UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
0F THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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 (l) has filed all
reports required to be filed by Section l3 or l5(d) of the Securities
Exchange Act of l934 during the preceding l2 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based on the closing price on March 15, 1999 was
$646,737,241.
As of March 15, 1999, 23,201,336 shares of the registrant's common stock
were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-K:
Document Part
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Annual Report to Shareholders For the Year Ended December 31, 1998 I,II
Proxy Statement for the 1999 Annual Meeting of Shareholders III
Table of Contents
Page
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Management's Discussion and Analysis of Financial Condition and Results of Operations 3
Five Year Selected Financial Data 29
Summary of Unaudited Quarterly Financial Information 30
Management's Statement of Responsibility 31
Independent Auditors' Report 32
Consolidated Statements of Income 33
Consolidated Balance Sheets 34
Consolidated Statements of Changes in Shareholders' Equity 35
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial Statements 37
Form 10-K 64
Signatures 70
Glossary of Terms 71
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The financial review which follows focuses on the factors affecting
the consolidated financial condition and results of operations of Banknorth
Group, Inc. ("Banknorth" or "Company") during 1998 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 1998 should be read in conjunction with this
review. Amounts in prior period consolidated financial statements are
reclassified whenever necessary to conform to the 1998 presentation. On
December 31, 1998, the shareholders of Banknorth Group, Inc. and Evergreen
Bancorp, Inc. ("Evergreen") of Glens Falls, New York approved a merger
between the two organizations. Evergreen was merged with and into Banknorth
on that date with each issued and outstanding share of Evergreen common
stock converted into 0.9 shares of Banknorth common stock. This resulted in
approximately 7.9 million in additional shares of Banknorth common stock
issued. All of the historical financial information in this annual report
has been restated for the effect of this transaction, which was accounted
for as a pooling-of-interests.
Except for historical information contained herein, the matters
contained in this review are "forward-looking statements" that involve risk
and uncertainties, including statements concerning future events or
performance and assumptions and other statements which are other than
statements of historical facts. The Company wishes to caution readers that
the following important factors, among others, could in the future affect
the Company's actual results and could cause the Company's actual results
for subsequent periods to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company herein:
* the effect of changes in laws and regulations, including federal
and state banking laws and regulations, with which the Company
and its banking subsidiaries must comply, the cost of such
compliance and the potentially material adverse effects if the
Company or any of its banking subsidiaries were not in
substantial compliance either currently or in the future as
applicable;
* the effect of changes in accounting policies and practices, as
may be adopted by the regulatory agencies as well as by the
Financial Accounting Standards Board, or changes in the
Company's organization, compensation and benefit plans;
* the effect on the Company's competitive position within its
market area of increasing consolidation within the banking
industry and increasing competition from larger "super regional"
and other banking organizations as well as non-bank providers of
various financial services;
* the effect of certain customers and vendors of critical systems
or services failing to adequately address issues relating to
becoming year 2000 compliant;
* the effect of unforeseen changes in interest rates;
* the effects of changes in the business cycle and downturns in
the local, regional or national economies;
* the effect of lower than expected revenues or cost savings from
the recently completed merger with Evergreen Bancorp, Inc. and
acquisition of the Berkshire branches;
* the effect of higher than expected costs and unanticipated
difficulties related to the cost of integration of acquired
businesses and operations;
* the effect of other risks and uncertainties discussed throughout
this report as well as those discussed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 and its
Current Report on Form 8-K dated July 31, 1998.
The Company wishes to caution readers not to place undue reliance on
any forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including those described above, could
cause the Company's actual results or circumstances for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions, which may be
made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
OVERVIEW
Banknorth's net income, after $16.3 million of after-tax merger and
acquisition expenses relating to two transactions in the fourth quarter of
1998, was $28.9 million, compared to $41.8 million for the year ended
December 31, 1997. Basic earnings per share ("EPS") was $1.24, and diluted
EPS was $1.22 for the year ended December 31, 1998, compared to $1.76 basic
EPS, and $1.74 diluted EPS for the year ended December 31, 1997. Operating
earnings, without the 1998 merger and acquisition expenses or the 1997 gain
on sale of merchant processing, were $45.2 million or $1.91 per diluted
share, and $40.2 million or $1.67 per diluted share for the years ended
December 31, 1998 and 1997, respectively. The 1998 operating results do not
include any of the cost savings to be realized from the Evergreen merger as
the merger was completed December 31, 1998. Management expects the savings
to be realized by the second half of 1999.
During the year 1998, Banknorth completed two merger and acquisition
transactions:
* In November 1998, Banknorth purchased eleven branches,
representing $291.5 million in deposits, in the Berkshires
region of Massachusetts from BankBoston, N.A. These branches
became part of First Massachusetts Bank, N.A. ("FMB"), a
subsidiary bank of Banknorth.
* On December 31, 1998, Banknorth completed its merger with
Evergreen. Evergreen has $1.1 billion in assets, $971.9 million
in deposits and 280 employees and will continue to operate as
Evergreen Bank, N.A., a banking subsidiary of Banknorth.
* As a result of these two transactions, the Company also acquired
approximately $1.5 billion in investment assets to be managed by
The Stratevest Group, N.A., ("Stratevest") Banknorth's
investment and financial management subsidiary.
MERGER AND ACQUISITION ACTIVITY
Evergreen Bancorp, Inc.
On December 31, 1998, the shareholders of Banknorth and Evergreen
approved a merger between the two organizations. Evergreen was merged with
and into Banknorth with each issued and outstanding share of Evergreen
common stock, together with associated preferred purchase rights, converted
into 0.9 shares of Banknorth common stock, plus cash in lieu of any
fractional share interest. This resulted in approximately 7.9 million in
additional shares of Banknorth common stock issued, bringing Banknorth's
outstanding shares to approximately 23.2 million immediately following the
merger.
Evergreen Bank, N.A. ("Evergreen Bank"), a national bank and formerly
Evergreen's sole banking subsidiary, will continue to operate its banking
business, as a wholly owned subsidiary of Banknorth. Evergreen Bank operates
28 offices in 8 counties in eastern upstate New York, throughout an area
extending from the Massachusetts border fifty miles south of Albany, north
to the Canadian border. Evergreen Bank serves commercial, individual,
institutional and municipal customers with a wide range of deposit and loan
products. As of December 31, 1998, Evergreen Bank had total assets of $1.1
billion and deposits of $971.9 million.
In order to effect the merger, one-time merger related expenses of
$20.1 million, ($15.1 million after-tax impact), were incurred in the fourth
quarter of 1998. The majority of these expenses were employment-related
costs and data processing conversion and termination costs. Further,
approximately $700 thousand of after-tax conversion related expenses are
expected to be realized in the first quarter of 1999 as the systems
conversions are completed. For additional information on merger and
acquisition expenses, see note 2 to the Company's consolidated financial
statements.
The merger qualified as a tax-free reorganization and was accounted
for as a pooling-of-interests. At the time the merger was announced, both
companies announced the recision of their previously announced stock
repurchase programs.
All historical financial information in this annual report has been
restated for the combination of the two companies.
First Massachusetts Bank-Berkshires Region
On November 13, 1998, Banknorth completed the purchase from
BankBoston, N.A. of ten full-service branches, one limited service branch
and nine remote ATM locations, as well as private banking relationships
associated with the branches in the Berkshire region of Massachusetts.
In connection with the Berkshire acquisition, Banknorth paid
BankBoston, N.A. a fixed premium of $52.5 million. At the closing, the
deposits of the Berkshire branches were approximately $290.1 million,
including accrued interest. Banknorth also purchased in the transaction
commercial loans associated with the branches with a net book balance as of
November 13, 1998 of approximately $73.6 million and a portfolio of consumer
loans originated in the branches with a net book balance of $35.8 million.
In addition, the Company received approximately $122.5 million in cash as
consideration for the net liabilities assumed. The Berkshire acquisition
(other than the private banking relationships) was made through First
Massachusetts Bank, N.A. (a Banknorth subsidiary) headquartered in
Worcester, Massachusetts, and has extended that bank's central Massachusetts
territory westward to the border of New York State and contiguous to the
southern reach of Evergreen's New York market area. The formation of First
Massachusetts Bank in 1996 is discussed below under the caption "First
Massachusetts Bank-Worcester Region".
The private banking relationships associated with these branches,
which as of closing represented approximately $1.0 billion of trust and
investment assets under management, including approximately $750 million in
discretionary trust assets under management, were acquired by Stratevest.
The transaction was accounted for under purchase accounting rules. As
such, both the assets acquired and liabilities assumed have been recorded on
the consolidated balance sheet of the Company at estimated fair value as of
the date of acquisition. Goodwill, representing the excess of cost over net
assets acquired, was $54.8 million, substantially all of which is deductible
for income tax purposes, and is being amortized over fifteen years on a
straight-line basis. The one-time acquisition-related expenses of $1.8
million pre-tax, or $1.2 million after-tax, were recorded in the fourth
quarter of 1998. To complete the transaction, Banknorth reallocated capital
resources through payment of a special dividend to Banknorth by its
subsidiary banks, except FMB, of approximately $21.5 million.
The results of operations for the branches and private banking
relationships acquired are included in Banknorth's consolidated financial
statements from the date of acquisition forward, which represented six weeks
in 1998.
First Massachusetts Bank-Worcester Region
On February 13, 1996, Banknorth completed the purchase of thirteen
banking offices of Shawmut Bank, N.A. in central and western Massachusetts.
A new subsidiary, First Massachusetts Bank, N.A., ("FMB"), with principal
offices in Worcester, Massachusetts was organized to own and operate the
acquired offices. The transaction was accounted for under purchase
accounting rules and resulted in the assumption of $560.3 million in
deposits, the acquisiton of $405.7 million in loans and fixed assets, and
$32.1 million in goodwill. In addition, the Company received approximately
$122.4 million in cash as consideration for the net liabilities assumed. To
complete this transaction, Banknorth issued 2,044,446 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.
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 91.61% and 93.73% of total assets at December 31, 1998
and 1997, respectively.
Banknorth, through its management of liabilities, attempts to provide
stable and flexible sources of funding within established liquidity and
interest rate risk guidelines. This is accomplished through core deposit
products offered within the markets served by the Company as well as through
the prudent use of purchased liabilities.
Banknorth's objectives in managing its balance sheet are to limit the
sensitivity of net interest income to actual or potential changes in
interest rates, and to enhance profitability through strategies that promise
sufficient reward for understood and controlled risk. The Company is
deliberate in its efforts to maintain adequate liquidity, under prevailing
and forecasted economic conditions, and to maintain an efficient and
appropriate mix of core deposits, purchased liabilities and long-term debt.
Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Debentures
On May 1, 1997, Banknorth established Banknorth Capital Trust I (the
"Trust"), which is a statutory business trust formed under Delaware law upon
filing a certificate of trust with the Delaware Secretary of State. The
Trust exists for the exclusive purposes of (i) issuing and selling 30 year
guaranteed preferred beneficial interests in Corporation's junior
subordinated debentures ("capital securities") in the aggregate amount of
$30.0 million at 10.52%, (ii) using the proceeds from the sale of the
capital securities to acquire the junior subordinated debentures issued by
the Company and (iii) engaging in only those other activities necessary,
advisable or incidental thereto. The junior subordinated debentures are the
sole assets of the Trust and, accordingly, payments under the junior
subordinated debentures are the sole revenue of the Trust. Banknorth owns
all of the common securities of the Trust. The Company has used the net
proceeds from the sale of the capital securities for general corporate
purposes. The capital securities, with associated expense that is tax
deductible, qualify as Tier I capital under regulatory definitions. The
Company's primary source of funds to pay interest on the debentures are
current dividends from subsidiary banks. Accordingly, the Company's ability
to service the debentures is dependent upon the continued ability of the
subsidiary banks to pay dividends.
Earning Assets
Earning assets were $3.8 billion during 1998, an increase of $273.5
million, or 7.7%, from 1997. Table A, Mix of Average Earning Assets,
presents information relating to the mix of earning assets during the last
three years.
Loans. Total loans of $2.8 billion at December 31, 1998, were $195.0
million, or 7.4%, above year-end 1997. The increase in total loans from 1997
levels is attributable to the $109.4 million in loans received in the
Berkshire branch acquisition, the strong commercial loan demand in the
Massachusetts market and improved lending activity in Vermont and New
Hampshire. The strong commercial loan demand offset a decline in the real
estate mortgage portfolio as a result of refinancing activity. During 1997,
management supplemented its in-market loan originations with the purchase of
residential real estate loans originated by other financial institutions in
an effort to replace loans maturing or prepaying, thus supporting the level
of earning assets. No such purchases were made in 1998. 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, 1998 were
$690.2 million representing 24.3% of total loans. The 1998 balance, $123.9
million higher than at December 31, 1997, reflects approximately $73.6
million of loans acquired in the Berkshire acquisition and increased lending
activity in the markets served by the Company. Banknorth offers a wide range
of commercial credit products and services to its customers. These include
secured and unsecured loan products specifically tailored to the credit
needs of the customer, underwritten with terms and conditions reflective of
portfolio risk objectives and corporate earnings requirements.
Commercial real estate loans increased $51.9 million, or 9.2%, during
1998 to reach $615.5 million at December 31, 1998. This category is
comprised primarily of mortgages on owner-occupied income producing
properties or businesses. In most cases, the Company maintains banking
relationships with these customers.
Residential real estate loans, $1.0 billion at December 31, 1998, were
$40.6 million lower than at year-end 1997 as a result of high refinancing
activity. Banknorth Mortgage Company, Inc. ("BMC") acts as a supplier of
residential real estate mortgage loan assets for the banking subsidiaries,
thereby allowing the banks to place assets on their balance sheet, which
meet desired rate and repricing characteristics. Loans made by BMC are the
primary means by which the Company replaces runoff in its portfolio, which
occurs through scheduled principal payments as well as loan pre-payments.
Installment loans, including credit card and lease receivables, were
$444.1 million at December 31, 1998, $51.8 million, or 13.2% higher than at
December 31, 1997. The majority of the increase was the result of the
Berkshire acquisition, which contributed $35.8 million in installment loans.
Further, lease receivables, made up primarily of automobile leases,
increased $2.7 million, or 3.5% over 1997. The increase in lease volume is
indicative of increased consumer preference towards automobile leasing over
traditional financing. In 1997, Banknorth began offering its lease and
indirect financing products under the name Northgroup Financial Services.
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 $43.0 million at December 31, 1998 and $25.0 million at
December 31, 1997. The increase in the balance outstanding was primarily the
result of the significant refinancing activity in 1998 given the low
interest rate environment. The production level experienced in 1998, as well
as loans sold to the secondary market, was at record high levels for BMC.
New loan originations and refinancing activity is expected to remain strong
into the first quarter of 1999 as the number of applications pending and
loans in various stages of production are at high levels as of December 31,
1998. Subsequent to the first quarter of 1999, management expects the level
of mortgage originations to return to more normal levels.
The majority of loans originated by BMC are sold to the secondary
market. Certain production, primarily adjustable rate, is retained by the
Company to be held in its mortgage portfolio. This is accomplished by the
sale of originated loans to the banking subsidiaries. At the time of sale,
the assets are moved from the held for sale category at the lower of cost or
market value, and reflected as mortgage loans on the Company's consolidated
financial statements. During 1998 and 1997, $91.5 million and $97.7 million,
respectively, of mortgage originations were retained in such a manner by the
Company's subsidiary banks.
Securities available for sale. The portfolio is managed on a total
return basis with the objective of exceeding the return that would be
experienced if investing solely in U.S. Treasury instruments. This category
of investments is used primarily for liquidity purposes while simultaneously
producing earnings. The portfolio is managed according to prudent policy
limits established for average duration, average convexity and average
portfolio life.
The designation of "available for sale" is made at the time of
purchase, based upon management's intent to hold the securities for an
indefinite period of time; however, these securities are available for sale
in response to changes in market interest rates, related changes in the
securities prepayment risk, needs for liquidity, or changes in the
availability of, and yield on alternative investments. These securities are
purchased under assumptions relating to liquidity and performance
characteristics, and may be sold or transferred to securities held to
maturity, when circumstances warrant. Sales may also occur when liquidity or
other funding needs arise. On a regular basis, horizon analyses are
performed for a 6-12 month time horizon to evaluate the need for re-
balancing the portfolio.
Securities available for sale totaled $1.1 billion at December 31,
1998 as compared to $958.6 million at December 31, 1997. The 1998 balance is
stated net of a fair value adjustment reflecting net unrealized gains of
$5.9 million, whereas the December 1997 balance is net of a fair value
adjustment reflecting net unrealized gains of $5.3 million. During 1998,
cash flow generated by the investment securities held to maturity portfolio
was re-invested in the available for sale portfolio resulting in
approximately $38.1 million of additional investments in the available for
sale category. The remaining increase in the available for sale portfolio
was primarily due to investing excess liquidity as a result of deposit
growth.
In January 1998, Banknorth sold approximately $85.5 million of balloon
mortgage-backed securities. While the sales resulted in a net loss of $504
thousand, the enhanced yield received through re-investment resulted in
recovery of the loss within six months. In addition to recovering the $504
thousand loss incurred from the sale, Banknorth received additional interest
income of approximately $523 thousand during 1998 and anticipates
approximately $994 thousand in improved interest income in 1999 as a result
of this sale. The new securities purchased, as well as the characteristics
of the total portfolio after the transaction, meet all established corporate
guidelines.
In the fourth quarter of 1997, Banknorth purchased $40.0 million of
bank-owned life insurance ("BOLI"). Further discussion of BOLI is provided
later in this document. Securities available for sale were allowed to
mature or were sold in order to provide the funding necessary to implement
the bank-owned life insurance program.
Investment securities held to maturity. The designation "investment
securities held to maturity" is made at the time of purchase or transfer
based upon the intent and ability to hold these securities until maturity.
The management of this portfolio focuses on yield and earnings generation,
liquidity through cash flow and interest rate risk characteristics within
the framework of the entire balance sheet. Cash flow guidelines and average
duration targets have been established for management of this portfolio. As
of December 31, 1998, the balance of securities in this category was $20.5
million, $38.1 million below the balance at December 31, 1997. The primary
cause of the reduced portfolio size was the continued reinvestment of
maturities throughout 1998 into the available for sale portfolio.
Table D, Securities Available for Sale and Investment Securities Held
to Maturity contains details of investment securities at December 31, 1998,
1997, and 1996.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $26.0 million during 1998, $30.1 million in 1997 and
$29.7 million in 1996. As of December 31, 1998, money market investments
were $4.9 million as compared to $71 thousand at December 31, 1997.
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 $310.3 million in 1998 on a fully tax equivalent
basis, an increase of $14.3 million, or 4.8%, from the 1997 total of $295.9
million, and $48.4 million higher than in 1996. Of the increase in interest
income from 1997 to 1998, $21.4 million was the result of increases in
earning assets. Decreases in the yields on earning assets resulted in a
decline in interest income of $7.1 million. In 1998, the average yield on
total earning assets was 8.14% as compared to 8.34% in 1997 and 8.46% in
1996.
Table F, Average Balances, Yields and Net Interest Margins and Table
H, Volume and Yield Analysis, contain details of changes by category of
interest income from earning assets for each of the last three years.
Funding Sources
Banknorth utilizes various traditional sources of funding to support
its earning asset portfolios. Average total funding in 1998 increased by
$283.8 million, or 8.4%, over the average for 1997. Table G, Average Sources
of Funding, presents the various categories of funds used and the
corresponding average balances for each of the last two years as well as the
changes by category for 1998, 1997 and 1996.
Deposits. Total core deposits increased $228.1 million, or 8.3%, over
1997. NOW and money market accounts increased by $212.0 million and non-
interest bearing deposits increased $43.7 million, while regular savings
declined $25.5 million. Approximately $35.9 million of the increase on
average in 1998 was the result of the Berkshire acquisition.
Purchased liabilities. Total purchased liabilities increased on
average from $608.3 million during 1997 to $666.8 million during 1998. As of
December 31, 1998, total short-term borrowed funds were $281.6 million as
compared to $449.9 million at December 31, 1997. Short-term borrowed funds
from the FHLB decreased significantly from $263.0 million at December 31,
1997 to $30.0 million at December 31, 1998. The decrease in short-term
borrowed funds was the result of paydowns made after receipt of cash in the
acquisition of the Berkshire branches and a refinancing of approximately
$30.0 million to longer-term debt at more favorable rates. Banknorth had no
brokered deposits during 1998 or 1997. Long-term advances from the Federal
Home Loan Bank increased on average from $34.5 million during 1997 to $53.9
million in 1998. Scheduled maturities of short-term advances were replaced
with long-term advances in response to movements in interest rates while
maintaining the Company's interest rate risk profile within established
guidelines.
Bank Debt. Average bank debt of $9.9 million during 1998 primarily
represents the 1994 funding of the acquisition of North American Bank
Corporation ("NAB"). As previously disclosed, Banknorth financed the
transaction with a bank credit facility whose original terms were re-
negotiated in December 1996. The re-negotiated terms provide improved
pricing and an extension of the repayment period. The balance of $7.8
million at December 31, 1998 will be repaid in three years. Additionally,
there was $463 thousand in bank debt at December 31, 1998 related to the
funding of the Employee Stock Ownership Plan of Evergreen Bank. This loan is
an adjustable rate loan that will mature in 2000.
Interest expense summary. Total interest expense was $144.7 million in
1998, an increase of $11.3 million, or 8.5%, as compared to 1997. Increased
levels of interest-bearing liabilities contributed $10.7 million to the
increase while the increase in rates paid increased interest expense by $600
thousand. The cost of interest bearing liabilities was 4.47% in 1998, an
increase of 2 basis points from 1997.
Tables F, Average Balances, Yields and Net Interest Margins and Table
H, Volume and Yield Analysis, contain details of changes by category of
interest expense for each of the last three years.
Time deposits, in denominations of $100 thousand and greater, at
December 31, 1998 were scheduled to mature as follows:
3 months or less $112,738
Over 3 to 6 months 48,792
Over 6 to 12 months 59,302
Over 12 months 18,239
--------
Total $239,071
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Net Interest Income
Net interest income for 1998 of $165.6 million was $3.0 million, or
1.9% higher than that recognized in 1997. The yield on earning assets
declined by 20 basis points in 1998 to 8.14%, while the cost of interest
bearing liabilities increased 2 basis points. Of the change in net interest
income of $3.0 million, $10.7 million was due to increased volume offset by
a $7.7 million decline due to changes in interest rates. The net interest
margin was 4.34% in 1998, 4.58% in 1997 and 4.89% in 1996.
Interest rates generally decreased during 1998, the result of which
was a decrease in the yield on earning assets. During the fourth quarter of
1998, the net interest margin was 4.31%, 3 basis points below the margin for
the full year of 1998. The net interest margin narrowed during 1998 as
competition for quality credits and retail deposits resulted in a tighter
spread between asset yields and deposit costs. A changing mix of deposits
where higher cost deposits, such as money market accounts, are increasing
faster than lower cost deposits also contributed to the narrowing margin.
Also impacting the net interest margin during 1997 and 1998 was the
issuance of $30.0 million in capital securities in May 1997. During 1997,
in an effort to increase interest income sufficient to offset the carrying
cost of the capital securities, the Company purchased approximately $120.0
million in earning assets. This leveraging strategy was intended to be
short-term in nature, until an appropriate long-term use was found. With the
Berkshire branch purchase in November 1998 and the subsequent restructuring
of the subsidiary banks' balance sheets, the leverage was effectively
removed by year-end 1998.
Further, the purchase of $40.0 million of BOLI in the fourth quarter
of 1997 adversely impacted the net interest margin as securities available
for sale were allowed to mature or were sold in order to provide the funding
necessary to implement the bank-owned life insurance program. The earnings
from BOLI are recorded as other non-interest income.
RISK MANAGEMENT
Credit Risk
Credit risk is managed through a network of loan officer authorities,
credit committees, loan policies and oversight from the corporate senior
credit officer and subsidiary boards of directors. Management follows a
policy of continually identifying, analyzing and grading credit risk
inherent in each loan portfolio. An ongoing independent review, subsequent
to management's review, of individual credits is performed on each
subsidiary bank's commercial loan portfolios by the independent Loan Review
function.
As a result of management's ongoing review of the loan portfolio,
loans are placed in non-accrual status, either due to the delinquent status
of principal and/or interest payments, or a judgment by management that,
although payments of principal and/or interest are current, such action is
prudent. Loans are generally placed in non-accrual status when principal
and/or interest is 90 days overdue, except in the case of consumer loans,
which are generally charged off when loan principal and/or interest payments
are 120 days overdue.
Non-performing assets ("NPAs"). Non-performing assets include non-
performing loans, which are those loans in a non-accrual status, loans which
have been classified as troubled debt restructurings and loans past due 90
days or more which are still accruing interest. Also included in the total
non-performing assets are foreclosed and repossessed non-real estate assets.
NPAs were $24.3 million at December 31, 1998, an increase of $1.1
million, or 4.5%, from December 31, 1997. The increase in NPAs was caused by
the designation of one $5.9 million commercial credit as a troubled debt
restructured loan ("TDR") in the third quarter of 1998. The principal and
interest payments on the loan were current throughout 1998 and the
classification of TDR was removed in early 1999 as the result of the
rewritten loan being at market interest rate. At that time, NPAs fell to
approximately $19.0 million. NPAs at December 31, 1996 were $26.9 million.
The ratio of NPAs to loans plus other real estate owned and repossessed
assets at December 31, 1998, was .86% compared to .88% at year end 1997.
Table I, Non-Performing Assets, contains the details of NPAs for the last
five years.
Non-performing loans ("NPLs") at December 31, 1998 were $21.0 million,
a net increase of $514 thousand, or 2.5%, from December 31, 1997.
The recorded investment in loans considered to be impaired totaled
$13.7 million as of December 31, 1998 and $10.8 million as of December 31,
1997. The related allowances for loan losses on these impaired loans were
$2.0 million and $1.3 million as of December 31, 1998 and 1997,
respectively. At December 31, 1998 and 1997, there were no impaired loans
which did not have an allowance for loan losses determined in accordance
with SFAS 114.
Although NPLs showed a slight increase year to year due to the one
$5.9 million commercial loan designated as restructured, non-accrual loans
decreased $5.6 million or 31.1% reflecting relative improvement in the
overall credit quality of the loan portfolio. Delinquency rates experienced
in the residential portfolio are consistent with trends seen regionally and
nationally. Given the possibility of increases in interest rates, management
expects that certain credits may encounter difficulty in continuing to
perform under the contractual terms of their loans should rates actually
increase. While this occurrence might result in increases in NPLs and
subsequent charge-offs, management does not expect it to materially affect
the Company's performance in 1999.
As of December 31, 1998, management is not aware of any credits that
pose significant adverse risk to eventual full collection.
Total other real estate owned and repossessed assets were $3.3 million
at the end of 1998, up $540 thousand from one year earlier.
Allowance for loan losses and provision. The allowance for loan losses
is maintained at a level estimated by management to provide adequately for
risk of loss inherent in the current loan portfolio. The adequacy of the
allowance for loan losses is monitored monthly. It is assessed for adequacy
using a methodology designed to ensure the level of the allowance reasonably
reflects the loan portfolio's risk profile. It is also evaluated to ensure
that it is sufficient to absorb probable credit losses inherent in the
current loan portfolio.
For purposes of evaluating the adequacy of the allowance, the Company
considers a number of significant factors that affect the collectibility of
the portfolio. For individually analyzed loans, these include estimates of
loss exposure, which reflect the facts and circumstances that affect the
likelihood of repayment of such loans as of the evaluation date. For
homogenous pools of loans, estimates of the Company's exposure to credit
loss reflect a thorough assessment of a number of factors, which could
affect loan collectibility. These factors include: the size, trend,
composition, and nature; changes in lending policies and procedures,
including underwriting standards and collection, charge-off and recovery
practices; trends experienced in non-performing and delinquent loans; past
loss experience; economic trends in the Company's market; portfolio
concentrations that may affect loss experienced across one or more
components of the portfolio; the effect of external factors such as
competition, legal and regulatory requirements; and the experience, ability,
and depth of lending management and staff. In addition, various regulatory
agencies, as an integral component of their examination process,
periodically review the Company's allowance for loan losses.
After a thorough consideration and validation of the factors discussed
above, required additions to the allowance for loan losses are made
periodically by charges to the provision for loan losses. These charges are
necessary to maintain the allowance at a level which management believes is
reasonably reflective of overall inherent risk of loss in the portfolio.
While management uses available information to recognize losses on loans,
additions to the allowance may fluctuate from one reporting period to
another. These fluctuations are reflective of changes in risk associated
with portfolio content and/or changes in management's assessment of any or
all of the determining factors discussed above.
Table J, Summary of Loan Loss Experience, includes an analysis of the
changes to the allowance for the past five years. Loans charged off in 1998
were $11.7 million, or .44% of average loans. This represents an improvement
over the prior year when charge-offs totaled $12.4 million, or .48% of
average loans. Recoveries in 1998 on loans previously charged off were $6.2
million as compared to $5.6 million in 1997.
The provision for loan losses ("provision") in 1998 was $9.3 million,
or .35% of average loans. In 1997, the provision was $9.4 million, or .36%
of average loans while in 1996, the provision was $7.0 million, or .30% of
average loans. The Company has experienced significant growth in higher
credit risk loan portfolios during 1998, as well as continued loan growth in
the Massachusetts market area through FMB, which was formed in 1996.
Commercial loans have increased by $123.9 million, or 21.9%, to $690.2
million at December 31, 1998, while installment loans have increased by
$51.8 million, or 13.2%, to $444.1 million at December 31, 1998. FMB's loan
portfolio increased by $131.1 million, or 27.5%, from $477.2 million at
December 31, 1997 to $608.3 million at December 31, 1998. The growth in
these loan portfolios was somewhat offset by the improved credit performance
in 1998 versus 1997, as discussed above, and accordingly the 1998 provision
is consistent with 1997.
The increase in the provision from 1996 to 1997 relates to the
Company's increased experience in working in the Massachusetts market, which
the Company entered in 1996 with the formation of a new banking subsidiary,
FMB. As discussed previously, the Company acquired approximately $396.9
million of loans from Shawmut. The balance in this portfolio grew to $477.2
million at December 31, 1997. These loans are primarily in the Massachusetts
market area, an area that the Company had not done business in prior to
1996. As the Company worked with these acquired loans and became more
familiar with the Massachusetts market area, and as this portfolio grew and
matured, the Company determined that an increased allowance for loan losses
was necessary. Accordingly, the provision in 1997 was increased from 1996.
The Company has found that delinquency and charge-off rates in the
Massachusetts market are higher than the market areas the Company's other
subsidiary banks operate in. As a result, an increase in the provision from
1996 to 1997 was necessary.
No portion of the allowance is restricted to any loan or group of
loans, and the entire allowance is available to absorb realized losses. The
amount and timing of realized losses and future allowance allocations may
vary from current estimates. Table K. Allocation of the Allowance for Loan
Losses presents the breakdown of the allowance for loan losses by loan type
for the latest five year ends.
Market Risk
Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of the
Company's business activities.
The responsibility for balance sheet risk management oversight is the
function of the Asset/Liability Committee ("ALCO"). The corporate ALCO,
chaired by the chief financial officer and composed of various subsidiary
presidents and other members of corporate senior management, meets on a
monthly basis to review balance sheet structure, formulate strategy in light
of expected economic conditions, and review performance against guidelines
established to control exposure to the various types of inherent risk. Bank
subsidiary ALCOs meet on a more frequent basis to adjust product prices as
necessary.
Interest rate risk can be defined as an exposure to a movement in
interest rates that could have an adverse effect on the Company's net
interest income. Interest rate risk arises naturally from the imbalance in
the repricing, maturity and/or cash flow characteristics of assets and
liabilities. Management's objectives are to measure, monitor and develop
strategies in response to the interest rate risk profile inherent in the
Company's consolidated balance sheet and off-balance sheet financial
instruments.
Interest rate risk is managed by the Corporate ALCO. Interest rate
risk measurement and management techniques incorporate the repricing and
cash flow attributes of balance sheet and off-balance sheet instruments as
they relate to potential changes in interest rates. The level of interest
rate risk, measured in terms of the potential future effect on net interest
income, is determined through the use of modeling and other analytical
techniques under multiple interest rate scenarios. Interest rate risk is
evaluated on a quarterly basis and reviewed by the Corporate ALCO with
subsidiary risk profiles presented to the respective boards of directors.
The Company's Asset Liability Management Policy, approved annually by
the boards of directors, establishes interest rate risk limits in terms of
variability of net interest income under rising, flat and decreasing rate
scenarios. It is the role of the ALCO to evaluate the overall risk profile
and to determine actions to maintain and achieve a posture consistent with
policy guidelines.
Certain imbalances causing interest rate risk to exceed policy limits
are correctable through management of asset and liability product offerings.
Depending upon the specific nature of the imbalance, it may be more
efficient and less costly to utilize off-balance sheet instruments such as
interest rate swaps, interest rate corridors, and interest rate cap or floor
agreements, among other things, to correct the imbalance. Banknorth has
utilized swaps, corridors and floors to address certain interest rate risk
exposures.
Significant portions of the Company's loans are adjustable or variable
rate resulting in reduced levels of interest income during periods of
falling rates. Certain categories of deposits reach a point in this instance
where market forces prevent further reduction in the rate paid on those
instruments. The net effect of these circumstances is reduced interest
income offset only by a nominal decrease in interest expense, thereby
narrowing the net interest margin. Additionally, the interest rate risk
characteristics of the loans and deposits purchased with the Shawmut
branches in 1996 exacerbated the potential for reduced interest income under
those circumstances. To protect the Company from this occurrence, interest
rate floors in the notional amount of $295.0 million were used to mitigate
the potential reduction in interest income on certain adjustable and
variable rate loans. Further, in May 1998, the Company sold interest rate
swaps in the notional amount of $50.0 million previously in use for a net
gain of $254 thousand. This gain is being amortized into interest income
over the original remaining term of the initial swap contracts of
approximately one year. The swaps were sold in order to reduce interest rate
risk sensitivity of the Company. In late 1998, interest rate corridors in
the notional amount of $50 million and interest rate swaps in the notional
amount of $50 million were entered into in order to mitigate the reduction
in interest income in a period of rising rates. In a period of quickly
rising interest rates, certain deposit products will reprice more rapidly
than certain assets potentially causing a reduction in interest income.
These contracts were designed to make a portion of the Corporation's fixed
rate loans sensitive to rising rates.
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, 1998,
the unamortized balance of these interest rate floors was $920 thousand. The
estimated fair value of these floors was $3.1 million as of December 31,
1998. The estimated fair value of the interest rate swap contracts and
interest rate corridor contracts were $292 thousand and $440 thousand,
respectively, as of December 31, 1998.
Banknorth utilizes an interest rate risk model widely recognized in
the financial industry to monitor and measure interest rate risk. The model
simulates the behavior of interest income and expense of all on and off
balance sheet financial instruments under different interest rate scenarios
together with a dynamic future balance sheet. Banknorth measures its
interest rate risk in terms of potential changes in net interest income.
The model requires that assets and liabilities be broken into
components as to fixed, variable, and adjustable interest rates as well as
other homogeneous groupings which are segregated as to maturity and type of
instrument. Cash flows and maturities are then determined, and for certain
assets, prepayment assumptions are estimated under different rate scenarios.
Repricing margins, caps, and ceilings are also determined for adjustable
rate assets.
Interest income and interest expense are then simulated under three
rate conditions. First, a flat rate scenario is created in which today's
prevailing rates are locked in and the only balance sheet fluctuations that
occur are due to cash flows, maturities, new volumes, and repricing volumes
consistent with this flat rate assumption. The second condition is a 200
basis point rise in rates over a twelve (12) month horizon together with a
dynamic balance sheet. Finally, there is a 200 basis point decline in rates
over a 12 month period together with a dynamic balance sheet. Next, the
simulation is extended to twenty-four (24) months to determine the interest
rate risk with the level of interest rates stabilizing in months 13 through
24 at a plus or minus 200 basis points from today's levels. Even though
rates remain stable during this 13 to 24 month time period, the balance
sheet has growth similar to the first twelve months as well as repricing
opportunities driven by maturities, cash flow, and adjustable rate products
which will continue to change the risk profile. Changes in net interest
income are then measured against the flat rate interest scenario. In
addition to the parallel simulation, interest rate risk is regularly
measured under various non-parallel yield curve shifts, pricing, and balance
sheet assumptions.
Table L. Interest Rate Risk summarizes the percentage change in
interest income and expense by significant earning asset and interest
bearing liability categories, as well as net interest income from the
forecasted net interest income expected in the flat rate scenario, described
above, to the expected net interest income in the rising rate and falling
rate scenarios also described above during the next 12 months, the 13 to 24
month time frame, as well as the 1 to 24 month time frame. As of December
31, 1998, based on various assumptions through the use of the Company's
interest rate risk simulation model described above, any reduction in net
interest income from the Company's flat-rate (given no changes in the
December 31, 1998 interest rate levels) forecasted change in net interest
income, would not exceed 5% from the flat rate scenario in months 1 through
12 under any of the parallel interest rate scenario used in the analysis
during the 12 month horizon. This level of variability places the Company's
interest rate risk profile within acceptable policy guidelines.
A tool used by some in the banking industry for measuring interest
rate risk is interest rate sensitivity gap ("gap") analysis. This approach
attempts to measure the difference between assets and liabilities repricing
or maturing within specified time periods.
A gap analysis has several significant limitations, which renders it
less meaningful to Banknorth than the above-discussed analysis. These
limitations include the fact that it is a static measurement, it does not
capture basis risk, and it does not capture risk that varies non-
proportionally with rate movements. The selection of the beginning and
ending dates of the time intervals used as gap buckets as well as the size
of the time interval can mask interest rate risk. Assets and liabilities do
not always have clear repricing dates and many loans and deposits reprice
earlier than their contractual maturities indicate. Gap analysis is also
unable to properly reflect the impact on net interest income of certain
interest rate floors. Such complexities are better addressed by the
Company's simulation model which, over the 24 month horizon, shows future
levels of net interest income to be relatively neutral to changes in the
interest rate environment as a result of the Company's active asset
liability management practices.
Liquidity Risk
Banknorth seeks to obtain favorable sources of liabilities and to
maintain prudent levels of liquid assets in order to satisfy varied
liquidity demands. Besides serving as a funding source for maturing
obligations, liquidity provides flexibility in responding to customer
initiated needs. Many factors affect the Company's ability to meet liquidity
needs, including variations in the markets served by its network of offices,
its mix of assets and liabilities, reputation and credit standing in the
marketplace, and general economic conditions.
The Company actively manages its liquidity position through target
ratios established under its liquidity policy. Continual monitoring of these
ratios, both historically and through forecasts under multiple interest rate
scenarios, allows Banknorth to employ strategies necessary to maintain
adequate liquidity. Management has also defined various degrees of adverse
liquidity situations that could potentially occur and has prepared
appropriate contingency plans should such situations arise.
The Company achieves its liability-based liquidity objectives in a
variety of ways. Net liabilities can be classified into three basic
categories for the purpose of managing liability-based liquidity: core
deposits, purchased liabilities and long-term or capital market funds. Core
deposits consist of non-interest bearing demand deposits and retail
deposits. These deposits result from relatively dependable customers and
commercial banking relationships and are therefore viewed as a stable
component of total required funding. Average core deposits increased from
1997 to 1998 by $228.1 million, or 8.3%. The Berkshire acquisition added
significantly to the deposit balances. Core deposits represented 81.5% of
total funding in 1998 and 81.7% in 1997. Banknorth will continue to seek
funding in the most efficient and cost effective manner as is possible.
Table G. reflects the components of funding over the last three years.
Among the traditional funding instruments comprising the category of
purchased liabilities are time deposits $100 thousand and greater, Federal
funds purchased, securities sold under agreement to repurchase, borrowings
from the United States Treasury Department (Treasury Tax and Loan accounts),
and short and long-term borrowings from the FHLB. The average balance of
purchased liabilities in 1998, as reflected in Table G, was $666.8 million,
$58.5 million or 9.6% higher than in 1997. Purchased liabilities represented
18.2% of total net funding in 1998 as compared to 17.9% in 1997.
One of the principal components of short-term borrowed funds is
securities sold under agreement to repurchase. These borrowings generally
represent short-term uninsured customer investments, which are secured by
Company securities. During 1998, the average securities sold under agreement
to repurchase were $164.9 million, as compared to $142.5 million in 1997.
Long-term funding, primarily through the FHLB, increased during 1998
by $19.4 million as short-term notes from the FHLB were replaced with
longer-term more favorable rate FHLB debt .
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 held for
sale in the secondary market. Alternatively, these assets may be pledged to
secure short-term borrowed funds.
The Company also uses the capital markets as a source of liquidity. In
May 1997, the Company established a trust to issue and sell $30.0 million in
capital securities. The net proceeds were used for general corporate
purposes. In February 1996, the Company issued 2,044,446 shares of common
stock resulting in $32.2 million in net proceeds which were used to provide
a portion of the initial capital of FMB and to help offset the reduction in
the Company's regulatory capital ratios resulting from the acquisition.
Off-Balance Sheet Risk
Commitments to extend credit. Banknorth makes contractual commitments
to extend credit and extends lines of credit which are subject to the
Company's credit approval and monitoring procedures. At December 31, 1998
and 1997, commitments to extend credit in the form of loans, including
unused lines of credit, amounted to $903.1 million and $618.8 million,
respectively. In the opinion of management, there are no material
commitments to extend credit that represent unusual risks.
Letters of credit and stand-by letters of credit. Banknorth guarantees
the obligations or performance of customers by issuing letters of credit and
stand-by letters of credit to third parties. These letters of credit are
frequently issued in support of third party debt, such as corporate debt
issuances, industrial revenue bonds and municipal securities. The risk
involved in issuing letters of credit and stand-by letters of credit is
essentially the same as the credit risk involved in extending loan
facilities to customers, and they are subject to the same credit
origination, portfolio maintenance and management procedures in effect to
monitor other credit and off-balance sheet products. At December 31, 1998
and 1997, outstanding letters of credit and stand-by letters of credit were
approximately $76.6 million and $67.5 million, respectively. An increase in
the amount of institutional business, primarily hospitals, caused the
majority of the increase year to year.
Counterparty risk. Banknorth enters into interest rate swap, corridor
and floor agreements under which the Company and the counterparty are
obligated to exchange interest payments on notional principal amounts. 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 agreement. Banknorth
controls counterparty risk through credit approvals, limits and monitoring
procedures.
OTHER OPERATING INCOME AND EXPENSES
Other operating income is a significant source of revenue for
Banknorth and an important factor in the Company's results of operations.
Other operating income totaled $41.5 million in 1998, $3.6 million or 9.6%
higher than in 1997 and $9.8 million or 30.9% higher than in 1996. The 1997
amount includes a $2.4 million gain on the sale of merchant processing.
Investment management income. The Stratevest Group, N.A., the
Company's investment and financial management subsidiary, contributes the
largest recurring portion of other operating income through fees generated
from the performance of trust and investment management services. Income
from trust and investment management services totaled $12.8 million in 1998,
an increase of $1.6 million, or 14.4%, over 1997 and $2.6 million, or 25.7%,
over 1996. The increase was the result of strong sales and market conditions
as well as the increase in the portfolio as a result of the Berkshire branch
acquisition. The Company's acquisition of approximately $1.0 billion in
investment assets as a result of the Berkshire branches purchase in November
1998 was added to the Stratevest portfolio of managed assets. This portion
of the portfolio generated approximately $797 thousand in fees during the
last two months of 1998 and is expected to have a significant impact on
earnings in 1999. Total assets under management totaled $4.1 billion,
including $2.6 billion under discretionary management, as of December 31,
1998, compared to total assets under management of $2.7 billion, including
$1.5 billion under discretionary management, as of December 31, 1997. Total
assets under management were $2.3 billion as of December 31, 1996, including
$1.3 billion under discretionary management. Continued opportunities for
increases in the generation of Stratevest's income lie in increased sales in
the Massachusetts, New York and New Hampshire markets. The Company is
experiencing increased sales in these areas and, accordingly, management
expects continued increased levels of trust and investment management income
for 1999.
Service charges on deposit accounts. Service charges on deposit
accounts, $11.7 million in 1998, were $932 thousand, or 8.7% above 1997 and
24.4% higher than in 1996. The increased service charges over the past two
years were primarily the result of improved charge policies implemented in
late 1997 and the Berkshire branch acquisition, which added approximately
$291.5 million in deposits in 1998. During 1997, Banknorth reviewed and
enhanced its policies and practices regarding service charges and service
charge waivers. Accordingly, the level of fee income increased in late 1997
and continued to improve in 1998. Further increases are expected in 1999 as
the effect of the Berkshire branch acquisition is fully realized.
Mortgage banking income. Mortgage banking income, which is comprised
of loan servicing income, net loan transactions and gains on the sale of
mortgage servicing rights, amounted to $5.5 million for the year ended
December 31, 1998. This category of income was up $825 thousand, or 17.7%,
from the year ended December 31, 1997 and up $931 thousand, or 20.4%, from
the year ended December 31, 1996. First, loan servicing income, primarily
mortgage servicing at BMC, in 1998 was $1.6 million, a decrease of $950
thousand, or 37.8%, from 1997 and a decrease of $1.3 million, or 45.0%, from
1996. Although the balance of mortgage loans serviced for unrelated third
parties increased slightly from $901.4 million at December 31, 1997 to
$935.1 million at December 31, 1998, amortization of mortgage servicing
rights and impairment valuation reserves increased causing a decline in loan
servicing income. The amortization of mortgage servicing rights was $1.4
million for 1998 compared to $1.1 million in 1997. This increase in
amortization expense is primarily related to the growth in the capitalized
mortgage servicing rights (MSRs) reflecting the continued application of new
accounting rules adopted in 1996. Additionally, the Company established a
valuation reserve of $500 thousand for impairment of MSRs in 1998 as a
result of the high refinancing activity. No impairment valuation reserve was
deemed necessary in 1997. The decline in loan servicing income from 1996 to
1997 was primarily due to increased amortization as noted above and the
decline in the portfolio of loans serviced. The amortization of MSRs was
$962 thousand for the year ended December 31, 1996.
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights," in 1996, which was superseded by SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," as of January 1, 1997. These standards require that entities
recognize as separate assets, the rights to service loans for others,
regardless of how those servicing rights are acquired. Recognition of the
MSRs results in an increased gain on sale or a decrease in the loss on sale
of loans. MSRs are amortized into servicing fee income in proportion to, and
over the period of, estimated net servicing income. Entities must measure
the impairment of MSRs based on the difference between the carrying amount
and the current estimated fair value of the MSRs.
Given the growth in MSRs, which at December 31, 1998 had a net
carrying value of $5.4 million as compared to $4.7 million at December 31,
1997, management expects that MSR amortization expense will continue to
increase. In addition, the current level of market interest rates is
resulting in high levels of refinancing activity. During periods of high
refinancing, the value of capitalized mortgage servicing rights declines and
results in reduced levels of servicing income. Should interest rates remain
at their relatively low levels throughout 1999, management expects a reduced
level of servicing income. This reduction may, however, be offset to some
degree by income resulting from increased levels of loan origination and
sales.
Additionally, the Company generates income through the sale of loans,
primarily fixed rate loans, to the secondary market. A portion of the
mortgage loans originated each year are generated through correspondent
relationships with other institutions. Under these correspondent
arrangements, the Company retains the servicing on these loans and the loans
are normally sold to the secondary market. At various times, when sufficient
correspondent loan servicing rights are accumulated, the correspondent
servicing rights may be sold and the gain recorded. In September 1998, the
Company executed a contract to sell $86 million of correspondent mortgage
loans and the related servicing rights resulting in a net gain of $392
thousand. In August 1997, the Company sold $130 million in correspondent
mortgage loan and the related servicing rights resulting in a net gain of
$896 thousand. These sales of the correspondent portfolio will occur
periodically given favorable market conditions. In total, the gains on sale
of mortgage servicing rights were $386 thousand, $921 thousand and $93
thousand in 1998, 1997 and 1996, respectively. The servicing rights were
comprised primarily of residential mortgages and second home mortgages of
customers outside Banknorth's normal market area.
Thirdly, net loan transaction income is generated through the
origination and subsequent sale of mortgage products into the secondary
mortgage market. Net loan transaction income in 1998 of $3.4 million was
significantly higher than 1997 and 1996 due to the strong loan production
and sales throughout 1998 given the high level of refinancing activity in
the current low rate environment. New loan originations and refinancing
activity was high throughout the year and is expected to remain strong into
the first quarter of 1999 as the number of applications pending and loans in
various stages of production are at high levels as of December 31, 1998.
Subsequent to the first quarter of 1999, management expects the level of
mortgage originations to return to more normal levels. The volume of loan
sales was lower in 1997 compared to 1996 resulting in a $394 thousand
decline in net loan transaction revenue between these years.
Card product income. Card product income decreased 29.7% in 1998
compared to 1997 as a result of the sale of the Company's merchant
processing business in December 1997. The gross merchant processing income
in 1997 was approximately $1.4 million and, therefore, other sources of card
product income were greater in 1998 than 1997 as the volume of debit card
transactions increased given broader consumer acceptance and usage of the
product. Card product income increased 4.5% from 1996 to 1997 given the
increase in transactional volume experienced.
Net securities transactions. Net gains or losses from securities
transactions are also included in other operating income. In 1998, the
Company realized $519 thousand in net securities gains as compared to 1997
when it realized $266 thousand in gains and 1996 when it realized net gains
in the amount of $25 thousand. As previously disclosed in this discussion,
in January 1998, given the market conditions, the investment securities
portfolio was restructured within Banknorth guidelines.
ATM income. ATM income represents the income generated from the ATM
network operated by Banknorth. ATM income amounted to $2.3 million for the
year ended December 31, 1998 compared to $1.4 million and $1.0 million for
the years ended December 31, 1997 and 1996, respectively. The increase in
ATM income over the last year is the result of a new initiative. In October
1997, the Company commenced charging a terminal convenience fee for ATM
transactions by non-customers. This fee allows the Company to recover a
portion of the expense of operating the ATM network for the benefit of its
customers and generated $1.1 million in fee income in 1998. The majority of
increase in 1997 over 1996 was due to an increase in the number of ATMs in
the network, primarily as a result of the establishment of FMB. Further, the
Company recorded $234 thousand of the above noted convenience fees in 1997.
Bank-owned life insurance. In the fourth quarter of 1997, Banknorth
purchased $40.0 million of bank-owned life insurance ("BOLI"). The BOLI was
purchased as a financing tool for employee benefits. The primary advantages
of life insurance financing are the tax preferred status of life insurance
cash values and death benefits and the cash flow generated at the death of
the insured. The purchase of the life insurance policy results in an
interest sensitive asset on the Company's consolidated balance sheet that
provides monthly tax-free income to the Company. The largest risk to the
BOLI program is credit risk of the insurance carriers. To mitigate this
risk, annual financial condition reviews are completed on all carriers. In
1998, the Company recorded $2.2 million in BOLI income compared to $77
thousand in 1997. Securities available for sale were allowed to mature or
were sold in order to provide the funding necessary to implement the bank-
owned life insurance program. As a result of this transaction, the Company
benefits prospectively from the tax-free nature of income generated from the
life insurance policies. In general, the yield received from the bank-owned
life insurance is comparable to the yield previously received on the
securities available for sale, thereby causing the Company's earnings stream
to benefit from the tax characteristics of the bank-owned life insurance.
Other income. Other income for 1998 exceeded 1997 levels by
approximately $322 thousand, or 8.2% and 1996 levels by $796 thousand, or
23.0%. The increase was primarily the result of the new official check
process implemented in February 1998. This process generated $439 thousand
during 1998.
Other Operating Expenses
Other operating expenses were $152.7 million in 1998, including
approximately $22.0 million in one-time merger and acquisition related
expenses of the two transactions noted earlier. Excluding one-time expenses,
other operating expenses were $130.8 million in 1998, $2.8 million, or 2.2%
above expense levels in 1997, and $11.0 million, or 9.2% higher than in
1996. The Company's efficiency ratio was 59.78% in 1998, down from 61.65% in
1997 and 62.21% in 1996.
Compensation. Compensation expense increased by $2.4 million, or 4.8%,
over 1997. The increase was primarily associated with the Company's various
incentive compensation programs which are directly related to the overall
performance of the Company as well as the obtainment of individual sales and
performance objectives. Such incentive-based expenses were up $3.0 million
in 1998 compared to 1997.
Offsetting these increases were declines in base salary expense and
severance costs. Base salary expense and full-time equivalent staff numbers
for the Company were actually down approximately $300 thousand and 75 full-
time equivalent staff, respectively, from the year ended December 31, 1997
to December 31, 1998, despite the addition of the Berkshire branches. The
Berkshire branches added approximately 85 full-time equivalent staff to the
organization with salary expense of $360 thousand for the six weeks of
operation in 1998. Excluding the Berkshire branch addition, staffing levels
were down approximately 160 full-time equivalent staff primarily due to cost
saving initiatives implemented in late 1997.
Additionally, the 1997 salaries expense included approximately $373
thousand in severance compensation relating to the work force reduction
noted above. This level of severance expense recorded as compensation was
approximately $300 thousand higher than that experienced in 1998. In 1998,
severance expenses were incurred related to the Evergreen merger, however,
these expenses were classified as one-time expenses for reporting purposes.
Additional reductions to compensation expense are expected to be realized in
the first six months of 1999 as duplicate positions created as a result of
the Evergreen merger are eliminated. Also, in connection with the merger of
the Banknorth and Evergreen defined benefit plans and related curtailment of
the Evergreen Plan, the Company expects to realize a curtailment gain during
1999.
Net occupancy. Net occupancy expense during 1998 was $9.8 million, a
decrease of $433 thousand, or 4.2% from 1997. Expenses in 1996 were $9.2
million. The decrease in the net occupancy expenses from 1998 to 1997 was
primarily the result of lower fuel and utilities expenses (approximately
$200 thousand less in 1998) given weather and current market conditions and
building maintenance costs (approximately $100 thousand less in 1998),
coupled with increased rental income of $118 thousand. The increase in the
costs from 1996 to 1997 was related to the full year of operation of FMB in
1997, the new headquarters of FMB and new branches in New Hampshire at
Farmington National Bank.
Equipment and software. Equipment and software expense was $9.4
million, $9.4 million and $8.5 million in 1998, 1997 and 1996, respectively.
Banknorth continuously invests in upgraded technology in order to offer
enhanced products and services or to create operating efficiencies. The
increase from 1996 to 1997 was primarily the result of a full year of
expense related to FMB and image-based item processing. During 1996, the
Company implemented an image-based item processing and statement rendering
system using electronic images of checks for filing and distribution to
customers. Management expects equipment and software expenses to increase in
1999 as a result of continued investment of additional technology, including
a new automated platform system for the branch network.
Data processing. Data processing fees include payments to Banknorth's
vendors of mainframe systems and site management, credit card processing,
ATM transaction processing and shareholder accounting services. Data
processing fees totaled $6.9 million in 1998, $7.2 million in 1997 and $7.0
million in 1996. The decline in this expense from 1997 to 1998 was the
result of the aforementioned termination of the merchant processing
contract. Generally, increases in these expenses are governed by contract
terms relating to either volume of activity and/or changes in the consumer
price index.
FDIC deposit insurance and other regulatory. FDIC deposit insurance
and other regulatory expense in 1998 increased $55 thousand or 5.1% from
1997 reflecting the growth in the deposit base. A large increase of 66.8%
was experienced from 1996 to 1997 due to the increase in insurance premiums.
The Federal Deposit Insurance Corporation Improvement Act mandated a
reduction in insurance rates when the Bank Insurance Fund achieved a 1.25%
reserve ratio. That target was reached in May 1995, resulting in reduced
premiums for the third and fourth quarters of 1995. The reduced premium
level continued through 1996. As of January 1, 1997, the Financing
Corporation (FICO) debt service assessment became applicable to all insured
institutions.
Other real estate owned. Expenses relating to other real estate owned
and repossessed assets decreased in 1998 by $380 thousand, to $1.1 million
as compared to 1997. These expenses were $1.4 million in 1997 and $385
thousand in 1996. Included in this expense category in 1998 are adjustments
of other real estate to estimated fair value in the amount of $445 thousand
and net gains on the sale of other real estate owned and repossessed assets
in the amount of $288 thousand. Fair value adjustments in 1997 and 1996 were
$438 thousand and $455 thousand, respectively, while net gains on sale in
those years were $223 thousand and $891 thousand, respectively. Net expenses
for maintenance, real estate taxes and property insurance relating to these
properties amounted to $911 thousand, $1.2 million and $821 thousand in
1998, 1997 and 1996, respectively. Management anticipates a level of other
real estate owned and repossession expenses in 1999 similar to that
experienced in 1998.
Advertising and Marketing. Advertising and marketing expenses were
$3.9 million in 1998, $442 thousand, or 12.9% higher than in 1997 and $332
thousand or 9.4% higher than in 1996. In 1998, Banknorth introduced a market
branding campaign and increased its marketing efforts in target markets. The
marketing expenses in 1996 were higher due to the introduction of First
Massachusetts Bank in Worcester.
Communications. Communications expenses totaled $3.0 million in 1998,
$2.9 million in 1997 and $2.8 million in 1996. The increase in communication
expenses was primarily due to the expansion of the voice/data communications
network to accommodate the Berkshire and Evergreen transactions.
Amortization of goodwill. Amortization of goodwill was $5.7 million in
1998 as compared to $5.3 million in 1997. The increased goodwill
amortization is the result of the Berkshire acquisition which generated an
additional $54.5 million in goodwill, or $3.6 million in amortization per
year, as this goodwill will be amortized over 15 years. The increase in 1998
represents 1.5 months of this increased amortization level. Goodwill expense
was $4.7 million in 1996 as there was only 10.5 months of the FMB
acquisition goodwill amortization in 1996. Based on existing goodwill, the
1999 goodwill amortization expense is expected to be $8.9 million. Further,
the goodwill related to the formation of FMB in 1996 is expected to be fully
amortized by February 2003, thereby reducing this expense category at that
point.
Capital securities. The capital securities issued in May 1997, which
created additional Tier I capital, gave rise to expense of $3.2 million in
1998 (full year) and $2.1 million in 1997 (partial year). As mentioned
previously, incremental investment purchases were made in an effort to
offset the cost of the capital securities through increased net interest
income. Funding for the investments was primarily in the form of borrowings
from the FHLB.
Merger and acquisition related expenses. The expenses incurred in
the merger with Evergreen and the acquisition of the Berkshire branches
amounted to approximately $22.0 million, or $16.3 million, after income tax
effect. The expenses were primarily investment banking fees, legal and
professional services, employment-related costs, data processing conversion
and termination fees and checking reissuance costs. An additional $700
thousand in after-tax expenses are expected to be incurred in the first
quarter of 1999 as the systems conversion of Evergreen was completed on
January 15, 1999.
In 1996, the Company incurred $1.6 million in one-time expenses in the
establishment of FMB. The majority of these expenses were check reissuance,
professional services and printing costs for forms and legal notifications.
For additional information on merger and acquisition expenses, see
note 2 to the Company's consolidated financial statements.
Other expenses. Other expenses totaled $13.0 million in 1998 and have
declined since the 1996 level of $15.2 million. Expenses for directors'
costs, insurance and postage have all declined over the last year. The
directors' costs declined due the change in the deferred compensation plan
for directors. Prior to July 1, 1997, the directors' deferred compensation
plan was a cash based plan tied to the performance of Banknorth stock and,
therefore, its expense was effected by the change in the stock price of
Banknorth. The plan was amended as of July 1, 1997 such that the ultimate
distribution of director deferred compensation will be made in Banknorth
common stock based on the stock price at the time the fees are earned. This
resulted in $362 thousand more in directors' expense in 1997 compared to
1998. Insurance costs were also down in 1998 compared to 1997 and 1996. The
only significant increase in other expenses was the $599 thousand increase
in State of Vermont franchise tax mandated under the statewide education
reform act.
Subsidiary Bank Merger
On July 30, 1998, the Company announced that it plans to merge one of
its subsidiary banks, Woodstock National Bank, into another subsidiary bank,
First Vermont Bank. The combination of the two banks is subject to
regulatory approval and is expected to take place in the second quarter of
1999 with Woodstock National Bank's three offices becoming branch offices of
First Vermont Bank.
Year 2000 Compliance
Historically, some computer software and hardware and firmware
systems, and equipment or machinery with embedded processors or processing
instructions (sometimes referred to as "embedded processors"), were written
to recognize and process dates with the year written with two digits. For
dates on or after January 1, 2000 (when four digits will be necessary to
identify dates accurately), or for periods beginning before, and ending on
or after January 1, 2000, such software, hardware and firmware systems and
embedded processors may not be able to recognize or properly process dates
or information including dates or time periods. Among other things, this may
cause computers to produce incorrect information, to shut down, to cause
other systems or equipment to shut down or malfunction, or to malfunction in
other ways, and may cause equipment or machinery with embedded processors to
malfunction or to shut down. This is often referred to as, among other
things, the "Year 2000 problem."
In order to assure to the extent possible that the Year 2000 problem
does not impair their ability to do business or subject them to liability,
companies are advised to determine whether and to what extent their
information technology or physical resources may be affected by Year 2000
problems, to repair, replace or retire the affected systems or assets, and
to test the new systems or assets to assure that they will not be affected
by the Year 2000 problem (which is often referred to as being "year 2000
compliant"). Some new hardware, software or equipment, and some revisions or
upgrades of hardware, software or equipment, may have so-called "bugs" or
may prove to be incompatible with existing or other new or upgraded systems
or components. As a result, the testing of the changed components, and of
systems and subsystems as a whole, is critical and experience has shown that
the process is time consuming.
In order to protect the integrity of the banking system, the Federal
Reserve Board and other federal banking regulatory agencies (collectively
known as the "Federal Financial Institutions Examination Council," or
"FFIEC") have issued guidelines to financial institutions for addressing the
Year 2000 problem and set milestones that financial institutions are
expected to meet in becoming Year 2000 compliant and testing to assure
compliance. In broad outline, those guidelines provide that (i) by September
30, 1997, financial institutions should have identified, assessed and begun
remediation of mission critical systems; (ii) by June 30, 1998, institutions
should be continuing remediation of mission critical systems and have
completed development of testing strategies and plans; (iii) by September 1,
1998, institutions should be continuing system remediation and should have
begun testing of internal mission critical systems; (iv) by December 31,
1998, institutions should have substantially completed testing of internal
mission critical systems; (v) by March 31, 1999, institutions relying on
service providers should have substantially completed system testing and all
institutions should have begun external testing with third parties (such as
other financial institutions, business partners and payment system
providers); and (vi) by June 30, 1999, institutions should have completed
testing of mission critical systems and substantially completed all
implementation of those systems.
Banknorth's Year 2000 remediation and compliance program (the "Year
2000 Project") is managed by a Project Group consisting of representatives
from more than 25 business units and functional departments within Banknorth
and its subsidiaries. The Project is directed by a Banknorth Vice President
who directly reports on the Project to Banknorth's Executive Vice President
- - Chief Information Officer. The Project is overseen by the Banknorth Board
and the board of directors of each subsidiary.
Banknorth has completed a preliminary assessment of all its computer
software, hardware and firmware systems, and equipment and machinery with
embedded processors (including vaults and other security systems, elevators
and HVAC systems). Banknorth believes that it has identified all components,
systems, equipment and databases that might not be able to function properly
as a result of the Year 2000 problems and has formulated a plan to replace,
upgrade or revise affected software, to upgrade or replace affected hardware
and equipment, and to remediate affected data and databases. Banknorth
substantially completed the replacements, upgrades and revisions of the
affected software, hardware and equipment by December 31, 1998. Banknorth
began compliance testing of components and systems in July 1998 and
substantially completed its compliance testing of vital banking systems by
the end of 1998. Testing will continue on an ongoing and industry-wide basis
thereafter.
Substantially all of Banknorth's mission critical systems are
outsourced or are purchased software packages. As a result, much of the
remediation and testing process is dependent on the accuracy of work
performed by, and the Year 2000 compliance of software, hardware and
firmware and equipment provided by, vendors. Banknorth has initiated
discussions with its vendors and monitored their Year 2000 compliance
programs and the compliance of their products or services with required
standards. Where possible, Banknorth is also considering and where
appropriate is arranging, alternate service or software providers in cases
where it appears that vendors may not timely provide adequate solutions.
The economic cost of the Year 2000 Project includes not just direct
incremental amounts expended by Banknorth for repairing, upgrading or
replacing hardware, software and facilities, but also the use of internal
resources devoted to the Year 2000 Project that would otherwise have been
devoted to other business opportunities. It is difficult to quantify the
economic cost of internal resources of the Project. However, Banknorth
estimates that over the life of this Project, between 1996 and 2000, it will
utilize approximately $5.5 million to $7.5 million of internal resources on
this effort. These are internal resources that would have been utilized for
other business opportunities and do not necessarily represent additional
operating expenditures or costs. As of December 31, 1998, approximately $4.0
million of these amounts have been expended. Further, Banknorth's direct
incremental expenditures for the Year 2000 Project are estimated at
approximately $3.5 million over this five year period. The largest of these
costs relates to the purchase and installation of the new branch platform.
Although this estimate includes hardware and equipment expenditures, which
would have been made even absent the Year 2000 problem as part of normal
operations, they are included in the above estimates as the timing of these
purchases and upgrades was accelerated due to the Year 2000 Project. As of
December 31, 1998, approximately $850 thousand of the direct incremental
expenditures have been made.
Banknorth has commenced a customer awareness program to inform its
customers (both depositors and borrowers) of the Year 2000 problem,
Banknorth's responses to the problem and the potential impact of the problem
on the customers and their business. Banknorth and its subsidiaries have had
awareness sessions with their customers and are taking into account
customers' Year 2000 compliance in evaluating and rating loans. Banknorth
Group, Inc. is aware that if borrowers suffer losses or illiquidity because
of their own Year 2000 problems (or the Year 2000 problems of others with
whom they do business or on whom they are dependent) Banknorth's subsidiary
banks may suffer credit losses or experience illiquidity. The standard loan
documentation of Banknorth's subsidiary banks has been revised to include
representations that the borrower is Year 2000 compliant and to give the
bank the right to examine the borrower's systems and procedures in order to
determine Year 2000 compliance.
Banknorth believes that the key risk factors associated with the Year
2000 are those it cannot directly control, primarily the readiness of key
suppliers and service providers, the readiness of the public infrastructure,
and as noted above, the readiness of its credit customers. However,
Banknorth and its subsidiaries have developed contingency plans and
strategies and so-called "work arounds" for each non-compliant system and
the possible failure of systems and resources that have been tested as
compliant. The contingency plans vary with the affected systems. Among other
things, Banknorth has designated certain of its local banks as "key
branches" and will equip them properly, so that the Banknorth banks can
continue banking operations even if there are electrical outages because
local utilities are not Year 2000 compliant. Banknorth is also arranging to
have temporary help available so that, in event of the failure of a mission
critical system, the functions affected by the system failure can be
performed manually.
The determination of the effect of Banknorth's own non-compliance with
Year 2000 requirements or the non-compliance of its vendors or customers is
complex and depends on numerous variables and unknowns. Without remediation,
the failure of critical software systems at any of the Banknorth banks or at
other banks could impair the ability of the banks to do business, the
failure of large or numerous borrowers to timely pay their loans could
impair the capital of one or more banks, and the failure of embedded
processors would adversely affect the physical security of the banks.
However, Banknorth believes that, as a result of its remediation and testing
efforts and its contingency plans, that worst case scenario is not likely.
Core Tangible Performance
After removing the impact of the balance of goodwill and the related
period amortization, and merger and acquisition costs, "core tangible"
performance for 1998, 1997 and 1996 was as follows:
(Dollars in thousands, except share and per share data) 1998 1997 1996
-------------------------------------------
Net income, as reported $ 28,920 $ 41,816 $ 35,703
Add: Merger and acquisition costs, net of tax 16,258 - 1,029
Add: Amortization of goodwill, net of tax 3,618 3,342 2,990
-------------------------------------------
"Core tangible income" $ 48,796 $ 45,158 $ 39,722
===========================================
Average tangible assets $ 4,026,822 $ 3,709,286 $ 3,260,084
Average tangible equity $ 287,324 $ 269,474 $ 240,643
Diluted weighted average shares 23,669,540 24,042,800 23,860,882
"Core tangible" return on average tangible assets 1.21% 1.22% 1.22%
"Core tangible" return on average tangible equity 16.98% 16.76% 16.51%
"Core tangible" diluted earnings per share $ 2.06 $ 1.88 $ 1.66
All share and per share data has been restated to give retroactive effect to
stock splits.
INCOME TAXES
In 1998, Banknorth recognized income tax expense of $14.5 million, as
compared to $20.2 million in 1997 and $17.7 million in 1996. The decrease in
1998 tax expense is primarily reflective of the one-time merger and
acquisition expenses which reduced the 1998 pre-tax income level. The one-
time expenses consisted of $15.6 million of tax deductible expenses
resulting in a $5.7 million tax benefit. Without the one-time expenses, tax
expense in 1998 would have been $20.2 million or 30.9% of pre-tax earnings.
The tax expense on the Company's income was lower than tax expense at the
statutory rate of 35%, due primarily to tax-exempt income, including loans,
securities and BOLI, as well as tax credits received on low-income housing
projects.
REGULATORY ENVIRONMENT
The banking industry in general is subject to various monetary and
fiscal policies and regulations, which include those determined by the
Federal Reserve Board, the Office of the Comptroller of the Currency,
Federal Deposit Insurance Corporation and state banking regulators, which
could affect the Company's results. Other factors that may cause actual
results to differ from the forward-looking statements include competition
with other local and regional banks, savings and loan associations, credit
unions and other non-bank financial institutions, such as investment banking
firms, investment advisory firms and brokerage firms, mutual funds and
insurance companies, as well as other entities which offer financial
services; changes in federal and state laws governing financial services;
interest rate, market and monetary fluctuations; inflation; general economic
conditions and economic conditions in the geographic regions and industries
in which the Company operates; introduction and acceptance of new banking-
related products, services and enhancements, fee pricing strategies, mergers
and acquisitions and their integration into the Company, and management's
ability to manage these and other risks.
CAPITAL RESOURCES
Consistent with its long-term goal of operating a sound and profitable
financial organization, Banknorth strives to maintain a "well capitalized"
company according to regulatory standards. Historically most of the
Company's capital requirements have been provided through retained earnings,
as indicated in Table M, Rate of Internal Capital Generation.
In October 1997, Banknorth announced a stock buyback plan. The Company
planned to buy back up to 5%, or 782,665 shares of its outstanding common
stock. As part of the merger with Evergreen, however, the stock buyback
program was rescinded in July 1998. As of December 31, 1998, the Company
held 369,300 treasury shares, all of which were purchased under the October
1997 stock buy back plan.
The Company (including, prior to 1989, its corporate predecessors) has
historically paid regular quarterly cash dividends on its common stock. This
pattern was temporarily interrupted during 1991 and 1992 when the board of
directors of the Company suspended payment of the regular cash dividend to
better preserve the Company's capital in the face of increasing levels of
non-performing loans requiring higher provisions for loan losses. As the
Company's performance recovered, payment of regular quarterly cash dividends
was resumed during the first quarter of 1993 at a level of $.05 per share.
The quarterly dividend was increased in 1994 to a level of $.075 per share,
to $.115 per share in 1995, to $.125 per share in 1996, $.145 per share in
1997, $.16 per share in 1998 and most recently to $.18 per share in January
1999. The Board makes decisions regarding payments of dividends based upon
the Company's earnings outlook and other relevant factors.
On February 24, 1998, the Board of Directors approved a 2-for-1 split
of the Company's common stock effected in the form of a 100% stock dividend.
The new shares were issued April 6, 1998, to shareholders of record on March
20, 1998. The stock split was recorded as of December 31, 1997 by a transfer
of $7.8 million from capital surplus to common stock, representing the $1.00
par value for each additional share issued. Further, on August 15, 1996, the
Board of Directors of the Evergreen Bancorp, Inc. approved a 2-for-1 split
effected in the form of a 100% stock dividend and was recorded by a transfer
of $4.3 million from capital surplus to common stock. All share and per
share data has been restated to reflect the stock splits.
The Company's principal source of funds to pay cash dividends and the
cost of capital securities and to service long-term debt requirements is
dividends from its subsidiary banks. Various laws and regulations restrict
the ability of banks to pay dividends to their shareholders. During 1998, as
part of its plan to adequately capitalize FMB for regulatory purposes after
the Berkshire acquisition and to allow Stratevest to purchase the private
banking relationships associated with the Berkshire branches, the Company
re-deployed accumulated capital of certain of its subsidiary banks through
the payment of a special dividend. Because the special dividend paid by the
subsidiary banks to effect the re-deployment exceeded applicable regulatory
limitations, the subsidiary banks obtained approval from the applicable
regulatory agencies for the payment of that portion of the dividend which
exceeded such regulatory limitations.
Additionally, in connection with the Evergreen merger, Evergreen Bank
paid a special dividend to the parent company. As the special dividend
exceeded applicable regulatory limitations, Evergreen Bank obtained approval
from the OCC for the payment of that portion of the dividend which exceeded
such regulatory limitations.
As a result of these capital redeployments, the payment of dividends
by the Company in the future will require the generation of sufficient
future earnings by the subsidiary banks. For further disclosures relative to
dividend restrictions and regulatory requirements, refer to the notes to the
consolidated financial statements.
At December 31, 1998, 1997 and 1996, the Company was well capitalized
according to the regulatory definitions. Table N, Capital Ratios, reveals
the components of capital and the changes from 1996 through 1998. In
connection with the formation of FMB in 1996 and to maintain the Company's
regulatory capital ratios as "well capitalized" following the acquisition of
the Shawmut branches, Banknorth, on February 14, 1996, issued 2,044,446
shares of common stock, generating $32.2 million of new capital.
Additionally, in May 1997, the Company established a trust to issue and sell
$30.0 million in capital securities which represented Tier I capital to the
Company.
TABLE A. Mix of Average Earning Assets
Percentage of
Years Ended December 31, % of Total Earning Assets
------------------------------------ Total --------------------------
(Dollars in thousands) 1998 1997 Change Change 1998 1997 1996
---------------------------------------------------------------------------
Loans, net of unearned income
and unamortized loan fees and costs:
Commercial, financial and agricultural $ 591,601 $ 554,467 $ 37,134 13.6% 15.5% 15.6% 16.3%
Construction and land development 39,519 34,119 5,400 2.0 1.0 1.0 0.7
Commercial real estate 584,610 551,074 33,536 12.3 15.3 15.5 16.0
Residential real estate 1,059,073 1,054,980 4,093 1.5 27.7 29.8 31.3
Credit card receivables 28,859 22,455 6,404 2.3 0.8 0.6 0.7
Lease receivables 76,132 74,631 1,501 0.6 2.0 2.1 1.9
Other installment 304,375 287,020 17,355 6.3 8.0 8.1 9.5
--------------------------------------------------------------------------
Total loans, net of unearned
income and unamortized loan
fees and costs 2,684,169 2,578,746 105,423 38.6 70.3 72.7 76.4
Securities available for sale:
U.S. Treasuries and Agencies 207,852 199,473 8,379 3.1 5.5 5.6 3.8
States and political subdivisions 7,094 3,760 3,334 1.2 0.2 0.1 -
Mortgage-backed securities 555,405 449,790 105,615 38.6 14.5 12.7 13.4
Corporate debt securities 214,149 166,518 47,631 17.4 5.6 4.7 2.1
Equities and other securities 45,305 41,805 3,500 1.3 1.2 1.2 0.9
Net unrealized gain (loss) 8,272 (1,672) 9,944 3.6 0.2 (0.1) (0.2)
--------------------------------------------------------------------------
Total securities available for sale,
at fair value 1,038,077 859,674 178,403 65.2 27.2 24.2 20.0
Investment securities, held to maturity:
U.S. Treasuries and Agencies 12,628 30,018 (17,390) (6.3) 0.3 0.8 0.9
States and political subdivisions 12,573 13,545 (972) (0.4) 0.3 0.4 0.5
Mortgage-backed securities 10,805 17,935 (7,130) (2.6) 0.3 0.5 0.7
Corporate debt securities 10 10 - - - - -
--------------------------------------------------------------------------
Total investment securities, held
to maturity, at amortized cost 36,016 61,508 (25,492) (9.3) 0.9 1.7 2.1
Loans held for sale 35,708 16,481 19,227 7.0 0.9 0.5 0.5
Money market investments 26,027 30,132 (4,105) (1.5) 0.7 0.9 1.0
--------------------------------------------------------------------------
Total earning assets $3,819,997 $3,546,541 $273,456 100.0% 100.0% 100.0% 100.0%
==========================================================================
TABLE B. Loan Portfolio
At December 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------------------------------
Commercial, financial,
and agricultural $ 690,170 24.3% $ 566,300 21.4% $ 525,685 21.0% $ 459,250 23.6% $ 458,583 24.5%
Real estate:
Construction and
land development 45,704 1.6 37,778 1.4 31,629 1.3 22,579 1.2 25,616 1.4
Commercial 615,503 21.7 563,566 21.3 531,364 21.2 398,586 20.5 386,663 20.6
Residential 1,041,667 36.7 1,082,235 41.0 1,018,964 40.6 723,483 37.1 715,526 38.1
-----------------------------------------------------------------------------------------------------
Total real estate 1,702,874 60.0 1,683,579 63.7 1,581,957 63.1 1,144,648 58.8 1,127,805 60.1
Credit card receivables 33,205 1.2 25,669 1.0 24,563 1.0 26,867 1.4 26,174 1.4
Lease receivables 79,001 2.8 76,302 2.9 70,396 2.8 47,055 2.4 33,291 1.8
Other installment 331,856 11.7 290,244 11.0 303,166 12.1 268,011 13.8 229,377 12.2
-----------------------------------------------------------------------------------------------------
Total installment 444,062 15.7 392,215 14.9 398,125 15.9 341,933 17.6 288,842 15.4
-----------------------------------------------------------------------------------------------------
Total loans 2,837,106 100.0 2,642,094 100.0 2,505,767 100.0 1,945,831 100.0 1,875,230 100.0
Less: Allowance for
loan losses 44,537 1.6 38,551 1.5 35,913 1.4 34,210 1.8 40,189 2.1
-----------------------------------------------------------------------------------------------------
Net loans $2,792,569 98.4% $2,603,543 98.5% $2,469,854 98.6% $1,911,621 98.2% $1,835,041 97.9%
=====================================================================================================
TABLE C. Maturities and Sensitivities of Loans to Changes in Interest Rates
At December 31, 1998, Maturing:
----------------------------------------------------
After 1 year
In 1 year but within After
(In thousands) or less 5 years 5 years Total
----------------------------------------------------
Commercial, financial and agricultural $232,815 $247,830 $209,525 $690,170
Construction and land development 20,148 25,556 - 45,704
----------------------------------------------------
Total $252,963 $273,386 $209,525 $735,874
====================================================
Predetermined interest rates $107,057 $116,402 $114,528 $337,987
Floating interest rates 145,906 156,984 94,997 397,887
----------------------------------------------------
Total $252,963 $273,386 $209,525 $735,874
====================================================
TABLE D. Securities Available for Sale and Investment Securities Held to
Maturity
At December 31,
------------------------------------
(Dollars in thousands) 1998 1997 1996
------------------------------------
Securities available for sale:
U.S. Treasuries and Agencies $ 165,683 $239,524 $140,671
States and political subdivisions 7,806 5,251 2,361
Mortgage-backed securities 711,540 464,405 416,641
Corporate debt securities 188,154 200,710 121,384
Equities and other securities 48,791 43,400 31,122
Net unrealized gain (loss) 5,891 5,263 (3,770)
------------------------------------
Fair value of securities available for sale $1,127,865 $958,553 $708,409
====================================
Investment securities, held to maturity:
U.S. Treasuries and Agencies $ 3,582 $ 29,385 $ 22,227
States and political subdivisions 11,443 13,555 12,117
Mortgage-backed securities 5,510 15,676 19,868
Corporate debt securities 10 10 10
------------------------------------
Amortized cost of investment securities, held to maturity $ 20,545 $ 58,626 $ 54,222
====================================
Fair value of investment securities, held to maturity $ 21,606 $ 59,832 $ 55,660
====================================
Excess of fair value over recorded value $ 1,061 $ 1,206 $ 1,438
Fair value as a % of amortized cost 105.2% 102.1% 102.7%
<FN>
Note: There were no holdings when taken in aggregate of any issuer(s) that
exceeded 10% of shareholders' equity at December 31, 1998.
</FN>
TABLE E. Investment Portfolio Maturity Distribution and Yields
As of December 31, 1998
------------------------------------------------------
Securities Available Investment Securities
For Sale Held to Maturity
------------------------------------------------------
(Dollars in thousands) Amount Yield (FTE) Amount Yield (FTE)
------------------------------------------------------
U.S.Treasuries and Agencies:
Within 1 year $ 28,745 6.15% $ - -%
1 to 5 years 79,697 6.02 1,569 6.74
6 to 10 years 52,233 6.79 - -
Over 10 years 5,008 6.18 2,013 7.52
--------------------------------------------------
$ 165,683 6.29% $ 3,582 7.18%
==================================================
State and political subdivisions:
Within 1 year $ 221 6.77% $ 1,642 8.75%
1 to 5 years 3,827 6.72 5,420 8.81
6 to 10 years 3,758 7.12 3,347 8.51
Over 10 years - - 1,034 8.38
--------------------------------------------------
$ 7,806 6.91% $11,443 8.67%
==================================================
Mortgage-backed securities:
Within 1 year $ 46,398 6.23% $ 23 7.21%
1 to 5 years 213,604 6.18 4,461 7.47
6 to 10 years 115,682 6.52 1,001 9.82
Over 10 years 335,856 6.56 25 8.59
--------------------------------------------------
$ 711,540 6.42% $ 5,510 7.90%
==================================================
Other securities:
Within 1 year $ 6,508 5.97% $ - -%
1 to 5 years 40,799 6.36 - -
6 to 10 years 32,095 6.55 10 7.00
Over 10 years 108,752 6.68 - -
No fixed maturity 48,791 5.87 - -
--------------------------------------------------
$ 236,945 6.42% $ 10 7.00%
==================================================
Total securities:
Within 1 year $ 81,872 6.18% $ 1,665 8.73%
1 to 5 years 337,927 6.17 11,450 8.00
6 to 10 years 203,768 6.61 4,358 8.81
Over 10 years 449,616 6.59 3,072 7.82
No fixed maturity 48,791 5.87 - -
Net unrealized gain 5,891 - - -
--------------------------------------------------
$1,127,865 6.37% $20,545 8.21%
==================================================
<FN>
Note: Actual maturities may differ from contractual maturities because, in
certain cases, borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
</FN>
TABLE F. Average Balances, Yields, and Net Interest Margins
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------------------------------
Earning assets:
Money market investments $ 26,027 $ 1,438 5.53% $ 30,132 $ 1,680 5.58% $ 29,663 $ 1,622 5.47%
Securities available for sale,
at fair value (1 and 2) 1,038,077 65,898 6.40 859,674 55,292 6.42 619,390 38,810 6.22
Loans held for sale 35,708 2,565 7.18 16,481 1,281 7.77 14,834 1,150 7.75
Investment securities, held
to maturity (2) 36,016 2,832 7.86 61,508 4,735 7.70 63,967 4,978 7.78
Loans, net of unearned
income and unamortized
loan fees and costs
(2 and 3) 2,684,169 237,530 8.85 2,578,746 232,931 9.03 2,362,251 215,261 9.11
-----------------------------------------------------------------------------------------
Total earning assets 3,819,997 310,263 8.14 3,546,541 295,919 8.34 3,090,105 261,821 8.46
Cash and due from banks 105,642 101,023 113,641
Allowance for loan losses (41,144) (37,282) (36,650)
Other assets 178,124 132,887 127,570
---------- ---------- ----------
Total assets $4,062,619 $3,743,169 $3,294,666
========== ========== ==========
Interest-bearing liabilities:
NOW accounts & money
market savings $1,241,029 44,676 3.60 $1,028,987 35,323 3.43 $ 945,578 30,115 3.18
Regular savings 309,341 7,968 2.58 334,796 8,805 2.63 360,660 9,560 2.65
Time deposits $100
thousand and greater 222,277 12,375 5.57 184,273 10,249 5.56 143,671 7,979 5.55
Time deposits under $100
thousand 1,012,054 55,462 5.48 1,014,224 55,066 5.43 946,513 50,528 5.34
-----------------------------------------------------------------------------------------
Total interest-bearing
deposits 2,784,701 120,481 4.33 2,562,280 109,443 4.27 2,396,422 98,182 4.10
Short-term borrowed funds 390,641 20,138 5.16 389,586 20,827 5.35 163,208 8,094 4.96
Long-term debt 63,776 4,039 6.33 47,139 3,065 6.50 67,206 4,213 6.27
-----------------------------------------------------------------------------------------
Total interest-bearing
liabilities 3,239,118 144,658 4.47 2,999,005 133,335 4.45 2,626,836 110,489 4.21
-----------------------------------------------------------------------------------------
Non-interest bearing deposits 429,272 385,540 359,058
Other liabilities 41,108 35,130 33,547
Capital securities 30,000 20,137 -
Shareholders' equity 323,121 303,357 275,225
---------- ---------- ----------
Total liabilities, capital
securities and shareholders'
equity $4,062,619 $3,743,169 $3,294,666
========== ========== ==========
Net interest income $165,605 $162,584 $151,332
======================================================================
Interest rate differential 3.67% 3.89% 4.25%
==================================================================
Net interest margin 4.34% 4.58% 4.89%
==================================================================
<FN>
Notes:
<F1> For the purpose of these computations, unrealized gains/(losses) are
excluded from the average rate calculation.
<F2> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal (35%) rate.
<F3> Includes principal balances of non-accrual loans and industrial
revenue bonds.
</FN>
TABLE G. Average Sources of Funding
Percentage of
Years Ended December 31, Change Total Net Funding
------------------------- -------------------- ----------------------------
(Dollars in thousands) 1998 1997 Amount Percent 1998 1997 1996
-----------------------------------------------------------------------------------
Non-interest bearing deposits $ 429,272 $ 385,540 $ 43,732 11.3% 11.7% 11.4% 12.0%
Retail deposits:
Regular savings 309,341 334,796 (25,455) (7.6) 8.4 9.9 12.1
Time deposits under $100
thousand 1,012,054 1,014,224 (2,170) (0.2) 27.6 30.0 31.7
NOW accounts & money
market savings 1,241,029 1,028,987 212,042 20.6 33.8 30.4 31.7
----------------------------------------------------------------------------------
Total retail deposits 2,562,424 2,378,007 184,417 7.8 69.8 70.3 75.5
----------------------------------------------------------------------------------
Total core deposits 2,991,696 2,763,547 228,149 8.3 81.5 81.7 87.5
Time deposits $100 thousand
and greater 222,277 184,273 38,004 20.6 6.1 5.4 4.8
Federal funds purchased 9,292 7,769 1,523 19.6 0.3 0.2 0.2
Securities sold under agreements
to repurchase 164,880 142,527 22,353 15.7 4.5 4.2 3.6
Borrowings from U.S. Treasury 14,987 12,570 2,417 19.2 0.4 0.4 0.3
Short-term notes from FHLB 201,482 226,720 (25,238) (11.1) 5.4 6.7 1.3
Long-term notes from FHLB 53,900 34,473 19,427 56.4 1.5 1.0 1.7
----------------------------------------------------------------------------------
Total purchased liabilities 666,818 608,332 58,486 9.6 18.2 17.9 11.9
Bank term loan 9,876 12,666 (2,790) (22.0) 0.3 0.4 0.6
----------------------------------------------------------------------------------
Total funding $3,668,390 $3,384,545 $283,845 8.4% 100.0% 100.0% 100.0%
==================================================================================
TABLE H. Volume and Yield Analysis
1998 vs. 1997 1997 vs. 1996
------------------------------------------------- -------------------------------------------------
Increase Due to Increase Due to
(In thousands) 1998 1997 (Decrease) Volume Rate 1997 1996 (Decrease) Volume Rate
-----------------------------------------------------------------------------------------------------
Interest income (FTE):
Money market investments $ 1,438 $ 1,680 $ (242) $ (227) $ (15) $ 1,680 $ 1,622 $ 58 $ 25 $ 33
Securities available for
sale, at fair value 65,898 55,292 10,606 10,778 (172) 55,292 38,810 16,482 15,233 1,249
Loans held for sale 2,565 1,281 1,284 1,381 (97) 1,281 1,150 131 128 3
Investment securities,
held to maturity 2,832 4,735 (1,903) (2,001) 98 4,735 4,978 (243) (192) (51)
Loans 237,530 232,931 4,599 9,241 (4,642) 232,931 215,261 17,670 19,560 (1,890)
---------------------------- ----------------------------
Total interest income 310,263 295,919 14,344 21,440 (7,096) 295,919 261,821 34,098 37,812 (3,714)
---------------------------- ----------------------------
Interest expense:
NOW accounts & money
market savings 44,676 35,323 9,353 7,604 1,749 35,323 30,115 5,208 2,844 2,364
Regular savings 7,968 8,805 (837) (670) (167) 8,805 9,560 (755) (683) (72)
Time deposits $100
thousand and greater 12,375 10,249 2,126 2,108 18 10,249 7,979 2,270 2,256 14
Time deposits under
$100 thousand 55,462 55,066 396 (111) 507 55,066 50,528 4,538 3,686 852
Short-term borrowed funds 20,138 20,827 (689) 51 (740) 20,827 8,094 12,733 12,096 637
Long-term debt 4,039 3,065 974 1,054 (80) 3,065 4,213 (1,148) (1,303) 155
---------------------------- ----------------------------
Total interest
expense 144,658 133,335 11,323 10,723 600 133,335 110,489 22,846 16,542 6,304
-----------------------------------------------------------------------------------------------------
Net interest income (FTE) $165,605 $162,584 $ 3,021 $10,717 $(7,696) $162,584 $151,332 $11,252 $21,270 $(10,018)
=====================================================================================================
<FN>
Increases and decreases in interest income and interest expense due to both
rate and volume have been allocated to volume on a consistent basis.
</FN>
TABLE I. Non-Performing Assets
As of December 31,
-------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
-------------------------------------------------------
Loans on non-accrual status:
Commercial, financial and agricultural $ 3,816 $ 6,636 $ 6,646 $ 4,839 $16,024
Real estate:
Construction and land development 19 - 39 103 730
Commercial 2,518 2,645 4,443 3,993 8,873
Residential 6,153 8,719 9,470 7,959 6,280
Other installment 23 176 187 46 -
-------------------------------------------------------
Total non-accrual 12,529 18,176 20,785 16,940 31,907
Restructured loans:
Real estate:
Commercial 5,940 - 849 426 2,916
Residential 32 36 39 85 69
Other installment 5 6 10 55 141
-------------------------------------------------------
Total restructured 5,977 42 898 566 3,126
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 1,216 494 214 474 1,107
Real estate:
Commercial 62 125 - 64 270
Residential 36 721 1,034 887 1,638
Credit card receivables 185 119 111 105 118
Lease receivables 177 151 48 28 -
Other installment 812 652 1,217 819 648
-------------------------------------------------------
Total past-due 90 days or more and still
accruing 2,488 2,262 2,624 2,377 3,781
-------------------------------------------------------
Total non-performing loans 20,994 20,480 24,307 19,883 38,814
-------------------------------------------------------
Other real estate owned 3,324 2,141 2,397 4,953 10,894
Non-real estate and repossessed assets 11 654 218 76 178
-------------------------------------------------------
Total foreclosed and repossessed assets (F/RA) 3,335 2,795 2,615 5,029 11,072
-------------------------------------------------------
Total non-performing assets $24,329 $23,275 $26,922 $24,912 $49,886
=======================================================
Allowance for loan losses $44,537 $38,551 $35,913 $34,210 $40,189
ALL coverage of non-performing loans 212.14% 188.24% 147.75% 172.06% 103.54%
Non-performing assets as a % of (loans & F/RA) 0.86 0.88 1.07 1.28 2.64
Non-performing assets to total assets 0.55 0.59 0.76 0.90 1.84
<FN>
Note: Installment loans are generally charged off at 120 days past due.
</FN>
TABLE J. Summary of Loan Loss Experience
Years Ended December 31,
----------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996 1995 1994
----------------------------------------------------------------------
Loans outstanding-end of year $2,837,106 $2,642,094 $2,505,767 $1,945,831 $1,875,230
Average loans outstanding 2,684,169 2,578,746 2,362,251 1,910,737 1,770,178
Allowance for loan losses at beginning of year 38,551 35,913 34,210 40,189 40,117
Allowance related to purchase acquisitions 2,200 - 1,650 - 1,608
Loans charged off:
Commercial, financial and agricultural (2,318) (1,803) (1,654) (9,852) (4,816)
Real estate:
Construction and land development - - (73) (357) (97)
Commercial (209) (669) (2,122) (2,287) (4,239)
Residential (1,916) (2,238) (1,961) (2,060) (1,724)
----------------------------------------------------------------------
Total real estate (2,125) (2,907) (4,156) (4,704) (6,060)
Credit card receivables (878) (691) (788) (576) (479)
Lease receivables (1,646) (1,510) (867) (410) (255)
Other installment (4,763) (5,453) (4,575) (3,157) (2,891)
----------------------------------------------------------------------
Total installment (7,287) (7,654) (6,230) (4,143) (3,625)
Total loans charged off (11,730) (12,364) (12,040) (18,699) (14,501)
Recoveries on loans previously charged off:
Commercial, financial and agricultural 1,673 1,325 1,008 2,478 3,734
Real estate:
Construction and land development 15 87 60 540 227
Commercial 542 638 1,039 1,430 1,419
Residential 829 636 681 318 393
----------------------------------------------------------------------
Total real estate 1,386 1,361 1,780 2,288 2,039
Credit card receivables 111 125 144 162 123
Lease receivables 1,190 970 695 277 155
Other installment 1,811 1,849 1,426 1,340 1,493
----------------------------------------------------------------------
Total installment 3,112 2,944 2,265 1,779 1,771
Total recoveries on loans 6,171 5,630 5,053 6,545 7,544
----------------------------------------------------------------------
Loans charged off, net of recoveries (5,559) (6,734) (6,987) (12,154) (6,957)
----------------------------------------------------------------------
Provision for loan losses 9,345 9,372 7,040 6,175 5,421
----------------------------------------------------------------------
Allowance for loan losses at end of year $ 44,537 $ 38,551 $ 35,913 $ 34,210 $ 40,189
======================================================================
Loans charged off, net, as a % of average total
loans 0.21% 0.26% 0.30% 0.64% 0.39%
Provision for loan losses as a % of average total
loans 0.35 0.36 0.30 0.32 0.31
Allowance for loan losses as a % of year-end total
loans 1.57 1.46 1.43 1.76 2.14
TABLE K. Allocation of the Allowance for Loan Losses
At December 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------------------------
% of % of % of % of % of
(Dollars in thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
----------------------------------------------------------------------------------------------------
Commercial and commercial
real estate $28,491 2.1% $23,636 2.0% $23,455 2.2% $22,426 2.5% $26,123 3.0%
Residential real estate 7,413 0.7 6,984 0.6 6,868 0.7 6,859 0.9 8,038 1.1
Installment 8,633 1.9 7,931 2.0 5,590 1.4 4,925 1.4 6,028 2.1
--------------------------------------------------------------------------------------------------
Total allowance for
loan losses $44,537 1.6% $38,551 1.5% $35,913 1.4% $34,210 1.8% $40,189 2.1%
==================================================================================================
TABLE L. Interest Rate Risk
Percentage Change in Net Interest Income from Flat Rate Scenario
------------------------------------------------------------------------------------
Year 1 Year 2 Total 24 Months
------------------------------------------------------------------------------------
Rising Rate Falling Rate Rising Rate Falling Rate Rising Rate Falling Rate
Scenario Scenario Scenario Scenario Scenario Scenario
------------------------------------------------------------------------------------
Investment securities held to maturity,
securities available for sale, and money
market investments 1.84% -2.21% 8.00% -10.53% 4.94% -6.40%
Total loans * 4.44% -4.23% 13.85% -13.00% 9.23% -8.70%
Total interest income 3.84% -3.77% 12.52% -12.44% 8.25% -8.17%
Interest-bearing transaction accounts 18.54% -12.13% 37.66% -22.70% 28.30% -17.53%
Time deposits 5.50% -4.50% 24.55% -13.85% 14.97% -9.15%
Total interest-bearing deposits 11.46% -7.99% 30.72% -18.01% 21.15% -13.03%
Short-term borrowed funds 21.57% -21.24% 46.52% -45.44% 34.48% -33.76%
Long-term debt 0.02% -0.02% 0.38% -0.38% 0.20% -0.20%
Total borrowings 16.49% -16.24% 36.40% -35.53% 26.69% -26.12%
Total interest expense 12.13% -9.08% 31.50% -20.41% 21.90% -14.80%
Net interest income -2.96% 0.60% -2.66% -6.06% -2.81% -2.80%
<FN>
<F*> Includes the effect of the interst rate swaps, corridors and floors,
which have notional amounts of $50.0 million, $50.0 million and $295.0
million, respectively, at December 31, 1998.
Note: Flat rate scenario: A flat rate scenario in which today's
prevailing rates are locked in and the
only balance sheet fluctuations that occur
are due to cash flows, maturities, new
volumes, and repricing volumes consistent
with this flat rate scenario.
Rising rate scenario: This scenario is a 200 basis point rise in
rates over a twelve month horizon together
with a dynamic balance sheet.
Falling rate scenario: This scenario is a 200 basis point decline
in rates over a twelve month period together
with a dynamic balance sheet.
</FN>
TABLE M. Rate of Internal Capital Generation
1998 1997 1996 1995 1994
--------------------------------------------------
Return on average total assets 0.71% 1.12% 1.08% 1.13% 0.91%
Return on average shareholders' equity 8.95 13.78 12.97 13.67 11.47
Average equity to average assets 7.95 8.10 8.35 8.25 7.96
Dividend payout 52.12 33.33 33.07 27.27 18.53
Earnings retention rate 47.88 66.67 66.93 72.73 81.47
Internal capital generation rate 4.29 9.19 8.68 9.94 9.34
<FN>
Note: All average equity and average asset amounts include the effect of the
fair market value adjustment on securities available for sale.
</FN>
TABLE N. Consolidated Capital Ratios
At December 31,
----------------------------------------
(Dollars in thousands) 1998 1997 1996
----------------------------------------
Total risk-adjusted on-balance sheet assets(1)(3) $2,880,854 $2,636,170 $2,387,504
Total risk-adjusted off-balance sheet items 174,890 140,813 135,688
----------------------------------------
Total risk-adjusted assets $3,055,744 $2,776,983 $2,523,192
========================================
Total risk-adjusted assets / average total assets, net of fair value
adjustments and goodwill(1)(3) 73.49% 72.41% 73.81%
Total shareholders' equity $ 321,262 $ 318,128 $ 292,176
Fair value adjustments(1) (3,759) (3,318) 2,453
Guaranteed preferred benefical interests in Corporation's junior
subordinated debentures 30,000 30,000 -
Minority interest 144 144 144
Goodwill (80,224) (31,119) (36,405)
Other intangibles(3) (74) - -
----------------------------------------
Total Tier I capital 267,349 313,835 258,368
Maximum allowance for loan losses(2) 38,197 34,712 31,540
----------------------------------------
Total capital $ 305,546 $ 348,547 $ 289,908
========================================
Quarterly average total assets, net of fair value adjustments
and goodwill(1)(3) $4,158,082 $3,835,310 $3,418,364
Allowance for loan losses 44,537 38,551 35,913
Total capital to total risk-adjusted assets 10.00% 12.55% 11.49%
Tier I capital to total risk-adjusted assets 8.75 11.30 10.24
Tier I capital to total quarterly average adjusted assets (Leverage) 6.43 8.18 7.56
<FN>
Notes:
<F1> The market valuation relating to securities available for sale included
in shareholders' equity and total assets on consolidated balance sheets
has been excluded from the above ratios.
<F2> The maximum allowance for loan losses that may be included in 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.
<F3> Mortgage servicing assets, included in total assets on the consolidated
balance sheet, that exceed 90% of fair market value of these assets, if
any, have been excluded from the above ratios.
</FN>
Five Year Selected Financial Data
Years Ended December 31,
---------------------------------------------------------------
(Dollars in thousands, except share and per share data) 1998 1997 1996 1995 1994
---------------------------------------------------------------
Statement of Income:
Interest and dividend income $ 308,701 $ 294,757 $ 260,541 $ 219,795 $ 185,390
Interest expense 144,658 133,335 110,489 95,552 71,282
---------------------------------------------------------------
Net interest income 164,043 161,422 150,052 124,243 114,108
Provision for loan losses 9,345 9,372 7,040 6,175 5,421
---------------------------------------------------------------
Net interest income after provision for loan losses 154,698 152,050 143,012 118,068 108,687
---------------------------------------------------------------
Other operating income:
Income from trust and investment management fees 12,838 11,223 10,217 9,639 9,617
Service charges on deposit accounts 11,657 10,725 9,370 7,872 7,684
Mortgage banking income 5,492 4,667 4,561 3,375 4,482
Card product income 2,227 3,166 3,029 2,789 3,497
ATM income 2,258 1,369 1,031 959 919
Net securities transactions 519 266 25 (546) (2,327)
Bank-owned life insurance 2,229 77 - - -
Gain on sale of merchant processing - 2,432 - - -
Other income 4,253 3,931 3,457 3,046 3,615
---------------------------------------------------------------
Total other operating income 41,473 37,856 31,690 27,134 27,487
Other operating expenses:
Compensation & employee benefits 65,545 62,994 59,830 50,614 47,764
Net occupancy, equipment & software 19,218 19,657 17,677 14,875 14,452
Data processing 6,889 7,232 7,005 6,721 7,119
FDIC deposit insurance and other regulatory 1,139 1,084 650 3,307 5,576
OREO and repossession 1,068 1,448 385 1,301 2,592
Amortization of goodwill 5,743 5,286 4,715 695 199
Capital securities 3,156 2,104 - - -
Merger and acquisition related expenses 21,968 - 1,583 - -
Other income 28,010 28,124 29,498 25,676 25,754
---------------------------------------------------------------
Total other operating expenses 152,736 127,929 121,343 103,189 103,456
---------------------------------------------------------------
Income before income tax expense and cumulative effect
of change in accounting 43,435 61,977 53,359 42,013 32,718
Income tax expense 14,515 20,161 17,656 11,260 9,550
---------------------------------------------------------------
Income before cumulative effect of change in accounting 28,920 41,816 35,703 30,753 23,168
Cumulative effect of change in accounting - - - - 138
---------------------------------------------------------------
Net income $ 28,920 $ 41,816 $ 35,703 $ 30,753 $ 23,306
===============================================================
Average Balances:
Loans $ 2,684,169 $ 2,578,746 $ 2,362,251 $ 1,910,737 $ 1,770,178
Loans held for sale 35,708 16,481 14,834 12,985 15,432
Securities available for sale 1,038,077 859,674 619,390 311,972 391,930
Investment securities, held to maturity 36,016 61,508 63,967 307,740 207,624
Money market investments 26,027 30,132 29,663 32,955 19,259
---------------------------------------------------------------
Total earning assets 3,819,997 3,546,541 3,090,105 2,576,389 2,404,423
Other assets 242,622 196,628 204,561 150,106 148,966
---------------------------------------------------------------
Total assets $ 4,062,619 $ 3,743,169 $ 3,294,666 $ 2,726,495 $ 2,553,389
===============================================================
Non interest-bearing deposits $ 429,272 $ 385,540 $ 359,058 $ 287,556 $ 282,511
Interest-bearing deposits 2,784,701 2,562,280 2,396,422 1,905,576 1,764,414
---------------------------------------------------------------
Total deposits 3,213,973 2,947,820 2,755,480 2,193,132 2,046,925
Short-term borrowed funds 390,641 389,586 163,208 172,230 151,471
Long-term debt 63,776 47,139 67,206 107,077 124,393
Other liabilities 41,108 35,130 33,547 29,119 27,357
Guaranteed preferred beneficial interests in Corporation's
junior subordinated debentures 30,000 20,137 - - -
Shareholders' equity 323,121 303,357 275,225 224,937 203,243
---------------------------------------------------------------
Total liabilities, guaranteed preferred beneficial
interests in Corporation's subordinated debentures
and shareholders' equity $ 4,062,619 $ 3,743,169 $ 3,294,666 $ 2,726,495 $ 2,553,389
===============================================================
Credit Quality Information:
Loans charged off, net of recoveries $ 5,559 $ 6,734 $ 6,987 $ 12,154 $ 6,957
Non-performing assets, p.e. 24,329 23,275 26,922 24,912 49,886
Share and Per Share Data:
Basic wtd. avg. number of shares outstanding 23,277,560 23,705,320 23,626,266 22,033,130 22,072,038
Basic earnings per share (Basic EPS) $ 1.24 $ 1.76 $ 1.51 $ 1.40 $ 1.06
Diluted wtd. avg. number of shares outstanding 23,669,540 24,042,800 23,860,882 22,177,558 22,152,288
Diluted earnings per share (Diluted EPS) $ 1.22 $ 1.74 $ 1.50 $ 1.39 $ 1.05
Tangible book value 10.40 12.21 10.72 10.62 9.00
Key Ratios:
Return on average assets 0.71% 1.12% 1.08% 1.13% 0.91%
Return on average shareholders' equity 8.95 13.78 12.97 13.67 11.47
Net interest margin, fte 4.34 4.58 4.89 4.87 4.80
Efficiency ratio 59.78 61.65 62.21 65.85 69.07
As a % of risk-adjusted assets, p.e.:
Total capital 10.00 12.55 11.49 13.31 12.75
Tier 1 capital 8.75 11.30 10.24 12.05 11.49
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 6.43 8.18 7.56 8.51 7.72
Tangible shareholders' equity, to tangible assets, p.e. 5.58 7.36 7.32 8.44 7.39
<FN>
Note: All share and per share data has been restated to give retroactive
effect to stock splits.
</FN>
Summary of Quarterly Financial Information
1998
(In thousands, except share ----------------------------------------------------------------------
and per share data) Year Q4 Q3 Q2 Q1
Statement of Income:
Interest and dividend income $ 308,701 $ 78,656 $ 77,216 $ 77,075 $ 75,754
Interest expense 144,658 36,106 36,695 36,368 35,489
----------------------------------------------------------------------
Net interest income 164,043 42,550 40,521 40,707 40,265
Provision for loan losses 9,345 2,335 2,335 2,335 2,340
----------------------------------------------------------------------
Net interest income after
provision for loan losses 154,698 40,215 38,186 38,372 37,925
----------------------------------------------------------------------
Other operating income:
Income from trust and invest-
ment management fees 12,838 3,791 2,946 3,139 2,962
Service charges on deposit accounts 11,657 2,969 2,861 2,948 2,879
Mortgage banking income 5,492 1,391 1,812 1,195 1,094
Card product income 2,227 686 569 542 430
ATM income 2,258 635 618 523 482
Net securities transactions 519 526 319 103 (429)
Bank-owned life insurance 2,229 569 567 553 540
Gain on sale of merchant processing - - - - -
All other 4,253 1,079 1,149 1,105 920
----------------------------------------------------------------------
Total other operating income 41,473 11,646 10,841 10,108 8,878
Other operating expenses:
Compensation & employee benefits 65,545 17,554 15,705 16,073 16,213
Net occupancy, equipment &
software 19,218 4,852 4,697 4,732 4,937
Data processing 6,889 1,472 1,756 1,926 1,735
FDIC deposit insurance and other
regulatory 1,139 292 284 283 280
OREO and repossession 1,068 331 239 142 356
Amortization of goodwill 5,743 1,779 1,321 1,321 1,322
Capital securities 3,156 789 789 789 789
Merger and acquisition related
expenses 21,968 21,968 - - -
All other 28,010 7,507 6,702 6,931 6,870
----------------------------------------------------------------------
Total other operating expenses 152,736 56,544 31,493 32,197 32,502
----------------------------------------------------------------------
Income before income tax expense (benefit) 43,435 (4,683) 17,534 16,283 14,301
Income tax expense (benefit) 14,515 (321) 5,416 5,019 4,401
----------------------------------------------------------------------
Net income (loss) $ 28,920 $ (4,362) $ 12,118 $ 11,264 $ 9,900
======================================================================
Average Balances:
Loans $2,684,169 $2,755,824 $2,675,888 $2,661,474 $2,642,333
Loans held for sale 35,708 36,490 34,435 41,921 29,926
Securities available for sale 1,038,077 1,123,294 1,041,605 1,016,664 969,011
Investment securities held to maturity 36,016 22,965 26,046 38,580 56,958
Money market investments 26,027 22,376 40,415 26,110 14,968
----------------------------------------------------------------------
Total earning assets 3,819,997 3,960,949 3,818,389 3,784,749 3,713,196
Other assets 242,622 281,190 233,103 231,505 223,890
----------------------------------------------------------------------
Total assets $4,062,619 $4,242,139 $4,051,492 $4,016,254 $3,937,086
======================================================================
Non interest-bearing deposits $ 429,272 $ 477,977 $ 431,872 $ 410,469 $ 394,254
Interest-bearing deposits 2,784,701 2,957,813 2,767,727 2,736,741 2,673,588
----------------------------------------------------------------------
Total deposits 3,213,973 3,435,790 3,199,599 3,147,210 3,067,842
Short-term borrowed funds 390,641 320,459 382,313 424,048 438,700
Long-term debt 63,776 74,634 74,534 59,459 46,044
Other liabilities 41,108 43,466 41,825 40,374 38,710
Guaranteed preferred beneficial interests
in Corporation's junior subordinated
debentures 30,000 30,000 30,000 30,000 30,000
Shareholders' equity 323,121 337,790 323,221 315,163 315,790
----------------------------------------------------------------------
Total liabilities, guaranteed
preferred beneficial interests in
Corporation's junior
subordinated debentures and
shareholders' equity $4,062,619 $4,242,139 $4,051,492 $4,016,254 $3,937,086
======================================================================
Loans charged off, net of recoveries $ 5,559 $ 1,743 $ 1,160 $ 1,654 $ 1,002
Non-performing assets, p.e. 24,329 24,329 25,694 20,110 22,773
Share and Per Share Data:
Basic wtd. avg. number of shares
outstanding 23,277,560 23,203,566 23,226,319 23,258,549 23,430,477
Basic earnings per share (Basic EPS) $ 1.24 $ (0.19) $ 0.52 $ 0.48 $ 0.42
Diluted wtd. avg. number of shares
outstanding 23,669,540 23,552,615 23,613,000 23,685,137 23,835,238
Diluted earnings per share
(Diluted EPS) $ 1.22 $ (0.19) $ 0.51 $ 0.48 $ 0.42
Tangible book value 10.40 10.40 13.26 12.61 12.30
Cash dividends declared 0.64 0.160 0.160 0.160 0.160
Closing price at period end 37.63 37.63 29.25 37.00 36.50
Key Ratios:
Return on average assets 0.71% (0.41)% 1.19% 1.12% 1.02%
Return on average shareholders' equity 8.95 (5.12) 14.87 14.34 12.71
Net interest margin, fte 4.34 4.31 4.26 4.36 4.44
Efficiency ratio 59.78 59.71 57.83 59.81 61.37
Expense ratio 2.07 2.03 1.90 2.08 2.23
As a % of risk-adjusted assets, p.e.
Total capital 10.00 10.00 12.67 12.39 12.33
Tier 1 capital 8.75 8.75 11.42 11.14 11.08
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 6.43 6.43 8.13 7.97 8.00
Tangible shareholders' equity, to
tangible assets, p.e. 5.58 5.58 7.60 7.24 7.20
1997
(In thousands, except share ----------------------------------------------------------------------
and per share data) Year Q4 Q3 Q2 Q1
Statement of Income:
Interest and dividend income $ 294,757 $ 76,444 $ 75,762 $ 73,307 $ 69,244
Interest expense 133,335 35,200 34,789 33,005 30,341
----------------------------------------------------------------------
Net interest income 161,422 41,244 40,973 40,302 38,903
Provision for loan losses 9,372 2,486 2,390 2,386 2,110
----------------------------------------------------------------------
Net interest income after
provision for loan losses 152,050 38,758 38,583 37,916 36,793
----------------------------------------------------------------------
Other operating income:
Income from trust and invest-
ment management fees 11,223 2,890 2,933 2,721 2,679
Service charges on deposit accounts 10,725 2,904 2,667 2,666 2,488
Mortgage banking income 4,667 1,010 1,902 824 931
Card product income 3,166 837 788 821 720
ATM income 1,369 460 370 281 258
Net securities transactions 266 71 163 14 18
Bank-owned life insurance 77 77 - - -
Gain on sale of merchant processing 2,432 2,432 - - -
All other 3,931 1,106 861 805 1,159
----------------------------------------------------------------------
Total other operating income 37,856 11,787 9,684 8,132 8,253
Other operating expenses:
Compensation & employee benefits 62,994 16,061 16,174 15,425 15,334
Net occupancy, equipment &
software 19,657 5,067 4,932 4,789 4,869
Data processing 7,232 1,878 1,804 1,788 1,762
FDIC deposit insurance and other
regulatory 1,084 290 269 266 259
OREO and repossession 1,448 441 333 443 231
Amortization of goodwill 5,286 1,322 1,322 1,321 1,321
Capital securities 2,104 789 789 526 -
Merger and acquisition related
expenses - - - - -
All other 28,124 7,075 7,151 7,080 6,818
----------------------------------------------------------------------
Total other operating expenses 127,929 32,923 32,774 31,638 30,594
----------------------------------------------------------------------
Income before income tax expense (benefit) 61,977 17,622 15,493 14,410 14,452
Income tax expense (benefit) 20,161 5,774 5,018 4,649 4,720
----------------------------------------------------------------------
Net income (loss) $ 41,816 $ 11,848 $ 10,475 $ 9,761 $ 9,732
======================================================================
Average Balances:
Loans $2,578,746 $2,621,516 $2,598,368 $2,571,322 $2,522,407
Loans held for sale 16,481 19,707 20,957 12,730 12,400
Securities available for sale 859,674 951,598 930,643 835,424 717,682
Investment securities held to maturity 61,508 61,505 66,828 63,895 53,661
Money market investments 30,132 20,785 24,359 40,290 35,305
----------------------------------------------------------------------
Total earning assets 3,546,541 3,675,111 3,641,155 3,523,661 3,341,455
Other assets 196,628 194,636 191,801 192,985 206,894
----------------------------------------------------------------------
Total assets $3,743,169 $3,869,747 $3,832,956 $3,716,646 $3,548,349
======================================================================
Non interest-bearing deposits $ 385,540 $ 404,834 $ 397,471 $ 373,497 $ 365,104
Interest-bearing deposits 2,562,280 2,619,986 2,579,460 2,546,910 2,501,271
----------------------------------------------------------------------
Total deposits 2,947,820 3,024,820 2,976,931 2,920,407 2,866,375
Short-term borrowed funds 389,586 421,396 436,679 396,009 303,129
Long-term debt 47,139 43,310 45,996 48,473 50,872
Other liabilities 35,130 34,956 33,991 35,956 35,639
Guaranteed preferred beneficial interests
in Corporation's junior subordinated
debentures 20,137 30,000 30,000 20,110 -
Shareholders' equity 303,357 315,265 309,359 295,691 292,334
----------------------------------------------------------------------
Total liabilities, guaranteed
preferred beneficial interests in
Corporation's junior
subordinated debentures and
shareholders' equity $3,743,169 $3,869,747 $3,832,956 $3,716,646 $3,548,349
======================================================================
Loans charged off, net of recoveries $ 6,734 $ 1,760 $ 1,338 $ 2,024 $ 1,612
Non-performing assets, p.e. 23,275 23,275 26,932 24,078 27,937
Share and Per Share Data:
Basic wtd. avg. number of shares
outstanding 23,705,320 23,677,296 23,754,913 23,662,846 23,728,390
Basic earnings per share (Basic EPS) $ 1.76 $ 0.50 $ 0.44 $ 0.41 $ 0.41
Diluted wtd. avg. number of shares
outstanding 24,042,800 24,079,118 24,101,642 23,961,171 24,027,135
Diluted earnings per share
(Diluted EPS) $ 1.74 $ 0.49 $ 0.42 $ 0.41 $ 0.42
Tangible book value 12.21 12.21 11.96 11.35 10.84
Cash dividends declared 0.58 0.145 0.145 0.145 0.145
Closing price at period end 32.13 32.13 27.32 23.13 20.25
Key Ratios:
Return on average assets 1.12% 1.21% 1.08% 1.05% 1.11%
Return on average shareholders' equity 13.78 14.91 13.43 13.24 13.50
Net interest margin, fte 4.58 4.49 4.49 4.60 4.74
Efficiency ratio 61.65 61.93 62.35 61.34 61.44
Expense ratio 2.39 2.30 2.36 2.41 2.54
As a % of risk-adjusted assets, p.e.
Total capital 12.55 12.55 12.76 12.53 11.55
Tier 1 capital 11.30 11.30 11.51 11.28 10.30
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 8.18 8.18 8.19 8.18 7.52
Tangible shareholders' equity, to
tangible assets, p.e. 7.36 7.36 7.40 7.09 7.22
<FN>
Note: All share and per share data has been restated to give retroactive
effect to stock splits.
</FN>
Management's Statement of Responsibility
The consolidated financial statements and related information in the
1998 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 LLP, is limited to an expression of their opinion as to the fairness
of the consolidated financial statements presented in all material
respects. Their opinion is based on an audit conducted in accordance with
generally accepted auditing standards as described in the second paragraph
of their report.
The board of directors, through its Examining and Audit Committee, is
responsible for ensuring that both management and the independent public
accountants fulfill their respective responsibilities with regard to the
consolidated financial statements. The Examining and Audit Committee, which
is comprised entirely of directors who are not officers or employees of the
Company, meets periodically with both management and the independent public
accountants to assure that each is carrying out its responsibilities. The
independent public accountants have full and free access to the Examining
and Audit Committee and meet with it, with and without management being
present, to discuss auditing and financial reporting matters.
William H. Chadwick
President & Chief Executive Officer
Thomas J. Pruitt
Executive Vice President & Chief Financial Officer
Neal E. Robinson
Senior Vice President & Treasurer
Independent Auditors' Report
The Shareholders Banknorth Group, Inc.
We have audited the accompanying consolidated balance sheets of
Banknorth Group, Inc. and subsidiaries as of December 31, 1998 and 1997,
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, 1998. 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, 1998 and 1997,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Albany, New York
January 22, 1999
Consolidated Statements of Income
Years Ended December 31,
--------------------------------
(Dollars in thousands, except per share data) 1998 1997 1996
--------------------------------
Interest and dividend income:
Interest and fees on loans $238,953 $233,414 $215,528
Interest on money market investments 1,438 1,680 1,622
Interest on securities available for sale 65,755 55,216 38,796
Interest on investment securities held to maturity 2,555 4,447 4,595
--------------------------------
Total interest and dividend income 308,701 294,757 260,541
Interest expense:
Deposits 120,481 109,443 98,182
Short-term borrowed funds 20,138 20,827 8,094
Long-term debt 4,039 3,065 4,213
--------------------------------
Total interest expense 144,658 133,335 110,489
--------------------------------
Net interest income 164,043 161,422 150,052
Less: provision for loan losses 9,345 9,372 7,040
--------------------------------
Net interest income after provision for loan losses 154,698 152,050 143,012
--------------------------------
Other operating income:
Income from trust and investment management fees 12,838 11,223 10,217
Service charges on deposit accounts 11,657 10,725 9,370
Mortgage banking income 5,492 4,667 4,561
Card product income 2,227 3,166 3,029
ATM income 2,258 1,369 1,031
Net securities transactions 519 266 25
Bank-owned life insurance 2,229 77 -
Gain on sale of merchant processing - 2,432 -
Other income 4,253 3,931 3,457
--------------------------------
Total other operating income 41,473 37,856 31,690
Other operating expenses:
Compensation 53,068 50,642 47,144
Employee benefits 12,477 12,352 12,686
Net occupancy 9,826 10,259 9,176
Equipment and software 9,392 9,398 8,501
Data processing 6,889 7,232 7,005
FDIC deposit insurance and other regulatory 1,139 1,084 650
Other real estate owned and repossession 1,068 1,448 385
Legal and professional 5,145 4,937 4,409
Printing and supplies 3,071 3,223 3,513
Advertising and marketing 3,870 3,428 3,538
Communications 2,963 2,905 2,792
Amortization of goodwill 5,743 5,286 4,715
Capital securities 3,156 2,104 -
Merger and acquisition related expenses 21,968 - 1,583
Other expenses 12,961 13,631 15,246
--------------------------------
Total other operating expenses 152,736 127,929 121,343
--------------------------------
Income before income tax expense 43,435 61,977 53,359
Income tax expense 14,515 20,161 17,656
--------------------------------
Net income $ 28,920 $ 41,816 $ 35,703
================================
Basic earnings per share $ 1.24 $ 1.76 $ 1.51
================================
Basic wtd. avg. number of shares 23,278 23,705 23,626
================================
Diluted earnings per share $ 1.22 $ 1.74 $ 1.50
================================
Diluted wtd. avg. number of shares 23,670 24,043 23,861
================================
All share and per share data has been restated to give retroactive effect
to stock splits.
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheets
At December 31,
------------------------
(In thousands, except share and per share data) 1998 1997
------------------------
Assets
Cash and due from banks $ 164,826 $ 112,297
Money market investments 4,900 71
------------------------
Cash and cash equivalents 169,726 112,368
------------------------
Securities available for sale, at fair value 1,127,865 958,553
Loans held for sale 42,996 24,958
Investment securities, held to maturity 20,545 58,626
(Fair value of $21,606 at December 31, 1998
and $59,832 at December 31, 1997)
Loans 2,837,106 2,642,094
Less: allowance for loan losses 44,537 38,551
------------------------
Net loans 2,792,569 2,603,543
------------------------
Accrued interest receivable 21,244 23,277
Premises, equipment and software, net 50,936 45,754
Other real estate owned and repossessed assets 3,335 2,795
Goodwill, net 80,224 31,119
Capitalized mortgage servicing rights 5,351 4,650
Bank-owned life insurance 42,306 40,077
Other assets 45,784 25,241
------------------------
Total assets $4,402,881 $3,930,961
========================
Liabilities, Guaranteed Preferred Beneficial
Interests in Corporation's Junior Subordinated
Debentures and Shareholders' Equity
Deposits:
Non-interest bearing $ 546,192 $ 430,373
NOW accounts & money market savings 1,490,944 1,108,669
Regular savings 328,986 311,938
Time deposits $100 thousand and greater 239,071 214,187
Time deposits under $100 thousand 1,034,304 988,467
------------------------
Total deposits 3,639,497 3,053,634
------------------------
Short-term borrowed funds:
Federal funds purchased 30,445 19,800
Securities sold under agreements to repurchase 208,511 144,924
Borrowings from U.S. Treasury 12,678 22,211
Borrowings from Federal Home Loan Bank 30,000 263,000
------------------------
Total short-term borrowed funds 281,634 449,935
------------------------
Long-term debt:
Federal Home Loan Bank term notes 66,062 31,209
Bank term loan 8,263 11,040
------------------------
Total long-term debt 74,325 42,249
------------------------
Accrued interest payable 7,101 7,530
Other liabilities 49,062 29,485
------------------------
Total liabilities 4,051,619 3,582,833
------------------------
Guaranteed preferred beneficial interests in
Corporation's junior subordinated debentures 30,000 30,000
------------------------
Shareholders' equity:
Preferred stock, $.01 par value; authorized
500,000 shares and none issued as of
December 31, 1998, and no shares authorized
as of December 31, 1997 - -
Common stock, $1.00 par value; authorized
70,000,000 shares and issued 23,548,392 shares
as of December 31, 1998, and authorized
38,000,000 shares and issued 23,669,335 shares
as of December 31, 1997 23,548 23,669
Capital surplus 86,033 88,363
Retained earnings 221,919 209,766
Unamortized employee restricted stock (1,266) (1,550)
Accumulated other comprehensive income 3,509 3,318
Common stock subscribed by ESOP (463) (640)
Less: Common stock in treasury, at cost;
369,300 shares as of December 31, 1998,
and 154,000 shares as of December 31, 1997 (12,018) (4,798)
------------------------
Total shareholders' equity 321,262 318,128
------------------------
Total liabilities, guaranteed preferred
beneficial interests in Corporation's junior
subordinated debentures and shareholders' equity $4,402,881 $3,930,961
========================
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Shareholders' Equity
Unamortized Common
Employee Stock
(Dollars and shares in thousands, Number of Shares Common Capital Retained Restricted Subscribed
except per share data) Issued Treasury Stock Surplus Earnings Stock by ESOP
---------------------------------------------------------------------------
Balance, January 1, 1996 11,134 244 $11,134 $74,409 $161,043 $ (898) $(967)
Comprehensive income:
Net income - - 35,703 - -
Other comprehensive income, net of tax:
Unrealized net holding losses arising
during the year (pre-tax $4,580) - - - - -
Reclassification adjustment for net
gains realized in net income
during the year (pre-tax $25) - - - - -
Other comprehensive income - - - - -
Comprehensive income
Issuance of common stock, net of costs 1,023 1,023 31,193 - - -
Cash dividends ($ .50 per share) - - (11,806) - -
Issuance of employee restricted stock 6 (23) 6 122 - (371) -
Amortization of employee restricted stock - 194 - 116 -
Exercise of employee stock options (69) - - (411) - -
Purchase of treasury stock 92 - - - - -
Stock vested in ESOP - - - - 159
2 for 1 stock split 4,336 4,336 (4,336) - - -
Pooled company transactions
Purchase and retirement of treasury stock (464) (169) (464) (5,362) - - -
Treasury stock reissued for stock
awards and options exercised (75) - - (194) - -
------------------------------------------------------------------------
Balance, December 31, 1996 16,035 - $16,035 $96,220 $184,335 $(1,153) $(808)
========================================================================
Comprehensive income:
Net income - - $ 41,816 - -
Other comprehensive income, net of tax:
Unrealized net holding gains arising
during the year (pre-tax $9,299) - - - - -
Reclassification adjustment for net
gains realized in net income during
the year (pre-tax $266) - - - - -
Other comprehensive income - - - - -
Comprehensive income
Cash dividends ($ .58 per share) - - (13,939) - -
Issuance of employee restricted stock (13) - - - (315) -
Amortization of employee restricted stock - 851 - (82) -
Issuance of restricted stock units under
directors' deferred compensation plan, net - 3,335 (4) - -
Exercise of employee stock options (170) - - (2,060) - -
Purchase of treasury stock 337 - - - - -
Stock vested in ESOP - - - - 168
2 for 1 stock split 7,826 7,826 (7,826) - - -
Pooled company transactions
Purchase and retirement of treasury stock (192) 115 (192) (4,217) - - -
Treasury stock reissued for stock
awards and options exercised (115) - - (382) - -
------------------------------------------------------------------------
Balance, December 31, 1997 23,669 154 $23,669 $88,363 $209,766 $(1,550) $(640)
========================================================================
Comprehensive income:
Net income - - $ 28,920 - -
Other comprehensive income, net of tax:
Unrealized net holding gains arising
during the year (pre-tax $1,147) - - - - -
Reclassification adjustment for net
gains realized in net income during
the year (pre-tax $519) - - - - -
Minimum pension liability adjustments - - - - -
Other comprehensive income - - - - -
Comprehensive income
Cash dividends ($ .64 per share) - - (15,072) - -
Issuance of employee restricted stock (7) - 41 - (254) -
Amortization of employee restricted stock - 259 - 538 -
Issuance of restricted stock units under
directors' deferred compensation plan, net - 385 (37) - -
Exercise of employee stock options (144) - - (1,920) - -
Purchase of treasury stock 366 - - - - -
Fractional shares repurchased (1) (1) (16) - - -
Stock vested in ESOP - - - - 177
Pooled company transactions
Purchase and retirement of treasury stock (120) 122 (120) (2,999) - - -
Treasury stock reissued for stock
awards and options exercised (122) - - 262 - -
------------------------------------------------------------------------
Balance, December 31, 1998 23,548 369 $23,548 $86,033 $221,919 $(1,266) $(463)
========================================================================
Accumulated
Other Com- Com- Total
(Dollars and shares in thousands, prehensive Treasury prehensive Shareholders'
except per share data) Income Stock Income Equity
------------------------------------------------------
Balance, January 1, 1996 $ 503 $ (2,243) $242,981
Comprehensive income:
Net income - - $35,703 35,703
-------
Other comprehensive income, net of tax:
Unrealized net holding losses arising
during the year (pre-tax $4,580) - - (2,940)
Reclassification adjustment for net
gains realized in net income
during the year (pre-tax $25) - - (16)
-------
Other comprehensive income (2,956) - (2,956) (2,956)
-------
Comprehensive income $32,747
=======
Issuance of common stock, net of costs - - 32,216
Cash dividends ($ .50 per share) - - (11,806)
Issuance of employee restricted stock - 371 128
Amortization of employee restricted stock - - 310
Exercise of employee stock options - 1,235 824
Purchase of treasury stock - (1,606) (1,606)
Stock vested in ESOP - - 159
2 for 1 stock split - - -
Pooled company transactions
Purchase and retirement of treasury stock - 1,440 (4,386)
Treasury stock reissued for stock
awards and options exercised - 803 609
--------------------------------------------------
Balance, December 31, 1996 $(2,453) $ - $292,176
==================================================
Comprehensive income:
Net income - - $41,816 $ 41,816
-------
Other comprehensive income, net of tax:
Unrealized net holding gains arising
during the year (pre-tax $9,299) - - 5,941
Reclassification adjustment for net
gains realized in net income during
the year (pre-tax $266) - - (170)
-------
Other comprehensive income 5,771 - 5,771 5,771
-------
Comprehensive income $47,587
=======
Cash dividends ($ .58 per share) - - (13,939)
Issuance of employee restricted stock - 315 -
Amortization of employee restricted stock - - 769
Issuance of restricted stock units under
directors' deferred compensation plan, net - - 3,331
Exercise of employee stock options - 4,882 2,822
Purchase of treasury stock - (9,995) (9,995)
Stock vested in ESOP - - 168
2 for 1 stock split - - -
Pooled company transactions
Purchase and retirement of treasury stock - (1,467) (5,876)
Treasury stock reissued for stock
awards and options exercised - 1,467 1,085
--------------------------------------------------
Balance, December 31, 1997 $ 3,318 $ (4,798) $318,128
==================================================
Comprehensive income:
Net income - - $28,920 $ 28,920
-------
Other comprehensive income, net of tax:
Unrealized net holding gains arising
during the year (pre-tax $1,147) - - 805
Reclassification adjustment for net
gains realized in net income during
the year (pre-tax $519) - - (364)
Minimum pension liability adjustments - - (250)
-------
Other comprehensive income 191 - 191 191
-------
Comprehensive income $29,111
=======
Cash dividends ($ .64 per share) - - (15,072)
Issuance of employee restricted stock - 213 -
Amortization of employee restricted stock - - 797
Issuance of restricted stock units under
directors' deferred compensation plan, net - - 348
Exercise of employee stock options - 4,864 2,944
Purchase of treasury stock - (12,297) (12,297)
Fractional shares repurchased - - (17)
Stock vested in ESOP - - 177
Pooled company transactions
Purchase and retirement of treasury stock - (1,921) (5,040)
Treasury stock reissued for stock
awards and options exercised - 1,921 2,183
--------------------------------------------------
Balance, December 31, 1998 $ 3,509 $(12,018) $321,262
==================================================
Note: Cash dividends per share represent the historical dividends of
Banknorth Group, Inc. All per share data has been restated to give
retroactive effect to stock splits.
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Years Ended December 31,
-----------------------------------
(In thousands) 1998 1997 1996
-----------------------------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 28,920 $ 41,816 $ 35,703
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises, equipment and software 6,743 6,623 5,819
Amortization of goodwill 5,743 5,286 4,715
Net amortization of securities available for sale 5,429 3,924 3,380
Net accretion of investment securities, held to maturity (192) (292) (360)
Provision for loan losses 9,345 9,372 7,040
Adjustment of other real estate owned to estimated fair value 445 438 455
Provision for deferred tax expense (benefit) (2,757) (1,255) 488
Amortization of employee restricted stock 797 769 438
Issuance of restricted stock units under directors'
deferred compensation plan, net 348 100 -
Net securities transactions (519) (266) (25)
Net gain on sale of other real estate owned and repossessed assets (288) (223) (891)
Proceeds from sale of loans held for sale 335,350 124,352 171,897
Originations and purchases of loans held for resale (350,018) (135,969) (163,249)
Net gain on sale of loans held for sale (3,370) (1,235) (1,629)
Gain on sale of mortgage servicing rights (386) (921) (93)
Earnings from bank-owned life insurance (2,229) (77) -
Decrease (increase) in interest receivable 2,033 (2,293) (3,517)
Increase (decrease) in interest payable (429) 1,241 376
Increase in other assets and other intangibles (16,885) 3,252 (929)
Increase in other liabilities 19,269 3,308 4,730
ESOP compensation expense 177 168 159
-----------------------------------
Total adjustments 8,606 16,302 28,804
-----------------------------------
Net cash provided by operating activities 37,526 58,118 64,507
-----------------------------------
Cash flows from investing activities:
Net cash provided by acquisition 122,526 - 122,358
Proceeds from maturity and call of securities available for sale 334,484 163,895 237,121
Proceeds from maturity and call of investment securities,
held to maturity 38,298 17,828 24,016
Proceeds from sale of securities available for sale 155,131 5,970 29,478
Purchase of securities available for sale (663,234) (414,671) (433,162)
Purchase of investment securities, held to maturity - (21,903) (5,006)
Proceeds from sale of OREO and repossessed assets 3,301 4,266 6,335
Payments received on OREO and repossessed assets 136 63 33
Loans purchased - (37,456) (38,189)
Net increase in originated loans (93,157) (110,547) (133,518)
Capital expenditures (9,981) (7,824) (8,214)
Purchase of bank-owned life insurance - (40,000) -
-----------------------------------
Net cash used in investing activities (112,496) (440,379) (198,748)
-----------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 295,852 186,714 (4,413)
Net increase (decrease) in short-term borrowed funds (168,301) 165,628 164,834
Issuance of common stock, net of expenses - - 32,216
Purchase of treasury stock (17,337) (15,871) (5,992)
Issuance of guaranteed preferred beneficial interests in
Corporation's junior subordinated debentures - 30,000 -
Issuance of long-term debt 38,895 350 10,000
Payments on long-term debt (6,819) (10,262) (37,311)
Exercise of employee stock options, net 5,127 3,907 1,433
Fractional shares repurchased (17) - -
Dividends paid (15,072) (13,939) (11,806)
-----------------------------------
Net cash provided by financing activities 132,328 346,527 148,961
-----------------------------------
Net increase (decrease) in cash and cash equivalents 57,358 (35,734) 14,720
-----------------------------------
Cash and cash equivalents at beginning of year 112,368 148,102 133,382
-----------------------------------
Cash and cash equivalents at end of year $ 169,726 $ 112,368 $ 148,102
===================================
Additional disclosure relative to statement of cash flows:
Interest paid $ 145,048 $ 132,168 $ 110,113
===================================
Taxes paid $ 21,722 $ 15,721 $ 22,217
===================================
Supplemental schedule of non-cash investing and financing activities:
Net transfer of loans to OREO and repossessed assets $ 4,134 $ 4,942 $ 3,376
Adjustment to securities available for sale to fair value, net of tax 441 5,771 (2,956)
Minimum pension liability adjustments (250) - -
Issuance of restricted stock units under directors'
deferred compensation plan, net - 3,231 -
Fair value of assets acquired in acquisition 112,696 - 405,741
Fair value of liabilities assumed 290,070 - 560,340
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
The accounting and reporting policies of Banknorth Group, Inc., a
Delaware Corporation, (the "Parent Company"), and its subsidiaries conform,
in all material respects, to generally accepted accounting principles and
to general practices within the banking industry. Collectively, the Parent
Company and its subsidiaries are referred to herein as "Banknorth",
"Company" or "Corporation".
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Banknorth-Evergreen Merger
On December 31, 1998, Evergreen Bancorp, Inc. ("Evergreen") and its
wholly owned subsidiary Evergreen Bank, N.A. ("Evergreen Bank") was merged
with and into Banknorth. The merger was accounted for as a pooling of
interests and, accordingly, the financial information for all prior periods
has been restated to present the combined financial condition and results
of operations of both companies as if the merger had been in effect for all
periods presented. Further details pertaining to the merger are presented
in Note 2.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Banknorth and its subsidiaries. All material intercompany
accounts and transactions have been eliminated. Amounts in the prior years'
consolidated financial statements are reclassified whenever necessary to
conform with the current year's presentation.
Cash and Cash Equivalents
Banknorth includes cash, due from banks, and money market investments
as Cash and Cash Equivalents for the consolidated statements of cash flows.
Securities
Management determines the appropriate classification of securities at
the time of purchase. If management has the positive intent and ability to
hold debt securities to maturity, they are classified as investment
securities held to maturity and are stated at amortized cost. If securities
are purchased for the purpose of selling them in the near term, they are
classified as trading securities and are reported at fair value with
unrealized gains and losses reflected in current earnings. All other debt
and marketable equity securities are classified as securities available for
sale and are reported at fair value, with the net unrealized gains or
losses reported, net of income taxes, in shareholders' equity as a
component of accumulated other comprehensive income. Non-marketable equity
securities are carried at cost. Gains or losses on disposition of all
securities are based on the adjusted cost of the specific security sold.
The cost of securities is adjusted for amortization of premium and
accretion of discount, which is calculated on the effective interest
method.
Unrealized losses on securities which reflect a decline in value
which is other than temporary, if any, are charged to income and reported
under the caption "Net securities transactions" in the consolidated
financial statements.
Loans
Loans are carried at the principal amount outstanding net of unearned
income and unamortized loan fees and expenses, which are amortized under
the effective interest method over the estimated lives of the loans.
Non-performing loans include non-accrual loans, loans restructured in
troubled debt restructurings (restructured loans) and loans which are 90
days or more past due and still accruing interest. Generally, loans are
placed on non-accrual status, either due to the delinquency status of
principal and/or interest payments, or a judgment by management that,
although payments of principal and/or interest are current, such action is
prudent. Except in the case of installment loans, which are generally
charged off when loan principal and/or interest payments are 120 days
overdue, loans are generally placed on non-accrual status when principal
and/or interest is 90 days overdue. When a loan is placed on non-accrual
status, all interest previously accrued in the current year but not
collected is reversed against current year interest income. Interest
accrued in the prior year and not collected is charged off against the
allowance for loan losses. When the principal is contractually current,
interest and fee income is recognized on a cash basis. If ultimate
repayment of principal is not expected or management judges it to be
prudent, any payment received on a non-accrual loan is applied to principal
until ultimate repayment becomes expected. Loans are removed from non-
accrual status when they become current as to principal and interest or
demonstrate a period of performance under the contractual terms and, in the
opinion of management, are fully collectible as to principal and interest.
The Company identifies impaired loans and measures the impairment in
accordance with Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures." A loan is considered impaired when it is probable that
the borrower will not repay the loan according to the original contractual
terms of the loan agreement, or the loan is restructured in a troubled debt
restructuring subsequent to January 1, 1995. These Statements prescribe
recognition criteria for loan impairment, generally related to commercial
type loans and measurement methods for impaired loans. Impaired loans are
included in non-performing loans, generally as non-accrual commercial type
loans, commercial type loans past due 90 days or more and still accruing
interest, and all loans restructured in a troubled debt restructuring
subsequent to January 1, 1995.
The allowance for loan losses related to impaired loans is based on
discounted cash flows using the loan's initial effective rate or the fair
value of the collateral for certain loans where repayment of the loan is
expected to be provided solely by the underlying collateral (collateral
dependent loans). The Company's impaired loans are generally collateral
dependent. The Company considers estimated cost to sell, on a discounted
basis, when determining the fair value of collateral in the measurement of
impairment if those costs are expected to reduce the cash flows available
to repay or otherwise satisfy the loans.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level estimated by
management to provide adequately for probable losses inherent in the loan
portfolio. The quality and collectibility of the loans are reviewed monthly
and graded by the applicable subsidiary loan officers. A continuous review
of loan quality and accuracy of grading is conducted independently by the
Company's loan review function. The adequacy of the allowance is monitored
monthly and is based on the grading and continuing review of individual
loans, the present and expected level of non-performing loans, delinquency
levels, past loss experience and economic conditions which may affect the
borrowers' ability to repay their loans. As a result of the test of
adequacy, required additions to the allowance for loan losses are made
periodically by charges to the provision for loan losses.
Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on loans,
future additions to the allowance for loan losses may be necessary based on
changes in economic conditions or changes in the value of properties
securing loans in the process of foreclosure. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies
may require the Company to recognize additions to the allowance for loan
losses based on their judgments about information available to them at the
time of their examination which may not be currently available to
management.
Mortgage Banking
Loan servicing revenues and expenses are recognized when service fees
are earned and expenses are incurred. Gains or losses on sales of mortgage
loans are recognized based upon the difference between the selling price
and the carrying value of the related mortgage loans sold. Such gains or
losses are increased or decreased by the amount of capitalized mortgage
servicing rights. Net deferred origination fees and costs are recognized at
the time of sale in the gain or loss determination. The mortgage loans
being serviced for others are not included in these consolidated financial
statements as they are not assets of the Company. Mortgage loans held for
sale are stated at the lower of aggregate cost or aggregate fair value as
determined by outstanding commitments from investors or current market
prices for loans with no sale commitments.
The Company adopted SFAS No. 122, "Accounting for Mortgage Servicing
Rights" in 1996. Effective January 1, 1997, SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities", superseded SFAS No. 122 and was adopted by the Company. SFAS
No. 125 requires that entities recognize as separate assets, the rights to
service mortgage loans for others, regardless of how those servicing rights
are acquired. Additionally, SFAS No. 125 requires that the capitalized
mortgage servicing rights be assessed for impairment based on the fair
value of those rights, and that impairment, if any, be recognized through a
valuation allowance.
The Company purchases mortgage servicing rights separately or it may
acquire mortgage servicing rights by purchasing or originating mortgage
loans and selling those loans with servicing rights retained. Purchased
mortgage servicing rights are capitalized at the cost to acquire the
rights. Originated mortgage servicing rights are capitalized based on the
allocated cost of the servicing rights, derived from a relative fair value
calculation, described below. Originated and purchased mortgage servicing
rights are carried at the lower of the capitalized amount, net of
accumulated amortization or fair value. Capitalized mortgage servicing
rights are amortized into servicing fee income in proportion to, and over
the period of, estimated net servicing income.
SFAS No. 125 requires that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing rights based on
relative fair values. To determine the fair value of mortgage servicing
rights, the Company uses a valuation model that calculates the present
value of future net servicing income. In using this valuation method, the
Company incorporates assumptions that it believes market participants would
use in estimating future net servicing income, which include estimates of
the cost of servicing, the discount rate, mortgage escrow earnings rate, an
inflation rate, ancillary income, prepayment speeds and default rates and
losses.
SFAS No. 125 requires enterprises to measure the impairment of
capitalized servicing rights based on the difference between the carrying
amount and current estimated fair value of the servicing rights. In
determining impairment, the Company aggregates all mortgage servicing
rights, and stratifies them based on the predominant risk characteristics
of loan type and interest rate. A valuation allowance is established for
any excess of amortized cost over the current fair value, by risk
stratification, by a charge to income. At December 31, 1998, a valuation
allowance of $500 thousand was established for impairment. There was no
allowance for impairment in the Company's capitalized mortgage servicing
rights as of December 31, 1997.
Premises, Equipment and Software
Premises, equipment and software are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed
on straight-line and various accelerated methods over the estimated useful
lives of the assets ranging from 3 years to 40 years. Leasehold
improvements are amortized over the shorter of the terms of the related
leases or the useful lives of the assets.
Other Real Estate Owned and Repossessed Assets
Other real estate owned includes both formally foreclosed and in-
substance foreclosed real properties. In-substance foreclosed properties
are those properties which the Company has taken possession of collateral
regardless of whether formal foreclosure proceedings have taken place.
Other real estate owned is recorded at the lower of the fair value of
the asset acquired less estimated costs to sell or "cost" (defined as the
fair value at initial foreclosure). At the time of foreclosure, or when
foreclosure occurs in-substance, the excess, if any, of the loan 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 in transactions accounted for using purchase
accounting. The goodwill is being amortized using the straight-line method
over the estimated period of benefit, not to exceed fifteen years.
Accumulated amortization on goodwill amounted to $16.4 million and $10.7
million as December 31, 1998 and December 31, 1997, respectively.
Intangible assets are periodically reviewed by management to assess
recoverability, and impairment is recognized as a charge to income if a
permanent loss in value is indicated.
Trust Assets
Assets held in fiduciary or agency capacities for customers of
Banknorth's trust subsidiary are not included in the accompanying
consolidated balance sheets since such assets are not assets of the
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.
On December 31, 1998, the Company adopted the provisions of SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," which amends existing disclosure requirements applicable to such
benefits. The Statement standardizes disclosure requirements to the extent
practicable and recommends a parallel format for presenting information
about pensions and other postretirement benefits. SFAS No. 132, which does
not change the measurement or recognition of these benefits, is effective
for fiscal years beginning after December 15, 1997.
Stock-Based Compensation
The Company accounts for its stock-based compensation plans in
accordance with the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. On January 1, 1996, the Company adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all stock-
based awards measured on the date of grant. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net income and pro forma net income per share
disclosures for employee stock-based grants made in 1995 and future years
as if the fair value based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosures of SFAS No. 123.
Bank-Owned Life Insurance
In the fourth quarter of 1997, Banknorth purchased $40.0 million of
bank-owned life insurance ("BOLI"). The BOLI was purchased as a financing
tool for employee benefits. The value of life insurance financing is the
tax preferred status of increases in life insurance cash values and death
benefits and the cash flow generated at the death of the insured. The
purchase of the life insurance policy results in an interest sensitive
asset on the Company's consolidated balance sheet that provides monthly
tax-free income to the Company. The largest risk to the BOLI program is
credit risk of the insurance carriers. To mitigate this risk, annual
financial condition reviews are completed on all carriers. As a result of
this transaction, the Company benefits prospectively from the tax-free
nature of income generated from the life insurance policies. BOLI is stated
on the Company's consolidated balance sheets as its current cash surrender
value. Increases in BOLI's cash surrender value are reported as other
operating income in the Company's consolidated income statements.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates for the periods in which the temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date.
The Company's policy is that deferred tax assets are reduced by a
valuation allowance if, based on the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not
be realized. In considering if it is more likely than not that some or all
of the deferred tax assets will not be realized, the Company considers
taxable temporary differences, historical taxes paid and estimates of
future taxable income.
Per Share Amounts
On December 31, 1997, the Company adopted the provisions of SFAS No.
128, "Earnings Per Share". SFAS No. 128 establishes standards for computing
and presenting earnings per share (EPS). SFAS No. 128 requires dual
presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and specifies additional
disclosure requirements.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common
shares outstanding for the period. Issuable shares (such as those related
to the directors' restricted stock units), and returnable shares (such as
restricted stock awards) are considered outstanding common shares and
included in the computation of basic EPS as of the date that all necessary
conditions have been satisfied. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity (such as the
Company's stock options).
All share and per share data has been restated to give retroactive
effect to stock splits.
Interest-Related Contracts
Banknorth uses a variety of off-balance sheet derivatives as part of
its interest rate risk management strategy. The instruments most frequently
used are interest rate swap, floor and corridor contracts. These contracts
are designated and are effective as hedges of existing risk positions.
These instruments are used to modify the repricing or maturity
characteristics of specified assets or liabilities, and are linked to the
related assets or liabilities being managed. Changes in the fair value of
the derivative are not included in the consolidated financial statements.
The net interest income or expense associated with such derivatives is
accrued and recognized as an adjustment to the interest income or interest
expense of the asset or liability being managed. The related interest
receivable or payable from such contracts is recorded in accrued interest
receivable or payable on the consolidated balance sheet. Premiums paid are
amortized as an adjustment to the interest income or interest expense of
the asset or liability being managed. Realized gains and losses, if any,
resulting from early termination of derivatives are deferred as an
adjustment to the carrying value of the hedged item and recognized as an
adjustment to the yield or interest cost of the hedged item over the
remaining term of the original swap, corridor, and floor contract.
Other Financial Instruments
The Company is a party to certain other financial instruments with
off-balance-sheet risk such as commitments to extend credit, unused lines
of credit, letters of credit and standby letters of credit, as well as
certain mortgage loans sold to investors with recourse. The Company's
policy is to record such instruments when funded.
Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities
In June 1996, the Financial Accounting Standards Board issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS No. 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are
secured borrowings. SFAS No. 125 is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after
December 31, 1996 and superseded SFAS No. 122, which is discussed above.
The adoption of SFAS No. 125 did not have a material impact on the
Company's consolidated financial statements.
Segment Reporting
During 1998, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." This Statement requires
the Company to report certain financial and other information about
significant revenue-producing segments of the business for which such
information is available, is utilized by the chief operating decision
makers and meets certain quantitative requirements as defined by this
Statement.
The Company's operations are solely in the financial services
industry and include the provision of traditional banking services. The
Company operates solely in the geographical regions of Vermont, New
Hampshire, Massachusetts and upstate New York. Management makes operating
decisions and assesses performance based on an ongoing review of its
traditional banking operations, which constitute the Company's only
reportable segment under SFAS No. 131.
Comprehensive Income
On January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." This Statement establishes standards
for reporting and display of comprehensive income and its components.
Comprehensive income includes the reported net income of a company adjusted
for items that are currently accounted for as direct entries to
shareholders' equity, such as the mark to market adjustment on securities
available for sale, foreign currency items and minimum pension liability
adjustments. At the Company, comprehensive income represents net income
plus other comprehensive income, which consists of the net change in
unrealized gains or losses on securities available for sale for the period
and minimum pension liability adjustments. Accumulated other comprehensive
income represents the net unrealized gains or losses on securities
available for sale and minimum pension liability adjustments as of the
balance sheet dates. All required disclosures under this Statement are
included in the Company's consolidated statements of changes in
shareholders' equity.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. This Statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. Management is currently evaluating the
impact of this Statement on the Company's consolidated financial
statements.
2. Mergers and Acquisitions
Evergreen Bancorp, Inc.
On December 31, 1998, the shareholders of Banknorth and Evergreen,
headquartered in Glens Falls, New York, approved a merger between the two
organizations. As of such date, Evergreen was merged with and into
Banknorth with each issued and outstanding share of Evergreen common stock,
together with associated preferred purchase rights, converted into 0.9
shares of Banknorth common stock, plus cash in lieu of any fractional share
interest. This resulted in approximately 7.9 million in additional shares
of Banknorth common stock issued, bringing Banknorth's outstanding shares
to approximately 23.2 million immediately following the merger.
Evergreen's subsidiary bank, Evergreen Bank will continue to operate
its banking business, as a wholly-owned subsidiary of Banknorth. Evergreen
Bank operates 28 offices in 8 counties in eastern upstate New York,
throughout an area extending from the Massachusetts border fifty miles
south of Albany, north to the Canadian border. Evergreen Bank serves
commercial, individual, institutional and municipal customers with a wide
range of deposit and loan products. As of December 31, 1998, Evergreen Bank
had total assets of $1.1 billion and deposits of $971.9 million.
Additionally, Evergreen's assets under trust management amounted to
approximately $500 million.
In order to effect the merger, one-time merger related expenses of
$20.1 million ($15.1 million after-tax impact) were incurred in the fourth
quarter of 1998. The majority of these expenses were employment-related
costs and data processing conversion and termination costs. Further,
approximately $700 thousand of after-tax conversion related expenses are
expected to be realized in the first quarter of 1999 as the systems
conversions are completed. At December 31, 1998, after payments of certain
one time merger related expenses, the Company had a remaining accrued
liability of approximately $15.4 million related to: compensation costs
related to severance, employment contracts and accelerated employee
benefits ($5.6 million); data processing contract termination costs ($3.9
million); investment banking fees ($3.5 million); and legal, accounting,
and other costs incidental to the merger ($2.4 million). With the exception
of certain vested employee benefits, the entire accrued liability of $15.4
million at December 31, 1998 is expected to be paid during the first
quarter of 1999.
The merger qualified as a tax-free reorganization and was accounted
for as a pooling-of-interests. At the time the merger was announced, both
companies announced the recision of their previously announced stock
repurchase programs. All financial information in this annual report has
been restated historically for the combination of the two companies.
The following table presents net interest income, net income and
earnings per share reported by each of the companies and on a combined
basis:
Years Ended December 31,
----------------------------------
1998 1997 1996
----------------------------------
Net interest income
Banknorth $121,939 $119,182 $108,868
Evergreen 42,104 42,240 41,184
----------------------------------
Combined $164,043 $161,422 $150,052
==================================
Net income
Banknorth $ 28,250 $ 30,489 $ 25,390
Evergreen 670 11,327 10,313
----------------------------------
Combined $ 28,920 $ 41,816 $ 35,703
==================================
Basic earnings per share
Banknorth $ 1.84 $ 1.95 $ 1.66
Evergreen .76 1.26 1.12
Combined 1.24 1.76 1.51
Diluted earnings per share
Banknorth $ 1.81 $ 1.93 $ 1.64
Evergreen .75 1.24 1.11
Combined 1.22 1.74 1.50
First Massachusetts Bank-Berkshires Region
On November 13, 1998, Banknorth completed the purchase from
BankBoston, N.A. of ten full-service branches, one limited service branch
and nine remote ATM locations, as well as private banking relationships
associated with the branches in the Berkshires region of Massachusetts.
In connection with the Berkshire acquisition, Banknorth paid
BankBoston, N.A. a fixed premium of $52.5 million. At the closing, the
deposits of the Berkshire branches were approximately $290.1 million,
including accrued interest. Banknorth also purchased in the transaction
commercial loans associated with the branches with a net book balance as of
November 13, 1998 of approximately $73.6 million and a portfolio of
consumer loans originated in the branches with a net book balance of $35.8
million. In addition, the Company received approximately $122.5 million in
cash as consideration for the net liabilities assumed. The Berkshire
acquisition (other than the private banking relationships) was made through
First Massachusetts Bank, N.A., a Banknorth subsidiary, headquartered in
Worcester, Massachusetts, and has extended that bank's central
Massachusetts territory westward to the border of New York State and
contiguous to the southern reach of Evergreen Bank's New York market area.
The private banking relationships associated with these branches,
which as of closing represented approximately $1.0 billion of trust and
investment assets under management, including approximately $750 million in
discretionary trust assets under management, were acquired by Banknorth's
trust and investment subsidiary, Stratevest, headquartered in Burlington,
Vermont.
The acquisition was accounted for using purchase accounting in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations" (APB No. 16). As such, both the assets acquired and
liabilities assumed have been recorded on the consolidated balance sheet of
the Company at estimated fair value as of the date of acquisition.
Goodwill, representing the excess of cost over net assets acquired, was
$54.5 million, substantially all of which is deductible for income tax
purposes, and is being amortized over fifteen years on a straight-line
basis. The one-time acquisition-related expenses of $1.8 million pre-tax,
or $1.2 million after-tax, were recorded in the fourth quarter of 1998. To
complete the transaction, Banknorth reallocated capital resources through
payment of a special dividend to Banknorth by its subsidiary banks, except
First Massachusetts, of approximately $21.5 million.
The results of operations for the branches and private banking
relationships acquired are included in Banknorth's consolidated financial
statements from the date of acquisition forward.
First Massachusetts Bank-Worcester Region
On February 13, 1996, Banknorth completed the purchase of thirteen
banking offices of Shawmut Bank, N.A. in central and western Massachusetts.
A new subsidiary, First Massachusetts Bank, N.A., ("FMB"), with principal
offices in Worcester, Massachusetts was organized to own and operate the
acquired offices. The transaction was accounted for under purchase
accounting rules and resulted in the assumption of $560.3 million in
deposits, the acquisition of $405.7 million in loans and fixed assets, and
$32.1 million in goodwill. In addition, the Company received approximately
$122.4 million in cash as consideration for the net liabilities assumed. To
complete this transaction, Banknorth issued 2,044,446 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.
The results of operations for FMB are included in Banknorth's
consolidated financial statements from the date of acquisition forward.
3. Securities Available for Sale
The amortized cost and estimated fair values of securities available
for sale are as follows:
At December 31, 1998
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
----------------------------------------------------
U.S. Treasuries and Agencies $ 165,683 $1,682 $ 98 $ 167,267
States and political subdivisions 7,806 237 - 8,043
Mortgage-backed securities 711,540 4,196 2,474 713,262
Corporate debt securities 188,154 2,483 144 190,493
--------------------------------------------------
Total debt securities 1,073,183 8,598 2,716 1,079,065
Equities and other securities 48,791 10 1 48,800
--------------------------------------------------
Total securities available for sale $1,121,974 $8,608 $2,717 $1,127,865
==================================================
At December 31, 1997
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
----------------------------------------------------
U.S. Treasuries and Agencies $ 239,524 $1,902 $ 279 $ 241,147
States and political subdivisions 5,251 112 - 5,363
Mortgage-backed securities 464,405 3,988 2,147 466,246
Corporate debt securities 200,710 1,852 176 202,386
--------------------------------------------------
Total debt securities 909,890 7,854 2,602 915,142
Equities and other securities 43,400 11 - 43,411
--------------------------------------------------
Total securities available for sale $ 953,290 $7,865 $2,602 $ 958,553
==================================================
Included in equity securities are certain non-marketable equity
securities amounting to $44.3 million and $43.4 million at December 31,
1998 and 1997, respectively, consisting of Federal Home Loan Bank and
Federal Reserve Bank equity securities. Both investments are required for
membership. Non-marketable equity securities are carried at cost.
The following table sets forth information with regard to contractual
maturities of debt securities available for sale as of December 31, 1998:
Estimated
Amortized Fair
Total Debt Securities Cost Value
- --------------------------------------------------------
(In thousands)
Within one year $ 81,872 $ 81,986
From one to five years 337,927 338,908
From five to ten years 203,768 206,014
After ten years 449,616 452,157
-------------------------
Total debt securities
available for sale $1,073,183 $1,079,065
=========================
Actual maturities may differ from contractual maturities because, in
certain cases, borrowers have the right to call or prepay obligations with
or without call or prepayment penalties.
The following table sets forth information with regard to sales
transactions of securities available for sale:
For the years ended
December 31,
-------------------------------
(In thousands) 1998 1997 1996
-------------------------------
Proceeds from sales $155,131 $5,970 $29,478
Gross realized gains from sales $ 1,076 $ 262 $ 43
Gross realized losses from sales $ 673 $ 32 $ 82
Securities available for sale with an amortized cost of approximately
$539.0 million and $442.2 million at December 31, 1998, and 1997,
respectively, were pledged to secure public deposits, securities sold under
agreements to repurchase, and for other purposes as required by law.
There were no holdings when taken in aggregate of any issuer(s) that
exceeded 10% of shareholders' equity at December 31, 1998.
4. Investment Securities Held to Maturity
The amortized cost and estimated fair values of investment securities
held to maturity are as follows:
At December 31, 1998
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
--------------------------------------------------
U.S. Treasuries and Agencies $ 3,582 $ 87 $ - $ 3,669
States and political subdivisions 11,443 785 - 12,228
Mortgage-backed securities 5,510 189 - 5,699
Corporate debt securities 10 - - 10
------------------------------------------------
Total investment securities
held to maturity $20,545 $1,061 $ - $21,606
================================================
At December 31, 1997
--------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
--------------------------------------------------
U.S. Treasuries and Agencies $29,385 $ 225 $ 5 $29,605
States and political subdivisions 13,555 826 - 14,381
Mortgage-backed securities 15,676 198 38 15,836
Corporate debt securities 10 - - 10
------------------------------------------------
Total investment securities
held to maturity $58,626 $1,249 $ 43 $59,832
================================================
The following table sets forth information with regard to contractual
maturities of debt securities held to maturity as of December 31, 1998:
Estimated
Amortized Fair
Total Debt Securities Cost Value
- -------------------------------------------------------
(In thousands)
Within one year $ 1,665 $ 1,689
From one to five years 11,450 11,937
From five to ten years 4,358 4,771
After ten years 3,072 3,209
---------------------
Total debt securities $20,545 $21,606
=====================
Actual maturities may differ from contractual maturities because, in
certain cases, borrowers have the right to call or prepay obligations with
or without call or prepayment penalties.
There were no sales of securities held to maturity in 1998, 1997 or
1996. During 1998 and 1997, certain investment securities were called
resulting in gains of $25 thousand and $37 thousand, respectively.
Investment securities with an amortized cost of approximately $10.7 million
and $38.7 million at December 31, 1998 and December 31, 1997, 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,
-------------------------
(In thousands) 1998 1997
-------------------------
Commercial, financial and agricultural, net of unamortized loan fees of $718 thousand in 1998
and $1.1 million in 1997 $ 690,170 $ 566,300
Real estate, net of unamortized loan costs of $1.3 million in 1998 and unamortized loan fees of
$80 thousand in 1997:
Residential (1-4 family) 1,041,667 1,082,235
Commercial 615,503 563,566
Construction and land development 45,704 37,778
-------------------------
Total real estate 1,702,874 1,683,579
Credit card receivables 33,205 25,669
Lease receivables, net of unearned discount of $10.9 million in 1998 and $10.7 million in 1997 79,001 76,302
Other installment, including deferred costs of $1.2 million in 1998 and $668 thousand in 1997 331,856 290,244
-------------------------
Total installment 444,062 392,215
-------------------------
Total loans 2,837,106 2,642,094
Less: allowance for loan losses 44,537 38,551
-------------------------
Net loans $2,792,569 $2,603,543
=========================
At December 31, 1998 and 1997, loans to executive officers, directors
and to associates of such persons aggregated to $29.1 million and $44.1
million, respectively. During 1998, new loans of $23.5 million were made,
and repayment of loans totaled $37.9 million. In the opinion of management,
such loans were made in the ordinary course of business on substantially
the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions. These loans do not
involve more than the normal risk of collectibility or present other
unfavorable features.
Banknorth primarily grants loans throughout the States of Vermont,
Massachusetts, New Hampshire and New York. Although the loan portfolio is
diversified, a substantial portion of its debtors' ability to repay is
dependent upon the economic conditions existing in these States. Adverse
trends in the real estate market in these States could also negatively
affect the Company's collateral position.
As of December 31, 1998 and 1997, one to four family first mortgage
loans with an approximate book value of $128.1 million and $392.3 million,
respectively, were pledged to secure borrowings from the Federal Home Loan
Bank.
Non-Performing Loans:
The following table sets forth information with regard to non-
performing loans:
At December 31,
-------------------------------
(In thousands) 1998 1997 1996
-------------------------------
Loans in non-accrual status $12,529 $18,176 $20,785
Loans contractually past
due 90 days or more and
still accruing interest 2,488 2,262 2,624
Restructured loans 5,977 42 898
-------------------------------
Total non-perform-
ing loans $20,994 $20,480 $24,307
===============================
Accumulated interest on the above non-performing loans of $921
thousand, $1.6 million, and $1.2 million, was not recognized as income in
1998, 1997, and 1996, respectively. Approximately $532 thousand, $1.1
million, and $1.1 million of interest on the above non-performing loans was
collected and recognized as income in 1998, 1997, and 1996, respectively.
Transactions in the allowance for loan losses are summarized as
follows:
For the Years Ended
December 31,
----------------------------------
(In thousands) 1998 1997 1996
----------------------------------
Balance at beginning of year $ 38,551 $ 35,913 $ 34,210
Allowance related to
purchase acquisitions 2,200 - 1,650
Provision for loan losses 9,345 9,372 7,040
Loans charged-off (11,730) (12,364) (12,040)
Recoveries on loans
previously charged-off 6,171 5,630 5,053
----------------------------------
Balance at end of year $ 44,537 $ 38,551 $ 35,913
==================================
Impaired loans are included in non-performing loans, generally as
non-accrual commercial type loans, commercial type loans past due 90 days
or more and still accruing interest and all loans restructured in troubled
debt restructurings subsequent to the adoption of SFAS No. 114. As of
December 31, 1998 and 1997, $6.0 million and $42 thousand, respectively, of
restructured loans were considered to be impaired.
At December 31, 1998 and 1997, the recorded investment in loans that
are considered to be impaired under SFAS No. 114 totaled $13.7 million and
$10.8 million, respectively, for which the related allowance for loan
losses is $2.0 million and $1.3 million, respectively. As of December 31,
1998 and 1997, there were no impaired loans which did not have an allowance
for loan losses determined in accordance with SFAS No. 114. The average
recorded investment in impaired loans during the years ended December 31,
1998, 1997 and 1996, was approximately $10.6 million, $11.9 million, and
$12.9 million, respectively. During 1998, the Company recognized interest
income on those impaired loans of $468 thousand, which included $400
thousand of interest income recognized using the cash basis method of
income recognition. During 1997, the Company recognized interest income on
those impaired loans of $895 thousand, which included $872 thousand of
interest income recognized using the cash basis method of income
recognition. During 1996, the Company recognized interest income on those
impaired loans of $834 thousand, which included $830 thousand of interest
income recognized using the cash basis method of income recognition.
6. Capitalized Mortgage Servicing Rights
The following table is a summary of activity for mortgage servicing
rights purchased and originated for the years ended December 31, 1998, 1997
and 1996:
(In thousands) Purchased Originated Total
------------------------------------
Balance at January 1, 1996 $3,311 $ 169 $ 3,480
Additions 520 883 1,403
Amortization (848) (114) (962)
-----------------------------------
Balance at January 1, 1997 $2,983 $ 938 $ 3,921
Additions 1,837 653 2,490
Amortization (885) (181) (1,066)
Sale of servicing (681) (14) (695)
-----------------------------------
Balance at December 31, 1997 $3,254 $1,396 $ 4,650
Additions 1,244 1,981 3,225
Amortization (985) (376) (1,361)
Impairment reserve (245) (255) (500)
Sale of servicing (662) (1) (663)
-----------------------------------
Balance at December 31, 1998 $2,606 $2,745 $ 5,351
===================================
The estimated fair value of the Company's capitalized mortgage
servicing rights approximates the carrying value at December 31, 1998 and
was approximately $5.6 million at December 31, 1997.
The mortgage servicing rights as of December 31, 1998 and 1997 relate
to approximately $625.1 million and $572.7 million, respectively, of
mortgage loans serviced for third parties. In addition, as of December 31,
1998 and 1997, the Company services approximately $310.0 million and $328.7
million, respectively, of mortgage loans sold to third parties prior to the
adoption of SFAS No. 122 and 125, 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,
---------------------
(In thousands) 1998 1997
---------------------
Land and land improvements $ 5,770 $ 5,796
Buildings and improvements 54,088 48,678
Equipment, fixtures, and software 50,974 46,618
---------------------
Total 110,832 101,092
Less: accumulated depreciation and
amortization 59,896 55,338
---------------------
Premises, equipment, and software, net $ 50,936 $ 45,754
=====================
Depreciation and amortization expense was approximately $6.7 million,
$6.7 million, and $5.8 million for the years ended December 31, 1998, 1997,
and 1996, respectively.
Certain premises, equipment and software are leased under non-
cancelable operating leases expiring periodically through the year 2027.
Some of these leases contain one or more renewal options. Current non-
cancelable operating leases generally require payment of real estate taxes
and/or property maintenance costs in excess of specified minimum rental
payments.
Rental expense for premises, equipment and software was approximately
$3.8 million, $3.5 million, and $3.0 million in 1998, 1997 and 1996,
respectively. Required minimum annual rental payments on non-cancelable
operating leases with original terms of one year or more consisted of the
following at December 31, 1998:
(In thousands)
1999 $ 3,868
2000 3,276
2001 2,257
2002 1,959
2003 1,675
Thereafter 7,541
-------
Total $20,576
=======
8. Other Real Estate Owned and Repossessed Assets
Other real estate owned and repossessed assets consist of the
following:
At December 31,
-----------------
(In thousands) 1998 1997
-----------------
Other real estate owned
Commercial $2,472 $1,007
Single family residential 591 722
Multi-family 179 182
Land 5 230
-----------------
Total other real estate owned 3,247 2,141
-----------------
In substance foreclosure
Multi-family 77 -
-----------------
Total in substance foreclosure 77 -
-----------------
Non real estate repossessed assets 11 654
-----------------
Total $3,335 $2,795
=================
9. Time Deposits
The approximate amount of contractual maturities of time deposits for
the years subsequent to December 31, 1998, is as follows:
(In thousands)
1999 $1,013,855
2000 194,393
2001 31,914
2002 18,273
2003 14,333
Thereafter 607
----------
Total time deposits $1,273,375
==========
10. Short-Term Borrowed Funds
As of December 31, 1998 and 1997, the Company had unused lines of
credit amounting to approximately $146.3 million and $149.3 million,
respectively, which are available primarily for overnight purchases of
Federal funds from correspondent banks primarily on an as-available basis.
Interest rates on Federal funds borrowings are determined by the federal
funds market. In addition, as of December 31, 1998 and 1997, the Company
had unused lines of credit with the Federal Home Loan Bank amounting to
$600.6 million and $408.2 million, respectively.
The Company enters into sales of securities under short term, usually
overnight, fixed coupon, repurchase agreements. Such agreements are treated
as financings, and the obligations to repurchase securities sold are
reflected as liabilities on the Company's consolidated balance sheets.
During the period of such agreements, the underlying securities are
transferred to a third party custodian's account that explicitly recognizes
the Company's interest in the securities.
The following table presents the detail of Banknorth's short-term
borrowed funds and weighted average interest rates thereon for each of the
last three years:
Securities
Federal Sold under Borrowings
Funds Agreements to from Borrowings
(Dollars in thousands) Purchased Repurchase U.S. Treasury from FHLB
------------------------------------------------------------
1998:
Ending balance $30,445 $208,511 $12,678 $ 30,000
Average amount outstanding 9,292 164,880 14,987 201,482
Maximum amount outstanding at any month end 30,445 208,511 31,046 307,000
Weighted average interest rate:
During year 5.64% 4.49% 5.18% 5.59%
End of year 5.48 3.55 4.12 5.54
1997:
Ending balance $19,800 $144,924 $22,211 $263,000
Average amount outstanding 7,769 142,527 12,570 226,720
Maximum amount outstanding at any month end 33,000 182,046 26,329 305,000
Weighted average interest rate:
During year 5.89% 4.65% 5.20% 5.69%
End of year 6.80 4.24 5.27 5.80
1996:
Ending balance $23,305 $117,500 $14,502 $129,000
Average amount outstanding 5,877 107,588 10,087 39,656
Maximum amount outstanding at any month end 39,200 117,711 25,531 129,000
Weighted average interest rate:
During year 5.76% 4.66% 5.11% 5.61%
End of year 7.74 4.83 5.16 5.47
11. Long-Term Debt
Long-term debt consists of secured term loans from the Federal Home
Loan Bank in the amounts of $66.1 million and $31.2 million at December 31,
1998 and 1997, respectively, and $8.3 million and $11.0 million of
unsecured debt from third party financial institutions at December 31, 1998
and 1997, respectively.
The following table sets forth the final maturities, outstanding
balances and weighted average interest rates of the long-term debt at
December 31, 1998:
Fixed Variable
Fixed Weighted Variable Weighted
Rate Average Rate Average
Maturity Outstanding Interest Outstanding Interest
Date Balance Rate Balance Rate
- -----------------------------------------------------------------------------
(Dollars in thousands)
1999 $ 342 6.81% $ - -%
2000 6,000 5.94 463 7.75
2001 40,176 5.95 7,800 5.63
2002 10 7.79 - -
2003 8,907 5.71 - -
2004-2013 10,627 6.83 - -
---------------------------------------------
Total $66,062 6.06% $8,263 5.74%
=============================================
The interest rate on the variable rate long-term note maturing in the
year 2001 is tied to LIBOR. The borrowings from Federal Home Loan Bank 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
-------------------------------
(In thousands) 1998 1997 1996
-------------------------------
Current tax expense $17,272 $21,416 $17,168
Deferred tax expense
(benefit) (2,757) (1,255) 488
-------------------------------
Total income tax
expense $14,515 $20,161 $17,656
===============================
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:
(In thousands) 1998 1997 1996
-------------------------------
Expense at statutory
federal tax rate $15,202 $21,692 $18,676
Increases (decreases) in tax
Expense resulting from:
Tax exempt income, net (1,780) (673) (853)
Acquisition costs 2,217 - -
Reduction in valuation
allowance (424) (487) (243)
State income tax (46) 219 1,097
Tax credits (1,158) (933) (698)
Other, net 504 343 (323)
-------------------------------
Income tax expense $14,515 $20,161 $17,656
===============================
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at December
31, 1998 and 1997 are presented below:
(In thousands) 1998 1997
-------------------
Temporary deductible items:
Differences in reporting the provision
for loan losses and loan charge offs $15,933 $13,909
Pension and deferred remuneration 9,618 8,144
Purchase accounting 1,530 1,205
Deferred net loan origination fees 410 515
Accrued medical benefits 241 227
Other 743 446
-------------------
Total gross deferred tax assets 28,475 24,446
Less valuation allowance (400) (824)
-------------------
Deferred tax assets, net of valuation
allowance 28,075 23,622
Temporary taxable items:
Lease financing 9,291 8,741
Depreciation 763 1,145
Mark-to-market for investments and
loans 386 213
Prepaid expenses 1,043 744
Mortgage servicing rights 982 510
Other 1,190 606
-------------------
Total gross deferred tax liabilities 13,655 11,959
-------------------
Net deferred tax asset at end of year 14,420 11,663
Net deferred tax assets at beginning
of year 11,663 10,408
-------------------
Deferred tax benefit for the years
ended December 31, 1998 and 1997 $ 2,757 $ 1,255
===================
Deferred tax assets are recognized subject to management's judgment
that realization is more likely than not. Based on the sufficiency of
temporary taxable items, historical taxable income, as well as estimates of
future taxable income, management believes it is more likely than not that
the entire net deferred tax asset at December 31, 1998 will be realized.
13. Employee Benefit Plans
The Corporation maintains a non-contributory defined benefit
retirement and pension plan covering substantially all employees. Benefit
payments to retired employees are based upon years of service, a percentage
of qualifying compensation during the final years of employment and an
average of social security maximum taxable earnings. The amounts
contributed to the plan are determined annually by applicable regulations.
Assets of the plan are primarily invested in listed stocks, common trust
funds maintained by the Company's trust subsidiary, The Stratevest Group,
N.A., corporate obligations and U.S. Government and Agency obligations.
Prior to December 31, 1998 the Company maintained two non-contributory
defined benefit retirement plans, the Evergreen Bancorp, Inc. Retirement
Plan and the Banknorth Group, Inc. Retirement Plan. Effective January 1,
1999, the Company merged these two plans.
The following table sets forth the plan's funded status and amounts
recognized in the consolidated balance sheets:
At December 31,
-------------------
(In thousands) 1998 1997
-------------------
Reconciliation of benefit obligation
Obligation at January 1 $43,049 $37,332
Service cost 2,502 1,940
Interest cost 3,241 2,928
Actuarial gain/loss 6,839 2,700
Benefits paid (2,157) (1,851)
-------------------
Obligation at December 31 53,474 43,049
-------------------
Reconciliation of fair value of plan
assets
Fair value of plan assets at January 1 47,029 39,928
Actual return on plan assets 8,078 8,096
Employer contribution 897 856
Benefits paid (2,157) (1,851)
-------------------
Fair value of plan assets at
December 31 53,847 47,029
-------------------
Funded status at December 31 373 3,980
Unrecognized net actuarial loss (4,636) (7,619)
Unrecognized prior service cost 448 497
Unrecognized net transition asset (291) (416)
-------------------
Accrued benefit cost $(4,106) $(3,558)
===================
Net pension costs recognized in the consolidated statements of income
for the years ended December 31, 1998, 1997, and 1996 are summarized as
follows:
(In thousands) 1998 1997 1996
-------------------------------
Components of net periodic
benefit cost
Service cost $ 2,502 $ 1,940 $ 1,644
Interest cost 3,241 2,928 2,636
Expected return on plan assets (4,147) (3,528) (4,014)
Amortization of transition
obligation (125) (124) (124)
Amortization of prior service
cost 49 49 49
Amortization of net
(gain) / loss (75) (135) 1,007
-------------------------------
Net periodic benefit cost $ 1,445 $ 1,130 $ 1,198
===============================
The actuarial assumptions used in determining the actuarial present
value of projected benefit obligations as of December 31 were as follows:
1998 1997 1996
-------------------------
Weighted-average assumptions
Discount rate 6.75% 7.00% 7.50%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 4.50% 4.50% 5.50%
In addition, the Company provides a defined benefit plan which
provides post-retirement 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 1998 and 1997
accounting for the plan is based on the level of cost sharing as of January
1, 1998 and 1997, respectively. Prior to December 31, 1998, the Company
maintained two defined benefit plans which provide post-retirement medical
benefits. Effective January 1, 1999, the Company merged these plans.
The following table presents the amounts recognized in the Company's
consolidated balance sheets:
At December 31,
-------------------
(In thousands) 1998 1997
-------------------
Accumulated post-retirement benefit
obligation
Obligation January 1 $ 4,695 $ 4,825
Service cost 174 155
Interest cost 308 323
Actuarial (gain) / loss 25 (220)
Benefits paid (354) (388)
-------------------
Obligation at December 31 4,848 4,695
-------------------
Unfunded accumulated benefit
obligation in excess of plan assets
at December 31 (4,848) (4,695)
Unrecognized net (gain) / loss 1,149 1,432
Unrecognized prior service cost 47 45
Unrecognized transition obligation 1,906 1,834
-------------------
Accrued post-retirement medical
and life benefit cost $(1,746) $(1,384)
===================
Net periodic post-retirement benefit cost recognized in the
consolidated statements of income for the years ended December 31, 1998,
1997, and 1996 are summarized as follows:
(In thousands) 1998 1997 1996
----------------------
Service cost (benefits attributed to
service during the period) $174 $155 $159
Interest costs 308 323 341
Recognition of transition obligation 244 243 243
Net amortization and deferral (11) (17) (6)
----------------------
Net periodic post retirement benefit
cost $715 $704 $737
======================
The discount rate used in determining the accumulated post-retirement
benefit obligation was 6.75%, 7.0% and 7.5% at December 31, 1998, 1997 and
1996, respectively. For measurement purposes, an 8.3 percent annual rate of
increase in the per capita cost of covered health care benefits was assumed
for fiscal 1998; the rate was assumed to decrease gradually down to 5.5%
for fiscal 2004 and remain at the level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rate one
percentage point in each year would increase the accumulated post
retirement benefit obligation as of December 31, 1998 by $399 thousand (or
by 8.4%) and the aggregate of the service and interest cost components of
the net periodic post-retirement benefit cost for fiscal 1998 by $53
thousand (or by 11.0%). Decreasing the assumed health care cost trend rate
one percentage point in each year would decrease the accumulated post-
retirement benefit obligation as of December 31, 1998 by $358 thousand (or
by 7.5%) and the aggregate of the service and interest cost components of
net periodic post-retirement benefit cost for fiscal 1998 by $46 thousand
(or by 9.6%).
The Company provides certain post-employment medical benefits to
inactive employees and accounts for these benefits in accordance with SFAS
No. 112, "Employers' Accounting for Postemployment Benefits." The charges
to expense with respect to short-term disability for the years ended
December 31, 1998, 1997, and 1996 were $170 thousand, $171 thousand, and
$157 thousand, respectively.
In addition to the Company's non-contributory defined benefit
retirement and pension plan, the Company provides supplemental employees
retirement plans to certain executives. The amount of liability recognized
in the Company's consolidated balance sheets was $6.6 million and $4.7
million at December 31, 1998 and 1997, respectively. The charges to expense
with respect to this plan amounted to $2.3 million, $1.1 million, and $751
thousand for the years ended December 31, 1998, 1997, and 1996,
respectively. Of the $2.3 million expense for 1998, $1.1 million is
included in the one time merger and acquisition expense related to the
acceleration of vesting of the Evergreen supplemental executive retirement
plan.
The Company and its subsidiaries have other benefit plans including
401(k) savings and profit sharing plans. The charges to expense with
respect to these plans amounted to $2.1 million in 1998, $1.8 million in
1997, and $1.2 million in 1996. Evergreen provided an employee stock
ownership plan (ESOP). The ESOP owns approximately 287,460 shares of
Banknorth stock. Funds for the purchase of these shares were obtained
through a borrowing from an unrelated financial institution. There was
approximately $463 thousand of unpaid principal related to this borrowing
at December 31, 1998, which is reflected as long-term debt on the Company's
consolidated balance sheet. During 1998, $270 thousand of the borrowing was
paid off by the Company releasing approximately 30 thousand shares, which
were allocated to participating employees' accounts. As of January 1, 1999,
the ESOP was merged with and into the Company's 401(k) Savings Plan.
Evergreen also had an employee stock purchase plan (ESPP), which
provided that Evergreen contribute an amount equal to 33% of each
participant's contribution up to a maximum of $100 biweekly. Contribution
under this plan amounted to $87 thousand, $81 thousand and $101 thousand
for 1998, 1997 and 1996, respectively. This plan was terminated January 1,
1999.
14. Dividend Restrictions and Regulatory Requirements
Cash and Due From Banks
Bank subsidiaries of Banknorth are required to maintain certain
reserves of vault cash and/or deposits with the Federal Reserve Bank. The
amount of this reserve requirement, included in Cash and Due from Banks,
was approximately $24.3 million and $18.5 million at December 31, 1998 and
1997, respectively.
Dividend Restrictions
The Company's ability to pay dividends to its shareholders is largely
dependent on the ability of its subsidiaries to pay dividends to the
Company. Payment of dividends by Vermont-chartered banks is subject to
applicable state and federal laws. Similarly, payment of dividends by
national banks is subject to applicable federal law. National banks must
obtain the approval of the Office of the Comptroller of the Currency for
the payment of dividends if the total of all dividends declared in any
calendar year would exceed the total of the bank's net profits, as defined
by applicable regulations, for that year, combined with its retained net
profits for the preceding two years. Furthermore, a national bank may not
pay a dividend in an amount greater than its undivided profits then on hand
after deducting its losses and bad debts, as defined by applicable
regulations.
Dividends paid by subsidiaries are the primary source of funds
available to Banknorth for payment of dividends to its shareholders, for
debt service, for expense related to capital securities, and other working
capital needs. Various laws and regulations restrict the ability of banks
to pay dividends to their shareholders. As of December 31, 1998, banking
subsidiaries were able to declare dividends to Banknorth in 1999, without
regulatory approval, of approximately $10.2 million plus an additional
amount equal to the net profits, as defined in the applicable regulations,
for 1999 through the date of any such dividend declarations, less any
required transfer to surplus.
In November 1998, in order to purchase the Berkshire branches from
BankBoston, the Company redeployed accumulated capital of $21.5 million
from certain of its subsidiary banks. Because the special dividend exceeded
applicable regulatory limitations, the Company obtained approval from the
applicable regulatory agencies for the payment of that portion of the
dividend which exceeded such regulatory limitations.
Additionally, in connection with the Evergreen merger, Evergreen Bank
paid a special dividend to the parent company. As the special dividend
exceeded applicable regulatory limitations, Evergreen Bank obtained
approval from the OCC for the payment of that portion of the dividend which
exceeded such regulatory limitations.
Payment of these 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 connection with 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) $9,580,000 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,
1998, the Company had authority to pay dividends of up to $3.9 million
under the terms of this restriction, after taking into account dividends
already paid and repurchases of the Company's stock during the calculation
period (September 30, 1996 through December 31, 1998).
Regulatory Capital Requirements
Regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at December 31, 1998, the
Company's subsidiary banks were required to maintain a minimum leverage
ratio of Tier I capital to total adjusted quarterly average assets of
4.00%; and minimum ratios of Tier I capital and total capital to risk
weighted assets of 4.00% and 8.00%, respectively. The Federal Reserve Board
("FRB") has adopted similar requirements for the consolidated capital of
bank holding companies.
Under their prompt corrective action regulations, regulatory
authorities are required to take certain supervisory actions (and may take
additional discretionary actions) with respect to an undercapitalized
institution. Such actions could have a direct material effect on an
institution's financial statements. The regulations establish a framework
for the classification of banks into five categories: well capitalized,
adequately capitalized, under capitalized, significantly under capitalized,
and critically under capitalized. Generally, an institution is considered
well capitalized if it has a Tier I (leverage) capital ratio of at least
5.0% (based on total adjusted quarterly average assets), a Tier I risk
based capital ratio of at least 6.0%, and a total risked based capital
ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific
quantitative measures of assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. Capital amounts
and classifications are also subject to qualitative judgments by the
regulatory authorities about capital components, risk weighting and other
factors.
As of December 31, 1998, the Company, on a consolidated basis, met
all capital adequacy requirements to which it is subject. Further, all of
the Company's subsidiary banks, with the exception of First Massachusetts
Bank, met all adequacy requirements which categorize each as well-
capitalized institutions. Due to the acquisition of Berkshire branch
offices by First Massachusetts Bank in the fourth quarter of 1998, this
subsidiary has temporarily been placed in the adequately-capitalized
classification.
The following is a summary of the Company's significant subsidiary
banks' and the Company's (on a consolidated basis) actual capital amounts
and ratios as of December 31, 1998 and 1997 compared to the regulatory
minimum capital adequacy requirements and the regulatory requirements for
classification as a well-capitalized institution:
At December 31, 1998
Regulatory
Ratio Requirements
--------------------------
For
Actual Minimum Classification
----------------- Capital as Well
(Dollars in thousands) Amount Ratio Adequacy Capitalized
-----------------------------------------------
Tier I (leverage) Capital:
Evergreen Bank, N.A. $ 66,062 5.92% 4.00% 5.00%
The Howard Bank, N.A. 54,952 7.39 4.00 5.00
First Massachusetts
Bank, N.A. 48,366 5.49 4.00 5.00
First Vermont Bank and
Trust Co. 48,062 7.28 4.00 5.00
Banknorth Group, Inc.
(consolidated) 267,349 6.43 4.00
Tier I Risk Based Capital:
Evergreen Bank, N.A. $ 66,062 9.81% 4.00% 6.00%
The Howard Bank, N.A. 54,952 8.80 4.00 6.00
First Massachusetts
Bank, N.A. 48,366 7.18 4.00 6.00
First Vermont Bank and
Trust Co. 48,062 8.98 4.00 6.00
Banknorth Group, Inc.
(consolidated) 267,349 8.75 4.00
Total Risk Based Capital:
Evergreen Bank, N.A. $ 74,527 11.07% 8.00% 10.00%
The Howard Bank, N.A. 62,781 10.05 8.00 10.00
First Massachusetts
Bank, N.A. 56,791 8.43 8.00 10.00
First Vermont Bank and
Trust Co. 54,762 10.23 8.00 10.00
Banknorth Group, Inc.
(consolidated) 305,546 10.00 8.00
At December 31, 1997
Regulatory
Ratio Requirements
--------------------------
For
Actual Minimum Classification
----------------- Capital as Well
(Dollars in thousands) Amount Ratio Adequacy Capitalized
-----------------------------------------------
Tier I (leverage) Capital:
Evergreen Bank, N.A. $ 82,176 8.20% 4.00% 5.00%
The Howard Bank, N.A. 55,562 8.01 4.00 5.00
First Massachusetts
Bank, N.A. 53,266 7.12 4.00 5.00
First Vermont Bank and
Trust Co. 49,431 8.05 4.00 5.00
Banknorth Group, Inc.
(consolidated) 313,835 8.18 4.00
Tier I Risk Based Capital:
Evergreen Bank, N.A. $ 82,176 12.90% 4.00% 6.00%
The Howard Bank, N.A. 55,562 9.75 4.00 6.00
First Massachusetts
Bank, N.A. 53,266 10.12 4.00 6.00
First Vermont Bank and
Trust Co. 49,431 9.75 4.00 6.00
Banknorth Group, Inc.
(consolidated) 313,835 11.30 4.00
Total Risk Based Capital:
Evergreen Bank, N.A. $ 90,186 14.20% 8.00% 10.00%
The Howard Bank, N.A. 65,690 11.00 8.00 10.00
First Massachusetts
Bank, N.A. 58,606 11.14 8.00 10.00
First Vermont Bank and
Trust Co. 55,772 11.00 8.00 10.00
Banknorth Group, Inc.
(consolidated) 348,547 12.55 8.00
15. Shareholders' Equity
Stock Split
On February 24, 1998, the Board of Directors of Banknorth declared a
2-for-1 split of its common stock effected in the form of a 100% stock
dividend. The stock split was recorded as of December 31, 1997 by a
transfer of $7.8 million from capital surplus to common stock, representing
the $1.00 par value for each additional share issued.
On August 15, 1996, the Board of Directors of the Evergreen Bancorp,
Inc. approved a 2-for-1 split effected in the form of a 100% stock dividend
and was recorded by a transfer of $4.3 million from capital surplus to
common stock. All per share data has been restated to reflect the splits.
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 $17.50. If any person or group acquires 20% or more of
the Corporation's common stock the Rights will entitle a holder (other than
such person or any member of such group) to buy a number of additional
shares of common stock of the Corporation having a market value of twice
the exercise price of each Right.
Following the acquisition by any person or group of 20% or more of
the Corporation's common stock, but only prior to the acquisition by a
person or group of a 50% stake, the Board of Directors will also have the
ability to exchange the Rights (other than Rights held by such person or
group), in whole or in part, for one share of common stock per right.
If the Corporation is involved in a merger or other business
combination at any time after a person or group has acquired 20% or more of
the Corporation's common stock, the Rights will entitle the holder to buy a
number of shares of common stock of the acquiring company having a market
value of twice the exercise price of each right.
Prior to the acquisition by a person or group of 20% or more of the
Corporation's common stock, at the option of the Board of Directors the
Rights are redeemable for one cent per Right. The Board of Directors is
also authorized to reduce the 20% threshold to not less than 10%.
16. Earnings Per Share
The following table provides calculations of basic and diluted
earnings per share:
For the years ended December 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Net Average Per Share Net Average Per Share Net Average Per Share
Income Shares Amount Income Shares Amount Income Shares Amount
---------------------------------------------------------------------------------------------------
(Dollars in thousands, except for share and per share data)
Basic earnings per share $28,920 23,277,560 $1.24 $41,816 23,705,320 $1.76 $35,703 23,626,266 $1.51
-------------------------------------------------------------------------------------------------
Effect of dilutive securities
Stock options 363,645 312,470 226,494
Restricted stock awards 28,335 25,010 8,122
-------------------------------------------------------------------------------------------------
Diluted earnings per share $28,920 23,669,540 $1.22 $41,816 24,042,800 $1.74 $35,703 23,860,882 $1.50
=================================================================================================
17. Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Debentures
On May 1, 1997, Banknorth established Banknorth Capital Trust I (the
"Trust") which is a statutory business trust formed under Delaware law upon
filing a certificate of trust with the Delaware Secretary of State. The
Trust exists for the exclusive purposes of (i) issuing and selling 30 year
guaranteed preferred beneficial interests in Corporation junior subodinated
debentures ("capital securities") in the aggregate amount of $30.0 million
at 10.52%, (ii) using the proceeds from the sale of the capital securities
to acquire the junior subordinated debentures issued by the Parent Company
and (iii) engaging in only those other activities necessary, advisable or
incidental thereto. The junior subordinated debentures are the sole assets
of the Trust and, accordingly, payments under the corporation obligated
junior debentures are the sole revenue of the Trust. All of the common
securities of the Trust are owned by the Parent Company. The Parent Company
has used the net proceeds from the sale of the capital securities for
general corporate purposes. The capital securities, with associated expense
that is tax deductible, qualify as Tier I capital under regulatory
definitions. The Company's primary source of funds to pay interest on the
debentures owed to the trust are current dividends from subsidiary banks
and interest income on loans made by the Parent Company to certain of its
subsidiary banks. Accordingly, the Parent Company's ability to service the
debentures is dependent upon the continued ability of the subsidiary banks
to pay dividends and service their debt obligations to the Parent Company.
Since the capital securities are not classified as debt for financial
statement purposes, the expense associated with the capital securities is
recorded as non-interest expense on the consolidated statements of income,
consistent with practice generally followed by issuers of this type of
security.
18. Long-Term Incentive Plan
In May 1997, the shareholders of Banknorth approved the 1997 Equity
Compensation Plan (the "Plan") which replaced the Banknorth Group, Inc.
Comprehensive Long-Term Executive Incentive Plan approved by the
shareholders of Banknorth in May 1990. No additional awards will be made
under the 1990 plan. The Plan authorizes the granting of stock option
awards, stock appreciation rights, restricted stock awards and restricted
stock units to employees and directors of the Corporation and/or
subsidiaries. The Plan is administered by the Corporation's Board of
Directors. Persons eligible to participate are chosen by the Board of
Directors. Subject to adjustments described in the Plan, the total number
of shares of Banknorth common stock that may be issued pursuant to the Plan
may not exceed 1,050,000. Such shares may be either newly-issued shares or
previously issued shares that have been reacquired by the Corporation.
Stock Options
The exercise price of each option equals the market price of the
Company's stock on the date of grant, and an option's maximum term is ten
years. Options vest over a two year period from the date the options are
granted. The Company applies APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for its stock option awards and,
accordingly, no compensation cost has been recognized for its stock-based
compensation awards ("awards") in the consolidated statements of income.
A summary of the status of the Company's fixed stock options as of
December 31, 1998, 1997, and 1996, and changes during the years ended on
those dates is presented below:
1998 1997 1996
------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Fixed Options Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,191,289 $15.37 1,182,089 $12.42 837,970 $ 9.89
Granted 289,650 32.13 328,727 21.94 487,039 15.73
Exercised (255,457) 12.76 (272,304) 10.14 (132,920) 8.40
Forfeited (13,000) 19.91 (47,223) 17.34 (10,000) 14.75
-----------------------------------------------------------------
Outstanding at end of year 1,212,482 19.88 1,191,289 15.37 1,182,089 12.42
=================================================================
Options exercisable at end of year 617,730 608,712 542,050
=================================================================
Weighted-average fair value of options
granted during the year $ 7.69 $ 5.09 $ 3.93
=================================================================
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------- ----------------------
Weighted Avg. Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Life Price at 12/31/98 Price
----------------------------------------------------------------------------------
$ 4.50 to 8 54,818 4.8 Years $ 7.50 54,818 $ 7.50
8 to 12 155,955 5.7 9.71 155,955 9.71
12 to 17 414,237 7.5 14.95 396,957 14.87
17 to 27 367,837 8.7 22.13 10,000 19.00
27 to 37 219,635 9.5 35.47 - -
-------------------------------------------------------------
$4.50 to 37 1,212,482 7.8 $19.88 617,730 $13.07
=============================================================
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 basic
and diluted earnings per share would have been reduced to the pro forma
amounts indicated below:
(In thousands, except per share data) 1998 1997 1996
-------------------------------
Net income As reported $28,920 $41,816 $35,703
Pro forma 28,172 41,211 34,716
Basic earnings per share As reported $ 1.24 $ 1.76 $ 1.51
Pro forma 1.21 1.74 1.48
Diluted earnings per share As reported 1.22 1.74 1.50
Pro forma 1.19 1.71 1.46
Pro forma net income reflects only awards granted in 1998, 1997 and
1996. Therefore, the full impact of calculating compensation cost for
awards under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
awards' vesting period and compensation cost for awards granted prior to
January 1, 1996 is not considered.
The fair value of each award grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1998, 1997 and 1996:
July December July July
1998 1997 1997 1996
---------------------------------------
Dividend yield 2.35% 2.26% 2.61% 3.13%
Expected volatility 25.95% 18.28% 20.55% 24.02%
Risk-free interest rate 4.50% 6.00% 5.50% 6.14%
Expected life 5 years 5 years 5 years 5 years
Restricted Stock Awards
Additionally, variable restricted stock awards were granted in each
year since 1992, along with restricted stock units worth 50% of the value
of the underlying shares, to executive officers chosen by the Corporation's
board of directors. At December 31, 1998, restricted stock outstanding
amounted to 85,800 shares. The following are the terms of the restricted
stock awards granted:
July 28, 1998: Variable restricted stock awards of 7,000 shares were
granted and are outstanding as of December 31, 1998.
Vesting for the 1998 shares and the units requires
continuous service through July 28, 2003. In addition,
vesting of 25% of both the shares and the units occurs for
the 1998 awards each year between 1998 and 2002 in which the
return on average equity is equal to or greater than 13% and
return on average assets is equal to or greater than 1.1% to
a maximum vesting of 100%.
July 22, 1997: Variable restricted stock awards of 13,000 shares were
granted and are outstanding as of December 31, 1998.
Vesting for the 1997 shares and the units requires
continuous service through July 22, 2002. In addition,
vesting of 25% of both the shares and the units occurs for
the 1997 awards each year between 1997 and 2001 in which
the return on average equity is equal to or greater than
13% and return on average assets is equal to or greater
than 1.1% to a maximum vesting of 100%.
July 23, 1996: Variable restricted stock awards of 22,800 shares were
granted and are outstanding as of December 31, 1998.
Vesting for the 1996 shares and the units requires
continuous service through July 23, 2001. In addition,
vesting of 25% of both the shares and the units occurs for
the 1996 awards each year between 1996 and 2000 in which
the return on average equity is equal to or greater than
13% and return on average assets is equal to or greater
than 1.1% to a maximum vesting of 100%.
July 25, 1995: Variable restricted stock awards of 25,000 shares were
granted and are outstanding as of December 31, 1998.
Vesting for the 1995 shares and the units requires
continuous service through July 25, 2000. In addition,
vesting of 25% of both the shares and the units occurs for
the 1995 awards each year between 1995 and 1999 in which
the return on average equity is equal to or greater than
13% and return on average assets is equal to or greater
than 1.1% to a maximum vesting of 100%.
July 26, 1994: Variable restricted stock awards of 21,000 shares were
granted, 3,000 shares were forfeited during 1994, and
18,000 shares were outstanding as of December 31, 1998.
Vesting for the 1994 shares and the units requires
continuous service through July 26, 1999. In addition,
vesting of 25% of both the shares and the units occurs for
the 1994 awards each year between 1994 and 1998 in which
the return on average equity is equal to or greater than
12% and return on average assets is equal to or greater
than 1.0% to a maximum vesting of 100%.
July 27, 1993: Variable restricted stock awards of 21,000 shares were
granted, 3,000 shares were forfeited during 1994, and the
remaining 18,000 shares were fully vested on July 27, 1998.
Restrictions are generally not 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 generally forfeited. For the years ended December 31, 1998,
1997, and 1996, compensation expense related to these restricted stock
awards and units amounted to $1.1million, $1.3 million, and $475 thousand,
respectively.
19. Commitments, Off-Balance Sheet Risk and
Contingent Liabilities
Commitments and Off-Balance-Sheet Risk
Banknorth and its subsidiaries are parties to financial instruments
with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers and to facilitate asset/liability
management. These financial instruments include interest rate swaps, floors
and corridors, commitments to extend credit, unused lines of credit,
letters of credit, standby letters of credit, and loans sold with recourse.
These instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized on the 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, unused lines of credit, letters of credit, standby letters
of credit and loans sold with recourse is represented by the contractual or
notional amount of these instruments. The Corporation uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Unless otherwise noted, the Corporation does not require collateral
or other security to support off-balance-sheet financial instruments with
credit risk.
Commitments to extend credit and unused lines of credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments and lines of credit
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since certain of the commitments and lines of
credit are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
The Corporation evaluates each customer's creditworthiness on a case by
case basis. The amount and type of collateral deemed necessary upon
extension of credit is based upon management's credit evaluation and is
consistent with existing credit policies for collateral of on-balance-sheet
instruments. Collateral varies but may include accounts receivable,
inventory, property, plant and equipment, income producing commercial
properties, and residential real estate.
The Company may enter into rate lock agreements which fix the
interest rate at which the loan, if ultimately made, will be originated.
Such agreements may be made with borrowers with whom commitments to extend
credit have been made, as well as with individuals who have applied for
mortgage loans and have not yet received a commitment. These rate lock
agreements expose the Company to interest rate risk given the possibility
that rates may change between the date of the rate lock agreements and the
date that the related loans, if ultimately originated, are sold. In
addition, the portfolio of mortgage loans held for sale expose the Company
to interest rate risk. At December 31, 1998 and 1997, 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 $57.0 million, and $27.0 million, respectively. In order
to limit the interest rate risk associated with rate lock agreements as
well as the interest rate risk associated with mortgage loans held for
sale, the Company enters into various agreements to sell loans in the
secondary mortgage market at fixed interest rates. Banknorth and its
subsidiaries have outstanding various commitments to sell real estate
mortgages amounting to approximately $49.1 million at December 31, 1998,
and $21.0 million at December 31, 1997.
Letters of credit and standby letters of credit are conditional
commitments issued by the Corporation to guarantee payment on behalf of a
customer and guarantee the performance of a customer to a third party. The
credit risk involved in issuing these instruments is essentially the same
as that involved in extending loans to customers. Since a portion of these
instruments will likely expire unused, the total amounts do not necessarily
represent future cash requirements. Each customer is evaluated individually
for creditworthiness under the same underwriting standards used for
commitments to extend credit and on-balance-sheet instruments. Corporate
policies governing loan collateral apply to letters of credit and standby
letters of credit at time of credit extension.
The Corporation has sold mortgage loans where the investor has
limited recourse to the Corporation as issuer. These loans represent normal
exposure to credit loss exhibited by residential mortgage loans. Generally,
the mortgage notes are secured by liens on the real estate and by private
mortgage insurance where the loan to value ratio exceeds 80% at the time of
extension of credit.
Certain mortgage loans are written on an adjustable basis and include
interest rate caps which limit annual and lifetime increases in the
interest rates on such loans. Generally, adjustable rate mortgages have an
annual rate increase cap of 2% and a lifetime rate increase cap of 5% to
6%. Interest rates charged on home equity lines of credit are also capped.
The home equity interest rate cap is 18% for the Company. In addition, all
other consumer loans are subject to statutory interest rate ceilings as
imposed by the State of Vermont and State of New York. No statutory
interest rate ceilings on consumer loans are imposed by the States of New
Hampshire or Massachusetts. At December 31, 1998, the State of Vermont
imposed ceilings ranged from 18% to 24% depending on the loan amount and
underlying collateral on consumer loans. The State of New York imposes
ceilings of 16% to 25% depending on the type of consumer loan. These caps
expose the Corporation to interest rate risk should market rates increase
above these limits. As of December 31, 1998 and 1997, respectively, $504.3
million and $564.2 million of loans had interest rate caps.
Financial instruments with off-balance-sheet credit risk are as
follows:
As of December 31, 1998
-----------------------------------
(In thousands) Fixed Variable Total
-----------------------------------
Financial instruments whose contract amounts represent maximum
credit risk-non-trading instruments:
Commitments to extend credit for mortgage loans held for sale $30,307 $ 5,007 $ 35,314
Commitments to extend credit 36,009 115,634 151,643
Unused lines of credit - 751,428 751,428
Letters of credit and standby letters of credit - 76,568 76,568
Mortgage loans sold with recourse 1,096 520 1,616
-----------------------------------
Total non-trading instruments $67,412 $949,157 $1,016,569
===================================
Financial instruments whose notional amounts exceed the amount of
credit risk:
Interest rate swap agreements (pay fixed) $50,000 $ - $ 50,000
===================================
Interest rate floor agreements (pay variable) $ - $295,000 $ 295,000
===================================
Interest rate corridor agreements (pay fixed) $50,000 $ - $ 50,000
===================================
As of December 31, 1997
-----------------------------------
(In thousands) Fixed Variable Total
-----------------------------------
Financial instruments whose contract amounts represent maximum
credit risk-non-trading instruments:
Commitments to extend credit for mortgage loans held for sale $13,442 $ 4,415 $ 17,857
Commitments to extend credit 10,450 81,666 92,116
Unused lines of credit - 526,731 526,731
Letters of credit and standby letters of credit - 67,469 67,469
Mortgage loans sold with recourse 1,259 82 1,341
-----------------------------------
Total non-trading instruments $25,151 $680,363 $ 705,514
===================================
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
===================================
Interest Rate Hedging Contracts
Interest rate hedging transactions generally involve the exchange of
fixed and variable rate interest payment obligations without the exchange
of the underlying principal (or notional) amounts. The Corporation's swaps,
corridors and floors are used as an interest rate risk management tool to
correct imbalances between the re-pricing characteristics of certain
interest earning assets and certain interest-bearing liabilities, thus
protecting the net interest income from adverse changes in interest rates.
The Corporation is exposed to risk should the counterparty default in
its responsibility to pay interest under the terms of the agreement.
However, Banknorth minimizes this risk by performing normal credit reviews
on the counterparties and by limiting its exposure to any one counterparty.
Notional principal amounts are a measure of the volume of agreements
transacted, but the level of credit risk is significantly less. As of
December 31, 1998, the Company does not expect any counterparties to fail
to meet their obligations.
The following provides information related to interest rate hedging
instruments as of December 31, 1998 and 1997 and for the years then ended:
(In thousands) 1998 1997
--------------------
Interest Rate Swap Contracts:
Notional amount at end of period $ 50,000 $ 50,000
Average notional amount during the year 20,274 50,000
Fair value at year-end 292 328
Weighted average rate paid at end of year 4.99% 5.84%
Weighted average rate received at end of year 5.18% 6.37%
Interest Rate Floor Contracts:
Notional amount at end of period $295,000 $295,000
Average notional amount during the year 295,000 295,000
Carrying value at year-end 920 1,486
Fair value at year-end 3,057 2,516
Weighted average rate paid at end of year 5.29% 5.84%
Weighted average rate received at end of year 5.99% 5.69%
Interest Rate Corridor Contracts:
Notional amount at end of period $ 50,000 $ -
Average notional amount during the year 1,370 -
Carrying value at year end 393 -
Fair value at year-end 440 -
As of December 31, 1998, the maturity dates of the interest rate swap
agreements ranged from December 21, 2001 to February 21, 2002. The maturity
dates of the interest rate corridor agreements were December 21, 2003. The
maturity dates of the interest rate floor agreements ranged from January
31, 2000 to June 4, 2001.
Data Processing Contract
Effective June 24, 1998, the Company entered into a facilities
management contract with a third-party data processing company. Under terms
of the facilities management contract, the Company will pay a minimum of
$6.6 million for the remainder of the contract, which expires in December,
2000. In addition, fees will be adjusted annually for inflation, based upon
the Consumer Price Index for all Urban Consumers-All Items, and based upon
actual increases of certain expenditures made on behalf of the Company by
the third-party data processing company, with no increase to exceed eight
percent, or be less than two percent.
Required minimum annual payments under these contracts were as
follows at December 31, 1998:
(In thousands)
1999 $3,320
2000 3,276
------
$6,596
======
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 $125 thousand per employee on medical and dental
claims.
In the ordinary course of business there are various legal
proceedings pending against Banknorth. After consultation with outside
counsel, management considers that the aggregate exposure, if any, arising
from such litigation would not have a material adverse effect on
Banknorth's consolidated financial position.
20. Disclosures About the Fair Value of
Financial Instruments
Disclosure About Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires that the Company disclose estimated fair values for financial
instruments. Fair value estimates, methods, and assumptions are set forth
below.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a significant
portion of the Company's financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates are based on existing on and off-balance-sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Company has a
substantial trust operation that contributes net fee income annually. The
trust operation is not considered a financial instrument, and its value has
not been incorporated into the fair value estimates. Other significant
assets and liabilities include the mortgage banking operation, benefits
resulting from the low-cost funding of deposit liabilities as compared to
the cost of borrowing funds in the market, and premises and equipment and
software. In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimate of fair value under
SFAS No. 107.
Short-Term Financial Instruments
The fair value of certain financial instruments is estimated to
approximate their carrying value because the remaining term to maturity of
the financial instrument is less than 90 days or the financial instrument
reprices in 90 days or less. Such financial instruments include cash and
due from banks, money market investments, accrued interest receivable,
accrued interest payable and short-term borrowed funds.
Securities Available for Sale and Investment Securities
Held to Maturity
The securities portfolios are financial instruments which are usually
traded in broad markets. Fair values are based upon market prices and
dealer quotations. If a quoted market price is not available for a
particular security, the fair value is determined by reference to quoted
market prices for securities with similar characteristics.
Loans Held For Sale
Estimated fair value of loans held for sale is determined based upon
outstanding commitments from investors or current market prices for amounts
with no sales commitments.
Loans
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 and Corridor Agreements
The estimated fair value of interest rate floor and corridor
agreements are obtained from dealer quotes. These values represent the
estimated amount the Company would receive or pay to terminate the
agreements, taking into account current interest rates and, when
appropriate, the current creditworthiness of the counterparties.
Deposit Liabilities
The estimated fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings, NOW and money market
accounts, is regarded to be the amount payable on demand as of December 31,
1998 and 1997. The estimated fair value of time deposits is based on the
discounted value of contractual cash flows. The discount rate is estimated
using the rates currently offered for deposits of similar remaining
maturities. The fair value estimates for deposits do not include the
benefit that results from the low-cost funding provided by the deposit
liabilities as compared to the cost of borrowing funds in the market.
Long-Term Debt
The fair value for the Company's long-term debt is estimated based on
the quoted market prices for the same or similar issues.
Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Debentures
The estimated fair value of the capital securities are obtained from
dealer quotes.
Table of On-Balance-Sheet Financial Instruments
The carrying value and estimated fair values of financial instruments
were as follows:
December 31, 1998 December 31, 1997
------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
------------------------------------------------------
Financial Assets:
Cash and due from banks $ 164,826 $ 164,826 $ 112,297 $ 112,297
Money market investments 4,900 4,900 71 71
Securities available for sale 1,127,865 1,127,865 958,553 958,553
Loans held for sale 42,996 43,321 24,958 25,055
Investment securities, held to maturity 20,545 21,606 58,626 59,832
Loans 2,837,106 2,842,959 2,642,094 2,638,335
Less: Allowance for loan losses 44,537 - 38,551 -
-------------------------------------------------------
Net loans 2,792,569 2,842,959 2,603,543 2,638,335
Accrued interest receivable 21,244 21,244 23,277 23,277
Interest rate floor and corridor agreements 1,313 3,497 1,486 2,516
Financial Liabilities:
Deposits:
Demand, NOW, savings and money market accounts $2,366,122 $2,366,122 $1,850,980 $1,850,980
Time deposits 1,273,375 1,277,906 1,202,654 1,208,633
Short-term borrowed funds 281,634 281,634 449,935 449,935
Long-term debt 74,325 76,158 42,249 42,926
Accrued interest payable 7,101 7,101 7,530 7,530
Guaranteed preferred beneficial interests in Corporation's
junior subordinated debentures 30,000 34,284 30,000 33,638
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, 1998 and
1997, the fair value was estimated at $93 thousand and $12 thousand for
commitments to extend credit and $87 thousand and $147 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, 1998 and 1997 were $1.7
million in both years.
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, 1998 and 1997 was $292 thousand and
$328 thousand, respectively.
21. Parent Company Only Financial Statements
The following information presents the financial position of
Banknorth Group, Inc. (Parent Company) at December 31, 1998 and 1997 and
the results of its operations and cash flows for each of the years in the
three-year period ended December 31, 1998:
BALANCE SHEETS
December 31,
---------------------
(In thousands) 1998 1997
---------------------
Assets
Cash and due from subsidiary banks $ 76 $ 50
Securities purchased under agreements to resell to a subsidiary bank 18,317 4,737
---------------------
Cash and cash equivalents 18,393 4,787
Investment in equity of bank subsidiaries 333,860 322,911
Investment in equity of non-bank subsidiaries 1,268 1,257
Securities available for sale, at fair value 6,039 15,126
Loans to bank subsidiaries - 10,438
Premises, equipment and software, net 11,601 11,480
Other assets 10,270 9,137
---------------------
Total assets $381,431 $375,136
=====================
Liabilities & Shareholders' Equity
Long-term debt $ 8,263 $ 11,040
Other liabilities 20,978 15,040
Liability to trust subsidiary related to capital securities 30,928 30,928
Total shareholders' equity 321,262 318,128
---------------------
Total liabilities & shareholders' equity $381,431 $375,136
=====================
STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------
(In Thousands) 1998 1997 1996
---------------------------------
Income:
Dividends from bank subsidiaries $ 62,559 $25,848 $ 67,965
Service fees paid by subsidiaries 33,875 32,685 28,791
Interest income on loans from bank subsidiaries 397 1,025 -
Other interest income 1,259 1,047 310
Net securities transactions 164 220 -
Other income 2,133 2,069 1,313
---------------------------------
Total income 100,387 62,894 98,379
Expenses:
Compensation 16,067 15,459 14,015
Employee benefits 3,616 4,192 3,178
Net occupancy 2,161 2,005 1,510
Equipment and software 4,004 4,002 3,651
Printing and supplies 1,003 1,123 1,261
Legal and other professional 1,703 1,609 1,635
Data processing 4,541 4,895 4,545
Directors' fees and expenses 857 895 531
Communications 545 521 465
Training and education 617 591 592
Postage 745 899 888
Interest 714 922 1,372
Interest on liability to trust subsidiary related to capital securities 3,254 2,169 -
Merger and acquisition related expenses 7,293 - -
Other expenses 2,294 2,193 2,518
---------------------------------
Total expenses 49,414 41,475 36,161
Income before income tax benefit and equity in undistributed (distributions in
excess of) income of subsidiaries 50,973 21,419 62,218
Income tax benefit (2,070) (1,707) (2,501)
---------------------------------
Income before equity in undistributed (distributions in excess of) income of bank
subsidiaries 53,043 23,126 64,719
Equity in undistributed (distributions in excess of) income of bank subsidiaries (24,135) 18,630 (29,058)
Equity in undistributed income of non-bank subsidiaries 12 60 42
---------------------------------
Net income $ 28,920 $41,816 $ 35,703
=================================
STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------
(In thousands) 1998 1997 1996
----------------------------------
Increase in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 28,920 $ 41,816 $ 35,703
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premise, equipment and software 1,826 1,711 1,492
Amortization of employee restricted stock, net 797 769 438
Issuance of restricted stock units under directors' deferred compensation
plan, net 348 100 -
Net securities transactions (164) (220) -
Decrease in interest payable (25) (10) (27)
Decrease (increase) in other assets (1,031) (7,933) 472
Increase in accrued expense and other liabilities 5,688 4,731 3,083
ESOP compensation expense 177 168 159
Equity in undistributed distribution in excess of (income of subsidiaries) 24,123 (18,690) 29,016
----------------------------------
Total adjustments 31,739 (19,374) 34,633
----------------------------------
Net cash provided by operating activities 60,659 22,442 70,336
----------------------------------
Cash flows from investing activities:
Proceeds from maturity of securities available for sale 4,556 1,346 250
Proceeds from sale of securities available for sale 4,478 325 -
Purchase of securities available for sale - (15,963) -
Decrease (increase) in loans to subsidiaries 10,438 (11,705) (883)
Decrease (increase) in investment in equity of subsidiaries (34,498) 3,794 (75,471)
Capital expenditures (1,952) (2,211) (2,466)
----------------------------------
Net cash used in investment activities (16,978) (24,414) (78,570)
----------------------------------
Cash flows from financing activities:
Purchase of treasury stock (17,337) (15,871) (5,992)
Fractional shares repurchased (17) - -
Issuance of liability to trust subsidiary related to capital securities - 30,000 -
Issuance of common stock, net of expenses - - 32,216
Payments on long-term debt (2,776) (2,696) (5,632)
Exercise of employee stock options, net 5,127 3,907 1,433
Dividends paid (15,072) (13,939) (11,806)
Transfer from subsidiaries of restricted stock units under directors' deferred
compensation plan, net - 1,431 -
----------------------------------
Net cash provided by (used in) financing activities (30,075) 2,832 10,219
----------------------------------
Net increase in cash and cash equivalents 13,606 860 1,985
----------------------------------
Cash and cash equivalents at beginning of year 4,787 3,927 1,942
----------------------------------
Cash and cash equivalents at end of year $ 18,393 $ 4,787 $ 3,927
==================================
Additional disclosure relative to cash flows:
Interest paid $ 714 $ 979 $ 1,379
==================================
Taxes paid $ 748 $ 440 $ 25
==================================
Supplemental schedule of non-cash investing and financing activities:
Adjustment of securities available for sale to fair value, net of tax $ (145) $ 48 $ 52
Adjustment of securities available for sale and securities available for sale
transferred to investment securities to fair value, net of tax, at the subsidiaries 585 4,740 2,559
Minimum pension liability adjustments (250) - -
Issuance of restricted stock units under directors' deferred compensation
plan, net - 1,739 -
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, 1998 filed with the Securities
and Exchange Commission (the "Commission").
Certain information included herein is incorporated by reference from
the Company's 1998 Annual Report to Shareholders ("Annual Report") as
indicated below. Except for those portions of the Annual Report which are
expressly incorporated herein by reference, the Annual Report is not to be
deemed filed with the Commission. The Annual Report and Form 10-K have not
been approved or disapproved by the Commission, nor has the Commission
passed upon the accuracy or adequacy of the same.
Part I Pages
Item 1. Business 3-30, 64
Item 2. Properties 45-46, 66
Item 3. Legal Proceedings 58, 66
Item 4. Submission of Matters to a Vote of
Security Holders N/A
Part II
Item 5. Market for Registrant's Common
Equity and Related Shareholder
Matters cover, 66, 68
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 3-30
Item 7a. Quantitative and Qualitative
Disclosures about Market Risk 9-11
Item 8. Financial Statements and
Supplementary Data 33-63
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 66
Part III*
Item 10. Directors and Executive Officers of
the Registrant 4-5, 15
Item 11. Executive Compensation 8-14, 16-23
Item 12. Security Ownership of Certain
Beneficial Owners and
Management 2-4
Item 13. Certain Relationships and Related
Transactions 8-9
Part IV**
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K
<FN>
<F*> 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 11, 1999.
<F**> 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 based banks;
namely, First Vermont Bank and Trust Company and its sole subsidiary,
Banknorth Mortgage 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 trust company;
one interim New Hampshire bank holding company, namely North American Bank
Corporation and its sole subsidiary, Farmington National Bank; one
Massachusetts based bank; First Massachusetts Bank, NA.; and one New York
based bank, Evergreen Bank, N.A. and its sole subsidiary. Banknorth also
established Banknorth Capital Trust 1 in May 1997. The trust exists for the
exclusive purpose of issuing and selling 30-year guaranteed preferred
beneficial interests in Corporation's junior subordinated debentures.
Banknorth is also the sole owner of North Group Realty, Inc., which owns
real estate utilized in the operation of Banknorth.
On December 31, 1998, the shareholders of Banknorth and Evergreen
approved a merger between the two organizations. Evergreen was merged with
and into Banknorth. As of December 31, 1998, Evergreen Bank had total
assets of $1.1 billion and deposits of $971.9 million.
On November 13, 1998, Banknorth completed the purchase from
BankBoston, N.A. of ten full-service branches, one limited service branch
and nine remote ATM locations in the Berkshire region of Massachusetts, as
well as private banking relationships associated with the branches. These
branches were consolidated into Banknorth's Massachusetts subsidiary, First
Massachusetts Bank, N.A. The transaction was accounted for under purchase
accounting rules. First Massachusetts, N.A. was organized by Banknorth in
1996 in connection with the purchase of thirteen banking offices of Shawmut
Bank, N.A. in central and western Massachusetts. The transaction was
accounted for under purchase accounting rules.
The subsidiary banks offer a full range of loan, deposit, investment
products and trust services designed to meet the financial needs of
individual consumers, businesses and municipalities. Mortgage banking
services are also offered through Banknorth Mortgage Company, a wholly-
owned subsidiary of First Vermont Bank and Trust Company. These services
are currently offered in the states of Vermont, Massachusetts, New York and
New Hampshire through a network of 99 banking offices.
Based on total assets of $4.4 billion as of December 31, 1998,
Banknorth is the largest bank holding company based in Vermont. In December
1998, Banknorth and its subsidiaries employed 1,500 on a full-time
equivalent basis.
Competition
Competition within New England and upstate New York for banking and
related business is strong. Banknorth, through its subsidiaries, competes
with both state and nationally-charted commercial banks for deposits, loans
and trust accounts, and with savings and loan associations, savings banks
and credit unions for deposits and loans. In addition, there is significant
competition with other financial institutions including personal loan
companies, mortgage banking companies, finance companies, insurance
companies, securities firms, mutual funds and certain government agencies
as well as major retailers all actively engaged in providing various types
of loans and other financial services.
Supervision and Regulation
As a registered bank holding company, Banknorth is subject to
regulation and examination by the Federal Reserve Board ("FRB"). Certain of
Banknorth's subsidiaries are organized as national banking associations,
which are subject to regulation, supervision and examination by the Office
of the Comptroller of the Currency, or organized as state-chartered, FDIC-
insured non-Federal Reserve member banks, which are subject to regulation,
supervision and examination by the applicable state banking regulators and
the FDIC. The following discussion summarizes certain aspects of applicable
banking laws and regulations.
The activities of Banknorth and those of companies which it controls
or in which it holds more than 5% of the voting stock are limited to
banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries or any other activity which the
FRB determines to be so closely related to banking and managing or
controlling banks as to be a proper incident thereto. In making such
determinations, the FRB is required to consider whether the performance of
such activities by a bank holding company or its subsidiaries can
reasonably be expected to produce benefits to the public such as greater
convenience, increased competition or gains in efficiency that outweigh
possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. Generally, bank holding companies, such as Banknorth, are
required to obtain prior approval of the FRB to engage in any new activity
or to acquire more than 5% of any class of voting stock of any company.
Bank holding companies are also required to obtain prior approval of
the FRB before acquiring more than 5% of any class of voting stock of any
bank, which is not already majority-owned by the bank holding company. With
the passage of the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 ("the Interstate Banking and Branching Act"), bank holding
companies became able to acquire banks based outside their home states
beginning September 29, 1995, without regard to the permissibility of such
acquisitions under state law, but subject to any state requirement that the
bank be organized and have been operating for a minimum period of time, not
to exceed five years, and the requirement that the bank holding company
control no more than 10% of the total amount of insured deposits nationwide
and no more than 30% of insured deposits in that state (or such lesser or
greater amount set by state law).
The Interstate Banking and Branching Act also authorized banks to
merge across state lines, thereby creating interstate branches. This
provision, which was effective June 1, 1997, allowed each state, prior to
the effective date, the opportunity to "opt out" of this provision, thereby
prohibiting interstate branching within that state. None of the states in
which the banking subsidiaries of Banknorth are located have "opted out" of
interstate branching. In addition, under the Interstate Banking and
Branching Act, a bank is now able to open new branches in a state in which
it does not already have banking operations if such state enacts a law
permitting such de novo branching. None of the four states in which
Banknorth currently operates (Massachusetts, New Hampshire, New York and
Vermont) has adopted legislation permitting de novo interstate branching,
but all of such states except New Hampshire permit the acquisition of
existing branches by an out-of-state bank or bank holding company.
Banknorth regularly evaluates merger and acquisition opportunities, and it
anticipates that it will continue to evaluate such opportunities in light
of this legislation.
Bank holding companies and their affiliates are subject to certain
restrictions under the Federal Reserve Act regarding, among other things,
extensions of credit, transfers of assets and purchases of services among
affiliated parties. Further, under the Federal Reserve Act and FRB
regulations, a bank holding company and its subsidiaries are prohibited
from engaging in certain tie-in arrangements in connection with extensions
of credit or furnishing of property or services to third parties.
Various laws and regulations administered by the OCC, the FDIC and
the state banking regulators affect the corporate practices of Banknorth's
subsidiary banks, such as payment of dividends, incurring of debt and
acquisition of financial institutions and other companies, and affect their
business practices such as payment of interest on deposits, the charging of
interest on loans, the types of business conducted and the location of
offices. There are no regulatory orders resulting from regulatory
examinations of any of the subsidiary banks of Banknorth.
The ability of Banknorth to pay dividends to its shareholders is
largely dependent on the ability of its subsidiaries to pay dividends to
it. Payment of dividends by Vermont-chartered banks is subject to
applicable state and federal laws; payment of dividends by national banks
is subject to applicable federal law. National banks must obtain the
approval of the OCC for the payment of dividends if the total of all
dividends declared in any calendar year would exceed the total of the
bank's net profits (as defined by applicable law) for that year, combined
with its retained net profits for the preceding two years. Furthermore, a
national bank may not pay a dividend in an amount greater than its
undivided profits then on hand after deducting its losses and bad debts, as
defined by applicable law.
In addition, the FRB, the OCC, the FDIC and state banking regulators
are authorized under applicable federal and state law to determine under
certain circumstances that the payment of dividends would be an unsafe or
unsound practice and to prohibit payment of such dividends. The payment of
dividends that deplete a bank's or bank holding company's capital base, or
render it illiquid, could be deemed to constitute such an unsafe or unsound
practice. The FRB, the FDIC and the OCC have each indicated that banking
organizations should generally pay dividends only out of current operating
earnings.
The FRB, the FDIC, and the OCC have issued substantially similar
risk-based and leverage capital guidelines for United States banking
organizations. In addition, those regulatory agencies may from time to time
require that a banking organization maintain capital above the minimum
levels, whether because of its financial condition or actual or anticipated
growth. The FRB's risk-based capital guidelines define a two-tier capital
framework and specify three relevant capital ratios: Tier I Capital Ratio,
a Total Capital Ratio and a "Leverage Ratio". "Tier I Capital" consists of
common and qualifying preferred shareholders' equity, less certain
intangibles and other adjustments. "Tier 2 Capital" consists of
subordinated and other qualifying debt, and the allowance for loan losses
up to 1.25% of risk-weighted assets. The sum of Tier I Capital and Tier 2
Capital, less investments in unconsolidated subsidiaries, represents
qualifying "Total Capital" at least 50% of which must consist of Tier 1
Capital. Risk-based capital ratios are calculated by dividing Tier 1
Capital and Total Capital by risk-weighted assets. Assets and off balance
sheet exposures are assigned to one of four categories or risk weights,
based primarily on relative credit risk. The minimum Tier 1 Capital is 4%
and the minimum Total Capital Ratio is 8%. The Leverage Ratio is determined
by dividing Tier 1 Capital by adjusted average total assets. Although the
stated minimum Leverage Ratio is 3%, most banking organizations are
required to maintain Leverage Ratios of at least 1 to 2 percentage points
above 3%.
Under applicable federal laws and regulations, deposit insurance
premium assessments to the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF") are based on a supervisory risk rating
system, with the most favorably rated institutions paying no premiums. The
deposits of each of Banknorth's subsidiary banks are insured under the BIF
and each such bank, except First Massachusetts Bank is presently in the
most favorable deposit insurance assessment category, and pays no deposit
premium assessment. Following the Berkshire acquisition, the premium
assessment rates of First Massachusetts bank was based on those for
"adequately capitalized" institutions and are expected to remain in that
category for the remainder of 1999. Payment of deposit premiums will not
have a material impact on First Massachusetts Bank or Banknorth.
Proposals to change the laws and regulations governing the banking
industry are frequently introduced in Congress, in state legislatures and
before the various bank regulatory agencies. A significant financial
modernization bill (H.R. 10) was introduced during the last session of
Congress but failed to pass and has been reintroduced, with certain
modifications during the current session. The likelihood or timing of
passage, the terms any legislation may ultimately contain, or its potential
impact on Banknorth or its subsidiaries, cannot be predicted with any
certainty.
Properties
As of December 31, 1998, Banknorth subsidiaries operated 99 community
banking offices and 143 automated banking machines in the states of
Vermont, Massachusetts, New York and New Hampshire. The Company's
headquarters are located at 300 Financial Plaza, Burlington, Vt.
The Company leases certain premises from third parties under terms
and conditions considered by management to be favorable to the Company.
Additional information relating to the Company's properties is set
forth in note 7 to the consolidated financial statements on pages 45-46 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 ("Common Stock"),
is in the over-the-counter market, quoted on the NASDAQ National Market
System ("NASDAQ"). As of December 31, 1998, there were 5,642 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 51 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) Documents Filed as Part of this Report
a.1. List of financial statements:
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996 Consolidated Balance Sheets at December 31, 1998
and December 31, 1997
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flow for the years ended December 31,
1998, 1997, and 1996
a.2. List of financial schedules
N/A
a.3. Exhibits
Item No.
3(i) Certificate of Incorporation of the Company, previously
filed with the Commission as Exhibit 3.1 to the
Company's Registration Statement on Form S-4
(Registration No. 333-68237) and incorporated herein by
reference.
3(ii) Amendment dated June 2, 1998 to the Company's
Certificate of Incorporation, previously filed with the
Commission as Exhibit 3(i) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1998, and incorporated herein by reference.
3(iii) By-laws of the Company, as amended and restated through
June 23, 1998, previously filed with the Commission as
Exhibit 3(ii) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998, and
incorporated herein by reference.
3(iv) Text of amendment to Article III, Section 3.1 of the
Company's By-laws, as adopted on December 31, 1998.
(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, as amended, dated as of November 27,
1990, by and between the Company and Registrar &
Transfer Company, previously filed with the Commission
as Exhibit 1 to the Company's Registration Statement on
Form 8-A/A, dated September 4, 1998.
(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) Change-of-Control Agreement, dated as of July 17, 1998,
between the Company and William H. Chadwick.*
(10)(iii) Form of Change-in-Control Agreement, dated July 9,
1998, between the Company and certain executive
officers.* (1)
(10)(iv) Employment Agreement, dated July 31, 1998, between the
Company and George W. Dougan.*
(10)(v) Change-in-Control Agreement, dated as of December 31,
1998, between the Company and George W. Dougan.*
(10)(vi) Banknorth Group, Inc. Comprehensive Long-term Executive
Incentive Compensation Plan, as amended, previously
filed with the Commission as Exhibit 10(4) to the
Company's Registration Statement on Form S-3 (Reg. No.
33-80273), and incorporated herein by reference.*
(10)(vii) Banknorth Group, Inc. Supplemental Employee Retirement
Plan, dated January 1, 1995, previously filed with the
Commission as Exhibit 10(xvi) to the Company's Annual
Report on Form 10-K for the year ended December 31,
1997, and incorporated herein by reference.*
(10)(viii) Banknorth Group, Inc. 1997 Management Incentive
Compensation Plan, previously filed as Exhibit 10(vii)
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein
by reference.*
(10)(ix) Banknorth Group, Inc. 1998 Management Incentive
Compensation Plan.*
(10)(x) Banknorth Group, Inc. 1999 Management Incentive
Compensation Plan.*
(10)(xi) 1994 Deferred Compensation Plan for Directors and
Selected Executive Officers of Banknorth Group, Inc.
and Participating Affiliates, amended and restated as
of July 1, 1997, previously filed as Exhibit 4 to the
Company's Registration Statement on Form S-8 (Reg. No.
333-38353), and incorporated herein by reference.*
(10)(xii) 1997 Equity Compensation Plan for Banknorth Group,
Inc., previously filed as Exhibit 4 to the Company's
Registration Statement on Form S-8 (Reg. No. 333-
38349), and incorporated herein by reference.*
(10)(xiii) Amended and restated 1995 Stock Incentive Plan of
Evergreen Bancorp, Inc., previously filed with the
Commission as Exhibit 10(e) to the Evergreen Bancorp,
Inc. Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated herein by
reference.*
(10)(xiv) 1995 Directors Stock Option Plan of Evergreen Bancorp,
Inc., previously filed with the Commission as Exhibit
4.1 to Evergreen Bancorp, Inc.'s Registration Statement
on Form S-8 (Registration No. 333-50225), and
incorporated herein by reference.*
(10)(xv) Amendment No. 1 to Directors Stock Option Plan of
Evergreen Bancorp, Inc., previously filed with the
Commission as Exhibit 10(g) to Evergreen Bancorp,
Inc.'s Annual Report on Form 10-K for the year ended
December 31, 1997, and incorporated herein by
reference.*
(10)(xvi) Supplemental Executive Retirement Plan of Evergreen
Bancorp, Inc., previously filed with the Commission as
Exhibit 10(I) Evergreen Bancorp, Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference.*
(10)(xvii) Senior Officer Supplement Retirement Plan of Evergreen
Bancorp, Inc., previously filed with the Commission as
Exhibit 10(i) to Evergreen Bancorp, Inc.'s Annual
Report on Form 10-K for year ended December 31, 1995,
and incorporated herein by reference.*
10(xviii) Credit Agreements, dated December 16, 1996, among
Banknorth Group, Inc., the lenders named therein, and
The First National Bank of Chicago, as Agent,
previously filed with the Commission as Exhibit 10(xii)
to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, and incorporated herein
by reference.*
10(xix) Affiliation Agreement and Plan of Reorganization, dated
July 31, 1998 between Banknorth Group, Inc. and
Evergreen Bancorp, Inc., previously filed with the
Commission as Exhibit 2.1 to the Company's Registration
Statement on Form S-4 (Registration No. 333-68237), and
incorporated herein by reference.*
(11) Statement re Computation of Per Share Earnings
Basic earnings per share computations are based on the
weighted average number of shares outstanding after
giving retroactive effect to stock splits. The effect
of the outstanding stock option and restricted stock
awards, which are described in the note 18 to the 1998
Banknorth Group, Inc. consolidated financial
statements, is reflected in diluted earnings per share.
See note 16 to the consolidated financial statements
for details on earnings per share computations
for 1998, 1997, and 1996.
(13) The Corporation's 1998 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.
Evergreen Bank, N.A. and its wholly owned subsidiary,
Evergreen Realty Funding Corp.
- New York
The Howard Bank, N.A.
- Vermont
First Vermont Bank and Trust Company and its wholly
owned subsidiary, Banknorth Mortgage Company
- Vermont
Franklin Lamoille Bank
- Vermont
Granite Savings Bank and Trust Company
- Vermont
Woodstock National Bank
- Vermont
North American Bank Corporation and its wholly owned
subsidiary, Farmington National Bank
- New Hampshire
The Stratevest Group, N.A.
- Vermont
First Massachusetts Bank, N.A., and its wholly owned
subsidiaries, First Massachusetts Security Corporation,
and Northgroup Investment and Insurance Services, Inc.
- Massachusetts
Banknorth Capital Trust I
-Vermont
North Group Realty
- Vermont
(23) Independent Auditors' Report
Consent of Independent Public Accountants
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the fourth quarter of
1998.
[FN]
<F*> denotes management contract or compensatory plan
<F1> The form of Change-in-Control Agreement for Messrs. Thomas J. Pruitt,
Richard J. Fitzpatrick, John M. Keel and Owen H. Becker is
substantially the same.
</FN>
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. Pruit
----------------------------------------------------------------------------
William H. Chadwick Thomas J. Pruitt
President and Chief Executive Executive Vice President and Chief
Officer Financial Officer
Date: March 24, 1999
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/ Angelo P. Pizzagalli Director, Chairman of the Board March 24, 1999
- --------------------------------
Angelo P. Pizzagalli
/s/ William H. Chadwick Director, President and Chief Executive Officer March 24, 1999
- -------------------------------- (Principal Executive Officer)
William H. Chadwick
/s/ Thomas J. Pruitt Executive Vice President and Chief Financial March 24, 1999
- -------------------------------- Officer (Principal Financial Officer)
Thomas J. Pruitt
/s/ Neal E. Robinson Treasurer and Principal Accounting Officer March 24, 1999
- --------------------------------
Neal E. Robinson
/s/ Thomas J. Amidon Director March 24, 1999
- --------------------------------
Thomas J. Amidon
/s/ Jacqueline D. Arthur Director March 24, 1999
- --------------------------------
Jacqueline D. Arthur
/s/ Robert A. Carrara Director March 24, 1999
- --------------------------------
Robert A. Carrara
/s/ Susan C. Crampton Director March 24, 1999
- --------------------------------
Susan C. Crampton
/s/ George W. Dougan Director March 24, 1999
- --------------------------------
George W. Dougan
/s/ Robert F. Flacke Director March 24, 1999
- --------------------------------
Robert F. Flacke
/s/ Luther F. Hackett Director March 24, 1999
- --------------------------------
Luther F. Hackett
/s/ Kathleen Hoisington Director March 24, 1999
- --------------------------------
Kathleen Hoisington
/s/ Douglas G. Hyde Director March 24, 1999
- --------------------------------
Douglas G. Hyde
/s/ Anthony J. Mashuta Director March 24, 1999
- --------------------------------
Anthony J. Mashuta
/s/ Richard M. Narkewicz, M.D. Director March 24, 1999
- --------------------------------
Richard M. Narkewicz, M.D.
/s/ John B. Packard Director March 24, 1999
- --------------------------------
John B. Packard
/s/ R. Allan Paul Director March 24, 1999
- --------------------------------
R. Allan Paul
/s/ Thomas P. Salmon Director March 24, 1999
- --------------------------------
Thomas P. Salmon
/s/ Patrick E. Welch Director March 24, 1999
- --------------------------------
Patrick E. Welch
A Glossary of Terms
Basis risk
Basis risk is the risk of adverse consequences resulting from unequal
changes in the spread between two or more rates for different instruments
with the same maturity.
Book value per share
Total shareholders' equity divided by shares out-standing on the same
date.
Cash dividends per share
Total cash dividends declared divided by average shares outstanding for
the period.
Cumulative effect of an accounting change
Although the presumption is that once an accounting principle has been
adopted it should not be changed, when a change is necessary it generally
is recognized by including the cumulative effect of the change in net
income of the period of change. The cumulative effect of a change in
accounting principle is the total direct effects, net of the related tax
effect, that the change has on prior periods.
Earning assets
Interest-bearing deposits with banks, securities available for sale,
investment securities held to maturity, loans (net of unearned income),
federal funds sold and securities purchased under agreements to resell.
Efficiency ratio
Total other operating expense, excluding OREO/ repossession expense,
goodwill amortization, merger and acquisition related expenses and other
non-recurring expenses, as a percentage of net interest income, on a
fully taxable equivalent basis, and total other operating income,
excluding securities gains/losses and non-recurring items. All items on a
fully taxable equivalent basis.
Expense ratio
Total other operating expense, excluding OREO/ repossession expense,
goodwill amortization, capital securities expense, merger and acquisition
related expenses and other non-recurring expenses, less other operating
income, excluding securities gains or losses and non-recurring items, as
a percentage of average earning assets. All items on a fully taxable
equivalent basis.
Fully taxable-equivalent (fte) income
Tax-exempt income which has been converted to place tax-exempt and
taxable income on a comparable basis before application of income taxes.
Impaired loans
Loans, usually commercial type loans, where it is probable that the
borrower will not repay the loan according to the original contractual
terms of the loan agreement and all loans restructured in troubled debt
restructurings subsequent to January 1, 1995.
Interest-bearing liabilities
Interest-bearing deposits, federal funds purchased, securities sold under
agreements to repurchase, other short-term borrowed funds and long-term
debt.
Internal capital generation rate
Earnings retention rate multiplied by the return on average shareholders'
equity.
Liquidity
The ability to meet both loan commitments and deposit withdrawals as they
come due.
Net loans 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.
Pooling of interests
An accounting method used for a combination in which the shareholders of
the combining entities become shareholders in a combined company. The
operating results of the two entities are "pooled" together historically
as if they were always one company.
Purchase accounting
An accounting method which, following an acquisition, the acquired entity
is recorded at fair value. The operating results of the acquired entity
are included in the acquiring entity's results from the date of the
acquisition forward.
Restructured loans
A refinanced loan in which the bank allows the borrower certain
concessions that would not normally be considered. The concessions are
always made in light of the borrower's financial difficulties, and the
objective of the bank is to maximize recovery of the investment.
Return on average assets (ROA)
Net income as a percentage of average total assets.
Return on average shareholders' equity (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.