10-Q 1 e10-q.txt BANKNORTH GROUP, INC. 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) 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 3 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
June 30, 2000 December 31,1999 ------------- ---------------- (Unaudited) 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 =========== ===========
See accompanying Notes to Consolidated Financial Statements. 3 4 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share data) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------------- ----------------------------- 2000 1999 2000 1999 ----------- ---------- ----------- ----------- 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
See accompanying Notes to Consolidated Financial Statements. 4 5 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) (Unaudited)
Accumulated Unearned Other Par Paid-in Retained Compen- Comprehensive Treasury Value Capital Earnings sation Income (Loss) Stock Total ----- ------- -------- ------ ------------- ----- ----- 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 ====== ======== ======== ======= ========= ======== ==========
See accompanying Notes to Consolidated Financial Statements. 5 6 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Six Months Ended June 30, ------------------------ 2000 1999 ------- ------- 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 =========== ===========
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 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.
Six Months Ended June 30, ------------------------ 2000 1999 -------- --------- 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 ======== =========
7 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):
Three Months Ended Six Months Ended June 30, June 30, ------------------------------- ------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- 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
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 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 10 TABLE 1 - Selected Quarterly Data (Dollars in thousands, except per share data)
2000 2000 1999 1999 Second First Fourth Third ------ ----- ------ ----- 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
1999 1999 Second First ------ ----- 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
(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 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 12 TABLE 2 - Average Balances, Yields and Rates (Dollars in thousands)
2000 Second Quarter 2000 First Quarter ----------------------------------- ----------------------------------- Yield/ Yield/ Average Balance Interest Rate (1) Average Balance Interest Rate (1) --------------- ------------------- ----------------------------------- 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%
---------- (1) Annualized. (2) Loans and leases include loans held for sale. 12 13 TABLE 2 - Average Balances, Yields and Rates (Dollars in thousands)
1999 Fourth Quarter 1999 Third Quarter ----------------------------------- ----------------------------------- Yield/ Yield/ Average Balance Interest Rate (1) Average Balance Interest Rate (1) ----------------------------------- --------------- ------------------ 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%
---------- (1) Annualized. (2) Loans and leases include loans held for sale. 13 14 TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES (Dollars in thousands)
1999 Second Quarter 1999 First Quarter ----------------------------------- ----------------------------------- Yield/ Yield/ Average Balance Interest Rate (1) Average Balance Interest Rate (1) ------------- ------------------- --------------- ------------------ 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%
---------- (1) Annualized. (2) Loans and leases include loans held for sale. 14 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)
Three Months Ended June 30, 2000 vs. 1999 Increase (decrease) due to ---------------------------------------------- Rate & Total Volume Rate Volume (1) Change ---------------------------------------------- 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 ==============================================
---------- (1) Includes changes in interest income and expense not due solely to volume or rate changes. 15 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 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)
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 ------------------------------------------------------------------------------ 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 ==============================================================================
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 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 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)
Non-Cash Amount Reductions Balance Included in Cash Applied to Balance at 12/31/99 Expense Payments Reserve 6/30/2000 -------- ----------- -------- ---------- ---------- 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 ======== ======= ======== ====== =======
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)
2000 2000 1999 1999 1999 1999 Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter ---------------------------------------------------- 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 ====================================================
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 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 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 22 TABLE 7 - Nonperforming Assets (Dollars in thousands)
06/30/2000 03/31/2000 12/31/1999 09/30/1999 06/30/1999 03/31/1999 ---------------------------------------------------------- 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%
(1) Total loans and leases are exclusive of loans held for sale. 22 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)
2000 Second 2000 First 1999 Fourth 1999 Third 1999 Second Quarter Quarter Quarter Quarter Quarter ----------------------------------------------------------------- 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%
1999 First Quarter ------------ 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%
(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 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 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 26
200 Basis Point 00 Basis Point 100 Basis Point 200 Basis Point Rate Decrease Rate Decrease Rate Increase Rate Increase --------------- --------------- --------------- --------------- June 30, 2000 1.79% 1.91% (2.02%) (3.14%) ===== ===== ====== ======
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.
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point Rate Decrease Rate Decrease Rate Increase Rate Increase ------------------------------------------------------------------- (Dollars in thousands) 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 ===================================================================
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 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 28
TABLE 9 - Regulatory Capital Requirements (Dollars in thousands) For Capital Adequacy Actual Purposes Excess ----------------------- --------------------- ------------------- Amount Ratio Amount Ratio Amount Ratio ----------- --------- ---------- ------- ---------- ------- 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%
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 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 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:
FOR AGAINST 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
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.
FOR AGAINST ABSTAIN 81,627,113 3,170,685 522,057
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.
FOR AGAINST ABSTAIN 76,749,580 7,304,971 1,265,303
4. Proposal to ratify the appointment of KPMG LLP as the Company's independent auditors for the year ending December 31, 2000.
FOR AGAINST ABSTAIN 84,856,769 224,463 238,626
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. 30 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