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, 1999
Commission file number (000-18173)
BANKNORTH GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 03-0321189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 BANK STREET 05401
P.O. BOX 5420 (Zip Code)
BURLINGTON, VERMONT
(Address of principal executive offices)
(802) 658-9959
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $1.00 per share)
Associated Preferred 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 o
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. [x]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the closing price on March 1, 2000 was
$461,144,129
As of March 15, 2000, 23,460,731 shares 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:
Document Part
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None
Table of Contents
Part I Pages
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Item 1. Business 3-5
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
Part II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 5
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-32
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk 7
Item 8. Financial Statements and Supplementary Data 33-63
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 64
Part III
Item 10. Directors and Executive Officers of the Registrant 64
Item 11. Executive Compensation 65-75
Item 12. Security Ownership of Certain Beneficial Owners
and Management 75-77
Item 13. Certain Relationships and Related Transactions 77
Part IV*
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 77
[FN]
<F*> 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.
</FN>
Part I.
Item 1. Business
Banknorth Group, Inc. is the sole owner of four Vermont based banks;
namely, First Vermont Bank and Trust Company (and its sole subsidiary,
Banknorth Mortgage Company, Inc.), Franklin Lamoille Bank, The Howard Bank,
N.A., and Granite Savings Bank and Trust Company; one Vermont limited
charter bank, The Stratevest Group, N.A., a trust company; one interim New
Hampshire bank holding company, namely North American Bank Corporation and
its sole subsidiary, Farmington National Bank; one Massachusetts based bank;
First Massachusetts Bank, N.A.; and one New York based bank, Evergreen Bank,
N.A. Banknorth also established Banknorth Capital Trust 1 in May 1997. The
trust exists for the exclusive purpose of issuing and selling 30-year
guaranteed preferred beneficial interest in Corporation's junior
subordinated debentures. Banknorth is also the sole owner of North Group
Realty, Inc., which owns real estate utilized in the operation of Banknorth.
On June 2, 1999, Banknorth announced that it and Peoples Heritage
Financial Group, Inc. ("PHFG") had entered into an Agreement and Plan of
Merger (the "Agreement"), which sets forth the terms and conditions pursuant
to which the Company would be merged with and into PHFG (the "Merger") and
PHFG would change its name to "Banknorth Group, Inc." The Agreement
provides, among other things, that as a result of the Merger, each
outstanding share of common stock of the Company will be converted into the
right to receive 1.825 shares of PHFG's common stock, plus cash in lieu of
any fractional share interest. Consummation of the Merger is subject to a
number of conditions including (i) the approval of the Agreement and the
Merger by the shareholders of the Company and PHFG, (ii) the receipt of
requisite regulatory approvals, (iii) receipt by the parties of an opinion
of counsel as to certain tax consequences of the Merger, (iv) receipt of a
letter from PHFG's independent public accountants stating their opinion that
the Merger shall qualify for pooling-of-interests accounting treatment and
(v) satisfaction of certain other conditions. The transaction will create a
$18 billion multi-state banking and financial services company. The merger
is expected to be completed during the second quarter of 2000.
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 in the states of Vermont, Massachusetts, New York and New
Hampshire through a network of 100 banking offices.
Based on total assets of $4.6 billion as of December 31, 1999,
Banknorth is the largest bank holding company based in Vermont. In December
1999, Banknorth and its subsidiaries employed 1,270 on a full-time
equivalent basis.
Competition
Competition within New England and upstate New York for banking and
related business is strong. Banknorth, through its subsidiaries, competes
with both state and nationally-charted 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.
Supervision and Regulation
As a registered bank holding company, Banknorth is subject to
regulation and examination by the Federal Reserve Board ("FRB"). Certain of
Banknorth's subsidiaries are organized as national banking associations,
which are subject to regulation, supervision and examination by the Office
of the Comptroller of the Currency ("OCC"), or organized as state-chartered,
FDIC-insured non-Federal Reserve member banks, which are subject to
regulation, supervision and examination by the applicable state banking
regulators and the FDIC. The following discussion summarizes certain aspects
of applicable banking laws and regulations.
The activities of Banknorth and those of companies which it controls
or in which it holds more than 5% of the voting stock are limited to
banking, managing or controlling banks, furnishing services to or performing
services for its subsidiaries or any other activity which the FRB determines
to be so closely related to banking and managing or controlling banks as to
be a proper incident thereto. In making such determinations, the FRB is
required to consider whether the performance of such activities by a bank
holding company or its subsidiaries can reasonably be expected to produce
benefits to the public such as greater convenience, increased competition or
gains in efficiency that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. Generally, bank holding companies,
such as Banknorth, are required to obtain prior approval of the FRB to
engage in any new activity or to acquire more than 5% of any class of voting
stock of any company.
Bank holding companies are also required to obtain prior approval of
the FRB before acquiring more than 5% of any class of voting stock of any
bank, which is not already majority-owned by the bank holding company. With
the passage of the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 ("the Interstate Banking and Branching Act"), bank holding
companies became able to acquire banks based outside their home states
beginning September 29, 1995, without regard to the permissibility of such
acquisitions under state law, but subject to any state requirement that the
bank be organized and have been operating for a minimum period of time, not
to exceed five years, and the requirement that the bank holding company
control no more than 10% of the total amount of insured deposits nationwide
and no more than 30% of insured deposits in that state (or such lesser or
greater amount set by state law).
The Interstate Banking and Branching Act also authorized banks to
merge across state lines, thereby creating interstate branches. This
provision, which was effective June 1, 1997, allowed each state, prior to
the effective date, the opportunity to "opt out"of this provision, thereby
prohibiting interstate branching within that state. None of the states in
which the banking subsidiaries of Banknorth are located have "opted out"of
interstate branching. In addition, under the Interstate Banking and
Branching Act, a bank is now able to open new branches in a state in which
it does not already have banking operations if such state enacts a law
permitting such de novo branching. None of the four states in which
Banknorth currently operates (Massachusetts, New Hampshire, New York and
Vermont) has adopted legislation permitting de novo interstate branching,
but all of such state except New Hampshire permit the acquisition of
existing branches by an out-of-state bank or bank holding company.
Bank holding companies and their affiliates are subject to certain
restrictions under the Federal Reserve Act regarding, among other things,
extensions of credit, transfers of assets and purchases of services among
affiliated parties. Further, under the Federal Reserve Act and FRB
regulations, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with extensions of
credit or furnishing of property or services to third parties.
Various laws and regulations administered by the OCC, the FDIC and the
Vermont Banking Commissioner affect the corporate practices of Banknorth's
subsidiary banks, such as payment of dividends, incurring of debt and
acquisition of financial institutions and other companies, and affect their
business practices such as payment of interest on deposits, the charging of
interest on loans, the types of business conducted and the location of
offices. There are no regulatory orders resulting from regulatory
examinations of any of the subsidiary banks of Banknorth.
The ability of Banknorth to pay dividends to its shareholders is
largely dependent on the ability of its subsidiaries to pay dividends to it.
Payment of dividends by Vermont-chartered banks is subject to applicable
state and federal laws; payment of dividends by national banks is subject to
applicable federal law. National banks must obtain the approval of the OCC
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 law) 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 law.
In addition, the FRB, the OCC, the FDIC and the Vermont Commissioner
are authorized under applicable federal and state law to determine under
certain circumstances that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment of such dividends. The payment of
dividends that deplete a bank's or bank holding company's capital base, or
render it illiquid, could be deemed to constitute such an unsafe or unsound
practice. The FRB, the FDIC and the OCC have each indicated that banking
organizations should generally pay dividends only out of current operating
earnings.
The FRB, the FDIC, and the OCC have issued substantially similar risk-
based and leverage capital guidelines for United States banking
organizations. In addition, those regulatory agencies may from time to time
require that a banking organization maintain capital above the minimum
levels, whether because of its financial condition or actual or anticipated
growth. The FRB's risk-based capital guidelines define a three-tier capital
framework and specify three relevant capital ratios: Tier I Capital Ratio, a
Total Capital Ratio and a "Leverage Ratio". "Tier I Capital" consists of
common and qualifying preferred shareholders' equity, less certain
intangibles and other adjustments. "Tier 2 Capital" and "Tier 3 Capital"
consist of subordinated and other qualifying debt, and the allowance for loan
and lease losses up to 1.25% of risk-weighted assets. The sum of Tier I,
Tier 2 Capital Capital and Tier 3 Capital, less investment in unconsolidated
subsidiaries, represents qualifying "Total Capital" at least 50% of which must
consist of Tier 1 Capital. Risk-based capital ratios are calculated by
dividing Tier 1 Capital and Total Capital by risk-weighted assets. Assets and
off balance sheet exposures are assigned to one of four categories or risk
weights, based primarily on relative credit risk. The minimum Tier 1 Capital
is 4% and the minimum Total Capital Ratio is 8%. The Leverage Ratio is
determined by dividing Tier 1 Capital by adjusted average total assets.
Although the stated minimum Leverage Ratio is 3%, most banking organizations
are required to maintain Leverage Ratios of at least 1 to 2 percentage points
above 3%.
Federal bank regulatory agencies require banking organizations that
engage in significant trading activity to calculate a capital charge for
market risk. Significant trading activity means trading activity of at least
10% of total assets or $1 billion, whichever is smaller, calculated on a
consolidated basis for bank holding companies. Federal bank regulators may
apply the market risk measure to other banks and bank holding companies as
the agency deems necessary or appropriate for safe and sound banking
practices. Each agency may exclude organizations that it supervises that
otherwise meet the criteria under certain circumstances. The market risk
charge will be included in the calculation of an organization's risk-based
capital ratios. Banknorth is not currently subject to this special capital
charge.
Under applicable federal laws and regulations, deposit insurance
premium assessments to the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF") are based on a supervisory risk rating
system, with the most favorably rated institutions paying no premiums. The
deposits of each of Banknorth's subsidiary banks except First Massachusetts
Bank is presently in the most favorable deposit insurance assessment
category, and pays no deposit premium assessment. As of December 31, 1999,
the Company, on a consolidated basis, met all capital adequacy requirements
to which it is subject. Further, all the Company's subsidiary banks, with
the exception of First Massachusetts Bank, met all capital adequacy
requirements for classification as well-capitalized institutions. Due to the
acquisition of the Berkshire branch offices by First Massachusetts Bank in
the fourth quarter of 1998, this subsidiary has temporarily been placed in
the adequately-capitalized classification. Although no assurance can be
given due to the number of variables that effect financial performance and
operations (many of which are outside Banknorth's control), the Company
expects that First Massachusetts Bank will be restored to the well-
capitalized classification in the year 2000.
Effective March 11, 2000, the federal Gramm-Leach-Bliley financial
modernization act (the "GLB Act") permits bank holding companies to become
financial holding companies and thereby affiliate with securities firms and
insurance companies and engage in other activities that are financial in
nature. A bank holding company is eligible to elect to become a financial
holding company if each of its subsidiary banks is well capitalized for
regulatory capital purposes, is well managed and has at least a satisfactory
rating under the Community Reinvestment Act ("CRA"). No regulatory approval
is required for a financial holding company to acquire a company, other than
a bank or savings association, engaged in activities that are financial in
nature or incident to activities that are financial in nature, as defined by
the Federal Reserve Board. The GLB Act defines activities which are
"financial in nature" to include securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance
underwriting and agency; merchant banking activities; and activities that
the Federal Reserve Board has determined to be closely related to banking.
In addition, the GLB Act provides that a national bank also may engage,
subject to limitations on investment, in activities that are financial in
nature, other than insurance underwriting, insurance company portfolio
investment, real estate development and real estate investment, through a
financial subsidiary of the bank, if the bank is well capitalized, well
managed and has at least a satisfactory CRA rating. Subsidiary banks of a
financial holding company or national banks with financial subsidiaries must
remain well capitalized and well managed in order to continue to engage in
activities that are financial in nature without regulatory actions or
restrictions, which could include divestiture of the financial in nature
subsidiary or subsidiaries. In addition, a financial holding company or a
bank may not acquire a company that is engaged in activities that are
financial in nature unless each of the subsidiary banks of the financial
holding company or the bank has a CRA rating of satisfactory or better.
Full implementation of the GLB Act will likely result in structural
changes to the financial services industry, the full effect of which cannot
be predicted with any certainty.
Item 2. Properties
As of December 31, 1999, Banknorth subsidiaries operated 100 community
banking offices and 144 automated banking machines in the states of Vermont,
Massachusetts, New York and New Hampshire. The Company's headquarters are
located at 100 Bank Street, Burlington, Vermont.
The Company leases certain premises from third parties under terms and
conditions considered by management to be at market terms.
Additional information relating to the Company's properties is set
forth in note 7 to the consolidated financial statements.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Part II.
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
Banknorth's common stock, $1.00 par value per share (the "Common
Stock"), is traded in the over-the-counter market and quoted on the NASDAQ
National Market System ("NASDAQ"). As of December 31, 1999, there were 4,863
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.
Item 6. Selected Financial Data-Five Year Selected Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
(In thousands, except share and per share data) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest income $ 319,584 $ 308,701 $ 294,757 $ 260,541 $ 219,795
Interest expense 141,602 144,658 133,335 110,489 95,552
-----------------------------------------------------------------------
Net interest income 177,982 164,043 161,422 150,052 124,243
Provision for loan and lease losses 9,475 9,345 9,372 7,040 6,175
-----------------------------------------------------------------------
Net interest income after provision
for loan and lease losses 168,507 154,698 152,050 143,012 118,068
-----------------------------------------------------------------------
Other operating income:
Income from trust and investment
management fees 19,455 12,838 11,223 10,217 9,639
Service charges on deposit accounts 13,077 11,657 10,725 9,370 7,872
Mortgage bankning income 4,081 5,492 4,667 4,561 3,375
Card product income 3,047 2,227 3,166 3,029 2,789
ATM income 2,718 2,258 1,369 1,031 959
Net securities transactions 374 519 266 25 (546)
Bank-owned life insurance 2,654 2,229 77 - -
Bank-owned life insurance claim 1,389 - - - -
Net gain on curtailment of pension plan 2,577 - - - -
Gain on sale of merchant processing - - 2,432 - -
All other 5,733 4,253 3,931 3,457 3,046
-----------------------------------------------------------------------
Total other operating income 55,105 41,473 37,856 31,690 27,134
-----------------------------------------------------------------------
Other operating expenses:
Compensation & employee benefits 67,879 65,545 62,994 59,830 50,614
Net occupancy, equipment & software expense 22,357 19,218 19,657 17,677 14,875
Data processing 6,758 6,889 7,232 7,005 6,721
FDIC deposit insurance and other regulatory 1,074 1,139 1,084 650 3,307
OREO and repossession 494 1,068 1,448 385 1,301
Amortization of goodwill 8,864 5,743 5,286 4,715 695
Capital securities 3,156 3,156 2,104 - -
Merger and aquistion related expenses 1,233 21,968 - 1,583 -
All other 33,702 28,010 28,124 29,498 25,676
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Total other operating expenses 145,517 152,736 127,929 121,343 103,189
-----------------------------------------------------------------------
Income before income tax expense 78,095 43,435 61,977 53,359 42,013
Income tax expense 23,559 14,515 20,161 17,656 11,260
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Net income $ 54,536 $ 28,920 $ 41,816 $ 35,703 $ 30,753
=======================================================================
Average Balances:
Loans $ 2,893,810 $ 2,684,169 $ 2,578,746 $ 2,362,251 $ 1,910,737
Loans held for sale 26,360 35,708 16,481 14,834 12,985
Securities available for sale 1,134,876 1,038,077 859,674 619,390 311,972
Investment securities 18,124 36,016 61,508 63,967 307,740
Money market investments 16,339 26,027 30,132 29,663 32,955
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Total earning assets 4,089,509 3,819,997 3,546,541 3,090,105 2,576,389
Other assets 332,751 242,622 196,628 204,561 150,106
-----------------------------------------------------------------------
Total assets $ 4,422,260 $ 4,062,619 $ 3,743,169 $ 3,294,666 $ 2,726,495
=======================================================================
Non interest-bearing deposits $ 512,856 $ 429,272 $ 385,540 $ 359,058 $ 287,556
Interest-bearing deposits 3,083,635 2,784,701 2,562,280 2,396,422 1,905,576
-----------------------------------------------------------------------
Total deposits 3,596,491 3,213,973 2,947,820 2,755,480 2,193,132
Short-term borrowed funds 348,538 390,641 389,586 163,208 172,230
Long-term debt 72,130 63,776 47,139 67,206 107,077
Other liabilities 46,314 41,108 35,130 33,547 29,119
Guaranteed preferred beneficial interests
in Corporation's junior subordinated debentures 30,000 30,000 20,137 - -
Shareholders' equity 328,787 323,121 303,357 275,225 224,937
-----------------------------------------------------------------------
Total liabilities, corporation-obligated
mandatorily redeemable capital securities
and shareholders' equity $ 4,422,260 $ 4,062,619 $ 3,743,169 $ 3,294,666 $ 2,726,495
=======================================================================
Loans charged off, net of recoveries $ 6,835 $ 5,559 $ 6,734 $ 6,987 $ 12,154
Non-performing assets, p.e. 14,483 24,329 23,275 26,922 24,912
Share and Per Share Data:
Basic wtd. avg. number of shares outstanding 23,435,122 23,277,560 23,705,320 23,626,266 22,033,130
Basic earnings per share (Basic EPS) $ 2.33 $ 1.24 $ 1.76 $ 1.51 $ 1.40
Diluted wtd. avg. number of shares outstanding 23,734,591 23,669,540 24,042,800 23,860,882 22,177,558
Diluted earnings per share (Diluted EPS) $ 2.30 $ 1.22 $ 1.74 $ 1.50 $ 1.39
Tangible book value 11.52 10.40 12.21 10.72 10.62
Key Ratios:
Return on average assets 1.23% 0.71% 1.12% 1.08% 1.13%
Return on average shareholders' equity 16.59 8.95 13.78 12.97 13.67
Net interest margin, fte 4.41 4.34 4.58 4.89 4.87
Efficiency ratio 57.88 59.78 61.65 62.21 65.85
As a % of risk-adjusted assets, p.e.:
Total capital 11.10 10.00 12.55 11.49 13.31
Tier 1 capital 9.85 8.75 11.30 10.24 12.05
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 7.18 6.43 8.18 7.56 8.51
Tangible shareholders' equity, to tangible
assets, p.e. 5.98 5.58 7.36 7.32 8.44
</TABLE>
All share and per share data has been restated to give retroactive effect to
stock splits.
Item 7 and 7A. Management's Discussion and Analysis of Financial Condition
and Results of Operations, including Quantitative and
Qualitative Disclosures about Market Risk
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 1999 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 (f.t.e.) basis.
Balances discussed are daily averages unless otherwise described. The
consolidated financial statements and related notes and the quarterly
reports to shareholders for 1999 should be read in conjunction with this
review. Amounts in prior period consolidated financial statements are
reclassified whenever necessary to conform to the 1999 presentation.
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 year 2000
compliance;
* 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 effect of the proposed merger with Peoples Heritage Financial
Group, Inc.;
* the effect of higher than expected costs and unanticipated
difficulties related to the cost of integration of acquired businesses
and operations; and
* the effect of other risks and uncertainties discussed throughout this
report.
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.
PROPOSED MERGER WITH PEOPLES HERITAGE FINANCIAL GROUP, INC.
On June 2, 1999, Banknorth announced that it and Peoples Heritage
Financial Group, Inc. ("PHFG") had entered into an Agreement and Plan of
Merger (the "Agreement"), which sets forth the terms and conditions pursuant
to which the Company would be merged with and into PHFG (the "Merger") and
PHFG would change its name to "Banknorth Group, Inc." The Agreement
provides, among other things, that as a result of the Merger, each
outstanding share of common stock of the Company will be converted into the
right to receive 1.825 shares of PHFG's common stock, plus cash in lieu of
any fractional share interest. Consummation of the Merger is subject to a
number of conditions including (i) the approval of the Agreement and the
Merger by the shareholders of the Company and PHFG, (ii) the receipt of
requisite regulatory approvals, (iii) receipt by the parties of an opinion
of counsel as to certain tax consequences of the Merger, (iv) receipt of a
letter from PHFG's independent public accountants stating their opinion that
the Merger shall qualify for pooling-of-interests accounting treatment and
(v) satisfaction of certain other conditions.
The transaction will create an $18 billion multi-state banking and
financial services company. The merger is expected to be completed during
the second quarter of 2000.
MERGER AND ACQUISITION ACTIVITY Evergreen Bancorp, Inc.
On December 31, 1998, the shareholders of Banknorth and Evergreen
approved a merger between the two organizations. Evergreen was merged with
and into Banknorth with each issued and outstanding share of Evergreen
common stock, together with associated preferred purchase rights, converted
into 0.9 shares of Banknorth common stock, plus cash in lieu of any
fractional share interest. This resulted in the issuance of approximately
7.9 million in additional shares of Banknorth common stock, bringing
Banknorth's outstanding shares to approximately 23.2 million immediately
following the merger.
In order to effect the merger, one-time merger related expenses of
$20.1 million, $15.1 million after-tax impact, were incurred in the fourth
quarter of 1998 and $1.2 million, $788 thousand after-tax, were incurred in
the first quarter of 1999. The majority of these expenses were employment-
related costs and data processing conversion and termination costs.
Additionally, the Company recorded in the first quarter
of 1999, a net gain of $2.6 million ($1.5 million after-tax) on the
curtailment of the Evergreen pension plan.
At December 31, 1998, after payments of certain one-time merger
related expenses, the Company had a remaining accrued liability for merger
costs of approximately $15.4 million, of which $11.4 million was paid during
1999. As of December 31, 1999, $4.0 million of these liabilities remain and
primarily represent the accrual for the supplemental early retirement plan
for certain senior executives of Evergreen.
The merger qualified as a tax-free reorganization and was accounted
for as a pooling-of-interests. All historical financial information has been
restated for the combination of the two companies.
First Massachusetts Bank-Berkshire Region
On November 13, 1998, Banknorth completed the purchase from
BankBoston, N.A. of ten full-service branches, one limited service branch
and nine remote ATM locations, as well as private banking relationships
associated with the branches in the Berkshire region of Massachusetts. The
acquisition was made through the Company's Massachusetts based subsidiary,
First Massachusetts Bank, N.A.
In connection with the Berkshire acquisition, Banknorth paid
BankBoston, N.A. a fixed premium of $52.5 million. At the closing, the
deposits of the Berkshire branches were approximately $290.1 million,
including accrued interest. Banknorth also purchased in the transaction
commercial loans associated with the branches with a net book balance as of
November 13, 1998 of approximately $73.6 million and a portfolio of consumer
loans originated in the branches with a net book balance of $35.8 million.
In addition, the Company received approximately $122.5 million in cash as
consideration for the net liabilities assumed.
The private banking relationships associated with these branches,
which as of closing represented approximately $1.0 billion of trust and
investment assets under management, including approximately $750 million in
discretionary trust assets under management, were acquired by Stratevest
Group, N.A. (Stratevest), Banknorth's investment and financial management
subsidiary.
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 $54.2 million, substantially all of which is deductible
for income tax purposes, and is being amortized over fifteen years on a
straight-line basis. The one-time acquisition-related expenses of $1.8
million pre-tax, or $1.2 million after-tax, were recorded in the fourth
quarter of 1998.
The results of operations for the branches and private banking
relationships acquired are included in Banknorth's consolidated financial
statements from the date of acquisition forward.
OVERVIEW
Banknorth's net income was $54.5 million, representing basic earnings
per share ("EPS") of $2.33 and diluted EPS of $2.30 for the year ended
December 31, 1999, compared to $28.9 million, after $16.3 million of after-
tax merger and acquisition expenses relating to two transactions in the
fourth quarter of 1998, representing basic EPS of $1.24 and diluted EPS of
$1.22 for the year ended December 31, 1998.
Net income in 1999 included a $1.5 million, after-tax, gain on
curtailment of a pension plan; a $1.4 million, tax-exempt, claim from bank-
owned life insurance ("BOLI"); $243 thousand, after tax, of net gains from
securities transactions; a $608 thousand, after-tax, payment of management
fees to our defined benefit pension plan, and $788 thousand, after-tax, of
merger and acquisition expenses. Net income in 1998 included $16.3 million
of after-tax merger and acquisition expenses. The following table sets forth
the calculation of diluted earnings per share from operations for the years
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Change
Diluted Earnings per Share 1999 1998 Amount Percent
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $2.30 $1.22 $1.08 88.5%
Pension plan curtailment (.06) - (.06) -100.0
BOLI claim (.06) - (.06) -100.0
Net securities transactions (.01) (.02) .01 50.0
Payment of management fees to
defined benefit pension plan .02 - .02 100.0
M & A expenses .03 .69 (.66) -95.7
Earnings per share from
operations $2.22 $1.89 $ .33 17.5%
</TABLE>
During 1999, the Company completed the core banking systems and
private banking conversions related to the Evergreen merger. As noted above,
the Company recorded and paid $1.2 million ($788 thousand, after tax) in
additional one-time expenses, primarily in data conversion and staff
expenses. Additionally, the Company recorded a net gain of $2.6 million
($1.5 million after tax) related to the curtailment of the Evergreen pension
plan resulting from the combination of the former Evergreen and Banknorth
pension plans following the merger.
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 92.00% and 91.61% of total assets at December 31, 1999
and 1998, 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.
Earning Assets
Average earning assets were $4.1 billion during 1999, an increase of
$269.5 million, or 7.1%, from 1998. 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 $3.0 billion at December 31, 1999, were $172.9
million, or 6.1%, above year-end 1998. The increase in total loans from the
1998 levels is primarily attributable to the continued strong loan demand in
the Massachusetts market and improved lending activity in Vermont and New
Hampshire. The strong commercial loan demand offset a decline in the real
estate mortgage portfolio as a result of refinancing activity. Given the
current economic indicators and interest rate environment, management
believes that the Company will see continued but slowing growth in the loan
portfolio during 2000. If interest rates rise, a greater slow down in
lending activity could be expected. 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, 1999 were
$632.8 million representing 21.0% of total loans. 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 at December 31, 1999 were $819.1 million
representing 27.2%. This category is comprised primarily of mortgages on
owner-occupied income producing properties or businesses. In most cases, the
Company maintains banking relationships with these customers.
The total increase in commercial and commercial real estate loans
amounted to $146.3 million from December 31, 1998 to December 31, 1999 and
is the result of strong lending activity in all regions of the Company.
Residential real estate loans, $1.0 billion at December 31, 1999, were
$21.2 million lower than at year-end 1998 as a result of the higher
refinancing activity in late 1998 and into 1999. Banknorth Mortgage Company,
Inc. ("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.
Installment loans, including credit card and lease receivables, were
$456.1 million at December 31, 1999, $12.1 million, or 2.7% higher than at
December 31, 1998. In 1997, Banknorth began offering its lease and indirect
financing products under the name Northgroup Financial Services.
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 averaged $26 million during 1999 and $35 million during 1998.
The production level experienced in 1998 was at record high levels for the
Company as refinancing activity was strong throughout the year given the low
interest rate environment. Interest rates rose throughout 1999 and
refinancing activity slowed. The current production in 1999 is primarily new
mortgage originations as the home buying market is active and interest rates
remain relatively low. Management expects the level of mortgage originations
to be lower in 2000, compared to 1999, as interest rates continue to rise
and the pipeline of mortgage loans in various stages of production is much
lower as of year end 1999 compared to year end 1998.
The majority of loans originated by BMC 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 originated 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 mortgage loans on the Company's consolidated
financial statements. During 1999 and 1998, $133.1 million and $91.5
million, respectively, of mortgage originations were retained in such a
manner by the Company's subsidiary banks.
Securities available for sale. This portfolio is managed on a total
return basis with the objective of exceeding, by 50 basis points, 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 prudent 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 securities held to
maturity, when circumstances warrant. Sales may also occur when liquidity or
other funding needs arise. On a regular basis, horizon analyses are
performed for a 6-12 month time horizon to evaluate the need for re-
balancing the portfolio.
Securities available for sale totaled $1.2 billion at December 31,
1999 as compared to $1.1 billion at December 31, 1998. The 1999 balance is
stated net of a fair value adjustment reflecting net unrealized losses of
$31.5 million, whereas the December 1998 balance is net of a fair value
adjustment reflecting net unrealized gains of $5.9 million. During 1999, on
average, the securities available for sale portfolio increased $96.8
million. The increase is primarily the result of investing excess liquidity
from deposit growth and the re-investment of $4.8 million in cash flow
generated by the investment securities held to maturity portfolio into the
available for sale portfolio.
During 1998, the securities available for sale portfolio increased
$178.5 million. This increase was also the result of investing excess
liquidity and the reinvestment of $38.3 million in cash flow from the
securities held to maturity portfolio. The excess liquidity in 1998 was
primarily from the Berkshire branch acquisition in which $122.5 million in
cash was received. This cash was used to paydown short-term borrowings at
the end of 1998 and establish the securities portfolio for the Berkshire
region. Additionally, the increase from 1997 to 1998 was affected by the
purchase of $40.0 million in bank-owned life insurance in 1997. Securities
available for sale were allowed to mature or were sold in 1997 in order to
provide the funding necessary to implement the bank-owned life insurance. In
1998, the securities available for sale portfolio was returned to its pre-
BOLI level. A second BOLI purchase of $16.0 million was completed in August
1999. Further discussion of BOLI is provided later in this document.
Investment securities held to maturity. The designation "securities
held to maturity"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, 1999, the balance of securities in this category was $15.8
million, $4.7 million below the balance at December 31, 1998. The primary
cause of the reduced portfolio size was the continued reinvestment of
maturities throughout 1999 into the available for sale portfolio.
Table D, Securities Available for Sale and Securities Held to Maturity
contains details of securities held to maturity at December 31, 1999, 1998
and 1997.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $16.3 million during 1999, $26.0 million in 1998 and
$30.1 million in 1997. As of December 31, 1999, money market investments
were $25.8 million as compared to $4.9 million at December 31, 1998. The
money market investment balance at December 31, 1999 was higher than usual
as the Company increased its liquidity at year end due to the uncertainties
surrounding the year 2000. No unusual activities occurred and liquidity
levels were returned to normal during early January 2000.
Internally, 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 $322.5 million in 1999 on a fully tax equivalent
basis, an increase of $12.2 million, or 3.9%, from the 1998 total of $310.3
million, and $26.6 million higher than in 1997. Of the increase in interest
income from 1998 to 1999, $22.7 million was the result of increases in
earning assets. Decreases in the yields on earning assets resulted in a
decline in interest income of $10.4 million. In 1999, the average yield on
total earning assets was 7.87% as compared to 8.14% in 1998 and 8.34% in
1997.
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 funding in 1999 increased by
$348.8 million, or 9.5%, over the average for 1998. 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 1999, 1998 and 1997.
Deposits. Total core deposits increased $345.0 million, or 11.5%, over
1998. NOW and money market accounts increased by $220.8 million, regular
savings increased $34.3 million, and non-interest bearing deposit increased
$83.6 million. There is also a small increase of $6.3 million in retail time
deposits under $100 thousand. In the relatively low interest rate
environment experienced in 1999, the indexed money market product offered is
an attractive option for our customers, thereby limiting the increase in
time deposits under $100 thousand. The majority of the increase was the
result of the Berkshire region which generated an additional $249.5 million
in deposits on average in 1999 compared to 1998. Increases were also seen in
all other market areas of the Company.
Purchased liabilities. Total purchased liabilities increased on
average from $666.8 million during 1998 to $674.2 million during 1999.
Increases in time deposit greater than $100 thousand, securities sold under
agreements to repurchase and long-term notes from FHLB were offset somewhat
by a decline in short-term notes from FHLB.
Time deposits greater than $100 thousand and securities sold under
repurchase agreements continue to be important sources of purchased
liabilities. Time deposits greater than $100 thousand averaged $259.8
million, or 38.5% of purchased liabilities, and 6.5% of total net funding of
the Company. This is an increase of $37.5 million from the 1998 average.
Securities sold under repurchase agreements averaged $201.4 million or 29.9%
of the purchased liabilities and 5.0% of total net funding of the Company
during 1999. This is an increase of $36.5 million, or 22.1%, from 1998. The
Company enters into sales of securities under short-term, usually overnight,
fixed coupon, repurchase agreements with customers. Such agreements are
treated as financings and the obligations to repurchase securities sold are
reflected as liabilities.
Average borrowings from the FHLB were shifted slightly from short- to
long-term in response to the movement in interest rates. Short-term
borrowings from the FHLB decreased $84.0 million on average from the year
ended December 31, 1998. The decrease in short-term FHLB borrowings was the
result of paydowns and the refinancing of approximately $30.0 million to
longer-term debt at more favorable rates during late 1998 and early 1999.
Long-term advances from the Federal Home Loan Bank increased on average from
$53.9 million for the year ended December 31, 1998 to $65.8 million for the
year ended December 31, 1999. Scheduled maturities of short-term advances
were replaced with long-term advances in response to movements in interest
rates while maintaining the Company's interest rate risk profile within
established guidelines. The year end balance for short-term FHLB borrowings
as of December 31, 1998 was unusual as the cash received in Berkshire branch
acquisition was used to paydown a significant amount of the short-term
borrowings of the Company at that point. The balance as of December 31, 1998
was $30.0 million compared to $265.0 million as of December 31, 1999 and
$263.0 million as of December 31, 1997. As can be seen by the average
balances, the excess cash was promptly invested in securities available for
sale and used to support loan growth and short-term borrowings returned to
more normal level.
Bank Debt. Average bank debt of $6.3 million during 1999 primarily
represents the 1999 funding of the acquisition of North American Bank
Corporation ("NAB"). In November 1999, this debt was prepaid in full by the
Company. A $55 thousand prepayment penalty was incurred. The only bank term
debt outstanding as of December 31, 1999 was $70 thousand related to the
funding of the Employee Stock Ownership Plan of Evergreen Bank. This loan is
an adjustable rate loan that was paid in full in January 2000.
Interest expense summary. Total interest expense was $141.6 million in
1999, a decrease of $3.1 million, or 2.1% as compared to 1998. The decrease
in interest expense was the result of the Company lowering its cost of
funding given current interest rates and the significant increase in core
deposits. Increased levels of interest-bearing liabilities contributed $10.9
million to the increase while the decrease in rates paid decreased interest
expense by $13.9 million. The cost of interest-bearing liabilities was 4.04%
in 1999, a decrease of 43 basis points from 1998.
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, 1999 were scheduled to mature as follows:
<TABLE>
<CAPTION>
<S> <C>
3 months or less $147,671
Over 3 to 6 months 67,129
Over 6 to 12 months 51,703
Over 12 months 24,975
--------
Total $291,478
========
</TABLE>
Net Interest Income
Net interest income for 1999 of $180.9 million was $15.3 million, or
9.2% higher than that recognized in 1998. The yield on earning assets
declined by 27 basis points in 1999 to 7.87%, while the cost of interest-
bearing liabilities decreased 43 basis points. Of the change in net interest
income of $15.3 million, $11.8 million was due to increased volume and $3.5
million was due to changes in interest rates. The net interest margin was
4.41% in 1999, 4.34% in 1998 and 4.58% in 1997.
While interest rates generally increased during 1999, the competition
for quality credits resulted in lower asset yields. The decrease in interest
expense was the result of the Company lowering its cost of funding given the
significant increase in core deposits.
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 still accruing interest. Also included in non-performing assets
are foreclosed and repossessed non-real estate assets.
NPAs were $14.5 million at December 31, 1999, a decrease of $9.8
million, or 40.5%, from December 31, 1998. The ratio of NPAs to total assets
at December 31, 1999, was .32% compared to .55% at December 31, 1998. The
decrease during this period was primarily due to the removal of one large
commercial credit from troubled debt restructuring ("TDR") status in January
1999. The credit was designated a TDR in the third quarter of 1998.
Prinicipal and interest payments were current for the remainder of 1998, and
since the loan was rewritten at a market interest rate, the TDR status was
removed in January of 1999. NPAs at December 31, 1997 were $23.3 million.
Table I, Non-performing Assets, contains the details of NPAs for the last
five years.
Non-performing loans ("NPLs") at December 31, 1999 were $13.9 million,
a net decrease of $7.1 million, or 33.9%, from December 31, 1998. This
reduction was primarily due to the removal of one large commercial credit
from TDR status in January 1999 as noted above. Delinquency rates in the
residential portfolio are consistent with trends seen regionally and
nationally. Given the possibility of further 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 charge-offs, management does not expect it to materially
affect the Company's performance during the next year.
The recorded investment in loans considered to be impaired totaled
$5.5 million as of December 31, 1999 and $13.6 million as of December 31,
1998. The related allowances for loan losses on these impaired loans were
$708 thousand and $2.0 million as of December 31, 1999 and 1998,
respectively. At December 31, 1999 and 1998, there were no impaired loans
which did not have an allowance for loan losses determined in accordance
with SFAS 114.
As of December 31, 1999, management is not aware of any credits that
pose significant adverse risk to eventual full collection, other than those
designated as NPLs.
Total other real estate owned and repossessed assets were $597
thousand at the end of 1999, down $2.7 million from one year earlier. During
1999, OREO was at its lowest level in five years primarily due to the
relatively strong economic environment. Management expects the number of
OREO properties held and the related expenses to increase in 2000 as
interest rates continue to increase.
Allowance for loan and lease losses and provision. The allowance for
loan and lease losses is maintained at a level estimated by management to
provide adequately for risk of probable losses inherent in the current loan
and lease portfolio. The adequacy of the allowance for loan and lease losses
is monitored monthly. It is assessed for adequacy using a methodology
designed to ensure the level of the allowance reasonably reflects the loan
and lease portfolios' risk profile. It is also evaluated to ensure that it
is sufficient to absorb all reasonably estimable credit losses inherent in
the current loan and lease portfolio.
For purposes of evaluating the adequacy of the allowance, the Company
considers a number of significant factors that affect the collectibility of
the portfolio. For individually analyzed loans, these include estimates of
loss exposure, which reflect the facts and circumstances that affect the
likelihood of repayment of such loans as of the evaluation date. For
homogenous pools of loans and leases, estimates of the Company's exposure to
credit loss reflect a thorough assessment of a number of factors, which
could affect collectibility. These factors include: the size, trend,
composition, and nature; changes in lending policies and procedures,
including underwriting standards and collection, charge-off and recovery
practices; trends experienced in non-performing and delinquent loans; past
loss experience; economic trends in the Company's market; portfolio
concentrations that may affect loss experienced across one or more
components of the portfolio; the effect of external factors such as
competition, legal and regulatory requirements; and, the experience,
ability, and depth of lending management and staff. In addition, various
regulatory agencies, as an integral component of their examination process,
periodically review the Company's allowance for loan and lease losses. Such
agencies may require the Company to recognize additions to the allowance
based on their judgement about information available to them at the time of
their examination, which may not be currently available to management.
After a thorough consideration and validation of the factors discussed
above, required additions to the allowance for loan and lease losses are
made periodically by charges to the provision for loan and lease losses.
These charges are necessary to maintain the allowance at a level which
management believes is reasonably reflective of overall inherent risk of
probable loss in the portfolio. While management uses available information
to recognize losses on loans and leases, additions to the allowance may
fluctuate from one reporting period to another. These fluctuations are
reflective of changes in risk associated with portfolio content and/or
changes in management's assessment of any or all of the determining factors
discussed above.
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 1999
were $12.1 million, or .42% of average loans. While 1999 charge-offs have
increased $395 thousand from the 1998 charge-offs of $11.7 million, as a
percentage of average loans, gross charge-offs decreased to .42% in 1999
from .44% in 1998. Recoveries in 1999 on loans previously charged-off were
$5.3 million as compared to $6.2 million in 1998, representing a decrease of
$881 thousand or 14.3%. As a result of these two factors, net charge-offs of
$6.8 million in 1999 increased $1.3 million or 23.0% from net charge-offs of
$5.6 million in 1998. Net charge-offs as a percentage of average loans also
increased in 1999 to .24% from .21% of average loans in 1998.
The provision for loan and lease losses ("provision") in 1999 was $9.5
million, or .33% of average loans. In 1998, the provision was $9.3 million,
or .35% of average loans, while in 1997, the provision was $9.4 million, or
.36% of average loans. The 1999 provision is relatively consistent with the
corresponding periods of 1998 and 1997.
Despite a reduction in the level of non-performing loans, discussed
above, the Company has experienced significant growth in its loan portfolio
overall, as well as growth in the higher credit risk loan portfolios in 1999
and 1998. Much of this growth is in the Massachusetts market area through
First Massachusetts Bank, which was formed in 1996. Commercial-related loans
(commercial, financial and agricultural, real estate, and construction and
land development) increased from $1.17 billion, or 44.2% of total loans at
December 31, 1997, to $1.35 billion, or 47.6% of total loans at December 31,
1998, and further increased to $1.53 billion, or 50.9% of total loans at
December 31, 1999. In addition, during this same time period, residential
real estate loans, the portion of the loan portfolio with the lowest credit
risk, decreased as a percentage of the total loan portfolio from 41.0% at
December 31, 1997, to 33.9% at December 31, 1999.
Much of the growth in the commercial-related loans noted above was
derived from the Massachusetts market area, an area that the Company had not
done business in prior to 1996. As the Company has become more familiar with
the Massachusetts market area, it has found that delinquency and charge-off
rates are higher than in market areas in which the Company's other
subsidiary banks operate.
Given the overall growth in the total loan portfolio and its
increasing composition of higher credit risk loan types, as well as a slight
increase in net loan charge-offs as a percentage of average loans, offset by
a reduction in non-performing loans, the provision has remained relatively
consistent between 1999, 1998 and 1997. Accordingly, the Company maintained
a steady ratio of allowance to total loans and leases of 1.57% at December
31, 1999 and 1998, and 1.46% at December 31, 1997.
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. Table K. Components of the Allowance for Loan
and Lease Losses presents the breakdown of the allowance for loan and lease
losses by loan type for the latest five-year ends.
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 adjust product prices as
necessary.
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, interest rate corridors, and interest rate cap or floor
agreements, among other things, to correct the imbalance. Banknorth has
utilized swaps, corridors and floors to address certain interest rate risk
exposures.
Significant portions 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. To protect the Company from this
occurrence, interest rate floors in the notional amount of $295.0 million,
interest rate corridors in the notional amount of $50.0 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 and corridors was $3.2
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,
1999, the unamortized balance of these interest rate floors and corridors
was $668 thousand. The estimated fair value of these floors and corridors
was a net gain of $897 thousand as of December 31, 1999. The estimated fair
value of the interest rate swap contracts was $1.7 million as of December
31, 1999.
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 be 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. Finally, there is a 200 basis point decline in rates over a
12 month period together with a dynamic balance sheet. 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 as well as repricing opportunities driven
by maturities, cash flow, and adjustable rate products which will continue
to change the risk profile. 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 L. 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, 1999, based on
various assumptions through the use of 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, 1999 interest
rate levels) forecasted change in net interest income, would not exceed 5%
from the flat rate scenario in months 1 through 12 under any of the parallel
interest rate scenario 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 that 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
1998 to 1999 by $345.0 million, or 11.5%. The Berkshire acquisition added
significantly to the deposit balances. Core deposits represented 83.1% of
total funding in 1999, 81.5% in 1998 and 81.7% in 1997. 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 1999, as reflected in Table G, was $674.2 million,
$7.4 million or 1.1% higher than in 1998. Purchased liabilities represented
16.8% of total net funding in 1999 as compared to 18.2% in 1998, and 17.9%
in 1997.
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 1999, the average securities sold under agreement to
repurchase were $201.4 million, as compared to $164.9 million in 1998.
Long-term funding, primarily through the FHLB, increased during 1999
by $11.4 million as short-term notes from the FHLB were replaced with
longer-term more favorable rate FHLB 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. Alternatively, these assets may be
pledged to secure short-term borrowings.
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.
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, 1999
and 1998, commitments to extend credit in the form of loans, including
unused lines of credit, amounted to $988.2 million and $938.4 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, 1999
and 1998, outstanding letters of credit and stand-by letters of credit were
approximately $78.0 million and $76.6 million, respectively.
Counterparty risk. Banknorth enters into interest rate swap, corridor
and floor agreements under which the Company and the swap, corridor or floor
counterparty are obligated to exchange interest payments on notional
principal amounts. For swap, corridor 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, corridor 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 $55.1 million in 1999, $13.6 million or 32.9%
higher than in 1998, and $17.2 million or 45.6% higher than 1997. Included
in the 1999 other income was a net gain of $2.6 million on the curtailment
of the Evergreen pension plan and $1.4 million of income from bank-owned
life insurance resulting from the death of a senior executive. Without these
one-time items, other operating income increased $9.7 million, or 23.3%, for
the year ended December 31, 1999 compared to the same period of 1998.
Investment management income. The Stratevest Group, N.A., the
Company's investment and financial management subsidiary, 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 $19.5 million in 1999,
an increase of $6.6 million, or 51.5%, over 1998 and $8.2 million, or 73.3%,
over 1997. The increase was primarily the result of the addition of the
Berkshire branch portfolio, as well as strong sales and market conditions
throughout the year. The Company's acquisition of approximately $1.0 billion
in investment assets as a result of the Berkshire branches purchase in
November 1998 was added to the Stratevest portfolio of managed assets. This
portion of the portfolio generated approximately $3.6 million in fees in
1999. Total assets under management totaled $4.2 billion, including $2.9
billion under discretionary management, as of December 31, 1999, compared to
total assets under management of $4.1 billion, including $2.7 billion under
discretionary management, as December 31, 1998. Total assets under
management were $2.7 billion as of December 31, 1997, including $1.5 billion
under discretionary management. Continued opportunities for increases in the
generation of Stratevest's income lie in increased sales in the
Massachusetts, New York and New Hampshire markets. The Company is
experiencing increased sales in these areas and, accordingly, management
expects continued increased levels of trust and investment management income
for 2000.
Service charges on deposit accounts. Service charges on deposit
accounts, $13.1 million in 1999, were $1.4 million, or 12.2% above 1998 and
21.9% higher than in 1997. The increased service charges over the past two
years were primarily the result of improved charge policies implemented in
late 1997 and the Berkshire branch acquisition in late 1998, which added
approximately $249.5 million in average deposits during 1999. 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 late 1997 and continued to improve throughout 1998 and 1999.
Mortgage banking income. Mortgage banking income, which is comprised
of loan servicing income, net loan transactions and gains on the sale of
mortgage servicing rights, amounted to $4.1 million for the year ended
December 31, 1999. This category of income was down $1.4 million, or 25.7%,
from the year ended December 31, 1998 and down $586 thousand, or 12.6%, from
the year ended December 31, 1997.
First, loan servicing income, primarily mortgage servicing fees at
BMC, was $1.9 million in 1999, $1.6 million in 1998 and $2.5 million in
1997. The gross servicing income declined each year between 1997 and 1999.
Although the balance of mortgage loans serviced for unrelated third parties
grew approximately 10% in each of the years, the mix of the servicing
portfolio from variable to fixed rate loans changed dramatically, primarily
between 1998 and 1999. The decline in gross servicing income was
approximately $312 thousand in 1999 compared to 1998 as the record high
refinancing activity during the low rate environment in 1998 generated a
high percentage of fixed rate loans. Gross servicing fees are lower on fixed
rate loans, thereby decreasing the gross servicing income earned in 1999. In
addition, loan servicing income was impacted by the establishment in 1998 of
a valuation reserve of $500 thousand for impairment of mortgage servicing
rights. The reserve was established as a result of the high refinancing
activity in 1998. As the activity returned to more normal levels in 1999,
the impairment reserve was reduced by $140 thousand.
The decline in loan servicing income from 1997 to 1998 was primarily
due to the establishment of the $500 thousand impairment reserve noted above
and the increase in amortization of mortgage servicing rights; no impairment
reserve was necessary in 1997. The amortization of mortgage servicing rights
was $1.3 million for 1998 compared to $1.0 million in 1997. This increase in
amortization expense is primarily related to the growth in the capitalized
mortgage servicing rights (MSRs) reflecting the continued application of new
accounting rules adopted 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, 1998. These standards require 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 decrease in the loss on sale
of loans. MSRs are amortized into servicing fee income in proportion to, and
over the period of, estimated net servicing income. Entities must measure
the impairment of MSRs based on the difference between the carrying amount
and the current estimated fair value of the MSRs.
The second source of mortgage banking income is net loan transactions.
Net loan transaction income is generated through the origination and
subsequent sale of mortgage products into the secondary mortgage market. Net
loan transaction income in 1999 of $2.1 million was significantly lower than
the record high level in 1998 of $3.4 million, but higher than the $1.2
million in 1997. In 1998, the Company experienced record level of production
throughout the year, which created strong sales activity. The sales activity
throughout 1999 returned to more normal levels, but remained strong, as
interest rates rose and refinancing activity slowed. The current production
in 1999 is primarily new mortgage originations as the home buying market was
strong and interest rates remained relatively low. As noted earlier,
management expects the level of mortgage originations to be lower in 2000,
compared to 1999, as interest rates continue to rise and the pipeline of
mortgage loans in various stages of production is much lower as of year end
1999 compared to year end 1998.
Thirdly, the Company generates mortgage banking income through the
sale of mortgage servicing rights. A portion of the mortgage loans
originated each year is generated through correspondent relationships with
other institutions. Under these correspondent arrangements, the Company
retains the servicing on these loans and the loans are normally sold to the
secondary market. At various times, when sufficient correspondent loan
servicing rights are accumulated, the correspondent servicing rights are
sold and the gain recorded. There were no sales of servicing in 1999. In
September 1998, the Company executed a contract to sell $86 million of the
servicing rights on the correspondent mortgage portfolio resulting in a net
gain of $392 thousand. In August 1997, the Company sold $130 million in
correspondent mortgage loan servicing rights resulting in a net gain of $896
thousand. These sales of the correspondent portfolio will occur periodically
given favorable market conditions. In total, the gains on sale of mortgage
servicing rights were $386 thousand and $921 thousand in 1998 and 1997,
respectively. The servicing rights were comprised primarily of residential
mortgages and second home mortgages of customers outside Banknorth's normal
market area.
Card product income. Card product income represents the fees and
interchange income generated by the use of Banknorth issued credit (Visa)
and debit cards. This income category increased $820 thousand, to $3.0
million, in 1999 as compared to 1998 as the volume of card transactions,
both credit and debit, increased given the addition of the Berkshire
customers and improved consumer acceptance and usage of the debit card
product.
Card income was down in 1998 in comparison to the year ended December
31, 1997 due to the sale of the merchant processing business in late 1997.
This business generated approximately $1.4 million in card product income
per year. Even though this service was no longer available in 1999, card
product income was down only $119 thousand from the 1997 levels due to the
increased customer base and usage in 1999.
ATM income. ATM income represents the income generated from the ATM
network operated by Banknorth. ATM income amounted to $2.7 million for the
year ended December 31, 1999 compared to $2.3 million and $1.4 million for
the years ended December 31, 1998 and 1997, respectively. The increase in
ATM income over the last year was the result of the terminal convenience
fee, assessed for non-customer usage, in all states in which the Company
operates and the addition of the Berkshire ATMs to the Banknorth network.
The increase in ATM income between 1998 and 1997 was the results of the
terminal convenience fee. In October 1997, the Company commenced charging a
terminal convenience fee for ATM transactions by non-customers. This fee
allows the Company to recover a portion of the expense of operating the ATM
network for the benefit of its customers. This fee was assessed in all
states in which the Company operates by 1999.
Net securities transactions. Net gains or losses from securities
transactions are also included in other operating income. In 1999, the
Company realized $374 thousand in net securities gains as compared $519
thousand in net gains in 1998, and $266 thousand in net gains in 1997. The
net gains recorded resulted from the normal management of the portfolio
within Banknorth guidelines given the current market conditions.
Bank-owned life insurance. In 1999, the Company recorded $2.7 million
in BOLI income compared to $2.2 million in 1998 and $77 thousand in 1997.
Banknorth purchased an additional $16.0 million of bank-owned life insurance
("BOLI") in the third quarter of 1999 to cover the Evergreen and Berkshire
region employees. As of December 31, 1999, as a result of the additional
purchase and the increase in the cash surrender value over the past two
years, the Company's total BOLI holdings increased to $60.4 million. The
BOLI program was first established in 1997 with the initial purchase of
$40.0 million. The BOLI was purchased as a financing tool for employee
benefits. The value of life insurance financing is the tax-preferred status
of life insurance cash values and death benefits and the cash flow generated
at the death of the insured. The purchase of the life insurance policy
results in an interest sensitive asset on the Company's consolidated balance
sheet that provides monthly tax-free income to the Company. The largest risk
to the BOLI program is credit risk of the insurance carriers. To mitigate
this risk, annual financial condition reviews are completed on all carriers.
Securities available for sale were allowed to mature or were sold in order
to provide the initial funding necessary to implement the bank-owned life
insurance program. The Company benefits prospectively 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.
Bank-owned life insurance claim. During the second quarter of 1999,
the Company recorded $1.4 million of income from a BOLI claim resulting from
the death of a senior executive. The income is non-recurring and tax-exempt.
Net gain on curtailment of pension plan. As noted earlier, the Company
recorded, in the first quarter of 1999, a net gain of $2.6 million from the
curtailment of the Evergreen pension plan resulting from the combination of
the former Evergreen and Banknorth pension plans following the merger. This
is a non-recurring income item. All employees of Banknorth are now
participants in a single pension plan.
Other income. Other income for 1999 exceeded 1998 levels by
approximately $1.5 million, or 34.8%, and 1997 levels by $1.8 million, or
45.8%. The largest portions of this income category are from personal
banking and commercial banking fees, including safe deposit box and official
checks. The increase is primarily as a result of the ten additional branches
acquired in the Berkshire region of Massachusetts in November 1998. Further,
during 1999, the Company's retail investment product offering generated an
additional $640 thousand in income compared to 1998 and 1997. In 1997, the
Company introduced retail investment products, including mutual funds and
fixed and variable annuities, available through NASD registered
representatives located in each bank. These products gained customer
acceptance and increased sales level in 1999.
Other Operating Expenses
Other operating expenses were $145.5 million in 1999 compared to
$152.7 million in 1998, and $127.9 million in 1997. The 1999 and 1998 other
expenses included approximately $1.2 million and $22.0 million,
respectively, in one-time merger and acquisition related expenses from the
Berkshire and Evergreen acquisitions. Further, the 1999 other expenses
included $937 thousand for the payment of management fees, plus interest, to
our defined benefit pension plan. Excluding these one-time expenses, other
operating expenses were $143.3 million in 1999, $12.6 million, or 9.6% above
expense levels in 1998, and $15.4 million, or 12.1% higher than in 1997. The
Company's efficiency ratio was 57.88% in 1999, down from 59.78% in 1998 and
61.65% in 1997.
Compensation. Compensation expense increased by $2.1 million, or 4.0%,
over 1998, and $4.5 million, or 9.0%, over 1997. The increase was primarily
due to regular salary costs given the addition of employees from the
Berkshire branch acquisition and merit increases. The additional increase
from 1997 to 1998 was the result of incentive based compensation plans which
are directly related to the overall performance of the Company and
obtainment of individual sales and performance objectives. The corporate and
sales performance were strong in both 1998 and 1999, resulting in greater
incentive based compensation costs than in 1997.
Employee benefits. Employee benefit costs remained relatively stable
during the last three years, despite the increasing compensation costs.
Payroll, pension and medical/dental insurance costs have increased, however,
the following events have kept total benefit costs stable. As of January 1,
1999, the Company merged the Evergreen Employee Stock Ownership Plan (ESOP)
into the Company's 401(k) Savings Plan. In doing so, the Company was able to
utilize the remaining unallocated stock in the ESOP to fund the Company's
401(k) match during 1999. The 401(k) matching expense amounted to $836
thousand in 1999, compared to $2.1 million and $1.7 million in 1998 and 1997,
respectively. The expense related to the 401(k) plan will return to the 1998
level in 2000. Additionally, in 1997, the establishment of a supplemental
retirement benefit plan for certain executives and directors resulted in
higher costs in that year.
Net occupancy expense. Net occupancy expense during 1999 was $12.0
million, an increase of $2.2 million, or 22.6% from 1998. Expenses in 1997
were $10.3 million. As noted earlier, in the Berkshire acquisition, the
Company acquired ten additional banking offices and their corresponding
occupancy costs.
Equipment and software. Equipment and software expense was $10.3
million, $9.4 million and $9.4 million in 1999, 1998 and 1997, respectively.
Banknorth continuously invests in upgraded technology in order to offer
enhanced products and services or to create operating efficiencies. The
increase from 1998 to 1999 was also due to a full year of expense for the
Berkshire branches.
Data processing fees. 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 $6.8 million in 1999, $6.9 million in 1998 and
$7.2 million in 1997. The decline in this expense is primarily due to the
reduction in core application processing costs as a result of the merger
with Evergreen. In 1998 and 1997, data processing costs included two
mainframe site management contracts. One contract was terminated upon the
merger with Evergreen, thereby reducing the overall data processing costs.
Further, the reduction in data processing fees between 1997 and 1998 was the
result of the termination of the merchant processing contract after the sale
of that business line.
Other real estate owned. Expenses relating to other real estate owned
and repossessed assets decreased in 1999 by $574 thousand, to $494 thousand
as compared to 1998. These expenses were $1.1 million in 1998 and $1.4
million in 1997. Included in this expense category in 1999 are adjustments
of other real estate to estimated fair value in the amount of $48 thousand
and net gains on the sale of other real estate owned and repossessed assets
in the amount of $228 thousand. Fair value adjustments in 1998 and 1997 were
$445 thousand and $438 thousand, respectively, while net gains on sale in
those years were $288 thousand and $223 thousand, respectively. Net expenses
for the maintenance, real estate taxes and property insurance relating to
these properties amounted to $674 thousand, $911 thousand, and $1.2 million
in 1999, 1998 and 1997, respectively. Management anticipates other real
estate owned and repossession expenses to increase in 2000 in comparison to
the 1999 level as the 1999 level was low due to the relatively strong
economic environment.
Printing and supplies. Printing and supplies expense remained stable
from 1998 to 1999 and decreased slightly from the 1997 level. In 1998, the
Company increased its cost control measures and outsourced the purchasing
function which allows for inventory levels to be kept low.
Advertising and Marketing. Advertising and marketing expenses were
$4.7 million in 1999, $846 thousand, or 21.9% higher than in 1998 and $1.2
million or 37.6% higher than in 1997. In 1998, Banknorth introduced a market
branding campaign and increased its marketing efforts in target markets.
This campaign was continued and increased in 1999 as the markets of the
Company increased with the Berkshire and Evergreen acquisitions.
Communication. Communications expenses totaled $3.8 million in 1999,
$3.0 million in 1998 and $2.9 million in 1997. The increase in communication
expenses was primarily due to the expansion of the voice/data communication
network to accommodate the Berkshire and Evergreen transactions.
Amortization of goodwill. Amortization of goodwill was $8.9 million in
1999 as compared to $5.7 million in 1998 and $5.3 million in 1997. The
increased goodwill amortization is the result of the Berkshire acquisition
which generated an additional $54.5 million in goodwill or $3.6 million in
amortization per year as this goodwill will be amortized over 15 years. The
2000 goodwill amortization expense is expected to remain at the $8.9 million
level.
Capital securities. The capital securities issued in May 1997, which
created additional Tier I capital, gave rise to expense of $3.2 million in
1999 and 1998. 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.
Merger and acquisition related expenses. The expenses incurred in the
merger with Evergreen and the acquisition of the Berkshire branches amounted
to approximately $1.2 million, or $788 thousand after-tax, in 1999 and $22.0
million, or $16.3 million after-tax, in 1998. The 1999 expenses were
primarily for the core systems conversion and the investment management
business conversion. The 1998 one-time expenses were primarily investment
banking fees, legal and professional services, employment-related costs,
data processing conversion and termination fees and checking reissuance
costs.
Other expenses. Other expenses totaled $17.0 million in 1999, up $4.1
million, or 31.5%, from the 1998 level. The majority of the increase was the
result of operating a larger institution with the inclusion of the Berkshire
branches and other internal growth. Operating expenses, including postage,
delivery, contributions, filing fees, franchise fees, and ATM network
charges, were all up in 1999.
In the fourth quarter of 1999, the Company recorded a $937 thousand
expense for the payment of management fees, plus interest, to our defined
benefit pension plan. These management fees had been paid by the plan in
prior years to Stratavest or predecessor trust company for services rendered
to the plan. Management, as well as legal counsel, believes that these fees
were legal, proper and reasonable for necessary fund management services
provided. The Department of Labor, during its review, contested these fees.
Rather than incur additional legal fees to argue the point, a payment of the
fees has been made. The plan is over funded and the effect of the payment
will be to reduce future pension expenses.
Further, the Company increased its investment in low-income housing
partnerships during 1999. The increased investment benefits the communities
in which the Company operates and provides favorable tax benefits. These
investments, however, are written down as the projects are completed and
age. The writedowns of these investments resulted in an additional $500
thousand in expense in 1999 in comparison to 1998.
Other expenses declined between 1997 and 1998 primarily due to
expenses for directors' costs, insurance and postage. The directors' costs
declined due the change in the deferred compensation plan for directors.
Prior to July 1, 1997, the directors' deferred compensation plan was a cash
based plan tied in part to the performance of Banknorth stock and, therefore,
its expense was affected by the change in the stock price of Banknorth. This
resulted in $364 thousand more in directors' expense in 1997 compared to
1998. The plan was amended as of July 1, 1997 such that the ultimate
distribution of the equity based portion of the director deferred compensation
will be made in Banknorth common stock based on the stock price at the time
the fees are earned.
SUBSIDIARY BANK MERGER
On May 24, 1999, the Company merged one of its subsidiary banks,
Woodstock National Bank, into another subsidiary bank, First Vermont Bank,
with Woodstock National Bank's three offices becoming branch offices of
First Vermont Bank. The conversion costs totaled approximately $400
thousand.
YEAR 2000 COMPLIANCE
In order to protect the integrity of the banking system, the Federal
Reserve Board and other federal banking regulatory agencies (collectively
known as the "Federal Financial Institutions Examination Council,"or
"FFIEC") issued guidelines to financial institutions for addressing the Year
2000 problem and set milestones that financial institutions were expected to
meet in becoming Year 2000 compliant and testing to assure compliance. All
FFIEC guidelines were met by the Company, and all of Banknorth's mission
critical systems were successfully operating as of January 1, 2000. However,
other Year 2000 computer problems may still arise during the year.
The economic cost of the Year 2000 Project included not just direct
incremental amounts expended by Banknorth for repairing, upgrading or
replacing hardware, software and facilities, but also the use of internal
resources devoted to the Year 2000 Project that would otherwise have been
devoted to other business opportunities. It is difficult to quantify the
economic cost of internal resources of the Project. However, Banknorth
estimated that over the life of this Project, between 1996 and 2000, it
utilized or will utilize approximately $6.0 million to $6.5 million of
internal resources on this effort. These are internal resources that would
have been utilized for other business opportunities and do not necessarily
represent additional operating expenditures or costs. As of December 31,
1999, approximately $6.3 million of these amounts had been expended. The
remaining amount of $200 thousand is designated for any additional
remediation work which might be needed during the Year 2000. Further,
Banknorth's direct incremental expenditures for the Year 2000 Project were
approximately $1.7 million over this five-year period. Although this amount
includes hardware and equipment expenditures, which would have been made
even absent the Year 2000 problem as part of normal operations, such
expenditures are included as Year 2000 direct expenses since the timing of
these purchases and upgrades was accelerated due to the Year 2000 Project.
Previous estimates by the Company indicated that the direct incremental
expenditures would be $3.7 million over this five-year period. However, the
purchase and installation of a new branch platform, included in our original
estimate, is no longer required due to the pending merger with PHFG.
As noted earlier, the Company has satisfied the FFIEC guidelines
described above and completed its Year 2000 compliance program. The Company
does not presently foresee any additional costs (other than the internal
costs to monitor the issue) or issues with its Year 2000 compliance,
however, no reassurance can be given on future unforeseen events.
INCOME TAXES
In 1999, Banknorth recognized income tax expense of $23.6 million, as
compared to $14.5 million in 1998 and $20.2 million in 1997. 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, including loans, securities and
BOLI, as well as tax credits received on low-income housing projects.
REGULATORY ENVIRONMENT
The banking industry in general is subject to various monetary and
fiscal policies and regulations, which include those determined by the
Federal Reserve Board, the Office of the Comptroller of the Currency,
Federal Deposit Insurance Corporation, state regulators and the Office of
Thrift Supervision, which policies and regulations could affect the
Company's results. Other factors that may cause actual results to differ
from the forward-looking statements include competition with other local,
regional and international banks, savings and loan associations, credit
unions and other non-bank financial institution, such as investment banking
firms, investment advisory firms and brokerage firms, mutual funds and
insurance companies, as well as other entities which offer financial
services, located both within and without the United States; interest rate,
market and monetary fluctuations; inflation; general economic conditions and
economic conditions in the geographic regions and industries in which the
Company operates; introduction and acceptance of new banking-related
products, services and enhancements; fee pricing strategies, mergers and
acquisitions and their integration into the Company, and management's
ability to manage these and other risks.
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
planned to buy back up to 5%, or 782,665 shares of its outstanding common
stock. As part of the merger with Evergreen, however, the stock buyback
program was rescinded in July 1998. As of December 31, 1999, the Company
held 100,661 treasury shares, all of which were purchased under the October
1997 stock buyback plan.
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, $.16 per share in 1998, $.18 per share in 1999 and most recently to
$.20 per share in 2000. The Board makes decisions regarding payment of
dividends based upon the Com-pany's earnings outlook and other relevant
factors.
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 were issued April 6, 1998, to shareholders of record on March 20,
1998. The stock split was recorded as of December 31, 1997 by a transfer of
$7.8 million from capital surplus to common stock, representing the $1.00
par value for each additional share issued. All per share data has been
restated to reflect the splits.
The Company's principal source of funds to pay cash dividends and the
cost of capital securities and to service long-term debt requirements is
dividends from its subsidiary banks. Various laws and regulations restrict
the ability of banks to pay dividends to their shareholders. During 1998, as
part of its plan to adequately capitalize FMB for regulatory purposes after
the Berkshire acquisition and to allow Stratevest to purchase the private
banking relationships assoicated with the Berkshire branches, the Company
re-deployed accumulated capital of certain of its subsidiary banks through
the payment of a special dividend. Because the special dividend exceeded
applicable regulatory limitations, the subsidiary banks obtained approval
from the applicable regulatory agencies for the payment of that portion of
the dividend.
Additionally, in connection with the Evergreen merger, Evergreen Bank
paid a special dividend to the parent company. As the special dividend
exceeded applicable regulatory limitations, Evergreen Bank obtained approval
from the OCC for the payment of that portion of the dividend which exceeded
such regulatory limitations.
As a result of these capital redeployments, 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, 1999, 1998 and 1997, the Company was well-capitalized
according to the regulatory definitions. Table M, Capital Ratios, reveals
the components of capital and the changes from 1997 through 1999.
TABLE A. Mix of Average Earning Assets
<TABLE>
<CAPTION>
Year Ended % of Percentage of
December 31, Total Total Earning Assets
----------------------------------------------------------------------
(Dollars in thousands) 1999 1998 Change Change 1999 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income and unamortized
loan fees and costs:
Commercial, financial and agricultural $ 581,834 $ 591,601 $ (9,767) (3.6)% 14.2% 15.5%
Construction and land development 65,171 39,519 25,652 9.5 1.6 1.0
Commercial real estate 777,717 584,610 193,107 71.7 19.0 15.3
Residential real estate 1,024,303 1,059,073 (34,770) (12.9) 25.0 27.7
Credit card receivables 31,653 28,859 2,794 1.0 0.8 0.8
Lease receivables 79,556 76,132 3,424 1.3 1.9 2.0
Other installment 333,576 304,375 29,201 10.8 8.2 8.0
-------------------------------------------------------------------
Total loans, net of unearned income and
unamortized loan fees and costs 2,893,810 2,684,169 209,641 77.8 70.7 70.3
Securities available for sale:
U.S. Treasuries and Agencies 167,703 236,840 (69,137) (25.7) 4.1 6.2
States and political subdivisions 40,459 7,094 33,365 12.4 1.0 0.2
Mortgage-backed securities 693,986 526,417 167,569 62.2 17.0 13.8
Corporate debt securities 194,462 214,149 (19,687) (7.3) 4.8 5.6
Equities and other securities 49,139 45,305 3,834 1.4 1.2 1.2
Net unrealized gain (loss) (10,873) 8,272 (19,145) (7.1) (0.3) 0.2
-------------------------------------------------------------------
Total securities available for sale, at fair
value 1,134,876 1,038,077 96,799 35.9 27.8 27.2
Investment securities held to maturity:
U.S. Treasuries and Agencies 3,070 12,628 (9,558) (3.5) 0.1 0.3
States and political subdivisions 10,393 12,573 (2,180) (0.8) 0.3 0.3
Mortgage-backed securities 4,651 10,805 (6,154) (2.3) 0.1 0.3
Corporate debt securities 10 10 - - - -
-------------------------------------------------------------------
Total investment securities held to maturity,
at amortized cost 18,124 36,016 (17,892) (6.6) 0.5 0.9
Loans held for sale 26,360 35,708 (9,348) (3.5) 0.6 0.9
Money market investments 16,339 26,027 (9,688) (3.6) 0.4 0.7
-------------------------------------------------------------------
Total earning assets $4,089,509 $3,819,997 $269,512 100.0% 100.0% 100.0%
===================================================================
</TABLE>
TABLE B. Loan Portfolio
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial,
and agricultural $ 632,830 21.0% $ 690,170 24.3% $ 566,300 21.4% $ 525,685 21.0% $ 459,250 23.6%
Real Estate:
Construction and land
development 81,431 2.7 45,704 1.6 37,778 1.4 31,629 1.3 22,579 1.2
Commercial 819,123 27.2 615,503 21.7 563,566 21.3 531,364 21.2 398,586 20.5
Residential 1,020,498 33.9 1,041,667 36.7 1,082,235 41.0 1,018,964 40.6 723,483 37.1
-----------------------------------------------------------------------------------------------------
Total real estate 1,921,052 63.8 1,702,874 60.0 1,683,579 63.7 1,581,957 63.1 1,144,648 58.8
-----------------------------------------------------------------------------------------------------
Credit card receivables 32,653 1.1 33,205 1.2 25,669 1.0 24,563 1.0 26,867 1.4
Lease receivables 78,371 2.6 79,001 2.8 76,302 2.9 70,396 2.8 47,055 2.4
Other installment 345,091 11.5 331,856 11.7 290,244 11.0 303,166 12.1 268,011 13.8
-----------------------------------------------------------------------------------------------------
Total installment 456,115 15.2 444,062 15.7 392,215 14.9 398,125 15.9 341,933 17.6
-----------------------------------------------------------------------------------------------------
Total loans 3,009,997 100.0 2,837,106 100.0 2,642,094 100.0 2,505,767 100.0 1,945,831 100.0
Less: Allowance for loan
losses 47,177 1.6 44,537 1.6 38,551 1.5 35,913 1.4 34,210 1.8
-----------------------------------------------------------------------------------------------------
Net loans $2,962,820 98.4% $2,792,569 98.4% $2,603,543 98.5% $2,469,854 98.6% $1,911,621 98.2%
=====================================================================================================
</TABLE>
TABLE C. Maturities and Sensitivities of Loans to Changes in Interest Rates
<TABLE>
<CAPTION>
At December 31, 1999, 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 $206,805 $229,562 $196,463 $632,830
Construction and land development 42,970 38,461 - 81,431
--------------------------------------------------
Total $249,775 $268,023 $196,463 $714,261
==================================================
Predetermined interest rates $122,039 $143,921 $ 99,664 $365,624
Floating interest rates 127,736 124,102 96,799 348,637
--------------------------------------------------
Total $249,775 $268,023 $196,463 $714,261
==================================================
</TABLE>
TABLE D. Securities Available for Sale and Investment Securities Held to
Maturity
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
(Dollars in thousands) 1999 1998 1997
--------------------------------------
<S> <C> <C> <C>
Securities available for sale:
U.S. Treasuries and Agencies $ 174,777 $ 165,683 $ 239,524
States and political subdivisions 48,619 7,806 5,251
Mortgage-backed securities 710,066 711,540 464,405
Corporate debt securities 203,395 188,154 200,710
Equities and other securities 49,675 48,791 43,400
Net unrealized gain (loss) (31,510) 5,891 5,263
--------------------------------------
Fair value of securities available for sale $1,155,022 $1,127,865 $ 958,553
======================================
Investment securities held to maturity:
U.S. Treasuries and Agencies $ 2,797 $ 3,582 $ 29,385
States and political subdivisions 9,223 11,443 13,555
Mortgage-backed securities 3,789 5,510 15,676
Corporate debt securities 10 10 10
--------------------------------------
Amortized cost of investment securities held to maturity $ 15,819 $ 20,545 $ 58,626
======================================
Fair value of investment securities held to maturity $ 15,880 $ 21,606 $ 59,832
======================================
Excess of fair value over recorded value $ 61 $ 1,061 $ 1,206
Fair value as a % of amortized cost 100.4% 105.2% 102.1%
<FN>
Note: There were no holdings of any single issuer that, when taken in
aggregate, exceeded 10% of shareholders' equity at December 31, 1999.
</FN>
</TABLE>
TABLE E. Investment Portfolio Maturity Distribution and Yields
<TABLE>
<CAPTION>
As of December 31, 1999
--------------------------------------------
Securities Available Investment Securities
For Sale Held to Maturity
--------------------------------------------
(Dollars in thousands) Amount Yield(FTE) Amount Yield(FTE)
--------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasuries and Agencies:
Within 1 year $ 20,233 6.82% $ 795 5.45%
1 to 5 years 78,994 5.16 - -
6 to 10 years 75,550 6.80 - -
Over 10 years - - 2,002 8.06
-----------------------------------------
$ 174,777 6.06% $ 2,797 7.32%
=========================================
States and political subdivisions:
Within 1 year $ 1,263 7.23% $ 1,201 8.53%
1 to 5 years 11,100 6.34 4,701 9.21
6 to 10 years 36,256 5.42 2,750 8.66
Over 10 years - - 571 8.73
-----------------------------------------
$ 48,619 5.67% $ 9,223 8.93%
=========================================
Mortgage-backed securities:
Within 1 year $ - -% $ 2,415 5.85%
1 to 5 years 28,076 6.92 1,328 6.00
6 to 10 years 116,798 6.83 46 8.50
Over 10 years 565,192 6.79 - -
-----------------------------------------
$ 710,066 6.80% $ 3,789 5.94%
=========================================
Corporate debt securities:
Within 1 year $ 4,118 6.46% $ - -%
1 to 5 years 49,375 6.41 - -
6 to 10 years 31,470 6.60 10 7.00
Over 10 years 118,432 6.90 - -
-----------------------------------------
$ 203,395 6.73% $ 10 7.00
=========================================
Equities and other securities:
No fixed maturity $ 49,675 4.10% $ - -%
Total securities:
Within 1 year $ 25,614 6.78% $ 4,411 6.51%
1 to 5 years 167,545 5.90 6,029 8.50
6 to 10 years 260,074 6.60 2,806 8.65
Over 10 years 683,624 6.81 2,573 8.21
No fixed maturity 49,675 4.10 - -
Valuation reserve (31,510) - - -
-----------------------------------------
$1,155,022 6.70% $15,819 7.93%
=========================================
<FN>
Note: Actual maturities may differ from contractural maturities because, in
certain cases, borrowers have the right to call or prepay obligations
with or without call or prepayment penalties.
</FN>
TABLE F. Average Balances, Yields, and Net Interest Margins
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------------------------
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 $ 16,339 $ 779 4.77% $ 26,027 $ 1,438 5.53% $ 30,132 $ 1,680 5.58%
Securities available for
sale, at fair value
(1 and 2) 1,134,876 71,281 6.22 1,038,077 65,898 6.40 859,674 55,292 6.42
Loans held for sale 26,360 2,087 7.92 35,708 2,565 7.18 16,481 1,281 7.77
Investment securities held
to maturity (2) 18,124 1,454 8.02 36,016 2,832 7.86 61,508 4,735 7.70
Loans, net of unearned
income and unamortized
loan fees and costs
(2 and 3) 2,893,810 246,908 8.53 2,684,169 237,530 8.85 2,578,746 232,921 9.03
-----------------------------------------------------------------------------------------------
Total earning assets 4,089,509 322,509 7.87 3,819,997 310,263 8.14 3,546,541 295,919 8.34
Cash and due from banks 132,024 105,642 101,023
Allowance for loan losses (46,538) (41,144) (37,282)
Other assets 247,265 178,124 132,887
----------------------------------------------------------------------------
Total assets $4,422,260 $4,062,619 $3,743,169
============================================================================
Interest-bearing liabilities:
NOW accounts & money
market savings $1,461,822 48,042 3.29 $1,241,029 44,676 3.60 $1,028,987 35,323 3.43
Regular savings 343,639 8,168 2.38 309,341 7,968 2.58 334,796 8,805 2.63
Time deposits $100
thousand and greater 259,810 13,641 5.25 222,277 12,375 5.57 184,273 10,249 5.56
Time deposits under $100
thousand 1,018,364 51,480 5.06 1,012,054 55,462 5.48 1,014,224 55,066 5.43
-----------------------------------------------------------------------------------------------
Total interest-bearing
deposits 3,083,635 121,331 3.93 2,784,701 120,481 4.33 2,562,280 109,443 4.27
Short-term borrowed funds 348,538 15,819 4.54 390,641 20,138 5.16 389,586 20,827 5.35
Long-term debt 72,130 4,452 6.17 63,776 4,039 6.33 47,139 3,065 6.50
-----------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 3,504,303 141,602 4.04 3,239,118 144,658 4.47 2,999,005 133,335 4.45
-----------------------------------------------------------------------------------------------
Non-interest bearing deposits 512,856 429,272 385,540
Other liabilities 46,314 41,108 35,130
Capital securities 30,000 30,000 20,137
Shareholders' equity 328,787 323,121 303,357
-----------------------------------------------------------------------------------------------
Total liabilities, capital
securities and shareholders'
equity $4,422,260 $4,062,619 $3,743,169
============================================================================
Net interest income $180,907 $165,605 $162,584
==========================================================================
Interest rate differential 3.83% 3.67% 3.89%
======================================================================
Net interest margin 4.41% 4.34% 4.58%
======================================================================
<FN>
Notes:
<F1> For the purpose of these computations, the average yield is based on
amortized cost.
<F2> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal (35%) rate.
<F3> Includes principal balances of non-accrual loans and industrial
revenue bonds.
</FN>
</TABLE>
TABLE G. Average Sources of Funding
<TABLE>
<CAPTION>
Percentage of
Years Ended December 31, Change Total net funding
-------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 Amount Percent 1999 1998 1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 512,856 $ 429,272 $ 83,584 19.5% 12.8% 11.7% 11.4%
Retail deposits:
Regular savings 343,639 309,341 34,298 11.1 8.6 8.4 9.9
Time deposits under $100
thousand 1,018,364 1,012,054 6,310 0.6 25.3 27.6 30.0
NOW accounts & money
market savings 1,461,822 1,241,029 220,793 17.8 36.4 33.8 30.4
-------------------------------------- ----------------------
Total retail deposits 2,823,825 2,562,424 261,401 10.2 70.3 69.8 70.3
-------------------------------------- ----------------------
Total core deposits 3,336,681 2,991,696 344,985 11.5 83.1 81.5 81.7
Time deposits $100 thousand and
greater 259,810 222,277 37,533 16.9 6.5 6.1 5.4
Federal funds purchased 14,486 9,292 5,194 55.9 0.4 0.3 0.2
Securities sold under agreements
to repurchase 201,400 164,880 36,520 22.1 5.0 4.5 4.2
Borrowings from U.S. Treasury 15,186 14,987 199 1.3 0.4 0.4 0.4
Short-term notes from FHLB 117,466 201,482 (84,016) (41.7) 2.9 5.4 6.7
Long-term notes from FHLB 65,849 53,900 11,949 22.2 1.6 1.5 1.0
-------------------------------------- ----------------------
Total purchased liabilities 674,197 666,818 7,379 1.1 16.8 18.2 17.9
Bank term loan 6,281 9,876 (3,595) (36.4) 0.1 0.3 0.4
-------------------------------------- ----------------------
Total net funding $4,017,159 $3,668,390 $ 348,769 9.5% 100% 100% 100%
=========================================================================
</TABLE>
TABLE H. Volume and Yield Analysis
<TABLE>
<CAPTION>
1999 vs. 1998 1998 vs. 1997
-----------------------------------------------------------------------------------------------
Due to Due to
(In thousands) 1999 1998 Change Volume Rate 1998 1997 Change Volume Rate
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income (FTE):
Money market investments $ 779 $ 1,438 $ (659) $ (461) $ (198) $ 1,438 $ 1,680 $ (242) $ (227) $ (15)
Securities available for
sale, at fair value 71,281 65,898 5,383 7,237 (1,854) 65,898 55,292 10,606 10,778 (172)
Loans held for sale 2,087 2,565 (478) (742) 264 2,565 1,281 1,284 1,381 (97)
Investment securities
held to maturity 1,454 2,832 (1,378) (1,436) 58 2,832 4,735 (1,903) (2,001) 98
Loans 246,908 237,530 9,378 17,967 (8,589) 237,530 232,931 4,599 9,241 (4,642)
--------------------------- ---------------------------
Total interest income 322,509 310,263 12,246 22,671 (10,425) 310,263 295,919 14,344 21,440 (7,096)
--------------------------- ---------------------------
Interest expense:
NOW accounts & money
market savings 48,042 44,676 3,366 7,213 (3,847) 44,676 35,323 9,353 7,604 1,749
Regular savings 8,168 7,968 200 819 (619) 7,968 8,805 (837) (670) (167)
Time deposits $100
thousand and greater 13,641 12,375 1,266 1,977 (711) 12,375 10,249 2,126 2,108 18
Time deposits under
$100 thousand 51,480 55,462 (3,982) 269 (4,251) 55,462 55,066 396 (111) 507
Short-term borrowed funds 15,819 20,138 (4,319) (1,897) (2,422) 20,138 20,827 (689) 51 (740)
Long-term debt 4,452 4,039 413 515 (102) 4,039 3,065 974 1,054 (80)
--------------------------- ---------------------------
Total interest expense 141,602 144,658 (3,056) 10,872 (13,928) 144,658 133,335 11,323 10,723 600
-------------------------------------------------------------------------------------------------
Net interest income (FTE) $180,907 $165,605 $15,302 $11,799 $ 3,503 $165,605 $162,584 $ 3,021 $10,717 $(7,696)
=================================================================================================
<FN>
Increases and decreases in interest income and interest expense due to both
rate and volume have been allocated to volume on a consistent basis.
</FN>
</TABLE>
TABLE I. Non-Performing Assets
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans on a non-accrual basis:
Commercial, financial and agricultural $ 2,083 $ 3,816 $ 6,636 $ 6,646 $ 4,839
Real estate:
Construction and land development - 19 - 39 103
Commercial 3,055 2,518 2,645 4,443 3,993
Residential 7,073 6,153 8,719 9,470 7,959
Other installment - 23 176 187 46
-----------------------------------------------------------
Total non-accrual 12,211 12,529 18,176 20,785 16,940
Restructured loans:
Real estate:
Commercial - 5,940 - 849 426
Residential 28 32 36 39 85
Other installment - 5 6 10 55
-----------------------------------------------------------
Total restructured 28 5,977 42 898 566
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 143 1,216 494 214 474
Real estate:
Commercial 146 62 125 - 64
Residential 93 36 721 1,034 887
Credit card receivables 241 177 119 111 105
Lease receivables 279 185 151 48 28
Other installment 745 812 652 1,217 819
-----------------------------------------------------------
Total past-due 90 days or more and
still accruing 1,647 2,488 2,262 2,624 2,377
-----------------------------------------------------------
Total non-performing loans 13,886 20,994 20,480 24,307 19,883
-----------------------------------------------------------
Other real estate owned 512 3,324 2,141 2,397 4,953
Non-real estate and repossessed assets 85 11 654 218 76
-----------------------------------------------------------
Total foreclosed and repossessed assets (F/RA) 597 3,335 2,795 2,615 5,029
-----------------------------------------------------------
Total non-performing assets $14,483 $24,329 $23,275 $26,922 $24,912
===========================================================
Allowance for loan losses $47,177 $44,537 $38,551 $35,913 $34,210
ALL coverage of non-performing loans 339.74% 212.14% 188.24% 147.75% 172.06%
Non-performing assets as a % of (loans & F/RA) 0.48 0.86 0.88 1.07 1.28
Non-performing assets to total assets 0.32 0.55 0.59 0.76 0.90
<FN>
Note: Installment loans are generally charged off at 120 days past due.
</FN>
</TABLE>
TABLE J. Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans outstanding-end of year $3,009,997 $2,837,106 $2,642,094 $2,505,767 $1,945,831
Average loans outstanding 2,893,810 2,684,169 2,578,746 2,362,251 1,910,737
Allowance for loan losses at
Beginning of year 44,537 38,551 35,913 34,210 40,189
Allowance related to
acquisitions - 2,200 - 1,650 -
Loans charged off:
Commercial, financial and
agricultural (972) (2,318) (1,803) (1,654) (9,852)
Real estate:
Construction and land
development (160) - - (73) (357)
Commercial (2,711) (209) (669) (2,122) (2,287)
Residential (859) (1,916) (2,238) (1,961) (2,060)
--------------------------------------------------------------------------
Total real estate (3,730) (2,125) (2,907) (4,156) (4,704)
Credit card receivables (1,112) (878) (691) (788) (576)
Lease receivables (1,377) (1,646) (1,510) (867) (410)
Other installment (4,934) (4,763) (5,453) (4,575) (3,157)
--------------------------------------------------------------------------
Total installment (7,423) (7,287) (7,654) (6,230) (4,143)
--------------------------------------------------------------------------
Total loans charged off (12,125) (11,730) (12,364) (12,040) (18,699)
Recoveries on loans:
Commercial, financial and
agricultural 692 1,673 1,325 1,008 2,478
Real estate:
Construction and land
development 11 15 87 60 540
Commercial 494 542 638 1,039 1,430
Residential 386 829 636 681 318
--------------------------------------------------------------------------
Total real estate 891 1,386 1,361 1,780 2,288
Credit card receivables 167 111 125 144 162
Lease receivables 906 1,190 970 695 277
Other installment 2,634 1,811 1,849 1,426 1,340
--------------------------------------------------------------------------
Total installment 3,707 3,112 2,944 2,265 1,779
--------------------------------------------------------------------------
Total recoveries on loans 5,290 6,171 5,630 5,053 6,545
--------------------------------------------------------------------------
Loans charged off, net
of recoveries (6,835) (5,559) (6,734) (6,987) (12,154)
--------------------------------------------------------------------------
Provision for loan losses 9,475 9,345 9,372 7,040 6,175
--------------------------------------------------------------------------
Allowance for loan losses at
end of year $47,177 $ 44,537 $ 38,551 $ 35,913 $ 34,210
==========================================================================
Loans charged off, net, as a
% of average total loans 0.24% 0.21% 0.26% 0.30% 0.64%
Provision for loan losses as
a % of average total loans 0.33 0.35 0.36 0.30 0.32
Allowance for loan losses as
a % of of year-end total loans 1.57 1.57 1.46 1.43 1.76
</TABLE>
Table K. Components of the Allowance for Loan Losses
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------
% of % of % of % of % of
(Dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and commercial
real estate $31,487 2.1% $28,491 2.1% $23,636 2.0% $23,455 2.2% $22,426 2.5%
Residential real estate 7,338 0.7% 7,413 0.7% 6,984 0.6% 6,868 0.7% 6,859 0.9%
Installment 8,352 1.8% 8,633 1.9% 7,931 2.0% 5,590 1.4% 4,925 1.4%
-------------------------------------------------------------------------------------------
Total allowance for loan
losses $47,177 1.6% $44,537 1.6% $38,551 1.5% $35,913 1.4% $34,210 1.8%
===========================================================================================
</TABLE>
Table L. Interest Rate Risk
<TABLE>
<CAPTION>
Percentage change in Net Interest Income from 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 held to maturity,
securities available for sale,
and money market investments 1.68% -2.03% 7.59% -7.15% 4.69% -4.63%
Total loans * 3.97% -3.94% 11.82% -12.04% 7.92% -8.02%
Total interest income 3.42% -3.48% 10.43% -11.17% 6.96% -7.37%
Interest-bearing transaction accounts 17.22% -11.78% 36.00% -23.74% 26.61% -17.76%
Time deposits 5.96% -5.49% 26.32% -19.05% 16.16% -12.28%
Total interest-bearing deposits 11.26% -8.45% 30.87% -21.25% 21.07% -14.86%
Short-term borrowed funds 16.66% -16.59% 38.72% -38.17% 27.58% -27.27%
Long-term debt 1.39% -1.43% 12.36% -12.38% 6.89% -6.92%
Total borrowings 14.46% -14.40% 34.83% -34.36% 24.56% -24.30%
Total interest expense 11.94% -9.73% 31.71% -24.02% 21.81% -16.87%
Net interest income -4.20% 2.10% -7.84% -0.13% -6.06% 0.96%
<FN>
<F*> Includes the effect of the interest rate swaps, corridors and floors,
which have notional amounts of $50.0 million, $50.0 million and $295.0
million, respectively, at December 31, 1999.
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.
Falling rate scenario: This scenario is a 200 basis point decline in
rates over a twelve month horizon together
with a dynamic balance sheet.
</FN>
</TABLE>
TABLE M. Rate of Internal Capital Generation
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average total assets 1.23% 0.71% 1.12% 1.08% 1.13%
Return on average shareholders' equity 16.59 8.95 13.78 12.97 13.67
Average equity to average assets 7.43 7.95 8.10 8.35 8.25
Dividend payout 30.75 52.12 33.33 33.07 27.27
Earnings retention rate 69.25 47.88 66.67 66.93 72.73
Internal capital generation rate 11.49 4.29 9.19 8.68 9.94
<FN>
Note: All average equity and average asset amounts include the effect of the
fair market value adjustment on securities available for sale.
</FN>
</TABLE>
TABLE N. Consolidated Capital Ratios
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
(Dollars in thousands) 1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Total risk-adjusted on-balance sheet assets (1) (3) $3,079,102 $2,880,854 $2,636,170
Total risk-adjusted off-balance sheet items 172,585 174,890 140,813
------------------------------------------
Total risk-adjusted assets $3,251,687 $3,055,744 $2,776,983
==========================================
Total risk-adjusted assets / average total assets,
net of fair value adjustments and goodwill (1) (3) 72.86% 73.49% 72.41%
Total shareholders' equity $ 341,297 $ 321,262 $ 318,128
Fair value adjustments (1) 19,995 (3,759) (3,318)
Corporation-obligated manditorily redeemable
capital securities 30,000 30,000 30,000
Goodwill (71,117) (80,224) (31,119)
Minority interest and other intangibles (3) 144 70 144
------------------------------------------
Total Tier I capital 320,319 267,349 313,835
Maximum allowance for loan and lease losses (2) 40,727 38,275 34,712
------------------------------------------
Total capital $ 361,046 $ 305,624 $ 348,547
==========================================
Quarterly average total assets, net of fair
value adjustments and goodwill (1) (3) $4,463,001 $4,158,082 $3,835,310
Allowance for loan and lease losses 47,177 44,537 38,551
Total capital to total risk-adjusted assets 11.10% 10.00% 12.55%
Tier I capital to total risk-adjusted assets 9.85 8.75 11.30
Tier I capital to total quarterly average adjusted
assets (Leverage) 7.18 6.43 8.18
<FN>
Notes:
<F1> The 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 and lease losses used in calculating
total capital is the period-end allowance for loan and lease losses or
1.25% of risk-adjusted assets prior to the allowance limitation,
whichever is lower.
<F3> Mortgage servicing assets, included in total assets on the
consolidated balance sheets, that exceed 90% of fair market value of
these assets, have been excluded in the above ratios.
</FN>
</TABLE>
Summary of Quarterly Financial Information
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------------
(in thousands, except share
and per share data) Year Q4 Q3 Q2 Q1
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest and dividend income $ 319,584 $ 82,690 $ 80,588 $ 78,448 $ 77,858
Interest expense 141,602 37,209 35,391 34,246 34,756
-----------------------------------------------------------------------
Net interest income 177,982 45,481 45,197 44,202 43,102
Provision for loan losses 9,475 2,600 2,600 2,275 2,000
-----------------------------------------------------------------------
Net interest income after
provision for loan losses 168,507 42,881 42,597 41,927 41,102
-----------------------------------------------------------------------
Other operating income:
Income from trust and investment
management fees 19,455 4,821 4,826 4,975 4,833
Service charges on deposit accounts 13,077 3,251 3,226 3,402 3,198
Mortgage banking income 4,081 743 724 1,290 1,324
Card product income 3,047 920 766 748 613
ATM income 2,718 669 759 671 619
Bank owned life insurance 2,654 819 744 552 539
Net securities transactions 374 - 6 143 225
Net gain on curtailment of pension plan 2,577 - - - 2,577
Bank owned life insurance claim 1,389 - - 1,389 -
All other 5,733 1,549 1,782 1,359 1,043
-----------------------------------------------------------------------
Total other operating income 55,105 12,772 12,833 14,529 14,971
-----------------------------------------------------------------------
Other operating expenses:
Compensation and employee benefits 67,879 16,908 16,852 17,344 16,775
Net occupancy, equipment and software 22,357 5,682 5,703 5,489 5,483
Data processing 6,758 1,333 1,556 1,767 2,102
FDIC deposit insurance and other regulatory 1,074 117 357 306 294
Other real estate owned and repossession 494 147 140 53 154
Amortization of goodwill 8,864 2,233 2,233 2,234 2,164
Capital securities 3,156 789 789 789 789
Merger and acquisition related expenses 1,233 - - 60 1,173
All other 33,702 10,191 7,685 8,344 7,482
-----------------------------------------------------------------------
Total other operating expenses 145,517 37,400 35,315 36,386 36,416
-----------------------------------------------------------------------
Income before income tax expense (benefit) 78,095 18,253 20,115 20,070 19,657
Income tax expense (benefit) 23,559 4,999 6,422 5,935 6,203
-----------------------------------------------------------------------
Net income (loss) $ 54,536 $ 13,254 $ 13,693 $ 14,135 $ 13,454
=======================================================================
Average Balances:
Loans $ 2,893,810 $ 2,963,522 $ 2,921,632 $ 2,852,496 $ 2,835,880
Loans held for sale 26,360 17,191 23,847 28,232 36,409
Securities available for sale,
at fair value 1,134,876 1,152,471 1,125,242 1,134,240 1,127,381
Investment securities, held to maturity 18,124 16,034 17,384 19,055 20,076
Money market investments 16,339 7,668 20,112 18,208 19,454
-----------------------------------------------------------------------
Total earning assets 4,089,509 4,156,886 4,108,217 4,052,231 4,039,200
Other assets 332,751 357,237 336,937 315,683 320,474
-----------------------------------------------------------------------
Total assets $ 4,422,260 $ 4,514,123 $ 4,445,154 $ 4,367,914 $ 4,359,674
=======================================================================
Non interest-bearing deposits $ 512,856 $ 535,956 $ 524,945 $ 494,857 $ 495,452
Interest-bearing deposits 3,083,635 3,098,836 3,059,319 3,091,763 3,084,735
-----------------------------------------------------------------------
Total deposits 3,596,491 3,634,792 3,584,264 3,586,620 3,580,187
Short-term borrowed funds 348,538 397,300 385,177 305,526 304,361
Long-term debt 72,130 68,521 72,577 73,337 74,141
Other liabilities 46,314 44,716 44,682 46,330 49,604
Guaranteed preferred beneficial interests
in Corporation's junior subordinated
debentures 30,000 30,000 30,000 30,000 30,000
Shareholders' equity 328,787 338,794 328,454 326,101 321,381
-----------------------------------------------------------------------
Total liabilities, guaranteed preferred
beneficial interests in Corporation's
junior subordinated debentures and
shareholders' equity $ 4,422,260 $ 4,514,123 $ 4,445,154 $ 4,367,914 $ 4,359,674
=======================================================================
Loans charged off, net of recoveries $ 6,835 $ 1,588 $ 3,570 $ 798 $ 879
Non-performing assets, p.e. 14,483 14,483 15,088 20,329 23,656
Share and Per Share Data:
Shares outstanding, net treasury stock, p.e. 23,447,731 23,447,731 23,340,073 23,255,296 23,204,585
Basic wtd. avg. number of shares 23,435,122 23,560,684 23,444,966 23,379,073 23,353,668
Basic earnings per share (Basic EPS) $ 2.33 $ 0.56 $ 0.58 $ 0.60 $ 0.58
Diluted wtd. avg. number of shares 23,734,591 23,845,836 23,754,876 23,665,780 23,663,808
Diluted earnings per share (Diluted EPS) $ 2.30 $ 0.56 $ 0.58 $ 0.60 $ 0.57
Tangible book value 11.52 11.52 11.29 10.94 10.63
Closing price at period end 26.75 26.75 29.88 33.00 28.25
Key Ratios:
Return on average assets 1.23% 1.16% 1.22% 1.30% 1.25%
Return on average shareholders' equity 16.59 15.52 16.54 17.39 16.98
Net interest margin, fte 4.41 4.40 4.42 4.44 4.39
Efficiency ratio 57.88 58.82 55.55 58.43 58.56
As a % of risk-adjusted assets, p.e. :
Total capital 11.10 11.10 10.84 10.61 10.36
Tier 1 capital 9.85 9.85 9.58 9.36 9.10
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 7.18 7.18 6.99 6.82 6.44
Tangible shareholders' equity, to
tangible assets, p.e. 5.98 5.98 5.98 5.86 5.79
<CAPTION>
1998
-----------------------------------------------------------------------
(in thousands, except share
and per share data) Year Q4 Q3 Q2 Q1
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest and dividend income $ 308,701 $ 78,656 $ 77,216 $ 77,075 $ 75,754
Interest expense 144,658 36,106 36,695 36,368 35,489
-----------------------------------------------------------------------
Net interest income 164,043 42,550 40,521 40,707 40,265
Provision for loan losses 9,345 2,335 2,335 2,335 2,340
-----------------------------------------------------------------------
Net interest income after provision for
loan losses 154,698 40,215 38,186 38,372 37,925
-----------------------------------------------------------------------
Other operating income:
Income from trust and investment
management fees 12,838 3,791 2,946 3,139 2,962
Service charges on deposit accounts 11,657 2,969 2,861 2,948 2,879
Mortgage banking income 5,492 1,391 1,812 1,195 1,094
Card product income 2,227 686 569 542 430
ATM income 2,258 635 618 523 482
Bank owned life insurance 2,229 569 567 553 540
Net securities transactions 519 526 319 103 (429)
Net gain on curtailment of pension plan - - - - -
Bank owned life insurance claim - - - - -
All other 4,253 1,079 1,149 1,105 920
-----------------------------------------------------------------------
Total other operating income 41,473 11,646 10,841 10,108 8,878
-----------------------------------------------------------------------
Other operating expenses:
Compensation and employee benefits 65,545 17,554 15,705 16,073 16,213
Net occupancy, equipment and software 19,218 4,852 4,697 4,732 4,937
Data processing 6,889 1,472 1,756 1,926 1,735
FDIC deposit insurance and other
regulatory 1,139 292 284 283 280
Other real estate owned and repossession 1,068 331 239 142 356
Amortization of goodwill 5,743 1,779 1,321 1,321 1,322
Capital securities 3,156 789 789 789 789
Merger and acquisition related expenses 21,968 21,968 - - -
All other 28,010 7,507 6,702 6,931 6,870
-----------------------------------------------------------------------
Total other operating expenses 152,736 56,544 31,493 32,197 32,502
-----------------------------------------------------------------------
Income before income tax expense (benefit) 43,435 (4,683) 17,534 16,283 14,301
Income tax expense (benefit) 14,515 (321) 5,416 5,019 4,401
-----------------------------------------------------------------------
Net income (loss) $ 28,920 $ (4,362) $ 12,118 $ 11,264 $ 9,900
=======================================================================
Average Balances:
Loans $ 2,684,169 $ 2,755,824 $ 2,675,888 $ 2,661,474 $ 2,642,333
Loans held for sale 35,708 36,490 34,435 41,921 29,926
Securities available for sale,
at fair value 1,038,077 1,123,294 1,041,605 1,016,664 969,011
Investment securities, held to maturity 36,016 22,965 26,046 38,580 56,958
Money market investments 26,027 22,376 40,415 26,110 14,968
-----------------------------------------------------------------------
Total earning assets 3,819,997 3,960,949 3,818,389 3,784,749 3,713,196
Other assets 242,622 281,190 233,103 231,505 223,890
-----------------------------------------------------------------------
Total assets $ 4,062,619 $ 4,242,139 $ 4,051,492 $ 4,016,254 $ 3,937,086
=======================================================================
Non interest-bearing deposits $ 429,272 $ 477,977 $ 431,872 $ 410,469 $ 394,254
Interest-bearing deposits 2,784,701 2,957,813 2,767,727 2,736,741 2,673,588
-----------------------------------------------------------------------
Total deposits 3,213,973 3,435,790 3,199,599 3,147,210 3,067,842
Short-term borrowed funds 390,641 320,459 382,313 424,048 438,700
Long-term debt 63,776 74,634 74,534 59,459 46,044
Other liabilities 41,108 43,466 41,825 40,374 38,710
Guaranteed preferred beneficial interests
in Corporation's junior subordinated
debentures 30,000 30,000 30,000 30,000 30,000
Shareholders' equity 323,121 337,790 323,221 315,163 315,790
-----------------------------------------------------------------------
Total liabilities, guaranteed preferred
beneficial interests in Corporation's
junior subordinated debentures and
shareholders' equity $ 4,062,619 $ 4,242,139 $ 4,051,492 $ 4,016,254 $ 3,937,086
=======================================================================
Loans charged off, net of recoveries $ 5,559 $ 1,743 $ 1,160 $ 1,654 $ 1,002
Non-performing assets, p.e. 24,329 24,329 25,694 20,110 22,773
Share and Per Share Data:
Shares outstanding, net treasury stock, p.e. 23,179,092 23,179,092 23,086,148 23,142,925 23,228,855
Basic wtd. avg. number of shares 23,277,560 23,203,566 23,226,319 23,258,549 23,430,477
Basic earnings per share (Basic EPS) $ 1.24 $ (0.19) $ 0.52 $ 0.48 $ 0.42
Diluted wtd. avg. number of shares 23,669,540 23,552,615 23,613,000 23,685,137 23,835,238
Diluted earnings per share (Diluted EPS) $ 1.22 $ (0.19) $ 0.51 $ 0.48 $ 0.42
Tangible book value 10.40 10.40 13.29 12.61 12.31
Closing price at period end 37.63 37.63 29.25 37.00 36.50
Key Ratios:
Return on average assets 0.71% (0.41)% 1.19% 1.12% 1.02%
Return on average shareholders' equity 8.95 (5.12) 14.87 14.34 12.71
Net interest margin, fte 4.34 4.31 4.26 4.36 4.44
Efficiency ratio 59.78 59.71 57.83 59.81 61.37
As a % of risk-adjusted assets, p.e. :
Total capital 10.00 10.00 12.67 12.39 12.33
Tier 1 capital 8.75 8.75 11.42 11.14 11.08
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 6.43 6.43 8.13 7.97 8.00
Tangible shareholders' equity, to
tangible assets, p.e. 5.58 5.58 7.60 7.24 7.20
<FN>
Note: All Share and per share data has been restated to give retroactive
effecto to stock split.
</FN>
</TABLE>
Item 8. Financial Statements and Supplementary Data
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, 1999 and 1998, 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, 1999. 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 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, 1999 and 1998, and
the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1999 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
January 19, 2000
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
(In thousands, except per share data) 1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $247,369 $238,953 $233,414
Interest on money market investments 779 1,438 1,680
Interest on securities available for sale 70,217 65,755 55,216
Interest on investment securities held to maturity 1,219 2,555 4,447
----------------------------------
Total interest and dividend income 319,584 308,701 294,757
----------------------------------
Interest expense:
Deposits 121,331 120,481 109,443
Short-term borrowed funds 15,819 20,138 20,827
Long-term debt 4,452 4,039 3,065
----------------------------------
Total interest expense 141,602 144,658 133,335
----------------------------------
Net interest income 177,982 164,043 161,422
Less: Provision for loan and lease losses 9,475 9,345 9,372
----------------------------------
Net interest income after provision for loan and
lease losses 168,507 154,698 152,050
----------------------------------
Other operating income:
Income from trust and investment management fees 19,455 12,838 11,223
Service charges on deposit accounts 13,077 11,657 10,725
Mortgage banking income 4,081 5,492 4,667
Card product income 3,047 2,227 3,166
ATM income 2,718 2,258 1,369
Net securities transactions 374 519 266
Bank-owned life insurance 2,654 2,229 77
Bank-owned life insurance claim 1,389 - -
Gain on sale of merchant processing - - 2,432
Net gain on curtailment of pension 2,577 - -
Other income 5,733 4,253 3,931
----------------------------------
Total other operating income 55,105 41,473 37,856
----------------------------------
Other operating expenses:
Compensation 55,186 53,068 50,642
Employee benefits 12,693 12,477 12,352
Net occupancy 12,048 9,826 10,259
Equipment and software 10,309 9,392 9,398
Data processing 6,758 6,889 7,232
FDIC deposit insurance and other regulatory 1,074 1,139 1,084
Other real estate owned and repossession 494 1,068 1,448
Legal and professional 5,117 5,145 4,937
Printing and supplies 3,047 3,071 3,223
Advertising and marketing 4,716 3,870 3,428
Communications 3,775 2,963 2,905
Amortization of goodwill 8,864 5,743 5,286
Capital securities 3,156 3,156 2,104
Merger and acquisition related expenses 1,233 21,968 -
Other expenses 17,047 12,961 13,631
----------------------------------
Total other operating expenses 145,517 152,736 127,929
----------------------------------
Income before income tax expense 78,095 43,435 61,977
Income tax expense 23,559 14,515 20,161
----------------------------------
Net income $ 54,536 $ 28,920 $ 41,816
==================================
Basic earnings per share $ 2.33 $ 1.24 $ 1.76
==================================
Basic wtd. avg. number of shares 23,435 23,278 23,705
==================================
Diluted earnings per share $ 2.30 $ 1.22 $ 1.74
==================================
Diluted wtd. avg. number of shares 23,735 23,670 24,043
==================================
<FN>
All share and per share data has been restated to give retroactive effecto
to stock split.
</FN>
</TABLE>
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
At December 31,
------------------------
(In thousands, except share and per share data) 1999 1998
------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 148,057 $ 164,826
Money market investments 25,790 4,900
------------------------
Cash and cash equivalents 173,847 169,726
------------------------
Securities available for sale, at fair value 1,155,022 1,127,865
Loans held for sale 15,098 42,996
Investment securities held to maturity 15,819 20,545
(Fair value of $15,880 at December 31, 1999
and $21,606 at December 31, 1998)
Loans and leases 3,009,997 2,837,106
Less: allowance for loan and lease losses 47,177 44,537
------------------------
Net loans and leases 2,962,820 2,792,569
------------------------
Accrued interest receivable 22,762 21,244
Premises, equipment and software, net 50,801 50,936
Other real estate owned and repossessed assets 597 3,335
Goodwill, net 71,117 80,224
Capitalized mortgage servicing rights 5,895 5,351
Bank-owned life insurance 60,360 42,306
Other assets 54,598 45,784
------------------------
Total assets $4,588,736 $4,402,881
========================
Liabilities, Guaranteed Preferred Beneficial
Interests in Corporation's Junior Subordinated
Debentures and Shareholders' Equity
Deposits:
Non-interest bearing $ 510,652 $ 546,192
NOW accounts & money market savings 1,466,043 1,490,944
Regular savings 330,684 328,986
Time deposits $100 thousand and greater 291,478 239,071
Time deposits under $100 thousand 996,887 1,034,304
------------------------
Total deposits 3,595,744 3,639,497
------------------------
Short-term borrowed funds:
Federal funds purchased - 30,445
Securities sold under agreements to repurchase 213,505 208,511
Borrowings from U.S. Treasury 34,919 12,678
Borrowings from Federal Home Loan Bank 265,000 30,000
------------------------
Total short-term borrowed funds 513,424 281,634
------------------------
Long-term debt:
Federal Home Loan Bank term notes 65,420 66,062
Bank term loan 70 8,263
------------------------
Total long-term debt 65,490 74,325
------------------------
Accrued interest payable 7,635 7,101
Other liabilities 35,146 49,062
------------------------
Total liabilities 4,217,439 4,051,619
------------------------
Commitments and contingent liabilities (Note 19)
Guaranteed preferred beneficial interests in
Corporation's junior subordinated debentures 30,000 30,000
Shareholders' equity:
Preferred stock, $.01 par value; authorized
500,000 shares and none issued as of
December 31, 1999 and 1998 - -
Common stock, $1.00 par value; authorized
70,000,000 shares and 23,548,392 shares
issued as of December 31, 1999 and 1998 23,548 23,548
Capital surplus 85,396 86,033
Retained earnings 257,236 221,919
Unamortized employee restricted stock (992) (1,266)
Unearned ESOP shares (69) (463)
Accumulated other comprehensive (loss) income (20,245) 3,509
Less: Common stock in treasury, at
cost; 100,661 shares as of December 31, 1999
and 369,300 shares as of December 31, 1998 (3,577) (12,018)
------------------------
Total shareholders' equity 341,297 321,262
------------------------
Total liabilities, guaranteed
preferred beneficial interests
in Corporation's junior subordinated
debentures and shareholders' equity $4,588,736 $4,402,881
========================
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unamortized
Employee
(Dollars and shares in thousands, Number of Shares Common Capital Retained Restricted
except per share data) Issued Treasury Stock Surplus Earnings Stock
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 16,035 - $16,035 $96,220 $184,335 $(1,153)
Comprehensive income:
Net income - - 41,816 -
Other comprehensive income, net of tax:
Unrealized net holding gains arising
during the year (pre-tax $9,299) - - - -
Reclassification adjustment for net
gains realized in net income during
the year (pre-tax $266) - - - -
Other comprehensive income - - - -
Comprehensive income
Cash dividends ($ .58 per share) - - (13,939) -
Issuance of employee restricted stock (13) - - - (315)
Amortization of employee restricted stock - 851 - (82)
Issuance of restricted stock units under
directors' deferred compensation plan, net - 3,335 (4) -
Exercise of employee stock options (170) - - (2,060) -
Purchase of treasury stock 337 - - - -
Stock vested in ESOP - - - -
2 for 1 stock split 7,826 7,826 (7,826) - -
Pooled company transactions:
Purchase and retirement of treasury stock (192) 115 (192) (4,217) - -
Treasury stock reissued for stock awards
and options exercised (115) - - (382) -
-----------------------------------------------------------------------
Balance, December 31, 1997 23,669 154 $23,669 $88,363 $209,766 $(1,550)
=======================================================================
Comprehensive income:
Net income - - 28,920 -
Other comprehensive income, net of tax:
Unrealized net holding gains
arising during the year
(pre-tax $1,147) - - - -
Reclassification adjustment for net
gains realized in net income
during the year (pre-tax $519) - - - -
Minimum pension liability
adjustments - - - -
Other comprehensive income - - - -
Comprehensive income
Cash dividends ($ .64 per share) - - (15,072) -
Issuance of employee restricted stock (7) - 41 - (254)
Amortization of employee restricted stock - 259 - 538
Issuance of restricted stock units under
directors' deferred compensation plan, net - 385 (37) -
Exercise of employee stock options (144) - - (1,920) -
Purchase of treasury stock 366 - - - -
Fractional shares repurchased (1) (1) (16) - -
Stock vested in ESOP - - - -
Pooled company transactions:
Purchase and retirement of treasury stock (120) 122 (120) (2,999) - -
Treasury stock reissued for stock awards
and options exercised (122) - - 262 -
-----------------------------------------------------------------------
Balance, December 31, 1998 23,548 369 $23,548 $86,033 $221,919 $(1,266)
=======================================================================
Comprehensive income:
Net income - - 54,536 -
Other comprehensive loss, net of tax:
Unrealized net holding losses
arising during the year
(pre-tax $37,401) - - - -
Reclassification adjustment for net
gains realized in net income
during the year (pre-tax $358) - - - -
Other comprehensive loss - - - -
Comprehensive income
Cash dividends ($ .72 per share) - - (16,768) -
Issuance of employee restricted stock (20) - 48 - (655)
Amortization of employee restricted stock - (813) - 929
Issuance of restricted stock units under
directors' deferred compensation plan, net (22) - 128 (313) -
Exercise of employee stock
options (226) - - (2,138) -
Stock vested in ESOP - - - -
-----------------------------------------------------------------------
Balance, December 31, 1999 23,548 101 $23,548 $85,396 $257,236 $ (992)
=======================================================================
<CAPTION>
Accumulated
Unearned Other Com- Com- Total
(Dollars and shares in thousands, ESOP prehensive Treasury prehensive Shareholders'
except per share data) shares Income/(Loss) Stock Income Equity
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $(808) $ (2,453) $ - $292,176
Comprehensive income:
Net income - - - $ 41,816 $ 41,816
--------
Other comprehensive income, net of tax:
Unrealized net holding gains arising
during the year (pre-tax $9,299) - - - 5,941
Reclassification adjustment for net
gains realized in net income during
the year (pre-tax $266) - - - (170)
--------
Other comprehensive income - 5,771 - 5,771 5,771
--------
Comprehensive income $ 47,587
========
Cash dividends ($ .58 per share) - - - (13,939)
Issuance of employee restricted stock - - 315 -
Amortization of employee restricted stock - - - 769
Issuance of restricted stock units under
directors' deferred compensation plan, net - - - 3,331
Exercise of employee stock options - - 4,882 2,822
Purchase of treasury stock - - (9,995) (9,995)
Stock vested in ESOP 168 - - 168
2 for 1 stock split - - - -
Pooled company transactions:
Purchase and retirement of treasury stock - - (1,467) (5,876)
Treasury stock reissued for stock awards
and options exercised - - 1,467 1,085
---------------------------------------------------------------
Balance, December 31, 1997 $(640) $ 3,318 $ (4,798) $318,128
===============================================================
Comprehensive income:
Net income - - - $ 28,920 $ 28,920
--------
Other comprehensive income, net of tax:
Unrealized net holding gains
arising during the year (pre-tax $1,147) - - - 805
Reclassification adjustment for net
gains realized in net income
during the year (pre-tax $519) - - - (364)
Minimum pension liability
adjustments - - - (250)
--------
Other comprehensive income - 191 - 191 191
--------
Comprehensive income $ 29,111
========
Cash dividends ($ .64 per share) - - - (15,072)
Issuance of employee restricted stock - - 213 -
Amortization of employee restricted stock - - - 797
Issuance of restricted stock units under
directors' deferred compensation plan, net - - - 348
Exercise of employee stock options - - 4,864 2,944
Purchase of treasury stock - - (12,297) (12,297)
Fractional shares repurchased - - - (17)
Stock vested in ESOP 177 - - 177
Pooled company transactions:
Purchase and retirement of treasury stock - - (1,921) (5,040)
Treasury stock reissued for stock awards
and options exercised - - 1,921 2,183
---------------------------------------------------------------
Balance, December 31, 1998 $(463) $ 3,509 $(12,018) $321,262
===============================================================
Comprehensive income:
Net income - - - $ 54,536 $ 54,536
--------
Other comprehensive loss, net of tax:
Unrealized net holding losses
arising during the year (pre-tax $37,401) - - (23,527)
Reclassification adjustment for net
gains realized in net income
during the year (pre-tax $358) - - - (227)
--------
Other comprehensive loss - (23,754) - (23,754) (23,754)
--------
Comprehensive income $ 30,782
========
Cash dividends ($ .72 per share) - - - (16,768)
Issuance of employee restricted stock - - 607 -
Amortization of employee restricted stock - - - 116
Issuance of restricted stock units under
directors' deferred compensation plan, net - - 737 552
Exercise of employee stock
options - - 7,097 4,959
Stock vested in ESOP 394 - - 394
---------------------------------------------------------------
Balance, December 31, 1999 $ (69) $(20,245) $ (3,577) $341,297
===============================================================
<FN>
Note: All per share data has been restated to give retroactive effect to
stock splits.
</FN>
</TABLE>
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
(In thousands) 1999 1998 1997
-----------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 54,536 $ 28,920 $ 41,816
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises, equipment and software 7,437 6,743 6,623
Amortization of goodwill 8,864 5,743 5,286
Net amortization of premiums on securities available for sale 6,124 5,429 3,924
Net accretion of discounts on investment securities held to maturity (81) (192) (292)
Provision for loan losses 9,475 9,345 9,372
Adjustment of other real estate owned to estimated fair value 48 445 438
Provision for deferred tax benefit (2,283) (2,757) (1,255)
Amortization of employee restricted stock 116 797 769
Issuance of restricted stock units under directors' deferred compensation plan, net 552 348 100
Net securities transactions (374) (519) (266)
Net gain on sale of other real estate owned and repossessed assets (228) (288) (223)
Proceeds from sale of loans held for sale 217,002 335,350 124,352
Originations and purchases of loans held for resale (186,987) (350,018) (135,969)
Net gain on sale of loans held for sale (2,117) (3,370) (1,235)
Gain on sale of mortgage servicing rights - (386) (921)
Net increase in cash surrender value of bank-owned life insurance (2,654) (2,229) (77)
(Increase) decrease in interest receivable (1,518) 2,033 (2,293)
Increase (decrease) in interest payable 534 (429) 1,241
Decrease (increase) in other assets and other intangibles 6,817 (16,885) 3,252
(Decrease) increase in other liabilities (13,916) 19,269 3,308
ESOP compensation expense 394 177 168
-----------------------------------
Total adjustments 47,205 8,606 16,302
-----------------------------------
Net cash provided by operating activities 101,741 37,526 58,118
-----------------------------------
Cash flows from investing activities:
Net cash provided by acquisition - 122,526 -
Proceeds from maturity and call of securities available for sale 313,290 334,484 163,895
Proceeds from maturity and call of investment securities held to maturity 4,823 38,298 17,828
Proceeds from sale of securities available for sale 16,869 155,131 5,970
Purchases of securities available for sale (400,484) (663,234) (414,671)
Purchases of investment securities, held to maturity - - (21,903)
Proceeds from sale of and payments received on OREO and repossessed assets 3,915 3,437 4,329
Loans purchased - - (37,456)
Net increase in originated loans (180,723) (93,157) (110,547)
Capital expenditures (7,303) (9,981) (7,824)
Purchase of bank-owned life insurance (15,400) - (40,000)
-----------------------------------
Net cash used in investing activities (265,013) (112,496) (440,379)
-----------------------------------
Cash flows from financing activities:
Net (decrease) increase in deposits (43,753) 295,852 186,714
Net increase (decrease) in short-term borrowed funds 231,790 (168,301) 165,628
Purchase of treasury stock - (17,337) (15,871)
Issuance of guaranteed preferred beneficial interests in Corporation's junior
subordinated debentures - - 30,000
Issuance of long-term debt 140 38,895 350
Payments on long-term debt (8,975) (6,819) (10,262)
Exercise of employee stock options, net 4,959 5,127 3,907
Fractional shares repurchased - (17) -
Dividends paid (16,768) (15,072) (13,939)
-----------------------------------
Net cash provided by financing activities 167,393 132,328 346,527
-----------------------------------
Net increase (decrease) in cash and cash equivalents 4,121 57,358 (35,734)
-----------------------------------
Cash and cash equivalents at beginning of year 169,726 112,368 148,102
-----------------------------------
Cash and cash equivalents at end of year $ 173,847 $ 169,726 $ 112,368
===================================
Additional disclosure relative to statement of cash flows
Interest paid $ 141,068 $ 145,048 $ 132,168
===================================
Taxes paid $ 24,151 $ 21,722 $ 15,721
===================================
Supplemental schedule of non-cash investing and financing activities
Net transfer of loans to OREO and repossessed assets $ 997 $ 4,134 $ 4,942
Adjustment of securities available for sale to fair value, net of tax (23,754) 441 5,771
Minimum pension liability adjustments - (250) -
Issuance of restricted stock units under directors' deferred compensation plan, net - - 3,231
Fair value of assets acquired in acquisition - 112,696 -
Fair value of liabilities assumed - 290,070 -
</FN>
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.
Banknorth-Evergreen Merger
On December 31, 1998, Evergreen Bancorp, Inc. and its wholly owned
subsidiary Evergreen Bank, N.A. (collectively "Evergreen") were merged with
and into Banknorth. The merger was accounted for as a pooling of interests
and, accordingly, the financial information for all prior periods has been
restated to present the combined financial condition and results of
operations of both companies as if the merger had been in effect for all
periods presented. Further details pertaining to the merger are presented in
Note 2.
Principles of Consolidation
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. 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 accumulated other
comprehensive income or loss. 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, which are amortized under the
effective interest method over the estimated lives of the loans.
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 lives 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. Interest accrued
in the prior year and not collected is charged off against the allowance for
loan losses. 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 or 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 and Lease Losses
The allowance for loan and lease losses is maintained at a level
estimated by management to provide adequately for probable losses inherent
in the loan and lease 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 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 are made periodically by
charges to the provision for loan and lease losses.
Management believes that the allowance for loan and lease losses is
adequate. While management uses available information to recognize losses on
loans and leases, future additions to the allowance 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 and lease losses. Such
agencies may require the Company to recognize additions to the allowance
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 capitalized 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 being serviced
for others 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 recognizes as separate assets the rights to service
mortgage loans for others, regardless of how those servicing rights are
acquired. Additionally, capitalized mortgage servicing rights are assessed
for impairment based on the fair value of those rights, and that impairment,
if any, is 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. Purchased
mortgage servicing rights are capitalized at the cost to acquire the rights.
Originated mortgage servicing rights are capitalized based on the allocated
cost of the servicing rights, derived from a relative fair value
calculation. Originated and purchased mortgage servicing rights are carried
at the lower of the capitalized amount, net of accumulated amortization, or
fair value. Capitalized mortgage servicing rights are amortized into
servicing fee income in proportion to, and over the period of, estimated net
servicing income.
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 it believes 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.
The Company measures 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
capitalized 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 (or a credit to
income if reversed). At December 31, 1999, a valuation allowance of $360
thousand was maintained for impairment. The valuation allowance was $500
thousand as of December 31, 1998. There was no valuation allowance as of
December 31, 1997.
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 $25.3 million and $16.4
million as of December 31, 1999 and 1998, respectively. Intangible assets
are periodically reviewed by management to assess recoverability, and
impairment is recognized as a charge to income if a permanent loss in value
is indicated.
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
Companies.
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 measured on the date of grant. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and earnings 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.
Bank-Owned Life Insurance
Bank-owned life insurance (BOLI) is recorded at its current cash
surrender value. BOLI is used by the Company as a financing tool for certain
employee benefits. The value of life insurance financing is the tax
preferred status of increases in life insurance cash values and death
benefits and the cash flow generated at the death of the insured. Increases
in BOLI's cash surrender value are reported as other operating income in the
Company's consolidated statement of income. The purchase of the life
insurance policy results in an interest sensitive asset on the Company's
consolidated balance sheet that provides monthly tax-free income to the
Company. The largest risk to the BOLI program is credit risk of the
insurance carriers. To mitigate this risk, annual financial condition
reviews are completed on all carriers. As a result of this transaction, the
Company benefits prospectively from the tax-free nature of income generated
from the life insurance policies.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary 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 for the periods in which the temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income tax expense 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 taxable
temporary differences, historical taxes paid and estimates of future taxable
income.
Per Share Amounts
Basic earnings per share (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 share and per share data has been restated to give retroactive
effect to stock splits.
Interest-Related Contracts
Banknorth uses a variety of off-balance sheet derivatives as part of
its interest rate risk management strategy. The instruments most frequently
used are interest rate swap, floor and corridor 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, and are linked to the related assets or
liabilities being hedged. 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 hedged. 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
hedged. Realized gains and losses, if any, resulting from early termination
of derivatives are deferred as an adjustment to the carrying value of the
hedged item and recognized as an adjustment to the yield or interest cost of
the hedged item over the remaining term of the original swap, floor or
corridor contract.
Other Financial Instruments
The Company is a party to other certain financial instruments with
off-balance-sheet risk such as commitments to extend credit, unused lines of
credit, letters of credit, and 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.
Segment Reporting
During 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement requires
the Company to report certain financial information about operating segments
meeting certain quantitative and other requirements as defined by this
Statement.
The Company's operations are solely in the financial services industry
and include the provision of traditional banking services. The Company
operates solely in the geographical regions of Vermont, New Hampshire,
Massachusetts and upstate New York. Management makes operating decisions and
assesses performance based on an ongoing review of its traditional banking
operations, which constitute the Company's only reportable segment under
SFAS No. 131.
Comprehensive Income
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. At
the Company, comprehensive income represents net income plus other
comprehensive income or loss, which consists of the net change in unrealized
gains or losses on securities available for sale for the period and minimum
pension liability adjustments, net of tax. Accumulated other comprehensive
income or loss represents the net unrealized gains or losses on securities
available for sale and minimum pension liability adjustments, net of tax, as
of the balance sheet dates.
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. As
amended, this Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Management is currently evaluating the impact
of this Statement on the Company's consolidated financial statements.
2. Mergers and Acquisitions
Proposed Merger with Peoples Heritage Financial Group, Inc. (Unaudited)
On June 2, 1999, Banknorth announced that it and Peoples Heritage
Financial Group, Inc. ("PHFG") had entered into an Agreement and Plan of
Merger (the "Agreement"), which sets forth the terms and conditions pursuant
to which the Company would be merged with and into PHFG (the "Merger") and
PHFG would change its name to "Banknorth Group, Inc." The Agreement
provides, among other things, that as a result of the Merger, each
outstanding share of common stock of the Company and associated preferred
share purchase rights will be converted into the right to receive 1.825
shares of PHFG's common stock and associated preferred share purchase rights,
plus cash in lieu of any fractional share interest. Consummation of the
Merger is subject to a number of conditions including (i) the approval of the
Agreement and Merger by the shareholders of the Company and PHFG, (ii) the
receipt of the requisite regulatory approvals, (iii) receipt by the parties
of an opinion of counsel as to certain tax consequences of the Merger, (iv)
receipt of a letter from PHFG's independent public accountants stating their
opinion that the Merger shall qualify for pooling-of-interests accounting
treatment and (v) satisfaction of certain other conditions. The transaction
will create a $18 billion multi-state banking and financial services company.
Subject to receipt of regulatory approval, it is expected that the
transaction will be closed in the second quarter of 2000.
Evergreen Bancorp, Inc.
On December 31, 1998, the shareholders of Banknorth and Evergreen,
headquartered in Glens Falls, New York, approved a merger between the two
organizations. Evergreen was merged with and into Banknorth with each issued
and outstanding share of Evergreen common stock, together with associ-ated
preferred share purchase rights, converted into 0.9 shares of Banknorth
common stock and associated preferred share purchase rights, plus cash in
lieu of any fractional share interest. This resulted in approximately 7.9
million additional shares of Banknorth common stock issued, bringing
Banknorth's outstanding shares to approximately 23.2 million immediately
following the merger.
The exchange qualified as a tax-free reorganization and was accounted
for as a pooling-of-interests. At the time the merger was announced both
companies announced the recision of their previously announced stock
repurchase programs. All financial information in this annual report has
been restated historically for the combination of the two companies.
Evergreen Bank operates as a wholly-owned subsidiary of Banknorth.
Evergreen operates 28 offices in 8 counties in eastern upstate New York,
throughout an area extending from the Massachusetts border fifty miles south
of Albany, north to the Canadian border. Evergreen Bank serves commercial,
individual, institutional and municipal customers a wide range of deposit
and loan products.
In order to effect the merger, one-time merger related expenses of
$20.1 million, $15.1 million after-tax impact, were incurred in the fourth
quarter of 1998 and $1.2 million, $788 thousand after-tax, were incurred in
the first quarter of 1999. The majority of these expenses were employment-
related costs and data processing conversion and termination costs. At
December 31, 1998, after payments of certain one-time merger related
expenses, the Company had a remaining accrued liability for merger costs of
approximately $15.4 million, of which $11.4 million was paid during 1999. As
of December 31, 1999, $4.0 million of these liabilities remain and primarily
represent the accrual for the supplemental early retirement plan for certain
senior executives of Evergreen.
First Massachusetts Bank-Berkshire Region
On November 13, 1998, Banknorth completed the purchase from
BankBoston, N.A. of ten full-service branches, one limited service branch
and nine remote ATM locations, as well as private banking relationships
associated with the branches in the Berkshires region of Massachusetts.
In connection with the Berkshire acquisition, Bank-north paid
BankBoston, N.A. a fixed premium of $52.5 million. At the closing, the
deposits of the Berkshire branches were approximately $290.1 million,
including accrued interest. Banknorth also purchased in the transaction
commercial loans associated with the branches with a net book balance as of
November 13, 1998 of approximately $73.6 million and a portfolio of consumer
loans originated in the branches with a net book balance of $35.8 million.
The Berkshire acquisition (other than the private banking relationships) was
made through First Massachusetts Bank, N.A. headquartered in Worcester,
Massachusetts, and has extended that bank's central Massachusetts territory
westward to the boarder of New York State and contiguous to the southern
reach of Evergreen Bank's New York market area.
The private banking relationships associated with these branches,
which as of closing represented approximately $1.0 billion of trust and
investment assets under management, including approximately $750 million in
discretionary trust assets under management, were acquired by Banknorth's
trust and investment subsidiary, The Stratevest Group, N.A. headquartered in
Burlington, Vermont.
The acquisition was accounted for using purchase accounting in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations". As such, both the assets acquired and liabilities assumed
were 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 $54.5 million, substantially all of
which is deductible for income tax purposes, and is being amortized over
fifteen years on a straight-line basis. The one-time acquisition-related
expenses of $1.8 million pre-tax, or $1.2 million after-tax, were recorded
in the fourth quarter of 1998. To complete the transaction, Banknorth
reallocated capital resources through payment of a special dividend to
Banknorth by its subsidiary banks, except First Massachusetts, of
approximately $21.5 million. All subsidiary banks paying a special dividend
remained well capitalized as of December 31, 1998. The funds from the
special dividend together with existing capital resources at the Parent
Company level (totaling approximately $26.0 million) were contributed to FMB
to ensure that the bank was adequately capitalized for regulatory capital
purposes.
The results of operations for the branches and private banking
relationships acquired are included in Banknorth's consolidated financial
statements from the date of acquisition forward.
3. Securities Available for Sale
The amortized cost and estimated fair value of securities available for sale
are as follows:
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasuries and Agencies $ 174,777 $ 3 $ 6,208 $ 168,572
States and political subdivisions 48,619 11 2,500 46,130
Mortgage-backed securities 710,066 554 19,574 691,046
Corporate debt securities 203,395 99 3,902 199,592
-------------------------------------------------------
Total debt securities 1,136,857 667 32,184 1,105,340
Equities and other securities 49,675 9 2 49,682
-------------------------------------------------------
Total securities available for sale $1,186,532 $ 676 $32,186 $1,155,022
=======================================================
<CAPTION>
At December 31, 1998
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasuries and Agencies $ 165,683 $1,682 $ 98 $ 167,267
States and political subdivisions 7,806 237 - 8,043
Mortgage-backed securities 711,540 4,196 2,474 713,262
Corporate debt securities 188,154 2,483 144 190,493
-------------------------------------------------------
Total debt securities 1,073,183 8,598 2,716 1,079,065
Equities and other securities 48,791 10 1 48,800
-------------------------------------------------------
Total securities available for sale $1,121,974 $8,608 $ 2,717 $1,127,865
=======================================================
</TABLE>
Included in equities and other securities are certain non-marketable
equity securities amounting to $45.1 million and $44.3 million at December
31, 1999 and 1998, respectively, consisting of Federal Home Loan Bank and
Federal Reserve Bank 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, 1999
(mortgage-backed securities are included by final contractual maturity):
<TABLE>
<CAPTION>
Estimated
Amortized Fair
(In thousands) Cost Value
-------------------------
<S> <C> <C>
Within one year $ 25,614 $ 25,548
From one to five years 167,545 163,714
From five to ten years 260,074 250,725
After ten years 683,624 665,353
-------------------------
Total $1,136,857 $1,105,340
=========================
</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,
-------------------------------
(In thousands) 1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Proceeds from sales $16,869 $155,131 $5,970
Gross realized gains from sales $ 252 $ 1,076 $ 262
Gross realized losses from sales $ 9 $ 673 $ 32
</TABLE>
Securities available for sale with an estimated fair value of
approximately $643.3 million and $539.0 million at December 31, 1999 and
1998, respectively, were pledged to secure public deposits, securities sold
under agreements to repurchase, and for other purposes as required by law.
There were no holdings of any single issuer that, when taken in
aggregate, exceeded 10% of shareholders' equity at December 31, 1999.
4. Investment Securities Held to Maturity
The amortized cost and estimated fair value of investment securities
held to maturity are as follows:
<TABLE>
<CAPTION>
At December 31, 1999
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasuries and Agencies $ 2,797 $ 5 $ 35 $ 2,767
States and political subdivisions 9,223 184 29 9,378
Mortgage-backed securities 3,789 46 110 3,725
Corporate debt securities 10 - - 10
---------------------------------------------------
Total investment securities
held to maturity $15,819 $ 235 $174 $15,880
===================================================
<CAPTION>
At December 31, 1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasuries and Agencies $ 3,582 $ 87 $ - $ 3,669
States and political subdivisions 11,443 785 - 12,228
Mortgage-backed securities 5,510 189 - 5,699
Corporate debt securities 10 - - 10
---------------------------------------------------
Total investment securities
held to maturity $20,545 $1,061 $ - $21,606
===================================================
</TABLE>
The following table sets forth information with regard to contractual
maturities of investment securities held to maturity as of December 31, 1999
(mortgage-backed securities are included by final contractual maturity):
<TABLE>
<CAPTION>
Estimated
Amortized Fair
(In thousands) Cost Value
-----------------------
<S> <C> <C>
Within one year $ 4,411 $ 4,340
From one to five years 6,029 6,162
From five to ten years 2,806 2,821
After ten years 2,573 2,557
---------------------
Total $15,819 $15,880
=====================
</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 held to maturity in 1999,
1998 or 1997. During 1999, 1998, and 1997, certain investment securities
were called resulting in gains of $16 thousand, $25 thousand, and $37
thousand, respectively. Investment securities with an amortized cost of
approximately $7.0 million and $10.7 million at December 31, 1999 and 1998,
respectively, were pledged to secure public deposits, securities sold under
agreements to repurchase, and for other purposes as required by law.
5. Loans and Leases and Allowance for Loan and Lease Losses
A summary of loans and leases by category is as follows:
<TABLE>
<CAPTION>
At December 31,
-------------------------
(In thousands) 1999 1998
-------------------------
<S> <C> <C>
Commercial, financial and agricultural, net of unamortized loan fees of $148 thousand in 1999
and $718 thousand in 1998 $ 632,830 $ 690,170
Real estate, net of unamortized loan costs of $1.6 million in 1999 and $1.3 million in 1998:
Residential (1-4 family) 1,020,498 1,041,667
Commercial 819,123 615,503
Construction and land development 81,431 45,704
-------------------------
Total real estate 1,921,052 1,702,874
-------------------------
Credit card receivables 32,653 33,205
Lease receivables, net of unearned income of $10.8 million in 1999 and $10.7 million in 1998 78,371 79,001
Other installment, including deferred costs of $1.0 million in 1999 and $1.2 million in 1998 345,091 331,856
-------------------------
Total installment 456,115 444,062
-------------------------
Total loans 3,009,997 2,837,106
Less: Allowance for loan and lease losses 47,177 44,537
-------------------------
Net loans and leases $2,962,820 $2,792,569
=========================
</TABLE>
At December 31, 1999 and 1998, loans to executive officers, directors
and to associates of such persons totaled $41.6 million and $29.1 million,
respectively. During 1999, new loans of $34.9 million were made, and
repayment of loans totaled $27.5 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, New Hampshire and New York. 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 these states could also negatively
affect the Company's collateral position.
As of December 31, 1999 and 1998, one to four family first mortgage
loans with an approximate book value of $440.6 million and $128.1 million,
respectively, were pledged to secure borrowings from the Federal Home Loan
Bank.
Non-Performing Loans:
The following table sets forth information with regard to non-
performing loans:
<TABLE>
<CAPTION>
At December 31,
-------------------------------
(In thousands) 1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Loans in non-accrual status $12,211 $12,529 $18,176
Loans contractually past
due 90 days or more and
still accruing interest 1,647 2,488 2,262
Restructured loans 28 5,977 42
-------------------------------
Total non-performing loans $ 13,886 $20,994 $20,480
===============================
</TABLE>
Accumulated interest on the above non-performing loans of $1.2
million, $921 thousand, and $1.6 million, was not recognized as income in
1999, 1998, and 1997, respectively. Approximately $741 thousand, $532
thousand, and $1.1 million of interest on the above non-performing loans was
collected and recognized as income in 1999, 1998, and 1997, respectively.
Transactions in the allowance for loan and lease losses are summarized
as follows:
<TABLE>
<CAPTION>
For the years ended
December 31,
----------------------------------
(In thousands) 1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 44,537 $ 38,551 $ 35,913
Allowance related to
purchase acquisition - 2,200 -
Provision for loan and lease
losses 9,475 9,345 9,372
Loans charged-off (12,125) (11,730) (12,364)
Recoveries on loans
previously charged-off 5,290 6,171 5,630
----------------------------------
Balance at end of year $ 47,177 $ 44,537 $ 38,551
==================================
</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 January 1, 1995. As of December 31, 1999 and
1998, $28 thousand and $6.0 million, respectively, of restructured loans
were considered to be impaired.
At December 31, 1999 and 1998, the recorded investment in loans that
are considered to be impaired totaled $5.5 million and $13.6 million,
respectively, for which the related allowance for loan losses is $708
thousand and $2.0 million, respectively. As of December 31, 1999, 1998 and
1997, 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, 1999, 1998
and 1997, was approximately $9.0 million, $10.6 million, and $11.9 million,
respectively. During 1999, the Company recognized interest income on those
impaired loans of $402 thousand, which included $374 thousand of interest
income recognized using the cash basis method of income recognition. During
1998, the Company recognized interest income on those impaired loans of $468
thousand, which included $400 thousand of interest income recognized using
the cash basis method of income recognition. During 1997, the Company
recognized interest income on those impaired loans of $895 thousand, which
included $872 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 and originated for the years ended December 31, 1999, 1998,
and 1997:
<TABLE>
<CAPTION>
(In thousands) Purchased Originated Total
------------------------------------
<S> <C> <C> <C>
Balance at January 1, 1997 $2,983 $ 938 $ 3,921
Additions 1,837 653 2,490
Amortization (885) (181) (1,066)
Sale of servicing (681) (14) (695)
-----------------------------------
Balance at December 31, 1997 $3,254 $1,396 $ 4,650
Additions 1,244 1,981 3,225
Amortization (985) (376) (1,361)
Impairment reserve (245) (255) (500)
Sale of servicing (662) (1) (663)
-----------------------------------
Balance at December 31, 1998 $2,606 $2,745 $ 5,351
Additions 435 1,446 1,881
Amortization (852) (625) (1,477)
Reduction of
impairment reserve 54 86 140
-----------------------------------
Balance at December 31, 1999 $2,243 $3,652 $ 5,895
===================================
</TABLE>
The estimated fair value of the Company's capitalized mortgage
servicing rights was $7.6 million at December 31, 1999 and $5.4 million at
December 31, 1998.
The mortgage servicing rights as of December 31, 1999 and 1998 relate
to approximately $705.9 million and $625.1 million , respectively, of
mortgage loans serviced for third parties. In addition, as of December 31,
1999 and 1998, the Company services approximately $213.2 million and $310.0
million, respectively, of mortgage loans sold to 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) 1999 1998
---------------------
<S> <C> <C>
Land and land improvements $ 4,870 $ 5,770
Buildings and improvements 57,524 54,088
Equipment, fixtures and software 54,881 50,974
---------------------
Total 117,275 110,832
Less: accumulated depreciation and
amortization 66,474 59,896
---------------------
Premises, equipment and software, net $ 50,801 $ 50,936
=====================
</TABLE>
Depreciation and amortization expense was approximately $7.4 million,
$6.7 million, and $6.7 million for the years ended December 31, 1999, 1998
and 1997, 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 costs in excess of specified minimum rental
payments.
Rental expense for premises, equipment and software was approximately
$4.8 million, $3.8 million, and $3.5 million in 1999, 1998 and 1997,
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, 1999:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000 $ 3,771
2001 2,718
2002 2,378
2003 1,991
2004 1,865
Thereafter 6,528
-------
Total $19,251
=======
</TABLE>
8. Other Real Estate Owned and Repossessed Assets
Other real estate owned and repossessed assets consist of the
following:
<TABLE>
<CAPTION>
At December 31,
---------------
(In thousands) 1999 1998
---------------
<S> <C> <C>
Other real estate owned:
Commercial $ - $2,472
Single family residential 393 591
Multi-family 119 179
Land - 5
---------------
Total other real estate owned 512 3,247
---------------
In-substance foreclosure:
Multi-family - 77
---------------
Total in-substance foreclosure - 77
---------------
Non real estate repossessed assets 85 11
---------------
Total $597 $3,335
===============
</TABLE>
9. Time Deposits
The approximate amount of contractual maturities of time deposits for
the years subsequent to December 31, 1999, is as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
2000 $1,016,610
2001 213,991
2002 25,990
2003 22,281
2004 8,672
Thereafter 821
----------
Total time deposits $1,288,365
==========
</TABLE>
10. Short-Term Borrowed Funds
As of December 31, 1999 and 1998, the Company had unused lines of
credit amounting to approximately $160.5 million and $146.3 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, 1999 and 1998, the Company had
unused lines of credit with the Federal Home Loan Bank amounting to $361.1
million and $600.6 million, respectively.
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
Funds Agreements to from Borrowings
(Dollars in thousands) Purchased Repurchase U.S. Treasury from FHLB
------------------------------------------------------------
<S> <C> <C> <C> <C>
1999:
Ending balance $ - $213,505 $34,919 $265,000
Average amount outstanding 14,486 201,400 15,186 117,466
Maximum amount outstanding at any month end 76,645 213,505 36,096 265,000
Weighted average interest rate:
During year 5.38% 4.02% 4.51% 5.26%
End of year - 3.69 4.76 5.78
1998:
Ending balance $30,445 $208,511 $12,678 $ 30,000
Average amount outstanding 9,292 164,880 14,987 201,482
Maximum amount outstanding at any month end 30,445 208,511 31,046 307,000
Weighted average interest rate:
During year 5.64% 4.49% 5.18% 5.59%
End of year 5.48 3.55 4.12 5.54
1997:
Ending balance $19,800 $144,924 $22,211 $263,000
Average amount outstanding 7,769 142,527 12,570 226,720
Maximum amount outstanding at any month end 33,000 182,046 26,329 305,000
Weighted average interest rate:
During year 5.89% 4.65% 5.20% 5.69%
End of year 6.80 4.24 5.27 5.80
</TABLE>
11. Long-Term Debt
Long-term debt consists of secured term loans from the Federal Home
Loan Bank in the amounts of $65.5 million and $66.1 million at December 31,
1999 and 1998, respectively, and $70 thousand and $8.3 million of unsecured
debt from third party financial institutions at December 31, 1999 and 1998,
respectively.
The following table sets forth the final maturities, outstanding
balances and weighted average interest rates of the long-term debt at
December 31, 1999:
<TABLE>
<CAPTION>
Fixed
Fixed Weighted
Rate Average
Maturity Outstanding Interest
Date Balance Rate
- ---------------------------------------------------
<S> <C> <C>
(Dollars in thousands)
2000 $ 6,070 5.96%
2001 40,100 5.95
2002 10 7.79
2003 8,876 5.71
2004 137 5.28
2005-2013 10,297 6.83
-------------------
Total $65,490 6.06%
===================
</TABLE>
The borrowings from the Federal Home Loan Bank of Boston are secured
by residential mortgage loans held in the Company's loan portfolio and
certain securities not pledged elsewhere.
12. Income Taxes
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
(In thousands) 1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Current tax expense $25,842 $17,272 $21,416
Deferred tax benefit (2,283) (2,757) (1,255)
-------------------------------
Total income tax
expense $23,559 $14,515 $20,161
===============================
</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) 1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Expense at statutory
federal tax rate $27,333 $15,202 $21,692
Increases (decreases) in tax
expense resulting from:
Tax exempt income, net (2,779) (1,780) (673)
Acquisition costs 105 2,217 0
Reduction in valuation
allowance (400) (424) (487)
State income tax 769 (46) 219
Tax credits (1,913) (1,158) (933)
Other, net 444 504 343
-------------------------------
Income tax expense $23,559 $14,515 $20,161
===============================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999 and
1998 are presented below:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
-------------------
<S> <C> <C>
Temporary deductible items:
Differences in reporting the
provision for loan and lease losses
and charge-offs $16,269 $15,933
Pension and deferred remuneration 10,284 9,618
Purchase accounting 2,228 1,530
Deferred net loan and lease
origination fees 359 410
Accrued medical benefits 230 241
Other 784 743
-------------------
Total gross deferred tax assets 30,154 28,475
Less valuation allowance - (400)
-------------------
Deferred tax assets, net of valuation
allowance 30,154 28,075
Temporary taxable items:
Lease financing 9,511 9,291
Depreciation 686 763
Mark-to-market for investments and
loans 284 386
Prepaid expenses 647 1,043
Mortgage servicing rights 1,035 982
Other 1,288 1,190
-------------------
Total gross deferred tax liabilities 13,451 13,655
-------------------
Net deferred tax asset at end of year 16,703 14,420
Net deferred tax assets at beginning
of year 14,420 11,663
-------------------
Deferred tax benefit for the years
ended December 31, 1999 and 1998 $ 2,283 $ 2,757
===================
</TABLE>
In addition to the deferred tax items shown in the table above, the
Company also had a deferred tax asset of approximately $11.5 million at
December 31, 1999, and a deferred tax liability of approximately $2.1
million at December 31, 1998, relating to the fair value adjustment on
securities available for sale. The Company also had a deferred tax asset of
approximately $90 thousand at both December 31, 1999 and 1998 related to
minimum pension liability adjustments.
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 deferred tax asset at December 31, 1999 will be realized.
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. Prior to December
31, 1998, the Company maintained two non-contributory defined benefit
retirement plans, the Evergreen Bancorp, Inc. Retirement Plan and the
Banknorth Group, Inc. Retirement Plan. Effective January 1, 1999, the
Company merged these two plans.
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) 1999 1998
-------------------
<S> <C> <C>
Reconciliation of benefit obligation:
Obligation at January 1 $53,474 $43,049
Service cost 2,562 2,502
Interest cost 3,500 3,241
Curtailment gain (2,577) -
Actuarial (gain) loss (5,655) 6,839
Benefits paid (2,270) (2,157)
-------------------
Obligation at December 31 49,034 53,474
-------------------
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 53,847 47,029
Actual return on plan assets 3,924 8,078
Employer contribution - 897
Benefits paid (2,270) (2,157)
-------------------
Fair value of plan assets at
December 31 55,501 53,847
-------------------
Funded status:
Funded status at December 31 6,467 373
Unrecognized net actuarial gain (9,338) (4,636)
Unrecognized prior service cost 282 448
Unrecognized net transition asset (246) (291)
-------------------
Accrued benefit cost $(2,835) $(4,106)
===================
</TABLE>
Net pension costs recognized in the consolidated statements of income
for the years ended December 31, 1999, 1998 and 1997, excluding the
curtailment gain of $2.6 million in 1999, are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
-------------------------------
<S> <C> <C> <C>
Service cost $ 2,562 $ 2,502 $ 1,940
Interest cost 3,500 3,241 2,928
Expected return on plan
assets (4,752) (4,147) (3,528)
Amortization of transition
asset (45) (125) (124)
Amortization of prior service
cost 40 49 49
Amortization of net gain - (75) (135)
-------------------------------
Net periodic benefit cost $ 1,305 $ 1,445 $ 1,130
===============================
</TABLE>
The actuarial assumptions used in determining the actuarial present
value of projected benefit obligations as of December 31 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------
<S> <C> <C> <C>
Weighted-average assumptions:
Discount rate 7.75% 6.75% 7.00%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.50% 4.50% 4.50%
</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 1999 and 1998 accounting for the plan is based on the
level of cost sharing as of January 1, 1999 and 1998, respectively. Prior to
December 31, 1998, the Company maintained two defined benefit post-
retirement plans. Effective January 1, 1999, the Company merged these plans.
The following table presents the amounts recognized in the Company's
consolidated balance sheets:
<TABLE>
<CAPTION>
At December 31,
-------------------
(In thousands) 1999 1998
-------------------
<S> <C> <C>
Accumulated post-retirement benefit
obligation:
Obligation January 1 $ 4,848 $ 4,695
Service cost 205 174
Interest cost 357 308
Actuarial loss 132 25
Benefits paid (403) (354)
-------------------
Obligation at December 31 5,139 4,848
-------------------
Unfunded accumulated benefit
obligation (5,139) (4,848)
Unrecognized net gain (221) (353)
Unrecognized prior service cost 48 47
Unrecognized transition obligation 3,165 3,408
-------------------
Accrued post-retirement benefit cost $(2,147) $(1,746)
===================
</TABLE>
Net periodic post-retirement benefit cost recognized in the
consolidated statements of income for the years ended December 31, 1999,
1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
----------------------
<S> <C> <C> <C>
Service cost 205 174 155
Interest cost 357 308 323
Amortization of transition obligation 243 244 243
Net amortization and deferral - (11) (17)
----------------------
Net periodic post-retirement benefit
cost $805 $715 $704
======================
</TABLE>
The discount rate used in determining the accumulated post-retirement
benefit obligation was 7.75%, 6.75% and 7.0% at December 31, 1999, 1998 and
1997, respectively.
For measurement purposes, a 7.9 percent annual rate of increase in the
per capita cost of covered health care benefits was assumed for fiscal 1999;
the rate was assumed to decrease gradually down to 5.5% for fiscal 2005 and
remain at the 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 rate one percentage point in each year
would increase the accumulated post retirement benefit obligation as of
December 31, 1999 by $454 thousand (or by 8.8%) and the aggregate of the
service and interest cost components of the net periodic post-retirement
benefit cost for fiscal 1999 by $62 thousand (or by 11.0%). Decreasing the
assumed health care cost trend rate one percentage point in each year would
decrease the accumulated post-retirement benefit obligation as of December
31, 1999 by $437 thousand (or by 8.5%) and the aggregate of the service and
interest cost components of net periodic post-retirement benefit cost for
fiscal 1999 by $53 thousand (or by 9.4%).
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, 1999, 1998 and 1997 were $317 thousand, $170 thousand and $171 thousand,
respectively.
In addition to the Company's non-contributory defined benefit
retirement and pension plan, the Company provides a supplemental employee
retirement plan to certain executives. The amount of liability recognized in
the Company's consolidated balance sheets was $6.1 million and $6.6 million
at December 31, 1999 and 1998, respectively. The charges to expense with
respect to this plan amounted to $844 thousand, $2.3 million, and $1.1
million for the years ended December 31, 1999, 1998 and 1997, respectively.
Of the $2.3 million expense for 1998, $1.1 million is included in the one-
time merger and acquisition expenses related to the accelerated vesting for
certain Evergreen executives. The discount rate used in determining the
actuarial present value of the projected benefit obligation was 7.75%, 6.75%
and 7.0% at December 31, 1999, 1998 and 1997, respectively.
The Company and its subsidiaries also have an Employee Savings Plan.
The charges to expense with respect to this plan amounted to $844 thousand
in 1999, $2.1 million in 1998, and $1.8 million in 1997. Evergreen
previously provided an employee stock ownership plan (ESOP). As of January
1, 1999, the ESOP was merged into the Company's Employee Savings Plan.
During 1999, 35,404 shares were used as a matching contribution for the
Company's Employee Savings Plan.
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. The
amount of this reserve requirement, included in Cash and Due from Banks, was
approximately $33.4 million and $24.3 million at December 31, 1999 and 1998,
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 Comptroller 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, 1999, banking
subsidiaries were able to declare dividends to Banknorth in 2000, without
regulatory approval, of approximately $21.8 million plus an additional
amount equal to the net profits, as defined in the applicable regulations,
for 2000 through the date of any such dividend declarations, less any
required transfer to surplus.
In November 1998, in order to purchase the Berkshire branches from
BankBoston, the Company redeployed accumulated capital of $21.8 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.
Additionally, in connection with the Evergreen merger, Evergreen Bank
paid a special dividend to the parent company. As the special dividend
exceeded applicable regulatory limitations, Evergreen Bank obtained approval
from the OCC for the payment of that portion of the dividend which exceeded
such regulatory limitations.
Payment of these special dividends may restrict 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.
Regulatory Capital Requirements
Regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at December 31, 1999, 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 their 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 risk 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, 1999, the Company, on a consolidated basis, met all
capital adequacy requirements to which it is subject. Further, all the
Company's subsidiary banks, with the exception of First Massachusetts Bank,
met all capital adequacy requirements for classification as well-capitalized
institutions. Due to the acquisition of Berkshire branch offices by First
Massachusetts Bank in the fourth quarter of 1998, this subsidiary has been
placed in the adequately-capitalized classification.
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, 1999 and 1998, compared to the required ratios
for minimum capital adequacy and for classification as a well-capitalized
institution:
<TABLE>
<CAPTION>
At December 31, 1999
Regulatory
Ratio Requirements
---------------------------
For
Actual Minimum Classification
------------------- Capital as Well
(Dollars in thousands) Amount Ratio Adequacy Capitalized
---------------------------------------------------
<S> <C> <C> <C> <C>
Tier I (leverage) Capital:
Evergreen Bank, N.A. $ 71,553 6.18% 4.00% 5.00%
The Howard Bank, N.A. 62,558 7.71 4.00 5.00
First Massachusetts
Bank, N.A. 62,529 6.04 4.00 5.00
First Vermont Bank and
Trust Co. 58,878 7.79 4.00 5.00
Banknorth Group, Inc.
(consolidated) 320,319 7.18 4.00
Tier I Risk Based Capital:
Evergreen Bank, N.A. $ 71,553 9.91% 4.00% 6.00%
The Howard Bank, N.A. 62,558 9.81 4.00 6.00
First Massachusetts
Bank, N.A. 62,529 8.43 4.00 6.00
First Vermont Bank and
Trust Co. 58,878 9.40 4.00 6.00
Banknorth Group, Inc.
(consolidated) 320,319 9.85 4.00
Total Risk Based Capital:
Evergreen Bank, N.A. $ 80,611 11.17% 8.00% 10.00%
The Howard Bank, N.A. 70,551 11.06 8.00 10.00
First Massachusetts
Bank, N.A. 71,801 9.69 8.00 10.00
First Vermont Bank and
Trust Co. 66,721 10.65 8.00 10.00
Banknorth Group, Inc.
(consolidated) 361,046 11.10 8.00
<CAPTION>
At December 31, 1998
Regulatory
Ratio Requirements
---------------------------
For
Actual Minimum Classification
------------------- Capital as Well
(Dollars in thousands) Amount Ratio Adequacy Capitalized
---------------------------------------------------
<S> <C> <C> <C> <C>
Tier I (leverage) Capital:
Evergreen Bank, N.A. $ 66,062 5.92% 4.00% 5.00%
The Howard Bank, N.A. 54,952 7.39 4.00 5.00
First Massachusetts
Bank, N.A. 48,366 5.49 4.00 5.00
First Vermont Bank and
Trust Co. 48,062 7.28 4.00 5.00
Banknorth Group, Inc.
(consolidated) 267,349 6.43 4.00
Tier I Risk Based Capital:
Evergreen Bank, N.A. $ 66,062 9.81% 4.00% 6.00%
The Howard Bank, N.A. 54,952 8.80 4.00 6.00
First Massachusetts
Bank, N.A. 48,366 7.18 4.00 6.00
First Vermont Bank and
Trust Co. 48,062 8.98 4.00 6.00
Banknorth Group, Inc.
(consolidated) 267,349 8.75 4.00
Total Risk Based Capital:
Evergreen Bank, N.A. $ 74,527 11.07% 8.00% 10.00%
The Howard Bank, N.A. 62,781 10.05 8.00 10.00
First Massachusetts
Bank, N.A. 56,791 8.43 8.00 10.00
First Vermont Bank and
Trust Co. 54,762 10.23 8.00 10.00
Banknorth Group, Inc.
(consolidated) 305,546 10.00 8.00
</TABLE>
15. Shareholders' Equity
Stock Split
On February 24, 1998, the Board of Directors of Banknorth 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 capital surplus to common stock, representing the $1.00
par value for each additional share issued.
Preferred 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 on each outstanding share of common stock, payable on, and to
shareholders of record as of, such date. On June 23, 1998, the Board of
Directors of the Company amended the Rights Agreement and the Rights so as
to constitute preferred share purchase rights ("Rights"). Each such Right
entitles the registered holder to purchase from the Company (if and when the
rights become exercisable) a one one-hundredth interest in a share of Series
C Junior Participating Preferred Stock, without par value (the "Preferred
Shares"), of the Company, at a price of $125 per one one-hundredth interest
in a Preferred Share (the "Purchase Price"), subject to adjustment in
certain circumstances. The amended Rights Agreement also provides that
shares of common stock issued after November 27, 1990 will have Share
Purchase Rights associated with them to the same extent as the shares
outstanding on such date. The Rights expire on November 27, 2005, unless the
expiration date is extended, or the Rights are earlier redeemed.
Rights become exercisable 10 days after a person or group acquires 20%
or more of the Company'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 Company'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). Until the Rights become exercisable, they are to be
evidenced by the certificates representing the Company's outstanding common
shares. Once exercisable, the Rights are to be evidenced by separate
certificates.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable and will be entitled to certain dividend and liquidation
preferences over the Company's common shares.
Following the acquisition by any person or group of 20% or more of the
Company's common stock, but only prior to the acquisition by a person or
group of a 50% stake, the Board of Directors will have the right 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 or one one-hundredth of a
Preferred Share (or of a share of a class or series of the Company's
preferred stock having equivalent rights, preferences and privileges), per
Right (subject to adjustment).
If the Company is involved in a merger or other business combination
at any time after a person or group has acquired 20% or more of the
Company'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
Company'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%.
In connection with the execution of the Company's merger agreement
with Peoples Heritage Financial Group, Inc., the Company amended the Rights
Agreement to provide that none of the execution and delivery of the merger
agreement, or the related stock option agreement in favor of Peoples
Heritage, or the consummation of the transactions contemplated thereby, will
have any consequences for purposes of the Rights Agreement.
16. Earnings Per Share
The following table provides calculations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------------------------------------------------------------------
1999 1998 1997
Weighted Weighted Weighted
(Dollars in thousands, except Net Average Per Share Net Average Per Share Net Average Per Share
for share and per share data) Income Shares Amount Income Shares Amount Income Shares Amount
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic earnings per share $54,536 23,435,122 $2.33 $28,920 23,277,560 $1.24 $41,816 23,705,320 $1.76
----------------------------------------------------------------------------------------------
Effect of dilutive securities:
Stock options 269,088 363,645 312,470
Restricted stock awards 30,381 28,335 25,010
----------------------------------------------------------------------------------------------
Diluted earnings per share $54,536 23,734,591 $2.30 $28,920 23,669,540 $1.22 $41,816 24,042,800 $1.74
==============================================================================================
</TABLE>
Options to purchase 303,944 shares of common stock at a weighted-
average exercise price of $35.13 were outstanding during 1999 but were not
included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the
shares.
Options to purchase 81,018 shares of common stock at a weighted-
average exercise price of $36.25 were outstanding during 1998 but were not
included in the computation of diluted earnings per share because the
options' exercise price was greater than the average market price of the
shares.
17. Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Debentures
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
guaranteed preferred beneficial interests in Corporation junior subordinated
debentures ("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 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 Parent 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 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.
Since the capital securities are not classified as debt for financial
statement purposes, the expense associated with the capital securities is
recorded as non-interest expense on the consolidated statements of income.
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. 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 option
awards ("awards") in the consolidated statements of income.
A summary of the status of the Company's fixed stock options as of
December 31, 1999, 1998 and 1997, and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,212,482 $19.88 1,191,289 $15.37 1,182,089 $12.42
Granted 278,000 33.56 289,650 32.13 328,727 21.94
Exercised (217,633) 16.81 (255,457) 12.76 (272,304) 10.14
Forfeited (6,258) 33.39 (13,000) 19.91 (47,223) 17.34
---------------------------------------------------------------------------
Outstanding at end of year 1,266,591 23.37 1,212,482 19.88 1,191,289 15.37
===========================================================================
Options exercisable at end of year 804,494 617,730 608,712
===========================================================================
Weighted-average fair value of
options granted during the year $ 9.74 $ 7.69 $ 5.09
===========================================================================
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ------------------------
Weighted Avg. Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.50 to 8 43,150 3.7 Years $ 7.52 43,150 $ 7.52
8 to 12 138,140 4.3 9.59 138,140 9.59
12 to 17 263,900 6.2 14.61 263,900 14.61
17 to 27 328,024 7.7 21.73 328,024 21.73
27 to 37 493,377 9.1 34.39 31,280 30.74
---------------------------------------------------------------------
$4.50 to 37 1,266,591 7.4 $23.37 804,494 $16.90
=====================================================================
</TABLE>
Had the Company recorded compensation cost under SFAS No. 123 based on
the fair value of the stock options at the grant date, 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>
(In thousands, except per share data) 1999 1998 1997
-------------------------------
<S> <C> <C> <C> <C>
Net income As reported $54,536 $28,920 $41,816
Pro forma 53,244 28,172 41,211
Basic earnings per share As reported $ 2.33 $ 1.24 $ 1.76
Pro forma 2.27 1.21 1.74
Diluted earnings per share As reported 2.30 1.22 1.74
Pro forma 2.24 1.19 1.71
</TABLE>
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 1999, 1998 and 1997:
<TABLE>
<CAPTION>
July July December July
1999 1998 1997 1997
-------------------------------------------
<S> <C> <C> <C> <C>
Dividend yield 2.45% 2.35% 2.26% 2.61%
Expected volatility 30.58% 25.95% 18.28% 20.55%
Risk-free interest rate 5.86% 4.50% 6.00% 5.50%
Expected life 5 years 5 years 5 years 5 years
</TABLE>
In connection with the proposed merger with PHFG, expected to be
consummated in 2000, all unvested stock options will immediately vest.
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, 1999, restricted stock awards
outstanding amounted to 77,500 shares. The following are the terms of the
restricted stock awards granted:
July 29, 1999: Variable restricted stock awards of 19,500 shares were
granted and are outstanding as of December 31, 1999. Vesting
for the 1999 shares and the units requires continuous
service through July 29, 2004. In addition, vesting of 25%
of both the shares and the units occurs for the 1999 awards
each year between 1999 and 2003 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 28, 1998: Variable restricted stock awards of 7,000 shares were
granted, 800 shares were forfeited during 1999, and 6,200
shares are outstanding as of December 31, 1999. Vesting for
the 1998 shares and the units requires continuous service
through July 28, 2003. In addition, vesting of 25% of both
the shares and the units occurs for the 1998 awards each
year between 1998 and 2002 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 22, 1997: Variable restricted stock awards of 13,000 shares were
granted, 2,000 shares were forfeited and 11,000 shares are
outstanding as of December 31, 1999. 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, 3,000 shares were forfeited during 1999, and 19,800
shares are outstanding as of December 31, 1999. 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, 4,000 shares were forfeited during 1999, and 21,000
shares are outstanding as of December 31, 1999. 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 the
remaining 18,000 shares were fully vested on July 26, 1999.
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, 1999, 1998, and 1997,
compensation expense related to these restricted stock awards and units
amounted to $140 thousand, $1.1million, and $1.3 million, respectively.
In connection with the proposed merger with PHFG, expected to be
consummated in 2000, all unvested restricted stock awards will immediately
vest.
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, floors
and corridors, 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 consolidated 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 and unused lines of credit are agreements
to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments and lines of credit generally have
fixed expiration dates or other termination clauses and may require payment
of a fee. Since certain of the commitments and lines of credit 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, 1999 and 1998, 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 $26.3 million, and $57.0 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 prices. Banknorth and its subsidiaries have
outstanding various commitments to sell real estate mortgages amounting to
approximately $25.7 million at December 31, 1999, and $49.1 million at
December 31, 1998.
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 likely 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, other
consumer loans are subject to statutory interest rate ceilings as imposed by
the State of Vermont and State of New York. No statutory interest rate
ceilings on consumer loans are imposed by the States of New Hampshire or
Massachusetts. At December 31, 1999, the State of Vermont imposed ceilings
ranged from 18% to 24% depending on the loan amount and underlying
collateral on consumer loans. The State of New York imposes ceilings of 16%
to 25% depending on the type of consumer loan. These caps expose the
Corporation to interest rate risk should market rates increase above these
limits. As of December 31, 1999 and 1998, $533.0 million and $504.3 million
of loans had interest rate caps.
Financial instruments with off-balance-sheet credit risk are as
follows:
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------------
(In thousands) Fixed Variable Total
-------------------------------------
<S> <C> <C> <C>
Financial instruments whose contract amounts represent maximum
credit risk-Non-trading instruments:
Commitments to extend credit for mortgage loans held for sale $11,142 $ 9,740 $ 20,882
Commitments to extend credit 16,396 67,274 83,670
Unused lines of credit - 883,607 883,607
Letters of credit and standby letters of credit - 77,984 77,984
Mortgage loans sold with recourse 772 80 852
-------------------------------------
Total non-trading instruments $28,310 $1,038,685 $1,066,995
-------------------------------------
Financial instruments whose notional amounts exceed the amount
of credit risk:
Interest rate swap agreements (pay fixed) $50,000 $ - $ 50,000
=====================================
Interest rate floor agreements (pay variable) $ - $ 295,000 $ 295,000
=====================================
Interest rate corridor agreements (pay fixed) $50,000 $ - $ 50,000
=====================================
<CAPTION>
As of December 31, 1998
-------------------------------------
(In thousands) Fixed Variable Total
-------------------------------------
<S> <C> <C> <C>
Financial instruments whose contract amounts represent maximum
credit-Non-trading instruments:
Commitments to extend credit for mortgage loans held for sale $30,307 $ 5,007 $ 35,314
Commitments to extend credit 36,009 115,634 151,643
Unused lines of credit - 751,428 751,428
Letters of credit and standby letters of credit - 76,568 76,568
Mortgage loans sold with recourse 1,096 520 1,616
-------------------------------------
Total non-trading instruments $67,412 $ 949,157 $1,016,569
=====================================
Financial instruments whose notional amounts exceed the amount of
credit risk:
Interest rate swap agreements (pay fixed) $50,000 $ - $ 50,000
=====================================
Interest rate floor agreements (pay variable) $ - $ 295,000 $ 295,000
=====================================
Interest rate corridor agreements (pay fixed) $50,000 $ - $ 50,000
=====================================
</TABLE>
Interest Rate Hedging Contracts
Interest rate hedging 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,
corridors and floors are used as an interest rate risk management tool to
correct imbalances between the re-pricing characteristics of certain
interest-earning assets and certain interest-bearing liabilities, thus
protecting net interest income from adverse changes in interest rates.
The Corporation is exposed to risk should the counterparty default in
its responsibility to pay interest under the terms of the 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, 1999, the Company does not expect any counterparties to fail to
meet their obligations.
The following provides information related to interest rate hedging
instruments as of December 31, 1999 and 1998 and for the years then ended:
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998
---------------------
<S> <C> <C>
Interest Rate Swap Contracts:
Notional amount at end of
year $ 50,000 $ 50,000
Average notional amount
during the year 50,000 20,274
Fair value at year-end 1,749 292
Weighted average rate paid
at end of year 4.99% 4.99%
Weighted average rate
received at end of year 6.15% 5.18%
Interest Rate Floor Contracts:
Notional amount at end of
year $295,000 $295,000
Average notional amount
during the year 295,000 295,000
Carrying value at end of
year 355 920
Fair value at year-end (1) 3,057
Weighted average rate paid
at end of year 6.16% 5.29%
Weighted average rate received
at end of year 6.50% 5.99%
Interest Rate Corridor Contracts:
Notional amount at end of
year $ 50,000 $ 50,000
Top/bottom rate of corridor
at end of year 6.0%/7.0% 6.0%/7.0%
Average notional amount
during the year $ 50,000 $ 1,370
Carrying value at end of year 313 393
Fair value at year-end 898 440
</TABLE>
The maturity of the floor contracts is $150 million in 2000 and $145
million in 2001. The maturity of the swap contracts is $16 million in 2001
and $34 million in 2002. All corridor contracts will mature in 2003.
Data Processing Contract
Effective June 24, 1998, the Company entered into a facilities
management contract with a third-party data processing company. Under terms
of the facilities management contract, as of December 31, 1999, the Company
will pay a minimum of $3.4 million for the remainder of the contract, which
expires in December 2000. In addition, fees will be adjusted annually for
inflation, based upon the Consumer Price Index for all Urban Consumers-All
Items, and based upon actual increases of certain expenditures made on
behalf of the Company by the third-party data processing company, with no
increase to exceed eight percent, or be less than two percent.
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 per year on medical
claims.
In the ordinary course of business there are various legal proceedings
pending against Banknorth and its subsidiaries. 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. Fair Value of Financial Instruments
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 and investment management operation that contributes net
fee income annually. The trust and investment management 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.
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 Held to Maturity
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 and Leases
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 Swap, Floor and Corridor Agreements
The estimated fair value of interest rate swap, floor and corridor
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. 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.
Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Debentures
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, 1999 December 31, 1998
-------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
-------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 148,057 $ 148,057 $ 164,826 $ 164,826
Money market investments 25,790 25,790 4,900 4,900
Securities available for sale 1,155,022 1,155,022 1,127,865 1,127,865
Loans held for sale 15,098 15,162 42,996 43,321
Investment securities held to maturity 15,819 15,880 20,545 21,606
Loans and leases 3,009,997 2,972,210 2,837,106 2,842,959
Less: Allowance for loan and lease losses 47,177 - 44,537 -
-------------------------------------------------------
Net loans and leases 2,962,820 2,972,210 2,792,569 2,842,959
Accrued interest receivable 22,762 22,762 21,244 21,244
Interest rate swap, floor & corridor agreements 668 2,646 1,313 3,789
Financial Liabilities:
Deposits:
Demand, NOW, savings and money market accounts $2,307,379 $2,307,379 $2,366,122 $2,366,122
Time deposits 1,288,365 1,290,452 1,273,375 1,277,906
Short-term borrowed funds 513,424 513,424 281,634 281,634
Long-term debt 65,490 64,540 74,325 76,158
Accrued interest payable 7,635 7,635 7,101 7,101
Guaranteed preferred beneficial interests in Corporation's
junior subordinated debentures 30,000 31,501 30,000 34,284
</TABLE>
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, 1999 and 1998,
the fair value was estimated at $92 thousand and $93 thousand for
commitments to extend credit and $89 thousand and $87 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, 1999 and 1998 were $1.7 million in
both years.
21. Parent Company Only Financial Statements
The following information presents the financial position of Banknorth
Group, Inc. (Parent Company) at December 31, 1999 and 1998 and the results
of its operations and cash flows for each of the years in the three-year
period ended December 31, 1999:
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
(In thousands) 1999 1998
---------------------
<S> <C> <C>
Assets
Cash and due from subsidiary banks $ 157 $ 76
Interest-bearing deposits with banks 10,216 -
Securities purchased under agreements to resell to a subsidiary bank 12,250 18,317
---------------------
Cash and cash equivalents 22,623 18,393
Investment in equity of bank subsidiaries 345,824 333,860
Investment in equity of non-bank subsidiaries 1,376 1,268
Securities available for sale, at fair value 4,535 6,039
Premises, equipment and software, net 7,389 11,601
Other assets 4,951 10,270
---------------------
Total assets $386,698 $381,431
=====================
Liabilities & Shareholders' Equity
Long-term debt $ 70 $ 8,263
Other liabilities 14,403 20,978
Liability to trust subsidiary related to capital securities 30,928 30,928
Total shareholders' equity 341,297 321,262
---------------------
Total liabilities & shareholders' equity $386,698 $381,431
=====================
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
(In thousands) 1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Income:
Dividends from bank subsidiaries $23,035 $ 62,559 $25,848
Service fees paid by subsidiaries 41,380 33,875 32,685
Interest income on loans from bank subsidiaries - 397 1,025
Other interest income 1,094 1,259 1,047
Net securities transactions - 164 220
Other income 2,249 2,133 2,069
--------------------------------
Total income 67,758 100,387 62,894
Expenses:
Compensation 18,420 16,067 15,459
Employee benefits 4,282 3,616 4,192
Net occupancy 2,973 2,161 2,005
Equipment and software 4,496 4,004 4,002
Printing and supplies 1,083 1,003 1,123
Legal and other professional 2,147 1,703 1,609
Data processing 5,537 4,541 4,895
Directors' fees and expenses 980 857 895
Communications 658 545 521
Training and education 522 617 591
Postage 1,261 745 899
Interest 424 714 922
Interest on liability to trust subsidiary related to capital securities 3,254 3,254 2,169
Merger and acquisition related expenses 932 7,293 -
Other expenses 4,335 2,294 2,193
---------------------------------
Total expenses 51,304 49,414 41,475
Income before income tax benefit and equity in undistributed (distributions in
excess of) income of subsidiaries 16,454 50,973 21,419
Income tax benefit (2,045) (2,070) (1,707)
---------------------------------
Income before equity in undistributed (distributions in excess of) income of bank
subsidiaries 18,499 53,043 23,126
Equity in undistributed (distributions in excess of) income of bank
subsidiaries 35,860 (24,135) 18,630
Equity in undistributed income of non-bank subsidiaries 177 12 60
---------------------------------
Net income $54,536 $ 28,920 $41,816
=================================
</TABLE>
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
(In thousands) 1999 1998 1997
----------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 54,536 $ 28,920 $ 41,816
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises, equipment and software 1,708 1,826 1,711
Amortization of employee restricted stock, net 116 797 769
Issuance of restricted stock units under directors' deferred compensation
plan, net 552 348 100
Net securities transactions - (164) (220)
Increase (decrease) in interest payable 12 (25) (10)
Decrease (increase) in other assets 5,701 (1,031) (7,933)
Increase (decrease) in accrued expense and other liabilities (6,587) 5,688 4,731
ESOP compensation expense 394 177 168
Equity in undistributed (distributions in excess of) income of subsidiaries (36,037) 24,123 (18,690)
----------------------------------
Total adjustments (34,141) 31,739 (19,374)
----------------------------------
Net cash provided by operating activities 20,395 60,659 22,442
----------------------------------
Cash flows from investing activities:
Proceeds from maturity of securities available for sale - 4,556 1,346
Proceeds from sale of securities available for sale 1,432 4,478 325
Purchase of securities available for sale - - (15,963)
Decrease (increase) in loans to subsidiaries - 10,438 (11,705)
Decrease (increase) in investment in equity of subsidiaries - (34,498) 3,794
Transfer of fixed assets from Parent Company to bank subsidiary 6,105 - -
Capital expenditures (3,700) (1,952) (2,211)
----------------------------------
Net cash provided by (used in) investment activities 3,837 (16,978) (24,414)
----------------------------------
Cash flows from financing activities:
Purchase of treasury stock - (17,337) (15,871)
Issuance of liability to trust subsidiary related to capital securities - - 30,000
Payments on long-term debt (8,193) (2,776) (2,696)
Exercise of employee stock options, net 4,959 5,127 3,907
Fractional shares repurchased - (17) -
Dividends paid (16,768) (15,072) (13,939)
Transfer from subsidiaries of restricted stock units under directors' deferred
compensation plan, net - - 1,431
----------------------------------
Net cash (used in) provided by financing activities (20,002) (30,075) 2,832
----------------------------------
Net increase in cash and cash equivalents 4,230 13,606 860
----------------------------------
Cash and cash equivalents at beginning of year 18,393 4,787 3,927
----------------------------------
Cash and cash equivalents at end of year $ 22,623 $ 18,393 $ 4,787
==================================
Additional disclosure relative to cash flows:
Interest paid $ 412 $ 739 $ 932
==================================
Taxes paid $ 1,811 $ 748 $ 440
==================================
Supplemental schedule of non-cash investing and financing activities:
Adjustment of securities available for sale to fair value, net of tax $ (39) $ (145) $ 48
Adjustment of securities available for sale to fair value, net of tax, at the
subsidiaries (23,715) 585 4,740
Minimum pension liability adjustments - (250) -
Issuance of restricted stock units under directors' deferred compensation
plan, net - - 1,739
</TABLE>
Item 9. 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 III.
Item 10. Directors and Executive Officers of the Registrant
Directors
Set forth in the table below is certain information concerning each of
Banknorth's incumbent directors. The dates indicated for service on the
Company's Board of Directors include service on the boards of the Company's
predecessor bank holding companies, but not the subsidiaries.
<TABLE>
<CAPTION>
Served as
Director
Name and Age Since Principal Occupation
- ----------------------------------------------------------------
Incumbent Directors whose terms expire in 2002:
<S> <C> <C>
Kathleen Hoisington, 57 1996 President,
Hoisington Realty, Inc.
Bennington, VT
(real estate agency)
Anthony J. Mashuta, 43 1998 President,
Cool Insuring Agency, Inc.
Latham, NY
(insurance services)
Angelo P. Pizzagalli, 65* 1983 Co-Chairman,
(Chairman of the Board Pizzagalli Construction
of Banknorth Group, Company
Inc.) South Burlington, VT
(construction business)
<CAPTION>
Incumbent Directors whose terms expire in 2001:
<S> <C> <C>
Thomas J. Amidon, Esq., 1982 Attorney at Law
60 * Stowe, VT
Jacqueline D. Arthur, 50 1996 Executive Vice President,
Frontline Group, Inc.
Nashville, TN
(association of technical
and professional
training companies)
Robert A. Carrara, 60 1983 Vice President and
Treasurer,
J.P. Carrara & Sons, Inc.
North Clarendon, VT
(concrete products)
William H. Chadwick, 63 1987 President and Chief
Executive Officer,
Banknorth Group, Inc.
Burlington, VT
Susan C. Crampton, 1985 Principal,
C.P.A., 59 * The Vermont Partnership
Jericho, VT
(business consultants)
George W. Dougan, 60* 1998 Vice Chairman,
Banknorth Group, Inc.
Burlington, VT
<CAPTION>
Incumbent Directors whose terms expire in 2000:
<S> <C> <C>
Robert F. Flacke, 67 1998 President,
Fort William Henry
Corporation
Lake George, NY
(Hotel operations)
Luther Frederick Hackett, 1983 President,
66* Yankee Insurance Group
South Burlington, VT
(financial services)
John B. Packard, 54 1997 President,
Catamount-Eagle Company,
LLC
Rye, NH
(manufacturer and distribu-
tor, industrial equipment)
Patrick E. Welch, 53* 1998 Chairman and Chief
Executive Officer,
National Life Insurance
Company
Montpelier, VT
<FN>
- -----------
<F*> Expected to be appointed to the Board of Directors of Peoples Heritage
Financial Group, Inc. ("Peoples Heritage") upon completion of the
Company's previously announced merger with and into Peoples Heritage.
</FN>
</TABLE>
Except as otherwise indicated, each of the individuals listed in the
foregoing table has been employed by the firm or has had the occupation set
forth opposite his or her name for the past five years. Before joining
Frontline Solutions, Inc. (and its corporate predecessor, American Training
Solutions, LLC), Ms. Arthur served as the Vice President and Chief Financial
Officer of CP Clare Corporation, an electronics manufacturer in Beverly
Massachusetts, and as Vice President and Chief Financial Officer of T Cell
Sciences, Inc., a biotechnology firm in Needham, Massachusetts. Before
becoming the Company's Vice Chairman in January, 1999 following the
Company's merger with Evergreen Bancorp, Inc., Mr. Dougan served as
Evergreen's Chairman, President and Chief Executive Officer. Before joining
National Life Insurance Company in 1997, Mr. Welch served as the Chairman of
the Board and Chief Executive Officer of GNA Corporation in Seattle,
Washington.
Certain of the nominees and incumbent directors also serve as
directors of other companies registered or filing reports under the
Securities Exchange Act of 1934, or investment companies registered under
the Investment Company Act of 1940, as follows:
Mr. Dougan Trans World Entertainment Corp.
Mr. Hackett Central Vermont Public Service Corporation and Vermont
Electric Power Company, Inc.
Mr. Welch Chairman, The Sentinel Group Funds
Executive Officers
Set forth below is certain information regarding each of Banknorth's
executive officers.
<TABLE>
<CAPTION>
Position with the Company
Name and Age and Occupation for Past Five Years
- ----------------------------------------------------------------------------
<S> <C>
William H. Chadwick, 63 President, Chief Executive Officer and
Director; Chair, Banknorth Policy Committee.
George W. Dougan, 60 Vice Chairman and Director; Member, Banknorth
Policy Committee. Previously: President,
Chief Executive Officer and Director of
Evergreen Bancorp, Inc., Glens Falls, NY
(prior to 1999).
Thomas J. Pruitt, 57 Executive Vice President and Chief Financial
Officer; Member, Bank-north Policy Committee;
Chairman, Banknorth Asset/Liability
Committee.
Richard J. Fitzpatrick, 50 Executive Vice President-Chief Banking
Officer; Member, Bank-north Policy Committee;
Chairman, Banknorth Presidents Council;
Chairman, Banknorth Credit Committee.
Previously: President, Chief Executive
Officer and Director, The Howard Bank, N.A.
Owen H. Becker, 62 Executive Vice President-Adminis-tration,
Banknorth; Member, Bank-north Policy
Committee.
Richard E. Johnson, 53 Senior Vice President-Investment and Asset
Management; Member, Banknorth Policy
Committee.
Thomas H. Pierce, 53 Senior Vice President-Marketing; Member,
Banknorth Policy Committee (since 1997).
Previously, Owner and Chief Executive
Officer, StayTuned Management Consulting,
Shelburne, VT (1995-1997); Executive Vice
President and Chief Operating Officer, Knight
Quality Stations, Boston, MA (prior to 1995).
James D. Adams, 54 Senior Vice President, Treasurer and
Principal Accounting Officer, Banknorth;
Treasurer, all Banknorth subsidiaries.
</TABLE>
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of the Exchange Act requires the Company's officers and
directors to file with the Securities and Exchange Commission reports of
their ownership and changes in ownership of the Company's equity securities
and to furnish the Company with copies of all such reports. Based solely on
the Company's review of copies of Section 16 reports received by it, or on
written representations from certain reporting persons that no filings were
required for those persons, the Company believes that during 1999 all
Section 16(a) filing requirements applicable to its officers and directors
were complied with.
Item 11. Executive Compensation
DIRECTOR COMPENSATION
Directors' Fees
Directors of the Company who are not also salaried employees of the
Company or its subsidiaries receive an annual retainer of $12,000. The Chair
of the Board receives an additional annual retainer of $20,000. Chairs of
the Company's standing committees receive an annual retainer of $2,000. All
directors, other than salaried employees of the Company, receive $750 for
each Board meeting attended and $600 for each committee attended, except
that if a committee meeting is held on the same day as a Board meeting the
committee meeting fee is $400. From time to time Board meetings and
committee meetings may be held by telephone conference, in which case
reduced meeting fees apply ($375 for Board meetings; $300 for committee
meetings). Directors are reimbursed for their out-of-pocket expenses
incurred in attending meetings of the Board or its committees.
Deferred Compensation Plan
Directors may elect to defer current receipt of some or all of their
fees under the Company's Amended and Restated 1994 Deferred Compensation
Plan For Directors and Selected Executives. Under the terms of the plan,
participants may elect to credit deferrals to either or both of (i) a cash
account which bears interest (adjusted annually) at a rate equal to one-half
a percentage point above the one-year Treasury bill rate, and (ii) a Company
common stock unit account. The number of common stock units credited to a
participant's account is determined by the amount of the deferrals and the
market value of the Company's common stock at the time the deferrals are
credited to the account. Payment of deferrals from the cash account is made
only in cash and payment from the Company stock account is made only in the
form of common stock. Payments are deferred until the participant's
retirement, death or disability, or at an earlier or later date elected by
the participant. Amounts deferred and interest and other accruals under the
plan represent a general unsecured obligation of the Company and no assets
of the Company have been segregated to meet the Company's obligations under
the plan.
Directors' Stock Ownership Guidelines
Because the Board believes that ownership of Company stock helps align
management and shareholder interests, the Board has adopted stock ownership
guidelines for directors and certain officers. The stock ownership
guidelines for executive officers are described below under the caption
"COMPENSATION COMMITTEE REPORT." The directors' stock ownership guidelines
recommend that each director own Company common stock equal in value to five
times the amount of the director's annual retainer. If a director fails to
achieve the recommended level of stock ownership within five years, the
director will receive his or her retainer partially in the form of the
Company's stock. Under the guidelines, stock units accrued under the
Deferred Compensation Plan are considered in satisfying the stock ownership
test, but stock options are not.
Directors Emeriti
Several former directors of the Company have been appointed to serve
as Directors Emeriti. Under By-law amendments adopted by the Board of
Directors in 1996, only individuals who were directors of the Company on
February 27, 1996 and who continue to serve until their retirement will
qualify for appointment as Directors Emeriti, provided that they retire
following attainment of age 65 and prior to the first Annual Meeting after
attainment of age 67. Directors Emeriti are entitled to attend meetings of
the Board of Directors, but do not vote on matters acted upon by the Board,
nor is their presence counted for purposes of determining a quorum. Director
Emeritus status terminates at the Annual Meeting following attainment of age
72. The Director Emeritus designation will terminate after all individuals
who served on the Board of Directors on February 27, 1996 have served as
Directors Emeriti or no longer qualify for such status. Each Director
Emeritus is paid an annual retainer of $12,000, but receives no meeting or
other fees. The present Directors Emeriti are Stephen E. Baker, Richard J.
Fleming, Sr., Richard M. Narkewicz, R. Allen Paul, Lawrence H. Reilly,
Margaret E. Richey, Thomas P. Salmon, Theodore H. Thomas, Jr. and Elizabeth
G. Woods.
Compensation Committee Interlocks and
Insider Participation
The Company is not aware of the existence of any interlocking
relationships between the senior management of the Company and that of any
other company.
The present members of the Compensation Committee of the Board are
John B. Packard (Chair), Robert A. Carrara, Anthony J. Mashuta and Angelo P.
Pizzagalli. President and Chief Executive Officer William H. Chadwick
attends meetings of the Compensation Committee ex officio, but is not a
member of the Committee and does not participate in its votes. The function
of the Company's Compensation Committee is to review and to make
recommendations to the Board of Directors concerning compensation and
benefits paid to the Company's employees and to the Boards of Directors of
the Company's subsidiaries. A Report of the Compensation Committee on
matters relating to executive compensation is set forth below.
Pizzagalli Construction Company ("Pizzagalli Construction"), of which
Compensation Committee member Angelo P. Pizzagalli is Co-Chairman, has acted
as a general contractor in construction projects for the Company or its
subsidiaries. The aggregate amount of the construction payments made by the
Company or its subsidiaries to Pizzagalli Construction during 1999 was $1.1
million. That sum includes amounts paid by Pizzagalli Construction to
subcontractors and does not represent the net remuneration earned by it.
COMPENSATION COMMITTEE REPORT
The Company's executive compensation program is administered by the
Compensation Committee of the Board of Directors. During 1999 the Committee
was composed of four independent, non-employee directors. Recommendations of
the Committee on compensation are submitted to the full Board of Directors
for approval.
Management and the Compensation Committee previously worked with the
consulting firm of Watson Wyatt Worldwide to develop and periodically review
the Company's overall compensation strategy. Based on the Committee's
recommendation, the Board has previously approved the following principal
objectives for the Company's executive policies:
* To increase management's focus on long-term strategic plans to
further the growth in the earnings of the Company.
* To increase management's focus on decisions to maximize annual
earnings.
* To link shareholder and management interests by tying a
significant portion of executive compensation rewards to changes
in shareholder value.
* To link shareholder and management interests by requiring
executive stock ownership.
* To attract experienced management.
* To retain quality management.
To reach these objectives, the executive compensation program for 1999
contained three components:
1. Base salary with possible annual merit increases based upon
individual performance.
2. Short-term cash incentive payments based on meeting the annual
plan and budget approved by the Board of Directors and taking into
consideration a comparison to a select group of peer banking
companies.
3. Long-term stock and stock-based cash awards, for meeting
performance goals approved by the Board of Directors over a two to
five year period and based on corporate performance.
The Committee believes that this compensation program fairly balances
individual, subsidiary and corporate performance and recognizes both the
short-term and long-term objectives of the Company.
As in prior years, the Committee in 1999 placed significant emphasis on
incentive compensation, which reduces the relative amount of compensation
that is fixed. Compensation for management positions is a mix of three
components. For example, the portions of total compensation for the
President and Chief Executive Officer ("CEO") under the approved plan for
1999, which would be earned if the Company met all performance objectives
was as follows:
<TABLE>
<S> <C>
Base Salary 45%
Short-Term Cash Incentives 22%
Long-Term Stock Awards 33%
Total Compensation 100%
</TABLE>
In general, the greater the executive's responsibilities, the greater
was the portion of his or her potential total compensation for 1999 that was
tied to performance incentives and to the value of the Company's common
stock. The Committee and the Board believe that this approach properly
reflects the greater potential impact senior management has on the strength
and performance of the Company over the longer term.
As in prior years, for 1999 the Committee and Board established a peer
group of like-sized, publicly traded commercial banking organizations for
purposes of executive compensation comparisons. The Company's 1999 executive
compensation program compared total compensation levels of the CEO and other
executives to approximately the 50th percentile of the compensation peer
group, which in 1999 consisted of 28 companies. There is no published data
readily available on the combined stock performance of that peer group,
though the Compensation Committee has from time to time reviewed the
relative stock performance over both one and five year periods of individual
companies included in the group.
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to a public company for taxable compensation in excess of $1
million paid to its CEO or any of its four most highly compensated executive
officers (other than the CEO). Based on historical compensation levels in
years prior to 1999, Section 162 has not previously limited the Company's
tax deduction for executive compensation. However, for 1999 Mr. Chadwick's
taxable compensation exceeded $1 million, due primarily to compensation
resulting from the exercise of stock options and vesting of performance
stock awards granted in prior years, which reflected appreciation in the
market value of the Company's common stock from the grant date market value.
It is expected, therefore, that Mr. Chadwick's 1999 taxable compensation in
excess of $1 million (approximately $390,000) will not be deductible to the
Company for tax purposes. Other than Mr. Chadwick, no senior executive of
the Company had taxable compensation for 1999 in excess of $1 million.
Components of Compensation
Base Salary. Consistent with the philosophy described above, the
Compensation Committee has generally targeted the base salary of the
Company's executive officers to be below the median of comparable
businesses. It has been the Committee's practice to review annually base
salaries for all managers and to approve base salary increases where
warranted in light of the executive's individual contribution to the
Company. Each position is assigned to a grade level and each grade level has
a range of base salary.
Mr. Chadwick's annual base salary rate was increased in March, 1999
from $320,000 to $400,000. In establishing his 1999 base salary level the
Committee and the Board considered the Company's 1998 performance, as
measured by established goals for net income, return on average equity
(ROAE), return on average assets (ROAA), efficiency ratio and the ratio of
non-performing assets to total assets (NPA/TA), as well as the Company's
1998 performance relative to its peer group. The other senior executives
whose performance met or exceeded expectations were also given base salary
increases in 1999. All salary increases for senior executives were approved
by the Compensation Committee and the Board.
Short-Term Cash Incentives. During 1999 executive personnel of the
Company and its subsidiaries earned cash incentives under the Management
Incentive Compensation Plan for meeting annual goals established by the
Board. Incentives for the parent company executives were based 100% on
corporate performance. Incentives for the subsidiary presidents were based
on 50% on corporate performance, 25% on the respective subsidiary's
performance and 25% on individual performance objectives. In every case, the
requirements of the Company to meet its overall goal were required to be met
before any incentives could be paid for the subsidiary's performance.
For 1999, there were five levels of incentives of participants.
Possible incentives for the President and CEO ranged between 0% and 90% of
salary paid for the calendar year and for the other four most highly
compensated executives, between 0% and 63%. Performance targets for the
Company included targets based on Net Income, ROAE, ROAA, efficiency ratio
and NPA/TA. Performance targets for each subsidiary were based on that
subsidiary's Net Income, ROAA, Efficiency Ratio, as well as the subsidiary's
efficiency ratio and NPA/TA ratio. The performance targets for 1999 were
designed to emphasize the link between short-term and long-term performance.
For purposes of calculating these performance measures, significant non-
recurring expenses (such as merger-related expenses) are excluded.
As in prior years, the 1999 plan included performance-based peer
comparisons of ROAE (weighted at two) and relative total return to
shareholders (weighted at one). The Compensation Committee exercised its
discretion under the plan to adjust slightly the 1999 peer comparison for
relative return to shareholders to a level consistent with payout of 100% of
the target awards. The Committee made that adjustment in light of the fact
that the Company's stock price, following announcement in June, 1999 of the
proposed merger with Peoples Heritage Financial Group, Inc. ("Peoples
Heritage") tended to follow the fluctuations in the market value of Peoples
Heritage common stock. The Committee also believed that the Company's stock
price relative to the peer group did not fully reflect the Company's solid
1999 financial results.
For the 1999 plan year, the President and CEO earned an incentive
award of 51% of base salary. The other four most highly compensated
executive officers of the Company earned incentive awards for 1999 ranging
from 41% to 35% of base salary.
Long-Term Stock Awards. The Banknorth Group, Inc. Equity Compensation
Plan (the Plan) was designed to reward improvements in the Company's long-
term performance. The Plan provides for discretionary awards to executives
designated by the Compensation Committee. Awards may include stock options,
stock appreciation rights, restricted stock, performance shares, restricted
stock units and performance share units. Because awards of options and stock
appreciation rights are keyed to the market value of the Company's stock at
the time of grant, the future value of those awards is entirely dependent on
subsequent increases in the market value of the Company's stock.
During 1999, the Board of Directors issued 278,000 non-qualified stock
options and awarded 19,500 performance shares (restricted stock with
performance-based restrictions) to select executives. Consistent with awards
made in prior years, the award amounts for 1999 were set to approximate the
compensation mix described above. The CEO received 10,000 non-qualified
stock options and 4,000 performance shares. These awards were the highest of
any Company executive. The other four most highly compensated executive
officers received, in the aggregate, 30,000 non-qualified stock options and
5,000 performance shares with vesting of performance shares over five years
tied to attainment of annual ROAE and ROAA targets. As in prior years,
performance share awards included an award of performance share units,
entitling the executive to a cash payment at vesting equal to one-half of
the market value of the vested performance shares.
Under the terms of the Plan, vesting of awards is accelerated upon a
change in control of the Company, which would include completion of the
Company's pending merger with Peoples Heritage.
Historically, the Compensation Committee and the Board have considered
stock-based awards annually based on the targeted compensation mix described
above and not based upon prior or anticipated future awards.
Executive Stock Ownership Guidelines
In order to further align the interests of executives and
shareholders, the Board in 1994 adopted stock ownership guidelines for the
Company's executives. (Similar guidelines were also adopted for the
Directors). The guidelines recommend that executives own Company stock equal
in market value to specified multiples of their base salary. The recommended
multiple for the CEO is three times base salary and for the next four most
highly compensated executive officers, the recommended multiple is two times
base salary. If an executive has not attained these levels of stock
ownership within five years, the executive may subsequently receive stock in
lieu of cash awards to which the executive may otherwise be entitled. Stock
options are excluded from the stock ownership calculations under the
guidelines.
Banknorth Group, Inc. Compensation Committee
John B. Packard, Chair Robert A. Carrara
Angelo P. Pizzagalli Anthony J. Mashuta
Pursuant to Item 402(a)(9) of Regulation S-K promulgated by the SEC,
neither the foregoing Report nor the material set forth below under the
caption "STOCK PERFORMANCE COMPARISON" shall be deemed to be filed with the
SEC for purposes of the Securities Exchange Act of 1934, nor shall such
Report or such material be deemed to be incorporated by reference in any
past or future filing by the Company under the Securities Exchange Act of
1934 or the Securities Act of 1933, as amended.
STOCK PERFORMANCE COMPARISON
Set forth below is a line-graph presentation comparing the change in
cumulative, five-year shareholder returns on the Company's stock with
cumulative, five-year returns of two peer indices-the Nasdaq U.S. Companies
Stock Index and the Nasdaq Bank Stock Index. Both indices are unmanaged and
published by Nasdaq.
Comparative Five-Year Total Returns*
BKNG Comparison to NASDAQ U.S. Companies and NASDAQ Banks
<TABLE>
<CAPTION>
NASDAQ NASDAQ NASDAQ
US BANK BKNG
------ ------ ------
<S> <C> <C> <C>
December 1994 100.000 100.000 100.000
January 1995 100.527 103.358 115.910
February 1995 105.809 108.414 115.820
March 1995 108.951 109.484 107.790
April 1995 112.381 112.519 112.380
May 1995 115.288 115.967 118.020
June 1995 124.623 120.898 124.380
July 1995 133.775 126.593 137.110
August 1995 136.491 133.407 146.850
September 1995 139.634 136.487 155.010
October 1995 138.829 138.715 148.020
November 1995 142.086 145.849 160.750
December 1995 141.335 149.002 180.690
January 1996 142.042 149.349 158.400
February 1996 147.456 151.400 160.750
March 1996 147.952 154.871 166.660
April 1996 160.208 154.083 165.470
May 1996 167.558 156.669 158.380
June 1996 160.006 157.446 163.150
July 1996 145.762 155.486 156.000
August 1996 153.937 166.256 169.100
September 1996 165.705 174.226 179.290
October 1996 163.870 181.938 165.500
November 1996 174.037 195.534 185.890
December 1996 173.892 196.734 200.380
January 1997 186.232 207.676 196.750
February 1997 175.932 219.401 218.670
March 1997 164.463 211.497 196.810
April 1997 169.582 216.244 206.530
May 1997 188.791 229.746 212.790
June 1997 194.590 246.095 226.250
July 1997 215.098 264.981 237.250
August 1997 214.787 262.824 246.010
September 1997 227.521 290.231 268.770
October 1997 215.665 291.412 297.670
November 1997 216.809 302.765 299.100
December 1997 213.073 329.387 317.640
January 1998 219.816 314.921 307.750
February 1998 240.487 332.307 318.600
March 1998 249.365 348.173 362.700
April 1998 253.566 352.514 360.210
May 1998 239.488 340.400 364.290
June 1998 256.215 341.060 369.280
July 1998 253.220 330.858 348.690
August 1998 203.167 269.515 274.810
September 1998 231.371 287.914 293.640
October 1998 241.360 308.821 319.990
November 1998 265.775 318.567 336.650
December 1998 300.248 327.115 379.520
January 1999 343.910 319.021 301.350
February 1999 313.083 316.369 271.640
March 1999 335.857 313.989 286.870
April 1999 345.300 337.120 268.470
May 1999 337.344 331.542 272.830
June 1999 367.468 336.987 337.370
July 1999 362.118 327.189 330.980
August 1999 376.461 314.973 298.320
September 1999 375.848 306.687 307.320
October 1999 403.163 331.190 347.500
November 1999 446.173 326.603 313.420
December 1999 542.430 314.424 277.020
Assumes $100 invested at the close of trading day preceding the first day of
the fifth preceding fiscal year in BKNG common stock, Nasdaq, and Nasdaq
Banks.
<FN>
<F*> Cumulative total return assumes reinvestment of dividends.
</FN>
</TABLE>
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation, and certain
other compensation, paid to the Chief Executive Officer and each of the
other four most highly compensated executive officers of the Company in 1999
for services rendered to the Company and its subsidiaries in all capacities
during each of the years 1997, 1998 and 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
--------------------------------------------------------------------------
Securities
Restricted Underlying All Other
Stock Options/ Compen-
Name and Principal Position Year Salary(1) Bonus Awards(2) SARs(#)(3) sation(4)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
William H. Chadwick, President and Chief 1999 $384,615 $204,654 $201,315 10,000 $6,400
Executive Officer 1998 327,499 182,509 174,000 10,000 6,400
1997 290,376 133,238 175,313 12,000 6,333
Thomas J. Pruitt, Executive Vice Chairman and 1999 $228,308 $ 97,186 $ 50,344 10,000 $5,992
Chief Financial Officer 1998 202,385 78,949 54,375 7,000 5,985
1997 188,846 60,656 70,125 8,000 6,041
George W. Dougan, Vice Chair 1999 $225,000 $ 95,778 $ 50,344 10,000 $6,666
Richard J. Fitzpatrick, Executive Vice President 1999 $218,269 $ 92,913 $ 50,344 10,000 $6,666
of the Company-Chief Banking Officer 1998 193,077 76,445 54,375 7,000 6,354
1997 158,846 64,634 5,063 5,000 5,708
Owen H. Becker-Executive Vice President- 1999 $167,500 $ 62,389 $100,688 - $ -
Administration 1998 147,923 57,704 - 8,847 4,478
1997 137,692 44,226 35,063 5,000 4,933
<FN>
<F1> Includes voluntary pre-tax and after-tax salary deferrals under the
Company's Employee Savings (401(k)) Plan.
<F2> During 1999, performance shares were awarded to the named executives
under the Company's 1997 Equity Compensation Plan as follows: Mr.
Chadwick, 4,000 shares; Mr. Pruitt, 1,000 shares; Mr. Dougan, 1,000
shares; Mr. Fitzpatrick, 1,000 shares; and Mr. Becker, 2,000 shares.
All such awards included an award of performance share units entitling
the holder to receive a cash payment upon vesting equal to 50% of the
value of the underlying shares. Vesting of both the performance shares
and performance share units awarded in 1999 requires continuous
service through the restriction period ending five years after the
date of grant and is subject to the additional condition that vesting
will occur in 25% increments (not to exceed 100% in the aggregate)
only in any of the calendar years 1999 through 2003 in which the
Company achieves a return on average equity of at least 13% and a
return on average assets of at least 1.1%. However, all awards will
vest immediately upon a change in control of the Company, which would
include completion of the Company's previously announced merger with
Peoples Heritage Financial Group, Inc. Holders of performance stock
are entitled to receive dividends on the performance stock during the
restriction period if and to the extent dividends are paid on the
Company's common stock generally. No dividends are paid on performance
stock units. The amounts disclosed in the table include the value of
both the performance stock and performance stock units on the date of
grant ($33.5625 per share for performance stock awarded in 1999),
without regard to restrictions. As of December 31, 1999, the total
number of unvested shares of performance stock held by the individuals
named in the table, together with the market value of those shares and
related performance stock units on such date ($26.75 per share),
without regard to restrictions, was as follows: Mr. Chadwick, 24,200
shares, $971,025; Mr. Pruitt, 9,400 shares, $377,175; Mr. Dougan,
1,000 shares, $40,125; Mr. Fitzpatrick, 6,500 shares, $260,813; and
Mr. Becker, 6,500 shares, $260,813.
<F3> The numbers shown in the table represent the shares underlying stock
options granted to the named executives under the Equity Compensation
Plan (or its predecessor plan) during each of the years shown. All
options shown in the table are subject to a two-year holding period
from the date of grant before they become exercisable, and expire ten
years from the date of grant. Options become immediately exercisable
upon a change in control of the Company (which would include
completion of the pending merger with Peoples Heritage) regardless of
whether the two-year holding period has been met. All 1999 options
were issued at an exercise price of $33.5625 per share, which
represents the fair market value of the Company's stock on the date of
grant (July 27, 1999).
<F4> Represents employer matching contributions under the Company's
Employee Savings (401(k)) Plan.
</FN>
</TABLE>
COMPENSATION AND BENEFIT PLANS
1997 Equity Compensation Plan
Executives may receive awards of stock options, stock appreciation
rights and restricted stock and restricted stock units (including
performance shares and performance share units) under the Company's 1997
Equity Compensation Plan (the "Equity Compensation Plan"). Eligibility is
limited to those officers and other key executive personnel of the Company
and its subsidiaries who are in positions in which they may contribute
significantly to the profitability of the Company. Eligible employees are
designated annually by the Board of Directors, upon recommendation of the
Compensation Committee, which administers the Plan. The Plan was approved by
the shareholders in 1997 and provides that up to 1,050,000 shares may be
issued, subject to standard antidilution adjustments such as for
recapitalizations, stock splits and stock dividends. The Plan terminates in
the year 2007 and any new Plan would require shareholder approval.
Awards of performance shares and performance share units made pursuant
to the Equity Compensation Plan, during the last three years to the five
executives named in the summary compensation table are disclosed in such
table and accompanying footnotes.
The following table sets forth certain information regarding the grant
of stock options under the Company's Equity Compensation Plan made during
1999 to the five executive officers named in the Summary Compensation Table.
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise Grant Date Grant Date
Options/SARs Employees in or Base Expiration Present
Name Granted(#) Fiscal Year Price($/Sh)(1) Date(2) Value(3)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
William H. Chadwick 10,000 3.6% $33.5625 7/27/09 $97,400
Thomas J. Pruitt 10,000 3.6% 33.5625 7/27/09 97,400
George W. Dougan 10,000 3.6% 33.5625 7/27/09 97,400
Richard J. Fitzpatrick 10,000 3.6% 33.5625 7/27/09 97,400
Owen H. Becker - - - - -
<FN>
<F1> Represents the fair market value of the Company's common stock on the
date of grant. The exercise price may be paid in cash or in shares of
the Company's stock valued at their fair market value on the date of
exercise, or a combination of the two, or through withholding of a
sufficient number of shares upon exercise.
<F2> All options listed in the table (a) were granted on July 27, 1999, (b)
are subject to a two-year holding period before they become
exercisable and (c) are subject to early termination following the
optionee's termination of employment during the option period.
<F3> Represents a discounted present value of $9.74 per share, determined
using the Black-Scholes valuation method and assuming a grant date
market price and option exercise price of $33.5625 per share, an
expected period of 5 years prior to option exercise, an annual
dividend yield of 2.45%, expected market value volatility of 30.58%
and an alternative, risk free investment rate of 5.86% per year.
</FN>
</TABLE>
In assessing the grant date values in the foregoing table it should be
kept in mind that no matter what theoretical value is placed on a stock
option on the date of grant, its ultimate value will be dependent on the
market value of the Company's stock at a future date and that value will in
large part depend, in turn, on the efforts of its management team to foster
the future success of the Company.
The following table sets forth certain information regarding year-end
values of outstanding stock options issued under the Equity Compensation
Plan (and its predecessor plan) to the executive officers named in the
summary compensation table, as well as information on option exercises
during 1999 by such officers:
Aggregated Option/SAR Exercises in Last Fiscal Year,
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Value of
Number of Unexercised
Number Unexercised In-the-Money
Of Shares Options/SARs Options/SARs
Underlying at FY-End(#)(2)(3) at FY-End($)(2)
Options/SARs Value Exercisable/ Exercisable/
Name Exercised Realized(1) Unexercisable Unexercisable
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William H. Chadwick 32,000 $476,623 0/20,000 $0/$0
Thomas J. Pruitt N/A N/A 29,000/17,000 $275,999/$0
George W. Dougan N/A N/A 126,000/10,000 $1,796,310/$0
Richard J. Fitzpatrick N/A N/A 15,000/17,000 $134,875/$0
Owen H. Becker 10,000 $142,306 0/8,847 $0/$0
<FN>
<F1> Represents the difference between the option exercise price and the
market value of the stock on the date of exercise.
<F2> Year-end values are based on the market value of the Company's stock
on December 31, 1999 ($26.75 per share), less the applicable option
exercise prices. The exercise prices of all options shown in the table
as unexercisable exceeded the per share market value of the Company's
common stock on December 31, 1999.
<F3> All presently exercisable options shown in the table for Mr. Dougan
represent Company stock options issued upon conversion of previously
issued Evergreen Bancorp. Inc. stock options in connection with the
Company's 1998 merger with Evergreen.
</FN>
</TABLE>
Management Incentive Compensation Plan
The Company's Management Incentive Compensation Plan, which provides
short-term performance incentives, is described above under the caption
"COMPENSATION COMMITTEE REPORT." Awards earned under the Plan for services
rendered during each of the last three years by the five executives named in
the summary compensation table are disclosed in such table.
Employee Savings (401(k)) Plan
The Company maintains an Employee Savings Plan (also known as a 401(k)
Plan) which provides a means for eligible employees to accumulate savings
and investment income without payment of current income taxes. Employees who
have completed at least three months of service, as defined in the Plan, and
are scheduled to work at least twenty hours per week are eligible to
participate. Participants may elect to contribute to the Plan between 1% and
15% of eligible compensation on a pre-tax basis or between 1% and 10% on an
after-tax basis, or a combination of both, up to a maximum of 15% of
eligible compensation. The Company makes a matching contribution in cash or
stock equal to 66 2/3% of the employee's contributions up to a maximum of 6%
of eligible compensation. A participant may direct the investment of his
Plan account among various portfolios maintained by the Company's trust and
investment management subsidiary, The Stratevest Group, N.A., which serves
as the trustee of the Plan. Participants are at all times fully vested in
their Plan accounts. Generally, distribution of employee contributions is
deferred until the participant's death, disability, retirement or other
termination of employment, except in cases of financial hardship. Voluntary
deferrals and matching employer contributions credited in the years 1997
through 1999 to the Plan accounts of the executives named in the summary
compensation table are reflected in the table and accompanying footnotes.
Deferred Compensation Plan
The Company's Amended and Restated 1994 Deferred Compensation Plan,
pursuant to which participants may elect to defer receipt of all or a
portion of their cash compensation, is described above under the caption
"DIRECTOR COMPENSATION-Deferred Compensation Plan."
Contracts with Management
Certain officers of the Company are each parties to a Change of
Control Agreement with the Company which provides for a lump sum payment to
the officer in the event his employment with the Company is terminated
(including a voluntary termination in some circumstances, such as due to a
material reduction in his duties) within two years following a change in
control of the Company. The change of control payment is equal to the value
of vested and unvested benefits and accruals under the Company's qualified
and non-qualified plans, plus a specified multiple (two times for each of
the named officers) of the aggregate of the officer's base salary then in
effect, the average annual cash bonus earned by the officer during a
specified calculation period (two years for each of the named officers) and
the value of the annual contributions and accruals for the officer's account
under the Company's qualified and non-qualified plans. The officer would
also be entitled under the agreement to immediate vesting of stock-based
compensation, including awards under the 1997 Equity Compensation Plan and
predecessor plans. Benefits under the change of control contracts are
subject to reduction to the extent necessary to avoid payment of
compensation that would be considered "excess parachute payments" under
Section 280G of the Internal Revenue Code.
Under these change of control agreements, a change in control is
deemed to have occurred if (i) any person (including an individual, entity
or group) directly or indirectly owns, controls or has power to vote 25% or
more of the Company's voting stock, (ii) any person controls the election of
a majority of the Company's directors, or (iii) the Board of Directors
determines that any person directly or indirectly exercises a controlling
influence over the management or policies of the Company. Completion of the
Company's pending merger with Peoples Heritage Financial Group, Inc. will
constitute a change of control for purposes of this Agreement, entitling Mr.
Dougan and Mr. Becker, whose employment will be terminated as a result of
the merger, to the specified change in control payment.
Mr. Dougan and the Company are also parties to an Employment Agreement
pursuant to which Mr. Dougan agreed to serve as Vice Chairman of the Company
for a three year period ending December 31, 2001, at an annual salary of
$225,000. During the term of his employment, Mr. Dougan is eligible to
participate in the Company's employee benefit plans and arrangements to the
same extent as other Company employees. Mr. Dougan's duties focus on
strategic planning, merger and acquisition opportunities and business
development. The payments to Mr. Dougan under his Change of Control
Agreement would be in lieu of any payments under his Employment Agreement to
which he would otherwise be entitled upon early termination of his
employment.
Employee Pension Plan
The Company maintains a non-contributory, trusteed retirement income
plan for the benefit of all employees of the Company and its subsidiaries
who are 21 years of age or older and who have completed at least 1,000 hours
of service during a one-year period, as defined in the plan. Pension
benefits are based on the participant's average annual compensation, years
of service and Social Security covered compensation at the date of
retirement. "Average annual compensation" is defined as the highest average
of the annual compensation earned in any three consecutive years during the
ten years prior to retirement; "Social Security covered compensation" is the
average of the taxable Social Security wage bases in effect during the last
35 years before attainment of Social Security normal retirement age; and a
"year of service" is ordinarily a year in which a participant has worked at
least 1,000 hours. A participant who retires on or after age 55 having at
least 10 years of service is entitled to early retirement benefits, with the
amount of the benefit adjusted accordingly. Participants are fully vested
after completion of five years of service. Pension benefits are payable as a
joint or single life annuity or (in certain circumstances) as a lump sum at
the election of the participant. Death benefits are payable to an employee's
spouse in certain circumstances if an employee who is vested in the Plan
dies prior to retirement. Special "grandfather provisions" apply to certain
employees of the Company or its predecessors or subsidiaries who were
covered under prior plans. Benefit calculations are subject to the annual
benefit limitation under Internal Revenue Code Section 415 ($130,000 for
1999) and to the limitation on annual covered compensation under Code
Section 401(a)(17) ($160,000 for 1999). However, the Company has entered
into supplemental retirement arrangements (described below) with certain
officers who would be affected by these limitations.
The following table represents estimated annual benefits payable under
the Plan upon retirement at age 65 in 2000 to participants in specified
compensation and years of service classifications. Actual benefits for
certain retirees covered by the grandfather provisions referred to above may
exceed the amounts shown in the table.
Assumed Average Three-Year Annual
<TABLE>
<CAPTION>
Years of Service
Compen- -------------------------------------------------------------
sation 10 15 20 25 30 35
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
25,000 3,250 4,875 6,500 8,125 8,938 9,750
50,000 7,469 11,203 14,937 18,671 20,296 21,921
75,000 12,344 18,515 24,687 30,859 33,296 35,734
100,000 17,219 25,826 34,437 43,046 46,296 49,546
125,000 22,094 33,140 44,187 55,234 59,296 63,359
150,000 26,969 40,453 53,937 67,421 72,296 71,171
175,000
& Higher 29,568 44,353 59,137 73,921 79,230 84,538
</TABLE>
For purposes of calculating benefits under the Plan for all
participants, including the executives named in the summary compensation
table, eligible earnings include salary and incentive compensation payments
(including any deferrals), but do not include matching employer
contributions under the 401(k) Plan. The credited years of service under the
Plan at December 31, 1999, for the executive officers named in the summary
compensation table were approximately as follows: Mr. Chadwick, 13 years;
Mr. Pruitt, 11 years; Mr. Dougan, 6 years; Mr. Fitzpatrick, 7 years; and Mr.
Becker, 5 years.
Supplemental Retirement Benefits
The Company maintains a supplemental retirement plan for those of its
executives (except as otherwise designated by the Board) whose pension under
the Company's pension plan would be subject to pay or benefit limits under
the Internal Revenue Code. Each of the executives named in the summary
compensation table other than Mr. Dougan participates in the Plan, which
restores the full amount of the benefit that would be payable under the
pension plan if the benefit formula were applied without regard to such
limitations. The Plan also provides that Mr. Becker, who joined the Company
in 1995 at age 57, will receive a benefit, payable at age 65, of either
$1,000 per month for life if he leaves the Company voluntarily before
becoming vested in the Company's qualified pension plan, or $2,000 per month
for life if he leaves after becoming vested. The table below shows total
estimated annual pension benefits (including supplemental benefits), for
specified compensation and years of service categories, assuming retirement
at age 65 in 2000.
Assumed Average Three-Year Annual
<TABLE>
<CAPTION>
Years of Service
-------------------------------------------------------------------
Compensation 10 15 20 25 30 35
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
175,000 31,844 47,765 63,887 79,609 85,296 90,984
200,000 36,719 55,078 73,437 91,796 98,296 104,796
225,000 41,594 62,390 83,187 103,984 111,296 118,609
250,000 46,469 69,703 92,937 116,171 124,296 132,421
275,000 51,344 77,015 102,687 128,359 137,296 146,234
300,000 56,219 84,328 112,437 140,546 150,296 160,046
325,000 61,094 91,640 122,187 152,734 163,296 173,859
350,000 65,969 98,953 131,937 164,921 176,296 187,871
375,000 70,844 106,265 141,687 177,109 189,296 201,484
400,000 75,719 113,578 151,437 189,296 202,296 215,296
425,000 80,594 120,890 161,187 201,484 215,296 229,109
450,000 85,469 128,203 170,937 213,671 228,296 242,921
475,000 90,344 135,515 180,887 226,859 241,296 256,734
500,000 95,219 142,828 190,437 238,046 254,296 270,546
525,000 100,094 150,140 200,187 250,234 267,296 284,359
550,000 104,969 157,453 209,937 262,421 280,296 298,171
575,000 109,844 164,765 219,887 274,609 293,296 311,984
</TABLE>
The supplemental plan also incorporates the terms of various
retirement agreements between the Company or its subsidiaries and certain
former employees, as well as the terms of a separate agreement with Mr.
Chadwick, which provides him with an additional supplemental annual
retirement benefit for the remainder of his lifetime following retirement at
age 65 (or earlier with the consent of the Company). That annual benefit is
equal to the number of years of his employment with the Company (and its
predecessor companies and subsidiaries), multiplied by $5,300, up to a
maximum annual benefit of $79,500. The annual benefit amount accrued for Mr.
Chadwick as of December 31, 1999 was $68,900. At the Company's election,
benefits under the agreement may be paid in equal monthly installments of
one-twelfth of the annual accrued benefit or in less frequent lump sum
payments. In the event of a change in control of the Company and subsequent
termination of his employment, Mr. Chadwick would be entitled to receive in
a lump sum a payment equal to the actuarial value of his accrued annual
benefit. The agreement also provides for benefits in the event Mr. Chadwick
becomes disabled while in the Company's employ.
The Board of Directors believes that supplemental retirement benefits
are an appropriate component of the Company's overall strategy for
attracting and maintaining executives of high caliber. Benefits under the
supplemental retirement arrangements referred to above will be paid out of
the general assets of the Company, either directly or through the purchase
of annuities or insurance coverage.
The Company assumed the terms of Evergreen Bancorp's supplemental
retirement plan in connection with the Company's merger with Evergreen
Bancorp in December, 1998. Benefit payments under that plan have been funded
through assets segregated in a rabbi trust. Mr. Dougan receives an
actuarially reduced monthly benefit under the plan in the amount of $12,544,
but does not participate in the Company's supplemental retirement plan
described above.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Stock Ownership of Directors and Executive Officers
As of February 15, 2000, the Company had issued and outstanding
23,460,731 shares of common stock. The following table shows the amount of
common stock owned beneficially as of such date, directly or indirectly, by
each incumbent director, by each of the executive officers named in the
summary compensation table presented in response to Item 11 of this Report,
and by all incumbent directors and executive officers of the Company as a
group. Except as otherwise indicated in the footnotes to the table the named
individuals possess sole voting and investment power over the shares listed.
<TABLE>
<CAPTION>
Shares Beneficially
Owned(1)(2)
Incumbent Directors Amount Percent
- ---------------------------------------------------------------
<S> <C> <C>
Thomas J. Amidon, Esq. 24,768(3) *
Jacqueline D. Arthur 3,474(4) *
Robert A. Carrara 9,027(5) *
William H. Chadwick 110,163(6) *
Susan C. Crampton, CPA 18,283(7) *
George W. Dougan 182,156(8) *
Robert F. Flacke 14,052(9) *
Luther Frederick Hackett 48,813(10) *
Kathleen Hoisington 2,039(11) *
Anthony J. Mashuta 12,233(12) *
John B. Packard 3,202(13) *
Angelo P. Pizzagalli 45,580(14) *
Patrick E. Welch 1,629(15) *
Certain Executive Officers
Owen H. Becker 6,500(16) *
Richard J. Fitzpatrick 36,445(17) *
Thomas J. Pruitt 68,063(18) *
All Directors and Executive
Officers as a Group
(19 individuals) 614,131 6%
<FN>
<F1> The number of shares beneficially owned by the persons set forth above
is determined in accordance with the rules under Section 13 of the
Securities Exchange Act of 1934, and the information is not
necessarily indicative of beneficial ownership for any other purpose.
Asterisk (*) indicates that the named individual's holdings represent
less than 1% of the outstanding Banknorth common stock.
<F2> Includes (i) 17,091 shares with respect to which voting or investment
powers are shared; (ii) 1,130 shares as to which beneficial ownership
is disclaimed; (iii) 51,100 shares of unvested performance stock
awarded to certain members of the group under the Company's 1997
Equity Compensation Plan or predecessor plans (together, the "Equity
Compensation Plan"); (iv) 203,700 shares underlying exercisable stock
options awarded to certain members of the group under the Equity
Compensation Plan, as amended ; (v) 44,297 stock units accrued to the
accounts of certain members of the group under the Company's 1994
Deferred Compensation Plan, as amended (the "Deferred Compensation
Plan"); and (vi) approximately 30,577 shares in which certain members
of the group have an indirect interest by virtue of their
participation in a pooled Company stock fund maintained under the
Company's 401(k) Plan. Each stock unit accrued under the Deferred
Compensation Plan will be payable in the form of one share of the
Company's Common Stock. Share information relating to the 401(k) Plan
and to the Deferred Compensation Plan is as of December 31, 1999, the
date of the most recent 401(k) Plan report and most recent quarterly
Deferred Compensation Plan accrual.
<F3> Includes (i) 8,682 stock units accrued to Mr. Amidon's account under
the Deferred Compensation Plan; and (ii) 1,000 shares underlying
exercisable stock options awarded under the Equity Compensation Plan.
<F4> Includes (i) 2,273 stock units accrued to Ms. Arthur's account under
the Deferred Compensation Plan; and (ii) 1,000 shares underlying
exercisable stock options awarded under the Equity Compensation Plan.
<F5> Includes (i) 4,289 stock units accrued to Mr. Carrara's account under
the Deferred Compensation Plan; and (ii) 1,000 shares underlying
exercisable stock options awarded under the Equity Compensation Plan.
<F6> Includes (i) 12,125 shares held by Mr. Chadwick indirectly through the
Company's 401(k) Plan; and (ii) 24,200 shares of unvested performance
stock granted under the Equity Compensation Plan.
<F7> Includes (i) 6,289 shares held by Mrs. Crampton jointly with her
husband; (ii) 4,080 shares held by her husband; (iii) 6,910 stock
units accrued to Ms. Crampton's account under the Deferred
Compensation Plan; and (iv) 1,000 shares underlying exercisable stock
options awarded under the Equity Compensation Plan.
<F8> Includes (i) 126,000 shares underlying exercisable stock options which
were awarded to Mr. Dougan by Evergreen Bancorp, Inc. ("Evergreen")
and converted into stock options to purchase common stock of the
Company upon consummation of the Company's merger with Evergreen; (ii)
1,284 shares allocated to Mr. Dougan's account under the Evergreen
Employee Stock Ownership Plan; and (iii) 1,000 shares of unvested
performance stock granted under the Company's Equity Compensation
Plan.
<F9> Includes (i) 3,600 shares underlying exercisable stock options which
were awarded to Mr. Flacke by Evergreen and subsequently converted
into stock options to purchase common stock of the Company; and (ii)
1,013 shares held by Mr. Flacke's wife, as to which beneficial
ownership is disclaimed.
<F10> Includes (i) 37,504 shares held by various corporations controlled by
Mr. Hackett; (ii) 117 shares held by Mrs. Hackett's wife, as to which
beneficial ownership is disclaimed ; and (iii) 2,000 shares underlying
exercisable stock options awarded under the Equity Compensation Plan.
<F11> Includes 1,000 shares underlying exercisable stock options awarded
under the Equity Compensation Plan.
<F12> Includes (i) 3,600 shares underlying exercisable stock options which
were awarded to Mr. Mashuta by Evergreen and subsequently converted
into stock options to purchase common stock of the Company; (ii) 2,700
shares held by Cool Insuring Agency, Inc., of which Mr. Mashuta is
President; and (iii) 3,250 stock units accrued to Mr. Mashuta's
account under the Deferred Compensation Plan.
<F13> Includes (i) 2,002 stock units accrued to Mr. Packard's account under
the Deferred Compensation Plan; and (ii) 1,000 shares underlying
exercisable stock options awarded under the Equity Compensation Plan.
<F14> Includes (i) 6,718 shares held by Pizzagalli Construction Company,
Inc., an affiliate of Mr. Pizzagalli as to which voting and investment
power is shared; (ii) 15,862 stock units accrued to Mr. Pizzagalli's
account under the Deferred Compensation Plan; and (iii) 1,000 shares
underlying exercisable stock options awarded under the Equity
Compensation Plan.
<F15> Includes 1,029 stock units accrued to Mr. Welch's account under the
Deferred Compensation Plan.
<F16> Includes (i) 6,500 shares of unvested performance stock granted to Mr.
Becker under the Equity Compensation Plan.
<F17> Includes (i) 8,195 shares held by Mr. Fitzpatrick indirectly through
the Company's 401(k) Plan; (ii) 6,500 shares of unvested performance
stock granted under the Equity Compensation Plan; and (iii) 15,000
shares underlying exercisable stock options awarded to Mr. Fitzpatrick
under the Equity Compensation Plan.
<F18> Includes (i) 7,655 shares held by Mr. Pruitt indirectly through the
Company's 401(k) Plan; (ii) 9,400 shares of unvested performance stock
granted under the Equity Compensation Plan; and (iii) 29,000 shares
underlying exercisable stock options awarded to Mr. Pruitt under the
Equity Compensation Plan.
</FN>
</TABLE>
--------------------
Shares Held in Fiduciary Capacity
As of February 15, 2000, the Company's wholly-owned trust and
investment management subsidiary, The Stratevest Group, N.A. ("Stratevest"),
held as fiduciary approximately 328,800 shares (or 1.4% of the outstanding
shares) over which it had sole voting and investment power and approximately
1,397,735 shares (or 5.9%) as to which it sought voting instructions from
beneficial owners, donors, beneficiaries, co-trustees or co-executors. In
cases in which Stratevest does not have sole voting control under the
governing instrument, it is Stratevest's practice to vote shares of the
Company's common stock in accordance with instructions from donors,
beneficiaries, co-trustees or co-executors and not to vote such shares
unless instructions are received. Shares held by Stratevest as fiduciary
over which it has sole voting power under either the governing instrument or
applicable statute are voted in a manner that best serves the interests of
trust beneficiaries.
The Company is not aware of any individual, person, entity or group
within the meaning of Section 13(d)(3) of the Securities Exchange Act of
1934 (the "Exchange Act") which currently owns beneficially more than 5% of
the Company's outstanding common stock.
Item 13. Certain Relationships and Related Transactions
Director Thomas J. Amidon is an attorney who practices law in Stowe,
Vermont. Director Susan C. Crampton's husband is a part owner of the law
firm of Gravel and Shea in Burlington, Vermont. Both of these law firms
performed various legal services for the Company or its subsidiaries during
1999 and it is expected that they will perform legal services for the
Company or its subsidiaries during 2000.
The Company's banking subsidiaries have had, and in the future expect
to have, banking transactions with directors and officers of the Company,
with members of their immediate families and with corporations and
organizations with which the directors and officers are affiliated. These
transactions were undertaken 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 with other persons,
and do not involve more than normal risk of collectibility or present any
other unfavorable features.
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Documents Filed as Part of this Report
a.1. List of financial statements:
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Balance Sheets at December 31, 1999 and December 31, 1998
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flow for the years ended December 31,
1999, 1998 and 1997
a.2. List of financial schedules
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.
<TABLE>
<CAPTION>
a.3. Exhibits
Item No.
<C> <S>
(2)(i) Agreement and Plan of Merger, dated as of June 1, 1999,
between Peoples Heritage Financial Group, Inc. and the
Company, previously filed with the Commission by Peoples
Heritage Financial Group, Inc. on June 9, 1999 as
Exhibit 2.1to its Current Report on Form 8-K/A, and
incorporated herein by reference.
(2)(ii) First Amendment, dated as of December 22, 1999, to
Agreement and Plan of Merger, dated as of June 1, 1999,
between the Company and Peoples Heritage Financial
Group, Inc., previously filed with the Commission on
December 23, 1999 as Exhibit 2 to the Company's Current
Report on Form 8-K, and incorporated herein by
reference.
(3)(i) Certificate of Incorporation of the Company, previously
filed with the Commission as Exhibit 3.1 to the
Company's Registration Statement on Form S-4
(Registration No. 333-68237) and incorporated herein by
reference.
(3)(ii) Amendment dated June 2, 1998 to the Company's
Certificate of Incorporation, previously filed with the
Commission as Exhibit 3(i) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998,
and incorporated herein by reference.
(3)(iii) By-laws of the Company, as amended and restated through
June 23, 1998, previously filed with the Commission as
Exhibit 3(ii) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, and
incorporated herein by reference.
(3)(iv) Text of amendment to Article III, Section 3.1 of the
Company's By-laws, as adopted on December 31, 1998,
previously filed with the Commission as Exhibit 3(iii)
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by
reference.
(4)(i) Common Stock Certificate of the Company, previously
filed with the Commission on December 7, 1995 as Exhibit
4 to the Company's Current Report on Form 8-K dated
November 30, 1989, as amended on Form 8-K/A, and
incorporated herein by reference.
(4)(ii) Rights Agreement, as amended, dated as of November 27,
1990, by and between the Company and Registrar &
Transfer Company, previously filed with the Commission
on September 4, 1998, as Exhibit 1 to the Company's
Registration Statement on Form 8-A/A.
(4)(iii) Amendment to Amended and Restated Rights Agreement,
dated as of June 1, 1999, previously filed with the
Commission by Peoples Heritage Financial Group, Inc. on
June 9, 1999, as Exhibit 99.2 to its Current Report on
Form 8-K/A, and incorporated herein by reference.
(4)(iv) Indenture, dated as of May 1, 1997, between Banknorth
Group, Inc. and the First National Bank of Chicago, as
Debenture Trustee, previously filed with the Commission
as Exhibit 4.1 to the Registration Statement on Form S-4
(Reg. No. 333-36257-01) filed by the Banknorth Capital
Trust I on September 24, 1997, and incorporated herein
by reference.
(4)(v) Form of Exchange Junior Subordinated Debenture,
previously filed with the Commission as Exhibit 4.2 to
the Registration Statement on Form S-4 (Reg. No. 333-
36257-01) filed by the Banknorth Capital Trust I on
September 24, 1997, and incorporated herein by
reference.
(4)(vi) Certificate of Trust of Banknorth Capital Trust I, dated
April 9, 1997, previously filed with the Commission as
Exhibit 4.3 to the Registration Statement on Form S-4
(Reg. No. 333-36257-01) filed by the Banknorth Capital
Trust I on September 24, 1997, and incorporated herein
by reference.
(4)(vii) Declaration of Trust of Banknorth Capital Trust I, dated
April 9, 1997, previously filed with the Commission as
Exhibit 4.4 to the Registration Statement on Form S-4
(Reg. No. 333-36257-01) filed by the Banknorth Capital
Trust I on September 24, 1997, and incorporated herein
by reference.
(4)(viii) Amended and Restated Declaration of Trust of Banknorth
Capital Trust I, dated as of May 1, 1997, previously
filed with the Commission as Exhibit 4.5 to the
Registration Statement on Form S-4 (Reg. No. 333-36257-
01) filed by the Banknorth Capital Trust I on September
24, 1997, and incorporated herein by reference.
(4)(ix) Form of Exchange Capital Security, previously filed with
the Commission as Exhibit 4.6 to the Registration
Statement on Form S-4 (Reg. No. 333-36257-01) filed by
the Banknorth Capital Trust I on September 24, 1997, and
incorporated herein by reference.
(4)(x) Form of Exchange Guarantee Agreement, previously filed
with the Commission as Exhibit 4.7 to the Registration
Statement on Form S-4 (Reg. No. 333-36257-01) filed by
the Banknorth Capital Trust I on September 24, 1997, and
incorporated herein by reference.
(10)(i) Supplemental Retirement Agreement dated July 1, 1991,
between the Company and William H. Chadwick.*
(10)(ii) Change-of-Control Agreement, dated as of July 17, 1998,
between the Company and William H. Chadwick, previously
filed with the Commission as Exhibit 10(ii) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and incorporated herein by reference.*
(10)(iii) Form of Change-in-Control Agreement, dated July 9, 1998,
between the Company and certain executive officers,
previously filed with the Commission as Exhibit 10(iii)
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by
reference.* (1)
(10)(iv) Employment Agreement, dated July 31, 1998, between the
Company and George W. Dougan, previously filed with the
Commission as Exhibit 10(iv) to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998,
and incorporated herein by reference.*
(10)(v) Change-in-Control Agreement, dated as of December 31,
1998, between the Company and George W. Dougan,
previously filed with the Commission as Exhibit 10(v) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by
reference.*
(10)(vi) Banknorth Group, Inc. Comprehensive Long-term Executive
Incentive Compensation Plan, as amended, 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)(vii) Banknorth Group, Inc. Supplemental Employee Retirement
Plan, dated January 1, 1995, previously filed with the
Commission as Exhibit10(xvi) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1994, and incorporated herein by reference.*
(10)(viii) Banknorth Group, Inc. 1998 Management Incentive
Compensation Plan, previously filed with the Commission
as Exhibit 10(ix) to the Company's Annual Report on Form
10-K for the year ended December 31, 1998, and
incorporated herein by reference.*
(10)(ix) Banknorth Group, Inc. 1999 Management Incentive
Compensation Plan, previously filed as Exhibit 10(x) to
the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, and incorporated herein by
reference.*
(10)(x) Banknorth Group, Inc. 2000 Management Incentive
Compensation Plan.*
(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 with the Commission 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 Bank-north Group,
Inc., previously filed with the Commission as Exhibit 4
to the Company's Registration Statement on Form S-8
(Reg. No. 333-38349), and incorporated herein by
reference.*
(10)(xiii) Amended and restated 1995 Stock Incentive Plan of
Evergreen Bancorp, Inc., previously filed with the
Commission as Exhibit 10(e) to the Evergreen Bancorp,
Inc. Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated herein by
reference.*
(10)(xiv) 1995 Directors Stock Option Plan of Evergreen Bancorp,
Inc., previously filed with the Commission as Exhibit
4.1 to Evergreen Bancorp, Inc.'s Registration Statement
on Form S-8 (Registration No. 333-50225), and
incorporated herein by reference.*
(10)(xv) Amendment No. 1 to Directors Stock Option Plan of
Evergreen Bancorp, Inc., previously filed with the
Commission as Exhibit 10(g) to Evergreen Bancorp, Inc.'s
Annual Report on Form 10-K for the year ended December
31, 1997, and incorporated herein by reference.*
(10)(xvi) Supplemental Executive Retirement Plan of Evergreen
Bancorp, Inc., previously filed with the Commission as
Exhibit 10(I) Evergreen Bancorp, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference.*
10(xvii) Evergreen Bancorp, Inc., previously filed with the
Commission as Exhibit 10(i) to Evergreen Bancorp, Inc.'s
Annual Report on Form 10-K for year ended December 31,
1995, and incorporated herein by reference.*
10(xviii) Stock Option Agreement, dated as of June 1, 1999,
between Peoples Heritage Financial Group, Inc. (as
grantee) and the Company (as issuer), previously filed
with the Commission by Peoples Heritage Financial Group,
Inc. on June 9, 1999 as Exhibit 10.1to its Current
Report on Form 8-K/A, and incorporated herein by
reference.
(10)(ix) Stock Option Agreement dated as of June 1,1999, between
Peoples Heritage Financial Group, Inc. (as issuer) and
the Company (as grantee), previously filed with the
Commission by Peoples Heritage Financial Group, Inc. on
June 9, 1999 as Exhibit 10.2 to its Current Report on
Form 8-K/A, and incorporated herein by reference.
(10)(xx) Form of letter agreement between affiliates of the
Company and Peoples Heritage Financial Group, Inc.,
previously filed with the Commission by Peoples Heritage
Financial Group, Inc. on June 9, 1999 as Exhibit 10.3 to
its Current Report on Form 8-K/A, 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, which are fully
described in the note 18 to the 1999 Banknorth Group,
Inc. consolidated financial statements included
elsewhere in this Report, is reflected in diluted
earnings per share. See footnote 16 to the consolidated
financial statements for details on earnings per share
computations for 1999, 1998 and 1997.
(21) Subsidiaries of Banknorth Group, Inc. (name and
jurisdiction of incorporation):
Evergreen Bank, N.A.
-United States
and its wholly owned subsidiary, Evergreen Realty
Funding Corp.
-New York
The Howard Bank, N.A.
-United States
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
North American Bank Corporation
-New Hampshire
and its wholly owned subsidiary, Farmington National
Bank
-United States
The Stratevest Group, N.A.
-United States
First Massachusetts Bank, N.A.
-United States
and its wholly owned subsidiaries, First Massachusetts
Security Corporation, and North-group Investment and
Insurance Services, Inc.
-Massachusetts
Banknorth Capital Trust I
-Delaware
North Group Realty
-Vermont
(23) Independent Auditors' Report
Consent of Independent Public Accountants
<FN>
<F*> denotes management contract or compensatory plan
<F1> The form of Change-in-Control Agreement for Mssrs. Thomas J. Pruitt,
Richard J. Fitzpatrick and Owen H. Becker is substantially the same.
</FN>
</TABLE>
(b) Reports on Form 8-K
8-K Report filed with the Commission on December 23, 1999, reporting
on the execution of the First Amendment, dated as of December 22,
1999, to Agreement and Plan of Merger, dated as of June 1, 1999, with
Peoples Heritage Financial Group, Inc., which amendment, among other
things, extended the deadline for completion of the Company's merger
with and into Peoples Heritage from April 1, 2000 to May 31, 2000.
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 28, 2000
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.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Angelo P. Pizzagalli Director, Chairman of the Board March 28, 2000
- --------------------------
Angelo P. Pizzagalli
/s/ William H. Chadwick Director, President and Chief Executive Officer March 28, 2000
- -------------------------- (Principal Executive Officer)
William H. Chadwick
/s/ Thomas J. Pruitt Executive Vice President and Chief Financial March 28, 2000
- -------------------------- Officer (Principal Financial Officer)
Thomas J. Pruitt
/s/ James D. Adams Treasurer and Principal Accounting Officer March 28, 2000
- --------------------------
James D. Adams
/s/ Thomas J. Amidon Director March 28, 2000
- --------------------------
Thomas J. Amidon
/s/ Jacqueline D. Arthur Director March 28, 2000
- --------------------------
Jacqueline D. Arthur
/s/ Robert A. Carrara Director March 28, 2000
- --------------------------
Robert A. Carrara
Director March 28, 2000
- --------------------------
Susan C. Crampton
/s/ George W. Dougan Director March 28, 2000
- --------------------------
George W. Dougan
/s/ Robert F. Flacke Director March 28, 2000
- --------------------------
Robert F. Flacke
/s/ Luther F. Hackett Director March 28, 2000
- --------------------------
Luther F. Hackett
Director March 28, 2000
- --------------------------
Kathleen Hoisington
Director March 28, 2000
- --------------------------
Anthony J. Mashuta
/s/ John B. Packard Director March 28, 2000
- --------------------------
John B. Packard
Director March 28, 2000
- --------------------------
Patrick E. Welch
</TABLE>
A 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 out-standing 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 and leases (net of unearned income), federal
funds sold and securities purchased under agreements to resell.
Efficiency ratio
Total other operating expense, excluding OREO/ repossession expense,
goodwill amortization, and other non-recurring expenses, as a percentage of
net interest income, on a fully taxable equivalent basis, and total other
operating income, excluding securities gains/losses and non-recurring items.
All items 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
items 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 and leases charged off
Reductions to the allowance for loan and lease losses for loans and leases
written off, net of the recovery of loans and leases 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 other real estate owned (OREO) is 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 and
lease 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.
Pooling of interests
An accounting method used for a combination in which the shareholders of the
combining entities become shareholders in a combined company. The operating
results of the two entities are "pooled" together historically as if they
were always one company.
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
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.
EXHIBIT 10(I)
AGREEMENT
THIS AGREEMENT, executed as of the first day of July, 1991, between
BANKNORTH GROUP, INC., a bank holding company organized under the laws of
the State of Delaware (hereinafter called the "Corporation") and WILLIAM H.
CHADWICK (hereinafter called the "Employee");
WHEREAS, the Employee is the Vice Chairman and Chief Operating Officer
of the Corporation; and
WHEREAS, the parties hereto, recognizing that the Employee cannot
achieve the full retirement benefit of the Corporation's pension plan
through his services to the Corporation under the Employment Agreement dated
as of February 24, 1987, among the Employee, Howard Bancorp (predecessor in
interest to the Corporation) and The Howard Bank, N.A., as amended by
Amendment dated October 9, 1990 among Employee, Corporation and the Howard
Bank, N.A. (hereinafter collectively called the "Employment Agreement"),
agreed prior to the Employee's employment that the Employee would receive
the benefits described in this Agreement; and
WHEREAS, the Corporation deems it to be in the Corporation's best
interest to attempt to retain the Employee's services as Vice Chairman and
Chief Operating Officer of the Corporation at least until he reaches his
normal retirement date on December 1, 2001 (hereinafter sometimes the
"normal retirement date");
NOW, THEREFORE, in consideration of the service performed in the past
and to be rendered in the future by the Employee, the parties hereto agree
as follows:
1. Prior Agreement. This Agreement is intended to supersede and
replace in all respects an agreement dated as of November 1, 1987 ("Prior
Agreement") between Howard Bancorp (predecessor in interest to the
Corporation) and Employee. The Prior Agreement is hereby terminated by
Employee and Corporation, who declare the Prior Agreement void and of no
further effect.
2. Employment. The Employee agrees that benefits will accrue
hereunder only as long as he continues to serve as Vice Chairman and Chief
Operating Officer of the Corporation. Notwithstanding the Employee's
continued service with the Corporation as consideration for the
Corporation's promises herein, this Agreement shall not be construed as a
contract of employment and nothing contained in this Agreement shall be
construed as a right of the Employee to be continued in the employment of
the Corporation or as a limitation on the right of the Corporation to
discharge the Employee.
3. Compensation After Retirement. The Employee may retire from the
active service of the Corporation on December 1, 2001, or upon such earlier
or later date as may be mutually agreed upon by the Employee and the
Corporation. Commencing on the first business day of the month following
the Employee's normal retirement date, or an earlier or later retirement
date if so agreed by the parties, the Corporation shall pay to the Employee
in each year of the Employee's life after retirement the Annual Deferred
Compensation Benefit determined as of the date of retirement in equal
monthly installments. Such payments to the Employee shall terminate as of
the date of the Employee's death. (For example, if the Employee retires on
his normal retirement date with a full accrued Annual Deferred Compensation
Benefit he shall be paid the sum of $6,625 per month until the date of his
death.)
4. Pre-retirement Death Benefit. If the Employee dies while still in
the active service of the Corporation, the Corporation shall pay to the
Employee's spouse, beginning on the first business day of the month
following the month in which the Employee died, a deferred compensation
benefit which shall be equal to fifty percent (50%) of the Annual Deferred
Compensation Benefit which has accrued as of the date of the Employee's
death. Such deferred compensation benefit payments shall be paid to the
Employee's spouse in equal monthly installments and shall terminate as of
the date of death of the Employee's spouse. If on the date of his death the
Employee is in the active service of the Corporation and is not married,
then no deferred compensation benefit shall be payable hereunder. (For
example, if the Employee were to die on December 14, 1991, then the
Employee's spouse, if he were then married, would be entitled to receive a
monthly payment of $1,104.17 [($21,200 + $5,300 annual accrual x 1 year) x
50% divided by 12 months] until the date of her death.)
5. Disability Benefit.
(a) If the Employee, due to a permanent physical or mental disability,
is unable to continue to serve in his capacity as Vice Chairman and Chief
Operating Officer, the Corporation shall pay to the Employee annually until
the date of his death the greater of (i) the Annual Deferred Compensation
Benefit which the Employee has accrued as of the date of disability, or (ii)
fifty percent (50%) of the total Annual Deferred Compensation Benefit which
the Employee would have accrued had he remained in the active service of the
Corporation until December 1, 2001. Such deferred compensation benefit
payments shall commence as of the first business day of the month following
the date of disability and shall be paid in equal monthly installments.
(b) If the Employee dies while so disabled and while receiving
benefits hereunder, the Corporation shall pay to the Employee's spouse, if
then living, beginning on the first day of the month following the month in
which the Employee died, a deferred compensation benefit which shall be
equal to fifty percent (50%) of the Annual Deferred Compensation Benefit
which would have been paid to the Employee because of such disability had he
survived. Such deferred compensation benefit payments shall be paid to the
Employee's spouse in equal monthly installments in the same manner as the
payments were made to the Employee. Such payment to the Employee's spouse
shall terminate as of the date of death of the Employee's spouse. If the
Employee is not married as of the date of his death, no deferred
compensation benefit shall be payable hereunder.
(c) The Board of Directors of the Corporation shall determine whether
a permanent disability for this purpose exists and the date of such
permanent disability, and such determinations shall be binding upon the
Employee and the Corporation.
6. Termination of Employment.
(a) If the Employee voluntarily terminates his employment with the
Corporation prior to December 1, 2001, or if the Corporation discharges the
Employee without his consent (whether with or without cause) prior to
December 1, 2001, the Corporation shall pay to the Employee the Annual
Deferred Compensation Benefit which the Employee has accrued as of the date
of termination of employment. Such deferred compensation benefit payments
shall commence upon the first business day of the month following December
1, 2001 (on which date the Employee shall be deemed to have retired). Such
payments to the Employee shall be made in accordance with the provisions of
Paragraph 3 hereof.
(b) If following termination of employment the Employee dies prior to
December 1, 2001, the Employee's spouse shall be entitled to receive a
deferred compensation benefit which shall equal fifty percent (50%) of the
Annual Deferred Compensation Benefit which would have been paid to the
Employee following his normal retirement date. Such deferred compensation
benefit payments shall not commence until the first business day of the
month following December 1, 2001, if the Employee's spouse is then living,
and shall be paid in equal monthly installments. Such payments to the
Employee's spouse shall terminate as of the date of her death. If following
termination of employment the Employee dies subsequent to receipt of any
payments hereunder, or if the Employee is not married as of the date of his
death, no deferred compensation benefit shall be payable hereunder after the
Employee's death.
(c) If the Employee shall become disabled after his employment with
the Corporation has terminated, he shall not be entitled to any payment of
deferred compensation benefits hereunder until his deemed retirement as
described in Paragraph 6(a) above.
7. Annual Deferred Compensation Benefit. The Annual Deferred
Compensation Benefit shall be determined as follows:
(a) As of December 1, 1990, the Annual Deferred Compensation Benefit
is hereby defined to be $21,200.
(b) On December 1 of each year from and including December 1, 1991
through and including December 1, 2001, the Annual Deferred Compensation
Benefit shall be increased by $5,300, if during the entire preceding year
the Employee was in the active service of the Corporation. If the Employee
retires, dies, is disabled or his service with the Corporation is terminated
before December 1, 2001 in circumstances under which the Employee or his
spouse is entitled to benefits hereunder, the Annual Deferred Compensation
Benefit shall be increased by $442 for each full calendar month that the
Employee was in the active service of the Corporation in any final partial
year of service.
(c) Therefore, the maximum possible Annual Deferred Compensation
Benefit is $79,500 per year.
8. Change-in-Control.
(a) In the event of a "Change-in-Control" (as defined in Paragraph 2.6
of the Employment Agreement) of the Corporation, subsequent to which the
Employee's employment is terminated, then at the time of the last payment of
compensation to the Employee under the Employment Agreement or any successor
agreement there shall also be paid to the Employee hereunder a lump sum
payment which shall be actuarially equivalent to the payments he would be
entitled to receive upon his normal retirement date if then living, provided
that such Annual Deferred Compensation Benefit shall accrue pursuant to
Paragraph 7 hereof only until the date of such last payment of compensation
under the Employment Agreement.
(b) The term "actuarially equivalent" as used in this Agreement shall
mean actuarially equivalent based upon the 1983 Group Annuity Mortality
Table and based on eight percent (8%) interest.
9. General Rules of Calculation and Construction.
Notwithstanding any other provisions of this Agreement:
(a) The Annual Deferred Compensation Benefit payable to the Employee
shall not be greater than $79,500 per year.
(b) The deferred compensation benefit payable to the Employee's spouse
in any year shall not be greater than fifty percent (50%) of the benefit to
which the Employee would have been entitled were he living.
(c) No payments shall be due the Employee after his death.
(d) No payments shall be due the Employee's spouse after her death.
(e) Only the person who is the Employee's spouse at the date of
execution of this Agreement shall be entitled to benefits hereunder and then
only if such person is the Employee's spouse at the time of his death, and
no other spouse of the Employee shall be entitled to benefits hereunder.
(f) Accruals to the Annual Deferred Compensation Benefit shall be
prorated on the basis of full months only and not on a daily basis.
(g) There shall be no proration of benefits hereunder for any partial
month.
(h) No person other than the Employee and his spouse at the time of
execution of this Agreement shall have any right to deferred compensation
benefits hereunder.
(i) For so long as the Employee shall be entitled to receive payments
under Paragraph 4.3(a) of the Employment Agreement, the Employee shall be
considered to be in the service of the Corporation as Vice Chairman and
Chief Operating Officer for all purposes of this Agreement (specifically
including benefit accrual), but he shall not be considered to be in the
Corporation's service beyond his normal retirement date.
10. Forfeiture of Deferred Compensation Benefits. The Employee shall
comply with the following conditions during the term of his employment and
following the termination of his employment until such time as his deferred
compensation benefits are no longer payable to him under the terms of this
Agreement:
(a) The Employee shall not, without the written consent of the
Corporation, be an officer, director, shareholder, employee or agent of, any
corporation, partnership or other entity, which in the reasonable opinion of
the Board of Directors of the Corporation is in competition with the
business of the Corporation and/or its subsidiaries; provided, however, that
nothing in this Agreement shall prohibit the Employee from owing stock or
other securities of a competitor which do not exceed one percent (1%) of any
class of such competitor's outstanding shares at any given time. Ownership
of such shares exceeding one percent (1%) shall be subject to approval by
the Board of Directors of the Corporation.
(b) For a period of six months following his retirement or termination
of employment with the Corporation, the Employee shall, upon the request of
the President of the Corporation, provide such services to the Corporation
as will insure the smooth transition of the Employee's duties to his
successor in employment.
(c) The Employee shall not engage in serious willful misconduct,
including, but not limited to, the commission by him of a felony or the
perpetration by him of a common-law or other fraud upon the Corporation or
any of its subsidiaries.
If the Employee breaches any of the conditions of this or any other
paragraph of this Agreement, the Agreement shall immediately be terminated,
and thereupon the Employee, his wife and all other persons shall forfeit all
rights to any deferred compensation benefits that are thereafter due under
this Agreement.
11. Assignment. Neither the Employee nor his spouse shall have any
right to alienate, encumber, sell, transfer, assign or otherwise dispose of
the rights or benefits provided under this Agreement, and in the event of
any attempted assignment, transfer or other disposition, the Corporation
shall have no further liability hereunder.
12. Unsecured Promise. The rights of the Employee and his spouse
under this Agreement shall be solely those of an unsecured creditor of the
Corporation. No asset of the Corporation shall be deemed to be held under
any trust for the benefit of the Employee of his spouse, or to be security
for the performance of the obligations of the Corporation hereunder.
13. Miscellaneous. This Agreement shall be binding upon and inure to
the benefit of the Corporation, its successors and assigns, and the
Employee, his spouse and their legal representatives. This Agreement shall
not be modified or amended except by a writing signed by both of the
parities. This Agreement shall be construed in accordance with the laws of
the State of Vermont. The invalidity or unenforceability of all or any part
of any provision hereof shall in no way affect the validity or
enforceability of any other provision or the remainder of any such
provision.
14. Right to Accelerate Payment of Benefits.
Notwithstanding any other provision of this Agreement with regard to
the payment of benefits, the Corporation hereby reserves the right, in its
sole discretion, to make one or more lump sum payments in lieu of any
provisions hereof providing for any other manner of payment, without the
consent of the Employee or his spouse; provided, however, that the
Corporation may not pay any benefit after the date on which it would be due
hereunder. Any lump sum payment so made shall be actuarially equivalent to
the payments that it is replacing.
IN WITNESS WHEREOF, the parties have signed this Agreement as of the
date first above written.
In Presence of: BANKNORTH GROUP, INC
- ------------------- BY: /s/ John H. Barry
-------------------------
Its Duly Authorized Agent
/s/ Catherine A. John BY: /s/ William H. Chadwick
- --------------------- -----------------------
Catherine A. John William H. Chadwick
/s/ Michael H. Venuti, Jr.
- --------------------------
Michael H. Venuti, Jr.
HOWARD BANK
SERP - FASB EXPENSE FOR ONE EXECUTIVE
BENEFIT IS BASED ON 25 YEARS OF SERVICE, WITH STATUTORY LIMITS
EXPENSE FUNDED
<TABLE>
<CAPTION>
VALUE OF PROJECTED EXPECTED ASSETS IF
PROJECTED SERVICE BENEFIT INTEREST RETURN ON TOTAL EXPENSE
Year BENEFIT COST OBLIGATION COST ASSETS PSC EXPENSE IS FUNDED
- -----------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
1990 44941 4221 17586 1407 0 2198 7826 7826
1991 97931 9197 46837 3747 626 5573 17891 26343
1992 160906 15111 90947 7276 2107 7393 27672 56122
1993 234783 22049 153119 12250 4490 10155 39964 100576
1994 321602 30203 237706 19016 8046 14770 55943 164565
1995 423517 39774 349862 27989 13165 23177 77775 255505
1996 543082 51002 495857 39669 20440 41315 111545 387491
1997 683432 0 683432 54675 30999 0 122777 541267
</TABLE>
EXHIBIT 10(X)
Banknorth Group, Inc.
2000 Management Incentive Compensation Plan
February 22, 2000
Purpose: The purpose of the Banknorth Group, Inc. 2000 Management Incentive
Compensation Plan is to assure the continued growth of the company and
provide incentive compensation payment opportunities for select company
executives in grade levels 29 and above.
Eligibility:
A. Employees, who are being terminated, as a result of the merger with
Peoples Heritage will receive a prorated payment based upon their
termination date. If that date occurs prior to 7/1/00, the payment
will be based on the 1Q Earning Per Share (EPS) results for Banknorth
Group. If the termination occurs after 7/1/00, the incentive payment
will be based upon a combination of BNG 1Q EPS and the appropriate
Peoples Heritage Incentive Plan for the 2Q. All the terms and
conditions regarding eligibility for specific severance plans will
apply to the payment of this incentive payment as well.
B. Employees remaining with the new company will participate in the BNG
EPS plan for the 1Q and will participate in the appropriate Peoples
Heritage Plan for the other three-quarters of 2000.
Company Performance: Company performance awards will be based upon the
attainment of First Quarter Diluted Earnings Per Share Goal. The following
table will be used in determining awards.
Earnings Per Share % of Target Award
---------------------------------------
$.65 150%
$.64 140%
$.63 130%
$.62 120%
$.61 110%
$.60 100%
$.59 90%
$.58 80%
$.57 70%
$.56 60%
$.55 50%
Grade Levels and Target Awards*
Grade Level Target Awards*
-----------------------------
36 50%
35 40%
33 & 34 35%
31 & 32 25%
30 20%
29 15%
*In the case of terminating employees, the target awards will be a
percentage of their 2000 base salary earnings through the date of
termination. For employees remaining with the new company the target award
will be a percentage of earnings through March 31, 2000
Example of Incentive Award Calculation (for terminated executive)
- -----------------------------------------------------------------
Assumptions:
- ------------
* Grade Level: 31
* Base Salary: $120,000
* Termination Date April 28, 2000
* Earnings through 4/28/00: $40,000 (4 months of $120,000)
* Target Award: $10,000 (25% of $40,000)
* 1Q Earnings Per Share: $.62 (120%)
* Incentive Award: $12,000 (120% X $10,000)
Payment of Awards
- -----------------
For employees being terminated, payment will be made as soon as practical
following the determination of results and calculation of the payment.
Employees staying with the new organization will receive the payment at a
time and manner consistent with Peoples Heritage practice.
Other Provisions:
- -----------------
All plan calculations will be based upon publicly reported financial
results. The Banknorth Group Board of directors reserves the right to
adjust performance targets and/or payouts under the plan in cases of
significant non-recurring events.
EXHIBIT 23
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,
No. 333-38353 on Form S-8, and
No. 333-68237 Post Effective Amendment No. 1 on Form S-8
of our report dated January 19, 2000, relating to the consolidated balance
sheets of Banknorth Group, Inc. and subsidiaries as of December 31, 1999
and 1998, 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, 1999, which report appears in the annual report
on Form 10-K of Banknorth Group, Inc. for the fiscal year ended December
31, 1999.
/s/ KPMG LLP
Albany, New York
March 24, 2000
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