UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 [ ]
23,204,585 shares of common stock, $l.00 par, outstanding on March 31,
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 Months
Ended March 31, 1999 and 1998 (Both unaudited) 2
Consolidated Balance Sheets at March 31, 1999 (Unaudited),
December 31, 1998 and March 31, 1998 (Unaudited) 3
Consolidated Statements of Changes in Shareholders'
Equity for the Three Months Ended March 31, 1999
(Unaudited) and the Year Ended December 31, 1998 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and 1998 (Both unaudited) 5
Notes to Unaudited Interim Consolidated Financial
Statements 6
Independent Auditors' Review Report 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
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 N/A
Item 5 Other Information N/A
Item 6 Exhibits and Reports on Form 8-K 34
Signatures 35
1st Quarter 1999 Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended December 31,
---------------------------- ----------------------------
(In thousands, except share and per share data) 1999 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME DATA
Net income, as reported $ 13,454 $ 9,900 $ 28,920 $ 41,816
Less "non-operating" income items:
Net securities transactions 225 (429) 519 266
Net gain on curtailment of pension plan 2,577 -- -- --
Gain on sale of merchant processing -- -- -- 2,432
Total "non-operating" income items 2,802 (429) 519 2,698
Income taxes on "non-operating" income items 1,140 (148) 195 946
Total "non-operating" income items, net of taxes 1,662 (281) 324 1,752
Add "non-operating" expense items:
Merger and acquisition related expenses 1,173 -- 21,968 --
Income taxes on "non-operating" expense items 425 -- 5,710 --
Total "non-operating" expense items, net of taxes 748 -- 16,258 --
Income from operations (1) $ 12,540 $ 10,181 $ 44,854 $ 40,064
Cash income from operations (2) $ 13,838 $ 10,974 $ 48,300 $ 43,236
SHARE AND PER SHARE DATA
Basic wtd. avg. number of shares 23,353,668 23,430,477 23,277,560 23,705,320
Basic earnings per share (Basic EPS)
Net income $ 0.58 $ 0.42 $ 1.24 $ 1.76
Income from operations (1) 0.54 0.43 1.93 1.69
Cash income from operations (2) 0.59 0.47 2.07 1.82
Diluted wtd. avg. number of shares 23,663,808 23,835,238 23,669,540 24,042,800
Diluted earnings per share (Diluted EPS)
Net income $ 0.57 $ 0.42 $ 1.22 $ 1.74
Income from operations (1) 0.53 0.43 1.90 1.67
Cash income from operations (2) 0.58 0.46 2.04 1.80
Shares outstanding, net of treasury
shares, p.e 23,204,585 23,228,855 23,179,092 23,515,335
Book value, p.e. $ 13.98 $ 13.59 $ 13.86 $ 13.53
Tangible book value, p.e. 10.63 12.31 10.40 12.21
Market price: (2)
High 37.25 37.38 42.75 33.50
Low 24.75 27.63 23.50 20.00
Average close 29.11 32.34 33.18 24.42
Last 28.25 36.50 37.63 32.13
Share volume (2) 3,665,138 2,161,724 9,803,072 7,907,500
Average monthly share volume (2) 1,221,713 720,575 816,923 658,958
Price/Tangible book value, p.e. 265.8% 296.5% 361.8% 263.1%
Price/Diluted EPS (last 4 qtrs.) 20.6 21.0 30.8 18.5
Price/Diluted income from operations per share (last
4 qtrs.) 14.2 21.6 19.8 19.2
AVERAGE BALANCES
Assets $ 4,359,674 $ 3,937,086 $ 4,062,619 $ 3,743,169
Earning assets 4,039,200 3,713,196 3,819,997 3,546,541
Loans 2,835,880 2,642,333 2,684,169 2,578,746
Goodwill 77,319 30,552 35,797 33,883
Deposits 3,580,187 3,067,842 3,213,973 2,947,820
Short-term borrowed funds 304,361 438,700 390,641 389,586
Long-term debt 74,141 46,044 63,776 47,139
Guaranteed preferred beneficial interests in
Corporation's subordinated debentures 30,000 30,000 30,000 20,137
Shareholders' equity 321,381 315,790 323,121 303,357
KEY RATIOS AND OTHER INFORMATION
Return on average assets:
Net income 1.25% 1.02% 0.71% 1.12%
Income from operations (1) 1.17 1.05 1.10 1.07
Cash income from operations (2) 1.29 1.13 1.19 1.16
Return on average shareholders' equity:
Net income 16.98 12.71 8.95 13.78
Income from operations (1) 15.82 13.08 13.88 13.21
Cash income from operations (2) 17.46 14.09 14.95 14.25
Efficiency ratio 58.56 61.37 59.78 61.65
Total non-interest income from
operations/total gross revenue (fte) 21.60 18.64 19.83 17.78
Stratevest total assets under management $ 3,990,756 $ 2,313,558 $ 4,126,000 $ 2,478,000
Managed assets with discretionary powers 2,655,515 1,131,389 2,478,000 1,446,000
Net loan charge-offs to average loans 0.12% 0.15% 0.21% 0.26%
Provision for loan losses to average loans 0.28 0.35 0.35 0.36
Allowance for loan losses to loans, p.e. 1.61 1.50 1.57 1.46
Allowance for loan losses coverage of
non-performing loans, p.e. 207.02 192.52 212.14 188.24
Non-performing assets to total assets, p.e. 0.55 0.57 0.55 0.59
Total capital to risk-adjusted assets, p.e. 10.36 12.33 10.00 12.55
Tier 1 capital to risk-adjusted assets, p.e. 9.10 11.08 8.75 11.30
Tier 1 capital to quarterly average total assets (leverage) 6.44 8.00 6.43 8.18
Tangible shareholders' equity to tangible assets, p.e. 5.79 7.20 5.58 7.36
<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
Ended March 31,
----------------------
(In thousands, except per share data) 1999 1998
---- ----
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $60,422 $58,865
Interest on money market investments 202 217
Interest on securities available for sale 16,903 15,654
Interest on investment securities held 331 1,018
----------------------
Total interest and dividend income 77,858 75,754
Interest expense:
Deposits 30,413 28,967
Short-term borrowed funds 3,211 5,777
Long-term debt 1,132 745
----------------------
Total interest expense 34,756 35,489
----------------------
Net interest income 43,102 40,265
Less: provision for loan losses 2,000 2,340
----------------------
Net interest income after provision for loan losses 41,102 37,925
----------------------
Other operating income:
Income from trust and investment management fees 4,833 2,962
Service charges on deposit accounts 3,198 2,879
Mortgage banking income 1,324 1,094
Card product income 613 430
ATM income 619 482
Net securities transactions 225 (429)
Bank owned life insurance 539 540
Net gain on curtailment of pension plan 2,577 --
Other income 901 920
----------------------
Total other operating income 14,829 8,878
Other operating expenses:
Compensation 13,390 12,919
Employee benefits 3,385 3,294
Net occupancy 3,039 2,620
Equipment and software 2,444 2,317
Data processing 2,102 1,735
FDIC deposit insurance and other regulatory 294 280
Other real estate owned and repossession 154 356
Legal and professional 927 1,102
Printing and supplies 737 798
Advertising and marketing 1,149 974
Communications 963 719
Amortization of goodwill 2,164 1,322
Capital securities 789 789
Merger and acquisition related expenses 1,173 --
Other expenses 3,564 3,277
----------------------
Total other operating expenses 36,274 32,502
----------------------
Income before income tax expense 19,657 14,301
Income tax expense 6,203 4,401
----------------------
Net income $13,454 $ 9,900
======================
Basic earnings per share $ 0.58 $ 0.42
======================
Basic wtd. avg. number of shares 23,354 23,430
======================
Diluted earnings per share $ 0.57 $ 0.42
======================
Diluted wtd. avg. number of shares 23,664 23,835
======================
<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>
March 31, December 31, March 31,
(In thousands, except share and per share data) 1999 1998 1998
--------- ------------ ---------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
Cash and due from banks $ 110,011 $ 164,826 $ 117,671
Money market investments 18,253 4,900 16,904
------------------------------------------
Cash and cash equivalents 128,264 169,726 134,575
------------------------------------------
Securities available for sale, at fair value 1,130,063 1,127,865 983,512
Loans held for sale 32,400 42,996 46,549
Investment securities, held to maturity
(Fair value of $19,999 at March 31, 1999, $21,606 at
December 31, 1998 and $50,710 at March 31, 1998) 19,462 20,545 49,605
Loans 2,833,658 2,837,106 2,651,608
Less: allowance for loan losses 45,658 44,537 39,889
------------------------------------------
Net loans 2,788,000 2,792,569 2,611,719
------------------------------------------
Accrued interest receivable 23,070 21,244 22,295
Premises, equipment and software, net 50,682 50,936 44,983
Other real estate owned and repossessed assets 1,601 3,335 1,905
Goodwill, net 77,835 80,224 29,797
Capitalized mortgage servicing rights 5,658 5,351 4,938
Bank-owned life insurance 42,845 42,306 40,617
Other assets 38,642 45,784 31,003
------------------------------------------
Total assets $4,338,522 $4,402,881 $4,001,498
==========================================
Liabilities, Guaranteed Preferred Beneficial Interests in
Corporation's Junior Subordinated Debentures and
Shareholders' Equity
Deposits:
Non-interest bearing $ 471,253 $ 546,192 $ 403,908
NOW accounts & money market savings 1,437,679 1,490,944 1,174,904
Regular savings 346,892 328,986 309,742
Time deposits $100 thousand and greater 287,062 239,071 230,568
Time deposits under $100 thousand 1,030,125 1,034,304 992,342
------------------------------------------
Total deposits 3,573,011 3,639,497 3,111,464
------------------------------------------
Short-term borrowed funds:
Federal funds purchased -- 30,445 22,880
Securities sold under agreements to repurchase 205,340 208,511 142,360
Borrowings from U.S. Treasury 13,629 12,678 17,025
Borrowings from Federal Home Loan Bank 70,000 30,000 272,000
------------------------------------------
Total short-term borrowed funds 288,969 281,634 454,265
------------------------------------------
Long-term debt:
Federal Home Loan Bank term notes 65,972 66,062 36,886
Bank term loan 7,430 8,263 10,214
------------------------------------------
Total long-term debt 73,402 74,325 47,100
------------------------------------------
Accrued interest payable 7,151 7,101 8,053
Other liabilities 41,524 49,062 34,851
------------------------------------------
Total liabilities 3,984,057 4,051,619 3,655,733
------------------------------------------
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 March 31, 1999 and
December 31, 1998 -- -- --
Common stock, $1.00 par value; authorized 70,000,000
shares and issued 23,548,392 shares as of March 31,
1999, and December 31, 1998, and authorized 38,000,000
shares and issued 23,542,855 as of March 31, 1998 23,548 23,548 23,543
Capital surplus 85,617 86,033 85,220
Retained earnings 226,818 221,919 215,335
Unamortized employee restricted stock (854) (1,266) (1,521)
Accumulated other comprehensive income 860 3,509 3,468
Unearned ESOP shares (279) (463) (463)
Less: Common stock in treasury, at cost; 343,807 shares
as of March 31, 1999, 369,300 shares as of December 31,
1998, and 314,000 shares as of March 31, 1998 (11,245) (12,018) (9,817)
------------------------------------------
Total shareholders' equity 324,465 321,262 315,765
------------------------------------------
Total liabilities, guaranteed preferred beneficial
interests in Corporation's junior subordinated
debentures and shareholders' equity $4,338,522 $4,402,881 $4,001,498
==========================================
<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)
<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 $218) - - - -
Other comprehensive income - - - -
Comprehensive income
Cash dividends declared ($ .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)
----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Unearned Other
ESOP Comprehensive Treasury Comprehensive
Shares Income Stock Income Total
-------- ------------- -------- ------------- -----
(Dollars and shares in thousands, except per share)
<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 exercise - - 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
---------------------------------------------------------------
<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>
Three Months Ended March 31,
----------------------------
(In thousands) 1999 1998
---- ----
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 13,454 $ 9,900
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization of premises, equipment and software 1,798 1,693
Amortization of goodwill 2,164 1,322
Net amortization of premiums on securities available for sale 2,187 993
Net accretion of discounts on investment securities (22) (70)
Provision for loan losses 2,000 2,340
Adjustment of other real estate owned to estimated fair value 94 50
Provision for deferred tax benefit (114) (225)
Amortization of employee restricted stock (148) 246
Issuance of restricted stock units under directors' deferred
compensation plan, net 144 142
Net securities transactions (225) 429
Net gain on sale of other real estate owned and repossessed assets (14) (91)
Proceeds from sale of loans held for sale 83,966 55,133
Originations and purchases of loans held for resale (72,408) (76,113)
Net gain on sale of loans held for sale (962) (611)
Earnings from bank owned life insurance (539) (540)
Decrease (increase) in interest receivable (1,826) 982
Increase in interest payable 50 523
Decrease (increase) in other assets and other intangibles 8,424 (5,745)
Increase (decrease) in other liabilities (11,714) 5,366
ESOP compensation expense 184 177
--------------------------
Total adjustments 13,039 (13,999)
--------------------------
Net cash provided by (used in) operating activities 26,493 (4,099)
--------------------------
Cash flows from investing activities:
Proceeds from maturity and call of securities available for sale 105,144 77,427
Proceeds from maturity and call of investment securities held to maturity 1,112 9,091
Proceeds from sale of securities available for sale 8,400 97,926
Purchase of securities available for sale (121,876) (201,221)
Proceeds from sale of OREO and repossessed assets 1,791 1,340
Net decrease (increase) in originated loans 2,432 (10,925)
Capital expenditures (1,278) (1,365)
--------------------------
Net cash used in investing activities (4,275) (27,727)
--------------------------
Cash flows from financing activities:
Net (decrease) increase in deposits (66,486) 57,830
Net increase in short-term borrowed funds 7,335 4,330
Purchase of treasury stock, net - (10,059)
Issuance of long-term debt - 7,645
Payments on long-term debt (923) (2,794)
Exercise of employee stock options 566 889
Dividends paid (4,172) (3,808)
--------------------------
Net cash provided by (used in) financing activities (63,680) 54,033
--------------------------
Net (decrease) increase in cash and cash equivalents (41,462) 22,207
--------------------------
Cash and cash equivalents at beginning of year 169,726 112,368
--------------------------
Cash and cash equivalents at end of year $ 128,264 $ 134,575
==========================
Additional disclosure relative to statement of cash flows:
Interest paid $ 34,706 $ 34,980
==========================
Taxes paid $ 5,735 $ 4,376
==========================
Supplemental schedule of non-cash investing and financing activities:
Net transfer of loans to OREO and repossessed assets $ 137 $ 409
Adjustment to securities available for sale to fair value, net of tax 2,649 150
<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 March 31, 1999 and 1998, and the
results of their operations and cash flows for the three months ended
March 31, 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. During 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, "Disclosure about Segments of an Enterprise
and Related Information." This Statement requires the Company to report
financial and other information about operating segments meeting certain
quantitative and other requirements as defined by this Statement. The
Company's operations are solely in the financial services industry and
include the provision of traditional banking services. The Company
operates solely in the geographical region of Vermont, New Hampshire,
Massachusetts and upstate New York. In the opinion of the
management, the Company does not have any reportable segments as
defined by SFAS No. 131.
3. 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 March 31,
-----------------------------------------------------------------------
1999 1998
---------------------------------- ---------------------------------
Weighted Weighted
In thousands, Net Average Per Share Net Average Per Share
except for share and per share date Income Shares Amount Income Shares Amount
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $13,454 23,353,668 $0.58 $9,900 23,430,477 $0.42
Effect of dilutive securities:
Stock options 280,793 373,997
Restricted stock awards 29,347 30,764
---------- ----------
Diluted earnings per share $13,454 23,663,808 $0.57 $9,900 23,835,238 $0.42
=====================================================================
</TABLE>
4. In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. This Statement is
effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. Management is currently evaluating the impact of this
Statement on the Company's consolidated financial statements.
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 March 31, 1999
and 1998, and the related consolidated statements of income and cash flows
for the three-month periods ended March 31, 1999 and 1998, and the
consolidated statements of changes in shareholders' equity for the three
months ended March 31, 1999. These consolidated financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists prinicipally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion regarding
the financial statements taken as a whole. Accordingly, we do not express
such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Banknorth Group, Inc.
and subsidiaries as of December 31, 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
April 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
months ended March 31, 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 annual 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.
OVERVIEW
Banknorth's net income was $13.5 million, representing basic earnings
per share ("EPS") of $.58 and diluted EPS of $.57, for the three months
ended March 31, 1999, compared to $9.9 million, or $.42 basic EPS, and $.42
diluted EPS for the three months ended March 31, 1998.
During the first quarter 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 $1.4 million, or $775
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 second and third
quarter of 1999, respectively.
MERGER AND 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 March 31, 1999, Evergreen Bank had total
assets of $1.1 billion and deposits of $990.6 million.
In order to effect the merger, one-time merger related expenses of
$21.3 million ($15.8 million after-tax impact), were incurred in the fourth
quarter of 1998 and the first quarter 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 March 31, 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). $10.9 million of these
liabilities were paid during the first quarter of 1999. As of March 31,
1999, $4.5 million of these liabilities remain. The remaining liability
primarily represents employment related costs and other costs incidential 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 second 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 92.98% and 93.67% of total assets at March
31, 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 $4.0 billion during the first quarter of 1999, an
increase of $326.0 million, or 8.8% from the first quarter of 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 $2.8 billion during the three months
ended March 31, 1999, were $193.5 million, or 7.3%, 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 March 31, 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 $32.4 million as of March 31, 1999, $14.1
million lower than the $46.5 million balance outstanding as of March 31,
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 in
the first quarter of 1999 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. On
average, loans held for sale remained high at $36.4 million during the
first quarter of 1999, $6.5 million, or 21.7% higher than the average for
the three-month period ending March 31, 1998. This was primarily the
result of the strong pipeline of mortgage loans as the number of
applications pending and loans in various stages of production were at high
levels as of December 31, 1998. Management expects the level of mortgage
originations to return to more normal levels for the remainder 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 March 31, 1999 as compared to $983.5 million at March 31, 1998,
an increase of $146.6 million or 14.9%. The balances include a fair value
adjustment reflecting net unrealized gains of $1.7 million at March 31,
1999, and $5.8 million at March 31, 1998. The increase in securities
available for sale is primarily 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 March 31, 1999 and 1998 were $1.1 billion and $969.0 million,
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 March 31, 1999, the balance of securities in this category was $19.5
million, $30.1 million below the balance at March 31, 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 March 31, 1999 and 1998, as
well as December 31, 1998.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $19.5 million during the first quarter of 1999, up
$4.5 million, or 30.0%, from the first 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 $78.4
million for the three-month period ended March 31, 1999, as compared to
$76.1 million for the same period in 1998. The increase of $2.3 million,
or 3.0%, resulted from the increases in earning assets through acquisition
and normal growth described previously. Total earning assets during the
first quarter of 1999 of $4.0 billion yielded 7.88%, while in 1998 earning
assets of $3.7 billion yielded 8.31%. The increase in earning assets
contributed $6.2 million towards the increase in interest income, while the
decline in yield of 43 basis points resulted in $3.9 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.
Funding Sources
Banknorth utilizes various traditional sources of funding to support
its earning asset portfolios. Average total net funding increased by $406.1
million, or 11.4%, in the first quarter of 1999 in comparison to the
average for the quarter ended March 31, 1998. Table E, Average Sources of
Funding, presents the various categories of funds used and the
corresponding average balances for the first quarter of 1999 and 1998.
Deposits. Total core deposits averaged $3.3 billion during the three
month period ended March 31, 1999, $476.1 million, or 16.7%, over the first
quarter average of 1998. The majority of the increase was the result of
the Berkshire branch acquisition, which contributed $292.7 million on
average in deposits during the first quarter of 1999. Overall, NOW and
money market accounts increased by $300.9 million, retail time deposits in
denominations less than $100,000 increased by $43.8 million and regular
savings increased $30.2 million. In the current low rate environment, the
indexed money market product offered is an attractive option for our
customers. Total core deposits represented 84.1% of total net funding
during the first quarter of 1999 as compared to 80.3% during the same
quarter of 1998.
Purchased liabilities. Total purchased liabilities decreased on
average by $67.3 million to $621.6 million during the first quarter of 1999
from $688.9 million during the first quarter of 1998. Short-term borrowed
funds decreased $134.3 million from $438.7 million for the three months
ended March 31, 1998 to $304.4 million for the three months ended March 31,
1999. Short-term borrowings from the FHLB decreased significantly from
$270.3 million at March 31, 1998 to $59.6 million at March 31, 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 $35.2 million for the three months ended March
31, 1998 to $66.0 million for the three months ended March 31, 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 $214.3 million or 34.5% of the purchased liabilities
for the first quarter of 1999. This is an increase of $70.2 million from
the average in the first 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 $8.1 million during the first
quarter of 1999 represented primarily the 1994 funding of the acquisition
of North American Bank Corporation. Banknorth financed the transaction
with a bank credit facility whose original terms were re-negotiated in
April 1999. The re-negotiated terms provide improved pricing and an
extension of the repayment period. The balance of $7.2 million at March 31,
1999 will be repaid within five years. Additionally, there was $280
thousand in bank debt at March 31, 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.
In April 1999, the Company obtained a $25 million commitment for a line
of credit with a third party. The line of credit has not yet been used.
Interest expense summary. Total interest expense for the three months
ended March 31, 1998 was $34.8 million, a decrease of $733 thousand or
2.1%, 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 $106.2 million
in higher cost borrowings, primarily short-term. Increased levels of
interest-bearing liabilities contributed $3.1 million to the increase in
interest expense while the decline in rates paid decreased interest expense
by $3.8 million. The cost of interest bearing liabilities was 4.07% in the
first quarter of 1999, a decrease of 49 basis points from the first
quarter of 1998.
Tables D, Average Balances, Yields and Net Interest Margins and Table
F, Volume and Yield Analysis, contain details of changes by category of
interest bearing liabilities and interest expense.
Net Interest Income
Net interest income totaled $43.7 million and $40.6 million for the
three month periods ended March 31, 1999 and 1998, respectively. The net
interest margin was 4.39% during the first quarter of 1999 as compared to
4.44% during the same period of 1998. The yield on earning assets of 7.88%
for the first quarter of 1999, was 43 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. The net interest
margin narrowed during 1998 and to date in 1999 as competition for quality
credits and retail deposits resulted in a tighter spread between asset
yields and liability costs.
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 are still accruing interest. Also included in the
total non-performing assets are foreclosed and repossessed non-real estate
assets.
NPAs were $23.7 million at March 31, 1999, an increase of $883
thousand, or 3.9%, from March 31, 1998 and a decrease of $673 thousand, or
2.8%, from December 31, 1998. The ratio of NPAs to loans plus other real
estate owned and repossessed assets at March 31, 1999, was .83% compared to
.86% at March 31, 1998. Table G, Non-Performing Assets, contains the
details for March 31, 1999 and 1998, and December 31, 1998.
Non-performing loans ("NPLs") at March 31, 1999 were $22.1 million, a
net increase of $1.3 million, or 6.5%, from March 31, 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 $1.6
million at March 31, 1999, down $453 thousand from one year earlier and
down $1.7 million 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 monthly. It is
assessed for adequacy using a methodology designed to ensure the level of
the allowance reasonably reflects the loan portfolio's risk profile. It is
also evaluated to ensure that it is sufficient to absorb all 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 March 31, 1999 and
1998, as well as for the year ended December 31, 1998. Loans charged off in
the first three months of 1999 were $2.3 million, or an annualized .32% of
average loans. This represents an improvement over the prior year's first
quarter results when charge-offs totaled $2.4 million, or an annualized
.36% of average loans. Recoveries on loans previously charged off were $1.4
million for both of the three-month periods ended March 31, 1999 and 1998.
The provision for loan losses ("provision") for the three months
ended March 31, 1999 was $2.0 million, or an annualized .28% of average
loans. Provisions of $2.3 million, or an annualized .35% of average loans,
and $9.3 million, or .35% of average loans were experienced during the
first quarter 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 first quarter of 1998
to the first 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 March 31, 1999 is down
slightly from the first quarter of 1998.
Provisions recorded are those necessary to maintain the allowance at
a level adequate enough to absorb reasonably predictable loan charge-offs.
At March 31, 1999, the allowance provided a coverage of non-performing
loans of 207.02% as compared to 212.14% and 192.52% at December 31, 1998
and March 31, 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, and interest rate swaps in the
notional amount of $50.0 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 March 31, 1999,
the unamortized balance of these interest rate floors and corridors was $1.2
million. The estimated fair value of these floors was $2.4 million as of March
31, 1999. The estimated fair value of the interest rate swap contracts and
interest rate corridors were $827 thousand and $393 thousand as of March
31, 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 March 31, 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 first
quarter of 1999, the average securities sold under agreements to repurchase
were $214.3 million, as compared to $144.1 million in the first quarter of
1998.
Long-term purchased funding, primarily through the FHLB, was $66.0
million during the first quarter of 1999, up $30.8 million from the quarter
ended March 31, 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 AND EXPENSES
Other operating income is a significant source of revenue for
Banknorth and an important factor in the Company's results of operations.
Other operating income totaled $14.8 million for the first quarter of 1999,
$6.0 million or 67.0% higher than the first quarter of 1998. Included in
the 1999 other income was a net gain of $2.6 million on the curtailment of
the Evergreen pension plan.
Investment management income. The Stratevest Group, N.A., the
Company's investment and financial management subsidiary, contributes the
largest recurring portion of other operating income through fees generated
from the performance of trust and investment management services. Income
from trust and investment management services totaled $4.8 million in the
first quarter of 1999, an increase of $1.9 million, or 63.2% 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 branch acquisition. The Company's acquisition of approximately
$1.0 billion in investment assets as a result of the Berkshire branches
acquisition 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 first quarter of 1999. Total assets
under management totaled $4.0 billion, including $2.7 billion under
discretionary management, as of March 31, 1999, compared to total assets
under management of $2.3 billion, including $1.1 billion under
discretionary management, as March 31, 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, $3.2 million for the three months ended March 31, 1999, were $319
thousand, or 11.1% 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 first quarter of 1999. During late 1997,
Banknorth reviewed and enhanced its policies and practices regarding
service charges and service charge waivers. Accordingly, the level of fee
income improved throughout 1998 and into 1999.
Mortgage banking income. Mortgage banking income, which is comprised
of loan servicing income, net loan transactions and gains on the sale of
mortgage servicing rights, amounted to $1.3 million for the three months
ended March 31, 1999. This category of income was up $230 thousand, or
21.0%, from March 31, 1998. Loan servicing income, primarily mortgage
servicing at BMC, was $366 thousand in the first quarter of 1999, a
decrease of $83 thousand, or 18.5%, from the same period of 1998, as a
result of the increased amortization in mortgage servicing rights. The
amortization of mortgage servicing rights was $369 thousand for the three
months ended March 31, 1999 compared to $319 thousand for the three months
ended March 31, 1998. This increase in amortization expense is primarily
related to the growth in the capitalized mortgage servicing rights (MSRs)
reflecting the continued application of new accounting rules adopted in
1996.
Additionally, 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 first quarter of 1999
amounted to $962 thousand, $351 thousand greater than the same period of
1998. The significant increase was the result of the record level
production throughout 1998 which created strong sales activity into 1999 as the
number of applications pending and loans in various stages of production
were at a high level at December 31, 1998. As these loans were closed and
were sold during the first quarter of 1999, gains from these net loan
transactions were recorded. Interest rates rose slightly in the first
quarter of 1999 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 $183 thousand, to $613
thousand, in the first quarter of 1999 as compared to the first 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.
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 $619 thousand for the three months ended March 31, 1999
compared to $482 thousand for the three months ended March 31, 1998. The
increase in ATM income over the last year was the result of the terminal
convenience fee being assessed in all states in which the Company operates
and the addition of the Berkshire ATMs to the Banknorth network. In mid
1997, the Company commenced charging a terminal convenience fee for ATM
transactions by non-customers in Vermont, New York and New Hampshire. This
fee allows the Company to recover a portion of the expense of operating the
ATM network. In September 1998, the Company began assessing this fee in
the Massachusetts market. Fee income is expected to remain at the first
quarter of 1999 level throughout the year.
Net securities transactions. Net gains or losses from securities
transactions are also included in other operating income. In the first
quarter of 1999, the Company realized $225 thousand in net securities gains
compared to the first quarter of 1998 when it realized $429 thousand in net
losses. The net gains recorded in the first quarter of 1999 resulted from
the management of the portfolio within Banknorth guidelines given the
current market conditions. The net loss in 1998 was the result of the sale
of approximately $85.5 million of securities available for sale during
January 1998 at a loss of approximately $504 thousand. The loss was
recovered through enhanced yields within a six month period. The Company
anticipates that it will consider additional sales from the securities
available for sale portfolio during 1999 as it attempts to achieve its
objectives in the total return management of the securities available for
sale portfolio. The Company also expects that future losses incurred, if
any, would be recovered through yield improvement within a one to two year
period.
Bank-owned life insurance income. In the fourth quarter of 1997,
Banknorth purchased $40.0 million of bank-owned life insurance ("BOLI"),
which resulted in approximately $540 thousand of income in both the first
quarters of 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 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.
Other income. Other income amounted to $901 thousand for the three
months ended March 31, 1999, compared to $920 thousand for the three months
ended March 31, 1998. The largest portions of this income category are
from personal banking and commercial banking fees, including safe deposit
box and official checks. The slight decline between the three-month
periods was caused by the recording of a $119 thousand gain on the sale of
fixed assets in the first quarter of 1998. Without this gain, other
banking income was up approximately 12.3% primarily as a result of the ten
additional branches acquired in the Berkshire region of Massachusetts.
Other Operating Expenses
Other operating expenses for the first quarter was $36.3 million,
$3.8 million, or 11.6%, above expense levels in the first quarter of 1998.
The majority of the increase in operating expenses was due to $1.2 million
in merger related expenses, $842 thousand in additional goodwill expense,
and $562 thousand in additional compensation and benefit expenses. The
Company's efficiency ratio was 58.56% in the first quarter of 1999, down
from 61.37% from the same period one year earlier.
Compensation. Compensation expense increased by $471 thousand, or
3.6%, in the first quarter of 1999 in comparison to the first quarter of
1998. The increase in this expense is primarily due to merit pay increases
during the year as the number of full-time equivalent employees was
approximately the same for both quarters. The location of the employees
changed with fewer employees in New York State and more employees in the
Berkshire region of Massachusetts and in Vermont during 1999 compared to the
first quarter of 1998. Benefits expenses also increased by 2.8% between
the three months ended March 31, 1999 and 1998.
Net occupancy. Net occupancy costs increased $419 thousand or 16.0%
from $2.6 million for the three months ended March 31, 1998 to $3.0 million
for the three months ended March 31, 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 $2.4
million and $2.3 million for the three months ended March 31, 1999 and
1998, respectively. Banknorth continuously invests in upgraded technology
in order to offer enhanced products and services or to create operating
efficiencies. Management expects equipment and software expenses to
increase in 1999 as a result of continued investment of additional
technology, including a new automated platform system for the branch
network.
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 increased $367 thousand or 21.2% in the first quarter of 1999 in
comparison to the same period of 1998 primarily as a result of additional
outside processing expense for servicing of the purchased Berkshire private
banking relationships. This expense of $300 thousand per quarter will be
incurred through the second quarter of 1999. After the Company's
conversion of these relationships is completed by early in the third quarter of
1999, this outside servicing expense will be discontinued.
Additionally, the Company's mainframe systems and site management
expenses were down in the first quarter of 1999 compared to the first
quarter of 1998 as a result of the completion of systems conversion of
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 expense in the first quarter of 1999 related to the system
conversion of the merger of two subsidiary banks, Woodstock National Bank
and First Vermont Bank. This conversion is expected to be completed in the
second quarter of 1999.
Other real estate owned. Expenses relating to other real estate
owned and repossessed assets decreased for the first quarter of 1999 by
$202 thousand as compared to March 31, 1998 as the holding costs of these
properties declined. Included in this expense category in the first
quarter of 1999 are net gains on the sale of other real estate owned and
repossessed assets in the amount of $14 thousand. Net gains on sales in
the first quarter of 1998 were $91 thousand. Management anticipates the
level of other real estate owned and repossession expenses to remain steady
throughout the year.
Legal and professional. Legal and professional expenses of $927
thousand during the first quarter of 1999, were $175 thousand lower than
the first quarter of 1998. Expenses were high in the first quarter of 1998
due to various business initiatives.
Advertising and marketing. Advertising and marketing expenses were
$1.1 million for the three months ended March 31, 1999, $175 thousand, or
18.0% 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.
Communications. Communications expenses totaled $963 thousand in the
first quarter of 1999, and $719 thousand in the first quarter of 1998. The
increase in communication expenses was primarily due to the expansion of
the voice/data communication network to accommodate the new locations of
Banknorth.
Amortization of goodwill. Amortization of goodwill amounted to $2.2
million in first quarter of 1999 compared to $1.3 million in the first
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 first
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 quarter of 1999 related to the merger with Evergreen
amounted to approximately $1.2 million, or $748 thousand, after income tax
effect. This brings total one-time merger related expenses to $21.3 million
($15.8 million after-tax impact). The majority of these expenses were
employment-related costs and data processing conversion and termination
costs.
The conversion of the private banking relationships of Berkshire and
Evergreen are scheduled for the second and third quarters of 1999,
respectively. Additional one-time expenses of $200 thousand related to
these conversions of the private banking relationships is expected to be
incurred.
Other expenses. Other expenses totaled $3.6 million and $3.3 million
for the three months ended March 31, 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 first quarter of 1999 compared to the first quarter of
1998. These low-income housing projects generate significant tax credits
and reduce the Company's effective tax rate from the statutory level.
SUBSIDIARY BANK MERGER
On July 30, 1998, the Company announced that it plans to merge one of
its subsidiary banks, Woodstock National Bank, into another subsidiary
bank, First Vermont Bank. The combination of the two banks is subject to
regulatory approval and is expected to take place in the second quarter of
1999 with Woodstock National Bank's three offices becoming branch offices
of First Vermont Bank. The conversion is expected to costs approximately
$400 thousand in total, of which $300 thousand in expense has been
recognized through March 31, 1999.
YEAR 2000 COMPLIANCE
Historically, some computer software and hardware and firmware
systems, and equipment or machinery with embedded processors or processing
instructions (sometimes referred to as "embedded processors"), were written
to recognize and process dates with the year written with two digits. For
dates on or after January 1, 2000 (when four digits will be necessary to
identify dates accurately), or for periods beginning before, and ending on
or after January 1, 2000, such software, hardware and firmware systems and
embedded processors may not be able to recognize or properly process dates
or information including dates or time periods. Among other things, this
may cause computers to produce incorrect information, to shut down, to
cause other systems or equipment to shut down of malfunction, or to
malfunction in other ways, and may cause equipment or machinery with
embedded processors to malfunction or to shut down. This is often referred
to as, among other things, the "Year 2000 problem."
In order to assure, to the extent possible, that the Year 2000
problem does not impair their ability to do business or subject them to
liability, companies are advised to determine whether and to what extent
their information technology or physical resources may be affected by Year
2000 problems, to repair, replace or retire the affected systems or assets,
and to test the new systems or assets to assure that they will not be
affected by the Year 2000 problem (which is often referred to as being
"year 2000 compliant"). Some new hardware, software or equipment, and some
revisions or upgrades of hardware, software or equipment, may have so-
called "bugs" or may prove to be incompatible with existing or other new or
upgraded systems or components. As a result, the testing of the changed
components, and of systems and subsystems as a whole, is critical and
experience has shown that the process is time consuming.
In order to protect the integrity of the banking system, the Federal
Reserve Board and other federal banking regulatory agencies (collectively
known as the "Federal Financial Institutions Examination Council," or
"FFIEC") have issued guidelines to financial institutions for addressing
the Year 2000 problem and set milestones that financial institutions are
expected to meet in becoming Year 2000 compliant and testing to assure
compliance. In broad outline, those guidelines provide that (i) by
September 30, 1997, financial institutions should have identified, assessed
and begun remediation of mission critical systems; (ii) by June 30, 1998,
institutions should be continuing remediation of mission critical systems
and have completed development of testing strategies and plans; (iii) by
September 1, 1998, institutions should be continuing system remediation and
should have begun testing of internal mission critical systems; (iv) by
December 31, 1998, institutions should have substantially completed testing
of internal mission critical systems; (v) by March 31, 1999, institutions
relying on service providers should have substantially completed system
testing and all institutions should have begun external testing with third
parties (such as other financial institutions, business partners and
payment system providers); and (vi) by June 30, 1999, institutions should
have completed testing of mission critical systems and substantially
completed all implementation of those systems.
Banknorth's Year 2000 remediation and compliance program (the "Year
2000 Project") is managed by a Project Group consisting of representatives
from more than 25 business units and functional departments within
Banknorth and its subsidiaries. The Project is directed by a Banknorth
Vice President 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 March 31,
1999, approximately $4.6 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 which is expected to be complete by November 30, 1999.
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 March 31, 1999, approximately $1.1 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 first quarter of 1999, Banknorth recognized income tax expense
of $6.2 million, as compared to $4.4 million in first quarter of 1998. The
effective rate was 31.6% in the first quarter of 1999 compared to 30.8% in
the first quarter of 1998. The tax expense on the Company's income was
lower than tax expense at the statutory rate of 35%, due primarily to tax-
exempt income, including loans, securities and BOLI, as well as tax credits
received on low-income housing projects.
CORE TANGIBLE PERFORMANCE
After removing the impact of the balance of goodwill and the related
period amortization and merger and acquisition costs, "core tangible"
performance as of March 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
March 31,
--------------------------
1999 1998
---- ----
(In thousands, except share and per share data)
<S> <C> <C>
Net income, as reported $ 13,454 $ 9,900
Less: Net gain on curtailment of pension plan (1,523) --
Add: Merger costs, net of tax 748 --
Add: Amortization of goodwill, net of tax 1,298 793
--------------------------
"Core tangible income" $ 13,977 $ 10,693
==========================
Average tangible assets $4,282,355 $3,906,534
Average tangible equity $ 244,062 $ 285,238
Diluted weighted average shares outstanding 23,663,808 23,835,238
"Core tangible" return on average tangible
assets 1.32% 1.11%
"Core tangible" return on average tangible
equity 23.23% 15.20%
"Core tangible" diluted earnings per share $ .59 $ .45
</TABLE>
All share and per share data has been restated to give retroactive effect
to stock splits.
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 March 31, 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 March 31, 1999, Banknorth's Tier I capital was $275.7 million, or
9.10% of total risk-adjusted assets, compared to $312.5 million and 11.08%
as of March 31, 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 6.44%, and 8.00% as of March 31, 1999
and 1998, respectively. Banknorth is "well capitalized" at March 31, 1999
according to regulatory definition, and thereby, exceeded all minimum
regulatory capital requirements. Table I, Capital Ratios, provides the
components of capital as of various dates.
TABLE A. Mix of Average Earning Assets
<TABLE>
<CAPTION>
Three Months Percentage of
Ended March 31, % 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 $ 568,856 $ 570,303 $ (1,447) (0.4)% 14.1% 15.4%
Construction and land development 62,625 36,087 26,538 8.1 1.5 1.0
Commercial real estate 723,013 567,107 155,906 47.8 17.9 15.3
Residential real estate 1,040,802 1,075,425 (34,623) (10.6) 25.8 29.0
Credit card receivables 31,608 27,182 4,426 1.3 0.8 0.7
Lease receivables 80,182 75,256 4,926 1.5 2.0 2.0
Other installment 328,794 290,973 37,821 11.6 8.1 7.8
----------------------------------------------------------------------
Total loans, net of unearned income and
unamortized loan fees and costs 2,835,880 2,642,333 193,547 59.3 70.2 71.2
Securities available for sale:
U.S. Treasuries and Agencies 172,008 205,808 (33,800) (10.4) 4.2 5.5
States and political subdivisions 22,760 5,748 17,012 5.2 0.6 0.2
Mortgage-backed securities 696,176 503,632 192,544 59.1 17.2 13.6
Corporate debt securities 184,178 201,096 (16,918) (5.2) 4.6 5.4
Equities and other securities 48,845 45,573 3,272 1.0 1.2 1.2
Net unrealized gain (loss) 3,414 7,154 (3,740) (1.1) 0.1 0.2
----------------------------------------------------------------------
Total securities available for sale,
at fair value 1,127,381 969,011 158,370 48.6 27.9 26.1
Investment securities, held to maturity:
U.S. Treasuries and Agencies 3,325 28,383 (25,058) (7.7) 0.1 0.8
States and political subdivisions 11,413 13,368 (1,955) (0.6) 0.3 0.3
Mortgage-backed securities 5,328 15,197 (9,869) (3.0) 0.1 0.4
Corporate debt securities 10 10 -- -- -- --
----------------------------------------------------------------------
Total investment securities, held to maturity,
at amortized cost 20,076 56,958 (36,882) (11.3) 0.5 1.5
Loans held for sale 36,409 29,926 6,483 2.0 0.9 0.8
Money market investments 19,454 14,968 4,486 1.4 0.5 0.4
----------------------------------------------------------------------
Total earning assets $4,039,200 $3,713,196 $326,004 100.0% 100.0% 100.0%
======================================================================
</TABLE>
TABLE B. Loan Portfolio
<TABLE>
<CAPTION>
At March 31, At December 31, % Change
-------------------------------------------------------------------------------------------------
1999 1998 1998
-------------------------------------------------------------------------------------------------
03/31/99 03/31/99
Amount Percent Amount Percent Amount Percent versus versus
(Dollars in thousands) 03/31/98 12/31/98
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural $ 548,498 19.4% $ 583,088 22.0% $ 690,170 24.3% (5.9)% (20.5)%
Real estate:
Construction and land
development 67,495 2.4 36,492 1.4 45,704 1.6 85.0 47.7
Commercial 743,139 26.2 567,398 21.4 615,503 21.7 31.0 20.7
Residential 1,034,053 36.5 1,070,078 40.3 1,041,667 36.7 (3.4) (0.7)
-----------------------------------------------------------------------------------------------
Total real estate 1,844,687 65.1 1,673,968 63.1 1,702,874 60.0 10.2 8.3
-----------------------------------------------------------------------------------------------
Credit card receivables 31,344 1.1 28,263 1.1 33,205 1.2 10.9 (5.6)
Lease receivables 80,705 2.8 74,152 2.8 79,001 2.8 8.8 2.2
Other installment 328,424 11.6 292,137 11.0 331,856 11.7 12.4 (1.0)
-----------------------------------------------------------------------------------------------
Total installment 440,473 15.5 394,552 14.9 444,062 15.7 11.6 (0.8)
-----------------------------------------------------------------------------------------------
Total loans 2,833,658 100.0 2,651,608 100.0 2,837,106 100.0 6.9 (0.1)
Less: allowance for loan
losses 45,658 1.6 39,889 1.5 44,537 1.6 14.5 2.5
------------------------------------------------------------------------------------------------
Net loans $2,788,000 98.4% $2,611,719 98.5% $2,792,569 98.4% 6.7% (0.2)%
================================================================================================
</TABLE>
TABLE C. Securities Available for Sale and Investment Securities Held to
Maturity
<TABLE>
<CAPTION>
At March 31, At December 31,
---------------------- ----------------
(Dollars in thousands) 1999 1998 1998
------------------------------------------
<S> <C> <C> <C>
Securities available for sale:
U.S. Treasuries and Agencies $ 169,821 $210,458 $ 165,683
States and political subdivisions 36,108 5,769 7,806
Mortgage-backed securities 693,017 511,080 711,540
Corporate debt securities 180,170 204,914 188,154
Equities and other securities 49,221 45,515 48,791
Net unrealized gain (loss) 1,726 5,776 5,891
---------------------------------------
Fair value of securities available for sale $1,130,063 $983,512 $1,127,865
=======================================
Investment securities, held to maturity:
U.S. Treasuries and Agencies $ 3,191 $ 22,005 $ 3,582
States and political subdivisions 11,167 12,919 11,443
Mortgage-backed securities 5,094 14,671 5,510
Corporate debt securities 10 10 10
---------------------------------------
Amortized cost of investment securities,
held to maturity $ 19,462 $ 49,605 $ 20,545
=======================================
Fair value of investment securities, held to maturity $ 19,999 $ 50,710 $ 21,606
=======================================
Excess of fair value over recorded value $ 537 $ 1,105 $ 1,061
Fair value as a % of amortized cost 102.8% 102.2% 105.2%
</TABLE>
Note: There were no holdings of any single issuer that, when taken in
aggregate, exceeded 10% of shareholders' equity at March 31, 1999.
TABLE D. Average Balances, Yields, and Net Interest Margins
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------------------------------------
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 $ 19,454 $ 202 4.21% $ 14,968 $ 217 5.88%
Securities available for sale, at fair value (1 and 2) 1,127,381 17,043 6.15 969,011 15,681 6.61
Loans held for sale 36,409 625 6.96 29,926 459 6.22
Investment securities, held to maturity (2) 20,076 395 7.98 56,958 1,092 7.78
Loans, net of unearned income and
unamortized loan fees and costs (2 and 3) 2,835,880 60,152 8.60 2,642,333 58,671 9.01
--------------------- ---------------------
Total earning assets 4,039,200 78,417 7.88 3,713,196 76,120 8.31
Cash and due from banks 126,520 95,440
Allowance for loan losses (45,303) (39,204)
Other assets 239,257 167,654
---------- ----------
Total assets $4,359,674 $3,937,086
========== ==========
Interest-bearing liabilities:
NOW accounts & money market savings $1,445,959 11,543 3.24 $1,145,029 10,301 3.65
Regular savings 338,752 2,041 2.44 308,511 2,003 2.63
Time deposits $100 thousand and greater 251,232 3,279 5.29 215,012 3,005 5.67
Time deposits under $100 thousand 1,048,792 13,550 5.24 1,005,036 13,658 5.51
--------------------- ---------------------
Total interest-bearing deposits 3,084,735 30,413 4.00 2,673,588 28,967 4.39
Short-term borrowed funds 304,361 3,211 4.28 438,700 5,777 5.34
Long-term debt 74,141 1,132 6.19 46,044 745 6.56
--------------------- ---------------------
Total interest-bearing liabilities 3,463,237 34,756 4.07 3,158,332 35,489 4.56
--------------------------------------------------------------------
Non-interest bearing deposits 495,452 394,254
Other liabilities 49,604 38,710
Capital securities 30,000 30,000
Shareholders' equity 321,381 315,790
---------- ----------
Total liabilities, capital securities and
shareholders' equity $4,359,674 $3,937,086
========== ==========
Net interest income $43,661 $40,631
======= =======
Interest rate differential 3.81% 3.75%
==== ====
Net interest margin 4.39% 4.44%
==== ====
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 March 31, Change Total Net Funding
------------------------- -------------------- -----------------
(Dollars in thousands) 1999 1998 Amount Percent 1999 1998
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 495,452 $ 394,254 $ 101,198 25.7% 12.5% 11.1%
Retail deposits:
Regular savings 338,752 308,511 30,241 9.8 8.6 8.7
Time deposits under $100 thousand 1,048,792 1,005,036 43,756 4.4 26.5 28.3
NOW accounts & money market savings 1,445,959 1,145,029 300,930 26.3 36.5 32.2
---------------------------------------------------------------------
Total retail deposits 2,833,503 2,458,576 374,927 15.2 71.6 69.2
---------------------------------------------------------------------
Total core deposits 3,328,955 2,852,830 476,125 16.7 84.1 80.3
Time deposits $100 thousand and greater 251,232 215,012 36,220 16.8 6.3 6.1
Federal funds purchased 18,332 12,919 5,413 41.9 0.5 0.4
Securities sold under agreements to
repurchase 214,264 144,072 70,192 48.7 5.4 4.1
Borrowings from U.S. Treasury 12,209 11,420 789 6.9 0.3 0.3
Short-term notes from FHLB 59,556 270,289 (210,733) (78.0) 1.5 7.6
Long-term notes from FHLB 66,012 35,186 30,826 87.6 1.7 0.9
---------------------------------------------------------------------
Total purchased liabilities 621,605 688,898 (67,293) (9.8) 15.7 19.4
Bank term loan 8,129 10,858 (2,729) (25.1) 0.2 0.3
---------------------------------------------------------------------
Total net funding $3,958,689 $3,552,586 $ 406,103 11.4% 100.0% 100.0%
=====================================================================
</TABLE>
TABLE F. Volume and Yield Analysis
<TABLE>
<CAPTION>
Three Months
Ended March 31, Due to
------------------ ------------------
1999 1998 Change Volume Rate
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands)
Interest income (FTE):
Money market investments $ 202 $ 217 $ (15) $ 47 $ (62)
Securities available for sale, at fair value 17,043 15,681 1,362 2,453 (1,091)
Loans held for sale 625 459 166 111 55
Investment securities, held to maturity 395 1,092 (697) (725) 28
Loans 60,152 58,671 1,481 4,152 (2,671)
----------------------------
Total interest income 78,417 76,120 2,297 6,226 (3,929)
----------------------------
Interest expense:
NOW accounts & money market savings 11,543 10,301 1,242 2,400 (1,158)
Regular savings 2,041 2,003 38 183 (145)
Time deposits $100 thousand and greater 3,279 3,005 274 475 (201)
Time deposits under $100 thousand 13,550 13,658 (108) 562 (670)
Short-term borrowed funds 3,211 5,777 (2,566) (1,420) (1,146)
Long-term debt 1,132 745 387 429 (42)
----------------------------
Total interest expense 34,756 35,489 (733) 3,083 (3,816)
--------------------------------------------------
Net interest income (FTE) $43,661 $40,631 $3,030 $3,143 $ (113)
==================================================
</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
March 31, December 31, March 31,
(Dollars in thousands) 1999 1998 1998
--------------------------------------
<S> <C> <C> <C>
Loans on non-accrual status:
Commercial, financial and agricultiral $ 6,133 $ 3,816 $ 6,232
Real estate:
Construction and land development 355 19 36
Commercial 6,403 2,518 2,450
Residential 7,182 6,153 9,745
Other installment 5 23 165
------------------------------------
Total non-accrual 20,078 12,529 18,628
Restructured loans:
Real estate:
Commercial - 5,940 -
Residential 31 32 35
Other installment 5 5 5
------------------------------------
Total restructured 36 5,977 40
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 186 1,216 921
Real estate:
Commercial 823 62 36
Residential 24 36 448
Credit card receivables 115 177 104
Lease receivables 75 185 65
Other installment 718 812 477
------------------------------------
Total past-due 90 days or more
and still accruing 1,941 2,488 2,051
------------------------------------
Total non-performing loans 22,055 20,994 20,719
Other real estate owned (OREO) 1,590 3,324 1,405
Non-real estate and repossessed assets 11 11 649
------------------------------------
Total foreclosed and repossessed assets (F/RA) 1,601 3,335 2,054
------------------------------------
Total non-performing assets $23,656 $24,329 $22,773
====================================
Allowance for loan losses (ALL) $45,658 $44,537 $39,889
ALL coverage of non-performing loans 207.02% 212.14% 192.52%
Non-performing assets as a % of (loans & F/RA) 0.83 0.86 0.86
Non-performing assets to total assets 0.55 0.55 0.57
Note: Installment loans are generally charged off at 120 days past due.
</TABLE>
TABLE H. Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Three Months Twelve Months Three Months
Ended March 31, Ended December 31, Ended March 31,
(Dollars in thousands) 1999 1998 1998
--------------------------------------------------------
<S> <C> <C> <C>
Loans outstanding-end of period $2,833,658 $2,837,106 $2,651,608
Average loans outstanding-period to date 2,835,880 2,684,169 2,642,333
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 (69) (2,318) (186)
Real estate:
Commercial (65) (209) (29)
Residential (214) (1,916) (459)
---------------------------------------------------
Total real estate (279) (2,125) (488)
Credit card receivables (244) (878) (112)
Lease receivables (287) (1,646) (398)
Other installment (1,375) (4,763) (1,194)
---------------------------------------------------
Total installment (1,906) (7,287) (1,704)
Total loans charged off (2,254) (11,730) (2,378)
---------------------------------------------------
Recoveries on loans, previously charged off:
Commercial, financial and agricultural 263 1,673 247
Real estate:
Construction and land development 3 15 6
Commercial 132 542 142
Residential 75 829 148
---------------------------------------------------
Total real estate 210 1,386 296
Credit card receivables 27 111 20
Lease receivables 215 1,190 376
Other installment 660 1,811 437
---------------------------------------------------
Total installment 902 3,112 833
Total recoveries on loans 1,375 6,171 1,376
---------------------------------------------------
Loans charged off, net of recoveries (879) (5,559) (1,002)
---------------------------------------------------
Provision for loan losses 2,000 9,345 2,340
---------------------------------------------------
Allowance for loan losses at end of period $ 45,658 $ 44,537 $ 39,889
===================================================
Loans charged off, net (annualized),
as a % of average total loans 0.12% 0.21% 0.15%
Provision for loan losses (annualized)
as a % of average total loans 0.28 0.35 0.35
Allowance for loan losses
as a % of period-end total loans 1.61 1.57 1.50
</TABLE>
TABLE I. Capital Ratios
<TABLE>
<CAPTION>
At At At At At
March 31, December 31, September 30, June 30, March 31,
(Dollars in thousands) 1999 1998 1998 1998 1998
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total risk-adjusted on-balance sheet assets (1)(3) $2,866,111 $2,880,854 $2,701,146 $2,696,843 $2,678,352
Total risk-adjusted off-balance sheet items 162,430 174,890 158,508 152,035 140,703
----------------------------------------------------------------------
Total risk-adjusted assets $3,028,541 $3,055,744 $2,859,654 $2,848,878 $2,819,055
======================================================================
Total risk-adjusted assets / average total assets,
net of fair value adjustments and goodwill (1)(3) 70.75% 73.49% 71.25% 71.52% 72.22%
Total shareholders' equity $ 324,465 $ 321,262 $ 334,017 $ 320,227 $ 315,765
Fair value adjustments (1) (1,110) (3,759) (10,281) (4,589) (3,653)
Corporation-obligated manditorily redeemable
capital securities 30,000 30,000 30,000 30,000 30,000
Goodwill (77,835) (80,224) (27,154) (28,476) (29,797)
Other Intangibles (3) 144 70 (145) 137 141
----------------------------------------------------------------------
Total Tier I capital 275,664 267,349 326,437 317,299 312,456
Maximum allowance for loan losses (2) 37,953 38,275 35,820 35,672 35,296
----------------------------------------------------------------------
Total capital $ 313,617 $ 305,624 $ 362,257 $ 352,971 $ 347,752
======================================================================
Quarterly average total assets,
net of fair value adjustments and goodwill (1)(3) $4,280,729 $4,158,082 $4,013,768 $3,983,182 $3,903,634
Allowance for loan losses 45,658 44,537 41,746 40,571 39,889
Total capital to total risk-adjusted assets 10.36% 10.00% 12.67% 12.39% 12.33%
Tier I capital to total risk-adjusted assets 9.10 8.75 11.42 11.14 11.08
Tier I capital to total quarterly average
adjusted assets (Leverage) 6.44 6.43 8.13 7.97 8.00
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) Q1 Q4 Q3 Q2 Q1
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest and dividend income $ 77,858 $ 78,656 $ 77,216 $ 77,075 $ 75,754
Interest expense 34,756 36,106 36,695 36,368 35,489
-----------------------------------------------------------------------
Net interest income 43,102 42,550 40,521 40,707 40,265
Provision for loan losses 2,000 2,335 2,335 2,335 2,340
-----------------------------------------------------------------------
Net interest income after provision
for loan losses 41,102 40,215 38,186 38,372 37,925
-----------------------------------------------------------------------
Other operating income:
Income from trust and investment management fees 4,833 3,791 2,946 3,139 2,962
Service charges on deposit accounts 3,198 2,969 2,861 2,948 2,879
Mortgage banking income 1,324 1,391 1,812 1,195 1,094
Card product income 613 686 569 542 430
ATM income 619 635 618 523 482
Bank owned life insurance 539 569 567 553 540
Net securities transactions 225 526 319 103 (429)
Net gain on curtailment of pension plan 2,577 -- -- -- --
All other 901 1,079 1,149 1,105 920
-----------------------------------------------------------------------
Total other operating income 14,829 11,646 10,841 10,108 8,878
Other operating expenses:
Compensation and employee benefits 16,775 17,554 15,705 16,073 16,213
Net occupancy, equipment and software 5,483 4,852 4,697 4,732 4,937
Data processing 2,102 1,472 1,756 1,926 1,735
FDIC deposit insurance and other regulatory 294 292 284 283 280
Other real estate owned and repossession 154 331 239 142 356
Amortization of goodwill 2,164 1,779 1,321 1,321 1,322
Capital securities 789 789 789 789 789
Merger and acquisition related expenses 1,173 21,968 -- -- --
All other 7,340 7,507 6,702 6,931 6,870
-----------------------------------------------------------------------
Total other operating expenses 36,274 56,544 31,493 32,197 32,502
-----------------------------------------------------------------------
Income before income tax expense (benefit) 19,657 (4,683) 17,534 16,283 14,301
Income tax expense (benefit) 6,203 (321) 5,416 5,019 4,401
-----------------------------------------------------------------------
Net income (loss) $ 13,454 $ (4,362) $ 12,118 $ 11,264 $ 9,900
=======================================================================
Average Balances:
Loans $ 2,835,880 $ 2,755,824 $ 2,675,888 $ 2,661,474 $ 2,642,333
Loans held for sale 36,409 36,490 34,435 41,921 29,926
Securities available for sale, at fair value 1,127,381 1,123,294 1,041,605 1,016,664 969,011
Investment securities, held to maturity 20,076 22,965 26,046 38,580 56,958
Money market investments 19,454 22,376 40,415 26,110 14,968
-----------------------------------------------------------------------
Total earning assets 4,039,200 3,960,949 3,818,389 3,784,749 3,713,196
Other assets 320,474 281,190 233,103 231,505 223,890
-----------------------------------------------------------------------
Total assets $ 4,359,674 $ 4,242,139 $ 4,051,492 $ 4,016,254 $ 3,937,086
=======================================================================
Non interest-bearing deposits $ 495,452 $ 477,977 $ 431,872 $ 410,469 $ 394,254
Interest-bearing deposits 3,084,735 2,957,813 2,767,727 2,736,741 2,673,588
-----------------------------------------------------------------------
Total deposits 3,580,187 3,435,790 3,199,599 3,147,210 3,067,842
Short-term borrowed funds 304,361 320,459 382,313 424,048 438,700
Long-term debt 74,141 74,634 74,534 59,459 46,044
Other liabilities 49,604 43,466 41,825 40,374 38,710
Guaranteed preferred beneficial interests in
Corporation's junior subordinated debentures 30,000 30,000 30,000 30,000 30,000
Shareholders' equity 321,381 337,790 323,221 315,163 315,790
-----------------------------------------------------------------------
Total liabilities, guaranteed preferred
beneficial interests in Corporation's junior
subordinated debentures and shareholders'
equity $ 4,359,674 $ 4,242,139 $ 4,051,492 $ 4,016,254 $ 3,937,086
=======================================================================
Loans charged off, net of recoveries $ 879 $ 1,743 $ 1,160 $ 1,654 $ 1,002
Non-performing assets, p.e. 23,656 24,329 25,694 20,110 22,773
Share and Per Share Data:
Basic wtd. avg. number of shares 23,353,668 23,203,566 23,226,319 23,258,549 23,430,477
Basic earnings per share (Basic EPS) $ 0.58 $ (0.19) $ 0.52 $ 0.48 $ 0.42
Diluted wtd. avg. number of shares 23,663,808 23,552,615 23,613,000 23,685,137 23,835,238
Diluted earnings per share (Diluted EPS) $ 0.57 $ (0.19) $ 0.51 $ 0.48 $ 0.42
Tangible book value 10.63 10.40 13.26 12.61 12.31
Closing price at period end 28.25 37.63 29.25 37.00 36.50
Key Ratios:
Return on average assets 1.25% (0.41)% 1.19% 1.12% 1.02%
Return on average shareholders' equity 16.98 (5.12) 14.87 14.34 12.71
Net interest margin, fte 4.39 4.31 4.26 4.36 4.44
Efficiency ratio 58.56 59.71 57.83 59.81 61.37
As a % of risk-adjusted assets, p.e. :
Total capital 10.36 10.00 12.67 12.39 12.33
Tier 1 capital 9.10 8.75 11.42 11.14 11.08
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 6.44 6.43 8.13 7.97 8.00
Tangible shareholders' equity, to tangible
assets, p.e. 5.79 5.58 7.60 7.24 7.20
Note: All share and per share data has been restated to give retroactive effect to stock splits.
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K.
Form 8-K, filed January 15, 1999, Banknorth announcing the
consummation of the merger between Banknorth Group, Inc. and
Evergreen Bancorp, Inc., in which Evergreen was merged with and
into Banknorth.
Form 8-K, filed February 19, 1999, Banknorth announcing its
unaudited financial results as of and for the month ended January
31, 1999. The publication of these unaudited financial results was
in accordance with a provision of the Affiliation Agreement and Plan
of Reorganization between Banknorth and Evergreen, dated July 31,
1998.
Form 8-K, filed March 26, 1999, Banknorth announcing that William H.
Chadwick, President and Chief Executive Officer of Banknorth Group,
Inc. announced his intention to retire from the Company, effective
January 1, 2000. The Company's Board of Directors has appointed a
search committee to identify a successor.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized.
BANKNORTH GROUP, INC.
Registrant
Date: 5/10/99 /S/ William H. Chadwick
-------------------------------------
William H. Chadwick
President and Chief Executive Officer
Date: 5/10/99 /S/ Thomas J. Pruitt
-------------------------------------
Thomas J. Pruitt
Executive Vice President and Chief
Financial Officer
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