Banknorth stands to gain market muscle If deal is approved, TD Bank’s backing could take Maine bank down East Coast

In the second big banking deal to roll ashore in Maine this year, TD Bank Financial Group of Toronto announced Thursday it would pay $3.8 billion to buy a majority interest in Portland-based Banknorth Group Inc. The merger came only months after Charleston, N.C.-based Bank of America Corp. said it would acquire FleetBoston Financial Corp. Valued at $47 billion, Fleet was by far the larger sale. But Maine is more deeply invested in Banknorth, with its 2,600 Maine jobs and its 19 percent market share (compared to Fleet Bank’s 8 percent), among the last of the state’s large, homegrown banking institutions.

Donald Dematteus, a banking consultant and superintendent of Maine Bureau of Banking from 1979 to 1999, said many Maine bankers understood Banknorth had become a choice target for a larger bank. But the potential sale of a controlling interest to Canada’s fourth-largest bank caught even some banking pros off guard.

“I was surprised, but not shocked, by the fact that it was an international deal,” Dematteus said. “But since Canada is one of our big trading partners, I think it makes an awful lot of sense.”

If approved by U.S. and Canadian regulators and by Banknorth shareholders, the deal would mate TD Bank’s vast cash resources to Banknorth’s access to Eastern Seaboard markets. (TD Bank noted $10.2 billion in cash on its books in July, up from $5.9 billion at the end of 2001.) The combination would muscle up Banknorth’s plans to expand at a rate of up to three acquisitions per year in Connecticut and Massachusetts and enter the New York market. Banknorth chairman and chief executive William Ryan previously had chalked out banks with assets of $1 billion or less as potential candidates. But with checks written by TD Bank, “Banknorth will have the resources to make bigger acquisitions than they’ve done previously,” said financial services analyst Michael Goldberg with Desjardins Securities in Toronto. “And I think that’s what it’s all about.”

The agreement would allow TD Bank to increase its control from 51 percent to full ownership through purchasing Banknorth’s outstanding shares. The company followed a similar strategy when it bought a partial interest in New York-based Waterhouse Securities Inc. in 1996. The company completed the acquisition of what is now TD Waterhouse Group Inc. in 2001.

But Banknorth represents TD Bank’s first step into U.S personal or consumer banking. It is a significant move in a country of 32 million residents, where banks largely have been gathered into five leading institutions. Rules could be about to change under Prime Minister Paul Martin, but currently prevent mergers among any of the nation’s largest banks. Cash-rich from the mortgage lending boom and unable to acquire at home, the leading Canadian banks have turned their checkbooks toward the United States and its 294 million consumers.

A string of acquisitions by the Bank of Montreal has made its Harris Bank group the fifth largest in the Chicago market. Canada’s largest bank, the Royal Bank of Canada, is much further down the list in the Southeast, but is growing rapidly through its Centura Bank in the Carolinas, Virginia, Georgia and Florida.

Banknorth gives TD Bank a strong launch into that race.

“It’s a very important strategic step for TD,” Goldberg said. “It sends the message that both Bank of Montreal and Toronto-Dominion [TD Bank] have a more significant presence in their markets than perhaps RBC does.”

If completed, the merger also would mark a turning point in chief executive Ed Clark’s two-year project to reorder some significant TD Bank sore spots. The bruises came from a series of high-profile failures among TD Bank’s corporate borrowers, primarily among large-scale telecom operators including Adelphia Communications Corp. and Canada’s vast public-private telecom gamble, Teleglobe International. TD Bank was never in danger of crumbling, but while less exposed Canadian banks kept a steady stride, its revenue dropped 20 percent and earnings plunged from $3.27 to 68 cents a share. (Earnings had otherwise grown steadily through the prior seven years.)

Clark was the chief operating officer at the massive Canada Trust before its acquisition by TD Bank in 2000 (trusts, while they lasted, were exempt from Canada’s merger limits). He claimed the same title at TD Bank, then stepped up to replace A. Charles Baillie as chief executive in October 2002.

He squashed the company’s wholesale lending portfolio from more than $10 billion to below $2 billion, and minimized costs across the TD Waterhouse operations in the United States. If the Banknorth deal closes, as the companies hope, in February 2005, TD Bank might once again have seized the market initiative.

In Maine, analysts expect the prospects for retaining jobs are better than if Banknorth had been acquired by a domestic bank. Some banking functions don’t translate across the international borders as well as they would to, say, North Carolina or to Ohio, the home of Keybank’s parent, Key Corp. Operations such as call centers, however, present one opportunity for the bank to consolidate expenses.

At its RBC Centura operations in Rocky Mount, N.C., Royal Bank managed to shift some call centers across the border and find other efficiencies while cutting few jobs.

“There were some rationalization of a few branches, but that’s about it,” said Lee Weisbecker, banking and finance writer for the Triangle Business Journal in Raleigh, N.C. “People-wise, it hasn’t had much of an impact.”

Clark and Ryan both have claimed no layoffs are planned for Banknorth’s 7,700-employee work force, 2,600 of which work in Maine. TD Bank did announce layoffs of more than 600 TD Waterhouse employees in July 2001 after completing its acquisition of the company.

Given the current market and Banknorth’s reputation for efficiency, Goldberg at Desjardins does not anticipate a similar strategy in Portland. More likely, he said, Banknorth will need all available hands to feed expansion to broader markets.

“I don’t think anything is going to happen as a result of this to diminish Banknorth’s presence in Maine, if anything, it is just going to get bigger,” he said. “I think Portland is going to become a very important operations center.”