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Sunday, 17 April 2016 15:55

Talmer explored several options before agreeing to $1.1 billion deal with Chemical Financial

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Prior to cutting the $1.1 billion deal that would make Chemical Financial Corp. the largest bank based in Michigan, Talmer Bancorp Inc. talked with several other potential partners about a merger or acquisition.

Five unnamed financial institutions each talked with Talmer during 2014 and 2015. None of the discussions, some of which came during the ongoing talks with Chemical Financial, ever transitioned into formal negotiations, according to a proxy statement filed with federal securities regulators. The filing details how the proposed Chemical-Talmer deal came together.

On the day the Chemical Financial deal was announced, Talmer CEO David Provost told investors the bank did not specifically shop around for a buyer, but the filing clearly illustrates that the leadership team was open to a merger or acquisition. 

That Talmer engaged in repeated conversations is not surprising given the present banking environment and ongoing industry consolidation, said Ken Marblestone, a managing director at Southfield-based investment bank Cascade Partners LLC.

Many banks today are examining where the market’s going and remain open to a merger or acquisition, Marblestone said, noting the escalating costs of complying with increased federal regulations, an uncertain regulatory future, and low interest rates.

“The industry is changing rapidly, so you have a lot of banks that are either thinking about being a buyer or being a seller, and that pace of change in the industry is just going to continue,” he said. “Talk is always appropriate. That’s the business today, and it’s happening at a very quick pace.”

The Troy-based Talmer Bancorp (Nasdaq: TLMR) has been a regular player in M&A as an acquirer. The bank grew over the years through eight acquisitions, primarily of troubled banks, completed from 2010 to 2014.

While it pursued the acquisition of troubled banks, “Talmer and its advisers also continued to engage in discussions and due diligence with numerous other potential merger and acquisition partners,” according to the SEC filing. 

TRANSFORMATIONAL DEAL

In January, Talmer ultimately struck a deal with the Midland-based Chemical Financial (Nasdaq: CHFC). Under terms of the deal, Talmer shareholders would receive $1.61 in cash and 0.4725 shares of Chemical Financial stock for each of their shares, or $15.64 per share based on the Jan. 25 closing price for Chemical. Pending regulatory and shareholder approvals, the two banks expect the deal to close in the second half of 2016.

If approved, the merger would give Chemical Financial more than $16 billion in assets and 266 offices, mostly in Michigan and northeast Ohio. The merger also would move Chemical Financial — which has grown in recent years through a series of acquisitions, most recently for Holland-based Lake Michigan Financial Corp. — into the Southeast Michigan market for the first time and extend the bank’s reach outside of the state.

As Chemical pursued its own acquisition strategy and given its lack of presence in the Southeast Michigan market — and with Talmer executives open to a merger — the deal seems “on the surface to make a lot of sense,” Marblestone said.

“Given Talmer’s focus on Southeast Michigan and a couple of other states, it was a natural for Chemical to be the interested party,” he said.

Talmer Bancorp, the holding company for Talmer Bank and Trust, has 51 branches and lending offices in Michigan, plus locations in Ohio, Illinois, Indiana and Nevada with about $6.6 billion in assets. In West Michigan, Talmer has offices in Grand Rapids, Portage, Holland, Muskegon and Grand Haven from when it bought the assets of the former Michigan Commerce Bank in early 2014 from the bankrupt Lansing-based Capital Bancorp.

A SERIES OF DISCUSSIONS

The first potential deal for Talmer came in late March 2014, a month after it became a public company. The investment banking firm that worked on its IPO, Keefe, Bruyette & Woods Inc. (KBW), and the CEO of a “slightly larger” Midwest-based community bank discussed a possible merger with Talmer executives.

They talked for months about a possible deal before the other bank decided in September 2015 to focus “on other priorities and so was not interested in pursuing a business combination with Talmer,” according to the securities filing.

Subsequent contacts with other banks followed. Talmer executives in November 2014 met with their counterparts at a “larger regional bank with operations in the State of Michigan.” The meeting ended “with a commitment to have further discussions, but without any clearly defined next steps,” according to the securities filing.

Talmer recontacted the bank in September 2015, as it was talking with Chemical, to see if it was still interested. The other bank  “expressed a desire to continue to meet periodically, but it was made clear to Talmer’s CFO that (it) was not prepared to pursue a transaction with Talmer at that time.” In December, the other bank’s CEO reiterated that position to Provost at Talmer.

Talmer executives in November 2014 also began talking to a third institution that was “a larger regional bank with banking offices in Michigan and Ohio.” They discussed “their respective banking franchises, management philosophies and the possibility of joining together.”

Executives at the two banks met again in July 2015 to discuss a strategic merger and talked by phone several times through the end of the year. In December, Talmer executives were told the bank “was not interested in pursuing a business combination in the near term,” according to the securities filing.

The next possible partner was a bank that “was slightly larger than Talmer and located in one of Talmer’s markets.” Talmer’s CFO in April 2015 met with executives of that bank, which had been identified by KBW as possibly having an interest in exploring a deal. The bank had a long-term interest in expanding into Talmer’s markets, although it was not “planning on this expansion within the next couple of years.”

PRELIMINARY IN NATURE’

In all four instances, talks with companies identified in the SEC filing as “Institutions A, B, C, and D” were “all preliminary in nature, with no specific proposals being made.”

“In addition to these institutions, Talmer or its advisers had preliminary exploratory discussions during 2014 and 2015 with representatives of several other potential merger partners ...  none of which indicated that it was interested in pursuing a business combination with Talmer at that time, except for Chemical and one substantially larger party,” the latter of which is identified in the SEC document as “Institution E.”

After doing preliminary due diligence, that bank had expressed an interest back in 2013 in buying Tamer in primarily a stock transaction. Talmer considered the offer as “not sufficient” and decided to “move forward independently,” although the two banks “continued to have informal dialogue over the next year and a half.”

Also in late March 2015, a strategic initiatives committee consisting of three outside directors updated Talmer’s board about possibly buying a bank that had about $2 billion in assets, known as “Institution F.” The committee offered an update on the ongoing talks with Institution E, as well. 

FINDING A FIT

Months earlier, in October 2014, KBW had introduced executives at Talmer and Chemical Financial to one another. Executives at the two banks continued their discussions in the following months. 

By midyear in 2015, Talmer was into deeper conversations with Institution E, and directors on June 17 retained KBW as its financial adviser “in anticipation of a potential merger,” according to the SEC filing.

The next day, June 18, Provost and Chemical Chairman and CEO David Ramaker met at a banking conference “to further discuss the possibility of a transformational merger.” Their respective CFOs met the following week. Talmer was informed that Chemical at that time was focused on completing the integration of Lake Michigan Financial, “although the parties agreed that they would continue dialogue.”

On July 13, Institution E submitted a draft merger agreement to Talmer for an all-stock stock deal, although it lacked an exchange ratio. By July 28, and after a series of meetings, Institution E decided not to make a merger proposal for Talmer to consider, “in part because (it) was not willing to offer a level of merger consideration that (it) believed would be acceptable to Talmer.”

OPENING THE DOOR

That decision left the door open for Chemical Financial to cut a deal with Talmer.

Provost and Ramaker “spoke at length on the telephone” the next day about a merger and “agreed to revisit the matter over the following months once Chemical completed integration activities related to its most recent acquisition.”

More meetings and talk followed through the summer and early fall. On Oct. 20, Chemical Financial directors instructed Ramaker to proceed with formal merger discussions. Chemical three days later retained Sandler O’Neill & Partners LP as financial adviser for a deal.

The two banks during the fall and early winter worked out a final merger agreement, which the Chemical Financial and Talmer boards of directors approved on Jan. 25, 2016. The merger, which would be Chemical’s 12th since 2000 and its largest deal by far, was announced the next day.

The merger surprised brokerage analysts who follow Talmer, one of whom was harshly critical of the financial terms during a conference call to discuss the deal. The merger also has been challenged in three separate lawsuits filed by shareholders, including by the City of Livonia Employees’ Retirement System

Read 4211 times Last modified on Friday, 15 April 2016 10:22

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