EX-13 16 b38140bgex13.txt 2000 ANNUAL REPORT TO SHAREHOLDERS 1 Exhibit 13 [BANKNORTH GROUP, INC. LOGO] 2000 ANNUAL REPORT DIRECTIONS NEW REDEFINING COMMUNITY BANKING [graphic] 2 NEW DIRECTIONS WITH THE ACQUISITION OF ONE OF THE NORTHEAST'S MOST RESPECTED FINANCIAL SERVICES PROVIDERS, THE FORMER PEOPLES HERITAGE FINANCIAL GROUP IS NOW BANKNORTH GROUP. WE ARE NOW ONE OF THE 50 LARGEST COMMERCIAL BANKS IN THE COUNTRY. WE ARE THE THIRD LARGEST BANKING COMPANY HEADQUARTERED IN NEW ENGLAND, AND THE REGION'S NUMBER ONE COMMUNITY BANKING COMPANY. AND BY COMBINING OUR PERSONALIZED COMMUNITY BANKING APPROACH WITH AN INCREASINGLY SOPHISTICATED ARRAY OF FINANCIAL SERVICES, WE ARE BROADENING THE WAY CUSTOMERS ACROSS THE NORTHEAST THINK ABOUT THEIR COMMUNITY BANK. WE ARE TRULY TAKING COMMUNITY BANKING IN NEW DIRECTIONS. ABOUT BANKNORTH GROUP, INC. FORMERLY PEOPLES HERITAGE FINANCIAL GROUP, INC., BANKNORTH GROUP, INC. HEADQUARTERED IN PORTLAND, MAINE, IS ONE OF THE COUNTRY'S 50 LARGEST COMMERCIAL BANKING COMPANIES WITH OVER $18 BILLION IN ASSETS. ITS MAINE AND NEW HAMPSHIRE BANKING SUBSIDIARIES, PEOPLES HERITAGE BANK, NA, AND BANK OF NEW HAMPSHIRE, NA, RESPECTIVELY, EACH HAVE THE NUMBER ONE DEPOSIT MARKET POSITION IN THEIR RESPECTIVE STATES. THE COMPANY'S VERMONT BANKS, THE HOWARD BANK, NA, FRANKLIN LAMOILLE BANK, NA, AND FIRST VERMONT BANK, NA, COMBINED HAVE THAT STATE'S SECOND LARGEST DEPOSIT MARKET SHARE. FIRST MASSACHUSETTS BANK, NA, IS ONE OF THE FIVE LARGEST BANKS IN MASSACHUSETTS. THE COMPANY ALSO OPERATES IN UPSTATE NEW YORK THROUGH EVERGREEN BANK, NA, AND IN NORTH CENTRAL CONNECTICUT WITH GBT, A DIVISION OF FIRST MASSACHUSETTS BANK, NA. THE COMPANY ALSO OPERATES A VARIETY OF INSURANCE AGENCIES IN NEW ENGLAND AS SUBSIDIARIES OF MORSE, PAYSON & NOYES INSURANCE, ITS LEAD AGENCY, A MONEY MANAGEMENT FIRM, THE STRATEVEST GROUP, NA, AN INVESTMENT SUBSIDIARY, HERITAGE INVESTMENT GROUP, AND A LEASING COMPANY, BANKNORTH LEASING. OTHER SUBSIDIARIES AND DIVISIONS PROVIDE SERVICES IN MORTGAGE BANKING, ASSET BASED LENDING, PRIVATE BANKING, MERCHANT SERVICES AND OTHER FINANCIAL SERVICES. BANKNORTH GROUP, INC., IS TRADED ON THE NASDAQ NATIONAL MARKET SYSTEM UNDER THE SYMBOL: BKNG 3 SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS EVEN WHILE COMPLETING THE LARGEST ACQUISITION IN OUR HISTORY, WE WERE ABLE TO TURN IN A RECORDSETTING FINANCIAL PERFORMANCE. IN 2000, BANKNORTH ACHIEVED ITS SEVENTH CONSECUTIVE RECORD EARNINGS YEAR ON AN OPERATING BASIS. OPERATING EARNINGS, EXCLUSIVE OF MERGER RELATED AND OTHER SPECIAL CHARGES, WERE $234.7 MILLION, OR $1.62 PER DILUTED SHARE, UP 9% ON A PER DILUTED SHARE BASIS FROM 1999. [BAR CHART] OPERATING DILUTED EARNINGS YEAR PER SHARE* 1996 $0.93 1997 $1.08 1998 $1.25 1999 $1.48 2000 $1.62 *Exclusive of special items
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) ------------------------------------------------------------------------------------------------------------------------------------ FOR THE YEAR 2000 1999 % Change 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $613,011 $624,229 (2)% $590,516 $566,346 $482,081 Provision for loan and lease losses 23,819 23,575 1 23,775 15,763 15,850 Noninterest income (excluding securities transactions) 226,644 191,140 19 161,124 134,144 104,789 Securities gains (losses) (15,456) 655 NM 6,423 2,837 3,520 Noninterest expenses (excluding special charges) 468,846 470,140 (0) 458,326 440,329 378,205 Special charges (1) 43,007 28,002 54 61,140 23,559 11,210 Net income 191,734 196,958 (3) 141,744 145,488 123,044 Operating income (net income excluding special items) (1) 234,686 217,774 8 186,946 161,035 131,826 ------------------------------------------------------------------------------------------------------------------------------------ SHARE DATA (2) ------------------------------------------------------------------------------------------------------------------------------------ Earnings per share: Basic $1.33 $1.35 (1)% $0.97 $1.00 $0.88 Diluted 1.32 1.34 (1) 0.95 0.98 0.87 Operating diluted earnings per share (1) 1.62 1.48 9 1.25 1.08 0.93 Operating diluted cash basis earnings per share (1)(3) 1.76 1.62 9 1.37 1.18 1.00 Dividends per share 0.50 0.47 6 0.44 0.38 0.34 Book value per share at year end 9.42 8.22 15 8.37 7.97 7.39 Tangible book value per share at year end . 8.11 6.95 17 6.97 6.88 6.59 Stock price: High 21.06 20.25 4 26.75 23.81 14.32 Low 10.44 14.31 (27) 12.81 12.94 9.50 Close 19.94 15.06 32 20.00 23.00 14.00 Weighted average shares outstanding: Basic 144,270 145,758 (1) 146,119 145,481 139,187 Diluted 145,194 147,428 (2) 148,965 148,600 141,658 ------------------------------------------------------------------------------------------------------------------------------------ KEY PERFORMANCE RATIOS ------------------------------------------------------------------------------------------------------------------------------------ Return on average assets 1.05% 1.12% (6)% 0.90% 1.05% 1.08% Return on average equity 15.69 16.42 (4) 11.96 13.01 12.53 Operating return on average assets (1) 1.28 1.24 3 1.19 1.16 1.16 Operating return on average equity (1) 19.20 18.16 6 15.78 14.40 13.42 Net interest margin (4) 3.65 3.86 (5) 4.10 4.42 4.58 Average equity to average assets 6.66 6.81 (2) 7.55 8.07 8.66 Efficiency ratio (5) 54.72 56.45 (3) 59.35 61.37 64.44 Noninterest income as a percent of total income (6) 26.99 23.44 15 21.44 19.15 17.86 Tier 1 leverage capital ratio 7.02 6.75 4 7.22 7.65 8.11 Dividend payout ratio (7) 36.91 33.19 11 40.38 39.60 33.86 ------------------------------------------------------------------------------------------------------------------------------------
NM Not Meaningful (1) Special items consist of (i) special charges and (ii) losses on restructuring the investment portfolio of $10.4 million on an after-tax basis in 2000. Special charges consist of merger charges, costs to discontinue the correspondent mortgage business, asset write-downs and branch closing costs and on an after-tax basis amounted to $32,591, $20,816, $45,202, $15,547 and $8,782 during 2000, 1999, 1998, 1997 and 1996, respectively, See note 9 to the Consolidated Financial Statements. (2) Where appropriate amounts have been adjusted for a two-for-one split of the common stock in May 1998. (3) Earnings before amortization of goodwill and core deposit premiums. (4) Net interest income divided by average interest-earnings assets, calculated on a fully-taxable equivalent basis. (5) Excludes distribution on securities of subsidiary trusts, special items and securities transactions. (6) Excludes securities transactions. (7) Cash dividends paid divided by net income. 1 4 [PHOTO] "IN LESS THAN A DECADE, WE HAVE GROWN FROM THE THIRD LARGEST BANK IN MAINE TO THE THIRD LARGEST BANKING COMPANY HEADQUARTERED IN NEW ENGLAND." DEAR SHAREHOLDERS: 2000 was perhaps the most momentous year in our history - yet dramatic change and growth have become something of a practiced routine for our organization. In 2000, we changed the name of our multi-state banking and financial services holding company from Peoples Heritage Financial Group, Inc., to Banknorth Group, Inc. - a name that is more descriptive of our new prominence as a diversified Northeast financial services leader. We acquired one of the Northeast's most respected financial services providers, Banknorth Group, Inc. Our largest acquisition ever broadened our market leadership, vaulted our assets to over $18 billion, and positioned us as the third largest banking company based in New England and one of the nation's 50 largest commercial banking companies. In addition, we achieved record operating earnings for the seventh consecutive year. During the period, we significantly expanded our franchise while maintaining our focus on profitability as demonstrated by our loan growth, fee income expansion, enhanced expense control and continued strong asset quality performance. A NORTHEAST BANKING LEADER In less than a decade, we have grown from the third largest bank in Maine to the third largest banking company headquartered in New England. While Peoples Heritage remains the name of our Maine banking subsidiary, the new Banknorth name now represents the dominant financial services organization in northern New England. Our acquisition of Banknorth Group expanded our franchise into two new states, Vermont and upstate New York, and strengthened our franchises in New Hampshire and Massachusetts. We now hold the number one deposit market share in Maine and New Hampshire and the number two deposit market share in Vermont. We are among the top five in market share in Massachusetts and have the potential for growth in Connecticut and upstate New York. In Massachusetts, the Banknorth acquisition also solidified our position in the Worcester area, the second largest city in New England, and linked our franchise in the Haverhill and Springfield areas to provide us with a strong presence across the state. 2 5 A YEAR OF ACCOMPLISHMENT At Banknorth, in keeping with the tradition established by Peoples Heritage Financial Group, we only seek growth with profitability. To that end, in 2000, we increased our profitability by continuing to expand and diversify our loan portfolio as evidenced by strong commercial and consumer loan growth. We enjoyed great success with "Simply Free Checking" - our fastest growing account. In addition, our development as a diversified financial services company significantly enhanced our fee income. To reflect our emergence as a commercial bank and expanded earnings capacity, we also changed all our bank charters to OCC commercial bank charters. The new charters reflect our greater earnings capacity over thrifts and the lending diversification well beyond mortgage loans. Since commercial banks generally trade at higher earnings multiples than thrifts, the change is also designed to deliver greater shareholder value. We also repurchased more than 5.5 million shares of our common stock in 2000, further reflecting our commitment to shareholders. REDEFINING COMMUNITY BANKING For us, community banking has always meant staying close to our customers - serving them in the ways they want to be served. As we look ahead, we will continue to maintain that commitment to our customers. Yet the ways in which we connect with our customers will continue to evolve. In 2001, we will leverage new ways to deliver seamlessly integrated financial services including electronic banking, insurance and investing services that bring together the entire range of Banknorth resources. We will seek to continue to deliver sales and service that set the standard in the markets we serve. By focusing on delivering for our customers while driving profitability, we have become the premier community banking and financial services company in the Northeast. For our customers, employees and shareholders, our opportunities for success continue to grow with us. Sincerely yours, /s/ William J. Ryan William J. Ryan Chairman, President and Chief Executive Officer [BAR CHART] YEAR FEE INCOME AS A % OF TOTAL INCOME* 1996 17.86% 1997 19.15% 1998 21.44% 1999 23.44% 2000 26.99% *As a percentage of total income excluding losses on securities restructuring [BAR CHART] YEAR OPERATING RETURN ON AVERAGE EQUITY* 1996 13.42% 1997 14.40% 1998 15.78% 1999 18.16% 2000 19.20% *Exclusive of special items 3 6 WE'RE NOW THE NUMBER ONE COMMUNITY BANK IN THE NORTHEAST [BAR CHART] YEAR OPERATING RETURN ON AVERAGE ASSETS* 1996 1.16% 1997 1.16% 1998 1.19% 1999 1.24% 2000 1.28% *Exclusive of special items RECORD FINANCIAL PERFORMANCE 2000 was another year of outstanding financial performance at Banknorth Group. Record earnings. We achieved our seventh consecutive earnings year on an operating basis. Operating earnings, exclusive of merger-related and other special charges, were $234.7 million, or $1.62 per diluted share in 2000, up 9% on a diluted share basis from 1999's operating earnings of $217.8 million, or $1.48 per diluted share. Total assets. The acquisition of Banknorth Group - our largest acquisition ever with assets of $4.6 billion - strengthened our market leadership and increased our assets to $18.2 billion at year end. Net income. Our net income for the year was $191.7 million, or $1.32 per diluted share, down 3% from 1999, mostly due to costs related to the acquisition of Banknorth by the former Peoples Heritage Financial Group which took on the Banknorth name. Expense control. Executing our largest bank acquisition in the past five years, we again achieved cost savings while enhancing revenues. Operating noninterest expenses actually declined slightly during 2000. Increased dividend. Following the fourth quarter of 2000, we increased our quarterly dividend by 4% over the dividend paid for the previous quarter. Loan growth. Loans were up 10% in 2000, led by a 20% increase in commercial business loans. Consumer loans increased by 12% and commercial real estate loans by 10%. Mortgage loans decreased by 1% for the year as a result of new loans being sold into the secondary market. Asset quality. Our asset quality remains strong. Nonperforming assets as a percentage of total assets stood at 0.37% at the end of 2000, level with year end 1999. Our loan growth did not come at the expense of asset quality. Fee income. Noninterest income, exclusive of securities restructuring, increased 19% for the year. With the acquisitions of insurance agencies in Massachusetts and Connecticut, insurance commissions jumped 27%. In addition, merchant and card product income and deposit services income were both up 17%, and trust and investment advisory services fees increased by 8% for the year. All combined, fee income increased to nearly 30% of revenue in the fourth quarter of 2000, up from 18% just four years ago. Return on Average Equity. Our profitability ratios continue to improve year to year. Operating Return on Average Equity (ROE) for the year reached 19.20%, up from 18.16% for the previous year. 4 7 Return on Average Assets. Operating Return on Average Assets (ROA) was 1.28% in 2000, up from 1.24% in 1999. Efficiency ratio. Maintaining our trend of better efficiency, in 2000 our efficiency ratio improved to 54.7% from 56.5% in 1999 - down 10 points in the past four years. THE NEW BANKNORTH Formerly Peoples Heritage Financial Group, Inc., the new Banknorth Group, Inc. is the third largest banking company headquartered in New England. We are one of the nation's 50 largest commercial banks with over $18.2 billion in assets, nearly 300 branches and 400 ATMs. Along with adopting the Banknorth Group name in 2000 to reflect our growing strength in the Northeast, this year's acquisition of Banknorth expanded our franchise and solidified our position as a Northeast community banking leader. We hold the number one market position in Maine and New Hampshire, number two in Vermont, we're among the top five in Massachusetts, and we have a growing presence in upstate New York and Connecticut. We also hold the largest combined market share in Maine, New Hampshire and Vermont. [GRAPHIC] 5 8 WE'RE NOW ONE OF THE NATION'S 50 LARGEST COMMERCIAL BANKS [BAR CHART] YEAR EFFICIENCY RATIO 1996 64.44% 1997 61.37% 1998 59.35% 1999 56.45% 2000 54.72% Maine. Our Maine subsidiary, Peoples Heritage Bank, strengthened our leading market position. The Bank was once again recognized as the number one lender to first-time homebuyers in Maine by the Maine State Housing Authority. The Government Banking Division now has 50% of the market share of municipal accounts in the state. And the Maine Development Foundation recognized our commitment to the state with their annual leadership award, The Champion for Economic Growth. Reflecting our profitable expansion, we opened a new corporate headquarters in Portland. New Hampshire. In New Hampshire, our affiliate, Bank of New Hampshire, received national recognition for its Small Business Solutions program. We are now taking the program throughout our banking network. The American Bankers Association recognized Bank of New Hampshire's commitment to the development of affordable housing programs and community projects. For the third consecutive year, we won the New Hampshire Business Finance Authority's number one lender award for large banks. Massachusetts. In Massachusetts, in addition to expanding our franchise, we unified our presence to strengthen our identity in the state by converting to a single name, First Massachusetts Bank. First Massachusetts was the name of the bank acquired in 2000 as part of the Banknorth acquisition. To reflect our wider geographic presence in Massachusetts, we also moved the headquarters of our Massachusetts bank to Worcester. Vermont. Our Vermont banks, The Howard Bank, Franklin Lamoille Bank, and First Vermont Bank, combined have that state's second largest deposit market share. With demographics similar to Maine and New Hampshire where we continue to thrive, we expect our products and services to enjoy great success. New York. In upstate New York, where we operate as Evergreen Bank, we are continuing to expand our breadth of products and services. Connecticut. And in Connecticut, GBT, a division of First Massachusetts Bank, provides a presence in an important market and affords us new opportunities. OUR STRATEGY FOR SUCCESS With the advent of our largest acquisition ever and new opportunities presented by the strength of our expanded franchise, 2000 was a year in which we once again reviewed our strategic plan and vision. To us, planning is an opportunity to evaluate our accomplishments, renew our vision, and expect more from ourselves. Our history is one of growth and success by combining our community banking philosophy with an increasingly sophisticated array of services - and we continue to take steps to strengthen our franchise for the future. Understandably, our plan is more one of refinement than major revision. 6 9 [GRAPHIC] Our Banknorth strategic plan is to build on our position as the premier community financial services company in the Northeast by focusing on performance, customers, employees and information. Greater performance. By performance, we mean we will look for ways to continue our strong growth in earnings by focusing on growing existing core businesses, by controlling costs, by strengthening noninterest income to improve revenue balance, and by establishing, acquiring, and partnering with complementary businesses. In 2000, we made strides on all counts. Our growth came from more than acquisitions. We continued to increase the number of 7 10 WE'RE NOW THE THIRD LARGEST BANKING COMPANY HEADQUARTED IN NEW ENGLAND products sold to each customer by improving our cross-sell ratios. We are also taking successful products and approaches among our subsidiary banks and rolling them out to other states to increase our success. As we expand as a diversified financial services company, our corresponding increase in noninterest income continues to improve our revenue balance. While we will continue to maintain our highly disciplined approach to acquisitions, we will seek out new opportunities to expand our size, strength, and ability to serve our customers and deliver shareholder value. Customer commitment. Our strategic plan is also a commitment to our customers. For all our customers, we pledge to deliver sales and service that set the standard in the markets we serve. Additionally, for our Relationship Customers, we will seek to deliver seamlessly integrated financial services that bring together the entire range of Banknorth resources. Employee strength. For our valued and talented employees, we have committed to further strengthening our ranks. We will ensure Banknorth is a place where each employee is and feels valued. We will empower managers to lead and to take action, and we will recognize and reward all employees for superlative performance. Enhanced information. Finally, we are committed to improving the accuracy, scope, availability, and ease-of-use of information in order to know and serve customers better, to strengthen decision-making, and to improve process quality, speed, and consistency. Our Internet Banking Services, discussed on the pages that follow, are just one example. REDEFINING COMMUNITY BANKING Community banking is not what it used to be - and that is just the way we want it at Banknorth. We are taking the concept of community banking - personalized, local service that is close to customers - and changing the way customers think about it. We are redefining community banking to include an increasingly sophisticated array of financial services, ones not usually available with the level of personalized service that has come to define the local banks of Banknorth Group. New directions. At Banknorth, our definition of community banking includes our expanded insurance and investing services, our individual and corporate trust services, our new Internet Banking program, our PhoneBank that handles over a million calls each month, our successful low-cost deposit products, local decision-making capabilities, and much more. To us, community banking simply has new aspects. Whenever we bring customers community banking, we always bring it to a community of one - even if that one is sitting at a home computer accessing our Internet Banking Services. 8 11 [GRAPHIC] 9 12 WE'VE NOW ACHIEVED RECORD EARNINGS 7 YEARS IN A ROW [BAR CHART] YEAR OPERATING INCOME* 1996 $131,826 1997 $161,035 1998 $186,946 1999 $217,774 2000 $234,686 *Net income excluding special items [BAR CHART] YEAR FEE INCOME GROWTH* 1996 $104,789 1997 $134,144 1998 $161,124 1999 $191,140 2000 $226,644 *Excluding losses on securities restructuring Strengthening relationships. Community banking is also about relationships. By getting to know our customers better, we are able to strengthen and deepen our relationships by increasing the number of products and services used by each customer. It is simply about helping our customers manage their finances better. At Banknorth, we are broadening the notion of community banking, so that it includes the full array of services that make us a one-stop financial resource for our customers - all available at or through their local community bank. OUR COMMERCIAL BANKING STRENGTH Banknorth provides a comprehensive range of commercial financial services. As a result, we are a leading choice for commercial borrowers across the Northeast. With an average commercial loan size of approximately $400,000, our lending expertise and systems are ideal for the mid-size and small businesses that comprise so much of our market area. We serve the large segment of commercial borrowers that bigger banks tend to ignore with a full range of commercial financial services that smaller banks simply cannot match. All with a level of service that demonstrates we care about each of our customers and value their business. At December 31, 2000, commercial business loans reached $2.3 billion, up 20% over December 31, 1999. Asset Based Lending. In addition to our traditional lending services that are typically collateral-based, the Asset Based Lending Group of Banknorth experienced significant growth in 2000. Driven by merger related market opportunities, our geographic expansion and the hiring of experienced asset based lending professionals, our asset based loan commitments reached $340 million, loans outstanding exceeded $200 million and fee income exceeded $1 million - all up over 100% from just one year ago. Cash Management. As an integral part of our commercial banking services, our cash management program keeps our customers' business capital working to maximize cash flow and investment income. In 2000, cash management fees grew 13% to $7.7 million. We have the majority of the cash management market share in Maine, have bolstered our market share in New Hampshire, and added new customer relationships in Massachusetts. Merchant Credit Card Processing. Our merchant credit card processing business has achieved tremendous growth and profitability increases over the past several years. In 2000, our merchant business contributed over $3.7 million in net fee income and we acquired over 2,500 new merchant customers, bringing our merchant customer total to nearly 12,000. 10 13 Leasing Services. In 2000, we changed the name of our leasing organization to Banknorth Leasing Company and opened a new office in Avon, Connecticut. We remain a strong municipal lessor in the New England market and have expanded our territory to include all of the Northeast. Commercial charters. Our change in 2000 to commercial banking charters with the Office of the Comptroller of Currency (OCC) reflects our strength as a commercial bank, our greater earnings capacity over thrifts and lending diversification well beyond mortgage loans. Internet Banking for business. Internet Banking services will be introduced to commercial customers in the second quarter of 2001. CONSUMER BANKING THE WAY OUR CUSTOMERS WANT IT At Banknorth we offer a full complement of consumer banking services, as well as less traditional consumer services one might not expect from community banks. Services such as trust, insurance and investment planning services, a delivery network that includes branches, ATMs, supermarket branches, and a PhoneBank - and now increasingly sophisticated Internet Banking Services that bring our capabilities right into the home. These are new directions for community banks as we continue to offer our customers the widest array of services delivered when and where they need and want them. Consumer lending. With growth in both Indirect Auto and Home Equity Lending, consumer lending increased 12% in 2000. One of our greatest strengths is our ability to take our consumer lending expertise to new markets. Banknorth is the leading indirect auto lender in most of the markets we serve. That is because we have developed a corporate expertise in working with car dealers and we understand and deliver what they need. For example, we provide a consistently high volume of loans, we review and approve loans quickly, usually in less than 20 minutes, and we're open on weekends and evenings, when the dealers are. As a home equity lender, we are a leading choice for those customers who need to turn some of the equity in their homes into cash - whether for a college education, home expansion, or another important expenditures. Mortgage lending. As the Northeast's leading community bank, we continue to lead the way in providing home mortgages. We are the number one mortgage originator in both Maine and New Hampshire. Deposit products. In 2000, we opened over 130,000 new "Simply Free Checking" accounts, as we executed our plan to leverage successful products across our markets. Expanded branch and ATM network. The acquisition of Banknorth Group brought our banking network to 285 branches and expanded our ATM network to 400 throughout the Northeast. In addition, we provide 11 14 WE'VE NOW GROWN TO OVER $18 BILLION IN ASSETS [BAR CHART] YEAR AVERAGE ASSETS 1996 $13,344,023 1997 $13,857,897 1998 $15,696,234 1999 $17,607,244 2000 $18,393,226 a network of supermarket branches offering weekend and evening hours. To improve efficiencies, we closed or sold branches that no longer met our business goals. Private Banking. We offer a full range of Private Banking services for those customers who require a higher level of specialized and personal banking service. PhoneBank. Another way we offer services when and where our customers want them is through our PhoneBank that handles over one million calls each month. Internet Banking for consumers. Our new Internet Banking service for retail customers, launched in early 2001, is one more way we are bringing our services right to our customers where they want them. INSURANCE SERVICES THAT BROADEN OUR SCOPE In 2000, we broadened our revenue stream by expanding our ability to provide insurance services throughout several of our markets. Accordingly, insurance commissions rose 27% in 2000 over 1999. Our insurance brokerage subsidiary completed key acquisitions of leading insurance agencies in Massachusetts and Connecticut to enhance and broaden our revenue base through the growth of fee-based income. In Massachusetts, our insurance brokerage subsidiary, Morse, Payson & Noyes Insurance, acquired the Palmer Goodell Insurance Agency headquartered in Springfield. The acquisition expanded our insurance agency presence into southwestern Massachusetts and expanded our capabilities in employee payroll deduction programs, disability insurance, and the insuring of schools, nonprofit organizations and health and human service agencies. In Connecticut, Morse, Payson & Noyes Insurance acquired one of the state's largest insurance agencies, the Watson Group located in Wethersfield. The purchase represents our initial entry into the Connecticut insurance brokerage business. With our increased size and corporate expertise, we gain greater leverage with underwriters to negotiate better pricing. In turn, we can increase our revenues while offering attractive rates to customers. GOVERNMENT BANKING THAT KEEPS ON GROWING Our expertise in Government Banking, formerly called Public Finance, continues to fuel our expansion in public sector deposits. In 2000, Government Banking deposits exceeded $1 billion, up from $626 million in 1999. Our new business includes the State of Maine account, Maine Turnpike Authority, and the State of Vermont account. Our Government Banking group now holds a 50% market share in Maine - much more than any other bank, and the number two market position in New Hampshire. 12 15 [GRAPHIC] EXPANDING TRUST AND INVESTMENT SERVICES Our new directions in community banking also include trust and investment services to provide all the services our customers need through their local community bank. Trust Services. In 2000, trust assets under management doubled with the acquisition of Banknorth and its money management firm, The Stratevest Group, NA. Investment Planning Services. Whether our customers are looking for mutual funds, stocks, bonds or annuities, they can find it through our Heritage Investment Planning Group. In 2000, our investment advisory services income rose 15% over 1999. 13 16 WE NOW HAVE OVER ONE MILLION CUSTOMERS [GRAPHIC] 14 17 INTERNET BANKING FOR CONSUMERS AND COMPANIES The successful launch of Internet Banking is yet another way we are bringing our consumer and commercial services to customers wherever they need them. Our recently launched Internet Banking service for retail customers now provides online account summaries and balances, account transfers, deposit account transaction histories, bill payment, link to credit card information, check reorders, change of address, and e-mail for problem resolution. Our Internet business services online will include full bank relationship access, account transaction history, bill payment, a link to account officers for loans and leases, and links to insurance brokerage and investment information. NEW DIRECTIONS FOR GROWTH We believe we are only beginning to realize the benefits of the tremendous opportunities resulting from the acquisition of Banknorth. We've gained new economies of scale, greater access to capital, and strengthened our franchise for the future. With mid-size loans at the heart of our commercial lending business, we can now provide more loans and larger dollar amounts. A greater range of customers now view us as a source for business lending. And our expanded size enables our customers to grow with us through our enhanced capabilities. We now have a greater opportunity to share successful products across markets and cross-sell services as appropriate. For example, the acquisition enabled us to bring new services to our acquired markets. In addition to opening tens of thousands of new checking accounts, we are rapidly expanding services such as home equity lending and indirect auto lending. Our insurance, investment and trust services also represent opportunities to expand as a one-stop financial resource. You could say we are doing what we have always done, sticking to our roots and our proven approach to community banking. To better serve our customers, our shareholders, and our employees, we are just branching out in new directions. 15 18 16 19 Banknorth Group, Inc. and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS (IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------------------------------------------------------------------------------------------------------------------------ RESULTS FOR THE YEAR 2000 1999 % Change 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------------ Net interest income $613,011 $624,229 (2)% $590,516 $566,346 $482,081 Provision for loan and lease losses 23,819 23,575 1 23,775 15,763 15,850 Noninterest income (excluding securities transactions) 226,644 191,140 19 161,124 134,144 104,789 Securities gains (losses) (15,456) 655 NM 6,423 2,837 3,520 Noninterest expenses (excluding special charges) 468,846 470,140 (0) 458,326 440,329 378,205 Special charges(1) 43,007 28,002 54 61,140 23,559 11,210 Net income 191,734 196,958 (3) 141,744 145,488 123,044 Operating income (net income excluding special items)(1) 234,686 217,774 8 186,946 161,035 131,826 ------------------------------------------------------------------------------------------------------------------------------------ SHARE DATA(2) ------------------------------------------------------------------------------------------------------------------------------------ Earnings per share: Basic $1.33 $1.35 (1)% $0.97 $1.00 $0.88 Diluted 1.32 1.34 (1) 0.95 0.98 0.87 Operating diluted earnings per share(1) 1.62 1.48 9 1.25 1.08 0.93 Operating diluted cash basis earnings per share(1)(3) 1.76 1.62 9 1.37 1.18 1.00 Dividends per share 0.50 0.47 6 0.44 0.38 0.34 Book value per share at year end 9.42 8.22 15 8.37 7.97 7.39 Tangible book value per share at year end 8.11 6.95 17 6.97 6.88 6.59 Stock price: High 21.13 20.25 4 26.75 23.81 14.32 Low 10.38 14.31 (27) 12.81 12.94 9.50 Close 19.94 15.06 32 20.00 23.00 14.00 Weighted average shares outstanding: Basic 144,270 145,758 (1) 146,119 145,481 139,187 Diluted 145,194 147,428 (2) 148,965 148,600 141,658 ------------------------------------------------------------------------------------------------------------------------------------ KEY PERFORMANCE RATIOS ------------------------------------------------------------------------------------------------------------------------------------ Return on average assets 1.05% 1.12% (6)% 0.90% 1.05% 1.08% Return on average equity 15.69 16.42 (4) 11.96 13.01 12.53 Operating return on average assets(1) 1.28 1.24 3 1.19 1.16 1.16 Operating return on average equity(1) 19.20 18.16 6 15.78 14.40 13.42 Net interest margin(4) 3.65 3.86 (5) 4.10 4.42 4.58 Average equity to average assets 6.66 6.81 (2) 7.55 8.07 8.66 Efficiency ratio(5) 54.72 56.45 (3) 59.35 61.37 64.44 Noninterest income as a percent of total income 26.99 23.44 15 21.44 19.15 17.86 Tier 1 leverage capital ratio 7.02 6.75 4 7.22 7.65 8.11 Dividend payout ratio(7) 36.91 33.19 11 40.38 39.60 33.86 ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE BALANCES ------------------------------------------------------------------------------------------------------------------------------------ Assets $18,343,226 $17,607,344 4% $15,696,234 $13,857,897 $11,344,023 Loans and leases 10,485,289 9,908,177 6 10,679,544 9,328,963 7,799,062 Earning assets 16,954,605 16,315,233 4 14,503,172 12,906,106 10,601,537 Deposits 11,891,481 11,784,103 1 11,435,942 10,341,582 9,004,618 Shareholders' equity 1,222,378 1,199,496 2 1,184,770 1,117,953 982,204 ------------------------------------------------------------------------------------------------------------------------------------ AT YEAR END ------------------------------------------------------------------------------------------------------------------------------------ Assets $18,233,810 $18,508,264 (1)% $16,453,120 $15,332,821 $12,894,769 Loans and leases, gross 10,845,662 9,854,656 10 9,925,137 10,012,718 8,524,522 Debt and equity securities 5,880,658 6,873,182 (14) 4,379,774 3,617,236 3,031,996 Deposits 12,107,256 11,710,501 3 12,016,212 11,088,410 9,996,458 Borrowings 4,560,615 5,367,478 (15) 2,910,173 2,774,286 1,648,026 Shareholders' equity 1,330,857 1,192,274 12 1,222,390 1,164,383 1,087,890 Common shares outstanding 141,245 144,974 (3) 146,105 146,133 147,231 Nonperforming assets(8) 67,132 69,192 (3) 89,021 98,125 97,007 ------------------------------------------------------------------------------------------------------------------------------------
NM Not meaningful (1) Special items consist of (i) special charges and (ii) losses on restructuring the investment portfolio of $10.4 million on an after-tax basis in 2000. Special charges consist of merger charges, costs to discontinue the correspondent mortgage business, asset write-downs and branch closing costs and on an after-tax basis amounted to $32,591, $20,816, $45,202, $15,547and $8,782 during 2000, 1999, 1998, 1997 and 1996, respectively. See Note 9 to the Consolidated Financial Statements. (2) Where appropriate amounts have been adjusted for a two-for-one split of the common stock in May 1998. (3) Earnings before amortization of goodwill and core deposit premiums. (4) Net interest income divided by average interest-earning assets, calculated on a fully-taxable equivalent basis. (5) Excludes distribution on securities of subsidiary trusts, special items and securities transactions. (6) Excludes securities transactions. (7) Cash dividends paid divided by net income (8) Nonperforming assets consist of nonperforming loans, other real estate owned and repossessed assets. 17 20 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion and analysis which follows focuses on the factors affecting Banknorth Group, Inc.'s (the "Company") results of operations during 2000, 1999, and 1998 and financial condition at December 31, 2000 and 1999. The Consolidated Financial Statements and related notes should be read in conjunction with this review. Certain amounts in years prior to 2000 have been reclassified to conform to the 2000 presentation. GENERAL Banknorth Group, Inc. is a multi-bank holding company which conducts business from its headquarters in Portland, Maine and, as of December 31, 2000, 285 offices located in Maine, New Hampshire, Massachusetts, Connecticut, Vermont and upstate New York. The Company is the largest bank holding company headquartered in northern New England and one of the Country's 50 largest commercial banking companies. The Company offers a broad range of commercial and consumer banking services and products as well as trust, investment advisory and insurance brokerage services through eight wholly-owned banking subsidiaries, all of which are national banks: Peoples Heritage Bank, N.A. ("PHB"), Bank of New Hampshire, N.A. ("BNH"), First Massachusetts Bank, N.A. ("First Massachusetts"), Franklin Lamoille Bank, N.A. ("Franklin Lamoille"), First Vermont Bank, N.A. ("First Vermont"), The Howard Bank, N.A. ("Howard"), Evergreen Bank, N.A. ("Evergreen") and The Stratevest Group, N.A ("Stratevest"), a nondepository trust company. PHB operates offices throughout Maine and, through subsidiaries, engages in financial planning, insurance brokerage and equipment leasing activities. At December 31, 2000, PHB had assets of $4.4 billion and equity of $327 million. BNH operates offices throughout New Hampshire. At December 31, 2000, BNH had assets of $4.6 billion and equity of $303 million. First Massachusetts operates offices in Massachusetts, southern New Hampshire and, through its GBT division, central Connecticut. At December 31, 2000, First Massachusetts had assets of $6.2 billion and equity of $438 million. Franklin Lamoille, Howard and First Vermont operate offices throughout Vermont. At December 31, 2000, Franklin Lamoille, Howard and First Vermont Bank had assets of $341 million, $1.0 billion and $753 million, respectively, and equity of $23 million, $77 million and $60 million, respectively. Evergreen operates offices in upstate New York and had assets of $1.3 billion and equity of $77 million at December 31, 2000. Stratevest is headquartered in Vermont and conducts business in each of the states in which the Company's depository subsidiaries have offices. At December 31, 2000, Stratevest had approximately $8.8 billion in assets under management. Each of the depository banks is a member of the Bank Insurance Fund ("BIF") administered by the Federal Deposit Insurance Corporation ("FDIC"). Business Strategy The principal business of the Company consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans and leases, commercial real estate loans, residential mortgage loans and a variety of consumer loans. In addition to keeping loans for its own portfolio, the Company sells loans into the secondary market. The Company also invests in mortgage-backed securities and securities issued by the United States Government and agencies thereof, as well as other securities. In addition, the Company engages in trust, investment advisory and insurance brokerage activities. The Company's goal is to sustain profitable, controlled growth by focusing on increasing loan and deposit market share in New England and upstate New York, developing new financial products, services and delivery channels, closely managing yields on earning assets and rates on interest-bearing liabilities, increasing noninterest income through, among other things, expanded trust, investment advisory and insurance brokerage services, and controlling the growth of non-interest expenses. It is also part of the business strategy of the Company to supplement internal growth with targeted acquisitions of other financial institutions and insurance agencies in its market area. During the period covered by this discussion, the Company engaged in numerous merger and acquisition related activities. For further information, see Note 2 to the Consolidated Financial Statements and "Completed Acquisitions" below. The Company regularly evaluates potential acquisitions and, as a general rule, announces acquisitions only after a definitive agreement has been reached. Economic Conditions The Company believes that its market area has witnessed steady economic growth since 1992. Although the Company's market area has witnessed steady economic growth, bank regulatory agencies are noting increased risk in loan portfolios at banks across the country. In addition, oil and gas price increases and other factors may result in an overall slow-down of the economy. There can be no assurance that the economies and real estate markets in the Company's primary market areas will continue to grow and be significant determinants of the quality of the Company's assets in future periods and, thus, its results of operations, liquidity and financial condition. Completed Acquisitions During the third quarter of 2000, the Company completed the acquisition of Palmer Goodell Insurance Agency, Inc. (based in Springfield, Massachusetts) and Arthur A. Watson & Co., Inc. (an insurance agency based in Wethersfield, Connecticut). These agencies, which were acquired for a combination of cash and stock, had combined annual revenues of approximately $18 million in 1999. The acquisitions resulted in the recording of goodwill of $22.5 million, which is being amortized over 20 years. These insurance agency acquisitions are an important part of the Company's strategy to offer its customers a full range of financial services in all the markets it serves. On May 10, 2000, the Company completed the acquisition of Banknorth Group, Inc. ("Banknorth"), which was effected by the merger of Banknorth with and into People Heritage Financial Group, Inc., which changed its name to "Banknorth Group, Inc." as a result of the merger. Approximately 42.9 million shares of common stock of the Company ("Common Stock") were issued in connection with this transaction. As of December 31, 1999, Banknorth had total assets of $4.6 billion and total shareholders' equity of $341 million. The acquisition was accounted for using the pooling-of-interests method and, accordingly, financial information for all periods presented prior to the date of acquisition has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. 18 21 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- On January 1, 1999, the Company completed the acquisition of SIS Bancorp, Inc. ("SIS"). Approximately 16.3 million shares of Common Stock were issued in connection with this acquisition. SIS had total assets of $2.0 billion and shareholders' equity of $139 million at December 31, 1998. The acquisition of SIS was accounted for as a pooling-of-interests and, accordingly, financial information for all periods presented prior to the date of acquisition has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. During 1998, the Company completed the acquisition of three insurance agencies for an aggregate of 454,864 shares of Common Stock. These acquisitions were accounted for as purchases and, accordingly, the Company's financial statements reflect their operations from the date of acquisition. The Company recorded $9.3 million of goodwill in connection with these purchases. On April 10, 1998, the Company completed the acquisition of CFX Corporation ("CFX"). Approximately 32.8 million shares of Common Stock were issued in connection with this transaction. At December 31, 1997, CFX had total assets of $2.9 billion and total shareholders' equity of $245.7 million. The acquisition of CFX was accounted for as a pooling-of-interests and, accordingly, financial information for all periods presented prior to the date of acquisition has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. The Company incurred various merger related and restructuring charges in connection with the foregoing acquisitions and in connection with acquisitions effected by acquired companies such as Banknorth, SIS and CFX (collectively, "special charges"). On an after-tax basis special charges amounted to $32.6 million, $20.8 million and $45.2 million in 2000, 1999 and 1998, respectively. Included in the 2000 special charges were $31.5 million of mergerrelated expenses and $1.1 million of expenses related to the closing of 11 branches. Special charges in 1999 included $5.3 million of after-tax costs to discontinue the Company's correspondent mortgage business. For additional information, see "Results of Operations - Special Charges" and Note 9 to the Consolidated Financial Statements. The Company also incurred a $15.9 million pre-tax loss on the restructuring of the securities portfolio in the second quarter of 2000, which along with special charges comprise special items. RESULTS OF OPERATIONS Comparison of 2000 and 1999 Overview The Company reported net income of $191.7 million or $1.32 per diluted share in 2000, compared to $197.0 million or $1.34 per diluted share in 1999. Excluding special items, the Company earned $234.7 million or $1.62 per diluted share in 2000 compared to $217.8 million or $1.48 per diluted share during 1999, an increase of 9%. Return on average equity excluding special items was 19.20% in 2000 compared to 18.16% in 1999. The improved results were attributable to increased noninterest income and improved efficiency. Total revenues, excluding securities transactions, increased 10% during 2000 as a result of increased noninterest income. Noninterest income excluding securities transactions increased 19% during 2000, primarily as a result of increases in income from deposit services, and insurance commissions. Net interest income decreased 2% during 2000, as compared to 1999. The decrease was attributable to a decrease in net interest margin due to increased short-term interest rates. The decline in net interest margin reflected an increase in the average rates paid on interest-bearing liabilities, particularly higher rates on Federal Home Loan Bank advances. Noninterest expenses, excluding special items, remained flat in 2000 while total revenues increased 9%. Factors affecting the results included the acquisition of two insurance agencies offset by the sale, merger or closing of branches and merger synergies throughout the year. Net Interest Income Net interest income on a fully taxable-equivalent basis decreased by $10.3 million, or 2%, during 2000 due primarily to a 61 basis point increase in average rates paid on interest-bearing liabilities. The net interest margin declined to 3.65% in 2000 from 3.86% during 1999 due primarily to rising short-term interest rates during the year. Average loans and leases increased by $577.1 million, or 6%, in 2000 compared to 1999. Commercial and consumer loans experienced significant growth while residential real estate loans declined. Residential real estate loans declined largely due to the Company's discontinuance of the correspondent mortgage business in January 1999 and the April 1999 conversion of $633 million of residential loans into mortgage-backed securities, which are classified as securities held to maturity. Average securities increased $146 million, or 2%, in 2000. Average deposits increased 1% during 2000. Average interest-bearing liabilities increased $569.2 million, or 4%, in 2000 compared to 1999. Information on average balances, yields and rates for the past three years can be found in Table 1. Table 2 shows the changes from 1999 to 2000 in tax equivalent net interest income by category due to changes in rate and volume. 19 22 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TABLE 1 -- THREE YEAR AVERAGE BALANCE SHEETS -------------------------------------------------------------------------------- The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income on interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. For purposes of the table and the following discussion, (i) income from interest-earning assets and net interest income is presented on a fully-taxable equivalent basis primarily by adjusting income and yields earned on tax-exempt interest received on loans to qualifying borrowers and on certain of the Company's securities to make them equivalent to income and yields earned on fully-taxable investments, assuming a federal income tax rate of 35%, and (ii) unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. Information is based on average daily balances during the indicated periods.
------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE YIELD/ Average Yield/ Average Yield/ (Dollars in Thousands) BALANCE INTEREST RATE Balance Interest Rate Balance Interest Rate ------------------------------------------------------------------------------------------------------------------------------------ Loans and leases (1) $10,485,289 $898,447 8.57% $9,908,177 $829,883 8.38% $10,679,544 $912,102 8.54% Investment securities 6,405,415 434,225 6.78% 6,259,436 395,616 6.32% 3,667,733 231,881 6.32% Federal funds sold and other short-term investments 63,901 3,677 5.75% 147,620 7,154 4.85% 155,895 6,890 4.42% ----------- --------- ----------- --------- ----------- --------- Total earning assets 16,954,605 1,336,349 7.88% 16,315,233 1,232,653 7.56% 14,503,172 1,150,873 7.94% --------- --------- --------- Noninterest earning assets 1,388,621 1,292,111 1,193,062 ----------- ----------- ----------- Total assets $18,343,226 $17,607,344 $15,696,234 =========== =========== =========== Interest-bearing deposits: Certificates of deposit $4,521,217 244,985 5.42% $4,617,521 231,755 5.02% $4,696,446 255,745 5.45% Brokered deposits 118,791 7,604 6.40% 179,760 9,653 5.37% 283,499 16,535 5.83% Other interest-bearing deposits 5,309,325 158,661 2.99% 5,179,164 132,118 2.55% 4,813,522 133,136 2.77% ----------- --------- ----------- --------- ----------- --------- Total interest-bearing deposits 9,949,333 411,250 4.13% 9,976,445 373,526 3.74% 9,793,467 405,416 4.14% Borrowed funds 5,005,268 306,026 6.11% 4,408,944 229,764 5.21% 2,761,451 150,228 5.44% ----------- --------- ----------- --------- ----------- --------- Total interest-bearing liabilities 14,954,601 717,276 4.80% 14,385,389 603,290 4.19% 12,554,918 555,644 4.43% --------- --------- --------- Non-interest bearing deposits 1,942,148 1,807,658 1,642,475 Other liabilities 125,324 111,723 184,071 Securities of subsidiary trusts 98,775 103,078 130,000 Shareholders' equity 1,222,378 1,199,496 1,184,770 ----------- ----------- ----------- Total liabilities and shareholders' equity $18,343,226 $17,607,344 $15,696,234 =========== =========== =========== Net earning assets $2,000,004 $1,929,844 $1,948,254 =========== =========== =========== Net interest income (fully-taxable equivalent) 619,073 629,363 595,229 Less: fully-taxable equivalent adjustments (6,062) (5,134) (4,713) --------- --------- --------- Net interest income $613,011 $624,229 $590,516 ========= ========= ========= Net interest rate spread (fully-taxable equivalent) 3.08% 3.37% 3.51% Net interest margin (fully-taxable equivalent) 3.65% 3.86% 4.10% ------------------------------------------------------------------------------------------------------------------------------------
(1) Loans and leases include portfolio loans and leases, loans held for sale and nonperforming loans, but unpaid interest on nonperforming loans has not been included for purposes of determining interest income. 20 23 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TABLE 2 -- CHANGES IN NET INTEREST INCOME -------------------------------------------------------------------------------- The following table presents certain information on a fully-taxable equivalent basis regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by old volume), (2) changes in volume (change in volume multiplied by old rate) and (3) changes in rate/volume (change in rate multiplied by change in volume).
------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2000 vs 1999 Year Ended December 31, 1999 vs 1998 Increase (Decrease) Due To Increase (Decrease) Due To ------------------------------------------------------------------------------------------------------------------------------------ Rate/ Rate/ (Dollars in Thousands) Rate Volume Volume Total Rate Volume Volume Total ------------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets: Loans and leases(1) $ 18,826 $ 48,362 $ 1,376 $ 68,564 $(17,087) $(65,875) $ 743 $(82,219) Investment securities 28,793 9,226 590 38,609 -- 163,796 (61) 163,735 Federal funds sold and other short-term investments 1,329 (4,060) (746) (3,477) 670 (366) (40) 264 -------- -------- ------- -------- -------- -------- ------- -------- Total earning assets 48,948 53,528 1,220 103,696 (16,417) 97,555 642 81,780 -------- -------- ------- -------- -------- -------- ------- -------- Interest-bearing liabilities: Deposits: Regular savings and money market access and NOW accounts 22,788 3,319 436 26,543 (10,590) 10,128 (556) (1,018) Certificates of deposit 18,470 (4,834) (406) 13,230 (20,195) (4,301) 506 (23,990) Brokered deposits 1,852 (3,274) (627) (2,049) (1,304) (6,048) 470 (6,882) -------- -------- ------- -------- -------- -------- ------- -------- Total interest-bearing deposits 43,110 (4,789) (597) 37,724 (32,089) (221) 420 (31,890) Borrowed funds 39,680 31,068 5,514 76,262 (6,351) 89,624 (3,737) 79,536 -------- -------- ------- -------- -------- -------- ------- -------- Total interest-bearing liabilities 82,790 26,279 4,917 113,986 (38,440) 89,403 (3,317) 47,646 -------- -------- ------- -------- -------- -------- ------- -------- Net interest income (fully taxable equivalent) $(33,842) $ 27,249 $(3,697) $(10,290) $ 22,023 $ 8,152 $ 3,959 $ 34,134 ======== ======== ======= ======== ======== ======== ======= ======== ------------------------------------------------------------------------------------------------------------------------------------
(1) Loans and leases include portfolio loans and leases, loans held for sale and nonperforming loans, but unpaid interest on nonperforming loans has not been included for purposes of determining interest income. Provision and Allowance for Loan and Lease Losses The Company recorded a provision for loan and lease losses in 2000 of $23.8 million, as compared to a $23.6 million provision in 1999. Net chargeoffs to average loans outstanding was 0.24% in 2000, consistent with 1999. Net chargeoffs were $25.3 million in 2000 compared to $23.6 million in 1999, due to lower recoveries in 2000. The allowance for loan and lease losses amounted to $153.6 million at December 31, 2000, as compared to $155.1 million at December 31, 1999. Nonperforming assets were down $2 million from December 31, 1999 to $67.1 million, or 0.37% of total assets. Accruing loans 90 days past due were $6.0 million at December 31, 2000, down 51% from the prior year. The allowance for loan and leases losses is maintained at a level determined to be adequate by management to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to income and by recoveries on loans previously charged off. Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment and is determined based on management's ongoing evaluation. The ongoing evaluation process includes a formal analysis of the allowance each quarter, which considers, among other factors, the character and size of the loan portfolio, current economic and market conditions, loan growth, delinquency trends, nonperforming loan trends, charge-off experience, portfolio migration data and other asset quality factors. The Company evaluates specific loan status reports on certain commercial and commercial real estate loans rated "substandard" or worse in excess of a specified dollar amount. Estimated reserves for each of these credits is determined by reviewing current collateral value, financial information, cash flow, payment history and trends and other relevant facts surrounding the particular credit. The remaining commercial and commercial real estate loans are provided for as part of pools of similar loans using a combination of historical loss experience and migration analysis, which considers the probability of a loan moving from one risk rating category to another over the passage of time, transition matrix and qualitative adjustments. For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical charge-offs and recovery experience to the current outstanding balance in each type of loan category, with consideration given to loan growth over the preceding twelve months. Although management utilizes its judgment in providing for losses, for the reasons discussed under "Asset Quality - Nonperforming Assets," there can be no assurance that the Company will not have to change the amount of its provision for loan and lease losses in future periods. 21 24 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TABLE 3-- FIVE YEAR TABLE OF ACTIVITY IN THE ALLOWANCE FOR LOAN AND LEASE LOSSES -------------------------------------------------------------------------------- The following sets forth information concerning the activity in the Company's allowance for loan and lease losses during the periods indicated.
--------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, --------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) 2000 1999 1998 1997 1996 --------------------------------------------------------------------------------------------------------------------------- Average loans and leases outstanding $10,485,289 $9,908,177 $10,679,544 $9,328,963 $7,799,062 =========== ========== =========== ========== ========== Allowance at the beginning of period $ 155,048 $ 155,098 $ 150,615 $ 142,682 $ 133,043 Additions due to acquisitions -- -- 2,200 7,361 13,015 Charge-offs: Real estate loans 5,394 8,698 10,233 6,991 21,336 Commercial business loans and leases 7,790 5,125 7,718 9,052 6,552 Consumer loans and leases 21,508 22,211 20,459 19,169 12,141 ----------- ---------- ----------- ---------- ---------- Total loans charged off 34,692 36,034 38,410 35,212 40,029 ----------- ---------- ----------- ---------- ---------- Recoveries: Real estate loans 2,478 3,153 6,912 9,676 13,735 Commercial business loans and leases 2,334 3,188 4,040 5,126 3,213 Consumer loans and leases 4,563 6,068 5,966 5,219 3,855 ----------- ---------- ----------- ---------- ---------- Total loans recovered 9,375 12,409 16,918 20,021 20,803 ----------- ---------- ----------- ---------- ---------- Net charge-offs 25,317 23,625 21,492 15,191 19,226 Provision for loan and lease losses 23,819 23,575 23,775 15,763 15,850 ----------- ---------- ----------- ---------- ---------- Allowance at the end of the period $ 153,550 $ 155,048 $ 155,098 $ 150,615 $ 142,682 =========== ========== =========== ========== ========== Ratio of net charge-offs to average loans and leases outstanding 0.24% 0.24% 0.20% 0.16% 0.25% Ratio of allowance to total portfolio loans and leases at end of period 1.42% 1.57% 1.56% 1.50% 1.67% Ratio of allowance to nonperforming loans and leases at end of period 249.13% 266.74% 206.71% 179.85% 183.69% ---------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------ TABLE 4-- ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES-- FIVE YEAR SCHEDULE ------------------------------------------------------------------------------------------------------------------------------------ The allowance for loan and lease losses is available for offsetting credit losses in connection with any loan, but is internally allocated to various loan categories as part of the Company's process for evaluating the adequacy of the allowance for loan and lease losses. The following table sets forth information concerning the allocation of the Company's allowance for loan and lease losses by loan categories at the dates indicated. ------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------ December 31, ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------------ PERCENT OF Percent of Percent of Percent of Percent of LOANS IN EACH Loans in Each Loans in Each Loans in Each Loans in Each CATEGORY TO Category to Category to Category to Category to AMOUNT TOTAL LOANS Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans ------------------------------------------------------------------------------------------------------------------------------------ Real estate loans $ 81,026 47.98% $ 79,147 50.40% $ 77,516 54.13% $ 79,958 59.83% $ 78,871 60.23% Commercial business loans and leases 50,486 21.29 49,316 19.53 46,753 18.50 36,161 15.67 37,317 15.88 Consumer loans and leases 22,038 30.73 26,585 30.07 30,829 27.37 27,254 24.50 20,237 23.89 Unallocated allowance -- -- -- -- -- -- 7,242 -- 6,257 -- -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- $153,550 100.00% $155,048 100.00% $155,098 100.00% $150,615 100.00% $142,682 100.00% ======== ======= ======== ======= ======== ======= ======== ======= ======== ======= ------------------------------------------------------------------------------------------------------------------------------------
22 25 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- The unallocated components in the preceding table relate to reserves acquired in connection with the acquisition of CFX. These reserves were allocated during 1998 in accordance with the Company's analysis of the CFX loan portfolio. Noninterest Income Noninterest income was $211.2 million in 2000 compared to $191.8 million in 1999. Excluding losses on securities restructuring, noninterest income increased $35.3 million or 19% in 2000, including increases of $11.8 million in deposit services income, and $5.5 million in insurance commissions. Deposit services income of $81.0 million increased 17% from 1999 and was attributable to volume driven increases in checking account income, particularly increases in overdraft fees and ATM fee income. Trust and investment advisory services income of $42.4 million increased 8% during 2000 primarily due to sales of investment products. Assets under management were $8.8 billion and $7.4 billion at December 31, 2000 and 1999, respectively, an increase of 19%. Insurance commissions income was $25.7 million and $20.3 million in 2000 and 1999, respectively, an increase of 27%. The Company's acquisitions of insurance agencies in Massachusetts and Connecticut at the end of third quarter of 2000 accounted for $4.8 million of the increase. Income from bank owned life insurance ("BOLI") was $17.7 million and $15.5 million in 2000 and 1999, respectively. This 14% increase reflects additional income from purchases in late 1999, as well as investment appreciation which resulted in higher cash surrender value. BOLI covers certain employees of the Company or its bank subsidiaries. The cash surrender value of BOLI was $306.4 million at December 31, 2000 compared to $288.8 million at December 31, 1999. Most of the Company's BOLI is invested in the `general account' of quality insurance companies. All such companies were rated AA-or better by Standard and Poors at December 31, 2000. Merchant and card product income of $15.4 million increased 17% from 1999 due to increases in transaction volume. This income represents fees and interchange income generated by the use of Company-issued debit cards and charges to merchants for credit card transactions processed. Mortgage banking services income of $22.0 million increased $1.5 million or 8% during 2000. The increase in 2000 resulted from higher gains on the sale of mortgage servicing rights which were substantially offset by lower gains on sales of loans into the secondary market. See the discussion below on capitalized mortgage servicing rights. The Company's portfolio of residential mortgages serviced for investors was $1.6 billion at December 31, 2000 compared to $4.5 billion and $5.2 billion at December 31, 1999 and 1998, respectively. Mortgage loans serviced for others decreased in 2000 primarily as a result of the sale of mortgage servicing rights, as discussed below. Capitalized mortgage servicing rights decreased from $52.7 million at December 31, 1999 to $23.2 million at December 31, 2000. After a comprehensive review of its mortgage banking operations, the Company decided to sell virtually all of its mortgage servicing rights and to sell mortgage servicing rights on new loan originations on a flow basis in the future. The Company sold this asset after it determined that it could no longer meet its internal investment targets because of the relatively small size of its loans serviced for others portfolio, the increasing level of sophistication of the national competitors and the volatility due to changes in interest rates inherent in the mortgage servicing rights asset. In the fourth quarter of 2000, the Company reached an agreement to sell the servicing rights on substantially all residential mortgage loans which it services for others. The sale will be in two installments and is expected to be completed by March 31, 2001. In the fourth quarter of 2000, the Company recorded a $5.2 million gain on sale of $1.8 billion of loans serviced for others, which was reduced by a $1.5 million loss on the sale of certain principal only securities and interest rate floor contracts which were used to hedge the prepayment risk related to the mortgage servicing rights asset. -------------------------------------------------------------------------------- TABLE 5 -- MORTGAGE BANKING SERVICES INCOME -------------------------------------------------------------------------------- The following table sets forth certain information relating to the Company's mortgage banking activities at the dates or for the periods indicated.
-------------------------------------------------------------------------------- At or for the Year Ended December 31, -------------------------------------------------------------------------------- (Dollars in Thousands) 2000 1999 1998 Residential mortgages serviced for investors $ 1,618,610 $ 4,540,948 $ 5,178,281 =========== =========== =========== Residential mortgage sales income $ 2,811 $ 8,617 $ 26,629 Residential mortgage servicing income, net 8,414 8,322 13,243 Change in impairment reserve for mortgage servicing rights 2,895 4,800 (11,586) Valuation adjustment- interest rate floor (197) (3,950) 2,380 Gain on sale of mortgage servicing rights 8,040 2,634 2,028 ----------- ----------- ----------- Mortgage banking services income $21,963 $20,423 $32,694 =========== =========== ===========
Net securities gains amounted to $439 thousand and $655 thousand during 2000 and 1999, respectively. Gains from the sale of securities are subject to market and economic conditions and, as a result, there can be no assurance that gains reported in prior periods will be achieved in the future. In 2000, the Company incurred a $15.9 million ($10.3 million after-tax) loss on restructuring parts of its securities portfolio by selling $104 million of securities available for sale coincident with the acquisition of Banknorth. The securities, which had a weighted average yield of 5.73%, were primarily perpetual preferred stocks acquired in prior acquisitions, treasury bonds (remaining maturity greater than 10 years) and below investment grade debt securities. After the restructuring, the Company no longer holds any of these types of securities. Other noninterest income amounted to $22.4 million and $13.2 million during 2000 and 1999, respectively, and consisted primarily of loan fee income, gains on sales of certain assets and commissions on official checks. The $9.2 million increase in 2000 consisted primarily of a $4.7 million gain on the sale of $29 million of credit card loans in the second quarter of 2000, a $1.2 million gain on sale of eight branches during the fourth quarter of 2000, realized gains on venture capital and limited partnership investments and increased loan fee income. 23 26 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- Noninterest Expense Noninterest expense was $511.9 million in 2000 compared to $498.1 million in 1999. Excluding special charges, noninterest expense in 2000 was slightly lower than 1999. The efficiency ratio, which excludes special items, distributions on securities of subsidiary trusts and securities transactions, improved to 54.72% during 2000 from 56.45% in 1999 primarily as a result of the efficiencies created by the assimilation of recent acquisitions, as well as operating improvements. Salaries and benefits expense of $230.2 million decreased by $1.3 million or 0.6% during 2000. The decline was due to merger-related savings, favorable pension experience and lower incentive compensation which were partially offset by normal merit increases. Data processing expense decreased 3% to $37.6 million in 2000 from $38.8 million during 1999. The decrease was primarily attributable to the absence in the current period of costs incurred in 1999 in order to ensure that the Company's computer systems properly recognized the year 2000, as well as merger-related savings. Occupancy expense in 2000 was essentially unchanged from that in 1999. Savings from the closing or sale of several branches during the year were offset by increased rent expense at other locations. Equipment expense increased $1.5 million or 5% in 2000 compared to 1999 due to increased maintenance and depreciation on new equipment and software. Amortization of goodwill and deposit premiums increased $374 thousand or 2% during 2000, due primarily to the purchase of two insurance agencies at the end of the third quarter of 2000. Advertising and marketing expense decreased $2.2 million or 15% during 2000, reflecting the synergies from recent acquisitions. Other noninterest expense, which is comprised primarily of general and administrative expenses, increased $2.0 million or 2% in 2000. Special Charges Special charges consist of merger-related expenses of $43.0 million, $20.6 million and $61.1 million during 2000, 1999 and 1998, respectively, as well as $1.6 million of expenses related to the closing of 11 branches in 2000 and $7.4 million of costs related to the discontinuation of the Company's correspondent mortgage lending business in 1999. On an after-tax basis, special charges amounted to $32.6 million, $20.8 million and $45.2 million for the years ended 2000, 1999 and 1998, respectively. For a tabular analysis of the Company's special charges, see Note 9 to the Consolidated Financial Statements. Taxes The Company's effective tax rate was 33.5% in 2000 compared to 33.1% in 1999. Comprehensive Income The Company's comprehensive income amounted to $282.6 million and $69.7 million during 2000 and 1999, respectively. Comprehensive income differed from the Company's net income in 2000 because of a $90.7 million net unrealized gain on securities and a $250 thousand adjustment to the minimum pension liability during 2000 and in 1999 due to a $127.3 million increase in net unrealized losses on securities. For additional information, see the Consolidated Financial Statements. COMPARISON OF 1999 AND 1998 The Company reported net income of $197.0 million for 1999, or $1.34 per diluted share, compared with net income of $141.7 million, or $0.95 per diluted share, reported for 1998. Excluding the impact of special charges, net income and diluted earnings per share were $217.8 million and $1.48, respectively, for 1999 and $186.9 million and $1.25, respectively, for 1998 (a per share increase of 18%). Excluding special charges, return on average assets and return on average equity were 1.24% and 18.16%, respectively, for 1999 and 1.19% and 15.78%, respectively, for 1998. Net interest income on a fully taxable-equivalent basis totaled $629.4 million during 1999, as compared with $595.2 million in 1998. The $34.1 million, or 6%, increase in 1999 was primarily attributable to deposit costs declining faster than loan yields, increased levels of noninterest bearing deposits and an increase in the average amount of investment securities outstanding. The provision for loan and lease losses was $23.6 million in 1999 compared to a $23.8 million provision in 1998 as a result of a decrease in residential real estate loans outstanding and the Company's estimate of future losses. The ratio of the allowance to nonperforming loans at December 31, 1999 was 267% compared to 207% at December 31, 1998. The allowance for loan and lease losses represented 1.57% of total loans at December 31, 1999 compared to 1.56% at December 31, 1998. The improved coverage resulted primarily from a decrease in the amount of the net loan portfolio, due primarily to a lower level of residential real estate loans. Noninterest income was $191.8 million and $167.5 million for the years ended December 31, 1999 and 1998, respectively. Increases of $14.3 million in deposit services income, $10.0 million in trust and investment advisory services income and $7.3 million in insurance commissions contributed to the $24.2 million, or 14%, increase in 1999. Deposit services income of $69.2 million reflected 26% growth from 1998. The 34% increase in trust and investment advisory services income was primarily due to increased assets under management and the acquisition of approximately $1.0 billion in investment assets in conjunction with the purchase of 10 branches in November 1998, as well as strong sales and market conditions throughout the year. The 56% increase in insurance commissions reflected the Company's acquisitions of insurance agencies in Massachusetts and New Hampshire in the fourth quarter of 1998, which were accounted for as purchases. Noninterest expense was $498.1 million for 1999 compared with $519.5 million for 1998, a 4% decrease. The 1999 decrease was primarily attributable to a decrease in special charges and distributions on securities of subsidiary trusts, which were substantially offset by increases in salaries and benefits, higher data processing expense and higher amortization of goodwill and deposit premiums due to recent purchase acquisitions. The efficiency ratio, which excludes special charges, distributions on securities of subsidiary trusts and securities transactions, improved from 59.35% in 1998 to 56.45% in 1999. Average earning assets increased $1.8 billion or 12% in 1999 primarily due to growth in investment securities due to additional investments in federal agency mortgage-backed securities. Average interest-bearing liabilities increased 15% in 1999 in order to fund the growth in assets. 24 27 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- FINANCIAL CONDITION The Company's consolidated total assets decreased by $274 million, or 1%, from $18.5 billion at December 31, 1999 to $18.2 billion at December 31, 2000 primarily due to investment maturities. Shareholders' equity totaled $1.3 billion and $1.2 billion at December 31, 2000 and 1999, respectively. The increase in shareholders' equity was attributable to earnings for 2000 of $192 million in addition to a decrease in the net unrealized loss on available for sale securities of $90.7 million, which were partially offset by the effects of dividends and share repurchases. Investment Securities and Other Earning Assets The average balance of the securities portfolio, which consists of securities available for sale and securities held to maturity, was $6.4 billion in 2000 and $6.3 billion in 1999, an increase of $146 million. The portfolio is comprised primarily of U.S. Government securities and mortgage-backed securities, most of which are seasoned 15-year federal agency securities. Other bonds and notes consist of asset-backed securities, corporate bonds and trust preferred securities. Other equity securities in 1999 and 1998 consisted primarily of preferred securities which were sold in 2000 as part of the securities restructuring. Securities available for sale are carried at fair value and had a net unrealized loss of $53.1 million and $193.3 million at December 31, 2000 and 1999, respectively. See Note 3 to the Consolidated Financial Statements. These unrealized losses do not impact net income or regulatory capital but are recorded as adjustments to shareholders' equity, net of related deferred income taxes. Unrealized losses, net of related deferred income taxes, are a component of the Company's "Comprehensive Income" contained in the Consolidated Statement of Changes in Shareholders' Equity. The Company does not consider any of the unrealized losses to be other than temporary. -------------------------------------------------------------------------------- TABLE 6 -- SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY -------------------------------------------------------------------------------- The following table sets forth the Company's investment securities at the dates indicated.
-------------------------------------------------------------------------------------------------- December 31, -------------------------------------------------------------------------------------------------- (Dollars in Thousands) 2000 1999 1998 -------------------------------------------------------------------------------------------------- Securities available for sale: U.S. Government and federal agencies $544,392 $709,497 $518,105 Tax-exempt bonds and notes 83,133 56,903 42,455 Other bonds and notes 426,199 455,435 193,167 Mortgage-backed securities 3,591,923 4,264,364 2,674,133 Collateralized mortgage obligations 575,091 723,290 471,159 ----------- ----------- ----------- Total debt securities 5,220,738 6,209,489 3,899,019 ----------- ----------- ----------- Federal Home Loan Bank stock 242,632 261,391 163,227 Federal Reserve Bank stock 13,312 5,062 4,807 Other equity securities 1,488 33,360 43,697 ----------- ----------- ----------- Total equity securities 257,432 299,813 211,731 ----------- ----------- ----------- Net unrealized gain (loss) (53,059) (193,271) 3,246 ----------- ----------- ----------- Fair value of securities available for sale $5,425,111 $6,316,031 $4,113,996 =========== =========== =========== Securities held to maturity: U.S. Government and federal agencies $-- $2,797 $3,582 Tax-exempt bonds and notes -- 7,753 9,612 Other bonds and notes -- 1,480 2,171 Asset-backed securities -- -- 65,350 Mortgage-backed securities -- 3,789 174,064 Collateralized mortgage obligations 455,547 541,332 10,999 ----------- ----------- ----------- Amortized cost of securities held to maturity $455,547 $557,151 $265,778 =========== =========== =========== Fair value of securities held to maturity $457,110 $535,605 $267,161 =========== =========== =========== Excess of fair value over recorded value $1,563 $(21,546) $1,383 =========== =========== =========== Fair value as a % of amortized cost 100.3% 96.1% 100.5% --------------------------------------------------------------------------------------------------
25 28 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TABLE 7 -- MATURITIES OF SECURITIES -------------------------------------------------------------------------------- The following table sets forth the contractual maturities and fully-taxable weighted average yields of the Company's debt securities at December 31, 2000.
------------------------------------------------------------------------------------------------------------------------------------ Amortized Cost Maturing in ------------------------------------------------------------------------------------------------------------------------------------ More than More than Less than 1 Year 1 to 5 Years 5 to 10 Years 10 Years Total ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------------------------------------------------------------------------------------------------------------------------------------ AVAILABLE FOR SALE: U.S. Government and federal agencies $182,056 5.45% $286,830 6.12% $ 61,242 6.80% $ 14,264 7.75% $ 544,392 6.02% Tax-exempt bonds and notes 54,236 6.73% 12,234 6.84% 5,766 6.88% 10,897 7.93% 83,133 6.92% Other bonds and notes 116 5.47% 107,508 6.75% 111,025 6.92% 207,550 7.52% 426,199 7.17% Mortgage-backed securities 2,402 5.57% 25,000 6.39% 154,766 6.61% 3,409,755 6.43% 3,591,923 6.44% Collateralized mortgage obligations 2,986 6.14% 9,846 6.14% 46,998 6.07% 515,261 6.29% 575,091 6.27% -------- -------- -------- ---------- ---------- Total $241,796 5.30% $441,418 6.25% $379,797 6.64% $4,157,727 6.47% $5,220,738 6.41% ======== ======== ======== ========== ========== HELD TO MATURITY: Collateralized mortgage obligations -- -- -- -- -- -- $ 455,547 7.57% $ 455,547 7.57% ======== ======== ======== ========== ========== ------------------------------------------------------------------------------------------------------------------------------------
Collateralized mortgage obligations ("CMOs") increased in 1999 primarily due to the Company's securitization of $633 million of single-family residential loans during the period. CMOs generally are backed by residential mortgages with original maturities in excess of 10 years. Loans Residential real estate loans (including loans held for sale) averaged $2.3 billion in 2000 compared to $2.8 billion in 1999, a decrease of 16%. The decrease in the 2000 average balance was primarily attributable to lower loans held for sale. Commercial real estate loans averaged $2.9 billion in 2000 and $2.6 billion in 1999, an 11% increase. The Company is continuing to focus primarily on lending to small and medium size business customers within its geographic markets. These loans consist of loans secured primarily by income-producing commercial real estate, service industry real estate, multi-family residential real estate and retail trade real estate, as well as loans for the acquisition, development and construction of such commercial real estate. Commercial loans and leases averaged $2.1 billion in 2000 and $1.8 billion in 1999, an increase of 19%. The increase in 2000 was largely attributable to additional opportunities in certain market areas due to industry consolidation. Included in these amounts are commercial business leases originated through a subsidiary of one of the Company's banking subsidiaries. These leases are direct equipment leases, primarily office equipment, and amounted to $63.9 million at December 31, 2000. Consumer loans and leases averaged $3.2 billion in 2000 and $2.8 billion in 1999, an increase of 13%. The growth in consumer loans was primarily in indirect automobile loans and home equity loans. Mobile home loans, which amounted to $161.3 million at December 31, 2000, continue to decline, reflecting the Company's strategy to emphasize other types of consumer loans. In June 2000, the Company ceased originating automobile leases. Automobile lease receivables totaled $81.6 million at December 31, 2000 compared to $138.2 million at December 31, 1999. 26 29 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TABLE 8 -- COMPOSITION OF LOAN PORTFOLIO -------------------------------------------------------------------------------- The following table sets forth the composition of the Company's loan portfolio at the dates indicated.
------------------------------------------------------------------------------------------------------------------------------------ December 31, ------------------------------------------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------------ % OF % of % of % of % of (Dollars in Thousands) AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans ------------------------------------------------------------------------------------------------------------------------------------ Residential real estate loans $ 2,248,714 20.73% $2,270,417 23.04% $3,088,864 31.12% $ 3,798,423 37.94% $3,170,151 37.19% Commercial real estate loans: Permanent first mortgage loans 2,663,775 24.56 2,493,492 25.30 2,078,725 20.94 2,022,896 20.20 1,847,814 21.68 Construction and development loans 291,388 2.69 202,825 2.06 204,372 2.06 169,053 1.69 116,707 1.37 ----------- ------ ---------- ------ ---------- ------ ----------- ------ ---------- ------ Total 2,955,163 27.25 2,696,317 27.36 2,283,097 23.00 2,191,949 21.89 1,964,521 23.05 ----------- ------ ---------- ------ ---------- ------ ----------- ------ ---------- ------ Commercial business loans and leases 2,308,904 21.29 1,924,201 19.53 1,836,412 18.50 1,569,429 15.67 1,353,451 15.88 Consumer loans and leases 3,332,881 30.73 2,963,721 30.07 2,716,764 27.37 2,452,917 24.50 2,036,399 23.89 ----------- ------ ---------- ------ ---------- ------ ----------- ------ ---------- ------ Total loans receivable $10,845,662 100.00% $9,854,656 100.00% $9,925,137 100.00% $10,012,718 100.00% $8,524,522 100.00% =========== ====== ========== ====== ========== ====== =========== ====== ========== ====== ------------------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------- TABLE 9-- SCHEDULED CONTRACTUAL AMORTIZATION OF CERTAIN LOANS AT DECEMBER 31, 2000 -------------------------------------------------------------------------------------------------------------- The following table sets forth the scheduled contractual amortization of the Company's construction and development loans and commercial business loans and leases at December 31, 2000, as well as the amount of such loans which are scheduled to mature after one year which have fixed or adjustable interest rates.
-------------------------------------------------------------------------------------------------------------- Real Estate Construction Commercial Business (Dollars in Thousands) and Development Loans Loans and Leases Total -------------------------------------------------------------------------------------------------------------- Amounts due: Within one year $ 81,661 $1,087,183 $1,165,095 After one year through five years 122,116 824,123 939,313 Beyond five years 87,611 397,598 495,884 ---------- ---------- ---------- Total $ 291,388 $2,308,904 $2,600,292 ========== ========== ========== Interest rate terms on amounts due after one year: Fixed $ 81,868 $ 640,088 $ 721,956 Adjustable 127,859 581,633 709,492 --------------------------------------------------------------------------------------------------------------
ASSET QUALITY General The Company monitors its asset quality with lending and credit policies which require the regular review of its loan portfolio. The Company maintains an internal rating system which provides a mechanism to regularly monitor the credit quality of its loan portfolio. The total loan portfolio increased in 2000 due to increases in commercial real estate loans, commercial business loans and leases and consumer loans and leases, while residential real estate loans remained flat when compared to last year. The Company's residential loan portfolio accounted for 21% of the total loan portfolio at December 31, 2000, down from 23% at the end of 1999. The Company's residential loans are generally secured by single-family homes (one-to-four units) and have a maximum loan to value ratio of 80%, unless they are protected by mortgage insurance. At December 31, 2000, 0.44% of the Company's residential loans were nonperforming, as compared to 0.76% at December 31, 1999, as nonperforming residential real estate loans decreased by $7.4 million while the total residential loan portfolio declined by $21.7 million due to prepayments, scheduled amortization, and, to a lesser extent, loan sales. The Company's commercial real estate loan portfolio accounted for 27% of the total loan portfolio at December 31, 2000 and 1999. The portfolio increased $258.8 million in 2000 compared to 1999. This portfolio consists primarily of loans secured by income-producing commercial real estate (including office and industrial buildings), service industry real estate (including hotels and health care facilities), multi-family (over four units) residential properties and retail trade real estate (food stores). These loans generally are secured by properties located in the New England states and New York, particularly Maine, Massachusetts, New Hampshire and Vermont. At December 31, 2000, 0.43% of the Company's commercial real estate loans were nonperforming, as compared to 0.66% at December 31, 1999. 27 30 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- The Company's commercial business loan and lease portfolio accounted for 21% of the total loan portfolio at December 31, 2000, compared to 20% at December 31, 1999. Commercial business loans and leases are generally made to small to medium size businesses located within the Company's geographic market area. These loans are not concentrated in any particular industry, but reflect the broad-based economy of New England and upstate New York. Commercial loans consist primarily of loans secured by various equipment, machinery and other corporate assets, as well as loans to provide working capital to business in the form of lines of credit. The Company generally does not emphasize the purchase of participations in syndicated commercial loans. At December 31, 2000, the Company had $161 million of participations in syndicated commercial loans and commitments to purchase an additional $151 million of such participations. At December 31, 2000, 1.41% of the Company's commercial business loans were nonperforming, as compared to 0.89% at December 31, 1999. The increase was primarily due to the addition of a $12.3 million commercial loan during the fourth quarter of 2000. Consumer loans and leases accounted for 31% of the Company's total loan portfolio at December 31, 2000, compared to 30% at December 31, 1999. At December 31, 2000, the Company's diversified consumer loan portfolio included $1.3 billion of automobile and other vehicle loans and leases, $1.1 billion of home equity loans, $161 million of mobile home loans, $144 million of education loans and $94 million of loans to finance certain medical/dental procedures (vision, dental and orthodontia fee plan loans). The increase in consumer loans over the prior year was due primarily to growth in automobile and home equity loans. The growth was consistent with the Company's strategy to provide a full range of financial services to its customers and to originate loans which are short-term and offer a higher yield than longer-term mortgage loans. At December 31, 2000, 0.19% of the Company's consumer loans were nonperforming, as compared to 0.20% at December 31, 1999. Nonperforming Assets Nonperforming assets consist of nonperforming loans (which do not include accruing loans 90 days or more overdue), other real estate owned and repossessed assets. Total nonperforming assets as a percentage of total assets were 0.37% at December 31, 2000 and 1999. Total nonperforming assets as a percentage of total loans and other nonperforming assets was 0.62% and 0.70% at December 31, 2000 and 1999, respectively. See Table 11 for a summary of nonperforming assets for the last five years. The Company continues to focus on asset quality issues and to allocate significant resources to the key asset quality control functions of credit policy and administration and loan review. The collection, workout and asset management functions focus on the reduction of nonperforming assets. Despite the ongoing focus on asset quality and reductions of nonperforming asset levels, there can be no assurance that adverse changes in the real estate markets and economic conditions in the Company's primary market areas will not result in higher nonperforming asset levels in the future and negatively impact the Company's operations through higher provisions for loan losses, net loan charge-offs, decreased accrual of interest income and increased noninterest expenses as a result of the allocation of resources to the collection and workout of nonperforming assets. Residential real estate loans are generally placed on nonaccrual when reaching 120 days past due or in process of foreclosure. All closed-end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on nonaccrual status. Consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. It is the policy of the Company to generally place all commercial real estate loans and commercial business loans and leases which are 90 days or more past due, unless secured by sufficient cash or other assets immediately convertible to cash, on nonaccrual status. At December 31, 2000, the Company had $6.0 million of accruing loans which were 90 days or more delinquent, as compared to $12.1 million and $24.5 million of such loans at December 31, 1999 and 1998, respectively. The decrease was primarily attributable to a decrease in residential real estate loans over 90 days delinquent, which the Company believes are well secured and in the process of collection. The Company also may place on nonaccrual and therefore nonperforming status loans currently less than 90 days past due or performing in accordance with their terms but which in management's judgment are likely to present future principal and/or interest repayment problems and which thus ultimately would be classified as nonperforming. Net Charge-offs Net charge-offs were $25.3 million during 2000, as compared to $23.6 million in 1999. Net charge-offs represented 0.24% of average loans and leases outstanding in 2000 and 1999. Net charge-offs on commercial business loans and leases in 2000 was substantially higher than 1999 due primarily to a $2.8 million charge-off on one commercial loan during the fourth quarter of 2000. See Table 3. -------------------------------------------------------------------------------- TABLE 10-- NET CHARGE-OFFS AS A PERCENT OF AVERAGE LOANS OUTSTANDING -------------------------------------------------------------------------------- The following table sets forth net charge-offs to average loans outstanding by type of loan during the periods indicated.
-------------------------------------------------------------------------------- Net Charge-offs to Average Loans Outstanding -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- Real estate loans 0.06% 0.10% Commercial business loans and leases 0.26 0.11 Consumer loans and leases 0.54 0.58 Total 0.24 0.24 --------------------------------------------------------------------------------
See Table 3 for more information concerning charge-offs and recoveries during each of the past five years. 28 31 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TABLE 11 -- FIVE YEAR SCHEDULE OF NON PERFORMING ASSETS -------------------------------------------------------------------------------- The following table sets forth information regarding nonperforming assets at the dates indicated.
------------------------------------------------------------------------------------------------- December 31, ------------------------------------------------------------------------------------------------- (Dollars in Thousands) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------- Residential real estate loans: Nonaccrual loans $ 9,894 $17,283 $15,503 $24,344 $21,568 Troubled debt restructurings -- 28 32 36 39 ------- ------- ------- ------- ------- Total 9,894 17,311 15,535 24,380 21,607 ------- ------- ------- ------- ------- Commercial real estate loans: Nonaccrual loans 12,155 16,754 22,481 23,769 26,410 Troubled debt restructurings 635 1,002 5,946 3,428 5,181 ------- ------- ------- ------- ------- Total 12,790 17,756 28,427 27,197 31,591 ------- ------- ------- ------- ------- Commercial business loans and leases: Nonaccrual loans 32,583 17,027 18,736 22,305 18,046 Troubled debt restructurings 38 82 874 114 615 ------- ------- ------- ------- ------- Total 32,621 17,109 19,610 22,419 18,661 ------- ------- ------- ------- ------- Consumer loans and leases: Nonaccrual loans 6,329 5,951 11,455 9,743 5,805 Troubled debt restructurings -- -- 5 6 10 ------- ------- ------- ------- ------- Total 6,329 5,951 11,460 9,749 5,815 ------- ------- ------- ------- ------- Total nonperforming loans: Nonaccrual loans 60,961 57,015 68,175 80,161 71,829 Troubled debt restructurings 673 1,112 6,857 3,584 5,845 ------- ------- ------- ------- ------- Total 61,634 58,127 75,032 83,745 77,674 ------- ------- ------- ------- ------- Other nonperforming assets: Other real estate owned, net of related reserves 4,074 8,154 10,354 10,508 17,008 Repossessions, net of related reserves 1,424 2,911 3,635 3,872 2,325 ------- ------- ------- ------- ------- Total 5,498 11,065 13,989 14,380 19,333 ------- ------- ------- ------- ------- Total nonperforming assets $67,132 $69,192 $89,021 $98,125 $97,007 ======= ======= ======= ======= ======= Accruing loans 90 days overdue $ 5,973 $12,131 $24,450 $11,048 $11,090 ======= ======= ======= ======= ======= Total nonperforming loans as a percentage of total loans 0.57% 0.59% 0.76% 0.84% 0.91% Total nonperforming assets as a percentage of total assets 0.37% 0.37% 0.54% 0.64% 0.75% Total nonperforming assets as a percentage of total loans and other non performing assets 0.62% 0.70% 0.90% 0.98% 1.14% -------------------------------------------------------------------------------------------------
29 32 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- Deposits Average demand deposit accounts increased 7% in 2000 to $1.9 billion from $1.8 billion in 1999. The increase in demand deposits was consistent with the Company's marketing focus on these accounts. Average interest-bearing deposits decreased by $27 million during 2000 to $9.9 billion. Average retail certificates of deposit decreased $96.3 million during 2000 to $4.5 billion. The average rate paid on certificates of deposit increased from 5.02% in 1999 to 5.42% in 2000. See Table 13 for the scheduled maturities of certificates of deposits of $100,000 or more. As part of its overall funding strategy, the Company uses deposits obtained through investment banking firms which obtain funds from their customers for deposit with the Company ("brokered deposits"). These brokered deposits (which include short-term certificates of deposit and money market accounts) averaged $119 million and $180 million in 2000 and 1999, respectively. The average rate paid on brokered deposits was 6.40% in 2000 compared to 5.37% in 1999. Other interest-bearing deposits (savings, NOW and money market accounts) increased 2% in 2000 to $5.3 billion from $5.2 billion in 1999. The average rate paid on these deposits increased from 2.55% in 1999 to 2.99% in 2000. -------------------------------------------------------------------------------- TABLE 12 -- CHANGE IN DEPOSIT BALANCES BY CATEGORY OF DEPOSITS -------------------------------------------------------------------------------- The following table presents the changes in the balances of deposits outstanding at the dates indicated.
----------------------------------------------------------------------------------------------------- December 31, 2000-1999 Change ----------------------------------------------------------------------------------------------------- (Dollars in Thousands) 2000 1999 1998 Amount Percent ----------------------------------------------------------------------------------------------------- Demand deposits $ 2,114,600 $ 1,821,764 $ 1,851,929 $ 292,836 16.07% Money market access/NOW accounts 3,975,318 3,698,934 3,564,737 276,384 7.47% Savings accounts 1,386,286 1,567,776 1,613,060 (181,490) (11.58%) Certificates of deposit 4,461,983 4,448,229 4,728,916 13,754 0.31% Brokered deposits 169,069 173,798 257,570 (4,729) (2.72%) ----------- ----------- ----------- ----------- Total deposits $12,107,256 $11,710,501 $12,016,212 $ 396,755 3.39% =========== =========== =========== =========== -----------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------- TABLE 13-- MATURITY OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT DECEMBER 31, 2000 -------------------------------------------------------------------------------- The following table sets forth the scheduled maturity of certificates of deposit of $100,000 or more at December 31, 2000. -------------------------------------------------------------------------------- (Dollars in Thousands) Balance Percent -------------------------------------------------------------------------------- 3 months or less $ 453,909 39% Over 3 to 6 months 281,462 24 Over 6 to 12 months 292,721 25 More than 12 months 141,625 12 ---------- --- $1,169,717 100% ========== === -------------------------------------------------------------------------------- Other Funding Sources Average borrowed funds for 2000 were $5.0 billion, compared with $4.4 billion in 1999. The increase in borrowed funds was utilized in part to fund higher levels of earning assets. The Company's primary sources of funds, other than deposits, are advances from the Federal Home Loan Bank ("FHLB") and securities sold under repurchase agreements. Average FHLB borrowings increased because growth in average earning assets exceeded growth in deposits. FHLB collateral consists primarily of first mortgage loans secured by single-family properties, certain unencumbered securities and other qualified assets. At December 31, 2000, FHLB borrowings amounted to $3.3 billion. The Company's additional borrowing capacity with the FHLB at December 31, 2000 was approximately $1.6 billion. See Note 11 to the Consolidated Financial Statements. At December 31, 2000 and 1999, securities sold under repurchase agreements amounted to $986.6 million and $1.3 billion, respectively, and were collaterallized by mortgage-backed securities and U.S. Government obligations. See Note 10 to the Consolidated Financial Statements. 30 33 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- RISK MANAGEMENT The primary goal of the Company's risk management program is to determine how certain existing or emerging issues facing the Company or the financial services industry affect the nature and extent of the risks faced by the Company. Based on a periodic self-evaluation, the Company determines key issues and develops plans and/or objectives to address risk. The Board of Directors (the "Board") and management believe that there are seven applicable "risk categories," consisting of credit risk, interest rate risk, liquidity risk, transaction risk, compliance risk, strategic risk and reputation risk. Each risk category is viewed from a quantity of risk perspective (high, medium or low) coupled with a quality of risk perspective. In addition, an aggregate level of risk is assigned to the Company as a whole as well as the direction of risk (stable, increasing or decreasing). Each risk category and the overall risk level is compared to regulatory views on a regular basis and then reported to the Board with an accompanying explanation as to the existence of any differences. The risk program includes risk identification, measurement, control and monitoring. The Board has established the overall strategic direction of the Company. It approves the overall risk policies of the Company and oversees the overall risk management process for the Company. The Board has delegated authority to three Board Committees, consisting of Audit, Board Risk Management and Asset Review Committees, and has charged each Committee with overseeing key risks. The executive risk management committee, which reports to the Board, evaluates the seven key risk areas of the Company and makes recommendations to the Board Risk Management Committee. ASSET LIABILITY MANAGEMENT The goal of asset-liability management is the prudent control of market risk, liquidity and capital. Asset-liability management is governed by policies reviewed and approved annually by the Company's Board of Directors (the "Board") and monitored periodically by a committee of the Board. The Board delegates responsibility for asset-liability management to the Asset Liability Management Committee ("ALCO"), which is comprised of members of senior management who set strategic directives that guide the day-to-day asset-liability management activities of the Company. The ALCO also reviews and approves all major risk, liquidity and capital management programs, except for product pricing. Product pricing is reviewed and approved by the Pricing Committee, which is comprised of a subset of ALCO members. Market Risk Market risk is the sensitivity of income to changes in interest rates, foreign exchange rates, commodity prices and other market-driven rates or prices. The Company has no trading operations and thus is only exposed to non-trading market risk. Interest-rate risk, including mortgage prepayment risk, is by far the most significant non-credit risk to which the Company is exposed. Interest-rate risk is the sensitivity of income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets and liabilities, affect net interest income, the Company's primary source of revenue. This risk arises directly from the Company's core banking activities - lending, deposit gathering and loan servicing. In addition to directly impacting net interest income, changes in the level of interest rates can also affect (i) the amount of loans originated and sold by the institution, (ii) the ability of borrowers to repay adjustable or variable rate loans, (iii) the average maturity of loans, (iv) the rate of amortization of capitalized mortgage servicing rights and premiums paid on securities, (v) the amount of unrealized gains and losses on securities available for sale and (vi) the fair value of the Company's saleable assets and derivatives and the resultant ability to realize gains. The primary objective of interest-rate risk management is to control the Company's exposure to interest-rate risk both within limits approved by the Board of Directors and guidelines established by the ALCO. These limits and guidelines reflect the Company's tolerance for interest-rate risk over both short-term and long-term horizons. The Company attempts to control interest-rate risk by identifying, quantifying and, where appropriate, hedging its exposure. The Company quantifies and measures interest-rate exposure using a model to dynamically simulate net interest income under various interest rate scenarios over a 12-month period. Simulated scenarios include deliberately extreme interest rate "shocks" and more gradual interest rate "ramps." Key assumptions in these simulation analyses relate to behavior of interest rates and spreads, increases or decreases of product balances and the behavior of the Company's deposit and loan customers. The most material assumption relates to the prepayment of mortgage assets (including mortgage loans, mortgage-backed securities and mortgage servicing rights). The risk of prepayment tends to increase when interest rates fall. Since future prepayment behavior of loan customers is uncertain, the resultant interest rate sensitivity of loan assets cannot be determined exactly. Complicating management's efforts to measure interest rate risk is the uncertainty of the maturity, repricing and/or runoff of some of the Company's assets and liabilities. To cope with these uncertainties, management gives careful attention to its assumptions. For example, many of the Company's interest-bearing deposit products (e.g. interest checking, savings and money market deposits) have no contractual maturity and based on historical experience have only a limited sensitivity to movements in market rates. Because management believes it has some control with respect to the extent and timing of rates paid on non-maturity deposits, certain assumptions regarding rate changes are built into the model. In the case of prepayment of mortgage assets, assumptions are derived from published dealer median prepayment estimates for comparable mortgage loans. The Company manages the interest-rate risk inherent in its core banking operations primarily using on-balance sheet instruments that sometimes contain embedded options, mainly fixed-rate portfolio securities and borrowed fund maturities. When appropriate, the Company will utilize off-balance sheet interest rate instruments such as interest-rate swaps, interest rate floors and interest rate corridor agreements, among other instruments. All derivatives hedging the mortgage servicing rights were sold in the third and fourth quarters of 2000. As a result, the Company currently has no material exposure to the new accounting requirements for the hedging of derivative securities, as set forth in Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Investments and Hedging Activities." The Company's policy on interest-rate risk simulation specifies that if interest rates were to shift gradually up or down 200 basis points, estimated net interest income for the subsequent 12 months should decline by less than 5%. The Company was in compliance with this limit at December 31, 2000. The following table reflects the 31 34 Banknorth Group, Inc. and Subsidiaries --------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------- 200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point Rate Increase Rate Increase Rate Decrease Rate Decrease ------------------------------------------------------------------------------------------------- DECEMBER 31, 2000 (3.18%) (1.46%) 0.51% 0.70% ====== ====== ==== ==== December 31, 1999 (3.11%) (1.72%) 1.57% 0.96% ====== ====== ==== ==== -------------------------------------------------------------------------------------------------
estimated percentage exposure of the Company's net interest income for the 12 months following the date indicated assuming a gradual shift in market interest rates of 100 and 200 basis points, respectively. The results implied in the above table indicate estimated changes in simulated net interest income for the subsequent 12 months assuming a gradual shift up or down in market rates of 100 and 200 basis points across the entire yield curve. Assuming a downward shift in rates, savings, money market and NOW accounts have implied interest rate floors and it is assumed that the related interest expense on these accounts will not decrease in proportion to the downward shift in rates. Assuming an upward shift in rates of 200 basis points, the simulated increase in interest income would be less than the simulated increase in interest expense as the Company's fixed-rate earning assets exceed its fixed-cost paying liabilities. It should be emphasized, however, that the results are dependent on material assumptions such as those discussed above. In the fourth quarter of 2000, the Company entered into an agreement to sell substantially all of its mortgage servicing rights (see "Non-Interest Income" for further details). Substantially all of the Company's remaining mortgage servicing rights at December 31, 2000 were sold in January 2001. Future mortgage servicing rights originated will be sold on a flow basis shortly after the mortgages are sold. As a result, future earnings exposure to the value of mortgage servicing rights is not expected to be material. The most significant factors affecting market risk exposure of net interest income during 2000 has been (i) the exposure created by changes in interest rates, (ii) changes in the shape of the U.S. Government securities yield curve, (iii) changes in the composition of mortgage assets (iv) increases in borrowings with embedded options and (v) the sale of mortgage servicing rights and its corresponding hedges. The Company's earnings are not directly and materially impacted by movements in foreign currency rate or commodity prices. Virtually all transactions are denominated in the U.S. dollar. Movements in equity prices may have an indirect but modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related businesses. LIQUIDITY On a parent-only basis, the Company's commitments and debt service requirements at December 31, 2000 consisted primarily of $98.8 million of junior subordinated debentures (including accrued interest) issued to two subsidiaries, $68.8 million to Peoples Heritage Capital Trust I and $30 million to Banknorth Capital Trust I, in connection with the issuance of 9.06% Capital Securities due 2027 and 10.52% Capital Securities due 2027, respectively. See Notes 12 and 18 to the Consolidated Financial Statements. The principal sources of funds for the Company to meet parent-only obligations are dividends from its banking subsidiaries, which are subject to regulatory limitations, and borrowing from public and private sources, including a $60 million unsecured line of credit which is renewable every 364 days and, if used, carries interest at 3 month LIBOR plus 0.75%. The line has not been used to date. For information on restrictions on the payment of dividends by the Company's banking subsidiaries, see Note 13 to the Consolidated Financial Statements. Banking Subsidiaries For banking subsidiaries of the Company, liquidity represents the ability to fund asset growth and accommodate deposit withdrawals. Liquidity risk is the danger that the banks cannot meet anticipated or unexpected funding requirements or can meet them only at excessive cost. Liquidity is measured by the ability to raise cash when needed at a reasonable cost. Many factors affect a bank's ability to meet liquidity needs, including variations in the markets served, its asset-liability mix, its reputation and credit standing in the market and general economic conditions. In addition to traditional retail deposits, the banks have various other liquidity sources, including proceeds from maturing securities and loans, the sale of securities, asset securitizations and borrowed funds such as FHLB advances, reverse repurchase agreements and brokered deposits. The Company continually monitors and forecasts its liquidity position. There are several interdependent methods used by the Company for this purpose, including daily review of fed funds positions, monthly review of balance sheet changes, monthly review of liquidity ratios, periodic liquidity forecasts and periodic review of contingent funding plans. As of December 31, 2000, the banks had in the aggregate $1.9 billion of "immediately accessible liquidity," defined as cash that could be raised within 1-3 days through collateralized borrowings or security sales. This represents 16% of deposits or 11% of assets. The Company's current policy minimum is 10% of deposits. Also as of December 31, 2000, the banks had in the aggregate "potentially volatile funds" of $1.3 billion. These are funds that might flow out of the banks over a 90-day period in an adverse environment. Management estimates this figure by applying adverse probabilities to its various credit-sensitive and economically-sensitive funding sources. As of December 31, 2000, the ratio of "immediately accessible liquidity" to "potentially volatile funds" was 150%, versus a policy minimum of 100%. In addition to the liquidity sources discussed above, management believes that its consumer loan portfolios provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sale or securitization. The banks also have significant untapped access to the national brokered deposit market. Both of these sources are contemplated as secondary liquidity in the Company's contingent funding plan. Management believes that the level of liquidity is 32 35 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- sufficient to meet current and future funding requirements. For additional information regarding off-balance sheet risks and commitments, see Note 14 to the Consolidated Financial Statements. CAPITAL At December 31, 2000 and 1999, shareholders' equity totaled $1.3 billion and $1.2 billion, respectively, or 7.30% and 6.44% of total assets, respectively. In addition, through subsidiary trusts, the Company had outstanding at such dates $98.8 million of capital securities which mature in 2027 and qualify as Tier 1 Capital. The changes in shareholders' equity included net income for the year ended December 31, 2000 of $191.7 million, a $90.7 million net unrealized gain on securities available for sale, which were partially offset by $96.6 million of stock repurchases (5,545,000 shares) and $70.8 million in dividends to shareholders. On January 23, 2001, the Company's Board of Directors authorized the repurchase of up to eight million shares, or approximately 6%, of the issued and outstanding Common Stock. Capital guidelines issued by the Federal Reserve Board require the Company to maintain certain ratios. The Company's Tier 1 Capital, as defined by the Federal Reserve Board, was $1.3 billion or 7.02% of average assets at December 31, 2000, compared to $1.2 billion or 6.75% of average assets at December 31, 1999. The Company also is required to maintain capital ratios based on the level of its assets, as adjusted to reflect their perceived level of risk. The Company's regulatory capital ratios currently exceed all applicable requirements. See Note 13 to the Consolidated Financial Statements. The Company's banking subsidiaries also are subject to federal regulatory capital requirements. At December 31, 2000, each of the Company's depository institution subsidiaries was deemed to be "well capitalized" under the regulations of the applicable federal banking agency and all of its banking subsidiaries were in compliance with applicable regulatory capital requirements. IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which sets accounting and reporting standards for derivative instruments and hedging activities. This Statement, as amended by SFAS No. 138, requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company adopted the Statement effective January 1, 2001. The Company estimates that it will report an after-tax loss from cumulative effect of adoption of approximately $286 thousand. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," a replacement of SFAS No. 125. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of SFAS No. 125. SFAS No. 140 is effective for transactions occurring after March 31, 2001 and for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The Company does not expect the impact to be material to the financial statements. FORWARD LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "antici-pate," "continue," or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary polices of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. 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. 33 36 Banknorth Group, Inc. and Subsidiaries --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------------------------------------ December 31, ------------------------------------------------------------------------------------------------------ (In Thousands, Except Number of Shares and Per Share Data) 2000 1999 ------------------------------------------------------------------------------------------------------ ASSETS Cash and due from banks $ 515,934 $ 546,816 Federal funds sold and other short-term investments 29,058 229,579 Securities available for sale, at market value 5,425,111 6,316,031 Securities held to maturity, market value $457,110 in 2000 and $535,605 in 1999 455,547 557,151 Loans held for sale, market value $51,823 in 2000 and $82,382 in 1999 51,131 82,318 Loans and leases 10,845,662 9,854,656 Less: Allowance for loan and lease losses 153,550 155,048 ------------ ------------ Net loans and leases 10,692,112 9,699,608 ------------ ------------ Premises and equipment 201,192 192,540 Goodwill and other intangibles 185,520 184,381 Mortgage servicing rights 23,225 52,724 Bank owned life insurance 306,411 288,783 Other assets 348,569 358,333 ------------ ------------ Total assets $ 18,233,810 $ 18,508,264 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Savings accounts $ 1,386,286 $ 1,567,776 Money market access and NOW accounts 3,975,318 3,698,934 Certificates of deposit (including certificates of $100 or more of $1,169,717 in 2000 and $952,546 in 1999) 4,461,983 4,448,229 Brokered deposits 169,069 173,798 Demand deposits 2,114,600 1,821,764 ------------ ------------ Total deposits 12,107,256 11,710,501 Federal funds purchased and securities sold under repurchase agreements 1,138,629 1,302,821 Borrowings from the Federal Home Loan Bank 3,348,242 3,997,819 Other borrowings 73,744 66,838 Other liabilities 136,307 139,236 ------------ ------------ Total liabilities 16,804,178 17,217,215 ------------ ------------ Company obligated, mandatorily redeemable securities of subsidiary trusts holding solely parent junior subordinated debentures 98,775 98,775 Shareholders' equity: Preferred stock, par value $0.01; 5,000,000 shares authorized, none issued -- -- Common stock, par value $0.01; 400,000,000 and 200,000,000 shares authorized, 149,584,159 issued in 2000 and 149,623,204 issued in 1999 1,496 1,496 Paid-in capital 617,234 617,523 Retained earnings 897,214 787,238 Unearned compensation (1,354) (2,751) Treasury stock at cost (8,339,556 shares in 2000 and 4,649,306 shares in 1999) (149,246) (85,838) Accumulated other comprehensive income (34,487) (125,394) ------------ ------------ Total shareholders' equity 1,330,857 1,192,274 ------------ ------------ Total liabilities and shareholders' equity $ 18,233,810 $ 18,508,264 ============ ============ ------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements. 34 37 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, ------------------------------------------------------------------------------------------------- (In Thousands, Except Per Share Data) 2000 1999 1998 ------------------------------------------------------------------------------------------------- Interest and dividend income: Interest and fees on loans and leases $ 894,449 $ 826,565 $ 908,944 Interest and dividends on securities 435,838 400,954 237,216 ----------- ----------- ----------- Total interest and dividend income 1,330,287 1,227,519 1,146,160 ----------- ----------- ----------- Interest expense: Interest on deposits 411,250 373,526 405,416 Interest on borrowed funds 306,026 229,764 150,228 ----------- ----------- ----------- Total interest expense 717,276 603,290 555,644 ----------- ----------- ----------- Net interest income 613,011 624,229 590,516 Provision for loan and lease losses 23,819 23,575 23,775 ----------- ----------- ----------- Net interest income after provision for loan and lease losses 589,192 600,654 566,741 ----------- ----------- ----------- Noninterest income: Deposit services 80,987 69,197 54,897 Mortgage banking services 21,963 20,423 32,694 Trust and investment advisory services 42,434 39,378 29,428 Insurance commissions 25,748 20,289 13,006 Bank owned life insurance 17,701 15,522 5,934 Merchant and card product income 15,384 13,126 9,615 Net securities gains 439 655 6,423 Losses on securities restructuring (15,895) -- -- Other noninterest income 22,427 13,205 15,550 ----------- ----------- ----------- 211,188 191,795 167,547 ----------- ----------- ----------- Noninterest expenses: Salaries and employee benefits 230,184 231,500 230,433 Data processing 37,607 38,806 32,288 Occupancy 39,198 39,326 36,637 Equipment 31,740 30,205 30,013 Amortization of goodwill and deposit premiums 21,016 20,642 17,354 Advertising and marketing 12,010 14,172 14,675 Distributions on securities of subsidiary trusts 9,387 9,834 12,216 Special charges 43,007 28,002 61,140 Other noninterest expenses 87,704 85,655 84,710 ----------- ----------- ----------- 511,853 498,142 519,466 ----------- ----------- ----------- Income before income tax expense 288,527 294,307 214,822 Applicable income tax expense 96,793 97,349 73,078 ----------- ----------- ----------- Net income $ 191,734 $ 196,958 $ 141,744 =========== =========== =========== Weighted average shares outstanding Basic 144,270 145,758 146,119 Diluted 145,194 147,428 148,965 Earnings per share: Basic $ 1.33 $ 1.35 $ 0.97 Diluted 1.32 1.34 0.95 -------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements. 35 38 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------ Accumulated Other Par Paid-in Retained Unearned Treasury Comprehensive (Dollars In Thousands) Value Capital Earnings Compensation Stock Income (Loss) Total ------------------------------------------------------------------------------------------------------------------------------------ Balances at December 31, 1997 $1,484 $602,634 $588,783 $(5,313) $(34,461) $ 11,256 $1,164,383 Net income -- -- 141,744 -- -- -- 141,744 Unrealized losses on securities, net of reclassification adjustment (1) -- -- -- -- -- (9,148) (9,148) Minimum pension liability (250) (250) --------- Comprehensive income -- -- -- -- -- -- 132,346 --------- Cancellation of treasury shares at acquisition (3) (4,996) -- -- (41) -- (5,040) Common stock issued for employee benefit plans 11 10,387 -- (545) -- -- 9,853 Treasury stock issued for employee benefit plans -- -- (4,164) -- 17,479 -- 13,315 Treasury stock purchased -- -- -- -- (50,300) -- (50,300) Issuance of restricted stock -- 426 (37) (254) 213 -- 348 Amortization of employee restricted stock -- 259 -- 538 -- -- 797 Common stock issued for acquisitions 4 8,538 -- -- -- -- 8,542 Decrease in unearned compensation--ESOP -- 1,376 -- 1,818 -- -- 3,194 Cash dividends -- -- (57,231) -- -- -- (57,231) Pooled company transactions -- -- 262 -- 1,921 -- 2,183 ------ -------- -------- ------- -------- -------- ---------- Balances at December 31, 1998 1,496 618,624 669,357 (3,756) (65,189) 1,858 1,222,390 Net income -- -- 196,958 -- -- -- 196,958 Unrealized losses on securities, net of reclassification adjustment (1) -- -- -- -- -- (127,252) (127,252) --------- Comprehensive income -- -- -- -- -- -- 69,706 --------- Premium on repurchase of trust preferred securities -- (1,801) -- -- -- -- (1,801) Treasury stock issued for employee benefit plans -- (4) (13,396) -- 31,752 -- 18,352 Treasury stock purchased -- -- -- -- (53,745) -- (53,745) Issuance of restricted stock -- 176 (313) (655) 1,344 -- 552 Amortization of employee restricted stock -- (813) -- 929 -- -- 116 Decrease in unearned compensation--ESOP -- 1,341 -- 731 -- -- 2,072 Cash dividends -- -- (65,368) -- -- -- (65,368) ------ -------- -------- ------- -------- -------- ---------- Balances at December 31, 1999 1,496 617,523 787,238 (2,751) (85,838) (125,394) 1,192,274 Net income -- -- 191,734 -- -- -- 191,734 Unrealized gains on securities, net of reclassification adjustment (1) -- -- -- -- -- 90,657 90,657 Minimum pension liability -- -- -- -- -- 250 250 --------- Comprehensive income -- -- -- -- -- -- 282,641 --------- Cancellation of treasury shares at acquisition (1) (2,206) -- -- 2,207 -- -- Treasury stock issued for employee benefit plans -- -- (10,790) -- 30,486 -- 19,696 Treasury stock purchased -- -- -- -- (96,585) -- (96,585) Issuance and distribution of restricted stock -- (119) (195) -- 484 -- 170 Amortization of employee restricted stock -- (390) -- 992 -- -- 602 Common stock issued for acquisitions 1 1,324 -- -- -- -- 1,325 Decrease in unearned compensation--ESOP -- 1,122 -- 405 -- -- 1,527 Payment of fractional shares -- (20) -- -- -- -- (20) Cash dividends -- -- (70,773) -- -- -- (70,773) ------ -------- -------- ------- -------- -------- ---------- Balances at December 31, 2000 $1,496 $617,234 $897,214 $(1,354) $(149,246) $(34,487) $1,330,857 ====== ======== ======== ======= ========= ======== ========== ------------------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------- December 31, ---------------------------------------------------------------------------------------------------------------------- (1) Disclosure of reclassification amount (all amounts net of tax): 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------- Unrealized holding gains (losses) arising during the period $ 80,611 $(126,842) $ (4,946) Less: reclassification adjustment for net gains (losses) included in net income (10,046) 410 4,202 --------- --------- --------- Net unrealized gains (losses) on securities $ 90,657 $(127,252) $ (9,148) ========= ========= ========= ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements. 36 39 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------------------------------------------------------------------ (Dollars In Thousands) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 191,734 $ 196,958 $ 141,744 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 23,819 23,575 23,775 Provision for depreciation 20,466 26,975 25,939 Amortization of goodwill and other intangibles 21,016 20,642 17,354 Net (increase) decrease in net deferred tax assets (3,445) (920) 18,693 ESOP and restricted stock expense 1,527 2,072 3,194 Amortization of employee restricted stock 602 116 797 Issuance of restricted stock units 170 552 348 Net (gains) losses realized from sales of securities and consumer loans 10,726 (655) (6,423) Net (gains) losses realized from sales of loans held for sale 915 415 (21,870) Earnings from bank owned life insurance (17,701) (14,133) (5,934) Net decrease (increase) in mortgage servicing rights 29,499 (7,285) 20,164 Proceeds from sales of loans held for sale 308,191 1,118,166 5,532,324 Residential loans originated and purchased for sale (277,919) (640,149) (5,639,625) Net decrease (increase) in interest and dividends receivable and other assets (24,790) (11,300) (42,290) Net increase (decrease) in other liabilities (10,396) 13,957 6,796 ------------ ------------ ------------ Net cash provided by operating activities 274,414 728,986 74,986 ------------ ------------ ------------ ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Proceeds from maturities and principal repayments of securities held to maturity 98,510 96,226 134,625 Purchase of securities held to maturity -- -- (148,553) Proceeds from sales of securities available for sale 278,984 44,330 787,459 Proceeds from maturities and principal repayments of securities available for sale 971,099 1,754,826 1,434,137 Purchases of securities available for sale (231,383) (3,958,537) (2,983,722) Net (increase) decrease in loans and leases (1,045,822) (586,876) 173,153 Proceeds from sales of loans 34,234 -- -- Net additions to premises and equipment (32,235) (24,006) (27,992) Purchase of bank owned life insurance -- (165,400) -- Payment for acquisitions, net of cash acquired (22,274) -- 122,526 ------------ ------------ ------------ Net cash provided (used) by investing activities 51,113 (2,839,437) (508,367) ------------ ------------ ------------ ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net increase (decrease) in deposits 396,755 (305,711) 637,791 Net increase (decrease) in securities sold under repurchase agreements (316,195) 502,340 88,569 Proceeds from Federal Home Loan Bank of Boston borrowings 12,799,452 5,003,333 3,357,550 Payments on Federal Home Loan Bank of Boston borrowings (13,449,029) (3,038,162) (3,197,979) Proceeds from issuance (repurchase) of securities of subsidiary trusts -- (33,026) -- Net increase (decrease) in other borrowings 6,441 20,238 (8,052) Issuance of common stock 21,001 18,353 23,673 Purchase of treasury stock (96,585) (53,745) (55,340) Cash dividends paid to shareholders (70,773) (65,368) (57,231) ------------ ------------ ------------ Net cash (used) provided by financing activities (708,933) 2,048,252 788,981 ------------ ------------ ------------ ------------------------------------------------------------------------------------------------------------------------------------ (Decrease) increase in cash and cash equivalents (383,406) (62,199) 355,600 Cash and cash equivalents at beginning of period 776,395 838,594 482,994 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 392,989 $ 776,395 $ 838,594 ============ ============ ============ ------------------------------------------------------------------------------------------------------------------------------------ In conjunction with the purchase acquisitions detailed in Note 2 to the Consolidated Financial Statements, assets were acquired and liabilities were assumed as follows: Fair value of assets acquired 13,534 -- $ 123,311 Less liabilities assumed 12,263 -- 292,079
-------------------------------------------------------------------------------- For the years ended December 31, 2000, 1999 and 1998, interest of $712,843, $599,981 and $563,557 and income taxes of $92,970, $77,436 and $56,995 were paid, respectively. During 2000 and 1999, $3,094 and $245,233 of investment securities were transferred to securities available for sale. During 1999, $632,735 of portfolio loans were transferred to loans held to maturity. -------------------------------------------------------------------------------- See accompanying notes to Consolidated Financial Statements. 37 40 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts expressed in thousands, except per share data) -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Banknorth Group, Inc. (the "Company") and its subsidiaries conform to generally accepted accounting principles and to general practice within the banking industry. The Company's principal business activities are retail and commercial banking as well as trust, investment advisory and insurance brokerage services, and are conducted through the Company's direct and indirect subsidiaries located in Maine, New Hampshire, Massachusetts and Connecticut, Vermont and New York. The Company and its subsidiaries are subject to regulation of, and periodic examination by, the Office of the Comptroller of Currency and the Federal Reserve Board, among other agencies. The following is a description of the more significant accounting policies. Financial Statement Presentation The Consolidated Financial Statements include the accounts of Banknorth Group, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in prior periods have been reclassified to conform to the current presentation. The Consolidated Financial Statements have been restated to reflect the Company's (formerly Peoples Heritage Financial Group, Inc.) acquisition of Banknorth Group, Inc. on May 10, 2000, which was accounted for as a pooling-of-interests. In accordance with accounting requirements for pooling-of-interests business combinations, the financial statements of the Company and Banknorth have been combined based on historical financial statements as previously reported by each company. See Note 2 "Acquisitions." Assets held in a fiduciary capacity are not assets of the Company and, accordingly, are not included in the Consolidated Balance Sheets. In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan and lease losses, deferred tax assets and the valuation of mortgage servicing rights. Cash and Cash Equivalents The Company is required to comply with various laws and regulations of the Federal Reserve Board which require that the Company maintain certain amounts of cash on deposit and is restricted from investing those amounts. For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and other short-term investments minus federal funds purchased. Generally, federal funds are sold or purchased for one-day periods. Securities Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and reflected at amortized cost. Investments not classified as "held to maturity" are classified as "available for sale." Securities available for sale consist of debt and equity securities that are available for sale in order to respond to changes in market interest rates, liquidity needs, changes in funding sources and other similar factors. These assets are specifically identified and are carried at market value. Changes in market value of available for sale securities, net of applicable income taxes, are reported as a separate component of shareholders' equity and comprehensive income. When a decline in market value of a security is considered other than temporary, the loss is charged to net securities gains (losses) in the consolidated statements of income as a writedown. Premiums and discounts are amortized and accreted over the term of the securities on a level yield method adjusted for prepayments. Gains and losses on the sale of securities are recognized at the time of the sale using the specific identification method. Loans and Leases Loans are carried at the principal amounts outstanding adjusted by partial charge-offs and net deferred loan costs or fees. Residential real estate loans are generally placed on nonaccrual when reaching 120 days past due or in process of foreclosure. All closed-end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on nonaccrual status. Consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. It is the policy of the Company to generally place all commercial real estate loans and commercial business loans and leases which are 90 days or more past due, unless secured by sufficient cash or other assets immediately convertible to cash, on nonaccrual status. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal is reasonably assured and the loan has performed for a period of time, generally six months. Loans are classified as impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and collateral value. Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield using the interest method over the estimated lives of the related loans. Consumer lease financing loans are carried at the amount of minimum lease payments plus residual values, less unearned income which is amortized into interest income using the interest method. Allowance for Loan and Lease Losses The allowance for loan and lease losses is maintained at a level determined to be adequate by management to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off, and reduced by charge-offs on loans and leases. Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment. Primary considerations in this evaluation are prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and management's estimation of future losses. The Company evaluates specific loan status reports on certain commercial and commercial real estate loans rated "substandard" or worse in excess of a 38 41 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- specified dollar amount. Estimated reserves for each of these credits is determined by reviewing current collateral value, financial information, cash flow, payment history and trends and other relevant facts surrounding the particular credit. The remaining commercial and commercial real estate loans are provided for as part of pools of similar loans based on a combination of historical loss experience and migration analysis, which considers the probability of a loan moving from one risk rating category to another over the passage of time, transition matrix and qualitative adjustments. Each of residential real estate loans and consumer loans are evaluated as a group by applying historical charge-off and recovery experience to the current outstanding balance in each loan category, with consideration given to loan growth over the preceding twelve months. Although management uses available information to establish the appropriate level of the allowance for loan and lease losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan and lease losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. Bank Owned Life Insurance Bank owned life insurance ("BOLI") represents life insurance on the lives of certain employees. The Company is the beneficiary of the insurance policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in other income, and are not subject to income taxes. The cash value is included in other assets. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of related assets. Long-lived assets are evaluated periodically for impairment. An assessment of recoverability is performed prior to any writedown of the asset. If circumstances suggest that their value may be impaired, an expense would then be charged in the current period. Goodwill and Other Intangibles Goodwill is amortized on a straight-line basis over various periods not exceeding twenty years; core deposit premiums are amortized on a level-yield basis over the estimated life of the associated deposits. Goodwill and other intangible assets are reviewed for possible impairment when it is determined that events or changed circumstances may affect the underlying basis of the asset. Mortgage Banking and Loans Held for Sale Loans originated for sale are classified as held for sale. These loans are specifically identified and carried at the lower of aggregate cost or estimated market value. Forward commitments to sell residential real estate mortgages are contracts that the Company enters into for the purpose of reducing the market risk associated with originating loans for sale. Market value is estimated based on outstanding investor commitments or, in the absence of such commitments, current investor yield requirements. Gains and losses on sales of mortgage loans are determined using the specific identification method and recorded as mortgage sales income, a component of mortgage banking services income. The gains and losses resulting from the sales of loans with servicing retained are adjusted to recognize the present value of future servicing fee income over the estimated lives of the related loans. Mortgage servicing rights are amortized on an accelerated method over the estimated weighted average life of the loans. Amortization is recorded as a charge against mortgage service fee income, a component of mortgage banking services income. The Company's assumptions with respect to prepayments, which affect the estimated average life of the loans, are adjusted periodically to reflect current circumstances. In evaluating the realizability of the carrying values of mortgage servicing rights, the Company assesses the estimated life of its servicing portfolio based on data which is disaggregated to reflect note rate, type and term on the underlying loans. Mortgage servicing fees received from investors for servicing their loan portfolios are recorded as mortgage servicing fee income when received. Loan servicing costs are charged to noninterest expenses when incurred. Derivative Financial Instruments From time to time the Company may use certain hedging strategies which include the use of derivative financial instruments. The primary objective of the Company's hedging strategies is to reduce net interest rate exposure arising from the Company's asset and liability structure. The Company uses a variety of off-balance sheet derivatives as part of its interest rate risk management strategy. The instruments most frequently used are interest rate swap, floor and corridor contracts. These contracts are designated and are effective as hedges of existing risk positions. These instruments are used to modify the repricing or maturity characteristics of specified assets or liabilities, and are linked to the related assets or liabilities being hedged. Changes in the fair value of the derivative are not included in the consolidated financial statements. The net interest income or expense associated with such derivatives is accrued and recognized as an adjustment to the interest income or interest expense of the asset or liability being hedged. The related interest receivable or payable from such contracts is recorded in accrued interest receivable or payable on the consolidated balance sheet. Premiums paid are amortized as an adjustment to the interest income or interest expense of the asset or liability being hedged. Realized gains and losses, if any, resulting from early termination of derivatives are deferred as an adjustment to the carrying value of the hedged item and recognized as an adjustment to the yield or interest cost of the hedged item over the remaining term of the original swap, floor or corridor contract. The Company may purchase interest rate floors tied to the CMT index to mitigate the prepayment risk associated with mortgage servicing rights which are accounted for as trading instruments and are carried at fair value. Changes in fair value are reported as a component of mortgage banking income. The Company also utilizes Treasury options to modify its forward mortgage commitments. Changes in fair value of the options are included in the calculation of the carrying value of loans held for sale. The Company also utilizes mortgage-backed securities options to modify its forward mortgage commitments. Changes in fair value of the options are included in the calculation of the carrying value of loans held for sale. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, 39 42 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- "Accounting for Derivative Instruments and Hedging Activities," which sets accounting and reporting standards for derivative instruments and hedging activities. The Statement, as amended by SFAS No. 138, requires the Company to recognize all derivatives on the balance sheet at fair value. The Company adopted the Statement effective January 1, 2001. The Company estimates that it will report an after-tax loss from cumulative effect of adoption of approximately $286 thousand. Investments in Limited Partnerships The Company has several investments in tax advantaged limited partnerships. These investments are included in other assets and are amortized over the same period the tax benefits are expected to be received. Pension, 401(k), and Other Employee Benefit Plans The Company and its subsidiaries have non-contributory defined benefit pension plans which cover most employees. The benefits are based on years of service and the employee's career average earnings. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The Company maintains Section 401(k) savings plans for substantially all employees of the Company and its subsidiaries. Under the plans, the Company makes a matching contribution of a portion of the amount contributed by each participating employee, up to a percentage of the employee's annual salary. The plans allow for supplementary profit sharing contributions by the Company, at its discretion, for the benefit of participating employees. The Company has a Profit Sharing Employee Stock Ownership Plan (the "ESOP") which is designed to invest primarily in Common Stock of the Company (the "Common Stock"). Substantially all employees are eligible to participate in the ESOP following one year of service. Employees may not make contributions to the ESOP but may receive a discretionary contribution from the Company based on their pro-rata share of eligible compensation. The Company previously sponsored a leveraged employee stock ownership plan which was merged with and into the ESOP. The Company is required to make annual contributions to the ESOP equal to the ESOP's debt service and the unallocated shares are pledged as collateral for the debt. As the debt is repaid, shares are released from collateral and allocated to eligible employees. The Company accounts for this ESOP in accordance with AICPA SOP 93-6, "Employers' Accounting for Employee Stock Ownership Plans." Accordingly, the debt of the ESOP is recorded as long-term debt and the shares pledged as collateral are reported as unearned compensation on the balance sheet. As shares are released from collateral, the Company records compensation expense equal to the current market price of the shares, and the shares are treated as outstanding for purposes of calculating earnings per share. Stock Compensation Plans Statement of Financial Accounting Standards SFAS No. 123, "Accounting for Stock-Based Compensation" encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted on or after January 1, 1995. See Note 15 - Stock Based Compensation Plans. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those 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 in the period that includes the enactment date. Income taxes are allocated to each entity in the consolidated group based on its share of taxable income. Tax credits generated from limited partnerships are reflected in earnings when realized for federal income tax purposes. Earnings Per Share Earnings per share have been computed in accordance with SFAS No. 128, "Earnings Per Share." Basic earnings per share have been calculated by dividing net income by weighted average shares outstanding before any dilution and adjusted to exclude the weighted average number of unallocated shares held by the ESOP. Diluted earnings per share have been calculated by dividing net income by weighted average shares outstanding after giving effect to the potential dilution that could occur if the potential common shares were converted into common stock using the treasury stock method. Segment Reporting An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. The Company's primary business is banking, which provides over 90% of its revenues and profits. Banking services are provided within the framework of seven full-service community banks which have similar economic characteristics, products and services, distribution channels and regulatory environments. Accordingly disaggregated segment information is not presented. 40 43 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- 2. ACQUISITIONS During the third quarter of 2000, the Company completed the acquisition of two insurance agencies based in Massachusetts and Connecticut for a combination of cash and stock. These acquisitions were accounted for under the purchase method and, as a result, the acquired assets and liabilities were added to those of the Company at their respective fair values and the excess of the purchase price over the fair value of net assets acquired, which aggregated $22.5 million, was recorded as goodwill and is being amortized to expense over 20 years. In addition, under this method of accounting the results of operations of the acquired agencies are included in the Company's results of operations only from their respective dates of acquisition. On May 10, 2000, the Company completed the acquisition of Banknorth Group, Inc. ("Banknorth"). Banknorth was headquartered in Burlington, Vermont and had 100 offices located throughout Vermont, Massachusetts, New Hampshire and upstate New York. Shareholders of Banknorth exchanged their shares for 1.825 newly issued shares of the Company's common stock, plus cash in lieu of any fractional share interests. Approximately 42.9 million shares of Common Stock were issued in connection with this acquisition, which was accounted for as a pooling-of-interests. As of December 31, 1999, Banknorth had total assets of $4.6 billion and total shareholders' equity of $341 million. On January 1, 1999, the Company completed the acquisition of SIS Bancorp, Inc. ("SIS"). Approximately 16.3 million shares of Common Stock were issued in connection with this acquisition, which was accounted for as a pooling-of-interests. SIS had total assets of $2.0 billion and shareholders' equity of $139 million at December 31, 1998. During 1998, the Company completed the acquisition of three insurance agencies for an aggregate of 454,864 shares of Common Stock. These acquisitions were accounted for as purchases and, accordingly, the Company's financial statements reflect them from the date of acquisition. The Company recorded $9.3 million of goodwill in connection with these purchases. The acquired agencies have been integrated into the Company's existing insurance agency operations. On April 10, 1998, the Company completed the acquisition of CFX Corporation ("CFX"). Approximately 32.8 million shares of Common Stock were issued in connection with this transaction. At December 31, 1997, CFX had total assets of $2.9 billion and total shareholders' equity of $245.7 million. The acquisition of CFX was accounted for as a pooling-of-interests and, accordingly, financial information for all periods presented prior to the date of acquisition has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. The Company incurred various merger related and restructuring charges in connection with the foregoing acquisitions and certain other matters (collectively, "special charges"). On a pre-tax basis special charges amounted to $43.0 million, $28.0 million and $61.1 million in 2000, 1999 and 1998, respectively. For additional information, see Note 9 - Special Charges. 41 44 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- 3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY A summary of the amortized cost and market values of securities available for sale and held to maturity follows:
------------------------------------------------------------------------------------------------------------------------------------ Amortized Gross Unrealized Gross Unrealized Market Cost Gains Losses Value ------------------------------------------------------------------------------------------------------------------------------------ AVAILABLE FOR SALE DECEMBER 31, 2000: U. S. Government obligations and obligations of U.S.Government agencies and corporations $ 544,392 $ 2,872 $ (7,873) $ 539,391 Tax-exempt bonds and notes 83,133 760 (659) 83,234 Other bonds and notes 426,199 2,260 (17,191) 411,268 Mortgage-backed securities 3,591,923 10,940 (33,544) 3,569,319 Collateralized mortgage obligations 575,091 207 (10,820) 564,478 ---------- ---------- ---------- ---------- Total debt securities 5,220,738 17,039 (70,087) 5,167,690 Federal Home Loan Bank stock 242,632 -- (11) 242,621 Federal Reserve Bank stock 13,312 -- -- 13,312 Other equity securities 1,488 -- -- 1,488 ---------- ---------- ---------- ---------- Total equity securities 257,432 -- (11) 257,421 ---------- ---------- ---------- ---------- Total securities available for sale $5,478,170 $ 17,039 $ (70,098) $5,425,111 ========== ========== ========== ========== ------------------------------------------------------------------------------------------------------------------------------------ DECEMBER 31, 1999: U. S. Government obligations and obligations of U.S.Government agencies and corporations $ 709,497 $ 21 $ (22,702) $ 686,816 Tax-exempt bonds and notes 56,903 82 (322) 56,663 Other bonds and notes 455,435 141 (12,159) 443,417 Mortgage-backed securities 4,264,364 1,629 (133,354) 4,132,639 Collateralized mortgage obligations 723,290 190 (23,914) 699,566 ---------- ---------- ---------- ---------- Total debt securities 6,209,489 2,063 (192,451) 6,019,101 Federal Home Loan Bank stock 261,391 -- -- 261,391 Other equity securities 38,422 74 (2,957) 35,539 ---------- ---------- ---------- ---------- Total equity securities 299,813 74 (2,957) 296,930 ---------- ---------- ---------- ---------- Total securities available for sale $6,509,302 $ 2,137 $ (195,408) $6,316,031 ========== ========== ========== ========== ------------------------------------------------------------------------------------------------------------------------------------ HELD TO MATURITY: DECEMBER 31, 2000: Collateralized mortgage obligations 455,547 1,563 -- 457,110 ---------- ---------- ---------- ---------- Total securities held to maturity $ 455,547 $ 1,563 -- $ 457,110 ========== ========== ========== ========== DECEMBER 31, 1999: U. S. Government obligations and obligations of U.S.Government agencies and corporations $ 2,797 $ 5 $ (35) $ 2,767 Tax-exempt bonds and notes 7,753 114 (29) 7,838 Other bonds and notes 1,480 70 -- 1,550 Mortgage-backed securities 3,789 46 (110) 3,725 Collateralized mortgage obligations 541,332 -- (21,607) 519,725 ---------- ---------- ---------- ---------- Total securities held to maturity $ 557,151 $ 235 $ (21,781) $ 535,605 ========== ========== ========== ========== ------------------------------------------------------------------------------------------------------------------------------------
42 45 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- The amortized cost and market values of debt securities available for sale at December 31, 2000 by contractual maturities are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2000, the Company had $265.5 million of securities available for sale with call provisions.
------------------------------------------------------------------------------------------------------------ Available for Sale Held to Maturity ------------------------------------------------------------------------------------------------------------ Amortized Cost Market Value Amortized Cost Market Value ------------------------------------------------------------------------------------------------------------ DECEMBER 31, 2000: Due in one year or less $ 241,796 $ 241,954 $ -- $ -- Due after one year through five years 441,418 441,516 -- -- Due after five years through ten years 379,797 375,573 -- -- Due after ten years 4,157,727 4,108,647 455,547 457,110 ---------- ---------- -------- -------- Total debt securities $5,220,738 $5,167,690 $455,547 $457,110 ========== ========== ======== ======== ------------------------------------------------------------------------------------------------------------
A summary of realized gains and losses on securities available for sale for 2000, 1999 and 1998 follows: -------------------------------------------------------------------------------- Gross Realized -------------------------------------------------------------------------------- Gains Losses -------------------------------------------------------------------------------- 2000 $ 443 $15,899 1999 885 361 1998 7,003 696 -------------------------------------------------------------------------------- 4. LOANS AND LEASES The Company's lending activities are conducted principally in New England and upstate New York. The principal categories of loans in the Company's portfolio are residential real estate loans, which are secured by single-family (one to four units) residences; commercial real estate loans, which are secured by multi-family (five or more units) residential and commercial real estate; commercial business loans and leases; and consumer loans and leases. A summary of loans and leases follows: -------------------------------------------------------------------------------- December 31, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- Residential real estate mortgages $ 2,248,714 $ 2,270,417 Commercial real estate mortgages: Commercial real estate 2,663,775 2,493,492 Construction and development 291,388 202,825 ----------- ----------- 2,955,163 2,696,317 Commercial business loans and leases 2,308,904 1,924,201 Consumer loans and leases 3,332,881 2,963,721 ----------- ----------- Total loans and leases $10,845,662 $ 9,854,656 =========== =========== -------------------------------------------------------------------------------- Loans and leases include net deferred charges of $4.3 million at December 31, 2000 and $4.5 million at December 31, 1999. Deferred charges included deferred loan origination costs, net of deferred loan origination fees, and unearned income on leases. 43 46 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- NON PERFORMING LOANS -------------------------------------------------------------------------------- The following table sets forth information regarding nonperforming loans and accruing loans 90 days or more overdue at the dates indicated:
-------------------------------------------------------------------------------- December 31, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- Residential real estate mortgages: Nonaccrual loans $ 9,894 $17,283 Troubled debt restructurings -- 28 ------- ------- Total 9,894 17,311 ------- ------- Commercial real estate loans: Nonaccrual loans 12,155 16,754 Troubled debt restructurings 635 1,002 ------- ------- Total 12,790 17,756 ------- ------- Commercial business loans and leases: Nonaccrual loans 32,583 17,027 Troubled debt restructurings 38 82 ------- ------- Total 32,621 17,109 ------- ------- Consumer loans: Nonaccrual loans 6,329 5,951 Troubled debt restructurings -- -- ------- ------- Total 6,329 5,951 ------- ------- Total nonperforming loans: Nonaccrual loans 60,961 57,015 Troubled debt restructurings 673 1,112 ------- ------- Total $61,634 $58,127 ======= ======= Accruing loans which are 90 days overdue $ 5,973 $12,131 ======= ======= --------------------------------------------------------------------------------
The ability and willingness of borrowers to repay loans is generally dependent on current economic conditions and real estate values within the borrowers' geographic areas. Interest income that would have been recognized for 2000 and 1999 if nonperforming loans at December 31, 2000 and 1999 had been performing in accordance with their original terms approximated $5.6 million in 2000 and 1999. Impaired loans are commercial and commercial real estate loans which the Company believes probably will not result in the collection of all amounts due according to the contractual terms of the loan agreement. The definition of "impaired loans" is not the same as the definition of "nonaccrual loans," although the two categories overlap. All commercial and commercial real estate nonaccrual loans are impaired, but not all impaired loans are on nonaccrual. Accrual of interest is discontinued when collectibility of principal or interest is uncertain or on which payments of principal or interest have become contractually past due 90 days. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility. The amount of reserves for impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral. At December 31, 2000 and 1999, total impaired loans were $46.5 million and $49.5 million, of which $29.7 million and $25.9 million had related allowances of $7.8 million and $4.3 million, respectively. During the years ended December 31, 2000 and 1999, the income recognized related to impaired loans was $373 thousand and $4.3 million respectively, and the average balance of outstanding impaired loans was $39.4 million and $59.6 million, respectively. The Company generally applies cash received on impaired loans to the principal balance of the loan. 5. ALLOWANCE FOR LOAN AND LEASE LOSSES A summary of changes in the allowance for loan and lease losses follows:
-------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- Balance at beginning of period $ 155,048 $ 155,098 $ 150,615 Allowance on acquired loans -- -- 2,200 Provisions charged to operations 23,819 23,575 23,775 Loans and leases charged off (34,692) (36,034) (38,410) Recoveries 9,375 12,409 16,918 --------- --------- --------- Balance at end of period $ 153,550 $ 155,048 $ 155,098 ========= ========= ========= --------------------------------------------------------------------------------
6. PREMISES AND EQUIPMENT A summary of premises and equipment follows:
-------------------------------------------------------------------------------- December 31, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- Land $ 20,458 $ 20,571 Buildings and leasehold improvements 196,014 198,221 Furniture, fixtures and equipment 203,764 194,777 ------- ------- 420,236 413,569 Less accumulated depreciation and amortization 219,044 221,029 -------- -------- $201,192 $192,540 ======== ======== --------------------------------------------------------------------------------
44 47 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- 7. MORTGAGE SERVICING RIGHTS An analysis of mortgage servicing rights for the years ended December 31, 2000, 1999, and 1998 follows:
------------------------------------------------------------------------------------------------------------------------- Mortgage Servicing Rights Valuation Allowance Total ------------------------------------------------------------------------------------------------------------------------- Balance as of December 31, 1997 $ 65,288 $ -- $ 65,288 Mortgage servicing rights capitalized 84,041 -- 84,041 Amortization charged against mortgage servicing fee income (15,731) -- (15,731) Impairment reserve charged against mortgage servicing fee income -- (11,586) (11,586) Mortgage servicing rights sold (76,573) -- (76,573) -------- -------- -------- Balance as of December 31, 1998 57,025 (11,586) 45,439 Mortgage servicing rights capitalized 16,149 -- 16,149 Amortization charged against mortgage servicing fee income (12,498) -- (12,498) Reduction of impairment reserve (credit to mortgage servicing fee income) -- 5,300 5,300 Mortgage servicing rights sold (1,666) -- (1,666) -------- -------- -------- Balance as of December 31, 1999 59,010 (6,286) 52,724 MORTGAGE SERVICING RIGHTS CAPITALIZED 3,977 -- 3,977 AMORTIZATION CHARGED AGAINST MORTGAGE SERVICING FEE INCOME (8,306) -- (8,306) REDUCTION OF IMPAIRMENT RESERVE (CREDIT TO MORTGAGE SERVICING FEE INCOME) -- 2,895 2,895 MORTGAGE SERVICING RIGHTS SOLD (28,065) -- (28,065) -------- -------- -------- BALANCE AS OF DECEMBER 31, 2000 $ 26,616 $ (3,391) $ 23,225 ======== ======== ======== ------------------------------------------------------------------------------------------------------------------------- December 31, ------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------- Residential real estate loans serviced for investors $1,618,610 $4,540,948 $5,178,281 ========== ========== ========== -------------------------------------------------------------------------------------------------------------------------
The Company generally continues to service residential real estate loans after the loans have been sold into the secondary market. The Company pays the investor that purchased the loan a pass-through rate which is less than the interest rate the Company receives from the borrower. The difference is retained by the Company as a fee for servicing the residential real estate loans. The Company capitalizes mortgage servicing rights at their allocated cost, based on relative fair values upon sale of the related loans. In the fourth quarter of 2000, the Company reached an agreement to sell the servicing rights on substantially all residential mortgage loans which it services for others. The sale will be in two installments and is expected to be completed by March 31, 2001. In the fourth quarter of 2000, the Company recorded a $5.2 million gain on sale of $1.8 billion of loans serviced for others which was reduced by a $1.5 million loss on the sale of related hedge instruments. 45 48 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- 8. INCOME TAXES The current and deferred components of income tax expense follow:
------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------- Current Federal $ 95,015 $ 90,930 $ 48,125 State 5,223 7,339 4,350 Deferred Federal (4,733) (572) 17,039 State 1,288 (348) 3,564 -------- -------- -------- $ 96,793 $ 97,349 $ 73,078 ======== ======== ======== -------------------------------------------------------------------------------------------------------------------------
The following table reconciles the expected federal income tax expense (computed by applying the federal statutory tax rate to income before taxes) to recorded income tax expense:
------------------------------------------------------------------------------------------------------------------------- Year Ended December 31, ------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------- Computed federal tax expense $ 100,984 $ 103,007 $ 75,188 State income tax, net of federal benefits 4,232 4,544 5,144 Benefit of tax-exempt income (4,553) (3,211) (2,778) Nondeductible merger expenses 3,043 1,740 4,908 Amortization of goodwill and other intangibles 3,369 3,519 3,034 Low income/rehabilitation credits (4,362) (4,913) (4,152) Restructuring of legal entities within affiliated group -- -- (5,069) Increase in cash surrender value of life insurance (6,195) (5,433) (2,077) Other, net 275 (1,904) (1,120) --------- --------- --------- Recorded income tax expense $ 96,793 $ 97,349 $ 73,078 ========= ========= ========= -------------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities which are included in Other Assets and Other Liabilities, respectively, at December 31, 2000 and 1999 follow:
------------------------------------------------------------------------------------------------------------------------- 2000 1999 ------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Allowance for loan and lease losses $ 55,053 $ 55,574 Reserve for mobile home dealers 574 806 Accrued pension expense -- 2,559 Difference of tax and book basis of other real estate owned 133 129 Interest accrued and payments received on non-performing loans for tax purposes 809 760 Compensation and employee benefits 12,955 15,213 Book reserves not yet realized for tax purposes 1,499 478 Unrealized depreciation on securities 18,659 68,112 Intangible asset 5,163 2,228 Other 6 942 -------- -------- Total gross deferred tax assets 94,851 146,801 -------- -------- Deferred tax liabilities Leases 12,838 26,407 Premises and equipment 12,466 8,503 Partnership investments 7,333 6,165 Loans 7,825 6,431 Mortgage servicing rights 4,779 11,397 Deferred income 3,287 -- Tax bad debt reserve 5,996 977 Other 1,182 1,768 -------- -------- Total gross deferred tax liabilities 55,706 61,648 -------- -------- Net deferred tax asset $ 39,145 $ 85,153 ======== ======== -------------------------------------------------------------------------------------------------------------------------
46 49 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- 9. SPECIAL CHARGES Special charges totaled $43.0 million, $28.0 million and $61.1 million in 2000, 1999 and 1998, respectively. Special charges included merger expenses of $35.2 million, $20.6 million and $61.1 million in 2000, 1999 and 1998, respectively, and $7.4 million of costs to discontinue the correspondent mortgage lending business in 1999. The following table summarizes special charges recorded in 2000 by type of expense and shows the activity in the accrued liability account during 2000.
--------------------------------------------------------------------------------------------------------------------------------- Amount Other Amounts Balance at Included in Cash Applied Balance at 12/31/1999 Expense Reallocations Payments to Reserve 12/31/2000 --------------------------------------------------------------------------------------------------------------------------------- Banknorth Merger Charges --------------------------------------------------------------------------------------------------------------------------------- Severance costs $ -- $ 13,050 $ 919 $ 12,565 $ 725 $ 679 Gain on curtailment of benefit plans (8,100) (400) -- (8,500) -- Data processing/systems integration -- 4,667 (1,050) 3,517 -- 100 Professional fees and transaction costs -- 8,250 542 8,792 -- -- Asset write-downs/facility costs -- 11,083 (1,011) 2,981 4,972 2,119 Gain on divestiture of branch -- (4,250) -- (4,250) -- -- Other costs -- 9,276 1,000 10,059 -- 217 -------- -------- -------- -------- -------- -------- $ -- $ 33,976 $ -- $ 33,664 ($ 2,803) $ 3,115 ======== ======== ======== ======== ======== ======== -------- Branch closings --------------------------------------------------------------------------------------------------------------------------------- Severance and salary costs $ -- $ 68 $ (48) $ 20 $ -- $ -- Asset write-downs/lease terminations -- 1,063 -- 310 753 -- Other costs -- 256 48 134 -- 170 -------- -------- -------- -------- -------- -------- -- $ 1,387 $ -- $ 464 $ 753 $ 170 ======== ======== ======== ======== ======== ======== --------------------------------------------------------------------------------------------------------------------------------- Other Special Charges --------------------------------------------------------------------------------------------------------------------------------- Write-down of auto lease residuals $ -- $ 3,700 $ -- $ -- $ 3,700 $ -- Facility write-downs --Evergreen merger -- 1,253 -- -- 1,253 -- Contract termination --merchant processing -- 3,091 -- 3,091 -- -- Balance forward from CFX/SIS mergers 1,628 (400) -- 1,228 -- -- -------- -------- -------- -------- -------- -------- $ 1,628 $ 7,644 $ -- $ 4,319 $ 4,953 $ -- ======== ======== ======== ======== ======== ======== ---------------------------------------------------------------------------------------------------------------------------------
The severance payments made in connection with the Banknorth merger covered approximately 100 employees whose positions were eliminated as a result of the merger. Asset write-downs and facility costs related mainly to duplicate facilities and fixed assets. 47 50 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- 10. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS -------------------------------------------------------------------------------- A summary of federal funds purchased and securities sold under repurchase agreements follows:
-------------------------------------------------------------------------------- December 31, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- Federal funds purchased $ 152,003 $ -- Securities sold under repurchase agreements 986,626 1,302,821 ---------- ---------- $1,138,629 $1,302,821 ========== ==========
-------------------------------------------------------------------------------- A summary of securities sold under short term repurchase agreements follows:
-------------------------------------------------------------------------------- At or for the Year Ended December 31, -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- Balance outstanding at end of period $ 986,626 $1,302,821 $ 800,481 Market value of collateral at end of period 1,194,365 1,536,101 941,634 Amortized cost of collateral at end of period 1,194,606 1,579,486 942,449 Average balance outstanding during the year 995,193 768,500 736,714 Maximum outstanding at any month end during the year 1,261,442 1,302,821 828,377 Average interest rate during the year 5.24% 4.34% 4.68% Average interest rate at end of year 4.99% 4.58% 4.26%
-------------------------------------------------------------------------------- Securities sold under repurchase agreements generally have maturities of 365 days or less and are collateralized by mortgage-backed securities and U.S. Government obligations. -------------------------------------------------------------------------------- 11. BORROWINGS FROM THE FEDERAL HOME LOAN BANK -------------------------------------------------------------------------------- A summary of the borrowings from the Federal Home Loan Bank follows: -------------------------------------------------------------------------------- December 31, 2000 -------------------------------------------------------------------------------- Maturity Dates Principal Amounts Interest Rates 2001 $2,423,001 4.95 - 6.63% 2002 210,118 6.63 - 7.79% 2003 171,246 4.98 - 6.43% 2004 239,163 5.28 - 7.72% 2005 161,466 6.14 - 7.15% 2006-2020 143,248 3.60 - 8.14% ---------- $3,348,242 ========== -------------------------------------------------------------------------------- December 31, 1999 -------------------------------------------------------------------------------- Maturity Dates Principal Amounts Interest Rates 2000 $795,445 4.70 - 7.75% 2001 562,100 5.38 - 6.44% 2002 2,090,130 5.12 - 7.79% 2003 149,077 5.00 - 6.43% 2004 235,405 5.28 - 7.11% 2005-2018 165,662 3.60 - 8.14% ---------- $3,997,819 ========== Callable borrowings of $150 million are shown in their respective periods assuming that the callable debt is redeemed at the initial call date while all other borrowings are shown in the periods corresponding to their scheduled maturity date. Short and long-term borrowings from the Federal Home Loan Bank, which consist of both fixed and adjustable rate borrowings, are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain unencumbered investment securities and other qualified assets. The Company has the ability to prepay most of its borrowings without penalty. 48 51 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- 12. CAPITAL TRUST SECURITIES On January 24, 1997, the Company sponsored the creation of Peoples Heritage Capital Trust I (the "Trust"), a statutory business trust created under the laws of Delaware. The Company is the owner of all of the common securities of the Trust (the "Common Securities"). On January 31, 1997, the Trust issued $100 million of 9.06% Capital Securities (the "Capital Securities," and with the common securities, the "Trust Securities"), the proceeds from which were used by the Trust, along with the Company's $3.1 million capital contribution for the Trust's Common Securities, to acquire $103.1 million aggregate principal amount of the Company's 9.06% Junior Subordinated Deferrable Interest Debentures due February 1, 2027 (the "Debentures"), which constitute the sole assets of the Trust. The Company has, through the Declaration of Trust establishing the Trust, Common Securities and Capital Securities Guarantee Agreements, the Debentures and a related Indenture, taken together, fully irrevocably and uncondition-ally guaranteed all of the Trust's obligations under the Trust Securities. In 1999, the Company repurchased $31.2 million of the Capital Securities. On May 1, 1997, Banknorth (now the Company) sponsored the creation of Banknorth Capital Trust I ("Trust 1"), a statutory business trust created under the laws of Delaware. The Company is the owner of all of the common securities of Trust 1 (the "Common Securities"). Trust 1 issued $30 million of 10.52% Capital Securities (the "Capital Securities," and with the common securities, the "Trust Securities"), the proceeds from which were used by Trust 1, along with the Company's $928 thousand capital contribution for Trust Common Securities, to acquire $31 million aggregate principal amount of the Company's 10.52% Junior Subordinated Deferrable Interest Debentures due February 1, 2027 (the "Debentures"), which constitute the sole assets of Trust 1. The Company has, through the Declaration of Trust establishing the Trust, Common Securities and Capital Securities Guarantee Agreements, the Debentures and a related Indenture, taken together, fully irrevocably and unconditionally guaranteed all of Trust 1's obligations under the Trust Securities. Separate financial statements of the Trusts are not required pursuant to Staff Accounting Bulletin 53 of the Securities and Exchange Commission. 13. SHAREHOLDERS' EQUITY In April 2000, the stockholders of the Company approved an increase in the authorized number of shares of Common Stock from 200,000,000 to 400,000,000. On January 23, 2001, the Company's Board of Directors authorized the repurchase of up to 8 million shares, or approximately 6%, of the Common Stock. Regulatory Capital Requirements Bank regulatory agencies have established capital adequacy standards which are used extensively in their monitoring and control of the industry. Certain of these standards relate capital to level of risk by assigning different weightings to assets and certain off-balance sheet activity. The Company must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below.
-------------------------------------------------------------------------------------------------------------------------------- Actual Capital Requirements Excess -------------------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------------------------------------------------------------------------------- As of December 31, 2000 Total capital (to risk weighted assets) $1,428,814 11.81% $ 967,752 8.00% $ 461,062 3.81% Tier 1 capital (to risk weighted assets) 1,277,574 10.56% 483,876 4.00% 793,698 6.56% TIER 1 leverage capital ratio (to average assets) 1,277,574 7.02% 727,852 4.00% 549,722 3.02% As of December 31, 1999 Total capital (to risk weighted assets) $1,376,171 12.02% 916,232 8.00% 459,939 4.02% Tier 1 capital (to risk weighted assets) 1,232,863 10.76% 458,115 4.00% 774,748 6.76% Tier 1 leverage capital ratio (to average assets) 1,232,863 6.75% 730,693 4.00% 502,170 2.75% --------------------------------------------------------------------------------------------------------------------------------
At December 31, 2000 and 1999, the Company and each of its banking subsidiaries were well-capitalized and in compliance with all applicable regulatory capital requirements. 49 52 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- Dividend Limitations Dividends paid by subsidiaries are the primary source of funds available to the Company for payment of dividends to its shareholders. The Company's banking subsidiaries are subject to certain requirements imposed by federal banking laws and regulations. These requirements, among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by the banking subsidiaries to the Company. Stockholder Rights Plan In 1989, the Company's Board of Directors adopted a Stockholder Rights Plan declaring a dividend of one preferred Stock Purchase Right for each outstanding share of Common Stock. The rights will remain attached to the Common Stock and are not exercisable except under limited circumstances relating to acquisition of, the right to acquire beneficial ownership of, or tender offer for 20% or more of the outstanding shares of Common Stock. The Rights have no voting or dividend privileges and, until they become exercisable, have no dilutive effect on the earnings of the Company. On July 27, 1999 the Board of Directors amended and restated the Stockholder Rights Plan to, among other things, extend the expiration date of the rights to September 25, 2009. On July 25, 2000, the Company again amended and restated the Stockholder Rights Plan to reflect its acquisition of Banknorth. Earnings per share The following table presents a reconciliation of earnings per share as of the dates indicated:
-------------------------------------------------------------------------------- For the Year Ended December 31, -------------------------------------------------------------------------------- (In thousands, except per share amounts) 2000 1999 1998 -------------------------------------------------------------------------------- Net income $191,734 $196,958 $141,744 ======== ======== ======== Weighted average shares outstanding: Basic 144,270 145,758 146,119 Effect of dilutive securities: Stock options 924 1,670 2,846 -------- -------- -------- Diluted 145,194 147,428 148,965 ======== ======== ======== Net income per share: Basic $ 1.33 $ 1.35 $ 0.97 Diluted 1.32 1.34 0.95 --------------------------------------------------------------------------------
14. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER OFF-BALANCE SHEET RISKS The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans, standby letters of credit, recourse arrangements on serviced loans and forward commitments to sell loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and recourse arrangements is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For forward commitments to sell loans, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its forward commitments to sell loans through credit approvals, limits and monitoring procedures. Financial instruments with off-balance sheet risk at December 31, 2000 and 1999 follow:
-------------------------------------------------------------------------------- Contract or Notional Amount at December 31, -------------------------------------------------------------------------------- 2000 1999 -------------------------------------------------------------------------------- Financial instruments with notional or contract amounts which represent credit risk: Commitments to originate loans, unused lines, standby letters of credit and unadvanced portions of construction loans $3,388,399 $3,132,878 Loans serviced with recourse 155,179 196,777 Loans sold with credit enhancements 28 706 Leases serviced with credit enhancements -- 4,933 Financial instruments with notional or contract amounts which exceed the amount of credit risk: Forward commitments to sell loans 92,363 73,700 Interest rate floors: notional amount 145,000 495,000 fair value 10 1,354 Interest rate swap agreements (pay fixed): notional amount -- 50,000 fair value -- 1,749 Interest rate corridor agreements (pay fixed): notional amount -- 50,000 fair value -- 898 --------------------------------------------------------------------------------
50 53 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- Commitments to originate loans, unused lines of credit and unadvanced portions of construction loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company has retained credit risk on certain residential mortgage loans sold with full or partial recourse and on certain residential mortgage loans whose servicing rights were acquired during 1990. Forward commitments to sell residential mortgage loans are contracts which the Company enters into for the purpose of reducing the market risk associated with originating loans for sale. Risks may arise from the possible inability of the Company to originate loans to fulfill the contracts, in which case the Company would normally purchase loans from correspondent banks or in the open market to deliver against the contract. At December 31, 2000, the Company was committed to invest up to $27.0 million in real estate development limited partnerships. At December 31, 2000 and 1999 the Company had $44.8 million and $32.8 million, respectively, invested in such partnerships, which are included in other assets. Legal Proceedings The Company 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 opinions of counsel, any such liability will not have a material effect on the consolidated financial position, results of operations or liquidity of the Company and its subsidiaries. Lease Obligations The Company leases certain properties used in operations under terms of operating leases which include renewal options. Rental expense under these leases approximated $18.1 million, $16.5 million and $13.3 million for the years ended 2000, 1999 and 1998, respectively. The following table sets forth the approximate minimum lease payments over the remaining terms of the leases at December 31, 2000. -------------------------------------------------------------------------------- 2001 $ 14,703 2002 13,041 2003 10,191 2004 9,548 2005 8,168 2006 and after 31,537 -------- $ 87,188 ======== -------------------------------------------------------------------------------- 51 54 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- 15. STOCK-BASED COMPENSATION PLANS Stock Option Plans In 1995, the Company adopted a stock option plan for non-employee directors, which was amended and restated in 2000 to authorize the issuance of up to an additional 530,000 shares. The maximum number of shares which may be granted under the amended plan is 1,060,000 shares, of which 100,000 were granted in 2000 at an exercise price of $14.13 per share, 114,000 were granted in 1999 at $18.06 per share and 110,000 were granted in 1998 at $24.31 per share. Since inception, a total of 50,600 shares had been issued upon exercise of the stock options granted pursuant to this plan through December 31, 2000. At December 31, 2000, there were 669,250 shares available for future grant. The Company has adopted various stock option plans for key employees. These plans include a stock option plan adopted in 1996 (the "1996 Option Plan"). The 1996 Option Plan, as amended, authorizes grants of options and other stock awards covering up to 6,000,000 shares of Common Stock. Stock options are granted with an exercise price equal to the stock's fair market value at the date of the grant and expire 10 years from the date of the grant. At December 31, 2000, there were 1,585,248 additional shares available for grant under the 1996 Option Plan. The per share weighted-average fair value of all stock options granted by the Company during 2000, 1999 and 1998 was $5.23, $5.72 and $6.61 on the date of the grants using the Black Scholes option-pricing model with the following average assumptions:
-------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- Expected dividend yield 3.24% 2.74% 2.50% Risk-free interest rate 6.14 5.53 5.50 Expected life 5.00 YEARS 5.00 years 5.00 years Volatility 38.27% 35.90% 32.87% --------------------------------------------------------------------------------
The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no cost has been recognized for its stock options in the financial statements. Had the Company determined cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated as follows:
-------------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- Net Income As reported $191,734 $196,958 $141,744 Pro forma $188,146 $191,396 $136,856 Basic Earnings per share As reported $ 1.33 $ 1.35 $ 0.97 Pro forma $ 1.30 $ 1.31 $ 0.94 Diluted Earnings per share As reported: $ 1.32 $ 1.34 $ 0.95 Pro forma $ 1.30 $ 1.30 $ 0.92 --------------------------------------------------------------------------------
Stock option activity is as follows:
-------------------------------------------------------------------------------- Number of Weighted Average Shares Exercise Price -------------------------------------------------------------------------------- Balance at December 31, 1997 8,537,701 $ 8.53 Granted 1,857,424 18.55 Exercised 2,302,194 6.71 Forfeited 87,548 14.76 --------- Balance at December 31, 1998 8,005,383 $ 11.83 Granted 1,680,656 $ 17.83 Exercised 1,713,368 8.26 Forfeited 281,540 16.72 --------- Balance at December 31, 1999 7,691,131 $ 13.72 Granted 1,632,212 $ 16.17 Exercised 1,530,041 8.60 Forfeited 597,363 18.66 --------- Balance at December 31, 2000 7,195,939 $ 15.00 ========= --------------------------------------------------------------------------------
52 55 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- The range of per share prices for outstanding and exercisable stock options at December 31, 2000 was as follows: -------------------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable -------------------------------------------------------------------------------------------------------- Number Weighted Average Number Range of Outstanding Remaining Weighted Average Outstanding Weighted Average Exercise Prices at 12/31/00 Contractual Life Exercise Price at 12/31/00 Exercise Price -------------------------------------------------------------------------------------------------------- up to $5.00 183,196 2.3 years $3.79 183,196 $3.90 $5.01 - $10.00 879,782 4.4 7.61 879,782 7.61 $10.01 - $15.00 1,351,879 5.6 11.75 1,213,379 11.64 $15.01 - $20.00 4,513,832 8.4 17.38 2,576,217 17.96 Over $20.00 267,250 7.1 23.10 266,150 23.12 --------- --------- 7,195,939 7.2 15.00 5,118,724 14.46 ========= ========= --------------------------------------------------------------------------------------------------------
Employee Stock Ownership Plans In 1989 the Company adopted a Profit Sharing Employee Stock Ownership Plan (the "ESOP") which is designed to invest primarily in Common Stock. Substantially all employees are eligible to participate in the ESOP following one year of service. Employees may not make contributions to the ESOP but may receive a discretionary contribution from the Company based on their pro-rata share of eligible compensation. The Company previously sponsored a leveraged employee stock ownership plan which was merged with and into the ESOP. The Company is required to make annual contributions to the ESOP equal to the ESOP's debt service and the unallocated shares are pledged as collateral for the debt. As the debt is repaid, shares are released from collateral and allocated to eligible employees. The Company accounts for this ESOP in accordance with AICPA SOP 93-6, "Employers' Accounting for Employee Stock Ownership Plans." Accordingly, the debt of the ESOP is recorded as long-term debt and the shares pledged as collateral are reported as unearned compensation on the balance sheet. As shares are released from collateral, the Company records compensation expense equal to the current market price of the shares, and the shares are treated as outstanding for purposes of calculating earnings per share. For 2000, 1999 and 1998, the Company contributed 2%, 2% and 3% of eligible compensation, respectively. The approximate expense of this contribution for 2000, 1999 and 1998 was $1.6 million, $1.8 million and $2.1 million, respectively. Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan is available to employees with one year of service. The maximum number of shares which may be issued under the Employee Stock Purchase Plan is 1,352,000 shares. Employees have the right to authorize payroll deductions up to 10% of their salary. As of December 31, 2000, 1,106,549 shares had been purchased under this plan. Restricted Stock Plan In 1990, the Company adopted a Restricted Stock Plan under which up to $10,000 of the annual fee payable to each non-employee Director of the Company and participating subsidiaries is payable solely in shares of Common Stock. Shares issued were 12,066, 7,376 and 6,420 in 2000, 1999 and 1998, respectively. 16. RETIREMENT AND OTHER BENEFIT PLANS Pension Plans The Company and its subsidiaries have noncontributory defined benefit plans covering most permanent, full-time employees. Benefits are based on career average earnings and length of service. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. The Company has adopted supplemental retirement plans for certain key officers. These plans were designed to offset the impact of changes in the Pension Plans which reduced benefits for highly paid employees. The Company also has entered into deferred compensation agreements with certain key officers. The cost of these agreements is accrued but not funded. The Company holds corporate-owned life insurance policies on the lives of certain executives. The death benefits are payable to the Company and will assist in the funding of the deferred compensation liability. The Company will recover the costs of premium payments from the cash value of these policies. Post Retirement Benefits Other Than Pensions The Company and its subsidiaries sponsor post-retirement benefit programs which provide medical coverage and life insurance benefits to a closed group of employees and directors who meet minimum age and service requirements. The Company and its subsidiaries recognize costs related to post retirement benefits under the accrual method, which recognizes costs over the employee's period of active employment. The impact of adopting SFAS No. 106 is being amortized over a twenty year period beginning January 1, 1993. 53 56 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- The following tables set forth the funded status and amounts recognized in the Company's Consolidated Balance Sheets at December 31, 2000 and 1999 for the pension plans and other post retirement benefit plans:
-------------------------------------------------------------------------------------------------------------------------------- Pension Plans Other Post Retirement Benefits -------------------------------------------------------------------------------------------------------------------------------- 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 119,209 $ 128,017 $ 12,104 $ 11,388 Service cost 5,636 7,537 312 336 Interest cost 9,296 8,945 1,019 852 Assumption changes -- (12,921) -- (833) Actuarial loss 900 1,666 1,349 1,380 Curtailment gain (5,875) (8,935) (1,600) -- Acquisitions -- 3,253 -- -- Benefits paid (9,300) (8,353) (1,230) (1,019) --------- --------- --------- --------- Benefit obligation at end of year $ 119,866 $ 119,209 $ 11,954 $ 12,104 ========= ========= ========= ========= CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 131,589 $ 123,078 $ -- $ -- Actual return on plan assets (3,315) 16,039 -- -- Employer contribution 2,046 1,057 1,230 1,019 Benefits paid (9,301) (8,353) (1,230) (1,019) Administrative expenses -- (232) -- -- --------- --------- --------- --------- Fair value of plan assets at end of year $ 121,019 $ 131,589 $ -- $ -- ========= ========= ========= ========= FUNDED STATUS $ 1,153 $ 12,380 $ (11,954) $ (12,104) Unrecognized net actuarial (gain) loss (12,679) (29,623) 1,216 (94) Unrecognized prior service cost 1,236 1,660 1,493 1,633 Unrecognized net transition obligation (1,378) (1,675) 4,864 5,257 --------- --------- --------- --------- Accrued benefit cost $ (11,668) $ (17,258) $ (4,381) $ (5,308) ========= ========= ========= ========= WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate 7.75% 7.75% 7.75% 7.75% Expected return on plan assets 8.50% 8.50% -- -- Rate of compensation increase 4.50% 4.50% -- --
------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2000 1999 1998 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 5,636 $ 7,537 $ 6,789 $ 312 $ 336 $ 262 Interest cost 9,296 8,945 7,969 1,019 852 733 Expected return on plan assets (11,018) (10,464) (9,435) -- -- -- Net amortization and deferral (1,842) (207) (305) 571 545 523 Curtailment gain -- -- 668 -- -- -- Amortization of net gain -- -- (75) -- -- -- -------- -------- -------- -------- -------- -------- Net periodic benefit cost $ 2,072 $ 5,811 $ 5,611 $ 1,902 $ 1,733 $ 1,518 ======== ======== ======== ======== ======== ======== ------------------------------------------------------------------------------------------------------------------------
Curtailment gains of $7.5 million and $8.0 million in 2000 and 1999, respectively, were recorded as a reduction of special charges relating to acquisitions. Multi-Employer Pension Plan An acquired company participated in a multi-employer pension plan in 1998. The plan was fully funded in 1998 and there is no future obligation relating to this plan. Pension expense attributable to the plan for the year ended December 31, 1998 was $377,000. 401 (k) Plan The Company has a contributory 401(k) Plan covering substantially all permanent employees after completion of one month of service. The Company matches employee contributions based on a predetermined formula and may make additional discretionary contributions. The total expense for these plans in 2000, 1999 and 1998 was $3.4 million, $3.2 million and $4.7 million, respectively. 54 57 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- 17. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company discloses fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. Where available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument. Also, because of differences in methodologies and assumptions used to estimate fair values, the Company's fair values should not be compared to those of other banks. Fair value estimates are based on existing 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. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company. For certain assets and liabilities, the information required under SFAS No. 107 is supplemented with additional information relevant to an understanding of the fair value. Also, fair values are presented for certain assets that are not financial instruments under the definition in SFAS No. 107. The following describes the methods and assumptions used by the Company in estimating the fair values of financial instruments and certain non-financial instruments: CASH AND CASH EQUIVALENTS, INCLUDING CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS AND FEDERAL FUNDS SOLD. For these cash and cash equivalents, which have maturities of 90 days or less, the carrying amounts reported in the balance sheet approximate fair values. SECURITIES AND LOANS HELD FOR SALE. Fair values are based on quoted bid market prices, where available. Where quoted market prices for an instrument are not available, fair values are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instrument being valued. Fair values are calculated based on the value of one unit without regard to premiums or discounts that might result from selling all of the Company's holdings of a particular security in one transaction. LOANS AND LEASES. The fair values of commercial, commercial real estate, residential real estate, and certain consumer loans and leases are estimated by discounting the contractual cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar quality. For certain variable-rate consumer loans, including home equity lines of credit the carrying value approximates fair value. For nonperforming loans and certain loans where the credit quality of the borrower has deteriorated significantly, fair values are estimated by discounting cash flows at a rate commensurate with the risk associated with those cash flows. MORTGAGE SERVICING RIGHTS. The fair value of the Company's mortgage servicing rights at December 31, 2000 was based on the expected present value of future mortgage servicing income, net of estimated servicing costs, considering market consensus loan prepayment predictions at that date. The fair value of the Company's mortgage servicing rights at December 31, 2000 was largely based on the terms of a contract to sell substantially all remaining mortgage servicing rights during the first quarter of 2001. DEPOSITS. The fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is based on the discounted value of contractual cash flows, applying interest rates currently being offered on the deposit products of similar maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of alternative forms of funding ("deposit base intangibles") BORROWINGS, INCLUDING FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER REPURCHASE AGREEMENTS, BORROWINGS FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS. The fair value of the Company's long-term borrowings is estimated based on quoted market prices for the issues for which there is a market, or by discounting cash flows based on current rates available to the Company for similar types of borrowing arrangements. For short-term borrowings that mature or reprice in 90 days or less, carrying value approximates fair value. OFF-BALANCE SHEET INSTRUMENTS: COMMITMENTS TO ORIGINATE LOANS AND COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT. In the course of originating loans and extending credit and standby letters of credit, the Company will charge fees in exchange for its lending commitment. While these commitment fees have value, the Company has not estimated their value due to the short-term nature of the under-lying commitments. FORWARD COMMITMENTS TO SELL LOANS. The fair value of the Company's forward commitments to sell loans reflects the value of origination fees and servicing rights recognizable upon sale of loans net of any cost to the Company if it fails to meet its sale obligation. Of the $92 million of forward sales commitments at December 31, 2000, the Company had $51 million in loans available to sell at that date as well as sufficient loan originations subsequent to December 31, 2000 to fulfill the commitments. Consequently, the Company has no unmet sales obligation to value and due to the short-term nature of the commitments and has not estimated the value of the fees and servicing. LOANS SERVICED WITH RECOURSE. Under certain of the Company's servicing arrangements with investors, the Company has recourse obligation to those serviced loan portfolios. In the event of foreclo-sure on a serviced loan, the Company is obligated to repay the investor to the extent of the investor's remaining balance after application of proceeds from the sale of the underlying collateral. To date, losses related to these recourse arrangements have been insignificant and while the Company cannot project future losses, the fair value of this recourse obligation is deemed to be likewise insignificant. 55 58 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- A summary of the fair values of the Company's significant financial instruments at December 31, 2000 and 1999 follows:
---------------------------------------------------------------------------------------------------------------------- 2000 1999 ---------------------------------------------------------------------------------------------------------------------- CARRYING FAIR Carrying Fair VALUE VALUE Value Value ---------------------------------------------------------------------------------------------------------------------- Assets: Cash and cash equivalents $ 544,992 $ 544,992 $ 776,395 $ 776,395 Securities--available for sale 5,425,111 5,425,111 6,316,031 6,316,031 Securities--held to maturity 455,547 457,110 557,151 535,605 Loans held for sale 51,131 51,823 82,318 82,382 Loans and leases, net 10,692,112 10,930,029 9,699,608 9,626,579 Mortgage servicing rights 23,225 24,926 52,724 59,254 Interest rate swaps, floor and corridor contracts -- 10 2,023 4,001 Liabilities: Deposits (with no stated maturity) 7,540,655 7,540,655 7,212,557 7,212,557 Time deposits 4,566,601 4,584,201 4,497,944 4,506,223 Borrowings 4,560,615 4,567,845 5,367,478 5,340,259 ----------------------------------------------------------------------------------------------------------------------
56 59 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- 18. CONDENSED PARENT INFORMATION Condensed Financial Statements of the Parent Company
----------------------------------------------------------------------------------------------------------- December 31, ----------------------------------------------------------------------------------------------------------- Balance Sheets 2000 1999 ----------------------------------------------------------------------------------------------------------- Assets: Cash and due from banks $ 4,134 $ 5,612 Interest bearing deposits with subsidiaries 67,894 65,885 Securities purchased under agreements to resell to a subsidiary bank -- 12,250 Securities available for sale 34,038 36,892 Investment in subsidiaries 1,315,385 1,159,979 Goodwill and other intangibles 11,057 12,910 Amounts receivable from subsidiaries 3,832 61,537 Other assets 56,854 41,329 ---------- ---------- Total assets $1,493,194 $1,396,394 ========== ========== Liabilities and shareholders' equity Amounts payable to subsidiaries $ 6,949 $ 28,720 Subordinated debentures supporting mandatory redeemable trust securities 134,021 134,021 Other liabilities 21,367 41,379 Shareholders' equity 1,330,857 1,192,274 ---------- ---------- Total liabilities and shareholders' equity $1,493,194 $1,396,394 ========== ==========
---------------------------------------------------------------------------------------------- Year Ended December 31, ---------------------------------------------------------------------------------------------- Statements of Income 2000 1999 1998 ---------------------------------------------------------------------------------------------- Operating income: Dividends from subsidiaries $ 140,480 $ 203,983 $ 132,091 Other operating income 7,909 6,931 6,277 --------- --------- --------- Total operating income 148,389 210,914 138,368 --------- --------- --------- Operating expenses: Interest on borrowings 12,712 13,222 13,343 Amortization of intangibles 1,853 1,847 1,843 Merger expenses 7,758 14,710 26,299 Other operating expenses 336 6,595 11,220 --------- --------- --------- Total operating expenses 22,659 36,374 52,705 --------- --------- --------- Income before income taxes and equity in undistributed net income of subsidiaries 125,730 174,540 85,663 Income tax expense (benefit) (2,319) (10,733) (11,964) --------- --------- --------- Income before equity in undistributed net income of subsidiaries 128,049 185,273 97,627 Equity in undistributed net income of subsidiaries 63,685 11,685 44,117 --------- --------- --------- Net income $ 191,734 $ 196,958 $ 141,744 ========= ========= ========= ----------------------------------------------------------------------------------------------
57 60 Banknorth Group, Inc. and Subsidiaries --------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------ Year Ended December 31, ------------------------------------------------------------------------------------------------------------ Statements of Cash Flows 2000 1999 1998 ------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 191,734 $ 196,958 $ 141,744 Adjustments to reconcile net income to net cash (used) provided by operating activities: Undistributed net income from subsidiaries (63,685) (11,685) (44,117) Amortization of goodwill and other intangibles 1,853 1,847 1,844 Securities losses (gains) -- -- (187) Decrease in unearned compensation 1,527 2,072 177 (Increase) decrease in amounts receivable from subsidiaries 57,705 (47,177) (6,173) Decrease (increase) in other assets (15,525) (11,661) (1,465) Increase (decrease) in amounts payable to subsidiaries (21,771) 19,767 19,366 Increase (decrease) in other liabilities (18,785) 17,466 (3,589) Other, net (42) 668 1,182 --------- --------- --------- Net cash provided by operating activities $ 133,011 $ 168,255 $ 108,782 --------- --------- --------- Cash flows from investing activities: Net decrease (increase) in interest bearing deposits with subsidiaries $ (2,009) $ (37,961) $ (4,210) Maturities of securities available for sale -- -- 4,556 Sales of available for sale securities -- 1,432 4,494 Purchase of available for sale securities -- (34,119) -- Sales of held to maturity securities 2,854 -- -- Maturity of securities purchased under agreements to resell 12,250 -- -- Capital contribution from (to) subsidiary -- 11,890 (46,498) --------- --------- --------- Net cash provided (used) by investing activities $ 13,095 $ (58,758) $ (41,658) --------- --------- --------- Cash flows from financing activities: Issuance of notes payable (net) $ -- $ 0 $ 0 Payment of notes payable (1,227) (10,805) (4,517) Dividends paid to shareholders (70,773) (65,368) (57,231) Treasury stock acquired (96,585) (53,745) (55,340) Common stock issued 21,001 18,352 19,291 --------- --------- --------- Net cash (used) provided by financing activities $(147,584) $(111,566) $ (97,797) --------- --------- --------- Net increase (decrease) in cash due from banks $ (1,478) $ (2,069) $ (30,673) Cash and due from banks at beginning of year 5,612 7,681 38,354 --------- --------- --------- Cash and due from banks at end of year $ 4,134 $ 5,612 $ 7,681 ========= ========= ========= Supplemental disclosure information: Interest paid on borrowings $ 12,712 $ 13,210 $ 13,053 ------------------------------------------------------------------------------------------------------------
58 61 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- 19. SELECTED QUARTERLY DATA (UNAUDITED)
----------------------------------------------------------------------------------------------------------------------------------- 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- FOURTH THIRD SECOND FIRST Fourth Third Second First QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter ----------------------------------------------------------------------------------------------------------------------------------- Interest income $ 337,281 $ 336,559 $ 331,054 $ 325,393 $ 323,286 $ 317,329 $ 298,798 $ 288,106 Interest expense 183,321 185,846 177,889 170,220 163,425 157,329 145,470 137,066 --------- --------- --------- --------- --------- --------- --------- --------- Net interest income 153,960 150,713 153,165 155,173 159,861 160,000 153,328 151,040 Provision for loan and lease losses 6,651 6,250 5,849 5,068 6,005 6,165 5,840 5,565 --------- --------- --------- --------- --------- --------- --------- --------- Net interest income after provision for loan and lease losses 147,309 144,463 147,316 150,105 153,856 153,835 147,488 145,475 Noninterest income 64,067 56,067 56,782 50,168 49,910 47,780 50,743 43,361 Losses on securities restructuring -- -- (15,895) -- -- -- -- -- Special charges (15) 414 37,271 5,337 (3,889) -- 60 31,831 Noninterest expenses 119,473 111,635 117,730 120,010 121,183 117,209 117,637 114,110 --------- --------- --------- --------- --------- --------- --------- --------- Income before income taxes 91,918 88,481 33,202 74,926 86,472 84,406 80,534 42,895 Income tax expense 29,554 27,890 14,323 25,026 27,637 28,132 25,633 15,947 --------- --------- --------- --------- --------- --------- --------- --------- Net income $ 62,364 $ 60,591 $ 18,879 $ 49,900 $ 58,835 $ 56,274 $ 54,901 $ 26,948 ========= ========= ========= ========= ========= ========= ========= ========= Earnings per share: Basic $ 0.43 $ 0.42 $ 0.13 $ 0.35 $ 0.41 $ 0.39 $ 0.37 $ 0.18 Diluted $ 0.43 $ 0.42 $ 0.13 $ 0.34 $ 0.40 $ 0.38 $ 0.37 $ 0.18 Operating earnings per share(1): Basic $ 0.43 $ 0.42 $ 0.40 $ 0.37 $ 0.39 $ 0.39 $ 0.37 $ 0.34 Diluted $ 0.43 $ 0.42 $ 0.40 $ 0.37 $ 0.39 $ 0.38 $ 0.37 $ 0.34 -----------------------------------------------------------------------------------------------------------------------------------
(1) Earnings before special charges and losses on securities restructuring. 59 62 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT The Board of Directors Banknorth Group, Inc.: We have audited the accompanying consolidated balance sheets of Banknorth Group, Inc. and subsidiaries as of December 31, 2000 and 1999, 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, 2000. 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 auditing standards generally accepted in the United States of America. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Boston, Massachusetts January 12, 2001 60 63 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- CORPORATE DIRECTORY -------------------------------------------------------------------------------- BANKNORTH GROUP, INC. BOARD OF DIRECTORS WILLIAM J. RYAN Chairman of the Board President & CEO Banknorth Group, Inc. ANGELO P. PIZZAGALLI Vice Chairman of the Board Co-Chairman, Pizzagalli Construction Company THOMAS J. AMIDON Attorney GARY G. BAHRE President & CEO New Hampshire International Speedway P. KEVIN CONDRON President & CEO The Granite Group LLC SUSAN G. CRAMPTON Principal The Vermont Partnership GEORGE W. DOUGAN Retired President Evergreen Bank, N.A. KATHERINE M. GREENLEAF Senior Vice President Wright Express LUTHER F. (FRED) HACKETT President Hackett, Valine & MacDounald DOUGLAS S. HATFIELD, JR. Attorney, President & Treasurer Hatfield, Moran & Barry, PA DAVID D. HINDLE Retired President & Chief Executive Officer Family Bank DANA S. LEVENSON Principal Levenson Business Group President Quatro Realty Corp. PHILIP A. MASON Attorney Mason & Martin, L.L.P. JOHN M. NAUGHTON Retired Executive Massachusetts Mutual Life Insurance Company MALCOLM W. PHILBROOK, JR. Attorney & President Crockett, Philbrook & Crouch, P.A. PAMELA P. PLUMB Pamela Plumb & Associates SETH A. RESNICOFF, MD Surgeon & President Concord Surgical Associates, P.A. CURTIS M. SCRIBNER President C. M. Scribner & Company PAUL R. SHEA Retired President & CEO Bank of New Hampshire Corp. JOHN E. VEASEY President Cedardale Athletic Club PATRICK E. WELCH Chairman & CEO National Life Insurance Company 61 64 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- [GRAPHIC] Left to right: J. Menario, A. Greene, T. Pruitt, W.Suehrstedt, P. Verrill, W. Ryan, J. Fridlington, C. Mitchell, D. Ott BANKNORTH GROUP, INC. SENIOR MANAGEMENT WILLIAM J. RYAN Chairman, President & Chief Executive Officer PETER J. VERRILL, CPA Executive Vice President Chief Operating Officer & Chief Financial Officer JOHN W. FRIDLINGTON Executive Vice President Chief Lending Officer ANDREW W. GREENE Executive Vice President Insurance and Investments CAROL L. MITCHELL, ESQ. Executive Vice President General Counsel, Clerk & Secretary DAVID J. OTT Executive Vice President Chief Banking Officer THOMAS J. PRUITT Executive Vice President & Chief Administrative Officer WENDY P. SUEHRSTEDT Executive Vice President Retail Delivery JOHN E. MENARIO Special Assistant to the President -------------------------------------------------------------------------------- BANKNORTH SUBSIDIARIES MAINE PEOPLE HERITAGE BANK, N.A. MICHAEL MCNAMARA President & CEO NEW HAMPSHIRE BANK OF NEW HAMPSHIRE, N.A. R. SCOTT BACON President & CEO MASSACHUSETTS FIRST MASSACHUSETTS BANK, N.A. CHRISTOPHER W. BRAMLEY President & CEO VERMONT/NEW YORK RICHARD J. FITZPATRICK President Vermont/ New York NEW YORK EVERGREEN BANK, N.A. DANIEL J. BURKE President & CEO VERMONT FIRST VERMONT BANK, N.A. JAMES R. KEYES President & CEO THE HOWARD BANK, N.A. PHILIP R. DANIELS President & CEO FRANKLIN LAMOILLE BANK, N.A. STEVEN J. BOURGEOIS President & CEO -------------------------------------------------------------------------------- BANKNORTH FINANCIAL SERVICES SUBSIDIARIES THE STRATEVEST GROUP, N.A. (MONEY MANAGEMENT) ROBERT B. ESAU President & CEO MORSE, PAYSON & NOYES INSURANCE PETER L. SPARTA President HERITAGE INVESTMENT PLANNING GROUP ANNE DUNNE President BANKNORTH LEASING TOBY COOK President 62 65 Banknorth Group, Inc. and Subsidiaries -------------------------------------------------------------------------------- SHAREHOLDER INFORMATION -------------------------------------------------------------------------------- ANNUAL MEETING The 2001 Annual Meeting of the Shareholders of Banknorth Group, Inc. will be held at 10:30 a.m. on Tuesday, April 24, 2001 at the Portland Marriott at Sable Oaks, 200 Sable Oaks Drive, South Portland, Maine. CORPORATE HEADQUARTERS Two Portland Square Portland, Maine Mailing Address: P.O. Box 9540 Portland, ME 04112-9540 Contact: Brian S. Arsenault, Senior Vice President, Corporate Communications 207-761-8517 or Peter J. Verrill Chief Operating Officer and Chief Financial Officer 207-761-8507 TOLL FREE: 1-800-462-3666 WEB SITE www.banknorth.com STOCK LISTING Banknorth Group, Inc. is traded over the counter on the NASDAQ National Market System under the symbol: BKNG. FORM 10-K AND OTHER REPORTS Banknorth will send a copy of its 2000 Annual Report and Form 10-K to shareholders upon request. Requests should be addressed to Investor Relations at the Corporate Headquarters. TRANSFER AGENT Shareholder inquiries regarding change of address or title should be directed to: American Stock Transfer & Trust Company 59 Maiden Lane New York, NY 10038 Phone: 800-937-5449 x8290 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS KPMG LLP 99 High Street Boston, MA 02110 RESEARCH COVERAGE A.G. Edwards & Sons, Inc., CIBC Oppenheimer, Inc., First Albany Corp., Fox-Pitt, Kelton, Inc., Friedman Billings Ramsey & Co., Johnston, Lemon & Co., Keefe, Bruyette & Woods, Inc., Lehman Brothers, Inc., Maine Securities Corp., Merrill Lynch, Pierce, Fenner & Smith, Parker/Hunter Incorporated, Pennsylvania Merchant Group, Salomon Smith Barney Inc., Sandler O'Neill & Partners, L.P., Tucker Anthony Cleary Gull MARKET MAKERS The following companies have generally been market makers for Banknorth Group, Inc. Common Stock as of December 31, 2000: Advest, Inc. A.G. Edwards & Sons Archipelago, LLC B-Trade Services, LLC Cantor Fitzgerald & Co. Carl P. Sherr & Co. CIBC World Markets Corp. Credit Suisse First Boston Co. First Tennessee Securities Corp. First Union Capital Markets Fleet Securities Fox-Pitt Kelton, Inc. Friedman Billings Ramsey & Co. Herzog, Heine, Geduld, Inc. Instinet Corporation Island Systems Corporation Jeffries & Company, Inc. Johnston Lemon & Co., Inc. Keefe, Bruyette & Woods, Inc. Knight Securities L.P. Legg Mason Wood Walker, Inc. Lehman Brothers Inc. Merrill Lynch, Pierce, Fenner Moors & Cabot, Inc. Morgan Stanley & Co. PaineWebber, Inc. Salomon Smith Barney, Inc. Sandler O'Neill & Partners, L.P. Schwab Capital Markets Sherwood Securities Corp. Southwest Securities, Inc. Spear, Leeds & Kellogg The Brass Utility, LLC Tucker Anthony Cleary Gull Weeden and Co., Inc. -------------------------------------------------------------------------------- COMMON STOCK PRICES Market prices for Banknorth Group, Inc.'s common stock and dividends per quarter during 2000 and 1999 are as follows:
-------------------------------------------------------------------------------- DIVIDENDS DECLARED MARKET PRICES 2000 QUARTERS PER SHARE HIGH LOW -------------------------------------------------------------------------------- FIRST $ 0.125 $ 16.13 $ 10.38 SECOND 0.125 18.00 11.94 THIRD 0.125 18.50 14.88 FOURTH 0.125 21.13 15.56 -------------------------------------------------------------------------------- 1999 Quarters -------------------------------------------------------------------------------- First $ 0.115 $ 20.25 $ 16.50 Second 0.115 20.13 15.75 Third 0.12 19.81 16.06 Fourth 0.12 19.56 14.31 --------------------------------------------------------------------------------
As of December 31, 2000, the Company had approximately 13,738 shareholders of record and 141,244,603 shares outstanding. These numbers do not reflect the number of individuals or institutional investors holding stock in nominee name through banks, brokerage firms and others. 66 [LOGO] BANKNORTH GROUP, INC. --------------------- Two Portland Square Post Office Box 9540 Portland, Maine 04112-9540