TCF TCF Financial Corporation

TCF Financial Corporation/Chemical Financial Corporation

RBC Capital Markets Financial Institutions Conference

March 13, 2019

10:40 AM EDT

    

Participants:

Craig R. Dahl - Chairman, President and Chief Executive Officer (TCF Financial Corporation)

Dennis Klaeser - Chief Financial Officer (Chemical Financial Corporation)

Brian W. Maass - Chief Financial Officer (TCF Financial Corporation)

Jon Arfstrom - RBC Capital Markets

Jon Arfstrom:

Thank you, everyone, for being here. Our next session is with TCF and Chemical Financial. This was obviously the much-talked-about merger of equals, and I know that - I've talked with a number of you about the combined companies and I know there's some questions. So, like all of these sessions, they can be very interactive. So, if you have questions specifically about how it came together or how it's all going to work, feel free to ask them.

Craig Dahl:	Sure. TCF is a $22 billion bank holding company operating primarily retail banking in markets of Minneapolis, Chicago, Detroit, and Denver. We also have a national lending platform which includes primarily equipment finance and inventory finance.

Dennis Klaeser:	And Chemical is approximately $20 billion bank, headquartered in Michigan. We actually just announced that we're moving the headquarters from Midland, Michigan, which was the legacy headquarters of Chemical Bank, which was also the headquarters of Dow Chemical, and we are moving our headquarters to downtown Detroit.

---

Jon Arfstrom:	Okay. Good. And then Craig, just 30,000-foot rationale before we dig into some of this.

Craig Dahl:

We've been on the road for four of the last five weeks, and that's typically the first question, is why now? And I think from my standpoint there's been a view by investors that our national lending platforms create additional risk because of their high level of profitability. I think that's a positive thing, but anyway. So, we're looking for some diversification. The Chemical balance sheet brings us CRE and C&I, and then a lot of their CRE, as Dennis commented on, is owner-occupied. So, we've got - we get really a lot of asset diversification by bringing the two banks together.

Jon Arfstrom:	Okay. Good. The merger of equals concept, it's very much I think a rifle shot. Once your transaction was announced and then the next big one was announced, we all rush to push companies together.

Craig Dahl:	Yes.

Jon Arfstrom:	But obviously, the human element is a big piece of it, other than the strategic part. Just talk a little bit about the history of the relationship and how this came together, maybe from both of you, from both sides.

Craig Dahl:	Sure. And it's unfortunate that Dave Provost couldn't be here today, because we've done literally all the meetings with the four of us, not the three of us.

Jon Arfstrom:	Dave will be the chairman of the combined company.

Craig Dahl:	He'll be the chairman of the bank.

Jon Arfstrom:	Of the bank, okay.

Craig Dahl:	And Gary Torgow will be the chairman of the board.

---

Jon Arfstrom:	Okay. You're knocking out all my questions.

Craig Dahl:	Sorry.

Jon Arfstrom:	It helps. I understand. I understand what you're saying. This all helps. But Dennis, from the Chemical point of view, anything else to add in terms of what you guys were looking for and why this really makes sense?

Dennis Klaeser:

Well, first of all, just from a CFO's perspective, just when you look at the financial metrics of the deal and at the market MOE deal with reasonable cost saves, it creates substantial EPS accretion for our shareholders. So, it really leaps our earnings power forward a couple of years, two or three years. And so, if you can deliver that type of EPS accretion to shareholders, you really should be looking at those types of transactions.

Jon Arfstrom:	Okay. And maybe a CFO type question - so, maybe Brian and Dennis - how many meetings have you been in since the transaction was announced?

Brian Maass:	It's except for one week, so, probably five out of the last six weeks we've been meeting with investors. So, there's probably been at least 150 investors that we've met with.

Jon Arfstrom:	Okay. And if you had to estimate what kind of pushback you get on the financials versus questions about strategic, are people more interested in strategic or the numbers?

Brian Maass:

They're far more interested in the strategic. People will often say, "All right. The numbers look good, but..." And they want to ask the questions about how easy is the system transition, what's the culture going to be like in the company - are kind of common questions that people ask. But no, the numbers, as Dennis alluded to, the numbers are good. Again, 13% cost rationalization provides what we think is top-performing metrics from a company perspective.

Jon Arfstrom:	Okay. Good. In terms of the rationale for the transaction structure, maybe a question for Dennis or Craig, in terms of Chemical is the legal acquirer, Chemical assets mark, the majority ownership of TCF. Just talk a little bit about how some of those decisions came into play.

Dennis Klaeser:	I'll touch on that quickly. It does get into some obscure accounting issues. But in terms of Chemical being the legal acquirer, a variety of different reasons. I would say the primary reason is because our stock was trading at a little bit of a richer price-to-tangible-book-value valuation. But in reality, it was somewhat arbitrary.

---

Jon Arfstrom:	Yes, that makes sense. I'd seen other companies that have to lug goodwill. So, that makes sense. Okay.

Craig Dahl:

The steps of the applications following through on that, and then simultaneously kickstarting that, the integration work. We've got - basically, we're going to rely heavily on the experience that the Chemical team has and gone through this multiple times. In addition, TCF's done quite a few, I'd say, national lending platform acquisitions both in inventory finance and equipment finance. And so, there's a lot of system integration work that we've done already from an experience standpoint. So, that's number one. We have good experience.

Jon Arfstrom:	Okay. And the people piece of it. You talked about telling people to get back to work, but obviously those are your people and you get to meet the Chemical people. And talk a little bit about that.

Craig Dahl:	Well, today, everything that I say that's recorded has to be shown to both teams, okay? So, we make it a rule to record everything so that whatever I'm telling the TCF team, the Chemical team is hearing, as well.

Jon Arfstrom:

Okay. Good. I want to get into the names and headquarters and stuff, but when we talked about integration and you referenced leaning a bit on the Chemical experience, Dennis, lessons learned? Talmer Chemical? Things that you think are absolutely critical to get right? I remember the day it was announced and I remember the criticism that you took. But it didn't take long for people to recognize the value. So, maybe talk about what you learned through that.

Dennis Klaeser:

Well, yes, it's a learning process, and each time you try to do it a little bit better. And one - in comparing to that experience, it took a little bit longer with Chemical and Talmer with the integration planning process to gain sort of traction, to assemble the team to begin that work process. Here, we've had a number of team members who actually been interacting before the deal got announced, because the due diligence was a fairly long, extended process.

---

Craig Dahl:	"The best of both banks," that phrase is in every communication that we have and talk about because it's not an either/or. It's really, again - and I can't stress enough the adjacency of our businesses, not the overlap of our businesses, and that's a key advantage.

Jon Arfstrom:	Yes, I agree. I want to talk about that in a second. I just - one more thing on the maybe merger structure. But we always talk about the name, the headquarters, and the management. And I think you've sorted out the management, but kind of walk us through some of the big decisions in terms of how to make sure this was a true merger of equals.

Craig Dahl:	Well, those were the top - and then I would add the board to that, okay? So, those were the top discussions that David and I had really over the summer and came pretty quickly.

Jon Arfstrom:	Right. Okay. Before we kind of get into some of the synergies and cost saves, any questions? Okay.

Craig Dahl:

Well, a quick number one is I was the national sales manager of Norwest Equipment Finance, and a majority of our business - not majority, but a heavy amount of our business each year came from bank customers in the equipment finance business. At TCF, we did not have a C&I portfolio. We've never - we have no business that's coming from bank customers. So, Chemical, with their in-state footprint, gives me an opportunity to add three or four sales reps to the equipment finance business and move right into that market and being additive to the commercial banking product set. We're not

---

Jon Arfstrom:	Okay. Good. Dennis, anything to add?

Dennis Klaeser:	I think one of the keys is leveraging our C&I lending capabilities. So, we've built that infrastructure out, the Treasury management services. And so, that platform now is very leverageable into the TCF markets. So, I think that's the really low-hanging fruit of revenue synergy.

Jon Arfstrom:	Okay. Good. And Craig alluded to this earlier, but maybe Brian and Dennis, there isn't a lot of overlap in terms of, call it, the producers; a little bit of branch overlap, but not a lot. How do you - how did you arrive at the cost saving assumptions? And then maybe what you think are the toughest ones to get done? And maybe is there some opportunity to do a little better?

Brian Maass:	I'll take kind of first stab at that question. So, we do have some branch overlap, and it's primarily in the southeast Michigan area. But there's different things that we - we both are in the mortgage business, we're both in the commercial business. There's a clear opportunity to have a combined, call it, middle office and back office function as it relates to those two businesses.

---

Jon Arfstrom:

Okay. Good. Maybe an odd question for this, but I think it's important. You guys are very active with your buyback prior to this. And I kind of look through the numbers and I see revenue synergies and complementary businesses that probably means better revenue growth. Expenses are down-ish. Credit seems okay. You're going to be accumulating a lot of capital. How do you think about that once the transaction closes?

Brian Maass:	So, from a - you're correct, which is not necessarily a problem. That's an opportunity.

Jon Arfstrom:	It is an opportunity.

Brian Maass:

But we see ourselves - right? - this 19% return on capital we'll be generating is a lot. Our first priority is going to be leveraging the organic growth of the company. Again, we see the strategic opportunity of putting these two companies together is we think we can accelerate our loan growth. We think we're going to be able to accelerate our deposit growth. So, capital will get deployed kind of from an organic means perspective.

Jon Arfstrom:	Okay. We've got a couple of minutes left if anybody has anything?

Craig Dahl:	I've got one.

Jon Arfstrom:	I was going to ask. I was going to say, "We have two and a half minutes. Is there a Craig Dahl manifesto or any closing points you want to make?"

Craig Dahl:

Well, there is two things. So, the first one is really when you look at the consolidated financial statements of the new TCF, we're going to have close to $2.5 billion of revenue, at a $50 billion level, and that's a huge advantage for us. And so, the ability to optimize the expense of how we deliver that, it's not necessarily expense embedded in the delivery of those products today; it's really more how the bank has been organized for a long time. And so, I'm excited. I'd rather - I've always wanted to be the guy that had a lot of revenue and I can work on the expense line, versus how am I going to double the revenue inside this business in this competitive market. And again, we don't see that going away.

---

Jon Arfstrom:	Okay. Great. We'll wrap it up there. But thanks, guys, for being here. Best of luck with everything as you move forward.

Craig Dahl:	Thank you.

Dennis Klaeser:	Thank you.

Brian Maass:	Thank you.

•	the failure to obtain necessary regulatory approvals when expected or at all (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the transaction);

•	the failure of either Chemical or TCF to obtain shareholder approval, or to satisfy any of the other closing conditions to the transaction on a timely basis or at all;

•	if the combined company is unable to retain its employees, particularly key management, the combined company could face disruptions with respect to integration, operations and customer retention.

•	the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the merger agreement;

•

the possibility that the anticipated benefits of the transaction, including anticipated cost savings and strategic gains, are not realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy, competitive factors in the areas where Chemical and TCF do business, or as a result of other unexpected factors or events;

•	the impact of purchase accounting with respect to the transaction, or any change in the assumptions used regarding the assets purchased and liabilities assumed to determine their fair value;

•	diversion of management’s attention from ongoing business operations and opportunities;

•	potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the transaction;

•	the ability of either company to effectuate share repurchases and the prices at which such repurchases may be effectuated;

•	the outcome of any legal proceedings that may be instituted against Chemical or TCF;

•	the integration of the businesses and operations of Chemical and TCF, which may take longer than anticipated or be more costly than anticipated or have unanticipated adverse results relating to Chemical’s or TCF’s existing businesses;

•	business disruptions following the merger; and

•

other factors that may affect future results of Chemical and TCF including changes in asset quality and credit risk; the inability to sustain revenue and earnings growth; changes in interest rates and capital markets; inflation; customer borrowing, repayment, investment and deposit practices; the impact, extent and timing of technological changes; capital management activities; and other actions of the Federal Reserve Board and legislative and regulatory actions and reforms.

---