Saturday, March 24, 2007

TD Banknorth Cuts 400 Jobs

Financial Post, Duncan Mavin, 23 March 2007

TD Banknorth, the U.S. retail banking unit of Toronto Dominion Bank, is slashing its workforce by 400 and closing 24 branches.

The cuts could include up to 70 non-branch jobs, according to Blackmont Capital analyst Brad Smith.

The measures could result in “one-time costs in the US$30-40-million range” said Mr. Smith. Portland, Maine-based Banknorth has targeted cost savings of between 5% and 8% by 2008.

The bank has been actively pursuing growth in the last couple of years, with acquisitions of US$3.2-billion in 2006 alone. But some of those purchases have come with problems, such as sub-standard branches.

The sector as a whole has also been hit by declining margins due to intense competition and an unfavourable interest rate environment. Management has said acquisitions are on hold for now.

Blackmont’s Mr. Smith said the announced cuts have no impact on his estimate for TD’s operating performance for 2007. He has not changed his 12-month target price of $73.00 for TD’s stock.
Financial Post, 24 March 2007

When Toronto-Dominion Bank bought a controlling stake in TD Banknorth two years ago, TD chief executive Ed Clark said a fundamental factor was finding a local management team "I can bet my reputation on."

Yesterday, a new management regime recently installed at Banknorth and headed by a long-serving TD banker sent from Canada put its stamp on the operations of the Portland, Me.-based retail bank by slashing 400 jobs, including as many as 80 back-office positions, and closing 24 branches.

Banknorth's new chief executive -- TD's Bharat Masrani, who took over the role this month at the expense of former CEO Bill Ryan -- said the job losses are "necessary in response to the current operating environment."

The move comes only a few months after TD's Mr. Clark announced in November that TD has agreed to buy all the outstanding shares of Banknorth it does not own for US$3.2-billion.

Edward Jones analyst Tom Kersting said the retail-banking environment in the United States has changed significantly since TD acquired a stake in Banknorth.

"When they bought in and they were doing acquisitions, the industry conditions were a lot better than they are today,"

Mr. Kersting said. "Right now it's very difficult for all the regional banks in the U.S."

Banknorth's results have largely disappointed -- the U.S. bank contributed $64-million to TD's first-quarter results, down from $65-million a year ago.

Intense competition and a tough interest-rate environment for U.S. banks have taken a bite out of margins for the whole U.S. retail-banking industry. Banknorth's performance in 2006 also suffered from the cost of integrating US$2.5-billion worth of acquisitions bought up by former chief Mr. Ryan.

A spokesman for TD said that the recent developments at Banknorth, including the announced back-office job cuts, do not reflect a significant change in strategy on TD's part.

"The emphasis is definitely on operations instead of acquisitions, but I think the change is subtle," he said.

Mr. Masrani has said he will cut costs by between 5% and 8% by 2008, which includes the job losses and branch closures announced yesterday. TD and Banknorth executives have also said acquisitions are on hold for the short term.

Most of the branch locations earmarked for closure were acquired in Banknorth's buying spree in 2006, said spokesman Jeff Nathanson.

Some of the acquired branches were not up to the same standards of customer service expected of a TD or TD Banknorth branch. Also, the acquisitions resulted in Banknorth owning branches in locations that are close together.

Banknorth said it will incur a restructuring charge of US$11- million to US$17-million related to the cuts.

Meanwhile, TD's bid to buy 100% of Banknorth has faced opposition from some shareholders, who have sued Banknorth claiming the TD offer is under priced. However, the Canadian bank is expected to close the transaction some time in April.
The Globe and Mail, Tara Perkins, 24 March 2007

After less than a month on the job, TD Banknorth Inc. chief executive officer Bharat Masrani is taking action to pare back the bank's fast-growing network.

But he insists TD Banknorth is still a growth company.

The bank will close up to 24 branches, eliminating 400 jobs. That will result in a charge of between $11-million (U.S.) and $17-million for the quarter that ends March 31.

It's likely not the end of the cutbacks. "We continue to look at other initiatives which may result in further charges," Mr. Masrani said in an interview yesterday.

The goal is to cut annual operating expenses by $50-million to $80-million by 2008.

Mr. Masrani took the CEO title at the start of this month. Toronto-Dominion Bank parachuted him down to the United States last fall, after nearly two decades with the company, to become president of TD Banknorth just months before TD announced plans to take the unit private. TD has offered $3.2-billion for the roughly 43 per cent of TD Banknorth shares it doesn't already own.

Yesterday's restructuring announcement "is a reflection of the tough banking environment," Mr. Masrani said, but "we continue to be a growth company."

Recent acquisitions have seen TD Banknorth virtually quadruple its assets to more than $40-billion since 2004, ranking it the 26th-biggest commercial banking organization in the United States. Acquisitions are on the back burner for the remainder of this year, although Mr. Masrani adds "never say never."

The strategy is very similar to that of rival Royal Bank of Canada, which followed a similar path for its U.S. retail bank Centura, Edward Jones analyst Tom Kersting noted.

RBC "bought a pretty large U.S. bank, they had some difficulties running it initially, they quit growing, they focused on their own operations," Mr. Kersting said. "And now you look at Centura, and they're doing pretty well and they're growing through acquisitions again."

This restructuring is "the right short-term move for TD Banknorth, and it should better position them for future long-term growth," Mr. Kersting said.

Mr. Masrani blames interest rates, or the "inverted yield curve," for much of the bank's woes. When short-term rates exceed long-term rates, it's more difficult to make money off the spread between the rate banks charge on loans and the rate they pay to borrow. And the interest rate environment has resulted in stiffer competition.

"That's causing big revenue pressures, not only for us but for all of the banks. And in order to address that, you have to address your expenses."

He's attempting to do that as another cloud hovers on the horizon.

TD Banknorth has no subprime, or high-risk, mortgage lending, he said.

"But, as is the case with any major financial problem, there could be knock-on effects that could impact other types of markets . . . Those are the issues that we worry about."

In the meantime, the job cuts will take place in coming months, mostly in New Jersey, with additional closings planned in Connecticut, New York, Pennsylvania and Massachusetts. Most branches are set to be closed in the third quarter, following regulatory approvals.

Blackmont Capital analyst Brad Smith wrote in a note to clients that the layoffs are about 4.6 per cent of the total work force, "suggesting 60-70 non-branch job[s] are included in the cuts." The branch closings are about 3.6 per cent of the branch network.

TD Banknorth, which made $128-million in the past quarter, is expected to become a wholly owned unit of the parent bank by April.

Some shareholders are taking legal action over that transaction, seeking to challenge the merger. TD said all of the lawsuits are without merit. In a regulatory filing last week, TD said it had agreed to settle one such suit for about $2.95-million. Other suits are still outstanding.

Also in its proxy statement last week, the bank said it was considering "various expense reductions and operational initiatives" that could include "possible management changes. . . .

"Although we are still evaluating these initiatives and none have yet been approved by our board of directors, we anticipate that we will record a pretax charge of approximately $40-million to $100-million . . . or approximately $0.11 to $0.27 per share, after tax, in the first or second quarter of 2007 to reflect the severance" and related costs, it said.