The deal Commerce Bancorp Inc. announced this week brought a measure of certainty to its own future, but for Pennsylvania Commerce Bancorp Inc. in Harrisburg, the potential ramifications could be rather unsettling.
Though they are separate companies, the $1.9 billion-asset Pennsylvania Commerce has an unusual agreement with the $48 billion-asset Cherry Hill, N.J., company giving it exclusive rights to the Commerce brand in 34 Pennsylvania counties. Customers of each company can even use the other’s branches.
The Pennsylvania company also outsources its back-office processing to Commerce.
Those arrangements could be terminated once Toronto-Dominion Bank’s U.S. subsidiary, TD Banknorth Inc. of Portland, Maine, acquires Commerce, and analysts said that possibility should be enough to force Pennsylvania Commerce to consider its options.
Rebranding and switching its back-office processing would be expensive and disruptive for Pennsylvania Commerce, said Stephen M. Moss, an analyst at Janney Montgomery Scott LLC, especially if it has to switch the processing twice — first to TD Banknorth’s system and then elsewhere.
“Pennsylvania Commerce has to take a look at what the costs are versus how much it could get from a sale,” Mr. Moss said. “To me, it seems like everything points to a sale.”
Joseph Fenech, an analyst at Sandler O’Neill & Partners LP, said the company’s recent regulatory problems — an apparent extension of an investigation into Commerce — increase the likelihood that it will look for a buyer.
“I’m sure a sale has to be something that they’re considering, even though staying independent would probably be their preference,” Mr. Fenech said. The arrangements between Pennsylvania Commerce and Commerce can be terminated with one year’s notice, he said.
Gary L. Nalbandian, Pennsylvania Commerce’s chairman, president, and chief executive, is ruling out talk of a sale. “Commerce Bancorp’s agreement with TD Bank, while of interest to us, does not alter our plans to operate and grow as an independent bank,” he said in a press release Tuesday.
The release did not address how Commerce’s sale might affect Pennsylvania Commerce’s operations, and Mr. Nalbandian would not answer any questions.
Commerce owns a 10% stake in Pennsylvania Commerce and is its largest shareholder. TD Banknorth has not indicated what it would do with the stake and the agreements it would inherit through the Commerce deal, which is expected to close early next year.
On Tuesday’s conference call announcing the $8.5 billion deal, executives from TD Banknorth and Commerce reacted with momentary confusion when Mark Fitzgibbon, a Sandler O’Neill analyst, asked what the deal would mean for Pennsylvania Commerce.
After an initial hesitation, Douglas J. Pauls, Commerce’s chief financial officer, spoke up. “We have a network agreement with them that runs out for several years, and, frankly, I think we’ll evaluate that operation, and we’ll make some decision as we go forward,” he said. “Nothing will change in the near term.”
Later a TD Banknorth spokesman referred questions about Pennsylvania Commerce to the New Jersey company. “We’ve gone over a billion issues here, and I’ve never heard this discussed.”
A Commerce spokesman did not return a phone call.
Analysts said Pennsylvania Commerce’s deposits and its 33 branches in six counties would be attractive to many buyers.
Mr. Moss said the company could fetch $37 to $42 a share. On Thursday its stock closed at $29.94 a share. It has fallen 6.6% since Mr. Nalbandian’s press release came out late Tuesday, but is still up 15.7% for the year.
M&T Bank Corp. and PNC Financial Services Group Inc. are potential acquirers, Mr. Moss said, because both are dealmakers with an interest in Pennsylvania Commerce’s market.
He also said large companies such as those two would be better able to handle the transaction than small ones, given that Pennsylvania Commerce has $350 million of “very interest rate-sensitive” municipal deposits. (Those deposits make up 23% of its total.)
Mr. Fenech said he thinks TD Banknorth might take a look at Pennsylvania Commerce, since it found the Commerce model appealing.
None of the companies identified as potential acquirers would discuss the issue.
Since its start in 1985, the Pennsylvania company has paid Commerce an annual fee based on asset size to imitate the original model, cloning everything from the Web site to the branches, right down to the free coin-counting machines in the lobbies.
Mr. Nalbandian is a close friend of Vernon W. Hill 2nd, Commerce’s charismatic founder, who was ousted as its chairman and CEO in July after the Office of the Comptroller of the Currency challenged insider dealings there.
Pennsylvania Commerce is also in trouble with regulators. It has a written agreement with the OCC to improve its risk management and Bank Secrecy Act compliance, among other things, and last month it disclosed that the agency is investigating its real estate dealings, its officers and directors, and the companies they control.
Like the much larger Commerce, Pennsylvania Commerce uses the firm owned by Mr. Hill’s wife, Shirley, to design its branches — one of several relationships believed to have attracted regulatory scrutiny for both banking companies.
In a proxy statement in May, the Pennsylvania company disclosed that Mr. Nalbandian is also the treasurer of NAI/Commercial-Industrial Realty Co., which helps Pennsylvania Commerce identify sites for branches.
