JAMES LAVOIE ‘Competing in every town’

When Portland, Maine-based Banknorth Group announced its plans to acquire Burlington-based Boston Federal Savings Bank last month, Banknorth viewed it as a chance to move into an area within its footprint not heavily populated with its branches. And while the move provides obvious benefits to Banknorth, some BostonFed competitors also see opportunity and advantage in the changing marketplace.

James Lavoie, chairman, president and chief executive officer of Middlesex Savings Bank in Natick, said the acquisition came as “no surprise to anyone.” BostonFed was a logical acquisition target because of its size, he said.

BostonFed has $1.7 billion in assets, $1.2 billion in deposits and 16 branches in Massachusetts, spanning Middlesex, Norfolk, Essex and Suffolk counties.

Middlesex Savings is a major competitor of BostonFed’s, with $3 billion in assets and 21 offices in Middlesex County. The banks compete directly in three communities where both institutions have branches.

The majority of BostonFed’s branches are located in Middlesex County. The bank has 10 branches and approximately $650 million in deposits in that county alone and upon the completion of the acquisition, Banknorth will expand to 34 branches and $1.7 billion in deposits in the same area.

Christopher Bramley, president of Banknorth Massachusetts, said gaining ground in Middlesex County was one reason BostonFed was appealing to Banknorth.

“They have a wonderful branch network that fills in the communities we don’t have,” said Bramley.

Banknorth will acquire branches in Arlington, Lexington, Billerica and Belmont.

“It’s a great demographic for us,” said Bramley.

Banknorth has a number of branches in Boston’s largely affluent MetroWest suburbs.

Bramley cited good customer and deposit bases in addition to the product offerings as other reasons Banknorth was interested in BostonFed.

“They have a wonderful residential lending business,” said Bramley. “It is one of their real strengths.”

Capitalizing on the heavy business concentration in Middlesex County, Bramley said Banknorth has a strong commercial lending program that will dovetail nicely with BostonFed’s residential lending business.

The acquisition will allow the two banks to combine services and offer a broader product line. Bramley said Banknorth will be bringing its Insurance Department to BostonFed branches. The bank is also looking to expand its existing investment services and increase its focus on retail and high-net worth customers in the area.

Jim Ackor, an analyst with RBC Capital Markets in Portland, Maine, said banks like Banknorth have thrived in the “middle of the [bank] spectrum.” But, even after acquiring BostonFed, Banknorth will remain a mid-tier institution and very distinct from banking behemoths such as Bank of America, said Ackor. Still, Banknorth has grown to be a formidable regional player.

‘Challenging Environment’

Despite its size, Lavoie said Banknorth’s increased presence in Middlesex County is not necessarily bad news for Middlesex Savings.

“We consider it to be a positive when a larger bank acquires a local competitor,” he said.

Lavoie said there is usually disruption during a merger and customers can become unhappy. He sees the merger as an opportunity to acquire new customers.

Bramley said the acquisition process is “business as usual” for the six months following an acquisition announcement; customers become aware of the changes, while competitors try to “exploit the situation.” He said during those six months there is no change at the bank being acquired, but things begin to heat up later in the process with computer system conversions. Banknorth will send out brochures and other literature to BostonFed customers to prepare them for the pending changes, he added.

Ackor said the smaller banks that allow people to see their “favorite teller” when they cash a paycheck will always fill a niche, while the ubiquitous larger banks with many ATMs and branches will fulfill other consumers’ needs.

“These types of banks are going to continue to ultimately provide products and services to two distinctly different clients,” said Ackor.

Despite being large in size, Bramley said Banknorth gives local branches the ability to make decisions and business is not done through one centralized location.

Although in today’s market banks of every size try to convey a local image to customers, many in the industry point out that even if they are not perceived as local, big banks are not going away. Lavoie said that competition with large banks is a reality that is here to stay for smaller institutions. In addition to going head to head with Banknorth, Middlesex Savings competes with other large institutions, like Citizens Bank.

“We’re competing in every town we’re in,” said Lavoie.

He said smaller banks need to provide something better than larger banks to keep customers coming in the door. Lavoie notes that competitive products, well-trained employees and a strong focus on customer service often are key to achieving that goal.

Lavoie said that being smaller or locally based isn’t an advantage by itself. People will do business at a large bank’s local branch if the branch provides great service. So ultimately, the competition can be fierce.

“You just compete against everybody,” said Lavoie, adding that a range of small, medium and large banks can be found in abundance in most communities.

While Banknorth’s expanding presence in markets such as Middlesex County may not radically affect smaller banks in today’s market, Ackor said he expects that in the future, Banknorth will become a legitimate threat to smaller-sized institutions.

Ackor said that eventually the banks in the middle of the spectrum, like Banknorth, will have the ability to draw clients from both small banks and larger banks because of what they can offer to both at the same time, like local service and an wide array of products. Such banks, in effect, can sometimes offer the best of both worlds – large and small at once.

Ackor notes that eventually it will also be more difficult for smaller banks to keep up with advances in technology and product offerings, while mid-tier banks often are of sufficient size to benefit from efficiencies of scale in the pursuit of new products and improved infrastructure.

“It’s an increasingly challenging environment,” said Ackor.

Although the ubiquitous bank mergers already have drastically reshaped the industry and the Massachusetts marketplace, many industry players say a great many acquisitions are yet to come.

“It’s not done yet,” said Glen White, chief executive officer of Mutual Federal Savings Bank in Whitman. “There are a few more regionally based [banks] that could go.”

Lavoie also said he sees a likelihood of more merger activity and predicted that Citizens Bank and Sovereign Bank are looking to acquire Bay State banks similar in size to BostonFed.

Ackor disagrees, saying there are fewer and fewer publicly traded entities of significant size available to would-be acquirers.

Lavoie said the abundance of mergers is simply a reality of public companies that have an obligation to their shareholders to consider each opportunity that comes their way.

Bramley said Banknorth has relied on acquisitions through the years to fill in areas within the bank’s footprint where it has fewer branches.

In just the last six months, Banknorth has also acquired CCBT Financial Cos., Foxborough Savings Bank and First & Ocean Bancorp. Banknorth will have 161 branches in Massachusetts when the BostonFed acquisition is complete. Banknorth did not enter into the Massachusetts market until 1996 when it acquired Haverhill-based Family Bank.

One particular downside to an acquisition is employee consolidation. Bramley said expects there will be some loss of jobs in “back-room support functions” as a result of the BostonFed deal. He said branch tellers and other customer service personnel will not be affected.

The conversion of BostonFed branches and operations into the Banknorth brand is expected to reach completion in January 2005 with a heavy marketing campaign beginning beforehand.

BostonFed Chairman, President and Chief Executive Officer David F. Holland referred all questions to Banknorth.