The World According to TD

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Across a footprint that stretches from Maine to Florida, TD Bank is almost annoyingly good at the small things customers love.

It offers dog treats to its branch patrons' four-legged companions. It makes sure its giveaway pens have no metal pocket clips (women don't like them; they cause too many snags). TD also has a flair for marketing stunts like the flash mob that performed an elaborate dance routine in Times Square last year. Employees and local dancers dressed up as doctors in green scrubs, encouraging consumers to get a free "checking check-up" to learn about recent changes to their bank accounts.

Indeed, TD prides itself on the attention it pays to every detail in its interactions with the public.

What's less obvious is how well the U.S. retail banking unit of Canada's TD Bank Group has paid attention to the big details.

With smart calls on the macroeconomic and competitive environments, TD has grown in ways that suggest its strategy is built on something far more substantial than dog treats and dance routines. And with a conviction about the future of retail banking that veers from the more cautious path of its peers, TD-which now has more branches in the United States than in Canada-is doubling down on its investment in branches here, while many of its rivals are openly questioning the profitability of retail banking. Chase, for example, predicts that 70 percent of customers with less than $100,000 in deposits and investments will be unprofitable as a result of new regulations on bank fees.

If the U.S. retail customer makes for a business with thinning margins, count TD among the banks planning to make it up on volume. While the average bank branch conducts 11,000 transactions per month, the average TD branch conducts 17,500. And the company, which first entered the U.S. in 2004, sees ample room for its young U.S. franchise to grab market share.

This spring, at its annual shareholders meeting, TD unveiled a plan to increase its branch presence in New York City by more than 50 percent, with the addition of 50 locations over the next four years. Though it means pitting itself, in an already saturated market, against the likes of JPMorgan Chase and Wells Fargo, TD sees the potential to become the area's third-largest retail bank by deposits, up from its current fifth-place standing.

It will take years to fully evaluate whether TD has made the right call. But Bharat Masrani, president and CEO of the U.S.-based TD Bank, doesn't see the bet on New York as being overly gutsy.

"It's not a small investment," he acknowledges. "But investments make sense if you are getting a decent return and it's providing you with a strategic advantage."

TD already enjoys both of those things in New York, where the bank and its legacy institutions went from having zero presence in 2001 to a strong franchise with close to 90 locations today.

Growing in Boston may be a tougher goal to achieve given the lack of available locations there, but TD has to continue to scout around if it is to keep on leveraging its presence in Massachusetts, where it currently has about 150 locations.

The bank also has aggressive growth plans in mind for South Florida, despite its being an epicenter of the mortgage meltdown. "The asset side of the balance sheet is challenging there, but there is nothing wrong with the deposit side in Florida," says Masrani. "This is the fifth largest state in the union. ... It's very attractive to us." Two years ago, TD had about 35 branches in Florida. Now it has 167.

The unwavering commitment to retail banking that TD has displayed since the start of the crisis has benefitted customers who say they couldn't get credit anywhere else. Among them: a franchisee of Kiddie Academy, which has a chain of 101 daycare centers in 22 states. The franchisee, which received pre-approval for a Small Business Administration loan, got turned down by two other institutions before obtaining a loan through TD.

"The banks all got kind of tight with their credit," says Lene Steelman, Kiddie Academy's controller and vice president of accounting. "Since we were getting 'no's,' we expected the same thing from [TD] also."

TD is a contrarian in part because it can afford to be. Its return on common equity is 18 percent, well above the 10 percent level of many big regional banks. And it reports a 50 percent increase in loan volume, excluding the impact of acquisitions, over the four years ended Dec. 31, compared with a 1 percent drop in loan volume overall for banks with more than $10 billion in assets.

When other banks hesitated, "TD hit the gas pedal," says Brian Klock, an analyst with Keefe, Bruyette & Woods. "They were making loans when other banks didn't want to."

Here again, Masrani argues that TD was just taking a logical step, not a haphazard one. "We didn't have the problems like the others. So why would we not be open for business?"

Key to TD's ability to come through the crisis in relatively strong shape is the bank's Canadian parentage. The subprime mortgage market was practically nonexistent in Canada, and the TD Bank Group's conservative profile prompted it to exit the structured products business three years ahead of the 2008 crash.

"At that time, the analysts and a lot of people vilified us and said, 'What were you guys thinking? This is the new holy grail of banking,'" recalls Masrani, who also is head of U.S. personal and commercial banking for TD Bank Group. "We exited because ... it was not obvious that it fit our risk appetite."

That's not to say, however, that neither TD nor its parent company is risk averse. Frustrated by the limited growth opportunities in its home country, TD Bank Group is one of several Canadian companies to have scouted for returns elsewhere.

Montreal-based BMO Financial Group doubled the size of its U.S. footprint in 2011 by acquiring Marshall & Ilsley for $4.1 billion. Scotiabank has expanded its foothold in Latin America and the Caribbean. (It has gone in a different direction than TD and BMO in the United States, having recently acquired the boutique U.S. energy investment bank Howard Weil.)

Of course, not all the Canadian forays south fared well. Royal Bank of Canada, which acquired Centura Banks for $2.3 billion in 2001, suffered from a lack of scale and good execution. RBC finally threw in the towel last year, selling its Raleigh, N.C.-based RBC Bank USA division to PNC Financial Services Group of Pittsburgh.

TD Bank Group took perhaps the biggest gamble of any company from the Great White North when it acquired Chrysler Financial from Cerberus Capital Management last year for $6.3 billion. The unit was struggling, but it had a captive auto finance business with a coast-to-coast footprint of 8,000 auto dealers. The merger of Chrysler Financial and TD Bank Group's existing auto lending unit is expected to produce $13 billion in loan volume this year, more than quadruple TD's 2010 levels.

TD Bank Group's successful U.S. expansion efforts predate the Chrysler deal, of course. Under CEO Ed Clark, the Toronto-based company transformed itself from a sleepy, Canadian retail bank operation into one of the top financial services firms in North America. Among U.S. banks, its TD Bank unit now ranks as the 10th largest, with $188.9 billion of assets at Dec. 31.

Clark, who declined to be interviewed for this story, pressed for growth in the United States even though it caused him grief from critics in Canada who accused him of neglecting customers there, says Tom Velk, an American economist who chairs the North American Studies program at McGill University in Montreal. "You have to give him credit for being a mold-breaker," he says.

Analysts also credit Masrani, describing the 55-year-old TD veteran as a shrewd operator and a good judge of talent.

A native of Uganda with a fondness for cricket, Masrani and his family were forced to leave their home after dictator Idi Amin expelled the country's Indian community in 1972. Masrani first went to the United Kingdom and attended boarding school outside of London. He later emigrated to Canada, and graduated from York University in Toronto.

Masrani joined TD in 1987 as a commercial lending trainee. By 2003, he had been promoted to chief risk officer, and a year later, when the company expanded into the United States by acquiring a majority stake in Banknorth Group of Portland, Maine, he was made CEO of TD Banknorth, as the U.S. unit was known then.

With the 2008 acquisition of Commerce Bancorp, Masrani's role expanded. He now oversees a U.S. business headquartered in both Portland and in Cherry Hill, N.J., where Vernon Hill, a fast-food franchisee who would become a banking icon, started Commerce.

The events leading up to TD's takeover of Commerce were tumultuous. Hill was forced out amid complaints by regulators about his family's insider dealings with the company.

While most everyone else was focusing on the Hill soap opera, TD saw potential in the empire Hill had built. Hill had envisioned bank branches as retail stores centered on customer service. Up in Canada, Clark had been molding his company along similar lines. "TD was probably closer to Commerce than most banks would be with their retail focus," says Barclays Capital analyst John Aiken.

Hill's legacy lives on at the bank in several ways. Most notably, the 69,414-square-foot training center formerly known as Commerce University is still used, though now it is known as TD University. Hill's wife, Shirley, an interior decorator, designed the ultra-modern building in the style of a hip Manhattan hotel lobby. Workers like it so much, TD says, a few have held their weddings there.

The other big piece of Hill's legacy is found in TD's management ranks. Despite the tumult preceding the acquisition by TD, Masrani says that everyone he had hoped to retain from Commerce indeed stayed on with the company. About 10 of those executives now hold senior management roles at TD.

Chris Giamo, who came over from Commerce and is regional president for TD in New York and Northern New Jersey, says the cultures merged seamlessly. "We did not really downsize," he says. "It was the best of all worlds."

Since acquiring Commerce, TD has bolstered its mortgage and credit-card businesses and added 162 branches in key markets along the Eastern seaboard. It also has expanded its relationships with customers, though it still sees plenty of room for improvement on that front. Its customers have an average of 4.5 TD products per household. Customers of a champion cross-seller like Wells Fargo have closer to six products per household.

With room to widen its existing relationships with customers, TD won't have to worry much about looking outside its footprint for growth, even if it already is No. 2 in a big market like Philadelphia, where it has 11 percent deposit market share.

"There are other markets where we have lots of room to grow," Masrani says. In deposits, TD has only just crossed the 5 percent mark in New York City. It has just a 4.4 percent share of the Boston metro area, and 2 percent of the Miami-Fort Lauderdale market.

"We can open a lot more stores and do a lot more business within the footprint for many years to come," Masrani says.

Since Commerce, TD has done a handful of small acquisitions, including the 2010 purchase of South Financial Group and some FDIC-assisted deals that helped the bank expand in Florida. Masrani doesn't sound like he's ready to get much more aggressive than that for now.

"I am not staying up nights looking for a transformative acquisition. Frankly, [with] the economy, there is still fragility there. There is not enough certainty. There is a lack of transparency in some asset values still.

"A lot of things would have to sort of start clarifying before we would look at a major acquisition."

That leaves a fair amount of organic growth to fulfill TD's ambitious retail branching plans. Masrani promises the bank will be very particular about where and when it expands, adding that the company can't continually open branches to increase sales at the expense of long-term profitability.

"If we were just doing that game, at some point my bottom line would disappear because opening a new store is not an inexpensive hobby," Masrani says. "It takes a few years before it starts to pay for itself."

Jonathan Berr is a freelance writer. He is based in New Jersey.

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