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Section 1: 8-K (8-K SUB DEBT OFFERING)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 25, 2019
Chemical Financial Corporation
(Exact Name of Registrant as
Specified in its Charter)
 
Michigan
(State or Other Jurisdiction
of Incorporation)
000-08185
(Commission
File Number)
38-2022454
(IRS Employer
Identification No.)
 

333 W. Fort Street, Suite 1800
Detroit, Michigan
(Address of Principal Executive Offices)
 
48226
(Zip Code)
 
Registrant's telephone number, including area code:  (800) 867-9757

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
CHFC
The NASDAQ Stock Market
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company    o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
 
 
 
 





Item 7.01
Regulation FD Disclosure.

On January 28, 2019, Chemical Financial Corporation (“Chemical”) announced its proposed merger-of-equals transaction with TCF Financial Corporation (“TCF”). The merger is expected to close in the third or early fourth quarter of 2019, subject to satisfaction of customary closing conditions, including receipt of regulatory approvals.

In connection with a proposed subordinated notes offering by TCF’s wholly-owned subsidiary bank, TCF National Bank, TCF National Bank will provide certain information to prospective investors, including unaudited pro forma condensed combined financial statements of Chemical and TCF for the year ended December 31, 2018, for the three months ended March 31, 2019 and as of March 31, 2019 and the related notes thereto. Chemical is furnishing herewith unaudited pro forma condensed combined financial statements of Chemical and TCF for the year ended December 31, 2018, for the three months ended March 31, 2019 and as of March 31, 2019 and the related notes thereto. The pro forma financial statements give pro forma effect to the merger and are derived from the historical financial statements of Chemical and TCF. The pro forma financial statements are preliminary and reflect a number of assumptions, including, among others, that the merger will be consummated.

The information in this Current Report on Form 8-K, including the exhibit hereto, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section or Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended. The information contained herein and in the accompanying exhibit shall not be incorporated by reference into any filing with the Securities and Exchange Commission (“SEC”) made by Chemical, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Important Information for Investors and Shareholders

This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful.

Cautionary Note Regarding Forward-Looking Statements

Statements included in this report which are not historical in nature are intended to be, and hereby are identified as, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, but are not limited to, statements regarding the outlook and expectations of Chemical and TCF with respect to their planned merger, the strategic benefits and financial benefits of the merger, including the expected impact of the transaction on the combined company’s future financial performance (including anticipated accretion to earnings per share, the tangible book value earn-back period and other operating and return metrics), forecasts of market trends, and the timing of the closing of the transaction. Chemical intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 21E of the Securities Exchange Act of 1934 and the Private Securities Reform Act of 1995. In some cases, forward-looking statements can be identified by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “approximately,” “estimate,” “predict,” “project,” “potential,” “poised,” “continue,” “ongoing,” “outlook,” “guidance” and variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence, which could cause actual results to differ materially from anticipated results. Such risks, uncertainties and assumptions, include, among others, the following:

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 satisfy any of the other closing conditions to the transaction on a timely basis or at all;
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.

Additional factors that could cause results to differ materially from those described above can be found in the risk factors described in Item 1A of each of Chemical’s and TCF’s Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2018 and in the Joint Proxy Statement/Prospectus regarding the proposed merger that was filed with the SEC on May 3, 2019 pursuant to Rule 424(b)(3) by Chemical and on Schedule 14A by TCF. Annualized, pro forma, projected and estimated numbers are used for illustrative purpose only, are not forecasts and may not reflect actual results. Chemical and TCF disclaim any obligation to update or revise any forward-looking statements contained in this report, which speak only as of the date hereof, whether as a result of new information, future events or otherwise, except as required by law.

Item 9.01
Financial Statements and Exhibits.

(d) Exhibits:

Exhibit No.
 
Exhibit
99.1
 







SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated:
June 25, 2019
CHEMICAL FINANCIAL CORPORATION
(Registrant)
 
 
 
 
 
 
 
 
/s/ Dennis L. Klaeser
 
 
Dennis L. Klaeser
 
 
Executive Vice President and Chief Financial Officer



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Section 2: EX-99.1 (EXHIBIT 99.1 PRO FORMA FINANCIALS)

Exhibit




EXHIBIT 99.1

UNAUDITED PRO FORMA

COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION

The following tables show the condensed consolidated financial information for each of Chemical Financial Corporation (“Chemical”) and TCF Financial Corporation (“TCF”), as well as unaudited pro forma combined condensed financial information for Chemical and TCF reflecting the proposed merger contemplated in the Agreement and Plan of Merger by and between Chemical and TCF, dated as of January 27, 2019 and pro forma adjustments described in the accompanying notes. The unaudited pro forma combined condensed financial information should be read in conjunction with Chemical’s audited financial statements as of and for the three year period ended December 31, 2018, which is included in Chemical’s Annual Report on Form 10-K for the year ended December 31, 2018, and unaudited consolidated financial statements as of and for the three months ended March 31, 2019, which is included in Chemical’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, and TCF’s audited financial statements as of and for the three year period ended December 31, 2018, which is included in TCF’s Annual Report on 10-K for the year ended December 31, 2018, and unaudited consolidated financial statements as of and for the three months ended March 31, 2018, which is included in TCF’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.

The unaudited pro forma combined condensed financial information assumes that the merger is accounted for as a reverse acquisition using the acquisition method of accounting, pursuant to FASB Topic 805-10, Business Combinations. Following the merger, existing shareholders of TCF will control approximately 54% of the pro forma voting interests in the combined company (based on common shares outstanding as of March 31, 2019), which is the primary reason that TCF is the accounting acquirer in the merger. Under the acquisition method of accounting, the assets and liabilities of Chemical, as the accounting acquiree, will be recorded at their respective fair values as of the date the merger is completed.

The unaudited pro forma combined condensed statement of financial condition gives effect to the merger as if the transaction had occurred on March 31, 2019. The unaudited pro forma combined condensed income statement for the quarter ended March 31, 2019 gives effect to the merger as if the transaction had become effective on January 1, 2019 and the unaudited pro forma combined condensed income statement for the year ended December 31, 2018 gives effect to the merger as if the transaction had become effective on January 1, 2018. For purposes of the unaudited pro forma combined condensed financial information, the purchase consideration has been allocated to Chemical’s assets and liabilities based upon management’s preliminary estimate of their fair values as of March 31, 2019.

The unaudited pro forma combined condensed financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined at the beginning of the period presented, nor the impact of possible business model changes. The unaudited pro forma combined condensed financial information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the realization of potential cost savings, revenue synergies, changes in market conditions and asset dispositions, among other factors, and, accordingly, does not attempt to predict or suggest future results. Chemical and TCF expect to incur costs associated with the merger and the integration of the businesses and operations of Chemical and TCF. However, the unaudited pro forma combined condensed financial information does not include these estimated merger and integration costs (other than estimated contractually obligated after-tax merger costs). See Note 5 accompanying the unaudited pro forma combined condensed financial information for additional information regarding estimated merger and integration costs.

In addition, as explained in more detail in the accompanying notes, the preliminary allocation of the pro forma purchase price reflected in the unaudited pro forma combined condensed financial information is subject to adjustment and may vary significantly from the actual purchase price allocation that will be recorded upon completion of the merger.









Chemical Financial Corporation and TCF Financial Corporation
Unaudited Pro Forma Combined Condensed Consolidated Statements of Financial Condition
As of March 31, 2019
 
Chemical as Reported
 
TCF as Reported
 
Pro Forma Adjustments
 
Pro Forma Chemical and TCF
 
Capital Actions
 
Pro Forma Chemical and TCF
 
(Amounts in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
517,576

 
$
463,822

 
$
(45,415
)
 (1)  
$
935,983

 
$
71,025

 (16)(17)  
$
1,007,008

Investment securities
3,923,573

 
3,197,010

 
5,096

 (2)  
7,125,679

 

 
7,125,679

Loans held-for-sale
23,535

 
64,468

 

 
88,003

 

 
88,003

Total loans and leases
15,324,048

 
19,383,675

 
(287,260
)
 (3)  
34,420,463

 

 
34,420,463

Allowance for loan and lease losses
(110,284
)
 
(147,972
)
 
110,284

 (4)  
(147,972
)
 

 
(147,972
)
Net loans and leases
15,213,764

 
19,235,703

 
(176,976
)
 
34,272,491

 

 
34,272,491

Premises and equipment, net
122,452

 
429,711

 
(6,600
)
 (5)  
545,563

 

 
545,563

Goodwill
1,134,568

 
154,757

 
(72,271
)
 (6)  
1,217,054

 

 
1,217,054

Other intangible assets
27,195

 
19,684

 
141,069

 (7)  
187,948

 

 
187,948

Interest receivable and other assets
837,650

 
853,560

 
3,558

 (8)  
1,694,768

 
975

 (17)  
1,695,743

Total Assets
$
21,800,313

 
$
24,418,715

 
$
(151,539
)
 
$
46,067,489

 
$
72,000

 
$
46,139,489

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
 
 
 
 
 
 
Deposits
$
16,061,999

 
$
19,024,111

 
$
(19,351
)
 (9)  
$
35,066,759

 
$

 
$
35,066,759

Collateralized customer deposits
413,199

 

 

 
413,199

 

 
413,199

Interest payable and other liabilities
261,571

 
981,341

 

 
1,242,912

 

 
1,242,912

Short-term borrowings
1,740,000

 
355,992

 

 
2,095,992

 

 
2,095,992

Other borrowings
426,035

 
1,411,426

 
(1,119
)
(10)  
1,836,342

 
150,000

 (17)  
1,986,342

Total liabilities
18,902,804

 
21,772,870

 
(20,470
)
 
40,655,204

 
150,000

 
40,805,204

Shareholders' equity:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock

 
169,302

 

(11)  
169,302

 

 
169,302

Common stock
71,551

 
1,733

 
81,571

(12)  
154,855

 
(1,889
)
 (16)  
152,966

Additional paid-in capital
2,209,860

 
875,797

 
202,252

(13)  
3,287,909

 
(76,111
)
 (16)  
3,211,798

Retained earnings
654,605

 
1,810,701

 
(700,020
)
(14)  
1,765,286

 

 
1,765,286

Accumulated other comprehensive income (loss)
(38,507
)
 
5,481

 
38,507

(15)  
5,481

 

 
5,481

Treasury stock and other

 
(246,621
)
 
246,621

(13)  

 

 

Noncontrolling interests in subsidiaries

 
29,452

 

 
29,452

 

 
29,452

Total shareholders' equity
2,897,509

 
2,645,845

 
(131,069
)
 
5,412,285

 
(78,000
)
 
5,334,285

Total Liabilities and Shareholders' Equity
$
21,800,313

 
$
24,418,715

 
$
(151,539
)
 
$
46,067,489

 
$
72,000

 
$
46,139,489

 
  
 
  
  
  
  
 
 
  
 
  
Book value per common share
$
40.50

 
$
14.93

 
 
 
$
33.67

 
 
 
$
33.57

Tangible book value per common share
$
24.39

 
$
13.86

 
 
 
$
24.59

 
 
 
$
24.39

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to unaudited pro forma combined condensed consolidated financial statements.
 
 
 
 
 
 
 
 
 
 
 
 
 
 











Chemical Financial Corporation and TCF Financial Corporation
Unaudited Pro Forma Combined Condensed Consolidated Statements of Income
For the Quarter Ended March 31, 2019
 
Chemical as Reported
 
TCF as Reported
 
Pro Forma Adjustments
 
Pro Forma Chemical and TCF
 
Capital Actions
 
Pro Forma Chemical and TCF
 
(Amounts in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
213,981

 
$
303,245

 
$
9,335

(18) 
$
526,561

 
$

 
$
526,561

Interest expense
51,157

 
52,338

 
5,778

(19) 
109,273

 
1,875

(23) 
111,148

Net interest income
162,824

 
250,907

 
3,557

 
417,288

 
(1,875
)
 
415,413

Provision for credit losses
2,059

 
10,122

 

 
12,181

 

 
12,181

Noninterest income
24,857

 
107,026

 

 
131,883

 

 
131,883

Operating expenses
109,015

 
253,075

 
(8,499
)
(20) 
353,591

 
25

(23) 
353,616

Net income before income tax expenses
76,607

 
94,736

 
12,056

 
183,399

 
(1,900
)
 
181,499

Income tax expense
13,665

 
21,287

 
2,532

(21) 
37,484

 
(399
)
(21) 
37,085

Net income after income tax expense
62,942

 
73,449

 
9,524

 
145,915

 
(1,501
)
 
144,414

Income attributable to noncontrolling interest

 
2,955

 

 
2,955

 

 
2,955

Net income attributable to Chemical/TCF
62,942

 
70,494

 
9,524

 
142,960

 
(1,501
)
 
141,459

Preferred stock dividends

 
2,493

 

 
2,493

 

 
2,493

Net income attributable to common shareholders
$
62,942

 
$
68,001

 
$
9,524

 
$
140,467

 
$
(1,501
)
 
$
138,966

 
 
 
 
 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.88

 
$
0.42

 
 
 
$
0.91

 
 
 
$
0.91

Diluted
$
0.87

 
$
0.42

 
 
 
$
0.90

 
 
 
$
0.90

Dividends per share
$
0.34

 
$
0.15

 
 
 
$
0.34

 
 
 
$
0.34

 
 
 
 
 
 
 
 
 
 
 
 
Average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
71,474

 
161,865

 
(78,561
)
(22) 
154,778

 
(1,889
)
(24) 
152,889

Diluted
72,141

 
162,428

 
(78,838
)
(22) 
155,731

 
(1,889
)
(24) 
153,842

 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to unaudited pro forma combined condensed consolidated financial statements.
 
 









Chemical Financial Corporation and TCF Financial Corporation
Unaudited Pro Forma Condensed Combined Statement of Income
Year Ended December 31, 2018
 
Chemical Historical
 
TCF Historical
 
Pro Forma Adjustments
 
Pro Forma Chemical and TCF
 
Capital Actions
 
Pro Forma Chemical and TCF
 
(Amounts in thousands, except per share data)
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
$
775,996

 
$
1,142,264

 
$
34,536

(18) 
$
1,952,796

 
$

 
$
1,952,796

Interest expense
143,663

 
150,257

 
23,111

(19) 
317,031

 
7,500

(23) 
324,531

Net interest income
632,333

 
992,007

 
11,425

 
1,635,765

 
(7,500
)
 
1,628,265

Provision for credit losses
30,750

 
46,768

 

 
77,518

 

 
77,518

Noninterest income
148,536

 
470,885

 

 
619,421

 

 
619,421

Operating expenses
424,198

 
1,014,400

 
25,267

(20) 
1,463,865

 
98

(23) 
1,463,963

Net income before income tax expenses
325,921

 
401,724

 
(13,842
)
 
713,803

 
(7,598
)
 
706,205

Income tax expense
41,901

 
86,096

 
(2,907
)
(21) 
125,090

 
(1,596
)
(21) 
123,494

Net income after income tax expense
284,020

 
315,628

 
(10,935
)
 
588,713

 
(6,002
)
 
582,711

Income attributable to noncontrolling interest

 
11,270

 

 
11,270

 

 
11,270

Net income attributable to Chemical/TCF
284,020

 
304,358

 
(10,935
)
 
577,443

 
(6,002
)
 
571,441

Preferred stock dividends

 
11,588

 

 
11,588

 

 
11,588

Impact of preferred stock redemption

 
3,481

 

 
3,481

 

 
3,481

Net income attributable to common shareholders
$
284,020

 
$
289,289

 
$
(10,935
)
 
$
562,374

 
$
(6,002
)
 
$
556,372

 
 
 
 
 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
 
 
 
 
Basic
$
3.98

 
$
1.75

 
 
 
$
3.64

 
 
 
$
3.64

Diluted
$
3.94

 
$
1.74

 
 
 
$
3.61

 
 
 
$
3.61

 
 
 
 
 
 
 
 
 
 
 
 
Dividends per share
$
1.24

 
$
0.60

 
 
 
$
1.24

 
 
 
$
1.24

 
 
 
 
 
 
 
 
 
 
 
 
Average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
71,338

 
165,585

 
(82,296
)
(22) 
154,627

 
(1,783
)
(24) 
152,844

Diluted
72,025

 
166,562

 
(82,777
)
(22) 
155,810

 
(1,783
)
(24) 
154,027

 
See accompanying notes to unaudited pro forma combined condensed financial statements.
 
Note 1-Basis of Presentation

The unaudited pro forma combined condensed financial information and explanatory notes have been prepared to illustrate the effects of the merger involving Chemical and TCF under the acquisition method of accounting with Chemical treated as the legal acquirer and TCF treated as the accounting acquirer. The unaudited pro forma combined condensed financial information is presented for illustrative purposes only and does not necessarily indicate the financial results of the combined companies had the companies actually been combined at the beginning of the period presented, nor does it necessarily indicate the results of operations in future periods or the future financial position of the combined entities. Under the acquisition method of accounting, the assets and liabilities of Chemical (as the accounting acquiree), as of the effective date of the merger, will be recorded at their respective fair values, and the excess of the purchase price consideration over the fair value of Chemical’s net assets will be allocated to goodwill. See Note 2 to the unaudited pro forma combined condensed financial information for detailed calculations of the estimated purchase price.

The merger, which is currently expected to be completed in the third or early fourth quarter of 2019, provides for TCF common shareholders to receive 0.5081 shares of Chemical common stock for each share of TCF common stock they hold immediately prior to the merger. Based on the closing trading price of shares of Chemical common stock on the NASDAQ Stock Market on June 17, 2019, the value of the merger consideration of TCF common stock would be $20.12 per share. Based on the closing trading price of shares of Chemical common stock on the NASDAQ Stock Market on January 25, 2019, the last trading day before the public announcement of the merger, the value of the merger consideration of TCF common stock would be $21.58 per share.








The pro forma purchase price allocation reflected in the unaudited pro forma combined condensed financial information is subject to adjustment and may vary from the actual purchase price allocation that will be recorded at the time the merger is completed. Adjustments may include, but not be limited to, changes in (i) Chemical’s statement of financial condition and operating results through the effective time of the merger; (ii) the aggregate value of the accounting purchase price determination if the price of shares of TCF common stock varies from the assumed $19.90 per share, which represents the closing share price of TCF common stock on June 17, 2019; (iii) total merger-related expenses from amounts included herein; and (iv) the underlying values of assets and liabilities if market conditions differ from current assumptions.

The accounting policies of both Chemical and TCF are in the process of being reviewed in detail. Upon completion of such review, conforming adjustments or financial statement reclassification may be made.

Note 2-Purchase Price Determination

The unaudited pro forma combined condensed statement of financial condition has been adjusted to reflect the preliminary calculation of the estimated purchase price to identifiable net assets acquired. Since the merger will be accounted for as a reverse acquisition, the estimated purchase price was determined in accordance with FASB ASC 805-40-30-2, which explains that the purchase price in a reverse acquisition is determined based on “the number of equity interests the legal acquiree would have had to issue to give the owners of the legal acquirer the same percentage equity interest in the combined entity that results from the reverse acquisition.”
 
The first step in estimating the purchase price in the merger is to determine the pro forma ownership of the combined institution following the merger. The table below summarizes, for each current shareholder group, the pro forma ownership of Chemical common stock following the merger as well as the pro forma market capitalization of the combined company using shares of Chemical and TCF common stock outstanding at March 31, 2019 and Chemical’s closing price on June 17, 2019.  

 
 
 Chemical Financial Corporation Ownership and Market Value Table (Pro Forma)
 
 
 Number of Chemical Outstanding Shares
(in thousands)
 
 Percentage
Ownership
 
 Market Value at $39.59 Chemical Share Price
(in thousands)
 
 
 
 
 
 
 
 Current Chemical shareholders
 
71,551

 
46.2%
 
$
2,832,704

 Current TCF shareholders
 
83,304

 
53.8%
 
3,298,005

 Total
 
154,855

 
100.0%
 
$
6,130,709


Next, the hypothetical number of shares TCF would have to issue to give Chemical owners the same percentage ownership in the combined company is calculated in the table below (based on shares of TCF common stock outstanding at March 31, 2019):

 
 
 Hypothetical TCF Ownership
 
 
 Number of TCF Outstanding Shares
(in thousands)
 
 Percentage Ownership
 
 
 
 
 
 Current Chemical shareholders
 
140,847

 
46.2%
 Current TCF shareholders
 
163,951

 
53.8%
 Total
 
304,798

 
100.0%








Finally, the purchase price is calculated based on the number of hypothetical shares of TCF common stock issued to Chemical shareholders multiplied by the share price as demonstrated in the table below (amounts in thousands except per share data).

Number of hypothetical TCF shares issued to Chemical shareholders
140,847

TCF market price per share as of June 17, 2019
$
19.90

Purchase price determination of hypothetical TCF shares issued to Chemical shareholders
2,802,855

Value of Chemical stock options hypothetically converted to options to acquire shares of TCF common stock
9,000

Purchase price consideration
$
2,811,855


Note 3-Preliminary Purchase Price Allocation

The pro forma adjustments include the estimated acquisition accounting entries to record the completion of the merger. The excess of the purchase price over the fair value of net assets acquired, net of deferred taxes, is allocated to goodwill. Estimated fair value adjustments included in the pro forma financial statements are based upon available information and certain assumptions considered reasonable, and may be revised as additional information becomes available.
 
Core deposit intangible assets of $168.3 million are included in the pro forma adjustments separate from goodwill and will be amortized on an accelerated method over ten years. Goodwill totaling $1.06 billion is included in the pro forma adjustments and is not subject to amortization. The purchase price is variable based on the price per share of TCF common stock at the closing date of the merger, which has not yet occurred. Accordingly, a 10% increase or decrease in the price per share of TCF common stock would result in a corresponding purchase price and goodwill adjustment of approximately $314 million.

Below is a summary of the preliminary purchase price allocation used to develop the unaudited pro forma combined condensed statement of financial condition (amounts in thousands):
 
 
 Chemical as Reported
 
 Adjustments to Reflect Chemical/TCF Merger
 
 Chemical as Adjusted for Acquisition Accounting
 Fair value of assets acquired:
 
 
 
 
 
 
 Cash and cash equivalents
 
$
517,576

 
$

 
$
517,576

 Investment securities
 
3,923,573

 
5,096

(2) 
3,928,669

 Loans held-for-sale
 
23,535

 

 
23,535

 Net loans
 
15,213,764

 
(176,976
)
 (3)(4) 
15,036,788

 Premises and equipment, net
 
122,452

 
(6,600
)
(5) 
115,852

 Other intangible assets
 
27,195

 
141,069

(7) 
168,264

 Interest receivable and other assets
 
837,650

 
3,558

(8) 
841,208

 Total assets acquired
 
20,665,745

 
(33,853
)
 
20,631,892

 Fair value of liabilities assumed:
 
 
 
 
 
 
 Deposits
 
16,061,999

 
(19,351
)
(9) 
16,042,648

 Collateralized customer deposits
 
413,199

 

 
413,199

 Interest payable and other liabilities
 
261,571

 

 
261,571

 Short-term borrowings
 
1,740,000

 

 
1,740,000

 Other borrowings
 
426,035

 
(1,119
)
(10) 
424,916

 Total liabilities assumed
 
18,902,804

 
(20,470
)
 
18,882,334

 Net assets acquired
 
1,762,941

 
(13,383
)
 
1,749,558

 Preliminary pro forma goodwill
 
 
 
 
 
$
1,062,297









 Note 4-Pro Forma Adjustments

The following pro forma adjustments have been reflected in the unaudited pro forma combined condensed financial information. All taxable adjustments were calculated using a 21.0% tax rate to arrive at deferred tax asset or liability adjustments. All adjustments are based on current assumptions and valuations, which are subject to change.

(1)
Adjustments to reflect the estimated contractually obligated after-tax merger costs of $45.4 million.
(2)
Adjustment to Chemical’s held-to-maturity investment securities to reflect the estimated fair value based on estimates of expected cash flows and current interest rates.
(3)
Adjustment to Chemical’s total loans, net of unrecognized costs, to reflect the estimated fair value of the loan portfolio based on estimates of expected cash flows, which includes credit loss expectations and current interest rates. The net adjustment includes the elimination of net unrecognized loan costs of $22.7 million, establishment of an estimated credit mark of $189.2 million, which is partially offset by reversal of Chemical’s existing credit mark on acquired loans of $25.0 million, and recognition of an estimated interest discount of $100.4 million.
(4)
Elimination of Chemical’s existing allowance for loan losses. Purchased loans in a business combination are recorded at estimated fair value on the purchase date, and the carryover of the related allowance for loan losses is prohibited.
(5)
Adjustment to the statement of financial condition to reduce Chemical’s land and buildings to estimated fair value, with a corresponding adjustment to the income statement to reduce depreciation expense over estimated lives of 25-40 years.
(6)
Adjustments to goodwill to eliminate Chemical’s goodwill of $1.13 billion associated with prior acquisitions and record estimated goodwill associated with the merger of $1.06 billion.
(7)
Adjustments to other intangible assets to eliminate Chemical’s core deposit intangible assets of $27.2 million associated with prior acquisitions and record estimated core deposit intangible assets associated with the merger of $168.3 million, based on a value of 1.50% of Chemical’s non-time customer deposits. Core deposit intangible assets recorded as a result of the merger are expected to be amortized on an accelerated basis over a period of ten years.
(8)
Adjustment to net deferred tax assets to reflect the effects of the acquisition accounting adjustments.
(9)
Adjustment to reflect the estimated fair value of Chemical’s interest-bearing time deposits based on market interest rates for similar instruments.
(10)
Adjustment of $4.0 million primarily related to reducing Chemical’s $410 million of long-term FHLB advances included in other borrowings to estimated fair value and adjustment of $2.8 million to increase Chemical’s $15.9 million of trust preferred securities included in other borrowings to estimated fair value.
(11)
No adjustment needed as each share of TCF 5.70% Series C Non-Cumulative Perpetual Preferred Stock issued and outstanding immediately prior to the merger date will be converted into one share of a newly created series of preferred stock of Chemical.
(12)
Adjustment to reflect the issuance of 83.3 million common shares of Chemical common stock with $1.00 par value per share in connection with the merger and eliminating 173.3 million issued common shares of TCF common stock with $0.01 par value per share.
(13)
Adjustments to eliminate Chemical’s additional paid in capital of $2.21 billion, record the hypothetical issuance of TCF common stock in excess of par value of $2.73 billion, which represents the purchase price consideration of $2.81 billion less $83.3 million classified as $1.00 par value common stock, and reclassify TCF’s historical equity accounts (common stock and treasury stock) into surplus due to the elimination of TCF’s common stock.
(14)
Adjustment to eliminate historical retained earnings of Chemical of $654.6 million and recognize contractually obligated after-tax merger costs of $45.4 million.
(15)
Adjustment to eliminate historical accumulated other comprehensive income of Chemical.
(16)
Adjustment to reflect TCF’s repurchases of $78.1 million of its common stock before the closing of the merger, representing the completion of its existing authorized share repurchase plan. Approximately 3.5 million shares are assumed to be repurchased by TCF at an average price of $22.23 per share, with the adjustment reflected in the pro forma based on the merger exchange ratio of 0.5081.
(17)
Adjustment to reflect issuance of $150 million of subordinated notes, net of estimated fees of $1.0 million, which subordinated notes are anticipated to be offered by TCF National Bank in June 2019. Fees associated with the issuance of such subordinated notes are capitalized and amortized over the life of the notes of ten years.
(18)
Net adjustment to interest income to recognize estimated discount loan accretion of $8.5 million for the three months ended March 31, 2019 and $31.6 million for the year ended December 31, 2018 attributable to recording the Chemical loans at fair value as of the transaction date. Adjustment also includes estimated interest accretion of $0.8 million for the three months ended March 31, 2019 and $2.9 million for the year ended December 31, 2018 associated with recording Chemical’s investment securities at fair value. The discount loan accretion and investment securities accretion are expected to accrete over a period of approximately seven years on an accelerated basis.
(19)
Net adjustment to interest expense to record estimated net amortization of premiums on Chemical’s time deposits and







long-term debt of $5.8 million for the three months ended March 31, 2019 and $23.3 million for the year ended December 31, 2018 and net accretion on the net discount on Chemical’s trust preferred securities of $0.05 million for the three months ended March 31, 2019 and $0.2 million for the year ended December 31, 2018. The premium amortization on deposits and long-term debt is expected to be approximately one year for each, and the discount accretion on trust preferred securities is expected to be approximately 14 years.
(20)
Adjustment to eliminate Chemical’s amortization of core deposit intangible asset amortization of $1.4 million for the three months ended March 31, 2019 and $5.7 million for the year ended December 31, 2018 and recognize estimated core deposit intangible asset amortization of $7.8 million for the three months ended March 31, 2019 and $31.2 million for the year ended December 31, 2018. See pro forma adjustment (7) above for information regarding Chemical’s amortization of core deposit intangible assets. Chemical is still in the process of evaluating the fair value of the intangible assets. Any resulting change in the fair value would have a direct impact on amortization expense. Amortization expense of the core deposit intangible assets for the first five years following the completion of the merger is estimated as follows: Year 1-$31.2 million; Year 2-$27.9 million; Year 3-$24.6 million; Year 4-$21.3 million; and Year 5-$18.1 million.
Adjustment also includes elimination of $14.9 million of combined merger-related expenses incurred by Chemical and TCF for the three months ended March 31, 2019.
(21)
Adjustment to recognize the tax impact of pro forma transaction-related adjustments at 21%.
(22)
Adjustment to eliminate TCF’s average common shares outstanding and recognize the issuance of 83.3 million shares of Chemical common stock based on TCF’s 163.95 million common shares outstanding at March 31, 2019 and 163.9 million common shares outstanding at December 31, 2018 and the merger exchange ratio of 0.5081. Average diluted shares outstanding also include the effect of dilutive nonparticipating restricted stock outstanding during the three months ended March 31, 2019 and dilutive nonparticipating restricted stock and stock options outstanding during the year ended December 31, 2018, adjusted for the merger exchange ratio of 0.5081.
(23)
Adjustment to recognized interest expense associated with TCF National Bank’s issuance of $150 million of subordinated notes, which subordinated notes are anticipated to be offered by TCF National Bank in June 2019 at an assumed interest rate of 5.0%. Adjustment to operating expenses to recognize amortization of $1.0 million of expected financing costs associated with issuance over a period of ten years. A 0.125% increase or decrease in the assumed interest rate would result in a change in interest expense associated with these subordinated notes of $0.05 million for the three months ended March 31, 2019 and $0.2 million for the year ended December 31, 2018.
(24)
Adjustment to reduce TCF’s common shares outstanding for repurchase of 3.5 million shares of its common stock before the closing of the merger, as discussed in pro forma adjustment (16) above, adjusted for the merger exchange ratio of 0.5081.

Note 5-Merger Integration Costs

Merger and integration related costs are estimated to be $325 million on a combined pre-tax basis, with contractually obligated pre-tax merger costs of $53.5 million ($45.4 million net of tax) due at closing. Contractually obligated merger costs are reflected in the pro forma combined condensed statement of financial condition as part of the pro forma adjustments discussed in Note 4. Merger and integration related costs are not included in the unaudited pro forma combined condensed statement of income since they will be recorded in the combined results of income as they are incurred prior to, or after completion of, the merger and are not indicative of what the historical results of the combined company would have been had the companies been actually combined during the periods presented.








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