Peoples Heritage Financial Group and Banknorth have set the merger date of May 10 after an 11-month engagement. The banks cleared a final regulatory hurdle when the Federal Reserve Board of Governors approved the merger April 24.

Peoples Heritage, already the third-largest bank in New England with $13.9 billion in assets, will grow to approximately $18.5 billion in assets and will control deposits of $11.9 billion. Portland, Maine-based Peoples Heritage will be the surviving entity, but the holding company will take the name of Burlington, Vt.-based Banknorth. Peoples Heritage Chief Executive Officer William J. Ryan will lead the company. Banknorth CEO William H. Chadwick delayed his retirement until the merger was completed.

This really solidifies us as a true commercial bank, said Brian S. Arsenault, Peoples Heritage’s senior vice president for corporate communications. We’re going to continue to operate very much like community banks in each state.

Peoples Heritage will buy Banknorth at a price of $780.7 million, based on the closing price of $18 per share of Peoples Heritage stock on June 1. Banknorth shareholders will receive 1.825 shares of Peoples Heritage common stock for each whole share of Banknorth common stock. The merger will be accounted for as a pooling of interests.

The merger gives the bank a presence in every New England state except Rhode Island, as well as upstate New York.

The deal joins together Peoples Heritage’s subsidiaries of Family Bank and SIS in the Bay State with Banknorth’s First Massachusetts Bank to create a Massachusetts franchise with $5.5 billion in assets. The banks will become FirstMass Bank on May 12, but it may take a few months to replace signage, Arsenault said.

Family Bank President and CEO Chris Bramley will become CEO of FirstMass Bank, which will have 76 Bay State branches, four in Southern New Hampshire and seven in Connecticut. The merger will combine Peoples Heritage’s presence in Springfield, Haverhill and Lowell with Banknorth’s presence in Worcester and the Berkshires.

Peoples Heritage also operates Bank of New Hampshire and Glastonbury Bank & Trust in Connecticut, in addition to its Maine franchise. Once combined, the company will have more than 330 branches and more than 430 ATMs.

The branches in the Granite State will operate as Bank of New Hampshire, while Maine branches will keep the Peoples Heritage name. The banks in each state will have separate boards of directors. In Vermont the company will operate three banks.

Test of Management
The banks plan to close the deal on May 10 and convert Banknorth systems in Massachusetts and New Hampshire beginning May 12. Computer systems in Vermont and New York will be converted in June. The new company plans to begin trading under the symbol BKNG on NASDAQ on May 15.

The commercial bank will convert the subsidiary banks to nationally chartered banks supervised by the Office of the Comptroller of the Currency.

The bank will focus on commercial lending to small and mid-sized businesses. Peoples Heritage’s average commercial loan is $250,000.

That’s clearly not in the Fleet giant business loan league, Arsenault said.

The bank will also focus on consumer lending such as home equity lending and indirect auto loans and home mortgage loans.

The merged company will create a formidable competitor for New England banks, said John S. Carusone, president of the Bank Analysis Center in Hartford, Conn. The company will have a wide range of products and talented management, he said.

I don’t think any institutions, irrespective of size, should take them for granted, Carusone said.

However, the bank will face the challenge of integrating several subsidiaries and their systems. If the new company has trouble with the conversion process, other banks will be standing by ready to court customers.

The challenge is to complete the integration as seamless a method possible from the customer standpoint, so as not to alienate banking clients during the transition, Carusone said. You can bet there will be a lot of community institutions that will look to picking off those dissatisfied customers.

Banknorth alone has nine subsidiaries, including the Stratevest Group investment banking firm.

These types of mergers really test management’s ability, and separate average management from very strong management, Carusone said.

Peoples Heritage had few branches in New Hampshire, where Banknorth had a large presence, and Peoples had no presence in Banknorth’s home state of Vermont. As a result, the Federal Reserve asked the company to divest only one branch in the merger. Peoples Heritage will sell one branch in Wolfeboro, N.H., that has $28.1 million in deposits.

The companies expected the merger would result in 300 job cuts, but because of attrition the number will probably be less than 100, Arsenault said. Most of Banknorth’s operational jobs will be moved to Maine.

The highly acquisitive bank is not likely to look for another deal soon.

We’re not going to do anything in the way of acquisition for the rest of this year, Arsenault said. In 2001 or 2002 we’ll look for other opportunities in Massachusetts and upstate New York.

When Ryan and Chadwick announced their banks would merge last summer, they expected the deal to close by the end of 1999. Much of the delay resulted from a Federal Reserve examination of Peoples Heritage’s risk-management practices.

Federal Reserve officials asked Peoples Heritage to change some risk-management practices after a September examination of the bank. Just before Christmas the banks announced the merger agreement would be extended to May 31.

They wanted to be assured that our risk-management process was adequate for what will now be an $18.5 billion, $19 billion bank, Arsenault said. They knew we had grown a whole lot in a few years.

The merger with Banknorth is Peoples Heritage’s 16th deal since 1993. It is also the largest merger or acquisition in the bank’s history.

Understandably, the regulatory process took longer than when you’re buying a $1 billion bank, Arsenault said.

As a result of the examination, Peoples Heritage changed its five-tiered system of classifying commercial loans to a 10-tiered system to have finer gradations of the quality of loans. Regulators wanted a senior-level employee to supervise the commercial area. The bank promoted the senior vice president in that area to an executive vice president.

In addition, Peoples Heritage hired an employee with plenty of regulatory background, a bank examiner with 12 years of experience at the OCC. The bank also changed its risk-management reports from quarterly to monthly.

After the bank made those changes, regulators were not able to schedule another visit until March, which further delayed the merger. In its approval last week, the Federal Reserve Board of Governors wrote the bank holding companies and their subsidiary banks are well capitalized and are expected to remain so after the consummation of the proposal.

In Boston the bank will rank as the sixth-largest bank in the market with $1.6 billion in deposits, accounting for 2 percent of the market. The bank will be the second-largest bank in Springfield after the merger, with deposits of $1.2 billion, or 20.9 percent of the market. In Worcester the bank will be the third-largest in the market with $482 million in deposits, or 11.2 percent of the local market.