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The proposed $3.6 billion merger between Chemical Financial Corp. and TCF Financial Corp. would create a Midwest bank based in Michigan that’s able to compete with the largest national banks and that’s likely to pursue further acquisitions.
Under the $3.6 billion all-stock deal, the Wayzata, Minn.-based TCF Financial (NYSE: TCF) would merge into the Detroit-based Chemical Financial (Nasdaq: CHFC). Once the deal closes, Chemical Bank locations would take on the TCF name.
The deal would create a bank with $45 billion in assets with 526 branch locations in nine states and $34 billion in deposits.
“$45 billion is large enough to compete with the very large financial institutions, but still kind of play your card as being your local bank in markets like Grand Rapids and mid-sized Midwest cities,” said analyst Terry McEvoy, managing director at Little Rock, Ark.-based Stephens Inc.
Bank executives billed the so-called “merger of equals” as accelerating growth and leveraging the strengths of both banks while generating about $180 million in cost savings. Executives expect the deal to close late in the third quarter or early in the fourth quarter of 2019, pending shareholder and regulatory approvals.
McEvoy expects the merged bank to pursue additional aquisitions once the deal closes and the two companies completely integrate.
“I would expect them to be opportunistic around future acquisitions,” he said.
The bank could pursue deals with similarly-sized banks, McEvoy said. Buying a $5 billion bank, for instance, “may not be enough to be strategically important for them,” although a smaller transaction could make sense in areas where the bank aims to fill in a market, he added.
TCF Financial has 314 bank offices in Michigan, Illinois, Minnesota, Colorado, Wisconsin, Arizona and South Dakota with $23.7 billion in total assets. The bank lacks a West Michigan office footprint, although its website lists a number of ATMs in the market.
Chemical Financial (Nasdaq: CHCF), which relocated its corporate headquarters last year from Midland to Detroit, has 212 banking offices, primarily in Michigan, plus northeast Ohio and northern Indiana, with $21.5 billion in assets. Chemical also is the largest bank headquartered in Michigan. Other banks operating in the state are larger, but are based elsewhere.
Patrick O’Keefe, a financial consultant and a principal at O’Keefe & Associates Consulting LLC in Bloomfield Hills, also expects to see future acquisitions by the merged bank. Another deal in the Midwest would create greater critical mass for the bank, he said.
“I can’t see why they would stop,” O’Keefe said. “I expect there will continue to be a push to grow. I would guess that they would continue to look for candidates that are at least their size and in the Midwest.”
Chemical Financial has grown substantially over the years through acquisitions, most notably via the $1.7 billion deal in August 2016 with the former Detroit-based Talmer Bancorp Inc. David Ramaker, Chemical Financial’s president and CEO at the time, abruptly departed the following June, leaving control to one-time Talmer executives who had built that bank through a series of acquisitions for the assets of distressed banks.
Through the TCF deal, Chemical Financial would extend further across the Midwest and with an asset base needed to deal with the regulatory costs banks face today, O’Keefe said. The merger with TCF is “really the next step from the Chemical Bank leadership to become a force in commercial lending,” he said.
“It’s going to be a formidable bank going forward,” O’Keefe said. “It’s really the next step for the Chemical Bank leadership to continue to acquire banks and be a real force in lending.”
According to FDIC data, Chemical Bank is one of the largest banks in the West Michigan market, ranking fourth in deposit market share in 2018 in the Grand Rapids metropolitan statistical area, where it had $1.94 billion in deposits through 32 offices as of June 30.
Statewide, Chemical Bank ranked seventh in deposit market share in the 2018 FDIC Summary of Deposits with $13.1 billion and 196 offices.
“By coming together, we are able to accelerate the growth of our business in a way neither company could have done alone in the near term,” said Craig Dahl, the chairman, president and CEO of TCF Financial.
Under the terms of the deal, TCF shareholders will receive 0.5081 shares of Chemical Financial stock for each of their shares.
The merger will result in per-share earnings accretion of 17 percent for Chemical shareholders and 31 percent for TCF shareholders, said Chemical Financial President and CEO David Provost, who will become chairman of the merged bank.
“We will remain committed to our communities and our customers and our focus on continually to deliver top performance for our shareholders,” Provost said.
The deal drew praise not just from analysts but also from Michigan Gov. Gretchen Whitmer, who called the merger “good news for our economy, our families, and the future of our state.”
In moving its headquarters to Detroit last year, Chemical Financial unveiled plans to develop a 20-story downtown building that will become the home of the merged bank.
“If we’re going to ensure Michigan’s success, we’ve got to attract more businesses to create jobs and boost the local economies in cities like Detroit,” Whitmer said in a statement. “This merger will create hundreds of jobs in the city, help local businesses attract the talent they need to thrive, and provide investment throughout the state.”
As Chemical Financial prepares to more than double in size through the merger and become a top-10 bank in the Midwest, a local competitor sees opportunity to pick up business and talent.
When asked about the deal during a conference call with analysts to discuss quarterly results, Independent Bank Corp. (Nasdaq: IBCP) President and CEO Brad Kessel said Chemical Bank was a “significant competitor.”
“And what we’ve experienced in prior significant mergers in our markets, going back to the last couple of years, it does create quite a bit of disruption and opportunities for the other banks in the marketplace, including ourselves, both from the customer acquisition side as well as potential talent acquisition side,” Kessel said. “So I think there is an opportunity, and time will tell to see how it all plays out.”
Independent Bank has 68 offices across the Lower Peninsula with $3.53 billion in total assets.
As far as his bank’s M&A strategy, Kessel said that Independent remains focused on driving organic growth but is open to an opportunity if it arises. The Grand Rapids-based Independent Bank last spring acquired TCSB Bancorp Inc. in Traverse City.
“I think that M&A side of things is somewhat opportunistic. You have to have a buyer and a seller and you have to have some alignment of pricing expectations and you have to have alignment of culture and strategy,” Kessel said. “So we never build our models and our forecasts assuming there is going to be that type of opportunity. Having said that, I think we would be open to looking at different things.”
Keefe, Bruyette & Woods Inc. serves as financial adviser to Chemical Financial. Nelson Mullins Riley & Scarborough LLP in Columbia, S.C., and Wachtell, Lipton, Rosen & Katz in New York City are serving as Chemical’s legal counsel.
Just prior to last week’s merger announcement, Chemical Financial reported higher net income of $73 million, or $1.01 per diluted share, for the fourth quarter, versus $70.4 million, or 98 cents per diluted share, in the same period a year earlier.