It has been a year since Cherry Hill-based TD Bank U.S. mutually terminated its $13.4 billion planned acquisition of Tennessee-based First Horizon due to a federal probe into the bank’s Bank Secrecy Act and anti-money laundering program.
The investigation by the U.S. Department of Justice and federal banking regulators is still a cloud hanging over the bank, a subsidiary of Toronto’s TD Bank Group (NYSE: TD). In a Friday interview, TD Bank U.S. CEO Leo Salom responded to concerns from investorsthat the investigation was causing the bank’s aggressive plan to add 150 new branches by 2027 to stagnate.
“Our long-term plans haven't fundamentally changed,” Salom said. “But we are pacing the rate of those store openings now, and we are shifting some of those investments to areas that we think we need to establish a leadership position.”
Salom said because the bank is in discussions with U.S. regulators regarding the anti-money laundering investigation he would not want to "prejudice what that timetable will look like" for the 150 new branches.
Salom said he was disappointed that the First Horizon deal did not close. The bank lost out on the opportunity to enter seven new states in the fast-growing Southeast, add over 400 branches and 1 million customers, and move from No. 8 to No. 6 in the list of the largest U.S. banks.
TD has shifted its focus back to organic growth, which has been its primary strategy for over a decade. The bank's last acquisitions came via the $8.5 billion purchase of Cherry Hill-based Commerce Bancorp in 2008 to get a foothold in the Mid-Atlantic and the deals to buy three Florida banks and South Carolina-based South Financial Group in 2010.
When the First Horizon deal fizzled, TD immediately announced a plan to add 150 new branches by 2027. Most will be in its growing footprint in Florida and the Carolinas with a handful in the Philadelphia area. TD will debut its first new local branch in July at The Carson, a 12-story apartment building in Northern Liberties that opened in May 2023. It has also received regulatory approval to open a location at 700 E. Hunting Park Ave. in North Philadelphia.
With the organic expansion plan in place, TD filed to open 26 new branches last year with the Office of the Comptroller of the Currency, and only filed to close one. The bank filed to close just two in 2022. Less than five months into 2024, TD has already filed to close 31 branches — including local sites in Hatboro, Skippack, Westtown and Cherry Hill — and has not filed to open any new branches.
The only time in the past two decades that TD has filed to close this many branches came at the height of the pandemic in 2021, when it shuttered 81 of its 1,223 total retail branches, almost 7% of all locations, in what it said was a response to changing customer expectations for digital, mobile and connected channel options. The bank now has over 1,100 retail branches, including 117 in the Philadelphia region.
“We're doing some store optimization this year, but we're still very committed to the store network,” Salom said. “In fact, it is my desire over the medium-to-longer term to continue to grow our store network.”
Salom’s comments came a day after TD announced that its second fiscal quarter earnings declined by 22%, with a drop in U.S. performance being a major culprit.
TD Bank U.S. net income was $433 million, down 58% from the same period of 2023. Revenue decreased 3% to $2.54 billion. The bank said the decline primarily reflects higher non-interest expenses (up 28%), higher provisions for credit losses (up 67%) and lower net interest income (down 7%).
Despite that, Salom believes the bank had a strong quarter, with loan volumes up 7% — business loans up 5% and personal loans up 10%. Deposits decreased 6%, reflecting an 18% drop in sweep deposits and 2% decline in business deposits that was partially offset by a 1% increase in consumer deposits. Minus the sweep deposits, the average deposits ticked up 1%.
A particular bright spot Salom outlined was that commercial lending fees were up 58%, the product of a focused effort on the mid-market space to accompany existing strength in small business and corporate lending. He also noted those fees were positively impacted by the number of mark-to-market losses last year that did not reoccur in the recently completed quarter.
The anti-money laundering investigation was a cloud over the quarter, as TD set aside $450 million to begin covering for a possible fine that some industry insiders believe could be as high as $2 billion. It also spent $500 million to overhaul systems that proved convenient to money launderers. The U.S. Department of Justice is focused on Chinese crime groups and drug traffickers who allegedly used the bank to launder money from U.S. fentanyl sales, according to a Wall Street Journal report.
In Philadelphia, Salom said TD was pleased to dethrone longtime market leader Wells Fargo as the top deposit taker in the Philadelphia region two years ago. He said the city of Philadelphia appears to be emerging from a challenging period during the pandemic.
“I'm seeing the city come back to life in terms of greater commuter activity, greater investment in the city,” Salom said. “You're seeing the real estate market firm up as well.”
Salom said TD is trying to infill its local retail footprint and make more community and philanthropic investments.
Looking at the broader economy, Salom said while gross domestic product and job growth have been extremely strong, higher interest rates and inflation have caused issues for TD’s consumer and small business customers. He said there has been a slight pullback in lending activity in certain segments that are waiting for the Federal Reserve to lower rates. That is particularly evident in the housing market, where he said consumers are holding out for a potential drop in rates. Conversely, he said mid-market and corporate clients are making investments in their businesses, with the health care, nonprofit, higher education and municipal finance sectors particularly strong.
After a year of strife, Salom demurred somewhat when asked about where he hopes TD’s U.S. operations will be a year from now. He did say the number one goal is risk management and governance in light of the probe. Once that situation is settled, the focus will be on investing in the bank’s digital and mobile platforms, credit cards, residential mortgage and investments. After onboarding a number of new midmarket clients in the past year to its new TD Cowen investment bank, the goal is also to support those clients with as many of the bank’s products and services as possible.
“If we can make progress on those various areas, I think the growth of the franchise will be strong and we'll continue to cement ourselves as one of the leading institutions on the East Coast,” Salom said.
