UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number (0-18173)
BANKNORTH GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 03-0321189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 FINANCIAL PLAZA
P.O. BOX 5420
BURLINGTON, VERMONT
(Address of principal executive offices)
05401
(Zip code)
(802) 658-9959
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (l) has filed all reports
required to be filed by Section l3 or l5(d) of the Securities Exchange Act of
l934 during the preceding l2 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
15,339,296 shares of common stock, $l.00 par, outstanding on March 31, 1998.
INDEX TO FORM 10-Q
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PART I PAGE
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Financial Highlights (Unaudited) 1
Item l Interim Financial Statements
Consolidated Statements of Income for the Three Months
Ended March 31, 1998 and 1997 (Both unaudited) 2
Consolidated Balance Sheets at March 31, 1998
(Unaudited), December 31, 1997 and March 31, 1997
(Unaudited) 3
Statements of Changes in Shareholders' Equity for the
Period January 1, 1997 to March 31, 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1997 (Both unaudited) 5
Notes to Unaudited Interim Consolidated Financial
Statements 6
Independent Auditors' Report 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures about Market Risk 13
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PART II
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Item 1 Legal Proceedings N/A
Item 2 Changes in Securities N/A
Item 3 Defaults Upon Senior Securities N/A
Item 4 Submission of Matters to a Vote of Security Holders N/A
Item 5 Other Information N/A
Item 6 Exhibits and Reports on Form 8-K N/A
Signatures 27
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1st Quarter 1998 Financial Highlights (Unaudited)
<TABLE>
Three Months Twelve Months
Ended March 31, Ended December 31,
---------------------------- -----------------------------
(Dollars in thousands, except share and per share data) 1998 1997 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME DATA
Net interest income, taxable equivalent $ 29,799 $ 28,686 $ 119,741 $ 109,467
Net interest margin 4.43% 4.73% 4.57% 4.86%
Net income $ 6,924 $ 7,050 $ 30,489 $ 25,390
SHARE AND PER SHARE DATA
Basic wtd. avg. number of shares outstanding 15,450,990 15,553,496 15,610,254 15,320,424
Basic earnings per share (Basic EPS) $ 0.45 $ 0.45 $ 1.95 $ 1.66
Diluted wtd. avg. number of shares outstanding 15,709,954 15,751,670 15,833,538 15,469,382
Diluted earnings per share (Diluted EPS) $ 0.44 $ 0.45 $ 1.93 $ 1.64
Shares outstanding, net of treasury shares, p.e. 15,339,296 15,653,296 15,499,296 15,653,296
Book value, p.e. $ 14.99 $ 13.27 $ 14.83 $ 13.21
Tangible book value, p.e. 13.06 11.05 12.84 10.90
Cash dividends declared 0.16 0.145 0.58 0.50
Market price:
High 37.38 23.13 33.50 20.75
Low 27.63 20.00 20.00 15.75
Close 36.50 20.25 32.13 20.75
Share volume 2,161,724 1,798,732 7,907,500 7,546,276
Average monthly share volume 720,575 599,577 658,958 628,856
Price/Basic EPS (last four reported quarters) 18.7 11.4 16.5 12.5
Price/Diluted EPS (last four reported quarters) 19.0 11.5 16.7 12.7
AVERAGE BALANCES
Assets $ 2,916,000 $ 2,617,498 $ 2,772,807 $ 2,405,407
Earning assets 2,731,060 2,457,419 2,617,544 2,247,267
Loans 1,963,829 1,864,504 1,916,097 1,730,720
Goodwill 30,358 35,600 33,650 34,582
Deposits 2,183,436 2,065,842 2,109,049 1,989,006
Short-term borrowed funds 428,723 295,780 382,168 159,672
Long-term debt 20,553 24,887 21,294 43,951
Corporation-obligated mandatorily redeemable capital
securities 30,000 --- 20,137 ---
Shareholders' equity 228,650 207,678 217,657 191,279
KEY RATIOS
Return on average assets 0.96% 1.09% 1.10% 1.06%
Return on average shareholders' equity 12.28 13.77 14.01 13.27
Efficiency ratio 62.56 61.37 62.06 62.11
Net loan charge-offs to average loans 0.15 0.35 0.29 0.34
Provision for loan losses to average loans 0.38 0.38 0.40 0.32
Allowance for loan losses to loans, p.e. 1.36 1.24 1.31 1.27
Allowance for loan losses coverage of non-performing
loans, p.e. 178.48 123.27 175.08 124.00
Non-performing assets to total assets, p.e. 0.55 0.76 0.56 0.76
Total capital to risk-adjusted assets, p.e. 11.72 10.43 11.83 10.35
Tier 1 capital to risk-adjusted assets, p.e. 10.48 9.22 10.63 9.11
Tier 1 capital to quarterly average total assets (Leverage) 7.88 6.92 7.97 6.91
Tangible shareholders' equity to tangible assets, p.e. 6.84 6.62 6.88 6.65
</TABLE>
Note: All share and per share data has been restated for the effect of the
2-for-1 stock split declared February 24, 1998.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
(Dollars in thousands, except per share data) 1998 1997
------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $44,144 $41,832
Interest on money market investments 45 114
Interest on securities available for sale 11,394 8,448
Interest on investment securities 412 588
------------------
Total interest income 55,995 50,982
Interest expense:
Deposits 20,408 18,384
Short-term borrowed funds 5,656 3,655
Long-term debt 336 395
------------------
Total interest expense 26,400 22,434
------------------
Net interest income 29,595 28,548
Less: provision for loan losses 1,845 1,750
------------------
Net interest income after provision for loan losses 27,750 26,798
------------------
Other operating income:
Income from trust and investment management fees 2,222 2,022
Service charges on deposit accounts 2,163 1,856
Card product income 408 720
Loan servicing income 417 689
Net loan transactions 611 235
Net securities transactions (439) 18
Bank owned life insurance 540 --
Other income 1,262 1,086
------------------
Total other operating income 7,184 6,626
Other operating expenses:
Compensation 9,842 8,966
Employee benefits 2,301 2,326
Net occupancy 2,008 1,975
Equipment and software 1,736 1,756
Data processing 1,151 1,207
Other real estate owned and repossession 222 97
Legal and professional 941 794
Printing and supplies 565 597
Advertising and marketing 688 614
Communications 592 587
Amortization of goodwill 1,306 1,306
Capital securities 789 --
Other expenses 2,915 2,756
------------------
Total other operating expenses 25,056 22,981
------------------
Income before income tax expense 9,878 10,443
Income tax expense 2,954 3,393
------------------
Net income $ 6,924 $ 7,050
==================
Basic earnings per share $ 0.45 $ 0.45
==================
Diluted earnings per share $ 0.44 $ 0.45
==================
</TABLE>
Note: All per share data has been restated for the effect of the 2-for-1
stock split declared February 24, 1998.
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
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<CAPTION>
March 31, December 31, March 31,
(Dollars in thousands, except share and per share data) 1998 1997 1997
-----------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
Cash and due from banks $ 88,591 $ 85,734 $ 84,726
Money market investments 100 50 101
----------------------------------------
Cash and cash equivalents 88,691 85,784 84,827
----------------------------------------
Securities available for sale, at fair value 710,426 710,308 542,861
Loans held for sale 46,549 24,958 8,533
Investment securities 22,598 23,972 31,977
Loans 1,969,114 1,960,629 1,899,495
Less: allowance for loan losses 26,850 25,721 23,638
----------------------------------------
Net loans 1,942,264 1,934,908 1,875,857
----------------------------------------
Accrued interest receivable 14,864 16,115 15,275
Premises, equipment and software, net 28,537 29,446 29,341
Other real estate owned and repossessed assets 1,238 1,574 1,013
Goodwill 29,613 30,919 34,836
Capitalized mortgage servicing rights 4,911 4,650 4,233
Bank-owned life insurance 40,617 40,077 -
Other assets 25,762 20,266 19,907
----------------------------------------
Total assets $2,956,070 $2,922,977 $2,648,660
========================================
Liabilities, Corporation-Obligated Mandatorily Redeemable
Capital Securities and Shareholders' Equity
Deposits:
Non-interest bearing $ 307,814 $ 324,320 $ 281,164
NOW accounts & money market savings 939,028 895,682 787,801
Regular savings 182,044 185,453 212,651
Time deposits $100 thousand and greater 96,643 103,998 88,173
Time deposits under $100 thousand 675,273 690,367 708,527
----------------------------------------
Total deposits 2,200,802 2,199,820 2,078,316
----------------------------------------
Short-term borrowed funds:
Federal funds purchased 22,880 700 12,430
Securities sold under agreements to repurchase 135,752 139,347 147,643
Borrowings from U.S. Treasury 14,630 19,730 16,839
Borrowings from Federal Home Loan Bank of Boston 272,000 263,000 140,000
----------------------------------------
Total short-term borrowed funds 445,262 422,777 316,912
----------------------------------------
Long-term debt:
Federal Home Loan Bank of Boston term notes 11,884 6,139 11,329
Bank term loan 9,750 10,400 12,350
----------------------------------------
Total long-term debt 21,634 16,539 23,679
----------------------------------------
Accrued interest payable 4,969 4,721 4,257
Other liabilities 23,521 19,248 17,722
----------------------------------------
Total liabilities 2,696,188 2,663,105 2,440,886
----------------------------------------
Corporation-obligated mandatorily redeemable capital securities 30,000 30,000 -
Shareholders' equity:
Common stock, $1.00 par value; authorized 20,000,000 shares;
issued 15,653,296 shares as of March 31, 1998 and December
31, 1997, and 7,826,648 shares as of March 31, 1997 15,653 15,653 7,827
Surplus 84,132 83,770 87,377
Retained earnings 138,522 134,486 119,755
Unamortized employee restricted stock (1,521) (1,550) (1,028)
Accumulated other comprehensive income 2,913 2,311 (6,157)
Less: Common stock in treasury, at cost:
314,000 shares as of March 31, 1998, 154,000 shares as of
December 31, 1997 and no shares as of March 31, 1997 (9,817) (4,798) -
----------------------------------------
Total shareholders' equity 229,882 229,872 207,774
----------------------------------------
Total liabilities, corporation-obligated mandatorily redeemable
capital securities and shareholders' equity $2,956,070 $2,922,977 $2,648,660
========================================
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unamortized Accumulated
Employee Other
Dollars in thousands, Common Retained Restricted Comprehensive Treasury Comprehensive
except per share data) Stock Surplus Earnings Stock Income Stock Income Total
------- ------- -------- ----------- ------------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 7,827 $87,410 $115,130 $(1,153) $(2,477) $ -- $206,737
Comprehensive income:
Net income -- -- 30,489 -- -- -- $30,489 30,489
-------
Other comprehensive income, net
of tax:
Unrealized net holding gains
arising during the year
(pre-tax $7,654) -- -- -- -- -- -- 4,954
Reclassification adjustment for
net gains realized in net
income during the year
(pre-tax $258) -- -- -- -- -- -- (166)
-------
Other comprehensive income 4,788 4,788 4,788
-------
Comprehensive income $35,277
=======
Cash dividends $.58 per share -- -- (9,069) -- -- -- (9,069)
Issuance of employee restricted
stock -- -- -- (315) -- -- (315)
Amortization of employee restricted
stock -- 851 -- (82) -- -- 769
Issuance of restricted stock units
under directors' deferred
compensation plan, net -- 3,335 (4) -- -- -- 3,331
Exercise of employee stock options,
net -- -- (2,060) -- -- -- (2,060)
Purchase of treasury stock, net -- -- -- -- -- (4,798) (4,798)
2-for-1 stock split 7,826 (7,826) -- -- -- -- --
-----------------------------------------------------------------------------------------
Balance, December 31, 1997 $15,653 $83,770 $134,486 $(1,550) $ 2,311 $(4,798) $229,872
=========================================================================================
Comprehensive income:
Net income -- -- 6,924 -- -- -- $ 6,924 6,924
-------
Other comprehensive income, net
of tax:
Unrealized net holding gains
arising during the quarter
(pre-tax $517) -- -- -- -- -- -- 318
Reclassification adjustment for
net losses realized in net
income during the quarter
(pre-tax $439) -- -- -- -- -- -- 284
-------
Other comprehensive income 602 602 602
-------
Comprehensive income $ 7,526
=======
Cash dividends $ .16 per share -- -- (2,472) -- -- -- (2,472)
Amortization of employee restricted
stock -- 217 -- 29 -- -- 246
Issuance of restricted stock units
under directors' deferred
compensation plan, net -- 145 (3) -- -- -- 142
Exercise of employee stock options,
net -- -- (413) -- -- -- (413)
Purchase of treasury stock, net -- -- -- -- -- (5,019) (5,019)
-----------------------------------------------------------------------------------------
Balance, March 31, 1998 $15,653 $84,132 $138,522 $(1,521) $ 2,913 $(9,817) $229,882
=========================================================================================
</TABLE>
Note: All per share data has been restated for the effect of the 2-for-1
stock split declared February 24, 1998.
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<CAPTION>
Three Months Ended March 31,
----------------------------
(Dollars in thousands) 1998 1997
----------------------------
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Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 6,924 $ 7,050
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of premises, equipment and software 1,225 1,186
Amortization of goodwill 1,306 1,306
Net amortization of securities available for sale 790 795
Net accretion of investment securities (70) (93)
Provision for loan losses 1,845 1,750
Adjustment of other real estate owned to estimated fair value -- 65
Provision for deferred tax expense (benefit) (79) 185
Amortization of employee restricted stock 246 92
Exercise of employee stock options, net (413) (155)
Issuance of restricted stock units under directors' deferred
compensation plan, net 142 --
Net (increase) decrease in trading account assets 11 --
Net securities transactions 439 (18)
Net gain on sale of securities held for trading (12) --
Net gain on sale of other real estate owned and repossessed assets (82) (151)
Proceeds from sale of loans held for sale 55,133 25,165
Originations and purchases of loans held for resale (76,113) (21,357)
Net gain on sale of loans held for sale (611) (235)
Decrease (increase) in interest receivable 1,251 (127)
Increase in interest payable 248 343
Decrease (increase) in other assets and other intangibles (6,127) 3,306
Increase (decrease) in other liabilities 4,273 (502)
---------------------------
Total adjustments (16,598) 11,555
---------------------------
Net cash provided by (used in) operating activities (9,674) 18,605
---------------------------
Cash flows from investing activities:
Proceeds from maturity and call of securities available for sale 46,442 15,188
Proceeds from maturity and call of investment securities 1,456 2,328
Proceeds from sale of securities available for sale 85,495 --
Purchase of securities available for sale (132,340) (33,469)
Proceeds from sale of OREO and repossessed assets 827 943
Loans purchased -- (26,352)
Net increase in originated loans (9,610) (27,492)
Capital expenditures (760) (1,085)
---------------------------
Net cash used in investing activities (8,490) (69,939)
---------------------------
Cash flows from financing activities:
Net increase in deposits 982 12,252
Net increase in short-term borrowed funds 22,485 36,451
Purchase of treasury stock, net (5,019) --
Issuance of long-term debt 7,645 --
Payments on long-term debt (2,550) (2,244)
Dividends paid (2,472) (2,270)
---------------------------
Net cash provided by financing activities 21,071 44,189
---------------------------
Net increase (decrease) in cash and cash equivalents 2,907 (7,145)
---------------------------
Cash and cash equivalents at beginning of period 85,784 91,972
---------------------------
Cash and cash equivalents at end of period $ 88,691 $ 84,827
===========================
Additional disclosure relative to statement of cash flows:
Interest paid $ 26,152 $ 22,091
===========================
Taxes paid $ 3,523 $ 106
===========================
Supplemental schedule of non-cash investing and financing activities:
Net transfer of loans to OREO and repossessed assets $ 409 $ 949
Adjustment to securities available for sale to fair value,
net of tax 602 (3,680)
Amounts receivable for trading securities sold 3,972 --
Amounts payable for trading securities purchased (3,971) --
</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 March 31, 1998 and 1997, the
Consolidated Statements of Income for the three months ended March 31,
1998 and 1997, and the Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 and the Consolidated
Statements of Changes in Shareholders' Equity for the three month period
ended March 31, 1998 and the year ended December 31, 1997. The
accompanying unaudited interim consolidated financial statements should
be read in conjunction with Banknorth Group, Inc.'s consolidated year end
financial statements, including notes thereto, which are included in
Banknorth Group, Inc.'s 1997 annual report to shareholders on Form 10-K.
2. Basic EPS excludes dilution and is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding for the period. Issuable shares (such as those related to
the directors' restricted stock units), and returnable shares (such as
restricted stock awards) are considered outstanding common shares and
included in the computation of basic earnings per share as of the date
that all necessary conditions have been satisfied. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity (such as the Company's stock options). Share and
per share data has been adjusted for the 2 for 1 stock split declared by
the Company on February 24, 1998.
The following table provides calculations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------------
Weighted Weighted
(Dollars in thousands, except for share Average Per Share Average Per Share
and per share data) Net Income Shares Amount Net Income Shares Amount
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $6,924 15,450,990 $0.45 $7,050 15,553,496 $0.45
===== =====
Effect of dilutive securities:
Stock options 228,200 164,558
Restricted stock awards 30,764 33,616
---------- ----------
Diluted earnings per share $6,924 15,709,954 $0.44 $7,050 15,751,670 $0.45
=======================================================================
</TABLE>
3. On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of
comprehensive income and its components. Comprehensive income includes
the reported net income of a company adjusted for items that are
currently accounted for as direct entries to equity, such as the mark to
market adjustment on securities available for sale, foreign currency
items and minimum pension liability adjustments. At the Company,
comprehensive income represents net income plus other comprehensive
income, which consists of the net change in unrealized gains or losses on
securities available for sale for the period. Accumulated other
comprehensive income represents the net unrealized gains or losses on
securities available for sale as of the balance sheet dates.
Comprehensive income for the three month periods ended March 31, 1998 and
1997 was $7.5 million and $3.4 million, respectively.
4. In February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," which amends the disclosure requirements of SFAS No. 87,
"Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting
for Certain Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits," and SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions." SFAS No. 132
standardizes the disclosure requirements of SFAS No. 87 and No. 106 to
the extent practicable and recommends a parallel format for presenting
information about pensions and other postretirement benefits. This
Statement is applicable to all entities and addresses disclosure only.
The Statement does not change any of the measurement or recognition
provisions provided for in SFAS No. 87, No. 88, or No. 106. The Statement
is effective for fiscal years beginning after December 15, 1997.
Management anticipates providing the required disclosures in the December
31, 1998 consolidated financial statements.
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 March 31, 1998 and
1997, and the related consolidated statements of income, and cash flows for the
three-month periods ended March 31, 1998 and 1997, and the consolidated
statements of changes in shareholders' equity for the three months ended March
31, 1998. These consolidated financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists prinicipally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Banknorth Group, Inc. and
subsidiaries as of December 31, 1997, and the related consolidated statements
of income and cash flows for the year then ended (not presented herein) and the
consolidated statement of changes in shareholders' equity for the year then
ended; and in our report dated January 23, 1998, except for note 15 which is as
of February 24, 1998, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1997 and the
consolidated statements of changes in shareholders' equity for the year ended
December 31, 1997, is fairly stated, in all material respects, in relation to
the consolidated balance sheet and statement of changes in shareholders' equity
from which it has been derived.
/S/ KPMG PEAT MARWICK LLP
Albany, New York
April 17, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The financial review which follows focuses on the factors affecting the
consolidated financial condition and results of operations of Banknorth Group,
Inc. ("the parent company") and its subsidiaries during the three months ended
March 31, 1998, with comparisons to 1997, as applicable. Collectively, the
parent company and its subsidiaries are referred to herein as "Banknorth" or
"Company". Net interest income and net interest margin are presented in this
discussion on a fully taxable equivalent basis (f.t.e.). Balances discussed are
daily averages unless otherwise described. The unaudited consolidated interim
financial statements, as well as the 1997 annual report to shareholders' should
be read in conjunction with this review. Amounts in prior period consolidated
financial statements are reclassified whenever necessary to conform to the
current period's presentation.
Except for historical information contained herein, the matters contained
in this review are "forward-looking statements" that involve risk and
uncertainties, including statements concerning future events or performance and
assumptions and other statements which are other than statements of historical
facts. The Company wishes to caution readers that the following important
factors, among others, could in the future affect the Company's actual results
and could cause the Company's actual results for subsequent periods to differ
materially from those expressed in any forward-looking statement made by or on
behalf of the Company herein:
* the effect of changes in laws and regulations, including federal
and state banking laws and regulations, with which the Company and
its banking subsidiaries must comply, the cost of such compliance
and the potentially material adverse effects if the Company or any
of its banking subsidiaries were not in substantial compliance
either currently or in the future as applicable;
* the effect of changes in accounting policies and practices, as may
be adopted by the regulatory agencies as well as by the Financial
Accounting Standards Board, or changes in the Company's
organization, compensation and benefit plans;
* the effect on the Company's competitive position within its market
area of increasing consolidation within the banking industry and
increasing competition from larger "super regional" and other
banking organizations as well as non-bank providers of various
financial services;
* the effect of certain customers and vendors of critical systems or
services failing to adequately address issues relating to becoming
year 2000 compliant;
* the effect of unforeseen changes in interest rates;
* the effects of changes in the business cycle and downturns in the
local, regional or national economies.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including those described above, could cause the
Company's actual results or circumstances for future periods to differ
materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made
to any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
OVERVIEW
Banknorth recorded net income of $6.9 million, representing basic
earnings per share ("EPS') of $.45 and $.44 diluted EPS, for the three months
ended March 31, 1998, compared to $7.1 million, or $.45 basic EPS, and $.45
diluted EPS for the three months ended March 31, 1997.
During the first quarter of 1998:
* Banknorth's stock price closed at $36.50 per share on March 31,
1998.
* The Company announced a 2-for-1 stock split in the form of a 100%
stock dividend which took effect on April 6, 1998.
* Retail loan production volume at Banknorth Mortgage Company, the
Company's mortgage banking subsidiary, was at record levels due to
the current low interest rate environment.
* The Company sold approximately $85.5 million of balloon
mortgage-backed securities held in the available for sale
portfolio. While the sale resulted in a pre-tax loss of $504
thousand, the enhanced yield received through reinvestment will
result in recovery of the loss in 1998 and enhanced earnings
prospectively. The effect of the loss on an after tax basis was two
cents on diluted earnings per share.
* 160,000 shares of the Company's common stock was repurchased in
accordance with the previously announced stock buyback plan.
STOCK SPLIT
On February 24, 1998, the board of directors declared a 2-for-1 split of
its common stock effected in the form of a 100% stock dividend. The new shares
were issued on April 6, 1998, to shareholders of record on March 20, 1998. The
stock split was recorded as of December 31, 1997 by a transfer of $7.8 million
from surplus to common stock, representing the $1.00 par value for each
additional share issued. All share and per share data has been restated to
reflect the split.
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
92.99% and 93.74% of total assets at March 31, 1998 and 1997, respectively.
Banknorth, through its management of liabilities, attempts to provide
stable and flexible sources of funding within established liquidity and
interest rate risk guidelines. This is accomplished through core deposit
products offered within the markets served by the Company as well as through
the prudent use of purchased liabilities.
Banknorth's objectives in managing its balance sheet are to limit the
sensitivity of net interest income to actual or potential changes in interest
rates, and to enhance profitability through strategies that promise sufficient
reward for understood and controlled risk. The Company is deliberate in its
efforts to maintain adequate liquidity, under prevailing and forecasted
economic conditions, and to maintain an efficient and appropriate mix of core
deposits, purchased liabilities and long-term debt.
Corporation-Obligated Mandatorily Redeemable Capital Securities
On May 1, 1997, Banknorth established Banknorth Capital Trust I (the
"Trust") which is a statutory business trust formed under Delaware law upon
filing a certificate of trust with the Delaware Secretary of State. The Trust
exists for the exclusive purposes of (i) issuing and selling 30 year
corporation-obligated mandatorily redeemable capital securities ("capital
securities") in the aggregate amount of $30.0 million at 10.52%, (ii) using the
proceeds from the sale of the capital securities to acquire the junior
subordinated debentures issued by the parent 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
debentures are the sole revenue of the Trust. All of the common securities of
the Trust are owned by the parent company. The Company has used the net
proceeds from the sale of the capital securities for general corporate
purposes. The capital securities, with associated expense that is tax
deductible, qualify as Tier I capital under regulatory definitions. The parent
company's primary sources of funds to pay interest on the debentures are
current dividends from subsidiary banks. Accordingly, the parent company's
ability to service the debentures is dependent upon the continued ability of
the subsidiary banks to pay dividends.
Earning Assets
Earning assets were $2.7 billion during the first quarter of 1998, an
increase of $273.6 million, or 11.1% from the first quarter of 1997. Table A,
Mix of Average Earning Assets, shows how the mix of earning assets has changed
as compared to the same period in 1997.
Loans. Average total loans of $2.0 billion during the three months ended
March 31, 1998, were $99.3 million, or 5.3%, above the same period of 1997. The
increase in total loans from year to year is attributable to strong loan demand
in the Massachusetts market and improved lending activity in Vermont and New
Hampshire. Table B, Loan Portfolio, provides the detailed components of the
loan portfolio as of March 31, 1998 and 1997, as well as December 31, 1997.
Given the current economic indicators and interest rate environment,
management believes that the Company will see continued but slowing growth in
the loan portfolio during 1998. 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 and held in its mortgage portfolio. Loans held for sale were $29.9
million during the first quarter of 1998, $17.5 million, or 141.3% higher than
the average for the three-month period ending March 31, 1997, and $10.2 million
or 51.9% higher than the average for the fourth quarter of 1997. New loan
originations and refinancing activity is at record levels due to the current
low market interest rates. This high production level results in a greater
level of mortgage product awaiting sale into the secondary market. Management
expects production will continue to be strong throughout the first half of
1998.
Securities available for sale. This portfolio is managed on a total
return basis with the objective of exceeding, by 50 basis points, the return
that would be experienced if investing solely in U.S. Treasury instruments.
This category of investments is used primarily for liquidity purposes while
simultaneously producing earnings, and is managed under prudent policy limits
established for average duration, average convexity and average portfolio life.
Period end balances in securities available for sale totaled $710.4
million at March 31, 1998 as compared to $542.9 million at March 31, 1997, an
increase of $167.6 million or 30.9%. The March 1998 balance is stated net of a
fair value adjustment reflecting net unrealized gains of $4.5 million, whereas
the March 1997 balance is net of a fair value adjustment reflecting net
unrealized losses of $9.7 million. The increase in the portfolio balance noted
above was primarily the result of the Company increasing its holdings of
securities available for sale in order to effectively leverage the net proceeds
of the capital securities, and the re-investment of cash flows generated by the
held-to-maturity portfolio into the available for sale portfolio. These
increases were partially offset by the Company's purchase of $40.0 million in
bank-owned life insurance ("BOLI") in the fourth quarter of 1997. Securities
available for sale were allowed to mature or were sold in order to provide the
funding necessary to implement the BOLI program. Average balances for
securities available for sale for the three months ended March 31, 1998 and
1997 were $711.1 million and $539.6 million, respectively.
In January 1998, Banknorth sold approximately $85.5 million of balloon
mortgage-backed securities from the available for sale portfolio. While the
sales resulted in a pre-tax net loss of $504 thousand, the enhanced yield
received through re-investment will result in recovery of the loss prior to the
end of 1998. Investment securities yielding approximately 5.12% were sold and
replaced with securities yielding approximately 6.48%. After recovering the
$504 thousand loss incurred, Banknorth anticipates additional interest income
of approximately $523 thousand during 1998 and approximately $994 thousand in
improved interest income in 1999 as a result of this sale. The new investment
securities purchased, as well as the characteristics of the portfolio after the
transaction, meet all established corporate guidelines.
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 on
yield and earnings generation, liquidity through cash flow and interest rate
risk characteristics within the framework of the entire balance sheet. Cash
flow guidelines and average duration targets have been established for
management of this portfolio. As of March 31, 1998, the balance of securities
in this category was $22.6 million, $9.4 million below the balance at March 31,
1997. The primary cause of the reduced portfolio size was the reinvestment of
cash flows from maturities during 1997 and thus far in 1998 into the available
for sale portfolio.
Table C, Securities Available for Sale and Investment Securities contains
details of investment securities at March 31, 1998 and 1997, as well as
December 31, 1997.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $2.9 million during the first quarter of 1998, down $4.8
million, or 61.9%, from the first quarter of 1997. Subsidiary banks with excess
overnight cash positions invest such funds with other subsidiary banks that may
have short term funding needs. This internal settlement, performed prior to
purchasing funds in the market, reduces funding costs and improves overall
liquidity.
Income on earning assets. Income from earning assets was $56.2 million
for the three-month period ended March 31, 1998, as compared to $51.1 million
for the same period in 1997. The increase of $5.1 million, or 9.9%, resulted
from the increases in earning assets through normal growth and asset purchases
described previously. Total earning assets during the first quarter of 1998 of
$2.7 billion yielded 8.36%, while in 1997 earning assets of $2.5 billion
yielded 8.42%. The increase in earning assets contributed $5.4 million towards
the increase in interest income, while the decline in yield of 6 basis points
resulted in $364 thousand less in interest income. Table D, Average Balances,
Yields and Net Interest Margins and Table F, Volume and Yield Analysis contain
details of changes by category of interest income from earning assets.
Funding Sources
Banknorth utilizes various traditional sources of funding to support its
earning asset portfolios. Average total net funding increased by $246.2
million, or 10.3%, in the first quarter of 1998 in comparison to the average
for the quarter ended March 31, 1997. Table E, Average Sources of Funding,
presents the various categories of funds used and the corresponding average
balances for the first quarter of 1998 and 1997.
Deposits. Total core deposits average $2.1 billion during the three month
period ended March 31, 1998, $110.1 million, or 5.6%, over the first quarter
average of 1997. NOW and money market accounts increased by $135.9 million,
while retail time deposits in denominations less than $100,000 decreased by
$20.6 million and regular savings decreased $30.0 million. In the current low
rate environment, the indexed money market product offered is an attractive
option for our customers. Total core deposits represented 79.2% of total net
funding during the first quarter of 1998 as compared to 82.8% during the same
quarter of 1997.
Purchased liabilities. Total purchased liabilities increased on average
by $138.7 million to $537.6 million during the first quarter of 1998 from
$398.9 million during the first quarter of 1997. The increased borrowings, or
purchased liabilities, were the result of the incremental funding requirements
related to loan and investment purchases made during 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 capital 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 and long-term debt to continue to be important
sources of funding.
Bank Debt. Average bank debt of $10.4 million during the first quarter of
1998 represents the 1994 funding of the acquisition of North American Bank
Corporation. Banknorth financed the transaction with a bank credit facility
whose original terms were re-negotiated in December 1996. The re-negotiated
terms provide improved pricing and an extension of the repayment period. The
balance of $9.8 million at March 31, 1998 will be repaid within four years.
Interest expense summary. Total interest expense for the three months
ended March 31, 1998 was $26.4 million, an increase of $4.0 million or 17.7%,
as compared to the same period of 1997. Increased levels of interest-bearing
liabilities contributed $2.5 million to the increase while the increase in
rates paid increased interest expense by $1.5 million. The cost of interest
bearing liabilities was 4.59% in the first quarter of 1998, an increase of 28
basis points from the first quarter of 1997.
Tables 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 $29.8 million and $28.7 million for the three
month periods ended March 31, 1998 and 1997, respectively. The net interest
margin was 4.43% during the first quarter of 1998 as compared to 4.73% during
the same period of 1997. The yield on earning assets of 8.36% for the first
quarter of 1998, was 6 basis points below the corresponding period of the prior
year. Interest rates generally decreased during 1997 and the first quarter of
1998. This trend of the decreasing yield on earning assets was experienced
throughout 1996 and 1997. During the fourth quarter of 1997, the net interest
margin was 4.48%, 9 basis points below the margin for the full year of 1997.
The net interest margin narrowed during 1997 and to date in 1998 as competition
for quality credits and retail deposits resulted in a tighter spread between
asset yields and deposit costs. A changing mix of deposits where higher cost
deposits, such as money market accounts, are increasing whereas lower cost
deposits are declining contributed to the narrowing margin.
Also impacting the net interest margin was the issuance of $30.0 million
in corporation-obligated mandatorily redeemable capital securities in May 1997.
In an effort to increase interest income sufficient to offset the cost of the
capital securities, the Company purchased approximately $120.0 million in
earning assets. This leveraging strategy is anticipated to be short-term in
nature, and use of these funds will change in response to future corporate
initiatives.
Further, the purchase of $40.0 million in BOLI adversely impacted the net
interest margin as securities available for sale were allowed to mature or
were sold in order to provide the funding necessary to implement the
bank-owned life insurance program. The earnings from BOLI are recorded as
other non-interest income and are tax exempt.
RISK MANAGEMENT
Credit Risk
Credit risk is managed through a network of loan officer authorities,
credit committees, loan policies and oversight from the corporate senior credit
officer and subsidiary boards of directors. Management follows a policy of
continually identifying, analyzing and grading credit risk inherent in each
loan portfolio. An ongoing independent review, subsequent to management's
review, of individual credits is performed on each subsidiary bank's commercial
loan portfolios by the independent Loan Review function.
As a result of management's ongoing review of the loan portfolio, loans
are placed in non-accrual status, either due to the delinquent status of
principal and/or interest payments, or a judgment by management that, although
payments of principal and/or interest are current, such action is prudent.
Loans are generally placed in non-accrual status when principal and/or interest
is 90 days overdue, except in the case of consumer loans which are generally
charged off when loan principal and/or interest payments are 120 days overdue.
Non-performing assets (NPAs). Non-performing assets include
non-performing loans, which are those loans in a non-accrual status, loans
which have been treated as troubled debt restructurings and loans past due 90
days or more and are still accruing interest. Also included in the total
non-performing assets are foreclosed and repossessed non-real estate assets.
NPAs were $16.3 million at March 31, 1998, a decrease of $3.9 million, or
19.4%, from March 31, 1997 and equal to the NPAs at December 31, 1997. The
ratio of NPAs to loans plus other real estate owned and repossessed assets at
March 31, 1998, was .83% compared to 1.06% at March 31, 1997. Table G,
Non-performing Assets, contains the details for March 31, 1998 and 1997, and
December 31, 1997.
Non-performing loans ("NPLs") at March 31, 1998 were $15.0 million, a net
decrease of $4.1 million, or 21.5%, from March 31, 1997. The decrease in NPLs
is largely in non-accrual loans reflecting relative improvement in the overall
credit quality of the loan portfolio. Delinquency rates in the residential
portfolio are consistent with trends seen regionally and nationally. Given the
possibility of increases in interest rates, management expects that certain
credits may encounter difficulty in continuing to perform under the contractual
terms of their loans should rates actually increase. While this occurrence
might result in increases in NPLs and subsequent charge-offs, management does
not expect it to materially affect the Company's performance during the year.
Total other real estate owned and repossessed assets were $1.2 million at
March 31, 1998, up $225 thousand from one year earlier and down $336 thousand
from December 31, 1997.
Allowance for loan losses and provision. The balance of the allowance for
loan losses ("allowance") has been accumulated over the years through periodic
provisions and is available to absorb future losses on loans. The adequacy of
the allowance is evaluated monthly based on review of all significant loans,
with particular emphasis on non-performing and other loans, if any, that
management believes warrant special attention. The balance of the 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, includes an analysis of the
changes to the allowance for the three months ended March 31, 1998 and 1997, as
well as for the year ended December 31, 1997. Loans charged off in the first
three months of 1998 were $1.9 million, or an annualized .39% of average loans.
This represents an improvement over the prior year's first quarter results when
charge-offs totaled $2.8 million, or an annualized .59% of average loans.
Recoveries in the first quarter of 1998 on loans previously charged off were
$1.2 million as compared to $1.1 million for the same period of 1997.
The provision for loan losses ("provision") for the three months ended
March 31, 1998 was $1.8 million, or an annualized .38% of average loans.
Provisions of $1.8 million, or an annualized .38% of average loans, and $7.7
million, or .40% of average loans were experienced during the first quarter of
1997 and the full year of 1997, respectively.
Provisions recorded are those necessary to maintain the allowance at a
level adequate enough to absorb reasonably predictable loan charge-offs. At
March 31, 1998, the allowance provided a coverage of non-performing loans of
178.48% as compared to 175.08% and 123.27% at December 31, 1997 and March 31,
1997, respectively.
Market Risk
Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of the
Company's business activities.
The responsibility for balance sheet risk management oversight is the
function of the Asset/Liability Committee ("ALCO"). The corporate ALCO, chaired
by the chief financial officer and composed of various subsidiary presidents
and other members of corporate senior management, meets on a monthly basis to
review balance sheet structure, formulate strategy in light of expected
economic conditions, and review performance against guidelines established to
control exposure to the various types of inherent risk. Bank subsidiary ALCOs
meet on a more frequent basis to implement policy, review adherence to
guidelines, adjust product prices as necessary and monitor liquidity.
Interest rate risk can be defined as an exposure to a movement in
interest rates that could have an adverse effect on the Company's net interest
income. Interest rate risk arises naturally from the imbalance in the
repricing, maturity and/or cash flow characteristics of assets and liabilities.
Management's objectives are to measure, monitor and develop strategies in
response to the interest rate risk profile inherent in the Company's
consolidated balance sheet and off-balance sheet financial instruments.
Interest rate risk is managed by the Corporate ALCO. Interest rate risk
measurement and management techniques incorporate the repricing and cash flow
attributes of balance sheet and off-balance sheet instruments as they relate to
potential changes in interest rates. The level of interest rate risk, measured
in terms of the potential future effect on net interest income, is determined
through the use of modeling and other analytical techniques under multiple
interest rate scenarios. Interest rate risk is evaluated on a quarterly basis
and reviewed by the Corporate ALCO with subsidiary risk profiles presented to
the respective boards of directors.
The Company's Asset Liability Management Policy, approved annually by the
boards of directors, establishes interest rate risk limits in terms of
variability of net interest income under rising, flat and decreasing rate
scenarios. It is the role of the ALCO to evaluate the overall risk profile and
to determine actions to maintain and achieve a posture consistent with policy
guidelines.
Certain imbalances causing interest rate risk to exceed policy limits are
correctable through management of asset and liability product offerings.
Depending upon the specific nature of the imbalance, it may be more efficient
and less costly to utilize off-balance sheet instruments such as interest rate
swaps and interest rate cap or floor agreements, among other things, to correct
the imbalance. Banknorth utilized both swaps and floors to address certain
interest rate risk exposures.
A significant portion of the Company's loans are adjustable or variable
rate resulting in reduced levels of interest income during periods of falling
rates. Certain categories of deposits reach a point in this instance where
market forces prevent further reduction in the rate paid on those instruments.
The net effect of these circumstances is reduced interest income offset only by
a nominal decrease in interest expense, thereby narrowing the net interest
margin. To protect the Company from this occurrence, interest rate floors in
the notional amount of $295.0 million and interest rate swaps in the notional
amount of $50.0 million are used to mitigate the potential reduction in
interest income on certain adjustable and variable rate loans.
The aggregate cost of the interest rate floors was $2.8 million which is
being amortized as an adjustment to the related loan yield on a straight-line
basis over the terms of the agreements. At March 31, 1998, the unamortized
balance of these interest rate floors was $1.3 million. The estimated fair
value of these floors was $665 thousand as of March 31, 1998. The estimated
fair value of the interest rate swap contracts was $254 thousand as of March
31, 1998.
Banknorth utilizes an interest rate risk model widely recognized in the
financial industry to monitor and measure interest rate risk. The model
simulates the behavior of interest income and expense of all on and off balance
sheet financial instruments under different interest rate scenarios together
with a dynamic future balance sheet. Banknorth measures its interest rate risk
in terms of potential changes in net interest income.
Liquidity Risk
Banknorth seeks to obtain favorable sources of liabilities and to
maintain prudent levels of liquid assets in order to satisfy varied liquidity
demands. Besides serving as a funding source for maturing obligations,
liquidity provides flexibility in responding to customer initiated needs. Many
factors affect the Company's ability to meet liquidity needs, including
variations in the markets served by its network of offices, its mix of assets
and liabilities, reputation and credit standing in the marketplace, and general
economic conditions.
The Company actively manages its liquidity position through target ratios
established under its liquidity policy. Continual monitoring of these ratios,
both historically and through forecasts under multiple interest rate scenarios,
allows Banknorth to employ strategies necessary to maintain adequate liquidity.
Management has also defined various degrees of adverse liquidity situations
which could potentially occur and has prepared appropriate contingency plans
should such situations arise.
The Company achieves its liability based liquidity objectives in a
variety of ways. Net liabilities can be classified into three basic categories
for the purpose of managing liability-based liquidity: core deposits, purchased
liabilities and long-term or capital market funds. Core deposits consist of
non-interest bearing demand deposits and retail deposits. These deposits result
from relatively dependable customers and commercial banking relationships and
are therefore viewed as a stable component of total required funding. Banknorth
will continue to seek funding in the most efficient and cost effective manner
as is possible. Table E reflects the components of funding for March 31, 1998
and 1997.
Among the traditional funding instruments comprising the category of
purchased liabilities are time deposits $100 thousand and greater, Federal
funds purchased, securities sold under agreement to repurchase, borrowings from
the United States Treasury Department Treasury, Tax and Loan accounts, and
short and long-term borrowings from the FHLB.
One of the principal components of short-term borrowed funds is
securities sold under agreement to repurchase. These borrowings generally
represent short-term uninsured customer investments, which are secured by
Company securities. During the first quarter of 1998, the average securities
sold under agreement to repurchase were $138.2 million, as compared to $143.8
million in the first quarter of 1997.
Long-term funding, primarily through the FHLB, was $10.2 million during
the first quarter of 1998, down $1.7 million from the quarter ended March 31,
1997. The long-term notes were replaced mostly by short-term notes from the
FHLB.
As previously discussed, the Company utilized financial institution
borrowings pursuant to a five year credit facility to finance the NAB
acquisition. The Company's primary source of funds to pay principal and
interest under this credit facility is dependent upon the continued ability of
the subsidiary banks to pay dividends in an amount sufficient to service such
debt.
A secondary source of liquidity is represented by asset-based liquidity.
Asset-based liquidity consists of holdings of securities available for sale and
short-term money market investments that can be readily converted to cash, as
well as single-family mortgage loans which qualify for secondary market sale.
The Company also uses the capital markets as a source of liquidity. In
May 1997, the Company established a trust to issue and sell $30.0 million in
capital securities. The net proceeds were used for general corporate purposes.
In February 1996, the Company issued 2,044,446 shares (1,022,223 shares
immediately prior to the split) of common stock resulting in $32.2 million in
net proceeds which 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.
OTHER OPERATING INCOME AND EXPENSES
Other operating income is a significant source of revenue for Banknorth
and an important factor in the Company's results of operations. Other operating
income totaled $7.2 million for the first quarter of 1998, $558 thousand or
8.4% higher than the first quarter of 1997.
Trust and investment management. The trust function contributes the
largest recurring portion of other operating income through fees generated from
the performance of trust and investment management services. Income from trust
and investment management services totaled $2.2 million in the first quarter of
1998, an increase of $200 thousand, or 9.9% over the same period of 1997. The
increase resulted from increased assets under management by The Stratevest
Group, N.A., the Company's trust bank as well as strong financial market
conditions. Opportunities for increases in the generation of trust income lie
in increased penetration of the Massachusetts and New Hampshire markets.
Accordingly, management expects increased levels of trust and investment
management income in 1998.
Service charges on deposit accounts. Service charges on deposit accounts,
$2.2 million for the three months ended March 31, 1998, were $307 thousand, or
16.5% above the same period of 1997. During late 1997, Banknorth reviewed and
enhanced its policies and practices regarding service charges and service
charge waivers. Accordingly, the level of fee income increased this quarter
over the 1997 level and is expected to increase further in 1998.
Card product income. Card product income declined $312 thousand, to $408
thousand, for the first quarter of 1998 as compared to the first quarter of
1997. The decline is the result of the sale of the merchant processing business
in late 1997. Income on card products is, therefore, expected to continue at a
reduced level throughout 1998 as the gross merchant processing income,
amounting to $1.4 million in 1997, will no longer by received by the Company.
Loan servicing income. Loan servicing income, primarily mortgage
servicing at BMC, was $417 thousand in the first quarter of 1998, a decrease of
$272 thousand, or 39.5%, from the same period of 1997. The decline is the
result of the reduction in the balance of mortgage loans serviced for unrelated
third parties from $984.3 million at March 31, 1997 to $887.1 million at the
March 31, 1998, and increased amortization of mortgage servicing rights (MSR).
The amortization of mortgage servicing rights was $318 thousand in the first
quarter of 1998 compared to $237 thousand for the same period in 1997. During
the first quarter of 1998, as a result of the high volume of refinancing, the
Company wrote down $80 thousand of its MSR balance due to impairment. Further
impairment writedowns or reserves are anticipated during the year.
Net loan transactions. Net loan transaction income is normally generated
through the origination and subsequent sale of mortgage products into the
secondary mortgage market. Net loan transaction income in the first quarter of
1998 amounted to $611 thousand, $376 thousand greater than the same period of
1997. The significant increase was the result of the record level production
during the first quarter of 1998 given the current low rate environment.
Net securities transactions. Net gains or losses from securities
transactions are also included in other operating income. In the first quarter
of 1998, the Company realized $439 thousand in net securities losses as
compared to the first quarter of 1997 when it realized $18 thousand in net
gains. The net loss in 1998 was the result of the sale of approximately $85.5
million of securities available for sale during January 1998 at a loss of
approximately $504 thousand. The loss is expected to be recovered through
enhanced yields within a six month period. The Company anticipates that it will
consider additional sales from the securities available for sale portfolio
during 1998 as it attempts to achieve its objectives in the total return
management of the securities available for sale portfolio. The Company also
expects that future losses incurred, if any, would be recovered through yield
improvement within a one to two year period.
BOLI income. In the fourth quarter of 1997, Banknorth purchased $40.0
million of bank-owned life insurance which resulted in $540 thousand in other
income in the first quarter of 1998. Securities available for sale were allowed
to mature or were sold in order to provide the funding necessary to implement
the bank-owned life insurance program. As a result of this fourth quarter
transaction, the Company benefits in future periods from the tax free nature of
income generated from the life insurance policies. In general, the yield
received from the bank owned life insurance is comparable to the yield
previously received on the securities available for sale, thereby causing the
Company's earnings stream to benefit from the tax characteristics of the
bank-owned life insurance.
Other income. Other income amounted to $1.3 million for the three months
ended March 31, 1998, compared to $1.1 million for the three months ended March
31, 1997. The increase in other income of $176 thousand, or 16.2%, was
primarily the result of newly implemented ATM terminal usage fees. In October
1997, the Company commenced charging a terminal usage fee for ATM transactions
by non-customers. During the first quarter of 1998, the Company recorded $190
thousand in surcharging income. This fee allows the Company to recover a
portion of the expense of operating the ATM network.
Other Operating Expenses
Other operating expenses for the first quarter of 1998 was $25.1
million, $2.1 million, or 9.0%, above expense levels in the first quarter of
1997. The majority of the increase in operating expenses is the expense of
$789 thousand relating to the capital securities issued in May 1997 and a $883
thousand increase in incentive compensation expense. The Company's efficiency
ratio was 62.56% in the first quarter of 1998, up from 61.37% from the same
period one year earlier.
Compensation. Compensation expense increased by $876 thousand, or 9.8%,
in the first quarter of 1998 in comparison to the first quarter of 1997. The
increase in this expense is primarily due to increased costs associated with
the increase in the volume of mortgage loan activity, and the increased costs
associated with incentive compensation, including the restricted stock awards
which are directly impacted by the increase in the Company's stock price.
Banknorth's stock price rose from $32.13 per share at December 31, 1997 to
$36.50 per share at March 31, 1998, an increase of 13.6%.
Data processing. Data processing fees include payments to Banknorth's
vendors of mainframe systems and site management, credit card processing, ATM
transaction processing and shareholder accounting services. These fees declined
$56 thousand or 4.6% in the first quarter of 1998 in comparison to the same
period of 1997 primarily as a result of the sale of the merchant processing
business. The Company is no longer incurring operating expenses for this
segment of the business.
Other real estate owned. Expenses relating to other real estate owned and
repossessed assets increased for the first quarter of 1998 by $125 thousand as
compared to March 31, 1997. Included in this expense category in the first
quarter of 1998 are net gains on the sale of other real estate owned and
repossessed assets in the amount of $82 thousand. Net gains on sales in the
first quarter of 1997 were $151 thousand. Management anticipates the level of
other real estate owned and repossession expenses to remain steady throughout
the year.
Legal and professional. Legal and professional expenses of $941 thousand
during the first quarter of 1998, were $147 thousand higher than the first
quarter of 1997. The increase in expense is primarily caused by increased
business in the mortgage banking area.
Advertising and marketing. Advertising and marketing expenses were $688
thousand for the three months ended March 31, 1998, $74 thousand, or 12.1%
higher than the first three months of 1997. A new branding initiative was
announced in late 1997 and resulted in higher expenses this quarter in
comparison to the same quarter a year ago. Marketing expenses are expected to
be slightly higher throughout 1998 in comparison to 1997.
Goodwill. Amortization of goodwill amounted to $1.3 million in first
quarters of 1998 and 1997. Goodwill expense is expected to remain at this level
throughout 1998.
Capital securities. The capital securities issue in May 1997, which
created Tier I capital, gave rise to expense of $789 million in the first
quarter of 1998. As mentioned previously, incremental investment purchases were
made in an effort to offset the cost of the capital securities through
increased net interest income. Funding for the investments was primarily in the
form of borrowings from the FHLB.
Other. Other expenses totaled $2.9 million and $2.8 million for the three
months ended March 31, 1998 and 1997, respectively. The majority of the $159
thousand increase was the result of increased directors' costs related to
deferred compensation caused by the change of the Banknorth stock price in the
first quarter of 1997 compared to the first quarter of 1998. The stock price
dropped $.50 per share in the first quarter of 1997.
YEAR 2000 COMPLIANCE
Banknorth is addressing the significant issues relating to the
programming code in existing computer systems as the year 2000 ("Y2k")
approaches. The Y2k problem is pervasive and complex as virtually every
computer operation faces the potential affects of the rollover of the two digit
year value to 00. The issue is whether computer systems are programmed to
recognize date sensitive information when the year changes to 2000.
Banknorth does not write any source programming code and therefore is
dependent upon external vendors and service providers to alter their programs
to become Y2k compliant. In 1996, the Company began the process of reviewing
the compliance of all programs in use and in 1997, developed a comprehensive
plan not only to test these systems but to maintain Y2k compliance after
successful testing has occurred. Additionally, the Company is working closely
with all of its vendors of data processing systems in order to become familiar
with their plans to become compliant. The Company has established a Y2k
committee comprised of managers throughout the organization and will track the
plan to address the significant Y2k challenges facing the Company.
The cost of ensuring that computer programs are capable of successfully
entering the year 2000 is expected to be significant in terms of utilization of
existing resources. Incremental expenses related to this issue are not, at this
time, expected to be material to the performance of Banknorth Group. The
Company is continuing to evaluate appropriate courses of corrective action in
case they become necessary, including conversion to new systems, if deemed in
the best interest of the Company.
INCOME TAXES
In the first quarter of 1998, Banknorth recognized income tax expense of
$3.0 million, as compared to $3.4 million in first quarter of 1997. The
decrease in tax expense is primarily reflective of the reduction in the
effective rate from 32.5% in the first quarter of 1997 to 29.9% in the first
quarter of 1998. The tax expense on the Company's income was lower than tax
expense at the statutory rate of 35%, due primarily to tax-exempt income, the
impact of BOLI earnings, and low-income housing credits.
CORE TANGIBLE PERFORMANCE
After removing the impact of the balance of goodwill and the related
period amortization, "core tangible" performance as of March 31, 1998 and 1997
was as follows:
<TABLE>
<CAPTION>
March 31,
----------------------------
1998 1997
------------ ------------
(Dollars in thousands, except share and per share data)
<S> <C> <C>
Net income, as reported $ 6,924 $ 7,050
Add: Amortization of goodwill, net of tax 836 836
---------------------------
"Core tangible income" $ 7,760 $ 7,886
===========================
Average tangible assets $ 2,885,642 $ 2,581,898
Average tangible equity $ 198,292 $ 172,078
Diluted weighted average shares outstanding 15,709,954 15,751,670
"Core tangible" return on average tangible assets 1.09% 1.24%
"Core tangible" return on average tangible equity 15.87% 18.59%
"Core tangible" diluted earnings per share $ .49 $ .50
</TABLE>
All share and per share data has been restated for the effect of the 2-for-1
stock split declared February 24, 1998.
CAPITAL RESOURCES
Consistent with its long-term goal of operating a sound and profitable
financial organization, Banknorth strives to maintain strong capital ratios.
Prior to 1996, new issues of equity securities had not been required since
traditionally most of its capital requirements had been provided through
retained earnings. However, to continue the Company's growth through
acquisition, Banknorth chose to raise approximately $32.2 million in equity
capital through the issuance of 2,044,446 shares (1,022,223 shares immediately
prior to the split) of its common stock in February 1996.
In October 1997, Banknorth announced a stock buyback plan. The Company
plans to buy back up to 5%, or 782,665 shares of its outstanding common stock.
The Company repurchased 314,000 shares as of March 31, 1998. These shares are
held as treasury stock by the Company. Management intends to complete the
buyback program in 1998.
On February 24, 1998, the Board of Directors approved a 2-for-1 split of
its common stock effected in the form of a 100% stock dividend. The new shares
were issued April 6, 1998, to shareholders of record on March 20, 1998. All per
share data has been restated for this stock split.
During the first quarter of 1998, the board of directors declared a
dividend of $.16 per share, resulting in a payout of 35.7% of first quarter
1998 net income. The board of directors of the Company presently intends to
continue the payment of regular quarterly cash dividends subject to adjustment
from time to time, based upon the Company's earnings outlook and other relevant
factors. The Company's principal source of funds to pay cash dividends is
derived from dividends from its subsidiary banks. Various laws and regulations
restrict the ability of banks to pay dividends to their shareholders. 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 March 31, 1998, Banknorth's Tier I capital was $227.4 million, or
10.48% of total risk-adjusted assets, compared to $179.1 million and 9.22% as
of March 31, 1997. The $48.3 million increase in the Tier I capital is
attributable to the strong earnings of the Company and the issuance of the
$30.0 million in Corporation-obligated mandatorily redeemable capital
securities. The capital securities qualify as Tier I capital under regulatory
definitions. The ratio of Tier I capital to total quarterly average adjusted
assets (leverage ratio) was 7.88%, and 6.92% as of March 31, 1998 and 1997,
respectively. Banknorth, and its subsidiaries individually, are "well
capitalized" at March 31, 1998 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 March 31, % of Total Earning Assets
------------------------ Total --------------------
(Dollars in thousands) 1998 1997 Change Change 1998 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income
and unamortized loan fees and costs:
Commercial, financial and agricultural $ 341,117 $ 308,200 $ 32,917 12.0% 12.5% 12.5%
Construction and land development 34,545 30,660 3,885 1.4 1.3 1.3
Commercial real estate 567,107 534,850 32,257 11.8 20.7 21.8
Residential real estate 765,601 744,450 21,151 7.7 28.0 30.3
Credit card receivables 27,181 22,867 4,314 1.6 1.0 0.9
Lease receivables 75,256 72,572 2,684 1.0 2.8 3.0
Other installment 153,022 150,905 2,117 0.8 5.6 6.1
-------------------------------------------------------------------
Total loans, net of unearned income
and unamortized loan fees and costs 1,963,829 1,864,504 99,325 36.3 71.9 75.9
Securities available for sale:
U.S. Treasuries and Agencies 133,227 114,687 18,540 6.8 4.9 4.7
States and political subdivisions 5,869 2,366 3,503 1.3 0.2 0.1
Mortgage-backed securities 329,672 273,159 56,513 20.6 12.1 11.1
Corporate debt securities 203,287 122,116 81,171 29.6 7.4 5.0
Equity securities 39,053 27,308 11,745 4.3 1.4 1.1
-------------------------------------------------------------------
Total securities available for sale,
at fair value 711,108 539,636 171,472 62.6 26.0 22.0
Investment securities:
U.S. Treasuries and Agencies 7,262 12,631 (5,369) (2.0) 0.3 0.5
States and political subdivisions 781 1,127 (346) (0.1) -- --
Mortgage-backed securities 15,197 19,385 (4,188) (1.5) 0.6 0.8
Corporate debt securities 10 10 -- -- -- --
-------------------------------------------------------------------
Total investment securities,
at amortized cost 23,250 33,153 (9,903) (3.6) 0.9 1.3
Loans held for sale 29,926 12,400 17,526 6.4 1.1 0.5
Money market investments 2,947 7,726 (4,779) (1.7) 0.1 0.3
-------------------------------------------------------------------
Total earning assets $2,731,060 $2,457,419 $273,641 100.0% 100.0% 100.0%
===================================================================
</TABLE>
TABLE B. Loan Portfolio
<TABLE>
<CAPTION>
At March 31, At December 31, % Change
-------------------------------------------- -------------------- --------------------
1998 1997 1997 03/31/98 03/31/98
-------------------- -------------------- -------------------- versus versus
(Dollars in thousands) Amount Percent Amount Percent Amount Percent 03/31/97 12/31/97
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural $ 354,999 18.0% $ 318,434 16.8% $ 332,385 17.0% 11.5% 6.8%
Real estate:
Construction and land development 35,080 1.8 31,881 1.7 36,276 1.8 10.0 (3.3)
Commercial 567,398 28.8 546,532 28.8 563,800 28.8 3.8 0.6
Residential 755,164 38.4 760,632 40.0 773,429 39.4 (0.7) (2.4)
------------------------------------------------------------------
Total real estate 1,357,642 69.0 1,339,045 70.5 1,373,505 70.0 1.4 (1.2)
------------------------------------------------------------------
Credit card receivables 28,251 1.4 21,280 1.1 25,669 1.3 32.8 10.1
Lease receivables 74,151 3.8 73,008 3.8 76,302 3.9 1.6 (2.8)
Other installment 154,071 7.8 147,728 7.8 152,768 7.8 4.3 0.9
------------------------------------------------------------------
Total installment 256,473 13.0 242,016 12.7 254,739 13.0 6.0 0.7
------------------------------------------------------------------
Total loans 1,969,114 100.0 1,899,495 100.0 1,960,629 100.0 3.7 0.4
Less: allowance for loan losses 26,850 1.4 23,638 1.2 25,721 1.3 13.6 4.4
------------------------------------------------------------------
Net loans $1,942,264 98.6% $1,875,857 98.8% $1,934,908 98.7% 3.5% 0.4%
==================================================================
</TABLE>
TABLE C. Securities Available for Sale and Investment Securities
<TABLE>
<CAPTION>
At March 31, At December 31,
-------------------- ----------------
(Dollars in thousands) 1998 1997 1997
-----------------------------------------
<S> <C> <C> <C>
Securities available for sale:
U.S. Treasuries and Agencies $121,338 $118,145 $141,245
States and political subdivisions 5,769 2,359 5,251
Mortgage-backed securities 334,819 277,851 320,473
Corporate debt securities 204,914 127,086 200,710
Equity securities 39,044 27,126 39,044
Valuation reserve 4,541 (9,706) 3,585
------------------------------------
Recorded value of securities available for sale $710,426 $542,861 $710,308
====================================
Investment securities:
U.S. Treasuries and Agencies $ 7,136 $ 11,823 $ 7,505
States and political subdivisions 780 1,127 781
Mortgage-backed securities 14,671 19,017 15,676
Corporate debt securities 10 10 10
------------------------------------
Recorded value of investment securities $ 22,598 $ 31,977 $ 23,972
====================================
Fair value of investment securities $ 22,851 $ 31,985 $ 24,246
====================================
Excess of fair value versus recorded value $ 253 $ 8 $ 274
Fair value as a % of recorded value 101.1% 100.0% 101.1%
</TABLE>
TABLE D. Average Balances, Yields, and Net Interest Margins
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
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 $ 2,947 $ 45 6.19% $ 7,726 $ 114 5.98%
Securities available for sale
(1 and 2) 711,108 11,423 6.57 539,636 8,459 6.31
Loans held for sale 29,926 459 6.22 12,400 238 7.78
Investment securities (1 and 2) 23,250 418 7.29 33,153 595 7.28
Loans, net of unearned income
and unamortized loan fees
(2 and 3) 1,963,829 43,854 9.06 1,864,504 41,714 9.07
--------------------- --------------------
Total earning assets 2,731,060 56,199 8.36 2,457,419 51,120 8.42
--------------------- --------------------
Cash and due from banks 72,542 80,217
Allowance for loan losses (26,208) (23,666)
Other assets 138,606 103,528
---------- ----------
Total assets $2,916,000 $2,617,498
========== ==========
Interest-bearing liabilities:
NOW accounts & money market
savings $ 917,865 8,822 3.90 $ 781,979 6,708 3.48
Regular savings 183,254 1,097 2.43 213,294 1,241 2.36
Time deposits $100 thousand
and greater 98,679 1,360 5.59 91,206 1,221 5.43
Time deposits under $100
thousand 685,009 9,129 5.40 705,599 9,214 5.30
--------------------- --------------------
Total interest-bearing
deposits 1,884,807 20,408 4.39 1,792,078 18,384 4.16
Short-term borrowed funds 428,723 5,656 5.35 295,780 3,655 5.01
Long-term debt 20,553 336 6.63 24,887 395 6.44
--------------------- --------------------
Total interest-bearing
liabilities 2,334,083 26,400 4.59 2,112,745 22,434 4.31
---------------------------------------------------------------
Non-interest bearing deposits 298,629 273,764
Other liabilities 24,638 23,311
Corporation-obligated mandatorily
redeemable capital securities 30,000 --
Shareholders' equity 228,650 207,678
---------- ----------
Total liabilities, corporation-
obligated mandatorily redeemable
capital securities and
shareholders' equity $2,916,000 $2,617,498
========== ==========
Net interest income $29,799 $28,686
======= =======
Interest rate differential 3.77% 4.11%
==== ====
Net interest margin 4.43% 4.73%
==== ====
Notes:
<F1> For the purpose of these computations, unrealized gains/(losses) are
excluded from the average rate calculation.
<F2> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal and state tax rates.
<F3> 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 March 31, Change Total Net Funding
----------------------- ------------------ -----------------
(Dollars in thousands) 1998 1997 Amount Percent 1998 1997
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 298,629 $ 273,764 $ 24,865 9.1% 11.3% 11.5%
Retail deposits:
Regular savings 183,254 213,294 (30,040) (14.1) 7.0 8.9
Time deposits under $100 thousand 685,009 705,599 (20,590) (2.9) 26.0 29.6
NOW accounts & money market savings 917,865 781,979 135,886 17.4 34.9 32.8
-------------------------------------------------------------
Total retail deposits 1,786,128 1,700,872 85,256 5.0 67.9 71.3
-------------------------------------------------------------
Total core deposits 2,084,757 1,974,636 110,121 5.6 79.2 82.8
Time deposits $100 thousand and greater 98,679 91,206 7,473 8.2 3.8 3.8
Federal funds purchased 11,132 6,285 4,847 77.1 0.4 0.3
Securities sold under agreements to repurchase 138,193 143,813 (5,620) (3.9) 5.2 6.0
Borrowings from U.S. Treasury 9,109 8,960 149 1.7 0.3 0.4
Short- term notes from FHLB 270,289 136,722 133,567 97.7 10.3 5.7
Long- term notes from FHLB 10,160 11,894 (1,734) (14.6) 0.4 0.5
-------------------------------------------------------------
Total purchased liabilities 537,562 398,880 138,682 34.8 20.4 16.7
Bank term loan 10,393 12,993 (2,600) (20.0) 0.4 0.5
-------------------------------------------------------------
Total net funding $2,632,712 $2,386,509 $246,203 10.3% 100.0% 100.0%
=============================================================
</TABLE>
TABLE F. Volume and Yield Analysis
<TABLE>
<CAPTION>
Three Months
Ended March 31, Due to
------------------ -----------------
(Dollars in thousands) 1998 1997 Change Volume Rate
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income (FTE):
Money market investments $ 45 $ 114 $ (69) $ (73) $ 4
Securities available for sale 11,423 8,459 2,964 2,615 349
Loans held for sale 459 238 221 269 (48)
Investment securities 418 595 (177) (178) 1
Loans 43,854 41,714 2,140 2,186 (46)
----------------------------
Total interest income 56,199 51,120 5,079 5,443 (364)
----------------------------
Interest expense:
NOW accounts & money market savings 8,822 6,708 2,114 1,304 810
Regular savings 1,097 1,241 (144) (181) 37
Time deposits $100 thousand and greater 1,360 1,221 139 103 36
Time deposits under $100 thousand 9,129 9,214 (85) (259) 174
Short-term borrowed funds 5,656 3,655 2,001 1,753 248
Long-term debt 336 395 (59) (71) 12
----------------------------
Total interest expense 26,400 22,434 3,966 2,507 1,459
-------------------------------------------------
Net interest income (FTE) $29,799 $28,686 $1,113 $2,936 $(1,823)
=================================================
</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
March 31, December 31, March 31,
--------- ------------ ----------
(Dollars in thousands) 1998 1997 1997
---------------------------------------
<S> <C> <C> <C>
Loans on a non-accrual basis:
Commercial, financial and agricultural $ 2,354 $ 2,749 $ 3,598
Real estate:
Construction and land development 36 -- 39
Commercial 2,450 2,645 3,704
Residential 8,966 7,936 9,098
Other installment -- 8 --
-------------------------------------
Total non-accrual 13,806 13,338 16,439
-------------------------------------
Restructured loans:
Real estate:
Commercial -- -- 379
Residential 35 36 38
Other installment 5 6 10
-------------------------------------
Total restructured 40 42 427
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 533 70 196
Real estate:
Commercial 36 125 285
Residential 155 332 906
Credit card receivables 104 119 161
Lease receivables 65 151 57
Other installment 305 514 705
-------------------------------------
Total past-due 90 days or more
and still accruing 1,198 1,311 2,310
-------------------------------------
Total non-performing loans 15,044 14,691 19,176
-------------------------------------
Other real estate owned (OREO) 738 1,074 1,013
Non-real estate and repossessed assets 500 500 --
-------------------------------------
Total foreclosed and repossessed assets (F/RA) 1,238 1,574 1,013
-------------------------------------
Total non-performing assets $16,282 $16,265 $20,189
=====================================
Allowance for loan losses (ALL) $26,850 $25,721 $23,638
ALL coverage of non-performing loans 178.48% 175.08% 123.27%
Non-performing assets as a % of (loans & F/RA) 0.83 0.83 1.06
Non-performing assets to total assets 0.55 0.56 0.76
</TABLE>
TABLE H. Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Three Months Twelve Months Three Months
Ended March 31, Ended December 31, Ended March 31,
--------------- ------------------ ---------------
(Dollars in thousands) 1998 1997 1997
--------------------------------------------------------
<S> <C> <C> <C>
Loans outstanding-end of period $1,969,114 $1,960,629 $1,899,495
Average loans outstanding-period to date 1,963,829 1,916,097 1,864,504
Allowance for loan losses at beginning of period $ 25,721 $ 23,520 $ 23,520
Loans charged off:
Commercial, financial and agricultural (43) (1,343) (155)
Real estate:
Construction and land development -- -- --
Commercial (29) (669) (85)
Residential (425) (1,915) (505)
----------------------------------------------------
Total real estate (454) (2,584) (590)
Credit card receivables (112) (691) (173)
Lease receivables (398) (1,510) (284)
Other installment (916) (4,022) (1,555)
----------------------------------------------------
Total installment (1,426) (6,223) (2,012)
Total loans charged off (1,923) (10,150) (2,757)
----------------------------------------------------
Recoveries on loans:
Commercial, financial and agricultural 135 592 159
Real estate:
Construction and land development 6 87 69
Commercial 142 638 182
Residential 144 628 211
----------------------------------------------------
Total real estate 292 1,353 462
Credit card receivables 18 109 30
Lease receivables 376 970 186
Other installment 386 1,665 288
----------------------------------------------------
Total installment 780 2,744 504
Total recoveries on loans 1,207 4,689 1,125
----------------------------------------------------
Loans charged off, net of recoveries (716) (5,461) (1,632)
----------------------------------------------------
Provision for loan losses 1,845 7,662 1,750
----------------------------------------------------
Allowance for loan losses at end of period $ 26,850 $ 25,721 $ 23,638
====================================================
Loans charged off, net (annualized),
as a % of average total loans 0.15% 0.29% 0.35%
Provision for loan losses (annualized)
as a % of average total loans 0.38 0.40 0.38
Allowance for loan losses
as a % of period-end total loans 1.36 1.31 1.24
</TABLE>
TABLE I. Capital Ratios
<TABLE>
<CAPTION>
At At At At At
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 1998 1997 1997 1997 1997
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total risk-adjusted on-balance sheet assets $2,061,517 $2,024,610 $1,960,074 $1,936,981 $1,836,108
Total risk-adjusted off-balance sheet items 106,994 108,212 107,849 104,257 107,077
--------------------------------------------------------------------
Total risk-adjusted assets $2,168,511 $2,132,822 $2,067,923 $2,041,238 $1,943,185
====================================================================
Total risk-adjusted assets / average total assets,
net of fair value adjustment and goodwill(1) 75.20% 75.02% 73.44% 75.27% 75.06%
Total shareholders' equity $ 229,882 $ 229,872 $ 228,486 $ 216,866 $ 207,774
Fair value adjustment(1) (2,913) (2,311) (1,563) 2,012 6,157
Corporation obligated mandatorily redeemable
capital securities 30,000 30,000 30,000 30,000 -
Goodwill (29,613) (30,919) 32,225 (33,530) (34,836)
--------------------------------------------------------------------
Total Tier I capital 227,356 226,642 224,698 215,348 179,095
Maximum allowance for loan losses(2) 26,850 25,721 25,061 23,963 23,638
--------------------------------------------------------------------
Total capital $ 254,206 $ 252,363 $ 249,759 $ 239,311 $ 202,733
====================================================================
Quarterly average total assets,
net of fair value adjustment and goodwill(1) $2,883,474 $2,843,167 $2,815,958 $2,711,913 $2,588,819
Allowance for loan losses 26,850 25,721 25,061 23,963 23,638
Total capital to total risk-adjusted assets 11.72% 11.83% 12.08% 11.72% 10.43%
Tier I capital to total risk-adjusted assets 10.48 10.63 10.87 10.55 9.22
Tier I capital to total quarterly average
adjusted assets (Leverage) 7.88 7.97 7.98 7.94 6.92
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>
1998 1997
----------- --------------------------------------------------------
(Dollars in thousands, except share and per share data) Q1 Q4 Q3 Q2 Q1
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest income $ 55,995 $ 56,891 $ 56,321 $ 54,312 $ 50,982
Interest expense 26,400 26,339 26,103 24,448 22,434
-----------------------------------------------------------------------
Net interest income 29,595 30,552 30,218 29,864 28,548
Provision for loan losses 1,845 2,036 1,940 1,936 1,750
-----------------------------------------------------------------------
Net interest income after provision for loan losses 27,750 28,516 28,278 27,928 26,798
-----------------------------------------------------------------------
Other operating income:
Income from trust and investment management fees 2,222 2,263 2,270 2,081 2,022
Service charges on deposit accounts 2,163 2,279 1,910 1,981 1,856
Card product income 408 816 787 822 720
Loan servicing income 417 603 630 640 641
Gain on sale of mortgage servicing rights -- (23) 896 -- 48
Net loan transactions 611 416 381 183 235
Net securities transactions (439) 71 163 6 18
Bank-owned life insurance 540 77 -- -- --
All other 1,262 3,622 964 862 1,086
-----------------------------------------------------------------------
Total other operating income 7,184 10,124 8,001 6,575 6,626
Other operating expenses:
Compensation & employee benefits 12,143 12,189 11,967 11,406 11,292
Net occupancy, equipment & software expense 3,744 3,858 3,772 3,681 3,731
Data processing 1,151 1,286 1,256 1,223 1,207
OREO and repossession 222 316 287 264 97
Amortization of goodwill 1,306 1,306 1,305 1,306 1,306
Capital securities 789 789 789 526 --
All other 5,701 5,735 5,695 5,628 5,348
-----------------------------------------------------------------------
Total other operating expenses 25,056 25,479 25,071 24,034 22,981
-----------------------------------------------------------------------
Income before income tax expense 9,878 13,161 11,208 10,469 10,443
Income tax expense 2,954 4,401 3,618 3,380 3,393
-----------------------------------------------------------------------
Net income $ 6,924 $ 8,760 $ 7,590 $ 7,089 $ 7,050
-----------------------------------------------------------------------
Average Balances:
Loans $ 1,963,829 $ 1,950,504 $ 1,933,960 $ 1,914,211 $ 1,864,504
Loans held for sale 29,926 19,707 20,957 12,730 12,400
Securities available for sale 711,108 716,592 708,403 627,897 539,636
Investment securities 23,250 24,853 27,074 30,125 33,153
Money market investments 2,947 8,286 7,934 5,684 7,726
-----------------------------------------------------------------------
Total earning assets 2,731,060 2,719,942 2,698,328 2,590,647 2,457,419
Other assets 184,940 156,455 151,418 152,785 160,079
-----------------------------------------------------------------------
Total assets $ 2,916,000 2,876,397 $ 2,849,746 $ 2,743,432 $ 2,617,498
-----------------------------------------------------------------------
Non-interest-bearing deposits $ 298,629 $ 305,831 $ 293,979 $ 278,612 $ 273,764
Interest-bearing deposits 1,884,807 1,860,793 1,830,540 1,798,630 1,792,078
-----------------------------------------------------------------------
Total deposits 2,183,436 2,166,624 2,124,519 2,077,242 2,065,842
Short-term borrowed funds 428,723 412,502 430,360 388,903 295,780
Long-term debt 20,553 17,577 20,196 22,607 24,887
Other liabilities 24,638 21,645 21,387 23,701 23,311
Corporation-obligated mandatorily redeemable
capital securities 30,000 30,000 30,000 20,110 --
Shareholders' equity 228,650 228,049 223,284 210,869 207,678
-----------------------------------------------------------------------
Total liabilities, corporation-obligated
mandatorily redeemable capital securities
and shareholders' equity $ 2,916,000 $ 2,876,397 $ 2,849,746 $ 2,743,432 $ 2,617,498
-----------------------------------------------------------------------
Loans charged off, net of recoveries $ 716 $ 1,376 $ 842 $ 1,611 $ 1,632
Non-performing assets, p.e. 16,282 16,265 18,545 16,302 20,189
Share and Per Share Data:
Basic wtd. avg. number of shares outstanding 15,450,990 15,639,784 15,694,514 15,553,496 15,553,496
Basic earnings per share (Basic EPS) $ 0.45 $ 0.56 $ 0.48 $ 0.46 $ 0.45
Diluted wtd. avg. number of shares outstanding 15,709,954 15,902,314 15,920,056 15,756,090 15,751,670
Diluted earnings per share (Diluted EPS) $ 0.44 $ 0.55 $ 0.48 $ 0.45 $ 0.45
Tangible book value, p.e. 13.06 12.84 12.54 11.71 11.05
Cash dividends declared 0.16 0.145 0.145 0.145 0.145
Closing price at quarter end 36.50 32.13 27.32 23.13 20.25
Cash dividends declared as a % of net income 35.70% 25.79% 29.91% 32.02% 32.20%
Key Ratios:
Return on average assets 0.96% 1.21% 1.06% 1.04% 1.09%
Return on average shareholders' equity 12.28 15.24 13.49 13.48 13.77
Net interest margin, fte 4.43 4.48 4.46 4.63 4.73
Efficiency ratio 62.56 62.44 62.93 61.43 61.37
Expense ratio 2.22 2.27 2.31 2.37 2.49
As a % of risk-adjusted assets, p.e.:
Total capital 11.72 11.83 12.08 11.72 10.43
Tier 1 capital 10.48 10.63 10.87 10.55 9.22
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 7.88 7.97 7.98 7.94 6.92
Tangible shareholders' equity to tangible
assets, p.e. 6.84 6.88 6.91 6.51 6.62
Price/Basic EPS (last 4 reported quarters) 18.7 16.5 14.9 12.9 11.4
Price/Diluted EPS (last 4 reported quarters) 19.0 16.7 14.9 13.0 11.5
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
BANKNORTH GROUP, INC.
Registrant
Date: 5/9/98 /S/ William H. Chadwick
-------------------------------------
William H. Chadwick
President and Chief Executive Officer
Date: 5/9/98 /S/ Thomas J. Pruitt
-------------------------------------
Thomas J. Pruitt
Executive Vice President and Chief
Financial Officer
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