<PAGE> 1
EXHIBIT 99(b)
INDEX TO FINANCIAL INFORMATION
Page
----
Consolidated Financial Statements 58
Notes to Consolidated Financial Statements 62
Management's Discussion and Analysis of Financial Condition
and Results of Operations 64
57
<PAGE> 2
BANKNORTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, 2000 December 31,1999
-------------- ----------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and due from banks $ 471,154 $ 546,816
Federal funds sold and other short term investments 76,666 229,579
Securities available for sale, at market value 6,156,348 6,316,031
Securities held to maturity (fair value of $524,535 and $535,605 at March 31, 2000
and December 31, 1999, respectively) 536,889 557,151
Loans held for sale 27,641 82,318
Loans and leases:
Residential real estate mortgages 2,317,181 2,270,417
Commercial real estate mortgages 2,742,298 2,696,317
Commercial business loans and leases 2,056,369 1,924,201
Consumer loans and leases 3,107,595 2,963,721
------------ ------------
10,223,443 9,854,656
Less: Allowance for loan and lease losses 155,078 155,048
------------ ------------
Net loans and leases 10,068,365 9,699,608
Premises and equipment 192,330 192,540
Goodwill and other intangibles 179,180 184,381
Mortgage servicing rights 44,780 52,724
Bank-owned life insurance 293,883 288,783
Other assets 375,656 358,333
------------ ------------
$ 18,422,892 $ 18,508,264
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Regular savings $ 1,574,833 $ 1,567,776
Money market and NOW accounts 3,737,794 3,698,934
Certificates of deposit 4,569,159 4,448,229
Brokered deposits 124,169 173,798
Demand deposits 1,863,028 1,821,764
------------ ------------
Total deposits 11,868,983 11,710,501
Federal funds purchased and securities sold under repurchase agreements 1,142,710 1,302,821
Borrowings from the Federal Home Loan Bank of Boston 3,952,265 3,997,819
Other borrowings 27,612 66,838
Other liabilities 133,429 139,236
------------ ------------
Total liabilities 17,124,999 17,217,215
------------ ------------
Company obligated, mandatory redeemable securities of subsidiary trusts 98,775 98,775
holding solely parent junior subordinated debentures
Shareholders' Equity:
Preferred stock (par value $0.01 per share, 5,000,000 shares authorized,
none issued) -- --
Common stock (par value $0.01 per share, 200,000,000 shares authorized,
149,623,201 and 149,623,204 shares issued) 1,496 1,496
Paid-in capital 617,885 617,523
Retained earnings 817,193 787,238
Unamortized employee restricted stock (890) (992)
Unearned compensation (1,606) (1,759)
Accumulated other comprehensive income (loss) (141,976) (125,394)
Treasury stock, at cost (5,281,903 shares and 4,649,306 shares) (92,984) (85,838)
------------ ------------
Total shareholders' equity 1,199,118 1,192,274
------------ ------------
$ 18,422,892 $ 18,508,264
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
58
<PAGE> 3
BANKNORTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data) (Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Interest and dividend income:
Interest on loans and leases $ 210,581 $ 214,893
Interest and dividends on securities 114,812 73,213
------------- -------------
Total interest and dividend income 325,393 288,106
Interest expense:
Interest on deposits 94,738 95,389
Interest on borrowed funds 75,482 41,677
------------- -------------
Total interest expense 170,220 137,066
Net interest income 155,173 151,040
Provision for loan and lease losses 5,068 5,565
------------- -------------
Net interest income after provision
for loan and lease losses 150,105 145,475
Noninterest income:
Customer services 18,636 14,629
Mortgage banking services 3,657 5,529
Insurance commissions 5,279 5,282
Trust services 8,660 8,300
Investment advisory services 1,818 1,011
Bank-owned life insurance income 5,100 2,847
Merchant and card product income 3,324 2,288
Net securities gains (13) 243
Other noninterest income 3,707 3,232
------------- -------------
50,168 43,361
Noninterest expenses:
Salaries and employee benefits 59,861 56,945
Data processing 8,767 10,092
Occupancy 11,104 9,988
Equipment 7,775 6,883
Distributions on securities of subsidiary trusts 2,347 2,775
Amortization of goodwill and other intangibles 5,201 5,132
Special charges 5,337 31,831
Other noninterest expenses 24,955 22,295
------------- -------------
125,347 145,941
Income before income tax expense 74,926 42,895
Applicable income tax expense 25,026 15,947
------------- -------------
Net income $ 49,900 $ 26,948
============= =============
Weighted average shares outstanding:
Basic 144,372,462 146,049,573
Diluted 145,226,682 148,037,961
Earnings per share:
Basic $0.35 $0.18
Diluted $0.34 0.18
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
59
<PAGE> 4
BANKNORTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Unearned Other
Par Paid-in Retained Compen- Comprehensive Treasury
Value Capital Earnings sation Income (Loss) Stock Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1999 $1,496 $617,523 $787,238 ($2,751) ($125,394) ($85,838) $1,192,274
Net income -- -- 49,900 -- -- -- 49,900
Unrealized losses on securities, net of
reclassification adjustment -- -- -- -- (16,582) -- (16,582)
-----------
Comprehensive income 33,318
-----------
Common stock issued for employee benefit plans -- -- (2,644) -- -- 5,197 2,553
Treasury stock purchased -- -- -- -- -- (12,343) (12,343)
Decrease in unearned compensation -- 225 -- 153 -- -- 378
Issuance of restricted stock units under directors'
deferred compensation plan, net -- 132 -- -- -- -- 132
Amortization of executive restricted stock -- 5 -- 102 -- -- 107
Cash dividends -- -- (17,301) -- -- -- (17,301)
--------------------------------------------------------------------------------
Balances at March 31, 2000 $1,496 $617,885 $817,193 ($2,496) ($141,976) ($92,984) $1,199,118
===============================================================================
Balances at December 31, 1998 $1,496 $618,624 $669,357 ($3,756) $1,858 ($65,189) $1,222,390
Net income -- -- 26,948 -- -- -- 26,948
Unrealized losses on securities net of
reclassification adjustment -- -- -- -- (1,048) -- (1,048)
----------
Comprehensive income -- -- -- -- -- -- 25,900
----------
Premium on repurchase of trust preferred securities -- (2,761) -- -- -- -- (2,761)
Common stock issued for employee benefit plans -- -- (2,216) -- -- 6,215 3,999
Issuance of restricted stock units under directors'
deferred compensation plan, net -- 144 -- -- -- -- 144
Amortization of executive restricted stock -- (560) -- 412 -- -- (148)
Decrease in unearned compensation -- 244 -- 241 -- -- 485
Payment of fractional shares -- (2) -- -- -- -- (2)
Cash dividends -- -- (20,364) -- -- -- (20,364)
-------------------------------------------------------------------------------
Balances at March 31, 1999 $1,496 $615,689 $673,725 ($3,103) $810 ($58,974) $1,229,643
===============================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
60
<PAGE> 5
<TABLE>
<CAPTION>
BANKNORTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited) Three Months Ended March 31,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 49,900 $ 26,948
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses 5,068 5,565
Depreciation 6,862 6,398
Amortization of goodwill and other intangibles 5,201 5,132
Net (decrease) increase in net deferred tax liabilities 10,090 (816)
ESOP and restricted stock expense 378 485
Amortization of employee restricted stock 107 (148)
Issuance of restricted stock units 132 144
Net gains realized from sales of securities and consumer loans 433 1,922
Net (gains) losses realized from sales of loans held for sale (a component of
mortgage banking services) 38 (888)
Earnings from bank owned life insurance (5,100) (2,847)
Net (increase) decrease in mortgage servicing rights 7,944 (4,871)
Proceeds from sales of loans held for sale 62,718 575,929
Residential loans originated and purchased for sale (8,079) (343,492)
Net decrease (increase) in interest and dividends receivable and other assets (18,078) (326)
Net increase (decrease) in other liabilities (5,807) (25,409)
----------- -----------
Net cash provided (used) by operating activities $ 111,807 $ 243,726
----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 24,507 29,035
Proceeds from maturities and principal repayments of securities available for sale 225,025 522,667
Purchases of securities available for sale (115,904) (1,460,116)
Proceeds from maturities and principal repayments of securities held to maturity 20,283 1,112
Purchase of securities held to maturity -- --
Net (increase) decrease in loans and leases (374,141) 19,443
Purchase of bank owned life insurance -- (150,000)
Net additions to premises and equipment (6,652) (5,411)
----------- -----------
Net cash provided (used) by investing activities $ (226,882) $(1,043,270)
----------- -----------
Cash flows from financing activities:
Net (decrease) increase in deposits 158,482 (226,047)
Net increase (decrease) in securities sold under repurchase agreements (191,111) (75,340)
Proceeds from Federal Home Loan Bank of Boston borrowings 2,944,300 1,135,000
Payments on Federal Home Loan Bank of Boston borrowings (2,989,854) (191,364)
Net increase (decrease) in other borrowings (39,226) (31,647)
Repurchase of trust preferred securities -- (32,761)
Issuance of stock 2,553 3,997
Purchase of treasury stock (12,343) --
Dividends paid (17,301) (16,188)
----------- -----------
Net cash provided (used) by financing activities $ (144,500) $ 565,650
----------- -----------
Increase (decrease) in cash and cash equivalents $ (259,575) $ (233,894)
Cash and cash equivalents at beginning of period 776,395 838,594
----------- -----------
Cash and cash equivalents at end of period $ 516,820 $ 604,700
=========== ===========
For the three months ended March 31, 2000 and 1999, interest of $171,330
and $136,190 and income taxes of $10,276 and $6,645 were paid,
respectively
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
61
<PAGE> 6
BANKNORTH GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(IN THOUSANDS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Banknorth Group,
Inc. (the "Company") have been prepared in accordance with generally accepted
accounting principles and predominant practices within the banking industry. The
Company has not changed its accounting and reporting policies from those
disclosed in its restated audited financial statements. See page 31.
On May 10, 2000, Peoples Heritage Financial Group, Inc. ("the Company")
completed the acquisition of Banknorth Group, Inc. ("Banknorth"), which was
accounted for under the pooling-of-interests method. The Company changed its
name to Banknorth Group, Inc. as a result of the merger. The consolidated
financial statements of the Company have been restated to reflect the
acquisition at the beginning of each period presented. At December 31, 1999,
Banknorth had total assets of $4.6 billion and total shareholders' equity of
$341 million.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. The results of operations and other data for the
three months ended March 31, 2000 are not necessarily indicative of the results
that may be expected for any other interim period or the entire year ending
December 31, 2000. Certain amounts in the prior periods have been reclassified
to conform to the current presentation.
NOTE 2 - OTHER COMPREHENSIVE INCOME (LOSS)
The components of total comprehensive income for the Company are net income and
unrealized gains (losses) on securities available for sale, net of tax. The
following is a reconciliation of comprehensive income for the three months ended
March 31, 2000 and 1999.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
2000 1999
-------- --------
<S> <C> <C>
Net income $ 49,900 $ 26,948
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities:
Unrealized holding gains (losses) arising during the period (16,571) (890)
Less: reclassification adjustment for gains included in net income 11 158
-------- --------
Other comprehensive income, net (16,582) (1,048)
-------- --------
Comprehensive income $ 33,318 $ 25,900
======== ========
</TABLE>
62
<PAGE> 7
NOTE 3 - EARNINGS PER SHARE
The computations of basic and diluted net income per share and weighted average
shares outstanding follow (dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net income $ 49,900 $ 26,948
=========== ===========
Weighted average shares outstanding
Basic 144,372,462 146,049,573
Effect of dilutive securities:
Stock options 854,221 1,988,388
----------- -----------
Diluted 145,226,682 148,037,961
=========== ===========
Net income per share:
Basic $0.35 $0.18
Diluted 0.34 0.18
</TABLE>
NOTE 4 - COMPLETED ACQUISITION
On May 10, 2000, Peoples Heritage Financial Group, Inc. completed the
acquisition of Banknorth which was effected by means of the merger of Banknorth
with and into the Company. The Company changed its name to "Banknorth Group,
Inc." as a result of the merger. As a result of the merger and the change in the
name of the Company, the Company's symbol on the Nasdaq stock market is now
BKNG. Upon consummation of the merger, each share of Banknorth common stock
outstanding was automatically converted into the right to receive 1.825 shares
of Company common stock, including each attached right issued pursuant to the
Company's shareholder rights plan (collectively, the "Common Stock"), with cash
in lieu of fractional share interests. Approximately 42.9 million shares were
issued or are issuable in connection with the merger. The financial statements
included herein have been restated to reflect the consummation of the merger at
the beginning of each period presented.
63
<PAGE> 8
BANKNORTH GROUP, INC. AND SUBSIDIARIES
(FORMERLY PEOPLES HERITAGE FINANCIAL GROUP, INC.)
MANAGEMENT'S DISCUSSION AND ANALYSIS
SUMMARY
Banknorth Group, Inc. (the "Company"), formerly Peoples Heritage Financial
Group, Inc., reported consolidated net income of $49.9 million, or $0.34 per
diluted share, for the first quarter of 2000. This compares with $26.9 million,
or $0.18 per diluted share, for the first quarter of 1999. Special charges
recorded in the first quarter of 2000 consisted of $5.3 million ($3.6 million
net of tax) of restructuring costs related primarily to branch closings and
merger-related charges. Special charges of $31.8 million ($23.2 million net of
tax) were recorded in the first quarter of 1999 and consisted of $24.4 million
of merger-related charges and $7.4 million of costs to discontinue the Company's
correspondent mortgage business. (See Table 5 for more information related to
special charges.)
Excluding the impact of special charges, the Company's operating income for the
first quarter of 2000 was $53.5 million, or $0.37 per diluted share, and return
on average equity ("ROE") and return on average assets (" ROA") were 17.96% and
1.17%, respectively. Operating income for the first quarter of 1999 was $50.1
million, or $0.34 per diluted share, and ROE and ROA were 16.87% and 1.23%,
respectively. Operating results for the first quarter of 2000 represent a 9%
increase in diluted earnings per share from the comparable period last year.
The improved operating results for the first quarter of 2000 over the first
quarter of 1999 were largely due to growth in earning assets levels and fee
income. Noninterest income increased 16% compared to the first quarter of 1999.
The growth in noninterest income was primarily due to a $4.0 million increase in
customer service income, a $2.3 million increase in income on bank owned life
insurance and an increase in investment advisory services income of $807
thousand. The efficiency ratio (noninterest expense excluding distributions on
securities of subsidiary trust and special charges, as a percentage of net
interest income and noninterest income, excluding net securities gains) was
57.30% in the first quarter of 2000 compared to 57.34% in the comparable period
last year. Selected quarterly data, ratios and per share data, both as reported
and on an operating basis, are provided in Table 1.
64
<PAGE> 9
TABLE 1 - Selected Quarterly Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
2000 1999 1999 1999 1999
First Fourth Third Second First
------------ ------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income $155,173 $159,861 $160,000 $153,328 $151,040
Provision for loan and lease losses 5,068 6,005 6,165 5,840 5,565
------------ ------------------------------------------------------
Net interest income after loan and lease loss provision 150,105 153,856 153,835 147,488 145,475
Noninterest income (excluding securities transactions) 50,181 49,910 47,771 50,340 43,118
Net securities gains (13) - 9 403 243
Noninterest expenses (excluding special charges) 120,010 121,183 117,209 117,637 114,110
Special charges (1) 5,337 (3,889) - 60 31,831
------------ ------------------------------------------------------
Income before income taxes 74,926 86,472 84,406 80,534 42,895
Income tax expense 25,026 27,637 28,132 25,633 15,947
------------ ------------------------------------------------------
Net income $ 49,900 $ 58,835 $ 56,274 $ 54,901 $ 26,948
============ ======================================================
Earnings per share:
Basic $0.35 $0.41 $0.39 $0.37 $0.18
Diluted 0.34 0.40 0.38 0.37 0.18
Operating earnings per share (excluding special charges):
Basic $0.37 $0.39 $0.39 $0.37 $0.34
Diluted 0.37 0.39 0.38 0.37 0.34
Return on average assets (2) 1.10% 1.28% 1.23% 1.26% 0.66%
Return on average equity (2) 16.75% 19.64% 18.77% 17.89% 9.06%
Operating ratios:
Return on average assets (excluding special charges) (2) 1.17% 1.22% 1.23% 1.27% 1.23%
Return on average equity (excluding special charges) (2) 17.96% 18.84% 18.77% 17.91% 16.87%
Efficiency ratio (3) 57.30% 56.65% 55.28% 56.59% 57.34%
Non-operating items, net of related income tax effect (1) $3,577 ($2,389) $0 $40 $23,205
</TABLE>
(1) Non-operating items consists of merger-related expenses and, in the first
quarter of 1999, one-time charges related to the discontinuance of the
Company's correspondent mortgage business.
(2) Annualized.
(3) Represents operating expenses, excluding distributions on securities of
subsidiary trusts and special charges, as a percentage of net interest
income and noninterest income, excluding net securities gains.
65
<PAGE> 10
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's fully taxable equivalent net interest income in the first quarter
of 2000 increased $4.4 million compared to the first quarter of 1999. The
increase was primarily attributable to increased levels of average earning
assets, which were offset in part by lower net interest margins. Commercial real
estate, commercial business and consumer loans all experienced significant
growth while residential real estate loans declined. Average residential real
estate loans declined largely due to the Company's discontinuance of the
correspondent mortgage business and the securitization of $633 million of
residential loans into a real estate investment conduit ("REMIC"), which are now
classified as securities held to maturity. Average securities increased due
primarily to this securitization and additional investments in agency
mortgage-backed securities. The Company's net interest margin was 3.72% for the
first quarter of 2000 compared to 4.03% for the comparable quarter of 1999. The
lower margin was due largely to increased levels of securities as a percent of
total assets (37% in the first quarter of 2000 compared to 29% in the first
quarter of 1999), purchases of bank owned life insurance (the earnings from
which are recorded as noninterest income) and an increase in average borrowings
as a percent of total average interest-bearing liabilities (35% in the first
quarter of 2000 compared to 25% in the first quarter of 1999). Table 2 shows
quarterly average balances, net interest income by category and rates for the
first quarter of 2000 and for each quarter in 1999. Table 3 shows the changes in
fully taxable equivalent net interest income by category due to changes in rate
and volume. See also "Asset-Liability Management" below.
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income from interest-earning assets and
the resultant average yields; (ii) the total dollar amount of interest expense
on interest-bearing liabilities and the resultant average cost; (iii) net
interest income; (iv) interest rate spread; and (v) net interest margin (net
interest income divided by average interest-earning assets). For purposes of the
tables and the following discussion, (i) income from interest-earning assets and
net interest income is presented on a fully-taxable equivalent basis primarily
by adjusting income and yields earned on tax-exempt interest received on loans
to qualifying borrowers and on certain of the Company's securities to make them
equivalent to income and yields earned on fully-taxable investments, assuming a
federal income tax rate of 35%, and (ii) nonaccrual loans have been included in
the appropriate average balance loan category, but unpaid interest on nonaccrual
loans has not been included for purposes of determining interest income. Average
balances are based on average daily balances during the indicated periods.
66
<PAGE> 11
TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)
<TABLE>
<CAPTION>
2000 First Quarter 1999 Fourth Quarter
----------------------------------- ------------------------------------
Yield/ Yield/
Average Balance Interest Rate(1) Average Balance Interest Rate(1)
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $ 2,337,127 $ 43,536 7.45% $ 2,356,697 $ 43,190 7.33%
Commercial real estate mortgages 2,731,631 60,698 8.94% 2,695,579 60,710 8.94%
Commercial loans and leases 1,952,209 43,019 8.86% 1,865,582 40,957 8.71%
Consumer loans and leases 3,036,234 64,193 8.50% 2,908,574 63,008 8.59%
----------------------------- ---------------------------
Total loans and leases 10,057,201 211,446 8.45% 9,826,432 207,865 8.39%
Securities 6,783,530 114,163 6.74% 7,030,811 115,643 6.58%
Federal funds sold and other short term investments 79,032 1,091 5.55% 80,898 1,208 5.92%
----------------------------- ---------------------------
Total earning assets 16,919,763 326,700 7.75% 16,938,141 324,716 7.61%
Nonearning assets 1,393,153 ------------ 1,362,000 ----------
----------------- -----------------
Total assets $18,312,916 $18,300,141
================= =================
Interest-bearing deposits:
Regular savings $ 1,561,943 8,176 2.11% $ 1,604,451 8,427 2.08%
NOW and money market accounts 3,639,746 27,701 3.06% 3,644,631 26,356 2.87%
Certificates of deposit 4,505,049 56,716 5.06% 4,511,629 56,058 4.93%
Brokered deposits 131,218 2,144 6.57% 143,328 2,062 5.71%
----------------------------- ---------------------------
Total interest-bearing deposits 9,837,956 94,737 3.87% 9,904,039 92,903 3.72%
Borrowed funds 5,262,911 75,483 5.77% 5,142,011 70,522 5.44%
----------------------------- ---------------------------
Total interest-bearing liabilities 15,100,867 170,220 4.53% 15,046,050 163,425 4.31%
Non-interest bearing deposits 1,798,107 ------------ 1,861,423 ----------
Other liabilities 117,311 105,295
Securities of subsidiary trusts 98,775 98,775
Shareholders' equity 1,197,856 1,188,598
----------------- -----------------
Total liabilities and shareholders' equity $18,312,916 $18,300,141
================= =================
Net earning assets $ 1,818,896 $ 1,892,091
================= =================
Net interest income (fully-taxable equivalent) 156,480 161,291
Less: fully-taxable equivalent adjustments (1,307) (1,430)
------------ ----------
Net interest income $155,173 $159,861
============ ==========
Net interest rate spread (fully-taxable equivalent) 3.22% 3.30%
Net interest margin (fully-taxable equivalent) 3.70% 3.78%
</TABLE>
(1) Annualized.
(2) Loans and leases include loans held for sale.
67
<PAGE> 12
TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 Third Quarter 1999 Second Quarter
------------------------------------ ------------------------------------
Yield/ Yield/
Average Balance Interest Rate(1) Average Balance Interest Rate(1)
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $ 2,535,350 $ 46,886 7.40% $ 2,687,207 $ 49,778 7.41%
Commercial real estate mortgages 2,626,837 57,882 8.74% 2,517,706 55,123 8.78%
Commercial loans and leases 1,862,931 40,058 8.53% 1,796,819 38,421 8.58%
Consumer loans and leases 2,754,214 59,996 8.64% 2,683,791 58,311 8.71%
----------------------------- ---------------------------
Total loans and leases 9,779,332 204,822 8.31% 9,685,523 201,633 8.35%
Securities 6,989,116 112,508 6.44% 6,257,096 95,808 6.12%
Federal funds sold and other short term investments 97,563 1,313 5.34% 208,006 2,542 4.90%
----------------------------- ---------------------------
Total earning assets 16,866,011 318,643 7.50% 16,150,625 299,983 7.45%
Nonearning assets 1,303,766 ------------ 1,266,088 ----------
----------------- -----------------
Total assets $18,169,777 $17,416,713
================= =================
Interest-bearing deposits:
Regular savings $ 1,640,217 8,627 2.09% $ 1,613,609 8,480 2.11%
NOW and money market accounts 3,607,758 25,277 2.78% $ 3,545,448 24,057 2.72%
Certificates of deposit 4,541,065 55,791 4.87% $ 4,671,041 57,914 4.97%
Brokered deposits 163,886 2,275 5.51% $ 201,244 2,811 5.60%
----------------------------- ---------------------------
Total interest-bearing deposits 9,952,926 91,970 3.67% 10,031,342 93,262 3.73%
Borrowed funds 5,015,825 65,358 5.17% 4,148,710 52,208 5.05%
----------------------------- ---------------------------
Total interest-bearing liabilities 14,968,751 157,328 4.17% 14,180,052 145,470 4.11%
Non-interest bearing deposits 1,810,848 ------------ 1,779,277 ----------
Other liabilities 101,867 126,708
Securities of subsidiary trusts 98,775 99,987
Shareholders' equity 1,189,536 1,230,689
----------------- -----------------
Total liabilities and shareholders' equity $18,169,777 $17,416,713
================= =================
Net earning assets $ 1,897,260 $ 1,970,573
================= =================
Net interest income (fully-taxable equivalent) 161,315 154,513
Less: fully-taxable equivalent adjustments (1,315) (1,185)
------------ ----------
Net interest income $160,000 $153,328
============ ==========
Net interest rate spread (fully-taxable equivalent) 3.33% 3.34%
Net interest margin (fully-taxable equivalent) 3.79% 3.84%
</TABLE>
(1) Annualized.
(2) Loans and leases include loans held for sale.
68
<PAGE> 13
TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 First Quarter
------------------------------------
Yield/
Average Balance Interest Rate(1)
------------------------------------
<S> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $3,461,965 $64,656 7.47%
Commercial real estate mortgages 2,438,735 54,024 8.98%
Commercial loans and leases 1,708,703 38,096 9.04%
Consumer loans and leases 2,739,169 58,788 8.70%
-----------------------------
Total loans and leases 10,348,572 215,564 8.45%
Securities 4,730,964 71,543 6.05%
Federal funds sold and other short term investments 205,919 2,022 3.98%
-----------------------------
Total earning assets 15,285,455 289,129 7.67%
Nonearning assets 1,233,435 ------------
-----------------
Total assets $16,518,890
=================
Interest-bearing deposits:
Regular savings $1,622,257 8,486 2.12%
NOW and money market accounts 3,482,796 23,549 2.74%
Certificates of deposit 4,749,889 60,722 5.18%
Brokered deposits 211,412 2,632 5.05%
-----------------------------
Total interest-bearing deposits 10,066,354 95,389 3.84%
Borrowed funds 3,301,978 41,677 5.12%
-----------------------------
Total interest-bearing liabilities 13,368,332 137,066 4.16%
Non-interest bearing deposits 1,731,140 ------------
Other liabilities 95,770
Securities of subsidiary trusts 118,000
Shareholders' equity 1,205,648
-----------------
Total liabilities and shareholders' equity $16,518,890
=================
Net earning assets $1,917,123
=================
Net interest income (fully-taxable equivalent) 152,063
Less: fully-taxable equivalent adjustments (1,023)
------------
Net interest income $151,040
============
Net interest rate spread (fully-taxable equivalent) 3.51%
Net interest margin (fully-taxable equivalent) 4.03%
</TABLE>
(1) Annualized.
(2) Loans and leases include loans held for sale.
69
<PAGE> 14
The following table presents certain information on a fully taxable equivalent
basis regarding changes in interest income and interest expense of the Company
for the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided with respect to changes
attributable to (1) changes in rate (change in rate multiplied by old volume),
(2) changes in volume (change in volume multiplied by old rate) and (3) changes
in rate/volume (change in rate multiplied by change in volume).
TABLE 3 - RATE VOLUME ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, 2000 vs. 1999
-----------------------------------------------
Increase (decrease) due to
-----------------------------------------------
Rate & Total
Volume Rate Volume(1) Change
-----------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases $ (6,122) $ -- $ 2,004 $ (4,118)
Securities 30,875 8,116 3,629 42,620
Federal funds sold and other short term investments (1,256) 804 (479) (931)
-----------------------------------------------
Total interest income 23,497 8,920 5,154 37,571
-----------------------------------------------
Interest expense:
Interest-bearing deposits
Regular savings (318) (40) 48 (310)
NOW and money market accounts 1,069 2,771 312 4,152
Certificates of deposit (3,153) (1,417) 564 (4,006)
Brokered deposits (1,007) 799 (280) (488)
-----------------------------------------------
Total interest-bearing deposits (3,409) 2,113 644 (652)
Borrowed funds 24,963 5,336 3,507 33,806
-----------------------------------------------
Total interest expense 21,554 7,449 4,151 33,154
-----------------------------------------------
Net interest income (fully taxable equivalent) $ 1,943 $ 1,471 $ 1,003 $ 4,417
===============================================
</TABLE>
(1) Includes changes in interest income and expense not due solely to volume or
rate changes.
70
<PAGE> 15
NONINTEREST INCOME
Noninterest income of $50.2 million during the first quarter of 2000 increased
16% from the first quarter of 1999. This increase was primarily due to customer
service income (up $4.0 million or 27%), trust and investment advisory services
income combined (up $1.2 million or 13%) and bank owned life insurance income
(up $2.3 million or 79%.) These increases were partially offset by a $1.9
million decline in mortgage banking services income due primarily to lower
levels of originations as a result of increased interest rates. Noninterest
income for the quarter ended March 31, 2000 was 24% of total revenue compared to
22% for the quarter ended March 31, 1999.
Customer services income in the first quarter of 2000 increased 27% from the
first quarter of 1999. The increase was primarily attributable to volume driven
increases in checking account fees and ATM fees and the conversion of customers
of SIS branches to the Company's deposit products.
Trust and investment advisory services income combined increased 13% from the
first quarter of 1999 due to higher sales of retail investment products during
the quarter. Assets under management were $7.4 billion and $7.1 billion at March
31, 2000 and 1999, respectively.
Bank-owned life insurance ("BOLI") income was $5.1 million for the first quarter
of 2000, compared to $2.8 million for the same period in 1999. The increase
includes a $1.2 million death benefit claim in February 2000 and higher
average levels of BOLI in 2000. BOLI covers certain employees of the Company's
bank subsidiaries. Most of the Company's BOLI is invested in the "general
account" of quality insurance companies. The majority of such companies were
rated AA- or better by Standard and Poors at March 31, 2000.
Mortgage banking services income of $3.7 million and $5.5 million provided 7%
and 13% of non-interest income for the quarters ended March 31, 2000 and 1999,
respectively. The 34% decrease from the same quarter of last year was due to a
$4.1 million decrease in mortgage sales income resulting primarily from the
discontinuance of the correspondent mortgage lending business in January 1999,
which was partially offset by a $2.2 million increase in net servicing income.
This improvement was due to a $1.6 million gain on the sale of mortgage
servicing rights and lower valuation adjustments on the mortgage servicing
rights and interest rate floors that hedge them. The amount of loans serviced
for others was $4.0 billion and $5.3 billion at March 31, 2000 and 1999,
respectively. See "Special Charges" in Table 5 for a discussion of the costs to
discontinue the correspondent mortgage lending business. See Table 4 for a
summary of mortgage banking services income by quarter for 2000 and 1999.
Capitalized mortgage servicing rights amounted to $44.8 million at March 31,
2000, compared to $52.7 million at December 31,1999. The decrease was due
largely to the sale of mortgage servicing rights totaling $6.2 million in the
first quarter of 2000. See Table 4 for details. Because mortgage servicing
rights are an interest-rate sensitive asset, the value of the Company's mortgage
servicing rights and the related mortgage banking services income may be
adversely impacted if mortgage interest rates decline and actual or expected
loan prepayments increase. To mitigate the prepayment risk associated with
adverse changes in interest rates and the resultant impairment to capitalized
mortgage servicing rights and effects on mortgage banking services income, the
Company has established a hedge program against a portion of its capitalized
mortgage servicing rights to help protect its value and mortgage banking
services income. Notwithstanding the foregoing, there can be no assurance that
significant declines in interest rates will not have a material impact on the
Company's mortgage servicing rights and mortgage banking services income or that
the hedge program will be successful in mitigating the effects of such a
decline.
71
<PAGE> 16
TABLE 4 - MORTGAGE BANKING SERVICES
(Dollars in thousands)
<TABLE>
<CAPTION>
At or for the Three Months Ended
03/31/2000 12/31/1999 09/30/1999 06/30/1999 03/31/1999
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
RESIDENTIAL MORTGAGES SERVICED FOR INVESTORS $ 3,993,680 $ 4,540,948 $ 4,682,347 $ 4,840,625 $ 5,259,768
==============================================================================
MORTGAGE BANKING SERVICES INCOME:
Sales income:
Residential mortgage sales income $ 169 ($ 386) $ 1,524 $ 3,395 $ 4,275
Lower of cost or market adjustment -
loans held for sale 30 1,028 731 (1,934) --
------------------------------------------------------------------------------
Total sales income 199 642 2,255 1,461 4,275
------------------------------------------------------------------------------
Servicing income:
Residential mortgage servicing income, net 1,439 1,810 1,641 2,359 1,996
Change in impairment reserve 1,005 485 1,343 2,597 875
Valuation adjustments - interest rate floor (545) 78 (953) (1,475) (1,600)
Gain (loss) on sale of capitalized mortgage
servicing rights 1,559 (207) (66) 2,924 (17)
------------------------------------------------------------------------------
Total servicing income 3,458 2,166 1,965 6,405 1,254
------------------------------------------------------------------------------
Total $ 3,657 $ 2,808 $ 4,220 $ 7,866 $ 5,529
==============================================================================
MORTGAGE SERVICING RIGHTS:
Balance at beginning of period $ 52,724 $ 54,132 $ 53,352 $ 50,924 $ 45,409
Mortgage servicing rights capitalized
and purchased 406 1,244 3,352 3,279 8,316
Amortization charged against
mortgage servicing fee income (3,020) (3,137) (3,073) (3,103) (3,197)
Change in impairment reserve 1,005 485 1,343 2,597 875
Mortgage servicing rights sold (6,335) -- (842) (345) (479)
------------------------------------------------------------------------------
Balance at end of period $ 44,780 $ 52,724 $ 54,132 $ 53,352 $ 50,924
==============================================================================
</TABLE>
72
<PAGE> 17
NON-INTEREST EXPENSE
Excluding special charges, amortization of intangibles and distribution on
securities of subsidiary trusts, non-interest expense was $112.5 million and
$106.2 million for the quarters ended March 31, 2000 and 1999, respectively, an
increase of 5.9%. The efficiency ratio was 57.30% and 57.34% for the quarters
ended March 31, 2000 and 1999, respectively, excluding special charges,
distributions on securities of subsidiary trusts and net securities gains.
Salaries and benefits expense of $59.9 million for the quarter ended March 31,
2000 increased $2.9 million or 5.1% from the same quarter of last year. The
increase was due to normal salary increases as well as increased cost of
benefits.
Data processing expense of $8.8 million for the quarter ended March 31, 2000
decreased $1.3 million or 13% from the same quarter a year ago, mostly due to
Year 2000 costs incurred in 1999.
Occupancy expense of $11.1 million increased $1.1 million from the first quarter
of 1999 due primarily to increases in rent expense in the first quarter of 2000
and a $300 thousand gain on sale of property recorded in the first quarter of
1999.
Equipment expense increased $892 thousand from the first quarter of last year
due to depreciation on new equipment.
Amortization of goodwill and other intangibles was $5.2 million for the quarters
ended March 31, 2000, which was consistent with 1999.
Restructuring charges of $5.3 million pre-tax were incurred in the first quarter
of 2000 related to the closing of 11 branches, redundant facilities and
write-downs of auto lease residuals. Special charges of $31.8 million in the
first quarter of 1999 included merger-related expenses of $24.4 million incurred
in connection with recent acquisitions and $7.4 million related to the
discontinuance of the Company's correspondent mortgage lending business. On an
after-tax basis, special charges amounted to $3.6 million and $23.2 million for
the three months ended March 31, 2000 and 1999, respectively.
73
<PAGE> 18
The following table summarizes activity related to special charges recorded from
December 31, 1999 through March 31, 2000.
TABLE 5 - SPECIAL CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-Cash
Amount Reductions
Balance Included in Cash Applied to Balance at
12/31/99 Expense Payments Reserve 3/31/2000
-------- ----------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BRANCH CLOSINGS
Severance and salary costs $ -- $ 68 $ -- $ -- $ 68
Asset write-downs/lease terminations -- 1,259 -- -- 1,259
Other costs -- 256 -- -- 256
------ ------ ------ ------ ------
$ -- $1,583 $ -- $ -- $1,583
====== ====== ====== ====== ======
OTHER SPECIAL CHARGES
Write-down of auto lease residuals $ -- $2,500 $ -- $2,500 $ --
Facility write-downs - Evergreen merger -- 1,254 -- 1,254 --
Balance forward from CFX/SIS mergers 1,628 -- 547 -- 1,081
------ ------ ------ ------ ------
$1,628 $3,754 $ 547 $3,754 $1,081
====== ====== ====== ====== ======
</TABLE>
Other non-interest expenses for the first quarter of 2000 increased $2.7 million
from the first quarter of 1999. The following table summarizes the principal
components of other non-interest expenses by quarter.
TABLE 6 - OTHER NON-INTEREST EXPENSES
(Dollars in thousands)
<TABLE>
<CAPTION>
2000 1999 1999 1999 1999
First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Advertising and marketing $ 2,985 $ 3,774 $ 3,418 $ 3,498 $ 3,482
Telephone 2,945 3,291 3,844 3,506 3,524
Office supplies 2,166 2,232 2,232 2,664 2,208
Postage and freight 2,470 2,254 2,185 2,218 2,640
Miscellaneous loan costs 2,203 1,108 2,420 2,180 2,194
Deposits and other assessments 961 957 1,219 1,033 962
Collection and carrying costs
of non-performing assets 746 204 499 366 855
Other 10,479 12,307 7,830 10,612 6,430
----------------------------------------------------------
TOTAL $24,955 $26,127 $23,647 $26,077 $22,295
==========================================================
</TABLE>
TAXES
The effective tax rate, excluding the effect of special charges, was 33% for
each of the quarters ended March 31, 2000 and 1999.
74
<PAGE> 19
OTHER COMPREHENSIVE INCOME
FASB Statement No. 130 requires disclosure of "Other comprehensive income."
Unlike net income, "other comprehensive income" includes the after-tax change in
unrealized gains and losses on securities. As a result of an increase in
interest rates during the first quarter of 2000, the unrealized loss on the
Company's securities portfolio increased $16.6 million, net of taxes and gains
and losses realized on sales of securities. At March 31, 2000, the net
unrealized loss of $218.9 million, before related tax effect, represented 3.6%
of securities available for sale. The Company attempts to balance the interest
rate risk of its assets with its liabilities (see "Asset-Liability Management").
However, the change in value of its liabilities, which tends to improve in
rising interest rate environments, is not included in "other comprehensive
income."
FINANCIAL CONDITION
LOANS AND LEASES
Total loans and leases (including loans held for sale) averaged $10.1 billion
during the first quarter of 2000, a decrease of $286 million or 2.8% from the
first quarter of 1999. The decrease was primarily in residential real estate
mortgages. Loans as a percent of average earning assets were 59% at March 31,
2000 compared to 68% at March 31, 1999.
Average residential real estate loans (which includes mortgage loans held for
sale) of $2.3 billion during the first quarter of 2000 declined $1.1 billion
from the first quarter of last year. The decline was primarily attributable to
the $633 million securitization of single-family residential real estate loans
into a REMIC in April 1999, which is classified as securities held to maturity,
as well as to decreased originations resulting from the discontinuance of the
Company's correspondent mortgage business. Mortgage loans held for sale amounted
to $28 million and $329 million at March 31, 2000 and 1999, respectively, and
$82 million at December 31, 1999. The decline in loans held for sale was due
primarily to the discontinuance of the correspondent mortgage business in the
first quarter of 1999 and the retention of a portion of residential real estate
loan originations in portfolio.
Average commercial real estate loans of $2.7 billion increased 12% from the
first quarter of last year. The average yield on commercial real estate loans
during the first quarter of 2000 was 8.94%, as compared to 8.98% in the first
quarter of 1999.
Commercial loans and leases averaged $2.0 billion during the first quarter of
2000, an increase of 14% over the first quarter of 1999. The yield on commercial
loans and leases decreased to 8.86% in the first quarter of 2000 from 9.04% in
the first quarter of 1999.
Average consumer loans and leases of $3.0 billion during the first quarter of
2000 increased 11% from the first quarter of 1999. The increase was primarily in
indirect automobile, student and home equity loans. The average yield on
consumer loans and leases declined from 8.70% in the first quarter of 1999 to
8.50% in the first quarter of 2000.
SECURITIES AND OTHER EARNING ASSETS
The Company's securities portfolio averaged $6.8 billion during the first
quarter of 2000, as compared to $4.7 billion in the first quarter of 1999, and
consisted primarily of mortgage-backed securities, most of which are seasoned 15
year federal agency securities and U.S. Treasury securities. Other securities
consisted of collateralized mortgage obligations, which include securitized
residential real estate loans held in a REMIC, and other asset-backed
securities. With the exception of such securitized loans, which are classified
as held to maturity and carried at cost, all of the Company's securities are
classified as available for sale and carried at market value. The majority of
securities available for sale are rated AAA or equivalently rated. A significant
portion of the increase in securities was to replace the decline in residential
real estate loans. The average yield on securities was 6.74% and 6.05% for the
quarters ended March 31, 2000 and 1999, respectively. The increased yield was
due in part to the addition of the REMIC securities which had a weighted average
yield of 7.60% during the three months ended March 31, 2000. Securities
available for sale are carried at fair value and had an after-tax unrealized
loss of $142.0 million and $125.4 million at March 31, 2000 and December 31,
1999, respectively. The unrealized loss was 3.6% of total securities available
for sale at March 31, 2000.
ASSET QUALITY
As shown in Table 7, nonperforming assets were $67.4 million at March 31, 2000,
or 0.37% of total assets, compared to $81.8 million or 0.48% of total assets at
March 31, 1999. The decline was attributable to declines in nonperforming
residential and commercial real estate loans as well as consumer loans. The
Company continues to monitor asset quality with regular reviews of its portfolio
in accordance with its lending and credit policies.
75
<PAGE> 20
The Company's residential loan portfolio accounted for 23% of the total loan
portfolio at March 31, 2000 and December 31, 1999. The Company's residential
loans are generally secured by single-family homes (one to four units) and have
a maximum loan to value ratio of 80%, unless they are protected by mortgage
insurance. At March 31, 2000, 0.61% of the Company's residential loans were
nonperforming, as compared with 0.76% at December 31, 1999 and 0.56% at March
31, 1999.
The Company's commercial real estate loan portfolio accounted for 27% of the
total loan portfolio at March 31, 2000 and December 31, 1999. Commercial real
estate loans consist primarily of loans secured by income-producing commercial
real estate (including office and industrial buildings), service industries real
estate (including hotels and health care facilities), multi-family (over four
units) residential properties and retail trade real estate (including food
stores). These loans generally are secured by properties located in the New
England states and New York, particularly Maine, Massachusetts and New
Hampshire. The Company generally does not emphasize the purchase of
participations in syndicated commercial real estate loans. At March 31, 2000,
the Company had $100 million of participations in syndicated commercial real
estate loans and commitments to purchase an additional $215 million of such
participations. At March 31, 2000, 0.60% of the Company's commercial real estate
loans were nonperforming, as compared with 0.66% at December 31, 1999 and 1.00%
at March 31, 1999.
The Company's commercial business loan and lease portfolio accounted for 19% of
the total loan portfolio at March 31, 2000 and December 31, 1999. Commercial
business loans and leases are not concentrated in any particular industry, but
reflect the broad-based economies of Maine, New Hampshire, Massachusetts and, to
a lesser extent,Vermont, New York and Connecticut. The Company's commercial
business loans and leases are generally to small and medium size businesses
located within its geographic market area. At March 31, 2000, 0.97% of the
Company's commercial business loans and leases were non-performing, as compared
with 0.89% at December 31, 1999 and 1.08% at March 31, 1999.
The Company's consumer loan and lease portfolio accounted for 30% of the total
loan portfolio at March 31, 2000 and December 31, 1999. The Company has a
diversified consumer loan and lease portfolio consisting of home equity,
automobile, mobile home, boat and recreational vehicles and education loans. At
March 31, 2000, 0.16% of the Company's consumer loans and leases were
nonperforming, as compared with 0.20% at December 31, 1999 and 0.31% at March
31, 1999.
At March 31, 2000, the Company had $7.9 million of accruing loans which were 90
days or more delinquent, as compared to $12.1 million of such loans at December
31, 1999. The decrease was primarily attributable to a decrease in residential
real estate loans over 90 days delinquent, which the Company believes are well
secured and in the process of collection.
76
<PAGE> 21
TABLE 7 - NONPERFORMING ASSETS
(Dollars in thousands)
<TABLE>
<CAPTION>
3/31/2000 12/31/1999 9/30/1999 6/30/1999 3/31/1999
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential real estate loans:
Nonaccrual loans $14,204 $17,283 $16,978 $17,729 $16,412
Troubled debt restructurings 27 28 30 30 31
-----------------------------------------------------------
Total 14,231 17,311 17,008 17,759 16,443
Commercial real estate loans:
Nonaccrual loans 15,621 16,754 16,536 21,605 23,415
Troubled debt restructurings 961 1,002 1,282 1,391 1,110
-----------------------------------------------------------
Total 16,582 17,756 17,818 22,996 24,525
-----------------------------------------------------------
Commercial business loans and leases:
Nonaccrual loans 19,818 17,027 20,440 22,944 18,827
Troubled debt restructurings 39 82 83 80 40
-----------------------------------------------------------
Total 19,857 17,109 20,523 23,024 18,867
-----------------------------------------------------------
Consumer loans and leases:
Nonaccrual loans 4,861 5,951 6,446 6,199 8,465
Troubled debt restructurings - - - 5 5
-----------------------------------------------------------
Total 4,861 5,951 6,446 6,204 8,470
Total nonperforming loans:
Nonaccrual loans 54,504 57,015 60,400 68,477 67,119
Troubled debt restructurings 1,027 1,112 1,395 1,506 1,186
-----------------------------------------------------------
Total 55,531 58,127 61,795 69,983 68,305
-----------------------------------------------------------
Other nonperforming assets:
Other real estate owned, net of related reserves 9,027 8,154 8,042 7,903 9,058
Repossessions, net of related reserves 2,792 2,911 2,773 3,411 4,457
-----------------------------------------------------------
Total other nonperforming assets 11,819 11,065 10,815 11,314 13,515
-----------------------------------------------------------
Total nonperforming assets $67,350 $69,192 $72,610 $81,297 $81,820
===========================================================
Accruing loans which are 90 days overdue $ 7,914 $12,131 $15,561 $19,342 $26,908
===========================================================
Total nonperforming loans as a percentage of total loans (1) 0.54% 0.59% 0.64% 0.74% 0.69%
Total nonperforming assets as a percentage of total assets 0.37% 0.37% 0.40% 0.45% 0.48%
Total nonperforming assets as a percentage of total loans
and leases (1) and total other nonperforming assets 0.66% 0.70% 0.75% 0.85% 0.83%
</TABLE>
(1) Total loans and leases are exclusive of loans held for sale.
77
<PAGE> 22
PROVISION/ALLOWANCE FOR LOAN LOSSES
The Company provided $5.1 million for loan and lease losses in the first quarter
of 2000, compared to $5.6 million in the first quarter of 1999. As shown in
Table 8, net charge-offs for the first quarter of 2000 were $5.0 million, or
0.20% of average loans outstanding, compared to $4.4 million, or 0.17% of
average loans outstanding, for the first quarter of 1999.
At March 31, 2000, the allowance for loan and lease losses amounted to $155.1
million or 1.52% of total portfolio loans and leases, as compared to $156.2
million or 1.58% at March 31, 1999. The ratio of the allowance for loan and
lease losses to nonperforming loans was 279% at March 31, 2000 and 229% at March
31, 1999. Management considers the allowance appropriate and adequate to cover
potential losses inherent in the loan portfolio based on the current economic
environment.
Provisions for loan losses are attributable to management's ongoing evaluation
of the adequacy of the allowance for loan and lease losses, which includes,
among other procedures, consideration of the character and size of the loan and
lease portfolio, such as internal risk ratings and credit concentrations, trends
in nonperforming loans, delinquent loans and net charge-offs, the volume of new
loan originations and other asset quality factors. Although management utilizes
its best judgment in providing for possible losses, there can be no assurance
that the Company will not have to change its provisions for loan and lease
losses in subsequent periods. Changing economic and business conditions in the
Company's market areas, particularly northern New England, fluctuations in local
markets for real estate, future changes in nonperforming asset trends, large
movements in market-based interest rates or other reasons could affect the
Company's future provisions for loan and lease losses.
78
<PAGE> 23
TABLE 8 - ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
2000 First 1999 Fourth 1999 Third 1999 Second 1999 First
Quarter Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans and leases outstanding
during the period (1) $10,057,201 $9,826,432 $9,779,332 $9,685,523 $10,348,572
=======================================================================
Allowance at beginning of period $ 155,048 $ 156,953 $ 157,774 $ 156,231 $ 155,098
Charge-offs:
Real estate mortgages 1,425 2,609 2,868 2,516 705
Commercial business loans and leases 759 1,949 1,457 513 1,206
Consumer loans and leases 5,956 5,678 5,434 5,539 5,560
-----------------------------------------------------------------------
Total loans charged off 8,140 10,236 9,759 8,568 7,471
-----------------------------------------------------------------------
Recoveries:
Real estate mortgages 983 212 529 1,692 720
Commercial business loans and leases 667 600 826 872 890
Consumer loans and leases 1,452 1,514 1,418 1,707 1,429
-----------------------------------------------------------------------
Total loans recovered 3,102 2,326 2,773 4,271 3,039
-----------------------------------------------------------------------
Net charge-offs 5,038 7,910 6,986 4,297 4,432
Additions charged to operating expenses 5,068 6,005 6,165 5,840 5,565
-----------------------------------------------------------------------
Allowance at end of period $ 155,078 $ 155,048 $ 156,953 $ 157,774 $ 156,231
=======================================================================
Ratio of net charge-offs to average loans and
leases outstanding during the period, annualized (1) 0.20% 0.32% 0.28% 0.18% 0.17%
Ratio of allowance to total loans and leases
at end of period (2) 1.52% 1.57% 1.63% 1.66% 1.58%
Ratio of allowance to nonperforming loans
at end of period 279% 267% 254% 225% 229%
Ratio of net charge-offs as a percent of
average outstanding loans, annualized (1):
Real estate mortgages 0.035% 0.188% 0.180% 0.063% -0.001%
Commercial business loans and leases 0.019% 0.287% 0.134% -0.080% 0.075%
Consumer loans and leases 0.597% 0.568% 0.578% 0.573% 0.612%
</TABLE>
(1) Average loans and leases include portfolio loans and loans held for sale.
(2) Total loans and leases are exclusive of loans held for sale.
79
<PAGE> 24
DEPOSITS
Average deposits of $11.6 billion during the first quarter of 2000 decreased
$160 million from the first quarter of 1999. Excluding brokered deposits,
average total deposits decreased $81 million compared to the first quarter of
1999. The ratio of portfolio loans to retail deposits was 87% and 85% at March
31, 2000 and December 31, 1999, respectively.
Average non-interest bearing deposit accounts of $1.8 billion during the first
quarter of 2000 increased $68.0 million or 4% from the first quarter of 1999.
The increase in these non-interest bearing deposits reflects the Company's
marketing of these accounts.
Average interest-bearing deposit accounts, excluding brokered deposits, of $9.7
billion during the first quarter of 2000 decreased $149 million from the first
quarter of 1999, primarily due to declines in certificates of deposit. The
average rates paid on all interest-bearing deposits increased from 3.84% in the
first quarter of 1999 to 3.87% in the first quarter of 2000.
OTHER FUNDING SOURCES
The Company's primary source of funding, other than deposits, are securities
sold under repurchase agreements and advances from the Federal Home Loan Bank of
Boston ("FHLB"). Average borrowed funds for the first quarter of 2000 were $5.3
billion, an increase of $2.0 billion from the first quarter of 1999. The
increase in borrowings generally was utilized to fund asset growth.
Average FHLB borrowings for the first quarter of 2000 were $3.9 billion, which
increased $1.5 billion or 61% from the first quarter of 1999 in order to fund
the growth in earning assets. FHLB collateral consists primarily of first
mortgage loans secured by 1 - 4 family properties, certain unencumbered
securities and other qualified assets. At March 31, 2000, the Company's FHLB
borrowings amounted to $4.0 billion and its additional borrowing capacity from
the FHLB was $1.1 billion.
Average balances for securities sold under repurchase agreements were $1.2
billion and $788 million for the quarters ended March 31, 2000 and 1999,
respectively, an increase of $435 million. These borrowings, with a cost of
5.99% for the quarter ended March 31, 2000, are secured by mortgage-backed
securities and U.S. Government obligations.
RISK MANAGEMENT
The primary goal of the Company's risk management program is to determine how
certain existing or emerging issues facing the Company or the financial services
industry affect the nature and extent of the risks faced by the Company. Based
on a periodic self-evaluation, the Company determines key issues and develops
plans and/or objectives to address risk. The Board of Directors (the "Board")
and management believe that there are seven applicable "risk categories,"
consisting of credit risk, interest rate risk, liquidity risk, transaction risk,
compliance risk, strategic risk and reputation risk. Each risk category is
viewed from a quantity of risk perspective (high, medium or low) coupled with a
quality of risk perspective. In addition, an aggregate level of risk is assigned
to the Company as a whole as well as the direction of risk (stable, increasing
or decreasing). Each risk category and the overall risk level is compared to
regulatory views on a regular basis and then reported to the Board with an
accompanying explanation as to the existence of any differences. The risk
program includes risk identification, risk measurement, risk control and risk
monitoring.
The Board has established the overall strategic direction of the Company. It
approves the overall risk policies of the Company and oversees the overall risk
management process for the Company. The Board has delegated authority to three
Board Committees, consisting of Audit, Board Risk Management and Asset Review
Committees, and has charged each Committee with overseeing key risks. The
executive risk management committee, which reports to the Board, evaluates the
seven key risk areas of the Company and makes recommendations to the Board Risk
Management Committee.
ASSET-LIABILITY MANAGEMENT
The goal of asset-liability management is the prudent control of market risk,
liquidity and capital. Asset-liability management is governed by policies
reviewed and approved annually by the Company's Board of Directors (the "Board")
and monitored periodically by a committee of the Board. The Board delegates
responsibility for asset-liability management to the Asset Liability Management
Committee ("ALCO"), which is comprised of members of senior management who set
strategic directives that guide the day-to-day asset-liability management
activities of the Company. The ALCO also reviews and approves all major risk,
liquidity and capital management programs.
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<PAGE> 25
Market Risk
Market risk is the sensitivity of income to changes in interest rates, foreign
exchange rates, commodity prices and other market-driven rates or prices. The
Company has no trading operations and thus is only exposed to non-trading market
risk.
Interest-rate risk, including mortgage prepayment risk, is by far the most
significant non-credit risk to which the Company in exposed. Interest-rate risk
is the sensitivity of income to changes in interest rates. Changes in interest
rates, as well as fluctuations in the level and duration of assets, affect net
interest income, the Company's primary source of revenue. This risk arises
directly from the Company's core banking activities - lending, deposit gathering
and loan servicing. In addition to directly impacting net interest income,
changes in the level of interest rates can also affect (i) the amount of loans
originated and sold by the institution, (ii) the ability of borrowers to repay
adjustable or variable rate loans, (iii) the average maturity of loans, (iv) the
rate of amortization of capitalized mortgage servicing rights and premiums paid
on securities, (v) the amount of unrealized gains and losses on securities
available for sale and (vi) the value of an institution's investment securities
and mortgage loans and the resultant ability to realize gains on the sale of
such assets.
The primary objective of interest-rate risk management is to control the
Company's exposure to interest-rate risk both within limits approved by the
Board of Directors and guidelines established by the ALCO. These limits and
guidelines reflect the Company's tolerance for interest-rate risk over both
short-term and long-term horizons. The Company attempts to control interest-rate
risk by identifying, quantifying and, where appropriate, hedging its exposure.
The Company quantifies and measures interest-rate exposure using a model to
dynamically simulate net interest income under various interest rate scenarios
over a 12 month period. Simulated scenarios include deliberately extreme
interest rate "shocks" and more gradual interest rate "ramps." Key assumptions
in these simulation analyses relate to behavior of interest rates and spreads,
increases or decreases of product balances and the behavior of the Company's
deposit and loan customers. The most material assumption relates to the
prepayment of mortgage assets (including mortgage loans, mortgage-backed
securities and mortgage servicing rights). The risk of prepayment tends to
increase when interest rates fall. Since future prepayment behavior of loan
customers is uncertain, the resultant interest rate sensitivity of loan assets
cannot be determined exactly. Complicating management's efforts to measure
interest rate risk is the uncertainty of the maturity, repricing and/or runoff
of some of the Company's assets and liabilities.
To cope with these uncertainties, management gives careful attention to its
assumptions. For example, many of the Company's interest-bearing deposit
products (e.g. interest checking, savings and money market deposits) have no
contractual maturity and based on historical experience have only a limited
sensitivity to movements in market rates. Because management believes it has
some control with respect to the extent and timing of rates paid on non-maturity
deposits, certain assumptions regarding rate changes are built into the model.
In the case of prepayment of mortgage assets, assumptions are derived from
published dealer median prepayment estimates for comparable mortgage loans.
The Company manages the interest-rate risk inherent in its core banking
operations primarily using on-balance sheet instruments that sometimes contain
embedded options, mainly fixed-rate portfolio securities and borrowed fund
maturities. When appropriate, the Company will utilize off-balance sheet
interest rate instruments such as interest-rate swaps, interest rate floors and
interest rate corridor agreements, among other instruments. The Company manages
the interest-rate risk inherent in its core banking operations primarily using
on-balance sheet instruments that sometimes contain embedded options, mainly
fixed-rate portfolio securities and borrowed fund maturities. When appropriate,
the Company will utilize off-balance sheet interest rate instruments such as
interest-rate swaps, interest rate floors and interest rate corridor agreements,
among other instruments. At March 31, 2000, the Company had interest rate floor
agreements in the notional amount of $345 million, of which $200 million were
used to hedge mortgage servicing rights, as discussed below, and $145 million
were purchased to hedge variable rate loans. These floors will mature no later
than June 2001 and may expire worthless as their strike prices are currently
well below market prices. At March 31, 2000, the Company also had $50 million
notional amount of interest rate swaps that mature in January 2001, pursuant to
which the Company pays a fixed rate of 4.99% and receives a floating rate equal
to 3-month LIBOR. At March 31, 2000, the Company also had $50 million notional
amount of interest rate corridor agreements that mature in December 2003, which
benefit the Company when the 3-month LIBOR is over 6%.
The Company's policy on interest-rate risk simulation specifies that if interest
rates were to immediately shift up or down 200 basis points, estimated net
interest income for the subsequent 12 months should decline by less than 10%.
The Company was in compliance with this limit at March 31, 2000. The Company
also monitors gradual changes in market interest rates which it believes better
represents its exposure to net interest income. During the second quarter of
2000, the Company adopted a new policy whereby the interest -rate simulation
specifies that if interest rates were to shift gradually up or down 200 basis
points, estimated net interest income for the subsequent 12 months should
decline by less than 5%. The following table reflects the estimated percentage
exposure of the Company's net interest income for the 12 months following the
date indicated assuming a gradual shift in market interest rates of 100 and 200
basis points, respectively.
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<TABLE>
<CAPTION>
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point
Rate Decrease Rate Decrease Rate Increase Rate Increase
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
March 31, 2000 0.98% 1.54% (2.18%) (3.77%)
==== ==== ===== =====
</TABLE>
The results implied in the above table indicate estimated changes in simulated
net interest income for the subsequent 12 months assuming a gradual shift up or
down in market rates of 100 and 200 basis points across the entire yield curve.
Assuming a downward shift in rates, savings, money market and NOW accounts have
implied interest rate floors and it is assumed that the related interest expense
on these accounts will not decrease in proportion to the downward shift in
rates. Assuming an upward shift in rates of 200 basis points, the simulated
increase in interest income would be less than the simulated increase in
interest expense as the Company's fixed-rate earning assets exceed its
fixed-cost paying liabilities. It should be emphasized, however, that the
results are dependent on material assumptions such as those discussed above.
The Company uses interest rate floors, U.S. Treasury debt instruments and
principal only strips to mitigate the prepayment risk associated with mortgage
servicing rights (see "Non-Interest Income" for further details). At March 31,
2000, the Company had $200 million notional amount in interest rate floors, $20
million in U.S. Treasury bonds and $20 million in principal only strips. The
U.S. Treasury Bonds, noted in the carrying value of mortgage servicing rights
table below, were sold in April 2000 as the amount of the hedge was decreased.
For mortgage servicing rights, the adverse impact of current movements in
interest rates on expected future cash flows must be recognized immediately
through an adjustment to their carrying value. If interest rates decline,
estimated future fee income from mortgage servicing rights is reduced because of
an expected increase in mortgage prepayments.
The following table sets forth the net exposure at March 31, 2000 of the
economic value of mortgage servicing rights and identified hedging instruments,
assuming an immediate shift by the indicated amount in market interest rates.
<TABLE>
<CAPTION>
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point
Rate Decrease Rate Decrease Rate Increase Rate Increase
------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage servicing rights ($21,200) ($9,100) $6,700 $12,100
Interest rate floors 5,800 1,600 (400) (600)
U.S. Treasury bonds 6,055 2,647 (2,145) (3,979)
Principal only strips 5,049 2,000 (1,600) (1,989)
-----------------------------------------------------------------------
Net exposure ($4,296) ($2,853) $2,555 $5,532
=======================================================================
</TABLE>
The foregoing estimates of the effects of specified changes in interest rates on
the Company's net interest income and the carrying value of its mortgage
servicing rights are based on various assumptions, as discussed above, which
approximate actual experience and which management of the Company considers to
be reasonable. The effects of changes in interest rates on the Company could
vary substantially if different assumptions were used or actual experience
differs from the historical experience on which the assumptions are based.
The most significant factors affecting market risk exposure of net interest
income in the past 12 months has been (i) the increase in interest rates, (ii)
changes in the yield curve for U.S. Government securities, (iii) changes in the
composition of mortgage assets (iv) increases in adjustable rate borrowings with
embedded interest rate caps and (v) the increase and diversification of assets
and off-balance sheet interest-rate instruments used to hedge mortgage servicing
rights.
The Company's earnings are not directly and materially impacted by movements in
foreign currency rate or commodity prices. Virtually all transactions are
denominated in the U.S. dollar. Movements in equity prices may have an indirect
but modest impact on earnings by affecting the volume of activity or the amount
of fees from investment-related businesses.
LIQUIDITY
PARENT COMPANY
On a parent-only basis at March 31,2000, the Company's commitments or debt
service requirements consisted primarily of junior subordinated debentures
issued to subsidiaries, Peoples Heritage Capital Trust I and Banknorth Capital
Trust I, in connection with the issuance of 9.06% Capital Securities due 2027
and 10.52% Capital Securities due 2027, respectively. The principal sources of
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<PAGE> 27
funds for the Company to meet parent-only obligations are dividends from its
banking subsidiaries, which are subject to regulatory limitations. Other
potential sources include public and private borrowings.
BANKING SUBSIDIARIES
For banking subsidiaries of the Company, liquidity represents the ability to
fund asset growth and accommodate deposit or withdrawals. Liquidity risk is the
danger that the banks cannot meet anticipated or unexpected funding requirements
or can meet them only at excessive cost. Liquidity is measured by the ability to
raise cash when needed at a reasonable cost. Many factors affect a bank's
ability to meet liquidity needs, including variations in the markets served, its
asset-liability mix, its reputation and credit standing in the market and
general economic conditions.
In addition to traditional retail deposits, the banks have various other
liquidity sources, including proceeds from maturing securities and loans, the
sale of securities, asset securitizations and borrowed funds such as FHLB
advances, reverse repurchase agreements and brokered deposits
The Company continually monitors and forecasts its liquidity position. There are
several interdependent methods used by the Company for this purpose, including
daily review of fed funds positions, monthly review of balance sheet changes,
monthly review of liquidity ratios, periodic liquidity forecasts and periodic
review of contingent funding plans.
As of March 31, 2000 the banks had in the aggregate $2.1 billion of "immediately
accessible liquidity" defined as cash that could be raised within 1-3 days
through collateralized borrowings or security sales. This represents 18% of
deposits or 12% of assets. The Company's current policy minimum is 10% of
deposits.
Also as of March 31, 2000 the banks had in the aggregate "potentially volatile
funds" of $1.2 billion. These are funds that might flow out of the banks over a
90-day period in an adverse environment. Management estimates this figure by
applying adverse probabilities to its various credit-sensitive and
economically-sensitive funding sources.
As of March 31, 2000, the ratio of "immediately accessible liquidity" to
"potentially volatile funds" was 172%, versus a policy minimum of 100%.
In addition to the liquidity sources discussed above, management believes that
its consumer loan portfolios provide a significant amount of contingent
liquidity that could be accessed in a reasonable time period through sale or
securitization. The banks also have significant untapped access to the national
brokered deposit market. Both of these sources are contemplated as secondary
liquidity in the Company's contingent funding plan. Management believes that the
level of liquidity is sufficient to meet current and future funding
requirements.
CAPITAL
At March 31, 2000, shareholders' equity amounted to $1.2 billion. In addition,
through subsidiary trusts, the Company had outstanding at such date $98.8
million of Capital Securities which qualify as Tier 1 Capital. The Company paid
a $0.125 per share dividend on its Common Stock during the first quarter of
2000. In July 1999, the Company authorized a 4,000,000 share repurchase program.
As of March 31, 2000, the Company completed this repurchase program at a total
cost of $66.1 million, having repurchased 912,500 shares for $12.3 million, or
an average price of $13.53 per share, in the first quarter of 2000.
Capital guidelines issued by the Federal Reserve Board require the Company to
maintain certain ratios, set forth in Table 9. As indicated in such table, the
Company's regulatory capital currently substantially exceeds all applicable
requirements.
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<PAGE> 28
<TABLE>
<CAPTION>
TABLE 9 - REGULATORY CAPITAL REQUIREMENTS
(Dollars in thousands) For Capital Adequacy
Actual Purposes Excess
-------------------- ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 2000:
Total capital (to risk weighted assets) $1,402,414 11.94% 939,998 8.00% $ 462,416 3.94%
Tier 1 capital (to risk weighted assets) 1,255,439 10.68% 469,999 4.00% 785,440 6.68%
Tier 1 leverage capital ratio (to average assets) 1,255,439 6.90% 727,761 4.00% 527,678 2.90%
As of December 31, 1999:
Total capital (to risk weighted assets) 1,376,171 12.02% 916,232 8.00% 459,939 4.02%
Tier 1 capital (to risk weighted assets) 1,232,863 10.76% 458,115 4.00% 774,748 6.76%
Tier 1 leverage capital (to average assets) 1,232,863 6.75% 730,693 4.00% 502,170 2.75%
</TABLE>
Net risk weighted assets were $11.7 billion and $11.5 billion at March 31, 2000
and December 31, 1999, respectively.
The Company's banking subsidiaries are also subject to federal regulatory
capital requirements. At March 31, 2000, each of the Company's banking
subsidiaries was deemed to be "well capitalized" under the regulations of the
applicable federal banking agency and in compliance with applicable capital
requirements.
IMPACT OF THE YEAR 2000
The Company has not experienced any significant disruptions to its financial or
operating activities caused by a failure of its computerized systems resulting
from Year 2000 issues. Year 2000 expenses incurred in 1999 were funded out of
the Company's operating cash flow.
COMPLETED ACQUISITION
On May 10, 2000, the Company completed the acquisition of Banknorth Group, Inc.,
which was effected by means of the merger of Banknorth Group, Inc. with and into
the Company. The Company changed its name to "Banknorth Group, Inc." as a result
of the merger. As a result of the merger and the change in the name of the
Company, the Company's symbol on the Nasdaq stock market is now BKNG. Upon
consummation of the merger, each share of Banknorth common stock outstanding was
automatically converted into the right to receive 1.825 shares of Company Common
Stock, including each attached right issued pursuant to the Company's
shareholder rights plan, with cash in lieu of fractional share interests.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which sets accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. This Statement currently is
scheduled to be effective for the Company for years beginning January 1, 2001
and is not expected to have a significant impact on the Company's financial
condition or results of operations.
FORWARD LOOKING STATEMENTS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements, which are based on various
assumptions (some of which are beyond the Company's control), may be identified
by reference to a future period or periods, or by the use of forward-looking
terminology, such as "may," "will," "believe," "expect," "estimate,"
"anticipate," "continue" or similar terms or variations on those terms or the
negative of those terms. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, those related to the economic environment, particularly in the
market areas in which the Company operates, competitive products and pricing,
fiscal and monetary policies of the U.S. Government, changes in government
regulations.
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affecting financial institutions, including regulatory fees and capital
requirements, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management, asset/liability
management, the financial and securities markets and the availability of and
costs associated with sources of liquidity.
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 events or circumstances
after the date of such statements.
85
