —         —         10.43  

Other, net

     1.34       0.56       (1.05
  

 

 

   

 

 

   

 

 

 

Effective income tax rate

     14.07     21.43     (13.72 )% 
  

 

 

   

 

 

   

 

 

 


As a result of the Tax Cuts and Jobs Act, enacted on December 22, 2017 (“Tax Reform”), the Corporation recorded a reasonable estimate of a net tax benefit of $130.7 million in its consolidated financial statements for 2017, primarily resulting from the re-measurement of the Corporation’s estimated net deferred tax liability. Certain of these amounts were provisional in nature, as all the information necessary to record more precise amounts was not available, prepared or analyzed for 2017. The Corporation recorded an additional net tax benefit of $1.1 million in the second quarter of 2018 for the finalization of the provisional amounts recorded in 2017.

The Corporation considers its undistributed foreign earnings to be reinvested indefinitely. This position is based on management’s determination that cash held in the Corporation’s foreign jurisdictions is not needed to fund its U.S. operations and that it either has reinvested or has intentions to reinvest these earnings. While management currently intends to indefinitely reinvest all of the Corporation’s foreign earnings, should circumstances or tax laws change, the Corporation may need to record additional income tax expense in the period in which such determination or tax law change occurs.

Due to the shift to a worldwide territorial tax regime as part of Tax Reform, future repatriations of foreign earnings are no longer subject to U.S. federal income tax. However, these foreign earnings may be subject to foreign withholding taxes should they be distributed in the form of dividends. As of December 31, 2019, the estimated withholding taxes that could be due on these earnings was $4.7 million.

Reconciliations of the changes in unrecognized tax benefits were as follows:

 

     At or For the Year Ended December 31,  

(In thousands)

   2019      2018      2017  

Balance, beginning of period

   $ 5,872      $ 4,645      $ 4,690  

Increases for tax positions related to the current year

     444        903        200  

Increases for tax positions related to prior years

     445        1,438        86  

Decreases for tax positions related to prior years

     (1,498      (970      (331

Settlements with taxing authorities

     (2,479      —          —    

Decreases related to lapses of applicable statutes of limitation

     (89      (144      —    
  

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 2,695      $ 5,872      $ 4,645  
  

 

 

    

 

 

    

 

 

 

The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $2.1 million and $3.7 million at December 31, 2019 and 2018, respectively. The Corporation recognizes increases and decreases for interest and penalties related to unrecognized tax benefits, where applicable, in income tax expense (benefit). The Corporation recognized approximately $400 thousand of tax benefit, $100 thousand of tax expense and $600 thousand of tax benefit for 2019, 2018 and 2017, respectively, related to interest and penalties. Interest and penalties of approximately $300 thousand and $700 thousand were accrued at December 31, 2019 and 2018, respectively.

The Corporation’s federal income tax returns are open and subject to examination for 2016 and later tax return years. The Corporation’s various state income tax returns are generally open for 2015 and later tax return years based on individual state statutes of limitation. The Corporation’s various foreign income tax returns are open and subject to examination for 2015 and later tax return years. Changes in the amount of unrecognized tax benefits within the next 12 months from normal expirations of statutes of limitation are not expected to be material.


The Corporation’s deferred tax assets and deferred tax liabilities were as follows:

 

     At December 31,  

(In thousands)

   2019      2018  

Deferred tax assets:

     

Net operating losses and other carryforwards

   $ 70,820      $ 20,591  

Acquisition-related fair value adjustments

     44,800        —    

Stock compensation and deferred compensation plans

     42,980        32,686  

Allowance for loan and lease losses

     25,178        33,546  

Nonaccrual interest

     6,209        637  

Investment securities available-for-sale

     —          9,235  

Other

     5,516        3,787  
  

 

 

    

 

 

 

Deferred tax assets

     195,503        100,482  

Valuation allowance

     (12,840      (14,291
  

 

 

    

 

 

 

Total deferred tax assets, net of valuation allowance

     182,663        86,191  
  

 

 

    

 

 

 

Deferred tax liabilities:

     

Lease financing

     339,691        297,603  

Goodwill and other intangibles

     35,031        2,290  

Premises and equipment

     30,122        40,130  

Investment securities available-for-sale

     16,760        —    

Loan servicing rights

     12,989        —    

Loan fees and discounts

     10,098        17,465  

Prepaid expenses

     9,508        7,921  

Other

     7,862        7,319  
  

 

 

    

 

 

 

Total deferred tax liabilities

     462,061        372,728  
  

 

 

    

 

 

 

Net deferred tax liabilities

   $ 279,398      $ 286,537  
  

 

 

    

 

 

 

The net operating losses and other carryforwards at December 31, 2019 consisted of federal net operating losses of $23.0 million that expire in 2026 through 2034, state net operating losses of $7.4 million that expire in 2020 through 2039, charitable contribution carryforwards of $3.4 million that expire in 2024, capital loss carryforwards of $200 thousand that expire in 2022, federal credit carryforwards of $19.5 million that expire in 2028 through 2039 and federal credit carryforwards of $5.0 million that do not expire. The valuation allowance against the Corporation’s deferred tax asset at December 31, 2019 consisted of state net operating losses of $12.3 million and capital loss carryforwards of $600 thousand. The valuation allowance at December 31, 2019 and 2018 principally applies to net operating losses and capital loss carryforwards that, in the opinion of management, are more-likely-than-not to expire unutilized. However, to the extent that tax benefits related to these carryforwards are realized in the future, the reduction in the valuation allowance will reduce income tax expense.

Note 17. Revenue from Contracts with Customers

The Corporation earns a variety of revenue, including interest and fees, from customers, as well as revenues from noncustomers. The majority of the Corporation’s sources of revenue are included in interest income and noninterest income and are outside of the scope of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Other sources of revenue fall within the scope of ASC 606 and are mostly included in noninterest income.


The Corporation recognizes revenue when the performance obligations related to the transfer of goods or services under the terms of a contract are satisfied. Some obligations are satisfied at a point in time, while others are satisfied over a period of time. Revenue is recognized as the amount of consideration expected to be received in exchange for transferring goods or services to a customer and is segregated based on the nature of product and services offered as part of contractual arrangements. Revenue streams within the scope of ASC 606 are discussed below.

 

   

Fees and Service Charges on Deposit Accounts Fees and service charges on deposit accounts includes fees and other charges the Corporation receives to provide various services, including but not limited to, service charges on deposit accounts and other fees including account analysis fees, monthly service fees, overdraft services, transferring funds, and accepting and executing stop-payment orders. The Corporation’s performance obligation for account analysis fees and monthly service fees are generally satisfied and, therefore, revenue is recognized over the period in which the service is provided. Deposit account related fees are largely transactional based, and therefore, the performance obligation is satisfied and the related revenue is recognized at the point in time when the transaction occurs.

 

   

Wealth Management Revenue Wealth management revenue includes fee income generated from personal and institutional customers. The Corporation also provides investment management services. Revenue is recognized over the period of time the services are rendered. Wealth management revenue also includes commissions that are earned for placing a brokerage transaction for execution. Revenue is recognized once the transaction is completed and the Corporation is entitled to receive consideration.

 

   

Card and ATM Revenue Card and ATM revenue includes ATM surcharges and debit card related revenue. ATM surcharges and certain debit card fees are transactional based and, therefore, the performance obligation is satisfied and the related revenue is recognized at the point in time when the transaction occurs. Other debit card fees satisfied over a period of time are recognized over the period in which the service is provided.

 

   

Other Noninterest Income Other noninterest income includes wire transfer fees, safe deposit box income and check orders. The consideration includes both fixed (e.g., safe deposit box fees) and transaction (i.e., wire-transfer fee and check orders) fees. Fixed fees are recognized over the period of time the service is provided, while transaction fees are recognized when a specific service is rendered to the customer.

 

   

Net Foreclosed Real Estate and Repossessed Assets Expense Net foreclosed real estate and repossessed assets expense includes net gain or loss on sales of other real estate owned and repossessed assets. Revenue is recognized at the time the sale is complete and the Corporation is entitled to receive consideration, including sales that are seller financed as receipt of all payment is expected.


The following tables present total noninterest income segregated between contracts with customers within the scope of ASC 606 and those within the scope of other GAAP topics.

 

     Year Ended December 31, 2019  
     Within the scope of ASC 606     Out of scope
of ASC 606
     Total  

(In thousands)

   Consumer
Banking
    Commercial
Banking
     Enterprise
Services
 

Noninterest income

            

Fees and service charges on deposit accounts

   $ 112,733     $ 4,924      $ —       $ 10,203      $ 127,860  

Wealth management revenue

     2,204       —          —         8,209        10,413  

Card and ATM revenue

     81,465       6        —         5,750        87,221  

Other noninterest income

     241       9,280        14,573       215,944        240,038  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 196,643     $ 14,210      $ 14,573     $ 240,106      $ 465,532  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Noninterest expense

            

Net foreclosed real estate and repossessed assets

   $ (1,088   $ 546      $ (18   $ 14,083      $ 13,523  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Year Ended December 31, 2018  
     Within the scope of ASC 606      Out of scope
of ASC 606
     Total  

(In thousands)

   Consumer
Banking
     Commercial
Banking
    Enterprise
Services
 

Noninterest income

             

Fees and service charges on deposit accounts

   $ 108,883      $ 4,224     $ —        $ 135      $ 113,242  

Card and ATM revenue

     78,119        4       —          283        78,406  

Other noninterest income

     1,363        11,387       21,592        228,407        262,749  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 188,365      $ 15,615     $ 21,592      $ 228,825      $ 454,397  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Noninterest expense

             

Net foreclosed real estate and repossessed assets

   $ —        $ (246   $ —        $ 17,296      $ 17,050  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

     December 31, 2017  
     Within the scope of ASC 606      Out of scope
of ASC 606
     Total  

(In thousands)

   Consumer
Banking
    Commercial
Banking
     Enterprise
Services
 

Noninterest income

             

Fees and service charges on deposit accounts

   $ 111,222     $ 4,176      $ —        $ 169      $ 115,567  

Card and ATM revenue

     74,992       4        —          169        75,165  

Other noninterest income

     (5,766     8,188        16,039        226,870        245,331  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 180,448     $ 12,368      $ 16,039      $ 227,208      $ 436,063  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expense

             

Net foreclosed real estate and repossessed assets

   $ —       $ 424      $ —        $ 17,332      $ 17,756  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Contract Balances A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Corporation’s noninterest income streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is most often received immediately or shortly after the Corporation satisfies its performance obligation and revenue is recognized. The Corporation does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances.


Note 18. Equity

Preferred Stock Preferred stock was as follows:

 

     At December 31,  

(In thousands)

   2019      2018  

Series C non-cumulative perpetual preferred stock

   $ 169,302      $ 169,302  
  

 

 

    

 

 

 

Pursuant to the merger agreement, each outstanding share of Legacy TCF 5.70% Series C Non-Cumulative Perpetual Preferred Stock, with a liquidation preference of $25,000 per share (the “Legacy TCF Preferred Stock”) was converted into the right to receive one share of newly created 5.70% Series C Non-Cumulative Perpetual Preferred Stock of TCF, par value $0.01 per share, with a liquidation preference of $25,000 per share (equivalent to $25 per depositary share) (the “New TCF Preferred Stock”), and each depository share representing 1/1000th of a share of Legacy TCF Preferred Stock was converted into one depositary share representing 1/1000th of a share of New TCF Preferred Stock. Immediately following the Merger Date, the Corporation had 7,000 shares of New TCF Preferred Stock outstanding and 7,000,000 related depositary shares outstanding. Dividends are payable on the Series C Preferred Stock if, as and when declared by TCF’s Board of Directors on a non-cumulative basis on March 1, June 1, September 1 and December 1 of each year. The Series C Preferred Stock may be redeemed at the Corporation’s option in whole or in part on December 1, 2022 or on any dividend payment date thereafter.

On March 1, 2018, the Corporation redeemed all 4,000,000 of the outstanding shares of the 6.45% Series B non-cumulative perpetual preferred stock of TCF Financial Corporation, par value $0.01 per share, with a liquidation preference of per share (the “Series B Preferred Stock”) for $100.0 million. Deferred stock issuance costs of $3.5 million originally recorded as a reduction to preferred stock upon the issuance of the Series B Preferred Stock were reclassified to retained earnings and resulted in a one-time, non-cash reduction to net income available to common shareholders utilized in the computation of earnings per common share and diluted earnings per common share for 2018. Dividends were payable on the Series B Preferred Stock if, as and when declared by the Corporation’s Board of Directors on a non-cumulative basis on March 1, June 1, September 1 and December 1 of each year.

Restricted Retained Earnings Retained earnings at TCF Bank at December 31, 2019 included approximately $170.2 million for which no provision for federal income taxes has been made. This amount represents earnings legally appropriated to thrift bad debt reserves and deducted for federal income tax purposes in prior years and is generally not available for payment of cash dividends or other distributions to shareholders. Future payments or distributions of these appropriated earnings could create a tax liability for the Corporation based on the amount of the distributions and the tax rates in effect at that time.

Treasury Stock and Other Treasury stock and other were as follows:

 

     At December 31,  

(In thousands)

   2019      2018  

Treasury stock, at cost

   $ —        $ 222,816  

Shares held in trust for deferred compensation plans, at cost

     28,037        29,366  
  

 

 

    

 

 

 

Total

   $ 28,037      $ 252,182  
  

 

 

    

 

 

 

The Corporation repurchased $86.3 million of its common stock in the year ended December 31, 2019 pursuant to its share repurchase program. Repurchases of common stock prior to the Merger date were recorded as treasury stock. In connection with the merger, all previously outstanding Legacy TCF treasury stock was eliminated. Subsequent to the merger, repurchases of common stock were retired. The Corporation repurchased $212.9 million and $9.2 million of its common stock for 2018 and 2017, respectively, pursuant to its share repurchase program. These shares were recorded as treasury stock. At December 31, 2019, the Corporation had the authority to repurchase an additional $122.5 million in aggregate value of shares pursuant to its share repurchase program.

The Corporation reissued 347,329 shares of treasury stock at a cost of $12.9 million in 2019 related to grants of restricted stock awards compared to 8,130 shares of treasury stock at a cost of $378 thousand in 2018. There were no reissuances of treasury stock in 2017.


The cost of TCF common stock held in trust for the deferred compensation plans, including the Directors Deferred Compensation Plans, TCF Financial 2015 Omnibus Incentive Plan and the TCF 401K Supplemental Plan, is reported in a manner similar to treasury stock (that is, changes in fair value are not recognized) with a corresponding deferred compensation obligation reflected in additional paid-in capital. Upon resignation, death, disability or termination of a deferred compensation plan participant or based on other contractual requirements, the shares held in trust are distributed to the respective plan’s participant or beneficiary, as applicable. See “Note 20. Share-based Compensation” and “Note 21. Retirement Plans” for further information on deferred compensation plans.

Non-controlling Interest in Subsidiaries TCF has a joint venture with The Toro Company (“Toro”) called Red Iron Acceptance, LLC (“Red Iron”). Red Iron provides U.S. distributors and dealers and select Canadian distributors of the Toro® and Exmark® branded products with sources of financing. TCF and Toro maintain a 55% and 45% ownership interest, respectively, in Red Iron. As TCF has a controlling financial interest in Red Iron, its financial results are consolidated in TCF’s financial statements. Toro’s interest is reported as a non-controlling interest within equity.

Note 19. Regulatory Capital Requirements

TCF and TCF Bank are subject to minimum capital requirements administered by the federal banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by the federal banking regulators that could have a material adverse effect on TCF. In general, TCF Bank may not declare or pay a dividend to TCF Financial in excess of 100% of its net retained earnings for the current year combined with its net retained earnings for the preceding two calendar years, which was $340.8 million at December 31, 2019, without prior approval of the Office of the Comptroller of the Currency (the “OCC”). The OCC also has the authority to prohibit the payment of dividends by a national bank when it determines such payments would constitute an unsafe and unsound banking practice. TCF Bank’s ability to make capital distributions in the future may require regulatory approval and may be restricted by its federal banking regulators. TCF Bank’s ability to make any such distributions will also depend on its earnings and ability to meet minimum regulatory capital requirements in effect during future periods. In the future, these capital adequacy standards may be higher than existing minimum regulatory capital requirements.

The Basel III capital standards allowed institutions not subject to the advanced approaches requirements to opt out of including components of accumulated other comprehensive income (loss) in common equity Tier 1 capital. TCF and TCF Bank made the one-time permanent election to not include accumulated other comprehensive income (loss) in regulatory capital.

Regulatory capital information for TCF and TCF Bank was as follows:

 

     TCF     TCF Bank              
     At December 31,     At December 31,              

(Dollars in thousands)

   2019     2018     2019     2018     Well-
capitalized
Standard
    Minimum
Capital
Requirement(1)
 

Regulatory Capital:

            

Common equity Tier 1 capital

   $ 4,050,826     $ 2,224,183     $ 4,039,191     $ 2,282,013      

Tier 1 capital

     4,236,648       2,408,393       4,059,417       2,300,472      

Total capital

     4,681,630       2,750,581       4,524,051       2,675,347      

Regulatory Capital Ratios:

            

Common equity Tier 1 capital ratio

     10.99     10.82     10.97     11.10     6.50     4.50

Tier 1 risk-based capital ratio

     11.49       11.72       11.03       11.19       8.00       6.00  

Total risk-based capital ratio

     12.70       13.38       12.29       13.01       10.00       8.00  

Tier 1 leverage ratio

     9.49       10.44       9.10       9.97       5.00       4.00  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Excludes capital conservation buffer of 2.5% and 1.875% at December 31, 2019 and 2018, respectively.


Note 20. Share-based Compensation

Before the Merger, Chemical and Legacy TCF granted share-based awards under their respective share-based compensation plans, including the Chemical Stock Incentive Plan of 2019 (the “Stock Incentive Plan of 2019””) and the TCF Financial 2015 Omnibus Incentive Plan (the “Legacy TCF Omnibus Incentive Plan”). At December 31, 2019, there were 1,808,804 shares reserved for issuance under the Stock Incentive Plan of 2019 and there were 2,271,524 shares reserved for issuance under the Legacy TCF Omnibus Incentive Plan.

In connection with the Merger, each equity award granted under Legacy TCF’s equity plans, including the Legacy TCF Omnibus Incentive Plan, was legally assumed by the combined company and adjusted so that its holder is entitled to receive a number of shares of TCF Financial’s common stock equal to the product of (a) the number of shares of Legacy TCF common stock subject to such award multiplied by (b) the Exchange Ratio and (c) rounded, as applicable, to the nearest whole share, and otherwise subject to the same terms and conditions (including, without limitation, with respect to vesting conditions (taking into account any vesting that occurred at the Merger Date) and cash dividend equivalent rights). For any Legacy TCF equity awards that were subject to performance-based vesting at multiple achievement levels, the number of shares of Legacy TCF common stock underlying such award was calculated and fixed as of the Merger Date assuming achievement of the applicable performance conditions at the greater of target level performance or the actual level of achievement of Legacy TCF’s performance results through the latest practicable date before the Merger Date. Such awards converted into service-based vesting awards with the applicable vesting date to be the last day of the original performance period. For purposes of Legacy TCF equity awards for which performance was achievable at a single level, the performance condition was deemed satisfied as of the Merger Date.

In connection with the Merger, all outstanding stock options, performance-based restricted stock units and time-vesting restricted stock units of Chemical (collectively, the “Chemical equity awards”) which were outstanding immediately before the Merger Date continue to be awards in respect of TCF Financial common stock following the Merger, subject to the same terms and conditions that were applicable to such awards before the Merger Date, except with respect to performance-based restricted stock units. The performance-based restricted stock units for which performance results had not been measured were measured as of the latest practicable date before the Merger Date and the number of performance-based restricted stock units was fixed at the greater of the target (100%) performance level or actual performance (the “Chemical earned awards”) and such Chemical earned awards will continue to vest based on the executive’s continued service through the end of the applicable performance period.

The fair value of share-based awards is recognized as compensation expense over the requisite service or performance period. Compensation expense for share-based awards was $15.2 million, $16.5 million and $12.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. The excess tax benefit realized from share-based compensation transactions during the years ended December 31, 2019, 2018 and 2017 was a benefit of $2.3 million, $2.6 million and $2.8 million, respectively.

Restricted Stock Units

The Corporation can grant performance-based restricted stock units (“PRSUs”) and time-based restricted stock units (“TRSUs”) (collectively referred to as “RSUs”) under the Stock Incentive Plan of 2019 and the Legacy TCF Omnibus Incentive Plan; provided that, RSUs granted under the Legacy TCF Omnibus Incentive Plan may only be granted to former employees of Legacy TCF. At December 31, 2019, there were no PRSUs outstanding dependent on achieving certain performance target levels and the grantee completing the requisite service period. The TRSUs vest upon satisfaction of a service condition. Upon achievement of the performance target level and/or satisfaction of a service condition, as applicable, the RSUs are converted into shares of TCF Financial’s common stock on a one-to-one basis.


A summary of the activity for RSUs for the years ended December 31, 2019, 2018 and 2017 is presented below:

 

     Number of Units      Weighted-average
Grant Date Fair
Value Per Unit
 

Outstanding at December 31, 2016

     228,867      $ 12.86  

Outstanding at December 31, 2016 as adjusted for conversion

     116,289        25.31  

Granted

     67,130        37.72  
  

 

 

    

 

 

 

Outstanding at December 31, 2017

     360,988        15.17  

Outstanding at December 31, 2017 as adjusted for conversion

     183,419        29.86  

Granted

     60,181        43.78  

Forfeited/canceled

     (10,411      28.59  

Vested

     (26,609      28.81  
  

 

 

    

 

 

 

Outstanding at December 31, 2018

     406,575        17.33  

Outstanding at December 31, 2018 as adjusted for conversion

     206,580        34.11  

Granted

     638,138        41.99  

Acquired in the Merger(1)

     879,779        47.36  

Forfeited/canceled

     (26,347      43.43  

Vested

     (186,330      38.11  
  

 

 

    

 

 

 

Outstanding at December 31, 2019

     1,511,820        44.49  
  

 

 

    

 

 

 

 

(1)

Inclusive of certain Legacy TCF PRSUs which were converted at their maximum payout into 55,022 TRSUs with a weighted-average grant date fair value per unit of $42.06.

Unrecognized compensation expense related to RSUs totaled $42.6 million at December 31, 2019 and is expected to be recognized over the remaining weighted-average period of 2.2 years.

Restricted Stock Awards

The Corporation’s restricted stock award transactions were as follows:

 

     Number of Awards      Weighted-Average
Grant Date Fair
Value Per Award
 

Outstanding at December 31, 2016

     3,536,175      $ 12.81  

Outstanding at December 31, 2016 as adjusted for conversion

     1,796,678        25.21  

Granted

     296,404        32.42  

Forfeited/canceled

     (293,174      22.39  

Vested

     (458,772      26.86  
  

 

 

    

 

 

 

Outstanding at December 31, 2017

     2,639,663      $ 13.65  

Outstanding at December 31, 2017 as adjusted for conversion

     1,341,136        26.86  

Granted

     387,909        42.61  

Forfeited/canceled

     (119,366      29.77  

Vested

     (446,447      24.09  
  

 

 

    

 

 

 

Outstanding at December 31, 2018

     2,289,446        16.70  

Outstanding at December 31, 2018 as adjusted for conversion

     1,163,232        32.87  

Granted

     269,915        40.82  

Forfeited/canceled

     (136,489      34.18  

Vested

     (408,353      34.37  
  

 

 

    

 

 

 

Outstanding at December 31, 2019

     888,305      $ 40.67  
  

 

 

    

 

 

 

At December 31, 2019, there were no shares of performance-based restricted stock awards outstanding. Unrecognized stock compensation expense for restricted stock awards was $18.5 million at December 31, 2019 with a weighted-average remaining amortization period of 2.4 years.


Stock Options

A summary of activity for the Corporation’s stock options is presented below:

 

     Non-Vested Stock Options
Outstanding
     Stock Options Outstanding  
     Number of
Options
     Weighted-
average
Exercise Price
     Number of
Options
     Weighted-
average
Exercise Price
 

Outstanding at December 31, 2016

     —        $ —          404,000      $ 15.75  

Outstanding at December 31, 2016 as adjusted for conversion

     —          —          205,272        31.00  

Exercised

     —          —          (19,308      31.00  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2017

     —          —          366,000        15.75  

Outstanding at December 31, 2017 as adjusted for conversion

           185,964        31.00  

Exercised

     —          —          (185,964      31.00  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2018

     —          —          —          —    

Acquired in the Merger(1)

     127,906        39.38        520,379        29.48  

Exercised

     —          —          (25,602      30.10  

Forfeited/canceled

     (5,953      32.81        —          —    

Expired

     —          —          (756      32.81  

Vested

     (1,144      46.95        1,144        46.95  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding at December 31, 2019

     120,809      $ 39.63        495,165      $ 29.48  
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable/vested at December 31, 2019

           495,165      $ 29.48  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Options acquired in the Merger expire ten years from the date of grant and vest ratably over a five-year period.

The weighted-average remaining contractual term was 3.87 years for all stock options outstanding and 3.25 years for all exercisable stock options at December 31, 2019. The intrinsic value of all outstanding in-the-money stock options and exercisable in-the-money stock options was $10.1 million and $9.0 million, respectively, at December 31, 2019. The aggregate intrinsic values of outstanding and exercisable options at December 31, 2019 were calculated based on the closing market price of TCF Financial’s common stock on December 31, 2019 of $46.80 per share less the exercise price. Options with intrinsic values less than zero, or “out-of-the-money” options, are not included in the aggregate intrinsic value reported.

During the year ended December 31, 2019, $771 thousand cash was received from option exercises.

At December 31, 2019, unrecognized compensation expense related to stock options totaled $586 thousand and is expected to be recognized over a remaining weighted average period of 1.7 years.

Note 21. Retirement Plans

The Corporation maintains four Legacy TCF employee benefit plans: (i) the TCF 401K Plan (the “TCF 401K”), (ii) the TCF 401K Supplemental Plan (the “Legacy TCF Supplemental Plan”), (iii) the TCF Cash Balance Pension Plan (the “Legacy TCF Pension Plan”), a defined benefit pension plan, and (iv) the TCF Postretirement Plan (the “Legacy TCF Postretirement Plan”). Effective November 1, 2019, the Legacy TCF Pension Plan has been terminated.

The Corporation also maintains the Chemical employee benefit plans that existed before the Merger: (i) the Chemical Financial Corporation Nonqualified Postretirement Benefit Plan (the “Chemical Postretirement Benefit Plan”), and (ii) the Chemical Financial Corporation 401k Savings Plan (the “Chemical 401k”). In addition, Chemical has a pension plan, the Chemical Pension Plan (together with TCF Pension Plan, defined as the “Pension Plans”), which is a defined benefit pension plan, that was terminated effective August 31, 2019.


Qualified Defined Benefit Pension Plans

The Board of Directors of Legacy TCF approved the termination of the Legacy TCF Pension Plan, a qualified defined benefit plan, effective November 1, 2019. The Legacy TCF Pension Plan covered employees who were hired prior to June 30, 2004, were at least 21 years old and had worked 1,000 hours. Effective March 31, 2006, Legacy TCF amended the Legacy TCF Pension Plan to discontinue compensation credits for all participants. Interest credits will continue to be paid until participants’ accounts are distributed from the Legacy TCF Pension Plan. The Corporation makes a monthly interest credit to each participant’s account. The interest rate used to determine the monthly interest credit is based on the one-year average of the 5-year Treasury Constant Maturity Rate plus 25 basis points, rounded to the nearest quarter point, capped at 12% and determined at the beginning of each year. The weighted-average interest crediting rate was 3.00% and 2.25% for 2019 and 2018, respectively. All participant accounts are 100% vested. At December 31, 2019 the Legacy TCF Pension Plan was remeasured and resulted in the Corporation recording an expense of $2.3 million related to the fair value adjustment. The Legacy TCF Pension Plan was fully funded as of December 31, 2019. The Corporation does not consolidate the assets and liabilities associated with the Legacy TCF Pension Plan.

The termination of the Chemical Pension Plan was approved effective August 31, 2019. The discount rate was adjusted to 3.48% based on the remeasurement of the Chemical Pension Plan required due to the Merger and the termination. At the time of the Merger, as a result of the termination, the Corporation recognized a prepaid asset representing the funded status of the Chemical Pension Plan, net of estimated settlement costs, and the balance previously recorded in accumulated other comprehensive income was eliminated. The purchase accounting adjustment, as a result of the Merger, was reported in goodwill. At December 31, 2019, the Chemical Pension Plan’s annual remeasurement resulted in the Corporation recording an expense of $4.0 million related to the fair value adjustment. The Chemical Pension Plan was fully funded as of December 31, 2019.

Nonqualified Postretirement Benefit Plans

The Legacy TCF Postretirement Plan provides health care benefits to eligible retired employees who retired prior to December 31, 2009. Effective January 1, 2000, the Corporation modified the Postretirement Plan for employees not yet eligible for benefits under the Postretirement Plan by eliminating the Corporation subsidy. The provisions for full-time and retired employees then eligible for these benefits were not changed. The Postretirement Plan is not funded.

The Chemical Postretirement Benefit Plan provides medical and dental benefits, upon retirement, to a limited number of active and retired employees. The majority of the retirees are required to make contributions toward the cost of their benefits based on their years of credited service and age at retirement. Covered employees include those who were at least age 50 as of January 1, 2012, that retire at age 60 or older, have at least 25 years of service with Chemical and are participants in the active employee group health insurance plan. Eligible employees may also cover their spouse until age 65 as long as the spouse is not offered health insurance coverage through his or her employer. Employees and their spouses eligible to participate in the Chemical Postretirement Benefit Plan are required to make contributions toward the cost of their benefits upon retirement, with the contribution levels designed to cover the projected overall cost of these benefits over the long-term. Retiree contributions are generally adjusted annually. The accounting for these postretirement benefits anticipates changes in future cost-sharing features such as retiree contributions, deductibles, copayments and coinsurance. The benefits can be amended, modified or terminated by the Corporation at any time.

401(k) Savings Plans

The TCF 401K, a qualified postretirement benefit and employee stock ownership plan, allows participants to make contributions of up to 50% of their covered compensation on a tax-deferred and/or after-tax basis, subject to the annual covered compensation limitation imposed by the Internal Revenue Service (“IRS”). TCF matches the contributions of all participants with TCF common stock at the rate of $1 per dollar for employees with one or more years of service up to a maximum company contribution of 5.0% of the employee’s covered compensation per pay period subject to the annual covered compensation limitation imposed by the IRS. Employee contributions vest immediately and matching contributions made subsequent to January 1, 2016 vest immediately. The corporation matching contributions made prior to January 1, 2016 are subject to a graduated vesting schedule based on an employee’s years of service with full vesting after five years. Dividends on TCF’s common shares held in the 401K reduce retained earnings and the shares are considered outstanding for computing earnings per share.


Employees have the opportunity to diversify and invest their account balance, including matching contributions, in various mutual funds or TCF common stock. At December 31, 2019, the fair value of the assets in the TCF 401K totaled $583.0 million and included $194.0 million invested in TCF common stock. Dividends on TCF common shares held in the 401K reduce retained earnings and the shares are considered outstanding for computing earnings per share. The Corporation’s matching contributions are expensed when earned. The Corporation’s contributions to the TCF 401K were $12.3 million for each of 2019, 2018 and 2017.

The Legacy TCF Supplemental Plan, a nonqualified plan, allows certain employees to contribute up to 50% of their salary and bonus. The Corporation’s matching contributions to this plan totaled $1.2 million, $1.3 million and $1.2 million for 2019, 2018 and 2017, respectively. The Corporation made no other contributions to this plan, other than payment of administrative expenses. The amounts deferred under this plan are invested in TCF common stock or mutual funds. At December 31, 2019 and 2018, the fair value of the assets in the plan totaled $69.7 million and $51.7 million, respectively, and included $27.6 million and $23.0 million, respectively, invested in TCF common stock. The plan’s assets invested in TCF common stock are held in trust and included in treasury stock and other. See “Note 18. Equity” for further information on treasury stock and other.

The Chemical 401K, a qualified postretirement benefit plan, is available to all former Chemical employees that continue to be employed following the Merger Date, and provides tax-deferred salary deductions and alternative investment options. The Corporation provides a safe harbor matching contribution of the participant’s elective deferrals up to a maximum of 6.0% of eligible compensation up to the maximum amount imposed by the IRS. The Chemical 401K provides the option to invest in TCF common stock. The Corporation’s matching contributions are expensed when earned. The Corporation’s contributions to the Chemical 401K were $4.1 million for 2019.

As of December 31, 2019, the Chemical 401K is merged with and into the TCF 401K.

Benefit Obligations and Plan Expenses

The measurement of the benefit obligation, prepaid pension asset, pension liability and annual pension expense involves actuarial valuation methods and the use of actuarial and economic assumptions. Due to the long-term nature of the Pension Plans’ obligation, actual results may differ significantly from the actuarial-based estimates. Differences between estimates and actual experience are recorded in the year they arise. The Corporation closely monitors all assumptions and updates them annually. The Corporation does not consolidate the assets and liabilities associated with the Pension Plans. The information set forth in the following tables is based on current actuarial reports.


The following schedule sets forth the changes in the benefit obligation and plan assets of the Corporation’s Plans:

 

     Pension Plans      Postretirement Benefit Plans  
     At or For the Year Ended December 31,  

(In thousands)

   2019      2018      2019      2018  

Benefit obligation:

           

Benefit obligation, beginning of year

   $ 28,330      $ 31,389      $ 3,320      $ 3,717  

Benefit obligation acquired in Merger

     136,587        —          2,271        —    

Service cost

     —          —          1        —    

Interest cost

     3,013        983        149        110  

Net actuarial loss (gain)

     3,831        (630      (19      (115

Benefits paid

     (5,785      (3,412      (446      (392
  

 

 

    

 

 

    

 

 

    

 

 

 

Benefit obligations, end of year

     165,976        28,330        5,276        3,320  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value of plan assets:

           

Fair value of plan assets, beginning of year

     32,844        36,863        —          —    

Fair value of plan assets acquired in Merger

     141,746        —          —          —    

Actual gain (loss) on plan assets

     333        (607      —          —    

Benefits paid

     (5,439      (3,412      (377      (392

Employer contributions

     —          —          377        392  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair value of plan assets, end of year

     169,484        32,844        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Funded status of plan, end of period

   $ 3,508      $ 4,514      $ (5,276    $ (3,320
  

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated benefit obligation

   $ 165,976      $ 28,330        
  

 

 

    

 

 

    

 

 

    

 

 

 

Amounts recognized in the Consolidated Statements of Financial Condition:

           

Prepaid (accrued) benefit cost, end of period

   $ 3,508      $ 4,514      $ (5,276    $ (3,320

Prior service cost included in accumulated other comprehensive income (loss)

   $ —        $ —        $ (101    $ (147
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average rate assumptions of the Corporation’s Plans follow:

 

     Legacy TCF Pension
Plan
    Chemical Pension
Plan
    Legacy TCF
Postretirement Plan
    Chemical Postretirement
Plan
 
(In thousands)    2019     2018     2017     2019     2018     2017     2019     2018     2017     2019     2018     2017  

Discount rate used in determining benefit obligation -December 31

     2.17     3.95     3.30     2.54     —       —       2.70     3.85     3.15     3.14     —       —  

Discount rate used in determining expense

     3.95       3.30       3.60       3.48       —         —         3.85       3.15       3.40       3.11       —         —    

Expected long-term return on Pension Plan Assets

     1.75       1.50       1.50       3.48       —         —         —         —         —         —         —         —    

Health care cost trend rate assumed for next year

     —         —         —         —         —         —         5.45       5.6       5.7       —         —         —    

Final health care cost trend rate

     —         —         —         —         —         —         4.50       4.5       4.5       —         —         —    

Year that final health care trend rate is reached

     —         —         —         —         —         —         2038       2038       2038       —         —         —    

The discount rates used to determine the projected benefit obligation for the Legacy TCF Pension Plan and Legacy TCF Postretirement Plan were determined by matching estimated benefit cash flows to a yield curve derived from corporate bonds rated AA by either Moody’s or Standard and Poor’s. Bonds containing call or put provisions were excluded. The average estimated duration of benefit cash flows was 6.18 years for the TCF Pension Plan. The discount rate used to determine the projected benefit obligation for the Chemical Pension Plan was determined by equating the present value of the projected benefit payments of the Chemical Pension Plan on an ongoing basis as of December 31, 2019, to the Plan’s projected plan termination liability as of December 31, 2019. The discount rate used to determine the projected benefit obligation for the Chemical Postretirement Plan was determined by using an independent third party valuation model as of December 31, 2019.


The net periodic benefit plan (income) cost included in other noninterest expense for the Corporation’s Plans was as follows for the years ended December 31:

 

     Pension Plans     Postretirement Plans  

(In thousands)

   2019     2018     2017     2019     2018     2017  

Interest cost

   $ 3,013     $ 983     $ 1,138     $ 149     $ 110     $ 133  

Service cost

     —         —         —         1       —         —    

Return on plan assets

     (333     607       (1,174     —         —         —    

Recognized actuarial (gain) loss

     3,831       (630     765       (19     (115     (248

Amortization of prior service cost

     —         —         —         (46     (46     (46
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit plan (income) cost

   $ 6,511     $ 960     $ 729     $ 85     $ (51   $ (161
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Corporation is eligible to contribute up to $10.0 million to the Pension Plans until the 2019 federal income tax return extended due date under various IRS funding methods. The Corporation made no cash contributions to the Legacy TCF Pension Plan or Chemical Pension Plan in 2019, 2018 and 2017, respectively. The Corporation does not expect to be required to contribute to the Pension Plans in 2020.

The Corporation contributed $377 thousand, $392 thousand and $332 thousand to the TCF Postretirement Plan in 2019, 2018 and 2017, respectively and no contributions were made to the Chemical Postretirement Plan in 2019. The Corporation expects to contribute $384 thousand to the Postretirement Plans in 2020. The Corporation currently has no plans to pre-fund the Postretirement Plans in 2020.

The following schedule presents estimated future benefit payments for the next 10 years under the Corporation’s Plans for retirees already receiving benefits and future retirees, assuming they retire and begin receiving unreduced benefits as soon as they are eligible:

 

(In thousands)

   Pension Plans      Postretirement Plans  

2020

   $ 168,945      $ 623  

2021

     —          594  

2022

     —          563  

2023

     —          518  

2024

     —          484  

2025 - 2029

     —          1,866  
  

 

 

    

 

 

 

Total

   $ 168,945      $ 4,648  
  

 

 

    

 

 

 

Pension Plan Assets

TCF’s Pension Plan investment policy permits investments in cash, money market mutual funds, direct fixed income securities to include U.S. Treasury securities and U.S. Government-sponsored enterprises, and indirect fixed income investment securities made in fund form (mutual fund or institutional fund) where the fund invests in fixed income securities in investment grade corporate credits, non-investment grade floating-rate bank loans and non-investment grade bonds.

The assets of the Chemical Pension Plan were historically invested by the Wealth Management department of Chemical Bank. The Chemical Pension Plan’s primary investment objective is long-term growth coupled with income. In consideration of the Pension Plan’s fiduciary responsibilities, emphasis is placed on quality investments with sufficient liquidity to meet benefit payments and plan expenses, as well as providing the flexibility to manage the investments to accommodate current economic and financial market conditions. To meet the Chemical Pension Plan’s long-term objective within the constraints of prudent management, target ranges have been set for the three primary asset classes: an equity securities range from 40.0% to 70.0%, a debt securities range from 20.0% to 60.0%, and a cash and cash equivalents and other range from 0.0% to 10.0%. Modest asset positions outside of these targeted ranges may occur due to the repositioning of assets within industries or other activity in the financial markets. Equity securities are primarily comprised of both individual securities and equity-based mutual funds, invested in either domestic or international markets. The stocks are diversified among the major economic sectors of the market and are selected based on balance sheet strength, expected earnings growth, the management team and position within their industries, among other characteristics. Debt securities are comprised of U.S. dollar denominated bonds issued by the U.S. Treasury, U.S. government agencies and investment grade bonds issued by corporations. The notes and bonds purchased are primarily rated “A” or better by the major bond rating companies from diverse industries.


The Pension Plans’ assets are measured at fair value on a recurring basis and grouped in three levels, based on the markets in which the assets are traded and the degree and reliability of estimates and assumptions used to determine fair value. Mutual funds, U.S. Treasury Bills, equity securities and interest-bearing cash are categorized as Level 1. The fair value of Level 1 assets is based on quotes from independent asset pricing services based on active markets. Mortgage-backed securities and U.S. Treasury and government sponsored agency bonds and notes are categorized as Level 2. The fair value of level 2 assets is based on prices obtained from independent pricing sources that are based on observable transactions of similar instruments, but not quoted markets. At December 31, 2019 and 2018, there were no assets categorized as Level 3. The fair value of the collective investment fund is based on the net asset value (“NAV”) of units as a practical expedient, and therefore the asset is not classified in the fair value hierarchy.

The following schedule sets forth the fair value of the Pension Plans’ assets and the level of valuation inputs used to value those assets at December 31, 2019 and 2018.

 

     At December 31, 2019  

(In thousands)

   Level 1      Level 2      Level 3      Total  

Cash

   $ 3,579      $ —        $ —        $ 3,579  

Debt Securities:

           

U.S. Treasury and government sponsored agency bonds and notes

     —          86,952        —          86,952  

Mutual funds(1)

     69,845        —          —          69,845  

Corporate bonds

     —          6,718        —          6,718  

Mortgage-backed securities

     —          2,346        —          2,346  

Other

     775        —          —          775  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments at fair value

   $ 74,199      $ 96,016      $ —        $ 170,215  
  

 

 

    

 

 

    

 

 

    

 

 

 
     At December 31, 2018  

(In thousands)

   Level 1      Level 2      Level 3      Total  

Cash

   $ 83      $ —        $ —        $ 83  

Debt Securities:

           

Mutual funds(1)

     21,566        —          —          21,566  

U.S. Treasury Bills

     2,993        —          —          2,993  

Mortgage-backed securities

     —          3,399        —          3,399  

Collective investment fund (measured at NAV of units as a practical expedient)

     —          —          —          4,812  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments at fair value

   $ 24,642      $ 3,399      $ —        $ 32,853  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Comprised primarily of money market mutual funds, fixed-income bonds issued by the U.S. Treasury and government sponsored agencies and bonds of U.S. and foreign issuers from diverse industries.

At December 31, 2019 and 2018, the Pension Plans did not hold any shares of the Corporation’s common stock.

Accumulated Other Comprehensive Loss

The following sets forth the changes in accumulated other comprehensive income (loss), before tax, related to the Corporation’s Pension Plans and Postretirement Plans during 2019:

 

     At or For the Year Ended December 31,  
     Postretirement Plans  

(In thousands)

   2019      2018      2017  

Accumulated other comprehensive income (loss) before tax, beginning of period

   $ (147    $ (193    $ (239

Net actuarial income (loss)

        

Amortization of prior service credit (recognized in net periodic benefit cost)

     46        46        46  
  

 

 

    

 

 

    

 

 

 

Accumulated other comprehensive income (loss) before tax, end of period

   $ (101    $ (147    $ (193
  

 

 

    

 

 

    

 

 

 


Note 22. Commitments, Contingent Liabilities and Guarantees

Financial Instruments with Off-Balance Sheet Risk In the normal course of business, the Corporation enters into financial instruments with off-balance sheet risk, primarily to meet the financing needs of its customers. These financial instruments, which are issued or held for purposes other than trading, involve elements of credit and interest-rate risk in excess of the amounts recognized in the Consolidated Statements of Financial Condition.

The Corporation’s exposure to credit loss, in the event of nonperformance by the counterparty to the financial instrument is represented by the contractual amount of the commitments. The Corporation uses the same credit policies in making these commitments as it does for making direct loans. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on a credit evaluation of the customer.

Financial instruments with off-balance sheet risk were as follows:

 

(In thousands)

   At December 31, 2019      At December 31, 2018  

Commitments to extend credit:

     

Commercial

   $ 5,743,072      $ 1,280,707  

Consumer

     2,305,096        1,627,960  
  

 

 

    

 

 

 

Total commitments to extend credit

     8,048,168        2,908,667  

Standby letters of credit and guarantees on industrial revenue bonds

     129,192        20,662  
  

 

 

    

 

 

 

Total

   $ 8,177,360      $ 2,929,329  
  

 

 

    

 

 

 

Commitments to Extend Credit Commitments to extend credit are agreements to lend 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. Since a certain amount of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral to secure any funding of these commitments predominantly consists of residential and commercial real estate mortgages.

Standby Letters of Credit and Guarantees on Industrial Revenue Bonds Standby letters of credit and guarantees on industrial revenue bonds are conditional commitments issued by the Corporation guaranteeing the performance of a customer to a third-party. These conditional commitments expire in various years through 2039. The majority of these standby letters of credit are collateralized. Collateral held consists primarily of commercial real estate mortgages. Since the conditions under which the Corporation is required to fund these commitments may not materialize, the cash requirements are expected to be less than the total outstanding commitments.

Contingencies and Guarantees The Corporation has originated and sold certain loans, and additionally acquired the potential liability for those historical originated and sold loans by merged or acquired entities, for which the buyer has limited recourse to the Corporation in the event the loans do not perform as specified in the agreements. The outstanding balance and the maximum potential amount of undiscounted future payments that the Corporation could be required to make in the event of nonperformance by the borrower totaled $6.0 million at December 31, 2019. In the event of nonperformance, the Corporation has rights to the underlying collateral securing the loans. At December 31, 2019, the Corporation had recorded a liability of $100 thousand, in connection with the recourse agreements, in other liabilities.

In addition, the Corporation acquired certain Small Business Administration (“SBA”) guaranteed loans in which the guaranteed portion had been sold to a third party investor. In the event these loans default and the SBA guaranty is no longer intact (i.e. an issue found to have occurred during the origination or the liquidation of the loans) the Corporation would be liable to make the loan whole to the third-party investor. The maximum potential amount of undiscounted future payments that the Corporation could be required to make in the event of default by the borrower was $16.7 million at December 31, 2019. In the event of default, the Corporation has rights to the underlying collateral securing the loans. At December 31, 2019, the Corporation had recorded a liability of $891 thousand, in other liabilities.


Representations, Warranties and Contractual Liabilities In connection with the Corporation’s residential mortgage loan sales, and the historical sales of merged or acquired entities, the Corporation makes certain representations and warranties that the loans meet certain criteria, such as collateral type, underwriting standards and the manner in which the loans will be serviced. The Corporation may be required to repurchase individual loans and/or indemnify the purchaser against losses if the loan fails to meet established criteria. In addition, some agreements contain a requirement to repurchase loans as a result of early payoffs by the borrower, early payment default of the borrower or the failure to obtain valid title. At December 31, 2019 and December 31, 2018 the liability recorded in connection with these representations and warranties was $5.7 million and $1.3 million, respectively, included in other liabilities.

Litigation Contingencies From time to time, the Corporation is a party to legal proceedings arising out of its lending, leasing and deposit operations, including foreclosure proceedings and other collection actions as part of its lending and leasing collections activities. The Corporation may also be subject to regulatory examinations and enforcement actions brought by federal regulators, including the Securities and Exchange Commission, the Federal Reserve, the OCC and the Consumer Financial Protection Bureau (“CFPB”) which may impose sanctions on the Corporation for failures related to regulatory compliance. From time to time borrowers and other customers, and employees and former employees have also brought actions against the Corporation, in some cases claiming substantial damages. The Corporation and other financial services companies are subject to the risk of class action litigation. Litigation is often unpredictable and the actual results of litigation cannot be determined and therefore the ultimate resolution of a matter and the possible range of loss associated with certain potential outcomes cannot be established. Based on the current understanding of the Corporation’s pending legal proceedings, management does not believe that judgments or settlements arising from pending or threatened legal matters, individually or in the aggregate, would have a material adverse effect on the consolidated financial position, operating results or cash flows of the Corporation.

Note 23. Derivative Instruments

Derivative instruments, recognized at fair value within other assets or accrued expenses and other liabilities on the Consolidated Statements of Financial Condition, were as follows:

 

     At December 31, 2019  
            Fair Value  

(In thousands)

   Notional Amount(1)      Derivative Assets      Derivative Liabilities  

Derivatives designated as hedging instruments:

        

Interest rate contract

   $ 150,000      $ —        $ 168  

Forward foreign exchange contracts

     177,593        —          3,251  
  

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

        —          3,419  
     

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

        

Interest rate contracts

     5,095,969        102,893        5,872  

Risk participation agreements

     316,353        202        354  

Forward foreign exchange contracts

     262,656        —          3,268  

Interest rate lock commitments

     158,111        2,772        20  

Forward loan sales commitments

     174,013        41        289  

Power Equity CDs

     29,009        734        734  

Swap agreement

     12,652        —          356  
  

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

        106,642        10,893  
     

 

 

    

 

 

 

Total derivatives before netting

        106,642        14,312  

Netting(2)

        (540      (5,109
     

 

 

    

 

 

 

Total derivatives, net

      $ 106,102      $ 9,203  
     

 

 

    

 

 

 

 

(1)

Notional or contract amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the Consolidated Statements of Financial Condition.

(2)

Includes netting of derivative asset and liability balances and related cash collateral, where counterparty netting agreements are in place.


     At December 31, 2018  
            Fair Value  

(In thousands)

   Notional Amount(1)      Derivative Assets      Derivative Liabilities  

Derivatives designated as hedging instruments:

        

Interest rate contract

   $ 150,000      $ 393      $ —    

Forward foreign exchange contracts

     157,271        2,980        —    
  

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

        3,373        —    
  

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments:

        

Interest rate contracts

     1,030,198        7,491        3,706  

Risk participation agreements

     65,251        25        26  

Forward foreign exchange contracts

     254,274        3,709        13  

Interest rate lock commitments

     28,007        652        28  

Swap agreement

     13,020        —          583  
  

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

        11,877        4,356  
     

 

 

    

 

 

 

Total derivatives before netting

        15,250        4,356  

Netting(2)

        (6,982      (991
     

 

 

    

 

 

 

Total derivatives, net

      $ 8,268      $ 3,365  
     

 

 

    

 

 

 

 

(1)

Notional or contract amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the Consolidated Statements of Financial Condition.

(2)

Includes netting of derivative asset and liability balances and related cash collateral, where counterparty netting agreements are in place.


Derivative instruments may be subject to master netting arrangements and collateral arrangements and qualify for offset in the Consolidated Statements of Financial Condition. A master netting arrangement with a counterparty creates a right of offset for amounts due to and from that same counterparty that is enforceable in the event of a default or bankruptcy. Derivative instruments subject to master netting arrangements and collateral arrangements are recognized on a net basis in the Consolidated Statements of Financial Condition. The gross amounts recognized, gross amounts offset and net amount presented of derivative instruments were as follows:

 

     At December 31, 2019  

(In thousands)

   Gross Amounts
Recognized
     Gross Amounts
Offset(1)
     Net Amount
Presented
 

Derivative assets

        

Interest rate contracts

   $ 102,893      $ (492    $ 102,401  

Risk participation agreements

     202        —          202  

Forward foreign exchange contracts

     —          —          —    

Interest rate lock commitments

     2,772        (7      2,765  

Forward loan sales commitments

     41        (41      —    

Power Equity CDs

     734        —          734  
  

 

 

    

 

 

    

 

 

 

Total derivative assets

   $ 106,642      $ (540    $ 106,102  
  

 

 

    

 

 

    

 

 

 

Derivative liabilities

        

Interest rate contracts

   $ 6,040      $ (491    $ 5,549  

Risk participation agreements

     354        —          354  

Forward foreign exchange contracts

     6,519        (4,214      2,305  

Interest rate lock commitments

     20        (7      13  

Forward loan sales commitments

     289        (41      248  

Power Equity CDs

     734        —          734  

Swap agreement

     356        (356      —    
  

 

 

    

 

 

    

 

 

 

Total derivative liabilities

   $ 14,312      $ (5,109    $ 9,203  
  

 

 

    

 

 

    

 

 

 
     At December 31, 2018  

(In thousands)

   Gross Amounts
Recognized
     Gross Amounts
Offset(1)
     Net Amount
Presented
 

Derivative assets

        

Interest rate contracts

   $ 7,884      $ (395    $ 7,489  

Risk participation agreements

     25        —          25  

Forward foreign exchange contracts

     6,689        (6,587      102  

Interest rate lock commitments

     652        —          652  
  

 

 

    

 

 

    

 

 

 

Total derivative assets

   $ 15,250      $ (6,982    $ 8,268  
  

 

 

    

 

 

    

 

 

 

Derivative liabilities

        

Interest rate contracts

   $ 3,706      $ (395    $ 3,311  

Risk participation agreements

     26        —          26  

Forward foreign exchange contracts

     13        (13      —    

Interest rate lock commitments

     28        —          28  

Swap agreement

     583        (583      —    
  

 

 

    

 

 

    

 

 

 

Total derivative liabilities

   $ 4,356      $ (991    $ 3,365  
  

 

 

    

 

 

    

 

 

 

 

(1)

Includes the amounts with counterparties subject to enforceable master netting arrangements that have been offset in the Consolidated Statements of Financial Condition.


Derivatives Designated as Hedging Instruments

Interest rate contract The carrying amount of the hedged subordinated debt, including the cumulative basis adjustment related to the application of fair value hedge accounting, is recorded in long-term borrowings on the Consolidated Statements of Financial Condition and was as follows:

 

     Carrying Amount
of the Hedged Liability
     Cumulative Amount of
Fair Value Hedging Adjustments
Included in the Carrying Amount
of the  Hedged Liability
 
     At December 31,      At December 31,  

(In thousands)

   2019      2018      2019      2018  

Subordinated bank note - 2025

   $ 151,454      $ 144,296      $ 2,773      $ (4,165
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the effect of fair value hedge accounting on the Consolidated Statements of Income for the years ended December 31, 2019 and 2018.

 

     Year Ended December 31,  

(In thousands)

   2019      2018      2017  

Statement of income line where the gain (loss) on the fair value hedge was recorded:

        

Interest expense on borrowings

   $ 72,072      $ 43,144      $ —    

Other noninterest income

     —          —          23,969  

Gain (loss) on interest rate contract (fair value hedge)

        

Hedged item

   $ (6,937    $ 2,163      $ 808  

Derivative designated as a hedging instrument

     6,986        (2,275      (609
  

 

 

    

 

 

    

 

 

 

Net income (expense) recognized on fair value hedge in interest expense on borrowings

     49        (112      199  
  

 

 

    

 

 

    

 

 

 

Forward Foreign Exchange Contracts The effect of net investment hedges on accumulated other comprehensive income was as follows:

 

     Year Ended December 31,  

(In thousands)

   2019      2018      2017  

Forward foreign exchange contracts

   $ (7,001    $ 13,762      $ (4,430
  

 

 

    

 

 

    

 

 

 

Derivatives Not Designated as Hedging Instruments Certain other interest rate contracts, forward foreign exchange contracts, interest rate lock commitments and other contracts have not been designated as hedging instruments. The effect of these derivatives on the Consolidated Statements of Income was as follows:

 

          Year Ended December 31,  

(In thousands)

  

Location of Gain (Loss)

   2019      2018      2017  

Interest rate contracts(1)

   Other noninterest income    $ (18,240    $ (440    $ (230

Risk participation agreements

   Other noninterest income      123        31        (38

Forward foreign exchange contracts

   Other noninterest expense      (10,209      23,707        (15,748

Interest rate lock commitments

   Net gains on sales of loans      (573      806        (73

Forward loan sales commitments

   Net gains on sales of loans      (172      —          —    

Swap agreement

   Other noninterest expense      (69      (274      (311
     

 

 

    

 

 

    

 

 

 

Net gain (loss) recognized

      $ (29,140    $ 23,830      $ (16,400
     

 

 

    

 

 

    

 

 

 

 

(1)

Included in the year ended December 31, 2019 is a loss of $17.3 million related to the termination of $1.1 billion of interest rate swaps.

The Corporation executes all of its forward foreign exchange contracts in the over-the-counter market with large financial institutions pursuant to International Swaps and Derivatives Association, Inc. agreements. These agreements include credit risk-related features that enhance the creditworthiness of these instruments, as compared with other obligations of the respective counterparty with whom the Corporation has transacted, by requiring that additional collateral be posted under certain circumstances. The amount of collateral required depends on the contract and is determined daily based on market and currency exchange rate conditions.


At December 31, 2019 and 2018, credit risk-related contingent features existed on forward foreign exchange contracts with a notional value of $23.1 million and $25.7 million, respectively. In the event the Corporation is rated less than BB- by Standard and Poor’s, the contracts could be terminated or the Corporation may be required to provide approximately $462 thousand in additional collateral at both December 31, 2019 and 2018. There were no forward foreign exchange contracts containing credit risk-related features in a liability position at both December 31, 2019 and December 31, 2018.

At December 31, 2019, the Corporation had posted $54.6 million, $4.8 million and $1.3 million of cash collateral related to its interest rate contracts, forward foreign exchange contracts and swap agreement, respectively.

Note 24. Fair Value Measurements

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 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.

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 Corporation 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 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 certain residential mortgage loans held-for-sale. Accordingly, the fair values of these 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, the Corporation 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.


Derivative Instruments:

Interest Rate Contracts: The Corporation executes interest rate contracts as described in Note 3. Summary of Significant Accounting Policies. 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 nonperformance 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 nonperformance. The risk of counterparty nonperformance 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 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: The Corporation’s swap agreement, categorized as Level 3, is related to the sale of the Corporation’s Visa Class B stock. The fair value of the swap agreement is based on the 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 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:

 

     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

     —          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.



     December 31, 2018  

(In thousands)

   Level 1      Level 2      Level 3      Total  

Assets

           

Investment securities available-for-sale

   $ —        $ 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

     —          7,884        —          7,884  

Risk participation agreements

     —          25        —          25  

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

   $ —        $ 3,706      $ —        $ 3,706  

Risk participation agreements

     —          26        —          26  

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, 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
 

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

Total net gains (losses) included in:

            

Net income

     1       534       2,568       778       (68     (119

Other comprehensive income (loss)

     (21     —         (262     —         —         —    

Acquired

     450       —         —         —         —         —    

Sales

     —         (164,693     —         —         —         —    

Originations

     —         175,304       2,789       —         —         —    

Principal paydowns / settlements

     (1     (4     (9,117     —         295       —    

Transfers out of Level 3 (1)

     —         (29,211     —         (1,402     —         145  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Asset (liability) balance, December 31, 2019

   $ 433     $ —       $ 12,813     $ —       $ (356   $ —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 10.0% to 30.0%. 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 impaired loans and leases as well as certain delinquent nonaccrual consumer loans. Previously, the Corporation did not include impaired leases.

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 2.0% to 30.0%. 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 discount rates ranging from 8.0% to 30.0%. 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 20.0% to 30.0%. Assets acquired through repossession or returned to the Corporation are initially recorded at the lower of 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 December 31, 2019 and December 31, 2018.

 

(In thousands)

   Level 1      Level 2      Level 3      Total  

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  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

The Corporation has elected the fair value option for certain 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)

   December 31, 2019      December 31, 2018  

Fair value carrying amount

   $ 91,202      $ 18,070  

Aggregate unpaid principal amount

     88,192        17,517  
  

 

 

    

 

 

 

Fair value carrying amount less aggregate unpaid principal

   $ 3,010      $ 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 December 31, 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 $27.9 million, $10.0 million and $4.9 million for the years ended December 31, 2019, 2018 and 2017, respectively, 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 December 31, 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 the 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 excluding financial instruments recorded at fair value on a recurring basis, were as follows. This information represents only a portion of the Consolidated Statements of Financial Condition and not the estimated value of the Corporation as a whole. Nonfinancial instruments such as the intangible value of the Corporation’s branches 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 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 and leases 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

     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

     56        —          56        —          56  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial instrument liabilities

   $ 9,810,060      $ —        $ 9,829,102      $ —        $ 9,829,102  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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)

     16,398,860        —          —          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

   $ 16,749,947      $ —        $ 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)

The Corporation executed an auto finance loan securitization during 2016 with a related receivable representing a cash reserve account posted at the inception of the securitization. The carrying amount is included in other assets.


Note 25. Earnings Per Common Share

The computations of basic and diluted earnings per common share were as follows:

 

     Year Ended December 31,  

(Dollars in thousands, except per share data)

   2019      2018      2017  

Basic Earnings Per Common Share:

        

Net income attributable to TCF Financial Corporation

   $ 295,468      $ 304,358      $ 268,637  

Preferred stock dividends

     9,975        11,588        19,904  

Impact of preferred stock redemption(1)

     —          3,481        5,779  
  

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

     285,493        289,289        242,954  

Less: Earnings allocated to participating securities

     20        42        42  
  

 

 

    

 

 

    

 

 

 

Earnings allocated to common stock

   $ 285,473      $ 289,247      $ 242,912  
  

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding used in basic earnings per common share calculation

     111,604,094        84,133,983        85,706,054  
  

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 2.56      $ 3.44      $ 2.83  
  

 

 

    

 

 

    

 

 

 

Diluted Earnings Per Common Share:

        

Earnings allocated to common stock

   $ 285,473      $ 289,247      $ 242,912  
  

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding used in basic earnings per common share calculation

     111,604,094        84,133,983        85,706,054  

Net dilutive effect of:

        

Non-participating restricted stock

     140,832        —          —    

Stock options

     73,439        1,184        14,544  

Warrants

     —          189,519        13,977  
  

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding used in diluted earnings per common share calculation

     111,818,365        84,324,686        85,734,575  
  

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 2.55      $ 3.43      $ 2.83  
  

 

 

    

 

 

    

 

 

 

Anti-dilutive shares outstanding not included in the computation of diluted earnings per common share

        

Non-participating restricted stock

     1,288,539        1,028,942        1,163,382  

Stock options

     97,980        —          —    
  

 

 

    

 

 

    

 

 

 

 

(1)

Amounts represent the deferred stock issuance costs originally recorded in preferred stock that were reclassified to retained earnings.

Note 26. Other Noninterest Expense

Other noninterest expense was as follows:

 

     Year Ended December 31,  

(In thousands)

   2019      2018      2017  

Outside processing

   $ 38,151      $ 20,574      $ 20,473  

Loan and lease expense

     31,216        13,649        22,149  

Advertising and marketing

     28,220        28,120        26,927  

Professional fees

     26,863        21,529        33,070  

Card processing and issuance costs

     21,235        17,461        18,325  

FDIC insurance

     18,298        15,056        16,049  

CFPB and OCC settlement charge

     —          32,000        —    

Goodwill impairment

     —          —          73,041  

Other

     139,733        107,097        115,712  
  

 

 

    

 

 

    

 

 

 

Total other noninterest expense

   $ 303,716      $ 255,486      $ 325,746  
  

 

 

    

 

 

    

 

 

 


Note 27. Reportable Segments

The Corporation’s reportable segments are Consumer Banking, Commercial Banking and Enterprise Services. Consumer Banking is comprised of all of the Corporation’s consumer-facing businesses and includes retail banking, consumer lending, wealth management and small business banking. Commercial Banking, previously named Wholesale Banking, is comprised of commercial and industrial and commercial real estate banking and lease financing. Enterprise Services is comprised of (i) corporate treasury, which includes the Corporation’s investment and borrowing portfolios and management of capital, debt and market risks, (ii) corporate functions, such as information technology, risk and credit management, bank operations, finance, investor relations, corporate development, internal audit, legal and human capital management that provide services to the operating segments, (iii) TCF Financial and (iv) eliminations.

In connection with the Merger, effective August 1, 2019, the Corporation renamed its Wholesale Banking segment to Commercial Banking to align with the way the Corporation is now managed. In addition, activity that was related to small business banking and private banking were moved from the Commercial Banking segment to the Consumer Banking segment. The revised presentation of previously reported segment data has been applied retroactively to all periods presented in these financial statements.

The Corporation evaluates performance and allocates resources based on each reportable segment’s net income or loss. The reportable segments follow GAAP as described in Note 1. Basis of Presentation, except for the accounting for intercompany interest income and interest expense, which are eliminated in consolidation and presenting net interest income on a fully tax-equivalent basis. The Corporation generally accounts for inter-segment sales and transfers at cost.

Certain information for each of the reportable segments, including reconciliations of the Corporation’s consolidated totals, was as follows:

 

(In thousands)

   Consumer
Banking
     Commercial
Banking
     Enterprise
Services
     Consolidated  

At or For the Year Ended December 31, 2019:

           

Net interest income

   $ 676,552      $ 536,154      $ 76,326      $ 1,289,032  

Provision for credit losses

     16,550        48,732        —          65,282  

Noninterest income

     273,915        198,898        (7,281      465,532  

Noninterest expense

     753,904        383,390        194,821        1,332,115  

Income tax expense (benefit)

     38,353        50,581        (38,693      50,241  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) after income tax expense (benefit)

     141,660        252,349        (87,083      306,926  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income attributable to non-controlling interest

     —          11,458        —          11,458  

Preferred stock dividends

     —          —          9,975        9,975  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) available to common shareholders

   $ 141,660      $ 240,891      $ (97,058    $ 285,493  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 14,225,928      $ 23,610,054      $ 8,815,571      $ 46,651,553  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(In thousands)

   Consumer
Banking
     Commercial
Banking
     Enterprise
Services
     Consolidated  

At or For the Year Ended December 31, 2018:

           

Net interest income

   $ 569,220      $ 383,031      $ 56,244      $ 1,008,495  

Provision for credit losses

     24,661        22,107        —          46,768  

Noninterest income

     262,797        190,442        1,158        454,397  

Noninterest expense

     669,967        308,727        35,706        1,014,400  

Income tax expense (benefit)

     31,645        52,675        1,776        86,096  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) after income tax expense (benefit)

     105,744        189,964        19,920        315,628  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income attributable to non-controlling interest

     —          11,270        —          11,270  

Preferred stock dividends

     —          —          11,588        11,588  

Impact of preferred stock call

     —          —          3,481        3,481  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) available to common shareholders

   $ 105,744      $ 178,694      $ 4,851      $ 289,289  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 8,344,771      $ 12,077,321      $ 3,277,520      $ 23,699,612  
  

 

 

    

 

 

    

 

 

    

 

 

 


(In thousands)

   Consumer
Banking
     Commercial
Banking
     Enterprise
Services
     Consolidated  

At or For the Year Ended December 31, 2017:

           

Net interest income (expense)

   $ 586,290      $ 359,844      $ (8,660    $ 937,474  

Provision for credit losses

     49,683        18,760        —          68,443  

Noninterest income

     285,222        150,526        315        436,063  

Noninterest expense

     748,272        272,888        38,774        1,059,934  

Income tax expense (benefit)

     49,927        (69,297      (14,254      (33,624
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) after income tax expense (benefit)

     23,630        288,019        (32,865      278,784  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income attributable to non-controlling interest

     —          10,147        —          10,147  

Preferred stock dividends

     —          —          19,904        19,904  

Impact of preferred stock call

     —          —          5,779        5,779  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) available to common shareholders

   $ 23,630      $ 277,872      $ (58,548    $ 242,954  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 9,062,862      $ 11,402,657      $ 2,536,640      $ 23,002,159  
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 28. Parent Company Financial Information

TCF Financial’s condensed statements of financial condition, income and cash flows were as follows:

Condensed Statements of Financial Condition

 

     At December 31,  

(In thousands)

   2019      2018  

Assets:

     

Cash and due from banks

   $ 157,103      $ 91,132  

Premises and equipment, net

     3,813        78  

Deferred tax asset

     8,536        2,974  

Investment in TCF Bank

     5,526,078        2,426,329  

Accounts receivable from TCF Bank

     25,887        23,780  

Other assets

     40,961        1,201  
  

 

 

    

 

 

 

Total assets

   $ 5,762,378      $ 2,545,494  
  

 

 

    

 

 

 

Liabilities and Equity:

     

Long term borrowings

   $ 19,021      $ —    

Accrued expenses and other liabilities

     36,342        7,693  
  

 

 

    

 

 

 

Total liabilities

     55,363        7,693  
  

 

 

    

 

 

 

Equity

     5,707,015        2,537,801  
  

 

 

    

 

 

 

Total liabilities and equity

   $ 5,762,378      $ 2,545,494  
  

 

 

    

 

 

 


Condensed Statements of Income

 

     Year Ended December 31,  

(In thousands)

   2019      2018      2017  

Interest income

   $ 262      $ 200      $ 183  

Interest expense

     484        —          —    
  

 

 

    

 

 

    

 

 

 

Net interest income

     (222      200        183  

Noninterest income:

        

Dividends from TCF Bank

     225,000        431,000        65,000  

Management fees

     14,001        20,532        15,660  

Other

     581        426        13  
  

 

 

    

 

 

    

 

 

 

Total noninterest income

     239,582        451,958        80,673  
  

 

 

    

 

 

    

 

 

 

Noninterest expense:

        

Compensation and employee benefits

     18,677        20,282        16,233  

Occupancy and equipment

     470        301        275  

Merger-Related expenses

     69,944        —          —    

Other

     5,040        5,682        3,353  
  

 

 

    

 

 

    

 

 

 

Total noninterest expense

     94,131        26,265        19,861  
  

 

 

    

 

 

    

 

 

 

Income before income tax benefit and equity in undistributed earnings (loss) of TCF Bank

     145,229        425,893        60,995  

Income tax benefit

     15,513        952        1,575  
  

 

 

    

 

 

    

 

 

 

Income before equity in undistributed earnings (loss) of TCF Bank

     160,742        426,845        62,570  

Equity in undistributed earnings (loss) of TCF Bank

     134,726        (122,487      206,067  
  

 

 

    

 

 

    

 

 

 

Net income

     295,468        304,358        268,637  

Preferred stock dividends

     9,975        11,588        19,904  

Impact of preferred stock redemption

     —          3,481        5,779  
  

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 285,493      $ 289,289      $ 242,954  
  

 

 

    

 

 

    

 

 

 


Condensed Statements of Cash Flows

 

     Year Ended December 31,  

(In thousands)

   2019      2018      2017  

Cash flows from operating activities:

        

Net income

   $ 295,468      $ 304,358      $ 268,637  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

        

Equity in undistributed (earnings) loss of TCF Bank

     (134,726      122,487        (206,067

Share-based compensation expense

     28,351        17,824        14,743  

Depreciation and amortization

     (640      4,986        9,110  

Provision (benefit) for deferred income taxes

     4,893        (583      4,690  

Net gains (losses) on sales of assets

     6        (402      —    

Net change in other assets

     (1,072      753        —    

Net change in other liabilities

     (1,154      (374      (2,494

Other, net

     (21,719      (7,958      (12,645
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

     169,407        441,091        75,974  
  

 

 

    

 

 

    

 

 

 

Cash flows from investing activities:

        

Purchases of premises and equipment and lease equipment

     (95      (3      (23

Proceeds from sales of premises and equipment

     17        727        —    

Net cash acquired in business combination

     155,155        —          —    
  

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) investing activities

     155,077        724        (23
  

 

 

    

 

 

    

 

 

 

Cash flows from financing activities:

        

Redemption of Series B preferred stock

     —          (100,000      —    

Net proceeds from public offering of Series C preferred stock

     —          —          169,302  

Redemption of Series A preferred stock

     —          —          (172,500

Repurchases of common stock

     (86,309      (212,929      (9,163

Common shares sold to TCF employee benefit plans

     —          715        23,254  

Dividends paid on preferred stock

     (9,975      (11,588      (19,904

Dividends paid on common stock

     (156,060      (99,490      (50,617

Payments related to tax-withholding upon conversion of share-based awards

     (6,198      (6,865      (5,506

Exercise of stock options

     29        (997      (57
  

 

 

    

 

 

    

 

 

 

Net cash used in financing activities

     (258,513      (431,154      (65,191
  

 

 

    

 

 

    

 

 

 

Net change in cash and due from banks

     65,971        10,661        10,760  

Cash and due from banks at beginning of period

     91,132        80,471        69,711  
  

 

 

    

 

 

    

 

 

 

Cash and due from banks at end of period

   $ 157,103      $ 91,132      $ 80,471  
  

 

 

    

 

 

    

 

 

 

TCF Financial’s operations are conducted through its banking subsidiary, TCF Bank. As a result, TCF Financial’s cash flows and ability to make dividend payments to its preferred and common shareholders depend on the earnings of TCF Bank. The ability of TCF Bank to pay dividends or make other payments to TCF Financial is limited by its obligation to maintain sufficient capital and by other regulatory restrictions on dividends. See “Note 19. Regulatory Capital Requirements” of Notes to Consolidated Financial Statements for further information.


Note 29. Accumulated Other Comprehensive Income (Loss)

The components of other comprehensive income (loss), reclassifications from accumulated other comprehensive income (loss) to various financial statement line items and the related tax effects were as follows:

 

(In thousands)

   Before Tax      Tax Effect      Net of Tax  

Year Ended December 31, 2019:

        

Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips:

        

Net unrealized gains (losses) arising during the period

   $ 109,403      $ (25,707    $ 83,696  

Reclassification of net (gains) losses from accumulated other comprehensive income (loss) to:

        

Total interest income

     2,644        (716      1,928  

Net gains (losses) on investment securities

     (1,517      369        (1,148

Other noninterest expense

     (485      129        (356
  

 

 

    

 

 

    

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

     642        (218      424  
  

 

 

    

 

 

    

 

 

 

Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips

     110,045        (25,925      84,120  
  

 

 

    

 

 

    

 

 

 

Recognized postretirement prior service cost:

        

Reclassification of amortization of prior service cost to other noninterest expense

     (46      13        (33

Net unrealized gains (losses) on net investment hedges

     (7,001      1,815        (5,186
  

 

 

    

 

 

    

 

 

 

Foreign currency translation adjustment(1)

     8,514        —          8,514  
  

 

 

    

 

 

    

 

 

 

Total other comprehensive income (loss)

   $ 111,512      $ (24,097    $ 87,415  
  

 

 

    

 

 

    

 

 

 

Year Ended December 31, 2018:

        

Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips:

        

Net unrealized gains (losses) arising during the period

   $ (16,373    $ 4,002      $ (12,371

Reclassification of net (gains) losses from accumulated other comprehensive income (loss) to:

        

Total interest income

     1,066        (335      731  

Net gains (losses) on investment securities

     (127      31        (96

Other noninterest expense

     90        (23      67  
  

 

 

    

 

 

    

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

     1,029        (327      702  
  

 

 

    

 

 

    

 

 

 

Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips

     (15,344      3,675        (11,669
  

 

 

    

 

 

    

 

 

 

Recognized postretirement prior service cost:

        

Reclassification of amortization of prior service cost to other noninterest expense

     (46      12        (34
  

 

 

    

 

 

    

 

 

 

Net unrealized gains (losses) on net investment hedges

     13,762        (3,312      10,450  
  

 

 

    

 

 

    

 

 

 

Foreign currency translation adjustment(1)

     (13,368      —          (13,368
  

 

 

    

 

 

    

 

 

 

Total other comprehensive income (loss)

   $ (14,996    $ 375      $ (14,621
  

 

 

    

 

 

    

 

 

 

Year Ended December 31, 2017:

        

Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips:

        

Net unrealized gains (losses) arising during the period

   $ 24,244      $ (8,857    $ 15,387  

Reclassification of net (gains) losses from accumulated other comprehensive income (loss) to:

        

Total interest income

     963        572        1,535  

Other noninterest expense

     (755      287        (468
  

 

 

    

 

 

    

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

     208        859        1,067  
  

 

 

    

 

 

    

 

 

 

Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips

     24,452        (7,998      16,454  
  

 

 

    

 

 

    

 

 

 

Recognized postretirement prior service cost:

        

Reclassification of amortization of prior service cost to other noninterest expense

     (46      17        (29
  

 

 

    

 

 

    

 

 

 

Net unrealized gains (losses) on net investment hedges

     (4,430      1,684        (2,746
  

 

 

    

 

 

    

 

 

 

Foreign currency translation adjustment(1)

     4,921        —          4,921  
  

 

 

    

 

 

    

 

 

 

Total other comprehensive income (loss)

   $ 24,897      $ (6,297    $ 18,600  
  

 

 

    

 

 

    

 

 

 

 

(1)

Foreign investments are deemed to be permanent in nature and, therefore, TCF does not provide for taxes on foreign currency translation adjustments.


Reclassifications of net (gains) losses from accumulated other comprehensive income (loss) for available-for-sale investment securities and interest-only strips were recorded in the Consolidated Statements of Income in interest income for those investment securities that were previously transferred to held-to-maturity, in net gains on investment securities for sales of available-for-sale investment securities and in other noninterest expense for interest-only strips. During 2014, the Corporation transferred $191.7 million of available-for-sale mortgage-backed investment securities to held-to-maturity. At December 31, 2019 and 2018, the unrealized holding loss on the transferred investment securities retained in accumulated other comprehensive income (loss) totaled $8.4 million and $11.0 million, respectively. These amounts are amortized over the remaining lives of the transferred investment securities. The tax effects of the reclassifications included in the table above were recorded in income tax expense (benefit) in the Consolidated Statements of Income.

The components of accumulated other comprehensive income (loss) were as follows:

 

(In thousands)

   Net Unrealized
Gains
(Losses) on
Available-for-
Sale
Investment
Securities and
Interest-only
Strips
    Net Unrealized
Gains
(Losses) on
Net
Investment
Hedges
    Foreign
Currency
Translation
Adjustment
    Recognized
Postretirement
Prior
Service Cost
    Total  

At or For the Year Ended December 31, 2019:

          

Balance, beginning of period

   $ (28,022   $ 14,986     $ (20,211   $ 109     $ (33,138

Other comprehensive income (loss)

     83,696       (5,186     8,514       —         87,024  

Amounts reclassified from accumulated other comprehensive income (loss)

     424       —         —         (33     391  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     84,120       (5,186     8,514       (33     87,415  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 56,098     $ 9,800     $ (11,697   $ 76     $ 54,277  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At or For the Year Ended December 31, 2018:

          

Balance, beginning of period

   $ (16,353   $ 4,536     $ (6,843   $ 143     $ (18,517

Other comprehensive income (loss)

     (12,371     10,450       (13,368     —         (15,289

Amounts reclassified from accumulated other comprehensive income (loss)

     702       —         —         (34     668  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     (11,669     10,450       (13,368     (34     (14,621
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ (28,022   $ 14,986     $ (20,211   $ 109     $ (33,138
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At or For the Year Ended December 31, 2017:

          

Balance, beginning of period

   $ (28,601   $ 6,493     $ (11,764   $ 147     $ (33,725

Other comprehensive income (loss)

     15,387       (2,746     4,921       —         17,562  

Amounts reclassified from accumulated other comprehensive income (loss)

     1,067       —         —         (29     1,038  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     16,454       (2,746     4,921       (29     18,600  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adoption impact of ASU 2018-02

     (4,206     789       —         25       (3,392
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ (16,353   $ 4,536     $ (6,843   $ 143     $ (18,517
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


Note 30. Selected Quarterly Financial Data (Unaudited)

 

     Quarter Ended  

(In thousands, except per share data)

   Dec. 31,
2019
     Sep. 30,
2019
    Jun. 30,
2019
     Mar. 31,
2019
     Dec. 31,
2018
     Sep. 30,
2018
     Jun. 30,
2018
     Mar. 31,
2018
 

Net interest income

   $ 408,753      $ 371,793     $ 254,057      $ 254,429      $ 253,153      $ 253,502      $ 254,751      $ 247,089  

Provision for credit losses

     14,403        27,188       13,569        10,122        18,894        2,270        14,236        11,368  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for credit losses

     394,350        344,605       240,488        244,307        234,259        251,232        240,515        235,721  

Noninterest income

     158,052        94,258       109,718        103,504        123,868        112,064        110,151        108,314  

Noninterest expense

     416,571        425,620       236,849        253,075        249,958        246,423        272,039        245,980  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income tax expense (benefit)

     135,831        13,243       113,357        94,736        108,169        116,873        78,627        98,055  

Income tax expense (benefit)

     21,375        (11,735     19,314        21,287        20,013        28,034        16,418        21,631  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income after income tax expense (benefit)

     114,456        24,978       94,043        73,449        88,156        88,839        62,209        76,424  

Income attributable to non-controlling interest

     2,057        2,830       3,616        2,955        2,504        2,643        3,460        2,663  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to TCF Financial Corporation

     112,399        22,148       90,427        70,494        85,652        86,196        58,749        73,761  

Preferred stock dividends

     2,494        2,494       2,494        2,493        2,494        2,494        2,494        4,106  

Impact of preferred stock redemption

     —          —         —          —          —          —          —          3,481  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 109,905      $ 19,654     $ 87,933      $ 68,001      $ 83,158      $ 83,702      $ 56,255      $ 66,174  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share:

                      

Basic

   $ 0.72      $ 0.15     $ 1.07      $ 0.83      $ 1.00      $ 1.00      $ 0.67      $ 0.77  

Diluted

     0.72        0.15       1.07        0.83        1.00        1.00        0.67        0.77  


Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Controls and Procedures

Disclosure Controls and Procedures TCF Financial carried out an evaluation, under the supervision and with the participation of TCF Financial’s management, including its Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial Officer) and Chief Accounting Officer (Principal Accounting Officer), of the effectiveness of the design and operation of TCF Financial’s disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on that evaluation, management concluded that TCF Financial’s disclosure controls and procedures were effective as of December 31, 2019.

Any system of disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system inherently has limitations and the benefits of controls must be weighed against their costs. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. Therefore, no assessment of a cost-effective system of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.

Disclosure controls and procedures are designed to ensure that information required to be disclosed by TCF Financial in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to TCF Financial’s management, including the Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial Officer) and Chief Accounting Officer (Principal Accounting Officer), as appropriate, to allow for timely decisions regarding required disclosure. TCF Financial’s disclosure controls also include internal controls that are designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use and that transactions are properly recorded and reported.

Changes in Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting for TCF. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of TCF; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of TCF are only being made in accordance with authorizations of management and directors of TCF; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of TCF’s assets that could have a material effect on the financial statements.

The Merger, which was completed on August 1, 2019, had a material impact on the financial position, results of operations and cash flows of the combined company from the date of acquisition through December 31, 2019. We continue to progress in our process of planning for the future integration of our financial systems and assessing the anticipated changes in the internal controls over financial reporting for the combined company. We expect that the integration will be completed in the second half of 2020 and we will disclose material changes in internal control over financial reporting on an on-going basis as they occur.


Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for TCF Financial Corporation (the “Corporation”). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Corporation are only being made in accordance with authorizations of management and directors of the Corporation; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material effect on the financial statements.

Management, with the participation of the Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), completed an assessment of TCF’s internal control over financial reporting as of December 31, 2019. This assessment was based on criteria for evaluating internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in May 2013. Based on this assessment, management concluded that TCF’s internal control over financial reporting was effective as of December 31, 2019.

KPMG LLP, the Corporation’s independent registered public accounting firm that audited the consolidated financial statements included in this annual report, has issued an unqualified attestation report on the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2019.

Any control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The design of a control system inherently has limitations and the benefits of controls must be weighed against their costs. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. Therefore, no assessment of a cost-effective system of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, will be detected.


Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors

TCF Financial Corporation:

Opinion on Internal Control Over Financial Reporting

We have audited TCF Financial Corporation and subsidiaries’ (the Corporation) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of financial condition of the Corporation as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 2, 2020 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Detroit, Michigan

March 2, 2020


Exhibit 99.2

TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Financial Condition (Unaudited)

 

(Dollars in thousands, except per share data)

   At September 30,
2020
    At December 31,
2019
 

ASSETS

    

Cash and cash equivalents:

    

Cash and due from banks

   $ 538,481     $ 491,787  

Interest-bearing deposits with other banks

     1,232,773       736,584  
  

 

 

   

 

 

 

Total cash and cash equivalents

     1,771,254       1,228,371  

Federal Home Loan Bank and Federal Reserve Bank stocks, at cost

     300,444       442,440  

Investment securities:

    

Available-for-sale, at fair value (amortized cost of $7,187,692 and $6,639,277)

     7,446,163       6,720,001  

Held-to-maturity, at amortized cost (fair value of $180,364 and $144,844)

     170,309       139,445  
  

 

 

   

 

 

 

Total investment securities

     7,616,472       6,859,446  

Loans and leases held-for-sale (includes $460,172 and $91,202 at fair value)

     460,427       199,786  

Loans and leases

     34,343,691       34,497,464  

Allowance for loan and lease losses

     (515,229     (113,052
  

 

 

   

 

 

 

Loans and leases, net

     33,828,462       34,384,412  

Premises and equipment, net

     469,699       533,138  

Goodwill

     1,313,046       1,299,878  

Other intangible assets, net

     151,875       168,368  

Loan servicing rights

     38,253       56,313  

Other assets

     1,615,857       1,479,401  
  

 

 

   

 

 

 

Total assets

   $ 47,565,789     $ 46,651,553  
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Liabilities

    

Deposits:

    

Noninterest-bearing

   $ 10,691,041     $ 7,970,590  

Interest-bearing

     28,481,056       26,497,873  
  

 

 

   

 

 

 

Total deposits

     39,172,097       34,468,463  

Short-term borrowings

     655,461       2,669,145  

Long-term borrowings

     871,845       2,354,448  

Other liabilities

     1,207,966       1,432,256  
  

 

 

   

 

 

 

Total liabilities

     41,907,369       40,924,312  
  

 

 

   

 

 

 

Equity

    

Preferred stock, $0.01 par value, 2,000,000 shares authorized; 7,000 shares issued

     169,302       169,302  

Common stock, $1.00 par value, 220,000,000 shares authorized

    

Issued—152,379,722 shares at September 30, 2020 and 152,965,571 shares at December 31, 2019

     152,380       152,966  

Additional paid-in capital

     3,450,669       3,462,080  

Retained earnings

     1,700,044       1,896,427  

Accumulated other comprehensive income

     191,771       54,277  

Other

     (27,122     (28,037
  

 

 

   

 

 

 

Total TCF Financial Corporation shareholders’ equity

     5,637,044       5,707,015  

Non-controlling interest

     21,376       20,226  
  

 

 

   

 

 

 

Total equity

     5,658,420       5,727,241  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 47,565,789     $ 46,651,553  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(In thousands, except per share data)

   2020     2019     2020      2019  

Interest income

         

Interest and fees on loans and leases

   $ 373,112     $ 417,370     $ 1,209,034      $ 983,890  

Interest on investment securities:

         

Taxable

     35,648       31,038       109,073        69,745  

Tax-exempt

     3,892       3,385       12,396        7,277  

Interest on loans held-for-sale

     3,829       1,408       8,712        2,832  

Interest on other earning assets

     3,967       6,607       14,995        13,739  
  

 

 

   

 

 

   

 

 

    

 

 

 

Total interest income

     420,448       459,808       1,354,210        1,077,483  
  

 

 

   

 

 

   

 

 

    

 

 

 

Interest expense

         

Interest on deposits

     31,852       70,900       146,056        149,154  

Interest on borrowings

     11,429       17,115       51,147        48,050  
  

 

 

   

 

 

   

 

 

    

 

 

 

Total interest expense

     43,281       88,015       197,203        197,204  
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income

     377,167       371,793       1,157,007        880,279  

Provision for credit losses

     69,664       27,188       245,333        50,879  
  

 

 

   

 

 

   

 

 

    

 

 

 

Net interest income after provision for credit losses

     307,503       344,605       911,674        829,400  
  

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest income

         

Leasing revenue

     31,905       39,590       102,642        117,032  

Fees and service charges on deposit accounts

     25,470       34,384       82,899        88,504  

Net gains (losses) on sales of loans and leases

     23,490       (5,984     73,114        13,374  

Card and ATM revenue

     23,383       23,315       65,704        62,470  

Wealth management revenue

     6,506       4,241       18,863        4,241  

Servicing fee revenue

     321       5,121       10,154        14,754  

Net gains on investment securities

     2,324       5,900       2,332        7,417  

Other

     5,411       (12,309     33,119        (312
  

 

 

   

 

 

   

 

 

    

 

 

 

Total noninterest income

     118,810       94,258       388,827        307,480  
  

 

 

   

 

 

   

 

 

    

 

 

 

Noninterest expense

         

Compensation and employee benefits

     168,323       155,745       511,650        395,953  

Occupancy and equipment

     48,233       49,229       159,628        132,789  

Lease financing equipment depreciation

     17,932       19,408       54,594        57,797  

Net foreclosed real estate and repossessed assets

     1,518       2,203       4,375        9,281  

Merger-related expenses

     54,011       111,259       172,358        124,943  

Other

     83,423       87,776       245,675        194,781  
  

 

 

   

 

 

   

 

 

    

 

 

 

Total noninterest expense

     373,440       425,620       1,148,280        915,544  
  

 

 

   

 

 

   

 

 

    

 

 

 

Income before income tax (benefit) expense

     52,873       13,243       152,221        221,336  

Income tax (benefit) expense

     (4,429     (11,735     14,870        28,866  
  

 

 

   

 

 

   

 

 

    

 

 

 

Income after income tax (benefit) expense

     57,302       24,978       137,351        192,470  

Income attributable to non-controlling interest

     1,564       2,830       5,950        9,401  
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income attributable to TCF Financial Corporation

     55,738       22,148       131,401        183,069  

Preferred stock dividends

     2,494       2,494       7,481        7,481  
  

 

 

   

 

 

   

 

 

    

 

 

 

Net income available to common shareholders

   $ 53,244     $ 19,654     $ 123,920      $ 175,588  
  

 

 

   

 

 

   

 

 

    

 

 

 

Earnings per common share

         

Basic

   $ 0.35     $ 0.15     $ 0.82      $ 1.79  

Diluted

     0.35       0.15       0.82        1.79  

Weighted-average common shares outstanding

         

Basic

     151,768,337       128,575,171       151,761,299        97,876,262  

Diluted

     151,821,592       128,754,588       151,826,928        98,055,279  
  

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Unaudited)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(In thousands)

   2020     2019     2020     2019  

Net income attributable to TCF Financial Corporation

   $ 55,738     $ 22,148     $ 131,401     $ 183,069  

Other comprehensive income (loss), net of tax:

        

Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips

     (7,694     19,230       138,550       87,223  

Net unrealized gains (losses) on net investment hedges

     (2,655     1,641       3,269       (2,846

Foreign currency translation adjustment

     3,721       (1,968     (4,298     5,014  

Recognized postretirement prior service cost

     (9     (9     (27     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     (6,637     18,894       137,494       89,366  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 49,101     $ 41,042     $ 268,895     $ 272,435  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Equity (Unaudited)

At or For the Three Months Ended September 30, 2020 and 2019

 

     TCF Financial Corporation              
     Number of
Shares Issued
     Preferred      Common      Additional
Paid-in
    Retained     Accumulated
Other
Comprehensive
Income
                Non-
controlling
    Total  

(Dollars in thousands)

   Preferred      Common      Stock      Stock      Capital     Earnings     (Loss)     Other     Total     Interest     Equity  

Balance, June 30, 2020

     7,000        152,233,106      $ 169,302      $ 152,233      $ 3,441,925     $ 1,700,480     $ 198,408     $ (27,093   $ 5,635,255     $ 23,300     $ 5,658,555  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     —          —          —          —          —         55,738       —         —         55,738       1,564       57,302  

Other comprehensive income (loss), net of tax

     —          —          —          —          —         —         (6,637     —         (6,637     —         (6,637

Net investment by (distribution to) non-controlling interest

     —          —          —          —          —         —         —         —         —         (3,488     (3,488

Dividends on 5.70% Series C Preferred Stock

     —          —          —          —          —         (2,494     —         —         (2,494     —         (2,494

Dividends on common stock of $0.35 per common share

     —          —          —          —          —         (53,680     —         —         (53,680     —         (53,680

Stock compensation plans, net of tax

     —          146,616        —          147        8,715       —         —         —         8,862       —         8,862  

Change in shares held in trust for deferred compensation plans, at cost

     —          —          —          —          29       —         —         (29     —         —         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2020

     7,000        152,379,722      $ 169,302      $ 152,380      $ 3,450,669     $ 1,700,044     $ 191,771     $ (27,122   $ 5,637,044     $ 21,376     $ 5,658,420  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2019

     7,000        87,943,860      $ 169,302      $ 87,944      $ 781,788     $ 1,874,308     $ 37,334     $ (265,017   $ 2,685,659     $ 24,858     $ 2,710,517  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     —          —          —          —          —         22,148       —         —         22,148       2,830       24,978  

Other comprehensive income (loss), net of tax

     —          —          —          —          —         —         18,894       —         18,894       —         18,894  

Reverse merger with Chemical Financial Corporation

     —          65,539,678        —          65,540        2,687,153       —         —         265,863       3,018,556       —         3,018,556  

Net investment by (distribution to) non-controlling interest

     —          —          —          —          —         —         —         —         —         (4,375     (4,375

Repurchases of 780,716 shares of common stock

     —          —          —          —          —         —         —         (32,310     (32,310     —         (32,310

Dividends on 5.70% Series C Preferred Stock

     —          —          —          —          —         (2,494     —         —         (2,494     —         (2,494

Dividends on common stock of $0.35 per common share

     —          —          —          —          —         (53,748     —         —         (53,748     —         (53,748

Stock compensation plans, net of tax

     —          87,843        —          87        13,070       —         —         242       13,399       —         13,399  

Change in shares held in trust for deferred compensation plans, at cost

     —          —          —          —          (3,852     —         —         3,852       —         —         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2019

     7,000        153,571,381      $ 169,302      $ 153,571      $ 3,478,159     $ 1,840,214     $ 56,228     $ (27,370   $ 5,670,104     $ 23,313     $ 5,693,417  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Equity (Unaudited)

At or For the Nine Months Ended September 30, 2020 and 2019

 

     TCF Financial Corporation              
     Number of
Shares Issued
    Preferred      Common     Additional
Paid-in
    Retained     Accumulated
Other
Comprehensive
                Non-
controlling
    Total  

(Dollars in thousands)

   Preferred      Common     Stock      Stock     Capital     Earnings     Income (Loss)     Other     Total     Interest     Equity  

Balance, December 31, 2019

     7,000        152,965,571     $ 169,302      $ 152,966     $ 3,462,080     $ 1,896,427     $ 54,277     $ (28,037   $ 5,707,015     $ 20,226     $ 5,727,241  

Cumulative effect adjustment related to adoption of Accounting Standards Update 2016-13(1)

     —          —         —          —         —         (159,323     —         —         (159,323     74       (159,249
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2020

     7,000        152,965,571       169,302        152,966       3,462,080       1,737,104       54,277       (28,037     5,547,692       20,300       5,567,992  

Net income

     —          —         —          —         —         131,401       —         —         131,401       5,950       137,351  

Other comprehensive income (loss), net of tax

     —          —         —          —         —         —         137,494       —         137,494       —         137,494  

Net investment by (distribution to) non-controlling interest

     —          —         —          —         —         —         —         —         —         (4,874     (4,874

Repurchases of 873,376 shares of common stock

     —          (873,376     —          (873     (32,225     —         —         —         (33,098     —         (33,098

Dividends on 5.70% Series C Preferred Stock

     —          —         —          —         —         (7,481     —         —         (7,481     —         (7,481

Dividends on common stock of $1.05 per common share

     —          —         —          —         —         (160,980     —         —         (160,980     —         (160,980

Stock compensation plans, net of tax

     —          287,527       —          287       21,729       —         —         —         22,016       —         22,016  

Change in shares held in trust for deferred compensation plans, at cost

     —          —         —          —         (915     —         —         915       —         —         —    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2020

     7,000        152,379,722     $ 169,302      $ 152,380     $ 3,450,669     $ 1,700,044     $ 191,771     $ (27,122   $ 5,637,044     $ 21,376     $ 5,658,420  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2018

     7,000        88,198,460     $ 169,302      $ 88,198     $ 798,627     $ 1,766,994     $ (33,138   $ (252,182   $ 2,537,801     $ 18,459     $ 2,556,260  

Net income

     —          —         —          —         —         183,069       —         —         183,069       9,401       192,470  

Other comprehensive income (loss), net of tax

     —          —         —          —         —         —         89,366       —         89,366       —         89,366  

Reverse merger with Chemical Financial Corporation

     —          65,539,678       —          65,540       2,687,153       —         —         265,863       3,018,556       —         3,018,556  

Net investment by (distribution to) non-controlling interest

     —          —         —          —         —         —         —         —         —         (4,547     (4,547

Repurchases of 1,453,908 shares of common stock

     —          —         —          —         —         —         —         (58,805     (58,805     —         (58,805

Dividends on 5.70% Series C Preferred Stock

     —          —         —          —         —         (7,481     —         —         (7,481     —         (7,481

Dividends on common stock of $0.94 per common share

     —          —         —          —         —         (102,368     —         —         (102,368     —         (102,368

Stock compensation plans, net of tax

     —          (166,757     —          (167     (5,626     —         —         15,759       9,966       —         9,966  

Change in shares held in trust for deferred compensation plans, at cost

     —          —         —          —         (1,995     —         —         1,995       —         —         —    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2019

     7,000        153,571,381     $ 169,302      $ 153,571     $ 3,478,159     $ 1,840,214     $ 56,228     $ (27,370   $ 5,670,104     $ 23,313     $ 5,693,417  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

See “Note 3. Summary of Significant Accounting Policies” for further information


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

 

     Nine Months Ended September 30,  

(In thousands)

   2020     2019  

Cash flows from operating activities

    

Income after income tax (benefit) expense

   $ 137,351     $ 192,470  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Provision for credit losses

     245,333       50,879  

Share-based compensation expense

     26,447       17,762  

Depreciation and amortization

     320,950       207,954  

Provision (benefit) for deferred income taxes

     (132,148     (27,732

Net gains on sales of assets

     (97,068     (46,966

Proceeds from sales of loans and leases held-for-sale

     1,271,793       512,051  

Originations of loans and leases held-for-sale, net of repayments

     (1,540,397     (548,371

Impairment of loan servicing rights

     17,248       4,520  

Net change in other assets

     (422,496     (188,081

Net change in other liabilities

     (165,881     16,229  

Other, net

     (42,154     (34,793
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (381,022     155,922  
  

 

 

   

 

 

 

Cash flows from investing activities

    

Proceeds from sales of investment securities available-for-sale

     50,797       1,993,274  

Proceeds from maturities of and principal collected on investment securities available-for-sale

     1,646,241       398,989  

Purchases of investment securities available-for-sale

     (2,074,989     (1,424,344

Proceeds from maturities of and principal collected on investment securities held-to-maturity

     22,643       11,945  

Purchases of investment securities held-to-maturity

     (27,428     (4,029

Redemption of Federal Home Loan Bank stock

     344,014       162,011  

Purchases of Federal Home Loan Bank stock

     (202,000     (142,000

Proceeds from sales of loans and leases

     530,734       566,880  

Loan and lease originations and purchases, net of principal collected

     (433,410     (674,459

Proceeds from sales of other assets

     60,018       82,970  

Purchases of premises and equipment and lease equipment

     (75,885     (108,404

Net cash acquired (paid) in business combination

     —         975,014  

Other, net

     23,456       (6,743
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (135,809     1,831,104  
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net change in deposits

     4,773,178       (15,296

Net change in short-term borrowings

     (2,013,623     (17,292

Proceeds from long-term borrowings

     4,956,373       2,799,986  

Payments on long-term borrowings

     (6,445,567     (3,838,454

Payments on liabilities related to acquisition and portfolio purchase

     —         (1,000

Repurchases of common stock

     (33,098     (58,804

Dividends paid on preferred stock

     (7,481     (7,481

Dividends paid on common stock

     (160,980     (102,368

Exercise of stock options

     (110     —    

Payments related to tax-withholding upon conversion of share-based awards

     (4,104     (5,813

Net investment by (distribution to) non-controlling interest

     (4,874     (4,547
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     1,059,714       (1,251,069
  

 

 

   

 

 

 

Net change in cash and due from banks

     542,883       735,957  

Cash and cash equivalents at beginning of period

     1,228,371       587,057  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,771,254     $ 1,323,014  
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid (received) for:

    

Interest on deposits and borrowings

   $ 195,619     $ 192,793  

Income taxes, net

     130,144       10,367  

Noncash activities:

    

Transfer of loans and leases to other assets

     38,938       73,314  

Transfer of loans and leases from held-for-investment to held for sale, net

     426,063       1,837,445  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.


TCF FINANCIAL CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation

On August 1, 2019 (the “Merger Date”), TCF Financial Corporation, a Delaware corporation (“Legacy TCF”), merged with and into Chemical Financial Corporation, a Michigan corporation (“Chemical”), with Chemical continuing as the surviving entity (the “Merger”). Immediately following the Merger, Chemical’s wholly owned bank subsidiary, Chemical Bank, a Michigan state-chartered bank, merged with and into Legacy TCF’s wholly owned bank subsidiary, TCF National Bank, a national banking association, with TCF National Bank surviving the merger (“TCF Bank”). Upon completion of the Merger, Chemical was renamed TCF Financial Corporation. TCF Financial Corporation (together with its direct and indirect subsidiaries, “we,” “us,” “our,” “TCF” or the “Corporation”), is a financial holding company, headquartered in Detroit, Michigan. TCF Bank has its main office in Sioux Falls, South Dakota. References herein to “TCF Financial” or the “Holding Company” refer to TCF Financial Corporation on an unconsolidated basis.

The Merger was accounted for as a reverse merger using the acquisition method of accounting, therefore, Legacy TCF was deemed the accounting acquirer for financial reporting purposes, even though Chemical was the legal acquirer. Accordingly, Legacy TCF’s historical financial statements are the historical financial statements of the combined company for all periods before the Merger Date. TCF’s results of operations include the results of operations of Chemical on and after August 1, 2019. Results for periods before August 1, 2019 reflect only those of Legacy TCF and do not include the results of operations of Chemical. The number of shares issued and outstanding, earnings per share, additional paid-in-capital, dividends paid and all references to share quantities of TCF have been retrospectively adjusted to reflect the equivalent number of shares issued to holders of Legacy TCF common stock in the Merger. See “Note 2. Merger” for further information. In addition, the assets and liabilities of Chemical as of the Merger Date have been recorded at their estimated fair value and added to those of Legacy TCF.

TCF Bank operates banking centers primarily located in Michigan, Illinois and Minnesota with additional locations in Colorado, Ohio, South Dakota and Wisconsin (TCF’s “primary banking markets”). Through its direct subsidiaries, TCF Bank provides a full range of consumer-facing and commercial services, including consumer and commercial banking, trust and wealth management, and specialty leasing and lending products and services to consumers, small businesses and commercial customers.

The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, the consolidated financial statements do not include all of the information and notes necessary for complete financial statements in conformity with GAAP. In the opinion of management, the accompanying unaudited consolidated financial statements contain all the significant adjustments, consisting of normal recurring items, considered necessary for fair presentation. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. The information in this Quarterly Report on Form 10-Q is written with the presumption that the users of the interim financial statements have read or have access to the Corporation’s most recent Annual Report on Form 10-K, which contains the latest audited financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations at and for the year ended December 31, 2019.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. These estimates are based on information available to management at the time the estimates are made. Actual results could differ from those estimates. Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.


Note 2. Merger

As described in Note 1. Basis of Presentation, on August 1, 2019, the Corporation completed the Merger with Legacy TCF.

The Merger was an all-stock transaction. Pursuant to the merger agreement, on the Merger Date, each holder of Legacy TCF common stock received 0.5081 shares (the “Exchange Ratio”) of TCF’s common stock for each share of Legacy TCF common stock held. Each outstanding share of common stock of Chemical remained outstanding and was unaffected by the Merger other than by the change of the Corporation’s name from Chemical Financial Corporation to TCF Financial Corporation. As of the effective time of the Merger on August 1, 2019, TCF Financial had approximately 153.5 million shares of common stock outstanding. On the Merger Date, the shares of Legacy TCF common stock, which previously traded under the ticker symbol “TCF” on the New York Stock Exchange (the “NYSE”) ceased trading on, and were delisted from, the NYSE. Following the Merger, TCF Financial common stock continues to trade on the Nasdaq Stock Market (“NASDAQ”), but its ticker symbol changed from “CHFC” to “TCF” effective August 1, 2019.

Pursuant to the merger agreement, each outstanding share of Legacy TCF 5.70% Series C Non-Cumulative Perpetual Preferred Stock, with a liquidation preference of $25,000 per share (the “Legacy TCF Preferred Stock”) was converted into the right to receive one share of newly created 5.70% Series C Non-Cumulative Perpetual Preferred Stock of TCF, with a liquidation preference of $25,000 per share (the “New TCF Preferred Stock”), and each depository share representing 1/1000th of a share of Legacy TCF Preferred Stock was converted into one depositary share representing 1/1000th of a share of New TCF Preferred Stock. Immediately following the effective time of the Merger, as of August 1, 2019, TCF Financial had 7,000 shares of New TCF Preferred Stock outstanding and 7.0 million related depositary shares outstanding.

The Merger constituted a business combination and was accounted for as a reverse merger using the acquisition method of accounting, therefore, Legacy TCF was deemed the acquirer for financial reporting purposes even though Chemical was the legal acquirer. As a result, the historical financial statements of Legacy TCF became the historical financial statements of the combined company. In addition, the assets acquired, including the intangible assets identified, and assumed liabilities of Chemical as of the Merger Date, have been recorded at their estimated fair value and added to those of Legacy TCF. In many cases, the determination of fair value required management to make estimates about discount rates, expected future cash flows, market conditions and other future events that are highly subjective in nature and subject to change.

As the legal acquirer, Chemical (now TCF Financial Corporation) issued approximately 81.9 million shares of TCF Financial common stock in connection with the Merger, which represented approximately 53% of the voting interests in TCF Financial upon completion of the Merger. Guidance in Accounting Standards Codification (“ASC”) 805-40-30-2 explains that the purchase price in a reverse acquisition is determined based on “the number of equity interests the legal acquiree would have had to issue to give the owners of the legal acquirer the same percentage equity interest in the combined entity that results from the reverse acquisition.” The first step in calculating the purchase price in the Merger is to determine the ownership of the combined company following the Merger. The table below summarizes the ownership of the combined company (“TCF Financial”) following the Merger, as well as the market capitalization of the combined company using shares of Chemical and Legacy TCF common stock outstanding at July 31, 2019 and Chemical’s closing price on July 31, 2019.

 

(Dollars in thousands)

   TCF Financial Ownership and Market Value Table  
     Number of
Chemical
Outstanding
Shares
     Percentage
Ownership
    Market Value
at $42.04
Chemical
Share Price
 

Legacy TCF shareholders

     81,920,494        53.38   $ 3,443,938  

Chemical shareholders

     71,558,755        46.62       3,008,330  
  

 

 

    

 

 

   

 

 

 

Total

     153,479,249        100.00   $ 6,452,268  
  

 

 

    

 

 

   

 

 

 


Next, the hypothetical number of shares Legacy TCF would have to issue to give Chemical owners the same percentage ownership in the combined company is calculated in the table below (based on shares of Legacy TCF common stock outstanding at July 31, 2019):

 

     Hypothetical Legacy TCF Ownership  
     Number of Legacy TCF
Outstanding Shares
     Percentage
Ownership
 

Legacy TCF shareholders

     161,229,078        53.38

Chemical shareholders

     140,835,967        46.62  
  

 

 

    

 

 

 

Total

     302,065,045        100.00
  

 

 

    

 

 

 

Finally, the purchase price is calculated based on the number of hypothetical shares of Legacy TCF common stock issued to Chemical shareholders multiplied by the share price as demonstrated in the table below.

 

(Dollars in thousands, except per share data)

      

Number of hypothetical Legacy TCF shares issued to Chemical shareholders

     140,835,967  

Legacy TCF market price per share as of July 31, 2019

   $ 21.38  

Purchase price determination of hypothetical Legacy TCF shares issued to Chemical shareholders

   $ 3,011,073  

Value of Chemical stock options hypothetically converted to options to acquire shares of Legacy TCF common stock

     7,335  

Cash in lieu of fractional shares

     148  
  

 

 

 

Purchase price consideration

   $ 3,018,556  
  

 

 

 


The following table provides the purchase price allocation as of the Merger Date and the assets acquired and liabilities assumed at their estimated fair value as of the Merger Date as recorded by the Corporation. The Corporation recorded the estimate of fair value based on initial valuations available at the Merger Date and these estimates are considered preliminary and subject to adjustment for up to one year after the Merger Date. While the Corporation believes that the information available at the Merger Date provided a reasonable basis for estimating fair value, following the Merger, the Corporation obtained additional information and evidence and then finalized all valuations and recorded final adjustments during the first quarter of 2020. These adjustments included: (i) changes in the estimated fair value of loans and leases acquired, (ii) changes in deferred tax assets related to fair value estimates and changes in the expected realization of items considered to be net operating loss carryforwards, and (iii) changes in goodwill as a result of the net effect of any adjustments.

 

(In thousands)

      

Purchase price consideration:

  

Stock

   $ 3,018,556  

Fair value of assets acquired(1)

  

Cash and cash equivalents

     975,014  

Federal Home Loan Bank and Federal Reserve Bank stocks

     218,582  

Investment securities

     3,774,738  

Loans held-for-sale

     44,532  

Loans and leases

     15,713,399  

Premises and equipment

     140,219  

Loan servicing rights

     59,567  

Other intangible assets

     159,532  

Net deferred tax asset(2)

     65,685  

Other assets

     552,432  
  

 

 

 

Total assets acquired

     21,703,700  

Fair value of liabilities assumed(1)

  

Deposits

     16,418,215  

Short-term borrowings

     2,629,426  

Long-term borrowings

     442,323  

Other liabilities

     353,469  
  

 

 

 

Total liabilities assumed

     19,843,433  

Fair value of net identifiable assets

     1,860,267  
  

 

 

 

Goodwill resulting from Merger(1)

   $ 1,158,289  
  

 

 

 

 

(1)

All amounts were previously reported in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of the following adjustments to fair value based on additional information obtained in the first quarter of 2020: (i) loans and leases ($17.2 million decrease), (ii) net deferred tax asset ($4.0 million increase), and (iii) goodwill resulting from Merger ($13.2 million increase).

(2)

Net deferred tax asset includes acquisition-related fair value adjustments, loss and tax credit carry forwards, mortgage servicing rights and core deposit and customer intangibles.

The final loan valuation adjustments also impacted interest income in the first quarter of 2020. Additional accretion of $2.4 million would have been recorded as interest income in the year ended December 31, 2019, had the final loan valuation been recorded at the Merger Date.

As described in more detail in Note 3. Summary of Significant Accounting Policies below, all Chemical loans and leases were recorded at their estimated fair value as of the Merger Date with no carryover of the related allowance for loans and lease losses. The acquired loans and leases were segregated into two classifications at acquisition, purchased credit impaired (“PCI”) loans accounted for under the provisions of legacy GAAP Accounting Standards Codification (“ASC”) Topic 310-30, and purchased nonimpaired loans and leases, also referred to as purchased loans and leases. The excess of cash flows expected to be collected over the estimated fair value of PCI loans is referred to as the accretable yield and is accreted into interest income over the estimated remaining life of the loan using the effective yield method. The difference between the contractually required payments and the cash flows expected to be collected at acquisition, considering the impact of prepayment and estimates of future credit losses expected to be incurred, is referred to as the nonaccretable difference.


Information regarding acquired loans and leases included in net loans and leases acquired at the Merger Date was as follows:

 

(In thousands)

      

PCI loans:

  

Contractually required payments receivable

   $ 413,176  

Nonaccretable difference

     (63,014
  

 

 

 

Expected cash flows

     350,162  

Accretable yield

     38,479  
  

 

 

 

Fair value of PCI loans

   $ 311,683  

Purchased nonimpaired loans and leases:

  

Unpaid principal balance

   $ 15,636,020  

Fair value discount

     (234,304
  

 

 

 

Fair value at acquisition

     15,401,716  
  

 

 

 

Total fair value at acquisition

   $ 15,713,399  
  

 

 

 

Other intangible assets consisted of core deposits and customer relationship intangibles with estimated fair values at the Merger Date of $138.2 million and $21.3 million, respectively. Core deposit intangibles are being amortized over a weighted-average life of ten years on an accelerated basis. Customer relationship intangibles are being amortized over a weighted-average life of 15.6 years based on expected economic benefits of the underlying intangible assets. The weighted-average life of amortizable intangibles acquired in the Merger was 11 years.

As a result of the Merger, the Corporation recorded $1.2 billion of goodwill. Of the $1.2 billion, $528.0 million was attributable to Consumer Banking and $630.3 million was attributable to Commercial Banking. The goodwill recorded is not deductible for income tax purposes.

Pro Forma Combined Results of Operations The following pro forma financial information presents the consolidated results of operations of Legacy TCF and Chemical as if the Merger had occurred as of January 1, 2019 with pro forma adjustments. The pro forma adjustments give effect to any change in interest income due to the accretion of the discount (amortization of premium) associated with the fair value adjustments to acquired loans and leases, any change in interest expense due to estimated premium amortization/discount accretion associated with the fair value adjustments to acquired time deposits and borrowings and other debt, amortization of the customer relationship intangibles, and amortization of the core deposit intangibles that would have resulted had the deposits been acquired as of January 1, 2019. Merger-related expenses incurred by TCF prior to completion of the Merger are not reflected in the pro forma amounts. The pro forma information does not necessarily reflect the results of operations that would have occurred had Legacy TCF merged with Chemical at the beginning of 2019. Anticipated cost savings that have not yet been realized are also not reflected in the pro forma amounts for the three and nine months ended September 30, 2020 and 2019.

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(In thousands, except per share data)

   2020      2019      2020      2019  

Net interest income and other noninterest income

   $ 495,977      $ 536,165      $ 1,545,834      $ 1,654,571  

Net income

     55,738        125,560        131,401        435,003  

Net income available to common shareholders

     53,244        123,066        123,920        427,522  

Earnings per share:

           

Basic

   $ 0.35      $ 0.81      $ 0.82      $ 2.79  

Diluted

     0.35        0.81        0.82        2.77  


Note 3. Summary of Significant Accounting Policies

Accounting policies in effect at December 31, 2019, as previously disclosed in “Note 3. Summary of Significant Accounting Policies” in the Corporation’s Annual Report on Form 10-K at and for the year ended December 31, 2019, remain significantly unchanged and have been followed similarly as in previous periods except for the allowance for credit losses accounting policy, the loans and leases acquired in a business combination accounting policy, the investments securities held-to-maturity accounting policy, and the investment securities available-for-sale accounting policy, resulting from the adoption of Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and related ASUs, as described below.

Allowance for Credit Losses The Corporation’s reserve methodology used to determine the appropriate level of the allowance for credit losses (“ACL”) is a critical accounting estimate. The ACL is maintained at a level believed to be appropriate to provide for the current credit losses expected to be incurred in the loan and lease portfolios over the remaining expected life of each financial asset at 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. The Corporation individually evaluates loans and leases that do not share similar risk characteristics with other financial assets for impairment, generally this means troubled debt restructuring (“TDR”) loans, previously removed TDR loans and any other loans and leases that no longer exhibit similar risk characteristics of one of the pools of financial assets used for collective evaluation. All other loans and leases are evaluated collectively for impairment. The ACL includes the allowance for loan and lease losses (“ALLL”) and a reserve for unfunded lending commitments (“RULC”). The ALLL and RULC are valuation accounts presented separately on the Consolidated Statements of Financial Condition. The ALLL is deducted from or added to loans’ amortized cost basis to present the net amount expected to be collected. The RULC for letters of credit, financial guarantees and binding unfunded loan commitments is recorded in other liabilities.

Individually evaluated loans and leases are a key component of the ALLL. Individually evaluated consumer loans are generally measured at the present value of the expected future cash flows discounted at the loan’s initial effective interest rate, unless the loans are collateral dependent, in which case loan impairment is based on the fair value of the collateral less estimated selling costs. Individually evaluated commercial loans and leases are generally measured at the present value of the expected future cash flows discounted at the initial effective interest rate of the loan or lease, unless the loan or lease is collateral dependent, in which case impairment is based on the fair value of collateral less estimated selling costs; however, if payment or satisfaction of the loan or lease is dependent on the operation, rather than the sale of the collateral, the impairment does not include estimated selling costs.

The impairment for all other consumer and commercial loans and leases is evaluated collectively by various characteristics. The collective evaluation of expected losses in these portfolios is based on their probability of default multiplied by historical loss rates, as well as adjustments for forward-looking information, including industry and macroeconomic forecasts. Management’s current methodology includes a twenty-four month reasonable and supportable forecast period with a twelve month straight line reversion to historical loss rates. Factors utilized in the determination of the amount of the allowance include historical loss experience, current economic forecasts and measurement date credit risk characteristics such as product type, lien position, delinquency, collateral value, credit bureau scores and financial statement ratios. The various quantitative and qualitative factors used in the methodologies are reviewed quarterly.

Loans and leases are charged off to the extent they are deemed to be uncollectible. Net charge-offs are included in historical data utilized for calculating the ACL. Loans that are not collateral dependent are charged off when deemed uncollectible based on specific facts and circumstances. Residential mortgage and home equity loans are charged off to the estimated fair value of the underlying collateral, less estimated selling costs, no later than 150 days past due. Additional review of the fair value, less estimated costs to sell, compared with the recorded value occurs upon foreclosure and additional charge-offs are recorded if necessary. Consumer installment loans will generally be charged off in full no later than 120 days past due, unless repossession is reasonably assured and in process, in which case the loan would be charged off to the fair value of the collateral, less estimated selling costs. Consumer loans in bankruptcy status may be charged down to the fair value of the collateral, less estimated selling costs, when the loan is 60 days past due, or within 60 days after receipt of bankruptcy notification, whichever is shorter. Deposit account overdrafts are reported in other loans. Net losses on uncollectible overdrafts are reported as net charge-offs in the ALLL within 60 days from the date of overdraft. Commercial loans and leases that are considered collateral dependent are charged off to the estimated fair value, less estimated selling costs when it becomes probable, based on current information and events, that all principal and interest amounts will not be collectible in accordance with their contractual terms.


The RULC leverages the same loss estimate methodology utilized to measure the ALLL. The Corporation estimates expected credit losses over the period in which it is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. The RULC estimate considers both the likelihood that funding will occur and expected credit losses on funded balances at the time of default.

The amount of the ACL significantly depends on management’s estimates of key factors and assumptions affecting valuation, appraisals of collateral, evaluations of performance and status, the amounts and timing of future cash flows expected to be received, forecasts of future economic conditions and reversion periods. Such estimates, appraisals, evaluations, cash flows and forecasts may be subject to frequent adjustments due to changing economic prospects of borrowers, lessees, properties or economic conditions. These estimates are reviewed quarterly and adjustments, if necessary, are recorded in the provision for credit losses in the periods in which they become known.

Accrued interest receivable is included in other assets on the Consolidated Statements of Financial Condition, and an ACL is not recorded for these balances. Generally, when a loan or lease is placed on nonaccrual status, typically when the collection of interest or principal is 90 days or more past due, uncollected interest accrued in prior years is charged off against the ACL and interest accrued in the current year is reversed against interest income.

Management maintains a framework of controls over the estimation process for the ACL, including review of collective reserve methodologies for compliance with GAAP. Management has a quarterly process to review the appropriateness of historical observation periods and loss assumptions, risk ratings assigned to commercial loans and leases, and discount rate assumptions used to estimate the fair value of consumer real estate. Management reviews its qualitative framework and the effect on the collective reserve compared with relevant credit risk factors and consistency with credit trends. Management also maintains controls over the information systems, models and spreadsheets used in the quantitative components of the reserve estimate. This includes the quality and accuracy of historical data used to derive loss rates, the probability of default, loss given default, the inputs to industry and macroeconomic forecasts and the reversion periods utilized. The results of this process are summarized and presented to management quarterly for their approval of the recorded allowance.

See “Note 8. Allowance for Credit Losses and Credit Quality” for further information.

Loans and Leases Acquired in a Business Combination The Corporation records loans and leases acquired in a business combination at fair value at the acquisition date and the fair value discount or premium is recognized as an adjustment to yield over the remaining life of each loan or lease. An ALLL is also recorded following the Corporation’s ACL accounting policy. Purchased and acquired loans and leases are evaluated at the acquisition date and classified as either (i) loans and leases purchased without evidence of deteriorated credit quality since origination, or (ii) loans and leases purchased that as of the date of acquisition have experienced a more-than-insignificant deterioration in credit quality since origination, referred to as purchased financial assets with credit deterioration (“PCD”) assets. In determining whether an acquired asset should be classified as PCD, the Corporation must make numerous assumptions, interpretations and judgments using internal and third-party credit quality information to determine whether or not the asset has experienced more-than-insignificant credit deterioration since origination. This is a point in time assessment and is inherently subjective due to the nature of the available information and judgment involved. Evidence of credit quality deterioration as of the acquisition date may include statistics such as past due and nonaccrual status, recent borrower credit scores and loan-to-value percentages. The ALLL estimated for PCD loans and leases as of the acquisition date is recorded as a gross-up of the loan or lease balance and the ALLL. Any remaining discount or premium after the gross-up is then recognized as an adjustment to yield over the remaining life of each PCD loan or lease. After the acquisition date, the accounting for acquired loans and leases, including PCD and non-PCD loans and leases, follows the same accounting guidance as loans and leases originated by the Corporation.

See “Note 8. Allowance for Credit Losses and Credit Quality” for further information.


Investment Securities Held-to-Maturity

Investment securities held-to-maturity are carried at cost and adjusted for amortization of premiums or accretion of discounts using a level yield method; however, transfers of investment securities available-for-sale to investment securities held-to-maturity are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of each transfer is retained in accumulated other comprehensive income (loss) and in the carrying value of the held-to-maturity investment security. Such amounts are then amortized over the remaining life of the transferred investment security as an adjustment of the yield on those securities. The Corporation evaluates investment securities held-to-maturity for credit losses on a quarterly basis, and records any such losses as a component of provision for credit losses in the Consolidated Statements of Income and a corresponding ACL. At September 30, 2020 there was no ACL recorded. See “Note 6. Investment Securities” for further information on investment securities held-to-maturity.

Investment Securities Available-for-Sale

Investment securities available-for-sale are carried at fair value with the unrealized gains or losses net of related deferred income taxes reported within accumulated other comprehensive income (loss). The cost of investment securities sold is determined on a specific identification basis and gains or losses on sales of investment securities available-for-sale are recognized on trade dates. Discounts and premiums on investment securities available-for-sale are amortized using a level yield method over the expected life of the security, or to the earliest call date for premiums on investment securities with call features. The Corporation evaluates investment securities available-for-sale for credit losses on a quarterly basis, and records any such losses as a component of provision for credit losses in the Consolidated Statements of Income and a corresponding ACL. At September 30, 2020 there was no ACL recorded. See “Note 6. Investment Securities” for further information on investment securities available-for-sale.

Recently Adopted Accounting Pronouncements

Effective January 1, 2020, the Corporation adopted ASU No. 2020-03, Codification Improvements to Financial Instruments, which is comprised of amendments intended to clarify or improve the accounting guidance for various financial instruments, including fair value measurement and disclosure, disclosures for depository and lending institutions, and the interaction between Topic 326—Financial Instruments—Credit losses and other Topics. Each of the clarifying amendments are either not relevant to the Corporation’s consolidated financial statements or further confirmed the Corporation’s existing interpretation of the accounting guidance. As such, the adoption of this guidance did not have a material impact on the consolidated financial statements.

Effective January 1, 2020, the Corporation adopted ASU No. 2019-08, Compensation-Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Codification Improvements-Share-Based Consideration Payable to a Customer, which requires entities to measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The adoption of this guidance did not have a material impact on the consolidated financial statements.

Effective January 1, 2020, the Corporation adopted ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606, which makes targeted improvements to the accounting for collaborative arrangements in response to questions raised as a result of the issuance of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The adoption of this guidance did not have a material impact on the consolidated financial statements.

Effective January 1, 2020, the Corporation adopted ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. In addition to providing variable interest entities (“VIE”) guidance to private companies, this ASU contains an amendment applicable to all entities which amends how a decision maker or service provider determines whether its fee is a variable interest in a VIE when a related party under common control also has an interest in the VIE. The adoption of this guidance did not have a material impact on the consolidated financial statements.

Effective January 1, 2020, the Corporation adopted ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. While the adoption of this guidance required adjustments to our fair value disclosures, it did not have a material impact on the consolidated financial statements.


Effective January 1, 2020, the Corporation adopted ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Under the new guidance, the Corporation will compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for any amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance largely remains unchanged. The adoption of this guidance did not have a material impact on the consolidated financial statements.

Effective January 1, 2020, the Corporation adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets (including off-balance sheet exposures), including trade and other receivables, debt securities held-to-maturity, loans, net investments in leases and purchased financial assets with credit deterioration. The ASU requires the use of a current expected credit loss (“CECL”) methodology to determine the allowance for credit losses for loans and debt securities held-to-maturity. CECL requires loss estimates for the remaining estimated life of the asset to be measured using historical loss data as well as adjustments for current conditions and reasonable and supportable forecasts of future economic conditions. Effective January 1, 2020, the Corporation also adopted the following ASUs, which further amend the original CECL guidance in Topic 326: (i) ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20 and should be accounted for in accordance with Topic 842; (ii) ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which clarifies and corrects certain unintended applications of the guidance contained in each of the amended Topics; (iii) ASU No. 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief, which provides an option to irrevocably elect to apply the fair value option in Subtopic 825-10 to certain instruments within the scope of Subtopic 326-20 upon adoption of Topic 326; (iv) ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarifies that expected recoveries of amounts previously written off or expected to be written off should be included in the estimate of allowance for credit losses for purchased financial assets with credit deterioration, provides certain transition relief for TDR accounting when the discounted cash flow method is used to estimate credit losses, allows entities to elect to disclose separately the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements, and clarifies that an entity should assess whether it reasonably expects the borrower will be able to continually replenish collateral securing financial assets when electing a practical expedient to measure the estimate of expected credit losses by comparing the amortized cost basis of the financial asset and the fair value of collateral securing the financial asset as of the reporting date. These ASUs were adopted on a modified retrospective basis.


CECL represents a significant change in GAAP and has resulted in a significant change to industry practice, which the Corporation expects will continue to evolve over time. Our adoption resulted in an ALLL as of January 1, 2020 that is larger than the ALLL that would have been recorded under the legacy guidance on the same date by $206.0 million in total for all portfolios. Approximately 20% of the increase relates to originated loans and leases, with the largest impact on the consumer segment given the longer duration of the portfolios. A significant portion of the increase is a result of new requirements to record ALLL related to acquired loans and leases, regardless of any credit mark previously recorded with respect to them. Approximately 80% of the increase relates to acquired loans and leases, which were recorded at estimated fair value at their respective acquisition date, the majority of which relate to loans and leases acquired in the Merger. Under legacy GAAP, credit marks were included in the determination of the fair value adjustments reflected as a discount to the carrying value of the loans, and an ALLL was not recorded on acquired loans and leases until evidence of credit deterioration existed post acquisition. However, upon adoption of CECL an ALLL is recorded for all acquired loans and leases based on the lifetime loss concept. Further, for acquired loans and leases that do not meet the definition of PCD, the credit and interest marks which existed from acquisition accounting as of December 31, 2019 will continue to accrete over the life of loan. For acquired loans that met the definition of PCI under legacy GAAP and converted to PCD at CECL adoption, the ALLL recorded is recognized through a gross-up that increases the amortized cost basis of loans with a corresponding ALLL, and therefore results in little to no impact to the cumulative effect adjustment to retained earnings. Prior to the adoption of CECL, PCI loans were not classified as nonaccrual loans because they were recorded at their net realizable value based on the principal and interest expected to be collected on the loans. At January 1, 2020, $73.4 million of loans previously classified as PCI were reclassified to nonaccrual loans as a result of the adoption of CECL. The adoption of CECL also resulted in an increase in the liability for unfunded lending commitments of $14.7 million. For other assets within the scope of the standard such as available-for-sale investment securities, held-to-maturity investment securities, and trade and other receivables, the impact from the standard was inconsequential. The cumulative tax effected adjustment to record ALLL and to increase the unfunded lending commitment liability resulted in a reduction to retained earnings of $159.3 million. Post-adoption, as loans and leases are added to the portfolio, the Corporation expects higher levels of ACL determined by CECL assumptions, resulting in accelerated recognition of provision for credit losses, as compared to historical results. In response to the COVID-19 pandemic, the regulatory agencies published a final rule that provides the option to delay the cumulative effect of the day 1 impact of CECL adoption on regulatory capital, along with 25% of the change in the adjusted allowance for credit losses (as computed for regulatory capital purposes which excludes PCD loans), for 2 years, followed by a three-year phase-in period. Management elected the 5-year transition period consistent with the final rule issued by the regulatory agencies. Additional and modified disclosure requirements under CECL are included in “Note 6. Investment Securities” and “Note 8. Allowance for Credit Losses and Credit Quality.”

CARES Act and Interagency Regulatory Guidance Regarding Troubled Debt Restructurings

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law. Section 4013 of the CARES Act provides banks the option to temporarily suspend certain TDR accounting guidance for loans modified due to the effects of COVID-19. Additionally, on April 7, 2020, the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency (collectively the “agencies”) issued a statement, “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)” (“Interagency Statement on Loan Modifications”) to encourage banks to work prudently with borrowers and to describe the agencies’ interpretation of how accounting guidance for troubled debt restructuring applies to certain COVID-19-related modifications.

The CARES Act includes a provision permitting the Corporation to opt out of applying TDR accounting guidance for certain loan modifications. Loan modifications made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the President of the United States declares a termination of the COVID-19 national emergency are eligible for this relief if the related loans were not more than 30 days past due as of December 31, 2019 and meet the other requirements. The Corporation will first assess if a loan modification meets the qualifications. If the loan modification does not meet the qualification under the CARES Act, the Corporation will then assess applicability of the Interagency Statement on Loan Modifications offering practical expedients for short term modifications. Under both guidance principals, subsequent modifications must be re-evaluated for the appropriate accounting treatment. The Corporation will apply its existing accounting policies for those loans that either do not qualify for the relief under either the CARES Act or the Interagency Statement on Loan Modifications, or for which the Corporation has decided not to apply the relief.


The Corporation has granted short-term (up to 180 days) deferral of payment for certain borrowers. In these cases, the Corporation recognizes interest income as earned. The deferred interest will be repaid by the borrower in a future period, and will be evaluated by the Corporation for collectability. Certain borrowers that need additional relief beyond the initial 180 day deferral continue to be evaluated under the CARES Act, if applicable, but will generally be placed on nonaccrual with any remaining accrued interest balance reversed against interest income.

Recently Issued but Not Yet Adopted Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which reduces the complexity of accounting for certain financial instruments with characteristics of both debt and equity. The adoption of this ASU will be required beginning with the Corporation’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2022. Early adoption is allowed, but no earlier than the quarter ending March 31, 2021. Management is currently evaluating the impact of this guidance on the consolidated financial statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides a number of optional expedients to general accounting guidance intended to ease the burden of the accounting impacts of reference rate reform related to contract modifications and hedge accounting elections. Adoption of the expedients is allowed after March 12, 2020 and no later than December 31, 2022. Management is currently evaluating the impact of this guidance on the consolidated financial statements.

In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force), which clarifies the interactions between Topic 321, Topic 323 and Topic 815, including accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. The adoption of this ASU will be required beginning with the Corporation’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2021. Early adoption is allowed. Management is currently evaluating the impact of this guidance on the consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify the accounting for income taxes by removing certain exceptions to the general rules found in Topic 740—Income Taxes. The adoption of this ASU will be required beginning with the Corporation’s Quarterly Report on Form 10-Q for the quarter ending March 31, 2021. Early adoption is allowed. Management is currently evaluating the impact of this guidance on the consolidated financial statements.

Note 4. Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks and interest-bearing deposits in other banks. Total cash and cash equivalents were $1.8 billion and $1.2 billion at September 30, 2020 and December 31, 2019, respectively.

As of March 26, 2020, TCF Bank was no longer required by Federal Reserve regulations to maintain reserves in cash on hand or at the Federal Reserve Bank.

The Corporation maintains cash balances that are restricted as to their use in accordance with certain obligations. Cash payments received on loans serviced for third parties are generally held in separate accounts until remitted. The Corporation may also retain cash balances for collateral on certain borrowings and derivatives. The Corporation maintained restricted cash totaling $103.9 million and $68.6 million at September 30, 2020 and December 31, 2019, respectively.


Note 5. Federal Home Loan Bank and Federal Reserve Bank Stocks

Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stocks were as follows:

 

(In thousands)

   At September 30,
2020
     At December 31, 2019  

FHLB stock, at cost

   $ 176,459      $ 318,473  

FRB stock, at cost

     123,985        123,967  
  

 

 

    

 

 

 

Total investments

   $ 300,444      $ 442,440  
  

 

 

    

 

 

 

The investments in FHLB stock are required investments related to the Corporation’s membership and borrowings in the FHLB of Des Moines, and additional commitments from the FHLB of Indianapolis and Cincinnati. The Corporation’s investments in the FHLB of Des Moines, Indianapolis and Cincinnati could be adversely impacted by the financial operations of the Federal Home Loan Banks and actions of their regulator, the Federal Housing Finance Agency. The amount of FRB stock that TCF Bank is required to hold is based on TCF Bank’s capital structure. The Corporation periodically evaluates investments for impairment. There was no impairment of these investments at September 30, 2020 and December 31, 2019.

Note 6. Investment Securities

The amortized cost and fair value of investment securities were as follows:

 

     Investment Securities Available-for-sale, At Fair Value  

(In thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

At September 30, 2020

           

Debt securities:

           

Obligations of states and political subdivisions

   $ 836,691      $ 41,081      $ 1,008      $ 876,764  

Government and government-sponsored enterprises

     205,213        372        500        205,085  

Mortgage-backed securities:

           

Residential agency

     5,229,551        171,039        580        5,400,010  

Residential non-agency

     205,029        4,571        3        209,597  

Commercial agency

     671,387        40,373        180        711,580  

Commercial non-agency

     39,368        3,295        —          42,663  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed debt securities

     6,145,335        219,278        763        6,363,850  

Corporate debt and trust preferred securities

     453        11        —          464  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 7,187,692      $ 260,742      $ 2,271      $ 7,446,163  
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2019

           

Debt securities:

           

Obligations of states and political subdivisions

   $ 852,096      $ 12,446      $ 687      $ 863,855  

Government and government-sponsored enterprises

     235,045        18        678        234,385  

Mortgage-backed securities:

           

Residential agency

     4,492,427        68,797        6,103        4,555,121  

Residential non-agency

     374,046        1,166        616        374,596  

Commercial agency

     645,814        8,639        2,049        652,404  

Commercial non-agency

     39,398        17        205        39,210  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed debt securities

     5,551,685        78,619        8,973        5,621,331  

Corporate debt and trust preferred securities

     451        —          21        430  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 6,639,277      $ 91,083      $ 10,359      $ 6,720,001  
  

 

 

    

 

 

    

 

 

    

 

 

 


     Investment Securities Held-to-Maturity  

(In thousands)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

At September 30, 2020

           

Residential agency mortgage-backed securities

   $ 166,594      $ 10,262      $ 207      $ 176,649  

Corporate debt and trust preferred securities

     3,715        —          —          3,715  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity (1)

   $ 170,309      $ 10,262      $ 207      $ 180,364  
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2019

           

Residential agency mortgage-backed securities

   $ 135,769      $ 5,576      $ 177      $ 141,168  

Corporate debt and trust preferred securities

     3,676        —          —          3,676  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 139,445      $ 5,576      $ 177      $ 144,844  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The adoption of CECL was inconsequential to held-to-maturity investment securities. At September 30, 2020 there was no ACL for investment securities held-to-maturity.

Accrued interest receivable for investment securities was $23.1 million and $21.6 million at September 30, 2020 and December 31, 2019, respectively, and is included in other assets on the Consolidated Statements of Financial Condition.

Gross unrealized losses and fair value of available-for-sale investment securities aggregated by investment category and the length of time the securities were in a continuous loss position were as follows:

 

     At September 30, 2020  
     Less than 12 months      12 months or more      Total  

(In thousands)

   Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Investment securities available-for-sale

                 

Debt securities:

                 

Obligations of states and political

subdivisions

   $ 47,548      $ 1,008      $ —        $ —        $ 47,548      $ 1,008  

Government and government sponsored enterprises

     100,992        500        —          —          100,992        500  

Mortgage-backed securities:

                 

Residential agency

     177,611        580        —          —          177,611        580  

Residential non-agency

     3,691        3        —          —          3,691        3  

Commercial agency

     58,349        180        —          —          58,349        180  

Commercial non-agency

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed debt securities

     239,651        763        —          —          239,651        763  

Total investment securities available-for-sale

   $ 388,191      $ 2,271      $ —        $ —        $ 388,191      $ 2,271  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities held-to-maturity

                 

Residential agency mortgage-backed securities

     51,766        207        —          —          51,766        207  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 51,766      $ 207      $ —        $ —        $ 51,766      $ 207  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 


     At December 31, 2019  
     Less than 12 months      12 months or more      Total  

(In thousands)

   Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Investment securities available-for-sale

 

     

Debt securities:

                 

Obligations of states and political subdivisions

   $ 60,639      $ 687      $ —        $ —        $ 60,639      $ 687  

Government and government sponsored enterprises

     226,177        678        —          —          226,177        678  

Mortgage-backed securities:

                 

Residential agency

     667,511        3,586        200,534        2,517        868,045        6,103  

Residential non-agency

     140,403        616        —          —          140,403        616  

Commercial agency

     176,880        2,049        —          —          176,880        2,049  

Commercial non-agency

     25,560        205        —          —          25,560        205  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mortgage-backed debt securities

     1,010,354        6,456        200,534        2,517        1,210,888        8,973  

Corporate debt and trust preferred securities

     430        21        —          —          430        21  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 1,297,600      $ 7,842      $ 200,534      $ 2,517      $ 1,498,134      $ 10,359  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The adoption of CECL was inconsequential to available-for-sale investment securities. At September 30, 2020 there was no ACL for investment securities available-for-sale. At September 30, 2020 there were 144 available-for-sale investment securities in an unrealized loss position. Management assessed each investment security with unrealized losses for credit impairment. Substantially all unrealized losses on investment securities were due to credit spreads and interest rates rather than credit impairment. As part of that assessment management evaluated and concluded that it is more-likely-than-not that the Corporation will not be required and does not intend to sell any of the investment securities prior to recovery of the amortized cost.

The gross gains and losses on sales of investment securities were as follows:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(In thousands)

   2020      2019      2020      2019  

Gross realized gains

   $ 2,309      $ 7,717      $ 2,309      $ 10,872  

Gross realized losses

     —          1,849        —          3,491  

Recoveries on previously impaired investment securities held-to-maturity

     15        32        23        36  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net gains on investment securities

   $ 2,324      $ 5,900      $ 2,332      $ 7,417  
  

 

 

    

 

 

    

 

 

    

 

 

 


The amortized cost and fair value of investment securities by final contractual maturity were as follows. Securities with multiple maturity dates are classified in the period of final maturity. The final contractual maturities do not consider possible prepayments and therefore expected maturities may differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     At September 30, 2020      At December 31, 2019  

(In thousands)

   Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Investment Securities Available-for-Sale

           

Due in one year or less

   $ 45,229      $ 45,518      $ 66,124      $ 66,112  

Due in 1-5 years

     171,134        176,145        191,364        192,065  

Due in 5-10 years

     664,743        703,227        547,813        555,523  

Due after 10 years

     6,306,586        6,521,273        5,833,976        5,906,301  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities available-for-sale

   $ 7,187,692      $ 7,446,163      $ 6,639,277      $ 6,720,001  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment Securities Held-to-Maturity

           

Due in one year or less

   $ 400      $ 400      $ —        $ —    

Due in 1-5 years

   $ 3,150      $ 3,150      $ 3,550      $ 3,550  

Due in 5-10 years

     49        55        58        64  

Due after 10 years

     166,710        176,759        135,837        141,230  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities held-to-maturity

   $ 170,309      $ 180,364      $ 139,445      $ 144,844  
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2020 and December 31, 2019, investment securities with a carrying value of $1.2 billion and $627.0 million, respectively, were pledged as collateral to secure certain deposits and borrowings.

Note 7. Loans and Leases

Loans and leases were as follows:

 

(In thousands)

   At September 30,
2020
     At December 31,
2019
 

Commercial loan and lease portfolio:

     

Commercial and industrial

   $ 11,557,237      $ 11,439,602  

Commercial real estate

     9,627,330        9,136,870  

Lease financing

     2,724,686        2,699,869  
  

 

 

    

 

 

 

Total commercial loan and lease portfolio

     23,909,253        23,276,341  
  

 

 

    

 

 

 

Consumer loan portfolio:

     

Residential mortgage

     5,790,251        6,179,805  

Home equity

     3,302,983        3,498,907  

Consumer installment

     1,341,204        1,542,411  
  

 

 

    

 

 

 

Total consumer loan portfolio

     10,434,438        11,221,123  
  

 

 

    

 

 

 

Total loans and leases(1)

   $ 34,343,691      $ 34,497,464  
  

 

 

    

 

 

 

 

(1)

Loans and leases are reported at historical cost including net direct fees and costs associated with originating and acquiring loans and leases, lease residuals, unearned income and unamortized purchase premiums and discounts. The aggregate amount of these loan and lease adjustments was $(174.2) million and $(201.5) million at September 30, 2020 and December 31, 2019, respectively.

Accrued interest receivable for loans and leases was $91.6 million and $106.5 million at September 30, 2020 and December 31, 2019, respectively, and is included in other assets on the Consolidated Statements of Financial Condition.

Acquired Loans and Leases The Corporation acquires loans and leases through business combinations and purchases of loan and lease portfolios. These loans and leases are recorded at fair value at acquisition and the fair value discount or premium is recognized as an adjustment to yield over the remaining life of each loan or lease. The Corporation purchased jumbo residential mortgage loans at their fair value of $423.0 million during the three months ended March 31, 2020, none of which qualified as PCD loans.

See “Note 3. Summary of Significant Accounting Policies” for further acquired loans and leases policy information.


Lease Income The components of total lease income were as follows:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(In thousands)

   2020      2019      2020      2019  

Interest income—loans and leases:

           

Interest income on net investment in direct financing and sales-type leases

   $ 32,696      $ 32,833      $ 100,655      $ 98,116  

Leasing revenue (noninterest income):

           

Lease income from operating lease payments

     23,542        25,492        71,243        76,388  

Profit recorded on commencement date on sales-type leases

     4,503        7,983        13,690        22,289  

Gains on sales of leased equipment

     3,860        6,115        17,709        18,355  
  

 

 

    

 

 

    

 

 

    

 

 

 

Leasing revenue

     31,905        39,590        102,642        117,032  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total lease income

   $ 64,601      $ 72,423      $ 203,297      $ 215,148  
  

 

 

    

 

 

    

 

 

    

 

 

 

Loan and Lease Sales The following table summarizes the net gains on sales of loans and leases. The Corporation retains servicing on a majority of loans sold. See “Note 10. Loan Servicing Rights” for further information.

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(In thousands)

   2020      2019      2020      2019  

Sale proceeds, net

   $ 667,807      $ 472,800      $ 1,802,193      $ 1,066,576  

Recorded investment in loans and leases sold, including accrued interest

     635,149        458,697        1,727,687        1,033,961  

Other

     (9,168      (20,087      (1,392      (19,241
  

 

 

    

 

 

    

 

 

    

 

 

 

Net gains on sales of loans and leases

   $ 23,490      $ (5,984    $ 73,114      $ 13,374  
  

 

 

    

 

 

    

 

 

    

 

 

 

The interest-only strips on the balance sheet related to loan sales were as follows:

 

(In thousands)

   At September 30, 2020      At December 31, 2019  

Interest-only strips

   $ 9,555      $ 12,813  
  

 

 

    

 

 

 

The Corporation recorded no impairment charges during the three months ended September 30, 2020 and $224 thousand of impairment charges on interest-only strips for the nine months ended September 30, 2020, and $22 thousand and $43 thousand of impairment charges for the three and nine months ended September 30, 2019, respectively.

The Corporation’s agreements to sell consumer loans typically contain certain representations, warranties and covenants regarding the loans sold or securitized. These representations, warranties and covenants generally relate to, among other things, the ownership of the loan, the validity, priority and perfection of the lien securing the loan, accuracy of information supplied to the buyer or investor, the loan’s compliance with the criteria set forth in the agreement, the manner in which the loans will be serviced, payment delinquency and compliance with applicable laws and regulations. These agreements generally require the repurchase of loans or indemnification of the purchaser in the event these representations are breached, warranties or covenants and such breaches are not cured. In addition, some agreements contain a requirement to repurchase loans as a result of early payoffs by the borrower, early payment default of the borrower or the failure to obtain valid title. Losses related to repurchases pursuant to such representations, warranties and covenants were immaterial for the three and nine months ended September 30, 2020 and 2019.

Note 8. Allowance for Credit Losses and Credit Quality

Effective January 1, 2020, the Corporation adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and related ASUs on a modified retrospective basis. Financial information at June 30, 2020 reflects this adoption, and historical financial information disclosed is in accordance with ASC Topic 310.


Allowance for Credit Losses The rollforwards of the allowance for credit losses were as follows:

 

(In thousands)

   Consumer Loan
Portfolio
    Commercial
Loan and Lease
Portfolio
    Total Allowance
for Loan and
Lease Losses
    Reserve for
Unfunded
Lending
Commitments(1)
    Total Allowance
for Credit
Losses
 

At or For the Three Months Ended September 30, 2020

          

Balance, beginning of period

   $ 157,685     $ 303,429     $ 461,114     $ 42,788     $ 503,902  

Charge-offs

     (5,768     (26,467     (32,235     —         (32,235

Recoveries

     3,698       3,961       7,659       —         7,659  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries

     (2,070     (22,506     (24,576     —         (24,576
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for credit losses(2)

     (20,835     99,158       78,323       (8,659     69,664  

Other

     357       11       368       —         368  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 135,137     $ 380,092     $ 515,229     $ 34,129     $ 549,358  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At or For the Three Months Ended September 30, 2019

          

Balance, beginning of period

   $ 70,711     $ 75,792     $ 146,503     $ 1,936     $ 148,439  

Charge-offs

     (14,098     (21,449     (35,547     —         (35,547

Recoveries

     5,330       1,639       6,969       —         6,969  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries

     (8,768     (19,810     (28,578     —         (28,578
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for credit losses(2)

     4,693       22,495       27,188       (342     26,846  

Other(3)

     (23,849     (46     (23,895     —         (23,895

Addition due to merger

     —         —         —         1,867       1,867  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 42,787     $ 78,431     $ 121,218     $ 3,461     $ 124,679  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At or For the Nine Months Ended September 30, 2020

          

Balance, beginning of period

   $ 28,572     $ 84,480     $ 113,052     $ 3,528     $ 116,580  

Impact of CECL adoption

     107,337       98,655       205,992       14,707       220,699  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted balance, beginning of period

     135,909       183,135       319,044       18,235       337,279  

Charge-offs

     (16,613     (40,309     (56,922     —         (56,922

Recoveries

     12,035       11,439       23,474       —         23,474  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries

     (4,578     (28,870     (33,448     —         (33,448
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for credit losses(2)

     3,449       225,990       229,439       15,894       245,333  

Other

     357       (163     194       —         194  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 135,137     $ 380,092     $ 515,229     $ 34,129     $ 549,358  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At or For the Nine Months Ended September 30, 2019

          

Balance, beginning of period

   $ 80,017     $ 77,429     $ 157,446     $ 1,428     $ 158,874  

Charge-offs

     (43,922     (37,122     (81,044     —         (81,044

Recoveries

     15,840       3,890       19,730       —         19,730  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (charge-offs) recoveries

     (28,082     (33,232     (61,314     —         (61,314
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for credit losses(2)

     16,644       34,235       50,879       166       51,045  

Other(3)

     (25,792     (1     (25,793     —         (25,793

Addition due to merger

     —         —         —         1,867       1,867  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 42,787     $ 78,431     $ 121,218     $ 3,461     $ 124,679  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

RULC is recognized within other liabilities.

(2)

As a result of the adoption of CECL, effective January 1, 2020, the provision for credit losses includes the provision for unfunded lending commitments that was previously included within other noninterest expense.

(3)

Primarily includes the transfer of the allowance for credit losses to loans and leases held-for-sale.


The following tables provide additional disclosures previously required by ASC Topic 310 related to the Corporation’s December 31, 2019 balances.

The allowance for loan and lease losses and loans and leases outstanding by type of allowance methodology was as follows:

 

     At December 31, 2019  

(In thousands)

   Consumer Loan
Portfolio
     Commercial Loan and
Lease Portfolio
     Total Loans and
Leases
 

Allowance for loan and lease losses

        

Collectively evaluated for impairment

   $ 26,430      $ 75,756      $ 102,186  

Individually evaluated for impairment

     1,468        5,769        7,237  

Loans acquired with deteriorated credit quality

     674        2,955        3,629  
  

 

 

    

 

 

    

 

 

 

Total

   $ 28,572      $ 84,480      $ 113,052  
  

 

 

    

 

 

    

 

 

 

Loans and leases outstanding

        

Collectively evaluated for impairment

   $ 11,087,534      $ 22,986,607      $ 34,074,141  

Individually evaluated for impairment

     60,694        115,843        176,537  

Loans acquired with deteriorated credit quality

     72,895        173,891        246,786  
  

 

 

    

 

 

    

 

 

 

Total

   $ 11,221,123      $ 23,276,341      $ 34,497,464  
  

 

 

    

 

 

    

 

 

 

Information on impaired loans and leases at December 31, 2019 was as follows:

 

     At December 31, 2019  

(In thousands)

   Unpaid Contractual
Balance
     Loan and Lease
Balance
     Related Allowance
Recorded
 

Impaired loans and leases with an allowance recorded:

        

Commercial loan and lease portfolio:

        

Commercial and industrial

   $ 20,069      $ 20,090      $ 2,844  

Commercial real estate

     4,225        3,962        333  

Lease financing

     10,956        10,956        2,592  
  

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     35,250        35,008        5,769  
  

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

        

Residential mortgage

     24,297        22,250        1,030  

Home equity

     9,418        8,791        438  
  

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     33,715        31,041        1,468  
  

 

 

    

 

 

    

 

 

 

Total impaired loans and leases with an allowance recorded

     68,965        66,049        7,237  
  

 

 

    

 

 

    

 

 

 

Impaired loans and leases without an allowance recorded:

        

Commercial loan and lease portfolio:

        

Commercial and industrial

     55,889        39,098        —    

Commercial real estate

     69,143        41,737        —    
  

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     125,032        80,835        —    
  

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

        

Residential mortgage

     31,142        22,594        —    

Home equity

     24,709        6,179        —    

Consumer installment

     2,095        880        —    
  

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     57,946        29,653        —    
  

 

 

    

 

 

    

 

 

 

Total impaired loans and leases without an allowance recorded

     182,978        110,488        —    
  

 

 

    

 

 

    

 

 

 

Total impaired loans and leases

   $ 251,943      $ 176,537      $ 7,237  
  

 

 

    

 

 

    

 

 

 


Accruing and Nonaccrual Loans and Leases The Corporation’s key credit quality indicator is the receivable’s payment performance status, defined as accruing or not accruing. Nonaccrual loans and leases are those which management believes have a higher risk of loss. Delinquent balances are determined based on the contractual terms of the loan or lease. Loans and leases that are over 90 days delinquent are a leading indicator for future charge-off trends and are generally placed on nonaccrual status. In addition, loans and leases that have requested payment deferral under the CARES Act of greater than 180 days are generally placed on nonaccrual status. The Corporation’s accruing and nonaccrual loans and leases were as follows:

 

(In thousands)

   Current      30-89 Days
Delinquent
and Accruing
     90 Days or
More
Delinquent and
Accruing
     Total
Accruing
     Nonaccrual(1)      Total  

At September 30, 2020

                 

Commercial loan and lease portfolio:

                 

Commercial and industrial

   $ 11,357,324      $ 56,320      $ 3,101      $ 11,416,745      $ 140,492      $ 11,557,237  

Commercial real estate

     9,492,853        63,981        244        9,557,078        70,252        9,627,330  

Lease financing

     2,648,447        30,652        3,564        2,682,663        42,023        2,724,686  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     23,498,624        150,953        6,909        23,656,486        252,767        23,909,253  

Consumer loan portfolio:

                 

Residential mortgage

     5,700,715        22,954        1,347        5,725,016        65,235        5,790,251  

Home equity

     3,160,742        90,057        —          3,250,799        52,184        3,302,983  

Consumer installment

     1,329,989        4,680        —          1,334,669        6,535        1,341,204  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     10,191,446        117,691        1,347        10,310,484        123,954        10,434,438  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 33,690,070      $ 268,644      $ 8,256      $ 33,966,970      $ 376,721      $ 34,343,691  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2019

                 

Commercial loan and lease portfolio:

                 

Commercial and industrial

   $ 11,283,832      $ 29,780      $ 331      $ 11,313,943      $ 53,812      $ 11,367,755  

Commercial real estate

     8,993,360        10,291        1,440        9,005,091        29,735        9,034,826  

Lease financing

     2,662,354        24,657        1,901        2,688,912        10,957        2,699,869  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     22,939,546        64,728        3,672        23,007,946        94,504        23,102,450  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

                 

Residential mortgage

     6,056,817        17,245        559        6,074,621        38,577        6,113,198  

Home equity

     3,434,771        22,568        —          3,457,339        35,863        3,493,202  

Consumer installment

     1,536,714        4,292        108        1,541,114        714        1,541,828  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     11,028,302        44,105        667        11,073,074        75,154        11,148,228  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Purchased credit impaired loans(1)

     217,206        3,843        25,737        246,786        —          246,786  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 34,185,054      $ 112,676      $ 30,076      $ 34,327,806      $ 169,658      $ 34,497,464  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Prior to the adoption of CECL as of January 1, 2020, purchased credit impaired loans were not classified as nonaccrual loans because they were recorded at their net realizable value based on the principal and interest expected to be collected on the loans. At January 1, 2020, $73.4 million of previous purchased credit impaired loans were reclassified to nonaccrual loans as a result of the adoption of CECL.


Loans and leases that are 90 days or more delinquent and accruing by year of origination were as follows:

 

            Amortized Cost Basis  

(In thousands)

   Term Loans and Leases by Origination Year      Revolving
Loans and
Leases
     Revolving Loans and
Leases Converted to Term
Loans and Leases
     Total  

At September 30, 2020

   2020      2019      2018      2017      2016      2015
and Prior
 

Commercial loan and lease portfolio:

                          

Commercial and industrial

   $ 142      $ 86      $ —        $ 4      $ —        $ 2,468      $ 401      $ —        $ 3,101  

Commercial real estate

     —          —          —          —          —          244        —          —          244  

Lease financing

     139        906        697        1,308        482        32        —          —          3,564  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     281        992        697        1,312        482        2,744        401        —          6,909  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

                          

Residential mortgage

     85        134        —          —          —          1,128        —          —          1,347  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     85        134        —          —          —          1,128        —          —          1,347  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total 90 days or more delinquent and accruing

   $ 366      $ 1,126      $ 697      $ 1,312      $ 482      $ 3,872      $ 401      $ —        $ 8,256  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Nonaccrual loans and leases by year of origination were as follows:

 

            Amortized Cost Basis  

(In thousands)

       
Term Loans and Leases by Origination Year
     Revolving
Loans and
Leases
     Revolving Loans and
Leases Converted to
Term Loans and
Leases
     Total  

At September 30, 2020

   2020      2019      2018      2017      2016      2015 and
Prior
 

Commercial loan and lease portfolio:

                          

Commercial and industrial

   $ 3,739      $ 38,211      $ 34,112      $ 17,978      $ 12,395      $ 16,424      $ 17,629      $ 4      $ 140,492  

Commercial real estate

     —          1,079        11,937        11,618        8,810        36,808        —          —          70,252  

Lease financing

     1,810        9,695        12,289        7,204        4,532        4,863        100        1,530        42,023  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     5,549        48,985        58,338        36,800        25,737        58,095        17,729        1,534        252,767  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

                          

Residential mortgage

     476        2,895        2,902        2,112        2,392        54,458        —          —          65,235  

Home equity

     675        1,604        458        341        211        4,502        43,360        1,033        52,184  

Consumer installment

     42        163        656        285        248        4,973        168        —          6,535  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     1,193        4,662        4,016        2,738        2,851        63,933        43,528        1,033        123,954  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonaccrual loans and leases

   $ 6,742      $ 53,647      $ 62,354      $ 39,538      $ 28,588      $ 122,028      $ 61,257      $ 2,567      $ 376,721  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 


The average balance of nonaccrual loans and leases and interest income recognized on nonaccrual loans and leases were as follows:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2020      2019      2020      2019  

(In thousands)

   Average
Loan and
Lease
Balance(1)
     Interest
Income
Recognized(1)
     Average
Loan and
Lease
Balance
     Interest
Income
Recognized
     Average
Loan and
Lease
Balance(1)
     Interest
Income
Recognized(1)
     Average
Loan and
Lease
Balance
     Interest
Income
Recognized
 

Commercial loan and lease portfolio:

                       

Commercial and industrial

   $ 119,338      $ 2,544      $ 36,761      $ 40      $ 97,153      $ 6,212      $ 40,550      $ 162  

Commercial real estate

     63,885        2,452        13,531        35        49,993        5,982        15,518        97  

Lease financing

     30,390        31        12,195        55        26,489        102        9,748        116  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     213,613        5,027        62,487        130        173,635        12,296        65,816        375  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

                       

Residential mortgage

     66,498        769        41,788        68        51,906        2,133        40,963        205  

Home equity

     49,872        3,000        35,991        79        44,023        3,283        32,476        174  

Consumer installment

     4,102        143        4,634        —          3,625        209        4,608        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     120,472        3,912        82,413        147        99,554        5,625        78,047        379  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total nonaccrual loans and leases

   $ 334,085      $ 8,939      $ 144,900      $ 277      $ 273,189      $ 17,921      $ 143,863      $ 754  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

At January 1, 2020, $73.4 million of previously purchased credit impaired loans were reclassified to nonaccrual loans as a result of the adoption of CECL. Beginning January 1, 2020, interest income, including the related purchase accounting accretion and amortization is included related to these loans.

In addition to the receivable’s payment performance status, credit quality is also analyzed using credit risk classifications, which vary based on the size and type of credit risk exposure and additionally measure liquidity, debt capacity, coverage and payment behavior as shown in the borrower’s financial statements. The credit risk classifications also measure the quality of the borrower’s management and the repayment support offered by any guarantors. Loan and lease credit risk classifications are derived from standard regulatory rating definitions, which include: pass, special mention, substandard, doubtful and loss. Substandard and doubtful loans and leases have well-defined weaknesses, but may never result in a loss.


The amortized cost basis of loans and leases by credit risk classifications and year of origination was as follows:

 

     Amortized Cost Basis  

(In thousands)

   Term Loans and Leases by Origination Year      Revolving
Loans and
Leases(1)
     Revolving Loans
and Leases
Converted to
Term Loans and
Leases(2)
     Total  

At September 30, 2020

   2020      2019      2018      2017      2016      2015 and
Prior
 

Commercial loan and lease portfolio:

                          

Commercial and industrial

                          

Pass

   $ 3,046,289      $ 2,070,267      $ 1,165,510      $ 650,511      $ 412,527      $ 354,391      $ 3,173,255      $ 45,162      $ 10,917,912  

Special mention

     9,996        55,414        34,345        44,613        14,564        13,127        142,520        —          314,579  

Substandard

     7,238        51,459        88,920        36,442        19,116        23,474        97,984        113        324,746  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial and industrial

     3,063,523        2,177,140        1,288,775        731,566        446,207        390,992        3,413,759        45,275        11,557,237  

Commercial real estate

                          

Pass

     930,314        2,152,099        1,932,737        1,371,335        784,174        1,672,418        —          —          8,843,077  

Special mention

     289        100,532        55,678        168,496        62,608        102,896        —          —          490,499  

Substandard

     1,056        5,129        34,754        119,637        43,004        90,174        —          —          293,754  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial real estate

     931,659        2,257,760        2,023,169        1,659,468        889,786        1,865,488        —          —          9,627,330  

Lease financing

                          

Pass

     718,133        797,020        449,720        270,567        143,098        47,280        31,963        172,653        2,630,434  

Special mention

     2,703        11,432        4,687        5,731        2,469        1,658        3,837        5,299        37,816  

Substandard

     5,428        11,672        15,082        9,305        5,501        5,926        418        3,104        56,436  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total lease financing

     726,264        820,124        469,489        285,603        151,068        54,864        36,218        181,056        2,724,686  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     4,721,446        5,255,024        3,781,433        2,676,637        1,487,061        2,311,344        3,449,977        226,331        23,909,253  

Consumer loan portfolio:

                          

Residential mortgage

                          

Pass

     1,024,652        1,243,341        743,949        507,124        497,004        1,702,326        —          —          5,718,396  

Special mention

     —          —          —          —          161        214        —          —          375  

Substandard

     677        3,076        3,387        2,488        3,173        58,679        —          —          71,480  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total residential mortgage

     1,025,329        1,246,417        747,336        509,612        500,338        1,761,219        —          —          5,790,251  

Home equity

                          

Pass

     24,496        56,729        54,356        44,760        32,586        146,650        2,871,820        8,501        3,239,898  

Substandard

     698        1,753        580        483        569        7,181        50,379        1,442        63,085  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total home equity

     25,194        58,482        54,936        45,243        33,155        153,831        2,922,199        9,943        3,302,983  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer installment

                          

Pass

     198,591        407,891        211,270        209,484        141,032        139,869        26,018        70        1,334,225  

Substandard

     397        1,262        1,382        1,062        547        1,860        469        —          6,979  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer installment

     198,988        409,153        212,652        210,546        141,579        141,729        26,487        70        1,341,204  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     1,249,511        1,714,052        1,014,924        765,401        675,072        2,056,779        2,948,686        10,013        10,434,438  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases

   $ 5,970,957      $ 6,969,076      $ 4,796,357      $ 3,442,038      $ 2,162,133      $ 4,368,123      $ 6,398,663      $ 236,344      $ 34,343,691  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

This balance includes $36.2 million of leased equipment that has been provided to lessees under certain master lease agreements. Under these agreements, the total amount of equipment included in each lease is provided over time, and additional amounts are required to be provided to the respective lessees in future accounting periods.

(2)

This balance includes $226.3 million of leased equipment that has been provided to lessees under certain master lease agreements. Under these agreements, the total amount of equipment included in each lease was provided over time, and all equipment required by the lease has been provided to the respective lessees in current or previous accounting periods.


The recorded investment of loans and leases by credit risk categories as of December 31, 2019 was as follows:

 

(In thousands)

   Pass      Special Mention      Substandard      Total  

At December 31, 2019

           

Commercial loan and lease portfolio:

           

Commercial and industrial

   $ 10,930,939      $ 315,097      $ 193,566      $ 11,439,602  

Commercial real estate

     8,891,361        170,114        75,395        9,136,870  

Lease financing

     2,646,874        28,091        24,904        2,699,869  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     22,469,174        513,302        293,865        23,276,341  
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

           

Residential mortgage

     6,135,096        565        44,144        6,179,805  

Home equity

     3,457,292        456        41,159        3,498,907  

Consumer installment

     1,541,524        —          887        1,542,411  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     11,133,912        1,021        86,190        11,221,123  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans and leases

   $ 33,603,086      $ 514,323      $ 380,055      $ 34,497,464  
  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings In certain circumstances, the Corporation may consider modifying the terms of a loan for economic or legal reasons related to the customer’s financial difficulties. If the Corporation grants a concession, the modified loan would generally be classified as a TDR. However, Section 4013 of the CARES Act and the Interagency Statement on Loan Modifications provide banks the option to temporarily suspend the application of TDR accounting guidance for loans modified due to the effects of COVID-19 when certain conditions are met. See “Note 3. Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements for information regarding recent updated guidance on TDR accounting provided by the CARES Act and Interagency guidance. TDRs typically involve a deferral of the principal balance of the loan, a reduction of the stated interest rate of the loan or, in certain limited circumstances, a reduction of the principal balance of the loan or the loan’s accrued interest.

The following table presents the recorded investment of loan modifications first classified as TDRs during the periods presented:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2020      2019      2020      2019  

(In thousands)

   Pre-
modification
Investment
     Post-
modification
Investment
     Pre-
modification
Investment
     Post-
modification
Investment
     Pre-
modification
Investment
     Post-
modification
Investment
     Pre-
modification
Investment
     Post-
modification
Investment
 

Commercial loan and lease portfolio:

                       

Commercial and industrial

   $ 5,378      $ 5,344      $ —        $ —        $ 10,742      $ 10,709      $ —        $ —    

Commercial real estate

     29,735        29,735        —          —          32,267        32,177        31,518        31,518  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loan and lease portfolio

     35,113        35,079        —          —          43,009        42,886        31,518        31,518  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

                       

Residential mortgage

     4,994        4,994        1,724        1,723        10,423        10,423        4,023        4,016  

Consumer installment

     88        88        —          —          481        391        —          —    

Home equity

     2,796        2,796        1,115        1,115        4,553        4,494        3,589        3,577  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     7,878        7,878        2,839        2,838        15,457        15,308        7,612        7,593  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 42,991      $ 42,957      $ 2,839      $ 2,838      $ 58,466      $ 58,194      $ 39,130      $ 39,111  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents TDR loans:

 

     At September 30, 2020      At December 31, 2019  

(In thousands)

   Accruing
TDR Loans
     Nonaccrual
TDR Loans
     Total
TDR Loans
     Accruing
TDR Loans
     Nonaccrual
TDR Loans
     Total
TDR Loans
 

Commercial loan and lease portfolio

   $ 36,947      $ 13,250      $ 50,197      $ 12,986      $ 5,356      $ 18,342  

Consumer loan portfolio

     17,956        21,526        39,482        12,403        14,875        27,278  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 54,903      $ 34,776      $ 89,679      $ 25,389      $ 20,231      $ 45,620  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 


Commitments to lend additional funds to borrowers whose terms have been modified in TDRs were $1.3 million and $638 thousand at September 30, 2020 and December 31, 2019, respectively.

Loan modifications to troubled borrowers are no longer disclosed as TDR loans in the calendar years after modification if the loans were modified to an interest rate equal to or greater than the yields of new loan originations with comparable risk at the time of restructuring and if the loan is performing based on the restructured terms; however, these loans are still considered impaired and follow the Corporation’s impaired loan reserve policies.

The following table summarizes the TDR loans that defaulted during the periods presented that were modified during the respective reporting period or within one year of the beginning of the respective reporting period. The Corporation considers a loan to have defaulted when under the modified terms it becomes 90 or more days delinquent, has been transferred to nonaccrual status, has been charged down or has been transferred to other real estate owned or repossessed and returned assets.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(In thousands)

   2020      2019      2020      2019  

Defaulted TDR loan balances modified during the applicable period

           

Commercial loan and lease portfolio:

           

Commercial and industrial

   $ 60      $ —        $ 283      $ 297  
  

 

 

    

 

 

    

 

 

    

 

 

 

Consumer loan portfolio:

           

Residential mortgage

     265        212        1,404        964  

Home equity

     170        82        426        328  

Consumer installment

     35        452        50        1,555  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer loan portfolio

     470        746        1,880        2,847  
  

 

 

    

 

 

    

 

 

    

 

 

 

Defaulted TDR loan balances

   $ 530      $ 746      $ 2,163      $ 3,144  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Real Estate Owned and Repossessed and Returned Assets Other real estate owned and repossessed and returned assets were as follows:

 

(In thousands)

   At September 30,
2020
     At December 31,
2019
 

Other real estate owned

   $ 35,554      $ 34,256  

Repossessed and returned assets

     11,104        8,045  

Consumer loans in process of foreclosure

     14,555        17,758  
  

 

 

    

 

 

 

Other real estate owned and repossessed and returned assets were written down $1.1 million and $2.3 million, and $2.3 million and $5.5 million during the three and nine months ended September 30, 2020 and September 30, 2019, respectively, and were included in other assets on the Consolidated Statements of Financial Condition.

Note 9. Goodwill

Goodwill was as follows:

 

(In thousands)

   At September 30, 2020      At December 31, 2019  

Goodwill related to consumer banking segment

   $ 771,555      $ 764,389  

Goodwill related to commercial banking segment

     541,491        535,489  
  

 

 

    

 

 

 

Goodwill, net

   $ 1,313,046      $ 1,299,878  
  

 

 

    

 

 

 

The Corporation recorded goodwill in the amount of $1.2 billion related to the merger with Legacy TCF completed on August 1, 2019. Goodwill was allocated to the appropriate reporting unit based on the relative fair value of assets acquired and deposits held by the reporting unit. This methodology allocates goodwill in proportion to the assets held by each reporting unit as well as incorporating the value of the funding source provided by the in place deposits. The reporting units aggregate between the Consumer Banking and Commercial Banking segments. See “Note 2. Merger” for further information. There was no impairment of goodwill for the three and nine months ended September 30, 2020 and 2019.


Note 10. Loan Servicing Rights

Information regarding LSRs was as follows:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(In thousands)

   2020      2019      2020      2019  

Balance, beginning of period

   $ 38,816      $ 18      $ 56,313      $ 23  

Acquired in the Merger

     —          59,567        —          59,567  

New servicing assets created

     5,280        1,906        11,238        1,906  

Impairment (charge) recovery

     (154      (4,520      (17,248      (4,520

Amortization

     (5,689      (1,670      (12,050      (1,675
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, end of period

   $ 38,253      $ 55,301      $ 38,253      $ 55,301  
  

 

 

    

 

 

    

 

 

    

 

 

 

Valuation allowance, end of period

   $ (21,131    $ (4,520    $ (21,131    $ (4,520
  

 

 

    

 

 

    

 

 

    

 

 

 

Loans serviced for others that have servicing rights capitalized, end of period

   $ 6,179,464      $ 6,647,153      $ 6,179,464      $ 6,647,153  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loan servicing, late fee and other ancillary fee income, included in servicing fee income, related to loans serviced for others that have servicing rights capitalized was $4.1 million and $12.4 million for the three and nine months ended September 30, 2020, respectively, and $2.8 million for both the three and nine months ended September 30, 2019.

Note 11. Investments in Qualified Affordable Housing Projects and Federal Historic Projects

The Corporation invests in qualified affordable housing projects and federal historic projects for the purposes of community reinvestment and to obtain tax credits. Return on the Corporation’s investment in these projects comes in the form of pass-through tax credits and tax losses. The carrying value of the investments is included in other assets. The Corporation primarily utilizes the proportional amortization method to account for investments in qualified affordable housing projects and the equity method to account for investments in other tax credit projects.

Under the proportional amortization method, the Corporation amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits. The Corporation recognized amortization expense of investments in qualified affordable housing projects of $5.2 million and $15.6 million for the three and nine months ended September 30, 2020, respectively, and $3.6 million and $8.5 million for the three and nine months ended September 30, 2019, respectively. Amortization expense was more than offset by tax credits and other benefits of $6.5 million and $19.4 million for the three and nine months ended September 30, 2020, respectively, and $4.5 million and $10.5 million for the three and nine months ended September 30, 2019, respectively. The Corporation’s remaining investment in qualified affordable housing projects totaled $219.9 million and $195.8 million at September 30, 2020 and December 31, 2019, respectively.

Under the equity method, the Corporation’s share of the earnings or losses is included in other noninterest expense. The Corporation’s remaining investment in the federal historic projects and Ohio historic preservation tax credits totaled $52.4 million and $43.6 million at September 30, 2020 and December 31, 2019, respectively. During the three months ended September 30, 2020, $0.5 million of income tax benefit was recognized due to the federal historic tax credits, which was partially offset by amortization expense, inclusive of impairment, of $0.4 million. During the nine months ended September 30, 2020, $1.1 million of income tax benefit was recognized due to the federal historic tax credits, which was partially offset by amortization expense, inclusive of impairment, of $0.8 million. During the three months ended September 30, 2020, the amount of state tax credits recognized, inclusive of impairment, was $0.4 million. During the nine months ended September 30, 2020, the amount of state tax credits recognized, inclusive of impairment, was $0.9 million.

The Corporation’s unfunded equity contributions relating to investments in qualified affordable housing projects and federal historic projects are included in other liabilities. The Corporation’s remaining unfunded equity contributions totaled $134.2 million and $131.3 million at September 30, 2020 and December 31, 2019, respectively.

Management analyzes these investments for potential impairment when events or changes in circumstances indicate that it is more-likely-than-not that the carrying amount of the investment will not be realized. An impairment loss is measured as the amount by which the carrying amount of an investment exceeds its fair value.


Investments in qualified affordable housing projects and federal historic projects are considered VIEs because TCF, as a limited partner, lacks the power to direct the activities that most significantly impact the entities’ economic performance. TCF has concluded it is not the primary beneficiary and therefore, they are not consolidated. The maximum exposure to loss on the VIE investments is limited to the carrying amount of the investments and the potential recapture of any recognized tax credits. TCF believes the likelihood of the tax credits being recaptured is remote, as a loss would only take place if the managing entity failed to meet certain government compliance requirements. Further, certain of TCF’s investments in affordable housing limited liability entities include guaranteed minimum returns which are backed by an investment grade credit-rated company, which reduces the risk of loss.

Note 12. Borrowings

TCF Bank is a member of the FHLB, which provides short- and long-term funding collateralized by mortgage related assets to its members.

Collateralized Deposits include TCF Bank’s Repurchase Investment Sweep Agreement product collateralized by mortgage-backed securities, and funds deposited by customers that are collateralized by investment securities owned by TCF Bank, as these deposits are not covered by FDIC insurance.

Short-term borrowings (borrowings with an original maturity of less than one year) were as follows:

 

     At September 30, 2020     At December 31, 2019  

(Dollars in thousands)

   Amount      Weighted-
average Rate
    Amount      Weighted-
average Rate
 

FHLB advances

   $ 400,000        0.37   $ 2,450,000        1.85

Collateralized Deposits

     253,959        0.14       219,145        0.64  

Line-of-Credit—TCF Commercial Finance Canada, Inc.

     1,502        1.50       —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total short-term borrowings

   $ 655,461        0.28     $ 2,669,145        1.75  
  

 

 

    

 

 

   

 

 

    

 

 

 

On June 29, 2020, TCF Financial voluntarily prepaid the outstanding $80.0 million on its $150.0 million unsecured 364-day revolving credit facility with an unaffiliated bank and subsequently closed the credit facility.

Long-term borrowings were as follows:

 

(In thousands)

   At September 30,
2020
     At December 31,
2019
 

FHLB advances

   $ 210,372      $ 1,822,058  

Subordinated debt obligations

     586,729        428,470  

Discounted lease rentals

     71,738        100,882  

Finance lease obligation

     3,006        3,038  
  

 

 

    

 

 

 

Total long-term borrowings

   $ 871,845      $ 2,354,448  
  

 

 

    

 

 

 

On May 6, 2020, TCF Bank issued $150.0 million of fixed-to-floating rate subordinated notes (the “2030 Notes”) at par. The fixed-to-floating rate subordinated notes, due May 6, 2030, bear an initial fixed interest rate of 5.50% per annum, payable semi-annually in arrears on May 6 and November 6, commencing on November 6, 2020. The 2030 Notes are redeemable at TCF Bank’s option beginning on May 6, 2025. Commencing May 6, 2025, the interest rate will reset quarterly to an annual interest rate equal to the then-current three-month LIBOR rate plus 509 basis points, payable quarterly in arrears on February 6, May 6, August 6 and November 6. TCF Bank incurred issuance costs of $1.6 million that are amortized as interest expense over the full term of the 2030 Notes using the effective interest method.

At September 30, 2020, TCF Bank had pledged $14.0 billion of loans secured by consumer and commercial real estate to provide borrowing capacity from the FHLB.

At September 30, 2020, TCF Bank had pledged $2.5 billion of loans secured by assets to provide borrowing capacity from the Federal Reserve Bank discount window. No borrowings were sourced from this facility at September 30, 2020.


The contractual maturities of long-term borrowings at September 30, 2020 were as follows:

 

(In thousands)

      

Remainder of 2020

   $ 501  

2021

     10,955  

2022

     135,533  

2023

     24,055  

2024

     8,806  

Thereafter

     691,995  

Total long-term borrowings

   $ 871,845  
  

 

 

 

Note 13. Accumulated Other Comprehensive Income (Loss)

The components of other comprehensive income (loss), reclassifications from accumulated other comprehensive income (loss) to various financial statement line items and the related tax effects were as follows:

 

     Three Months Ended September 30,  
     2020     2019  

(In thousands)

   Before Tax     Tax Effect     Net of Tax     Before Tax     Tax Effect     Net of Tax  

Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips:

            

Net unrealized gains (losses) arising during the period

   $ (8,489   $ 1,992     $ (6,497   $ 24,236     $ (5,606   $ 18,630  

Reclassification of net (gains) losses from accumulated other comprehensive income (loss) to:

            

Total interest income

     777       (183     594       844       (205     639  

Net gains (losses) on investment securities

     (2,309     542       (1,767     —         —         —    

Other noninterest expense

     (32     8       (24     (53     14       (39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

     (1,564     367       (1,197     791       (191     600  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips

     (10,053     2,359       (7,694     25,027       (5,797     19,230  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recognized postretirement prior service cost:

            

Reclassification of amortization of prior service cost to other noninterest expense

     (12     3       (9     (12     3       (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustment(1)

     3,721       —         3,721       (1,968     —         (1,968
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) on net investment hedges

     (3,469     814     $ (2,655     2,170       (529     1,641  

Total other comprehensive income (loss)

   $ (9,813   $ 3,176     $ (6,637   $ 25,217     $ (6,323   $ 18,894  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Nine Months Ended September 30,  
     2020     2019  

(In thousands)

   Before Tax     Tax Effect     Net of Tax     Before Tax     Tax Effect     Net of Tax  

Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips:

            

Net unrealized gains (losses) arising during the period

   $ 180,391     $ (42,562   $ 137,829     $ 114,263     $ (27,519   $ 86,744  

Reclassification of net (gains) losses from accumulated other comprehensive income (loss) to:

            

Total interest income

     3,156       (741     2,415       2,495       (607     1,888  

Net gains (losses) on investment securities

     (2,309     542       (1,767     (1,513     368       (1,145

Other noninterest expense

     95       (22     73       (350     86       (264
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive income (loss)

     942       (221     721       632       (153     479  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips

     181,333       (42,783     138,550       114,895       (27,672     87,223  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recognized postretirement prior service cost:

            

Reclassification of amortization of prior service cost to other noninterest expense

     (35     8       (27     (35     10       (25
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustment(1)

     (4,298     —         (4,298     5,014       —         5,014  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) on net investment hedges

     4,272       (1,003     3,269       (3,761     915       (2,846
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

   $ 181,272     $ (43,778   $ 137,494     $ 116,113     $ (26,747   $ 89,366  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Foreign investments are deemed to be permanent in nature and, therefore, TCF does not provide for taxes on foreign currency translation adjustments.


The components of accumulated other comprehensive income (loss) were as follows:

 

(In thousands)

   Net Unrealized
Gains (Losses) on
Available-for-Sale
Investment
Securities and
Interest-
only Strips
    Net Unrealized
Gains
(Losses) on
Net
Investment
Hedges
    Foreign
Currency
Translation
Adjustment
    Recognized
Postretirement
Prior
Service Cost
    Total  

At or For the Three Months Ended September 30, 2020

          

Balance, beginning of period

   $ 202,342     $ 15,724     $ (19,716   $ 58     $ 198,408  

Other comprehensive income (loss)

     (6,497     (2,655     3,721       —         (5,431

Amounts reclassified from accumulated other comprehensive income (loss)

     (1,197     —         —         (9     (1,206
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     (7,694     (2,655     3,721       (9     (6,637
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 194,648     $ 13,069     $ (15,995   $ 49     $ 191,771  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At or For the Three Months Ended September 30, 2019

          

Balance, beginning of period

   $ 39,971     $ 10,499     $ (13,229   $ 93     $ 37,334  

Other comprehensive income (loss)

     18,630       1,641       (1,968     —         18,303  

Amounts reclassified from accumulated other comprehensive income (loss)

     600       —         —         (9     591  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     19,230       1,641       (1,968     (9     18,894  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 59,201     $ 12,140     $ (15,197   $ 84     $ 56,228  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At or For the Nine Months Ended September 30, 2020

          

Balance, beginning of period

   $ 56,098     $ 9,800     $ (11,697   $ 76     $ 54,277  

Other comprehensive income (loss)

     137,829       3,269       (4,298     —         136,800  

Amounts reclassified from accumulated other comprehensive income (loss)

     721       —         —         (27     694  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     138,550       3,269       (4,298     (27     137,494  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 194,648     $ 13,069     $ (15,995   $ 49     $ 191,771  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At or For the Nine Months Ended September 30, 2019

          

Balance, beginning of period

   $ (28,022   $ 14,986     $ (20,211   $ 109     $ (33,138

Other comprehensive income (loss)

     86,744       (2,846     5,014       —         88,912  

Amounts reclassified from accumulated other comprehensive income (loss)

     479       —         —         (25     454  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

     87,223       (2,846     5,014       (25     89,366  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 59,201     $ 12,140     $ (15,197   $ 84     $ 56,228  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 14. Regulatory Capital Requirements

TCF and TCF Bank are subject to minimum capital requirements administered by the federal banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by the federal banking regulators that could have a material adverse effect on TCF. In general, TCF Bank may not declare or pay a dividend to TCF Financial in excess of 100% of its net retained earnings for the current year combined with its net retained earnings for the preceding two calendar years, which was $73.6 million at September 30, 2020, without prior approval of the Office of the Comptroller of the Currency (“OCC”). The OCC also has the authority to prohibit the payment of dividends by a national bank when it determines such payments would constitute an unsafe and unsound banking practice. TCF Bank’s ability to make capital distributions in the future may require regulatory approval and may be restricted by its federal banking regulators. TCF Bank’s ability to make any such distributions will also depend on its earnings and ability to meet minimum regulatory capital requirements in effect during future periods. In the future, these capital adequacy standards may be higher than existing minimum regulatory capital requirements.

The Basel III capital standards allowed institutions not subject to the advanced approaches requirements to opt out of including components of accumulated other comprehensive income (loss) in common equity Tier 1 capital. TCF and TCF Bank made the one-time permanent election to not include accumulated other comprehensive income (loss) in regulatory capital.


Effective January 1, 2020, the Corporation adopted CECL. In response to the COVID-19 pandemic, the regulatory agencies published a final rule that provides the option to delay the cumulative effect of the day 1 impact of CECL adoption on regulatory capital, along with 25% of the change in the adjusted allowance for credit losses (as computed for regulatory capital purposes which excludes PCD loans), for two years, followed by a three-year phase-in period. Management elected the 5-year transition period consistent with the final rule issued by the regulatory agencies.

Regulatory capital information for TCF and TCF Bank was as follows:

 

     TCF     TCF Bank  

(Dollars in thousands)

   At September
30, 2020
    At December
31, 2019
    At September
30, 2020
    At December
31, 2019
    Well-
capitalized
Standard
    Minimum
Capital
Requirement(1)
 

Regulatory Capital:

            

Common equity Tier 1 capital

   $ 4,053,931     $ 4,050,826     $ 4,029,278     $ 4,039,191      

Tier 1 capital

     4,244,609       4,236,648       4,050,654       4,059,417      

Total capital

     4,972,715       4,681,630       4,769,055       4,524,051      

Regulatory Capital Ratios:

            

Common equity Tier 1 capital ratio

     11.45     10.99     11.39     10.97     6.50     7.00

Tier 1 risk-based capital ratio

     11.98       11.49       11.45       11.03       8.00       8.50  

Total risk-based capital ratio

     14.04       12.70       13.48       12.29       10.00       10.50  

Tier 1 leverage ratio

     8.83       9.49       8.43       9.10       5.00       4.00  

 

(1)

Excludes capital conservation buffer of 2.5% at both September 30, 2020 and December 31, 2019.

Note 15. Derivative Instruments

Derivative instruments, recognized at fair value within other assets or other liabilities on the Consolidated Statements of Financial Condition, were as follows:

 

     At September 30, 2020  
            Fair Value  

(In thousands)

   Notional Amount(1)      Derivative Assets      Derivative Liabilities  

Derivatives designated as hedging instruments

        

Interest rate contract

   $ 150,000      $ —        $ 84  

Forward foreign exchange contracts

     196,852        2,237        85  
  

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

      $ 2,237      $ 169  
     

 

 

    

 

 

 

Derivatives not designated as hedging instruments

        

Interest rate contracts

   $ 5,773,205      $ 279,710      $ 14,001  

Risk participation agreements

     445,120        163        171  

Forward foreign exchange contracts

     95,052        537        125  

Interest rate lock commitments

     579,456        18,596        4  

Forward loan sales commitments

     805,887        117        786  

Power Equity CDs

     21,958        442        443  

Swap agreement

     12,652        —          141  
  

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

      $ 299,565      $ 15,671  
     

 

 

    

 

 

 

Total derivatives before netting

        301,802        15,840  

Netting(2)

        (2,861      498  
     

 

 

    

 

 

 

Total derivatives, net

      $ 298,941      $ 16,338  
     

 

 

    

 

 

 

 

(1)

Notional or contract amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the Consolidated Statements of Financial Condition.

(2)

Includes netting of derivative asset and liability balances and related cash collateral, where counterparty netting agreements are in place.


     At December 31, 2019  
            Fair Value  

(In thousands)

   Notional Amount(1)      Derivative Assets      Derivative Liabilities  

Derivatives designated as hedging instruments

        

Interest rate contract

   $ 150,000      $ —        $ 168  

Forward foreign exchange contracts

     177,593        —          3,251  
  

 

 

    

 

 

    

 

 

 

Total derivatives designated as hedging instruments

      $ —        $ 3,419  
  

 

 

    

 

 

    

 

 

 

Derivatives not designated as hedging instruments

        

Interest rate contracts

   $ 5,095,969      $ 102,893      $ 5,872  

Risk participation agreements

     316,353        202        354  

Forward foreign exchange contracts

     262,656        —          3,268  

Interest rate lock commitments

     158,111        2,772        20  

Forward loan sales commitments

     174,013        41        289  

Power Equity CD

     29,009        734        734  

Swap agreement

     12,652        —          356  
  

 

 

    

 

 

    

 

 

 

Total derivatives not designated as hedging instruments

      $ 106,642      $ 10,893  
     

 

 

    

 

 

 

Total derivatives before netting

      $ 106,642      $ 14,312  

Netting(2)

        (540      (5,109
     

 

 

    

 

 

 

Total derivatives, net

      $ 106,102      $ 9,203  
     

 

 

    

 

 

 

 

(1)

Notional or contract amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the Consolidated Statements of Financial Condition.

(2)

Includes netting of derivative asset and liability balances and related cash collateral, where counterparty netting agreements are in place.

Derivative instruments may be subject to master netting arrangements and collateral arrangements and qualify for offset in the Consolidated Statements of Financial Condition. A master netting arrangement with a counterparty creates a right of offset for amounts due to and from that same counterparty that is enforceable in the event of a default or bankruptcy. Derivative instruments subject to master netting arrangements and collateral arrangements are recognized on a net basis in the Consolidated Statements of Financial Condition. The gross amounts recognized, gross amounts offset and net amount presented of derivative instruments were as follows:

 

     At September 30, 2020  

(In thousands)

   Gross Amounts
Recognized
     Gross Amounts
Offset(1)
     Net Amount
Presented
 

Derivative assets

        

Interest rate contracts

   $ 279,710      $ —        $ 279,710  

Risk participation agreements

     163        —          163  

Forward foreign exchange contracts

     2,774        (2,740      34  

Interest rate lock commitments

     18,596        (4      18,592  

Forward loan sales commitments

     117        (117      —    

Power Equity CDs

     442        —          442  
  

 

 

    

 

 

    

 

 

 

Total derivative assets

   $ 301,802      $ (2,861    $ 298,941  
  

 

 

    

 

 

    

 

 

 

Derivative liabilities

        

Interest rate contracts

   $ 14,085      $ —        $ 14,085  

Risk participation agreements

     171        —          171  

Forward foreign exchange contracts

     210        760        970  

Interest rate lock commitments

     4        (4      —    

Forward loan sales commitments

     786        (117      669  

Power Equity CDs

     443        —          443  

Swap agreement

     141        (141      —    
  

 

 

    

 

 

    

 

 

 

Total derivative liabilities

   $ 15,840      $ 498      $ 16,338  
  

 

 

    

 

 

    

 

 

 

 

(1)

Includes the amounts with counterparties subject to enforceable master netting arrangements that have been offset in the Consolidated Statements of Financial Condition.


     At December 31, 2019  

(In thousands)

   Gross Amounts
Recognized
     Gross Amounts
Offset(1)
     Net Amount
Presented
 

Derivative assets

        

Interest rate contracts

   $ 102,893      $ (492    $ 102,401  

Risk participation agreements

     202        —          202  

Forward foreign exchange contracts

     —          —          —    

Interest rate lock commitments

     2,772        (7      2,765  

Forward loan sales commitments

     41        (41      —    

Power Equity CDs

     734        —          734  
  

 

 

    

 

 

    

 

 

 

Total derivative assets

   $ 106,642      $ (540    $ 106,102  
  

 

 

    

 

 

    

 

 

 

Derivative liabilities

        

Interest rate contracts

   $ 6,040      $ (491    $ 5,549  

Risk participation agreements

     354        —          354  

Forward foreign exchange contracts

     6,519        (4,214      2,305  

Interest rate lock commitments

     20        (7      13  

Forward loan sales commitments

     289        (41      248  

Power Equity CD

     734        —          734  

Swap agreement

     356        (356      —    
  

 

 

    

 

 

    

 

 

 

Total derivative liabilities

   $ 14,312      $ (5,109    $ 9,203  
  

 

 

    

 

 

    

 

 

 

 

(1)

Includes the amounts with counterparties subject to enforceable master netting arrangements that have been offset in the Consolidated Statements of Financial Condition.

Derivatives Designated as Hedging Instruments

Interest rate contract: The carrying amount of the hedged subordinated debt, including the cumulative basis adjustment related to the application of fair value hedge accounting, is recorded in long-term borrowings on the Consolidated Statements of Financial Condition and was as follows:

 

     Carrying Amount
of the Hedged Liability
     Cumulative Amount of
Fair Value Hedging Adjustments
Included in the Carrying Amount
of the Hedged Liability
 

(In thousands)

   At September 30,
2020
     At December 31,
2019
     At September 30,
2020
     At December 31,
2019
 

Subordinated bank note—2025

   $ 160,694      $ 151,454      $ 11,840      $ 2,773  
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes the effect of fair value hedge accounting on the Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019.

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(In thousands)

   2020      2019      2020      2019  

Statement of income line where the gain (loss) on the fair value hedge was recorded:

           

Interest expense on borrowings

   $ 11,429      $ 17,115      $ 51,147      $ 48,050  

Gain (loss) on interest rate contract (fair value hedge)

           

Hedged item

     680        (2,100      (9,068      (8,847

Derivative designated as a hedging instrument

     (731      2,195        9,134        8,938  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gain (loss) on interest rate contract recognized in interest expense on borrowings

   $ (51    $ 95      $ 66      $ 91  
  

 

 

    

 

 

    

 

 

    

 

 

 


Forward foreign exchange contracts: The effect of net investment hedges on accumulated other comprehensive income was as follows:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(In thousands)

   2020      2019      2020      2019  

Forward foreign exchange contracts

   $ (3,469    $ 2,170      $ 4,272      $ (3,761
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives Not Designated as Hedging Instruments Certain other interest rate contracts, forward foreign exchange contracts, interest rate lock commitments and other contracts have not been designated as hedging instruments. The effect of these derivatives on the Consolidated Statements of Income was as follows:

 

          Three Months Ended September 30,     Nine Months Ended September 30,  

(In thousands)

  

Location of Gain (Loss)

   2020     2019     2020     2019  

Interest rate contracts(1)

   Other noninterest income    $ (2,314   $ (20,085   $ 3,459     $ (21,345

Risk participation agreements

   Other noninterest expense      (310     321       (523     38  

Forward foreign exchange contracts

   Other noninterest expense      (1,606     3,307       9,615       (5,302

Interest rate lock commitments

   Net gains on sales of loans and leases      68       337       15,840       1,117  

Forward loan sales commitments

   Net gains on sales of loans and leases      3,881       (11     (421     (11

Swap agreement

   Other noninterest income      —         4       (1     4  
     

 

 

   

 

 

   

 

 

   

 

 

 

Net gain (loss) recognized

      $ (281   $ (16,127   $ 27,969     $ (25,499
     

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Included in both the three and nine months ended September 30, 2019 is a loss of $17.3 million related to the termination of $1.1 billion of interest rate swaps.

At September 30, 2020 and December 31, 2019, credit risk-related contingent features existed on forward foreign exchange contracts with a notional value of $26.3 million and $23.1 million, respectively. In the event the Corporation is rated less than BB- by Standard and Poor’s, the contracts could be terminated or the Corporation may be required to provide approximately $526 thousand and $462 thousand in additional collateral at September 30, 2020 and December 31, 2019, respectively. There were no forward foreign exchange contracts containing credit risk-related features in a liability position at both September 30, 2020 and December 31, 2019.

At September 30, 2020, the Corporation had posted $67.9 million and $0.8 million of cash collateral related to its interest rate contracts and forward foreign exchange contracts, respectively, and received $3.5 million of cash collateral related to its forward foreign exchange contracts.

Note 16. Fair Value Measurements

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
Amount
     Estimated Fair Value  

(In thousands)

   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
Amount
     Estimated Fair Value  

(In thousands)

   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.

Note 17. Revenue from Contracts with Customers

The Corporation earns a variety of revenue, including interest and fees, from customers, as well as revenues from noncustomers. The majority of the sources of revenue are included in interest income and noninterest income and are outside of the scope of ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Other sources of revenue fall within the scope of ASC 606 and are mostly included in noninterest income.

The Corporation recognizes revenue when the performance obligations related to the transfer of goods or services under the terms of a contract are satisfied. Some obligations are satisfied at a point in time, while others are satisfied over a period of time. Revenue is recognized as the amount of consideration expected to be received in exchange for transferring goods or services to a customer and is segregated based on the nature of product and services offered as part of contractual arrangements. Revenue streams within the scope of ASC 606 are discussed below.

 

   

Fees and Service Charges on Deposit Accounts Fees and service charges on deposit accounts includes fees and other charges TCF receives to provide various services, including but not limited to, service charges on deposit accounts and other fees including account analysis fees, monthly service fees, overdraft services, transferring funds, and accepting and executing stop-payment orders. The Corporation’s performance obligation for account analysis fees and monthly service fees are generally satisfied and, therefore, revenue is recognized over the period in which the service is provided. Deposit account related fees are largely transactional based, and therefore, the performance obligation is satisfied and the related revenue is recognized at the point in time when the transaction occurs.

 

   

Wealth Management Revenue Wealth management revenue includes fee income generated from personal and institutional customers. The Corporation also provides investment management services. Revenue is recognized over the period of time the services are rendered. Wealth management revenue also includes commissions that are earned for placing a brokerage transaction for execution. Revenue is recognized once the transaction is completed and the Corporation is entitled to receive consideration.

 

   

Card and ATM Revenue Card and ATM revenue includes ATM surcharges and debit card related revenue. ATM surcharges and certain debit card fees are transaction-based and, therefore, the performance obligation is satisfied and the related revenue is recognized at the point in time when the transaction occurs. Other debit card fees satisfied over a period of time are recognized over the period in which the service is provided.

 

   

Other Noninterest Income Other noninterest income includes wire transfer fees, safe deposit box income and check orders. The consideration includes both fixed (e.g., safe deposit box fees) and transaction (e.g., wire-transfer fee and check orders) fees. Fixed fees are recognized over the period of time the service is provided, while transaction fees are recognized when a specific service is rendered to the customer.


The following tables present total noninterest income segregated between contracts with customers within the scope of ASC 606 and those within the scope of other GAAP topics.

 

     Three Months Ended September 30, 2020  
     Within the scope of ASC 606      Out of scope
of ASC 606
     Total  

(In thousands)

   Consumer
Banking
     Commercial
Banking
     Enterprise
Services
 

Noninterest income

              

Fees and service charges on deposit accounts

   $ 23,010      $ 2,425      $ —        $ 35      $ 25,470  

Wealth management revenue

     1,334        —          —          5,172        6,506  

Card and ATM revenue

     21,635        64        —          1,684        23,383  

Other noninterest income

     1,461        1,413        199        60,378        63,451  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 47,440      $ 3,902      $ 199      $ 67,269      $ 118,810  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended September 30, 2019  
     Within the scope of ASC 606      Out of scope
of ASC 606
    Total  

(In thousands)

   Consumer
Banking
    Commercial
Banking
     Enterprise
Services
 

Noninterest income

            

Fees and service charges on deposit accounts

   $ 32,552     $ 2,046      $ —        $ (214   $ 34,384  

Wealth management revenue

     1,047       —          —          3,194       4,241  

Card and ATM revenue

     21,479       2        —          1,834       23,315  

Other noninterest income

     (455     1,592        163        31,018       32,318  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 54,623     $ 3,640      $ 163      $ 35,832     $ 94,258  
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

     Nine Months Ended September 30, 2020  
     Within the scope of ASC 606      Out
of scope of
ASC 606
     Total  

(In thousands)

   Consumer
Banking
     Commercial
Banking
     Enterprise
Services
 

Noninterest income

              

Fees and service charges on deposit accounts

   $ 75,130      $ 7,459      $ —        $ 310      $ 82,899  

Wealth management revenue

     3,846        —          —          15,017        18,863  

Card and ATM revenue

     59,041        66        —          6,597        65,704  

Other noninterest income

     1,293        4,466        767        214,835        221,361  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 139,310      $ 11,991      $ 767      $ 236,759      $ 388,827  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30, 2019  
     Within the scope of ASC 606      Out of scope
of ASC 606
    Total  

(In thousands)

   Consumer
Banking
     Commercial
Banking
     Enterprise
Services
 

Noninterest income

             

Fees and service charges on deposit accounts

   $ 84,453      $ 4,243      $ —        $ (192   $ 88,504  

Wealth management revenue

     1,047        —          —          3,194       4,241  

Card and ATM revenue

     60,584        3        —          1,883       62,470  

Other noninterest income

     395        6,908        245        144,717       152,265  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 146,479      $ 11,154      $ 245      $ 149,602     $ 307,480  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Contract Balances A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The noninterest income streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is most often received immediately or shortly after the Corporation satisfies its performance obligation and revenue is recognized. The Corporation does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances.


Note 18. Share-based Compensation

The Corporation maintains share-based compensation plans under which it periodically grants share-based awards for a fixed number of shares to directors and certain officers of the Corporation.

Before the Merger, Chemical and Legacy TCF granted share-based awards under their respective share-based compensation plans, including the Chemical Stock Incentive Plan of 2019 (the “Stock Incentive Plan of 2019”) and the TCF Financial 2015 Omnibus Incentive Plan (the “Legacy TCF Omnibus Incentive Plan”). At September 30, 2020, there were 1,440,141 shares reserved for issuance under the Legacy TCF Omnibus Incentive Plan and there were 1,147,952 shares reserved for issuance under the Stock Incentive Plan of 2019.

The fair value of share-based awards is recognized as compensation expense over the requisite service or performance period. Compensation expense for share-based awards, including the merger-related share-based compensation expense was $11.9 million and $33.6 million for the three and nine months ended September 30, 2020, respectively, and $9.8 million and $13.6 million for the same period in 2019, respectively. The excess tax realized from share-based compensation transactions during the three and nine months ended September 30, 2020 was an expense of $897 thousand and $2.0 million, respectively, and a benefit of $743 thousand and $2.0 million for the same period in 2019, respectively.

Restricted Stock Units

The Corporation can grant performance-based restricted stock units (“PRSUs”) and time-based restricted stock units (“TRSUs”) (collectively referred to as “RSUs”) under the Stock Incentive Plan of 2019 and the Legacy TCF Omnibus Incentive Plan; provided, that, RSUs granted under the Legacy TCF Omnibus Incentive Plan may only be granted to new employees hired after the merger or employees who previously were employees of Legacy TCF. At September 30, 2020, there were 407,323 PRSUs outstanding dependent on achieving certain performance target levels and the grantee completing the requisite service period. The TRSUs vest upon satisfaction of a service condition. Upon achievement of the satisfaction of a service condition and/or performance target level, as applicable, the TRSUs are converted into shares of TCF Financial’s common stock on a one-to-one basis and the PRSUs are converted into shares of TCF Financial’s common stock in accordance with the achievement of the performance target (ranging from 0% to 150% of the granted PRSUs). Compensation expense related to RSUs is recognized over the expected requisite performance or service period, as applicable.

A summary of the activity for RSUs at and for the nine months ended September 30, 2020 is presented below:

 

     Number of
Units
     Weighted-average
Grant Date Fair
Value Per Unit
 

Outstanding at December 31, 2019

     1,511,820      $ 44.49  

Granted

     1,465,165        24.59  

Forfeited/canceled

     (45,388      28.93  

Vested

     (601,651      43.99  
  

 

 

    

 

 

 

Outstanding at September 30, 2020

     2,329,946      $ 32.41  
  

 

 

    

 

 

 

Unrecognized compensation expense related to RSUs totaled $52.1 million at September 30, 2020 and is expected to be recognized over the remaining weighted-average period of 2.7 years.

Restricted Stock Awards

The Corporation’s restricted stock award transactions were as follows:

 

     Number of Awards      Weighted-Average Grant
Date Fair Value Per
Award
 

Outstanding at December 31, 2019

     888,305      $ 40.67  

Granted

     54,040        25.91  

Forfeited/canceled

     (7,959      39.91  

Vested

     (379,485      41.11  
  

 

 

    

 

 

 

Outstanding at September 30, 2020

     554,901      $ 38.63  
  

 

 

    

 

 

 


At September 30, 2020, there were no shares of performance-based restricted stock awards outstanding. Unrecognized stock compensation expense for restricted stock awards was $11.5 million at September 30, 2020 with a weighted-average remaining amortization period of 1.9 years.

The following table provides information regarding total expense for restricted stock awards:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(In thousands)

   2020      2019      2020      2019  

Restricted stock expense related to employees(1)

   $ 7,600      $ 4,779      $ 17,995      $ 9,455  

Restricted stock expense related to directors(2)

     352        391        566        709  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restricted stock expense

   $ 7,952      $ 5,170      $ 18,561      $ 10,164  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Included in “Compensation and employee benefits” in the Consolidated Statements of Income.

(2)

Included in “Other noninterest expense” in the Consolidated Statements of Income.

Stock Options

A summary of activity for the Corporation’s stock options at and for the nine months ended September 30, 2020 is presented below:

 

     Non-Vested Stock Options
Outstanding
     Stock Options Outstanding  
     Number of
Options
     Weighted-
average
Exercise Price
     Number of
Options
     Weighted-
average
Exercise Price
 

Outstanding at December 31, 2019

     120,809      $ 39.63        495,165      $ 29.48  

Exercised

     —          —          (82,276      22.03  

Forfeited/canceled

     (3,659      38.18        —          —    

Expired

     —          —          (74,626      38.89  

Vested

     (57,262      38.38        57,262        38.38  
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding at September 30, 2020

     59,888      $ 40.92        395,525      $ 30.55  

Exercisable/vested at September 30, 2020

  

 

 

 

  

 

 

 

     395,525      $ 30.55  
        

 

 

    

 

 

 

The weighted-average remaining contractual term was 4.1 years for all outstanding stock options and 3.9 years for exercisable stock options at September 30, 2020.

Note 19. Retirement Plans

The Corporation’s retirement plans include qualified defined benefit pension plans, nonqualified postretirement benefit plans, 401(k) savings plans and nonqualified supplemental retirement plans. These plans are discussed in further detail in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019.

Qualified Defined Benefit Pension Plans

The TCF Cash Balance Pension Plan (the “Legacy TCF Pension Plan”) and the Chemical Financial Corporation Employees’ Pension Plan (“Chemical Pension Plan”) are both defined as qualified benefit pension plans (collectively, the “Pension Plans”), which previously provided for postretirement pension benefits for plan eligible employees.

The Board of Directors of Legacy TCF approved the termination of the Legacy TCF Pension Plan effective November 1, 2019. The Corporation believes all participants will have their benefits paid in full. During the three months ended September 30, 2020, distributions were made to all participants electing a lump sum payment. Due to the TCF Pension Plan’s funding level, assets were liquidated and additional funding was made for the annuity purchase in October 2020. The weighted-average interest crediting rate was 2.05% as of September 30, 2020. TCF does not consolidate the assets and liabilities associated with the Legacy TCF Pension Plan.


The termination of the Chemical Pension Plan was effective August 31, 2019. The discount rate was adjusted to 3.48% based on the remeasurement of the Chemical Pension Plan required due to the Merger and the termination. At the time of the Merger, as a result of the termination, the Corporation recognized a prepaid asset representing the funded status of the Chemical Pension Plan, net of estimated settlement costs, and the balance previously recorded in accumulated other comprehensive income was eliminated. The purchase accounting adjustment, as a result of the Merger, was reported in goodwill. The Chemical Pension Plan was fully funded as of September 30, 2020. During the three months ended September 30, 2020, distributions were made to all participants electing a lump-sum payment. Following that distribution, existing plan assets will be liquidated over the next several months and an annuity purchase transaction was completed in October 2020.

Nonqualified Postretirement Benefit Plans

The Legacy TCF Postretirement Plan provides health care benefits to eligible retired employees who retired prior to December 31, 2009. The provisions for active and retired employees then eligible for these benefits were not changed. The Postretirement Plan is not funded.

The Chemical Postretirement Benefit Plan provides medical and dental benefits, during retirement, to a limited number of active and retired employees. The benefits can be amended, modified or terminated by the Corporation at any time.

401(k) Savings Plans

The TCF 401K Plan (the “TCF 401K”), a qualified postretirement benefit and employee stock ownership plan provides, and until December 31, 2019 the Chemical Financial Corporation 401K Savings Plan (the “Chemical 401K”), a qualified postretirement benefit plan provided the option to invest in TCF common stock. Effective December 31, 2019, the Chemical 401K merged with and into the TCF 401K. All participant balances remaining in the Chemical 401K were transferred into the TCF 401K on December 31, 2019.

Nonqualified Supplemental Retirement Plans

The TCF 401K Supplemental Plan (the “Legacy TCF SERP”) and the TCF Financial Corporation Deferred Compensation Plan (the “TCF Deferred Compensation Plan”) are both defined as nonqualified supplemental retirement plans. The Legacy TCF SERP’s assets, which include investments in TCF common stock, are held in trust and included in equity in the other line item.

Net Periodic Benefit

The net periodic benefit plan (income) cost included in other noninterest expense for defined benefit pension plans and postretirement benefit plans were as follows:

 

     Defined Benefit Pension Plans  
     Three Months Ended September 30,      Nine Months Ended September 30,  

(In thousands)

   2020      2019      2020      2019  

Interest cost

   $ 946      $ 1,046      $ 2,839      $ 1,574  

Return on plan assets

     (864      (949      (2,594      (1,223
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit plan (income) cost

   $ 82      $ 97      $ 245      $ 351  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Postretirement Benefit Plans  
     Three Months Ended September 30,      Nine Months Ended September 30,  

(In thousands)

   2020      2019      2020      2019  

Interest cost

   $ 36      $ 41      $ 107      $ 101  

Service cost

     —          —          1        —    

Amortization of prior service cost

     (12      (11      (35      (35
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit plan (income) cost

   $ 24      $ 30      $ 73      $ 66  
  

 

 

    

 

 

    

 

 

    

 

 

 


TCF made no cash contributions to the defined benefit pension plans during the three and nine months ended September 30, 2020 and 2019. Due to the funding level upon final termination, assets were liquidated and additional funding was made for the annuity purchase in October 2020. TCF contributed $0.1 million and $0.2 million to the Legacy TCF Postretirement Plan during the three and nine months ended September 30, 2020, respectively, compared to $0.1 million and $0.3 million during the three and nine months ended September 30, 2019, respectively. TCF made no contributions to the Chemical Postretirement Benefit Plan during both the three and nine months ended September 30, 2020 and 2019.

As of December 31, 2019, the TCF 401K allows participants to make contributions of up to 50% of their covered compensation on a tax-deferred and/or after-tax basis, subject to the annual covered compensation limitation imposed by the Internal Revenue Service (“IRS”). TCF matches the contributions of all participants at a rate of $1 per dollar for employees to a maximum company contribution of 5% of the employee’s covered compensation per pay period subject to the annual covered compensation limitation imposed by the IRS. Employee contributions and matching contributions vest immediately. The Corporation match under the TCF 401K was $5.0 million and $16.8 million for the three and nine months ended September 30, 2020, respectively. The Corporation match under both the Legacy TCF 401k and the Chemical 401k was $4.3 million and $11.4 million for the three and nine months ended September 30, 2019, respectively. Dividends on TCF’s common shares held in the TCF 401K are reinvested in such fund or, at the election of the participant, may be paid in cash to the participant.

Effective January 1, 2020, the TCF Deferred Compensation Plan (previously the Chemical Deferred Compensation Plan), a nonqualified supplemental retirement plan, was amended to allow certain employees to contribute up to 60% of their salary and up to 85% of bonus compensation. The amounts deferred under this plan are invested in a selection of participant designated mutual funds.

Note 20. Earnings Per Common Share

The computations of basic and diluted earnings per common share were as follows:

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

(Dollars in thousands, except per share data)

   2020      2019      2020      2019  

Basic earnings per common share

           

Net income attributable to TCF Financial Corporation

   $ 55,738      $ 22,148      $ 131,401      $ 183,069  

Preferred stock dividends

     2,494        2,494        7,481        7,481  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

     53,244        19,654        123,920        175,588  

Less: Earnings allocated to participating securities

     —          —          —          19  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings allocated to common stock

   $ 53,244      $ 19,654      $ 123,920      $ 175,569  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding used in basic earnings per common share calculation

     151,768,337        128,575,171        151,761,299        97,876,262  
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per common share

   $ 0.35      $ 0.15      $ 0.82      $ 1.79  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

           

Earnings allocated to common stock

   $ 53,244      $ 19,654      $ 123,920      $ 175,569  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding used in basic earnings per common share calculation

     151,768,337        128,575,171        151,761,299        97,876,262  

Net dilutive effect of:

           

Non-participating restricted stock

     26,163        73,698        12,383        139,795  

Stock options

     27,092        105,719        53,246        39,222  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common shares outstanding used in diluted earnings per common share calculation

     151,821,592        128,754,588        151,826,928        98,055,279  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.35      $ 0.15      $ 0.82      $ 1.79  
  

 

 

    

 

 

    

 

 

    

 

 

 

Anti-dilutive shares outstanding not included in the computation of diluted earnings per common share

           

Non-participating restricted stock

     2,303,249        1,271,045        2,531,355        1,271,045  

Stock options

     323,386        97,980        228,106        97,980  
  

 

 

    

 

 

    

 

 

    

 

 

 


Note 21. Other Noninterest Income and Expense

Other noninterest income and expense was as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(In thousands)

   2020      2019      2020      2019  

Other Noninterest Income

           

Gain on branch sales(1)

   $ —        $ —        $ 14,717      $ —    

Termination of interest rate swaps

     —          (17,302      —          (17,302

Loan servicing rights impairment

     (154      (4,520      (17,248      (4,520

Other

     5,565        9,513        35,650        21,510  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other noninterest income

   $ 5,411      $ (12,309    $ 33,119      $ (312
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Noninterest Expense

           

Outside processing

   $ 15,697      $ 12,084      $ 42,414      $ 23,475  

Loan and lease expense

     7,849        6,750        23,988        13,413  

Professional fees

     6,552        7,406        18,749        18,319  

Advertising and marketing

     8,251        7,101        21,091        19,229  

FDIC insurance

     5,138        6,298        18,439        11,708  

Card processing and issuance costs

     6,064        5,746        20,585        14,437  

Other

     33,872        42,391        100,409        94,200  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other noninterest expense

   $ 83,423      $ 87,776      $ 245,675      $ 194,781  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represents the completion of the sale of seven banking centers in conjunction with deposits associated with those banking centers.

Note 22. Reportable Segments

The Corporation’s reportable segments are Consumer Banking, Commercial Banking and Enterprise Services. Consumer Banking is comprised of all of the Corporation’s consumer-facing businesses and includes retail banking, consumer lending, wealth management and small business banking. Commercial Banking, previously named Wholesale Banking, is comprised of commercial and industrial and commercial real estate banking and lease financing. Enterprise Services is comprised of (i) corporate treasury, which includes the Corporation’s investment and borrowing portfolios and management of capital, debt and market risks, (ii) corporate functions, such as information technology, risk and credit management, bank operations, finance, investor relations, corporate development, internal audit, legal and human capital management that provide services to the operating segments, (iii) the Holding Company and (iv) eliminations.

In connection with the Merger, effective August 1, 2019, the Corporation renamed its Wholesale Banking segment to Commercial Banking to align with the way it is now managed. In addition, activity that was related to small business banking and private banking were moved from the Wholesale Banking (now named Commercial Banking) segment to the Consumer Banking segment. The revised presentation of previously reported segment data has been applied retroactively to all periods presented in these financial statements.

The Corporation evaluates performance and allocates resources based on each reportable segment’s net income or loss. The reportable segments follow GAAP as described in Note 1. Basis of Presentation, except for the accounting for intercompany interest income and interest expense, which are eliminated in consolidation and presenting net interest income on a fully tax-equivalent basis. The Corporation generally accounts for inter-segment sales and transfers at cost.


Certain information for each of the Corporation’s reportable segments, including reconciliations of the consolidated totals, was as follows:

 

(In thousands)

   Consumer
Banking
     Commercial
Banking
     Enterprise
Services
     Consolidated  

At or For the Three Months Ended September 30, 2020

           

Net interest income

   $ 216,851      $ 167,160      $ (6,844    $ 377,167  

Provision (benefit) for credit losses

     (27,217      96,881        —          69,664  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for credit losses

     244,068        70,279        (6,844      307,503  

Noninterest income

     78,587        35,105        5,118        118,810  

Noninterest expense

     204,239        105,646        63,555        373,440  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income tax expense (benefit)

     118,416        (262      (65,281      52,873  

Income tax expense (benefit)

     19,744        (8,613      (15,560      (4,429
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) after income tax expense (benefit)

     98,672        8,351        (49,721      57,302  

Income attributable to non-controlling interest

     —          1,564        —          1,564  

Preferred stock dividends

     —          —          2,494        2,494  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) available to common shareholders

     98,672        6,787        (52,215      53,244  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $13,935,521      $ 23,466,019        $10,164,249      $ 47,565,789  
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues from external customers

     

Interest income

   $ 139,827      $ 237,060      $ 43,561      $ 420,448  

Noninterest income

     78,587        35,105        5,118        118,810  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 218,414      $ 272,165      $ 48,679      $ 539,258  
  

 

 

    

 

 

    

 

 

    

 

 

 

At or For the Three Months Ended September 30, 2019

     

Net interest income

   $ 191,940      $ 157,437      $ 22,416      $ 371,793  

Provision for credit losses

     4,489        22,699        —          27,188  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for credit losses

     187,451        134,738        22,416        344,605  

Noninterest income

     57,102        47,929        (10,773      94,258  

Noninterest expense

     210,728        102,841        112,051        425,620  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income tax expense (benefit)

     33,825        79,826        (100,408      13,243  

Income tax expense (benefit)

     6,817        8,172        (26,724      (11,735
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) after income tax expense (benefit)

     27,008        71,654        (73,684      24,978  

Income attributable to non-controlling interest

     —          2,830        —          2,830  

Preferred stock dividends

     —          —          2,494        2,494  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

     27,008        68,824        (76,178      19,654  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $13,701,633      $ 19,045,367        $12,945,511      $ 45,692,511  
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues from external customers

     

Interest income

   $ 153,843      $ 265,678      $ 40,287      $ 459,808  

Noninterest income

     57,102        47,929        (10,773      94,258  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 210,945      $ 313,607      $ 29,514      $ 554,066  
  

 

 

    

 

 

    

 

 

    

 

 

 


(In thousands)

   Consumer
Banking
     Commercial
Banking
     Enterprise
Services
     Consolidated  

At or For the Nine Months Ended September 30, 2020

           

Net interest income

   $ 616,968      $ 522,619      $ 17,420      $ 1,157,007  

Provision for credit losses

     6,228        239,105        —          245,333  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for credit losses

     610,740        283,514        17,420        911,674  

Noninterest income

     245,277        134,709        8,841        388,827  

Noninterest expense

     640,417        325,425        182,438        1,148,280  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income tax expense (benefit)

     215,600        92,798        (156,177      152,221  

Income tax expense (benefit)

     37,478        11,133        (33,741      14,870  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) after income tax expense (benefit)

     178,122        81,665        (122,436      137,351  

Income attributable to non-controlling interest

     —          5,950        —          5,950  

Preferred stock dividends

     —          —          7,481        7,481  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) available to common shareholders

     178,122        75,715        (129,917      123,920  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $13,935,521      $ 23,466,019      $ 10,164,249      $ 47,565,789  
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues from external customers

  

Interest income

   $ 430,162      $ 788,745      $ 135,303      $ 1,354,210  

Noninterest income

     245,277        134,709        8,841        388,827  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 675,439      $ 923,454      $ 144,144      $ 1,743,037  
  

 

 

    

 

 

    

 

 

    

 

 

 

At or For the Nine Months Ended September 30, 2019

  

Net interest income

   $ 470,738      $ 350,848      $ 58,693      $ 880,279  

Provision for credit losses

     16,406        34,473        —          50,879  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for credit losses

     454,332        316,375        58,693        829,400  

Noninterest income

     183,767        132,883        (9,170      307,480  

Noninterest expense

     520,007        267,147        128,390        915,544  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income tax expense (benefit)

     118,092        182,111        (78,867      221,336  

Income tax expense (benefit)

     26,529        30,271        (27,934      28,866  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) after income tax expense (benefit)

     91,563        151,840        (50,933      192,470  

Income attributable to non-controlling interest

     —          9,401        —          9,401  

Preferred stock dividends

     —          —          7,481        7,481  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

     91,563        142,439        (58,414      175,588  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $13,701,633      $ 19,045,367      $ 12,945,511      $ 45,692,511  
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues from external customers

  

Interest income

   $ 370,016      $ 619,419      $ 88,048      $ 1,077,483  

Noninterest income

     183,767        132,883        (9,170      307,480  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 553,783      $ 752,302      $ 78,878      $ 1,384,963  
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 23. Commitments, Contingent Liabilities and Guarantees

Financial Instruments with Off-Balance Sheet Risk In the normal course of business, the Corporation enters into financial instruments with off-balance sheet risk, primarily to meet the financing needs of its customers. These financial instruments, which are issued or held for purposes other than trading, involve elements of credit and interest-rate risk in excess of the amounts recognized in the Consolidated Statements of Financial Condition.

The Corporation’s exposure to credit loss, in the event of non-performance by the counterparty to the financial instrument is represented by the contractual amount of the commitments. The Corporation uses the same credit policies in making these commitments as it does for making direct loans. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on a credit evaluation of the customer.

Financial instruments with off-balance sheet risk were as follows:

 

(In thousands)

   At September 30,
2020
     At December 31,
2019
 

Commitments to extend credit:

     

Commercial

   $ 4,522,128      $ 5,743,072  

Consumer

     2,171,676        2,305,096  
  

 

 

    

 

 

 

Total commitments to extend credit

     6,693,804        8,048,168  

Standby letters of credit and guarantees on industrial revenue bonds

     116,792        129,192  
  

 

 

    

 

 

 

Total

   $ 6,810,596      $ 8,177,360  
  

 

 

    

 

 

 


Commitments to Extend Credit: Commitments to extend credit are agreements to lend 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. Since a certain amount of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral to secure any funding of these commitments predominantly consists of residential and commercial real estate mortgages.

Standby Letters of Credit and Guarantees on Industrial Revenue Bonds: Standby letters of credit and guarantees on industrial revenue bonds are conditional commitments issued by the Corporation guaranteeing the performance of a customer to a third party. These conditional commitments expire in various years through 2039. The majority of these standby letters of credit are collateralized. Collateral held consists primarily of commercial real estate mortgages. Since the conditions under which the Corporation is required to fund these commitments may not materialize, the cash requirements are expected to be less than the total outstanding commitments.

Contingencies and Guarantees The Corporation has originated and sold certain loans, and additionally acquired the potential liability for loans originated and sold by merged or acquired entities, for which the buyer has limited recourse to the Corporation in the event the loans do not perform as specified in the agreements. These loans had an outstanding balance of $6.6 million and $6.2 million at September 30, 2020 and December 31, 2019, respectively. The maximum potential amount of undiscounted future payments that the Corporation could be required to make in the event of nonperformance by the borrower totaled $6.6 million and $6.0 million at September 30, 2020 and December 31, 2019, respectively. In the event of nonperformance, the Corporation has rights to the underlying collateral securing the loans. At December 31, 2019 the Corporation had recorded a liability of $0.1 million, in connection with the recourse agreements, in other liabilities. There was no recorded liability at September 30, 2020.

In addition, the Corporation acquired, through the Merger, certain Small Business Administration (“SBA”) guaranteed loans in which the guaranteed portion had been sold to a third party investor. In the event these loans default and the SBA guaranty is no longer intact (i.e. an issue is found to have occurred during the origination or the liquidation of the loans) the Corporation would be liable to make the loan whole to the third party investor. The maximum potential amount of undiscounted future payments that the Corporation could be required to make in the event of default by the borrower was $13.9 million and $16.7 million at September 30, 2020 and December 31, 2019, respectively. In the event of default, the Corporation has rights to the underlying collateral securing the loans. At September 30, 2020 and December 31, 2019, the Corporation had recorded a liability of $0.8 million and $0.9 million, respectively, in other liabilities.

Representations, Warranties and Contractual Liabilities In connection with the Corporation’s residential mortgage loan sales, and the historical sales of merged or acquired entities, the Corporation makes certain representations and warranties that the loans meet certain criteria, such as collateral type, underwriting standards and the manner in which the loans will be serviced. The Corporation may be required to repurchase individual loans and/or indemnify the purchaser against losses if the loan fails to meet established criteria. In addition, some agreements contain a requirement to repurchase loans as a result of early payoffs by the borrower, early payment default of the borrower or the failure to obtain valid title. At September 30, 2020 and December 31, 2019 the liability recorded in connection with these representations and warranties was $3.8 million and $5.7 million, respectively, included in other liabilities.

Litigation Contingencies From time to time, we are a party to legal proceedings arising out of our lending, leasing and deposit operations, including foreclosure proceedings and other collection actions as part of our lending and leasing collections activities. We may also be subject to regulatory examinations and enforcement actions brought by federal regulators, including the SEC, the Federal Reserve, the OCC and the CFPB which may impose sanctions on us for failures related to regulatory compliance. From time to time borrowers and other customers, and employees and former employees have also brought actions against us, in some cases claiming substantial damages. We, like other financial services companies are subject to the risk of class action litigation. Litigation is often unpredictable and the actual results of litigation cannot be determined and therefore the ultimate resolution of a matter and the possible range of loss associated with certain potential outcomes cannot be established. Based on our current understanding of our pending legal proceedings, management does not believe that judgments or settlements arising from pending or threatened legal matters, individually or in the aggregate, would have a material adverse effect on our consolidated financial position, operating results or cash flows.


Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information combines the historical consolidated financial position and results of operations of Huntington Bancshares Incorporated (“Huntington”) and TCF Financial Corporation (“TCF”) as an acquisition by Huntington of TCF. The merger of TCF with and into Huntington (the “merger”) was announced on December 13, 2020, and provides that each share of common stock, par value $1.00 per share, of TCF (“TCF common stock”) issued and outstanding immediately prior to the effective time of the merger (the “effective time”) (other than certain shares held by Huntington or TCF) will be automatically converted into the right to receive 3.0028 shares (the “exchange ratio” and such shares, the “merger consideration”) of common stock, par value $0.01 per share, of Huntington (“Huntington common stock”). In addition, at the effective time, each share of 5.70% Series C Non-Cumulative Perpetual Preferred Stock, no par value, of TCF (“ TCF series C preferred stock”) issued and outstanding immediately prior to the effective time will be automatically converted into the right to receive one share of a newly created series of preferred stock of Huntington (the “new Huntington preferred stock”).

The unaudited pro forma condensed combined financial information have been prepared to give effect to the following:

 

   

The acquisition of TCF by Huntington under the provision of the Financial Accounting Standards Board (FASB) Accounting Standards Codification, ASC 805, “Business Combinations” where the assets and liabilities of TCF will be recorded by Huntington at their respective fair values as of the date the merger is completed;

 

   

The distribution of shares of Huntington common stock to TCF’s shareholders in exchange for shares of TCF common stock (based upon a 3.0028 exchange ratio);

 

   

Certain reclassifications to conform historical financial statement presentation of TCF to Huntington; and

 

   

Transaction costs in connection with the merger.

The following unaudited pro forma condensed combined financial information and related notes are based on and should be read in conjunction with (i) the historical audited consolidated financial statements of Huntington and the related notes included in Huntington’s Annual Report on Form 10-K for the year ended December 31, 2019, and the historical unaudited condensed consolidated financial statements of Huntington and the related notes included in Huntington’s Quarterly Report on Form 10-Q for the period ended September 30, 2020, and (ii) the historical audited consolidated financial statements of TCF and the related notes included in Exhibit 99.1 to this current report on Form 8-K, and the historical unaudited consolidated financial statements of TCF and the related notes included in Exhibit 99.2 to this current report on Form 8-K.

The unaudited pro forma condensed combined income statements for the nine months ended September 30, 2020 and for the year ended December 31, 2019 combine the historical consolidated income statements of Huntington and TCF, giving effect to the merger as if it had been completed on January 1, 2019. The accompanying unaudited pro forma condensed combined balance sheet as of September 30, 2020 combines the historical consolidated balance sheets of Huntington and TCF, giving effect to the merger as if it had been completed on September 30, 2020.

The unaudited pro forma condensed combined financial information is provided for illustrative information purposes only. The unaudited pro forma condensed combined financial information is not necessarily, and should not be assumed to be, an indication of the actual results that would have been achieved had the merger been completed as of the dates indicated or that may be achieved in the future. The pro forma financial information has been prepared by Huntington in accordance with Regulation S-X Article 11, Pro Forma Financial Information, as amended by the final rule, Amendments to Financial Disclosures About Acquired and Disposed Businesses, as adopted by the SEC on May 21, 2020.

The unaudited pro forma condensed combined financial information also does not consider any potential effects of changes in market conditions on revenues, expense efficiencies, asset dispositions, and share repurchases, among other factors. In addition, as explained in more detail in the accompanying notes, the preliminary allocation of the pro forma purchase price reflected in the unaudited pro forma condensed combined financial information is subject to adjustment and may vary significantly from the actual purchase price allocation that will be recorded upon completion of the merger.


As of the date of January 28, 2021, Huntington has not completed the valuation analysis and calculations in sufficient detail necessary to arrive at the required estimates of the fair market value of the TCF assets to be acquired or liabilities to be assumed, other than a preliminary estimate for intangible assets and certain financial assets and financial liabilities. Accordingly, apart from the aforementioned, certain TCF assets and liabilities are presented at their respective carrying amounts and should be treated as preliminary values. A final determination of the fair value of TCF’s assets and liabilities will be based on TCF’s actual assets and liabilities as of the date on which the closing of the merger occurs (the “closing date”) and, therefore, cannot be made prior to the completion of the merger. In addition, the value of the merger consideration to be paid by Huntington in shares of Huntington common stock upon the completion of the merger will be determined based on the closing price of Huntington common stock on the closing date and the number of issued and outstanding shares of TCF common stock immediately prior to the closing of the merger. Actual adjustments may differ from the amounts reflected in the unaudited pro forma condensed combined financial information, and the differences may be material.

Further, Huntington has not identified all adjustments necessary to conform TCF’s accounting policies to Huntington’s accounting policies. Upon completion of the merger, or as more information becomes available, Huntington will perform a more detailed review of TCF’s accounting policies. As a result of that review, differences could be identified between the accounting policies of the two companies that, when conformed, could have a material impact on the financial information of Huntington after giving effect to the merger (the “combined company”).

As a result of the foregoing, the pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analysis is performed. The preliminary pro forma adjustments have been made solely for the purpose of providing the unaudited pro forma condensed combined financial information. Huntington estimated the fair value of certain TCF assets and liabilities based on a preliminary valuation analysis, due diligence information, information presented in TCF’s SEC filings and other publicly available information. Until the merger is completed, both companies are limited in their ability to share certain information.

Upon completion of the merger, a final determination of the fair value of TCF’s assets acquired and liabilities assumed will be performed. Any changes in the fair values of the net assets or total purchase consideration as compared with the information shown in the unaudited pro forma condensed combined financial information may change the amount of the total purchase consideration allocated to goodwill and other assets and liabilities and may impact the combined company’s statement of income. The final purchase consideration allocation may be materially different than the preliminary purchase consideration allocation presented in the unaudited pro forma condensed combined financial information.


UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

As of September 30, 2020

 

(dollars in millions,

except per share data)

               Transaction Accounting Adjustments      Pro forma
Condensed
Combined
 
   Historical
Huntington
    Historical
TCF
    Reclassifications
Note 2
    Pro forma
Adjustments
    Note 4  

Assets

             

Cash and due from banks

   $ 1,029     $ 538     $ —       $ —          $ 1,567  

Interest-bearing deposits in the Federal Reserve Bank

     5,246       1,233              6,479  

Interest-bearing deposits in banks

     109       —                109  

Trading account securities

     54       —                54  

Available-for-sale securities

     14,807       7,446              22,253  

Held-to-maturity securities

     8,557       170         10       A        8,737  

Other securities

     421       301              722  

Loans held for sale

     1,303       460              1,763  

Loans and Leases

     81,156       34,344         146       B        115,646  

Allowance for loan and lease losses

     (1,796     (515       (333     C        (2,644
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Net loans and leases

     79,360       33,829       —         (187        113,002  

Bank owned life insurance

     2,567       —         156            2,723  

Premises and equipment

     752       470         (89     D        1,133  

Goodwill

     1,990       1,313         893       E        4,196  

Servicing rights and other intangible assets

     419       190         24       F        633  

Other assets

     3,502       1,616       (156     (3     G        4,959  
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Total Assets

   $    120,116     $   47,566     $ —       $ 648        $    168,330  
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Liabilities and Shareholders’ Equity

             

Deposits

   $ 95,154     $ 39,172     $ —       $ 20       H      $ 134,346  

Short-term borrowings

     222       655              877  

Long-term debt

     9,174       872         29       I        10,075  

Other liabilities

     2,649       1,208         9       J        3,866  
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Total Liabilities

     107,199       41,907       —         58          149,164  

Shareholder’s Equity:

             

Preferred stock

     2,191       169         15       K        2,375  

Common stock

     10       152         (147     L        15  

Capital surplus

     8,766       3,451         2,949       M        15,166  

Less treasury shares, at cost, and other

     (59     (27       27          (59

Accumulated other comprehensive gain (loss)

     257       192         (192     N        257  

Retained earnings

     1,752       1,700         (2,062     O        1,390  
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Total shareholders’ equity

     12,917       5,637       —         590          19,144  
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Noncontrolling interests in consolidated subsidiaries

     —         22         —            22  
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Total Equity Capital

     12,917       5,659       —         590          19,166  
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

Total liabilities and shareholders’ equity

   $ 120,116     $ 47,566     $ —       $ 648        $ 168,330  
  

 

 

   

 

 

   

 

 

   

 

 

      

 

 

 

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Information


UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT

For the Nine Months Ended September 30, 2020

 

(dollars in millions,

except per share data)

                Transaction Accounting Adjustments      Pro forma
Condensed
Combined
 
   Historical
Huntington
    Historical
TCF
     Reclassifications
Note 2
    Pro forma
Adjustments
    Note 5  

Interest and fee income:

              

Loans and leases

   $ 2,327     $ 1,209      $ —       $ (50     A      $ 3,486  

Investment securities

     407       121        —         (2     B        526  

Other

     35       24        —         —            59  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Total interest income

     2,769       1,354        —         (52        4,071  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Interest expense:

              

Deposits

     182       146        —         (1     C        327  

Borrowings

     188       51        —         11       D        250  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Total interest expense

     370       197        —         10          577  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Net interest income

     2,399       1,157        —         (62        3,494  

Provision for credit losses

     945       245        —         —            1,190  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Net interest income after provision for credit losses

     1,454       912        —         (62        2,304  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Service charges on deposit accounts

     223       83        —         —            306  

Cards and payment processing income

     183       66        —         —            249  

Trust and investment management services

     140       19        —         —            159  

Mortgage banking income

     277       10        —         —            287  

Leasing income

     —         103        —         —            103  

Capital markets fees

     91       —          15       —            106  

Insurance income

     72       —          —         —            72  

Bank owned life insurance income

     49       —          4       —            53  

Gain on sale of loans and leases

     30       73        —         —            103  

Net (losses) gains on sales of securities

     (1     2        —         —            1  

Other income

     118       33        (19     —            132  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Total noninterest income

     1,182       389        —         —            1,571  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Personnel costs

     1,267       512        —         —            1,779  

Outside data processing and other services

     273       —          63       —            336  

Equipment

     132       160        (70     —            222  

Net occupancy

     119       —          70       (2     F        187  

Lease financing equipment depreciation

     —         55        —         —            55  

Professional services

     34       —          18       —            52  

Amortization of intangibles

     31       —          16       5       G        52  

Marketing

     23       —          21       —            44  

Deposit and other insurance expense

     24       —          18       —            42  

Merger-related expenses

     —         172        —         —            172  

Other expense

     136       249        (136     —            249  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Total noninterest expense

     2,039       1,148        —         3          3,190  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Income before income taxes

     597       153        —         (65        685  

Provision for income taxes

     96       15        —         (15     J        96  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Income before minority interest

     501       138        —         (50        589  

Income attributable to minority interest

     —         6        —         —            6  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net income

     501       132        —         (50        583  

Dividends on preferred shares

     65       7        —         —            72  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Net income applicable to common shares

   $ 436     $ 125      $ —       $ (50      $ 511  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Earnings per common share

   $ 0.43       0.82             $ 0.35  

Diluted earnings per common share

     0.42       0.82             $ 0.34  

Weighted average common shares

     1,017,052       151,761            K        1,472,761  

Diluted average common shares

     1,031,573       151,827            K        1,487,479  

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Information


UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT

For the Year Ended December 31, 2019

 

(dollars in millions,

except per share data)

                Transaction Accounting Adjustments      Pro forma
Condensed
Combined
 
   Historical
Huntington
    Historical
TCF
     Reclassifications
Note 2
    Pro forma
Adjustments
    Note 5  

Interest and fee income:

              

Loans and leases

   $ 3,541     $ 1,431      $ —         19       A      $ 4,991  

Investment securities

     596       118        —         (4     B        710  

Other

     64       38        —         —            102  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Total interest income

     4,201       1,587        —         15          5,803  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Interest expense:

              

Deposits

     585       226        —         18       C        829  

Borrowings

     403       72        —         10       D        485  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Total interest expense

     988       298        —         28          1,314  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Net interest income

     3,213       1,289        —         (13        4,489  

Provision for credit losses

     287       65        —         330       E        682  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Net interest income after provision for credit losses

     2,926       1,224        —         (343        3,807  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Service charges on deposit accounts

     372       128        —         —            500  

Cards and payment processing income

     246       87        —         —            333  

Trust and investment management services

     178       10        —         —            188  

Mortgage banking income

     167       21        —         —            188  

Leasing income

     —         164        —         —            164  

Capital markets fees

     123       —          (7     —            116  

Insurance income

     88       —          —         —            88  

Bank owned life insurance income

     66       —          2       —            68  

Gain on sale of loans and leases

     55       26        —         —            81  

Net (losses) gains on sales of securities

     (24     7        —         —            (17

Other income

     183       22        5       —            210  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Total noninterest income

     1,454       465        —         —            1,919  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Personnel costs

     1,654       577        —         —            2,231  

Outside data processing and other services

     346       —          59       —            405  

Equipment

     163       190        (76     —            277  

Net occupancy

     159       —          75       (3     F        231  

Lease financing equipment depreciation

     —         76        —         —            76  

Professional services

     54       —          26       —            80  

Amortization of intangibles

     49       —          12       20          81  

Marketing

     37       —          28       —            65  

Deposit and other insurance expense

     34       —          18       —            52  

Merger-related expenses

     —         172        —         87          259  

Other expense

     225       317        (142     50          450  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Total noninterest expense

     2,721       1,332        —         154          4,207  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Income before income taxes

     1,659       357        —         (497        1,519  

Provision for income taxes

     248       50        —         (111        187  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Income before minority interest

     1,411       307        —         (386        1,332  

Income attributable to minority interest

     —         12        —         —            12  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Net income

     1,411       295        —         (386        1,320  

Dividends on preferred shares

     74       10        —         —            84  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Net income applicable to common shares

   $ 1,337     $ 285      $ —       $ (386      $ 1,236  
  

 

 

   

 

 

    

 

 

   

 

 

      

 

 

 

Earnings per common share

   $ 1.29     $ 2.56             $ 0.90  

Diluted earnings per common share

     1.27       2.55             $ 0.89  

Weighted average common shares

     1,038,840       111,604            K        1,373,965  

Diluted average common shares

     1,056,079       111,818            K        1,391,847  

See accompanying Notes to the Unaudited Pro Forma Condensed Combined Financial Information


NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

Note 1. Basis of Presentation

The accompanying unaudited pro forma condensed combined financial information and related notes were prepared in accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed combined income statement for the nine months ended September 30, 2020 and for the year ended December 31, 2019 combine the historical consolidated income statement of Huntington and TCF, giving effect to the merger as if it had been completed on January 1, 2019. The accompanying unaudited pro forma condensed combined balance sheet as of September 30, 2020 combines the historical consolidated balance sheets of Huntington and TCF, giving effect to the merger as if it had been completed on September 30, 2020.

The unaudited pro forma condensed combined financial information and explanatory notes have been prepared to illustrate the effects of the merger involving Huntington and TCF under the acquisition method of accounting with Huntington treated as the acquirer. The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not necessarily indicate the financial results of the combined company had the companies actually been combined at the beginning of each period presented, nor does it necessarily indicate the results of operations in future periods or the future financial position of the combined company. Under the acquisition method of accounting, the assets and liabilities of TCF, as of the effective time, will be recorded by Huntington at their respective fair values, and the excess of the merger consideration over the fair value of TCF’s net assets will be allocated to goodwill.

The merger provides for TCF common shareholders to receive 3.0028 shares of Huntington common stock for each share of TCF common stock they hold immediately prior to the merger. Based on the closing trading price of shares of Huntington common stock on the Nasdaq Global Select Market on January 22, 2021, the value of the merger consideration per share of TCF common stock was $41.56. In addition, each share of TCF’s series C preferred stock will be converted into the right to receive a share of new Huntington preferred stock.

The pro forma allocation of the purchase price reflected in the unaudited pro forma condensed combined financial information is subject to adjustment and may vary from the actual purchase price allocation that will be recorded at the time the merger is completed. Adjustments may include, but are not be limited to, changes in (i) TCF’s balance sheet through the effective time; (ii) the aggregate value of merger consideration paid if the price of shares of Huntington common stock varies from the assumed $13.84 per share, which represents the closing share price of Huntington common stock on January 22, 2021; (iii) total merger related expenses if consummation and/or implementation costs vary from currently estimated amounts; and (iv) the underlying values of assets and liabilities if market conditions differ from current assumptions.

The accounting policies of both Huntington and TCF are in the process of being reviewed in detail. Upon completion of such review, additional conforming adjustments or financial statement reclassification may be necessary.

Note 2. Reclassification Adjustments

During the preparation of the unaudited pro forma condensed combined financial information, management performed a preliminary analysis of TCF’s financial information to identify differences in accounting policies and differences in balance sheet and income statement presentation as compared to the presentation of Huntington. At the time of preparing the unaudited pro forma condensed combined financial information, Huntington had not identified all adjustments necessary to conform TCF’s accounting policies to Huntington’s accounting policies. The adjustments represent Huntington’s best estimates based upon the information currently available to Huntington and could be subject to change once more detailed information is available.


Note 3. Preliminary Purchase Price Allocation

The following table summarizes the determination of the purchase price consideration with a sensitivity analysis assuming a 10% increase and 10% decrease in the price per share of Huntington common stock from the January 22, 2021 baseline with its impact on the preliminary goodwill.

 

(dollars in millions, except per share data, shares in thousands)    January 22, 2021      10% Increase      10% Decrease  

Shares of TCF

     152,514        152,514        152,514  

Exchange ratio

     3.0028        3.0028        3.0028  
  

 

 

    

 

 

    

 

 

 

Huntington shares to be issued

     457,969        457,969        457,969  

Price per share of Huntington common stock on January 22, 2021

   $ 13.84      $ 15.22      $ 12.46  
  

 

 

    

 

 

    

 

 

 

Preliminary consideration for common stock

   $ 6,338      $ 6,970      $ 5,706  

Consideration for equity awards

     52        58        47  

Preferred stock fair value adjustment

     15        15        15  
  

 

 

    

 

 

    

 

 

 

Total pro forma purchase price consideration

   $ 6,405      $ 7,043      $ 5,768  
  

 

 

    

 

 

    

 

 

 

Preliminary goodwill

   $ 2,206      $ 2,844      $ 1,569  
  

 

 

    

 

 

    

 

 

 

TCF Net Assets at Fair Value

        

Assets

        

Cash and deposits

         $ 1,771  

Investment and other securities

           7,927  

Loans held for sale

           460  

Loans and leases

           33,972  

Core deposit and other intangible assets

           214  

Other assets

           1,994  
        

 

 

 

Total Assets

           46,338  

Liabilities and Equity

        

Deposits

           39,192  

Short-term borrowings

           655  

Long-term debt

           901  

Other liabilities

           1,185  
        

 

 

 

Total liabilities

           41,933  

Preferred stock

           184  

Non-controlling interest

           22  
        

 

 

 

Total liabilities and equity

           42,139  

Net assets acquired

           4,199  
        

 

 

 

Preliminary goodwill

         $ 2,206  
        

 

 

 

Note 4. Pro Forma Adjustments to the Unaudited Condensed Combined Balance Sheets

The following pro forma adjustments have been reflected in the unaudited pro forma condensed combined financial information. All taxable adjustments were calculated using a 22.4% tax rate, which represents the blended statutory rate, to arrive at deferred tax asset or liability adjustments. All adjustments are based on preliminary assumptions and valuations, which are subject to change.

 

A.

Adjustment to securities classified as held-to maturity to reflect the estimated fair value of the acquired investment securities.


B.

Adjustment to loans and leases reflect estimated fair value adjustments, which include lifetime credit loss expectations for loans and leases, current interest rates and liquidity. The adjustment includes the following:

 

     September 30, 2020  
     (dollars in millions)  

Reversal of historical TCF loan and lease fair value adjustments

   $ 132  

Estimate of lifetime credit losses on acquired loans and leases

     (848

Estimate of fair value related to current interest rates and liquidity

     344  
  

 

 

 

Net fair value pro forma adjustments

     (372

Gross up of PCD loans and leases for credit mark - See C below for Allowance

     518  
  

 

 

 

Cumulative pro forma adjustments to loans and leases

   $ 146  
  

 

 

 

For purposes of pro forma presentation, the fair value adjustment is being recognized over a weighted average period of 2 years for commercial loans and 5 years for consumer loans in Interest and Fee Income— Loans and Leases.

 

C.

Adjustments to the allowance for loan and lease losses include the following:

 

     September 30, 2020  
     (dollars in millions)  

Reversal of historical TCF allowance for loan and lease losses

   $ (515

Estimate of lifetime credit losses for PCD loans and leases

     518  

Estimate of lifetime credit losses for non-PCD loans and leases

     330  
  

 

 

 

Net change in allowance for loan and lease losses

   $ 333  
  

 

 

 

 

D.

Adjustment to property and equipment to reflect the estimated fair value of acquired premises and equipment.

 

E.

Eliminate the historical TCF goodwill of $1.3 billion at the closing date and record estimated goodwill associated with the merger of $2.2 billion.

 

F.

Eliminate the historical TCF other intangibles of $152 million and record an estimated core deposit intangible of $164 million and a trust relationship intangible of $12 million related to the merger.

 

G.

Adjustment to other assets to reflect the estimated fair value of other real estate owned.

 

H.

Adjustment to deposits to reflect the estimated fair value of certificates of deposits.

 

I.

Adjustment to long-term debt to reflect the estimated fair value of TCF long-term debt.

 

J.

Adjustment to other liabilities for the following:

 

     September 30, 2020  
     (dollars in millions)  

Estimate of the fair value of accrued expenses and other liabilities

   $ 14  

Foundation contribution

     50  

Merger-related transaction costs

     87  

Deferred taxes related to acquisition accounting adjustments

     (142
  

 

 

 

Net other liabilities transaction accounting adjustments

   $ 9  
  

 

 

 

 

K.

Adjustment to preferred shares to reflect the estimated fair value of the TCF series C preferred stock and its conversion to new Huntington preferred stock.

 

L.

Adjustments to common stock to eliminate TCF common stock of $152 million par value and record the issuance of Huntington common stock to TCF common shareholders of $5 million par value.


M.

Adjustments to capital surplus to eliminate TCF capital surplus of $3.5 billion and record the issuance of Huntington common stock in excess of par value to TCF common shareholders of $6.4 billion.

 

N.

Adjustment to eliminate TCF accumulated other comprehensive gain of $192 million.

 

O.

Adjustment to eliminate TCF retained earnings of $1.7 billion offset by purchase accounting adjustments included herein.

Note 5. Pro Forma Adjustments to the Unaudited Condensed Combined Income Statements

 

A.

Net adjustments to interest income of $(50) million and $19 million for the nine-month period ended September 30, 2020 and the year ended December 31, 2019, respectively, to eliminate TCF accretion of discounts on previously acquired loans and leases and record the estimated amortization of the net premium on acquired loans and leases.

 

B.

Net adjustments to interest income of $(2) million and $(4) million for the nine-month period ended September 30, 2020 and the year ended December 31, 2019, respectively, to record the estimated amortization of the premium on acquired held-to-maturity securities.

 

C.

Net adjustment to reflect interest expense on deposits of $(1) million and $18 million for the nine-month period ended September 30, 2020 and the year ended December 31, 2019, respectively, to eliminate the TCF discount accretion on previously acquired deposits and to record the estimated amortization of the deposit premium on acquired interest-bearing deposits.

 

D.

Net adjustment to reflect interest expense on borrowings of $11 million and $10 million for the nine-month period ended September 30, 2020 and the year ended December 31, 2019, respectively, to eliminate the TCF discount accretion on previously acquired debt and to record the estimated amortization of premium on long-term debt.

 

E.

Adjustment to record provision expense on TCF’s non-PCD loans of $330 million.

 

F.

Adjustment to occupancy expense of $(2) million and $(3) million for the nine-month period ended September 30, 2020 and the year ended December 31, 2019, respectively, to reflect reduction of depreciation expense as a result of estimated fair value on acquired property. Average life of the depreciable assets will be twelve years.

 

G.

Net adjustments to intangible amortization of $5 million and $20 million for the nine-month period ended September 30, 2020 and the year ended December 31, 2019, respectively, to eliminate TCF amortization on other intangible assets and record estimated amortization of acquired other intangible assets. Core deposit intangibles will be amortized using the sum-of-the-years-digits method over ten years. Trust relationship intangible assets will be amortized using the sum-of-the-year-digits over twelve years.

 

                   Amortization Expense  
(dollars in millions)    Estimated
Fair
Value
     Useful Life
(years)
     Year ended
December 31, 2019
    Nine-month
period ended
September 30, 2020
 

Core deposit intangible

   $ 164        10      $ 30     $ 20  

Trust relationship intangible

     12        12        2       1  
  

 

 

       

 

 

   

 

 

 
   $ 176           32       21  

Historical amortization expense

           (12     (16
        

 

 

   

 

 

 

Pro forma net adjustment to amortization

         $ 20     $ 5  
        

 

 

   

 

 

 

Amortization for next five years

          

Remainder of 2020

   $ 7          

2021

     25          

2022

     22          

2023

     19          

2024

     16          


H.

Adjustment to reflect the merger-related transaction costs of $87 million.

 

I.

Adjustment to reflect Huntington’s committed contribution of $50 million to establish a new Huntington Donor Advised Fund at the Community Foundation for Southeast Michigan.

 

J.

Adjustment to income tax expense to record the income tax effects of pro forma adjustments at the estimated combined statutory federal and state rate at 22.4%.

 

K.

Adjustments to weighted-average shares of Huntington common stock outstanding to eliminate weighted-average shares of TCF common stock outstanding and record shares of Huntington common stock outstanding, calculated using an exchange ratio of 3.0028 per share for all shares.

Note 6. Potential Divestitures in Connection with the Merger

As part of the initial filing of the application to the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) on January 11, 2021, Huntington and TCF offered to divest TCF branches in four Michigan banking markets with deposits totaling approximately $375 million, based on Summary of Deposit levels reported as of June 30, 2020, to address potential competitive concerns. Because there can be no assurance that the divestiture proposal will be accepted or deemed sufficient by the Federal Reserve Board and the Antitrust Division of the Department of Justice (the “DOJ”), these divestitures are excluded from the unaudited pro forma condensed combined financial information.