Huntington bets economic rebound, cost savings will justify TCF deal

The seeds of Huntington Bancorp’s $6 billion deal for the $48 billion-asset TCF Financial were planted mid-October, at the annual fundraising dinner for Yeshiva Beth Yehudah, a prominent Jewish educational system in suburban Detroit.

Huntington Chairman and CEO Steve Steinour, who received a leadership award, was chatting afterward with TCF Chairman Gary Torgow, when Torgow gently broached the possibility of a merger.

“Gary said, ‘I have a dream that one day we might put the two [banks] together,’” Steinour recalled Monday, a day after the deal was announced. “I actually didn’t do anything with the idea. … I just thought, ‘Wouldn’t that be nice.’”

It wasn’t until 10 days later, after Detroit-based TCF reported earnings for the quarter ended Sept. 30, that a sense of urgency kicked in, Steinour said. He reasoned that significant branch overlap between TCF and his Columbus, Ohio, company could provide rich cost-cutting opportunities, and a merger would deepen Huntington’s presence in Chicago and provide an entrée into Denver — a market Huntington has long eyed — as well as Minneapolis.

Ultimately, Steinour’s big bet here is that fortune will favor the bold, that the country will soon emerge from the coronavirus pandemic and a strong economic recovery will take hold.

“We’ve been viewed as being optimistic in comparison to others, but that’s the way we see it,” Steinour said. “After listening to TCF talk about similar expectations, I thought, `This is the perfect time.’”

Several analysts said the deal made sense, but Huntington investors reacted more skeptically than some expected.

Brian Klock, who covers Huntington for Keefe, Bruyette & Woods, agreed that timing was right for a big deal, although his reasoning was different.

“It’s a challenging environment,” Klock said. “The reality is, banks are looking at the next few years of zero interest rates and saying, `We need scale.’”

The all-stock transaction — which would create a company with $168 billion of assets — would allow Huntington to put its relatively strong share price to work, said Chris Marinac, who covers the company for Janney Montgomery Scott. Had Huntington waited six months, the math might not have been so favorable, Marinac said.

Huntington trades for approximately 1.6 times its tangible book value, compared to about 1.3 times for TCF, according to Wolfe Research analyst Bill Carcache.

Huntington expects to complete the deal in the second quarter, about four months faster than its August 2016 acquisition of FirstMerit in Akron, which took 10 months to complete. The systems conversion could follow as early as Labor Day, Steinour said.

Klock said he didn’t foresee any challenges to hitting that target. Neither did Steinour.

“We know what we have to do, and we’ll execute with focus and energy to deliver the expected results to our shareholders,” Steinour said.

However, there appeared to be some initial doubts about how quickly the deal would pay off for Huntington.

After falling as much as 6% in midday trading, Huntington shares rallied to close down about 3% at $12.51 on Monday. TCF shares jumped more than 6% on the day to close at $36.95.

In a research note, Evercore ISI analyst John Pancari said Huntington shareholders “appear to have lingering concerns” about the basis of Huntington’s financial projections — especially its accounting treatment of certain credits and the 2022 earnings projections for TCF.

He also noted that some investors are questioning the “timing and rationale behind TCF’s sale” given that TCF’s stock is trading lower than it was a year ago and the fact that the company just completed a big acquisition last year.

While TCF has spent several quarters in cost-saving mode following its merger with Chemical Financial in August 2019, Huntington believes it can achieve $490 million of cost savings by the end of 2022. Those would generate 18% earnings accretion when fully realized.

The companies did not provide specific details about where they would cut costs, but the biggest area of branch overlap is in Michigan. Overall, a total of 224 TCF locations lie within three miles of a Huntington branch, according to Huntington’s presentation to investors.

“We’ve done this before, we have the playbook” Huntington Chief Financial Officer Zach Wheeler said Monday, noting Huntington outperformed its 40% cost-savings projection in its deal for FirstMerit, delivering 45%.

“It’s a really interesting point,” said Terry McEvoy, an analyst at Stephens. “After cutting significant costs in terms of the merger of equals between TCF and Chemical, Huntington thinks it can still reduce TCF’s expense base by 37%. I think that speaks to the opportunities to continue to rethink that base going forward.”

Huntington also touted opportunities to expand small-business lending in Minneapolis and Denver, as well as the chance to cross-sell products to TCF’s 11,000 inventory finance clients, which sell power sports, lawn-and-garden, marine and specialty vehicles.

“We really like inventory finance,” Steinour said. “It’s a specialty business and they’re really good at it.”

Huntington says it will be able to sell more products — mortgages, home equity loans and credit cards — to TCF’s 1.5 million consumer customers, as well as insurance and Small Business Administration loans to TCF’s commercial clients.

To aid in the process, Huntington plans to spend $150 million on digital banking investments beginning in the second quarter. “These funds will be focused on customer-facing digital development to create new innovative products and features that will further strengthen our digital competitive advantage,” Wheeler said.

“This partnership will provide us the opportunity for deeper investments in our communities, more jobs in Detroit, an increased commitment in Minneapolis and a better experience for our customers,” Torgow said in a press release. “We will be a top regional bank, with the scale to compete and the passion to serve.”

Torgow is expected to remain with the merged company as chairman of Huntington Bank’s board.

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