UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission file number (0-18173)
BANKNORTH GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 03-0321189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 FINANCIAL PLAZA
P.O. BOX 5420
BURLINGTON, VERMONT
(Address of principal executive offices)
05401
(Zip Code)
(802) 658-9959
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (l) has filed all
reports required to be filed by Section l3 or l5(d) of the Securities
Exchange Act of l934 during the preceding l2 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
7,826,648 shares of common stock, $l.00 par, outstanding on March 31, 1997.
INDEX TO FORM 10-Q
PART I PAGE
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Financial Highlights (Unaudited) 1
Item l Interim Financial Statements
Consolidated Statements of Income for the Three Months
Ended March 31, 1997 and 1996 (Both unaudited) 2
Consolidated Balance Sheets at March 31, 1997 (Unaudited),
December 31, 1996 and March 31, 1996 (Unaudited) 3
Statements of Changes in Shareholders' Equity for the
Period January 1, 1996 to March 31, 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1997 and 1996 (Both unaudited) 5
Notes to Unaudited Interim Consolidated Financial Statements 6
Independent Auditors' Report 7
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II
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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 23
Signatures 24
Glossary 25
Financial Highlights (Unaudited)
Three Months Twelve Months
Ended March 31, Ended December 31,
------------------------- -------------------------
(Dollars in thousands, except share and per share data) 1997 1996 1996 1995
-------------------------------------------------------
Income Data
Interest income $ 50,982 $ 43,133 $ 190,008 $ 152,624
Interest expense 22,434 18,517 81,140 67,980
-------------------------------------------------------
Net interest income 28,548 24,616 108,868 84,644
Provision for loan losses 1,750 1,300 5,600 4,375
-------------------------------------------------------
Net interest income after provision for loan losses 26,798 23,316 103,268 80,269
Non-interest income 6,626 5,886 25,303 20,910
Goodwill amortization 1,306 731 4,652 632
Other expenses 21,675 21,422 86,548 69,957
-------------------------------------------------------
Total non-interest expense 22,981 22,153 91,200 70,589
-------------------------------------------------------
Income before income taxes 10,443 7,049 37,371 30,590
Income taxes 3,393 2,299 11,981 8,217
-------------------------------------------------------
Net income $ 7,050 $ 4,750 $ 25,390 $ 22,373
=======================================================
Share And Per Share Data
Weighted average number of shares outstanding 7,826,648 7,332,386 7,703,758 6,804,425
Net income $ 0.90 $ 0.65 $ 3.30 $ 3.29
Shares outstanding, p.e. 7,826,648 7,826,648 7,826,648 6,804,425
Book value $ 26.55 $ 24.50 $ 26.41 $ 23.50
Tangible book value, p.e. 22.10 19.38 21.80 22.25
Cash dividends declared 0.29 0.25 1.00 0.92
Market price:
High 46.25 38.50 41.50 39.50
Low 40.00 32.50 31.50 21.75
Close 40.50 35.25 41.50 38.50
Share volume 899,366 1,149,471 3,773,138 2,205,539
Average monthly share volume 299,789 383,157 314,428 183,795
Average Balances
Assets $2,617,498 $2,159,688 $2,405,407 $1,875,400
Earning assets, net of fair value adjustment 2,461,629 2,022,082 2,252,385 1,781,836
Loans 1,864,504 1,538,784 1,730,720 1,329,188
Goodwill 35,600 23,511 34,582 9,007
Deposits 2,065,842 1,785,940 1,989,006 1,453,878
Short-term borrowed funds 295,780 124,853 159,672 164,010
Long-term debt 24,887 52,411 43,951 94,107
Shareholders' equity 207,678 175,518 191,279 145,950
Key Ratios
Return on average assets 1.09% 0.88% 1.06% 1.19%
Return on average shareholders' equity 13.77 10.88 13.27 15.33
Efficiency ratio 61.37 62.73 62.11 65.11
Net loan charge-offs to average loans 0.35 0.22 0.34 0.28
Provision for loan losses to average loans 0.38 0.34 0.32 0.33
Allowance for loan losses to loans, p.e. 1.24 1.39 1.27 1.64
Allowance for loan losses coverage of non-performing loans, p.e. 123.27 158.21 124.00 158.15
Non-performing assets to total assets, p.e. 0.76 0.66 0.76 0.79
Total capital to risk-adjusted assets, p.e. 10.43 10.32 10.35 12.48
Tier 1 capital to risk-adjusted assets, p.e. 9.22 9.07 9.11 11.22
Tier 1 capital to quarterly average total assets (Leverage) 6.92 7.29 6.91 8.05
Tangible shareholders' equity to tangible assets, p.e. 6.62 6.39 6.65 7.96
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months
Ended March 31,
------------------
(In thousands, except per share data) 1997 1996
------------------
Interest Income:
Interest and fees on loans $41,832 $35,817
Interest on money market investments 114 405
Interest on securities available for sale 8,448 6,050
Interest on investment securities 588 861
------------------
Total interest income 50,982 43,133
Interest Expense:
Deposits 18,384 16,336
Short-term borrowed funds 3,655 1,416
Long-term debt 395 765
------------------
Total interest expense 22,434 18,517
------------------
Net Interest Income 28,548 24,616
Less: provision for loan losses 1,750 1,300
------------------
Net interest income after provision for loan losses 26,798 23,316
------------------
Other Operating Income:
Income from fiduciary activities 2,022 1,996
Service charges on depositor accounts 1,856 1,340
Card product income 720 599
Loan servicing income 689 679
Net loan transactions 235 601
Net securities transactions 18 3
Other income 1,086 668
------------------
Total other operating income 6,626 5,886
Other Operating Expenses:
Salaries 8,966 8,375
Employee benefits 2,326 2,171
Net occupancy expenses 1,975 1,786
Equipment and software expenses 1,756 1,433
Data processing fees 1,207 1,108
FDIC deposit insurance and other regulatory expenses 187 99
Other real estate owned and repossession expenses 97 30
Legal and professional fees 794 857
Printing and supplies expenses 597 1,426
Advertising and marketing expenses 614 1,097
Amortization of goodwill 1,306 731
Other expenses 3,156 3,040
------------------
Total other operating expenses 22,981 22,153
------------------
Income before income tax expense 10,443 7,049
Income tax expense 3,393 2,299
------------------
Net Income $ 7,050 $ 4,750
==================
Net income per share $ 0.90 $ 0.65
==================
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
March 31, December 31, March 31,
(In thousands, except share and per share data) 1997 1996 1996
------------------------------------------
(Unaudited) (Unaudited)
Assets
Cash and due from banks $ 84,726 $ 91,871 $ 87,251
Money market investments 101 101 3,600
-----------------------------------------
Cash and cash equivalents 84,827 91,972 90,851
-----------------------------------------
Securities available for sale, at fair value 542,861 531,269 442,452
Loans held for sale 8,533 12,106 17,766
Investment securities 31,977 34,194 47,154
Loans 1,899,495 1,848,232 1,735,050
Less: allowance for loan losses 23,638 23,520 24,183
-----------------------------------------
Net loans 1,875,857 1,824,712 1,710,867
-----------------------------------------
Accrued interest receivable 15,275 15,148 14,798
Premises, equipment and software, net 29,341 29,448 29,639
Other real estate owned and repossessed assets 1,013 921 623
Goodwill 34,836 36,142 40,063
Capitalized mortgage servicing rights 4,233 3,921 3,729
Other assets 19,907 21,490 16,164
-----------------------------------------
Total assets $2,648,660 $2,601,323 $2,414,106
=========================================
Liabilities and Shareholders' Equity
Deposits:
Demand deposits $ 281,164 $ 287,598 $ 259,833
NOW accounts & money market savings 787,801 773,870 762,225
Regular savings 212,651 215,364 245,476
Time deposits $100 thousand and greater 88,173 91,245 79,268
Time deposits under $100 thousand 708,527 697,987 693,823
-----------------------------------------
Total deposits 2,078,316 2,066,064 2,040,625
-----------------------------------------
Short-term borrowed funds:
Federal funds purchased 12,430 23,305 --
Securities sold under agreements to repurchase 147,643 116,484 98,712
Borrowings from U.S. Treasury 16,839 11,672 13,198
Borrowings from Federal Home Loan Bank of Boston 140,000 129,000 --
-----------------------------------------
Total short-term borrowed funds 316,912 280,461 111,910
-----------------------------------------
Long-term debt:
Federal Home Loan Bank of Boston term notes 11,329 12,923 32,566
Bank term loan 12,350 13,000 16,800
-----------------------------------------
Total long-term debt 23,679 25,923 49,366
-----------------------------------------
Accrued interest payable 4,257 3,914 4,649
Other liabilities 17,722 18,224 15,835
-----------------------------------------
Total liabilities 2,440,886 2,394,586 2,222,385
-----------------------------------------
Shareholders' equity:
Common stock, $1.00 par value; authorized 20,000,000 shares;
issued and outstanding 7,826,648 shares 7,827 7,827 7,827
Surplus 87,377 87,410 87,091
Retained earnings 119,755 115,130 100,701
Unamortized employee restricted stock (1,028) (1,153) (745)
Net unrealized losses on securities available for
sale, net of tax (6,157) (2,477) (3,153)
-----------------------------------------
Total shareholders' equity 207,774 206,737 191,721
-----------------------------------------
Total liabilities and shareholders' equity $2,648,660 $2,601,323 $2,414,106
=========================================
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Net
Unearned Unrealized
Portion of Gains (Losses)
Employee On Securities,
Common Retained Restricted Available for
(In thousands, except per share data) Stock Surplus Earnings Stock Sale, Net of Tax Total
----------------------------------------------------------------------------
Balance, January 1, 1996 $6,804 $56,023 $ 97,978 $ (898) $ 29 $159,936
Net income -- -- 25,390 -- -- 25,390
Issuance of common stock, net of expenses 1,023 31,193 -- -- -- 32,216
Adjustment of securities available for sale
to fair value, net of tax -- -- -- -- (2,506) (2,506)
Cash dividends $1.00 per share -- -- (7,827) -- -- (7,827)
Issuance of employee restricted stock -- -- -- (371) -- (371)
Amortization of employee restricted stock -- 194 -- 116 -- 310
Exercise of employee stock options -- -- (411) -- -- (411)
----------------------------------------------------------------------------
Balance, December 31, 1996 $7,827 $87,410 $115,130 $(1,153) $(2,477) $206,737
============================================================================
Net income -- -- 7,050 -- -- 7,050
Adjustment of securities available for sale
to fair value, net of tax -- -- -- -- (3,680) (3,680)
Cash dividends $.29 per share -- -- (2,270) -- -- (2,270)
Amortization of employee restricted stock -- (33) -- 125 -- 92
Exercise of employee stock options -- -- (155) -- -- (155)
----------------------------------------------------------------------------
Balance, March 31, 1997 (Unaudited) $7,827 $87,377 $119,755 $(1,028) $(6,157) $207,774
============================================================================
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31,
----------------------------
(In thousands) 1997 1996
----------------------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 7,050 $ 4,750
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of premises, equipment and software 1,186 1,020
Amortization of goodwill 1,306 731
Net accretion of investment securities (93) (114)
Net amortization of securities available for sale 795 468
Provision for loan losses 1,750 1,300
Adjustment of other real estate owned to estimated fair value 65 16
Provision for deferred tax expense (benefit) 185 (281)
Amortization of employee restricted stock 92 28
Exercise of employee stock options (155) (70)
Net securities transactions (18) (3)
Net gain on sale of other real estate owned and repossessed assets (151) (163)
Proceeds from sale of loans held for sale 25,165 54,122
Originations and purchases of loans held for resale (39,750) (59,445)
Net gain on sale of loans held for sale (235) (601)
Increase in interest receivable (127) (1,369)
Increase in interest payable 343 309
Decrease (increase) in other assets and other intangibles 3,306 (280)
Increase (decrease) in other liabilities (502) 2,314
---------------------------
Total adjustments (6,838) (2,018)
---------------------------
Net cash provided by operating activities 212 2,732
---------------------------
Cash flows from investing activities:
Net cash provided by acquisition -- 124,141
Proceeds from maturity and call of securities available for sale 15,188 50,714
Proceeds from maturity and call of investment securities 2,328 2,663
Proceeds from sale of securities available for sale -- 20,235
Purchase of securities available for sale (33,469) (159,698)
Proceeds from sale of OREO and repossessed assets 943 1,015
Loans purchased (26,352) --
Net (increase) decrease in originated loans (9,099) 20,491
Capital expenditures (1,085) (1,870)
---------------------------
Net cash provided by (used in) investing activities (51,546) 57,691
---------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 12,252 (78,658)
Net increase (decrease) in short-term borrowed funds 36,451 (4,303)
Issuance of common stock, net of expenses -- 32,216
Payments on long term debt (2,244) (6,631)
Dividends paid (2,270) (1,957)
---------------------------
Net cash provided by (used in) financing activities 44,189 (59,333)
---------------------------
Net increase (decrease) in cash and cash equivalents (7,145) 1,090
---------------------------
Cash and cash equivalents at beginning of period 91,972 89,761
---------------------------
Cash and cash equivalents at end of period $ 84,827 $ 90,851
===========================
Additional disclosure relative to statement of cash flows:
Interest paid $ 22,091 $ 17,782
===========================
Taxes paid $ 106 $ 5,077
===========================
Supplemental schedule of non-cash investing and financing activities:
Net transfer of loans to OREO and repossessed assets $ 949 $ 322
Net transfer of loans held for sale to loan status 18,393 7,080
Adjustment to securities available for sale to fair value, net of tax (3,680) (3,182)
Fair value of assets acquired in acquisition -- 405,741
Fair value of liabilities assumed -- 560,340
See accompanying notes to unaudited interim consolidated financial statements.
Notes to Unaudited Interim Consolidated Financial Statements
1. The accompanying unaudited interim consolidated financial statements
include the accounts of the Company and its subsidiaries, First
Massachusetts Bank, N.A., North American Bank Corporation and its
wholly owned subsidiary, Farmington National Bank, The Howard Bank,
N.A., First Vermont Bank and Trust Company and its wholly owned
subsidiary, Banknorth Mortgage Company, Franklin Lamoille Bank,
Granite Savings Bank and Trust Company, Woodstock National Bank, The
Stratevest Group, N.A. and North Group Realty, Inc. It is the opinion
of management that the accompanying unaudited interim consolidated
financial statements have been prepared in accordance with the
instructions to Form 10-Q and reflect all adjustments which are
considered necessary to report fairly the financial position as of
March 31, 1997 and 1996, the Consolidated Statements of Income for the
three months ended March 31, 1997 and 1996, and the Consolidated
Statements of Cash Flows for the three months ended March 31, 1997 and
1996 and the Consolidated Statements of Changes in Shareholders'
Equity for the period January 1, 1996 through March 31, 1997. The
accompanying unaudited interim consolidated 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 1996 annual report to
shareholders on Form 10-K.
2. Earnings per share were calculated based on 7,826,648 and 7,332,386
weighted average shares issued and outstanding during the three month
periods ended March 31, 1997 and 1996, respectively. The effect of the
outstanding stock option awards is not material to the calculation of
earnings per share.
3. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share"
(SFAS No. 128). SFAS No. 128 establishes standards for computing and
presenting earnings per share (EPS). This Statement simplifies the
standards for computing EPS making them comparable to international EPS
standards and supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share" and related interpretations. SFAS No. 128 replaces
the presentation of primary EPS with the presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the
basic EPS computation to the numerator and denominator of the diluted
EPS computation.
Basic EPS excludes dilution and is computed by dividing income available
to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity
(such as the Company's stock options). This Statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. Earlier adoption is not permitted. This
Statement requires restatement of all prior-period EPS data presented.
Management does not anticipate the effect of the adoption of SFAS No.
128 to be material.
[LOGO] KPMG Peat Marwick LLC
74 N. Pearl St.
Albany, New York 12207
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Banknorth Group, Inc.
We have reviewed the consolidated balance sheets of Banknorth Group, Inc. and
subsidiaries ("the Company") as of March 31, 1997 and 1996, and the related
consolidated statements of income and cash flows for the three-month periods
ended March 31, 1997 and 1996, and the consolidated statement of changes in
shareholders' equity for the three month period ended March 31, 1997. 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 prinicipally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Banknorth Group, Inc. and
subsidiaries as of December 31, 1996, and the related consolidated statements
of income and cash flows for the year then ended (not presented herein) and
consolidated statement of changes in shareholders' equity for the year then
ended; and in our report dated January 24, 1997 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, 1996 and the consolidated statement of changes in shareholders'
equity for the year ended December 31, 1996, 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.
/S/ KPMG PEAT MARWICK LLP
April 25, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The review that follows focuses on the factors affecting the financial
condition and results of operations of Banknorth Group, Inc. ("Banknorth" or
"Company") during the three months ended March 31, 1997, with comparisons to
1996 as applicable. Net interest income and net interest margin are
presented on a fully taxable equivalent basis in this discussion. Balances
discussed are daily averages unless otherwise described. The unaudited
consolidated interim financial statements, as well as the 1996 annual report
to shareholders' should be read in conjunction with this review. Amounts in
prior period consolidated financial statements are reclassified whenever
necessary to conform to the current period's 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 non-bank providers of
various financial services;
* uncertainties due to the limited amount 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 $7.1 million, or $.90 per share for
the three months ended March 31, 1997, as compared to $4.8 million, or $.65
per share recorded in the same period in 1996.
During the first quarter of 1997:
* The quarterly cash dividend was increased to $.29 per share.
* The Company earned a return on average shareholders' equity of
13.77%.
* The effiency ratio was 61.37%.
MERGER AND ACQUISITION ACTIVITY
First Massachusetts Bank, N.A. ("FMB")
On February 16, 1996, Banknorth completed the purchase of thirteen
banking offices of Shawmut Bank, N.A. (the "Shawmut branches") in central and
western Massachusetts. A new subsidiary, FMB, with principal offices in
Worcester, Massachusetts, was organized to own and operate the acquired
offices.
Under the terms of the Purchase and Assumption Agreement with Shawmut
Bank, National Association ("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 were past due 90 days or more. In
addition, the Company received approximately $124.1 million in cash as
consideration for the net liabilities assumed.
The transaction was 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, substantially all of which is deductible
for income tax purposes, and is being amortized over seven years on a
straight-line basis. The results of operations for FMB are included in
Banknorth's consolidated financial statements from the date of acquisition
forward.
To complete the transaction, Banknorth issued 1,022,223 shares of
common stock in February, 1996. The net proceeds of $32.2 million were used
to provide a portion of the initial capital of FMB and to help offset the
reduction in the Company's regulatory capital ratios resulting from the
acquisition.
ASSET LIABILITY MANAGEMENT
In managing its asset portfolios, Banknorth utilizes funding and
capital sources within sound credit, investment, interest rate and liquidity
risk guidelines. Loans and securities are the Company's primary earning
assets with additional capacity invested in money market instruments.
Earning assets were 93.74% and 93.04% of total assets at March 31, 1997 and
1996, respectively.
Banknorth, through its management of liabilities, attempts to provide
stable and flexible sources 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 limit 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 bank term debt.
Earning Assets
Earning assets of $2.5 billion during the first quarter of 1997, were
$439.5 million, or 21.7%, higher than during the first quarter of 1996
primarily due to the addition of FMB. Table A, Mix of Average Earning
Assets, shows how the mix of earning assets has changed as compared to the
same period in 1996.
Loans. Table B, Loan Portfolio, provides the detailed components of
the loan portfolio as of March 31, 1997 and 1996,and December 31, 1996,
while Table A. Mix of Average Earning Assets provides information relating
to average balances for the quarters ended March 31, 1997 and 1996.
Total average loans were $1.9 billion during the period ended March
31, 1997, an increase of $325.7 million, or 21.2%, over the same period in
1996 primarily the result of the addition of FMB and growth. Loan demand was
strong during 1996, especially in the markets served by FMB. During the
first quarter of 1997, in order to supplement loan originations and to
expand the portfolio of earning assets, the Company purchased approximately
$26.4 million of primarily residential real estate loans.
Given current economic indicators, management believes that the
Company will see continued but slowing growth in the loan portfolio during
the balance of 1997. While the most recent interest rate increase initiated
by the Federal Reserve Bank is not expected to significantly impact lending
activity in the Company's markets, additional increases could lead to a slow
down in lending activity.
Loans held for sale. Loans designated as held for sale are primarily
single-family mortgages originated by the Company's mortgage banking
subsidiary or purchased through its wholesale lending operation, awaiting
sale into the secondary market or to other Banknorth subsidiaries. Loans
originated or purchased by the mortgage company are sold on the secondary
market with some level of production, primarily adjustable rate mortgages,
retained by the Company to be held in its mortgage portfolio. Loans held
for sale were $12.4 million during the first quarter of 1997, $4.8 million,
or 27.9% below the three month average during 1996. Recent movements in
interest rates have slowed both new loan originations as well as refinancing
activity, resulting in a reduced level of mortgage product awaiting sale
into the secondary market.
Securities available for sale. This 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 securities is used primarily for liquidity purposes while simultaneously
producing an earnings stream, and is managed under policy limits established
for average duration, average convexity and average portfolio life.
Period end balances in securities available for sale totaled $542.9
million, $531.3 million and $442.5 million at March 31, 1997, December 31,
1996 and March 31, 1996, respectively. The increase of $100.4 million from
March 31, 1996 to March 31, 1997 reflects purchases made primarily during
the fourth quarter of 1996 and first quarter of 1997 aimed at increasing the
size of the earning asset portfolio. Average balances for the three months
ended March 31, 1997 and 1996 were $543.8 million and $389.5 million,
respectively.
Investment securities. The designation "investment securities" is
made at the time of purchase or transfer based upon the intent and ability
to hold these securities until maturity. The management of this portfolio
focuses primarily on yield and earnings generation, liquidity through cash
flow and interest rate risk characteristics within the framework of the
entire balance sheet. Cash flow guidelines and average duration targets have
been established for management of this portfolio. The balance of securities
in this category was $32.0 million as of March 31, 1997 as compared to $34.2
million and $47.2 million as of December 31 and March 31, 1996,
respectively. The decrease from March 31, 1996 reflects the reinvestment of
cash flows generated by this portfolio into the available for sale portfolio
during 1996 and thus far in 1997.
Table C, Securities Available for Sale and Investment Securities
provides details of securities available for sale and investment securities
at March 31, 1997 and 1996, as well as December 31, 1996.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $7.7 million during the first quarter of 1997, down
$20.5 million from the first quarter of 1996. During the first quarter of
1996, the Company maintained high levels of liquidity in anticipation of
deposit runoff at the newly formed FMB. The liquidity needs of that bank
have reached normal levels resulting in a significant decrease in the
investment in short-term money market instruments.
Income from earning assets. Income from earning assets was $51.1
million for the three month period ended March 31, 1997, as compared to
$43.3 million for the same period in 1996. The increase of $7.8 million, or
18.0%, resulted from the full quarter effect of the branch acquisition which
gave rise to FMB, as well as increases in earning assets through natural
growth. Total earning assets during the first quarter 1997 of $2.5 billion
yielded 8.42%, while in 1996 earning assets of $2.0 billion yielded 8.62%.
The increase in earning assets contributed $8.7 million towards the increase
in interest income, while the decline in yield of 20 basis points caused a
decrease of $875 thousand. Table D, Average Balances, Yields and Net
Interest Margins and Table F, Volume and Yield Analysis contain details of
changes by category of interest income from earning assets.
Funding Sources
The Company utilizes various traditional sources of funds to support
its earning asset portfolios. Table E, Average Sources of Funding, presents
the various categories of funds used and the corresponding average balances
for the first quarter of 1997 and 1996, and changes, by category, from the
first quarter of 1996.
Core Deposits. Total core deposits averaged $2.0 billion during the
three month period ended March 31, 1997, $256.1 million above the first
quarter average in 1996. Total core deposits represented 85.6% of total net
funding during the first quarter of 1997 as compared to 90.5% during the
same quarter of 1996.
Purchased Liabilities. Total purchased liabilities increased on
average from $227.9 million during the first quarter of 1996 to $398.9
million during the first quarter of 1997. The increased borrowings, or
purchased liabilities, was the result of the incremental funding
requirements related to loan and investment purchases made during 1996 and
the first quarter of 1997. As stated previously, various asset purchases
were made to increase the Company's earning asset base. Banknorth constantly
seeks to fund its earning assets in the most efficient and profitable
manner. Accordingly, management expects prudent levels of short-term
borrowed funds and long-term debt to continue to be important sources of
funding.
Expense of Interest-Bearing Liabilities. Banknorth's interest expense
for the three months ended March 31, 1997, was $22.4 million, $3.9 million,
or 21.2%, above 1996. Higher levels of interest bearing liabilities caused
the increase in interest expense. Total interest bearing liabilities of $2.1
billion during the first quarter of 1997, were $377.1 million higher than in
1996, and with a total cost of 4.31%, 2 basis points over the corresponding
period of the prior year. Table D, Average Balances, Yields and Net Interest
Margins and Table F, Volume and Yield Analysis contain details of changes by
category of interest bearing liabilities and interest expense.
Net Interest Income
Net interest income totaled $28.7 million and $24.8 million for the
three month periods ended March 31, 1997 and 1996, respectively. The net
interest margin was 4.73% during the first quarter of 1997 as compared to
4.93% during the first quarter of 1996. The yield on earning assets of 8.42%
for the first quarter of 1997, was 20 basis points below the corresponding
period of the prior year, while the cost of interest bearing liabilities,
4.31% in 1997, increased 2 basis points over the corresponding period of the
prior year.
Included in net interest income is the effect of interest rate swap
transactions and interest rate floors. Banknorth utilizes these off-balance
sheet instruments to correct imbalances between the re-pricing
characteristics of interest earning assets and interest bearing liabilities.
A significant portion of the Company's loans are adjustable or variable rate
resulting in reduced levels of interest income during periods of falling
rates. Certain categories of deposits reach a point where market forces
prevent further reduction in the rate paid on those instruments. The net
effect of these circumstances is reduced interest income offset only by a
nominal decrease in interest expense, thereby narrowing the net interest
margin. To protect the Company from this occurrence, interest rate floors
in the notional amount of $295.0 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 cost 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 the interest rate floors as of March 31, 1997 was $1.9 million.
The estimated fair value of these floors was $323 thousand as of March 31,
1997. The estimated fair value of the interest rate swap contracts was
$(304) thousand as of March 31, 1997.
Non-Performing Assets
As categorized by Banknorth Group, non-performing assets include non-
performing loans which are those loans in a non-accrual status, loans which
have been treated as troubled debt restructurings and loans past due 90 days
and still accruing interest. Also included in the total of non-performing
assets are foreclosed and in-substance foreclosed real estate properties and
repossessed non-real estate assets. Table G, Non-Performing Assets,
contains details of non-performing assets.
Non-performing loans. Non-performing loans totaled $19.2 million, up
$208 thousand, or 1.1% from December 31, 1996, and $3.9 million higher than
at March 31, 1996, respectively.
The Company is closely monitoring certain performing loans due to
indications of financial difficulty or other factors influencing the
ultimate collectibility of those loans.
Other real estate owned. Total other real estate owned was $1.0
million at March 31, 1997, as compared to $623 thousand at March 31, 1996,
and $921 thousand at year end 1996.
Allowance for loan losses and provision. The balance of the allowance
for loan losses ("allowance") is maintained at a level that is, in
management's judgment, representative of the amount of risk inherent in the
loan portfolio, given past, present and expected conditions. Table H,
Summary of Loan Loss Experience, provides information regarding types of
loans charged off and associated recoveries.
Loans charged off equaled $2.8 million, or an annualized .59% of
average loans for the first quarter of 1997, an increase of $649 thousand
from the first quarter of 1996. Recoveries of $1.1 million for the first
quarter of 1997, were $121 thousand less than during the same period in
1996. Given the growth in the loan portfolio , management expects an
increased level of loan charge-offs in 1997 as compared to that experienced
in 1996.
The provision for loan losses ("provision") for the first quarter of
1997 was $1.8 million, or an annualized .38% of average loans. Provisions of
$1.3 million, or an annualized .34% of average loans, and $5.6 million, or
.32% of average loans were experienced during the first quarter of 1996 and
the full year of 1996, respectively.
Provisions recorded are those necessary to maintain the allowance at a
level adequate enough to absorb reasonably predictable loan charge-offs. At
March 31, 1997, the allowance provided a coverage of non-performing loans of
123.27% as compared to 158.21% and 124.00% at March 31, 1996 and December
31,1996, respectively.
Liquidity and Interest Rate Sensitivity
Banknorth seeks to obtain favorable sources of funding and to maintain
prudent levels of liquid assets in order to satisfy varied liquidity
demands. Besides serving as a funding source for maturing obligations,
liquidity provides flexibility in responding to customer initiated needs.
Many factors affect the Company's ability to meet liquidity needs, including
variations in the markets served by its network of offices, its mix of
assets and liabilities, reputation and credit standing in the marketplace,
and general economic conditions. Banknorth's earnings performance and strong
capital position enable the Company to raise funds easily in the marketplace
and to secure new sources of funding.
The Company utilized a financial institution borrowing pursuant to a
five year credit facility to finance its 1994 acquisition of North American
Bank Corporation, parent company of Farmington National Bank. In December,
1996, this credit facility was re-negotiated on terms considered favorable
to the Company. The Company's primary source of funds to pay principal and
interest under this facility is current dividends from its subsidiary banks.
Accordingly, the Company's ability to service the debt under this credit
facility is dependent upon the continued ability of the subsidiary banks to
pay dividends in an amount sufficient to service such debt.
The Company actively manages its liquidity position through target
ratios established under its liquidity policy. Continual monitoring of
these ratios, both historically and through forecasts, allows Banknorth to
employ strategies necessary to maintain adequate liquidity. Management has
also defined various degrees of adverse liquidity situations which could
potentially occur and has prepared appropriate contingency plans should such
situations arise.
Management of interest rate risk involves continual monitoring of the
relative sensitivity of asset and liability portfolios to changes in rate
due to maturities, re-pricing opportunities and embedded options.
Sophisticated forecasting models are utilized to quantify the impact of
changes in rates on the Company's net interest income. Specific guidelines
relating to interest rate sensitivity have been established by the Company
and are monitored on a regular basis.
OTHER OPERATING INCOME AND EXPENSES
Other Operating Income
Other operating income totaled $6.6 million for the quarter ended
March 31, 1997, $740 thousand, or 12.6% higher than that recorded during the
first quarter of 1996. Included in other operating income for the first
quarter of 1997 was a non-recurring gain on the sale of fixed assets in the
amount of $133 thousand. The fixed asset sale was related to check
processing equipment which had reached the end of its useful life and was
replaced by the more technically advanced imaging equipment.
Service charge income was $1.9 million during the three months ended
March 31, 1997, as compared to $1.3 million during the same quarter of 1996.
Increases in transaction fees on deposit accounts and a full quarter of
activity at FMB accounted for the increase.
Card product income in 1997 increased by $121 thousand, or 20.2%, over
1996, the result of the introduction of the Visa check card and growth in
the merchant services portfolio.
Net loan transactions amounted to $235 thousand during the three
months ended March 31, 1997, a decrease of $366 thousand from 1996. The
decrease in net loan transactions is reflective of reduced loan origination
volumes due to the increasing interest rate environment, as well as the
highly competitive nature of the mortgage market where pricing on new loans
is reducing gains realized at the time of sale.
Other income, $1.1 million for the three months ended March 31, 1997,
increased $418 thousand, or 62.6% over the same period in 1996. A
significant portion of the increase resulted from the aforementioned gain on
sale of fixed assets. A full quarter of activity at FMB in 1997 also
contributed to the increase.
Other Operating Expenses
Other operating expenses for the first quarter of 1997 were $23.0
million, $828 thousand, or 3.7% above the first three months in 1996. One-
time expenses related to the start-up of FMB and Stratevest were
approximately $1.8 million during the first quarter of 1996. Other one-time
expenses related to a data processing conversion and the transition to a new
incentive-based compensation system were approximately $366 thousand, also
in 1996. The Company's efficiency ratio, which is adjusted to exclude
material one-time income and expenses, was 61.37% for the first quarter of
1997, down from 62.73% during the same period in 1996.
Salaries expense, the largest component of other operating expenses,
was $9.0 million, up $591 thousand, or 7.1% from 1996. The 1996 expense
includes one-time costs of approximately $267 thousand related to the
startup of FMB. The increase over 1996 is attributable primarily to
increased staffing levels necessary to fully staff administrative and credit
functions at FMB, as well as normal salary increases.
Net occupancy expenses of $2.0 million during the three months ended
March 31, 1997, were $189 thousand, or 10.6% above the same period in 1996.
Contributing to the increase was a full quarter of operation at FMB.
Equipment and software expenses were $1.8 million and $1.4 million for
the quarters ended March 31, 1997 and 1996, respectively. The increase from
1996 to 1997 is attributable to a full quarter of FMB and new technology
including imaging equipment and a marketing customer information file
system.
FDIC deposit insurance and other regulatory expense, increased $88
thousand from the same period in 1996. The Federal Deposit Insurance
Corporation Improvement Act mandated a reduction in insurance rates when the
Bank Insurance Fund achieved a 1.25% capitalization ratio. That target was
reached in May 1996 resulting in significantly lower insurance premiums in
1996 than in previous years. The expense increase in 1997 over 1996 was the
result of higher deposit balances primarily due to FMB and higher insurance
rates due to the passage of the Economic Growth and Regulatory Reduction Act
of 1996. This act, which resulted in higher Bank Insurance Fund (BIF)
assessments for 1997 and thereafter, provides for the recapitalization of
the Savings Association Insurance Fund (SAIF) and for the eventual merger of
the SAIF and the BIF.
Other real estate owned and repossession expenses were $97 thousand in
1997 and $30 thousand in 1996. In 1997, expenses relating to properties in
the OREO portfolio were $248 thousand with net gains on the sale of OREO
properties of $151 thousand, whereas, in 1996 OREO expenses were $193
thousand and net gains on sale of disposed properties were $163 thousand.
Legal and professional expenses during the three months ended March
31, 1997 decreased by $63 thousand from 1996. Included in 1996 were one-time
expenses related to the FMB acquisition of $99 thousand.
Printing and supplies expense was $597 thousand during the first
quarter of 1997, $829 thousand less than during the same period in 1996. The
decrease reflects the non-recurring expenses of approximately $492 thousand
relating mostly to the initial check issuance to FMB customers, expenses of
approximately $166 thousand for new ATM and debit cards, and approximately
$90 thousand in paper expenses related to the Company's new imaging system,
all included in the 1996 expense.
Marketing expenses were $614 thousand and $1.1 million during the
three months ended March 31, 1997 and 1996, respectively. Non-recurring
marketing and advertising expenses relating to FMB, Stratevest and the
ATM/debit card program totaled approximately $543 thousand in the first
quarter of 1996.
Goodwill amortization expense of $1.3 million during the first quarter
of 1997, was $575 thousand higher than in 1996 reflecting a full quarter of
amortization of goodwill related to the FMB branch acquisition in 1997.
Income Taxes
In the first quarter of 1997, the Company recognized income tax
expense of $3.4 million, or 32.5% of the income before taxes. Tax expense
on the Company's income was lower than tax expense at the Federal statutory
rate of 35%, primarily due to tax-exempt interest income and low income
housing credits.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable
financial organization, Banknorth strives to maintain strong capital ratios.
Prior to 1996, new issues of equity securities had not been required since
traditionally most of its capital requirements had been provided through
retained earnings. However, to continue the Company's growth through
acquisition, Banknorth chose to raise approximately $32.2 million in equity
capital through the issuance of 1,022,223 shares of its common stock in
February, 1996.
During the first quarter of 1997, the board of directors declared a
dividend of $.29 per share, an increase of $.04 per share from the previous
quarter. This dividend resulted in a payout of 32.2% of the first quarter
1997 net income. The board of directors of the Company presently intends to
continue the payment of regular quarterly cash dividends subject to
adjustment from time to time, based upon the Company's earnings outlook and
other relevant factors. The Company's principal source of funds to pay cash
dividends is derived from dividends from its subsidiary banks. Various laws
and regulations restrict the ability of banks to pay dividends to their
shareholders. As part of its plan to capitalize FMB at a "well-capitalized"
level for regulatory capital purposes, the Company, in the first quarter of
1996, redeployed accumulated capital of certain of its subsidiary banks which
included substantially all of the then current dividend paying capacity of
such subsidiary banks. Because the special dividend exceeded applicable
regulatory limitations, the Company obtained approval from the applicable
regulatory agencies for the payment of that portion of the dividend which
exceeded such regulatory limitations. Payment of that special dividend
restricts the dividend paying capacity of the subsidiary banks to 100% or
less of prospective current period net income. Accordingly, the payment of
dividends by the Company in the future will require the generation of
sufficient future earnings by the subsidiary banks.
At March 31, 1997, Banknorth's Tier I capital was $179.1 million, or
9.22% of total risk adjusted assets, compared to $154.8 million and 9.07% as
of March 31, 1996. The ratio of tier I capital to total assets (leverage
ratio) was 6.92%, and 7.29% as of March 31, 1997 and 1996, respectively.
Banknorth, and its subsidiaries individually, are "well capitalized" at
March 31, 1997 according to regulatory definition, and thereby, exceed all
minimum regulatory capital requirements . Table I, Capital Ratios, provides
the components of capital as of various dates.
On May 1, 1997, Banknorth established Banknorth Capital Trust I (the
"Trust") which is a statutory business trust formed under Delaware law upon
the filing of a certificate of trust with the Delaware Secretary of State.
The Trust exists for the exclusive purposes of (i) issuing and selling 30 year
trust securities in the aggregate amount of $30.0 million at 10.52%, (ii)
using the proceeds from the sale of the trust securities to acquire the junior
subordinated debentures issued by the Company and (iii) engaging in only
those other activities necessary, advisable or incidental thereto. The
junior subordinated debentures will be the sole assets of the Trust and,
accordingly, payments under the junior subordinated debentures will be the
sole revenue of the Trust. All of the common securities of the Trust will
be owned by Banknorth Group. The Company intends to use the net proceeds
from the sale of the junior subordinated debentures for general corporate
purposes. The trust securities, with associated expense that is tax
deductible, qualify as Tier I capital under current regulatory definitions.
- -------------------------------------------------------------------------------------------------------------------------
TABLE A. Mix of Average Earning Assets
Three Months Percentage of
Ended March 31, % of Total Earning Assets
----------------------- Total --------------------
(Dollars in thousands) 1997 1996 Change Change 1997 1996
-----------------------------------------------------------------------
Loans, net of unearned income
and unamortized loan fees and costs:
Commercial, financial and agricultural $ 308,200 $ 248,597 $ 59,603 13.6% 12.5% 12.3%
Construction and land development 30,660 21,036 9,624 2.2 1.2 1.0
Commercial real estate 534,850 434,885 99,965 22.7 21.7 21.5
Residential real estate 744,450 607,169 137,281 31.2 30.3 30.0
Credit card receivables 22,867 25,013 (2,146) (0.5) 0.9 1.2
Lease receivables 72,572 49,461 23,111 5.3 3.0 2.5
Other installment 150,905 152,623 (1,718) (0.4) 6.1 7.6
------------------------------------------------------------------
Total loans, net of unearned income and 1,864,504 1,538,784 325,720 74.1 75.7 76.1
unamortized loan fees and costs
Securities available for sale:
U.S. Treasuries and Agencies 115,520 67,170 48,350 11.0 4.7 3.3
States and political subdivisions 2,361 -- 2,361 0.5 0.1 --
Mortgage-backed securities 276,246 267,408 8,838 2.0 11.3 13.2
Corporate debt securities 122,592 32,794 89,798 20.5 5.0 1.6
Equity securities 27,127 22,143 4,984 1.1 1.1 1.1
------------------------------------------------------------------
Total securities available for sale 543,846 389,515 154,331 35.1 22.2 19.2
Investment securities:
U.S. Treasuries and Agencies 12,631 23,120 (10,489) (2.4) 0.5 1.2
States and political subdivisions 1,127 1,602 (475) (0.1) -- 0.1
Mortgage-backed securities 19,385 22,757 (3,372) (0.8) 0.8 1.1
Corporate debt securities 10 892 (882) (0.2) -- --
------------------------------------------------------------------
Total investment securities 33,153 48,371 (15,218) (3.5) 1.3 2.4
Loans held for sale 12,400 17,196 (4,796) (1.1) 0.5 0.9
Money market investments 7,726 28,216 (20,490) (4.6) 0.3 1.4
------------------------------------------------------------------
Total earning assets $2,461,629 $2,022,082 $ 439,547 100.0% 100.0% 100.0%
==================================================================
- ------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
TABLE B. Loan Portfolio
At March 31, At December 31, % Change
------------------------------------------- -------------------- ------------------
1997 1996 1996 3/31/97 3/31/97
------------------------------------------------------------------ versus versus
(Dollars in thousands) Amount Percent Amount Percent Amount Percent 3/31/96 12/31/96
---------------------------------------------------------------------------------------
Commercial, financial, and
agricultural $ 318,434 16.8% $ 259,611 15.0% $ 300,730 16.3% 22.7% 5.9%
Real Estate:
Construction and land
development 31,881 1.7 18,432 1.0 29,364 1.6 73.0 8.6
Commercial 546,532 28.8 479,795 27.7 531,364 28.7 13.9 2.9
Residential 760,632 40.0 746,161 43.0 737,261 39.9 1.9 3.2
----------------------------------------------------------------
Total real estate 1,339,045 70.5 1,244,388 71.7 1,297,989 70.2 7.6 3.2
----------------------------------------------------------------
Credit card receivables 21,280 1.1 24,171 1.4 24,563 1.3 (12.0) (13.4)
Lease receivables 73,008 3.8 52,707 3.0 70,396 3.8 38.5 3.7
Other installment 147,728 7.8 154,173 8.9 154,554 8.4 (4.2) (4.4)
----------------------------------------------------------------
Total installment 242,016 12.7 231,051 13.3 249,513 13.5 4.7 (3.0)
----------------------------------------------------------------
Total loans 1,899,495 100.0 1,735,050 100.0 1,848,232 100.0 9.5 2.8
Less: allowance for loan losses 23,638 1.2 24,183 1.4 23,520 1.3 (2.3) 0.5
----------------------------------------------------------------
Net loans $1,875,857 98.8% $1,710,867 98.6% $1,824,712 98.7% 9.6% 2.8%
================================================================
- --------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
TABLE C. Securities Available for Sale and Investment Securities
At March 31, At December 31,
------------------------ ---------------
(Dollars in thousands) 1997 1996 1996
-------------------------------------------
Securities available for sale:
U.S. Treasuries and Agencies $118,145 $ 76,991 $111,774
States and political subdivisions 2,359 -- 2,361
Mortgage-backed securities 277,851 284,776 272,433
Corporate debt securities 127,086 62,191 121,384
Equity securities 27,126 23,344 27,128
Valuation reserve (9,706) (4,850) (3,811)
---------------------------------------
Total recorded value of
securities available for sale $542,861 $442,452 $531,269
=======================================
Investment securities:
U.S. Treasuries and Agencies $ 11,823 $ 22,484 $ 13,181
States and political subdivisions 1,127 1,596 1,135
Mortgage-backed securities 19,017 22,342 19,868
Corporate debt securities 10 732 10
---------------------------------------
Total recorded value of
investment securities $ 31,977 $ 47,154 $ 34,194
=======================================
Fair value of investment securities $ 31,985 $ 47,967 $ 34,644
=======================================
Excess of fair value versus
recorded value $ 8 $ 813 $ 450
Fair value as a % of recorded value 100% 101.7% 101.3%
- ------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
TABLE D. Average Balances, Yields, and Net Interest Margins
Three Months Ended March 31,
----------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------
Earning assets:
Money market investments $ 7,726 $ 114 5.98% $ 28,216 $ 405 5.77%
Securities available for sale, at amortized cost(1) 543,846 8,459 6.31 389,515 6,050 6.25
Loans held for sale 12,400 238 7.78 17,196 300 7.02
Investment securities, at amortized cost(1) 33,153 595 7.28 48,371 868 7.22
Loans, net of unearned income and
unamortized loan fees (1 and 2) 1,864,504 41,714 9.07 1,538,784 35,690 9.33
-------------------------------------------------------------------
Total earning assets 2,461,629 51,120 8.42 2,022,082 43,313 8.62
-------------------------------------------------------------------
Cash and due from banks 80,217 79,376
Allowance for loan losses (23,666) (23,103)
Valuation reserve for securities available for sale (4,210) (358)
Other assets 103,528 81,691
-----------------------------------------------
Total assets $2,617,498 $2,159,688
===============================================
Interest-bearing liabilities:
NOW accounts & money market savings $ 781,979 $ 6,708 3.48% $ 664,376 $ 5,617 3.40%
Regular savings 213,294 1,241 2.36 209,336 1,268 2.44
Time deposits $100 thousand and greater 91,206 1,221 5.43 67,447 974 5.81
Time deposits under $100 thousand 705,599 9,214 5.30 617,210 8,477 5.52
-------------------------------------------------------------------
Total interest-bearing deposits 1,792,078 18,384 4.16 1,558,369 16,336 4.22
Long-term debt 24,887 395 6.44 52,411 765 5.87
Short-term borrowed funds 295,780 3,655 5.01 124,853 1,416 4.56
-------------------------------------------------------------------
Total interest-bearing liabilities 2,112,745 22,434 4.31 1,735,633 18,517 4.29
-------------------------------------------------------------------
Demand deposits 273,764 227,571
Other liabilities 23,311 20,966
Shareholders' equity 207,678 175,518
-----------------------------------------------
Total liabilities and shareholders' equity $2,617,498 $2,159,688
===============================================
Net interest income $28,686 $24,796
============================================
Interest rate differential 4.11% 4.33%
=========================================
Net interest margin 4.73% 4.93%
=========================================
<FN>
Notes:
<F1> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal tax rate.
<F2> Includes principal balances of non-accrual loans and industrial
revenue bonds.
- --------------------------------------------------------------------------------------------------------------------------------
</FN>
- ------------------------------------------------------------------------------------------------------------------------
TABLE E. Average Sources of Funding
Three Months Percentage of
Ended March 31, Change Total Net Funding
------------------------ -------------------- -----------------
(Dollars in thousands) 1997 1996 $ % 1997 1996
---------------------------------------------------------------------
Demand deposits $ 273,764 $ 227,571 $ 46,193 20.3% 11.9% 12.0%
Retail deposits:
Regular savings 213,294 209,336 3,958 1.9 9.2 11.0
Time deposits under $100 thousand 705,599 617,210 88,389 14.3 30.6 32.5
NOW accounts & money market savings 781,979 664,376 117,603 17.7 33.9 35.0
------------------------------------------------------------------
Total retail deposits 1,700,872 1,490,922 209,950 14.1 73.7 78.5
------------------------------------------------------------------
Total core deposits 1,974,636 1,718,493 256,143 14.9 85.6 90.5
Less: cash and due from banks 80,217 79,376 841 1.1 3.5 4.2
------------------------------------------------------------------
Net core deposits 1,894,419 1,639,117 255,302 15.6 82.1 86.3
------------------------------------------------------------------
Time deposits $100 thousand and greater 91,206 67,447 23,759 35.2 4.0 3.4
Federal funds purchased 6,285 3,419 2,866 83.8 0.3 0.2
Securities sold under agreements to repurchase 143,813 107,360 36,453 34.0 6.2 5.7
Borrowings from U.S. Treasury 8,960 7,316 1,644 22.5 0.4 0.4
Short-term notes from FHLB 136,722 6,758 129,964 1,923.1 5.9 0.4
Long-term notes from FHLB 11,894 35,611 (23,717) (66.6) 0.5 1.9
------------------------------------------------------------------
Total purchased liabilities 398,880 227,911 170,969 75.0 17.3 12.0
------------------------------------------------------------------
Bank term loan 12,993 16,800 (3,807) (22.7) 0.6 0.9
Common stock offering, net -- 16,285 (16,285) (100.0) -- 0.8
------------------------------------------------------------------
Total net funding $2,306,292 $1,900,113 $406,179 21.4% 100.0% 100.0%
==================================================================
- ------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
TABLE F. Volume and Yield Analysis
Three Months
Ended March 31, Due to
------------------ ----------------
(In thousands) 1997 1996 Change Volume Rate
------------------------------------------------
Interest income (FTE):
Money market investments $ 114 $ 405 $ (291) $ (306) $ 15
Securities available for sale 8,459 6,050 2,409 2,351 58
Loans held for sale 238 300 (62) (94) 32
Investment securities 595 868 (273) (280) 7
Loans 41,714 35,690 6,024 7,011 (987)
-------------------------------------------------
Total interest income 51,120 43,313 7,807 8,682 (875)
-------------------------------------------------
Interest expense:
NOW accounts & money market savings 6,708 5,617 1,091 960 131
Regular savings 1,241 1,268 (27) 14 (41)
Time deposits $100 thousand and greater 1,221 974 247 310 (63)
Time deposits under $100 thousand 9,214 8,477 737 1,072 (335)
Long-term debt 395 765 (370) (444) 74
Short-term borrowed funds 3,655 1,416 2,239 2,100 139
-------------------------------------------------
Total interest expense 22,434 18,517 3,917 4,012 (95)
-------------------------------------------------
Net interest income (FTE) $28,686 $24,796 $3,890 $4,670 $(780)
=================================================
<FN>
Note:
Increases and decreases in interest income and interest expense due to both
rate and volume have been allocated to volume on a consistent basis.
</FN>
- -----------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
TABLE G. Non-Performing Assets
At At At
March 31, December 31, March 31,
---------------------------------------
(Dollars in thousands) 1997 1996 1996
---------------------------------------
Loans on a non-accrual basis:
Commercial, financial and agricultural $ 3,598 $ 3,221 $ 750
Real estate:
Construction and land development 39 39 101
Commercial 3,704 4,443 4,630
Residential 9,098 9,290 8,340
--------------------------------------
Total non-accrual 16,439 16,993 13,821
--------------------------------------
Restructured loans:
Real estate:
Commercial 379 716 288
Residential 38 39 85
Other installment 10 10 6
--------------------------------------
Total restructured 427 765 379
--------------------------------------
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 196 169 193
Real estate:
Commercial 285 -- 24
Residential 906 88 255
Credit card receivables 161 111 210
Lease receivables 57 48 --
Other installment 705 794 404
--------------------------------------
Total past-due 90 days or more
and still accruing 2,310 1,210 1,086
--------------------------------------
Total non-performing loans 19,176 18,968 15,286
--------------------------------------
Foreclosed real estate 739 921 623
In-substance foreclosed real estate 274 -- --
--------------------------------------
Total other real estate owned (OREO) 1,013 921 623
Total non-performing assets $ 20,189 $ 19,889 $ 15,909
======================================
Allowance for loan losses (ALL) $ 23,638 $ 23,520 $ 24,183
ALL coverage of non-performing loans 123.27% 124.00% 158.21%
Non-performing assets as a % of (loans & OREO) 1.06 1.08 0.92
Non-performing assets to total assets 0.76 0.76 0.66
- ------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
TABLE H. Summary of Loan Loss Experience
Three Months Twelve Months Three Months
Ended March 31, Ended December 31, Ended March 31,
(Dollars in thousands) 1997 1996 1996
--------------- ------------------ ---------------
Loans outstanding-end of period $ 1,899,495 $ 1,848,232 $ 1,735,050
Average loans outstanding-period to date 1,864,504 1,730,720 1,538,784
----------------------------------------------------
Allowance for loan losses at beginning of period $ 23,520 $ 22,095 $ 22,095
Allowance related to acquisition -- 1,650 1,650
Loans charged off:
Commercial, financial and agricultural (155) (1,356) (120)
Real estate:
Construction and land development -- (73) --
Commercial (85) (2,122) (523)
Residential (505) (1,772) (372)
----------------------------------------------------
Total real estate (590) (3,967) (895)
Credit card receivables (173) (788) (157)
Lease receivables (284) (867) (204)
Other installment (1,555) (3,348) (732)
----------------------------------------------------
Total installment (2,012) (5,003) (1,093)
Total loans charged off (2,757) (10,326) (2,108)
----------------------------------------------------
Recoveries on loans:
Commercial, financial and agricultural 159 619 164
Real estate:
Construction and land development 69 60 22
Commercial 182 1,039 516
Residential 211 669 45
----------------------------------------------------
Total real estate 462 1,768 583
Credit card receivables 30 144 33
Lease receivables 186 695 177
Other installment 288 1,275 289
----------------------------------------------------
Total installment 504 2,114 499
Total recoveries on loans 1,125 4,501 1,246
----------------------------------------------------
Loans charged off, net of recoveries (1,632) (5,825) (862)
----------------------------------------------------
Provision for loan losses 1,750 5,600 1,300
----------------------------------------------------
Allowance for loan losses at end of period $ 23,638 $ 23,520 $ 24,183
====================================================
Loans charged off, net (annualized), as a % of
average total loans 0.35% 0.34% 0.22%
Provision for loan losses (annualized) as a %
of average total loans 0.38 0.32 0.34
Allowance for loan losses as a % of period-end
total loans 1.24 1.27 1.39
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TABLE I. Capital Ratios
At At At At At
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 1997 1996 1996 1996 1996
--------------------------------------------------------------------------
Total risk-adjusted on-balance sheet assets $ 1,836,108 $ 1,795,825 $ 1,709,036 $ 1,659,773 $ 1,610,790
Total risk-adjusted off-balance sheet items 107,077 103,647 106,281 106,200 95,512
--------------------------------------------------------------------------
Total risk-adjusted assets $ 1,943,185 $ 1,899,472 $ 1,815,317 $ 1,765,973 $ 1,706,302
==========================================================================
Total risk-adjusted assets / average total assets,
net of fair value adjustment and goodwill(1) 75.06% 75.87% 73.75% 73.71% 80.38%
Total shareholders' equity $ 207,774 $ 206,737 $ 199,800 $ 194,430 $ 191,721
Fair value adjustment(1) 6,157 2,477 4,556 5,320 3,153
Other adjustments to Tier I capital (34,836) (36,142) (37,448) (38,744) (40,063)
--------------------------------------------------------------------------
Total Tier I capital 179,095 173,072 166,908 161,006 154,811
Maximum allowance for loan losses(2) 23,638 23,520 22,711 22,107 21,364
--------------------------------------------------------------------------
Total capital $ 202,733 $ 196,592 $ 189,619 $ 183,113 $ 176,175
==========================================================================
Quarterly average total assets, net of fair value
adjustment and goodwill(1) $ 2,588,819 $ 2,503,637 $ 2,461,484 $ 2,395,825 $ 2,122,778
Allowance for loan losses 23,638 23,520 24,284 24,669 24,183
Total capital to total risk-adjusted assets 10.43% 10.35% 10.45% 10.37% 10.32%
Tier I capital to total risk-adjusted assets 9.22 9.11 9.19 9.12 9.07
Tier I capital to total quarterly average
adjusted assets (Leverage) 6.92 6.91 6.78 6.72 7.29
<FN>
Notes:
<F1> The market valuation relating to securities available for sale
included in shareholders' equity and total assets on 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
1997 1996
----------- -----------------------------------------------------
(In thousands, except share and per share data) Q1 Q4 Q3 Q2 Q1
----------- ----------- ----------- ----------- -----------
Statement of Income:
Interest income $ 50,982 $ 50,246 $ 49,175 $ 47,454 $ 43,133
Interest expense 22,434 21,666 20,899 20,058 18,517
-------------------------------------------------------------------
Net interest income 28,548 28,580 28,276 27,396 24,616
Provision for loan losses 1,750 1,500 1,500 1,300 1,300
-------------------------------------------------------------------
Net interest income after provision for loan losses 26,798 27,080 26,776 26,096 23,316
-------------------------------------------------------------------
Other Income:
Income from fiduciary activities 2,022 1,750 2,084 2,005 1,996
Service charges on depositor accounts 1,856 1,734 1,692 1,792 1,340
Credit card income 720 938 764 728 599
Loan servicing income 689 701 795 670 679
Net loan transactions 235 413 257 358 601
Net securities transactions 18 7 21 -- 3
All other 1,086 961 844 903 668
-------------------------------------------------------------------
Total other income 6,626 6,504 6,457 6,456 5,886
Other Expenses:
Salaries 8,966 9,117 9,278 9,053 8,375
Employee benefits 2,326 1,898 2,057 2,146 2,171
Net occupancy expenses 1,975 1,971 1,669 1,767 1,786
Equipment and software expenses 1,756 1,958 1,569 1,701 1,433
Data processing fees 1,207 1,156 1,111 1,209 1,108
FDIC deposit insurance and other regulatory expenses 187 129 134 99 99
OREO and repossession expenses 97 96 267 78 30
Amortization of goodwill 1,306 1,305 1,297 1,319 731
All other 5,161 5,731 5,794 5,138 6,420
-------------------------------------------------------------------
Total other expenses 22,981 23,361 23,176 22,510 22,153
-------------------------------------------------------------------
Income before income taxes 10,443 10,223 10,057 10,042 7,049
Income tax expense 3,393 3,190 3,244 3,248 2,299
-------------------------------------------------------------------
Net income $ 7,050 $ 7,033 $ 6,813 $ 6,794 $ 4,750
===================================================================
Average Balances:
Loans $ 1,864,504 $ 1,838,093 $ 1,797,510 $ 1,746,552 $ 1,538,784
Loans held for sale 12,400 12,010 14,497 15,668 17,196
Securities available for sale 543,846 488,277 474,626 446,227 389,515
Investment securities 33,153 35,846 40,151 45,703 48,371
Money market investments 7,726 1,631 9,835 18,522 28,216
-------------------------------------------------------------------
Total earning assets 2,461,629 2,375,857 2,336,619 2,272,672 2,022,082
Other assets 155,869 161,445 157,757 156,577 137,606
-------------------------------------------------------------------
Total assets 2,617,498 2,537,302 2,494,376 2,429,249 2,159,688
===================================================================
Demand deposits $ 273,764 $ 284,835 $ 272,492 $ 261,437 $ 227,571
Interest-bearing deposits 1,792,078 1,779,766 1,788,238 1,768,600 1,558,369
-------------------------------------------------------------------
Total deposits 2,065,842 2,064,601 2,060,730 2,030,037 1,785,940
Short-term borrowed funds 295,780 215,332 172,217 138,632 124,853
Long-term debt 24,887 31,497 44,713 47,311 52,411
Other liabilities 23,311 22,027 21,426 21,574 20,966
Shareholders' equity 207,678 203,845 195,290 191,695 175,518
-------------------------------------------------------------------
Total liabilities and shareholders' equity $ 2,617,498 $ 2,537,302 $ 2,494,376 $ 2,429,249 $ 2,159,688
===================================================================
Loans charged off, net of recoveries $ 1,632 $ 2,264 $ 1,885 $ 814 $ 862
Non-performing assets, p.e. 20,189 19,889 23,330 23,248 15,909
Share and Per Share Data:
Shares outstanding, p.e. 7,826,648 7,826,648 7,826,648 7,826,648 7,826,648
Weighted average shares outstanding 7,826,648 7,826,648 7,826,648 7,826,648 7,332,386
Tangible book value, p.e. $ 22.10 $ 21.80 $ 20.74 $ 19.89 $ 19.38
Cash dividends declared 0.29 0.25 0.25 0.25 0.25
Net income 0.90 0.90 0.87 0.87 0.65
Closing price at quarter end 40.50 41.50 37.38 34.25 35.25
Cash dividends declared as a % of net income 32.22% 27.78% 28.74% 28.74% 38.46%
Key Ratios:
Return on average assets 1.09% 1.10% 1.09% 1.12% 0.88%
Return on average shareholders' equity 13.77 13.73 13.88 14.25 10.88
Net interest margin, fte 4.73 4.81 4.83 4.88 4.93
Efficiency ratio 61.37 62.36 61.34 62.07 62.73
Expense ratio 2.49 2.59 2.54 2.59 2.66
As a % of risk-adjusted assets, p.e.:
Total capital 10.43 10.35 10.45 10.37 10.32
Tier 1 capital 9.22 9.11 9.19 9.12 9.07
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 6.92 6.91 6.78 6.72 7.29
Tangible shareholders' equity, to tangible assets, p.e. 6.62 6.65 6.56 6.44 6.39
Price earnings ratio (last 4 reported quarters) 11.4 12.6 11.5 10.6 11.1
Item 6 Exhibits and Reports on Form 8-K
Form 8-K dated April 11, 1997 relating to release of unaudited
information (including consolidated balance sheet information, consolidated
income statement information and certain per share data) on consolidated
results of operations and financial position of the Company and its
subsidiaries for the quarter ended and as of March 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized.
BANKNORTH GROUP, INC.
Registrant
Date: 5/9/97 /s/ William H. Chadwick
----------------------------------------
William H. Chadwick
President and Chief Executive Officer
Date: 5/9/97 /s/ Thomas J. Pruitt
----------------------------------------
Thomas J. Pruitt
Executive Vice President and Chief
Financial Officer
A GLOSSARY OF TERMS
Basis Risk
Basis risk is the risk of adverse consequences resulting from unequal
changes in the spread between two or more rates for different instruments
with the same maturity.
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, if significant.
Efficiency ratio
Total other operating expense, excluding 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 or losses and non-recurring items.
Expense ratio
Total other operating expense, excluding 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 intangible assets.
Tangible total assets
Total assets less intangible assets.