Merger

9 Months Ended

Sep. 30, 2019

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

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

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

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

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



(In thousands)	TCF Financial Ownership and Market Value Table
	Number of Chemical Outstanding Shares	Percentage Ownership		Market Value at $42.04 Chemical Share Price
Chemical shareholders	71,559	46.62	%	$	3,008,330
Legacy TCF shareholders	81,920	53.38		3,443,938
Total	153,479	100		$	6,452,268

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



(In thousands)	Hypothetical Legacy TCF Ownership
	Number of Legacy TCF Outstanding Shares	Percentage Ownership
Chemical shareholders	140,836	46.62	%
Legacy TCF shareholders	161,229	53.38
Total	302,065	100	%

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



(In thousands, except per share data)
Number of hypothetical Legacy TCF shares issued to Chemical shareholders	140,835,967
Legacy TCF market price per share as of July 31, 2019	$	21.38
Purchase price determination of hypothetical Legacy TCF shares issued to Chemical shareholders	3,011,073
Value of Chemical stock options hypothetically converted to options to acquire shares of Legacy TCF common stock	7,335
Cash in lieu of fractional shares	148
Purchase price consideration	$	3,018,556

The following table provides the purchase price allocation as of the Merger Date and the Chemical assets acquired and liabilities assumed at their estimated fair value as of the Merger Date as recorded by TCF. We recorded the estimate of fair value based on initial valuations available at the Merger Date and these estimates are considered preliminary and subject to adjustment for up to one year after the Merger Date. While we believe that the information available on the Merger Date provided a reasonable basis for estimating fair value, we expect that we may obtain additional information and evidence during the measurement period that would result in changes to the estimated fair value amounts. The measurement period ends on the earlier of one year after the Merger Date or the date we are able to determine that we have obtained all necessary information about the facts and circumstances that existed as of Merger Date. Subsequent adjustments to fair value, if necessary, will be reflected in our future filings. These adjustments include: (i) changes in the estimated fair value of loans acquired, (ii) changes in the estimated fair value of intangible assets acquired, (iii) changes in deferred tax assets related to fair value estimates and changes in the expected realization of items considered to be net operating loss carryforwards and (iv) changes in goodwill as a result of the net effect of any adjustments.



(In thousands)
Purchase price consideration:
Stock	$	3,018,556
Fair value of assets acquired:
Cash and cash equivalents	975,014
Federal Home Loan Bank and Federal Reserve Bank stocks	218,582
Investment securities	3,774,738
Loans held-for-sale	44,532
Loans and leases	15,726,213
Premises and equipment	140,219
Loan servicing rights	59,567
Other intangible assets	201,568
Net deferred tax asset⁽¹⁾	49,345
Other assets	553,796
Total assets acquired	21,743,574
Fair value of liabilities assumed:
Deposits	16,418,019
Short-term borrowings	2,629,426
Long-term borrowings	442,323
Other liabilities	345,604
Total liabilities assumed	19,835,372
Fair value of net identifiable assets	1,908,202
Goodwill resulting from Merger⁽²⁾	$	1,110,354


(1)	Net deferred tax asset includes acquisition-related fair value adjustments, loss and tax credit carry forwards, mortgage servicing rights and core deposit and customer intangibles.


(2)	The goodwill recorded was primarily attributable to the synergies and economies of scale expected from combining the operations of Legacy TCF and Chemical.

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

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



(In thousands)
PCI loans:
Contractually required payments receivable	$	458,374
Nonaccretable difference	(105,031		)
Expected cash flows	353,343
Accretable yield	39,733
Fair value of PCI loans	$	313,610

Purchased nonimpaired loans and leases:
Unpaid principal balance	$	15,636,020
Fair value discount	(223,417		)
Fair value at acquisition	15,412,603
Total fair value at acquisition	$	15,726,213

Supplemental disclosures of cash flow information related to investing and financing activities regarding the Merger are as follows for the nine months ended September 30, 2019:



(In thousands)
Business combination
Fair value of tangible assets acquired	$	21,482,439
Goodwill, loan servicing rights and other identifiable intangible assets acquired	1,371,489
Liabilities assumed	19,835,372
Common stock and stock options converted	3,018,556

Other intangible assets consisted of core deposits and customer relationship intangibles with estimated fair values at the Merger Date of $177.8 million and $23.8 million, respectively. Core deposit intangibles are being amortized over a weighted-average life of ten years on an accelerated basis. Customer relationship intangibles are being amortized over a weighted-average life of 15.6 years based on expected economic benefits of the underlying intangible assets. The weighted-average life of amortizable intangibles acquired in the Merger was eleven years.

As a result of the Merger, we recorded $1.1 billion of goodwill. Due to the timing of the Merger, we are in the process of completing our analysis of the allocation of goodwill across business segments, and, therefore, goodwill is presented as part of Enterprise Services at September 30, 2019. The goodwill recorded is not deductible for income tax purposes.

Pro Forma Combined Results of Operations The following pro forma financial information presents the consolidated results of operations of Legacy TCF and Chemical as if the Merger had occurred as of January 1, 2018 with pro forma adjustments. The pro forma adjustments give effect to any change in interest income due to the accretion of the discount (premium) associated with the fair value adjustments to acquired loans, any change in interest expense due to estimated premium amortization/discount accretion associated with the fair value adjustments to acquired time deposits and borrowings and other debt and the amortization of the core deposit intangible that would have resulted had the deposits been acquired as of January 1, 2018. Merger-related expenses incurred by TCF during the three and nine months ended September 30, 2019 are not reflected in the pro forma amounts. The pro forma information does not necessarily reflect the results of operations that would have occurred had Legacy TCF merged with Chemical at the beginning of 2018. Anticipated cost savings that have not yet been realized are also not reflected in the pro forma amounts for the three and nine months ended September 30, 2019 and 2018.



	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands, except per share data)	2019		2018		2019		2018
Net interest income and other noninterest income	$	536,165	$	570,396	$	1,654,571	$	1,693,537
Net income	125,560		156,977		435,003		434,686
Net income available to common shareholders	123,066		154,483		427,522		422,111
Earnings per share:
Basic	$	0.81	$	1.00	$	2.79	$	2.71
Diluted	0.81		0.99		2.77		2.69