United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended
December 31, 1997
Commission file number (0-18173)
BANKNORTH GROUP, INC. (logo)
(Exact name of registrant as specified in its charter)
State or other jurisdiction of incorporation or
organization: DELAWARE
I.R.S. Employer Identification No.: 03-0321189
Address and Zip code of principal executive offices: 300 FINANCIAL PLAZA
P.O. BOX 5420
BURLINGTON, VERMONT
05401
Registrant's telephone number, including area code: (802) 658-9959
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $1.00 per share)
Associated Common Share Purchase Rights
Indicate by check mark whether the Registrant (l) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act
of l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price on March 2, 1998, was $979,797,532
As of March 2, 1998, 15,339,296 shares (7,669,648 shares immediately prior
to the split) of the registrant's common stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-K:
Annual Report to Shareholders For the Year Ended
December 31, 1997 Part I, Part II
Proxy Statement for the 1998 Annual Meeting of Shareholders Part III
Table of Contents
Page
3 Management's Discussion and Analysis of Financial Condition and
Results of Operations
26 Five Year Selected Financial Data
27 Summary of Unaudited Quarterly Financial Information
28 Management's Statement of Responsibility
29 Independent Auditors' Report
30 Consolidated Statements of Income
31 Consolidated Balance Sheets
32 Consolidated Statements of Changes in Shareholders' Equity
33 Consolidated Statements of Cash Flows
34 Notes to Consolidated Financial Statements
61 Form 10-K
66 Signatures
67 Glossary of Terms
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The financial review which follows focuses on the factors affecting
the consolidated financial condition and results of operations of Banknorth
Group, Inc. ("Banknorth" or "Company") during 1997 and, in summary form, the
preceding two years. Net interest income and net interest margin are
presented in this discussion on a fully taxable equivalent basis (f.t.e.).
Balances discussed are daily averages unless otherwise described. The
consolidated financial statements and related notes and the quarterly
reports to shareholders for 1997 should be read in conjunction with this
review. Amounts in prior period consolidated financial statements are
reclassified whenever necessary to conform to the 1997 presentation.
On February 24, 1998, the board of directors declared a 2-for-1 split
of its common stock effected in the form of a 100% stock dividend. The stock
split was recorded as of December 31, 1997 by a transfer of $7.8 million
from surplus to common stock, representing the $1.00 par value for each
additional share issued. The number of shares issued at December 31, 1997,
after giving effect to the split, was 15,653,296 (7,826,648 shares
immediately prior to the split). The December 31, 1997 share data and all
per share data has been restated to reflect the split.
Except for historical information contained herein, the matters
contained in this review are "forward-looking statements" that involve risk
and uncertainties, including statements concerning future events or
performance and assumptions and other statements which are other than
statements of historical facts. The Company wishes to caution readers that
the following important factors, among others, could in the future affect
the Company's actual results and could cause the Company's actual results
for subsequent periods to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company herein:
* the effect of changes in laws and regulations, including federal
and state banking laws and regulations, with which the Company
and its banking subsidiaries must comply, the cost of such
compliance and the potentially material adverse effects if the
Company or any of its banking subsidiaries were not in
substantial compliance either currently or in the future as
applicable;
* the effect of changes in accounting policies and practices, as
may be adopted by the regulatory agencies as well as by the
Financial Accounting Standards Board, or changes in the
Company's organization, compensation and benefit plans;
* the effect on the Company's competitive position within its
market area of increasing consolidation within the banking
industry and increasing competition from larger "super regional"
and other banking organizations as well as non-bank providers of
various financial services;
* the effect of certain customers and vendors of critical systems
or services failing to adequately address issues relating to
becoming year 2000 compliant;
* the effect of unforeseen changes in interest rates;
* the effects of changes in the business cycle and downturns in the
local, regional or national economies.
The Company wishes to caution readers not to place undue reliance on
any forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including those described above, could
affect the Company's actual results or circumstances for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
OVERVIEW
Banknorth recorded net income of $30.5 million, representing basic
earnings per share ("EPS") of $1.95 and $1.93 diluted EPS, for the year
ended December 31, 1997, compared to $25.4 million, or $1.66 basic EPS, and
$1.64 diluted EPS for the year ended December 31, 1996.
During the year 1997:
* Banknorth generated a return on average equity of 14.01%.
* The Company announced and began execution of a 5% stock buy-back
program in the fourth quarter.
* Banknorth issued $30.0 million of corporation-obligated
mandatorily redeemable capital securities in support of general
corporate activities.
* Banknorth purchased $40.0 million of bank-owned life insurance to
fund portions of certain employee benefits.
* The Company realized a gain of $2.4 million on the fourth quarter
sale of its merchant processing services.
* Banknorth undertook a comprehensive study of its operations which
is intended to enhance revenues and reduce expenses on a
prospective basis.
MERGER AND ACQUISITION ACTIVITY
On February 16, 1996, Banknorth completed the purchase of thirteen
banking offices of Shawmut Bank, N.A. in central and western Massachusetts.
A new subsidiary, First Massachusetts Bank, N.A., ("FMB"), with principal
offices in Worcester, Massachusetts was organized to own and operate the
acquired offices.
Under the terms of the Purchase and Assumption Agreement with Shawmut
Bank, N.A. ("Shawmut"), Banknorth paid a premium of $29.2 million,
representing 5.23% on deposit liabilities assumed, including accrued
interest payable, calculated based upon the average amount of deposits
outstanding (including accrued interest payable) over the thirty day period
ended February 13, 1996.
At the closing, the Company assumed total liabilities with an
estimated fair value of $560.3 million and acquired total assets, including
loans, accrued interest receivable on such loans, certain real property,
furniture, fixtures, equipment and other assets, with an estimated fair
value of $405.7 million. No loans acquired were past due 90 days or more. In
addition, the Company received approximately $124.1 million in cash as
consideration for the net liabilities assumed.
The transaction was accounted for under purchase accounting rules. As
such, both the assets acquired and liabilities assumed have been recorded on
the consolidated balance sheet of the Company at estimated fair value as of
the date of acquisition. Goodwill, representing the excess of cost over net
assets acquired, was $32.1 million, substantially all of which is deductible
for income tax purposes, and is being amortized over seven years on a
straight-line basis. The results of operations for FMB are included in
Banknorth's consolidated financial statements from the date of acquisition
forward.
To complete the transaction, Banknorth issued 2,044,446 shares
(1,022,223 shares immediately prior to the split) of common stock in
February, 1996. The net proceeds of $32.2 million were used to provide a
portion of the initial capital of FMB and to help offset the reduction in
the Company's regulatory capital ratios resulting from the acquisition.
An important aspect of Banknorth's strategic direction is controlled,
profitable growth through acquisition. The Company continues to focus its
attention on possible acquisition candidates in New England and upstate New
York. Minimal book value dilution, coupled with future accretion to the
earnings base, are the primary criteria which must be met.
ASSET/LIABILITY MANAGEMENT
In managing its asset portfolios, Banknorth utilizes funding and
capital sources within sound credit, investment, interest rate and liquidity
risk guidelines. Loans and securities are the Company's primary earning
assets with additional capacity invested in money market instruments.
Earning assets were 93.05% and 93.26% of total assets at December 31, 1997
and 1996, respectively.
Banknorth, through its management of liabilities, attempts to provide
stable and flexible sources of funding within established liquidity and
interest rate risk guidelines. This is accomplished through core deposit
products offered within the markets served by the Company as well as through
the prudent use of purchased liabilities.
Banknorth's objectives in managing its balance sheet are to limit the
sensitivity of net interest income to actual or potential changes in
interest rates, and to enhance profitability through strategies that promise
sufficient reward for understood and controlled risk. The Company is
deliberate in its efforts to maintain adequate liquidity, under prevailing
and forecasted economic conditions, and to maintain an efficient and
appropriate mix of core deposits, purchased liabilities and long-term debt.
Corporation-Obligated Mandatorily Redeemable Capital Securities
On May 1, 1997, Banknorth established Banknorth Capital Trust I (the
"Trust") which is a statutory business trust formed under Delaware law upon
filing a certificate of trust with the Delaware Secretary of State. The
Trust exists for the exclusive purposes of (i) issuing and selling 30 year
corporation-obligated mandatorily redeemable capital securities ("capital
securities") in the aggregate amount of $30.0 million at 10.52%, (ii) using
the proceeds from the sale of the capital securities to acquire the junior
subordinated debentures issued by the Company and (iii) engaging in only
those other activities necessary, advisable or incidental thereto. The
corporation-obligated junior subordinated debentures are the sole assets of
the Trust and, accordingly, payments under the corporation-obligated junior
debentures are the sole revenue of the Trust. All of the common securities
of the Trust are owned by Banknorth. The Company has used the net proceeds
from the sale of the capital securities for general corporate purposes. The
capital securities, with associated expense that is tax deductible, qualify
as Tier I capital under regulatory definitions. The Company's primary
sources of funds to pay interest on the debentures are current dividends
from subsidiary banks. Accordingly, the Company's ability to service the
debentures is dependent upon the continued ability of the subsidiary banks
to pay dividends.
Earning Assets
Earning assets were $2.6 billion during 1997, an increase of $370.3
million, or 16.5% from 1996. Table A, Mix of Average Earning Assets,
presents information relating to the mix of earning assets during the last
three years.
Loans. Total loans of $2.0 billion at December 31, 1997, were $112.4
million, or 6.1%, above year end 1996. The increase in total loans from 1996
levels is attributable to strong loan demand in the Massachusetts market and
improved lending activity in Vermont and New Hampshire. During 1997 and
1996, management supplemented its in-market loan originations with the
purchase of residential real estate loans originated by other financial
institutions in an effort to replace loans maturing or prepaying, thus
supporting the level of earning assets. Table B, Loan Portfolio, provides
the detailed components of the loan portfolio as of year-end, for each of
the last five years.
Commercial, financial and agricultural loans at December 31, 1997,
were $332.4 million representing 17.0% of total loans. The 1997 balance,
$31.7 million higher than at December 31, 1996, reflects increased lending
activity in the markets served by the Company. Banknorth offers a wide range
of commercial credit products and services to its customers. These include
secured and unsecured loan products specifically tailored to the credit
needs of the customer, underwritten with terms and conditions reflective of
portfolio risk objectives and corporate earnings requirements.
Commercial real estate loans increased $32.4 million, or 6.1%, during
1997 to reach $563.8 million at December 31, 1997. This category is
comprised primarily of mortgages on owner-occupied income producing
properties or businesses. In most cases, the Company maintains complete
banking relationships with these customers.
Residential real estate loans, $773.4 million at December 31, 1997,
were $36.2 million higher than at year end 1996. Banknorth Mortgage Company
("BMC") acts as a supplier of mortgage loan assets for the banking
subsidiaries, thereby allowing the banks to place assets on their balance
sheet which meet desired rate and repricing characteristics. Loans made by
BMC are the primary means by which the Company replaces runoff in its
portfolio which occurs through scheduled principal payments as well as loan
pre-payments. Periodically, Banknorth will supplement these loan
originations with purchases of residential real estate loans made by other
financial institutions. In 1997, in an effort to increase earning assets,
Banknorth purchased approximately $37.5 million of such loans.
Installment loans, including credit card and lease receivables, were
$254.7 million at December 31, 1997, $5.2 million, or 2.1% higher than at
December 31, 1996. Lease receivables, made up primarily of automobile
leases, increased $5.9 million, or 8.4% over 1996. The increase in lease
volume is indicative of increased consumer preference towards automobile
leasing over traditional financing. In 1997, Banknorth began offering its
lease and indirect financing products under the name Northgroup Financial
Services. Management expects increased penetration in 1998 in this highly
competitive market.
Loans held for sale. Loans designated as held for sale are primarily
single-family mortgages, originated by the Company's mortgage banking
subsidiary or purchased through its wholesale lending operation, awaiting
sale into the secondary market or to other Banknorth subsidiaries. Loans
held for sale were $25.0 million at December 31, 1997 and $12.1 million at
December 31, 1996. Balances in this category vary from period to period
largely due to the difference in timing between loan originations and the
settlement of sales into the secondary market.
The majority of loans originated by BMC, primarily fixed rate, are
sold to the secondary market. Certain production, primarily adjustable rate,
is retained by the Company to be held in its mortgage portfolio. This is
accomplished by the sale of high quality loans to the banking subsidiaries.
At the time of sale, the assets are moved from the held for sale category at
the lower of cost or market value, and reflected as loans on the Company's
consolidated financial statements. During 1997 and 1996, $97.7 million and
$44.9 million, respectively, of mortgage originations were retained in such
a manner by the Company's subsidiary banks.
Securities available for sale. The portfolio is managed on a total
return basis with the objective of exceeding the return that would be
experienced if investing solely in U.S. Treasury instruments. This category
of investments is used primarily for liquidity purposes while simultaneously
producing earnings, and is managed under policy limits established for
average duration, average convexity and average portfolio life.
The designation of "available for sale" is made at the time of
purchase, based upon management's intent to hold the securities for an
indefinite period of time; however, these securities would be available for
sale in response to changes in market interest rates, related changes in the
securities prepayment risk, needs for liquidity, or changes in the
availability of, and yield on alternative investments. These securities are
purchased under assumptions relating to liquidity and performance
characteristics, and may be sold or transferred to investment securities,
when these characteristics are significantly diminished by changes in
economic circumstances. Sales may also occur when liquidity or other funding
needs arise. On a regular basis, horizon analysis is performed for a 6-12
month time horizon to evaluate the need for re-balancing the portfolio.
In November 1995, the Financial Accounting Standards Board ("FASB")
issued a "Special Report" which granted all entities a one-time opportunity
to reconsider their ability and intent to hold securities accounted for
under Statement of Financial Accounting Standards ("SFAS") No. 115 to
maturity. This decision allowed entities to transfer securities from the
held-to-maturity category without "tainting" their remaining held-to-
maturity securities. On November 30, 1995, in response to the FASB's action,
the Company reclassified certain securities having an aggregate unamortized
cost of $197.1 million and an aggregate fair value of $195.3 million from
"held-to-maturity" to "available for sale."
Period end balances in securities available for sale totaled $710.3
million at December 31, 1997 as compared to $531.3 million at December 31,
1996. The 1997 balance is stated net of a fair value adjustment reflecting
net unrealized gains of $3.6 million, whereas the December 1996 balance is
net of a fair value adjustment reflecting net unrealized losses of $3.8
million. In 1997, the Company increased its holdings of securities available
for sale by $179.0 million in order to effectively leverage the net proceeds
of the capital securities. During 1997, cash flow generated by the "held-to-
maturity" portfolio was re-invested in the available for sale portfolio
accounting for approximately $10.6 million of the increase. In the fourth
quarter of 1997, Banknorth purchased $40.0 million of bank-owned life
insurance ("BOLI"). Further discussion of BOLI is provided later in this
document. Securities available for sale were allowed to mature or were sold
in order to provide the funding necessary to implement the bank-owned life
insurance program. During 1996, maturities occurring in the held-to-maturity
portfolio were also reinvested in the available for sale portfolio.
In January, 1998, Banknorth sold approximately $85.5 million of
balloon mortgage-backed securities held in the available for sale portfolio.
While the sales resulted in a net loss of $504 thousand, the enhanced yield
received through re-investment will result in recovery of the loss within
six months. Securities yielding approximately 5.12% were sold and replaced
with securities yielding approximately 6.48%. After recovering the $504
thousand loss incurred, Banknorth anticipates additional interest income of
approximately $523 thousand during 1998 and approximately $994 thousand in
improved interest income in 1999 as a result of this transaction. The
securities purchased, as well as the characteristics of the portfolio after
the transaction, meet all established corporate guidelines.
Investment securities. The designation "investment securities" is made
at the time of purchase or transfer based upon the intent and ability to
hold these securities until maturity. The management of this portfolio
focuses on yield and earnings generation, liquidity through cash flow and
interest rate risk characteristics within the framework of the entire
balance sheet. Cash flow guidelines and average duration targets have been
established for management of this portfolio. As of December 31, 1997, the
balance of securities in this category was $24.0 million, $10.2 million
below the balance at December 31, 1996. The primary cause of the reduced
portfolio size was the reinvestment of maturities throughout 1997 into the
available for sale portfolio.
Table D, Securities Available for Sale and Investment Securities
contains details of investment securities at December 31, 1997, 1996, and
1995.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $7.4 million during 1997, $14.5 million in 1996 and
$9.7 million in 1995. As of December 31, 1997, money market investments were
$50 thousand as compared to $101 thousand at December 31, 1996. Subsidiary
banks with excess overnight cash positions invest such funds with other
subsidiary banks that may have short-term funding needs. This internal
settlement, performed prior to purchasing funds in the market, reduces
funding costs and improves overall liquidity.
Income on earning assets. The Company's income from earning assets,
total interest income, was $219.1 million in 1997 on a fully tax equivalent
basis, an increase of $28.5 million, or 14.9%, from the 1996 total of $190.6
million, and $65.8 million higher than in 1995. Of the increase in interest
income from 1996 to 1997, $30.7 million was the result of increases in
earning assets. Decreases in the yields on earning assets resulted in a
decline in interest income of $2.3 million. In 1997, the average yield on
total earning assets was 8.36% as compared to 8.46% in 1996 and 8.60% in
1995.
Table F, Average Balances, Yields and Net Interest Margins and Table
H, Volume and Yield Analysis, contain details of changes by category of
interest income from earning assets for each of the last three years.
Funding Sources
Banknorth utilizes various traditional sources of funding to support
its earning asset portfolios. Average total net funding increased by $319.9
million, or 14.6%, over the average for 1996. Table G, Average Sources of
Funding, presents the various categories of funds used and the corresponding
average balances for each of the last two years as well as the changes by
category for 1997, 1996 and 1995.
Deposits. Total core deposits increased $102.1 million, or 5.3% over
1996. Retail time deposits in denominations less than $100,000 increased by
$23.9 million while NOW and money market accounts increased by $73.9
million.
Purchased liabilities. Total purchased liabilities increased on
average from $264.6 million during 1996 to $485.6 million during 1997. As of
December 31, 1997, total short-term borrowings were $422.8 million as
compared to $280.5 million at December 31, 1996. Short-term borrowings from
the FHLB increased from $129.0 million at December 31, 1996 to $263.0
million at December 31, 1997. The increase in short-term borrowings was the
result of funding needs for incremental securities available for sale
purchases made during 1997. Banknorth had no brokered deposits during 1997
and 1996. Long-term advances from the Federal Home Loan Bank declined on
average from $28.7 million during 1996 to $9.3 million in 1997. Scheduled
maturities of long-term advances were replaced with short-term advances in
response to movements in interest rates while maintaining the Company's
interest rate risk profile within established guidelines.
Bank Debt. Average bank debt of $12.0 million during 1997 represents
the 1994 funding of the acquisition of North American Bank Corporation
("NAB"). Banknorth financed the transaction with a bank credit facility
whose original terms were re-negotiated in December, 1996. The re-negotiated
terms provide improved pricing and an extension of the repayment period. The
balance of $10.4 million at December 31, 1997 will be repaid in four years.
Interest expense summary. Total interest expense was $99.3 million in
1997, an increase of $18.2 million, or 22.4% as compared to 1996. Increased
levels of interest-bearing liabilities contributed $13.2 million to the
increase while the increase in rates paid increased interest expense by $5.0
million. The cost of interest-bearing liabilities was 4.47% in 1997, an
increase of 26 basis points from 1996.
Tables F, Average Balances, Yields and Net Interest Margins and Table
H, Volume and Yield Analysis, contain details of changes by category of
interest expense for each of the last three years.
Time deposits, in denominations of $100 thousand and greater, at
December 31, 1997 were scheduled to mature as follows:
<TABLE>
<S> <C>
3 months or less $ 43,150
Over 3 to 6 months 19,308
Over 6 to 12 months 23,473
Over 12 months 18,067
--------
Total $103,998
========
</TABLE>
Net Interest Income
Net interest income for 1997 of $119.7 million was $10.3 million, or
9.4% higher than that recognized in 1996. The yield on earning assets
declined by 10 basis points in 1997 to 8.36%, while the cost of interest-
bearing liabilities increased 26 basis points. Of the change in net interest
income of $10.3 million, $17.5 million was due to increased volume offset by
a $7.3 million decline due to changes in interest rates. The net interest
margin was 4.57% in 1997, 4.86% in 1996 and 4.79% in 1995.
Interest rates generally decreased during 1997, the result of which
was a decrease in the yield on earning assets. During the fourth quarter of
1997, the net interest margin was 4.48%, 9 basis points below the margin for
the full year of 1997. The net interest margin narrowed during 1997 as
competition for quality credits and retail deposits resulted in a tighter
spread between asset yields and deposit costs. A changing mix of deposits
where higher cost deposits, such as money market accounts, are increasing
faster than lower cost deposits also contributed to the narrowing margin.
Also impacting the net interest margin was the issuance of $30.0
million in corporation-obligated mandatorily redeemable capital securities
in May 1997. In an effort to increase interest income sufficient to offset
the cost of the capital securities, the Company purchased approximately
$120.0 million in earning assets, primarily securities available for sale.
The leveraging reduced the net interest margin by 14 basis point in 1997.
This leveraging strategy is anticipated to be short-term in nature, and use
of these funds will change in response to future corporate initiatives.
Further, in 1998, the purchase of $40.0 million in BOLI will adversely
impact the net interest margin by 6 basis points as securities available for
sale were allowed to mature or were sold in order to provide the funding
necessary to implement the bank-owned life insurance program. The proceeds
from BOLI are recorded as other non-interest income.
RISK MANAGEMENT
Credit Risk
Credit risk is managed through a network of loan officer authorities,
credit committees, loan policies and oversight from the corporate senior
credit officer and subsidiary boards of directors. Management follows a
policy of continually identifying, analyzing and grading credit risk
inherent in each loan portfolio. An ongoing independent review, subsequent
to management's review, of individual credits is performed on each
subsidiary bank's commercial loan portfolios by the independent Loan Review
function.
As a result of management's ongoing review of the loan portfolio,
loans are placed in non-accrual status, either due to the delinquent status
of principal and/or interest payments, or a judgment by management that,
although payments of principal and/or interest are current, such action is
prudent. Loans are generally placed in non-accrual status when principal
and/or interest is 90 days overdue, except in the case of consumer loans
which are generally charged off when loan principal and/or interest payments
are 120 days overdue.
Non-performing assets (NPAs). Non-performing assets include non-
performing loans, which are those loans in a non-accrual status, loans which
have been treated as troubled debt restructurings and loans past due 90 days
or more and are still accruing interest. Also included in the total non-
performing assets are foreclosed and repossessed non-real estate assets.
NPAs were $16.3 million at December 31, 1997, a decrease of $3.6
million, or 18.2%, from December 31, 1996. NPAs at December 31, 1995 were
$15.1 million. The ratio of NPAs to loans plus other real estate owned and
repossessed assets at December 31, 1997, was .83% compared to 1.08% at year
end 1996. Table I, Non-Performing Assets, contains the details of NPAs for
the last five years.
Non-performing loans ("NPLs") at December 31, 1997 were $14.7 million,
a net decrease of $4.3 million, or 22.5%, from December 31, 1996.
The recorded investment in loans considered to be impaired totaled
$6.0 million as of December 31, 1997 and $8.6 million as of December 31,
1996. The related allowances for loan losses on these impaired loans were
$962 thousand and $1.9 million as of December 31, 1997 and 1996,
respectively. At December 31, 1997 and 1996, there were no impaired loans
which did not have an allowance for loan losses determined in accordance
with SFAS No. 114, "Accounting by Creditors For Impairment of a Loan," as
amended by SFAS No. 118, "Accounting by Creditors For Impairment of Loan-
Income Recognition and Disclosures."
The decrease in NPLs is largely in non-accrual loans reflecting
relative improvement in the overall credit quality of the loan portfolio.
Experienced delinquency rates in the residential portfolio are consistent
with trends seen regionally and nationally. Given the possibility of
increases in interest rates, management expects that certain credits may
encounter difficulty in continuing to perform under the contractual terms of
their loans should rates actually increase. While this occurrence might
result in increases in NPLs and subsequent chargeoffs, management does not
expect it to materially affect the Company's performance in 1998.
As of December 31, 1997, there are no other loans in the Company's
portfolio that management is aware of that pose significant adverse risk to
eventual full collection of principal and interest.
Total other real estate owned and repossessed assets were $1.6 million
at the end of 1997, up $653 thousand from one year earlier.
Allowance for loan losses and provision. The balance of the allowance
for loan losses ("allowance") has been accumulated over the years through
periodic provisions and is available to absorb future losses on loans. The
adequacy of the allowance is evaluated monthly based on review of all
significant loans, with particular emphasis on non-performing and other
loans, if any, that management believes warrant special attention. The
balance of the allowance is maintained at a level that is, in management's
judgment, representative of the amount of risk inherent in the loan
portfolio given past, present and expected conditions.
Table J, Summary of Loan Loss Experience, includes an analysis of the
changes to the allowance for the past five years. Loans charged off in 1997
were $10.2 million, or .53% of average loans. This represents an improvement
over the prior year when charge offs totaled $10.3 million, or .60% of
average loans. Recoveries in 1997 on loans previously charged off were $4.7
million as compared to $4.5 million in 1996.
The provision for loan losses ("provision") in 1997 was $7.7 million,
or .40% of average loans. In 1996, the provision was $5.6 million, or .32%
of average loans while in 1995 the provision was $4.4 million, or .33% of
average loans.
No portion of the allowance is restricted to any loan or group of
loans, and the entire allowance is available to absorb realized losses. The
amount and timing of realized losses and future allowance allocations may
vary from current estimates. The following table presents the breakdown of
the allowance by loan type at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
% OF % OF
AMOUNT LOANS AMOUNT LOANS
----------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Commercial and commercial real estate $16,849 1.8% $15,361 1.8%
Residential real estate 4,639 0.6 4,498 0.6
Installment 4,233 1.7 3,661 1.5
----------------------------------
Total allowance for loan losses $25,721 1.3% $23,520 1.3%
==================================
</TABLE>
Market Risk
Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of the
Company's business activities.
The responsibility for balance sheet risk management oversight is the
function of the Asset/Liability Committee ("ALCO"). The corporate ALCO,
chaired by the chief financial officer and composed of various subsidiary
presidents and other members of corporate senior management, meets on a
monthly basis to review balance sheet structure, formulate strategy in light
of expected economic conditions, and review performance against guidelines
established to control exposure to the various types of inherent risk. Bank
subsidiary ALCOs meet on a more frequent basis to implement policy, review
adherence to guidelines, adjust product prices as necessary and monitor
liquidity.
Interest rate risk can be defined as an exposure to a movement in
interest rates that could have an adverse effect on the Company's net
interest income. Interest rate risk arises naturally from the imbalance in
the repricing, maturity and/or cash flow characteristics of assets and
liabilities. Management's objectives are to measure, monitor and develop
strategies in response to the interest rate risk profile inherent in the
Company's consolidated balance sheet and off-balance sheet financial
instruments.
Interest rate risk is managed by the Corporate ALCO. Interest rate
risk measurement and management techniques incorporate the repricing and
cash flow attributes of balance sheet and off-balance sheet instruments as
they relate to potential changes in interest rates. The level of interest
rate risk, measured in terms of the potential future effect on net interest
income, is determined through the use of modeling and other analytical
techniques under multiple interest rate scenarios. Interest rate risk is
evaluated on a quarterly basis and reviewed by the Corporate ALCO with
subsidiary risk profiles presented to the respective boards of directors.
The Company's Asset Liability Management Policy, approved annually by
the boards of directors, establishes interest rate risk limits in terms of
variability of net interest income under rising, flat and decreasing rate
scenarios. It is the role of the ALCO to evaluate the overall risk profile
and to determine actions to maintain and achieve a posture consistent with
policy guidelines.
Certain imbalances causing interest rate risk to exceed policy limits
are correctable through management of asset and liability product offerings.
Depending upon the specific nature of the imbalance, it may be more
efficient and less costly to utilize off-balance sheet instruments such as
interest rate swaps and interest rate cap or floor agreements, among other
things, to correct the imbalance. Banknorth has utilized both swaps and
floors to address certain interest rate risk exposures.
A significant portion of the Company's loans are adjustable or
variable rate resulting in reduced levels of interest income during periods
of falling rates. Certain categories of deposits reach a point in this
instance where market forces prevent further reduction in the rate paid on
those instruments. The net effect of these circumstances is reduced interest
income offset only by a nominal decrease in interest expense, thereby
narrowing the net interest margin. Additionally, the interest rate risk
characteristics of the loans and deposits purchased with the Shawmut
branches exacerbated the potential for reduced interest income under those
circumstances. To protect the Company from this occurrence, interest rate
floors in the notional amount of $295.0 million and interest rate swaps in
the notional amount of $50.0 million were used to mitigate the potential
reduction in interest income on certain adjustable and variable rate loans.
The aggregate cost of the interest rate floors was $2.8 million which
is being amortized as an adjustment to the related loan yield on a straight-
line basis over the terms of the agreements. At December 31, 1997, the
unamortized balance of these interest rate floors was $1.5 million. The
estimated fair value of these floors was $2.5 million as of December 31,
1997. The estimated fair value of the interest rate swap contracts was $328
thousand as of December 31, 1997.
Banknorth utilizes an interest rate risk model widely recognized in
the financial industry to monitor and measure interest rate risk. The model
simulates the behavior of interest income and expense of all on and off-
balance sheet financial instruments under different interest rate scenarios
together with a dynamic future balance sheet. Banknorth measures its
interest rate risk in terms of potential changes in net interest income.
The model requires that assets and liabilities are broken into
components as to fixed, variable, and adjustable interest rates as well as
other homogeneous groupings which are segregated as to maturity and type of
instrument. Cash flows and maturities are then determined, and for certain
assets, prepayment assumptions are estimated under different rate scenarios.
Repricing margins, caps, and ceilings are also determined for adjustable
rate assets.
Interest income and interest expense are then simulated under three
rate conditions. First, a flat rate scenario in which today's prevailing
rates are locked in and the only balance sheet fluctuations that occur are
due to cash flows, maturities, new volumes, and repricing volumes consistent
with this flat rate assumption. The second condition is a 200 basis point
rise in rates over a twelve (12) month horizon together with a dynamic
balance sheet anticipated to be consistent with such an interest rate
change. Finally, there is a 200 basis point decline in rates over a 12 month
period together with a dynamic balance sheet anticipated to be consistent
with such an interest rate change. Next, the simulation is extended to
twenty-four months (24) to determine the interest rate risk with the level
of interest rates stabilizing in months 13 through 24 at a plus or minus 200
basis points from today's levels. Even though rates remain stable during
this 13 to 24 month time period, the balance sheet has growth similar to the
first twelve months modeled for each of the rate conditions, as well as
repricing opportunities driven by maturities, cash flow, and adjustable rate
products which will continue to change the balance sheet risk profile for
each of the rate conditions. Changes in net interest income are then
measured against the flat rate interest scenario. In addition to the
parallel simulation, interest rate risk is regularly measured under various
non-parallel yield curve shifts, pricing and balance sheet assumptions.
Table K. summarizes the percentage change in interest income and
expense by significant earning asset and interest-bearing liability
categories, as well as net interest income from the forecasted net interest
income expected in the flat rate scenario, described above, to the expected
net interest income in the rising rate and falling rate scenarios also
described above during the next 12 months, the 13 to 24 month time frame, as
well as the 1 to 24 month time frame. As of December 31, 1997, based on the
Company's interest rate risk simulation model described above, any reduction
in net interest income from the Company's flat-rate (given no changes in the
December 31, 1997 interest rate levels) forecasted net interest income,
would not exceed 5% in months 1 through 12 under any of the parallel
interest rate scenarios used in the analysis during the 12 month horizon.
This level of variability places the Company's interest rate risk profile
within acceptable policy guidelines.
A tool used by some in the banking industry for measuring interest
rate risk is interest rate sensitivity gap ("gap") analysis. This approach
attempts to measure the difference between assets and liabilities repricing
or maturing within specified time periods.
A gap analysis has several significant limitations, which renders it
less meaningful to Banknorth than the above discussed analysis. These
limitations include the fact that it is a static measurement, it does not
capture basis risk, and it does not capture risk that varies non-
proportionally with rate movements. The selection of the beginning and
ending dates of the time intervals used as gap buckets as well as the size
of the time interval can mask interest rate risk. Assets and liabilities do
not always have clear repricing dates and many loans and deposits reprice
earlier than their contractual maturities indicate. Gap analysis is also
unable to properly reflect the impact on net interest income of certain
interest rate floors. Such complexities are better addressed by the
Company's simulation model which, over the 24 month horizon, shows future
levels of net interest income to be relatively neutral to changes in the
interest rate environment as a result of the Company's active asset
liability management practices.
Liquidity Risk
Banknorth seeks to obtain favorable sources of liabilities and to
maintain prudent levels of liquid assets in order to satisfy varied
liquidity demands. Besides serving as a funding source for maturing
obligations, liquidity provides flexibility in responding to customer
initiated needs. Many factors affect the Company's ability to meet liquidity
needs, including variations in the markets served by its network of offices,
its mix of assets and liabilities, reputation and credit standing in the
marketplace, and general economic conditions.
The Company actively manages its liquidity position through target
ratios established under its liquidity policy. Continual monitoring of these
ratios, both historically and through forecasts under multiple interest rate
scenarios, allows Banknorth to employ strategies necessary to maintain
adequate liquidity. Management has also defined various degrees of adverse
liquidity situations which could potentially occur and has prepared
appropriate contingency plans should such situations arise.
The Company achieves its liability based liquidity objectives in a
variety of ways. Net liabilities can be classified into three basic
categories for the purpose of managing liability-based liquidity: core
deposits, purchased liabilities and long-term or capital market funds. Core
deposits consist of non-interest bearing demand deposits and retail
deposits. These deposits result from relatively dependable customers and
commercial banking relationships and are therefore viewed as a stable
component of total required funding. Average core deposits increased from
1996 to 1997 by $102.1 million, or 5.3%. Core deposits represented 80.1% of
total funding in 1997 and 87.2% in 1996. Banknorth will continue to seek
funding in the most efficient and cost effective manner as is possible.
Table G reflects the components of funding over the last three years.
Among the traditional funding instruments comprising the category of
purchased liabilities are time deposits $100 thousand and greater, Federal
funds purchased, securities sold under agreement to repurchase, borrowings
from the United States Treasury Department Treasury, Tax and Loan accounts,
and short and long-term borrowings from the FHLB. The average balance of
purchased liabilities in 1997, as reflected in Table G, was $485.6 million,
$221.0 million or 83.5% higher than in 1996. Purchased liabilities
represented 19.3% of total net funding in 1997 as compared to 12.1% in 1996.
One of the principal components of short-term borrowings is securities
sold under agreement to repurchase. These borrowings generally represent
short-term uninsured customer investments, which are secured by Company
securities. During 1997, the average securities sold under agreement to
repurchase were $138.0 million, as compared to $106.9 million in 1996.
Long-term funding, primarily through the FHLB, decreased during 1997
by $19.5 million and were replaced mostly by short-term notes from the FHLB.
As previously discussed, the Company utilized financial institution
borrowings pursuant to a five-year credit facility to finance the NAB
acquisition. The Company's primary source of funds to pay principal and
interest under this credit facility is dependent upon the continued ability
of the subsidiary banks to pay dividends in an amount sufficient to service
such debt.
A secondary source of liquidity is represented by asset-based
liquidity. Asset-based liquidity consists of holdings of securities
available for sale and short-term money market investments that can be
readily converted to cash, as well as single-family mortgage loans which
qualify for secondary market sale.
The Company also uses the capital markets as a source of liquidity. In
May 1997, the Company established a trust to issue and sell $30.0 million in
capital securities. The net proceeds were used for general corporate
purposes. In February 1996, the Company issued 2,044,446 shares (1,022,223
shares immediately prior to the split) of common stock resulting in $32.2
million in net proceeds which were used to provide a portion of the initial
capital of FMB and to help offset the reduction in the Company's regulatory
capital ratios resulting from the acquisition.
Off-Balance Sheet Risk
Commitments to extend credit. Banknorth makes contractual commitments
to extend credit and extends lines of credit which are subject to the
Company's credit approval and monitoring procedures. At December 31, 1997
and 1996, commitments to extend credit in the form of loans, including
unused lines of credit, amounted to $530.0 million and $477.8 million,
respectively. In the opinion of management, there are no material
commitments to extend credit that represent unusual risks.
Letters of credit and stand-by letters of credit. Banknorth guarantees
the obligations or performance of customers by issuing letters of credit and
stand-by letters of credit to third parties. These letters of credit are
frequently issued in support of third party debt, such as corporate debt
issuances, industrial revenue bonds and municipal securities. The risk
involved in issuing letters of credit and stand-by letters of credit is
essentially the same as the credit risk involved in extending loan
facilities to customers, and they are subject to the same credit
origination, portfolio maintenance and management procedures in effect to
monitor other credit and off-balance sheet products. At December 31, 1997
and 1996, outstanding letters of credit and stand-by letters of credit were
approximately $61.3 million and $32.0 million, respectively. An increase in
the amount of institutional business, primarily hospitals, caused the
majority of the increase year to year.
Counterparty risk. Banknorth enters into interest rate swap and floor
agreements under which the Company and the swap or floor counterparty are
obligated to exchange interest payments on notional principal amounts. For
swap and floor transactions, the contract or notional amount does not
represent exposure to credit loss. The Company is exposed to risk should the
counterparty default in its responsibility to pay interest under the terms
of the swap or floor agreement. Banknorth controls counterparty risk through
credit approvals, limits and monitoring procedures.
OTHER OPERATING INCOME AND EXPENSES
Other operating income is a significant source of revenue for
Banknorth and an important factor in the Company's results of operations.
Other operating income totaled $31.3 million in 1997, $6.0 million or 23.8%
higher than in 1996. Included in the 1997 increase is the $2.4 million gain
on the sale of merchant processing services.
Trust and investment management services. The trust function
contributes the largest recurring portion of other operating income through
fees generated from the performance of trust and investment management
services. Income from trust and investment management services totaled $8.6
million in 1997, an increase of $801 thousand, or 10.2% over 1996. In
February 1996, the Company consolidated its subsidiary banks' trust
departments into a newly formed limited charter national bank, The
Stratevest Group, N.A. This new structure results in higher levels of income
resulting from improved marketing and sales initiatives and enhanced product
offerings. Opportunities for increases in the generation of trust income lie
in increased penetration of the Massachusetts and New Hampshire markets.
Accordingly, management expects increased levels of trust and investment
management income in 1998.
Service charges on deposit accounts. Service charges on deposit
accounts, $8.0 million in 1997, were $1.5 million, or 22.4% above 1996 and
58.0% higher than in 1995. During 1997, Banknorth reviewed and enhanced its
policies and practices regarding service charges and service charge waivers.
Accordingly, the level of fee income increased in 1997 and is expected to
increase further in 1998. In October 1997, the Company commenced charging a
terminal usage fee for ATM transactions by non-customers. Based on normal
expected levels of activity, management expects surcharge income to increase
$600 thousand in 1998. This fee allows the Company to recover a portion of
the expense of operating the ATM network.
Card product income. Card product income increased 3.8% in 1997
compared to 1996. In December 1997, as noted earlier, the Company sold its
merchant processing business. Income on card products is, therefore,
expected to decline in 1998 as the gross merchant processing income,
amounting to $1.4 million in 1997, will no longer be received by the
Company.
Loan servicing income. Loan servicing income, primarily mortgage
servicing at BMC, in 1997 was $2.5 million, a decrease of $238 thousand, or
8.6%, from 1996. In addition to the decline in the balance of mortgage loans
serviced for unrelated third parties from $1.0 billion at December 31, 1996
to $901.4 million at the December 31, 1997, amortization of mortgage
servicing rights also increased causing a further decline in loan servicing
income. The amortization of mortgage servicing rights was $1.8 million for
1997 compared to $962 thousand in 1996. This increase in amortization
expense is primarily related to the growth in the capitalized mortgage
servicing rights (MSRs) resulting from the adoption of new accounting rules
in 1996.
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights," in 1996, which was superseded by SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," as of January 1, 1997. SFAS No. 125 requires that entities
recognize as separate assets, the rights to service loans for others,
regardless of how those servicing rights are acquired. Recognition of the
MSRs results in an increased gain on sale or a decreased loss on sale of
loan. MSRs are amortized into servicing fee income in proportion to, and
over the period of, estimated net servicing income. SFAS No. 125 also
requires entities to measure the impairment of MSRs based on the difference
between the carrying amount and the current estimated fair value of the
MSRs.
Given the growth in MSRs, which at December 31, 1997 was $4.7 million
as compared to $3.9 million at December 31, 1996, management expects that
MSR amortization expense will continue to increase. In addition, the current
level of market interest rates is resulting in high levels of refinancing
activity. During periods of high refinancing, the value of capitalized
mortgage servicing rights declines and results in reduced levels of
servicing income. Should interest rates remain at their relatively low
levels throughout 1998, management expects a reduced level of servicing
income. This reduction may, however, be offset to some degree by income
resulting from increased levels of loan origination.
Net loan transactions. Net loan transaction income is normally
generated through the origination and subsequent sale of mortgage products
into the secondary mortgage market. Net loan transaction income in 1997 of
$1.2 million was $414 thousand lower than in 1996 due primarily to a
reduction in the volume of loan sales. Net loan transactions were higher in
1996 than in 1995 due to application of the new accounting rules discussed
above and an increase in the volume of loan sales.
Banknorth recognized a net gain of approximately $921 thousand on the
sale of certain mortgage servicing rights in 1997. The servicing rights were
comprised primarily of residential mortgages and second home mortgages of
customers outside Banknorth's normal market area.
Net securities transactions. Net gains or losses from securities
transactions are also included in other operating income. In 1997, the
Company realized $258 thousand in net securities gains as compared to 1996
when it realized $31 thousand in net gains and 1995 when it realized net
losses in the amount of $409 thousand. As disclosed previously in this
discussion, Banknorth sold approximately $85.5 million of securities
available for sale during January 1998 at a loss of approximately $504
thousand. The loss is expected to be recovered through enhanced yields
within a six month period. The Company anticipates that it will consider
additional sales from the securities available for sale portfolio during
1998 as it attempts to achieve its objectives in the total return management
of the securities available for sale portfolio. The Company also expects
that future losses incurred, if any, would be recovered through yield
improvement within a one to two year period.
Other income. Included in other income is the gain on sale of merchant
processing services of $2.4 million realized during the fourth quarter of
1997. Excluding this gain, other income exceeded 1996 levels by
approximately $1.6 million, or 47.0% primarily due to gains on sale of fixed
assets and distributions from venture capital fund investments. While not
material to the results of operations during 1997, included in other income
is $77 thousand in income related to the newly purchased bank-owned life
insurance and $76 thousand in income from the newly offered retail
investment product line. Management expects these programs to contribute
positively in future reporting periods.
In the fourth quarter of 1997, Banknorth purchased $40.0 million of
bank-owned life insurance ("BOLI"). Securities available for sale were
allowed to mature or were sold in order to provide the funding necessary to
implement the bank-owned life insurance program As a result of this fourth
quarter transaction, the Company benefits in future periods from the tax
free nature of income generated from the life insurance policies. In
general, the yield received from the bank owned life insurance is comparable
to the yield previously received on the securities available for sale,
thereby causing the Company's earnings stream to benefit from the tax
characteristics of the bank-owned life insurance.
Other Operating Expenses
Other operating expenses were $97.6 million in 1997, $6.4 million, or
7.0% above expense levels in 1996, and $27.0 million, or 38.2% higher than
in 1995. Included in 1997 total other operating expenses are those relating
to the capital securities issued in May, 1997. Capital securities expense
amounted to $2.1 million in 1997. Total operating expenses in 1996 include
expenses relating to FMB, both recurring and one-time, as well as one-time
expenses relating to the formation of Stratevest, transition to a new
incentive compensation plan and a data processing conversion in the
ATM/debit card area. One-time expenses in 1996 relating to these activities
amounted to approximately $2.1 million before taxes resulting in an after-
tax impact on diluted earnings per share of $.09. Further, in 1996 the
Company incurred a $250 thousand loss from a burglary at one of its
subsidiary bank branches. The Company's efficiency ratio was 62.06% in 1997,
down from 62.11% in 1996 and 65.11% in 1995.
Compensation. Compensation expense increased by $2.6 million, or 7.3%,
over 1996. Of the increase, $1.1 million is related to expenses associated
with the Company's various incentive compensation programs which are
directly related to the overall performance of the Company. The increase in
compensation expense during 1996 as compared to 1995 is related to the
direct expense of and the staffing levels necessary to provide operational
and other support functions to FMB. The 1996 expense of $35.8 million was
$7.5 million, or 26.5% above 1995 compensation expense of $28.3 million.
Included in compensation expense in 1997 is $1.1 million relating to
the Banknorth Short-Term Management Incentive Compensation Plan ("Plan").
The Plan expense in 1996 was $849 thousand and $1.2 million in 1995. In
1997, performance of the Company in relationship to targets defined by the
Plan, resulted in an increased level of award to participants from that made
in 1996. Further, the executive restricted stock compensation plan resulted
in expense of $1.3 million in 1997, compared to $475 thousand in 1996 and
$609 thousand in 1995. The increase in the expense of the restricted stock
plan in 1997 is directly correlated to the increase in the Banknorth stock
price. Banknorth's stock price rose from $20.75 per share to $32.13 per
share, an increase of 54.8%. Also included in 1997 compensation expense was
approximately $200 thousand in severance compensation relating to a work
force reduction. Since July 1, 1997, the Company's workforce has been
reduced by approximately 100 individuals, mostly through attrition. In
total, the reduction in workforce is expected to contain the growth in
compensation expense during 1998.
Net occupancy. Net occupancy expense during 1997 was $7.9 million, an
increase of $687 thousand, or 9.6% over 1996. The primary cause of the
increase was the opening of the new main office of FMB in downtown
Worcester, MA. The leased facility provides housing for the bank's
management team and a new banking facility which is expected to improve the
marketing efforts of FMB. Also contributing to the increase was the opening
of a new branch office in Dover, New Hampshire. The formation of FMB and the
increase in leased office space for necessary support functions were the
primary cause of the $1.7 million increase in net occupancy expense during
1996. FMB incurred occupancy expenses in the amount of $1.0 million during
1996.
Equipment and software. Equipment and software expense was $7.2
million, $6.7 million and $5.5 million in 1997, 1996 and 1995, respectively.
The increase in 1997 over 1996 is reflective of additional expenses related
to the new main office facility in Massachusetts and the aforementioned
branch in New Hampshire. Banknorth also continuously invests in upgraded
technology in order to offer enhanced products and services or to create
operating efficiencies. In 1996, FMB incurred equipment and software
expenses of approximately $522 thousand. The remaining portion of the
increase in 1996 as compared with 1995 is due primarily to increased
expenditures for furniture and equipment for the additional staff required
to provide operational support to the new bank. During 1996, the Company
began implementing an image-based item processing and statement rendering
system using electronic images of checks for filing and distribution to
customers.
Data processing. Data processing fees include payments to Banknorth's
vendors of mainframe systems and site management, credit card processing,
ATM transaction processing and shareholder accounting services. Data
processing fees totaled $5.0 million in 1997 and $4.6 million in 1996 and
1995. Generally, these expenses are governed by contract terms relating to
either volume of activity and/or changes in the consumer price index.
FDIC deposit insurance and other regulatory. FDIC deposit insurance
and other regulatory expense in 1997 increased $334 thousand or 72.5% from
1996 reflecting the increase in insurance premiums. The Federal Deposit
Insurance Corporation Improvement Act mandated a reduction in insurance
rates when the Bank Insurance Fund achieved a 1.25% reserve ratio. That
target was reached in May 1995, resulting in reduced premiums for the third
and fourth quarters of 1995 as well as a refund of premiums for the June
1995 time period. The reduced premium level continued through 1996, thereby
causing the decrease in this expense category from 1995 to 1996.
Other real estate owned. Expenses relating to other real estate owned
and repossessed assets increased in 1997 by $493 thousand as compared to
1996. These expenses were $471 thousand in 1996 and $520 thousand in 1995.
Included in this expense category in 1997 are adjustments of other real
estate to estimated fair value in the amount of $294 thousand and net gains
on the sale of other real estate owned and repossessed assets in the amount
of $208 thousand. Fair value adjustments in 1996 and 1995 were $176 thousand
and $241 thousand, respectively, while net gains on sale in those years were
$598 thousand and $835 thousand, respectively. Net expenses for the
maintenance, real estate taxes and property insurance relating to these
properties amounted to $878 thousand in 1997. Management anticipates a level
of other real estate owned and repossession expenses in 1998 similar to that
experienced in 1997.
Legal and professional. Legal and professional expenses of $3.4
million in 1997, were $156 thousand lower than in 1996, and $710 thousand
higher than in 1995. Approximately $416 thousand of the increase in legal
and professional expenses in 1996 as compared to 1995 were incurred by FMB.
Otherwise, legal and professional fees in 1996 increased from 1995 primarily
due to expenses related to various business development initiatives.
Printing and supplies. Printing and supplies expense in 1997 decreased
$973 thousand, or 30.0% from 1996. Printing and supplies expenses were high
in 1996 due to FMB, the issuance of new ATM and debit cards and the
implementation of the imaging system.
Advertising and marketing. Advertising and marketing expenses were
$2.4 million in 1997, $344 thousand, or 12.5% lower than in 1996. As with
other categories of expense, the primary cause of the decrease from 1996 was
the addition of FMB and expenses related to the start-up of Stratevest in
1996. Included in 1996 expenses are FMB marketing expenses of $882 thousand.
Communications. Communications expenses totaled $2.4 million in both
1997 and 1996. The 1995 expense level was lower at $1.5 million. The
increase in communication expenses was primarily due to the establishment of
FMB in the western Massachusetts market.
Goodwill. Amortization of goodwill amounted to $5.2 million in 1997 as
compared to $4.7 million in 1996 which included approximately 10.5 months of
amortization of the goodwill related to the FMB acquisition. Goodwill
expense was $632 thousand in 1995. The 1998 expense level is expected to be
similar to the 1997 level.
Capital securities. The capital securities issue in May 1997, which
created Tier I capital, gave rise to expense of $2.1 million in 1997. As
mentioned previously, incremental investment purchases were made in an
effort to offset the cost of the capital securities through increased net
interest income. Funding for the investments was primarily in the form of
borrowings from the FHLB.
Other expenses. Other expenses totaled $11.1 million in 1997 flat
relative to 1996. Contributing to the increase in 1996 from 1995 were
expenses both one-time and recurring at FMB in its first year of operations,
and a loss of approximately $250 thousand resulting from a burglary at one
of the subsidiary bank branches.
YEAR 2000 COMPLIANCE
Banknorth is addressing the significant issues relating to the
programming code in existing computer systems as the year 2000 ("Y2k")
approaches. The Y2k problem is pervasive and complex as virtually every
computer operation faces the potential affects of the rollover of the two
digit year value to 00. The issue is whether computer systems are programmed
to recognize date sensitive information when the year changes to 2000.
Banknorth does not write any source programming code and therefore is
dependent upon external vendors and service providers to alter their
programs to become Y2k compliant. In 1996, the Company began the process of
reviewing the compliance of all programs in use and in 1997, developed a
comprehensive plan not only to test these systems but to maintain Y2k
compliance after successful testing has occurred. Additionally, the Company
is working closely with all of its vendors of data processing systems in
order to become familiar with their plans to become compliant. The Company
has established a Y2k committee comprised of managers throughout the
organization and will track the plan to address the significant Y2k
challenges facing the Company. The Y2k plan has established December 31,
1998 as the expected completion date, when all computer systems will be
tested and determined to be Y2k compliant. This date is consistent with
current banking policy as promulgated by banking regulators, and provides
for continued compliance testing through fiscal year 1999.
The cost of ensuring that computer programs are capable of
successfully entering the year 2000 is expected to be significant in terms
of utilization of existing resources. Incremental expenses related to this
issue are not, at this time, expected to be material to the performance of
Banknorth Group. The Company is continuing to evaluate appropriate courses
of corrective action in case they become necessary, including conversion to
new systems, if deemed in the best interest of the Company.
The risks associated with this issue go beyond Banknorth's own ability
to solve Y2k problems. Should significant commercial customers fail to
address Y2k issues effectively, their ability to meet debt service
requirements could be impaired resulting in increased credit risk and
increased loan chargeoffs. Should suppliers of critical services fail in
their efforts to become Y2k compliant, or if significant third party
interfaces fail to be compatible with Banknorth or fail to be Y2k compliant,
it could have significant adverse affects on the operations and financial
results of Banknorth Group. Accordingly, the Company has begun a process
which assesses and monitors, on an individual account basis, the adequacy of
significant commercial customers' actions to address Y2k issues. The
assessment will be risk rated and has become a factor used in underwriting
credit and analyzing the adequacy of Banknorth's allowance for loan losses.
All vendors of services and third party interfaces are being reviewed and
contingency plans developed in case they are unable to provide normal
service.
INCOME TAXES
In 1997, Banknorth recognized income tax expense of $14.8 million, as
compared to $12.0 million in 1996 and $8.2 million in 1995. The increase in
tax expense is primarily reflective of the improved earnings performance
with income before taxes of $45.3 million, $37.4 million and $30.6 million
in 1997, 1996, and 1995, respectively. In each year, the tax expense on the
Company's income was lower than tax expense at the statutory rate of 35%,
due primarily to tax exempt income, tax credits, and in 1996 and 1995, the
reduction of the deferred tax asset valuation reserve.
CORE TANGIBLE PERFORMANCE
After removing the impact of the balance of goodwill and the related
period amortization, "core tangible" performance for 1997, 1996 and 1995 was
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
(Dollars in thousands, except
share and per share data)
Net income, as reported $ 30,489 $ 25,390 $ 22,373
Add: Amortization of goodwill,
net of tax 3,342 2,990 615
-----------------------------------------
"Core tangible income" $ 33,831 $ 28,380 $ 22,988
=========================================
Average tangible assets $ 2,739,156 $ 2,370,825 $ 1,873,319
Average tangible equity $ 184,007 $ 156,697 $ 136,943
Diluted weighted average
shares outstanding 15,833,538 15,469,382 13,636,228
"Core tangible" return on
average tangible assets 1.24% 1.20% 1.23%
"Core tangible" return on
average tangible equity 18.39% 18.11% 16.79%
"Core tangible" diluted
earnings per share $ 2.14 $ 1.83 $ 1.69
</TABLE>
Note: All share and per share data has been restated for the effect of
the 2-for-1 stock split declared on February 24, 1998.
REGULATORY ENVIRONMENT
The Financial Institutions Reform, Recovery and Enforcement Act and
the Federal Deposit Insurance Corporation Improvement Act are laws enacted
that have or will change various aspects of the banking industry, including
regulatory oversight and reporting issues. Management does not expect these
laws to have a material impact on the operations of the Company's
subsidiaries.
Banknorth's subsidiary banks' deposits are insured by the Federal
Deposit Insurance Corporation (FDIC) as members of the Bank Insurance Fund
(BIF). As a result of the BIF reaching its statutory reserve ratio, FDIC
insurance expense was essentially eliminated in 1996 for "well capitalized"
banks that were members of the BIF, while Savings Association Insurance Fund
(SAIF) members continue to pay premiums ranging from .23 % to .31% of
deposits. In order to eliminate the disparity and any competitive
disadvantage between BIF and SAIF member institutions with respect to
deposit insurance premiums, legislation to recapitalize the SAIF was enacted
in September of 1996. The legislation provided for, among other things, the
merger of the BIF and the SAIF on January 1, 1999 if no savings associations
then exist. The legislation also included a requirement that BIF members
contribute to the repayment of FICO bonds. The BIF assessment for this
purpose was effective January 1, 1997 and was limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999
or when no savings associations exist. Thereafter, the assessments on BIF
member institutions will be made on the same basis as SAIF member
institutions. The rates established by the FDIC to implement this
requirement for all FDIC-insured institutions are 6.5 basis points on SAIF
deposits and 1.5 basis points on BIF deposits until BIF insured institutions
participate fully in the assessment.
CAPITAL RESOURCES
Consistent with its long-term goal of operating a sound and profitable
financial organization, Banknorth strives to maintain a "well capitalized"
company according to regulatory standards. Historically most of the
Company's capital requirements have been provided through retained earnings,
as indicated in Table L, Rate of Internal Capital Generation.
In October 1997, Banknorth announced a stock buyback plan. The Company
plans to buy back up to 5%, or 782,665 shares (391,332 shares immediately
prior to the split) of its outstanding common stock. The Company repurchased
154,000 shares (77,000 shares immediately prior to the split) as of December
31, 1997. These shares are held as treasury stock by the Company. Management
intends to complete the buyback program in 1998.
The Company (including, prior to 1989, its corporate predecessors) has
historically paid regular quarterly cash dividends on its common stock. This
pattern was temporarily interrupted during 1991 and 1992 when the board of
directors of the Company suspended payment of the regular cash dividend to
better preserve the Company's capital in the face of increasing levels of
non-performing loans requiring higher provisions for loan losses. As the
Company's performance recovered, payment of regular quarterly cash dividends
was resumed during the first quarter of 1993 at a level of $.05 per share.
The quarterly dividend was increased in 1994 to a level of $.075 per share,
to $.115 per share in 1995, to $.125 per share in 1996, $.145 per share in
1997 and most recently to $.16 per share in January of 1998.
On February 24, 1998, the board of directors approved a 2-for-1 split
of its common stock effected in the form of a 100% stock dividend. The new
shares will be issued April 6, 1998, to shareholders of record on March 20,
1998. All per share data has been restated for this stock split.
Each quarter, the board of directors declares the payment of regular
quarterly cash dividends, subject to adjustment from time to time, based
upon the Company's earnings outlook and other relevant factors. The board
desires to maintain a dividend payout level of approximately 30% of net
income.
The Company's principal source of funds to pay cash dividends, the
cost of capital securities and service long-term debt requirements are
derived from dividends from its subsidiary banks. Various laws and
regulations restrict the ability of banks to pay dividends to their
shareholders. As part of its plan to capitalize FMB at a "well capitalized"
level for regulatory purposes, the Company re-deployed accumulated capital
of certain of its subsidiary banks. Because the special dividend exceeded
applicable regulatory limitations, the Company obtained approval from the
applicable regulatory agencies for the payment of that portion of the
dividend which exceeded such regulatory limitations. The payment of
dividends by the Company in the future will require the generation of
sufficient future earnings by the subsidiary banks. For further disclosures
relative to dividend restrictions and regulatory requirements, refer to the
notes to the consolidated financial statements.
At December 31, 1997, Banknorth's Tier I capital was $226.6 million,
or 10.63% of risk-adjusted assets, compared to $173.1 million and 9.11% at
December 31, 1996, and $151.4 million and 11.22% at December 31, 1995. The
ratio of Tier I capital to quarterly average adjusted assets, or leverage
ratio, at December 31, 1997 was 7.97% as compared to 6.91% and 8.05% in 1996
and 1995, respectively. Both ratios compare favorably with peer
organizations and exceed all "well capitalized" regulatory requirements on a
consolidated basis as well as at the subsidiary bank level.
Table M, Capital Ratios, reveals the components of capital and the
changes from 1995 through 1997. To assist in establishing FMB as a "well
capitalized" bank, and offset the reduction in maintaining the Company's
regulatory capital ratios as "well capitalized" as a result of the
acquisition of the Shawmut branches, Banknorth, on February 14, 1996, issued
2,044,446 shares (1,022,223 shares immediately prior to the split) of common
stock generating $32.2 million of new capital. Additionally, in May 1997,
the Company established a trust to issue and sell $30.0 million in capital
securities which represents Tier I capital to the Company.
Table A. Mix of Average Earning Assets
<TABLE>
<CAPTION>
PERCENTAGE OF
YEARS ENDED DECEMBER 31, % of TOTAL EARNING ASSETS
------------------------------------- TOTAL -----------------------------
(Dollars in thousands) 1997 1996 CHANGE CHANGE 1997 1996 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income and
unamortized loan fees and costs:
Commercial, financial and agricultural $ 323,572 $ 281,391 $ 42,181 11.4% 12.4% 12.5% 12.5%
Construction and land development 32,390 21,805 10,585 2.9 1.2 1.0 1.2
Commercial real estate 551,074 486,522 64,552 17.4 21.0 21.6 21.9
Residential real estate 761,764 704,382 57,382 15.5 29.1 31.3 27.5
Credit card receivables 22,455 23,707 (1,252) (0.3) 0.9 1.1 1.4
Lease receivables 74,631 57,611 17,020 4.6 2.9 2.6 2.1
Other installment 150,211 155,302 (5,091) (1.4) 5.7 6.9 8.3
-----------------------------------------------------------------------------
Total loans, net of unearned income
and unamortized loan fees and costs 1,916,097 1,730,720 185,377 50.1 73.2 77.0 74.9
Securities available for sale:
U.S. Treasuries and Agencies 139,973 87,516 52,457 14.2 5.4 3.9 2.2
States and political subdivisions 3,792 701 3,091 0.8 0.1 - -
Mortgage-backed securities 303,515 269,024 34,491 9.3 11.6 12.0 4.5
Corporate debt securities 166,631 64,007 102,624 27.7 6.4 2.9 0.5
Equity securities 34,871 23,469 11,402 3.1 1.3 1.0 1.1
-----------------------------------------------------------------------------
Total securities available for sale,
at fair value 648,782 444,717 204,065 55.1 24.8 19.8 8.3
Investment securities:
U.S. Treasuries and Agencies 9,836 18,982 (9,146) (2.5) 0.4 0.8 3.5
States and political subdivisions 993 1,414 (421) (0.1) - 0.1 0.1
Mortgage-backed securities 17,935 21,590 (3,655) (1.0) 0.7 1.0 11.8
Corporate debt securities 10 507 (497) (0.1) - - 0.1
------------------------------------------------------------------------------
Total investment securities,
at amortized cost 28,774 42,493 (13,719) (3.7) 1.1 1.9 15.5
Loans held for sale 16,481 14,834 1,647 0.4 0.6 0.7 0.7
Money market investments 7,410 14,503 (7,093) (1.9) 0.3 0.6 0.6
------------------------------------------------------------------------------
Total earning assets $ 2,617,544 $ 2,247,267 $370,277 100.0% 100.0% 100.0% 100.0%
==============================================================================
</TABLE>
Table B. Loan Portfolio
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------- -------------------- -------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Commercial, financial,
and agricultural $ 332,385 17.0% $ 300,730 16.3% $ 228,877 16.9% $ 201,431 15.5% $ 190,087 16.9%
Real Estate:
Construction and
land development 36,276 1.8 29,364 1.6 20,587 1.5 23,042 1.8 17,959 1.6
Commercial 563,800 28.8 531,364 28.7 398,586 29.5 386,663 29.8 365,329 32.5
Residential 773,429 39.4 737,261 39.9 477,458 35.4 483,936 37.4 371,210 33.1
------------------------------------------------------------------------------------------------------------
Total real estate 1,373,505 70.0 1,297,989 70.2 896,631 66.4 893,641 69.0 754,498 67.2
------------------------------------------------------------------------------------------------------------
Credit card receivables 25,669 1.3 24,563 1.3 26,867 2.0 26,174 2.0 27,134 2.4
Lease receivables 76,302 3.9 70,396 3.8 47,055 3.5 33,291 2.6 19,851 1.8
Other installment 152,768 7.8 154,554 8.4 151,623 11.2 141,534 10.9 131,646 11.7
------------------------------------------------------------------------------------------------------------
Total installment 254,739 13.0 249,513 13.5 225,545 16.7 200,999 15.5 178,631 15.9
------------------------------------------------------------------------------------------------------------
Total loans 1,960,629 100.0 1,848,232 100.0 1,351,053 100.0 1,296,071 100.0 1,123,216 100.0
Less: Allowance for
loan losses 25,721 1.3 23,520 1.3 22,095 1.6 21,437 1.7 21,363 1.9
------------------------------------------------------------------------------------------------------------
Net loans $1,934,908 98.7% $1,824,712 98.7% $1,328,958 98.4% $1,274,634 98.3% $1,101,853 98.1%
============================================================================================================
</TABLE>
Table C. Maturities and Sensitivities of Loans to Changes in Interest Rates
<TABLE>
<CAPTION>
At DECEMBER 31, 1997, MATURING:
------------------------------------------------
AFTER 1 YEAR
IN 1 YEAR BUT WITHIN AFTER
(In thousands) OR LESS 5 YEARS 5 YEARS TOTAL
------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $127,500 $127,249 $77,636 $332,385
Construction and land development 17,368 18,908 - 36,276
------------------------------------------------
Total $144,868 $146,157 $77,636 $368,661
================================================
Predetermined interest rates $ 64,104 $ 50,000 $32,786 $146,890
Floating interest rates 80,764 96,157 44,850 221,771
------------------------------------------------
Total $144,868 $146,157 $77,636 $368,661
================================================
</TABLE>
Table D. Securities Available for Sale and Investment Securities
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------
(Dollars in thousands) 1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Securities available for sale:
U.S. Treasuries and Agencies $141,245 $111,774 $ 76,401
States and political subdivisions 5,251 2,361 -
Mortgage-backed securities 320,473 272,433 249,549
Corporate debt securities 200,710 121,384 12,147
Equity securities 39,044 27,128 20,943
Valuation reserve 3,585 (3,811) 45
--------------------------------
Recorded value of securities available for sale $710,308 $531,269 $359,085
================================
Investment securities:
U.S. Treasuries and Agencies $ 7,505 $ 13,181 $ 23,837
States and political subdivisions 781 1,135 1,630
Mortgage-backed securities 15,676 19,868 23,146
Corporate debt securities 10 10 1,067
--------------------------------
Recorded value of investment securities $ 23,972 $ 34,194 $ 49,680
================================
Fair value of investment securities $ 24,246 $ 34,644 $ 51,087
================================
Excess of fair value versus recorded value $ 274 $ 450 $ 1,407
Fair value as a % of recorded value 101.1% 101.3% 102.8%
</TABLE>
Table E. Investment Portfolio Maturity Distribution and Yields
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------------------------------
SECURITIES AVAILABLE
FOR SALE INVESTMENT SECURITIES
----------------------- ---------------------
(Dollars in thousands) AMOUNT YIELD (FTE) AMOUNT YIELD (FTE)
-------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasuries and Agencies
Within 1 year $ 33,761 5.25% $ 5,180 6.52%
1 to 5 years 91,613 6.35 2,325 6.79
6 to 10 years 15,871 7.15 - -
-------------------------------------------------
$141,245 6.18% $ 7,505 6.60%
=================================================
States and political subdivisions
1 to 5 years $ 2,881 6.69% $ 528 7.95%
6 to 10 years 2,370 7.32 - -
Over 10 years - - 253 2.74
-------------------------------------------------
$ 5,251 6.97% $ 781 6.26%
=================================================
Mortgage-backed securities
Within 1 year $ 491 4.24% $ 7,567 6.62%
1 to 5 years 86,874 5.08 6,854 7.75
6 to 10 years 56,297 6.44 1,229 9.36
Over 10 years 176,811 7.03 26 8.28
-------------------------------------------------
$320,473 6.39% $15,676 7.33%
=================================================
Other securities
Within 1 year $ 5,147 5.48% $ - -%
1 to 5 years 47,268 6.28 - -
6 to 10 years 73,595 6.53 10 7.00
Over 10 years 74,700 6.78 - -
No fixed maturity 39,044 6.00 - -
-------------------------------------------------
$239,754 6.45% $ 10 7.00%
=================================================
Total
Within 1 year $ 39,399 5.27% $12,747 6.58%
1 to 5 years 228,636 5.86 9,707 7.53
6 to 10 years 148,133 6.57 1,239 9.34
Over 10 years 251,511 6.96 279 3.26
No fixed maturity 39,044 6.00 - -
Valuation reserve 3,585 - - -
-------------------------------------------------
$710,308 6.34% $23,972 7.07%
=================================================
</TABLE>
Note: Actual maturities may differ from contractural maturities because,
in certain cases, borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Table F. Average Balances, Yields, and Net Interest Margins
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------ ------------------------------ ------------------------------
INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(Dollars in thousands) BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Money market investments $ 7,410 $ 418 5.64% $ 14,503 $ 806 5.56% $ 9,718 $ 562 5.78%
Scurities available for sale
(1 and 2) 648,782 41,179 6.32 444,717 27,474 6.11 147,796 9,255 6.15
Loans held for sale 16,481 1,281 7.77 14,834 1,150 7.75 12,985 1,024 7.89
Investment securities (1 and 2) 28,774 2,060 7.16 42,493 3,037 7.15 274,688 17,439 6.24
Loans, net of unearned income
and unamortized loan fees
(2 and 3) 1,916,097 174,127 9.09 1,730,720 158,140 9.14 1,329,188 125,031 9.41
-------------------------------------------------------------------------------------------------
Total earning assets 2,617,544 219,065 8.36 2,247,267 190,607 8.46 1,774,375 153,311 8.60
Cash and due from banks 75,736 83,631 60,441
Allowance for loan losses (24,516) (24,142) (21,564)
Other assets 104,043 98,651 62,148
---------- ---------- ----------
Total assets $2,772,807 $2,405,407 $1,875,400
========== ========== ==========
Interest-bearing liabilities:
NOW accounts & money market
savings $ 815,261 29,653 3.64 $ 741,351 24,829 3.35 $ 513,280 18,343 3.57
Regular savings 204,830 4,905 2.39 223,936 5,351 2.39 189,927 4,935 2.60
Time deposits $100 thousand
and greater 94,176 5,190 5.51 76,194 4,266 5.60 45,658 2,481 5.43
Time deposits under $100
thousand 706,460 37,685 5.33 682,587 36,172 5.30 510,433 27,330 5.35
-------------------------------------------------------------------------------------------------
Total interest-bearing
deposits 1,820,727 77,433 4.25 1,724,068 70,618 4.10 1,259,298 53,089 4.22
Short-term borrowed funds 382,168 20,477 5.36 159,672 7,913 4.96 164,010 9,017 5.50
Long-term debt 21,294 1,414 6.64 43,951 2,609 5.94 94,107 5,874 6.24
-------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 2,224,189 99,324 4.47 1,927,691 81,140 4.21 1,517,415 67,980 4.48
-------------------------------------------------------------------------------------------------
Non-interest-bearing deposits 288,322 264,938 194,580
Other liabilities 22,502 21,499 17,455
Corporation-obligated mandatorily
redeemable capital securities 20,137 - -
Shareholders' equity 217,657 191,279 145,950
---------- ---------- ----------
Total liabilities, corporation-
obligated mandatorily redeemable
capital securities and
shareholders' equity $2,772,807 $2,405,407 $1,875,400
========== ========== ==========
Net interest income $119,741 $109,467 $ 85,331
======== ======== ========
Interest rate differential 3.89% 4.25% 4.12%
===== ===== =====
Net interest margin 4.57% 4.86% 4.79%
===== ===== =====
Notes:
<F1> For the purpose of these computations, unrealized gains/(losses) are
excluded from the average rate calculation.
<F2> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal and state tax rates.
<F3> Includes principal balances of non-accrual loans and industrial
revenue bonds.
</TABLE>
Table G. Average Sources of Funding
<TABLE>
<CAPTION>
PERCENTAGE OF
YEARS ENDED DECEMBER 31, Change TOTAL NET FUNDING
------------------------ ------------------ --------------------------
1997 1996 AMOUNT PERCENT 1997 1996 1995
----------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 288,322 $ 264,938 $ 23,384 8.8% 11.5% 12.1% 11.4%
Retail deposits:
Regular savings 204,830 223,936 (19,106) (8.5) 8.2 10.2 11.1
Time deposits under $100 thousand 706,460 682,587 23,873 3.5 28.1 31.1 29.8
NOW accounts & money market savings 815,261 741,351 73,910 10.0 32.4 33.8 30.0
----------------------------------------------------------------------------
Total retail deposits 1,726,551 1,647,874 78,677 4.8 68.7 75.1 70.9
----------------------------------------------------------------------------
Total core deposits 2,014,873 1,912,812 102,061 5.3 80.2 87.2 82.3
Time deposits $100 thousand and greater 94,176 76,194 17,982 23.6 3.7 3.5 2.7
Federal funds purchased 7,441 5,368 2,073 38.6 0.3 0.2 0.2
Securities sold under agreements to repurchase 137,961 106,918 31,043 29.0 5.5 4.9 5.8
Borrowings from U.S. Treasury 10,046 7,730 2,316 30.0 0.4 0.4 0.5
Short-term notes from FHLB 226,720 39,656 187,064 471.7 9.0 1.8 3.1
Long-term notes from FHLB 9,282 28,736 (19,454) (67.7) 0.4 1.3 4.3
----------------------------------------------------------------------------
Total purchased liabilities 485,626 264,602 221,024 83.5 19.3 12.1 16.6
Bank term loan 12,012 15,215 (3,203) (21.1) 0.5 0.7 1.1
----------------------------------------------------------------------------
Total net funding $2,512,511 $2,192,629 $319,882 14.6% 100.0% 100.0% 100.0%
============================================================================
</TABLE>
Table H. Volume and Yield Analysis
<TABLE>
<CAPTION>
1997 VS. 1996 1996 VS. 1995
---------------------------------------------------- -------------------------------------------------
DUE TO DUE TO
INCREASE ------------------ INCREASE -----------------
1997 1996 (DECREASE) VOLUME RATE 1996 1995 (DECREASE) VOLUME RATE
--------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income (FTE):
Money market investments $ 418 $ 806 $ (388) $ (400) $ 12 $ 806 $ 562 $ 244 $ 265 $ (21)
Securities available for
sale 41,179 27,474 13,705 12,760 945 27,474 9,255 18,219 18,279 (60)
Loans held for sale 1,281 1,150 131 128 3 1,150 1,024 126 144 (18)
Investment securities 2,060 3,037 (977) (981) 4 3,037 17,439 (14,402) (16,960) 2,558
Loans 174,127 158,140 15,987 16,852 (865) 158,140 125,031 33,109 36,698 (3,589)
----------------------------- -----------------------------
Total interest income 219,065 190,607 28,458 30,719 (2,261) 190,607 153,311 37,296 38,426 (1,130)
Interest expense:
NOW accounts & money
market savings 29,653 24,829 4,824 2,674 2,150 24,829 18,343 6,486 7,615 (1,129)
Regular savings 4,905 5,351 (446) (446) - 5,351 4,935 416 803 (387)
Time deposits $100
thousand and greater 5,190 4,266 924 993 (69) 4,266 2,481 1,785 1,707 78
Time deposits under $100
thousand 37,685 36,172 1,513 1,308 205 36,172 27,330 8,842 9,097 (255)
Short-term borrowed funds 20,477 7,913 12,564 11,925 639 7,913 9,017 (1,104) (218) (886)
Long-term debt 1,414 2,609 (1,195) (1,503) 308 2,609 5,874 (3,265) (2,983) (282)
----------------------------- -----------------------------
Total interest expense 99,324 81,140 18,184 13,172 5,012 81,140 67,980 13,160 16,021 (2,861)
-------------------------------------------------------------------------------------------------------
Net interest income (FTE) $119,741 $109,467 $10,274 $17,547 $(7,273) $109,467 $ 85,331 $ 24,136 $22,405 $1,731
=======================================================================================================
</TABLE>
Increases and decreases in interest income and interest expense due to both
rate and volume have been allocated to volume on a consistent basis.
Table I. Non-Performing Assets
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans on a non-accrual basis:
Commercial, financial and agricultural $ 2,749 $ 3,221 $ 648 $ 2,073 $ 2,174
Real estate:
Construction and land development - 39 103 730 282
Commercial 2,645 4,443 3,993 8,873 18,232
Residential 7,936 9,290 7,625 6,092 6,819
Credit card receivables - - - - 3
Other installment 8 - - - 1
---------------------------------------------------
Total non-accrual 13,338 16,993 12,369 17,768 27,511
Restructured loans:
Real estate:
Commercial - 716 288 260 709
Residential 36 39 85 69 46
Other installment 6 10 55 141 159
---------------------------------------------------
Total restructured 42 765 428 470 914
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 70 169 87 54 30
Real estate:
Commercial 125 - 64 270 35
Residential 332 88 396 466 7
Credit card receivables 119 111 105 118 57
Lease receivables 151 48 28 - 81
Other installment 514 794 494 243 381
---------------------------------------------------
Total past-due 90 days or more
and still accruing 1,311 1,210 1,174 1,151 591
---------------------------------------------------
Total non-performing loans 14,691 18,968 13,971 19,389 29,016
---------------------------------------------------
Other real estate owned 1,074 921 1,169 575 3,444
Non-real estate repossessed assets 500 - - - -
---------------------------------------------------
Total foreclosed and repossessed assets (F/RA) 1,574 921 1,169 575 3,444
---------------------------------------------------
Total non-performing assets $16,265 $19,889 $15,140 $19,964 $32,460
===================================================
Allowance for loan losses (ALL) $25,721 $23,520 $22,095 $21,437 $21,363
ALL coverage of non-performing loans 175.08% 124.00% 158.15% 110.56% 73.62%
Non-performing assets as a % of (loans & F/RA) 0.83 1.08 1.12 1.54 2.88
Non-performing assets to total assets 0.56 0.76 0.79 1.07 1.95
</TABLE>
Table J. Summary of Loan Loss Experience
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans outstanding-end of year $1,960,629 $1,848,232 $1,351,053 $1,296,071 $1,123,216
Average loans outstanding 1,916,097 1,730,720 1,329,188 1,187,773 1,091,851
Allowance for loan losses at
beginning of year $ 23,520 $ 22,095 $ 21,437 $ 21,363 $ 22,099
------------------------------------------------------------------
Allowance related to acquisitions - 1,650 - 1,608 -
Loans charged off:
Commercial, financial and agricultural (1,343) (1,356) (1,283) (795) (3,000)
Real estate:
Construction and land development - (73) (357) (97) (183)
Commercial (669) (2,122) (2,287) (4,239) (4,216)
Residential (1,915) (1,772) (1,833) (1,441) (792)
------------------------------------------------------------------
Total real estate (2,584) (3,967) (4,477) (5,777) (5,191)
Credit card receivables (691) (788) (576) (479) (469)
Lease receivables (1,510) (867) (410) (255) (66)
Other installment (4,022) (3,348) (2,415) (2,414) (2,991)
------------------------------------------------------------------
Total installment (6,223) (5,003) (3,401) (3,148) (3,526)
Total loans charged off (10,150) (10,326) (9,161) (9,720) (11,717)
------------------------------------------------------------------
Recoveries on loans:
Commercial, financial and agricultural 592 619 1,597 1,459 3,104
Real estate:
Construction and land development 87 60 540 227 99
Commercial 638 1,039 1,430 1,419 1,067
Residential 628 669 302 309 268
------------------------------------------------------------------
Total real estate 1,353 1,768 2,272 1,955 1,434
Credit card receivables 109 144 162 123 119
Lease receivables 970 695 277 155 31
Other installment 1,665 1,275 1,136 1,284 1,593
------------------------------------------------------------------
Total installment 2,744 2,114 1,575 1,562 1,743
Total recoveries on loans 4,689 4,501 5,444 4,976 6,281
------------------------------------------------------------------
Loans charged off, net of recoveries (5,461) (5,825) (3,717) (4,744) (5,436)
------------------------------------------------------------------
Provision for loan losses 7,662 5,600 4,375 3,210 4,700
------------------------------------------------------------------
Allowance for loan losses at
end of year $ 25,721 $ 23,520 $ 22,095 $ 21,437 $ 21,363
==================================================================
Loans charged off, net, as a % of
average total loans 0.29% 0.34% 0.28% 0.40% 0.50%
Provision for loan losses as a %
of average total loans 0.40% 0.32% 0.33% 0.27% 0.43%
Allowance for loan losses
as a % of year-end total loans 1.31% 1.27% 1.64% 1.65% 1.90%
</TABLE>
Table K. Interest Rate Risk
<TABLE>
<CAPTION>
PERCENTAGE CHANGE IN NET INTEREST INCOME FROM THE FLAT RATE SCENARIO
YEAR 1 YEAR 2 TOTAL 24 MONTHS
--------------------------- --------------------------- ---------------------------
RISING RATE FALLING RATE RISING RATE FALLING RATE RISING RATE FALLING RATE
SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO SCENARIO
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment securities, securities
available for sale, and money
market investments 1.08% (1.63%) 6.84% (9.20%) 4.01% (5.48%)
Total loans* 4.64 (4.11) 13.60 (11.29) 9.22 (7.78)
Total interest income 3.92 (3.61) 12.24 (10.87) 8.17 (7.32)
NOW accounts, money market
savings and regular savings 15.49 (9.56) 33.40 (20.58) 24.71 (15.24)
Time deposits 4.73 (4.35) 25.15 (18.32) 15.02 (11.39)
Total interest-bearing deposits 9.94 (6.87) 29.24 (19.44) 19.77 (13.27)
Short-term borrowed funds 15.21 (14.28) 43.05 (38.05) 29.24 (26.26)
Long-term debt 5.31 (5.31) 11.38 (11.38) 7.86 (7.86)
Total borrowings 14.55 (13.68) 41.49 (36.74) 28.00 (25.19)
Total interest expense 11.04 (8.49) 32.07 (23.43) 21.70 (16.06)
Net interest income (2.64) 0.89 (5.55) 0.41 (4.14) 0.64
<F*> Includes the effect of the interest rate swaps and floors, which have
notional amounts of $50.0 million and $295.0 million, respectively,
at December 31, 1997.
</TABLE>
Note: Flat rate scenario: A flat rate scenario in which today's
prevailing rates are locked in and the
only balance sheet fluctuations that occur
are due to cash flows, maturities, new
volumes, and repricing volumes consistent
with this flat rate scenario.
Rising rate scenario: This scenario is a 200 basis point rise in
rates over a twelve month horizon together
with a dynamic balance sheet anticipated
to be consistent with such an interest
rate change.
Falling rate scenario: This scenario is a 200 basis point decline
in rates over a twelve month period
together with a dynamic balance sheet
anticipated to be consistent with such an
interest rate change.
Table L. Rate of Internal Capital Generation
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
----------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average total assets:
Income before cumulative effect of accounting changes 1.10% 1.06% 1.19% 0.93% 0.72%
Net income 1.10 1.06 1.19 0.94 0.50
Return on average shareholders' equity:
Income before cumulative effect of accounting changes 14.01 13.27 15.33 12.14 8.93
Net income 14.01 13.27 15.33 12.24 6.20
Average equity to average assets 7.85 7.95 7.78 7.64 8.05
Dividend payout 29.75 30.83 27.98 25.67 23.73
Earnings retention rate 70.25 69.17 72.02 74.33 76.27
Internal capital generation rate 9.84 9.18 11.04 9.10 4.73
</TABLE>
Note: For 1997, 1996, 1995 and 1994, amounts include the effect of the
fair market value adjustment on securities available for sale.
Table M. Capital Ratios
<TABLE>
<CAPTION>
DECEMBER 31, % CHANGE
-------------------------------------- -------------------
1997 1996
vs. vs.
1997 1996 1995 1996 1995
-------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total risk-adjusted on-balance-sheet assets $2,024,610 $1,795,825 $1,272,079 12.7% 41.2%
Total risk-adjusted off-balance-sheet items 108,212 103,647 76,432 4.4 35.6
--------------------------------------
Total risk-adjusted assets $2,132,822 $1,899,472 $1,348,511 12.3 40.9
======================================
Total risk-adjusted assets / average total assets,
net of fair value adjustment and goodwill(1) 75.02% 75.87% 71.77% - -
Total shareholders' equity $ 229,872 $ 206,737 $ 159,936 11.2 29.3
Fair value adjustment(1) (2,311) 2,477 (29) (193.3) 8,641.4
Corporation-obligated mandatorily redeemable
capital securities 30,000 - - - -
Goodwill (30,919) (36,142) (8,553) 14.5 (322.6)
--------------------------------------
Total Tier I capital 226,642 173,072 151,354 31.0 14.3
Maximum allowance for loan losses(2) 25,721 23,520 16,921 9.4 39.0
--------------------------------------
Total capital $ 252,363 $ 196,592 $ 168,275 28.4 16.8
======================================
Quarterly average total assets net of fair value
adjustment and goodwill(1) $2,843,167 $2,503,637 $1,879,047 13.6 33.2
Allowance for loan losses, period end 25,721 23,520 22,095 9.4 6.4
Total capital to total risk-adjusted assets 11.83% 10.35% 12.48%
Tier I capital to total risk-adjusted assets 10.63 9.11 11.22
Tier I capital to total quarterly average
adjusted assets (Leverage) 7.97 6.91 8.05
Notes:
<F1> The goodwill and market valuation relating to securities available
for sale included in shareholders' equity and total assets on the
consolidated balance sheets has been excluded in the above ratios.
<F2> The maximum allowance for loan losses used in calculating total
capital is the period-end allowance for loan losses or 1.25% of
risk-adjusted assets prior to the allowance limitation, whichever is
lower.
</TABLE>
Five Year Selected Financial Data
<TABLE>
<CAPTION>
(Dollars in thousands, except share and per share data) 1997 1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest income $ 218,506 $ 190,008 $ 152,624 $ 124,403 $ 113,178
Interest expense 99,324 81,140 67,980 49,599 44,670
-----------------------------------------------------------------------
Net interest income 119,182 108,868 84,644 74,804 68,508
Provision for loan losses 7,662 5,600 4,375 3,210 4,700
-----------------------------------------------------------------------
Net interest income after provision for loan losses 111,520 103,268 80,269 71,594 63,808
-----------------------------------------------------------------------
Other operating income:
Income from trust and investment management fees 8,636 7,835 7,426 7,227 7,455
Service charges on deposit accounts 8,026 6,558 5,081 4,917 5,128
Card product income 3,145 3,029 2,789 2,835 2,751
Loan servicing income 2,514 2,752 2,701 2,509 2,040
Gain on sale of mortgage servicing rights 921 93 - 664 -
Net loan transactions 1,215 1,629 568 1,214 3,408
Net securities transactions 258 31 (409) (2,234) 1,110
All other 6,611 3,376 2,754 2,839 2,865
-----------------------------------------------------------------------
Total other operating income 31,326 25,303 20,910 19,971 24,757
Other operating expenses:
Compensation & employee benefits 46,854 44,095 34,805 32,632 32,925
Net occupancy, equipment & software 15,042 13,854 11,006 10,752 10,008
Data processing 4,972 4,584 4,629 5,027 4,840
FDIC deposit insurance and other regulatory 795 461 2,062 3,415 3,634
OREO and repossession 964 471 520 1,723 4,606
Amortization of goodwill 5,223 4,652 632 136 5
Capital securities 2,104 - - - -
All other 21,611 23,083 16,935 16,243 15,851
-----------------------------------------------------------------------
Total other operating expenses 97,565 91,200 70,589 69,928 71,869
-----------------------------------------------------------------------
Income before income tax expense 45,281 37,371 30,590 21,637 16,696
Income tax expense 14,792 11,981 8,217 5,734 5,235
-----------------------------------------------------------------------
Income before cumulative effect of changes in accounting 30,489 25,390 22,373 15,903 11,461
Cumulative effect of changes in accounting - - - 138 (3,500)
-----------------------------------------------------------------------
Net income $ 30,489 $ 25,390 $ 22,373 $ 16,041 $ 7,961
=======================================================================
Average Balances:
Loans $ 1,916,097 $ 1,730,720 $ 1,329,188 $ 1,187,773 $ 1,091,851
Loans held for sale 16,481 14,834 12,985 15,432 24,161
Securities available for sale 648,782 444,717 147,796 221,828 337,523
Investment securities 28,774 42,493 274,688 176,980 23,491
Money market investments 7,410 14,503 9,718 11,419 9,873
-----------------------------------------------------------------------
Total earning assets 2,617,544 2,247,267 1,774,375 1,613,432 1,486,899
Other assets 155,263 158,140 101,025 100,382 107,289
-----------------------------------------------------------------------
Total assets $ 2,772,807 $ 2,405,407 $ 1,875,400 $ 1,713,814 $ 1,594,188
=======================================================================
Non-interest-bearing deposits $ 288,322 $ 264,938 $ 194,580 $ 185,676 $ 178,734
Interest-bearing deposits 1,820,727 1,724,068 1,259,298 1,121,073 1,099,550
-----------------------------------------------------------------------
Total deposits 2,109,049 1,989,006 1,453,878 1,306,749 1,278,284
Short-term borrowed funds 382,168 159,672 164,010 145,616 130,176
Long-term debt 21,294 43,951 94,107 113,364 41,312
Other liabilities 22,502 21,499 17,455 17,077 16,107
Corporation-obligated mandatorily redeemable capital
securities 20,137 - - - -
Shareholders' equity 217,657 191,279 145,950 131,008 128,309
-----------------------------------------------------------------------
Total liabilities, corporation-obligated
mandatorily redeemable capital securities and
shareholders' equity $ 2,772,807 $ 2,405,407 $ 1,875,400 $ 1,713,814 $ 1,594,188
=======================================================================
Loans charged off, net of recoveries $ 5,461 $ 5,825 $ 3,717 $ 4,744 $ 5,436
Non-performing assets, p.e. 16,265 19,889 15,140 19,964 32,460
Share and Per Share Data:
Basic wtd. avg. number of shares outstanding 15,610,254 15,320,424 13,545,892 13,561,222 13,579,760
Basic earnings per share (Basic EPS) $ 1.95 $ 1.66 $ 1.65 $ 1.18 $ 0.59
Diluted wtd. avg. number of shares outstanding 15,833,538 15,469,382 13,636,228 13,605,520 13,616,256
Diluted earnings per share (Diluted EPS) $ 1.93 $ 1.64 $ 1.64 $ 1.18 $ 0.58
Tangible book value 12.84 10.90 11.12 9.27 9.73
Cash dividends declared 0.58 0.50 0.46 0.30 0.20
Closing price at year end 32.13 20.75 19.25 11.00 9.75
Cash dividends declared as a % of net income 29.75% 30.83% 27.98% 25.67% 23.73%
Key Ratios:
Return on average assets
Before cumulative effect of accounting change 1.10% 1.06% 1.19% 0.93% 0.72%
Net income 1.10 1.06 1.19 0.94 0.50
Return on average shareholders' equity
Before cumulative effect of accounting change 14.01 13.27 15.33 12.14 8.93
Net income 14.01 13.27 15.33 12.24 6.20
Net interest margin, fte 4.57 4.86 4.79 4.65 4.65
Efficiency ratio 62.06 62.11 65.11 69.76 72.88
Expense ratio 2.36 2.59 2.70 2.84 2.96
As a % of risk-adjusted assets, p.e.:
Total capital 11.83 10.35 12.48 11.86 12.95
Tier 1 capital 10.63 9.11 11.22 10.61 11.70
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 7.97 6.91 8.05 7.41 7.96
Tangible shareholders' equity, to tangible assets, p.e. 6.88 6.65 7.96 6.77 7.86
Price/Basic EPS (last 4 reported quarters) 16.5 12.5 11.7 9.3 16.5
Price/Diluted EPS (last 4 reported quarters) 16.7 12.7 11.7 9.3 16.8
</TABLE>
Note: All share and per share data has been restated for the effect of
the 2-for-1 stock split declared February 24, 1998.
Summary of Unaudited Quarterly Financial Information
<TABLE>
<CAPTION>
1997
(Dollars in thousands, except share -----------------------------------------------------------------------
and per share data) YEAR Q4 Q3 Q2 Q1
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest income $ 218,506 $ 56,891 $ 56,321 $ 54,312 $ 50,982
Interest expense 99,324 26,339 26,103 24,448 22,434
-----------------------------------------------------------------------
Net interest income 119,182 30,552 30,218 29,864 28,548
Provision for loan losses 7,662 2,036 1,940 1,936 1,750
-----------------------------------------------------------------------
Net interest income after provision
for loan losses 111,520 28,516 28,278 27,928 26,798
-----------------------------------------------------------------------
Other operating income:
Income from trust and investment
management fees 8,636 2,263 2,270 2,081 2,022
Service charges on deposit accounts 8,026 2,279 1,910 1,981 1,856
Card product income 3,145 816 787 822 720
Loan servicing income 2,514 603 630 640 641
Gain on sale of mortgage servicing rights 921 (23) 896 - 48
Net loan transactions 1,215 416 381 183 235
Net securities transactions 258 71 163 6 18
All other 6,611 3,699 964 862 1,086
-----------------------------------------------------------------------
Total other operating income 31,326 10,124 8,001 6,575 6,626
Other operating expenses:
Compensation & employee benefits 46,854 12,189 11,967 11,406 11,292
Net occupancy, equipment & software 15,042 3,858 3,772 3,681 3,731
Data processing 4,972 1,286 1,256 1,223 1,207
FDIC deposit insurance and other regulatory 795 217 197 194 187
OREO and repossession 964 316 287 264 97
Amortization of goodwill 5,223 1,306 1,305 1,306 1,306
Capital securities 2,104 789 789 526 -
All other 21,611 5,518 5,498 5,434 5,161
-----------------------------------------------------------------------
Total other operating expenses 97,565 25,479 25,071 24,034 22,981
-----------------------------------------------------------------------
Income before income tax expense 45,281 13,161 11,208 10,469 10,443
Income tax expense 14,792 4,401 3,618 3,380 3,393
-----------------------------------------------------------------------
Net income $ 30,489 $ 8,760 $ 7,590 $ 7,089 $ 7,050
=======================================================================
Average Balances:
Loans $ 1,916,097 $ 1,950,504 $ 1,933,960 $ 1,914,211 $ 1,864,504
Loans held for sale 16,481 19,707 20,957 12,730 12,400
Securities available for sale 648,782 716,592 708,403 627,897 539,636
Investment securities 28,774 24,853 27,074 30,125 33,153
Money market investments 7,410 8,286 7,934 5,684 7,726
-----------------------------------------------------------------------
Total earning assets 2,617,544 2,719,942 2,698,328 2,590,647 2,457,419
Other assets 155,263 156,455 151,418 152,785 160,079
-----------------------------------------------------------------------
Total assets $ 2,772,807 $ 2,876,397 $ 2,849,746 $ 2,743,432 $ 2,617,498
=======================================================================
Non-interest-bearing deposits $ 288,322 $ 305,831 $ 293,979 $ 278,612 $ 273,764
Interest-bearing deposits 1,820,727 1,860,793 1,830,540 1,798,630 1,792,078
-----------------------------------------------------------------------
Total deposits 2,109,049 2,166,624 2,124,519 2,077,242 2,065,842
Short-term borrowed funds 382,168 412,502 430,360 388,903 295,780
Long-term debt 21,294 17,577 20,196 22,607 24,887
Other liabilities 22,502 21,645 21,387 23,701 23,311
Corporation-obligated mandatorily
redeemable capital securities 20,137 30,000 30,000 20,110 -
Shareholders' equity 217,657 228,049 223,284 210,869 207,678
-----------------------------------------------------------------------
Total liabilities, corporation-obligated
mandatorily redeemable capital
securities and shareholders' equity $ 2,772,807 $ 2,876,397 $ 2,849,746 $ 2,743,432 $ 2,617,498
=======================================================================
Loans charged off, net of recoveries $ 5,461 $ 1,376 $ 842 $ 1,611 $ 1,632
Non-performing assets, p.e. 16,265 16,265 18,545 16,302 20,189
Share and Per Share Data:
Basic wtd. avg. number of shares
outstanding 15,610,254 15,639,784 15,694,514 15,553,496 15,553,496
Basic earnings per share (Basic EPS) $ 1.95 $ 0.56 $ 0.48 $ 0.46 $ 0.45
Diluted wtd. avg. number of
shares outstanding 15,833,538 15,902,314 15,920,056 15,756,090 15,751,670
Diluted earnings per share (Diluted EPS) $ 1.93 $ 0.55 $ 0.48 $ 0.45 $ 0.45
Tangible book value 12.84 12.84 12.54 11.71 11.05
Cash dividends declared 0.58 0.145 0.145 0.145 0.145
Closing price at period end 32.13 32.13 27.32 23.13 20.25
Cash dividends declared as a % of net income 29.75% 25.79% 29.91% 32.02% 32.20%
Key Ratios:
Return on average assets 1.10% 1.21% 1.06% 1.04% 1.09%
Return on average shareholders' equity 14.01 15.24 13.49 13.48 13.77
Net interest margin, fte 4.57 4.48 4.46 4.63 4.73
Efficiency ratio 62.06 62.44 62.93 61.43 61.37
Expense ratio 2.36 2.27 2.31 2.37 2.49
As a % of risk-adjusted assets, p.e.:
Total capital 11.83 11.83 12.08 11.72 10.43
Tier 1 capital 10.63 10.63 10.87 10.55 9.22
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 7.97 7.97 7.98 7.94 6.92
Tangible shareholders' equity, to
tangible assets, p.e. 6.88 6.88 6.91 6.51 6.62
Price / Basic EPS (last 4 reported quarters) 16.5 16.5 14.9 12.9 11.4
Price / Diluted EPS (last 4 reported
quarters) 16.7 16.7 14.9 13.0 11.5
<CAPTION>
1996
(Dollars in thousands, except share -----------------------------------------------------------------------
and per share data) YEAR Q4 Q3 Q2 Q1
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest income $ 190,008 $ 50,246 $ 49,175 $ 47,454 $ 43,133
Interest expense 81,140 21,666 20,899 20,058 18,517
-----------------------------------------------------------------------
Net interest income 108,868 28,580 28,276 27,396 24,616
Provision for loan losses 5,600 1,500 1,500 1,300 1,300
-----------------------------------------------------------------------
Net interest income after provision
for loan losses 103,268 27,080 26,776 26,096 23,316
-----------------------------------------------------------------------
Other operating income:
Income from trust and investment
management fees 7,835 1,750 2,084 2,005 1,996
Service charges on deposit accounts 6,558 1,734 1,692 1,792 1,340
Card product income 3,029 938 764 728 599
Loan servicing income 2,752 695 716 662 679
Gain on sale of mortgage servicing rights 93 6 79 8 -
Net loan transactions 1,629 413 257 358 601
Net securities transactions 31 7 21 - 3
All other 3,376 961 844 903 668
-----------------------------------------------------------------------
Total other operating income 25,303 6,504 6,457 6,456 5,886
Other operating expenses:
Compensation & employee benefits 44,095 11,015 11,335 11,199 10,546
Net occupancy, equipment & software 13,854 3,929 3,238 3,468 3,219
Data processing 4,584 1,156 1,111 1,209 1,108
FDIC deposit insurance and other regulatory 461 129 134 99 99
OREO and repossession 471 96 267 78 30
Amortization of goodwill 4,652 1,305 1,297 1,319 731
Capital securities - - - -
All other 23,083 5,731 5,794 5,138 6,420
-----------------------------------------------------------------------
Total other operating expenses 91,200 23,361 23,176 22,510 22,153
-----------------------------------------------------------------------
Income before income tax expense 37,371 10,223 10,057 10,042 7,049
Income tax expense 11,981 3,190 3,244 3,248 2,299
-----------------------------------------------------------------------
Net income $ 25,390 $ 7,033 $ 6,813 $ 6,794 $ 4,750
=======================================================================
Average Balances:
Loans $ 1,730,720 $ 1,838,093 $ 1,797,510 $ 1,746,552 $ 1,538,784
Loans held for sale 14,834 12,010 14,497 15,668 17,196
Securities available for sale 444,717 484,765 465,591 438,687 389,157
Investment securities 42,493 35,846 40,151 45,703 48,371
Money market investments 14,503 1,631 9,835 18,522 28,216
-----------------------------------------------------------------------
Total earning assets 2,247,267 2,372,345 2,327,584 2,265,132 2,021,724
Other assets 158,140 164,957 166,792 164,117 137,964
-----------------------------------------------------------------------
Total assets $ 2,405,407 $ 2,537,302 $ 2,494,376 $ 2,429,249 $ 2,159,688
=======================================================================
Non-interest-bearing deposits $ 264,938 $ 284,835 $ 272,492 $ 261,437 $ 227,571
Interest-bearing deposits 1,724,068 1,779,766 1,788,238 1,768,600 1,558,369
-----------------------------------------------------------------------
Total deposits 1,989,006 2,064,601 2,060,730 2,030,037 1,785,940
Short-term borrowed funds 159,672 215,332 172,217 138,632 124,853
Long-term debt 43,951 31,497 44,713 47,311 52,411
Other liabilities 21,499 22,027 21,426 21,574 20,966
Corporation-obligated mandatorily
redeemable capital securities - - - - -
Shareholders' equity 191,279 203,845 195,290 191,695 175,518
-----------------------------------------------------------------------
Total liabilities, corporation-obligated
mandatorily redeemable capital
securities and shareholders' equity $ 2,405,407 $ 2,537,302 $ 2,494,376 $ 2,429,249 $ 2,159,688
=======================================================================
Loans charged off, net of recoveries $ 5,825 $ 2,264 $ 1,885 $ 814 $ 862
Non-performing assets, p.e. 19,889 19,889 23,330 23,248 15,909
Share and Per Share Data:
Basic wtd. avg. number of shares
outstanding 15,320,424 15,553,496 15,558,948 15,576,296 14,587,772
Basic earnings per share (Basic EPS) $ 1.66 $ 0.45 $ 0.44 $ 0.44 $ 0.33
Diluted wtd. avg. number of
shares outstanding 15,469,382 15,731,408 15,700,676 15,714,292 14,727,422
Diluted earnings per share (Diluted EPS) $ 1.64 $ 0.45 $ 0.43 $ 0.43 $ 0.32
Tangible book value 10.90 10.90 10.37 9.95 9.69
Cash dividends declared 0.50 0.125 0.125 0.125 0.125
Closing price at period end 20.75 20.75 18.69 17.13 17.63
Cash dividends declared as a % of net income 30.83% 27.81% 28.72% 28.80% 41.20%
Key Ratios:
Return on average assets 1.06% 1.10% 1.09% 1.12% 0.88%
Return on average shareholders' equity 13.27 13.73 13.88 14.25 10.88
Net interest margin, fte 4.86 4.81 4.83 4.88 4.93
Efficiency ratio 62.11 62.36 61.33 62.07 62.73
Expense ratio 2.59 2.59 2.54 2.59 2.66
As a % of risk-adjusted assets, p.e.:
Total capital 10.35 10.35 10.45 10.37 10.32
Tier 1 capital 9.11 9.11 9.19 9.12 9.07
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 6.91 6.91 6.78 6.72 7.29
Tangible shareholders' equity, to
tangible assets, p.e. 6.65 6.65 6.56 6.44 6.39
Price / Basic EPS (last 4 reported quarters) 12.5 12.5 11.4 10.5 11.1
Price / Diluted EPS (last 4 reported
quarters) 12.7 12.7 11.6 10.6 11.2
</TABLE>
Note: All share and per share data has been restated for the effect of
the 2-for-1 stock split declared February 24, 1998.
Management's Statement of Responsibility
The consolidated financial statements and related information in the
1997 Annual Report were prepared in conformity with generally accepted
accounting principles. Management is responsible for the integrity and
objectivity of the consolidated financial statements and related
information. Accordingly, it maintains an extensive system of internal
controls and accounting policies and procedures to provide reasonable
assurance of the accountability and safeguarding of Company assets and of
the accuracy of financial information. These procedures include management
evaluations of asset quality and the impact of economic events,
organizational arrangements that provide an appropriate division of
responsibility, and a program of internal audits to evaluate independently
the adequacy and application of financial and operating controls and
compliance with Company policies and procedures.
The responsibility of the Company's independent public accountants,
KPMG Peat Marwick LLP, is limited to an expression of their opinion as to
the fairness of the consolidated financial statements presented in all
material respects. Their opinion is based on an audit conducted in
accordance with generally accepted auditing standards as described in the
second paragraph of their report.
The board of directors, through its Examining and Audit Committee, is
responsible for ensuring that both management and the independent public
accountants fulfill their respective responsibilities with regard to the
consolidated financial statements. The Examining and Audit Committee, which
is comprised entirely of directors who are not officers or employees of the
Company, meets periodically with both management and the independent public
accountants to assure that each is carrying out its responsibilities. The
independent public accountants have full and free access to the Examining
and Audit Committee and meet with it, with and without management being
present, to discuss auditing and financial reporting matters.
William H. Chadwick
President & Chief Executive Officer
Thomas J. Pruitt
Executive Vice President & Chief Financial Officer
Neal E. Robinson
Senior Vice President & Treasurer
Independent Auditors' Report
The Shareholders Banknorth Group, Inc.
We have audited the accompanying consolidated balance sheets of
Banknorth Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Banknorth Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements,
effective January 1, 1996, the Company adopted the provisions of the
Financial Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing
Rights", which requires entities to recognize as separate assets, the rights
to service mortgage loans for others, regardless of how those servicing
rights are acquired. As discussed in note 1, the Company adopted the
provisions of the FASB's SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", which
supersedes SFAS No. 122.
/s/ KPMG PEAT MARWICK LLP
Albany, New York
January 23, 1998, except for note 15
which is as of February 24, 1998
Consolidated Statements of Income
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
--------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $174,947 $158,734 $125,408
Interest on money market investments 418 806 562
Interest on securities available for sale 41,103 27,460 9,255
Interest on investment securities 2,038 3,008 17,399
--------------------------------
Total interest income 218,506 190,008 152,624
Interest expense:
Deposits 77,433 70,618 53,089
Short-term borrowed funds 20,477 7,913 9,017
Long-term debt 1,414 2,609 5,874
--------------------------------
Total interest expense 99,324 81,140 67,980
--------------------------------
Net interest income 119,182 108,868 84,644
Less: provision for loan losses 7,662 5,600 4,375
--------------------------------
Net interest income after provision for loan losses 111,520 103,268 80,269
--------------------------------
Other operating income:
Income from trust and investment management fees 8,636 7,835 7,426
Service charges on deposit accounts 8,026 6,558 5,081
Card product income 3,145 3,029 2,789
Loan servicing income 2,514 2,752 2,701
Net loan transactions 1,215 1,629 568
Net securities transactions 258 31 (409)
Other income 7,532 3,469 2,754
--------------------------------
Total other operating income 31,326 25,303 20,910
Other operating expenses:
Compensation 38,445 35,823 28,316
Employee benefits 8,409 8,272 6,489
Net occupancy 7,880 7,193 5,487
Equipment and software 7,162 6,661 5,519
Data processing 4,972 4,584 4,629
FDIC deposit insurance and other regulatory 795 461 2,062
Other real estate owned and repossession 964 471 520
Legal and professional 3,433 3,589 2,723
Printing and supplies 2,273 3,246 1,915
Advertising and marketing 2,404 2,748 2,029
Communications 2,420 2,354 1,497
Amortization of goodwill 5,223 4,652 632
Capital securities 2,104 - -
Other expenses 11,081 11,146 8,771
--------------------------------
Total other operating expenses 97,565 91,200 70,589
--------------------------------
Income before income tax expense 45,281 37,371 30,590
Income tax expense 14,792 11,981 8,217
--------------------------------
Net income $ 30,489 $ 25,390 $ 22,373
================================
Basic earnings per share $ 1.95 $ 1.66 $ 1.65
================================
Diluted earnings per share $ 1.93 $ 1.64 $ 1.64
================================
</TABLE>
Note: All per share data has been restated for the effect of the 2-for-1
stock split declared February 24, 1998.
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
(In thousands, except share and per share data)
<S> <C> <C>
Assets
Cash and due from banks $ 85,734 $ 91,871
Money market investments 50 101
------------------------
Cash and cash equivalents 85,784 91,972
------------------------
Securities available for sale, at fair value 710,308 531,269
Loans held for sale 24,958 12,106
Investment securities 23,972 34,194
Loans 1,960,629 1,848,232
Less: allowance for loan losses 25,721 23,520
------------------------
Net loans 1,934,908 1,824,712
------------------------
Accrued interest receivable 16,115 15,148
Premises, equipment and software, net 29,446 29,448
Other real estate owned and repossessed assets 1,574 921
Goodwill 30,919 36,142
Capitalized mortgage servicing rights 4,650 3,921
Bank-owned life insurance 40,077 -
Other assets 20,266 21,490
------------------------
Total assets $2,922,977 $2,601,323
========================
Liabilities, Corporation-Obligated Mandatorily Redeemable
Capital Securities and Shareholders' Equity
Deposits:
Non-interest bearing $ 324,320 $ 287,598
NOW accounts & money market savings 895,682 773,870
Regular savings 185,453 215,364
Time deposits $100 thousand and greater 103,998 91,245
Time deposits under $100 thousand 690,367 697,987
------------------------
Total deposits 2,199,820 2,066,064
------------------------
Short-term borrowed funds:
Federal funds purchased 700 23,305
Securities sold under agreements to repurchase 139,347 16,484
Borrowings from U.S. Treasury 19,730 11,672
Borrowings from Federal Home Loan Bank of Boston 263,000 129,000
------------------------
Total short-term borrowed funds 422,777 280,461
------------------------
Long-term debt:
Federal Home Loan Bank of Boston term notes 6,139 12,923
Bank term loan 10,400 13,000
------------------------
Total long-term debt 16,539 25,923
------------------------
Accrued interest payable 4,721 3,914
Other liabilities 19,248 18,224
------------------------
Total liabilities 2,663,105 2,394,586
------------------------
Corporation-obligated mandatorily redeemable capital securities 30,000 -
Shareholders' equity
Common stock, $1.00 par value; authorized 20,000,000 shares;
issued 15,653,296 shares as of December 31, 1997
and 7,826,648 shares as of December 31, 1996 15,653 7,827
Surplus 83,770 87,410
Retained earnings 134,486 115,130
Unamortized employee restricted stock (1,550) (1,153)
Net unrealized gains (losses) on securities available for
sale, net of tax 2,311 (2,477)
Less: Common stock in treasury, at cost:
1997-154,000 shares (4,798) -
------------------------
Total shareholders' equity 229,872 206,737
------------------------
Total liabilities, corporation-obligated mandatorily redeemable
capital securities and shareholders' equity $2,922,977 $2,601,323
========================
</TABLE>
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
<TABLE>
<CAPTION>
NET
UNREALIZED
UNAMORTIZED GAINS (LOSSES)
EMPLOYEE ON SECURITIES
COMMON RETAINED RESTRICTED AVAILABLE FOR SALE, TREASURY
STOCK SURPLUS EARNINGS STOCK NET OF TAX STOCK TOTAL
--------------------------------------------------------------------------------------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 $ 6,804 $55,473 $ 82,176 $ (394) $(8,495) $ - $135,564
--------------------------------------------------------------------------------------
Net income - - 22,373 - - - 22,373
Adjustment of securities available for sale
to fair value, net of tax - - - - 4,620 - 4,620
Adjustment of securities available for sale
transferred to the investment portfolio,
net of tax - - - - 3,904 - 3,904
Cash dividends $ .46 per share - - (6,260) - - - (6,260)
Issuance of employee restricted stock - - - (361) - - (361)
Amortization of employee restricted stock - 550 (143) - - 407
Exercise of employee stock options - - (311) - - - (311)
--------------------------------------------------------------------------------------
Balance, December 31, 1995 $ 6,804 $56,023 $ 97,978 $ (898) $ 29 $ - $159,936
--------------------------------------------------------------------------------------
Net income - - 25,390 - - - 25,390
Issuance of common stock, net of
expenses 1,023 31,193 - - - - 32,216
Adjustment of securities available for sale
to fair value, net of tax - - - - (2,506) - (2,506)
Cash dividends $ .50 per share - - (7,827) - - - (7,827)
Issuance of employee restricted stock - - - (371) - - (371)
Amortization of employee restricted stock - 194 - 116 - - 310
Exercise of employee stock options - - (411) - - - (411)
--------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 7,827 $87,410 $115,130 $(1,153) $(2,477) $ - $206,737
--------------------------------------------------------------------------------------
Net income - - 30,489 - - - 30,489
Adjustment of securities available for sale
to fair value, net of tax - - - - 4,788 - 4,788
Cash dividends $ .58 per share - - (9,069) - - - (9,069)
Issuance of employee restricted stock - - - (315) - - (315)
Amortization of employee restricted stock - 851 - (82) - - 769
Issuance of restricted stock units under
directors' deferred compensation plan,
net - 3,335 (4) - - - 3,331
Exercise of employee stock options - - (2,060) - - - (2,060)
Purchase of treasury stock - - - - - (4,798) (4,798)
Two-for-one stock split 7,826 (7,826) - - - - -
--------------------------------------------------------------------------------------
Balance, December 31, 1997 $15,653 $83,770 $134,486 $(1,550) $ 2,311 $(4,798) $229,872
======================================================================================
</TABLE>
Note: All per share data has been restated for the effect of the 2-for-1
stock split declared February 24, 1998.
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
(In thousands) 1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 30,489 $ 25,390 $ 22,373
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises, equipment
and software 4,832 4,286 4,198
Amortization of goodwill 5,223 4,652 632
Net amortization of securities available for sale 3,387 2,986 648
Net amortization (accretion) of investment securities (338) (399) 719
Provision for loan losses 7,662 5,600 4,375
Adjustment of other real estate owned to estimated
fair value 294 176 241
Provision for deferred tax expense (benefit) (714) 1,420 (181)
Amortization of employee restricted stock, net 769 310 407
Exercise of employee stock options, net (2,060) (411) (311)
Net securities transactions (258) (31) 409
Net gain on sale of other real estate owned and
repossessed assets (208) (598) (835)
Proceeds from sale of loans held for sale 121,756 168,773 135,750
Originations and purchases of loans held for resale (132,472) (160,032) (140,331)
Net gain on sale of loans held for sale (1,215) (1,629) (568)
Gain on sale of mortgage servicing rights (921) (93) -
Increase in interest receivable (967) (1,719) (120)
Increase (decrease) in interest payable 807 (426) (664)
Increase in other assets and other intangibles (1,303) (8,076) (4,831)
Increase (decrease) in other liabilities 4,355 4,703 (199)
-----------------------------------
Total adjustments 8,629 19,492 (661)
-----------------------------------
Net cash provided by operating activities 39,118 44,882 21,712
-----------------------------------
Cash flows from investing activities:
Net cash provided by acquisition - 124,141 -
Proceeds from maturity and call of securities
available for sale 109,472 185,605 110,008
Proceeds from maturity and call of investment securities 10,598 15,938 76,125
Proceeds from sale of securities available for sale 5,438 22,725 38,074
Purchase of securities available for sale (289,756) (387,368) (185,567)
Purchase of investment securities - (10) (533)
Proceeds from sale of OREO and repossessed assets 2,675 3,424 2,742
Payments received on OREO and repossessed assets - 33 331
Loans purchased (37,456) (38,189) (3,010)
Net increase in originated loans (83,816) (69,010) (58,762)
Capital expenditures (4,967) (4,933) (3,847)
Purchase of bank-owned life insurance (40,000) - -
-----------------------------------
Net cash used in investing activities (327,812) (147,644) (24,439)
-----------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 133,756 (53,219) 117,302
Net increase (decrease) in short-term borrowed funds 142,316 164,248 (38,933)
Issuance of common stock, net of expenses - 32,216 -
Purchase of treasury stock (4,798) - -
Issuance of corporation-obligated mandatorily redeemable
capital securities 30,000 - -
Issuance of long-term debt 350 - -
Payments on long-term debt (9,734) (30,074) (65,592)
Issuance of restricted stock awards (315) (371) (361)
Dividends paid (9,069) (7,827) (6,260)
-----------------------------------
Net cash provided by financing activities 282,506 104,973 6,156
-----------------------------------
Net increase (decrease) in cash and cash equivalents (6,188) 2,211 3,429
-----------------------------------
Cash and cash equivalents at beginning of year 91,972 89,761 86,332
-----------------------------------
Cash and cash equivalents at end of year $ 85,784 $ 91,972 $ 89,761
===================================
Additional disclosure relative to statement of cash flows:
Interest paid $ 98,517 $ 81,140 $ 68,644
===================================
Taxes paid $ 11,918 $ 15,539 $ 8,057
===================================
Supplemental schedule of non-cash investing
and financing activities:
Net transfer of loans to OREO and repossessed assets $ 3,414 $ 2,787 $ 3,073
Adjustment to securities available for sale to fair value,
net of tax 4,788 (2,506) 4,620
Investments held to maturity transferred to securities
available for sale - - 197,103
Adjustment to securities available for sale transferred to
investment portfolio to fair value, net of tax - - 3,904
Issuance of restricted stock units under directors' deferred
compensation plan, net 3,331 - -
Fair value of assets acquired in acquisition - 405,741 -
Fair value of liabilities assumed - 560,340 -
</TABLE>
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Banknorth Group, Inc., a
Delaware Corporation, (the "Parent Company"), and its subsidiaries conform,
in all material respects, to generally accepted accounting principles and to
general practices within the banking industry. Collectively, the Parent
Company and its subsidiaries are referred to herein as "Banknorth",
"Company" or "Corporation".
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Banknorth and its subsidiaries. All material intercompany
accounts and transactions have been eliminated. Amounts in the prior years'
consolidated financial statements are reclassified whenever necessary to
conform with the current year's presentation.
CASH AND CASH EQUIVALENTS
Banknorth includes cash, due from banks, and money market investments
as Cash and Cash Equivalents for the consolidated statements of cash flows.
SECURITIES
Management determines the appropriate classification of securities at
the time of purchase. If management has the positive intent and ability to
hold debt securities to maturity, they are classified as investment
securities held to maturity and are stated at amortized cost. If securities
are purchased for the purpose of selling them in the near term, they are
classified as trading securities and are reported at fair value with
unrealized gains and losses reflected in current earnings. The Company did
not maintain a trading portfolio through December 31, 1997. All other debt
and marketable equity securities are classified as securities available for
sale and are reported at fair value, with the net unrealized gains or losses
reported, net of income taxes, as a separate component of shareholders'
equity. Non-marketable equity securities are carried at cost. Gains or
losses on disposition of all securities are based on the adjusted cost of
the specific security sold. The cost of securities is adjusted for
amortization of premium and accretion of discount, which is calculated on
the effective interest method.
Unrealized losses on securities which reflect a decline in value which
is other than temporary, if any, are charged to income and reported under
the caption "Net securities transactions" in the consolidated financial
statements.
LOANS
Loans are carried at the principal amount outstanding net of unearned
income and unamortized loan fees and costs. Nonrefundable loan origination
and commitment fees and direct costs associated with originating or
acquiring loans are deferred. The net deferred amount is amortized as an
adjustment to the related loan yield over the contractual life of the
related loans.
Non-performing loans include non-accrual loans, loans restructured in
troubled debt restructurings (restructured loans) and loans which are 90
days or more past due and still accruing interest. Generally, loans are
placed on non-accrual status, either due to the delinquency status of
principal and/or interest payments, or a judgment by management that,
although payments of principal and/or interest are current, such action is
prudent. Except in the case of installment loans, which are generally
charged off when loan principal and/or interest payments are 120 days
overdue, loans are generally placed on non-accrual status when principal
and/or interest is 90 days overdue. When a loan is placed on non-accrual
status, all interest previously accrued in the current year but not
collected is reversed against current year interest income. When the
principal is contractually current, interest and fee income is earned on a
cash basis. If ultimate repayment of principal is not expected or management
judges it to be prudent, any payment received on a non-accrual loan is
applied to principal until ultimate repayment becomes expected. Loans are
removed from non-accrual status when they become current as to principal and
interest and demonstrate a period of performance under the contractual terms
and, in the opinion of management, are fully collectible as to principal and
interest.
The Company identifies impaired loans and measures the impairment in
accordance with Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures." A loan is considered impaired when it is probable that the
borrower will not repay the loan according to the original contractual terms
of the loan agreement, or the loan is restructured in a troubled debt
restructuring subsequent to January 1, 1995. These Statements prescribe
recognition criteria for loan impairment, generally related to commercial
type loans and measurement methods for impaired loans. Impaired loans are
included in non-performing loans, generally as non-accrual commercial type
loans, commercial type loans past due 90 days or more and still accruing
interest, and all loans restructured in a troubled debt restructuring
subsequent to January 1, 1995.
The allowance for loan losses related to impaired loans is based on
discounted cash flows using the loan's initial effective rate or the fair
value of the collateral for certain loans where repayment of the loan is
expected to be provided solely by the underlying collateral (collateral
dependent loans). The Company's impaired loans are generally collateral
dependent. The Company considers estimated cost to sell, on a discounted
basis, when determining the fair value of collateral in the measurement of
impairment if those costs are expected to reduce the cash flows available to
repay or otherwise satisfy the loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level estimated by
management to provide adequately for losses inherent in the loan portfolio.
The quality and collectibility of the loans are reviewed monthly and graded
by the applicable subsidiary loan officers. A continuous review of loan
quality and accuracy of grading is conducted independently by the Company's
loan review function. The adequacy of the allowance is monitored monthly and
is based on the grading and continuing review of individual loans, the
present and expected level of non-performing loans, delinquency levels, past
loss experience and economic conditions which may affect the borrowers'
ability to repay their loans. As a result of the test of adequacy, required
additions to the allowance for loan losses are made periodically by charges
to the provision for loan losses.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on loans,
future additions to the allowance for loan losses may be necessary based on
changes in economic conditions or changes in the value of properties
securing loans in the process of foreclosure. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies
may require the Company to recognize additions to the allowance for loan
losses based on their judgments about information available to them at the
time of their examination which may not be currently available to
management.
MORTGAGE BANKING
Loan servicing revenues and expenses are recognized when service fees
are earned and expenses are incurred. Gains or losses on sales of mortgage
loans are recognized based upon the difference between the selling price and
the carrying value of the related mortgage loans sold. Such gains or losses
are increased or decreased by the amount of related mortgage servicing
rights. Net deferred origination fees and costs are recognized at the time
of sale in the gain or loss determination. The mortgage loans serviced for
unrelated third parties are not included in these consolidated financial
statements as they are not assets of the Company. Mortgage loans held for
sale are stated at the lower of aggregate cost or aggregate fair value as
determined by outstanding commitments from investors or current market
prices for loans with no sale commitments.
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights" in 1996. Effective January 1, 1997, SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", superseded SFAS No. 122 and was adopted by the Company. SFAS
No. 125 requires that entities recognize as separate assets, the rights to
service mortgage loans for others, regardless of how those servicing rights
are acquired. Additionally, SFAS No. 125 requires that the capitalized
mortgage servicing rights be assessed for impairment based on the fair value
of those rights, and that impairment, if any, be recognized through a
valuation allowance.
The Company purchases mortgage servicing rights separately or it may
acquire mortgage servicing rights by purchasing or originating mortgage
loans and selling those loans with servicing rights retained. Generally,
purchased mortgage servicing rights are capitalized at the cost to acquire
the rights and are carried at the lower of cost, net of accumulated
amortization, or fair value. Originated mortgage servicing rights are
capitalized based on the allocated cost of the servicing rights, derived
from a relative fair value calculation, and are recorded at the lower of the
capitalized amount, net of accumulated amortization or fair value. Mortgage
servicing rights are amortized into servicing fee income in proportion to,
and over the period of, estimated net servicing income.
SFAS No. 125 requires that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing rights based on its
relative fair value. To determine the fair value of mortgage servicing
rights, the Company uses a valuation model that calculates the present value
of future net servicing income. In using this valuation method, the Company
incorporates assumptions that they believe market participants would use in
estimating future net servicing income, which include estimates of the cost
of servicing, the discount rate, mortgage escrow earnings rate, an inflation
rate, ancillary income, prepayment speeds and default rates and losses.
SFAS No. 125 requires enterprises to measure the impairment of
servicing rights based on the difference between the carrying amount and
current estimated fair value of the servicing rights. In determining
impairment, the Company aggregates all mortgage servicing rights, and
stratifies them based on the predominant risk characteristics of loan type
and interest rate. A valuation allowance is established for any excess of
amortized cost over the current fair value, by risk stratification, by a
charge to income. At December 31, 1997 and 1996, no allowance for impairment
in the Company's capitalized mortgage servicing rights was necessary.
PREMISES, EQUIPMENT AND SOFTWARE
Premises, equipment and software are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed on
straight-line and various accelerated methods over the estimated useful
lives of the assets ranging from 3 years to 40 years. Leasehold improvements
are amortized over the shorter of the terms of the related leases or the
useful lives of the assets.
OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS
Other real estate owned includes both formally foreclosed and in-
substance foreclosed real properties. In-substance foreclosed properties are
those properties which the Company has taken possession of the collateral
regardless of whether formal foreclosure proceedings have taken place.
Other real estate owned is recorded at the lower of the fair value of
the asset acquired less estimated costs to sell or "cost" (defined as the
fair value at initial foreclosure). At the time of foreclosure, or when
foreclosure occurs in-substance, the excess, if any, of the loan value over
the fair market value of the asset received, less estimated cost to sell, is
charged to the allowance for loan losses. Subsequent declines in the value
of such assets and net operating expenses of such assets are charged
directly to other operating expenses.
GOODWILL
Goodwill represents the excess of purchase price over the fair value
of net assets acquired for transactions accounted for using purchase
accounting. The goodwill is being amortized using the straight-line method
over the estimated period of benefit, not to exceed fifteen years.
Accumulated amortization on goodwill amounted to $10.6 million and $5.4
million as December 31, 1997 and December 31, 1996, respectively.
TRUST ASSETS
Assets held in fiduciary or agency capacities for customers of
Banknorth's trust subsidiary are not included in the accompanying
consolidated balance sheets since such assets are not assets of the
subsidiaries.
PENSION COSTS
The Company maintains a noncontributory, defined benefit retirement
and pension plan covering substantially all employees. Pension costs, based
on actuarial computations of current and future benefits for employees, are
charged to current operating expenses.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all stock-
based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and pro forma net income per share disclosures
for employee stock-based grants made in 1995 and future years as if the fair
value based method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosures of SFAS No. 123.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company's policy is that deferred tax assets are reduced by a
valuation allowance if, based on the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized. In considering if it is more likely than not that some or all of
the deferred tax assets will not be realized, the Company considers
temporary taxable differences, historical taxes and estimates of future
taxable income.
PER SHARE AMOUNTS
On December 31, 1997, the Company adopted the provisions of SFAS No.
128, "Earnings per Share". SFAS No. 128 establishes standards for computing
and presenting earnings per share (EPS). This Statement supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share" and related
interpretations. SFAS No. 128 requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with
complex capital structures and specifies additional disclosure requirements.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Issuable shares (such as those related to
the directors' restricted stock units), and returnable shares (such as
restricted stock awards) are considered outstanding common shares and
included in the computation of basic earnings per share as of the date that
all necessary conditions have been satisfied. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted
in the issuance of common stock that then shared in the earnings of the
entity (such as the Company's stock options). All prior-period EPS data has
been restated to conform to the provisions of this Statement. The adoption
of this Statement did not have a material effect on the Company's financial
position or results of operations.
All per share data has been restated for the 2-for-1 stock split
declared by the Company on February 24, 1998.
INTEREST-RELATED CONTRACTS
Banknorth uses a variety of off-balance sheet investment products as
part of its interest rate risk management strategy. The instruments most
frequently used are interest rate swap and floor contracts. These contracts
are designated and are effective as hedges of existing risk positions. These
instruments are used to modify the repricing or maturity characteristics of
specified assets or liabilities, are linked to the related assets or
liabilities being managed. The fair value and the changes in the fair value
of the derivative are not included in the consolidated financial statements.
The net interest income or expense associated with such derivatives is
accrued and recognized as an adjustment to the interest income or interest
expense of the asset or liability being managed. The related interest
receivable or payable from such contracts is recorded in accrued interest
receivable or payable on the consolidated balance sheet. Premiums paid are
amortized as an adjustment to the interest income or interest expense of the
asset or liability being managed. Realized gains and losses, if any,
resulting from early termination are deferred as an adjustment to the
carrying value of the hedged item and recognized as an adjustment to the
yield of the hedged item for the remaining life of the original swap and
floor agreement.
OTHER FINANCIAL INSTRUMENTS
The Company is a party to certain financial instruments with off-
balance-sheet risk such as commitments to extend credit, unused lines of
credit, letters of credit, standby letters of credit, as well as certain
mortgage loans sold to investors with recourse. The Company's policy is to
record such instruments when funded.
TRANSFER AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES
In June 1996, the Financial Accounting Standards Board issued SFAS No.
125, "Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996 and superseded SFAS No. 122, which is discussed above. Certain
aspects of SFAS No. 125 were amended by SFAS No. 127, "Deferral of the
Effective Date of Certain Provision of SFAS No. 125." The adoption of SFAS
No. 125, as amended, did not have a material impact on the Company's
consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income ". SFAS No. 130 establishes standards
for reporting and displaying of comprehensive income. SFAS No. 130 states
that comprehensive income includes the reported net income of a company
adjusted for items that are currently accounted for as direct entries to
equity, such as the mark to market adjustment on securities available for
sale, foreign currency items and minimum pension liability adjustments. This
statement is effective for fiscal years beginning after December 15, 1997.
Management will provide the required information for inclusion in 1998
consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information ."
SFAS No. 131 establishes standards for reporting by public companies about
operating segments of their business. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic
areas and major customers. This statement is effective for periods beginning
after December 15, 1997. Management anticipates developing the required
information for inclusion in the 1998 annual consolidated financial
statements of Banknorth Group, Inc., however, it is not expected that this
Statement will significantly effect to Company's reporting requirements.
2. Acquisitions
On February 16, 1996 Banknorth completed the purchase of thirteen
banking offices of Shawmut Bank, N.A. ("Shawmut"). A new subsidiary, First
Massachusetts Bank, N.A. ("FMB" or "First Massachusetts"), with principal
offices in Worcester, Massachusetts, was organized to own and operate the
acquired offices.
Under the terms of the Purchase and Assumption Agreement with Shawmut,
Banknorth paid a premium of $29.2 million, representing 5.23% of deposit
liabilities assumed, including accrued interest payable, calculated based
upon the average amount of deposits outstanding (including accrued interest
payable) over the thirty day period ended February 13, 1996.
At the closing, the Company assumed total liabilities with an
estimated fair value of $560.3 million and acquired total assets, including
loans, accrued interest receivable on such loans, certain real property,
furniture, fixtures, equipment and other assets, with an estimated fair
value of $405.7 million. No loans acquired were past due 90 days or more. In
addition, the Company received approximately $124.1 million in cash as
consideration for the net liabilities assumed.
The acquisition was accounted for using purchase accounting in
accordance with Accounting Principal Board Opinion No. 16, "Business
Combinations" (APB No. 16). Under this method of accounting, the purchase
price is allocated to the respective assets acquired and liabilities assumed
based on their estimated fair values, net of applicable income tax effects.
Goodwill, representing the excess of cost over net assets acquired, was
$32.1 million and is being amortized over seven years on a straight-line
basis. The results of operations for First Massachusetts are included in
Banknorth's consolidated financial statements from the date of acquisition
forward.
To complete the transaction, Banknorth issued 2,044,446 shares
(1,022,223 shares immediately prior to the split) of common stock in
February 1996. The net proceeds of $32.2 million were used to provide a
portion of the initial capital of First Massachusetts and to help offset the
reduction in the Company's regulatory capital ratios resulting from the
acquisition.
3. Securities Available for Sale
The amortized cost and estimated fair values of the securities available
for sale are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasuries and Agencies $141,245 $ 894 $ 276 $141,863
States and political subdivisions 5,251 112 - 5,363
Mortgage-backed securities 320,473 2,844 1,673 321,644
Corporate debt securities 200,710 1,852 176 202,386
-------------------------------------------------
Total debt securities 667,679 5,702 2,125 671,256
Equity securities 39,044 8 - 39,052
-------------------------------------------------
Total securities available for sale $706,723 $5,710 $2,125 $710,308
=================================================
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasuries and Agencies $111,774 $ 213 $ 956 $111,031
States and political subdivisions 2,361 15 1 2,375
Mortgage-backed securities 272,433 914 3,777 269,570
Corporate debt securities 121,384 210 610 120,984
-------------------------------------------------
Total debt securities 507,952 1,352 5,344 503,960
Equity securities 27,128 181 - 27,309
-------------------------------------------------
Total securities available for sale $535,080 $1,533 $5,344 $531,269
=================================================
</TABLE>
Included in equity securities are certain non-marketable equity
securities amounting to $39.0 million and $27.0 million at December 31,
1997, and 1996 respectively, consisting of Federal Home Loan Bank of Boston
and Federal Reserve Bank of Boston equity securities. Both investments are
required for membership. Non-marketable equity securities are carried at
cost.
The following table sets forth information with regard to contractual
maturities of debt securities available for sale as of December 31, 1997:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
TOTAL DEBT SECURITIES COST VALUE
----------------------
(In thousands)
<S> <C> <C>
Within one year $ 39,399 $ 39,272
From one to five years 228,636 228,387
From five to ten years 148,133 149,610
After ten years 251,511 253,987
---------------------
Total debt securities available for sale $667,679 $671,256
=====================
</TABLE>
Actual maturities may differ from contractual maturities because, in
certain cases, borrowers have the right to call or prepay obligations with
or without call or prepayment penalties.
The following table sets forth information with regard to sales
transactions of securities available for sale:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Proceeds from sales $5,438 $22,725 $38,074
Gross realized gains from sales $ 253 $ 12 $ 122
Gross realized losses from sales $ 32 $ 25 $ 531
</TABLE>
Securities available for sale with an amortized cost of approximately
$271.8 million and $241.7 million at December 31, 1997, and 1996,
respectively, were pledged to secure public deposits, securities sold under
agreements to repurchase, and for other purposes as required by law.
4. Investment Securities
The amortized cost and estimated fair values of the investment
securities portfolio are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasuries and Agencies $ 7,505 $ 83 $ - $ 7,588
States and political subdivisions 781 31 - 812
Mortgage-backed securities 15,676 198 38 15,836
Corporate debt securities 10 - - 10
-----------------------------------------------
Total investment securities $23,972 $312 $38 $24,246
===============================================
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasuries and Agencies $13,181 $181 $ 4 $13,358
States and political subdivisions 1,135 40 - 1,175
Mortgage-backed securities 19,868 253 20 20,101
Corporate debt securities 10 - - 10
-----------------------------------------------
Total investment securities $34,194 $474 $24 $34,644
===============================================
</TABLE>
The following table sets forth information with regard to contractual
maturities of debt securities as of December 31, 1997:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
TOTAL DEBT SECURITIES COST VALUE
----------------------
(In thousands)
<S> <C> <C>
Within one year $12,747 $12,733
From one to five years 9,707 9,872
From five to ten years 1,239 1,345
After ten years 279 296
--------------------
Total debt securities $23,972 $24,246
====================
</TABLE>
Actual maturities may differ from contractual maturities because, in
certain cases, borrowers have the right to call or prepay obligations with
or without call or prepayment penalties.
There were no sales of investment securities in 1997, 1996 or 1995.
During 1997 and 1996, certain investment securities were called resulting in
gains of $37 thousand and $44 thousand, respectively. Investment securities
with an amortized cost of approximately $6.2 million and $11.5 million at
December 31, 1997 and December 31, 1996, respectively, were pledged to
secure public deposits, securities sold under agreements to repurchase, and
for other purposes as required by law.
5. Loans and Allowance for Loan Losses
A summary of loans by category is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1997 1996
------------------------
(In thousands)
<S> <C> <C>
Commercial, financial and agricultural,
net of unamortized loan fees of $582 thousand
in 1997 and $402 thousand in 1996 $ 332,385 $ 300,730
Real estate, net of unamortized loan costs of
$490 thousand in 1997 and $244 thousand in 1996:
Residential 773,429 737,261
Commercial 563,800 531,364
Construction and land development 36,276 29,364
------------------------
Total real estate 1,373,505 1,297,989
------------------------
Credit card receivables 25,669 24,563
Lease receivable, net of unearned discount of
$10.7 million in 1997 and $10.2 million in 1996 76,302 70,396
Other installment, including deferred costs of
$2.5 million in 1997 and $3.0 million in 1996 152,768 154,554
------------------------
Total installment 254,739 249,513
------------------------
Total loans 1,960,629 1,848,232
Less: allowance for loan losses 25,721 23,520
------------------------
Net loans $1,934,908 $1,824,712
========================
</TABLE>
At December 31, 1997 and 1996, loans to executive officers, directors
and to associates of such persons aggregated $32.8 million and $46.7
million, respectively. During 1997, new loans of $28.9 million were made,
and repayment of loans totaled $36.8 million. In the opinion of management,
such loans were made in the ordinary course of business on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions. These loans do not involve more than
the normal risk of collectibility or present other unfavorable features.
Banknorth primarily grants loans throughout the States of Vermont,
Massachusetts and New Hampshire. Although the loan portfolio is diversified,
a substantial portion of its debtors' ability to repay is dependent upon the
economic conditions existing in these States. Adverse trends in the real
estate market in the States of Vermont, Massachusetts or New Hampshire could
also negatively affect the Company's collateral position.
As of December 31, 1997 and 1996, one to four family first mortgage
loans with an approximate book value of $358.9 million and $189.2 million,
respectively, were pledged to secure borrowings from the Federal Home Loan
Bank of Boston.
NON-PERFORMING LOANS:
The following table sets forth the information with regard to non-
performing loans:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------
1997 1996 1995
-----------------------------
(In thousands)
<S> <C> <C> <C>
Loans in non-accrual status $13,338 $16,993 $12,369
Loans contractually past due 90 days
or more and still accruing interest 1,311 1,210 1,174
Restructured loans 42 765 428
-----------------------------
Total non-performing loans $14,691 $18,968 $13,971
=============================
</TABLE>
Accumulated interest on non-performing loans of $1.0 million, $772
thousand, and $774 thousand, was not recognized as income in 1997, 1996, and
1995, respectively. Approximately $913 thousand, $1.0 million, and $913
thousand of interest on non-performing loans was collected and recognized as
income in 1997, 1996, and 1995, respectively.
Transactions in the allowance for loan losses are summarized as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------
1997 1996 1995
-------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 23,520 $ 22,095 $21,437
Allowance related to acquisition - 1,650 -
Provision for loan losses 7,662 5,600 4,375
Loans charged off (10,150) (10,326) (9,161)
Recoveries on loans previously charged off 4,689 4,501 5,444
-------------------------------
Balance at end of year $ 25,721 $ 23,520 $22,095
===============================
</TABLE>
Impaired loans are included in non-performing loans, generally as non-
accrual commercial type loans, commercial type loans past due 90 days or
more and still accruing interest and all loans restructured in troubled debt
restructurings subsequent to the adoption of SFAS No. 114. As of December
31, 1997 and 1996, $42 thousand and $765 thousand, respectively, of
restructured loans were considered to be impaired.
At December 31, 1997 and 1996, the recorded investment in loans that
are considered to be impaired under SFAS No. 114 totaled $6.0 million and
$8.6 million, respectively, for which the related allowance for loan losses
is $962 thousand and $1.9 million, respectively. As of December 31, 1997 and
1996, there were no impaired loans which did not have an allowance for loan
losses determined in accordance with SFAS No. 114. The average recorded
investment in impaired loans during the years ended December 31, 1997, 1996
and 1995, was approximately $7.2 million, $8.7 million, and $10.2 million,
respectively. During 1997, the Company recognized interest income on those
impaired loans of $515 thousand, which included $492 thousand of interest
income recognized using the cash basis method of income recognition. During
1996, the Company recognized interest income on those impaired loans of $492
thousand, which included $488 thousand of interest income recognized using
the cash basis method of income recognition. During 1995, the Company
recognized interest income on those impaired loans of $250 thousand, which
included $228 thousand of interest income recognized using the cash basis
method of income recognition.
6. Mortgage Servicing Rights
The following table is a summary of activity for mortgage servicing
rights purchased ("Purchased"), originated ("Originated") and excess
servicing fees receivable ("Excess") for the years ended December 31, 1997
and 1996:
<TABLE>
<CAPTION>
(In thousands) PURCHASED ORIGINATED EXCESS TOTAL
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 $3,311 $ - $169 $ 3,480
Additions 520 869 14 1,403
Amortization (848) (81) (33) (962)
------------------------------------------
Balance at December 31, 1996 $2,983 $ 788 $150 $ 3,921
Additions 1,837 647 6 2,490
Amortization (885) (167) (14) (1,066)
Sale of servicing (681) - (14) (695)
------------------------------------------
Balance at December 31, 1997 $3,254 $1,268 $128 $ 4,650
==========================================
</TABLE>
The result of the adoption of the new mortgage servicing rights
accounting requirements in the first quarter of 1996 was to capitalize $869
thousand in mortgage servicing rights and increase the gains or decrease the
losses on the sale of these loans originated in the year ended December 31,
1996. The estimated fair value of the Company's capitalized mortgage
servicing rights was $5.6 million at both December 31, 1997 and 1996.
The mortgage servicing rights as of December 31, 1997 and 1996 relate
to approximately $572.7 million and $537.5 million, respectively, of
mortgage loans serviced for third parties. In addition, as of December 31,
1997 and 1996, the Company services approximately $328.7 million and $469.7
million, respectively, of mortgage loans for third parties for which there
is no capitalized servicing asset on the Company's consolidated financial
statements.
7. Premises, Equipment and Software
A summary of premises, equipment and software is as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------
(In thousands) 1997 1996
------------------
<S> <C> <C>
Land and land improvements $ 3,566 $ 3,566
Buildings and improvements 32,309 31,428
Equipment, fixtures, and software 33,206 36,737
------------------
Total 69,081 71,731
Less: accumulated depreciation and amortization 39,635 42,283
------------------
Premises, equipment, and software, net $29,446 $29,448
==================
</TABLE>
Depreciation and amortization expense was approximately $4.8 million,
$4.3 million, and $4.2 million for the years ended December 31, 1997, 1996,
and 1995, respectively.
Certain premises, equipment and software are leased under non-
cancelable operating leases expiring periodically through the year 2027.
Some of these leases contain one or more renewal options. Current non-
cancelable operating leases generally require payment of real estate taxes
and/or property maintenance fees in excess of specified minimum rental
payments.
Rental expense for premises, equipment and software was approximately
$3.3 million, $2.9 million, and $1.7 million in 1997, 1996 and 1995,
respectively. Required minimum annual rental payments on non-cancelable
operating leases with original terms of one year or more consisted of the
following at December 31, 1997:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1998 $ 2,679
1999 1,879
2000 1,495
2001 1,269
2002 1,121
Thereafter 4,823
-------
Total $13,266
=======
</TABLE>
8. Other Real Estate Owned and Repossessed Assets
Other real estate owned (OREO) and repossessed assets consist of the
following:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
(In thousands) 1997 1996
---------------
<S> <C> <C>
Other real estate owned
Commercial $ 368 $308
Condominium - 13
Land 230 37
Single family residential 476 563
---------------
Total other real estate owned 1,074 921
---------------
Non real estate repossessed assets 500 -
---------------
Total $1,574 $921
===============
</TABLE>
9. Deposits
The approximate amount of contractual maturities of time deposits for
the years subsequent to December 31, 1997, is as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1998 $601,553
1999 151,596
2000 23,859
2001 11,888
2002 5,008
Thereafter 461
--------
Total time deposits $794,365
========
</TABLE>
10. Short-Term Borrowed Funds
As of December 31, 1997 and 1996, the Company had unused lines of
credit amounting to approximately $136.8 million and $96.8 million,
respectively, which are available primarily for overnight purchases of
Federal funds from correspondent banks primarily on an as-available basis.
Interest rates on Federal funds borrowings are determined by the federal
funds market. In addition, as of December 31, 1997 and 1996, the Company had
unused lines of credit with the Federal Home Loan Bank of Boston amounting
to $214.9 million, and $317.3 million, respectively. Interest rates on
Federal Home Loan Bank borrowings, determined by the Federal Home Loan Bank,
are generally priced above the Federal funds rate for overnight borrowings.
The Company enters into sales of securities under short-term, usually
overnight, fixed coupon, repurchase agreements. Such agreements are treated
as financings, and the obligations to repurchase securities sold are
reflected as liabilities on the Company's consolidated balance sheets.
During the period of such agreements, the underlying securities are
transferred to a third party custodian's account that explicitly recognizes
the Company's interest in the securities.
The following table presents the detail of Banknorth's short-term
borrowed funds and weighted average interest rates thereon for each of the
last three years:
<TABLE>
<CAPTION>
SECURITIES
FEDERAL SOLD UNDER BORROWINGS BORROWINGS
FUNDS AGREEMENTS TO FROM FROM FHLB
(Dollars in thousands) PURCHASED REPURCHASE U.S. TREASURY OF BOSTON
-------------------------------------------------------
<S> <C> <C> <C> <C>
1997:
Ending balance $ 700 $139,347 $19,730 $263,000
Average amount outstanding 7,441 137,961 10,046 226,720
Maximum amount outstanding at any month end 33,000 178,831 23,329 305,000
Weighted average interest:
During year 5.89% 4.67% 5.20% 5.69%
End of year 6.63 4.23 5.27 5.80
1996:
Ending balance $23,305 $116,484 $11,672 $129,000
Average amount outstanding 5,368 106,918 7,730 39,656
Maximum amount outstanding at any month end 27,700 117,214 22,531 129,000
Weighted average interest:
During year 5.78% 4.66% 5.10% 5.61%
End of year 7.74 4.48 5.16 5.47
1995:
Ending balance $ - $ 95,472 $ 8,241 $ 12,500
Average amount outstanding 4,274 98,586 8,486 52,664
Maximum amount outstanding at any month end 25,300 111,382 21,059 72,500
Weighted average interest:
During year 6.33% 5.07% 5.61% 6.22%
End of year - 5.04 5.16 6.18
</TABLE>
11. Long-Term Debt
Long-term debt consists of secured term loans from the Federal Home
Loan Bank of Boston in the amounts of $6.1 million and $12.9 million at
December 31, 1997 and 1996, respectively, and $10.4 million and $13.0
million of unsecured debt from a third party financial institution at
December 31, 1997 and 1996, respectively.
The following table sets forth the final maturities, outstanding
balances and weighted average interest rates of the long-term debt at
December 31, 1997:
<TABLE>
<CAPTION>
FIXED VARIABLE
FIXED WEIGHTED VARIABLE WEIGHTED
RATE AVERAGE RATE AVERAGE
MATURITY OUTSTANDING INTEREST OUTSTANDING INTEREST
DATE BALANCE RATE BALANCE RATE
- ------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1998 $3,614 4.79% - -
1999 342 6.81 - -
2000 - - - -
2001 246 5.67 $10,400 7.57%
2002 10 7.79 - -
2003-2013 1,927 7.26 - -
------ -------
Total $6,139 $10,400
====== =======
</TABLE>
The interest rate on the variable rate long-term note is tied to
LIBOR. The borrowings from Federal Home Loan Bank of Boston are secured by
mortgage loans held in the Company's loan portfolios and certain securities
not pledged elsewhere.
12. Income Taxes
The components of the income tax expense are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-----------------------------
(In thousands) 1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Current tax expense $15,506 $10,561 $8,398
Deferred tax expense (benefit) (714) 1,420 (181)
-----------------------------
Total income tax expense $14,792 $11,981 $8,217
=============================
</TABLE>
Applicable income tax expense for financial reporting purposes differs
from the amount computed by applying the statutory federal income tax rate
to pre-tax income for the reasons noted in the table below:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Expense at statutory federal tax rate $15,848 $13,080 $10,707
Increases (decreases) in tax
expense resulting from:
Tax exempt income, net (378) (445) (447)
Reduction in valuation allowance - (100) (1,636)
Tax credits available (933) (698) (607)
Other, net 255 144 200
-----------------------------
Income tax expense $14,792 $11,981 $ 8,217
=============================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997 and
1996 are presented below:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
-------------------
<S> <C> <C>
Temporary deductible items:
Differences in reporting the provision
for loan losses and loan charge offs $ 9,825 $ 8,075
Pension and deferred remuneration 5,229 4,441
Purchase accounting 1,205 1,273
Deferred net loan origination fees 323 400
Accrued medical benefits 227 197
Other 157 29
-------------------
Total gross deferred tax assets 16,966 14,415
Temporary taxable items:
Lease financing (8,741) (6,939)
Depreciation (764) (765)
Mark-to-market for investments and loans (213) (519)
Prepaid expenses (561) (575)
Mortgage servicing rights (510) (318)
Other (606) (442)
-------------------
Total gross deferred tax liabilities (11,395) (9,558)
-------------------
Net deferred tax asset at end of year 5,571 4,857
Net deferred tax assets at beginning of year 4,857 5,672
-------------------
(714) 815
Deferred tax assets from acquisition - 605
-------------------
Deferred tax expense (benefit) for the
years ended December 31, 1997 and 1996 $ (714) $ 1,420
===================
</TABLE>
Deferred tax assets are recognized subject to management's judgment
that realization is more likely than not. Based on the sufficiency of
temporary taxable items, historical taxable income, as well as estimates of
future taxable income, management believes it is more likely than not that
the entire net deferred tax asset at December 31, 1997 will be realized.
During 1996, the valuation allowance of $100 thousand was reduced to zero.
During 1995, the valuation allowance was reduced by $1.6 million primarily
as the result of an increase in the amount of historical taxable income
available to justify the deferred tax asset at December 31, 1995 as compared
with December 31, 1994.
13. Employee Benefit Plans
The Corporation maintains a non-contributory defined benefit
retirement and pension plan covering substantially all employees. Benefit
payments to retired employees are based upon years of service, a percentage
of qualifying compensation during the final years of employment and an
average of social security maximum taxable earnings. The amounts contributed
to the plan are determined annually by applicable regulations. Assets of the
plan are primarily invested in listed stocks, common trust funds maintained
by the Company's trust subsidiary, The Stratevest Group, N.A., corporate
obligations and U.S. Government and Agency obligations.
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheets:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
(In thousands) 1997 1996
---------------------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits $(22,975) $(19,605)
Non-vested benefits (927) (686)
---------------------
Accumulated benefit obligation (23,902) (20,291)
Effect of anticipated future compensation
levels and other events (5,911) (5,545)
---------------------
Projected benefit obligation (29,813) (25,836)
Estimated fair value of assets held in the plan 31,032 26,151
---------------------
Projected plan assets in excess of
benefit obligation 1,219 315
Unrecognized net loss from past experience
different from that assumed and effects
of changes in assumptions (3,193) (2,041)
Net prior service cost not yet recognized
in net periodic pension cost 363 403
Unrecognized net asset being recognized
over 9 years (240) (349)
---------------------
Accrued pension cost included in
other liabilities $ (1,851) $ (1,672)
=====================
</TABLE>
Net pension costs recognized in the consolidated statements of income
for the years ended December 31, 1997, 1996, and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Service cost $ 1,346 $ 1,053 $ 715
Interest cost 2,080 1,842 1,623
Actual return on plan assets (5,128) (4,035) (4,464)
Amortization of net prior service cost 40 40 40
Amortization of transition net asset (109) (109) (109)
Deferral of actual return on plan assets
versus actuarial long-term assumptions 2,805 2,026 2,792
-----------------------------
Net pension cost $ 1,034 $ 817 $ 597
=============================
</TABLE>
The actuarial assumptions used in determining the actuarial present
value of projected benefit obligations as of December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------
<S> <C> <C> <C>
Weighted average discount rate 7.00% 7.50% 7.50%
Rate of increase in future compensation 4.50% 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
</TABLE>
In addition, the Company provides a defined benefit post-retirement
plan which provides medical benefits to substantially all employees, as well
as life insurance benefits to a closed group of retirees. Active employees
are only eligible for medical coverage from early retirement until age 65.
Post-age 65 medical coverage and life insurance benefits are offered to a
closed group of retirees. The post-retirement health care portion of the
plan is contributory, with participant contributions adjusted annually and
contains other cost-sharing features, such as deductibles and co-insurance.
The funding policy of the plan is to pay claims and/or insurance premiums as
they come due. The 1997 and 1996 accounting for the plan is based on the
level of cost sharing as of January 1, 1997 and 1996, respectively.
The following table presents the amounts recognized in the Company's
consolidated balance sheets:
<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------
(In thousands) 1997 1996
-------------------
<S> <C> <C>
Accumulated post-retirement benefit obligation:
Retirees and eligible beneficiaries $(1,245) $(1,280)
Active employees fully eligible for benefits (181) (197)
Other active plan participants (1,197) (1,147)
-------------------
(2,623) (2,624)
Unrecognized transition obligation 2,024 2,159
Net prior service cost not yet recognized
in net post-retirement benefit cost 183 193
Unrecognized net gain from past experience
different from that assumed and changes
in assumptions (196) (237)
-------------------
Accrued post-retirement benefit cost
included in other liabilities $ (612) $ (509)
===================
</TABLE>
Net periodic post-retirement benefit cost recognized in the
consolidated statements of income for the years ended December 31, 1997,
1996, and 1995 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1997 1996 1995
--------------------
<S> <C> <C> <C>
Service cost $120 $123 $ 93
Interest cost 184 191 190
Recognition of transition obligation 135 135 135
Net amortization and deferral 2 8 (14)
--------------------
Net periodic post-retirement benefit cost $441 $457 $404
====================
</TABLE>
The discount rate used in determining the accumulated post-retirement
benefit obligation was 7.0%, 7.5%, and 7.5% at December 31, 1997, 1996, and
1995, respectively. For measurement purposes, a 8.7% annual rate of increase
in the per capita cost of covered health care benefits was assumed for
medical coverage for 1997; the rate was assumed to decrease uniformly to
5.5% by 2004 and to remain at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated post-retirement
benefit obligation as of December 31, 1997 by approximately $194 thousand
and the aggregate of the service and interest cost for 1997 would increase
by approximately $31 thousand.
The Company provides certain post-employment medical benefits to
inactive employees and accounts for these benefits in accordance with SFAS
No. 112, "Employers' Accounting for Postemployment Benefits." The charges to
expense with respect to short-term disability for the years ended December
31, 1997, 1996, and 1995 were $171 thousand, $157 thousand, and $159
thousand, respectively.
In addition to the Company's non-contributory defined benefit
retirement and pension plan, the Company provides a supplemental employees
retirement plan to certain executives. The amount of liability recognized in
the Company's consolidated balance sheets was $2.0 million and $1.8 million
at December 31, 1997 and 1996, respectively. The charges to expense with
respect to this plan amounted to $371 thousand, $350 thousand, and $293
thousand for the years ended December 31, 1997, 1996, and 1995,
respectively.
The Company and its subsidiaries have a 401-K savings plan. The charge
to expense with respect to this plan amounted to $1.0 million in 1997, $937
thousand in 1996, and $736 thousand in 1995.
14. Dividend Restrictions and Regulatory Requirements
CASH AND DUE FROM BANKS
Bank subsidiaries of Banknorth are required to maintain certain
reserves of vault cash and/or deposits with the Federal Reserve Bank of
Boston. The amount of this reserve requirement, included in Cash and Due
from Banks, was approximately $12.7 million and $24.9 million at December
31, 1997 and 1996, respectively.
DIVIDEND RESTRICTIONS
The Company's ability to pay dividends to its shareholders is largely
dependent on the ability of its subsidiaries to pay dividends to the
Company. Payment of dividends by Vermont-chartered banks is subject to
applicable state and federal laws. Similarly, payment of dividends by
national banks is subject to applicable federal law. National banks must
obtain the approval of the Office of the Controller of the Currency for the
payment of dividends if the total of all dividends declared in any calendar
year would exceed the total of the bank's net profits, as defined by
applicable regulations, for that year, combined with its retained net
profits for the preceding two years. Furthermore, a national bank may not
pay a dividend in an amount greater than its undivided profits then on hand
after deducting its losses and bad debts, as defined by applicable
regulations.
Dividends paid by subsidiaries are the primary source of funds
available to Banknorth for payment of dividends to its shareholders, for
debt service, for expense related to capital securities, and other working
capital needs. Various laws and regulations restrict the ability of banks to
pay dividends to their shareholders. As of December 31, 1997, banking
subsidiaries were able to declare dividends to Banknorth in 1998, without
regulatory approval, of approximately $2.1 million plus an additional amount
equal to the net profits, as defined in the applicable regulations, for 1998
through the date of any such dividend declarations, less any required
transfer to surplus.
In February 1996, as part of its plan to capitalize the Company's
newly formed subsidiary bank, First Massachusetts Bank, at a "well-
capitalized" level for regulatory capital purposes, the Company redeployed
accumulated capital of $45.6 million from certain of its subsidiary banks.
Because the special dividend exceeded applicable regulatory limitations, the
Company obtained approval from the applicable regulatory agencies for the
payment of that portion of the dividend which exceeded such regulatory
limitations. Payment of these dividends significantly restricts the dividend
paying capacity of the subsidiary banks. The payment of dividends by the
Company in the future will require the generation of sufficient future
earnings by the subsidiary banks.
In relationship to the funding of the acquisition of North American
Bank Corporation, the Company has a credit agreement with a third party
institution. The credit agreement was revised December 19, 1996 and
restricts the Company's ability to pay dividends on its capital stock or
redeem, repurchase or otherwise acquire or retire any of its capital stock
during the period from September 30, 1996 to the date of calculation in an
amount not to exceed the sum of (a) $7,000,000 plus (b) 40% of the Company's
consolidated net income with certain adjustments, for such period, computed
on a cumulative basis for such period. As of December 31, 1997, the Company
had authority to pay dividends of up to $11.0 million under the terms of
this restriction, after taking into account dividends already paid and
repurchases of the Company's stock during the calculation period (September
30, 1996 through December 31, 1997).
REGULATORY CAPITAL REQUIREMENTS
Regulatory regulations require banks to maintain minimum levels of
regulatory capital. Under the regulations in effect at December 31, 1997,
the Company's subsidiary banks were required to maintain a minimum leverage
ratio of Tier I capital to total adjusted quarterly average assets of 4.00%;
and minimum ratios of Tier I capital and total capital to risk weighted
assets of 4.00% and 8.00%, respectively. The Federal Reserve Board ("FRB")
has adopted similar requirements for the consolidated capital of bank
holding companies.
Under its prompt corrective action regulations, regulatory authorities
are required to take certain supervisory actions (and may take additional
discretionary actions) with respect to an undercapitalized institution. Such
actions could have a direct material effect on an institution's financial
statements. The regulations establish a framework for the classification of
banks into five categories: well capitalized, adequately capitalized, under
capitalized, significantly under capitalized, and critically under
capitalized. Generally, an institution is considered well capitalized if it
has a Tier I (leverage) capital ratio of at least 5.0% (based on total
adjusted quarterly average assets), a Tier I risk based capital ratio of at
least 6.0%, and a total risked based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific
quantitative measures of assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Capital amounts
and classifications are also subject to qualitative judgments by the
regulatory authorities about capital components, risk weighting and other
factors.
As of December 31, 1997 and 1996, the Company's subsidiary banks and
the Company met all capital adequacy requirements to which they are subject.
Further, the most recent regulatory notification categorized each of the
subsidiary banks as well-capitalized institutions under the prompt
corrective action regulations. There have been no conditions or events since
that notification that have changed the subsidiary banks' capital
classifications.
The following is a summary of the Company's significant subsidiary
banks' and the Company's (on a consolidated basis) actual capital amounts
and ratios as of December 31, 1997 and 1996, compared to the regulatory
minimum capital adequacy requirements and the regulatory requirements for
classification as a well-capitalized institution:
<TABLE>
<CAPTION>
REGULATORY REQUIREMENTS
--------------------------------------
ACTUAL MINIMUM CAPITAL FOR CLASSIFICATION
------------------ ADEQUACY AS WELL CAPITALIZED
AT DECEMBER 31, 1997 AMOUNT RATIO RATIO RATIO
-----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tier I (leverage) Capital:
The Howard Bank, N.A. $ 55,562 8.01% 4.00% 5.00%
First Massachusetts Bank, N.A. 53,266 7.12 4.00 5.00
First Vermont Bank and Trust Co. 49,431 8.05 4.00 5.00
Banknorth Group, Inc. (consolidated) 226,642 7.97 4.00
Tier I Risk Based Capital:
The Howard Bank, N.A. $ 55,562 9.75% 4.00% 6.00%
First Massachusetts Bank, N.A. 53,266 10.12 4.00 6.00
First Vermont Bank and Trust Co. 49,431 9.75 4.00 6.00
Banknorth Group, Inc. (consolidated) 226,642 10.63 4.00
Total Risk Based Capital:
The Howard Bank, N.A. $ 65,690 11.00% 8.00% 10.00%
First Massachusetts Bank, N.A. 58,606 11.14 8.00 10.00
First Vermont Bank and Trust Co. 55,772 11.00 8.00 10.00
Banknorth Group, Inc. (consolidated) 252,363 11.83 8.00
<CAPTION>
REGULATORY REQUIREMENTS
-------------------------------------
ACTUAL MINIMUM CAPITAL FOR CLASSIFICATION
------------------ ADEQUACY AS WELL CAPITALIZED
AT DECEMBER 31, 1996 AMOUNT RATIO RATIO RATIO
-----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tier I (leverage) Capital:
The Howard Bank, N.A. $ 49,003 7.50% 4.00% 5.00%
First Massachusetts Bank, N.A. 46,980 7.98 4.00 5.00
First Vermont Bank and Trust Co. 46,435 7.91 4.00 5.00
Banknorth Group, Inc. (consolidated) 173,072 6.91 4.00
Tier I Risk Based Capital:
The Howard Bank, N.A. $ 49,003 9.51% 4.00% 6.00%
First Massachusetts Bank, N.A. 46,980 10.25 4.00 6.00
First Vermont Bank and Trust Co. 46,435 9.83 4.00 6.00
Banknorth Group, Inc. (consolidated) 173,072 9.11 4.00
Total Risk Based Capital:
The Howard Bank, N.A. $ 55,447 10.77% 8.00% 10.00%
First Massachusetts Bank, N.A. 50,794 11.08 8.00 10.00
First Vermont Bank and Trust Co. 52,347 11.08 8.00 10.00
Banknorth Group, Inc. (consolidated) 196,592 10.35 8.00
</TABLE>
15. Shareholders' Equity
STOCK SPLIT
On February 24, 1998, the Board of Directors declared a 2-for-1 split
of its common stock effected in the form of a 100% stock dividend. The stock
split was recorded as of December 31, 1997 by a transfer of $7.8 million
from surplus to common stock, representing the $1.00 par value for each
additional share issued. The number of shares issued at December 31, 1997,
after giving effect to the split, was 15,653,296 (7,826,648 shares
immediately prior to the split). The December 31, 1997 share data and all
per share data has been restated to reflect the split.
COMMON SHARE PURCHASE RIGHTS
On November 27, 1990, the Board of Directors adopted a Rights
Agreement and declared a dividend distribution of one Common Share Purchase
Right ("Right") on each outstanding share of common stock, payable December
7, 1990, to shareholders of record on that date. The Rights Agreement also
provides that shares of common stock issued after December 7, 1990 will have
Common Share Purchase Rights associated with them to the same extent as the
shares outstanding on December 7, 1990. The Rights expire on December 7,
2000.
Rights become exercisable 10 days after a person or group acquires 20%
or more of the Corporation's common stock, or ten business days (or such
later date as may be determined by the Board of Directors prior to a person
or group acquiring 20% or more of the Corporation's common stock) after a
person or group announces an offer, the consummation of which, would result
in such person or group owning 20% or more of the common stock (even if no
purchases actually occur).
When the Rights first become exercisable, unless a person or group has
acquired 20% or more of the Corporation's common stock, a holder will be
entitled to buy from the Corporation one share of common stock at the
exercise price of $35.00. If any person or group acquires 20% or more of the
Corporation's common stock the Rights will entitle a holder (other than such
person or any member of such group) to buy a number of additional shares of
common stock of the Corporation having a market value of twice the exercise
price of each Right.
Following the acquisition by any person or group of 20% or more of the
Corporation's common stock, but only prior to the acquisition by a person or
group of a 50% stake, the Board of Directors will also have the ability to
exchange the Rights (other than Rights held by such person or group), in
whole or in part, for one share of common stock per right.
If the Corporation is involved in a merger or other business
combination at any time after a person or group has acquired 20% or more of
the Corporation's common stock, the Rights will entitle the holder to buy a
number of shares of common stock of the acquiring company having a market
value of twice the exercise price of each right.
Prior to the acquisition by a person or group of 20% or more of the
Corporation's common stock, at the option of the Board of Directors the
Rights are redeemable for one cent per Right. The Board of Directors is also
authorized to reduce the 20% threshold to not less than 10%.
16. Earnings Per Share
The following table provides calculations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
---------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- --------------------------- -----------------------------
WEIGHTED PER WEIGHTED PER WEIGHTED PER
NET AVERAGE SHARE NET AVERAGE SHARE NET AVERAGE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
---------------------------------------------------------------------------------------------
(In thousands, except for share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per share $30,489 15,610,254 $1.95 $25,390 15,320,424 $1.66 $22,373 13,545,892 $1.65
=============================================================================================
Effect of dilutive shares:
Stock options 191,634 123,948 82,214
Restricted stock awards 31,650 25,010 8,122
---------- ---------- ----------
Diluted earnings per share $30,489 15,833,538 $1.93 $25,390 15,469,382 $1.64 $22,373 13,636,228 $1.64
=============================================================================================
</TABLE>
17. Capital Securities
On May 1, 1997, Banknorth established Banknorth Capital Trust I (the
"Trust") which is a statutory business trust formed under Delaware law upon
filing a certificate of trust with the Delaware Secretary of State. The
Trust exists for the exclusive purposes of (i) issuing and selling 30 year
corporation-obligated mandatorily redeemable capital securities ("capital
securities") in the aggregate amount of $30.0 million at 10.52%, (ii) using
the proceeds from the sale of the capital securities to acquire the junior
subordinated debentures issued by the Parent Company and (iii) engaging in
only those other activities necessary, advisable or incidental thereto. The
corporation-obligated junior subordinated debentures are the sole assets of
the Trust and, accordingly, payments under the corporation obligated junior
debentures are the sole revenue of the Trust. All of the common securities
of the Trust are owned by the Parent Company. The Company has used the net
proceeds from the sale of the capital securities for general corporate
purposes. The capital securities, with associated expense that is tax
deductible, qualify as Tier I capital under regulatory definitions. The
Parent Company's primary sources of funds to pay interest on the debentures
owed to the Trust are current dividends from subsidiary banks and interest
income on loans made by the Parent Company to certain of its subsidiary
banks. Accordingly, the Parent Company's ability to service the debentures
is dependent upon the continued ability of the subsidiary banks to pay
dividends and service their debt obligations to the Parent Company.
18. Long-Term Incentive Plan
In May 1997, the shareholders of Banknorth approved the 1997 Equity
Compensation Plan (the Plan) which replaced the Banknorth Group, Inc.
Comprehensive Long-Term Executive Incentive Plan approved by the
shareholders of Banknorth in May 1990. No additional awards will be made
under the 1990 plan. The Plan authorizes the granting of stock option
awards, stock appreciation rights, restricted stock awards and restricted
stock units to employees and directors of the Corporation and/or
subsidiaries. The Plan is administered by the Corporation's Board of
Directors. Persons eligible to participate are chosen by the Board of
Directors. Subject to adjustments described in the Plan, the total number of
shares of Banknorth common stock that may be issued pursuant to the Plan may
not exceed 1,050,000 (525,000 shares immediately prior to the split). Such
shares may be either newly-issued shares or previously issued shares that
have been reacquired by the Corporation.
Stock Options
The exercise price of each option equals the market price of the
Company's stock on the date of grant, and an option's maximum term is ten
years. Options vest over a two year period from the date the options are
granted. The Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for its stock option awards and,
accordingly, no compensation cost has been recognized for its stock options
in the consolidated statements of income.
A summary of the status of the Company's stock options as of December
31, 1997, 1996, and 1995, and changes during the years ended on those dates
is presented below. All share data has been restated for the effect of the
2-for-1 stock split declared February 24, 1998:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 690,300 $13.04 506,950 $10.96 404,700 $ 9.35
Granted 183,164 24.04 263,000 16.00 168,000 14.00
Exercised (168,650) 9.97 (69,650) 8.81 (34,550) 6.81
Forfeited (2,000) 15.88 (10,000) 14.75 (31,200) 11.19
--------------------------------------------------------------
Outstanding at end of year 702,814 16.63 690,300 13.04 506,950 10.96
==============================================================
Options exercisable at end of year 262,650 274,300 208,950
======== ======== ========
Weighted-average fair value of
options granted during the year $ 5.38 $ 3.76 $ 3.15
======== ======== ========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ------------------------
WEIGHTED-AVG WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4 to 7 16,950 4.3 years $ 6.18 16,950 $ 6.18
9 to 12 111,200 6.1 10.67 111,200 10.67
14 to 16 381,500 8.2 15.22 134,500 14.00
19 to 24 179,164 9.4 23.13 - -
32 14,000 10.0 32.00 - -
----------------------------------------------------------------
$4 to 32 702,814 8.1 $16.63 262,650 $12.09
================================================================
</TABLE>
Had the Company recorded compensation cost based on the fair value at
the grant date for its stock-based compensation awards ("awards") under SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's
consolidated net income and basic and diluted earnings per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net income As reported $30,489 $25,390 $22,373
Pro forma 30,192 24,958 22,223
Basic earnings per share As reported $1.95 $1.66 $1.65
Pro forma 1.93 1.63 1.64
Diluted earnings per share As reported $1.93 $1.64 $1.64
Pro forma 1.91 1.61 1.63
</TABLE>
Pro forma net income reflects only awards granted in 1997, 1996 and
1995. Therefore, the full impact of calculating compensation cost for awards
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the awards'
vesting period and compensation cost for awards granted prior to January 1,
1995 is not considered.
The fair value of each award grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1997, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER JULY JULY JULY
1997 1997 1996 1995
-----------------------------------------
<S> <C> <C> <C> <C>
Dividend yield 2.26% 2.61% 3.13% 3.29%
Expected volatility 18.28% 20.55% 24.02% 25.47%
Risk-free interest rate 6.00% 5.50% 6.14% 5.30%
Expected life 5 years 5 years 5 years 5 years
</TABLE>
RESTRICTED STOCK AWARDS
Additionally, variable restricted stock awards were granted in each
year since 1992, along with restricted stock units worth 50% of the value of
the underlying shares, to executive officers chosen by the Corporation's
board of directors. At December 31, 1997, restricted stock options
outstanding amounted to 96,800 shares. All share data has been restated for
the effect of the 2-for-1 stock split declared February 24, 1998. The
following are the terms of the restricted stock awards granted:
July 22, 1997: Variable restricted stock awards of 13,000 shares were
granted and are outstanding as of December 31, 1997. Vesting for the 1997
shares and the units requires continuous service through July 22, 2002.
In addition, vesting of 25% of both the shares and the units occurs for
the 1997 awards each year between 1997 and 2001 in which the return on
average equity is equal to or greater than 13% and return on average
assets is equal to or greater than 1.1% to a maximum vesting of 100%.
July 23, 1996: Variable restricted stock awards of 22,800 shares were
granted and are outstanding as of December 31, 1997. Vesting for the 1996
shares and the units requires continuous service through July 23, 2001.
In addition, vesting of 25% of both the shares and the units occurs for
the 1996 awards each year between 1996 and 2000 in which the return on
average equity is equal to or greater than 13% and return on average
assets is equal to or greater than 1.1% to a maximum vesting of 100%.
July 25, 1995: Variable restricted stock awards of 25,000 shares were
granted and are outstanding as of December 31, 1997. Vesting for the
1995 shares and the units requires continuous service through July 25,
2000. In addition, vesting of 25% of both the shares and the units occurs
for the 1995 awards each year between 1995 and 1999 in which the return
on average equity is equal to or greater than 13% and return on average
assets is equal to or greater than 1.1% to a maximum vesting of 100%.
July 26, 1994: Variable restricted stock awards of 21,000 shares were
granted, 3,000 shares were forfeited during 1994, and 18,000 shares were
outstanding as of December 31, 1997. Vesting for the 1994 shares and the
units requires continuous service through July 26, 1999. In addition,
vesting of 25% of both the shares and the units occurs for the 1994
awards each year between 1994 and 1998 in which the return on average
equity is equal to or greater than 12% and return on average assets is
equal to or greater than 1.0% to a maximum vesting of 100%.
July 27, 1993: Variable restricted stock awards of 21,000 shares were
granted, 3,000 shares were forfeited during 1994, and 18,000 shares were
outstanding as of December 31, 1997. Vesting for the 1993 shares and the
units requires continuous service through July 27, 1998. In addition,
vesting of 50% of both the shares and the units occurs for the 1993
awards each year between 1995 and 1997 in which the return on average
equity is equal to or greater than 12% and return on average assets is
equal to or greater than 1% to a maximum vesting of 100%.
July 28, 1992: Variable restricted stock awards of 20,000 shares were
granted, 4,000 shares were forfeited during 1994 and the remaining 16,000
shares were fully vested on July 28, 1997.
No restrictions are removed on any of the above noted stock awards
until the end of the required continuous service period. If participants are
not employees at the end of the continuous service period, all awards are
forfeited. For the years ended December 31, 1997, 1996, and 1995,
compensation expense related to these restricted stock awards and units
amounted to $1.3 million, $475 thousand, and $609 thousand, respectively.
19. Commitments, Off-Balance Sheet Risk and Contingent Liabilities
COMMITMENTS AND OFF-BALANCE-SHEET RISK
Banknorth and its subsidiaries are parties to financial instruments
with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers and to facilitate asset/liability
management. These financial instruments include interest rate swaps,
interest rate floors, commitments to extend credit, unused lines of credit,
letters of credit, standby letters of credit, and loans sold with recourse.
These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the balance sheet.
The contract or notional amount of these instruments reflect the extent of
involvement the Corporation has in particular instruments.
The maximum exposure to credit loss in the event of complete non-
performance by the other party to the financial instruments, and any
collateral or guarantees which prove to be of no value, for commitments to
extend credit, letters of credit, standby letters of credit and loans sold
with recourse is represented by the contractual or notional amount of these
instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Unless otherwise noted, the Corporation does not require collateral or
other security to support off-balance-sheet financial instruments with
credit risk.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Corporation
evaluates each customer's creditworthiness on a case by case basis. The
amount and type of collateral deemed necessary upon extension of credit is
based upon management's credit evaluation and is consistent with existing
credit policies for collateral of on-balance-sheet instruments. Collateral
varies but may include accounts receivable, inventory, property, plant and
equipment, income producing commercial properties, and residential real
estate.
The Company may enter into rate lock agreements which fix the interest
rate at which the loan, if ultimately made, will be originated. Such
agreements may be made with borrowers with whom commitments to extend credit
have been made, as well as with individuals who have applied for mortgage
loans and have not yet received a commitment. These rate lock agreements
expose the Company to interest rate risk given the possibility that rates
may change between the date of the rate lock agreements and the date that
the related loans, if ultimately originated, are sold. In addition, the
portfolio of mortgage loans held for sale expose the Company to interest
rate risk. At December 31, 1997 and 1996, the Company had rate lock
agreements (certain of which relate to loan applications for which no formal
commitment has been made) and mortgage loans held for sale amounting to
approximately $27.0 million, and $15.9 million, respectively. In order to
limit the interest rate risk associated with rate lock agreements as well as
the interest rate risk associated with mortgage loans held for sale, the
Company enters into various agreements to sell loans in the secondary
mortgage market at fixed interest rates. Banknorth and its subsidiaries have
outstanding various commitments to sell real estate mortgages amounting to
approximately $21.0 million at December 31, 1997, and $11.6 million at
December 31, 1996.
Letters of credit and standby letters of credit are conditional
commitments issued by the Corporation to guarantee payment on behalf of a
customer and guarantee the performance of a customer to a third party. The
credit risk involved in issuing these instruments is essentially the same as
that involved in extending loans to customers. Since a portion of these
instruments will expire unused, the total amounts do not necessarily
represent future cash requirements. Each customer is evaluated individually
for creditworthiness under the same underwriting standards used for
commitments to extend credit and on-balance-sheet instruments. Corporate
policies governing loan collateral apply to letters of credit and standby
letters of credit at time of credit extension.
The Corporation has sold mortgage loans where the investor has limited
recourse to the Corporation as issuer. These loans represent normal exposure
to credit loss exhibited by residential mortgage loans. Generally, the
mortgage notes are secured by liens on the real estate and by private
mortgage insurance where the loan to value ratio exceeds 80% at the time of
extension of credit.
Certain mortgage loans are written on an adjustable basis and include
interest rate caps which limit annual and lifetime increases in the interest
rates on such loans. Generally, adjustable rate mortgages have an annual
rate increase cap of 2% and a lifetime rate increase cap of 5% to 6%.
Interest rates charged on home equity lines of credit are also capped. The
home equity interest rate cap is 18% for the Company. In addition, all other
consumer loans are subject to statutory interest rate ceilings as imposed by
the State of Vermont. No statutory interest rate ceilings on consumer loans
are imposed by the States of New Hampshire or Massachusetts. At December 31,
1997, the State of Vermont imposed ceilings ranged from 18% to 24% depending
on the loan amount and underlying collateral on consumer loans. These caps
expose the Corporation to interest rate risk should market rates increase
above these limits. As of December 31, 1997 and 1996, $480.7 million and
$476.4 million of loans had interest rate caps.
Financial instruments with off-balance-sheet credit risk are as
follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------------
(In thousands) FIXED VARIABLE TOTAL
-------------------------------
<S> <C> <C> <C>
Financial instruments whose contact amounts
include credit risk-trading instruments:
Commitments to extend credit for mortgage
loans held for sale $13,442 $ 4,415 $ 17,857
Mortgage loans sold with recourse 1,259 82 1,341
-------------------------------
Total trading instruments $14,701 $ 4,497 $ 19,198
===============================
Financial instruments whose contact amounts
include credit risk-non-trading instruments:
Commitments to extend credit $10,450 $ 21,291 $ 31,741
Unused lines of credit - 480,439 480,439
Letters of credit and standby letters of credit - 61,301 61,301
-------------------------------
Total non-trading instruments $10,450 $563,031 $573,481
===============================
Financial instruments whose notional amounts
exceed the amount of credit risk:
Interest rate swap agreements (pay variable) $ - $ 50,000 $ 50,000
===============================
Interest rate floor agreements (pay variable) $ - $295,000 $295,000
===============================
<CAPTION>
AS OF DECEMBER 31, 1996
-------------------------------
(In thousands) FIXED VARIABLE TOTAL
-------------------------------
<S> <C> <C> <C>
Financial instruments whose contact amounts
include credit risk- trading instruments:
Commitments to extend credit for mortgage
loans held for sale $13,685 $ 5,155 $ 18,840
Mortgage loans sold with recourse 1,316 83 1,399
-------------------------------
Total trading instruments $15,001 $ 5,238 $ 20,239
===============================
Financial instruments whose contact amounts
include credit risk-non-trading instruments:
Commitments to extend credit $13,963 $ 26,935 $ 40,898
Unused lines of credit - 418,111 418,111
Letters of credit and standby letters of credit - 32,037 32,037
-------------------------------
Total non-trading instruments $13,963 $477,083 $491,046
===============================
Financial instruments whose notional amounts
exceed the amount of credit risk:
Interest rate swap agreements (pay variable) $ - $ 50,000 $ 50,000
===============================
Interest rate floor agreements (pay variable) $ - $295,000 $295,000
===============================
</TABLE>
INTEREST RATE SWAP AND FLOOR CONTRACTS
Interest rate swap and floor transactions generally involve the
exchange of fixed and variable rate interest payment obligations without the
exchange of the underlying principal (or notional) amounts. The
Corporation's swaps and floors are used as an interest rate risk management
tool to protect the net interest income from adverse changes in interest
rates. The Corporation is exposed to risk should the swap or floor
counterparty default in its responsibility to pay interest under the terms
of the swap/floor agreement. However, Banknorth minimizes this risk by
performing normal credit reviews on the counterparties and by limiting its
exposure to any one counterparty. Notional principal amounts are a measure
of the volume of agreements transacted, but the level of credit risk is
significantly less. As of December 31, 1997 and 1996, the Company does not
expect any counterparties to fail to meet their obligations.
Interest rate floors and swaps were utilized by the Company in 1997
and 1996 to correct imbalances between the re-pricing characteristics of
certain interest earning assets and certain interest-bearing liabilities. A
significant portion of the Company's loans are adjustable or variable rate
resulting in reduced levels of interest income during periods of falling
rates. Certain categories of deposits reach a point where market forces
prevent further reduction in the rate paid on those instruments. The net
effect of these circumstances is reduced interest income offset only by a
nominal decrease in interest expense, thereby narrowing the net interest
margin. Interest rate floors and swaps are, therefore, utilized to protect
the Company from this occurrence. At December 31, 1997 and 1996, these
instruments are intended to offset potential declines in interest income on
certain variable and floating rate loans.
The following provides information related to interest rate swap and
floor contracts as of December 31, 1997 and 1996 and for the years then
ended:
<TABLE>
<CAPTION>
(In thousands) 1997 1996
--------------------
<S> <C> <C>
Interest Rate Swap Contract:
Notional amount at end of period $ 50,000 $ 50,000
Average notional amount during the year 50,000 30,000
Fair value at year-end 328 270
Weighted average variable rate paid
at end of year 5.84% 5.54%
Weighted average fixed rate received
at end of year 6.37% 6.37%
Interest Rate Floor Contract:
Notional amount at end of period $295,000 $295,000
Average notional amount during the year 295,000 234,809
Carrying value 1,486 2,051
Fair value at year-end 2,516 3,994
Weighted average variable rate paid
at end of year 5.84% 5.56%
Weighted average fixed rate received
at end of year 5.69% 5.80%
</TABLE>
DATA PROCESSING CONTRACT
Effective September 1, 1994, the Company entered into a five-year
facilities management contract with a third-party data processing company.
Under terms of the facilities management contract, the Company will pay a
minimum of $6.0 million for the remainder of the contract, which expires in
August, 1999. In addition, fees will be adjusted annually for inflation,
based upon the Consumer Price Index for all Urban Consumers-All Items, with
no increase to exceed eight percent, or be less than two percent.
Required minimum annual payments under these contracts were as follows
at December 31, 1997:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
1998 $3,562
1999 2,406
------
$5,968
======
</TABLE>
CONTINGENT LIABILITIES
The Corporation has a self-insurance plan which covers both medical
and dental benefits for employees. Under the terms of the plan, the Company
pays up to a maximum of $100 thousand per employee on medical and dental
claims.
In the ordinary course of business there are various legal proceedings
pending against Banknorth. After consultation with outside counsel,
management considers that the aggregate exposure, if any, arising from such
litigation would not have a material adverse effect on Banknorth's
consolidated financial position.
20. Disclosures About the Fair Value of Financial Instruments
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires that the Company disclose estimated fair values for financial
instruments. Fair value estimates, methods, and assumptions are set forth
below.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on existing on and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that are
not considered financial instruments. For example, the Company has a
substantial trust operation that contributes net fee income annually. The
trust operation is not considered a financial instrument, and its value has
not been incorporated into the fair value estimates. Other significant
assets and liabilities include the mortgage banking operation, benefits
resulting from the low-cost funding of deposit liabilities as compared to
the cost of borrowing funds in the market, and premises and equipment and
software. In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimate of fair value under
SFAS No. 107.
SHORT-TERM FINANCIAL INSTRUMENTS
The fair value of certain financial instruments is estimated to
approximate their carrying value because the remaining term to maturity of
the financial instrument is less than 90 days or the financial instrument
reprices in 90 days or less. Such financial instruments include cash and due
from banks, money market investments, accrued interest receivable, accrued
interest payable and short-term borrowed funds.
SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES
The securities portfolios are financial instruments which are usually
traded in broad markets. Fair values are based upon market prices and dealer
quotations. If a quoted market price is not available for a particular
security, the fair value is determined by reference to quoted market prices
for securities with similar characteristics.
LOANS HELD FOR SALE
Estimated fair value of loans held for sale is determined based upon
outstanding commitments from investors or current market prices for amounts
with no sales commitments.
LOANS
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type including
commercial, financial and agricultural, commercial real estate, construction
and land development, residential real estate, credit card and lease
receivables and other installment loans. Each loan category is further
segmented into fixed and variable interest rate terms and performing and
non-performing categories.
The estimated fair value of performing loans, except the portfolio of
residential mortgage loans and credit card receivables, is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate
risk inherent in the respective loan portfolio. The estimate of maturity is
based on the Company's historical experience with repayments for each loan
classification, modified, as required, by an estimate of the effect of
current economic and lending conditions. For residential mortgage loans,
fair value is estimated by discounting contractual cash flows adjusted for
prepayment estimates using discount rates based on secondary market sources
adjusted to reflect differences in servicing and credit costs.
Estimated fair value for non-performing loans is based on recent
external appraisals of the collateral or estimated cash flows discounted
using a rate commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific
borrower information.
The fair value estimate for credit card receivables is based on the
carrying value of existing loans. Given the repricing frequency of this
portfolio, the estimated fair value is expected to approximate the carrying
value. This estimate does not include the value that relates to estimated
cash flows from new loans generated from existing cardholders over the
remaining life of the portfolio.
Management has made estimates of fair value discount rates that it
believes to be reasonable. However, because there is no market for many of
these financial instruments, management has no basis to determine whether
the estimated fair value would be indicative of the value negotiated in an
actual sale.
INTEREST RATE FLOOR AGREEMENTS
The estimated fair value of interest rate floor agreements are
obtained from dealer quotes. These values represent the estimated amount the
Company would receive or pay to terminate the agreements, taking into
account current interest rates and, when appropriate, the current
creditworthiness of the counterparties.
DEPOSIT LIABILITIES
The estimated fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings, NOW and money market
accounts, is regarded to be the amount payable on demand as of December 31,
1997 and 1996. The estimated fair value of time deposits is based on the
discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits of similar remaining
maturities. The fair value estimates for deposits do not include the benefit
that results from the low-cost funding provided by the deposit liabilities
as compared to the cost of borrowing funds in the market.
LONG-TERM DEBT
The fair value for the Company's long-term debt is estimated based on
the quoted market prices for the same or similar issues.
CORPORATION-OBLIGATED MANDATORILY REDEEMABLE CAPITAL SECURITIES
The estimated fair value of the capital securities are obtained from
dealer quotes.
TABLE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair values of financial instruments
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
(In thousands) AMOUNT VALUE AMOUNT VALUE
----------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 85,734 $ 85,734 $ 91,871 $ 91,871
Money market investments 50 50 101 101
Securities available for sale 710,308 710,308 531,269 531,269
Loans held for sale 24,958 25,055 12,106 12,270
Investment securities 23,972 24,246 34,194 34,644
Loans 1,960,629 1,966,705 1,848,232 1,846,334
Less: Allowance for loan losses 25,721 - 23,520 -
----------------------------------------------------
Net loans 1,934,908 1,966,705 1,824,712 1,846,334
Accrued interest receivable 16,115 16,115 15,148 15,148
Interest rate floor agreements 1,486 2,516 2,051 3,994
Financial Liabilities:
Deposits:
Demand, NOW, savings and money market accounts $1,405,455 $1,405,455 $1,276,832 $1,276,832
Time deposits 794,365 796,970 789,232 792,721
Short-term borrowed funds 422,777 422,777 280,461 280,461
Long-term debt 16,539 16,854 25,923 25,949
Accrued interest payable 4,721 4,721 3,914 3,914
Corporation-obligated mandatorily redeemable
capital securities 30,000 33,638 - -
</TABLE>
Note: Loans held for sale represent the only trading financial
instrument; all other financial instruments are considered to be held
for purposes other than trading.
COMMITMENTS TO EXTEND CREDIT, UNUSED LINES OF CREDIT, LETTERS OF CREDIT,
STANDBY LETTERS OF CREDIT AND FINANCIAL GUARANTEES
These financial instruments generally are not sold or traded, and
estimated fair values are not readily available. However, the fair value of
commitments to extend credit and unused lines of credit is estimated using
the fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For loan commitments and unused
lines of credit for which the Company has locked in an interest rate,
estimated fair value also considers the difference between current levels of
interest rates and the committed rates. As of December 31, 1997 and 1996,
the fair value was estimated at $12 thousand and $18 thousand for
commitments to extend credit and $147 thousand and $344 thousand for unused
lines of credit, respectively. The estimated fair value of financial
guarantees, such as mortgage loans sold with recourse, letters of credit and
standby letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties. The estimated fair value of such
financial guarantees as of December 31, 1997 and 1996 were $1.7 million and
$582 thousand, respectively.
INTEREST RATE SWAP AGREEMENTS
The estimated fair value of interest rate swap agreements are obtained
from dealer quotes. These values represent the estimated amount the Company
would receive or pay to terminate the contracts or agreements, taking into
account current interest rates and, when appropriate, the current
creditworthiness of the counterparties. The fair value of interest rate swap
agreements at December 31, 1997 and 1996 was $328 thousand and $270
thousand, respectively.
21. Parent Company Only Financial Statements
The following information presents the financial position of Banknorth
Group, Inc. (Parent Company) at December 31, 1997 and 1996 and the results
of its operations and cash flows for each of the years in the three-year
period ended December 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
BALANCE SHEETS 1997 1996
--------------------
(In thousands)
<S> <C> <C>
Assets
Cash and due from subsidiary banks $ 50 $ 6
Securities purchased under agreements
to resell to a subsidiary bank 1,633 3,341
--------------------
Cash and cash equivalents 1,683 3,347
Investment in equity of bank subsidiaries 239,548 217,206
Investment in equity of non-bank subsidiaries 1,257 269
Securities available for sale, at fair value 15,118 319
Loans to bank subsidiaries 10,438 -
Premises, equipment and software, net 5,165 4,522
Other assets 7,434 3,704
--------------------
Total assets $280,643 $229,367
====================
Liabilities and Shareholders' Equity
Bank term loan $ 10,400 $ 13,000
Other liabilities 9,443 9,630
Liability to trust subsidiary related
to capital securities 30,928 -
Total shareholders' equity 229,872 206,737
--------------------
Total liabilities and shareholders' equity $280,643 $229,367
====================
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------
STATEMENTS OF INCOME 1997 1996 1995
-----------------------------
(In thousands)
<S> <C> <C> <C>
Income:
Dividends from bank subsidiaries $14,748 $59,065 $12,280
Service fees paid by subsidiaries 32,685 28,791 26,978
Interest income on loans from bank subsidiaries 1,025 - -
Other interest income 888 221 233
Net securities transactions 220 - -
Other income 1,701 993 1,002
-----------------------------
Total income 51,267 89,070 40,493
Expenses:
Compensation 15,431 13,706 12,888
Employee benefits 3,142 2,843 2,588
Net occupancy 1,607 1,510 1,328
Equipment and software 3,939 3,651 2,802
Printing and supplies 1,119 1,261 960
Legal and other professional 1,598 1,633 1,248
Data processing 4,895 4,545 4,485
Directors' fees and expenses 778 531 888
Communications 521 465 398
Training and education 591 592 338
Postage 880 888 717
Interest 917 1,191 1,657
Interest on liability to trust subsidiary
related to capital securities 2,169 - -
Other expenses 2,068 1,897 1,752
-----------------------------
Total expenses 39,655 34,713 32,049
Income before income tax benefit and equity
in undistributed (distributions in excess
of) income of subsidiaries 11,612 54,357 8,444
Income tax benefit (1,215) (2,119) (1,883)
-----------------------------
Income before equity in undistributed (distributions
in excess of) income of subsidiaries 12,827 56,476 10,327
Equity in undistributed (distributions in excess of)
income of bank subsidiaries 17,602 (31,128) 12,005
Equity in undistributed income of non-bank subsidiaries 60 42 41
-----------------------------
Net income $30,489 $25,390 $22,373
=============================
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
STATEMENTS OF CASH FLOWS 1997 1996 1995
-----------------------------
(In thousands)
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $30,489 $25,390 $22,373
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premise,
equipment and software 1,473 1,274 1,188
Amortization of employee restricted stock, net 769 310 407
Exercise of employee stock options, net (2,060) (411) (311)
Net securities transactions (220) - -
Decrease in interest payable (14) (32) (305)
Decrease (increase) in other assets (3,623) 543 (3,166)
Increase in accrued expense and other liabilities 2,654 2,513 1,180
Equity in undistributed (distribution in excess of)
income of subsidiaries (17,662) 31,086 (12,046)
-----------------------------
Total adjustments (18,683) 35,283 (13,053)
-----------------------------
Net cash provided by operating activities 11,806 60,673 9,320
Cash flows from investing activities:
Proceeds from maturity of securities available for sale 1,096 - -
Proceeds from sale of securities available for sale 325 - -
Purchase of securities available for sale (15,963) - -
Decrease (increase) in loans to subsidiaries (10,438) - -
Decrease (increase) in investment in equity of subsidiaries (928) (78,030) 50
Capital expenditures (2,211) (1,406) (1,452)
-----------------------------
Net cash used in investment activities (28,119) (79,436) (1,402)
-----------------------------
Cash flows from financing activities:
Purchase of treasury stock (4,798) - -
Issuance of corporation-obligated mandatorily
redeemable capital securities 30,000 - -
Issuance of common stock, net of expenses - 32,216 -
Payments on long-term debt (2,600) (3,800) (4,200)
Issuance of employee restricted stock awards (315) (371) (361)
Dividends paid (9,069) (7,827) (6,260)
Issuance of restricted stock units under deferred directors'
compensation plan, net 1,431 - -
-----------------------------
Net cash provided by (used in) financing activities 14,649 20,218 (10,821)
-----------------------------
Net increase (decrease) in cash and cash equivalents (1,664) 1,455 (2,903)
-----------------------------
Cash and cash equivalents at beginning of year 3,347 1,892 4,795
-----------------------------
Cash and cash equivalents at end of year $ 1,683 $ 3,347 $ 1,892
=============================
Additional disclosure relative to cash flows:
Interest paid $ 917 $ 1,193 $ 1,962
=============================
Taxes paid $ 440 $ 25 $ 40
=============================
Supplemental schedule of non-cash investing and financing activities:
Adjustment of securities available for sale to fair value, net of tax $ 48 $ 52 $ 30
Adjustment of securities available for sale and securities
available sale transferred to investment securities to
fair value, net of tax, at the subsidiaries 4,740 2,559 8,494
Issuance of restricted stock units under deferred directors'
compensation plan, net 1,900 - -
</TABLE>
Form 10-K
The following is a copy, except for the cover page, cross-reference
sheet, certain portions of Part IV, signature pages, exhibit index and
exhibits, of the Annual Report of Banknorth Group, Inc. (the "Company") on
Form 10-K for the year ended December 31, 1997 filed with the Securities and
Exchange Commission (the "Commission").
Certain information included herein is incorporated by reference from
the Company's 1997 Annual Report to Shareholders ("Annual Report") as
indicated below. Except for those portions of the Annual Report which are
expressly incorporated herein by reference, the Annual Report is not to be
deemed filed with the Commission. The Annual Report and Form 10-K have not
been approved or disapproved by the Commission, nor has the Commission
passed upon the accuracy or adequacy of the same.
Part I Pages
Item 1. Business 3-25, 61-62
Item 2. Properties 42, 62-63
Item 3. Legal Proceedings 55, 63
Item 4. Submission of Matters to a Vote of Security Holders N/A
Part II Pages
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters cover, 63
Item 6. Selected Financial Data 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 3-25
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk 9-10
Item 8. Financial Statements and Supplementary Data 30-60
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 63
Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial
Owners and Management
Item 13. Certain Relationships and Related Transactions
Part IV**
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
* The information required by Part III is incorporated herein by
reference from the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on May 12, 1998.
** A list of exhibits in the Form 10-K is set forth on the Exhibit Index
included in the Form 10-K filed with the Commission and incorporated
herein by reference. Copies of any exhibit to the Form 10-K may be
obtained from the company by contacting Corporate Communications,
Banknorth Group, Inc., P.O. Box 5420, Burlington, Vt., 05402-5420. All
financial statement schedules are omitted since the required information
is either not applicable, is immaterial or is included in the
consolidated financial statements of the Company and notes thereto in the
Annual Report.
Business
Banknorth Group, Inc. is the sole owner of five Vermont banks; namely,
First Vermont Bank and Trust Company, Franklin Lamoille Bank, The Howard
Bank, N.A., Granite Savings Bank and Trust Company and Woodstock National
Bank; one Vermont limited charter bank, The Stratevest Group, N.A., a
consolidated trust subsidiary; one New Hampshire holding company; namely
North American Bank Corporation and its sole subsidiary, Farmington National
Bank; and one Massachusetts bank; First Massachusetts Bank, NA., and its
wholly owned subsidiaries, First Massachusetts Security Corporation, and
Northgroup Investment and Insurance Services, Inc. Banknorth also
established Banknorth Capital Trust 1 in May 1997. The Trust exists for the
exclusive purpose of issuing and selling 30 year corporation-obligated
mandatorily redeemable capital securities. Banknorth is also the sole owner
of North Group Realty, Inc., which owns real estate utilized in the
operation of Banknorth.
On October 14, 1994, Banknorth Group acquired North American Bank
Corporation and its sole subsidiary, Farmington National Bank. The
acquisition, which was accounted for as a purchase, is the first for
Banknorth in the state of New Hampshire.
On February 16, 1996, Banknorth completed the purchase of thirteen
banking offices from Shawmut Bank, N.A. A new subsidiary, First
Massachusetts Bank, N.A., with principal offices in Worcester,
Massachusetts, was organized to own and operate the acquired offices.
The subsidiary banks offer a full range of loan, deposit, investment
products and trust services designed to meet the financial needs of
individual consumers, businesses and municipalities. Mortgage banking
services are also offered through Banknorth Mortgage Company, a wholly-owned
subsidiary of First Vermont Bank and Trust Company. These services are
currently offered throughout the states of Vermont, Massachusetts and New
Hampshire through a network of 60 banking offices.
Based on total assets of $2.9 billion as of December 31, 1997,
Banknorth is the largest bank holding company based in Vermont. In December
1997, Banknorth and its subsidiaries employed 1,185 on a full-time
equivalent basis.
Competition
Competition within New England for banking and related business is
strong. Banknorth, through its subsidiaries, competes with both state and
nationally-chartered commercial banks for deposits, loans and trust
accounts, and with savings and loan associations, savings banks and credit
unions for deposits and loans. In addition, there is significant competition
with other financial institutions including personal loan companies,
mortgage banking companies, finance companies, insurance companies,
securities firms, mutual funds and certain government agencies as well as
major retailers all actively engaged in providing various types of loans and
other financial services.
In recent years the competitive environment in the New England banking
industry has expanded to include larger out-of-region bank holding
companies. In 1987, the Vermont legislature enacted the Interstate Banking
Act, which permitted, during a phase-in period, acquisitions of Vermont
banks and bank holding companies by bank holding companies based in the
states of Connecticut, Maine, Massachusetts, New Hampshire and Rhode Island,
so long as such states permitted acquisitions by Vermont institutions on
terms not substantially more restrictive. Effective February 1, 1990, the
act permitted interstate banking on a nationwide reciprocal basis.
Supervision and Regulation
Banknorth and its subsidiaries are subject to regulation and
supervision by a variety of government agencies including the Federal
Reserve System, the Office of the Comptroller of the Currency, the Federal
Deposit Insurance Corporation and the Vermont Department of Banking and
Insurance. As a bank holding company, Banknorth is subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "Act"), and its
examination and reporting requirements. The Act requires Banknorth to obtain
the prior approval of the Board of Governors of the Federal Reserve System
for bank acquisitions, limits the shares of out-of-state banking
organizations unless permitted by state law and prescribes limitations on
the non-banking activities of the Company.
Banknorth Group and its direct or indirect subsidiaries, are
considered "affiliates" for the purpose of Section 19(i) of the Federal
Deposit Insurance Act, as amended, and are thus subject to limitations with
respect to their ability to make loans and other extensions of credit to, or
investments in, each other, and are likewise subject to specific restrictive
collateral security requirements in respect to certain loans or other
extensions of credit.
The banking industry is affected by the monetary and fiscal policies
of government agencies, including the Federal Reserve System. An important
function of the Federal Reserve System is to regulate aggregate national
bank credit and money through such means as open market dealings in
securities, establishment of the discount rate on bank borrowings and
changes in reserve requirements against bank deposits.
The United States Congress has periodically considered and adopted
legislation which has resulted in, and could result in further, deregulation
of both banks and other financial institutions. Such legislation could relax
or eliminate geographic restrictions on banks and bank holding companies and
could place Banknorth and its subsidiaries in more direct competition with
other financial institutions, including mutual funds, securities and
brokerage firms, and investment banking firms. No assurance can be given as
to whether any additional national legislation will be adopted and as to the
effect of such legislation on the business of Banknorth.
The Financial Institutions Reform, Recovery and Enforcement Act
(FIRREA) and the Federal Deposit Insurance Company Improvement Act (FDICIA)
are laws enacted that have changed various aspects of the banking industry,
including regulator oversight and reporting issues.
In addition, the passage of the Economic Growth and Regulatory
Paperwork Reduction Act of 1996, which among other things provides for the
recapitalization of the Savings Association Insurance Fund ("SAIF") and for
the eventual merger of the SAIF and the Bank Insurance Fund ("BIF"), has
resulted in higher BIF assessments for 1997 and future years.
Properties
As of December 31, 1997, Banknorth subsidiaries operated 60 community
banking offices and 75 automated banking machines throughout the states of
Vermont, Massachusetts and New Hampshire. The Company's headquarters are
located at 300 Financial Plaza, Burlington, Vt.
The Company leases certain premises from third parties under terms and
conditions considered by management to be favorable to the Company.
Additional information relating to the Company's properties is set
forth in note 7 to the consolidated financial statements on pages 42 of the
Annual Report and incorporated herein by reference.
Legal Proceedings
Banknorth and certain of its subsidiaries have been named as
defendants in various legal proceedings arising from their normal business
activities. Although the amount of any ultimate liability with respect to
such proceedings cannot be determined, in the opinion of management, based
upon the opinion of counsel, any such liability will not have a material
effect on the consolidated financial position of Banknorth and its
subsidiaries.
Market for Registrant's Common Equity and Related Shareholder Matters
Banknorth's common stock, $1.00 par value per share (the "Common
Stock"), began trading in the over-the-counter market, quoted on the NASDAQ
National Market System ("NASDAQ"). As of December 31, 1997, there were 4,184
holders of record of the Common Stock.
Holders of the Common Stock are entitled to receive such dividends as
may be legally declared by the board of directors and, in the event of
dissolution and liquidation, to receive the net assets of Banknorth
remaining after payment of all liabilities, in proportion to their
respective holdings. Additional information concerning certain limitations
on the payment of dividends by the Company and its bank subsidiaries is set
forth under "Business - Supervision and Regulation" and in note 14 to the
consolidated financial statements on pages 47-49 in the Annual Report and
incorporated herein by reference.
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
There were no changes in accountants, nor were there any disagreements
with the accountants on accounting and financial disclosure.
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.
a.1. List of financial statements:
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Balance Sheets at December 31, 1997 and December 31, 1996
Consolidated Statements of Changes in Shareholders' Equity for the
Period January 1, 1995 to December 31, 1997
Consolidated Statements of Cash Flow for the years ended December 31,
1997, 1996, and 1995
a.2. List of financial schedules (Not applicable)
a.3. Exhibits
Item No.
(3) Articles of incorporation and by-laws, previously filed
with the Commission as (i) Exhibit 4 to the Company's
Current Report on Form 8-K dated November 30, 1989, and (ii)
as amended on Form 8-K/A dated December 7, 1995, (iii) as
amended as an exhibit to the Company's Annual Report for the
year ended December 31, 1996, and incorporated herein by
reference.
(4)(i) Common Stock Certificate of the Company,
previously filed with the Commission as Exhibit 4
to the Company's Current Report on Form 8-K dated
November 30, 1989, as amended on Form 8-K/A dated
December 7, 1995, and incorporated herein by
reference.
(4)(ii) Rights Agreement dated as of November
27, 1990 between the Company and Mellon Securities
Trust Company, as rights agent, previously filed
with the Commission as Exhibit 1 to the Company's
Registration Statement on Form 8-A dated November
29, 1990, and incorporated herein by reference.
(4)(iii) First Amendment to Rights Agreement,
dated as of February 13, 1996, between the Company
and Mellon Securities Trust Company, as Rights
Agent, previously filed with the Commission as
Exhibit 3 to the Company's amended Registration
Statement on Form 8-K/A dated March 1, 1996, and
incorporated herein by reference.
3(b) Reports on Form 8-K
8-K Report dated October 30, 1997 announcing Stock
Repurchase Program.
(10) Material contracts
10(i) Supplemental Retirement Agreement dated
November 1, 1987, between the Company and William
H. Chadwick, previously filed with the Commission
as Exhibit 10(xiv) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1994,
and incorporated herein by reference. *
10(ii) Employment Agreement dated December 21,
1994, between the Company and William H. Chadwick,
previously filed with the Commission as Exhibit
10(xiv) to the Company's Annual Report on Form
10-K for the year ended December 31, 1994, and
incorporated herein by reference.*
10(iii) Change-in-Control Agreement, dated
December 21, 1994, between the Company and Thomas
J. Pruitt, previously filed with the Commission as
Exhibit 10(xv) to the Company's Annual report on
Form 10-K for the year ended December 31, 1994,
and incorporated herein by reference.*
10(iv) Banknorth Group, Inc. Comprehensive
Long-term Executive Incentive Compensation Plan,
as amended and restated July 26, 1994, previously
filed with the Commission as Exhibit 10(4) to the
Company's Registration Statement on Form S-3 (Reg.
No. 33-80273), and incorporated herein by
reference.*
10(v) Banknorth Group, Inc. Supplemental
Employees Retirement Plan, dated January 1, 1995,
previously filed with the Commission as Exhibit
10(xvi) to the Company's Annual Report on Form
10-K for the year ended December 31, 1994, and
incorporated herein by reference.*
10(vi) Banknorth Group, Inc. 1996 Management
Incentive Compensation Plan, previously filed as
Exhibit 10(10) to the Company's Registration
Statement on Form S-3 (Reg. No. 33-80273), and
incorporated herein by reference.*
10(vii) Banknorth Group, Inc. 1997 Management
Incentive Compensation Plan.*
10(viii) Change-in-Control Agreement, dated
January 1, 1996, between the Company and Richard
J. Fitzpatrick., previously filed with the
Commission as Exhibit 10(xi) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by
reference.*
10(ix) Change-in-Control Agreement, dated
January 1, 1996, between the Company and Robert
M. Gillis, previously filed with the Commission
as Exhibit 10(xii) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995,
and incorporated herein by reference.*
10(x) Change-in-Control Agreement, dated March
24, 1997, between the Company and John M. Keel.*
10(xi) 1994 Deferred Compensation Plan for
Directors and Selected Executive Officers of
Banknorth Group, Inc. and Participating
Affiliates, amended and restated as of July 1,
1997, previously filed as Exhibit 4 to the
Company's Registration Statement on Form S-8
(Reg. No. 333-38353), and incorporated herein by
reference.*
10(xii) 1997 Equity Compensation Plan for
Banknorth Group, Inc., previously filed as Exhibit
4 to the Company's Registration Statement on Form
S-8 (Reg. No. 333-38349), and incorporated herein
by reference.*
10(xiii) Credit Agreements, dated December 16,
1996, among Banknorth Group, Inc., the lenders
named therein, and The First National Bank of
Chicago, as Agent, previously filed with the
Commission as Exhibit 10(xii) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated herein by
reference.
(11) Statement re Computation of Per Share Earnings
Earnings per share computations are based on the weighted
average number of shares outstanding after giving
retroactive effect to stock dividends. The effect of the
outstanding stock option awards are fully described in note
18 to the 1997 Banknorth Group, Inc. consolidated financial
statements.
(13) The Corporation's 1997 Annual Report to Shareholders,
specifically designated portions of which have been
incorporated by reference in this Report on Form 10-K, is
filed herewith.
(21) Subsidiaries of Banknorth Group, Inc.
The Howard Bank, N.A.-Vermont
First Vermont Bank and Trust Company and its wholly owned
subsidiary, Banknorth Mortgage Company-Vermont
Franklin Lamoille Bank-Vermont
Granite Savings Bank and Trust Company-Vermont
Woodstock National Bank-Vermont
North American Bank Corporation and its wholly owned
subsidiary, Farmington National Bank-New Hampshire
The Stratevest Group, N.A.-Vermont
First Massachusetts Bank, N.A., and its wholly owned
subsidiaries, First Massachusetts Security Corporation, and
Northgroup Investment and Insurance Services, Inc.-
Massachusetts
Banknorth Capital Trust I-Vermont
North Group Realty-Vermont
(23) Independent Auditors' Report
Consent of Independent Public Accountants
(99) The Proxy Statement for the Corporation's 1998 Annual
Meeting of Shareholders to be filed with the Commission is
incorporated herein by reference.
- --------------------
* denotes management contract or compensatory plan.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Banknorth Group, Inc.
By: /s/ William H. Chadwick By: /s/ Thomas J. Pruitt
------------------------------------- --------------------------------
William H. Chadwick Thomas J. Pruitt
President and Chief Executive Officer Executive Vice President and
Chief Financial Officer
Date: March 24, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
- --------------------------------------------------------------------------------
/s/ Luther F. Hackett Director, Chairman of the Board March 24, 1998
- -----------------------------
Luther F. Hackett
/s/ William H. Chadwick Director, President and Chief March 24, 1998
- ----------------------------- Executive Officer
William H. Chadwick (Principal Executive Officer)
/s/ Thomas J. Pruitt Executive Vice President and March 24, 1998
- ---------------------------- Chief Financial Officer
Thomas J. Pruitt (Principal Financial Officer)
/s/ Neal E. Robinson Treasurer and Principal March 24, 1998
- ----------------------------- Accounting Officer
Neal E. Robinson
/s/ Thomas J. Amidon Director March 24, 1998
- -----------------------------
Thomas J. Amidon
/s/ Jacqueline D. Arthur Director March 24, 1998
- -----------------------------
Jacqueline D. Arthur
/s/ Robert A. Carrara Director March 24, 1998
- -----------------------------
Robert A. Carrara
/s/ Susan C. Crampton Director March 24, 1998
- -----------------------------
Susan C. Crampton
/s/ Richard J. Fleming Director March 24, 1998
- -----------------------------
Richard J. Fleming
/s/ Kathleen Hoisington Director March 24, 1998
- -----------------------------
Kathleen Hoisington
/s/ Douglas G. Hyde Director March 24, 1998
- -----------------------------
Douglas G. Hyde
/s/ Richard M. Narkewicz, M.D. Director March 24, 1998
- ------------------------------
Richard M. Narkewicz, M.D.
/s/ R. Allan Paul Director March 24, 1998
- ------------------------------
R. Allan Paul
/s/ Angelo P. Pizzagelli Director March 24, 1998
- ------------------------------
Angelo P. Pizzagalli
/s/ John B. Packard Director March 24, 1998
- ------------------------------
John B. Packard
/s/ Thomas P. Salmon Director March 24, 1998
- ------------------------------
Thomas P. Salmon
Glossary of Terms
Basis Risk
Basis risk is the risk of adverse consequences resulting from unequal
changes in the spread between two or more rates for different instruments
with the same maturity.
Book value per share
Total shareholders' equity divided by shares outstanding on the same date.
Cash dividends per share
Total cash dividends declared divided by average shares outstanding for the
period.
Cumulative effect of an accounting change
Although the presumption is that once an accounting principle has been
adopted it should not be changed, when a change is necessary it generally is
recognized by including the cumulative effect of the change in net income of
the period of change. The cumulative effect of a change in accounting
principle is the total direct effects, net of the related tax effect, that
the change has on prior periods.
Earning assets
Interest-bearing deposits with banks, securities available for sale,
investment securities, loans (net of unearned income), and money market
investments.
Efficiency ratio
Total other operating expense, excluding OREO/ repossession expense,
goodwill amortization, and other non-recurring expenses, as a percentage of
net interest income, and total other operating income, excluding securities
gains/losses and non-recurring items. All amounts are on a fully taxable
equivalent basis.
Expense ratio
Total other operating expense, excluding OREO/ repossession expense,
goodwill amortization, capital securities expense, and other non-recurring
expenses, less other operating income, excluding securities gains or losses
and non-recurring items, as a percentage of average earning assets. All
amounts are on a fully taxable equivalent basis.
Fully taxable-equivalent (fte) income
Tax-exempt income which has been converted to place tax-exempt and taxable
income on a comparable basis before application of income taxes.
Impaired loans
Loans, usually commercial type loans, where it is probable that the borrower
will not repay the loan according to the original contractual terms of the
loan agreement and all loans restructured in troubled debt restructurings
subsequent to January 1, 1995.
Interest-bearing liabilities
Interest-bearing deposits, federal funds purchased, securities sold under
agreements to repurchase, other short-term borrowed funds and long-term
debt.
Internal Capital Generation Rate
Earnings retention rate multiplied by the return on average shareholders'
equity.
Liquidity
The ability to meet both loan commitments and deposit withdrawals as they
come due.
Net loans charged off
Reductions to the allowance for loan losses for loans written off, net of
the recovery of loans previously written off.
Net interest income
The difference between income on earning assets and interest expense on
interest-bearing liabilities.
Net interest margin
Fully taxable-equivalent basis net interest income as a percentage of
average earning assets.
Net loan transactions
Gains and losses resulting from sales of loans, primarily by the mortgage
banking operation.
Net securities transactions
Gains and losses resulting from sales of securities available for sale at
prices above or below the amortized cost of the securities sold and gains
realized on the call of certain securities.
Non-accrual loans
Loans for which no periodic accrual of interest income is realized.
Non-performing assets
When foreclosed and repossessed assets are added to non-performing loans,
the result is defined as non-performing assets.
Non-performing loans
Non-performing loans are defined as all non-accrual and restructured loans,
and all loans which are 90 days or more past-due but still accruing
interest.
Other operating expenses
All expenses other than interest expense and the provision for loan losses.
Other operating income
All income other than interest income and dividend income.
Other real estate owned (OREO)
Real estate acquired through foreclosure or in-substance foreclosure.
Purchase accounting
An accounting method which, following an acquisition, the acquired entity is
recorded at fair value. The operating results of the acquired entity are
included in the acquiring entity's results from the date of the acquisition
forward.
Restructured loans
A refinanced loan in which the bank allows the borrower certain concessions
that would not normally be considered. The concessions are always made in
light of the borrower's financial difficulties, and the objective of the
bank is to maximize recovery of the investment.
Return on average assets (ROA)
Net income as a percentage of average total assets.
Return on average shareholders' equity (ROE)
Net income as a percentage of average shareholders' equity. A key ratio
which provides a measure of how efficiently equity has been employed.
Significant non-recurring income or expense items
A significant non-recurring income or expense item represents income or
expense which is reported in the quarter in which it occurs, and is not
expected to recur in future periods.
Tangible book value
Tangible shareholders' equity divided by shares outstanding on the same
date.
Tangible shareholders' equity
Shareholders' equity less goodwill.
Tangible total assets
Total assets less goodwill.
BANKNORTH GROUP, INC.
Management Incentive Compensation Plan
OBJECTIVES
----------
1. Increase executive focus on implementation of strategic plans to
further (1) growth in the earnings and (2) return on assets and
equity.
2. Increase executive focus on decisions to improve earnings and returns
in their subsidiary.
3. Improve executive focus in decision-making on what is in the best
interests of Banknorth Group, Inc. and rewards for continuously
improving relative performance against peer banks.
4. Provide a reasonable opportunity for payout consistent with
stockholder expectations and Company performance.
5. Facilitate securing, retaining and motivating the highest caliber of
management employees.
PRIMARY PROVISIONS
------------------
I. THRESHOLD LEVEL
There will be no awards made under the Incentive Compensation Plan
("the Plan") unless the Corporation attains at least a comprehensive
performance rating of "2" on net income, ROAA, and ROAE targets of
1997, after accruing for all plan awards.
II. CORPORATE PERFORMANCE AWARDS
Corporate performance awards will be based on (1) Net Income, (2)
Return on Average Assets, and (3) Return on Average Equity, measured
against Plan after taxes and before accounting adjustments. The total
performance rating will be the numerical average of the ratings on
each target objective. The modification factor is listed in the
exhibits.
III. SUBSIDIARY UNIT PERFORMANCE AWARDS
Subsidiary bank unit performance awards will be based on
subsidiary net income as measured against plan and efficiency ratio,
return on average assets, and salary and benefits as a percent of
earning assets as measured against corporate performance targets in
these areas. Subsidiary mortgage and Stratevest Group unit awards
will be based on subsidiary income and profit margin as measured
against plan.
IV. RELATIVE PERFORMANCE MODIFICATION
Performance awards will be further modified by comparing Banknorth
Group, Inc.'s performance against a peer group of approximately 40
similar sized banks. The relative performance to peers will be
determined by the ranking of a weighted average percentile for ROAE,
weighted at 4 and ROAA, Net Interest Margin, Operating Expense/Average
Assets, and NPAs/Assets all weighted at one each. The modification
factor for relative performance is listed in the exhibits. At least
fifty percent of the award will be paid as close as possible to the
time that the internal performance is determined. The remaining
amount, adjusting for relative performance to peers, will be paid when
that data is available.
V. COMPENSATION LEVELS AND TARGET AWARDS
Incentive compensation levels and the corresponding targets for 1997
are as follows:
Level 5 (Grade 36) - 50% of base salary
Level 4 (Grades 33 & 34) - 35% of base salary
Level 3 (Grades 31 & 32) - 25% of base salary
Level 2 (Grade 30) - 20% of base salary
Level 1 (Grade 29) - 15% of base salary
Base salary for each participant will equal the regular salary earned
in 1997 during the period they were employed in the compensation
level.
VI. INDIVIDUAL PERFORMANCE
Performance awards may be modified at the discretion of the CEO and by
approval of the Compensation Committee of the Board. Any modification
of an individual executive's awards will be based upon that
executive's performance against key performance objectives (KPO's),
not measured otherwise in the corporate and subsidiary unit
performance awards. This modification will be limited to 15%
individually and 7.5% as a group.
VII. ELIGIBILITY
An eligible participant must be an active employee at the end of the
plan year to receive any award. Persons hired or promoted into
eligible positions prior to July 1 of the plan year will have their
potential award pro-rated. Eligible participants may be assigned by
the CEO to alternate compensation levels during the year due to
changes in pay grade or job responsibilities. In such cases, their
award will be pro-rated based on time employed in differing levels.
When managers participate in an incentive plan targeted to their
function, they will not be eligible to participate in this plan.
VIII. INDIVIDUAL TARGET AWARDS
Category "A":
Incentive compensation awards are determined for participants based
100% on corporate performance.
Category "B":
Incentive compensation awards are determined for participants based
50% on corporate performance and 50% on respective subsidiary unit
performance.
Category "C":
Incentive compensation awards are determined for participants based
25% on corporate performance and 75% on respective subsidiary unit
performance.
Eligible participants may be assigned by the CEO to alternate
categories based on transfers, reorganization, or other factors.
Awards may either be prorated based on time in the category or given
based on the category in which the participants spent the most time,
at the discretion of the CEO.
IX. OTHER PROVISIONS
All plan calculations will be made based upon the audited year end
financial statement. No awards will be made until the date of the
audit opinion and adjustments, if any, have been approved by the
Banknorth Group Compensation Committee.
The Board reserves the right to adjust performance targets and/or
payouts under this plan in cases of significant non-recurring events.
___________________________________________________________________________
1997
Management Incentive Compensation Program
Internal Performance Management System (IPMS)
CORPORATE
<TABLE>
<CAPTION>
Performance Levels (% of Target)
Performance Corporate --------------------------------
Category Target 1 2 3 4 5
----------- --------- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
NI $30,051 80 90 100 110 120
ROAA 1.11% 80 90 100 110 120
ROAE 13.75% 80 90 100 110 120
</TABLE>
___________________________________________________________________________
1997
Management Incentive Compensation Program
Internal Performance Management System (IPMS)
SUBSIDIARY
<TABLE>
<CAPTION>
Performance Levels (% of Target)
Performance Subsidiary --------------------------------
Category Target 1 2 3 4 5
- -------------------- ---------- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
FMB, NI $4,001 80 90 100 110 120
FMB, ROAA .58% 80 90 100 110 120
FMB, Effic Ratio 56.62% 80 90 100 110 120
FMB, Sal & Ben/EA .91% 80 90 100 110 120
HB, NI $9,118 80 90 100 110 120
HB, ROAA 1.33% 80 90 100 110 120
HB, Effic. Ratio 58.06% 80 90 100 110 120
HB, Sal & Ben/EA .83% 80 90 100 110 120
FVB, NI $7,763 (1) 80 90 100 110 120
FVB, ROAA 1.34% (1) 80 90 100 110 120
FVB, Effic. Ratio 54.30% (1) 80 90 100 110 120
FVB, Sal & Ben/EA .73% (1) 80 90 100 110 120
FLB, NI $3,939 80 90 100 110 120
FLB, ROAA 1.32% 80 90 100 110 120
FLB, Effic. Ratio 55.82% 80 90 100 110 120
FLB, Sal & Ben/EA .86% 80 90 100 110 120
FNB, NI $1,726 (2) 80 90 100 110 120
FNB, ROAA .82% (2) 80 90 100 110 120
FNB, Effic. Ratio 58.17% (2) 80 90 100 110 120
FNB, Sal & Ben/EA 1.00% (2) 80 90 100 110 120
GB, NI $1,657 80 90 100 110 120
GB, ROAA 1.13% 80 90 100 110 120
GB, Effic. Ratio 58.13% 80 90 100 110 120
GB, Sal & Ben/EA .88% 80 90 100 110 120
WNB, NI $ 967 80 90 100 110 120
WNB, ROAA 1.27% 80 90 100 110 120
WNB, Effic. Ratio 59.57% 80 90 100 110 120
WNB, Sal & Ben/EA .85% 80 90 100 110 120
<FN>
- -------------------
<F1> BMC eliminations deducted from FVB
<F2> NAB consolidated
NOTE: Ratio may change slightly when final Balance Sheet adjustments are
made.
</FN>
</TABLE>
___________________________________________________________________________
1997
Management Incentive Compensation Program
Internal Performance Management System (IPMS)
SUBSIDIARY (cont'd)
<TABLE>
<CAPTION>
Performance Levels (% of Target)
Performance Subsidiary --------------------------------
Category Target 1 2 3 4 5
- -------------------- ---------- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
BMC, NI $1,042 80 90 100 110 120
BMC, Profit Margin 22.09% (3) 80 90 100 110 120
SG, NI $ -0- 80 90 100 110 120
SG, Profit Margin 26.09% (4) 80 90 100 110 120
<FN>
- --------------------
<F3> Income before income taxes
--------------------------------
Net int. inc. + other income
<F4> Income before income taxes + GW amortization - net int. inc.
----------------------------------------------------------------
Other income
</FN>
</TABLE>
___________________________________________________________________________
1997
Management Incentive Compensation Program
Internal Performance Management System (IPMS) Modifier
<TABLE>
<CAPTION>
IPMS Level % of Target Incentive
--------------------- ---------------------
(see Exhibits 2A, 2B)
<S> <C>
5.0 200%
4.5 175%
4.0 150%
3.5 125%
3.0 100%
2.5 75%
2.0 50% (Threshold)
1.5 0%
1.0 0%
<FN>
NOTES: Actual performance and target incentive will be established on an
interpolated basis.
</FN>
</TABLE>
No awards will be paid if performance falls below an IPMS of 2.0.
___________________________________________________________________________
1997
Management Incentive Compensation Program
Relative Performance Management System (RPMS) Modifier
<TABLE>
<CAPTION>
Banknorth %ile Award
Performance Against Modification
The Peer Group Factor
------------------- ------------
<S> <C>
100 %ile 150%
90 %ile 140%
80 %ile 130%
70 %ile 120%
60 %ile 110%
50 %ile 100%
40 %ile 90%
30 %ile 80%
20 %ile 50%
10 %ile 0%
0 %ile 0%
<FN>
NOTE: Actual performance and award modification factor will be established
on an interpolated basis.
</FN>
</TABLE>
CHANGE-IN-CONTROL AGREEMENT
Agreement effective as of the 24th day of March, 1997, by and between
BANKNORTH GROUP, INC., a bank holding company, 300 Financial Plaza,
Burlington, Vermont (hereinafter "BNG"), and JOHN M. KEEL, the Executive
Vice President, Chief Information Officer of BNG, of Solon, Ohio
(hereinafter "Executive").
WHEREAS, Executive is now Executive Vice President, Chief Information
Officer of BNG (hereinafter the "Position"); and
WHEREAS, BNG wishes to secure the future services of Executive in the
Position; and
WHEREAS, in order to induce Executive to remain in the Position, BNG
wishes to assure Executive of the benefits of certain compensation in the
event of a Change-in-Control of BNG; and
WHEREAS, Executive is willing to enter into this Agreement for such
periods and upon the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and agreements
hereinafter set forth and to induce Executive to remain in the employ of
BNG, the parties agree as follows:
1. Term of Agreement.
1.1 This Agreement shall remain in effect indefinitely;
provided, however, that either Executive or BNG may terminate this
Agreement on a future date certain by delivering written notice to
the other party not less than one (1) month prior to the future
termination date.
2. Change-in-Control.
2.1 A "Change-in-Control" shall be deemed to have occurred, for
all purposes of this Agreement, if any "Person", as defined in Section
2.2, has acquired control of BNG. A Person has control if:
(a) the Person directly or indirectly or acting through
one or more other Persons owns, controls, or has power to vote
25 percent or more of any class of voting securities of BNG;
(b) the Person controls in any manner the election of a
majority of the directors of BNG; or
(c) the Board of Directors of BNG determines that the
Person directly or indirectly exercises a controlling influence
over the management or policies of BNG.
2.2 A "Person" shall include a natural person, corporation, or
other entity. When two (2) or more Persons act as a partnership,
limited partnership, syndicate, or other group for the purpose of
acquiring, holding or disposing of BNG common stock, such partnership,
syndicate or group shall be considered a Person. Beneficial ownership
shall be determined under the then current provisions of Securities
Exchange Act Rule 13d-3; Reg. Section 240.13d-3.
2.3 If during the Term of this Agreement a Change-in-Control
occurs, BNG shall be contractually bound to employ the Executive for a
period of two years from the effective date of such Change-in-Control
(the "Contract Term"). During the Contract Term the Executive's
employment with BNG shall end without further liability of BNG only if
the Executive's employment terminates as provided in Section 2.4. If
(i) BNG terminates Executive's employment for any reason other than
for Cause (defined herein), or (ii) Executive terminates his
employment for Good Reason as provided in Section 4.1 (either being an
"involuntary termination"), Executive shall be entitled to receive
such compensation benefits as are provided in Section 3.1 for the
Contract Term, unless such period terminates earlier under Section
2.4. For all purposes of this Agreement, "Cause" shall mean
Executive's material failure to apply, in good faith, on a full time
basis (allowing for usual vacations and sick leave) all of his skill
and experience to the performance of the duties and responsibilities
of the Position, or the serious willful misconduct of Executive
including, but not limited to, the commission by Executive of a felony
or the perpetration by Executive of a common-law fraud upon BNG or any
affiliate thereof.
2.4 Notwithstanding the provisions of Section 2.3, the Contract
Term shall terminate upon the occurrence of one or more of the
following events:
(a) Executive's attainment of the age of 65, unless
otherwise agreed;
(b) Executive's attainment of the age of 62, if he shall
have given the Board of Directors of BNG six (6) months' written
notice of his desire to take early retirement;
(c) the death of Executive;
(d) the commission of any act which would justify a
termination for Cause hereunder; or
(e) the Executive's "permanent disability" defined as
Executive's inability by reason of physical or mental illness to
fulfill his obligations hereunder for the reasonably foreseeable
future, as determined by the Board of Directors of BNG after
considering all relevant medical evidence.
2.5 Executive has no duty to mitigate damages in the event of
an involuntary termination. BNG's obligations to Executive under
Article 3 are subject to Executive's compliance with the provisions of
Article 6.
3. Compensation.
3.1 BNG shall, for the Contract Term, make the following
payments and provide the following benefits to Executive if he is
then employed by BNG or if his employment with BNG has ended through
an involuntary termination:
(a) Executive's base salary immediately prior to the
Change-in- Control shall be continued for the Contract Term
subject to increase as set forth below. Salary compensation so
determined shall be paid in accordance with BNG's normal payroll
practices. Executive's base salary will be increased annually
at a rate no less than the prior year's increase in the Consumer
Price Index For All Urban Consumers, All Items, as published by
the U.S. Department of Labor, Bureau of Labor Statistics.
(b) Executive during the Contract Term shall continue to
participate in any employee welfare or retirement plan or
program of BNG available generally to employees of BNG to the
extent that such continued participation is possible under the
general terms and provisions of such plans and programs. Such
plans may include plans for hospital services, medical services,
major medical, dental, disability, survivor benefits, employees'
pension plan and profit sharing plan. In the event Executive is
unable to continue participation in any such plan or program,
Executive annually shall be entitled to receive for the Contract
Term an amount equal to the average annual contributions,
payments, credits, or allocations made by BNG to him, to his
account, or on his behalf over the three (3) year period (or
such shorter period if the plan or program has not been in
effect for Executive for 3 years) preceding termination of
employment, provided that with respect to hospital, medical,
dental, major medical, survivor, disability and other similar
insurance benefit plans provided by BNG in which continued
participation is not possible, Executive shall in addition be
entitled to receive from BNG an amount reasonably necessary to
permit Executive to obtain comparable substitute benefits or
coverage. Partial years shall be prorated.
(c) Executive's benefits provided pursuant to BNG's Long-
Term Incentive Plan (Stock Option Program) shall not be affected
by the provisions of this Agreement, and no supplemental
payments shall be made by BNG with respect to the Long-Term
Incentive Plan; Executive's rights under the Long-Term Incentive
Plan shall be determined exclusively under such plan and
separate agreements, if any, between Executive and BNG entered
into pursuant to such plan.
(d) During the remainder of the Contract Term, BNG
annually shall pay Executive an amount equal to the average cash
bonuses paid to Executive under the Short-Term Incentive
Compensation Plan for the three (3) consecutive calendar year
periods (or the period of Executive's participation in such plan
if less than three (3) years) ending on the last day of the
calendar year preceding the year in which Executive's employment
is terminated. Such amount shall be paid annually in the same
manner and at the same time as such benefits are paid to Plan
participants generally. Partial years shall be prorated.
(e) Notwithstanding the foregoing, BNG shall not pay to
Executive and Executive shall not be entitled to receive any
payment or benefit that would be treated as an "excess parachute
payment" as such phrase is defined under Section 280G of the
Internal Revenue Code of 1986 or any future amendment thereto or
any corresponding provision of any future United States revenue
statute. In the event any such excess parachute payment is made
to Executive for any reason, Executive agrees to reimburse BNG
in the amount of such payment upon demand.
4. Termination for Good Reason.
4.1 If Executive, by written notice to the Board of Directors
of BNG, terminates his employment at any time during the Contract Term
for "Good Reason" (defined herein), the Executive shall be entitled to
receive all of the payments and benefits specified in Section 3.1.
For all purposes of this Agreement the phrase "Good Reason" shall mean
a material reduction in position responsibility and authority vested
in Executive, a compensation or benefit reduction contrary to the
terms of this Agreement, a required relocation outside of the state in
which Executive's principal office is now situated, or a significant
change in Executive's reporting relationships.
5. Benefits.
5.1 Executive is now a participant, and in the future may
become a participant, in certain arrangements for the benefit of
Executive and/or executive officers, including, but not limited to,
the following:
(a) Long-Term Incentive (Stock Option) Plan; and
(b) Short-Term Incentive Compensation Plan.
This Agreement shall in no way affect Executive's participation in
such plans or arrangements, except as otherwise expressly provided
herein.
6. Noncompetition Provisions.
6.1 During the Contract Term, Executive shall not become an
officer, employee, agent, partner, or director of any business
enterprise in substantial direct competition (as defined below) with
BNG or with any subsidiary of BNG, as the business of BNG, or any
subsidiary of BNG may be constituted at the time of termination of
Executive's employment.
6.2 For the purposes of Section 6.1, a business enterprise with
which Executive becomes associated as an officer, employee, agent,
partner or director, shall be considered in "substantial direct
competition" if, during a period when such competition is prohibited,
such business enterprise is a financial institution, a bank, or a bank
holding company, or is a subsidiary of a bank holding company which is
engaged in any business within the scope of the business then engaged
in by BNG or any subsidiary of BNG, which business enterprise has an
office or a branch located in any county where BNG or any subsidiary
of BNG has a branch or an office or located in any county contiguous
to any such county.
6.3 Except as provided in Section 6.4, in the event of a breach
by Executive of the noncompetition provisions of Section 6.1, BNG
shall be entitled to terminate the payment of all compensation,
payments and benefits to Executive and shall be entitled to such other
relief, including injunctive relief, as may be permitted in law or
equity.
6.4 In the event of a breach by Executive of the noncompetition
provisions of Section 6.1, after an involuntary termination, the
termination of payment of such compensation to Executive shall be the
sole remedy of BNG.
7. Notices.
All notices under this Agreement shall be in writing and shall
be deemed effective when delivered in person to Executive or to the
Secretary of BNG, or forty-eight (48) hours after deposit thereof in
the U.S. mails, postage prepaid, addressed, in the case of the
Executive, to his last known address as carried on the personnel
records of BNG, and in the case of BNG, to its corporate headquarters,
attention of the Secretary, or to such other address as the party to
be notified may specify by notice to the other party.
8. Prior Agreements.
This Agreement supersedes and replaces all prior agreements
relating to the subject matter hereof.
9. Attorneys' Fees.
If it becomes necessary for Executive or BNG to commence or
become a party to litigation for the purpose of enforcing any rights
arising under this Agreement, the prevailing party shall be entitled
to reimbursement from the losing party for all legal fees, costs and
expenses incurred in connection with any such litigation.
10. Successors and Assigns.
The rights and obligations of BNG under this Agreement shall
inure to the benefit of and shall be binding upon the successors and
assigns of BNG. The rights and obligations of Executive under this
Agreement shall inure to the benefit of and shall be binding upon
Executive's heirs and successors. Executive may not assign his rights
and obligations under this Agreement.
11. Severability.
If any of the terms or conditions of this Agreement shall be
declared void or unenforceable by any court or administrative body of
competent jurisdiction, such term or condition shall be deemed
severable from the remainder of this Agreement, and the other terms
and conditions of this Agreement shall continue to be valid and
enforceable.
12. Construction.
This Agreement shall be construed under the laws of the State of
Vermont. Article headings are for convenience only and shall not be
considered a part of the terms and provisions of the Agreement. This
Agreement may be modified only by a writing signed by the parties.
IN WITNESS WHEREOF, Banknorth Group, Inc. has caused this Agreement to
be executed by a duly authorized officer and Executive has hereunto set his
hand and seal as of the day and year first above written.
EXECUTIVE BANKNORTH GROUP, INC.
/s/ John M. Keel By: /s/ Michael J. New
John M. Keel Its duly authorized agent
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Banknorth Group, Inc.:
We consent to incorporation by reference in the following registration
statements of Banknorth Group, Inc.:
No. 33-38040 on Form S-8,
No. 33-53292 on Form S-8,
No. 333-38349 on Form S-8, and
No. 333-38353 on Form S-8
of our report dated January 23, 1998, except note 15 which is as of February
24, 1998, relating to the consolidated balance sheets of Banknorth Group,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997,
which report appears in the annual report on Form 10-K of Banknorth Group,
Inc. for the fiscal year ended December 31, 1997. Our report refers to the
adoption of the provisions of Statement of Financial Accounting Standards
(SFAS) No. 122, "Accounting for Mortgage Servicing Rights" and SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities."
/s/ KPMG PEAT MARWICK LLP
Albany, New York
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 85,734
<INT-BEARING-DEPOSITS> 50
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 710,308
<INVESTMENTS-CARRYING> 23,972
<INVESTMENTS-MARKET> 24,246
<LOANS> 1,960,629
<ALLOWANCE> 25,721
<TOTAL-ASSETS> 2,922,977
<DEPOSITS> 2,199,820
<SHORT-TERM> 422,777
<LIABILITIES-OTHER> 23,969
<LONG-TERM> 16,539
30,000
0
<COMMON> 15,653
<OTHER-SE> 214,219
<TOTAL-LIABILITIES-AND-EQUITY> 2,922,977
<INTEREST-LOAN> 174,947
<INTEREST-INVEST> 43,141
<INTEREST-OTHER> 418
<INTEREST-TOTAL> 218,506
<INTEREST-DEPOSIT> 77,433
<INTEREST-EXPENSE> 21,891
<INTEREST-INCOME-NET> 119,182
<LOAN-LOSSES> 7,662
<SECURITIES-GAINS> 258
<EXPENSE-OTHER> 97,565
<INCOME-PRETAX> 45,281
<INCOME-PRE-EXTRAORDINARY> 45,281
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,489
<EPS-PRIMARY> 1.95
<EPS-DILUTED> 1.93
<YIELD-ACTUAL> 4.57
<LOANS-NON> 13,338
<LOANS-PAST> 1,311
<LOANS-TROUBLED> 42
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 23,520
<CHARGE-OFFS> 10,150
<RECOVERIES> 4,689
<ALLOWANCE-CLOSE> 25,721
<ALLOWANCE-DOMESTIC> 25,721
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 89,111 91,871
<INT-BEARING-DEPOSITS> 650 101
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 359,085 531,269
<INVESTMENTS-CARRYING> 49,680 34,194
<INVESTMENTS-MARKET> 51,087 34,644
<LOANS> 1,351,053 1,848,232
<ALLOWANCE> 22,095 23,520
<TOTAL-ASSETS> 1,910,174 2,601,323
<DEPOSITS> 1,560,769 2,066,064
<SHORT-TERM> 116,213 280,461
<LIABILITIES-OTHER> 17,259 22,138
<LONG-TERM> 55,997 25,923
0 0
0 0
<COMMON> 6,804 7,827
<OTHER-SE> 153,132 198,910
<TOTAL-LIABILITIES-AND-EQUITY> 1,910,174 2,601,323
<INTEREST-LOAN> 125,408 158,734
<INTEREST-INVEST> 26,654 30,468
<INTEREST-OTHER> 562 806
<INTEREST-TOTAL> 152,624 190,008
<INTEREST-DEPOSIT> 53,089 70,618
<INTEREST-EXPENSE> 14,891 10,522
<INTEREST-INCOME-NET> 84,644 108,868
<LOAN-LOSSES> 4,375 5,600
<SECURITIES-GAINS> (409) 31
<EXPENSE-OTHER> 70,589 91,200
<INCOME-PRETAX> 30,590 37,371
<INCOME-PRE-EXTRAORDINARY> 30,590 37,371
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 22,373 25,390
<EPS-PRIMARY> 1.65 1.66
<EPS-DILUTED> 1.64 1.64
<YIELD-ACTUAL> 4.79 4.86
<LOANS-NON> 12,369 16,993
<LOANS-PAST> 1,174 1,210
<LOANS-TROUBLED> 428 765
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 21,437 22,095
<CHARGE-OFFS> 9,161 10,326
<RECOVERIES> 5,444 4,501
<ALLOWANCE-CLOSE> 22,095 23,520
<ALLOWANCE-DOMESTIC> 22,095 23,520
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
