CHEMICAL FINANCIAL CO.
Table of Contents
Description Page
Forward-looking Information 34
Overview 35
Critical Accounting Policies and Estimates 38
Results of Operations 40
Performance Summary 40
Consolidated Results of Operations Analysis 41
Net Interest Income 41
Provision for Credit Losses 44
Noninterest Income 45
Noninterest Expense 47
Income Taxes 48
Reportable Segment Results 48
Consolidated Financial Condition Analysis 50
Investment Securities 50
Loans and Leases 51
Credit Quality 55
Liquidity Management 63
Deposits 63
Borrowings 64
Contractual Obligations and Commitments 65
Capital Management 66
Non-GAAP Financial Measures 67
Recent Accounting Developments 73
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Table of Con tents
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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Table of Con tents
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 theFederal 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 theSEC for the year endedDecember 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
Through our wholly-owned bank subsidiary,TCF National Bank , a national banking association ("TCF Bank ") with its main office inSioux 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 ofDecember 31, 2020 , TCF had 478 branches primarily located inMichigan ,Illinois andMinnesota , with additional locations inColorado ,Ohio ,South Dakota andWisconsin (our "primary banking markets"). We also conduct business across all 50 states,Canada ,New Zealand andAustralia through our specialty lending and leasing businesses. 35 -------------------------------------------------------------------------------- Table of Con tents References herein to "TCF Financial" or the "Holding Company" refer toTCF 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 theExecutive 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 ofDecember 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 atDecember 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 withWayne County, Michigan to provide fast relief through low-interest loans to help small businesses in theDetroit area; and •committed$250 thousand for relief efforts supportingGreat 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 theMidland, Michigan area. 36
-------------------------------------------------------------------------------- Table of Con tents 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
OnAugust 1, 2019 (the "TCF/Chemical Merger Date"),TCF Financial Corporation , aDelaware corporation ("Legacy TCF"), merged with and intoChemical Financial Corporation , aMichigan corporation ("Chemical"), with Chemical surviving the merger (the "TCF/Chemical Merger") and being renamedTCF Financial Corporation . Immediately following the TCF/Chemical Merger, Chemical's wholly owned bank subsidiary,Chemical Bank , aMichigan state-chartered bank, merged with and intoTCF Bank , withTCF Bank surviving the TCF/Chemical Merger. Upon completion of the TCF/Chemical Merger, Chemical was renamedTCF 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 beforeAugust 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 endedDecember 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 throughTCF'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. 37
-------------------------------------------------------------------------------- Table of Con tents Proposed Merger with Huntington Bancshares IncorporatedTCF and Huntington Bancshares Incorporated ("Huntington") have entered into an Agreement and Plan of Merger, dated as ofDecember 13, 2020 . Under the merger agreement, TCF will merge with and into Huntington, withHuntington continuing as the surviving entity. Immediately following the merger,TCF Bank will merge with and intoThe Huntington National Bank , withThe Huntington National Bank as the surviving bank. The merger agreement was approved by the boards of directors of TCF andHuntington , 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 withHuntington and Failure to complete our proposed merger withHuntington 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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Table of Con tents
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 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. 39 -------------------------------------------------------------------------------- Table of Con tents 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 endedDecember 31, 2020 and$172.0 million for the year endedDecember 31, 2019 . Notable items, on a pre-tax basis, for the year endedDecember 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 endedDecember 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 endedDecember 31, 2019 , also included$11.8 million of tax basis adjustment benefits considered a notable item. For the year endedDecember 31, 2018 , net income included a$32.0 million pre-tax charge related to the settlement to resolve certain matters with theConsumer Financial Protection Bureau (the "CFPB") andOffice 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 endedDecember 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 endedDecember 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/ 2020 2019 2018 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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Table of Con tents
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. AtDecember 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 endedDecember 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 theFederal 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 endedDecember 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 theFederal 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 endedDecember 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. 41
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Table of Con tents
Year Ended December 31,
2020 2019 Change
Average Yields and Average Yields and Average Yields and
(Dollars in thousands) Balance Interest Rates Balance Interest Rates Balance Interest 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 13,115,473Total 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
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Table of Con tents
Year Ended December 31,
2019 2018 Change
Average Yields and Average Yields and Average Yields and
(Dollars in thousands) Balance Interest Rates Balance Interest Rates Balance Interest Rates (bps)
Assets:
Federal Home Loan Bank andFederal 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 9,080,246Total 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
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Table of Con tents
Volume and Rate Variance Analysis
Year Ended December 31, 2020 vs. 2019 Year Ended December 31, 2019 vs. 2018
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
Average Average
(Dollars in thousands) Average Volume Yield/Rate Total Change Average Volume 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
$ 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
$ 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
(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 beginningJanuary 1, 2020 as a result of the adoption of CECL. 44 -------------------------------------------------------------------------------- Table of Con tents 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 onJanuary 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
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.
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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
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Table of Con tents
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
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 theCFPB 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 beginningAugust 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
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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 theCFPB 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 inMarch 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. 48 -------------------------------------------------------------------------------- Table of Con tents 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
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 theCFPB 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
Commercial Banking generated net income available to common shareholders of$170.7 million for 2020, compared with$240.9 million for 2019 and$178.7 million for 2018. The decrease in 2020, compared to 2019, was primarily due to an increase in provision for credit losses and a decrease in leasing revenue, partially offset by the incremental income resulting from the TCF/Chemical Merger and lower cost of funds. The provision increase in 2020, compared to 2019, reflects a build to the overall allowance for loans and leases primarily due to the impact of COVID-19 and additionally impacted by the adoption of CECL. The increase in 2019, compared to 2018, was primarily due to the incremental income resulting from the TCF/Chemical Merger. 49 -------------------------------------------------------------------------------- Table of Con tents Enterprise Services Enterprise Services is comprised of (i) corporate treasury, which includes our investment and borrowing portfolios and management of capital, debt and market risks, (ii) corporate functions, such as information technology, risk and credit management, bank operations, finance, investor relations, corporate development, internal audit, legal and human capital management that provide services to the operating segments, (iii)TCF Financial and (iv) eliminations. Our investment portfolio accounts for the earning assets within this segment. Borrowings may be used to offset reductions in deposits or to support lending activities. This segment also includes residual revenues and expenses representing the difference between actual amounts incurred by Enterprise Services and amounts allocated to the operating segments, including interest rate risk residuals such as funds transfer pricing mismatches. Year Ended December 31, (In thousands) 2020 2019 2018 Enterprise Services Net interest income$ 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
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 atDecember 31, 2020 , compared with$6.7 billion atDecember 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 atDecember 31, 2020 , compared with$139.4 million atDecember 31, 2019 . Our investment securities held-to-maturity portfolio consists primarily of fixed-rate mortgage-backed securities issued by theFNMA . The increase in debt securities held to maturity was primarily due to purchases of residential mortgage-backed securities. 50 -------------------------------------------------------------------------------- Table of Con tents The amortized cost and fair value of investment securities available-for-sale and held-to-maturity were as follows: At December 31, 2020 2019 2018 (In thousands) Amortized Cost Fair value Amortized Cost Fair value Amortized Cost Fair value Investment securities available-for-sale Debt securities: Residential mortgage-backed securities$ 6,308,376 $ 6,467,760
$ 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 Obligations of States and Political Corporate Debt And Trust Preferred Residential mortgage-backed Securities Subdivisions Commercial
mortgage-backed Securities Government and Government-sponsored Enterprises 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.
Loans and Leases Held-for-Sale Our loans and leases held-for-sale were$222.0 million atDecember 31, 2020 , an increase of$22.2 million , compared to$199.8 million atDecember 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 toFlorida ,Texas ,New York ,California andCanada . 51 -------------------------------------------------------------------------------- Table of Con tents Total loans and leases were$34.5 billion at bothDecember 31, 2020 andDecember 31, 2019 . AtDecember 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 fromDecember 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
(0.1) 14.1
The contractual maturities of loans and leases outstanding were as follows:
At December 31, 2020(1)
Commercial and Commercial real Lease Residential Consumer
(in thousands) industrial estate Financing mortgage Home equity installment Total
Amounts due:
Within 1 year $ 3,483,409 2,007,581
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 atDecember 31, 2020 , an increase of$665.9 million , or 2.9%, compared to$23.3 billion atDecember 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. 52 -------------------------------------------------------------------------------- Table of Con tents 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 atDecember 31, 2020 , a decrease of$17.2 million , compared to$11.4 billion atDecember 31, 2019 . AtDecember 31, 2020 , C&I loans included$1.6 billion of PPP loans. Our C&I portfolio by North American Industry Classification System ("NAICS") code was as follows: At December 31, 2020 Percent of total loan and lease (In thousands) Balance portfolio Retail trade$ 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 atDecember 31, 2020 , an increase of$565.7 million , compared to$9.1 billion atDecember 31, 2019 . Our commercial real estate loan portfolio by property and loan type was as follows: At December 31, 2020 2019 Percent of total Percent of total loan and lease loan and lease (In thousands) Balance portfolio Balance portfolio Multifamily$ 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 Selfstorage 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
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Table of Con tents
Our lease financing portfolio by market type was as follows:
At December 31,
2020 2019
Percent of total Percent of total
loan and lease loan and lease
(Dollars in thousands) Balance portfolio Balance 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
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 bothDecember 31, 2020 andDecember 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 atDecember 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 atDecember 31, 2019 (consisting of$3.0 billion of home equity lines of credit and$474.7 million of amortizing home equity loans). AtDecember 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. AtDecember 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 atDecember 31, 2020 , a decrease of$309.0 million , or 20.0%, compared to$1.5 billion atDecember 31, 2019 . 54 -------------------------------------------------------------------------------- Table of Con tents 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
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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
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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Table of Con tents
Changes in the amount of nonaccrual loans and leases were as follows:
At or For
the Year Ended
Commercial Loan
Consumer Loan and Lease
(in thousands) Portfolio 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
Commercial Loan
Consumer Loan and Lease
(in thousands) Portfolio 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
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
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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Table of Con tents
Loans and leases by portfolio and regulatory classification were as follows:
At December 31, 2020
Non-classified Classified
(In thousands) Pass Special Mention Total 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
(In thousands) Pass Special Mention Substandard Total
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
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. OnDecember 27, 2020 , this provision of the CARES Act was extended to the earlier ofJanuary 1, 2022 or 60 days after the President ofthe United States declares a termination of the COVID-19 national emergency. InMarch 2020 , TCF began providing assistance to customers in response to the COVID-19 pandemic, predominantly in the form of payment deferrals. As ofDecember 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 ofDecember 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
(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
(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. 62 -------------------------------------------------------------------------------- Table of Con tents Investment Securities Held-to-Maturity The investment securities held-to-maturity portfolio consist primarily of fixed-rate mortgage-backed securities issued and guaranteed byFNMA , 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 forTCF Bank to direct management of the Corporation's liquidity risk and aHolding Company Investment and Liquidity Management Policy, which establishes a minimum target amount of cash or liquid investmentsTCF 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 theFederal Reserve Bank atDecember 31, 2020 , compared with$489.7 million atDecember 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. AtDecember 31, 2020 ,$1.0 billion of our securities were pledged as collateral to secure certain deposits and borrowings.
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 theFederal Home Loan Bank (the "FHLB") ofDes Moines . We had$6.5 billion of additional borrowing capacity at the FHLB ofDes Moines atDecember 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
Our wholly-owned subsidiaryTCF Commercial Finance Canada, Inc. ("TCFCFC") maintains a$20.0 million Canadian dollar-denominated line of credit facility with an unaffiliated bank, which is guaranteed byTCF Bank . TCFCFC had no outstanding borrowings under the line of credit with the counterparty at bothDecember 31, 2020 andDecember 31, 2019 . Deposits Deposits were$38.9 billion atDecember 31, 2020 , compared with$34.5 billion atDecember 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 atDecember 31, 2020 , compared with 23.1% of total deposits atDecember 31, 2019 . Our weighted-average interest rate for deposits, including noninterest-bearing deposits, was 0.44% for 2020 compared with 0.88% for 2019. 63 -------------------------------------------------------------------------------- Table of Con tents Certificates of deposit, including Certificate of Deposit Account Registry Service ("CDARS") deposits, IRA deposits and brokered deposits, were$5.5 billion atDecember 31, 2020 , compared with$7.5 billion atDecember 31, 2019 . The maturities of certificates of deposit with denominations equal to or greater than$100,000 atDecember 31, 2020 were as follows: (in thousands) Three months or less$ 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 atDecember 31, 2020 , compared with$5.0 billion atDecember 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 $150.0 million of fixed-to-floating rate
subordinated notes (the "2030 Notes"), at par. The 2030 Notes, due May 6, 2030 ,
bear an initial fixed interest rate of 5.50% per annum until May 6, 2025 ,
payable semi-annually in arrears on May 6 and November 6 , commencing on November
6, 2020 , resetting quarterly thereafter to the then-current three-month LIBOR
rate plus 509 basis points.
See "Note 15. Borrowings" of Notes to Consolidated Financial Statements for further information regarding our long-term borrowings.
Contractual Obligations and Commitments As discussed in the Notes to Consolidated Financial Statements, we have certain obligations and commitments to make future payments under contracts.
AtDecember 31, 2020 , the aggregate contractual obligations and commitments were as follows: Payments Due by Period Less than 1-3 3-5 More than (in thousands) Total 1 year years years 5 years Contractual Obligations: Certificates of deposit$ 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
Less than 1-3 3-5 More than
(in thousands) Total 1 year years years 5 years
Commitments:
Commitments to extend credit:
Commercial $ 4,396,191 $ 2,001,118
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-------------------------------------------------------------------------------- Table of Con tents 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 toTCF Financial and incorporatesTCF 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 andTCF Bank manage capital levels to exceed all regulatory capital requirements. OnOctober 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 endedDecember 31, 2020 , we repurchased 873,376 shares of our common stock totaling$33.1 million , all of which occurred during the first quarter. BetweenOctober 24, 2019 andDecember 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. EffectiveJanuary 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. AtDecember 31, 2020 andDecember 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 sinceDecember 31, 2020 that management believes have changedTCF 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
Preferred Stock Preferred stock was
Other Other equity was a reduction to total equity of$26.7 million atDecember 31, 2020 , compared with a reduction of$28.0 million atDecember 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 endedDecember 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 endedDecember 31, 2019 . Our common stock dividend payout ratio was 100.0% for the year endedDecember 31, 2020 , compared with 50.4% for the year endedDecember 31, 2019 and 34.3% for the year endedDecember 31, 2018 .TCF Financial's primary funding sources for dividends are dividends received fromTCF Bank . 66 -------------------------------------------------------------------------------- Table of Con tents OnJanuary 26, 2021 , our board of directors declared a regular quarterly cash dividend of$0.35 per common share payable onMarch 1, 2021 to shareholders of record at the close of business onFebruary 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 onMarch 1, 2021 to shareholders of record at the close of business onFebruary 12, 2021 . Common Shareholders' Equity Total common shareholders' equity was$5.5 billion , or 11.51% of total assets, atDecember 31, 2020 , compared with$5.5 billion , or 11.87%, atDecember 31, 2019 . Tangible common equity was$4.0 billion , or 8.72% of total tangible assets, atDecember 31, 2020 , compared with$4.1 billion , or 9.01%, atDecember 31, 2019 . Book value per common share was$36.06 atDecember 31, 2020 , compared with$36.20 atDecember 31, 2019 . Tangible book value per common share was$26.49 atDecember 31, 2020 , compared with$26.60 atDecember 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 andCFPB /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. 67
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Table of Con tents
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
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)
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
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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Table of Con tents
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
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Table of Con tents
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
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
(c) $ 212,784 $
285,493
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
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
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)
(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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Table of Con tents 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
(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
(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
Net interest income$ 1,538,401 $
1,289,032
516,063 465,532 454,397 436,063 454,281
Total revenue (c) $ 2,054,464 $
1,754,564
Noninterest income$ 516,063 $
465,532
- 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
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Table of Con tents
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
(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
(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:
Change from
At December 31, 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
$ 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
72-------------------------------------------------------------------------------- Table of Con tents 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 theFinance 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%.
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Table of Con tents
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 andTCF 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 theFNMA 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. 74 -------------------------------------------------------------------------------- Table of Con tents 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 fromTCF 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 forTCF Bank to direct management of TCF's liquidity risk. The objective of the Liquidity Management Policy is to ensure thatTCF 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 theFederal 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, theU.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. 75
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