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, 1998
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 [ ]
15,246,296 shares of common stock, $l.00 par, outstanding on September 30,
1998.
INDEX TO FORM 10-Q
PART I PAGE
- -------------------------------------------------------------------------------
Financial Highlights (Unaudited) 1
Item l Interim Financial Statements
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 1998 and 1997
(Both unaudited) 2
Consolidated Balance Sheets at September 30, 1998
(Unaudited), December 31, 1997 and September 30,
1997 (Unaudited) 3
Statements of Changes in Shareholders' Equity for
the Three Months Ended March 31, 1998, June 30, 1998
and September 30, 1998 (Unaudited) and the Year Ended
December 31, 1997 4
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1998 and 1997 (Both
unaudited) 5
Notes to Unaudited Interim Consolidated Financial Statements 6
Independent Auditors' Report 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures about Market Risk 14
PART II
- -------------------------------------------------------------------------------
Item 1 Legal Proceedings N/A
Item 2 Changes in Securities 34
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 35
3nd Quarter 1998 Financial Highlights (Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ---------------------------
(Dollars in thousands, except share and per share data) 1998 1997 1998 1997
---- ---- ---- ----
INCOME DATA
Net interest income, taxable equivalent $ 30,349 $ 30,365 $ 90,568 $ 89,048
Net interest margin 4.32% 4.46% 4.39% 4.60%
Net income $ 9,071 $ 7,590 $ 24,317 $ 21,729
SHARE AND PER SHARE DATA
Basic wtd. avg. number of shares outstanding 15,318,311 15,694,514 15,375,452 15,600,502
Basic earnings per share (Basic EPS) $ 0.59 $ 0.48 $ 1.58 $ 1.39
Diluted wtd. avg. number of shares outstanding 15,545,242 15,920,056 15,625,019 15,809,272
Diluted earnings per share (Diluted EPS) $ 0.58 $ 0.48 $ 1.56 $ 1.37
Shares outstanding, net of treasury shares, p.e. 15,246,296 15,653,296 15,246,296 15,653,296
Book value, p.e. $ 15.99 $ 14.60 $ 15.99 $ 14.60
Tangible book value, p.e. 14.22 12.54 14.22 12.54
Cash dividends declared 0.16 0.145 0.48 0.435
Market price:
High 42.75 28.38 42.75 28.38
Low 27.00 22.69 27.00 20.00
Average close 32.69 24.78 33.63 22.43
Last 29.25 27.32 29.25 27.32
Share volume 1,699,941 2,271,560 6,865,764 5,707,692
Average monthly share volume 566,647 757,187 762,863 634,188
Price/Tangible book value, p.e. 205.7% 217.9% 205.7% 217.9%
Price/Diluted EPS (last four reported quarters) 13.9 14.9 13.9 14.9
AVERAGE BALANCES
Assets $ 2,987,125 $ 2,849,746 $ 2,955,397 $ 2,737,786
Earning assets 2,795,367 2,698,328 2,765,350 2,583,014
Loans 1,992,927 1,933,960 1,978,891 1,904,480
Goodwill 27,787 33,038 29,063 34,315
Deposits 2,274,750 2,124,519 2,229,375 2,092,227
Short-term borrowed funds 370,438 430,360 404,171 369,363
Long-term debt 49,186 20,196 34,698 22,546
Corporation-obligated mandatorily redeemable capital securities 30,000 30,000 30,000 16,813
Shareholders' equity 235,388 223,284 231,172 214,044
KEY RATIOS
Return on average assets 1.20% 1.06% 1.10% 1.06%
Return on average shareholders' equity 15.29 13.49 14.06 13.57
Efficiency ratio 57.44 62.93 59.73 61.93
Total other operating income to gross revenue (t.e.) 23.02 20.85 21.40 19.23
Net loan charge-offs to average loans 0.11 0.17 0.12 0.29
Provision for loan losses to average loans 0.37 0.40 0.37 0.39
Allowance for loan losses to loans, p.e. 1.48 1.29 1.48 1.29
Allowance for loan losses coverage of non-performing loans, p.e. 170.01 143.09 170.01 143.09
Non-performing assets to total assets, p.e. 0.61 0.65 0.61 0.65
Total capital to risk-adjusted assets, p.e. 12.04 12.08 12.04 12.08
Tier 1 capital to risk-adjusted assets, p.e. 10.79 10.87 10.79 10.87
Tier 1 capital to quarterly average total assets (Leverage) 8.06 7.98 8.06 7.98
Tangible shareholders' equity to tangible assets, p.e. 7.36 6.91 7.36 6.91
<FN>
Note: All share and per share data has been restated for the effect of the
2-for-1 stock split declared February 24, 1998.
</FN>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(Dollars in thousands, except per share data) 1998 1997 1998 1997
---- ---- ---- ----
Interest income:
Interest and fees on loans $45,241 $44,457 $134,627 $130,000
Interest on money market investments 368 109 563 303
Interest on securities available for sale 11,541 11,279 34,360 29,714
Interest on investment securities held to maturity 220 476 952 1,598
---------------------------------------------------
Total interest income 57,370 56,321 170,502 161,615
Interest expense:
Deposits 21,675 19,770 62,998 57,015
Short-term borrowed funds 4,841 5,990 15,985 14,856
Long-term debt 767 343 1,641 1,114
---------------------------------------------------
Total interest expense 27,283 26,103 80,624 72,985
---------------------------------------------------
Net interest income 30,087 30,218 89,878 88,630
Less: provision for loan losses 1,840 1,940 5,525 5,626
---------------------------------------------------
Net interest income after provision for loan losses 28,247 28,278 84,353 83,004
---------------------------------------------------
Other operating income:
Income from trust and investment management fees 2,290 2,270 6,906 6,373
Service charges on deposit accounts 2,135 1,910 6,521 5,747
Card product income 531 787 1,453 2,329
Loan servicing income 372 630 1,011 1,911
Gain on sale of mortgage servicing rights 392 896 386 944
Net loan transactions 873 381 2,345 799
Net securities transactions 127 163 (243) 187
Bank owned life insurance 567 -- 1,660 --
Other income 1,789 964 4,613 2,912
---------------------------------------------------
Total other operating income 9,076 8,001 24,652 21,202
Other operating expenses:
Compensation 9,447 9,923 29,035 28,332
Employee benefits 2,152 2,044 6,590 6,333
Net occupancy 1,792 1,981 5,722 5,904
Equipment and software 1,779 1,791 5,279 5,280
Data processing 1,204 1,256 3,663 3,686
Other real estate owned and repossession 127 287 465 648
Legal and professional 1,223 972 3,270 2,424
Printing and supplies 467 598 1,508 1,795
Advertising and marketing 705 612 2,080 1,856
Communications 592 599 1,785 1,796
Amortization of goodwill 1,305 1,305 3,917 3,917
Capital securities 789 789 2,367 1,315
Other expenses 2,599 2,914 8,202 8,800
---------------------------------------------------
Total other operating expenses 24,181 25,071 73,883 72,086
---------------------------------------------------
Income before income tax expense 13,142 11,208 35,122 32,120
Income tax expense 4,071 3,618 10,805 10,391
---------------------------------------------------
Net income $ 9,071 $ 7,590 $ 24,317 $ 21,729
===================================================
Basic earnings per share $ 0.59 $ 0.48 $ 1.58 $ 1.39
===================================================
Basic wtd. avg. number of shares outstanding 15,318 15,695 15,375 15,601
===================================================
Diluted earnings per share $ 0.58 $ 0.48 $ 1.56 $ 1.37
===================================================
Diluted wtd. avg. number of shares outstanding 15,545 15,920 15,625 15,809
===================================================
<FN>
Note: All per share data has been restated for the effect of the 2-for-1
stock split declared February 24, 1998.
</FN>
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
September 30, December 31, September 30,
(Dollars in thousands, except share and per share data) 1998 1997 1997
------------- ------------ -------------
(Unaudited) (Unaudited)
Assets
Cash and due from banks $ 80,107 $ 85,734 $ 89,742
Money market investments 100 50 5,678
---------------------------------------------
Cash and cash equivalents 80,207 85,784 95,420
---------------------------------------------
Securities available for sale, at fair value 739,057 710,308 715,850
Loans held for sale 33,314 24,958 17,139
Investment securities held to maturity
(Fair value of $11,477 at September 30, 1998, $24,246
at December 31, 1997 and $24,455 at September 30, 1997) 11,081 23,972 26,171
Loans 1,993,477 1,960,629 1,938,824
Less: allowance for loan losses 29,433 25,721 25,061
---------------------------------------------
Net loans 1,964,044 1,934,908 1,913,763
---------------------------------------------
Accrued interest receivable 15,431 16,115 17,102
Premises, equipment and software, net 28,111 29,446 29,908
Other real estate owned and repossessed assets 800 1,574 1,031
Goodwill 27,002 30,919 32,225
Capitalized mortgage servicing rights 4,871 4,650 4,521
Bank-owned life insurance 41,737 40,077 --
Other assets 24,273 20,266 19,470
---------------------------------------------
Total assets $2,969,928 $2,922,977 $2,872,600
=============================================
Liabilities, Corporation-Obligated Mandatorily Redeemable
Capital Securities and Shareholders' Equity
Deposits:
Non-interest bearing $ 338,210 $ 324,320 $ 303,031
NOW accounts & money market savings 1,009,431 895,682 823,706
Regular savings 173,464 185,453 198,826
Time deposits $100 thousand and greater 96,669 103,998 93,884
Time deposits under $100 thousand 665,492 690,367 710,126
---------------------------------------------
Total deposits 2,283,266 2,199,820 2,129,573
---------------------------------------------
Short-term borrowed funds:
Federal funds purchased 22,400 700 25,000
Securities sold under agreements to repurchase 169,303 139,347 146,581
Borrowings from U.S. Treasury 14,646 19,730 19,387
Borrowings from Federal Home Loan Bank of Boston 131,000 263,000 254,000
---------------------------------------------
Total short-term borrowed funds 337,349 422,777 444,968
---------------------------------------------
Long-term debt:
Federal Home Loan Bank of Boston term notes 40,081 6,139 7,948
Bank term loan 8,450 10,400 11,050
---------------------------------------------
Total long-term debt 48,531 16,539 18,998
---------------------------------------------
Accrued interest payable 4,491 4,721 5,178
Other liabilities 22,554 19,248 15,397
---------------------------------------------
Total liabilities 2,696,191 2,663,105 2,614,114
---------------------------------------------
Corporation-obligated mandatorily redeemable capital
securities 30,000 30,000 30,000
Shareholders' equity:
Preferred stock, $.01 par value; authorized 500,000
shares as of September 30, 1998, and no shares
authorized as of December 31, 1997 and
September 30, 1997 -- -- --
Common stock, $1.00 par value; authorized 70,000,000
shares and issued 15,653,296 shares as of September
30, 1998, and authorized 20,000,000 shares and issued
15,653,296 shares as of December 31, 1997, and authorized
20,000,000 shares and issued 7,826,648 shares as of
September 30, 1997 15,653 15,653 7,827
Surplus 83,718 83,770 90,925
Retained earnings 149,892 134,486 129,627
Unamortized employee restricted stock (1,093) (1,550) (1,456)
Accumulated other comprehensive income 8,728 2,311 1,563
Less: Common stock in treasury, at cost;
407,000 shares as of September 30, 1998, 154,000 shares
as of December 31, 1997 and no shares as of September
30, 1997 (13,161) (4,798) --
---------------------------------------------
Total shareholders' equity 243,737 229,872 228,486
---------------------------------------------
Total liabilities, corporation-obligated mandatorily
redeemable capital securities and shareholders' equity $2,969,928 $2,922,977 $2,872,600
=============================================
See accompanying notes to unaudited interim consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Unamortized Accumulated
Employee Other
(Dollars in thousands, except Common Retained Restricted Comprehensive Treasury Comprehensive
per share data) Stock Surplus Earnings Stock Income Stock Income Total
--------------------------------------------------------------------------------------------------
Balance, January 1, 1997 $ 7,827 $87,410 $115,130 $(1,153) $(2,477) -- -- $206,737
Comprehensive income:
Net income -- -- 30,489 -- -- -- $30,489 30,489
-------
Other comprehensive income,
net of tax:
Unrealized net holding gains
arising during the year
(pre-tax $7,654) -- -- -- -- -- -- 4,954
Reclassification adjustment
for net gains realized in
net income during the year
(pre-tax $258) -- -- -- -- -- -- (166)
-------
Other comprehensive income -- -- -- -- 4,788 -- 4,788 4,788
-------
Comprehensive income $35,277
=======
Cash dividends $ .58 per share -- -- (9,069) -- -- -- (9,069)
Issuance of employee restricted
stock -- -- -- (315) -- -- (315)
Amortization of employee
restricted stock -- 851 -- (82) -- -- 769
Issuance of restricted stock
units under directors' deferred
compensation plan, net -- 3,335 (4) -- -- -- 3,331
Exercise of employee stock
options, net -- -- (2,060) -- -- -- (2,060)
Purchase of treasury stock, net -- -- -- -- -- (4,798) (4,798)
2 for 1 stock split 7,826 (7,826) -- -- -- -- --
----------------------------------------------------------------------- --------
Balance, December 31, 1997 $15,653 $83,770 $134,486 $(1,550) $ 2,311 $ (4,798) $229,872
======================================================================== ========
Comprehensive income:
Net income -- -- $ 6,924 -- -- -- $ 6,924 $ 6,924
-------
Other comprehensive income,
net of tax:
Unrealized net holding gains
arising during the quarter
(pre-tax $517) -- -- -- -- -- -- 318
Reclassification adjustment
for net losses realized in
net income during the quarter
(pre-tax $439) -- -- -- -- -- -- 284
-------
Other comprehensive income -- -- -- -- 602 -- 602 602
-------
Comprehensive income $ 7,526
=======
Cash dividends $ .16 per share -- -- (2,472) -- -- -- (2,472)
Amortization of employee
restricted stock -- 217 -- 29 -- -- 246
Issuance of restricted stock
units under directors' deferred
compensation plan, net -- 145 (3) -- -- -- 142
Exercise of employee stock
options, net -- -- (413) -- -- -- (413)
Purchase of treasury stock, net -- -- -- -- -- (5,019) (5,019)
----------------------------------------------------------------------- --------
Balance, March 31, 1998 $15,653 $84,132 $138,522 $(1,521) $ 2,913 $ (9,817) $229,882
======================================================================= ========
Comprehensive income:
Net income -- -- $ 8,322 -- -- -- $ 8,322 $ 8,322
-------
Other comprehensive income,
net of tax:
Unrealized net holding gains
arising during the quarter
(pre-tax $1,493) -- -- -- -- -- -- 951
Reclassification adjustment
for net gains realized in
net income during the quarter
(pre-tax $69) -- -- -- -- -- -- (44)
-------
Other comprehensive income -- -- -- -- 907 -- 907 907
-------
Comprehensive income $ 9,229
=======
Cash dividends $ .16 per share -- -- (2,434) -- -- -- (2,434)
Amortization of employee
restricted stock -- 38 -- 211 -- -- 249
Issuance of restricted stock
units under directors' deferred
compensation plan, net -- 78 (18) -- -- -- 60
Exercise of employee stock
options, net -- -- (830) -- -- -- (830)
Purchase of treasury stock, net -- -- -- -- -- (3,556) (3,556)
----------------------------------------------------------------------- --------
Balance, June 30, 1998 $15,653 $84,248 $143,562 $(1,310) $ 3,820 $(13,373) $232,600
======================================================================= ========
Comprehensive income:
Net income -- -- $ 9,071 -- -- -- $ 9,071 $ 9,071
-------
Other comprehensive income,
net of tax:
Unrealized net holding gains
arising during the quarter
(pre-tax $7,811) -- -- -- -- -- -- 4,989
Reclassification adjustment
for net gains realized in
net income during the quarter
(pre-tax $127) -- -- -- -- -- -- (81)
-------
Other comprehensive income -- -- -- -- 4,908 -- 4,908 4,908
-------
Comprehensive income $13,979
=======
Cash dividends $ .16 per share -- -- (2,433) -- -- -- (2,433)
Issuance of employee restricted
stock -- 41 -- (253) -- 212 --
Amortization of employee
restricted stock -- (622) -- 470 -- -- (152)
Issuance of restricted stock
units under directors' deferred
compensation plan, net -- 51 (16) -- -- -- 35
Exercise of employee stock
options, net -- -- (292) -- -- -- (292)
----------------------------------------------------------------------- --------
Balance, September 30, 1998 $15,653 $83,718 $149,892 $(1,093) $ 8,728 $(13,161) $243,737
======================================================================= ========
<FN>
Note: All per share data has been restated for the effect of the 2-for-1
stock split declared February 24, 1998.
</FN>
See accompanying notes to unaudited interim consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
(Dollars in thousands) 1998 1997
-----------------------
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 24,317 $ 21,729
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises, equipment and software 3,660 3,514
Amortization of goodwill 3,917 3,917
Net amortization of securities available for sale 2,550 2,567
Net accretion of investment securities held to maturity (177) (258)
Provision for loan losses 5,525 5,626
Adjustment of other real estate owned to estimated fair value 200 209
Provision for deferred tax expense (benefit) (744) 196
Amortization of employee restricted stock 343 484
Issuance of restricted stock units under directors'
deferred compensation plan, net 237 --
Net decrease in trading account assets 17 --
Net securities transactions 243 (187)
Net gain on sale of securities held for trading (17) --
Net gain on sale of other real estate owned and repossessed assets (250) (184)
Proceeds from sale of loans held for sale 235,646 88,429
Originations and purchases of loans held for resale (241,271) (91,719)
Net gain on sale of loans held for sale (2,345) (799)
Gain on sale of mortgage servicing rights (386) (944)
Decrease (increase) in interest receivable 684 (1,954)
Increase (decrease) in interest payable (230) 2,579
Increase in other assets and other intangibles (8,347) (989)
Increase (decrease) in other liabilities 3,306 (1,103)
-----------------------
Total adjustments 2,561 9,384
-----------------------
Net cash provided by operating activities 26,878 31,113
-----------------------
Cash flows from investing activities:
Proceeds from maturity and call of securities available for sale 138,472 71,216
Proceeds from maturity and call of investment
securities held to maturity 13,092 8,318
Proceeds from sale of securities available for sale 99,000 290
Purchase of securities available for sale (258,974) (252,234)
Proceeds from sale of OREO and repossessed assets 2,148 2,036
Loans purchased -- (37,453)
Net increase in originated loans (35,985) (59,395)
Capital expenditures (2,769) (3,991)
-----------------------
Net cash used in investing activities (45,016) (271,213)
-----------------------
Cash flows from financing activities:
Net increase in deposits 83,446 63,509
Net increase (decrease) in short-term borrowed funds (85,428) 164,507
Purchase of treasury stock, net (8,363) --
Issuance of corporation-obligated mandatorily
redeemable capital securities -- 30,000
Issuance of long-term debt 37,645 --
Payments on long-term debt (5,653) (6,925)
Issuance of restricted stock awards (212) (315)
Exercise of employee stock options, net (1,535) (418)
Dividends paid (7,339) (6,810)
-----------------------
Net cash provided by financing activities 12,561 243,548
-----------------------
Net increase (decrease) in cash and cash equivalents (5,577) 3,448
-----------------------
Cash and cash equivalents at beginning of period 85,784 91,972
-----------------------
Cash and cash equivalents at end of period $ 80,207 $ 95,420
=======================
Additional disclosure relative to statement of cash flows:
Interest paid $ 80,854 $ 70,406
=======================
Taxes paid $ 13,083 $ 8,615
=======================
Supplemental schedule of non-cash investing and financing activities:
Net transfer of loans to OREO and repossessed assets $ 1,324 $ 2,171
Adjustment to securities available for sale to fair value, net of tax 6,417 4,040
Issuance of restricted stock units under deferred
compensation plan, net -- 3,039
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., North Group
Realty, Inc., and Banknorth Capital Trust I. 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 September 30, 1998 and 1997, the
Consolidated Statements of Income for the three and nine months ended
September 30, 1998 and 1997, and the Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997 and the Consolidated
Statements of Changes in Shareholders' Equity for the three months ended
March 31, 1998, June 30, 1998, and September 30, 1998 and the year ended
December 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 1997 annual report to
shareholders on Form 10-K.
2. Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Issuable shares (such as those related to the
directors' restricted stock units), and returnable shares (such as
restricted stock awards) are considered outstanding common shares and are
included in the computation of basic earnings per share as of the date that
all necessary conditions have been satisfied. 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). All share and per share data
has been adjusted for the 2-for-1 stock split declared by the Company on
February 24, 1998.
The following table provides calculations of basic and diluted earnings per
share:
Three Months Ended September 30,
-----------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Weighted Per Weighted Per
(Dollars in thousands, except Net Average Share Net Average Share
for share and per share data) Income Shares Amount Income Shares Amount
-----------------------------------------------------------------
Basic earnings per share $ 9,071 15,318,311 $0.59 $ 7,590 15,694,514 $0.48
Effect of dilutive securities
Stock options 198,101 199,140
Restricted stock awards 28,830 26,402
---------- ----------
Diluted earnings per share $ 9,071 15,545,242 $0.58 $ 7,590 15,920,056 $0.48
===================== =====================
Nine Months Ended September 30,
-----------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Weighted Per Weighted Per
(Dollars in thousands, except Net Average Share Net Average Share
for share and per share data) Income Shares Amount Income Shares Amount
-----------------------------------------------------------------
Basic earnings per share $24,317 15,375,452 $1.58 $21,729 15,600,502 $1.39
Effect of dilutive securities
Stock options 220,635 176,890
Restricted stock awards 28,932 31,880
---------- ----------
Diluted earnings per share $24,317 15,625,019 $1.56 $21,729 15,809,272 $1.37
===================== =====================
3. On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income includes the
reported net income of a company adjusted for items that are currently
accounted for as direct entries to equity, such as the mark to market
adjustment on securities available for sale, foreign currency items and
minimum pension liability adjustments. At the Company, comprehensive income
represents net income plus other comprehensive income, which consists of the
net change in unrealized gains or losses on securities available for sale
for the period. Accumulated other comprehensive income represents the net
unrealized gains or losses on securities available for sale as of the
balance sheet dates. Comprehensive income for the nine month periods ended
September 30, 1998 and 1997 was $30.7 million and $23.3 million,
respectively.
4. In February 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which amends the disclosure requirements of SFAS
No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers'
Accounting for Certain Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132
standardizes the disclosure requirements of SFAS No. 87 and No. 106 to the
extent practicable and recommends a parallel format for presenting
information about pensions and other postretirement benefits. This
Statement is applicable to all entities and addresses disclosure only. The
Statement does not change any of the measurement or recognition provisions
provided for in SFAS No. 87, No. 88, or No. 106. The Statement is effective
for fiscal years beginning after December 15, 1997. Management anticipates
providing the required disclosures in the December 31, 1998 consolidated
financial statements.
5. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. This
Statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Management is currently evaluating the impact of this
Statement on the Company's consolidated financial statements.
[LOGO] KPMG Peat Marwick LLP
515 Broadway
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 September 30, 1998 and 1997, and
the related consolidated statements of income for the three and nine month
periods ended September 30, 1998 and 1997, and the consolidated statements of
changes in shareholders' equity for the three month periods ended March 31,
1998, June 30, 1998, and September 30, 1998, and the consolidated statements
of cash flows for the nine month periods ended September 30, 1998 and 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 principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications
that should be made to the consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Banknorth Group, Inc.
and subsidiaries as of December 31, 1997, and the related consolidated
statements of income and cash flows for the year then ended (not presented
herein) and the consolidated statement of changes in shareholders' equity
for the year then ended; and in our report dated January 23, 1998, except
for note 15 which is as of February 24, 1998, 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, 1997 and the consolidated statements of changes in
shareholders' equity for the year ended December 31, 1997, 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
Albany, New York
October 14, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The financial review which follows focuses on the factors affecting
the consolidated financial condition and results of operations of Banknorth
Group, Inc. ("the parent company") and its subsidiaries during the three and
nine months ended September 30, 1998, with comparisons to 1997, as
applicable. Collectively, the parent company and its subsidiaries are
referred to herein as "Banknorth" or "Company". Net interest income and net
interest margin are presented in this discussion on a fully taxable
equivalent basis ("f.t.e."). Balances discussed are daily averages unless
otherwise described. The unaudited consolidated interim financial
statements, as well as the 1997 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
banking organizations as well as non-bank providers of various
financial services;
* the effect of certain customers and vendors of critical systems or
services failing to adequately address issues relating to becoming
year 2000 compliant;
* 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.
* the effect of lower than expected revenues or cost savings from the
pending merger with Evergreen Bancorp, Inc.;
* the effect of higher than expected costs and unanticipated
difficulties related to the cost of integration of acquired
businesses and operations;
* the effect of other risks and uncertainties discussed throughout
this report as well as those discussed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 and its
Current Report on Form 8-K dated July 31, 1998.
The Company wishes to caution readers not to place undue reliance on
any forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including those described above, could
cause the Company's actual results or circumstances for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
MERGERS & ACQUISITIONS
EVERGREEN BANCORP, INC.
On July 31, 1998, Banknorth announced that it had reached a definitive
agreement to merge with Evergreen Bancorp, Inc. ("Evergreen"), a bank
holding company headquartered in Glens Falls, New York. Under the terms of
the merger agreement, shareholders of Evergreen will receive a fixed
exchange of 0.9 shares of Banknorth common stock for each share of Evergreen
common stock plus cash in lieu of any fractional shares. Banknorth will
issue approximately 7.9 million shares in the transaction, bringing
Banknorth's outstanding shares to approximately 23.2 million immediately
following the merger. In addition, all outstanding stock options of
Evergreen will be converted into Banknorth stock options, adjusted to
reflect the merger conversion ratio. The proposed exchange is expected to
qualify as a tax-free reorganization and will be accounted for as a pooling-
of-interests. On September 30, 1998, Evergreen's total consolidated assets,
deposits and shareholders' equity were $1.1 billion, $954 million and $90
million, respectively. The Company expects to incur pre-tax merger and
restructuring items of approximately $21 million ($15.8 million after tax).
The merger, which is subject to regulatory and shareholder approval, is
expected to be completed by the end of 1998 and to enhance the Company's
earnings in 1999. At the time it announced the proposed merger with
Evergreen, the Company also announced the recision of its previously
announced stock repurchase program.
BANKBOSTON BERKSHIRE COUNTY
On July 1, 1998, Banknorth entered into an agreement to purchase
BankBoston, N.A.'s Berkshire County, Massachusetts banking operations,
consisting of ten full service branches, one limited service branch and nine
remote ATM locations, as well as private banking relationships associated
with the branches. In connection with the Berkshire Acquisition, Banknorth
will pay to BankBoston, N.A. a fixed premium of $52.5 million. As of March
31, 1998, deposits at the Berkshire branches were approximately $285.0
million, plus accrued interest. Banknorth also agreed to purchase in the
transaction commercial loans associated with the branches with a net book
balance as of March 31, 1998 of approximately $78.0 million and a portfolio
of consumer loans originated at the branches with a net book balance as of
March 31, 1998 of approximately $40.0 million. The Berkshire acquisition
(other than the private banking relationships) will be made through First
Massachusetts, N.A., headquartered in Worcester, Massachusetts, and will
extend that bank's central Massachusetts territory westward to the border of
New York State and contiguous to the southern reach of Evergreen's New York
market area. The private banking relationships associated with the
Berkshire branches, which, as of March 31, 1998, represented approximately
$1.0 billion of trust and investment assets under management, will be
acquired by Banknorth's trust and investment management subsidiary, The
Stratevest Group, N.A., headquartered in Burlington, Vermont and financed
through loans from certain of Banknorth's subsidiary banks.
To complete the transaction, Banknorth will reallocate capital
resources through payment of a special dividend to Banknorth by its
subsidiary banks, except First Massachusetts of approximately $21.5 million.
All subsidiary banks paying a special dividend are expected to remain well-
capitalized after payment. The funds from the special dividend together
with existing capital resources at the parent company level (totaling
approximately $26 million) will then be contributed by Banknorth to the
capital of First Massachusetts to ensure that First Massachusetts is
adequately capitalized for regulatory capital purposes.
After completion of both of the above noted transactions, the total
assets of Banknorth will be approximately $4.3 billion.
OVERVIEW
Banknorth recorded net income of $9.1 million, representing diluted
earnings per share ("EPS") of $.58, for the three months ended September 30,
1998, compared to $7.6 million, or $.48 diluted EPS for the three months
ended September 30, 1997. For the year to date period ended September 30,
1998, net income was $24.3 million, or $1.56 diluted EPS, as compared to
$21.7 million, or $1.37 diluted EPS.
During the third quarter of 1998:
* Banknorth reported a return on average assets of 1.20% and a return
on average equity of 15.29% for the third quarter of 1998.
* The efficiency ratio for the quarter declined to 57.44%, the lowest
level experienced by Banknorth. Further, operating expenses
declined for the third straight quarter.
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 93.50% and 94.12% of total assets at September 30, 1998
and 1997, 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 long-term debt.
Corporation-Obligated Mandatorily Redeemable Capital Securities
On May 1, 1997, Banknorth established Banknorth Capital Trust I (the
"Trust") which is a statutory business trust formed under Delaware law upon
filing a certificate of trust with the Delaware Secretary of State. The
Trust exists for the exclusive purposes of (i) issuing and selling 30 year
corporation-obligated mandatorily redeemable capital securities ("capital
securities") in the aggregate amount of $30.0 million at 10.52%, (ii) using
the proceeds from the sale of the capital securities to acquire the
corporation-obligated junior subordinated debentures ("debentures") issued
by the parent company and (iii) engaging in only those other activities
necessary, advisable or incidental thereto. The debentures are the sole
assets of the Trust and, accordingly, payments under the debentures are the
sole revenue of the Trust. All of the common securities of the Trust are
owned by the parent company. The Company has used the net proceeds from the
sale of the capital securities for general corporate purposes. The capital
securities, with associated expense that is tax deductible, qualify as Tier
I capital under regulatory definitions. The parent company's primary
sources of funds to pay interest on the debentures are current dividends
from subsidiary banks. Accordingly, the parent company's ability to service
the debentures is dependent upon the continued ability of the subsidiary
banks to generate sufficient earnings to pay dividends. As noted above, the
Company plans to reallocate capital resources through the use of a special
dividend from certain of its subsidiary banks to the parent company, which
will reduce the dividend paying capacity of those banks. Management does
not expect that this reallocation of capital nor the related impact on the
dividend paying capacity of these subsidiary banks will adversely affect the
parent company's ability to service the debentures. See also "Capital
Resources" section of this document.
Earning Assets
Earning assets were $2.8 billion during the third quarter of 1998, an
increase of $97.0 million, or 3.6% from the third quarter of 1997 primarily
due to the growth of the loan portfolio resulting from increased loan demand
and growth in the securities available for sale portfolio. For the year to
date period, earning assets were $2.8 billion as compared to $2.6 billion in
1997. Table A, Mix of Average Earning Assets, shows how the mix of earning
assets has changed as compared to the same period in 1997.
Loans. Average total loans of $2.0 billion during the three months
ended September 30, 1998, were $59.0 million, or 3.0%, above the same period
of 1997. The increase in total loans from year to year is attributable to
improved commercial loan demand offset by a decline in the real estate
mortgage portfolio as a result of refinancing activity. Table B, Loan
Portfolio, provides the detailed components of the loan portfolio as of
September 30, 1998 and 1997, as well as December 31, 1997.
Given the current economic indicators and interest rate environment,
management believes that the Company will see continued but slowing
commercial loan growth in the loan portfolio over the next several months.
Although a falling interest rate environment normally encourages borrowing,
management expects that the unstable international economic news may slow
loan demand.
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 and held in its mortgage portfolio. Loans held for
sale were $34.4 million during the third quarter of 1998, $13.5 million, or
64.3% higher than the average for the three-month period ending September
30, 1997, but $7.5 million or 17.9% lower than the average for the second
quarter of 1998. New loan originations and refinancing activity remained
strong in the third quarter, however, fell off slightly from the record
levels of the second quarter of 1998. This high production level results in
a greater level of mortgage product awaiting sale into the secondary market.
Given the recent decline in interest rates and the strong application
volume, management expects production will continue to be strong through
year end 1998.
Securities available for sale. This portfolio is managed on a total
return basis with the objective of exceeding, by 50 basis points, the return
that would be experienced if investing solely in U.S. Treasury instruments.
The primary purpose of this category of investments is liquidity while
simultaneously producing earnings, and is managed under prudent policy
limits established for average duration, average convexity and average
portfolio life.
Period end balances in securities available for sale totaled $739.1
million at September 30, 1998 as compared to $715.9 million at September 30,
1997, an increase of $23.2 million or 3.2%. The September 1998 balance is
stated net of a fair value adjustment reflecting net unrealized gains of
$13.6 million compared to the net unrealized gains of $2.5 million in
September 1997. The increase in the portfolio balance noted above was
primarily the result of the Company increasing its holdings of securities
available for sale through the re-investment of cash flows generated by the
held-to-maturity portfolio into the available for sale portfolio and the
increased fair value adjustment stated above. These increases were
partially offset by the Company's purchase of $40.0 million in bank-owned
life insurance ("BOLI") in the fourth quarter of 1997. Securities available
for sale were allowed to mature or were sold in order to provide the funding
necessary to implement the BOLI program. Average balances for securities
available for sale for the three months ended September 30, 1998 and 1997
were $729.4 million and $708.4 million, respectively.
In January 1998, Banknorth sold approximately $85.5 million of balloon
mortgage-backed securities from the available for sale portfolio. While the
sales resulted in a pre-tax net loss of $504 thousand, the enhanced yield
received through re-investment resulted in recovery of the loss within six
months. These securities which were yielding approximately 5.12% were sold
and replaced with securities yielding approximately 6.48%. After recovering
the $504 thousand loss incurred, Banknorth anticipates additional interest
income of approximately $523 thousand during 1998 and approximately $994
thousand in improved interest income in 1999 as a result of this sale. The
new securities purchased, as well as the characteristics of the portfolio
after the transaction, meet all established corporate guidelines.
Investment securities held to maturity. The designation "investment
securities held to maturity" 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 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. As
of September 30, 1998, the balance of securities in this category was $11.1
million, $15.1 million below the balance at September 30, 1997. The primary
cause of the reduced portfolio size was the reinvestment of cash flows from
maturities during 1997, and thus far in 1998 into the available for sale
portfolio.
Table C, Securities Available for Sale and Investment Securities Held
to Maturity contains details of investment securities at September 30, 1998
and 1997, as well as December 31, 1997.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $26.5 million during the third quarter of 1998, up
$18.5 million, or 233.7%, from the third quarter of 1997 primarily due to
strong deposit growth. Short-term borrowed funds are being paid off given
the strong growth of deposits and repurchase agreements. The timing of the
pay-off of the borrowings, however, lags slightly behind the deposit growth,
thereby generating higher money market investment balances. Subsidiary
banks with excess overnight cash positions invest such funds with other
subsidiary banks that may have short-term funding needs. This internal
settlement, performed prior to purchasing/selling funds in the market,
reduces funding costs and improves overall liquidity. For the year to date
period ended September 30, 1998, money market investments were $13.5
million, 89.7% higher than the average for the nine months ended September
30, 1997.
Income on earning assets. Income from earning assets was $57.6 million
for the three-month period ended September 30, 1998, as compared to $56.5
million for the same period in 1997. The increase of $1.2 million, or 2.1%,
resulted from the increases in earning assets through normal growth and
asset purchases described previously. Total earning assets during the third
quarter of 1998 of $2.8 billion yielded 8.20%, while in 1997 earning assets
of $2.7 billion yielded 8.30%. The increase in earning assets contributed
$1.9 million towards the increase in interest income, while the decline in
yield of 10 basis points resulted in $689 thousand less in interest income.
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 months ended September 30, 1998 and 1997, income from
earning assets was $171.2 million and $162.0 million, respectively. Total
earning assets of $2.8 billion, increased $182.3 million or 7.1% over the
nine month average of 1997. The yield on earning assets was 8.29% during
the first nine months of 1998 as compared to 8.37% during the same period of
1997. During the first nine months of 1998, the increase in earning assets
contributed $10.7 million towards the increase over the same period of 1997,
while the 8 basis point reduction in yield caused a $1.6 million decrease.
Funding Sources
Banknorth utilizes various traditional sources of funding to support
its earning asset portfolios. Average total net funding increased by $119.3
million, or 4.6%, in the third quarter of 1998 in comparison to the average
for the quarter ended September 30, 1997. Table E, Average Sources of
Funding, presents the various categories of funds used and the corresponding
average balances for the third quarter of 1998 and 1997.
Deposits. Total core deposits averaged $2.2 billion during the three
month period ended September 30, 1998, $140.8 million, or 6.9%, over the
third quarter average of 1997. NOW and money market accounts increased by
$191.1 million, while retail time deposits in denominations less than
$100,000 decreased by $51.3 million and regular savings decreased $28.0
million. In the current low rate environment, the indexed money market
product offered is an attractive option for our customers. Total core
deposits represented 80.6% of total net funding during the third quarter of
1998 as compared to 78.9% during the same quarter of 1997.
Purchased liabilities. Total purchased liabilities decreased on
average by $18.9 million to $512.6 million during the third quarter of 1998
from $531.5 million during the third quarter of 1997. The decreased
borrowings, or purchased liabilities, were the result of the strong deposit
growth which allowed for the paydown of short-term borrowed funds from FHLB.
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.
Bank Debt. Average bank debt of $9.1 million during the third quarter
of 1998 represents the 1994 funding of the acquisition of North American
Bank Corporation ("NAB"). Banknorth financed the transaction with a bank
credit facility whose original terms were re-negotiated in December 1996.
The re-negotiated terms provide improved pricing and an extension of the
repayment period. The balance of $8.5 million at September 30, 1998 will be
repaid within four years.
Interest expense summary. Total interest expense for the three months
ended September 30, 1998 was $27.3 million, an increase of $1.2 million or
4.5%, as compared to the same period of 1997. Total interest bearing
liabilities of $2.4 billion, increased $90.3 million or 4.0%. Increased
levels of interest-bearing liabilities contributed $1.1 million to the
increase in interest expense while the increase in rates paid increased
interest expense by $115 thousand. The cost of interest bearing liabilities
was 4.56% in the third quarter of 1998, an increase of 2 basis points from
the third quarter of 1997.
Total interest bearing liabilities averaged $2.4 billion during the
nine months ended September 30, 1998, $158.2 million, or 7.2%, higher than
in 1997. The cost of funds was 4.57% in 1998 as compared to 4.44% in 1997.
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 $30.3 million and $30.4 million for the
three-month periods ended September 30, 1998 and 1997, respectively. The
net interest margin was 4.32% during the third quarter of 1998 as compared
to 4.46% during the same period of 1997. The yield on earning assets of
8.20% for the third quarter of 1998, was 10 basis points below the
corresponding period of the prior year. Interest rates generally decreased
during 1997 and early 1998. This trend of the decreasing yield on earning
assets was experienced throughout 1997 and 1998. During the fourth quarter
of 1997, the net interest margin was 4.48%, 9 basis points below the margin
for the full year of 1997. The net interest margin narrowed during 1997 and
to date in 1998 as competition for quality credits and retail deposits
resulted in a tighter spread between asset yields and deposit costs. A
changing mix of deposits where higher cost deposits, such as money market
accounts, are increasing whereas lower cost deposits are declining
contributed to the narrowing margin.
Also impacting the net interest margin was the issuance of $30.0
million in corporation-obligated mandatorily redeemable capital securities
in May 1997. In an effort to increase interest income sufficient to offset
the cost of the capital securities, the Company purchased approximately
$120.0 million in earning assets. This leveraging strategy is anticipated to
be short-term in nature, and use of these funds may change in response to
future corporate initiatives.
Further, the purchase of $40.0 million in BOLI adversely impacted the
net interest margin as securities available for sale were allowed to mature
or were sold in order to provide the funding necessary to implement the
bank-owned life insurance program. The earnings from BOLI are recorded as
other non-interest income and are tax exempt.
RISK MANAGEMENT
Credit Risk
Credit risk is managed through a network of loan officer authorities,
credit committees, loan policies and oversight from the corporate senior
credit officer and subsidiary boards of directors. Management follows a
policy of continually identifying, analyzing and grading credit risk
inherent in each loan portfolio. An ongoing independent review, subsequent
to management's review, of individual credits is performed on each
subsidiary bank's commercial loan portfolios by the independent Loan Review
function.
As a result of management's ongoing review of the loan portfolio,
loans are placed in non-accrual status, either due to the delinquent status
of principal and/or interest payments, or a judgment by management that,
although payments of principal and/or interest are current, such action is
prudent. Loans are generally placed in non-accrual status when principal
and/or interest is 90 days overdue, except in the case of consumer loans
which are generally charged off when loan principal and/or interest payments
are 120 days overdue.
Non-performing assets ("NPAs"). 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
or more and are still accruing interest. Also included in the total non-
performing assets are foreclosed and repossessed non-real estate assets.
NPAs were $18.1 million at September 30, 1998, a decrease of $433
thousand from September 30, 1997 but increased $1.8 million from December
31, 1997. The ratio of NPAs to loans plus other real estate owned and
repossessed assets at September 30, 1998, was .91% compared to .96% at
September 30, 1997 and .83% at December 31, 1997. Table G, Non-Performing
Assets, contains the details for September 30, 1998 and 1997, and December
31, 1997.
Non-performing loans ("NPLs") at September 30, 1998 were $17.3
million, a net decrease of $202 thousand, or 1.2%, from September 30, 1997,
but an increase of $2.6 million, or 17.8%, from December 31, 1997. The
increase in the NPLs from year end 1997 is primarily due to the recording of
one large commercial loan ($6.3 million) as a troubled debt restructured
loan ("TDR") in the third quarter. The principal and interest payments on
this loan are current and the TDR designation is expected to be removed in
1999 as the result of the rewritten loan being at market interest rate.
Without this loan, NPLs were down from year end 1997 as loans in non-accrual
status fell from a level of $13.3 million as of December 31, 1997 to $8.9
million as of September 30, 1998. Delinquency rates in the residential
portfolio are consistent with trends seen regionally and nationally.
Further, commercial delinquencies for Banknorth have remained flat. Given
the current unstable economic news from abroad and the growing impact of
this news on our national economy, management expects that certain credits
may be adversely impacted and may encounter difficulty in continuing to
perform under the contractual terms of their loans. While this occurrence
might result in increases in NPLs and subsequent charge-offs, management
does not expect it to materially affect the Company's performance during the
next several quarters.
Total other real estate owned and repossessed assets were $800
thousand at September 30, 1998, down $231 thousand from one year earlier and
down $774 thousand from December 31, 1997.
Allowance for loan losses and provision. The allowance for loan losses is
maintained at a level estimated by management to provide adequately for risk
of loss inherent in the loan portfolio. The adequacy of the allowance for
loan losses is monitored monthly. It is assessed for adequacy using a
methodology designed to ensure the level of the allowance reasonably
reflects the loan portfolio's risk profile. It is also evaluated to ensure
that it is sufficient to absorb all estimated credit losses inherent in the
current loan portfolio. For purposes of evaluating the adequacy of the
allowance, the Company considers a number of significant factors that affect
the collectibility of the portfolio. For individually analyzed loans, these
include estimates of loss exposure, which reflect the facts and
circumstances that affect the likelihood of repayment of such loans as of
the evaluation date. For homogenous pools of loans, estimates of the
Company's exposure to credit loss reflect a thorough assessment of a number
of factors which could affect loan collectibility. These factors include:
the size, trend, composition, and nature; changes in lending policies and
procedures, including underwriting standards and collection, charge-off and
recovery practices; trends experienced in non-performing and delinquent
loans; past loss experience; economic trends in the Company's market;
portfolio concentrations that may affect loss experienced across one or more
components of the portfolio; the effect of external factors such as
competition, legal and regulatory requirements; and, the experience,
ability, and depth of lending management and staff. In addition, various
regulatory agencies, as an integral component of their examination process,
periodically review the Company's allowance for loan losses. Such agencies
may require the Company to recognize additions to the allowance based on
their judgement about information available to them at the time of their
examination, which may not be currently available to management.
After a thorough consideration and validation of the factors discussed
above, required additions to the allowance for loan losses are made
periodically by charges to the provision for loan losses. These charges are
necessary to maintain the allowance at a level which management believes is
reasonably reflective of overall inherent risk of credit. While management
uses available information to recognize losses on loans, additions to the
allowance may fluctuate from one reporting period to another. These
fluctuations are reflective of changes in risk associated with portfolio
content and/or changes in management's assessment of any or all of the
determining factors discussed above. The provision for loan losses
("provision") for the three months ended September 30, 1998 was $1.8
million, or an annualized .37% of average loans. The provision for the
first nine months of the year was $5.5 million or an annualized .37% of
average loans. Provisions of $5.6 million, or an annualized .39% of average
loans, and $7.7 million, or .40% of average loans were experienced during
the first nine months of 1997 and the full year of 1997, respectively.
During the past year the Company has experienced growth in the commercial
and installment loan segments of the portfolio. Offsetting this growth and
the increased credit risk inherently associated with these loans is the
overall improvement experienced in the performance and condition of the loan
portfolio. As a result of these considerations, the 1998 provision has
remained relatively constant in comparison to 1997 on both a quarter to date
and year to date basis.
Table H, Summary of Loan Loss Experience, includes an analysis of the
changes to the allowance for the nine months ended September 30, 1998 and
1997, as well as for the year ended December 31, 1997. Loans charged off in
the first nine months of 1998 were $5.6 million, or an annualized .38% of
average loans. This represents an improvement over the prior year's nine
month results when charge-offs totaled $7.6 million, or an annualized .53%
of average loans. Recoveries in the first nine months of 1998 on loans
previously charged off were $3.8 million as compared to $3.5 million for the
same period of 1997.
At September 30, 1998, the allowance provided a coverage of non-
performing loans of 170.01% as compared to 175.08% and 143.09% at December
31, 1997 and September 30, 1997, respectively.
Market Risk
Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of the
Company's business activities.
The responsibility for balance sheet risk management oversight is the
function of the Asset/Liability Committee ("ALCO"). The corporate ALCO,
chaired by the chief financial officer and composed of various subsidiary
presidents and other members of corporate senior management, meets on a
monthly basis to review balance sheet structure, formulate strategy in light
of expected economic conditions, and review performance against guidelines
established to control exposure to the various types of inherent risk. Bank
subsidiary ALCOs meet to implement policy, review adherence to guidelines,
adjust product prices as necessary and monitor liquidity.
Interest rate risk can be defined as an exposure to a movement in
interest rates that could have an adverse effect on the Company's net
interest income. Interest rate risk arises naturally from the imbalance in
the repricing, maturity and/or cash flow characteristics of assets and
liabilities. Management's objectives are to measure, monitor and develop
strategies in response to the interest rate risk profile inherent in the
Company's consolidated balance sheet and off-balance sheet financial
instruments.
Interest rate risk is managed by the Corporate ALCO. Interest rate
risk measurement and management techniques incorporate the repricing and
cash flow attributes of balance sheet and off-balance sheet instruments as
they relate to potential changes in interest rates. The level of interest
rate risk, measured in terms of the potential future effect on net interest
income, is determined through the use of modeling and other analytical
techniques under multiple interest rate scenarios. Interest rate risk is
evaluated on a quarterly basis and reviewed by the Corporate ALCO with
subsidiary risk profiles presented to the respective boards of directors.
The Company's Asset Liability Management Policy, approved annually by
the boards of directors, establishes interest rate risk limits in terms of
variability of net interest income under rising, flat and decreasing rate
scenarios. It is the role of the ALCO to evaluate the overall risk profile
and to determine actions to maintain and achieve a posture consistent with
policy guidelines.
Certain imbalances that could potentially cause interest rate risk to
exceed policy limits are correctable through management of asset and
liability product offerings. Depending upon the specific nature of the
imbalance, it may be more efficient and less costly to utilize off-balance
sheet instruments such as interest rate swaps and interest rate cap or floor
agreements, among other things, to correct the imbalance. Banknorth has
historically utilized both swaps and floors to address certain interest rate
risk exposures.
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 in this
instance where market forces prevent further reduction in the rate paid on
those instruments. The net effect of these circumstances would be 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
are used to mitigate the potential reduction in interest income on certain
adjustable and variable rate loans. The notional amount of $50.0 million
in interest rate swaps previously in use were sold in May 1998 for a net
gain of $254 thousand. This gain is being amortized into interest income
over the original remaining lives of the initial swap contracts of
approximately one year. The swaps were sold in order to reduce interest
rate risk sensitivity of the Company.
The aggregate cost of the interest rate floors 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. At September 30, 1998, the
unamortized balance of these interest rate floors was $1.1 million. The
estimated fair value of these floors was $4.1 million as of September 30,
1998.
Banknorth utilizes an interest rate risk model widely recognized in
the financial industry to monitor and measure interest rate risk. The model
simulates the behavior of interest income and expense of all on and off
balance sheet financial instruments under different interest rate scenarios
together with a dynamic future balance sheet. Banknorth measures its
interest rate risk in terms of potential changes in net interest income.
Liquidity Risk
Banknorth seeks to obtain favorable sources of liabilities 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.
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 under multiple interest rate
scenarios, 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.
The Company achieves its liability based liquidity objectives in a
variety of ways. Net liabilities can be classified into three basic
categories for the purpose of managing liability-based liquidity: core
deposits, purchased liabilities and long-term or capital market funds. Core
deposits consist of non-interest bearing demand deposits and retail
deposits. These deposits result from relatively dependable customers and
commercial banking relationships and are therefore viewed as a stable
component of total required funding. Banknorth will continue to seek funding
in the most efficient and cost effective manner as possible. Table E
reflects the components of funding for September 30, 1998 and 1997.
Among the traditional funding instruments comprising the category of
purchased liabilities are time deposits $100 thousand and greater, Federal
funds purchased, securities sold under agreement to repurchase, borrowings
from the United States Treasury Department Treasury, Tax and Loan accounts,
and short and long-term borrowings from the FHLB.
One of the principal components of short-term borrowed funds is
securities sold under agreement to repurchase. These borrowings generally
represent short-term uninsured customer investments, which are secured by
Company securities. During the third quarter of 1998, the average securities
sold under agreement to repurchase were $169.6 million, as compared to
$129.4 million in the third quarter of 1997.
Borrowings from the FHLB, both short-term and long-term, were down
$65.6 million, or 22.5%, from the third quarter of 1997 to the third quarter
of 1998. The decrease was the result of the paydown of borrowings due to
the strong deposit and repurchase agreement growth.
As previously discussed, the Company utilized financial institution
borrowings pursuant to a five year credit facility to finance the NAB
acquisition. The Company's primary source of funds to pay principal and
interest 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.
A secondary source of liquidity is represented by asset-based
liquidity. Asset-based liquidity consists of holdings of securities
available for sale and short-term money market investments that can be
readily converted to cash, as well as single-family mortgage loans which
qualify for secondary market sale.
The Company also uses the capital markets as a source of liquidity.
In May 1997, the Company established a trust to issue and sell $30.0 million
in capital securities. The net proceeds were used for general corporate
purposes. In February 1996, the Company issued 2,044,446 shares of common
stock resulting in $32.2 million in net proceeds which were used to provide
a portion of the initial capital of First Massachusetts Bank and to help
offset the reduction in the Company's regulatory capital ratios resulting
from the acquisition.
OTHER OPERATING INCOME AND EXPENSES
Other operating income is a significant source of revenue for
Banknorth and an important factor in the Company's results of operations.
Other operating income totaled $9.1 million for the third quarter of 1998,
$1.1 million or 13.4% higher than the third quarter of 1997. For the nine
months ended September 30, 1998 and 1997, other operating income was $24.7
million and $21.2 million, respectively. The improvement in other
operating income resulted primarily from the implementation of performance
initiatives announced in the second half 1997, including but not limited to,
improved collection of service charges, ATM convenience fees, and bank-owned
life insurance, and the current strong mortgage banking environment.
Trust and investment management. The Stratevest Group, N.A., the
company's trust and investment management subsidiary, contributes the
largest recurring portion of other operating income through fees generated
from the performance of trust and investment management services. Income
from trust and investment management services totaled $2.3 million in the
third quarter of 1998, an increase of $20 thousand, or 0.9% over the same
period of 1997. For the nine months ended September 30, 1998, trust and
investment management income was $6.9 million, up $533 thousand, or 8.4%,
over the same period of 1997. The increase resulted from increases in
assets under management. Continued opportunities for increases in the
generation of Stratevest income lie in increased sales in the Massachusetts
and New Hampshire markets. The Company is experiencing increased sales in
these areas and, accordingly, management expects increased levels of trust
and investment management income for the entire 1998 year as compared to the
previous year. Offsetting these increases is the impact of the declining
prices in the stock market. The management fees for several of the trust
accounts are determined based on the market value of the account.
Service charges on deposit accounts. Service charges on deposit
accounts, $2.1 million for the three months ended September 30, 1998, were
$225 thousand, or 11.8% above the same period of 1997. During late 1997,
Banknorth reviewed and enhanced its policies and practices regarding service
charges and service charge waivers. Accordingly, the level of fee income
increased this quarter over the 1997 level. For the nine months ended
September 30, 1998, service charges on deposits were $6.5 million, an
increase of $774 thousand or 13.5% compared to the first nine months of
1997.
Card product income. Card product income declined $256 thousand, to
$531 thousand, for the third quarter of 1998 as compared to the third
quarter of 1997. The decline is the result of the sale of the merchant
processing business in late 1997. Income on card products is, therefore,
expected to continue at the present level throughout 1998 as the gross
merchant processing income, amounting to $1.4 million in 1997, will no
longer be received by the Company. Eliminating the effect of the merchant
service sale, card product income was up $173 thousand in the third quarter
of 1998 compared to the third quarter of 1997 primarily as a result of the
increased usage of the debit and credit card products. For the nine months
ended September 30, 1998 and 1997, card product income was $1.5 million and
$2.3 million, respectively.
Loan servicing income. Loan servicing income, primarily mortgage
servicing at BMC, was $372 thousand in the third quarter of 1998, a decrease
of $258 thousand, or 41.0%, from the same period of 1997. The decline is the
result of the reduction in the balance of mortgage loans serviced for
unrelated third parties from $1.0 billion at September 30, 1997 to $945
million at September 30, 1998, and increased amortization of mortgage
servicing rights ("MSRs"). The amortization of MSRs was $452 thousand in the
third quarter of 1998 compared to $296 thousand for the same period in 1997.
During the third quarter of 1998, as a result of the high volume of
refinancing in the current low interest rate environment, the Company wrote
down $60 thousand of its MSR balance due to impairment considerations. The
total impairment writedown for the year amounts to $380 thousand. Further
impairment writedowns or reserves may be necessary during the remainder of
the year if the high volume of refinancing continues. For the nine months
ended September 30, 1998 and 1997, loan servicing income was $1.0 million
and $1.9 million, respectively.
Gain on sale of mortgage servicing rights. The Company generates
income through the sale of loans, primarily fixed rate loans, to the
secondary market. A portion of the mortgage loans originated each year are
generated through correspondent relationships with other institutions.
Under these correspondent arrangements, the Company retains the servicing on
these loans and the loans are normally sold to the secondary market. At
various times, when sufficient correspondent loan servicing rights are
accumulated, the correspondent servicing rights are sold and the gain
recorded. In September 1998, the Company executed a contract to sell $86
million of the servicing rights on the correspondent mortgage portfolio
resulting in a net gain of $392 thousand. In August 1997, the Company sold
$130 million in correspondent mortgage loan servicing rights resulting in a
net gain of $896 thousand. These sales of the correspondent portfolio will
occur periodically given favorable market conditions.
Net loan transactions. Net loan transaction income is generated
through the origination and subsequent sale of mortgage products into the
secondary mortgage market. Net loan transaction income in the third quarter
of 1998 amounted to $873 thousand, $492 thousand greater than the same
period of 1997. The significant increase was the result of the strong
production and sales during the third quarter of 1998 given the current low
rate environment. This continued the strong production and sales levels
started during the first quarter of the year. For the nine months ended
September 30, 1998, net loan transactions were $2.3 million, $1.5 million,
or 193.5%, higher than the same period of 1997. New loan originations and
refinancing activity was high for the first nine months of the year and is
expected to remain strong through the fourth quarter as the number of
applications pending and loans in various stages of production are at high
levels as of September 30, 1998.
Net securities transactions. Net gains or losses from securities
transactions are also included in other operating income. In the third
quarter of 1998, the Company realized $127 thousand in net securities gains
as compared to net gains of $163 thousand in the third quarter of 1997. For
the nine months ended September 30, 1998, net losses of $243 thousand were
realized primarily as the result of the sale of approximately $85.5 million
of securities available for sale during January 1998 at a net loss of
approximately $504 thousand. The net loss was recovered through enhanced
yields within a six month period after the sale. The Company anticipates
that it will consider additional sales from the securities available for
sale portfolio during 1998 as it attempts to achieve its objectives in the
total return management of the securities available for sale portfolio. The
Company also expects that future losses incurred, if any, would be recovered
through yield improvement within a one to two year period.
Bank-Owned Life Insurance. In the fourth quarter of 1997, Banknorth
purchased $40.0 million of bank-owned life insurance ("BOLI"). The BOLI
was purchased as a financing tool for employee benefits. The value of life
insurance financing is the tax preferred status of life insurance cash
values and death benefits and the cash flow generated at the death of the
insured. The purchase of the life insurance policy results in an interest
sensitive asset on the Company's consolidated balance sheet that provides
monthly tax-free income to the Company. The largest risk to the BOLI
program is credit risk of the insurance carriers. To mitigate this risk,
annual financial condition reviews are completed on all carriers. Earnings
from BOLI amounted to $567 thousand in other income in the third quarter of
1998 and $1.7 million for the nine month period ended at that point.
Securities available for sale were allowed to mature or were sold in order
to provide the funding necessary to implement the bank-owned life insurance
program. As a result of this transaction, the Company benefits prospectively
from the tax-free nature of income generated from the life insurance
policies. In general, the yield received from the bank-owned life insurance
is comparable to the yield previously received on the securities available
for sale, thereby causing the Company's earnings stream to benefit from the
tax characteristics of the bank-owned life insurance.
Other income. Other income amounted to $1.8 million for the three
months ended September 30, 1998, compared to $964 thousand for the three
months ended September 30, 1997. The increase was primarily the result of
two new initiatives implemented in the last year. First, in October 1997,
the Company commenced charging a terminal convenience fee for ATM
transactions by non-customers. This fee allows the Company to recover a
portion of the expense of operating the ATM network for the benefit of its
customers. The second initiative, a new official check process, was
implemented in February 1998. Further, the Company received $176 thousand
from a venture capital investment. For the nine months ended September 30,
1998 and 1997, other income was $4.6 million and $2.9 million, respectively.
Again the above noted initiatives were primarily responsible for the
majority of the increase.
Other Operating Expenses
Other operating expenses for the third quarter of 1998 were $24.2
million, $890 thousand, or 3.5%, below expense levels in the third quarter
of 1997. The majority of the decrease in operating expenses is lower
compensation costs, occupancy and other insurance expenses. The Company's
efficiency ratio improved to 57.44% in the third quarter of 1998, down from
62.93% from the same period one year earlier. For the nine months ended
September 30, 1998 and 1997, other operating expense was $73.9 million and
$72.1 million, respectively. The efficiency ratio on a year to date basis
was 59.73% for the first nine months of 1998 compared to 61.93% for the same
period of 1997.
Compensation. Compensation expense decreased by $476 thousand, or
4.8%, in the third quarter of 1998 in comparison to the third quarter of
1997. The decline was primarily due to the lower expense of the executive
restricted stock awards, as the Company's stock price closed at $29.25 as of
September 30, 1998 compared to the June 30, 1998 closing price of $37.00.
The expense of the restricted stock awards is directly impacted by changes
in the Company's stock price. The expense for the three months ended
September 30, 1998 was nominal compared to the expense of $367 thousand in
the third quarter of 1997. Further, base salary expense for the Company was
down $283 thousand from the third quarter of 1997 to due to the cost savings
initiative implemented late in 1997. The full-time equivalent employee count
has fallen approximately 160 from September 30, 1997 to September 30, 1998.
The current staffing count is 1,014 as of September 30, 1998. For the nine
months ended September 30, 1998, compensation expense was $703 thousand, or
2.5%, greater than the same period of 1997, despite the $548 thousand or
2.2% decline in base salary expense. The increase was primarily due to the
costs associated with the early retirement of a senior officer, and the
increased costs associated with 1998 incentive compensation, including the
short-term management incentives, and restricted stock awards.
Employee benefits. Employee benefits costs were up $108 thousand or
5.3% for the three months ended September 30, 1998 compared to the same
period one year earlier. The increase was primarily in medical insurance
premiums and pension costs. The medical insurance premiums increased $107
thousand quarter to quarter. The pension actuarial assumptions were updated
given the current interest rate environment and current mortality tables.
The result was an increase in pension expense of $28 thousand from the third
quarter of 1997 compared to the same quarter of 1998. For the year to date
period ended September 30, 1998 and 1997, the employee benefit expense was
$6.6 million and $6.3 million, respectively.
Net occupancy. Net occupancy expenses were $1.8 million for the third
quarter of 1998 compared to $2.0 million for the third quarter of 1997.
Repairs and maintenance expense were low in the third quarter of 1998 as
were janitorial expenses. In early 1998, the janitorial services of the
Company were renegotiated reducing the expenses. Year to date, net
occupancy expenses amounted to $5.7 million and $5.9 million as of September
30, 1998 and 1997, respectively.
Data processing. Data processing expense was unchanged for the third
quarter of 1998 compared to the third quarter of 1997. In the second quarter
of 1998, the third party contract for data processing service was extended
to February 2001. For the nine months ended September 30, 1998 and 1997,
the data processing expenses were $3.7 million in each period.
Other real estate owned. Expenses relating to other real estate owned
and repossessed assets decreased for the third quarter of 1998 by $160
thousand as compared to September 30, 1997. For the nine months ended
September 30, 1998 and 1997, these expenses were $465 thousand and $648
thousand, respectively. Included in this expense category in the first nine
months of 1998 are net gains on the sale of other real estate owned and
repossessed assets in the amount of $250 thousand. Net gains on sales in
the first nine months of 1997 were $184 thousand. Management anticipates the
level of other real estate owned and repossession expenses to increase
should economic conditions deteriorate.
Legal and professional. Legal and professional expenses of $1.2
million during the third quarter of 1998, were $251 thousand higher than the
third quarter of 1997. For the nine months ended September 30, 1998 and
1997, legal and other professional expenses were $3.3 million and $2.4
million, respectively.
Advertising and marketing. Advertising and marketing expenses were
$705 thousand for the three months ended September 30, 1998, $93 thousand,
or 15.2% higher than the third quarter of 1997. A new branding initiative
was announced in late 1997 and resulted in higher expenses this quarter in
comparison to the same quarter a year ago. Marketing expenses are expected
to be slightly higher throughout 1998 in comparison to 1997. For the nine
months ended September 30, 1998 and 1997, these marketing expenses were $2.1
million and $1.9 million, respectively.
Goodwill. Amortization of goodwill amounted to $1.3 million in the
third quarters of 1998 and 1997 and $3.9 million for both of the nine-month
periods. The goodwill balance outstanding will increase by approximately
$52 million as a result of the Berkshire acquisition. Goodwill amortization
expense will increase by approximately $3.6 million annually.
Capital securities. The capital securities issue in May 1997, which
created Tier I capital, gave rise to expense of $789 thousand in the third
quarter of 1998 and 1997. As mentioned previously, incremental investment
purchases were made in an effort to offset the cost of the capital
securities through increased net interest income. Funding for the
investments was primarily in the form of borrowings from the FHLB.
Other. Other expenses totaled $2.6 million and $2.9 million for the
three months ended September 30, 1998 and 1997, respectively. The majority
of the $315 thousand decrease was the result of lower insurance costs. The
only significant increase in other expenses was the $145 thousand increase
in State of Vermont franchise tax mandated under the statewide education
reform act. For the nine months ended September 30, 1998 and 1997, other
operating expense was $8.2 million and $8.8 million, respectively.
SUBSIDIARY BANK MERGER
On July 30, 1998, the Company announced that it plans to merge one of
its subsidiary banks, Woodstock National Bank, into another subsidiary bank,
First Vermont Bank. The combination of the two banks is subject to
regulatory approval and is expected to take place in the spring of 1999 with
Woodstock National Bank's three offices becoming branch offices of First
Vermont Bank.
YEAR 2000 COMPLIANCE
Historically, some computer software and hardware and firmware
systems, and equipment or machinery with embedded processors or processing
instructions (sometimes referred to as "embedded processors"), were written
to recognize and process dates with the year written with two digits. For
dates on or after January 1, 2000 (when four digits will be necessary to
identify dates accurately), or for periods beginning before, and ending on
or after January 1, 2000, such software, hardware and firmware systems and
embedded processors may not be able to recognize or properly process dates
or information including dates or time periods. Among other things, this
may cause computers to produce incorrect information, to shut down, to cause
other systems or equipment to shut down of malfunction, or to malfunction in
other ways, and may cause equipment or machinery with embedded processors to
malfunction or to shut down. This is often referred to as, among other
things, the "Year 2000 problem."
In order to assure to the extent possible that the Year 2000 problem
does not impair their ability to do business or subject them to liability,
companies are advised to determine whether and to what extent their
information technology or physical resources may be affected by Year 2000
problems, to repair, replace or retire the affected systems or assets, and
to test the new systems or assets to assure that they will not be affected
by the Year 2000 problem (which is often referred to as being "year 2000
compliant"). Some new hardware, software or equipment, and some revisions
or upgrades of hardware, software or equipment, may have so-called "bugs" or
may prove to be incompatible with existing or other new or upgraded systems
or components. As a result, the testing of the changed components, and of
systems and subsystems as a whole, is critical and experience has shown that
the process is time consuming.
In order to protect the integrity of the banking system, the Federal
Reserve Board and other federal banking regulatory agencies (collectively
known as the "Federal Financial Institutions Examination Council," or
"FFIEC") have issued guidelines to financial institutions for addressing the
Year 2000 problem and set milestones that financial institutions are
expected to meet in becoming Year 2000 compliant and testing to assure
compliance. In broad outline, those guidelines provide that (i) by
September 30, 1997, financial institutions should have identified, assessed
and begun remediation of mission critical systems; (ii) by June 30, 1998,
institutions should be continuing remediation of mission critical systems
and have completed development of testing strategies and plans; (iii) by
September 1, 1998, institutions should be continuing system remediation and
should have begun testing of internal mission critical systems; (iv) by
December 31, 1998, institutions should have substantially completed testing
of internal mission critical systems; (v) by March 31, 1999, institutions
relying on service providers should have substantially completed system
testing and all institutions should have begun external testing with third
parties (such as other financial institutions, business partners and payment
system providers); and (vi) by June 30, 1999, institutions should have
completed testing of mission critical systems and substantially completed
all implementation of those systems.
Banknorth's Year 2000 remediation and compliance program (the "Year
2000 Project") is managed by a Project Group consisting of representatives
from more than 25 business units and functional departments within Banknorth
and its subsidiaries. The Project is directed by a Banknorth Vice President
who directly reports on the Project to Banknorth's Executive Vice President
- - Chief Information Officer. The Project is overseen by the Banknorth Board
and the board of directors of each subsidiary.
Banknorth has completed a preliminary assessment of all its computer
software, hardware and firmware systems, and equipment and machinery with
embedded processors (including vaults and other security systems, elevators
and HVAC systems). Banknorth believes that it has identified all
components, systems, equipment and databases that might not be able to
function properly as a result of the Year 2000 problems and has formulated a
plan to replace, upgrade or revise affected software, to upgrade or replace
affected hardware and equipment, and to remediate affected data and
databases. Banknorth anticipates that all those replacements, upgrades and
revisions will be substantially completed by December 31, 1998. Banknorth
began compliance testing of components and systems in July, 1998 and expects
to have substantially completed that compliance testing by the end of 1998,
although testing will continue on an ongoing and industry-wide basis
thereafter.
Substantially all of Banknorth's mission critical systems are
outsourced or are purchased software packages. As a result, much of the
remediation and testing process is dependent on the accuracy of work
performed by, and the Year 2000 compliance of software, hardware and
firmware and equipment provided by, vendors. Banknorth has initiated
discussions with its vendors and monitored their Year 2000 compliance
programs and the compliance of their products or services with required
standards. Where possible, Banknorth is also considering and where
appropriate is arranging, alternate service or software providers in cases
where it appears that vendors may not timely provide adequate solutions.
The economic cost of the Year 2000 Project includes not just direct
incremental amounts expended by Banknorth for repairing, upgrading or
replacing hardware, software and facilities, but also the use of internal
resources devoted to the Year 2000 Project that would otherwise have been
devoted to other business opportunities. It is difficult to quantify the
economic cost of internal resources of the Project. However, Banknorth
estimates that over the life of this Project, between 1996 and 2000, it will
utilize approximately $5.5 million to $7.5 million of internal resources on
this effort. These are internal resources that would have been utilized for
other business opportunities and do not necessarily represent additional
operating expenditures or costs. As of September 30, 1998, approximately
$3.3 million of these amounts have been expended. Further, Banknorth will
make direct incremental expenditures for the Year 2000 Project of
approximately $3.5 million over this five year period. Although many of
these hardware and equipment expenditures would have been made even absent
the Year 2000 problem as part of normal operations, they are included in the
above estimates as the timing of these purchases and upgrades was
accelerated due to the Year 2000 Project. As of September 30, 1998,
approximately $500 thousand of the direct incremental expenditures have been
made.
Banknorth has commenced a customer awareness program to inform its
customers (both depositors and borrowers) of the Year 2000 problem,
Banknorth's responses to the problem and the potential impact of the problem
on the customers and their business. Banknorth and its subsidiaries have
had awareness sessions with their customers and are taking into account
customers' Year 2000 compliance in evaluating and rating loans. Banknorth
Group, Inc. is aware that if borrowers suffer losses or illiquidity because
of their own Year 2000 problems (or the Year 2000 problems of others with
whom they do business or on whom they are dependent) Banknorth's subsidiary
banks may suffer credit losses or experience illiquidity. The standard loan
documentation of Banknorth's subsidiary banks has been revised to include
representations that the borrower is Year 2000 compliant and to give the
bank the right to examine the borrower's systems and procedures in order to
determine Year 2000 compliance.
Banknorth believes that the key risk factors associated with the Year
2000 are those it cannot directly control, primarily the readiness of key
suppliers and service providers, the readiness of the public infrastructure,
and as noted above, the readiness of its credit customers. However,
Banknorth and its subsidiaries have developed contingency plans and
strategies and so-called "work arounds" for each non-compliant system and
the possible failure of systems and resources that have been tested as
compliant. The contingency plans vary with the affected systems. Among
other things, Banknorth has designated certain of its local banks as "key
branches" and will equip properly, so that the Banknorth banks can continue
banking operations even if there are electrical outages because local utilities
are not Year 2000 compliant. Banknorth is also arranging to have temporary
help available so that, in event of the failure of a mission critical system,
the functions affected by the system failure can be performed manually.
The determination of the effect of Banknorth's own non-compliance with
Year 2000 requirements or the non-compliance of its vendors or customers is
complex and depends on numerous variables and unknowns. Without
remediation, the failure of critical software systems at any of the
Banknorth banks or at other banks could impair the ability of the banks to
do business, the failure of large or numerous borrowers to timely pay their
loans could impair the capital of one or more banks, and the failure of
embedded processors would adversely affect the physical security of the
banks. However, Banknorth believes that, as a result of its remediation and
testing efforts and its contingency plans, that worst case scenario is not
likely.
Banknorth has created a working group separate from the Year 2000
group to deal with the implementation of the merger and the integration of
Evergreen and Banknorth information technology systems. As a result, it is
expected that the merger will not affect the timely completion of the Year
2000 Project. In addition, since the Banknorth systems will be implemented
in the Combined Company, the merger should not affect the ability of the
systems of the Combined Company to be Year 2000 compliant.
INCOME TAXES
In the third quarter of 1998, Banknorth recognized income tax expense
of $4.1 million, as compared to $3.6 million in third quarter of 1997. The
increase in tax expense is primarily reflective of increased earnings,
despite the reduction in the effective rate from 32.3% in the third quarter
of 1997 to 31.0% in the third quarter of 1998. The tax expense on the
Company's income was lower than tax expense at the statutory rate of 35%,
due primarily to tax-exempt income, including loans, securities and BOLI, as
well as low-income housing credits. For the nine months ended September 30,
1998 and 1997, the effective tax rates were 30.8% and 32.4%, respectively.
CORE TANGIBLE PERFORMANCE
After removing the impact of the balance of goodwill and the related
period amortization, "core tangible" performance as of September 30, 1998
and 1997 was as follows:
Nine Months
Ended September 30
--------------------------
(Dollars in thousands, except share and per share data) 1998 1997
--------------------------
Net income, as reported $ 24,317 $ 21,729
Add: Amortization of goodwill, net of tax 2,508 2,508
--------------------------
"Core tangible income" $ 26,825 $ 24,237
==========================
Average tangible assets $ 2,926,334 $ 2,703,471
Average tangible equity $ 202,109 $ 179,729
Diluted weighted average shares outstanding 15,625,019 15,809,272
"Core tangible" return on average tangible assets 1.23% 1.20%
"Core tangible" return on average tangible equity 17.75% 18.03%
"Core tangible" diluted earnings per share $ 1.72 $ 1.53
All share and per share data has been restated for the effect of the 2-for-1
stock split declared February 24, 1998.
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 2,044,446 shares of its common stock in
February 1996.
In October 1997, Banknorth announced a plan to repurchase up to 5% of
its common stock.. In connection with the Evergreen acquisition, the stock
buyback plan was rescinded on July 31, 1998. As of July 31, 1998, the
Company had repurchased 414,000 shares, which are being held as treasury
stock. During September 1998, 7,000 shares were reissued from treasury
stock to fund the executive restricted stock awards, reducing the shares
held in treasury to 407,000 shares. Additional shares of treasury stock are
expected to be reissued to cover the needs of stock incentive plans during
the fourth quarter of 1998.
On February 24, 1998, the Board of Directors approved a 2-for-1 split
of its common stock effected in the form of a 100% stock dividend. The new
shares were issued April 6, 1998, to shareholders of record on March 20,
1998. All share and per share data has been restated for this stock split.
During the third quarter of 1998, the board of directors declared a
dividend of $.16 per share, resulting in a payout of 26.8% of third quarter
1998 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.
In the first quarter of 1996, as part of its plan to capitalize FMB at
a "well-capitalized" level for regulatory capital purposes, the Company
redeployed accumulated capital of certain of its subsidiary banks which
included substantially all of the 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. The Company is again planning for the
redeployment of accumulated capital of certain subsidiary banks to
capitalize FMB in order to complete the Berkshire acquisition. During the
third quarter of 1998, the Company requested regulatory approval for the
payment of a special dividend from certain subsidiary banks to the parent
company in connection with redeployment of capital resources to First
Massachusetts Bank, to support its acquisition of the Berkshire County,
Massachusetts banking operations of BankBoston, N.A. Payment of the special
dividend by certain subsidiaries will restrict the dividend paying capacity
of those subsidiary banks to 100% or less of prospective current period net
income. It is expected that these certain subsidiary banks will remain
well-capitalized after payment of the special dividend and that First
Massachusetts will be adequately capitalized after consummation of the
Berkshire County acquisition. Banknorth also utilizes dividends from its
subsidiaries for the payment of the cost of the capital securities and long
term debt. Accordingly, the payment of dividends by the Company in the
future will require the generation of sufficient earnings by the subsidiary
banks in excess of its debt service requirements. The Company presently
expects all subsidiary banks to be profitable and continue to pay sufficient
dividends.
At September 30, 1998, Banknorth's Tier I capital was $237.7 million,
or 10.79% of total risk-adjusted assets, compared to $224.7 million and
10.87% as of September 30, 1997. The $13.0 million increase in the Tier I
capital is attributable to the strong earnings of the Company. The ratio of
Tier I capital to total quarterly average adjusted assets (leverage ratio)
was 8.06%, and 7.98% as of September 30, 1998 and 1997, respectively.
Banknorth, and its subsidiaries individually, were "well capitalized" at
September 30, 1998 according to regulatory definition, and thereby, exceeded
all minimum regulatory capital requirements. Table I, Capital Ratios,
provides the components of capital as of various dates.
TABLE A. Mix of Average Earning Assets
Three Months Percentage of
Ended September 30, % of Total Earning Assets
------------------------ Total --------------------
(Dollars in thousands) 1998 1997 Change Change 1998 1997
---------------------------------------------------------------------
Loans, net of unearned income
and unamortized loan fees and costs:
Commercial, financial and agricultural $ 371,365 $ 333,854 $37,511 38.7 % 13.3% 12.4%
Construction and land development 39,191 30,078 9,113 9.4 1.4 1.1
Commercial real estate 589,564 554,562 35,002 36.1 21.1 20.6
Residential real estate 724,859 768,987 (44,128) (45.5) 25.9 28.5
Credit card receivables 27,993 21,474 6,519 6.7 1.0 0.8
Lease receivables 75,952 75,557 395 0.4 2.7 2.8
Other installment 164,003 149,448 14,555 15.0 5.9 5.5
---------------------------------------------------------------------
Total loans, net of unearned income and
unamortized loan fees and costs 1,992,927 1,933,960 58,967 60.8 71.3 71.7
Securities available for sale:
U.S. Treasuries and Agencies 109,302 158,073 (48,771) (50.3) 3.9 5.8
States and political subdivisions 7,971 4,780 3,191 3.3 0.3 0.2
Mortgage-backed securities 343,480 317,342 26,138 26.9 12.3 11.8
Corporate debt securities 229,585 188,869 40,716 42.0 8.2 7.0
Equity securities 39,052 39,339 (287) (0.3) 1.4 1.5
---------------------------------------------------------------------
Total securities available for sale, at fair value 729,390 708,403 20,987 21.6 26.1 26.3
Investment securities held to maturity:
U.S. Treasuries and Agencies 2,729 8,600 (5,871) (6.0) 0.1 0.3
States and political subdivisions 773 944 (171) (0.2) -- --
Mortgage-backed securities 8,625 17,520 (8,895) (9.2) 0.3 0.6
Corporate debt securities 10 10 -- -- -- --
---------------------------------------------------------------------
Total investment securities held to maturity,
at amortized cost 12,137 27,074 (14,937) (15.4) 0.4 0.9
Loans held for sale 34,435 20,957 13,478 13.9 1.2 0.8
Money market investments 26,478 7,934 18,544 19.1 1.0 0.3
---------------------------------------------------------------------
Total earning assets $2,795,367 $2,698,328 $97,039 100.0 % 100.0% 100.0%
====================================================================
TABLE B. Loan Portfolio
At September 30, At December 31, % Change
--------------------------------------------- -------------------- --------------------
1998 1997 1997
--------------------- --------------------- -------------------- 09/30/98 09/30/98
versus versus
(Dollars in thousands) Amount Percent Amount Percent Amount Percent 09/30/97 12/31/97
---------------------------------------------------------------------------------------------
Commercial, financial, and
agricultural $ 369,709 18.5% $ 325,852 16.8% $ 332,385 17.0% 13.5% 11.2%
Real estate:
Construction and land development 40,036 2.0 31,708 1.6 36,276 1.8 26.3 10.4
Commercial 594,025 29.8 556,351 28.7 563,800 28.8 6.8 5.4
Residential 717,103 36.0 776,735 40.1 773,429 39.4 (7.7) (7.3)
--------------------------------------------------------------------
Total real estate 1,351,164 67.8 1,364,794 70.4 1,373,505 70.0 (1.0) (1.6)
--------------------------------------------------------------------
Credit card receivables 27,989 1.4 22,037 1.1 25,669 1.3 27.0 9.0
Lease receivables 77,273 3.9 75,094 3.9 76,302 3.9 2.9 1.3
Other installment 167,342 8.4 151,047 7.8 152,768 7.8 10.8 9.5
--------------------------------------------------------------------
Total installment 272,604 13.7 248,178 12.8 254,739 13.0 9.8 7.0
--------------------------------------------------------------------
Total loans 1,993,477 100.0 1,938,824 100.0 1,960,629 100.0 2.8 1.7
Less: allowance for loan losses 29,433 1.5 25,061 1.3 25,721 1.3 17.4 14.4
--------------------------------------------------------------------
Net loans $1,964,044 98.5% $1,913,763 98.7% $1,934,908 98.7% 2.6% 1.5%
====================================================================
TABLE C. Securities Available for Sale and Investment Securities Held to
Maturity
At September 30, At December 31,
-------------------- ----------------
(Dollars in thousands) 1998 1997 1997
----------------------------------------
Securities available for sale:
U.S. Treasuries and Agencies $ 99,742 $153,954 $141,245
States and political subdivisions 7,811 4,725 5,251
Mortgage-backed securities 361,125 317,721 320,473
Corporate debt securities 217,686 197,885 200,710
Equity securities 39,044 39,106 39,044
Valuation reserve 13,649 2,459 3,585
------------------------------------
Recorded value of securities available for sale $739,057 $715,850 $710,308
====================================
Investment securities held to maturity:
U.S. Treasuries and Agencies $ 2,564 $ 8,484 $ 7,505
States and political subdivisions 772 785 781
Mortgage-backed securities 7,735 16,892 15,676
Corporate debt securities 10 10 10
------------------------------------
Recorded value of investment securities held to maturity $ 11,081 $ 26,171 $ 23,972
====================================
Fair value of investment securities held to maturity $ 11,477 $ 26,455 $ 24,246
====================================
Excess of fair value versus recorded value $ 396 $ 284 $ 274
Fair value as a % of recorded value 103.6% 101.1% 101.1%
Note: There were no holdings when taken in aggregate of any issuer(s) that
exceeded 10% of shareholders' equity at 9/30/98.
TABLE D. Average Balances, Yields, and Net Interest Margins
Three Months Ended September 30,
--------------------------------------------------------------------
1998 1997
-------------------------------- ---------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
--------------------------------------------------------------------
Earning assets:
Money market investments $ 26,478 $ 368 5.51% $ 7,934 $ 109 5.45%
Securities available for sale, at fair
value (1 and 2) 729,390 11,581 6.36 708,403 11,303 6.33
Loans held for sale 34,435 639 7.36 20,957 417 7.89
Investment securities held to maturity(2) 12,137 225 7.35 27,074 481 7.05
Loans, net of unearned income and
unamortized loan fees (2 and 3) 1,992,927 44,819 8.92 1,933,960 44,158 9.06
--------------------- ---------------------
Total earning assets 2,795,367 57,632 8.20 2,698,328 56,468 8.30
---------- ----------
Cash and due from banks 79,145 73,633
Allowance for loan losses (28,732) (24,742)
Other assets 141,345 102,527
---------- ----------
Total assets $2,987,125 $2,849,746
========== ==========
Interest-bearing liabilities:
NOW accounts & money market savings $1,009,308 10,138 3.99 $ 818,182 7,594 3.68
Regular savings 176,580 1,084 2.44 204,565 1,243 2.41
Time deposits $100 thousand and greater 102,041 1,433 5.57 92,655 1,282 5.49
Time deposits under $100 thousand 663,844 9,020 5.39 715,138 9,651 5.35
--------------------- ---------------------
Total interest-bearing deposits 1,951,773 21,675 4.41 1,830,540 19,770 4.28
Short-term borrowed funds 370,438 4,841 5.18 430,360 5,990 5.52
Long-term debt 49,186 767 6.19 20,196 343 6.74
--------------------- ---------------------
Total interest-bearing liabilities 2,371,397 27,283 4.56 2,281,096 26,103 4.54
------------------------------------------------------------------
Non-interest bearing deposits 322,977 293,979
Other liabilities 27,363 21,387
Corporation-obligated mandatorily
redeemable capital securities 30,000 30,000
Shareholders' equity 235,388 223,284
---------- ---------
Total liabilities, corporation-obligated
mandatorily redeemable capital securities
and shareholders' equity $2,987,125 $2,849,746
========== ==========
Net interest income $30,349 $30,365
======= =======
Interest rate differential 3.64% 3.76%
==== ====
Net interest margin 4.32% 4.46%
==== ====
<FN>
Notes:
<F1> For the purpose of the average yield computations, unrealized gains/
(losses) are excluded from the average rate calculation.
<F2> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal and state tax rates. The
incremental rate used to calculate tax exempt income on a tax
equivalent basis is 36%.
<F3> Includes principal balances of non-accrual loans and industrial
revenue bonds.
</FN>
Nine Months Ended September 30,
--------------------------------------------------------------------
1998 1997
-------------------------------- ---------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
--------------------------------------------------------------------
Earning assets:
Money market investments $ 13,494 $ 563 5.58% $ 7,115 $ 303 5.69%
Securities available for sale, at fair
value (1 and 2) 719,754 34,464 6.45 625,930 29,764 6.32
Loans held for sale 35,444 1,898 7.16 15,394 898 7.80
Investment securities held to maturity(2) 17,767 968 7.28 30,095 1,616 7.18
Loans, net of unearned income and
unamortized loan fees (2 and 3) 1,978,891 133,299 9.01 1,904,480 129,452 9.09
--------------------- ----------------------
Total earning assets 2,765,350 171,192 8.29 2,583,014 162,033 8.37
---------- ----------
Cash and due from banks 76,758 75,844
Allowance for loan losses (27,488) (24,184)
Other assets 140,777 103,112
---------- ----------
Total assets $2,955,397 $2,737,786
========== ==========
Interest-bearing liabilities:
NOW accounts & money market savings $ 968,025 28,480 3.93 $ 798,187 21,371 3.58
Regular savings 179,636 3,268 2.43 209,023 3,733 2.39
Time deposits $100 thousand and greater 99,222 4,152 5.59 91,504 3,738 5.46
Time deposits under $100 thousand 671,544 27,098 5.40 708,510 28,173 5.32
--------------------- ----------------------
Total interest-bearing deposits 1,918,427 62,998 4.39 1,807,224 57,015 4.22
Short-term borrowed funds 404,171 15,985 5.29 369,363 14,856 5.38
Long-term debt 34,698 1,641 6.32 22,546 1,114 6.61
--------------------- ----------------------
Total interest-bearing liabilities 2,357,296 80,624 4.57 2,199,133 72,985 4.44
------------------------------------------------------------------
Non-interest bearing deposits 310,948 285,003
Other liabilities 25,981 22,793
Corporation-obligated mandatorily
redeemable capital securities 30,000 16,813
Shareholders' equity 231,172 214,044
---------- ----------
Total liabilities, corporation-obligated
mandatorily redeemable capital securities
and shareholders' equity $2,955,397 $2,737,786
========== ==========
Net interest income $ 90,568 $ 89,048
======== ========
Interest rate differential 3.72% 3.93%
==== ====
Net interest margin 4.39% 4.60%
==== ====
<FN>
Notes:
<F1> For the purpose of the average yield computations, unrealized gains/
(losses) are excluded from the average rate calculation.
<F2> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal and state tax rates. The
incremental rate used to calculate tax exempt income on a tax
equivalent basis is 36%.
<F3> Includes principal balances of non-accrual loans and industrial
revenue bonds.
</FN>
TABLE E. Average Sources of Funding
Three Months Percentage of
Ended September 30, Change Total Net Funding
----------------------- ------------------- -----------------
(Dollars in thousands) 1998 1997 Amount Percent 1998 1997
---------------------------------------------------------------------
Non-interest bearing deposits $ 322,977 $ 293,979 $ 28,998 9.9 % 12.0% 11.4%
Retail deposits:
Regular savings 176,580 204,565 (27,985) (13.7) 6.6 7.9
Time deposits under $100 thousand 663,844 715,138 (51,294) (7.2) 24.6 27.8
NOW accounts & money market savings 1,009,308 818,182 191,126 23.4 37.5 31.8
-------------------------------------------------------------------
Total retail deposits 1,849,732 1,737,885 111,847 6.4 68.7 67.5
-------------------------------------------------------------------
Total core deposits 2,172,709 2,031,864 140,845 6.9 80.7 78.9
Time deposits $100 thousand and greater 102,041 92,655 9,386 10.1 3.8 3.6
Federal funds purchased 2,758 8,038 (5,280) (65.7) 0.1 0.3
Securities sold under agreements to repurchase 169,582 129,411 40,171 31.0 6.3 5.0
Borrowings from U.S. Treasury 12,027 9,661 2,366 24.5 0.4 0.4
Short-term notes from FHLB 186,071 283,250 (97,179) (34.3) 6.9 11.0
Long-term notes from FHLB 40,093 8,503 31,590 371.5 1.5 0.3
-------------------------------------------------------------------
Total purchased liabilities 512,572 531,518 (18,946) (3.6) 19.0 20.6
Bank term loan 9,093 11,693 (2,600) (22.2) 0.3 0.5
-------------------------------------------------------------------
Total net funding $2,694,374 $2,575,075 $119,299 4.6 % 100.0% 100.0%
===================================================================
TABLE F. Volume and Yield Analysis
Three Months
Ended September 30, Due to
-------------------- ------------------
(Dollars in thousands) 1998 1997 Change Volume Rate
----------------------------------------------------
Interest income (FTE):
Money market investments $ 368 $ 109 $ 259 $ 258 $ 1
Securities available for sale 11,581 11,303 278 224 54
Loans held for sale 639 417 222 250 (28)
Investment securities held to maturity 225 481 (256) (276) 20
Loans 44,819 44,158 661 1,343 (682)
------------------------------
Total interest income 57,632 56,468 1,164 1,853 (689)
------------------------------
Interest expense:
NOW accounts & money market savings 10,138 7,594 2,544 1,905 639
Regular savings 1,084 1,243 (159) (174) 15
Time deposits $100 thousand and greater 1,433 1,282 151 132 19
Time deposits under $100 thousand 9,020 9,651 (631) (703) 72
Short-term borrowed funds 4,841 5,990 (1,149) (780) (369)
Long-term debt 767 343 424 452 (28)
------------------------------
Total interest expense 27,283 26,103 1,180 1,065 115
----------------------------------------------------
Net interest income (FTE) $ 30,349 $ 30,365 $ (16) $ 788 $ (804)
=====================================================
Nine Months
Ended September 30, Due to
-------------------- -------------------
(Dollars in thousands) 1998 1997 Change Volume Rate
-----------------------------------------------------
Interest income (FTE):
Money market investments $ 563 $ 303 $ 260 $ 266 $ (6)
Securities available for sale 34,464 29,764 4,700 4,088 612
Loans held for sale 1,898 898 1,000 1,074 (74)
Investment securities held to maturity 968 1,616 (648) (671) 23
Loans 133,299 129,452 3,847 4,987 (1,140)
------------------------------
Total interest income 171,192 162,033 9,159 10,714 (1,555)
------------------------------
Interest expense:
NOW accounts & money market savings 28,480 21,371 7,109 5,019 2,090
Regular savings 3,268 3,733 (465) (528) 63
Time deposits $100 thousand and greater 4,152 3,738 414 325 89
Time deposits under $100 thousand 27,098 28,173 (1,075) (1,499) 424
Short-term borrowed funds 15,985 14,856 1,129 1,378 (249)
Long-term debt 1,641 1,114 527 576 (49)
------------------------------
Total interest expense 80,624 72,985 7,639 5,501 2,138
----------------------------------------------------
Net interest income (FTE) $ 90,568 $ 89,048 $1,520 $ 5,213 $(3,693)
====================================================
<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
September 30, December 31, September 30,
(Dollars in thousands) 1998 1997 1997
------------- ------------ -------------
Loans on a non-accrual basis:
Commercial, financial and agricultural $ 857 $ 2,749 $ 4,728
Real estate:
Construction and land development 55 - -
Commercial 1,907 2,645 2,942
Residential 6,064 7,936 8,132
Other installment - 8 14
----------------------------------------
Total non-accrual 8,883 13,338 15,816
Restructured loans:
Real estate:
Commercial 6,340 - -
Residential 33 36 37
Other installment 5 6 6
----------------------------------------
Total restructured 6,378 42 43
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 149 70 456
Real estate:
Commercial 1,066 125 137
Residential - 332 226
Credit card receivables 168 119 146
Lease receivables 192 151 228
Other installment 476 514 462
----------------------------------------
Total past-due 90 days or more
and still accruing 2,051 1,311 1,655
----------------------------------------
Total non-performing loans 17,312 14,691 17,514
Other real estate owned (OREO) 789 1,074 756
Non-real estate and repossessed assets 11 500 275
----------------------------------------
Total foreclosed and repossessed assets (F/RA) 800 1,574 1,031
----------------------------------------
Total non-performing assets $18,112 $16,265 $18,545
========================================
Allowance for loan losses (ALL) $29,433 $25,721 $25,061
ALL coverage of non-performing loans 170.01% 175.08% 143.09%
Non-performing assets as a % of (loans & F/RA) 0.91 0.83 0.96
Non-performing assets to total assets 0.61 0.56 0.65
TABLE H. Summary of Loan Loss Experience
Nine Months Ended Twelve Months Ended Nine Months Ended
(Dollars in thousands) September 30, 1998 December 31, 1997 September 30, 1997
---------------------------------------------------------------
Loans outstanding-end of period $1,993,477 $1,960,629 $1,938,824
Average loans outstanding-period to date 1,978,891 1,916,097 1,904,480
Allowance for loan losses at beginning of period $ 25,721 $ 23,520 $ 23,520
Loans charged off:
Commercial, financial and agricultural (244) (1,343) (1,065)
Real estate:
Commercial (151) (669) (495)
Residential (1,125) (1,915) (1,296)
-------------------------------------------------------
Total real estate (1,276) (2,584) (1,791)
Credit card receivables (552) (691) (523)
Lease receivables (1,282) (1,510) (956)
Other installment (2,267) (4,022) (3,250)
-------------------------------------------------------
Total installment (4,101) (6,223) (4,729)
Total loans charged off (5,621) (10,150) (7,585)
-------------------------------------------------------
Recoveries on loans:
Commercial, financial and agricultural 529 592 502
Real estate:
Construction and land development 11 87 75
Commercial 486 638 485
Residential 596 628 402
-------------------------------------------------------
Total real estate 1,093 1,353 962
Credit card receivables 71 109 82
Lease receivables 994 970 644
Other installment 1,121 1,665 1,310
-------------------------------------------------------
Total installment 2,186 2,744 2,036
Total recoveries on loans 3,808 4,689 3,500
-------------------------------------------------------
Loans charged off, net of recoveries (1,813) (5,461) (4,085)
-------------------------------------------------------
Provision for loan losses 5,525 7,662 5,626
-------------------------------------------------------
Allowance for loan losses at end of period $ 29,433 $ 25,721 $ 25,061
=======================================================
Loans charged off, net (annualized),
as a % of average total loans 0.12% 0.29% 0.29%
Provision for loan losses (annualized)
as a % of average total loans 0.37 0.40 0.39
Allowance for loan losses
as a % of period-end total loans 1.48 1.31 1.29
TABLE I. Capital Ratios
At At At At At
September 30, June 30, March 31, December 31, September 30,
(Dollars in thousands) 1998 1998 1998 1997 1997
------------------------------------------------------------------------
Total risk-adjusted on-balance sheet assets (1) (3) $2,082,581 $2,077,236 $2,061,517 $2,024,610 $1,960,074
Total risk-adjusted off-balance sheet items 121,445 115,393 106,994 108,212 107,849
----------------------------------------------------------------------
Total risk-adjusted assets $2,204,026 $2,192,629 $2,168,511 $2,132,822 $2,067,923
======================================================================
Total risk-adjusted assets / average total assets,
net of fair value adjustments and goodwill (1) (3) 74.68% 74.83% 75.20% 75.02% 73.44%
Total shareholders' equity $ 243,737 $ 232,600 $ 229,882 $ 229,872 $ 228,486
Fair value adjustments (1) (3) (9,003) (3,820) (2,913) (2,311) (1,563)
Corporation-obligated mandatorily redeemable 30,000 30,000 30,000 30,000 30,000
capital securities
Goodwill (27,002) (28,307) (29,613) (30,919) (32,225)
-----------------------------------------------------------------------
Total Tier I capital 237,732 230,473 227,356 226,642 224,698
Maximum allowance for loan losses (2) 27,574 27,417 26,850 25,721 25,061
-----------------------------------------------------------------------
Total capital $ 265,306 $ 257,890 $ 254,206 $ 252,363 $ 249,759
======================================================================
Quarterly average total assets, net of
fair value adjustments and goodwill (1) (3) $2,951,120 $2,930,026 $2,883,474 $2,843,167 $2,815,958
Allowance for loan losses 29,433 28,116 26,850 25,721 25,061
Total capital to total risk-adjusted assets 12.04% 11.76% 11.72% 11.83% 12.08%
Tier I capital to total risk-adjusted assets 10.79 10.51 10.48 10.63 10.87
Tier I capital to total quarterly average
adjusted assets (Leverage) 8.06 7.87 7.88 7.97 7.98
<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.
<F3> Mortgage servicing assets, included in total assets on the consolidating
balance sheets, that exceed 90% of fair market value of these assets,
have been excluded in the above ratios.
</FN>
SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
1998 1997
(Dollars in thousands, except share ----------------------------------------- --------------------------
and per share data) Q3 Q2 Q1 Q4 Q3
-----------------------------------------------------------------------
Statement of Income:
Interest income $ 57,370 $ 57,137 $ 55,995 $ 56,891 $ 56,321
Interest expense 27,283 26,941 26,400 26,339 26,103
-----------------------------------------------------------------------
Net interest income 30,087 30,196 29,595 30,552 30,218
Provision for loan losses 1,840 1,840 1,845 2,036 1,940
-----------------------------------------------------------------------
Net interest income after provision
for loan losses 28,247 28,356 27,750 28,516 28,278
-----------------------------------------------------------------------
Other operating income:
Income from trust and investment management fees 2,290 2,394 2,222 2,263 2,270
Service charges on deposit accounts 2,135 2,223 2,163 2,279 1,910
Card product income 531 514 408 816 787
Loan servicing income 372 222 417 603 630
Gain / (loss) on sale of mortgage servicing rights 392 (6) -- (23) 896
Net loan transactions 873 861 611 416 381
Net securities transactions 127 69 (439) 71 163
Bank-owned life insurance 567 553 540 77 --
All other 1,789 1,562 1,262 3,622 964
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Total other operating income 9,076 8,392 7,184 10,124 8,001
Other operating expenses:
Compensation & employee benefits 11,599 11,883 12,143 12,189 11,967
Net occupancy, equipment & software expense 3,571 3,686 3,744 3,858 3,772
Data processing 1,204 1,308 1,151 1,286 1,256
OREO and repossession 127 116 222 316 287
Amortization of goodwill 1,305 1,306 1,306 1,306 1,305
Capital securities 789 789 789 789 789
All other 5,586 5,558 5,701 5,735 5,695
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Total other operating expenses 24,181 24,646 25,056 25,479 25,071
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Income before income tax expense 13,142 12,102 9,878 13,161 11,208
Income tax expense 4,071 3,780 2,954 4,401 3,618
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Net income $ 9,071 $ 8,322 $ 6,924 $ 8,760 $ 7,590
=======================================================================
Average Balances:
Loans $ 1,992,927 $ 1,979,596 $ 1,963,829 $ 1,950,504 $ 1,933,960
Loans held for sale 34,435 41,921 29,926 19,707 20,957
Securities available for sale 729,390 718,565 711,108 716,592 708,403
Investment securities held to maturity 12,137 18,034 23,250 24,853 27,074
Money market investments 26,478 10,797 2,947 8,286 7,934
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Total earning assets 2,795,367 2,768,913 2,731,060 2,719,942 2,698,328
Other assets 191,758 193,240 184,940 156,455 151,418
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Total assets $ 2,987,125 $ 2,962,153 $ 2,916,000 $ 2,876,397 $ 2,849,746
=======================================================================
Non-interest-bearing deposits $ 322,977 $ 311,010 $ 298,629 $ 305,831 $ 293,979
Interest-bearing deposits 1,951,773 1,917,966 1,884,807 1,860,793 1,830,540
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Total deposits 2,274,750 2,228,976 2,183,436 2,166,624 2,124,519
Short-term borrowed funds 370,438 413,953 428,723 412,502 430,360
Long-term debt 49,186 34,041 20,553 17,577 20,196
Other liabilities 27,363 25,910 24,638 21,645 21,387
Corporation-obligated mandatorily redeemable
capital securities 30,000 30,000 30,000 30,000 30,000
Shareholders' equity 235,388 229,273 228,650 228,049 223,284
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Total liabilities, corporation-obligated
mandatorily redeemable capital securities
and shareholders' equity $ 2,987,125 $ 2,962,153 $ 2,916,000 $ 2,876,397 $ 2,849,746
=======================================================================
Loans charged off, net of recoveries $ 523 $ 574 $ 716 $ 1,376 $ 842
Non-performing assets, p.e. 18,112 12,187 16,282 16,265 18,545
Share and Per Share Data:
Basic wtd. avg. number of shares outstanding 15,318,311 15,360,499 15,450,990 15,639,784 15,694,514
Basic earnings per share (Basic EPS) $ 0.59 $ 0.54 $ 0.45 $ 0.56 $ 0.48
Diluted wtd. avg. number of shares outstanding 15,545,242 15,621,944 15,709,954 15,902,314 15,920,056
Diluted earnings per share (Diluted EPS) $ 0.58 $ 0.53 $ 0.44 $ 0.55 $ 0.48
Tangible book value, p.e. 14.22 13.41 13.06 12.84 12.54
Cash dividends declared 0.16 0.16 0.16 0.145 0.145
Closing price at quarter end 29.25 37.00 36.50 32.13 27.32
Cash dividends declared as a % of net income 26.82% 29.25% 35.70% 25.79% 29.91%
Key Ratios:
Return on average assets 1.20% 1.13% 0.96% 1.21% 1.06%
Return on average shareholders' equity 15.29 14.56 12.28 15.24 13.49
Net interest margin, fte 4.32 4.41 4.43 4.48 4.46
Efficiency ratio 57.44 59.49 62.39 62.41 62.93
Expense ratio 1.80 2.00 2.20 2.27 2.31
As a % of risk-adjusted assets, p.e.:
Total capital 12.04 11.76 11.72 11.83 12.08
Tier 1 capital 10.79 10.51 10.48 10.63 10.87
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 8.06 7.87 7.88 7.97 7.98
Tangible shareholders' equity to tangible assets, p.e. 7.36 6.89 6.84 6.88 6.91
Price/Diluted EPS (last 4 reported quarters) 13.9 18.5 19.0 16.7 14.9
<FN>
Note: All share and per share data has been restated for the effect of the
2-for-1 stock split declared February 24, 1998.
</FN>
ITEM 2. CHANGES IN SECURITIES
On September 4, 1998, the Company filed with the Delaware Secretary of State a
corrective amendment to the amendment filed on June 25, 1998 to conform the
text of the Amendment of Article Fourth of the Company's Certificate of
Incorporation to the text as adopted by the shareholders at the 1998 Annual
Meeting.
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: 11/09/98 /s/ William H. Chadwick
-------------------------------------
President and Chief Executive Officer
Date: 11/09/98 /s/ Thomas J. Pruitt
-------------------------------------
Executive Vice President and Chief
Financial Officer