Toronto-Dominion Bank TD-T is acquiring U.S.-based bank First Horizon Corp. for US$13.4-billion in an all-cash deal that fulfills TD’s long-stated desire to bulk up in the southeastern United States and sets its sights on expansion into adjacent markets.
Toronto-based TD will pay US$25 per First Horizon share, drawing on a large store of extra capital that TD has built up in recent years. The price tag is on the high side relative to other recent bank mergers, at 2.3 times First Horizon’s tangible book value, though both banks stand to benefit from anticipated interest-rate hikes this year.
First Horizon is based in Memphis, Tenn., and has US$89-billion in assets with 412 branches across a dozen states. It fills gaps for TD in states where the Canadian bank wants a larger presence such as Florida and North Carolina, and makes TD an instant competitor in new states such as Tennessee and Louisiana, with smaller footholds in Virginia, Georgia and Texas.
Chief executive officer Bharat Masrani said in an interview that the bank has patiently hunted for the right deal, and “this one fits perfectly,” adding: “We’ve been, obviously, looking at this for a while.”
TD has been open about its interest in potential deals in the U.S. southeast for at least five years. But the bank took a conservative approach to mergers, in keeping with Mr. Masrani’s reputation as a shrewd risk manager – so much so that some critics called TD too conservative. The move to acquire First Horizon is a major investment in the future of its U.S. arm that will help define his tenure. And it hands the challenge of combining the two banks to Leo Salom, who just took over as head of the bank’s U.S. division in January as part of an overhaul of TD’s senior leadership team.
It is one of the two largest deals a Canadian bank has made to buy a U.S. lender, following Bank of Montreal’s proposed acquisition of California-based Bank of the West for $20.9-billion in December. Reports suggested TD was also a bidder for Bank of the West, but Mr. Masrani said on Monday that First Horizon is “not our second choice at all.”
He has known First Horizon CEO Bryan Jordan for a decade, since they met while serving together on the Federal Advisory Council to the U.S. Federal Reserve. After closing, Mr. Jordan will join TD as a vice-chair and report to Mr. Masrani, and be named chair of TD’s U.S. board.
First Horizon has just completed its integration of a 2019 merger of equals with Louisiana-based IberiaBank Corp., and TD waited for that process to finish. “I did approach Bryan as to what would make sense and that’s how the discussion started,” Mr. Masrani said.
The main rationale for the deal is to add scale in and around TD’s existing footprint, which stretches the length of the eastern U.S. It adds US$55-billion of loans and US$75-billion of deposits. And TD is counting on demographics to create a new pool of customers who can help the combined business grow: The bank said it expects population growth in First Horizon’s markets to be about 50 per cent higher than the U.S. national average.
When combined with TD’s existing U.S. business, TD expects to have the sixth-largest U.S. bank by assets, with US$614-billion in assets, 10.7 million customers and 1,560 branches across 22 states.
The deal also gives TD a starting point to expand beyond its eastern stronghold. First Horizon has a modest presence in Atlanta, Houston and Dallas – cities that TD considers attractive places to build up its commercial banking business. In total, First Horizon has about 100,000 commercial clients.
Yet the transaction does not mark a significant strategic shift for TD. “It extends the footprint … it continues their east coast footprint and moves towards the west,” Ebrahim Poonawala, an analyst at Bank of America Securities, said in an interview. “This is probably as plain vanilla as you can get.”
Once the deal closes, TD “remains a larger version of itself,” Scotia Capital analyst Meny Grauman said in a note to clients.
TD was already a bank with significant U.S. scale, but consolidation in the American banking sector has raised the bar to stay competitive, especially on technology and regulatory compliance.
“There was a time when what we would call sufficient scale was at a lower amount, and that has just gone up,” Mr. Masrani said. “In fact it’s key to be successful, otherwise you will not be able to keep up.”
TD expects the transaction to close in the first quarter of its 2023 fiscal year, which starts in November of 2022. But U.S. regulators are scrutinizing bank mergers more closely, creating the potential for delays. If the deal does not close by Nov. 27, TD will pay a premium equal to 5.4 cents per share each month until closing.
“The timing of regulatory approval is uncertain in our view, and there is also risk of a competing bid,” Mr. Grauman said.
Keeping First Horizon’s employees from leaving will be a key challenge for TD as First Horizon enters its second merger in two years. TD will spend US$494-million to acquire preferred stock in First Horizon and earmark US$150-million of that to pay retention incentives. Mr. Masrani told analysts he is “very comfortable that the programs will retain the talent.”
TD executives said they plan to keep all of First Horizon’s branches and front-line staff, including retail branch staff and commercial banking relationship managers, rebranding First Horizon branches with TD’s name over the coming years. There is minimal overlap between the two banks’ branches, with only 8 per cent located less than one mile apart.
TD expects to reap US$610-million in cost savings by the end of 2024, mostly from combining technology systems and back-office functions, cutting some corporate real estate and using its increased size to negotiate better deals with vendors.
TD was in a unique position to make such a large deal without issuing stock. The bank had an estimated $18-billion in extra capital on hand. Through much of the COVID-19 pandemic, Canada’s banking regulator prohibited dividend hikes and share buybacks, causing capital to pile up until restrictions were lifted in November. After closing, TD expects its capital levels to stay above regulatory minimums, with a common equity Tier 1 ratio above 11 per cent.
In Monday trading, First Horizon shares soared 28.7 per cent to close at US$23.48 on the New York Stock Exchange. In Toronto, TD shares fell 2.3 per cent to $102.28.
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