<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-16947
BANKNORTH GROUP, INC. (formerly Peoples Heritage Financial Group, Inc.)
(Exact name of Registrant as specified in its charter)
Maine 01-0437984
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Portland Square, Portland, Maine 04112
(Address of principal executive offices) (Zip Code)
(207) 761-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [ ]
The number of shares outstanding of the Registrant's common stock and related
stock purchase rights as of August 1, 2000 is:
Common stock, par value $.01 per share 144,583,456
-------------------------------------- -----------
(Class) (Outstanding)
<PAGE> 2
INDEX
BANKNORTH GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Income -
Three months and six months ended
June 30, 2000 and 1999 4
Consolidated Statements of Changes in Shareholders'
Equity - Six months ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 30
PART II. OTHER INFORMATION
Item 1. Legal proceedings 30
Item 2. Changes in securities and use of proceeds 30
Item 3. Defaults upon senior securities 30
Item 4. Submission of matters to a vote of security holders 30
Item 5 Other information 30
Item 6 Exhibits and reports on Form 8-K 30
Signatures 31
2
<PAGE> 3
BANKNORTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, 2000 December 31,1999
------------- ----------------
(Unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 550,311 $ 546,816
Federal funds sold and other short term investments 68,305 229,579
Securities available for sale, at market value 5,913,854 6,316,031
Securities held to maturity (fair value of $495,295 and
$535,605 at June 30, 2000 and December 31, 1999,
respectively) 498,557 557,151
Loans held for sale 16,541 82,318
Loans and leases:
Residential real estate mortgages 2,304,088 2,270,417
Commercial real estate mortgages 2,899,759 2,696,317
Commercial business loans and leases 2,170,661 1,924,201
Consumer loans and leases 3,149,679 2,963,721
----------- -----------
10,524,187 9,854,656
Less: Allowance for loan and lease losses 156,464 155,048
----------- -----------
Net loans and leases 10,367,723 9,699,608
----------- -----------
Premises and equipment 188,430 192,540
Goodwill and other intangibles 173,980 184,381
Mortgage servicing rights 44,135 52,724
Bank-owned life insurance 299,619 288,783
Other assets 372,171 358,333
=========== ===========
$18,493,626 $18,508,264
=========== ===========
Liabilities and Shareholders' Equity
Deposits:
Regular savings $ 1,486,619 $ 1,567,776
Money market and NOW accounts 3,838,762 3,698,934
Certificates of deposit 4,502,653 4,448,229
Brokered deposits 114,226 173,798
Demand deposits 2,002,284 1,821,764
----------- -----------
Total deposits 11,944,544 11,710,501
----------- -----------
Federal funds purchased and securities sold under
repurchase agreements 994,139 1,302,821
Borrowings from the Federal Home Loan Bank of Boston 3,961,353 3,997,819
Other borrowings 135,878 66,838
Other liabilities 138,850 139,236
----------- -----------
Total liabilities 17,174,764 17,217,215
----------- -----------
Company obligated, mandatory redeemable securities of
subsidiary trusts holding solely parent junior
subordinated debentures 98,775 98,775
Shareholders' Equity:
Preferred stock (par value $0.01 per share, 5,000,000
shares authorized, none issued) - -
Common stock (par value $0.01 per share, 400,000,000
and 200,000,000 shares authorized, 149,509,060
and 149,623,204 shares issued) 1,495 1,496
Paid-in capital 615,470 617,523
Retained earnings 817,993 787,238
Unearned compensation (1,522) (2,751)
Accumulated other comprehensive income (loss) (124,606) (125,394)
Treasury stock, at cost (5,053,143 shares and
4,649,306 shares) (88,743) (85,838)
----------- -----------
Total shareholders' equity 1,220,087 1,192,274
----------- -----------
$18,493,626 $18,508,264
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 4
BANKNORTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share data) (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
2000 1999 2000 1999
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest on loans and leases $ 220,383 $ 200,825 $ 430,964 $ 415,718
Interest and dividends on securities 110,671 97,973 225,483 171,186
----------- ----------- ----------- -----------
Total interest and dividend income 331,054 298,798 656,447 586,904
Interest expense:
Interest on deposits 101,122 93,262 195,859 188,651
Interest on borrowed funds 76,767 52,208 152,250 93,885
----------- ----------- ----------- -----------
Total interest expense 177,889 145,470 348,109 282,536
Net interest income 153,165 153,328 308,338 304,368
Provision for loan and lease losses 5,849 5,840 10,917 11,405
----------- ----------- ----------- -----------
Net interest income after provision
for loan and lease losses 147,316 147,488 297,421 292,963
Noninterest income:
Customer services 20,445 16,811 39,081 31,440
Mortgage banking services 4,984 7,866 8,641 13,395
Insurance commissions 4,694 4,314 9,973 9,596
Trust services 8,767 8,692 17,427 16,992
Investment advisory services 1,618 1,695 3,436 2,706
Bank-owned life insurance income 4,165 4,950 9,265 7,797
Merchant and card product income, net 4,215 3,251 7,539 5,539
Net securities gains 38 403 25 646
Losses on securities restructuring (15,895) - (15,895) -
Other noninterest income 7,856 2,761 11,563 5,993
----------- ----------- ----------- -----------
40,887 50,743 91,055 94,104
Noninterest expenses:
Salaries and employee benefits 57,425 56,514 117,286 113,459
Data processing 9,269 9,965 18,036 20,057
Occupancy 9,928 9,904 21,032 19,892
Equipment 7,791 7,636 15,566 14,519
Distributions on securities of
subsidiary trusts 2,347 2,374 4,694 5,149
Amortization of goodwill and other
intangibles 5,200 5,167 10,401 10,299
Special charges 37,271 60 42,608 31,891
Other noninterest expenses 25,770 26,077 50,725 48,372
----------- ----------- ----------- -----------
155,001 117,697 280,348 263,638
Income before income tax expense 33,202 80,534 108,128 123,429
Applicable income tax expense 14,323 25,633 39,349 41,580
----------- ----------- ----------- -----------
Net income $ 18,879 $ 54,901 $ 68,779 $ 81,849
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 144,280,007 146,623,912 144,363,290 146,352,209
Diluted 145,167,475 148,312,018 145,211,641 148,194,179
Earnings per share:
Basic $0.13 $0.37 $0.48 $0.56
Diluted 0.13 0.37 0.47 0.55
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE> 5
BANKNORTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Unearned Other
Par Paid-in Retained Compen- Comprehensive Treasury
Value Capital Earnings sation Income (Loss) Stock Total
----- ------- -------- ------ ------------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1999 $1,496 $617,523 $787,238 ($2,751) ($125,394) ($85,838) $1,192,274
Net income - - 68,779 - - - 68,779
Unrealized gain on securities, net of
reclassification adjustment - - - - 788 - 788
----------
Comprehensive income 69,567
----------
Common stock issued for employee benefit
plans - - (3,397) - - 7,231 3,834
Cancellation of treasury shares at
acquisition (1) (2,206) - - - 2,207 -
Treasury stock purchased - - - - - (12,343) (12,343)
Decrease in unearned compensation - 472 - 237 - - 709
Issuance of restricted stock - 71 - - - - 71
Amortization of restricted stock awards - (390) - 992 - - 602
Cash dividends - - (34,627) - - - (34,627)
------ -------- -------- ------- --------- -------- ----------
Balances at June 30, 2000 $1,495 $615,470 $817,993 ($1,522) ($124,606) ($88,743) $1,220,087
====== ======== ======== ======= ========= ======== ==========
Balances at December 31, 1998 $1,496 $618,624 $669,357 ($3,756) $1,858 ($65,189) $1,222,390
Net income - - 81,849 - - - 81,849
Unrealized losses on securities, net of
reclassification adjustment - - - - (57,888) - (57,888)
----------
Comprehensive income 23,961
----------
Common stock issued for employee benefit plans - - (6,770) - - 18,347 11,577
Decrease in unearned compensation - 244 - 311 - - 555
Issuance of restricted stock - 134 (61) - - 220 293
Amortization of restricted stock awards - (276) - 402 - - 126
Premium on repurchase of trust preferred
securities - (1,801) - - - - (1,801)
Payment of fractional shares - (2) - - - - (2)
Cash dividends - - (32,407) - - - (32,407)
------ -------- -------- ------- --------- -------- ----------
Balances at June 30, 1999 $1,496 $616,923 $711,968 ($3,043) ($56,030) ($46,622 $1,224,692
====== ======== ======== ======= ========= ======== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE> 6
BANKNORTH GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 68,779 $ 81,849
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan and lease losses 10,917 11,405
Depreciation 13,646 13,334
Amortization of goodwill and other intangibles 10,401 10,299
Provision for deferred tax expense (11,374) (1,333)
ESOP expense 709 555
Issuance and amortization of restricted stock 673 419
Net (gains) losses realized from sales of securities
and consumer loans 11,135 (646)
Net losses realized from sales of loans held for
sale (a component of
mortgage banking services) 192 2
Earnings from bank owned life insurance (9,265) 7,797
Net (increase) decrease in mortgage servicing
rights 8,589 (7,226)
Proceeds from sales of loans held for sale 71,499 830,998
Residential loans originated and purchased for
sale (5,914) (428,821)
Net decrease (increase) in interest and dividends
receivable and other assets (7,900) (27,730)
Net increase (decrease) in other liabilities (386) 22,428
----------- -----------
Net cash provided (used) by operating activities $ 161,701 $ 497,736
----------- -----------
Cash flows from investing activities:
Proceeds from sales of securities available for sale $ 106,469 $ 44,330
Proceeds from maturities and principal repayments of
securities available for sale 473,417 1,029,941
Purchases of securities available for sale (185,832) (2,984,554)
Proceeds from maturities and principal repayments of
securities held to maturities 55,500 34,053
Net (increase) decrease in loans and leases (708,531) (235,621)
Proceeds from sale of loans 34,234 --
Purchase of bank owned life insurance -- (150,000)
Net additions to premises and equipment (9,536) (7,745)
---------- -----------
Net cash provided (used) by investing activities ($ 234,279) ($2,269,596)
---------- -----------
Cash flows from financing activities:
Net (decrease) increase in deposits $ 234,043 ($ 284,638)
Net increase (decrease) in securities sold under
repurchase agreements (308,682) 37,874
Proceeds from Federal Home Loan Bank of Boston
borrowings 6,799,300 2,218,785
Payments on Federal Home Loan Bank of Boston
borrowings (6,835,766) (436,261)
Net increase (decrease) in other borrowings 69,040 25,319
Repurchase of trust preferred securities -- (33,026)
Issuance of stock 3,834 11,575
Purchase of treasury stock (12,343) --
Dividends paid (34,627) (32,407)
----------- -----------
Net cash provided by financing activities ($ 85,201) $ 1,507,221
----------- -----------
Increase (decrease) in cash and cash equivalents ($ 157,779) ($ 264,639)
Cash and cash equivalents at beginning of period 776,395 838,594
=========== ===========
Cash and cash equivalents at end of period $ 618,616 $ 573,955
=========== ===========
</TABLE>
For the six months ended June 30, 2000 and 1999, interest of $349,239 and
$281,514 and income taxes of $54,249 and $26,867 were paid, respectively.
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE> 7
BANKNORTH GROUP, INC. AND SUBSIDIARIES
JUNE 30, 2000
(IN THOUSANDS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and predominant
practices within the banking industry. The Company has not changed its
accounting and reporting policies from those disclosed in its 1999 Annual
Report.
On May 10, 2000, Peoples Heritage Financial Group, Inc. ("the Company")
completed the acquisition of Banknorth Group, Inc. ("Banknorth"), which was
accounted for under the pooling-of-interests method. The Company changed its
name to Banknorth Group, Inc. as a result of the merger. The consolidated
financial statements of the Company have been restated to reflect the
acquisition at the beginning of each period presented. At December 31, 1999, the
former Banknorth had total assets of $4.6 billion and total shareholders' equity
of $341.3 million.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the consolidated financial
statements have been included. The results of operations and other data for the
six months ended June 30, 2000 are not necessarily indicative of the results
that may be expected for any other interim period or the entire year ending
December 31, 2000. Certain amounts in the prior periods have been reclassified
to conform to the current presentation.
NOTE 2 - OTHER COMPREHENSIVE INCOME (LOSS)
The components of total comprehensive income for the Company are net income and
unrealized gains (losses) on securities available for sale, net of tax. The
following is a reconciliation of comprehensive income for the six months ended
June 30, 2000 and 1999.
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------
2000 1999
-------- ---------
<S> <C> <C>
Net income $ 68,779 $ 81,849
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on available for sale securities:
Unrealized holding gains (losses) arising during the period (9,528) (57,468)
Less: reclassification adjustment for gains (losses) included in net income (10,316) 420
-------- ---------
Other comprehensive income (loss), net 788 (57,888)
-------- ---------
Comprehensive income $ 69,567 $ 23,961
======== =========
</TABLE>
7
<PAGE> 8
NOTE 3 - EARNINGS PER SHARE
The computations of basic and diluted net income per share and weighted average
shares outstanding follow (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 18,879 $ 54,901 $ 68,779 $ 81,849
============ ============ ============ ============
Weighted average shares outstanding
Basic: 144,280,007 146,623,912 144,363,290 146,352,209
Effect of dilutive securities:
Stock options 887,468 1,688,106 848,351 1,841,970
============ ============ ============ ============
Diluted 145,167,475 148,312,018 145,211,641 148,194,179
============ ============ ============ ============
Net income per share:
Basic $ 0.13 $ 0.37 $ 0.48 $ 0.56
Diluted 0.13 0.37 0.47 0.55
</TABLE>
NOTE 4 - COMPLETED ACQUISITION
On May 10, 2000, Peoples Heritage Financial Group, Inc. ("the Company")
completed the acquisition of Banknorth Group, Inc., which was effected by means
of the merger of Banknorth Group, Inc. with and into the Company. The Company
changed its name to "Banknorth Group, Inc." as a result of the merger. As a
result of the merger and the change in the name of the Company, the Company's
symbol on the Nasdaq stock market is now BKNG. Upon consummation of the merger,
each share of former Banknorth common stock outstanding was automatically
converted into the right to receive 1.825 shares of Company common stock,
including each attached right issued pursuant to the Company's shareholder
rights plan (collectively, the "Common Stock"), with cash in lieu of fractional
share interests. Approximately 42.9 million shares of Common Stock were issued
or are issuable in connection with the merger.
8
<PAGE> 9
BANKNORTH GROUP, INC. AND SUBSIDIARIES, INC.)
MANAGEMENT'S DISCUSSION AND ANALYSIS
SUMMARY
Banknorth Group, Inc. (the "Company") reported consolidated net income of $18.9
million, or $0.13 per diluted share, for the second quarter of 2000. This
compares with $54.9 million, or $0.37 per diluted share, for the second quarter
of 1999. Non-operating items recorded in the second quarter of 2000 consisted of
$37.3 million ($28.5 million net of tax) of merger charges and $15.9 million
($10.3 million net of tax) of losses on restructuring the securities portfolio.
See Table 5 for more information related to special charges.
The Company's operating income for the second quarter of 2000 was $57.7 million,
or $0.40 per diluted share, and return on average equity ("ROE") and return on
average assets (" ROA") were 19.82% and 1.27%, respectively. Operating income
for the second quarter of 1999 was $54.9 million, or $0.37 per diluted share,
and ROE and ROA were 17.91% and 1.27%, respectively. Operating results for the
second quarter of 2000 represent an 8% increase in diluted earnings per share
from the comparable period last year.
The six months ended June 30, 2000 included $58.5 million of non-operating items
($42.4 million net of tax). The six months ended June 30, 1999 included
non-operating items of $31.9 million ($23.2 million after tax). (See Table 5 for
more information related to special charges.) The Company's operating income for
the first six months of 2000 was $111.2 million, or $0.77 per diluted share, and
ROE and ROA were 18.97% and 1.22%, respectively. Operating income for the first
six months of 1999 was $105.1 million, or $0.71 per diluted share, and ROE and
ROA of 17.50% and 1.25%, respectively. Operating results for the first six
months of 2000 represent an 8% increase in diluted earnings per share from the
comparable period last year.
The improved operating results for the second quarter of 2000 over the second
quarter of 1999 were largely due to strong fee income and control of expenses.
Noninterest income increased 12% compared to the second quarter of 1999
excluding losses related to repositioning the securities portfolio. The growth
in noninterest income was primarily due to a $3.6 million increase in customer
service income, a $964 thousand increase in merchant and card product income
and a $4.7 million gain on the sale of a credit card portfolio. Operating
noninterest expenses for the second quarter of 2000 were consistent with the
same quarter in 1999. The efficiency ratio (noninterest expense excluding
distributions on securities of subsidiary trust and special charges, as a
percentage of net interest income and noninterest income, excluding net
securities gains) was 54.97% in the second quarter of 2000 compared to 56.59% in
the comparable period last year. Selected quarterly data, ratios and per share
data, both as reported and on an operating basis, are provided in Table 1.
9
<PAGE> 10
TABLE 1 - Selected Quarterly Data
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
2000 2000 1999 1999
Second First Fourth Third
------ ----- ------ -----
<S> <C> <C> <C> <C>
Net interest income $ 153,165 $ 155,173 $ 159,861 $ 160,000
Provision for loan and lease losses 5,849 5,068 6,005 6,165
--------- --------- --------- ---------
Net interest income after loan and lease loss provisions 147,316 150,105 153,856 153,835
Noninterest income (excluding securities transactions) 56,744 50,181 49,910 47,771
Net securities gains (1) (15,857) (13) -- 9
Noninterest expenses (excluding special charges) 117,730 120,010 121,183 117,209
Special charges (1) 37,271 5,337 (3,889) --
--------- --------- --------- ---------
Income before income taxes 33,202 74,926 86,472 84,406
Income tax expense 14,323 25,026 27,637 28,132
--------- --------- --------- ---------
Net income $ 18,879 $ 49,900 $ 58,835 $ 56,274
========= ========= ========= =========
Earnings per share:
Basic $ 0.13 $ 0.35 $ 0.41 $ 0.39
Diluted 0.13 0.34 0.40 0.38
Operating earnings per share (excluding special charges):
Basic $ 0.40 $ 0.37 $ 0.39 $ 0.39
Diluted 0.40 0.37 0.39 0.38
Return on average assets (2) 0.41% 1.10% 1.28% 1.23%
Return on average equity (2) 6.48% 16.75% 19.64% 18.77%
Operating ratios:
Return on average assets (excluding special charges)(2) 1.27% 1.17% 1.22% 1.23%
Return on average equity (excluding special charges)(2) 19.82% 17.96% 18.84% 18.77%
Efficiency ratio (3) 54.97% 57.30% 56.65% 55.28%
Non-operating items, net of related income tax effect $ 38,870 $ 3,577 ($ 2,389) $ 0
</TABLE>
<TABLE>
<CAPTION>
1999 1999
Second First
------ -----
<S> <C> <C>
Net interest income $ 153,328 $ 151,040
Provision for loan and lease losses 5,840 5,565
--------- ---------
Net interest income after loan and lease loss provisions 147,488 145,475
Noninterest income (excluding securities transactions) 50,340 43,118
Net securities gains 403 243
Noninterest expenses (excluding special charges) 117,637 114,110
Special charges (1) 60 31,831
--------- ---------
Income before income taxes 80,534 42,895
Income tax expense 25,633 15,947
--------- ---------
Net income $ 54,901 $ 26,948
========= =========
Earnings per share:
Basic $ 0.37 $ 0.18
Diluted 0.37 0.18
Operating earnings per share (excluding special charges):
Basic $ 0.37 $ 0.34
Diluted 0.37 0.34
Return on average assets (2) 1.26% 0.66%
Return on average equity (2) 17.89% 9.06%
Operating ratios:
Return on average assets (excluding special charges)(2) 1.27% 1.23%
Return on average equity (excluding special charges)(2) 17.91% 16.87
Efficiency ratio (3) 56.59% 57.34
Non-operating items, net of related income tax effect (1) $ 40 $ 23,205
</TABLE>
(1) Non-operating items consists of merger-related expenses, losses on
restructuring the investment portfolio, branch closing costs and, in the
first quarter of 1999, one-time charges related to the discontinuance of
the Company's correspondent mortgage business.
(2) Annualized.
(3) Represents noninterest expenses, excluding distributions on securities
of subsidiary trusts and special charges, as a percentage of net
interest income and noninterest income, excluding net securities gains.
10
<PAGE> 11
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's fully taxable equivalent net interest income in the second quarter
of 2000 increased $146 thousand compared to the second quarter of 1999. The
increase was primarily attributable to increased levels of average earning
assets, which were offset part by lower net interest margins. Average commercial
real estate, commercial business and consumer loans all experienced significant
growth while average residential real estate loans declined. Residential real
estate loans declined largely due to the Company's discontinuance of the
correspondent mortgage business. Average securities increased during the three
months ended June 30, 2000, as compared to the comparable period in the prior
year, due primarily to additional investments in agency securities. The
Company's net interest margin was 3.67% for the second quarter of 2000 compared
to 3.84% for the comparable quarter of 1999. The lower margin was due to the
cost of funds rising ahead of, and faster than, the yield on earning assets.
Table 2 shows quarterly average balances, net interest income by category and
rates for the first and second quarters of 2000 and for each quarter in 1999.
Table 3 shows the changes in fully taxable equivalent net interest income by
category due to changes in rate and volume. See also "Interest Rate Risk and
Asset Liability Management" below.
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income from interest-earning assets and
the resultant average yields; (ii) the total dollar amount of interest expense
on interest-bearing liabilities and the resultant average cost; (iii) net
interest income; (iv) interest rate spread; and (v) net interest margin (net
interest income divided by average interest-earning assets). For purposes of the
tables and the following discussion, (i) income from interest-earning assets and
net interest income is presented on a fully-taxable equivalent basis primarily
by adjusting income and yields earned on tax-exempt interest received on loans
to qualifying borrowers and on certain of the Company's securities to make them
equivalent to income and yields earned on fully-taxable investments, assuming a
federal income tax rate of 35%, and (ii) nonaccrual loans have been included in
the appropriate average balance loan category, but unpaid interest on nonaccrual
loans has not been included for purposes of determining interest income. Average
balances are based on average daily balances during the indicated periods.
11
<PAGE> 12
TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)
<TABLE>
<CAPTION>
2000 Second Quarter 2000 First Quarter
----------------------------------- -----------------------------------
Yield/ Yield/
Average Balance Interest Rate (1) Average Balance Interest Rate (1)
--------------- ------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $2,336,378 $44,190 7.57% $2,337,127 $43,536 7.45%
Commercial real estate mortgages 2,819,294 62,581 8.93 2,731,631 60,698 8.94
Commercial loans and leases 2,132,627 48,021 9.06 1,952,209 43,019 8.86
Consumer loans and leases 3,101,735 66,598 8.64 3,036,234 64,193 8.50
---------- ------- ---------------------
Total loans and leases 10,390,034 221,390 8.56 10,057,201 211,446 8.45
Securities 6,478,785 109,892 6.79 6,783,530 114,163 6.74
Federal funds sold and other short term
investments 80,250 1,266 6.34 79,032 1,091 5.55
---------- ------- ---------------------
Total earning assets 16,949,069 332,548 7.87 16,919,763 326,700 7.75
Nonearning assets 1,398,125 1,393,153
=========== ===========
Total assets $18,347,194 $18,312,916
=========== ===========
Interest-bearing deposits:
Regular savings $1,545,893 8,037 2.09 $1,561,943 8,176 2.11
NOW and money market accounts 3,770,025 31,269 3.34 3,639,746 27,701 3.06
Certificates of deposit 4,540,737 59,822 5.30 4,505,049 56,716 5.06
Brokered deposits 123,670 1,994 6.49 131,218 2,144 6.57
----------- ------- -----------------------
Total interest-bearing deposits 9,980,325 101,122 4.08 9,837,956 94,737 3.87
Borrowed funds 5,086,715 76,767 6.07 5,262,911 75,483 5.77
----------- ------- -----------------------
Total interest-bearing liabilities 15,067,040 177,889 4.75 15,100,867 170,220 4.53
-------
Non-interest bearing deposits 1,875,798 1,798,107
Other liabilities 133,627 117,311
Securities of subsidiary trusts 98,775 98,775
Shareholders' equity 1,171,954 1,197,856
=========== ===========
Total liabilities and shareholders' equity $18,347,194 $18,312,916
=========== ===========
Net earning assets $ 1,882,029 $ 1,818,896
=========== ===========
Net interest income (fully-taxable equivalent) 154,659 156,480
Less: fully-taxable equivalent adjustments (1,494) (1,307)
========== ==========
Net interest income $153,165 $155,173
========== ==========
Net interest rate spread (fully-taxable equivalent) 3.12% 3.22%
Net interest margin (fully-taxable equivalent) 3.67% 3.70%
</TABLE>
----------
(1) Annualized.
(2) Loans and leases include loans held for sale.
12
<PAGE> 13
TABLE 2 - Average Balances, Yields and Rates
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 Fourth Quarter 1999 Third Quarter
----------------------------------- -----------------------------------
Yield/ Yield/
Average Balance Interest Rate (1) Average Balance Interest Rate (1)
----------------------------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $2,356,697 $43,190 7.33% $2,535,350 $46,886 7.40%
Commercial real estate mortgages 2,695,579 60,710 8.94 2,626,837 57,882 8.74
Commercial loans and leases 1,865,582 40,957 8.71 1,862,931 40,058 8.53
Consumer loans and leases 2,908,574 63,008 8.59 2,754,214 59,996 8.64
---------- ------- ---------- -------
Total loans and leases 9,826,432 207,865 8.39 9,779,332 204,822 8.31
Securities 7,030,811 115,643 6.58 6,989,116 112,508 6.44
Federal funds sold and other short term investments 80,898 1,208 5.92 $97,563 1,313 5.34
---------- ------- ---------- ------
Total earning assets 16,938,141 324,716 7.61 16,866,011 318,643 7.50
------- -------
Nonearning assets 1,362,000 1,303,766
----------- -----------
Total assets $18,300,141 $18,169,777
=========== ===========
Interest-bearing deposits:
Regular savings $1,604,451 8,427 2.08 $1,640,217 8,627 2.09
NOW and money market accounts 3,644,631 26,356 2.87 3,607,758 25,277 2.78
Certificates of deposit 4,511,629 56,058 4.93 4,541,065 55,791 4.87
Brokered deposits 143,328 2,062 5.71 163,886 2,275 5.51
----------- ------- ----------- -------
Total interest-bearing deposits 9,904,039 92,903 3.72 9,952,926 91,970 3.67
Borrowed funds 5,142,011 70,522 5.44 5,015,825 65,358 5.17
----------- ------- ----------- -------
Total interest-bearing liabilities 15,046,050 163,425 4.31 14,968,751 157,328 4.17
------- -------
Non-interest bearing deposits 1,861,423 1,810,848
Other liabilities 105,295 101,867
Securities of subsidiary trusts 98,778 98,775
Shareholders' equity 1,188,598 1,189,536
----------- -----------
Total liabilities and shareholders' equity $18,300,144 $18,169,777
=========== ===========
Net earning assets $ 1,892,091 $ 1,897,260
=========== ===========
Net interest income (fully-taxable equivalent) 161,291 161,315
Less: fully-taxable equivalent adjustments (1,430) (1,315)
-------- --------
Net interest income $159,861 $160,000
======== ========
Net interest rate spread (fully-taxable
equivalent) 3.30% 3.33%
Net interest margin (fully-taxable equivalent) 3.78% 3.79%
</TABLE>
----------
(1) Annualized.
(2) Loans and leases include loans held for sale.
13
<PAGE> 14
TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 Second Quarter 1999 First Quarter
----------------------------------- -----------------------------------
Yield/ Yield/
Average Balance Interest Rate (1) Average Balance Interest Rate (1)
------------- ------------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages $ 2,687,207 $49,778 7.41% $ 3,461,965 $64,656 7.47%
Commercial real estate mortgages 2,517,706 55,123 8.78 2,438,735 54,024 8.98
Commercial loans and leases 1,796,819 38,421 8.58 1,708,703 38,096 9.04
Consumer loans and leases 2,683,791 58,311 8.71 2,739,169 58,788 8.70
----------- -------- ------------ --------
Total loans and leases 9,685,523 201,633 8.35 10,348,572 215,564 8.45
Securities 6,257,096 95,808 6.12 4,730,964 71,543 6.05
Federal funds sold and other short term
investments 208,006 2,542 4.90 205,919 2,022 3.98
----------- -------- ------------ --------
Total earning assets 16,150,625 299,983 7.45 15,285,455 289,129 7.67
-------- --------
Nonearning assets 1,266,088 1,233,435
----------- ------------
Total assets $17,416,713 $ 16,518,890
=========== ============
Interest-bearing deposits:
Regular savings $ 1,613,609 8,480 2.11 $1,622,257 8,486 2.12
NOW and money market accounts 3,545,448 24,057 2.72 3,482,796 23,549 2.74
Certificates of deposit 4,671,041 57,914 4.97 4,749,889 60,722 5.18
Brokered deposits 201,244 2,811 5.60 211,412 2,632 5.05
----------- -------- ------------ --------
Total interest-bearing deposits 10,031,342 93,262 3.73 10,066,354 95,389 3.84
Borrowed funds 4,148,710 52,208 5.05 3,301,978 41,677 5.12
----------- -------- ------------ --------
Total interest-bearing liabilities 14,180,052 145,470 4.11 13,368,332 137,066 4.16
-------- --------
Non-interest bearing deposits 1,779,277 1,731,140
Other liabilities 126,708 95,770
Securities of subsidiary trusts 99,987 118,000
Shareholders' equity 1,230,689 1,205,648
----------- ------------
Total liabilities and shareholders' equity $17,416,713 $ 16,518,890
=========== ============
Net earning assets $ 1,970,573 $ 1,917,123
=========== ============
Net interest income (fully-taxable equivalent) 154,513 152,063
Less: fully-taxable equivalent adjustments (1,185) (1,023)
-------- --------
Net interest income $153,328 $151,040
======== ========
Net interest rate spread (fully-taxable equivalent) 3.34% 3.51%
Net interest margin (fully-taxable equivalent) 3.84% 4.03%
</TABLE>
----------
(1) Annualized.
(2) Loans and leases include loans held for sale.
14
<PAGE> 15
The following table presents certain information on a fully taxable equivalent
basis regarding changes in interest income and interest expense of the Company
for the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided with respect to changes
attributable to (1) changes in rate (change in rate multiplied by old volume),
(2) changes in volume (change in volume multiplied by old rate) and (3) changes
in rate/volume (change in rate multiplied by change in volume).
TABLE 3 - RATE /VOLUME ANALYSIS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 vs. 1999
Increase (decrease) due to
----------------------------------------------
Rate & Total
Volume Rate Volume (1) Change
----------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans and leases $14,626 $5,057 $ 74 $19,757
Securities 3,373 10,423 288 14,084
Federal funds sold and other short term investments (1,556) 745 (465) (1,276)
----------------------------------------------
Total interest income 16,443 16,225 (103) 32,565
----------------------------------------------
Interest expense:
Interest-bearing deposits
Regular savings (355) (80) (8) (443)
NOW and money market accounts 1,519 5,465 228 7,212
Certificates of deposit (1,610) 3,833 (315) 1,908
Brokered deposits (1,080) 445 (182) (817)
----------------------------------------------
Total interest-bearing deposits (1,526) 9,663 (277) 7,860
Borrowed funds 11,778 10,521 2,260 24,559
----------------------------------------------
Total interest expense 10,252 20,184 1,983 32,419
Net interest income (fully taxable equivalent) $ 6,191 ($3,959) ($2,086) $ 146
==============================================
</TABLE>
----------
(1) Includes changes in interest income and expense not due solely to volume
or rate changes.
15
<PAGE> 16
NONINTEREST INCOME
Excluding a $15.9 million loss on securities restructuring, as discussed below,
second quarter noninterest income totaled $56.8 million, a 12% increase from the
second quarter of 1999. This increase was primarily due to customer service
income (up $3.6 million or 22%) and merchant and card product income (up $964
thousand or 30%) and a $4.7 million gain on the sale of a credit card portfolio.
These increases were partially offset by a $2.9 million decline in mortgage
banking services income due primarily to lower gains on the sale of mortgage
servicing rights and the discontinuance of the correspondent mortgage business
in the first quarter of 1999. Noninterest income, excluding losses related to
restructuring the securities portfolio, for the quarter ended June 30, 2000 was
27% of total revenue compared to 25% for the quarter ended June 30, 1999. For
the six months ended June 30, 2000 and 1999, excluding losses on securities
restructuring, noninterest income amounted to $107.0 million and $94.1 million,
respectively. The 13.7% increase was primarily due to increases in customer
services income, merchant and card product income, investment advisory fees and
the gain on the sale of a credit card portfolio.
Customer services income in the second quarter of 2000 increased 22% from the
second quarter of 1999. For the six months ended June 30, 2000 and 1999,
customer service income amounted to $39.1 million and $31.4 million,
respectively, an increase of $7.6 million or 24.3%. These increases were
primarily attributable to volume driven increases in checking account fees and
ATM fees.
Combined trust and investment advisory services income remained consistent
during the second quarters of 2000 and 1999. For the six months ended June 30,
2000 and 1999, combined trust and investment advisory services income amounted
to $20.9 million and $19.7 million, respectively. Assets under management were
$7.7 billion and $7.2 billion at June 30, 2000 and 1999, respectively.
Bank-owned life insurance ("BOLI") income was $4.2 million for the second
quarter of 2000, compared to $5.0 million for the same period in 1999. For the
six months ended June 30, 2000 and 1999, BOLI income was $9.3 million and $7.8
million, respectively. There was a $1.2 million death benefit recorded in the
first quarter of 2000 while the second quarter of 1999 included a $1.4 million
death benefit. There was also increased income on higher average levels of BOLI
in 2000. For the second quarter of 2000, the average carrying value of BOLI was
$297 million compared to $264 million for the second quarter of 1999. 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
June 30, 2000.
Merchant and card product income was $4.2 million for the second quarter of
2000, compared to $3.3 million for the same period in 1999. For the six months
ended June 30, 2000 and 1999, merchant and card product income was $7.5 million
and $5.5 million, respectively. 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. The increases represent additional volume
due to increases in the customer base.
Mortgage banking services income of $5.0 million and $7.9 million provided 12%
and 16% of non-interest income for the quarters ended June 30, 2000 and 1999,
respectively. The 37% decrease from the same quarter of last year was due to a
$1.2 million decrease in mortgage sales income resulting primarily from lower
originations as a result of fewer refinancings. In addition, there was a $1.7
million decrease in net servicing income due to a sale of mortgage servicing
rights relating to $408 million principal amount of loans in the second
quarter of 1999. A $2.9 million gain was recognized on this sale. The amount of
loans serviced for others was $3.8 billion and $4.8 billion at June 30, 2000 and
1999, respectively. For the six months ended June 30, 2000 and 1999, mortgage
banking services income amounted to $8.6 million and $13.4 million, or 10% and
14% of noninterest income for the six months ended June 30,2000 and 1999,
respectively. The $4.8 million decrease was largely due to the discontinuance of
the correspondent mortgage lending business and lower gains on the sale of the
mortgage servicing rights. See Table 4 for a summary of mortgage banking
services income by quarter for 2000 and 1999.
Capitalized mortgage servicing rights amounted to $44.1 million at June 30,
2000, compared to $52.7 million at December 31,1999. The decrease was due
largely to the sale of mortgage servicing rights totaling $6.3 million in the
first quarter of 2000. See Table 4 for details. Because mortgage servicing
rights are an interest-rate sensitive asset, the value of the Company's mortgage
servicing rights and the related mortgage banking services income may be
adversely impacted if mortgage interest rates decline and actual or expected
loan prepayments increase. To mitigate the prepayment risk
16
<PAGE> 17
associated with adverse changes in interest rates and the resultant impairment
to capitalized mortgage servicing rights and effects on mortgage banking
services income, the Company has established a hedge program against a portion
of its capitalized mortgage servicing rights to help protect its value and
mortgage banking services income. Notwithstanding the foregoing, there can be no
assurance that significant declines in interest rates will not have a material
adverse 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 4 - MORTGAGE BANKING SERVICES
(Dollars in thousands)
<TABLE>
<CAPTION>
At or for the Three Months Ended
------------------------------------------------------------------------------
6/30/00 3/31/00 12/31/99 9/30/99 6/30/99 3/31/99
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
RESIDENTIAL MORTGAGES SERVICED FOR INVESTORS $3,832,996 $3,993,680 $4,540,948 $4,682,347 $4,840,625 $5,259,768
==============================================================================
MORTGAGE BANKING SERVICES INCOME:
Sales income:
Residential mortgage sales income $ 318 $ 169 ($ 386) $ 1,524 $ 3,395 $ 4,275
Lower of cost or market adjustment -
loans held for sale (36) 30 1,028 731 (1,934) --
------------------------------------------------------------------------------
Total sales income 282 199 642 2,255 1,461 4,275
------------------------------------------------------------------------------
Servicing income:
Residential mortgage servicing income, net 2,956 1,439 1,810 1,641 2,359 1,996
Change in impairment reserve on mortgage
servicing rights 1,728 1,005 485 1,343 2,597 875
Valuation adjustments - interest rate floor (106) (545) 78 (953) (1,475) (1,600)
Gain (loss) on sale of capitalized mortgage
servicing rights 124 1,559 (207) (66) 2,924 (17)
------------------------------------------------------------------------------
Total servicing income 4,702 3,458 2,166 1,965 6,405 1,254
------------------------------------------------------------------------------
Total $ 4,984 $ 3,657 $ 2,808 $ 4,220 $ 7,866 $ 5,529
==============================================================================
MORTGAGE SERVICING RIGHTS:
Balance at beginning of period $ 44,780 $ 52,724 $ 54,132 $ 53,352 $ 50,924 $ 45,409
Mortgage servicing rights capitalized
and purchased 69 406 1,244 3,352 3,279 8,316
Amortization charged against
mortgage servicing fee income (2,442) (3,020) (3,137) (3,073) (3,103) (3,197)
Change in impairment reserve 1,728 1,005 485 1,343 2,597 875
Mortgage servicing rights sold -- (6,335) -- (842) (345) (479)
------------------------------------------------------------------------------
Balance at end of period $ 44,135 $ 44,780 $ 52,724 $ 54,132 $ 53,352 $ 50,924
==============================================================================
</TABLE>
During the quarter, the Company restructured parts of its securities portfolio
by selling $104 million of securities available for sale, realizing a loss of
$15.9 million pre-tax ($10.6 million after-tax). The securities, with a weighted
average yield of 5.73%, were primarily perpetual preferred stocks acquired in
prior acquisitions, treasury bonds (remaining maturity greater than 10 years)
and below investment grade debt securities. After the restructuring, the Company
no longer holds any of these types of securities.
Other income increased by $5.0 million or 185% and by $5.6 million or 93% during
the three and six months ended June 30, 2000 and 1999, respectively, in each
case as compared to the comparable period in the prior year. These increases
were primarily attributable to a $4.7 million gain on the sale of a $29 million
credit card portfolio in June 2000.
17
<PAGE> 18
NON-INTEREST EXPENSE
Excluding special charges and distribution on securities of subsidiary trusts,
non-interest expense was $115.4 million and $115.3 million for the quarters
ended June 30, 2000 and 1999, respectively, representing an increase of $120
thousand, or less than 1%. The modest rate of growth is due in part to
merger-related savings in the second quarter of 2000. The efficiency ratio was
54.97% and 56.59% for the quarters ended June 30, 2000 and 1999, respectively,
excluding special charges, distributions on securities of subsidiary trusts and
net securities gains (losses). For the six months ended June 30, 2000 and 1999,
noninterest expense, excluding special charges and distribution on securities of
subsidiary trusts amounted to $233.0 million and $226.6 million, respectively,
an increase of $6.4 million or 2.4%. Calculated in the same manner as for the
three months ended June 30,2000 and 1999, the efficiency ratio was 56.12% and
56.96% for the six months ended June 30, 2000 and 1999, respectively.
Salaries and benefits expense of $57.4 million for the quarter ended June 30,
2000 increased $911 thousand or 1.6% from the same quarter of last year. On a
year to date basis, salaries and benefits expense amounted to $117.3 million in
2000 compared to $113.5 million in 1999, representing an increase of $32.8
million or 3.4%. The increases were due to normal salary increases as well as
the increased cost of benefits.
Data processing expense of $9.3 million for the quarter ended June 30, 2000
decreased $696 thousand or 7% from the same quarter a year ago. For the six
months ended June 30, 2000 and 1999, data processing expense amounted to $18.0
million and $20.1 million, respectively, a $2.0 million or 10% decrease. These
decreases were primarily attributable to the absence in the current periods of
costs incurred in 1999 in order to ensure that the Company's computer systems
properly recognized the year 2000.
Occupancy expense of $9.9 million during the three months ended June 30, 2000
remained relatively unchanged from the same quarter in 1999. For the six months
ended June 30, 2000 and 1999, occupancy expense amounted to $21.0 million and
$19.9 million, a $1.1 million or 6% increase.
Equipment expense increased $155 thousand during the three months ended June 30,
2000 from the second quarter of last year. For the six months ended June 30,
2000 and 1999, equipment expense was $15.6 million and $14.5 million,
respectively, a $1.0 million or 7% increase. These increases were primarily due
to depreciation relating to new equipment.
Amortization of goodwill and other intangibles was $5.2 million for the quarters
ended June 30, 2000 and 1999 and $10.4 million and $10.3 million for the six
months ended June 30, 2000 and 1999, respectively.
Special charges of $37.3 million pre-tax were incurred in the second quarter of
2000 relating to the acquisition of Banknorth. The Company also incurred a $15.9
million pre-tax loss on the restructuring of the securities portfolio in the
second quarter of 2000. Through June 30, 2000, special charges amounted to $42.6
million pre-tax ($32.1 million after tax) in 2000 and $31.9 million pre-tax
($23.2 million after tax) in 1999. Included in 2000 special charges were $41.0
million of merger related expenses and $1.6 million of branch closing expenses
related to the closing of 11 branches. Special charges in 1999 included
merger-related expenses of $24.5 million and $7.4 million related to the
discontinuance of the Company's correspondent mortgage lending business.
18
<PAGE> 19
The following table summarizes activity related to special charges recorded from
December 31, 1999 through June 30, 2000.
TABLE 5 - SPECIAL CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Non-Cash
Amount Reductions
Balance Included in Cash Applied to Balance at
12/31/99 Expense Payments Reserve 6/30/2000
-------- ----------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BANKNORTH MERGER CHARGES
Severance costs $ -- $12,550 $ 9,019 $ -- $ 3,531
Gain on curtailment of benefit plans -- (8,100) -- -- (8,100)
Data processing/systems integration -- 5,167 1,350 -- 3,817
Professional fees and transaction costs -- 7,462 6,786 -- 676
Asset write-downs/lease terminations -- 11,469 330 4,768 6,371
Customer communications -- 6,314 3,236 -- 3,078
Other costs -- 2,409 2,312 -- 97
-------- ------- -------- ------ -------
$ -- $37,271 $ 23,033 $4,768 $ 9,470
======== ======= ======== ====== =======
BRANCH CLOSINGS
Severance and salary costs $ -- $ 68 $ -- $ -- $ 68
Asset write-downs/lease terminations -- 1,259 142 -- 1,117
Other costs -- 256 239 -- 17
-------- ------- -------- ------ -------
$ -- $ 1,583 $ 381 $ -- $ 1,202
======== ======= ======== ====== =======
OTHER SPECIAL CHARGES
Write-down of auto lease residuals $ -- $ 2,500 $ -- $2,500 $ --
Facility write-downs - Evergreen merger -- 1,253 -- 1,253 --
Balance forward from CFX/SIS mergers 1,628 -- 905 -- 723
-------- ------- -------- ------ -------
$ 1,628 $ 3,753 $ 905 $3,753 $ 723
======== ======= ======== ====== =======
</TABLE>
Other non-interest expenses decreased by $307 thousand or 1% and increased by
$2.4 million or 5% during the three and six months ended June 30, 2000,
respectively, in each case as compared to the comparable periods in the prior
year. The following table summarizes the principal components of other
non-interest expenses by quarter.
TABLE 6 - OTHER NON-INTEREST EXPENSES
(Dollars in thousands)
<TABLE>
<CAPTION>
2000 2000 1999 1999 1999 1999
Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Advertising and marketing $ 3,606 $ 2,985 $ 3,774 $ 3,418 $ 3,498 $ 3,482
Telephone 3,134 2,945 3,291 3,844 3,506 3,524
Office supplies 2,673 2,166 2,232 2,232 2,664 2,208
Postage and freight 2,376 2,470 2,254 2,185 2,218 2,640
Miscellaneous loan costs 1,717 2,203 1,108 2,420 2,180 2,194
Deposits and other assessments 1,002 961 957 1,219 1,033 962
Collection and carrying costs
of non-performing assets 590 746 204 499 366 855
Other 10,672 10,479 12,307 7,830 10,612 6,430
----------------------------------------------------
Total $25,770 $24,955 $26,127 $23,647 $26,077 $22,295
====================================================
</TABLE>
TAXES
The effective tax rate, excluding the effect of special charges, was 33% and 32%
for the quarters and for the year ended June 30, 2000 and 1999, respectively.
19
<PAGE> 20
OTHER COMPREHENSIVE INCOME
FASB Statement No. 130 requires disclosure of "Other comprehensive income."
Unlike net income, "other comprehensive income" includes the after-tax change in
unrealized gains and losses on securities. As a result of realized losses on
available for sale securities, the unrealized loss on the Company's securities
portfolio declined $788 thousand, net of taxes from December 31, 1999 to June
30, 2000. At June 30, 2000, the net unrealized loss of $188.6 million, before
related tax effect, represented 3.1% of securities available for sale. The
Company attempts to balance the interest rate risk of its assets with its
liabilities (see "Interest Rate Risk and Asset Liability Management"). However,
the change in value of its liabilities, which tends to improve in rising
interest rate environments, is not included in "other comprehensive income."
FINANCIAL CONDITION
LOANS AND LEASES
Total loans and leases (including loans held for sale) averaged $10.4 billion
during the second quarter of 2000, an increase of $705 million or 7.3% from the
second quarter of 1999. All loan categories experienced increases except for
residential real estate loans. Average loans as a percent of average earning
assets were 61% at June 30, 2000 compared to 60% at June 30, 1999.
Average residential real estate loans (which includes mortgage loans held for
sale) of $2.3 billion during the second quarter of 2000 declined $350 million
from the second quarter of last year. The decline was primarily attributable to
decreased originations resulting from the discontinuance of the Company's
correspondent mortgage business and higher prevailing interest rates. Mortgage
loans held for sale amounted to $16.5 million and $158.6 million at June 30,
2000 and 1999, respectively, and $82.3 million at December 31, 1999. The decline
in loans held for sale was due primarily to the retention of a portion of
residential real estate loan originations in portfolio and lower originations.
Average commercial real estate loans of $2.8 billion increased 12% from the
second quarter of last year. The average yield on commercial real estate loans
during the first quarter of 2000 was 8.93%, as compared to 8.78% in the second
quarter of 1999.
Commercial loans and leases averaged $2.1 billion during the second quarter of
2000, an increase of 19% over the second quarter of 1999. The yield on
commercial loans and leases increased to 9.06% in the second quarter of 2000
from 8.58% in the second quarter of 1999.
Average consumer loans and leases of $3.1 billion during the second quarter of
2000 increased 16% from the second quarter of 1999. The increase was primarily
in indirect automobile and home equity loans. The average yield on consumer
loans and leases decreased from 8.71% in the second quarter of 1999 to 8.64% in
the first quarter of 2000.
SECURITIES AND OTHER EARNING ASSETS
The Company's securities portfolio averaged $6.5 billion during the second
quarter of 2000, as compared to $6.3 billion in the second quarter of 1999, and
consisted primarily of mortgage-backed securities, most of which are seasoned 15
year federal agency securities and U.S. Treasury securities. Other securities
consisted of collateralized mortgage obligations, which included securitized
residential real estate loans held in a REMIC, and asset-backed securities. With
the exception of the securitized loans held in a REMIC that are classified as
held to maturity and carried at cost, all of the Company's securities are
classified as available for sale and carried at market value. The majority of
securities available for sale are rated AAA or equivalently rated. A significant
portion of the increase in securities was to replace the decline in residential
real estate loans. This increase was partially offset by the sale of $104
million of securities to restructure the securities portfolio, as discussed
above. The average yield on securities was 6.79% and 6.12% for the quarters
ended June 30, 2000 and 1999, respectively. The increased yield was due in part
to the addition of the REMIC securities which had a weighted average yield of
7.42%. Securities available for sale are carried at fair value and had an
after-tax unrealized loss of $124.4 million and $125.1 million June 30, 2000 and
December 31, 1999, respectively. The unrealized loss was 3.1% of total
securities available for sale at June 30, 2000.
20
<PAGE> 21
ASSET QUALITY
As shown in Table 7, nonperforming assets were $60.6 million at June 30, 2000,
or 0.33% of total assets, compared to $81.3 million or 0.45% of total assets at
June 30, 1999. There were declines in all loan categories with significant
declines in nonperforming residential real estate loans and commercial business
loans. The Company continues to monitor asset quality with regular reviews of
its portfolio in accordance with its lending and credit policies.
The Company's residential loan portfolio accounted for 22% of the total loan
portfolio at June 30, 2000, as compared with 23% at December 31, 1999. The
Company's residential loans are generally secured by single-family homes (one to
four units) and have a maximum loan to value ratio of 80%, unless they are
protected by mortgage insurance. At June 30, 2000, 0.41% of the Company's
residential loans were nonperforming, as compared with 0.76% at December 31,
1999 and .74% at June 30, 1999.
The Company's commercial real estate loan portfolio accounted for 27% of the
total loan portfolio at June 30, 2000 consistent with December 31, 1999.
Commercial real estate loans consist primarily of loans secured by
income-producing commercial real estate (including office and industrial
buildings), service industries real estate (including hotels and health care
facilities), multi-family (over four units) residential properties and retail
trade real estate (including food stores). These loans generally are secured by
properties located in the New England states and New York, particularly Maine,
Massachusetts and New Hampshire. The Company generally does not emphasize the
purchase of participations in syndicated commercial real estate loans. At June
30, 2000, the company had $115 million of participations in syndicated
commercial real estate loans and commitments to purchase an additional $260
million of such participations. At June 30, 2000, 0.65% of the Company's
commercial real estate loans were nonperforming, as compared with 0.66% at
December 31, 1999 and 0.90% at June 30, 1999.
The Company's commercial business loan and lease portfolio accounted for 21% of
the total loan portfolio at June 30, 2000, as compared with 20% at December 31,
1999. Commercial business loans and leases are not concentrated in any
particular industry, but reflect the broad-based economies of Maine, New
Hampshire, Massachusetts and, to a lesser extent, Vermont, New York and
Connecticut. The Company's commercial business loans and leases are generally to
small and medium size businesses located within its geographic market area. At
June 30, 2000, 0.77% of the Company's commercial business loans and leases were
non-performing, as compared with 0.89% at December 31, 1999 and 1.24% at June
30, 1999.
The Company's consumer loan and lease portfolio accounted for 30% of the total
loan portfolio at June 30, 2000 and 1999. The Company has a diversified consumer
loan and lease portfolio consisting of home equity, automobile, mobile home,
boat and recreational vehicles and education loans. At June 30, 2000, 0.16% of
the Company's consumer loans and leases were nonperforming, as compared with
0.20% at December 31, 1999 and .23% at June 30, 1999.
At June 30, 2000, the Company had $7.2 million of accruing loans which were 90
days or more delinquent, as compared to $12.1 million of such loans at December
31, 1999. The decrease was primarily attributable to a decrease in residential
real estate loans over 90 days delinquent, which the Company believes are well
secured and in the process of collection.
21
<PAGE> 22
TABLE 7 - Nonperforming Assets
(Dollars in thousands)
<TABLE>
<CAPTION>
06/30/2000 03/31/2000 12/31/1999 09/30/1999 06/30/1999 03/31/1999
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Residential real estate loans:
Nonaccrual loans $ 9,405 $14,204 $17,283 $16,978 $17,729 $16,412
Troubled debt restructurings -- 27 28 30 30 31
------------------------------------------------------------------
Total 9,405 14,231 17,311 17,008 17,759 16,443
------------------------------------------------------------------
Commercial real estate loans:
Nonaccrual loans 18,270 15,621 16,754 16,536 21,605 23,415
Troubled debt restructurings 692 961 1,002 1,282 1,391 1,110
------------------------------------------------------------------
Total 18,962 16,582 17,756 17,818 22,996 24,525
------------------------------------------------------------------
Commercial business loans and leases:
Nonaccrual loans 16,570 19,818 17,027 20,440 22,944 18,827
Troubled debt restructurings 39 39 82 83 80 40
------------------------------------------------------------------
Total 16,609 19,857 17,109 20,523 23,024 18,867
------------------------------------------------------------------
Consumer loans and leases:
Nonaccrual loans 5,110 4,861 5,951 6,446 6,199 8,465
Troubled debt restructurings -- -- -- -- 5 5
------------------------------------------------------------------
Total 5,110 4,861 5,951 6,446 6,204 8,470
------------------------------------------------------------------
Total nonperforming loans:
Nonaccrual loans 49,355 54,504 57,015 60,400 68,477 67,119
Troubled debt restructurings 731 1,027 1,112 1,395 1,506 1,186
------------------------------------------------------------------
Total 50,086 55,531 58,127 61,795 69,983 68,305
------------------------------------------------------------------
Other nonperforming assets:
Other real estate owned, net of related reserves 8,419 9,027 8,154 8,042 7,903 9,058
Repossessions, net of related reserves 2,125 2,792 2,911 2,773 3,411 4,457
------------------------------------------------------------------
Total other nonperforming assets 10,544 11,819 11,065 10,815 11,314 13,515
------------------------------------------------------------------
------------------------------------------------------------------
Total nonperforming assets $60,630 $67,350 $69,192 $72,610 $81,297 $81,820
==================================================================
==================================================================
Accruing loans which are 90 days overdue $ 7,211 $ 7,914 $12,131 $15,561 $19,342 $26,908
==================================================================
Total nonperforming loans as a percentage of total loans)(1) 0.48% 0.54% 0.59% 0.64% 0.74% 0.69%
Total nonperforming assets as a percentage of total assets 0.33% 0.37% 0.37% 0.40% 0.45% 0.48%
Total nonperforming assets as a percentage of total loans
and leases (1) and total other nonperforming assets 0.58% 0.66% 0.70% 0.75% 0.85% 0.83%
</TABLE>
(1) Total loans and leases are exclusive of loans held for sale.
22
<PAGE> 23
PROVISION/ALLOWANCE FOR LOAN LOSSES
The Company provided $5.8 million for loan and lease losses in the second
quarter of 2000 and 1999. As shown in Table 8, net charge-offs for the second
quarter of 2000 were $4.5 million, or 0.17% of average loans outstanding,
compared to $4.3 million, or 0.18% of average loans outstanding, for the second
quarter of 1999. Net charge-offs have continued to decline since the fourth
quarter of 1999. The provisions for loan and lease losses during the quarter
ended June 30, 2000 exceeded net charge-offs during the period in order to
provide coverage for the increase in the loan portfolio during the period.
Provisions are made to the allowance for loan and lease losses in order to
maintain the allowance at a level which management believes is reasonable and
reflective of the overall risk of loss inherent in the loan portfolio.
At June 30, 2000, the allowance for loan and lease losses amounted to $156.5
million or 1.49% of total portfolio loans and leases, as compared to $157.8
million or 1.66% at June 30, 1999. The ratio of the allowance for loan and lease
losses to nonperforming loans was 312% at June 30, 2000 and 225% at June 30,
1999. Management considers the allowance appropriate and adequate to cover
potential losses inherent in the loan portfolio based on the current economic
environment.
Provisions for loan losses are attributable to management's ongoing evaluation
of the adequacy of the allowance for loan and lease losses, which includes,
among other procedures, consideration of the character and size of the loan and
lease portfolio, such as internal risk ratings and credit concentrations, trends
in nonperforming loans, delinquent loans and net charge-offs, the volume of new
loan originations and other asset quality factors. Although management utilizes
its best judgment in providing for possible losses, there can be no assurance
that the Company will not have to change its provisions for loan and lease
losses in subsequent periods. Changing economic and business conditions in the
Company's market areas, particularly northern New England, fluctuations in local
markets for real estate, future changes in nonperforming asset trends, large
movements in market-based interest rates or other reasons could affect the
Company's future provisions for loan and lease losses.
TABLE 8 - ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands)
<TABLE>
<CAPTION>
2000 Second 2000 First 1999 Fourth 1999 Third 1999 Second
Quarter Quarter Quarter Quarter Quarter
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans and leases outstanding
during the period (1) $10,390,034 $10,062,968 $9,826,431 $9,779,332 $9,685,523
=================================================================
Allowance at beginning of period $ 155,078 $ 155,048 $ 156,953 $ 157,774 $ 156,231
Charge-offs:
Real estate mortgages 894 1,425 2,609 2,868 2,516
Commercial business loans and leases 1,519 759 1,949 1,457 513
Consumer loans and leases 4,382 5,956 5,678 5,434 5,539
-----------------------------------------------------------------
Total loans charged off 6,795 8,140 10,236 9,759 8,568
-----------------------------------------------------------------
Recoveries:
Real estate mortgages 409 983 212 529 1,692
Commercial business loans and leases 619 667 600 826 872
Consumer loans and leases 1,304 1,452 1,514 1,418 1,707
-----------------------------------------------------------------
Total loans recovered 2,332 3,102 2,326 2,773 4,271
-----------------------------------------------------------------
Net charge-offs 4,463 5,038 7,910 6,986 4,297
Additions charged to operating expenses 5,849 5,068 6,005 6,165 5,840
-----------------------------------------------------------------
Allowance at end of period $ 156,464 $ 155,078 $ 155,048 $ 156,953 $ 157,774
=================================================================
Ratio of net charge-offs to average loans and
leases outstanding during the period, annualized(1) 0.17% 0.20% 0.32% 0.28% 0.18%
Ratio of allowance to total loans and leases
at end of period (2) 1.49% 1.52% 1.57% 1.63% 1.66%
Ratio of allowance to nonperforming loans
at end of period 312% 279% 267% 254% 225%
Ratio of net charge-offs as a percent of
average outstanding loans, annualized (1):
Real estate mortgages 0.038% 0.035% 0.188% 0.180% 0.063%
Commercial business loans and lease 0.170% 0.019% 0.287% 0.134% -0.080%
Consumer loans and leases 0.399% 0.596% 0.568% 0.578% 0.573%
</TABLE>
<TABLE>
<CAPTION>
1999 First
Quarter
------------
<S> <C>
Average loans and leases outstanding
during the period (1) $10,348,572
============
Allowance at beginning of period $ 155,098
Charge-offs:
Real estate mortgages 705
Commercial business loans and leases 1,206
Consumer loans and leases 5,560
------------
Total loans charged off 7,471
------------
Recoveries:
Real estate mortgages 720
Commercial business loans and leases 890
Consumer loans and leases 1,429
------------
Total loans recovered 3,039
------------
Net charge-offs 4,432
Additions charged to operating expenses 5,565
------------
Allowance at end of period $ 156,231
============
Ratio of net charge-offs to average loans and
leases outstanding during the period, annualized (1) 0.17%
Ratio of allowance to total loans and leases
at end of period (2) 1.58%
Ratio of allowance to nonperforming loans
at end of period 229%
Ratio of net charge-offs as a percent of
average outstanding loans, annualized (1):
Real estate mortgages -0.001%
Commercial business loans and lease 0.075%
Consumer loans and leases 0.612%
</TABLE>
(1) Average loans and leases include portfolio loans and loans held for sale.
(2) Total loans and leases are exclusive of loans held for sale.
23
<PAGE> 24
DEPOSITS
Average deposits of $11.9 billion during the second quarter of 2000 increased
$46 million from the second quarter of 1999. Excluding brokered deposits,
average total deposits increased $123 million compared to the second quarter of
1999. The ratio of portfolio loans to retail deposits was 88% and 84% at June
30, 2000 and December 31, 1999, respectively.
Average non-interest bearing deposit accounts of $1.9 billion during the second
quarter of 2000 increased $96.5 million or 5% from the second quarter of 1999.
The increase in these non-interest bearing deposits is consistent with the
Company's marketing of these lower-cost accounts.
Average interest-bearing deposit accounts, excluding brokered deposits, of $9.9
billion during the second quarter of 2000 increased $26.6 million from the
second quarter of 1999 primarily due to increases in NOW and money market
accounts. The average rates paid on all deposit types increased from 3.73% in
the second quarter of 1999 to 4.08% in the second quarter of 2000.
OTHER FUNDING SOURCES
The Company's primary source of funding, other than deposits, are securities
sold under repurchase agreements and advances from the Federal Home Loan Bank of
Boston ("FHLB"). Average borrowed funds for the second quarter of 2000 were $5.1
billion, an increase of $938 million from the second quarter of 1999. The
increase in borrowings was generally needed to fund asset growth.
Average FHLB borrowings for the second quarter of 2000 were $4.0 billion, which
increased $570 million or 17% from the second quarter of 1999 in order to fund
the growth in earning assets. FHLB collateral consists primarily of first
mortgage loans secured by 1 - 4 family properties, certain unencumbered
securities and other qualified assets. At June 30, 2000, the Company's FHLB
borrowings amounted to $4.0 billion and its additional borrowing capacity from
the FHLB was $1.3 billion.
Average balances for securities sold under repurchase agreements were $997.7
million and $709.4 million for the quarters ended June 30, 2000 and 1999,
respectively, an increase of $288 million. These borrowings, with a cost of
5.25% for the quarter ended June 30, 2000, are secured by mortgage-backed
securities and U.S. Government obligations.
RISK MANAGEMENT
The primary goal of the Company's risk management program is to determine how
certain existing or emerging issues facing the Company or the financial services
industry affect the nature and extent of the risks face by the Company. Based on
a periodic self-evaluation, the Company determines key issues and develops plans
and or objectives to address risk. The Board of Directors (the "Board") and
management believe that there are seven applicable "risk categories," consisting
of credit risk, interest rate risk, liquidity risk, transaction risk, compliance
risk, strategic risk and reputation risk. Each risk category is viewed from a
quantity of risk perspective (high, medium or low) coupled with a quality of
risk perspective. In addition, an aggregate level of risk is assigned to the
Company as a whole as well as the direction of risk (stable, increasing or
decreasing). Each risk category and the overall risk level is compared to
regulatory views on a regular basis and then reported to the Board with an
accompanying explanation as to the existence of any differences. The risk
program includes risk identification, risk measurement, risk control and risk
monitoring.
The Board has established the overall strategic direction of the Company. It
approves the overall risk policies of the Company and oversees the overall risk
management process for the Company. The Board has delegated authority to three
Board Committees, consisting of Audit, Board Risk Management and Asset Review
Committees, and has charged each Committee with overseeing key risks. The
executive risk management committee, which reports to the Board, evaluates the
seven key risk areas of the Company and makes recommendations to the Board Risk
Management Committee.
ASSET-LIABILITY MANAGEMENT
The goal of asset-liability management is the prudent control of market risk,
liquidity and capital. Asset-liability management is governed by policies
reviewed and approved annually by the Company's Board of Directors (the "Board")
and monitored periodically by a committee of the Board. The Board delegates
responsibility for asset-liability management to the Asset Liability Management
Committee ("ALCO"), which is comprised of members of senior management who set
24
<PAGE> 25
strategic directives that guide the day-to-day asset-liability management
activities of the Company. The ALCO also reviews and approves all major risk,
liquidity and capital management programs.
Market Risk
Market risk is the sensitivity of income to changes in interest rates, foreign
exchange rates, commodity prices and other market-driven rates or prices. The
Company has no trading operations and thus is only exposed to non-trading market
risk.
Interest-rate risk, including mortgage prepayment risk, is by far the most
significant non-credit risk to which the Company in exposed. Interest-rate risk
is the sensitivity of income to changes in interest rates. Changes in interest
rates, as well as fluctuations in the level and duration of assets and
liabilities, 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 fair value of the Company's
saleable assets and derivatives and the resultant ability to realize gains.
The primary objective of interest-rate risk management is to control the
Company's exposure to interest-rate risk both within limits approved by the
Board of Directors and guidelines established by the ALCO. These limits and
guidelines reflect the Company's tolerance for interest-rate risk over both
short-term and long-term horizons. The Company attempts to control interest-rate
risk by identifying, quantifying and, where appropriate, hedging its exposure.
The Company quantifies and measures interest-rate exposure using a model to
dynamically simulate net interest income under various interest rate scenarios
over a 12-month period. Simulated scenarios include deliberately extreme
interest rate "shocks" and more gradual interest rate "ramps." Key assumptions
in these simulation analyses relate to behavior of interest rates and spreads,
increases or decreases of product balances and the behavior of the Company's
deposit and loan customers. The most material assumption relates to the
prepayment of mortgage assets (including mortgage loans, mortgage-backed
securities and mortgage servicing rights). The risk of prepayment tends to
increase when interest rates fall. Since future prepayment behavior of loan
customers is uncertain, the resultant interest rate sensitivity of loan assets
cannot be determined exactly. Complicating management's efforts to measure
interest rate risk is the uncertainty of the maturity, repricing and/or runoff
of some of the Company's assets and liabilities.
To cope with these uncertainties, management gives careful attention to its
assumptions. For example, many of the Company's interest-bearing deposit
products (e.g. interest checking, savings and money market deposits) have no
contractual maturity and based on historical experience have only a limited
sensitivity to movements in market rates. Because management believes it has
some control with respect to the extent and timing of rates paid on non-maturity
deposits, certain assumptions regarding rate changes are built into the model.
In the case of prepayment of mortgage assets, assumptions are derived from
published dealer median prepayment estimates for comparable mortgage loans.
The Company manages the interest-rate risk inherent in its core banking
operations primarily using on-balance sheet instruments that sometimes contain
embedded options, mainly fixed-rate portfolio securities and borrowed fund
maturities. When appropriate, the Company will utilize off-balance sheet
interest rate instruments such as interest-rate swaps, interest rate floors and
interest rate corridor agreements, among other instruments. At June 30, 2000,
the Company had interest rate floor agreements in the notional amount of $345
million of which $200 million are used to hedge mortgage servicing rights
discussed below and the remaining $145 million were purchased to hedge variable
rate loans. These floors will mature no later than June 2001 and may expire
worthless as their strike prices are currently well below market prices. The
Company also has $50 million of interest rate swaps that mature in January 2001
in which the Company pays a fixed rate of 4.99% and receives a floating rate
equal to 3-month LIBOR. The Company also has $50 million of interest rate
corridors that mature in December 2003 in which the Company receives payments
when the 3-month LIBOR is between 6% and 7%.
The Company's policy on interest-rate risk simulation specifies that if interest
rates were to shift gradually up or down 200 basis points, estimated net
interest income for the subsequent 12 months should decline by less than 5%. The
Company was in compliance with this limit at June 30, 2000. 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 12
months following the date indicated assuming a gradual shift in market interest
rates of 100 and 200 basis points, respectively.
25
<PAGE> 26
<TABLE>
<CAPTION>
200 Basis Point 00 Basis Point 100 Basis Point 200 Basis Point
Rate Decrease Rate Decrease Rate Increase Rate Increase
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
June 30, 2000 1.79% 1.91% (2.02%) (3.14%)
===== ===== ====== ======
</TABLE>
The results implied in the above table indicate estimated changes in simulated
net interest income for the subsequent 12 months assuming a gradual shift up or
down in market rates of 100 and 200 basis points across the entire yield curve.
Assuming a downward shift in rates, savings, money market and NOW accounts have
implied interest rate floors and it is assumed that the related interest expense
on these accounts will not decrease in proportion to the downward shift in
rates. Assuming an upward shift in rates of 200 basis points, the simulated
increase in interest income would be less than the simulated increase in
interest expense as the Company's fixed-rate earning assets exceed its
fixed-cost paying liabilities. It should be emphasized, however, that the
results are dependent on material assumptions such as those discussed above.
The Company uses interest rate floors, U.S. Treasury debt instruments and
principal only strips to mitigate the prepayment risk associated with mortgage
servicing rights (see "Non-Interest Income" for further details). At June 30,
2000, the Company had $200 million notional amount in interest rate floors and
$20 million in principal only strips designated as hedges. 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 hedging instruments,
assuming an immediate shift by the indicated amount in market interest rates.
<TABLE>
<CAPTION>
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point
Rate Decrease Rate Decrease Rate Increase Rate Increase
-------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage servicing right ($17,900) ($7,600) $5,470 $7,900
Interest rate floors 6,600 2,400 (650) (760)
Principal only strips 5,500 1,950 (1,250) (2,200)
-------------------------------------------------------------------
Net exposure ($5,800) ($3,250) $3,570 $4,940
===================================================================
</TABLE>
The foregoing estimates of the effects of specified changes in interest rates on
the Company's net interest income and the carrying value of its mortgage
servicing rights are based on various assumptions, as discussed above, which
approximate actual experience and which management of the Company considers to
be reasonable. The effects of changes in interest rates on the Company could
vary substantially if different assumptions were used or actual experience
differs from the historical experience on which the assumptions are based.
The most significant factors affecting market risk exposure of net interest
income during 2000 has been (i) the increase in interest rates, (ii) changes in
the yield curve for U.S. Government securities, (iii) changes in the composition
of mortgage assets (iv) increases in adjustable rate borrowings with embedded
interest rate caps and (v) the decreases of assets and off-balance sheet
interest-rate instruments used to hedge mortgage servicing rights.
The Company's earnings are not directly and materially impacted by movements in
foreign currency rate or commodity prices. Virtually all transactions are
denominated in the U.S. dollar. Movements in equity prices may have an indirect
but modest impact on earnings by affecting the volume of activity or the amount
of fees from investment-related businesses.
LIQUIDITY
Parent Company
On a parent-only basis at June 30, 2000, the Company's commitments or debt
service requirements consisted primarily of junior subordinated debentures
issued to two subsidiaries, $68.8 million to
26
<PAGE> 27
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. 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. Other potential
sources include public and private borrowings.
Banking Subsidiaries
For banking subsidiaries of the Company, liquidity represents the ability to
fund asset growth or accommodate deposit withdrawals. Liquidity risk is the
danger that the banks cannot meet anticipated or unexpected funding requirements
or can meet them only at excessive cost. Liquidity is measured by the ability to
raise cash when needed at a reasonable cost. Many factors affect a bank's
ability to meet liquidity needs, including variations in the markets served, its
asset-liability mix, its reputation and credit standing in the market and
general economic conditions.
In addition to traditional retail deposits, the banks have various other
liquidity sources, including proceeds from maturing securities and loans, the
sale of securities, asset securitizations and borrowed funds such as FHLB
advances, reverse repurchase agreements and brokered deposits
The Company continually monitors and forecasts its liquidity position. There are
several interdependent methods used by the Company for this purpose, including
daily review of fed funds positions, monthly review of balance sheet changes,
monthly review of liquidity ratios, periodic liquidity forecasts and periodic
review of contingent funding plans.
As of June 30, 2000, the banks had in the aggregate $1.8 billion of "immediately
accessible liquidity", defined as cash that could be raised within 1-3 days
through collateralized borrowings or security sales. This represents 15% of
deposits or 10% of assets. The Company's current policy minimum is 10% of
deposits.
Also as of June 30, 2000, the banks had in the aggregate "potentially volatile
funds" of $1.2 billion. These are funds that might flow out of the banks over a
90-day period in an adverse environment. Management estimates this figure by
applying adverse probabilities to its various credit-sensitive and
economically-sensitive funding sources.
As of June 30, 2000, the ratio of "immediately accessible liquidity" to
"potentially volatile funds" was 151%, versus a policy minimum of 100%.
In addition to the liquidity sources discussed above, management believes that
its consumer loan portfolios provide a significant amount of contingent
liquidity that could be accessed in a reasonable time period through sale or
securitization. The banks also have significant untapped access to the national
brokered deposit market. Both of these sources are contemplated as secondary
liquidity in the Company's contingent funding plan. Management believes that the
level of liquidity is sufficient to meet current and future funding
requirements.
CAPITAL
At June 30, 2000, shareholders' equity amounted to $1.2 billion. In addition,
through subsidiary trusts, the Company had outstanding at such date $98.8
million of Capital Securities which mature in 2027 and qualify as Tier 1
Capital. The Company paid a $0.125 per share dividend on its common stock during
each of the second and first quarters of 2000. In July 1999, the Company
authorized a 4,000,000 share repurchase program. The Company completed this
repurchase program in the first quarter of 2000 at a total cost of $66.1
million, having repurchased 912,500 shares for $12.3 million, or an average
price of $13.53 per share.
Capital guidelines issued by the Federal Reserve Board require the Company to
maintain certain ratios, set forth in Table 9. As indicated in such table, the
Company's regulatory capital currently substantially exceeds all applicable
requirements.
27
<PAGE> 28
<TABLE>
<CAPTION>
TABLE 9 - Regulatory Capital Requirements
(Dollars in thousands) For Capital Adequacy
Actual Purposes Excess
----------------------- --------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
----------- --------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000:
Total capital (to risk weighted assets) $1,415,680 11.90% 951,716 8.00% $ 463,964 3.90%
Tier 1 capital (to risk weighted assets) 1,267,438 10.65% 475,858 4.00% 791,580 6.65%
Tier 1 leverage capital ratio (to average assets) 1,267,438 6.92% 733,023 4.00% 534,415 2.92%
As of December 31, 1999:
Total capital (to risk weighted assets) 1,376,171 12.02% 916,232 8.00% 459,939 4.02%
Tier 1 capital (to risk weighted assets) 1,232,863 10.76% 458,115 4.00% 774,748 6.76%
Tier 1 leverage capital (to average assets) 1,232,863 6.75% 730,693 4.00% 502,170 2.75%
</TABLE>
Net risk weighted assets were $11.9 billion and $11.5 billion at June 30, 2000
and December 31, 1999, respectively.
The Company's banking subsidiaries are also subject to federal regulatory
capital requirements. At June 30, 2000, each of the Company's banking
subsidiaries was deemed to be "well capitalized" under the regulations of the
applicable federal banking agency and in compliance with applicable capital
requirements.
COMPLETED ACQUISITION
On May 10, 2000, the Company completed the acquisition of Banknorth Group, Inc.,
which was effected by means of the merger of Banknorth Group, Inc. with and into
the Company under the pooling-of-interests method of accounting. The Company
changed its name to "Banknorth Group, Inc." as a result of the merger. As a
result of the merger and the change in the name of the Company, the Company's
symbol on the Nasdaq stock market is now BKNG. Upon consummation of the merger,
each share of Banknorth common stock outstanding was automatically converted
into the right to receive 1.825 shares of Company common stock including each
attached right issued pursuant to the Company's shareholder rights plan with
cash in lieu of fractional share interests.
NEW INITIATIVES
The Company has begun an E-commerce initiative which is expected to be rolled
out in three phases starting in the fourth quarter of this year. The E-commerce
initiatives will be designed to complement the Company's existing delivery
channels and be competitive with web based products offered by most regional
banks. The total investment is expected to be $30 to $40 million over the next
three years which is expected to be offset through operating efficiencies
and enhanced revenue.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which sets accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. This Statement currently is
scheduled to be effective for the Company for years beginning January 1, 2001
and is not expected to have a significant impact on the Company's financial
condition or results of operations.
28
<PAGE> 29
FORWARD LOOKING STATEMENTS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements, which are based on various
assumptions (some of which are beyond the Company's control), may be identified
by reference to a future period or periods, or by the use of forward-looking
terminology, such as "may," "will," "believe," "expect," "estimate,"
"anticipate," "continue" or similar terms or variations on those terms or the
negative of those terms. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, those related to the economic environment, particularly in the
market areas in which the Company operates, competitive products and pricing,
fiscal and monetary policies of the U.S. Government, changes in government
regulations affecting financial institutions, including regulatory fees and
capital requirements, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management, asset/liability
management, the financial and securities markets and the availability of and
costs associated with sources of liquidity.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of events or circumstances
after the date of such statements.
29
<PAGE> 30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset-Liability
Management" is incorporated herein by reference.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which in the aggregate are believed by
management to be immaterial to the financial condition and results of
operations of the Company.
Item 2. Changes in securities and use of proceeds - not applicable.
Item 3. Defaults upon senior securities - not applicable.
Item 4. Submission of matters to a vote of security holders.
(a) An annual meeting of shareholders of the Company was held on April
25, 2000 ("Annual Meeting").
(b) Not applicable.
(c) There were 101,333,614 shares of Common Stock of the Company eligible
to be voted at the Annual Meeting and 85,319,871 shares were
represented at the meeting by the holders thereof, which constituted
a quorum. The items voted upon at the Annual Meeting and the vote for
each proposal ere as follows:
1. Election of directors for a three-year term:
Director Nominees Elected for Three Year Terms:
<TABLE>
<CAPTION>
FOR AGAINST
<S> <C> <C>
Gary G. Bahre 83,279,614 2,040,248
David D. Hindle 81,690,393 3,629,471
Malcolm W. Philbrook, Jr. 81,759,896 3,559,969
Paul R. Shea 83,468,381 1,851,481
John E. Veasey 83,320,536 1,996,328
</TABLE>
2. Proposal to amend the Articles of Incorporation of the
company to increase the number of authorized shares of Common
Stock of the Company form 200,000,000 to 400,000,000.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
81,627,113 3,170,685 522,057
</TABLE>
3. Proposal to amend the Amended and Restated 1995 Stock Option
Plan for Non-employee Directors to authorize the issuance of
up to an additional 530,000 shares of Common Stock.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
76,749,580 7,304,971 1,265,303
</TABLE>
4. Proposal to ratify the appointment of KPMG LLP as the
Company's independent auditors for the year ending December
31, 2000.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
84,856,769 224,463 238,626
</TABLE>
Item 5. Other Information - not applicable.
Item 6. Exhibits and reports on Form 8-K.
(a) Exhibit 27 - Financial Data Schedule.
(b) The Company filed a Current Report on Form 8-K on April 25, 2000,
May 11, 2000, and July 26, 2000.
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<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANKNORTH GROUP, INC.
Date: August 14, 2000 By: /s/ William J. Ryan
-------------------------------
William J. Ryan
Chairman, President and
Chief Executive Officer
Date: August 14, 2000 By: /s/ Peter J. Verrill
-------------------------------
Peter J. Verrill
Executive Vice President,
Operating Officer and
Chief Financial Officer
Date: August 14, 2000 By: /s/ Stephen J. Boyle
-------------------------------
Stephen J. Boyle
Executive Vice President and
Controller
(principal accounting officer)
31
