Last year, TCF Financial (TCB), which owns the TCF National Bank, merged with Chemical Financial to form a new entity that is a top 10 bank in the midwestern U.S., with $47 billion in assets under management and $35 billion in deposits.
It's among a spate of bank mergers that occurred in 2019 and part of a trend that is expected to continue this year as a slowing economy and lower interest rates, among other issues, spur industry consolidation.
Whenever a company is involved in a major merger or acquisition, investors should examine what the combined entity looks like. What are the advantages and challenges, and is it a good investment?
Q4 earnings up
The merger closed in August of last year, with Chemical bringing about $20 billion in assets with some 200 Chemical Bank branches throughout Michigan, Indiana, and Ohio. The new TCF now has about 500 branches throughout the Midwest, including Illinois, Minnesota, Wisconsin, South Dakota, Ohio, Indiana, and Colorado.
Since the merger was finalized, the stock is up 5% to around $44 per share. The company exceeded analyst expectations in the fourth quarter with adjusted quarterly net income of $161 million -- up from $85 million. Adjusted earnings per share (EPS) was $1.04, up from the year-ago rate of $1.00. Of course, these numbers are compared with legacy TCF performance, so it's not a proper apples-to-apples comparison.
In the fourth quarter, the first as a combined entity, the company consolidated its mortgage lending platform and commercial loan origination system. Loans were up 2.9% in the quarter, with commercial loan balances increasing by $1 billion. Credit quality is strong, with net charge-offs of just 0.07%.
The company sold off the legacy TCF auto finance portfolio to reduce its risk, free up liquidity, and improve its return on capital. Also, it divested its branches in Arizona to focus on the Midwest market.
A good mix?
Looking ahead, TCF president and CEO Craig Dahl laid out the company's strategic priorities for 2020 on the fourth-quarter earnings call. One is to achieve cost reductions resulting from merger-related synergies and streamlining. The goal is to reduce expenses by about 5% in 2020 to around $320 million.
Another priority is to continue the process of integrating the systems, which began in the fourth quarter. This will not only reduce expenses but also create more robust offerings that incorporate the best from both companies. In addition, the company will focus on building on the growth it saw in the fourth quarter as it looks to take advantage of its complementary strengths. The additional scale will enable the bank to offer more products to a broader customer base while holding down expenses. All this will be done while maintaining the company's strong risk profile.
The combined company seems to be on solid footing, but as with most bank mergers, the real story won't come into view until after it has completed its integration plan. The scale should be advantageous for the bank over the long run in a consolidating sector, but investors might want to watch and wait to see how it executes.