Monday, January 30, 2006

TD Firmly Rooted in Old America

TD's U.S. strategy focuses on historic New England with an eye on Manhattan

The Toronto Star, Stuart Laidlaw, 30 January 2006

New York —Toronto Dominion Bank's first foray into Manhattan retail banking is more of a happy accident than the kind of bold initiative on which its U.S. captain has built his name, but that could soon change.

The bank has an ideal location — in world-famous Rockefeller Center, a mecca for tourists and locals alike — but the cramped branch's rec-room-style wood panelling and brass trim suggest a bank that's not quite keeping up with its flashy and stylistic competitors across Midtown.

"Their branches are old, they're tired," Mark Fitzgibbon, a bank analyst with Sandler O'Neill & Partners says in an interview at his Manhattan office.

"They've got a lot of work to do fixing them up."

Bear Stearns & Co. Ltd. bank analyst Salvatore DiMartino works just around the corner from the Hudson United Bank that has become the latest in the TD family.

"It's a fixer-upper," he says, choosing his words carefully during an interview in his Madison Avenue office.

Maine-based TD Banknorth, 51 per cent owned by Toronto Dominion, picked up the branch and another one near Wall Street as part of a $1.9 billion (U.S.) deal to buy Hudson that closes tomorrow. Hudson got the branches in an earlier deal.

By purchasing Hudson, Banknorth, a top New England lender, enters greater New York for the first time, giving it access to a rich market of 19 million people.

"There's not 19 million people in the whole rest of our franchise," Banknorth chief executive Bill Ryan told the Toronto Star in an interview earlier this month.

"I just want to get my hands on that."

Based in Portland, Maine, Ryan is starting to feel hemmed in after more than two-dozen deals in 15 years across the U.S. Northeast, having achieved a 20 per cent share in several markets. As a result, Ryan says he may start facing resistance from regulators in New England if he keeps buying banks there.

"The feds wouldn't allow it," he said of the Federal Reserve Bank, which must approve U.S. bank mergers.

And so he looked south to Hudson and its 204 branches concentrated in New York's suburbs, much as parent TD looked south in 2004 when it paid $3.8 billion for a majority stake in Banknorth as a domestic ban on bank mergers hampered growth at home.

In Banknorth's case, moving south put it in the world's premier banking market, and raises the possibility that Ryan might be able to make his long hoped-for assault on Manhattan. In an interview with the Star, however, Ryan said any such move beyond his two small branches there is still a few years off.

For now, he said, the real prize is in the suburbs.

"Our strategy initially is to go into suburbs where everybody lives. We did this in Boston, and it worked very well."

While Banknorth has become a major player in the Boston banking market, including paying between $5 million and $6 million to rename the Boston Bruins' home arena TD Banknorth Garden, the bank has remained largely in the suburbs.

It's a strategy both Fitzgibbon and DiMartino, like most analysts, say has worked well for Banknorth, which attracted TD as a suitor two years ago because of its track record buying underperforming rural and suburban banks and turning them around.

"They like to be in rural areas and the suburbs where the competition is a little less intense," Fitzgibbon says.

But the realities of suburban New York banking may force Banknorth to consider breaking with past practice, making the move into the highly competitive Manhattan market sooner than might otherwise be the case.

DiMartino points to suburban rivals such as his own bank, North Fork Bank, which have moved aggressively into Manhattan to provide better service to commuter clients demanding a branch near their work, as well as their homes.

"They may find they have to get into Manhattan," DiMartino says of Banknorth.

But before he makes that kind of jump, Ryan says he wants to know if he can run the same sort of community bank he has in the suburbs, with long hours, branches open Saturday and Sunday and an emphasis on the consumer.

In the city, the native New Yorker says, banking is much more commercial.

"That market is different from everything else we are doing. If we have to change the way we do business, I don't think we should" increase the bank's presence in Manhattan, he says.

Such a move could effectively leave him running two banks — one suburban and one big city, he says.

"I don't think it will work."

That puts Banknorth at something of a crossroads — trying to decide whether to keep buying banks in New York suburbs, and even follow the I-95 Interstate south into new territory, or take the Holland Tunnel from New Jersey into Manhattan, following the pattern set by competitors such as North Fork.

"The way this really works in the future is probably to just get to know the New York bankers pretty well and see who is really a good operator and maybe at a later date try to buy that bank," says Ryan, who says he admires the success North Fork has had in his hometown market.

Based on Long Island with no branches in Manhattan until just a couple of years ago, North Fork now has more than 20 branches in the Big Apple, including one on Madison Avenue that DiMartino at Bear Stearns says he uses at least as much as his home branch in the Whitestone area of Queens.

Before that branch opened, DiMartino says banking was starting to get inconvenient.

"If I wanted to do my family's banking, it had to be on weekends," he says.

Now, he can just pop into the branch down the street on his lunch hour, leaving his weekends free. He says Hudson may face pressure to offer similar convenience.

"Retail banking is all about marketing," he says. "The products and services they offer are not all that different."

In such an environment, he says, little things such as branch location and convenience can make the difference in attracting new customers. He confesses, for example, that he chose his bank for one simple reason: drive-through tellers along his morning commute.

"It's the easiest thing, you don't have to get out of the car."

For Ryan, the city is still a prize worth pursuing, but not just yet. There are still a lot of suburban banks to be bought first, and a lot of learning to be done about banking in the New York area.

With the Hudson deal, besides the two Manhattan branches, Banknorth will also pick up several branches in Philadelphia, the fifth-largest city in the United States.

"Philly is really the first time we are going into a big city, so that experience will help us and tell us that we can gain experience quicker to go into the city based on our Philly experience," Ryan says.

"Or maybe our Philly experience will tell us to go slower."

With only 1 per cent of the market share in the greater New York area, Ryan says Banknorth still has plenty of room to grow in the region before it worries about where to go next.

"I think we should wear out our welcome in the Northeast and get everything done there and create a really solid company and then say okay, now let's continue to expand the geography," he says.

"This is our first acquisition in the metro New York area. It shouldn't be our last."

But he and his executives have also said that before moving into Manhattan, the bank could bypass the city and keep going south — to the suburbs of Baltimore and Washington, D.C., in the next few years.

Banknorth chief operating officer Peter Verrill told an analysts' conference in New York in late November that the bank could be in the suburbs of Washington, D.C., in five years and to Florida within a decade.

"We are looking at ranges a lot larger than we have in the past," he said.

In an interview, Ryan said such expansion would likely not be on his watch, which is expected to last only a few more years. For now, he says, he will focus on getting as many of those 19 million people living in and around New York coming to his bank.

"I am going to concentrate on the metro New York area, Massachusetts and Connecticut. Those are the areas where I think we have the best opportunity to buy other banks and expand our franchise."

His successor, however, can expect to find that the same pressures that New York analysts say might eventually push the bank into Manhattan — consumer demand for convenience — will one day make it necessary for Banknorth to move into the U.S. South, he says.

"There are so many people in the Northeast that live in Florida in the wintertime," Ryan says. "At some point, there will be so many of them that we'll just say, look, we've got to be there."

But he soon returns to thoughts of his home market, and all the suburban New York banks waiting to be bought, saying there's still much work to be done in the North.

"I don't want to pass up all the opportunities in banks we know, that we are familiar with, that we feel comfortable with, to do something in Florida."