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December 11, 2006

Building a 'better bank' | TD Banknorth discusses changes to its management and ownership structure

By Whit Richardson

After overseeing 27 acquisitions in 15 years as chairman and CEO of the bank now known as TD Banknorth, Bill Ryan finally had to sit one deal out: the sale of TD Banknorth itself.

Last month, four independent members of the Portland-based bank's board of directors made the recommendation, unanimously approved by the full board, to sell the bank for $3.2 billion to its majority shareholder, Toronto-based TD Bank Financial Group. Though it's not Ryan's style to sit on the sidelines for such decisions, he will have to get used to the idea. That's because in late October, TD Banknorth announced that Ryan, 63, would step aside as CEO next spring, turning over day-to-day management of the bank's operations. He will remain chairman, a post he plans to keep until 2010, to focus on the bank's long-term mergers-and-acquisitions strategy.

The management and ownership change might seem like a big shakeup at TD Banknorth, but neither event is exactly a surprise, say analysts who follow the company. TD Bank Financial Group purchased 51% of Banknorth Inc.'s shares in March of 2005, noting at the time that a complete buyout would follow at some point in the future. But other news coming from the top, such as the announcement that TD Banknorth will hold off on new acquisitions for the time being, weren't as carefully planned.

The pause in acquisitions is a reaction to slumping earnings due to the current banking environment, which Ryan says is not as robust as in years past. "We have the inverted yield curve, where short-term rates are higher than long-term rates, and that's a killer in banking," Ryan says. "If you go out and talk to 100 bankers, one thing that will come up in conversation with all 100 of them is the inverted yield curve, and they won't be bragging about it."

With the interest rate squeeze putting pressure on TD Banknorth's earnings, which declined three percent in the recent third quarter, to $86.1 million, the bank's managers decided that acquisitions don't look practical at the moment. Instead, the focus will be on finding growth by strengthening existing operations — or, as Ed Clark, CEO of TD Bank Financial Group, said when discussing the plan to buy the remaining shares of TD Banknorth, making "a better bank rather than a bigger one."

While TD Banknorth waits for the banking environment to improve, the job of finding organic growth opportunities will fall to the man who will take over for Ryan as CEO: Bharat Masrani, former vice chair and chief risk officer at TD Bank Financial Group who joined TD Banknorth as president in September.

Back to basics
TD Banknorth is far from the small Maine bank that struggled to survive in the early 1990s, when it was known as Peoples Heritage Bank. Through bank acquisition after bank acquisition, TD Banknorth grew to become a $40 billion financial services company and one of the 25 largest commercial banks in the country, according to the company. During that growth, Ryan acted as both CEO, managing the bank's daily operations, and as chairman, formulating and executing the bank's ambitious mergers and acquisitions strategy.

Handling both roles is a big job for one person, and Ryan says he is ready to step back from the daily grind as CEO. But it was important for him to have a smooth transition in the upper management of the bank. Enter Masrani, who first joined TD Banknorth's board of directors a year and a half ago, and who is described by banking analysts as a competent manager with experience on the operational side of the banking business. While Masrani takes over management responsibilities, Ryan will be free to continue pursuing acquisitions. (For more on TD Banknorth's mergers-and-acquisitions strategy going forward, see "Planting seeds," below.)

Masrani sees his job as ensuring TD Banknorth remains competitive in its traditional Northeast territory and in the mid-Atlantic region the bank recently entered. That way, when the banking environment does improve, the bank will be in solid shape to take advantage of the boost. "And I know all the banks talk about that, but I think there are certain basic things that we do that if we enhance them then we will do better than some of our competitors," Masrani says.

In broad terms, Masrani sees two key areas of focus: improving brand awareness and expanding TD Banknorth's core products and services. "When I say 'organically grow,' we are thinking of the basic things in banking," Masrani says. "What do our customers want? How can we serve them better? How can we make sure our employees are engaged to ensure they provide superior customer service?"

The bank also will concentrate on absorbing its most recent, and largest, acquisition: the $1.9 billion purchase of Mahwah, N.J.-based Hudson United Bancorp, which has roughly 200 branches in New Jersey, New York, Pennsylvania and Connecticut. "I think they will use this time to focus onÂ… creating a cohesive and well-integrated unit in the mid Atlantic, thereby creating a better platform to expand further some time in the future," says James Ackor, an analyst who follows TD Banknorth for RBC Capital Management in Portland. "In reality, that's where the growth opportunities are."

The mid Atlantic region also is probably the most competitive market TD Banknorth has entered so far, say analysts. But Banknorth has always had a good reputation for customer service compared to larger banks, says Kevin Timmons, senior banking analyst at C.L. King & Associates in Albany, which could help it make headway in the region. "When Fleet was an independent in this area, that was Banknorth's bread and butter, to effectively take market share away from Fleet," Timmons says. "They have to continue trying to focus on being that kind of bank that can go up against others and take market share."

Ryan says one approach that has helped TD Banknorth in the past has been introducing new services before competitors. In the mid-1990s, the bank was the first in Maine to open on Sundays, and was the first to open a branch in a grocery store, says Ryan. "We have to be thinking about that," he says. "Are there innovative approaches to banking that would help us to be more succesful than our peers? I don't want to give secrets away, but I'd be surprised if we don't look at longer hours at some of our locations in Maine because people are looking for more convenience in their banking."

But banks' earnings are suffering at the moment. TD Banknorth has seen its net income decrease in five of the last seven quarters. So Ryan sees advantages in being 100% owned by a larger company with deeper pockets during this difficult period. Going private under the umbrella of TD Bank Financial Group will also mean less pressure from shareholders.

Barring unforeseen circumstances, the sale to TD Bank Financial Group is likely to be finalized when TD Banknorth's minority shareholders vote on the deal in March or April.

Two of the largest shareholders have agreed to support the deal, though at least one minority shareholder, Helene Hutt, has filed a lawsuit in Delaware's Chancery Court trying to block the transaction, claiming the price TD Bank Financial Group is paying for TD Banknorth's shares, $32.33 a share, is "grossly unfair," according to a report by Bloomberg News.

In the meantime, Masrani says he'll be working to make sure TD Banknorth improves its operations so it is ready to expand again when the market improves. "I wish I could tell you this was sexy and fashionable, that there's one silver bullet," Masrani says. "But that's not how it works. We're a financial services company and day in and day out we have to reengineer ourselves."

TD Banknorth

Founded: As Peoples Savings Bank in Auburn, 1875
Employees in Maine: 2,700
Total branches: Nearly 600
Total ATMs: More than 750
Total consolidated assets: $40 billion
Net income, 2005: $274 million
Contact: 800-462-3666
www.tdbanknorth.com

Planting seeds

Just because TD Banknorth will wait until the banking environment improves before pursuing any more acquisitions, that doesn't mean there's less work to do for Bill Ryan, who will step down as CEO in the spring to focus on his role as the bank's chairman. He'll rely on his rapport with executives and board members at other banks to help explore potential options that can be pursued when the market improves. "Bill has been phenomenal at creating relationships with other banks, primarily in New England, in the past 15 years," says James Ackor, an analyst at RBC Capital Management in Portland. "When a bank decides to sell, a lot of times Bill Ryan and Banknorth get the first call."

Ryan says that reputation in banking circles comes from a long-term vision. "This is not something where you call a CEO you don't know and say, 'Hey Joe, have you ever thought about selling your bank?'" Ryan says, sitting on a couch in his 6th-floor corner office in Portland. "I call them up and say, 'Hey, you know, I'm trying to figure out how I'm going to run my bank in the future. Want to get together for dinner and talk about it?'"

From those initial conversations, Ryan says it typically takes a least a year for two banks to become comfortable enough to even begin talking specifically about a merger. So while Ryan explores his options, one of two things needs to happen in the marketplace for TD Banknorth to consider further acquisitions: Either the gap between short- and long-term interest rates needs to widen so banks' earnings go up, or the banks considering selling need to lower their expectations. "In a perfect world I'd love to continue to buy a bank or two in Massachusetts, a bank in Connecticut and a couple of banks in the mid-Atlantic region," Ryan says. "And I think given two or three years we'll be able to feel good about doing just that."
Whit Richardson

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