UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission file number (0-18173)
BANKNORTH GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 03-0321189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 FINANCIAL PLAZA
P.O. BOX 5420
BURLINGTON, VERMONT
(Address of principal executive offices)
05401
(Zip code)
(802) 658-9959
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (l) has filed all
reports required to be filed by Section l3 or l5(d) of the Securities
Exchange Act of l934 during the preceding l2 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [x] No [ ]
7,826,648 shares of common stock, $l.00 par, outstanding on June 30, 1997.
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 Six Months Ended June 30, 1997 and 1996
(Both unaudited) 2
Consolidated Balance Sheets at June 30, 1997
(Unaudited), December 31, 1996 and June 30, 1996
(Unaudited) 3
Consolidated Statements of Changes in Shareholders'
Equity for the Period January 1, 1996 to
June 30, 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996
(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
PART II
Item 1 Legal Proceedings N/A
Item 2 Changes in Securities N/A
Item 3 Defaults Upon Senior Securities N/A
Item 4 Submission of Matters to a Vote of Security Holders 28
Item 5 Other Information N/A
Item 6 Exhibits and Reports on Form 8-K N/A
Signatures 29
Glossary 30
Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------- -------------------------
(Dollars in thousands, except share and per share 1997 1996 1997 1996
-------------------------------------------------------
<S> <C> <C> <C> <C>
Income Data
Interest income $ 54,312 $ 47,454 $ 105,294 $ 90,587
Interest expense 24,448 20,058 46,882 38,575
-------------------------------------------------------
Net interest income 29,864 27,396 58,412 52,012
Provision for loan losses 1,936 1,300 3,686 2,600
-------------------------------------------------------
Net interest income after provision for
loan losses 27,928 26,096 54,726 49,412
Non-interest income 6,575 6,456 13,201 12,342
Goodwill amortization 1,306 1,319 2,612 2,050
Other expenses 22,728 21,191 44,403 42,613
-------------------------------------------------------
Total non-interest expense 24,034 22,510 47,015 44,663
-------------------------------------------------------
Income before income taxes 10,469 10,042 20,912 17,091
Income taxes 3,380 3,248 6,773 5,547
-------------------------------------------------------
Net income $ 7,089 $ 6,794 $ 14,139 $ 11,544
=======================================================
Share and Per Share Data
Weighted average number of shares outstanding 7,826,648 7,826,648 7,826,648 7,579,517
Net income $ 0.91 $ 0.87 $ 1.81 $ 1.52
Goodwill, after income tax effect 0.11 0.11 0.21 0.18
Net income, excluding goodwill 1.02 0.98 2.02 1.70
Shares outstanding, p.e. 7,826,648 7,826,648 7,826,648 7,826,648
Book value $ 27.71 $ 24.84 $ 27.71 $ 24.84
Tangible book value, p.e. 23.42 19.89 23.42 19.89
PE Ratio (last for reported quarters) 12.9 10.6 12.9 10.6
Cash dividends declared 0.29 0.25 0.58 0.50
Market price:
High 46.25 36.25 46.25 38.50
Low 40.50 32.50 40.00 32.50
Close 46.25 34.25 46.25 34.25
Share volume 818,700 1,093,788 1,718,066 2,243,259
Average monthly share volume 272,900 364,596 286,344 373,877
Average Balances
Assets $2,743,432 $2,429,249 $2,680,834 $2,294,483
Earning assets, net of fair value adjustment 2,590,647 2,265,132 2,524,401 2,143,430
Loans 1,914,211 1,746,552 1,889,495 1,642,670
Goodwill 34,334 39,583 34,964 31,547
Deposits 2,077,242 2,030,037 2,072,532 1,913,164
Short-term borrowed funds 388,903 138,632 341,640 126,567
Long-term debt 22,607 47,311 23,740 49,861
Corporation-obligated mandatorily redeemable
capital securities of subsidiary trust
holding solely junior subordinated debentures
of the Corporation 20,110 - 10,110 -
Shareholders' equity 210,869 191,695 209,303 183,621
Key Ratios
Return on average assets 1.04% 1.12% 1.06% 1.01%
Return on average shareholders' equity 13.48 14.25 13.62 12.64
Efficiency ratio 61.43 62.07 61.40 62.38
Net loan charge-offs to average loans 0.34 0.19 0.34 0.20
Provision for loan losses to average loans 0.40 0.30 0.39 0.32
Allowance for loan losses to loans, p.e. 1.24 1.39 1.24 1.39
Allowance for loan losses coverage of
non-performing loans, p.e. 152.21 112.40 152.21 112.40
Non-performing assets to total assets, p.e. 0.57 0.95 0.57 0.95
Total capital to risk-adjusted assets, p.e. 11.72 10.37 11.72 10.37
Tier 1 capital to risk-adjusted assets, p.e. 10.55 9.12 10.55 9.12
Tier 1 capital to quarterly average total assets
(Leverage) 7.94 6.72 7.94 6.72
Tangible shareholders' equity to tangible
assets, p.e. 6.51 6.44 6.51 6.44
</TABLE>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------- ---------------------
(In thousands, except per share data) 1997 1996 1997 1996
-----------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $43,711 $39,787 $ 85,543 $75,604
Interest on money market investments 80 242 194 647
Interest on securities available for sale 9,987 6,626 18,435 12,676
Interest on investment securities 534 799 1,122 1,660
-----------------------------------------------
Total interest income 54,312 47,454 105,294 90,587
Interest Expense:
Deposits 18,861 17,692 37,245 34,028
Short-term borrowed funds 5,211 1,676 8,866 3,092
Long-term debt 376 690 771 1,455
-----------------------------------------------
Total interest expense 24,448 20,058 46,882 38,575
-----------------------------------------------
Net Interest Income 29,864 27,396 58,412 52,012
Less: provision for loan losses 1,936 1,300 3,686 2,600
-----------------------------------------------
Net Interest Income After Provision for
Loan Losses 27,928 26,096 54,726 49,412
-----------------------------------------------
Other Operating Income:
Income from fiduciary activities 2,081 2,005 4,103 4,001
Service charges on depositor accounts 1,981 1,792 3,837 3,132
Card product income 822 728 1,542 1,327
Loan servicing income 640 670 1,329 1,349
Net loan transactions 183 358 418 959
Net securities transactions 6 -- 24 3
Other income 862 903 1,948 1,571
-----------------------------------------------
Total other operating income 6,575 6,456 13,201 12,342
Other Operating Expenses:
Salaries 9,443 9,053 18,409 17,428
Employee benefits 1,963 2,146 4,289 4,317
Net occupancy expenses 1,948 1,767 3,923 3,553
Equipment and software expenses 1,733 1,701 3,489 3,134
Data processing fees 1,223 1,209 2,430 2,317
FDIC deposit insurance and other regulatory
expenses 194 99 381 198
Other real estate owned and repossession
expenses 264 78 361 108
Legal and professional fees 658 833 1,452 1,690
Printing and supplies expenses 600 572 1,197 1,998
Advertising and marketing expenses 630 657 1,244 1,754
Amortization of goodwill 1,306 1,319 2,612 2,050
Other expenses 4,072 3,076 7,228 6,116
-----------------------------------------------
Total other operating expenses 24,034 22,510 47,015 44,663
-----------------------------------------------
Income before income tax expense 10,469 10,042 20,912 17,091
Income tax expense 3,380 3,248 6,773 5,547
-----------------------------------------------
Net Income $ 7,089 $ 6,794 $ 14,139 $11,544
===============================================
Net Income Per Share $ 0.91 $ 0.87 $ 1.81 $ 1.52
===============================================
</TABLE>
See accompanying notes to unaudited interim consolidated financial
statements.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31, June 30,
1997 1996 1996
(In thousands, except share and per share data) -------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
Cash and due from banks $ 88,422 $ 91,871 $ 85,076
Money market investments 4,502 101 50
------------------------------------------
Cash and cash equivalents 92,924 91,972 85,126
------------------------------------------
Securities available for sale, at fair value 701,063 531,269 460,901
Loans held for sale 17,286 12,106 14,237
Investment securities 28,041 34,194 43,373
Loans 1,931,434 1,848,232 1,770,339
Less: allowance for loan losses 23,963 23,520 24,669
------------------------------------------
Net loans 1,907,471 1,824,712 1,745,670
------------------------------------------
Accrued interest receivable 16,551 15,148 15,600
Premises, equipment and software, net 30,054 29,448 29,427
Other real estate owned and repossessed assets 559 921 1,301
Goodwill 33,530 36,142 38,744
Capitalized mortgage servicing rights 4,743 3,921 3,845
Other assets 19,085 21,490 19,816
------------------------------------------
Total assets $2,851,307 $2,601,323 $2,458,040
==========================================
Liabilities, Corporation-Obligated Mandatorily Redeemable
Capital Securities and Shareholders' Equity
Deposits:
Demand deposits $ 302,922 $ 287,598 $ 269,336
NOW accounts & money market savings 798,798 773,870 757,340
Regular savings 205,935 215,364 230,537
Time deposits $100 thousand and greater 87,615 91,245 72,666
Time deposits under $100 thousand 706,560 697,987 710,352
------------------------------------------
Total deposits 2,101,830 2,066,064 2,040,231
------------------------------------------
Short-term borrowed funds:
Federal funds purchased -- 23,305 4,375
Securities sold under agreements to repurchase 129,405 116,484 88,590
Borrowings from U.S. Treasury 23,329 11,672 17,012
Borrowings from Federal Home Loan Bank of Boston 305,000 129,000 46,000
------------------------------------------
Total short-term borrowed funds 457,734 280,461 155,977
------------------------------------------
Long-term debt:
Federal Home Loan Bank of Boston term notes 9,722 12,923 31,041
Bank term loan 11,700 13,000 15,750
------------------------------------------
Total long-term debt 21,422 25,923 46,791
------------------------------------------
Accrued interest payable 5,638 3,914 4,547
Other liabilities 17,817 18,224 16,064
------------------------------------------
Total liabilities 2,604,441 2,394,586 2,263,610
------------------------------------------
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely junior
subordinated debentures of the Corporation 30,000 -- --
Shareholders' equity:
Common stock, $1.00 par value; authorized 20,000,000
shares; issued and outstanding 7,826,648 shares 7,827 7,827 7,827
Surplus 87,566 87,410 87,052
Retained earnings 124,532 115,130 105,520
Unamortized employee restricted stock (1,047) (1,153) (649)
Net unrealized losses on securities available for
sale, net of tax (2,012) (2,477) (5,320)
------------------------------------------
Total shareholders' equity 216,866 206,737 194,430
------------------------------------------
Total liabilities, corporation-obligated mandatorily
redeemable capital securities and shareholders' equity $2,851,307 $2,601,323 $2,458,040
==========================================
</TABLE>
See accompanying notes to unaudited interim consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Unrealized
Unearned Gains (Losses)
Portion of On Securities,
Employee Available
Common Retained Restricted for Sale,
(In thousands, except per share data) Stock Surplus Earnings Stock Net of Tax Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $6,804 $56,023 $ 97,978 $ (898) $ 29 $159,936
Net income -- -- 25,390 -- -- 25,390
Issuance of common stock, net of expenses 1,023 31,193 -- -- -- 32,216
Adjustment of securities available for
sale to fair value, net of tax -- -- -- -- (2,506) (2,506)
Cash dividends $1.00 per share -- -- (7,827) -- -- (7,827)
Issuance of employee restricted stock -- -- -- (371) -- (371)
Amortization of employee restricted stock -- 194 -- 116 -- 310
Exercise of employee stock options -- -- (411) -- -- (411)
----------------------------------------------------------------------------
Balance, December 31, 1996 $7,827 $87,410 $115,130 $(1,153) $(2,477) $206,737
============================================================================
Net income -- -- 7,050 -- -- 7,050
Adjustment of securities available for
sale to fair value, net of tax -- -- -- -- (3,680) (3,680)
Cash dividends $.29 per share -- -- (2,270) -- -- (2,270)
Amortization of employee restrict stock -- (33) -- 125 -- 92
Exercise of employee stock options -- -- (155) -- -- (155)
----------------------------------------------------------------------------
Balance, March 31, 1997 (Unaudited) $7,827 $87,377 $119,755 $(1,028) $(6,157) $207,774
============================================================================
Net income -- -- 7,089 -- -- 7,089
Adjustment of securities available for
sale to fair value, net of tax -- -- -- -- 4,145 4,145
Cash dividends $.29 per share -- -- (2,270) -- -- (2,270)
Amortization of employee restricted stock -- 189 -- (19) -- 170
Exercise of employee stock options -- -- (42) -- -- (42)
----------------------------------------------------------------------------
Balance, June 30, 1997 (Unaudited) $7,827 $87,566 $124,532 $(1,047) $(2,012) $216,866
============================================================================
</TABLE>
See accompanying notes to unaudited interim consolidated financial
statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
(In thousands) -------------------------
1997 1996
-------------------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 14,139 $ 11,544
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization of premises, equipment and software 2,334 2,095
Amortization of goodwill 2,612 2,050
Net accretion of investment securities (179) (208)
Net amortization of securities available for sale 1,686 1,427
Provision for loan losses 3,686 2,600
Adjustment of other real estate owned to estimated fair value 184 75
Provision for deferred tax benefit (98) (22)
Amortization of employee restricted stock 262 85
Exercise of employee stock options (197) (88)
Net securities transactions (24) (3)
Net gain on sale of other real estate owned and repossessed assets (177) (313)
Proceeds from sale of loans held for sale 45,212 100,704
Originations and purchases of loans held for resale (49,974) (95,309)
Net gain on sale of loans held for sale (418) (959)
Increase in interest receivable (1,403) (2,171)
Increase in interest payable 1,724 207
Decrease (increase) in other assets and other intangibles 1,527 (2,887)
Increase (decrease) in other liabilities (407) 2,543
-----------------------
Total adjustments 6,350 9,826
-----------------------
Net cash provided by (used in) operating activities 20,489 21,370
-----------------------
Cash flows from investing activities:
Net cash provided by acquisition -- 124,141
Proceeds from maturity and call of securities available for sale 36,651 149,228
Proceeds from maturity and call of investment securities 6,355 6,537
Proceeds from sale of securities available for sale -- 20,235
Purchase of securities available for sale (207,497) (280,956)
Proceeds from sale of OREO and repossessed assets 1,623 1,536
Loans purchased (30,023) (23,381)
Net (increase) decrease in originated loans (57,690) (419)
Capital expenditures (2,954) (2,734)
-----------------------
Net cash provided by (used in) investing activities (253,535) (5,813)
-----------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 35,766 (79,052)
Net increase in short-term borrowed funds 177,273 39,764
Issuance of common stock, net of expenses -- 32,216
Issuance of corporation-obligated mandatorily redeemable capital
securities 30,000 --
Payments on long term debt (4,501) (9,206)
Dividends paid (4,540) (3,914)
-----------------------
Net cash provided by (used in) financing activities 233,998 (20,192)
-----------------------
Net increase (decrease) in cash and cash equivalents 952 (4,635)
-----------------------
Cash and cash equivalents at beginning of period 91,972 89,761
-----------------------
Cash and cash equivalents at end of period $ 92,924 $ 85,126
=======================
Additional disclosure relative to statement of cash flows:
Interest paid $ 45,158 $ 37,942
=======================
Taxes paid $ 4,905 $ 8,745
=======================
Supplemental schedule of non-cash investing and financing activities:
Net transfer of loans to OREO and repossessed assets $ 1,268 $ 1,430
Adjustment to securities available for sale to fair value, net of tax 465 (5,349)
Fair value of assets acquired in acquisition -- 405,741
Fair value of liabilities assumed -- 560,340
</TABLE>
See accompanying notes to unaudited interim consolidated financial
statements.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited interim consolidated financial statements
include the accounts of the Company and its subsidiaries, First
Massachusetts Bank, N.A., North American Bank Corporation and its
wholly owned subsidiary, Farmington National Bank, The Howard Bank,
N.A., First Vermont Bank and Trust Company and its wholly owned
subsidiary, Banknorth Mortgage Company, Franklin Lamoille Bank,
Granite Savings Bank and Trust Company, Woodstock National Bank, The
Stratevest Group, N.A. and North Group Realty, Inc. It is the opinion
of management that the accompanying unaudited interim consolidated
financial statements have been prepared in accordance with the
instructions to Form 10-Q and reflect all adjustments which are
considered necessary to report fairly the financial position as of
June 30, 1997 and 1996, the Consolidated Statements of Income for the
three and six months ended June 30, 1997 and 1996, and the
Consolidated Statements of Cash Flows for the six months ended June
30, 1997 and 1996 and the Consolidated Statements of Changes in
Shareholders' Equity for the period January 1, 1996 through June 30,
1997. The accompanying unaudited interim consolidated financial
statements should be read in conjunction with Banknorth Group, Inc.'s
consolidated year end financial statements, including notes thereto,
which are included in Banknorth Group, Inc.'s 1996 annual report to
shareholders on Form 10-K.
2. Earnings per share were calculated based on 7,826,648 and 7,579,517
weighted average shares issued and outstanding during the six month
periods ended June 30, 1997 and 1996, respectively, and 7,826,648
weighted average shares issued and outstanding during the three month
periods ended June 30, 1997 and 1996. The effect of the outstanding
stock option awards is not material to the calculation of earnings per
share.
3. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share"
(SFAS No. 128). SFAS No. 128 establishes standards for computing and
presenting earnings per share (EPS). This Statement simplifies the
standards for computing EPS making them comparable to international EPS
standards and supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share" and related interpretations. SFAS No. 128 replaces
the presentation of primary EPS with the presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation.
Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity (such as
the Company's stock options). This Statement is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods. Earlier adoption is not permitted. This Statement
requires restatement of all prior-period EPS data presented. Management
does not anticipate the effect of the adoption of SFAS No. 128 to be
material.
4. In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129), which establishes
standards for disclosure about a company's capital structure. In
accordance with SFAS No. 129, companies will be required to provide
in the financial statements a complete description of all aspects of
their capital structure, including call and put features, redemption
requirements and conversion options. The disclosures required by SFAS
No. 129 are for financial statements for periods ending after December
15, 1997. Management anticipates providing the required information in
the 1997 annual financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" (SFAS No. 130). SFAS No. 130 establishes standards for reporting
and displaying of comprehensive income. SFAS No. 130 states that
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.
This statement is effective for fiscal years beginning after December 15,
1997. Management anticipates developing the required information for
inclusion in the 1998 annual consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131
establishes standards for reporting by public companies about operating
segments of their business. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas and
major customers. This statement is effective for periods beginning after
December 15, 1997. Management anticipates developing the required
information for inclusion in the 1998 annual consolidated financial
statements of Banknorth Group, Inc.
[LOGO] KPMG Peat Marwick, LLP
74 North Pearl Street
Albany, New York 12207
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Banknorth Group, Inc.
We have reviewed the accompanying consolidated balance sheets of Banknorth
Group, Inc. and subsidiaries ("the Company") as of June 30, 1997 and 1996, and
the related consolidated statements of income for the three and six month
periods ended June 30, 1997 and 1996, and the consolidated statements of
changes in shareholders' equity for the three month periods ended March 31,
1997 and June 30, 1997, and the consolidated statements of cash flows for the
six month periods ended June 30, 1997 and 1996. These consolidated financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Banknorth Group, Inc. and
subsidiaries as of December 31, 1996, 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 24, 1997 we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1996 and the consolidated statement of changes in shareholders'
equity for the year ended December 31, 1996, is fairly stated, in all material
respects, in relation to the consolidated balance sheet and statement of
changes in shareholders' equity from which it has been derived.
/S/ KPMG PEAT MARWICK LLP
Albany, New York
July 25, 1997
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The review that follows focuses on the factors affecting the financial
condition and results of operations of Banknorth Group, Inc. ("Banknorth" or
"Company") during the three and six months ended June 30, 1997, with
comparisons to 1996 as applicable. Net interest income and net interest
margin are presented on a fully taxable equivalent basis in this discussion.
Balances discussed are daily averages unless otherwise described. The
unaudited interim consolidated financial statements, as well as the 1996
annual report to shareholders' should be read in conjunction with this
review. Amounts in prior period consolidated financial statements are
reclassified whenever necessary to conform to the current period's
presentation.
Except for historical information contained herein, the matters
contained in this review are "forward-looking statements" that involve risk
and uncertainties, including statements concerning future events or
performance and assumptions and other statements which are other than
statements of historical facts. The Company wishes to caution readers that
the following important factors, among others, could in the future affect
the Company's actual results and could cause the Company's actual results
for subsequent periods to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company herein:
* the effect of changes in laws and regulations, including federal
and state banking laws and regulations, with which the Company and
its banking subsidiaries must comply, the cost of such compliance
and the potentially material adverse effects if the Company or any
of its banking subsidiaries were not in substantial compliance
either currently or in the future as applicable;
* the effect of changes in accounting policies and practices, as may
be adopted by the regulatory agencies as well as by the Financial
Accounting Standards Board, or changes in the Company's
organization, compensation and benefit plans;
* the effect on the Company's competitive position within its market
area of increasing consolidation within the banking industry and
increasing competition from larger "super regional" and other out-
of-state banking organizations as well as non-bank providers of
various financial services;
* uncertainties due to the limited amount of operating history of the
Company's Massachusetts subsidiary;
* the effect of unforeseen changes in interest rates;
* the effects of changes in the business cycle and downturns in the
local, regional or national economies.
OVERVIEW
Banknorth recorded net income of $7.1 million, or $.91 per share for
the three months ended June 30, 1997, as compared to $6.8 million, or $.87
per share recorded for the same period in 1996. For the year to date
period ended June 30, 1997, net income was $14.1 million, or $1.81 per
share, as compared to $11.5 million, or $1.52 per share in 1996.
During the second quarter of 1997:
* Banknorth Group, Inc. common stock closed at an all-time high of
$46.25 as of June 30, 1997.
* Two new branches were added to the Company's branch network in
Dover, New Hampshire and Worcester, Massachusetts.
* The Company established Banknorth Capital Trust I to issue and
sell 30 year trust securities in the aggregate amount of $30.0
million at 10.52%, and to use the proceeds from the sale of the
trust securities to acquire the junior subordinated debentures
issued by the Company. The Company has used the net proceeds from
the sale of the junior subordinated debentures for general
corporate purposes. The trust securities, with associated expense
that is tax deductible, qualify as Tier I capital under regulatory
definitions.
* Earning assets in the amount of $120 million were added during the
quarter utilizing the $30.0 million of net proceeds generated by
the issuance of the trust securities noted above. This increase in
earning assets was funded primarily with short-term borrowed funds.
MERGER AND ACQUISITION ACTIVITY
First Massachusetts Bank, N.A. ("FMB")
On February 16, 1996, Banknorth completed the purchase of thirteen
banking offices of Shawmut Bank, N.A. (the "Shawmut branches") in central
and western Massachusetts. A new subsidiary, First Massachusetts Bank, N.A.
(FMB), with principal offices in Worcester, Massachusetts, was organized to
own and operate the acquired offices.
Under the terms of the Purchase and Assumption Agreement with Shawmut
Bank, National Association ("Shawmut"), Banknorth paid a premium of $29.2
million, representing 5.23% of deposit liabilities assumed, including
accrued interest payable, calculated based upon the average amount of
deposits outstanding (including accrued interest payable) over the thirty
day period ended February 13, 1996.
At the closing, the Company assumed total liabilities with an
estimated fair value of $560.3 million and acquired total assets, including
loans, accrued interest receivable on such loans, certain real property,
furniture, fixtures, equipment and other assets, with an estimated fair
value of $405.7 million. No loans were past due 90 days or more. In
addition, the Company received approximately $124.1 million in cash as
consideration for the net liabilities assumed.
The transaction was accounted for under purchase accounting rules. As
such, both the assets acquired and liabilities assumed have been recorded on
the consolidated balance sheet of the Company at estimated fair value as of
the date of acquisition. Goodwill, representing the excess of cost over net
assets acquired, was $32.1 million, substantially all of which is deductible
for income tax purposes, and is being amortized over seven years on a
straight-line basis. The results of operations for FMB are included in
Banknorth's consolidated financial statements from the date of acquisition
forward.
To complete the transaction, Banknorth issued 1,022,223 shares of
common stock in February, 1996. The net proceeds of $32.2 million were used
to provide a portion of the initial capital of FMB and to help offset the
reduction in the Company's regulatory capital ratios resulting from the
acquisition.
ASSET/LIABILITY MANAGEMENT
In managing its asset portfolios, Banknorth utilizes funding and
capital sources within sound credit, investment, interest rate and liquidity
risk guidelines. Loans and securities are the Company's primary earning
assets with additional capacity invested in money market instruments.
Earning assets were 94.07% and 93.12% of total assets at June 30, 1997 and
1996, respectively.
Banknorth, through its management of liabilities, attempts to provide
stable and flexible sources of funding within established liquidity and
interest rate risk guidelines. This is accomplished primarily 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, bank term debt and
corporation-obligated mandatorily redeemable capital securities.
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
the filing of a certificate of trust with the Delaware Secretary of State.
The Trust exists for the exclusive purposes of (i) issuing and selling 30
year corporation-obligated mandatorily redeemable capital securities (trust
securities) in the aggregate amount of $30.0 million at 10.52%, (ii) using
the proceeds from the sale of the trust securities to acquire the junior
subordinated debentures issued by the Company and (iii) engaging in only
those other activities necessary, advisable or incidental thereto. The
corporation obligated junior subordinated debentures are the sole assets of
the Trust and, accordingly, payments under the corporation obligated junior
subordinated debentures are the sole revenue of the Trust. All of the
common securities of the Trust are owned by Banknorth Group. The Company
has used the net proceeds from the sale of the junior subordinated
debentures for general corporate purposes. The trust securities, with
associated expense that is tax deductible, qualify as Tier I capital under
regulatory definitions. The Company's primary source of funds to pay
interest on the debentures is current dividends from its subsidiary banks.
Accordingly, the Company's ability to service the debentures is dependent
upon the continued ability of the subsidiary banks to pay dividends in an
amount sufficient to service the debentures.
Earning Assets
Earning assets of $2.6 billion during the second quarter of 1997, were
$325.2 million, or 14.3%, higher than during the second quarter of 1996
primarily due to growth of the loan portfolio resulting from increased loan
demand and growth in the securities portfolios aimed at increasing the
earning assets of the Company. For the year-to-date period, earnings assets
were $2.5 billion in 1997 as compared with $2.1 billion in 1996. Table A,
Mix of Average Earning Assets, shows how the mix of earning assets has
changed as compared to the same period in 1996.
Loans. Table B, Loan Portfolio, provides the detailed components of
the loan portfolio as of June 30, 1997 and 1996, and December 31, 1996,
while Table A Mix of Average Earning Assets provides information relating to
average balances for the quarters ended June 30, 1997 and 1996.
Total average loans were $1.9 billion during the quarter ended June
30, 1997, an increase of $167.7 million, or 9.6%, over the same period in
1996, resulting from strong loan growth, primarily in the markets served by
FMB. During the first six months of 1997, in order to supplement loan
originations and to expand the portfolio of earning assets, the Company
purchased approximately $30.0 million of primarily residential real estate
loans.
Given current economic indicators, management believes that the
Company will see continued but slowing growth in the loan portfolio during
the balance of 1997. While the most recent interest rate increase initiated
by the Federal Reserve Bank is not expected to significantly impact lending
activity in the Company's markets, additional increases could lead to a slow
down in lending activity.
Loans held for sale. Loans designated as held for sale are primarily
single-family mortgages originated by the Company's mortgage banking
subsidiary or purchased through its wholesale lending operation, awaiting
sale into the secondary market or to other Banknorth subsidiaries. Loans
originated or purchased by the mortgage company are sold on the secondary
market with some level of production, primarily adjustable rate mortgages,
retained by the Company to be held in its mortgage portfolio. Loans held
for sale were $12.7 million during the second quarter of 1997, $2.9 million,
or 18.8% below the three month average ending June 30, 1996. Due to higher
interest rates in the first two months of the second quarter of 1997, both
new loan originations as well as refinancing activity, primarily in the
construction and correspondent lines of business, were low resulting in a
reduced level of mortgage product awaiting sale into the secondary market.
Recent downward movement in interest rates in late June 1997 has resulted in
increased demand and, therefore, management expects production to increase
in the third quarter of 1997.
Securities available for sale. This portfolio is managed on a total
return basis with the objective of exceeding the return, by 50 basis points,
that would be experienced if investing solely in U.S. Treasury instruments.
This category of securities is used primarily for liquidity purposes while
simultaneously producing an earnings stream, and is managed under policy
limits established for average duration, average convexity and average
portfolio life.
Securities available for sale totaled $701.1 million, $531.3 million
and $460.9 million at June 30, 1997, December 31, 1996 and June 30, 1996,
respectively. The increase of $240.2 million from June 30, 1996 to June 30,
1997 reflects purchases made primarily during the fourth quarter of 1996
aimed at increasing the size of the earning asset portfolio, and purchases
made to effectively leverage the net proceeds of the corporation obligated
junior subordinated debentures during the second quarter of 1997. Average
balances for the three months ended June 30, 1997 and 1996 were $635.1 million
and $446.2 million, respectively.
Investment securities. The designation "investment securities" is made
at the time of purchase or transfer based upon the intent and ability to
hold these securities until maturity. The management of this portfolio
focuses primarily on yield and earnings generation, liquidity through cash
flow and interest rate risk characteristics within the framework of the
entire balance sheet. Cash flow guidelines and average duration targets have
been established for management of this portfolio. The balance of securities
in this category was $28.0 million as of June 30, 1997 as compared to $34.2
million and $43.4 million as of December 31, and June 30, 1996,
respectively. The decrease from June 30, 1996 reflects the reinvestment of
cash flows generated by this portfolio into the available for sale portfolio
during 1996 and thus far in 1997.
Table C, Securities Available for Sale and Investment Securities
provides details of securities available for sale and investment securities
at June 30, 1997 and 1996, as well as December 31, 1996.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $5.7 million during the second quarter of 1997, down
$12.8 million, or 69.3%, from the second quarter of 1996. The same trend was
experienced for the six months ended June 30, 1997 as compared to the same
period of 1996. Money market investments were $16.7 million, or 71.3%
higher in the first half of 1996 as compared to 1997. During the first half
of 1996, the Company maintained high levels of liquidity in anticipation of
deposit runoff at the newly formed FMB. The liquidity needs of that bank
have reached normal levels resulting in a significant decrease in the
investment in short-term money market instruments.
Income from earning assets. Income from earning assets was $54.4
million for the three month period ended June 30, 1997, as compared to
$47.6 million for the same period in 1996. The increase of $6.8 million, or
14.3%, resulted from the increases in earning assets through normal growth
and the leveraging of the net proceeds in regards to the capital trust
transaction described above. Total earning assets during the second quarter
of 1997 of $2.6 billion yielded 8.41%, while in 1996 earning assets of $2.3
billion yielded 8.43%. The increase in earning assets contributed $6.4
million towards the increase in interest income, while the change in the mix
of the average earning assets offset by a slight decline in yield of 2 basis
points caused an increase of $413 thousand. Table D, Average Balances,
Yields and Net Interest Margins and Table F, Volume and Yield Analysis
contain details of changes by category of interest income from earning
assets.
For the six months ended June 30, 1997 and 1996, income from earning
assets was $105.6 million and $90.9 million, respectively. Total earning
assets of $2.5 billion, increased $382.7 million, or 17.8% over the six month
average of 1996. The yield on earning assets was 8.41% during the first six
months of 1997 as compared to 8.52% during the same period of 1996. During
the first six months of 1997, the increase in earning assets contributed
$15.1 million towards the increase over the same period of 1996, while the 11
basis point reduction in yield caused a $465 thousand decrease.
Funding Sources
The Company utilizes various traditional sources of funds to support
its earning asset portfolios. Table E, Average Sources of Funding, presents
the various categories of funds used and the corresponding average balances
for the second quarter of 1997 and 1996, and changes, by category, from the
second quarter of 1996.
Core Deposits. Total core deposits averaged $2.0 billion during the
three month period ended June 30, 1997, $30.0 million above the second
quarter average in 1996. Total core deposits represented 82.3% of total
net funding during the second quarter of 1997 as compared to 91.8% during
the same quarter of 1996.
Purchased Liabilities. Total purchased liabilities increased on
average from $243.6 million during the second quarter of 1996 to $489.8
million during the second quarter of 1997. The increased borrowings, or
purchased liabilities, were the result of the incremental funding
requirements related to loan and investment purchases made during 1996 and
the first half of 1997. As stated previously, various asset purchases were
made to increase the Company's earning asset base and effectively utilize
the net proceeds from the trust securities transaction. 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,
long-term debt and the trust securities to continue to be important sources
of funding.
Corporation-Obligated Mandatorily Redeemable Capital Securities. In
addition to the traditional sources of funding listed in Table E, on May 1,
1997, as previously described, the Company established Banknorth Capital
Trust I for the exclusive purposes of issuing and selling 30 year trust
securities in the aggregate amount of $30.0 million at 10.52%.
Expense of Interest-Bearing Liabilities. Banknorth's interest expense
for the three months ended June 30, 1997, was $24.4 million, $4.4 million,
or 21.9%, above 1996. Total interest bearing liabilities of $2.2 billion
during the second quarter of 1997, were $255.6 million higher than in 1996,
and with a total cost of 4.44%, 31 basis points over the corresponding
period of the prior year. Higher levels of interest bearing liabilities
caused $3.4 million of the increase in interest expense, while the 31 basis
point increase in the cost of funds resulted in the remainder of the
increase of $946 thousand.
Total interest bearing liabilities averaged $2.2 billion during the
six month period ended June 30, 1997, $320.8 million, or 17.4%, higher than
in 1996. The cost of funds was 4.38% in 1997 as compared to 4.22% in 1996.
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 $30.0 million and $27.6 million for the
three month periods ended June 30, 1997 and 1996, respectively. The net
interest margin was 4.63% during the second quarter of 1997 as compared to
4.88% during the second quarter of 1996. The yield on earning assets of
8.41% for the second quarter of 1997, was 2 basis points below the
corresponding period of the prior year, while the cost of interest bearing
liabilities, 4.44% in 1997, increased 31 basis points over the corresponding
period of the prior year. The prospective impact on net interest margin,
as a result of adding earning assets to nullify the cost of the capital
securities issue, will be a reduction of approximately 11 basis points.
Included in net interest income is the effect of interest rate swap
transactions and interest rate floors. Banknorth utilizes these off-balance
sheet instruments to correct imbalances between the re-pricing
characteristics of interest earning assets and interest bearing liabilities.
A significant portion of the Company's loans are adjustable or variable rate
resulting in reduced levels of interest income during periods of falling
rates. Certain categories of deposits reach a point where market forces
prevent further reduction in the rate paid on those instruments. The net
effect of these circumstances is reduced interest income, offset only by a
nominal decrease in interest expense, thereby narrowing the net interest
margin.
To protect the Company from this occurrence, interest rate floors in
the notional amount of $295.0 million and interest rate swaps in the
notional amount of $50 million were used to mitigate the potential reduction
in interest income on certain adjustable and variable rate loans. The
aggregate cost of the interest rate floors at the time of purchase was $2.8
million which is being amortized as an adjustment to the related loan yield
on a straight line basis over the terms of the agreements. The unamortized
balance of the interest rate floors as of June 30, 1997 was $1.8 million.
The estimated fair value of these floors was $45 thousand as of June 30,
1997. The estimated fair value of the interest rate swap contracts was $89
thousand as of June 30, 1997.
Non-Performing Assets
As categorized by Banknorth Group, non-performing assets include non-
performing loans which are those loans in a non-accrual status, loans which
have been treated as troubled debt restructurings and loans past due 90 days
and still accruing interest. Also included in the total of non-performing
assets are foreclosed and in-substance foreclosed real estate properties and
repossessed non-real estate assets. Table G, Non-Performing Assets,
contains details of non-performing assets. Non-performing assets were .57%
of total assets as of June 30, 1997.
Non-performing loans. Non-performing loans totaled $15.7 million, down
$3.2 million, or 17.0% from December 31, 1996, and $6.2 million lower than
at June 30, 1996, respectively. Banknorth's delinquent rate in the
consumer sector compares favorably with both national and regional rates
thus far in 1997. Non-performing loans are at the lowest level since the
first quarter of 1996 and management does not expect any material changes in
the level of non-performing loans during the remainder of 1997.
Other real estate owned. Total other real estate owned was $559
thousand at June 30, 1997, as compared to $1.3 million at June 30, 1996, and
$921 thousand at year end 1996.
Allowance for loan losses and provision. The balance of the allowance
for loan losses ("allowance") is maintained at a level that is, in
management's judgment, representative of the amount of risk inherent in the
loan portfolio, given past, present and expected conditions. Table H,
Summary of Loan Loss Experience, provides information regarding types of
loans charged off and associated recoveries.
Loans charged off equaled $5.5 million, or an annualized .58% of
average loans for the first six months of 1997, an increase of $1.5 million
from the first six months of 1996. Recoveries of $2.3 million for the first
six months of 1997, were $36 thousand less than during the same period in
1996. Given the growth in the loan portfolio, management expects an
increased level of loan charge-offs in 1997 as compared to that experienced
in 1996.
The provision for loan losses ("provision") for the second quarter of
1997 was $1.9 million, or an annualized .40% of average loans. Provisions of
$1.3 million, or an annualized .30% of average loans, and $5.6 million, or
.32% of average loans were experienced during the second quarter of 1996 and
the full year of 1996, respectively. Provisions of $3.7 million, or an
annualized .39% of average loans, and $2.6 million, or an annualized .32%
of average loans, were experienced during the six month periods ended June
30, 1997 and 1996, respectively.
Provisions recorded are those necessary to maintain the allowance at a
level adequate enough to absorb reasonably predictable loan charge-offs. At
June 30, 1997, the allowance provided a coverage of non-performing loans of
152.21% as compared to 124.00% and 112.40% at December 31,1996 and June 30,
1996, respectively. The allowance coverage of non-performing loans was
123.27% at March 31, 1997.
Liquidity and Interest Rate Sensitivity
Banknorth seeks to obtain favorable sources of funding and to maintain
prudent levels of liquid assets in order to satisfy varied liquidity
demands. Besides serving as a funding source for maturing obligations,
liquidity provides flexibility in responding to customer initiated needs.
Many factors affect the Company's ability to meet liquidity needs, including
variations in the markets served by its network of offices, its mix of
assets and liabilities, reputation and credit standing in the marketplace,
and general economic conditions. Banknorth's earnings performance and strong
capital position enable the Company to raise funds in the marketplace and to
secure new sources of funding.
The Company utilized a financial institution borrowing pursuant to a
five-year credit facility to finance its 1994 acquisition of North American
Bank Corporation, parent company of Farmington National Bank. In December
1996, this credit facility was re-negotiated on terms considered favorable
to the Company. The Company's primary source of funds to pay principal and
interest under this facility is current dividends from its subsidiary banks.
Accordingly, the Company's ability to service the debt under this credit
facility is dependent upon the continued ability of the subsidiary banks to
pay dividends in an amount sufficient to service such debt.
The Company actively manages its liquidity position through target
ratios established under its liquidity policy. Continual monitoring of
these ratios, both historically and through forecasts, allows Banknorth to
employ strategies necessary to maintain adequate liquidity. Management has
also defined various degrees of adverse liquidity situations which could
potentially occur and has prepared appropriate contingency plans should such
situations arise.
Management of interest rate risk involves continual monitoring of the
relative sensitivity of asset and liability portfolios to changes in rate
due to maturities, re-pricing opportunities and embedded options.
Sophisticated forecasting models are utilized to quantify the impact of
changes in rates on the Company's net interest income. Specific guidelines
relating to interest rate sensitivity have been established by the Company
and are monitored on a regular basis. Testing under various "rate shock"
scenarios have indicated that the Company's consolidated balance sheet is
virtually matched.
OTHER OPERATING INCOME AND EXPENSES
Other Operating Income
Other operating income totaled $6.6 million for the quarter ended June
30, 1997, $119 thousand, or 1.8% higher than that recorded during the
second quarter of 1996. For the six months ended June 30, 1997 and 1996,
other operating income was $13.2 million and $12.3 million, respectively.
Income from fiduciary activities was $2.1 million for the quarter
ended June 30, 1997, $76 thousand or 3.8% higher than the income recorded in
the second quarter of 1996. Income from fiduciary activities was $4.1
million and $4.0 million for the six months ended June 30, 1997 and 1996,
respectively.
Service charges on deposit accounts was $2.0 million during the three
months ended June 30, 1997, as compared to $1.8 million during the same
quarter of 1996. On a year-to-date basis, service charge income was $3.8
million, $705 thousand, or 22.5% higher than the same period of 1996.
Growth in the number of deposit accounts and increases in transaction fees
charged on deposit accounts caused the aforementioned increases.
Card product income in the second quarter of 1997 increased by $94
thousand, or 12.9%, over 1996, the result of the increases in the Visa check
card transaction volume and growth in the merchant services portfolio. For
the six months ended June 30, 1997 and 1996, card product income was $1.5
million and $1.3 million, respectively.
Net loan transactions amounted to $183 thousand during the three
months ended June 30, 1997, a decrease of $175 thousand from 1996. For
the six months ended June 30, 1997 and 1996, net loan transactions amounted
to $418 thousand and $959 thousand, respectively. While the 1997 retail
mortgage production is running near 1996 levels and total mortgage
production is only 7% below the 1996 level, more of the production in 1997
is the adjustable rate product and is being retained on the balance sheet of
the Company rather than being sold to the secondary market. Further, net
loan transactions were reduced by the highly competitive nature of the
mortgage market where pricing on new loans is reducing gains realized at the
time of sale.
Other income, $862 thousand for the three months ended June 30, 1997,
declined slightly, $41 thousand or 4.5%, from the same period in 1996. For
the six months ended June 30, 1997 and 1996, other income was $1.9 million
and $1.6 million, respectively. The $377 thousand increase was primarily
the result of gains recorded in the first quarter of 1997 from the sale of
check processing equipment and the payout of a venture capital fund
investment.
Other Operating Expenses
Other operating expenses for the second quarter of 1997 were $24.0
million, $1.5 million, or 6.8% above the second quarter of 1996. Other
operating expenses were up $2.4 million from $44.7 million for the first
six months of 1996 to $47.0 million for the six months ended June 30, 1997.
The largest increases in expenses were in the categories of salaries, OREO
and repossession expense and other expenses related to the cost of the trust
securities and directors' deferred compensation plan.
One-time expenses related to the start-up of FMB and Stratevest were
approximately $1.8 million during the first quarter of 1996. Other one-time
expenses related to a data processing conversion and the transition to a new
incentive-based compensation system were approximately $366 thousand, also
in the first quarter of 1996. The Company's efficiency ratio, which is
adjusted to exclude material one-time income and expenses, was 61.40% for
the first six months of 1997, down from 62.38% during the same period in
1996.
Salaries expense, the largest component of other operating expenses,
was $9.4 million for the second quarter of 1997, up $390 thousand, or 4.3%
from the same period in 1996. For the six months ended June 30, 1997 and
1996, salaries expense amounted to $18.4 million and $17.4 million,
respectively. The increase over 1996 is primarily attributable to a full six
months of salary expense related to FMB in 1997, as well as increased staffing
levels at FMB to meet demand and staff two new branches, and normal salary
increases corporate wide.
Despite the increase in salaries expense, the employee benefits
expense was lower in the second quarter of 1997 compared to the same period
of 1996 due primarily to a reduction in the estimate of medical claims.
Employee benefits expense was $4.3 million in the first six months of 1997
and 1996.
Net occupancy expenses of $1.9 million during the three months ended
June 30, 1997, were $181 thousand, or 10.2% above the same period in 1996.
Net occupancy expenses increased from $3.6 million for the six months ended
June 30, 1996 to $3.9 million for the six months ended June 30, 1997 or an
increase of 10.4%. The increase is attributable to a full six months of
occupancy expense related to FMB in 1997 and the addition of two branches.
Equipment and software expenses were $1.7 million in both quarters
ended June 30, 1997 and 1996. For the six months ended June 30, 1997 and
1996, equipment and software expense was $3.5 million and $3.1 million,
respectively. The increase from 1996 to 1997 is attributable to a full six
months of FMB in 1997 and new corporate-wide technology.
For the quarter ended June 30, 1997, FDIC deposit insurance and other
regulatory expense, increased $95 thousand from the same period in 1996.
The expense increase in 1997 over 1996 was the result of higher deposit
balances primarily due to FMB and higher insurance rates due to the passage
of the Economic Growth and Regulatory Reduction Act of 1996. This act,
which resulted in higher Bank Insurance Fund (BIF) assessments for 1997 and
thereafter, provides for the recapitalization of the Savings Association
Insurance Fund (SAIF) and for the eventual merger of the SAIF and the BIF.
For the six months ended June 30, 1997 and 1996, regulatory expense amounted
to $381 thousand and $198 thousand, respectively, an increase of $183
thousand or 92.4%.
Other real estate owned and repossession expenses were $264 thousand
for the quarter ended June 30, 1997 as compared to $78 thousand in the same
period of 1996. Other real estate owned and repossession expenses increased
$253 thousand from $108 thousand for the six months ended June 30, 1996 to
$361 thousand as of June 30, 1997. In 1997, expenses relating to properties
in the OREO portfolio were $538 thousand with net gains on the sale of OREO
properties of $177 thousand, whereas, in 1996, OREO expenses were $421
thousand and net gains on the sale of disposed properties were $313 thousand.
Legal and professional expenses during the three months ended June 30,
1997 decreased by $175 thousand from the second quarter of 1996. For the
six month period, the decline amounted to $238 thousand. Included in 1996
were one-time expenses related to the FMB acquisition of $99 thousand.
Printing and supplies expense was $600 thousand during the second
quarter of 1997, $28 thousand more than during the same period in 1996. For
the six months ended June 30, 1997 and 1996, printing and supplies expenses
represented $1.2 million and $2.0 million, respectively. The decrease
reflects the non-recurring expenses of approximately $492 thousand relating
mostly to the initial check issuance to FMB customers, expenses of
approximately $166 thousand for new ATM and debit cards, and approximately
$90 thousand in paper expenses related to the Company's new imaging system,
all incurred in the first quarter of 1996. The quarterly expenses of $600
thousand are considered the normalized expense level for the Company.
Advertising and marketing expenses were $630 thousand and $657
thousand during the three months ended June 30, 1997 and 1996, respectively.
Advertising and marketing expenses declined from $1.8 million for the six
months ended June 30, 1996 to $1.2 million for the same period of 1997.
Non-recurring advertising and marketing expenses relating to FMB, Stratevest
and the ATM/debit card program totaled approximately $543 thousand in the
first quarter of 1996.
Goodwill amortization expense was $1.3 million during the second
quarter of 1997 and 1996. Year to date, the goodwill expense was $562
thousand higher than in 1996 reflecting a full six months of amortization of
goodwill related to the FMB branch acquisition in 1997.
Other expenses increased $996 thousand, or 32.4%, to $4.1 million in
the second quarter of 1997 from the second quarter of 1996. Year-to-date,
other expenses were up $1.1 million or 18.2%. The increase in this category
is caused primarily by the cost of the trust securities of $526 thousand,
which will become a recurring cost prospectively, and the $607 thousand
increase in director fees resulting from a deferred compensation plan.
Under the deferred directors' compensation plan, a phantom stock component
is adjusted to reflect the market price of Banknorth Common stock. The
significant increase in the stock price during the second quarter of 1997
compared to the second quarter of 1996 created this significant increase in
expense.
Income Taxes
In the second quarter of 1997, the Company recognized income tax
expense of $3.4 million, or 32.3% of the income before taxes. On a year-to-
date basis, tax expense was $6.8 million or 32.4% of income before taxes.
Tax expense on the Company's income was lower than tax expense at the
Federal statutory rate of 35%, primarily due to tax-exempt interest income
and low-income housing credits.
Capital Resources
Consistent with its long-term goal of operating a sound and profitable
financial organization, Banknorth strives to maintain strong capital ratios.
Prior to 1996, new issues of equity securities had not been required since
traditionally most of its capital requirements had been provided through
retained earnings. However, to continue the Company's growth through
acquisition, Banknorth chose to raise approximately $32.2 million in equity
capital through the issuance of 1,022,223 shares of its common stock in
February, 1996.
During the second quarter of 1997, the board of directors declared a
dividend of $.29 per share, resulting in a payout of 31.9% of second quarter
1997 net income. The board of directors of the Company presently intends to
continue the payment of regular quarterly cash dividends subject to
adjustment from time to time, based upon the Company's earnings outlook and
other relevant factors. The Company's principal source of funds to pay cash
dividends is derived from dividends from its subsidiary banks. Various laws
and regulations restrict the ability of banks to pay dividends to their
shareholders. As part of its plan to capitalize FMB at a "well-capitalized"
level for regulatory capital purposes, the Company, in the first quarter of
1996, redeployed accumulated capital of certain of its subsidiary banks
which included substantially all of the then current dividend paying
capacity of such subsidiary banks. Because the special dividend exceeded
applicable regulatory limitations, the Company obtained approval from the
applicable regulatory agencies for the payment of that portion of the
dividend which exceeded such regulatory limitations. Payment of that
special dividend restricts the dividend paying capacity of the subsidiary
banks to 100% or less of prospective current period net income.
Accordingly, the payment of dividends by the Company in the future will
require the generation of sufficient earnings by the subsidiary banks. The
Company presently expects all subsidiary banks to be profitable and continue
to pay sufficient dividends.
At June 30, 1997, Banknorth's Tier I capital was $215.3 million, or
10.55% of total risk-adjusted assets, compared to $161.0 million and 9.12%
as of June 30, 1996. The $54.3 million increase in the Tier I capital is
attributable to the strong earnings of the Company and the issuance of the
$30.0 million in Corporation-obligated mandatorily redeemable capital
securities. The trust securities qualify as Tier I capital under regulatory
definitions. The ratio of Tier I capital to total quarterly average
adjusted assets (leverage ratio) was 7.94%, and 6.72% as of June 30, 1997
and 1996, respectively. Banknorth, and its subsidiaries individually, are
"well capitalized" at June 30, 1997 according to regulatory definition, and
thereby, exceed all minimum regulatory capital requirements. Table I,
Capital Ratios, provides the components of capital as of various dates.
TABLE A. Mix of Average Earning Assets
<TABLE>
<CAPTION>
Three Months Percentage of
Ended June 30, % of Total Earning Assets
----------------------- Total --------------------
(Dollars in thousands) 1997 1996 Change Change 1997 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income
and unamortized loan fees and costs:
Commercial, financial and agricultural $ 324,951 $ 280,064 $ 44,887 13.8% 12.5% 12.3%
Construction and land development 33,894 18,413 15,481 4.8 1.3 0.8
Commercial real estate 550,592 485,013 65,579 20.1 21.2 21.4
Residential real estate 760,486 729,276 31,210 9.6 29.3 32.1
Credit card receivables 21,908 23,879 (1,971) (0.6) 0.8 1.1
Lease receivables 74,387 54,835 19,552 6.0 2.9 2.4
Other installment 147,993 155,072 (7,079) (2.2) 5.7 6.8
---------------------------------------------------------------
Total loans, net of unearned income and
unamortized loan fees and costs 1,914,211 1,746,552 167,659 51.5 73.7 76.9
Securities available for sale:
U.S. Treasuries and Agencies 140,347 82,381 57,966 17.8 5.4 3.6
States and political subdivisions 2,908 388 2,520 0.8 0.1 --
Mortgage-backed securities 305,829 282,594 23,235 7.1 11.8 12.5
Corporate debt securities 152,696 57,492 95,204 29.3 5.9 2.5
Equity securities 33,344 23,372 9,972 3.1 1.3 1.0
---------------------------------------------------------------
Total securities available for sale, at amortized cost 635,124 446,227 188,897 58.1 24.5 19.6
Investment securities:
U.S. Treasuries and Agencies 10,359 21,472 (11,113) (3.5) 0.4 0.9
States and political subdivisions 1,124 1,589 (465) (0.1) -- 0.1
Mortgage-backed securities 18,632 21,927 (3,295) (1.0) 0.7 1.0
Corporate debt securities 10 715 (705) (0.2) -- --
---------------------------------------------------------------
Total investment securities, at amortized cost 30,125 45,703 (15,578) (4.8) 1.1 2.0
Loans held for sale 12,730 15,668 (2,938) (0.9) 0.5 0.7
Money market investments 5,684 18,522 (12,838) (3.9) 0.2 0.8
---------------------------------------------------------------
Total earning assets $2,597,874 $2,272,672 $325,202 100.0% 100.0% 100.0%
===============================================================
</TABLE>
TABLE B. Loan Portfolio
<TABLE>
<CAPTION>
At June 30, At December 31, % Change
------------------------------------------- -------------------- ------------------
1997 1996 1996 6/30/97 6/30/97
------------------------------------------------------------------ versus versus
(Dollars in thousands) Amount Percent Amount Percent Amount Percent 6/30/96 12/31/96
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural $ 336,743 17.4% $ 288,756 16.3% $ 300,730 16.3% 16.6% 12.0%
Real Estate:
Construction and land
development 31,731 1.6 16,361 0.9 29,364 1.6 93.9 8.1
Commercial 551,968 28.6 489,269 27.6 531,364 28.7 12.8 3.9
Residential 765,974 39.7 738,946 41.8 737,261 39.9 3.7 3.9
----------------------------------------------------------------
Total real estate 1,349,673 69.9 1,244,576 70.3 1,297,989 70.2 8.4 4.0
----------------------------------------------------------------
Credit card receivables 21,513 1.1 23,226 1.3 24,563 1.3 (7.4) (12.4)
Lease receivables 74,707 3.9 56,989 3.2 70,396 3.8 31.1 6.1
Other installment 148,798 7.7 156,792 8.9 154,554 8.4 (5.1) (3.7)
----------------------------------------------------------------
Total installment 245,018 12.7 237,007 13.4 249,513 13.5 3.4 (1.8)
----------------------------------------------------------------
Total loans 1,931,434 100.0 1,770,339 100.0 1,848,232 100.0 9.1 4.5
Less: allowance for loan losses 23,963 1.2 24,669 1.4 23,520 1.3 (2.9) 1.9
----------------------------------------------------------------
Net loans $1,907,471 98.8% $1,745,670 98.6% $1,824,712 98.7% 9.3% 4.5%
================================================================
</TABLE>
TABLE C. Securities Available for Sale and Investment Securities
<TABLE>
<CAPTION>
At June 30, At December 31,
-------------------- ---------------
(Dollars in thousands) 1997 1996 1996
---------------------------------------
<S> <C> <C> <C>
Securities available for sale:
U.S. Treasuries and Agencies $158,494 $ 88,366 $111,774
States and political subdivisions 4,727 653 2,361
Mortgage-backed securities 320,065 277,694 272,433
Corporate debt securities 181,710 78,977 121,384
Equity securities 39,245 23,396 27,128
Valuation reserve (3,178) (8,185) (3,811)
------------------------------------
Total recorded value of
securities available for sale $701,063 $460,901 $531,269
====================================
Investment securities:
U.S. Treasuries and Agencies $ 8,847 $ 19,512 $ 13,181
States and political subdivisions 1,110 1,574 1,135
Mortgage-backed securities 18,074 21,576 19,868
Corporate debt securities 10 711 10
------------------------------------
Total recorded value of
investment securities $ 28,041 $ 43,373 $ 34,194
====================================
Fair value of investment securities $ 28,173 $ 43,695 $ 34,644
====================================
Excess of fair value versus
recorded value $ 132 $ 322 $ 450
Fair value as a % of recorded value 100.5% 100.7% 101.3%
</TABLE>
TABLE D. Average Balances, Yields, and Net Interest Margins
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Money market investments $ 5,684 $ 80 5.65% $ 18,522 $ 242 5.25%
Securities available for sale, at amortized cost(1) 635,124 10,002 6.32 446,227 6,626 5.97
Loans held for sale 12,730 243 7.66 15,668 303 7.78
Investment securities, at amortized cost(1) 30,125 540 7.19 45,703 806 7.09
Loans, net of unearned income and
unamortized loan fees (1 and 2) 1,914,211 43,580 9.13 1,746,552 39,641 9.13
---------------------------------------------------------------
Total earning assets 2,597,874 54,445 8.41 2,272,672 47,618 8.43
---------------------------------------------------------------
Cash and due from banks 73,754 82,463
Allowance for loan losses (24,132) (24,618)
Valuation reserve for securities available for sale (7,227) (7,540)
Other assets 103,163 106,272
---------- ----------
Total assets $2,743,432 $2,429,249
========== ==========
Interest-bearing liabilities:
NOW accounts & money market savings $ 794,001 $ 7,069 3.57% $ 754,989 $ 6,077 3.24%
Regular savings 209,308 1,249 2.39 237,535 1,400 2.37
Time deposits $100 thousand and greater 90,634 1,235 5.47 73,409 1,026 5.62
Time deposits under $100 thousand 704,687 9,308 5.30 702,667 9,189 5.26
---------------------------------------------------------------
Total interest-bearing deposits 1,798,630 18,861 4.21 1,768,600 17,692 4.02
Long-term debt 22,607 376 6.67 47,311 690 5.87
Short-term borrowed funds 388,903 5,211 5.37 138,632 1,676 4.86
---------------------------------------------------------------
Total interest-bearing liabilities 2,210,140 24,448 4.44 1,954,543 20,058 4.13
---------------------------------------------------------------
Demand deposits 278,612 261,437
Other liabilities 23,701 21,574
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely junior
subordinated debentures of the Corporation 20,110 --
Shareholders' equity 210,869 191,695
---------- ----------
Total liabilities and shareholders' equity $2,743,432 $2,429,249
========== ==========
Net interest income $29,997 $27,560
======= =======
Interest rate differential 3.97% 4.30%
==== ====
Net interest margin 4.63% 4.88%
==== ====
Notes:
<F1> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal tax rate.
<F2> Includes principal balances of non-accrual loans and industrial
revenue bonds.
</TABLE>
TABLE D. Average Balances, Yields, and Net Interest Margins
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------------------------
1997 1996
------------------------------- -------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Money market investments $ 6,699 $ 194 5.84% $ 23,369 $ 647 5.57%
Securities available for sale, at amortized cost(1) 589,738 18,461 6.31 417,871 12,676 6.10
Loans held for sale 12,566 481 7.72 16,432 603 7.38
Investment securities, at amortized cost(1) 31,630 1,135 7.24 47,037 1,674 7.16
Loans, net of unearned income and
unamortized loan fees (1 and 2) 1,889,495 85,294 9.10 1,642,670 75,331 9.22
---------------------------------------------------------------
Total earning assets 2,530,128 105,565 8.41 2,147,379 90,931 8.52
---------------------------------------------------------------
Cash and due from banks 76,968 80,919
Allowance for loan losses (23,900) (23,860)
Valuation reserve for securities available for sale (5,727) (3,949)
Other assets 103,365 93,994
---------- ----------
Total assets $2,680,834 $2,294,483
========== ==========
Interest-bearing liabilities:
NOW accounts & money market savings $ 788,024 $13,777 3.53% $ 709,676 $11,694 3.31%
Regular savings 211,290 2,490 2.38 223,435 2,668 2.40
Time deposits $100 thousand and greater 90,918 2,456 5.45 70,428 2,000 5.71
Time deposits under $100 thousand 705,140 18,522 5.30 659,939 17,666 5.38
---------------------------------------------------------------
Total interest-bearing deposits 1,795,372 37,245 4.18 1,663,478 34,028 4.11
Long-term debt 23,740 771 6.55 49,861 1,455 5.87
Short-term borrowed funds 341,640 8,866 5.23 126,567 3,092 4.91
---------------------------------------------------------------
Total interest-bearing liabilities 2,160,752 46,882 4.38 1,839,906 38,575 4.22
---------------------------------------------------------------
Demand deposits 277,160 249,686
Other liabilities 23,509 21,270
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely junior
subordinated debentures of the Corporation 10,110 --
Shareholders' equity 209,303 183,621
---------- ----------
Total liabilities and shareholders' equity $2,680,834 $2,294,483
========== ==========
Net interest income $58,683 $52,356
======= =======
Interest rate differential 4.03% 4.30%
==== ====
Net interest margin 4.68% 4.90%
==== ====
Notes:
<F1> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal tax rate.
<F2> Includes principal balances of non-accrual loans and industrial
revenue bonds.
</TABLE>
TABLE E. Average Sources of Funding
<TABLE>
<CAPTION>
Three Months Percentage of
Ended June 30, Change Total Net Funding
------------------------ ------------------- -----------------
(Dollars in thousands) 1997 1996 Amount Percent 1997 1996
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 278,612 $ 261,437 $ 17,175 6.6% 11.5% 12.3%
Retail deposits:
Regular savings 209,308 237,535 (28,227) (11.9) 8.7 11.1
Time deposits under $100 thousand 704,687 702,667 2,020 0.3 29.2 33.0
NOW accounts & money market savings 794,001 754,989 39,012 5.2 32.9 35.4
------------------------------------------------------------------
Total retail deposits 1,707,996 1,695,191 12,805 0.8 70.8 79.5
------------------------------------------------------------------
Total core deposits 1,986,608 1,956,628 29,980 1.5 82.3 91.8
Less: cash and due from banks 73,754 82,463 (8,709) (10.6) 3.1 3.9
------------------------------------------------------------------
Net core deposits 1,912,854 1,874,165 38,689 2.1 79.2 87.9
------------------------------------------------------------------
Time deposits $100 thousand and greater 90,634 73,409 17,225 23.5 3.8 3.4
Federal funds purchased 10,397 3,827 6,570 171.7 0.4 0.2
Securities sold under agreements to repurchase 135,718 101,377 34,341 33.9 5.6 4.8
Borrowings from U.S. Treasury 12,451 6,857 5,594 81.6 0.5 0.3
Short-term notes from FHLB 230,337 26,571 203,766 766.9 9.6 1.2
Long-term notes from FHLB 10,264 31,561 (21,297) (67.5) 0.4 1.5
------------------------------------------------------------------
Total purchased liabilities 489,801 243,602 246,199 101.1 20.3 11.4
------------------------------------------------------------------
Bank term loan 12,343 15,750 (3,407) (21.6) 0.5 0.7
------------------------------------------------------------------
Total net funding $2,414,998 $2,133,517 $281,481 13.2% 100.0% 100.0%
==================================================================
</TABLE>
TABLE F. Volume and Yield Analysis
<TABLE>
<CAPTION>
Three Months
Ended June 30, Due to
------------------ ------------------
(In thousands) 1997 1996 Change Volume Rate
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income (FTE):
Money market investments $ 80 $ 242 $ (162) $ (180) $ 18
Securities available for sale 10,002 6,626 3,376 2,987 389
Loans held for sale 243 303 (60) (55) (5)
Investment securities 540 806 (266) (277) 11
Loans 43,580 39,641 3,939 3,939 --
--------------------------------------------------
Total interest income 54,445 47,618 6,827 6,414 413
--------------------------------------------------
Interest expense:
NOW accounts & money market savings 7,069 6,077 992 371 621
Regular savings 1,249 1,400 (151) (163) 12
Time deposits $100 thousand and greater 1,235 1,026 209 236 (27)
Time deposits under $100 thousand 9,308 9,189 119 49 70
Long-term debt 376 690 (314) (408) 94
Short-term borrowed funds 5,211 1,676 3,535 3,359 176
--------------------------------------------------
Total interest expense 24,448 20,058 4,390 3,444 946
--------------------------------------------------
Net interest income (FTE) $ 29,997 $27,560 $ 2,437 $ 2,970 $ (533)
==================================================
<CAPTION>
Six Months
Ended June 30, Due to
------------------ -----------------
1997 1996 Change Volume Rate
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income (FTE):
Money market investments $ 194 $ 647 $ (453) $ (484) $ 31
Securities available for sale 18,461 12,676 5,785 5,350 435
Loans held for sale 481 603 (122) (150) 28
Investment securities 1,135 1,674 (539) (558) 19
Loans 85,294 75,331 9,963 10,941 (978)
--------------------------------------------------
Total interest income 105,565 90,931 14,634 15,099 (465)
--------------------------------------------------
Interest expense:
NOW accounts & money market savings 13,777 11,694 2,083 1,309 774
Regular savings 2,490 2,668 (178) (156) (22)
Time deposits $100 thousand and greater 2,456 2,000 456 547 (91)
Time deposits under $100 thousand 18,522 17,666 856 1,118 (262)
Long-term debt 771 1,455 (684) (852) 168
Short-term borrowed funds 8,866 3,092 5,774 5,573 201
--------------------------------------------------
Total interest expense 46,882 38,575 8,307 7,539 768
--------------------------------------------------
Net interest income (FTE) $ 58,683 $52,356 $ 6,327 $ 7,560 $(1,233)
==================================================
</TABLE>
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.
TABLE G. Non-Performing Assets
<TABLE>
<CAPTION>
At At At
June 30, December 31, June 30,
---------------------------------
(Dollars in thousands) 1997 1996 1996
---------------------------------
<S> <C> <C> <C>
Loans on a non-accrual basis:
Commercial, financial and agricultural $ 2,600 $ 3,221 $ 3,076
Real estate:
Construction and land development 39 39 73
Commercial 3,184 4,443 6,852
Residential 8,493 9,290 9,511
--------------------------------
Total non-accrual 14,316 16,993 19,512
--------------------------------
Restructured loans:
Real estate:
Commercial 378 716 828
Residential 38 39 83
Other installment 6 10 6
--------------------------------
Total restructured 422 765 917
--------------------------------
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 119 169 209
Real estate:
Commercial -- -- 371
Residential 165 88 73
Credit card receivables 157 111 138
Lease receivables 93 48 63
Other installment 471 794 664
--------------------------------
Total past-due 90 days or more
and still accruing 1,005 1,210 1,518
--------------------------------
Total non-performing loans 15,743 18,968 21,947
--------------------------------
Foreclosed real estate 534 921 1,301
In-substance foreclosed real estate 25 -- --
--------------------------------
Total other real estate owned (OREO) 559 921 1,301
Total non-performing assets $16,302 $19,889 $23,248
================================
Allowance for loan losses (ALL) $23,963 $23,520 $24,669
ALL coverage of non-performing loans 152.21% 124.00% 112.40%
Non-performing assets as a % of (loans & OREO) 0.84 1.08 1.31
Non-performing assets to total assets 0.57 0.76 0.95
</TABLE>
TABLE H. Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Six Months Twelve Months Six Months
Ended June 30, Ended December 31, Ended June 30,
(Dollars in thousands) 1997 1996 1996
---------------------------------------------------
<S> <C> <C> <C>
Loans outstanding-end of period $1,931,434 $1,848,232 $1,770,339
Average loans outstanding-period to date 1,889,495 1,730,720 1,642,670
-----------------------------------------------
Allowance for loan losses at beginning of period $ 23,520 $ 22,095 $ 22,095
Allowance related to acquisition -- 1,650 1,650
Loans charged off:
Commercial, financial and agricultural (825) (1,356) (313)
Real estate:
Construction and land development -- (73) --
Commercial (466) (2,122) (768)
Residential (945) (1,772) (702)
-----------------------------------------------
Total real estate (1,411) (3,967) (1,470)
Credit card receivables (349) (788) (401)
Lease receivables (565) (867) (424)
Other installment (2,362) (3,348) (1,373)
-----------------------------------------------
Total installment (3,276) (5,003) (2,198)
Total loans charged off (5,512) (10,326) (3,981)
-----------------------------------------------
Recoveries on loans:
Commercial, financial and agricultural 395 619 357
Real estate:
Construction and land development 71 60 36
Commercial 263 1,039 699
Residential 288 669 219
-----------------------------------------------
Total real estate 622 1,768 954
Credit card receivables 53 144 82
Lease receivables 366 695 275
Other installment 833 1,275 637
-----------------------------------------------
Total installment 1,252 2,114 994
Total recoveries on loans 2,269 4,501 2,305
-----------------------------------------------
Loans charged off, net of recoveries (3,243) (5,825) (1,676)
-----------------------------------------------
Provision for loan losses 3,686 5,600 2,600
-----------------------------------------------
Allowance for loan losses at end of period $ 23,963 $ 23,520 $ 24,669
===============================================
Loans charged off, net (annualized),
as a % of average total loans 0.34% 0.34% 0.20%
Provision for loan losses (annualized)
as a % of average total loans 0.39 0.32 0.32
Allowance for loan losses
as a % of period-end total loans 1.24 1.27 1.39
</TABLE>
TABLE I. Capital Ratios
<TABLE>
<CAPTION>
At At At At At
June 30, March 31, December 31, September 30, June 30,
(Dollars in thousands) 1997 1997 1996 1996 1996
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total risk-adjusted on-balance-sheet assets $1,936,981 $1,836,108 $1,795,825 $1,709,036 $1,659,773
Total risk-adjusted off-balance-sheet items 104,257 107,077 103,647 106,281 106,200
--------------------------------------------------------------------
Total risk-adjusted assets $2,041,238 $1,943,185 $1,899,472 $1,815,317 $1,765,973
====================================================================
Total risk-adjusted assets / average total assets,
net of fair value adjustment and goodwill(1) 75.27% 75.06% 75.87% 73.75% 73.71%
Total shareholders' equity $ 216,866 $ 207,774 $ 206,737 $ 199,800 $ 194,430
Fair value adjustment(1) 2,012 6,157 2,477 4,556 5,320
Corporation-obligated mandatorily redeemable
capital securities 30,000 --- --- --- ---
Other adjustments to Tier I capital (33,530) (34,836) (36,142) (37,448) (38,744)
--------------------------------------------------------------------
Total Tier I capital 215,348 179,095 173,072 166,908 161,006
Maximum allowance for loan losses(2) 23,963 23,638 23,520 22,711 22,107
--------------------------------------------------------------------
Total capital $ 239,311 $ 202,733 $ 196,592 $ 189,619 $ 183,113
====================================================================
Quarterly average total assets,
net of fair value adjustment and goodwill(1) $2,711,913 $2,588,819 $2,503,637 $2,461,484 $2,395,825
Allowance for loan losses 23,963 23,638 23,520 24,284 24,669
Total capital to total risk-adjusted assets 11.72% 10.43% 10.35% 10.45% 10.37%
Tier I capital to total risk-adjusted assets 10.55 9.22 9.11 9.19 9.12
Tier I capital to total quarterly average
adjusted assets (Leverage) 7.94 6.92 6.91 6.78 6.72
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.
</TABLE>
SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1997 1996
------------------------ --------------------------------------
(In thousands, except share and per share data) Q2 Q1 Q4 Q3 Q2
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest income $ 54,312 $ 50,982 $ 50,246 $ 49,175 $ 47,454
Interest expense 24,448 22,434 21,666 20,899 20,058
------------------------------------------------------------------
Net interest income 29,864 28,548 28,580 28,276 27,396
Provision for loan losses 1,936 1,750 1,500 1,500 1,300
------------------------------------------------------------------
Net interest income after provision for loan losses 27,928 26,798 27,080 26,776 26,096
------------------------------------------------------------------
Other Income:
Income from fiduciary activities 2,081 2,022 1,750 2,084 2,005
Service charges on depositor accounts 1,981 1,856 1,734 1,692 1,792
Card product income 822 720 938 764 728
Loan servicing income 640 689 701 795 670
Net loan transactions 183 235 413 257 358
Net securities transactions 6 18 7 21 --
All other 862 1,086 961 844 903
------------------------------------------------------------------
Total other income 6,575 6,626 6,504 6,457 6,456
Other Expenses:
Salaries 9,443 8,966 9,117 9,278 9,053
Employee benefits 1,963 2,326 1,898 2,057 2,146
Net occupancy expenses 1,948 1,975 1,971 1,669 1,767
Equipment and software expenses 1,733 1,756 1,958 1,569 1,701
Data processing fees 1,223 1,207 1,156 1,111 1,209
FDIC deposit insurance and other regulatory expenses 194 187 129 134 99
OREO and repossession expenses 264 97 96 267 78
Amortization of goodwill 1,306 1,306 1,305 1,297 1,319
All other 5,960 5,161 5,731 5,794 5,138
------------------------------------------------------------------
Total other expenses 24,034 22,981 23,361 23,176 22,510
------------------------------------------------------------------
Income before income taxes 10,469 10,443 10,223 10,057 10,042
Income tax expense 3,380 3,393 3,190 3,244 3,248
------------------------------------------------------------------
Net income $ 7,089 $ 7,050 $ 7,033 $ 6,813 $ 6,794
------------------------------------------------------------------
Average Balances:
Loans $1,914,211 $1,864,504 $1,838,093 $1,797,510 $1,746,552
Loans held for sale 12,730 12,400 12,010 14,497 15,668
Securities available for sale 635,124 543,846 488,277 474,626 446,227
Investment securities 30,125 33,153 35,846 40,151 45,703
Money market investments 5,684 7,726 1,631 9,835 18,522
------------------------------------------------------------------
Total earning assets 2,597,874 2,461,629 2,375,857 2,336,619 2,272,672
Other assets 145,558 155,869 161,445 157,757 156,577
------------------------------------------------------------------
Total assets $2,743,432 $2,617,498 $2,537,302 $2,494,376 $2,429,249
==================================================================
Demand deposits $ 278,612 $ 273,764 $ 284,835 $ 272,492 $ 261,437
Interest-bearing deposits 1,798,630 1,792,078 1,779,766 1,788,238 1,768,600
------------------------------------------------------------------
Total deposits 2,077,242 2,065,842 2,064,601 2,060,730 2,030,037
Short-term borrowed funds 388,903 295,780 215,332 172,217 138,632
Long-term debt 22,607 24,887 31,497 44,713 47,311
Other liabilities 23,701 23,311 22,027 21,426 21,574
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely junior
subordinated debentures of the Corporation 20,110 -- -- -- --
Shareholders' equity 210,869 207,678 203,845 195,290 191,695
------------------------------------------------------------------
Total liabilities, Corporation-obligated
mandatorily redeemable-capital securities and
shareholders' equity $2,743,432 $2,617,498 $2,537,302 $2,494,376 $2,429,249
==================================================================
Loans charged off, net of recoveries $ 1,611 $ 1,632 $ 2,264 $ 1,885 $ 814
Non-performing assets, p.e. 16,302 20,189 19,889 23,330 23,248
Share and Per Share Data:
Shares outstanding, p.e. 7,826,648 7,826,648 7,826,648 7,826,648 7,826,648
Weighted average shares outstanding 7,826,648 7,826,648 7,826,648 7,826,648 7,826,648
Tangible book value, p.e. $ 23.42 $ 22.10 $ 21.80 $ 20.74 $ 19.89
Cash dividends declared 0.29 0.29 0.25 0.25 0.25
Net income 0.91 0.90 0.90 0.87 0.87
Closing price at quarter end 46.25 40.50 41.50 37.38 34.25
Cash dividends declared as a % of net income 31.87% 32.22% 27.78% 28.74% 28.74%
Key Ratios:
Return on average assets 1.04% 1.09% 1.10% 1.09% 1.12%
Return on average shareholders' equity 13.48 13.77 13.73 13.88 14.25
Net interest margin, fte 4.63 4.73 4.81 4.83 4.88
Efficiency ratio 61.43 61.37 62.35 61.34 62.07
Expense ratio 2.45 2.49 2.59 2.54 2.59
As a % of risk-adjusted assets, p.e.:
Total capital 11.72 10.43 10.35 10.45 10.37
Tier 1 capital 10.55 9.22 9.11 9.19 9.12
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 7.94 6.92 6.91 6.78 6.72
Tangible shareholders' equity, to tangible assets, p.e. 6.51 6.62 6.65 6.56 6.44
Price earnings ratio (last 4 reported quarters) 12.9 11.4 12.6 11.5 10.6
</TABLE>
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders at
the Annual Meeting of Shareholders of Banknorth Group, Inc. on May 13, 1997:
1. To elect four directors to serve until the 2000 Annual Meeting of
Shareholders
2. To adopt the 1997 Equity Compensation Plan
3. To adopt the amended and restated 1994 Deferred Compensation Plan
for Directors and Selected Executives
4. To ratify the selection of independent auditors of the Company
for 1997.
The results of the votes were as follows:
<TABLE>
<CAPTION>
MATTER FOR AGAINST WITHHELD/FOR BROKER NON-VOTE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Election of Directors:
Richard J. Fleming 5,723,010 --- 71,930 N/A
Luther F. Hackett 5,685,592 --- 109,348 N/A
Richard M. Narkewicz, M.D. 5,722,722 --- 72,218 N/A
John Packard 5,720,239 --- 74,701 N/A
Adoption of 1997 Equity
Compensation Plan 4,648,113 427,285 143,854 N/A
Adoption of amended
and restated
1994 Deferred Compensation
Plan for Directors and
Selected Executives 5,095,630 440,592 188,647 N/A
Selection of Auditors
KPMG Peat Marwick, LLP 5,746,614 18,086 30,240 N/A
</TABLE>
Broker non-votes are not applicable as no non-routine items were voted upon
during the 1996 Annual Meeting of Shareholders.
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: 8/13/97 /S/ William H. Chadwick
William H. Chadwick
President and Chief Executive Officer
Date: 8/13/97 /S/ Thomas J. Pruitt
Thomas J. Pruitt
Executive Vice President and Chief
Financial Officer
A GLOSSARY OF TERMS
Basis Risk
Basis risk is the risk of adverse consequences resulting from unequal
changes in the spread between two or more rates for different instruments
with the same maturity.
Book value per share
Total shareholders' equity divided by shares out-standing on the same
date.
Cash dividends per share
Total cash dividends declared divided by average shares outstanding for
the period.
Cumulative effect of an accounting change
Although the presumption is that once an accounting principle has been
adopted it should not be changed, when a change is necessary it generally
is recognized by including the cumulative effect of the change in net
income of the period of change. The cumulative effect of a change in
accounting principle is the total direct effects, net of the related tax
effect, that the change has on prior periods.
Earning assets
Interest-bearing deposits with banks, securities available for sale,
investment securities, loans (net of unearned income), federal funds sold
and securities purchased under agreements to resell.
Earnings per share
Net income divided by average shares outstanding during the period,
including the effect of stock options, if significant.
Efficiency ratio
Total other operating expense, excluding OREO/ repossession expense,
goodwill amortization and other non-recurring expenses, as a percentage
of net interest income, on a fully taxable equivalent basis, and total
other operating income, excluding securities gains/losses and non-recurring
items.
Expense ratio
Total other operating expense, excluding OREO/ repossession expense,
goodwill amortization and other non-recurring expenses, less other
operating income, excluding securities gains or losses and non-recurring
items, as a percentage of average earning assets.
Fully taxable-equivalent (fte) income
Tax-exempt income which has been converted to place tax-exempt and
taxable income on a comparable basis before application of income taxes.
Impaired loans
Loans, usually commercial type loans, where it is probable that the
borrower will not repay the loan according to the original contractual
terms of the loan agreement and all loans restructured in troubled debt
restructurings subsequent to January 1, 1995.
Interest-bearing liabilities
Interest-bearing deposits, federal funds purchased, securities sold under
agreements to repurchase, other short-term borrowings and long-term debt.
Liquidity
The ability to meet both loan commitments and deposit withdrawals as they
come due.
Net loans charged off
Reductions to the allowance for loan losses for loans written off, net of
the recovery of loans previously written off.
Net interest income
The difference between income on earning assets and interest expense on
interest-bearing liabilities.
Net interest margin
Fully taxable-equivalent basis net interest income as a percentage of
average earning assets.
Net loan transactions
Gains and losses resulting from sales of first mortgage loans into
secondary market, primarily by the mortgage banking operation.
Net securities transactions
Gains and losses resulting from sales of securities available for sale at
prices above or below the amortized cost of the securities sold and gains
realized on the call of certain securities.
Non-accrual loans
Loans for which no periodic accrual of interest income is realized.
Non-performing assets
When other real estate owned (OREO) is added to non-performing loans, the
result is defined as non-performing assets.
Non-performing loans
Non-performing loans are defined as all non-accrual and restructured
loans, and all loans which are 90 days or more past-due but still
accruing interest.
Other operating expenses
All expenses other than interest expense and the provision for loan
losses.
Other operating income
All income other than interest income and dividend income.
Other real estate owned (OREO)
Real estate acquired through foreclosure or in-substance foreclosure.
Purchase accounting
An accounting method which, following an acquisition, the acquired entity
is recorded at fair value. The operating results of the acquired entity
are included in the acquiring entity's result from the date of the
acquisition forward.
Restructured loans
A refinanced loan in which the bank allows the borrower certain
concessions that would not normally be considered. The concessions are
always made in light of the borrower's financial difficulties, and the
objective of the bank is to maximize recovery of the investment.
Return on average assets (ROA)
Net income as a percentage of average total assets. A key ratio which
indicates how effectively a bank holding company uses its total
resources.
Return on average shareholders' equity (ROE)
Net income as a percentage of average shareholders' equity. A key ratio
which provides a measure of how efficiently equity has been employed.
Significant non-recurring income or expense items
A significant non-recurring income or expense item represents income or
expense which is reported in the quarter in which it occurs, and is not
expected to recur in future periods.
Tangible book value
Tangible shareholders' equity divided by shares outstanding on the same
date.
Tangible shareholders' equity
Shareholders' equity less goodwill.
Tangible total assets
Total assets less goodwill.
<TABLE> <S> <C>
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<NAME> BANKNORTH GROUP, INC.
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<PERIOD-END> JUN-30-1997
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