After swearing off deals this past spring, Toronto-Dominion Bank’s TD Banknorth Inc. unveiled an agreement Tuesday to buy Commerce Bancorp Inc. of Cherry Hill, N.J., that would double the Canadian company’s U.S. assets.
W. Edmund Clark, the $404 billion-asset Toronto-Dominion’s chief executive and president, acknowledged his earlier stance but called the $8.5 billion stock-and-cash deal “opportunistic” and “transformational” for his company.
“All the planets perfectly aligned to bring this deal to fruition,” he said on a conference call. “A great franchise became available unexpectedly. Our currency, at the same time, gained considerable strength — both the Canadian dollar and TD shares.”
Buying Commerce, which has a similar branch-building strategy and little overlap with Toronto-Dominion, would allow it to accelerate its plans for U.S. organic growth, Mr. Clark said.
Commerce would add 449 branches, most of them in the Northeast, and $48 billion of assets to TD Banknorth.
The Portland, Maine, unit currently has $43 billion of assets and a 600-branch network that stretches from Maine to Pennsylvania, including a small operation in New York City. Commerce has operations from New York to Pennsylvania, as well as in Florida (where TD Banknorth would get its first branches) and the Washington area. After the acquisition, TD Banknorth would rank 21st in U.S. banking assets, according to June 30 statistics from the Federal Reserve Board. Currently, Commerce ranks 30th, and TD Banknorth ranks 32nd.
However, Toronto-Dominion would not acquire Commerce Banc Insurance Services, Inc., which Commerce Bancorp has agreed to sell to George E. Norcross 3rd, the unit’s chairman and CEO and the parent company’s second-largest shareholder.
Toronto-Dominion entered the U.S. retail banking market in March 2005 by acquiring a stake in Banknorth Group Inc., which was renamed TD Banknorth. Last year TD Banknorth acquired Hudson United Bancorp of Mahwah, N.J., and this year it bought Interchange Financial Service Inc. of Saddle Brook. In April, Toronto-Dominion bought the rest of TD Banknorth.
Commerce Bancorp has grappled with regulatory issues in recent years. Its founder, Vernon W. Hill 2nd, resigned abruptly over the summer as its CEO, and subsequently as its chairman, following regulatory pressure over alleged conflicts of interest between Commerce and companies he and his family controlled. Commerce continues to operate under a consent order with one of its regulators and a memorandum of understanding with another.
Mr. Clark said that his company is comfortable Commerce’s issues are not systemic. “This was a rather narrowly defined issue centered on a single individual.”
Dennis DiFlorio, Commerce’s current CEO, characterized the deal as one born out of strategic concerns rather than necessity.
“At the end of the day, to move forward in this industry, you need scale. You are going to need sophisticated products,” he said in an interview after the call.
Commerce executives also said that they talked with several suitors but settled on Toronto-Dominion because of its product suite and capital markets business. Toronto-Dominion, which owns a 40% stake in TD Ameritrade Holding Corp. and is testing a joint TD Ameritrade/TD Banknorth branch, said Tuesday that Commerce caters to the kinds of customers that TD Ameritrade attracts.
Mr. DiFlorio would continue to manage Commerce’s business and would report to Bharat Masrani, TD Banknorth’s president and CEO. During the conference call Mr. Masrani gave little away about which brands Toronto-Dominion would keep. “We will be looking to make our changes within 12 to 18 months,” he said. But Mr. DiFlorio said in the interview, “By no means is this the end of the Commerce story.”
The deal would require some balance-sheet restructuring by Commerce. It said it would sell “a portion of its fixed-rate investment securities” and reinvest them in short-term or floating-rate securities. As a result, it would post a third-quarter after-tax charge of $150 million. However, Mr. Clark said Toronto-Dominion is willing to absorb any earnings hit from Commerce’s large securities portfolio. As of June 30, 57.9% of Commerce’s assets were securities.
TD Banknorth would cut $310 million of expenses after the deal closes in March or April, Mr. Clark said, and Toronto-Dominion expects to take a $490 million restructuring charge. The price is a 6% premium to Commerce’s closing price Monday. Gary Townsend, an analyst at Friedman, Billings, Ramsey & Co. Inc., called the premium “unfulfilling” in a research note issued Tuesday. However, Mr. DiFlorio said on the call that the price was one of the reasons his company agreed to the deal.
