UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30,
1997.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I PAGE
- ---------------------------------------------------------------------------------------------
<S> <C>
Financial Highlights (Unaudited) 1
Item l Interim Financial Statements
Consolidated Statements of Income for the Three and Nine Months
Ended September 30, 1997 and 1996 (Both unaudited) 2
Consolidated Balance Sheets at September 30, 1997 (Unaudited),
December 31, 1996 and September 30, 1996 (Unaudited) 3
Consolidated Statements of Changes in Shareholders' Equity for the Period
January 1, 1996 to September 30, 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 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 N/A
Item 5 Other Information N/A
Item 6 Exhibits and Reports on Form 8-K 28
Signatures 29
Glossary 30
</TABLE>
Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------ ------------------------
(Dollars in thousands, except share and per share data) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income Data
Interest income $ 56,321 $ 49,175 $ 161,615 $ 139,762
Interest expense 26,103 20,899 72,985 59,474
----------------------------------------------------
Net interest income 30,218 28,276 88,630 80,288
Provision for loan losses 1,940 1,500 5,626 4,100
----------------------------------------------------
Net interest income after provision for loan losses 28,278 26,776 83,004 76,188
Non-interest income 8,001 6,457 21,202 18,799
Goodwill amortization 1,305 1,297 3,917 3,347
Capital securities expense 789 -- 1,315 --
Other expenses 22,977 21,879 66,854 64,492
----------------------------------------------------
Total non-interest expense 25,071 23,176 72,086 67,839
----------------------------------------------------
Income before income taxes 11,208 10,057 32,120 27,148
Income taxes 3,618 3,244 10,391 8,791
----------------------------------------------------
Net income $ 7,590 $ 6,813 $ 21,729 $ 18,357
====================================================
Share and Per Share Data
Weighted average number of shares outstanding 7,826,648 7,826,648 7,826,648 7,662,495
Net income $ 0.97 $ 0.87 $ 2.78 $ 2.40
Goodwill, after income tax effect 0.11 0.11 0.32 0.28
Net income, excluding goodwill 1.08 0.98 3.10 2.68
Shares outstanding, p.e. 7,826,648 7,826,648 7,826,648 7,826,648
Book value $ 29.19 $ 25.53 $ 29.19 $ 25.53
Tangible book value, p.e. 25.08 20.74 25.08 20.74
Cash dividends declared 0.29 0.25 0.87 0.75
Market price:
High 56.75 37.50 56.75 38.50
Low 45.38 31.50 40.00 31.50
Close 54.63 37.38 54.63 37.38
Share volume 1,135,780 661,529 2,853,846 2,904,788
Average monthly share volume 378,593 220,510 317,094 322,754
PE Ratio (last four reported quarters) 14.8 11.5 14.8 11.5
Average Balances
Assets $2,849,746 $2,494,376 $2,737,786 $2,361,620
Earning assets 2,698,766 2,336,619 2,586,958 2,210,923
Loans 1,933,960 1,797,510 1,904,480 1,694,663
Goodwill 33,038 38,266 34,315 33,803
Deposits 2,124,519 2,060,730 2,092,227 1,962,312
Short-term borrowed funds 430,360 172,217 369,363 142,295
Long-term debt 20,196 44,713 22,546 48,132
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely junior
subordinated debentures of the Corporation 30,000 -- 16,813 --
Shareholders' equity 223,284 195,290 214,044 187,558
Key Ratios
Return on average assets 1.06% 1.09% 1.06% 1.04%
Return on average shareholders' equity 13.49 13.88 13.57 13.07
Efficiency ratio 62.93 61.33 61.93 62.01
Net loan charge-offs to average loans 0.17 0.42 0.29 0.28
Provision for loan losses to average loans 0.40 0.33 0.39 0.32
Allowance for loan losses to loans, p.e. 1.29 1.33 1.29 1.33
Allowance for loan losses coverage of non-performing loans, p.e. 143.09 108.99 143.09 108.99
Non-performing assets to total assets, p.e. 0.65 0.93 0.65 0.93
Total capital to risk-adjusted assets, p.e. 12.08 10.45 12.08 10.45
Tier 1 capital to risk-adjusted assets, p.e. 10.87 9.19 10.87 9.19
Tier 1 capital to quarterly average total assets (Leverage) 7.98 6.78 7.98 6.78
Tangible shareholders' equity to tangible assets, p.e. 6.91 6.56 6.91 6.56
</TABLE>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
(In thousands, except per share data) 1997 1996 1997 1996
-----------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $44,457 $41,109 $130,000 $116,714
Interest on money market investments 109 132 303 778
Interest on securities available for sale 11,279 7,227 29,714 19,903
Interest on investment securities 476 707 1,598 2,367
-----------------------------------------
Total interest income 56,321 49,175 161,615 139,762
Interest Expense:
Deposits 19,770 18,113 57,015 52,141
Short-term borrowed funds 5,990 2,127 14,856 5,220
Long-term debt 343 659 1,114 2,113
-----------------------------------------
Total interest expense 26,103 20,899 72,985 59,474
-----------------------------------------
Net Interest Income 30,218 28,276 88,630 80,288
Less: provision for loan losses 1,940 1,500 5,626 4,100
-----------------------------------------
Net Interest Income After Provision for Loan Losses 28,278 26,776 83,004 76,188
-----------------------------------------
Other Operating Income:
Income from fiduciary activities 2,270 2,084 6,373 6,085
Service charges on depositor accounts 1,910 1,692 5,747 4,824
Card product income 787 764 2,329 2,091
Loan servicing income 630 716 1,911 2,057
Gain on sale of mortgage servicing rights 896 79 944 87
Net loan transactions 381 257 799 1,216
Net securities transactions 163 21 187 24
Other income 964 844 2,912 2,415
-----------------------------------------
Total other operating income 8,001 6,457 21,202 18,799
Other Operating Expenses:
Salaries 9,923 9,278 28,332 26,706
Employee benefits 2,044 2,057 6,333 6,374
Net occupancy expenses 1,981 1,669 5,904 5,222
Equipment and software expenses 1,791 1,569 5,280 4,703
Data processing fees 1,256 1,111 3,686 3,428
FDIC deposit insurance and other regulatory expenses 197 134 578 332
Other real estate owned and repossession expenses 287 267 648 375
Legal and professional fees 972 924 2,424 2,614
Printing and supplies expenses 598 603 1,795 2,601
Advertising and marketing expenses 612 701 1,856 2,455
Amortization of goodwill 1,305 1,297 3,917 3,347
Capital securities expense 789 -- 1,315 --
Other expenses 3,316 3,566 10,018 9,682
-----------------------------------------
Total other operating expenses 25,071 23,176 72,086 67,839
-----------------------------------------
Income before income tax expense 11,208 10,057 32,120 27,148
Income tax expense 3,618 3,244 10,391 8,791
-----------------------------------------
Net Income $ 7,590 $ 6,813 $ 21,729 $ 18,357
=========================================
Net Income Per Share $ 0.97 $ 0.87 $ 2.78 $ 2.40
=========================================
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31, September 30,
1997 1996 1996
------------------------------------------
(In thousands, except share and per share data) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
Cash and due from banks $ 89,742 $ 91,871 $ 91,706
Money market investments 5,678 101 50
----------------------------------------
Cash and cash equivalents 95,420 91,972 91,756
----------------------------------------
Securities available for sale, at fair value 715,850 531,269 468,154
Loans held for sale 17,139 12,106 12,935
Investment securities 26,171 34,194 38,321
Loans 1,938,824 1,848,232 1,820,094
Less: allowance for loan losses 25,061 23,520 24,284
----------------------------------------
Net loans 1,913,763 1,824,712 1,795,810
----------------------------------------
Accrued interest receivable 17,102 15,148 15,243
Premises, equipment and software, net 29,908 29,448 29,256
Other real estate owned and repossessed assets 1,031 921 1,049
Goodwill 32,225 36,142 37,448
Capitalized mortgage servicing rights 4,521 3,921 3,875
Other assets 19,470 21,490 17,853
----------------------------------------
Total assets $2,872,600 $2,601,323 $2,511,700
========================================
Liabilities, Corporation-Obligated Mandatorily Redeemable
Capital Securities and Shareholders' Equity
Deposits:
Demand deposits $ 303,031 $ 287,598 $ 288,317
NOW accounts & money market savings 823,706 773,870 755,234
Regular savings 198,826 215,364 225,123
Time deposits $100 thousand and greater 93,884 91,245 83,255
Time deposits under $100 thousand 710,126 697,987 706,744
----------------------------------------
Total deposits 2,129,573 2,066,064 2,058,673
----------------------------------------
Short-term borrowed funds:
Federal funds purchased 25,000 23,305 8,400
Securities sold under agreements to repurchase 146,581 116,484 111,713
Borrowings from U.S. Treasury 19,387 11,672 22,531
Borrowings from Federal Home Loan Bank of Boston 254,000 129,000 48,000
----------------------------------------
Total short-term borrowed funds 444,968 280,461 190,644
----------------------------------------
Long-term debt:
Federal Home Loan Bank of Boston term notes 7,948 12,923 29,493
Bank term loan 11,050 13,000 13,650
----------------------------------------
Total long-term debt 18,998 25,923 43,143
----------------------------------------
Accrued interest payable 6,493 3,914 4,267
Other liabilities 14,082 18,224 15,173
----------------------------------------
Total liabilities 2,614,114 2,394,586 2,311,900
----------------------------------------
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 90,925 87,410 87,227
Retained earnings 129,627 115,130 110,339
Unamortized employee restricted stock (1,456) (1,153) (1,037)
Net unrealized gains (losses) on securities
available for sale, net of tax 1,563 (2,477) (4,556)
----------------------------------------
Total shareholders' equity 228,486 206,737 199,800
----------------------------------------
Total liabilities, corporation-obligated mandatorily
redeemable capital securities and shareholders' equity $2,872,600 $2,601,323 $2,511,700
========================================
</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 restricted stock -- (33) -- 125 -- 92
Exercise of employee stock options -- -- (155) -- -- (155)
-----------------------------------------------------------------
Balance, March 31, 1997 (Unaudited) $7,827 $87,377 $119,755 $(1,028) $(6,157) $207,774
=================================================================
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
=================================================================
Net income -- -- 7,590 -- -- 7,590
Adjustment of securities available for sale
to fair value, net of tax -- -- -- -- 3,575 3,575
Cash dividends $.29 per share -- -- (2,270) -- -- (2,270)
Amortization of employee restricted stock -- 316 -- (94) -- 222
Issuance of employee restricted stock -- -- -- (315) -- (315)
Issuance of restricted stock units under deferred
compensation plan, net -- 3,043 (4) -- -- 3,039
Exercise of employee stock options -- -- (221) -- -- (221)
-----------------------------------------------------------------
Balance, September 30, 1997 (Unaudited) $7,827 $90,925 $129,627 $(1,456) $ 1,563 $228,486
=================================================================
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(In thousands) 1997 1996
-------------------------------
<S> <C> <C>
Increase in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 21,729 $ 18,357
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of premises, equipment and software 3,514 3,159
Amortization of goodwill 3,917 3,347
Net accretion of investment securities (258) (329)
Net amortization of securities available for sale 2,567 2,516
Provision for loan losses 5,626 4,100
Adjustment of other real estate owned to estimated fair value 209 174
Provision for deferred tax expense 196 890
Amortization of employee restricted stock 484 243
Exercise of employee stock options (418) (125)
Net securities transactions (187) (24)
Net gain on sale of other real estate owned and repossessed assets (184) (378)
Proceeds from sale of loans held for sale 88,429 133,169
Originations and purchases of loans held for resale (91,719) (126,345)
Net gain on sale of loans held for sale (799) (1,216)
Gain on sale of mortgage servicing rights (944) (87)
Increase in interest receivable (1,954) (1,814)
Increase (decrease) in interest payable 2,579 (73)
Increase in other assets and other intangibles (989) (2,052)
Increase (decrease) in other liabilities (1,103) 1,652
------------------------------
Total adjustments 8,966 16,807
------------------------------
Net cash provided by operating activities 30,695 35,164
------------------------------
Cash flows from investing activities:
Net cash provided by acquisition -- 124,141
Proceeds from maturity and call of securities available for sale 71,216 167,507
Proceeds from maturity and call of investment securities 8,318 11,731
Proceeds from sale of securities available for sale 290 20,235
Purchase of securities available for sale (252,234) (306,401)
Proceeds from sale of OREO and repossessed assets 2,036 1,996
Loans purchased (37,453) (38,189)
Net increase in originated loans (59,395) (37,493)
Capital expenditures (3,991) (3,637)
------------------------------
Net cash used in investing activities (271,213) (60,110)
------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits 63,509 (60,610)
Net increase in short-term borrowed funds 164,507 74,431
Issuance of common stock, net of expenses -- 32,216
Issuance of corporation-obligated mandatorily redeemable
capital securities 30,000 --
Payments on long term debt (6,925) (12,854)
Issuance of restricted stock awards (315) (371)
Dividends paid (6,810) (5,871)
------------------------------
Net cash provided by financing activities 243,966 26,941
------------------------------
Net increase in cash and cash equivalents 3,448 1,995
------------------------------
Cash and cash equivalents at beginning of period 91,972 89,761
------------------------------
Cash and cash equivalents at end of period $ 95,420 $ 91,756
==============================
Additional disclosure relative to statement of cash flows:
Interest paid $ 70,406 $ 59,121
==============================
Taxes paid $ 8,615 $ 10,602
==============================
Supplemental schedule of non-cash investing and financing activities:
Net transfer of loans to OREO and repossessed assets $ 2,171 $ 1,672
Adjustment to securities available for sale to fair value, net of tax 4,040 (4,585)
Issuance of restricted stock units under deferred
compensation plan, net 3,039 --
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., North Group Realty, Inc. and Banknorth Capital
Trust I. It is the opinion of management that the accompanying
unaudited interim consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and reflect all
adjustments which are considered necessary to report fairly the
financial position as of September 30, 1997 and 1996, the Consolidated
Statements of Income for the three and nine months ended September 30,
1997 and 1996, and the Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 and the Consolidated
Statements of Changes in Shareholders' Equity for the period January
1, 1996 through September 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 7,662,495
weighted average shares issued and outstanding during the nine month
periods ended September 30, 1997 and 1996, respectively, and 7,826,648
weighted average shares issued and outstanding during the three month
periods ended September 30, 1997 and 1996. The effect of the
outstanding stock option awards and restricted stock units 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", 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 September 30, 1997 and 1996,
and the related consolidated statements of income for the three and nine month
periods ended September 30, 1997 and 1996, and the consolidated statements of
changes in shareholders' equity for the three month periods ended March 31,
1997, June 30, 1997 and September 30, 1997, and the consolidated statements of
cash flows for the nine month periods ended September 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
October 24, 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 nine months ended September 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 $7.6 million, or $.97 per share for
the three months ended September 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 September 30, 1997, net income was $21.7 million, or $2.78 per
share, as compared to $18.4 million, or $2.40 per share in 1996.
During the third quarter of 1997:
* Banknorth Group, Inc. common stock closed at an all-time high of
$54.63 as of September 30, 1997.
* The Company is undertaking a comprehensive study of its operations
which is intended to enhance revenues and reduce expenses on a
prospective basis.
* Effective July 1, 1997, the deferred compensation plan for
directors and selected executives was amended from a phantom stock
plan to a restricted unit plan, thereby reducing the expense
associated with this deferred compensation plan.
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. 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 94.12% and 93.15% of total assets at September 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
(capital securities) in the aggregate amount of $30.0 million at 10.52%,
(ii) using the proceeds from the sale of the capital securities to acquire
the 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 capital securities
for general corporate purposes. The capital securities, with associated
expense that is tax deductible, qualify as Tier I capital under regulatory
definitions. The 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 $2.7 billion during the third quarter of 1997, were
$362.1 million, or 15.5%, higher than during the third quarter of 1996
primarily due to growth of the loan portfolio resulting from increased loan
demand and growth in the available for sale securities portfolio aimed at
increasing the earning assets of the Company and leveraging the proceeds of
the capital securities. For the year-to-date period, earnings assets were
$2.6 billion in 1997 as compared with $2.2 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 September 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 September 30, 1997 and
1996.
Total average loans were $1.9 billion during the quarter ended
September 30, 1997, an increase of $136.5 million, or 7.6%, over the same
period in 1996, resulting from strong loan growth, primarily in the markets
served by FMB. During the first nine months of 1997, in order to supplement
loan originations and to expand the portfolio of earning assets, the Company
purchased approximately $37.5 million of primarily residential real estate
loans.
Given current economic indicators and interest rate environment,
management believes that the Company will see continued but slowing growth
in the loan portfolio during the balance of 1997. If interest rates rise,
a greater slow down in lending activity could be expected.
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 $21.0 million during the third quarter of 1997, $6.5 million,
or 44.6% higher than the three month average ending September 30, 1996. Due
to the level of market interest rates in the third quarter of 1997, both new
loan originations as well as refinancing activity, primarily in the retail
line of business, were high resulting in a greater level of mortgage product
awaiting sale into the secondary market. Management expects production to
fall in the fourth quarter of 1997 due to the seasonality of the retail
business and the end of the prime selling season in the Northeast.
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 $715.9 million, $531.3 million
and $468.2 million at September 30, 1997, December 31, 1996 and September
30, 1996, respectively. The increase of $247.7 million from September 30,
1996 to September 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 in 1997 to effectively leverage the net
proceeds of the capital securities. Average balances for the three months
ended September 30, 1997 and 1996 were $708.8 million and $474.6 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 $26.2 million as of September 30, 1997 as compared to
$34.2 million and $38.3 million as of December 31, and September 30, 1996,
respectively. The decrease from September 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 September 30, 1997 and 1996, as well as December 31, 1996.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $7.9 million during the third quarter of 1997, down
$1.9 million, or 19.3%, from the third quarter of 1996. For the year to date
period, money market investments were $11.7 million, or 62.2% higher in the
first nine months 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 beginning in the third
quarter of 1996 and continuing through the current period.
Income from earning assets. Income from earning assets was $56.5
million for the three month period ended September 30, 1997, as compared to
$49.3 million for the same period in 1996. The increase of $7.2 million, or
14.6%, resulted from the increases in earning assets through normal growth
and asset purchases described above. Total earning assets during the third
quarter of 1997 of $2.7 billion yielded 8.30%, while in 1996 earning assets
of $2.3 billion yielded 8.39%. The increase in earning assets contributed
$6.9 million towards the increase in interest income. Table D, Average
Balances, Yields and Net Interest Margins and Table F, Volume and Yield
Analysis contain details of changes by category of interest income from
earning assets.
For the nine months ended September 30, 1997 and 1996, income from
earning assets was $162.0 million and $140.2 million, respectively. Total
earning assets of $2.6 billion, increased $376.0 million, or 17.0% over the
nine month average of 1996. The yield on earning assets was 8.37% during
the first nine months of 1997 as compared to 8.47% during the same period of
1996. During the first nine months of 1997, the increase in earning assets
contributed $21.8 million towards the increase in interest income over the
same period of 1996, while the 10 basis point reduction in yield caused a
$36 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 third quarter of 1997 and 1996, and changes, by category, from the
third quarter of 1996.
Core Deposits. Total core deposits averaged $2.0 billion during the
three month period ended September 30, 1997, $51.4 million above the third
quarter average in 1996. Total core deposits represented 81.2% of total
net funding during the third quarter of 1997 as compared to 90.3% during the
same quarter of 1996.
Purchased Liabilities. Total purchased liabilities increased on
average by 88.1% to $531.5 million during the third quarter of 1997 from
$282.5 million during the third quarter of 1996. The increased borrowings,
or purchased liabilities, were the result of the incremental funding
requirements related to loan and investment purchases made during the fourth
quarter of 1996 and the first nine months 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.
Expense of Interest-Bearing Liabilities. Banknorth's interest expense
for the three months ended September 30, 1997, was $26.1 million, $5.2
million, or 24.9%, above 1996. Total interest bearing liabilities of $2.3
billion during the third quarter of 1997, were $275.9 million, or 13.8% ,
higher than in 1996, and with a total cost of 4.54%, 39 basis points over
the corresponding period of the prior year. Higher levels of interest
bearing liabilities caused $3.8 million of the increase in interest
expense, while the 39 basis point increase in the cost of funds resulted in
the remainder of the increase of $1.4 million.
Total interest bearing liabilities averaged $2.2 billion during the
nine month period ended September 30, 1997, $303.3 million, or 16.0%, higher
than in 1996. The cost of funds was 4.44% in 1997 as compared to 4.19% 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 $30.4 million and $28.4 million for the
three month periods ended September 30, 1997 and 1996, respectively. The net
interest margin was 4.46% during the third quarter of 1997 as compared to
4.83% during the third quarter of 1996. The yield on earning assets of
8.30% for the third quarter of 1997, was 9 basis points below the
corresponding period of the prior year, while the cost of interest bearing
liabilities, 4.54% in 1997, increased 39 basis points over the corresponding
period of the prior year. The impact on net interest margin, as a result
of adding earning assets to offset the cost of the capital securities
issue, was a reduction of approximately 10 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 with
a notional amount of $295.0 million and interest rate swaps with a notional
amount of $50.0 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 September 30, 1997 was $1.6
million. The estimated fair value of these floors was $621 thousand as of
September 30, 1997. The estimated fair value of the interest rate swap
contracts was $301 thousand as of September 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 .65%
of total assets as of September 30, 1997.
Non-performing loans. Non-performing loans totaled $17.5 million, down
$1.5 million, or 7.7% from December 31, 1996, and $4.8 million lower than
at September 30, 1996, respectively. Banknorth's delinquency rate in the
consumer sector compares favorably with both national and regional rates
thus far in 1997. Non-performing loans, although at a slightly higher level
than the June 30, 1997 level of $15.7 million, continue to remain at a low
level compared to a year earlier. Management does not expect any material
changes in the level of non-performing loans during the remainder of 1997.
The level of impaired loans does not exceed the level of non-performing
loans at September 30, 1997.
Other real estate owned. Total other real estate owned was $1.0
million at September 30, 1997, as compared to $1.0 million at September 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 $7.6 million, or an annualized .53% of
average loans for the first nine months of 1997, an increase of $752
thousand from the first nine months of 1996. Recoveries of $3.5 million for
the first nine months of 1997, were $228 thousand higher 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 third quarter of
1997 was $1.9 million, or an annualized .40% of average loans. Provisions of
$1.5 million, or an annualized .33% of average loans, and $5.6 million, or
.32% of average loans were experienced during the third quarter of 1996 and
the full year of 1996, respectively. Provisions of $5.6 million, or an
annualized .39% of average loans, and $4.1 million, or an annualized .32%
of average loans, were experienced during the nine month periods ended
September 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
September 30, 1997, the allowance provided a coverage of non-performing
loans of 143.09% as compared to 124.00% and 108.99% at December 31,1996 and
September 30, 1996, respectively. The allowance coverage of non-performing
loans was 152.21% at June 30, 1997 and 123.27% as of 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 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 $8.0 million for the quarter ended
September 30, 1997, $1.5 million, or 23.9%, higher than that recorded during
the third quarter of 1996, primarily due to the recording of a $896 thousand
net gain on the sale of $130 million in mortgage servicing rights by the
Company's mortgage banking subsidiary. For the nine months ended September
30, 1997 and 1996, other operating income was $21.2 million and $18.8
million, respectively.
Income from fiduciary activities was $2.3 million for the quarter
ended September 30, 1997, $186 thousand or 8.9% higher than the income
recorded in the third quarter of 1996. The increase resulted from greater
assets under management by The Stratevest Group, N.A., the Company's trust
bank and strong market conditions which increased fee revenue. Income from
fiduciary activities was $6.4 million and $6.1 million for the nine months
ended September 30, 1997 and 1996, respectively.
Service charges on deposit accounts was $1.9 million during the three
months ended September 30, 1997, as compared to $1.7 million during the same
quarter of 1996. On a year-to-date basis, service charge income was $5.7
million, $923 thousand, or 19.1% higher than the same period of 1996.
Growth in the number of deposit accounts, increases in transaction fees
charged on deposit accounts and reduced levels of fee waivers caused the
aforementioned increases.
Card product income in the third quarter of 1997 increased by $23
thousand, or 3.0%, over 1996, the result of the increases in Visa check
card transaction volume and growth in the merchant services portfolio. For
the nine months ended September 30, 1997 and 1996, card product income was
$2.3 million and $2.1 million, respectively.
Loan servicing income was $630 thousand in the third quarter of 1997,
down $86 thousand or 12.0%, from $716 thousand for the third quarter of
1996. For the nine months ended September 30, 1997 and 1996, loan servicing
income was $1.9 million and $2.1 million, respectively. The reduced level
of loan servicing income during 1997 is the result of greater amortization
of mortgage servicing rights than in the same period a year ago.
The Company recorded net gains on the sale of servicing of $944
thousand for the nine months ended September 30, 1997 and $87 thousand for
the same period of 1996. In August 1997, the Company sold $130 million in
mortgage loan servicing rights at a price of 1.26% resulting in a net gain
of $896 thousand. In 1996, the Company sold $6.9 million in servicing for a
gain of $79 thousand.
Net loan transactions amounted to $381 thousand during the three
months ended September 30, 1997, an increase of $124 thousand from 1996.
The increase was the result of strong retail mortgage loan production in
the third quarter of 1997 due to the decline in interest rates during the
quarter. For the nine months ended September 30, 1997, however, net loan
transactions amounted to $799 thousand, compared to $1.2 million for the
same period in 1996. While the 1997 retail mortgage production is running
near 1996 levels, 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, $964 thousand for the three months ended September 30,
1997, was up $120 thousand or 14.2% from the same period in 1996. The
increase was the result of the Company's new retail investment product
offerings and the payout of a venture capital fund investment. For the
nine months ended September 30, 1997 and 1996, other income was $2.9 million
and $2.4 million, respectively. The $497 thousand increase was the result
of the two previously mentioned items, retail investment income and venture
capital investment gains, as well as the sale of check processing equipment.
During the third quarter of 1997, Banknorth began a comprehensive
study intended to enhance the level of fee income on a prospective basis.
Other Operating Expenses
Other operating expenses for the third quarter of 1997 were $25.1
million, $1.9 million, or 8.2% above the third quarter of 1996. Other
operating expenses were up $4.2 million from $67.8 million for the first
nine months of 1996 to $72.1 million for the nine months ended September 30,
1997. The largest increases in expenses were in the categories of salaries,
equipment, 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 61.93% for
the first nine months of 1997, down from 62.01% during the same period in
1996.
Salaries expense, the largest component of other operating expenses,
was $9.9 million for the third quarter of 1997, up $645 thousand, or 7.0%
from the same period in 1996. For the nine months ended September 30, 1997
and 1996, salaries expense amounted to $28.3 million and $26.7 million ,
respectively. The increase over 1996 is primarily attributable to a full
nine months of salary expense related to FMB in 1997, increased staffing
levels at FMB to meet loan demand, staffing of new branches in Massachusetts
and New Hampshire, higher executive compensation costs due to the
significant increase in the stock price and normal salary increases
corporate wide.
Despite the increase in salaries expense, the employee benefits
expense was slightly lower in the third 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 $6.3 million and $6.4 million in the
first nine months of 1997 and 1996, respectively.
Net occupancy expenses of $2.0 million during the three months ended
September 30, 1997, were $312 thousand, or 18.7% above the same period in
1996. Net occupancy expenses increased from $5.2 million for the nine
months ended September 30, 1996 to $5.9 million for the nine months ended
September 30, 1997 or an increase of 13.1%. The increase is attributable to
a full nine months of expense related to FMB in 1997 and the addition of two
branches in the second quarter of 1997.
Equipment and software expenses were $1.8 million and $1.6 million for
the quarters ended September 30, 1997 and 1996, respectively. For the nine
months ended September 30, 1997 and 1996, equipment and software expense was
$5.3 million and $4.7 million, respectively. The increase from 1996 to 1997
is attributable to a full nine months of FMB in 1997 and new corporate-wide
technology enhancements.
For the quarter ended September 30, 1997, FDIC deposit insurance and
other regulatory expense, increased $63 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 nine months ended September 30, 1997 and 1996, regulatory expense
amounted to $578 thousand and $332 thousand, respectively, an increase of
$246 thousand or 74.1%.
Other real estate owned and repossession expenses were $287 thousand
for the quarter ended September 30, 1997 as compared to $267 thousand in the
same period of 1996. Other real estate owned and repossession expenses
increased $273 thousand from $375 thousand for the nine months ended
September 30, 1996 to $648 thousand for the nine months ended September 30,
1997. In 1997, expenses relating to properties in the OREO portfolio were
$832 thousand with net gains on the sale of OREO properties of $184
thousand, whereas, in 1996, OREO expenses were $753 thousand and net gains
on the sale of disposed properties were $378 thousand.
Legal and professional expenses during the three months ended
September 30, 1997 increased by $48 thousand from the third quarter of 1996.
For the nine month period, the expenses in this category declined $190
thousand in 1997 compared to 1996. Included in the first quarter of 1996
were one-time expenses related to the FMB acquisition of $99 thousand.
Printing and supplies expense was $598 thousand during the third
quarter of 1997, which was slightly lower than than the same period in
1996. For the nine months ended September 30, 1997 and 1996, printing and
supplies expenses represented $1.8 million and $2.6 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 $612 thousand and $701
thousand during the three months ended September 30, 1997 and 1996,
respectively. Advertising and marketing expenses declined from $2.5
million for the nine months ended September 30, 1996 to $1.9 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 third
quarter of 1997 and 1996. Year to date, the goodwill expense was $570
thousand higher than in 1996 reflecting a full nine months of amortization
of goodwill related to the FMB branch acquisition.
Capital securities expense represents the cost of the $30 million in
capital securities issued in May of 1997. This is a recurring cost
prospectively of $789 thousand per quarter.
Other expenses decreased $250 thousand, or 7.0%, to $3.3 million in
the third quarter of 1997 from the third quarter of 1996. Year-to-date,
other expenses were up $336 thousand or 3.5%. The directors' and selected
executives' deferred compensation plan is the cause of both the decrease in
expense for the quarter and the increase for the year. The deferred
compensation plan contained a phantom stock cash liability component until
June 30, 1997 and as the stock price rose, the cost of the plan increased.
The significant increase in the stock price during the first six months of
1997 as compared to the same period of 1996 created a $607 thousand
increase in expense. Effective July 1, 1997, however, the phantom stock
cash liability component of the deferred compensation plan was replaced with
a restricted stock unit plan. The amended plan, The 1994 Deferred
Compensation Plan for Directors and Selected Executives of Banknorth Group,
Inc., was adopted by the Shareholders of the Company at the 1997 Annual
Meeting in May 1997. Under the provisions of the amended restricted stock
unit plan, the directors can defer compensation into restricted stock units
entitling them to a fixed number of shares at a later date. Accordingly, as
the stock price changes, there is no impact on the Company's earnings.
Therefore, in the third quarter of 1997, there was $34.3 thousand in directors
expense related to the directors' restricted stock plan compared to $224.2
thousand in the third quarter of 1996 related to the phantom stock plan.
As previously mentioned, Banknorth began a comprehensive study during
the third quarter of 1997. This study is intended to reduce operating
expenses on a prospective basis.
Income Taxes
In the third quarter of 1997, the Company recognized income tax expense
of $3.6 million, or 32.3% of the income before taxes. On a year-to-date basis,
tax expense was $10.4 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 third quarter of 1997, the board of directors declared a
dividend of $.29 per share, resulting in a payout of 29.9% of third 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 September 30, 1997, Banknorth's Tier I capital was $224.7 million,
or 10.87% of total risk-adjusted assets, compared to $166.9 million and
9.19% as of September 30, 1996. The $57.8 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 7.98%, and 6.78% as
of September 30, 1997 and 1996, respectively. Banknorth, and its
subsidiaries individually, are "well capitalized" at September 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 September 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 $ 333,854 $ 296,081 $ 37,773 10.4% 12.4% 12.7%
Construction and land development 30,078 20,003 10,075 2.8 1.1 0.9
Commercial real estate 554,562 503,054 51,508 14.2 20.6 21.5
Residential real estate 768,987 739,504 29,483 8.1 28.5 31.6
Credit card receivables 21,474 22,662 (1,188) (0.3) 0.8 1.0
Lease receivables 75,557 59,145 16,412 4.5 2.8 2.5
Other installment 149,448 157,061 (7,613) (2.1) 5.5 6.7
--------------------------------------------------------------------
Total loans, net of unearned income and
unamortized loan fees and costs 1,933,960 1,797,510 136,450 37.6 71.7 76.9
Securities available for sale:
U.S. Treasuries and Agencies 157,991 98,370 59,621 16.5 5.8 4.2
States and political subdivisions 4,726 653 4,073 1.1 0.2 --
Mortgage-backed securities 318,813 274,352 44,461 12.3 11.8 11.8
Corporate debt securities 188,147 77,855 110,292 30.4 7.0 3.4
Equity securities 39,164 23,396 15,768 4.4 1.5 1.0
--------------------------------------------------------------------
Total securities available for sale, at
amortized cost 708,841 474,626 234,215 64.7 26.3 20.4
Investment securities:
U.S. Treasuries and Agencies 8,600 17,264 (8,664) (2.4) 0.3 0.7
States and political subdivisions 944 1,332 (388) (0.1) -- 0.1
Mortgage-backed securities 17,520 21,210 (3,690) (1.0) 0.6 0.9
Corporate debt securities 10 345 (335) (0.1) -- --
--------------------------------------------------------------------
Total investment securities, at
amortized cost 27,074 40,151 (13,077) (3.6) 0.9 1.7
Loans held for sale 20,957 14,497 6,460 1.8 0.8 0.6
Money market investments 7,934 9,835 (1,901) (0.5) 0.3 0.4
--------------------------------------------------------------------
Total earning assets $2,698,766 $2,336,619 $362,147 100.0% 100.0% 100.0%
====================================================================
</TABLE>
TABLE B. Loan Portfolio
<TABLE>
<CAPTION>
At September 30, At December 31, % Change
------------------------------------------- ------------------- ------------------
1997 1996 1996 9/30/97 9/30/97
--------------------- ------------------ ------------------- versus versus
(Dollars in thousands) Amount Percent Amount Percent Amount Percent 9/30/96 12/31/96
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural $ 325,852 16.8% $ 299,583 16.5% $ 300,730 16.3% 8.8% 8.4%
Real Estate:
Construction and land
development 31,708 1.6 23,533 1.3 29,364 1.6 34.7 8.0
Commercial 556,351 28.7 511,796 28.1 531,364 28.7 8.7 4.7
Residential 776,735 40.1 744,578 40.9 737,261 39.9 4.3 5.4
------------------------------------------------------------------------------------
Total real estate 1,364,794 70.4 1,279,907 70.3 1,297,989 70.2 6.6 5.1
------------------------------------------------------------------------------------
Credit card receivables 22,037 1.1 21,907 1.2 24,563 1.3 0.6 (10.3)
Lease receivables 75,094 3.9 62,278 3.4 70,396 3.8 20.6 6.7
Other installment 151,047 7.8 156,419 8.6 154,554 8.4 (3.4) (2.3)
------------------------------------------------------------------------------------
Total installment 248,178 12.8 240,604 13.2 249,513 13.5 3.1 (0.5)
------------------------------------------------------------------------------------
Total loans 1,938,824 100.0 1,820,094 100.0 1,848,232 100.0 6.5 4.9
Less: allowance for loan losses 25,061 1.3 24,284 1.3 23,520 1.3 3.2 6.6
------------------------------------------------------------------------------------
Net loans $1,913,763 98.7% $1,795,810 98.7% $1,824,712 98.7% 6.6% 4.9%
====================================================================================
</TABLE>
TABLE C. Securities Available for Sale and Investment Securities
<TABLE>
<CAPTION>
At September 30, At December 31,
-------------------- -----------------
(Dollars in thousands) 1997 1996 1996
----------------------------------------
<S> <C> <C> <C>
Securities available for sale:
U.S. Treasuries and Agencies $153,954 $102,325 $111,774
States and political subdivisions 4,725 652 2,361
Mortgage-backed securities 317,721 268,799 272,433
Corporate debt securities 197,885 79,991 121,384
Equity securities 39,106 23,396 27,128
Valuation adjustment 2,459 (7,009) (3,811)
----------------------------------
Total recorded value of
securities available for sale $715,850 $468,154 $531,269
==================================
Investment securities:
U.S. Treasuries and Agencies $ 8,484 $ 16,156 $ 13,181
States and political subdivisions 785 1,135 1,135
Mortgage-backed securities 16,892 20,865 19,868
Corporate debt securities 10 165 10
----------------------------------
Total recorded value of
investment securities $ 26,171 $ 38,321 $ 34,194
==================================
Fair value of investment securities $ 26,455 $ 38,599 $ 34,644
==================================
Excess of fair value versus
recorded value $ 284 $ 278 $ 450
Fair value as a % of recorded value 101.1% 100.7% 101.3%
</TABLE>
TABLE D. Average Balances, Yields, and Net Interest Margins
<TABLE>
<CAPTION>
Three Months Ended September 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 $ 7,934 $ 109 5.45% $ 9,835 $ 132 5.34%
Securities available for sale, at
amortized cost(1) 708,841 11,303 6.33 474,626 7,227 6.06
Loans held for sale 20,957 417 7.89 14,497 289 7.93
Investment securities, at amortized cost(1) 27,074 481 7.05 40,151 714 7.07
Loans, net of unearned income and
unamortized loan fees (1 and 2) 1,933,960 44,158 9.06 1,797,510 40,928 9.06
-----------------------------------------------------------
Total earning assets 2,698,766 56,468 8.30 2,336,619 49,290 8.39
-----------------------------------------------------------
Cash and due from banks 73,633 85,448
Allowance for loan losses (24,742) (24,370)
Valuation reserve for securities available
for sale (438) (9,035)
Other assets 102,527 105,714
---------- ----------
Total assets $2,849,746 $2,494,376
========== ==========
Interest-bearing liabilities:
NOW accounts & money market savings $ 818,182 7,594 3.68 $ 772,857 6,517 3.35
Regular savings 204,565 1,243 2.41 228,414 1,366 2.38
Time deposits $100 thousand and greater 92,655 1,282 5.49 80,266 1,108 5.49
Time deposits under $100 thousand 715,138 9,651 5.35 706,701 9,122 5.14
-----------------------------------------------------------
Total interest-bearing deposits 1,830,540 19,770 4.28 1,788,238 18,113 4.03
Short-term borrowed funds 430,360 5,990 5.52 172,217 2,127 4.91
Long-term debt 20,196 343 6.74 44,713 659 5.86
-----------------------------------------------------------
Total interest-bearing liabilities 2,281,096 26,103 4.54 2,005,168 20,899 4.15
-----------------------------------------------------------
Demand deposits 293,979 272,492
Other liabilities 21,387 21,426
Corporation-obligated mandatorily redeemable
capital securities of subsidiary trust holding
solely junior subordinated debentures
of the Corporation 30,000 --
Shareholders' equity 223,284 195,290
---------- ----------
Total liabilities, corporation-obligated
mandatorily redeemable capital securities
and shareholders' equity $2,849,746 $2,494,376
========== ==========
Net interest income $30,365 $28,391
======= =======
Interest rate differential 3.76% 4.24%
==== ====
Net interest margin 4.46% 4.83%
==== ====
Notes:
<F1> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal and state tax rates.
<F2> Includes principal balances of non-accrual loans and industrial
revenue bonds.
</TABLE>
TABLE D. Average Balances, Yields, and Net Interest Margins
<TABLE>
<CAPTION>
Nine Months Ended September 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 $ 7,115 $ 303 5.69% $ 18,825 $ 778 5.52%
Securities available for sale, at amortized
cost(1) 629,874 29,764 6.32 436,928 19,903 6.08
Loans held for sale 15,394 898 7.80 15,782 892 7.55
Investment securities, at amortized cost(1) 30,095 1,616 7.18 44,725 2,390 7.14
Loans, net of unearned income and
unamortized loan fees (1 and 2) 1,904,480 129,452 9.09 1,694,663 116,258 9.16
------------------------------------------------------------
Total earning assets 2,586,958 162,033 8.37 2,210,923 140,221 8.47
------------------------------------------------------------
Cash and due from banks 75,844 82,440
Allowance for loan losses (24,184) (24,031)
Valuation reserve for securities available
for sale (3,944) (5,657)
Other assets 103,112 97,945
---------- ----------
Total assets $2,737,786 $2,361,620
========== ==========
Interest-bearing liabilities:
NOW accounts & money market savings $ 798,187 21,371 3.58 $ 730,890 18,212 3.33
Regular savings 209,023 3,733 2.39 225,107 4,032 2.39
Time deposits $100 thousand and greater 91,504 3,738 5.46 73,731 3,109 5.63
Time deposits under $100 thousand 708,510 28,173 5.32 675,641 26,788 5.30
------------------------------------------------------------
Total interest-bearing deposits 1,807,224 57,015 4.22 1,705,369 52,141 4.08
Short-term borrowed funds 369,363 14,856 5.38 142,295 5,220 4.90
Long-term debt 22,546 1,114 6.61 48,132 2,113 5.86
------------------------------------------------------------
Total interest-bearing liabilities 2,199,133 72,985 4.44 1,895,796 59,474 4.19
------------------------------------------------------------
Demand deposits 285,003 256,943
Other liabilities 22,793 21,323
Corporation-obligated mandatorily redeemable
capital securities of subsidiary trust holding
solely junior subordinated debentures of the
Corporation 16,813 --
Shareholders' equity 214,044 187,558
---------- ----------
Total liabilities, corporation-obligated
mandatorily redeemable capital securities
and shareholders' equity $2,737,786 $2,361,620
========== ==========
Net interest income $89,048 $ 80,747
======= ========
Interest rate differential 3.93% 4.28%
==== =====
Net interest margin 4.60% 4.88%
==== ====
Notes:
<F1> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal and state tax rates.
<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 September 30, Change Total Net Funding
------------------------ ------------------- -----------------
(Dollars in thousands) 1997 1996 Amount Percent 1997 1996
---- ---- ------ ------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Demand deposits $ 293,979 $ 272,492 $ 21,487 7.9% 11.7% 12.4%
Retail deposits:
Regular savings 204,565 228,414 (23,849) (10.4) 8.2 10.4
Time deposits under $100 thousand 715,138 706,701 8,437 1.2 28.6 32.2
NOW accounts & money market savings 818,182 772,857 45,325 5.9 32.7 35.3
------------------------------------------------------------------
Total retail deposits 1,737,885 1,707,972 29,913 1.8 69.5 77.9
------------------------------------------------------------------
Total core deposits 2,031,864 1,980,464 51,400 2.6 81.2 90.3
Less: cash and due from banks 73,633 85,448 (11,815) (13.8) 2.9 3.9
------------------------------------------------------------------
Net core deposits 1,958,231 1,895,016 63,215 3.3 78.3 86.4
------------------------------------------------------------------
Time deposits $100 thousand and greater 92,655 80,266 12,389 15.4 3.7 3.7
Federal funds purchased 8,038 6,432 1,606 25.0 0.3 0.3
Securities sold under agreements to repurchase 129,411 107,804 21,607 20.0 5.2 4.9
Borrowings from U.S. Treasury 9,661 9,144 517 5.7 0.4 0.4
Short-term notes from FHLB 283,250 48,837 234,413 480.0 11.3 2.2
Long-term notes from FHLB 8,503 30,024 (21,521) (71.7) 0.3 1.4
------------------------------------------------------------------
Total purchased liabilities 531,518 282,507 249,011 88.1 21.2 12.9
------------------------------------------------------------------
Bank term loan 11,693 14,689 (2,996) (20.4) 0.5 0.7
Total net funding $2,501,442 $2,192,212 $309,230 14.1% 100.0% 100.0%
==================================================================
</TABLE>
TABLE F. Volume and Yield Analysis
<TABLE>
<CAPTION>
Three Months
Ended September 30, Due to
-------------------- -------------------
(In thousands) 1997 1996 Change Volume Rate
---- ---- ------ ------ ----
<S> <C> <C> <C> <C> <C>
Interest income (FTE):
Money market investments $ 109 $ 132 $ (23) $ (26) $ 3
Securities available for sale 11,303 7,227 4,076 3,753 323
Loans held for sale 417 289 128 129 (1)
Investment securities 481 714 (233) (231) (2)
Loans 44,158 40,928 3,230 3,230 --
--------------------------------------------------------
Total interest income 56,468 49,290 7,178 6,855 323
--------------------------------------------------------
Interest expense:
NOW accounts & money market savings 7,594 6,517 1,077 434 643
Regular savings 1,243 1,366 (123) (140) 17
Time deposits $100 thousand and greater 1,282 1,108 174 174 --
Time deposits under $100 thousand 9,651 9,122 529 155 374
Short-term borrowed funds 5,990 2,127 3,863 3,598 265
Long-term debt 343 659 (316) (415) 99
--------------------------------------------------------
Total interest expense 26,103 20,899 5,204 3,806 1,398
--------------------------------------------------------
Net interest income (FTE) $ 30,365 $ 28,391 $ 1,974 $ 3,049 $(1,075)
========================================================
</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 F. Volume and Yield Analysis
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Due to
-------------------- -------------------
(In thousands) 1997 1996 Change Volume Rate
---- ---- ------ ------ ----
<S> <C> <C> <C> <C> <C>
Interest income (FTE):
Money market investments $ 303 $ 778 $ (475) $ (499) $ 24
Securities available for sale 29,764 19,903 9,861 9,077 784
Loans held for sale 898 892 6 (24) 30
Investment securities 1,616 2,390 (774) (787) 13
Loans 129,452 116,258 13,194 14,081 (887)
--------------------------------------------------------
Total interest income 162,033 140,221 21,812 21,848 (36)
--------------------------------------------------------
Interest expense:
NOW accounts & money market savings 21,371 18,212 3,159 1,792 1,367
Regular savings 3,733 4,032 (299) (299) --
Time deposits $100 thousand and greater 3,738 3,109 629 723 (94)
Time deposits under $100 thousand 28,173 26,788 1,385 1,284 101
Short-term borrowed funds 14,856 5,220 9,636 9,125 511
Long-term debt 1,114 2,113 (999) (1,269) 270
--------------------------------------------------------
Total interest expense 72,985 59,474 13,511 11,356 2,155
--------------------------------------------------------
Net interest income (FTE) $ 89,048 $ 80,747 $ 8,301 $10,492 $(2,191)
========================================================
</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
September 30, December 31, September 30,
------------- ------------ -------------
(Dollars in thousands) 1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Loans on a non-accrual basis:
Commercial, financial and agricultural $ 4,728 $ 3,221 $ 3,839
Real estate:
Construction and land development -- 39 70
Commercial 2,942 4,443 6,343
Residential 8,132 9,290 10,049
Other installment 14 -- --
-----------------------------------------
Total non-accrual 15,816 16,993 20,301
-----------------------------------------
Restructured loans:
Real estate:
Commercial -- 716 822
Residential 37 39 40
Other installment 6 10 6
-----------------------------------------
Total restructured 43 765 868
-----------------------------------------
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 456 169 123
Real estate:
Commercial 137 -- 40
Residential 226 88 46
Credit card receivables 146 111 138
Lease receivables 228 48 48
Other installment 462 794 717
-----------------------------------------
Total past-due 90 days or more
and still accruing 1,655 1,210 1,112
-----------------------------------------
Total non-performing loans 17,514 18,968 22,281
-----------------------------------------
Foreclosed real estate 756 921 1,038
In-substance foreclosed real estate 275 -- --
-----------------------------------------
Total other real estate owned (OREO) 1,031 921 1,038
Non-real estate and repossessed assets -- -- 11
-----------------------------------------
Total foreclosed and repossed assets (F/RA) 1,031 921 1,049
Total non-performing assets $ 18,545 $ 19,889 $ 23,330
=========================================
Allowance for loan losses (ALL) $ 25,061 $ 23,520 $ 24,284
ALL coverage of non-performing loans 143.09% 124.00% 108.99%
Non-performing assets as a % of (loans & OREO) 0.96 1.08 1.28
Non-performing assets to total assets 0.65 0.76 0.93
</TABLE>
TABLE H. Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Nine Months Twelve Months Nine Months
Ended September 30, Ended December 31, Ended September 30,
------------------- ------------------ -------------------
(Dollars in thousands) 1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Loans outstanding-end of period $1,938,824 $1,848,232 $1,820,094
Average loans outstanding-period to date 1,904,480 1,730,720 1,694,663
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 (1,065) (1,356) (367)
Real estate:
Construction and land development -- (73) (73)
Commercial (495) (2,122) (1,574)
Residential (1,296) (1,772) (1,129)
-------------------------------------------------------
Total real estate (1,791) (3,967) (2,776)
Credit card receivables (523) (788) (576)
Lease receivables (956) (867) (721)
Other installment (3,250) (3,348) (2,393)
-------------------------------------------------------
Total installment (4,729) (5,003) (3,690)
Total loans charged off (7,585) (10,326) (6,833)
-------------------------------------------------------
Recoveries on loans:
Commercial, financial and agricultural 502 619 469
Real estate:
Construction and land development 75 60 46
Commercial 485 1,039 862
Residential 402 669 272
-------------------------------------------------------
Total real estate 962 1,768 1,180
Credit card receivables 82 144 114
Lease receivables 644 695 566
Other installment 1,310 1,275 943
-------------------------------------------------------
Total installment 2,036 2,114 1,623
Total recoveries on loans 3,500 4,501 3,272
-------------------------------------------------------
Loans charged off, net of recoveries (4,085) (5,825) (3,561)
-------------------------------------------------------
Provision for loan losses 5,626 5,600 4,100
-------------------------------------------------------
Allowance for loan losses at end of period $ 25,061 $ 23,520 $ 24,284
=======================================================
Loans charged off, net (annualized),
as a % of average total loans 0.29% 0.34% 0.28%
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 1.29 1.27 1.33
</TABLE>
TABLE I. Capital Ratios
<TABLE>
<CAPTION>
At At At At At
September 30, June 30, March 31, December 31, September 30,
(Dollars in thousands) 1997 1997 1997 1996 1996
------------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Total risk-adjusted on-balance sheet assets $1,960,074 $1,936,981 $1,836,108 $1,795,825 $1,709,036
Total risk-adjusted off-balance sheet items 107,849 104,257 107,077 103,647 106,281
-----------------------------------------------------------------------
Total risk-adjusted assets $2,067,923 $2,041,238 $1,943,185 $1,899,472 $1,815,317
=======================================================================
Total risk-adjusted assets / average total assets,
net of fair value adjustment and goodwill (1) 73.44% 75.27% 75.06% 75.87% 73.75%
Total shareholders' equity $ 228,486 $ 216,866 $ 207,774 $ 206,737 $ 199,800
Fair value adjustment (1) (1,563) 2,012 6,157 2,477 4,556
Corporation obligated junior subordinate debenture 30,000 30,000 0 0 0
Other adjustments to Tier I capital (32,225) (33,530) (34,836) (36,142) (37,448)
-----------------------------------------------------------------------
Total Tier I capital 224,698 215,348 179,095 173,072 166,908
Maximum allowance for loan losses (2) 25,061 23,963 23,638 23,520 22,711
-----------------------------------------------------------------------
Total capital $ 249,759 $ 239,311 $ 202,733 $ 196,592 $ 189,619
=======================================================================
Quarterly average total assets,
net of fair value adjustment and goodwill (1) $2,815,958 $2,711,913 $2,588,819 $2,503,637 $2,461,484
Allowance for loan losses 25,061 23,963 23,638 23,520 24,284
Total capital to total risk-adjusted assets 12.08% 11.72% 10.43% 10.35% 10.45%
Tier I capital to total risk-adjusted assets 10.87 10.55 9.22 9.11 9.19
Tier I capital to total quarterly average
adjusted assets (Leverage) 7.98 7.94 6.92 6.91 6.78
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) Q3 Q2 Q1 Q4 Q3
-- -- -- -- --
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest income $ 56,321 $ 54,312 $ 50,982 $ 50,246 $ 49,175
Interest expense 26,103 24,448 22,434 21,666 20,899
----------------------------------------------------------
Net interest income 30,218 29,864 28,548 28,580 28,276
Provision for loan losses 1,940 1,936 1,750 1,500 1,500
----------------------------------------------------------
Net interest income after provision for loan losses 28,278 27,928 26,798 27,080 26,776
----------------------------------------------------------
Other Income:
Income from fiduciary activities 2,270 2,081 2,022 1,750 2,084
Service charges on depositor accounts 1,910 1,981 1,856 1,734 1,692
Card product income 787 822 720 938 764
Loan servicing income 630 640 641 695 716
Gain on sale of mortgage servicing rights 896 -- 48 6 79
Net loan transactions 381 183 235 413 257
Net securities transactions 163 6 18 7 21
All other 964 862 1,086 961 844
----------------------------------------------------------
Total other income 8,001 6,575 6,626 6,504 6,457
Other Expenses:
Salaries 9,923 9,443 8,966 9,117 9,278
Employee benefits 2,044 1,963 2,326 1,898 2,057
Net occupancy expenses 1,981 1,948 1,975 1,971 1,669
Equipment and software expenses 1,791 1,733 1,756 1,958 1,569
Data processing fees 1,256 1,223 1,207 1,156 1,111
FDIC deposit insurance and other regulatory expenses 197 194 187 129 134
OREO and repossession expenses 287 264 97 96 267
Amortization of goodwill 1,305 1,306 1,306 1,305 1,297
Capital securities expense 789 526 -- -- --
All other 5,498 5,434 5,161 5,731 5,794
----------------------------------------------------------
Total other expenses 25,071 24,034 22,981 23,361 23,176
----------------------------------------------------------
Income before income taxes 11,208 10,469 10,443 10,223 10,057
Income tax expense 3,618 3,380 3,393 3,190 3,244
----------------------------------------------------------
Net income $ 7,590 $ 7,089 $ 7,050 $ 7,033 $ 6,813
==========================================================
Average Balances:
Loans $1,933,960 $1,914,211 $1,864,504 $1,838,093 $1,797,510
Loans held for sale 20,957 12,730 12,400 12,010 14,497
Securities available for sale 708,841 635,124 543,846 488,277 474,626
Investment securities 27,074 30,125 33,153 35,846 40,151
Money market investments 7,934 5,684 7,726 1,631 9,835
----------------------------------------------------------
Total earning assets 2,698,766 2,597,874 2,461,629 2,375,857 2,336,619
Other assets 150,980 145,558 155,869 161,445 157,757
----------------------------------------------------------
Total assets $2,849,746 $2,743,432 $2,617,498 $2,537,302 $2,494,376
==========================================================
Demand deposits $ 293,979 $ 278,612 $ 273,764 $ 284,835 $ 272,492
Interest-bearing deposits 1,830,540 1,798,630 1,792,078 1,779,766 1,788,238
----------------------------------------------------------
Total deposits 2,124,519 2,077,242 2,065,842 2,064,601 2,060,730
Short-term borrowed funds 430,360 388,903 295,780 215,332 172,217
Long-term debt 20,196 22,607 24,887 31,497 44,713
Other liabilities 21,387 23,701 23,311 22,027 21,426
Corporation-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely junior
subordinated debentures of the Corporation 30,000 20,110 -- -- --
Shareholders' equity 223,284 210,869 207,678 203,845 195,290
----------------------------------------------------------
Total liabilities, corporation-obligated mandatorily redeemable
capital securities and shareholders' equity $2,849,746 $2,743,432 $2,617,498 $2,537,302 $2,494,376
==========================================================
Loans charged off, net of recoveries $ 842 $ 1,611 $ 1,632 $ 2,264 $ 1,885
Non-performing assets, p.e. 18,545 16,302 20,189 19,889 23,330
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. $ 25.08 $ 23.42 $ 22.10 $ 21.80 $ 20.74
Cash dividends declared 0.29 0.29 0.29 0.25 0.25
Net income 0.97 0.91 0.90 0.90 0.87
Closing price at quarter end 54.63 46.25 40.50 41.50 37.38
Cash dividends declared as a % of net income 29.90% 31.87% 32.22% 27.78% 28.74%
Key Ratios:
Return on average assets 1.06% 1.04% 1.09% 1.10% 1.09%
Return on average shareholders' equity 13.49 13.48 13.77 13.73 13.88
Net interest margin, fte 4.46 4.63 4.73 4.81 4.83
Efficiency ratio 62.93 61.43 61.37 62.35 61.33
Expense ratio 2.43 2.45 2.49 2.59 2.54
As a % of risk-adjusted assets, p.e.:
Total capital 12.08 11.72 10.43 10.35 10.45
Tier 1 capital 10.87 10.55 9.22 9.11 9.19
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 7.98 7.94 6.92 6.91 6.78
Tangible shareholders' equity, to tangible assets, p.e. 6.91 6.51 6.62 6.65 6.56
Price earnings ratio (last 4 reported quarters) 14.8 12.9 11.4 12.6 11.5
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K dated October 30, 1997 relating to a press release announcing
a stock buyback plan. The Company plans to buy back up to 5%, or 391,332
shares of its outstanding common stock. The Company has 7.8 million
outstanding shares. The text of the press release is attached as an exhibit
to this report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized.
BANKNORTH GROUP, INC.
Registrant
Date: 11/13/97 /S/ Thomas J. Pruitt
--------------------------------------
Thomas J. Pruitt
Executive Vice President and Chief
Financial Officer
Date: 11/13/97 /S/ Neal E. Robinson
--------------------------------------
Neal E. Robinson
Senior Vice President
and Treasurer
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 borrowed funds and long-term
debt.
Liquidity
The ability to meet both loan commitments and deposit withdrawals as they
come due.
Net loans charged off
Reductions to the allowance for loan losses for loans written off, net of
the recovery of loans previously written off.
Net interest income
The difference between income on earning assets and interest expense on
interest-bearing liabilities.
Net interest margin
Fully taxable-equivalent basis net interest income as a percentage of
average earning assets.
Net loan transactions
Gains and losses resulting from sales of loans, primarily by the mortgage
banking operation.
Net securities transactions
Gains and losses resulting from sales of securities available for sale at
prices above or below the amortized cost of the securities sold and gains
realized on the call of certain securities.
Non-accrual loans
Loans for which no periodic accrual of interest income is realized.
Non-performing assets
When other real estate owned (OREO) is added to non-performing loans, the
result is defined as non-performing assets.
Non-performing loans
Non-performing loans are defined as all non-accrual and restructured
loans, and all loans which are 90 days or more past-due but still accruing
interest.
Other operating expenses
All expenses other than interest expense and the provision for loan
losses.
Other operating income
All income other than interest income and dividend income.
Other real estate owned (OREO)
Real estate acquired through foreclosure or in-substance foreclosure.
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 results 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>
<ARTICLE> 9
<CIK> 0000851105
<NAME> BANKNORTH GROUP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
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<INVESTMENTS-CARRYING> 26,171
<INVESTMENTS-MARKET> 26,455
<LOANS> 1,938,824
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30,000
0
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<INTEREST-INCOME-NET> 88,630
<LOAN-LOSSES> 5,626
<SECURITIES-GAINS> 187
<EXPENSE-OTHER> 72,086
<INCOME-PRETAX> 32,120
<INCOME-PRE-EXTRAORDINARY> 32,120
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,729
<EPS-PRIMARY> 2.78
<EPS-DILUTED> 2.78
<YIELD-ACTUAL> 4.60
<LOANS-NON> 15,816
<LOANS-PAST> 1,655
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<ALLOWANCE-CLOSE> 25,061
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