Road to TCF-Chemical Financial merger began in 2015

Executives of TCF Financial Corp. and Chemical Financial Group met each other at an industry show in 2015.

They have watched each other since, said Craig Dahl, CEO of Wayzata-based TCF, which on Monday announced a "merger of equals" with Detroit-based Chemical.

TCF officials were impressed at how a similar 2016 merger between Chemical and another Michigan bank, Talmer Bancorp, played out, along with its headquarters move to Detroit.

The past few months seemed the right time to talk about pairing the two companies, said Dahl, who will become CEO of the merged entity.

For one, the two banks have complementary strengths and geographic footprints.

TCF brings strength in fees from its leasing and equipment finance business, while Chemical brings strength in wealth management and mortgage banking fees.

"These unique strengths, we believe, we can leverage across the combined company," Dahl said in a conference call Monday with analysts. "And although we have not modeled revenue opportunities, we believe we are well positioned to transfer each partner's strength into each other's markets to drive incremental revenues."

Chemical's path is similar to TCF's in many ways. It was founded in 1917 as a state savings bank in Midland, Mich., providing services to a city dominated by Dow Chemical Co. It evolved over the years and went public in 1988, after which it more aggressively pursued acquisitions of smaller community banks.

Its largest move came in 2016 when it acquired Talmer, based in Troy, Mich., to become Michigan's largest bank. When David Provost took the helm a year later, analysts — who had praised the integration despite some IT and other bumps — predicted that Chemical would continue to use merger-and-acquisition activity.

The management team from Chemical has done about 10 transactions in recent years but spent more attention on a cultural fit in the TCF deal in addition to assessing the business synergies.

"What we've done differently in this transaction is that [Dahl] and I and our management team has spent a lot of time going through culture [and] responsibilities. So we spend a lot more time on that than we have in the past," said Provost, who will become chairman of the merged company, in the conference call.

The newest move with TCF received mostly positive reaction.

"While the timing is surprising, we believe the financial and strategic merits of this deal are very compelling given the value created in forming this top-performing Midwest super community bank on a pro forma basis," Nathan Race, senior research analyst at Piper Jaffray, said in a research note.

Provost said centralizing back-office operations and IT efficiencies will provide the most savings.

Both companies even released fourth-quarter financial results on Monday that exceeded analysts' expectations for fourth-quarter EPS. However, each side canceled their customary earnings conference call so they could discuss the mutual benefits of the new deal.

TCF said its profit for the last three months of 2018 fell nearly 16 percent to $85.7 million, or 51 cents a share. Its year-ago results were lifted by a one-time gain when the new federal tax allowed TCF to lower the value of deferred tax liability. Without that gain, TCF's profit in the year-ago quarter amounted to 32 cents a share. Revenue for the fourth quarter was $377.0 million, up 3.9 percent.

Chemical reported a fourth-quarter profit of $73 million, or $1.01 a share, up from $9.4 million, or 13 cents a share, a year ago.

Because of the complementary nature of the banks, a merger of equals, or MOE, made sense, Dahl said.

In MOEs, both companies negotiate upfront terms of the deal such as leadership positions and headquarter location, which will be in Chemical's home of Detroit.

The company officers then sign new employment contracts. Dahl, 64, signed on for three years to lead the integration.

Wells Fargo Securities analyst Jared Shaw, who covers midcap banks, said earlier this month that conditions for bank mergers were improving.

"Bottom line — we look for the pace of M&A activity to accelerate during 2019, with most deals still comprised of smaller institutions," he said in a research note. "And while we haven't seen it yet, we would not be surprised to see mergers of equals (MOEs) activity in the midcap group."

Shaw at the time upgraded TCF from "market perform" to "outperform," a buy rating.

"Recent de-risking of the balance sheet [namely exiting the auto business] and a retail heavy granular deposit base should both help minimize EPS volatility," Shaw wrote about TCF.

Race, of Piper Jaffray, said while in the TCF-Chemical merger, Chemical is the official acquirer, that was likely due to accounting benefits.

"It's more of a case that one plus one equals three, in this example," he said. "If TCF had been acquired by a larger corporation, it might have been more that one plus one equals two."

Patrick Kennedy • 612-673-7926

Neal St. Anthony • 612-673-7144