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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
June 30, 2018
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 Commission File No. 001-10253
 
TCF Financial Corporation
(Exact name of registrant as specified in its charter)
Delaware
41-1591444
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
200 Lake Street East
Wayzata, Minnesota 55391-1693
(Address and Zip Code of principal executive offices)
(952) 745-2760
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ                                                   No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ                                                   No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if smaller reporting company)
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨                                                 No þ
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Outstanding at
Class
July 27, 2018
Common Stock, $.01 par value
167,691,547 shares


Table of Contents



TABLE OF CONTENTS
 
Description
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





Table of Contents



Part I - Financial Information                                                

Item 1. Financial Statements

TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
At June 30, 2018
 
At December 31, 2017
 
(Unaudited)
 
 
Assets:
 

 
 

Cash and due from banks
$
581,876

 
$
621,782

Investments
95,661

 
82,644

Debt securities held to maturity
155,962

 
161,576

Debt securities available for sale
2,249,784

 
1,709,018

Loans and leases held for sale
291,871

 
134,862

Loans and leases:
 

 
 

Consumer real estate:
 

 
 

First mortgage lien
1,800,885

 
1,959,387

Junior lien
2,830,029

 
2,860,309

Total consumer real estate
4,630,914

 
4,819,696

Commercial
3,706,401

 
3,561,193

Leasing and equipment finance
4,648,049

 
4,761,661

Inventory finance
3,005,165

 
2,739,754

Auto finance
2,603,260

 
3,199,639

Other
20,957

 
22,517

Total loans and leases
18,614,746

 
19,104,460

Allowance for loan and lease losses
(165,619
)
 
(171,041
)
Net loans and leases
18,449,127

 
18,933,419

Premises and equipment, net
430,956

 
421,549

Goodwill, net
154,757

 
154,757

Other assets
774,468

 
782,552

Total assets
$
23,184,462

 
$
23,002,159

Liabilities and Equity:
 

 
 

Deposits:
 

 
 

Checking
$
6,408,174

 
$
6,300,127

Savings
5,570,979

 
5,287,606

Money market
1,562,008

 
1,764,998

Certificates of deposit
4,822,112

 
4,982,271

Total deposits
18,363,273

 
18,335,002

Short-term borrowings
761

 

Long-term borrowings
1,554,569

 
1,249,449

Total borrowings
1,555,330

 
1,249,449

Accrued expenses and other liabilities
761,281

 
737,124

Total liabilities
20,679,884

 
20,321,575

Equity:
 

 
 

Preferred stock, par value $0.01 per share, 30,000,000 shares authorized;
 
 
 
7,000 and 4,007,000 shares issued
169,302

 
265,821

Common stock, par value $0.01 per share, 280,000,000 shares authorized;
 
 
 
173,522,007 and 172,158,449 shares issued
1,735

 
1,722

Additional paid-in capital
877,364

 
877,217

Retained earnings, subject to certain restrictions
1,649,449

 
1,577,311

Accumulated other comprehensive income (loss)
(52,811
)
 
(18,517
)
Treasury stock at cost, 5,837,036 and 489,030 shares and other
(164,107
)
 
(40,797
)
Total TCF Financial Corporation stockholders' equity
2,480,932

 
2,662,757

Non-controlling interest in subsidiaries
23,646

 
17,827

Total equity
2,504,578

 
2,680,584

Total liabilities and equity
$
23,184,462

 
$
23,002,159

 
See accompanying notes to consolidated financial statements.



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Table of Contents



TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(In thousands, except per share data)
2018
 
2017
 
2018
 
2017
Interest income:
 

 
 

 
 
 
 
Loans and leases
$
269,280

 
$
234,092

 
$
529,655

 
$
453,640

Debt securities available for sale
12,516

 
8,052

 
22,639

 
16,032

Debt securities held to maturity
998

 
1,035

 
2,017

 
2,315

Loans held for sale and other
3,529

 
5,338

 
7,274

 
18,837

Total interest income
286,323

 
248,517

 
561,585

 
490,824

Interest expense:
 

 
 

 
 
 
 
Deposits
23,953

 
14,436

 
46,463

 
28,151

Borrowings
11,571

 
6,920

 
21,124

 
13,398

Total interest expense
35,524

 
21,356

 
67,587

 
41,549

Net interest income
250,799

 
227,161

 
493,998

 
449,275

Provision for credit losses
14,236

 
19,446

 
25,604

 
31,639

Net interest income after provision for credit losses
236,563

 
207,715

 
468,394

 
417,636

Non-interest income:
 

 
 

 
 
 
 
Fees and service charges
32,670

 
32,733

 
63,421

 
64,015

Card revenue
14,962

 
14,154

 
28,721

 
27,304

ATM revenue
4,933

 
5,061

 
9,583

 
9,736

Subtotal
52,565

 
51,948

 
101,725

 
101,055

Gains on sales of auto loans, net

 
380

 

 
3,244

Gains on sales of consumer real estate loans, net
7,192

 
8,980

 
16,315

 
17,871

Servicing fee income
7,484

 
10,730

 
15,779

 
22,381

Subtotal
14,676

 
20,090

 
32,094

 
43,496

Leasing and equipment finance
42,904

 
39,830

 
84,751

 
68,128

Other
3,934

 
2,795

 
7,650

 
5,498

Fees and other revenue
114,079

 
114,663

 
226,220

 
218,177

Gains (losses) on debt securities, net
24

 

 
87

 

Total non-interest income
114,103

 
114,663

 
226,307

 
218,177

Non-interest expense:
 

 
 

 
 
 
 
Compensation and employee benefits
120,575

 
115,630

 
244,415

 
239,928

Occupancy and equipment
40,711

 
38,965

 
81,225

 
78,565

Other
89,084

 
61,363

 
147,903

 
125,579

Subtotal
250,370

 
215,958

 
473,543

 
444,072

Operating lease depreciation
17,945

 
12,466

 
35,219

 
23,708

Foreclosed real estate and repossessed assets, net
3,857

 
4,639

 
8,773

 
9,188

Other credit costs, net
(133
)
 
24

 
484

 
125

Total non-interest expense
272,039

 
233,087

 
518,019

 
477,093

Income before income tax expense
78,627

 
89,291

 
176,682

 
158,720

Income tax expense
16,418

 
25,794

 
38,049

 
46,637

Income after income tax expense
62,209

 
63,497

 
138,633

 
112,083

Income attributable to non-controlling interest
3,460

 
3,065

 
6,123

 
5,373

Net income attributable to TCF Financial Corporation
58,749

 
60,432

 
132,510

 
106,710

Preferred stock dividends
2,494

 
4,847

 
6,600

 
9,694

Impact of preferred stock redemption

 

 
3,481

 

Net income available to common stockholders
$
56,255

 
$
55,585

 
$
122,429

 
$
97,016

Earnings per common share:
 

 
 

 
 
 
 
Basic
$
0.34

 
$
0.33

 
$
0.73

 
$
0.58

Diluted
$
0.34

 
$
0.33

 
$
0.73

 
$
0.58

 
See accompanying notes to consolidated financial statements.


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TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2018
 
2017
 
2018
 
2017
Net income attributable to TCF Financial Corporation
$
58,749

 
$
60,432

 
$
132,510

 
$
106,710

Other comprehensive income (loss), net of tax:
 

 
 

 
 

 
 

Net unrealized gains (losses) on debt securities available for sale and interest-only strips
(4,806
)
 
12,341

 
(32,625
)
 
15,110

Net unrealized gains (losses) on net investment hedges
3,779

 
(1,149
)
 
5,383

 
(1,462
)
Foreign currency translation adjustments
(4,925
)
 
2,007

 
(7,035
)
 
2,588

Recognized postretirement prior service cost
(8
)
 
(7
)
 
(17
)
 
(14
)
Total other comprehensive income (loss), net of tax
(5,960
)
 
13,192

 
(34,294
)
 
16,222

Comprehensive income
$
52,789

 
$
73,624

 
$
98,216

 
$
122,932

 
See accompanying notes to consolidated financial statements.


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TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Equity (Unaudited)
 
TCF Financial Corporation
 
 
 
Number of
Shares Issued
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
and Other
Total
Non-
controlling
Interest
Total
Equity
(Dollars in thousands)
Preferred
Common
Balance, December 31, 2016
4,006,900

171,034,506

$
263,240

$
1,710

$
862,776

$
1,382,901

$
(33,725
)
$
(49,419
)
$
2,427,483

$
17,162

$
2,444,645

Change in accounting principle




1,319

(1,319
)





Balance, January 1, 2017
4,006,900

171,034,506

263,240

1,710

864,095

1,381,582

(33,725
)
(49,419
)
2,427,483

17,162

2,444,645

Net income





106,710



106,710

5,373

112,083

Other comprehensive income (loss), net of tax






16,222


16,222


16,222

Net investment by (distribution to) non-controlling interest









231

231

Dividends on preferred stock





(9,694
)


(9,694
)

(9,694
)
Dividends on common stock





(25,243
)


(25,243
)

(25,243
)
Common shares purchased by TCF employee benefit plans

752,177


8

12,586




12,594


12,594

Stock compensation plans, net of tax

(254,196
)

(3
)
(1,004
)



(1,007
)

(1,007
)
Change in shares held in trust for deferred compensation plans, at cost




(17,226
)


17,226




Balance, June 30, 2017
4,006,900

171,532,487

$
263,240

$
1,715

$
858,451

$
1,453,355

$
(17,503
)
$
(32,193
)
$
2,527,065

$
22,766

$
2,549,831

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2017
4,007,000

172,158,449

$
265,821

$
1,722

$
877,217

$
1,577,311

$
(18,517
)
$
(40,797
)
$
2,662,757

$
17,827

$
2,680,584

Change in accounting principle





(116
)


(116
)

(116
)
Balance, January 1, 2018
4,007,000

172,158,449

265,821

1,722

877,217

1,577,195

(18,517
)
(40,797
)
2,662,641

17,827

2,680,468

Net income





132,510



132,510

6,123

138,633

Other comprehensive income (loss), net of tax






(34,294
)

(34,294
)

(34,294
)
Net investment by (distribution to) non-controlling interest









(304
)
(304
)
Redemption of Series B Preferred Stock
(4,000,000
)

(96,519
)


(3,481
)


(100,000
)

(100,000
)
Repurchases of 5,348,006 shares of common stock







(125,886
)
(125,886
)

(125,886
)
Dividends on preferred stock





(6,600
)


(6,600
)

(6,600
)
Dividends on common stock





(50,175
)


(50,175
)

(50,175
)
Common stock warrants exercised
 
970,761


10

(10
)






Common shares purchased by TCF employee benefit plans

34,627



715




715


715

Stock compensation plans, net of tax

358,170


3

2,018




2,021


2,021

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




(2,576
)


2,576




Balance, June 30, 2018
7,000

173,522,007

$
169,302

$
1,735

$
877,364

$
1,649,449

$
(52,811
)
$
(164,107
)
$
2,480,932

$
23,646

$
2,504,578

See accompanying notes to consolidated financial statements.


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TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
 
Six Months Ended June 30,
(In thousands)
2018
 
2017
Cash flows from operating activities:
 

 
 

Net income
$
138,633

 
$
112,083

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

 
 

Provision for credit losses
25,604

 
31,639

Depreciation and amortization
110,235

 
94,919

Provision for deferred income taxes
19,958

 
4,567

Proceeds from sales of loans and leases held for sale
157,088

 
120,929

Originations of loans and leases held for sale, net of repayments
(168,792
)
 
(289,094
)
Gains on sales of assets, net
(18,589
)
 
(26,112
)
Net change in other assets and accrued expenses and other liabilities
21,328

 
(80,440
)
Other, net
(22,102
)
 
(22,909
)
Net cash provided by (used in) operating activities
263,363

 
(54,418
)
Cash flows from investing activities:
 

 
 

Proceeds from maturities of and principal collected on debt securities
77,383

 
66,774

Purchases of debt securities
(650,051
)
 
(153,131
)
Redemption of Federal Home Loan Bank stock
126,001

 
137,001

Purchases of Federal Home Loan Bank stock
(139,000
)
 
(145,000
)
Proceeds from sales of loans and leases
370,934

 
891,838

Loan and lease originations and purchases, net of principal collected on loans and leases
415,881

 
(754,427
)
Acquisition of Equipment Financing & Leasing Corporation, net of cash acquired

 
(8,120
)
Proceeds from sales of lease equipment
5,612

 
3,959

Purchases of lease equipment
(559,866
)
 
(508,624
)
Proceeds from sales of real estate owned
15,301

 
28,205

Purchases of premises and equipment
(33,530
)
 
(21,863
)
Other, net
10,317

 
14,528

Net cash provided by (used in) investing activities
(361,018
)
 
(448,860
)
Cash flows from financing activities:
 

 
 

Net change in deposits
30,204

 
272,729

Net change in short-term borrowings
911

 
3,966

Proceeds from long-term borrowings
5,015,317

 
5,799,831

Payments on long-term borrowings
(4,705,436
)
 
(5,609,219
)
Redemption of Series B preferred stock
(100,000
)
 

Repurchases of common stock
(125,886
)
 

Common shares sold to TCF employee benefit plans
715

 
12,594

Dividends paid on preferred stock
(6,600
)
 
(9,694
)
Dividends paid on common stock
(50,175
)
 
(25,243
)
Exercise of stock options
(997
)
 
(57
)
Net investment by (distribution to) non-controlling interest
(304
)
 
231

Net cash provided by (used in) financing activities
57,749

 
445,138

Net change in cash and due from banks
(39,906
)
 
(58,140
)
Cash and due from banks at beginning of period
621,782

 
609,603

Cash and due from banks at end of period
$
581,876

 
$
551,463

Supplemental disclosures of cash flow information:
 

 
 

Cash paid (received) for:
 

 
 

Interest on deposits and borrowings
$
64,294

 
$
38,715

Income taxes, net
(22,439
)
 
51,010

Transfer of loans and leases to other assets
50,078

 
47,935

Transfer of loans and leases from held for investment to held for sale, net
514,273

 
628,438

See accompanying notes to consolidated financial statements.


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TCF FINANCIAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation
 
TCF Financial Corporation (together with its direct and indirect subsidiaries, "we," "us," "our," "TCF" or the "Company"), a Delaware corporation, is a national bank holding company based in Wayzata, Minnesota. References herein to "TCF Financial" or the "Holding Company" refer to TCF Financial Corporation on an unconsolidated basis. Its principal subsidiary, TCF National Bank ("TCF Bank"), is headquartered in Sioux Falls, South Dakota. TCF Bank operates bank branches in Illinois, Minnesota, Michigan, Colorado, Wisconsin, Arizona and South Dakota (TCF's primary banking markets). Through its direct subsidiaries, TCF Bank provides a full range of consumer facing and commercial services, including consumer banking services, commercial banking services, commercial leasing and equipment financing, and commercial inventory financing.
 
The accompanying unaudited consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP") for interim financial information and in accordance with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, the consolidated financial statements do not include all of the information and notes necessary for complete financial statements in conformity with GAAP. In the opinion of management, the accompanying unaudited consolidated financial statements contain all the significant adjustments, consisting of normal recurring items, considered necessary for fair presentation. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year. The information in this Quarterly Report on Form 10-Q is written with the presumption that the users of the interim financial statements have read or have access to the Company's most recent Annual Report on Form 10-K, which contains the latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations at December 31, 2017 and for the year then ended.

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



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Note 2. Summary of Significant Accounting Policies

Accounting policies in effect at December 31, 2017 remain significantly unchanged and have been followed similarly as in previous periods.

New Accounting Pronouncements Adopted

Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2017-12: Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands hedge accounting for nonfinancial and financial risk components and amends measurement methodologies to more closely align hedge accounting with a company’s risk management activities. The ASU decreases the complexity of preparing and understanding hedge results through measurement and reporting of hedge ineffectiveness. In addition, disclosures have been enhanced and the presentation of hedged results changed to align the effects of the hedging instrument and the hedged item. The adoption of this ASU was on a modified retrospective basis and resulted in the Company recording a cumulative effect reduction to the opening balance of retained earnings of $116 thousand.

Effective January 1, 2018, the Company adopted ASU No. 2017-09: Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance about which changes to the terms and conditions of a share-based payment award requires an entity to apply modification accounting in Topic 718. The adoption of this ASU was on a prospective basis and will be applicable to an award modified on or after January 1, 2018. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Effective January 1, 2018, the Company adopted ASU No. 2017-07: Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changes how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Under the new guidance, employers present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Only the service cost component is eligible for capitalization in assets. The other components of net periodic benefit cost are presented separately from the line item that includes service cost and outside of any subtotal of operating income. In addition, disclosure of the line items used to present the other components of net periodic benefit cost is required if the components are not presented separately in the income statement. The adoption of this ASU was on a modified retrospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Effective January 1, 2018, the Company adopted ASU No. 2017-05: Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with non-customers. The ASU also clarifies that Accounting Standards Codification 610-20 applies to the derecognition of nonfinancial assets and in substance nonfinancial assets unless other specific guidance applies or the sale is to a customer. The guidance does not apply to the derecognition of businesses, nonprofit activities, financial assets, including equity method investments, or to revenue contracts with customers. The adoption of this ASU was on a modified retrospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Effective January 1, 2018, the Company adopted ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The ASU provides a more robust framework to use in determining when a set of assets and activities is a business. The adoption of this ASU was on a prospective basis. TCF will evaluate future transactions to determine if they should be accounted for as acquisitions (or disposals) of assets or businesses.

Effective January 1, 2018, the Company adopted ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires entities to show changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities no longer present transfers between cash and cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The adoption of this ASU was on a retrospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.



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Effective January 1, 2018, the Company adopted ASU No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control, which changes the way in which a single decision maker considers indirect interests when performing the primary beneficiary analysis under the variable interest model. Under the amended guidance, indirect interests held by a related party would be considered on a proportional basis. The adoption of this ASU was on a retrospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Effective January 1, 2018, the Company adopted ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires the income tax effects of intercompany sales and transfers of assets, other than inventory, to be recognized in the period the transaction occurs. The adoption of this ASU was on a modified retrospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Effective January 1, 2018, the Company adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain types of cash receipts and cash payments are presented in the statement of cash flows. The adoption of this ASU was on a retrospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Effective January 1, 2018, the Company adopted ASU No. 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products, which requires issuers of prepaid stored-value products redeemable for goods, services or cash at third-party merchants to derecognize liabilities related to those products for breakage. The adoption of this ASU was on a modified retrospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Effective January 1, 2018, the Company adopted ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which amend the classification and measurement of investments in equity securities, simplify the impairment analysis of equity investments without readily determinable fair values, require separate presentation of certain fair value changes for financial liabilities measured at fair value and eliminate certain disclosure requirements associated with the fair value of financial instruments. The adoption of these ASUs was on a prospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Effective January 1, 2018, the Company adopted the following ASUs using the modified retrospective method with no cumulative-effect adjustment to opening retained earnings: ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606); ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date; ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers; ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs and ASU No. 2017-14, Income Statement - Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606).

TCF derives a majority of its revenue from loans and leases, as well as any related servicing fee revenue, which are not within the scope of these ASUs. These ASUs are applicable to most of the fees and service charges, card and ATM revenue earned by TCF, as well as the gains on sales of certain non-financial assets. However, the recognition of these revenue streams does not change in a significant manner as a result of the adoption of these ASUs. The majority of this revenue is both charged to the customer and earned either at a point in time or on a transactional basis. As a result, the revenue expected to be recognized in any future year related to remaining performance obligations, contracts where revenue is recognized when invoiced and contracts with variable consideration related to undelivered performance obligations are not material. In addition, receivables related to fees and service charges and the related bad debt expense are not material. There are no material contract assets, contract liabilities or deferred contract costs recorded in the Company's Consolidated Statements of Financial Condition. As a significant majority of the Company's revenue streams are not included in the scope of these ASUs and the recognition of revenue for the revenue streams within the scope of these ASUs are not significantly changed, the adoption of this guidance did not have a material impact on the Company's consolidated financial statements.


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Note 3Cash and Due from Banks
 
At June 30, 2018 and December 31, 2017, TCF Bank was required by Federal Reserve regulations to maintain reserves of $107.8 million and $107.0 million, respectively, in cash on hand or at the Federal Reserve Bank.

TCF maintains cash balances that are restricted as to their use in accordance with certain contractual agreements primarily related to the servicing of auto finance loans. Cash payments received on loans serviced for third parties are generally held in separate accounts until remitted. TCF may also retain cash balances for collateral on certain borrowings, forward foreign exchange contracts, interest rate contracts and other contracts. TCF maintained restricted cash totaling $24.6 million and $36.5 million at June 30, 2018 and December 31, 2017, respectively.

TCF had cash held in interest-bearing accounts of $297.6 million and $324.2 million at June 30, 2018 and December 31, 2017, respectively.

Note 4.  Debt Securities Available for Sale and Debt Securities Held to Maturity
 
Debt securities were as follows:
 
At June 30, 2018
 
At December 31, 2017
(In thousands)
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
Debt securities available for sale:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored enterprises and federal agencies
$
1,477,991

 
$
782

 
$
37,706

 
$
1,441,067

 
$
908,189

 
$
308

 
$
13,812

 
$
894,685

Other
4

 

 

 
4

 
6

 

 

 
6

Obligations of states and political subdivisions
826,024

 
497

 
17,808

 
808,713

 
810,159

 
7,967

 
3,799

 
814,327

Total debt securities available for sale
$
2,304,019

 
$
1,279

 
$
55,514

 
$
2,249,784

 
$
1,718,354

 
$
8,275

 
$
17,611

 
$
1,709,018

Debt securities held to maturity:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored enterprises and federal agencies
$
153,162

 
$
634

 
$
1,221

 
$
152,575

 
$
158,776

 
$
4,462

 
$
412

 
$
162,826

Other securities
2,800

 

 

 
2,800

 
2,800

 

 

 
2,800

Total debt securities held to maturity
$
155,962

 
$
634

 
$
1,221

 
$
155,375

 
$
161,576

 
$
4,462

 
$
412

 
$
165,626

 
At June 30, 2018 and December 31, 2017, mortgage-backed securities with a carrying value of $1.6 million and $0.9 million, respectively, were pledged as collateral to secure certain deposits and borrowings.

We have assessed each security with unrealized losses included in the table above for credit impairment. As part of that assessment we evaluated and concluded that we do not intend to sell any of the securities and that it is more likely than not that we will not be required to sell prior to recovery of the amortized cost. Unrealized losses on debt securities available for sale and debt securities held to maturity were due to changes in interest rates.
 
There were no sales or impairment charges for debt securities available for sale and debt securities held to maturity during the second quarter and first six months of 2018 or 2017. Net gains (losses) on debt securities were $24 thousand and $87 thousand for the second quarter and first six months of 2018, respectively, related to recoveries on previously impaired debt securities held to maturity.



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Gross unrealized losses and fair value of debt securities available for sale and debt securities held to maturity aggregated by investment category and the length of time the securities were in a continuous loss position were as follows:  
 
At June 30, 2018
 
Less than 12 months
 
12 months or more
 
Total
(In thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Debt securities available for sale:
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored enterprises and federal agencies
$
822,130

 
$
17,084

 
$
388,347

 
$
20,622

 
$
1,210,477

 
$
37,706

Obligations of states and political subdivisions
463,025

 
8,375

 
213,228

 
9,433

 
676,253

 
17,808

Total debt securities available for sale
$
1,285,155

 
$
25,459

 
$
601,575

 
$
30,055

 
$
1,886,730

 
$
55,514

 
 
 
 
 
 
 
 
 
 
 
 
Debt securities held to maturity:
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored enterprises and federal agencies
$
31,067

 
$
648

 
$
11,438

 
$
573

 
$
42,505

 
$
1,221

Total debt securities held to maturity
$
31,067

 
$
648

 
$
11,438

 
$
573

 
$
42,505

 
$
1,221

 
At December 31, 2017
 
Less than 12 months
 
12 months or more
 
Total
(In thousands)
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
Debt securities available for sale:
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored enterprises and federal agencies
$
406,298

 
$
2,686

 
$
428,585

 
$
11,126

 
$
834,883

 
$
13,812

Obligations of states and political subdivisions
103,759

 
486

 
207,516

 
3,313

 
311,275

 
3,799

Total debt securities available for sale
$
510,057

 
$
3,172

 
$
636,101

 
$
14,439

 
$
1,146,158

 
$
17,611

 
 
 
 
 
 
 
 
 
 
 
 
Debt securities held to maturity:
 

 
 

 
 

 
 

 
 

 
 

Mortgage-backed securities:
 

 
 

 
 

 
 

 
 

 
 

U.S. Government sponsored enterprises and federal agencies
$
13,309

 
$
132

 
$
11,470

 
$
280

 
$
24,779

 
$
412

Total debt securities held to maturity
$
13,309

 
$
132

 
$
11,470

 
$
280

 
$
24,779

 
$
412




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The amortized cost and fair value of debt securities available for sale and debt 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 prepay.
 
At June 30, 2018
 
At December 31, 2017
(In thousands)
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Debt securities available for sale:
 

 
 

 
 

 
 

Due in one year or less
$
4

 
$
4

 
$
6

 
$
6

Due in 1-5 years
45,170

 
45,222

 
15,178

 
15,312

Due in 5-10 years
643,621

 
631,225

 
514,336

 
517,867

Due after 10 years
1,615,224

 
1,573,333

 
1,188,834

 
1,175,833

Total debt securities available for sale
$
2,304,019

 
$
2,249,784

 
$
1,718,354

 
$
1,709,018

 
 
 
 
 
 
 
 
Debt securities held to maturity:
 

 
 

 
 

 
 

Due in one year or less
$
1,000

 
$
1,000

 
$
1,000

 
$
1,000

Due in 1-5 years
1,400

 
1,400

 
1,400

 
1,400

Due in 5-10 years
434

 
437

 
400

 
400

Due after 10 years
153,128

 
152,538

 
158,776

 
162,826

Total debt securities held to maturity
$
155,962

 
$
155,375

 
$
161,576

 
$
165,626


Interest income attributable to debt securities available for sale was as follows:
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(In thousands)
2018
 
2017
 
2018
 
2017
Taxable interest income
$
8,163

 
$
4,434

 
$
13,976

 
$
9,088

Tax-exempt interest income
4,353

 
3,618

 
8,663

 
6,944

Total interest income
$
12,516

 
$
8,052

 
$
22,639

 
$
16,032


Note 5Loans and Leases

Loans and leases were as follows:
(In thousands)
At June 30, 2018
 
At December 31, 2017
Consumer real estate:
 

 
 

First mortgage lien
$
1,800,885

 
$
1,959,387

Junior lien
2,830,029

 
2,860,309

Total consumer real estate
4,630,914

 
4,819,696

Commercial:
 

 
 

Commercial real estate:
 

 
 

Permanent
2,388,547

 
2,385,752

Construction and development
419,721

 
365,533

Total commercial real estate
2,808,268

 
2,751,285

Commercial business
898,133

 
809,908

Total commercial
3,706,401

 
3,561,193

Leasing and equipment finance
4,648,049

 
4,761,661

Inventory finance
3,005,165

 
2,739,754

Auto finance
2,603,260

 
3,199,639

Other
20,957

 
22,517

Total loans and leases(1)
$
18,614,746

 
$
19,104,460

(1)
Loans and leases are reported at historical cost including net direct fees and costs associated with originating and acquiring loans and leases, lease residuals, unearned income and unamortized purchase premiums and discounts. The aggregate amount of these loan and lease adjustments was $11.3 million and $33.3 million at June 30, 2018 and December 31, 2017, respectively.
 


11

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Loan Sales During the second quarter and first six months of 2018, TCF sold $181.7 million and $448.0 million, respectively, of consumer real estate loans, received cash of $188.2 million and $461.0 million, respectively, and recognized net gains of $7.2 million and $16.3 million, respectively. During the second quarter and first six months of 2017, TCF sold $273.4 million and $652.8 million, respectively, of consumer real estate loans, received cash of $283.3 million and $682.5 million, respectively, and recognized net gains of $9.0 million and $17.9 million, respectively. Related to these sales, TCF retained interest-only strips of $0.6 million and $3.8 million during the second quarter and first six months of 2018, respectively, and $0.6 million and $1.9 million during the same periods in 2017. Included in consumer real estate loans sold in the first six months of 2017 were $49.4 million of non-accrual loans, which were sold servicing released. TCF generally retains servicing on loans sold.

During the second quarter and first six months of 2018, TCF did not sell any auto finance loans. During the second quarter and first six months of 2017, TCF sold $48.0 million and $298.6 million, respectively, of auto finance loans, received cash of $48.5 million and $303.3 million, respectively, and recognized net gains of $0.4 million and $3.2 million, respectively.

No servicing assets or liabilities related to consumer real estate or auto finance loans were recorded within TCF's Consolidated Statements of Financial Condition at June 30, 2018 or December 31, 2017, as the contractual servicing fees are adequate to compensate TCF for its servicing responsibilities based on the amount demanded by the marketplace.

Total interest-only strips and the contractual liabilities related to loan sales were as follows:
(In thousands)
At June 30, 2018
 
At December 31, 2017
Interest-only strips attributable to:
 
 
 
Consumer real estate loan sales
$
17,076

 
$
16,440

Auto finance loan sales
2,811

 
4,946

Total interest-only strips
$
19,887

 
$
21,386

Contractual liabilities attributable to:
 
 
 
Consumer real estate loan sales
$
613

 
$
1,234


TCF recorded no impairment charges on the consumer real estate interest-only strips in the second quarter of 2018 and $268 thousand of impairment charges in the first six months of 2018 and $296 thousand and $875 thousand in the same periods in 2017. TCF recorded $13 thousand and $348 thousand of impairment charges on the auto finance interest-only strips in the second quarter and first six months of 2018, respectively, and $141 thousand and $165 thousand in the same periods in 2017.
 


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Note 6Allowance for Loan and Lease Losses and Credit Quality Information
 
The rollforwards of the allowance for loan and lease losses were as follows:
(In thousands)
Consumer
Real Estate
 
Commercial
 
Leasing and
Equipment
Finance
 
Inventory
Finance
 
Auto
Finance
 
Other
 
Total
At or For the Quarter Ended June 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
47,685

 
$
37,198

 
$
23,182

 
$
13,253

 
$
45,822

 
$
563

 
$
167,703

Charge-offs
(2,056
)
 
(4
)
 
(2,693
)
 
(673
)
 
(11,095
)
 
(1,667
)
 
(18,188
)
Recoveries
1,278

 
31

 
587

 
156

 
2,579

 
787

 
5,418

Net (charge-offs) recoveries
(778
)
 
27

 
(2,106
)
 
(517
)
 
(8,516
)
 
(880
)
 
(12,770
)
Provision for credit losses
550

 
3,066

 
1,182

 
(860
)
 
9,302

 
996

 
14,236

Other
(3,503
)
 

 
(11
)
 
(36
)
 

 

 
(3,550
)
Balance, end of period
$
43,954

 
$
40,291

 
$
22,247

 
$
11,840

 
$
46,608

 
$
679

 
$
165,619

 
 
 
 
 
 
 
 
 
 
 
 
 
 
At or For the Quarter Ended June 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
53,851

 
$
33,697

 
$
21,257

 
$
15,816

 
$
35,108

 
$
437

 
$
160,166

Charge-offs
(2,813
)
 
(2,699
)
 
(2,244
)
 
(887
)
 
(8,204
)
 
(1,479
)
 
(18,326
)
Recoveries
1,699

 
194

 
746

 
275

 
1,667

 
831

 
5,412

Net (charge-offs) recoveries
(1,114
)
 
(2,505
)
 
(1,498
)
 
(612
)
 
(6,537
)
 
(648
)
 
(12,914
)
Provision for credit losses
253

 
3,477

 
2,167

 
(3,108
)
 
15,847

 
810

 
19,446

Other
(582
)
 

 
(4
)
 
33

 
(525
)
 

 
(1,078
)
Balance, end of period
$
52,408

 
$
34,669

 
$
21,922

 
$
12,129

 
$
43,893

 
$
599

 
$
165,620

 
 
(In thousands)
Consumer
Real Estate
 
Commercial
 
Leasing and
Equipment
Finance
 
Inventory
Finance
 
Auto
Finance
 
Other
 
Total
At or For the Six Months Ended June 30, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
47,168

 
$
37,195

 
$
22,528

 
$
13,233

 
$
50,225

 
$
692

 
$
171,041

Charge-offs
(4,210
)
 
(4
)
 
(4,649
)
 
(1,222
)
 
(24,536
)
 
(3,432
)
 
(38,053
)
Recoveries
2,315

 
45

 
1,203

 
296

 
5,364

 
1,909

 
11,132

Net (charge-offs) recoveries
(1,895
)
 
41

 
(3,446
)
 
(926
)
 
(19,172
)
 
(1,523
)
 
(26,921
)
Provision for credit losses
2,654

 
3,055

 
3,178

 
(348
)
 
15,555

 
1,510

 
25,604

Other
(3,973
)
 

 
(13
)
 
(119
)
 

 

 
(4,105
)
Balance, end of period
$
43,954

 
$
40,291

 
$
22,247

 
$
11,840

 
$
46,608

 
$
679

 
$
165,619

 
 
 
 
 
 
 
 
 
 
 
 
 
 
At or For the Six Months Ended June 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
59,448

 
$
32,695

 
$
21,350

 
$
13,932

 
$
32,310

 
$
534

 
$
160,269

Charge-offs
(6,265
)
 
(5,431
)
 
(4,290
)
 
(1,106
)
 
(17,017
)
 
(3,119
)
 
(37,228
)
Recoveries
12,391

 
259

 
1,360

 
394

 
2,900

 
1,921

 
19,225

Net (charge-offs) recoveries
6,126

 
(5,172
)
 
(2,930
)
 
(712
)
 
(14,117
)
 
(1,198
)
 
(18,003
)
Provision for credit losses
(7,884
)
 
7,146

 
3,553

 
(1,143
)
 
28,704

 
1,263

 
31,639

Other
(5,282
)
 

 
(51
)
 
52

 
(3,004
)
 

 
(8,285
)
Balance, end of period
$
52,408

 
$
34,669

 
$
21,922

 
$
12,129

 
$
43,893

 
$
599

 
$
165,620




13

Table of Contents



The allowance for loan and lease losses and loans and leases outstanding by type of allowance methodology were as follows:
 
At June 30, 2018
(In thousands)
Consumer
Real Estate
 
Commercial
 
Leasing and
Equipment
Finance
 
Inventory
Finance
 
Auto
Finance
 
Other
 
Total
Allowance for loan and lease losses:
 

 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
27,116

 
$
38,728

 
$
18,661

 
$
11,310

 
$
46,463

 
$
679

 
$
142,957

Individually evaluated for impairment
16,838

 
1,563

 
3,586

 
530

 
145

 

 
22,662

Total
$
43,954

 
$
40,291

 
$
22,247

 
$
11,840

 
$
46,608

 
$
679

 
$
165,619

Loans and leases outstanding:
 

 
 

 
 

 
 

 
 

 
 

 
 

Collectively evaluated for impairment
$
4,513,542

 
$
3,672,528

 
$
4,617,762

 
$
3,003,072

 
$
2,592,297

 
$
20,955

 
$
18,420,156

Individually evaluated for impairment
117,372

 
33,873

 
23,254

 
2,093

 
10,963

 
2

 
187,557

Loans acquired with deteriorated credit quality

 

 
7,033

 

 

 

 
7,033

Total
$
4,630,914

 
$
3,706,401

 
$
4,648,049

 
$
3,005,165

 
$
2,603,260

 
$
20,957

 
$
18,614,746

 
At December 31, 2017
(In thousands)
Consumer
Real Estate
 
Commercial
 
Leasing and
Equipment
 Finance
 
Inventory
 Finance
 
Auto
 Finance
 
Other
 
Total
Allowance for loan and lease losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Collectively evaluated for impairment
$
28,851

 
$
35,635

 
$
19,083

 
$
12,945

 
$
49,900

 
$
691

 
$
147,105

Individually evaluated for impairment
18,317

 
1,560

 
3,445

 
288

 
325

 
1

 
23,936

Total
$
47,168

 
$
37,195

 
$
22,528

 
$
13,233

 
$
50,225

 
$
692

 
$
171,041

Loans and leases outstanding:
 

 
 

 
 

 
 

 
 

 
 
 
 
Collectively evaluated for impairment
$
4,675,626

 
$
3,524,864

 
$
4,721,905

 
$
2,735,638

 
$
3,188,810

 
$
22,513

 
$
18,869,356

Individually evaluated for impairment
144,070

 
36,329

 
27,912

 
4,116

 
10,829

 
4

 
223,260

Loans acquired with deteriorated credit quality