<PAGE> 1
EXHIBIT 99(a)
INDEX TO FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Selected Consolidated Financial Data 6
Management's Discussion and Analysis of Financial Condition and Results of Operations 7
Consolidated Financial Statements 27
Notes to Consolidated Financial Statements 31
Independent Auditors' Report 56
</TABLE>
5
<PAGE> 2
BANKNORTH GROUP, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Share Data) 1999 1998 % Change 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Results for the Year
Net interest income $ 624,229 $ 590,516 6% $ 566,346 $ 482,081 $ 423,059
Provision for loan and lease losses 23,575 23,775 (1) 15,763 15,850 20,410
Noninterest income (excluding securities
transactions) 191,140 161,124 19 134,144 104,789 87,872
Securities transactions 655 6,423 (90) 2,837 3,520 1,067
Noninterest expenses (excluding special
charges) 470,140 458,326 3 440,329 378,205 337,752
Special charges(1) 28,002 61,140 (54) 23,559 11,210 4,958
Net income 196,958 141,744 39 145,488 123,044 100,962
Operating income (net income excluding
special charges) 217,774 186,946 16 161,035 131,826 104,640
---------------------------------------------------------------------------------------------------------------------------------
Share Data(2)
Earnings per share:
Basic $ 1.35 $ 0.97 39% $ 1.00 $ 0.88 $ 0.75
Diluted 1.34 0.95 40 0.98 0.87 0.74
Excluding special charges:
Diluted earnings per share(1) 1.48 1.25 18 1.08 0.93 0.77
Diluted cash earnings per share(1)(3) 1.62 1.37 18 1.18 1.00 0.79
Dividends per share 0.47 0.44 7 0.38 0.34 0.26
Book value per share at year end 8.22 8.37 (2) 7.97 7.39 6.73
Tangible book value per share at year end 6.95 6.97 (0) 6.88 6.59 6.06
Stock price:
High 20.25 26.75 (24) 23.81 14.32 11.44
Low 14.31 12.81 12 12.94 9.50 5.88
Close 15.06 20.00 (25) 23.00 14.00 11.38
Weighted average shares outstanding:
Basic 145,757,788 146,119,422 (0) 145,481,258 139,186,574 134,311,379
Diluted 147,427,667 148,964,639 (1) 148,600,118 141,658,250 136,462,409
---------------------------------------------------------------------------------------------------------------------------------
Key Performance Ratios
Return on average assets 1.12% 0.90% 24% 1.05% 1.08% 1.03%
Return on average equity 16.42 11.96 37 13.01 12.53 11.66
Net interest margin(4) 3.86 4.10 (6) 4.42 4.58 4.64
Average equity to average assets 6.81 7.55 (10) 8.07 8.66 8.82
Efficiency ratio(5) 56.45 59.35 (5) 61.37 64.44 66.11
Tier 1 leverage capital ratio 6.75 7.22 (7) 7.65 8.11 8.83
Dividend payout ratio(6) 33.19 40.38 (18) 39.60 33.86 31.19
Excluding special charges:
Return on average assets(1) 1.24 1.19 4 1.16 1.16 1.07
Return on average equity(1) 18.16 15.78 15 14.40 13.42 12.09
Average Balances
Assets $ 17,607,344 $ 15,696,234 12% $ 13,857,897 $ 11,344,023 $ 9,814,063
Loans and leases 9,908,177 10,679,544 (7) 9,328,963 7,799,062 6,589,517
Earning assets 16,315,233 14,503,172 12 12,906,106 10,601,537 9,194,434
Deposits 11,784,103 11,435,942 3 10,341,582 9,004,618 7,879,343
Shareholders' equity 1,199,496 1,184,770 1 1,117,953 982,204 865,661
At Year End
Assets $ 18,508,264 $ 16,453,120 12% $ 15,332,821 $ 12,894,769 $ 10,260,306
Loans and leases 9,699,608 9,770,039 (1) 9,862,103 8,381,840 6,626,706
Debt and equity securities 6,873,182 4,379,774 57 3,617,236 3,031,996 2,415,293
Deposits 11,710,501 12,016,212 (3) 11,088,410 9,996,458 8,219,118
Borrowings 5,367,478 2,910,173 84 2,774,286 1,648,026 976,977
Shareholders' equity 1,192,274 1,222,390 (2) 1,164,383 1,087,890 935,381
Common shares outstanding (thousands) 144,974 146,105 (1) 146,133 147,231 138,988
Nonperforming assets(7) 69,192 89,021 (22) 98,125 97,007 104,963
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Special charges consist of merger related and other restructuring charges
which on an after-tax basis were $20,816, $45,202, $15,547, $8,782 and
$3,678 for 1999, 1998, 1997, 1996 and 1995, respectively. See Note 9 to the
Consolidated Financial Statements.
(2) Where appropriate amounts have been adjusted for a two-for-one split of the
common stock in May 1998.
(3) Earnings before amortization of goodwill and core deposit premiums.
(4) Net interest income divided by average interest-earning assets, calculate
on a fully-taxable equivalent basis.
(5) Excludes distribution on securities of subsidiary trust, special charges
and securities transactions.
(6) Cash dividends paid divided by net income.
(7) Nonperforming assets consist of nonperforming loans, other real estate
owned and repossessed assets, net of related reserves where appropriate.
6
<PAGE> 3
BANKNORTH GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
On May 10, 2000 Peoples Heritage Financial Group, Inc. ("PHFG") completed
its acquisition of Banknorth Group, Inc. PHFG changed its name to Banknorth
Group, Inc. (the "Company") as a result of the merger. The merger was accounted
for as a pooling of interests and accordingly all related financial information
has been restated of all periods presented.
The discussion and analysis which follows focuses on the factors affecting
the Company's results of operations during 1999, 1998 and 1997 and financial
condition at December 31, 1999 and 1998. The Consolidated Financial Statements
and related notes should be read in conjunction with this review. Certain
amounts in years prior to 1999 have been reclassified to conform to the 1999
presentation.
GENERAL
Banknorth Group, Inc. (the "Company") is a multi-bank holding company which
conducts business from its headquarters in Portland, Maine and, as of December
31, 1999, approximately 300 offices located in Maine, New Hampshire,
Massachusetts, Connecticut, Vermont and upstate New York. The Company is the
largest bank holding company headquartered in northern New England and the
fourth largest bank holding company headquartered in New England.
The Company offers a broad range of commercial and consumer banking
services and products as well as trust, investment advisory and insurance
brokerage services through eight wholly-owned banking subsidiaries: Peoples
Heritage Bank, N.A. ("PHB"), Bank of New Hampshire, N.A. ("BNH"), First
Massachusetts Bank, N.A. ("First Massachussets"), which conducts business in
certain areas under the name of GBT, a division of First Massachussets,
Franklin Lamoille Bank, N.A. ("Franklin Lamoille"), First Vermont Bank, N.A.
("First Vermont"), The Stratevest Group, N.A. ("Stratevest"), Evergreen Bank,
N.A. ("Evergreen"), and The Howard Bank, N.A. ("Howard"). PHB operates offices
throughout Maine and, through subsidiaries, engages in financial planning,
insurance brokerage and equipment leasing activities. At December 31, 1999, PHB
had consolidated assets of $4.4 billion and consolidated shareholder's equity of
$290 million. BNH operates offices throughout New Hampshire. At December 31,
1999, BNH had assets of $5.1 billion and shareholder's equity of $274 million.
First Massachussets operates offices in Massachusetts and southern New
Hampshire. At December 31, 1999, First Massachussets had assets of $5.9 billion
and shareholder's equity of $372 million. The Company's three Vermont-based
banks, Franklin Lamoille, Howard and First Vermont Bank, had assets of $331.6
million, $983.3 million and $772.7 million and shareholder's equity of $23
million, $70 million and $57 million at December 31, 1999, respectively.
Evergreen is a New York based bank which had assets of $1.2 billion and
shareholder's equity of $65 million at December 31, 1999. Each of the banks is a
national bank and a member of the Bank Insurance Fund ("BIF") administered by
the Federal Deposit Insurance Corporation ("FDIC"). Stratevest is a
nondepository national bank with approximately $4.2 billion in assets under
management at December 31, 1999.
Business Strategy
The principal business of the Company consists of attracting deposits from
the general public and using such deposits and other sources of funds to
originate commercial business loans and leases, commercial real estate loans,
residential mortgage loans and a variety of consumer loans. In addition to
keeping loans for its own portfolio, the Company sells loans into the secondary
market. The Company also invests in mortgage-backed securities and securities
issued by the United States Government and agencies thereof, as well as other
securities. In addition, the Company engages in trust, investment advisory and
insurance brokerage activities and services residential mortgage loans for
investors.
The Company's goal is to sustain profitable, controlled growth by focusing
on increasing loan and deposit market share in New England and upstate New York,
developing new financial products, services and delivery channels, closely
managing yields on earning assets and rates on interest-bearing liabilities,
increasing noninterest income through, among other things, expanded trust,
investment advisory and insurance brokerage services, and controlling the growth
of noninterest expenses. It is also part of the business strategy of the Company
to supplement internal growth with targeted acquisitions of other financial
institutions in its market area. During the period covered by this discussion,
the Company engaged in numerous merger and acquisition related activities. For
further information, see Note 2 to the Consolidated Financial Statements and
"Acquisitions" below. The Company regularly evaluates potential acquisitions and
as a general rule announces acquisitions only after a definitive agreement has
been reached.
The Company generally does not, as a matter of policy, make any specific
projections as to future earnings nor does it endorse any projections regarding
future performance that may be made by others.
7
<PAGE> 4
Economic Conditions
The Company believes that its market area has witnessed steady economic
growth since 1992. There can be no assurance that this will continue to be the
case, however, and the economies and real estate markets in the Company's
primary market areas will continue to be significant determinants of the quality
of the Company's assets in future periods and, thus, its results of operations.
Completed Acquisitions
On May 10, 2000, the Company completed the acquisition of Banknorth Group,
Inc. ("Banknorth"), which was effected by means of the merger of Banknorth with
and into People Heritage Financial Group, Inc. which 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. Approximately 42.9 million shares of common stock of the
Company ("Common Stock") were issued or are issuable in connection with this
transaction. As of December 31, 1999, Banknorth had total assets of $4.6 billion
and total shareholders' equity of $341 million. The acquisition was accounted
for using the pooling-of-interests method and, accordingly, financial
information for all periods presented prior to the date of acquisition has been
restated to present the combined financial condition and results of operations
as if the acquisition had been in effect for all such periods.
On January 1, 1999, the Company completed the acquisition of SIS Bancorp,
Inc. ("SIS"). Approximately 16,255,885 shares of Common Stock were issued in
connection with this acquisition. SIS had total assets of $2.0 billion and
shareholders' equity of $139 million at December 31, 1998. The acquisition of
SIS was accounted for as a pooling-of-interests and, accordingly, financial
information for all periods presented prior to the date of acquisition has been
restated to present the combined financial condition and results of operations
as if the acquisition had been in effect for all such periods.
During 1998, the Company completed the acquisition of three insurance
agencies for an aggregate of 454,864 shares of Common Stock. These acquisitions
were accounted for as purchases and, accordingly, the Company's financial
statements reflect their operations from the date of acquisition. The Company
recorded $9.3 million of goodwill in connection with these purchases. The
acquired agencies have been integrated into the Company's existing insurance
agency operations.
On April 10, 1998, the Company completed the acquisition of CFX Corporation
("CFX"). Approximately 32,796,280 shares of Common Stock were issued in
connection with this transaction. At December 31, 1997, CFX had total assets of
$2.9 billion and total shareholders' equity of $245.7 million. The acquisition
of CFX was accounted for as a pooling-of-interests and, accordingly, financial
information for all periods presented prior to the date of acquisition has been
restated to present the combined financial condition and results of operations
as if the acquisition had been in effect for all such periods.
In the fourth quarter of 1997, the Company purchased Atlantic Bancorp
("Atlantic"), the parent company of Atlantic Bank N.A. headquartered in
Portland, Maine, for $70.8 million. Atlantic had total assets of $462.9 million
and total shareholders' equity of $37.7 million. The Company recorded $34.7
million of goodwill in connection with this transaction. During the same period,
the Company also acquired all of the outstanding stock of MPN Holdings ("MPN"),
the holding company of Morse, Payson & Noyes Insurance. The transaction was
effected through the exchange of MPN stock for 445,678 shares of Common Stock
and resulted in $7.8 million of goodwill. Both acquisitions were accounted for
as purchases and, accordingly, the Company's financial statements reflect them
from the date of acquisition.
The Company incurred various merger related and restructuring charges in
connection with the foregoing acquisitions and in connection with acquisitions
effected by acquired companies such as Banknorth, SIS and CFX (collectively,
"special charges"). On an after-tax basis special charges amounted to $20.8
million, $45.2 million and $15.5 million in 1999, 1998 and 1997, respectively.
Special charges in 1999 included $5.3 million of after-tax costs to discontinue
the Company's correspondent mortgage business. Special charges in 1997 included
$4.4 million of after-tax charges related to exiting the lease securitization
business conducted through CFX Funding, a subsidiary of CFX. For additional
information, see "Results of Operations - Special Charges" and Note 9 to the
Consolidated Financial Statements.
8
<PAGE> 5
RESULTS OF OPERATIONS
Overview
The Company reported net income of $197.0 million or $1.34 per diluted
share in 1999, compared to $141.7 million or $0.95 per diluted share in 1998.
Excluding special charges, the Company earned $1.48 per diluted share in 1999
compared to $1.25 per diluted share during 1998, an increase of 18%. Return on
average equity excluding special charges was 18.16% in 1999 compared to 15.78%
in 1998. The improved results were attributable to the successful assimilation
of recent acquisitions as well as increases in net interest income and
noninterest income.
Total revenues increased 8% during 1999 as a result of increases in both
interest income and noninterest income. Net interest income increased 6% during
1999, as compared to 1998. The increase was attributable to a 12% increase in
average interest-earning assets, which was offset in part by a decrease in net
interest margin from 4.10% in 1998 to 3.86% in 1999. The decline in net interest
margin was primarily attributable to the increase in investment securities
(which have lower yields relative to loans) as a percent of total interest
earning assets. Investment securities were 38% of total interest earning assets
in 1999 compared to 25% in 1998. Noninterest income excluding securities
transactions increased 19% during 1999, primarily as a result of increases in
income from customer services, trust and investment advisory services and
insurance commissions.
Noninterest expenses, excluding special charges, increased 3% during 1999
compared to an 8% increase in total revenues. The increase in noninterest
expenses primarily resulted from increases in data processing expenses and
amortization of goodwill and deposit premiums.
Net Interest Income Net interest income on a fully taxable-equivalent basis
increased by $34.1 million, or 6%, during 1999 due primarily to a 12% increase
in average earning assets. Average loans and leases decreased by $771.4 million,
or 7.2%, in 1999 compared to 1998. Commercial and consumer loans experienced
significant growth while residential real estate loans declined. 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 in a REMIC, which are now classified as securities held to
maturity. Average securities increased $2.6 billion, or 71%, in 1999 compared to
1998 due to this securitization and additional investments in agency
mortgage-backed securities. The net interest margin declined to 3.86% in 1999
from 4.10% during 1998. The lower margin was largely due to increased levels of
securities as a percent of total earning assets, 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 liabilities.
Information on average balances, yields and rates for the past three years can
be found in Table 1. Table 2 shows the changes from 1998 to 1999 in tax
equivalent net interest income by category due to changes in rate and volume.
9
<PAGE> 6
TABLE 1 - THREE YEAR AVERAGE BALANCE SHEETS
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company 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. For purposes of the table 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 equity securities to make them equivalent to income and yields
earned on fully-taxable investments, assuming a federal income tax rate of 35%,
and (ii) unpaid interest on nonaccrual loans has not been included for purposes
of determining interest income. Information is based on average daily balances
during the indicated periods.
<TABLE>
<CAPTION>
Table 1 - Three Year Average Balance Sheets
Year Ended December 31,
----------------------------------------------------------------------
(Dollars in thousands)
1999 1998
----------------------------------- -------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Loans and leases(1) $ 9,908,177 829,883 8.38% $ 10,679,544 912,102 8.54%
Investment securities 6,259,436 395,616 6.32% 3,667,733 231,881 6.32%
Federal funds sold and other
short-term investments 147,620 7,154 4.85% 155,895 6,890 4.42%
------------ ------------ ------------ ------------
Total earning assets 16,315,233 1,232,653 7.56% 14,503,172 1,150,873 7.94%
------------ ------------
Nonearning assets 1,292,111 1,193,062
------------ ------------
Total assets $ 17,607,344 $ 15,696,234
============ ============
Interest-bearing deposits:
Certificates of deposit 4,617,521 231,755 5.02% 4,696,446 255,745 5.45%
Brokered deposits 179,760 9,653 5.37% 283,499 16,535 5.83%
Other interest-bearing deposits 5,179,164 132,118 2.55% 4,813,522 133,316 2.77%
------------ ------------ ------------ ------------
Total interest-bearing deposits 9,976,445 373,526 3.74% 9,793,467 405,416 4.14%
Borrowed funds 4,408,944 229,764 5.21% 2,761,451 150,228 5.44%
------------ ------------ ------------ ------------
Total interest-bearing deposits 14,385,389 603,290 4.19% 12,554,918 555,644 4.43%
------------ ------------
Non-interest bearing deposits 1,807,658 1,642,475
Other liabilities 111,723 184,071
Securities of subsidiary trusts 103,078 130,000
Shareholders' equity 1,199,496 1,184,770
------------ ------------
Total liabilities and shareholders'
equity $ 17,607,344 $ 15,696,234
============ ============
Net earning assets $ 1,929,844 $ 1,948,254
=========== ============
Net interest income (fully-taxable
equivalent) 629,363 595,229
Less: fully-taxable equivalent
adjustments (5,134) (4,713)
------------ ------------
Net interest income $ 624,229 $ 590,516
============ ============
Net interest rate spread
(fully-taxable equivalent) 3.37% 3.51%
Net interest margin
(fully-taxable equivalent) 3.86% 4.10%
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
(Dollars in thousands)
1997
----------------------------------
Average Yield/
Balance Interest Rate
------- -------- ------
<S> <C> <C> <C>
Loans and leases(1) $ 9,328,963 825,155 8.85%
Investment securities 3,459,587 228,317 6.60%
Federal funds sold and other
short-term investments 117,556 6,046 5.14%
------------ -----------
Total earning assets 12,906,106 1,059,518 8.21%
-----------
Nonearning assets 951,791
------------
Total assets $ 13,857,897
============
Interest-bearing deposits:
Certificates of deposit 4,426,355 240,710 5.44%
Brokered deposits 155,281 9,324 6.00%
Other interest-bearing deposits 4,390,451 120,887 2.75%
------------ -----------
Total interest-bearing deposits 8,972,087 370,921 4.13%
Borrowed funds 2,142,328 118,760 5.54%
------------ -----------
Total interest-bearing deposits 11,114,415 489,681 4.41%
-----------
Non-interest bearing deposits 1,369,495
Other liabilities 148,409
Securities of subsidiary trusts 107,625
Shareholders' equity 1,117,953
------------
Total liabilities and shareholders'
equity $ 13,857,897
============
Net earning assets $ 1,791,691
============
Net interest income (fully-taxable
equivalent) 569,837
Less: fully-taxable equivalent
adjustments (3,491)
-----------
Net interest income $ 566,346
===========
Net interest rate spread
(fully-taxable equivalent) 3.80%
Net interest margin
(fully-taxable equivalent) 4.42%
</TABLE>
(1) Loans and leases include portfolio loans and leases, loans held for sale
and nonperforming loans, but unpaid interest on nonperforming loans has not
been included for purposes of determining interest income.
10
<PAGE> 7
TABLE 2 - CHANGES IN NET INTEREST INCOME
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 2 Rate/Volume
<TABLE>
<CAPTION>
Year Ended December 31, 1999 vs 1998 Year Ended December 31, 1998 vs 1997
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------------------------------------------------------------------
Rate/ Rate/
(In thousands) Rate Volume Volume Total Rate Volume Volume Total
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases(1) $(17,087) $(65,875) $ 743 $(82,219) $(28,920) $119,526 $(3,659) $86,947
Investment securities -- 163,796 (61) 163,735 (9,687) 13,738 (487) 3,564
Federal funds sold
and other short-term investment 670 (366) (40) 264 (846) 1,971 (281) 844
------------------------------------------- -----------------------------------------
Total earning assets (16,417) 97,555 642 81,780 (39,453) 135,235 (4,427) 91,355
------------------------------------------- -----------------------------------------
Interest-bearing liabilities:
Deposits:
Regular savings and money
market access accounts (10,590) 10,128 (556) (1,018) 878 11,634 (263) 12,249
Certificates of deposit (20,195) (4,301) 506 (23,990) 443 14,693 (101) 15,035
Brokered deposits (1,304) (6,048) 470 (6,882) (268) 7,669 (220) 7,211
------------------------------------------- -----------------------------------------
Total interest-bearing deposits (32,089) (221) 420 (31,890) 1,053 34,026 (584) 34,495
Borrowed funds (6,351) 89,624 (3,737) 79,536 (2,142) 34,299 (689) 31,468
------------------------------------------- -----------------------------------------
Total interest-bearing liabilities (38,440) 89,403 (3,317) 47,646 (1,089) 68,325 (1,273) 65,963
------------------------------------------- -----------------------------------------
Net interest income
(fully taxable equivalent) $ 22,023 $ 8,152 $ 3,959 $ 34,134 $(38,364) $ 66,910 $(3,154) $25,392
=========================================== =========================================
</TABLE>
(1) Loans and leases include portfolio loans and loans held for sale and
nonperforming loans.
Provision and Allowance for Loan and Lease Losses
The Company recorded a provision for loan and lease losses in 1999 of $23.6
million, as compared to a $23.8 million provision in 1998. Net chargeoffs to
average loans outstanding was 0.24% in 1999 compared to 0.20% in 1998. The
slight increase was due to lower average levels of residential real estate
loans, which generally have low levels of charge-offs.
The allowance for loan and lease losses represented 1.57% of portfolio
loans and leases outstanding at December 31, 1999, as compared to 1.56% at
December 31, 1998. The ratio of the allowance to nonperforming loans at December
31, 1999 was 267%, as compared to 207% at December 31, 1998. Management believes
that the improvement in this coverage ratio is consistent with the change in the
composition of the loan portfolio and reduced levels of nonperforming loans, as
discussed below.
11
<PAGE> 8
The allowance for loan and leases losses is maintained at a level
determined to be adequate by management to absorb future charge-offs of loans
and leases deemed uncollectable. This allowance is increased by provisions
charged to operating expense and by recoveries on loans previously charged off.
Arriving at an appropriate level of allowance for loan and lease losses
necessarily involves a high degree of judgment and is determined based on
management's ongoing evaluation. The ongoing evaluation process includes a
formal analysis of the allowance each quarter, which considers, among other
procedures, the character and size of the loan portfolio, trends in
nonperforming loans, delinquent loans and net charge-offs, as well as new loan
originations and other asset quality factors. The Company evaluates the
commercial real estate and commercial business loan portfolio by using a loan by
loan analysis of a significant portion of "classified" loans and calculating a
reserve requirement on these loans. Based on these results, factors are applied
to the remaining portfolio to calculate a range of possible loan losses. For the
residential real estate and consumer loan portfolios, the range of reserves is
calculated by applying historical chargeoff and recovery experience to the
current outstanding balance in each type of loan category, with consideration
given to loan growth over the preceding twelve months. Although management
utilizes its best judgment in providing for losses, for the reasons discussed
under "Asset Quality - Nonperforming Assets," there can be no assurance that the
Company will not have to change its level of provision for loan losses in future
periods.
TABLE 3 - FIVE YEAR TABLE OF ACTIVITY IN THE ALLOWANCE FOR LOAN AND LEASE LOSSES
The following sets forth information concerning the activity in the
Company's allowance for loan and lease losses during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans and leases outstanding $9,908,177 $10,679,544 $9,328,963 $7,799,062 $6,589,517
======================================================================
Allowance at the beginning of period $ 155,098 $ 150,615 $ 142,682 $ 133,043 $ 143,165
Additions due to acquisitions -- 2,200 7,361 13,015 2,457
Charge-offs:
Real estate loans 8,698 10,233 6,991 21,336 24,770
Commercial business loans and leases 5,125 7,718 9,052 6,552 16,950
Consumer loans and leases 22,211 20,459 19,169 12,141 9,154
----------------------------------------------------------------------
Total loans charged off 36,034 38,410 35,212 40,029 50,874
----------------------------------------------------------------------
Recoveries:
Real estate loans 3,153 6,912 9,676 13,735 9,154
Commercial business loans and leases 3,188 4,040 5,126 3,213 5,642
Consumer loans and leases 6,068 5,966 5,219 3,855 3,089
----------------------------------------------------------------------
Total loans recovered 12,409 16,918 20,021 20,803 17,885
----------------------------------------------------------------------
Net charge-offs 23,625 21,492 15,191 19,226 32,989
Provision for loan and lease losses 23,575 23,775 15,763 15,850 20,410
----------------------------------------------------------------------
Allowance at the end of the period $ 155,048 $ 155,098 $ 150,615 $ 142,862 $ 133,043
======================================================================
Ratio of net charge-offs to average loans
and leases outstanding 0.24% 0.20% 0.16% 0.25% 0.50%
Ratio of allowances to total portfolio loans
and leases at end of period 1.57% 1.56% 1.50% 1.67% 1.97%
Ratio of allowance to nonperforming loans at
end of period 266.74% 206.71% 179.85% 183.69% 161.49%
</TABLE>
12
<PAGE> 9
TABLE 4 - ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES - FIVE YEAR
SCHEDULE
The allowance for loan and lease losses is available for offsetting credit
losses in connection with any loan, but is internally allocated to various loan
categories as part of the Company's process for evaluating the adequacy of the
allowance for loan and lease losses. The following table sets forth information
concerning the allocation of the Company's allowance for loan and lease losses
by loan categories at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
-------------------- -------------------- -------------------- -------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
Loans in each Loans in each Loans in each Loans in each Loans in each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
-------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans $ 79,147 50.40% $ 77,516 54.12% $ 79,958 59.83% $ 78,871 60.23% $ 77,787 59.56%
Commercial business
loans and leases 49,316 19.53% 46,753 18.50% 36,161 15.67% 37,317 15.88% 30,437 16.94%
Consumer loans
and leases 26,585 30.07% 30,829 27.37% 27,254 24.50% 20,237 23.89% 17,844 23.50%
Unallocated allowance -- -- 7,242 6,257 6,975
----------------- ----------------- ----------------- ----------------- -----------------
$155,048 100.00% $155,098 100.00% $150,615 100.00% $142,682 100.00% $133,043 100.00%
================= ================= ================= ================= =================
</TABLE>
The unallocated component in the preceding table relates to reserves
acquired in connection with the acquisition of CFX. These reserves were
allocated during 1998 in accordance with the Company's analysis of the CFX loan
portfolio. Otherwise, the Company's methods and assumptions in determining the
adequacy of the allowance for loan losses has not changed significantly from
prior years. Review of specific loans, loan growth, charge-off history and
regional and national economic conditions and trends are the primary factors
considered by management in determining the adequacy of the allowance for loan
and lease losses. At December 31, 1999, non-performing loans as a percent of
total loans was 0.59%, as compared to 0.76% at December 31, 1998. At December
31, 1999, the Company's allowance as a percentage of non-performing loans was
267%, as compared to 207% at December 31, 1998. This increase reflected lower
levels of non-performing loans in 1999, as discussed below.
Noninterest Income
Noninterest income was $191.8 million in 1999 compared to $167.5 million in
1998. The 14.5% increase in 1999 resulted primarily from increases of $14.3
million in customer services income, $10.0 million in trust and investment
advisory services income combined, $9.6 million in bank owned life insurance
("BOLI") income and $7.3 million in insurance commissions, which were offset by
a $12.3 million decrease in mortgage banking services due primarily to the
discontinuation of the correspondent mortgage business and a $5.8 million
decrease in net securities gains.
Customer services income of $69.2 million increased 26% from 1998 and was
attributable to increased fees, including fees charged to non-customers for
using Company ATMs.
Merchant and card product income of $13.1 million increased 37% from 1998
due to increases in card transactions and increases in the customer base. This
income represents fees and interchange income generated by the use of
Company-issued credit and debit cards and charges to merchants for credit card
deposits.
Mortgage banking services income of $20.4 million decreased $12.3 million
during 1999. The decrease resulted from a $18.0 million, or 68%, decrease in
mortgage sales income primarily from the discontinuance of the correspondent
mortgage lending business in January 1999, and a $4.9 million decrease in net
mortgage servicing income due to a 30% decrease in the average total of
mortgages serviced for others. See "Special Charges" below for a discussion of
the cost to discontinue the correspondent mortgage lending business. The
Company's portfolio of residential mortgages serviced for investors was $4.5
billion at December 31, 1999 compared to $5.2 billion and $7.1 billion at
December 31, 1998 and 1997, respectively. Mortgage loans serviced for others
decreased in 1998 primarily as a result of the sale of mortgage servicing rights
relating to $2.9 billion of loans for $78.0 million. Gains on the sales of
mortgage servicing rights totaled $2.6 million and $2.0 million in 1999 and
1998, respectively. Capitalized mortgage servicing rights increased from $45.4
million at December 31, 1998 to $52.7 million at December 31, 1999 due primarily
to lower impairment reserves as a result of rising interest rates. See Note 7 to
the Consolidated Financial Statements. Because mortgage servicing rights are an
interest-rate sensitive asset, the value of the Company's mortgage servicing
rights and the related mortgage banking 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 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 income. See "Asset-Liability
Management." Notwithstanding the foregoing,
13
<PAGE> 10
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 income or that the hedge program will be successful in mitigating the
effects of such a decline.
TABLE 5 - MORTGAGE BANKING SERVICES INCOME
The following table sets forth certain information relating to the
Company's mortgage banking activities at the dates and for the periods
indicated.
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-------------------------------------------------------
1999 1998 1997
-------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Residential mortgages serviced for investors $4,540,948 $5,178,281 $7,050,511
======================================================
Residential mortgage sales income $ 8,617 $ 26,629 $ 14,966
Residential mortgage servicing income, net 8,322 13,243 15,079
Impairment reserve for mortgage servicing rights 4,800 (11,586) --
Valuation adjustment - interest rate floor (3,950) 2,380 --
Gain (loss) on sale of mortgage servicing 2,634 2,028 3,301
------------------------------------------------------
Mortgage banking service income $ 20,423 $ 32,694 $ 33,346
======================================================
</TABLE>
Trust and investment advisory services income of $39.4 million increased
34% during 1999 primarily due to increased assets under management and a branch
office acquisition by Banknorth, as well as strong sales and market conditions
throughout the year. Assets under management were $7.4 billion and $7.1 billion
at December 31, 1999 and 1998, respectively, an increase of 4%.
Insurance commission income was $20.3 million and $13.0 million in 1999 and
1998, respectively. This 56% increase reflected the Company's acquisitions of
insurance agencies in Massachusetts and New Hampshire in the fourth quarter of
1998.
BOLI income was $15.5 million and $5.9 million in 1999 and 1998,
respectively. The increase related to additional purchases of BOLI in 1999 and a
$1.4 million death benefit. The cash surrender value of BOLI was $288.8 million
at December 31, 1999 compared to $109.3 million at December 31, 1998. This
increase reflects both additional purchases of BOLI and increases in cash
surrender value. 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. All such companies were rated AA- or better by
Standard and Poors at December 31, 1999.
Net securities gains amounted to $655 thousand and $6.4 million during 1999
and 1998, respectively. Gains from the sale of securities are subject to market
and economic conditions and, as a result, there can be no assurance that gains
reported in prior periods will be achieved in the future.
Other noninterest income amounted to $13.2 million and $15.6 million during
1999 and 1998, respectively, and consisted primarily of loan fee income. Other
noninterest income in 1998 included a $1.0 million gain on sale of a credit card
portfolio.
Noninterest Expense
Noninterest expense was $498.1 million in 1999 compared to $519.5 million
in 1998. The $21.3 million or 4.1% decrease was largely attributable to a
decrease in special charges ($33.1 million) and a decrease in distributions on
securities of subsidiary trust ($2.4 million). These decreases were partially
offset by increases in data processing expenses ($8.2 million), including Year
2000 costs, and amortization of goodwill and deposit premiums relating to a
branch office acquisition by Banknorth in late 1998 ($3.3 million). Excluding
special charges, noninterest expense increased 3%. The efficiency ratio improved
to 56.45% during 1999 from 59.35% in 1998 primarily as a result of the
efficiencies created by the assimilation of recent acquisitions, as well as
operating improvements.
Salaries and benefits expense of $231.5 million increased less than 1%
during 1999 due to acquisition related savings, which were largely offset by
normal merit raises.
14
<PAGE> 11
Data processing expense increased 20% to $38.8 million in 1999 from $32.3
million during 1998. The increase was due, in part, to the implementation of
system upgrades to accommodate increased volumes and expenditures for Year 2000
initiatives. See "Year 2000" for further discussion.
Occupancy expense increased 8% primarily due to its branch office
acquisition by Banknorth in late 1998. Equipment expense remained consistent
with the prior year during 1999. Amortization of goodwill and deposit premiums
increased 19% during 1999 due primarily to amortization of goodwill related to
the branch office acquisition by Banknorth and the Company's purchases of
insurance agencies in late 1998. Advertising and marketing expense decreased 3%
during 1999, reflecting the synergies from recent acquisitions.
Other noninterest expense, which is comprised primarily of general and
administrative expenses, decreased $735 thousand or less than 1%.
Special Charges
Special charges consist of merger-related expenses of $20.6 million, $61.1
million and $16.4 million during 1999, 1998 and 1997, respectively, as well as
$7.4 million of costs related to the discontinuation of the Company's
correspondent mortgage lending business in 1999 and a $7.2 million charge
related to exiting the lease securitization business, conducted through CFX
Funding, in 1997. On an after-tax basis, special charges amounted to $20.8
million, $45.2 million and $15.5 million for the years ended 1999, 1998 and
1997, respectively. For a tabular analysis of the Company's special charges, see
Note 9 to the Consolidated Financial Statements.
Taxes
The Company's effective tax rate was 33.1% in 1999 compared to 34.0% in
1998.
Comprehensive Income
The Company's comprehensive income amounted to $69.7 million and $132.3
million during 1999 and 1998, respectively. Comprehensive income differed from
the Company's net income in these periods because of a $127.3 million increase
in net unrealized loss on securities during 1999 and a $9.1 million increase in
net unrealized loss on securities during 1998. For additional information, see
the Consolidated Financial Statements.
COMPARISON OF 1998 AND 1997
The Company reported net income of $141.7 million for 1998, or $0.95 per
diluted share, compared with net income of $145.5 million, or $0.98 per diluted
share, reported for 1997. Excluding the impact of special charges, net income
and diluted earnings per share were $186.9 million and $1.25, respectively, for
1998 and $161.0 million and $1.08, respectively, for 1997. Excluding special
charges, return on average assets and return on average equity were 1.19% and
15.78%, respectively, for 1998 and 1.16% and 14.40%, respectively, for 1997.
Net interest income on a fully taxable-equivalent basis totaled $595.2
million during 1998, as compared with $569.8 million in 1997. The $25.4 million,
or 4%, increase in 1998 was primarily attributable to an increase in the average
amount of loans outstanding.
The provision for loan and lease losses was $23.8 million in 1998 compared
to a $15.8 million provision in 1997 as a result of significant loan growth in
commercial and consumer loans and the Company's estimate of future potential
losses. The ratio of the allowance to nonperforming loans at December 31, 1998
was 207% compared to 180% at December 31, 1997. The allowance for loan and lease
losses represented 1.56% of total loans at December 31, 1998 compared to 1.50%
at December 31, 1997. The improved coverage resulted primarily from a decrease
in the amount of the net loan portfolio, due primarily to a lower level of
residential real estate loans.
Noninterest income was $167.5 million and $137.0 million for the years
ended December 31, 1998 and 1997, respectively. Increases of $8.3 million in
customer services income, $5.6 million in trust and investment advisory services
income and $11.1 million in insurance commissions contributed to the $30.6
million, or 22%, increase in 1998. Customer services income of $54.9 million
reflected an 18% growth from 1997. In 1998, the Company recorded a full year of
insurance commissions compared to 1997 since the Company entered the insurance
business in the fourth quarter of 1997.
Noninterest expense was $519.5 million for 1998 compared with $463.9
million for 1997, a 12% increase. The 1998 increase was primarily attributable
to an increase in special charges, salaries and benefits, higher data processing
expense and higher intangible amortization due to recent purchase acquisitions.
The efficiency ratio, which excludes special charges and dividends on the
capital securities, improved from 61.37% in 1997 to 59.35% in 1998.
Average earning assets increased $1.6 billion or 12% in 1998 primarily due
to internal growth in loans and loans held for sale. Average interest-bearing
liabilities increased 13% in 1998 in order to fund the growth in assets.
15
<PAGE> 12
FINANCIAL CONDITION
The Company's consolidated total assets increased by $2.1 billion, or 12%,
from $16.5 billion at December 31, 1998 to $18.5 billion at December 31, 1999.
Shareholders' equity totaled $1.2 billion at December 31, 1999 and 1998.
Earnings for 1999 of $197 million were offset by an increase in the net
unrealized loss on available for sale securities of $127.3 million, as well as
the effects of dividends and share repurchases.
Investment Securities and Other Earning Assets
The average balance of the securities portfolio, which consists of
securities available for sale and securities held to maturity, was $6.3 billion
in 1999 and $3.7 billion in 1998. The increase was primarily in mortgage backed
securities and due to a program undertaken by the Company to offset lower levels
of residential real estate loans and to increase balance sheet leverage. The
portfolio is comprised primarily of U.S. Treasury securities and mortgage-backed
securities, most of which are seasoned 15-year federal agency securities. Other
bonds and notes consist of asset-backed securities, corporate bonds and trust
preferred securities. Other equity securities consist of corporate preferred
stock with no stated maturity.
TABLE 6 - SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
The following table sets forth the Company's investment securities at the
dates indicated.
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
--------------------------------------------------------
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Securities available for sale:
U.S. Government and federal agencies $ 709,497 $ 518,105 $ 762,266
Tax-exempt bonds and notes 56,903 42,455 32,908
Other bonds and notes 455,435 193,167 284,698
Mortgage-backed securities 4,264,364 2,674,133 1,560,627
Collateralized mortgage obligations 723,290 471,159 485,338
--------------------------------------------------------
Total debt securities 6,209,489 3,899,019 3,125,837
Federal Home Loan Bank of Boston stock 261,391 163,227 134,719
Other equity securities 38,422 48,504 59,062
--------------------------------------------------------
Total equity securities 299,813 211,731 193,781
--------------------------------------------------------
Net unrealized gain (loss) (193,271) 3,246 17,801
--------------------------------------------------------
Fair value of securities available for sale $ 6,316,031 $ 4,113,996 $ 3,337,419
========================================================
Securities held to maturity:
U.S. Government and federal agencies $ 2,797 $ 3,582 $ 39,506
Tax-exempt bonds and notes 7,753 9,612 24,856
Other bonds and notes 1,480 2,171 2,924
Asset-backed securities -- 65,350 46,046
Mortgage-backed securities 3,789 174,064 163,192
Collateralized mortgage obligations 541,332 10,999 3,293
--------------------------------------------------------
Amortized cost of securities held to maturity $ 557,151 $ 265,778 $ 279,817
========================================================
Fair value of securities held to maturity $ 535,605 $ 267,161 $ 281,723
========================================================
Excess of fair value over recorded value $ (21,546) $ 1,383 $ 1,906
========================================================
Fair value as a % of amortized cost 96.1% 100.5% 100.7%
</TABLE>
16
<PAGE> 13
TABLE 7 - MATURITIES OF SECURITIES
The following table sets forth the contractual maturities and fully-taxable
equivalent weighted average yields of the Company's debt securities available
for sale at December 31, 1999.
<TABLE>
<CAPTION>
Amortized Cost Maturing in
-------------------------------------------------------------------------------------------
More than
Less Than 1 Year 1 to 5 Years 5 to 10 Years More than 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
---------------- --------------- --------------- ------------------ ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and federal agencies $65,641 5.46% $491,089 5.64% $ 84,550 6.93% $ 68,217 5.71% $ 709,497 5.78%
Tax-exempt bonds and notes 3,893 6.78% 11,556 6.86% 4,493 7.23% 10,914 8.01% 30,856 7.31%
Other bonds and notes 4,793 6.52% 68,607 6.53% 162,143 6.70% 245,939 7.37% 481,482 7.02%
Mortgage-backed securities 911 5.48% 33,966 6.75% 231,215 6.77% 3,998,272 6.51% 4,264,364 6.52%
Collateralized mortgage obligations 106 5.01% 14,308 6.27% 45,758 6.77% 663,118 6.54% 723,290 6.55%
------- -------- -------- ---------- ----------
Total $75,344 5.60% $619,526 5.84% $528,159 6.78% $4,986,460 6.55% $6,209,489 6.49%
======= ======== ======== ========== ==========
</TABLE>
The following table sets forth the maturities and weighted average yields of the
Company's debt securities held to maturity at December 31, 1999.
<TABLE>
<CAPTION>
Amortized Cost Maturing in
------------------------------------------------------------------------------------------
More than
Less Than 1 Year 1 to 5 Years 5 to 10 Years More than 10 Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
---------------- --------------- --------------- ------------------ ----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and federal agencies $ 795 5.45% $ 0 0.00% $ 0 0.00% $ 2,002 8.06% $ 2,797 7.32%
Tax-exempt bonds and notes 1,201 8.53% 3,213 8.85% 2,750 8.66% 571 8.73% 7,753 8.72%
Other bonds and notes -- 0.00% 1,470 10.00% 10 7.00% -- 0.00% 1,480 9.98%
Asset-backed securities -- 0.00% 0 0.00% -- 0.00% -- 0.00% -- 0.00%
Mortgage-backed securities 2,415 5.85% 1,328 6.00% 46 8.50% -- 0.00% 3,789 5.94%
Collateralized mortgage obligations -- 0.00% -- 0.00% -- 0.00% 541,332 7.30% 541,332 7.30%
-------- -------- -------- -------- --------
Total $ 4,411 6.51% $ 6,029 8.50% $ 2,806 8.65% $543,905 7.30% $557,151 7.32%
======== ======== ======== ======== ========
</TABLE>
Securities available for sale are carried at fair value and had a net
unrealized loss of $193.3 million at December 31, 1999 as compared to a net
unrealized gain of $3.2 million at December 31, 1998. See Note 3 to the
Consolidated Financial Statements. These unrealized losses do not impact net
income or regulatory capital but are recorded as adjustments to shareholders'
equity, net of related deferred income taxes. Unrealized losses, net of related
deferred income taxes, are a component of the Company's "Comprehensive Income"
contained in the Consolidated Statement of Changes in Shareholders' Equity. The
Company does not consider any of the unrealized losses to be other than
temporary.
Collateralized mortgage obligations ("CMOs") increased in 1999 primarily
due to the Company's securitization of $633 million of single-family residential
loans during the period.
Mortgage-backed securities and CMOs generally are backed by residential
mortgages with original maturities in excess of 10 years. Such securities have
been included in the above table based on the estimated maturity characteristics
of the underlying loans and not on the scheduled maturities of the securities.
Loans
Residential real estate loans (including loans held for sale) averaged $2.9
billion in 1999 compared to $4.3 billion in 1998, a decrease of 33%. The
decrease in the 1999 average balance resulted primarily from the discontinuation
of the correspondent mortgage business in January 1999 and the securitization of
$633 million of residential real estate loans.
Commercial real estate loans averaged $2.6 billion in 1999 and $2.2 billion
in 1998, a 16% increase. The Company is continuing to focus on lending to small
and medium size business customers within its geographic markets. These loans
consist of loans secured primarily by income-producing commercial real estate,
service industry real estate, multi-family residential real estate and retail
trade real estate, as well as loans for the acquisition, development and
construction of such commercial real estate.
Commercial loans and leases averaged $1.8 billion in 1999 and $1.7 billion
in 1998, an increase of 8%. Included in these amounts are commercial business
leases originated through a subsidiary of one of the Company's banking
subsidiaries. These leases are direct equipment leases, primarily office
equipment, and amounted to $51.2 million at December 31, 1999.
Consumer loans and leases averaged $2.6 billion in 1999 and $2.4 billion in
1998, an increase of 7%. The growth in consumer loans was primarily in indirect
automobile loans and home equity loans. Mobile home loans, which amounted to
$194.0 million at
17
<PAGE> 14
December 31, 1999, continue to decline, reflecting the Company's strategy to
emphasize other types of consumer loans. In June 2000, the Company ceased
originating automobile lease receivables. Automobile lease receivables totaled
$138.2 million at December 31, 1999 compared to $175.9 million at December 31,
1998.
TABLE 8 - COMPOSITION OF LOAN PORTFOLIO
The following table sets forth the composition of the Company's loan portfolio
at the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996
--------------------- --------------------- --------------------- ---------------------
% of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans $ 2,270,417 23.04% $ 3,088,864 31.12% $ 3,798,423 37.94% $ 3,170,151 37.19%
Commercial real estate loans:
Permanent first mortgage loans 2,493,492 25.30% 2,078,725 20.94% 2,022,896 20.20% 1,847,814 21.68%
Construction and development loans 202,825 2.06% 204,372 2.06% 169,053 1.69% 116,707 1.37%
-------------------- -------------------- -------------------- --------------------
Total 2,696,317 27.36% 2,283,097 23.00% 2,191,949 21.89% 1,964,521 23.05%
-------------------- -------------------- -------------------- --------------------
Commercial business loans and leases 1,924,201 19.53% 1,836,412 18.50% 1,569,429 15.67% 1,353,451 15.88%
Consumer loans and leases 2,963,721 30.07% 2,716,764 27.37% 2,452,917 24.50% 2,036,399 23.89%
-------------------- -------------------- -------------------- --------------------
Total loans receivable 9,854,656 100.00% 9,925,137 100.00% 10,012,718 100.00% 8,524,522 100.00%
====== ====== ====== ======
Allowances for loan and lease losses 155,048 155,098 150,615 142,682
----------- ----------- ----------- -----------
Net loans receivable $ 9,699,608 $ 9,770,039 $ 9,862,103 $ 8,381,840
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------
1995
-------------------------
% of
Amount Loans
-------------------------
<S> <C> <C>
Residential real estate loans $2,395,822 35.44%
Commercial real estate loans:
Permanent first mortgage loans 1,543,380 22.83%
Construction and development 86,671 1.28%
------------------------
Total 1,630,051 24.11%
------------------------
Commercial business loans and leases 1,145,379 16.94%
Consumer loans and leases 1,588,594 23.50%
------------------------
Total loans receivable 6,759,846 100.00%
======
Allowances for loan and lease losses 133,043
----------
Net loans receivable $6,626,803
==========
</TABLE>
TABLE 9 - SCHEDULED CONTRACTUAL AMORTIZATION OF LOANS AT DECEMBER 31, 1999
The following table sets forth the scheduled contractual amortization of
the Company's construction and development loans and commercial business loans
and leases at December 31, 1999, as well as the amount of loans which are
scheduled to mature after one year which have fixed or adjustable interest
rates. Demand loans, loans having no schedule of repayments and no stated
maturity and overdraft loans are reported as due in one year or less.
<TABLE>
<CAPTION>
Real Estate
Construction Commercial
and Development Business Loans
Loans and Leases
--------------- --------------
(In thousands)
<S> <C> <C>
Amounts due:
Within one year $ 75,371 $ 934,356
After one year
through five years 79,008 601,665
Beyond five years 48,446 388,180
---------- ----------
Total $ 202,825 $1,924,201
========== ==========
Interest rate terms on amounts due
after one year:
Fixed $ 63,999 $ 591,113
Adjustable 63,455 398,732
</TABLE>
18
<PAGE> 15
ASSET QUALITY
General
The Company monitors its asset quality with lending and credit policies
which require the regular review of its portfolio. The Company maintains an
internal rating system which provides a mechanism to regularly monitor the
credit quality of its loan portfolio.
The Company's residential loan portfolio accounted for 23% of the total
loan portfolio at December 31, 1999, down from 31% at the end of 1998. The
decrease in 1999 resulted primarily from the securitization of $633 million of
residential real estate loans, as well as increased levels of prepayments,
particularly early in the year. The Company's strategy generally is to originate
fixed-rate residential loans for sale to investors in the secondary market. 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 December 31, 1999, 0.76% of the
Company's residential loans were nonperforming, as compared to 0.50% at December
31, 1998, as nonperforming residential real estate loans increased by $1.8
million while the total residential loan portfolio declined by $818 million due
to prepayments, loans sales and the securitization of $633 million of single-
family residential real estate loans in 1999.
The Company's commercial real estate loan portfolio accounted for 27% of
the total loan portfolio at December 31,1999, compared to 23% at December 31,
1998. This portfolio consists primarily of loans secured by income-producing
commercial real estate (including office and industrial buildings), service
industry real estate (including hotels and health care facilities), multi-family
(over four units) residential properties and retail trade real estate (food
stores). At December 31, 1999, 0.66% of the Company's commercial real estate
loans were nonperforming, as compared to 1.25% at December 31, 1998.
The Company's commercial business loan and lease portfolio accounted for
20% of the total loan portfolio at December 31, 1999, compared to 19% at
December 31, 1998. Commercial business loans and leases are generally made to
small to medium size businesses located within the Company's geographic market
area. These loans are not concentrated in any particular industry, but reflect
the broad-based economy of New England. Commercial loans consist primarily of
loans secured by various equipment, machinery and other corporate assets, as
well as loans to provide working capital to business in the form of lines of
credit. At December 31, 1999, 0.89% of the Company's commercial business loans
were nonperforming, as compared to 1.07% at December 31, 1998.
Consumer loans and leases accounted for 30% of the Company's total loan
portfolio at December 31, 1999, compared to 27% at December 31, 1998. At
December 31, 1999, the Company's diversified consumer loan portfolio included
$1.1 billion of automobile loans and leases, $1.1 billion of home equity loans,
$194 million of mobile home loans, $141 million of education loans and $65
million of boat and recreational vehicle loans. The increase in consumer loans
over the prior year was due primarily to growth in automobile and home equity
loans. The growth was consistent with the Company's strategy to provide a full
range of financial services to its customers and to originate loans which are
short-term and offer a higher yield than longer-term mortgage loans. At December
31, 1999, 0.20% of the Company's consumer loans were nonperforming, as compared
to 0.42% at December 31, 1998.
Nonperforming Assets
Nonperforming assets consist of nonperforming loans (which do not include
accruing loans 90 days or more overdue) and other real estate owned and
repossessed assets. Total nonperforming assets as a percentage of total assets
decreased to 0.37% at December 31, 1999, compared to 0.54% at December 31, 1998.
In addition, total nonperforming assets as a percentage of total loans and other
nonperforming assets was 0.70% and 0.90% at December 31, 1999 and 1998,
respectively. See Table 11 for a summary of nonperforming assets for the last
five years.
The Company continues to focus on asset quality issues and to allocate
significant resources to the key asset quality control functions of credit
policy and administration and loan review. The collection, workout and asset
management functions focus on the reduction of nonperforming assets. Despite the
ongoing focus on asset quality and reductions of nonperforming asset levels,
there can be no assurance that adverse changes in the real estate markets and
economic conditions in the Company's primary market areas will not result in
higher nonperforming asset levels in the future and negatively impact the
Company's operations through higher provisions for loan losses, net loan
chargeoffs, decreased accrual of interest income and increased noninterest
expenses as a result of the allocation of resources to the collection and
workout of nonperforming assets.
19
<PAGE> 16
It is the policy of the Company to generally place all commercial real
estate loans and commercial business loans and leases which are 90 days or more
past due, unless secured by sufficient cash or other assets immediately
convertible to cash, on nonaccrual status. Residential real estate loans and
consumer loans and leases are placed on nonaccrual status generally when in
management's judgment the collectability of interest and/or principal is
doubtful. At December 31, 1999, the Company had $12.1 million of accruing loans
which were 90 days or more delinquent, as compared to $24.5 million and $11.0
million of such loans at December 31, 1998 and 1997, respectively. The increase
at year-end 1998 was primarily attributable to an increase in residential real
estate loans over 90 days delinquent, which were well secured and in the process
of collection.
It is also the policy of the Company to place on nonaccrual and therefore
nonperforming status loans currently less than 90 days past due or performing in
accordance with their terms but which in management's judgment are likely to
present future principal and/or interest repayment problems and which thus
ultimately would be classified as nonperforming.
Net Charge-offs
Net charge-offs were $23.6 million during 1999, as compared to $21.5
million in 1998. Net charge-offs in 1999 represented .24% of average loans and
leases outstanding, as compared to .20% in 1998. Decreased gross charge-offs in
1999 compared to 1998 were primarily due to real estate loans, while decreased
recoveries related primarily to commercial real estate loans. See Table 3.
TABLE 10 - NET CHARGE-OFFS AS A PERCENT OF AVERAGE LOANS OUTSTANDING
The following table sets forth net charge-offs to average loans outstanding
by type of loan during the periods indicated.
<TABLE>
<CAPTION>
Net Charge-offs to
Average Loans Outstanding
-------------------------
1999 1998
---- ----
<S> <C> <C>
Real estate loans 0.10% 0.05%
Commercial business loans and leases 0.11% 0.22%
Consumer loans and leases 0.58% 0.55%
---- ----
Total 0.24% 0.20%
==== ====
</TABLE>
See Table 3 for more information concerning charge-offs and recoveries during
each of the past five years.
20
<PAGE> 17
TABLE 11 - FIVE YEAR SCHEDULE OF NON-PERFORMING ASSETS
The following table sets forth information regarding nonperforming assets at the
dates indicated.
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1999 1998 1997 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Residential real estate loans:
Nonaccrual loans $ 17,283 $ 15,503 $ 24,344 $ 21,568 $ 23,410
Troubled debt restructurings 28 32 36 39 85
----------------------------------------------------------------
Total 17,311 15,535 24,380 21,607 23,495
----------------------------------------------------------------
Commercial real estate loans:
Nonaccrual loans 16,754 22,481 23,769 26,410 29,666
Troubled debt restructurings 1,002 5,946 3,428 5,181 8,351
----------------------------------------------------------------
Total 17,756 28,427 27,197 31,591 38,017
----------------------------------------------------------------
Commercial business loans and leases:
Nonaccrual loans 17,027 18,736 22,305 18,046 14,731
Troubled debt restructurings 82 874 114 615 1,897
----------------------------------------------------------------
Total 17,109 19,610 22,419 18,661 16,628
----------------------------------------------------------------
Consumer loans:
Nonaccrual loans 5,951 11,455 9,743 5,805 4,189
Troubled debt restructurings -- 5 6 10 55
----------------------------------------------------------------
Total 5,951 11,460 9,749 5,815 4,244
----------------------------------------------------------------
Total nonperforming loans:
Nonaccrual loans 57,015 68,175 80,161 71,829 71,996
Troubled debt restructurings 1,112 6,857 3,584 5,845 10,388
----------------------------------------------------------------
Total 58,127 75,032 83,745 77,674 82,384
----------------------------------------------------------------
Other nonperforming assets:
Other real estate owned, net of related reserves 8,154 10,354 10,508 17,008 20,950
Repossession, net of related reserves 2,911 3,635 3,872 2,325 1,629
----------------------------------------------------------------
Total 11,065 13,989 14,380 19,333 22,579
----------------------------------------------------------------
Total nonperforming assets $ 69,192 $ 89,021 $ 98,125 $ 97,007 $104,963
================================================================
Accruing loans 90 days overdue $ 12,131 $ 24,450 $ 11,048 $ 11,090 $ 7,376
================================================================
Total nonperforming loans as a percentage of total loans 0.59% 0.76% 0.84% 0.91% 1.22%
Total nonperforming assets as a percentage of total assets 0.37% 0.54% 0.64% 0.75% 1.02%
Total nonperforming assets as a percentage of total loans
and other non-performing assets 0.70% 0.90% 0.98% 1.14% 1.55%
</TABLE>
Deposits
Average interest-bearing deposits increased by $183 million, or 2%, during
1999 to $10.0 billion. Average retail certificates of deposit decreased $78.9
million during 1999 to $4.6 billion. The average rate paid on certificates of
deposit decreased from 5.45% in 1998 to 5.02% in 1999. See Table 13 for the
scheduled maturities of certificates of deposits of $100,000 or more. As part of
its overall funding strategy, the Company uses deposits obtained through
investment banking firms which obtain funds from their customers for deposit
with the Company ("brokered deposits"). These brokered deposits (which include
short-term certificates of deposit and money market accounts) averaged $180
million and $283 million in 1999 and 1998, respectively. The average rate paid
on brokered deposits was 5.37% in 1999 compared to 5.83% in 1998. Other
interest-bearing deposits (savings, NOW and money market accounts), increased 8%
in 1999 to $5.2 billion from $4.8 billion in 1998. The average rate paid on
these deposits declined from 2.77% in 1998 to 2.55% in 1999.
Average demand deposit accounts increased 10% in 1999 to $1.8 billion from
$1.6 billion in 1998. The increase in demand deposits was consistent with the
Company's increased marketing of these accounts.
21
<PAGE> 18
TABLE 12 - CHANGE IN DEPOSIT BALANCES BY CATEGORY OF DEPOSITS
The following table presents the changes in the balances of deposits outstanding
at the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31, 1999-1998 Change
----------------------------------------------------- -------------------------
(Dollars in thousands) 1999 1998 1997 Amount Percent
----------------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
Demand deposits $ 1,821,764 $ 1,851,929 $ 1,585,700 $ (30,165) -1.63%
Money market access/NOW accounts 3,698,934 3,564,737 2,933,066 134,917 3.76%
Savings accounts 1,567,776 1,613,060 1,665,187 (45,284) -2.81%
Certificates of deposit 4,448,229 4,728,916 4,654,467 (280,687) -5.94%
Brokered deposits 173,798 257,570 249,990 (83,772) -32.52%
----------------------------------------------------- ------------------------
Total deposits $11,710,501 $12,016,212 $11,088,410 $ (305,711) -2.54%
===================================================== ========================
</TABLE>
TABLE 13 - MATURITY OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT DECEMBER
31, 1999
The following table sets forth the scheduled maturity of certificates of deposit
of $100,000 or more at December 31, 1999.
<TABLE>
<CAPTION>
Balance Percent
------- -------
(Dollars in thousands)
<S> <C> <C>
3 months or less $400,251 42.02%
Over 3 to 6 months 248,221 26.06%
Over 6 to 12 months 195,932 20.57%
More than 12 months 108,142 11.35%
-------- ------
$952,546 100.00%
======== ======
</TABLE>
Other Funding Sources
Average borrowed funds for 1999 were $4.4 billion, compared with
$2.8 billion in 1998. The increase in borrowed funds was utilized in part to
fund higher levels of investment securities. The Company's primary sources of
funds, other than deposits, are securities sold under repurchase agreements and
advances from the Federal Home Loan Bank of Boston ("FHLB"). Average FHLB
borrowings increased because growth in average earning assets exceeded growth in
deposits. FHLB collateral consists primarily of first mortgage loans secured by
single-family properties, certain unencumbered securities and other qualified
assets. At December 31, 1999, FHLB borrowings amounted to $4.0 billion. The
Company's additional borrowing capacity with the FHLB at December 31, 1999 was
approximately $1.5 billion. See Note 11 to the Consolidated Financial
Statements.
At December 31, 1999 and 1998, securities sold under repurchase agreements
amounted to $1.3 billion and $800.5 million, respectively, and were
collateralized by mortgage-backed securities and U.S. Government obligations.
See Note 10 to the Consolidated Financial Statements.
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.
22
<PAGE> 19
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 Board and monitored periodically by a
committee of the Board. The Board delegates responsibility for asset-liability
management to the corporate Liquidity and Funds Management Committee ("LFMC"),
which is comprised of members of senior management and sets strategic directives
that guide the day-to-day asset-liability management activities of the Company.
The LFMC also reviews and approves all major risk, liquidity and capital
management programs.
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 is 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 the Company'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 LFMC. 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 exposures 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, the 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, 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 in to the model.
In the case of prepayment of mortgage assets, assumptions are derived from
published dealer median prepayment estimates for comparable mortgage loans.
23
<PAGE> 20
The Company manages the interest-rate risk inherent in its core banking
operations primarily using on-balance sheet instruments, 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 December 31, 1999, the Company had interest rate floor
agreements in the notional amount of $495 million, of which $200 million were
used to hedge mortgage servicing rights as discussed below, and $295 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 December 31, 1999, 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 December 31, 1999 the Company also has $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 Board's policy on interest-rate risk simulation specifies that if
interest rates were to shift immediately 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 December 31, 1999. The
Company also monitors gradual changes in market interest rates, which it
believes better represents its exposure to net interest income. The following
table reflects the estimated percentage exposure of the Company's net interest
income for the following 12 months assuming a gradual shift in market interest
rates of 100 and 200 basis points, respectively.
<TABLE>
<CAPTION>
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point
Rate Increase Rate Increase Rate Decrease Rate Decrease
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
December 31, 1999 (3.11)% (1.72)% 1.57% 0.96%
==== ==== ==== ====
</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 and various cash instruments to
mitigate the prepayment risk associated with mortgage servicing rights (see
"Non-Interest Income" for further details). 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 the date indicated of the
carrying value of mortgage servicing rights and identified hedge 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
December 31, 1999 Rate Decrease Rate Decrease Rate Increase Rate Increase
------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage servicing rights $(21,200) $ (8,800) $ 7,000 $ 10,600
Interest rate floors 7,100 2,600 (1,000) (1,200)
U.S. Treasury bonds 6,000 2,600 (2,200) (3,900)
Principal only strips 5,700 2,800 (1,600) (2,200)
---------------------------------------------------------------------
Net exposure $ (2,400) $ (800) $ 2,200 $ 3,300
=====================================================================
</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.
24
<PAGE> 21
The most significant factors affecting market risk exposure of net interest
income during 1999 were (i) the increases in market interest rates, (ii) changes
in the composition of mortgage assets, (iii) increase and diversification of
assets and off-balance sheet interest-rate instruments used to hedge mortgage
servicing rights and (iv) changes in the composition of interest-bearing
deposits and borrowings.
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
On a parent-only basis, the Company's commitments and debt service
requirements at December 31, 1999, consisted primarily of $98.8 million of
junior subordinated debentures (including accrued interest) issued to two
subsidiaries, $68.8 million to Peoples Heritage Capital Trust I and $30 million
to Banknorth Capital Trust I, in connection with the issuance of 9.06% Capital
Securities due 2027 and 10.52% Capital Securities due 2027, respectively. See
Notes 12 and 18 to the Consolidated Financial Statements. The principal sources
of funds for the Company to meet parent-only obligations are dividends from its
banking subsidiaries, which are subject to regulatory limitations. See Note 13
to the Consolidated Financial Statements. Other sources of funds available to
the Company on a parent-only basis include borrowings from public and private
sources.
For banking subsidiaries of the Company, liquidity represents the ability
to meet both loan commitments and deposit withdrawals. Funds to meet these needs
generally can be obtained by converting liquid assets to cash or by attracting
new deposits or other sources of funding. 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 in-market deposit sources, banks have many other
sources of liquidity, including proceeds from maturing securities and loans, the
sale of securities, asset securitizations and other non-relationship funding
sources, such as FHLB borrowings, senior or subordinated debt, commercial paper
and wholesale purchased funds. Management believes that the high proportion of
residential and installment consumer loans in its banks' loan portfolios also
provides a significant amount of contingent liquidity through the conventional
securitization programs that exist today.
Management believes that the level of liquidity is sufficient to meet
current and future funding requirements. For additional information regarding
off-balance sheet risks and commitments, see Note 14 to the Consolidated
Financial Statements.
CAPITAL
At December 31, 1999 and 1998, shareholders' equity totaled $1.2 billion or
6.44% and 7.43% of total assets at December 31, 1999 and 1998, respectively. The
changes in shareholders' equity included the $127.3 million increase in net
unrealized loss on securities available for sale, $54 million of stock
repurchases (2,941,800 shares) and $65 million in dividends to shareholders,
which were partially offset by the Company's net income during 1999.
Capital guidelines issued by the Federal Reserve Board require the Company
to maintain certain ratios. The Company's Tier 1 Capital, as defined by the
Federal Reserve Board, was $1.2 billion or 6.75% of average assets at December
31, 1999, compared to $1.1 billion or 7.22% of average assets at December 31,
1998. The Company's regulatory capital ratios currently exceed all applicable
requirements. See Note 13 to the Consolidated Financial Statements.
The Company's banking subsidiaries also are subject to federal regulatory
capital requirements. At December 31, 1999, 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 regulatory
capital requirements.
25
<PAGE> 22
YEAR 2000
The Company has not experienced any significant disruptions to its
financial or operating activities caused by failure of its computerized systems
resulting from Year 2000 issues. Management does not expect Year 2000 issues to
have a material adverse effect on the Company's operations or financial results
in 2000.
The Company does not separately track the internal costs incurred for the
Year 2000 expenses, except for the dedicated salary of the project coordinator.
The vast majority of internal costs related to the payroll cost for staff
assigned to the Year 2000 project team and Company personnel assigned to testing
the changes resulting from the Year 2000 effort. The Company incurred
approximately $2.9 million in incremental costs in 1999 for Year 2000 work. All
Year 2000 costs were expensed as incurred and were funded out of the Company's
operating cash flow.
IMPACT ON NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("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, which is effective for years beginning January 1, 2000,
is not expected to have a significant impact on the Company's financial
condition or results of operations. In May 1999, the FASB issued an exposure
draft to amend SFAS No. 133 to defer the effective date to January 1, 2001.
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 these 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 polices of the U.S. Government,
changes in government regulations 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 anticipated or
unanticipated events or circumstances after the date of such statements.
26
<PAGE> 23
BANKNORTH GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except number of shares and per share data) December 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 546,816 $ 580,261
Federal funds sold and other short-term investments 229,579 288,778
Securities available for sale, at market value 6,316,031 4,113,996
Securities held to maturity, market value $535,605 in 1999
and $267,161 in 1998 557,151 265,778
Loans held for sale, market value $82,382 in 1999
and $561,620 in 1998 82,318 560,750
Loans and leases 9,854,656 9,925,137
Less: Allowance for loan and lease losses 155,048 155,098
----------- -----------
Net loans and leases 9,699,608 9,770,039
----------- -----------
Premises and equipment 192,540 195,510
Goodwill and other intangibles 184,381 204,587
Mortgage servicing rights 52,724 45,439
Bank owned life insurance 288,783 109,250
Other assets 358,333 318,732
----------- -----------
Total assets $18,508,264 $16,453,120
=========== ===========
LIABILITIES AND SHAREHOLDERS'S EQUITY
Deposits:
Savings accounts $ 1,567,776 $ 1,613,060
Money market access and NOW accounts 3,698,934 3,564,737
Certificates of deposit (including certificates of $100 or more of
$952,546 in 1999 and $970,808 in 1998) 4,448,229 4,728,916
Brokered deposits 173,798 257,570
Demand deposits 1,821,764 1,851,929
----------- -----------
Total deposits 11,710,501 12,016,212
Federal funds purchased and securities sold under repurchase agreements 1,302,821 830,926
Borrowings from the Federal Home Loan Bank of Boston 3,997,819 2,032,647
Other borrowings 66,838 46,600
Other liabilities 139,236 174,345
----------- -----------
Total liabilities 17,217,215 15,100,730
----------- -----------
Company obligated, mandatorily redeemable securities of subsidiary trusts
holding solely parent junior subordinated debentures 98,775 130,000
Shareholders' equity:
Preferred stock, par value $0.01; 5,000,000 shares authorized,
none issued -- --
Common stock, par value $0.01; 200,000,000 shares authorized,
149,623,204 issued in 1999 and 149,624,400 in 1998 1,496 1,496
Paid-in capital 617,523 618,624
Retained earnings 787,238 669,357
Unearned compensation (2,751) (3,756)
Accumulated other comprehensive income (125,394) 1,858
Treasury stock at cost (4,649,306 shares in 1999 and 3,519,704 shares in 1998) (85,838) (65,189)
----------- -----------
Total shareholders' equity 1,192,274 1,222,390
----------- -----------
$18,508,264 $16,453,120
=========== ===========
</TABLE>
See accompanying notes to Consolidated Financial Statements.
27
<PAGE> 24
BANKNORTH GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(In thousands, except
number of shares and per share data) Year Ended December 31,
------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans and leases $ 826,565 $ 908,944 $ 823,414
Interest and dividends on securities 400,954 237,216 232,613
------------ ------------ ------------
Total interest and dividend income 1,227,519 1,146,160 1,056,027
------------ ------------ ------------
Interest expense:
Interest on deposits 373,526 405,416 370,921
Interest on borrowed funds 229,764 150,228 118,760
------------ ------------ ------------
Total interest expense 603,290 555,644 489,681
------------ ------------ ------------
Net interest income 624,229 590,516 566,346
Provision for loan and lease losses 23,575 23,775 15,763
Net interest income after provision
for loan and lease losses 600,654 566,741 550,583
------------ ------------ ------------
Noninterest income:
Customer services 69,197 54,897 46,619
Mortgage banking services 20,423 32,694 33,346
Trust and investment advisory services 39,378 29,428 23,844
Insurance commissions 20,289 13,006 1,899
Net securities gains 655 6,423 2,837
Bank owned life insurance 15,522 5,934 2,328
Merchant and card product income 13,126 9,615 7,920
Other noninterest income 13,205 15,550 18,188
------------ ------------ ------------
191,795 167,547 136,981
------------ ------------ ------------
Noninterest expenses:
Salaries and employee benefits 231,500 230,433 219,191
Data processing 38,806 32,288 27,065
Occupancy 39,326 36,637 35,000
Equipment 30,205 30,013 31,039
Amortization of goodwill and deposit premiums 20,642 17,354 14,029
Distributions of securities of subsidiary trusts 9,834 12,216 10,455
Advertising and marketing 14,172 14,675 14,426
Special charges 28,002 61,140 23,559
Other noninterest expenses 85,655 84,710 89,124
------------ ------------ ------------
498,142 519,466 463,888
------------ ------------ ------------
Income before income tax expense 294,307 214,822 223,676
Applicable income tax expense 97,349 73,078 78,188
------------ ------------ ------------
Net income $ 196,958 $ 141,744 $ 145,488
============ ============ ============
Weighted average shares outstanding:
Basic 145,757,788 146,119,422 145,481,258
Diluted 147,427,667 148,964,639 148,600,118
Earnings per share:
Basic $ 1.35 $ 0.97 $ 1.00
Diluted 1.34 0.95 0.98
</TABLE>
See accompanying notes to Consolidated Financial Statements.
28
<PAGE> 25
BANKNORTH GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except number of shares and per share data)
<TABLE>
<CAPTION>
Unearned
Par Paid-in Retained Compen-
Value Capital Earnings sation
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances at December 31, 1996 $ 1,337 $ 595,470 $ 503,588 $ (5,654)
Net income -- -- 145,488 --
Unrealized gains on securities,
net of reclassification adjustment(1) -- -- -- --
Comprehensive income
Common stock issued for employee benefit plans 7 4,846 -- --
Treasury stock issued for employee benefit plans -- 23 (3,102) (98)
Treasury stock purchased -- -- -- --
Issuance of restricted stock -- 3,335 (4) (315)
Amortization of employee restricted stock -- 851 -- (82)
Common stock issued for acquisitions -- (5) 2,572 --
Decrease in unearned compensation - ESOP -- 901 -- 836
Cash dividends paid -- -- (57,608) --
Common stock dividends declared 1 1,761 (1,769) --
2 for 1 stock split 143 (143) -- --
Pooled company transactions (4) (4,405) (382) --
--------------------------------------------------------------
Balances at December 31, 1997 1,484 602,634 588,783 (5,313)
Net income -- -- 141,744 --
Unrealized losses on securities,
net of reclassification adjustment(1) -- -- -- --
Minimum pension liability
Comprehensive income
Cancellation of treasury shares at acquisition (3) (4,996) -- --
Common stock issued for employee benefit plans 11 10,387 -- (545)
Treasury stock issued for employee benefit plans -- -- (4,164) --
Treasury stock purchased -- -- -- --
Issuance of restricted stock -- 426 (37) (254)
Amortization of employee restricted stock -- 259 -- 538
Common stock issued for acquisitions 4 8,538 -- --
Decrease in unearned compensation - ESOP -- 1,376 -- 1,818
Cash dividends paid -- -- (57,231) --
Pooled company transactions 262
--------------------------------------------------------------
Balances at December 31, 1998 1,496 618,624 669,357 (3,756)
Net income -- -- 196,958 --
Unrealized losses on securities,
net of reclassification adjustment(1) -- -- -- --
Comprehensive income
Premium on repurchase of trust preferred securities -- (1,801) -- --
Treasury stock issued for employee benefit plans -- (4) (13,396) --
Treasury stock purchased -- -- -- --
Issuance of restricted stock -- 176 (313) (655)
Amortization of employee restricted stock -- (813) -- 929
Decrease in unearned compensation - ESOP -- 1,341 -- 731
Cash dividends paid -- -- (65,368) --
--------------------------------------------------------------
Balances at December 31, 1999 $ 1,496 $ 617,523 $ 787,238 $ (2,751)
==============================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated Other
Treasury Comprehensive
Stock Income (Loss) Total
--------------------------------------------
<S> <C> <C> <C>
Balances at December 31, 1996 $ (5,758) $ (1,093) $ 1,087,890
Net income -- -- 145,488
Unrealized gains on securities,
net of reclassification adjustment(1) -- 12,349 12,349
-----------
Comprehensive income 157,837
-----------
Common stock issued for employee benefit plans -- -- 4,853
Treasury stock issued for employee benefit plans 14,356 -- 11,179
Treasury stock purchased (50,105) -- (50,105)
Issuance of restricted stock 315 -- 3,331
Amortization of employee restricted stock -- -- 769
Common stock issued for acquisitions 6,731 -- 9,298
Decrease in unearned compensation - ESOP -- -- 1,737
Cash dividends paid -- -- (57,608)
Common stock dividends declared -- -- (7)
2 for 1 stock split -- -- (0)
Pooled company transactions -- -- (4,791)
---------------------------------------------
Balances at December 31, 1997 (34,461) 11,256 1,164,383
Net income -- -- 141,744
Unrealized losses on securities,
net of reclassification adjustment(1) -- (9,148) (9,148)
Minimum pension liability (250) (250)
-----------
Comprehensive income 132,346
-----------
Cancellation of treasury shares at acquisition (41) -- (5,040)
Common stock issued for employee benefit plans -- -- 9,853
Treasury stock issued for employee benefit plans 17,479 -- 13,315
Treasury stock purchased (50,300) -- (50,300)
Issuance of restricted stock 213 -- 348
Amortization of employee restricted stock -- -- 797
Common stock issued for acquisitions -- -- 8,542
Decrease in unearned compensation - ESOP -- -- 3,194
Cash dividends paid -- -- (57,231)
Pooled company transactions 1,921 2,183
---------------------------------------------
Balances at December 31, 1998 (65,189) 1,858 1,222,390
Net income -- -- 196,958
Unrealized losses on securities,
net of reclassification adjustment(1) -- (127,252) (127,252)
-----------
Comprehensive income 69,706
-----------
Premium on repurchase of trust preferred securities -- -- (1,801)
Treasury stock issued for employee benefit plans 31,752 -- 18,352
Treasury stock purchased (53,745) -- (53,745)
Issuance of restricted stock 1,344 -- 552
Amortization of employee restricted stock -- -- 116
Decrease in unearned compensation - ESOP -- -- 2,072
Cash dividends paid -- -- (65,368)
---------------------------------------------
Balances at December 31, 1999 $ (85,838) $ (125,394) $ 1,192,274
=============================================
</TABLE>
(1) Disclosure of reclassification amount (all amounts net of tax):
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the period $(126,842) $ (4,946) $ 14,190
Less: reclassification adjustment for net gains included in net income 410 4,202 1,841
---------------------------------------
Net unrealized gains (losses) on securities $(127,252) $ (9,148) $ 12,349
=======================================
</TABLE>
See accompanying notes to Consolidated Financial Statements.
29
<PAGE> 26
BANKNORTH GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31,
--------------------------------------------------------
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 196,958 $ 141,744 $ 145,488
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Provision for loan and lease losses 23,575 23,775 15,763
Provision for depreciation 26,975 25,939 25,648
Amortization of goodwill and other intangibles 20,642 17,354 14,029
Net (increase) decrease in net deferred tax assets (920) 18,693 12,040
ESOP and restricted stock expense 2,072 3,194 1,737
Amortization of employee restricted stock 116 797 769
Issuance of restricted stock units 552 348 100
Net (gains) losses realized from sales of securities and
consumer loans (655) (6,423) (2,750)
Net (gains) losses realized from sales of loans held for sale 415 (21,870) (13,031)
Earnings from bank owned life insurance (14,133) (5,934) (2,328)
Net decrease (increase) in mortgage servicing rights (7,285) 20,164 (20,189)
Proceeds from sales of loans held for sale 1,118,166 5,532,324 3,349,449
Residential loans originated and purchased for sale (640,149) (5,639,625) (3,556,865)
Net decrease (increase) in interest and dividends
receivable and other assets (11,300) (42,290) (51,091)
Net increase (decrease) in other liabilities 13,957 6,796 (3,182)
-------------------------------------------------------
Net cash provided (used) by operating activities 728,986 74,986 (84,413)
-------------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities and principal repayments of
securities held to maturity 96,226 134,625 121,327
Purchase of securities held to maturity -- (148,553) (93,921)
Proceeds from sales of securities available for sale 44,330 787,459 337,505
Proceeds from maturities and principal repayments of
securities available for sale 1,754,826 1,434,137 1,073,213
Purchases of securities available for sale (3,958,537) (2,983,722) (1,950,205)
Net (increase) decrease in loans and leases (586,876) 173,153 (1,257,719)
Proceeds from sales of loans -- -- 36,502
Net additions to premises and equipment (24,006) (27,992) (26,166)
Purchase of bank owned life insurance (165,400) -- (40,000)
Payment for acquisitions, net of cash acquired -- 122,526 (28,261)
-------------------------------------------------------
Net cash provided (used) by investing activities (2,839,437) (508,367) (1,827,725)
-------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in deposits (305,711) 637,791 737,776
Net increase (decrease) in securities sold under
repurchase agreements 502,340 88,569 60,672
Proceeds from Federal Home Loan Bank of Boston borrowings 5,003,333 3,357,550 2,050,283
Payments on Federal Home Loan Bank of Boston borrowings (3,038,162) (3,197,979) (1,184,822)
Proceeds from issuance (repurchase) of securities of
subsidiary trusts (33,026) -- 128,361
Net increase (decrease) in other borrowings 20,238 (8,052) (8,234)
Issuance of common stock 18,353 23,673 17,105
Purchase of treasury stock (53,745) (55,340) (55,981)
Cash dividends paid to shareholders (65,368) (57,231) (57,608)
-------------------------------------------------------
Net cash provided by financing activities 2,048,252 788,981 1,687,552
-------------------------------------------------------
Increase (decrease) in cash and cash equivalents (62,199) 355,600 (224,586)
Cash and cash equivalents at beginning of period 838,594 482,994 707,580
--------------------------------------------------------
Cash and cash equivalents at end of period $ 776,395 $ 838,594 $ 482,994
=======================================================
In conjunction with the purchase acquisitions detailed in Note 2 to the Consolidated Financial Statements, assets were acquired
and liabilities were assumed as follows:
Fair value of assets acquired -- $ 123,311 $ 21,424
Less liabilities assumed -- 292,079 12,122
</TABLE>
--------------------------------------------------------------------------------
For the years ended December 31, 1999, 1998 and 1997, interest of $ 599,981,
$563,557 and $ 481,280 and income taxes of $ 77,436, $ 56,995 and $ 58,747 were
paid, respectively. During 1999 and 1998, $ 245,233 and $ 28,184 of investment
securities were transferred to securities available for sale. During 1999,
$632,735 of portfolio loans were transferred to loans held to maturity.
--------------------------------------------------------------------------------
See accompanying notes to Consolidated Financial Statements.
30
<PAGE> 27
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts expressed in thousands, except share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Banknorth Group, Inc. (the
"Company") and its subsidiaries conform to generally accepted accounting
principles and to general practice within the banking industry. The Company's
principal business activities are retail, commercial and mortgage banking as
well as trust, investment advisory and insurance brokerage services, and are
conducted through the Company's direct and indirect subsidiaries located in
Maine, New Hampshire, Massachusetts and Connecticut, Vermont and New York,
consisting of Peoples Heritage Bank, N.A., Bank of New Hampshire, N.A., First
Massachusetts, N.A., Franklin Lamoille Bank, N.A., First Vermont Bank, N.A., The
Howard Bank, N.A.,The Stratevest Group, N.A., and Evergreen Bank N.A.,
respectively (collectively, the "Banks"), as well as wholly-owned subsidiaries
of the Banks. The Company and its subsidiaries are subject to regulation of, and
periodic examination by, the Office of the Comptroller of Currency and the
Federal Reserve Board, among other agencies. The following is a description of
the more significant accounting policies.
Financial Statement Presentation.
The Consolidated Financial Statements include the accounts of Banknorth
Group, Inc. and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Certain amounts in prior
periods have been reclassified to conform to the current presentation.
The Consolidated Financial Statements have been restated to reflect the
Company's acquisition of Banknorth Group, Inc. on May 10, 2000 which was
accounted for as a pooling-of-interests. In accordance with accounting
requirements for pooling-of-interests business combinations, the financial
statements of the Company and Banknorth have been combined based on historical
financial statements as previously reported by each company. See Note 2 -
"Acquisitions".
Assets held in a fiduciary capacity by subsidiary trust departments are not
assets of the Company and, accordingly, are not included in the Consolidated
Balance Sheets.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amount of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
change relate to the determination of the allowance for loan and lease losses,
deferred tax assets and the valuation of mortgage servicing rights.
Cash and Cash Equivalents.
The Company is required to comply with various laws and regulations of the
Federal Reserve Bank which require that the Company maintain certain amounts of
cash on deposit and is restricted from investing those amounts.
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks federal funds sold and other short-term investments
minus federal funds purchased. Generally, federal funds are sold or purchased
for one-day periods.
Securities.
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost.
Investments not classified as "held to maturity" are classified as
"available for sale." Securities available for sale consist of debt and equity
securities that are available for sale in response to changes in market interest
rates, liquidity needs, changes in funding sources and other similar factors.
These assets are specifically identified and are carried at market value.
Changes in market value, net of applicable income taxes, are reported as a
separate component of shareholders' equity and comprehensive income. When a
decline in market value of a security is considered other than temporary, the
loss is charged to net securities gains (losses) in the consolidated statements
of income as a writedown.
Premiums and discounts are amortized and accreted over the term of the
securities on a level yield method adjusted for prepayments. Gains and losses on
the sale of securities are recognized at the time of the sale using the specific
identification method.
31
<PAGE> 28
Loans.
Loans are carried at the principal amounts outstanding adjusted by partial
charge-offs and net deferred loan costs or fees. Except for residential real
estate and consumer loans, loans are generally placed on nonaccrual status when
they are past due 90 days as to either principal or interest, or when in
management's judgment the collectibility of interest or principal of the loan
has been significantly impaired. When a loan has been placed on nonaccrual
status, previously accrued and uncollected interest is reversed against interest
on loans. A loan can be returned to accrual status when collectibility of
principal is reasonably assured and the loan has performed for a period of time,
generally six months. Loans are classified as impaired when it is probable that
the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status and collateral value.
Loan origination and commitment fees and certain direct origination costs
are deferred, and the net amount is amortized as an adjustment of the related
loan's yield using the interest method over the contractual life of the related
loans.
Consumer lease financing loans are carried at the amount of minimum lease
payments plus residual values, less unearned income which is amortized into
interest income using the interest method.
Allowance for Loan and Lease Losses.
The allowance for loan and lease losses is maintained at a level determined
to be adequate by management to absorb future charge-offs of loans and leases
deemed uncollectable. This allowance is increased by provisions charged to
operating expense and by recoveries on loans previously charged off, and reduced
by charge-offs on loans and leases.
Arriving at an appropriate level of allowance for loan and lease losses
necessarily involves a high degree of judgment. Primary considerations in this
evaluation are prior loan loss experience, the character and size of the loan
portfolio, business and economic conditions and management's estimation of
future potential losses. The Company evaluates the commercial loan portfolio by
using a loan by loan analysis of a significant portion of "classified" loans and
calculating a reserve requirement on these loans. Based on these results, loss
factors are applied to the remaining portfolio to calculate a range of possible
loan losses. Loss factors are calculated based on the assigned risk rating, and
are regularly updated based on the Company's actual loss experience. Residential
real estate and consumer loans are evaluated as a group by applying historical
charge-off and recovery experience to the current outstanding balance in each
loan category, with consideration given to loan growth over the preceding twelve
months. Although management uses available information to establish the
appropriate level of the allowance for loan and lease losses, future additions
to the allowance may be necessary based on estimates that are susceptible to
change as a result of changes in economic conditions and other factors. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Company's allowance for loan and lease losses.
Such agencies may require the Company to recognize adjustments to the allowance
based on their judgments about information available to them at the time of
their examination.
Bank Owned Life Insurance
Bank owned life insurance (BOLI) represents life insurance on the lives of
certain employees. The Company is the beneficiary of the insurance policies.
Increases in the cash value of the policies, as well as insurance proceeds
received, are recorded in other income, and are not subject to income taxes. The
cash value is included in other assets.
Premises and Equipment.
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of related assets.
Long-lived assets are evaluated periodically for impairment. An assessment
of recoverability is performed prior to any writedown of the asset. If
circumstances suggest that their value may be impaired, an expense would then be
charged in the current period.
Goodwill and Other Intangibles.
Goodwill is amortized on a straight-line basis over various periods not
exceeding twenty years; core deposit premiums are amortized on a level-yield
basis over the estimated life of the associated deposits. Goodwill and other
intangible assets are reviewed for possible impairment when it is determined
that events or changed circumstances may affect the underlying basis of the
asset.
32
<PAGE> 29
Mortgage Banking and Loans Held for Sale.
Loans originated for sale are classified as held for sale. These loans are
specifically identified and carried at the lower of aggregate cost or estimated
market value. Forward commitments to sell residential real estate mortgages are
contracts that the Company enters into for the purpose of reducing the market
risk associated with originating loans for sale. Market value is estimated based
on outstanding investor commitments or, in the absence of such commitments,
current investor yield requirements.
Gains and losses on sales of mortgage loans are determined using the
specific identification method and recorded as mortgage sales income, a
component of mortgage banking services income. The gains and losses resulting
from the sales of loans with servicing retained are adjusted to recognize the
present value of future servicing fee income over the estimated lives of the
related loans. Purchased mortgage servicing rights are recorded at cost upon
acquisition.
Mortgage servicing rights are amortized on an accelerated method over the
estimated weighted average life of the loans. Amortization is recorded as a
charge against mortgage service fee income, a component of mortgage banking
services income. The Company's assumptions with respect to prepayments, which
affect the estimated average life of the loans, are adjusted periodically to
reflect current circumstances. In evaluating the realizability of the carrying
values of mortgage servicing rights, the Company assesses the estimated life of
its servicing portfolio based on data which is disaggregated to reflect note
rate, type and term on the underlying loans.
Mortgage servicing fees received from investors for servicing their loan
portfolios are recorded as mortgage servicing fee income when received. Loan
servicing costs are charged to noninterest expenses when incurred.
Derivative Financial Instruments
The Company uses a variety of off-balance sheet derivatives as part of its
interest rate risk management strategy. The instruments most frequently used are
interest rate swap, floor and corridor contracts. These contracts are designated
and are effective as hedges of existing risk positions. These instruments are
used to modify the repricing or maturity characteristics of specified assets or
liabilities, and are linked to the related assets or liabilities being hedged.
Changes in the fair value of the derivative are not included in the consolidated
financial statements. The net interest income or expense associated with such
derivatives is accrued and recognized as an adjustment to the interest income or
interest expense of the asset or liability being hedged. The related interest
receivable or payable from such contracts is recorded in accrued interest
receivable or payable on the consolidated balance sheet. Premiums paid are
amortized as an adjustment to the interest income or interest expense of the
asset or liability being hedged. Realized gains and losses, if any, resulting
from early termination of derivatives are deferred as an adjustment to the
carrying value of the hedged item and recognized as an adjustment to the yield
or interest cost of the hedged item over the remaining term of the original
swap, floor or corridor contract. The Company may purchase interest rate floors
tied to the CMT index to mitigate the prepayment risk associated with mortgage
servicing rights which are accounted for as trading instruments and are carried
at fair value. Changes in fair value are reported as a component of mortgage
banking income. The Company also utilizes Treasury options to modify its forward
mortgage commitments. Changes in fair value of the options are included in the
calculation of the carrying value of loans held for sale.
Investments in Limited Partnerships
The Company has several investments in tax advantaged limited partnerships.
These investments are included in other assets and are amortized over the same
period the tax benefits are expected to be received.
Pension, 401(k), and Other Employee Benefit Plans
The Company and its subsidiaries have defined benefit and defined
contribution pension plans which cover most full-time employees. The benefits
are based on years of service and the employee's career average earnings. The
Company's funding policy is to contribute annually the maximum amount that can
be deducted for federal income tax purposes. Contributions are intended to
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future.
The Company maintains Section 401(k) savings plans for substantially all
employees of the Company and its subsidiaries. Under the plans, the Company
makes a matching contribution of a portion of the amount contributed by each
participating employee, up to a percentage of the employee's annual salary. The
plans allow for supplementary profit sharing contributions by the Company, at
its discretion, for the benefit of participating employees
The Company has a Profit Sharing Employee Stock Ownership Plan which is
designed to invest primarily in Common Stock of the Company. Substantially all
employees are eligible to participate in the Plan following one year of service.
Employees may not make contributions to the Plan but may receive a discretionary
contribution from the Company based on their pro-rata share of eligible
compensation. The Company sponsors a leveraged employee stock ownership plan
(the "ESOP"). The Company is required to make annual contributions to the ESOP
equal to the ESOP's debt service and the unallocated shares are pledged as
collateral for
33
<PAGE> 30
the debt. As the debt is repaid, shares are released from collateral and
allocated to eligible employees. The Company accounts for this ESOP in
accordance with AICPA SOP 93-6 "Employers' Accounting for Employee Stock
Ownership Plans." Accordingly, the debt of the ESOP is recorded as long-term
debt and the shares pledged as collateral are reported as unearned compensation
on the balance sheet. As shares are released from collateral, the Company
records compensation expense equal to the current market price of the shares,
and the shares are treated as outstanding for purposes of calculating earnings
per share.
Stock Compensation Plans
Statement of Financial Accounting Standards (SFAS No. 123), "Accounting for
Stock-Based Compensation" encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby
compensation cost is the excess, if any, of the quoted market price of the stock
at the grant date (or other measurement date) over the amount an employee must
pay to acquire the stock. The Company has elected to continue with the
accounting methodology in Opinion No. 25 and, as a result, must make pro forma
disclosures of net income and earnings per share as if the fair value based
method of accounting had been applied. The pro forma disclosures include the
effects of all awards granted on or after January 1, 1995. See Note 15 - Stock
Based Compensation Plans.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. If current available information raises doubt as to the
realization of the deferred tax assets, a valuation allowance is established.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Income taxes are allocated to each
entity in the consolidated group based on its share of taxable income.
Tax credits generated from limited partnerships are reflected in earnings
when realized for federal income tax purposes.
Earnings Per Share
Earnings per share have been computed in accordance with SFAS No. 128,
"Earnings Per Share". Basic earnings per share have been calculated by dividing
net income by weighted average shares outstanding before any dilution adjusted
to exclude the weighted average number of unallocated shares held by the ESOP.
Diluted earnings per share have been calculated by dividing net income by
weighted average shares outstanding after giving effect to the potential
dilution that could occur if the common stock equivalents were converted into
common stock using the treasury stock method.
Segment Reporting
An operating segment is defined as a component of a business for which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and
evaluate performance. The Company's primary business is banking, which provides
over 90% of its revenues and profits. Banking services are provided within the
framework of seven community banks which have similar economic characteristics,
products and services, distribution channels and regulatory environments.
Accordingly disaggregated segment information is not presented.
2. ACQUISITIONS
On May 10, 2000, the Company completed the acquisition of Banknorth Group,
Inc. ("Banknorth"). Banknorth was headquartered in Burlington, Vermont and had
100 offices located throughout Vermont, Massachusetts, New Hampshire and upstate
New York. Shareholders of Banknorth exchanged their shares for 1.825 newly
issued shares of the Company's common stock, plus cash in lieu of any fractional
share interests. The acquisition was accounted for using the
pooling-of-interests method. As of December 31, 1999, Banknorth had total assets
of $4.6 billion and total shareholders' equity of $341 million.
On January 1, 1999, the Company completed the acquisition of SIS Bancorp,
Inc. ("SIS"). Approximately 16,255,885 shares of common stock of the Company
(the "Common Stock") were issued in connection with this acquisition, which was
accounted for as a pooling-of-interests. SIS had total assets of $2.0 billion
and shareholders' equity of $139 million at December 31, 1998.
34
<PAGE> 31
During 1998, the Company completed the acquisition of three insurance
agencies for an aggregate of 454,864 shares of Common Stock. These acquisitions
were accounted for as purchases and, accordingly, the Company's financial
statements reflect them from the date of acquisition. The Company recorded $9.3
million of goodwill in connection with these purchases. The acquired agencies
have been integrated into the Company's existing insurance agency operations.
On April 10, 1998, the Company completed the acquisition of CFX Corporation
("CFX"). Approximately 32,796,280 shares of Common Stock were issued in
connection with this transaction. At December 31, 1997, CFX had total assets of
$2.9 billion and total shareholders' equity of $245.7 million. The acquisition
of CFX was accounted for as a pooling-of-interests and, accordingly, financial
information for all periods presented prior to the date of acquisition has been
restated to present the combined financial condition and results of operations
as if the acquisition had been in effect for all such periods.
In the fourth quarter of 1997, the Company purchased Atlantic Bancorp
("Atlantic"), the parent company of Atlantic Bank N.A. headquartered in
Portland, Maine, for $70.8 million. Atlantic had total assets of $462.9 million
and total shareholders' equity of $37.7 million. The Company recorded $34.7
million of goodwill with this transaction. During the same period, the Company
also acquired all of the outstanding stock of MPN Holdings ("MPN"), the holding
company of Morse, Payson & Noyes Insurance. The transaction was effected through
the exchange of MPN stock for 445,678 shares of Common Stock and resulted in
$7.8 million of goodwill. Both acquisitions were accounted for as purchases and,
accordingly, the Company's financial statements reflect them from the date of
acquisition.
The Company incurred various merger related and restructuring charges in
connection with the foregoing acquisitions and certain other matters
(collectively, "special charges"). On a pre-tax basis special charges amounted
to $28.0 million, $61.1 million and $23.6 million in 1999, 1998 and 1997,
respectively. For additional information, see Note 9 - Special Charges.
35
<PAGE> 32
3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY
A summary of the amortized cost and market values of securities available for
sale and held to maturity follows:
<TABLE>
<CAPTION>
Amortized Gross Unrealized Gross Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
DECEMBER 31, 1999:
U. S. Government obligations and obligations
of U.S.Government agencies and corporations $ 709,497 $ 21 $ (22,702) $ 686,816
Tax-exempt bonds and notes 56,903 82 (322) 56,663
Other bonds and notes 455,435 141 (12,159) 443,417
Mortgage-backed securities 4,264,364 1,629 (133,354) 4,132,639
Collateralized mortgage obligations 723,290 190 (23,914) 699,566
-----------------------------------------------------------------------
Total debt securities 6,209,489 2,063 (192,451) 6,019,101
Federal Home Loan Bank of Boston stock 261,391 -- -- 261,391
Other equity securities 38,422 74 (2,957) 35,539
-----------------------------------------------------------------------
Total equity securities 299,813 74 (2,957) 296,930
-----------------------------------------------------------------------
Total securities available for sale $6,509,302 $ 2,137 $ (195,408) $6,316,031
=======================================================================
DECEMBER 31, 1998:
U. S. Government obligations and obligations
of U.S. Government agencies and corporations $ 518,105 $ 2,383 $ (913) $ 519,575
Tax-exempt bonds and notes 42,455 1,077 -- 43,532
Other bonds and notes 193,167 2,580 (144) 195,603
Mortgage-backed securities 2,674,133 6,041 (9,397) 2,670,777
Collateralized mortgage obligations 471,159 2,476 (1,619) 472,016
-----------------------------------------------------------------------
Total debt securities 3,899,019 14,557 (12,073) 3,901,503
Federal Home Loan Bank of Boston stock 163,227 -- -- 163,227
Other equity securities 48,504 1,321 (559) 49,266
-----------------------------------------------------------------------
Total equity securities 211,731 1,321 (559) 212,493
-----------------------------------------------------------------------
Total securities available for sale $4,110,750 $ 15,878 $ (12,632) $4,113,996
=======================================================================
HELD TO MATURITY:
DECEMBER 31, 1999:
U. S. Government obligations and obligations
of U.S.Government agencies and corporations $ 2,797 $ 5 $ (35) $ 2,767
Tax-exempt bonds and notes 7,753 114 (29) 7,838
Other bonds and notes 1,480 70 -- 1,550
Asset backed securities -- -- -- --
Mortgage-backed securities 3,789 46 (110) 3,725
Collateralized mortgage obligations 541,332 -- (21,607) 519,725
-----------------------------------------------------------------------
Total securities held to maturity $ 557,151 $ 235 $ (21,781) $ 535,605
=======================================================================
DECEMBER 31, 1998:
U.S. Treasuries and Agencies $ 3,582 $ 87 $ 0 $ 3,669
States and political Subdivisions 9,612 659 -- 10,271
Other bonds and notes 2,171 126 (4) 2,293
Asset backed securities 65,350 328 (104) 65,574
Mortgage-backed securities 174,064 730 (521) 174,273
Collateralized mortgage obligations 10,999 90 (8) 11,081
-----------------------------------------------------------------------
Total securities held to maturity $ 265,778 $ 2,020 $ (637) $ 267,161
=======================================================================
</TABLE>
36
<PAGE> 33
The amortized cost and market values of debt securities available for sale at
December 31, 1999 by contractual maturities are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. At
December 31, 1999, the Company had $285.9 million of securities available for
sale with call provisions.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
-------------------------------------------------------------------------
Amortized Cost Market Value Amortized Cost Market Value
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1999:
------------------
Due in one year or less $ 75,344 $ 75,161 $ 4,411 $ 4,340
Due after one year through five years 619,526 608,782 6,029 6,162
Due after five years through ten years 528,159 510,532 2,806 2,821
Due after ten years 4,986,460 4,824,626 543,905 522,282
----------------------------------------------------------------------
Total debt securities $6,209,489 $6,019,101 $ 557,151 $ 535,605
======================================================================
</TABLE>
A summary of realized gains and losses on securities available for sale for
1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
Gross Realized
----------------------
Gains Losses
------ ------
<S> <C> <C>
1999 $ 885 $ 361
1998 7,003 696
1997 5,584 2,783
</TABLE>
37
<PAGE> 34
4. LOANS AND LEASES
The Company's lending activities are conducted principally in New England
and upstate New York. The principal categories of loans in the Company's
portfolio are residential real estate loans, which are secured by single-family
(one to four units) residences; commercial real estate loans, which are secured
by multi-family (five or more units) residential and commercial real estate;
commercial business loans and leases; and consumer loans and leases. A summary
of loans and leases follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
----------- ----------
<S> <C> <C>
Residential real estate mortgages $2,270,417 $3,088,864
Commercial real estate mortgages:
Commercial real estate 2,493,492 2,078,725
Construction and development 202,825 204,372
---------- ----------
2,696,317 2,283,097
Commercial business loans and leases 1,924,201 1,836,412
Consumer loans and leases 2,963,721 2,716,764
---------- ----------
Total loans and leases $9,854,656 $9,925,137
========== ==========
</TABLE>
Loans and leases include unearned income and net deferred loan costs of $4.5
million at December 31, 1999 and $2.5 million at December 31, 1998.
The following table sets forth information regarding nonperforming loans and
accruing loans 90 days or more overdue at the dates indicated:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
------- -------
<S> <C> <C>
Residential real estate mortgages :
Nonaccrual loans $17,283 $15,503
Troubled debt restructurings 28 32
------- -------
Total 17,311 15,535
Commercial real estate loans:
Nonaccrual loans 16,754 22,481
Troubled debt restructurings 1,002 5,946
------- -------
Total 17,756 28,427
Commercial business loans and leases:
Nonaccrual loans 17,027 18,736
Troubled debt restructurings 82 874
------- -------
Total 17,109 19,610
Consumer loans:
Nonaccrual loans 5,951 11,455
Troubled debt restructurings -- 5
------- -------
Total 5,951 11,460
Total nonperforming loans:
Nonaccrual loans 57,015 68,175
Troubled debt restructurings 1,112 6,857
------- -------
Total $58,127 $75,032
======= =======
Accruing loans which are 90 days overdue $12,131 $24,450
======= =======
</TABLE>
The ability and willingness of borrowers to repay loans is generally
dependent on current economic conditions and real estate values within the
borrowers' geographic areas.
38
<PAGE> 35
Interest income that would have been recognized for 1999 if nonperforming
loans at December 31, 1999 had been performing in accordance with their original
terms approximated $5.6 million.
Impaired loans are commercial, commercial real estate, and individually
significant mortgage and consumer loans for which it is probable that the
Company will not be able to collect all amounts due according to the contractual
terms of the loan agreement. The definition of "impaired loans" is not the same
as the definition of "nonaccrual loans," although the two categories overlap.
Nonaccrual loans include impaired loans and loans on which the accrual of
interest is discontinued when collectibility of principal or interest is
uncertain or on which payments of principal or interest have become
contractually past due 90 days. The Company may choose to place a loan on
nonaccrual status due to payment delinquency or uncertain collectibility, while
not classifying the loan as impaired, if (i) it is probable that the Company
will collect all amounts due in accordance with the contractual terms of the
loan or (ii) the loan is not a commercial, commercial real estate or an
individually significant mortgage or consumer loan. The amount of impairment for
these types of impaired loans is determined by the difference between the
present value of the expected cash flows related to the loan, using the original
contractual interest rate, and its recorded value, or, as a practical expedient
in the case of collateralized loans, the difference between the fair value of
the collateral and the recorded amount of the loans. When foreclosure is
probable, impairment is measured based on the fair value of the collateral.
Mortgage and consumer loans which are not individually significant are measured
for impairment collectively. Loans that experience insignificant payment delays
and insignificant shortfalls in payment amounts generally are not classified as
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record and the
amount of the shortfall in relation to the principal and interest owed.
At December 31, 1999 and 1998, total impaired loans were $49.5 million and
$60.8 million, of which $25.9 million and $35.5 million had related allowances
of $4.3 million and $9.6 million, respectively. During the years ended December
31, 1999 and 1998, the income recognized related to impaired loans was $4.3
million and $4.2 million respectively, and the average balance of outstanding
impaired loans was $59.6 million and $54.6 million, respectively. The Company
recognizes interest on impaired loans on the cash basis when the ability to
collect the principal balance is not in doubt; otherwise, cash received is
applied to the principal balance of the loan.
5. ALLOWANCE FOR LOAN AND LEASE LOSSES
A summary of changes in the allowance for loan and lease losses follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 155,098 $ 150,615 $ 142,682
Allowance on acquired loans -- 2,200 7,361
Provisions charged to operations 23,575 23,775 15,763
Loans and leases charged off (36,034) (38,410) (35,212)
Recoveries 12,409 16,918 20,021
-------------------------------------------------
Balance at end of period $ 155,048 $ 155,098 $ 150,615
=================================================
</TABLE>
6. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Land $ 20,571 $ 23,307
Buildings and leasehold improvements 198,221 202,850
Furniture, fixtures and equipment 194,777 188,424
--------------------------
413,569 414,581
Less accumulated depreciation and amortization 221,029 219,071
--------------------------
$192,540 $195,510
==========================
</TABLE>
39
<PAGE> 36
7. MORTGAGE SERVICING RIGHTS
An analysis of mortgage servicing rights for the years ended December 31,
1999, 1998 and 1997 follows:
<TABLE>
<CAPTION>
Mortgage Valuation Total
Servicing Allowance
Rights
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 $ 45,291 $ 0 $ 45,291
Mortgage servicing rights capitalized 58,442 -- 58,442
Mortgage servicing rights acquired through acquisition 586 -- 586
Amortization charged against mortgage servicing fee income (9,159) -- (9,159)
Impairment reserve charged against mortgage servicing fee income -- -- --
Mortgage servicing rights sold (29,872) -- (29,872)
----------------------------------------------
Balance as of December 31, 1997 65,288 0 65,288
Mortgage servicing rights capitalized 84,041 -- 84,041
Amortization charged against mortgage servicing fee income (15,731) -- (15,731)
Impairment reserve charged against mortgage servicing fee income -- (11,586) (11,586)
Mortgage servicing rights sold (76,573) -- (76,573)
----------------------------------------------
Balance as of December 31, 1998 57,025 (11,586) 45,439
Mortgage servicing rights capitalized 16,149 -- 16,149
Amortization charged against mortgage servicing fee income (12,498) -- (12,498)
Reduction of impairment reserve (credit to mortgage servicing fee income) -- 5,300 5,300
Mortgage servicing rights sold (1,666) -- (1,666)
----------------------------------------------
Balance as of December 31, 1999 $ 59,010 $ (6,286) $ 52,724
==============================================
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1999 1998 1997
--------------------------------------------------
<S> <C> <C> <C>
Residential real estate loans serviced for investors $4,540,948 $5,178,281 $7,050,511
==================================================
</TABLE>
The Company generally continues to service residential real estate
mortgages after the loans have been sold into the secondary market. The Company
pays the investor that purchased the loan a pass-through rate which is less than
the interest rate the Company receives from the borrower. The difference is
retained by the Company as a fee for servicing the residential real estate
mortgages. The Company capitalizes mortgage servicing rights at their allocated
cost, based on relative fair values upon sale of the related loans. The Company
periodically sells residential mortgage servicing rights to other servicers.
40
<PAGE> 37
8. INCOME TAXES
The current and deferred components of income tax expense follow:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
Current
Federal $ 90,930 $ 48,125 $ 59,599
State 7,339 4,350 4,734
Deferred
Federal (572) 17,039 12,805
State (348) 3,564 1,050
---------------------------------------------
$ 97,349 $ 73,078 $ 78,188
=============================================
</TABLE>
The following table reconciles the expected federal income tax expense (computed
by applying the federal statutory tax rate to income before taxes) to recorded
income tax expense:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
Computed federal tax expense $ 103,007 $ 75,188 $ 78,287
State income tax, net of federal benefits 4,544 5,144 3,760
Benefit of tax-exempt income (3,211) (2,778) (2,113)
Nondeductible merger expenses 1,740 4,908 1,854
Amortization of goodwill and other intangibles 3,519 3,034 2,380
Low income/rehabilitation credits (4,913) (4,152) (3,823)
Restructuring of legal entities within affiliated group -- (5,069) --
Increase in cash surrender value of life insurance (5,433) (2,077) (765)
Other, net (1,904) (1,120) (1,392)
-------------------------------------------------
Recorded income tax expense $ 97,349 $ 73,078 $ 78,188
=================================================
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities which are included in Other Assets and Other
Liabilities, respectively, at December 31, 1999 and 1998 follow:
<TABLE>
<CAPTION>
At December 31,
--------------------------
Deferred tax assets 1999 1998
--------------------------
<S> <C> <C>
Allowance for loan and lease losses $ 55,574 $ 56,048
Reserve for mobile home dealers 806 1,404
Accrued pension expense 2,559 5,641
Difference of tax and book basis of OREO 129 229
Interest accrued and payments received on
non-performing loans for tax purposes 760 1,408
Compensation and employee benefits 15,213 12,960
Book reserves not yet realized for tax purposes 478 1,629
Unrealized depreciation on securities 68,112 --
Employee stock awards -- 501
Intangible asset 2,228 1,530
Investment tax credit carryforward -- 2,245
Other 942 1,477
--------------------------
Total gross deferred tax assets 146,801 85,072
--------------------------
Deferred tax liabilities
Leases $ 26,407 $ 26,044
Premises & equipment 8,503 1,547
Partnership investments 6,165 8,731
Loans 6,431 6,788
Mortgage servicing rights 11,397 14,630
Tax bad debt reserve 977 8,660
Unrealized appreciation of securities -- 1,105
Other 1,768 2,551
--------------------------
Total gross deferred tax liabilities 61,648 70,056
--------------------------
Net deferred tax asset $ 85,153 $ 15,016
==========================
</TABLE>
41
<PAGE> 38
9. SPECIAL CHARGES
Special charges include merger expenses of $20.6 million, $61.1 million and
$16.4 million in 1999, 1998 and 1997, respectively, and $7.4 million of costs to
discontinue the correspondent mortgage lending business in 1999 and $7.2 million
of charges related to exiting the lease securitization business (conducted
through CFX Funding) in 1997. Special charges recorded in 1999 totaled $28.0
million (pre-tax) and $20.8 million (post-tax). The total pre-tax charges
consisted of $34.5 million recorded in the first quarter of 1999 less reversal
of previous merger charges of $3.9 million recorded in the fourth quarter of
1999 and a $2.6 million pension curtailment gain recorded in the first quarter
of 1999 in connection with the acquisition of Evergreen Bancorp by Banknorth.
The $3.9 million reversal related mainly to lower than anticipated payments for
severance, losses on lease residuals, legal fees and claims related to
guarantees on a securitized lease portfolio, as well as higher than
anticipated pension curtailment gain in connection with the SIS and CFX
acquisitions. The following table summarizes special charges recorded in 1999 by
type and shows the balance in the accrued liability account as of December 31,
1999 and 1998. These special charges related to the acquisitions of CFX and SIS
by the Company and Evergreen Bancorp by Banknorth and the discontinuance of the
correspondent mortgage business.
<TABLE>
<CAPTION>
Non-Cash
Original Amount Reductions
Balance Expense Expense Included in Cash Applied to Balance at
12/31/98 Recorded Adjustment Expense Reallocations Payments Reserve 12/31/1999
-------- -------- ---------- ----------- ------------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SIS MERGER
Severance costs $ -- $ 10,890 $ (500) $ 10,390 $ (613) $ (9,777) $ -- $ --
Pension curtailment gain (4,000) (869) (4,869) -- 4,869 --
Data processing/systems integration -- 4,669 -- 4,669 (395) (4,274) -- --
Professional fees -- 2,978 -- 2,978 219 (3,197) -- --
Asset write-downs / lease terminations -- 1,800 -- 1,800 749 (577) (1,612) 360
Customer communications 1,100 -- 1,100 13 (1,113) --
Fund charitable foundation 3,000 -- 3,000 -- (3,000) --
Other costs -- 1,621 -- 1,621 27 (1,648) -- --
-------- -------- -------- -------- -------- -------- -------- ------
$ -- $ 22,058 $ (1,369) $ 20,689 $ -- $(23,586) $ 3,257 $ 360
======== ======== ======== ======== ======== ======== ======== ======
CFX MERGER
Severance costs $ 32 $ 455 $ -- $ 455 $ (385) $ (102) $ -- $ --
Pension curtailment gain -- -- (515) (515) -- -- 515 --
Data processing/systems integration -- 507 507 -- (507) -- --
Professional fees -- 336 336 -- (336) -- --
Asset write-downs / lease terminations -- 2,267 (1,156) 1,111 (100) (308) (297) 406
Customer communications -- 48 48 -- (48) --
Other costs 1,131 200 (849) (649) 485 (105) -- 862
-------- -------- -------- -------- -------- -------- -------- ------
$ 1,163 $ 3,813 $ (2,520) $ 1,293 $ -- $ (1,406) $ 218 $1,268
======== ======== ======== ======== ======== ======== ======== ======
EVERGREEN MERGER
Severance costs $ -- $ 233 $ -- $ 233 $ -- $ (233) $ -- $ --
Pension curtailment gain -- (2,577) -- (2,577) -- -- 2,577 --
Other costs -- 1,000 1,000 -- (1,000) -- --
-------- -------- -------- -------- -------- -------- -------- ------
$ -- $ (1,344) $ -- $ (1,344) $ -- $ (1,233) $ 2,577 $ --
======== ======== ======== ======== ======== ======== ======== ======
DISCONTINUANCE OF THE CORRESPONDENT
LENDING BUSINESS
Severance costs $ -- $ 1,986 $ -- $ 1,986 $ 264 $ (2,250) $ -- $ --
Professional fees -- 1,793 -- 1,793 (678) (1,115) -- --
Asset write-downs -- 1,293 -- 1,293 -- -- (1,293) --
Correspondent losses -- 957 -- 957 988 (1,945) -- --
Other exit costs -- 1,335 -- 1,335 (574) (761) -- --
-------- -------- -------- -------- -------- -------- -------- ------
$ -- $ 7,364 $ -- $ 7,364 $ -- $ (6,071) $ (1,293) $ --
======== ======== ======== ======== ======== ======== ======== ======
</TABLE>
The severance payments made in connection with the SIS merger covered
approximately 100 employees whose positions were eliminated as a result of the
merger. Property and asset write-downs related to the SIS merger related mainly
to duplicate facilities and fixed assets. Special charges were also recorded by
SIS during the fourth quarter of 1998 totaling $3.8 million, which were related
mainly to certain employee benefits which were fully vested as a result of the
merger and certain professional fees. The special charges recorded in 1999 for
CFX related mainly to higher write-downs of duplicate facilities and fixed
assets and additional systems integration costs. The special charges recorded in
1999 for the Evergreen merger related to additional conversion costs for the
core systems and the investment management business. The special charges
recorded in connection with discontinuing the correspondent mortgage business
included severance payments to terminated employees, professional and legal
fees, write-off of remaining goodwill applicable to a prior acquisition of a
mortgage company, and losses on sales of certain loans originated by
correspondents. Write-downs to estimated fair value were based on independent
appraisals where practical and on management estimates for the remaining assets.
42
<PAGE> 39
10. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Federal funds purchased $ 0 $ 30,445
Securities sold under repurchases agreements 1,302,821 800,481
---------- ----------
$1,302,821 $ 830,926
========== ==========
</TABLE>
A summary of securities sold under short term repurchase agreements follows:
<TABLE>
<CAPTION>
At or for the Year Ended December 31,
--------------------------------------------
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
Balance outstanding at end of period $1,302,821 $800,481 $711,912
Market value of collateral at end of period 1,536,101 941,634 856,761
Amortized cost of collateral at end of period 1,579,486 942,449 885,287
Average balance outstanding 768,500 736,714 684,072
Maximum outstanding at any month end during the period 1,302,821 828,377 848,715
Average interest rate during the period 4.34% 4.68% 4.77%
Average interest rate at end of period 4.58% 4.26% 4.89%
</TABLE>
Securities sold under repurchase agreements generally have maturities of
365 days or less and are collateralized by mortgage-backed securities and U.S.
Government obligations.
11. BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON
A summary of the borrowings from the Federal Home Loan Bank of Boston is as
follows:
<TABLE>
<CAPTION>
At December 31, 1999 At December 31, 1998
--------------------------------------- ---------------------------------------
Maturity Principal Maturity Principal
Dates Amounts Interest Rates Dates Amounts Interest Rates
-------- --------- -------------- -------- --------- ---------------
<S> <C> <C> <C> <C> <C>
2000 $795,445 4.70-7.75% 1999 $260,694 4.84-8.13%
2001 562,100 5.38-6.44% 2000 445,444 4.70-6.49%
2002 2,090,130 5.12-7.79% 2001 1,008,220 4.98-6.44%
2003 149,077 5.00-6.43% 2002 10,425 6.70-7.79%
2004 235,405 5.28-7.11% 2003 124,108 5.00-6.59%
2005-2018 165,662 3.60-8.14% 2004-2016 183,756 3.60-8.14%
---------- ----------
$3,997,819 $2,032,647
========== ==========
</TABLE>
Callable borrowings of $50 million are shown in their respective periods
assuming that the callable debt is redeemed at the initial call date while all
other borrowing are shown in the periods corresponding to their scheduled
maturity date.
Short and long-term borrowings from the Federal Home Loan Bank of Boston,
which consist of both fixed and adjustable rate borrowings, are secured by a
blanket lien on qualified collateral, consisting primarily of loans with first
mortgages secured by one to four family properties, certain unencumbered
investment securities and other qualified assets. The Company has the ability to
prepay most of its borrowings without penalty.
43
<PAGE> 40
12. CAPITAL TRUST SECURITIES
On January 24, 1997, the Company sponsored the creation of Peoples Heritage
Capital Trust I (the "Trust"), a statutory business trust created under the laws
of Delaware. The Company is the owner of all of the common securities of the
Trust (the "Common Securities"). On January 31, 1997, the Trust issued $100
million of 9.06% Capital Securities (the "Capital Securities," and with the
common securities, the "Trust Securities"), the proceeds from which were used by
the Trust, along with the Company's $3.1 million capital contribution for the
Trust's Common Securities, to acquire $103.1 million aggregate principal amount
of the Company's 9.06% Junior Subordinated Deferrable Interest Debentures due
February 1, 2027 (the "Debentures"), which constitute the sole assets of the
Trust. The Company has, through the Declaration of Trust establishing the Trust,
Common Securities and Capital Securities Guarantee Agreements, the Debentures
and a related Indenture, taken together, fully irrevocably and unconditionally
guaranteed all of the Trust's obligations under the Trust Securities. In 1999,
the Company repurchased $31.2 million of the Capital Securities.
On May 1, 1997, Banknorth (now the Company) sponsored the creation of Banknorth
Capital Trust I ("Trust 1"), a statutory business trust created under the laws
of Delaware. The Company is the owner of all of the common securities of Trust 1
(the "Common Securities"). Trust 1 issued $30 million of 10.52% Capital
Securities (the "Capital Securities," and with the common securities, the "Trust
Securities"), the proceeds from which were used by Trust 1, along with the
Company's $998 thousand capital contribution for Trust Common Securities, to
acquire $31 million aggregate principal amount of the Company's 10.52% Junior
Subordinated Deferrable Interest Debentures due February 1, 2027 (the
"Debentures"), which constitute the sole assets of Trust 1. The Company has,
through the Declaration of Trust establishing the Trust, Common Securities and
Capital Securities Guarantee Agreements, the Debentures and a related Indenture,
taken together, fully irrevocably and unconditionally guaranteed all of Trust
1's obligations under the Trust Securities.
Separate financial statements of the Trusts are not required pursuant to Staff
Accounting Bulletin 53 of the Securities and Exchange Commission.
13. SHAREHOLDERS' EQUITY
In April 1998, the stockholders of the Company approved an increase in the
authorized number of shares of Common Stock from 100,000,000 to 200,000,000, and
in April 2000, the stockholders of the Company approved an increase in the
authorized number shares of Common Stock From 200,000,000 to 400,000,000. In May
1998, the Company declared a two-for-one split for each share of Common Stock
then outstanding and for all then outstanding options to purchase shares of
Common Stock. All references in the Consolidated Financial Statements to the
number of shares and per share amounts have been adjusted retroactively for the
increases in authorized capitalization and the stock split.
Regulatory Capital Requirements.
Bank regulatory agencies have established capital adequacy standards which
are used extensively in their monitoring and control of the industry. Certain of
these standards relate capital to level of risk by assigning different
weightings to assets and certain off-balance sheet activity. The Company must
maintain a minimum total risk-based, Tier 1 risk-based and Tier 1 leverage
ratios as set forth in the table below.
<TABLE>
<CAPTION>
Actual Capital Requirements Excess
---------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
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 ratio (to average assets) 1,232,863 6.75% 730,693 4.00% 502,170 2.75%
As of December 31, 1998
Total capital (to risk weighted assets) 1,274,598 12.14% 839,886 8.00% 434,712 4.14%
Tier 1 capital (to risk weighted assets) 1,143,072 10.89% 419,943 4.00% 723,129 6.89%
Tier 1 leverage capital ratio (to average assets) 1,143,072 7.22% 633,419 4.00% 509,653 3.22%
</TABLE>
At December 31, 1999 and 1998, the Company and each of its banking
subsidiaries were well-capitalized and in compliance with all applicable
regulatory capital requirements.
44
<PAGE> 41
Dividend Limitations.
Dividends paid by subsidiaries are the primary source of funds available to
the Company for payment of dividends to its shareholders. The Banks are subject
to certain requirements imposed by federal banking laws and regulations. These
requirements, among other things, establish minimum levels of capital and
restrict the amount of dividends that may be distributed by the Banks to the
Company.
Stockholder Rights Plan.
In 1989, the Company's Board of Directors adopted a Stockholder Rights Plan
declaring a dividend of one preferred Stock Purchase Right for each outstanding
share of Common Stock. The rights will remain attached to the Common Stock and
are not exercisable except under limited circumstances relating to acquisition
of, the right to acquire beneficial ownership of, or tender offer for 20% or
more of the outstanding shares of Common Stock. The Rights have no voting or
dividend privileges and, until they become exercisable, have no dilutive effect
on the earnings of the Company. On July 27, 1999 the Board of Directors amended
and restated the Stockholder Rights Plan to, among other things, extend the
expiration date of the rights to September 25, 2009. On July 25, 2000, the
Company again amended and restated the Stockholder Rights Plan to reflect its
acquisition of Banknorth.
Earnings per share
The following table presents a reconciliation of earnings per share as of
the dates indicated:
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------------
(Dollars in thousands, except per share 1999 1998 1997
amounts) ---- ---- ----
<S> <C> <C> <C>
Net income $ 196,958 $ 141,744 $ 145,488
============ ============ ============
Weighted average shares outstanding
Basic 145,767,788 146,119,422 145,481,258
Effect of dilutive securities:
Stock options 1,659,879 2,845,217 3,118,860
------------ ------------ ------------
Diluted 147,427,667 148,964,639 148,600,118
============ ============ ============
Net income per share:
Basic $ 1.35 $ 0.97 $ 1.00
Diluted 1.34 0.95 0.98
</TABLE>
14. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER OFF-BALANCE SHEET RISKS
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments include commitments to originate loans, standby letters of
credit, recourse arrangements on serviced loans and forward commitments to sell
loans. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the Consolidated
Balance Sheets. The contract or notional amounts of those instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments, standby letters of
credit and recourse arrangements is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. For forward commitments to sell loans, the contract or notional
amounts do not represent exposure to credit loss. The Company controls the
credit risk of its forward commitments to sell loans through credit approvals,
limits and monitoring procedures.
45
<PAGE> 42
Financial instruments with off-balance sheet risk at December 31, 1999 and 1998
follow:
<TABLE>
<CAPTION>
Contract or Notional Amount at
December 31,
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Financial instruments with notional or contract
amounts which represent credit risk:
Commitments to originate loans, unused lines,
standby letters of credit and unadvanced
portions of construction loans $3,132,878 $3,059,495
Loans serviced with recourse 23,147 25,792
Loans sold with credit enhancements 706 3,294
Leases serviced with credit enhancements 4,933 6,227
Financial instruments with notional or contract amounts
which exceed the amount of credit risk:
Forward commitments to sell loans 73,700 315,327
Interest rate floors - notional amount 495,000 415,000
- fair value 1,354 6,490
Interest rate swap agreements (pay fixed)
- notional amount 50,000 50,000
- fair value 1,749 292
Interest rate corridor agreements (pay fixed)
- notional amount 50,000 50,000
- fair value 898 440
</TABLE>
Commitments to originate loans, unused lines of credit and unadvanced
portions of construction loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Because many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Company has retained credit risk on certain residential mortgage loans
sold with full or partial recourse and on certain residential mortgage loans
whose servicing rights were acquired during 1990.
Forward commitments to sell residential mortgage loans are contracts which
the Company enters into for the purpose of reducing the market risk associated
with originating loans for sale. Risks may arise from the possible inability of
the Company to originate loans to fulfill the contracts, in which case the
Company would normally purchase loans from correspondent banks or in the open
market to deliver against the contract.
At December 31, 1999, the Company was committed to invest up to $18.1
million in real estate development limited partnerships. At December 31, 1999
and 1998 the Company had $32.8 million and $30.1 million, respectively, invested
in such partnerships, which are included in other assets.
Legal Proceedings.
The Company and certain of its subsidiaries have been named as defendants
in various legal proceedings arising from their normal business activities.
Although the amount of any ultimate liability with respect to such proceedings
cannot be determined, in the opinion of management, based upon the opinions of
counsel, any such liability will not have a material effect on the consolidated
financial position, results of operations or liquidity of the Company and its
subsidiaries.
46
<PAGE> 43
Lease Obligations.
The Company leases certain properties used in operations under terms of
operating leases which include renewal options. Rental expense under these
leases approximated $16.5 million, $13.3 million, and $11.0 million for the
years ended 1999, 1998 and 1997, respectively.
Approximate minimum lease payments over the remaining terms of the leases
at December 31, 1999 follow:
2000 $14,099
2001 12,912
2002 11,344
2003 8,289
2004 7,784
2005 and after 36,875
-------
$91,303
=======
15. STOCK-BASED COMPENSATION PLANS
Employee Stock Ownership Plans.
In 1989 the Company adopted a Profit Sharing Employee Stock Ownership Plan
which is designed to invest primarily in Common Stock of the Company.
Substantially all employees are eligible to participate in the Plan following
one year of service. Employees may not make contributions to the Plan but may
receive a discretionary contribution from the Company based on their pro-rata
share of eligible compensation. For 1999, 1998 and 1997, the Company contributed
2%, 3% and 4% of eligible compensation, respectively. The approximate expense of
this contribution for 1999, 1998 and 1997 was $1.8 million, $2.1 million and
$1.3 million, respectively.
Stock Option Plans.
In 1995, the Company adopted a stock option plan for non-employee
directors, which was amended and restated in 1997. The maximum number of shares
which may be granted under the amended plan is 1,060,000 shares, of which
114,000 were granted in 1999 at $18.06 per share, 110,000 were granted in 1998
at $24.31 per share and 59,000 were granted in 1997 at $15.82 per share. A total
of 26,500 shares had been issued upon exercise of the stock options granted
pursuant to this plan through December 31, 1999.
The Company has adopted various stock option plans for key employees. These
plans include a stock option plan adopted in 1996 (the "1996 Option Plan") and a
stock option plan adopted in 1986 (the "1986 Option Plan"). The 1986 Option
Plan, as amended, authorized the issuance of 3,340,000 shares of Common Stock,
substantially all of which have been issued. The 1996 Option Plan, as amended,
authorizes grants of options and other stock awards covering up to 6,000,000
shares of Common Stock. Stock options are granted with an exercise price equal
to the stock's fair market value at the date of the grant and expire 10 years
from the date of the grant. At December 31, 1999, there were 2,959,705
additional shares available for grant under the 1996 Option Plan.
The per share weighted-average fair value of stock options granted by the
Company during 1999, 1998 and 1997 was $5.72, $6.61 and $7.03 and on the date of
the grants using the Black Scholes option-pricing model with the following
average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield 2.74% 2.50% 2.50%
Risk-free interest rate 5.53 5.50 5.82
Expected life 5.00 years 5.00 years 5.00 years
Volatility 35.90% 32.87% 32.90%
</TABLE>
47
<PAGE> 44
The Company applies APB Opinion No. 25 in accounting for its stock option
plans and, accordingly, no cost has been recognized for its stock options in the
financial statements. Had the Company determined cost based on the fair value at
the grant date for its stock options under SFAS No. 123, the Company's net
income would have been reduced to the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------
<S> <C> <C> <C>
Net Income
As reported $196,958 $141,744 $145,488
Pro forma $191,396 $136,856 $141,160
Basic Earnings per share
As reported $ 1.35 $ 0.97 $ 1.00
Proforma $ 1.31 $ 0.94 $ 0.97
Diluted Earnings per share
As reported: $ 1.34 $ 0.95 $ 0.98
Proforma $ 1.30 $ 0.92 $ 0.95
</TABLE>
Proforma net income reflects only stock options granted since January 1, 1995.
Therefore, the full impact of calculating cost for stock options under SFAS No.
123 is not reflected in the proforma net income amounts presented above because
cost is reflected over the options' vesting period and cost for options granted
prior to January 1, 1995 is not considered.
Stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Balance at December 31, 1997 8,537,701 8.53
Granted 1,857,424 18.55
Exercised 2,302,194 6.71
Forfeited 87,548 14.76
---------
Balance at December 31, 1998 8,005,383 11.83
Granted 1,680,656 17.83
Exercised 1,713,368 8.26
Forfeited 281,540 16.72
---------
Balance at December 31, 1999 7,691,131 13.72
=========
</TABLE>
The range of per share exercise prices for outstanding and exercisable stock
options at December 31, 1999 was as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Outstanding Weighted Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
--------------- ----------- ---------------- --------------- ----------- ----------------
<C> <C> <C> <C> <C> <C>
up to $5.00 530,571 2.9 years $3.57 525,571 $3.61
$ 5.01 - $10.00 1,557,197 4.9 7.40 1,557,197 7.40
$10.01 - $15.00 1,610,125 5.9 11.57 1,325,125 11.57
$15.01 - $20.00 3,684,838 7.8 18.00 2,362,630 18.26
Over $20.00 308,400 7.0 23.26 214,075 23.53
--------- ---------
7,691,131 6.4 13.72 5,984,598 12.86
========= =========
</TABLE>
48
<PAGE> 45
Employee Stock Purchase Plan.
The Company has an Employee Stock Purchase Plan covering all full-time
employees with one year of service. The maximum number of shares which may be
issued under the Employee Stock Purchase Plan is 1,352,000 shares. Employees
have the right to authorize payroll deductions up to 10% of their salary. As of
December 31, 1999, 893,591 shares had been purchased under this plan.
Restricted Stock Plan.
In 1990, the Company adopted a Restricted Stock Plan under which up to
$10,000 of the annual fee payable to each non-employee Director of the Company
and participating subsidiaries is payable solely in shares of Common Stock.
Directors of the Company and certain participating subsidiaries who are not
full-time employees of the Company or any of its subsidiaries are eligible to
participate. Shares issued were 7,376, 6,420 and 3,840 in 1999, 1998 and 1997,
respectively.
16. RETIREMENT AND OTHER BENEFIT PLANS
Pension Plans.
The Company and its subsidiaries have noncontributory defined benefit plans
covering most permanent, full-time employees. Benefits are based on career
average earnings and length of service. The Company's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes.
The Company has adopted supplemental retirement plans for several key
officers. These plans were designed to offset the impact of changes in the
Pension Plans which reduced benefits for highly paid employees. The Company also
has entered into deferred compensation agreements with certain key officers. The
cost of these agreements is accrued but not funded. The Company purchased
corporate-owned life insurance policies on the lives of certain retirees. The
death benefits are payable to the Company and will assist in the funding of the
deferred compensation liability. The Company will recover the costs of premium
payments from the cash value of these policies.
Post Retirement Benefits Other Than Pensions.
The Company and its subsidiaries sponsor post-retirement benefit programs
which provide medical coverage and life insurance benefits to employees and
directors who meet minimum age and service requirements.
The Company and its subsidiaries recognize costs related to post retirement
benefits under the accrual method, which recognizes costs over the employee's
period of active employment. The impact of adopting SFAS No. 106 is being
amortized over a twenty year period beginning January 1, 1993.
49
<PAGE> 46
The following tables set forth the funded status and amounts recognized in
the Company's Consolidated Balance Sheets at December 31, 1999 and 1998 for the
pension plans and other post retirement benefit plans:
<TABLE>
<CAPTION>
Pension Plans Other Post Retirement Benefits
-------------------------- ------------------------------
1999 1998 1999 1998
-------------------------- ------------------------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 128,017 $ 109,152 $ 11,388 $ 10,668
Service cost 7,537 6,789 336 262
Interest cost 8,945 7,969 852 733
Assumption changes (12,921) 3,713 (833) 299
Actuarial (gain) loss 1,666 8,369 1,380 294
Curtailment gain (8,935) (924) -- --
Acquisitions 3,253 -- -- --
Benefits paid (8,353) (7,051) (1,019) (868)
-------------------------- ------------------------------
Benefit obligation at end of year $ 119,209 $ 128,017 $ 12,104 $ 11,388
========================== ==============================
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 123,078 $ 111,441 $ -- $ --
Actual return on plan assets 16,039 16,895 -- --
Employer contribution 1,057 1,793 1,019 868
Benefits paid (8,353) (7,051) (1,019) (868)
Administrative expenses (232) -- -- --
-------------------------- ------------------------------
Fair value of plan assets at end of year $ 131,589 $ 123,078 $ -- $ --
========================== ==============================
Funded status $ 12,380 $ (4,939) $ (12,104) ($ 11,388)
Unrecognized net actuarial (gain) loss (29,623) (12,761) (94) (629)
Unrecognized prior service cost 1,660 2,263 1,633 1,772
Unrecognized net transition obligation (1,675) (2,462) 5,257 5,649
-------------------------- ------------------------------
Prepaid (accrued) benefit cost $ (17,258) $ (17,899) $ (5,308) ($ 4,596)
========================== ==============================
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.75% 6.50% 7.75% 6.50%
Expected return on plan assets 8.50% 8.50% -- --
Rate of compensation increase 4.50% 4.50% -- --
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
--------------------------------- ---------------------------
1999 1998 1997 1999 1998 1997
--------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost
Service cost $ 7,537 $ 6,789 $ 5,358 $ 336 $ 262 $ 213
Interest cost 8,945 7,969 6,950 852 733 741
Expected return on plan assets (10,464) (9,435) (7,729) -- -- --
Net amortization and deferral (207) (305) (288) 545 523 484
Curtailment gain -- 668 -- -- -- --
Amortization of net gain -- (75) (135) -- -- --
--------------------------------- ---------------------------
Net periodic benefit cost $ 5,811 $ 5,611 $ 4,156 $1,733 $1,518 $1,438
================================= ===========================
</TABLE>
Curtailment gains of $8.0 million in 1999 were recorded as a reduction of
special charges relating to the Evergreen, SIS and CFX acquisitions.
50
<PAGE> 47
Multi-Employer Pension Plan
An acquired company participated in a multi-employer pension plan in 1998
and 1997. The plan was fully funded in 1998 and there is no future obligation
relating to this plan. Pension expense attributable to the plan for the years
ended December 31, 1998 and 1997 was $377,000 and $396,000, respectively.
Thrift Incentive Plan.
The Company has a contributory Thrift Incentive Plan covering substantially
all permanent employees after completion of one year of service. The Company
matches employee contributions based on a predetermined formula and may make
additional discretionary contributions. Banknorth also had an Employee Savings
Plan. The total expense for these plans in 1999, 1998 and 1997 was $3.2 million,
$4.7 million, and $4.1 million, respectively.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company discloses fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate fair value. Fair value estimates are made as of a specific point in
time based on the characteristics of the financial instruments and relevant
market information. Where available, quoted market prices are used. In other
cases, fair values are based on estimates using present value or other valuation
techniques. These techniques involve uncertainties and are significantly
affected by the assumptions used and judgments made regarding risk
characteristics of various financial instruments, discount rates, estimates of
future cash flows, future expected loss experience and other factors. Changes in
assumptions could significantly affect these estimates. Derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
certain cases, could not be realized in an immediate sale of the instrument.
Also, because of differences in methodologies and assumptions used to estimate
fair values, the Company's fair values should not be compared to those of other
banks.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the value of
assets and liabilities that are not considered financial instruments.
Accordingly, the aggregate fair value amounts presented do not purport to
represent the underlying market value of the Company. For certain assets and
liabilities, the information required under SFAS No. 107 is supplemented with
additional information relevant to an understanding of the fair value. Also,
fair values are presented for certain assets that are not financial instruments
under the definition in SFAS No. 107.
The following describes the methods and assumptions used by the Company in
estimating the fair values of financial instruments and certain non-financial
instruments:
CASH AND CASH EQUIVALENTS, INCLUDING CASH AND DUE FROM BANKS, SHORT-TERM
INVESTMENTS AND FEDERAL FUNDS SOLD. For these cash and cash equivalents, which
have maturities of 90 days or less, the carrying amounts reported in the balance
sheet approximate fair values.
SECURITIES AND LOANS HELD FOR SALE. Fair values are based on quoted bid
market prices, where available. Where quoted market prices for an instrument are
not available, fair values are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments and the
instrument being valued. Fair values are calculated based on the value of one
unit without regard to premiums or discounts that might result from selling all
of the Company's holdings of a particular security in one transaction.
LOANS AND LEASES. The fair values of commercial, commercial real estate,
residential real estate, and certain consumer loans and leases are estimated by
discounting the contractual cash flows using interest rates currently being
offered for loans with similar terms to borrowers of similar quality.
For certain variable-rate consumer loans, including home equity lines of
credit the carrying value approximates fair value.
For nonperforming loans and certain loans where the credit quality of the
borrower has deteriorated significantly, fair values are estimated by
discounting cash flows at a rate commensurate with the risk associated with
those cash flows.
MORTGAGE SERVICING RIGHTS. The fair value of the Company's mortgage
servicing rights is based on the expected present value of future mortgage
servicing income, net of estimated servicing costs, considering market consensus
loan prepayment predictions.
51
<PAGE> 48
DEPOSITS. The fair value of deposits with no stated maturity is equal to
the carrying amount. The fair value of time deposits is based on the discounted
value of contractual cash flows, applying interest rates currently being offered
on the deposit products of similar maturities.
The fair value estimates for deposits do not include the benefit that
results from the low-cost funding provided by the deposit liabilities compared
to the cost of alternative forms of funding ("deposit base intangibles")
BORROWINGS, INCLUDING FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER
REPURCHASE AGREEMENTS, BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON AND
OTHER BORROWINGS. The fair value of the Company's long-term borrowings is
estimated based on quoted market prices for the issues for which there is a
market, or by discounting cash flows based on current rates available to the
Company for similar types of borrowing arrangements. For short-term borrowings
that mature or reprice in 90 days or less, carrying value approximates fair
value.
OFF-BALANCE SHEET INSTRUMENTS:
COMMITMENTS TO ORIGINATE LOANS AND COMMITMENTS TO EXTEND CREDIT AND STANDBY
LETTERS OF CREDIT. In the course of originating loans and extending credit and
standby letters of credit, the Company will charge fees in exchange for its
lending commitment. While these commitment fees have value, the Company has not
estimated their value due to the short-term nature of the underlying
commitments.
FORWARD COMMITMENTS TO SELL LOANS. The fair value of the Company's forward
commitments to sell loans reflects the value of origination fees and servicing
rights recognizable upon sale of loans net of any cost to the Company if it
fails to meet its sale obligation. Of the $74 million of forward sales
commitments at December 31, 1999, the Company had $67.2 million in loans
available to sell at that date as well as sufficient loan originations
subsequent to December 31, 1999 to fulfill the commitments. Consequently, the
Company has no unmet sales obligation to value and due to the short-term nature
of the commitments has not estimated the value of the fees and servicing.
LOANS SERVICED WITH RECOURSE. Under certain of the Company's servicing
arrangements with investors, the Company has recourse obligation to those
serviced loan portfolios. In the event of foreclosure on a serviced loan, the
Company is obligated to repay the investor to the extent of the investor's
remaining balance after application of proceeds from the sale of the underlying
collateral. To date, losses related to these recourse arrangements have been
insignificant and while the Company cannot project future losses, the fair value
of this recourse obligation is deemed to be likewise insignificant.
A summary of the fair values of the Company's significant financial
instruments at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 776,395 $ 776,395 $ 869,039 $ 869,039
Securities - available for sale 6,316,031 6,316,031 4,113,996 4,113,996
Securities - held to maturity 557,151 535,605 265,778 267,161
Loans held for sale 82,318 82,382 560,750 561,620
Loans and leases, net 9,699,608 9,626,579 9,770,039 9,869,083
Mortgage servicing rights 52,724 59,254 45,439 46,577
Interest rate swaps, floor & corridor contracts 2,023 4,001 4,746 7,222
Liabilities:
Deposit (with no stated maturity) 7,212,557 7,212,557 7,227,677 7,227,677
Time deposits 4,497,944 4,506,223 4,788,535 4,808,479
Borrowings 5,367,478 5,340,259 2,910,173 2,917,732
</TABLE>
52
<PAGE> 49
18. CONDENSED PARENT INFORMATION
Condensed Financial Statements of the Parent Company
<TABLE>
<CAPTION>
December 31,
-----------------------------
Balance Sheets 1999 1998
-----------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 5,612 $ 7,681
Interest bearing deposits with subsidiaries 65,885 21,857
Securities purchased under agreements to resell to a subsidiary bank 12,250 18,317
Securities available for sale 36,892 6,078
Investment in subsidiaries 1,159,979 1,281,542
Goodwill and other intangibles 12,910 14,716
Amounts receivable from subsidiaries 61,537 14,360
Other assets 41,329 35,531
-----------------------------
Total assets $1,396,394 $1,400,082
=============================
Liabilities and shareholders' equity
Amounts payable to subsidiaries $ 28,720 $ 8,953
Subordinated debentures supporting mandatory redeemable trust securities 134,021 136,633
Other liabilities 41,379 32,106
Shareholders' equity 1,192,274 1,222,390
-----------------------------
Total liabilities and shareholders' equity $1,396,394 $1,400,082
=============================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
Operating income:
Dividends from subsidiaries $203,983 $132,091 $95,721
Other operating income 6,931 6,277 8,697
-----------------------------------------
Total operating income 210,914 138,368 104,418
-----------------------------------------
Operating expenses:
Interest on borrowings 13,222 13,343 12,161
Amortization of intangibles 1,847 1,843 1,869
Merger expenses 14,710 26,299 354
Other operating expenses 6,595 11,220 13,126
-----------------------------------------
Total operating expenses 36,374 52,705 27,510
-----------------------------------------
Income before income taxes and equity in
undistributed net income of subsidiaries 174,540 85,663 76,908
Income tax expense (benefit) (10,733) (11,964) (4,804)
-----------------------------------------
Income before equity in undistributed net income of subsidiaries 185,273 97,627 81,712
Equity in undistributed net income of subsidiaries 11,685 44,117 63,776
-----------------------------------------
Net income $196,958 $141,744 $145,488
=========================================
</TABLE>
(1) Amounts in parenthesis represent the excess of dividends over net income
from subsidiaries.
53
<PAGE> 50
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
-------------------------------------
<S> <C> <C> <C>
Statements of Cash Flows
Cash flows from operating activities:
Net income $ 196,958 $ 141,744 $ 145,488
Adjustments to reconcile net income to net
cash (used) provided by operating activities:
Undistributed net income from subsidiaries (11,685) (44,117) (63,776)
Amortization of goodwill and other intangibles 1,847 1,844 1,869
Securities losses (gains) -- (187) (333)
Decrease in unearned compensation 2,072 177 168
(Increase) decrease in amounts receivable from subsidiaries (47,177) (6,173) 6,938
Decrease (increase) in other assets (11,661) (1,465) (11,868)
Increase (decrease) in amounts payable to subsidiaries 19,767 19,366 (11,868)
Increase (decrease) in other liabilities 17,466 (3,589) 11,338
Other, net 668 1,182 (2,440)
-------------------------------------
Net cash provided by operating activities $ 168,255 $ 108,782 $ 75,516
=====================================
Cash flows from investing activities:
Net decrease (increase) in interest bearing deposits with subsidiaries ($ 37,961) ($ 4,210) $ (10,734)
Maturities of securities available for sale -- 4,556 $ 1,346
Sales of available for sale securities 1,432 4,494 510
Purchase of available for sale securities (34,119) -- (15,970)
Sales of held to maturity securities -- -- 4,337
Purchase of held to maturity securities -- -- (4,017)
Capital contribution from (to) subsidiary 11,890 (46,498) (51,206)
-------------------------------------
Net cash (used) provided by investing activities $ (58,758) $ (41,658) $ (75,734)
=====================================
Cash flows from financing activities:
Issuance of notes payable (net) $ 0 $ 0 $ 133,093
Payment of notes payable (10,805) (4,517) (4,873)
Other shareholders' equity, net -- -- 3,118
Dividends paid to shareholders (65,368) (57,231) (57,608)
Treasury stock acquired (53,745) (55,340) (55,981)
Common stock issued 18,352 19,291 16,516
-------------------------------------
Net cash provided (used) by financing activities $(111,566) $ (97,797) $ 34,265
=====================================
Net increase (decrease) in cash due from banks $ (2,069) $ (30,673) $ 34,047
Cash and due from banks at beginning of year 7,681 38,354 4,207
-------------------------------------
Cash and due from banks at end of year $ 5,612 $ 7,681 $ 38,254
=====================================
Supplemental disclosure information:
Interest paid on borrowings $ 9,956 $ 9,799 $ 6,088
</TABLE>
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<PAGE> 51
19. SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------- -------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $323,286 $317,329 $298,798 $288,106 $287,611 $287,427 $285,689 $285,433
Interest expense 163,425 157,329 145,470 137,066 138,828 139,437 138,763 138,616
------------------------------------------------------------------------------------------
Net interest income 159,861 160,000 153,328 151,040 148,783 147,990 146,926 146,817
Provision for loan and lease losses 6,005 6,165 5,840 5,565 6,308 6,308 5,570 5,589
------------------------------------------------------------------------------------------
Net interest income after provision
for loan and lease losses 153,856 153,835 147,488 145,475 142,475 141,682 141,356 141,228
Noninterest income 49,910 47,780 50,743 43,361 44,952 41,593 42,004 38,998
Special charges (3,889) 0 60 31,831 25,766 0 34,474 900
Noninterest expenses 121,183 117,209 117,637 114,110 116,297 111,171 113,278 117,580
------------------------------------------------------------------------------------------
Income before income taxes 86,472 84,406 80,534 42,895 45,364 72,104 35,608 61,746
Income tax expense 27,637 28,132 25,633 15,947 17,796 22,744 11,808 20,730
------------------------------------------------------------------------------------------
Net income $ 58,835 $ 56,274 $ 54,901 $ 26,948 $ 27,568 $ 49,360 $ 23,800 $ 41,016
==========================================================================================
Earnings per share:
Basic $0.41 $0.39 $0.37 $0.18 $0.19 $0.34 $0.16 $0.28
Diluted $0.40 $0.38 $0.37 $0.18 $0.19 $0.33 $0.16 $0.28
Operating earnings per share (1):
Basic $0.39 $0.39 $0.37 $0.34 $0.33 $0.34 $0.33 $0.29
Diluted $0.39 $0.38 $0.37 $0.34 $0.32 $0.33 $0.32 $0.28
</TABLE>
(1) Earnings before special charges
55
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Banknorth Group, Inc.:
We have audited the accompanying consolidated balance sheets of Banknorth Group,
Inc.(formerly Peoples Heritage Financial Group, Inc.) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of income,
changes in shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Banknorth Group,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.
Boston, Massachusetts /s/ KPMG LLP
August 2, 2000
56
