UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
Commission file number (0-18173)
BANKNORTH GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 03-0321189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Indentification No.)
300 FINANCIAL PLAZA
P.O. BOX 5420
BURLINGTON, VERMONT
(Address of principal executive offices)
05401
(Zip Code)
(802) 658-9959
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (l) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
7,826,648 shares of common stock, $l.00 par, outstanding on March 31, 1996.
1ST QUARTER 1996 FINANCIAL HIGHLIGHTS (UNAUDITED)
Three Months Ended Years Ended
March 31, December 31,
----------------------------------------------------
1996 1995 1995 1994
----------------------------------------------------
(Dollars in thousands, except per share data)
INCOME DATA
Net interest income, taxable equivalent $ 24,796 $ 21,314 $ 85,331 $ 75,323
Net interest margin 4.93% 4.92% 4.79% 4.65%
Net income $ 4,750 $ 5,242 $ 22,373 $ 16,041
PERIOD END BALANCES
Assets $2,414,106 $1,862,651 $1,910,174 $1,873,888
Earning assets 2,246,022 1,766,223 1,779,642 1,761,426
Loans 1,735,050 1,313,169 1,351,053 1,296,071
Deposits 2,040,625 1,412,217 1,560,769 1,443,467
Short-term borrowings 111,910 188,687 116,213 155,146
Long-term debt 49,366 103,824 55,997 121,589
Shareholders' equity 191,721 141,359 159,936 135,564
AVERAGE BALANCES
Assets $2,159,688 $1,846,908 $1,875,400 $1,713,814
Earning assets, net of fair value adjustment 2,022,082 1,757,856 1,781,864 1,621,251
Loans 1,538,784 1,295,777 1,329,188 1,187,773
Deposits 1,785,940 1,415,581 1,453,878 1,306,749
Short-term borrowings 124,853 167,810 164,010 145,616
Long-term debt 52,411 108,613 94,107 113,364
Shareholders' equity 175,518 137,492 145,950 131,008
SHARE AND PER SHARE DATA
Shares outstanding 7,826,648 6,804,425 6,804,425 6,804,425
Weighted average shares outstanding 7,332,386 6,804,425 6,804,425 6,804,425
Net income $ 0.65 $ 0.77 $ 3.29 $ 2.36
Cash dividends declared 0.25 0.23 0.92 0.60
Market price:
High 38.50 25.75 39.50 26.00
Low 32.50 21.75 21.75 17.75
Close 35.25 23.50 38.50 22.00
Share volume 1,149,471 457,704 2,205,539 3,406,370
Average monthly share volume 383,157 152,568 183,795 283,864
Book value 24.50 20.77 23.50 19.92
Tangible book value 18.92 18.95 21.75 18.07
KEY RATIOS
Return on average assets 0.88% 1.15% 1.19% 0.94%
Return on average shareholders' equity 10.88 15.46 15.33 12.24
Efficiency ratio (adjusted for non-recurring items) 65.11 66.61 65.79 69.98
Net loan charge-offs to average loans 0.22 0.27 0.28 0.40
Provision for loan losses to average loans 0.34 0.31 0.33 0.27
Allowance for loan losses to loans, p.e 1.39 1.64 1.64 1.65
Allowance for loan losses coverage of non-performing
loans, p.e 158.21 105.95 158.15 110.56
Non-performing assets to total assets, p.e 0.66 1.13 0.79 1.07
Total capital to risk-adjusted assets, p.e 10.32 12.12 12.48 11.86
Tier 1 capital to risk-adjusted assets, p.e 9.07 10.86 11.22 10.61
Tier 1 capital to average total assets (leverage) 7.29 7.51 8.05 7.41
INDEX TO FORM 10-Q
PART I Page
- --------------------------------------------------------------------------------------------------------------
Item l Financial Statements
Consolidated Statements of Income For the Three Months Ended March 31, 1996
and 1995 (Both unaudited) 3
Consolidated Balance Sheets at March 31, 1996 (Unaudited), December 31, 1995 and
March 31, 1995 (Unaudited) 4
Consolidated Statements of Changes in Shareholders' Equity For the Period
December 31, 1994 to March 31, 1996 (Unaudited) 5
Consolidated Statements of Cash Flows for the Three Months ended March 31, 1996
and 1995 (Both unaudited) 6
Notes to Unaudited Consolidated Interim Financial Statements 7
Independent Auditors' Report 9
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10
PART II
- --------------------------------------------------------------------------------------------------------------
Item 1 Legal Proceedings N/A
Item 2 Changes in Securities N/A
Item 3 Defaults Upon Senior Securities N/A
Item 4 Submission of Matters to a Vote of Security Holders N/A
Item 5 Other Information N/A
Item 6 Exhibits and Reports on Form 8-K 26
Signatures 27
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 31,
------------------
1996 1995
------------------
(In thousands, except
for per share amounts)
Interest income:
Interest and fees on loans $35,817 $ 29,824
Interest on money market investments 405 136
Interest on securities available for sale 6,050 1,949
Interest on investment securities 861 4,891
------------------
Total interest income 43,133 36,800
Interest expense:
Deposits 16,336 11,654
Short-term borrowed funds 1,416 2,295
Long-term debt 765 1,681
------------------
Total interest expense 18,517 15,630
------------------
Net interest income 24,616 21,170
Less: provision for loan losses 1,300 1,000
------------------
Net interest income after provision for loan losses 23,316 20,170
Other operating income:
Income from trust activities 1,996 1,822
Service charges on depositor accounts 1,340 1,236
Credit card income 599 598
Loan servicing income 679 718
Net loan transactions 601 92
Net securities transactions 3 7
Net loss on sale of fixed and other assets -- (5)
Other income 668 574
------------------
Total other operating income 5,886 5,042
Other operating expenses:
Salaries 8,375 6,737
Employee benefits 2,171 1,787
Net occupancy expenses 1,786 1,431
Equipment and software expenses 1,433 1,351
Data processing fees 1,108 1,186
FDIC deposit insurance and other regulatory expenses 99 914
Other real estate owned and repossession expenses 30 277
Legal and professional fees 857 772
Printing and supplies expenses 1,426 449
Advertising and marketing expenses 1,097 412
Amortization of goodwill 731 159
Other expenses 3,040 2,353
------------------
Total other operating expenses 22,153 17,828
------------------
Income before income taxes 7,049 7,384
Income tax expense 2,299 2,142
------------------
Net income $ 4,750 $ 5,242
==================
Net income per share $ 0.65 $ 0.77
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
March 31, December 31, March 31,
1996 1995 1995
-----------------------------------------
(Unaudited) (Unaudited)
(In thousands except share and per share data)
ASSETS
Cash and due from banks $ 87,251 $ 89,111 $ 56,098
Money market investments 3,600 650 7,750
----------------------------------------
Cash and cash equivalents 90,851 89,761 63,848
----------------------------------------
Securities available for sale, at fair value 442,452 359,085 125,132
Loans held for sale 17,766 19,174 12,359
Investment securities 47,154 49,680 307,813
Loans 1,735,050 1,351,053 1,313,169
Less: Allowance for loan losses 24,183 22,095 21,553
----------------------------------------
Net loans 1,710,867 1,328,958 1,291,616
----------------------------------------
Accrued interest receivable 14,798 11,505 12,020
Premises, equipment and software, net 29,639 24,917 24,650
Other real estate owned and repossessed assets 623 1,169 770
Goodwill and other intangibles 43,629 11,916 12,404
Other assets 16,327 14,009 12,039
----------------------------------------
Total assets $ 2,414,106 $ 1,910,174 $ 1,862,651
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand deposits $ 259,833 $ 228,334 $ 180,592
NOW accounts 237,949 200,085 175,902
Money market savings 524,276 363,107 315,713
Regular savings 245,476 173,565 198,324
Time deposits $100 thousand and greater 79,268 59,233 41,754
Time deposits under $100 thousand 693,823 536,445 499,932
----------------------------------------
Total deposits 2,040,625 1,560,769 1,412,217
----------------------------------------
Short-term borrowed funds:
Securities sold under agreements to repurchase 98,712 95,472 110,347
Borrowings from U.S. Treasury 13,198 8,241 5,840
Borrowings from Federal Home Loan Bank of Boston -- 12,500 72,500
----------------------------------------
Total short-term borrowed funds 111,910 116,213 188,687
----------------------------------------
Long-term debt:
Federal Home Loan Bank of Boston term notes 32,566 39,197 83,874
Bank term loan 16,800 16,800 19,950
----------------------------------------
Total long-term debt 49,366 55,997 103,824
----------------------------------------
Accrued interest payable 4,649 3,914 4,964
Other liabilities 15,835 13,345 11,600
----------------------------------------
Total liabilities 2,222,385 1,750,238 1,721,292
----------------------------------------
Shareholders' equity:
Common stock, $1.00 par value; authorized 20,000,000 shares; issued
and outstanding 7,826,648 shares at March 31, 1996 and 6,804,425 at
December 31, 1995 and March 31, 1995 7,827 6,804 6,804
Surplus 87,091 56,023 55,512
Retained earnings 100,701 97,978 85,834
Unamortized employee restricted stock (745) (898) (386)
Net unrealized gains (losses) on securities available for sale, net
of tax (3,153) 29 (2,721)
Net unrealized losses on securities available for sale transferred
to the investment portfolio, net of tax -- -- (3,684)
----------------------------------------
Total shareholders' equity 191,721 159,936 141,359
----------------------------------------
Total liabilities and shareholders' equity $ 2,414,106 $ 1,910,174 $ 1,862,651
========================================
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unearned Net
Portion of Unrealized
Employee Gains (Losses)
Common Retained Restricted On Securites,
Stock Surplus Earnings Stock Net of Tax Total
----------------------------------------------------------------------
(In thousands, except for per share data)
Balance, December 31, 1994 $ 6,804 $ 55,473 $ 82,176 $ (394) $ (8,495) $ 135,564
Net income -- -- 22,373 -- -- 22,373
Decrease in net unrealized losses on
securities available for sale, net of tax -- -- -- -- 4,620 4,620
Decrease in net unrealized losses on
securities available for sale transferred
to the investment portfolio, net of tax -- -- -- -- 3,904 3,904
Cash dividends $.92 per share -- -- (6,260) -- -- (6,260)
Issuance of employee restricted stock -- -- -- (361) -- (361)
Amortization of employee restricted stock -- 550 -- (143) -- 407
Exercise of employee stock options -- -- (311) -- -- (311)
----------------------------------------------------------------------
Balance, December 31, 1995 6,804 56,023 97,978 (898) 29 159,936
----------------------------------------------------------------------
Net income -- -- 4,750 -- -- 4,750
Issuance of common stock, net of expenses 1,023 31,193 -- -- -- 32,216
Decrease in net unrealized gains on
securities available for sale, net of tax -- -- -- -- (3,182) (3,182)
Cash dividends $.25 per share -- -- (1,957) -- -- (1,957)
Amortization of employee restricted stock -- (125) -- 153 -- 28
Exercise of employee stock options -- -- (70) -- -- (70)
----------------------------------------------------------------------
Balance, March 31, 1996 $ 7,827 $ 87,091 $ 100,701 $ (745) $ (3,153) $ 191,721
======================================================================
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
----------------------------
1996 1995
----------------------------
(In thousands)
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 4,750 $ 5,242
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization of premises, equipment and software 1,020 1,047
Amortization of goodwill 731 159
Provision for loan losses 1,300 1,000
Adjustment of other real estate owned to estimated fair value 16 29
Provision for deferred tax benefit (281) (588)
Amortization of employee restricted stock 28 47
Exercise of employee stock options (70) (19)
Net securities transactions (3) (7)
Net gain on sale of other real estate owned (163) (96)
Proceeds from sale of loans held for sale 54,122 17,148
Originations and purchases of loans held for resale (59,445) (36,191)
Net gain on sale of loans held for sale (601) (92)
Capitalized originated mortgage servicing rights (252) --
Increase in interest receivable (3,293) (635)
Increase in interest payable 735 386
Decrease (increase) in other assets and other intangibles (157) 959
Increase (decrease) in other liabilities 2,490 (1,944)
Net loss on sale of fixed and other assets -- 5
---------------------
Total adjustments (3,823) (18,792)
---------------------
Net cash provided by (used) in operating activities 927 (13,550)
---------------------
Cash flows from investing activities:
Proceeds from maturity and call of securities available for sale 51,182 2,046
Proceeds from maturity and call of investment securities 2,549 10,231
Proceeds from sale of securities available for sale 20,235 1,997
Purchase of securities available for sale (159,698) (7,755)
Purchase of investment securities -- (533)
Proceeds from sale of OREO and repossessed assets 1,015 333
Payments received on OREO and repossessed assets -- 3
Net loans purchased (396,942) (8,672)
Net decrease in loans 20,491 11,027
Capital expenditures (5,742) (575)
Proceeds from sale of fixed assets and other assets -- 3
---------------------
Net cash provided by (used in) investing activities (466,910) 8,105
---------------------
Cash flows from financing activities:
Branches purchased-deposits acquired 558,514 --
Less: purchase premium and capitalized costs (32,108) --
---------------------
Deposits acquired (net of premium and capitalized costs) 526,406 --
Net decrease in deposits (78,658) (31,250)
Net increase (decrease) in short-term borrowings (4,303) 33,541
Issuance of common stock, net of expenses 32,216 --
Payments on long term debt (6,631) (17,765)
Dividends paid (1,957) (1,565)
---------------------
Net cash provided by (used in) financing activities 467,073 (17,039)
---------------------
Net increase (decrease) in cash and cash equivalents 1,090 (22,484)
---------------------
Cash and cash equivalents at beginning of period 89,761 86,332
---------------------
Cash and cash equivalents at end of period $ 90,851 $ 63,848
=====================
Additional disclosure relative to statement of cash flows:
Interest paid $ 17,782 $ 15,244
=====================
Taxes paid $ 5,077 --
=====================
Supplemental schedule of non-cash investing and financing activities:
Net transfer of loans to OREO and repossessed assets $ 322 $ 464
Net transfer of loans held for sale to loan status 7,080 20,801
Decrease (increase) in net unrealized losses on securities available
for sale, net of tax (3,182) 1,870
Decrease (increase) in net unrealized losses on securities available
for sale, transferred to held to maturity, net of tax -- 220
See accompanying notes to the unaudited interim consolidated financial statements.
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated interim financial statements include
the accounts of the Company and its subsidiaries, First Massachusetts Bank,
N.A., North American Bank Corporation and its wholly owned subsidiary,
Farmington National Bank, The Howard Bank, N.A., First Vermont Bank and Trust
Company and its wholly owned subsidiary, Banknorth Mortgage Company, Franklin
Lamoille Bank, Granite Savings Bank and Trust Company, Woodstock National Bank,
The Stratevest Group, N. A. and North Group Realty, Inc. It is the opinion of
management that the accompanying unaudited consolidated interim financial
statements have been prepared in accordance with the instructions to Form 10-Q
and reflect all adjustments which are considered necessary to report fairly the
financial position as of March 31, 1996, the Consolidated Statements of Income
for the three months ended March 31, 1996 and 1995, and the Consolidated
Statements of Cash Flows for the three months ended March 31, 1996 and 1995. The
accompanying unaudited consolidated interim financial statements should be read
in conjunction with Banknorth Group, Inc.'s consolidated year end financial
statements, including notes thereto, which are included in Banknorth Group,
Inc.'s 1995 annual report to shareholders on Form 10-K.
2. Earnings per share were calculated based on 7,332,386 and 6,804,425 weighted
average shares issued and outstanding during the three month periods ended March
31, 1996 and 1995, respectively. The effect of the outstanding stock option
awards is not material to the calculation of earnings per share.
3. In May 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS No. 122"), which amends SFAS No. 65, "Accounting for Certain
Mortgage Banking Activities." SFAS No. 122 requires that entities recognize as
separate assets, the rights to service mortgage loans for others, regardless of
how those servicing rights are acquired. Additionally, SFAS No. 122 requires
that the capitalized mortgage servicing rights be assessed for impairment based
on the fair value of those rights, and that impairment, if any, be recognized
through a valuation allowance. The Company adopted SFAS No. 122 in the first
quarter of 1996. The result of adoption was to capitalize $252 thousand in
mortgage servicing rights and increase the gains or decrease the losses on the
sale of these loans originated in the first three months of 1996.
The Company purchases mortgage servicing rights separately or it may
acquire mortgage servicing rights by purchasing or originating mortgage loans
and selling those loans with servicing rights retained. Generally, purchased
mortgage servicing rights are capitalized at the cost to acquire the rights and
are carried at the lower of cost, net of accumulated amortization, or fair
value. Originated mortgage servicing rights are capitalized based on the
relative fair value of the serving rights to the fair value of the loan and are
recorded at the lower of the capitalized amount, net of accumulated amortization
or fair value. The mortgage loans being serviced are not included in the
Company's consolidated financial statements as they are not assets of the
Company.
Mortgage servicing rights are amortized into servicing fee income in
proportion to, and over the period of, estimated net servicing income. The
Company uses a cash flow model to calculate the amortization of mortgage
servicing rights.
SFAS No. 122 requires that a portion of the cost of originating a mortgage
loan be allocated to the mortgage servicing rights based on its relative fair
value. To determine the fair value of mortgage servicing rights, the Company
uses a valuation model that calculates the present value of future net servicing
income. In using this valuation method, the Company incorporates assumptions
that they believe market participants would use in estimating future net
servicing income, which include estimates of the cost of servicing, the discount
rate, mortgage escrow earnings rate, an inflation rate, ancillary income,
prepayment speeds and default rates and losses.
SFAS No. 122 requires enterprises to measure the impairment of servicing
rights based on the difference between the carrying amount and current estimated
fair value of the servicing rights. In determining impairment, the Company
aggregates all mortgage servicing rights, including those capitalized prior to
adoption of SFAS No. 122, and stratifies them based on the predominant risk
characteristics of interest rate and loan type. A valuation allowance is
established for any excess of amortized cost over the current fair value, by
risk stratification, by a charge to income.
The following table is a summary of activity for mortgage servicing rights
purchased ("Purchased"), originated ("Originated") and excess servicing fees
receivable ("Excess") for the three months ended March 31, 1996 (in thousands):
- --------------------------------------------------------------------------------
Purchased Originated Excess Total
---------------------------------------
Balance at January 1, 1996 $ 3,037 $ -- $ 169 $ 3,206
Additions 181 252 3 436
Amortization (202) (12) (9) (223)
---------------------------------------
Balance as of March 31, 1996 $ 3,016 $ 240 $ 163 $ 3,419
=======================================
- --------------------------------------------------------------------------------
SFAS No. 122 requires enterprises to measure the impairment of servicing
rights based on the difference between the carrying amount of the servicing
rights and their current fair value. At March 31, 1996, no allowance for
impairment in the Company's mortgage servicing rights was necessary. The
estimated fair value of the mortgage servicing rights associated with the above
capitalized servicing was $3.9 million at March 31, 1996.
Gains on mortgage loans sold on a servicing retained basis are also
adjusted to include "excess servicing fees." The net present value of such
excess servicing is capitalized and amortized in proportion to, and over the
estimated period of net servicing income. Excess servicing fees are adjusted to
reflect significant prepayments and payoffs of the underlying serviced loans.
The above mortgage servicing rights relate to approximately $425.7 million
of mortgage loans serviced for third parties. In addition, the Company services
approximately $579.6 million of mortgage loans for third parties for which there
is no capitalized servicing asset on the Company's consolidated financial
statements.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Banknorth Group, Inc.
We have reviewed the consolidated balance sheets of Banknorth Group, Inc.
and subsidiaries (the "Company") as of March 31, 1996 and 1995, and the related
consolidated statements of income and cash flows for the three-month periods
ended March 31, 1996 and 1995, and the consolidated statement of changes in
shareholders' equity for the three months ended March 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Banknorth Group, Inc. and
subsidiaries as of December 31, 1995, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for the year then ended
(not presented herein); and in our report dated January 26, 1996 we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated balance sheet as of
December 31, 1995, and consolidated statement of changes in shareholders' equity
for the year ended December 31, 1995, is fairly stated, in all material
respects, in relation to the consolidated balance sheet and statement of changes
in shareholders' equity from which it has been derived.
As discussed in note 3 to the consolidated interim financial statements,
effective January 1, 1996, the Company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights," which changed its method of
recognizing and accounting for mortgage servicing rights.
KPMG Peat Marwick LLP
April 26, 1996
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The review that follows focuses on the factors affecting the financial
condition and results of operations of Banknorth Group, Inc. ("Banknorth" or
"Company") during the three months ended March 31, 1996, with comparisons to
1995 as applicable. Net interest income and net interest margin are presented on
a fully taxable equivalent basis in this discussion. Balances discussed are
daily averages unless otherwise described. The unaudited consolidated interim
financial statements, as well as the 1995 annual report to shareholders' should
be read in conjunction with this review. Certain amounts in years prior to 1996
have been reclassified to conform to the 1996 presentation.
Except for historical information contained herein, the matters contained
in this review are "forward-looking statements" that involve risk and
uncertainties, including statements concerning future events or performance and
assumptions and other statements which are other than statements of historical
fact. The Company wishes to caution readers that the following important
factors, among others, could in the future affect the Company's actual results
and could cause the Company's actual results for subsequent periods to differ
materially from those expressed in any forward-looking statement made by or on
behalf of the Company herein: (1) the effect of changes in laws and regulations,
including federal and state banking laws and regulations, with which the Company
and its banking subsidiaries must comply, the cost of such compliance and the
potentially material adverse effects if the Company or any of its banking
subsidiaries were not in substantial compliance either currently or in the
future as applicable; (2) the effect of changes in accounting policies and
practices, as may be adopted by the regulatory agencies as well as by the
Financial Accounting Standards Board, or of changes in the Company's
organization, compensation and benefit plans; (3) the effect on the Company's
competitive position within its market area of increasing consolidation within
the banking industry and increasing competition from larger "super regional" and
other out-of-state banking organizations as well as nonbank providers of various
financial services; (4) uncertainties due to a lack of operating history of the
Company's Massacusetts subsidiary; (5) the effect of unforeseen changes in
interest rates; and (6) the effect of changes in the business cycle and
downturns in the local, regional or national economies.
OVERVIEW
Banknorth recorded net income of $4.8 million, or $.65 per share for the
three months ended March 31, 1996, as compared to $5.2 million, or $.77 per
share recorded in the same period in 1995.
During the first quarter of 1996:
* The Company issued 1,022,223 shares of common stock, raising $32.2
million in new equity capital, net of costs associated with the
issue.
* The quarterly cash dividend was increased to $.25 per share.
* The Company completed its acquisition of thirteen banking offices in
central and western Massachusetts, and formed First Massachusetts
Bank, N.A. ("FMB") to own and operate the branches.
* The Company consolidated its bank trust departments into a new
subsidiary, The Stratevest Group, N.A. ("Stratevest").
* In establishing FMB and Stratevest, and in undergoing a data
processing conversion in the ATM/debit card area, the Company
incurred one-time expenses of approximately $1.4 million, net of
taxes ($.19 per share).
* The Company earned a return on shareholders' equity of 10.88%.
* The return on average assets was .88% and the efficiency ratio was
65.11%
MERGER AND ACQUISITION ACTIVITY
On February 16, 1996 Banknorth completed the purchase of thirteen banking
offices of Shawmut Bank, N.A. ("Shawmut"). A new subsidiary, FMB, with principal
offices in Worcester, Massachusetts, was organized to own and operate the
acquired offices.
Under the terms of the Purchase and Assumption Agreement with Shawmut,
Banknorth paid a premium of $29.2 million, representing 5.23% of deposit
liabilities assumed, including accrued interest payable, calculated based upon
the average amount of deposits outstanding (including accrued interest payable)
over the thirty-day period ended February 13, 1996.
At the closing, the Company assumed total liabilities with an estimated
fair value of $560.3 million and acquired total assets, including loans, accrued
interest receivable on such loans, certain real property, furniture, fixtures,
equipment and other assets, with an estimated fair value of $405.7 million. No
loans acquired were past due 90 days or more. In addition, the Company received
approximately $127.0 million in cash as consideration for the net liabilities
assumed.
The transaction is being accounted for under purchase accounting rules. As
such, both the assets acquired and liabilities assumed have been recorded on the
consolidated balance sheet of the Company at estimated fair value as of the date
of acquisition. Goodwill, representing the excess of cost over net assets
acquired was $32.1 million and is being amortized over seven years on a
straight-line basis. The results of operations for FMB are included in
Banknorth's consolidated financial statements from the date of acquisition
forward.
ASSET LIABILITY MANAGEMENT
In managing its asset portfolios, Banknorth utilizes funding and capital
sources within sound credit, interest rate and liquidity risk guidelines. Loans
and securities are the Company's primary interest earning asset portfolios with
additional capacity invested in money market instruments.
Banknorth, through its management of liabilities, attempts to provide a
stable and flexible source of funding within established liquidity and interest
rate risk guidelines. This is accomplished through core deposit products offered
within the markets served by the Company as well as through the prudent use of
purchased liabilities.
Banknorth's objectives in managing its balance sheet are to manage the
sensitivity of net interest income to actual or potential changes in interest
rates and to enhance profitability through strategies that promise sufficient
reward for understood and controlled risk. The Company is deliberate in its
efforts to maintain adequate liquidity, under prevailing and forecasted economic
conditions, and to maintain an efficient and appropriate mix of core deposits,
purchased liabilities and long-term debt.
Earning Assets
Earning assets of $2.0 billion during the first quarter of 1996, were
$264.2 million, or 15.0%, higher than during the first quarter of 1995 primarily
due to the addition of FMB. Table A, Mix of Average Earning Assets, shows how
the mix of earning assets has changed as compared to the same period in 1995.
Loans. Total loans were $1.5 billion during the period ended March 31,
1996, an increase of $243.0 million, or 18.8%, over the same period in 1995. Of
the increase, approximately $189.3 million resulted from the addition of FMB.
In-market loan demand increased during 1995 and the first quarter of 1996 in the
Company's markets which continue to experience significant competition between
lenders for quality credits.
Table B, Loan Portfolio, provides the detailed components of the loan
portfolio as of March 31, 1996 and 1995 as well as December 31, 1995. Primarily
through the branch purchases, total loans as of March 31, 1996 were $421.9
million, or 32.1% higher than at March 31, 1995. Commercial, financial and
agricultural loans increased $53.8 million, or 26.2% while commercial real
estate loans increased by $91.8 million, or 23.7%. The largest increase in loan
balances occurred in residential real estate which increased $251.7 million, or
50.9%. A substantial portion of the loans acquired through the branch purchase
were residential real estate mortgages.
Given current economic indicators, both nationally as well as in
Banknorth's local markets, and given the opportunities afforded by entering the
Massachusetts market, management believes that the Company will see increased
levels of loan activity during 1996.
Offsetting increases resulting from the origination of loans were loans
charged-off during the twelve months ended March 31, 1996 in the amount of $9.2
million.
Loans held for sale. Loans held for sale are generally comprised of
single-family mortgages originated by Banknorth Mortgage Company or purchased
through its wholesale lending operation, that are awaiting sale into the
secondary market, or, to other Banknorth subsidiaries. Loans originated or
purchased by the mortgage company are sold on the secondary market with some
level of production, primarily adjustable rate mortgages, retained by the
Company to be held in its mortgage portfolio. Loans held for sale were $17.2
million during the first quarter of 1996, $7.3 million, or 74.3% above the three
month average during 1995. Falling interest rates spurred new mortgage
originations and refinancings during the first quarter of 1996 and during the
later part of 1995.
Securities available for sale. This category of investments is used
primarily for liquidity while simultaneously producing earnings. On January 1,
1994, Banknorth adopted Statement of Financial Accounting Standards No. 115
("SFAS No.115"), "Accounting for Certain Investments in Debt and Equity
Securities". This Statement requires securities available for sale to be
reported at fair value on the Company's consolidated financial statements. SFAS
No.115 also requires unrealized net gains or losses to be reported as a separate
component of shareholders' equity.
In November 1995, the Financial Accounting Standards Board ("FASB") issued
a "Special Report" which granted all entities a one-time opportunity to
reconsider their ability and intent to hold securities accounted for under SFAS
No. 115 to maturity. This decision allowed entities to transfer securities from
the held-to-maturity category without "tainting" their remaining
held-to-maturity securities. On November 30, 1995, in response to the FASB's
action, the Company reclassified certain securities having an aggregate
unamortized cost of $197.1 million and an aggregate fair value of $195.3 million
from "held-to-maturity" to "available for sale."
Period end balances in securities available for sale totaled $442.5
million, $359.1 million and $125.1 million at March 31, 1996, December 31, 1995
and March 31, 1995, respectively. The increase of $83.4 million from December
31, 1995 to March 31, 1996 reflects purchases made for the newly established
portfolio at FMB. Funding for the first quarter 1996 purchases was provided by
the cash portion of the net settlement associated with the acquisition of the
branches as previously discussed. Average balances for the three months ended
March 31, 1996 and 1995 were $389.5 million and $126.6 million, respectively.
Investment securities. The designation "investment securities" is made at
the time of purchase or transfer based upon the positive intent and ability to
hold these securities until maturity. The management of this portfolio focuses
primarily on yield and earnings generation, liquidity through cash flow and
interest rate risk characteristics within the framework of the entire balance
sheet. The balance of securities in this category was $47.2 million as of March
31, 1996 as compared to $49.7 million and $307.8 million as of December 31 and
March 31, 1995, respectively. The decrease from March 31, 1995 reflects the
fourth quarter 1995 transfer to the available for sale portfolio while the
decrease from year end 1995 is the result of maturities and principal payments
received on mortgage-backed securities.
Table C, Securities Available for Sale and Investment Securities provides
details of securities available for sale and investment securities at March 31,
1996 and 1995, as well as December 31, 1995.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $28.2 million during the first quarter of 1996, up $18.8
million from the first quarter of 1995. Of the increase, approximately $14.1
million is attributable to FMB. The Company is maintaining a high liquidity
position during the early stages of FMB's operation to accommodate potential
deposit runoff and expected increased loan demand.
Income from earning assets. Income from earning assets was $43.3 million
for the three month period ended March 31, 1996, as compared to $36.9 million
for the same period in 1995. The increase of $6.4 million, or 17.2%, resulted
from increases in earning assets through natural growth and the branch
acquisition which gave rise to FMB, as well as by increases in the yield on
interest earning assets. Total earning assets during the first quarter 1996 of
$2.0 billion yielded 8.62%, while in 1995 earning assets of $1.8 billion yielded
8.52%. The increase in earning assets contributed $5.6 million towards the
increase in interest income, while the improvement in yield of 10 basis points
caused an increase of $763 thousand. Table D, Average Balances, Yields and Net
Interest Margins and Table F, Volume and Yield Analysis contain details of
changes by category of interest income from earning assets.
Funding Sources
The Company utilizes various traditional sources of funds to support its
earning asset portfolios. Table E, Average Sources of Funding, presents the
various categories of funds used and the corresponding average balances for the
first quarter of 1996 and 1995, and changes, by category, from the first quarter
of 1995.
Core Deposits. Total core deposits averaged $1.7 billion during the three
month period ended March 31, 1996, $342.5 million above the first quarter
average in 1995. Of the increase, approximately $253.2 million is the result of
FMB, while approximately $89.3 million reflects true deposit growth. It is
management's expectation that core deposits will increase during coming
quarters, after a potential initial decline, as FMB establishes itself in its
central and western Massachusetts markets.
Purchased Liabilities. Total purchased liabilities decreased on average
from $295.0 million during the first quarter of 1995 to $227.9 million during
the first quarter of 1996. The decreases in both short- and long-term borrowings
were the result of increased core deposit volumes and the decision to reduce
Federal Home Loan Bank advances in anticipation of the branch acquisition.
Offsetting the decreases in short- and long-term borrowings were increases of
$27.9 million and $11.7 million in time deposits over $100,000 and securities
sold under agreements to repurchase, respectively. These noted increases are
primarily the result of FMB. As Banknorth constantly seeks to fund its earning
assets in the most efficient and profitable manner, management expects prudent
levels of short-term borrowings and long-term debt to continue to be important
sources of funding.
Expense of Interest-Bearing Liabilities. Banknorth's interest expense for
the three months ended March 31, 1996, was $18.5 million, $2.9 million, or
18.5%, above 1995. Higher levels of interest bearing liabilities caused interest
expense to increase $2.6 million, while higher costs of funds resulted in an
increase of $288 thousand, together causing the increase of $2.9 million. Total
interest bearing liabilities of $1.7 billion during the first quarter of 1996,
were $231.4 million higher than in 1995, and with a total cost of 4.29%, 8 basis
points more expensive than in the prior year. Table D, Average Balances, Yields
and Net Interest Margins and Table F, Volume and Yield Analysis contain details
of changes by category of interest bearing liabilities and interest expense.
Net Interest Income
Net interest income totaled $24.8 million and $21.3 million for the three
month periods ended March 31, 1996 and 1995, respectively. The net interest
margin was 4.93% during the first quarter of 1996 as compared to 4.92% during
the first quarter of 1995. The yield on earning assets of 8.62% for the first
quarter of 1996, was 10 basis points above the prior year, while the cost of
interest bearing liabilities, 4.29% in 1996, increased 8 basis points.
Included in net interest income is the effect of interest rate swap
transactions and interest rate floors. Banknorth utilizes these off-balance
sheet instruments to correct imbalances between the re-pricing characteristics
of interest earning assets and interest bearing liabilities. A significant
portion of the Company's loans are adjustable or variable rate resulting in
reduced levels of interest income during periods of falling rates. Certain
categories of deposits reach a point where market forces prevent further
reduction in the rate paid on those instruments. The net effect of these
circumstances is reduced interest income offset only by a nominal decrease in
interest expense, thereby narrowing the net interest margin. To protect the
Company from this occurrence, interest rate floors were used to mitigate the
potential reduction in interest income on certain adjustable and variable rate
loans. During the first quarter of 1996, the notional principal amounts of
interest rate floors were $150.0 million. At March 31, 1996, the fair value of
the interest rate floors was $2.5 million while the fair value of the interest
rate floors at the time of purchase was $1.7 million which is being amortized as
an adjustment to the related loan yield on a straight-line basis over the five
year term of the agreements. The unamortized balance as of March 31, 1996 was
$1.3 million. The only active interest rate swap contract ($10.0 million
notional principal amount) expired early in the first quarter of 1996 and had an
immaterial effect on the Company's net interest income.
Non-Performing Assets
As categorized by Banknorth Group, non-performing assets include
non-performing loans which are those loans in a non-accrual status, loans which
have been treated as troubled debt restructurings and loans past due 90 days and
still accruing interest. Also included in the total of non-performing assets are
foreclosed and in-substance foreclosed real estate properties and repossessed
non-real estate assets. Table G, Non-Performing Assets, contains details of
non-performing assets.
On January 1, 1995, Banknorth adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," ("SFAS
No. 114") as amended by Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure," ("SFAS No. 118"). At that time, all of the Company's in-substance
foreclosed assets were reclassified into impaired loan status as required by
SFAS No. 114. For all prior periods presented, amounts related to insubstance
foreclosures have also been reclassified. These Statements prescribe recognition
criteria for loan impairment, generally related to commercial type loans and
measurement methods for impaired loans.
Non-performing loans. Non-performing loans totaled $15.3 million, down
$5.1 million, or 24.9% from March 31, 1995, and $1.3 million higher than at
December 31, 1995, respectively.
With the acquisition of FMB's loan portfolio, management expects the level
of non-performing loans may increase during 1996 as Banknorth's loan review
standards are applied against the population of purchased loans, and as
management is able to determine the overall financial condition of these
borrowers. Additionally, the Company is closely monitoring certain performing
loans due to indications of financial difficulty or other factors influencing
the ultimate collectibility of those loans.
Other real estate owned. Total other real estate owned was $623 thousand
at March 31, 1996, as compared to $770 thousand at March 31, 1995, and $1.2
million at year end 1995.
Allowance for loan losses and provision. The balance of the allowance for
loan losses ("allowance") is maintained at a level that is, in management's
judgment, representative of the amount of risk inherent in the loan portfolio,
given past, present and expected conditions. Table H, Summary of Loan Loss
Experience, provides information regarding types of loans charged-off and
associated recoveries.
Loans charged-off equaled $2.1 million, or an annualized .55% of average
loans for the first quarter of 1996, an increase of $34 thousand from the first
quarter of 1995. Recoveries of $1.2 million for the first quarter of 1996, were
$56 thousand higher than during the same period in 1995. Given the growth in the
loan portfolio, management expects an increased level of loan charge-offs in
1996 as compared to that experienced in 1995.
The provision for loan losses ("provision") for the first quarter of 1996
was $1.3 million, or an annualized .34% of average loans. Provisions of $1.0
million, or an annualized .31% of average loans, and $4.4 million, or .33% of
average loans were experienced during the first quarter of 1995 and the full
year of 1995, respectively. Similar provisions to that recorded during the first
quarter are expected for subsequent quarters during 1996.
Provisions recorded are those necessary to maintain the allowance at a
level adequate enough to absorb reasonably predictable loan charge-offs. At
March 31, 1996, the allowance provided a coverage of non-performing loans of
158.21% as compared to 105.95% and 158.15% at March 31, 1995 and December 31,
1995, respectively.
Liquidity and Interest Rate Sensitivity
Banknorth seeks to obtain favorable sources of funding and to maintain
prudent levels of liquid assets in order to satisfy varied liquidity demands.
Besides serving as a funding source for maturing obligations, liquidity provides
flexibility in responding to customer initiated needs. Many factors affect the
Company's ability to meet liquidity needs, including variations in the markets
served by its network of offices, its mix of assets and liabilities, reputation
and credit standing in the marketplace, and general economic conditions.
Banknorth's earnings performance and strong capital position enable the Company
to raise funds easily in the marketplace and to secure new sources of funding.
The Company utilized a financial institution borrowing pursuant to a five
year credit facility to finance its 1994 acquisition of North American Bank
Corporation, parent company of Farmington National Bank. The Company's primary
source of funds to pay principal and interest under this facility is current
dividends from its subsidiary banks. Accordingly, the Company's ability to
service the debt under this credit facility is dependent upon the continued
ability of the subsidiary banks to pay dividends in an amount sufficient to
service such debt.
The Company actively manages its liquidity position through target ratios
established under its liquidity policy. Continual monitoring of these ratios,
both historically and through forecasts, allows Banknorth to employ strategies
necessary to maintain adequate liquidity. Management has also defined various
degrees of adverse liquidity situations which could potentially occur and has
prepared appropriate contingency plans should such situations arise.
Management of interest rate risk involves continual monitoring of the
relative sensitivity of asset and liability portfolios to changes in rate due to
maturities, re-pricing opportunities and embedded options. Sophisticated
forecasting models are utilized to quantify the impact of changes in rates on
the Company's net interest income. Specific guidelines relating to interest rate
sensitivity have been established by the Company and are monitored on a regular
basis.
OTHER OPERATING INCOME AND EXPENSES
Other Operating Income
Other operating income totaled $5.9 million for the quarter ended March
31, 1996, $844 thousand, or 16.7% higher than that recorded during the first
quarter of 1995. The addition of FMB accounted for approximately $179 thousand
of the increase, which was primarily the result of the recognition of $601
thousand in net loan transactions during the first quarter of 1996, as compared
to $92 thousand during the first quarter of 1995.
Income from trust activities, $1.8 million through March 31, 1995,
increased to $2.0 million in 1996. On February 1, 1996, the Company consolidated
its subsidiary banks' trust departments into a newly formed limited charter
bank, Stratevest. Under this structure, the Company expects higher levels of
income to result from improved marketing and sales initiatives and enhanced
product offerings. Accordingly, management believes future quarters in 1996 will
be improved over the same periods in 1995.
Loan servicing income declined by $39 thousand, or 5.4% over the same
period in 1995. Falling interest rates have increased mortgage re-financing
activity. This, in turn, has accelerated the rate of amortization of capitalized
mortgage servicing rights which lowers the level of servicing income recognized
by the Company.
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standard No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS No. 122"),
which amends SFAS No. 65, "Accounting for Certain Mortgage Banking Activities."
SFAS No. 122 requires that entities recognize as separate assets, the rights to
service mortgage loans for others, regardless of how those rights are acquired.
Additionally, SFAS No. 122 requires that the capitalized mortgage servicing
rights be assessed for impairment based on the fair value of those rights. and
that impairment, if any, be recognized through a valuation allowance. The
adoption of SFAS No. 122 is anticipated to result in increased gains recognized
on the sale of the mortgage loans when servicing rights are retained, offset by
the amortization of the capitalized mortgage servicing rights. Net loan
transactions, $601 thousand for the three months ended March 31, 1996, increased
significantly from $92 thousand during the first quarter of 1995. This increase
in income is directly related to an increase in mortgage lending activity
brought on by the lower level of mortgage interest rates, and the impact of the
new accounting for mortgage servicing rights under SFAS No. 122. Of the total
net loan transactions, $252 thousand resulted from recognition of income under
SFAS No. 122.
Other income, $668 thousand for the three months ended March 31, 1996,
increased $94 thousand, or 16.4% over the same period in 1995. FMB accounted for
approximately $40 thousand of the increase.
Other Operating Expenses
Other operating expenses for the first quarter of 1996 were $22.2 million,
$4.3 million, or 24.3% above the first three months in 1995. One-time expenses
related to the start-up of FMB and Stratevest were approximately $1.8 million
during the first quarter of 1996. Other one-time expenses related to a data
processing conversion and the transition to a new incentive-based compensation
system were approximately $366 thousand. Recurring operating expenses for FMB
were approximately $3.4 million during the first quarter of 1996. The Company's
efficiency ratio which is adjusted to exclude material one-time expenses, was
65.11% for the first quarter of 1996, down from 66.61% during the same period in
1995.
Salary expense, the largest component of other operating expenses, was
$8.4 million, up $1.6 million or 24.3% from 1995. The 1996 expense includes
one-time costs of approximately $273 thousand and normal salary expense of FMB
of approximately $423 thousand. The remaining portion of the increase over 1995
is attributable to increased staffing levels necessary to provide operational
and other support functions to FMB.
The acquisition of thirteen branch offices and the increase in leased
office space for necessary support functions were the primary cause of the
increase of $355 thousand in occupancy expenses over 1995. Of the increase,
approximately $49 thousand was non-recurring. Equipment and software expenses
increased by $82 thousand, or 6.1% over 1995, with approximately half of the
increase related to FMB.
FDIC deposit insurance and other regulatory expense, decreased $815
thousand from the same period in 1995. The Federal Deposit Insurance Corporation
Improvement Act mandated a reduction in insurance rates when the Bank Insurance
Fund achieved a 1.25% capitalization ratio. That target was reached in May 1995
resulting in significantly lower insurance premiums.
The improvement in asset quality is clearly illustrated in the level of
expenses relating to other real estate owned and repossession activities. This
expense category, $277 thousand for the three months ended March 31, 1995, fell
to $30 thousand, during the same period in 1996. Management expects continued
lower levels of expense during subsequent quarters in 1996.
Legal and professional expenses increased by $85 thousand over 1995 due
entirely to start-up expenses for FMB and Stratevest.
Printing and supplies expense was $1.4 million during the first quarter of
1996, $977 thousand higher than during the same period in 1995. The increase
included non-recurring expenses of approximately $492 thousand relating mostly
to the initial check issuance to FMB customers, expenses of approximately $166
thousand for new ATM cards and debit cards, and approximately $90 thousand in
paper expenses related to the Company's new imaging system.
Marketing expenses were $1.1 million and $412 thousand during the three
months ended March 31, 1996 and 1995, respectively. Non-recurring marketing and
advertising expenses relating to FMB, Stratevest and the ATM/debit card program
totaled approximately $543 thousand.
Other expenses, $3.8 million in 1996, also increased significantly from
1995 primarily due to one-time expenses, the addition of recurring expenses for
FMB as well as amortization of goodwill associated with First Massachusetts.
INCOME TAXES
In the first quarter of 1996, the Company recognized income tax expense of
$2.3 million, or 32.6% of the income before taxes. Tax expense on the Company's
income was lower than tax expense at the Federal statutory rate of 35%,
primarily due to tax-exempt interest income and low income housing credits.
CAPITAL RESOURCES
Consistent with its long-term goal of operating a sound and profitable
financial organization, Banknorth strives to maintain strong capital ratios.
Prior to 1996, new issues of equity securities had not been required since
traditionally most of its capital requirements had been provided through
retained earnings. However, to continue the Company's growth through
acquisition, Banknorth chose to raise approximately $32.2 million in equity
capital through the issuance in February, 1996, of 1,022,223 shares of its
common stock.
During the first quarter of 1996, the board of directors declared a
dividend of $.25 per share, an increase of $.02 per share from the previous
quarter. This dividend resulted in a payout of 38.5% of net income. The board of
directors of the Company presently intends to continue the payment of regular
quarterly cash dividends subject to adjustment from time to time, based upon the
Company's earnings outlook and other relevant factors. The Company's principal
source of funds to pay cash dividends is derived from dividends from its
subsidiary banks. Various laws and regulations restrict the ability of banks to
pay dividends to their shareholders. As part of its plan to capitalize FMB at a
"well-capitalized" level for regulatory capital purposes, the Company redeployed
accumulated capital of certain of its subsidiary banks which included
substantially all of the current dividend paying capacity of such subsidiary
banks. Because the special dividend exceeded applicable regulatory limitations,
the Company obtained approval from the applicable regulatory agencies for the
payment of that portion of the dividend which exceeded such regulatory
limitations. Payment of these dividends significantly restricts the dividend
paying capacity of the subsidiary banks. Accordingly, the payment of dividends
by the Company in the future will require the generation of sufficient future
earnings by the subsidiary banks.
At March 31, 1996, Banknorth's Tier I capital was $154.8 million, or 9.07%
of total risk adjusted assets, compared to $138.5 million and 10.86% as of March
31, 1995. The ratio of tier I capital to average total assets (leverage ratio)
was 7.29%, and 7.51% as of March 31, 1996 and 1995, respectively. Banknorth, and
its subsidiaries individually, are "well capitalized" at March 31, 1996
according to regulatory definition, and thereby, exceed all minimum regulatory
capital requirements. Table I, Capital Ratios, reveals the components of capital
as of various dates.
- -------------------------------------------------------------------------------------------------------------------
TABLE A.--Mix of Average Earning Assets
Three Months Components of
Ended March 31, % of Total Earning Assets
------------------------ Total --------------------
1996 1995 Change Change 1996 1995
---------------------------------------------------------------------
(Dollars in thousands)
Loans, net of unearned income
and unamortized loan fees $1,538,784 $1,295,777 $ 243,007 92.0% 76.1% 73.7%
Securities available for sale:
U.S. Treasuries and agencies 67,170 39,186 27,984 10.6 3.3 2.2
Mortgage-backed securities 266,099 65,120 200,979 76.1 13.2 3.7
Other securities 56,246 22,304 33,942 12.8 2.8 1.3
---------------------------------------------------------------------
Total securities available for sale 389,515 126,610 262,905 99.5 19.3 7.2
Investment securities:
U.S. Treasuries and agencies 23,120 72,872 (49,752) (18.8) 1.1 4.2
Mortgage-backed securities 22,757 237,989 (215,232) (81.5) 1.1 13.5
States and political subdivisions 1,477 1,856 (379) (0.1) 0.1 0.1
Other securities 1,017 3,438 (2,421) (0.9) 0.1 0.2
---------------------------------------------------------------------
Total investment securities 48,371 316,155 (267,784) (101.3) 2.4 18.0
Loans held for sale 17,196 9,866 7,330 2.7 0.8 0.6
Money market investments 28,216 9,448 18,768 7.1 1.4 0.5
---------------------------------------------------------------------
Total earning assets $2,022,082 $1,757,856 $ 264,226 100.0% 100.0% 100.0%
=====================================================================
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
TABLE B.--Loan Portfolio
At March 31,
-------------------------------------------- At December 31, % Change % Change
1996 1995 1995 03/31/96 03/31/96
------------------------------------------------------------------ vs. vs.
Amount Percent Amount Percent Amount Percent 03/31/95 12/31/95
----------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial, financial, and
agricultural $ 259,611 15.0% $ 205,790 15.7% $ 228,877 16.9% 26.2% 13.4%
Real Estate:
Construction and land development 18,432 1.0 23,035 1.8 20,587 1.5 (20.0) (10.5)
Commercial 479,795 27.7 387,997 29.5 398,586 29.5 23.7 20.4
Residential 746,161 43.0 494,464 37.7 477,458 35.4 50.9 56.3
-----------------------------------------------------------------
Total real estate 1,244,388 71.7 905,496 69.0 896,631 66.4 37.4 38.8
-----------------------------------------------------------------
Credit card receivables 24,171 1.4 25,615 1.9 26,867 2.0 (5.6) (10.0)
Lease receivables 52,707 3.0 34,749 2.6 47,055 3.5 51.7 12.0
Other installment 154,173 8.9 141,519 10.8 151,623 11.2 8.9 1.7
-----------------------------------------------------------------
Total installment 231,051 13.3 201,883 15.3 225,545 16.7 14.4 2.4
-----------------------------------------------------------------
Total loans 1,735,050 100.0 1,313,169 100.0 1,351,053 100.0 32.1 28.4
Less: Allowance for loan losses 24,183 1.4 21,553 1.6 22,095 1.6 12.2 9.5
-----------------------------------------------------------------
Net loans $1,710,867 98.6% $1,291,616 98.4% $1,328,958 98.4% 32.5% 28.7%
=================================================================
- --------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TABLE C.--Securities available for sale and investment securities
At March 31,
---------------------- At December 31,
1996 1995 1995
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Securities available for sale:
U.S. Treasuries and agencies $ 76,991 $ 39,001 $ 76,401
Mortgage-backed securities 282,758 67,422 249,549
Other securities 87,553 22,808 33,090
Valuation reserve (4,850) (4,099) 45
-------------------------------------
Recorded value of securities available for sale $ 442,452 $ 125,132 $359,085
=====================================
Investment securities:
U.S. Treasuries and agencies $ 22,484 $ 71,023 $ 23,837
States and political subdivisions 1,596 2,161 1,630
Mortgage-backed securities 22,342 231,551 23,146
Other securities 732 3,078 1,067
-------------------------------------
Recorded value of investment securities $ 47,154 $ 307,813 $ 49,680
=====================================
Fair value of investment securities $ 47,967 $ 302,303 $ 51,087
=====================================
Excess (deficiency) of fair value
versus recorded value $ 813 $ (5,510) $ 1,407
Fair value as a % of recorded value 101.7% 98.2% 102.8%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
TABLE D.--Average Balances, Yields, and Net Interest Margins
Three Months Ended March 31,
-------------------------------------------------------------------
1996 1995
-------------------------------------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------
(Dollars in thousands)
Earning assets:
Money market investments $ 28,216 $ 405 5.77% $ 9,448 $ 136 5.84%
Securities available for sale 389,515 6,050 6.25 126,610 1,949 6.24
Loans held for sale 17,196 300 7.02 9,866 197 8.10
Investment securities, at amortized cost:
Taxable 46,894 845 7.25 314,299 4,874 6.29
Tax-exempt (Note 1) 1,477 23 6.26 1,856 24 5.24
------------------------------------------------------------------
Total investment securities 48,371 868 7.22 316,155 4,898 6.28
------------------------------------------------------------------
Loans, net of unearned income and
unamortized loan fees (Notes 1,2,3) 1,538,784 35,690 9.33 1,295,777 29,764 9.32
------------------------------------------------------------------
Total earning assets 2,022,082 43,313 8.62 1,757,856 36,944 8.52
---------------------------------------------------
Cash and due from banks 79,376 58,746
Allowance for loan losses (23,103) (21,775)
Valuation reserve for securities available
for sale (358) (11,427)
and investment securities
Other assets 81,691 63,508
---------- ----------
Total assets $2,159,688 $1,846,908
============================================
Interest-bearing liabilities:
NOW accounts $ 212,059 760 1.44 $ 175,201 694 1.61
Money market savings 452,317 4,857 4.32 314,255 3,369 4.35
Regular savings 209,336 1,268 2.44 210,728 1,318 2.54
Time deposits $100 thousand and greater 67,447 974 5.81 39,569 468 4.80
Time deposits under $100 thousand 617,210 8,477 5.52 488,038 5,805 4.82
Long-term debt 52,411 765 5.87 108,613 1,681 6.28
Short-term borrowings 124,853 1,416 4.56 167,810 2,295 5.55
------------------------------------------------------------------
Total interest-bearing liabilities 1,735,633 18,517 4.29 1,504,214 15,630 4.21
------------------------------------------------------------------
Demand deposits
Other liabilities 227,571 187,790
Shareholders' equity 20,966 17,412
175,518 137,492
--------------------------------------------
Total liabilities and shareholders' equity $2,159,688 $1,846,908
============================================
Net interest income $24,796 $21,314
==========================================
Interest rate differential 4.33% 4.31%
========================================
Net interest margin 4.93% 4.92%
========================================
Notes:
<F1> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal tax rate.
<F2> Includes principal balances of non-accrual loans.
<F3> Includes industrial revenue bonds.
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TABLE E.--Average Sources of Funding
Component
Three Months Ended March 31, Change Total Net Funding
----------------------------------------------------------------------------
1996 1995 $ % 1996 1995 1994
----------------------------------------------------------------------------
(Dollars in thousands)
Demand deposits $ 227,571 $ 187,790 $ 39,781 21.2% 12.1% 11.5% 12.5%
Retail deposits:
Regular savings 209,336 210,728 (1,392) (0.7) 11.0 12.9 13.4
Time deposits under $100 thousand 617,210 488,038 129,172 26.5 32.8 29.9 30.3
NOW account 212,059 175,201 36,858 21.0 11.3 10.7 11.8
Money market savings 452,317 314,255 138,062 43.9 24.0 19.2 15.5
----------------------------------------------------------------------------
Total retail deposits 1,490,922 1,188,222 302,700 25.5 79.1 72.7 71.0
----------------------------------------------------------------------------
Total core deposits 1,718,493 1,376,012 342,481 24.9 91.2 84.2 83.5
Less: Cash and due from banks 79,376 58,746 20,630 35.1 4.2 3.6 4.5
----------------------------------------------------------------------------
Net core deposits 1,639,117 1,317,266 321,851 24.4 87.0 80.6 79.0
----------------------------------------------------------------------------
Time deposits $100 thousand and greater 67,447 39,569 27,878 70.5 3.5 2.4 3.2
Federal funds purchased 3,419 6,475 (3,056) (47.2) 0.2 0.4 0.5
Securities sold under agreements to repurchase 107,360 95,697 11,663 12.2 5.7 5.9 5.7
Borrowings from U.S. Treasury 7,316 9,194 (1,878) (20.4) 0.4 0.6 0.9
Other short-term borrowings 6,758 56,444 (49,686) (88.0) 0.4 3.4 3.8
Long-term note from FHLB 35,611 87,625 (52,014) (59.4) 1.9 5.4 6.9
----------------------------------------------------------------------------
Total purchased liabilities 227,911 295,004 (67,093) (22.7) 12.1 18.1 21.0
Bank term loan 16,800 20,988 (4,188) (20.0) 0.9 1.3 --
----------------------------------------------------------------------------
Total capital market funds 16,800 20,988 (4,188) (20.0) 0.9 1.3 --
----------------------------------------------------------------------------
Total net funding $1,883,828 $1,633,258 $250,570 15.3% 100.0% 100.0% 100.0%
============================================================================
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TABLE F.--Volume and Yield Analysis
1996 vs. 1995
-----------------------------------------------------
Three Months Ended
March 31, Increase Due to
-----------------------------------------------------
1996 1995 (Decrease) Volume Rate
-----------------------------------------------------
(In thousands)
Interest income (FTE):
Money market investments $ 405 $ 136 $ 269 $ 271 $ (2)
Securities available for sale 6,050 1,949 4,101 4,098 3
Loans held for sale 300 197 103 130 (27)
Investment securities:
Taxable 845 4,874 (4,029) (4,781) 752
Tax-exempt 23 24 (1) (6) 5
-----------------------------------------------------
Total investments 868 4,898 (4,030) (4,787) 757
-----------------------------------------------------
Loans 35,690 29,764 5,926 5,894 32
-----------------------------------------------------
Total interest income 43,313 36,944 6,369 5,606 763
-----------------------------------------------------
Interest expense:
NOW accounts 760 694 66 140 (74)
Money market savings 4,857 3,369 1,488 1,512 (24)
Regular savings 1,268 1,318 (50) (9) (41)
Time deposits $100 thousand and greater 974 468 506 406 100
Time deposits under $100 thousand 8,477 5,805 2,672 1,820 852
Long-term debt 765 1,681 (916) (805) (111)
Short-term borrowings 1,416 2,295 (879) (465) (414)
-----------------------------------------------------
Total interest expense 18,517 15,630 2,887 2,599 288
-----------------------------------------------------
Net interest income (FTE) $24,796 $21,314 $ 3,482 $ 3,007 $ 475
=====================================================
Increases and decreases in interest income and interest expense due to both rate
and volume have been allocated to volume on a consistent basis.
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TABLE G.--Non-Performing Assets
At At At
March 31, December 31, March 31,
1996 1995 1995
--------------------------------------
(Dollars in thousands)
Loans on a non-accrual basis:
Commercial, financial and agricultural $ 750 $ 648 $ 1,327
Real estate:
Construction and land development 101 103 1,096
Commercial 4,630 3,993 9,026
Residential 8,340 7,625 7,149
------------------------------------
Total non-accrual 13,821 12,369 18,598
------------------------------------
Restructured loans:
Real estate:
Commercial 288 288 260
Residential 85 85 67
Other installment 6 55 134
------------------------------------
Total restructured 379 428 461
------------------------------------
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 193 87 100
Real estate:
Commercial 24 64 670
Residential 255 396 221
Credit card 210 105 104
Other installment 404 522 188
------------------------------------
Total past-due 90 days or more and still accruing 1,086 1,174 1,283
------------------------------------
Total non-performing loans 15,286 13,971 20,342
------------------------------------
Foreclosed real estate 623 1,169 609
Insubstance foreclosed real estate -- -- 161
------------------------------------
Total other real estate owned (OREO) 623 1,169 770
------------------------------------
Total non-performing assets (NPA) $15,909 $15,140 $21,112
====================================
Allowance for loan losses (ALL) $24,183 $22,095 $21,553
Coverage of non-performing loans 158.21% 158.15% 105.95%
Non-performing assets as a % of (loans & OREO) 0.92% 1.12% 1.61%
Non-performing assets to total assets 0.66% 0.79% 1.13%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TABLE H.--Summary of Loan Loss Experience
Three Months Year Three Months
Ended Ended Ended
March 31, December 31, March 31,
1996 1995 1995
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Allowance for loan losses at beginning of period $ 22,095 $ 21,437 $ 21,437
----------------------------------------
Allowance of bank acquired on February 16, 1996 1,650 -- --
Loans charged-off:
Commercial, financial and agricultural (120) (1,283) (353)
Real estate:
Construction and land development -- (357) (2)
Commercial (523) (2,287) (519)
Residential (372) (1,833) (442)
----------------------------------------
Total real estate (895) (4,477) (963)
Consumer (1,093) (3,401) (758)
----------------------------------------
Total loans charged-off (2,108) (9,161) (2,074)
----------------------------------------
Recoveries on loans:
Commercial, financial and agricultural 164 1,597 409
Real estate:
Construction and land development 22 540 83
Commercial 516 1,430 187
Residential 45 302 98
----------------------------------------
Total real estate 583 2,272 368
----------------------------------------
Consumer 499 1,575 413
----------------------------------------
Total recoveries on loans 1,246 5,444 1,190
----------------------------------------
Loans charged-off, net of recoveries (862) (3,717) (884)
----------------------------------------
Provision for loan losses 1,300 4,375 1,000
----------------------------------------
Allowance for loan losses at end of period $ 24,183 $ 22,095 $ 21,553
========================================
Loans outstanding-end of period $1,735,050 $1,351,053 $1,313,169
Average loans outstanding-period to date 1,538,784 1,329,188 1,295,777
Loans charged-off, net, as a % of average total
loans (annualized) 0.22% 0.28% 0.27%
Provision for loan losses as a % of average total
loans (annualized) 0.34% 0.33% 0.31%
Allowance for loan losses as a % of period-end total loans 1.39% 1.64% 1.64%
- ----------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
TABLE I.--Capital Ratios
3/31/96 12/31/95 9/30/95 6/30/95 3/31/95
------------------------------------------------------------------
(Dollars in thousands)
Total risk-adjusted on-balance-sheet assets $1,610,790 $1,272,079 $1,282,863 $1,242,524 $1,222,902
Total risk-adjusted off-balance-sheet items 95,512 76,432 66,160 63,749 52,218
------------------------------------------------------------------
Total risk-adjusted assets $1,706,302 $1,348,511 $1,349,023 $1,306,273 $1,275,120
==================================================================
Total risk-adjusted assets/total assets,
net of fair value adjustment and goodwill (1) 71.78% 70.91% 70.46% 68.84% 68.56%
Total shareholders' equity $ 191,721 $ 159,936 $ 151,924 $ 147,282 $ 141,359
Fair value adjustment (1) 3,153 (29) 3,652 4,446 6,405
Other adjustments to Tier I capital (40,063) (8,553) (8,711) (9,071) (9,230)
------------------------------------------------------------------
Total Tier I capital 154,811 151,354 146,865 142,657 138,534
Maximum allowance for loan losses (2) 21,364 16,921 16,919 16,385 16,008
------------------------------------------------------------------
Total capital $ 176,175 $ 168,275 $ 163,784 $ 159,042 $ 154,542
==================================================================
Average total assets, net of fair value
adjustment and goodwill (1) $2,122,778 $1,879,047 $1,896,991 $1,861,252 $1,844,083
Allowance for loan losses 24,183 22,095 21,410 20,907 21,553
Leverage Ratio (average assets) 7.29% 8.05% 7.74% 7.66% 7.51%
Tier I capital/total risk-adjusted assets 9.07 11.22 10.89 10.92 10.86
Total capital/total risk-adjusted assets 10.32 12.48 12.14 12.18 12.12
Notes:
<F1> Banknorth Group adopted SFAS No. 115 as of January 1, 1994. Risk Based
Capital guidelines have been amended to exclude SFAS No. 115 adjustments,
therefore, the market valuation included in shareholders' equity and total
assets on the consolidated Balance Sheets has been excluded in the above
ratios.
<F2> The maximum allowance for loan losses used in calculating total capital
is the period-end allowance for loan losses or 1.25% of risk-adjusted
assets prior to the allowance limitation, whichever is lower.
- -------------------------------------------------------------------------------------
SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
1996 1995
------------------------------------------------------------------
(In thousands, except for share and per share data) Q1 Q4 Q3 Q2 Q1
------------------------------------------------------------------
STATEMENT OF INCOME:
Interest income $ 43,133 $ 38,643 $ 39,214 $ 37,967 $ 36,800
Interest expense 18,517 17,508 17,763 17,079 15,630
------------------------------------------------------------------
Net interest income 24,616 21,135 21,451 20,888 21,170
Provision for loan losses 1,300 1,125 1,125 1,125 1,000
------------------------------------------------------------------
Net interest income after provision for
loan losses 23,316 20,010 20,326 19,763 20,170
------------------------------------------------------------------
Other income:
Income from trust activities 1,996 1,835 1,879 1,890 1,822
Service charges on depositor accounts 1,340 1,226 1,298 1,321 1,236
Credit card 599 842 684 665 598
Loan servicing 679 679 649 655 718
Net loan transactions 601 217 165 94 92
Net securities transactions 3 9 (471) 46 7
Net gain (loss) on sales of fixed and other
assets -- (86) 222 7 (5)
All other 668 697 727 618 574
------------------------------------------------------------------
Total other income 5,886 5,419 5,153 5,296 5,042
Other expenses:
Salaries 8,375 7,661 7,104 6,814 6,737
Employee benefits 2,171 1,457 1,589 1,656 1,787
Net occupancy expenses 1,786 1,388 1,343 1,325 1,431
Equipment and software expenses 1,433 1,400 1,400 1,368 1,351
Data processing fees 1,108 1,242 1,125 1,076 1,186
FDIC deposit insurance and other regulatory
expenses 99 234 9 905 914
OREO and repossession expenses 30 (95) 347 (9) 277
Amortization of goodwill 731 157 157 159 159
All other 6,420 4,558 4,313 4,078 3,986
------------------------------------------------------------------
Total other expenses 22,153 18,002 17,387 17,372 17,828
------------------------------------------------------------------
Income before income taxes 7,049 7,427 8,092 7,687 7,384
Income tax expense 2,299 1,596 2,266 2,213 2,142
------------------------------------------------------------------
Net income $ 4,750 $ 5,831 $ 5,826 $ 5,474 $ 5,242
==================================================================
AVERAGE BALANCES:
Loans $1,538,784 $1,352,356 $1,343,177 $1,324,586 $1,295,777
Loans held for sale 17,196 16,309 15,647 10,197 9,866
Securities available for sale 389,515 191,408 128,822 129,333 126,610
Investment securities 48,371 216,701 301,023 310,093 316,155
Money market investments 28,216 10,717 15,595 3,035 9,448
------------------------------------------------------------------
Total earning assets 2,022,082 1,787,491 1,804,264 1,777,244 1,757,856
Other assets 137,606 100,138 97,786 88,633 89,052
------------------------------------------------------------------
Total assets $2,159,688 $1,887,629 $1,902,050 $1,865,877 $1,846,908
==================================================================
Demand deposits $ 227,571 $ 205,354 $ 199,122 $ 186,609 $ 187,790
Interest-bearing deposits 1,558,369 1,307,950 1,266,310 1,233,929 1,227,791
------------------------------------------------------------------
Total deposits 1,785,940 1,513,304 1,465,432 1,420,538 1,415,581
Short-term borrowings 124,853 129,836 176,809 183,021 167,810
Long-term debt 52,411 72,534 94,169 101,506 108,613
Other liabilities 20,966 17,678 17,695 17,029 17,412
Shareholders' equity 175,518 154,277 147,945 143,783 137,492
------------------------------------------------------------------
Total liabilities and shareholders'
equity $2,159,688 $1,887,629 $1,902,050 $1,865,877 $1,846,908
==================================================================
Loans charged-off, net of recoveries $ 862 $ 440 $ 622 $ 1,771 $ 884
Non-performing assets, p.e. 15,909 15,140 17,954 19,850 21,112
SHARE DATA:
Shares outstanding, p.e. 7,826,648 6,804,425 6,804,425 6,804,425 6,804,425
Weighted average shares outstanding 7,332,386 6,804,425 6,804,425 6,804,425 6,804,425
Tangible book value, p.e. $ 18.92 $ 21.75 $ 20.53 $ 19.83 $ 18.95
Cash dividends declared 0.25 0.23 0.23 0.23 0.23
Net income 0.65 0.86 0.86 0.80 0.77
Closing price at quarter end 35.25 38.50 33.25 26.88 23.50
Cash dividends declared as a % of net income 38.46% 26.74% 26.74% 28.75% 29.87%
RATIOS:
Return on average assets 0.88% 1.23% 1.22% 1.18% 1.15%
Return on average shareholders' equity 10.88 15.00 15.62 15.27 15.46
Net interest margin, fte 4.93 4.73 4.76 4.75 4.85
Efficiency ratio 65.11 67.52 66.31 66.65 66.61
Expense ratio 2.80 2.80 2.76 2.77 2.88
As a % of risk-adjusted assets:
Total capital 10.32 12.48 12.14 12.18 12.12
Tier 1 capital 9.07 11.22 10.89 10.92 10.86
As a % of average total assets:
Tier 1 capital (regulatory leverage) 7.29 8.05 7.74 7.66 7.51
Tangible shareholders equity, p.e. to tangible
assets, p.e 6.26 7.80 7.33 7.14 6.97
Price earnings ratio (last twelve months) 11.1 11.7 10.1 8.8 8.5
Item 6. Exhibits and Reports Filed on Form 8-K
Form 8-K dated January 18, 1996 relating to release of unaudited
information (including balance sheet, income statement and certain per
share data) on 1995 fourth quarter and year end results of operations.
Form 8-K dated February 27, 1996, relating to the acquisition of
thirteen divested branches of Fleet National Bank of Massachusetts
(formerly known as Shawmut Bank, National Association).
Form 8-K/A dated April 18, 1996, providing information relating to
loans acquired and deposit liabilities assumed through the acquisition
of thirteen divested branches of Fleet National Bank of Massachusetts
(formerly known as Shawmut Bank, National Association), as well as pro
forma consolidated financial information reflecting the acquisition of
the branches as if it had occurred as of December 31, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANKNORTH GROUP, INC.
Registrant
Date: 5/10/96 /s/ WILLIAM H. CHADWICK
-----------------------------------------
William H. Chadwick
President and Chief Executive Officer
Date: 5/10/96 /s/ THOMAS J. PRUITT
-----------------------------------------
Thomas J. Pruitt
Executive Vice President and Chief
Financial Officer