UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
For the fiscal year ended December 31 , 2020
or
For the transition period from to
Commission File No. 000-08185
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address and Zip Code of principal executive offices)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☑ | Accelerated filer | ☐ | |||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | 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. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the close price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter as reported by The NASDAQ Stock Market, was approximately $4.3 billion.
As of February 19, 2021, there were 152,604,938 shares outstanding of the registrant's common stock, par value $1 per share, its only outstanding class of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Specific portions of the Registrant's definitive Proxy Statement for the 2021 Annual Meeting of Shareholders or of the Registrant’s amendment to the Annual Report on Form 10-K/A to be filed with the SEC not later than 120 days after December 31, 2020 are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
| Description | Page | |||||||
Part I
Item 1. Business
General
TCF Financial Corporation, formerly known as Chemical Financial Corporation, ("TCF") is a financial holding company incorporated in Michigan in 1973 and headquartered in Detroit, Michigan. We had total assets of $47.8 billion at December 31, 2020 and were the 31st largest publicly traded bank holding company in the United States based on total assets at December 31, 2020.
Through our wholly-owned bank subsidiary, TCF National Bank, a national banking association ("TCF Bank") with its main office in Sioux Falls, South Dakota, we provide 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. As of December 31, 2020, TCF had 478 branches primarily located in Michigan, Illinois and Minnesota, and with locations in Colorado, Ohio, Wisconsin and South Dakota (our "primary banking markets"). We also conduct business across all 50 states, Canada, New Zealand and Australia through our specialty lending and leasing businesses.
References herein to "TCF Financial" or the "Holding Company" refer to TCF Financial Corporation on an unconsolidated basis. TCF Financial Corporation (together with its direct and indirect subsidiaries), are referred to as "we," "us," "our," "TCF" or the "Corporation".
Proposed Merger with Huntington Bancshares Incorporated
TCF and Huntington Bancshares Incorporated ("Huntington") have entered into an Agreement and Plan of Merger, dated as of December 13, 2020, which we refer to as the "TCF/Huntington Merger Agreement". Under the TCF/Huntington Merger Agreement, TCF will merge with and into Huntington, with Huntington continuing as the surviving entity, in a transaction we refer to as "the TCF/Huntington Merger." Immediately following the TCF/Huntington Merger, TCF Bank will merge with and into Huntington's wholly owned banking subsidiary, The Huntington National Bank, with The Huntington National Bank as the surviving bank. The TCF/Huntington Merger Agreement was approved by the boards of directors of TCF and Huntington, and is subject to shareholder and regulatory approval and other customary closing conditions. The transaction is anticipated to close in the second quarter of 2021. The transaction is discussed in more detail in "Note 3. Business Combinations" of the Notes to Consolidated Financial Statements under Item 8 of this Annual Report.
Reportable Segments
Our reportable segments are Consumer Banking, Commercial Banking and Enterprise Services.
Consumer Banking Segment
Consumer Banking is comprised of all of our consumer and small business-facing businesses and includes Retail Banking, Wealth Management, Residential and Consumer Lending, and Business Banking. Our consumer banking strategy is primarily to generate deposits and originate high credit quality loans for investment and sale. Deposits are generated from consumers and small businesses to provide a source of low-cost funds, with a focus on building and maintaining quality customer relationships.
Retail Banking We offer an array of solutions for consumers and small businesses through our physical and digital distribution channels. We offer a broad selection of deposit and lending services including (i) checking and savings accounts, (ii) debit and credit cards, (iii) check cashing and remittance services and (iv) residential, consumer and small business lending.
Deposits are our primary source of funds for use in lending and for other general business purposes. Deposit inflows and outflows are significantly influenced by general interest rates, market and competitive conditions and other economic factors. We acquire deposits from within our primary banking markets through (i) checking, savings and money market accounts, (ii) certificates of deposit, and (iii) individual retirement accounts. Such deposit accounts provide fee income, including fees and service charges.
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At December 31, 2020, we had 478 branches, consisting of 373 traditional branches, 102 supermarket branches and three campus branches. We operate 219 branches in Michigan, 107 in Illinois, 80 in Minnesota, 32 in Colorado, 23 in Ohio, 16 in Wisconsin and one in South Dakota. We also offer 1,062 ATMs across our primary banking markets.
Providing a wide range of retail banking services is an integral component of our business philosophy. Primary drivers of our fees and service charges include the number of customers we attract, our customers' level of engagement and the frequency with which our customers use our solutions. Our business philosophy is to offer our customers an "easy-to-bank-with" experience, with multiple solutions that benefit the customer and are consistent with our business philosophy. Our customers have convenient access to funds through their credit and debit cards, as well as by utilizing our enhanced digital channels. Our card programs are supported by interchange fees paid by merchants.
Wealth Management Services offered through the Wealth Management department of TCF Bank include investment management and custodial services; trust services; financial and estate planning; and retirement planning and employee benefit programs. The Wealth Management department earns revenue largely from fees based on the market value of those assets under our management, which can fluctuate as the market fluctuates. Our Wealth Management department had assets under custodial and management arrangements of $4.3 billion at December 31, 2020. Through the Wealth Management department, we also sell investment products (largely annuity products and mutual funds) through the TCF Financial Advisors program. Customer assets within the TCF Financial Advisors program were $1.9 billion at December 31, 2020.
Residential and Consumer Lending We originate residential and other consumer loans for personal, family or household purposes, such as home purchases, debt consolidation and financing of home improvements. Our retail lending origination activity primarily consists of consumer real estate secured lending. It also includes originating loans secured by personal property and, to a limited extent, unsecured personal loans. Consumer loans are originated for investment and for sale, either on a fixed-term basis or as a revolving line of credit.
We also service loans for investors under contracts where we receive a fee for performing servicing activities on consumer loans that are not owned by us and are not included on our balance sheet. This process involves collecting monthly loan payments on behalf of investors, reporting information to those investors on a timely basis and maintaining custodial escrow accounts for remitting principal and interest payments to investors, and for paying property taxes and insurance premiums on behalf of borrowers.
Business Banking We offer small businesses, corporations and governmental entities various products and services, including loans and lines of credit, deposits, cash management, capital market products, international trade finance, letters of credit, foreign exchange management services and loan syndication services.
Commercial Banking Segment
Commercial Banking is comprised of commercial and industrial, commercial real estate banking and lease financing. Our commercial banking strategy focuses on building full-service commercial relationships including originating high credit quality loans and leases and providing deposit and treasury services.
Commercial and Industrial The commercial and industrial loans we originate are secured by various types of business assets including inventory, receivables, equipment or financial instruments, and may also be backed by personal guarantees of the owner or other sources of repayment. Commercial and industrial loans are used for a variety of purposes, including working capital and financing the purchase of equipment.
TCF Bank's wholly-owned subsidiary, TCF Inventory Finance, Inc. ("TCFIF") originates commercial, primarily variable-rate loans which are secured by the underlying floorplan equipment and supported by repurchase agreements from original equipment manufacturers. TCFIF focuses on establishing relationships with distributors, dealer buying groups and manufacturers, giving us access to thousands of independent retailers primarily in the areas of powersports equipment and lawn and garden equipment. TCFIF's portfolio balances are impacted by seasonal shipments and sales activities as dealers receive inventory shipments in anticipation of the upcoming selling season while carrying current season product. In 2009, TCFIF formed 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® brands with reliable, cost-effective sources of financing. We maintain a 55% ownership interest in Red Iron, with Toro owning the other 45%.
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Commercial Real Estate The commercial real estate loans we originate are primarily secured by multi-family housing, office buildings, health care facilities, warehouse and industrial buildings, hotel and motel buildings, self-storage buildings and retail services buildings. The commercial real estate portfolio represented 40.5% and 39.3% of our total commercial portfolio at December 31, 2020 and 2019, respectively.
Lease Financing TCF Capital Solutions, a division of TCF Bank, delivers comprehensive lease and equipment finance products addressing the diverse financing needs of small to large companies in a growing number of select market segments including specialty vehicles, construction equipment, golf cart and turf equipment, manufacturing equipment, medical equipment, trucks and trailers, furniture and fixtures, technology and data processing equipment, and agricultural equipment.
Enterprise Services
Enterprise Services is comprised of (i) corporate treasury, which includes our 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. Our investment portfolio accounts for the earning assets within this segment. Borrowings may be used to offset reductions in deposits or to support lending activities. This segment also includes residual revenues and expenses representing the difference between actual amounts incurred by Enterprise Services and amounts allocated to the operating segments, including interest rate risk residuals such as funds transfer pricing mismatches.
Corporate Treasury Corporate treasury's primary responsibility is management of our liquidity, capital, interest rate risk, and investment and borrowing portfolios. Corporate treasury has authority to invest in various types of liquid assets including, but not limited to, U.S. Department of the Treasury obligations and debt securities of various federal agencies and U.S. Government sponsored enterprises, obligations of states and political subdivisions, deposits of insured banks, bankers' acceptances and federal funds. Corporate treasury also has the authority to enter into wholesale borrowing transactions which may be used to compensate for reductions in deposit inflows or net deposit outflows, or to support lending, leasing and other expansion activities. These borrowings may include Federal Home Loan Bank ("FHLB") advances, brokered deposits, repurchase agreements, federal funds and other permitted borrowings from counterparties.
See "Item 7. Management's Discussion and Analysis - Consolidated Results of Operations Analysis - Reportable Segments" and "Note 27. Reportable Segments" of Notes to Consolidated Financial Statements for further information.
Other Information
Activities of Subsidiaries of TCF Our business operations include those conducted by direct and indirect subsidiaries of TCF Financial, all of which are consolidated for purposes of preparing our consolidated financial statements. TCF Bank's subsidiaries principally engage in inventory finance activities. See "Commercial Banking" above for further information.
Competition We compete with a number of depository institutions and financial service providers primarily based on price and service and we face significant competition in attracting and retaining deposits and in lending activities. Direct competition for deposits comes primarily from banks, savings institutions, credit unions and investment banks. Additional significant competition for deposits comes from institutions selling money market mutual funds and corporate and government securities. We compete for the origination of loans with banks, mortgage bankers, mortgage brokers, consumer and commercial finance companies, credit unions, insurance companies and savings institutions. We also compete nationwide with other companies and banks in the financing of equipment and inventory, leasing of equipment and origination of residential mortgage loans. The growth of financial technology companies, disintermediation and lowered barriers to entry through technology have increased competition for loan, lease and deposit products as non-banks now offer products and services traditionally provided by banks.
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Human Capital Resources and Management As of December 31, 2020, we had 7,123 employees, including 580 part-time employees. We are a purpose-driven organization dedicated to championing our customers and building stronger individuals, businesses, and communities. We deliver on this mission first by putting our values into practice. Our core beliefs guide our daily interactions with customers and between team members. They are:
•Care Like a Neighbor We are passionate about people. Treating our customers and team members with respect, care, and generosity has always — and will always — define our bank. We demonstrate our commitment through small acts and big gestures.
•Take Initiative on all Fronts We are motivated by our entrepreneurial spirit. We value technology and actively implement features that will make our customers’ lives easier and internal processes more efficient.
•Strive for Excellence Every day we show up to work and give it our all. Integrity, honesty, and fairness are the foundations of who we are. They enable us to deliver what our customers and team members need when they need it.
•Win as a Team Our greatest power is collaboration. To create exceptional solutions, we lean on one another’s strengths and lean-in to diversity of all kinds. We value all perspectives because it makes us a stronger, more unified team.
We believe that by investing in our team member experience and thoughtfully developing our culture, we simultaneously invest in our customers and shareholders and increase the long-term value of our business. 2020 was a year of change and integration for TCF following our 2019 merger of equals. We integrated and enhanced our human capital management programs that drive positive team member experience, shape our culture, and enhance our employee value proposition to attract and retain highly engaged team members who put our values into action, while caring for team members who were impacted by an unexpected pandemic, historic flooding in our Midland, Michigan area, and the destruction of banking center properties during civil unrest.
Compensation and Benefits
We provide our employees with comprehensive benefits, some of which are provided on a contributory basis, including medical and dental plans, a 401(k) savings plan with a company matching contribution, life insurance and short- and long-term disability coverage. To compete for increasingly mobile banking center talent and to improve the financial well-being of team members, we implemented a $15 per hour minimum wage for all team members in the fourth quarter of 2020. Additionally, we maintained full wage payments through “emergency pay” to banking center team members when they were not able to work due to pandemic-related banking center closures and we provided extra “premium pay” to team members who staffed banking centers in-person during the height of the pandemic.
Health and Well-being
We made several enhancements to benefits and health and well-being programs in 2020, both prior to the pandemic and in response to it. We implemented a flexible Paid Time Off program for a large portion of our professional workforce, under which time off usage is self-directed and not centrally monitored except in states where required. We found that the majority of team members were not generally using their full PTO allotments, and decided to trust managers and team members to locally manage PTO usage to alleviate burnout and enhance productivity. We adopted a market-forward, gender-neutral parental leave program to improve work/home balance for new parents regardless of their family circumstance. We also provided team members with new home fitness and childcare and educational support resources to help them cope with the stressors created by the pandemic and working from home.
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Culture
We made significant progress towards integrating cultures following the TCF/Chemical Merger. This work began with articulating our purpose and beliefs in the beginning of the year, a process that included listening to and gathering feedback from diverse stakeholders across all levels of jobs in the organization. We conducted regular pulse surveys and “journey mapping” sessions to gauge employee attitudes towards human capital management endeavors, including return-to-work and COVID-19 vaccination strategies. We also established eight employee resource groups to provide a forum through which team members of similar backgrounds and life circumstances, or team members wishing to learn more about others’ experiences, could engage with each other and with external thought leaders. As the country was coming to terms with racial injustice, we ensured that our team members’ voices were heard. We also hosted a panel discussion for all team members, consisting of notable academics, community and religious leaders and the Michigan State Police Commissioner, to discuss racial injustice, and made our executive leaders available during "office hours" for team members to share their perspective. When Midland area flooding unexpectedly displaced team members from their homes, we provided economic and temporary housing support.
Talent Management
In 2020, we expanded our recruiting presence and collaboration with targeted universities to include historically black colleges and universities, and continued to strengthen an innovative intern program to attract high-quality talent from a diverse array of communities and to ensure equality and fairness of representation in our candidate pool. We introduced a new set of “leadership behaviors” and coached team members to better understand the types of actions and behaviors that promote our Purpose and Beliefs. We implemented a talent assessment and calibration process to focus on the growth and development of our leadership pipeline and developed resources to support our diversity initiatives. We also introduced a workforce analytics function to measure talent retention effectiveness, team member engagement, and diversity, equity, and inclusion progress.
Transitional Support
With a robust history of merger activity and a track-record of meeting financial synergy targets and shareholder commitments, we know well how disruptive job loss or job change is to displaced team members. We invest generously in our displaced team members to ease their transition and facilitate better future business and customer connections. Every team member is treated with respect as a member of the TCF community through their termination date and beyond. Displaced team members are offered competitive severance packages, outplacement support services and COBRA subsidies.
Supervision and Regulation
As a financial institution, we operate in a highly regulated environment. The regulatory framework under which we operate is intended primarily for the protection of depositors and the Federal Deposit Insurance Corporation’s (the “FDIC’s”) Deposit Insurance Fund and not for the protection of our shareholders and creditors. The following is a general summary of the material aspects of certain statutes and regulations applicable to us. These summary descriptions are not complete, and you should refer to the full text of the statutes, regulations, and corresponding guidance for more information. These statutes and regulations are subject to change, and additional statutes, regulations, and corresponding guidance may be adopted. We are unable to predict these future changes or the effects, if any, that these changes could have on our business, revenues, and results of operations.
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Examinations and Regulatory Sanctions TCF Financial is a financial holding company registered under the Bank Holding Company Act of 1956 (the “BHC Act”) and is subject to supervision and regulation by the Federal Reserve. Federal laws subject financial holding companies to restrictions on the types of activities in which they may engage and to a range of supervisory requirements and activities, including regulatory enforcement actions, for violation of laws and policies. TCF Financial is required to file annual and quarterly reports with the Federal Reserve and such additional information as the Federal Reserve may require pursuant to the BHC Act. The Federal Reserve may examine a bank holding company or any of its subsidiaries and charge the company for the cost of such an examination. TCF Bank is a national banking association, which is subject to primary regulation and supervision by the Office of the Comptroller of the Currency ("OCC") and the Consumer Financial Protection Bureau (“CFPB”) for many consumer-related laws and regulations, and secondarily by the Federal Reserve and the FDIC. Both the OCC and CFPB regularly examine TCF Bank. The FDIC may also periodically examine and evaluate insured banks. TCF Bank is subject to requirements and restrictions under federal law, including capital requirements restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of TCF Bank.
Federal banking regulators may impose a number of restrictions or new requirements on institutions, including, but not limited to, growth limitations, dividend restrictions, increased regulatory capital requirements, increased loan and lease loss reserve requirements, increased supervisory assessments, activity limitations or other restrictions that could have an adverse effect on such institutions, their holding companies or holders of their debt and equity securities. Various enforcement remedies, including civil money penalties, may be assessed against an institution or an institution's directors, officers, employees, agents or independent contractors. Certain enforcement actions may not be publicly disclosed by us or our federal banking regulators. Subsidiaries of TCF Bank are also subject to state and/or self-regulatory organization licensing, regulation and examination requirements in connection with certain activities.
Regulatory Capital Requirements TCF Financial and TCF Bank are subject to various minimum regulatory capital requirements administered by the Federal Reserve and the OCC. These requirements include quantitative measures that assign risk weightings to assets and off-balance sheet items, as well as define and set minimum regulatory capital requirements. Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by the federal banking regulators that, if undertaken, could have a material adverse effect on our financial condition and results of operations.
The Basel III capital standards impose minimum capital requirements for bank holding companies and banks. The rules apply to all national and state banks and savings associations regardless of size and bank holding companies and savings and loan holding companies with more than $3 billion in total consolidated assets. More stringent requirements are imposed on “advanced approaches” banking organizations which are organizations with $250 billion or more in total consolidated assets, $10 billion or more in total foreign exposures, or that have opted into the Basel III capital regime. In addition, in order to avoid restrictions on capital distributions or discretionary bonus payments to executives, under Basel III, a banking organization must maintain a “capital conservation buffer” on top of its minimum risk-based capital requirements. This buffer must consist solely of common equity Tier 1 capital, but the buffer applies to all three risk-based measurements (common equity Tier 1 capital, Tier 1 capital and total capital). The 2.5% capital conservation buffer was phased in incrementally over time, and became fully effective for us on January 1, 2019, resulting in the following effective minimum capital plus capital conservation buffer ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. TCF Financial and TCF Bank made the one-time permanent election permitted under the Basel III capital standards to not include accumulated other comprehensive income (loss) in regulatory capital. TCF Financial and TCF Bank exceeded the Basel III capital standard at December 31, 2020. See "Note 18. Regulatory Capital Requirements" of the Notes to Consolidated Financial Statements for further information.
In addition to the capital rules applicable to both banks and bank holding companies discussed above, under the prompt corrective action regulations, the federal bank regulators are required and authorized to take supervisory actions against undercapitalized banks. For this purpose, a bank is placed in one of five categories based on the bank’s capital: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Currently, the quantitative requirements for being well-capitalized are (at least 5% leverage capital, 6.5% common equity Tier 1 capital, 8% Tier 1 capital and 10% total capital). TCF Bank was considered well-capitalized at December 31, 2020.
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On December 21, 2018, the federal banking agencies issued a joint final rule to revise their regulatory capital rules to (i) address the upcoming implementation of a new credit impairment model, the Current Expected Credit Loss, or CECL model, an accounting standard under GAAP; (ii) provide an optional three-year phase-in period for the day-one adverse regulatory capital effects that banking organizations were expected to experience upon adopting CECL; and (iii) require the use of CECL in stress tests beginning with the 2020 capital planning and stress testing cycle for certain banking organizations that are subject to stress testing. In response to the COVID-19 pandemic, the federal banking agencies published a final rule in 2020 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, for two years, followed by a three-year phase-in period. We elected the 5-year transition period consistent with the final rule issued by the federal banking agencies. See "Note 2. Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements for further information.
In addition to the capital rules applicable to both banks and bank holding companies discussed above, under the prompt corrective action regulations, the federal bank regulators are required and authorized to take supervisory actions against undercapitalized banks. For this purpose, a bank is placed in one of five categories based on the bank’s capital: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Currently, the quantitative requirements for being well-capitalized are (at least 5% leverage capital, 6.5% common equity Tier 1 capital, 8% Tier 1 capital and 10% total capital). TCF Bank was considered well-capitalized at December 31, 2020.
Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, banking regulators must appoint a receiver or conservator for an institution that is “critically undercapitalized.” The federal banking agencies have specified by regulation the relevant capital level for each category. An institution that is categorized as “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized” is required to submit an acceptable capital restoration plan to its appropriate federal banking agency, which, for TCF Bank, is the OCC. Failure to meet capital guidelines could subject TCF Bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting brokered deposits and other restrictions on our business.
Restrictions on Distributions TCF Financial's ability to pay dividends is subject to limitations imposed by the Federal Reserve. In general, Federal Reserve regulatory guidelines require the board of directors of a bank holding company to consider a number of factors in determining the payment of dividends, including the quality and level of current and future earnings. See "Note 17. Equity" of Notes to Consolidated Financial Statements for further information on restricted retained earnings.
Dividends or other capital distributions from TCF Bank to TCF Financial are the primary source of funds to enable TCF Financial to pay dividends on its preferred and common stock, to pay TCF Financial's obligations, to repurchase common stock or to meet other cash needs. The ability of TCF Financial and TCF Bank to pay dividends depends on regulatory policies and regulatory capital requirements and may be subject to regulatory approval. TCF Financial and TCF Bank must also maintain the common equity Tier 1 capital conservation buffer of 2.5% to avoid becoming subject to restrictions on capital distributions (as discussed above).
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 without prior approval of 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 the OCC. 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. See "Note 18. Regulatory Capital Requirements" of Notes to Consolidated Financial Statements for further information.
Restricted retained earnings represent 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. In addition, income tax considerations may limit the ability of TCF Bank to make dividend payments in excess of its current and accumulated tax earnings. Annual dividend distributions in excess of earnings could result in a tax liability based on the amount of excess earnings distributed and current tax rates.
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Regulation of TCF and Affiliates and Insider Transactions TCF Financial is subject to Federal Reserve regulations, examinations and reporting requirements applicable to bank holding companies. Subsidiaries of bank holding companies, like TCF Bank, are subject to certain restrictions in their dealings with holding company affiliates.
Source of Strength A holding company must serve as a source of strength for its subsidiary banks and the Federal Reserve may require a holding company to contribute additional capital to an undercapitalized subsidiary bank. In addition, the OCC may assess TCF Financial if it believes the capital of TCF Bank has become impaired. If TCF Financial were to fail to pay such an assessment within three months, the Board of Directors would be required to cause the sale of TCF Bank's stock to cover a deficiency in the capital. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal banking regulator to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and may be entitled to priority over other creditors.
Restrictions on Acquisitions and Changes in Control Under federal and state law, merger and branch acquisition transactions may be subject to certain restrictions, including certain nationwide and statewide insured deposit maximum concentration levels or other limitations. In addition, federal and state laws and regulations contain a number of provisions which impose restrictions on changes in control of financial institutions such as TCF Financial or TCF Bank and which require regulatory approval prior to any such changes in control.
Under the BHA Act, Federal Reserve approval is required before acquiring more than 5% control, or substantially all of the assets, of another bank or bank holding company, or merging or consolidating with such a bank or bank holding company. The BHCA also generally prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, providing services for its subsidiaries or conducting activities permitted by the Federal Reserve as being closely related to the business of banking. Further restrictions or limitations on acquisitions or establishing financial subsidiaries may also be imposed by our regulators or examiners.
Insurance of Accounts TCF Bank is a member of the FDIC, which maintains the Deposit Insurance Fund (the "DIF"). The FDIC insures deposits up to prescribed limits for each depositor through the DIF, which is funded through assessments on member institutions. To maintain the DIF, member institutions are assessed an insurance premium based on an assessment base and an assessment rate.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") gave the FDIC much greater discretion to manage the DIF and also changed the assessment base from domestic deposits to average total assets less tangible equity. Additionally, the Dodd-Frank Act raised the minimum designated reserve ratio (the "DRR") to 1.35% of estimated insured deposits from 1.15% and required this new minimum be reached by September 30, 2020. After having reached 1.35% percent, if the reserve ratio falls below 1.35%, or if the FDIC projects that the reserve ratio will, within 6 months, fall below 1.35%, the FDIC must adopt a restoration plan that provides that the DIF will return to 1.35% within 8 years (or longer if the FDIC finds it necessary due to extraordinary circumstances) which can include a surcharge assessment. As of September 30, 2018, the DIF reserve ratio was 1.36%. Subsequently, the reserve ratio fell to 1.30% as a result of the unprecedented inflow of more than $1 trillion in estimated insured deposits in the first half of 2020. The DIF ratio calculated by the FDIC using estimated insured deposits as of September 30, 2020 was 1.30%. On September 15, 2020, the FDIC adopted a restoration plan, but did not adopt a surcharge as part of the plan. The FDIC stated that the DIF would return to 1.35% without further action by the FDIC during the eight-year period based on a range of reasonable estimates of future losses and assuming a return to normal insured deposit growth rates.
In 2020, insurance premiums on bank deposits insured by the FDIC for banks with at least $10.0 billion in total assets ranged from 1.5 cents to 40 cents per $100 of the institution's assessment base. Our FDIC insurance expense was $23.9 million, $18.3 million and $15.1 million in 2020, 2019 and 2018, respectively.
In addition to deposit insurance premium assessments from the FDIC, additional assessments may be imposed by the Financing Corporation, a separate U.S. government agency affiliated with the FDIC, to pay for the interest cost of Financing Corporation bonds. The final collection for this assessment was on March 29, 2019.
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Community Reinvestment Act TCF Bank is subject to certain requirements and reporting obligations under the Community Reinvestment Act (“CRA”), which requires federal banking regulators to evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate- income neighborhoods. The CRA further requires these criteria to be considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on TCF Bank. Additionally, financial institutions must publicly disclose the terms of various CRA‑related agreements. In its most recent CRA examination, TCF Bank received an “outstanding” rating.
In December 2019, the FDIC and the OCC proposed changes to the regulations implementing the CRA, which, if adopted will result in changes to the current CRA framework. On May 20, 2020, the OCC issued its final rule. The rule was effective October 1, 2020, but TCF Bank will have until January 1, 2023 before it would be evaluated using the new performance standards and tests, and any examination conducted before that date would use the prior performance standards and tests. The OCC stated that the revisions will benefit communities, businesses and banks by: (i) clarifying what qualifies for CRA consideration; (ii) updating how banks define assessment areas; (iii) evaluating bank CRA performance more objectively through quantitative measures; (iv) making reporting more transparent and timelier; (v) providing greater support for small business, small and family-owned farms, and Indian Country; and (vi) thoroughly evaluating banks' CRA performance in all their assessment areas, not just a limited evaluation in some of them. The FDIC has not adopted a final rule and the Federal Reserve Board issued an advance notice of proposed rulemaking on September 21, 2020.
CFPB Examination The Dodd-Frank Act created the CFPB, which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, such as TCF Bank. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products.
The CFPB has issued a number of regulations related to the origination of mortgages, foreclosures, and overdrafts as well as many other consumer issues. Additionally, the CFPB has proposed, or may propose, additional regulations or modify existing regulations that directly relate to our business. Although it is difficult to predict at this time the extent to which the CFPB’s proposed and yet to be proposed regulations impact the operations and financial condition of the TCF Bank, such rules may have a material impact on our compliance costs, compliance risk and fee income.
Anti-Money Laundering As a financial institution, TCF Bank must maintain anti‑money laundering programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Financial institutions are also prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and “knowing your customer” in their dealings with foreign financial institutions, foreign customers and other high-risk customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions, and recent laws provide law enforcement authorities with increased access to financial information maintained by banks. Anti‑money laundering obligations have been substantially strengthened as a result of the USA PATRIOT Act (the “Patriot Act”), as described below. Bank regulators routinely examine institutions for compliance with these obligations, and this area has become a particular focus of the regulators in recent years. In addition, the regulators are required to consider compliance in connection with the regulatory review of applications. The regulatory authorities have been active in imposing “cease and desist” orders and money penalty sanctions against institutions found to be violating these obligations.
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USA Patriot Act The Patriot Act became effective on October 26, 2001 and amended the Bank Secrecy Act. The Patriot Act provides, in part, for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering by enhancing anti‑money laundering and financial transparency laws, as well as enhanced information collection tools and enforcement mechanics for the U.S. government, including:
•requiring standards for verifying customer identification at account opening;
◦rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering;
◦reports by nonfinancial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and
◦filing suspicious activities reports by brokers and dealers if they believe a customer may be violating U.S. laws and regulations.
The Patriot Act requires financial institutions to undertake enhanced due diligence of private bank accounts or correspondent accounts for non‑U.S. persons that they administer, maintain, or manage. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.
Under the Patriot Act, the Financial Crimes Enforcement Network (“FinCEN”) can send TCF Bank a list of the names of persons suspected of involvement in terrorist activities or money laundering. TCF Bank may be requested to search its records for any relationships or transactions with persons on the list. If TCF Bank finds any relationships or transactions, it must report those relationships or transactions to FinCEN.
Consumer Protection Regulations Interest and other charges that TCF Bank collects or contracts for are subject to state usury laws and federal laws concerning interest rates. TCF Bank’s loan operations also are subject to federal laws applicable to credit transactions, such as:
◦the Truth in Lending Act, governing disclosures of credit terms to consumer borrowers;
◦the Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
◦the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
◦the Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
◦the Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by collection agencies; and
◦the rules and regulations of the various governmental agencies charged with the responsibility of implementing these federal laws.
In addition, TCF Bank’s deposit operations are subject to the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of ATMs and other electronic banking services.
National Bank Investment Limitations Permissible investments by national banks are limited by the National Bank Act of 1864, as amended, and by rules of the OCC. Non-traditional bank activities permitted by the Gramm-Leach-Bliley Act of 1999 will subject a bank to additional regulatory limitations or requirements, including a required regulatory capital deduction and application of transactions with affiliates limitations in connection with such activities.
Taxation
Federal Taxation Our federal income tax returns are open and subject to examination for 2017 and later tax return years.
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State Taxation TCF and/or its subsidiaries currently file tax returns in all state and local taxing jurisdictions which impose corporate income, franchise or other taxes. Our various state income tax returns are generally open for 2016 and later tax return years based on individual state statutes of limitation. The methods of filing and the methods for calculating taxable and apportionable income vary depending on the laws of each taxing jurisdiction.
Foreign Taxation TCF and/or its subsidiaries currently file tax returns in Australia, New Zealand, Canada and certain Canadian provinces. Our various foreign tax returns are open and subject to examination for 2016 and later tax return years. The methods of filing and the methods for calculating taxable and apportionable income vary depending on the laws of each taxing jurisdiction.
See "Item 7. Management's Discussion and Analysis - Consolidated Results of Operations Analysis - Income Taxes", "Note 2. Summary of Significant Accounting Policies" and "Note 26. Income Taxes" of Notes to Consolidated Financial Statements for further information regarding TCF's income taxes.
Available Information
Our website, www.tcfbank.com, includes free access to our news releases, investor presentations, conference calls to discuss published financial results, our Annual Report and periodic filings required by the U.S. Securities and Exchange Commission (the "SEC"), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and amendments to those reports, as soon as reasonably practicable after electronic filing of such material with, or furnishing it to, the SEC. Our periodic filings required by the SEC are also available on the SEC's website, www.sec.gov. Our Compensation and Pension Committee, Corporate Governance, Nominating and ESG Committee and Audit Committee charters, Corporate Governance and Director Standards, Codes of Ethics and information on all of our securities are also available on our website. Shareholders may request these documents in print free of charge by contacting the Corporate Secretary at TCF Financial Corporation, 333 West Fort Street, Suite 1800, Detroit, MI 48226.
Item 1B. Unresolved Staff Comments
None.
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Item 1A. Risk Factors.
There are risks, many beyond our control, which could cause our results to differ significantly from management’s expectations. Some of these significant risks and uncertainties are described below. Any factor described in this Annual Report on Form 10-K could, by itself or together with one or more other factors, adversely affect our business, results of operations and/or financial condition, and the market price of our common stock could decline significantly. Additional risks and uncertainties not currently known to us or that we currently consider to not be material also may materially and adversely affect us. In assessing these risks, you should also refer to other information disclosed in our SEC filings, including the financial statements and notes thereto. The risks discussed below also include forward-looking statements, and actual results may differ substantially from those discussed or implied in these forward-looking statements.
Credit Risks
If we fail to effectively manage credit risk, our business and financial condition will suffer.
We must effectively manage credit risk. As a lender, we are exposed to the risk that our borrowers will be unable to repay their loans according to their terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan, including risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers, including the risk that a borrower may not provide information to us about its business in a timely manner, and/or may present inaccurate or incomplete information to us, and risks relating to the value of collateral. Collateral values are adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, terrorist activity, environmental contamination and other external events. In order to manage credit risk successfully, we must, among other things, maintain disciplined and prudent underwriting standards and ensure that our lenders follow those standards. The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans, the inability of our employees to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we significantly increase our allowance for loan losses, each of which could adversely affect our net income. As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial condition or results of operations.
Our allowance for loan and lease losses, and fair value adjustments with respect to loans and leases acquired in our acquisitions, may prove to be insufficient to absorb actual losses in our loan and lease portfolio, which may adversely affect our business, financial condition and results of operations.
We maintain an allowance for loan and lease losses, which is a reserve established through a provision for loan and lease losses charged to net income that represents management's estimate of expected losses over the life of the existing loan and lease portfolio. The level of the allowance for loan and lease losses reflects management's continuing evaluation of specific credit risks, loan and lease loss experience, current loan portfolio quality, the value of real estate, economic forecasts, political and regulatory conditions and unidentified losses inherent in the current loan and lease portfolio. The determination of the appropriate level of the allowance for loan and lease losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Deterioration in economic forecasted conditions and declines in real estate values, new information regarding existing loans and leases, and identification of additional problem loans and other factors, all may require an increase in the allowance for loan and lease losses.
The application of the purchase method of accounting to loans and leases acquired via acquisitions will impact our allowance for loan and lease losses. Under the purchase method of accounting, all acquired loans and leases are recorded in our Consolidated Financial Statements at their estimated fair value at the time of acquisition, and any related allowance for loan and lease loss is eliminated. Credit quality, among other factors, is considered in the determination of the fair value of loans and leases acquired. Subsequent to acquisition an allowance is recorded on the new amortized cost basis, based on the expected credit losses on the acquired loans and leases. To the extent that our estimates of fair value of acquired loans and leases were too high, or the allowance based on estimates of future expected credit losses is too low, we will incur losses associated with the acquired loans and leases.
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If our analysis or assumptions prove to be incorrect, our current allowance may not be sufficient, and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan and lease portfolio. Material additions to the allowance for loan and lease losses would materially decrease our net income and adversely affect our general financial condition.
In addition, our regulators review our allowance for loan and lease losses as part of their periodic examinations, and may require an increase in the allowance for loan and lease losses or the recognition of further loan charge-offs, based on judgments and assumptions different than those of management.
Market Risks
We continue to face risks and uncertainties related to the outbreak of COVID-19.
Our operations and profitability are impacted by business and economic conditions generally, as well as those in the primary banking markets in which we operate. The COVID-19 pandemic first declared in March 2020 by the World Health Organization resulted in historic job losses and decreases in economic activity, which have improved, but have not returned to pre-pandemic levels. Although we have taken steps such as offering loan deferrals to attempt to mitigate the adverse consequences to our businesses, these steps may not be sufficient, and the effects of the pandemic may impact the ability of individuals and businesses to make payments, the value of underlying collateral, and the ability of guarantors to make payments in the case of default, and may reduce our ability to access capital, subject us to increased liability, and otherwise adversely impact the financial condition, results of operations, prospects of our businesses and our credit ratings. While the United States and various state and local governments have implemented various programs designed to aid individuals and businesses, the duration of such programs and the impact of, and extent to which these efforts will be successful, remain uncertain.
Many of our customers and counterparties have been and may continue to be adversely impacted by the COVID-19 pandemic and resulting economic downturn. As a result, we have faced and may continue to face a decrease in demand for certain products, and disruptions in the operations of our branch network and our vendors. The pandemic could also result in the recognition of additional credit losses in our loan and lease portfolios and increase our allowance for credit losses as both businesses and consumers are negatively impacted by the economic downturn. Additionally, customers that continue to work remotely and may not have appropriately secured remote networks may be more vulnerable to cyber-attacks or phishing schemes. Any of these occurrences could have a material adverse effect on our financial condition, results of operations and prospects. The extent to which the pandemic impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning its severity and the actions necessary to contain it or address its impact, among others. Although certain pharmaceutical companies have received emergency approval for and released vaccines, the pace of distribution and administration of the vaccine has been uneven and slower than anticipated, and the duration of COVID-related impact on economic activity and customer behavior continue to be unknown and may not be temporary.
In addition, the COVID-19 outbreak has caused, and will continue to cause, substantial disruption to our employees as a result of illness, increased family responsibilities, self-isolation, travel limitations, and otherwise. Most areas within the United States have imposed business and other restrictions, and the duration of such restrictions remains uncertain. These restrictions have affected many of our customers and businesses through which we sell our products and services, and the increased reliance on remote work may result in increased vulnerabilities through heavy dependence on remote networks.
Any of the foregoing factors, or other cascading effects of the COVID-19 pandemic that are not currently known, could materially impact our team members and decrease our ability to serve customers, increase our costs, negatively impact our sales and adversely affect our results of operations and our liquidity position, possibly to a significant degree.
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Our financial results are significantly affected by general economic and political conditions.
Our operations and profitability are impacted by both business and economic conditions generally, as well as those in the primary banking markets in which we operate. Economic conditions have a significant impact on the demand for our products and services, as well as the ability of our customers to repay loans and leases, the value of the collateral securing loans and leases, our ability to sell loans and leases, the stability of our deposit funding sources and sales revenue at the end of contractual lease terms. A significant decline in general economic conditions caused by inflation, recession, unemployment, changes in debt securities markets, government shutdowns, defaults, anticipated defaults or rating agency downgrades of sovereign debt (including debt of the U.S.), changes in housing market prices, depressed oil prices, trade disputes and related tariffs or other factors could impact economic conditions or may have a destabilizing effect on the financial markets and, in turn, could have a material adverse effect on our financial condition and results of operations.
For example, tariffs or other trade restrictions on products and materials that our customers import or export could cause the prices of our customers’ products to increase which could reduce demand for such products, or reduce their margins and revenue, financial results and ability to service debt; which, in turn, could adversely affect our financial condition and results of operations. It remains unclear what the U.S. Administration or foreign governments will or will not do with respect to tariffs already imposed, additional tariffs that may be imposed, or international trade agreements and policies. In addition, coronavirus and concerns regarding the extent to which it may spread have affected, and may increasingly affect, international trade (including supply chains and export levels), travel, employee productivity and other economic activities.
Additionally, adverse economic conditions may result in a decline in demand for equipment that we lease or finance, which could result in a decline in the amount of new equipment being placed in service, as well as declines in the values of collateral already in service. Adverse economic conditions and supply chain disruptions may also impact the ability of dealers to obtain product from manufacturers, resulting in decreased borrowing needs. Any such difficulties could have a material adverse effect on our financial condition and results of operations.
Our financial results are subject to interest rate risk.
Our earnings and cash flows largely depend on our net interest income. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, including the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence the amount of interest we receive on loans, leases and other investments and the amount of interest we pay on deposits and other borrowings, as well as: (i) our ability to originate loans and leases and attract or retain deposits; (ii) the fair value of our financial assets and liabilities and (iii) the average life of our interest-earning assets. A significant portion of our loans, including certain consumer, commercial real estate and commercial and industrial loans, bear interest at variable- and adjustable-rates. Increases in market interest rates can have a negative impact on our business, including reducing the amount of money our customers borrow or adversely impacting their ability to make increased payments caused by any increase in interest rates. In addition, as interest rates increase, in order to compete for deposits in our primary banking markets, we may have to offer higher interest rates to depositors, or pursue other sources of liquidity, such as wholesale funding. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans, leases and other investments, our net interest income and earnings could be adversely affected due to the increase in interest expense without a corresponding increase in interest income. Earnings could also be adversely affected if the interest rates received on loans, leases and other investments decrease more quickly than the interest rates paid on deposits and other borrowings. In addition, we have an investment security portfolio that could decline substantially in value if interest rates increase materially or if obligations of states and political subdivisions become subject to less favorable tax treatment. Although management believes it has implemented effective asset and liability management strategies, any substantial, unexpected or prolonged change in market interest rates could have a material adverse effect on our financial condition and results of operations.
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We are subject to certain risks related to originating and selling loans that could have a material adverse effect on our financial condition and results of operations.
We sell loans to generate earnings and manage our liquidity and capital levels, as well as to create geographical and product diversity in our loan portfolio. Disruptions in the financial markets, a decrease in demand for these loans, or changes to laws or regulations that reduce the attractiveness of such loans to purchasers of the loans could require us to decrease our lending activities or retain a greater portion of the loans we originate. Selling fewer loans would result in a decrease in the gains recognized on the sale of loans, could increase our capital needs as a result of the increased assets, and result in decreased liquidity and increased credit risk as our loan portfolios increased in size, any of which could have a material adverse effect on our financial condition and results of operations.
The structure of certain loan sales may result in the retention of credit or financial risks. We may receive interest-only strips or retain loan servicing rights in connection with certain of our loan sales. The interest-only strip is recorded at fair value, which represents the present value of future cash flows expected to be received by us. The value of these interest-only strips may be affected by factors such as changes in the behavior patterns of customers (including defaults and prepayments), changes in the strength of the economy and developments in the interest rate markets; therefore, actual performance may differ from our expectations. Loan servicing rights, the right to service a loan and receive servicing income over the life of the loan, are recognized as assets or liabilities at estimated fair value. The value of loan servicing rights is affected by prepayment speeds of mortgage loans and changes; therefore, actual performance may differ from our expectations. The impact of such factors could have a material adverse effect on the value of these interest-only strips and loan servicing rights and on our financial condition and results of operations.
When loans are sold or securitized, it is customary to make representations, warranties and covenants to the purchaser or investors about the loans, including the manner in which they were originated and will be serviced. 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 defects affecting the security interest in the collateral. We have not been obligated to make significant repurchases of sold loans in the past. A material increase in the amount of loans repurchased could have a material adverse effect on our financial condition and results of operations.
Some of our loan sales involve long-term residential mortgage loans. Purchasers of residential mortgage loans, such as government sponsored entities, require sellers of residential mortgage loans to either repurchase loans previously sold or reimburse purchasers for losses related to loans previously sold when losses are incurred on a loan due to actual or alleged failure to strictly conform to the purchaser's purchase criteria. As a result, we may face increased pressure from purchasers of our residential mortgage loans to repurchase those loans or reimburse purchasers for losses related to those loans and we may face increasing expenses to defend against such claims. If we are required in the future to repurchase loans, reimburse purchasers of loans for losses related to them, or if we incur increasing expenses to defend against such claims, our financial condition and results of operations could be adversely affected.
We operate in a highly competitive industry and market areas.
We face substantial competition in all areas of our operations from a variety of different competitors, both within and beyond our primary banking markets, many of which are larger and may have more financial resources than us. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, other financial service businesses, including investment advisory and wealth management firms, mutual fund companies, and securities brokerage and investment banking firms, as well as super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. In addition, as customers' preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for banks to expand their geographic reach by providing services over the Internet and for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. For example, consumers can now pay bills and transfer funds directly without banks, resulting in the loss of fee income, the loss of customer deposits and income generated from those deposits and lending opportunities.
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We compete with these institutions both in attracting deposits and assets under management, and in making new loans. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can. To compete with these institutions, we may have to pay higher interest rates to attract deposits, accept lower yields on loans to attract loans and pay higher wages for new employees, resulting in lower net interest margin and reduced profitability. In addition, the loss of deposits to competitors may require us to address our liquidity needs in ways that increase our funding costs.
Our ability to compete successfully also depends on a number of other factors, including, among other things: our ability to develop, maintain and build long-term customer relationships based on quality service, high ethical standards and safe, sound assets; customer satisfaction with our service; and the ability to expand our market position. Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability and have a material adverse effect on our financial condition and results of operations.
Failure to keep pace with technological changes could adversely affect our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology‑driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Implementation of new technology may, if not properly executed, result in service interruptions, errors, and delays which could damage our reputation and lead to the loss of customer relationships.
Although we are committed to keeping pace with technological advances and investing in new technology, our competitors, many of which have greater resources than we do, may be able to offer additional or superior products to those that we will be able to provide, which would put us at a competitive disadvantage. Failure to successfully keep pace with and implement technological changes could have a material adverse effect on our business, financial condition, results of operations and future prospects.
Our earnings are significantly affected by the fiscal and monetary policies of the federal government and its agencies, as well as other legal changes affecting businesses and consumers.
The policies of the Federal Reserve impact us significantly. The Federal Reserve regulates the supply of money and credit in the U.S. Its policies directly and indirectly influence the rate of interest earned on loans and leases and paid on borrowings and interest-bearing deposits, and also affect the value of financial instruments that we hold. Changes in those policies are difficult to predict. In addition, legal changes affecting consumers and businesses, including the deductibility or other tax attributes associated with certain products, may significantly decrease the demand for certain products that we offer. Any changes to the fiscal and monetary policies, including those by the Federal Reserve or the federal government, could have a material adverse effect on our financial condition and results of operations.
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Uncertainty relating to the London Inter-bank Offered Rate, or LIBOR, calculation process and potential phasing out of LIBOR may adversely affect us.
On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR until the official cessation of publication of LIBOR rates. The Federal Reserve System, in conjunction with the Alternative Reference Rates Committee, has recommended the replacement of LIBOR with a new index, calculated by short-term repurchase agreements collateralized by U.S. Treasury securities, called the Secured Overnight Financing Rate (“SOFR”). At this time, it is impossible to predict the effect of transition from LIBOR on the value of LIBOR-based securities and variable rate loans, or other securities or financial arrangements. If LIBOR rates are no longer available, and we are required to implement a substitute index for the calculation of interest rates under our loan agreements with our borrowers, we may experience significant expenses in effecting the transition, and may be subject to disputes or litigation with customers and creditors over the appropriateness or comparability to LIBOR of the substitute index, which could have an adverse effect on our results of operations.
Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses and could have a material adverse effect on our business, financial condition and results of operations.
Liquidity Risks
We are subject to liquidity risk in our operations, which could adversely affect our ability to fund our various obligations and jeopardize our business, financial condition and results of operations.
Liquidity risk is the possibility that we will not be able to meet our obligations as they come due or capitalize on growth opportunities as they arise because of an inability to liquidate assets or obtain adequate funding on a timely basis, at a reasonable cost and within acceptable risk tolerances. Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals by depositors, repayment of debt, dividends to shareholders, operating expenses and capital expenditures. Liquidity is derived primarily from retail deposits, principal and interest payments on loans and investment securities, net cash provided from operations and access to other funding. If we are unable to continue to attract and retain core deposits, to obtain third-party financing on favorable terms, or to have access to interbank or other liquidity sources, we may not be able to grow our assets as quickly as planned. If customers move money out of bank deposits into other investments, we would need to seek other funding alternatives, including wholesale funding, in order to continue to grow, thereby increasing our funding costs, if such funding was available at all, and reducing our net interest income and net income.
Our liquidity could also be limited by an inability to access the capital markets or by unforeseen outflows of cash, which could arise due to circumstances outside of our control, including those related to market, credit, operational, and other risks discussed in these risk factors. Our credit rating is important to our liquidity. A reduction or anticipated reduction in our credit ratings could adversely affect the ability of TCF Bank and its subsidiaries to lend by adversely affecting liquidity and our competitive position, increasing our borrowing costs, limiting our access to the capital markets or triggering unfavorable contractual obligations, such as termination of or the requirement that we provide additional collateral pursuant to our derivative contracts.
Furthermore, we are required by federal and state regulatory authorities to maintain specified levels of capital to support our operations. We may need to raise additional capital, in the form of debt or equity, in the future to have sufficient capital resources to meet our commitments and to fund our business needs and future growth, and we may not be able to raise additional capital in the future on terms acceptable to us or at all. Limitations on our access to capital, may adversely affect our capital costs and our ability to raise capital, subject us to increased regulatory supervision and restrictions on our business, and have a material adverse effect on our business, financial condition and results of operations and could be dilutive to both tangible book value and our share price.
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Operational Risks
A failure in or breach of our operational or security systems or infrastructure, or those of third-parties, including as a result of cyberattacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses.
Our operations rely on the secure processing, storage and transmission of confidential and other sensitive business and consumer information on our computer systems and networks and those of third-party providers. Under various federal and state laws, we are responsible for safeguarding such information, and ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs.
Although we take protective measures to maintain the confidentiality, integrity and availability of information across all geographic and product lines, and endeavor to modify these protective measures as circumstances (including changes in our size and complexity) warrant, the nature of the threats continues to evolve. As a result, our computer systems, software and networks may be vulnerable to unauthorized access, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service, computer viruses or other malicious code, cyber-attacks and other adverse events. Threats may originate externally from third-parties such as foreign governments, organized crime and other hackers, including as a result of attacks on infrastructure-support providers and application developers, or may originate internally from within our organization. We may not be able to ensure that all of our customers, suppliers, counterparties and other third-parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us. In addition, the increasing reliance on technology systems and networks and the occurrence and potential adverse impact of attacks on such systems and networks, both generally and in the financial services industry, have enhanced government and regulatory scrutiny of the measures taken by companies to protect against cyber-security threats. As these threats, and government and regulatory oversight of associated risks, continue to evolve, we may be required to expend additional resources to enhance or expand upon the security measures we currently maintain and may be subject to regulatory actions if we fail to take sufficient measures or experience breaches.
In particular, information pertaining to us and our customers is maintained, and transactions are executed, on our networks and systems, as well as those of our customers and certain of our third-party partners, such as our online banking or reporting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our customers against fraud and security breaches and to maintain our customers’ confidence. While to the best of our knowledge we have not experienced any material breaches of information security, such breaches may occur through intentional or unintentional acts by those having or gaining access to our systems or our customers’ or counterparties’ confidential information, including employees. Vulnerabilities in third-party technologies (and technology, including browsers and operating systems used by our customers) or other developments could result in a compromise or breach of the technology, processes and controls that we use to protect data. Furthermore, our customers' devices may become the target of cyber-attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss or destruction of our or our customers' confidential, proprietary and other information, or otherwise disrupt our operations or those of our customers or third parties. For example, various retailers have reported they were victims of cyber-attacks in which large amounts of their customers' data, including debit and credit card information, was obtained. In these situations, we may incur costs related to preventative actions or fraudulent transaction activity affecting our customers.
Any breach of our systems, or those of third-parties, could result in losses to us or our customers; loss of business and/or customers; damage to our reputation; expenses (including the cost of notification to consumers, credit monitoring and forensics, and fees and fines imposed by card networks); disruption to our business; our inability to grow our online services or other businesses; additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition and results of operations.
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We depend on information technology, information and data, and telecommunications systems of third-parties, and systems failures, interruptions involving these systems could have an adverse effect on our operations, financial condition and results of operations.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems, third-party servicers accounting systems and mobile and online banking platforms. We outsource some of our major systems, such as payment processing systems, and online banking platforms. While we select these third-party vendors carefully and attempt to monitor ongoing compliance with any arrangements with TCF, we do not control their actions. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans, gather deposits and provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. In addition, failure of third-parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third-parties could disrupt our operations or adversely affect our reputation. Furthermore, concentration among larger third-party providers servicing large segments of the banking industry can also potentially affect wide segments of the financial industry.
It may be difficult for us to replace some of our third-party vendors, particularly vendors providing our core banking, debit card services and information services in a timely manner if they are unwilling or unable to provide us with these services in the future for any reason, and even if we are able to replace them, it may be at higher cost or result in operational disruptions. Any such events could result in the loss of customers and have a material adverse effect on our business, financial condition or results of operations. In addition, any future implementation of technological changes and upgrades to maintain current systems (such as the conversion of Legacy TCF’s business to our core operating system) represent significant undertakings that may result in operational and customer challenges during and after implementation. Key challenges include service interruptions, transaction processing errors and system conversion delays, which may cause us to alienate customers or fail to comply with applicable laws, and may cause us to incur additional expenses, which may be substantial.
We rely on quantitative models to manage certain accounting, risk management and capital planning functions.
We use quantitative models to help manage certain aspects of our business and to assist with certain business decisions, including estimating probable loan losses, measuring the fair value of financial instruments when reliable market prices are unavailable, estimating the effects of changing interest rates and other market measures on our financial condition and results of operations, risk management and for capital planning purposes. Our modeling methodologies rely on many assumptions, historical analyses and correlations. These assumptions may be incorrect, particularly in times of market distress, and the historical correlations on which we rely may no longer be relevant. As businesses and markets evolve, our measurements may not accurately reflect this evolution. Even if the underlying assumptions and historical correlations used in our models are adequate, our models may be deficient due to errors in computer code, bad data, misuse of data, or the use of a model for a purpose outside the scope of the model’s design.
All models have certain limitations. Reliance on models presents the risk that our business decisions based on information incorporated from models will be adversely affected due to incorrect, missing or misleading information. In addition, our models may not capture or fully express the risks we face, may suggest that we have sufficient capitalization when we do not, or may lead us to misjudge the business and economic environment in which we will operate. If our models fail to produce reliable results on an ongoing basis, we may not make appropriate risk management, capital planning, or other business or financial decisions. Strategies that we employ to manage and govern the risks associated with our use of models may not be effective or fully reliable, and as a result, we may realize losses or other lapses. Also, information that we provide to the public or regulators based on poorly designed models could be inaccurate or misleading.
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The implementation and adoption of new accounting standards may result in changes to our current methodologies and cause us to incur transition costs. For example, in January 2020, we implemented the Current Expected Credit Loss ("CECL") model in accordance with Financial Accounting Standards Board ("FASB") accounting standards. The CECL model differs significantly from the "incurred loss" model required under GAAP. Accordingly, the adoption of the CECL model has and will continue to materially affect how we determine our allowance for loan and lease losses. At times, the model may require us to significantly increase our allowance, increasing our capital needs, and may create more volatility in the level of our provision for credit losses, either of which may adversely affect our business, financial condition and results of operations.
Banking regulators continue to focus on the models used by financial institutions in their businesses. If our regulators believe that the quality of the models used to generate the relevant information is insufficient, they may restrict certain actions, including distributions to shareholders, expansion of our products or services or place other limitations on us, or may take enforcement action against us by one of our regulators.
Our controls and framework for managing risks may fail or not be effective in mitigating risk and any resulting loss.
Our risk management framework seeks to mitigate risk and any resulting loss. We have established processes intended to identify, measure, monitor, report and analyze the types of risk to which we are subject, including legal and compliance, operational, reputational, strategic and market risk such as interest rate, credit, liquidity and foreign currency risk. However, as with any risk management framework, there are inherent limitations to our risk management strategies, and any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any significant failure, circumvention, or breakdowns in our risk management framework or failure to comply with regulations related to controls and procedures could have a material adverse effect on our financial condition and results of operations.
We may be required to recognize an impairment of our goodwill or core deposit intangible assets, or to establish a valuation allowance against our deferred income tax assets, which could have a material adverse effect on our financial condition and results of operations.
Goodwill represents the excess of the amounts paid to acquire assets over their fair value at the date of acquisition. We test goodwill at least annually for impairment. All of our goodwill at December 31, 2020 was recorded on the books of TCF Bank. The fair value of TCF Bank is impacted by the performance of its business and other factors. Core deposit intangible ("CDI") assets represent the estimated value of stable customer deposits, excluding time deposits, acquired in business combinations that provide a source of funds below market interest rates. We amortize our CDI assets over the estimated period the corresponding customer deposits are expected to exist. We test our CDI assets periodically for impairment. If we experience higher than expected deposit run-off, our CDI assets could be impaired. If we determine that our goodwill or CDI assets have been impaired, we must recognize a write-down by the amount of the impairment, with a corresponding charge to net income. Such write-downs could have a material adverse effect on our financial condition and results of operations. At December 31, 2020, we had $1.3 billion of goodwill, representing 23.1% of shareholders' equity, and $111.3 million of CDI assets.
Deferred income tax represents the tax effect of the differences between the book and tax basis of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in management's determination include our performance, including the ability to generate taxable net income. If, based on available information, it is more-likely-than-not that the deferred income tax asset will not be realized, then a valuation allowance must be established with a corresponding charge to net income. As of December 31, 2020, we carried a valuation allowance against our deferred tax assets of $10.8 million. Charges to establish a valuation allowance with respect to our deferred tax assets could have a material adverse effect on the financial condition and results of operations.
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We depend on the accuracy and completeness of information about our customers and counterparties.
In deciding whether to extend credit or enter into other transactions, and in evaluating and monitoring our loan and lease portfolio on an ongoing basis, we rely on information provided to us by or on behalf of our customers and counterparties, including financial statements, credit reports and other financial information. We may also rely on representations of those customers and counterparties or of other third-parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate, incomplete, fraudulent or misleading financial statements, credit reports or other financial or business information, or the failure to receive such information on a timely basis, could result in loan and lease losses, regulatory enforcement actions, reputational damage or other effects that could have a material adverse effect on our business, financial condition or results of operations.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. Diminished availability of counterparties which satisfy our credit quality requirements could negatively impact our business. In addition, our credit risk may be exacerbated when the collateral that we hold cannot be realized or is liquidated at prices insufficient to recover the full amount of the loan. Any such losses could materially and adversely affect our business, financial condition or results of operations.
Our evaluation of investment securities for credit losses involves subjective determinations and could materially impact our financial condition and results of operations.
Our evaluation of impairment in our investment securities portfolio involves a quantitative and qualitative process, which is subject to risks and uncertainties and is intended to determine whether declines in the fair value of such investments should be recognized in current period earnings. The risks and uncertainties include changes in general economic conditions, the issuer's net income, projected net income and financial condition or future recovery prospects, the effects of changes in interest rates or credit spreads and the expected recovery period. The determination of the amount of credit loss recorded in a period is based upon our evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available.
Management considers a wide range of factors about the security issuer and uses judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. Inherent in management's evaluation of the security are assumptions and estimates about the operations of the issuer and its future earnings potential which may prove to be erroneous and may result in future impairments to the value of securities which could have a material adverse effect on our financial condition and results of operations.
We are exposed to risk of environmental liabilities with respect to real properties that we may acquire.
In the course of our business, we may acquire properties securing loans we have originated or purchased through the foreclosure of loans that are in default. Particularly in commercial real estate lending, there is a risk that hazardous substances could be discovered on these properties. In this event, we might be required to remove these substances from the affected properties at our sole cost and expense. The cost of this removal could substantially exceed the value of the affected properties. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third-parties seeking damages for environmental contamination emanating from the site. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties. If we were to become subject to significant environmental liabilities or costs, our business, results of operations and financial condition could be materially and adversely affected.
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Strategic Risks
We face risks and uncertainties related to our proposed merger with Huntington.
Before the transactions contemplated in the TCF/Huntington Merger Agreement can be completed, various approvals must be obtained, including approval of the Federal Reserve Bank and the Office of the Comptroller of the Currency. The terms and conditions of the approvals that are granted may impose conditions, limitations, obligations or costs, or place restrictions on the conduct of the combined company’s business or require changes to the terms of the transactions contemplated by the TCF/Huntington Merger Agreement. There can be no assurance that regulators will not impose any such conditions, limitations, obligations or restrictions and that such conditions, limitations, obligations or restrictions will not have the effect of delaying the completion of any of the transactions contemplated by the TCF/Huntington Merger Agreement, imposing additional material costs on or materially limiting the revenues of the combined company following the merger or otherwise reduce the anticipated benefits of the merger if the TCF/Huntington Merger were consummated successfully within the expected timeframe. In addition, there can be no assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the TCF/Huntington Merger.
Huntington and TCF have operated and, until the completion of the TCF/Huntington Merger, will continue to operate independently, and we may experience unexpected difficulties integrating our businesses following the TCF/Huntington Merger. It is possible that the integration could result in the loss of key employees, the loss of customers, the disruption of either company’s or both companies’ ongoing businesses, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. The success of the TCF/Huntington Merger will depend on, among other things, the ability to the businesses in a manner that facilitates growth opportunities and realizes cost savings.
In addition, the TCF/Huntington Merger Agreement contains provisions that restrict TCF’s ability to, among other things, initiate, solicit, knowingly encourage or knowingly facilitate, inquiries or proposals with respect to, or, subject to certain exceptions generally related to its board of directors’ exercise of its fiduciary duties, engage in any negotiations concerning, or provide any confidential information relating to, any alternative acquisition proposals. These provisions, which include a $238.8 million termination fee payable under certain circumstances, might discourage a potential competing acquirer that might have an interest in engaging in a superior transaction from considering or proposing that acquisition, or might result in lower value received by TCF shareholders than would have otherwise been received.
Failure to complete our proposed merger with Huntington could negatively impact our business, financial results and stock price.
If the TCF/Huntington Merger is not completed for any reason, our ongoing business may be adversely affected, and, without realizing any of the benefits of having completed the merger, we will be subject to a number of risks, including the following:
•we may be required, under certain circumstances, to pay Huntington a termination fee of $238.8 million under the TCF/Huntington Merger Agreement;
•we will be required to pay certain costs relating to the merger, whether or not the TCF/Huntington Merger is completed, such as legal, accounting, financial advisor and printing fees;
•the TCF/Huntington Merger Agreement places certain restrictions on the conduct of our business prior to completion of the TCF/Huntington Merger, which may adversely affect our ability to execute certain of our business strategies; and
•matters relating to the TCF/Huntington Merger may require substantial commitments of time and resources by our management, which could otherwise have been devoted to other opportunities that may have been beneficial to us, as an independent company.
In addition, if the TCF/Huntington Merger is not completed, we may experience negative reactions from the financial markets and from our customers and employees. For example, we may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the TCF/Huntington Merger, without realizing any of the anticipated benefits of completing the TCF/Huntington Merger. The market price of our common stock could decline to the extent that the current market prices reflect a market assumption that the TCF/Huntington Merger will be completed. We also could be subject to litigation related to any failure to complete the TCF/Huntington Merger or to proceedings commenced against us to perform our obligations under the TCF/Huntington Merger Agreement. Any of the above risks could materially affect our business, financial results and stock price.
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New lines of business or new products and services may subject us to additional risk.
From time to time, we may develop new lines of business, offer new products and services within existing lines of business, and expand into new markets or pursue new distribution channels. There are substantial risks and uncertainties associated with these efforts, particularly where the markets are new or not fully developed. In developing and marketing new lines of business and new products or services, we may invest significant time and resources. Initial timetables for the introduction and development of, or anticipated level of growth or profitability for new lines of business and new products or services, may not be achieved. External factors such as compliance with regulations, competitive alternatives and shifting market preferences may also impact the success of implementation of a new line of business or a new product or service. Any new line of business or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business and new products or services could have a material adverse effect on our financial condition and results of operations.
We depend on our executive officers and other key employees to continue the implementation of our long-term business strategy, and we could be harmed by the unexpected loss of their services.
We believe that our continued growth and future success will depend in large part on the skills of our executive officers and other key employees and our ability to motivate and retain these individuals, as well as our ability to attract, motivate and retain highly skilled employees. Competition for employees is intense, and uncertainty surrounding our planned merger may result in increased attrition. If we are unable to retain personnel, including our key management, who are critical to our future operations, we could face disruptions in our operations, loss of existing customers, loss of key information, expertise or know-how, and unanticipated additional recruitment costs, all of which could have a material adverse effect on our business, financial condition, results of operation and future prospects.
Our ability to maintain our reputation is critical to the success of our business, including our ability to attract and retain customer relationships, and failure to do so may materially adversely affect our performance.
The reputation of TCF Bank is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. Damage to our reputation could undermine the confidence of our current and potential customers in our ability to provide financial services. Such damage could also impair the confidence of our investors, counterparties and business partners, and ultimately affect our ability to effect transactions or maintain or hire qualified management and personnel. Maintaining our reputation depends not only on our success in controlling and mitigating the various risks described herein, but also on our success in identifying and appropriately addressing issues that may arise in areas such as potential conflicts of interest, anti-money laundering, client personal information and privacy issues, recordkeeping, regulatory investigations and any litigation that may arise from the failure or perceived failure of us to comply with legal and regulatory requirements. If our reputation is negatively affected, by the actions of our employees or otherwise, the resulting negative public opinion and potential regulatory action could adversely affect our business, financial condition and results of operations.
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Compliance Risks
We face risk of noncompliance with the Bank Secrecy Act and other anti-money laundering statutes and regulations and corresponding enforcement proceedings.
The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "PATRIOT Act") and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and to file suspicious activity and currency transaction reports as appropriate. Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. Regulators also have focused on compliance with Bank Secrecy Act and anti-money laundering regulations. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our growth plans. Sanctions that the regulators have imposed on banks that have not complied with all requirements have been especially severe. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could materially and adversely affect our business, financial condition and results of operations.
We are subject to extensive laws and government regulation and supervision and these laws or regulations, or changes to them or their enforcement could have a material adverse effect on our financial results.
We are subject to extensive federal and state laws, regulation and supervision. Banking regulations are primarily intended to protect bank customers, depositors' funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect our revenues, lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulators continually review banking laws, regulations and policies for possible changes and the implementation of banking laws or regulations may change depending on leadership at federal banking agencies.
For example, the Community Reinvestment Act, the Equal Credit Opportunity Act and the Fair Housing Act impose nondiscriminatory lending requirements on financial institutions. The Federal Reserve, the CFPB, the Department of Justice, and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to our performance under the fair lending laws and regulations could adversely impact our rating under the Community Reinvestment Act and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger or other growth activity.
Many aspects of the banking business involve a substantial risk of legal liability. From time to time, we are, or may become, the subject of reviews, investigations and proceedings, and other forms of regulatory inquiry, including by bank regulatory agencies, self-regulatory agencies, the SEC and law enforcement authorities. The results of such proceedings could lead to significant civil or criminal penalties, including monetary penalties, damages, adverse judgements, settlements, fines, injunctions, restrictions on the way we conduct our business or reputational harm.
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Future changes in regulations, regulatory policies, interpretation and enforcement of statutes, regulations or policies could reduce revenues and increase compliance burdens and limit the types of financial services and products we may offer, or increase competition from non-banks offering competing financial services and products, among other things. Future legislative and regulatory initiatives cannot be fully or accurately predicted. Such proposals may impose higher standards than currently applicable or anticipated with respect to capital and liquidity requirements, leverage, deposit insurance and risk management requirements for depository institutions. For example, the CFPB has examination and enforcement authority over TCF Bank and its subsidiaries, and broad rulemaking authority to administer and carry out the purposes and objectives of the federal consumer financial laws with respect to all financial institutions that offer financial products and services to consumers. The CFPB is authorized to make rules identifying and prohibiting acts or practices that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. Since many new banking rules are issued with limited interpretive guidance, we may not sufficiently comply with or anticipate the full impact of such new rules. The term "abusive" may be interpreted in changing or inconsistent ways over time. Regulatory actions that adversely impact our deposit, lending, loan collection, campus banking programs or customer opt-in preferences with respect to overdrafts could have a material adverse effect on our financial condition and results of operations. In recent years there has been an increase in the frequency of enforcement actions brought by federal banking regulators, such as the CFPB, dealing with matters such as fair lending, account fees, loan servicing and other products and services provided to customers.
While we have policies and procedures designed to prevent violations of laws, regulations and regulatory policies, and to ensure compliance with new or changed laws, regulations and regulatory policies, violations and compliance failures may still occur, and could result in reputational damage, remediation, disgorgement, regulatory enforcement actions, penalties, increased capital requirements, higher deposit insurance assessments, other monetary relief, injunctive relief or changes to our business practices or operations, any of which could have a material adverse effect on our financial condition and results of operations.
We are periodically named as a defendant in a variety of litigation and other actions, which may have a material adverse effect on our financial condition and results of operations.
We are periodically subject to claims and legal actions related to our operations. These claims and legal actions could result in large, unpredictable monetary awards or penalties, as well as significant defense costs. While we maintain insurance coverage in amounts and with deductibles that we believe are appropriate for our operations, such insurance does not cover all types of liability, including regulatory fines or penalties and may not continue to be available to us at a reasonable cost, or at all. As a result, we may be exposed to substantial uninsured liabilities, which could have a material adverse effect on our financial condition and results of operations.
In addition, customers may make claims and take legal action pertaining to our deposit products and sale and servicing of our loan and lease products, account opening/origination practices, fees, employment practices, checking account overdraft program “opt in” requirements, or fiduciary responsibilities. The COVID-19 pandemic has also resulted in novel legal and regulatory risks, including in the area of workplace safety, and related emergency lending programs have been associated with increased fraud and related oversight and law enforcement activities.
The financial services industry has also increasingly been targeted by lawsuits alleging infringement of patent rights, often from patent holding companies seeking to monetize patents they have purchased or otherwise obtained. Regardless of the scope or validity of such patents or other intellectual property rights, or the merits of any claims by potential or actual litigants, we may have to engage in protracted and costly litigation which may be time consuming and disruptive to our operations and management. If we are found to infringe on one or more patents or other intellectual property rights, we may be required to pay substantial damages or royalties to a third-party, or it may be subject to a temporary or permanent injunction prohibiting us from utilizing certain technologies.
Whether or not such claims and legal actions have merit, they may result in significant financial liability and could adversely affect the market perception of TCF Bank and our products and services, as well as impact customer demand for those products and services. Any financial liability or reputational damage from these claims or legal action could have a material adverse effect on our financial condition and results of operations.
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We are subject to examinations, challenges and rates set by tax authorities that could adversely affect our results of operations and financial condition.
We are subject to federal, state and foreign income tax regulations, which often require interpretation due to their complexity. Changes in income tax regulations or tax rates, including those resulting from the enactment of tax law changes or in how the regulations are interpreted could have a material adverse effect on our results of operations. In the normal course of business, we are routinely subject to examinations and challenges from taxing authorities regarding our tax positions. Taxing authorities have been aggressive in challenging tax positions taken by financial institutions. These tax positions may relate to tax compliance, sales and use, franchise, gross receipts, payroll, property and income tax issues, including tax base, apportionment and tax credit planning. These challenges may result in adjustments to the timing or amount of taxable income or deductions, or the allocation of income among tax jurisdictions. If any such challenges are made and are not resolved in our favor, they could have a material adverse effect on our financial condition and results of operations.
Item 2. Properties
Our headquarters is located in Detroit, Michigan, in an office building that is leased. We also operate regional offices located in the Minneapolis-St. Paul area of Minnesota, Midland, Michigan and Chicago. At December 31, 2020, we leased or licensed 157 of our bank branch offices, owned the buildings and land for 296 of our bank branch offices and owned the buildings and leased the land for the remaining 25 of our bank branch offices, all of which are functional and appropriately maintained and are utilized by both our Consumer Banking and Commercial Banking reportable segments. These branch offices are located in Michigan, Illinois, Minnesota, Colorado, Ohio, Wisconsin and South Dakota. For further information on premises and equipment, see "Note 9. Premises and Equipment, Net" of Notes to Consolidated Financial Statements.
Item 3. Legal Proceedings
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 in the event of a regulatory violation. The COVID-19 pandemic has resulted in novel legal and regulatory risks, including risks in the area of workplace safety, risks related to emergency lending programs and the associated risk of fraud and regulatory activity. 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.
On February 2, 2021, a complaint, captioned Shiva Stein v. TCF Financial Corporation et al., No. 1:21-cv-00273-JKB (D. Md.), was filed by a purported shareholder of TCF in the U.S. District Court for the District of Maryland. The complaint names TCF, the TCF board of directors and Huntington as defendants. The complaint alleges, among other things, that the defendants caused a materially incomplete and misleading registration statement relating to the proposed merger to be filed with the SEC in violation of Section 14(a) and Section 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The complaint seeks, among other relief, an injunction preventing the closing of the merger unless and until defendants disclose the allegedly omitted material information, rescission of the merger to the extent already implemented or awarding of rescissory damages, damages and an award of attorneys’ and experts’ fees. TCF and Huntington believe the claims asserted in the lawsuit are without merit.
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On February 6, 2021, a complaint captioned Maegon Cassell v. Huntington Bancshares Incorporated et al., No. 1:21-cv-00161-MN, was filed by a purported shareholder of Huntington in the U.S. District Court for the District of Delaware. The complaint names Huntington, the Huntington board of directors and TCF as defendants. The complaint alleges, among other things, that the defendants caused a materially incomplete and misleading registration statement relating to the proposed merger to be filed with the SEC in violation of Section 14(a) and Section 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The complaint seeks, among other relief, an injunction preventing the closing of the merger, rescission of the merger in the event consummated or awarding of rescissory damages, dissemination of a registration statement that does not contain any allegedly untrue statements of material fact, a declaration that defendants violated Section 14(a) and Section 20(a) of the Exchange Act as well as Rule 14a-9 promulgated thereunder and an award of attorneys’ and experts’ fees. TCF and Huntington believe the claims asserted in the lawsuit are without merit.
On February 9, 2021, a complaint captioned Joe Osterhout v. TCF Financial Corporation et al., No. 1:21-cv-00403-SKC, was filed by a purported shareholder of TCF in the U.S. District Court for the District of Colorado. The complaint names TCF and the TCF board of directors as defendants. The complaint alleges, among other things, that the defendants caused a materially incomplete and misleading registration statement relating to the proposed merger to be filed with the SEC in violation of Section 14(a) and Section 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The complaint seeks, among other relief, an injunction preventing the closing of the merger and any vote on the merger unless and until defendants disclose the allegedly omitted material information, rescission of the merger in the event consummated or awarding of rescissory damages, a declaration that defendants violated Section 14(a) and Section 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder and an award of attorneys’ fees and experts’ fees. TCF and Huntington believe the claims asserted in the lawsuit are without merit.
There can be no assurances that additional complaints or demands will not be filed or made with respect to the merger. If additional similar complaints or demands are filed or made, absent new or different allegations that are material, neither TCF and Huntington will necessarily announce them.
Item 4. Mine Safety Disclosures
Not applicable.
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Part II
Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Our common stock trades on the NASDAQ Stock Market® under the symbol "TCF." As of February 19, 2021, there were 8,458 holders of record of our common stock.
Dividends
The Board of Directors of TCF Financial and TCF Bank have each adopted a Capital Adequacy and Dividend Policy. The policies define how enterprise risk related to capital will be managed, how the adequacy of capital will be measured and the process by which capital strategy, capital management and preferred and common stock dividend recommendations will be presented to TCF's Board of Directors. Our management is charged with ensuring that capital strategy actions, including the declaration of preferred and common stock dividends, are prudent, efficient and provide value to our shareholders, while ensuring that past and prospective earnings retention is consistent with our capital needs, asset quality, risk profile and overall financial condition.
The Board of Directors currently intends to continue its practice of paying quarterly cash dividends on our common stock as justified by our financial condition. The declaration and amount of future dividends will depend on circumstances existing at the time, including our earnings, financial condition and capital requirements, the cash available to pay such dividends (derived mainly from dividends and distributions from TCF Bank which may be limited by its dividend paying capacity), alternative uses of capital, and regulatory and contractual limitations and such other factors as the Board of Directors may deem relevant. In addition, the ability of TCF Financial and TCF Bank to pay dividends depends on regulatory policies and capital requirements and may be subject to regulatory approval. See "Item 1. Business - Regulation - Regulatory Capital Requirements", "Item 1. Business - Regulation - Restrictions on Distributions", "Note 18. Regulatory Capital Requirements" and "Note 29. Parent Company Financial Information" of Notes to Consolidated Financial Statements. Dividends for the current dividend period on all outstanding shares of preferred stock must be declared and paid or declared and a sum sufficient for the payment thereof must be set aside before any dividend may be declared or paid on our common stock.
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Total Return Performance
The following chart compares the cumulative total shareholder return on our common stock over the last five fiscal years with the cumulative total return of the KBW NASDAQ Regional Banking Index and the Standard and Poor's ("S&P") 500 Stock Index (assuming the investment of $100 in each index on December 31, 2015 and reinvestment of all dividends). As a result of the merger of equals between TCF and Chemical Financial Corporation (the "TCF/Chemical Merger") in which Chemical Financial Corporation was the legal acquirer and subsequently changed its name to TCF Financial Corporation, the total shareholder return shown below for TCF Financial Corporation reflects Chemical Financial Corporation's stock price and dividends paid for the period of December 31, 2015 through the closing of the TCF/Chemical Merger on August 1, 2019, and the combined company's stock price and dividends paid for the period of August 1, 2019 through December 31, 2020.
TCF Total Stock Return Performance Chart(1)
u TCF Financial Corporation(1) l KBW NASDAQ Regional Banking Index n S&P 500 Index
| At December 31, | |||||||||||||||||||||||||||||||||||
| Index | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | |||||||||||||||||||||||||||||
| TCF Financial Corporation | $ | 100.00 | $ | 162.12 | $ | 163.60 | $ | 114.70 | $ | 151.61 | $ | 125.67 | |||||||||||||||||||||||
| KBW NASDAQ Regional Banking Index | 100.00 | 139.02 | 141.45 | 116.70 | 144.49 | 131.91 | |||||||||||||||||||||||||||||
| S&P 500 Index | 100.00 | 111.96 | 136.40 | 130.42 | 171.49 | 203.04 | |||||||||||||||||||||||||||||
Source: S&P Global Market Intelligence
(1)Prior to the TCF/Chemical Merger, the shares were traded under the symbol "CHFC".
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Repurchases of TCF Common Stock
Share repurchase activity for the quarter ended December 31, 2020 was as follows:
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plan | |||||||||||||||||||
| October 1 to October 31, 2020 | |||||||||||||||||||||||
Share repurchase program(1) | — | $ | — | — | $ | 89,419,941 | |||||||||||||||||
Employee transactions(2) | 17,350 | 25.73 | N.A. | N.A. | |||||||||||||||||||
| November 1 to November 30, 2020 | |||||||||||||||||||||||
Share repurchase program(1) | — | $ | — | — | $ | 89,419,941 | |||||||||||||||||
Employee transactions(2) | — | — | N.A. | N.A. | |||||||||||||||||||
| December 1 to December 31, 2020 | |||||||||||||||||||||||
Share repurchase program(1) | — | $ | — | — | $ | 89,419,941 | |||||||||||||||||
Employee transactions(2) | 104 | 36.03 | N.A. | N.A. | |||||||||||||||||||
| Total | |||||||||||||||||||||||
Share repurchase program(1) | — | $ | — | — | $ | 89,419,941 | |||||||||||||||||
Employee transactions(2) | 17,454 | 25.79 | N.A. | N.A. | |||||||||||||||||||
N.A. Not Applicable
(1)On October 24, 2019, the Board of Directors approved an authorization to repurchase up to $150.0 million of our common stock. Repurchases will be based on market conditions, the trading price of our shares and other factors including prior approval in accordance with the TCF/Huntington Merger Agreement. The ability to repurchase shares in the future may be adversely affected by new legislation or regulations or by changes in regulatory policies.
(2)Represents restricted stock withheld pursuant to the terms of awards granted under the Legacy TCF Financial Omnibus Incentive Plan to offset tax withholding obligations that occur upon vesting and release of restricted stock. The plan provides that the value of shares withheld shall be the average of the high and low prices of common stock of TCF Financial Corporation on the date the relevant transaction occurs.
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Item 6. Selected Financial Data
The selected five-year financial summary presented below should be read in conjunction with the Consolidated Financial Statements and related notes thereto, which are included elsewhere in this report. Our financial results were significantly impacted by the TCF/Chemical Merger, and periods before August 1, 2019 reflect financial data of Legacy TCF, while periods after the TCF/Chemical Merger reflect financial data for the combined company. Certain reclassifications have been made to prior period financial statements to conform to the current period presentation. Earnings per share and share quantities of TCF have been retrospectively adjusted to reflect the equivalent number of shares issued in the TCF/Chemical Merger. Our Consolidated Financial Statements are prepared in accordance with United States generally accepted accounting principles ("GAAP"). As noted in the following table, we have included certain non-GAAP financial measures, which should be read in conjunction with the section entitled, "Non-GAAP Financial Measures" and the accompanying table entitled "Reconciliation of Non-GAAP Operating Results," for an explanation of the use of the non-GAAP financial measures and a reconciliation of non-GAAP measures to the most directly comparable GAAP financial measure. Historical data is not necessarily indicative of our future results of operations or financial condition. See "Item 1A. Risk Factors" for more discussion of factors that could cause our results to differ significantly from management's expectation.
| For the Year Ended December 31, | |||||||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||
| Consolidated Income: | |||||||||||||||||||||||||||||
| Interest income | $1,765,662 | $1,587,261 | $1,159,329 | $1,031,745 | $942,681 | ||||||||||||||||||||||||
| Interest expense | 227,261 | 298,229 | 150,834 | 94,271 | 82,956 | ||||||||||||||||||||||||
| Net interest income | 1,538,401 | 1,289,032 | 1,008,495 | 937,474 | 859,725 | ||||||||||||||||||||||||
| Noninterest income | 516,063 | 465,532 | 454,397 | 436,063 | 454,281 | ||||||||||||||||||||||||
| Total revenue | 2,054,464 | 1,754,564 | 1,462,892 | 1,373,537 | 1,314,006 | ||||||||||||||||||||||||
Provision for credit losses(1) | 257,151 | 65,282 | 46,768 | 68,443 | 65,874 | ||||||||||||||||||||||||
| Noninterest expense | 1,527,371 | 1,332,115 | 1,014,400 | 1,059,934 | 909,887 | ||||||||||||||||||||||||
Income before income tax expense | 269,942 | 357,167 | 401,724 | 245,160 | 338,245 | ||||||||||||||||||||||||
| Income tax expense (benefit) | 39,901 | 50,241 | 86,096 | (33,624) | 116,528 | ||||||||||||||||||||||||
Income attributable to non-controlling interest | 7,282 | 11,458 | 11,270 | 10,147 | 9,593 | ||||||||||||||||||||||||
Net income attributable to TCF | 222,759 | 295,468 | 304,358 | 268,637 | 212,124 | ||||||||||||||||||||||||
| Preferred stock dividends | 9,975 | 9,975 | 11,588 | 19,904 | 19,388 | ||||||||||||||||||||||||
| Impact of preferred stock redemption | — | — | 3,481 | 5,779 | — | ||||||||||||||||||||||||
Net income available to common shareholders | $ | 212,784 | $ | 285,493 | $ | 289,289 | $ | 242,954 | $ | 192,736 | |||||||||||||||||||
| Earnings per common share: | |||||||||||||||||||||||||||||
| Basic | $ | 1.40 | $ | 2.56 | $ | 3.44 | $ | 2.83 | $ | 2.27 | |||||||||||||||||||
| Diluted | 1.40 | 2.55 | 3.43 | 2.83 | 2.27 | ||||||||||||||||||||||||
| Dividends declared | 1.40 | 1.29 | 1.18 | 0.59 | 0.59 | ||||||||||||||||||||||||
| Financial Ratios: | |||||||||||||||||||||||||||||
| Return on average assets ("ROAA") | 0.48 | % | 0.92 | % | 1.37 | % | 1.26 | % | 1.05 | % | |||||||||||||||||||
| Return on average common equity ("ROACE") | 3.88 | 7.67 | 12.42 | 10.80 | 9.13 | ||||||||||||||||||||||||
Return on average tangible common equity ("ROATCE")(2) | 5.73 | 9.81 | 13.56 | 15.73 | 10.29 | ||||||||||||||||||||||||
| Net interest margin | 3.47 | 4.17 | 4.66 | 4.52 | 4.33 | ||||||||||||||||||||||||
Net interest margin (FTE)(3)(4) | 3.50 | 4.20 | 4.69 | 4.59 | 4.34 | ||||||||||||||||||||||||
| Dividend payout ratio | 100.00 | 50.41 | 34.33 | 20.83 | 26.09 | ||||||||||||||||||||||||
| Efficiency ratio | 74.34 | 75.92 | 69.34 | 77.17 | 69.25 | ||||||||||||||||||||||||
| Credit Quality Ratios: | |||||||||||||||||||||||||||||
| Net charge-offs as a percentage of average loans and leases | 0.13 | 0.27 | 0.29 | 0.24 | 0.26 | ||||||||||||||||||||||||
| Adjusted Financial Results (non-GAAP): | |||||||||||||||||||||||||||||
Adjusted net income attributable to TCF(2) | $ | 389,467 | $ | 461,232 | $ | 329,867 | $ | 211,025 | $ | 212,124 | |||||||||||||||||||
Adjusted diluted earnings per common share(2) | $ | 2.50 | $ | 4.04 | $ | 3.73 | $ | 2.16 | $ | 2.27 | |||||||||||||||||||
Adjusted ROAA(2) | 0.82 | % | 1.41 | % | 1.48 | % | 1.00 | % | 1.05 | % | |||||||||||||||||||
Adjusted ROACE(2) | 6.92 | 12.13 | 13.51 | 8.24 | 9.13 | ||||||||||||||||||||||||
Adjusted ROATCE(2) | 9.88 | 15.34 | 14.74 | 9.25 | 10.29 | ||||||||||||||||||||||||
Adjusted efficiency ratio (2) | 60.95 | 60.58 | 64.77 | 69.71 | 67.59 | ||||||||||||||||||||||||
(1)Effective January 1, 2020, TCF adopted Accounting Standard Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Top 326): Measurement of Credit Losses on Financial Instruments and related ASUs on a modified retrospective basis. Financial information at and for the year ended December 31, 2020 is reflected as such. The historical information disclosed is in accordance with ASC Topic 310 and ASC Topic 450.
(2)See "Item 7. Management's Discussion and Analysis - Consolidated Financial Condition Analysis - Non-GAAP Financial Measures" for further information.
(3)Net interest income on a fully tax-equivalent ("FTE") basis divided by average interest-earning assets.
(4)Presented on a tax-equivalent basis using the federal statutory tax rate in effect for each period presented.
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| At December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||
| Consolidated Financial Condition: | ||||||||||||||||||||||||||||||||
| Loans and leases | $ | 34,466,408 | $ | 34,497,464 | $ | 19,073,020 | $ | 19,105,284 | $ | 17,844,716 | ||||||||||||||||||||||
| Total assets | 47,802,487 | 46,651,553 | 23,699,612 | 23,002,159 | 21,441,326 | |||||||||||||||||||||||||||
| Deposits | 38,856,319 | 34,468,463 | 18,903,686 | 18,335,002 | 17,242,522 | |||||||||||||||||||||||||||
| Borrowings | 1,992,095 | 5,023,593 | 1,449,472 | 1,249,449 | 1,077,572 | |||||||||||||||||||||||||||
| Total equity | 5,689,297 | 5,727,241 | 2,556,260 | 2,680,584 | 2,444,645 | |||||||||||||||||||||||||||
| Financial Ratios: | ||||||||||||||||||||||||||||||||
| Common equity to assets | 11.51 | % | 11.87 | % | 9.99 | % | 10.42 | % | 10.09 | % | ||||||||||||||||||||||
Tangible common equity as a percent of tangible assets (non-GAAP)(1) | 8.72 | 9.01 | 9.32 | 9.72 | 9.13 | |||||||||||||||||||||||||||
| Total risk-based capital ratio | 14.03 | 12.70 | 13.38 | 13.90 | 13.69 | |||||||||||||||||||||||||||
| Book value per common share | $ | 36.06 | $ | 36.20 | $ | 28.44 | $ | 27.48 | $ | 24.91 | ||||||||||||||||||||||
Tangible book value per common share (non-GAAP)(1) | 26.49 | 26.60 | 26.33 | 25.43 | 22.29 | |||||||||||||||||||||||||||
| Credit Quality Ratios: | ||||||||||||||||||||||||||||||||
Nonaccrual loans and leases as a percentage of total loans and leases(2) | 1.97 | % | 0.49 | % | 0.56 | % | 0.62 | % | 1.02 | % | ||||||||||||||||||||||
Nonperforming assets as a percentage of total loans and leases and other real estate owned(2) | 2.06 | 0.59 | 0.65 | 0.72 | 1.28 | |||||||||||||||||||||||||||
Allowance for loan and lease losses as a percentage of total nonaccrual loans and leases(2) | 77.64 | 66.64 | 148.65 | 144.24 | 88.33 | |||||||||||||||||||||||||||
Allowance for credit losses as a percentage of total nonaccrual loans and leases(2) | 81.08 | 68.71 | 150.00 | 145.49 | 88.94 | |||||||||||||||||||||||||||
Allowance for loan and lease losses as a percentage of total loans and leases(2) | 1.53 | 0.33 | 0.83 | 0.90 | 0.90 | |||||||||||||||||||||||||||
Allowance for credit losses as a percentage of total loans and leases(2) | 1.59 | 0.34 | 0.83 | 0.90 | 0.90 | |||||||||||||||||||||||||||
(1)See "Item 7. Management's Discussion and Analysis - Consolidated Financial Condition Analysis - Non-GAAP Financial Measures" for further information.
(2)Effective January 1, 2020, TCF adopted Accounting Standard Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Top 326): Measurement of Credit Losses on Financial Instruments and related ASUs on a modified retrospective basis. Financial information at and for the year ended December 31, 2020 is reflected as such. The historical information disclosed is in accordance with ASC Topic 310 and ASC Topic 450.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Table of Contents
| Description | Page | ||||
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Forward-looking Information
Any statements contained in this Annual Report on Form 10-K regarding the outlook for the Corporation's businesses and their respective markets, such as projections of future performance, targets, guidance, statements of the Corporation's plans and objectives, forecasts of market trends and other matters are forward-looking statements based on the Corporation's assumptions and beliefs. Such statements may be identified by such words or phrases as "will likely result," "are expected to," "will continue," "outlook," "will benefit," "is anticipated," "estimate," "project," "management believes" or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those discussed in such statements and no assurance can be given that the results in any forward-looking statement will be achieved. For these statements, TCF claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any forward-looking statement speaks only as of the date on which it is made and we disclaim any obligation to subsequently revise any forward-looking statement to reflect events or circumstances after such date or to reflect the occurrence of anticipated or unanticipated events.
These statements include, among others, statements related to: our strategic plan to develop customer relationships that will drive core deposit growth and stability, management's belief that our commercial and commercial real estate loan portfolios are generally well-secured, the impact of projected changes in net interest income assuming changes to short-term market interest rates, statements regarding our risk exposure, statements related to our planned merger with Huntington Bancshares Incorporated ("Huntington"), including statements related to the anticipated effects on results of operations and financial condition from expected developments. All statements referencing future time periods are forward-looking.
Furthermore, management's determination of the allowance for credit losses and related provision; the carrying value of goodwill and loan servicing rights; the fair value of investment securities (including whether there is any credit impairment); and management's assumptions concerning postretirement benefit plans involve judgments that are inherently forward-looking. There can be no assurance that future loan losses will be limited to the amounts estimated. All of the information concerning interest rate sensitivity is forward-looking. The future effect of changes in the financial and credit markets and the national and regional economies on the banking industry, generally, and on us, specifically, are also inherently uncertain.
Certain factors could cause the Corporation's future results to differ materially from those expressed or implied in any forward-looking statements contained herein. These factors include the factors discussed in Part I, Item 1A of this Annual Report on Form 10-K under the heading "Risk Factors", the factors discussed below and any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statements. Since it is not possible to foresee all such factors, these factors should not be considered as complete or exhaustive: macroeconomic and other challenges and uncertainties resulting from the COVID-19 pandemic, such as the extent and duration of the impact on public health, the U.S. and global economies, financial markets and consumer and corporate customers and clients, including economic activity, employment levels and market liquidity, as well as the various actions taken in response to the challenges and uncertainties by governments, central banks and others, including TCF; a failure to manage credit risk; cyber-security breaches involving us or third parties, hacking, denial of service, loss or theft of information, or other cyber-attacks that disrupt TCF's business operations or damage its reputation; adverse developments affecting TCF's banking centers; inability to successfully execute on TCF's growth strategy through acquisitions or expanding existing business relationships; calculating an allowance for loan and lease losses insufficient to absorb actual losses in our loan and lease portfolio; adverse effects related to competition from traditional competitors, non-bank providers of financial services and new technologies; technological difficulties, including those related to system upgrades or the failure to keep pace with technological changes in response to customer demands; risks related to developing new products, markets or lines of business; adverse political or economic conditions; risks related to TCF's loan origination and sales activity; lack of access to liquidity or ability to raise capital that isn’t dilutive; adverse changes in monetary, fiscal or tax policies; litigation or government enforcement actions; heightened consumer protection, supervisory or regulatory practices or requirements; deficiencies in TCF's compliance programs, risk mitigation frameworks or ineffective internal controls; dependence on accurate and complete information from customers and counterparties; the failure to attract and retain key employees; soundness of other financial institutions and other counterparty risk, including the risk of default, operational disruptions, or diminished availability of counterparties who satisfy our credit quality requirements; inability to grow deposits, increase earnings and revenue, manage operating expenses, or pay and receive dividends; interruptions, systems failures in information technology and telecommunications systems failures of third-party services; deficiencies in TCF's quantitative models; the effect of any negative publicity or reputational damage; changes in accounting standards or interpretations of existing standards; adverse federal, state or foreign tax assessments; and the effects of man-made and natural disasters, any of which may negatively affect our operations and/or our customers.
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This report also contains forward-looking statements regarding TCF's outlook or expectations with respect to the planned merger with Huntington. Examples of forward-looking statements include, but are not limited to, statements regarding the outlook and expectations of TCF and Huntington with respect to the planned merger, the strategic benefits and financial benefits of the merger, including the expected impact of the merger on the combined corporation's future financial performance, and the timing of the closing of the transaction. Such risks, uncertainties and assumptions, include, among others, the following:
•the failure to obtain necessary regulatory approvals when expected or at all (and the risk that such approvals may result in the imposition of conditions that could adversely affect TCF or Huntington or the expected benefits of the merger);
•the failure of either TCF or Huntington to obtain shareholder approval, or to satisfy any of the other closing conditions to the merger on a timely basis or at all;
•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;
•the possibility that the anticipated benefits of the transaction, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, economic weakness, competitive factors in the areas where TCF and Huntington do business, or as a result of other unexpected factors or events;
•the impact of purchase accounting with respect to the transaction, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;
•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 of either TCF or Huntington to repurchase their stock and the prices at which such repurchases may be made;
•the outcome of any current or future legal proceedings against TCF or Huntington related to the merger;
•the integration of the businesses and operations of TCF and Huntington, which may take longer than anticipated or be more costly than anticipated or have unanticipated adverse results relating to our existing businesses;
•business disruptions following the merger; and
•other factors that may affect future results of TCF and Huntington including changes in asset quality and credit risk; the inability to grow revenue and earnings; changes in interest rates and capital markets; inflation; customer borrowing, repayment, investment and deposit practices; the impact, extent and timing of technological changes; capital management activities; and other actions of the Federal Reserve Board and legislative and regulatory actions and reforms.
Additional factors that could cause results to differ materially from those described above can be found in the risk factors described in Part I, Item 1A of this Annual Report on Form 10-K under the heading "Risk Factors" and Huntington’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2020. Annualized, pro forma, projected and estimated numbers are used for illustrative purpose only, are not forecasts and may not reflect actual results. TCF disclaims any obligation to update or revise any forward-looking statements contained in this communication, which speak only as of the date hereof, whether as a result of new information, future events or otherwise, except as required by law.
Overview
TCF Financial Corporation, formerly known as Chemical Financial Corporation, ("TCF") is a financial holding company incorporated in Michigan in 1973 and headquartered in Detroit, Michigan.
Through our wholly-owned bank subsidiary, TCF National Bank, a national banking association ("TCF Bank") with its main office in Sioux Falls, South Dakota, we provide 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. As of December 31, 2020, TCF had 478 branches primarily located in Michigan, Illinois and Minnesota, with additional locations in Colorado, Ohio, South Dakota and Wisconsin (our "primary banking markets"). We also conduct business across all 50 states, Canada, New Zealand and Australia through our specialty lending and leasing businesses.
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References herein to "TCF Financial" or the "Holding Company" refer to TCF Financial Corporation on an unconsolidated basis. TCF Financial Corporation (together with its direct and indirect subsidiaries, are referred to as "we," "us," "our," "TCF" or the "Corporation".
Supporting Team Members, Customers and Communities
To support our team members we have:
•Implemented health and safety policies, protocols and guidelines while ensuring adequate PPE and cleaning supplies are available at all locations in response to the COVID-19 pandemic;
•provided company-paid time off for team members not able to work for reasons related to COVID-19 and enhanced compensation for team members required to work in the office for a period of time;
•offered reimbursement to eligible team member who, due to COVID-19, had to find back-up care for their child or dependent with health/developmental needs for a period of time;
•provided equipment and resources to allow nearly all of our middle and back office employees to work from home and developed a thoughtful return to work approach where team members are returning in phases based on safety guidelines and local restrictions while evaluating lessons learned and opportunities for a more flexible workspace strategy in the future; and
•established various internal initiatives to increase awareness of diversity and inclusion issues including launching the Executive Diversity and Inclusion Council, providing executive office hours for team members to have candid discussions with leaders regarding diversity issues, required unconscious bias training for all team members, and organizing Employee Resource Groups to serve as a resource to positively influence the culture, support efforts to attract, develop and attract diverse team members.
To support our customers we have:
•Assisted customers in response to the COVID-19 pandemic via loan and lease deferrals, evaluated under the CARES Act, with $329.8 million on deferral status as of December 31, 2020 ($246.5 million of commercial balance and $83.3 million of consumer balance); and
•assisted business and commercial customers via $1.9 billion of total loans funded through the Paycheck Protection Program ("PPP"), of which $1.6 billion of PPP loan balance was outstanding at December 31, 2020.
To support our communities we have:
•Established a $1 billion loan commitment for minority communities and minority- and women-owned small businesses over 5 years;
•expanded closing costs assistance program through the Heart and Home Lending Program providing up to $10 million of grants to help cover closing costs for qualified low-to-moderate income home buyers over 5 years;
•partnered with Wayne County, Michigan to provide fast relief through low-interest loans to help small businesses in the Detroit area; and
•committed $250 thousand for relief efforts supporting Great Lakes Bay Region community organizations and a $10 million Hardship Lending Program to support residents and business impacted by dam failures and historic flooding in the Midland, Michigan area.
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The COVID-19 pandemic has resulted in historic job losses and decreases in economic activity. While the duration and full extent of job losses and magnitude of economic dislocation are not yet known, it is clear that they have impacted, and may impact in the future, the ability of individuals and small businesses to make payments, the value of underlying collateral and the ability of guarantors to make payments in the case of default, which may decrease consumer demand for our products and services and reduce our ability to access capital. As a result of the decrease in economic activity and restrictions on certain activities, we have faced and may continue to face a decrease in demand for certain products, reduced access to our banking centers by our customers, and disruptions in the operations of our vendors. The pandemic could also result in the recognition of additional credit losses in our loan and lease portfolios and increase our allowance for credit losses as both businesses and consumers are negatively impacted by the economic downturn. In addition, reduced origination volumes and credit losses triggered by COVID-19 may impact significant estimates included within our fair valuation analyses. The extent of such impact will depend on the outcome of certain developments, including but not limited to, the duration and spread of the outbreak as well as its continuing impact on our customers, vendors, employees and the financial markets all of which are uncertain. See Part I, Item 1A, "Risk Factors - Market Risks - We continue to face risks and uncertainties related to the outbreak of COVID-19" for further discussion.
Merger of Equals between TCF and Chemical Financial Corporation
On August 1, 2019 (the "TCF/Chemical Merger Date"), TCF Financial Corporation, a Delaware corporation ("Legacy TCF"), merged with and into Chemical Financial Corporation, a Michigan corporation ("Chemical"), with Chemical surviving the merger (the "TCF/Chemical Merger") and being renamed TCF Financial Corporation. Immediately following the TCF/Chemical Merger, Chemical’s wholly owned bank subsidiary, Chemical Bank, a Michigan state-chartered bank, merged with and into TCF Bank, with TCF Bank surviving the TCF/Chemical Merger. Upon completion of the TCF/Chemical Merger, Chemical was renamed TCF Financial Corporation.
The TCF/Chemical 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 TCF/Chemical Merger Date. Our results of operations for the periods before August 1, 2019 reflect financial data of Legacy TCF, while periods after the TCF/Chemical Merger reflect financial data for the combined company. Accordingly, comparisons of our results for the year ended December 31, 2020 with those of prior periods may not be meaningful. 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 in the TCF/Chemical Merger. See "Note 3. Business Combinations" of the Notes to Consolidated Financial Statements for further information.
Business Overview
Net interest income, the difference between interest income earned on loans and leases, investment securities and other earning assets (interest income) and interest paid on deposits and borrowings (interest expense), represented 74.9% of our total revenue for 2020, compared with 73.5% for 2019 and 68.9% for 2018. Net interest income can change significantly from period to period based on interest rates, customer prepayment patterns and the volume and mix of interest earning assets, noninterest-bearing deposits and interest-bearing liabilities. We manage the risk of changes in interest rates on our net interest income through TCF's Asset & Liability Committee ("ALCO") and through related interest rate risk monitoring and management policies. See "Part I, Item 1A. Risk Factors" and "Item 7A. Quantitative and Qualitative Disclosures about Market Risk" for further discussion.
Noninterest income is a significant source of our revenue and an important component of our results of operations. The significant components of noninterest income are leasing revenue, fees and service charges on deposit accounts, net gains on sales of loans and leases, card and ATM revenue, wealth management revenue and servicing fee revenue. Leasing revenue generates noninterest income primarily from operating and sales-type leases. Primary drivers of fees and service charges on deposit accounts include the number of customers we attract, the customers' level of engagement and the frequency with which the customer uses our solutions. Providing a wide range of consumer banking services is an integral component of our business philosophy. We sell loans, primarily secured by consumer real estate, which results in gains on sales, as well as servicing fee income. Primary drivers of gains on sales include our ability to originate loans, identify loan buyers and execute loan sales.
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Proposed Merger with Huntington Bancshares Incorporated
TCF and Huntington Bancshares Incorporated ("Huntington") have entered into an Agreement and Plan of Merger, dated as of December 13, 2020. Under the merger agreement, TCF will merge with and into Huntington, with Huntington continuing as the surviving entity. Immediately following the merger, TCF Bank will merge with and into The Huntington National Bank, with The Huntington National Bank as the surviving bank. The merger agreement was approved by the boards of directors of TCF and Huntington, and is subject to shareholder and regulatory approval and other customary closing conditions. The transaction is anticipated to close in the second quarter of 2021. The transaction is discussed in more detail in "Note 3. Business Combinations" of the Notes to Consolidated Financial Statements under Item 8 of this Annual Report. See Part I, Item 1A, "Risk Factors - Strategic Risks - We face risks and uncertainties related to our proposed merger with Huntington and Failure to complete our proposed merger with Huntington could negatively impact our business, financial results and stock price" for further discussion.
The following portions of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("Management's Discussion and Analysis") focus in more detail on the results of operations for 2020, 2019 and 2018 and on information about TCF's financial condition, loan and lease portfolio, liquidity, funding resources, capital and other matters.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements are prepared in accordance with GAAP, Securities and Exchange Commission ("SEC") rules and interpretive releases and general practices within our industry. Application of these principles requires management to establish accounting policies and make estimates, assumptions and complex judgments that affect the amounts reported in our Consolidated Financial Statements and accompanying notes. The estimates, assumptions and judgments are based on historical experience and various assumptions that we believe to be reasonable as of the date of the financial statements; accordingly, as this information changes, our Consolidated Financial Statements could reflect different estimates, assumptions and judgments. Actual results could differ significantly from those estimates.
Certain accounting measurements inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. We use third-party sources to assist us with developing certain estimates, assumptions and judgments regarding certain amounts reported in our Consolidated Financial Statements and accompanying notes. When using third-party sources, management remains responsible for complying with GAAP. To meet management's responsibilities, we have processes in place to develop an understanding of the third-party methodologies used and to design and implement internal controls.
We have identified the determination of the allowance for credit losses (loans and leases and unfunded lending commitments), accounting for business combinations (including fair value of acquired loans and leases and core deposit intangibles), and the evaluation of goodwill impairment to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new or additional information becomes available or circumstances change, including overall changes in the economic climate and/or market interest rates. Therefore, we consider these to be critical accounting policies and estimates and discuss them directly with the Audit Committee of our Board of Directors.
See "Note 2. Summary of Significant Accounting Policies" of Notes to Consolidated Financial Statements for further discussion of our significant accounting policies.
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Allowance for Credit Losses
The allowance for credit losses ("ACL") represents management's estimate of 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 ACL includes the allowance for loan and lease losses ("ALLL") and a reserve for unfunded lending commitments ("RULC"). Determining the amount of the ACL is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amounts and timing of expected future cash flows, adjustments for forward-looking information, estimates of losses based on measurement date credit risk characteristics and consideration of other qualitative factors, all of which may be susceptible to significant change.
Events that are not within our control, such as changes in economic conditions, could change and could cause the ACL to be overstated or understated. The amount of ACL is affected by net charge-offs or recoveries and the provision or benefit for credit losses charged to earnings, which increase or decrease the ACL.
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.
See "Note 2. Summary of Significant Accounting Policies" and "Note 8. Allowance for Credit Losses and Credit Quality" of the Consolidated Financial Statements for additional disclosure regarding our ACL.
Accounting for Business Combinations
In determining the estimated fair value of assets acquired as part of the TCF/Chemical Merger, 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, market rates and prepayments speeds. 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, servicing costs, 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 3. Business Combinations" and "Note 2. Summary of Significant Accounting Policies" for further information.
Goodwill
Goodwill represents the excess of the purchase price of our business acquisitions and purchases of banking centers over the fair value of the net assets acquired. Goodwill is not amortized, but rather is tested by management annually in the fourth quarter for impairment, or more frequently if triggering events occur and indicate potential impairment, in accordance with ASC Topic 350-20, Goodwill (ASC 350-20). ASC 350-20 allows an entity to assess qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. ASC 350-20 also allows an entity to bypass the qualitative assessment approach and determine if goodwill is impaired utilizing a quantitative assessment approach.
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During each quarter of 2020 we evaluated if there were any goodwill impairment triggering events and whether it was more-likely-than-not that the fair value of any reporting unit was less than its carrying amount. We assessed economic conditions, including projections of the duration of current conditions and timing of a potential recovery; industry and market considerations; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting units including TCF/Chemical Merger synergies; the market price of our common stock and other relevant events. At the conclusion of each assessment, we determined that it was not more-likely-than-not that the fair value of each reporting unit was less than its carrying amount. During the fourth quarter we completed our annual impairment test, which did not indicate impairment for any reporting unit, nor were any reporting units at risk. If economic conditions deteriorate, or the pandemic’s effects prolong or worsen, it may be more-likely-than-not that the fair value of one or more of TCF's reporting units falls below its respective carrying amount and would need to be evaluated for impairment.
Results of Operations
Performance Summary We reported net income of $222.8 million for 2020, compared with $295.5 million for 2019 and $304.4 million for 2018. Merger-related expenses included in net income totaled $203.9 million for the year ended December 31, 2020 and $172.0 million for the year ended December 31, 2019. Notable items, on a pre-tax basis, for the year ended December 31, 2020, included $17.6 million of loan servicing rights impairment, $14.2 million of gains on sales of branches, net of expense related to branch exit costs and $4.0 million of expense related to the sale of the Legacy TCF auto finance portfolio. Notable items, on a pre-tax basis, for the year ended December 31, 2019, included a $32.1 million loss on sale and expenses related to the Legacy TCF auto finance portfolio, a $17.3 million loss on termination of interest rate swaps, $9.4 million of expense associated with the write-down of company-owned vacant land parcels due to an intent to sell and branch exit costs, $6.3 million of expense related to pension fair valuation adjustment on plans with previously announced terminations, and $3.9 million of loan servicing rights impairment, partially offset by $5.9 million of gain on sales of certain investment securities. The year ended December 31, 2019, also included $11.8 million of tax basis adjustment benefits considered a notable item. For the year ended December 31, 2018, net income included a $32.0 million pre-tax charge related to the settlement to resolve certain matters with the Consumer Financial Protection Bureau (the "CFPB") and Office of the Comptroller of the Currency (the "OCC") considered a notable item. Adjusted net income, a non-GAAP financial measure that excludes merger-related expenses and the identified notable items, net of tax, was $389.5 million for the year ended December 31, 2020, compared to $461.2 million for 2019 and $329.9 million for 2018. See "Non-GAAP Financial Measures" in this Management's Discussion and Analysis for further information.
We reported diluted earnings per common share of $1.40 for 2020, compared with $2.55 for 2019 and $3.43 for 2018. Adjusted diluted earnings per common share, a non-GAAP financial measure that excludes merger-related expenses and the identified notable items, was $2.50 for the year ended December 31, 2020, compared to $4.04 for 2019 and $3.73 for 2018. See "Non-GAAP Financial Measures" in this Management's Discussion and Analysis for further information.
The following table provides our financial ratios and adjusted ratios (non-GAAP), which exclude merger-related expenses and the identified notable items.
| Summary of Financial Ratios | ||||||||||||||||||||||||||
| Year Ended December 31, | Change From | |||||||||||||||||||||||||
| 2020 | 2019 | 2018 | 2020/ | |||||||||||||||||||||||
| 2019 | ||||||||||||||||||||||||||
| Return on average assets ("ROAA") | 0.48 | % | 0.92 | % | 1.37 | % | (44) | bps | ||||||||||||||||||
| Return on average common equity ("ROACE") | 3.88 | 7.67 | 12.42 | (379) | ||||||||||||||||||||||
Return on average tangible common equity ("ROATCE')(1) | 5.73 | 9.81 | 13.56 | (408) | ||||||||||||||||||||||
| Efficiency ratio | 74.34 | 75.92 | 69.34 | (158) | ||||||||||||||||||||||
| Adjusted Financial Results (non-GAAP) | ||||||||||||||||||||||||||
Adjusted ROAA(1) | 0.82 | % | 1.41 | % | 1.48 | % | (59) | bps | ||||||||||||||||||
Adjusted ROACE(1) | 6.92 | 12.13 | 13.51 | (521) | ||||||||||||||||||||||
Adjusted ROATCE(1) | 9.88 | 15.34 | 14.74 | (546) | ||||||||||||||||||||||
Adjusted efficiency ratio(1) | 60.95 | 60.58 | 64.77 | 37 | ||||||||||||||||||||||
(1)See section entitled "Non-GAAP Financial Measures" in this Management's Discussion and Analysis for further information.
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Consolidated Results of Operations Analysis
Net Interest Income Net interest income was $1.5 billion for 2020, compared with $1.3 billion for 2019 and $1.0 billion for 2018. Net interest income, our largest source of revenue (revenue is comprised of net interest income and noninterest income), represented 74.9% of our total revenue for 2020, compared with 73.5% for 2019 and 68.9% for 2018. The increases in net interest income in 2020, compared to 2019, as well as 2019, compared to 2018, was primarily attributable to the increase in interest-earning assets acquired in the TCF/Chemical Merger, partially offset by the increase in interest-bearing liabilities acquired in the TCF/Chemical Merger.
Purchase accounting accretion and amortization included in net interest income was $84.2 million for 2020, compared to $58.9 million for 2019. At December 31, 2020, the remaining fair value discount from purchase accounting on acquired loans totaled $108.1 million. Additionally, 2020 net interest income recorded included $43.4 million of interest and fee income from PPP loans less funding costs. Fully taxable equivalent ("FTE") adjustments to net interest income totaled $12.1 million for 2020, compared to $8.4 million for 2019 and $3.6 million for 2018. Adjusted net interest income, including FTE adjustments and excluding purchase accounting accretion and amortization and the impact from PPP loans, a non-GAAP financial measure, was $1.4 billion for 2020, compared to $1.2 billion for 2019 and $1.0 billion for 2018. See "Non-GAAP Financial Measures" in this Management's Discussion and Analysis for further information. Net interest income (FTE), a non-GAAP financial measure, was $1.6 billion for 2020, compared with $1.3 billion for 2019 and $1.0 billion for 2018. Net interest income (FTE), a non-GAAP financial measure, is the difference between interest income and interest expense adjusted for the tax benefit received on tax-exempt loans, leases and investment securities. The presentation of net interest income (FTE) is not in accordance with GAAP but is customary in the banking industry. For further information on the calculation of net interest income (FTE), see the tables below.
Net interest margin was 3.47% for 2020, compared to 4.17% for 2019 and 4.66% for 2018. Net interest margin (FTE), a non-GAAP financial measure, is calculated by dividing net interest income (FTE) by average interest-earning assets, expressed as a percentage. Net interest income and net interest margin are affected by (i) changes in prevailing short- and long-term interest rates, (ii) loan, lease and deposit pricing strategies and competitive conditions, (iii) the volume and mix of interest-earning assets, noninterest-bearing deposits and interest-bearing liabilities, (iv) the level of nonaccrual loans and leases and other real estate owned and (v) the impact of modified loans and leases. Net interest margin (FTE) was 3.50% for 2020, compared with 4.20% for 2019 and 4.69% for 2018. The decrease in both net interest margin and net interest margin (FTE) for the year ended December 31, 2020, compared to 2019, was primarily due to a decrease in the yield earned on loans and leases as result of the lower average yields added to the portfolio through the TCF/Chemical Merger in addition to the impact of the Federal Reserve's rate cuts and higher cash balances, partially offset by lower cost of funds. The decrease in both net interest margin and net interest margin (FTE) for the year ended December 31, 2019, compared to 2018, was primarily driven by a decrease in loan and lease yields due to the impact of the lower overall yield earned on loans and leases we acquired through the TCF/Chemical Merger, the impact of the Federal Reserve's interest rate cuts on our variable-rate loans and an increase in our cost of funds. The presentation of net interest margin (FTE) is not in accordance with GAAP but is customary in the banking industry. For further information on the calculation of net interest income (FTE), see the tables below.
The following tables present the average balances of our major categories of assets and liabilities, interest income and expense (FTE), average interest rates earned and paid on assets and liabilities, net interest income (FTE), net interest spread and net interest margin for the years ended December 31, 2020, 2019 and 2018. The presentation of net interest income (FTE) is not in accordance with GAAP but is customary in the banking industry and ensures comparability of net interest income arising from both taxable and tax-exempt loans and investment securities.
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| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Average Balance | Interest | Yields and Rates | Average Balance | Interest | Yields and Rates | Average Balance | Interest | Yields and Rates (bps) | ||||||||||||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Federal Home Loan Bank and Federal Reserve Bank stocks | $ | 379,482 | $ | 13,356 | 3.52 | % | $ | 210,001 | $ | 6,030 | 2.87 | % | $ | 169,481 | $ | 7,326 | 65 | ||||||||||||||||||||||||||||||||||||
| Investment securities held-to-maturity | 141,604 | 1,842 | 1.30 | 144,318 | 2,950 | 2.04 | (2,714) | (1,108) | (74) | ||||||||||||||||||||||||||||||||||||||||||||
| Investment securities available-for-sale: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxable | 6,050,684 | 142,620 | 2.36 | 3,516,413 | 103,077 | 2.93 | 2,534,271 | 39,543 | (57) | ||||||||||||||||||||||||||||||||||||||||||||
Tax-exempt(1)(2) | 713,658 | 20,470 | 2.87 | 541,525 | 14,746 | 2.72 | 172,133 | 5,724 | 15 | ||||||||||||||||||||||||||||||||||||||||||||
| Loans and leases held-for-sale | 351,898 | 11,394 | 3.24 | 336,292 | 18,599 | 5.53 | 15,606 | (7,205) | (229) | ||||||||||||||||||||||||||||||||||||||||||||
Loans and leases(1)(2)(3) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 11,924,867 | 559,783 | 4.66 | 8,371,066 | 519,506 | 6.18 | 3,553,801 | 40,277 | (152) | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | 9,547,701 | 405,173 | 4.17 | 5,523,347 | 298,414 | 5.33 | 4,024,354 | 106,759 | (116) | ||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | 2,693,493 | 133,272 | 4.95 | 2,570,109 | 131,547 | 5.12 | 123,384 | 1,725 | (17) | ||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 6,053,036 | 233,723 | 3.86 | 3,902,959 | 170,706 | 4.37 | 2,150,077 | 63,017 | (51) | ||||||||||||||||||||||||||||||||||||||||||||
| Home equity | 3,405,718 | 179,628 | 5.27 | 3,272,760 | 101,687 | 5.51 | 132,958 | 77,941 | (24) | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer installment | 1,412,510 | 71,392 | 5.05 | 1,844,714 | 214,116 | 6.54 | (432,204) | (142,724) | (149) | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases | 35,037,325 | 1,582,971 | 4.49 | 25,484,955 | 1,435,976 | 5.61 | 9,552,370 | 146,995 | (112) | ||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits with banks and other | 1,352,825 | 5,096 | 0.38 | 534,979 | 14,326 | 2.66 | 817,846 | (9,230) | (228) | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | 44,027,476 | 1,777,749 | 4.01 | 30,768,483 | 1,595,704 | 5.17 | 13,258,993 | 182,045 | (116) | ||||||||||||||||||||||||||||||||||||||||||||
| Other assets | 4,373,462 | 2,758,447 | 1,615,015 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 48,400,938 | $ | 33,526,930 | $ | 14,874,008 | |||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and Equity: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits | $ | 9,844,485 | $ | 5,622,092 | $ | 4,222,393 | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Savings | 9,093,600 | 28,408 | 0.31 | 7,203,987 | 52,087 | 0.72 | 1,889,613 | (23,679) | (41) | ||||||||||||||||||||||||||||||||||||||||||||
| Certificates of deposit | 6,812,648 | 89,835 | 1.32 | 6,086,251 | 122,494 | 2.01 | 726,397 | (32,659) | (69) | ||||||||||||||||||||||||||||||||||||||||||||
| Checking | 6,676,803 | 11,947 | 0.18 | 3,920,613 | 13,961 | 0.36 | 2,756,190 | (2,014) | (18) | ||||||||||||||||||||||||||||||||||||||||||||
| Money market | 5,289,371 | 36,796 | 0.70 | 2,729,156 | 37,615 | 1.38 | 2,560,215 | (819) | (68) | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 27,872,422 | 166,986 | 0.60 | 19,940,007 | 226,157 | 1.13 | 7,932,415 | (59,171) | (53) | ||||||||||||||||||||||||||||||||||||||||||||
| Total deposits | 37,716,907 | 166,986 | 0.44 | 25,562,099 | 226,157 | 0.88 | 12,154,808 | (59,171) | (44) | ||||||||||||||||||||||||||||||||||||||||||||
| Borrowings: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 2,023,374 | 17,279 | 0.84 | 1,279,073 | 20,836 | 1.61 | 744,301 | (3,557) | (77) | ||||||||||||||||||||||||||||||||||||||||||||
| Long-term borrowings | 1,459,004 | 42,996 | 2.93 | 1,592,915 | 51,236 | 3.19 | (133,911) | (8,240) | (26) | ||||||||||||||||||||||||||||||||||||||||||||
| Total borrowings | 3,482,378 | 60,275 | 1.72 | 2,871,988 | 72,072 | 2.49 | 610,390 | (11,797) | (77) | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 31,354,800 | 227,261 | 0.72 | 22,811,995 | 298,229 | 1.30 | 8,542,805 | (70,968) | (58) | ||||||||||||||||||||||||||||||||||||||||||||
| Total deposits and borrowings | 41,199,285 | 227,261 | 0.55 | 28,434,087 | 298,229 | 1.05 | 12,765,198 | (70,968) | (50) | ||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 1,528,080 | 1,177,805 | 350,275 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | 42,727,365 | 29,611,892 | 13,115,473 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total TCF Financial Corp. shareholders' equity | 5,649,567 | 3,889,204 | 1,760,363 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-controlling interest in subsidiaries | 24,006 | 25,834 | (1,828) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total equity | 5,673,573 | 3,915,038 | 1,758,535 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and equity | $ | 48,400,938 | $ | 33,526,930 | $ | 14,874,008 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net interest spread (FTE) | 3.46 | 4.12 | (66) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income (FTE) and net interest margin (FTE) | $ | 1,550,488 | 3.50 | $ | 1,297,475 | 4.20 | % | $ | 253,013 | (70) | |||||||||||||||||||||||||||||||||||||||||||
| Reconciliation of Net Interest Income (FTE) and Net Interest Margin (FTE) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income and net interest margin (GAAP) | $ | 1,538,401 | 3.47 | % | $ | 1,289,032 | 4.17 | % | $ | 249,369 | (70) | ||||||||||||||||||||||||||||||||||||||||||
| Adjustments for taxable equivalent interest | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and leases(1)(3) | 7,785 | 5,348 | 2,437 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Tax-exempt investment securities(1)(3) | 4,302 | 3,095 | 1,207 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total FTE adjustments | 12,087 | 8,443 | 3,644 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income (FTE) and net interest margin (FTE) | $ | 1,550,488 | 3.50 | % | $ | 1,297,475 | 4.20 | % | $ | 253,013 | (70) | ||||||||||||||||||||||||||||||||||||||||||
(1)Interest and yields are presented on a FTE basis.
(2)The yield on tax-exempt loans, leases and available-for-sale investment securities is computed on a FTE basis using a statutory federal income tax rate of 21%.
(3)Average balances of loans and leases include nonaccrual loans and leases and are presented net of unearned income
42
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Average Balance | Interest | Yields and Rates | Average Balance | Interest | Yields and Rates | Average Balance | Interest | Yields and Rates (bps) | ||||||||||||||||||||||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Federal Home Loan Bank and Federal Reserve Bank stocks | $ | 210,001 | $ | 6,030 | 2.87 | % | $ | 89,774 | $ | 3,618 | 4.03 | % | $ | 120,227 | $ | 2,412 | (116) | ||||||||||||||||||||||||||||||||||||
| Investment securities held-to-maturity | 144,318 | 2,950 | 2.04 | 154,619 | 3,970 | 2.57 | (10,301) | (1,020) | (53) | ||||||||||||||||||||||||||||||||||||||||||||
| Investment securities available-for-sale: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxable | 3,516,413 | 103,077 | 2.93 | 1,390,016 | 37,436 | 2.69 | 2,126,397 | 65,641 | 24 | ||||||||||||||||||||||||||||||||||||||||||||
Tax-exempt(1)(2) | 541,525 | 14,746 | 2.72 | 815,540 | 21,694 | 2.66 | (274,015) | (6,948) | 6 | ||||||||||||||||||||||||||||||||||||||||||||
| Loans and leases held-for-sale | 336,292 | 18,599 | 5.53 | 103,240 | 6,686 | 6.48 | 233,052 | 11,913 | (95) | ||||||||||||||||||||||||||||||||||||||||||||
Loans and leases(1)(2)(3) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 8,371,066 | 519,506 | 6.18 | 6,171,331 | 386,541 | 6.25 | 2,199,735 | 132,965 | (7.00) | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | 5,523,347 | 298,414 | 5.33 | 2,799,523 | 135,791 | 4.78 | 2,723,824 | 162,623 | 55.00 | ||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | 2,570,109 | 131,547 | 5.12 | 2,459,823 | 125,185 | 5.09 | 110,286 | 6,362 | 3.00 | ||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 3,902,959 | 170,706 | 4.37 | 1,788,729 | 95,375 | 5.33 | 2,114,230 | 75,331 | (96.00) | ||||||||||||||||||||||||||||||||||||||||||||
| Home equity | 3,272,760 | 101,687 | 5.51 | 2,579,271 | 142,700 | 5.53 | 693,489 | (41,013) | (2.00) | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer installment | 1,844,714 | 214,116 | 6.54 | 3,028,370 | 200,356 | 6.62 | (1,183,656) | 13,760 | (8.00) | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases | 25,484,955 | 1,435,976 | 5.61 | 18,827,047 | 1,085,948 | 5.75 | 6,657,908 | 350,028 | (14.00) | ||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits with banks and other | 534,979 | 14,326 | 2.66 | 229,698 | 8,346 | 3.63 | 305,281 | 5,980 | (97) | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | 30,768,483 | 1,595,704 | 5.17 | 21,609,934 | 1,167,698 | 5.39 | 9,158,549 | 428,006 | (22) | ||||||||||||||||||||||||||||||||||||||||||||
| Other assets | 2,758,447 | 1,452,214 | 1,306,233 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 33,526,930 | $ | 23,062,148 | $ | 10,464,782 | |||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and Equity: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits | $ | 5,622,092 | $ | 3,843,494 | $ | 1,778,598 | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Savings | 7,203,987 | 52,087 | 0.72 | 5,621,723 | 20,009 | 0.36 | 1,582,264 | 32,078 | 36 | ||||||||||||||||||||||||||||||||||||||||||||
| Certificates of deposit | 6,086,251 | 122,494 | 2.01 | 4,897,937 | 75,385 | 1.54 | 1,188,314 | 47,109 | 47 | ||||||||||||||||||||||||||||||||||||||||||||
| Checking | 3,920,613 | 13,961 | 0.36 | 2,438,040 | 714 | 0.03 | 1,482,573 | 13,247 | 33 | ||||||||||||||||||||||||||||||||||||||||||||
| Money market | 2,729,156 | 37,615 | 1.38 | 1,553,255 | 11,582 | 0.75 | 1,175,901 | 26,033 | 63 | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits | 19,940,007 | 226,157 | 1.13 | 14,510,955 | 107,690 | 0.74 | 5,429,052 | 118,467 | 39 | ||||||||||||||||||||||||||||||||||||||||||||
| Total deposits | 25,562,099 | 226,157 | 0.88 | 18,354,449 | 107,690 | 0.59 | 7,207,650 | 118,467 | 29 | ||||||||||||||||||||||||||||||||||||||||||||
| Borrowings: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 1,279,073 | 20,836 | 1.61 | 3,288 | 77 | 2.33 | 1,275,785 | 20,759 | (72) | ||||||||||||||||||||||||||||||||||||||||||||
| Long-term borrowings | 1,592,915 | 51,236 | 3.19 | 1,412,186 | 43,067 | 3.03 | 180,729 | 8,169 | 16 | ||||||||||||||||||||||||||||||||||||||||||||
| Total borrowings | 2,871,988 | 72,072 | 2.49 | 1,415,474 | 43,144 | 3.02 | 1,456,514 | 28,928 | (53) | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 22,811,995 | 298,229 | 1.30 | 15,926,429 | 150,834 | 0.94 | 6,885,566 | 147,395 | 36 | ||||||||||||||||||||||||||||||||||||||||||||
| Total deposits and borrowings | 28,434,087 | 298,229 | 1.05 | 19,769,923 | 150,834 | 0.76 | 8,664,164 | 147,395 | 29 | ||||||||||||||||||||||||||||||||||||||||||||
| Accrued expenses and other liabilities | 1,177,805 | 761,723 | 416,082 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | 29,611,892 | 20,531,646 | 9,080,246 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total TCF Financial Corp. shareholders' equity | 3,889,204 | 2,506,179 | 1,383,025 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-controlling interest in subsidiaries | 25,834 | 24,323 | 1,511 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total equity | 3,915,038 | 2,530,502 | 1,384,536 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and equity | $ | 33,526,930 | $ | 23,062,148 | $ | 10,464,782 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net interest spread (FTE) | 4.12 | 4.63 | (51) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income (FTE) and net interest margin (FTE) | $ | 1,297,475 | 4.20 | % | $ | 1,016,864 | 4.69 | $ | 280,611 | (49) | |||||||||||||||||||||||||||||||||||||||||||
| Reconciliation of Net Interest Income (FTE) and Net Interest Margin (FTE) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income and net interest margin (GAAP) | $ | 1,289,032 | 4.17 | % | $ | 1,008,495 | 4.66 | % | $ | 280,537 | (49) | ||||||||||||||||||||||||||||||||||||||||||
| Adjustments for taxable equivalent interest | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans and leases(1)(3) | 5,348 | 3,813 | 1,535 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Tax-exempt investment securities(1)(3) | 3,095 | 4,556 | (1,461) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Total FTE adjustments | 8,443 | 8,369 | 74 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income (FTE) and net interest margin (FTE) | $ | 1,297,475 | 4.20 | % | $ | 1,016,864 | 4.69 | % | $ | 280,611 | (49) | ||||||||||||||||||||||||||||||||||||||||||
(1)Interest and yields are presented on a FTE basis.
(2)The yield on tax-exempt loans, leases and available-for-sale investment securities is computed on a FTE basis using a statutory federal income tax rate of 21%.
(3)Average balances of loans and leases include nonaccrual loans and leases and are presented net of unearned income.
43
Volume and Rate Variance Analysis
| Year Ended December 31, 2020 vs. 2019 | Year Ended December 31, 2019 vs. 2018 | ||||||||||||||||||||||||||||||||||
| Increase (Decrease) Due to Changes in | Increase (Decrease) Due to Changes in | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Average Volume | Average Yield/Rate | Total Change | Average Volume | Average Yield/Rate | Total Change | |||||||||||||||||||||||||||||
| Changes in Interest Income on Interest-Earning Assets: | |||||||||||||||||||||||||||||||||||
| Federal Home Loan Bank and Federal Reserve Bank stocks | $ | 5,699 | $ | 1,627 | $ | 7,326 | $ | 3,699 | $ | (1,287) | $ | 2,412 | |||||||||||||||||||||||
| Investment securities held-to-maturity | (54) | (1,054) | (1,108) | (251) | (769) | (1,020) | |||||||||||||||||||||||||||||
| Investment securities available-for-sale: | |||||||||||||||||||||||||||||||||||
| Taxable | 62,845 | (23,302) | 39,543 | 62,055 | 3,586 | 65,641 | |||||||||||||||||||||||||||||
Tax-exempt(1) | 4,901 | 823 | 5,724 | (7,450) | 502 | (6,948) | |||||||||||||||||||||||||||||
| Loans and leases held-for-sale | 827 | (8,032) | (7,205) | 13,023 | (1,110) | 11,913 | |||||||||||||||||||||||||||||
Loans and leases(1) | 471,293 | (324,298) | 146,995 | 377,736 | (27,708) | 350,028 | |||||||||||||||||||||||||||||
| Interest-bearing deposits with banks and other | 9,813 | (19,043) | (9,230) | 8,746 | (2,766) | 5,980 | |||||||||||||||||||||||||||||
| Total interest-earning assets | $ | 555,324 | $ | (373,279) | $ | 182,045 | $ | 457,558 | $ | (29,552) | $ | 428,006 | |||||||||||||||||||||||
| Changes in Interest Expense on Interest-Bearing Liabilities: | |||||||||||||||||||||||||||||||||||
| Interest-bearing deposits: | |||||||||||||||||||||||||||||||||||
| Savings | 11,186 | (34,865) | (23,679) | 6,877 | 25,201 | 32,078 | |||||||||||||||||||||||||||||
| Certificates of deposit | 13,241 | (45,900) | (32,659) | 20,769 | 26,340 | 47,109 | |||||||||||||||||||||||||||||
| Checking | $ | 6,936 | $ | (8,950) | (2,014) | $ | 684 | $ | 12,563 | 13,247 | |||||||||||||||||||||||||
| Money market | 23,783 | (24,602) | (819) | 12,275 | 13,758 | 26,033 | |||||||||||||||||||||||||||||
| Interest-bearing deposits | 55,146 | (114,317) | (59,171) | 40,605 | 77,862 | 118,467 | |||||||||||||||||||||||||||||
| Short-term borrowings | 8,993 | (12,550) | (3,557) | 20,791 | (32) | 20,759 | |||||||||||||||||||||||||||||
| Long-term borrowings | (4,176) | (4,064) | (8,240) | 5,721 | 2,448 | 8,169 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | $ | 59,963 | $ | (130,931) | $ | (70,968) | $ | 67,117 | $ | 80,278 | $ | 147,395 | |||||||||||||||||||||||
Total change in net interest income (FTE)(2) | $ | 495,361 | $ | (242,348) | $ | 253,013 | $ | 390,441 | $ | (109,830) | $ | 280,611 | |||||||||||||||||||||||
(1)Changes attributable to the combined impact of volume and rate have been allocated proportionately to the change due to volume and the change due to rate.
(2)Computed on a FTE basis using a federal income tax rate of 21%.
Provision for Credit Losses The provision for credit losses was $257.2 million for 2020, compared with $65.3 million for 2019 and $46.8 million for 2018. The provision for credit losses is comprised of the provision for credit losses related to loans and leases and the provision (benefit) for credit losses related unfunded lending commitments as follows:
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Provision for credit losses | |||||||||||||||||
| Provision for credit losses related to loans and leases | $ | 252,073 | $ | 65,282 | $ | 46,768 | |||||||||||
Provision (benefit) for credit losses related to unfunded lending commitments(1) | 5,078 | 233 | (51) | ||||||||||||||
Total provision for credit losses(1) | $ | 257,151 | $ | 65,515 | $ | 46,717 | |||||||||||
(1)Provision for credit losses related to loans and leases and the provision (benefit) for credit losses related to unfunded lending commitments are included within provision for credit losses in the Consolidated Statements of Income beginning January 1, 2020 as a result of the adoption of CECL.
44
The increase in provision for credit losses related to loans and leases of $186.8 million in 2020, compared to 2019, reflects a build to the overall allowance for loans and leases primarily due to the impact of COVID-19 and additionally impacted by the adoption of CECL. During 2020, the COVID-19 pandemic had a negative impact on current and forecasted macroeconomic conditions and created uncertainty around the performance of certain sectors that have been more heavily impacted, including motor coach, shuttle bus, hotel, retail commercial real estate, franchise, retail trade and fitness. Prior to the adoption of CECL on January 1, 2020, the allowance for credit losses was calculated under an incurred loss model which delayed recognition of loss until it was probable the loss had been incurred. The accounting under CECL considers current credit losses expected to be incurred in the loan and lease portfolios over the remaining expected life of each financial asset and considers expected future changes in macroeconomic conditions. In addition, as a result of the adoption of CECL, the provision for credit losses now includes the provision (benefit) for unfunded lending commitments that was previously included within other noninterest expense. The increase in provision for credit losses in 2019, compared to 2018, was primarily due to an increase in originated loan growth driven by increased activity in the loan and lease portfolio as a result of the TCF/Chemical Merger, and to a lesser extent, an increase in commercial and industrial net charge-offs, primarily due to one loan relationship, and a decrease in recoveries on previous charge-offs related to sales of consumer nonaccrual and TDR loans. The increase in provision for credit losses related to unfunded lending commitments of $4.8 million in 2020, compared to 2019, was primarily due to macroeconomic conditions impacted by the COVID-19 pandemic, partially offset by a decline in the total unfunded commitment balance. The provision for credit losses is predominantly a function of our reserving methodology used to determine the appropriate level of the allowance for credit losses, which is a critical accounting estimate.
For further information, see "Consolidated Financial Condition Analysis — Credit Quality" in this Management's Discussion and Analysis and "Note 8. Allowance for Credit Losses and Credit Quality" of Notes to Consolidated Financial Statements.
Noninterest Income The components of noninterest income were as follows:
| Year Ended December 31, | Change | ||||||||||||||||||||||||||||||||||||||||
| 2020 / 2019 | 2019 / 2018 | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | $ | % / bps | $ | % / bps | ||||||||||||||||||||||||||||||||||
| Leasing revenue | $ | 142,723 | $ | 163,718 | $ | 172,603 | $ | (20,995) | (12.8) | % | $ | (8,885) | (5.1) | % | |||||||||||||||||||||||||||
| Fees and service charges on deposit accounts | 112,681 | 127,860 | 113,242 | (15,179) | (11.9) | 14,618 | 12.9 | ||||||||||||||||||||||||||||||||||
| Card and ATM revenue | 88,699 | 87,221 | 78,406 | 1,478 | 1.7 | 8,815 | 11.2 | ||||||||||||||||||||||||||||||||||
| Net gains on sales of loans and leases | 86,776 | 26,308 | 33,695 | 60,468 | N.M. | (7,387) | (21.9) | ||||||||||||||||||||||||||||||||||
| Wealth management revenue | 25,701 | 10,413 | — | 15,288 | 146.8 | 10,413 | N.M. | ||||||||||||||||||||||||||||||||||
| Servicing fee revenue | 10,603 | 20,776 | 27,334 | (10,173) | (49.0) | (6,558) | (24.0) | ||||||||||||||||||||||||||||||||||
| Net gains on investment securities | 2,338 | 7,425 | 348 | (5,087) | (68.5) | 7,077 | N.M. | ||||||||||||||||||||||||||||||||||
| Other | 46,542 | 21,811 | 28,769 | 24,731 | 113.4 | (6,958) | (24.2) | ||||||||||||||||||||||||||||||||||
| Total noninterest income | $ | 516,063 | $ | 465,532 | $ | 454,397 | $ | 50,531 | 10.9 | $ | 11,135 | 2.5 | |||||||||||||||||||||||||||||
Total noninterest income as a percentage of total revenue | 25.1 | % | 26.5 | % | 31.1 | % | -140 bps | -460 bps | |||||||||||||||||||||||||||||||||
N.M. Not Meaningful
Noninterest income was $516.1 million for 2020, compared to $465.5 million for 2019 and $454.4 million for 2018. Noninterest income for the year ended December 31, 2020 included notable items of $17.6 million of loan servicing rights impairment and a $14.7 million gain on the sale of our Arizona branches, and for the year ended December 31, 2019 notable items included a $27.5 million net loss on sale of the Legacy TCF auto finance portfolio, a $17.3 million loss on termination of interest rate swaps and $3.9 million of loan servicing rights impairment, and $5.9 million of gains on sales of certain investment securities. Adjusted noninterest income, a non-GAAP financial measure that excludes the identified notable items, was $519.0 million for 2020, compared to $508.3 million for 2019 and $454.4 million for 2018. See "Non-GAAP Financial Measures" in this Management's Discussion and Analysis for further information.
Leasing revenue Leasing revenue was $142.7 million for 2020, compared with $163.7 million for 2019 and $172.6 million for 2018. Leasing revenue is impacted by changes in our operating lease revenue and sales-type lease revenue through our equipment financing activity. The decrease in leasing revenue for 2020, compared to 2019 was primarily due to a decrease in sales-type lease revenue through our equipment financing activity impacted by the COVID-19 pandemic.
45
Fees and service charges on deposit accounts Fees and service charges on deposit accounts were $112.7 million for 2020, compared with $127.9 million for 2019 and $113.2 million for 2018. The decrease in 2020, compared to 2019, was primarily attributable to customer account balances maintaining excess liquidity through the COVID-19 pandemic resulting in a decline in fees charged, partially offset by incremental fees resulting from the TCF/Chemical Merger. The increase in 2019, compared to 2018, was primarily attributable to incremental fees resulting from the TCF/Chemical Merger.
Card and ATM revenue Card and ATM revenue was $88.7 million for 2020, compared with $87.2 million for 2019 and $78.4 million for 2018. The increase in 2020, compared to 2019, was primarily attributable to incremental revenue resulting from the TCF/Chemical Merger, partially offset by the decline in debit card and ATM activity related to the COVID-19 pandemic. The increase in 2019, compared to 2018, was primarily due to incremental revenue resulting from the TCF/Chemical Merger.
Net gains on sales of loans and leases Net gains on sales of loans and leases were $86.8 million for 2020, compared with $26.3 million for 2019 and $33.7 million for 2018. The increase in 2020, compared to 2019, was primarily due the higher volume of consumer loans sold resulting from the TCF/Chemical Merger and the $27.5 million loss related to the sale of the Legacy TCF auto finance portfolio during 2019. The decrease in 2019 from 2018 was primarily due to the $27.5 million loss related to the sale of the Legacy TCF auto finance portfolio, partially offset by the higher volume of consumer loans sold resulting from the TCF/Chemical Merger and the recognition of a $3.7 million gain on sale of loans and leases related to a nonaccrual and TDR loan sale. We sold $2.4 billion of loans and leases in 2020, compared with $2.9 billion in 2019, or $1.8 billion excluding the sale of the Legacy TCF auto finance portfolio, and $1.2 billion in 2018.
Wealth management Wealth management revenue is comprised of investment fees that are generally based on the market value of assets within a trust account, custodial fees and fees from the sale of investment products and is a revenue stream added as a result of the TCF/Chemical Merger. Revenues from wealth management were $25.7 million for 2020, compared with $10.4 million for 2019. The increase in 2020, compared to 2019, was primarily attributable to it being a new revenue stream as a result of the TCF/Chemical Merger.
Servicing fee revenue Servicing fee revenue was $10.6 million for 2020, compared with $20.8 million for 2019 and $27.3 million for 2018. The decreases in 2020, compared to 2019, and in 2019, compared to 2018, were primarily due to the continued run-off in the auto finance serviced for others portfolio, partially offset by revenue added as a result of the servicing portfolio acquired in the TCF/Chemical Merger.
Net gains on investment securities Net gains on investment securities were $2.3 million for 2020, compared to $7.4 million for 2019 and $348 thousand for 2018. Net gains on investment securities decreased in 2020, compared to 2019 due to lower sales activity and increased in 2019, compared to 2018, due to increased sales activity. In 2019, we sold $1.6 billion of investment securities as a result of balance sheet repositioning following the TCF/Chemical Merger resulting in $5.9 million of net gains.
Other Other noninterest income was $46.5 million for 2020, compared to $21.8 million for 2019 and $28.8 million for 2018. The increase in 2020, compared to 2019, was primarily due to the $17.3 million loss on termination of interest rate swaps recognized in 2019 and the $14.7 million gain on the sale of our Arizona branches recognized in 2020, partially offset by an increase in loan servicing rights impairment. The increase in 2019, compared to 2018, was primarily due to a $17.3 million loss related to the termination of interest rate swaps and the recognition of $3.9 million of loan servicing rights impairment, partially offset by an increase in incremental revenue resulting from the TCF/Chemical Merger.
46
Noninterest Expense The components of noninterest expense were as follows:
| Year Ended December 31, | Change | ||||||||||||||||||||||||||||||||||||||||
| 2020 / 2019 | 2019 / 2018 | ||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | $ | % / bps | $ | % / bps | ||||||||||||||||||||||||||||||||||
| Compensation and employee benefits | $ | 702,702 | $ | 576,922 | $ | 502,196 | $ | 125,780 | 21.8 | % | $ | 74,726 | 14.9 | % | |||||||||||||||||||||||||||
| Occupancy and equipment | 209,690 | 189,560 | 165,839 | 20,130 | 10.6 | 23,721 | 14.3 | ||||||||||||||||||||||||||||||||||
| Lease financing equipment depreciation | 73,204 | 76,426 | 73,829 | (3,222) | (4.2) | 2,597 | 3.5 | ||||||||||||||||||||||||||||||||||
| Net foreclosed real estate and repossessed assets | 5,136 | 13,523 | 17,050 | (8,387) | (62.0) | (3,527) | (20.7) | ||||||||||||||||||||||||||||||||||
| Merger-related expenses | 203,888 | 171,968 | — | 31,920 | 18.6 | 171,968 | N.M. | ||||||||||||||||||||||||||||||||||
| Other | 332,751 | 303,716 | 255,486 | 29,035 | 9.6 | 48,230 | 18.9 | ||||||||||||||||||||||||||||||||||
| Total noninterest expense | $ | 1,527,371 | $ | 1,332,115 | $ | 1,014,400 | $ | 195,256 | 14.7 | $ | 317,715 | 31.3 | |||||||||||||||||||||||||||||
| Full-time equivalent staff (at period end) | 6,881 | 7,762 | 5,278 | (881) | (11.4) | 2,484 | 47.1 | ||||||||||||||||||||||||||||||||||
| Efficiency ratio | 74.34 | % | 75.92 | % | 69.34 | % | (158) bps | 658 bps | |||||||||||||||||||||||||||||||||
Adjusted efficiency ratio (non-GAAP)(1) | 60.95 | 60.58 | 64.77 | 37 | (419) | ||||||||||||||||||||||||||||||||||||
N.M. Not Meaningful
(1)See "Consolidated Financial Condition Analysis - Non-GAAP Financial Measures" in this Management's Discussion and Analysis for further information.
Noninterest expense was $1.5 billion for 2020, compared to $1.3 billion for 2019 and $1.0 billion for 2018. Noninterest expense included merger-related expenses of $203.9 million in 2020 and $172.0 million in 2019. Noninterest expense for 2020 included $4.0 million of expenses related to the sale of the Legacy TCF auto finance portfolio ($1.6 million included in occupancy and equipment, $1.4 million included in other noninterest expense and $1.0 million included in compensation and employee benefits) and $0.6 million of expense related to branch exit costs, included in other noninterest expense, considered notable items. Noninterest expense for 2019 included $9.4 million of expense associated with the write-down of company-owned vacant land parcels and branch exit costs, included in other noninterest expense, and $4.7 million of expenses related to the sale of the Legacy TCF auto finance portfolio ($2.2 million included in other noninterest expense, $1.5 million included in occupancy and equipment and $930 thousand included in compensation and employee benefits) and $6.3 million of expense related to a pension fair value adjustment on plans with previously announced terminations, included in other noninterest expense, considered notable items. Noninterest expense for 2018 included a $32.0 million charge related to the settlement with the CFPB and the OCC, included in other noninterest expense, considered a notable item. Adjusted noninterest expense, a non-GAAP financial measure that excludes merger-related expenses and the identified notable items, was $1.3 billion for 2020, compared to $1.1 billion for 2019 and $982.4 million for 2018. During 2020 we achieved our committed merger expense synergies on schedule while completing our integration activities by our target delivery date. See "Non-GAAP Financial Measures" in this Management's Discussion and Analysis for further information.
Compensation and employee benefits Compensation and employee benefits expense was $702.7 million for 2020, compared with $576.9 million for 2019 and $502.2 million for 2018. The increase in 2020, compared to 2019, was primarily due to the staff additions beginning August 1, 2019 resulting from the TCF/Chemical Merger. In 2020, compensation and employee benefits expense also included $21.6 million of executive severance expense and $1.0 million of expense related to the sale of the Legacy TCF auto finance portfolio. The increase in 2019, compared to 2018, was primarily due to the staff additions resulting from the TCF/Chemical Merger. In 2019, compensation and employee benefits expense also included $930 thousand of expense related to the sale of the Legacy TCF auto finance portfolio.
Occupancy and equipment Occupancy and equipment expense was $209.7 million for 2020, compared with $189.6 million for 2019 and $165.8 million for 2018. The increase in 2020, compared to 2019, was primarily due to the incremental operating costs associated with the TCF/Chemical Merger in addition to expenses related to COVID-19 safety protocols. The increase in 2019, compared to 2018, was primarily due to the incremental operating costs associated with the TCF/Chemical Merger in addition to $1.5 million of expense related to the sale of the Legacy TCF auto finance portfolio. Depreciation and amortization expense related to premises and equipment was $76.0 million, $75.3 million and $48.6 million for 2020, 2019 and 2018, respectively.
Lease financing equipment depreciation Lease financing equipment depreciation was $73.2 million for 2020, compared with $76.4 million for 2019 and $73.8 million for 2018. Shifts in lease financing equipment depreciation are the result of changes in balances of leased equipment.
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Net foreclosed real estate and repossessed assets Net foreclosed real estate and repossessed assets expense was $5.1 million for 2020, compared with $13.5 million for 2019 and $17.1 million for 2018. The decrease in 2020, compared to 2019, was primarily due to a decrease in repossessed asset expense, partially offset by a reduction in gains on sales of repossessed assets. The decrease in 2019, compared to 2018, was primarily due to an increase in gains on sales of repossessed assets.
Merger-related expenses Merger-related expenses were $203.9 million for 2020, compared to $172.0 million for 2019. Merger-related expenses consisted primarily of employment related expenses, professional fees and merger-related branch closing expenses. Merger-related expenses for 2020 included $5.2 million related to our pending merger with Huntington, while the remainder of merger-related expenses in 2020 and all in 2019 related to the TCF/Chemical Merger. We had no merger-related expense in 2018.
Other noninterest expense Other noninterest expense was $332.8 million for 2020, compared with $303.7 million for 2019 and $255.5 million for 2018. The increase in 2020, compared to 2019, was primarily due to incremental costs associated with the TCF/Chemical Merger. Other noninterest expense for 2020 also included $7.0 million of impairment, or $5.6 million after tax, of historic tax credits placed into service, which is offset by income tax benefit within income tax expense related to the same tax credits. The increase in 2019, compared to 2018, was primarily due to incremental costs associated with the TCF/Chemical Merger and notable items including: $9.4 million of expense related to write-downs of company-owned vacant land parcels and branch exit costs, $6.3 million of expense related to pension fair value adjustments on plans with previously announced terminations and $2.2 million of expense related to the sale of the Legacy TCF auto finance portfolio, partially offset by the settlement with the CFPB and the OCC of $32.0 million that was recognized in 2018. Other noninterest expense for 2019 also included a $4.0 million impairment, or $3.2 million after tax, of historic tax credits placed into service. See "Note 25. Other Noninterest Income and Expense" of Notes to Consolidated Financial Statements for further information.
Income Taxes Income tax expense was $39.9 million, or 14.8% of income before income tax expense, for 2020, compared with $50.2 million, or 14.1%, for 2019 and $86.1 million, or 21.4%, for 2018. The decrease in income tax expense for 2020, compared to 2019, was primarily due to a decrease in pre-tax income. Income tax expense for 2020 included a benefit of $16.0 million attributable to tax net operating loss ("NOL") carryback benefits associated with the Coronavirus Aid, Relief and Economic Security (“CARES" Act). The $16.0 million benefit included a $9.0 million benefit associated with pre-2020 depreciation method changes and a $7.0 million benefit related to estimated current year activity. The decrease in income tax expense for 2019, compared to 2018, was primarily due to the inclusion of $11.8 million of tax basis adjustment benefits, a $5.7 million benefit provided by the repricing of our net deferred tax position in connection with the completion of the TCF/Chemical Merger and a $4.6 million income tax benefit related to federal historic tax credits. The remaining fluctuations in our effective income tax rate reflect changes for each period in the proportion of tax-exempt interest income, nondeductible expenses and credits relative to income before income tax expense. See "Note 2. Summary of Significant Accounting Policies" and "Note 26. Income Taxes" of Notes to Consolidated Financial Statements for further information.
The CARES Act was enacted in March 2020 in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOLs from 2018, 2019 and 2020 to be carried back five years to generate refunds of previously paid income taxes. Additionally, it provides retroactive changes in depreciation rules for certain qualified improvement property. Guidance implementing the CARES Act’s provisions provided retroactive choices to opt into or out of the full expensing of equipment purchases in the year of acquisition. During 2020, we implemented these and other options provided by the CARES Act, which resulted in a forecasted full year 2020 federal tax NOL. Carrying back 2020 federal tax NOLs to pre-2018 years results in tax refunds and a permanent tax benefit associated with the difference between the 21% federal tax rate in 2020 and the 35% federal tax rate before 2018.
Reportable Segment Results Our reportable segments are Consumer Banking, Commercial Banking and Enterprise Services. See "Note 27. Reportable Segments" of Notes to Consolidated Financial Statements for further information regarding net income (loss), revenues and assets for each of our reportable segments.
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Consumer Banking
Consumer Banking is comprised of all of our consumer and small business-facing businesses and includes Retail Banking, Wealth Management, Residential and Consumer Lending, and Business Banking. Our consumer banking strategy is primarily to generate deposits and originate high credit quality loans for investment and sale. Deposits are generated from consumers and small businesses to provide a source of low cost funds, with a focus on building and maintaining quality customer relationships.
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Consumer Banking | |||||||||||||||||
| Net interest income | $ | 834,106 | $ | 676,552 | $ | 569,220 | |||||||||||
| Provision for credit losses | 16,945 | 16,550 | 24,661 | ||||||||||||||
| Net interest income after provision for credit losses | 817,161 | 660,002 | 544,559 | ||||||||||||||
| Noninterest income | 318,029 | 273,915 | 262,797 | ||||||||||||||
| Noninterest expense | 852,733 | 753,904 | 669,967 | ||||||||||||||
| Income before income tax expense | 282,457 | 180,013 | 137,389 | ||||||||||||||
| Income tax expense | 62,654 | 38,353 | 31,645 | ||||||||||||||
| Net income available to common shareholders | 219,803 | 141,660 | 105,744 | ||||||||||||||
| Total assets (at period end) | $ | 13,663,990 | $ | 14,224,545 | $ | 6,414,228 | |||||||||||
Consumer Banking generated net income available to common shareholders of $219.8 million for 2020, compared with $141.7 million for 2019 and $105.7 million for 2018. The increase in 2020, compared to 2019, was primarily due to the incremental income resulting from the TCF/Chemical Merger and lower cost of funds, partially offset by an increase in incremental operating costs and a decrease in fees and service charges on deposit accounts primarily attributable to customer account balances maintaining excess liquidity resulting in a decline in fees charged. The increase in 2019, compared to 2018, was primarily due to the incremental income resulting from the TCF/Chemical Merger and the 2018 expense associated with the settlement with the CFPB and the OCC of $32.0 million, partially offset by an increase in incremental operating costs.
Commercial Banking Commercial Banking is comprised of commercial and industrial, commercial real estate banking and lease financing. Our commercial banking strategy focuses on building full commercial relationships including originating high credit quality loans and leases and providing deposit and treasury services.
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Commercial Banking | |||||||||||||||||
| Net interest income | $ | 697,190 | $ | 536,154 | $ | 383,031 | |||||||||||
| Provision for credit losses | 240,206 | 48,732 | 22,107 | ||||||||||||||
| Net interest income after provision for credit losses | 456,984 | 487,422 | 360,924 | ||||||||||||||
| Noninterest income | 186,304 | 198,898 | 190,442 | ||||||||||||||
| Noninterest expense | 430,158 | 383,390 | 308,727 | ||||||||||||||
| Income before income tax expense | 213,130 | 302,930 | 242,639 | ||||||||||||||
| Income tax expense | 35,128 | 50,581 | 52,675 | ||||||||||||||
| Income after income tax expense | 178,002 | 252,349 | 189,964 | ||||||||||||||
| Income attributable to non-controlling interest | 7,282 | 11,458 | 11,270 | ||||||||||||||
| Net income available to common shareholders | 170,720 | 240,891 | 178,694 | ||||||||||||||
| Total assets (at period end) | $ | 24,063,599 | $ | 20,395,308 | $ | 9,086,125 | |||||||||||
Commercial Banking generated net income available to common shareholders of $170.7 million for 2020, compared with $240.9 million for 2019 and $178.7 million for 2018. The decrease in 2020, compared to 2019, was primarily due to an increase in provision for credit losses and a decrease in leasing revenue, partially offset by the incremental income resulting from the TCF/Chemical Merger and lower cost of funds. The provision increase in 2020, compared to 2019, reflects a build to the overall allowance for loans and leases primarily due to the impact of COVID-19 and additionally impacted by the adoption of CECL. The increase in 2019, compared to 2018, was primarily due to the incremental income resulting from the TCF/Chemical Merger.
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Enterprise Services
Enterprise Services is comprised of (i) corporate treasury, which includes our 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. Our investment portfolio accounts for the earning assets within this segment. Borrowings may be used to offset reductions in deposits or to support lending activities. This segment also includes residual revenues and expenses representing the difference between actual amounts incurred by Enterprise Services and amounts allocated to the operating segments, including interest rate risk residuals such as funds transfer pricing mismatches.
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Enterprise Services | |||||||||||||||||
| Net interest income | $ | 7,105 | $ | 76,326 | $ | 56,244 | |||||||||||
| Noninterest income | 11,730 | (7,281) | 1,158 | ||||||||||||||
| Noninterest expense | 244,480 | 194,821 | 35,706 | ||||||||||||||
| Income (loss) before income tax (benefit) expense | (225,645) | (125,776) | 21,696 | ||||||||||||||
| Income tax (benefit) expense | (57,881) | (38,693) | 1,776 | ||||||||||||||
| Income (loss) after income tax (benefit) expense | (167,764) | (87,083) | 19,920 | ||||||||||||||
| Preferred stock dividends | 9,975 | 9,975 | 11,588 | ||||||||||||||
| Impact of preferred stock call | — | — | 3,481 | ||||||||||||||
| Net (loss) income available to common shareholders | (177,739) | (97,058) | 4,851 | ||||||||||||||
| Total assets (at period end) | $ | 10,074,898 | $ | 12,031,700 | $ | 8,199,259 | |||||||||||
Enterprise Services generated net loss available to common shareholders of $177.7 million for 2020, compared with net loss available to common shareholders of $97.1 million for 2019 and net income available to common shareholders of $4.9 million for 2018. The increase in net loss in 2020, compared to 2019, was primarily due to increases in merger-related expenses and compensation and employee benefits and a decrease in net interest income. The increase in net loss in 2019, compared to 2018, was primarily due to an increase in merger-related expenses, partially offset by an increase in net interest income driven by investment securities acquired in the TCF/Chemical Merger.
Consolidated Financial Condition Analysis
Investment Securities Total investment securities available-for-sale, at fair value, were $8.3 billion at December 31, 2020, compared with $6.7 billion at December 31, 2019. Our investment securities available-for-sale are debt securities consisting primarily of fixed-rate mortgage-backed securities issued by the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"), and obligations of states and political subdivisions. The increase in investment securities was primarily due to purchases of additional residential mortgage-backed securities.
From time to time, we sell investment securities available-for-sale and utilize the proceeds to reduce borrowings, fund growth in loans and leases or for other corporate purposes. We sold $48.5 million of investment securities during the year ended 2020, $2.0 billion during the year ended 2019 and $251.3 million during the year ended 2018.
Total investment securities held-to-maturity were $184.4 million at December 31, 2020, compared with $139.4 million at December 31, 2019. Our investment securities held-to-maturity portfolio consists primarily of fixed-rate mortgage-backed securities issued by the FNMA. The increase in debt securities held to maturity was primarily due to purchases of residential mortgage-backed securities.
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The amortized cost and fair value of investment securities available-for-sale and held-to-maturity were as follows:
| At December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| (In thousands) | Amortized Cost | Fair value | Amortized Cost | Fair value | Amortized Cost | Fair value | |||||||||||||||||||||||||||||
| Investment securities available-for-sale | |||||||||||||||||||||||||||||||||||
| Debt securities: | |||||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | $ | 6,308,376 | $ | 6,467,760 | $ | 4,866,473 | $ | 4,929,717 | $ | 1,930,700 | $ | 1,913,194 | |||||||||||||||||||||||
| Obligations of states and political subdivisions | 827,191 | 870,181 | 852,096 | 863,855 | 566,304 | 556,871 | |||||||||||||||||||||||||||||
| Commercial mortgage-backed securities | 708,593 | 750,381 | 685,212 | 691,614 | — | — | |||||||||||||||||||||||||||||
| Government and government-sponsored enterprises | 196,560 | 195,900 | 235,045 | 234,385 | — | — | |||||||||||||||||||||||||||||
| Corporate debt and trust preferred securities | 453 | 501 | 451 | 430 | — | — | |||||||||||||||||||||||||||||
| Total investment securities available-for-sale | 8,041,173 | 8,284,723 | 6,639,277 | 6,720,001 | 2,497,004 | 2,470,065 | |||||||||||||||||||||||||||||
| Investment securities held-to-maturity | |||||||||||||||||||||||||||||||||||
| Residential mortgage-backed securities | 180,946 | 190,141 | 135,769 | 141,168 | 146,052 | 146,467 | |||||||||||||||||||||||||||||
| Corporate debt and trust preferred securities | 3,413 | 3,413 | 3,676 | 3,676 | 2,800 | 2,800 | |||||||||||||||||||||||||||||
| Total investment securities held-to-maturity | 184,359 | 193,554 | 139,445 | 144,844 | 148,852 | 149,267 | |||||||||||||||||||||||||||||
| Total investment securities | $ | 8,225,532 | $ | 8,478,277 | $ | 6,778,722 | $ | 6,864,845 | $ | 2,645,856 | $ | 2,619,332 | |||||||||||||||||||||||
The carrying value and FTE yield of investment securities available-for-sale and investment securities held-to-maturity by final contractual maturity were as follows. 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, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage-backed Securities | Obligations of States and Political Subdivisions | Commercial mortgage-backed Securities | Government and Government-sponsored Enterprises | Corporate Debt And Trust Preferred Securities | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | Amount | Yield (1) | Amount | Yield (1) | Amount | Yield (1) | Amount | Yield (1) | Amount | Yield (1) | Amount | Yield (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Investment securities available-for-sale | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Due in one year or less | $ | — | — | % | $ | 46,163 | 2.66 | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 46,163 | 2.66 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Due in 1-5 years | 14,287 | 1.88 | 141,458 | 2.87 | 12,380 | 1.56 | — | — | — | — | 168,125 | 2.69 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Due in 5-10 years | 124,363 | 2.02 | 246,743 | 2.53 | 331,349 | 1.95 | 17,784 | 1.60 | — | — | 720,239 | 2.15 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Due after 10 years | 6,329,110 | 1.96 | 435,817 | 2.73 | 406,652 | 2.51 | 178,116 | 1.76 | 501 | 4.74 | 7,350,196 | 2.03 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $6,467,760 | 1.96 | % | $ | 870,181 | 2.69 | % | $ | 750,381 | 2.25 | % | $ | 195,900 | 1.75 | % | $ | 501 | 4.74 | % | $ | 8,284,723 | 2.06 | % | ||||||||||||||||||||||||||||||||||||||||||||||||
| Investment securities held-to-maturity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Due in one year or less | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 400 | 3.00 | % | $ | 400 | 3.00 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Due in 1-5 years | — | — | — | — | — | — | — | — | 2,150 | 3.00 | 2,150 | 3.00 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Due in 5-10 years | 46 | 6.50 | — | — | — | — | — | — | — | — | 46 | 6.50 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Due after 10 years | 180,900 | 1.86 | — | — | — | — | — | — | 863 | 6.00 | 181,763 | 1.88 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 180,946 | 1.86 | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | 3,413 | 3.76 | % | $ | 184,359 | 1.90 | % | |||||||||||||||||||||||||||||||||||||||||||||||
(1)Interest and yields are presented on a FTE basis.
See "Note 6. Investment Securities" of Notes to Consolidated Financial Statements for further information regarding our investment securities available-for-sale and investment securities held-to-maturity.
Loans and Leases Held-for-Sale Our loans and leases held-for-sale were $222.0 million at December 31, 2020, an increase of $22.2 million, compared to $199.8 million at December 31, 2019.
Loans and Leases Our commercial loan and lease portfolio is comprised of commercial and industrial loans, commercial real estate loans, and lease financing. Our consumer loan portfolio is comprised of residential mortgages, home equity loans and lines of credit and consumer installment loans. Our lending markets primarily consist of communities throughout our primary banking markets in addition to Florida, Texas, New York, California and Canada.
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Total loans and leases were $34.5 billion at both December 31, 2020 and December 31, 2019. At December 31, 2020, commercial and industrial loans included $1.6 billion of PPP loans outstanding. Loans and leases excluding PPP loans, a non-GAAP financial measure, decreased $1.6 billion from December 31, 2019 primarily due to a decrease in the commercial and industrial portfolio, primarily inventory finance, related to strong dealer activity and the lack of backfill from manufacturers as a result of logistical issues and the economic slowdown, in addition to a decrease in our consumer loan portfolio, partially offset by increases in our commercial real estate and lease financing portfolios and loan and lease purchases. See "Non-GAAP Financial Measures" in this Management's Discussion and Analysis for further information.
Information about our loans and leases was as follows:
| Compound Annual | |||||||||||||||||||||||||||||||||||||||||
| Growth Rate | |||||||||||||||||||||||||||||||||||||||||
| At December 31, | 1-Year | 5-Year | |||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | 2020 / 2019 | 2020 / 2016 | ||||||||||||||||||||||||||||||||||
Commercial loan and lease portfolio: | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 11,422,383 | $ | 11,439,602 | $ | 6,298,240 | $ | 5,920,423 | $ | 5,180,864 | (0.2) | % | 17.1 | % | |||||||||||||||||||||||||||
| Commercial real estate | 9,702,587 | 9,136,870 | 2,830,705 | 2,681,827 | 2,593,409 | 6.2 | 30.2 | ||||||||||||||||||||||||||||||||||
| Lease financing | 2,817,231 | 2,699,869 | 2,530,163 | 2,461,182 | 2,319,579 | 4.3 | 4.0 | ||||||||||||||||||||||||||||||||||
Total commercial loan and lease portfolio | 23,942,201 | 23,276,341 | 11,659,108 | 11,063,432 | 10,093,852 | 2.9 | 18.9 | ||||||||||||||||||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 6,182,045 | 6,179,805 | 2,335,835 | 1,826,988 | 2,131,839 | — | 23.7 | ||||||||||||||||||||||||||||||||||
| Home equity | 3,108,736 | 3,498,907 | 3,074,505 | 2,992,708 | 2,952,514 | (11.2) | 1.0 | ||||||||||||||||||||||||||||||||||
| Consumer installment | 1,233,426 | 1,542,411 | 2,003,572 | 3,222,156 | 2,666,511 | (20.0) | (14.3) | ||||||||||||||||||||||||||||||||||
| Total consumer loan portfolio | 10,524,207 | 11,221,123 | 7,413,912 | 8,041,852 | 7,750,864 | (6.2) | 6.3 | ||||||||||||||||||||||||||||||||||
| Total loans and leases | $ | 34,466,408 | $ | 34,497,464 | $ | 19,073,020 | $ | 19,105,284 | $ | 17,844,716 | (0.1) | 14.1 | |||||||||||||||||||||||||||||
The contractual maturities of loans and leases outstanding were as follows:
At December 31, 2020(1) | |||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Commercial and industrial | Commercial real estate | Lease Financing | Residential mortgage | Home equity | Consumer installment | Total | ||||||||||||||||||||||||||||||||||
Amounts due: | |||||||||||||||||||||||||||||||||||||||||
| Within 1 year | $ | 3,483,409 | 2,007,581 | $ | 239,312 | $ | 11,912 | $ | 68,294 | $ | 35,415 | $ | 5,845,923 | ||||||||||||||||||||||||||||
| 1 to 5 years | 6,727,751 | 5,410,955 | 2,255,665 | 59,061 | 407,616 | 493,638 | 15,354,686 | ||||||||||||||||||||||||||||||||||
| Over 5 years | 1,211,223 | 2,284,051 | 322,254 | 6,111,072 | 2,632,826 | 704,373 | 13,265,799 | ||||||||||||||||||||||||||||||||||
Total | 11,422,383 | 9,702,587 | 2,817,231 | 6,182,045 | 3,108,736 | 1,233,426 | 34,466,408 | ||||||||||||||||||||||||||||||||||
| Amounts due after 1 year: | |||||||||||||||||||||||||||||||||||||||||
| Fixed-rate loans and leases | 5,453,114 | 2,233,537 | 2,577,919 | 3,781,885 | 306,012 | 1,172,105 | 15,524,572 | ||||||||||||||||||||||||||||||||||
Variable- and adjustable-rate loans and leases | 2,485,860 | 5,461,469 | — | 2,388,248 | 2,734,430 | 25,906 | 13,095,913 | ||||||||||||||||||||||||||||||||||
| Total after 1 year | $ | 7,938,974 | $ | 7,695,006 | $ | 2,577,919 | $ | 6,170,133 | 3,040,442 | $ | 1,198,011 | 28,620,485 | |||||||||||||||||||||||||||||
(1)This table does not include the effect of prepayments, which is an important consideration in management's interest-rate risk analysis. Our experience indicates that loans and leases remain outstanding for significantly shorter periods than their contractual terms.
Commercial Loan and Lease Portfolio
Our commercial loan and lease portfolio was $23.9 billion at December 31, 2020, an increase of $665.9 million, or 2.9%, compared to $23.3 billion at December 31, 2019. We believe that our commercial loan and lease portfolio is well diversified across business lines and has no concentration in any one industry.
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Commercial and industrial Commercial and industrial ("C&I") loans and lines of credit include loans to varying types of businesses, municipalities, school districts and nonprofit organizations, for the purpose of supporting working capital and operational needs and financing equipment. C&I loans are secured by various types of business assets including inventory, floorplan equipment, receivables, equipment or financial instruments. Origination levels related to equipment dealers are impacted by the velocity of fundings and repayments with dealers. C&I loans were $11.4 billion at December 31, 2020, a decrease of $17.2 million, compared to $11.4 billion at December 31, 2019. At December 31, 2020, C&I loans included $1.6 billion of PPP loans.
Our C&I portfolio by North American Industry Classification System ("NAICS") code was as follows:
| At December 31, 2020 | |||||||||||
| (In thousands) | Balance | Percent of total loan and lease portfolio | |||||||||
| Retail trade | $ | 2,174,624 | 6.3 | % | |||||||
| Transportation and warehouse | 1,446,765 | 4.2 | |||||||||
| Manufacturing | 1,258,285 | 3.7 | |||||||||
| Real estate rental and leasing | 924,979 | 2.7 | |||||||||
| Wholesale trade | 850,500 | 2.5 | |||||||||
| Construction | 730,346 | 2.1 | |||||||||
| Health care and social assistance | 634,868 | 1.8 | |||||||||
| Finance and insurance | 463,336 | 1.3 | |||||||||
| Administration and Support and Waste Management and Remediation | 422,708 | 1.2 | |||||||||
| All other | 2,515,972 | 7.3 | |||||||||
| Total | $ | 11,422,383 | 33.1 | % | |||||||
Commercial real estate Commercial real estate loans include loans that are secured by real estate occupied by the borrower for ongoing operations, non-owner occupied real estate leased to one or more tenants and construction and development loans primarily originated for construction of commercial properties. Construction and development loans often convert to a commercial real estate loan at the completion of the construction period. Commercial real estate loans were $9.7 billion at December 31, 2020, an increase of $565.7 million, compared to $9.1 billion at December 31, 2019.
Our commercial real estate loan portfolio by property and loan type was as follows:
| At December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| (In thousands) | Balance | Percent of total loan and lease portfolio | Balance | Percent of total loan and lease portfolio | |||||||||||||||||||
| Multifamily | $ | 1,900,898 | 5.5 | % | $ | 1,799,949 | 5.2 | % | |||||||||||||||
| Office | 1,383,043 | 4.0 | 1,219,618 | 3.5 | |||||||||||||||||||
| Retail | 1,256,064 | 3.6 | 1,323,773 | 3.8 | |||||||||||||||||||
| Warehouse | 1,121,502 | 3.3 | 1,081,165 | 3.1 | |||||||||||||||||||
| Hotel | 799,365 | 2.3 | 759,773 | 2.2 | |||||||||||||||||||
| Senior housing | 776,505 | 2.3 | 729,169 | 2.1 | |||||||||||||||||||
| Self‐storage | 532,256 | 1.5 | 436,415 | 1.3 | |||||||||||||||||||
| Mixed use | 432,764 | 1.3 | 450,782 | 1.3 | |||||||||||||||||||
| Other | 1,500,190 | 4.4 | 1,336,226 | 4.0 | |||||||||||||||||||
| Total | $ | 9,702,587 | 28.2 | % | $ | 9,136,870 | 26.5 | % | |||||||||||||||
Lease financing We provide a broad range of comprehensive lease products addressing the diverse financing needs of small to large companies. Lease financing loans were $2.8 billion at December 31, 2020, an increase of $117.4 million, compared to $2.7 billion at December 31, 2019.
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Our lease financing portfolio by market type was as follows:
| At December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| (Dollars in thousands) | Balance | Percent of total loan and lease portfolio | Balance | Percent of total loan and lease portfolio | |||||||||||||||||||
| Specialty vehicles | $ | 613,941 | 1.7 | % | $ | 554,543 | 1.6 | % | |||||||||||||||
| Golf | 547,716 | 1.6 | 469,451 | 1.4 | |||||||||||||||||||
| Healthcare | 507,170 | 1.5 | 523,244 | 1.5 | |||||||||||||||||||
| Construction | 300,370 | 0.9 | 246,750 | 0.7 | |||||||||||||||||||
| Manufacturing | 224,062 | 0.7 | 298,187 | 0.9 | |||||||||||||||||||
| Material handling | 219,340 | 0.6 | 131,367 | 0.4 | |||||||||||||||||||
| Technology | 194,703 | 0.6 | 221,152 | 0.6 | |||||||||||||||||||
| Agricultural | 127,008 | 0.4 | 117,198 | 0.3 | |||||||||||||||||||
| Other | 82,921 | 0.2 | 137,977 | 0.4 | |||||||||||||||||||
| Total | $ | 2,817,231 | 8.2 | % | $ | 2,699,869 | 7.8 | % | |||||||||||||||
Consumer Loan Portfolio
Our consumer loan portfolio was $10.5 billion at December 31, 2020, a decrease of $696.9 million, or 6.2%, compared to $11.2 billion at December 31, 2019.
Residential mortgage Residential mortgage loans consist primarily of one- to four-family residential loans with fixed and adjustable interest rates, with amortization periods generally from 15 to 30 years. The loan-to-value ratio at the time of origination is generally 90% or less. Loans with more than an 80% loan-to-value ratio generally require private mortgage insurance. Residential mortgage loans also include loans to consumers for the construction of single family residences that are secured by these properties. Residential mortgage loans were $6.2 billion at both December 31, 2020 and December 31, 2019.
Home equity Home equity loans and lines of credit are comprised of loans to consumers who utilize equity in their personal residence, including junior lien mortgages, as collateral to secure the loan or line-of-credit. Our home equity portfolio totaled $3.1 billion at December 31, 2020 (consisting of $2.8 billion of home equity lines of credit and $332.0 million of amortizing home equity loans), a decrease of $390.2 million, compared to $3.5 billion at December 31, 2019 (consisting of $3.0 billion of home equity lines of credit and $474.7 million of amortizing home equity loans). At December 31, 2020, $2.3 billion of our home equity lines of credit were loans with a 10-year interest-only draw period and a 20-year amortization repayment period, of which all were within the 10-year interest-only draw period and will not convert to amortizing loans until 2021 or later. At December 31, 2020, $505.2 million of the home equity line of credits were interest-only revolving draw loans with no defined amortization period and original draw periods of 0 to 40 years. Home equity lines of credit mostly include junior lien mortgages where the first lien mortgage is held by a unaffiliated financial institution.
Consumer installment Consumer installment loans consist of relatively small loan amounts to consumers to finance personal items (primarily automobiles, recreational vehicles and marine vehicles) and are primarily indirect loans purchased from dealerships. Consumer rates are both fixed and variable, with negotiated terms. Our consumer installment loans typically amortize over periods up to 60 months. Consumer loans not secured by real estate are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value, and more difficult to control, than real estate. Consumer installment loans were $1.2 billion at December 31, 2020, a decrease of $309.0 million, or 20.0%, compared to $1.5 billion at December 31, 2019.
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Credit Quality The following summarizes our loan and lease portfolio based on the credit quality factors that we believe are the most important and should be considered to understand the overall condition of the portfolio. The following items should be considered throughout this section:
•Loans and leases that are over 90-days delinquent and accruing generally are a leading indicator for future charge-off trends.
•Nonaccrual loans and leases have been charged down to the estimated fair value of the collateral less estimated selling costs, or reserved for expected loss upon workout.
•Within the performing loans and leases, we classify customers within regulatory classification guidelines. Loans and leases that are "classified" are loans or leases that management has concerns regarding the ability of the borrowers to meet existing loan or lease terms and conditions, but may never become nonaccrual or result in a loss.
Past due loans and leases Delinquent balances are determined based on the contractual terms of the loan or lease. See "Note 8. Allowance for Credit Losses and Credit Quality" of Notes to Consolidated Financial Statements for further information. Over 90-day delinquent loans and leases by type, excluding nonaccrual loans and leases, were as follows.
| 90 Days or More Delinquent and Accruing | Percentage of Period-end Loans and Leases | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| At December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial loan and lease portfolio: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 1,458 | $ | 331 | $ | 760 | $ | 1,216 | $ | 75 | 0.01 | % | — | % | 0.01 | % | 0.02 | % | — | % | |||||||||||||||||||||||||||||||||||||||
| Commercial real estate | 22 | 1,440 | — | — | — | — | 0.02 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | 3,935 | 1,901 | 1,882 | 918 | 1,009 | 0.14 | 0.07 | 0.07 | 0.04 | 0.04 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial loan and lease portfolio | 5,415 | 3,672 | 2,642 | 2,134 | 1,084 | 0.02 | 0.02 | 0.02 | 0.02 | 0.01 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 1,965 | 559 | 1,275 | 593 | 2,144 | 0.03 | 0.01 | 0.06 | 0.03 | 0.11 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Home equity | 63 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer installment | — | 108 | 3,349 | 3,005 | 2,323 | — | 0.01 | 0.17 | 0.09 | 0.09 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer loan portfolio | 2,028 | 667 | 4,624 | 3,598 | 4,467 | 0.02 | 0.01 | 0.06 | 0.05 | 0.06 | |||||||||||||||||||||||||||||||||||||||||||||||||
Portfolios acquired with deteriorated credit quality(1) | — | 25,737 | 178 | 1,200 | — | — | 10.43 | 4.65 | 10.13 | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 7,443 | $ | 30,076 | $ | 7,444 | $ | 6,932 | $ | 5,551 | 0.02 | % | 0.09 | % | 0.04 | % | 0.04 | % | 0.03 | % | |||||||||||||||||||||||||||||||||||||||
(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.
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Nonperforming assets Nonperforming assets, consisting of nonaccrual loans and leases and other real estate owned, were as follows:
| At December 31, | |||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||
| Commercial loan and lease portfolio: | |||||||||||||||||||||||||||||
| Commercial and industrial | $ | 259,439 | $ | 53,812 | $ | 26,061 | $ | 10,958 | $ | 10,587 | |||||||||||||||||||
| Commercial real estate | 154,439 | 29,735 | 4,518 | 6,785 | 5,564 | ||||||||||||||||||||||||
| Lease financing | 90,822 | 10,957 | 7,993 | 10,247 | 5,782 | ||||||||||||||||||||||||
| Total commercial loan and lease portfolio | 504,700 | 94,504 | 38,572 | 27,990 | 21,933 | ||||||||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||||||||
| Residential mortgage | 97,653 | 38,577 | 33,111 | 61,951 | 106,124 | ||||||||||||||||||||||||
| Home equity | 69,383 | 35,863 | 25,654 | 21,274 | 46,346 | ||||||||||||||||||||||||
| Consumer installment | 5,566 | 714 | 8,581 | 7,367 | 7,042 | ||||||||||||||||||||||||
| Total consumer loan portfolio | 172,602 | 75,154 | 67,346 | 90,592 | 159,512 | ||||||||||||||||||||||||
| Total nonaccrual loans and leases | 677,302 | 169,658 | 105,918 | 118,582 | 181,445 | ||||||||||||||||||||||||
| Other real estate owned | 33,192 | 34,256 | 17,403 | 18,225 | 46,797 | ||||||||||||||||||||||||
| Total nonperforming assets | $ | 710,494 | $ | 203,914 | $ | 123,321 | $ | 136,807 | $ | 228,242 | |||||||||||||||||||
Nonaccrual loans and leases as a percentage of total loans and leases | 1.97 | % | 0.49 | % | 0.56 | % | 0.62 | % | 1.02 | % | |||||||||||||||||||
Nonperforming assets as a percentage of total loans and leases and other real estate owned | 2.06 | 0.59 | 0.65 | 0.72 | 1.28 | ||||||||||||||||||||||||
Allowance for loan and lease losses as a percentage of nonaccrual loans and leases | 77.64 | 66.64 | 148.65 | 144.24 | 88.33 | ||||||||||||||||||||||||
| Allowance for credit losses as a percentage of nonaccrual loans and leases | 81.08 | 68.71 | 66.67 | 68.73 | 112.43 | ||||||||||||||||||||||||
Nonperforming assets were $710.5 million at December 31, 2020, compared with $203.9 million at December 31, 2019. The increase in nonperforming assets reflected an increase in nonaccrual balances in our commercial loan and lease portfolio, the adoption of CECL ($73.4 million of loans previously accounted for as purchased credit impaired were reclassified to nonaccrual loans as of January 1, 2020 due to the adoption of CECL) and an increase in nonaccrual balances in our consumer loan portfolio. The increase within the commercial portfolio was primarily driven by certain portfolios more heavily impacted by COVID-19, including the motor coach, shuttle bus, hotel, franchise, retail commercial real estate, fitness and retail trade sectors, the majority of which have been on deferral for over 180 days. At December 31, 2020, nonaccrual loans and leases included $219.0 million within travel-related sectors ($104.0 million in motor coach, $36.5 million in shuttle bus and $78.5 million in hotel) in addition to, $25.5 million in the franchise sector, $18.7 million in the retail commercial real estate sector, $5.3 million in the fitness sector and $1.3 million in the retail trade sector. Due to the prolonged recovery of revenues for borrowers in these sectors given the dependency on travel and related activity levels highly impacted by COVID-19, we have taken a proactive approach by working with borrowers to extend deferrals into 2021 where necessary, many of which have been moved to nonaccrual status.
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, they are well secured and in process of collection. Delinquent consumer home equity loans with a junior lien are also 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. In addition, under the CARES Act, loans and leases that have been granted a deferral of greater than 180 days are generally placed on nonaccrual status. Loans 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 in 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.
Commercial real estate, residential mortgage and home equity nonaccrual loans are secured by real estate. Given the nature of these assets and the related mortgage foreclosure, property sale and, if applicable, mortgage insurance claims processes, it can take 18 months or longer for a loan to migrate from initial delinquency to final disposition. This resolution process generally takes much longer for loans secured by real estate than for unsecured loans or loans secured by other property primarily due to state real estate foreclosure laws.
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Changes in the amount of nonaccrual loans and leases were as follows:
| At or For the Year Ended December 31, 2020 | |||||||||||||||||
| (in thousands) | Consumer Loan Portfolio | Commercial Loan and Lease Portfolio | Total | ||||||||||||||
| Balance, beginning of period | $ | 75,154 | $ | 94,504 | $ | 169,658 | |||||||||||
Transfer in of loans previously accounted for as purchased credit impaired(1) | 20,560 | 52,825 | 73,385 | ||||||||||||||
| Adjusted balance, beginning of period | 95,714 | 147,329 | 243,043 | ||||||||||||||
| Additions | 143,178 | 624,427 | 767,605 | ||||||||||||||
| Charge-offs | (10,619) | (61,887) | (72,506) | ||||||||||||||
| Transfers to other assets | (6,931) | (17,332) | (24,263) | ||||||||||||||
| Return to accrual status | (19,903) | (67,639) | (87,542) | ||||||||||||||
| Payments received | (28,849) | (119,172) | (148,021) | ||||||||||||||
| Other, net | 12 | (1,026) | (1,014) | ||||||||||||||
| Balance, end of period | $ | 172,602 | $ | 504,700 | $ | 677,302 | |||||||||||
| At or For the Year Ended December 31, 2019 | |||||||||||||||||
| (in thousands) | Consumer Loan Portfolio | Commercial Loan and Lease Portfolio | Total | ||||||||||||||
| Balance, beginning of period | $ | 67,346 | $ | 38,572 | $ | 105,918 | |||||||||||
| Acquired in the TCF/Chemical Merger | 16,414 | 64,830 | 81,244 | ||||||||||||||
| Additions | 77,841 | 156,436 | 234,277 | ||||||||||||||
| Charge-offs | (9,580) | (36,208) | (45,788) | ||||||||||||||
| Transfers to other assets | (17,126) | (19,779) | (36,905) | ||||||||||||||
| Return to accrual status | (7,770) | (39,356) | (47,126) | ||||||||||||||
| Payments received | (25,126) | (72,979) | (98,105) | ||||||||||||||
| Sales | (26,722) | — | (26,722) | ||||||||||||||
| Other, net | (123) | 2,988 | 2,865 | ||||||||||||||
| Balance, end of period | $ | 75,154 | $ | 94,504 | $ | 169,658 | |||||||||||
(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.
Interest income recognized on loans and leases in nonaccrual status and contractual interest that would have been recorded had the loans and leases performed in accordance with their original contractual terms were as follows:
| Year Ended December 31, | |||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Contractual interest due on nonaccrual loans and leases | $ | 58,002 | $ | 17,310 | $ | 10,921 | |||||||||||
| Interest income recognized on nonaccrual loans and leases | 31,768 | 5,514 | 1,351 | ||||||||||||||
| Unrecognized interest income | $ | 26,234 | $ | 11,796 | $ | 9,570 | |||||||||||
See "Note 2. Summary of Significant Accounting Policies" and "Note 8. Allowance for Credit Losses and Credit Quality" of Notes to Consolidated Financial Statements for further information.
Loan and lease credit classifications We assess the risk of our loan and lease portfolio utilizing numerous risk characteristics as outlined in the previous sections. Credit classifications are an additional characteristic monitored in the overall credit risk process. Loan and lease credit classifications are derived from standard regulatory rating definitions, which include: non-classified (pass and special mention) and classified (substandard). Classified loans and leases have well-defined weaknesses, but may never result in a loss.
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Loans and leases by portfolio and regulatory classification were as follows:
| At December 31, 2020 | |||||||||||||||||||||||
| Non-classified | Classified | Total | |||||||||||||||||||||
| (In thousands) | Pass | Special Mention | Substandard | ||||||||||||||||||||
| Commercial loan and lease portfolio: | |||||||||||||||||||||||
| Commercial and industrial | $ | 10,710,654 | $ | 267,585 | $ | 444,144 | $ | 11,422,383 | |||||||||||||||
| Commercial real estate | 8,807,045 | 531,016 | 364,526 | 9,702,587 | |||||||||||||||||||
| Lease financing | 2,681,307 | 34,084 | 101,840 | 2,817,231 | |||||||||||||||||||
| Total commercial loan and lease portfolio | 22,199,006 | 832,685 | 910,510 | 23,942,201 | |||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||
| Residential mortgage | 6,078,865 | 112 | 103,068 | 6,182,045 | |||||||||||||||||||
Home equity | 3,028,765 | — | 79,971 | 3,108,736 | |||||||||||||||||||
| Consumer installment | 1,227,061 | — | 6,365 | 1,233,426 | |||||||||||||||||||
| Total consumer loan portfolio | 10,334,691 | 112 | 189,404 | 10,524,207 | |||||||||||||||||||
| Total loans and leases | $ | 32,533,697 | $ | 832,797 | $ | 1,099,914 | $ | 34,466,408 | |||||||||||||||
| At December 31, 2019 | |||||||||||||||||||||||
| Non-classified | Classified | Total | |||||||||||||||||||||
| (In thousands) | Pass | Special Mention | Substandard | ||||||||||||||||||||
| 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 | |||||||||||||||
Total classified loans and leases were $1.1 billion at December 31, 2020, compared with $380.1 million at December 31, 2019. The increase was primarily due to downgrades in our commercial loan and lease portfolio, largely occurring due to economic impacts caused by COVID-19. We have identified certain sectors within our commercial loan and lease portfolio that have been more heavily impacted by COVID-19 including motor coach, shuttle bus, hotel, retail commercial real estate, franchise, retail trade and fitness, excluding any PPP loans within these sectors as they are guaranteed by the Small Business Administration. At December 31, 2020, these previously identified higher COVID-19 impacted sectors represent $725.3 million of the total commercial loan and lease portfolio classified balance, of which $269.8 million are on nonaccrual status. Sectors identified as having a higher impact due to COVID-19 may change in future periods depending on how economic environment conditions develop over time.
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Loan modifications Troubled debt restructuring ("TDR") loans are loans to financially troubled borrowers that have been modified such that we have granted a concession in terms to improve the likelihood of collection of all principal and modified interest owed. TDR loans were as follows:
| At December 31, | |||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||
| Accruing TDR Loans: | |||||||||||||||||||||||||||||
| Commercial loan and lease portfolio | $ | 35,697 | $ | 12,986 | $ | 12,665 | $ | 22,512 | $ | 25,106 | |||||||||||||||||||
| Consumer loan portfolio | 16,658 | 12,403 | 85,794 | 91,559 | 100,935 | ||||||||||||||||||||||||
| Total | 52,355 | 25,389 | 98,459 | 114,071 | 126,041 | ||||||||||||||||||||||||
| Nonaccrual TDR Loans: | |||||||||||||||||||||||||||||
| Commercial loan and lease portfolio | 23,575 | 5,356 | 6,153 | 1,972 | 3,877 | ||||||||||||||||||||||||
| Consumer loan portfolio | 22,804 | 14,875 | 22,554 | 39,634 | 77,465 | ||||||||||||||||||||||||
| Total | 46,379 | 20,231 | 28,707 | 41,606 | 81,342 | ||||||||||||||||||||||||
| Total TDR loans: | |||||||||||||||||||||||||||||
| Commercial loan and lease portfolio | 59,272 | 18,342 | 18,818 | 24,484 | 28,983 | ||||||||||||||||||||||||
| Consumer loan portfolio | 39,462 | 27,278 | 108,348 | 131,193 | 178,400 | ||||||||||||||||||||||||
| Total | $ | 98,734 | $ | 45,620 | $ | 127,166 | $ | 155,677 | $ | 207,383 | |||||||||||||||||||
Over 90-day delinquency as a percentage of total accruing TDR loans | 0.99 | % | 0.52 | % | 0.14 | % | — | % | 0.30 | % | |||||||||||||||||||
Total TDRs were $98.7 million at December 31, 2020, compared with $45.6 million at December 31, 2019.
Loan modifications to borrowers who have not been granted concessions are not considered TDR loans and therefore are not included in the table above. In addition, Section 4013 of the CARES Act and the Interagency Statement on Loan Modifications provide banks the option to temporarily suspend certain TDR accounting guidance for loans modified due to the effects of COVID-19 when certain conditions are met. On December 27, 2020, this provision of the CARES Act was extended to the earlier of January 1, 2022 or 60 days after the President of the United States declares a termination of the COVID-19 national emergency. In March 2020, TCF began providing assistance to customers in response to the COVID-19 pandemic, predominantly in the form of payment deferrals. As of December 31, 2020, $329.8 million of loan and lease balance was on deferral status, of which $218.0 million are on nonaccrual status, the majority of which have been on deferral for over 180 days. TCF additionally granted certain other loan modifications which provide temporary customer assistance predominantly in the form of financial covenant concessions and modification of borrowing base. As of December 31, 2020, other loan modifications balance was $401.6 million. See "Note 2. 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 Regulatory guidance. TDR loans with an interest rate consistent with market rates on loans with comparable risk at the time of restructuring and performing based on the restructured terms are no longer disclosed as TDR loans in the calendar years after modification; however, these loans are still considered impaired and follow our impaired loan reserve policies.
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.
Interest income recognized on TDR loans and contractual interest that would have been recorded had the TDR loans performed in accordance with their original contractual terms were as follows:
| Year Ended December 31, | |||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Contractual interest due on TDR loans | $ | 4,929 | $ | 6,157 | $ | 6,842 | |||||||||||
| Interest income recognized on TDR loans | 1,448 | 4,325 | 4,673 | ||||||||||||||
| Unrecognized interest income | $ | 3,481 | $ | 1,832 | $ | 2,169 | |||||||||||
See "Note 8. Allowance for Credit Losses and Credit Quality" of Notes to Consolidated Financial Statements for further information regarding our loan modifications.
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Allowance for credit losses The ACL includes the ALLL and the RULC. The ALLL is a valuation account presented separately on the Consolidated Statements of Financial Condition that 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 on the Consolidated Statements of Financial Condition. The Corporation's reserve methodology used to determine the appropriate level of the 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 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 conditions. Factors utilized in the determination of the amount of the allowance include historic loss experience 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.
We consider our ACL of $549.2 million, or 1.59% of total loans and leases, appropriate to cover current credit losses expected to be incurred in the loan and lease portfolios over the remaining expected life of each financial asset at December 31, 2020, including loans and leases which are not currently known to require specific allowances. The increase in ACL and the ACL as a percentage of total loans and leases from December 31, 2019 was primarily due to the adoption of CECL at January 1, 2020, and the impact of COVID-19. During 2020 the COVID-19 pandemic had a negative impact on current and forecasted macroeconomic conditions and created uncertainty around the performance of certain sectors that have been more heavily impacted, including motor coach, shuttle bus, hotel, retail commercial real estate, franchise, retail trade and fitness. In the fourth quarter of 2020, we began to see improvement in current and forecasted macro-economic conditions, however, these improvements were offset by continued uncertainty around the performance of sectors more heavily impacted by COVID-19. The ACL as a percentage of total loans and leases, excluding PPP loans was 1.67%, a non-GAAP financial measure. PPP loans are individually guaranteed by the Small Business Administration and therefore the accounting under CECL does not require reserves to be recorded on such loans. No assurance can be given that we will not, in any particular period, sustain loan and lease losses that are sizable in relation to the amount reserved or will not require significant changes in the balance of the ACL due to subsequent evaluations of the loan and lease portfolios, in light of factors then prevailing, including economic conditions, information obtained during our ongoing credit review process or regulatory requirements. Among other factors, economic slowdown, increasing levels of unemployment, declines in collateral values and/or rising interest rates may have an adverse impact on the current adequacy of our ACL by increasing credit risk and the risk of potential loss. See "Non-GAAP Financial Measures" in this Management's Discussion and Analysis for further information.
The total ACL is expected to absorb losses from any segment of the portfolio. The allocation of our ACL disclosed in the following table is subject to change based on changes in the criteria used to evaluate the allowance.
Prior to the adoption of CECL on January 1, 2020, the ACL was calculated under an incurred loss model which delayed recognition of loss until it was probable the loss had been incurred, in contrast to the accounting under CECL which considers current credit losses expected to be incurred in the loan and lease portfolios over the remaining expected life of each financial asset.
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In conjunction with "Note 8. Allowance for Credit Losses and Credit Quality" of Notes to Consolidated Financial Statements, detailed information regarding our allowance for loan and lease losses was as follows:
ACL(1) | Reserve Rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| At December 31, | At December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | CECL(2) | 2019 | 2018 | 2017 | 2016 | 2020 | CECL(2) | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial loan and lease portfolio: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 155,665 | $ | 93,884 | $ | 42,430 | $ | 41,103 | $ | 35,451 | $ | 33,193 | 1.36 | % | 0.82 | % | 0.38% | 0.66% | 0.61% | 0.65% | ||||||||||||||||||||||||||||||||||||
| Commercial real estate | 192,331 | 67,620 | 27,308 | 22,877 | 24,842 | 22,785 | 1.98 | 0.74 | 0.29 | 0.79 | 0.90 | 0.86 | ||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | 40,978 | 21,631 | 14,742 | 13,449 | 12,663 | 11,999 | 1.45 | 0.80 | 0.55 | 0.53 | 0.51 | 0.52 | ||||||||||||||||||||||||||||||||||||||||||||
| Total commercial loan and lease portfolio | 388,974 | 183,135 | 84,480 | 77,429 | 72,956 | 67,977 | 1.62 | 0.79 | 0.36 | 0.66 | 0.66 | 0.67 | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer loan portfolio: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 72,315 | 72,939 | 8,099 | 21,436 | 26,698 | 33,829 | 1.17 | 1.18 | 0.13 | 0.92 | 1.46 | 1.59 | ||||||||||||||||||||||||||||||||||||||||||||
| Home equity | 45,761 | 47,003 | 17,795 | 23,430 | 20,470 | 25,620 | 1.47 | 1.34 | 0.51 | 0.76 | 0.68 | 0.87 | ||||||||||||||||||||||||||||||||||||||||||||
| Consumer Installment | 18,818 | 15,967 | 2,678 | 35,151 | 50,917 | 32,843 | 1.53 | 1.04 | 0.17 | 1.75 | 1.58 | 1.23 | ||||||||||||||||||||||||||||||||||||||||||||
| Total consumer loan portfolio | 136,894 | 135,909 | 28,572 | 80,017 | 98,085 | 92,292 | 1.30 | 1.21 | 0.25 | 1.08 | 1.22 | 1.19 | ||||||||||||||||||||||||||||||||||||||||||||
| Total allowance for loan and lease losses | 525,868 | 319,044 | 113,052 | 157,446 | 171,041 | 160,269 | 1.53 | 0.92 | 0.33 | 0.83 | 0.90 | 0.90 | ||||||||||||||||||||||||||||||||||||||||||||
| Other credit loss reserves: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reserves for unfunded commitments | 23,313 | 18,235 | 3,528 | 1,428 | 1,479 | 1,115 | N.A. | N.A. | N.A. | N.A. | N.A. | N.A. | ||||||||||||||||||||||||||||||||||||||||||||
| Total credit loss reserves | $ | 549,181 | $ | 337,279 | $ | 116,580 | $ | 158,874 | $ | 172,520 | $ | 161,384 | 1.59 | % | 0.98 | % | 0.34% | 0.83% | 0.90% | 0.90% | ||||||||||||||||||||||||||||||||||||
N.A. Not Applicable
(1) Allowance for credit losses effective January 1, 2020 are calculated under the guidance of CECL. At December 31, 2019 allowance for credit losses were calculated under the guidance of ASC Topic 310 and ASC Topic 450 prior to adoption of CECL, See "Note 2. Summary of Significant Accounting Policies" and "Note 8. Allowance for Credit Losses and Credit Quality" of Notes to Consolidated Financial Statements for further information.
(2) Balances at December 31,2019 adjusted for the adoption of CECL as of January 1, 2020.
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The rollforwards of the allowance for credit losses were as follows:
| Year Ended December 31, | |||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||
| Allowance for loan and lease losses | |||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 113,052 | $ | 157,446 | $ | 171,041 | $ | 160,269 | $ | 156,054 | |||||||||||||||||||
| Impact of CECL adoption | 205,992 | — | — | — | — | ||||||||||||||||||||||||
| Adjusted balance, beginning of period | 319,044 | 157,446 | 171,041 | 160,269 | 156,054 | ||||||||||||||||||||||||
| Charge-offs: | |||||||||||||||||||||||||||||
| Commercial loan and lease portfolio: | |||||||||||||||||||||||||||||
| Commercial and industrial | (48,816) | (39,566) | (16,005) | (8,840) | (7,450) | ||||||||||||||||||||||||
| Commercial real estate | (8,105) | (302) | — | (3,608) | (752) | ||||||||||||||||||||||||
| Lease financing | (6,324) | (7,587) | (4,203) | (6,813) | (2,912) | ||||||||||||||||||||||||
| Total commercial loan and lease portfolio | (63,245) | (47,455) | (20,208) | (19,261) | (11,114) | ||||||||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||||||||
| Residential mortgage | (2,131) | (3,456) | (3,417) | (5,592) | (9,710) | ||||||||||||||||||||||||
| Home equity | (4,346) | (3,219) | (3,710) | (6,270) | (8,915) | ||||||||||||||||||||||||
| Consumer installment | (16,793) | (43,805) | (57,393) | (47,969) | (34,346) | ||||||||||||||||||||||||
| Total consumer loan portfolio | (23,270) | (50,480) | (64,520) | (59,831) | (52,971) | ||||||||||||||||||||||||
| Total charge-offs | (86,515) | (97,935) | (84,728) | (79,092) | (64,085) | ||||||||||||||||||||||||
| Recoveries: | |||||||||||||||||||||||||||||
| Commercial loan and lease portfolio: | |||||||||||||||||||||||||||||
| Commercial and industrial | 21,930 | 5,120 | 1,606 | 1,840 | 1,924 | ||||||||||||||||||||||||
| Commercial real estate | 1,830 | 322 | 183 | 777 | 308 | ||||||||||||||||||||||||
| Lease financing | 2,145 | 1,289 | 1,427 | 1,119 | 1,343 | ||||||||||||||||||||||||
| Total commercial loan and lease portfolio | 25,905 | 6,731 | 3,216 | 3,736 | 3,575 | ||||||||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||||||||
| Residential mortgage | 2,634 | 4,271 | 5,261 | 6,100 | 1,115 | ||||||||||||||||||||||||
| Home equity | 3,346 | 5,689 | 6,488 | 14,681 | 5,949 | ||||||||||||||||||||||||
| Consumer installment | 9,547 | 13,693 | 14,738 | 10,135 | 8,211 | ||||||||||||||||||||||||
| Total consumer loan portfolio | 15,527 | 23,653 | 26,487 | 30,916 | 15,275 | ||||||||||||||||||||||||
| Total recoveries | 41,432 | 30,384 | 29,703 | 34,652 | 18,850 | ||||||||||||||||||||||||
| Net charge-offs | (45,083) | (67,551) | (55,025) | (44,440) | (45,235) | ||||||||||||||||||||||||
Provision for credit losses related to loans and leases(1) | 252,073 | 65,282 | 46,768 | 68,443 | 65,874 | ||||||||||||||||||||||||
Other(2) | (166) | (42,125) | (5,338) | (13,231) | (16,424) | ||||||||||||||||||||||||
| Balance, end of period | $ | 525,868 | $ | 113,052 | $ | 157,446 | $ | 171,041 | $ | 160,269 | |||||||||||||||||||
| Reserve for unfunded lending commitments | |||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 3,528 | $ | 1,428 | $ | 1,479 | $ | 1,115 | $ | 1,044 | |||||||||||||||||||
| Impact of CECL adoption | 14,707 | — | — | — | — | ||||||||||||||||||||||||
| Adjusted balance, beginning of period | 18,235 | 1,428 | 1,479 | 1,115 | 1,044 | ||||||||||||||||||||||||
Provision (benefit) for credit losses related to unfunded lending commitments(1) | 5,078 | 233 | (51) | 364 | 71 | ||||||||||||||||||||||||
| Addition due to the TCF/Chemical Merger | — | 1,867 | — | — | — | ||||||||||||||||||||||||
| Balance, end of period | 23,313 | 3,528 | 1,428 | 1,479 | 1,115 | ||||||||||||||||||||||||
| Total allowance for credit losses | $ | 549,181 | $ | 116,580 | $ | 158,874 | $ | 172,520 | $ | 161,384 | |||||||||||||||||||
(1)Provision for credit losses related to loans and leases and the provision for credit losses related to unfunded lending commitments are included within Provision for Credit Losses.
(2)Primarily includes the transfer of the allowance for loan and lease losses to loans and leases held-for-sale.
Net loan and lease charge-offs for 2020 were $45.1 million, or 0.13% of average loans and leases, compared with $67.6 million, or 0.27% of average loans and leases, for 2019 and $55.0 million, or 0.29% of average loans and leases, for 2018. The decrease in net loan and lease charge-offs in 2020 was primarily due to a decrease in consumer installment loans, partially offset by an increase in the commercial loan and lease portfolio. The increase in net loan and lease charge-offs in 2019, compared to 2018, was primarily due to an increase in charge-offs in commercial and industrial net charge-offs, partially offset by $4.7 million of recoveries of previous charge-offs related to the sale of consumer nonaccrual and TDR loans.
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Investment Securities Held-to-Maturity The investment securities held-to-maturity portfolio consist primarily of fixed-rate mortgage-backed securities issued and guaranteed by FNMA, GNMA and FHLMC which significantly decreases credit risk. The most important credit quality factor we consider to understand the condition of the residential agency mortgage-backed securities is that all are AAA rated and agency-guaranteed.
Liquidity Management We manage our liquidity to ensure that our funding needs are met both promptly and in a cost-effective manner. Asset liquidity arises from liquid assets that can be sold or pledged as collateral, amortization, prepayment or maturity of assets and from our ability to sell loans. Liability liquidity results from our ability to maintain a diverse set of funding sources to promptly meet funding requirements.
The TCF Financial Board of Directors have adopted a Liquidity Management Policy for TCF Bank to direct management of the Corporation's liquidity risk and a Holding Company Investment and Liquidity Management Policy, which establishes a minimum target amount of cash or liquid investments TCF Financial will hold. See "Item 7A. Quantitative and Qualitative Disclosures about Market Risk" for further information.
TCF Bank had $434.3 million of net liquidity qualifying interest-bearing deposits at the Federal Reserve Bank at December 31, 2020, compared with $489.7 million at December 31, 2019. Certain investment securities held-to-maturity and investment securities available-for-sale provide the ability to liquidate or pledge unencumbered securities as needed. At December 31, 2020, $1.0 billion of our securities were pledged as collateral to secure certain deposits and borrowings.
TCF Financial had net liquidity qualifying cash of $173.0 million at December 31, 2020, compared with $156.0 million at December 31, 2019.
Deposits are the primary source of our funds for use in lending and for other general business purposes. In addition to deposits, we receive funds from loan and lease repayments, loan sales and borrowings. Borrowings may be used to compensate for reductions in normal sources of funds, such as deposit inflows at less than projected levels, net deposit outflows or to fund balance sheet growth. We primarily borrow from the Federal Home Loan Bank (the "FHLB") of Des Moines. We had $6.5 billion of additional borrowing capacity at the FHLB of Des Moines at December 31, 2020, as well as access to the Federal Reserve Discount Window. In addition, we maintain a diversified set of unsecured and uncommitted funding sources, including access to overnight federal funds purchased lines, brokered deposits and capital markets. Lending activities, such as loan originations, loan purchases and equipment purchases for lease financing, are the primary uses of our funds.
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.
Our wholly-owned subsidiary TCF Commercial Finance Canada, Inc. ("TCFCFC") maintains a $20.0 million Canadian dollar-denominated line of credit facility with an unaffiliated bank, which is guaranteed by TCF Bank. TCFCFC had no outstanding borrowings under the line of credit with the counterparty at both December 31, 2020 and December 31, 2019.
Deposits Deposits were $38.9 billion at December 31, 2020, compared with $34.5 billion at December 31, 2019. The increase in deposits was primarily due to increases in noninterest-bearing deposits of $3.1 billion, interest-bearing checking account balances of $1.3 billion, savings account balances of $1.0 billion and money market deposits of $1.0 billion, reflecting PPP funding, federal stimulus program infusions and lower consumer spending impacted by the COVID-19 pandemic, partially offset by the continued run-off of certificates of deposit which declined $1.9 billion.
Noninterest-bearing checking accounts represented 28.3% of total deposits at December 31, 2020, compared with 23.1% of total deposits at December 31, 2019. Our weighted-average interest rate for deposits, including noninterest-bearing deposits, was 0.44% for 2020 compared with 0.88% for 2019.
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Certificates of deposit, including Certificate of Deposit Account Registry Service ("CDARS") deposits, IRA deposits and brokered deposits, were $5.5 billion at December 31, 2020, compared with $7.5 billion at December 31, 2019. The maturities of certificates of deposit with denominations equal to or greater than $100,000 at December 31, 2020 were as follows:
| (in thousands) | |||||
| Three months or less | $ | 969,469 | |||
| Over three through six months | 971,200 | ||||
| Over six through 12 months | 620,115 | ||||
| Over 12 months | 218,482 | ||||
| Total | $ | 2,779,266 | |||
Borrowings Borrowings were $2.0 billion at December 31, 2020, compared with $5.0 billion at December 31, 2019. The decrease in borrowings was primarily due to a decrease in long and short-term FHLB advances, partially offset by the issuance of $150.0 million of fixed-to-floating rate subordinated notes.
Information regarding short-term borrowings (borrowings with an original maturity of less than one year) was as follows:
| At or For the Year Ended December 31, | ||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | |||||||||||||||||
| FHLB advances | ||||||||||||||||||||
| Maximum outstanding at any month-end | $ | 3,200,000 | $ | 2,450,000 | $ | — | ||||||||||||||
| Balance outstanding at end of period | 400,000 | 2,450,000 | — | |||||||||||||||||
| Weighted average interest rate at end of period | 0.33 | % | 1.85 | % | — | % | ||||||||||||||
| Average balance outstanding | $ | 1,781,421 | $ | 1,173,879 | $ | — | ||||||||||||||
| Weighted average interest rate | 0.88 | % | 1.69 | % | — | % | ||||||||||||||
| Federal funds purchased | ||||||||||||||||||||
| Maximum outstanding at any month-end | $ | — | $ | — | $ | — | ||||||||||||||
| Balance outstanding at end of period | — | — | — | |||||||||||||||||
| Weighted average interest rate at end of period | — | % | — | % | — | % | ||||||||||||||
| Average balance outstanding | $ | 57 | $ | 156 | $ | 156 | ||||||||||||||
| Weighted average interest rate | 1.78 | % | 2.51 | % | 1.91 | % | ||||||||||||||
| Collateralized deposits | ||||||||||||||||||||
| Maximum outstanding at any month-end | $ | 253,960 | $ | 271,249 | $ | — | ||||||||||||||
| Balance outstanding at end of period | 217,363 | 219,145 | — | |||||||||||||||||
| Weighted average interest rate at end of period | 0.11 | % | 0.64 | % | — | % | ||||||||||||||
| Average balance outstanding | $ | 218,745 | $ | 103,931 | $ | 1,977 | ||||||||||||||
| Weighted average interest rate | 0.32 | % | 0.67 | % | 2.19 | % | ||||||||||||||
| Line-of-credit: TCF Financial Corporation | ||||||||||||||||||||
| Maximum outstanding at any month-end | 80,000 | — | — | |||||||||||||||||
| Balance outstanding at end of period | — | — | — | |||||||||||||||||
| Weighted average interest rate at end of period | — | % | — | % | — | % | ||||||||||||||
| Average balance outstanding | 22,568 | — | — | |||||||||||||||||
| Weighted average interest rate | 2.40 | % | — | % | — | % | ||||||||||||||
| Line-of-credit: TCF Commercial Finance Canada, Inc. | ||||||||||||||||||||
| Maximum outstanding at any month-end | $ | 3,066 | $ | 10,455 | $ | 8,565 | ||||||||||||||
| Balance outstanding at end of period | — | — | — | |||||||||||||||||
| Weighted average interest rate at end of period | — | % | — | % | — | % | ||||||||||||||
| Average balance outstanding | $ | 583 | $ | 1,107 | $ | 1,155 | ||||||||||||||
| Weighted average interest rate | 1.93 | % | 3.00 | % | 2.63 | % | ||||||||||||||
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Long-term borrowings were as follows:
| At December 31, | |||||||||||
| (in thousands) | 2020 | 2019 | |||||||||
| FHLB advances | $ | 709,848 | $ | 1,822,058 | |||||||
| Subordinated debt obligations | 586,145 | 428,470 | |||||||||
| Discounted lease rentals | 75,770 | 100,882 | |||||||||
| Finance lease obligation | 2,969 | 3,038 | |||||||||
| Total long-term borrowings | $ | 1,374,732 | $ | 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 2030 Notes, due May 6, 2030, bear an initial fixed interest rate of 5.50% per annum until May 6, 2025, payable semi-annually in arrears on May 6 and November 6, commencing on November 6, 2020, resetting quarterly thereafter to the then-current three-month LIBOR rate plus 509 basis points.
See "Note 15. Borrowings" of Notes to Consolidated Financial Statements for further information regarding our long-term borrowings.
Contractual Obligations and Commitments As discussed in the Notes to Consolidated Financial Statements, we have certain obligations and commitments to make future payments under contracts.
At December 31, 2020, the aggregate contractual obligations and commitments were as follows:
| Payments Due by Period | |||||||||||||||||||||||||||||
| (in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||||||
| Contractual Obligations: | |||||||||||||||||||||||||||||
| Certificates of deposit | $ | 5,524,381 | $ | 5,012,121 | $ | 444,023 | $ | 58,827 | $ | 9,410 | |||||||||||||||||||
| Long-term borrowings | 1,363,757 | 186,318 | 495,908 | 352,590 | 328,941 | ||||||||||||||||||||||||
Lease obligations(1) | 366,073 | 27,808 | 58,739 | 50,480 | 229,046 | ||||||||||||||||||||||||
| IT related contracts | 265,966 | 52,887 | 91,207 | 88,781 | 33,091 | ||||||||||||||||||||||||
| Investments in affordable housing | 107,764 | 83,393 | 23,341 | 417 | 613 | ||||||||||||||||||||||||
| Marketing related contracts | 51,451 | 6,105 | 10,332 | 6,756 | 28,258 | ||||||||||||||||||||||||
Construction contracts and land purchase commitments for future branch sites | 23,294 | 16,760 | 6,534 | — | — | ||||||||||||||||||||||||
Liabilities related to acquisition and portfolio purchase (2) | 5,203 | 4,149 | 1,054 | — | — | ||||||||||||||||||||||||
Other contractual obligations (3) | 122,503 | 22,409 | 35,999 | 37,667 | 26,428 | ||||||||||||||||||||||||
| Total | $ | 7,830,392 | $ | 5,411,950 | $ | 1,167,137 | $ | 595,518 | $ | 655,787 | |||||||||||||||||||
(1)Includes obligations for leases that have not yet commenced.
(2)Relates to acquisition of a leasing business in 2017.
(3)Includes card contracts, certain tax investment projects, private equity capital investments and other similar types of investments.
| Amount of Commitment - Expiration by Period | |||||||||||||||||||||||||||||
| (in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||||||||||
| Commitments: | |||||||||||||||||||||||||||||
| Commitments to extend credit: | |||||||||||||||||||||||||||||
| Commercial | $ | 4,396,191 | $ | 2,001,118 | $ | 1,564,168 | $ | 647,046 | $ | 183,859 | |||||||||||||||||||
| Consumer | 2,126,327 | 119,426 | 142,046 | 153,502 | 1,711,353 | ||||||||||||||||||||||||
| Total commitments to extend credit | 6,522,518 | 2,120,544 | 1,706,214 | 800,548 | 1,895,212 | ||||||||||||||||||||||||
Standby letters of credit and guarantees on industrial revenue bonds | 114,636 | 78,825 | 27,022 | 8,638 | 151 | ||||||||||||||||||||||||
| Total | $ | 6,637,154 | $ | 2,199,369 | $ | 1,733,236 | $ | 809,186 | $ | 1,895,363 | |||||||||||||||||||
Unrecognized tax benefits, projected benefit obligations, demand deposits with indeterminate maturities and discretionary credit facilities that do not obligate us to lend have been excluded from the contractual obligations table above.
65
Capital Management We are committed to managing capital to maintain protection for shareholders, depositors and creditors. We employ a variety of capital management tools to achieve our capital goals, including, but not limited to, dividends, public offerings of preferred and common stock, common stock repurchases, redemption of preferred stock and the issuance or redemption of subordinated debt and other capital instruments. We maintain a Capital Planning and Dividend Policy which applies to TCF Financial and incorporates TCF Bank's Capital Planning and Dividend Policy. These policies are intended to ensure that capital strategy actions, including the addition of new capital, if needed, common stock repurchases, redemption of preferred stock or the declaration of preferred stock, common stock and bank dividends are prudent, efficient and provide value to our shareholders, while ensuring that past and prospective earnings retention is consistent with our capital needs for growth, as well as asset quality and overall financial condition. TCF Financial and TCF Bank manage capital levels to exceed all regulatory capital requirements.
On October 24, 2019, our board of directors approved an authorization to repurchase up to $150 million of our common stock. The repurchase program has no expiration, and permits shares to be repurchased in compliance with Rule 10b-18 of the Exchange Act, through one or more broker-dealers as part of “block purchases” made by TCF, and/or through privately negotiated purchases, accelerated stock repurchase agreements, or Rule 10b5-1 plans at our discretion. During the year ended December 31, 2020, we repurchased 873,376 shares of our common stock totaling $33.1 million, all of which occurred during the first quarter. Between October 24, 2019 and December 31, 2019, we repurchased 657,817 shares of our common stock totaling $27.5 million. We have $89.4 million available for repurchase under the repurchase program. In accordance with the TCF/Huntington Merger Agreement, we are not permitted to repurchase shares of common stock without Huntington's prior approval.
Effective January 1, 2020, the Corporation adopted CECL. Consistent with the treatment of the ACL under the capital rule’s standardized approach, the ALLL (excluding PCD loans) and RULC are eligible for inclusion in TCF’s Tier 2 capital up to 1.25 percent of standardized total risk weighted assets. 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.
At December 31, 2020 and December 31, 2019, TCF Bank's capital ratios exceeded the quantitative capital ratios required for an institution to be considered "well-capitalized." Significant factors that may affect capital adequacy include, but are not limited to, economic uncertainty, deteriorating economic conditions, a disproportionate growth in assets versus capital and a change in mix or credit quality of assets. There are no conditions or events since December 31, 2020 that management believes have changed TCF Bank's status as well-capitalized. See "Note 18. Regulatory Capital Requirements" of Notes to Consolidated Financial Statement for further information.
Equity Total equity was $5.7 billion, or 11.9% of total assets, at December 31, 2020, compared with $5.7 billion, or 12.3% of total assets, at December 31, 2019.
Preferred Stock Preferred stock was $169.3 million at both December 31, 2020 and December 31, 2019. See "Note 17. Equity" of Notes to Consolidated Financial Statements for further information regarding our preferred stock.
Other Other equity was a reduction to total equity of $26.7 million at December 31, 2020, compared with a reduction of $28.0 million at December 31, 2019. Other equity was comprised of shares held in trust for deferred compensation plans. See "Note 17. Equity" of Notes to Consolidated Financial Statements for further information.
Common Stock Dividends Dividends to common shareholders on a per share basis were $1.40 for the year ended December 31, 2020. Dividends to common shareholders on a per share basis, adjusted to reflect the exchange ratio in the TCF/Chemical Merger Exchange for dividends paid prior to the completion of the TCF/Chemical Merger, were $1.29 for the year ended December 31, 2019. Our common stock dividend payout ratio was 100.0% for the year ended December 31, 2020, compared with 50.4% for the year ended December 31, 2019 and 34.3% for the year ended December 31, 2018. TCF Financial's primary funding sources for dividends are dividends received from TCF Bank.
66
On January 26, 2021, our board of directors declared a regular quarterly cash dividend of $0.35 per common share payable on March 1, 2021 to shareholders of record at the close of business on February 12, 2021, and declared a quarterly cash dividend of $0.35625 per depositary share representing a 1/1,000th interest in a share of the 5.70% Series C Non-Cumulative Perpetual Preferred Stock, payable on March 1, 2021 to shareholders of record at the close of business on February 12, 2021.
Common Shareholders' Equity Total common shareholders' equity was $5.5 billion, or 11.51% of total assets, at December 31, 2020, compared with $5.5 billion, or 11.87%, at December 31, 2019. Tangible common equity was $4.0 billion, or 8.72% of total tangible assets, at December 31, 2020, compared with $4.1 billion, or 9.01%, at December 31, 2019. Book value per common share was $36.06 at December 31, 2020, compared with $36.20 at December 31, 2019. Tangible book value per common share was $26.49 at December 31, 2020, compared with $26.60 at December 31, 2019. Tangible common equity and tangible book value are non-GAAP measures that exclude goodwill and other intangible assets. See "Consolidated Financial Condition Analysis — Non-GAAP Financial Measures" in this Management's Discussion and Analysis for further information.
Non-GAAP Financial Measures This Annual Report on Form 10-K contains references to financial measures that are not defined in GAAP. Such non-GAAP financial measures include our tangible book value per common share; tangible common shareholders' equity; presentation of net interest income and net interest margin on a fully tax-equivalent ("FTE") basis; our adjusted efficiency ratio (which excludes merger-related expenses, sale of legacy TCF auto finance portfolio and related expenses, gains on sales of branches, termination of interest rate swaps, write-down of company-owned vacant land parcels and branch exit costs, gain on sale of certain investment securities, pension fair valuation adjustment, loan servicing rights and goodwill impairment, the impact of the Tax Cuts and Jobs Act, CFPB/OCC settlement adjustment, lease financing equipment depreciation, net interest income FTE adjustment, amortization of intangible assets and historic tax credit amortization); composition of loans and leases, excluding PPP loans, the adjusted allowance for credit losses as a percentage of loans and leases, excluding PPP loans; adjusted net interest income and margin (which excludes purchased accounting accretion and amortization and the impact of PPP loans); and other adjusted information presented excluding merger-related expenses and notable items (defined as sale of legacy TCF auto finance portfolio and related expenses, gains on sales of branches, termination of interest rate swaps, write-down of company-owned vacant land parcels and branch exit costs, gain on sales of certain investment securities, pension fair valuation adjustment, loan servicing rights and goodwill impairment and CFPB/OCC settlement adjustment) including net income, diluted earnings per share, return on average assets, return on average common shareholders' equity and return on average tangible common shareholders' equity), tangible book value per common share and tangible common equity to tangible assets. Management believes that the presentation of these non-GAAP financial measures (i) provides important supplemental information that contributes to a proper understanding of our operating performance, (ii) enables a more complete understanding of factors and trends affecting our business and (iii) allows investors to evaluate our performance in a manner similar to management, the financial services industry, bank stock analysts, and bank regulators. Management uses non-GAAP financial measures internally in the preparation of our operating budgets, monthly financial performance reporting, and in our presentation to investors of our performance. Non-GAAP financial measures are not defined by GAAP and other entities may calculate them differently than we do. Non-GAAP financial measures have inherent limitations and are not required to be uniformly applied. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.
The following tables provide a reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure. A reconciliation of net interest income and net interest margin (FTE) to the most directly comparable GAAP financial measure can be found within the Net Interest Income subheading of this Annual Report on Form 10-K.
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The computation of the adjusted diluted earnings per common share and adjusted net income attributable to TCF was as follows:
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||
| Net income available to common shareholders | $ | 212,784 | $ | 285,493 | $ | 289,289 | $ | 242,954 | $ | 192,736 | ||||||||||||||||||||||
| Earnings allocated to participating securities | — | (20) | (42) | (42) | (49) | |||||||||||||||||||||||||||
| Earnings allocated to common shareholders | (a) | 212,784 | 285,473 | 289,247 | 242,912 | 192,687 | ||||||||||||||||||||||||||
| Merger-related expenses | 203,888 | 171,968 | — | — | — | |||||||||||||||||||||||||||
| Notable items: | ||||||||||||||||||||||||||||||||
Sale of Legacy TCF auto finance portfolio and related expenses(1) | 3,964 | 32,128 | — | — | — | |||||||||||||||||||||||||||
Termination of interest rate swaps(2) | — | 17,302 | — | — | — | |||||||||||||||||||||||||||
Gain on sale of certain investment securities(3) | — | (5,869) | — | — | — | |||||||||||||||||||||||||||
Gains on sales of branches, write-down of company-owned vacant land parcels and branch exit costs, net(4) | (14,166) | 9,384 | — | — | — | |||||||||||||||||||||||||||
Loan servicing rights impairment(2) | 17,605 | 3,882 | — | — | — | |||||||||||||||||||||||||||
Pension fair valuation adjustment(5) | — | 6,341 | — | — | — | |||||||||||||||||||||||||||
CFPB/OCC settlement adjustment(5) | — | — | 32,000 | — | — | |||||||||||||||||||||||||||
Re-measurement of net deferred tax liability(6) | — | — | — | (130,653) | — | |||||||||||||||||||||||||||
Goodwill impairment(5) | — | — | — | 73,041 | ||||||||||||||||||||||||||||
| Total notable items | 7,403 | 63,168 | 32,000 | (57,612) | — | |||||||||||||||||||||||||||
| Total merger-related items and notable items | 211,291 | 235,136 | 32,000 | (57,612) | — | |||||||||||||||||||||||||||
Related income tax expense, net of benefits(7) | (44,583) | (69,372) | (6,491) | — | — | |||||||||||||||||||||||||||
| Total adjustments, net of tax | 166,708 | 165,764 | 25,509 | (57,612) | — | |||||||||||||||||||||||||||
| Adjusted earnings allocated to common stock | (b) | $ | 379,492 | $ | 451,237 | $ | 314,756 | $ | 185,300 | $ | 192,687 | |||||||||||||||||||||
Weighted-average common shares outstanding used in diluted earnings per common share calculation(8) | (c) | 151,887,559 | 111,818,365 | 84,324,686 | 85,734,575 | 85,006,293 | ||||||||||||||||||||||||||
| Diluted earnings per common share | (a) / (c) | $ | 1.40 | $ | 2.55 | $ | 3.43 | $ | 2.83 | $ | 2.27 | |||||||||||||||||||||
| Adjusted diluted earnings per common share | (b) / (c) | 2.50 | 4.04 | 3.73 | 2.16 | 2.27 | ||||||||||||||||||||||||||
| Net income attributable to TCF | $ | 222,759 | $ | 295,468 | $ | 304,358 | $ | 268,637 | $ | 212,124 | ||||||||||||||||||||||
| Total adjustments, net of tax | 166,708 | 165,764 | 25,509 | (57,612) | — | |||||||||||||||||||||||||||
| Adjusted net income attributable to TCF | $ | 389,467 | $ | 461,232 | $ | 329,867 | $ | 211,025 | $ | 212,124 | ||||||||||||||||||||||
(1)Year ended December 31, 2020 amount included within occupancy and equipment ($1.6 million), other noninterest expense ($1.4 million) and compensation and employee benefits ($1.0 million). Year ended December 31 2019 amount included within net gains on sales of loans and leases ($27.5 million) (inclusive of the transfer of the Legacy TCF auto finance portfolio in the third quarter of 2019), other noninterest expense ($2.2 million), occupancy and equipment ($1.5 million) and compensation and employee benefits ($930 thousand).
(2)Included within other noninterest income.
(3)Included within net gains on investment securities.
(4)Year ended December 31, 2020 amount included within other noninterest income ($14.7 million net gain) and other noninterest expense ($0.6 million). Year ended December 31, 2019 amount included within other noninterest expense.
(5)Included within other noninterest expense.
(6)Includes the impact of the re-measurement of our estimated net deferred tax liability as a result of the enactment of the Tax Cuts and Jobs Act.
(7)Included within income tax expense.
(8)Assumes conversion of common shares, as applicable.
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The computation of the adjusted net interest income and margin was as follows:
| Year Ended December 31, | |||||||||||||||||
| (Dollars in thousands, except per share data) | 2020 | 2019 | 2018 | ||||||||||||||
| Net Interest Income | $ | 1,538,401 | $ | 1,289,032 | $ | 1,008,495 | |||||||||||
| Adjustments for taxable equivalent interest (FTE) | 12,087 | 8,443 | 8,369 | ||||||||||||||
| Net interest income (FTE) | 1,550,488 | 1,297,475 | 1,016,864 | ||||||||||||||
| Purchase accounting accretion and amortization | (84,174) | (58,934) | — | ||||||||||||||
| Net fees recognized on PPP loans | (35,762) | — | — | ||||||||||||||
Interest recognition on PPP loans(1) | (7,634) | — | — | ||||||||||||||
| Total PPP loans impact | (43,396) | — | — | ||||||||||||||
| Adjusted net interest income, including FTE adjustments and excluding purchase accounting accretion and amortization and PPP impact | $ | 1,422,918 | $ | 1,238,541 | $ | 1,016,864 | |||||||||||
| Net interest margin (GAAP) | 3.47 | % | 4.17 | % | 4.66 | % | |||||||||||
| FTE impact | 0.03 | 0.03 | 0.03 | ||||||||||||||
| Net interest margin (FTE) | 3.50 | 4.20 | 4.69 | % | |||||||||||||
| Purchase accounting accretion and amortization | (0.29) | (0.26) | — | ||||||||||||||
PPP loans impact(2) | — | — | — | ||||||||||||||
| Adjusted net interest margin, excluding purchase accounting accretion and amortization and PPP loans impact (FTE) | 3.21 | % | 3.94 | % | 4.69 | % | |||||||||||
(1)Interest income on PPP loans less funding costs.
(2)The exclusion of PPP loans additionally reduces average earning assets by $1.2 billion in the year ended December 31, 2020.
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The computation of the adjusted return on average assets, common equity and average tangible common equity was as follows:
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||
Adjusted net income after tax expense: | ||||||||||||||||||||||||||||||||
Income after tax expense | (a) | $ | 230,041 | $ | 306,926 | $ | 315,628 | $ | 278,784 | $ | 221,717 | |||||||||||||||||||||
| Merger-related expenses | 203,888 | 171,968 | — | — | — | |||||||||||||||||||||||||||
| Notable items | 7,403 | 63,168 | 32,000 | (57,612) | — | |||||||||||||||||||||||||||
| Related income tax expense, net of tax benefits | (44,583) | (69,372) | (6,491) | — | — | |||||||||||||||||||||||||||
| Adjusted net income after tax expense for ROAA calculation | (b) | $ | 396,749 | $ | 472,690 | $ | 341,137 | $ | 221,172 | $ | 221,717 | |||||||||||||||||||||
| Net income available to common shareholders | (c) | $ | 212,784 | $ | 285,493 | $ | 289,289 | $ | 242,954 | $ | 192,736 | |||||||||||||||||||||
| Other intangibles amortization | 21,992 | 11,660 | 3,417 | 2,345 | 1,388 | |||||||||||||||||||||||||||
| Related income tax expense | (4,678) | (2,752) | (799) | (1,046) | (493) | |||||||||||||||||||||||||||
| Net income available to common shareholders used in ROATCE calculation | (d) | $ | 230,098 | $ | 294,401 | $ | 291,907 | $ | 244,253 | $ | 193,631 | |||||||||||||||||||||
Adjusted net income available to common shareholders: | ||||||||||||||||||||||||||||||||
| Net income available to common shareholders | $ | 212,784 | $ | 285,493 | $ | 289,289 | $ | 242,954 | $ | 192,736 | ||||||||||||||||||||||
| Notable items | 7,403 | 63,168 | 32,000 | (57,612) | — | |||||||||||||||||||||||||||
| Merger-related expenses | 203,888 | 171,968 | — | — | — | |||||||||||||||||||||||||||
| Related income tax expense, net of tax benefits | (44,583) | (69,372) | (6,491) | — | — | |||||||||||||||||||||||||||
| Net income available to common shareholders used in adjusted ROACE calculation | (e) | 379,492 | 451,257 | 314,798 | 185,342 | 192,736 | ||||||||||||||||||||||||||
| Other intangibles amortization | 21,992 | 11,660 | 3,417 | 2,345 | 1,388 | |||||||||||||||||||||||||||
| Related income tax expense | (4,678) | (2,752) | (799) | (1,046) | (493) | |||||||||||||||||||||||||||
| Net income available to common shareholders used in adjusted ROATCE calculation | (f) | $ | 396,806 | $ | 460,165 | $ | 317,416 | $ | 186,641 | $ | 193,631 | |||||||||||||||||||||
Average balances: | ||||||||||||||||||||||||||||||||
| Average assets | (g) | $ | 48,400,938 | $ | 33,526,930 | $ | 23,062,148 | $ | 22,051,967 | $ | 21,075,415 | |||||||||||||||||||||
| Total average equity | 5,673,573 | 3,915,038 | 2,530,502 | 2,535,938 | 2,394,701 | |||||||||||||||||||||||||||
| Non-controlling interest in subsidiaries | (24,006) | (25,834) | (24,323) | (22,514) | (21,525) | |||||||||||||||||||||||||||
| Total TCF Financial Corporation shareholders' equity | 5,649,567 | 3,889,204 | 2,506,179 | 2,513,424 | 2,373,176 | |||||||||||||||||||||||||||
| Preferred stock | (169,302) | (169,302) | (176,971) | (264,474) | (263,240) | |||||||||||||||||||||||||||
| Average total common shareholders' equity used in ROACE calculation | (h) | $ | 5,480,265 | $ | 3,719,902 | $ | 2,329,208 | $ | 2,248,950 | $ | 2,109,936 | |||||||||||||||||||||
| Average goodwill, net | (1,310,071) | (620,253) | (154,757) | (219,144) | (225,640) | |||||||||||||||||||||||||||
| Average other intangibles, net | (157,824) | (99,038) | (22,136) | (12,799) | (2,379) | |||||||||||||||||||||||||||
Average tangible common shareholders' equity used in ROATCE calculation | (i) | $ | 4,012,370 | $ | 3,000,611 | $ | 2,152,315 | $ | 2,017,007 | $ | 1,881,917 | |||||||||||||||||||||
ROAA | (a)/(g) | 0.48 | % | 0.92 | % | 1.37 | % | 1.26 | % | 1.05 | % | |||||||||||||||||||||
Adjusted ROAA | (b)/(g) | 0.82 | 1.41 | 1.48 | 1.00 | 1.05 | ||||||||||||||||||||||||||
ROACE | (c)/(h) | 3.88 | 7.67 | 12.42 | 10.80 | 9.13 | ||||||||||||||||||||||||||
Adjusted ROACE | (e)/(h) | 6.92 | 12.13 | 13.51 | 8.24 | 9.13 | ||||||||||||||||||||||||||
ROATCE | (d)/(i) | 5.73 | 9.81 | 13.56 | 12.11 | 10.29 | ||||||||||||||||||||||||||
Adjusted ROATCE | (f)/(i) | 9.88 | 15.34 | 14.74 | 9.25 | 10.29 | ||||||||||||||||||||||||||
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The computation of the adjusted efficiency ratio, noninterest income and noninterest expense was as follows:
| Year Ended December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||
| Noninterest expense | (a) | $ | 1,527,371 | $ | 1,332,115 | $ | 1,014,400 | $ | 1,059,934 | $ | 909,887 | |||||||||||||||||||||
| Merger-related expenses | (203,888) | (171,968) | — | — | — | |||||||||||||||||||||||||||
| Expenses related to the sale of Legacy TCF auto finance portfolio | (3,964) | (4,670) | — | — | — | |||||||||||||||||||||||||||
| CFPB/OCC settlement adjustment | — | — | (32,000) | — | — | |||||||||||||||||||||||||||
| Write-down of company-owned vacant land parcels and branch exit costs | (551) | (9,384) | — | — | — | |||||||||||||||||||||||||||
| Pension fair valuation adjustment | — | (6,341) | — | — | ||||||||||||||||||||||||||||
| Goodwill impairment | — | — | — | (73,041) | — | |||||||||||||||||||||||||||
| Adjusted noninterest expense | $ | 1,318,968 | $ | 1,139,752 | $ | 982,400 | $ | 986,893 | $ | 909,887 | ||||||||||||||||||||||
| Lease financing equipment depreciation | (73,204) | (76,426) | (73,829) | (55,901) | (40,359) | |||||||||||||||||||||||||||
| Amortization of intangibles | (21,992) | (11,660) | (3,417) | (2,345) | (1,388) | |||||||||||||||||||||||||||
| Historic tax credit amortization | (7,050) | (4,030) | — | — | — | |||||||||||||||||||||||||||
| Adjusted noninterest expense, efficiency ratio | (b) | $ | 1,216,722 | $ | 1,047,636 | $ | 905,154 | $ | 928,647 | $ | 868,140 | |||||||||||||||||||||
| Net interest income | $ | 1,538,401 | $ | 1,289,032 | $ | 1,008,495 | $ | 937,474 | $ | 859,725 | ||||||||||||||||||||||
| Noninterest income | 516,063 | 465,532 | 454,397 | 436,063 | 454,281 | |||||||||||||||||||||||||||
| Total revenue | (c) | $ | 2,054,464 | $ | 1,754,564 | $ | 1,462,892 | $ | 1,373,537 | $ | 1,314,006 | |||||||||||||||||||||
| Noninterest income | $ | 516,063 | $ | 465,532 | $ | 454,397 | $ | 436,063 | $ | 454,281 | ||||||||||||||||||||||
| Loss on transfer of Legacy TCF auto finance portfolio to held-for-sale | — | 27,458 | — | — | — | |||||||||||||||||||||||||||
| Termination of interest rate swaps | — | 17,302 | — | — | — | |||||||||||||||||||||||||||
| Gain on sales of certain investment securities | — | (5,869) | — | — | — | |||||||||||||||||||||||||||
| Gain on sales of branches | (14,717) | — | — | — | — | |||||||||||||||||||||||||||
| Loan servicing rights impairment | 17,605 | 3,882 | — | — | — | |||||||||||||||||||||||||||
| Adjusted noninterest income | 518,951 | 508,305 | 454,397 | 436,063 | 454,281 | |||||||||||||||||||||||||||
| Net interest income | 1,538,401 | 1,289,032 | 1,008,495 | 937,474 | 859,725 | |||||||||||||||||||||||||||
| Net interest income FTE adjustment | 12,087 | 8,443 | 8,369 | 14,542 | 10,813 | |||||||||||||||||||||||||||
| Adjusted net interest income | 1,550,488 | 1,297,475 | 1,016,864 | 952,016 | 870,538 | |||||||||||||||||||||||||||
| Lease financing equipment depreciation | (73,204) | (76,426) | (73,829) | (55,901) | (40,359) | |||||||||||||||||||||||||||
| Adjusted total revenue, efficiency ratio | (d) | $ | 1,996,235 | $ | 1,729,354 | $ | 1,397,432 | $ | 1,332,178 | $ | 1,284,460 | |||||||||||||||||||||
| Efficiency ratio | (a)/(c) | 74.34 | % | 75.92 | % | 69.34 | % | 77.17 | % | 69.25 | % | |||||||||||||||||||||
| Adjusted efficiency ratio | (b)/(d) | 60.95 | 60.58 | 64.77 | 69.71 | 67.59 | ||||||||||||||||||||||||||
71
The computations of tangible common equity to tangible assets and tangible book value per common share were as follows:
| At December 31, | ||||||||||||||||||||||||||||||||
| (Dollars in thousands, except per share data) | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||
| Total equity | $ | 5,689,297 | $ | 5,727,241 | $ | 2,556,260 | $ | 2,680,584 | $ | 2,444,645 | ||||||||||||||||||||||
| Non-controlling interest in subsidiaries | (18,484) | (20,226) | (18,459) | (17,827) | (17,162) | |||||||||||||||||||||||||||
Total TCF Financial Corporation shareholders' equity | 5,670,813 | 5,707,015 | 2,537,801 | 2,662,757 | 2,427,483 | |||||||||||||||||||||||||||
| Preferred stock | (169,302) | (169,302) | (169,302) | (265,821) | (263,240) | |||||||||||||||||||||||||||
| Total common shareholders' equity | (a) | 5,501,511 | 5,537,713 | 2,368,499 | 2,396,936 | 2,164,243 | ||||||||||||||||||||||||||
| Goodwill, net | (1,313,046) | (1,299,878) | (154,757) | (154,757) | (225,640) | |||||||||||||||||||||||||||
| Other intangibles, net | (146,377) | (168,368) | (20,496) | (23,662) | (1,708) | |||||||||||||||||||||||||||
| Tangible common shareholders' equity | (b) | $ | 4,042,088 | $ | 4,069,467 | $ | 2,193,246 | $ | 2,218,517 | $ | 1,936,895 | |||||||||||||||||||||
| Total assets | (c) | $ | 47,802,487 | $ | 46,651,553 | $ | 23,699,612 | $ | 23,002,159 | $ | 21,441,326 | |||||||||||||||||||||
| Goodwill, net | (1,313,046) | (1,299,878) | (154,757) | (154,757) | (225,640) | |||||||||||||||||||||||||||
| Other intangibles, net | (146,377) | (168,368) | (20,496) | (23,662) | (1,708) | |||||||||||||||||||||||||||
| Tangible assets | (d) | $ | 46,343,064 | $ | 45,183,307 | $ | 23,524,359 | $ | 22,823,740 | $ | 21,213,978 | |||||||||||||||||||||
| Common stock shares outstanding | (e) | 152,565,504 | 152,965,571 | 83,289,382 | 87,225,232 | 86,881,005 | ||||||||||||||||||||||||||
| Common equity to assets | (a)/(c) | 11.51 | % | 11.87 | % | 9.99 | % | 10.42 | % | 10.09 | % | |||||||||||||||||||||
Tangible common equity to tangible assets | (b)/(d) | 8.72 | 9.01 | 9.32 | 9.72 | 9.13 | ||||||||||||||||||||||||||
| Book value per common share | (a)/(e) | $ | 36.06 | $ | 36.20 | $ | 28.44 | $ | 27.48 | $ | 24.91 | |||||||||||||||||||||
| Tangible book value per common share | (b)/(e) | 26.49 | 26.60 | 26.33 | 25.43 | 22.29 | ||||||||||||||||||||||||||
The computations of loans and leases and the related allowance for credit losses excluding PPP loans were as follows:
| At December 31, | Change from December 31, 2019 | |||||||||||||||||||
(Dollars in thousands) | 2020 | 2019 | $ | % | ||||||||||||||||
Commercial and industrial | $ | 11,422,383 | $ | 11,439,602 | $ | (17,219) | (0.2)% | |||||||||||||
Commercial real estate | 9,702,587 | 9,136,870 | 565,717 | 6.2 | ||||||||||||||||
Lease financing | 2,817,231 | 2,699,869 | 117,362 | 4.3 | ||||||||||||||||
Total commercial loan and lease portfolio | 23,942,201 | 23,276,341 | 665,860 | 2.9 | ||||||||||||||||
Residential mortgage | 6,182,045 | 6,179,805 | 2,240 | — | ||||||||||||||||
Home equity | 3,108,736 | 3,498,907 | (390,171) | (11.2) | ||||||||||||||||
Consumer installment | 1,233,426 | 1,542,411 | (308,985) | (20.0) | ||||||||||||||||
Total consumer loan portfolio | 10,524,207 | 11,221,123 | (696,916) | (6.2) | ||||||||||||||||
Total loans and leases | 34,466,408 | 34,497,464 | (31,056) | (0.1) | ||||||||||||||||
PPP (Commercial and industrial) | 1,553,908 | — | 1,553,908 | N.M. | ||||||||||||||||
Loans and leases excluding PPP loans | ||||||||||||||||||||
Commercial and industrial | 9,868,475 | 11,439,602 | (1,571,127) | (13.7) | ||||||||||||||||
Commercial real estate | 9,702,587 | 9,136,870 | 565,717 | 6.2 | ||||||||||||||||
Lease financing | 2,817,231 | 2,699,869 | 117,362 | 4.3 | ||||||||||||||||
Total commercial loan and lease portfolio | 22,388,293 | 23,276,341 | (888,048) | (3.8) | ||||||||||||||||
Residential mortgage | 6,182,045 | 6,179,805 | 2,240 | — | ||||||||||||||||
Home equity | 3,108,736 | 3,498,907 | (390,171) | (11.2) | ||||||||||||||||
Consumer installment | 1,233,426 | 1,542,411 | (308,985) | (20.0) | ||||||||||||||||
Total consumer loan portfolio | 10,524,207 | 11,221,123 | (696,916) | (6.2) | ||||||||||||||||
Total loans and leases, excluding PPP loans | $ | 32,912,500 | $ | 34,497,464 | $ | (1,584,964) | (4.6)% | |||||||||||||
Allowance for credit losses | $ | 549,181 | $ | 116,580 | $ | 432,601 | N.M. | |||||||||||||
Allowance for credit losses as a % of total loans and leases | 1.59% | 0.34% | 125 | bps | ||||||||||||||||
Allowance for credit losses as a % of loans and leases, excluding PPP loans | 1.67 | 0.34 | 133 | |||||||||||||||||
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Recent Accounting Developments
For a description of new accounting standards issued, but not yet adopted, see "Note 2. Summary of Significant Accounting Policies" of Notes to Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our results of operations depend, to a large degree, on our net interest income and our ability to manage interest rate risk. Although we manage other risks in the normal course of business, such as credit risk, liquidity risk and foreign currency risk, we consider interest rate risk to be one of our more significant market risks.
Interest Rate Risk
Our ALCO and the Finance Committee of our Board of Directors have established interest rate risk policy limits. Interest rate risk is defined as the exposure of net interest income and fair value of financial instruments (interest earning assets, deposits and borrowings) to movements in interest rates. The major sources of our interest rate risk are timing differences in the maturity and repricing characteristics of assets and liabilities, changes in the shape of the yield curve, changes in consumer behavior and changes in relationships between rate indices (basis risk). Management measures these risks and their impact in various ways, including through the use of simulation and valuation analyses. The interest rate scenarios may include gradual or rapid changes in interest rates, spread narrowing and widening, yield curve twists and changes in assumptions about consumer behavior in various interest rate scenarios. A mismatch between maturities, interest rate sensitivities and prepayment characteristics of assets and liabilities results in interest rate risk. We, like most financial institutions, have material interest rate risk exposure to changes in both short- and long-term interest rates, as well as variable interest rate indices (e.g., the prime rate or London Interbank Offered Rate).
Our ALCO is responsible for reviewing our interest rate sensitivity position and establishing policies to monitor and limit exposure to interest rate risk. ALCO manages our interest rate risk based on interest rate expectations and other factors. The principal objective in managing our assets and liabilities is to provide maximum levels of net interest income and facilitate our funding needs, while maintaining acceptable levels of interest rate risk and liquidity risk.
ALCO primarily uses two interest rate risk tools with policy limits to evaluate our interest rate risk: net interest income simulation and economic value of equity ("EVE") analysis.
Management utilizes net interest income simulation models to estimate the near-term effects of changing interest rates on our net interest income. Net interest income simulation involves forecasting net interest income under a variety of scenarios, including the level of interest rates, the shape of the yield curve and the spreads between market interest rates. Management exercises best judgment in making assumptions regarding events that management can influence, such as non-contractual deposit repricings and events outside management's control, including consumer behavior on loan and deposit activity and the effect that competition has on both loan and deposit pricing. These assumptions are subjective and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude and frequency of interest rate changes and changes in market conditions, consumer behavior and management strategies, among other factors. We perform various sensitivity analyses on new loan spreads, prepayment rates, basis risk and deposit assumptions.
The following table presents changes in our net interest income over a twelve month period if short- and long-term interest rates were to sustain an immediate change. These projections were based on our assets and liabilities remaining static over the next twelve months and factored into the simulation model.
| Impact on Net Interest Income | |||||||||||||||||
| (Dollars in thousands) | December 31, 2020 | December 31, 2019 | |||||||||||||||
| Immediate change in interest rates: | |||||||||||||||||
| +200 basis points | $ | 61,700 | 4.2 | % | $ | 32,200 | 2.1 | % | |||||||||
| +100 basis points | 32,700 | 2.2 | 20,900 | 1.4 | |||||||||||||
-100 basis points(1) | (39,500) | (2.7) | (60,900) | (4.0) | |||||||||||||
(1) Sensitivity measure is calculated assuming market rates do not decline below 0%.
73
The increases in sensitivity to rising rates at December 31, 2020, compared to December 31, 2019, was primarily driven by increased deposits, lower wholesale borrowing and overall lower rate environment. The decrease in sensitivity to a declining rate at December 31, 2020, compared to December 31, 2019, is primarily driven by a lower rate environment. The sensitivity measure is calculated assuming market rates do not decline below 0%. It is expected that a rate below 0% could cause further net interest income compression.
Management also uses EVE to measure risk in the balance sheet that might not be taken into account in the net interest income simulation analysis. Net interest income simulation highlights exposure over a relatively short time period, while EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet positions. The valuation of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the discounted present value of liability cash flows. EVE analysis addresses only the current balance sheet and does not incorporate the planned changes to assets or liabilities. As with the net interest income simulation model, EVE analysis is based on key assumptions about the timing and variability of balance sheet cash flows and does not take into account any potential responses by management to anticipated changes in interest rates.
Credit Risk
Credit risk is defined as the risk to our current or anticipated earnings or capital arising from an obligor's failures to meet the terms of any contract with us or otherwise failing to perform as agreed, such as the failure of customers and counterparties to meet their contractual obligations, as well as contingent exposures from unfunded loan commitments and letters of credit.
Our Enterprise Risk Management Committee meets at least quarterly and is responsible for monitoring the loan and lease portfolio composition and risk tolerance within the various segments of the portfolio. The Enterprise Risk Management Committee and TCF Financial's Board of Directors have adopted a Risk Appetite Statement to manage our credit risk by setting (i) a desired balance between asset classes, (ii) concentration limits based on loan type and business line and (iii) maximum tolerances for credit performance. To manage credit risk arising from lending and leasing activities, management has adopted and maintains underwriting policies and procedures and periodically reviews the appropriateness of these policies and procedures. Customers and guarantors or recourse providers are evaluated as part of initial underwriting processes and through periodic reviews. For consumer loans, credit scoring models are used to help determine eligibility for credit and terms of credit. These models are periodically reviewed to verify that they are predictive of borrower performance. Limits are established on the exposure to a single customer (including affiliates) and on concentrations for certain categories of customers. Loan and lease credit approval levels are established so that larger credit exposures receive managerial review at the appropriate level through the credit committees.
Management continuously monitors asset quality in order to manage our credit risk and to determine the appropriateness of valuation allowances, including, in the case of commercial loans, inventory finance loans and equipment finance loans and leases, a risk rating methodology under which a rating of one through nine is assigned to each loan or lease. The rating reflects management's assessment of the potential impact on repayment of the customer's financial and operational condition. Asset quality is monitored separately based on the type or category of loan or lease. The rating process allows management to better define our loan and lease portfolio risk profile. Management also uses various risk models to estimate probable impact on payment performance under various scenarios, both expected and unexpected.
We also have credit risk in our investment securities available-for-sale portfolio related to obligations of states and political subdivisions and non-agency collateralized mortgage obligations. We maintain a set of underwriting criteria and regularly monitor credit performance under the direction and supervision of the TCF Bank Credit Committee to manage this risk. The remainder of the investment securities available-for-sale portfolio and the investment securities held-to-maturity portfolio consist primarily of fixed-rate mortgage-backed securities issued and guaranteed by the FNMA and the FHLMC, and therefore credit risk is minimal. All investment related counterparties and transaction limits are reviewed and approved annually by both ALCO and the TCF Bank Credit Committee.
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Liquidity Risk
Liquidity risk is defined as the risk to earnings or capital arising from our inability to meet our obligations when they come due without incurring unacceptable losses.
TCF Financial's primary source of cash flow is capital distributions from TCF Bank. TCF Bank may be required to receive regulatory approval prior to making any such distributions in the future and such distributions 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. See "Item 1. Business - Regulation - Restrictions on Distributions", "Note 18. Regulatory Capital Requirements" and "Note 29. Parent Company Financial Information" of Notes to Consolidated Financial Statements for further information.
TCF Financial's Board of Directors have adopted a Liquidity Management Policy for TCF Bank to direct management of TCF's liquidity risk. The objective of the Liquidity Management Policy is to ensure that TCF Bank meets its cash and collateral obligations promptly, in a cost-effective manner and with the highest degree of reliability. The maintenance of adequate levels of asset and liability liquidity will provide us with the ability to meet both expected and unexpected cash flows and collateral needs. Key liquidity ratios, asset liquidity levels and the amount available from funding sources are reported to ALCO on a monthly basis. TCF Bank's Liquidity Management Policy defines liquidity stress scenarios and establishes asset liquidity target ranges based on those stress scenarios that are deemed appropriate for its risk profile.
Our asset liquidity may be held in the form of on-balance sheet cash invested with the Federal Reserve Bank or other highly liquid marketable securities that are not pledged and can be sold or pledged to various counterparties under established agreements. Our liability liquidity is sourced primarily through deposits and other secured sources of funding. See "Item 7. Management's Discussion and Analysis - Consolidated Results of Operations Analysis - Liquidity Management" for further information.
Foreign Currency Risk
We are also exposed to foreign currency risk as changes in the exchange rates of the Canadian, New Zealand and Australian dollars may impact our investment in TCFCFC. We enter into forward foreign exchange contracts in order to minimize the risk of changes in foreign exchange rates on its investment in and loans to TCFCFC. The values of forward foreign exchange contracts vary over their contractual lives as the related currency exchange rates fluctuate. We may also experience realized and unrealized gains or losses on forward foreign exchange contracts as a result of changes in foreign exchange rates. See "Note 2. Summary of Significant Accounting Policies" and "Note 19. Derivative Instruments" of Notes to Consolidated Financial Statements for further information.
LIBOR Transition
In 2017, the U.K. Financial Conduct Authority (the “FCA”) noted that market conditions raised serious questions about the future sustainability of LIBOR benchmarks. Many financial products, including mortgages and other consumer loans, commercial loans, corporate loans, various types of debt, derivatives and other securities, reference LIBOR to determine their applicable interest rate. As part of the expected upcoming cessation of publication of LIBOR rates, TCF created a company-wide LIBOR transition plan and has already taken several important steps to ensure TCF’s operational readiness for the transition, including completing an inventory of existing LIBOR-indexed products and developing LIBOR fallback language for inclusion in loans that contemplates the transition away from LIBOR. As part of our plan, we have and will continue to engage with industry working groups and regulators in order to monitor and respond to risks associated with the discontinuation, unavailability, or non-representativeness of LIBOR, and will continue to actively engage with our clients to facilitate the transition to alternative reference rates.
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Item 8. Financial Statements and Supplementary Data
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, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2020, 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, 2020, 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 February 26, 2021 expressed an unqualified opinion on the effectiveness of the Corporation’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Corporation has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates 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 a critical audit matter 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Allowance for loan and lease losses evaluated on a collective basis
As discussed in Notes 2 and 8 to the consolidated financial statements, the Corporation adopted Topic 326 as of January 1, 2020. The total allowance for credit losses (ACL) as of January 1, 2020 and December 31, 2020 was $337.3 million and $549.2 million, respectively; a portion of which related to the allowance for loan and lease losses evaluated on a collective basis (together, the collective ALLL). The Corporation’s estimate of the collective ALLL uses a current expected credit losses methodology that consists of both quantitative and qualitative loss components. The Corporation estimates the quantitative component by segmenting the loan and lease portfolio into pools of loans and leases with similar risk characteristics. Expected credit losses for the quantitative component of the collective ALLL are calculated as the product of (i) probability of default (PD), (ii) loss given default (LGD), and (iii) exposure at default (EAD) on an undiscounted basis. The PD and LGD incorporate a single economic forecast scenario and macroeconomic assumptions over a reasonable and supportable forecast period. Following the reasonable and supportable forecast period, the Corporation reverts on a straight-line basis over the reversion period to its historical loss rates for the remaining life of the respective loans and leases. The historical loss rates are determined based on loss data evaluated over the historical observation periods. The Corporation estimates the EAD using a prepayment methodology which projects prepayments over the life of the loans and leases. The qualitative component of the collective ALLL is comprised of adjustments for economic conditions and asset-specific risk characteristics to the extent they do not exist in the historical loss information. These adjustments are based on qualitative factors not reflected in the quantitative component and impact the measurement of expected credit losses.
We identified the assessment of the January 1, 2020 collective ALLL and December 31, 2020 collective ALLL as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment due to measurement uncertainty. Specifically, the assessment encompassed the evaluation of the collective ALLL methodology, including the (1) models used to estimate the PD and LGD, (2) determination of portfolio segmentation, (3) credit risk rating assumptions for commercial loans and leases, (4) selection of the economic forecast scenario and macroeconomic assumptions, (5) determination of the length of the reasonable and supportable forecast and reversion periods, and (6) qualitative adjustments. The assessment also included an evaluation of the conceptual soundness and performance of the PD and LGD models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Corporation’s measurement of the collective ALLL estimates, including controls over the:
–development of the collective ALLL methodology
–development of the PD and LGD models
–performance monitoring of the PD and LGD models for the December 31, 2020 collective ALLL
–identification and determination of the assumptions used in the quantitative component of the collective ALLL methodology
–development of the adjustments for qualitative factors
–analysis of the ACL results, trends, and ratios.
We evaluated the Corporation’s process to develop the collective ALLL estimates by testing certain sources of data and assumptions that the Corporation used, and we considered the relevance and reliability of such data and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:
–evaluating the Corporation’s collective ALLL methodology for compliance with U.S. generally accepted accounting principles
–evaluating judgments made by the Corporation relative to the development and performance testing of the PD and LGD models by comparing them to relevant Corporation specific metrics and trends and the applicable industry and regulatory practices
–assessing the conceptual soundness of the PD and LGD models by inspecting the model documentation to determine whether the models are suitable for their intended use
–evaluating the selection of the economic forecast scenario and related macroeconomic assumptions by comparing it to the Corporation’s business environment, relevant industry practices and publicly available forecasts
77
–evaluating the length of the reasonable and supportable forecast and reversion periods by comparing them to specific portfolio risk characteristics and trends
–determining whether the loan and lease portfolios are segmented by similar risk characteristics by comparing to the Corporation’s business environment and relevant industry practices
–testing individual credit risk ratings for a selection of certain commercial loan and lease borrower relationships by evaluating the financial performance of the borrower, sources of repayment, and any relevant guarantees or underlying collateral
–evaluating the methodology used to develop the adjustments for qualitative factors and the effect of those factors on the collective ALLL compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative models.
We also assessed the sufficiency of the audit evidence obtained related to the January 1, 2020 collective ALLL and December 31, 2020 collective ALLL by evaluating the:
–cumulative results of the audit procedures
–qualitative aspects of the Corporation’s accounting practices
–potential bias in the accounting estimates.
/s/ KPMG LLP
We have served as the Corporation's auditor since 1991.
Detroit, Michigan
February 26, 2021
78
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
| (Dollars in thousands, except per share data) | At December 31, 2020 | At December 31, 2019 | |||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents: | |||||||||||
| Cash and due from banks | $ | $ | |||||||||
| Interest-bearing deposits with other banks | |||||||||||
| Total cash and cash equivalents | |||||||||||
| Federal Home Loan Bank and Federal Reserve Bank stocks, at cost | |||||||||||
| Investment securities: | |||||||||||
Available-for-sale, at fair value (amortized cost of $ | |||||||||||
Held-to-maturity, at amortized cost (fair value of $ | |||||||||||
| Total investment securities | |||||||||||
Loans and leases held-for-sale (includes $ | |||||||||||
| Loans and leases | |||||||||||
| Allowance for loan and lease losses | ( | ( | |||||||||
| Loans and leases, net | |||||||||||
| Premises and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Loan servicing rights | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Liabilities | |||||||||||
| Deposits: | |||||||||||
| Noninterest-bearing | $ | $ | |||||||||
| Interest-bearing | |||||||||||
| Total deposits | |||||||||||
| Short-term borrowings | |||||||||||
| Long-term borrowings | |||||||||||
| Other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Equity | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
Issued - | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive income | |||||||||||
| Other | ( | ( | |||||||||
| Total TCF Financial Corporation shareholders' equity | |||||||||||
| Non-controlling interest | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See accompanying notes to consolidated financial statements.
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TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
| Year Ended December 31, | |||||||||||||||||
| (Dollars in thousands, except per share data) | 2020 | 2019 | 2018 | ||||||||||||||
| Interest income | |||||||||||||||||
| Interest and fees on loans and leases | $ | $ | $ | ||||||||||||||
| Interest on investment securities: | |||||||||||||||||
| Taxable | |||||||||||||||||
| Tax-exempt | |||||||||||||||||
| Interest on loans held-for-sale | |||||||||||||||||
| Interest on other earning assets | |||||||||||||||||
| Total interest income | |||||||||||||||||
| Interest expense | |||||||||||||||||
| Interest on deposits | |||||||||||||||||
| Interest on borrowings | |||||||||||||||||
| Total interest expense | |||||||||||||||||
| Net interest income | |||||||||||||||||
| Provision for credit losses | |||||||||||||||||
| Net interest income after provision for credit losses | |||||||||||||||||
| Noninterest income | |||||||||||||||||
| Leasing revenue | |||||||||||||||||
| Fees and service charges on deposit accounts | |||||||||||||||||
| Card and ATM revenue | |||||||||||||||||
| Net gains on sales of loans and leases | |||||||||||||||||
| Wealth management revenue | |||||||||||||||||
| Servicing fee revenue | |||||||||||||||||
| Net gains on investment securities | |||||||||||||||||
| Other | |||||||||||||||||
| Total noninterest income | |||||||||||||||||
| Noninterest expense | |||||||||||||||||
| Compensation and employee benefits | |||||||||||||||||
| Occupancy and equipment | |||||||||||||||||
| Lease financing equipment depreciation | |||||||||||||||||
| Net foreclosed real estate and repossessed assets | |||||||||||||||||
| Merger-related expenses | |||||||||||||||||
| Other | |||||||||||||||||
| Total noninterest expense | |||||||||||||||||
| Income before income tax expense | |||||||||||||||||
| Income tax expense | |||||||||||||||||
| Income after income tax expense | |||||||||||||||||
| Income attributable to non-controlling interest | |||||||||||||||||
| Net income attributable to TCF Financial Corporation | |||||||||||||||||
| Preferred stock dividends | |||||||||||||||||
| Impact of preferred stock redemption | |||||||||||||||||
| Net income available to common shareholders | $ | $ | $ | ||||||||||||||
| Earnings per common share | |||||||||||||||||
| Basic | $ | $ | $ | ||||||||||||||
| Diluted | |||||||||||||||||
| Weighted-average common shares outstanding | |||||||||||||||||
| Basic | |||||||||||||||||
| Diluted | |||||||||||||||||
See accompanying notes to consolidated financial statements.
80
TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Net income attributable to TCF Financial Corporation | $ | $ | $ | ||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||
| 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 other comprehensive income (loss), net of tax | ( | ||||||||||||||||
| Comprehensive income | $ | $ | $ | ||||||||||||||
See accompanying notes to consolidated financial statements.
81
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) | Other | Total | Non- controlling Interest | Total Equity | ||||||||||||||||||||||||||
| (Dollars in thousands) | Preferred | Common | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||
Change in accounting principle | — | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||
Balance, January 1, 2018 | ( | ( | |||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | — | — | — | ( | — | ( | — | ( | ||||||||||||||||||||||||
Net investment by (distribution to) non-controlling interest | — | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||
| Redemption of Series B Preferred Stock | ( | — | ( | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||
Repurchases of | — | — | — | — | — | — | — | ( | ( | — | ( | ||||||||||||||||||||||||
Dividends on | — | — | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||
Dividends on | — | — | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||
Dividends on common stock of $ | — | — | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||
| Common stock warrants exercised | — | — | ( | — | — | — | — | — | — | ||||||||||||||||||||||||||
Common shares purchased by TCF employee benefit plans | — | — | — | — | — | — | |||||||||||||||||||||||||||||
Stock compensation plans, net of tax | — | — | — | — | — | ||||||||||||||||||||||||||||||
Change in shares held in trust for deferred compensation plans, at cost | — | — | — | — | ( | — | — | — | — | — | |||||||||||||||||||||||||
Balance, December 31, 2018 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | ||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Reverse merger with Chemical Financial Corporation | — | — | — | — | — | ||||||||||||||||||||||||||||||
Net investment by (distribution to) non-controlling interest | — | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||
Repurchases of | — | ( | — | ( | ( | — | — | ( | ( | — | ( | ||||||||||||||||||||||||
Dividends on | — | — | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||
Dividends on common stock of $ | — | — | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||
Stock compensation plans, net of tax | — | ( | — | ( | — | — | — | ||||||||||||||||||||||||||||
Change in shares held in trust for deferred compensation plans, at cost | — | — | — | — | ( | — | — | — | — | — | |||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
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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) | Other | Total | Non- controlling Interest | Total Equity | ||||||||||||||||||||||||||
| (Dollars in thousands) | Preferred | Common | |||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||
Cumulative effect adjustment related to adoption of (1) | — | — | — | — | — | ( | — | — | ( | ( | |||||||||||||||||||||||||
| Balance, January 1, 2020 | ( | ||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Net investment by (distribution to) non-controlling interest | — | — | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||
Repurchases of | — | ( | — | ( | ( | — | — | ( | — | ( | |||||||||||||||||||||||||
Dividends on | — | — | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||
Dividends on common stock of $ | — | — | — | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||
Stock compensation plans, net of tax | — | — | — | — | — | ||||||||||||||||||||||||||||||
Change in shares held in trust for deferred compensation plans, at cost | — | — | — | — | ( | — | — | — | — | — | |||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||
(1) See "Note 2. Summary of Significant Accounting Policies" for further information
See accompanying notes to consolidated financial statements.
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TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Cash flows from operating activities | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||||||||
| Provision for credit losses | |||||||||||||||||
| Share-based compensation expense | |||||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Provision (benefit) for deferred income taxes | ( | ||||||||||||||||
| Net gains on sales of assets | ( | ( | ( | ||||||||||||||
| Proceeds from sales of loans and leases held-for-sale | |||||||||||||||||
| Originations of loans and leases held-for-sale, net of repayments | ( | ( | ( | ||||||||||||||
| Impairment of loan servicing rights | |||||||||||||||||
| Net change in other assets | ( | ( | ( | ||||||||||||||
| Net change in other liabilities | ( | ||||||||||||||||
| Other, net | ( | ( | ( | ||||||||||||||
| Net cash provided by (used in) operating activities | |||||||||||||||||
| Cash flows from investing activities | |||||||||||||||||
| Proceeds from sales of investment securities available-for-sale | |||||||||||||||||
| Proceeds from maturities of and principal collected on investment securities available-for-sale | |||||||||||||||||
| Purchases of investment securities available-for-sale | ( | ( | ( | ||||||||||||||
| Proceeds from maturities of and principal collected on investment securities held-to-maturity | |||||||||||||||||
| Purchases of investment securities held-to-maturity | ( | ( | ( | ||||||||||||||
| Redemption of Federal Home Loan Bank stock | |||||||||||||||||
| Purchases of Federal Home Loan Bank stock | ( | ( | ( | ||||||||||||||
| Proceeds from sales of loans and leases | |||||||||||||||||
Loan and lease originations and purchases, net of principal collected | ( | ( | ( | ||||||||||||||
| Proceeds from sales of other assets | |||||||||||||||||
| Purchases of premises and equipment and lease equipment | ( | ( | ( | ||||||||||||||
| Net cash acquired (paid) in business combinations | |||||||||||||||||
| Other, net | ( | ||||||||||||||||
| Net cash provided by (used in) investing activities | ( | ( | |||||||||||||||
| Cash flows from financing activities | |||||||||||||||||
| Net change in deposits | ( | ||||||||||||||||
| Net change in short-term borrowings | ( | ||||||||||||||||
| Proceeds from long-term borrowings | |||||||||||||||||
| Payments on long-term borrowings | ( | ( | ( | ||||||||||||||
| Payments on liabilities related to acquisition and portfolio purchase | ( | ( | |||||||||||||||
| Redemption of Series B preferred stock | ( | ||||||||||||||||
| Repurchases of common stock | ( | ( | ( | ||||||||||||||
| Common shares sold to TCF employee benefit plans | |||||||||||||||||
| Dividends paid on preferred stock | ( | ( | ( | ||||||||||||||
| Dividends paid on common stock | ( | ( | ( | ||||||||||||||
| Exercise of stock options | ( | ( | |||||||||||||||
| Payments related to tax-withholding upon conversion of share-based awards | ( | ( | ( | ||||||||||||||
| Net investment by (distribution to) non-controlling interest | ( | ( | ( | ||||||||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||||||||
| Net change in cash and due from banks | ( | ||||||||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||||||||
| Cash and cash equivalents at end of period | $ | $ | $ | ||||||||||||||
| Supplemental disclosures of cash flow information | |||||||||||||||||
| Cash paid (received) for: | |||||||||||||||||
| Interest on deposits and borrowings | $ | $ | $ | ||||||||||||||
| Income taxes, net | ( | ||||||||||||||||
| Noncash activities: | |||||||||||||||||
Transfer of loans and leases to other assets | |||||||||||||||||
| Transfer of loans and leases from held-for-investment to held-for-sale, net | |||||||||||||||||
See accompanying notes to consolidated financial statements.
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TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Basis of Presentation
On August 1, 2019 (the "TCF/Chemical 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 "TCF/Chemical Merger"). Immediately following the TCF/Chemical 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 ("TCF Bank") surviving the TCF/Chemical Merger. Upon completion of the TCF/Chemical 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 TCF/Chemical 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 TCF/Chemical 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 adjusted to reflect the equivalent number of shares issued to holders of Legacy TCF common stock in the TCF/Chemical Merger. See "Note 3. Business Combinations" for further information. In addition, the assets and liabilities of Chemical as of the TCF/Chemical 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 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.
Note 2. Summary of Significant Accounting Policies
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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. The Corporation recorded the estimate of fair value based on initial valuations available at the TCF/Chemical Merger Date and these estimates were considered preliminary as of September 30, 2019, and subject to adjustment for up to one year after the TCF/Chemical Merger Date. While the Corporation believes that the information available on the TCF/Chemical Merger Date provided a reasonable basis for estimating fair value, following the TCF/Chemical Merger, the Corporation obtained additional information and evidence and then finalized all valuations and recorded final adjustments during the first quarter of 2020.
In determining the estimated fair value of assets acquired as part of the TCF/Chemical Merger, 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 3. Business Combinations" 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, 2020 and 2019, 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, 2020.
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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 the loss given default and the exposure at default (representing the estimated outstanding principal balance of the loans and leases upon default) on an undiscounted basis, as well as adjustments for forward-looking information, including industry and macroeconomic conditions. Management's current methodology for the quantitative component of the collective evaluation of expected losses utilizes a single economic forecast scenario over 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 and measurement date credit risk characteristics such as product type, lien position, delinquency, collateral value, credit bureau scores, credit risk ratings and financial statement ratios. These quantitative factors, as well as qualitative factors such as adjustments for economic conditions and asset-specific risk characteristics to the extent they do not exist in the historical loss information, are reviewed quarterly. Adjustments are based on qualitative factors not reflected in the quantitative component and impact the measurement of expected credit losses.
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 financial and 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.
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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, exposure at default, the inputs to industry and macroeconomic conditions and the reversion periods utilized. The results of this process are summarized and presented to management quarterly for their approval of the recorded allowance.
Prior to the adoption of ASU No. 2016-13, the allowance for credit losses was calculated in accordance with ASC Topic 310, "Receivables" and ASC Topic 450, "Contingencies". The allowance for credit losses were 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 not known to require specific allowances. The collective evaluation of incurred losses was based on historical loss rates multiplied by the respective loss emergence periods.
See "Note 8. Allowance for Credit Losses and Credit Quality" and the following details within "Recently Adopted Accounting Policies" for further information.
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See "Note 8. Allowance for Credit Losses and Credit Quality" for further information on loans and leases.
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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.
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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.
Net Investment Hedges Forward foreign exchange contracts, which generally settle within 35 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 2 to 15 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 35 days. Changes in the fair value of these forward foreign exchange contracts are recorded in other noninterest expense.
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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.
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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.
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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.
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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 TCF/Chemical 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. On December 27, 2020, these provisions were extended to the earlier of January 1, 2022 or 60 days after the President of the United States declares a termination of the COVID-19 national emergency. 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.
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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 Accounting Pronouncements
In October 2020, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2020-10, Codification Improvements, which is intended to clarify or correct the unintended application of the Codification of accounting guidance for a wide variety of topics. 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. The adoption of this guidance will not have a material impact on the consolidated financial statements.
In October 2020, the FASB issued ASU No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs, which clarifies the intent of certain updates that were included in ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. 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. The adoption of this guidance will not have a material impact on the consolidated financial statements.
In August 2020, 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. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, which clarifies that the scope of Topic 848 includes derivative instruments that do not reference a rate that is expected to be discontinued but that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. 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. The adoption of this guidance will not have a material impact 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. The adoption of this guidance will not have a material impact on the consolidated financial statements.
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Note 3. Business Combinations
Proposed Merger with Huntington Bancshares Incorporated
On December 13, 2020, TCF and Huntington Bancshares Incorporated ("Huntington") jointly announced the signing of a definitive merger agreement (the "TCF/Huntington Merger Agreement"). Under the terms of the agreement, which was unanimously approved by the boards of directors of both companies, TCF will merge into Huntington, with Huntington continuing as the surviving entity, with dual headquarters for banking operations in Detroit, Michigan and Columbus, Ohio. Huntington is headquartered in Columbus, Ohio with reported assets of $123.0 billion as of December 31, 2020. Under the terms of the TCF/Huntington Merger Agreement, TCF shareholders will receive 3.0028 shares of Huntington common stock for each share of TCF common stock. Holders of TCF common stock will receive cash in lieu of fractional shares. Each outstanding share of 5.70 % Series C Non-Cumulative Perpetual Preferred Stock of TCF will be converted into the right to receive one share of a newly created series of preferred stock of Huntington. Subject to receipt of regulatory approvals and satisfaction of other customary closing conditions, including approval of both TCF and Huntington shareholders, the transaction is anticipated to close in the second quarter of 2021.
TCF/Chemical Merger
As described in "Note 1. Basis of Presentation," on August 1, 2019, the Corporation completed the TCF/Chemical Merger with Legacy TCF.
The TCF/Chemical Merger was an all-stock transaction. Pursuant to the merger agreement, on the TCF/Chemical 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 TCF/Chemical 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 TCF/Chemical Merger on August 1, 2019, TCF Financial had approximately 153.5 million shares of common stock outstanding. On the TCF/Chemical 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 TCF/Chemical 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 TCF/Chemical 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 TCF/Chemical 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 TCF/Chemical 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.
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As the legal acquirer, Chemical (now TCF Financial Corporation) issued approximately 81.9 million shares of TCF Financial common stock in connection with the TCF/Chemical Merger, which represented approximately 53 % of the voting interests in TCF Financial upon completion of the TCF/Chemical 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 TCF/Chemical Merger is to determine the ownership of the combined company following the TCF/Chemical Merger. The table below summarizes the ownership of the combined company ("TCF Financial") following the TCF/Chemical 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 $ | |||||||||||||||
| Legacy TCF shareholders | % | $ | |||||||||||||||
| Chemical shareholders | |||||||||||||||||
| Total | $ | ||||||||||||||||
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 | % | |||||||||||||
| Chemical shareholders | ||||||||||||||
| Total | ||||||||||||||
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 | ||||||||
| Legacy TCF market price per share as of July 31, 2019 | $ | |||||||
| Purchase price determination of hypothetical Legacy TCF shares issued to Chemical shareholders | ||||||||
| Value of Chemical stock options hypothetically converted to options to acquire shares of Legacy TCF common stock | ||||||||
| Cash in lieu of fractional shares | ||||||||
| Purchase price consideration | $ | |||||||
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The following table provides the purchase price allocation as of the TCF/Chemical Merger Date and the assets acquired and liabilities assumed at their estimated fair value as of the TCF/Chemical Merger Date as recorded by the Corporation. The Corporation recorded the estimate of fair value based on initial valuations available at the TCF/Chemical Merger Date and these estimates were considered preliminary as of September 30, 2019, and subject to adjustment for up to one year after the TCF/Chemical Merger Date. While the Corporation believes that the information available on the TCF/Chemical Merger Date provided a reasonable basis for estimating fair value, following the TCF/Chemical 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 | $ | ||||
Fair value of assets acquired(1): | |||||
| Cash and cash equivalents | |||||
| Federal Home Loan Bank and Federal Reserve Bank stocks | |||||
| Investment securities | |||||
| Loans held-for-sale | |||||
| Loans and leases | |||||
| Premises and equipment | |||||
| Loan servicing rights | |||||
| Other intangible assets | |||||
Net deferred tax asset(2) | |||||
| Other assets | |||||
| Total assets acquired | |||||
Fair value of liabilities assumed(1): | |||||
| Deposits | |||||
| Short-term borrowings | |||||
| Long-term borrowings | |||||
| Other liabilities | |||||
| Total liabilities assumed | |||||
| Fair value of net identifiable assets | |||||
Goodwill resulting from the TCF/Chemical Merger(1) | $ | ||||
(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 the TCF/Chemical 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 TCF/Chemical Merger Date.
As described in more detail in "Note 2. Summary of Significant Accounting Policies", all Chemical loans and leases were recorded at their estimated fair value as of the TCF/Chemical 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.
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Information regarding acquired loans and leases included in loans and leases acquired at the TCF/Chemical Merger Date was as follows:
| (In thousands) | |||||
| PCI loans: | |||||
| Contractually required payments receivable | $ | ||||
| Nonaccretable difference | ( | ||||
| Expected cash flows | |||||
Accretable yield | |||||
| Fair value of PCI loans | $ | ||||
| Purchased nonimpaired loans and leases: | |||||
| Unpaid principal balance | $ | ||||
| Fair value discount | ( | ||||
| Fair value at acquisition | |||||
Total fair value at acquisition | $ | ||||
Supplemental disclosures of cash flow information related to investing and financing activities regarding the TCF/Chemical Merger are as follows for the year ended December 31, 2019:
| (In thousands) | |||||
| Business combination | |||||
Fair value of tangible assets acquired(1) | $ | ||||
Goodwill, loan servicing rights and other identifiable intangible assets acquired(1) | |||||
| Liabilities assumed | |||||
| Common stock and stock options converted | |||||
(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 the TCF/Chemical Merger ($13.2 million increase).
Other intangible assets consisted of core deposits and customer relationship intangibles with estimated fair values at the TCF/Chemical 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 TCF/Chemical Merger was 11 years.
As a result of the TCF/Chemical 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.
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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 TCF/Chemical Merger had occurred as of January 1, 2018 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, 2018. Merger-related expenses incurred by TCF at the effective date of the TCF/Chemical Merger or subsequent to the TCF/Chemical 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 2018. 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 and 2018.
| Year Ended December 31, | |||||||||||
| (In thousands, except per share data) | 2019 | 2018 | |||||||||
| Net interest income and other noninterest income | $ | $ | |||||||||
| Net income | |||||||||||
| Net income available to common shareholders | |||||||||||
| Earnings per share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | |||||||||||
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 $1.3 billion and $1.2 billion at December 31, 2020 and 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 $95.1 million and $68.6 million at December 31, 2020 and 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:
| At December 31, | |||||||||||
| (In thousands) | 2020 | 2019 | |||||||||
| FHLB stock, at cost | $ | $ | |||||||||
| FRB stock, at cost | |||||||||||
| Total investments | $ | $ | |||||||||
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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, 2020 | |||||||||||||||||||||||
Debt securities: | |||||||||||||||||||||||
Obligations of states and political subdivisions | $ | $ | $ | $ | |||||||||||||||||||
Government and government-sponsored enterprises | |||||||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||
| Residential agency | |||||||||||||||||||||||
| Residential non-agency | |||||||||||||||||||||||
| Commercial agency | |||||||||||||||||||||||
| Commercial non-agency | |||||||||||||||||||||||
Total mortgage-backed debt securities | |||||||||||||||||||||||
Corporate debt and trust preferred securities | |||||||||||||||||||||||
Total investment securities available-for-sale | $ | $ | $ | $ | |||||||||||||||||||
| At December 31, 2019 | |||||||||||||||||||||||
Debt securities: | |||||||||||||||||||||||
Obligations of states and political subdivisions | $ | $ | $ | $ | |||||||||||||||||||
Government and government-sponsored enterprises | |||||||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||
| Residential agency | |||||||||||||||||||||||
| Residential non-agency | |||||||||||||||||||||||
| Commercial agency | |||||||||||||||||||||||
| Commercial non-agency | |||||||||||||||||||||||
Total mortgage-backed debt securities | |||||||||||||||||||||||
Corporate debt and trust preferred securities | |||||||||||||||||||||||
Total investment securities available-for-sale | $ | $ | $ | $ | |||||||||||||||||||
| Investment Securities Held-to-Maturity | |||||||||||||||||||||||
(In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
| At December 31, 2020 | |||||||||||||||||||||||
| Residential agency mortgage-backed securities | $ | $ | $ | $ | |||||||||||||||||||
| Corporate debt and trust preferred securities | |||||||||||||||||||||||
Total investment securities held-to-maturity(1) | $ | $ | $ | $ | |||||||||||||||||||
| At December 31, 2019 | |||||||||||||||||||||||
| Residential agency mortgage-backed securities | $ | $ | $ | $ | |||||||||||||||||||
| Corporate debt and trust preferred securities | |||||||||||||||||||||||
Total investment securities held-to-maturity | $ | $ | $ | $ | |||||||||||||||||||
(1)The adoption of CECL was inconsequential to held-to-maturity investment securities. At December 31, 2020 there was no ACL for investment securities held-to-maturity.
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Accrued interest receivable for investment securities was $20.6 million and $21.6 million at December 31, 2020 and 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 December 31, 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: | |||||||||||||||||||||||||||||||||||
| Government and government sponsored enterprises | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | |||||||||||||||||||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||||||||||||||
| Residential agency | |||||||||||||||||||||||||||||||||||
Residential non-agency | |||||||||||||||||||||||||||||||||||
Commercial agency | |||||||||||||||||||||||||||||||||||
Commercial non-agency | |||||||||||||||||||||||||||||||||||
Total mortgage-backed debt securities | |||||||||||||||||||||||||||||||||||
Total investment securities available-for-sale | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Obligations of states and political subdivisions | |||||||||||||||||||||||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||||||||||||||||||||
| Residential agency | |||||||||||||||||||||||||||||||||||
Residential non-agency | |||||||||||||||||||||||||||||||||||
Commercial agency | |||||||||||||||||||||||||||||||||||
Commercial non-agency | |||||||||||||||||||||||||||||||||||
Total mortgage-backed debt securities | |||||||||||||||||||||||||||||||||||
Corporate debt and trust preferred securities | |||||||||||||||||||||||||||||||||||
Total investment securities available-for-sale | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
The adoption of CECL was inconsequential to available-for-sale investment securities. At December 31, 2020 there was no ACL for investment securities available-for-sale. At December 31, 2020 there were 176 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 available-for-sale 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.
106
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Gross realized gains | $ | $ | $ | ||||||||||||||
| Gross realized losses | |||||||||||||||||
Recoveries on previously impaired investment securities held-to-maturity | |||||||||||||||||
| Net gains on investment securities | $ | $ | $ | ||||||||||||||
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, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| (In thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||||||||
| Investment Securities Available-for-Sale | |||||||||||||||||||||||
| Due in one year or less | $ | $ | $ | $ | |||||||||||||||||||
| Due in 1-5 years | |||||||||||||||||||||||
| Due in 5-10 years | |||||||||||||||||||||||
| Due after 10 years | |||||||||||||||||||||||
| Total investment securities available-for-sale | $ | $ | $ | $ | |||||||||||||||||||
| Investment Securities Held-to-Maturity | |||||||||||||||||||||||
| Due in one year or less | $ | $ | $ | $ | |||||||||||||||||||
| Due in 1-5 years | |||||||||||||||||||||||
| Due in 5-10 years | |||||||||||||||||||||||
| Due after 10 years | |||||||||||||||||||||||
| Total investment securities held-to-maturity | $ | $ | $ | $ | |||||||||||||||||||
Note 7. Loans and Leases
Loans and leases were as follows:
| At December 31, | |||||||||||
| (In thousands) | 2020 | 2019 | |||||||||
| Commercial loan and lease portfolio: | |||||||||||
Commercial and industrial(1) | $ | $ | |||||||||
| Commercial real estate | |||||||||||
| Lease financing | |||||||||||
| Total commercial loan and lease portfolio | |||||||||||
| Consumer loan portfolio: | |||||||||||
| Residential mortgage | |||||||||||
| Home equity | |||||||||||
| Consumer installment | |||||||||||
| Total consumer loan portfolio | |||||||||||
Total loans and leases(2) | $ | $ | |||||||||
(1)Includes $1.6 billion of PPP loans at December 31, 2020.
(2)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 $(118.6 ) million and $(201.5 ) million at December 31, 2020 and 2019, respectively.
Accrued interest receivable for loans and leases was $93.6 million and $106.5 million at December 31, 2020 and December 31, 2019, respectively, and is included in other assets on the Consolidated Statements of Financial Condition.
107
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 $1.1 billion during the year ended December 31, 2020, none of which qualified as PCD loans.
See "Note 2. Summary of Significant Accounting Policies" for further acquired loans and leases policy information.
Leases The components of the net investment in direct financing and sales-type leases were as follows:
| At December 31, | |||||||||||
| (In thousands) | 2020 | 2019 | |||||||||
| Carrying amount | $ | $ | |||||||||
| Unguaranteed residual assets | |||||||||||
| Net direct fees and costs and unearned income | ( | ( | |||||||||
| Total net investment in direct financing and sales-type leases | $ | $ | |||||||||
The carrying amount of the sales-type and direct financing leases subject to residual value guarantees was $344.3 million and $277.1 million at December 31, 2020 and December 31, 2019, respectively.
The components of total lease income were as follows:
| Year Ended December 31, | |||||||||||
| (In thousands) | 2020 | 2019 | |||||||||
| Interest and fees on loans and leases (Interest income): | |||||||||||
| Interest income on net investment in direct financing and sales-type leases | $ | $ | |||||||||
| Leasing revenue (Noninterest income): | |||||||||||
| Lease income from operating lease payments | |||||||||||
| Profit (loss) recorded on commencement date on sales-type | |||||||||||
| Gain (losses) on sales of leased equipment | |||||||||||
| Leasing revenue | |||||||||||
| Total lease income | $ | $ | |||||||||
Lease financing equipment depreciation on equipment leased to others was $73.2 million and the net book value of equipment leased to others and related initial direct costs under operating leases was $326.9 million at December 31, 2020. 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, 2020 were as follows:
| (In thousands) | |||||
| 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Equipment under leases not yet commenced | |||||
| Total undiscounted future minimum lease payments receivable for direct financing and sales-type leases | |||||
| Third-party residual value guarantees | |||||
| Total carrying amount of direct financing and sales-type leases | $ | ||||
108
Undiscounted future minimum lease payments expected to be received for operating leases at December 31, 2020 were as follows:
| (In thousands) | |||||
| 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total undiscounted future minimum lease payments | $ | ||||
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 11. Loan Servicing Rights" for further information.
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Sale proceeds, net | $ | $ | $ | ||||||||||||||
| Recorded investment in loans and leases sold, including accrued interest | |||||||||||||||||
| Changes in fair value of loans held-for-sale and related derivative instruments, capitalized servicing and other | ( | ( | ( | ||||||||||||||
| Net gains on sales of loans and leases | $ | $ | $ | ||||||||||||||
During 2019, the Corporation completed the sale of the Legacy TCF auto finance portfolio of $1.1 billion, which had previously been included within loans held-for-sale, 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) | 2020 | 2019 | |||||||||
| Interest-only strips | $ | $ | |||||||||
We recorded $224 thousand, $62 thousand and $661 thousand of impairment charges on interest-only strips in 2020, 2019 and 2018, 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 2020, 2019 and 2018.
109
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 December 31, 2020 reflects this adoption, and historical financial information disclosed is in accordance with ASC Topic 310 and ASC Topic 450.
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 Loans and Leases | Reserve for Unfunded Lending Commitments(1) | Total Allowance for Credit Losses | ||||||||||||||||||||||||
| Year ended December 31, 2020 | |||||||||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Impact of CECL adoption | |||||||||||||||||||||||||||||
| Adjusted balance, beginning of period | |||||||||||||||||||||||||||||
| Charge-offs | ( | ( | ( | ( | |||||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||||||||
| Net (charge-offs) recoveries | ( | ( | ( | ( | |||||||||||||||||||||||||
Provision for credit losses(2) | |||||||||||||||||||||||||||||
| Other | ( | ( | ( | ( | |||||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Year ended December 31, 2019 | |||||||||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ( | ( | $ | ( | ||||||||||||||||||||||||
| Recoveries | |||||||||||||||||||||||||||||
| Net (charge-offs) recoveries | ( | ( | ( | ( | |||||||||||||||||||||||||
Provision for credit losses(2) | |||||||||||||||||||||||||||||
Other(3) | ( | ( | ( | ( | |||||||||||||||||||||||||
| Addition due to merger | |||||||||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Year ended December 31, 2018 | |||||||||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Charge-offs | ( | ( | ( | $ | ( | ||||||||||||||||||||||||
| Recoveries | $ | ||||||||||||||||||||||||||||
| Net (charge-offs) recoveries | ( | ( | ( | ( | |||||||||||||||||||||||||
Provision for credit losses(2) | ( | $ | |||||||||||||||||||||||||||
Other(3) | ( | ( | ( | ( | |||||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(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.
Management considers our ACL of $549.2 million, or 1.59 % of total loans and leases, appropriate to cover current credit losses expected to be incurred in the loan and lease portfolios over the remaining expected life of each financial asset at December 31, 2020, including loans and leases which are not currently known to require specific allowances. The increase in ACL and the ACL as a percentage of total loans and leases from December 31, 2019 was primarily due to the adoption of CECL at January 1, 2020, and the impact of COVID-19. During 2020 the COVID-19 pandemic had a negative impact on current and forecasted macroeconomic conditions and created uncertainty around the performance of certain sectors that have been more heavily impacted, including motor coach, shuttle bus, hotel, retail commercial real estate, franchise, retail trade and fitness. In the fourth quarter of 2020, we began to see improvement in current and forecasted macro-economic conditions, however, these improvements were offset by continued uncertainty around the performance of sectors more heavily impacted by COVID-19. PPP loans are individually guaranteed by the Small Business Administration and therefore the accounting under CECL does not require reserves to be recorded on such loans.
110
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 | $ | $ | $ | ||||||||||||||
| Individually evaluated for impairment | |||||||||||||||||
| Loans acquired with deteriorated credit quality | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
| Loans and leases outstanding | |||||||||||||||||
| Collectively evaluated for impairment | $ | $ | $ | ||||||||||||||
| Individually evaluated for impairment | |||||||||||||||||
Loans acquired with deteriorated credit quality | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
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 | $ | $ | $ | ||||||||||||||
| Commercial real estate | |||||||||||||||||
| Lease financing | |||||||||||||||||
| Total commercial loan and lease portfolio | |||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||
| Residential mortgage | |||||||||||||||||
| Home equity | |||||||||||||||||
| Total consumer loan portfolio | |||||||||||||||||
Total impaired loans and leases with an allowance recorded | |||||||||||||||||
Impaired loans and leases without an allowance recorded: | |||||||||||||||||
| Commercial loan and lease portfolio: | |||||||||||||||||
| Commercial and industrial | |||||||||||||||||
| Commercial real estate | |||||||||||||||||
| Total commercial loan and lease portfolio | |||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||
| Residential mortgage | |||||||||||||||||
| Home equity | |||||||||||||||||
| Consumer installment | |||||||||||||||||
| Total consumer loan portfolio | |||||||||||||||||
Total impaired loans and leases without an allowance recorded | |||||||||||||||||
| Total impaired loans and leases | $ | $ | $ | ||||||||||||||
111
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 December 31, 2020 | |||||||||||||||||||||||||||||||||||
Commercial loan and lease portfolio: | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Commercial real estate | |||||||||||||||||||||||||||||||||||
| Lease financing | |||||||||||||||||||||||||||||||||||
Total commercial loan and lease portfolio | |||||||||||||||||||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||||||||||||||
| Residential mortgage | |||||||||||||||||||||||||||||||||||
| Home equity | |||||||||||||||||||||||||||||||||||
| Consumer installment | |||||||||||||||||||||||||||||||||||
Total consumer loan portfolio | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| At December 31, 2019 | |||||||||||||||||||||||||||||||||||
| Commercial loan and lease portfolio: | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Commercial real estate | |||||||||||||||||||||||||||||||||||
| Lease financing | |||||||||||||||||||||||||||||||||||
| Total commercial loan and lease portfolio | |||||||||||||||||||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||||||||||||||
| Residential mortgage | $ | $ | |||||||||||||||||||||||||||||||||
| Home equity | |||||||||||||||||||||||||||||||||||
| Consumer installment | |||||||||||||||||||||||||||||||||||
| Total consumer loan portfolio | |||||||||||||||||||||||||||||||||||
Purchased credit impaired loans(1) | $ | ||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(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.
The Corporation's nonaccrual loans and leases were as follows:
| At December 31, | |||||||||||||||||
| 2020 | 2019 | ||||||||||||||||
| (In thousands) | Total nonaccrual | Nonaccrual with no ACL | Total nonaccrual | ||||||||||||||
Commercial loan and lease portfolio: | |||||||||||||||||
| Commercial and industrial | $ | $ | $ | ||||||||||||||
| Commercial real estate | |||||||||||||||||
| Lease financing | |||||||||||||||||
Total commercial loan and lease portfolio | |||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||
| Residential mortgage | |||||||||||||||||
| Home equity | |||||||||||||||||
| Consumer installment | |||||||||||||||||
Total consumer loan portfolio | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
112
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 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| At December 31, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 and Prior | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Commercial loan and lease portfolio: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial loan and lease portfolio | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Home equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer installment | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer loan portfolio | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total 90 days or more delinquent and accruing | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| At December 31, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 and Prior | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Commercial loan and lease portfolio: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial loan and lease portfolio | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Home equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer installment | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer loan portfolio | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total nonaccrual loans and leases | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
113
The average balance of nonaccrual loans and leases and interest income recognized on nonaccrual loans and leases were as follows:
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| (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 | Interest Income Recognized | |||||||||||||||||||||||||||||
| Commercial loan and lease portfolio: | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Commercial real estate | |||||||||||||||||||||||||||||||||||
| Lease financing | |||||||||||||||||||||||||||||||||||
| Total commercial loan and lease portfolio | |||||||||||||||||||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||||||||||||||
| Residential mortgage | |||||||||||||||||||||||||||||||||||
| Home equity | |||||||||||||||||||||||||||||||||||
| Consumer installment | |||||||||||||||||||||||||||||||||||
| Total consumer loan portfolio | |||||||||||||||||||||||||||||||||||
Total nonaccrual loans and leases | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
(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 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.
114
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) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| At December 31, 2020 | 2020 | 2019 | 2018 | 2017 | 2016 | 2015 and Prior | Total | ||||||||||||||||||||||||||||||||||||||||||||||
| Commercial loan and lease portfolio: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Special mention | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial and industrial | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special mention | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial real estate | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special mention | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total lease financing | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total commercial | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Special mention | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total residential mortgage | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Home equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total home equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer installment | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Substandard | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer installment | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total consumer | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||
(1)This balance includes $23.8 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 $230.5 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.
115
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 | $ | $ | $ | $ | |||||||||||||||||||
| Commercial real estate | |||||||||||||||||||||||
| Lease financing | |||||||||||||||||||||||
| Total commercial loan and lease portfolio | |||||||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||
| Residential mortgage | |||||||||||||||||||||||
| Home equity | |||||||||||||||||||||||
| Consumer installment | |||||||||||||||||||||||
| Total consumer loan portfolio | |||||||||||||||||||||||
| Total loans and leases | $ | $ | $ | $ | |||||||||||||||||||
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 2. 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:
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||
| (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 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
Commercial real estate | |||||||||||||||||||||||||||||||||||
| Total commercial loan and lease portfolio | |||||||||||||||||||||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||||||||||||||||||||
| Residential mortgage | |||||||||||||||||||||||||||||||||||
| Home equity | |||||||||||||||||||||||||||||||||||
| Consumer installment | |||||||||||||||||||||||||||||||||||
| Total consumer loan portfolio | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
The following table presents TDR loans:
| At December 31, | |||||||||||||||||||||||||||||||||||
| 2020 | 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 | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Consumer loan portfolio | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
116
Commitments to lend additional funds to borrowers whose terms have been modified in TDRs were $2.6 million at December 31, 2020 and $638 thousand at December 31, 2019.
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) | 2020 | 2019 | 2018 | ||||||||||||||
Defaulted TDR loan balances modified during the applicable period | |||||||||||||||||
| Commercial loan and lease portfolio: | |||||||||||||||||
| Commercial and industrial | $ | $ | $ | ||||||||||||||
| Commercial real estate | |||||||||||||||||
| Total commercial loan and lease portfolio | |||||||||||||||||
| Consumer loan portfolio: | |||||||||||||||||
| Residential mortgage | |||||||||||||||||
| Home equity | |||||||||||||||||
| Consumer installment | |||||||||||||||||
| Total consumer loan portfolio | |||||||||||||||||
Defaulted TDR loan balances | $ | $ | $ | ||||||||||||||
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) | 2020 | 2019 | |||||||||
| Other real estate owned | $ | $ | |||||||||
| Repossessed and returned assets | |||||||||||
| Consumer real estate loans in process of foreclosure | |||||||||||
Other real estate owned and repossessed and returned assets were written down $2.6 million, $7.7 million and $3.4 million in 2020, 2019 and 2018, respectively.
117
Note 9. Premises and Equipment, Net
Premises and equipment, net were as follows:
| At December 31, | |||||||||||
| (In thousands) | 2020 | 2019 | |||||||||
| Land | $ | $ | |||||||||
| Office buildings | |||||||||||
| Leasehold improvements | |||||||||||
| Furniture, equipment and computer software | |||||||||||
| Premises and equipment leased under finance leases | |||||||||||
| Accumulated depreciation and amortization | ( | ( | |||||||||
| Premises and equipment, net | $ | $ | |||||||||
Depreciation and amortization expense related to premises and equipment was $76.0 million, $75.3 million and $48.6 million for 2020, 2019 and 2018, respectively.
Note 10. Goodwill and Other Intangible Assets
Goodwill was as follows:
| At December 31, | |||||||||||
| (In thousands) | 2020 | 2019 | |||||||||
| Goodwill related to consumer banking segment | $ | $ | |||||||||
| Goodwill related to commercial banking segment | |||||||||||
| Goodwill, net | $ | $ | |||||||||
The Corporation recorded goodwill in the amount of $1.2 billion related to the TCF/Chemical Merger 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 3. Business Combinations" for further information. During each quarter of 2020 we evaluated whether it was more-likely-than-not that the fair value of any reporting unit was less than its carrying amount. During the fourth quarter we completed our annual impairment test, which did not indicate impairment for any reporting unit. There was no
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, 2020 | ||||||||||||||||||||||||||||||||
| Gross carrying value | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Accumulated amortization | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||
| Net carrying amount | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| At December 31, 2019 | ||||||||||||||||||||||||||||||||
| Gross carrying value | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Accumulated amortization | ( | ( | ( | ( | ( | |||||||||||||||||||||||||||
| Net carrying amount | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
There was no
Amortization expense for intangible assets was $22.0 million, $11.7 million and $3.4 million for 2020, 2019 and 2018, respectively.
118
The estimated future amortization expense on intangible assets for the next five years is as follows:
| (In thousands) | Total | |||||||
| 2021 | $ | |||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| 2025 | ||||||||
Note 11. Loan Servicing Rights
Information regarding LSRs was as follows:
| At December 31, | |||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Balance, beginning of period | $ | $ | $ | ||||||||||||||
| Acquired in the TCF/Chemical Merger | |||||||||||||||||
| New servicing assets created | |||||||||||||||||
| Impairment (charge) recovery | ( | ( | |||||||||||||||
| Amortization | ( | ( | ( | ||||||||||||||
| Balance, end of period | $ | $ | $ | ||||||||||||||
| Valuation allowance, end of period | $ | ( | $ | ( | $ | ||||||||||||
| Loans serviced for others that have servicing rights capitalized, end of period | $ | $ | $ | ||||||||||||||
Note 12. Operating Lease Right-of-Use Assets and Liabilities
Operating lease right-of-use assets, included in other assets, were $106.7 million and $118.7 million at December 31, 2020 and December 31, 2019, respectively. Operating lease liabilities, included in other liabilities, were $122.8 million and $138.4 million at December 31, 2020 and December 31, 2019, respectively. In connection with the TCF/Chemical Merger, during the year ended December 31, 2019, 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, 2020 were as follows:
| (In thousands) | |||||
| 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 and thereafter | |||||
| Total undiscounted future minimum operating lease payments | |||||
| Discount | ( | ||||
| Total operating lease liabilities | $ | ||||
119
As of December 31, 2020, the Corporation had approximately $231.6 million in additional leases for real property that have not yet commenced and are excluded from the operating lease liability table above. All of this amount 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, | |||||||||||
| 2020 | 2019 | ||||||||||
| Weighted-average discount rate | % | % | |||||||||
| Weighted-average remaining lease term | |||||||||||
The components of total lease cost for operating leases, included in occupancy and equipment noninterest expense, were as follows:
| Year Ended December 31, | |||||||||||
| (In thousands) | 2020 | 2019 | |||||||||
| Lease expense | $ | $ | |||||||||
| Short-term and variable lease cost | |||||||||||
| Sublease income | ( | ( | |||||||||
| Total lease cost for operating leases | $ | $ | |||||||||
Supplemental cash flow information related to operating leases was as follows:
| Year Ended December 31, | |||||||||||
| (In thousands) | 2020 | 2019 | |||||||||
| Operating lease right-of-use assets obtained in exchange for operating lease liabilities | $ | $ | |||||||||
| Cash paid for amounts included in the measurement of lease liabilities - operating | |||||||||||
Note 13. Investments in Qualified Affordable Housing Projects and Historic Projects
The Corporation invests in qualified affordable housing projects and 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 $21.2 million, $13.3 million and $9.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Amortization expense was more than offset by tax credits and other tax benefits of $26.3 million, $16.6 million and $11.6 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Corporation's remaining investment in qualified affordable housing projects accounted for under the proportional amortization method totaled $214.3 million at December 31, 2020 and $195.8 million at December 31, 2019.
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 historic projects and Ohio historic preservation tax credits totaled $48.6 million at December 31, 2020 and $43.6 million at December 31, 2019. During the year ended December 31, 2020, $5.2 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 $4.4 million. 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. During the year ended December 31, 2020, the benefit provided by the Ohio historic preservation tax credits, inclusive of impairment, was $875 thousand, recognized as a reduction to other noninterest expense. There were no Ohio historic preservation tax credits outstanding during the year ended December 31, 2019.
120
The Corporation's unfunded equity contributions relating to investments in qualified affordable housing projects and historic projects are included in other liabilities. The Corporation's remaining unfunded equity contributions totaled $107.4 million at December 31, 2020 and $131.3 million at December 31, 2019.
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 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 14. Deposits
Deposits were as follows:
| At December 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| (Dollars in thousands) | Amount | Year-to-Date Weighted-average Rate | Amount | Year-to-Date Weighted-average Rate | |||||||||||||||||||
| Checking: | |||||||||||||||||||||||
| Noninterest-bearing | $ | — | % | $ | — | % | |||||||||||||||||
| Interest-bearing | |||||||||||||||||||||||
| Total checking | |||||||||||||||||||||||
| Savings | |||||||||||||||||||||||
| Certificates of deposit | |||||||||||||||||||||||
| Money market | |||||||||||||||||||||||
Total deposits | $ | % | $ | % | |||||||||||||||||||
Excluded from total deposits are account overdrafts which have been classified as loans. At December 31, 2020 and 2019, overdrafts totaled $12.9 million and $19.0 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, 2020 were as follows:
| (In thousands) | |||||
| 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total | $ | ||||
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 $1.4 billion and $2.2 billion at December 31, 2020 and 2019, respectively.
121
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, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| (Dollars in thousands) | Amount | Weighted-average Rate | Amount | Weighted-average Rate | |||||||||||||||||||
| FHLB advances | $ | % | $ | % | |||||||||||||||||||
| Collateralized deposits | |||||||||||||||||||||||
| Total short-term borrowings | $ | % | $ | % | |||||||||||||||||||
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:
| At December 31, | ||||||||||||||||||||
| 2020 | 2019 | |||||||||||||||||||
| (Dollars in thousands) | Stated Rate | Amount | Amount | |||||||||||||||||
FHLB advances due 2021 to 2025 (1)(2) | $ | $ | ||||||||||||||||||
| Subordinated debt: | ||||||||||||||||||||
Subordinated debt obligation due 2022 | ||||||||||||||||||||
Subordinated debt obligation due 2025 | ||||||||||||||||||||
Subordinated debt obligation due 2029 | ||||||||||||||||||||
Subordinated debt obligation due 2030 | ||||||||||||||||||||
Subordinated debt securities due 2032-2035 (3)(4) | ||||||||||||||||||||
Hedge related adjustment(5) | ||||||||||||||||||||
Total subordinated debt obligations | ||||||||||||||||||||
Discounted lease rentals due 2021 to 2025 | ||||||||||||||||||||
Finance lease obligation due 2038 | ||||||||||||||||||||
Total long-term borrowings | $ | $ | ||||||||||||||||||
(1)Includes the current portion of FHLB advances of $150.0 million and $110.0 million at December 31, 2020 and 2019, respectively.
(2)The December 31, 2020 and 2019 balances include amounts payable of $0.7 billion and $1.8 billion, respectively, and purchase accounting premiums of $9.8 million and $12.1 million, respectively.
(3)The December 31, 2020 and 2019 balances include amounts payable of $20.6 1.5 million and $1.6 million, respectively.
(4)Floating-rate based on three-month LIBOR plus 1.45 % - 3.25 %.
(5)Related to subordinated bank notes with a stated maturity of 2025.
FHLB advances are collateralized by residential mortgage and commercial real estate loans.
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 $1.5 million that are amortized as interest expense over the full term of the 2030 Notes using the effective interest method.
122
At December 31, 2020 and 2019, TCF Bank had pledged $12.5 billion and $10.5 billion, respectively, of loans secured by consumer and commercial real estate to provide borrowing capacity from the FHLB.
At December 31, 2020 and 2019, TCF Bank had pledged $3.2 billion and $903.1 million, respectively, of loans secured by assets to provide borrowing capacity from the Federal Reserve Bank discount window. No
The contractual maturities of long-term borrowings at December 31, 2020 were as follows:
| (In thousands) | |||||
| 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total long-term borrowings | $ | ||||
123
Note 16. 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, 2020: | |||||||||||||||||
Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips: | |||||||||||||||||
| Net unrealized gains (losses) arising during the period | $ | $ | ( | $ | |||||||||||||
Reclassification of net (gains) losses from accumulated other comprehensive income (loss) to: | |||||||||||||||||
| Total interest income | ( | ||||||||||||||||
| Net gains (losses) on investment securities | ( | ( | |||||||||||||||
| Other noninterest expense | ( | ||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ( | ||||||||||||||||
Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips | ( | ||||||||||||||||
| Recognized postretirement prior service cost: | |||||||||||||||||
| Net unrealized gains (losses) arising during the period | ( | ||||||||||||||||
Reclassification of amortization of prior service cost to other noninterest expense | ( | ( | |||||||||||||||
| Net unrealized gains (losses) on recognized postretirement prior service cost | ( | ||||||||||||||||
| Net unrealized gains (losses) on net investment hedges | ( | ( | |||||||||||||||
Foreign currency translation adjustment(1) | |||||||||||||||||
| Total other comprehensive income (loss) | $ | $ | ( | $ | |||||||||||||
| 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 | $ | $ | ( | $ | |||||||||||||
Reclassification of net (gains) losses from accumulated other comprehensive income (loss) to: | |||||||||||||||||
| Total interest income | ( | ||||||||||||||||
| Net gains (losses) on investment securities | ( | ( | |||||||||||||||
| Other noninterest expense | ( | ( | |||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ( | ||||||||||||||||
Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips | ( | ||||||||||||||||
| Recognized postretirement prior service cost: | |||||||||||||||||
Reclassification of amortization of prior service cost to other noninterest expense | ( | ( | |||||||||||||||
| Net unrealized gains (losses) on net investment hedges | ( | ( | |||||||||||||||
Foreign currency translation adjustment(1) | |||||||||||||||||
| Total other comprehensive income (loss) | $ | $ | ( | $ | |||||||||||||
| Year Ended December 31, 2018: | |||||||||||||||||
Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips: | |||||||||||||||||
| Unrealized gains (losses) arising during the period | $ | ( | $ | $ | ( | ||||||||||||
Reclassification of net (gains) losses from accumulated other comprehensive income (loss) to: | |||||||||||||||||
| Total interest income | ( | ||||||||||||||||
| Gains (losses) on debt securities, net | ( | ( | |||||||||||||||
| Other noninterest expense | ( | ||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | ( | ||||||||||||||||
Net unrealized gains (losses) on available-for-sale investment securities and interest-only strips | ( | ( | |||||||||||||||
| Recognized postretirement prior service cost: | |||||||||||||||||
Reclassification of amortization of prior service cost to other noninterest expense | ( | ( | |||||||||||||||
| Net unrealized gains (losses) on net investment hedges | ( | ||||||||||||||||
Foreign currency translation adjustment(1) | ( | ( | |||||||||||||||
| Total other comprehensive income (loss) | $ | ( | $ | $ | ( | ||||||||||||
(1)Foreign investments are deemed to be permanent in nature and, therefore, TCF does not provide for taxes on foreign currency translation adjustments.
124
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, 2020 and 2019, the unrealized holding loss on the transferred investment securities retained in accumulated other comprehensive income (loss) totaled $4.5 million and $8.4 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, 2020: | |||||||||||||||||||||||||||||
| Balance, beginning of period | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||
| Net other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||
| At or For the Year Ended December 31, 2019: | |||||||||||||||||||||||||||||
| Balance, beginning of period | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||
| Other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||
| Net other comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||
| Balance, end of period | $ | $ | $ | ( | $ | $ | |||||||||||||||||||||||
| At or For the Year Ended December 31, 2018: | |||||||||||||||||||||||||||||
| Balance, beginning of period | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||
| Net other comprehensive income (loss) | ( | ( | ( | ( | |||||||||||||||||||||||||
| Balance, end of period | $ | ( | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||
Note 17. Equity
Preferred Stock Preferred stock was as follows:
| At December 31, | |||||||||||
| (In thousands) | 2020 | 2019 | |||||||||
| Series C non-cumulative perpetual preferred stock | $ | $ | |||||||||
Series C Non-Cumulative Perpetual Preferred Stock, 5.70 0.01 25,000 25 7,000 shares of TCF Preferred Stock outstanding and 7,000,000
125
Restricted Retained Earnings Retained earnings at TCF Bank at December 31, 2020 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.
Other Other equity consist of shares held in trust for deferred compensation plans was as follows:
| At December 31, | |||||||||||
| (In thousands) | 2020 | 2019 | |||||||||
| Shares held in trust for deferred compensation plans, at cost | |||||||||||
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 22. Share-based Compensation" and "Note 23. Retirement Plans" for further information on deferred compensation plans.
The Corporation repurchased $33.1 million and $27.5 million of its common stock in the years ended December 31, 2020 and 2019, respectively, pursuant to its share repurchase program in effect as of October 24, 2019. Repurchases of common stock prior to the TCF/Chemical Merger date were recorded as treasury stock. In connection with the TCF/Chemical Merger, all previously outstanding Legacy TCF treasury stock was eliminated. Subsequent to the TCF/Chemical Merger, repurchases of common stock are retired. The Corporation repurchased $58.8 million and $212.9 million of its common stock for 2019 and 2018, respectively, pursuant to the Legacy TCF share repurchase program. At December 31, 2020, the Corporation had the authority to repurchase an additional $89.4 million in aggregate value of shares pursuant to its share repurchase program. The Corporation had no treasury stock in 2020. The Corporation reissued 347,329 shares of treasury stock at a cost of $12.9 million in 2019, compared to 8,130 shares of treasury stock at a cost of $378 thousand in 2018.
Note 18. 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 calendar years, which was $132.1 million at December 31, 2020, 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.
126
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 resulting in a $211.2 million, or a cumulative 59 basis point, regulatory capital benefit as of December 31, 2020. The CECL transitional amount of $211.2 million includes $159.2 million related to the cumulative effect of adopting CECL and $52.0 million related to the estimated incremental effect of CECL since adoption.
Regulatory capital information for TCF and TCF Bank was as follows:
| TCF | TCF Bank | ||||||||||||||||||||||||||||||||||
| At December 31, | At December 31, | ||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | 2020 | 2019 | 2020 | 2019 | Well-capitalized Standard | Minimum Capital Requirement(1) | |||||||||||||||||||||||||||||
| Regulatory Capital: | |||||||||||||||||||||||||||||||||||
| Common equity Tier 1 capital | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
| Tier 1 capital | |||||||||||||||||||||||||||||||||||
| Total capital | |||||||||||||||||||||||||||||||||||
| Regulatory Capital Ratios: | |||||||||||||||||||||||||||||||||||
Common equity Tier 1 capital ratio | % | % | % | % | % | % | |||||||||||||||||||||||||||||
| Tier 1 risk-based capital ratio | |||||||||||||||||||||||||||||||||||
| Total risk-based capital ratio | |||||||||||||||||||||||||||||||||||
| Tier 1 leverage ratio | |||||||||||||||||||||||||||||||||||
(1)Excludes capital conservation buffer of 2.5
Note 19. 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, 2020 | |||||||||||||||||
| Fair Value | |||||||||||||||||
| (In thousands) | Notional Amount(1) | Derivative Assets | Derivative Liabilities | ||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||
| Interest rate contract | $ | $ | $ | ||||||||||||||
Forward foreign exchange contracts | |||||||||||||||||
Total derivatives designated as hedging instruments | |||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||
Interest rate contracts | |||||||||||||||||
| Risk participation agreements | |||||||||||||||||
| Forward foreign exchange contracts | |||||||||||||||||
| Interest rate lock commitments | |||||||||||||||||
Forward loan sales commitments | |||||||||||||||||
Power Equity CDs | |||||||||||||||||
Swap agreement | |||||||||||||||||
| Total derivatives not designated as hedging instruments | |||||||||||||||||
| Total derivatives before netting | |||||||||||||||||
Netting(2) | ( | ( | |||||||||||||||
Total derivatives, net | $ | $ | |||||||||||||||
(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.
127
| At December 31, 2019 | |||||||||||||||||
| Fair Value | |||||||||||||||||
| (In thousands) | Notional Amount(1) | Derivative Assets | Derivative Liabilities | ||||||||||||||
| Derivatives designated as hedging instruments: | |||||||||||||||||
| Interest rate contract | $ | $ | $ | ||||||||||||||
Forward foreign exchange contracts | |||||||||||||||||
Total derivatives designated as hedging instruments | |||||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||
Interest rate contracts | |||||||||||||||||
| Risk participation agreements | |||||||||||||||||
| Forward foreign exchange contracts | |||||||||||||||||
| Interest rate lock commitments | |||||||||||||||||
Forward loan sales commitments | |||||||||||||||||
Power Equity CDs | |||||||||||||||||
Swap agreement | |||||||||||||||||
| Total derivatives not designated as hedging instruments | |||||||||||||||||
| Total derivatives before netting | |||||||||||||||||
Netting(2) | ( | ( | |||||||||||||||
Total derivatives, net | $ | $ | |||||||||||||||
(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.
128
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, 2020 | |||||||||||||||||
| (In thousands) | Gross Amounts Recognized | Gross Amounts Offset(1) | Net Amount Presented | ||||||||||||||
| Derivative assets | |||||||||||||||||
| Interest rate contracts | $ | $ | $ | ||||||||||||||
| Risk participation agreements | |||||||||||||||||
| Forward foreign exchange contracts | ( | ||||||||||||||||
| Interest rate lock commitments | ( | ||||||||||||||||
| Forward loan sales commitments | ( | ||||||||||||||||
| Power Equity CDs | |||||||||||||||||
| Total derivative assets | $ | $ | ( | $ | |||||||||||||
| Derivative liabilities | |||||||||||||||||
| Interest rate contracts | $ | $ | $ | ||||||||||||||
| Risk participation agreements | |||||||||||||||||
| Forward foreign exchange contracts | ( | ||||||||||||||||
| Interest rate lock commitments | ( | ||||||||||||||||
| Forward loan sales commitments | ( | ||||||||||||||||
| Power Equity CDs | |||||||||||||||||
| Swap agreement | ( | ||||||||||||||||
| Total derivative liabilities | $ | $ | ( | $ | |||||||||||||
| At December 31, 2019 | |||||||||||||||||
| (In thousands) | Gross Amounts Recognized | Gross Amounts Offset(1) | Net Amount Presented | ||||||||||||||
| Derivative assets | |||||||||||||||||
| Interest rate contracts | $ | $ | ( | $ | |||||||||||||
| Risk participation agreements | |||||||||||||||||
| Interest rate lock commitments | ( | ||||||||||||||||
| Forward loan sales commitments | ( | ||||||||||||||||
| Power Equity CDs | |||||||||||||||||
| Total derivative assets | $ | $ | ( | $ | |||||||||||||
| Derivative liabilities | |||||||||||||||||
| Interest rate contracts | $ | $ | ( | $ | |||||||||||||
| Risk participation agreements | |||||||||||||||||
| Forward foreign exchange contracts | ( | ||||||||||||||||
| Interest rate lock commitments | ( | ||||||||||||||||
| Forward loan sales commitments | ( | ||||||||||||||||
| Power Equity CDs | |||||||||||||||||
| Swap agreement | ( | ||||||||||||||||
| Total derivative liabilities | $ | $ | ( | $ | |||||||||||||
(1)Includes the amounts with counterparties subject to enforceable master netting arrangements that have been offset in the Consolidated Statements of Financial Condition.
129
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) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Subordinated bank note - 2025 | $ | $ | $ | $ | |||||||||||||||||||
The following table summarizes the effect of fair value hedge accounting on the Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018.
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
Statement of income line where the gain (loss) on the fair value hedge was recorded: | |||||||||||||||||
| Interest expense on borrowings | $ | $ | $ | ||||||||||||||
| Gain (loss) on interest rate contract (fair value hedge) | |||||||||||||||||
| Hedged item | ( | ( | |||||||||||||||
| Derivative designated as a hedging instrument | ( | ||||||||||||||||
| Net income (expense) recognized on fair value hedge in interest expense on borrowings | $ | $ | $ | ( | |||||||||||||
Forward Foreign Exchange Contracts The effect of net investment hedges on accumulated other comprehensive income was as follows:
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Forward foreign exchange contracts | $ | ( | $ | ( | $ | ||||||||||||
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) | 2020 | 2019 | 2018 | ||||||||||||||||
Interest rate contracts(1) | Other noninterest income | $ | $ | ( | $ | ( | ||||||||||||||
| Risk participation agreements | Other noninterest expense | ( | ||||||||||||||||||
| Forward foreign exchange contracts | Other noninterest expense | ( | ||||||||||||||||||
| Interest rate lock commitments | Net gains on sales of loans and leases | ( | ||||||||||||||||||
| Forward loan sales commitments | Net gains on sales of loans and leases | ( | ( | |||||||||||||||||
| Swap agreement | Other noninterest income | ( | ( | ( | ||||||||||||||||
| Net gain (loss) recognized | $ | $ | ( | $ | ||||||||||||||||
(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.
130
At December 31, 2020 and 2019, credit risk-related contingent features existed on forward foreign exchange contracts with a notional value of $35.0 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 $699 thousand and $462 thousand in additional collateral at December 31, 2020 and 2019 respectively. There were no
At December 31, 2020, the Corporation had posted $43.6 million and $2.4 million of cash collateral related to its interest rate contracts and forward foreign exchange contracts, respectively.
Note 20. 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. Unobservable inputs used to value the interest-only strips include a discount rate of 14 % (weighted average) and prepayment rates of 4 % (weighted average).
131
Derivative Instruments:
Interest Rate Contracts: The Corporation executes interest rate contracts as described in "Note 19. 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 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 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 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 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.
132
The balances of assets and liabilities measured at fair value on a recurring basis were as follows:
| December 31, 2020 | ||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||
| Assets | ||||||||||||||
| Investment securities available-for-sale | $ | $ | $ | $ | ||||||||||
| Loans held-for-sale | ||||||||||||||
| Interest-only strips | ||||||||||||||
Derivative assets:(1) | ||||||||||||||
| Interest rate contracts | ||||||||||||||
| Risk participation agreements | ||||||||||||||
| Forward foreign exchange contracts | ||||||||||||||
| Interest rate lock commitments | ||||||||||||||
| Forward loan sales commitments | ||||||||||||||
| Power Equity CDs | ||||||||||||||
| Total derivative assets | ||||||||||||||
| Assets held in trust for deferred compensation plans | ||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||
| Liabilities | ||||||||||||||
Derivative liabilities:(1) | ||||||||||||||
| Interest rate contracts | $ | $ | $ | $ | ||||||||||
| Risk participation agreements | ||||||||||||||
| Forward foreign exchange contracts | ||||||||||||||
| Interest rate lock commitments | ||||||||||||||
| Forward loan sales commitments | ||||||||||||||
| Power Equity CDs | ||||||||||||||
| Swap agreement | ||||||||||||||
| Total derivative liabilities | ||||||||||||||
| Liabilities held in trust for deferred compensation plans | ||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | ||||||||||
(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.
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| December 31, 2019 | |||||||||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Investment securities available-for-sale | $ | $ | $ | $ | |||||||||||||||||||
| Loans held-for-sale | |||||||||||||||||||||||
| Interest-only strips | |||||||||||||||||||||||
Derivative assets:(1) | |||||||||||||||||||||||
| Interest rate contracts | |||||||||||||||||||||||
| Risk participation agreements | |||||||||||||||||||||||
| Interest rate lock commitments | |||||||||||||||||||||||
| Forward loan sales commitments | |||||||||||||||||||||||
| Power Equity CDs | |||||||||||||||||||||||
| Total derivative assets | |||||||||||||||||||||||
| Forward loan sales commitments, non-derivative | |||||||||||||||||||||||
| Assets held in trust for deferred compensation plans | |||||||||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities | |||||||||||||||||||||||
Derivative liabilities:(1) | |||||||||||||||||||||||
| Interest rate contracts | $ | $ | $ | $ | |||||||||||||||||||
| Risk participation agreements | |||||||||||||||||||||||
| Forward foreign exchange contracts | |||||||||||||||||||||||
| Interest rate lock commitments | |||||||||||||||||||||||
| Forward loan sales commitments | |||||||||||||||||||||||
| Power Equity CDs | |||||||||||||||||||||||
| Swap agreement | |||||||||||||||||||||||
| Total derivative liabilities | |||||||||||||||||||||||
| Liabilities held in trust for deferred compensation plans | |||||||||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | |||||||||||||||||||
(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.
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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, 2017 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Total net gains (losses) included in: | |||||||||||||||||||||||||||||||||||
| Net income | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | |||||||||||||||||||||||||||||||||||
| Sales | ( | ||||||||||||||||||||||||||||||||||
| Originations | |||||||||||||||||||||||||||||||||||
| Principal paydowns / settlements | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Asset (liability) balance, December 31, 2018 | $ | $ | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Unrealized gains (losses) included in other comprehensive income for assets held at the end of the period | |||||||||||||||||||||||||||||||||||
| Asset (liability) balance, beginning of period | $ | $ | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||||
| Total net gains (losses) included in: | |||||||||||||||||||||||||||||||||||
| Net income | ( | ( | |||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||||||||||||||
| Acquired | |||||||||||||||||||||||||||||||||||
| Sales | ( | ||||||||||||||||||||||||||||||||||
| Originations | |||||||||||||||||||||||||||||||||||
| Principal paydowns / settlements | ( | ( | ( | ||||||||||||||||||||||||||||||||
Transfers out of Level 3 (1) | ( | ( | |||||||||||||||||||||||||||||||||
| Asset (liability) balance, December 31, 2019 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Unrealized gains (losses) included in other comprehensive income for assets held at the end of the period | $ | ( | $ | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||
| Asset (liability) balance, beginning of period | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Total net gains (losses) included in: | |||||||||||||||||||||||||||||||||||
| Net income | ( | ||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||||||||
| Acquired | |||||||||||||||||||||||||||||||||||
| Sales | |||||||||||||||||||||||||||||||||||
| Originations | |||||||||||||||||||||||||||||||||||
| Principal paydowns / settlements | ( | ||||||||||||||||||||||||||||||||||
Transfers out of Level 3 (1) | |||||||||||||||||||||||||||||||||||
| Asset (liability) balance, December 31, 2020 | $ | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||
| Unrealized gains (losses) included in other comprehensive income for assets held at the end of the period | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||
(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 a discount rate of 10.0 %.
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 8 % to 40 %. Loan servicing rights are recorded at the lower of cost or fair value.
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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 of 10.0 %. 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. Assets acquired through repossession or returned to TCF 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
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| At December 31, 2020 | |||||||||||||||||||||||
| Loans and leases | $ | $ | $ | $ | |||||||||||||||||||
| Loan servicing rights | |||||||||||||||||||||||
| Other real estate owned | |||||||||||||||||||||||
| Repossessed and returned assets | |||||||||||||||||||||||
| Total non-recurring fair value measurements | $ | $ | $ | $ | |||||||||||||||||||
| At December 31, 2019 | |||||||||||||||||||||||
| Loans and leases | $ | $ | $ | $ | |||||||||||||||||||
| Loan servicing rights | |||||||||||||||||||||||
| Other real estate owned | |||||||||||||||||||||||
| Repossessed and returned assets | |||||||||||||||||||||||
| Total non-recurring fair value measurements | $ | $ | $ | $ | |||||||||||||||||||
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:
| At December 31, | |||||||||||
| (In thousands) | 2020 | 2019 | |||||||||
| Fair value carrying amount | $ | $ | |||||||||
| Aggregate unpaid principal amount | |||||||||||
| Fair value carrying amount less aggregate unpaid principal | $ | $ | |||||||||
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 100.8 million, $27.9 million and $10.0 million for the years ended December 31, 2020, 2019 and 2018, 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.
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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, 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 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 not recorded in their entirety on a recurring basis 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, 2020 | |||||||||||||||||||||||||||||
| Carrying | Estimated Fair Value | ||||||||||||||||||||||||||||
| (In thousands) | Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
| Financial instrument assets | |||||||||||||||||||||||||||||
| FHLB and FRB stocks | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Investment securities held-to-maturity | |||||||||||||||||||||||||||||
| Loans and leases held-for-sale | |||||||||||||||||||||||||||||
Net loans(1) | |||||||||||||||||||||||||||||
Securitization receivable(2) | |||||||||||||||||||||||||||||
| Deferred fees on commitments to extend credit | |||||||||||||||||||||||||||||
| Total financial instrument assets | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Financial instrument liabilities | |||||||||||||||||||||||||||||
| Certificates of deposits | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Long-term borrowings | |||||||||||||||||||||||||||||
| Total financial instrument liabilities | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| At December 31, 2019 | |||||||||||||||||||||||||||||
| Carrying | Estimated Fair Value | ||||||||||||||||||||||||||||
| (In thousands) | Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
| Financial instrument assets | |||||||||||||||||||||||||||||
| FHLB and FRB stocks | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Investment securities held-to-maturity | |||||||||||||||||||||||||||||
| Loans held-for-sale | |||||||||||||||||||||||||||||
Net loans(1) | |||||||||||||||||||||||||||||
Securitization receivable(2) | |||||||||||||||||||||||||||||
Deferred fees on commitments to extend credit(2) | |||||||||||||||||||||||||||||
| Total financial instrument assets | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Financial instrument liabilities | |||||||||||||||||||||||||||||
| Certificates of deposits | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Long-term borrowings | |||||||||||||||||||||||||||||
Deferred fees on standby letters of credit(3) | |||||||||||||||||||||||||||||
| Total financial instrument liabilities | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
(1)Expected credit losses are included in the carrying amount and estimated fair values.
(2)Carrying amounts is included in other assets.
(3)Carrying amounts are included in other liabilities.
137
Note 21. 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 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.
138
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, 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 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Wealth management revenue | |||||||||||||||||||||||||||||
| Card and ATM revenue | |||||||||||||||||||||||||||||
| Other noninterest income | |||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Wealth management revenue | $ | ||||||||||||||||||||||||||||
| Card and ATM revenue | |||||||||||||||||||||||||||||
| Other noninterest income | |||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| 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 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Card and ATM revenue | |||||||||||||||||||||||||||||
| Other noninterest income | |||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Note 22. 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 TCF/Chemical 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, 2020, there were 1,002,931 shares reserved for issuance under the Stock Incentive Plan of 2019 and there were 1,358,516 shares reserved for issuance under the Legacy TCF Omnibus Incentive Plan.
139
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 merger-related share-based compensation expense was $46.0 million, $26.3 million and $16.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. The excess tax realized from share-based compensation transactions during the years ended December 31, 2020, 2019 and 2018 was an expense of $2.6 million, a benefit of $2.3 million and a benefit of $2.6 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 new employees hired after the TCF/Chemical Merger or employees who previously were employees of Legacy TCF. At December 31, 2020, there were 309,432 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 for the years ended December 31, 2020, 2019 and 2018 is presented below:
| Number of Units | Weighted-average Grant Date Fair Value Per Unit | ||||||||||
| Outstanding at December 31, 2017 | $ | ||||||||||
| Outstanding at December 31, 2017 as adjusted for conversion | |||||||||||
| Granted | |||||||||||
| Forfeited/canceled | ( | ||||||||||
| Vested | ( | ||||||||||
| Outstanding at December 31, 2018 | |||||||||||
| Outstanding at December 31, 2018 as adjusted for conversion | |||||||||||
| Granted | |||||||||||
Acquired in the TCF/Chemical Merger(1) | |||||||||||
| Forfeited/canceled | ( | ||||||||||
| Vested | ( | ||||||||||
| Outstanding at December 31, 2019 | |||||||||||
| Granted | |||||||||||
| Forfeited/canceled | ( | ||||||||||
| Vested | ( | ||||||||||
| Outstanding at December 31, 2020 | |||||||||||
(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 $43.1 million at December 31, 2020 and is expected to be recognized over the remaining weighted-average period of 2.5 years.
140
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, 2017 | $ | ||||||||||
| Outstanding at December 31, 2017 as adjusted for conversion | |||||||||||
| Granted | |||||||||||
| Forfeited/canceled | ( | ||||||||||
| Vested | ( | ||||||||||
| Outstanding at December 31, 2018 | $ | ||||||||||
| Outstanding at December 31, 2018 as adjusted for conversion | |||||||||||
| Granted | |||||||||||
| Forfeited/canceled | ( | ||||||||||
| Vested | ( | ||||||||||
| Outstanding at December 31, 2019 | |||||||||||
| Granted | |||||||||||
| Forfeited/canceled | ( | ||||||||||
| Vested | ( | ||||||||||
| Outstanding at December 31, 2020 | $ | ||||||||||
At December 31, 2020, there were no shares of performance-based restricted stock awards outstanding. Unrecognized stock compensation expense for restricted stock awards was $8.7 million at December 31, 2020 with a weighted-average remaining amortization period of 1.8 years.
The following table provides information regarding total expense for restricted stock awards:
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
Restricted stock expense related to employees(1) | $ | $ | $ | ||||||||||||||
Restricted stock expense related to directors(2) | |||||||||||||||||
| Total restricted stock expense | $ | $ | $ | ||||||||||||||
(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.
141
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, 2017 | $ | $ | |||||||||||||||||||||
| Outstanding at December 31, 2017 as adjusted for conversion | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Outstanding at December 31, 2018 | |||||||||||||||||||||||
Acquired in the TCF/Chemical Merger(1) | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Forfeited/canceled | ( | ||||||||||||||||||||||
| Expired | ( | ||||||||||||||||||||||
| Vested | ( | ||||||||||||||||||||||
| Outstanding at December 31, 2019 | |||||||||||||||||||||||
| Exercised | ( | ||||||||||||||||||||||
| Forfeited/canceled | ( | ||||||||||||||||||||||
| Expired | ( | ||||||||||||||||||||||
| Vested | ( | ||||||||||||||||||||||
| Outstanding at December 31, 2020 | $ | $ | |||||||||||||||||||||
| Exercisable/vested at December 31, 2020 | $ | ||||||||||||||||||||||
(1)Options acquired in the TCF/Chemical Merger expire ten years from the date of grant and vest ratably over a five-year period.
The weighted-average remaining contractual term was 4.0 years for all stock options outstanding and 3.8 years for all exercisable stock options at December 31, 2020. The intrinsic value of all outstanding in-the-money stock options and exercisable in-the-money stock options was $2.9 million and $2.8 million, respectively, at December 31, 2020. The aggregate intrinsic values of outstanding and exercisable options at December 31, 2020 were calculated based on the closing market price of TCF Financial's common stock on December 31, 2020 of $37.02 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, 2020, $2.1 million cash was received from option exercises.
Note 23. Retirement Plans
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Qualified Defined Benefit Pension Plans
The Board of Directors of Legacy TCF approved the termination of the Legacy TCF Pension Plan effective November 1, 2019. The weighted-average interest crediting rate was 3.00 % for 2019. All participants have had their benefits paid in full. During 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 2020. The weighted-average interest crediting rate was 2.05 % at liquidation. The Corporation does not consolidate the assets and liabilities associated with the Legacy TCF Pension Plan.
The Board of Directors terminated the Chemical Pension Plan 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 TCF/Chemical Merger and the termination. At the time of the TCF/Chemical 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 TCF/Chemical Merger, was reported in goodwill. The Chemical Pension Plan was fully funded as of December 31, 2020. During 2020, distributions were made to all participants electing a lump-sum payment. Plan assets remaining following the lump sum distribution and annuity purchase completed in 2020 will be liquidated and/or transferred to a qualified retirement plan over the next several months.
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 Legacy TCF modified the TCF Postretirement Plan for employees not yet eligible for benefits under the Postretirement Plan by eliminating the company subsidy. The provisions for full-time and retired employees then eligible for these benefits were not changed. The TCF 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
Effective December 31, 2019, the Chemical Financial Corporation 401K Savings Plan merged with and into the TCF 401K. All participant balances remaining were transferred into the TCF 401K on December 31, 2019. 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 at the rate of $1 per dollar for employees with 180 days or more of service up to a maximum company contribution of 5 percent 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.
143
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, 2020, the fair value of the assets in the TCF 401K totaled $593.5 million and included $146.8 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 $20.8 million for 2020, compared to $16.4 million and $12.3 million for 2019 and 2018, respectively.
Nonqualified Supplemental Retirement Plans
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 $0.5 million, $1.2 million and $1.3 million for 2020, 2019 and 2018, 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, 2020 and 2019, the fair value of the assets in the plan totaled $69.5 million and $69.7 million, respectively, and included $21.5 million and $27.6 million, respectively, invested in TCF common stock. The plan's assets invested in TCF common stock are held in trust and included in Other equity. See "Note 17. Equity" for further information on Other equity.
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.
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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) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||
| Benefit obligation: | |||||||||||||||||||||||
| Benefit obligation, beginning of year | $ | $ | $ | $ | |||||||||||||||||||
| Benefit obligation acquired in TCF/Chemical Merger | |||||||||||||||||||||||
| Service cost | |||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Net actuarial (gain) loss | ( | ||||||||||||||||||||||
Plan amendment(1) | ( | ||||||||||||||||||||||
| Benefits paid | ( | ( | ( | ( | |||||||||||||||||||
| Benefit obligations, end of year | |||||||||||||||||||||||
| Fair value of plan assets: | |||||||||||||||||||||||
| Fair value of plan assets, beginning of year | |||||||||||||||||||||||
| Fair value of plan assets acquired in TCF/Chemical Merger | |||||||||||||||||||||||
Actual gain on plan assets(2) | |||||||||||||||||||||||
| Benefits paid | ( | ( | ( | ( | |||||||||||||||||||
| Employer contributions | |||||||||||||||||||||||
| Fair value of plan assets, end of year | |||||||||||||||||||||||
| Funded status of plan, end of period | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Accumulated benefit obligation | $ | $ | $ | $ | |||||||||||||||||||
| Amounts recognized in the Consolidated Statements of Financial Condition: | |||||||||||||||||||||||
| Prepaid (accrued) benefit cost, end of period | $ | $ | $ | ( | $ | ( | |||||||||||||||||
| Prior service cost included in accumulated other comprehensive income (loss) | $ | $ | $ | ( | $ | ( | |||||||||||||||||
(1)The Legacy TCF Postretirement Plan was updated to move a fully insured medical program through Medicare Advantage and a prior service credit has been established.
(2)Includes $8.5 million net gain as a result of the Pension Plans mark to market adjustment and a net pension settlement gain, included in other noninterest expense in the Consolidated Statements of Income during 2020.
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) | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discount rate used in determining benefit obligation -December 31 | N/A | % | % | N/A | % | % | % | % | % | % | % | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Discount rate used in determining expense | % | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Expected long-term return on Pension Plan Assets | N/A | N/A | N/A | N/A | N/A | N/A | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Health care cost trend rate assumed for next year | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Final health care cost trend rate | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Year that final health care trend rate is reached | — | — | — | — | — | — | 2038 | 2038 | 2038 | 2028 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
N/A Not Applicable.
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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) | 2020 | 2019 | 2018 | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||
| Interest cost | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Service cost | |||||||||||||||||||||||||||||||||||
| Return on plan assets | ( | ( | |||||||||||||||||||||||||||||||||
| Recognized actuarial loss (gain) | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Amortization of prior service cost | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Net periodic benefit plan (income) cost | $ | ( | $ | $ | $ | $ | $ | ( | |||||||||||||||||||||||||||
The Corporation is eligible to contribute up to $10.0 million to the Pension Plans until the 2020 federal income tax return extended due date under various IRS funding methods. The Corporation made a $2.4 million cash contribution to the Legacy TCF Pension Plan in 2020, compared to none no cash contributions to the Chemical Pension Plan in 2020 and 2019. As a result of the Pension Plan terminations, the Corporation will not make any further contributions.
The Corporation contributed $264 thousand, $377 thousand and $392 thousand to the TCF Postretirement Plan in 2020, 2019 and 2018, respectively and no contributions were made to the Chemical Postretirement Benefit Plan in 2020 and 2019. The Corporation expects to contribute $332 thousand to the Postretirement Plans in 2021. The Corporation currently has no plans to pre-fund the Postretirement Plans in 2021.
The Pension Plans have been fully terminated and no longer have estimated future benefit payments. The following schedule presents estimated future benefit payments for the next 10 years under the Corporation's Postretirement 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) | Postretirement Plans | ||||
| 2021 | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 - 2029 | |||||
| Total | $ | ||||
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.
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Prior to the termination, the assets of the Chemical Pension Plan were historically invested by the Wealth Management department of Chemical Bank. Previously, the Chemical Pension Plan's primary investment objective was long-term growth coupled with income. In consideration of the Chemical Pension Plan's fiduciary responsibilities, emphasis was 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. Prior to the termination, to meet the Chemical Pension Plan's long-term objective within the constraints of prudent management, target ranges were 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 did occur due to the repositioning of assets within industries or other activity in the financial markets. Equity securities were primarily comprised of both individual securities and equity-based mutual funds, invested in either domestic or international markets. The stocks were diversified among the major economic sectors of the market and were selected based on balance sheet strength, expected earnings growth, the management team and position within their industries, among other characteristics. Debt securities were comprised of U.S. dollar denominated bonds issued by the U.S. Treasury, U.S. government sponsored agencies and investment grade bonds issued by corporations. The notes and bonds purchased were primarily rated "A" or better by the major bond rating companies from diverse industries.
Prior to the termination, the Pension Plans' assets were 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 were 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 enterprises and notes were categorized as Level 2. The fair value of level 2 assets is based on prices obtained from independent pricing sources that were based on observable transactions of similar instruments, but not quoted markets. At December 31, 2020 and 2019, there were no
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, 2020 and 2019.
| At December 31, 2020 | |||||||||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Cash | $ | $ | $ | $ | |||||||||||||||||||
| Total investments at fair value | $ | $ | $ | $ | |||||||||||||||||||
| At December 31, 2019 | |||||||||||||||||||||||
| (In thousands) | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||
| Cash | $ | $ | $ | $ | |||||||||||||||||||
| Debt Securities: | |||||||||||||||||||||||
| U.S. Treasury and government sponsored agency bonds and notes | |||||||||||||||||||||||
Mutual funds(1) | |||||||||||||||||||||||
| Corporate bonds | |||||||||||||||||||||||
| Mortgage-backed securities | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total investments at fair value | $ | $ | $ | $ | |||||||||||||||||||
At December 31, 2019, the Pension Plans did no t hold any shares of the Corporation's common stock.
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Accumulated Other Comprehensive Loss
The following sets forth the changes in accumulated other comprehensive income (loss), before tax, related to the Corporation's Postretirement Plans:
| At or For the Year Ended December 31, | |||||||||||||||||
| Postretirement Plans | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Accumulated other comprehensive income (loss) before tax, beginning of period | $ | ( | $ | ( | $ | ( | |||||||||||
| Amortization of prior service credit (recognized in net periodic benefit cost) | |||||||||||||||||
| Plan amendment | ( | ||||||||||||||||
| Accumulated other comprehensive income (loss) before tax, end of period | $ | ( | $ | ( | $ | ( | |||||||||||
The Pension Plans do not have any accumulated other comprehensive income (loss).
Note 24. Earnings Per Common Share
| Year Ended December 31, | |||||||||||||||||
| (Dollars in thousands, except per share data) | 2020 | 2019 | 2018 | ||||||||||||||
| Basic earnings per common share: | |||||||||||||||||
| Net income attributable to TCF Financial Corporation | $ | $ | $ | ||||||||||||||
| Preferred stock dividends | |||||||||||||||||
Impact of preferred stock redemption(1) | |||||||||||||||||
| Net income available to common shareholders | |||||||||||||||||
| Less: Earnings allocated to participating securities | |||||||||||||||||
| Earnings allocated to common stock | $ | $ | $ | ||||||||||||||
Weighted-average common shares outstanding used in basic earnings per common share calculation | |||||||||||||||||
| Basic earnings per common share | $ | $ | $ | ||||||||||||||
| Diluted earnings per common share: | |||||||||||||||||
| Earnings allocated to common stock | $ | $ | $ | ||||||||||||||
Weighted-average common shares outstanding used in basic earnings per common share calculation | |||||||||||||||||
| Net dilutive effect of: | |||||||||||||||||
| Non-participating restricted stock | |||||||||||||||||
| Stock options | |||||||||||||||||
| Warrants | |||||||||||||||||
Weighted-average common shares outstanding used in diluted earnings per common share calculation | |||||||||||||||||
| Diluted earnings per common share | $ | $ | $ | ||||||||||||||
| Anti-dilutive shares outstanding not included in the computation of diluted earnings per common share | |||||||||||||||||
| Non-participating restricted stock | |||||||||||||||||
| Stock options | |||||||||||||||||
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Note 25. Other Noninterest Income and Expense
Other noninterest income and expense was as follows:
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
Other Noninterest Income | |||||||||||||||||
Gain on branch sales(1) | $ | $ | $ | ||||||||||||||
| Termination of interest rate swaps | ( | ||||||||||||||||
Loan servicing rights impairment | ( | ( | |||||||||||||||
Other | |||||||||||||||||
| Total other noninterest income | $ | $ | $ | ||||||||||||||
Other Noninterest Expense | |||||||||||||||||
| Outside processing | $ | $ | $ | ||||||||||||||
| Loan and lease expense | |||||||||||||||||
| Professional fees | |||||||||||||||||
| Advertising and marketing | |||||||||||||||||
| FDIC insurance | |||||||||||||||||
| Card processing and issuance costs | |||||||||||||||||
| CFPB and OCC settlement charge | |||||||||||||||||
| Other | |||||||||||||||||
| Total other noninterest expense | $ | $ | $ | ||||||||||||||
(1) Represents the completion of the sale of seven banking centers in conjunction with deposits associated with those banking centers.
Note 26. Income Taxes
Applicable income taxes in the Consolidated Statements of Income were as follows:
| (In thousands) | Current | Deferred | Total | ||||||||||||||
| Year Ended December 31, 2020: | |||||||||||||||||
| Federal | $ | $ | ( | $ | |||||||||||||
| State | ( | ||||||||||||||||
| Foreign | ( | ||||||||||||||||
| Total | $ | $ | ( | $ | |||||||||||||
| Year Ended December 31, 2019: | |||||||||||||||||
| Federal | $ | ( | $ | $ | |||||||||||||
| State | ( | ||||||||||||||||
| Foreign | ( | ||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
| Year Ended December 31, 2018: | |||||||||||||||||
| Federal | $ | $ | $ | ||||||||||||||
| State | |||||||||||||||||
| Foreign | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
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Reconciliations to the Corporation's effective income tax rates from the statutory federal income tax rates were as follows:
| Year Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Federal income tax rate | % | % | % | ||||||||||||||
| Increase (decrease) resulting from: | |||||||||||||||||
| CARES Act federal NOL carryback | ( | ||||||||||||||||
| Tax credit investments | ( | ( | ( | ||||||||||||||
| Executive compensation limitation | |||||||||||||||||
| State income tax, net of federal tax | |||||||||||||||||
| Tax-exempt income | ( | ( | ( | ||||||||||||||
| FDIC Insurance | |||||||||||||||||
| Tax basis adjustment | ( | ( | |||||||||||||||
| State tax settlements, net of federal tax | ( | ( | |||||||||||||||
| TCF/Chemical Merger deferred tax reprice | ( | ||||||||||||||||
| Other, net | ( | ( | |||||||||||||||
| Effective income tax rate | % | % | % | ||||||||||||||
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 enacted by the Tax Cuts and Jobs Act, 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, 2020, the estimated withholding taxes that could be due on these earnings was $5.3 million.
The CARES Act was enacted in March 2020 in response to the COVID-19 pandemic. The CARES Act, among other things, permits NOLs from 2018, 2019 and 2020 to be carried back five years to generate refunds of previously paid income taxes. Additionally, it provides retroactive changes in depreciation rules for certain qualified improvement property. Guidance implementing the CARES Act’s provisions provided retroactive choices to opt into or out of the full expensing of equipment purchases in the year of acquisition. During the year ended December 31, 2020, the Corporation implemented these and other options provided by the CARES Act, which resulted in a forecasted full year 2020 federal tax NOL. Carrying back 2020 federal tax NOLs to pre-2018 years results in tax refunds and a permanent tax benefit associated with the difference between the 21% federal tax rate in 2020 and the 35% federal tax rate prior to 2018.
Reconciliations of the changes in unrecognized tax benefits were as follows:
| At or For the Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Balance, beginning of period | $ | $ | $ | ||||||||||||||
| Increases for tax positions related to the current year | |||||||||||||||||
| Increases for tax positions related to prior years | |||||||||||||||||
| Decreases for tax positions related to prior years | ( | ( | ( | ||||||||||||||
| Settlements with taxing authorities | ( | ( | |||||||||||||||
| Decreases related to lapses of applicable statutes of limitation | ( | ( | ( | ||||||||||||||
| Balance, end of period | $ | $ | $ | ||||||||||||||
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The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1.2 million and $2.1 million at December 31, 2020 and 2019, 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 $0.2 million of tax benefit, $0.4 million of tax benefit and $0.1 million of tax expense for 2020, 2019 and 2018, respectively, related to interest and penalties. Interest and penalties of approximately $0.1 million and $0.3 million were accrued at December 31, 2020 and 2019, respectively.
The Corporation's federal income tax returns are open and subject to examination for 2017 and later tax return years. The Corporation's various state income tax returns are generally open for 2016 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 2016 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) | 2020 | 2019 | |||||||||
| Deferred tax assets: | |||||||||||
| Allowance for loan and lease losses | $ | $ | |||||||||
| Net operating losses and other carryforwards | |||||||||||
| Stock compensation and deferred compensation plans | |||||||||||
| Acquisition-related fair value adjustments | |||||||||||
| Nonaccrual interest | |||||||||||
| Other | |||||||||||
| Deferred tax assets | |||||||||||
| Valuation allowance | ( | ( | |||||||||
| Total deferred tax assets, net of valuation allowance | |||||||||||
| Deferred tax liabilities: | |||||||||||
| Lease financing | |||||||||||
| Investment securities available-for-sale | |||||||||||
| Goodwill and other intangibles | |||||||||||
| Loan fees and discounts | |||||||||||
| Premises and equipment | |||||||||||
| Deferred Income | |||||||||||
| Prepaid expenses | |||||||||||
| Loan servicing rights | |||||||||||
| Other | |||||||||||
| Total deferred tax liabilities | |||||||||||
| Net deferred tax liabilities | $ | $ | |||||||||
The net operating losses and other carryforwards at December 31, 2020 consisted of federal net operating losses of $23.1 million that expire in 2028 through 2036, state net operating losses of $4.6 million that expire in 2023 through 2040, charitable contribution carryforwards of $1.3 million that expire in 2025, capital loss carryforwards of $0.2 million that expire in 2022, federal credit carryforwards of $29.4 million that expire in 2028 through 2040 and federal credit carryforwards of $4.9 million that do not expire. The valuation allowance against the Corporation’s deferred tax asset at December 31, 2020 consisted of state net operating losses of $10.7 million and other items of $0.1 million. The valuation allowance at December 31, 2020 and 2019 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.
151
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.
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, 2020: | |||||||||||||||||||||||
| Net interest income | $ | $ | $ | $ | |||||||||||||||||||
| Provision for credit losses | |||||||||||||||||||||||
| Net interest income after provision for credit losses | |||||||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||
| Noninterest expense | |||||||||||||||||||||||
| Income (loss) before income tax expense (benefit) | ( | ||||||||||||||||||||||
| Income tax expense (benefit) | ( | ||||||||||||||||||||||
| Income (loss) after income tax expense (benefit) | ( | ||||||||||||||||||||||
| Income attributable to non-controlling interest | |||||||||||||||||||||||
| Preferred stock dividends | |||||||||||||||||||||||
| Net income (loss) available to common shareholders | $ | $ | $ | ( | $ | ||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Revenues from external customers: | |||||||||||||||||||||||
| Interest income | $ | $ | $ | $ | |||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
152
| (In thousands) | Consumer Banking | Commercial Banking | Enterprise Services | Consolidated | |||||||||||||||||||
| At or For the Year Ended December 31, 2019: | |||||||||||||||||||||||
| Net interest income | $ | $ | $ | $ | |||||||||||||||||||
| Provision for credit losses | |||||||||||||||||||||||
| Net interest income after provision for credit losses | |||||||||||||||||||||||
| Noninterest income | ( | ||||||||||||||||||||||
| Noninterest expense | |||||||||||||||||||||||
| Income (loss) before income tax expense (benefit) | ( | ||||||||||||||||||||||
| Income tax expense (benefit) | ( | ||||||||||||||||||||||
| Income (loss) after income tax expense (benefit) | ( | ||||||||||||||||||||||
| Income attributable to non-controlling interest | |||||||||||||||||||||||
| Preferred stock dividends | |||||||||||||||||||||||
| Net income (loss) available to common shareholders | $ | $ | $ | ( | $ | ||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Revenues from external customers: | |||||||||||||||||||||||
| Interest income | $ | $ | $ | $ | |||||||||||||||||||
| Noninterest income | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| (In thousands) | Consumer Banking | Commercial Banking | Enterprise Services | Consolidated | |||||||||||||||||||
| At or For the Year Ended December 31, 2018: | |||||||||||||||||||||||
| Net interest income (expense) | $ | $ | $ | $ | |||||||||||||||||||
| Provision for credit losses | |||||||||||||||||||||||
| Net interest income after provision for credit losses | |||||||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||
| Noninterest expense | |||||||||||||||||||||||
| Income (loss) before income tax expense (benefit) | |||||||||||||||||||||||
| Income tax expense (benefit) | |||||||||||||||||||||||
| Income (loss) after income tax expense (benefit) | |||||||||||||||||||||||
| Income attributable to non-controlling interest | |||||||||||||||||||||||
| Preferred stock dividends | |||||||||||||||||||||||
| Impact of preferred stock call | |||||||||||||||||||||||
| Net income (loss) available to common shareholders | $ | $ | $ | $ | |||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| Revenues from external customers: | |||||||||||||||||||||||
| Interest income | $ | $ | $ | $ | |||||||||||||||||||
| Noninterest income | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Note 28. 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.
153
Financial instruments with off-balance sheet risk were as follows:
| At December 31, | |||||||||||
| (In thousands) | 2020 | 2019 | |||||||||
| Commitments to extend credit: | |||||||||||
| Commercial | $ | $ | |||||||||
| Consumer | |||||||||||
| Total commitments to extend credit | |||||||||||
| Standby letters of credit and guarantees on industrial revenue bonds | |||||||||||
| Total | $ | $ | |||||||||
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. These loans had an outstanding balance of $7.0 million and $6.2 million at December 31, 2020 and 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 $7.0 million and $6.0 million at December 31, 2020 and 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 $100 thousand, in connection with the recourse agreements, in other liabilities. There was no recorded liability at December 31, 2020.
In addition, the Corporation has 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 $13.2 million and $16.7 million at December 31, 2020 and 2019, respectively. In the event of default, the Corporation has rights to the underlying collateral securing the loans. At December 31, 2020 and 2019, the Corporation had recorded a liability of $829 thousand and $891 thousand, 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 December 31, 2020 and 2019 the liability recorded in connection with these representations and warranties was $3.6 million and $5.7 million, respectively, included in other liabilities.
154
Note 29. 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) | 2020 | 2019 | |||||||||
| Assets: | |||||||||||
| Cash and due from banks | $ | $ | |||||||||
| Premises and equipment, net | |||||||||||
| Deferred tax asset | |||||||||||
| Investment in TCF Bank | |||||||||||
| Accounts receivable from TCF Bank | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and Equity: | |||||||||||
| Long term borrowings | $ | $ | |||||||||
| Accrued expenses and other liabilities | |||||||||||
| Total liabilities | |||||||||||
| Equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
155
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Interest income: | $ | $ | $ | ||||||||||||||
| Interest expense | |||||||||||||||||
| Net interest income | ( | ( | |||||||||||||||
| Noninterest income: | |||||||||||||||||
| Dividends from TCF Bank | |||||||||||||||||
| Management fees | |||||||||||||||||
| Other | |||||||||||||||||
| Total noninterest income | |||||||||||||||||
| Noninterest expense: | |||||||||||||||||
| Compensation and employee benefits | |||||||||||||||||
| Occupancy and equipment | |||||||||||||||||
| Merger-Related expenses | |||||||||||||||||
| Other | |||||||||||||||||
| Total noninterest expense | |||||||||||||||||
Income before income tax benefit and equity in undistributed earnings (loss) of TCF Bank | |||||||||||||||||
| Income tax benefit | |||||||||||||||||
| Income before equity in undistributed earnings (loss) of TCF Bank | |||||||||||||||||
| Equity in undistributed earnings (loss) of TCF Bank | ( | ( | |||||||||||||||
| Net income | |||||||||||||||||
| Preferred stock dividends | |||||||||||||||||
| Impact of preferred stock redemption | |||||||||||||||||
| Net income available to common shareholders | $ | $ | $ | ||||||||||||||
156
| Year Ended December 31, | |||||||||||||||||
| (In thousands) | 2020 | 2019 | 2018 | ||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income | $ | $ | $ | ||||||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||||||||
| Equity in undistributed (earnings) loss of TCF Bank | ( | ||||||||||||||||
| Share-based compensation expense | |||||||||||||||||
| Depreciation and amortization | ( | ( | |||||||||||||||
| Provision (benefit) for deferred income taxes | ( | ( | |||||||||||||||
| Net gains (losses) on sales of assets | ( | ||||||||||||||||
| Net change in other assets | ( | ( | |||||||||||||||
| Net change in other liabilities | ( | ( | |||||||||||||||
| Other, net | ( | ( | ( | ||||||||||||||
| Net cash provided by operating activities | |||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Purchases of premises and equipment and lease equipment | ( | ( | ( | ||||||||||||||
| Proceeds from sales of premises and equipment | |||||||||||||||||
| Net cash acquired in business combination | |||||||||||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Redemption of Series B preferred stock | ( | ||||||||||||||||
| Repurchases of common stock | ( | ( | ( | ||||||||||||||
| Common shares sold to TCF employee benefit plans | |||||||||||||||||
| Dividends paid on preferred stock | ( | ( | ( | ||||||||||||||
| Dividends paid on common stock | ( | ( | ( | ||||||||||||||
| Payments related to tax-withholding upon conversion of share-based awards | ( | ( | ( | ||||||||||||||
| Exercise of stock options | ( | ( | |||||||||||||||
| Net cash used in financing activities | ( | ( | ( | ||||||||||||||
| Net change in cash and due from banks | |||||||||||||||||
| Cash and due from banks at beginning of period | |||||||||||||||||
| Cash and due from banks at end of period | $ | $ | $ | ||||||||||||||
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 18. Regulatory Capital Requirements" of Notes to Consolidated Financial Statements for further information.
157
Note 30. Selected Quarterly Financial Data (Unaudited)
| Quarter Ended | ||||||||||||||||||||||||||
| (In thousands, except per share data) | Dec. 31, 2020 | Sep. 30, 2020 | Jun. 30, 2020 | Mar. 31, 2020 | Dec. 31, 2019 | Sep. 30, 2019 | Jun. 30, 2019 | Mar. 31, 2019 | ||||||||||||||||||
| Net interest income | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Provision for credit losses | ||||||||||||||||||||||||||
Net interest income after provision for credit losses | ||||||||||||||||||||||||||
| Noninterest income | ||||||||||||||||||||||||||
| Noninterest expense | ||||||||||||||||||||||||||
Income before income tax expense (benefit) | ||||||||||||||||||||||||||
| Income tax expense (benefit) | ( | ( | ||||||||||||||||||||||||
Income after income tax expense (benefit) | ||||||||||||||||||||||||||
Income attributable to non-controlling interest | ||||||||||||||||||||||||||
Net income attributable to TCF Financial Corporation | ||||||||||||||||||||||||||
| Preferred stock dividends | ||||||||||||||||||||||||||
Net income available to common shareholders | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Earnings per common share: | ||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
158
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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, 2020.
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.
There were no changes in internal control over financial reporting (as a defined rule in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2020 that materially affected, or are reasonably likely to materially affect, TCF's internal control over financial reporting.
159
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, 2020. 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, 2020.
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, 2020.
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.
160
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, 2020, 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, 2020, 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, 2020 and 2019, 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, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 26, 2021 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
February 26, 2021
161
Item 9B. Other Information
None.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding our directors and executive officers will be set forth in the following sections of our definitive Proxy Statement for the 2021 Annual Meeting of Shareholders ("2021 Proxy"): Election of Directors; Background of Executive Officers Who Are Not Directors; and Delinquent Section 16(a) Reports, and is incorporated herein by reference, or will be included in an amendment to the Annual Report on Form 10-K/A to be filed with the SEC not later than 120 days after December 31, 2020 ("2021 10-K/A").
Information regarding procedures for nominations of directors is set forth in the following sections of our 2021 Proxy and is incorporated herein by reference, or will be included in our 2021 10-K/A: Corporate Governance - Director Nominations; and Additional Information.
Audit Committee and Financial Expert
Information regarding our Audit Committee, its members and financial experts will be set forth in the following sections of our 2021 Proxy and is incorporated herein by reference, or will be included in our 2021 10-K/A: Election of Directors - Background of the Nominees; Corporate Governance - Board Committees, Committee Memberships, and Meetings in 2020; and Corporate Governance - Audit Committee.
Our Board of Directors is required to determine whether it has at least one Audit Committee Financial Expert and that the expert is independent. An Audit Committee Financial Expert is a committee member who has an understanding of generally accepted accounting principles and financial statements and has the ability to assess the general application of these principles in connection with the accounting for estimates, accruals and reserves. Additionally, this individual should have experience preparing, auditing, analyzing or evaluating financial statements that present the breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our financial statements or experience actively supervising one or more persons engaged in such activities. The member should also have an understanding of internal control over financial reporting as well as an understanding of audit committee functions.
The Board has determined that all members of the Audit Committee, including Karen L. Grandstrand, Barbara J. Mahone, Roger J. Sit, Julie H. Sullivan, Jeffery L. Tate, and Franklin C. Wheatlake, are independent and that Directors Sit, Sullivan and Tate each meet the requirements of audit committee financial experts. Additional information regarding Ms. Grandstrand, Ms. Mahone, Mr. Sit, Dr. Sullivan, Mr. Tate and Mr. Wheatlake and the other directors will be set forth in the section Election of Directors - Background of the Nominees in our 2021 Proxy and is incorporated herein by reference, or will be included in our 2021 10-K/A.
Code of Ethics for Senior Financial Management
We have adopted a code of ethics applicable to the Principal Executive Officer ("PEO"), Principal Financial Officer ("PFO") and Principal Accounting Officer ("PAO") (the "Senior Financial Management Code of Ethics") as well as a code of ethics generally applicable to all of our employees (including the PEO, PFO and PAO) and directors (the "Code of Ethics"). The Code of Ethics and the Senior Financial Management Code of Ethics are both available for review on our website at www.tcfbank.com by clicking on "About TCF" and then "Corporate Governance" and then selecting either "Code of Ethics Policy" or "Code of Ethics for Senior Financial Management". Any changes to either code will be posted on the website and any waivers granted to or violations by the PEO, PFO, PAO or any director of TCF Financial will also be posted on our website. To date, there have been no waivers granted to or violations by the PEO, PFO, PAO or any director of our directors.
162
Item 11. Executive Compensation
Information regarding compensation of our directors and executive officers will be set forth in the following sections of our 2021 Proxy and is incorporated herein by reference, or will be included in our 2021 10-K/A: Corporate Governance - Compensation and Pension Committee; Director Compensation; Compensation Discussion and Analysis; Compensation Committee Report; and Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information regarding ownership of our common stock by our directors, executive officers and certain other shareholders and shares authorized under equity compensation plans will be set forth in the following sections of TCF's 2021 Proxy and is incorporated herein by reference, or will be included in our 2021 10-K/A: Equity Compensation Plans Approved by Shareholders; and Ownership of TCF Stock.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information regarding director independence and certain relationships and transactions between TCF and certain related persons will be set forth in the section entitled Corporate Governance - Director Independence and Related Person Transactions of our 2021 Proxy and is incorporated herein by reference, or will be included in our 2021 10-K/A.
Item 14. Principal Accounting Fees and Services
Information regarding principal accounting fees and services and the Audit Committee's pre-approval policies and procedures relating to audit and non-audit services provided by our independent registered public accounting firm will be set forth in the section entitled Independent Registered Public Accountants in our 2021 Proxy and is incorporated herein by reference, or will be included in our 2021 10-K/A.
163
Part IV
Item 15. Exhibits, Financial Statement Schedules
| 1. Financial Statements | |||||
| The following consolidated financial statements of TCF Financial Corporation are filed as part of this report: | |||||
| Description | Page | ||||
| 2. Financial Statement Schedules | |||||
All financial statement schedules have been included in the Consolidated Financial Statements or the Notes thereto, or are either inapplicable or not required. | |||||
164
3. Exhibits
| Exhibit Number | Description | |||||||
| 2(a) | Agreement and Plan of Merger, by and between TCF Financial Corporation and Huntington Bancshares Incorporated, dated as of December 13, 2020*. Previously filed as Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed with the SEC on December 17, 2020. Here incorporated by reference. | |||||||
| 3(a) | Restated Articles of Incorporation of TCF Financial Corporation Previously filed as Exhibit 3.1 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 10, 2017. Here incorporated by reference. | |||||||
| 3(b) | Amendment to the Restated Articles of Incorporation of TCF Financial Corporation, including the Certificate of Designations of 5.70% Series C Non-Cumulative Perpetual Preferred Stock. Previously filed as Exhibit 3.2 to the registrant’s Current Report on Form 8-K filed with the SEC on August 1, 2019. Here incorporated by reference. | |||||||
| 3(c) | Amended and Restated Bylaws of TCF Financial Corporation, as of October 28, 2020. Previously filed as Exhibit 3.1 to the registrant's Current Report on Form 8-K filed with the SEC on October 26, 2020. Here incorporated by reference. | |||||||
| 4(a)# | ||||||||
| 4(b) | Long-Term Debt. The registrant has outstanding long-term debt which at the time of this Annual Report does not exceed 10% of the registrant's total consolidated assets. The registrant agrees to furnish copies of the agreements defining the rights of holders of such long-term debt to the SEC upon request. | |||||||
| 10(a)* | Amended and Restated Chemical Financial Corporation Stock Incentive Plan of 2006. Previously filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, filed with the SEC on August 3, 2011. Here incorporated by reference. | |||||||
| 10(b)* | Chemical Financial Corporation Stock Incentive Plan of 2012. Previously filed as Appendix A to the registrant's definitive proxy statement for the registrant's 2012 Annual Meeting of Shareholders, filed with the SEC on March 1, 2012. Here incorporated by reference. | |||||||
| 10(c)* | Chemical Financial Corporation Stock Incentive Plan of 2015. Previously filed as Appendix C to the registrant's definitive proxy statement for the registrant's 2015 Annual Meeting of Shareholders, filed with the SEC on March 6, 2015. Here incorporated by reference. | |||||||
| 10(d)* | Chemical Financial Corporation Stock Incentive Plan of 2017. Previously filed as Exhibit 10.1 to the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, filed with the SEC on May 10, 2017. Here incorporated by reference. | |||||||
| 10(e)* | Chemical Financial Corporation Supplemental Retirement Income Plan. Previously filed as Exhibit 10.5 to the registrant's Registration Statement on Form S-4, filed with the SEC on February 19, 2010. Here incorporated by reference. | |||||||
| 10(f)* | Chemical Financial Corporation Deferred Compensation Plan for Directors. Previously filed as Exhibit 10.2 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 24, 2012. Here incorporated by reference. | |||||||
| 10(g)* | TCF Financial Corporation Deferred Compensation Plan, as amended effective January 1, 2020. Previously filed as Exhibit 10(g) to the registrant's Annual Report on Form 10-K, filed with the SEC on March 2, 2020. Here incorporated by reference. | |||||||
| 10(h)* | Chemical Financial Corporation Directors' Deferred Stock Plan. Previously filed as Exhibit 10.8 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 26, 2014. Here incorporated by reference. | |||||||
| 10(i)* | Chemical Financial Corporation Executive Annual Incentive Plan. Previously filed as Exhibit 10.9 of the registrant's Annual Report on Form 10-K filed with the SEC on February 28, 2018. Here incorporated by reference. | |||||||
| 10(j)* | Form of Restricted Stock Unit Agreement pursuant to the Stock Incentive Plan of 2017 for Performance-Based Restricted Stock. Previously filed as Exhibit 10.29 of the registrant’s Annual Report on Form 10-K filed with the SEC on February 28, 2018. Here incorporated by reference. | |||||||
| 10(k)* | Form of Restricted Stock Unit Agreement pursuant to the Stock Incentive Plan of 2017 for Time-Vested Restricted Stock. Previously filed as Exhibit 10.30 of the registrant’s Annual Report on Form 10-K filed with the SEC on February 28, 2018. Here incorporated by reference. | |||||||
| 10(l)* | Form of Restricted Stock Unit Agreement pursuant to the Stock Incentive Plan of 2017 for Performance-Based Restricted Stock awarded to Executive Leadership. Previously filed as Exhibit 10.29 of the registrant’s Annual Report on Form 10-K filed with the SEC on February 28, 2019. Here incorporated by reference. | |||||||
| 10(m)* | Form of Restricted Stock Unit Agreement pursuant to the Stock Incentive Plan of 2017 for Performance-Based Restricted Stock awarded to the Chairman and Chief Executive Officer. Previously filed as Exhibit 10.30 of the registrant’s Annual Report on Form 10-K filed with the SEC on February 28, 2019. Here incorporated by reference. | |||||||
| 10(n)* | Form of Restricted Stock Unit Agreement pursuant to the Stock Incentive Plan of 2017 for Time-Vested Restricted Stock awarded to Executive Leadership. Previously filed as Exhibit 10.31 of the registrant’s Annual Report on Form 10-K filed with the SEC on February 28, 2019. Here incorporated by reference. | |||||||
| 10(o)* | Form of Restricted Stock Unit Agreement pursuant to the Stock Incentive Plan of 2017 for Time-Vested Restricted Stock awarded to the Chairman and Chief Executive Officer. Previously filed as Exhibit 10.32 of the registrant’s Annual Report on Form 10-K filed with the SEC on February 28, 2019. Here incorporated by reference. | |||||||
| 10(p)* | Stock Incentive Plan of 2019. Previously filed as Appendix A to the registrant's definitive proxy statement for the registrant's 2019 Annual Meeting of Shareholders, filed with the SEC on March 28, 2019. Here incorporated by reference. | |||||||
| 10(q)* | Form of Restricted Stock Unit Agreement pursuant to the Stock Incentive Plan of 2019 for Time-Based Restricted Stock Units. Previously filed as Exhibit 10(d) of the registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 8, 2020. Here incorporated by reference. | |||||||
| 10(r)* | Form of Restricted Stock Unit Agreement pursuant to the Stock Incentive Plan of 2019 for Performance-Based Restricted Stock Units. Previously filed as Exhibit 10(e) of the registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 8, 2020. Here incorporated by reference. | |||||||
| 10(u)* | Form of Director’s Restricted Stock Agreement pursuant to the Stock Incentive Plan of 2019 for Deferred Restricted Stock. Previously filed as Exhibit 10(f) of the registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 8, 2020. Here incorporated by reference. | |||||||
165
| 10(v)* | Form of Director’s Restricted Stock Agreement pursuant to the Stock Incentive Plan of 2019 for Non-Deferred Restricted Stock. Previously filed as Exhibit 10(g) of the registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 8, 2020. Here incorporated by reference. | |||||||
| 10(w)* | Form of Retention Time-Vesting Restricted Stock Unit Agreement. Previously filed as Exhibit 10.4 of the registrant’s Current Report on Form 8-K filed with the SEC on August 1, 2019. Here incorporated by reference. | |||||||
| 10(x)* | Amended and Restated TCF Financial 2015 Omnibus Incentive Plan. Previously filed as Exhibit 10(a) to Legacy TCF’s Annual Report on Form 10-K filed with the SEC on February 26, 2019. Here incorporated by reference. | |||||||
| 10(y)* | Form of Restricted Stock Award Agreement under the TCF Financial 2015 Omnibus Incentive Plan. Previously filed as Exhibit 10(aa) of the registrant’s Annual Report on Form 10-K filed with the SEC on March 2, 2020. Here incorporated by reference. | |||||||
| 10(z)* | Form of Performance-Based Restricted Stock Award Agreement under the TCF Financial 2015 Omnibus Incentive Plan. Previously filed as Exhibit 10(bb) of the registrant’s Annual Report on Form 10-K filed with the SEC on March 2, 2020. Here incorporated by reference. | |||||||
| 10(aa)* | Form of Restricted Stock Unit Agreement pursuant to the TCF Financial 2015 Omnibus Incentive Plan for Time-Based Restricted Stock Units. Previously filed as Exhibit 10(i) of the registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 8, 2020. Here incorporated by reference. | |||||||
| 10(bb)* | Form of Restricted Stock Unit Agreement pursuant to the TCF Financial 2015 Omnibus Incentive Plan for Performance-Based Restricted Stock Units. Previously filed as Exhibit 10(j) of the registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 8, 2020. Here incorporated by reference. | |||||||
| 10(cc)* | Form of TCF Financial Corporation Management Incentive Plan - Executive Award. Previously filed as Exhibit 10(a)-6 to Legacy TCF’s Annual Report on Form 10-K filed with the SEC on February 26, 2019. Here incorporated by reference. | |||||||
| 10(dd)* | ||||||||
| 10(ee)* | Form of Deferred Restricted Stock Award Agreement as executed by certain executives. Previously filed as Exhibit 10(b)-2 to Legacy TCF’s Annual Report on Form 10-K filed with the SEC on February 26, 2019. Here incorporated by reference. | |||||||
| 10(ff)* | Form of Performance-Based Restricted Stock Award Agreement as executed by certain executives. Previously filed as Exhibit 10(b)-3 to Legacy TCF’s Annual Report on Form 10-K filed with the SEC on February 26, 2019. Here incorporated by reference. | |||||||
| 10(gg)* | TCF Financial Corporation Supplemental Employee Retirement Plan - ESPP Plan as amended and restated through January 24, 2005. Previously filed as Exhibit 10(e) to Legacy TCF’s Annual Report on Form 10-K filed with the SEC on February 26, 2019. Here incorporated by reference. | |||||||
| 10(hh)* | ||||||||
| 10(ii)* | ||||||||
| 10(jj)* | ||||||||
| 10(kk)* | Form of Deferred Director’s Restricted Stock Agreement. Previously filed as Exhibit 10(k)-1 to Legacy TCF’s Annual Report on Form 10-K filed with the SEC on February 26, 2019. Here incorporated by reference. | |||||||
| 10(ll)* | ||||||||
| 10(mm)* | ||||||||
| 10(nn)* | Trust Agreement for TCF Directors Deferred Compensation Plan; as amended by amendment adopted April 30, 2001; as amended by amendment adopted October 10, 2001; and as amended by amendments adopted May 3, 2002; and as amended by Third Amendment of TCF Directors Deferred Compensation Trust effective as of June 30, 2003. | |||||||
| 10(oo)* | TCF Employees Omnibus Deferred Compensation Plan, as restated effective April 15, 2019. Previously filed as Exhibit 10(rr) to the registrant’s Annual Report on Form 10-K filed with the SEC on March 2, 2020. Here incorporated by reference. | |||||||
| 10(pp)* | Rabbi Trust Agreement for TCF Employees Omnibus Deferred Compensation Plan, effective April 15, 2019. Previously filed as Exhibit 10(ss) to the registrant’s Annual Report on Form 10-K filed with the SEC on March 2, 2020. Here incorporated by reference. | |||||||
| 10(qq)* | Amended and Restated Employment Agreement dated November 6, 2019, between TCF Financial Corporation and Craig R. Dahl. Previously filed as Exhibit 10.1 of the registrant’s Quarterly Report on Form 10-Q with the SEC on November 12, 2019. Here incorporated by reference. | |||||||
| 10(rr)* | Separation and Release Agreement by and between Craig R. Dahl and TCF Financial Corporation, dated October 26, 2020. Previously filed as Exhibit 10.1 of the registrant’s Current Report on Form 8-K filed with the SEC on October 26, 2020. Here incorporated by reference. | |||||||
| 10(ss)* | Amended and Restated Retention Agreement between David T. Provost and TCF Financial Corporation, dated March 10, 2020. Previously filed as Exhibit 10.1 of the registrant’s Current Report on Form 8-K filed with the SEC on March 16, 2020. Here incorporated by reference. | |||||||
| 10(tt)* | Separation and Release between David T. Provost and TCF Financial Corporation, dated May 8, 2020. Previously filed as Exhibit 10(k) of the registrant’s Quarterly Report on Form 10-Q filed with the SEC on May 8, 2020. Here incorporated by reference. | |||||||
| 10(uu)* | Executive Employment Agreement, by and between David T. Provost and TCF Financial Corporation, dated as of December 13, 2020. Previously filed as Exhibit 10.1 of the registrant’s Current Report on Form 8-K filed with the SEC on December 17, 2020. Here incorporated by reference. | |||||||
| 10(vv)* | Executive Employment Agreement, by and between Gary Torgow and TCF Financial Corporation, dated as of December 13, 2020. Previously filed as Exhibit 10.2 of the registrant’s Current Report on Form 8-K filed with the SEC on December 17, 2020. Here incorporated by reference. | |||||||
| 10(ww)* | Amended and Restated Executive Employment Agreement dated December 13, 2020, between TCF Financial Corporation and Thomas C. Shafer. Previously filed as Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed with the SEC on December 17, 2020. Here incorporated by reference. | |||||||
166
| 10(xx)* | Employment Agreement between Dennis L. Klaeser, Chemical Financial Corporation and Chemical Bank, dated July 1, 2018. Previously filed as Exhibit 10.2 to the registrant's Current Report on Form 8-K filed with the SEC on July 3, 2018. Here incorporated by reference. | |||||||
| 10(yy)* | Letter Agreement dated December 13, 2019 between Dennis L. Klaeser and TCF Financial Corporation. Previously filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on December 16, 2019. Here incorporated by reference. | |||||||
| 10(zz)* | Consulting Agreement between Dennis L. Klaeser and TCF Financial Corporation, dated August 5, 2020. Previously filed as Exhibit 10(j) of the registrant's Quarterly Report on Form 10-Q filed with the SEC on August 7, 2020. Here incorporated by reference. | |||||||
| 10(aaa)* | Amended and Restated Executive Employment Agreement dated December 13, 2020, by and among TCF Financial Corporation, TCF National Bank, and Brian Maass. Previously filed as Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed with the SEC on December 17, 2020. Here incorporated by reference. | |||||||
| 10(bbb)* | Lease, dated May 31, 2019, by and between GPC Adams LLC and Chemical Bank. Previously filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on June 6, 2019. Here incorporated by reference. | |||||||
| 10(ccc)*# | ||||||||
| 21# | ||||||||
| 23# | ||||||||
| 31.1# | ||||||||
| 31.2# | ||||||||
| 32.1# | ||||||||
| 32.2# | ||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH# | Inline XBRL Taxonomy Extension Schema Document | |||||||
| 101.CAL# | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||
| 101.DEF# | Inline XBRL Taxonomy Extension Definitions Linkbase Document | |||||||
| 101.LAB# | Inline XBRL Taxonomy Extension Label Linkbase Document | |||||||
| 101.PRE# | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and embedded within Exhibit 101). | |||||||
*These agreements are management contracts or compensation plans or arrangements required to be filed as Exhibits to this Form 10-K.
# Filed herein
167
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TCF FINANCIAL CORPORATION | ||||||||
| /s/ David T. Provost | ||||||||
David T. Provost, | ||||||||
| Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
Dated: February 26, 2021
168
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name | Title | Date | ||||||
| /s/ David T. Provost | February 26, 2021 | |||||||
David T. Provost | Chief Executive Officer (Principal Executive Officer) | |||||||
| /s/ Brian W. Maass | February 26, 2021 | |||||||
Brian W. Maass | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||
| /s/ Kathleen S. Wendt | February 26, 2021 | |||||||
| Kathleen S. Wendt | Executive Vice President and Chief Accounting Officer (Principal Accounting Officer) | |||||||
| /s/ Gary Torgow | February 26, 2021 | |||||||
| Gary Torgow | Executive Chairman | |||||||
| /s/ Thomas C. Shafer | February 26, 2021 | |||||||
| Thomas C. Shafer | Executive Vice Chairman | |||||||
| /s/ Peter Bell | February 26, 2021 | |||||||
| Peter Bell | Director | |||||||
| /s/ Karen L. Grandstrand | February 26, 2021 | |||||||
| Karen L. Grandstrand | Director | |||||||
| /s/ Richard H. King | February 26, 2021 | |||||||
| Richard H. King | Director | |||||||
| /s/ Ronald A. Klein | February 26, 2021 | |||||||
| Ronald A. Klein | Director | |||||||
| /s/ Barbara J. Mahone | February 26, 2021 | |||||||
| Barbara J. Mahone | Director | |||||||
| /s/ Barbara L. McQuade | February 26, 2021 | |||||||
| Barbara L. McQuade | Director | |||||||
| /s/ Vance K. Opperman | February 26, 2021 | |||||||
| Vance K. Opperman | Lead Director | |||||||
| /s/ Roger J. Sit | February 26, 2021 | |||||||
| Roger J. Sit | Director | |||||||
| /s/ Julie H. Sullivan | February 26, 2021 | |||||||
| Julie H. Sullivan | Director | |||||||
| /s/ Jeffrey L. Tate | February 26, 2021 | |||||||
| Jeffrey L. Tate | Director | |||||||
| /s/ Arthur A. Weiss | February 26, 2021 | |||||||
| Arthur A. Weiss | Director | |||||||
| /s/ Franklin C. Wheatlake | February 26, 2021 | |||||||
| Franklin C. Wheatlake | Director | |||||||
| /s/ Theresa M. H. Wise | February 26, 2021 | |||||||
| Theresa M. H. Wise | Director | |||||||
169