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TCF Financial- A "New" Way to Bank on the Midwest

·2 mins read

TCF Financial Corp. (TCF) is a new entity that was created through the merger of Chemical Financial Corp. and Legacy TCF on August 1, 2019, recalls Douglas Gerlach, editor of Investor Advisory Service.

It was designed as a “merger of equals,” with executive ranks and board composition consisting of a melding of its two legacy companies. The combined entity is one of the top 50 banks in the United States. We are interested in TCF for two reasons.

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First, the company has made a strong case for significant cost savings over the first 18 months post-merger. Neither has historically been a low-cost provider so there is plenty of room to accomplish this goal. Much of the cost savings are expected to come from rationalizing corporate overhead and merging back-office functions.

The second reason is the strategic rationale for the merger: the two banks are highly complementary with little overlap. Legacy TCF was primarily a consumer bank with a footprint largely in Minnesota and Illinois; Chemical was almost exclusively in Michigan.

Legacy TCF was mainly a consumer bank while Chemical was a business bank. Legacy TCF also brought in national lending platforms to serve customers outside of the branch footprint.

The result of the merger is a well-diversified loan portfolio across all major loan types. Reflecting Chemical’s concentration, about half the deposit base is in Michigan, and 38% of the loan portfolio as well. The new TCF is the largest bank headquartered in the state, and it recently showed its commitment by acquiring naming rights for Michigan’s largest convention center.

The company set a goal of achieving $180 million in cost reductions during the first 18 months after the merger. This would equate to almost $1 of additional EPS. Cost savings should be increasingly felt over the course of 2020 with the full impact not evident in earnings until 2021.

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We believe our earnings estimates are somewhat conservative even though they are above Wall Street consensus. We think TCF Financial can grow its revenue by about 6% per year, comparable to the growth of the combined bank pre-merger.

At 14% growth from estimated 2019 results, EPS could reach $7.72 in five years. A repeat of the average high P/E ratio of 16.0 could lead to a potential high price of 123 and total return over 24% annually. The downside risk appears to be 24% to 35, the low price reached in the difficult market of Q4, 2018.

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