Chemical-TCF: Why this deal, and why now?

Chemical Financial in Detroit and TCF Financial Wayzata, Minn., realized how much they needed each other.

After months of discussions, the companies agreed to an all-stock merger that would create a new regional bank in the Midwest and give each bank the scale needed to remain competitive, executives said during a Monday conference call to discuss the $3.6 billion deal.

The merger is the largest bank deal since last May and one of the biggest announced in the last five years. It remains to be seen if other banks will follow in their footsteps.

“It could be the biggest deal of the year — you never know,” said John Rodis, an analyst with FIG Partners.

Here are several takeaways from the merger, based on interviews and the companies' conference call.

The structure was critical
The companies' leaders first met “a number of years ago” before Craig Dahl took the helm at TCF.

“We hit it off very nicely on a professional and personal basis,” David Provost, Chemical's CEO, said in an interview. “We kept in contact over the last few years and started seriously exploring this merger sometime in the last several months.”

By and large, the executive roles are evenly divided, along with the board seats. Dahl will remain president and CEO, while Gary Torgow, Chemical's chairman, will have the same title at TCF. Provost will serve as the company's vice chairman and the bank's chairman.

The company will be known as TCF but will be based in Detroit, where Chemical recently moved its headquarters. There is a $134 million termination fee.

Chemical is the legal acquirer even though TCF’s shareholders will own a majority of the company’s stock.

How did the companies determine the buyer?

It was mostly a mathematical decision, executives said during Monday’s call. Chemical’s stock is trading at a slightly higher premium, which shortens the earnback period for the deal’s projected 7.9% dilution to tangible book value to less than three years.

TBV dilution is very important to investors, who tend to punish deals with lengthy earnback periods. Lower dilution should put less pressure on the company to deliver on a deal that only promises 13% cost savings.

“The dynamics work well because it’s a no-premium deal,” Siefers said. “By not paying a premium, you get a lot more flexibility and all the benefits of the deal can shine through.”

Provost got a much different reaction in 2016 when he agreed to sell Talmer to Chemical in a privately negotiated transaction with a premium far below what other similar-sized sellers had received.

Geography and scale matter
The merger will create new opportunities for a company that will suddenly become a banking giant across the Midwest.

That says a lot for TCF, which was already among the biggest banks in Minnesota, and Chemical, which became Michigan’s largest bank when it bought Talmer Bancorp for $1.1 billion in August 2016.

The new TCF would have 526 branches across nine states: Arizona, Colorado, Illinois, Indiana, Michigan, Minnesota, Ohio, South Dakota and Wisconsin. Executives don’t expect to close many branches, and there are no plans to cut customer-facing employees.

Executives said they want to bring the best of each company to a wider territory.

The merger "will increase our scale, accelerate our growth strategies and expand our product offerings across a wider customer base, generating significant value," Dahl said during Monday's conference call.

"With minimal overlap, we expect to experience little disruption to our go-to market strategies and our customer relationships as we combine our two platforms," Dahl added. "By coming together, we are able to accelerate the growth of our business in way neither company could have done alone in the near term."

A win for Detroit
The merger is a win for Detroit, which has been slowly trying to come back and reinvent itself for years. It lost Comerica in 2007 when the company moved its headquarters to Dallas.

Provost has long been an advocate for the city.

While Talmer’s CEO, Provost in 2014 formed a partnership with the city to offer $1 million to people looking to move into the Marygrove College neighborhood.

Chemical has since developed stronger ties with Detroit, culminating with the bank’s selection last summer to be the primary manager for up to $500 million in city deposits. Chemical also agreed to move its headquarters, and 500 employees, to downtown Detroit, where it will occupy a new 20-story building that will soon be under construction.

Chemical is also a participant in the Detroit Home Mortgage program, an effort formed in 2016 to assist people seeking mortgages.

The deal “enhances our profile in the city,” Dahl said. “Detroit has not had a lot of exciting news for banks over the last 20 years.”

Why did the companies pick Detroit over Minneapolis?

“In any merger like this, you have to pick one” headquarters, Dahl said in response to an analyst’s question. “We have a real commitment to Detroit from a business perspective, so that really had some impact, but we're going to have a big presence in Minneapolis as well as our presence in Chicago and Midland. … It seemed like a natural fit.”

A diversified bank
Executives touted the transaction’s ability to diversify business lines and the balance sheet at the new company. It will also helped to reduce concentrations in certain areas.

The merger brings more balance, said Scott Siefers, an analyst with Sandler O’Neill. Chemical, while good at making loans, has struggled to gather deposits. TCF has a more stable funding base tied to sticky deposits, he said.

The new TCF will have a 97% loan-to-deposit ratio.

About 40% of total loans will involve commercial and business banking. Another 40% will be tied to residential and consumer banking. A fifth of total loans will consist of leasing, equipment and inventory finance.

The merger should also result in a reduced emphasis on consumer fees at TCF.

The company last summer agreed to pay a $5 million fine to two regulators, along with $25 million in restitution, after its reliance on overdraft fees was questioned.

Provost was asked during the conference call about TCF’s overdraft policies.

“We've spent a lot of time … with our due diligence work, and we felt very comfortable that we have a great program,” Provost responded. “We'll take a look at how things go forward, but right now we feel very, very comfortable.”

The merger will advance efforts at both banks to tap the brakes in auto lending.

TCF decided in late 2017 to exit auto lending. Chemical has $700 million in auto loans on its books, though most are in-market loans made through dealers in Michigan and northern Ohio.

The role of reg relief
The deal also shows how regulatory relief may alter the banking landscape.

While this is the fifth-biggest deal announced in the last five years, it is the only one on that list to feature a pair of $20 billion-asset banks.

This type of deal would have been very challenging if the threshold for systemically important financial institutions had not been raised from $50 billion to $250 billion.

TCF and Chemical are creating an institution that would have been staring down the old threshold immediately after closing. Executives would have needed to prepare for stricter capital and liquidity requirements rather than making the most of the combination.

“Certainly, it was more doable under the changes in the regulatory environment,” Rodis said. “That being said, I still think all things equal, if the deal works, if the culture is right, accretion is there and so forth — I still think it could have happened.”

Chemical and Talmer have been acutely aware of regulatory thresholds.

Chemical used the purchase of Talmer to jump over the $10 billion-asset mark, where it became subject to caps on interchange fees.

Laura Alix and Paul Davis contributed to this report.