Banknorth Group, Inc.

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Banknorth Group, Inc.

Two Portland Square
P.O. Box 9540
Portland, Maine 04112-9540
U.S.A.
Telephone: (207) 761-8500
Toll Free: (800) 462-3666
Fax: (207) 761-8534
Web site: http://www.banknorth.com

Public Company
Incorporated: 1852 as Portland Savings Bank
Employees: 6,000
Total Assets: $23.4 billion (2002)
Stock Exchanges: New York
Ticker Symbol: BNK
NAIC: 522110 Commercial Banking; 522120 Savings Institutions; 523110 Investment Banking and Securities Dealing; 524113 Direct Life Insurance Carrier; 551111 Office of Bank Holding Companies

One of the 30 largest commercial banking companies in the United States, Banknorth Group, Inc. is headquartered in Portland, Maine, and has banking divisions in six states throughout the Northeast. Banknorth is the third-largest banking company in New England. Through its banking subsidiary, Banknorth, N.A., the company operates as Peoples Heritage Bank in Maine, Bank of New Hampshire, Banknorth Massachusetts, Banknorth Connecticut, Banknorth Vermont, and Evergreen Bank in upstate New York. Banknorth operates in over 300 branches and more than 470 ATM’s in the New England region. With total assets of $26 billion in 2003, Banknorth and its operating subsidiaries and divisions offer a range of commercial and consumer banking and financial services for individuals, businesses, and governments, including investment planning, money management, insurance, securities brokerage, leasing, merchant services, mortgage banking, and government banking.

19th-century New England Roots

Banknorth Group traces its roots back to several prominent 19th-century New England banks, including Portland Savings Bank, Penobscot Savings Bank, and Waterville Savings Bank. Portland Savings Bank, one of New England’s best-known mutual institutions, received its charter April 17, 1852. On July 3 of that year, Portland Savings opened its doors to receive its first transaction, a $100-dollar deposit. At that time, Millard Fillmore was president, and the bank could count Henry Wads-worth Longfellow as one of its customers. Its first office was situated in a one-room space on Middle Street and was open only on Wednesdays and Saturdays from 11:00 A.M. to 1:00 P.M. Its first president was Portland mayor Albion K. Parris, who was also a former Maine governor, U.S. senator and congressman, and justice of the Maine Supreme Court. After land speculation during the 1830s precipitated many bank failures in the East, it was helpful for the public’s confidence to have such an upstanding citizen as Parris heading the new bank.

By 1856, Portland Savings’ assets had grown from its initial deposit of $100 to $161,825, and in 1860 the bank made its first significant loan. To help finance a renovation of an old mansion into a hotel, the bank took a $10,000 mortgage that allowed its owners to remodel the renowned Preble House. Also that year, it loaned $20,000 for the completion of the Morse-Libby House, which exists today as Victoria Mansion, a national historic landmark that represents one of the finest examples of pre-Civil War architecture. At the bank’s tenth anniversary in 1862, Portland Savings held $406,656 in deposits.

In 1866, a fire swept through Portland and destroyed Portland Savings, as well as all other banks in the city. Portland Savings purchased land on Exchange Street to build anew while occupying temporary office space in a store at Free and Cotton Streets. On May 1, 1867, it opened its doors in the new Exchange Street location, offering such services to its customers as the first safe deposit vault.

Throughout the late 19th century, Portland Savings played an integral role in developing industry in the greater Portland area by offering loans to Westbrook Manufacturing Company, Maine Central Railroad, Portland Street Railroad Company, Bath Iron Works, Berlin Mills, Portland Rolling Mill, Portland Steam Packet Company, and the Portland Company. Additionally, Portland Savings weathered several bank panics and runs to emerge with $7,424,851 in deposits by the end of the century. In 1906, Portland Savings opened its first branch bank in Monument Square, where it ultimately located its main office in March 1925.

During the tumultuous years of World War I, when many people bought savings bonds, deposits in the bank fell to $11,682,00 in 1918 from $14,161,00 in 1917. By the end of the decade, deposits were once again up. However, difficult times were ahead with the stock market crash of 1929. In 1922, the bank counted 30,881 individual depositors, yet by 1932 that number had fallen to 25,298. The bank endured the Great Depression by forming a real estate department to operate the properties of the many defaulted loans and encouraged borrowers to hang in until the bank could bail them out. Tenaciously holding on, Portland Savings had over $24,000,000 in deposits at the anniversary of its centennial in 1952 and $40,000,000 in 1958.

New England Bank Mergers: 1982–89

Big changes in Maine banks began in 1982 when the respected century-old mutual institutions Waterville Savings Bank, Penobscot Savings Bank of Bangor, and Heritage Savings Bank of Rockland merged to form Heritage Savings Bank. A year later, in 1983, Portland Savings Bank merged with Peoples Savings Bank of Lewiston-Auburn, Maine. This merger created Peoples Savings Bank, which then had assets of over $413 million and a net worth over $24 million, with 18 branch offices from Kittery to Fort Kent, Maine, forming the second-largest thrift institution in the state with the largest area of coverage. Two years later, in 1985, Peoples Bank merged with Heritage Savings Bank to create Peoples Savings Heritage Bank, the largest bank in Maine, with assets over $970 million, 33 branch offices, and 550 employees.

The bank’s president, Weston L. Bonney, an alumnus of Bates College in Lewiston, Maine, had served as chairman of the board and director of the Bank of New England-Bay State in Lawrence, Massachusetts, as well as chief executive officer at Depositors Trust Co. in Lewiston. At the onset of the merger, Bonney maintained that Peoples Heritage would not be owned by out-of state financial institutions, as had occurred with many other banks in Maine. Bonney emphasized the direction of Peoples Heritage in the Portland Evening Express, maintaining, “We want to remain sensitive to our local communities.” He further asserted that the bank would limit any single loan to $8 million. Bonney also speculated about Peoples’ status as a mutual institution. Like all its predecessor banks, Peoples Heritage operated under the mutual system by which depositors own the bank and elected corporators and a board of directors to govern it. Bonney noted, “If we grow faster than our earnings can be retained, it’s always possible we might have to convert to a stock bank.”

Peoples Heritage announced plans to build new headquarters in 1986. With assets reaching over $1.049 billion and a growing staff, the bank needed a larger space than the Congress Street building, the offices Portland Savings had originally occupied in 1925. Scheduled to be completed in 1987, the new headquarters would be located in the Old Port’s financial district in a ten-story, 190,000-square foot building.

True to Bonney’s predictions in 1985, Peoples Heritage went public in 1986, forming Peoples Heritage Financial Group, with shares opening at $15 and quickly rising to $21 a share. At the completion of the bank’s conversion from mutual to stock, Peoples Heritage had raised $135.5 million in equity by December 1986, having offered 9.2 million shares to depositors, employees, residents of Maine, and through underwriters to the general public. At the bank’s first annual meeting as a publicly held company in 1987, the bank reported 1987 first-quarter profits of $4.7 million, a rise by 85 percent from the previous year. The bank looked to grow further through acquisitions of banks in other states. Peoples Heritage purchased the New Hampshire-based First National Bank of Portsmouth. The bank also diversified its $1 billion loan portfolio away from a focus on residential mortgages to aggressively pursue commercial real estate loans, small business loans, and consumer loans. Maintaining its focus on serving community needs, Peoples Heritage received high valuation reports from such research groups as Alex Brown & Sons, E.F. Hutton Equity Research, and Scottish Life Assurance Co.

Peoples Heritage acquired Oxford Bank and Trust Co. in Maine and First Coastal Banks Inc., a bank holding company with two subsidiaries in New Hampshire, between 1988 and 1989. By 1989, the bank had achieved status as the largest bank holding company based in Maine, beating out The One Bancorp. Peoples Heritage held assets of $2.8 billion and a record $6 million earnings during its third quarter amid an increasingly soft New England economy. The bank focused on controlling non-performing real estate loans that had become a detriment for many New England banks by late 1989.

Company Perspectives:

Banknorth will be the premier community bank in the Northeast. Our goal is to maximize sustainable earnings. We operate primarily within the environment that we know well: the Northeastern United States. Our decisions are based on an understanding of the needs of customers and the demands of the marketplace. We strive to provide service that is timely, personal, and creative and that conforms with local ways of doing business. We are a responsible employer. We are a responsible corporate citizen. We strive for quality in everything we do.

Economic Downturn: 1989–93

In 1989, William J. Ryan, former president and chief executive officer of the Bank of New England North in Lowell, Massachusetts, was hired by Peoples Heritage to be groomed to replace Bonney as president in 1990. Officials remained cautiously optimistic about the bank’s prospects and such analysts as Prudential-Bache Securities commended Peoples’ “lending restraint during the [real estate] boom,” noting that such restraint “could pay off dramatically during the bust.”

Cautious optimism soon gave way to a darker economic outlook. During the late 1980s and early 1990s, the recession in the real estate sector caused over 100 New England banks to fail, including such venerable institutions as Maine Savings and Maine National Bank. After its strong showing in late 1989, Peoples Heritage reported losses in earnings of $61.9 million in 1990 and $25 million in 1991. At 1989 year-end, Peoples Heritage reported $49.2 million in non-performing loans, and by end of first quarter 1990 the amount of non-performing loans had increased to $76.5 million, a rise of 55 percent. Stock in Peoples Heritage plunged from $18 a share in 1989 to $1.87 over the next several years. In April 1990, the bank doubled its reserves as a measure to cover possible future losses on bad loans. Most analysts viewed this action as prudent and characterized the bank’s management as strong. John R. Hefferen of Alex Brown brokerage was quoted in the Portland Press Herald as stating, “I have the sense and think [Peoples] have the right people doing the right things, but... to a certain extent it’s our of their hands. … They’re trying to manage these problems as aggressively as possible, but the economy is truly the significant factor.”

The company finally was able to show a small profit of $329,000 in the third quarter 1992, the first profit in two years. Ryan, the company’s president and chief operating officer, related to the Portland Press Herald, “This quarter is a break through. We will build on that profitability for the next year or two.” Three years later, in a speech to the Newcomen Society of the United States, Ryan summarized the bank’s standing during those difficult years: “Success isn’t measured by the position you’re in, it’s measured by the obstacles you overcome.” Ryan also credited the Peoples Heritage Board of Directors and a loyal staff who worked without salary increases for as long as three years to withstand the downturn and ultimately emerge successful.

Successful Turnaround and Acquisitions: 1993–2003

By 1993, after years of losses, Peoples Heritage finally showed a significant profit of $15.5 million to clearly establish its turnaround. The bank raised $40 million in capital and was poised to expand its product base and develop its niche as a bank focusing on high-quality customer service. Peoples Heritage became the first Maine bank to offer Sunday banking hours and also the first bank in Maine to open full service branch offices in supermarkets. New accounts nearly doubled by 1994, with an average of 60,000 new accounts a year. According to Ryan, the bank aimed to meet the fiduciary responsibility of a public company while remaining independent. By 1995, Peoples Heritage stock traded at $19.25 a share, and the firm had established itself as one of the top ten companies in New England.

After gaining solid financial standing, Peoples began a move toward acquiring companies. In an interview with Lynn Fosse in the Wall Street Corporate Reporter, Ryan stated, “In 1993 we reviewed our strategy for the future and decided the best thing to do would be to grow the company outside Maine, taking the philosophy of community banking to other New England states.” At that time, Peoples had approximately 90 percent of its assets in the state of Maine. At first, Peoples purchased companies in New Hampshire and Massachusetts, later expanding into Vermont, upstate New York, and Connecticut to diversify its geographic and product mix while also continuing to grow within the state of Maine. In 1996, Peoples acquired the Bank of New Hampshire, based in Manchester, and Family Bank of Haverhill in Massachusetts.

While acquiring a number of small to mid-sized companies, Peoples also set its sights on larger finds. In 1997, Peoples acquired the $3 billion company CFX Corp., based in Keene, New Hampshire, a deal that placed Peoples as the fourth largest banking company in New England. In 1999, the company purchased the $2 billion asset SIS Bancorp of Springfield, Massachusetts, a deal that also placed Peoples in Connecticut through its subsidiary Glastonbury Bank and Trust Co., which had branches throughout central Connecticut. Also in 1999, Peoples acquired the $4.4 billion asset Banknorth Group Inc. of Burlington, Vermont, for $780 million in stock. The deal also included Evergreen Bank of Glenn Falls, New York, which had been a subsidiary of Banknorth. Subsequently, Peoples took the Banknorth name. Ryan stated at the time, “Our new name will more clearly represent our presence in every New England state except Rhode Island and our entry into Upstate New York. We also hope to send the market a clear message that we are truly a commercial banking company and not a traditional thrift.”

Key Dates:

1852:: Portland Savings Bank receives a charter on April 17 and opens its doors on July 3 to receive its first deposit.
1869:: Penobscot Savings Bank is incorporated.
1982:: Waterville Savings Bank, Penobscot Savings Bank of Bangor, and Heritage Savings Bank of Rockland merge to form Heritage Savings Bank.
1983:: Portland Savings Bank and Peoples Savings Bank of Lewiston-Auburn merge to form Peoples Savings Bank.
1985:: Heritage Savings Bank and Peoples Savings Bank merge to form Peoples Heritage Savings Bank.
1986:: Peoples Heritage goes public and forms Peoples Heritage Financial Group.
1993:: The bank earns a $15.5 million profit to turn its profitability around.
1994:: Peoples Heritage introduces Sunday banking hours and supermarket banking, one of first banks in New England to offer such services.
2000:: The bank purchases Burlington, Vermont-based Bank-north, a bank with $4.4 billion in assets, and changes the name of its holding company from Peoples Heritage Financial Group, Inc. to Banknorth Group, Inc.
2001:: Banknorth introduces online banking and Customer eCare, the bank’s first step in online strategy to be executed over several years.
2002:: The bank’s divisions are consolidated under a single charter bank as Banknorth, N.A. and moves to the New York Stock Exchange.
2003:: Banknorth is ranked on Forbes Platinum 400 list.

In 2001, Banknorth focused on creating a strong presence in Massachusetts. It announced plans to acquire Andover Bancorp Inc. and Metro West Bank, a pair of acquisitions that would add 32 branches in eastern Massachusetts and the wealthy northern suburbs of Boston, deposits of $2 billion, and assets of $3 billion to Banknorth. Banknorth paid $333 million in stock for Ando ver and $166 million in cash for Metro West. In five years, Banknorth’s presence in Massachusetts grew from no assets to becoming the fifth-largest bank in the state. These acquisitions typified Banknorth’s strategy to purchase small, community banks that showed a clear, strategic fit and could seamlessly integrate into their own branch network.

In March 2002, Banknorth revealed plans to purchase at least ten more banks in Massachusetts, Connecticut, and upstate New York to achieve $30 billion in assets by 2005. Its first visible step in that direction was to announce a definitive agreement to purchase Ipswich Bancshares Inc. in Ipswich, Massachusetts, a northern Boston suburb, for $41 million in cash and stock. In August 2002, Banknorth announced it would purchase another North Shore bank, Warren Bancorp Inc. of Peabody, Massachusetts, for $122.6 million in cash and stock.

By 2002, Banknorth had acquired over 20 banks across six different states. Banknorth was the biggest bank in both Maine and New Hampshire, the second-largest in Vermont, and the fourth-largest in Massachusetts. The company broadened its scope in Connecticut when it purchased for $157 million Bancorp Connecticut Inc., the parent company of the 142-year-old Southington Savings Bank. Later in 2002, Banknorth announced plans to purchase the Connecticut holding company American Financial Holdings Inc., which was the parent of American Savings Bank, for $709.3 million in cash and stock. This deal, completed in early 2003, helped Banknorth leap from 14th in market share in the state of Connecticut to fifth. In the ten months from November 2001 to August 2002, Banknorth had spent over $1.5 billion in cash and shares of its own stock to acquire six banks. Banknorth’s strategy with such aggressive acquisitions was to carefully weigh each acquisition before committing. According to company spokesman Brian Arsenault, “The property we purchase must add to our earnings within a year of being acquired by our company.” Most analysts agreed that Banknorth’s careful growth strategy paid off with the company showing no more debt despite its $1.5 billion spending.

Growing Insurance Operations

Concurrent with its aggressive bank acquisitions, Banknorth actively sought to expand its insurance operations, which in early 2000 were located in Maine, New Hampshire, and Massachusetts. In September 2000, through its subsidiary, Morse, Payson & Noyes (MPN), Banknorth purchased the Watson Group in Connecticut. Company spokesman Arsenault explained in American Banker, “Our strategy is to have an insurance agency in every market in which we provide banking services.” In 2001, with the acquisitions of Andover Bancorp and Metro West in Massachusetts, Banknorth’s MPN Massachusetts offices were poised to benefit from cross-selling insurance products in the lucrative new bank branches in the northern Boston suburbs. MPN represented Banknorth’s largest insurance operation, but it also had purchased a number of other smaller insurance companies. By July 2001, Banknorth’s insurance unit had seven agencies in Maine, Massachusetts, New Hampshire, and Connecticut where the focus was to cross-sell personal, commercial, and disability insurance. By year-end 2001, the agencies had sold $400 million in insurance.

Banknorth’s next step was to add insurance agencies in New York and Vermont. In mid-2002, Banknorth announced an intention to purchase Community Insurance Agencies Inc. of South Glen Falls, New York, making progress on its strategy to have insurance operations in each state where the company claims banking operations. Banknorth Insurance was closer to its goal of reaching $100 million in revenues by 2004.

Bright Outlook for the 21st Century

In January 2003, Banknorth CEO Ryan was interviewed for CNN’s Stock of the Day, a feather in the cap of “a regional bank that’s turned into a giant in the Northeast.” Analysts are fond of relating the success stories of Banknorth, a company that follows a prudent and well-planned growth strategy. At the start of the 21st century, Banknorth intended to build on its successes by meeting the local needs of a community while still offering the services of larger banks. Ryan asserted in the CNN interview, “We think we want to stick within our knitting, and our knitting is New England. So I think we’ll continue to grow in New England.”