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 September 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 [ ]
7,826,648 shares of common stock, $l.00 par, outstanding on September 30, 1996.
INDEX TO FORM 10-Q
PART I Page
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Third Quarter 1996 Financial Highlights (Unaudited) 1
Item l Financial Statements
Consolidated Statements of Income For the Three Months and
Nine Months Ended September 30, 1996 and 1995 (All unaudited) 2
Consolidated Balance Sheets at September 30, 1996 (Unaudited),
December 31, 1995 and September 30, 1995 (Unaudited) 3
Statements of Changes in Shareholders' Equity For the Year
Ended December 31, 1995 and January 1, 1996 to
September 30, 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1996 and 1995 (Both unaudited) 5
Notes to Unaudited Consolidated Interim Financial Statements 6
Independent Auditors' Report 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II
- --------------------------------------------------------------------------------
Item 1 Legal Proceedings N/A
Item 2 Changes in Securities N/A
Item 3 Defaults Upon Senior Securities N/A
Item 4 Submission of Matters to a Vote of Security Holders N/A
Item 5 Other Information N/A
Item 6 Exhibits and Reports on Form 8-K N/A
Signatures 27
Glossary 28
3RD QUARTER 1996 FINANCIAL HIGHLIGHTS (UNAUDITED)
(Dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------
1996 1995 1996 1995
-----------------------------------------------------------
INCOME DATA
Net interest income, taxable equivalent $ 28,391 $ 21,640 $ 80,747 $ 64,025
Net interest margin 4.83% 4.76% 4.88% 4.81%
Net income $ 6,813 $ 5,826 $ 18,357 $ 16,542
PERIOD END BALANCES
Assets $ 2,511,700 $1,919,585 $ 2,511,700 $1,919,585
Earning assets 2,339,554 1,801,413 2,339,554 1,801,413
Goodwill 37,448 8,711 37,448 8,711
Loans 1,820,094 1,351,338 1,820,094 1,351,338
Deposits 2,058,673 1,489,610 2,058,673 1,489,610
Short-term borrowings 190,644 164,225 190,644 164,225
Long-term debt 43,143 91,296 43,143 91,296
Shareholders' equity 199,800 151,924 199,800 151,924
AVERAGE BALANCES
Assets $ 2,494,376 $1,902,050 $ 2,361,620 $1,871,555
Earning assets, net of fair value adjustment 2,336,619 1,804,224 2,210,923 1,779,937
Goodwill 38,266 8,898 33,803 9,131
Loans 1,797,510 1,343,177 1,694,663 1,321,375
Deposits 2,060,730 1,465,432 1,962,312 1,434,115
Short-term borrowings 172,217 176,809 142,295 175,563
Long-term debt 44,713 94,169 48,132 101,377
Shareholders' equity 195,290 147,945 187,558 143,121
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 7,662,495 6,804,425
Net income $ 0.87 $ 0.86 $ 2.40 $ 2.43
Cash dividends declared 0.25 0.23 0.75 0.69
Market price:
High 37.50 35.00 38.50 35.00
Low 31.50 26.25 31.50 21.75
Close 37.38 33.25 37.38 33.25
Share volume 661,529 812,154 2,904,788 1,641,798
Average monthly share volume 220,510 270,718 322,754 182,422
Book value 25.53 22.33 25.53 22.33
Tangible book value 20.74 21.05 20.74 21.05
KEY RATIOS
Return on average assets 1.09% 1.22% 1.04% 1.18 %
Return on average shareholders' equity 13.88 15.62 13.07 15.45
Efficiency ratio 61.33 65.73 62.01 65.91
Net loan charge-offs to average loans 0.42 0.19 0.28 0.33
Provision for loan losses to average loans 0.33 0.34 0.32 0.33
Allowance for loan losses to loans, p.e. 1.33 1.58 1.33 1.58
Allowance for loan losses coverage of non-performing
loans, p.e. 108.99 125.78 108.99 125.78
Non-performing assets to total assets, p.e. 0.93 0.94 0.93 0.94
Total capital to risk-adjusted assets, p.e. 10.45 12.14 10.45 12.14
Tier 1 capital to risk-adjusted assets, p.e. 9.19 10.89 9.19 10.89
Tier 1 capital to quarterly average total assets
(Leverage) 6.78 7.74 6.78 7.74
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------
(In thousands, except for per share amounts) 1996 1995 1996 1995
---------------------------------------------------
Interest income:
Interest and fees on loans $ 41,109 $ 32,296 $ 116,714 $ 93,211
Interest on money market investments 132 225 778 407
Interest on securities available for sale 7,227 2,042 19,903 5,982
Interest on investment securities 707 4,651 2,367 14,381
---------------------------------------------------
Total interest income 49,175 39,214 139,762 113,981
Interest expense:
Deposits 18,113 13,889 52,141 38,424
Short-term borrowed funds 2,127 2,405 5,220 7,298
Long-term debt 659 1,469 2,113 4,750
---------------------------------------------------
Total interest expense 20,899 17,763 59,474 50,472
---------------------------------------------------
Net interest income 28,276 21,451 80,288 63,509
Less: provision for loan losses 1,500 1,125 4,100 3,250
---------------------------------------------------
Net interest income after provision for loan losses 26,776 20,326 76,188 60,259
---------------------------------------------------
Other operating income:
Income from fiduciary activities 2,084 1,879 6,085 5,591
Service charges on depositor accounts 1,692 1,298 4,824 3,855
Credit card income 764 684 2,091 1,947
Loan servicing income 795 649 2,144 2,022
Net loan transactions 257 165 1,216 351
Net securities transactions 21 (471) 24 (418)
Other income 844 949 2,415 2,143
---------------------------------------------------
Total other operating income 6,457 5,153 18,799 15,491
Other operating expenses:
Salaries 9,278 7,104 26,706 20,655
Employee benefits 2,057 1,589 6,374 5,032
Net occupancy expenses 1,669 1,343 5,222 4,099
Equipment and software expenses 1,569 1,400 4,703 4,119
Data processing fees 1,111 1,125 3,428 3,387
FDIC deposit insurance and other regulatory expenses 134 9 332 1,828
Other real estate owned and repossession expenses 267 347 375 615
Legal and professional fees 924 636 2,614 2,054
Printing and supplies expenses 603 489 2,601 1,390
Advertising and marketing expenses 701 571 2,455 1,576
Amortization of goodwill 1,297 157 3,347 476
Other expenses 3,566 2,617 9,682 7,356
---------------------------------------------------
Total other operating expenses 23,176 17,387 67,839 52,587
---------------------------------------------------
Income before income taxes 10,057 8,092 27,148 23,163
Income tax expense 3,244 2,266 8,791 6,621
---------------------------------------------------
Net income $ 6,813 $ 5,826 $ 18,357 $ 16,542
===================================================
Net income per share $ 0.87 $ 0.86 $ 2.40 $ 2.43
===================================================
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
September 30, December 31, September 30,
1996 1995 1995
------------------------------------------
(In thousands except share and per share data) (Unaudited) (Unaudited)
ASSETS
Cash and due from banks $ 91,706 $ 89,111 $ 63,177
Money market investments 50 650 9,150
----------------------------------------
Cash and cash equivalents 91,756 89,761 72,327
----------------------------------------
Securities available for sale, at fair value 468,154 359,085 134,193
Loans held for sale 12,935 19,125 15,438
Investment securities 38,321 49,680 291,294
Loans 1,820,094 1,351,053 1,351,338
Less: Allowance for loan losses 24,284 22,095 21,410
----------------------------------------
Net loans 1,795,810 1,328,958 1,329,928
----------------------------------------
Accrued interest receivable 15,243 11,505 13,757
Premises, equipment and software, net 29,256 24,917 24,617
Other real estate owned and repossessed assets 1,049 1,169 932
Goodwill 37,448 8,553 8,711
Capitalized mortgage servicing rights 3,875 3,530 3,663
Other assets 17,853 13,891 24,725
----------------------------------------
Total assets $ 2,511,700 $ 1,910,174 $ 1,919,585
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Demand deposits $ 288,317 $ 228,334 $ 207,130
NOW accounts 229,172 200,085 176,308
Money market savings 526,062 363,107 348,126
Regular savings 225,123 173,565 182,703
Time deposits $100 thousand and greater 83,255 59,233 54,092
Time deposits under $100 thousand 706,744 536,445 521,251
----------------------------------------
Total deposits 2,058,673 1,560,769 1,489,610
----------------------------------------
Short-term borrowed funds:
Federal funds purchased 8,400 -- 3,000
Securities sold under agreements to repurchase 111,713 95,472 98,948
Borrowings from U.S. Treasury 22,531 8,241 14,777
Borrowings from Federal Home Loan Bank of Boston 48,000 12,500 47,500
----------------------------------------
Total short-term borrowed funds 190,644 116,213 164,225
----------------------------------------
Long-term debt:
Federal Home Loan Bank of Boston term notes 29,493 39,197 73,446
Bank term loan 13,650 16,800 17,850
----------------------------------------
Total long-term debt 43,143 55,997 91,296
----------------------------------------
Accrued interest payable 4,267 3,914 4,539
Other liabilities 15,173 13,345 17,991
----------------------------------------
Total liabilities 2,311,900 1,750,238 1,767,661
----------------------------------------
Shareholders' equity:
Common stock, $1.00 par value; authorized 20,000,000 shares;
issued and outstanding 7,826,648 shares at September 30, 1996
and 6,804,425 at December 31, 1995 and September 30, 1995 7,827 6,804 6,804
Surplus 87,227 56,023 55,821
Retained earnings 110,339 97,978 93,799
Unamortized employee restricted stock (1,037) (898) (848)
Net unrealized gains (losses) on securities available for sale,
net of tax (4,556) 29 (498)
Net unrealized losses on securities available for sale
transferred to the investment portfolio, net of tax -- -- (3,154)
----------------------------------------
Total shareholders' equity 199,800 159,936 151,924
----------------------------------------
Total liabilities and shareholders' equity $ 2,511,700 $ 1,910,174 $ 1,919,585
========================================
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
------------------------------------------------------------------------------
Net income -- -- 6,813 -- -- 6,813
Decrease in net unrealized losses on
securities available for sale, net of tax -- -- -- -- 764 764
Cash dividends $.25 per share -- -- (1,957) -- -- (1,957)
Amortization of employee restricted stock -- 175 -- (17) -- 158
Issuance of employee restricted stock -- -- -- (371) -- (371)
Exercise of employee stock options -- -- (37) -- -- (37)
------------------------------------------------------------------------------
Balance, September 30, 1996 $ 7,827 $ 87,227 $ 110,339 $ (1,037) $ (4,556) $ 199,800
==============================================================================
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
---------------------------------
1996 1995
---------------------------------
(In thousands) (Unaudited) Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 18,357 $ 16,542
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization of premises, equipment and software 3,159 3,168
Amortization of goodwill 3,347 476
Provision for loan losses 4,100 3,250
Adjustment of other real estate owned to estimated fair value 174 157
Provision for deferred tax expense (benefit) 890 (1,680)
Amortization of employee restricted stock 243 255
Exercise of employee stock options (125) (224)
Net securities transactions (24) 418
Net gain on sale of other real estate owned (378) (544)
Proceeds from sale of loans held for sale 133,082 92,138
Originations and purchases of loans held for resale (158,818) (113,811)
Net gain on sale of loans held for sale (547) (351)
Net gain on capitalization of mortgage servicing rights (669) --
Increase in interest receivable (3,738) (2,372)
Increase (decrease) in interest payable 353 (39)
Decrease (increase) in other assets and other intangibles (2,202) 220
Increase (decrease) in other liabilities 1,828 (1,338)
---------------------------
Total adjustments (19,325) (20,277)
---------------------------
Net cash used in operating activities (968) (3,735)
---------------------------
Cash flows from investing activities:
Proceeds from maturity and call of securities available for sale 170,023 9,863
Proceeds from maturity and call of investment securities 11,402 27,479
Proceeds from sale of securities available for sale 20,235 15,283
Purchase of securities available for sale (306,401) (41,856)
Purchase of investment securities -- (533)
Proceeds from sale of OREO and repossessed assets 1,964 1,811
Payments received on OREO and repossessed assets 32 222
Branches purchased-Loans acquired (396,942) --
Net loans purchased (38,189) --
Net increase in loans (5,020) (39,981)
Capital expenditures (7,509) (2,705)
Proceeds from sale of fixed assets and other assets 21 274
---------------------------
Net cash used in investing activities (550,384) (30,143)
---------------------------
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 (60,610) 46,143
Net increase in short-term borrowings 74,431 9,079
Issuance of common stock, net of expenses 32,216 --
Payments on long term debt (12,854) (30,293)
Issuance of restricted stock awards (371) (361)
Dividends paid (5,871) (4,695)
---------------------------
Net cash provided by financing activities 553,347 19,873
---------------------------
Net increase (decrease) in cash and cash equivalents 1,995 (14,005)
---------------------------
Cash and cash equivalents at beginning of period 89,761 86,332
---------------------------
Cash and cash equivalents at end of period $ 91,756 $ 72,327
===========================
Additional disclosure relative to statement of cash flows:
Interest paid $ 59,121 $ 50,511
===========================
Taxes paid $ 10,602 $ 5,285
===========================
Supplemental schedule of non-cash investing and financing activities:
Net transfer of loans to OREO and repossessed assets $ 1,672 $ 1,152
Net transfer of loans held for sale to loan status 32,473 35,652
Amounts payable for securities available for sale purchased -- 5,785
Amounts receivable for securities available for sale sold -- 12,629
Decrease (increase) in net unrealized losses on securities available for
sale, net of tax (4,585) 4,093
Decrease in net unrealized losses on securities available for sale,
transferred to held to maturity, net of tax -- 750
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 Banknorth Group, Inc. and its subsidiaries (the
"Company"), 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 September 30, 1996, the
Consolidated Statements of Income for the three and nine months ended September
30, 1996 and 1995, the Consolidated Statements of Changes in Shareholders'
Equity for the three months ended March 31, 1996, June 30, 1996 and September
30, 1996, and the Consolidated Statements of Cash Flows for the nine months
ended September 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 7,662,495 and 6,804,425
weighted average shares issued and outstanding during the nine month periods
ended September 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 $669 thousand in
mortgage servicing rights and increase the gains or decrease the losses on the
sale of these loans originated in the first nine 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
allocated cost of the servicing rights, derived from a relative fair value
calculation, 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 nine months ended September 30, 1996 (in
thousands):
- ----------------------------------------------------------------------------------------------------------------
Purchased Originated Excess Total
--------------------------------------------------
Balance at January 1, 1996 $ 3,311 $ -- $ 169 $ 3,480
Additions 430 669 9 1,108
Amortization (637) (50) (26) (713)
--------------------------------------------------
Balance as of September 30, 1996 $ 3,104 $ 619 $ 152 $ 3,875
==================================================
- ----------------------------------------------------------------------------------------------------------------
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 September 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 $4.7 million at
September 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 $524.4 million
of mortgage loans serviced for third parties. In addition, the Company services
approximately $459.2 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 September 30, 1996 and 1995, and the
related consolidated statements of income for the three and nine month periods
ended September 30, 1996 and 1995, and the consolidated statements of cash
flows for the nine month periods ended September 30, 1996 and 1995, and changes
in shareholders' equity for the three month periods ended March 31, 1996, June
30, 1996 and September 30, 1996. These consolidated financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Banknorth Group, Inc. and 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 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/ KMPG PEAT MARWICK LLP
October 25, 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 nine months ended September 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. Amounts in prior
period financial statements are reclassified whenever necessary to conform to
the current periods' 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
facts. The Company wishes to caution readers that the following important
factors, among others, could in the future affect the Company's actual results
and could cause the Company's actual results for subsequent periods to differ
materially from those expressed in any forward-looking statement made by or on
behalf of the Company herein:
* the effect of changes in laws and regulations, including federal and
state banking laws and regulations, with which the Company and its
banking subsidiaries must comply, the cost of such compliance and the
potentially material adverse effects if the Company or any of its
banking subsidiaries were not in substantial compliance either
currently or in the future as applicable;
* the effect of changes in accounting policies and practices, as may be
adopted by the regulatory agencies as well as by the Financial
Accounting Standards Board, or changes in the Company's organization,
compensation and benefit plans;
* the effect on the Company's competitive position within its market
area of increasing consolidation within the banking industry and
increasing competition from larger "super regional" and other
out-of-state banking organizations as well as nonbank providers of
various financial services;
* uncertainties due to a lack of operating history of the Company's
Massachusetts subsidiary;
* the effect of unforeseen changes in interest rates;
* the effects of changes in the business cycle and downturns in the
local, regional or national economies.
OVERVIEW
Banknorth recorded net income of $6.8 million, or $.87 per share for the
three months ended September 30, 1996, as compared to $5.8 million, or $.86 per
share recorded in the same period in 1995. For the year to date period ended
September 30, 1996, net income was $18.4 million, or $2.40 per share, as
compared to $16.5 million and $2.43 per share in 1995.
During the third quarter of 1996:
* The Company earned a return on average shareholders' equity of 13.88%
* The return on average assets was 1.09% * The efficiency ratio was
61.33%
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 third quarter of 1996, were
$532.4 million, or 29.5%, higher than during the third quarter of 1995
primarily due to the addition of First Massachusetts. 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 $1.8 billion during the three month period ended
September 30, 1996, an increase of $454.3 million, or 33.8%, over the same
period in 1995. Of the increase, approximately $423.2 million resulted from the
addition of First Massachusetts and growth in its loan portfolio subsequent to
opening. In-market loan demand has continued to increase during 1996. The
Company's markets also continue to experience significant competition between
lenders for quality credits. In an effort to increase the level of earning
assets during the first nine months of 1996, the Company purchased
approximately $38.2 million in residential mortgage loans located outstanding
of the Company's market areas.
Table B, Loan Portfolio, provides the detailed components of the loan
portfolio as of September 30, 1996 and 1995 as well as December 31, 1995.
Primarily from the addition of FMB, total loans as of September 30, 1996 of
$1.8 billion, were $468.8 million, or 34.7% higher than at September 30, 1995.
Commercial, financial and agricultural loans increased $63.9 million, or 27.1%
while commercial real estate loans increased by $119.0 million, or 30.3%. The
largest increase in loan balances occurred in residential real estate which
increased $256.7 million, or 52.6%. A substantial portion of the loans acquired
through the branch purchase were residential real estate mortgages.
Following an initial period of runoff in the FMB loan portfolio subsequent
to its opening, credit activity at First Massachusetts has been vibrant
resulting in growth in that bank's loan portfolio during the third quarter of
1996. Continued growth is expected during the fourth quarter of 1996. During
the period in which runoff was occurring at First Massachusetts, loan growth at
the Company's Vermont and New Hampshire banking subsidiaries offset the runoff
and resulted in net increases in loan receivables.
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.
Securities available for sale. The portfolio is managed on a total return
basis with the objective of exceeding the return that would be experienced if
investing solely in U.S. Treasury instruments. This category of investments is
used primarily for liquidity 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, "Accounting For Certain
Investments in Debt and Equity Securities" (SFAS No. 115) to maturity. This
decision allowed entities to transfer securities from the held-to-maturity
category without "tainting" their remaining held-to-maturity securities. On
November 30, 1995, in response to the FASB's action, the Company reclassified
certain securities having an aggregate unamortized cost of $197.1 million and
an aggregate fair value of $195.3 million from "held-to-maturity" to "available
for sale."
Period end balances in securities available for sale totaled $468.2
million, $359.1 million and $134.2 million at September 30, 1996, December 31,
1995 and September 30, 1995, respectively. The increase of $109.1 million from
December 31, 1995 to September 30, 1996 reflects purchases made for the newly
established portfolio at First Massachusetts as well as purchases in excess of
the reinvestment of proceeds from sale, maturity and call of securities
available for sale. The purchases in excess of the reinvestment of portfolio
generated cashflows were made in an effort to increase the level of earning
assets. Average balances for the three months ended September 30, 1996 and 1995
were $474.6 million and $128.8 million, respectively.
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 $38.3 million as of September 30,
1996 as compared to $49.7 million and $291.3 million as of December 31 and
September 30, 1995, respectively. The decrease from September 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.
Table C, Securities Available for Sale and Investment Securities, provides
details of securities available for sale and investment securities at September
30, 1996 and 1995, as well as December 31, 1995.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $9.8 million during the third quarter of 1996, down $5.8
million from the third quarter of 1995. The third quarter average is $8.7
million lower than during the second quarter of 1996. The reduced average in
money market investments is the result of increases in the Company's loan and
securities available for sale portfolios.
Income from earning assets. Income from earning assets was $49.3 million
for the three month period ended September 30, 1996, as compared to $39.4
million for the same period in 1995. The increase of $9.9 million, or 25.1%,
resulted from increases in earning assets through normal growth, the branch
acquisition which gave rise to First Massachusetts and purchases of earning
assets during the third quarter of 1996. Total earning assets during the third
quarter 1996 of $2.3 billion yielded 8.39%, while in 1995 earning assets of
$1.8 billion yielded 8.66%. The increase in earning assets contributed $10.7
million towards the increase in interest income over 1995, while the 27 basis
point decline in yield caused a decrease of $861 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 nine month periods ended September 30, 1996 and 1995, income from
earning assets was $140.2 million and $114.5 million, respectively. Total
earning assets of $2.2 million, increased $431.0 million, or 24.2% over the
nine month average in 1995. The yield on earning assets was 8.47% during the
first nine months of 1996 as compared to 8.60% 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
third quarter of 1996 and 1995, and changes, by category, from the third
quarter of 1995.
Core deposits. Total core deposits averaged $2.0 billion during the three
month period ended September 30, 1996, $558.7 million above the third quarter
average in 1995. Of the increase, approximately $499.2 million relates to First
Massachusetts, while approximately $59.5 million reflects deposit growth at
other operating subsidiaries. It is management's expectation that core deposits
will continue to increase during the balance of 1996 as First Massachusetts
continues to establishes itself in its central and western Massachusetts
markets.
Purchased liabilities. Total purchased liabilities decreased on average
from $295.8 million during the third quarter of 1995 to $282.5 million during
the third quarter of 1996. The decreases in both short and long-term borrowings
were the result of increased core deposit volumes and the decision to reduce
Federal Home Loan Bank advances in anticipation of the branch acquisition.
Offsetting the decreases in short and long-term borrowings were increases of
$36.6 million in time deposits over $100,000 which resulted primarily from the
addition of First Massachusetts. 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 September 30, 1996, was $20.9 million, $3.1 million, or
17.7%, above 1995. Higher levels of interest bearing liabilities caused
interest expense to increase $4.6 million, while a lower cost of funds resulted
in a decrease of $1.5 million, together causing the increase of $3.1 million.
Total interest bearing liabilities of $2.0 billion during the third quarter of
1996, were $467.9 million higher than in 1995, and with a total cost of 4.15%,
43 basis points less expensive than in the prior year.
Total interest bearing liabilities averaged $1.9 billion during the nine
month period ended September 30, 1996, $376.0 million, or 24.7%, higher than in
1995. The cost of funds was 4.19% in 1996 as compared to 4.44% 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 $28.4 million and $21.6 million for the three
month periods ended September 30, 1996 and 1995, respectively. The net interest
margin was 4.83% during the third quarter of 1996 as compared to 4.76% during
the third quarter of 1995. The yield on earning assets of 8.39% for the third
quarter of 1996, was 27 basis points below the prior year, while the cost of
interest bearing liabilities, 4.15% in 1996, decreased 43 basis points. Net
interest income for the nine months ended September 30, 1996 and 1995 totaled
$80.7 million and $64.0 million, respectively. The net interest margin was
4.88% during the first nine months of 1996 as compared to 4.81% for the first
nine months of 1995.
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 $295 million and interest rate swaps in the notional amount of $50 million
were used to mitigate the potential reduction in interest income on certain
adjustable and variable rate loans. 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
September 30, 1996 was $2.2 million. The estimated fair value of these floors
was $1.3 million as of September 30, 1996. The estimated fair value of the
interest rate swap contracts was ($68) thousand as of September 30, 1996.
Non-Performing Assets
As categorized by Banknorth, non-performing assets include non-performing
loans which are those loans in a non-accrual status, loans which have been
treated as troubled debt restructurings and loans past due 90 days and still
accruing interest. Also included in the total of non-performing assets are
foreclosed and in-substance foreclosed real estate properties and repossessed
non-real estate assets. Table G, Non-Performing Assets, contains details of
non-performing assets.
On January 1, 1995, Banknorth adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan," (SFAS
No. 114) as amended by Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure," (SFAS No. 118). At that time, all of the Company's in-substance
foreclosed assets were reclassified into impaired loan status as required by
SFAS No. 114. For all prior periods presented, amounts related to insubstance
foreclosures have also been reclassified. These Statements prescribe
recognition criteria for loan impairment, generally related to commercial type
loans and measurement methods for impaired loans.
Non-performing loans. Non-performing loans totaled $22.3 million, up $5.3
million, or 30.9% from September 30, 1995, and $8.3 million higher than at
December 31, 1995, respectively. 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 levels but are
consistent with these trends.
Other real estate owned. Total other real estate owned was $1.0 million at
September 30, 1996, as compared to $932 thousand at September 30, 1995, and
$1.2 million at year end 1995. Management does not expect any significant
increase in this balance during the fourth quarter 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, net of recoveries, equaled $3.6 million, or an
annualized .28% of average total loans for the first nine months of 1996, an
increase of $284 thousand from the same period in 1995. Year to date recoveries
of $3.3 million in 1996, were $560 thousand lower than 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 1996 as
compared to that experienced in 1995.
The provision for loan losses ("provision") for the third quarter of 1996
was $1.5 million, or an annualized .33% of average total loans. Provision
expense was $4.1 million during the nine month period in 1996, .32% of average
total loans on an annualized basis. Provisions of $3.3 million, or an
annualized .33% of average total loans, and $4.4 million, or .33% of average
total loans were experienced during the nine months ended September 30, 1995
and the full year of 1995, respectively. The quarterly provision was increased
during the third quarter of 1996 over that reflected in earnings during
previous quarters in 1996, primarily due to increases in delinquency factors
and the growth of the loan portfolio.
Provisions recorded are those necessary to maintain the allowance at a
level adequate enough to absorb reasonably predictable loan charge-offs. At
September 30, 1996, the allowance was deemed adequate by management and
provided a coverage of non-performing loans of 108.99% as compared to 125.78%
and 158.15% at September 30, 1995 and December 31, 1995, respectively. The
allowance coverage of non-performing loans was 112.40% as of June 30, 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 expects that the future earnings stream of its
subsidiary banks will be sufficient to support dividend payments well in excess
of the required debt service.
Banknorth 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
September 30, 1996, $1.3 million, or 25.3% higher than that recorded during the
third quarter of 1995. For the nine months ended September 30, 1996 and 1995,
other operating income was $18.8 million and $15.5 million, respectively. The
addition of First Massachusetts accounted for approximately $665 thousand of
the increase in the three month period ended September 30, 1996 and $1.6
million in the nine month period then ended.
Income from fiduciary activities, $5.6 million for the nine months ended
September 30, 1995, increased to $6.1 million in 1996. For the quarters ended
September 30, 1996 and 1995, income from fiduciary activities was $2.1 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 gross
fiduciary income during the fourth quarter in 1996 will be improved over the
same period in 1995.
Service charges on depositor accounts were $1.7 million during the third
quarter of 1996, $394 thousand, or 30.4% higher than during the same quarter of
1995. On a year to date basis, service charge income was $4.8 million, $969
thousand, or 25.1% higher than in the same period in 1995. The aforementioned
increases are due primarily to the addition of FMB which contributed $437
thousand and $1.1 million during the three and nine month periods ended
September 30, 1996, respectively.
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. Adoption
of SFAS No. 122 was expected to result in increased gains recognized on the
sale of the mortgage loans when servicing rights are retained, offset by the
amortization of the capitalized mortgage servicing rights. Net loan
transactions, $257 thousand for the three months ended September 30, 1996,
increased significantly from $165 thousand during the third quarter of 1995.
This increase in income is directly related to an increase in mortgage lending
activity brought on by a lower level mortgage interest rates, and the impact of
accounting for mortgage servicing rights under SFAS No. 122. Of the total net
loan transactions, $168 thousand resulted from recognition of income under SFAS
No. 122. For the nine month period ended September 30, 1996, net loan
transactions were $1.2 million, up $865 thousand from the comparable period in
1995. Of the increase, $669 thousand resulted from recognition of income under
SFAS No. 122.
Net securities transactions in the third quarter of 1995 resulted in net
losses of $471 thousand. Sales of securities available for sale in the amount
of approximately $12.6 million during the third quarter of 1995 were initiated
due to yield deterioration resulting from acceleration of prepayments on
certain mortgage backed securities which accelerated premium amortization.
Reinvestment of the sale proceeds were at yields higher than the yields on
those securities sold. Net securities transactions during the first nine months
of 1996 were nominal and resulted primarily from the call of securities.
Other income, $844 thousand for the three months ended September 30, 1996,
decreased $105 thousand from the same period in 1995. During the third quarter
of 1995, the Company sold a property which had been held for possible future
expansion at a net gain of approximately $225 thousand. For the nine months
ended September 30, 1996, other income was $2.4 million, $272 thousand higher
than in 1995.
Other Operating Expenses
Other operating expenses for the third quarter of 1996 were $23.2 million,
$5.8 million, or 33.3% above the same three months in 1995. For the nine month
period ended September 30, 1996, other operating expenses were $67.8 million,
including start-up expenses for First Massachusetts 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 nine month numbers were approximately $366 thousand.
Further, a loss of $250 thousand was recorded in the third quarter of 1996
related to a burglary at one of the subsidiary banking branches. Recurring
operating expenses for First Massachusetts were approximately $5.6 million
during the third quarter of 1996 and $14.9 million for the nine month period
ended September 30, 1996. The Company's efficiency ratio which is adjusted to
exclude net securities transactions, OREO expenses and certain one-time
expenses as well as the amortization of goodwill, was 61.33% for the third
quarter of 1996, down from 65.73% during the same period in 1995. During the
nine month periods ended September 30, 1996, the Company's efficiency ratio was
62.01% and 65.91% in 1996 and 1995, respectively.
Salary expense, the largest component of other operating expenses, was
$9.3 million during the third quarter of 1996, up $2.2 million or 30.6% from
1995. A significant portion of the increase over 1995 is attributable to First
Massachusetts and increased staffing levels necessary to provide operational
and other support functions to FMB. Salary expense for the nine months ended
September 30, 1996, was $26.7 million as compared to $20.7 million during the
same period of 1995. The above noted factors also caused the increase in
employee benefits expense during both the three and nine month periods
discussed.
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 $326 thousand in occupancy expense during the third quarter of 1996
as compared to the same quarter of 1995. Third quarter equipment and software
expenses increased by $169 thousand, or 12.1% over 1995, with approximately
half of the increase related to First Massachusetts.
FDIC deposit insurance and other regulatory expense during the third
quarter of 1996, increased $125 thousand from the same period in 1995. The
third quarter of 1995 was the first in which the reduced FDIC insurance
premiums resulting from the Bank Insurance Fund reaching a 1.2% reserve ratio,
impacted comparable quarters. During the third quarter of 1995, the Company
received a refund of premiums paid in the second quarter of 1995 thus
significantly reducing this expense category and accounting for the increase
between the third quarter of 1995 and 1996. For the nine month periods ended
September 30, 1996 and 1995, deposit insurance and other regulatory expenses
were $332 thousand and $1.8 million, respectively.
Legal and professional expenses during the third quarter of 1996 increased
by $288 thousand over the same quarter in 1995 due primarily to consulting fees
associated with the Company's strategic planning effort and accruals for legal
costs.
Printing and supplies expense was $603 thousand during the third quarter
of 1996, $114 thousand higher than during the same period in 1995 while for the
nine month period ended September 30, 1996, printing and supplies expenses were
$2.6 million as compared to $1.4 million during 1995. The year to date increase
reflects first quarter 1996 expenses relating to the initial issuance of checks
to First Massachusetts customers and the issuance of new ATM and debit cards to
the Company's customer base.
Advertising and marketing expenses were $701 thousand during the three
months ended September 30, 1996, an increase of $130 thousand, or 22.8% over
the same period in 1995. Marketing expenditures for FMB amounted to $246
thousand during the third quarter of 1996. Expenditures were $2.5 million
during the nine months ended September 30, 1996 which included non-recurring
items of approximately $543 thousand related to FMB and advertising associated
with the issuance of ATM and debit cards. Advertising and marketing expenses in
the comparable period of 1995 were $1.6 million.
Amortization of goodwill increased significantly to $1.3 million during
the third quarter of 1996 in comparison to $157 thousand for the same period of
1995, resulting from the FMB acquisition.
Other expenses, $3.6 million during the three months ended September 30,
1996, increased $949 thousand, or 36.3% from 1995 primarily due to the addition
of recurring expenses for First Massachusetts and a loss of approximately $250
thousand resulting from a burglary at one of the subsidiary bank branches.
One-time expenses coupled with recurring expenses of FMB account for the most
of the increase on a year to date basis.
Core Tangible Performance
After removing the impact of the balance of goodwill and the related
period amortization, as well as the impact of the significant one-time expenses
discussed previously, "core tangible" return on average tangible equity was
19.08% for the nine months ended September 30, 1996, up 2.10 percentage points
from the same period a year earlier. The following table represents "core
tangible" performance for the first nine months of 1996, compared to 1995:
Nine Months Ended September 30,
($ in thousands) 1996 1995
---------------------------------
Net income, as reported $ 18,357 $ 16,542
Adjustments, net of tax effect:
Significant one-time expenses 1,443 --
Amortization of goodwill 2,158 476
-------------------------------
"Core tangible" income $ 21,958 $ 17,018
===============================
Average tangible assets $ 2,327,817 $ 1,862,424
Average tangible equity $ 153,755 $ 133,990
"Core tangible" return on average tangible assets 1.26% 1.22%
"Core tangible" return on average tangible equity 19.08% 16.98%
Income Taxes
In the third quarter of 1996, the Company recognized income tax expense of
$3.2 million, or 32.3% of the income before taxes. Tax expense on the Company's
income was lower than tax expense at the Federal statutory rate of 35%,
primarily due to tax-exempt interest income and low income housing credits.
Activity within the committee structure of the Vermont State Legislature
has the potential to result in legislation that would impose a state income tax
on banks rather than the current deposit based franchise tax. If such
legislation was to be enacted, the change in tax methodology could result in
significantly higher tax expense in future reporting periods.
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 third quarter of 1996, the board of directors declared a
dividend of $.25 per share, representing a payout of 28.7% of third 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 September 30, 1996, Banknorth's Tier I capital was $166.9 million, or
9.19% of total risk adjusted assets, compared to $146.9 million and 10.89% as
of September 30, 1995. The leverage ratio was 6.78%, and 7.74% as of September
30, 1996 and 1995, respectively. Banknorth, and its subsidiaries individually,
are "well capitalized" at September 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 September 30, % of Total Earning Assets
-------------------------------------------------------------------
Total
(Dollars in thousands) 1996 1995 Change Change 1996 1995
-------------------------------------------------------------------
Loans, net of unearned income
and unamortized loan fees $1,797,510 $1,343,177 $454,333 85.3% 76.9% 74.4%
Securities available for sale:
U.S. Treasuries and agencies 98,370 39,019 59,351 11.2 4.2 2.2
Mortgage-backed securities 272,333 64,729 207,604 39.0 11.7 3.6
Other securities 103,923 25,074 78,849 14.8 4.5 1.4
----------------------------------------------------------------
Total securities available for sale 474,626 128,822 345,804 65.0 20.4 7.2
Investment securities:
U.S. Treasuries and agencies 17,264 70,775 (53,511) (10.0) 0.7 3.9
Mortgage-backed securities 21,210 225,752 (204,542) (38.4) 0.9 12.5
States and political subdivisions 1,290 2,126 (836) (0.2) 0.1 0.1
Other securities 387 2,370 (1,983) (0.4) 0.0 0.1
----------------------------------------------------------------
Total investment securities 40,151 301,023 (260,872) (49.0) 1.7 16.6
Loans held for sale 14,497 15,607 (1,110) (0.2) 0.6 0.9
Money market investments 9,835 15,595 (5,760) (1.1) 0.4 0.9
----------------------------------------------------------------
Total earning assets $2,336,619 $1,804,224 $532,395 100.0% 100.0% 100.0%
================================================================
- -------------------------------------------------------------------------------
TABLE B.--Loan Portfolio
At September 30, At December 31,
--------------------------------------------------------- % Change % Change
1996 1995 1995 09/30/96 09/30/96
--------------------------------------------------------- vs. vs.
(Dollars in thousands) Amount Percent Amount Percent Amount Percent 09/30/95 12/31/95
--------------------------------------------------------------------------------
Commercial, financial, and
agricultural $ 299,583 16.5% $ 235,731 17.4% $ 228,877 16.9% 27.1% 30.9%
Real Estate:
Construction and land
development 23,533 1.3 18,311 1.4 20,587 1.5 28.5 14.3
Commercial 511,796 28.1 392,784 29.1 398,586 29.5 30.3 28.4
Residential 744,578 40.9 487,836 36.1 477,458 35.4 52.6 55.9
-------------------------------------------------------
Total real estate 1,279,907 70.3 898,931 66.6 896,631 66.4 42.4 42.7
-------------------------------------------------------
Credit card receivables 21,907 1.2 25,377 1.9 26,867 2.0 (13.7) (18.5)
Lease receivables 62,278 3.4 40,945 3.0 47,055 3.5 52.1 32.4
Other installment 156,419 8.6 150,354 11.1 151,623 11.2 4.0 3.2
-------------------------------------------------------
Total installment 240,604 13.2 216,676 16.0 225,545 16.7 11.0 6.7
-------------------------------------------------------
Total loans 1,820,094 100.0 1,351,338 100.0 1,351,053 100.0 34.7 34.7
Less: Allowance for loan
losses 24,284 1.3 21,410 1.6 22,095 1.6 13.4 9.9
-------------------------------------------------------
Net loans $1,795,810 98.7% $1,329,928 98.4% $1,328,958 98.4% 35.0% 35.1%
=======================================================
- -------------------------------------------------------------------------------
TABLE C.--Securities available for sale and investment securities
At September 30, At December 31,
--------------------------------------------
1996 1995 1995
--------------------------------------------
(Dollars in thousands)
Securities available for sale:
U.S. Treasuries and agencies $ 102,325 $ 39,975 $ 76,401
States and political subdivisions 652 -- --
Mortgage-backed securities 268,799 59,182 249,549
Other securities 103,387 35,802 33,090
Valuation reserve (7,009) (766) 45
---------------------------------------
Recorded value of securities available for sale $ 468,154 $134,193 $359,085
=======================================
Investment securities:
U.S. Treasuries and agencies $ 16,156 $ 69,244 $ 23,837
States and political subdivisions 1,135 2,114 1,630
Mortgage-backed securities 20,865 217,727 23,146
Other securities 165 2,209 1,067
---------------------------------------
Recorded value of investment securities $ 38,321 $291,294 $ 49,680
=======================================
Fair value of investment securities $ 38,599 $293,032 $ 51,087
=======================================
Excess of fair value versus recorded value $ 278 $ 1,738 $ 1,407
Fair value as a % of recorded value 100.7 % 100.6% 102.8%
- -------------------------------------------------------------------------------
TABLE D.--Average Balances, Yields, and Net Interest Margins
Three Months Ended September 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 $ 9,835 $ 132 5.34% $ 15,595 $ 225 5.72%
Securities available for sale, at amortized cost 474,626 7,227 6.06 128,822 2,042 6.29
Loans held for sale 14,497 289 7.93 15,607 303 7.70
Investment securities, at amortized cost:
Taxable 38,861 692 7.08 298,897 4,630 6.15
Tax-exempt (Note 1) 1,290 22 6.78 2,126 30 5.60
-------------------------------------------------------------------
Total investment securities 40,151 714 7.07 301,023 4,660 6.14
-------------------------------------------------------------------
Loans, net of unearned income and
unamortized loan fees (Notes 1,2,3) 1,797,510 40,928 9.06 1,343,177 32,173 9.50
-------------------------------------------------------------------
Total earning assets 2,336,619 49,290 8.39 1,804,224 39,403 8.66
-----------------------------------------------------
Cash and due from banks 85,448 62,513
Allowance for loan losses (24,370) (21,222)
Valuation reserve for securities available for sale (9,035) (6,779)
and investment securities
Other assets 105,714 63,314
------------------------------------------------
Total assets $ 2,494,376 $ 1,902,050
================================================
Interest-bearing liabilities:
NOW accounts $ 238,107 810 1.35 $ 177,742 773 1.73
Money market savings 534,750 5,707 4.25 342,626 4,055 4.70
Regular savings 228,414 1,366 2.38 186,093 1,214 2.59
Time deposits $100 thousand and greater 80,266 1,108 5.49 43,655 631 5.73
Time deposits under $100 thousand 706,701 9,122 5.14 516,194 7,216 5.55
-------------------------------------------------------------------
Total interest-bearing deposits 1,788,238 18,113 4.03 1,266,310 13,889 4.35
Long-term debt 44,713 659 5.86 94,169 1,469 6.19
Short-term borrowings 172,217 2,127 4.91 176,809 2,405 5.40
-------------------------------------------------------------------
Total interest-bearing liabilities 2,005,168 20,899 4.15 1,537,288 17,763 4.58
-------------------------------------------------------------------
Demand deposits
Other liabilities 272,492 199,122
Shareholders' equity 21,426 17,695
195,290 147,945
------------------------------------------------
Total liabilities and shareholders' equity $ 2,494,376 $ 1,902,050
================================================
Net interest income $ 28,391 $ 21,640
=============================================
Interest rate differential 4.24% 4.08%
==========================================
Net interest margin 4.83% 4.76%
==========================================
<FN>
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.
</FN>
- -------------------------------------------------------------------------------
TABLE D.--Average Balances, Yields, and Net Interest Margins
Nine Months Ended September 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 $ 18,825 $ 778 5.52% $ 9,382 $ 407 5.80%
Securities available for sale, at amortized cost 436,928 19,903 6.08 128,272 5,982 6.24
Loans held for sale 15,782 892 7.55 11,879 707 7.96
Investment securities, at amortized cost:
Taxable 43,315 2,320 7.15 306,981 14,322 6.24
Tax-exempt (Note 1) 1,410 70 6.63 2,048 85 5.55
--------------------------------------------------------------------
Total investment securities 44,725 2,390 7.14 309,029 14,407 6.23
--------------------------------------------------------------------
Loans, net of unearned income and
unamortized loan fees (Notes 1,2,3) 1,694,663 116,258 9.16 1,321,375 92,994 9.41
--------------------------------------------------------------------
Total earning assets 2,210,923 140,221 8.47 1,779,937 114,497 8.60
------------------------------------------------------
Cash and due from banks 82,440 59,236
Allowance for loan losses (24,031) (21,459)
Valuation reserve for securities available for sale (5,657) (8,886)
and investment securities
Other assets 97,945 62,727
------------------------------------------------
Total assets $ 2,361,620 $ 1,871,555
================================================
Interest-bearing liabilities:
NOW accounts $ 228,895 2,330 1.36 $ 178,024 2,205 1.66
Money market savings 501,995 15,882 4.23 324,808 11,102 4.57
Regular savings 225,107 4,032 2.39 194,003 3,774 2.60
Time deposits $100 thousand and greater 73,731 3,109 5.63 42,805 1,674 5.23
Time deposits under $100 thousand 675,641 26,788 5.30 503,264 19,669 5.23
--------------------------------------------------------------------
Total interest-bearing deposits 1,705,369 52,141 4.08 1,242,904 38,424 4.13
Long-term debt 48,132 2,113 5.86 101,377 4,750 6.26
Short-term borrowings 142,295 5,220 4.90 175,563 7,298 5.56
--------------------------------------------------------------------
Total interest-bearing liabilities 1,895,796 59,474 4.19 1,519,844 50,472 4.44
--------------------------------------------------------------------
Demand deposits
Other liabilities 256,943 191,211
Shareholders' equity 21,323 17,379
187,558 143,121
------------------------------------------------
Total liabilities and shareholders' equity $ 2,361,620 $ 1,871,555
================================================
Net interest income $ 80,747 $ 64,025
==============================================
Interest rate differential 4.28% 4.16%
==========================================
Net interest margin 4.88% 4.81%
==========================================
<FN>
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.
</FN>
- -------------------------------------------------------------------------------
TABLE E.--Average Sources of Funding
As a % of
Three Months Ended September 30, Change Total Net Funding
------------------------------------------------------------------------
1996 1995 $ % 1996 1995
------------------------------------------------------------------------
(Dollars in thousands)
Demand deposits $ 272,492 $ 199,122 $ 73,370 36.8% 12.4% 11.9%
Retail deposits:
Regular savings 228,414 186,093 42,321 22.7 10.4 11.1
Time deposits under $100 thousand 706,701 516,194 190,507 36.9 32.2 30.8
NOW accounts 238,107 177,742 60,365 34.0 10.9 10.6
Money market savings 534,750 342,626 192,124 56.1 24.4 20.5
-------------------------------------------------------------------
Total retail deposits 1,707,972 1,222,655 485,317 39.7 77.9 73.0
-------------------------------------------------------------------
Total core deposits 1,980,464 1,421,777 558,687 39.3 90.3 84.9
Less: Cash and due from banks 85,448 62,513 22,935 36.7 3.9 3.7
-------------------------------------------------------------------
Net core deposits 1,895,016 1,359,264 535,752 39.4 86.4 81.2
-------------------------------------------------------------------
Time deposits $100 thousand and greater 80,266 43,655 36,611 83.9 3.7 2.6
Federal funds purchased 6,432 898 5,534 616.3 0.3 0.1
Securities sold under agreements to repurchase 107,804 96,992 10,812 11.1 4.9 5.8
Borrowings from U.S. Treasury 9,144 11,430 (2,286) (20.0) 0.4 0.7
Other short-term borrowings 48,837 67,489 (18,652) (27.6) 2.2 4.0
Long-term note from FHLB 30,024 75,292 (45,268) (60.1) 1.4 4.5
-------------------------------------------------------------------
Total purchased liabilities 282,507 295,756 (13,249) (4.5) 12.9 17.7
Long-term bank debt 14,689 18,877 (4,188) (22.2) 0.7 1.1
-------------------------------------------------------------------
Total capital market funds 14,689 18,877 (4,188) (22.2) 0.7 1.1
-------------------------------------------------------------------
Total net funding $ 2,192,212 $ 1,673,897 $ 518,315 31.0% 100.0% 100.0%
===================================================================
- -------------------------------------------------------------------------------
TABLE F.--Volume and Yield Analysis
1996 vs. 1995
---------------------------------------------------------------
Three Months Ended
September 30, Increase Due to
---------------------------------------------------------------
(In thousands) 1996 1995 (Decrease) Volume Rate
---------------------------------------------------------------
Interest income (FTE):
Money market investments $ 132 $ 225 $ (93) $ (78) $ (15)
Securities available for sale 7,227 2,042 5,185 5,259 (74)
Loans held for sale 289 303 (14) (23) 9
Investment securities:
Taxable 692 4,630 (3,938) (4,637) 699
Tax-exempt 22 30 (8) (14) 6
------------------------------------------------------------
Total investments 714 4,660 (3,946) (4,651) 705
------------------------------------------------------------
Loans 40,928 32,173 8,755 10,241 (1,486)
------------------------------------------------------------
Total interest income 49,290 39,403 9,887 10,748 (861)
------------------------------------------------------------
Interest expense:
NOW accounts 810 773 37 207 (170)
Money market savings 5,707 4,055 1,652 2,040 (388)
Regular savings 1,366 1,214 152 238 (86)
Time deposits $100 thousand and greater 1,108 631 477 503 (26)
Time deposits under $100 thousand 9,122 7,216 1,906 2,438 (532)
Long-term debt 659 1,469 (810) (732) (78)
Short-term borrowings 2,127 2,405 (278) (60) (218)
------------------------------------------------------------
Total interest expense 20,899 17,763 3,136 4,634 (1,498)
------------------------------------------------------------
Net interest income (FTE) $ 28,391 $ 21,640 $ 6,751 $ 6,114 $ 637
============================================================
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
---------------------------------------------------------------
Nine Months Ended
September 30, Increase Due to
---------------------------------------------------------------
(In thousands) 1996 1995 (Decrease) Volume Rate
---------------------------------------------------------------
Interest income (FTE):
Money market investments $ 778 $ 407 $ 371 $ 391 $ (20)
Securities available for sale 19,903 5,982 13,921 14,075 (154)
Loans held for sale 892 707 185 221 (36)
Investment securities:
Taxable 2,320 14,322 (12,002) (14,093) 2,091
Tax-exempt 70 85 (15) (32) 17
------------------------------------------------------------
Total investments 2,390 14,407 (12,017) (14,125) 2,108
------------------------------------------------------------
Loans 116,258 92,994 23,264 25,737 (2,473)
------------------------------------------------------------
Total interest income 140,221 114,497 25,724 26,299 (575)
------------------------------------------------------------
Interest expense:
NOW accounts 2,330 2,205 125 525 (400)
Money market savings 15,882 11,102 4,780 5,607 (827)
Regular savings 4,032 3,774 258 551 (293)
Time deposits $100 thousand and greater 3,109 1,674 1,435 1,307 128
Time deposits under $100 thousand 26,788 19,669 7,119 6,855 264
Long-term debt 2,113 4,750 (2,637) (2,332) (304)
Short-term borrowings 5,220 7,298 (2,078) (1,211) (867)
------------------------------------------------------------
Total interest expense 59,474 50,472 9,002 11,302 (2,299)
------------------------------------------------------------
Net interest income (FTE) $ 80,747 $ 64,025 $16,722 $14,997 $1,724
============================================================
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
September 30, December 31, September 30,
(Dollars in thousands) 1996 1995 1995
-------------------------------------------
Loans on a non-accrual basis:
Commercial, financial and agricultural $ 3,839 $ 648 $ 901
Real estate:
Construction and land development 70 103 204
Commercial 6,343 3,993 6,653
Residential 10,049 7,625 7,131
Other installment -- -- 49
--------------------------------------
Total non-accrual 20,301 12,369 14,938
--------------------------------------
Restructured loans:
Real estate:
Commercial 822 288 288
Residential 40 85 89
Other installment 6 55 93
--------------------------------------
Total restructured 868 428 470
--------------------------------------
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 123 87 185
Real estate:
Commercial 40 64 529
Residential 46 396 409
Credit card 138 105 72
Lease receivables 48 28 --
Other installment 717 494 419
--------------------------------------
Total past-due 90 days or more and still accruing 1,112 1,174 1,614
--------------------------------------
Total non-performing loans 22,281 13,971 17,022
--------------------------------------
Foreclosed real estate 1,038 1,169 884
--------------------------------------
Total other real estate owned (OREO) 1,038 1,169 884
Non-real estate and repossessed assets 11 -- 48
--------------------------------------
Total foreclosed and repossessed assets (F/RA) 1,049 1,169 932
--------------------------------------
Total non-performing assets (NPA) $ 23,330 $ 15,140 $ 17,954
======================================
Allowance for loan losses (ALL) $ 24,284 $ 22,095 $ 21,410
Coverage of non-performing loans 108.99 % 158.15% 125.78%
Non-performing assets as a % of (loans & F/RA) 1.28 % 1.12% 1.33%
Non-performing assets to total assets 0.93 % 0.79% 0.94%
- -------------------------------------------------------------------------------
TABLE H.--Summary of Loan Loss Experience
Nine Months Year Nine Months
Ended Ended Ended
September 30, December 31, September 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 (367) (1,283) (988)
Real estate:
Construction and land development (73) (357) (354)
Commercial (1,574) (2,287) (2,116)
Residential (1,129) (1,833) (1,230)
------------------------------------------------
Total real estate (2,776) (4,477) (3,700)
Credit card (576) (576) (462)
Lease receivables (721) (410) (325)
Other installment (2,393) (2,415) (1,634)
------------------------------------------------
Total consumer (3,690) (3,401) (2,421)
Total loans charged off (6,833) (9,161) (7,109)
------------------------------------------------
Recoveries on loans:
Commercial, financial and agricultural 469 1,597 1,103
Real estate:
Construction and land development 46 540 354
Commercial 862 1,430 822
Residential 272 302 255
------------------------------------------------
Total real estate 1,180 2,272 1,431
------------------------------------------------
Credit card 114 162 123
Lease receivables 566 277 226
Other installment 943 1,136 949
------------------------------------------------
Total consumer 1,623 1,575 1,298
Total recoveries on loans 3,272 5,444 3,832
------------------------------------------------
Loans charged off, net of recoveries (3,561) (3,717) (3,277)
------------------------------------------------
Provision for loan losses 4,100 4,375 3,250
------------------------------------------------
Allowance for loan losses at end of period $ 24,284 $ 22,095 $ 21,410
================================================
Loans outstanding-end of period $ 1,820,094 $ 1,351,053 $ 1,351,338
Average loans outstanding-period to date 1,694,663 1,329,188 1,321,375
Loans charged off, net (annualized), as a % of average
total loans 0.28% 0.28% 0.33%
Provision for loan losses (annualized), as a % of
average total loans 0.32% 0.33% 0.33%
Allowance for loan losses as a % of period-end total loans 1.33% 1.64% 1.58%
- -------------------------------------------------------------------------------
TABLE I.--Capital Ratios
9/30/96 6/30/96 3/31/96 12/31/95 9/30/95
----------------------------------------------------------------
(Dollars in thousands)
Total risk-adjusted on-balance-sheet assets $ 1,709,036 $1,659,773 $1,610,790 $1,272,079 $1,282,863
Total risk-adjusted off-balance-sheet items 106,281 106,200 95,512 76,432 66,160
----------------------------------------------------------------
Total risk-adjusted assets $ 1,815,317 $1,765,973 $1,706,302 $1,348,511 $1,349,023
================================================================
Total risk-adjusted assets/average total
assets, net of fair value adjustment
and goodwill (1) 73.75% 73.71% 80.38% 71.77% 71.11%
Total shareholders' equity $ 199,800 $ 194,430 $ 191,721 $ 159,936 $ 151,924
Fair value adjustment (1) 4,556 5,320 3,153 (29) 3,652
Other adjustments to Tier I capital (37,448) (38,744) (40,063) (8,553) (8,711)
----------------------------------------------------------------
Total Tier I capital 166,908 161,006 154,811 151,354 146,865
Maximum allowance for loan losses (2) 22,711 22,107 21,364 16,921 16,919
----------------------------------------------------------------
Total capital $ 189,619 $ 183,113 $ 176,175 $ 168,275 $ 163,784
================================================================
Quarterly average total assets, net of fair
value adjustment and goodwill (1) $ 2,461,484 $2,395,825 $2,122,778 $1,879,047 $1,896,991
Allowance for loan losses 24,284 24,669 24,183 22,095 21,410
Total capital to total risk-adjusted assets 10.45% 10.37% 10.32% 12.48% 12.14%
Tier I capital to total risk-adjusted assets 9.19 9.12 9.07 11.22 10.89
Tier I capital to total quarterly average
adjusted assets (Leverage) 6.78 6.72 7.29 8.05 7.74
<FN>
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.
</FN>
SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
1996 1995
--------------------------------------------------------------------
(In thousands, except for share data) Q3 Q2 Q1 Q4 Q3
--------------------------------------------------------------------
STATEMENT OF INCOME:
Interest income $ 49,175 $ 47,454 $ 43,133 $ 38,643 $ 39,214
Interest expense 20,899 20,058 18,517 17,508 17,763
-------------------------------------------------------------------
Net interest income 28,276 27,396 24,616 21,135 21,451
Provision for loan losses 1,500 1,300 1,300 1,125 1,125
-------------------------------------------------------------------
Net interest income after provision for
loan losses 26,776 26,096 23,316 20,010 20,326
-------------------------------------------------------------------
Other income:
Income from trust activities 2,084 2,005 1,996 1,835 1,879
Service charges on depositor accounts 1,692 1,792 1,340 1,226 1,298
Loan servicing 795 670 679 679 649
Credit card 764 728 599 842 684
Net loan transactions 257 358 601 217 165
Net securities transactions 21 -- 3 9 (471)
All other 844 903 668 611 949
-------------------------------------------------------------------
Total other income 6,457 6,456 5,886 5,419 5,153
Other expenses:
Salaries 9,278 9,053 8,375 7,661 7,104
Employee benefits 2,057 2,146 2,171 1,457 1,589
Net occupancy expenses 1,669 1,767 1,786 1,388 1,343
Equipment and software expenses 1,569 1,701 1,433 1,400 1,400
Data processing fees 1,111 1,209 1,108 1,242 1,125
FDIC deposit insurance and other regulatory
expenses 134 99 99 234 9
OREO and repossession expenses 267 78 30 (95) 347
Amortization of goodwill 1,297 1,319 731 157 157
All other 5,794 5,138 6,420 4,558 4,313
-------------------------------------------------------------------
Total other expenses 23,176 22,510 22,153 18,002 17,387
-------------------------------------------------------------------
Income before income taxes 10,057 10,042 7,049 7,427 8,092
Income tax expense 3,244 3,248 2,299 1,596 2,266
-------------------------------------------------------------------
Net income $ 6,813 $ 6,794 $ 4,750 $ 5,831 $ 5,826
===================================================================
AVERAGE BALANCES:
Loans $ 1,797,510 $ 1,746,552 $ 1,538,784 $ 1,352,356 $ 1,343,177
Loans held for sale 14,497 15,668 17,196 16,309 15,607
Securities available for sale 474,626 446,227 389,515 191,408 128,822
Investment securities 40,151 45,703 48,371 216,701 301,023
Money market investments 9,835 18,522 28,216 10,717 15,595
-------------------------------------------------------------------
Total earning assets 2,336,619 2,272,672 2,022,082 1,787,491 1,804,264
Other assets 157,757 156,577 137,606 100,138 97,786
-------------------------------------------------------------------
Total assets $ 2,494,376 $ 2,429,249 $ 2,159,688 $ 1,887,629 $ 1,902,050
===================================================================
Demand deposits $ 272,492 $ 261,437 $ 227,571 $ 205,354 $ 199,122
Interest-bearing deposits 1,788,238 1,768,600 1,558,369 1,307,950 1,266,310
-------------------------------------------------------------------
Total deposits 2,060,730 2,030,037 1,785,940 1,513,304 1,465,432
Short-term borrowings 172,217 138,632 124,853 129,836 176,809
Long-term debt 44,713 47,311 52,411 72,534 94,169
Other liabilities 21,426 21,574 20,966 17,678 17,695
Shareholders' equity 195,290 191,695 175,518 154,277 147,945
-------------------------------------------------------------------
Total liabilities and shareholders'
equity $ 2,494,376 $ 2,429,249 $ 2,159,688 $ 1,887,629 $ 1,902,050
===================================================================
Loans charged off, net of recoveries $ 1,885 $ 814 $ 862 $ 440 $ 622
Non-performing assets, p.e. 23,330 23,248 15,909 15,140 17,954
SHARE DATA:
Shares outstanding, p.e. 7,826,648 7,826,648 7,826,648 6,804,425 6,804,425
Weighted average shares outstanding 7,826,648 7,826,648 7,332,386 6,804,425 6,804,425
Tangible book value, p.e. $ 20.74 $ 19.89 $ 19.38 $ 22.25 $ 21.05
Cash dividends declared 0.25 0.25 0.25 0.23 0.23
Net income 0.87 0.87 0.65 0.86 0.86
Closing price at quarter end 37.38 34.25 35.25 38.50 33.25
Cash dividends declared as a % of net
income 28.74% 28.74% 38.46% 26.74% 26.74%
RATIOS:
Return on average assets 1.09% 1.12% 0.88% 1.23% 1.22%
Return on average shareholders' equity 13.88 14.25 10.88 15.00 15.62
Net interest margin, fte 4.83 4.88 4.93 4.73 4.76
Efficiency ratio 61.33 62.07 62.73 66.94 65.73
Expense ratio 2.54 2.59 2.66 2.76 2.72
As a % of risk-adjusted assets:
Total capital 10.45 10.37 10.32 12.48 12.14
Tier 1 capital 9.19 9.12 9.07 11.22 10.89
As a % of total assets:
Tier 1 capital (regulatory leverage) 6.78 6.72 7.29 8.05 7.74
Tangible shareholders equity, p.e. to
tangible assets, p.e 6.56 6.44 6.39 7.96 7.49
Price earnings ratio (last twelve months) 11.5 10.6 11.1 11.7 10.1
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: 11/12/96 /s/ WILLIAM H. CHADWICK
-------------------------------------
William H. Chadwick
President and Chief Executive Officer
Date: 11/12/96 /s/ THOMAS J. PRUITT
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Thomas J. Pruitt
Executive Vice President and Chief
Financial Officer
A GLOSSARY OF TERMS
Book value per share
Total shareholders' equity divided by shares outstanding on the same date.
Cash dividends per share
Total cash dividends declared divided by average shares outstanding for
the period.
Cumulative effect of an accounting change
Although the presumption is that once an accounting principle has been
adopted it should not be changed, when a change is necessary it generally
is recognized by including the cumulative effect of the change in net
income of the period of change. The cumulative effect of a change in
accounting principle is the total direct effects, net of the related tax
effect, that the change has on prior periods.
Earning assets
Interest-bearing deposits with banks, securities available for sale,
investment securities, loans (net of unearned income), federal funds sold
and securities purchased under agreements to resell.
Earnings per share
Net income divided by average shares outstanding during the period,
including the effect of stock options.
Efficiency ratio
Total other operating expense, excluding goodwill amortization,
OREO/repossession expense and other non-recurring expenses, as a
percentage of net interest income, on a fully taxable equivalent basis,
and total other operating income, excluding securities gains/losses and
non-recurring items.
Expense ratio
Total other operating expense, excluding goodwill amortization,
OREO/repossession expense and other non-recurring expenses, less other
operating income, excluding securities gains or losses and non-recurring
items, as a percentage of average earning assets.
Fully taxable-equivalent (fte) income
Tax-exempt income which has been converted to place tax-exempt and taxable
income on a comparable basis before application of income taxes.
Impaired loans
Loans, usually commercial type loans, where it is probable that the
borrower will not repay the loan according to the original contractual
terms of the loan agreement and all loans restructured in troubled debt
restructurings subsequent to January 1, 1995.
Intangible assets
Intangible assets include goodwill, purchased mortgage servicing rights,
servicing release premiums, and purchased credit card rights.
Interest-bearing liabilities
Interest-bearing deposits, federal funds purchased, securities sold under
agreements to repurchase, other short-term borrowings and long-term debt.
Liquidity
The ability to meet both loan commitments and deposit withdrawals as they
come due.
Net loans charged off
Reductions to the allowance for loan losses for loans written off, net of
the recovery of loans previously written off.
Net interest income
The difference between income on earning assets and interest expense on
interest-bearing liabilities.
Net interest margin
Fully taxable-equivalent basis net interest income as a percentage of
average earning assets.
Net loan transactions
Gains and losses resulting from sales of loans, primarily by the mortgage
banking operation.
Net securities transactions
Gains and losses resulting from sales of securities available for sale at
prices above or below the amortized cost of the securities sold and gains
realized on the call of certain securities.
Non-accrual loans
Loans for which no periodic accrual of interest income is realized.
Non-performing assets
When other real estate owned (OREO) is added to non-performing loans, the
result is defined as non-performing assets.
Non-performing loans
Non-performing loans are defined as all non-accrual and restructured
loans, and all loans which are 90 days or more past-due but still accruing
interest.
Other operating expenses
All expenses other than interest expense and the provision for loan
losses.
Other operating income
All income other than interest income and dividend income.
Other real estate owned (OREO)
Real estate acquired through foreclosure or in-substance foreclosure.
Parent company
A company that owns or controls subsidiaries through the ownership of
voting stock.
Purchase accounting
An accounting method which, following an acquisition, the acquired entity
is recorded at fair value. The operating results of the acquired entity
are included in the acquiring entity's result from the date of the
acquisition forward.
Restructured loans
A refinanced loan in which the bank allows the borrower certain
concessions that would not normally be considered. The concessions are
always made in light of the borrower's financial difficulties, and the
objective of the bank is to maximize recovery of the investment.
Return on average assets (ROA)
Net income as a percentage of average total assets. A key ratio which
indicates how effectively a bank holding company uses its total resources.
Return on average shareholders' equity (ROE)
Net income as a percentage of average shareholders' equity. A key ratio
which provides a measure of how efficiently equity has been employed.
Significant non-recurring income or expense items
A significant non-recurring income or expense item represents income or
expense which is reported in the quarter in which it occurs, and is not
expected to recur in future periods.
Tangible book value
Tangible shareholders' equity divided by shares outstanding on the same
date.
Tangible shareholders' equity
Shareholders' equity less goodwill.
Tangible total assets
Total assets less goodwill.