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 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
Commission file number (0-18173)
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.)
300 FINANCIAL PLAZA 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 Common Share Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the closing price on March 3, 1997, was
$332,632,540.
As of March 26, 1997, 7,826,648 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
-------- ----
Annual Report to Shareholders For the Year Ended December 31, 1996 I, II
Proxy Statement for the 1997 Annual Meeting of Shareholders III
Page
----
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 1
Five Year Selected Financial Data ...................................... 19
Summary of Unaudited Quarterly Financial Information.................... 20
Management's Statement of Responsibility................................ 21
Independent Auditors' Report............................................ 22
Consolidated Statements of Income....................................... 23
Consolidated Balance Sheets............................................. 24
Consolidated Statements of Changes in Shareholders' Equity.............. 25
Consolidated Statements of Cash Flows................................... 26
Notes to Consolidated Financial Statements.............................. 27
Form 10-K............................................................... 48
Signatures.............................................................. 53
Glossary of Terms....................................................... 54
Management's Discussion of Financial Condition and Results of Operations
The financial review which follows focuses on the factors affecting the
financial condition and results of operations of Banknorth Group, Inc.
("Banknorth," "Company" or "Corporation") during 1996 and, in summary form, the
preceding two years. Net interest income and net interest margin are presented
in this discussion on a fully taxable equivalent basis (f.t.e.). Balances
discussed are daily averages unless otherwise described. The consolidated
financial statements and related notes and the quarterly reports to
shareholders for 1996 should be read in conjunction with this review. Certain
amounts in years prior to 1996 have been reclassified to conform to the 1996
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
out-of-state banking organizations as well as non-bank providers of
various financial services;
* uncertainties due to a lack of operating history of the Company's
Massachusetts subsidiary;
* 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.
OVERVIEW
Banknorth recorded net income of $25.4 million, or $3.30 per share, for
the year ended December 31, 1996, compared to $22.4 million, or $3.29 per
share, for the year ended December 31, 1995. In 1994, income before the
cumulative effect of the accounting change which resulted from the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" on January 1, 1994, was
$15.9 million while net income for the year 1994 was $16.0 million.
During the year 1996:
* Banknorth issued 1,022,223 shares of common stock, raising $32.2
million in new equity capital, net of costs associated with the
issue.
* The Company completed the acquisition of thirteen banking offices
in central and western Massachusetts, and formed First
Massachusetts Bank, N.A. ("FMB"), Banknorth's first bank in
Massachusetts.
* Banknorth consolidated its bank trust departments into a new
subsidiary, The Stratevest Group, N.A. ("Stratevest") to market
trust and financial management services more effectively.
* Net income per share was $3.30 as compared to $3.29 in 1995 and
$2.36 in 1994.
* The Company incurred one-time expenses related to the establishment
of FMB and Stratevest, transition to a new incentive compensation
plan and a data processing conversion in the ATM/debit card area
totaling approximately $1.4 million, net of taxes, or $.18 per
share.
* Banknorth incurred goodwill expense of $4.7 million, or $.39 per
share, net of tax, in 1996 as compared to $632 thousand and $136
thousand in 1995 and 1994, respectively.
MERGER AND ACQUISITION ACTIVITY
First Massachusetts Bank, N.A.
On February 16, 1996, Banknorth completed the purchase of thirteen
banking offices of Shawmut Bank, N.A. (the "Shawmut branches") in central and
western Massachusetts. A new subsidiary, FMB, with principal offices in
Worcester, Massachusetts was organized to own and operate the acquired offices.
Under the terms of the Purchase and Assumption Agreement with Shawmut
Bank, National Association (Shawmut), Banknorth paid a premium of $29.2
million, representing 5.23% on deposit liabilities assumed, including accrued
interest payable, calculated based upon the average amount of deposits
outstanding (including accrued interest payable) over the thirty day period
ended February 13, 1996.
At the closing, the Company assumed total liabilities with an estimated
fair value of $560.3 million and acquired total assets, including loans,
accrued interest receivable on such loans, certain real property, furniture,
fixtures, equipment and other assets, with an estimated fair value of $405.7
million. No loans acquired were past due 90 days or more. In addition, the
Company received approximately $124.1 million in cash as consideration for the
net liabilities assumed.
The transaction was accounted for under purchase accounting rules. As
such, both the assets acquired and liabilities assumed have been recorded on
the consolidated balance sheet of the Company at estimated fair value as of the
date of acquisition. Goodwill, representing the excess of cost over net assets
acquired, was $32.1 million, substantially all of which is deductible for
income tax purposes, and is being amortized over seven years on a straight-line
basis. The results of operations for FMB are included in Banknorth's
consolidated financial statements from the date of acquisition forward.
To complete the transaction, Banknorth issued 1,022,223 shares of common
stock in February, 1996. The net proceeds of $32.2 million were used to provide
a portion of the initial capital of FMB and to help offset the reduction in the
Company's regulatory capital ratios resulting from the acquisition.
North American Bank Corporation
On October 14, 1994, Banknorth completed the purchase of North American
Bank Corporation ("NAB") and its sole subsidiary, Farmington National Bank
("Farmington"). The acquisition was accounted for as a purchase of stock and
resulted in approximately $9.3 million of goodwill. The goodwill is being
amortized over fifteen years on a straight line basis. The results of
operations for NAB and Farmington are included in Banknorth's consolidated
financial statements from the date of acquisition forward.
Banknorth financed the NAB transaction using a five-year credit facility
from another bank. The credit agreement was re-negotiated in December, 1996,
and contains certain covenants, none of which impose significant limits on
management's ability to operate the Company and, therefore, are not expected to
materially impact the financial condition of Banknorth.
An important aspect of Banknorth's strategic direction is controlled,
profitable growth through acquisition. The Company continues to focus its
attention on possible acquisition candidates in New England and upstate New
York. Minimal book value dilution, coupled with future accretion to the
earnings base, are the primary criteria which must be met.
ASSET/LIABILITY MANAGEMENT
In managing its asset portfolios, Banknorth utilizes funding and capital
sources within sound credit, investment, interest rate and liquidity risk
guidelines. Loans and securities are the Company's primary earning assets with
additional capacity invested in money market instruments. Earning assets were
93.26% and 93.16% of total assets at December 31, 1996 and 1995, 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 bank term debt.
Earning Assets
Earning assets were $2.3 billion during 1996, an increase of $470.5
million, or 26.4% from 1995. Of the increase, $445.1 million resulted from the
acquisition of the branches comprising FMB. Earning assets grew 1.4%, exclusive
of FMB. Table A, Mix of Average Earning Assets, presents information relating
to the mix of earning assets during the last three years.
TABLE A.--Mix of Average Earning Assets
Percentage of
Years ended December 31, % of Total Earning Assets
------------------------------------ Total ------------------------
1996 1995 Change Change 1996 1995 1994
-------------------------------------------------------------------------
(Dollars in thousands)
Loans, net of unearned income and unamortized loan
fees and costs:
Commercial, financial and agricultural $ 281,391 $ 221,294 $ 60,097 12.7% 12.5% 12.4% 12.4%
Construction and land development 21,805 20,960 845 0.2 1.0 1.2 1.3
Commercial real estate 486,522 388,359 98,163 20.9 21.6 21.8 22.3
Residential real estate 704,382 488,571 215,811 45.9 31.3 27.4 26.0
Credit card receivables 23,707 25,465 (1,758) (0.4) 1.0 1.4 1.5
Lease receivables 57,611 38,071 19,540 4.1 2.5 2.1 1.8
Other installment 155,302 146,468 8,834 1.9 6.9 8.3 8.0
------------------------------------------------------------------------
Total loans, net of unearned income and
unamortized loan fees and costs 1,730,720 1,329,188 401,532 85.3 76.8 74.6 73.3
Securities available for sale:
U.S. Treasuries and Agencies 88,651 41,061 47,590 10.1 4.0 2.3 4.2
States and political subdivisions 698 -- 698 0.2 -- -- --
Mortgage-backed securities 272,769 81,207 191,562 40.7 12.1 4.6 8.8
Corporate debt securities 64,363 8,235 56,128 11.9 2.9 0.5 --
Equity securities 23,354 20,059 3,295 0.7 1.0 1.1 1.0
------------------------------------------------------------------------
Total securities available for sale 449,835 150,562 299,273 63.6 20.0 8.5 14.0
Investment securities:
U.S. Treasuries and Agencies 18,982 62,614 (43,632) (9.2) 0.8 3.5 1.4
States and political subdivisions 1,414 2,196 (782) (0.2) 0.1 0.1 --
Mortgage-backed securities 21,590 212,167 (190,577) (40.5) 1.0 11.9 9.5
Corporate debt securities 507 2,406 (1,899) (0.4) -- 0.1 0.1
------------------------------------------------------------------------
Total investment securities 42,493 279,383 (236,890) (50.3) 1.9 15.6 11.0
Loans held for sale 14,834 12,985 1,849 0.4 0.7 0.7 1.0
Money market investments 14,503 9,718 4,785 1.0 0.6 0.6 0.7
------------------------------------------------------------------------
Total earning assets $ 2,252,385 $ 1,781,836 $ 470,549 100.0% 100.0% 100.0% 100.0%
========================================================================
Loans. Total loans of $1.8 billion at December 31, 1996, were $497.2
million, or 36.8%, above year end 1995. The increase in total loans from 1995
levels is attributable to three primary factors. FMB represented approximately
$420.0 million of the increase. The remaining $77.2 million increase in total
loans was comprised of purchases of loans during 1996 of $38.2 million, and
increases in loan originations in Vermont and New Hampshire of $39.0 million.
After an initial period of loan runoff, credit activity at FMB increased
significantly. Improved credit demand in all markets served resulted in
increased loan originations during 1996 as compared to 1995. During 1996,
management supplemented its in-market loan originations with the purchase of
residential real estate loans originated by other financial institutions in an
effort to increase the level of earning assets. Table B, Loan Portfolio,
provides the detailed components of the loan portfolio as of year-end, for each
of the last five years.
Commercial, financial and agricultural loans at December 31, 1996, were
$300.7 million representing 16.3% of total loans. The 1996 balance, $71.9
million higher than at December 31, 1995, reflects increased lending activity
in the markets served by the Company as well as the addition of the FMB
portfolio. The Company offers a wide range of commercial credit products and
services to its customers. These include secured and unsecured loan products
specifically tailored to the credit needs of the customer, underwritten with
terms and conditions reflective of portfolio risk objectives and corporate
earnings requirements.
Commercial real estate loans increased $132.8 million, or 33.3%, during
1996 to reach $531.4 million at December 31, 1996. This category is comprised
primarily of mortgages on owner-occupied income producing properties or
businesses. In most cases, the Company maintains complete banking relationships
with these customers.
Residential real estate loans, $737.3 million at December 31, 1996, were
$259.8 million higher than at year end 1995. A significant portion of the loans
acquired in establishing FMB were residential mortgages, thereby accounting for
most of the increase in this loan category. Banknorth Mortgage Company ("BMC")
acts as a supplier of mortgage loan assets for the banking subsidiaries,
thereby allowing the banks to place assets on their balance sheet which meet
desired rate and repricing characteristics. Loans originated by BMC are the
primary means by which the Company replaces runoff in its portfolio which
occurs through scheduled principal payments as well as loan pre-payments.
Periodically, Banknorth will supplement these loan originations with purchases
of residential real estate loans made by other financial institutions. In 1996,
in an effort to increase earning assets, Banknorth purchased approximately
$38.2 million of such loans.
Installment loans, including credit card and lease receivables, were
$249.5 million at December 31, 1996, $24.0 million, or 10.6% higher than at
December 31, 1995. Lease receivables increased $23.3 million , or 49.6% over
1995 while other consumer loans increased $2.9 million, or 1.9% over year end
1995. The increase in lease volume as compared to the increase in other
installment receivables is indicative of increased consumer preference towards
automobile leasing over traditional financing.
Loans held for sale. Loans designated as held for sale are primarily
single-family mortgages, originated by the Company's mortgage banking
subsidiary or purchased through its wholesale lending operation, awaiting sale
into the secondary market or to other Banknorth subsidiaries. Loans held for
sale were $12.1 million at December 31, 1996 and $19.1 million at December 31,
1995. Balances in this category vary from period to period largely due to the
difference in timing between loan originations and the settlement of sales into
the secondary market.
The majority of loans originated by BMC, primarily fixed rate, are sold
to the secondary market. Certain production, primarily adjustable rate, is
retained by the Company to be held in its mortgage portfolio. This is
accomplished by the sale of high quality loans to the banking subsidiaries. At
the time of sale, the assets are moved from the held for sale category at the
lower of cost or market value, and reflected as loans on the Company's
consolidated financial statements. During 1996 and 1995, $44.9 million and
$50.4 million, respectively, of mortgage originations were retained in such a
manner by the Company's subsidiary banks.
TABLE B.--Loan Portfolio
At December 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------- ------------------- ------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial, financial and
agricultural $ 300,730 16.3% $ 228,877 16.9% $ 201,431 15.5% $ 190,087 16.9% $ 188,201 17.2%
Real
Estate:
Construction and land
development 29,364 1.6 20,587 1.5 23,042 1.8 17,959 1.6 18,562 1.7
Commercial 531,364 28.7 398,586 29.5 386,663 29.8 365,329 32.5 367,264 33.5
Residential 737,261 39.9 477,458 35.4 483,936 37.4 371,210 33.1 353,616 32.3
-----------------------------------------------------------------------------------------------------
Total real estate 1,297,989 70.2 896,631 66.4 893,641 69.0 754,498 67.2 739,442 67.5
-----------------------------------------------------------------------------------------------------
Credit card receivables 24,563 1.3 26,867 2.0 26,174 2.0 27,134 2.4 23,279 2.1
Lease receivables 70,396 3.8 47,055 3.5 33,291 2.6 19,851 1.8 10,591 1.0
Other installment 154,554 8.4 151,623 11.2 141,534 10.9 131,646 11.7 134,138 12.2
-----------------------------------------------------------------------------------------------------
Total installment 249,513 13.5 225,545 16.7 200,999 15.5 178,631 15.9 168,008 15.3
-----------------------------------------------------------------------------------------------------
Total loans 1,848,232 100.0 1,351,053 100.0 1,296,071 100.0 1,123,216 100.0 1,095,651 100.0
Less: Allowance for loan
losses 23,520 1.3 22,095 1.6 21,437 1.7 21,363 1.9 22,099 2.0
-----------------------------------------------------------------------------------------------------
Net loans $1,824,712 98.7% $1,328,958 98.4% $1,274,634 98.3% $1,101,853 98.1% $1,073,552 98.0%
=====================================================================================================
TABLE C.--Maturities and Sensitivities of Loans to Changes in Interest Rates
At December 31, 1996, Maturing:
------------------------------------------------
After 1 year
In 1 year but within After
or less 5 years 5 years Total
------------------------------------------------
(In thousands)
Commercial, financial and agricultural $ 101,827 $ 119,126 $ 79,777 $ 300,730
Construction and land development 14,472 14,892 -- 29,364
------------------------------------------------
Total $ 116,299 $ 134,018 $ 79,777 $ 330,094
================================================
Predetermined interest rates $ 44,251 $ 35,336 $ 26,842 $ 106,429
Floating interest rates 72,048 98,682 52,935 223,665
------------------------------------------------
Total $ 116,299 $ 134,018 $ 79,777 $ 330,094
================================================
Securities available for sale. The portfolio is managed on a total return
basis with the objective of exceeding the return that would be experienced if
investing solely in U.S. Treasury instruments. This category of securities is
used primarily for liquidity purposes while simultaneously producing earnings,
and is managed under policy limits established for average duration, average
convexity and average portfolio life.
The designation of "available for sale" is made at the time of purchase,
based upon management's intent to hold the securities for an indefinite period
of time; however, these securities would be available for sale in response to
changes in market interest rates, related changes in the securities prepayment
risk, needs for liquidity, or changes in the availability of, and yield on
alternative investments. These securities are purchased under assumptions
relating to liquidity and performance characteristics, and may be sold or
transferred to held-to-maturity, when these characteristics are significantly
diminished by changes in economic circumstances. Sales may also occur when
liquidity or other funding needs arise. On a regular basis, horizon analysis is
performed on a 6--12 month time horizon to evaluate the need of re-balancing
the portfolio.
In November 1995, the Financial Accounting Standards Board ("FASB")
issued a "Special Report" which granted all entities a one-time opportunity to
reconsider their ability and intent to hold securities accounted for under SFAS
115 to maturity. This decision allowed entities to transfer securities from the
held-to-maturity category without "tainting" their remaining held-to-maturity
securities. On November 30, 1995, in response to the FASB's action, the Company
reclassified certain securities having an aggregate unamortized cost of $197.1
million and an aggregate fair value of $195.3 million from "held-to-maturity"
to "available for sale."
Period end balances in securities available for sale totaled $531.3
million at December 31, 1996 as compared to $359.1 million at December 31,
1995. The 1996 balance is stated net of a fair value adjustment reflecting net
unrealized losses of $3.8 million, whereas the December 1995 balance is net of
a fair value adjustment reflecting net unrealized gains of $45 thousand. In
1996, the Company increased its holdings of securities available for sale by
$113.9 million in order to establish an adequate portfolio at FMB. During 1996,
cash flow generated by the "held-to-maturity" portfolio were re-invested in the
available for sale portfolio accounting for approximately $15.5 million of the
increase. During the fourth quarter of 1996, Banknorth purchased $52.0 million
of various issues in order to increase the size of its earning asset portfolio.
During 1995, maturities occurring in the held-to-maturity portfolio were also
reinvested in the available for sale portfolio.
Equity securities are comprised primarily of non-marketable investments
in both the Federal Reserve Bank of Boston and the Federal Home Loan Bank of
Boston ("FHLB"). Both investments are required for memberships.
TABLE D.--Securities Available for Sale and Investment Securities
At December 31,
-----------------------------------
1996 1995 1994
-----------------------------------
(Dollars in thousands)
Securities available for sale:
U.S. Treasuries and Agencies $ 111,774 $ 76,401 $ 39,976
States and political subdivisions 2,361 -- --
Mortgage-backed securities 272,433 249,549 63,446
Corporate debt securities 121,384 12,147 3,239
Equity securities 27,128 20,943 18,850
Valuation reserve (3,811) 45 (6,957)
-----------------------------------
Recorded value of securities available for
sale $ 531,269 $ 359,085 $ 118,554
===================================
Investment securities:
U.S. Treasuries and Agencies $ 13,181 $ 23,837 $ 70,926
States and political subdivisions 1,135 1,630 1,898
Mortgage-backed securities 19,868 23,146 236,362
Corporate debt securities 10 1,067 7,990
-----------------------------------
Recorded value of investment securities $ 34,194 $ 49,680 $ 317,176
===================================
Fair value of investment securities $ 34,644 $ 51,087 $ 301,682
===================================
Excess (deficiency) of fair value versus
recorded value $ 450 $ 1,407 $ (15,494)
Fair value as a % of recorded value 101.3% 102.8% 95.1%
Table E.--Investment Portfolio Maturity Distribution
As of December 31, 1996
-----------------------
Amount Yield (FTE)
-----------------------
(Dollars in thousands)
Securities available for sale:
U.S.Treasuries and Agencies:
Within 1 year $ 5,967 5.15%
1 to 5 years 105,807 5.91
------------------
$ 111,774 5.87%
==================
State and political subdivisions:
1 to 5 years $ 2,361 6.71%
==================
Mortgage-backed securities:
Within 1 year $ 430 3.45%
1 to 5 years 108,785 5.18
6 to 10 years 30,106 6.44
Over 10 years 133,112 6.99
------------------
$ 272,433 6.20%
==================
Corporate debt securities:
1 to 5 years $ 44,066 5.91%
6 to 10 years 37,492 6.31
Over 10 years 39,826 6.66
------------------
$ 121,384 6.28%
==================
Total securities available for sale:
Within 1 year $ 6,397 5.04%
1 to 5 years 261,019 5.61
6 to 10 years 67,598 6.37
Over 10 years 172,938 6.91
Equity securities 27,128 5.97
Valuation reserve (3,811) --
------------------
$ 531,269 6.18%
==================
Investment securities:
U.S.Treasuries and Agencies:
Within 1 year $ 4,990 6.78%
1 to 5 years 8,191 6.68
------------------
$ 13,181 6.72%
==================
State and political subdivisions:
Within 1 year $ 325 10.57%
1 to 5 years 530 7.94
Over 10 years 280 2.63
------------------
$ 1,135 7.38%
==================
Mortgage-backed securities:
Within 1 year $ 698 7.13%
1 to 5 years 17,660 7.60
6 to 10 years 1,484 9.03
Over 10 years 26 7.48
------------------
$ 19,868 7.69%
==================
Corporate debt securities:
6 to 10 years $ 10 7.00%
==================
Total investment securities:
Within 1 year $ 6,013 7.03%
1 to 5 years 26,381 7.32
6 to 10 years 1,494 9.02
Over 10 years 306 3.04
------------------
$ 34,194 7.30%
==================
Investment securities. The designation "investment securities" is made
at the time of purchase or transfer based upon the intent and ability to hold
these securities until maturity. The management of this portfolio focuses on
yield and earnings generation, liquidity through cash flow and interest rate
risk characteristics within the framework of the entire balance sheet. Cash
flow guidelines and average duration targets have been established for
management of this portfolio. As of December 31, 1996, the balance of
securities in this category was $34.2 million, $15.5 million below the balance
at December 31, 1995. The primary cause of the reduced portfolio size was the
reinvestment of maturities throughout 1996 into the available for sale
portfolio. During the fourth quarter of 1995, in anticipation of the
acquisition of the Shawmut branches and the formation of FMB discussed above,
proceeds from securities called were used to pay down long-term advances from
the FHLB rather than being reinvested in new securities.
Table D, Securities Available for Sale and Investment Securities contains
details of investment securities at December 31, 1996, 1995, and 1994.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $14.5 million during 1996, an increase of $4.8 million
over the average balance in 1995. As of December 31, 1996, money market
investments were $101 thousand as compared to $650 thousand at December 31,
1995. 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 $190.6 million in 1996 on a fully tax equivalent basis, an
increase of $37.3 million, or 24.3%, from the 1995 total of $153.3 million, and
$65.7 million higher than in 1994. Of the increase in interest income from 1995
to 1996, $38.4 million was the result of increases in earning assets. Decreases
in the yields on earning assets resulted in a decline in interest income of
$1.1 million. In 1996, the average yield on total earning assets was 8.46% as
compared to 8.60% in 1995 and 7.71% in 1994. The acquisition of FMB contributed
to both the increase in earning assets and total interest income.
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.
TABLE F.--Average Balances, Yields, and Net Interest Margins
1996 1995 1994
----------------------------- ----------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------------------------------
(Dollars in thousands)
Earning assets:
Money market investments $ 14,503 $ 806 5.56% $ 9,718 $ 562 5.78% $ 11,419 $ 462 4.05%
Securities available for sale,
at amortized cost (Note 1) 449,835 27,474 6.11 150,562 9,255 6.15 228,103 13,066 5.73
Loans held for sale 14,834 1,150 7.75 12,985 1,024 7.89 15,432 1,195 7.74
Investment securities, at
amortized cost (Note 1) 42,493 3,037 7.15 279,383 17,439 6.24 178,524 10,607 5.94
Loans, net of unearned income
and unamortized loan
fees (Notes 1,2,3) 1,730,720 158,140 9.14 1,329,188 125,031 9.41 1,187,773 99,592 8.38
------------------------------------------------------------------------------------------
Total earning assets 2,252,385 190,607 8.46 1,781,836 153,311 8.60 1,621,251 124,922 7.71
------------------------------------------------------------------------------------------
Cash and due from banks 83,631 60,441 64,222
Allowance for loan losses (24,142) (21,564) (20,933)
Valuation reserve for securities
available for sale and investment
securities (5,118) (7,461) (7,819)
Other assets 98,651 62,148 57,093
------------------------------------------------------------------------------------------
Total assets $2,405,407 $1,875,400 $1,713,814
==========================================================================================
Interest-bearing liabilities:
NOW accounts & money
market savings $ 741,351 24,829 3.35 $ 513,280 18,343 3.57 $ 424,381 11,679 2.75
Regular savings 223,936 5,351 2.39 189,927 4,935 2.60 202,423 5,056 2.50
Time deposits $100 thousand
and greater 76,194 4,266 5.60 45,658 2,481 5.43 41,157 1,704 4.14
Time deposits under $100
thousand 682,587 36,172 5.30 510,433 27,330 5.35 453,112 19,352 4.27
------------------------------------------------------------------------------------------
Total interest-bearing
deposits 1,724,068 70,618 4.10 1,259,298 53,089 4.22 1,121,073 37,791 3.37
Long-term debt 43,951 2,609 5.94 94,107 5,874 6.24 113,364 5,585 4.93
Short-term borrowed funds 159,672 7,913 4.96 164,010 9,017 5.50 145,616 6,223 4.27
------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,927,691 81,140 4.21 1,517,415 67,980 4.48 1,380,053 49,599 3.59
------------------------------------------------------------------------------------------
Demand deposits 264,938 194,580 185,676
Other liabilities 21,499 17,455 17,077
Shareholders' equity 191,279 145,950 131,008
------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $2,405,407 $1,875,400 $1,713,814
==========================================================================================
Net interest income (FTE) $109,467 $ 85,331 $ 75,323
==============================================================================
Interest rate differential 4.25% 4.12% 4.12%
===================================================================
Net interest margin 4.86% 4.79% 4.65%
===================================================================
<FN>
Notes:
<F1> (1) Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal tax rate.
<F2> (2) Includes principal balances of non-accrual loans.
<F3> (3) Includes industrial revenue bonds.
</FN>
Funding Sources
Banknorth utilizes various traditional sources of funding to support its
earning asset portfolios. Average total net funding increased by $485.7
million, or 29.4 %, over the average for 1995. 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 percentage of
net funding by category for 1996, 1995 and 1994.
TABLE G.--Average Sources of Funding
Percentage
Years Ended December 31, Change Total Net Funding
------------------------ ------------------- -------------------------
1996 1995 $ % 1996 1995 1994
------------------------------------------------------------------------
(Dollars in thousands)
Demand deposits $ 264,938 $ 194,580 $ 70,358 36.2% 12.4% 11.8% 12.4%
Retail deposits:
Regular savings 223,936 189,927 34,009 17.9 10.5 11.6 13.5
Time deposits under $100 thousand 682,587 510,433 172,154 33.7 31.9 30.9 30.2
NOW accounts & money
market savings 741,351 513,280 228,071 44.4 34.7 31.0 28.2
-----------------------------------------------------------------------
Total retail deposits 1,647,874 1,213,640 434,234 35.8 77.1 73.5 71.9
-----------------------------------------------------------------------
Total core deposits 1,912,812 1,408,220 504,592 35.8 89.5 85.3 84.3
Less: Cash and due from banks 83,631 60,441 23,190 38.4 3.9 3.7 4.3
-----------------------------------------------------------------------
Net core deposits 1,829,181 1,347,779 481,402 35.7 85.6 81.6 80.0
-----------------------------------------------------------------------
Time deposits $100 thousand and greater 76,194 45,658 30,536 66.9 3.6 2.8 2.7
Federal funds purchased 5,368 4,274 1,094 25.6 0.3 0.3 0.4
Securities sold under agreements to
repurchase 106,918 98,586 8,332 8.5 5.0 6.0 5.6
Borrowings from U.S. Treasury 7,730 8,486 (756) (8.9) 0.4 0.5 0.6
Short-term notes from FHLB 39,656 52,664 (13,008) (24.7) 1.9 3.2 3.2
Long-term notes from FHLB 28,736 74,712 (45,976) (61.5) 1.2 4.4 7.2
-----------------------------------------------------------------------
Total purchased liabilities 264,602 284,380 (19,778) (7.0) 12.4 17.2 19.7
Bank term loan 15,215 19,395 (4,180) (21.6) 0.7 1.2 0.3
Stock offering, net 28,255 -- 28,255 100.0 1.3 -- --
-----------------------------------------------------------------------
Total net funding $2,137,253 $1,651,554 $ 485,699 29.4% 100.0% 100.0% 100.0%
=======================================================================
Deposits. Total core deposits increased $504.6 million over 1995 of which
$439.1 million resulted from the acquisition of FMB. Retail time deposits in
denominations less than $100,000 increased by $172.2 million while NOW and
money market accounts increased by $228.1 million.
Purchased liabilities. Total purchased liabilities decreased on average
from $284.4 million during 1995 to $264.6 million during 1996. As of December
31, 1996, total short-term borrowings were $280.5 million as compared to $116.2
million at December 31, 1995. Short- term borrowings from the FHLB increased
from $12.5 million at December 31, 1995 to $129.0 million at December 31, 1996.
The increase in short-term borrowings was the result of funding needs at FMB as
well as funding needs for incremental loan and securities available for sale
purchases made during 1996. Banknorth had no brokered deposits during 1996 and
1995 and does not anticipate the need for such funding in the future. Long-term
advances from the Federal Home Loan Bank declined on average from $74.7 million
during 1995 to $28.7 million in 1996. Scheduled maturities of long-term
advances were replaced with short-term advances in order to improve spreads
while maintaining the Company's interest rate risk profile within established
guidelines.
Bank Term Debt. Bank term debt of $15.2 million during 1996 represents
the late 1994 funding of the acquisition of NAB. As previously disclosed,
Banknorth financed the transaction with a bank credit facility whose original
terms were re-negotiated in December, 1996. The new terms provide improved
pricing and an extension of the repayment period. The balance of $13.0 million
at December 31, 1996 will be repaid over a five year period.
Interest expense summary. Total interest expense was $81.1 million in
1996, an increase of $13.2 million, or 19.4% as compared to 1995. Increased
levels of interest-bearing liabilities, a large portion of which reflect FMB,
contributed $16.0 million to the increase while the decrease in rates paid
reduced interest expense by $2.9 million. The cost of interest-bearing
liabilities was 4.21% in 1996, a decrease of 27 basis points from 1995.
Table F, Average Balances, Yields and Net Interest Margins and Table H,
Volume and Yield Analysis, contain details of changes by category of interest
expense for each of the last three years.
Time deposits, in denominations of $100 thousand and greater, at December
31, 1996 were scheduled to mature as follows:
(in thousands)
3 months or less $ 37,772
Over 3 to 6 months 18,908
Over 6 to 12 months 22,081
Over 12 months 12,484
--------
Total $ 91,245
========
TABLE H.--Volume and Yield Analysis
1996 vs. 1995 1995 vs. 1994
------------------------------------------------- -------------------------------------------------
Increase Due to Increase Due to
1996 1995 (Decrease) Volume Rate 1995 1994 (Decrease) Volume Rate
----------------------------------------------------------------------------------------------------
(In thousands)
Interest income (FTE):
Money market investments $ 806 $ 562 $ 244 $ 265 $ (21) $ 562 $ 462 $ 100 $ (98) $ 198
Securities available for
sale 27,474 9,255 18,219 18,279 (60) 9,255 13,066 (3,811) (4,769) 958
Loans held for sale 1,150 1,024 126 144 (18) 1,024 1,195 (171) (191) 20
Investment securities 3,037 17,439 (14,402) (16,960) 2,558 17,439 10,607 6,832 6,305 527
Loans 158,140 125,031 33,109 36,698 (3,589) 125,031 99,592 25,439 13,308 12,131
---------------------------------------------------------------------------------------------------
Total interest income 190,607 153,311 37,296 38,426 (1,130) 153,311 124,922 28,389 14,555 13,834
---------------------------------------------------------------------------------------------------
Interest expense:
NOW accounts and money
market savings 24,829 18,343 6,486 7,615 (1,129) 18,343 11,679 6,664 3,184 3,480
Regular savings 5,351 4,935 416 803 (387) 4,935 5,056 (121) (323) 202
Time deposits $100
thousand and greater 4,266 2,481 1,785 1,707 78 2,481 1,704 777 246 531
Time deposits under $100
thousand 36,172 27,330 8,842 9,097 (255) 27,330 19,352 7,978 3,084 4,894
Long-term debt 2,609 5,874 (3,265) (2,983) (282) 5,874 5,585 289 (1,196) 1,485
Short-term borrowings 7,913 9,017 (1,104) (218) (886) 9,017 6,223 2,794 1,003 1,791
---------------------------------------------------------------------------------------------------
Total interest
expense 81,140 67,980 13,160 16,021 (2,861) 67,980 49,599 18,381 5,998 12,383
Net interest income (FTE) $109,467 $ 85,331 $24,136 $22,405 $ 1,731 $ 85,331 $ 75,323 $10,008 $ 8,557 $ 1,451
===================================================================================================
Increases and decreases in interest income and interest expense due to both
rate and volume have been allocated to volume on a consistent basis.
Net Interest Income
Net interest income for 1996 of $109.5 million was $24.1 million, or
28.3% higher than that recognized in 1995. The yield on earning assets declined
by 14 basis points in 1996 to 8.46%, while the cost of interest bearing
liabilities decreased 27 basis points. Of the change in net interest income of
$24.1 million, $22.4 million was due to increased volume and $1.7 million was
due to changes in interest rates. The net interest margin was 4.86% in 1996,
4.79% in 1995 and 4.65% in 1994.
Interest rates decreased during 1996, the result of which was a decrease
in both the yield on earning assets and the cost of interest-bearing
liabilities. During the fourth quarter of 1996, the net interest margin was
4.81%, 5 basis points below the margin for the full year of 1996. The net
interest margin narrowed during the later part of 1996 as competition for
quality credits and retail deposits resulted in a tighter spread between asset
yields and deposit costs. A changing mix of deposits where higher cost deposits
increased faster than lower cost deposits also contributed to the narrowing
margin. Given this trend, management expects the net interest margin in 1997 to
be lower than that experienced during 1996.
RISK MANAGEMENT
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 subsidiary presidents and other
members of corporate senior management, meets on a monthly basis to review
balance sheet structure, formulate strategy in light of expected economic
conditions, and review performance against guidelines established to control
exposure to the various types of inherent risk. Bank subsidiary ALCOs meet on a
more frequent basis to implement policy, review adherence to guidelines, adjust
product prices as necessary and monitor liquidity.
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 (NPA's). Non-performing assets include
non-performing loans, which are those loans in a non-accrual status, loans
which have been treated as troubled debt restructurings and loans past due 90
days or more and are still accruing interest. Also included in the total
non-performing assets are foreclosed real estate properties and repossessed
non-real estate assets.
On January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," (SFAS 114) as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure," (SFAS 118). At that time, all of the Company's in-substance
foreclosed assets were reclassified into impaired loan status as required by
SFAS 114. For all prior periods presented, amounts related to in-substance
foreclosures have also been reclassified. These Statements prescribe
recognition criteria for loan impairment, generally related to commercial type
loans and measurement methods for impaired loans.
NPA's were $19.9 million at December 31, 1996, an increase of $4.7
million, or 31.4%, from December 31, 1995. NPA's at December 31, 1994 were
$20.0 million. The NPA ratio at December 31, 1996, was 1.08% compared to 1.12%
at year end 1995. Table I, Non-Performing Assets, contains the details of NPA's
for the last five years.
Non-performing loans ("NPL's") at December 31, 1996 were $19.0 million, a
net increase of $5.0 million, or 35.8%, from December 31, 1995.
The recorded investment in loans considered to be impaired under SFAS 114
totaled $8.6 million as of December 31, 1996 and $5.0 million as of December
31, 1995. The related allowances for loan losses on these impaired loans were
$1.9 million and $1.1 million as of December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, there were no impaired loans which did not have
an allowance for loan losses determined in accordance with SFAS 114.
The increase in NPL's is largely in non-accrual loans and is attributable
to weakening in certain large commercial and commercial real estate credits,
increased delinquencies in the residential real estate portfolio and increased
volume primarily related to the formation of FMB. Delinquency rates and the
increase in non-accrual loans in the residential portfolio are consistent with
trends seen regionally and nationally. Given the possibility of increases in
interest rates, management expects that certain credits may encounter
difficulty in continuing to perform under the contractual terms of their loans
should rates actually increase. While this occurrence might result in increases
in NPL's and subsequent chargeoffs, management does not expect it to materially
affect the Company's performance in 1997.
As of December 31, 1996, there are no other loans in the Company's
portfolio that management is aware of that pose significant adverse risk to the
eventual full collection of principal.
Total other real estate owned was $921 thousand at the end of 1996, down
$248 thousand from one year earlier.
TABLE I.--Non-Performing Assets
As of December 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---------------------------------------------------------
(Dollars in thousands)
Loans on a non-accrual basis:
Commercial, financial and agricultural $ 3,221 $ 648 $ 2,073 $ 2,174 $ 4,734
Real estate:
Construction and land development 39 103 730 282 1,196
Commercial 4,443 3,993 8,873 18,232 26,460
Residential 9,290 7,625 6,092 6,819 8,532
Credit card receivables -- -- -- 3 12
Other installment -- -- -- 1 17
---------------------------------------------------------
Total non-accrual 16,993 12,369 17,768 27,511 40,951
Restructured loans:
Commercial, financial and agricultural -- -- -- -- 255
Real estate:
Commercial 716 288 260 709 221
Residential 39 85 69 46 --
Other installment 10 55 141 159 16
---------------------------------------------------------
Total restructured 765 428 470 914 492
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 169 87 54 30 88
Real estate:
Commercial -- 64 270 35 628
Residential 88 396 466 7 724
Credit card receivables 111 105 118 57 73
Lease receivables 48 28 -- 81 --
Other installment 794 494 243 381 740
---------------------------------------------------------
Total past-due 90 days or more and still
accruing 1,210 1,174 1,151 591 2,253
---------------------------------------------------------
Total non-performing loans 18,968 13,971 19,389 29,016 43,696
---------------------------------------------------------
Other real estate owned (OREO) 921 1,169 575 3,444 7,151
---------------------------------------------------------
Total non-performing assets $ 19,889 $ 15,140 $ 19,964 $ 32,460 $ 50,847
=========================================================
Allowance for loan losses (ALL) $ 23,520 $ 22,095 $ 21,437 $ 21,363 $ 22,099
ALL coverage of non-performing loans 124.00% 158.15% 110.56% 73.62% 50.57%
Non-performing assets as a % of (loans & OREO) 1.08 1.12 1.54 2.88 4.61
Non-performing assets to total assets 0.76 0.79 1.07 1.95 3.26
Allowance and provision for loan losses. The balance of the allowance for
loan losses ("allowance") has been accumulated over the years through periodic
provisions and is available to absorb future losses on loans. The adequacy of
the allowance is evaluated monthly based on review of all significant loans,
with particular emphasis on non-performing and other loans that management
believes warrant special attention. The balance of the allowance is maintained
at a level that is, in management's judgment, representative of the amount of
risk inherent in the loan portfolio given past, present and expected
conditions.
Table J, Summary of Loan Loss Experience, includes an analysis of the
changes to the allowance for the past five years. Loans charged off in 1996
were $10.3 million, or .60% of average loans, an increase of $1.2 million from
the $9.2 million in 1995. Recoveries in 1996 on loans previously charged off
were $4.5 million as compared to $5.4 million in 1995. TABLE J.--Summary of
Loan Loss Experience
Years Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------------------
(Dollars in thousands)
Loans outstanding--end of year $1,848,232 $1,351,053 $1,296,071 $1,123,216 $1,095,651
Average loans outstanding $1,730,720 $1,329,188 $1,187,773 $1,091,851 $1,125,675
Allowance for loan losses at beginning of year $ 22,095 $ 21,437 $ 21,363 $ 22,099 $ 22,096
------------------------------------------------------------------
Allowance related to acquisitions 1,650 -- 1,608 -- --
Loans charged off:
Commercial, financial and agricultural (1,356) (1,283) (795) (3,000) (8,049)
Real estate:
Construction and land development (73) (357) (97) (183) (176)
Commercial (2,122) (2,287) (4,239) (4,216) (5,283)
Residential (1,772) (1,833) (1,441) (792) (1,467)
------------------------------------------------------------------
Total real estate (3,967) (4,477) (5,777) (5,191) (6,926)
Credit card receivables (788) (576) (479) (469) (496)
Lease receivables (867) (410) (255) (66) --
Other installment (3,348) (2,415) (2,414) (2,991) (4,255)
------------------------------------------------------------------
Total installment (5,003) (3,401) (3,148) (3,526) (4,751)
Total loans charged off (10,326) (9,161) (9,720) (11,717) (19,726)
------------------------------------------------------------------
Recoveries on loans:
Commercial, financial and agricultural 619 1,597 1,459 3,104 1,976
Real estate:
Construction and land development 60 540 227 99 185
Commercial 1,039 1,430 1,419 1,067 1,107
Residential 669 302 309 268 531
------------------------------------------------------------------
Total real estate 1,768 2,272 1,955 1,434 1,823
Credit card receivables 144 162 123 119 110
Lease receivables 695 277 155 31 --
Other installment 1,275 1,136 1,284 1,593 2,487
------------------------------------------------------------------
Total installment 2,114 1,575 1,562 1,743 2,597
Total recoveries on loans 4,501 5,444 4,976 6,281 6,396
------------------------------------------------------------------
Loans charged off, net of recoveries (5,825) (3,717) (4,744) (5,436) (13,330)
------------------------------------------------------------------
Provision for loan losses 5,600 4,375 3,210 4,700 13,333
------------------------------------------------------------------
Allowance for loan losses at end of year $ 23,520 $ 22,095 $ 21,437 $ 21,363 $ 22,099
==================================================================
Loans charged off, net, as a % of average
total loans 0.34% 0.28% 0.40% 0.50% 1.18%
Provision for loan losses as a % of average
total loans 0.32 0.33 0.27 0.43 1.18
Allowance for loan losses as a % of
year-end total loans 1.27 1.64 1.65 1.90 2.02
The provision for loan losses ("provision") in 1996 was $5.6 million, or
.32% of average loans. In 1995, the provision was $4.4 million, or .33% of
average loans while in 1994 the provision was $3.2 million, or .27% of average
loans.
The following table presents the breakdown of the allowance by loan type
at December 31, 1996 and 1995:
1996 1995
------------------- ----------------
% of % of
Amount Loans Amount Loans
-------------------------------------
(Dollars in thousands)
Commercial and commercial real estate $ 15,361 1.8% $ 14,484 2.2%
Residential real estate 4,498 0.6 4,430 2.0
Installment 3,661 1.5 3,181 0.7
-----------------------------------
Total allowance for loan losses $ 23,520 1.3% $ 22,095 1.6%
===================================
Interest Rate Risk
Interest rate risk can be defined as an exposure to a movement in
interest rates that could have an adverse effect on the Company's net interest
income. Interest rate risk arises naturally from the imbalance in the
repricing, maturity and/or cash flow characteristics of assets and liabilities.
Management's objectives are to measure, monitor and develop strategies in
response to the interest rate risk profile inherent in the Company's
consolidated balance sheet and off-balance sheet financial instruments.
Interest rate risk is managed by the Corporate ALCO. Interest rate risk
measurement and management techniques incorporate the repricing and cash flow
attributes of balance sheet and off-balance sheet instruments as they relate to
potential changes in interest rates. The level of interest rate risk, measured
in terms of the potential future effect on net interest income, is determined
through the use of modeling and other analytical techniques under multiple
interest rate scenarios. Interest rate risk is evaluated on a quarterly basis
and reviewed by the Corporate ALCO with subsidiary risk profiles presented to
the respective boards of directors.
The Company's Asset Liability Management Policy, approved annually by the
boards of directors, establishes interest rate risk limits in terms of
variability of net interest income under rising, flat and decreasing rate
scenarios. It is the role of the ALCO to evaluate the overall risk profile and
to determine actions to maintain and achieve a posture consistent with policy
guidelines.
Certain imbalances causing interest rate risk to exceed policy limits are
correctable through management of asset and liability product offerings.
Depending upon the specific nature of the imbalance, it may be more efficient
and less costly to utilize off-balance sheet instruments such as interest rate
swaps and interest rate cap or floor agreements, among other things, to correct
the imbalance. Banknorth has utilized both swaps and floors to address certain
interest rate risk exposures.
A significant portion of the Company's loans are adjustable or variable
rate resulting in reduced levels of interest income during periods of falling
rates. Certain categories of deposits reach a point in this instance where
market forces prevent further reduction in the rate paid on those instruments.
The net effect of these circumstances is reduced interest income offset only by
a nominal decrease in interest expense, thereby narrowing the net interest
margin. Additionally, the interest rate risk characteristics of the loans and
deposits purchased with the Shawmut branches exacerbated the potential for
reduced interest income under those circumstances. To protect the Company from
this occurrence, at December 31, 1996, interest rate floors in the notional
amount of $295 million and interest rate swaps in the notional amount of $50
million were used to mitigate the potential reduction in interest income on
certain adjustable and variable rate loans.
The aggregate cost of the interest rate floors was $2.8 million which is
being amortized as an adjustment to the related loan yield on a straight-line
basis over the terms of the agreements. At December 31, 1996, the unamortized
balance of these interest rate floors was $2.1 million. The estimated fair
value of these floors was $4.0 million as of December 31, 1996. The estimated
fair value of the interest rate swap contracts was $270 thousand as of December
31, 1996.
As of December 31, 1996, based on the various assumptions through the use
of the Company's interest rate risk simulation model, the change in net
interest income from the Company's flat-rate (given no changes in the December
31, 1996 interest rate levels) forecasted net interest income would not exceed
5% under any of the interest rate scenarios used in the analysis. This level of
variability places the Company's interest rate risk profile within acceptable
policy guidelines. The following table summarizes the percentage change from
the flat-rate forecasted net interest income if rates, rather than remaining at
their December 31, 1996 levels, increased or decreased 200 basis points
steadily through the 24 month planning horizon:
% Change from Flat-
Rate Forecast
--------------------
Rising Falling
Rate Rate
Scenario Scenario
--------------------
Months 1--12 -1.86% 0.00%
Months 13--24 -3.45% -2.01%
Months 1--24 -2.69% -1.05%
A tool used by some in the banking industry for measuring interest rate
risk is interest rate sensitivity gap ("gap") analysis. This approach attempts
to measure the difference between assets and liabilities repricing or maturing
within specified time periods.
A gap analysis has several significant limitations, which renders it less
meaningful to Banknorth than the above discussed analysis. These limitations
include the fact that it is a static measurement, it does not capture basis
risk, and it does not capture risk that varies non-proportionally with rate
movements. The selection of the beginning and ending dates of the time
intervals used as gap buckets as well as the size of the time interval can mask
interest rate risk. Assets and liabilities do not always have clear repricing
dates and many loans and deposits reprice earlier than their contractual
maturities indicate. Gap analysis is also unable to properly reflect the impact
on net interest income of certain interest rate floors. Such complexities are
better addressed by the Company's simulation model which, over the 24 month
horizon, shows future levels of net interest income to be relatively neutral to
changes in the interest rate environment as a result of the Company's active
asset liability management practices.
Liquidity Risk
Banknorth seeks to obtain favorable sources of liabilities and to
maintain prudent levels of liquid assets in order to satisfy varied liquidity
demands. Besides serving as a funding source for maturing obligations,
liquidity provides flexibility in responding to customer initiated needs. Many
factors affect the Company's ability to meet liquidity needs, including
variations in the markets served by its network of offices, its mix of assets
and liabilities, reputation and credit standing in the marketplace, and general
economic conditions.
The Company actively manages its liquidity position through target ratios
established under its liquidity policy. Continual monitoring of these ratios,
both historically and through forecasts under multiple interest rate scenarios,
allows Banknorth to employ strategies necessary to maintain adequate liquidity.
Management has also defined various degrees of adverse liquidity situations
which could potentially occur and has prepared appropriate contingency plans
should such situations arise.
The Company achieves its liability-based liquidity objectives in a
variety of ways. Net liabilities can be classified into three basic categories
for the purpose of managing liability-based liquidity: net core deposits,
purchased liabilities and long-term or capital market funds. Net core deposits
consist of non-interest bearing demand deposits and retail deposits, less cash
and amounts due from other banks. These deposits result from relatively
dependable customers and commercial banking relationships and are therefore
viewed as a stable component of total required funding. Net core deposits
increased from 1995 to 1996 by $481.4 million, or 35.7%. Net core deposits
represented 85.6% of total funding in 1996 and 81.6% in 1995. 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 during 1996, as reflected in Table G, was $264.6 million, $19.8
million or 7.0% lower than in 1995. Purchased liabilities represented 12.4% of
total funding in 1996 as compared to 17.2% in 1995.
The principal component of short-term borrowings is securities sold under
agreement to repurchase. These borrowings generally represent short-term
uninsured customer investments, which are secured by the Company's investment
portfolio. During 1996, the average securities sold under agreement to
repurchase were $106.9 million, as compared to $98.6 million in 1995.
Long-term funding, primarily through the FHLB, decreased during 1996 by
$46.0 million and were replaced mostly by time deposits $100 thousand and
greater and securities sold under repurchase agreements.
As previously discussed, the Company utilized financial institution
borrowings pursuant to a five-year credit facility to finance the NAB
acquisition. The Company's primary source of funds to pay principal and
interest under this credit facility is dependent upon the continued ability of
the subsidiary banks to pay dividends in an amount sufficient to service such
debt.
A secondary source of liquidity is represented by asset-based liquidity.
Asset-based liquidity consists of holdings of securities available for sale and
short-term money market investments that can be readily converted to cash, as
well as single-family mortgage loans which qualify for secondary market sale.
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, 1996 and 1995,
commitments to extend credit in the form of loans, including unused lines of
credit, amounted to $477.8 million and $341.4 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, 1996 and 1995, outstanding letters of credit and
stand-by letters of credit were approximately $32.0 million and $25.2 million,
respectively.
Counterparty risk. Banknorth enters into interest rate swap and floor
agreements under which the Company and the swap or floor counterparty are
obligated to exchange interest payments on notional principal amounts. For swap
and floor transactions, the contract or notional amount does not represent
exposure to credit loss. The Company is exposed to risk should the counterparty
default in its responsibility to pay interest under the terms of the swap or
floor agreement. Banknorth controls counterparty risk through credit approvals,
limits and monitoring procedures.
OTHER OPERATING INCOME AND EXPENSES
Other operating income. 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 $25.3 million in 1996, $4.4 million
or 21.0% higher than in 1995. The 1996 increase is due primarily to increases
in service charges on deposit accounts generated by FMB, net loan transactions
and reduced levels of securities losses.
The trust function contributes the largest recurring portion of other
operating income through fees generated from the performance of fiduciary
services. Income from fiduciary activities totaled $7.8 million in 1996, an
increase of $409 thousand, or 5.5% over 1995. In February, 1996, the Company
consolidated its subsidiary banks' trust departments into a newly formed
limited charter national bank, The Stratevest Group, N.A. Under this new
structure the Company expects higher levels of income to result from improved
marketing and sales initiatives and enhanced product offerings. Additional
opportunities for the generation of trust income lie in the penetration of the
Massachusetts and New Hampshire markets. Accordingly, management expects
increased levels of fiduciary income in 1997.
Service charges on deposit accounts, $6.6 million in 1996, were $1.5
million, or 29.1% above 1995 and 33.4% higher than in 1994. The acquisition of
NAB provided increased levels of service charge income in 1995 while FMB
contributed significantly to the increase in 1996.
Credit card income was $3.0 million in 1996 and $2.8 million in 1995 and
1994, respectively. Targeted promotional campaigns during 1996 and 1995 were
the primary reasons for the increase in income.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standard No. 122, "Accounting for Mortgage Servicing Rights," (SFAS 122), which
amends Statement of Financial Accounting Standard No. 65, "Accounting for
Certain Mortgage Banking Activities". SFAS 122 requires that entities recognize
as separate assets, the rights to service mortgage loans for others, regardless
of how those rights are acquired. Additionally, SFAS 122 requires that the
capitalized mortgage servicing rights be assessed for impairment based on the
fair value of those rights, and that impairment, if any, be recognized through
a valuation allowance.
Loan servicing income, primarily mortgage servicing at BMC, in 1996 was
$2.8 million, an increase of $144 thousand, or 5.3%, over 1995 . Offsetting
loan servicing income for 1996 was $881 thousand of purchased and excess
mortgage servicing rights amortization expense and $81 thousand in amortization
of newly recognized originated mortgage servicing rights under SFAS 122. Loan
servicing income was $2.7 million in 1995, 7.7% above that recognized in 1994.
The increase from 1994 reflected growth in the servicing portfolio as well as
reduced rates of amortization of purchased mortgage servicing rights and excess
servicing, both due to the movement in interest rates.
Net loan transaction income is normally generated through the origination
and subsequent sale of mortgage products into the secondary mortgage market.
Net loan transaction income of $1.6 million was $1.1 million higher than in
1995, directly the result of increased originations of mortgage loans to be
sold into the secondary market and income recognition under SFAS 122. Included
in net loan transaction income in 1996 was $869 thousand resulting from
application of SFAS 122. Net loan transactions were lower in 1995 than in 1994
due to reduced levels of mortgage originations resulting from an upward
movement in interest rates.
Banknorth recognized a net gain of approximately $664 thousand on sale of
certain mortgage servicing rights in 1994. The servicing rights were comprised
primarily of residential mortgages and second home mortgages of customers
outside Banknorth's normal market area.
Net gains or losses from securities transactions are also included in
other operating income. In 1996, the Company realized $31 thousand in net
securities gains as compared to 1995 when it incurred $409 thousand in net
losses and 1994 when it realized net losses in the amount of $2.2 million. The
Company anticipates that it will consider sales from the securities available
for sale portfolio during 1997 as it attempts to achieve its objectives in the
total return management of the securities available for sale portfolio. The
Company also expects that losses incurred, if any, would be recovered through
yield improvement within a one to two year period.
Other Operating Expenses
Other operating expenses were $91.2 million in 1996, $20.6 million, or
29.2% above expense levels in 1995, and $21.3 million, or 30.4% higher than in
1994. Included in 1996 total other operating expenses are those relating to
FMB, both recurring and one-time, as well as one-time expenses relating to the
formation of Stratevest, transition to a new incentive compensation plan and a
data processing conversion in the ATM/debit card area. One-time expenses
relating to these activities amounted to approximately $2.1 million before
taxes resulting in an after-tax impact on net income per share of $.18.
Further, the Company incurred a $250 thousand loss from a burglary at one of
its subsidiary bank branches. The Company's efficiency ratio was 62.11% in
1996, down from 65.11% in 1995 and 69.76% in 1994.
Salaries expense increased by $7.5 million, or 26.5%, over 1995. Of the
increase, $4.3 million was related to the direct expense of FMB, while a
significant portion of the remaining increase resulted from the increased
staffing levels necessary to provided operational and other support functions
to FMB. The 1995 expense of $28.3 million was $2.3 million, or 8.9% above 1994
salaries expense of $26.0 million. The increase in 1995 was directly the result
of NAB.
Included in salaries expense in 1996 is $849 thousand relating to the
Banknorth Short-Term Management Incentive Compensation Plan ("Plan"). The Plan
expense in 1995 was $1.2 million and $700 thousand in 1994. In 1996,
performance of the Company in relationship to targets defined by the Plan,
resulted in a reduced level of award to participants from that made in 1995.
Employee benefit expense for 1996 was $8.3 million in 1996, up $1.8
million from 1995. Payroll tax expense increased by approximately $773 thousand
over 1995 while insurance, pension and 401-K expenses increased $592 thousand,
$211 thousand and $219 thousand, respectively. Included in the increase
described above are benefit expenses related to the employees of FMB of $966
thousand in 1996.
The formation of FMB and the increase in leased office space for
necessary support functions were the primary cause of the $1.7 million increase
in net occupancy expense during 1996. FMB incurred occupancy expenses in the
amount of $1.0 million. Occupancy expense of $5.5 million in 1995, was $142
thousand, or 2.7% higher than 1994. Contributing to the increase in 1995 over
1994 were expenses relating to a full year of Farmington, the opening of a new
branch office in Rochester, N.H. and continued efforts to comply with the
Americans with Disabilities Act which requires retro-fitting certain customer
contact areas.
Equipment and software expense was $6.7 million, $5.5 million and $5.4
million in 1996, 1995 and 1994, respectively. In 1996, FMB incurred equipment
and software expenses of approximately $522 thousand. The remaining portion of
the increase in 1996 as compared with 1995 is due primarily to increased
expenditures for furniture and equipment for the additional staff required to
provide operational support to the new bank. The Company continues to invest in
various technologies which allow the Company to operate more efficiently,
either through reduced staff levels or avoidance of future adds to staff, and
enhance service to our customer base. During 1996, the Company began
implementing an image-based proof of deposit system using electronic images of
checks for filing and distribution to customers. The implementation of this new
system was completed at all subsidiary banks during early 1997.
Data processing fees include payments to Banknorth's vendors of mainframe
systems and site management, credit card processing, ATM transaction processing
and payroll processing. Data processing fees totaled $4.6 million in 1996 and
1995, $5.0 million in 1994. Generally, these expenses are governed by contract
terms relating to either volume of activity and/or changes in the consumer
price index. In 1994, Banknorth re-negotiated the five-year contract under
which data processing services are provided by the Company's facilities
manager. As expected, the contract revisions lowered data processing expense in
1996 and 1995.
FDIC deposit insurance and other regulatory expense in 1996 decreased
$1.6 million from 1995. The Federal Deposit Insurance Corporation Improvement
Act mandated a reduction in insurance rates when the Bank Insurance Fund
achieved a 1.25% reserve ratio. That target was reached in May 1995, resulting
in reduced premiums for the third and fourth quarters of 1995 as well as a
refund of premiums for the June 1995 time period. The reduced premium level
continued through 1996 reaching a fixed nominal fee paid by the subsidiary
banks. For 1997, the Company is expected to pay approximately $850 thousand in
increased regulatory premiums due to the legislation involving the combination
of the Bank Insurance Fund and Savings Association Insurance Fund.
Expenses relating to other real estate owned and repossessed assets
declined in 1996 by $49 thousand as compared to 1995. These expenses were $471
thousand in 1996, $520 thousand in 1995 and $1.7 million in 1994. Included in
this expense category in 1996 are adjustments of other real estate to estimated
fair value in the amount of $176 thousand and net gains on the sale of other
real estate owned in the amount of $598 thousand. Fair value adjustments in
1995 and 1994 were $241 thousand and $904 thousand, respectively, while net
gains on sale in those years were $835 thousand and $1.1 million, respectively.
Net expenses for the maintenance, real estate taxes and property insurance
relating to these properties amounted to $802 million in 1996. Management
anticipates a level of other real estate owned and repossession expenses in
1997 similar to that experienced in 1996.
Legal and professional expenses of $3.6 million in 1996, were $866
thousand, or 31.8% higher than in 1995, and $806 thousand, or 29.0% higher than
in 1994. Approximately $416 thousand of the increase in legal and professional
expenses were incurred by FMB in 1996. Otherwise, legal and professional fees
in 1996 increased from 1995 primarily due to expenses related to various
business development initiatives.
Printing and supplies expense in 1996 increased $1.3 million from 1995.
Of the increase, $945 thousand is related to FMB. Also contributing to the
increase was the expense associated with issuing new ATM and debit cards to the
Company's customer base and the supplies for the new image-based proof of
deposit technology. The increase of $182 thousand between 1995 and 1994 was
mainly attributable to recognition of a full year of operations of NAB.
Advertising and marketing expenses were $2.7 million in 1996, $719
thousand, or 35.4% higher than in 1995. As with other categories of expense,
the primary cause of the increases from year to year is the addition of either
FMB in 1996 or Farmington in 1995. Included in 1996 expenses are FMB marketing
expenses of $882 thousand while included in 1995 expenses were $155 thousand
related to NAB. In 1996, advertising and marketing expenditures also included
the startup of Stratevest and the roll out of the new debit card program.
Communication expenses amounted to $2.4 million in 1996, up $857 thousand
from 1995. The increase was primarily due to formation of FMB and the increased
volume of usage at the other subsidiary banks and 24 hour banking.
Amortization of goodwill amounted to $4.7 million in 1996 representing
approximately 10.5 months of amortization of the goodwill related to FMB and a
full year of amortization of the NAB goodwill. Goodwill expense was $632
thousand in 1995 and $136 thousand in 1994.
Other expenses totaled $11.1 million in 1996 as compared with $8.8
million in 1995 and $9.0 million in 1994. Contributing to the increase from
1995 were expenses related to directors' compensation relative to a phantom
stock program, a loss of approximately $250 thousand resulting from a burglary
at one of the subsidiary bank branches, and both one-time and recurring
expenses at FMB.
Core Tangible Performance
After removing the impact of the balance of goodwill and the related
period amortization, as well as the impact of the significant one-time net
expenses discussed previously, "core tangible" performance for 1996, 1995 and
1994 was as follows:
1996 1995 1994
-----------------------------------------
(Dollars in thousands)
Net income, as reported $ 25,390 $ 22,373 $ 16,041
Adjustments, net of tax effect:
Significant one-time net expenses/(income) 1,443 -- (114)
Amortization of goodwill 2,990 615 132
-----------------------------------------
"Core tangible income" $ 29,823 $ 22,988 $ 16,059
=========================================
Average tangible assets $ 2,370,825 $ 1,866,393 $ 1,711,877
Average tangible equity 156,697 136,943 129,071
Weighted average shares outstanding 7,703,758 6,804,425 6,804,425
"Core tangible" return on average tangible assets 1.26% 1.23% .94%
"Core tangible" return on average tangible equity 19.03% 16.79% 12.44%
"Core tangible" net income per share $ 3.87 $ 3.38 $ 2.36
INCOME TAXES
In 1996, Banknorth recognized tax expense of $12.0 million, as compared
to $8.2 million in 1995 and $5.7 million in 1994. The increase in tax expense
is primarily reflective of the improved earnings performance with income before
taxes and cumulative effect of accounting changes of $37.4 million, $30.6
million and $21.6 million in 1996, 1995, and 1994, respectively. In each year,
the tax expense on the Company's income was lower than tax expense at the
statutory rate of 35%, due primarily to tax exempt income, tax credits and the
reduction of the deferred tax asset valuation reserve.
Activity within the committee structure of the Vermont State Legislature
has the potential to result in legislation that would impose a state income tax
on banks rather than the current deposit based franchise tax. If such
legislation was to be enacted, the change in tax methodology could result in
significantly higher tax expense in future reporting periods.
REGULATORY ENVIRONMENT
The Financial Institutions Reform, Recovery and Enforcement Act and the
Federal Deposit Insurance Corporation Improvement Act are laws enacted that
have or will change various aspects of the banking industry, including
regulatory oversight and reporting issues. Management does not expect these
laws to have a material impact on the operations of the Company's subsidiaries.
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 K, Rate of Internal Capital Generation.
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 $.10 per share. The
quarterly dividend was increased in 1994 to a level of $.15 per share, to $.23
per share in 1995, to $.25 per share in 1996, and most recently to $.29 per
share in January of 1997.
The Banknorth board of directors presently intends to continue the
payment of regular quarterly cash dividends, equal to approximately 30% of net
income, subject to adjustment from time to time, based upon the Company's
earnings outlook and other relevant factors. The Company's principal source of
funds to pay cash dividends are derived from dividends from its subsidiary
banks. Various laws and regulations restrict the ability of banks to pay
dividends to their shareholders. As part of its plan to capitalize FMB at a
"well capitalized" level for regulatory purposes, the Company re-deployed
accumulated capital of certain of its subsidiary banks. Because the special
dividend exceeded applicable regulatory limitations, the Company obtained
approval from the applicable regulatory agencies for the payment of that
portion of the dividend which exceeded such regulatory limitations. The payment
of dividends by the Company in the future will require the generation of
sufficient future earnings by the subsidiary banks. For further disclosures
relative to dividend restrictions and regulatory requirements, refer to the
notes to the consolidated financial statements.
At December 31, 1996, Banknorth's Tier 1 capital was $173.1 million, or
9.11% of risk-adjusted assets, compared to $151.4 million and 11.22% at
December 31, 1995, and $134.7 million and 10.61% at December 31, 1994. The
ratio of Tier 1 capital to quarterly average adjusted assets, or leverage
ratio, at December 31, 1996 was 6.91% as compared to 8.05% and 7.41% in 1995
and 1994 , respectively. Both ratios compare favorably with peer organizations
and exceed all "well capitalized" regulatory requirements on a consolidated
basis as well as at the subsidiary bank level.
Table L, Capital Ratios, reveals the components of capital and the
changes from 1994 through 1996.
TABLE K.--Rate of Internal Capital Generation
1996 1995 1994 1993 1992
-----------------------------------------------
Return on average total assets:
Income before cumulative effect of accounting changes 1.06% 1.19% 0.93% 0.72% 0.14%
Net income 1.06 1.19 0.94 0.50 0.14
Return on average shareholders' equity:
Income before cumulative effect of accounting changes 13.27 15.33 12.14 8.93 1.74
Net income 13.27 15.33 12.24 6.20 1.74
Average equity to average assets 7.95 7.78 7.64 8.05 7.85
Dividend payout 30.30 27.96 25.42 34.19 --
Earnings retention rate 69.70 72.04 74.58 65.81 100.00
Internal capital generation rate 9.25 11.04 9.13 4.08 1.74
<FN>
<F1> Note: For 1996, 1995 and 1994, amounts include the effect of the fair market
value adjustment on securities available for sale.
</FN>
To assist in establishing FMB as a "well capitalized" bank, and offset
the reduction in maintaining the Company's regulatory capital ratios as "well
capitalized" as a result of the acquisition of the Shawmut branches, Banknorth,
on February 14, 1996, issued 1,022,223 shares of common stock generating $32.2
million, net of costs, of new capital.
TABLE L.--Capital Ratios
December 31, % change
---------------------------------------- --------------------
1996 1995
vs. vs.
1996 1995 1994 1995 1994
--------------------------------------------------------------
(Dollars in thousands)
Total risk-adjusted on-balance-sheet assets $ 1,795,825 $ 1,272,079 $ 1,215,843 41.2% 4.6%
Total risk-adjusted off-balance-sheet items 103,647 76,432 53,885 35.6 41.8
-------------------------------------------------------------
Total risk-adjusted assets $ 1,899,472 $ 1,348,511 $ 1,269,728 40.9 6.2
=============================================================
Total risk-adjusted assets/average total assets,
net of fair value adjustment and goodwill (1) 75.87% 71.77% 69.90% -- --
Total shareholders' equity $ 206,737 $ 159,936 $ 135,564 29.3 18.0
Fair value adjustment (1) 2,477 (29) 8,495 (8,641.4) (100.3)
Other adjustments to Tier 1 capital (36,142) (8,553) (9,391) 322.6 (8.9)
-------------------------------------------------------------
Total Tier 1 capital 173,072 151,354 134,668 14.3 12.4
Maximum allowance for loan losses (2) 23,520 16,921 15,940 39.0 6.2
-------------------------------------------------------------
Total capital $ 196,592 $ 168,275 $ 150,608 16.8 11.7
=============================================================
Quarterly average total assets,
net of fair value adjustment and goodwill (1) $ 2,503,637 $ 1,879,047 $ 1,816,503 33.2 3.4
Allowance for loan losses 23,520 22,095 21,437 6.4 3.1
Total capital to total risk-adjusted assets 10.35% 12.48% 11.86%
Tier 1 capital to total risk-adjusted assets 9.11 11.22 10.61
Tier 1 capital to total quarterly average
adjusted assets (Leverage) 6.91 8.05 7.41
<FN>
Notes:
<F1> (1) 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> (2) The maximum allowance for loan losses used in calculating total capital
is the period-end allowance for loan losses or 1.25% of risk-adjusted
assets prior to the allowance limitation, whichever is lower.
</FN>
Five Year Selected Financial Data
1996 1995 1994 1993 1992
-------------------------------------------------------------------
(In thousands, except for share data)
STATEMENT OF INCOME:
Interest income $ 190,008 $ 152,624 $ 124,403 $ 113,178 $ 123,671
Interest expense 81,140 67,980 49,599 44,670 58,575
-------------------------------------------------------------------
Net interest income 108,868 84,644 74,804 68,508 65,096
Provision for loan losses 5,600 4,375 3,210 4,700 13,333
-------------------------------------------------------------------
Net interest income after provision for loan losses 103,268 80,269 71,594 63,808 51,763
Other income:
Income from fiduciary activities 7,835 7,426 7,227 7,455 6,988
Service charges on depositor accounts 6,558 5,081 4,917 5,128 4,990
Credit card income 3,029 2,789 2,835 2,751 2,640
Loan servicing income 2,845 2,701 2,509 2,040 1,854
Net loan transactions 1,629 568 1,214 3,408 4,889
Gain on sale of mortgage servicing rights -- -- 664 -- --
Net securities transactions 31 (409) (2,234) 1,110 73
All other 3,376 2,754 2,839 2,865 2,253
-------------------------------------------------------------------
Total other income 25,303 20,910 19,971 24,757 23,687
Other expenses:
Salaries 35,823 28,316 25,990 26,734 26,190
Employee benefits 8,272 6,489 6,642 6,191 7,445
Net occupancy expenses 7,193 5,487 5,345 5,027 5,096
Equipment and software expenses 6,661 5,519 5,407 4,981 5,320
Data processing fees 4,584 4,629 5,027 4,840 4,725
FDIC insurance and other regulatory expenses 461 2,062 3,415 3,634 3,474
OREO and repossession expenses 471 520 1,723 4,606 5,587
Amortization of goodwill 4,652 632 136 5 5
All other 23,083 16,935 16,243 15,851 15,274
-------------------------------------------------------------------
Total other expenses 91,200 70,589 69,928 71,869 73,116
-------------------------------------------------------------------
Income before income taxes 37,371 30,590 21,637 16,696 2,334
Income tax expense 11,981 8,217 5,734 5,235 163
-------------------------------------------------------------------
Income before cumulative effect of changes in accounting 25,390 22,373 15,903 11,461 2,171
Cumulative effect of changes in accounting -- -- 138 (3,500) --
-------------------------------------------------------------------
Net income $ 25,390 $ 22,373 $ 16,041 $ 7,961 $ 2,171
===================================================================
AVERAGE BALANCES:
Loans $ 1,730,720 $ 1,329,188 $ 1,187,773 $ 1,091,851 $ 1,125,675
Loans held for sale 14,834 12,985 15,432 24,161 20,468
Securities available for sale 449,835 150,562 228,103 337,523 72,528
Investment securities 42,493 279,383 178,524 23,491 238,339
Money market investments 14,503 9,718 11,419 9,873 17,574
-------------------------------------------------------------------
Total earning assets 2,252,385 1,781,836 1,621,251 1,486,899 1,474,584
Other assets 153,022 93,564 92,563 107,289 117,324
-------------------------------------------------------------------
Total assets $ 2,405,407 $ 1,875,400 $ 1,713,814 $ 1,594,188 $ 1,591,908
===================================================================
Demand deposits $ 264,938 $ 194,580 $ 185,676 $ 178,734 $ 166,177
Interest-bearing deposits 1,724,068 1,259,298 1,121,073 1,099,550 1,207,840
-------------------------------------------------------------------
Total deposits 1,989,006 1,453,878 1,306,749 1,278,284 1,374,017
Short-term borrowings 159,672 164,010 145,616 130,176 57,875
Long-term debt 43,951 94,107 113,364 41,312 14,834
Other liabilities 21,499 17,455 17,077 16,107 20,186
Shareholders' equity 191,279 145,950 131,008 128,309 124,996
-------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,405,407 $ 1,875,400 $ 1,713,814 $ 1,594,188 $ 1,591,908
===================================================================
Loans charged off, net of recoveries $ 5,825 $ 3,717 $ 4,744 $ 5,436 $ 13,330
Non-performing assets, p.e. 19,889 15,140 19,964 32,460 50,847
SHARED DATA:
Shares outstanding, p.e. 7,826,648 6,804,425 6,804,425 6,804,425 6,804,425
Weighted average shares outstanding 7,703,758 6,804,425 6,804,425 6,804,425 6,804,425
Tangible book value, p.e. $ 21.80 $ 22.25 $ 18.54 $ 19.40 $ 18.71
Cash dividends declared 1.00 0.92 0.60 0.40 --
Income before cumulative effect of account changes 3.30 3.29 2.34 1.68 0.32
Net income 3.30 3.29 2.36 1.17 0.32
Closing price at year end 41.50 38.50 22.00 19.50 13.50
Cash dividends declared as a % of net income 30.30% 27.96% 25.42% 34.19% --%
RATIOS:
Return on average assets
Before cumulative effect of accounting changes 1.06% 1.19% 0.93% 0.72% 0.14%
Net income 1.06 1.19 0.94 0.50 0.14
Return on average shareholders' equity
Before cumulative effect of accounting changes 13.27 15.33 12.14 8.93 1.74
Net income 13.27 15.33 12.24 6.20 1.74
Net interest margin, fte 4.86 4.79 4.65 4.65 4.47
Efficiency ratio 62.11 65.11 69.76 72.88 75.37
Expense ratio 2.59 2.70 2.84 2.96 2.98
As a % of risk-adjusted assets:
Total capital 10.35 12.48 11.86 12.95 12.71
Tier 1 capital 9.11 11.22 10.61 11.70 11.45
As a % of total assets:
Tier 1 capital (regulatory leverage) 6.91 8.05 7.41 7.96 8.19
Tangible shareholders' equity, p.e. to tangible
assets, p.e. 6.65 7.96 6.77 7.86 8.15
Price earnings ratio 12.6 11.7 9.3 16.7 42.2
Summary of Unaudited Quarterly Financial Information
1996 1995
------------------------------------------------------ ------------------------------------------------------
Q4 Q3 Q2 Q1 Year Q4 Q3 Q2 Q1 Year
------------------------------------------------------ ------------------------------------------------------
(In thousands, except
for share data)
STATEMENT OF INCOME:
Interest income $ 50,246 $ 49,175 $ 47,454 $ 43,133 $ 190,008 $ 38,643 $ 39,214 $ 37,967 $ 36,800 $ 152,624
Interest expense 21,666 20,899 20,058 18,517 81,140 17,508 17,763 17,079 15,630 67,980
-------------------------------------------------------------------------------------------------------------
Net interest income 28,580 28,276 27,396 24,616 108,868 21,135 21,451 20,888 21,170 84,644
Provision for loan
losses 1,500 1,500 1,300 1,300 5,600 1,125 1,125 1,125 1,000 4,375
-------------------------------------------------------------------------------------------------------------
Net interest income
after provision
for loan losses 27,080 26,776 26,096 23,316 103,268 20,010 20,326 19,763 20,170 80,269
-------------------------------------------------------------------------------------------------------------
Other income:
Income from fiduciary
activities 1,750 2,084 2,005 1,996 7,835 1,835 1,879 1,890 1,822 7,426
Service charges on
depositor accounts 1,734 1,692 1,792 1,340 6,558 1,226 1,298 1,321 1,236 5,081
Credit card income 938 764 728 599 3,029 842 684 665 598 2,789
Loan servicing income 701 795 670 679 2,845 679 649 655 718 2,701
Net loan
transactions 413 257 358 601 1,629 217 165 94 92 568
Net securities
transactions 7 21 -- 3 31 9 (471) 46 7 (409)
All other 961 844 903 668 3,376 611 949 625 569 2,754
-------------------------------------------------------------------------------------------------------------
Total other income 6,504 6,457 6,456 5,886 25,303 5,419 5,153 5,296 5,042 20,910
Other expenses:
Salaries 9,117 9,278 9,053 8,375 35,823 7,661 7,104 6,814 6,737 28,316
Employee benefits 1,898 2,057 2,146 2,171 8,272 1,457 1,589 1,656 1,787 6,489
Net occupancy
expenses 1,971 1,669 1,767 1,786 7,193 1,388 1,343 1,325 1,431 5,487
Equipment and
software expenses 1,958 1,569 1,701 1,433 6,661 1,400 1,400 1,368 1,351 5,519
Data processing fees 1,156 1,111 1,209 1,108 4,584 1,242 1,125 1,076 1,186 4,629
FDIC deposit
insurance and other
regulatory expenses 129 134 99 99 461 234 9 905 914 2,062
OREO and repossession
expenses 96 267 78 30 471 (95) 347 (9) 277 520
Amortization of
goodwill 1,305 1,297 1,319 731 4,652 157 157 159 159 632
All other 5,731 5,794 5,138 6,420 23,083 4,558 4,313 4,078 3,986 16,935
-------------------------------------------------------------------------------------------------------------
Total other expenses 23,361 23,176 22,510 22,153 91,200 18,002 17,387 17,372 17,828 70,589
-------------------------------------------------------------------------------------------------------------
Income before income
taxes 10,223 10,057 10,042 7,049 37,371 7,427 8,092 7,687 7,384 30,590
Income tax expense 3,190 3,244 3,248 2,299 11,981 1,596 2,266 2,213 2,142 8,217
-------------------------------------------------------------------------------------------------------------
Net income $ 7,033 $ 6,813 $ 6,794 $ 4,750 $ 25,390 $ 5,831 $ 5,826 $ 5,474 $ 5,242 $ 22,373
=============================================================================================================
AVERAGE BALANCES:
Loans $1,838,093 $1,797,510 $1,746,552 $1,538,784 $1,730,720 $1,352,356 $1,343,177 $1,324,586 $1,295,777 $1,329,188
Loans held for sale 12,010 14,497 15,668 17,196 14,834 16,267 15,607 10,178 9,854 12,985
Securities available
for sale 488,277 474,626 446,227 389,515 449,835 191,408 128,822 129,333 126,610 150,562
Investment
securities 35,846 40,151 45,703 48,371 42,493 216,701 301,023 310,092 316,155 279,383
Money market
investments 1,631 9,835 18,522 28,216 14,503 10,717 15,595 3,035 9,448 9,718
-------------------------------------------------------------------------------------------------------------
Total earning
assets 2,375,857 2,336,619 2,272,672 2,022,082 2,252,385 1,787,449 1,804,224 1,777,224 1,757,844 1,781,836
Other assets 161,445 157,757 156,577 137,606 153,022 100,180 97,826 88,653 89,064 93,564
-------------------------------------------------------------------------------------------------------------
Total assets $2,537,302 $2,494,376 $2,429,249 $2,159,688 $2,405,407 $1,887,629 $1,902,050 $1,865,877 $1,846,908 $1,875,400
=============================================================================================================
Demand deposits $ 284,835 $ 272,492 $ 261,437 $ 227,571 $ 264,938 $ 205,354 $ 199,122 $ 186,609 $ 187,790 $ 194,580
Interest-bearing
deposits 1,779,766 1,788,238 1,768,600 1,558,369 1,724,068 1,307,950 1,266,310 1,233,929 1,227,791 1,259,298
-------------------------------------------------------------------------------------------------------------
Total deposits 2,064,601 2,060,730 2,030,037 1,785,940 1,989,006 1,513,304 1,465,432 1,420,538 1,415,581 1,453,878
Short-term
borrowings 215,332 172,217 138,632 124,853 159,672 129,836 176,809 183,021 167,810 164,010
Long-term debt 31,497 44,713 47,311 52,411 43,951 72,534 94,169 101,506 108,613 94,107
Other liabilities 22,027 21,426 21,574 20,966 21,499 17,678 17,695 17,029 17,412 17,455
Shareholders' equity 203,845 195,290 191,695 175,518 191,279 154,277 147,945 143,783 137,492 145,950
-------------------------------------------------------------------------------------------------------------
Total liabilities
and shareholders'
equity $2,537,302 $2,494,376 $2,429,249 $2,159,688 $2,405,407 $1,887,629 $1,902,050 $1,865,877 $1,846,908 $1,875,400
=============================================================================================================
Loans charged off,
net of recoveries $ 2,264 $ 1,885 $ 814 $ 862 $ 5,825 $ 440 $ 622 $ 1,771 $ 884 $ 3,717
Non-performing
assets, p.e. 19,889 23,330 23,248 15,909 19,889 15,140 17,954 19,850 21,112 15,140
SHARE DATA:
Shares outstanding,
p.e. 7,826,648 7,826,648 7,826,648 7,826,648 7,826,648 6,804,425 6,804,425 6,804,425 6,804,425 6,804,425
Weighted average
shares outstanding 7,826,648 7,826,648 7,826,648 7,332,386 7,703,758 6,804,425 6,804,425 6,804,425 6,804,425 6,804,425
Tangible book value,
p.e. $21.80 $20.74 $19.89 $19.38 $21.80 $22.25 $21.05 $20.31 $19.42 $22.25
Cash dividends
declared 0.25 0.25 0.25 0.25 1.00 0.23 0.23 0.23 0.23 0.92
Net income 0.90 0.87 0.87 0.65 3.30 0.86 0.86 0.80 0.77 3.29
Closing price at
quarter end 41.50 37.38 34.25 35.25 41.50 38.50 33.25 26.88 23.50 38.50
Cash dividends
declared as a % of
net income 27.78% 28.74% 28.74% 38.46% 30.30% 26.74% 26.74% 28.75% 29.87% 27.96%
RATIOS:
Return on average
assets 1.10% 1.09% 1.12% 0.88% 1.06% 1.23% 1.22% 1.18% 1.15% 1.19%
Return on average
shareholders' equity 13.73 13.88 14.25 10.88 13.27 15.00 15.62 15.27 15.46 15.33
Net interest margin,
fte 4.81 4.83 4.88 4.93 4.86 4.73 4.76 4.75 4.85 4.79
Efficiency ratio 62.36 61.34 62.07 62.73 62.11 67.13 61.92 65.45 66.01 65.11
Expense ratio 2.59 2.54 2.59 2.66 2.59 2.79 2.48 2.70 2.85 2.70
As a % of risk-
adjusted assets:
Total capital 10.35 10.45 10.37 10.32 10.35 12.48 12.14 12.18 12.12 12.48
Tier 1 capital 9.11 9.19 9.12 9.07 9.11 11.22 10.89 10.92 10.86 11.22
As a % of total
assets:
Tier 1 capital
(regulatory
leverage) 6.91 6.78 6.72 7.29 6.91 8.05 7.74 7.66 7.51 8.05
Tangible shareholders'
equity, p.e. to
tangible assets,
p.e. 6.65 6.56 6.44 6.39 6.65 7.96 7.49 7.30 7.13 7.96
Price earnings ratio
(last twelve months) 12.6 11.5 10.6 11.1 12.6 11.7 10.1 8.8 8.5 11.7
Management's Statement of Responsibility
The consolidated financial statements and related information in the 1996
Annual Report were prepared in conformity with generally accepted accounting
principles. Management is responsible for the integrity and objectivity of the
consolidated financial statements and related information. Accordingly, it
maintains an extensive system of internal controls and accounting policies and
procedures to provide reasonable assurance of the accountability and
safeguarding of Company assets and of the accuracy of financial information.
These procedures include management evaluations of asset quality and the impact
of economic events, organizational arrangements that provide an appropriate
division of responsibility, and a program of internal audits to evaluate
independently the adequacy and application of financial and operating controls
and compliance with Company policies and procedures.
The responsibility of the Company's independent public accountants, KPMG
Peat Marwick LLP, is limited to an expression of their opinion as to the
fairness of the consolidated financial statements presented. Their opinion is
based on an audit conducted in accordance with generally accepted auditing
standards as described in the second paragraph of their report.
The board of directors, through its Examining and Audit Committee, is
responsible for ensuring that both management and the independent public
accountants fulfill their respective responsibilities with regard to the
consolidated financial statements. The Examining and Audit Committee, which is
comprised entirely of directors who are not officers or employees of the
Company, meets periodically with both management and the independent public
accountants to assure that each is carrying out its responsibilities. The
independent public accountants have full and free access to the Examining and
Audit Committee and meet with it, with and without management being present, to
discuss auditing and financial reporting matters.
William H. Chadwick Thomas J. Pruitt Neal E. Robinson
President & Chief Executive Executive Vice President & Treasurer
Officer Chief Financial Officer
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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in note 1 to the consolidated financial statements, effective
January 1, 1996, the Company adopted the provisions of the Financial Accounting
Standards Board's Statement of Financial Accounting Standard No. 122,
"Accounting for Mortgage Servicing Rights," which requires entities to
recognize as separate assets, the rights to service mortgage loans for others,
regardless of how those servicing rights are acquired. As discussed in notes 1
and 5 to the consolidated financial statements, effective January 1, 1995, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standard No. 114, "Accounting by Creditors
for Impairment of a Loan," and Statement of Financial Accounting Standard No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures," which prescribe recognition criteria for loan impairment and
measurement methods for impaired loans. As discussed in note 1 to the
consolidated financial statements, effective January 1, 1994, the Company
adopted the provisions of the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," which changed its method of accounting for
certain investments in debt and equity securities.
/s/ KPMG PEAT MARWICK LLP
Albany, New York
January 24, 1997
Consolidated Statements of Income
Years Ended December 31,
-----------------------------------
1996 1995 1994
-----------------------------------
(In thousands, except for per share amounts)
Interest income:
Interest and fees on loans $ 158,734 $ 125,408 $ 100,276
Interest on money market investments 806 562 462
Interest on securities available for sale 27,460 9,255 13,066
Interest on investment securities 3,008 17,399 10,599
-----------------------------------
Total interest income 190,008 152,624 124,403
Interest expense:
Deposits 70,618 53,089 37,791
Short-term borrowed funds 7,913 9,017 6,223
Long-term debt 2,609 5,874 5,585
-----------------------------------
Total interest expense 81,140 67,980 49,599
-----------------------------------
Net interest income 108,868 84,644 74,804
Less: provision for loan losses 5,600 4,375 3,210
-----------------------------------
Net interest income after provision for loan losses 103,268 80,269 71,594
-----------------------------------
Other operating income:
Income from fiduciary activities 7,835 7,426 7,227
Service charges on depositor accounts 6,558 5,081 4,917
Credit card income 3,029 2,789 2,835
Loan servicing income 2,845 2,701 2,509
Net loan transactions 1,629 568 1,214
Gain on sale of mortgage servicing rights -- -- 664
Net securities transactions 31 (409) (2,234)
Other income 3,376 2,754 2,839
-----------------------------------
Total other operating income 25,303 20,910 19,971
Other operating expenses:
Salaries 35,823 28,316 25,990
Employee benefits 8,272 6,489 6,642
Net occupancy expenses 7,193 5,487 5,345
Equipment and software expenses 6,661 5,519 5,407
Data processing fees 4,584 4,629 5,027
FDIC deposit insurance and other regulatory expenses 461 2,062 3,415
Other real estate owned and repossession expenses 471 520 1,723
Legal and professional fees 3,589 2,723 2,783
Printing and supplies expenses 3,246 1,915 1,733
Advertising and marketing expenses 2,748 2,029 1,500
Communications expenses 2,354 1,497 1,192
Amortization of goodwill 4,652 632 136
Other expenses 11,146 8,771 9,035
-----------------------------------
Total other operating expenses 91,200 70,589 69,928
-----------------------------------
Income before income tax expense and cumulative effect of
accounting change 37,371 30,590 21,637
Income tax expense 11,981 8,217 5,734
-----------------------------------
Income before cumulative effect of accounting change 25,390 22,373 15,903
Cumulative effect of change in accounting for securities
available for sale, net of tax -- -- 138
-----------------------------------
Net income $ 25,390 $ 22,373 $ 16,041
===================================
Income per share before cumulative effect of accounting change $ 3.30 $ 3.29 $ 2.34
Net income per share 3.30 3.29 2.36
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
December 31, December 31,
1996 1995
----------------------------
(In thousands, except share and per share data)
ASSETS
Cash and due from banks $ 91,871 $ 89,111
Money market investments 101 650
---------------------------
Cash and cash equivalents 91,972 89,761
---------------------------
Securities available for sale, at fair value 531,269 359,085
Loans held for sale 12,106 19,125
Investment securities 34,194 49,680
Loans 1,848,232 1,351,053
Less: Allowance for loan losses 23,520 22,095
---------------------------
Net loans 1,824,712 1,328,958
---------------------------
Accrued interest receivable 15,148 11,505
Premises, equipment and software, net 29,448 24,917
Other real estate owned and repossessed assets 921 1,169
Goodwill 36,142 8,553
Capitalized mortgage servicing rights 3,921 3,480
Other assets 21,490 13,941
---------------------------
Total assets $ 2,601,323 $ 1,910,174
===========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand deposits $ 287,598 $ 228,334
NOW accounts & money market savings 773,870 563,192
Regular savings 215,364 173,565
Time deposits $100 thousand and greater 91,245 59,233
Time deposits under $100 thousand 697,987 536,445
---------------------------
Total deposits 2,066,064 1,560,769
---------------------------
Short-term borrowed funds:
Federal funds purchased 23,305 --
Securities sold under agreements to repurchase 116,484 95,472
Borrowings from U.S. Treasury 11,672 8,241
Borrowings from Federal Home Loan Bank of Boston 129,000 12,500
---------------------------
Total short-term borrowed funds 280,461 116,213
---------------------------
Long-term debt:
Federal Home Loan Bank of Boston term notes 12,923 39,197
Bank term loan 13,000 16,800
---------------------------
Total long-term debt 25,923 55,997
---------------------------
Accrued interest payable 3,914 3,914
Other liabilities 18,224 13,345
---------------------------
Total liabilities 2,394,586 1,750,238
---------------------------
Shareholders'equity:
Common stock, $1.00 par value; authorized 20,000,000
shares; issued and outstanding 7,826,648 shares at
December 31, 1996 and 6,804,425 at December 31, 1995 7,827 6,804
Surplus 87,410 56,023
Retained earnings 115,130 97,978
Unamortized employee restricted stock (1,153) (898)
Net unrealized gains (losses) on securities available
for sale, net of tax (2,477) 29
Total shareholders' equity 206,737 159,936
---------------------------
Total liabilities and shareholders' equity $ 2,601,323 $ 1,910,174
===========================
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
Three Years Ended December 31, 1996
--------------------------------------------------------------------------
Net
Unearned unrealized
portion of gains (losses)
employee on securites
Common Retained restricted available for
Stock Surplus Earnings stock sale, net of tax Total
--------------------------------------------------------------------------
(In thousands, except for per share amounts)
Balance, January 1, 1994 $ 6,804 $ 55,548 $ 70,373 $ (319) $ -- $ 132,406
Income before cumulative effect of accounting change -- -- 15,903 -- -- 15,903
Cumulative effect of change in accounting for
securities available for sale, net of tax -- -- 138 -- -- 138
Net unrealized losses on securities available for
sale, net of tax -- -- -- -- (4,591) (4,591)
Net unrealized losses on securities available for
sale transferred to the investment portfolio, net
of tax -- -- -- -- (3,904) (3,904)
Cash dividends $ .60 per share -- -- (4,083) -- -- (4,083)
Issuance of employee restricted stock -- -- -- (247) -- (247)
Amortization of employee restricted stock -- (75) -- 172 -- 97
Exercise of employee stock options -- -- (155) -- -- (155)
--------------------------------------------------------------------------
Balance, December 31, 1994 $ 6,804 $ 55,473 $ 82,176 $ (394) $ (8,495) $ 135,564
--------------------------------------------------------------------------
Net income -- -- 22,373 -- -- 22,373
Adjustment of securities available for sale to fair
value, net of tax -- -- -- -- 4,620 4,620
Adjustment of securities available for sale
transferred to the investment portfolio to fair
value, net of tax -- -- -- -- 3,904 3,904
Cash dividends $ .92 per share -- -- (6,260) -- -- (6,260)
Issuance of employee restricted stock -- -- -- (361) -- (361)
Amortization of employee restricted stock -- 550 (143) -- 407
Exercise of employee stock options -- -- (311) -- -- (311)
--------------------------------------------------------------------------
Balance, December 31, 1995 $ 6,804 $ 56,023 $ 97,978 $ (898) $ 29 $ 159,936
--------------------------------------------------------------------------
Net income -- -- 25,390 -- -- 25,390
Issuance of common stock, net of expenses 1,023 31,193 -- -- -- 32,216
Adjustment of securities available for sale to fair
value, net of tax -- -- -- -- (2,506) (2,506)
Cash dividends $ 1.00 per share -- -- (7,827) -- -- (7,827)
Issuance of employee restricted stock -- -- -- (371) -- (371)
Amortization of employee restricted stock -- 194 -- 116 -- 310
Exercise of employee stock options -- -- (411) -- -- (411)
--------------------------------------------------------------------------
Balance, December 31, 1996 $ 7,827 $ 87,410 $ 115,130 $ (1,153) $ (2,477) $ 206,737
==========================================================================
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Years Ended December 31,
----------------------------------------
1996 1995 1994
----------------------------------------
(In thousands)
Increase in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 25,390 $ 22,373 $ 16,041
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization of premises, equipment and
software 4,286 4,198 4,285
Amortization of goodwill 4,652 632 136
Provision for loan losses 5,600 4,375 3,210
Adjustment of other real estate owned to estimated fair value 176 241 904
Provision for deferred tax expense (benefit) 1,420 (181) (278)
Cumulative effect of a change in accounting for securities
available for sale, net of tax -- -- (138)
Amortization of employee restricted stock 310 407 97
Exercise of employee stock options (411) (311) (155)
Net securities transactions (31) 409 2,234
Net gain on sale of other real estate owned and repossessed assets (598) (835) (1,086)
Proceeds from sale of loans held for sale 168,680 135,750 149,329
Originations and purchases of loans held for resale (204,916) (190,710) (166,090)
Net gain on sale of loans held for sale (1,629) (568) (1,214)
Net gain on sale of mortgage servicing rights -- -- (664)
Increase in interest receivable (1,719) (120) (1,909)
Decrease in interest payable (426) (664) (214)
Decrease (increase) in other assets and other intangibles (8,076) (4,831) 8,721
Increase (decrease) in other liabilities 4,703 (199) (3,035)
----------------------------------------
Total adjustments (27,979) (52,407) (5,867)
----------------------------------------
Net cash provided by (used in) operating activities (2,589) (30,034) 10,174
----------------------------------------
Cash flows from investing activities:
Net cash provided by (used in) acquisitions 124,141 -- (5,007)
Proceeds from maturity and call of securities available for sale 188,591 110,656 34,157
Proceeds from maturity and call of investment securities 15,539 76,844 20,778
Proceeds from sale of securities available for sale 22,725 38,074 238,249
Purchase of securities available for sale (387,368) (185,567) (198,654)
Purchase of investment securities (10) (533) (79,736)
Proceeds from sale of OREO and repossessed assets 3,424 2,742 7,363
Payments received on OREO and repossessed assets 33 331 206
Net loans purchased (38,189) (3,010) (66,217)
Net increase in loans (24,126) (8,383) 11,552
Capital expenditures (4,933) (3,847) (852)
----------------------------------------
Net cash provided by (used in) investing activities (100,173) 27,307 (38,161)
----------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (53,219) 117,302 17,595
Net increase (decrease) in short-term borrowed funds 164,248 (38,933) 5,792
Issuance of common stock, net of expenses 32,216 -- --
Issuance of long-term debt -- -- 61,500
Payments on long-term debt (30,074) (65,592) (36,712)
Issuance of employee restricted stock (371) (361) (247)
Dividends paid (7,827) (6,260) (4,083)
----------------------------------------
Net cash provided by financing activities 104,973 6,156 43,845
----------------------------------------
Net increase in cash and cash equivalents 2,211 3,429 15,858
----------------------------------------
Cash and cash equivalents at beginning of year 89,761 86,332 70,474
----------------------------------------
Cash and cash equivalents at end of year $ 91,972 $ 89,761 $ 86,332
========================================
Additional disclosure relative to statement of cash flows:
Interest paid $ 81,140 $ 68,644 $ 49,813
========================================
Taxes paid $ 15,539 $ 8,057 $ 16
========================================
Supplemental schedule of non-cash investing and financing
activities:
Net transfer of loans to OREO and repossessed assets $ 2,787 $ 3,073 $ 4,518
Net transfer of loans held for sale to loan status 44,884 50,379 33,741
Investments held to maturity transferred to securities available
for sale upon the adoption of Statement of Financial Accounting
Standards No. 115 -- -- 9,846
Securities available for sale transferred to held to maturity -- -- 108,362
Investments held-to-maturity transferred to securities available
for sale -- 197,103 --
Adjustment to securities available for sale to fair value, net of
tax (2,506) 4,620 (4,453)
Adjustment to securities available for sale transferred to
investment portfolio to fair value, net of tax -- 3,904 (3,904)
Fair value of assets acquired in acquisitions 405,741 -- 183,314
Fair value of liabilities assumed 560,340 -- 164,220
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, ("Banknorth", "Company" or "Corporation"), and its
subsidiaries conform, in all material respects, to generally accepted
accounting principles and to general practices within the banking industry.
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.
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.
Securities
On January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115). 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
shareholders' equity. Non-marketable equity securities are carried at cost.
Gains or losses on disposition of all securities are based on the adjusted cost
of the specific security sold. The cost of securities is adjusted for
amortization of premium and accretion of discount, which is calculated on the
effective interest method.
Unrealized losses on securities which reflect a decline in value which is
other than temporary, if any, are charged to income and reported under the
caption "Net securities transactions" in the consolidated financial statements.
Transfers from securities available for sale to investment securities are
recorded at the securities' fair value on the date of the transfer. Any net
unrealized gains or losses continue to be reported as a separate component of
shareholders' equity, on a net tax basis, as long as the securities are carried
in the investment security portfolio, and are amortized over the remaining life
of the transferred securities as an adjustment to yield in a manner consistent
with the amortization of any premium or discount.
Loans
Loans are carried at the principal amount outstanding net of unearned
income and unamortized loan fees and expenses, 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 life
of the related loans.
Non-performing loans include non-accrual loans, 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
when, in the opinion of management, the loans are expected to be fully
collectible as to principal and interest.
As of January 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," (SFAS No. 114). SFAS No. 114 was amended by Statement of Financial
Accounting Standard No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures," (SFAS No. 118). 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.
The adoption of SFAS Nos. 114 and 118 did not have a significant effect
on the Company's consolidated financial statements.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level estimated by
management to provide adequately for losses inherent in the loan portfolio. The
quality and collectibility of the loans are reviewed monthly and graded by the
applicable subsidiary loan officers. A continuous review of loan quality and
accuracy of grading is conducted independently by the Company's loan review
function. The adequacy of the allowance is monitored monthly and is based on
the grading and continuing review of individual loans, the present and expected
level of non-accrual loans, delinquency levels, past loss experience and
economic conditions which may affect the borrowers' ability to repay their
loans. As a result of the test of adequacy, required additions to the allowance
for loan losses are made periodically by charges to the provision for loan
losses.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance for loan losses may be necessary based on changes in
economic conditions or changes in the value of properties securing loans in the
process of foreclosure. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance for loan losses based on their judgments about
information available to them at the time of their examination which may not be
currently available to management.
Mortgage Banking
Loan servicing revenues and expenses are recognized when service fees are
earned and expenses are incurred. Gains or losses on sales of mortgage loans
are recognized based upon the difference between the selling price and the
carrying value of the related mortgage loans sold. Such gains or losses are
increased or decreased by the amount of originated mortgage servicing rights
and excess service fees receivable recorded. Net deferred origination fees and
costs are recognized at the time of sale in the gain or loss determination. The
mortgage loans being serviced 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.
In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 122, "Accounting for Mortgage Servicing
Rights" (SFAS No. 122), which amends Statement of Financial Accounting Standard
No. 65, "Accounting for Certain Mortgage Banking Activities." SFAS No. 122
requires that entities recognize as separate assets, the rights to service
mortgage loans for others, regardless of how those servicing rights are
acquired. Additionally, SFAS No. 122 requires that the capitalized mortgage
servicing rights be assessed for impairment based on the fair value of those
rights, and that impairment, if any, be recognized through a valuation
allowance. The Company adopted SFAS No. 122 in the first quarter of 1996.
The Company purchases mortgage servicing rights separately or it may
acquire mortgage servicing rights by purchasing or originating mortgage loans
and selling those loans with servicing rights retained. Generally, purchased
mortgage servicing rights are capitalized at the cost to acquire the rights and
are carried at the lower of cost, net of accumulated amortization, or fair
value. Originated mortgage servicing rights are capitalized based on the
allocated cost of the servicing rights, derived from a relative fair value
calculation, and are recorded at the lower of the capitalized amount, net of
accumulated amortization, or fair value. Mortgage servicing rights are
amortized into servicing fee income in proportion to, and over the period of,
estimated net servicing income.
SFAS No. 122 requires that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing rights based on its
relative fair value. To determine the fair value of mortgage servicing rights,
the Company uses a valuation model that calculates the present value of future
net servicing income. In using this valuation method, the Company incorporates
assumptions that they believe market participants would use in estimating
future net servicing income, which include estimates of the cost of servicing,
the discount rate, mortgage escrow earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses.
SFAS No. 122 requires enterprises to measure the impairment of servicing
rights based on the difference between the carrying amount and current
estimated fair value of the servicing rights. In determining impairment, the
Company aggregates all mortgage servicing rights, including those capitalized
prior to adoption of SFAS No. 122, and stratifies them based on the predominant
risk characteristics of loan type and interest rate. A valuation allowance is
established for any excess of amortized cost over the current fair value, by
risk stratification, by a charge to income. At December 31, 1996, no allowance
for impairment in the Company's capitalized mortgage servicing rights was
necessary.
Premises, Equipment and Software
Premises, equipment and software are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed on
straight-line and various accelerated methods over the estimated useful lives
of the assets ranging from 3 years to 30 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
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 fair value of the asset
acquired less estimated costs to sell. 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.
Trust Assets
Assets held in fiduciary or agency capacities for customers of
Banknorth's trust subsidiary are not included in the accompanying consolidated
balance sheets since such assets are not assets of the subsidiaries.
Pension Costs
The Company maintains a noncontributory, defined benefit retirement and
pension plan covering substantially all employees. Pension costs, based on
actuarial computations of current and future benefits for employees, are
charged to current operating expenses.
Stock Option Plan
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. As such, compensation
expense is recorded on the date of grant only if the current market price of
the underlying stock exceeds the exercise price. On January 1, 1996, the
Company adopted Standard of Financial Accounting Standard No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123), which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities
to continue to apply the provisions of APB Opinion No. 25 and provide pro forma
net income and pro forma net income per share disclosures for employee
stock-based awards made in 1995 and future years as if the fair value based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosures of SFAS No. 123.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
The Company's policy is that deferred tax assets are reduced by a
valuation allowance if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will not be
realized. In considering if it is more likely than not that some or all of the
deferred tax assets will not be realized, the Company considers temporary
taxable differences, historical taxes and estimates of future taxable income.
Per Share Amounts
Net income per share is calculated by dividing net income by the weighted
average number of shares outstanding during the period, retroactively adjusted
to give effect to the declaration of stock dividend, stock splits and pooling
of interests, if any. The weighted average number of shares outstanding were
7,703,758 for the year ended December 31, 1996 and 6,804,425 in each of the
years ended December 31, 1995 and 1994. The effect of the outstanding stock
option awards is not material to the calculation of net income per share.
Cash and Cash Equivalents
Banknorth includes cash, due from banks, Federal funds sold and all
highly liquid debt instruments with original maturities of three months or
less, if any, as Cash and Cash Equivalents for the consolidated statements of
cash flows.
Interest-Related Contracts
The Company and its subsidiaries use interest rate swap and floor
contracts as part of asset/liability management. These contracts are designated
and are effective as hedges of existing risk positions. Gains and losses, if
any, are deferred as an adjustment to the carrying value of the hedged item and
recognized as an adjustment to the yield of the hedged item for the remaining
life of the original swap and floor agreement.
Other Financial Instruments
The Company is a party to certain financial instruments with off-balance
sheet risk such as commitments to extend credit, unused lines of credit,
letters of credit, standby letters of credit, as well as certain mortgage loans
sold to investors with recourse. The Company's policy is to record such
instruments when funded.
Transfer and Servicing of Financial Assets and Extinguishments of Liabilities
In June 1996, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 125, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No.
125). SFAS No. 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. SFAS No. 125 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996 and will supersede SFAS No. 122, which is discussed
above. Certain aspects of SFAS No. 125 were amended by Statement of Financial
Accounting Standard No. 127, "Deferral of the Effective Date of Certain
Provision of FASB Statement No. 125." Management believes the adoption of SFAS
No. 125, as amended, will not have a material impact on the Company's
consolidated financial statements.
Reclassification
Amounts in the prior years' consolidated financial statements are
reclassified whenever necessary to conform with the current year's
presentation.
2. Acquisitions
First Massachusetts Bank, N.A.
On February 16, 1996, Banknorth completed the purchase of thirteen
banking offices of Shawmut Bank, N.A. ("Shawmut"). A new subsidiary, First
Massachusetts Bank, N.A. ("FMB" or "First Massachusetts"), with principal
offices in Worcester, Massachusetts, was organized to own and operate the
acquired offices.
Under the terms of the Purchase and Assumption Agreement with Shawmut,
Banknorth paid a premium of $29.2 million, representing 5.23% of deposit
liabilities assumed, including accrued interest payable, calculated based upon
the average amount of deposits outstanding (including accrued interest payable)
over the thirty day period ended February 13, 1996.
At the closing, the Company assumed total liabilities with an estimated
fair value of $560.3 million and acquired total assets, including loans,
accrued interest receivable on such loans, certain real property, furniture,
fixtures, equipment and other assets, with an estimated fair value of $405.7
million. No loans acquired were past due 90 days or more. In addition, the
Company received approximately $124.1 million in cash as consideration for the
net liabilities assumed.
The acquisition was accounted for using purchase accounting in accordance
with Accounting Principal Board Opinion No. 16, "Business Combinations" (APB
No. 16). Under this method of accounting, the purchase price is allocated to
the respective assets acquired and liabilities assumed based on their estimated
fair values, net of applicable income tax effects. Goodwill, representing the
excess of cost over net assets acquired, was $32.1 million and is being
amortized over seven years on a straight-line basis. The results of operations
for First Massachusetts are included in Banknorth's consolidated financial
statements from the date of acquisition forward.
To complete the transaction, Banknorth issued 1,022,223 shares of common
stock in February 1996. The net proceeds of $32.2 million were used to provide
a portion of the initial capital of First Massachusetts and to help offset the
reduction in the Company's regulatory capital ratios resulting from the
acquisition.
North American Bank Corporation
On October 14, 1994, the Company acquired, for approximately $19.1
million in cash, the outstanding capital stock of North American Bank
Corporation (NAB), a New Hampshire corporation and registered bank holding
company. NAB's sole subsidiary is the Farmington National Bank, based in
Farmington, New Hampshire, which operated banking offices in Farmington,
Wolfeboro, and Alton, and a limited service facility in Melvin Village.
The acquisition was accounted for using purchase accounting rules. The
acquisition of NAB resulted in approximately $9.3 million of goodwill. The
goodwill is being amortized to expense using the straight line method over a
period of fifteen years. The results of operations for NAB are included in
Banknorth's consolidated financial statements from the date of acquisition
forward.
3. Securities Available for Sale
In November 1995, the Financial Accounting Standards Board released its
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." The Special Report
contained, among other things, a unique provision that allowed entities to, as
of one date either concurrent with the initial adoption of the Special Report
(November 15, 1995), but no later than December 31, 1995, reassess the
appropriateness of the classifications of all securities held at that time. On
November 30, 1995, the Company transferred certain securities with amortized
costs totaling approximately $197.1 million and fair values totaling
approximately $195.3 million from the "held-to-maturity" classification to the
"available for sale" classification.
The amortized cost and estimated fair values of the securities available
for sale are as follows:
At December 31, 1996
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
(In thousands)
U.S. Treasuries and Agencies $ 111,774 $ 213 $ 956 $ 111,031
States and political subdivisions 2,361 15 1 2,375
Mortgage-backed securities 272,433 914 3,777 269,570
Corporate debt securities 121,384 210 610 120,984
-----------------------------------------------
Total debt securities 507,952 1,352 5,344 503,960
Equity securities 27,128 181 -- 27,309
-----------------------------------------------
Total securities available for sale $ 535,080 $ 1,533 $ 5,344 $ 531,269
===============================================
At December 31, 1995
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
(In thousands)
U.S. Treasuries and Agencies $ 76,401 $ 112 $ 125 $ 76,388
Mortgage-backed securities 249,549 2,032 2,284 249,297
Corporate debt securities 12,147 210 -- 12,357
-----------------------------------------------
Total debt securities 338,097 2,354 2,409 338,042
Equity securities 20,943 100 -- 21,043
-----------------------------------------------
Total securities available for sale $ 359,040 $ 2,454 $ 2,409 $ 359,085
===============================================
Included in equity securities are certain non-marketable equity
securities amounting to $27.0 million and $20.8 million at December 31, 1996,
and 1995, respectively, consisting of Federal Home Loan Bank of Boston and
Federal Reserve Bank of Boston equity securities. Both investments are required
for membership. Non-marketable equity securities are carried at cost.
The following table sets forth information with regard to contractual
maturities of debt securities available for sale as of December 31, 1996:
Estimated
Amortized Fair
Total Debt Securities Cost Value
- --------------------------------------------------------------------
(In thousands)
Within one year $ 6,397 $ 6,371
From one to five years 261,019 257,764
From five to ten years 67,598 67,274
After ten years 172,938 172,551
----------------------
Total debt securities available for sale $ 507,952 $ 503,960
======================
The following table sets forth information with regard to sales
transactions of securities available for sale:
For the years ended December 31,
---------------------------------
1996 1995 1994
---------------------------------
(In thousands)
Proceeds from sale of:
Debt securities $ 22,725 $ 38,074 $ 238,249
Gross realized gains from sale of:
Debt securities $ 12 $ 122 $ 699
Gross realized losses from sale of:
Debt securities $ 25 $ 531 $ 2,933
Securities available for sale with an amortized cost of approximately
$241.7 million and $179.9 million at December 31, 1996, and 1995, respectively,
were pledged to secure public deposits, securities sold under agreements to
repurchase, and for other purposes as required by law.
4. Investment Securities
The amortized cost and estimated fair values of the investment securities
portfolio are as follows:
At December 31, 1996
----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------
(In thousands)
U.S. Treasuries and Agencies $ 13,181 $ 181 $ 4 $ 13,358
States and political subdivisions 1,135 40 -- 1,175
Mortgage-backed securities 19,868 253 20 20,101
Corporate debt securities 10 -- -- 10
----------------------------------------------
Total investment securities $ 34,194 $ 474 $ 24 $ 34,644
==============================================
At December 31, 1995
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
(In thousands)
U.S. Treasuries and Agencies $ 23,837 $ 500 $ -- $ 24,337
States and political subdivisions 1,630 44 -- 1,674
Mortgage-backed securities 23,146 855 -- 24,001
Corporate debt securities 1,067 8 -- 1,075
----------------------------------------------
Total investment securities $ 49,680 $ 1,407 $ -- $ 51,087
==============================================
The following table sets forth information with regard to contractual
maturities of debt securities as of December 31, 1996:
Estimated
Amortized Fair
Total Debt Securities Cost Value
- -----------------------------------------------------
(In thousands)
Within one year $ 6,013 $ 6,046
From one to five years 26,381 26,673
From five to ten years 1,494 1,600
After ten years 306 325
---------------------
Total debt securities $ 34,194 $ 34,644
=====================
There were no sales of investment securities in 1996, 1995 or 1994.
During 1996, investment securities with an amortized cost of $783 thousand were
called resulting in a gain of $44 thousand. Investment securities with a book
value of approximately $11.5 million and $21.7 million at December 31, 1996 and
December 31, 1995, respectively, were pledged to secure public deposits,
securities sold under agreements to repurchase, and for other purposes as
required by law.
5. Loans and Allowance for Loan Losses
A summary of loans by category is as follows:
At December 31,
--------------------------
1996 1995
--------------------------
(In thousands)
Commercial, financial and agricultural, net of unamortized loan
fees of $402 thousand in 1996 and $173 thousand in 1995 $ 300,730 $ 228,877
Real estate, net of unamortized loan cost of $ 244 thousand in
1996 and net of unamortized loan fees of $102 thousand in 1995:
Residential (1-4 family) 737,261 477,458
Commercial 531,364 398,586
Construction and land development 29,364 20,587
--------------------------
Total real estate 1,297,989 896,631
--------------------------
Credit card receivables 24,563 26,867
Lease receivables, net of unearned discount of $10.2 million
in 1996 and $6.6 million in 1995 70,396 47,055
Other installment, including deferred costs of $3.0 million in
1996 and $3.8 million in 1995 154,554 151,623
--------------------------
Total installment 249,513 225,545
--------------------------
Total loans 1,848,232 1,351,053
Less: Allowance for loan losses 23,520 22,095
--------------------------
Net loans $ 1,824,712 $ 1,328,958
==========================
At December 31, 1996 and 1995, loans to executive officers, directors and
to associates of such persons aggregated $46.7 million and $49.7 million,
respectively. During 1996, new loans of $79.6 million were made, and repayment
of loans totaled $82.6 million. In the opinion of management, such loans were
made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions. These loans do not involve more than the normal risk
of collectibility or present other unfavorable features.
Banknorth primarily grants loans throughout the States of Vermont,
Massachusetts and New Hampshire. Although the loan portfolio is diversified, a
substantial portion of its debtors' ability to repay is dependent upon the
economic conditions existing in these States. Adverse trends in the real estate
market in Vermont, Massachusetts or New Hampshire could also negatively affect
the Company's collateral position.
As of December 31, 1996 and 1995, one to four family first mortgage loans
with an approximate book value of $189.2 million and $68.9 million,
respectively, were pledged to secure borrowings from the Federal Home Loan Bank
of Boston.
Non-performing Loans:
The following table sets forth the information with regard to
non-performing loans:
At December 31,
------------------------------
1996 1995 1994
------------------------------
(In thousands)
Loans in non-accrual status $ 16,993 $ 12,369 $ 17,768
Loans contractually past due 90 days or
more and still accruing interest 1,210 1,174 1,151
Restructured loans 765 428 470
------------------------------
Total non-performing loans $ 18,968 $ 13,971 $ 19,389
==============================
Accumulated interest on non-performing loans of $772 thousand, $774
thousand, and $1.1 million, was not recognized as income in 1996, 1995 and
1994, respectively. Approximately $1.0 million, $913 thousand, and $705
thousand of interest on restructured and non-accrual loans was collected and
recognized as income in 1996, 1995, and 1994, respectively.
Transactions in the allowance for loan losses are summarized as follows:
For the years ended
--------------------------------
1996 1995 1994
--------------------------------
(In thousands)
Balance at beginning of year $ 22,095 $ 21,437 $ 21,363
Allowance related to acquisitions 1,650 -- 1,608
Provision for loan losses 5,600 4,375 3,210
Loans charged off (10,326) (9,161) (9,720)
Recoveries on loans previously charged off 4,501 5,444 4,976
--------------------------------
Balance at end of year $ 23,520 $ 22,095 $ 21,437
================================
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 the adoption of SFAS No. 114. Since January 1,
1995, loans totaling $765 thousand were restructured and are considered to be
impaired.
At December 31, 1996 and 1995, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 totaled $8.6 million and $5.0
million, respectively, for which the related allowance for loan losses is $1.9
million and $1.1 million, respectively. As of December 31, 1996 and 1995, 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, 1996 and 1995 was
approximately $8.7 million and $10.2 million, respectively. During 1996, the
Company recognized interest income on those impaired loans of $492 thousand,
which included $488 thousand of interest income recognized using the cash basis
method of income recognition. During 1995, the Company recognized interest
income on those impaired loans of $250 thousand, which included $228 thousand
of interest income recognized using the cash basis method of income
recognition.
6. Mortgage Servicing Rights
The following table is a summary of activity for mortgage servicing
rights purchased ("Purchased"), originated ("Originated") and excess servicing
fees receivable ("Excess") for the years ended December 31, 1996 and 1995:
Purchased Originated Excess Total
-----------------------------------------
(In thousands)
Balance at January 1, 1995 $ 3,184 $ -- $ 232 $ 3,416
Additions 813 -- 9 822
Amortization (686) -- (72) (758)
----------------------------------------
Balance at December 31, 1995 $ 3,311 $ -- $ 169 $ 3,480
Additions 520 869 14 1,403
Amortization (848) (81) (33) (962)
----------------------------------------
Balance as of December 31, 1996 $ 2,983 $ 788 $ 150 $ 3,921
========================================
The Company adopted SFAS No. 122 in the first quarter of 1996. The result
of adoption was to capitalize $869 thousand in mortgage servicing rights and
increase the gains or decrease the losses on the sale of these loans originated
in the year ended December 31, 1996. The estimated fair value of the Company's
capitalized mortgage servicing rights was $5.6 million at December 31, 1996.
The mortgage servicing rights as of December 31, 1996 relate to
approximately $537.5 million of mortgage loans serviced for third parties. In
addition, as of December 31, 1996, the Company services approximately $469.7
million of mortgage loans for third parties for which there is no capitalized
servicing asset on the Company's consolidated financial statements.
7. Premises, Equipment and Software
A summary of premises, equipment and software is as follows:
At December 31,
-------------------
1996 1995
-------------------
(In thousands)
Land and land improvements $ 3,566 $ 2,460
Buildings and improvements 31,428 27,951
Equipment, fixtures and software 36,737 33,230
-------------------
Total 71,731 63,641
Less: Accumulated depreciation and amortization 42,283 38,724
-------------------
Premises, equipment and software, net $ 29,448 $ 24,917
===================
Depreciation and amortization expense was approximately $4.3 million for
the year ended December 31, 1996, approximately $4.2 million for the year ended
December 31, 1995, and approximately $4.3 million for the year ended December
31, 1994.
Certain premises, equipment and software are leased under non-cancelable
operating leases expiring periodically through the year 2027. Some of these
leases contain one or more renewal options. Current non-cancelable operating
leases generally require payment of real estate taxes and/or property
maintenance fees in excess of specified minimum rental payments.
Rental expense for premises, equipment and software was approximately
$2.9 million in 1996, $1.7 million in 1995 and $1.6 million in 1994. 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, 1996:
(In thousands)
1997 $ 2,519
1998 2,179
1999 1,434
2000 1,156
2001 1,004
Thereafter 5,587
--------
Total $ 13,879
========
8. Other Real Estate Owned and Repossessed Assets
Other real estate owned (OREO) and repossessed assets consist of the
following:
At December 31,
----------------
1996 1995
----------------
(In thousands)
Other real estate owned
Commercial $ 308 $ 495
Condominium 13 70
Apartment -- 60
Land 37 97
Single family residential 563 447
----------------
$ 921 $ 1,169
================
OREO and repossessed assets transactions during 1996, 1995 and 1994 are
summarized as follows:
1996 1995 1994
-----------------------------
(In thousands)
Balance at beginning of year $ 1,169 $ 575 $ 3,444
Net transfer of loans to OREO and repossessed assets 2,787 3,073 4,518
Write down of OREO and repossessed assets (265) (241) (904)
Proceeds from sale of OREO and repossessed assets (3,424) (2,742) (7,363)
Payments received on OREO and repossessed assets (33) (331) (206)
Deferred gain on sale of OREO 89 -- --
Net gain on sale of OREO and repossessed assets 598 835 1,086
-----------------------------
Balance at end of year $ 921 $ 1,169 $ 575
=============================
9. Deposits
A summary of depositors' balances is as follows:
December 31, December 31,
1996 1995
---------------------------
(In thousands)
Demand deposits, NOW accounts & money market savings $ 1,061,468 $ 791,526
Regular savings 215,364 173,565
Time deposits 789,232 595,678
--------------------------
Total deposits $ 2,066,064 $ 1,560,769
==========================
The approximate amount of contractual maturities of time deposits for the
years subsequent to December 31, 1996, is as follows:
(In thousands)
1997 $ 587,284
1998 135,849
1999 35,442
2000 19,673
2001 9,830
Thereafter 1,154
---------
Total deposits $ 789,232
=========
10. Short-Term Borrowed Funds
As of December 31, 1996 and 1995, the Company had unused lines of credit
amounting to approximately $96.8 million and $105.5 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, 1996 and 1995, the Company had unused lines of
credit with the Federal Home Loan Bank of Boston amounting to $317.3 million,
and $234.1 million, respectively. Interest rates on Federal Home Loan Bank
borrowings, determined by the Federal Home Loan Bank, are generally priced
above the Federal funds rate for overnight borrowings.
The Company enters into sales of securities under short term, usually
overnight, fixed coupon, repurchase agreements. Such agreements are treated as
financings, and the obligations to repurchase securities sold are reflected as
liabilities on the Company's consolidated balance sheets. During the period of
such agreements, the underlying securities are transferred to a third party
custodian's account that explicitly recognizes the Company's interest in the
securities.
The following table presents the detail of Banknorth's short-term
borrowed funds and weighted average interest rates thereon for each of the last
three years:
Securities
Federal Sold under Borrowings Borrowings
Funds Agreements to from from FHLB
Purchased Repurchase U.S. Treasury of Boston
------------------------------------------------------
(Dollars in thousands)
1996:
Ending balance $ 23,305 $ 116,484 $ 11,672 $ 129,000
Average amount outstanding 5,368 106,918 7,730 39,656
Maximum amount outstanding at any month end 27,700 117,214 22,531 129,000
Weighted average interest:
During year 5.78% 4.66% 5.10% 5.61%
End of year 7.74 4.48 5.16 5.47
1995:
Ending balance $ -- $ 95,472 $ 8,241 $ 12,500
Average amount outstanding 4,274 98,586 8,486 52,664
Maximum amount outstanding at any month end 25,300 111,382 21,059 72,500
Weighted average interest:
During year 6.33% 5.07% 5.61% 6.22%
End of year -- 5.04 5.16 6.18
1994:
Ending balance $ -- $ 90,172 $ 9,974 $ 55,000
Average amount outstanding 5,290 83,834 9,143 47,349
Maximum amount outstanding at any month end 29,075 103,041 24,112 78,500
Weighted average interest:
During year 4.49% 4.28% 3.88% 4.32%
End of year -- 5.15 5.21 6.02
11. Long-Term Debt
Long-term debt consists of secured term loans from the Federal Home Loan
Bank of Boston in the amounts of $12.9 million and $39.2 million at December
31, 1996 and 1995, respectively, and $13.0 million and $16.8 million of
unsecured debt from a third party financial institution at December 31, 1996
and 1995, respectively.
The following table sets forth the final maturities, outstanding balance
and weighted average interest rates of the long-term debt at December 31, 1996:
Fixed Variable
Fixed Weighted Variable Weighted
Rate Average Rate Average
Maturity Outstanding Interest Outstanding Interest
Date Balance Rate Balance Rate
- -------------------------------------------------------------------
(Dollars in thousands)
1997 $ 668 6.18% $ -- --%
1998 9,975 4.77 -- --
1999 342 6.81 -- --
2000 -- -- -- --
2001 313 5.67 13,000 7.43
2002--2013 1,625 7.49 -- --
-------------------------------------------
Total $ 12,923 $ 13,000
===========================================
The interest rate on the variable rate long-term note is tied to LIBOR.
The borrowings from Federal Home Loan Bank of Boston are secured by
mortgage loans held in the Company's loan portfolios and certain securities not
pledged elsewhere.
12. Income Taxes
The components of the income tax expense are as follows:
For the years ended
-----------------------------
1996 1995 1994
-----------------------------
(In thousands)
Current tax expense $ 10,561 $ 8,398 $ 6,012
Deferred tax expense (benefit) 1,420 (181) (278)
----------------------------
Total income tax expense $ 11,981 $ 8,217 $ 5,734
============================
The Company has identified certain securities to be "marked-to-market"
for tax return purposes in accordance with the 1993 Tax Act. Accordingly, any
change in the fair value of these securities, as measured at December 31 of
each year, creates a current tax liability or refund for tax return purposes.
The identification of securities as mark-to-market for tax return purposes has
no effect on the Company's tax expense. As of December 31, 1996, the
mark-to-market associated with approximately $535.0 million of securities
created a current tax refund of $1.5 million. As of December 31, 1995, the
mark-to-market associated with approximately $359.0 million of securities
created a current tax liability of $5.1 million.
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:
1996 1995 1994
-------------------------------
(In thousands)
Expense at statutory federal tax rate $ 13,080 $ 10,707 $ 7,573
Increases (decreases) in tax expense resulting from:
Tax exempt income, net (445) (447) (400)
Reduction in valuation allowance (100) (1,636) (1,000)
Tax credits available (698) (607) (345)
Other, net 144 200 (94)
-------------------------------
Income tax expense $ 11,981 $ 8,217 $ 5,734
===============================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are presented below:
1996 1995
--------------------
(In thousands)
Temporary deductible items:
Differences in reporting the provision for loan losses
and loan charge offs $ 8,075 $ 7,972
Pension and deferred remuneration 4,441 3,586
Purchase accounting 1,273 777
Deferred net loan origination fees 400 493
Accrued medical benefits 197 189
Other 29 327
--------------------
Total gross deferred tax assets 14,415 13,344
Less valuation allowance -- (100)
--------------------
Deferred tax assets net of valuation allowance $ 14,415 $ 13,244
====================
Temporary taxable items:
Lease financing $ (6,939) $ (4,852)
Depreciation (765) (920)
Mark-to-market for investments and loans (519) (769)
Prepaid expenses (575) (491)
Mortgage servicing rights (318) --
Other (442) (540)
--------------------
Total gross deferred tax liabilities (9,558) (7,572)
--------------------
Net deferred tax asset at end of year 4,857 5,672
Net deferred tax assets at beginning of year 5,672 5,491
--------------------
815 (181)
Deferred tax assets from acquisition 605 --
--------------------
Deferred tax expense (benefit) for the years ended
December 31, 1996 and 1995 $ 1,420 $ (181)
====================
Deferred tax assets are recognized subject to management's judgment that
realization is more likely than not. At December 31, 1994, the Company had
limited historical taxable income available to justify the realization of its
entire gross deferred tax asset of $13.9 million. In addition, primarily as a
result of the significant volatility in taxable income caused by the
"mark-to-market" tax rules adopted by the Company with respect to certain
securities in accordance with the 1993 Tax Act, there was uncertainty regarding
the level of taxable income which would be generated in 1995. Accordingly, as
of December 31, 1994, the Company was unable to conclude that it was more
likely than not that the entire deferred tax asset would be fully realized.
Based upon the availability of temporary taxable items, historical taxable
income and an estimate of the future taxable income, a deferred tax asset
valuation allowance of $1.7 million was maintained. This deferred tax asset
valuation allowance was $1.0 million less than December 31, 1993. The reduction
in the deferred tax asset valuation allowance during 1994 was primarily the
result of an increase in the amount of historical taxable income available to
justify the deferred tax asset at December 31, 1994 as compared with December
31, 1993.
During 1995, the valuation reserve was reduced by $1.6 million as a
result of taxable income generated which includes taxable income from the tax
"mark-to-market" of certain investment securities as of December 31, 1995, in
accordance with the 1993 Tax Act. The remaining valuation allowance for
December 31, 1995 was $100 thousand.
During 1996, the valuation allowance of $100 thousand was reduced to
zero. Based primarily on the sufficiency of temporary taxable items, historical
taxable income, as well as estimates of future taxable income, management
believes it is more likely than not that the entire net deferred tax asset at
December 31, 1996 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.
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheets:
At December 31,
----------------------
1996 1995
----------------------
(In thousands)
Actuarial present value of benefit obligation:
Vested benefits $ (19,605) $ (20,686)
Non-vested benefits (686) (759)
----------------------
Accumulated benefit obligation (20,291) (21,445)
Effect of anticipated future compensation levels and other
events (5,545) (1,895)
----------------------
Projected benefit obligation (25,836) (23,340)
Estimated fair value of assets held in the plan 26,151 22,639
----------------------
Projected plan assets in excess/(deficiency) of benefit
obligation 315 (701)
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions (2,041) (639)
Net prior service cost not yet recognized in net periodic
pension cost 403 443
Unrecognized net asset being recognized over 9 years (349) (458)
----------------------
Accrued pension cost included in other liabilities $ (1,672) $ (1,355)
======================
Net pension costs recognized in the consolidated statements of income for
the years ended December 31, 1996, 1995, and 1994 are summarized as follows:
1996 1995 1994
-----------------------------
(In thousands)
Service cost $ 1,053 $ 715 $ 835
Interest cost 1,842 1,623 1,606
Actual loss (return) on plan assets (4,035) (4,464) 64
Amortization of net prior service cost 40 40 40
Amortization of transition net asset (109) (109) (109)
Deferral of actual return (loss) on plan assets
versus actuarial long-term assumptions 2,026 2,792 (1,806)
-----------------------------
Net pension cost $ 817 $ 597 $ 630
=============================
The actuarial assumptions used in determining the actuarial present value
of projected benefit obligations as of December 31:
1996 1995 1994
-----------------------
Weighted average discount rate 7.50% 7.50% 8.25%
Rate of increase in future compensation 5.50% 5.50% 5.50%
Expected long-term rate of return on assets 9.00% 9.00% 9.00%
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
1996 and 1995 accounting for the plan is based on the level of cost sharing as
of January 1, 1996 and 1995, respectively.
The following table presents the amounts recognized in the Company's
consolidated balance sheets:
At December 31,
--------------------
1996 1995
--------------------
(In thousands)
Accumulated post-retirement benefit obligation:
Retirees and eligible beneficiaries $ (1,280) $ (1,447)
Active employees fully eligible for benefits (197) (154)
Other active plan participants (1,147) (893)
--------------------
(2,624) (2,494)
Unrecognized transition obligation 2,159 2,294
Net prior service cost not yet recognized in net
post-retirement benefit cost 193 75
Unrecognized net gain from past experience different
from that assumed and changes in assumptions (237) (240)
--------------------
Accrued post-retirement benefit cost included in
other liabilities $ (509) $ (365)
====================
Net periodic post-retirement benefit cost recognized in the consolidated
statements of income for the years ended December 31, 1996, 1995, and 1994 are
summarized as follows:
1996 1995 1994
---------------------
(In thousands)
Service cost $ 123 $ 93 $ 112
Interest cost 191 190 238
Recognition of transition obligation 135 135 135
Net amortization and deferral 8 (14) 7
---------------------
Net periodic post-retirement benefit cost $ 457 $ 404 $ 492
=====================
The discount rate used in determining the accumulated post-retirement
benefit obligation was 7.5%, 7.5%, and 8.25% at December 31, 1996, 1995, and
1994, respectively. For measurement purposes, a 9.1% annual rate of increase in
the per capita cost of covered health care benefits was assumed for medical
coverage for 1996; the rate was assumed to decrease uniformly to 5.5% by 2004
and to remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated post-retirement benefit obligation as
of December 31, 1996 by approximately $197 thousand and the aggregate of the
service and interest cost for 1996 would increase by approximately $32
thousand.
During the years ended December 31, 1996, 1995 and 1994, the Company
recorded an expense of $157 thousand, $159 thousand and $202 thousand,
respectively, related to certain post-employment benefits provided to inactive
employees.
In addition to the Company's non-contributory defined benefit retirement
and pension plan, the Company provides a supplemental employees retirement
plan. The amount of liability recognized in the Company's consolidated balance
sheets was $1.8 million and $1.7 million at December 31, 1996 and 1995,
respectively. The charges to expense with respect to this plan amounted to $350
thousand, $293 thousand, and $177 thousand for the years ended December 31,
1996, 1995, and 1994, respectively.
The Company and its subsidiaries have other benefit plans including
savings and profit sharing plans and executive benefit plans. The charges to
expense with respect to these plans amounted to $975 thousand in 1996, $736
thousand in 1995, and $704 thousand in 1994.
14. Dividend Restrictions and Regulatory Requirements
Cash and Due From Banks
Bank subsidiaries of Banknorth are required to maintain certain reserves
of vault cash and/or deposits with the Federal Reserve Bank of Boston. The
amount of this reserve requirement, included in Cash and Due from Banks, was
approximately $24.9 million and $20.0 million at December 31, 1996 and 1995,
respectively.
Dividend Restrictions
The Company's ability to pay dividends to its shareholders is largely
dependent on the ability of its subsidiaries to pay dividends to the Company.
Payment of dividends by Vermont-chartered banks is subject to applicable state
and federal laws. Similarly, payment of dividends by national banks is subject
to applicable federal law. National banks must obtain the approval of the
Office of the Controller of the Currency for the payment of dividends if the
total of all dividends declared in any calendar year would exceed the total of
the bank's net profits, as defined by applicable regulations, for that year,
combined with its retained net profits for the preceding two years.
Furthermore, a national bank may not pay a dividend in an amount greater than
its undivided profits then on hand after deducting its losses and bad debts, as
defined by applicable regulations.
Dividends paid by subsidiaries are the primary source of funds available
to Banknorth for payment of dividends to its shareholders and for debt service
and other working capital needs. Various laws and regulations restrict the
ability of banks to pay dividends to their shareholders. As of December 31,
1996, banking subsidiaries were able to declare dividends to Banknorth in 1997,
without regulatory approval, of approximately $4.7 million plus an additional
amount equal to the net profits, as defined in the applicable regulations, for
1997 through the date of any such dividend declarations, less any required
transfer to surplus.
In February 1996, as part of its plan to capitalize the Company's newly
formed subsidiary bank, First Massachusetts Bank, at a "well-capitalized" level
for regulatory capital purposes, the Company redeployed accumulated capital of
$45.6 million from certain of its subsidiary banks. Because the special
dividend exceeded applicable regulatory limitations, the Company obtained
approval from the applicable regulatory agencies for the payment of that
portion of the dividend which exceeded such regulatory limitations. Payment of
these dividends significantly restricts the dividend paying capacity of the
subsidiary banks. The payment of dividends by the Company in the future will
require the generation of sufficient future earnings by the subsidiary banks.
In relationship to the funding of the acquisition of North American Bank
Corporation, the Company has a credit agreement with a third party institution.
The credit agreement was revised December 19, 1996 and restricts the Company's
ability to pay dividends on its capital stock or redeem , repurchase or
otherwise acquire or retire any of its capital stock during the period from
September 30, 1996 to the date of calculation in an amount not to exceed the
sum of (a) $7,000,000 plus (b) 40% of the Company's consolidated net income
with certain adjustments, for such period, computed on a cumulative basis for
such period. As of December 31, 1996, the Company had authority to pay
dividends of up to $7.9 million under the terms of this restriction, after
taking into account dividends already paid during the calculation period
(September 30, 1996 through December 31, 1996).
Regulatory Capital Requirements
Regulatory regulations require banks to maintain minimum levels of
regulatory capital. Under the regulations in effect at December 31, 1996, the
Company's subsidiary banks were required to maintain a minimum leverage ratio
of Tier 1 capital to total adjusted quarterly average assets of 4.00%; and
minimum ratios of Tier 1 capital and total capital to risk weighted assets of
4.00% and 8.00%, respectively. The Federal Reserve Board ("FRB") has adopted
similar requirements for the consolidated capital of bank holding companies.
Under its prompt corrective action regulations, regulatory authorities
are required to take certain supervisory actions (and may take additional
discretionary actions) with respect to an undercapitalized institution. Such
actions could have a direct material effect on an institution's financial
statements. The regulations establish a framework for the classification of
banks into five categories: well capitalized, adequately capitalized, under
capitalized, significantly under capitalized, and critically under capitalized.
Generally, an institution is considered well capitalized if it has a Tier 1
(leverage) capital ratio of at least 5.0% (based on total adjusted quarterly
average assets), a Tier 1 risk based capital ratio of at least 6.0%, and a
total risked based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the the regulatory
authorities about capital components, risk weighting and other factors.
As of December 31, 1996, the Company's subsidiary banks and the Company
met all capital adequacy requirements to which they are subject. Further, the
most recent regulatory notification categorized each of the subsidiary banks as
well-capitalized institutions under the prompt corrective action regulations.
There have been no conditions or events since that notification that have
changed the subsidiary banks' capital classifications.
The following is a summary of the Company's significant subsidiary banks'
and the Company's (on a consolidated basis) actual capital amounts and ratios
as of December 31, 1996, compared to the regulatory minimum capital adequacy
requirements and the regulatory requirements for classification as a
well-capitalized institution:
Regulatory Requirements
-------------------------------------
Actual Minimum Capital For Classification
-------------------- Adequacy as Well Capitalized
Amount Ratio Ratio Ratio
------------------------------------------------------------
(In thousands)
Tier 1 (leverage) Capital:
The Howard Bank, N.A. $ 49,003 7.50% 4.00% 5.00%
First Massachusetts Bank, N.A. 46,980 7.98 4.00 5.00
First Vermont Bank and Trust Co. 46,435 7.91 4.00 5.00
Banknorth Group, Inc. (consolidated) 173,072 6.91 4.00 5.00
Tier 1 Risk Based Capital:
The Howard Bank, N.A. $ 49,003 9.51% 4.00% 6.00%
First Massachusetts Bank, N.A. 46,980 10.25 4.00 6.00
First Vermont Bank and Trust Co. 46,435 9.83 4.00 6.00
Banknorth Group, Inc. (consolidated) 173,072 9.11 4.00 6.00
Total Risk Based Capital:
The Howard Bank, N.A. $ 55,447 10.77% 8.00% 10.00%
First Massachusetts Bank, N.A. 50,794 11.08 8.00 10.00
First Vermont Bank and Trust Co. 52,347 11.08 8.00 10.00
Banknorth Group, Inc. (consolidated) 196,592 10.35 8.00
15. Shareholders' Equity
Common Share Purchase Rights
On November 27, 1990, the Board of Directors adopted a Rights Agreement
and declared a dividend distribution of one Common Share Purchase Right
("Right") on each outstanding share of common stock, payable December 7, 1990,
to shareholders of record on that date. The Rights Agreement also provides that
shares of common stock issued after December 7, 1990 will have Common Share
Purchase Rights associated with them to the same extent as the shares
outstanding on December 7, 1990. The Rights expire on December 7, 2000.
Rights become exercisable 10 days after a person or group acquires 20% or
more of the Corporation's common stock, or ten business days (or such later
date as may be determined by the Board of Directors prior to a person or group
acquiring 20% or more of the Corporation's common stock) after a person or
group announces an offer, the consummation of which, would result in such
person or group owning 20% or more of the common stock (even if no purchases
actually occur).
When the Rights first become exercisable, unless a person or group has
acquired 20% or more of the Corporation's common stock, a holder will be
entitled to buy from the Corporation one share of common stock at the exercise
price of $35.00. If any person or group acquires 20% or more of the
Corporation's common stock the Rights will entitle a holder (other than such
person or any member of such group) to buy a number of additional shares of
common stock of the Corporation having a market value of twice the exercise
price of each Right.
Following the acquisition by any person or group of 20% or more of the
Corporation's common stock, but only prior to the acquisition by a person or
group of a 50% stake, the Board of Directors will also have the ability to
exchange the Rights (other than Rights held by such person or group), in whole
or in part, for one share of common stock per right.
If the Corporation is involved in a merger or other business combination
at any time after a person or group has acquired 20% or more of the
Corporation's common stock, the Rights will entitle the holder to buy a number
of shares of common stock of the acquiring company having a market value of
twice the exercise price of each right.
Prior to the acquisition by a person or group of 20% or more of the
Corporation's common stock, at the option of the Board of Directors the Rights
are redeemable for one cent per Right. The Board of Directors is also
authorized to reduce the 20% threshold to not less than 10%.
16. Long-Term Incentive Plan
On May 8, 1990, the shareholders of Banknorth approved the Banknorth
Group, Inc. Comprehensive Long-Term Executive Incentive Plan ("Plan"), which
authorizes the granting of stock option awards, stock appreciation rights,
restricted stock awards, and restricted stock units to eligible employees of
the Corporation and/or its subsidiaries. The Plan is administered by the
Corporation's Board of Directors. Persons eligible to participate are chosen by
the Board of Directors. Directors of the Corporation who are not otherwise
officers or employees of the Corporation or of a subsidiary are not eligible to
participate in the Plan. 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 500,000. 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 Plan and, accordingly, no compensation
cost has been recognized for its stock options in the consolidated statements
of income. Had the Company recorded compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's consolidated net income and net income
per share would have been reduced to the pro forma amounts indicated below:
1996 1995
----------------------
(In thousands, except
for per share amounts)
Net Income As reported $ 25,390 $ 22,373
Pro forma 24,958 22,223
Net income per share As reported $ 3.30 $ 3.29
Pro forma 3.24 3.27
Pro forma net income reflects only options granted in 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options'
vesting period of two years and compensation cost for options granted prior to
January 1, 1995 is not considered. The effect of the variable restricted stock
awards discussed below is not material to the above pro forma disclosures.
The fair value of each option 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 1996 and 1995, respectively:
dividend yield of 3.13% and 3.29%; expected volatility of 24% and 25%, risk
free interest rates of 6.14% and 5.30%, and expected lives of 5 years for both
1996 and 1995 option grants.
A summary of the status of the Company's fixed stock options as of
December 31, 1996, 1995, and 1994, and changes during the years ended on those
dates is presented below:
1996 1995 1994
-------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 253,475 $21.91 202,350 $18.70 163,100 $15.89
Granted 131,500 31.99 84,000 28.00 78,000 23.00
Exercised (34,825) 17.61 (17,275) 13.62 (13,750) 11.47
Forfeited (5,000) 29.50 (15,600) 22.37 (25,000) 17.70
-----------------------------------------------------------------
Outstanding at end of year 345,150 26.07 253,475 21.91 202,350 18.70
=================================================================
Options exercisable at end of year 137,150 104,475 51,150
=================================================================
Weighted-average fair value of options
granted during the year $7.51 $6.29
=================================================================
For the exercise of the option awards noted above, the Corporation
elected to reacquire previously issued shares to cover the exercised options.
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
-----------------------------------------------------------------------
Weighted-Avg Weighted- Weighted-
Number Remaining Avg Number Avg
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/96 Life Price at 12/31/96 Price
- -------------------------------------------------------------------------------------------
$ 9 to 13 28,100 5.3 years $12.00 28,100 $12.00
19 to 23 109,050 7.1 21.27 109,050 21.27
28 to 32 203,000 9.1 30.30 -- --
38 5,000 9.0 38.00 -- --
---------------------------------------------------------------------------------------
$ 9 to 38 345,150 8.2 $26.07 137,150 $19.37
=======================================================================================
Restricted Stock Awards
Additionally, under the Plan, variable restricted stock awards were
granted in each year since 1992, including 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, 1996, restricted stock
options outstanding amounted to 49,900 shares. The following are the terms of
the restricted stock options granted:
July 23, 1996: Variable restricted stock awards of 11,400 shares were
granted and are outstanding as of December 31, 1996. 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 12,500 shares were
granted and are outstanding as of December 31, 1996. 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 10,500 shares were
granted and 9,000 shares were outstanding as of December 31, 1996.
Vesting for the 1994 shares and the units requires continuous service
through July 26, 1999. In addition, vesting of 25% of both the shares and
the units occurs for the 1994 awards each year between 1994 and 1998 in
which the return on average equity is equal to or greater than 12% and
return on average assets is equal to or greater than 1% to a maximum
vesting of 100%.
July 27, 1993: Variable restricted stock awards of 10,500 shares were
granted and 9,000 shares were outstanding as of December 31, 1996.
Vesting for the 1993 shares and the units requires continuous service
through July 27, 1998. In addition, vesting of 50% of both the shares and
the units occurs for the 1993 awards each year between 1995 and 1997 in
which the return on average equity is equal to or greater than 12% and
return on average assets is equal to or greater than 1% to a maximum
vesting of 100%. As of December 31, 1996, the 1993 awards were fully
vested.
July 28, 1992: Variable restricted stock awards of 10,000 shares were
granted and 8,000 shares were outstanding as of December 31, 1996.
Vesting for the 1992 shares and the units requires continuous service
through July 28, 1997. In addition, vesting of 50% of both the shares and
the units occurs for the 1992 awards each year between 1994 and 1996, in
which the return on average equity is equal to or greater than 12% to a
maximum vesting of 100%. As of December 31, 1996, the 1992 awards were
fully vested.
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, 1996, 1995 and 1994, compensation
expense related to these restricted stock awards and units amounted to $475
thousand, $609 thousand, and $146 thousand, respectively. For the issuance of
the variable restricted stock awards noted above, the Company elected to
reacquire previously issued shares.
17. 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, commitments to extend
credit, letters of credit, standby letters of credit, and loans sold with
recourse. These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the balance sheet. The
contract or notional amount of these instruments reflect the extent of
involvement the Corporation has in particular instruments.
The maximum exposure to credit loss in the event of complete
non-performance by the other party to the financial instruments, and any
collateral or guarantees which prove to be of no value, for commitments to
extend credit, letters of credit, standby letters of credit and loans sold with
recourse is represented by the contractual or notional amount of these
instruments. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Unless otherwise noted, the Corporation does not require collateral or
other security to support off-balance sheet financial instruments with credit
risk.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Corporation evaluates each
customer's creditworthiness on a case by case basis. The amount and type of
collateral deemed necessary upon extension of credit is based upon management's
credit evaluation and is consistent with existing credit policies for
collateral of on-balance sheet instruments. Collateral varies but may include
accounts receivable, inventory, property, plant and equipment, income producing
commercial properties, and residential real estate.
The Company may enter into rate lock agreements which fix the interest
rate at which the loan, if ultimately made, will be originated. Such agreements
may be made with borrowers with whom commitments to extend credit have been
made, as well as with individuals who have applied for mortgage loans and have
not yet received a commitment. These rate lock agreements expose the Company to
interest rate risk given the possibility that rates may change between the date
of the rate lock agreement 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, 1996 and 1995,
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 $19.5 million, and $35.6 million,
respectively. In order to limit the interest rate risk associated with rate
lock agreements as well as the interest rate risk associated with mortgage
loans held for sale, the Company enters into various agreements to sell loans
in the secondary mortgage market at fixed interest rates. Banknorth and its
subsidiaries have outstanding various commitments to sell real estate mortgages
amounting to approximately $12.3 million at December 31, 1996, and $23.1
million at December 31, 1995.
Letters of credit and standby letters of credit are conditional
commitments issued by the Corporation to guarantee payment on behalf of a
customer and guarantee the performance of a customer to a third party. The
credit risk involved in issuing these instruments is essentially the same as
that involved in extending loans to customers. Since a portion of these
instruments will expire unused, the total amounts do not necessarily represent
future cash requirements. Each customer is evaluated individually for
creditworthiness under the same underwriting standards used for commitments to
extend credit and on-balance-sheet instruments. Corporate policies governing
loan collateral apply to letters of credit and standby letters of credit at
time of credit extension.
The Corporation has sold mortgage loans where the investor has limited
recourse to the Corporation as issuer. These loans represent normal exposure to
credit loss exhibited by residential mortgage loans. Generally, the mortgage
notes are secured by liens on the real estate and by private mortgage insurance
where the loan to value ratio exceeds 80% at the time of extension of credit.
Certain mortgage loans are written on an adjustable basis and include
interest rate caps which limit annual and lifetime increases in the interest
rates on such loans. Generally, adjustable rate mortgages have an annual rate
increase cap of 2% and a lifetime rate increase cap of 5% to 6%. Interest rates
charged on home equity lines of credit are also capped. The home equity
interest rate cap is 18% for the Company. In addition, all other consumer loans
are subject to statutory interest rate ceilings as imposed by the State of
Vermont. No statutory interest rate ceilings on consumer loans are imposed by
the States of New Hampshire or Massachusetts. At December 31, 1996, the State
of Vermont imposed ceilings ranged from 18% to 24% depending on the loan amount
and underlying collateral on consumer loans. These caps expose the Corporation
to interest rate risk should market rates increase above these limits. As of
December 31, 1996 and 1995, $553.4 million, and $454.5 million of loans had
interest rate caps.
Financial instruments with off-balance sheet credit risk are as follows:
As of December 31, 1996
--------------------------------
Fixed Variable Total
--------------------------------
(In thousands)
Financial instruments whose contract amounts include
credit risk--trading instruments:
Commitments to extend credit for mortgage loans
held for sale $ 13,685 $ 5,155 $ 18,840
Mortgage loans sold with recourse 1,316 83 1,399
--------------------------------
Total trading instruments $ 15,001 $ 5,238 $ 20,239
================================
Financial instruments whose contract amounts include
credit risk--non-trading instruments:
Commitments to extend credit $ 13,963 $ 26,935 $ 40,898
Unused lines of credit -- 418,111 418,111
Letters of credit and standby letters of credit -- 32,037 32,037
--------------------------------
Total non-trading instruments $ 13,963 $ 477,083 $ 491,046
================================
Financial instruments whose notional amounts exceed
the amount of credit risk:
Interest rate swap agreements (pay variable) $ -- $ 50,000 $ 50,000
================================
Interest rate floor agreements (pay variable) $ -- $ 295,000 $ 295,000
================================
As of December 31, 1995
--------------------------------
Fixed Variable Total
--------------------------------
(In thousands)
Financial instruments whose contract amounts include
credit risk--trading instruments:
Commitments to extend credit for mortgage loans
held for sale $ 8,582 $ 1,435 $ 10,017
Mortgage loans sold with recourse 1,276 -- 1,276
--------------------------------
Total trading instruments $ 9,858 $ 1,435 $ 11,293
================================
Financial instruments whose contract amounts include
credit risk--non-trading instruments:
Commitments to extend credit $ 9,923 $ 35,432 $ 45,355
Unused lines of credit -- 286,042 286,042
Letters of credit and standby letters of credit -- 25,233 25,233
--------------------------------
Total non-trading instruments $ 9,923 $ 346,707 $ 356,630
================================
Financial instruments whose notional amounts exceed
the amount of credit risk:
Interest rate swap agreements (pay fixed) $ 10,000 $ -- $ 10,000
================================
Interest rate floor agreements (pay variable) $ -- $ 150,000 $ 150,000
================================
Interest Rate Swap and Floor Contracts
Interest rate swap and floor transactions generally involve the exchange
of fixed and variable rate interest payment obligations without the exchange of
the underlying principal (or notional) amounts. The Corporation's swaps and
floors are used as an interest rate risk management tool to protect the net
interest income from adverse changes in interest rates. The Corporation is
exposed to risk should the swap or floor counterparty default in its
responsibility to pay interest under the terms of the swap/floor agreement.
However, Banknorth minimizes this risk by performing normal credit reviews on
the counterparties and by limiting its exposure to any one counterparty.
Notional principal amounts are a measure of the volume of agreements
transacted, but the level of credit risk is significantly less. As of December
31, 1996, the Company does not expect any counterparties to fail to meet their
obligations.
Interest rate floors and swaps were utilized by the Company in 1996 and
1995 to correct imbalances between the re-pricing characteristics of certain
interest earning assets and certain interest-bearing liabilities. A significant
portion of the Company's loans are adjustable or variable rate resulting in
reduced levels of interest income during periods of falling rates. Certain
categories of deposits reach a point where market forces prevent further
reduction in the rate paid on those instruments. The net effect of these
circumstances is reduced interest income offset only by a nominal decrease in
interest expense, thereby narrowing the net interest margin. Interest rate
floors and swaps are, therefore, utilized to protect the Company from this
occurrence. At December 31, 1996, these instruments are intended to offset
potential declines in interest income on certain variable and floating rate
loans.
The following provides information related to interest rate swap and
floor contracts as of December 31, 1996 and 1995 and for the years then ended:
1996 1995
----------------------
(Dollars in thousands)
Interest Rate Swap Contracts:
Notional amount at end of period $ 50,000 $ 10,000
Average notional amount during the year 30,000 12,137
Fair value at year-end 270 --
Weighted average variable rate paid end of year 5.54% --
Weighted average fixed rate received at end of year 6.37% --
Weighted average fixed rate paid end of year -- 7.36%
Weighted average variable rate received at end of year -- 5.94%
Interest Rate Floor Contracts:
Notional amount at end of period $ 295,000 $ 150,000
Average notional amount during the year 234,809 126,438
Carrying value 2,051 1,392
Fair value at year-end 3,994 5,230
Weighted average variable rate paid at end of year 5.56% 5.83%
Weighted average fixed rate received at end of year 5.80% 6.25%
Data Processing Contract
Effective September 1, 1994, the Company entered into a five-year
facilities management contract with a third-party data processing company.
Under terms of the facilities management contract, the Company will pay a
minimum of $9.4 million for the remainder of the contract, which expires in
August, 1999. In addition, fees will be adjusted annually for inflation, based
upon the Consumer Price Index for all Urban Consumers--All Items ("CPI-ALL"),
with no increase to exceed eight percent, or be less than two percent.
Required minimum annual payments under these contracts were as follows at
December 31, 1996:
(In thousands)
1997 $ 3,462
1998 3,531
1999 2,386
-------
$ 9,379
=======
Contingent Liabilities
The Corporation has a self-insurance plan which covers both medical and
dental benefits for employees. Under the terms of the plan, the Company pays up
to a maximum of $100 thousand per employee on medical and dental claims.
In the ordinary course of business there are various legal proceedings
pending against Banknorth. After consultation with outside counsel, management
considers that the aggregate exposure, if any, arising from such litigation
would not have a material adverse effect on Banknorth's consolidated financial
position.
18. Disclosures About the Fair Value of Financial Instruments
Disclosure About Fair Value of Financial Instruments
Statement of Financial Accounting Standard No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS No. 107), requires that the Company
disclose estimated fair values for financial instruments. Fair value estimates,
methods, and assumptions are set forth below.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of the
Company's financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has a substantial trust
operation that contributes net fee income annually. The trust operation is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities include the
mortgage banking operation, benefits resulting from the low-cost funding of
deposit liabilities as compared to the cost of borrowing funds in the market,
and premises, equipment and software. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the
estimate of fair value under SFAS No. 107.
Short-Term Financial Instruments
The fair value of certain financial instruments is estimated to
approximate their carrying value because the remaining term to maturity of the
financial instrument is less than 90 days or the financial instrument reprices
in 90 days or less. Such financial instruments include cash and due from banks,
money market investments, accrued interest receivable, accrued interest payable
and short-term borrowed funds.
Securities Available for Sale and Investment Securities
The securities portfolios are financial instruments which are usually
traded in broad markets. Fair values are based upon market prices and dealer
quotations. If a quoted market price is not available for a particular
security, the fair value is determined by reference to quoted market prices for
securities with similar characteristics.
Loans Held For Sale
Estimated fair value of loans held for sale is determined based upon
outstanding commitments from investors or current market prices for amounts
with no sales commitments.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type including commercial, financial
and agricultural, commercial real estate, construction and land development,
residential real estate, credit card and lease receivables and other
installment loans. Each loan category is further segmented into fixed and
variable interest rate terms and performing and non-performing categories.
The estimated fair value of performing loans, except the portfolio of
residential mortgage loans and credit card receivables, is calculated by
discounting scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent
in the respective loan portfolio. The estimate of maturity is based on the
Company's historical experience with repayments for each loan classification,
modified, as required, by an estimate of the effect of current economic and
lending conditions. For residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources adjusted to reflect
differences in servicing and credit costs.
Estimated fair value for non-performing loans is based on recent external
appraisals of the collateral or estimated cash flows discounted using a rate
commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific
borrower information.
The fair value estimate for credit card receivables is based on the
carrying value of existing loans. Given the repricing frequency of this
portfolio, the estimated fair value is expected to approximate the carrying
value. This estimate does not include the value that relates to estimated cash
flows from new loans generated from existing cardholders over the remaining
life of the portfolio.
Management has made estimates of fair value discount rates that it
believes to be reasonable. However, because there is no market for many of
these financial instruments, management has no basis to determine whether the
estimated fair value would be indicative of the value negotiated in an actual
sale.
Interest Rate Floor Agreements
The estimated fair value of interest rate floor agreements are obtained
from dealer quotes. These values represent the estimated amount the Company
would receive or pay to terminate the agreements, taking into account current
interest rates and, when appropriate, the current creditworthiness of the
counterparties.
Deposit Liabilities
The estimated fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings, NOW, and money market accounts,
is regarded to be the amount payable on demand as of December 31, 1996 and
1995. 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.
Table of On-Balance Sheet Financial Instruments
The carrying value and estimated fair values of financial instruments
were as follows:
December 31, 1996 December 31, 1995
--------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------
(In thousands)
Financial Assets:
Cash and due from banks $ 91,871 $ 91,871 $ 89,111 $ 89,111
Money market investments 101 101 650 650
Securities available for sale 531,269 531,269 359,085 359,085
Loans held for sale 12,106 12,270 19,125 19,249
Investment securities 34,194 34,644 49,680 51,087
Loans 1,848,232 1,846,334 1,351,053 1,350,195
Less: Allowance for loan losses 23,520 -- 22,095 --
--------------------------------------------------------
Net loans 1,824,712 1,846,334 1,328,958 1,350,195
Accrued interest receivable 15,148 15,148 11,505 11,505
Interest rate floor agreements 2,051 3,994 1,392 5,230
Financial Liabilities:
Deposits:
Demand, NOW, savings and money market accounts $ 1,276,832 $ 1,276,832 $ 965,091 $ 965,091
Time deposits 789,232 792,721 595,678 596,228
Short-term borrowed funds 280,461 280,461 116,213 116,213
Long-term debt 25,923 25,949 55,997 55,855
Accrued interest payable 3,914 3,914 3,914 3,914
<FN>
<F1> Note: Loans held for sale represent the only trading financial instrument; all
other financial instruments are considered to be held for purposes other
than trading.
<FN>
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, 1996 and 1995, the fair value was estimated at $118 thousand
and $40 thousand for commitments to extend credit and $344 thousand and $372
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, 1996 and 1995 were $582 thousand
and $513 thousand, respectively.
Interest Rate Swap Agreements
The estimated fair value of interest rate swap agreements are obtained
from dealer quotes. These values represent the estimated amount the Company
would receive or pay to terminate the contracts or agreements, taking into
account current interest rates and, when appropriate, the current
creditworthiness of the counterparties. The fair value of interest rate swap
agreements at December 31, 1996 was $270 thousand. There was no estimated fair
value on the interest rate swap agreements due to the short expiration of the
swap agreement as of December 31, 1995.
19. Parent Company Only Financial Statements
The following information presents the financial position of Banknorth
Group, Inc. (Parent Company) at December 31, 1996 and 1995 and the results of
its operations and cash flows for each of the years in the three-year period
ended December 31, 1996:
December 31,
----------------------
BALANCE SHEETS 1996 1995
----------------------
(In thousands)
Assets:
Cash and due from subsidiary banks $ 6 $ 5
Securities purchased under agreements to resell
to a subsidiary bank 3,341 1,887
----------------------
Cash and cash equivalents 3,347 1,892
Investment in equity of bank subsidiaries 217,206 172,863
Investment in equity of non-bank subsidiaries 269 227
Securities available for sale 319 238
Other assets 8,226 8,665
----------------------
Total assets $ 229,367 $ 183,885
======================
Liabilities and Shareholders' Equity:
Long-term debt $ 13,000 $ 16,800
Accrued expenses and other liabilities 9,630 7,149
Total shareholders' equity 206,737 159,936
----------------------
Total liabilities and shareholders' equity $ 229,367 $ 183,885
======================
Years ended December 31,
--------------------------------
STATEMENTS OF INCOME 1996 1995 1994
--------------------------------
(In thousands)
Income:
Dividends from bank subsidiaries $ 59,065 $ 12,280 $ 4,389
Service fees paid by subsidiaries 28,853 26,978 25,873
Interest income 221 233 115
Net securities transactions -- -- 20
Other income 931 1,002 881
--------------------------------
Total income 89,070 40,493 31,278
Expenses:
Salaries and wages 13,706 12,888 10,967
Employee benefits 2,843 2,588 2,452
Occupancy 1,510 1,328 1,292
Equipment 3,651 2,802 3,007
Printing and supplies 1,261 960 896
Legal and other professional fees 1,633 1,248 1,286
Outside data processing services 4,545 4,485 4,966
Directors' fees and expenses 531 888 502
Telephone and telecommunications 465 398 310
Training and education 592 338 220
Postage 888 717 677
Interest 1,191 1,657 378
Other 1,897 1,752 1,234
--------------------------------
Total expenses 34,713 32,049 28,187
Income before income tax benefit and equity in undistributed
(distributions in excess of) income of subsidiaries 54,357 8,444 3,091
Income tax benefit (2,119) (1,883) (501)
--------------------------------
Income before equity in undistributed (distributions in
excess of) income of subsidiaries 56,476 10,327 3,592
Equity in undistributed (distributions in excess of) income
of bank subsidiaries (31,128) 12,005 12,408
Equity in undistributed income of non-bank subsidiaries 42 41 41
--------------------------------
Net income $ 25,390 $ 22,373 $ 16,041
================================
STATEMENTS OF CASH FLOWS
Years ended December 31,
--------------------------------
1996 1995 1994
--------------------------------
(In thousands)
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 25,390 $ 22,373 $ 16,041
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,274 1,188 922
Gain on sale of securities available for sale -- -- (20)
Exercise of employee stock options (411) (311) (155)
Amortization of employee restricted stock 310 407 97
Increase (decrease) in interest payable (32) (305) 378
Decrease (increase) in other assets 543 (3,166) 555
Increase in accrued expense and other liabilities 2,513 1,180 1,746
Equity in undistributed (distributions in excess of)
income of subsidiaries 31,086 (12,046) (12,446)
--------------------------------
Total adjustments 35,283 (13,053) (8,923)
--------------------------------
Net cash provided by operating activities 60,673 9,320 7,118
--------------------------------
Cash flows from investing activities:
Decrease (increase) in investment in equity of subsidiaries (78,030) 50 (19,094)
Proceeds from sale of securities available for sale -- -- 1,127
Capital expenditures (1,406) (1,452) (1,338)
--------------------------------
Net cash used in investment activities (79,436) (1,402) (19,305)
--------------------------------
Cash flows from financing activities:
Issuance of common stock, net of expenses 32,216 -- --
Issuance of employee restricted stock (371) (361) (247)
Dividends paid (7,827) (6,260) (4,083)
Payments on long-term debt (3,800) (4,200) --
Issuance of long-term debt -- -- 21,000
--------------------------------
Net cash provided by (used in) financing activities 20,218 (10,821) 16,670
--------------------------------
Net increase (decrease) in cash and cash equivalents 1,455 (2,903) 4,483
--------------------------------
Cash and cash equivalents at beginning of year 1,892 4,795 312
--------------------------------
Cash and cash equivalents at end of year $ 3,347 $ 1,892 $ 4,795
================================
Additional disclosure relative to cash flows:
Interest paid $ 1,193 $ 1,962 $ 378
================================
Taxes paid $ 25 $ 40 $ 16
================================
Supplemental schedule of non-cash investing and financing
activities:
Adjustment of securities available for sale to fair value,
net of tax $ 52 $ 30 $ 33
Adjustment of securities available for sale and securities
available for sale transferred to investment securities
to fair value, net of tax, at the subsidiaries 2,559 8,494 (8,529)
Form 10-K
The following is a copy, except for the cover page, cross-reference
sheet, certain portions of Part IV, signature pages, exhibit index and
exhibits, of the Annual Report of Banknorth Group, Inc. (the "Company") on Form
10-K for the year ended December 31, 1996, filed with the Securities and
Exchange Commission (the "Commission").
Certain information included herein is incorporated by reference from the
Company's 1996 Annual Report to Shareholders ("Annual Report") as indicated
below. Except for those portions of the Annual Report which are expressly
incorporated herein by reference, the Annual Report is not to be deemed filed
with the Commission. The Annual Report and Form 10-K have not been approved or
disapproved by the Commission, nor has the Commission passed upon the accuracy
or adequacy of the same.
Part I Pages
- ---------------------------------------------------------------------------
Item 1. Business 1-20, 48
Item 2. Properties 33, 50
Item 3. Legal Proceedings 43-44, 50
Item 4. Submission of Matters to a Vote of Security Holders N/A
Part II Pages
- ---------------------------------------------------------------------------
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters cover, 50
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 1-20
Item 8. Financial Statements and Supplementary Data 23-47
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 50
Part III
- ---------------------------------------------------------------------------
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Item 13. Certain Relationships and Related Transactions
Part IV**
- ---------------------------------------------------------------------------
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
- ---------------------------------------------------------------------------
<FN>
<F1> * The information required by Part III is incorporated herein by reference
from the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on May 13, 1997.
<F2> ** A list of exhibits in the Form 10-K is set forth on the Exhibit Index
included in the Form 10-K filed with the Commission and incorporated
herein by reference. Copies of any exhibit to the Form 10-K may be
obtained from the Company by contacting Corporate Communications,
Banknorth Group, Inc., P.O. Box 5420, Burlington, Vt., 05402-5420. All
financial statement schedules are omitted since the required information
is either not applicable, is immaterial or is included in the
consolidated financial statements of the Company and notes thereto in the
Annual Report.
</FN>
Business
Banknorth Group, Inc. is the sole owner of five Vermont banks; namely,
First Vermont Bank and Trust Company, Franklin Lamoille Bank, The Howard Bank,
N.A., Granite Savings Bank and Trust Company and Woodstock National Bank; one
Vermont limited charter bank, The Stratevest Group, N.A., a consolidated trust
subsidiary; one New Hampshire holding company; namely North American Bank
Corporation and its sole subsidiary, Farmington National Bank; and one
Massachusetts bank; First Massachusetts Bank, NA. Banknorth is also the sole
owner of North Group Realty, Inc., which owns real estate utilized in the
operation of Banknorth.
On October 14, 1994, Banknorth Group acquired North American Bank
Corporation and its sole subsidiary, Farmington National Bank. The acquisition,
which was accounted for as a purchase, is the first for Banknorth in the state
of New Hampshire.
On February 16, 1996, Banknorth completed the purchase of thirteen
banking offices from Shawmut Bank, N.A. A new subsidiary, First Massachusetts
Bank, N.A., with principal offices in Worcester, Massachusetts, was organized
to own and operate the acquired offices.
The subsidiary banks offer a full range of loan, deposit, investment
products and trust services designed to meet the financial needs of individual
consumers, businesses and municipalities. Mortgage banking services are also
offered through Banknorth Mortgage Company, a wholly-owned subsidiary of First
Vermont Bank and Trust Company. These services are currently offered throughout
the states of Vermont, Massachusetts and New Hampshire through a network of 58
banking offices.
Based on total assets of $2.6 billion as of December 31, 1996, Banknorth
is the largest bank holding company based in Vermont. In December 1996,
Banknorth and its subsidiaries employed 1,108 on a full-time equivalent basis.
Deposit and Loan Products
Deposit Products. The Company offers a variety of deposit products
typical of commercial banks and has designed product offerings responsive to
the needs of both individuals and businesses. Traditional demand deposit
accounts, interest-bearing transaction accounts (NOW accounts) and savings
accounts are offered on a competitive basis to meet customers' basic banking
needs. Indexed money market accounts, time deposits in the form of certificates
of deposit and IRA/KEOUGH accounts provide customers with price competitive and
flexible investment alternatives.
Loan Products. The Company offers a broad range of commercial and
consumer loan products designed to meet the banking needs of individual
customers, businesses and municipalities. Additional information is set forth
below relating to the Company's loan products, including major loan categories,
general loan terms, credit underwriting criteria, and risks particular to each
category of loans.
Commercial, Financial and Agricultural Loans; Commercial Real Estate
Loans. The Company 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 risk profile objectives and corporate
earnings requirements. These products are offered through the Subsidiary Banks
and all credit decisions are made on a decentralized basis under the umbrella
of a common corporate commercial loan policy which was developed to provide a
clear framework for determining acceptable levels of credit risk, underwriting
criteria, monitoring existing credits, and managing problem credit
relationships. Credit risk control mechanisms have been established at the
Subsidiary Banks and are monitored closely for compliance by a loan review
department at the Company level.
The Company has, from time to time, purchased loans originated by other
financial institutions as a means of supplementing in-market loan originations.
Risks particular to commercial, financial and agricultural loans include
borrowers' capacities to perform according to contractual terms of loan
agreements during periods of unfavorable economic conditions and changing
competitive environments. Management expertise and competency are critical
factors affecting the customers' performance and ultimate ability to repay
their debt obligations. Commercial real estate loans create exposure to market
value risk where the value of the underlying collateral decreases primarily as
the result of regional economic trends.
Consumer Loans and Leases. The Company offers a range of consumer loan
products. These products include both open-end (credit cards, home equity lines
of credit, unsecured revolving lines of credit) and closed-end (secured and
unsecured direct and indirect installment loans and leases) loans and leases
which are delivered through the Subsidiary Banks and through a network of
retail dealers. This delivery mechanism is supported by an automated loan
platform delivery system and a central underwriting process. The lending
process is designed to ensure not only the efficient delivery of credit
products, but also compliance with applicable consumer regulations while
minimizing credit risk exposure.
Credit decisions are made under the guidance of a standard consumer loan
policy, with the assistance of central underwriting resources. The loan policy
was developed to provide definitive guidance encompass ing credit underwriting,
monitoring and management. Credits are monitored for compliance with
established standards at both the Company and Subsidiary Bank level. The
quality and condition of the consumer loan and lease portfolio, as well as
compliance with established standards, is also monitored closely.
A borrower's ability to repay consumer debt is generally dependent upon
the stability of the income stream necessary to service the debt. Adverse
changes in economic conditions resulting in higher levels of unemployment
increase the risk of consumer defaults. Risk of default is also impacted by a
customer's total debt obligation. While the Company can analyze a borrower's
capacity to repay at the time a credit decision is made, subsequent extensions
of credit by other financial institutions may cause the customer to become
over-extended, thereby increasing the risk of default.
Residential Real Estate Loans. The Company offers mortgage banking
services, originating a full array of mortgage loan products and servicing a
$1.5 billion residential mortgage portfolio, approximately $1 billion of which
is serviced for unaffiliated third parties. The majority of loans originated by
the Company, both fixed and adjustable rate, are underwritten to secondary
market standards. Most originated residential mortgage loans are sold to the
secondary market. Loans made which are not eligible for sale in the secondary
market are held in the Subsidiary Banks' loan portfolios. Residential real
estate loans possess risk characteristics much the same as consumer loans.
Stability of the borrower's employment is a critical factor in determining the
likelihood of repayment. Market value risk, where the value of the underlying
collateral declines due to economic conditions, is also a factor.
Competition
Competition within New England 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.
In recent years the competitive environment in the New England banking
industry has expanded to include larger out-of-region bank holding companies.
In 1987, the Vermont legislature enacted the Interstate Banking Act, which
permitted, during a phase-in period, acquisitions of Vermont banks and bank
holding companies by bank holding companies based in the states of Connecticut,
Maine, Massachusetts, New Hampshire and Rhode Island, so long as such states
permitted acquisitions by Vermont institutions on terms not substantially more
restrictive. Effective February 1, 1990, the act permitted interstate banking
on a nationwide reciprocal basis.
Supervision and Regulation
Banknorth and its subsidiaries are subject to regulation and supervision
by a variety of government agencies including the Federal Reserve system, the
Office of the Comptroller of the Currency, the Federal Deposit Insurance
Corporation and the Vermont Department of Banking and Insurance. As a bank
holding company, Banknorth is subject to regulation under the Bank Holding
Company Act of 1956, as amended (the "Act"), and its examination and reporting
requirements. The Act requires Banknorth to obtain the prior approval of the
Board of Governors of the Federal Reserve System for bank acquisitions, limits
the shares of out-of-state banking organizations unless permitted by state law
and prescribes limitations on the non-banking activities of the Company.
Banknorth Group and its direct or indirect subsidiaries, are considered
"affiliates" for the purpose of Section 19(i) of the Federal Deposit Insurance
Act, as amended, and are thus subject to limitations with respect to their
ability to make loans and other extensions of credit to, or investments in,
each other, and are likewise subject to specific restrictive collateral
security requirements in respect to certain loans or other extensions of
credit.
The banking industry is affected by the monetary and fiscal policies of
government agencies, including the Federal Reserve System. An important
function of the Federal Reserve System is to regulate aggregate national bank
credit and money through such means as open market dealings in securities,
establishment of the discount rate on bank borrowings and changes in reserve
requirements against bank deposits.
The United States Congress has periodically considered and adopted
legislation which has resulted in, and could result in further, deregulation of
both banks and other financial institutions. Such legislation could relax or
eliminate geographic restrictions on banks and bank holding companies and could
place Banknorth and its subsidiaries in more direct competition with other
financial institutions, including mutual funds, securities and brokerage firms,
and investment banking firms. No assurance can be given as to whether any
additional national legislation will be adopted and as to the effect of such
legislation on the business of Banknorth.
The Financial Institutions Reform, Recovery and Enforcement Act (FIRREA)
and the Federal Deposit Insurance Company Improvement Act (FDICIA) are laws
enacted that have changed various aspects of the banking industry, including
regulator oversight and reporting issues.
In addition, the passage of the Economic Growth and Regulatory Paperwork
Reduction Act of 1996, which among other things provides for the
recapitalization of the Savings Association Insurance Fund ("SAIF") and for the
eventual merger of the SAIF and the Bank Insurance Fund ("BIF"), has resulted
in higher BIF assessments for 1997 and future years.
Properties
As of December 31, 1996, Banknorth subsidiaries operated 58 community
banking offices and 75 automated banking machines throughout the states of
Vermont, Massachusetts and New Hampshire. The Company's headquarters are
located at 300 Financial Plaza, Burlington, Vt.
The Company leases certain premises from third parties under terms and
conditions considered by management to be favorable to the Company.
Additional information relating to the Company's properties is set forth
in note 7 to the consolidated financial statements on page 33 of the Annual
Report and incorporated herein by reference.
Legal Proceedings
Banknorth and certain of its subsidiaries have been named as defendants
in various legal proceedings arising from their normal business activities.
Although the amount of any ultimate liability with respect to such proceedings
cannot be determined, in the opinion of management, based upon the opinion of
counsel, any such liability will not have a material effect on the consolidated
financial position of Banknorth and its subsidiaries.
Market for Registrant's Common Equity and Related Shareholder Matters
Banknorth's common stock, $1.00 par value per share (the "Common Stock"),
began trading in the over-the-counter market, quoted on the Nasdaq National
Market System ("Nasdaq"). As of December 31, 1996, there were 4,150 holders of
record of the Common Stock.
Holders of the Common Stock are entitled to receive such dividends as may
be legally declared by the Board of Directors and, in the event of dissolution
and liquidation, to receive the net assets of Banknorth remaining after payment
of all liabilities, in proportion to their respective holdings. Additional
information concerning certain limitations on the payment of dividends by the
Company and its bank subsidiaries is set forth under "Business -- Supervision
and Regulation" and in note 14 to the consolidated financial statements on
pages 37-38 in the Annual Report and incorporated herein by reference.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
There were no changes in accountants, nor were there any disagreements
with the accountants on accounting and financial disclosure.
Part IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
a.3. Exhibits Reg. S-K Item 601 Exhibit Table
Item No.
(3) Articles of incorporation and by-laws (previously filed with
the Commission as Exhibit 4 to the Company's Current
Report on Form 8-K dated November 30, 1989, as amended on
Form 8-K/A dated December 7, 1995, and incorporated herein
by reference).
(4)(i) Common Stock Certificate of the Company, previously
filed with the Commission as Exhibit 4 to the Company's
Current Report on Form 8-K dated November 30, 1989, as
amended on Form 8-K/A dated December 7, 1995, and
incorporated herein by reference.
(4)(ii) Rights Agreement dated as of November 27, 1990 between
the Company and Mellon Securities Trust Company, as
rights agent, previously filed with the Commission as
Exhibit 1 to the Company's Registration Statement on
Form 8-A dated November 29, 1990, and incorporated
herein by reference.
(4)(iii) First Amendment to Rights Agreement, dated as of
February 13, 1996, between the Company and Mellon
Securities Trust Company, as Rights Agent, previously
filed with the Commission as Exhibit 3 to the Company's
amended Registration Statement on Form 8-A/A dated
March 1, 1996, and incorporated herein by reference.
(10) Material contracts
10(i) Supplemental Retirement Agreement dated November 1,
1987, between the Company and William H. Chadwick,
previously filed with the Commission as Exhibit 10(xiv)
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, and incorporated herein
by reference.
10(ii) Employment Agreement dated December 21, 1994, between
the Company and William H. Chadwick, previously filed
with the Commission as Exhibit 10(xiv) to the Company's
Annual Report on Form 10-K for the year ended December
31, 1994, and incorporated herein by reference.
10(iii) Change-in-control Agreement, dated December 21, 1994,
between the Company and Thomas J. Pruitt, previously
filed with the Commission as Exhibit 10(xv) to the
Company's Annual report on Form 10-K for the year ended
December 31, 1994, and incorporated herein by
reference.
10(iv) Banknorth Group, Inc. Comprehensive Long-term Executive
Incentive Compensation Plan, as amended and restated
July 26, 1994, previously filed as Exhibit 10(4) to the
Company's Registration Statement on Form S-3 (Reg. No.
33-80273), and incorporated herein by reference.
10(v) 1994 Deferred Compensation Plan for Directors and
Selected Executive Officers of Banknorth Group, Inc.
and Participating Affiliates, amended and restated as
of January 1, 1996, previously filed with the
Commission as Exhibit 10(vii) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1995, and incorporated herein by reference.
10(vi) Banknorth Group, Inc. Supplemental Employees Retirement
Plan, dated January 1, 1995, previously filed with the
Commission as Exhibit 10(xvi) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1994, and incorporated herein by reference.
10(vii) Banknorth Group, Inc. 1996 Management Incentive
Compensation Plan, previously filed as Exhibit 10(10)
to the Company's Registration Statement on Form S-3
(Reg. No. 33-80273), and incorporated herein by
reference.
10(viii) Banknorth Group, Inc. 1997 Management Incentive
Compensation Plan.
10(ix) Change-in-Control Agreement, dated January 1, 1996,
between the Company and Richard J. Fitzpatrick.,
previously filed with the Commission as Exhibit 10(xi)
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995, and incorporated herein
by reference.
10(x) Change-in-Control Agreement, dated January 1, 1996,
between the Company and Robert M. Gillis, previously
filed with the Commission as Exhibit 10(xii) to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1995, and incorporated herein by
reference.
10(xi) Credit Agreement (as amended), dated October 14, 1994,
among Banknorth Group, Inc, the lenders named therein,
and The First National Bank of Chicago, as Agent,
previously filed as Exhibit 10(9) to the Company's
Registration Statement on Form S-3 (Reg. No. 33-80273),
and incorporated herein by reference. (Replaced by
Exhibit 10 (xii) listed below.)
10(xii) Credit Agreement, dated December 16, 1996, among
Banknorth Group, Inc., the lenders named therein, and
The First National Bank of Chicago, as Agent.
(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 and poolings of interest. The effect
of the outstanding stock option awards, which are fully
described in the note 16 to the 1996 Banknorth Group, Inc.
consolidated financial statements, is not significant to the
calculation of the per share earnings. Weighted average number
of shares outstanding for each year in the period 1992 to 1996
are as follows:
1996 7,703,758
1995 6,804,425
1994 6,804,425
1993 6,804,425
1992 6,804,425
(13) The Corporation's 1996 Annual Report to Shareholders,
specifically designated portions of which have been
incorporated by reference in this Report on Form 10-K, is filed
herewith.
(21) Subsidiaries of Banknorth Group, Inc.
The Howard Bank, N.A.--Vermont
First Vermont Bank and Trust Company and its wholly owned
subsidiary, Banknorth Mortgage Company--Vermont
Franklin Lamoille Bank--Vermont
Granite Savings Bank and Trust Company--Vermont
Woodstock National Bank-- Vermont
North American Bank Corporation and its wholly owned
subsidiary, Farmington National Bank-- New Hampshire
The Stratevest Group, N.A.-- Vermont
First Massachusetts Bank, N.A., and its wholly owned
subsidiaries, First Massachusetts Security Corporation
(commenced operations on January 1, 1997), and North-group
Investment and Insurance Services, Inc. (commencing
operations in April, 1997)-- Massachusetts
North Group Realty, Inc.--Vermont
(23) Independent Auditors' Report
Consent of Independent Public Accountants
(99) The Proxy Statement for the Corporation's 1997 Annual Meeting
of Shareholders to be filed with the commission is incorporated
herein by reference.
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 Executive Vice President and Chief
Officer Financial Officer
Date: March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ LUTHER F. HACKETT Director, Chairman of the Board March 25, 1997
- ----------------------------------
Luther F. Hackett
/s/ WILLIAM H. CHADWICK Director, President and Chief Executive March 25, 1997
- ---------------------------------- Officer (Principal Executive Officer)
William H. Chadwick
/s/ THOMAS J. PRUITT Executive Vice President and Chief Financial March 25, 1997
- ---------------------------------- Officer (Principal Financial Officer)
Thomas J. Pruitt
/s/ NEAL E. ROBINSON Treasurer and Principal Accounting Officer March 25, 1997
- ----------------------------------
Neal E. Robinson
/s/ THOMAS J. AMIDON Director March 25, 1997
- ----------------------------------
Thomas J. Amidon
/s/ JACQUELINE D. ARTHUR Director March 25, 1997
- ----------------------------------
Jacqueline D. Arthur
/s/ NORDAHL L. BRUE Director March 25, 1997
- ----------------------------------
Nordahl L. Brue
/s/ ROBERT A. CARRARA Director March 25, 1997
- ----------------------------------
Robert A. Carrara
/s/ SUSAN C. CRAMPTON Director March 25, 1997
- ----------------------------------
Susan C. Crampton
/s/ RICHARD J. FLEMING Director March 25, 1997
- ----------------------------------
Richard J. Fleming
/s/ KATHLEEN HOISINGTON Director March 25, 1997
- ----------------------------------
Kathleen Hoisington
/s/ RICHARD M. NARKEWICZ, M.D. Director March 25, 1997
- ----------------------------------
Richard M. Narkewicz, M.D.
/s/ R. ALLAN PAUL Director March 25, 1997
- ----------------------------------
R. Allan Paul
/s/ ANGELO P. PIZZAGELLI Director March 25, 1997
- ----------------------------------
Angelo P. Pizzagalli
/s/ MARGARET E. RICHEY Director March 25, 1997
- ----------------------------------
Margaret E. Richey
/s/ THOMAS P. SALMON Director March 25, 1997
- ----------------------------------
Thomas P. Salmon
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 outstanding on the same date.
Cash dividends per share
Total cash dividends declared divided by average shares outstanding for the
period.
Cumulative effect of an accounting change
Although the presumption is that once an accounting principle has been adopted
it should not be changed, when a change is necessary it generally is recognized
by including the cumulative effect of the change in net income of the period of
change. The cumulative effect of a change in accounting principle is the total
direct effects, net of the related tax effect, that the change has on prior
periods.
Earning assets
Interest-bearing deposits with banks, securities available for sale, investment
securities, loans (net of unearned income), federal funds sold and securities
purchased under agreements to resell.
Earnings per share
Net income divided by average shares outstanding during the period, including
the effect of stock options, if significant.
Efficiency ratio
Total other operating expense, excluding goodwill amortization,
OREO/repossession expense 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.
Expense ratio
Total other operating expense, excluding goodwill amortization,
OREO/repossession 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.
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.
Intangible assets
Intangible assets include goodwill, purchased mortgage servicing rights,
servicing release premiums, and purchased credit card rights.
Interest-bearing liabilities
Interest-bearing deposits, federal funds purchased, securities sold under
agreements to repurchase, other short-term borrowings and long-term debt.
Liquidity
The ability to meet both loan commitments and deposit withdrawals as they come
due.
Net loans charged off
Reductions to the allowance for loan losses for loans written off, net of the
recovery of loans previously written off.
Net interest income
The difference between income on earning assets and interest expense on
interest-bearing liabilities.
Net interest margin
Fully taxable-equivalent basis net interest income as a percentage of average
earning assets.
Net loan transactions
Gains and losses resulting from sales of loans, primarily by the mortgage
banking operation.
Net securities transactions
Gains and losses resulting from sales of securities available for sale at
prices above or below the amortized cost of the securities sold and gains
realized on the call of certain securities.
Non-accrual loans
Loans for which no periodic accrual of interest income is realized.
Non-performing assets
When other real estate owned (OREO) and repossessed assets 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 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.
Parent Company
A company that owns or controls subsidiaries through the ownership of voting
stock.
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 result 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. A key ratio which indicates
how effectively a bank holding company uses its total resources.
Return on average shareholders' equity (ROE)
Net income as a percentage of average shareholders' equity. A key ratio which
provides a measure of how efficiently equity has been employed.
Significant non-recurring income or expense items
A significant non-recurring income or expense item represents income or expense
which is reported in the quarter in which it occurs, and is not expected to
recur in future periods.
Tangible book value
Tangible shareholders' equity divided by shares outstanding on the same date.
Tangible shareholders' equity
Shareholders' equity less goodwill.
Tangible total assets
Total assets less goodwill.