William J. Ryan – On radar screens
Too small to be a big bank, too big to be a small bank: That’s how one senior executive at BankNorth Group described the $18.2 billion-asset institution.
BankNorth and Sovereign Bank are poised on the razor’s edge of size. Representatives of the two banks spoke about earnings and plans for the future at the Keefe, Bruyette & Woods Eastern Regional Bank Symposium on March 8.
During the past year, both have undertaken large acquisitions; People’s Heritage Financial Group became BankNorth and Sovereign acquired more than 2 million customers from the Fleet/BankBoston divestiture.
“It was an interesting time,” said William J. Ryan, chairman, president and chief executive officer of BankNorth. “We announced it [the acquisition] at the beginning of last year. Obviously, some people didn’t like it. Our stock in March of last year got as low as 10 and 3/8. Those who stayed with us were very lucky, since our stock doubled in price in the last seven months.” BankNorth owns banks in Vermont, Maine and New Hampshire, as well as First Massachusetts Bank in Northern Massachusetts.
For the seventh consecutive year, the company has posted record operating earnings and, according to Ryan, has plans to continue that record for another season.
“If you were starting a New England franchise, this would probably be as good as it gets. We hope to continue to run this franchise, certainly. Though now I’m not so sure how long that will continue. We must be on the radar screens of other big companies that want to come to New England. We certainly weren’t when we were a $2 billion company up in Portland [Maine]. But at $18.2 billion, probably as much as we are acquiring, we should be looking over our shoulder periodically, too,” he said.
Since an upturn in its performance in 1993, the bank has grown into one of the 50 largest banking companies in the country. It owns 22 percent of the banking assets in Maine and 21 percent in New Hampshire, where it competes with FleetBoston Financial and Citizens Bank.
“We have a top-five market share in Massachusetts. First Massachusetts Bank is a $6.5 million franchise that covers the northern tier of the state. We’re not in the greater Boston area at this point and I don’t think we will be in the future,” said Ryan.
Last year the company opened 130,000 new checking accounts, and Ryan predicts it will open another 160,000 this year. “Operating fee income has increased 18 percent year over year. It’s up to 27 percent for the year 2000. It’s at 29 percent in the fourth quarter. Our fee income was about 6 percent of our total income about six years ago. We knew we had to get to a benchmark of about 30 percent, and it’s grown very nicely,” he said.
While Ryan joked about being able to charge more in fees when you’re the only game in town, he said the company has changed from being a savings bank to a commercial bank. “We’re fair but we’re firm,” he said of the fees to customers.
Fee income growth for the company is expected at 15 percent for the next year. Revenue and earnings per share will probably grow in the 8 to 10 percent range, he said.
Recognizing what areas to delve into and stay out of is part of what made Bank-North’s success. “Our plan for the future is very straightforward. We [will] continue to focus on what the strengths of the company are, our niches. It’s small- and medium-business commercial lending. We’re the dominant small-business lender in all the states that we’re in and it makes sense. We can’t compete with the Fleets of this world for those Fortune 500 credits, and you want to know something? There are very few Fortune 500 companies in Maine and New Hampshire. So we have to go after those small-business loans,” said Ryan.
Developing an e-commerce strategy that delivers added features to business customers is expected to have a positive impact on customer loyalty, he said. One example is providing a discount service for products a restaurant customer may purchase, such as an oven. “So we’ll be able to offer our business customer everything they’ll need in order to do business without leaving the banking site,” Ryan said.
The company also will continue its diversification approach to its loan portfolio as “one of the best ways to avoid problems,” said Ryan. In the last year, the company has stopped doing commercial real estate loans in Massachusetts, however, because the heated market “reminded us of the early ’90s,” said Ryan. “We probably were wrong, we didn’t have to quit as soon as we did, but we did,” he said.
Overall, the company expects to continue its stable growth and continually improve its asset quality, particularly in light of the slowing economy.
Only the Beginning
While BankNorth has been quietly growing in the Northern New England states, Sovereign Bank moved up from the Atlantic states and landed in the middle of one of the largest divestitures in the history of banking.
“Sovereign has become a super-community bank stretching from north of Boston to Philadelphia, with market shares that are No. 3 generally in major states that we covered,” said John P. Hamill, chairman and chief executive officer of Sovereign Bank New England.
When the bank announced it was going to double its size with the acquisitions, analysts fretted the bank might not be able to handle the job.
“I think many of the analysts, when they were looking at this particular transaction, were saying ‘how can Sovereign possibly double its size?’ but forgot the fact that 4,000 people based in New England [were retained as customers],” said Hamill.
The company was able to show fourth-quarter growth in fee-based businesses. “The retail banking fees showed a $3.5 million improvement over the prior quarter. Mortgage banking revenue increased by $3.7 million and our loan fees and charges and capital markets revenues started to show some pickup but that, we think, is only the beginning,” said Hamill.
One of the strategic moves employed by the company recently raised eyebrows, when Sovereign issued a common equity offering to pay down debt.
“There are really five reasons why we did this,” said Mark R. McCollom, chief accounting officer at Sovereign.
“Our capital levels do still lag behind some of our peers, so this equity offering helped to ensure that somewhat,” said McCollom, adding that they thought it might be a good time to “sacrifice” earnings per share by a few cents in order to strengthen the overall balance sheet. Another reason they made the offering was to preserve capital at the bank.
“We have a $240 million debt maturity that comes due on March 15. We have the ability to dividend up from the bank fund that paydown, but obviously that would have the impact of reducing your capital at the bank. So, by raising equity at the holding company, you not only improve your consolidated ratios, you also preserve capital at the bank level,” he said.
Lastly, there is a non-solicitation agreement in place with Fleet whereby Fleet has agreed not to directly solicit Sovereign customers and employees for a two-year period of time. The drag on equity that comes out of Sovereign’s payment for that agreement is made up by the equity offering, said McCollom.
One area of concentration for growth is small-business loans, according to Joseph P. Campanelli, president of corporate and commercial banking at Sovereign. In addition to $12 billion in deposits supporting $8 billion in loans, the company acquired $1 billion in small-business loans supported by nearly $2 billion in deposits for about 10,000 small-business owners in the tri-state area.
“This represents a real focus on companies that have revenues of less than $10 million. Our average loan exposure is roughly $1 million, ranging from several hundred thousand up to a high of $2 million. We see this as a significant opportunity and one of the stronger growth markets that we have, especially in penetrating with additional product sales,” said Campanelli, who included products such as cash management and private banking in that list.
“It’s been quite a year. When you look back you realize a lot’s been accomplished. We are now one company operating multiple markets,” he said.
