TD Bank faces stiff challenge as out-of-state bank entering N.C. market – Winston-Salem Journal

Namely, how to grow N.C. deposits market share beyond what they spent hundreds of millions, if not billions, of dollars to acquire in a typical big-splash transaction.

The Toronto-based financial institution announced Feb. 28 plans to pay $13.4 billion, worth $25 a share, to purchase First Horizon National Corp. of Memphis, Tenn., in a megadeal projected to close in the first quarter of 2023.

TD has been slowly creating a presence in N.C. with 11 branches in the Asheville, Foothills and Wilmington markets.

Buying First Horizon would gain it another 92 N.C. branches, including 12 in Forsyth County and 30 altogether in the Triad and Northwest N.C.

First Horizon has about 412 branches overall in 12 states, foremost in Florida, Tennessee and North Carolina.

The N.C. and Triad banking sectors have demonstrated consistently during the 21st century that achieving modest- to-sizable increases in deposit holdings doesn’t necessarily move the needle on market share.

Just ask banks that include First Horizon, as well as Wells Fargo & Co., PNC Financial Services Group, SunTrust Banks Inc., Fifth Third Bancorp, F.N.B. Corp., Pinnacle Financial Partners Inc. and Bank OZK.

For example, after Wells Fargo bought a collapsing Wachovia Corp. in December 2008, it acquired a 21.7% market share and $44.96 billion in deposits in N.C. for 2010 — trailing just Bank of America Corp. — according to Federal Deposit Insurance Corp. data.

That was after shipping the bulk of Wachovia’s headquarters deposits to San Francisco in 2009 and 2010 in a buyer-reaps-the-spoils maneuver.

In the FDIC’s 2021 N.C. deposits report, Wells Fargo’s market share had dropped to 14.5%, even with $73.43 billion in deposits. Wells Fargo was surpassed by Truist Financial Corp. with an 18.3% market share.

First Horizon, F.N.B. and Pinnacle leaped into the North Carolina marketplace in 2017 and 2018 through buying super-community banks — Capital Bank Financial Corp. by First Horizon, Yadkin Financial Corp. by F.N.B. and BNC Bancorp by Pinnacle.

Those banks’ market shares and deposits as of June 30, 2018, were: F.N.B. in eighth place at 1.2% with $4.69 billion in deposits; First Horizon in ninth place at 1.2% with $4.46 billion in deposits; and Pinnacle in 11th place at 1.1% with $3.97 billion in deposits.

Three years later, F.N.B. still is eighth at 1.43% and $6.94 billion, First Horizon still ninth at 1.35% and $6.83 billion, and Pinnacle still 11th at 1.06% and $5.36 billion.

RBC-Centura example

Perhaps the most relevant comparisons to TD’s proposed purchase of First Horizon goes back to January 2001 when Royal Bank of Canada paid $2.3 billion to purchase Centura Bank, which had at that time 212 branches in N.C.

The attraction: Centura held a 5.04% N.C. market share — good enough for fifth — and $6.91 billion in total assets.

RBC Centura, which later became RBC Bank USA, struggled mightily to expand its Centura base.

So much so that just 11 years later, Royal Bank of Canada sold its RBC Bank USA properties that included 424 branches overall and $25 billion on total assets to PNC for $3.5 billion.

At that time, RBC Bank USA held a 2.77% market share, still fifth, and $9.45 billion in deposits.

Also at that time: analysts questioned whether PNC paid too much for RBC Bank even though it gained a sizable foothold in Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia.

James Rohr, then-chairman and chief executive of PNC, said the deal provided the bank with “a great opportunity to enter attractive Southeast markets in a way that will create value for our shareholders.”

But Keith Horowitz, an analyst with Citigroup, said at that time PNC was not getting a top-three market share in any significant metropolitan statistical areas in those states.

Fast forward to 2021, and PNC holds a 2.14% market share, down to sixth, with $10.78 billion in deposits.

Tony Plath, a retired finance professor at UNC-Charlotte, said he expects TD to outperform RBC when it comes to buying and integrating First Horizon.

“But given RBC’s dismal performance in the U.S. after the Centura acquisition, that’s a really low bar to clear,” Plath said.

“TD will obviously benefit from First Horizon’s larger U.S. footprint, stronger U.S. balance sheet, better U.S. management team and demonstrably less hostility between the Canadian and American managers who will run its business here.”

Plath said TD already has the advantage of several years’ operation of the AmeriTrade discount brokerage, “which gives it a better sense of the culture and ethos of the U.S. financial services industry that RBC simply lacked in 2001.”

Desirable Southeast

CFRA analyst Alexander Yokum said N.C. is a highly desirable banking market even with Bank of America Corp. and Truist based in Charlotte and Wells Fargo with a major presence there, too.

In recent months, JPMorgan Chase & Co., US Bancorp and Fifth Third Bancorp have been aggressively adding branches in the Charlotte and Triangle markets, though showing no interest in the Triad to date.

“The combined (TD) will have a sizable presence in the Northeast/mid-Atlantic states, as well as the fast-growing and attractive Southeast region,” Yokum said.

Chris Marinac, with Janney Montgomery Scott, calls TD’s offer for First Horizon “a game-changer for other banks across several Southeast and Southwest markets.”

Until recently, bank acquisitions tended to have a 5% to 15% customer run-off in the first year because of account issues or the preference to not want to be a megabank’s customer.

“Several banks, large and small, who compete within the First Horizon and the former IberiaBank footprint are possible beneficiaries of the combination,” Marinac said.

“In our view, TD has to restart the systems upgrade process and eventually execute for this opportunity.

“In our mind, this leaves First Horizon’s customers wide open for competitors — this is especially true at a time of enormous change in digital banking products and initiatives across the banking industry.”

“TD passed up several other U.S. banks to acquire First Horizon,” which Marinac said could have included the likes of First Citizens Bancshares Inc., F.N.B., Bank OZK and Pinnacle.

More deals coming?

Brian Martin, an analyst with Janney Montgomery Scott, said there are many rationales for bank deals, some of which represent lessons learned from BB&T Corp.’s $33.5 billion purchase of SunTrust Banks Inc. to launch Truist Financial Corp. in December 2019.

That is the largest megabank deal since the Great Recession of 2008-11.

“We expect bank mergers and acquisitions activity to remain strong in 2022 as momentum from 2021 continues and conditions remain ripe for continued consolidation,” Martin said.

“Motivations for buyers and sellers remain firmly in place including: earnings headwinds from elevated levels of liquidity; the need to rationalize expenses over a larger asset base; increased competition from fintechs; the desire to increase share in existing markets or expand footprints to better compete with larger banks; and struggles to keep pace with significant technology spending.”

Martin cautioned that larger deals “have come under greater (federal regulatory) scrutiny and are taking longer to close.”

“Some industry experts believe this added scrutiny could trickle down to small bank deals over time.

“We believe this could lead to an increase in small bank deals in the near term as bankers look to get in front of potential regulatory roadblocks,” Martin said.

Peter Gwaltney, president and chief executive of N.C. Bankers Association, said “regulatory burden and risk has increased the cost and complexity of banking. Banks of all sizes are seeking scale to shoulder the burden.”

Still, Plath said the soaring economic growth in Charlotte and the Triangle, coupled with steady growth in the Triad, is too good of an opportunity for the out-of-state banks to pass up.

“We’re simply running out of banks here in North Carolina in the mad rush to consolidate these things into bigger, and not-necessarily-better, regional franchises,” Plath said.

Tough competition

Plath questions how much TD can gain in N.C. deposits market share going head-to-head with JPMorgan Chase, Bank of America, Wells Fargo & Co. and Truist.

“I wouldn’t give them much of a chance in clearing this much higher, and more meaningful, bar,” Plath said.

Zagros Madjd-Sadjadi, an economics professor at Winston-Salem State University, said that “I think this deal looks a lot better on paper than in practice.”

“Although this will certainly substantially increase TD’s asset base in the area, and TD is a major bank both domestically and worldwide, I just do not think it has the name recognition that will allow it to effectively compete here in the Southeast against the likes of Truist, Bank of America and Wells Fargo.

Madjd-Sadjadi said TD is “going to suffer from the same issues that RBC did in this regard and without a strong Canadian presence in the Carolinas, I just do not see it being the powerhouse necessary to compete successfully against our established banking entities.”

“TD does seem to excel in customer service, but that takes a lot of word of mouth to get it to high penetration in terms of market share when it is starting out as a relative unknown quantity.

“This has to be a long-term play if it is going to work out for TD, as the initial reaction of local customers will likely be one of skepticism especially in light of RBC’s unsuccessful foray into our region when RBC and TD are similarly sized and similarly managed banking giants.”