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 June 30, 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 incorporation (I.R.S. Employer
or organization) Identification 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 o
7,826,648 shares of common stock, $l.00 par, outstanding on June 30, 1996.
2nd Quarter 1996 Financial Highlights (Unaudited)
(Quarterly information unaudited--Dollars in thousands,
except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
- ------------------------------------------------------------------------------------------------------------------
1996 1995 1996 1995
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INCOME DATA
Net interest income, taxable equivalent $ 27,560 $ 21,062 $ 52,356 $ 42,386
Net interest margin 4.88% 4.75% 4.90% 4.84%
Net income $ 6,794 $5,474 $11,544 $10,716
PERIOD END BALANCES
Assets $2,458,040 $1,902,260 $2,458,040 $1,902,260
Earning assets 2,288,900 1,781,162 2,288,900 1,781,162
Loans 1,770,339 1,339,411 1,770,339 1,339,411
Deposits 2,040,231 1,451,015 2,040,231 1,451,015
Short-term borrowings 155,977 188,002 155,977 188,002
Long-term debt 46,791 99,071 46,791 99,071
Shareholders' equity 194,430 147,282 194,430 147,282
AVERAGE BALANCES
Assets $2,429,249 $1,865,877 $2,294,483 $1,856,032
Earning assets, net of fair value adjustment 2,272,672 1,777,244 2,147,379 1,767,607
Loans 1,746,552 1,324,586 1,642,670 1,310,290
Deposits 2,030,037 1,420,538 1,913,164 1,417,638
Short-term borrowings 138,632 183,021 126,567 175,488
Long-term debt 47,311 101,506 49,861 105,040
Shareholders' equity 191,695 143,783 183,621 140,647
SHARE AND PER SHARE DATA
Shares outstanding 7,826,648 6,804,425 7,826,648 6,804,425
Weighted average shares outstanding 7,826,648 6,804,425 7,579,517 6,804,425
Net income $ 0.87 $ 0.80 $ 1.52 $ 1.57
Cash dividends declared 0.25 0.23 0.50 0.46
Market price:
High 36.25 27.00 38.50 27.00
Low 32.50 23.50 32.50 21.75
Close 34.25 26.88 34.25 26.88
Share volume 1,093,788 371,940 2,243,259 829,644
Average monthly share volume 364,596 123,980 373,877 138,274
Book value 24.84 21.65 24.84 21.65
Tangible book value 19.89 20.31 19.89 20.31
KEY RATIOS
Return on average assets 1.12% 1.18% 1.01% 1.16%
Return on average shareholders' equity 14.25 15.27 12.64 15.36
Efficiency ratio (adjusted for
non-recurring items) 62.07 66.02 62.38 66.00
Net loan charge-offs to average loans 0.19 0.53 0.20 0.41
Provision for loan losses to average loans 0.30 0.34 0.32 0.32
Allowance for loan losses to loans, p.e. 1.39 1.56 1.39 1.56
Allowance for loan losses coverage of
non-performing loans, p.e. 112.40 109.89 112.40 109.89
Non-performing assets to total assets, p.e. 0.95 1.04 0.95 1.04
Total capital to risk-adjusted assets, p.e. 10.37 12.18 10.37 12.18
Tier 1 capital to risk-adjusted assets, p.e. 9.12 10.92 9.12 10.92
Leverage ratio 6.72 7.66 6.72 7.66
Index to Form 10-Q
PART I Page
- ---------------------------------------------------------------------------
Item l Financial Statements
Consolidated Statements of Income For the Three Months
and Six Months Ended June 30, 1996 and 1995 (Both unaudited) 1
Consolidated Balance Sheets at June 30, 1996 (Unaudited),
December 31, 1995 and June 30, 1995 (Unaudited) 2
Statements of Changes in Shareholders' Equity For the
Period Ended December 31, 1995 and January 1, 1996 to
June 30, 1996 (Unaudited) 3
Consolidated Statements of Cash Flows for the Six Months
ended June 30, 1996 and 1995 (Both unaudited) 4
Notes to Unaudited Consolidated Interim Financial Statements 5
Independent Auditors' Report 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
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 25
Item 5 Other Information N/A
Item 6 Exhibits and Reports on Form 8-K N/A
Signatures 26
Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
- ---------------------------------------------------------------------------------------------------
(In thousands, except for per share amounts) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------
Interest income:
Interest and fees on loans $39,787 $31,094 $75,604 $60,915
Interest on money market investments 242 46 647 182
Interest on securities available for sale 6,626 1,991 12,676 3,940
Interest on investment securities 799 4,836 1,660 9,730
- ---------------------------------------------------------------------------------------------------
Total interest income 47,454 37,967 90,587 74,767
Interest expense:
Deposits 17,692 12,881 34,028 24,535
Short-term borrowed funds 1,676 2,598 3,092 4,893
Long-term debt 690 1,600 1,455 3,281
- ---------------------------------------------------------------------------------------------------
Total interest expense 20,058 17,079 38,575 32,709
- ---------------------------------------------------------------------------------------------------
Net interest income 27,396 20,888 52,012 42,058
Less: provision for loan losses 1,300 1,125 2,600 2,125
- ---------------------------------------------------------------------------------------------------
Net interest income after provision for loan
losses 26,096 19,763 49,412 39,933
Other operating income:
Income from trust activities 2,005 1,890 4,001 3,712
Service charges on depositor accounts 1,792 1,321 3,132 2,557
Credit card income 728 665 1,327 1,263
Loan servicing income 670 655 1,349 1,373
Net loan transactions 358 94 959 186
Net securities transactions -- 46 3 53
Other income 903 625 1,571 1,194
- ---------------------------------------------------------------------------------------------------
Total other operating income 6,456 5,296 12,342 10,338
Other operating expenses:
Salaries 9,053 6,814 17,428 13,551
Employee benefits 2,146 1,656 4,317 3,443
Net occupancy expenses 1,767 1,325 3,553 2,756
Equipment and software expenses 1,701 1,368 3,134 2,719
Data processing fees 1,209 1,076 2,317 2,262
FDIC deposit insurance and other regulatory
expenses 99 905 198 1,819
Other real estate owned and repossession
expenses 78 (9) 108 268
Legal and professional fees 833 624 1,690 1,418
Printing and supplies expenses 572 452 1,998 901
Advertising and marketing expenses 657 593 1,754 1,005
Amortization of goodwill 1,319 159 2,050 318
Other expenses 3,076 2,409 6,116 4,740
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Total other operating expenses 22,510 17,372 44,663 35,200
- ---------------------------------------------------------------------------------------------------
Income before income taxes 10,042 7,687 17,091 15,071
Income tax expense 3,248 2,213 5,547 4,355
- ---------------------------------------------------------------------------------------------------
Net income $ 6,794 $ 5,474 $11,544 $10,716
===================================================================================================
Net income per share $ 0.87 $ 0.80 $ 1.52 $ 1.57
===================================================================================================
See accompanying notes to unaudited interim consolidated financial
statements.
Consolidated Balance Sheets
June 30, December 31, June 30,
1996 1995 1995
- ----------------------------------------------------------------------------------------------
(In thousands except share and per share data) (Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 85,076 $ 89,111 $ 79,058
Money market investments 50 650 1,450
- ---------------------------------------------------------------------------------------------
Cash and cash equivalents 85,126 89,761 80,508
- ---------------------------------------------------------------------------------------------
Securities available for sale, at fair value 460,901 359,085 125,917
Loans held for sale 14,237 19,174 14,484
Investment securities 43,373 49,680 299,900
Loans 1,770,339 1,351,053 1,339,411
Less: Allowance for loan losses 24,669 22,095 20,907
- ---------------------------------------------------------------------------------------------
Net loans 1,745,670 1,328,958 1,318,504
- ---------------------------------------------------------------------------------------------
Accrued interest receivable 15,600 11,505 11,256
Premises, equipment and software, net 29,427 24,917 24,607
Other real estate owned and repossessed assets 1,301 1,169 825
Goodwill 38,744 8,553 9,071
Capitalized mortgage servicing rights 3,691 3,363 3,304
Other assets 19,970 14,009 13,884
- ---------------------------------------------------------------------------------------------
Total assets $2,458,040 $1,910,174 $1,902,260
=============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand deposits $ 269,336 $ 228,334 $ 205,213
NOW accounts 235,288 200,085 183,077
Money market savings 522,052 363,107 321,563
Regular savings 230,537 173,565 188,753
Time deposits $100 thousand and greater 72,666 59,233 42,343
Time deposits under $100 thousand 710,352 536,445 510,066
- ---------------------------------------------------------------------------------------------
Total deposits 2,040,231 1,560,769 1,451,015
- ---------------------------------------------------------------------------------------------
Short-term borrowed funds:
Federal funds purchased 4,375 -- 8,000
Securities sold under agreements to repurchase 88,590 95,472 89,760
Borrowings from U.S. Treasury 17,012 8,241 18,742
Borrowings from Federal Home Loan Bank of Boston 46,000 12,500 71,500
- ---------------------------------------------------------------------------------------------
Total short-term borrowed funds 155,977 116,213 188,002
- ---------------------------------------------------------------------------------------------
Long-term debt:
Federal Home Loan Bank of Boston term notes 31,041 39,197 80,171
Bank term loan 15,750 16,800 18,900
- ---------------------------------------------------------------------------------------------
Total long-term debt 46,791 55,997 99,071
- ---------------------------------------------------------------------------------------------
Accrued interest payable 4,547 3,914 4,611
Other liabilities 16,064 13,345 12,279
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Total liabilities 2,263,610 1,750,238 1,754,978
- ---------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, $1.00 par value; authorized
20,000,000 shares; issued and outstanding
7,826,648 shares at June 30, 1996 and 6,804,425
at December 31, 1995 and June 30, 1995 7,827 6,804 6,804
Surplus 87,052 56,023 55,600
Retained earnings 105,520 97,978 89,726
Unamortized employee restricted stock (649) (898) (402)
Net unrealized gains (losses) on securities
available for sale, net of tax (5,320) 29 (998)
Net unrealized losses on securities available
for sale transferred to the
investment portfolio, net of tax -- -- (3,448)
- ---------------------------------------------------------------------------------------------
Total shareholders' equity 194,430 159,936 147,282
- ---------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $2,458,040 $1,910,174 $1,902,260
=============================================================================================
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
- ----------------------------------------------------------------------------------------------------------------------------
Net income -- -- 6,794 -- -- 6,794
Increase in net unrealized losses on
securities available for sale, net of tax -- -- -- -- (2,167) (2,167)
Cash dividends $.25 per share -- -- (1,957) -- -- (1,957)
Amortization of employee restricted stock -- (39) -- 96 -- 57
Exercise of employee stock options -- -- (18) -- -- (18)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 $7,827 $87,052 $105,520 $(649) $(5,320) $194,430
============================================================================================================================
See accompanying notes to unaudited interim consolidated financial
statements.
Consolidated Statements of Cash Flows
Six Months Ended June 30,
- -------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------
(In thousands) (Unaudited)
Decrease in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 11,544 $ 10,716
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of premises,
equipment and software 2,095 2,112
Amortization of goodwill 2,050 318
Provision for loan losses 2,600 2,125
Adjustment of other real estate owned to
estimated fair value 75 97
Provision for deferred tax (benefit)/expense (22) 1,480
Amortization of employee restricted stock 85 119
Exercise of employee stock options (88) (36)
Net securities transactions (3) (53)
Net gain on sale of other real estate owned (313) (387)
Proceeds from sale of loans held for sale 100,704 40,971
Originations and purchases of loans held for
resale (111,577) (73,788)
Net gain on sale of loans held for sale (458) (186)
Net gain on capitalization of mortgage servicing
rights (501) --
Increase (decrease) in interest receivable (4,095) 129
Increase in interest payable 633 33
Increase in other assets and other intangibles (3,026) (4,046)
Increase (decrease) in other liabilities 2,719 (1,265)
- -----------------------------------------------------------------------------------------
Total adjustments (9,122) (32,377)
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 2,422 (21,661)
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturity and call of securities
available for sale 150,655 6,705
Proceeds from maturity and call of investment
securities 6,329 18,501
Proceeds from sale of securities available for sale 20,235 15,283
Purchase of securities available for sale (280,956) (23,876)
Purchase of investment securities -- (533)
Proceeds from sale of OREO and repossessed assets 1,533 1,230
Payments received on OREO and repossessed assets 3 120
Branches purchased-loans acquired (396,942) --
Net loans purchased (23,381) (8,672)
Net decrease (increase) in loans 15,849 (6,090)
Capital expenditures (6,606) (1,640)
Proceeds from sale of fixed assets and other assets 10 53
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities (513,271) 1,081
- -----------------------------------------------------------------------------------------
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 increase (decrease) in deposits (79,052) 7,548
Net increase in short-term borrowings 39,764 32,856
Issuance of common stock, net of expenses 32,216 --
Payments on long term debt (9,206) (22,518)
Dividends paid (3,914) (3,130)
- -----------------------------------------------------------------------------------------
Net cash provided by financing activities 506,214 14,756
- -----------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4,635) (5,824)
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 89,761 86,332
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 85,126 $ 80,508
=========================================================================================
Additional disclosure relative to statement of cash
flows:
Interest paid $ 37,942 $ 32,676
=========================================================================================
Taxes paid $ 8,745 $ 4,281
=========================================================================================
Supplemental schedule of non-cash investing and
financing activities:
Net transfer of loans to OREO and repossessed assets $ 1,430 $ 459
Net transfer of loans held for sale to loan status 16,268 32,544
Decrease (increase) in net unrealized losses on
securities available for sale, net of tax (5,349) 3,593
Decrease in net unrealized losses on securities
available for sale, transferred to held
to maturity, net of tax -- 456
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
June 30, 1996, the Consolidated Statements of Income for the three and six
months ended June 30, 1996 and 1995, the Consolidated Statements of Changes
in Shareholders' Equity for the three month periods ended March 31, 1996
and June 30, 1996, and the Consolidated Statements of Cash Flows for the
six months ended June 30, 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 7,579,517 and 6,804,425
weighted average shares issued and outstanding during the six month periods
ended June 30, 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 $501 thousand in mortgage servicing rights and increase the gains
or decrease the losses on the sale of these loans originated in the first
six 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 servicing 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 six months ended June 30, 1996
(in thousands):
Purchased Originated Excess Total
- ---------------------------------------------------------------------------------
Balance at January 1, 1996 $3,037 $ -- $ 169 $3,206
Additions 365 501 9 875
Amortization (409) (43) (23) (475)
- ---------------------------------------------------------------------------------
Balance as of June 30, 1996 $2,993 $ 458 $ 155 $3,606
=================================================================================
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 June 30, 1996, no
allowance for impairment in the Company's mortgage servicing rights was
necessary. The estimated fair value of all mortgage servicing rights was
$4.5 million at June 30, 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 $518.4
million of mortgage loans serviced for third parties. In addition, the
Company services approximately $471.3 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 June 30, 1996 and 1995, and the
related consolidated statements of income for the three and six month
periods ended June 30, 1996 and 1995, and the consolidated statements of
changes in shareholders' equity for the three month periods ended March 31,
1996 and June 30,1996, and the consolidated statements of cash flows for the
six month periods ended June 30, 1996 and 1995. 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 the 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
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.
/s/ KPMG PEAT MARWICK LLP
July 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 and six months ended June 30, 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
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 Massachusetts 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 $6.8 million, or $.87 per share for
the three months ended June 30, 1996, as compared to $5.5 million, or $.80
per share recorded in the same period in 1995. For the year to date period
ended June 30, 1996, net income was $11.5 million, or $1.52 per share, as
compared to $10.7 million and $1.57 per share in 1995.
During the second quarter of 1996:
* The Company earned a return on shareholders' equity of 14.25%
* The return on average assets was 1.12%
* The efficiency ratio was 62.07%
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, First
Massachusetts Bank, N.A.("FMB" or "First Massachusetts"), with principal
offices in Worcester, Massachusetts, was organized to own and operate the
acquired offices.
Under the terms of the Purchase and Assumption Agreement with Shawmut,
Banknorth paid a premium of $29.2 million, representing 5.23% of deposit
liabilities assumed, including accrued interest payable, calculated based
upon the average amount of deposits outstanding (including accrued interest
payable) over the thirty day period ended February 13, 1996.
At the closing, the Company assumed total liabilities with an
estimated fair value of $560.3 million and acquired total assets, including
loans, accrued interest receivable on such loans, certain real property,
furniture, fixtures, equipment and other assets, with an estimated fair
value of $405.7 million. No loans acquired were past due 90 days or more. In
addition, the Company received approximately $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 First
Massachusetts 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 $2.3 billion during the second quarter of 1996, were
$495.4 million, or 27.9%, higher than during the second 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 $1.7 billion during the three month period
ended June 30, 1996, an increase of $422.0 million, or 31.9%, over the same
period in 1995. Of the increase, approximately $419.5 million resulted from
the addition of FMB. In-market loan demand increased during 1995 and the
first two quarters 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 June 30, 1996 and 1995 as well as December 31, 1995.
Primarily through the branch purchases, total loans as of June 30, 1996 were
$430.9 million, or 32.2% higher than at June 30, 1995. Commercial, financial
and agricultural loans increased $68.0 million, or 30.8% while commercial
real estate loans increased by $98.7 million, or 25.3%. The largest increase
in loan balances occurred in residential real estate which increased $243.4
million, or 49.1%. A substantial portion of the loans acquired through the
branch purchases were residential real estate mortgages.
Since the establishment of First Massachusetts, declines in the
residential loan balances have occurred due to runoff. Loan growth in the
Company's Vermont and New Hampshire markets has exceeded the runoff at First
Massachusetts resulting in an increase in total loan receivables of $35.3
million since March 31, 1996. Current lending activity at First
Massachusetts is vibrant based upon the level of new applications and
commitments to fund new loans. Management anticipates growth in that bank's
loan portfolio during the third quarter of 1996.
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 the remainder of 1996.
Additionally, the Company plans to complete the purchase of approximately
$17 million in mortgage loans located outside of the Company's market areas
during the third quarter in an effort to increase the level of earning
assets.
Securities available for sale. This category of investments is used
primarily for liquidity while simultaneously producing earnings. 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 Statement of
Financial Accounting Standards No. 115 (SFAS No.115) "Accounting For Certain
Investments in Debt and Equity Securities", 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 $460.9
million, $359.1 million and $125.9 million at June 30, 1996, December 31,
1995 and June 30, 1995, respectively. The increase of $101.8 million from
December 31, 1995 to June 30, 1996 reflects purchases made for the newly
established portfolio at FMB as well as purchases in excess of the
reinvestment of proceeds from the sale, maturity and call of securities
available for sale of approximately $10.4 million. The purchases in excess
of the reinvestment of portfolio generated cash flows were made in an effort
to increase the level of earning assets. Average balances for the three
months ended June 30, 1996 and 1995 were $446.2 million and $129.3 million,
respectively.
Table C, Securities Available for Sale and Investment Securities
provides details of securities available for sale at June 30, 1996 and 1995,
as well as December 31, 1995.
Investment securities. 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 $43.4 million
as of June 30, 1996 as compared to $49.7 million and $299.9 million as of
December 31 and June 30, 1995, respectively. The decrease from June 30, 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. The cash
proceeds from maturities and principal payments were generally reinvested in
the "available for sale" portfolio and management expects this trend to
continue.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $18.5 million during the second quarter of 1996, up
$15.5 million from the second quarter of 1995. Of the increase,
approximately $17.2 million is attributable to FMB. The Company maintained a
high liquidity position during the early stages of First Massachusetts'
operation to accommodate expected deposit runoff and loan demand. Recent
deposit product promotions in the Massachusetts market have been successful
in increasing the level of customer deposits at First Massachusetts Bank. As
a result, in the later part of the quarter ended June 30, 1996, the Company
reduced its liquidity position in order to reinvest these funds in higher
earning securities.
Income from earning assets. Income from earning assets was $47.6
million for the three month period ended June 30, 1996, as compared to $38.1
million for the same period in 1995. The increase of $9.5 million, or 24.8%,
resulted from increases in earning assets through normal growth and the
branch acquisitions which gave rise to FMB. Total earning assets during the
second quarter 1996 of $2.3 billion yielded 8.43%, while in 1995 earning
assets of $1.8 billion yielded 8.61%. The increase in earning assets
contributed $9.8 million towards the increase in interest income over 1995 ,
while the 18 basis point reduction in yield caused a decrease of $320
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.
For the six month periods ended June 30, 1996 and 1995, income from
earning assets was $90.9 million and $75.1 million, respectively. Total
earning assets of $2.1 billion, increased $379.8 million, or 21.5% over the
six month average in 1995. The yield on earning assets was 8.52% during the
first six months of 1996 as compared to 8.57% during the same period in
1995.
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 second quarter of 1996 and 1995, and changes, by category, from the
second quarter of 1995.
Core Deposits. Total core deposits averaged $2.0 billion during the
three month period ended June 30, 1996, $578.5 million above the second
quarter average in 1995. Of the increase, approximately $500.2 million is
the result of FMB, while approximately $78.3 million reflects true deposit
growth. It is management's expectation that core deposits will increase
during coming quarters as First Massachusetts continues to establish itself
in its central and western Massachusetts markets.
Purchased Liabilities. Total purchased liabilities decreased on
average from $307.0 million during the second quarter of 1995 to $243.6
million during the second 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 acquisitions. Offsetting the decreases in short and long-term
borrowings were increases of $31.0 million in time deposits $100 thousand
and greater. Of the noted increase in time deposits $100 thousand and
greater, the most significant portion is 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 June 30, 1996, was $20.1 million, $3.0 million,
or 17.4%, above 1995. Higher levels of interest bearing liabilities caused
interest expense to increase $4.1 million, while a lower cost of funds
resulted in a decrease of $1.1 million, together causing the increase of
$3.0 million. Total interest bearing liabilities of $2.0 billion during the
second quarter of 1996, were $436.1 million higher than in 1995, and with a
total cost of 4.13%, 38 basis points less expensive than in the prior year.
Total interest bearing liabilities averaged $1.8 billion during the
six month period ended June 30, 1996, $328.4 million, or 21.7%, higher than
in 1995. The cost of funds was 4.22% in 1996 as compared to 4.36% in 1995.
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 $27.6 million and $21.1 million for the
three month periods ended June 30, 1996 and 1995, respectively. The net
interest margin was 4.88% during the second quarter of 1996 as compared to
4.75% during the second quarter of 1995. The yield on earning assets of
8.43% for the second quarter of 1996, was 18 basis points below the prior
year, while the cost of interest bearing liabilities, 4.13% in 1996,
decreased 38 basis points.
Included in net interest income is the effect of interest rate swap
transactions and interest rate floors. Banknorth utilizes these 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.
Additionally, the interest rate risk characteristics of the loans and
deposits purchased through the branch acquisitions exacerbated the potential
for reduced interest income under these circumstances. To protect the
Company from this occurrence, interest rate floors in the notional amount of
$145.0 million, and interest rate swaps in the notional amount of $50.0 million
were purchased during the second quarter of 1996 and used in conjunction
with the previously held portfolio of interest rate floors to mitigate the
potential reduction in interest income on certain adjustable and variable
rate loans. At June 30, 1996, the notional principal amounts of all interest
rate floors held was $295.0 million with an estimated fair value in excess
of amortized cost of $1.2 million. The aggregate fair value of the interest
rate floors at the time of purchase was $2.8 million which is being
amortized as an adjustment to the related loan yield on a straight-line
basis over the terms of the agreements. The unamortized balance of interest
rate floors as of June 30, 1996 was $2.3 million. The estimated fair value
of the interest rate swap contracts was ($137) thousand as of June 30, 1996.
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 in substance foreclosures have also been reclassified.
These Statements prescribe recognition criteria for loan impairment,
generally related to commercial type loans and measurement methods for
impaired loans.
Non-performing loans. Non-performing loans totaled $21.9 million, up
$2.9 million, or 15.4% from June 30, 1995, and $8.0 million higher than at
December 31, 1995. The increase in non-performing loans is primarily in
loans on a nonaccrual basis and is primarily the result of weakening in
certain large commercial and commercial real estate credits, as well as
increased delinquency in the residential real estate portfolio. Delinquency
rates and recognition of a non-accrual status of loans in the residential
portfolio are lagging the regional and national trends but are consistent
with these trends.
With current economic trends and the growth in the loan portfolio,
management expects the level of non-performing loans will continue to
increase during the remainder of 1996.
Other real estate owned. Total other real estate owned was $1.3
million at June 30, 1996, as compared to $825 thousand at June 30, 1995, and
$1.2 million at year end 1995. Management does not expect any significant
increase in this balance during the remaining of 1996.
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 $4.0 million, or an annualized .48% of
average loans for the first six months of 1996, a decrease of $1.2 million
from the same period in 1995. Year to date recoveries of $2.3 million in
1996 were similar to the level of recoveries recorded during the same period
in 1995. Given the growth in the loan portfolio and the level of non-
performing assets, management expects an increased level of loan charge-offs
in the remainder 1996 as compared to that experienced in 1995.
The provision for loan losses ("provision") for the second quarter of
1996 was $1.3 million, or an annualized .30% of average loans. Provision
expense was $2.6 million during the six month period in 1996, .32% of
average loans on an annualized basis. Provisions of $2.1 million, or an
annualized .32% of average loans, and $4.4 million, or .33% of average loans
were experienced during the six months ended June 30, 1995 and the full year
of 1995, respectively. Based upon the above, it is anticipated that the
level of provision will increase in the subsequent quarters of 1996.
Provisions recorded are those necessary to maintain the allowance at a
level adequate to absorb reasonably predictable loan charge-offs. At June
30, 1996, the allowance provided a coverage of non-performing loans of
112.40% as compared to 109.89% and 158.15% at June 30, 1995 and December
31,1995, respectively. The allowance coverage of non-performing loans was
158.21% as of March 31, 1996.
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 $6.5 million for the quarter ended June
30, 1996, $1.2 million, or 21.9% higher than that recorded during the second
quarter of 1995. For the six months ended June 30, 1996 and 1995, other
operating income was $12.3 million and $10.3 million, respectively. The
addition of FMB accounted for approximately $773 thousand of the increase in
the three month period ended June 30, 1996 and $952 thousand in the six
month period then ended.
Income from trust activities, $3.7 million through June 30, 1995,
increased to $4.0 million in 1996. For the quarters ended June 30, 1996 and
1995, income from trust activities was $2.0 million and $1.9 million,
respectively. On February 1, 1996, the Company consolidated its subsidiary
banks' trust departments into a newly formed limited charter bank, The
Stratevest Group, N.A. 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 the remainder of 1996 will be improved over the same periods in 1995.
Service charges on depositor accounts were $1.8 million during the
second quarter of 1996, $471 thousand, or 35.7% higher than during the same
quarter of 1995. On a year to date basis, service charge income was $3.1
million, $575 thousand, or 22.5% higher than in the same period in 1995. The
aforementioned increases are primarily due to the addition of FMB which at
June 30, 1996 has just completed its first full quarter of operations.
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 will result in
increased gains recognized on the sale of the mortgage loans when servicing
rights are retained, offset by reduced loan servicing income from the
amortization of the capitalized mortgage servicing rights. Net loan
transactions, $358 thousand for the three months ended June 30, 1996,
increased significantly from $94 thousand during the second quarter of 1995.
This increase in income is directly related to the impact of accounting for
mortgage servicing rights under SFAS No.122. Of the total net loan
transactions for the quarter ended June 30, 1996, $249 thousand resulted
from recognition of income under SFAS No.122. On a year to date basis, of
the total net loan transactions of $959 thousand, $501 thousand resulted
from the recognition of income under SFAS No. 122.
Other income, $903 thousand for the three months ended June 30, 1996,
increased $278 thousand, or 44.5% over the same period in 1995. For the six
months ended June 30, 1996, other income was $1.6 million, $377 thousand, or
31.6% higher than in 1995. FMB accounted for approximately $187 thousand and
$227 thousand of the increases recognized during the three and six month
periods, respectively.
Other Operating Expenses
Other operating expenses for the second quarter of 1996 were $22.5
million, $5.1 million, or 29.6% above the second three months in 1995. For
the period ended June 30, 1996, other operating expenses were $44.7 million,
including start-up expenses for FMB and Stratevest of approximately $1.8
million. Other one-time expenses related to a data processing conversion and
the transition to a new incentive-based compensation system included in the
six month numbers were approximately $366 thousand. Recurring operating
expenses for First Massachusetts were approximately $5.7 million during the
second quarter of 1996 and $9.1 million for the six month period ended June
30, 1996. The Company's efficiency ratio which is adjusted to exclude
material one-time expenses as well as the amortization of goodwill, was
62.07% for the second quarter of 1996, down from 66.02% during the same
period in 1995.
Salary expense, the largest component of other operating expenses, was
$9.1 million during the second quarter of 1996, up $2.2 million or 32.9%
from 1995. A significant portion of the increase over 1995 is attributable
to FMB and increased staffing levels necessary to provide operational and
other support functions to First Massachusetts. Salary expense for the six
months ended June 30, 1996, was $17.4 million as compared to $13.6 million
during the same period of 1995. The addition of First Massachusetts as well
as increases in operations and support staff also caused the increase in
employee benefits expense.
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 $442 thousand in net occupancy expense over the second quarter
of 1995. Second quarter equipment and software expenses increased by $333
thousand, or 24.3% over 1995, with approximately half of the increase
related to FMB.
FDIC deposit insurance and other regulatory expense during the second
quarter of 1996, decreased $806 thousand from the same period in 1995,
bringing the year to date decrease to $1.6 million. The Federal Deposit
Insurance Corporation Improvement Act mandated a reduction in insurance
rates when the Bank Insurance Fund achieved a 1.25% reserve ratio. That
target was reached in May 1995 resulting in significantly lower insurance
premiums.
Other real estate owned (OREO) and repossession expenses, $78 thousand
during the three months ended June 30, 1996, increased $87 thousand over the
same period in 1995. The OREO expense for the three months ended June 30,
1995 were low due to net gains of $291 thousand recorded on the sale of OREO
properties.
Legal and professional expenses during the second quarter of 1996
increased by $209 thousand over the same quarter in 1995 due primarily to
consulting fees associated with the Company's long-range planning effort,
legal expenses relating to establishing trust activities in Massachusetts
and legal expenses relating to the Company's ongoing mergers and
acquisitions activities.
Printing and supplies expense was $572 thousand during the second
quarter of 1996, $120 thousand higher than during the same period in 1995.
The increase is related to one-time expenses associated with the Company's
new imaging system and the addition of FMB. For the six month period ended
June 30, 1996, printing and supplies expenses were $2.0 million as compared
to $901 thousand during 1995. The increase reflects first quarter 1996
expenses relating to the initial issuance of checks to FMB customers and the
issuance of new ATM and debit cards to the Company's customer base.
Advertising and marketing expenses returned to more normal levels at
$657 thousand during the three months ended June 30, 1996, an increase of
$64 thousand, or 10.8% over the same period in 1995. Non-recurring marketing
and advertising expenses relating to FMB, The Stratevest Group and the
ATM/debit card program totaled approximately $543 thousand during the six
month period ended June 30,1996.
Amortization of goodwill increased significantly to $1.3 million in
the second quarter of 1996 in comparison to the same period of 1995 due to
the amortization of the goodwill in FMB acquisition.
Other expenses, $3.1 million during the three months ended June 30,
1996, increased $667 thousand, or 27.7% from 1995 primarily due to the
addition of recurring expenses for First Massachusetts.
Income Taxes
In the second quarter of 1996, the Company recognized income tax
expense of $3.2 million, or 32.3% of the income before taxes. On a year to
date basis, tax expense was $5.5 million or 32.5% of 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 of 1,022,223 shares of its common stock.
During the second quarter of 1996, the board of directors declared a
dividend of $.25 per share, representing a payout of 28.7% of second quarter
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.
At June 30, 1996, Banknorth's Tier I capital was $161.0 million, or
9.12% of total risk adjusted assets, compared to $142.7 million and 10.92%
as of June 30, 1995. The leverage ratio was 6.72%, and 7.66% as of June 30,
1996 and 1995, respectively. Banknorth, and its subsidiaries individually,
are "well capitalized" at June 30, 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 June 30, % of Total Earning Assets
- ----------------------------------------------------------------------------------------------------------------------
Total
(Dollars in thousands) 1996 1995 Change Change 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
Loans, net of unearned income
and unamortized loan fees $1,746,552 $1,324,586 $421,966 85.2% 76.9% 74.5%
Securities available for sale:
U.S. Treasuries and agencies 82,381 38,275 44,106 8.9 3.6 2.2
Mortgage-backed securities 280,576 67,068 213,508 43.1 12.3 3.8
Other securities 83,270 23,990 59,280 12.0 3.7 1.3
- ------------------------------------------------------------------------------------------------------------------
Total securities available for
sale 446,227 129,333 316,894 64.0 19.6 7.3
Investment securities:
U.S. Treasuries and agencies 21,471 72,037 (50,566) (10.2) 0.9 4.0
Mortgage-backed securities 21,927 232,936 (211,009) (42.6) 1.0 13.1
States and political subdivisions 1,464 2,157 (693) (0.1) 0.1 0.1
Other securities 841 2,963 (2,122) (0.5) 0.0 0.2
- ------------------------------------------------------------------------------------------------------------------
Total investment securities 45,703 310,093 (264,390) (53.4) 2.0 17.4
Loans held for sale 15,668 10,197 5,471 1.1 0.7 0.6
Money market investments 18,522 3,035 15,487 3.1 0.8 0.2
- ------------------------------------------------------------------------------------------------------------------
Total earning assets $2,272,672 $1,777,244 $495,428 100.0% 100.0% 100.0%
==================================================================================================================
TABLE B.--Loan Portfolio
At June 30, At December 31,
----------------------------------------------------------------------- % Change % Change
1996 1995 1995 06/30/96 06/30/96
----------------------------------------------------------------------- vs. vs.
(Dollars in thousands) Amount Percent Amount Percent Amount Percent 06/30/95 12/31/95
- --------------------------------------------------------------------------------------------------------------------------------
Commercial, financial, and
agricultural $ 288,756 16.3% $ 220,763 16.5% $ 228,877 16.9% 30.8% 26.2%
Real Estate:
Construction and land
development 16,361 0.9 21,259 1.6 20,587 1.5 (23.0) (20.5)
Commercial 489,269 27.6 390,587 29.2 398,586 29.5 25.3 22.8
Residential 738,946 41.8 495,595 37.0 477,458 35.4 49.1 54.8
- -----------------------------------------------------------------------------------------------------
Total real estate 1,244,576 70.3 907,441 67.8 896,631 66.4 37.2 38.8
- -----------------------------------------------------------------------------------------------------
Credit card receivables 23,226 1.3 25,890 1.9 26,867 2.0 (10.3) (13.6)
Lease receivables 56,989 3.2 36,786 2.7 47,055 3.5 54.9 21.1
Other installment 156,792 8.9 148,531 11.1 151,623 11.2 5.6 3.4
- -----------------------------------------------------------------------------------------------------
Total installment 237,007 13.4 211,207 15.7 225,545 16.7 12.2 5.1
- -----------------------------------------------------------------------------------------------------
Total loans 1,770,339 100.0 1,339,411 100.0 1,351,053 100.0 32.2 31.0
Less: Allowance for loan
losses 24,669 1.4 20,907 1.6 22,095 1.6 18.0 11.6
- -----------------------------------------------------------------------------------------------------
Net loans $1,745,670 98.6% $1,318,504 98.4% $1,328,958 98.4% 32.4% 31.4%
=====================================================================================================
TABLE C.--Securities available for sale and investment securities
At June 30,
---------------------- At December 31,
1996 1995 1995
- ------------------------------------------------------------------------------------------------
(Dollars in thousands)
Securities available for sale:
U.S. Treasuries and agencies $ 88,366 $ 37,999 $ 76,401
States and political subdivisions 653 -- --
Mortgage-backed securities 277,694 65,202 249,549
Other securities 102,373 24,250 33,090
Valuation reserve (8,185) (1,534) 45
- -----------------------------------------------------------------------------------------
Recorded value of securities available for sale $460,901 $125,917 $359,085
=========================================================================================
Investment securities:
U.S. Treasuries and agencies $ 19,512 $ 69,126 $ 23,837
States and political subdivisions 1,574 2,136 1,630
Mortgage-backed securities 21,576 225,741 23,146
Other securities 711 2,897 1,067
- -----------------------------------------------------------------------------------------
Recorded value of investment securities $ 43,373 $299,900 $ 49,680
=========================================================================================
Fair value of investment securities $ 43,695 $302,164 $ 51,087
=========================================================================================
Excess of fair value over recorded value $ 322 $ 2,264 $ 1,407
Fair value as a % of recorded value 100.7% 100.8% 102.8%
TABLE D.--Average Balances, Yields, and Net Interest Margins
Three Months Ended June 30,
----------------------------------------------------------------------------
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 $ 18,522 $ 242 5.25% $ 3,035 $ 46 6.08%
Securities available for sale 446,227 6,626 5.97 129,333 1,991 6.17
Loans held for sale 15,668 303 7.78 10,197 207 8.14
Investment securities, at
amortized cost:
Taxable 44,239 782 7.11 307,936 4,815 6.27
Tax-exempt (Note 1) 1,464 24 6.59 2,157 30 5.58
- ----------------------------------------------------------------------------------------------------------------
Total investment securities 45,703 806 7.09 310,093 4,845 6.27
- ----------------------------------------------------------------------------------------------------------------
Loans, net of unearned income and
unamortized loan fees (Notes 1,2,3) 1,746,552 39,641 9.13 1,324,586 31,052 9.40
- ----------------------------------------------------------------------------------------------------------------
Total earning assets 2,272,672 47,618 8.43 1,777,244 38,141 8.61
---------------------------------------------------------
Cash and due from banks 82,463 57,183
Allowance for loan losses (24,618) (21,385)
Valuation reserve for securities
available for sale (7,540) (8,504)
and investment securities
Other assets 106,272 61,339
- ----------------------------------------------------------------------------------------
Total assets $2,429,249 $1,865,877
========================================================================================
Interest-bearing liabilities:
NOW accounts $ 236,419 759 1.29 $ 173,868 739 1.70
Money market savings 518,570 5,318 4.12 317,871 3,680 4.64
Regular savings 237,535 1,400 2.37 192,417 1,242 2.59
Time deposits $100 thousand and
greater 73,409 1,026 5.62 42,401 575 5.44
Time deposits under $100 thousand 702,667 9,189 5.26 507,372 6,645 5.25
Long-term debt 47,311 690 5.87 101,506 1,600 6.32
Short-term borrowings 138,632 1,676 4.86 183,021 2,598 5.69
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,954,543 20,058 4.13 1,518,456 17,079 4.51
- ----------------------------------------------------------------------------------------------------------------
Demand deposits
Other liabilities 261,437 186,609
Shareholders' equity 21,574 17,029
191,695 143,783
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $2,429,249 $1,865,877
========================================================================================
Net interest income $27,560 $21,062
==============================================
Interest rate differential 4.30% 4.10%
============================================
Net interest margin 4.88% 4.75%
============================================
Notes:
<F1> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such income at the Federal tax rate.
<F2> Includes principal balances of non-accrual loans.
<F3> Includes industrial revenue bonds.
TABLE D.--Average Balances, Yields, and Net Interest Margins
Six Months Ended June 30,
---------------------------------------------------------------------------
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 $ 23,369 $ 647 5.57% $ 6,224 $ 182 5.90%
Securities available for sale,
at amortized cost 417,871 12,676 6.10 127,994 3,940 6.21
Loans held for sale 16,432 603 7.38 10,000 404 8.15
Investment securities, at
amortized cost:
Taxable 45,567 1,627 7.18 311,090 9,692 6.28
Tax-exempt (Note 1) 1,470 47 6.43 2,009 55 5.52
- ----------------------------------------------------------------------------------------------------------------
Total investment securities 47,037 1,674 7.16 313,099 9,747 6.28
- ----------------------------------------------------------------------------------------------------------------
Loans, net of unearned income and
unamortized loan fees (Notes 1,2,3) 1,642,670 75,331 9.22 1,310,290 60,822 9.36
- ----------------------------------------------------------------------------------------------------------------
Total earning assets 2,147,379 90,931 8.52 1,767,607 75,095 8.57
---------------------------------------------------------
Cash and due from banks 80,919 57,571
Allowance for loan losses (23,860) (21,580)
Valuation reserve for securities
available for sale (3,949) (9,957)
and investment securities
Other assets 93,994 62,391
- ----------------------------------------------------------------------------------------
Total assets $2,294,483 $1,856,032
========================================================================================
Interest-bearing liabilities:
NOW accounts $ 224,239 1,519 1.36 $ 178,167 1,433 1.62
Money market savings 485,437 10,175 4.22 315,751 7,047 4.50
Regular savings 223,435 2,668 2.40 198,023 2,560 2.61
Time deposits $100 thousand and
greater 70,428 2,000 5.71 42,374 1,043 4.96
Time deposits under $100 thousand 659,939 17,666 5.38 496,691 12,452 5.06
Long-term debt 49,861 1,455 5.87 105,040 3,281 6.30
Short-term borrowings 126,567 3,092 4.91 175,488 4,893 5.62
- ----------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,839,906 38,575 4.22 1,511,534 32,079 4.36
- ----------------------------------------------------------------------------------------------------------------
Demand deposits
Other liabilities 249,686 186,632
Shareholders' equity 21,270 17,219
183,621 140,647
- ----------------------------------------------------------------------------------------
Total liabilities and shareholders'
equity $2,294,483 $1,856,032
========================================================================================
Net interest income $52,356 $42,386
==============================================
Interest rate differential 4.30% 4.21%
============================================
Net interest margin 4.90% 4.84%
============================================
Notes:
<F1> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such income 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 June 30, Change Total Net Funding
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 $ % 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Demand deposits $ 261,437 $ 186,609 $ 74,828 40.1% 12.3% 11.3% 11.9%
Retail deposits:
Regular savings 237,535 192,417 45,118 23.4 11.1 11.7 13.7
Time deposits under $100
thousand 702,667 507,372 195,295 38.5 33.0 30.8 30.5
NOW accounts 236,419 173,868 62,551 36.0 11.1 10.5 11.2
Money market savings 518,570 317,871 200,699 63.1 24.3 19.3 15.6
- ------------------------------------------------------------------------------------------------------------------------
Total retail deposits 1,695,191 1,191,528 503,663 42.3 79.5 72.3 71.0
- ------------------------------------------------------------------------------------------------------------------------
Total core deposits 1,956,628 1,378,137 578,491 42.0 91.8 83.6 82.9
Less: Cash and due from banks 82,463 57,183 25,280 44.2 3.9 3.4 4.2
- ------------------------------------------------------------------------------------------------------------------------
Net core deposits 1,874,165 1,320,954 553,211 41.9 87.9 80.2 78.7
- ------------------------------------------------------------------------------------------------------------------------
Time deposits $100 thousand and
greater 73,409 42,401 31,008 73.1 3.4 2.6 2.8
Federal funds purchased 3,827 8,963 (5,136) (57.3) 0.2 0.5 0.4
Securities sold under agreements
to repurchase 101,377 105,128 (3,751) (3.6) 4.8 6.4 5.3
Borrowings from U.S. Treasury 6,857 7,188 (331) (4.6) 0.3 0.4 0.7
Other short-term borrowings 26,571 61,742 (35,171) (57.0) 1.2 3.7 4.1
Long-term note from FHLB 31,561 81,568 (50,007) (61.3) 1.5 5.0 8.0
- ------------------------------------------------------------------------------------------------------------------------
Total purchased liabilities 243,602 306,990 (63,388) (20.6) 11.4 18.6 21.3
Bank term loan 15,750 19,938 (4,188) (21.0) 0.7 1.2 --
- ------------------------------------------------------------------------------------------------------------------------
Total capital market funds 15,750 19,938 (4,188) (21.0) 0.7 1.2 --
- ------------------------------------------------------------------------------------------------------------------------
Total net funding $2,133,517 $1,647,882 $485,635 29.5% 100.0% 100.0% 100.0%
========================================================================================================================
TABLE F.--Volume and Yield Analysis
1996 vs. 1995
-------------------------------------------------------------
Three Months Ended
June 30,
-------------------- Increase Due to
(In thousands) 1996 1995 (Decrease) Volume Rate
- -------------------------------------------------------------------------------------------------
Interest income (FTE):
Money market investments $ 242 $ 46 $ 196 $ 202 $ (6)
Securities available for sale 6,626 1,991 4,635 4,699 (64)
Loans held for sale 303 207 96 105 (9)
Investment securities:
Taxable 782 4,815 (4,033) (4,676) 643
Tax-exempt 24 30 (6) (11) 5
- ------------------------------------------------------------------------------------------------
Total investments 806 4,845 (4,039) (4,687) 648
- ------------------------------------------------------------------------------------------------
Loans 39,641 31,052 8,589 9,478 (889)
- ------------------------------------------------------------------------------------------------
Total interest income 47,618 38,141 9,477 9,797 (320)
- ------------------------------------------------------------------------------------------------
Interest expense:
NOW accounts 759 739 20 197 (177)
Money market savings 5,318 3,680 1,638 2,049 (411)
Regular savings 1,400 1,242 158 251 (93)
Time deposits $100 thousand
and greater 1,026 575 451 432 19
Time deposits under $100
thousand 9,189 6,645 2,544 2,531 13
Long-term debt 690 1,600 (910) (796) (114)
Short-term borrowings 1,676 2,598 (922) (544) (378)
- ------------------------------------------------------------------------------------------------
Total interest expense 20,058 17,079 2,979 4,120 (1,141)
- ------------------------------------------------------------------------------------------------
Net interest income (FTE) $27,560 $21,062 $6,498 $5,677 $ 821
================================================================================================
Increases and decreases in interest income and interest expense due to both
rate and volume have been allocated to volume on a consistent basis.
1996 vs. 1995
-------------------------------------------------------------
Six Months Ended
June 30,
-------------------- Increase Due to
(In thousands) 1996 1995 (Decrease) Volume Rate
- -------------------------------------------------------------------------------------------------
Interest income (FTE):
Money market investments $ 647 $ 182 $ 465 $ 475 $ (10)
Securities available for sale 12,676 3,940 8,736 8,806 (70)
Loans held for sale 603 404 199 237 (38)
Investment securities:
Taxable 1,627 9,692 (8,065) (9,457) 1,392
Tax-exempt 47 55 (8) (17) 9
- -------------------------------------------------------------------------------------------------
Total investments 1,674 9,747 (8,073) (9,474) 1,401
- -------------------------------------------------------------------------------------------------
Loans 75,331 60,822 14,509 15,421 (912)
- -------------------------------------------------------------------------------------------------
Total interest income 90,931 75,095 15,836 15,465 371
- -------------------------------------------------------------------------------------------------
Interest expense:
NOW accounts 1,519 1,433 86 316 (230)
Money market savings 10,175 7,047 3,128 3,568 (440)
Regular savings 2,668 2,560 108 303 (195)
Time deposits $100 thousand
and greater 2,000 1,043 957 799 158
Time deposits under $100
thousand 17,666 12,452 5,214 4,424 790
Long-term debt 1,455 3,281 (1,826) (1,601) (225)
Short-term borrowings 3,092 4,893 (1,801) (1,181) (620)
- -------------------------------------------------------------------------------------------------
Total interest expense 38,575 32,709 5,866 6,628 (762)
- -------------------------------------------------------------------------------------------------
Net interest income (FTE) $52,356 $42,386 $ 9,970 $ 8,837 $ 1,133
=================================================================================================
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
June 30, December 31, June 30,
(Dollars in thousands) 1996 1995 1995
- --------------------------------------------------------------------------------------------
Loans on a non-accrual basis:
Commercial, financial and agricultural $ 3,076 $ 648 $ 1,234
Real estate:
Construction and land development 73 103 210
Commercial 6,852 3,993 9,013
Residential 9,511 7,625 7,197
- -------------------------------------------------------------------------------------------
Total non-accrual 19,512 12,369 17,654
- -------------------------------------------------------------------------------------------
Restructured loans:
Real estate:
Commercial 828 288 259
Residential 83 85 67
Other installment 6 55 130
- -------------------------------------------------------------------------------------------
Total restructured 917 428 456
- -------------------------------------------------------------------------------------------
Past-due 90 days or more and still accruing
interest:
Commercial, financial and agricultural 209 87 210
Real estate:
Commercial 371 64 187
Residential 73 396 129
Credit card 138 105 180
Other installment 727 522 209
- -------------------------------------------------------------------------------------------
Total past-due 90 days or more and still
accruing interest 1,518 1,174 915
- -------------------------------------------------------------------------------------------
Total non-performing loans 21,947 13,971 19,025
- -------------------------------------------------------------------------------------------
Foreclosed real estate 1,301 1,169 825
Insubstance foreclosed real estate -- -- --
- -------------------------------------------------------------------------------------------
Total other real estate owned (OREO) 1,301 1,169 825
- -------------------------------------------------------------------------------------------
Total non-performing assets (NPA) $23,248 $15,140 $19,850
===========================================================================================
Allowance for loan losses (ALL) $24,669 $22,095 $20,907
Coverage of non-performing loans 112.40% 158.15% 109.89%
Non-performing assets as a % of (loans & OREO) 1.31% 1.12% 1.48%
Non-performing assets to total assets 0.95% 0.79% 1.04%
TABLE H.--Summary of Loan Loss Experience
Six Months Year Six Months
Ended Ended Ended
June 30, December 31, June 30,
(Dollars in thousands) 1996 1995 1995
- -------------------------------------------------------------------------------------------------------
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 (313) (1,283) (629)
Real estate:
Construction and land development -- (357) (300)
Commercial (768) (2,287) (1,689)
Residential (702) (1,833) (903)
- -------------------------------------------------------------------------------------------------------
Total real estate (1,470) (4,477) (2,892)
Consumer (2,198) (3,401) (1,621)
- -------------------------------------------------------------------------------------------------------
Total loans charged-off (3,981) (9,161) (5,142)
- -------------------------------------------------------------------------------------------------------
Recoveries on loans:
Commercial, financial and agricultural 357 1,597 772
Real estate:
Construction and land development 36 540 209
Commercial 699 1,430 418
Residential 219 302 181
- -------------------------------------------------------------------------------------------------------
Total real estate 954 2,272 808
- -------------------------------------------------------------------------------------------------------
Consumer 994 1,575 907
- -------------------------------------------------------------------------------------------------------
Total recoveries on loans 2,305 5,444 2,487
- -------------------------------------------------------------------------------------------------------
Loans charged-off, net of recoveries (1,676) (3,717) (2,655)
- -------------------------------------------------------------------------------------------------------
Provision for loan losses 2,600 4,375 2,125
- -------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of period $ 24,669 $ 22,095 $ 20,907
=======================================================================================================
Loans outstanding-end of period $1,770,339 $1,351,053 $1,339,411
Average loans outstanding-period to date 1,642,670 1,329,188 1,310,290
Loans charged-off, net (annualized), as a % of
average total loans 0.20% 0.28% 0.41%
Provision for loan losses (annualized) as a %
of average total loans 0.32% 0.33% 0.32%
Allowance for loan losses as a % of period-end total
loans 1.39% 1.64% 1.56%
TABLE I.--Capital Ratios
6/30/96 3/31/96 12/31/95 9/30/95 6/30/95
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Total risk-adjusted on-balance-sheet assets $1,659,773 $1,610,790 $1,272,079 $1,282,863 $1,242,524
Total risk-adjusted off-balance-sheet items 106,200 95,512 76,432 66,160 63,749
- ------------------------------------------------------------------------------------------------------------------------------
Total risk-adjusted assets $1,765,973 $1,706,302 $1,348,511 $1,349,023 $1,306,273
==============================================================================================================================
Total risk-adjusted assets/average total assets,
net of fair value adjustment and goodwill (1) 73.71% 80.38% 71.77% 71.11% 70.18%
Total shareholders' equity $ 194,430 $ 191,721 $ 159,936 $ 151,924 $ 147,282
Fair value adjustment (1) 5,320 3,153 (29) 3,652 4,446
Other adjustments to Tier I capital (38,744) (40,063) (8,553) (8,711) (9,071)
- ------------------------------------------------------------------------------------------------------------------------------
Total Tier I capital 161,006 154,811 151,354 146,865 142,657
Maximum allowance for loan losses (2) 22,107 21,364 16,921 16,919 16,385
- ------------------------------------------------------------------------------------------------------------------------------
Total capital $ 183,113 $ 176,175 $ 168,275 $ 163,784 $ 159,042
==============================================================================================================================
Average total assets, net of fair value
adjustment and goodwill (1) $2,395,825 $2,122,778 $1,879,047 $1,896,991 $1,861,252
Allowance for loan losses 24,669 24,183 22,095 21,410 20,907
Leverage Ratio (average assets) 6.72% 7.29% 8.05% 7.74% 7.66%
Tier I capital/total risk-adjusted assets 9.12 9.07 11.22 10.89 10.92
Total capital/total risk-adjusted assets 10.37 10.32 12.48 12.14 12.18
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 data) Q2 Q1 Q4 Q3 Q2 Q1
- --------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME:
Interest income $ 47,454 $ 43,133 $ 38,643 $ 39,214 $ 37,967 $ 36,800
Interest expense 20,058 18,517 17,508 17,763 17,079 15,630
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 27,396 24,616 21,135 21,451 20,888 21,170
Provision for loan losses 1,300 1,300 1,125 1,125 1,125 1,000
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 26,096 23,316 20,010 20,326 19,763 20,170
- --------------------------------------------------------------------------------------------------------------------------------
Other income:
Income from trust activities 2,005 1,996 1,835 1,879 1,890 1,822
Service charges on depositor
accounts 1,792 1,340 1,226 1,298 1,321 1,236
Credit card 728 599 842 684 665 598
Loan servicing 670 679 679 649 655 718
Net loan transactions 358 601 217 165 94 92
Net securities transactions -- 3 9 (471) 46 7
Net gain (loss) on sales of fixed
and other assets 9 -- (86) 222 7 (5)
All other 894 668 697 727 618 574
- --------------------------------------------------------------------------------------------------------------------------------
Total other income 6,456 5,886 5,419 5,153 5,296 5,042
Other expenses:
Salaries 9,053 8,375 7,661 7,104 6,814 6,737
Employee benefits 2,146 2,171 1,457 1,589 1,656 1,787
Net occupancy expenses 1,767 1,786 1,388 1,343 1,325 1,431
Equipment and software expenses 1,701 1,433 1,400 1,400 1,368 1,351
Data processing fees 1,209 1,108 1,242 1,125 1,076 1,186
FDIC deposit insurance and other
regulatory expenses 99 99 234 9 905 914
OREO and repossession expenses 78 30 (95) 347 (9) 277
Amortization of goodwill 1,319 731 157 157 159 159
All other 5,138 6,420 4,558 4,313 4,078 3,986
- --------------------------------------------------------------------------------------------------------------------------------
Total other expenses 22,510 22,153 18,002 17,387 17,372 17,828
- --------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 10,042 7,049 7,427 8,092 7,687 7,384
Income tax expense 3,248 2,299 1,596 2,266 2,213 2,142
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 6,794 $ 4,750 $ 5,831 $ 5,826 $ 5,474 $ 5,242
================================================================================================================================
AVERAGE BALANCES:
Loans $1,746,552 $1,538,784 $1,352,356 $1,343,177 $1,324,586 $1,295,777
Loans held for sale 15,668 17,196 16,309 15,647 10,197 9,866
Securities available for sale 446,227 389,515 191,408 128,822 129,333 126,610
Investment securities 45,703 48,371 216,701 301,023 310,093 316,155
Money market investments 18,522 28,216 10,717 15,595 3,035 9,448
- --------------------------------------------------------------------------------------------------------------------------------
Total earning assets 2,272,672 2,022,082 1,787,491 1,804,264 1,777,244 1,757,856
Other assets 156,577 137,606 100,138 97,786 88,633 89,052
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $2,429,249 $2,159,688 $1,887,629 $1,902,050 $1,865,877 $1,846,908
================================================================================================================================
Demand deposits $ 261,437 $ 227,571 $ 205,354 $ 199,122 $ 186,609 $ 187,790
Interest-bearing deposits 1,768,600 1,558,369 1,307,950 1,266,310 1,233,929 1,227,791
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 2,030,037 1,785,940 1,513,304 1,465,432 1,420,538 1,415,581
Short-term borrowings 138,632 124,853 129,836 176,809 183,021 167,810
Long-term debt 47,311 52,411 72,534 94,169 101,506 108,613
Other liabilities 21,574 20,966 17,678 17,695 17,029 17,412
Shareholders' equity 191,695 175,518 154,277 147,945 143,783 137,492
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $2,429,249 $2,159,688 $1,887,629 $1,902,050 $1,865,877 $1,846,908
================================================================================================================================
Loans charged-off, net of recoveries $ 814 $ 862 $ 440 $ 622 $ 1,771 $ 884
Non-performing assets, p.e. 23,248 15,909 15,140 17,954 19,850 21,112
SHARE DATA:
Shares outstanding, p.e. 7,826,648 7,826,648 6,804,425 6,804,425 6,804,425 6,804,425
Weighted average shares
outstanding 7,826,648 7,332,386 6,804,425 6,804,425 6,804,425 6,804,425
Tangible book value, p.e. $ 19.89 $ 19.38 $ 22.25 $ 21.05 $ 20.31 $ 19.42
Cash dividends declared 0.25 0.25 0.23 0.23 0.23 0.23
Net income 0.87 0.65 0.86 0.86 0.80 0.77
Closing price at quarter end 34.25 35.25 38.50 33.25 26.88 23.50
Cash dividends declared as a %
of net income 28.74% 38.46% 26.74% 26.74% 28.75% 29.87%
RATIOS:
Return on average assets 1.12% 0.88% 1.23% 1.22% 1.18% 1.15%
Return on average shareholders'
equity 14.25 10.88 15.00 15.62 15.27 15.46
Net interest margin, fte 4.88 4.93 4.73 4.76 4.75 4.85
Efficiency ratio 62.07 62.73 66.94 65.73 66.02 66.01
Expense ratio 2.59 2.66 2.76 2.75 2.74 2.85
As a % of risk-adjusted assets:
Total capital 10.37 10.32 12.48 12.14 12.18 12.12
Tier 1 capital 9.12 9.07 11.22 10.89 10.92 10.86
As a % of average total assets:
Tier 1 capital (regulatory
leverage) 6.72 7.29 8.05 7.74 7.66 7.51
Tangible shareholders equity, p.e.
to tangible assets, p.e 6.44 6.39 7.96 7.49 7.30 7.13
Price earnings ratio (last twelve
months) 10.6 11.1 11.7 10.1 8.8 8.5
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders at the
Annual Meeting of Shareholders' of Banknorth Group, Inc. on May 14, 1996:
1. To elect five directors to serve until 1998 Annual Meeting for
Shareholders
2. To ratify the selection of independent auditors of the Company for 1996.
The results of the vote were as follows:
VOTES CAST
WITHHELD/ BROKER
MATTER FOR AGAINST ABSTAIN NON-VOTE
-------------------------------------------------------------------------
Nordahl Brue 5,430,442 -- 111,963 N/A
Kathleen Hoisington 5,413,556 -- 129,349 N/A
R. Allan Paul 5,416,263 -- 126,142 N/A
Angelo Pizzagelli 5,399,701 -- 142,704 N/A
Thomas Salmon 5,402,431 -- 139,974 N/A
Selecton of Auditors
KPMG Peat Marwick 5,506,284 21,921 14,200 N/A
Broker non-votes are not applicable as no non-routine items were voted upon
during the 1995 Annual Meeting of Shareholders.
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: 8/13/96 /s/ William H. Chadwick
-------------------------------
William H. Chadwick
President and Chief Executive Officer
Date: 8/13/96 /s/ Thomas J. Pruitt
-------------------------------
Thomas J. Pruitt
Executive Vice President and Chief
Financial Officer