e425
Filed by The Toronto-Dominion Bank
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Subject Company: Hudson United Bancorp
Commission File No.: 001-08660
Attached are transcripts of presentation by The Toronto-Dominion Bank and TD Banknorth Inc. at
the 2005 Scotia Capital Financials Summit on September 13, 2005.
These materials may be deemed to be solicitation material in respect of the proposed merger of TD
Banknorth and Hudson United Bancorp. In connection with the proposed transaction, a registration
statement on Form S-4 has been filed with the SEC. Shareholders of TD Banknorth and shareholders of
Hudson United are encouraged to read the registration statement and any other relevant documents
filed with the SEC, including the joint proxy statement/prospectus that is a part of the
registration statement, because they contain important information about the proposed merger. The
final joint proxy statement/prospectus will be mailed to shareholders of TD Banknorth and
shareholders of Hudson United. Investors and security holders will be able to obtain the documents
free of charge at the SECs website, www.sec.gov, from TD Banknorth, Two Portland Square, P.O. Box
9540, Portland, Maine 04112-9540, Attention: Investor Relations, or from Hudson United, 1000
MacArthur Boulevard, Mahwah, New Jersey 07430, Attention: Investor Relations.
TD Banknorth, Hudson United Bancorp and their respective directors and executive officers and other
members of management and employees may be deemed to participate in the solicitation of proxies in
respect of the proposed transactions. Information regarding TD Banknorths directors and executive
officers is available in TD Banknorths proxy statement for its 2005 annual meeting of
shareholders, which was filed with the SEC on April 20, 2005, and information regarding Hudson
Uniteds directors and executive officers is available in Hudson Uniteds proxy statement for its
2005 annual meeting of shareholders, which was filed with the SEC on March 23, 2005. Additional
information regarding the interests of such potential participants will be included in the joint
proxy statement/prospectus and the other relevant documents filed with the SEC when they become
available.
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2005 Scotia Capital Financials Summit |
TRANSCRIPT OF DAN MARINANGELIS PRESENTATION
AT 2005 SCOTIA CAPITAL FINANCIALS SUMMIT
TUESDAY SEPTEMBER 13, 2005
(CHECK AGAINST DELIVERY)
THE INFORMATION CONTAINED IN THIS TRANSCRIPT IS A TEXTUAL REPRESENTATION OF THE TD BANKNORTHS
AND THE TORONTO-DOMINION BANKS (TD) CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN
ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING
OF THE SUBSTANCE OF THE CONFERENCE CALL. IN NO WAY DOES TD ASSUME ANY RESPONSIBILITY FOR ANY
INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON TDS WEB SITE OR IN THIS
TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE CONFERENCE CALL ITSELF AND TD BANKNORTHS AND TDS SEC
FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
FORWARD-LOOKING INFORMATION
From time to time, the Bank makes written and oral forward-looking statements, including in
this presentation, in other filings with Canadian regulators or the U.S. Securities and Exchange
Commission (SEC), and in other communications. All such statements are made pursuant to the safe
harbour provisions of the United States Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, among others, statements regarding the Banks objectives and
targets and strategies to achieve them, the outlook for the Banks business lines, and the Banks
anticipated financial performance. Forward-looking statements are typically identified by words
such as believe, expect, anticipate, intend, estimate, plan, may and could. By
their very nature, these statements require us to make assumptions and are subject to inherent
risks and uncertainties, general and specific, which may cause actual results to differ materially
from the expectations expressed in the forward-looking statements. Some of the factors that could
cause such differences include: the credit, market, liquidity, interest rate, operational and other
risks discussed in the management discussion and analysis section in other regulatory filings made
in Canada and with the SEC, including the Banks 2004 Annual Report; general business and economic
conditions in Canada, the United States and other countries in which the Bank conducts business, as
well as the effect of changes in monetary policy in those jurisdictions and changes in the foreign
exchange rates for the currencies of those jurisdictions; the degree of competition in the markets
in which the Bank operates, both from established competitors and new entrants; legislative and
regulatory developments; the accuracy and completeness of information the Bank receives on
customers and counterparties; the timely development and introduction of new products and services
in receptive markets; expanding existing distribution channels; developing new distribution
channels and realizing increased revenue from these channels, including electronic commerce-based
efforts; the Banks ability to execute its growth and acquisition strategies including those of its
subsidiaries; changes in accounting policies and methods the Bank uses to report its financial
condition, including uncertainties associated with critical accounting assumptions and estimates;
the effect of applying future accounting changes; global capital market activity; consolidation in
the Canadian financial services sector; the Banks ability to attract and retain key executives;
reliance on third parties to provide components of the Banks business infrastructure;
technological changes; change in tax laws; unexpected judicial or regulatory proceedings; continued
negative impact of the United States litigation environment; unexpected changes in consumer
spending and saving habits; the possible impact on the Banks businesses of international conflicts
and terrorism; acts of God, such as earthquakes; the effects of disease or illness on local,
national or international economies; the effects of disruptions to public infrastructure, such as
transportation, communications, power or water supply; and managements ability to anticipate and
manage the risks associated with these factors and execute the Banks strategies. A substantial
amount of the Banks business involves making loans or otherwise committing resources to specific
companies, industries or countries. Unforeseen events affecting such borrowers, industries or
countries could have a material adverse effect on the Banks financial results, businesses,
financial condition or liquidity. The preceding list is not exhaustive of all possible factors.
Other factors could also adversely affect the Banks results. For more information see the
discussion starting on page 37 of the 2004 Annual Report. All such factors should be considered
carefully when making decisions with respect to the Bank, and undue reliance should not be placed
on the Banks forward-looking statements. The Bank does not undertake to update any forward-looking
statements, whether written or oral, that may be made from time to time by or on its behalf.
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Dan Marinangeli
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EVP & CFO, TD Bank Financial Group |
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Kevin Choquette
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Analyst and Managing Director, Scotia Capital |
Good afternoon and I know that was a very short lunch break but were just going to try to
keep on schedule here.
Our first presenter this afternoon from TD Bank Financial Group is Dan Marinangeli, executive vice
president and chief financial officer. Dan joined the bank in 1987 and in 1995 was appointed Senior
Vice President, Finance Division and to his current role in 1999. TD Bank has increased its common
dividend 100% since the beginning of 2000 with the bank being the most active of the Canadian banks
in terms of acquisitions, with Banknorth, Hudson United and Ameritrade.
Dan Marinangeli
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EVP & CFO, TD Bank Financial Group |
Slides 1& 2
Thanks, Kevin. Its great to be here. Forward-looking statements, obviously, if there are any,
disregard them.
Slide 3
Id like to say three things today, if I can, and get three things across to you. The first point
Id like to make is basically describe our strategy for building a better bank, then describe in
more detail our four businesses and how the four businesses tie into our basic strategies, and
finally give you some indication, a sense of why we think TD is a different bank from our peer
group.
Slide 4
Our basic strategies in the bank are all geared towards lessening the barriers to a premium P/E
multiple. The TD trades at about 12.5 times next years consensus cash earnings. Thats well under
the average for the TSX, of course, and its not a particular premium to the other Canadian banks
either. We think we need to address four issues to reduce this discount.
The first issue is we need to outperform the market vis-a-vis earnings growth. We have to do that
with a lower risk profile. And third issue is we need to redeploy our capital, earning a
satisfactory return. I think weve done a reasonable job of that. And the fourth factor is really a
rele-factor , we have to have the confidence of our investors and we need to be consistent, we need
to do what we say were going to do. And its been the policy of the bank for several years now to
be very transparent and open with investors and basically follow through on what we say were going
to do.
I think weve done fairly well in points number one and two. I think we still have a challenge in
following through on point number three, the redeployment of our capital. I think weve made some
initial strides there, but obviously the game continues and well be judged on how well we do over
the next several years.
Slide 5
So, in terms of growth, looking at our segment performance weve experienced exceptional results in
our personal and commercial bank. Results so far this year are up 18% and it now represents 61% of
the total earnings of the bank. Weve got solid results in wealth, especially solid results in
Canada for wealth.
TD Banknorth is a new segment starting this year and year to date weve seen slight declines in our
wholesale business for reasons that Ill talk about later in the presentation.
Slide 6
So this is translated into, at the consolidated level, some pretty strong results. We have so far
year to date earnings of $3.08. Thats up 8% over the same period last year and youll recall that
last year was an exceptional year for the bank where our earnings were up 26% over the previous
year. We havent had any significant impact in these results of PCL reversals, which are, for the
most part, excluded from our core cash earnings.
Weve said that we felt that we could grow earnings per share in the range of 7 to 10% this year.
In order to do this we need to get earnings growth from our largest business, TD Canada Trust, by
about 10% or better and we need wealth to grow in excess of 10% because we dont see TD Securities,
our wholesale business, growing at 10% in the future. And Id say so far were on track.
Slide 7
Were quite pleased with our performance recently, especially how it compares to our peer group
where on a year to date basis weve now outperformed the peer group by about 16 percentage points
since 2003. But earnings growth needs to be compared to the level of risk that any bank takes to
get these earnings number and in this regard weve done even better.
Slide 8
We continue to outperform our peers in return on risk-weighted assets and were doing this despite
the very benign credit environment facing our industry. This environment probably isnt going to
stay this way forever. You have to wonder if all the banks are earning enough in their lending
businesses over a total credit cycle to get the kind of returns that are required.
Slide 9
Higher returns on risk-weighted assets implies our capital is growing very rapidly. In fact, that
is the case and in TDs case were currently generating about $1.5 billion a year in capital for
reinvestment. Weve been doing a fair amount of reinvestment recently. We estimate that the pro
forma tangible common equity ratio at the end of our third quarter, including the announced deal
with Ameritrade and Hudson United, would be about 7.6%.
Slide 10 & 11
So, looking at our four businesses, how have they performed and what are their strategies? We have
four very solid growing businesses. The first one Ill talk about is the personal and commercial
banking business in Canada, also known as TD Canada Trust. Its been a tremendous story for us,
both in terms of earnings growth and the generator of economic capital for the bank. In fact, this
is where the majority of the excess capital that the bank has generated has come from.
Slide 12
And how have we been doing it and what are the strategies that have worked so well in TD Canada
Trust? Well, we have basically tremendous market share in personal banking in Canada, about a 21%
market share across most personal products in Canada, higher in some, slightly lower than others.
But thats not across the board, so we have some businesses where our market share for historical
reasons are well under that 20 to 21%. Examples would include credit cards, small business and
commercial banking, the insurance business as well. Despite the fact that we do very well in
Meloche Monnex and weve seen exceptional growth in that business, we still only have single digit
market share in the P&C insurance business in Canada.
So what we need to do is we need to use the strengths in our personal banking businesses to improve
the market share and growth potential to those businesses where were underrepresented. Were using
our strengths to grow our weaker businesses. And we need to do that in order to grow faster than
the
market because we have got a fairly mature market in Canada but you need to grow faster in certain
businesses if youre to outperform that market.
Secondly, we feel very strongly that we need to continually reinvest in our systems and processes
in TD Canada Trust in order to produce cost savings two or three years out. So in TD Canada Trust,
IT spend is a goal, not a way to reduce expenses. There is never any pressure on our retail banking
staff to reduce IT spend in order to shave 0.5 point off the efficiency ratio. What we do is we
want to redeploy, reinvest the savings that weve had from previous initiatives into new
initiatives so that two or three years from now we will be able to reap the cost reduction benefits
in that way.
And finally, over time we need to continually invest in our growth businesses. A good example of
this is Meloche Monnex. Weve done a few very small tuck-in purchases in Meloche Monnex, which over
time have greatly enhanced the Meloche Monnex growth platform.
Slide 13
One of the great stories of the retail bank is that despite the fact that margins have declined
since 2002 fairly substantially across the whole system, weve been able to continually improve our
efficiency ratio. And thats a very difficult thing to do when your top line revenue is being
constrained by margin declines. Our efficiency ratio so far this year, 56.4%. Although banks dont
all report their business now on a consistent basis, we think that that is the best efficiency
ratio for retail banking in Canada. Were the low cost producer and thats the place where you
think where we think we really need to be given the maturity of the Canadian business.
Slide 14
Were also starting to get some traction in a few of our underrepresented businesses that I
mentioned before. So in small business and commercial banking, for instance, weve seen over the
past year, nine months year to date, we see business loans and deposits growing by about 9% on a
year over year basis. This is after several years of very static balances in our small business and
commercial banking businesses.
Likewise, on the insurance front you can see that our revenue net of claims in our insurance
businesses, being Meloche Monnex and our life insurance businesses, on a year to date 05 basis are
up about 47% over the previous year. Were seeing solid momentum in some of these underrepresented
businesses, especially in the small business and commercial banking business. I would say that in
the insurance businesses what were seeing is a very likely to be a plateauing of the growth
rate over the next several periods. We cant continue to grow at 47% for very much longer, but are
expecting insurance revenues to grow in the 10 to 15% range over the next foreseeable future.
Slide 15
So how does this compare to our peer group in terms of profitability in the personal commercial
bank? It compares quite well, of course. On a basis in 2002 to 2004, i.e. the two-year growth of
our P&C bank, were up 34% versus the peer group of 15%, more than doubling our peer group.
On a year to date basis, three quarters 05 versus three quarters 04, were up 18% compared to the
13% peer group number. This is, we think, a substantial out-performance in what is supposed to be a
very mature well bank business.
Slide 16
Moving on to our wealth management story, we think theres a pretty good story on this front as
well. The strategy here again, same as in retail banking, use our strengths to address our
weaknesses.
And, as you know, because the TD Bank did not buy a full service brokerage in the late 80s like
the other banks, we have had a very significant under-representation in the full service brokerage
business. And despite the fact that we have a very strong discount brokerage business, weve been
underrepresented in some other facets of the wealth business in Canada.
So what we need to do is invest on the advice side, as we said on many occasions, and, in fact,
weve been successful at this in the last nine months. The non-discount portion of this business in
Canada has grown by 32% in the nine months year to date over the same period last year. The key is
to use our very strong distribution channels in Canada and to continue building on our investment
advisor and financial planner networks.
And weve we started 2005 with 364 planners. We had planned to build that by 100 during the year
and were on track to do that. On the investment advisor front we started at 414 and we had planned
to add 50 and were on track to add 50 for the year. So were on track to get to our planned
numbers by the end of this fiscal year.
Slide 17
One of our extreme strengths in the wealth management business, of course, is our retail mutual
fund business. This has performed exceptionally well and really has been built on exceptional
performance over the last several years. You can see in this chart that our Morningstar 4 & 5 star
rated accounts are higher than the industry and likewise our 1 & 2 star rated funds are well under
what the industry has as a norm. So were performing better than the industry.
And because of that, to a large extent because of that, in our very strong distribution network we
are the number two retail fund, retail mutual fund complex sales firm at $3.8 billion so far this
fiscal year. Weve been gaining market share, extensive market share, both in the banking part of
the fund business and in the total industry part of the fund business. Its clear that effective
distribution is clearly becoming to the fore here and the banks, of course, are doing very well as
a result and we are one of the biggest beneficiaries of that trend.
Slide 18
So all in, weve seen tremendous growth in our wealth management business with a very strong
non-discount component. On the discount side the big story, of course, is our announced pending
Ameritrade deal. We announced that in late June. I wont say a lot about Ameritrade or Banknorth
now because both of those companies are on the agenda, Banknorth right after me today and
Ameritrade tomorrow.
Slide 19
But if you wanted to look at the impact that Ameritrade could have on the profitability of our
wealth businesses, if you assume that our domestic wealth business, including TD Waterhouse Canada,
were to continue at the same pace as we have for the first three quarters of this year, and that
would include TD Waterhouse Canada, continue at that pace in 06 and 07 and if you were to also
make the same assumption with TD Waterhouse U.S. and Ameritrade going into the combined entity of
TD Ameritrade, i.e. the last nine months would be annualized and the same results would be achieved
in 06 and 07. If you then layered in the synergies that weve modeled and disclosed at the
analysts meeting in June and any funding costs associated with the deal, you can see a fairly
significant impact in terms of profitability on our wealth business in total.
Slide 20
So moving on to the wholesale banking business in TD Bank Financial Group, this has been a success
story as well but for different reasons. It certainly hasnt been a success story from an earnings
growth perspective. You can see that net income has been relatively flat over the last three years
if you include the nine months year to date number for this year. But its been hugely successful
from a risk reduction perspective.
I have a slide in a few minutes on the risk of TD Securities. Youll see that its greatly reduced
over this period. That results in less capital being used and despite the fact that earnings
havent grown very much over the last few years, our return on invested capital is very
satisfactory, approaching 20% in 03 and exceeding 20% in both 04 and year to date 05. And the
fact that we use return on invested capital and
economic profit as a prime metric in the securities industry I think is quite unusual for that
industry, as most of you may know, in fact.
Slide 21
So weve developed a different strategy for TD Securities. It operates within a fairly modest
capital allocation. Its currently at $2.6 billion, so the risks that they take are commensurate
with the allocation of capital and greatly reduced from previous periods. As I mentioned, the key
metric is return on invested capital54 economic profit, so that tends to align the goals and
desires of our senior management team in TD Securities with that of the TD Bank and shareholder
group. And I dont think that is all that common in the industry.
Consistent with this strategy we continue to focus TD Securities in Canada. We announced in the
second quarter that we would be restructuring our structured products business that is outside of
Canada and we continue to look at ways to reduce the riskiness of TD Securities generally through
retrenching to Canada and generally through reducing the capital usage in those marginal businesses
that dont return a satisfactory return on invested capital.
Slide 22
One of our prime domestic focuses in the last several years is to improve our institutional
equities business and you can see that based on the stock the block trade percentage of market
share, weve moved from number five in 2002 up to number one with a 16.2% market share year to date
in 05. Again, great success here.
What weve had in the past in TD Securities is a very strong fixed income business, as you probably
know, and what weve attempted to do here is match it in Canada with a strong equities business as
well. I think itd be fair to say, though, that with a fairly strong equities and fixed income
business, we still lag the industry in terms of investment banking and historically weve lacked
the diversified deep franchise that the other security firms have in Canada. And so what were
doing is were focusing our effort in Canada and attempting to again bring the resources back where
we think we can have a significant impact in Canada.
Slide 23
Evidence of the reduction in risk can be seen on the next slide and you can see that in 2002 we had
average invested capital of 4.2 billion and thats now down to an average in Q3 of $2.6 billion, a
significant reduction in capital used, and with a commensurate reduction in the risk-weighted
assets used in TD Securities, 62 billion total in 2002 down to only $32 billion currently.
A number of factors went into play in terms of risk reduction obviously. The non-core credit
portfolio, corporate lending portfolio, the rundown of that portfolio, which was very successful,
reduced both capital used and risk-weighted assets. As well, the focus on our trading businesses
and developing more sophisticated models within the market risk category has also reduced
significantly the risk-weighted assets used in that business.
Slide 24
Just a few words on TD Banknorth. From TDs perspective, as Peter Verrill is going to be saying a
few words about TD Banknorth in a few minutes, but were quite pleased with the way TD Banknorth
has performed so far. Again, its very early days. Weve had effectively one full quarter and a
part quarter of their results included in our consolidated results. Banknorth was a significant
strategic move for the TD Bank. I shouldnt have to say that; most of you know thats true. What it
does is it gives us scope for the redeployment of capital in future periods and to get higher
growth in earnings within our peer group in Canada.
The pending acquisition of Hudson United proves that we can indeed expand the footprint of TD
Banknorth out of its traditional geography. And the fact that we have strong local management
onsite for
Banknorth makes this a doable strategy. Without local management you wouldnt be able to expand the
local footprint to the degree that we have in a short period of time in Banknorth.
Slide 25
In terms of TD Ameritrade, again TD Ameritrade is presenting tomorrow, but the new TD Ameritrade
will be an exceptionally strong competitor in its industry, very well positioned. Itll be the
largest discount broker by trades per day in the industry. Itll be well placed to participate in
future consolidation in this industry and it now appears that the TD and Ameritrade deals that we
announced in June has probably been a spark or an incentive for other firms to participate in
consolidation, as we saw with Harris Direct.
This will take the TD brand across America. This will be a very large business. Itll have a very
high profile in the U.S. Coupled with our brand of TD Banknorth in the northeast, the TD Ameritrade
brand, which well be able to spend significant amounts of money on media purchases, TD will become
a much more known brand name in the U.S. It also fits very well with our overall strategy.
We like our business we like our businesses to be of critical mass. We like our businesses to be
competitive, we like them to be able to stand on their own and survive. TD Ameritrade will
certainly meet that criteria. This will be a very, very strong competitor in its space. And very
strong businesses in individual geographies and individual businesses should result in stronger P/E
for the consolidated bank stock here back in Canada.
So, as you look at this pie chart, you can see that our earning stream will be more diversified
once we close the Ameritrade deal. Ameritrade will TD Ameritrade will represent about 8% of the
cash earnings of the bank once all the synergies are realized, Banknorth, about 9%, again when all
synergies are realized with Hudson United. TD Waterhouse in the Canadian wealth business, the fund
business and the full service business, will represent about 11% of our total profitability and our
wholesale business at 19%, slightly under 20%, with a balance, a very significant 53%, representing
TD Canada Trust in Canada.
Slide 26 & 27
So, when you get down to the end of it, why is TD Bank different than our peer group? What
differentiates us from the other four major banks in Canada? Well, I hope Ive described the lower
risk profile that the TD Bank has. Thats been a conscious decision on our part. I think its fair
to say that we kind of got a few hints along the way as to what we should do in that regard. 2002
may have been an example of learning through necessity, but once we did learn we have applied those
strategies extensively.
We do have faster organic growth than our peer group. We dont view Canada really as a slow growth
franchise given the fact that we have certain under-penetrated businesses. The TD Canada Trust
merger produced some anomalies in the market shares of our various businesses and its our task and
our strategy to exploit those anomalies using our strengths to deal with our weaknesses.
We have an incredible focus on capital management and optimizing invested capital. I think this is
clearly a differentiating factor between this bank and others. We recognize that this isnt really
a strategic game were playing. Strategies are pretty simple. I think you can read about strategies
in the global mail almost any day. What you have to be able to do is apply those strategies, put
them into place, and execute those strategies in a way that creates shareholder wealth. So far I
think were on track. We have a long way to go.
And lastly, I think the TD Bank has by far the strongest U.S. growth platform of any of the major
banks, in fact, two significant players, TD Banknorth, which is a dominant player in its region,
and TD Ameritrade, which will be a very strong competitor across the whole U.S. market.
Slide 28
We have some other materials, which if I flipped to this slide already, I apologize for not
plugging it sooner. We also have some pending securities filings and so I ask you to read this
slide, please.
And now, Kevin, were open for questions.
Kevin Choquette - Analyst and Managing Director, Scotia Capital
Dan, TD has been a leader on the Canadian banks and taking parts of itself public in order to
achieve higher valuations and strategic benefits associated. With that Im thinking, of course, of
Waterhouse. It was private, public, private and it will be public again when its blended into
Ameritrade and Banknorth, of course. But it seems to me that TD should be the first of the big
banks to carve out part of itself as an income trust. Can you please talk about your thoughts in
that regard, in particular in Canadian wealth management operations and perhaps even TD Canada
Trust?
Dan Marinangeli - EVP & CFO, TD Bank Financial Group
I think there are considerable impediments to creating an income trust that are parts of the bank.
To be honest, we havent spent a lot of time thinking about how we might achieve what youve
suggested. There are considerable regulatory questions. The Canadian banks are, as you know, are
creatures of the Canadian Bank Act, which anticipates a corporate form at the consolidated level
certainly. So I think the whole bank doing an income trust would be not on the table.
Components of the bank would lend itself to an income trust in that they would have fairly stable
cash flows I think. We have no plans for doing that and I would be quite surprised if any plans are
hatched in the short term.
The real solution, of course, is very simple here. The finance department, the Canadian government
should fix the double taxation of dividends. And that would be very positive from a corporate
Canada perspective, exceptionally positive from the Canadian bank perspective.
And, in fact, I would submit that fixing that problem with the current tax rules would be more
positive to the bank as a whole than spinning off a part of its business in a trust form, which
would always be, to be honest, would be open to future tax law change and restructurings required
therefore and it would be, in some respects, perhaps the last straw in terms of fixing the current
trust rules. Im not sure that it would be very wise for the banks to get in the middle of that.
Kevin Choquette - Analyst and Managing Director, Scotia Capital
Other questions? Keith?
Unidentified Audience Member
Thank you. Dan, can you bring us up to speed where youre going to be on the unsecured lending
platform and how thats going to roll out and the timeframe for that plus any comments on what
youve been doing in your credit card market share? You guys have been very aggressive marketers.
Are you seeing any increases of market share there or where that stands?
Dan Marinangeli - EVP & CFO, TD Bank Financial Group
Okay, the first question, Keith, youre wondering about our laser development. Weve been
developing an unsecured lending platform now for several years. We have parts of it in place. It
rolls in over the next
nine months or so. Well have it all in place by the middle of next year. I would say that at this
stage were cautious about the impact that might have on market share or ability to grow that
business. We have seen no appreciable growth in those unsecured balances. We have not gained market
share. You can see by looking at the PCL numbers that weve recorded that we have not blown up PCL
numbers as a result of expanding that business. It is our desire to expand that business, but were
going very slow and were going to be very careful that we dont destroy value here by expanding
too fast.
Its clear that the unsecured personal lending business in Canada hasnt been, over an extended
period of time, a creator of economic profit and you go back in a historical sense, it generally
has been an under-priced product in Canada. And so were looking at ways to make it an economic
profit creator at the same time as expanding our volumes and market share and we really want to go
slow on that.
In terms of our credit card business, I would say that were not expanding market share to a
significant extent and that were growing volumes in single digits, whereas some of our competitors
are doing double digits. So again, the unsecured platform that we need to expand that business is
the same ones Im talking about. So I would say that were being slow and careful on both fronts.
Kevin Choquette - Analyst and Managing Director, Scotia Capital
Questions? Dan, how would you recap your return expectations on a longer-term basis with respective
Banknorth and Ameritrade?
Dan Marinangeli - EVP & CFO, TD Bank Financial Group
The Banknorth ROIC for the first full quarter, Kevin, as you know, was about 5.5%. When we did the
deal we were looking at slightly higher ROICs than that the initial period, only 50 basis points
higher, 6% was the expectation. So were pretty well there in the first quarter, close, and we hope
to be there for the full year. So Id say that Banknorth has met our expectations. Its certainly
met our expectations in finding a good deal to do. Its those follow-on deals that improve ROIC, so
in fact if anything, were probably a little bit ahead of schedule in terms of getting that next
deal done. So were happy with Banknorth.
Ameritrade, its early to say and its difficult for us to actually figure out what the actual ROIC
is for Ameritrade because were taking an asset that weve built up over a number of years. We had
taken significant amounts of capital out of that business over this period and, in fact, if you
were to go back and look at all the money we spent on TD Waterhouse in the U.S., deduct all the
money we made on the IPO and selling parts of that business off, like the night trading shares that
they had back in the 90s, youre hard pressed to find any invested capital. So we will be
investing some more cash and buying up to the 39.9%. The return on that capital will be very, very
strong. So it cant help but be a winner.
Unidentified Audience Member
Given your interest obviously in investing more along the Banknorth route, does this mean that
youll likely be as active in the buyback of your shares? And can you just discuss a bit of the
tradeoff that you see and the rate return that you can get from a buyback of your shares versus the
rates of return on a shorter-term or longer-term basis that you see in acquisitions?
Dan Marinangeli - EVP & CFO, TD Bank Financial Group
Okay. In fact, were not very active in buying our shares back at all. We havent been active in
buying our shares back for, oh, a couple of years I think. And even at that point we were only
buying shares back as
a result of dilution on the option plans. The TD Bank has not been an active buyer of its own
shares for quite some time.
We feel that the best way to create shareholder wealth in owning TD Bank shares is to earn a return
on our invested capital in excess of the equity cost of capital that we have. By definition, you
cant buy your shares back and do that. We think that we can invest in places like Banknorth or TD
Ameritrade where we can earn the cost of equity at the bank. And its longer term, perhaps, in the
case of Banknorth at 6% or 5.5%. Its not the equity cost of capital of our retail businesses. We
think its more like 9%, so well need to build up that level over the next year or two.
We feel that its the redeployment of capital that were paid to do and its finding opportunities
to redeploy that capital or raise the return in excess of the equity cost of capital. Thats our
job. Thats our number one job. Thats what we intend to do. If it ever gets to the point where
theres some environmental reason why there is just nothing to invest in, period, across the whole
spectrum of possibilities, then we would certainly look back at buying our shares. But its hard to
imagine that buying your shares back is the only or the best always possible use of your capital,
in my view, my personal view.
Kevin Choquette - Analyst and Managing Director, Scotia Capital
Okay, on that note Id like to thank Dan for his presentation.
Dan Marinangeli - EVP & CFO, TD Bank Financial Group
Thanks, Kevin.
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2005 Scotia Capital Financials Summit |
TRANSCRIPT OF PETER VERRILL AND
STEVE BOYLES PRESENTATION
AT 2005 SCOTIA CAPITAL FINANCIALS SUMMIT
TUESDAY SEPTEMBER 13, 2005
(CHECK AGAINST DELIVERY)
THE INFORMATION CONTAINED IN THIS TRANSCRIPT IS A TEXTUAL REPRESENTATION OF THE TD BANKNORTHS
AND THE TORONTO-DOMINION BANKS (TD) CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN
ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING
OF THE SUBSTANCE OF THE CONFERENCE CALL. IN NO WAY DOES TD ASSUME ANY RESPONSIBILITY FOR ANY
INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON TDS WEB SITE OR IN THIS
TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE CONFERENCE CALL ITSELF AND TD BANKNORTHS AND TDS SEC
FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
FORWARD-LOOKING INFORMATION
This presentation contains certain forward-looking statements with respect to the financial
condition, results of operations and business of TD Banknorth. Words such as expect, feel,
believe, will, may, anticipate, plan, estimate, intend, should and similar
expressions are intended to identify forward-looking statements. Forward-looking statements are
subject to various factors which could cause actual results to differ materially from these
estimates. These factors include, but are not limited, to, changes in general economic conditions,
interest rates, deposit flows, loan demand, competition, legislation or regulation and accounting
principles, policies or guidelines, as well as other economic, competitive, governmental,
regulatory and accounting and technological factors affecting TD Banknorths operations. In
addition, acquisitions may result in large one-time charges to income, may not produce revenue
enhancements or cost savings at levels or within time frames originally anticipated and may result
in unforeseen integration difficulties. Investors are encouraged to access TD Banknorths periodic
reports filed with the Securities and Exchange Commission for financial and business information
regarding TD Banknorth, including information which could affect TD Banknorths forward-looking
statements. TD Banknorth does not undertake any obligation to update these forward-looking
statements to reflect events or circumstances that occur after the date on which such statements
were made.
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Peter Verrill
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Senior Executive VP & COO, TD Banknorth |
Steve Boyle
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EVP & CFO, TD Banknorth |
PRESENTATION
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Kevin Choquette
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Analyst and Managing Director, Scotia Capital |
We are delighted to have TD Banknorth present for the first time at the conference. Joining
us today from TD Banknorth is Peter Verrill, Senior Executive Vice President, and Chief Operating
Officer, as well as Stephen Boyle, TD Banknorths Chief Financial Officer. Peter has been with the
bank and its predecessor banks for the past 25 years, and in his current role since 1996. Stephen
has been with the bank about nine years and in his current role since October 2003. Peter?
Peter Verrill Senior Executive VP & COO, TD Banknorth
Slide 1&2
Thank you very much. I may need some help on the IT side here, but eventually we will get to the
next slide. Before I do get started, I did want to tell you my first goal is not to try to
contradict anything that Dan may have said earlier in his presentation, so Ill try to be good
about that. And then secondly, Id like to also perhaps anticipate a question that may come up, and
that is how is the relationship between TD and TD Banknorth going, and actually, its going
extremely well. Theyve done everything they said they were going to do. I only hope that as we
teach TD to do their banking the way the Americans do that theyll catch on a little bit faster
than they have, but we will keep working on that.
Yes, this is the forward financial information slide that you can read at your leisure.
What Id like to do is Id like to talk a little bit about TD Banknorth today, who we are and what
our strategies are, and then Ill ask Stephen Boyle to come up to talk more specifically about the
Hudson United transaction, which is the transaction that Dan alluded to earlier.
Slide 3&4
TD Banknorth is headquartered in Portland Maine. We are the result of consolidation of several
banks over the last several years. In fact, about 25 banks over the last 15 years, in northern New
England primarily, and stretching down into Massachusetts and Connecticut. We are approximately 55%
owned by TD Financial Group. It was just about six months ago today that TD did acquire a majority
interest in TD Banknorth. We are about $32 billion in asset size, as of June 30th, and on a pro
forma basis with Hudson United we will be about $40 billion in size, and that will put us in the
top 25, near the top 20, nationally in terms of asset size for commercial banks.
We service more than 1.3 million households throughout New England, and a small franchise in
upstate New York, with over 7800 employees.
About 15 years ago when we began our diversification strategy and acquisition strategy, we
determined that we needed to broaden the base. We had just come out really of the recession in the
early 1990s, and knew that in order to be successful we had to diversify geographically as well as
balance sheet. And as a result of that, I think today we have a fairly diversified both loan and
deposit base, with an emphasis on retail and commercial banking along with some fee businesses,
such as wealth management and insurance.
We operate a community banking model, which Ill describe a little bit more detail in a few
moments, which has been very successful for us, and one that we think we can continue to utilize in
a model going forth as it is one that we dont believe is constrained by asset size.
And in terms of poised for growth, our past growth has really come from acquisitions, and although
we have been able to grow move into higher growth areas such as Massachusetts and Connecticut,
its difficult. We oftentimes get asked whats the difference between organic growth and
acquisition growth, but the way our model works is that once we acquire a company we fully
integrate that company as quickly as possible into our own company and therefore its difficult and
its perhaps not worth the effort to try to distinguish between organic and acquisition growth. We
really look at acquisition growth as a core part of our business and we believe with the
affiliation and partnership with TD that we are poised for additional growth.
Slide 4
Here is a picture of our franchise and Steve will show you a pro forma picture with Hudson United,
but you can see that were located primarily in the New England, with a franchise along the Eastern
Shore of New York State, up in New York State. We have around 400 branches. We have 30 wealth
management offices throughout the footprint, as well as 71 Banknorth investment offices and 27
insurance groups. The insurance business is something thats fairly new to the Company. We bought
our first insurance agency in 1998, and our strategy there is to try to build that franchise within
the banking footprint. So as we
expand our banking footprint we will look for opportunities to expand our insurance agency business
as well, and its not underwriting, its insurance agency commission base.
Slide 5
Community banking model. I think thats one of the areas that we distinguish ourselves from our
competitors, and by definition what we mean by community banking really is the empowerment that we
give to our people out in the field to make local decisions.
The way we are structured is that we have a bank President in each region, which is primarily by
state. That bank President has a Chief Lending Officer, as well as a Chief Retail Officer reporting
to him or her, and they are indeed empowered to make all local decisions that impact the customers.
When a customer comes into get a loan or to do business, the person there doesnt have to say,
Well, I have to call up Portland, Maine got in to find out the answer, they can make those
decisions right there. Thats not to say that we dont have a very strong corporate wide risk
management infrastructure because we do, but we do allow and require people out in the field to
make those decisions. That provides quick decision-making ability, and allows us to react very
quickly to the customer needs.
We also believe that it allows us to deliver a more superior service to our customers. We are able
to react to those customers. Our people are not only encouraged to make decisions out in the
communities, but well so encourage those people to be very active community members. Many of our
loan offices and retail people are very active in local community affairs, whether its a nonprofit
organization, education or whatever, we provide time off for them to participate in the communities
that they are involved in, so that theyll know what the needs of the customers are.
There community banking model targets essentially the small and midmarket commercial base as well
as the retail base. We dont go after the Fortune 500 type of companies, which a Bank of America
perhaps might be doing. That has allowed us to be, I think, very successful with the community
banking model. Our Chief competitors are the Citizen Banks of the world, the Sovereign Banks of the
world, and the local community banks, not really the Bank of Americas or the J.P. Morgans.
We are focused on growing core deposits, checking accounts, from which hopefully we will be able to
cross sell additional services either banking or non-banking such as insurance.
Slide 6
In terms of our performance over the last several years, we believe that weve been able to deliver
consistently strong performance. Ill show you some graphs in a few moments that will I think
outline that, but on an overall basis, weve been able to show in excess of 10 years of operating
earnings per share growth. Our profitability has been relatively strong for a community banking
model. First six months of this year 29% cash ROE, and a 51% cash efficiency ratio as of June 30th.
Slide 7
Weve been able to revive consistent and strong core loan and deposit growth, and again, Ill show
you some graphs in a moment to back that up. Our strategy has been to try to build up our fee
income areas in low risk type of fee income. We are quite conservative in terms of the types of
businesses we want to enter. That may not always generate the highest return, but I think overall
in the long-term its going to provide the most consistent strong returns.
And superior asset quality. Most of the people at our company have been there a longtime. Ive been
there 28 years, and we all went through the recession of 1990, 1991, and we know the mistakes that
were made then and we know what it takes to correct those mistakes. Theres a lot of things that
can hurt you in banking, but asset quality can kill you, so thats one area that we have paid
particular attention to, and I think our asset quality numbers will back that up.
In terms of loan and deposit growth, you can see in the left-hand side, in the green bars, that our
loan growth over the last five years has grown at a compounded annual growth rate of over 13%. Our
deposits have grown at a rate in excess of 10%. I would say that the deposit growth rate is
probably higher than we would anticipate going forward. Thats historically a fairly strong deposit
growth rate. What weve been able to do is to supplement our organic deposit growth rate however
with acquisitions of very strong retail
deposit franchises. And that has allowed us to continue to grow our loans at significantly higher
rates, supplementing out deposit growth with acquisitions.
In terms of the yields on the bottom of the page, it shows the yields on our asset bases as well as
our deposit base, and to help you do the math here, if you take the difference in those numbers, in
other words the spread, you can see what the impact of the flattening yield curve is beginning to
have and has had on the Company. Going back to the year 2000, our spread was 4.44%. That continued
to grow up to 2002, as the yield curve was steepening to 4.64%, and then it began a decline in
2004, was at 4.21%. In fact, if you took a look at the spread for the first six months of this
year, youll see that it has decline began to 3.76%. So we are in an environment with a very flat
yield curve. I dont predict interest rates, but what we try to do is positioned company so that we
are less vulnerable to swings interest rates, and I think thats one of the disciplines that TD has
been able to bring to bear for TD Banknorth, and its helped us tremendously. We had to significant
deleveraging programs, one in the fourth quarter of last year, and one in the first quarter of this
year that I think put us in good position to try to mitigate the impact of a flattening yield curve
to our margin. Our margin today is in excess of 4%.
Slide 8
Fee income, cash efficiency ratio, you can see those two over the last five years have improved
significantly. In fact, if you look at the cash efficiency ratio, which is on the right side of the
grass here, the previous five years you would have seen that that was up in the 60% quartile
decimal, and weve been able to do that, improved that, for two reasons. One is the ability to
successfully integrate the many acquisitions weve done, which have taken costs out of the acquired
company and secondly, been able to grow our revenue base faster than our expense base.
Slide 9
Asset quality, which I mentioned before, is so important to us, and this is the one thing that we
will not take shortcuts on. On the left-hand side is the ratio of nonperforming assets to total
assets, and over the last five years you can see its been pretty consistent, as well as the net
charge-off ratio on the right hand side, very low level, 21 basis points for the year ending 2004.
We recognize that over the last seven or eight years weve been in a very positive credit cycle and
we also realize that thats not going to last forever. We are not seeing any signs at this point in
time that its changing in the near term, but we do know that its going to go through another
cycle at some point in time, so averaged management infrastructure is built around trying to
predict as best we can wear the bubbles are going to burst, where the problems are going to be, and
to cut back in those areas before the problems really occur.
And to give you an example, some of the areas that recently we have identified as potential
problems are for instance the condo market area, particularly in the Greater Boston area, and weve
cut back significantly on lending for those type of projects. Weve also looked at, in the past, at
health-care industry, and in particular some of the real estate areas. So we try to predict where
those problems are going to be and take action ahead of time.
Slide 10 & 11
The results has been I think a fairly consistent growth in our cash operating earnings, 11.4% over
the last five years, to in excess of $400 million last year, and our earnings per share growth have
seen a similar type of growth. When you look at the cash operating earnings, our GAPP earnings is
going to show some volatility because of the several acquisitions that we do, and the impact that
one time costs have on that, which are reflected in the GAPP earnings, but not necessarily in the
cash operating earnings.
Slide 12
Acquisitions, we thought wed talk about quickly because it is such an important part of our
success and of our strategy going forward. Acquisitions are we believe a core competency of the
Company. We believe we use a very disciplined and conservative acquisition model. Theres really
three phases to an acquisition. The first phase is the pre-due diligence analysis. We work very
closely with investment bankers, and now with TD, to identify and to evaluate potential acquisition
candidates. As you know, M&A activity, you have to be opportunistic, to be able to react quickly,
and we think we have a pretty good system in place in order to do that.
The second phase really is the actual due diligence itself. The same people who have been doing the
due diligence for the last 25 acquisitions are the same people doing it today. We have a team of
anywhere from 20 to 50 people, depending on the complexity of the Company we are acquiring, that
will go in there in a very short period of time because you only have a few days, be able to
decipher where the issues are, where the risks are and do we have plans or can we put plans in
place to mitigate those risks. And the third phase, which is perhaps the most important, is the
ability to actually plan the integration and execute the integration. You can only make one mistake
in this business, and once you make one mistake, you are sort of out of the business for awhile.
Our model has been that we will make the deal accretive to our earnings per share within a year,
and historically, weve only used cost savings to be able to obtain that. Any revenue enhancements
would be a bonus to that, but I think as we move forward we are going to have to look at revenue
enhancements as something that really, indeed, is and should be a part of the model. As I
mentioned, weve done 25 acquisitions over the last 15 years or so. 10 on those have been since the
year 2000 and in the higher growth markets of Massachusetts and Connecticut.
And I would mentioned that although Hudson perhaps is the largest integration that we have done, if
measured by asset size, it is far from the most complex integration that we have done. From an
integration systems conversion prospective, its fairly straightforward, we are already well into
our planning for it. The intent is to convert Hudson United on to the systems of TD Banknorth in
May of next year. The things that jump up and bite you are the things you dont know about, but as
of today theres nothing there that we havent seen before or have been able to perform in the
past.
Slide 13
So what makes us different from our competitors before Steve comes up and talks about Hudson
United? We believe we have a strong management team, with a proven track record. That is one of the
reasons that TD bought us, and hopefully we were able to show them that they made the right
decision.
In 2004, Forbes named us the best managed bank in America. In 2005, we were the runner-ups, the top
10. I think Wells Fargo won it this past year. We do what we will say we do. There are no hidden
agendas, we believe we are a straightforward we have a straightforward simple approach to
banking. We dont like to take on a lot of risk. Again, as I said before, that may not give you the
highest returns in a given period of time, but over the long haul I think we provide the strongest
earnings.
We believe we are well positioned for both organic and acquisition growth, in the higher markets in
the Northeast, and with the affiliation with TD, we now have a new weapon, in our ability to access
their capital to help us by the type of growth that they are looking for as well as what we are
looking for as well as what we are looking for. We are not going to change our model and we are not
going to do anything different, but now we have the ability with TDs strength to look at potential
candidates in the past we perhaps would not have been able to do.
And finally, we are going to keep our focus on superior asset quality the cause we know thats the
one thing that can sink the ship.
So on that, Id like to turn it over to Steve, wholl talk about the Hudson transaction.
Steve Boyle EVP & CFO, TD Banknorth
Slide 14
Thanks Peter. We are tremendously excited about this Hudson United transaction, and Id like to
take a few slides just to show you why.
Slide 15
The first thing was we had done a pretty good job of rolling out New England. We felt comfortable
that we had coverage in almost all the areas in except for right below Boston and southeastern
Massachusetts,
and in Fairfield County in Connecticut. There werent a lot of acquisitions left for us to do, yet
we knew that acquisitions were a core part of our strategy, so we had to breakout of New England.
You can see the obvious place to do that is into metro New York. First thing we had to do was
partner with TD, so we had access to their capital, and then we had to find the right Company to
buy. And we are convinced that Hudson United is the right Company to buy.
The first thing that you can see is it fills out Connecticut beautifully for us, so we are really
in all the highly populated wealthy areas in Connecticut that we wanted to be in, right now, Day 1,
as a result of Hudson United.
And then you can see that it positions us into suburban New York, so the suburbs right around New
York and New York State and New Jersey, and then a nice foothold in the Philadelphia area.
You can also see that we picked up quite a number of branches; 200 branches in this area, but only
about 6 billion in deposits, so its a very manageable acquisition in terms of the amount of
customers that were taking on.
Slide 16
So beyond the map, why are we excited? One of the first things that we thought about going into
this area, is its a highly competitive banking environment. And we wanted to be able to go in and
be able to grow our market share and grow our deposits significantly. So by coming in with this
Hudson United platform, we enter with relatively low market share, but high amount of fixed costs.
We have all those branches positioned so that we can develop a very competitive product offering
and grow our deposits and our loans at a faster rate than in our historic franchise.
The other thing thats interesting here is that it gives us a number of strategic options. So we
can now move into New York City or Long Island. We can grow de novo in New Jersey and in the
Philadelphia area or we can do fill in acquisitions in the New Jersey Philadelphia area. So we have
a tremendous amount of strategic options here.
Slide 17
These markets are tremendous for us. Moving from northern New England, which was a very rural
market, as Peter said, into Boston and Massachusetts and Connecticut which are more affluent, we
see that herein Fairfield County in New Jersey is some of the most affluent markets in the United
States, and markets that have grown faster historically been our markets have in northern New
England.
Slide 18
We mentioned Connecticut. Just to give you some of the numbers, we had 42 branches or $1.6 billion
in deposits. Fairfield County, which again, really is the suburbs off New York. We had $800 million
in deposits, 19 branches. If we were to pursue a de novo strategy that many banks are doing in that
area, probably would have taken us 3,4,5 years to get established in these markets. We will be
established Day 1, yet we will also be in a position where we can continue to grow beyond the
customers that Hudson United has today.
We get a foothold, as I said, in the New York area, and one of the things that is nice for us is
that we see this as a franchise where we can really add value. With the multiples that you have to
pay today to buy banks in United States, and probably in Canada, its not enough anymore just to go
in and get costs saves. You really need to be able to pick up the incremental amount of growth that
you are getting in the franchise.
Hudson has struggled on the retail side of their business to get the same level of growth that
their competitors have, and weve devised a plan that we feel very confident is going to work, that
by turning around some of the deferred maintenance, investing in the branches, re-branding to TD
Banknorth, increasing the amount of advertising, and putting in a much more competitive product
set, that we will be able to grow the business substantially faster than Hudson United was able to,
and therefore provide value to our shareholders.
Slide 19
One of the nice things that Hudson United and Banknorth, while they are different in a number of
ways, are very similar in a number of ways. I think probably the area where we are most similar is
in business mix. There are some nice slides in the appendix, we dont have enough time to go
through them, but I think youll see that we have very similar commercial line of business, same
kind of emphasis on community banking, relationships with the customers, small loan size. They have
a very, very solid non-interest-bearing deposits base of all the banks that we looked at
potentially buying in the metro New York area. They have one of the highest percentages off
non-interest-bearing deposits as a percent of total deposits. So the mix is really the same. Its
really just getting their growth to accelerate a little bit.
Why do we feel comfortable that we can manage the execution risk here? Peter mentioned that weve
done a lot of acquisitions. We do them very well. We think on a relative basis this isnt very big.
We like the markets. In going into New York there was a lot of questions. You know, oh, big city,
its very different than what youve done in the past. We dont necessarily buy into that 100%, but
clearly, these markets are very suburban, and very similar to the markets that we see say in the
metro Boston area, where weve operated very well and very profitably.
We are going to bring our own management in at the highest level at Hudson United. Wendy
Suehrstedt, who runs the retail line of business for Banknorth now is going to go down and be the
President there, so we are very comfortable with the management thats going to be running it. And
we feel like that some of the compliance issues that Hudson United has had historically will be
easily overcome, and I think that you saw probably yesterday that their cease and desist order has
been lifted, so were very happy with that, and obviously that just takes one more roadblock out of
the way to getting this acquisition done.
And we were able to use the expertise off TD in a couple of the nice niche businesses that Hudson
United had that we werent familiar with, they were familiar with them, and so we were able to get
comfortable, and now we are going to just continue to run those businesses as they had been run at
Hudson United. They have a nice private-label credit card business and they also do some premium
finance on the insurance side.
Slide 20
I wont spend a lot of time, but as a pro forma organization, looks very strong. Over 40 billion in
assets, 93% loan to deposit ratio, very strong capital ratios, with also at the ability to generate
significant excess capital on an ongoing basis to fund our continuing expansion and our continuing
acquisition efforts.
Slide 21
I wont go through this in a lot of detail, but I think theres one thing that we didnt really
touch on too much. Its in the appendices as opposed to the body of the transaction, but as Peter
mentioned we make these acquisitions to the accretive in a year. This acquisition is $0.02 diluted
in the first nine months, but it will be $0.06 a accretive to earnings per share in the first full
year and I think is very consistent with the acquisitions that weve done historically, and the
acquisitions that we plan to do in the future.
So with that, Id be happy to take any questions, and I know Peter would as well.
Unidentified Audience Member
You talked about the yield curve in the U.S. that is I mean especially on the short edge we see
a lot of pressure. Do you anticipate some more competition for deposits? I mean youve acquired a
lot of non-interest-bearing deposits and maybe some more awareness for interest rates. I mean
people didnt care if they get 1 percent or 0 percent, but now theyre becoming more substantial.
Do you see more pressure on the money market funds?
Peter Verrill - Senior Executive VP & COO, TD Banknorth
I think thats a good observation, but I think thats one of the opportunities we see with Hudson
United in particular. In northern New England, where we have a very significant market share of 22%
or so, fortunately theres not a lot of competition, so there its really just a defensive position
retaining what is a
very strong margin. In the Hudson marketplace and to some extent perhaps in Massachusetts and
Connecticut, more so in Connecticut, where we have a much smaller market share, with think there
some opportunity to be more aggressive in terms of our pricing, where some of the major competitors
in those markets will not be able to necessarily be as aggressive on the pricing, so we think we
can price up in some of those markets where we can grow market share fairly rapidly, and not impact
the greatest percentage of our deposit base. So there is competition, but we believe with only a 2
or 3% market share that we are going to be in a better position to get some of that market share.
Unidentified Audience Member
Thank you. Two questions. One is you made the comment in your initial presentation that were not
going to do anything different than weve done before, just because we are part of TD. We are going
to keep on executing out base strategy kind of thing. And at the same time you and both the CFO
made reference to, we are now including we need to include revenue synergies to be able to
for things to be accretive in the first year. So just if you could clarify that statement. And then
my second point is a more detailed question on the synergies or the accretion, maybe we can ask
after youve done your answer.
Peter Verrill - Senior Executive VP & COO, TD Banknorth
OK great. Ill try to answer the first one. Steve perhaps can take the second one. Historically
thats accurate; we have not had to utilize revenue enhancements as a factor in providing accretion
in our model, but has Steve said, I think going forward I think the model has to be adjusted a
little bit, particularly as we get into new markets and we do much larger acquisitions. I think
revenue enhancements, our ability to add value to a transaction, is going to be something that
distinguishes our ability to be successful in acquisitions from someone else. So I think if we just
rely on cost savings were not going to be able to have the growth in acquisitions that perhaps
weve been able to do in the past, so we are going to have to be our ability to be able to
produce revenue type of enhancements and adding value is going to be important to ask in making the
acquisition successful. So it is a little change in the model. I agree with that.
Steve Boyle - EVP & CFO, TD Banknorth
I just would and I think its a change more in the environment and in the prices of deals than it
is of TD imposed, oh, TD believes in revenue enhancements and we didnt. I think its to make
acquisitions work at these levels of prices, youve got to get revenue enhancements.
Unidentified Audience Member
And then just a detailed question, youve got an Appendix in the back, youve got a number of
charts there, the first chart shows the accretion calculation, and a major part of that is the
growth in Hudson earnings from 06 to 07. Can you just explain the large growth in Hudson United
earnings? It looks like ...
Unidentified Company Representative
Sure.
Unidentified Company Representative
... about 50% in net income.
Steve Boyle - EVP & CFO, TD Banknorth
Well, the biggest thing is that the first period is a nine-month period and the second one is a
year. Other than that, its just normal organic growth in terms of the base case by case.
Unidentified Company Representative
Maybe 8%.
Unidentified Audience Member
Are you sure thats it? Because its 06. Its 07 versus 06, so Im assuming 06 is a 12-month
number.
Steve Boyle - EVP & CFO, TD Banknorth
No, 06 is a 9-month number.
Unidentified Audience Member
OK, thanks.
Unidentified Audience Member
Have you had an opportunity to look at the lending book of Hudson United with regard to some
of these identifying of a bubble areas?
Peter Verrill - Senior Executive VP & COO, TD Banknorth
Yes, ...
Unidentified Audience Member
And what ...
Peter Verrill - Senior Executive VP & COO, TD Banknorth
Go ahead, Im sorry.
Unidentified Audience Member
... synergy youve got.
Peter Verrill - Senior Executive VP & COO, TD Banknorth
Yes, that was one area that we spent a lot of time during our due diligence process identifying. We
probably had 30 people from our company as well as some people from TD Financial Group in there
looking at the loan portfolios. We examined I think it was somewhere around 75, 80% in dollar value
of their commercial loan portfolio. We became very comfortable with their underwriting standards.
We think their commercial lending practices are sound. We believe where theyve perhaps fallen a
little bit behind is on the retail side, and not on the commercial side. So we are very comfortable
with their commercial book. They have very similar underwriting methods as we do. So we feel good
about it.
Unidentified Audience Member
Thank you. Could you please comment on housing and mortgage market in your regions? Particularly
with respect to more aggressive tactics like interest only mortgages and things like that.
Peter Verrill - Senior Executive VP & COO, TD Banknorth
Sure. We do not have a very significant relative to certainly thrift residential mortgage
portfolio. In fact, the majority of loans that weve originated over the last several years have
been sold out into the secondary market. So, the portfolio that we have in our books today, which
is under 20% of our loan portfolio is a very seasoned normal type of loan, fixed-rate adjustable,
but not interest only type loans. So if theres a real estate bubble, and there are a lot of people
who are beginning to think there might be in certain segments or markets, we dont think we are
going to be significantly impacted by that. The residential lending portfolio of TD Banknorth is a
relatively insignificant part of our business.
Unidentified Company Representative
Any further questions? Well, Id like to thank Banknorth for coming up and presenting. Thank you
very much, gentlemen.
Peter Verrill - Senior Executive VP & COO, TD Banknorth
Thank you for having us.