Originally Published: January 28, 2019 in Crain's Detroit Business By Chad Livengood

Chemical Bank to acquire TCF in $3.6 billion deal that creates Midwest powerhouse

Chemical Bank acquiring TCF Bank in $3.6 billion all-stock deal Combined banks will operate under TCF brand with 500 branches nationally New downtown Detroit headquarters "going to have to grow," bank chairman says Chemical Financial Corp.'s $3.6 billion all-stock deal acquisition of TCF Financial Corp. to operate under the TCF Bank brand name will make it the largest midcap bank in the Midwest — and may require more downtown Detroit office space.

"I think (the headquarters) is going to have to grow, because we're going to have more people in Detroit," said Chemical Bank chairman Gary Torgow, who will become executive chairman of the new holding company that will own both banks.

Chemical Bank officially moved its headquarters from Midland to downtown Detroit last year and began planning the construction of a 20-story, 250,000-square-foot headquarters building at Woodward Avenue and Elizabeth Street, across from Comerica Park. Chemical Bank has hired Neumann/Smith Architecture to design the new headquarters building on a vacant lot south of The Filmore Detroit theater and Little Caesars Pizza's new headquarters.

The merger with TCF may require more space for the bank's employees and less space for other tenants in the new tower, Torgow said.

"We are confident that this merger will enhance our ability to deliver stronger and more sustainable growth and greater value creation than either company could achieve alone," TCF Financial CEO and Chairman Craig Dahl said in a statement.

Under the deal, Dahl will remain the CEO and president of the combined banks and current Chemical Chief Financial Officer Dennis Klaeser will be the CFO. Tom Shafer, president and CEO of Chemical Bank, will retain the title of president in the new company and be the chief operating officer, according to a news release.

Torgow will serve as executive chairman of a combined holding company, and his business partner, David Provost, will be the combined banks' chairman.

The combined companies will be based in Detroit under the TCF Bank name, but will maintain a significant operating presence in Minneapolis as well as Midland and Chicago. TCF Bank is based in Wayzata, Minn., a western suburb of Minneapolis.

"TCF's been in Michigan for a long, long time. ... They've got a great national presence," Torgow said. "We thought it made a lot of economic sense to keep their name."

Merger talks between the two banks' executives began more than six months ago, Torgow said, but there was one non-negotiable stipulation from the Chemical Bank board: "There was never a doubt — we weren't doing anything if it wasn't headquartered in Detroit," said Torgow, a native Detroiter and founder of Sterling Group, a private equity and real estate investment firm.

Torgow said he briefed Gov. Gretchen Whitmer and Detroit Mayor Mike Duggan about the acquisition Sunday. Torgow served on Whitmer's transition committee and quarterbacked a deal for Chemical Bank and six other corporations to donate $5 million each to Duggan's Strategic Neighborhood Fund for neighborhood redevelopment projects.

Chemical Bank's Midland office will continue to have about 500 employees, Torgow said.

"I don't think any market is going to be hurt here — they're only going to be enhanced," he said.

The timetable

The acquisition is expected to close in the late third or early fourth quarter of this year, pending regulatory approvals.

After that, the 200 Chemical Bank branches will get changes in signs to the TCF Bank brand, Torgow said.

The banks said the deal will result in annual cost savings of about $180 million, with what they characterized as "minimal" reduction in bank branches. Most of the savings would be achieved through the elimination of redundancies in back-office staff and information systems technology, Chemical Bank spokesman Tom Wennerberg said.

"There's very, very little overlap anywhere in the country," Torgow told Crain's. "We're really anticipating very few changes in the branch network."

Chemical was already by far the largest bank headquartered in Detroit since announcing its move to the city from Midland last year, filling a void left by Comerica Inc. in 2007 when the bank with roots in Detroit predating the Civil War moved its corporate headquarters to Dallas.

The return of more banking sector jobs to Detroit is welcome news, Wayne County Executive Warren Evans said Monday.

"Given where Detroit and Wayne County were financially just a few years ago, this news says a lot about where we are today," Evans said in a statement. "This merger will allow the region to be a player in the financial industry in a way it hasn't in quite some time."

When Chemical Bank announced its move to Detroit in July, Duggan's administration announced it was making Chemical Bank the city's primary bank in partnership with Detroit-based First Independence Bank, one of the largest African-American-owned banks in the nation.

The deal's details

TCF shareholders will receive 0.5081 shares of Chemical common stock for each share of TCF common stock, equivalent to $21.58 per TCF share based on the closing price as of Jan. 25, valuing the deal at about $3.6 billion. Upon completion of the deal, TCF shareholders will own 54 percent of the company and Chemical shareholders will own 46 percent, the companies said.

"Through improved profitability and earnings predictability, we will be able to reinvest in the business to drive multiple growth engines, enhance our ability to compete in the next generation of banking and sustain consistent return on capital for shareholders," Dahl said. "We believe the combined company will also create new opportunities for our employees and enable us to attract and retain top talent."

The deal will add 17 percent to earnings per share for Chemical Financial shareholders and 31 percent for TCF shareholders, the banks said.

"The beauty, at least for them, when you do a merger like this, is it doesn't cost any capital," said Patrick O'Keefe, a Bloomfield Hills financial consultant.

In the Michigan market, the latest acquisition would move Chemical Bank from seventh place in deposits in Michigan to sixth, according to Crain's data. As of June, Chemical had $13.1 billion in Michigan deposits and TCF $3.2 billion.

TCF, however, adds significant operations outside Michigan to Chemical's portfolio for the first time. In its most recent annual report, TCF said it had 123 branches in Illinois, 88 in Minnesota, 50 in Michigan, 33 in Colorado, 17 in Wisconsin, seven in Arizona and two in South Dakota.

Nationally, TCF has about 1 million customers compared with Chemical's 300,000 customers in Michigan, Ohio and Indiana, making them ripe for acquisition by bigger national banks, O'Keefe said.

"Both of these banks were forced to make a move here one way or another or be acquired," said O'Keefe, a member of the board at First Independence Bank.

Growth by acquisition — and more to come?

The Chemical-TCF merger would add another step of dramatic growth for banks operated under Torgow and Provost, who started with a single branch and $10 million in assets just more than a decade ago. The TCF acquisition drew praise from Terry McEvoy, a managing director and bank analyst at Little Rock, Ark.-based Stephens Inc., who has been covering the Chemical Bank management team since soon after they founded First Michigan Bank as a single-branch community bank in Troy in 2007. Financed in part by Wilbur Ross, then a New York-based investor and now U.S. commerce secretary, First Michigan grew rapidly by buying the assets of distressed banks during and after the Great Recession. It changed its name to Talmer Bank and Trust in 2011 to help it grow its footprint beyond Michigan, then was bought by Midland-based Chemical Bank in 2016. In June 2017, former Talmer executives on the Chemical board engineered the retirement of David Ramaker as president and CEO of Chemical Financial Corp., a move praised by McEvoy at the time, saying that the Talmer execs were smart operators and he expected them to look to grow through further acquisitions. "This transaction is exactly what we expected," McEvoy told Crain's Monday. "The company had invested considerably in an operating platform that would let it run a bigger bank, and given management's track record, an acquisition was going to be a key part of that. The management team likes to buy banks and squeeze out synergies that create value for shareholders. The market is speaking. Chemical's stock has been up 5 to 7 percent today, which is far better than what you normally see when these deals are announced.

"From a personal standpoint, seeing this company grow so quickly has been amazing. The returns to shareholders and what they've created is very impressive." McEvoy said that TCF was particularly strategic for Chemical because of its broader lines of commercial lending. "TCF has national lending businesses in leasing, equipment financing and inventory financing. The combined company will have 23 percent of its loans in these specialized lines, and that is all TCF." He said it made sense for Chemical, even through it is the acquiring company, to take the TCF name because of TCF's much larger footprint, with operations in Denver, Phoenix, Milwaukee and Chicago. "Keeping the TCF name makes for less disruption." McEvoy said he expects Chemical/TCF to continue to grow through acquisitions once this deal is fully integrated. "I think by the end of 2020, another acquisition will be in the cards." It had been rumored in recent months that Chemical might be buying Troy-based Flagstar Bancorp Inc., but McEvoy hadn't put much stock in that. "That deal always comes up because of how close they are on the map, but it doesn't make a lot of sense," he said. John Donnelly of the Grosse Pointe investment-banking firm of Donnelly Penman & Partners, was the broker who helped raise the money that launched First Michigan in 2007. Coincidentally, he was at a national banking conference in Phoenix called the Acquire or Be Acquired conference, which is sponsored by Bank Director Magazine, when news of the TCF deal broke.

"This is the premier banking conference in the county. There are more than 1,000 bankers and investment bankers here, and everyone is buzzing about the deal. There may be someone who doesn't like (the Chemical-TCF deal), but I haven't heard them," said Donnelly. "The buzz out here is very positive. These are two franchises that don't collide much. It's a hand-in-glove situation. Gary Torgow is now emerging as a major power broker. It took a lot of planning to make this happen." Of the growth of a one-branch bank to where it will be when the deal closes, Donnelly said: "It's an amazing story. This will go down as one of the biggest success stories in the history of state banking." Chemical Bank's competitors see it as an ideal time for banks in the region. "My general reaction is that the combination of these two banks makes for a nice additional competitor in the marketplace," said Rick Hampson, Michigan market president for Citizens Bank. "It speaks to how well banking is going in the Midwest and how well the economy is going here in general. We welcome the competition. We've been growing our business organically. We have more than 100 branches in Southeast Michigan, and we've been growing our commercial lending business, as well. We feel good about what we are doing." Hampson's parent company, Providence, R.I.-based Citizens Financial Group Inc. (NYSE: CFG) has grown its footprint through three recent acquisitions. Last November it bought Clarfeld Financial Advisors LLC, a wealth-management firm in Tarrytown, N.Y.; last May, it bought Franklin American Mortgage of Franklin, Tenn; and in May 2017, it bought the Cleveland M&A advisory firm Western Reserve Partners. Also on Monday, Chemical reported net income of $73 million for its fourth quarter, which ended Dec. 31. That was up from $9.4 million in the same quarter a year earlier. For the full year, the bank's net income rose to $284 million from $149.5 million in 2017.

Shares of Chemical Financial (Nasdaq: CHFC) rose $2.28, or 5.3 percent, to $44.75 in afternoon trading. TCF's stock jumped $1.13, or 5.2 percent, $22.71. Chemical's shares are down about 25 percent from their 52-week high of $59.60, hit early last year. Editor’s note: This article has been updated to clarify that TCF Financial Corp. and Chemical Financial Corp. may need more office space within a planned 20-story downtown Detroit headquarters than Chemical Bank originally intended before the merger announcement.