UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 [ ]
23,255,296 shares of common stock, $l.00 par, outstanding on June 30,
1999.
INDEX TO FORM 10-Q
PART I PAGE
Financial Highlights (Unaudited) 1
Item l Interim Financial Statements
Consolidated Statements of Income for the Three and
Six Months Ended June 30, 1999 and 1998 (Both unaudited) 2
Consolidated Balance Sheets at June 30, 1999 (Unaudited),
December 31, 1998 and June 30, 1998 (Unaudited) 3
Consolidated Statements of Changes in Shareholders'
Equity for the Three Months Ended March 31, 1999,
(Unaudited), June 30, 1999 (Unaudited) and the Year Ended
December 31, 1998 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 (Both unaudited) 5
Notes to Unaudited Interim Consolidated Financial
Statements 6
Independent Auditors' Review 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 16
PART II
Item 1 Legal Proceedings N/A
Item 2 Changes in Securities N/A
Item 3 Defaults Upon Senior Securities N/A
Item 4 Submission of Matters to a Vote of Security Holders 38
Item 5 Other Information N/A
Item 6 Exhibits and Reports on Form 8-K 38
Signatures 39
2nd Quarter 1999 Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
(In thousands, except share and per share data) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME DATA
Net income, as reported $ 14,135 $ 11,264 $ 27,589 $ 21,164
Less "non-operating" income items:
Net securities transactions 143 103 368 (326)
Bank-Owned Life Insurance claim 1,389 -- 1,389 --
Net gain on curtailment of pension plan -- -- 2,577 --
--------------------------------------------------------
Total "non-operating" income items 1,532 103 4,334 (326)
Income taxes on "non-operating" income items 54 38 1,194 (110)
--------------------------------------------------------
Total "non-operating" income items, net of taxes 1,478 65 3,140 (216)
--------------------------------------------------------
Add "non-operating" expense items:
Merger and acquisition related expenses 60 -- 1,233 --
Income taxes on "non-operating" expense items 22 -- 445 --
--------------------------------------------------------
Total "non-operating" expense items, net of taxes 38 -- 788 --
--------------------------------------------------------
Income from operations (1) $ 12,695 $ 11,199 $ 25,237 $ 21,380
Cash income from operations (2) $ 14,035 $ 11,992 $ 27,876 $ 22,966
SHARE AND PER SHARE DATA
Basic wtd. avg. number of shares 23,379,073 23,258,549 23,366,459 23,344,513
Basic earnings per share (Basic EPS)
Net income $ 0.60 $ 0.48 $ 1.18 $ 0.91
Income from operations (1) 0.54 0.48 1.08 0.92
Cash income from operations (2) 0.60 0.52 1.19 0.98
Diluted wtd. avg. number of shares 23,665,780 23,685,137 23,666,002 23,760,188
Diluted earnings per share (Diluted EPS)
Net income $ 0.60 $ 0.48 $ 1.17 $ 0.89
Income from operations (1) 0.54 0.47 1.07 0.90
Cash income from operations (2) 0.59 0.51 1.18 0.97
Shares outstanding, net of treasury shares, p.e. 23,255,296 23,142,925 23,255,296 23,142,925
Book value, p.e. $ 14.19 $ 13.84 $ 14.19 $ 13.84
Tangible book value, p.e. 10.94 12.61 10.94 12.61
Market price: (3)
High 33.00 39.13 37.25 39.13
Low 25.00 33.38 24.75 27.63
Average close 27.79 35.85 28.44 34.12
Last 33.00 37.00 33.00 37.00
Share volume (3) 5,945,509 3,004,099 9,610,647 5,165,823
Average monthly share volume (3) 1,981,836 1,001,366 1,601,775 860,971
Price/Tangible book value, p.e. 301.6% 293.4% 301.6% 293.4%
Price/Diluted EPS (last 4 qtrs.) 16.0 21.1 16.0 21.1
Price/Diluted income from operations per share (last 4 qtrs.) 14.7 19.6 14.7 19.6
AVERAGE BALANCES
Assets $ 4,367,914 $ 4,016,254 $ 4,363,840 $ 3,976,911
Earning assets 4,052,231 3,784,749 4,045,752 3,749,169
Loans 2,852,496 2,661,474 2,844,234 2,651,956
Goodwill 76,883 29,250 77,100 29,898
Deposits 3,586,620 3,147,210 3,583,322 3,108,270
Short-term borrowed funds 305,526 424,048 305,046 430,809
Long-term debt 73,337 59,459 73,737 52,789
Guaranteed preferred beneficial interests in Corporation's
subordinated debentures 30,000 30,000 30,000 30,000
Shareholders' equity 326,101 315,163 323,777 315,496
KEY RATIOS AND OTHER INFORMATION
Return on average assets:
Net income 1.30% 1.12% 1.27% 1.07%
Income from operations (1) 1.17 1.12 1.17 1.08
Cash income from operations (2) 1.29 1.21 1.29 1.16
Return on average shareholders' equity:
Net income 17.39 14.34 17.18 13.53
Income from operations (1) 15.61 14.25 15.72 13.67
Cash income from operations (2) 17.26 15.26 17.36 14.68
Net interest margin 4.44 4.36 4.41 4.39
Efficiency ratio 58.43 59.81 58.50 60.58
Total non-interest income from operations/total gross revenue (fte) 22.35 19.58 21.98 19.11
Stratevest total assets under management $ 4,103,919 $ 2,917,078 $ 4,103,919 $ 2,917,078
Managed assets with discretionary powers 2,735,487 1,663,244 2,735,487 1,663,244
Net loan charge-offs to average loans 0.11% 0.25% 0.12% 0.20%
Provision for loan losses to average loans 0.32 0.35 0.30 0.35
Allowance for loan losses to loans, p.e. 1.62 1.53 1.62 1.53
Allowance for loan losses coverage of non-performing loans, p.e. 240.53 241.97 240.53 241.97
Non-performing assets to total assets, p.e. 0.46 0.50 0.46 0.50
Total capital to risk-adjusted assets, p.e. 10.61 12.39 10.61 12.39
Tier 1 capital to risk-adjusted assets, p.e. 9.36 11.14 9.36 11.14
Tier 1 capital to quarterly average total assets (Leverage) 6.82 7.97 6.82 7.97
Tangible shareholders' equity to tangible assets, p.e. 5.86 7.24 5.86 7.24
<FN>
Note: All share and per share data has been restated to give retroactive
effect to stock splits.
<F1> Income from operations equals net income, excluding merger expenses,
net securities transactions, gain on sale of merchant processing, and
gain on curtailment of pension plan, net of income tax.
<F2> Cash income from operations represents income from operations,
excluding goodwill amortization expense, net of income tax effect.
<F3> Market price per share and share volume represents the historical
market price per share and share volume of Banknorth Group, Inc.
</FN>
</TABLE>
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------- ---------------------
(In thousands, except per share data) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $60,890 $59,891 $121,312 $118,756
Interest on money market investments 211 367 413 584
Interest on securities available for sale 17,014 16,132 33,917 31,786
Interest on investment securities held to maturity 333 685 664 1,703
---------------------------------------------
Total interest and dividend income 78,448 77,075 156,306 152,829
Interest expense:
Deposits 29,834 29,813 60,247 58,779
Short-term borrowed funds 3,286 5,608 6,497 11,385
Long-term debt 1,126 947 2,258 1,693
---------------------------------------------
Total interest expense 34,246 36,368 69,002 71,857
---------------------------------------------
Net interest income 44,202 40,707 87,304 80,972
Less: provision for loan losses 2,275 2,335 4,275 4,675
---------------------------------------------
Net interest income after provision for loan losses 41,927 38,372 83,029 76,297
---------------------------------------------
Other operating income:
Income from trust and investment management fees 4,975 3,139 9,808 6,101
Service charges on deposit accounts 3,402 2,948 6,600 5,827
Mortgage banking income 1,290 1,195 2,614 2,289
Card product income 748 542 1,361 972
ATM income 671 523 1,290 1,005
Net securities transactions 143 103 368 (326)
Bank-Owned Life Insurance 552 553 1,091 1,093
Bank-Owned Life Insurance claim 1,389 -- 1,389 --
Net gain on curtailment of pension plan -- -- 2,577 --
Other income 1,290 1,105 2,191 2,025
---------------------------------------------
Total other operating income 14,460 10,108 29,289 18,986
Other operating expenses:
Compensation 14,119 12,979 27,509 25,897
Employee benefits 3,225 3,094 6,610 6,389
Net occupancy 2,949 2,356 5,988 4,976
Equipment and software 2,540 2,376 4,984 4,693
Data processing 1,767 1,926 3,869 3,661
FDIC deposit insurance and other regulatory 306 283 600 563
Other real estate owned and repossession 53 142 207 497
Legal and professional 1,280 1,299 2,207 2,401
Printing and supplies 859 730 1,596 1,528
Advertising and marketing 1,177 1,058 2,326 2,032
Communications 940 732 1,903 1,451
Amortization of goodwill 2,234 1,321 4,398 2,643
Capital securities 789 789 1,578 1,578
Merger and acquisition related expenses 60 -- 1,233 --
Other expenses 4,019 3,112 7,583 6,390
---------------------------------------------
Total other operating expenses 36,317 32,197 72,591 64,699
---------------------------------------------
Income before income tax expense 20,070 16,283 39,727 30,584
Income tax expense 5,935 5,019 12,138 9,420
---------------------------------------------
Net income $14,135 $11,264 $ 27,589 $ 21,164
=============================================
Basic earnings per share $ 0.60 $ 0.48 $ 1.18 $ 0.91
=============================================
Basic wtd. avg. number of shares 23,379 23,259 23,366 23,345
=============================================
Diluted earnings per share $ 0.60 $ 0.48 $ 1.17 $ 0.89
=============================================
Diluted wtd. avg. number of shares 23,666 23,685 23,666 23,760
=============================================
<FN>
All share and per share data has been restated to give retroactive effect
to stock splits.
See accompanying notes to unaudited interim consolidated financial statements.
</FN>
</TABLE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(In thousands, except share and per share data) 1999 1998 1998
--------- ------------ ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
Cash and due from banks $ 131,601 $ 164,826 $ 125,658
Money market investments 100 4,900 44,405
-----------------------------------------
Cash and cash equivalents 131,701 169,726 170,063
-----------------------------------------
Securities available for sale, at fair value 1,133,250 1,127,865 1,029,411
Loans held for sale 26,246 42,996 36,284
Investment securities, held to maturity 18,087 20,545 29,628
(Fair value of $18,389 at June 30, 1999, $21,606 at
December 31, 1998 and $30,644 at June 30, 1998)
Loans 2,902,439 2,837,106 2,658,665
Less: allowance for loan losses 47,135 44,537 40,570
-----------------------------------------
Net loans 2,855,304 2,792,569 2,618,095
-----------------------------------------
Accrued interest receivable 23,137 21,244 23,451
Premises, equipment and software, net 50,365 50,936 44,457
Other real estate owned and repossessed assets 733 3,335 3,343
Goodwill, net 75,602 80,224 28,476
Capitalized mortgage servicing rights 6,038 5,351 5,323
Bank-owned life insurance 42,804 42,306 41,170
Other assets 49,969 45,784 27,638
-----------------------------------------
Total assets $4,413,236 $4,402,881 $4,057,339
=========================================
Liabilities, Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Debentures and
Shareholders' Equity
Deposits:
Non-interest bearing $ 497,174 $ 546,192 $ 428,233
NOW accounts & money market savings 1,448,520 1,490,944 1,251,682
Regular savings 346,288 328,986 305,518
Time deposits $100 thousand and greater 230,799 239,071 219,834
Time deposits under $100 thousand 1,004,466 1,034,304 982,147
-----------------------------------------
Total deposits 3,527,247 3,639,497 3,187,414
-----------------------------------------
Short-term borrowed funds:
Federal funds purchased 76,645 30,445 --
Securities sold under agreements to repurchase 193,297 208,511 147,994
Borrowings from U.S. Treasury 31,768 12,678 31,046
Borrowings from Federal Home Loan Bank 105,000 30,000 225,500
-----------------------------------------
Total short-term borrowed funds 406,710 281,634 404,540
-----------------------------------------
Long-term debt:
Federal Home Loan Bank term notes 65,998 66,062 65,224
Bank term loan 6,710 8,263 9,563
-----------------------------------------
Total long-term debt 72,708 74,325 74,787
-----------------------------------------
Accrued interest payable 6,328 7,101 8,127
Other liabilities 40,281 49,062 32,244
-----------------------------------------
Total liabilities 4,053,274 4,051,619 3,707,112
-----------------------------------------
Guaranteed preferred beneficial interests in
Corporation's junior subordinated debentures 30,000 30,000 30,000
Shareholders' equity:
Preferred stock, $.01 par value; authorized 500,000
shares and none issued as of June 30, 1999 and
December 31, 1998 -- -- --
Common stock, $1.00 par value; authorized 70,000,000
shares and issued 23,548,392 shares as of June 30,
1999, and December 31, 1998, and authorized 38,000,000
shares and issued 23,556,925 as of June 30, 1998 23,548 23,548 23,557
Capital surplus 85,891 86,033 85,525
Retained earnings 240,386 221,919 221,952
Unamortized employee restricted stock (864) (1,266) (1,310)
Accumulated other comprehensive income (loss) (9,125) 3,509 4,339
Unearned ESOP shares (209) (463) (463)
Less: Common stock in treasury, at cost; 293,096 shares
as of June 30, 1999, 369,300 shares as of December 31,
1998, and 414,000 shares as of June 30, 1998 (9,665) (12,018) (13,373)
-----------------------------------------
Total shareholders' equity 329,962 321,262 320,227
-----------------------------------------
Total liabilities, guaranteed preferred beneficial
interests in Corporation's junior subordinated
debentures and shareholders' equity $4,413,236 $4,402,881 $4,057,339
=========================================
<FN>
See accompanying notes to unaudited interim consolidated financial statements.
</FN>
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unamortized
Employee
Number of Shares Common Capital Retained Restricted
Issued Treasury Stock Surplus Earnings Stock
------ -------- ----- ------- -------- ----------
(Dollars and shares in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 23,669 154 $23,669 $88,363 $209,766 $(1,550)
Comprehensive income:
Net income -- -- 28,920 --
Other comprehensive income, net of tax:
Unrealized net holding gains arising
during the year (pre-tax $1,147) -- -- -- --
Reclassification adjustment for net
gains realized in net income during
the year (pre-tax $519) -- -- -- --
Minimum pension liability adjustments -- -- -- --
Other comprehensive income -- -- -- --
Comprehensive income
Cash dividends declared ($ .64 per share) -- -- (15,072) --
Issuance of employee restricted stock (7) -- 41 -- (254)
Amortization of employee restricted stock -- 259 -- 538
Issuance of restricted stock units under
directors' deferred compensation plan, net -- 385 (37) --
Exercise of employee stock options (144) -- -- (1,920) --
Purchase of treasury stock 366 -- -- -- --
Fractional shares repurchased (1) (1) (16) -- --
Stock vested in ESOP -- -- -- --
Pooled company transactions
Purchase and retirement of treasury stock (120) 122 (120) (2,999) -- --
Treasury stock reissued for stock awards
and options exercised (122) -- -- 262 --
----------------------------------------------------------------
Balance, December 31, 1998 23,548 369 $23,548 $86,033 $221,919 $(1,266)
----------------------------------------------------------------
Comprehensive income:
Net income -- -- 13,454 --
Other comprehensive income, net of tax:
Unrealized net holding losses arising
during the quarter (pre-tax $3,947) -- -- -- --
Reclassification adjustment for net gains
realized in net income during the
quarter (pre-tax $218) -- -- -- --
Other comprehensive income (loss) -- -- -- --
Comprehensive income
Cash dividends declared ($ .36 per share) -- -- (8,348) --
Amortization of employee restricted stock -- (560) -- 412
Issuance of restricted stock units under
directors' deferred compensation plan -- 144 -- --
Exercise of employee stock options (25) -- -- (207) --
Stock vested in ESOP -- -- -- --
----------------------------------------------------------------
Balance, March 31, 1999 23,548 344 $23,548 $85,617 $226,818 $ (854)
----------------------------------------------------------------
Comprehensive income:
Net income -- -- 14,135 --
Other comprehensive income, net of tax:
Unrealized net holding losses arising
during the quarter (pre-tax $15,596) -- -- -- --
Reclassification adjustment for net gains
realized in net income during the
quarter (pre-tax $140) -- -- -- --
Other comprehensive income (loss) -- -- -- --
Comprehensive income
Amortization of employee restricted stock -- 284 -- (10)
Issuance of restricted stock units under
directors' deferred compensation plan, net (7) -- (10) (61) --
Exercise of employee stock options (44) -- -- (506) --
Stock vested in ESOP -- -- -- --
----------------------------------------------------------------
Balance, June 30, 1999 23,548 293 $23,548 $85,891 $240,386 $ (864)
----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Unearned Other
ESOP Comprehensive Treasury Comprehensive
Shares Income (Loss) Stock Income (Loss) Total
-------- ------------- -------- ------------- -----
(Dollars and shares in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $(640) $ 3,318 $ (4,798) $318,128
Comprehensive income:
Net income -- -- -- $28,920 $ 28,920
-------
Other comprehensive income, net of tax:
Unrealized net holding gains arising
during the year (pre-tax $1,147) -- -- -- 805
Reclassification adjustment for net
gains realized in net income during
the year (pre-tax $519) -- -- -- (364)
Minimum pension liability adjustments -- -- -- (250)
-------
Other comprehensive income -- 191 -- 191 191
-------
Comprehensive income $29,111
=======
Cash dividends declared ($ .64 per share) -- -- -- (15,072)
Issuance of employee restricted stock -- -- 213 --
Amortization of employee restricted stock -- -- -- 797
Issuance of restricted stock units under
directors' deferred compensation plan, net -- -- -- 348
Exercise of employee stock options -- -- 4,864 2,944
Purchase of treasury stock -- -- (12,297) (12,297)
Fractional shares repurchased -- -- -- (17)
Stock vested in ESOP 177 -- -- 177
Pooled company transactions
Purchase and retirement of treasury stock -- -- (1,921) (5,040)
Treasury stock reissued for stock awards
and options exercised -- -- 1,921 2,183
------------------------------------ --------
Balance, December 31, 1998 $(463) $ 3,509 $(12,018) $321,262
------------------------------------ --------
Comprehensive income:
Net income -- -- -- $13,454 $ 13,454
-------
Other comprehensive income, net of tax:
Unrealized net holding losses arising
during the quarter (pre-tax $3,947) -- -- -- (2,506)
Reclassification adjustment for net gains
realized in net income during the
quarter (pre-tax $218) -- -- -- (143)
-------
Other comprehensive income -- (2,649) -- (2,649) (2,649)
-------
Comprehensive income $10,805
=======
Cash dividends declared ($ .36 per share) -- -- -- (8,348)
Amortization of employee restricted stock -- -- -- (148)
Issuance of restricted stock units under
directors' deferred compensation plan -- -- -- 144
Exercise of employee stock options -- -- 773 566
Stock vested in ESOP 184 -- -- 184
------------------------------------ --------
Balance, March 31, 1999 $(279) $ 860 $(11,245) $324,465
------------------------------------ --------
Comprehensive income:
Net income -- -- -- $14,135 $ 14,135
-------
Other comprehensive income, net of tax:
Unrealized net holding losses arising
during the quarter (pre-tax $15,596) -- -- -- (9,896)
Reclassification adjustment for net gains
realized in net income during the
quarter (pre-tax $140) -- -- -- (89)
-------
Other comprehensive income -- (9,985) -- (9,985) (9,985)
-------
Comprehensive income $ 4,150
-------
Amortization of employee restricted stock -- -- -- 274
Issuance of restricted stock units under
directors' deferred compensation plan, net -- -- 220 149
Exercise of employee stock options -- -- 1,360 854
Stock vested in ESOP 70 -- -- 70
------------------------------------------------------------------
Balance, June 30, 1999 $(209) $(9,125) $ (9,665) $329,962
------------------------------------------------------------------
<FN>
Note: Cash dividends per share represent historical dividends of Banknorth
Group, Inc. All share and per share data has been restated to give
retroactive effect of stock splits
See accompanying notes to unaudited interim consolidated financial statements.
</FN>
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
(In thousands) 1999 1998
---- ----
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 27,589 $ 21,164
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of premises, equipment and software 3,625 3,408
Amortization of goodwill 4,398 2,643
Net amortization of premiums on securities available for sale 4,104 2,396
Net accretion of discounts on investment securities (49) (119)
Provision for loan losses 4,275 4,675
Adjustment of other real estate owned to estimated fair value (26) 135
Provision for deferred tax (benefit) expense 342 (606)
Amortization of employee restricted stock 126 495
Issuance of restricted stock units under directors' deferred
compensation plan, net 293 202
Net securities transactions (368) 326
Net gain on sale of other real estate owned and repossessed assets (47) (227)
Proceeds from sale of loans held for sale 143,331 152,836
Originations and purchases of loans held for resale (125,022) (162,690)
Net gain on sale of loans held for sale (1,559) (1,472)
Net increase in cash surrender value of bank owned life insurance (498) (1,093)
Decrease (increase) in interest receivable (1,893) (174)
(Decrease) increase in interest payable (773) 597
Decrease (increase) in other assets and other intangibles 2,292 (2,980)
Increase (decrease) in other liabilities (8,781) 2,759
ESOP compensation expense 254 177
------------------------
Total adjustments 24,024 1,288
------------------------
Net cash provided by operating activities 51,613 22,452
------------------------
Cash flows from investing activities:
Proceeds from maturity and call of securities available for sale 204,440 157,227
Proceeds from maturity and call of investment securities held to maturity 2,518 29,130
Proceeds from sale of securities available for sale 16,869 102,063
Purchase of securities available for sale (250,342) (330,902)
Proceeds from sale of OREO and repossessed assets 3,002 2,120
Net decrease (increase) in originated loans (67,337) (21,803)
Capital expenditures (3,069) (2,555)
------------------------
Net cash used in investing activities (93,919) (64,720)
------------------------
Cash flows from financing activities:
Net (decrease) increase in deposits (112,250) 133,780
Net increase (decrease) in short-term borrowed funds 125,076 (45,395)
Purchase of treasury stock -- (17,337)
Issuance of long-term debt 140 37,468
Payments on long-term debt (1,757) (4,930)
Exercise of employee stock options 1,420 3,936
Dividends paid (8,348) (7,559)
------------------------
Net cash provided by financing activities 4,281 99,963
------------------------
Net (decrease) increase in cash and cash equivalents (38,025) 57,695
------------------------
Cash and cash equivalents at beginning of period 169,726 112,368
------------------------
Cash and cash equivalents at end of period $ 131,701 $ 170,063
========================
Additional disclosure relative to statement of cash flows:
Interest paid $ 69,775 $ 71,295
========================
Taxes paid $ 9,464 $ 10,118
========================
Supplemental schedule of non-cash investing and financing activities:
Net transfer of loans to OREO and repossessed assets $ 327 $ 2,576
Adjustment to securities available for sale to fair value, net of tax (12,634) 1,021
<FN>
See accompanying notes to unaudited interim consolidated financial statements.
</FN>
</TABLE>
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited interim consolidated financial statements
include the accounts of the Company and its subsidiaries, Evergreen
Bank, N.A., 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 June 30, 1999 and 1998, the
results of their operations for the three and six months ended June
30, 1999 and 1998, and cash flows for the six months ended June 30,
1999 and 1998. 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 1998
annual report to shareholders on Form 10-K. On December 31, 1998,
Evergreen Bancorp, Inc. and its wholly owned subsidiary Evergreen
Bank, N.A. ("Evergreen") was merged with and into Banknorth. The
merger was accounted for as a pooling of interests and, accordingly,
the financial information for all prior periods has been restated to
present the combined financial condition and results of operations of
both companies as if the merger had been in effect for all periods
presented.
2. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of
common shares outstanding for the period. Issuable shares (such as
those related to the directors' restricted stock units), and
returnable shares (such as restricted stock awards) are considered
outstanding common shares and are included in the computation of basic
earnings per share as of the date that all necessary conditions have
been satisfied. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity (such as the Company's stock options). All share and per share
data has been restated to give retroactive effect to stock splits.
The following table provides calculations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------------------------------------------
Dollars in thousands, 1999 1998
except for per share data --------------------------------- ---------------------------------
Weighted Weighted
Net Average Per Share Net Average Per Share
Income Shares Amount Income Shares Amount
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $14,135 23,379,073 $0.60 $11,264 23,258,549 $0.48
Effect of dilutive securities:
Stock options 253,956 399,387
Restricted stock awards 32,751 27,201
---------- ----------
Diluted earnings per share $14,135 23,665,780 $0.60 $11,264 23,685,137 $0.48
=====================================================================
<CAPTION>
Six Months Ended June 30,
----------------------------------------------------------------------
Dollars in thousands, 1999 1998
except for per share data --------------------------------- ---------------------------------
Weighted Weighted
Net Average Per Share Net Average Per Share
Income Shares Amount Income Shares Amount
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $27,589 23,366,459 $1.18 $21,164 23,344,513 $0.91
Effect of dilutive securities:
Stock options 268,494 386,692
Restricted stock awards 31,049 28,983
---------- ----------
Diluted earnings per share $27,589 23,666,002 $1.17 $21,164 23,760,188 $0.89
=====================================================================
</TABLE>
3. In June 1998, the Financial Accounting Standards Board ("FASB"),
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
During the second quarter of 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FASB Statement No. 133." SFAS No. 137 defers
the effective date of SFAS No. 133 by one year from Fiscal quarters of
Fiscal years beginning after June 15, 1999 to Fiscal quarters of
Fiscal years beginning after June 15, 2000. Management is currently
evaluating the impact of this Statement on the Company's consolidated
financial statements.
4. On June 2, 1999, Banknorth announced that it and Peoples Heritage
Financial Group, Inc. ("PHFG") had entered into an Agreement and Plan
of Merger (the "Agreement"), which sets forth the terms and conditions
pursuant to which the Company would be merged with and into PHFG (the
"Merger") and PHFG would change its name to "Banknorth Group, Inc."
The Agreement provides, among other things, that as a result of the
Merger, each outstanding share of common stock of the Company will be
converted into the right to receive 1.825 shares of PHFG's common
stock, plus cash in lieu of any fractional share interest.
Consummation of the Merger is subject to a number of conditions
including (i) the approval of the Agreement and Merger by the
shareholders of the Company and PHFG, (ii) the receipt of requisite
regulatory approvals, (iii) receipt by the parties of an opinion of
counsel as to certain tax consequences of the Merger, (iv) receipt by
the parties of letters from their independent public accountants
stating their opinion that the Merger shall qualify for pooling of
interests accounting treatment and (v) satisfaction of certain other
conditions. The transaction is valued at $780.7 million and will
create a $17 billion multi-state banking and financial services
company. It is expected that the transaction will be closed by year
end 1999.
INDEPENDENT AUDITORS' REVIEW REPORT
The Board of Directors
Banknorth Group, Inc.
We have reviewed the accompanying consolidated balance sheets of
Banknorth Group, Inc. and subsidiaries ("the Company") as of June 30, 1999
and 1998, and the related consolidated statements of income for the three
and six month periods ended June 30, 1999 and 1998, and the consolidated
statements of changes in shareholders' equity for the three month periods
ended March 31, 1999 and June 30, 1999, and the consolidated statements of
cash flows for the six-month periods ended June 30, 1999 and 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 principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our review, we are not aware of any material modifications
that should be made to the consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Banknorth Group, Inc.
and subsidiaries as of December 31, 1998, 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 22, 1999, 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, 1998 and the consolidated statements of
changes in shareholders' equity for the year ended December 31, 1998, are
fairly stated, in all material respects, in relation to the consolidated
balance sheet and statement of changes in shareholders' equity from which
they have been derived.
/S/ KPMG LLP
Albany, New York
July 16, 1999
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") and its subsidiaries during the three and six
months ended June 30, 1999, with comparisons to 1998, 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 1998
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 1999 presentation. On
December 31, 1998, the shareholders of Banknorth Group, Inc. and Evergreen
Bancorp, Inc. ("Evergreen") of Glens Falls, New York approved a merger
between the two organizations. Evergreen was merged with and into Banknorth
on that date with each issued and outstanding share of Evergreen common stock
converted into 0.9 shares of Banknorth common stock. This resulted in the
issuance of approximately 7.9 million in additional shares of Banknorth
common stock. All of the historical financial information in this quarterly
report has been restated for the effect of this transaction, which was
accounted for as a pooling-of-interests.
Except for historical information contained herein, the matters
contained in this review are "forward-looking statements" that involve risk
and uncertainties, including statements concerning future events or
performance and assumptions and other statements which are other than
statements of historical facts. The Company wishes to caution readers that
the following important factors, among others, could in the future affect the
Company's actual results and could cause the Company's actual results for
subsequent periods to differ materially from those expressed in any forward-
looking statement made by or on behalf of the Company herein:
* the effect of changes in laws and regulations, including federal and
state banking laws and regulations, with which the Company and its
banking subsidiaries must comply, the cost of such compliance and
the potentially material adverse effects if the Company or any of
its banking subsidiaries were not in substantial compliance either
currently or in the future as applicable;
* the effect of changes in accounting policies and practices, as may
be adopted by the regulatory agencies as well as by the Financial
Accounting Standards Board, or changes in the Company's
organization, compensation and benefit plans;
* the effect on the Company's competitive position within its market
area of increasing consolidation within the banking industry and
increasing competition from larger "super regional" and other
banking organizations as well as non-bank providers of various
financial services;
* the effect of certain customers and vendors of critical systems or
services failing to adequately address issues relating to becoming
year 2000 compliant;
* the effect of unforeseen changes in interest rates;
* the effects of changes in the business cycle and downturns in the
local, regional or national economies;
* the effect of lower than expected revenues or cost savings from the
recently completed merger with Evergreen and acquisition of the
Berkshire branches;
* the effect of higher than expected costs and unanticipated
difficulties related to the cost of integration of acquired
businesses and operations; and
* the effect of other risks and uncertainties discussed throughout
this report as well as those discussed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
The Company wishes to caution readers not to place undue reliance on
any forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including those described above, could
cause the Company's actual results or circumstances for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions, which may be
made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
MERGER WITH PEOPLES HERITAGE FINANCIAL GROUP, INC.
On June 2, 1999, Banknorth announced that it and Peoples Heritage
Financial Group, Inc. ("PHFG") had entered into an Agreement and Plan of
Merger (the "Agreement"), which sets forth the terms and conditions pursuant
to which the Company would be merged with and into PHFG (the "Merger") and
PHFG would change its name to "Banknorth Group, Inc." The Agreement
provides, among other things, that as a result of the Merger, each
outstanding share of common stock of the Company will be converted into the
right to receive 1.825 shares of PHFG's common stock, plus cash in lieu of
any fractional share interest. Consummation of the Merger is subject to a
number of conditions including (i) the approval of the Agreement and the
Merger by the shareholders of the Company and PHFG, (ii) the receipt of
requisite regulatory approvals, (iii) receipt by the parties of an opinion of
counsel as to certain tax consequences of the Merger, (iv) receipt by the
parties of letters from their independent public accountants stating their
opinion that the Merger shall qualify for pooling-of-interests accounting
treatment and (v) satisfaction of certain other conditions.
The transaction is valued at $780.7 million and will create a $17
billion multi-state banking and financial services company. It is expected
that the transaction will be closed by year end 1999. The operational
integration of the two companies is expected to be completed during the
second quarter of 2000.
OVERVIEW
Banknorth's net income was $14.1 million, representing basic earnings
per share ("EPS") of $.60 and diluted EPS of $.60, for the three months ended
June 30, 1999, compared to $11.3 million, or $.48 basic EPS, and $.48 diluted
EPS for the three months ended June 30, 1998. For the year to date period
ended June 30, 1999, net income was $27.6 million, representing basic EPS of
$1.18 and diluted EPS of $1.17 as compared to $21.2 million, or $.91 basic
EPS, and $.89 diluted EPS.
During the first half of 1999, the Company completed the core banking
systems conversion related to the Evergreen merger. As a result, the Company
recorded and paid $1.2 million in additional one-time expenses, primarily in
data conversion and staff expenses. Additionally, the Company recorded a net
gain of $2.6 million related to the curtailment of the Evergreen pension
resulting from the combination of the former Evergreen and Banknorth pension
plans following the merger. The net result of the merger-related activities
was a net pre-tax gain of $1.3 million, or $735 thousand in after tax impact.
This represents a $.03 impact on the diluted EPS. Final systems conversions
for the Berkshire and Evergreen private banking relationships are scheduled
to be completed in the third quarter of 1999.
ACQUISITION ACTIVITY
Evergreen Bancorp, Inc.
On December 31, 1998, the shareholders of Banknorth and Evergreen
approved a merger between the two organizations. Evergreen was merged with
and into Banknorth with each issued and outstanding share of Evergreen common
stock, together with associated preferred purchase rights, converted into 0.9
shares of Banknorth common stock, plus cash in lieu of any fractional share
interest. This resulted in the issuance of approximately 7.9 million in
additional shares of Banknorth common stock, bringing Banknorth's outstanding
shares to approximately 23.2 million immediately following the merger.
Evergreen Bank, N.A. ("Evergreen Bank"), a national bank and formerly
Evergreen's sole banking subsidiary, will continue to operate its banking
business, as a wholly owned subsidiary of Banknorth. Evergreen Bank operates
28 offices in 8 counties in eastern upstate New York, throughout an area
extending from the Massachusetts border fifty miles south of Albany, north to
the Canadian border. Evergreen Bank serves commercial, individual,
institutional and municipal customers with a wide range of deposit and loan
products. As of June 30, 1999, Evergreen Bank had total assets of $1.1
billion and deposits of $968.0 million.
In order to effect the merger, one-time merger related expenses of
$21.3 million ($15.9 million after-tax impact), were incurred in the fourth
quarter of 1998 and the first half of 1999. The majority of these expenses
were employment-related costs and data processing conversion and termination
costs. Additionally, as mentioned above, the Company recorded in the first
quarter of 1999, a net gain of $2.6 million on the curtailment of the
Evergreen pension plan. As of June 30, 1999, the systems conversion was
completed in all areas, except the private banking relationships. The
conversion of the private banking relationships of Evergreen is scheduled to
occur in the third quarter of 1999 and the Company expects to incur an
additional $100 thousand in one-time expenses to complete this conversion.
At December 31, 1998, after payments of certain one-time merger related
expenses, the Company had a remaining accrued liability of approximately
$15.4 million related to: compensation costs, including severance, employment
contracts and accelerated employee benefits ($5.6 million); data processing
contract termination costs ($3.9 million); investment banking fees ($3.5
million); and legal, accounting, and other costs incidental to the merger
($2.4 million). $11.1 million of these liabilities were paid during the
first half of 1999. As of June 30, 1999, $4.3 million of these liabilities
remain. The remaining liability primarily represents employment related
costs and other costs incidental to the merger.
The merger qualified as a tax-free reorganization and was accounted for
as a pooling-of-interests. At the time the merger was announced, both
companies announced the recision of their previously announced stock
repurchase programs.
All historical financial information in this quarterly report has been
restated for the combination of the two companies.
First Massachusetts Bank - Berkshire Region
On November 13, 1998, Banknorth completed the purchase from BankBoston,
N.A. of ten full-service branches, one limited service branch and nine remote
ATM locations, as well as private banking relationships associated with the
branches in the Berkshire region of Massachusetts.
In connection with the Berkshire acquisition, Banknorth paid
BankBoston, N.A. a fixed premium of $52.5 million. At the closing, the
deposits of the Berkshire branches were approximately $290.1 million,
including accrued interest. Banknorth also purchased in the transaction
commercial loans associated with the branches with a net book balance as of
November 13, 1998 of approximately $73.6 million and a portfolio of consumer
loans originated in the branches with a net book balance of $35.8 million.
In addition, the Company received approximately $122.5 million in cash as
consideration for the net liabilities assumed. The Berkshire acquisition
(other than the private banking relationships) was made through First
Massachusetts Bank, N.A. headquartered in Worcester, Massachusetts, and has
extended that bank's central Massachusetts territory westward to the border
of New York State and contiguous to the southern reach of Evergreen's New
York market area.
The private banking relationships associated with these branches, which
as of closing represented approximately $1.0 billion of trust and investment
assets under management, including approximately $750 million in
discretionary trust assets under management, were acquired by Stratevest.
The transaction was accounted for under purchase accounting rules. As
such, both the assets acquired and liabilities assumed have been recorded on
the consolidated balance sheet of the Company at estimated fair value as of
the date of acquisition. Goodwill, representing the excess of cost over net
assets acquired, was $54.2 million, substantially all of which is deductible
for income tax purposes, and is being amortized over fifteen years on a
straight-line basis. The one-time acquisition-related expenses of $1.8
million pre-tax, or $1.2 million after-tax, were recorded in the fourth
quarter of 1998. The conversion of the private banking relationships of the
Berkshires, as previously noted, is to be completed in the third quarter of
1999 and an additional $100 thousand in one-time expenses are expected to be
incurred in the completion of this conversion.
The results of operations for the branches and private banking
relationships acquired are included in Banknorth's consolidated financial
statements from the date of acquisition forward.
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 92.45% and 93.62% of total assets at June 30, 1999 and 1998,
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.
Earning Assets
Earning assets were $4.1 billion during the second quarter of 1999, an
increase of $267.5 million, or 7.1% from the second quarter of 1998. For the
year to date period, earning assets were $4.0 billion as compared to $3.7
billion in 1998. Table A, Mix of Average Earning Assets, shows how the mix
of earning assets has changed as compared to the same period in 1998.
Loans. Average total loans of $2.9 billion during the three months
ended June 30, 1999, were $191.0 million, or 7.2%, above the same period of
1998. The increase is primarily attributable to the Berkshire branch
acquisition completed in November 1998. The Berkshire acquisition added
approximately $100 million on average to the loan portfolio. The remainder
of the increase is attributable to strong loan demand in the Massachusetts
market and improved lending activity in Vermont and New Hampshire. The strong
commercial loan demand offset a decline in the real estate mortgage portfolio
as a result of refinancing activity. Table B, Loan Portfolio, provides the
detailed components of the loan portfolio as of June 30, 1999 and 1998, as
well as December 31, 1998.
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 1999. 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 held for sale were $26.2 million as of June 30, 1999, $10.0
million lower than the $36.3 million balance outstanding as of June 30, 1998.
The production level experienced in 1998 was at record high levels for the
Company as refinancing activity was strong throughout the year given the low
interest rate environment. Interest rates rose slightly throughout 1999 and
refinancing activity slowed. The current production in 1999 is primarily new
mortgage originations as the home buying season is active and interest rates
remain relatively low. Management expects the level of mortgage originations
to continue at the more normal level, as seen to date in 1999, for the second
half of 1999.
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 $1.1
billion at June 30, 1999 as compared to $1.0 billion at June 30, 1998, an
increase of $103.8 million or 10.1%. The balances include a fair value
adjustment reflecting a net unrealized loss of $14.0 million at June 30,
1999, compared to a net unrealized gain of $7.2 milllion at June 30, 1998.
The increase in securities available for sale is primarily the result of the
cash flow generated by the investment securities held to maturity portfolio
re-invested in the available for sale portfolio and the investing of excess
liquidity as a result of deposit growth. Average balances for securities
available for sale for the three months ended June 30, 1999 and 1998 were
$1.1 billion and $1.0 billion, respectively.
Investment securities held to maturity. The designation "investment
securities held to maturity" is made at the time of purchase or transfer
based upon the intent and ability to hold these securities until maturity.
The management of this portfolio focuses on yield and earnings generation,
liquidity through cash flow and interest rate risk characteristics within the
framework of the entire balance sheet. Cash flow guidelines and average
duration targets have been established for management of this portfolio. As
of June 30, 1999, the balance of securities in this category was $18.1
million, $11.5 million below the balance at June 30, 1998. The primary cause
of the reduced portfolio size was the reinvestment of cash flows from
maturities during 1998 and thus far in 1999 into the available for sale
portfolio.
Table C, Securities Available for Sale and Investment Securities
contains details of investment securities at June 30, 1999 and 1998, as well
as December 31, 1998.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $18.2 million during the second quarter of 1999, down
$7.9 million, or 30.3%, from the second quarter of 1998. 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 $79.2 million
for the three-month period ended June 30, 1999, as compared to $77.5 million
for the same period in 1998. The increase of $1.7 million, or 2.2%, resulted
from the increases in earning assets through acquisition and normal growth
described previously. Total earning assets during the second quarter of 1999
of $4.1 billion yielded 7.83%, while in 1998 earning assets of $3.8 billion
yielded 8.22%. The increase in earning assets contributed $5.3 million
towards the increase in interest income, while the decline in yield of 39
basis points resulted in $3.6 million less in interest income. Table D,
Average Balances, Yields and Net Interest Margins and Table F, Volume and
Yield Analysis contain details of changes by category of interest income from
earning assets.
For the six months ended June 30, 1999 and 1998, income from earning
assets was $157.6 million and $153.6 million, respectively. Total earning
assets of $4.0 billion, increased $296.6 million or 7.9% over the six month
average of 1998. The yield on earning assets was 7.85% during the first six
months of 1999 as compared to 8.26% during the same period of 1998. During
the first six months of 1999, the increase in earning asset contributed $11.6
million towards the increase over the same period of 1998, while the 41 basis
point reduction in yield caused a $7.6 million decrease.
Funding Sources
Banknorth utilizes various traditional sources of funding to support
its earning asset portfolios. Average total net funding increased by $334.8
million, or 9.2%, in the second quarter of 1999 in comparison to the average
for the quarter ended June 30, 1998. Table E, Average Sources of Funding,
presents the various categories of funds used and the corresponding average
balances for the second quarter of 1999 and 1998.
Deposits. Total core deposits averaged $3.3 billion during the three
month period ended June 30, 1999, $401.6 million, or 13.7%, over the second
quarter average of 1998. The majority of the increase was the result of the
Berkshire branch acquisition, which contributed $291.5 million on average in
deposits during the second quarter of 1999. Overall, NOW and money market
accounts increased by $259.1 million, retail time deposits in denominations
less than $100,000 increased by $20.0 million and regular savings increased
$38.2 million. In the current low rate environment, the indexed money market
product offered is an attractive option for our customers. Total core
deposits represented 83.8% of total net funding during the second quarter of
1999 as compared to 80.5% during the same quarter of 1998.
Purchased liabilities. Total purchased liabilities decreased on average
by $64.0 million to $633.3 million during the second quarter of 1999 from
$697.3 million during the second quarter of 1998. Short-term borrowed funds
decreased $118.5 million from $424.0 million for the three months ended June
30, 1998 to $305.5 million for the three months ended June 30, 1999. Short-
term borrowings from the FHLB decreased significantly from $256.0 million at
June 30, 1998 to $85.6 million at June 30, 1999. The decrease in short-term
borrowed funds was the result of paydowns made after receipt of cash in the
acquisition of the Berkshire branches and a refinancing of approximately
$30.0 million to longer-term debt at more favorable rates. Long-term advances
from the Federal Home Loan Bank increased on average from $49.3 million for
the three months ended June 30, 1998 to $66.0 million for the three months
ended June 30, 1999. Scheduled maturities of short-term advances were
replaced with long-term advances in response to movements in interest rates
while maintaining the Company's interest rate risk profile within established
guidelines.
Securities sold under repurchase agreements continued to be an
important source of purchased liabilities. Securities sold under repurchase
agreements averaged $192.6 million or 30.4% of the purchased liabilities for
the second quarter of 1999. This is an increase of $49.4 million from the
average in the second quarter of 1998. The Company enters into sales of
securities under short-term, usually overnight, fixed coupon, repurchase
agreements with customers. Such agreements are treated as financings and the
obligations to repurchase securities sold are reflected as liabilities.
Bank Debt. Average bank debt of $7.4 million during the second quarter
of 1999 represented primarily the 1994 funding of the acquisition of North
American Bank Corporation. The balance of $6.7 million at June 30, 1999 will
be repaid within five years. Additionally, there was $280 thousand in bank
debt at June 30, 1999 related to the funding of the Employee Stock Ownership
Plan of Evergreen Bank. This loan is an adjustable rate loan that will
mature in 2000.
Interest expense summary. Total interest expense for the three months
ended June 30, 1999 was $34.2 million, a decrease of $2.1 million or 5.8%, as
compared to the same period of 1998. The decrease in interest expense was the
result of the Company lowering its cost of funding given the significant
increase in core deposits and the decline of $104.6 million in higher cost
borrowings, primarily short-term. Increased levels of interest-bearing
liabilities contributed $2.5 million to the increase in interest expense
while the decline in rates paid decreased interest expense by $4.6 million.
The cost of interest bearing liabilities was 3.96% in the second quarter of
1999, a decrease of 57 basis points from the second quarter of 1998.
Total interest-bearing liabilities averaged $3.5 billion during the six
months ended June 30, 1999, $278.1 million, or 8.7%, higher than in 1998.
The cost of funds was 4.01% in 1999 as compared to 4.54% in 1998. Table D,
Average Balances, Yields and Net Interest Margins and Table F, Volume and
Yield Analysis contain details of changes by category of interest bearing
liabilities and interest expense.
Net Interest Income
Net interest income totaled $44.9 million and $41.1 million for the
three month periods ended June 30, 1999 and 1998, respectively. The net
interest margin was 4.44% during the second quarter of 1999 as compared to
4.36% during the same period of 1998. The yield on earning assets of 7.83%
for the second quarter of 1999, was 39 basis points below the corresponding
period of the prior year. Interest rates generally decreased during 1998 and
rose slightly in early 1999. This trend of the decreasing yield on earning
assets was experienced throughout 1998 and 1997. In the second quarter of
1999, the cost of funds declined 57 basis points from the second quarter of
1998. This decline in the cost of funds was greater than the decline in the
yield on earning assets, resulting in a slight increase in the net interest
margin in the second quarter of 1999 compared to the second quarter of 1998.
Net interest income totaled $88.6 million for the six months ended June
30, 1999, compared to $81.7 million for the same period of 1998. The net
interest margin increased slightly from 4.39% for the six months ended June
30, 1998 to 4.41% for the six months ended June 30, 1999. As noted earlier,
the decline in the cost of funds exceeded the decline in the yield in earning
assets during this time period.
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 classified as troubled debt restructurings and loans past due 90
days or more and still accruing interest. Also included in the total non-
performing assets are foreclosed and repossessed non-real estate assets.
NPAs were $20.3 million at June 30, 1999, an increase of $219 thousand,
or 1.1%, from June 30, 1998 and a decrease of $4.0 million, or 16.4%, from
December 31, 1998. The ratio of NPAs to loans plus other real estate owned
and repossessed assets at June 30, 1999, was .70% compared to .76% at June
30, 1998. Table G, Non-Performing Assets, contains the details for June 30,
1999 and 1998, and December 31, 1998.
Non-performing loans ("NPLs") at June 30, 1999 were $19.6 million, a
net increase of $2.8 million, or 16.9%, from June 30, 1998. 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 $733 thousand
at June 30, 1999, down $2.6 million from one year earlier and from December
31, 1998.
Allowance for loan losses and provision. The allowance for loan losses
is maintained at a level estimated by management to provide adequately for
risk of loss inherent in the current loan portfolio. The adequacy of the
allowance for loan losses is monitored quarterly. It is assessed for
adequacy using a methodology designed to ensure the level of the allowance
reasonably reflects the loan portfolio's risk profile. It is also evaluated
to ensure that it is sufficient to absorb all probable and reasonably
estimable credit losses inherent in the current loan portfolio.
For purposes of evaluating the adequacy of the allowance, the Company
considers a number of significant factors that affect the collectibility of
the portfolio. For individually analyzed loans, these include estimates of
loss exposure, which reflect the facts and circumstances that affect the
likelihood of repayment of such loans as of the evaluation date. For
homogenous pools of loans, estimates of the Company's exposure to credit loss
reflect a thorough assessment of a number of factors, which could affect loan
collectibility. These factors include: the size, trend, composition, and
nature; changes in lending policies and procedures, including underwriting
standards and collection, charge-off and recovery practices; trends
experienced in non-performing and delinquent loans; past loss experience;
economic trends in the Company's market; portfolio concentrations that may
affect loss experienced across one or more components of the portfolio; the
effect of external factors such as competition, legal and regulatory
requirements; and, the experience, ability, and depth of lending management
and staff. In addition, various regulatory agencies, as an integral
component of their examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to
recognize additions to the allowance based on their judgement about
information available to them at the time of their examination, which may not
be currently available to management.
After a thorough consideration and validation of the factors discussed
above, required additions to the allowance for loan losses are made
periodically by charges to the provision for loan losses. These charges are
necessary to maintain the allowance at a level which management believes is
reasonably reflective of overall risk of loss inherent in the loan portfolio.
While management uses available information to recognize losses on loans,
additions to the allowance may fluctuate from one reporting period to
another. These fluctuations are reflective of changes in risk associated
with portfolio content and/or changes in management's assessment of any or
all of the determining factors discussed above.
Table H, Summary of Loan Loss Experience, includes an analysis of the
changes to the allowance for the three months ended June 30, 1999 and 1998,
as well as for the year ended December 31, 1998. Loans charged off in the
first six months of 1999 were $4.6 million, or an annualized .32% of average
loans. This represents an improvement over the prior year's results when
charge-offs totaled $5.7 million, or an annualized .43% of average loans.
Recoveries on loans previously charged off were $2.9 million for the six
months ended June 30, 1999 compared to $3.0 million for the same period of
1998.
The provision for loan losses ("provision") for the three months ended
June 30, 1999 was $2.3 million, or an annualized .32% of average loans. The
provision for the first six months of the year was $4.3 million or an
annualized .30% of average loans. Provisions of $4.7 million, or an
annualized .35% of average loans, and $9.3 million, or .35% of average loans
were experienced during the first half of 1998 and the full year of 1998,
respectively. The decrease in the provision is primarily the result of a
reduction of the higher credit risk loan portfolios as a percentage of the
total loan portfolio. Previously, the Company had experienced significant
growth in commercial, commercial real estate, and installment loans as well
as its Massachusetts market. Accordingly, the provision was increased in
fiscal 1997 as compared to fiscal 1996 and in fiscal 1998 as compared to
fiscal 1997. In addition, as discussed above, charge-offs and net charge-
offs have decreased from the second quarter of 1998 to the second quarter of
1999. These items are somewhat offset by the slight increase in non-
performing loans, as discussed above. Accordingly, the provision for loan
losses for the quarter ended June 30, 1999 is down slightly from the second
quarter of 1998.
At June 30, 1999, the allowance provided a coverage of non-performing
loans of 240.53% as compared to 212.14% and 241.97% at December 31, 1998 and
June 30, 1998, 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 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, interest rate corridors and interest rate cap or floor
agreements, among other things, to correct the imbalance. Banknorth utilized
swaps, floors and corridors 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 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 were used to mitigate the potential
reduction in interest income on certain adjustable and variable rate loans.
Further, in May 1998, the Company sold interest rate swaps in the notional
amount of $50.0 million previously in use for a net gain of $254 thousand.
This gain is being amortized into interest income over the original remaining
lives of the initial swap contracts of approximately one year. The swaps
were sold in order to reduce interest rate risk sensitivity of the Company.
In late 1998, interest rate corridors in the notional amount of $50.0 million
and interest rate swaps in the notional amount of $50.0 million were entered
into in order to mitigate the reduction in interest income in a period of
rising rates. In a period of quickly rising interest rates, certain deposit
products will reprice more rapidly than certain fixed rate earning assets
potentially causing a reduction in interest income. These contracts were
designed to make a portion of the Corporation's fixed rate loans sensitive to
rising rates.
The aggregate cost of the interest rate floors and corridors was $3.2
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 June 30, 1999,
the unamortized balance of these interest rate floors and corridors was $991
thousand. The estimated fair value of these floors was $2.3 million as of
June 30, 1999. The estimated fair value of the interest rate swap contracts
and interest rate corridors were $1.2 million and $462 thousand as of June
30, 1999.
Banknorth utilizes an interest rate risk model widely recognized in the
financial industry to monitor and measure interest rate risk. The model
simulates the behavior of interest income and expense of all on and off
balance sheet financial instruments under different interest rate scenarios
together with a dynamic future balance sheet. Banknorth measures its interest
rate risk in terms of potential changes in net interest income.
Liquidity Risk
Banknorth seeks to obtain favorable sources of liabilities and to
maintain prudent levels of liquid assets in order to satisfy varied liquidity
demands. Besides serving as a funding source for maturing obligations,
liquidity provides flexibility in responding to customer initiated needs.
Many factors affect the Company's ability to meet liquidity needs, including
variations in the markets served by its network of offices, its mix of assets
and liabilities, reputation and credit standing in the marketplace, and
general economic conditions.
The Company actively manages its liquidity position through target
ratios established under its liquidity policy. Continual monitoring of these
ratios, both historically and through forecasts under multiple interest rate
scenarios, allows Banknorth to employ strategies necessary to maintain
adequate liquidity. Management has also defined various degrees of adverse
liquidity situations which could potentially occur and has prepared
appropriate contingency plans should such situations arise.
The Company achieves its liability-based liquidity objectives in a
variety of ways. Net liabilities can be classified into three basic
categories for the purpose of managing liability-based liquidity: core
deposits, purchased liabilities, and long-term or capital market funds. Core
deposits consist of non-interest bearing demand deposits and retail deposits.
These deposits result from relatively dependable customers and commercial
banking relationships and are therefore viewed as a stable component of total
required funding. Banknorth will continue to seek funding in the most
efficient and cost effective manner as possible. Table E reflects the
components of funding for June 30, 1999 and 1998.
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 purchased funding is short-term
borrowed funds through sales of securities under agreements to repurchase.
These borrowings generally represent short-term uninsured customer
investments, which are secured by Company securities. During the second
quarter of 1999, the average securities sold under agreements to repurchase
were $192.6 million, as compared to $143.2 million in the second quarter of
1998.
Long-term purchased funding, primarily through the FHLB, was $73.3
million during the second quarter of 1999, up $13.9 million from the quarter
ended June 30, 1998 as short-term notes from the FHLB were replaced with
longer term FHLB debt at more favorable rates.
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, held for sale in
the secondary market. Alternatively these assets may be pledged to secure
short-term borrowed funds.
The Company also uses the capital markets as a source of liquidity. In
May 1997, the Company established a trust to issue and sell $30.0 million in
capital securities. The net proceeds were used for general corporate
purposes. In February 1996, the Company issued 2,044,446 shares of common
stock resulting in $32.2 million in net proceeds which were used to provide a
portion of the initial capital of FMB and to help offset the reduction in the
Company's regulatory capital ratios resulting from the acquisition.
OTHER OPERATING INCOME
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 $14.5 million for the second quarter of 1999, $4.4
million or 43.1% higher than the second quarter of 1998. For the six months
ended June 30, 1999 and 1998, other operating income was $29.3 million and
$19.0 million, respectively, an increase of $10.3 million, or 54.3%. Included
in the first half of 1999 other income was a net gain of $2.6 million on the
curtailment of the Evergreen pension plan and $1.4 million of income from
bank-owned life insurance resulting from the death of a senior executive.
Without these one-time items, other operating income increased $6.3 million,
or 33.4%, for the six month period ended June 30, 1999 compared to the same
period of 1998.
Investment management income. The Stratevest Group, N.A.,
("Stratevest"), the Company's investment and financial management subsidiary,
contributes the largest recurring portion of other operating income through
fees generated from trust and investment management services. Income from
such services totaled $5.0 million in the second quarter of 1999, an increase
of $1.8 million, or 58.5% over the same period of 1998. For the six months
ended June 30, 1999, trust and investment management income was $9.8 million,
up $3.7 million, or 60.8%, over the same period of 1998. The increase was
the result of strong sales and market conditions as well as the increase in
the managed assets as a result of the Berkshire acquisition. The Company's
acquisition of approximately $1.0 billion in investment assets in November
1998 was added to the Stratevest portfolio of managed assets. This portion
of the portfolio generated approximately $1.6 million in investment
management income in the second quarter of 1999. Total assets under
management totaled $4.1 billion, including $2.7 billion under discretionary
management, as of June 30, 1999, compared to total assets under management of
$2.9 billion, including $1.7 billion under discretionary management, as of
June 30, 1998. Continued opportunities for increases in the generation of
Stratevest's income lie in increased sales in the Massachusetts, New York and
New Hampshire markets. The Company is experiencing increased sales in these
areas and, accordingly, management expects continued increased levels of
trust and investment management income for 1999.
Service charges on deposit accounts. Service charges on deposit
accounts, $3.4 million for the three months ended June 30, 1999, were $454
thousand, or 15.4% above the same period of 1998. The increase in service
charges was primarily the result of improved charge policies implemented in
late 1997 and the Berkshire branch acquisition, which added on average $292.7
million in deposits in the second quarter of 1999.
Mortgage banking income. Mortgage banking income, which is comprised
of loan servicing income and net loan transactions amounted to $1.3 million
for the three months ended June 30, 1999. This category of income was up $95
thousand, or 7.9%, from June 30, 1998.
Net loan transaction income is generated through the origination and
subsequent sale of mortgage products into the secondary mortgage market. Net
loan transaction income in the second quarter of 1999 amounted to $596
thousand, $289 thousand lower than the same period of 1998. In 1998, the
Company experienced record level production throughout the year, which
created strong sales activity. The sales activity in the second quarter of
1999 has returned to more normal levels as interest rates rose and
refinancing activity slowed. The current production in 1999 is primarily new
mortgage originations as the home buying season has begun and interest rates
remain relatively low.
Card product income. Card product income represents the fees and
interchange income generated by the use of Banknorth issued credit (Visa) and
debit cards. This income category increased $206 thousand, to $748 thousand,
in the second quarter of 1999 as compared to the second quarter of 1998 as
the volume of debit card transactions increased given the addition of the
Berkshire customers and improved consumer acceptance and usage of the
product. For the six months ended June 30, 1999 and 1998, card product income
was $1.4 million and $972 thousand, respectively.
ATM income. ATM income represents the income generated from the ATM
network operated by Banknorth for the benefit of its customers. ATM income
amounted to $671 thousand for the three months ended June 30, 1999 compared
to $523 thousand for the three months ended June 30, 1998. The increase in
ATM income over the last year was the result of the terminal convenience fee,
assessed for non customer usage, in all states in which the Company operates
and the addition of the Berkshire ATMs to the Banknorth network. For the six
months ended June 30, 1999 and 1998, ATM income was $1.3 million and $1.0
million, respectively. Fee income is expected to remain at approximately that
level for the remainder of 1999.
Bank-owned life insurance income. In the fourth quarter of 1997,
Banknorth purchased $40.0 million of bank-owned life insurance ("BOLI"),
which resulted in approximately $552 thousand and $553 thousand of income in
the second quarters of 1999 and 1998, respectively and $1.1 million in the
year to date periods ended June 30, 1999 and 1998. The BOLI was purchased as
a financing tool for employee benefits. The value of life insurance financing
is the tax-preferred status of life insurance cash values. The purchase of
the life insurance policy results in an interest sensitive asset on the
Company's consolidated balance sheet that provides monthly tax-free income to
the Company. The largest risk to the BOLI program is credit risk of the
insurance carriers. To mitigate this risk, the Company selected insurance
carriers with a minimum rating of A (Best rating) and further, annual
financial condition reviews are completed on all carriers. Securities
available for sale were allowed to mature or were sold in order to provide
the funding necessary to implement the bank-owned life insurance program. As
a result of this transaction, the Company benefits 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.
Net gain on curtailment of pension plan. As noted earlier, the Company
recorded, in the first quarter of 1999, a net gain of $2.6 million from the
curtailment of the Evergreen pension plan resulting from the combination of
the former Evergreen and Banknorth pension plans following the merger. This
is a non-recurring income item. All employees of Banknorth are now
participants in a single pension plan.
Bank-owned life insurance claim. During the second quarter of 1999,
the Company recorded $1.4 million of income from BOLI resulting from the
death of a senior executive. The income is non-recurring and tax-exempt.
Other income. Other income amounted to $1.3 million for the three
months ended June 30, 1999, compared to $1.1 million for the three months
ended June 30, 1998. For the six months ended June 30, 1999 and 1998, other
income was $2.2 million and $2.0 million, respectively. The largest portions
of this income category are from personal banking and commercial banking
fees, including safe deposit box and official checks. The increase is
primarily as a result of the ten additional branches acquired in the
Berkshire region of Massachusetts.
OTHER OPERATING EXPENSES
Other operating expenses for the second quarter was $36.3 million, $4.1
million, or 12.8%, above expense levels in the second quarter of 1998. The
majority of the increase in operating expenses was due to $913 thousand in
additional goodwill expense, $1.3 million in additional compensation and
benefit expenses and $593 million in occupancy. The Company's efficiency
ratio was 58.43% in the second quarter of 1999, down from 59.81% from the
same period one year earlier. For the six months ended June 30, 1999 and
1998, other operating expense was $72.6 million and $64.7 million,
respectively. The efficiency ratio on a year to date basis was 58.50% for
the first half of 1999 compared to 60.58% for the same period of 1998.
Compensation. Compensation expense increased by $1.1 million, or 8.8%,
in the second quarter of 1999 in comparison to the second quarter of 1998.
The increase in this expense is primarily due to an increase in performance
based compensation recorded in 1999 in comparison to 1998. Sales and
performance based compensation in 1999 for the trust subsidiary, subsidiary
banks and overall Company exceeded those accrued or paid to date in 1998.
Additionally, severance expense of $130 thousand was recorded in the second
quarter of 1999 as the facilities management of the Company was outsourced.
Finally, temporary help expense in the second quarter of 1999 exceeded that
of the second quarter of 1998 by $110 thousand as the integration of the
Evergreen, Berkshire and trust operations is being completed. Year to date,
compensation expense increased $1.6 million or 6.2%. Benefits expenses also
increased by 4.2% between the three months ended June 30, 1999 and 1998.
Net occupancy. Net occupancy costs increased $593 thousand or 25.2%
from $2.4 million for the three months ended June 30, 1998 to $2.9 million
for the three months ended June 30, 1999. As noted earlier, in the Berkshire
acquisition, the Company acquired ten additional banking offices and its
corresponding occupancy costs. Occupancy expenses are expected to remain at
this level throughout 1999.
Equipment and software. Equipment and software expense was $2.5
million and $2.4 million for the three months ended June 30, 1999 and 1998,
respectively. Banknorth continuously invests in upgraded technology in order
to offer enhanced products and services or to create operating efficiencies.
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
decreased $159 thousand or 8.3% in the second quarter of 1999 in comparison
to the same period of 1998 primarily due to the reduction in core application
processing costs as a result of the merger with Evergreen. In 1998, the data
processing costs consisted of two mainframe site management contracts. One
contract was terminated upon the merger with Evergreen, thereby reducing the
overall data processing costs. Offsetting this favorable change in data
processing expense, the Company recognized $300 thousand in data processing
costs for the outside servicing of the purchased Berkshire private banking
relationships. This outside servicing expense was eliminated in the second
quarter of 1999.
Other real estate owned. Expenses relating to other real estate owned
and repossessed assets decreased for the second quarter of 1999 by $89
thousand as compared to June 30, 1998 as the holding cost of these properties
declined. Included in this expense category in the second quarter of 1999 are
net gains on the sale of other real estate owned and repossessed assets in the
amount of $103 thousand. Net gains on sales in the second quarter of 1998
were $117 thousand. Year to date, OREO expense continue to be low at $207
thousand in 1999, compared to $497 thousand in 1998. Management anticipates
the level of other real estate owned and repossession expenses to remain
steady throughout the year.
Advertising and marketing. Advertising and marketing expenses were $1.2
million for the three months ended June 30, 1999, $119 thousand, or 11.2%
higher than the first three months of 1998. In 1998, Banknorth introduced a
market branding campaign and increased its marketing efforts in target
markets. Marketing expenses are expected to be higher throughout 1999 in
comparison to 1998. Year to date, advertising and marketing expenses were
$294 thousand or 14.5% higher in 1999 compared to 1998.
Communications. Communications expenses totaled $940 thousand in the
second quarter of 1999, and $732 thousand in the second quarter of 1998. The
increase in communication expenses was primarily due to the expansion of the
voice/data communication network to accommodate the aforementioned acquired
locations of Banknorth.
Amortization of goodwill. Amortization of goodwill amounted to $2.2
million in second quarter of 1999 compared to $1.3 million in the second
quarter of 1998. The increased goodwill amortization is the result of the
Berkshire acquisition completed in November 1998, which generated an
additional $54.2 million in goodwill or $3.6 million in amortization per year
as this goodwill will be amortized over 15 years. Based on existing goodwill,
the 1999 goodwill amortization expense is expected to be $8.7 million.
Capital securities. The capital securities issued in May 1997, which
created Tier I capital, gave rise to expense of $789 thousand in the second
quarters of 1999 and 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.
Merger and acquisition related expenses. The merger expenses incurred
in the first six months of 1999, related to the merger with Evergreen,
amounted to approximately $1.2 million, or $788 thousand, after income tax
effect. The majority of these expenses were employment-related costs and
data processing conversion and termination costs.
Other expenses. Other expenses totaled $4.0 million and $3.1 million
for the three months ended June 30, 1999 and 1998, respectively. The
majority of the increase was due to additional operating expenses of a larger
institution, including postage and delivery, check sale costs, and network
charges. Additionally, the Company increased its investment in low-income
housing projects during 1998, which resulted in a greater amount of
writedowns in the second quarter of 1999 compared to the second quarter of
1998. These low-income housing projects generate significant tax credits and
reduce the Company's effective tax rate from the statutory level. Year to
date, other expense increased $1.2 million or 18.7%. Expenses in this
category are expected to continue at approximately this level throughout the
year.
SUBSIDIARY BANK MERGER
On May 24, 1999, the Company merged one of its subsidiary banks,
Woodstock National Bank, into another subsidiary bank, First Vermont Bank,
with Woodstock National Bank's three offices becoming branch offices of First
Vermont Bank. The conversion costs totaled approximately $400 thousand.
YEAR 2000 COMPLIANCE
Historically, some computer software and hardware and firmware systems,
and equipment or machinery with embedded processors or processing
instructions (sometimes referred to as "embedded processors"), were written
to recognize and process dates with the year written with two digits. For
dates on or after January 1, 2000 (when four digits will be necessary to
identify dates accurately), or for periods beginning before, and ending on or
after January 1, 2000, such software, hardware and firmware systems and
embedded processors may not be able to recognize or properly process dates or
information including dates or time periods. Among other things, this may
cause computers to produce incorrect information, to shut down, to cause
other systems or equipment to shut down or malfunction, or to malfunction in
other ways, and may cause equipment or machinery with embedded processors to
malfunction or to shut down. This is often referred to as, among other
things, the "Year 2000 problem."
In order to assure, to the extent possible, that the Year 2000 problem
does not impair their ability to do business or subject them to liability,
companies are advised to determine whether and to what extent their
information technology or physical resources may be affected by Year 2000
problems, to repair, replace or retire the affected systems or assets, and to
test the new systems or assets to assure that they will not be affected by
the Year 2000 problem (which is often referred to as being "year 2000
compliant"). Some new hardware, software or equipment, and some revisions or
upgrades of hardware, software or equipment, may have so-called "bugs" or may
prove to be incompatible with existing or other new or upgraded systems or
components. As a result, the testing of the changed components, and of
systems and subsystems as a whole, is critical and experience has shown that
the process is time consuming.
In order to protect the integrity of the banking system, the Federal
Reserve Board and other federal banking regulatory agencies (collectively
known as the "Federal Financial Institutions Examination Council," or
"FFIEC") have issued guidelines to financial institutions for addressing the
Year 2000 problem and set milestones that financial institutions are expected
to meet in becoming Year 2000 compliant and testing to assure compliance. In
broad outline, those guidelines provide that (i) by September 30, 1997,
financial institutions should have identified, assessed and begun remediation
of mission critical systems; (ii) by June 30, 1998, institutions should be
continuing remediation of mission critical systems and have completed
development of testing strategies and plans; (iii) by September 1, 1998,
institutions should be continuing system remediation and should have begun
testing of internal mission critical systems; (iv) by December 31, 1998,
institutions should have substantially completed testing of internal mission
critical systems; (v) by June 30, 1999, institutions relying on service
providers should have substantially completed system testing and all
institutions should have begun external testing with third parties (such as
other financial institutions, business partners and payment system
providers); and (vi) by June 30, 1999, institutions should have completed
testing of mission critical systems and substantially completed all
implementation of those systems.
Banknorth's Year 2000 remediation and compliance program (the "Year
2000 Project") is managed by a Project Group consisting of representatives
from more than 25 business units and functional departments within Banknorth
and its subsidiaries. The Project is directed by a Banknorth Vice President
and is overseen by the Banknorth Board and the board of directors of each
subsidiary.
Banknorth has completed a preliminary assessment of all its computer
software, hardware and firmware systems, and equipment and machinery with
embedded processors (including vaults and other security systems, elevators
and HVAC systems). Banknorth believes that it has identified all components,
systems, equipment and databases that might not be able to function properly
as a result of the Year 2000 problems and has formulated a plan to replace,
upgrade or revise affected software, to upgrade or replace affected hardware
and equipment, and to remediate affected data and databases. Banknorth
substantially completed the replacements, upgrades and revisions of the
affected software, hardware and equipment by December 31, 1998. Banknorth
began compliance testing of components and systems in July, 1998 and
substantially completed its compliance testing of vital banking systems by
the end of 1998. Testing will continue on an ongoing and industry-wide basis
thereafter.
Substantially all of Banknorth's mission critical systems are
outsourced or are purchased software packages. As a result, much of the
remediation and testing process is dependent on the accuracy of work
performed by, and the Year 2000 compliance of software, hardware and firmware
and equipment provided by, vendors. Banknorth has initiated discussions with
its vendors and monitored their Year 2000 compliance programs and the
compliance of their products or services with required standards. Where
possible, Banknorth is also considering and where appropriate is arranging,
alternate service or software providers in cases where it appears that
vendors may not timely provide adequate solutions.
The economic cost of the Year 2000 Project includes not just direct
incremental amounts expended by Banknorth for repairing, upgrading or
replacing hardware, software and facilities, but also the use of internal
resources devoted to the Year 2000 Project that would otherwise have been
devoted to other business opportunities. It is difficult to quantify the
economic cost of internal resources of the Project. However, Banknorth
estimates that over the life of this Project, between 1996 and 2000, it will
utilize approximately $5.5 million to $7.5 million of internal resources on
this effort. These are internal resources that would have been utilized for
other business opportunities and do not necessarily represent additional
operating expenditures or costs. As of June 30, 1999, approximately $5.2
million of these amounts have been expended. Further, Banknorth's direct
incremental expenditures for the Year 2000 Project are estimated at $3.7
million over this five year period. The largest of these costs relates to
the purchase and installation of a new branch platform. Although this
estimate includes hardware and equipment expenditures, which would have been
made even absent the Year 2000 problem as part of normal operations, such
expenditures are included in the estimates since the timing of these
purchases and upgrades was accelerated due to the Year 2000 Project. As of
June 30, 1999, approximately $1.3 million of the direct incremental
expenditures have been made.
Banknorth has commenced a customer awareness program to inform its
customers (both depositors and borrowers) of the Year 2000 problem,
Banknorth's responses to the problem and the potential impact of the problem
on the customers and their business. Banknorth and its subsidiaries have had
awareness sessions with their customers and are taking into account
customers' Year 2000 compliance in evaluating and rating loans. Banknorth
Group, Inc. is aware that if borrowers suffer losses or illiquidity because
of their own Year 2000 problems (or the Year 2000 problems of others with
whom they do business or on whom they are dependent) Banknorth's subsidiary
banks may suffer credit losses or experience illiquidity. The standard loan
documentation of Banknorth's subsidiary banks has been revised to include
representations that the borrower is Year 2000 compliant and to give the bank
the right to examine the borrower's systems and procedures in order to
determine Year 2000 compliance.
Banknorth believes that the key risk factors associated with the Year
2000 are those it cannot directly control, primarily the readiness of key
suppliers and service providers, the readiness of the public infrastructure,
and as noted above, the readiness of its credit customers. However,
Banknorth and its subsidiaries have developed contingency plans and
strategies and so-called "work arounds" for each non-compliant system and the
possible failure of systems and resources that have been tested as compliant.
The contingency plans vary with the affected systems. Among other things,
Banknorth has designated certain of its local banks as "key branches" and
will equip them properly, so that the Banknorth banks can continue banking
operations even if there are electrical outages because local utilities are
not Year 2000 compliant. Banknorth is also arranging to have temporary help
available so that, in event of the failure of a mission critical system, the
functions affected by the system failure can be performed manually.
The determination of the effect of Banknorth's own non-compliance with
Year 2000 requirements or the non-compliance of its vendors or customers is
complex and depends on numerous variables and unknowns. Without remediation,
the failure of critical software systems at any of the Banknorth banks or at
other banks could impair the ability of the banks to do business, the failure
of large or numerous borrowers to timely pay their loans could impair the
capital of one or more banks, and the failure of embedded processors would
adversely affect the physical security of the banks. However, Banknorth
believes that, as a result of its remediation and testing efforts and its
contingency plans, that worst case scenario is not likely.
Banknorth has created a working group separate from the Year 2000 group
to deal with the implementation of the merger and the integration of
Evergreen and Banknorth information technology systems. As a result, it is
expected that the merger will not affect the timely completion of the Year
2000 Project. In addition, since the Banknorth systems will be implemented
in the combined Company, the merger should not affect the ability of the
systems of the combined Company to be Year 2000 compliant.
INCOME TAXES
In the second quarter of 1999, Banknorth recognized income tax expense
of $5.9 million, as compared to $5.0 million in second quarter of 1998. The
effective rate was 29.57% in the second quarter of 1999 compared to 30.82% in
the second quarter of 1998. The tax expense on the Company's income was lower
than tax expense at the statutory rate of 35%, due primarily to tax-exempt
income, including loans, securities and BOLI, as well as tax credits received
on low-income housing projects. The recording of the $1.4 million in tax-
exempt income from a BOLI claim in the second quarter of 1999 was primarily
the cause of the decline in the effective rate from the second quarter of
1998 to the second quarter of 1999. For the six months ended June 30, 1999,
the effective tax rate was 30.55% compared to 30.80% for the same period of
1998.
CAPITAL RESOURCES
Consistent with its long-term goal of operating a sound and profitable
financial organization, Banknorth strives to maintain a "well capitalized"
company according to regulatory standards. Historically most of the Company's
capital requirements have been provided through retained earnings.
In October 1997, Banknorth announced a stock buyback plan. The Company
planned to buy back up to 5%, or 782,665 shares of its outstanding common
stock. As part of the merger with Evergreen, however, the stock buyback
program was rescinded in July 1998. As of June 30, 1999, the Company held
343,807 treasury shares, all of which were purchased under the October 1997
stock buyback plan.
The Company (including, prior to 1989, its corporate predecessors) has
historically paid regular quarterly cash dividends on its common stock.
Since 1993, the Company's dividend has increased from a level of $.05 per
share to most recently $.18 per share in January 1999 and March 1999. The
Board makes decisions regarding payment of dividends based upon the Company's
earnings outlook and other relevant factors.
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. The stock split was recorded as of December 31, 1997 by a transfer of
$7.8 million from capital surplus to common stock, representing the $1.00 par
value for each additional share issued. Further, on August 15, 1996, the
Board of Directors of the Evergreen Bancorp, Inc. approved a 2-for-1 split
effected in the form of a 100% stock dividend and was recorded by a transfer
of $4.3 million from capital surplus to common stock. All per share data has
been restated to reflect the splits.
The Company's principal source of funds to pay cash dividends and the
cost of capital securities and to service long-term debt requirements is
dividends from its subsidiary banks. Various laws and regulations restrict
the ability of banks to pay dividends to their shareholders. During 1998, as
part of its plan to adequately capitalize FMB for regulatory purposes after
the Berkshire acquisition and to allow Stratevest to purchase the private
banking relationships associated with the Berkshire branches, the Company re-
deployed accumulated capital of certain of its subsidiary banks through the
payment of a special dividend. Because the special dividend exceeded
applicable regulatory limitations, the subsidiary banks obtained approval
from the applicable regulatory agencies for the payment of that portion of
the dividend.
Additionally, in connection with the Evergreen merger, Evergreen Bank
paid a special dividend to the parent company. As the special dividend
exceeded applicable regulatory limitations, Evergreen Bank obtained approval
from the OCC for the payment of that portion of the dividend which exceeded
such regulatory limitations.
As a result of these capital redeployments, the payment of dividends by
the Company in the future will require the generation of sufficient future
earnings by the subsidiary banks
At June 30, 1999, Banknorth's Tier I capital was $293.8 million, or
9.36% of total risk-adjusted assets, compared to $317.3 million and 11.14% as
of June 30, 1998. The decrease in the Tier I capital is attributable to the
$54.2 million in additional goodwill generated by the Berkshire branch
acquisition. The ratio of Tier I capital to total quarterly average adjusted
assets (leverage ratio) was 6.82%, and 7.97% as of June 30, 1999 and 1998,
respectively. Banknorth is "well capitalized" at June 30, 1999 according to
regulatory definition, and thereby, exceed all minimum regulatory capital
requirements. Table I, Capital Ratios, provides the components of capital as
of various dates.
TABLE A. Mix of Average Earning Assets
<TABLE>
<CAPTION>
Three Months Percentage of
Ended June 30, % of Total Earning Assets
-------------------------- Total --------------------
(Dollars in thousands) 1999 1998 Change Change 1999 1998
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income
and unamortized loan fees and costs:
Commercial, financial and agricultural $ 564,748 $ 585,169 $ (20,421) (7.6)% 13.9% 15.5%
Construction and land development 66,666 35,634 31,032 11.6 1.7 0.9
Commercial real estate 761,452 576,665 184,787 69.1 18.8 15.2
Residential real estate 1,018,779 1,062,828 (44,049) (16.5) 25.1 28.1
Credit card receivables 31,873 28,573 3,300 1.2 0.8 0.7
Lease receivables 80,309 74,846 5,463 2.0 2.0 2.0
Other installment 328,669 297,759 30,910 11.6 8.1 7.9
----------------------------------------------------------------------
Total loans, net of unearned income and
unamortized loan fees and costs 2,852,496 2,661,474 191,022 71.4 70.4 70.3
Securities available for sale:
U.S. Treasuries and Agencies 172,329 231,983 (59,654) (22.3) 4.3 6.1
States and political subdivisions 41,575 6,974 34,601 13.0 1.0 0.2
Mortgage-backed securities 689,213 509,285 179,928 67.3 17.0 13.5
Corporate debt securities 185,068 217,128 (32,060) (12.0) 4.6 5.7
Equities and other securities 49,220 45,403 3,817 1.4 1.2 1.2
Net unrealized gain (loss) (3,165) 5,891 (9,056) (3.4) (0.1) 0.2
----------------------------------------------------------------------
Total securities available for sale,
at fair value 1,134,240 1,016,664 117,576 44.0 28.0 26.9
Investment securities, held to maturity:
U.S. Treasuries and Agencies 3,191 13,040 (9,849) (3.7) 0.1 0.4
States and political subdivisions 10,947 12,806 (1,859) (0.7) 0.3 0.3
Mortgage-backed securities 4,907 12,724 (7,817) (2.9) 0.1 0.3
Corporate debt securities 10 10 -- -- -- --
----------------------------------------------------------------------
Total investment securities, held to maturity,
at amortized cost 19,055 38,580 (19,525) (7.3) 0.5 1.0
Loans held for sale 28,232 41,921 (13,689) (5.1) 0.7 1.1
Money market investments 18,208 26,110 (7,902) (3.0) 0.4 0.7
----------------------------------------------------------------------
Total earning assets $4,052,231 $3,784,749 $ 267,482 100.0% 100.0% 100.0%
======================================================================
</TABLE>
TABLE B. Loan Portfolio
<TABLE>
<CAPTION>
At June 30, At December 31, % Change
---------------------------------------------- --------------------- --------------------
1999 1998 1998
--------------------- --------------------- ---------------------
06/30/99 06/30/99
Amount Percent Amount Percent Amount Percent versus versus
(Dollars in thousands) 06/30/98 12/31/98
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural $ 593,921 20.5% $ 581,369 21.9% $ 690,170 24.3% 2.2% (13.9)%
Real estate:
Construction and land
development 61,295 2.1 36,883 1.4 45,704 1.6 66.2 34.1
Commercial 779,573 26.9 578,342 21.8 615,503 21.7 34.8 26.7
Residential 1,012,226 34.8 1,056,486 39.6 1,041,667 36.7 (4.2) (2.8)
---------------------------------------------------------------------------------------------
Total real estate 1,853,094 63.8 1,671,711 62.8 1,702,874 60.0 10.9 8.8
---------------------------------------------------------------------------------------------
Credit card receivables 31,907 1.1 28,863 1.1 33,205 1.2 10.5 (3.9)
Lease receivables 79,920 2.8 74,943 2.8 79,001 2.8 6.6 1.2
Other installment 343,597 11.8 301,779 11.4 331,856 11.7 13.9 3.5
---------------------------------------------------------------------------------------------
Total installment 455,424 15.7 405,585 15.3 444,062 15.7 12.3 2.6
---------------------------------------------------------------------------------------------
Total loans 2,902,439 100.0 2,658,665 100.0 2,837,106 100.0 9.2 2.3
Less: allowance for loan
losses 47,135 1.6 40,570 1.5 44,537 1.6 16.2 5.8
---------------------------------------------------------------------------------------------
Net loans $2,855,304 98.4% $2,618,095 98.5% $2,792,569 98.4% 9.1% 2.2%
=============================================================================================
</TABLE>
TABLE C. Securities Available for Sale and Securities Held to Maturity
<TABLE>
<CAPTION>
At June 30, At December 31,
------------------------ ----------------
(Dollars in thousands) 1999 1998 1998
--------------------------------------------
<S> <C> <C> <C>
Securities available for sale:
U.S. Treasuries and Agencies $ 165,796 $ 217,413 $ 165,683
States and political subdivisions 48,522 7,816 7,806
Mortgage-backed securities 672,530 521,297 711,540
Corporate debt securities 211,203 230,291 188,154
Equities and other securities 49,209 45,350 48,791
Net unrealized gain (loss) (14,010) 7,244 5,891
-----------------------------------------
Fair value of securities available for sale $1,133,250 $1,029,411 $1,127,865
=========================================
Investment securities, held to maturity:
U.S. Treasuries and Agencies $ 3,192 $ 6,965 $ 3,582
States and political subdivisions 10,182 12,475 11,443
Mortgage-backed securities 4,703 10,178 5,510
Corporate debt securities 10 10 10
-----------------------------------------
Amortized cost of investment securities,
held to maturity $ 18,087 $ 29,628 $ 20,545
=========================================
Fair value of investment securities, held to maturity $ 18,389 $ 30,644 $ 21,606
=========================================
Excess of fair value over recorded value $ 302 $ 1,016 $ 1,061
Fair value as a % of amortized cost 101.7% 103.4% 105.2%
</TABLE>
Note: There were no holdings of any single issuer that, when taken in
aggregate, exceeded 10% of shareholders' equity at June 30, 1999.
TABLE D. Average Balances, Yields, and Net Interest Margins
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------------------------
1999 1998
-------------------------------- -------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Earning assets:
Money market investments $ 18,208 $ 211 4.65% $ 26,110 $ 367 5.64%
Securities available for sale, at fair value (1 and 2) 1,134,240 17,283 6.09 1,016,664 16,168 6.42
Loans held for sale 28,232 530 7.53 41,921 799 7.64
Investment securities, held to maturity (2) 19,055 395 8.31 38,580 755 7.85
Loans, net of unearned income and
unamortized loan fees and costs (2 and 3) 2,852,496 60,737 8.54 2,661,474 59,369 8.95
--------------------- ---------------------
Total earning assets 4,052,231 79,156 7.83 3,784,749 77,458 8.22
Cash and due from banks 125,671 102,018
Allowance for loan losses (46,538) (40,833)
Other assets 236,550 170,320
---------- ----------
Total assets $4,367,914 $4,016,254
========== ==========
Interest-bearing liabilities:
NOW accounts & money market savings $1,467,248 11,593 3.17 $1,208,185 11,005 3.65
Regular savings 345,450 2,052 2.38 307,265 1,987 2.59
Time deposits $100 thousand and greater 261,780 3,358 5.15 223,996 3,142 5.63
Time deposits under $100 thousand 1,017,285 12,831 5.06 997,295 13,679 5.50
--------------------- ---------------------
Total interest-bearing deposits 3,091,763 29,834 3.87 2,736,741 29,813 4.37
Short-term borrowed funds 305,526 3,286 4.31 424,048 5,608 5.30
Long-term debt 73,337 1,126 6.16 59,459 947 6.39
--------------------- ---------------------
Total interest-bearing liabilities 3,470,626 34,246 3.96 3,220,248 36,368 4.53
-----------------------------------------------------------------
Non-interest bearing deposits 494,857 410,469
Other liabilities 46,330 40,374
Capital securities 30,000 30,000
Shareholders' equity 326,101 315,163
---------- ----------
Total liabilities, capital securities and
shareholders' equity $4,367,914 $4,016,254
========== ==========
Net interest income $44,910 $41,090
======= =======
Interest rate differential 3.87% 3.69%
==== ====
Net interest margin 4.44% 4.36%
==== ====
Notes:
<F1> For the purpose of these computations, the average yield is based on
amortized cost.
<F2> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal (35%) rate.
<F3> Includes principal balances of non-accrual loans and industrial revenue
bonds.
</TABLE>
TABLE D. Average Balances, Yields, and Net Interest Margins
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------------------
1999 1998
-------------------------------- -------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Earning assets:
Money market investments $ 18,828 $ 413 4.42% $ 20,569 $ 584 5.73%
Securities available for sale, at fair value (1 and 2) 1,130,830 34,326 6.12 992,969 31,849 6.51
Loans held for sale 32,298 1,155 7.21 35,957 1,258 7.06
Investment securities, held to maturity (2) 19,562 791 8.15 47,718 1,847 7.81
Loans, net of unearned income and
unamortized loan fees and costs (2 and 3) 2,844,234 120,889 8.57 2,651,956 118,039 8.98
---------- -------- ---------- --------
Total earning assets 4,045,752 157,574 7.85 3,749,169 153,577 8.26
Cash and due from banks 126,093 98,747
Allowance for loan losses (45,924) (40,023)
Other assets 237,919 169,018
---------- ----------
Total assets $4,363,840 $3,976,911
========== ==========
Interest-bearing liabilities:
NOW accounts & money market savings $1,456,663 23,136 3.20 $1,176,781 21,306 3.65
Regular savings 342,119 4,093 2.41 307,885 3,990 2.61
Time deposits $100 thousand and greater 256,535 6,637 5.22 219,529 6,147 5.65
Time deposits under $100 thousand 1,032,952 26,381 5.15 1,001,144 27,336 5.51
---------- -------- ---------- --------
Total interest-bearing deposits 3,088,269 60,247 3.93 2,705,339 58,779 4.38
Short-term borrowed funds 305,046 6,497 4.29 430,809 11,385 5.33
Long-term debt 73,737 2,258 6.18 52,789 1,693 6.47
---------- -------- ---------- --------
Total interest-bearing liabilities 3,467,052 69,002 4.01 3,188,937 71,857 4.54
---------- -------- ---------- --------
Non-interest bearing deposits 495,053 402,931
Other liabilities 47,958 39,547
Capital securities 30,000 30,000
Shareholders' equity 323,777 315,496
---------- ----------
Total liabilities, capital securities and
shareholders' equity $4,363,840 $3,976,911
========== ==========
Net interest income $ 88,572 $ 81,720
======== ========
Interest rate differential 3.84% 3.72%
==== ====
Net interest margin 4.41% 4.39%
==== ====
Notes:
<F1> For the purpose of these computations, the average yield is based on
amortized cost.
<F2> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal (35%) rate.
<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 June 30, Change Total Funding
------------------------ -------------------- ---------------
(Dollars in thousands) 1999 1998 Amount Percent 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 494,857 $ 410,469 $ 84,388 20.6% 12.4% 11.3%
Retail deposits:
Regular savings 345,450 307,265 38,185 12.4 8.7 8.5
Time deposits under $100 thousand 1,017,285 997,295 19,990 2.0 25.7 27.5
NOW accounts & money market savings 1,467,248 1,208,185 259,063 21.4 37.0 33.2
-------------------------------------------------------------------
Total retail deposits 2,829,983 2,512,745 317,238 12.6 71.4 69.2
-------------------------------------------------------------------
Total core deposits 3,324,840 2,923,214 401,626 13.7 83.8 80.5
Time deposits $100 thousand and greater 261,780 223,996 37,784 16.9 6.6 6.2
Federal funds purchased 13,839 8,631 5,208 60.3 0.3 0.2
Securities sold under agreements to
repurchase 192,587 143,150 49,437 34.5 4.9 3.9
Borrowings from U.S. Treasury 13,496 16,304 (2,808) (17.2) 0.3 0.5
Short-term notes from FHLB 85,604 255,963 (170,359) (66.6) 2.2 7.0
Long-term notes from FHLB 65,962 49,253 16,709 33.9 1.7 1.4
-------------------------------------------------------------------
Total purchased liabilities 633,268 697,297 (64,029) (9.2) 16.0 19.2
Bank term loan 7,375 10,206 (2,831) (27.7) 0.2 0.3
-------------------------------------------------------------------
Total funding $3,965,483 $3,630,717 $ 334,766 9.2% 100.0% 100.0%
===================================================================
</TABLE>
TABLE F. Volume and Yield Analysis
<TABLE>
<CAPTION>
Three Months
Ended June 30, Due to
------------------ -------------------
1999 1998 Change Volume Rate
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Interest income (FTE):
Money market investments $ 211 $ 367 $ (156) $ (92) $ (64)
Securities available for sale, at fair value 17,283 16,168 1,115 1,947 (832)
Loans held for sale 530 799 (269) (258) (11)
Investment securities, held to maturity 395 755 (360) (404) 44
Loans 60,737 59,369 1,368 4,089 (2,721)
-----------------------------
Total interest income 79,156 77,458 1,698 5,325 (3,627)
-----------------------------
Interest expense:
NOW accounts & money market savings 11,593 11,005 588 2,034 (1,446)
Regular savings 2,052 1,987 65 226 (161)
Time deposits $100 thousand and greater 3,358 3,142 216 484 (268)
Time deposits under $100 thousand 12,831 13,679 (848) 246 (1,094)
Short-term borrowed funds 3,286 5,608 (2,322) (1,275) (1,047)
Long-term debt 1,126 947 179 213 (34)
-----------------------------
Total interest expense 34,246 36,368 (2,122) 2,454 (4,576)
----------------------------------------------------
Net interest income (FTE) $44,910 $41,090 $ 3,820 $ 2,871 $ 949
=====================================================
</TABLE>
Increases and decreases in interest income and interest expense due to both
rate and volume have been allocated to volume on a consistent basis.
TABLE F. Volume and Yield Analysis
<TABLE>
<CAPTION>
Six Months
Ended June 30, Due to
------------------ -------------------
1999 1998 Change Volume Rate
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Interest income (FTE):
Money market investments $ 413 $ 584 $ (171) $ (37) $ (134)
Securities available for sale, at fair value 34,326 31,849 2,477 4,385 (1,908)
Loans held for sale 1,155 1,258 (103) (130) 27
Investment securities, held to maturity 791 1,847 (1,056) (1,136) 80
Loans 120,889 118,039 2,850 8,242 (5,392)
-------------------------------
Total interest income 157,574 153,577 3,997 11,584 (7,587)
-------------------------------
Interest expense:
NOW accounts & money market savings 23,136 21,306 1,830 4,456 (2,626)
Regular savings 4,093 3,990 103 408 (305)
Time deposits $100 thousand and greater 6,637 6,147 490 958 (468)
Time deposits under $100 thousand 26,381 27,336 (955) 832 (1,787)
Short-term borrowed funds 6,497 11,385 (4,888) (2,666) (2,222)
Long-term debt 2,258 1,693 565 641 (76)
-------------------------------
Total interest expense 69,002 71,857 (2,855) 5,526 (8,381)
-------------------------------------------------------
Net interest income (FTE) $ 88,572 $ 81,720 $ 6,852 $ 6,058 $ 794
=======================================================
</TABLE>
Increases and decreases in interest income and interest expense due to both
rate and volume have been allocated to volume on a consistent basis.
TABLE G. Non-Performing Assets
<TABLE>
<CAPTION>
At At At
June 30, December 31, June 30,
(Dollars in thousands) 1999 1998 1998
------------------------------------
<S> <C> <C> <C>
Loans on non-accrual status:
Commercial, financial and agricultural $ 4,344 $ 3,816 $ 4,317
Real estate:
Construction and land development 439 19 36
Commercial 6,672 2,518 2,146
Residential 6,754 6,153 7,714
Other installment -- 23 214
-----------------------------------
Total non-accrual 18,209 12,529 14,427
Restructured loans:
Real estate:
Commercial -- 5,940 --
Residential 30 32 33
Other installment 5 5 5
-----------------------------------
Total restructured 35 5,977 38
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 250 1,216 560
Real estate:
Commercial -- 62 511
Residential -- 36 464
Credit card receivables 252 177 197
Lease receivables 224 185 32
Other installment 626 812 538
-----------------------------------
Total past-due 90 days or more
and still accruing 1,352 2,488 2,302
-----------------------------------
Total non-performing loans 19,596 20,994 16,767
Other real estate owned (OREO) 733 3,324 3,159
Non-real estate and repossessed assets -- 11 184
-----------------------------------
Total foreclosed and repossessed assets (F/RA) 733 3,335 3,343
-----------------------------------
Total non-performing assets $20,329 $24,329 $20,110
===================================
Allowance for loan losses (All) 47,135 44,537 40,570
ALL coverage of non-performing loans 240.53% 212.14% 241.97%
Non-performing assets as a % of (loans & F/RA) 0.70 0.86 0.76
Non-performing assets to total assets 0.46 0.55 0.50
Note: Installment loans are generally charged off at 120 days past due.
</TABLE>
TABLE H. Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Six Months Twelve Months Six Months
Ended June 30, Ended December 31, Ended June 30,
(Dollars in thousands) 1999 1998 1998
------------------------------------------------------
<C> <C> <C>
Loans outstanding-end of period $2,902,439 $2,837,106 $2,658,665
Average loans outstanding-period to date 2,844,234 2,684,169 2,651,915
Allowance for loan losses at beginning
of period 44,537 38,551 38,551
Allowance related to purchase acquisitions -- 2,200 --
Loans charged off:
Commercial, financial and agricultural (236) (2,318) (1,401)
Real estate:
Commercial (526) (209) (133)
Residential (380) (1,916) (1,006)
--------------------------------------------------
Total real estate (906) (2,125) (1,139)
Credit card receivables (481) (878) (300)
Lease receivables (503) (1,646) (781)
Other installment (2,464) (4,763) (2,037)
--------------------------------------------------
Total installment (3,448) (7,287) (3,118)
Total loans charged off (4,590) (11,730) (5,658)
--------------------------------------------------
Recoveries on loans, previously charged off:
Commercial, financial and agricultural 447 1,673 541
Real estate:
Construction and land development 3 15 9
Commercial 396 542 337
Residential 200 829 413
--------------------------------------------------
Total real estate 599 1,386 759
Credit card receivables 73 111 42
Lease receivables 404 1,190 604
Other installment 1,390 1,811 1,056
--------------------------------------------------
Total installment 1,867 3,112 1,702
Total recoveries on loans 2,913 6,171 3,002
--------------------------------------------------
Loans charged off, net of recoveries (1,677) (5,559) (2,656)
--------------------------------------------------
Provision for loan losses 4,275 9,345 4,675
--------------------------------------------------
Allowance for loan losses at end of period $ 47,135 $ 44,537 $ 40,570
==================================================
Loans charged off, net (annualized),
as a % of average total loans 0.12% 0.21% 0.20%
Provision for loan losses (annualized)
as a % of average total loans 0.30 0.35 0.35
Allowance for loan losses
as a % of period-end total loans 1.62 1.57 1.53
</TABLE>
TABLE I. Capital Ratios
<TABLE>
<CAPTION>
At At At At At
June 30, March 31, December 31, September 30, June 30,
(Dollars in thousands) 1999 1999 1998 1998 1998
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total risk-adjusted on-balance sheet assets (1)(3) $2,971,280 $2,866,111 $2,880,854 $2,701,146 $2,696,843
Total risk-adjusted off-balance sheet items 163,762 162,430 174,890 158,508 152,035
-----------------------------------------------------------------------
Total risk-adjusted assets $3,135,042 $3,028,541 $3,055,744 $2,859,654 $2,848,878
=======================================================================
Total risk-adjusted assets / average total assets,
net of fair value adjustments and goodwill (1)(3) 72.89% 70.75% 73.49% 71.25% 71.52%
Total shareholders' equity $ 329,962 $ 324,465 $ 321,262 $ 334,017 $ 320,227
Fair value adjustments (1) 8,875 (1,110) (3,759) (10,281) (4,589)
Corporation-obligated manditorily redeemable
capital securities 30,000 30,000 30,000 30,000 30,000
Goodwill (75,602) (77,835) (80,224) (27,154) (28,476)
Other Intangibles (3) 144 144 70 (145) 137
-----------------------------------------------------------------------
Total Tier I capital 293,379 275,664 267,349 326,437 317,299
Maximum allowance for loan losses (2) 39,286 37,953 38,275 35,820 35,672
-----------------------------------------------------------------------
Total capital $ 332,665 $ 313,617 $ 305,624 $ 362,257 $ 352,971
=======================================================================
Quarterly average total assets,
net of fair value adjustments and goodwill (1)(3) $4,301,187 $4,280,729 $4,158,082 $4,013,768 $3,983,182
Allowance for loan losses 47,135 45,658 44,537 41,746 40,570
Total capital to total risk-adjusted assets 10.61% 10.36% 10.00% 12.67% 12.39%
Tier I capital to total risk-adjusted assets 9.36 9.10 8.75 11.42 11.14
Tier I capital to total quarterly average
adjusted assets (Leverage) 6.82 6.44 6.43 8.13 7.97
Notes:
<F1> The market valuation relating to securities available for sale included
in shareholders' equity and total assets on consolidated balance sheets
has been excluded in the above ratios.
<F2> The maximum allowance for loan losses used in calculating total capital
is the period-end allowance for loan losses or 1.25% of risk-adjusted
assets prior to the allowance limitation, whichever is lower.
<F3> Mortgage servicing assets, included in total assets on the consolidating
balance sheets, that exceed 90% of fair market value of these assets,
have been excluded in the above ratios.
</TABLE>
SUMMARY OF QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1999 1998
--------------------------- --------------------------------------------
(In thousands, except share and per share data) Q2 Q1 Q4 Q3 Q2
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest and dividend income $ 78,448 $ 77,858 $ 78,656 $ 77,216 $ 77,075
Interest expense 34,246 34,756 36,106 36,695 36,368
---------------------------------------------------------------------------
Net interest income 44,202 43,102 42,550 40,521 40,707
Provision for loan losses 2,275 2,000 2,335 2,335 2,335
---------------------------------------------------------------------------
Net interest income after provision
for loan losses 41,927 41,102 40,215 38,186 38,372
---------------------------------------------------------------------------
Other operating income:
Income from trust and investment management fees 4,975 4,833 3,791 2,946 3,139
Service charges on deposit accounts 3,402 3,198 2,969 2,861 2,948
Mortgage banking income 1,290 1,324 1,391 1,812 1,195
Card product income 748 613 686 569 542
ATM income 671 619 635 618 523
Bank owned life insurance 552 539 569 567 553
Net securities transactions 143 225 526 319 103
Net gain on curtailment of pension plan -- 2,577 -- -- --
Bank owned life insurance claim 1,389
All other 1,290 901 1,079 1,149 1,105
---------------------------------------------------------------------------
Total other operating income 14,460 14,829 11,646 10,841 10,108
Other operating expenses:
Compensation and employee benefits 17,344 16,775 17,554 15,705 16,073
Net occupancy, equipment and software 5,489 5,483 4,852 4,697 4,732
Data processing 1,767 2,102 1,472 1,756 1,926
FDIC deposit insurance and other regulatory 306 294 292 284 283
Other real estate owned and repossession 53 154 331 239 142
Amortization of goodwill 2,234 2,164 1,779 1,321 1,321
Capital securities 789 789 789 789 789
Merger and acquisition related expenses 60 1,173 21,968 -- --
All other 8,275 7,340 7,507 6,702 6,931
---------------------------------------------------------------------------
Total other operating expenses 36,317 36,274 56,544 31,493 32,197
---------------------------------------------------------------------------
Income before income tax expense (benefit) 20,070 19,657 (4,683) 17,534 16,283
Income tax expense (benefit) 5,935 6,203 (321) 5,416 5,019
---------------------------------------------------------------------------
Net income (loss) $ 14,135 $ 13,454 $ (4,362) $ 12,118 $ 11,264
===========================================================================
Average Balances:
Loans $ 2,852,496 $ 2,835,880 $ 2,755,824 $ 2,675,888 $ 2,661,474
Loans held for sale 28,232 36,409 36,490 34,435 41,921
Securities available for sale, at fair value 1,134,240 1,127,381 1,123,294 1,041,605 1,016,664
Investment securities, held to maturity 19,055 20,076 22,965 26,046 38,580
Money market investments 18,208 19,454 22,376 40,415 26,110
---------------------------------------------------------------------------
Total earning assets 4,052,231 4,039,200 3,960,949 3,818,389 3,784,749
Other assets 315,683 320,474 281,190 233,103 231,505
---------------------------------------------------------------------------
Total assets $ 4,367,914 $ 4,359,674 $ 4,242,139 $ 4,051,492 $ 4,016,254
===========================================================================
Non interest-bearing deposits $ 494,857 $ 495,452 $ 477,977 $ 431,872 $ 410,469
Interest-bearing deposits 3,091,763 3,084,735 2,957,813 2,767,727 2,736,741
---------------------------------------------------------------------------
Total deposits 3,586,620 3,580,187 3,435,790 3,199,599 3,147,210
Short-term borrowed funds 305,526 304,361 320,459 382,313 424,048
Long-term debt 73,337 74,141 74,634 74,534 59,459
Other liabilities 46,330 49,604 43,466 41,825 40,374
Guaranteed preferred beneficial interests in
Corporation's junior subordinated debentures 30,000 30,000 30,000 30,000 30,000
Shareholders' equity 326,101 321,381 337,790 323,221 315,163
---------------------------------------------------------------------------
Total liabilities, guaranteed preferred
beneficial interests in Corporation's junior
subordinated debentures and shareholders'
equity $ 4,367,914 $ 4,359,674 $ 4,242,139 $ 4,051,492 $ 4,016,254
===========================================================================
Loans charged off, net of recoveries $ 798 $ 879 $ 1,743 $ 1,160 $ 1,654
Non-performing assets, p.e. 20,329 23,656 24,329 25,694 20,110
Share and Per Share Data:
Basic wtd. avg. number of shares 23,379,073 23,353,668 23,203,566 23,226,319 23,258,549
Basic earnings per share (Basic EPS) $ 0.60 $ 0.58 $ (0.19) $ 0.52 $ 0.48
Diluted wtd. avg. number of shares 23,665,780 23,663,808 23,552,615 23,613,000 23,685,137
Diluted earnings per share (Diluted EPS) $ 0.60 $ 0.57 $ (0.19) $ 0.51 $ 0.48
Tangible book value 10.94 10.63 10.40 13.26 12.61
Closing price at period end 33.00 28.25 37.63 29.25 37.00
Key Ratios:
Return on average assets 1.30 1.25 (0.41)% 1.19% 1.12%
Return on average shareholders' equity 17.39 16.98 (5.12) 14.87 14.34
Net interest margin, fte 4.44 4.39 4.31 4.26 4.36
Efficiency ratio 58.43 58.56 59.71 57.83 59.81
As a % of risk-adjusted assets, p.e. :
Total capital 10.61 10.36 10.00 12.67 12.39
Tier 1 capital 9.36 9.10 8.75 11.42 11.14
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 6.82 6.44 6.43 8.13 7.97
Tangible shareholders' equity, to tangible
assets, p.e. 5.86 5.79 5.58 7.60 7.24
Note: All share and per share data has been restated to give retroactive
effect to stock splits.
</TABLE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders at the
Annual Meeting of Shareholders of Banknorth Group, Inc. on May 11, 1999:
1. To elect five directors to serve until the 2002 Annual Meeting of
Shareholders;
2. To ratify the selection of the independent public accounting firm of
KPMG LLP as the Company's external auditors for 1999.
The results of the votes were as follows:
WITHHELD/ BROKER
MATTER FOR AGAINST FOR NON-VOTE
------ --- ------- --------- --------
Election of Directors:
Kathleen Hoisington 17,826,926 --- 279,411 N/A
Douglas G. Hyde, Esq. 17,858,632 --- 247,705 N/A
Anthony J. Mashuta 17,886,977 --- 219,360 N/A
Angelo Pizzagalli 17,875,024 --- 231,313 N/A
Thomas P. Salmon, Esq. 17,893,540 --- 212,797 N/A
Selection of Auditors
KPMG Peat Marwick LLP 18,202,990 42,161 43,186 N/A
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
Form 8-K, filed June 4, 1999, Banknorth announcing that it and
Peoples Heritage Financial Group, Inc. ("PHFG") had entered
into an Agreement and Plan of Merger, dated June 1, 1999,
which sets forth the terms and conditions pursuant to which
the Company would be merged with and into PHFG and PHFG would
change its name to "Banknorth Group, Inc."
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized.
BANKNORTH GROUP, INC.
Registrant
Date: 8/13/99 /S/ William H. Chadwick
-------------------------------------
William H. Chadwick
President and Chief Executive Officer
Date: 8/13/99 /S/ Thomas J. Pruitt
-------------------------------------
Thomas J. Pruitt
Executive Vice President and Chief
Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 131,601
<INT-BEARING-DEPOSITS> 100
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,133,250
<INVESTMENTS-CARRYING> 18,087
<INVESTMENTS-MARKET> 18,389
<LOANS> 2,902,439
<ALLOWANCE> 47,135
<TOTAL-ASSETS> 4,413,236
<DEPOSITS> 3,527,247
<SHORT-TERM> 406,710
<LIABILITIES-OTHER> 46,609
<LONG-TERM> 72,708
30,000
0
<COMMON> 23,548
<OTHER-SE> 306,414
<TOTAL-LIABILITIES-AND-EQUITY> 4,413,236
<INTEREST-LOAN> 60,890
<INTEREST-INVEST> 17,347
<INTEREST-OTHER> 211
<INTEREST-TOTAL> 78,448
<INTEREST-DEPOSIT> 29,834
<INTEREST-EXPENSE> 4,412
<INTEREST-INCOME-NET> 44,202
<LOAN-LOSSES> 2,275
<SECURITIES-GAINS> 143
<EXPENSE-OTHER> 36,317
<INCOME-PRETAX> 20,070
<INCOME-PRE-EXTRAORDINARY> 20,070
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,135
<EPS-BASIC> 0.60
<EPS-DILUTED> 0.60
<YIELD-ACTUAL> 4.44
<LOANS-NON> 18,209
<LOANS-PAST> 1,352
<LOANS-TROUBLED> 35
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 46,537
<CHARGE-OFFS> 4,590
<RECOVERIES> 2,913
<ALLOWANCE-CLOSE> 47,135
<ALLOWANCE-DOMESTIC> 47,135
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
