EX-99.(A) 3 ex99-a.txt FINANCIAL INFORMATION AS OF 12/31/99 AND 12/31/98 1 EXHIBIT 99(a) INDEX TO FINANCIAL INFORMATION
Page ---- Selected Consolidated Financial Data 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Consolidated Financial Statements 27 Notes to Consolidated Financial Statements 31 Independent Auditors' Report 56
5 2 BANKNORTH GROUP, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
(Dollars in Thousands, Except Share Data) 1999 1998 % Change 1997 1996 1995 --------------------------------------------------------------------------------------------------------------------------------- Results for the Year Net interest income $ 624,229 $ 590,516 6% $ 566,346 $ 482,081 $ 423,059 Provision for loan and lease losses 23,575 23,775 (1) 15,763 15,850 20,410 Noninterest income (excluding securities transactions) 191,140 161,124 19 134,144 104,789 87,872 Securities transactions 655 6,423 (90) 2,837 3,520 1,067 Noninterest expenses (excluding special charges) 470,140 458,326 3 440,329 378,205 337,752 Special charges(1) 28,002 61,140 (54) 23,559 11,210 4,958 Net income 196,958 141,744 39 145,488 123,044 100,962 Operating income (net income excluding special charges) 217,774 186,946 16 161,035 131,826 104,640 --------------------------------------------------------------------------------------------------------------------------------- Share Data(2) Earnings per share: Basic $ 1.35 $ 0.97 39% $ 1.00 $ 0.88 $ 0.75 Diluted 1.34 0.95 40 0.98 0.87 0.74 Excluding special charges: Diluted earnings per share(1) 1.48 1.25 18 1.08 0.93 0.77 Diluted cash earnings per share(1)(3) 1.62 1.37 18 1.18 1.00 0.79 Dividends per share 0.47 0.44 7 0.38 0.34 0.26 Book value per share at year end 8.22 8.37 (2) 7.97 7.39 6.73 Tangible book value per share at year end 6.95 6.97 (0) 6.88 6.59 6.06 Stock price: High 20.25 26.75 (24) 23.81 14.32 11.44 Low 14.31 12.81 12 12.94 9.50 5.88 Close 15.06 20.00 (25) 23.00 14.00 11.38 Weighted average shares outstanding: Basic 145,757,788 146,119,422 (0) 145,481,258 139,186,574 134,311,379 Diluted 147,427,667 148,964,639 (1) 148,600,118 141,658,250 136,462,409 --------------------------------------------------------------------------------------------------------------------------------- Key Performance Ratios Return on average assets 1.12% 0.90% 24% 1.05% 1.08% 1.03% Return on average equity 16.42 11.96 37 13.01 12.53 11.66 Net interest margin(4) 3.86 4.10 (6) 4.42 4.58 4.64 Average equity to average assets 6.81 7.55 (10) 8.07 8.66 8.82 Efficiency ratio(5) 56.45 59.35 (5) 61.37 64.44 66.11 Tier 1 leverage capital ratio 6.75 7.22 (7) 7.65 8.11 8.83 Dividend payout ratio(6) 33.19 40.38 (18) 39.60 33.86 31.19 Excluding special charges: Return on average assets(1) 1.24 1.19 4 1.16 1.16 1.07 Return on average equity(1) 18.16 15.78 15 14.40 13.42 12.09 Average Balances Assets $ 17,607,344 $ 15,696,234 12% $ 13,857,897 $ 11,344,023 $ 9,814,063 Loans and leases 9,908,177 10,679,544 (7) 9,328,963 7,799,062 6,589,517 Earning assets 16,315,233 14,503,172 12 12,906,106 10,601,537 9,194,434 Deposits 11,784,103 11,435,942 3 10,341,582 9,004,618 7,879,343 Shareholders' equity 1,199,496 1,184,770 1 1,117,953 982,204 865,661 At Year End Assets $ 18,508,264 $ 16,453,120 12% $ 15,332,821 $ 12,894,769 $ 10,260,306 Loans and leases 9,699,608 9,770,039 (1) 9,862,103 8,381,840 6,626,706 Debt and equity securities 6,873,182 4,379,774 57 3,617,236 3,031,996 2,415,293 Deposits 11,710,501 12,016,212 (3) 11,088,410 9,996,458 8,219,118 Borrowings 5,367,478 2,910,173 84 2,774,286 1,648,026 976,977 Shareholders' equity 1,192,274 1,222,390 (2) 1,164,383 1,087,890 935,381 Common shares outstanding (thousands) 144,974 146,105 (1) 146,133 147,231 138,988 Nonperforming assets(7) 69,192 89,021 (22) 98,125 97,007 104,963 ---------------------------------------------------------------------------------------------------------------------------------
(1) Special charges consist of merger related and other restructuring charges which on an after-tax basis were $20,816, $45,202, $15,547, $8,782 and $3,678 for 1999, 1998, 1997, 1996 and 1995, respectively. See Note 9 to the Consolidated Financial Statements. (2) Where appropriate amounts have been adjusted for a two-for-one split of the common stock in May 1998. (3) Earnings before amortization of goodwill and core deposit premiums. (4) Net interest income divided by average interest-earning assets, calculate on a fully-taxable equivalent basis. (5) Excludes distribution on securities of subsidiary trust, special charges and securities transactions. (6) Cash dividends paid divided by net income. (7) Nonperforming assets consist of nonperforming loans, other real estate owned and repossessed assets, net of related reserves where appropriate. 6 3 BANKNORTH GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On May 10, 2000 Peoples Heritage Financial Group, Inc. ("PHFG") completed its acquisition of Banknorth Group, Inc. PHFG changed its name to Banknorth Group, Inc. (the "Company") as a result of the merger. The merger was accounted for as a pooling of interests and accordingly all related financial information has been restated of all periods presented. The discussion and analysis which follows focuses on the factors affecting the Company's results of operations during 1999, 1998 and 1997 and financial condition at December 31, 1999 and 1998. The Consolidated Financial Statements and related notes should be read in conjunction with this review. Certain amounts in years prior to 1999 have been reclassified to conform to the 1999 presentation. GENERAL Banknorth Group, Inc. (the "Company") is a multi-bank holding company which conducts business from its headquarters in Portland, Maine and, as of December 31, 1999, approximately 300 offices located in Maine, New Hampshire, Massachusetts, Connecticut, Vermont and upstate New York. The Company is the largest bank holding company headquartered in northern New England and the fourth largest bank holding company headquartered in New England. The Company offers a broad range of commercial and consumer banking services and products as well as trust, investment advisory and insurance brokerage services through eight wholly-owned banking subsidiaries: Peoples Heritage Bank, N.A. ("PHB"), Bank of New Hampshire, N.A. ("BNH"), First Massachusetts Bank, N.A. ("First Massachussets"), which conducts business in certain areas under the name of GBT, a division of First Massachussets, Franklin Lamoille Bank, N.A. ("Franklin Lamoille"), First Vermont Bank, N.A. ("First Vermont"), The Stratevest Group, N.A. ("Stratevest"), Evergreen Bank, N.A. ("Evergreen"), and The Howard Bank, N.A. ("Howard"). PHB operates offices throughout Maine and, through subsidiaries, engages in financial planning, insurance brokerage and equipment leasing activities. At December 31, 1999, PHB had consolidated assets of $4.4 billion and consolidated shareholder's equity of $290 million. BNH operates offices throughout New Hampshire. At December 31, 1999, BNH had assets of $5.1 billion and shareholder's equity of $274 million. First Massachussets operates offices in Massachusetts and southern New Hampshire. At December 31, 1999, First Massachussets had assets of $5.9 billion and shareholder's equity of $372 million. The Company's three Vermont-based banks, Franklin Lamoille, Howard and First Vermont Bank, had assets of $331.6 million, $983.3 million and $772.7 million and shareholder's equity of $23 million, $70 million and $57 million at December 31, 1999, respectively. Evergreen is a New York based bank which had assets of $1.2 billion and shareholder's equity of $65 million at December 31, 1999. Each of the banks is a national bank and a member of the Bank Insurance Fund ("BIF") administered by the Federal Deposit Insurance Corporation ("FDIC"). Stratevest is a nondepository national bank with approximately $4.2 billion in assets under management at December 31, 1999. Business Strategy The principal business of the Company consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans and leases, commercial real estate loans, residential mortgage loans and a variety of consumer loans. In addition to keeping loans for its own portfolio, the Company sells loans into the secondary market. The Company also invests in mortgage-backed securities and securities issued by the United States Government and agencies thereof, as well as other securities. In addition, the Company engages in trust, investment advisory and insurance brokerage activities and services residential mortgage loans for investors. The Company's goal is to sustain profitable, controlled growth by focusing on increasing loan and deposit market share in New England and upstate New York, developing new financial products, services and delivery channels, closely managing yields on earning assets and rates on interest-bearing liabilities, increasing noninterest income through, among other things, expanded trust, investment advisory and insurance brokerage services, and controlling the growth of noninterest expenses. It is also part of the business strategy of the Company to supplement internal growth with targeted acquisitions of other financial institutions in its market area. During the period covered by this discussion, the Company engaged in numerous merger and acquisition related activities. For further information, see Note 2 to the Consolidated Financial Statements and "Acquisitions" below. The Company regularly evaluates potential acquisitions and as a general rule announces acquisitions only after a definitive agreement has been reached. The Company generally does not, as a matter of policy, make any specific projections as to future earnings nor does it endorse any projections regarding future performance that may be made by others. 7 4 Economic Conditions The Company believes that its market area has witnessed steady economic growth since 1992. There can be no assurance that this will continue to be the case, however, and the economies and real estate markets in the Company's primary market areas will continue to be significant determinants of the quality of the Company's assets in future periods and, thus, its results of operations. Completed Acquisitions On May 10, 2000, the Company completed the acquisition of Banknorth Group, Inc. ("Banknorth"), which was effected by means of the merger of Banknorth with and into People Heritage Financial Group, Inc. which changed its name to "Banknorth Group, Inc." as a result of the merger. As a result of the merger and the change in the name of the Company, the Company's symbol on the Nasdaq stock market is now BKNG. Approximately 42.9 million shares of common stock of the Company ("Common Stock") were issued or are issuable in connection with this transaction. As of December 31, 1999, Banknorth had total assets of $4.6 billion and total shareholders' equity of $341 million. The acquisition was accounted for using the pooling-of-interests method and, accordingly, financial information for all periods presented prior to the date of acquisition has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. On January 1, 1999, the Company completed the acquisition of SIS Bancorp, Inc. ("SIS"). Approximately 16,255,885 shares of Common Stock were issued in connection with this acquisition. SIS had total assets of $2.0 billion and shareholders' equity of $139 million at December 31, 1998. The acquisition of SIS was accounted for as a pooling-of-interests and, accordingly, financial information for all periods presented prior to the date of acquisition has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. During 1998, the Company completed the acquisition of three insurance agencies for an aggregate of 454,864 shares of Common Stock. These acquisitions were accounted for as purchases and, accordingly, the Company's financial statements reflect their operations from the date of acquisition. The Company recorded $9.3 million of goodwill in connection with these purchases. The acquired agencies have been integrated into the Company's existing insurance agency operations. On April 10, 1998, the Company completed the acquisition of CFX Corporation ("CFX"). Approximately 32,796,280 shares of Common Stock were issued in connection with this transaction. At December 31, 1997, CFX had total assets of $2.9 billion and total shareholders' equity of $245.7 million. The acquisition of CFX was accounted for as a pooling-of-interests and, accordingly, financial information for all periods presented prior to the date of acquisition has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. In the fourth quarter of 1997, the Company purchased Atlantic Bancorp ("Atlantic"), the parent company of Atlantic Bank N.A. headquartered in Portland, Maine, for $70.8 million. Atlantic had total assets of $462.9 million and total shareholders' equity of $37.7 million. The Company recorded $34.7 million of goodwill in connection with this transaction. During the same period, the Company also acquired all of the outstanding stock of MPN Holdings ("MPN"), the holding company of Morse, Payson & Noyes Insurance. The transaction was effected through the exchange of MPN stock for 445,678 shares of Common Stock and resulted in $7.8 million of goodwill. Both acquisitions were accounted for as purchases and, accordingly, the Company's financial statements reflect them from the date of acquisition. The Company incurred various merger related and restructuring charges in connection with the foregoing acquisitions and in connection with acquisitions effected by acquired companies such as Banknorth, SIS and CFX (collectively, "special charges"). On an after-tax basis special charges amounted to $20.8 million, $45.2 million and $15.5 million in 1999, 1998 and 1997, respectively. Special charges in 1999 included $5.3 million of after-tax costs to discontinue the Company's correspondent mortgage business. Special charges in 1997 included $4.4 million of after-tax charges related to exiting the lease securitization business conducted through CFX Funding, a subsidiary of CFX. For additional information, see "Results of Operations - Special Charges" and Note 9 to the Consolidated Financial Statements. 8 5 RESULTS OF OPERATIONS Overview The Company reported net income of $197.0 million or $1.34 per diluted share in 1999, compared to $141.7 million or $0.95 per diluted share in 1998. Excluding special charges, the Company earned $1.48 per diluted share in 1999 compared to $1.25 per diluted share during 1998, an increase of 18%. Return on average equity excluding special charges was 18.16% in 1999 compared to 15.78% in 1998. The improved results were attributable to the successful assimilation of recent acquisitions as well as increases in net interest income and noninterest income. Total revenues increased 8% during 1999 as a result of increases in both interest income and noninterest income. Net interest income increased 6% during 1999, as compared to 1998. The increase was attributable to a 12% increase in average interest-earning assets, which was offset in part by a decrease in net interest margin from 4.10% in 1998 to 3.86% in 1999. The decline in net interest margin was primarily attributable to the increase in investment securities (which have lower yields relative to loans) as a percent of total interest earning assets. Investment securities were 38% of total interest earning assets in 1999 compared to 25% in 1998. Noninterest income excluding securities transactions increased 19% during 1999, primarily as a result of increases in income from customer services, trust and investment advisory services and insurance commissions. Noninterest expenses, excluding special charges, increased 3% during 1999 compared to an 8% increase in total revenues. The increase in noninterest expenses primarily resulted from increases in data processing expenses and amortization of goodwill and deposit premiums. Net Interest Income Net interest income on a fully taxable-equivalent basis increased by $34.1 million, or 6%, during 1999 due primarily to a 12% increase in average earning assets. Average loans and leases decreased by $771.4 million, or 7.2%, in 1999 compared to 1998. Commercial and consumer loans experienced significant growth while residential real estate loans declined. Residential real estate loans declined largely due to the Company's discontinuance of the correspondent mortgage business and the securitization of $633 million of residential loans in a REMIC, which are now classified as securities held to maturity. Average securities increased $2.6 billion, or 71%, in 1999 compared to 1998 due to this securitization and additional investments in agency mortgage-backed securities. The net interest margin declined to 3.86% in 1999 from 4.10% during 1998. The lower margin was largely due to increased levels of securities as a percent of total earning assets, purchases of bank owned life insurance (the earnings from which are recorded as noninterest income) and an increase in average borrowings as a percent of total average liabilities. Information on average balances, yields and rates for the past three years can be found in Table 1. Table 2 shows the changes from 1998 to 1999 in tax equivalent net interest income by category due to changes in rate and volume. 9 6 TABLE 1 - THREE YEAR AVERAGE BALANCE SHEETS The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income of the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. For purposes of the table and the following discussion, (i) income from interest-earning assets and net interest income is presented on a fully-taxable equivalent basis primarily by adjusting income and yields earned on tax-exempt interest received on loans to qualifying borrowers and on certain of the Company's equity securities to make them equivalent to income and yields earned on fully-taxable investments, assuming a federal income tax rate of 35%, and (ii) unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. Information is based on average daily balances during the indicated periods.
Table 1 - Three Year Average Balance Sheets Year Ended December 31, ---------------------------------------------------------------------- (Dollars in thousands) 1999 1998 ----------------------------------- ------------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate ------- -------- ------ ------- -------- ------ Loans and leases(1) $ 9,908,177 829,883 8.38% $ 10,679,544 912,102 8.54% Investment securities 6,259,436 395,616 6.32% 3,667,733 231,881 6.32% Federal funds sold and other short-term investments 147,620 7,154 4.85% 155,895 6,890 4.42% ------------ ------------ ------------ ------------ Total earning assets 16,315,233 1,232,653 7.56% 14,503,172 1,150,873 7.94% ------------ ------------ Nonearning assets 1,292,111 1,193,062 ------------ ------------ Total assets $ 17,607,344 $ 15,696,234 ============ ============ Interest-bearing deposits: Certificates of deposit 4,617,521 231,755 5.02% 4,696,446 255,745 5.45% Brokered deposits 179,760 9,653 5.37% 283,499 16,535 5.83% Other interest-bearing deposits 5,179,164 132,118 2.55% 4,813,522 133,316 2.77% ------------ ------------ ------------ ------------ Total interest-bearing deposits 9,976,445 373,526 3.74% 9,793,467 405,416 4.14% Borrowed funds 4,408,944 229,764 5.21% 2,761,451 150,228 5.44% ------------ ------------ ------------ ------------ Total interest-bearing deposits 14,385,389 603,290 4.19% 12,554,918 555,644 4.43% ------------ ------------ Non-interest bearing deposits 1,807,658 1,642,475 Other liabilities 111,723 184,071 Securities of subsidiary trusts 103,078 130,000 Shareholders' equity 1,199,496 1,184,770 ------------ ------------ Total liabilities and shareholders' equity $ 17,607,344 $ 15,696,234 ============ ============ Net earning assets $ 1,929,844 $ 1,948,254 =========== ============ Net interest income (fully-taxable equivalent) 629,363 595,229 Less: fully-taxable equivalent adjustments (5,134) (4,713) ------------ ------------ Net interest income $ 624,229 $ 590,516 ============ ============ Net interest rate spread (fully-taxable equivalent) 3.37% 3.51% Net interest margin (fully-taxable equivalent) 3.86% 4.10%
Year Ended December 31, ---------------------------------- (Dollars in thousands) 1997 ---------------------------------- Average Yield/ Balance Interest Rate ------- -------- ------ Loans and leases(1) $ 9,328 825,155 8.85% Investment securities 3,459,587 228,317 6.60% Federal funds sold and other short-term investments 117,556 6,046 5.14% ------------ ----------- Total earning assets 12,906,106 1,059,518 8.21% ----------- Nonearning assets 951,791 ------------ Total assets $ 13,857,897 ============ Interest-bearing deposits: Certificates of deposit 4,426,355 240,710 5.44% Brokered deposits 155,281 9,324 6.00% Other interest-bearing deposits 4,390,451 120,887 2.75% ------------ ----------- Total interest-bearing deposits 8,972,087 370,921 4.13% Borrowed funds 2,142,328 118,760 5.54% ------------ ----------- Total interest-bearing deposits 11,114,415 489,681 4.41% ----------- Non-interest bearing deposits 1,369,495 Other liabilities 148,409 Securities of subsidiary trusts 107,625 Shareholders' equity 1,117,953 ------------ Total liabilities and shareholders' equity $ 13,857,897 ============ Net earning assets $ 1,791,691 ============ Net interest income (fully-taxable equivalent) 569,837 Less: fully-taxable equivalent adjustments (3,491) ----------- Net interest income $ 566,346 =========== Net interest rate spread (fully-taxable equivalent) 3.80% Net interest margin (fully-taxable equivalent) 4.42%
(1) Loans and leases include portfolio loans and leases, loans held for sale and nonperforming loans, but unpaid interest on nonperforming loans has not been included for purposes of determining interest income. 10 7 TABLE 2 - CHANGES IN NET INTEREST INCOME The following table presents certain information on a fully-taxable equivalent basis regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by old volume), (2) changes in volume (change in volume multiplied by old rate) and (3) changes in rate/volume (change in rate multiplied by change in volume). Table 2 Rate/Volume
Year Ended December 31, 1999 vs 1998 Year Ended December 31, 1998 vs 1997 Increase (Decrease) Due to Increase (Decrease) Due to ---------------------------------------------------------------------------------------- Rate/ Rate/ (In thousands) Rate Volume Volume Total Rate Volume Volume Total ---------------------------------------------------------------------------------------- Interest-earning assets: Loans and leases(1) $(17,087) $(65,875) $ 743 $(82,219) $(28,920) $119,526 $(3,659) $86,947 Investment securities -- 163,796 (61) 163,735 (9,687) 13,738 (487) 3,564 Federal funds sold and other short-term investment 670 (366) (40) 264 (846) 1,971 (281) 844 ------------------------------------------- ----------------------------------------- Total earning assets (16,417) 97,555 642 81,780 (39,453) 135,235 (4,427) 91,355 ------------------------------------------- ----------------------------------------- Interest-bearing liabilities: Deposits: Regular savings and money market access accounts (10,590) 10,128 (556) (1,018) 878 11,634 (263) 12,249 Certificates of deposit (20,195) (4,301) 506 (23,990) 443 14,693 (101) 15,035 Brokered deposits (1,304) (6,048) 470 (6,882) (268) 7,669 (220) 7,211 ------------------------------------------- ----------------------------------------- Total interest-bearing deposits (32,089) (221) 420 (31,890) 1,053 34,026 (584) 34,495 Borrowed funds (6,351) 89,624 (3,737) 79,536 (2,142) 34,299 (689) 31,468 ------------------------------------------- ----------------------------------------- Total interest-bearing liabilities (38,440) 89,403 (3,317) 47,646 (1,089) 68,325 (1,273) 65,963 ------------------------------------------- ----------------------------------------- Net interest income (fully taxable equivalent) $ 22,023 $ 8,152 $ 3,959 $ 34,134 $(38,364) $ 66,910 $(3,154) $25,392 =========================================== =========================================
(1) Loans and leases include portfolio loans and loans held for sale and nonperforming loans. Provision and Allowance for Loan and Lease Losses The Company recorded a provision for loan and lease losses in 1999 of $23.6 million, as compared to a $23.8 million provision in 1998. Net chargeoffs to average loans outstanding was 0.24% in 1999 compared to 0.20% in 1998. The slight increase was due to lower average levels of residential real estate loans, which generally have low levels of charge-offs. The allowance for loan and lease losses represented 1.57% of portfolio loans and leases outstanding at December 31, 1999, as compared to 1.56% at December 31, 1998. The ratio of the allowance to nonperforming loans at December 31, 1999 was 267%, as compared to 207% at December 31, 1998. Management believes that the improvement in this coverage ratio is consistent with the change in the composition of the loan portfolio and reduced levels of nonperforming loans, as discussed below. 11 8 The allowance for loan and leases losses is maintained at a level determined to be adequate by management to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off. Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment and is determined based on management's ongoing evaluation. The ongoing evaluation process includes a formal analysis of the allowance each quarter, which considers, among other procedures, the character and size of the loan portfolio, trends in nonperforming loans, delinquent loans and net charge-offs, as well as new loan originations and other asset quality factors. The Company evaluates the commercial real estate and commercial business loan portfolio by using a loan by loan analysis of a significant portion of "classified" loans and calculating a reserve requirement on these loans. Based on these results, factors are applied to the remaining portfolio to calculate a range of possible loan losses. For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical chargeoff and recovery experience to the current outstanding balance in each type of loan category, with consideration given to loan growth over the preceding twelve months. Although management utilizes its best judgment in providing for losses, for the reasons discussed under "Asset Quality - Nonperforming Assets," there can be no assurance that the Company will not have to change its level of provision for loan losses in future periods. TABLE 3 - FIVE YEAR TABLE OF ACTIVITY IN THE ALLOWANCE FOR LOAN AND LEASE LOSSES The following sets forth information concerning the activity in the Company's allowance for loan and lease losses during the periods indicated.
Year Ended December 31, ----------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1997 1996 1995 ----------------------------------------------------------------------- Average loans and leases outstanding $9,908,177 $10,679,544 $9,328,963 $7,799,062 $6,589,517 ====================================================================== Allowance at the beginning of period $ 155,098 $ 150,615 $ 142,682 $ 133,043 $ 143,165 Additions due to acquisitions -- 2,200 7,361 13,015 2,457 Charge-offs: Real estate loans 8,698 10,233 6,991 21,336 24,770 Commercial business loans and leases 5,125 7,718 9,052 6,552 16,950 Consumer loans and leases 22,211 20,459 19,169 12,141 9,154 ---------------------------------------------------------------------- Total loans charged off 36,034 38,410 35,212 40,029 50,874 ---------------------------------------------------------------------- Recoveries: Real estate loans 3,153 6,912 9,676 13,735 9,154 Commercial business loans and leases 3,188 4,040 5,126 3,213 5,642 Consumer loans and leases 6,068 5,966 5,219 3,855 3,089 ---------------------------------------------------------------------- Total loans recovered 12,409 16,918 20,021 20,803 17,885 ---------------------------------------------------------------------- Net charge-offs 23,625 21,492 15,191 19,226 32,989 Provision for loan and lease losses 23,575 23,775 15,763 15,850 20,410 ---------------------------------------------------------------------- Allowance at the end of the period $ 155,048 $ 155,098 $ 150,615 $ 142,862 $ 133,043 ====================================================================== Ratio of net charge-offs to average loans and leases outstanding 0.24% 0.20% 0.16% 0.25% 0.50% Ratio of allowances to total portfolio loans and leases at end of period 1.57% 1.56% 1.50% 1.67% 1.97% Ratio of allowance to nonperforming loans at end of period 266.74% 206.71% 179.85% 183.69% 161.49%
12 9 TABLE 4 - ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES - FIVE YEAR SCHEDULE The allowance for loan and lease losses is available for offsetting credit losses in connection with any loan, but is internally allocated to various loan categories as part of the Company's process for evaluating the adequacy of the allowance for loan and lease losses. The following table sets forth information concerning the allocation of the Company's allowance for loan and lease losses by loan categories at the dates indicated.
December 31, -------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1997 1996 1995 -------------------- -------------------- -------------------- -------------------- -------------------- Percent of Percent of Percent of Percent of Percent of Loans in each Loans in each Loans in each Loans in each Loans in each Category to Category to Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans -------------------- -------------------- -------------------- -------------------- -------------------- Real estate loans $ 79,147 50.40% $ 77,516 54.12% $ 79,958 59.83% $ 78,871 60.23% $ 77,787 59.56% Commercial business loans and leases 49,316 19.53% 46,753 18.50% 36,161 15.67% 37,317 15.88% 30,437 16.94% Consumer loans and leases 26,585 30.07% 30,829 27.37% 27,254 24.50% 20,237 23.89% 17,844 23.50% Unallocated allowance -- -- 7,242 6,257 6,975 ----------------- ----------------- ----------------- ----------------- ----------------- $155,048 100.00% $155,098 100.00% $150,615 100.00% $142,682 100.00% $133,043 100.00% ================= ================= ================= ================= =================
The unallocated component in the preceding table relates to reserves acquired in connection with the acquisition of CFX. These reserves were allocated during 1998 in accordance with the Company's analysis of the CFX loan portfolio. Otherwise, the Company's methods and assumptions in determining the adequacy of the allowance for loan losses has not changed significantly from prior years. Review of specific loans, loan growth, charge-off history and regional and national economic conditions and trends are the primary factors considered by management in determining the adequacy of the allowance for loan and lease losses. At December 31, 1999, non-performing loans as a percent of total loans was 0.59%, as compared to 0.76% at December 31, 1998. At December 31, 1999, the Company's allowance as a percentage of non-performing loans was 267%, as compared to 207% at December 31, 1998. This increase reflected lower levels of non-performing loans in 1999, as discussed below. Noninterest Income Noninterest income was $191.8 million in 1999 compared to $167.5 million in 1998. The 14.5% increase in 1999 resulted primarily from increases of $14.3 million in customer services income, $10.0 million in trust and investment advisory services income combined, $9.6 million in bank owned life insurance ("BOLI") income and $7.3 million in insurance commissions, which were offset by a $12.3 million decrease in mortgage banking services due primarily to the discontinuation of the correspondent mortgage business and a $5.8 million decrease in net securities gains. Customer services income of $69.2 million increased 26% from 1998 and was attributable to increased fees, including fees charged to non-customers for using Company ATMs. Merchant and card product income of $13.1 million increased 37% from 1998 due to increases in card transactions and increases in the customer base. This income represents fees and interchange income generated by the use of Company-issued credit and debit cards and charges to merchants for credit card deposits. Mortgage banking services income of $20.4 million decreased $12.3 million during 1999. The decrease resulted from a $18.0 million, or 68%, decrease in mortgage sales income primarily from the discontinuance of the correspondent mortgage lending business in January 1999, and a $4.9 million decrease in net mortgage servicing income due to a 30% decrease in the average total of mortgages serviced for others. See "Special Charges" below for a discussion of the cost to discontinue the correspondent mortgage lending business. The Company's portfolio of residential mortgages serviced for investors was $4.5 billion at December 31, 1999 compared to $5.2 billion and $7.1 billion at December 31, 1998 and 1997, respectively. Mortgage loans serviced for others decreased in 1998 primarily as a result of the sale of mortgage servicing rights relating to $2.9 billion of loans for $78.0 million. Gains on the sales of mortgage servicing rights totaled $2.6 million and $2.0 million in 1999 and 1998, respectively. Capitalized mortgage servicing rights increased from $45.4 million at December 31, 1998 to $52.7 million at December 31, 1999 due primarily to lower impairment reserves as a result of rising interest rates. See Note 7 to the Consolidated Financial Statements. Because mortgage servicing rights are an interest-rate sensitive asset, the value of the Company's mortgage servicing rights and the related mortgage banking income may be adversely impacted if mortgage interest rates decline and actual or expected loan prepayments increase. To mitigate the prepayment risk associated with adverse changes in interest rates and the resultant impairment to capitalized mortgage servicing rights and effects on mortgage banking income, the Company has established a hedge program against a portion of its capitalized mortgage servicing rights to help protect its value and mortgage banking income. See "Asset-Liability Management." Notwithstanding the foregoing, 13 10 there can be no assurance that significant declines in interest rates will not have a material impact on the Company's mortgage servicing rights and mortgage banking income or that the hedge program will be successful in mitigating the effects of such a decline. TABLE 5 - MORTGAGE BANKING SERVICES INCOME The following table sets forth certain information relating to the Company's mortgage banking activities at the dates and for the periods indicated.
At or For the Year Ended December 31, ------------------------------------------------------- 1999 1998 1997 ------------------------------------------------------- (In thousands) Residential mortgages serviced for investors $4,540,948 $5,178,281 $7,050,511 ====================================================== Residential mortgage sales income $ 8,617 $ 26,629 $ 14,966 Residential mortgage servicing income, net 8,322 13,243 15,079 Impairment reserve for mortgage servicing rights 4,800 (11,586) -- Valuation adjustment - interest rate floor (3,950) 2,380 -- Gain (loss) on sale of mortgage servicing 2,634 2,028 3,301 ------------------------------------------------------ Mortgage banking service income $ 20,423 $ 32,694 $ 33,346 ======================================================
Trust and investment advisory services income of $39.4 million increased 34% during 1999 primarily due to increased assets under management and a branch office acquisition by Banknorth, as well as strong sales and market conditions throughout the year. Assets under management were $7.4 billion and $7.1 billion at December 31, 1999 and 1998, respectively, an increase of 4%. Insurance commission income was $20.3 million and $13.0 million in 1999 and 1998, respectively. This 56% increase reflected the Company's acquisitions of insurance agencies in Massachusetts and New Hampshire in the fourth quarter of 1998. BOLI income was $15.5 million and $5.9 million in 1999 and 1998, respectively. The increase related to additional purchases of BOLI in 1999 and a $1.4 million death benefit. The cash surrender value of BOLI was $288.8 million at December 31, 1999 compared to $109.3 million at December 31, 1998. This increase reflects both additional purchases of BOLI and increases in cash surrender value. BOLI covers certain employees of the Company's bank subsidiaries. Most of the Company's BOLI is invested in the 'general account' of quality insurance companies. All such companies were rated AA- or better by Standard and Poors at December 31, 1999. Net securities gains amounted to $655 thousand and $6.4 million during 1999 and 1998, respectively. Gains from the sale of securities are subject to market and economic conditions and, as a result, there can be no assurance that gains reported in prior periods will be achieved in the future. Other noninterest income amounted to $13.2 million and $15.6 million during 1999 and 1998, respectively, and consisted primarily of loan fee income. Other noninterest income in 1998 included a $1.0 million gain on sale of a credit card portfolio. Noninterest Expense Noninterest expense was $498.1 million in 1999 compared to $519.5 million in 1998. The $21.3 million or 4.1% decrease was largely attributable to a decrease in special charges ($33.1 million) and a decrease in distributions on securities of subsidiary trust ($2.4 million). These decreases were partially offset by increases in data processing expenses ($8.2 million), including Year 2000 costs, and amortization of goodwill and deposit premiums relating to a branch office acquisition by Banknorth in late 1998 ($3.3 million). Excluding special charges, noninterest expense increased 3%. The efficiency ratio improved to 56.45% during 1999 from 59.35% in 1998 primarily as a result of the efficiencies created by the assimilation of recent acquisitions, as well as operating improvements. Salaries and benefits expense of $231.5 million increased less than 1% during 1999 due to acquisition related savings, which were largely offset by normal merit raises. 14 11 Data processing expense increased 25% to $40.5 million in 1999 from $32.3 million during 1998. The increase was due, in part, to the implementation of system upgrades to accommodate increased volumes and expenditures for Year 2000 initiatives. See "Year 2000" for further discussion. Occupancy expense increased 8% primarily due to its branch office acquisition by Banknorth in late 1998. Equipment expense remained consistent with the prior year during 1999. Amortization of goodwill and deposit premiums increased 19% during 1999 due primarily to amortization of goodwill related to the branch office acquisition by Banknorth and the Company's purchases of insurance agencies in late 1998. Advertising and marketing expense decreased 3% during 1999, reflecting the synergies from recent acquisitions. Other noninterest expense, which is comprised primarily of general and administrative expenses, decreased $735 thousand or less than 1%. Special Charges Special charges consist of merger-related expenses of $20.6 million, $61.1 million and $16.4 million during 1999, 1998 and 1997, respectively, as well as $7.4 million of costs related to the discontinuation of the Company's correspondent mortgage lending business in 1999 and a $7.2 million charge related to exiting the lease securitization business, conducted through CFX Funding, in 1997. On an after-tax basis, special charges amounted to $20.8 million, $45.2 million and $15.5 million for the years ended 1999, 1998 and 1997, respectively. For a tabular analysis of the Company's special charges, see Note 9 to the Consolidated Financial Statements. Taxes The Company's effective tax rate was 33.1% in 1999 compared to 34.0% in 1998. Comprehensive Income The Company's comprehensive income amounted to $69.7 million and $132.3 million during 1999 and 1998, respectively. Comprehensive income differed from the Company's net income in these periods because of a $127.3 million increase in net unrealized loss on securities during 1999 and a $9.1 million increase in net unrealized loss on securities during 1998. For additional information, see the Consolidated Financial Statements. COMPARISON OF 1998 AND 1997 The Company reported net income of $141.7 million for 1998, or $0.95 per diluted share, compared with net income of $145.5 million, or $0.98 per diluted share, reported for 1997. Excluding the impact of special charges, net income and diluted earnings per share were $186.9 million and $1.25, respectively, for 1998 and $161.0 million and $1.08, respectively, for 1997. Excluding special charges, return on average assets and return on average equity were 1.19% and 15.78%, respectively, for 1998 and 1.16% and 14.40%, respectively, for 1997. Net interest income on a fully taxable-equivalent basis totaled $595.2 million during 1998, as compared with $569.8 million in 1997. The $25.4 million, or 4%, increase in 1998 was primarily attributable to an increase in the average amount of loans outstanding. The provision for loan and lease losses was $23.8 million in 1998 compared to a $15.8 million provision in 1997 as a result of significant loan growth in commercial and consumer loans and the Company's estimate of future potential losses. The ratio of the allowance to nonperforming loans at December 31, 1998 was 207% compared to 180% at December 31, 1997. The allowance for loan and lease losses represented 1.56% of total loans at December 31, 1998 compared to 1.50% at December 31, 1997. The improved coverage resulted primarily from a decrease in the amount of the net loan portfolio, due primarily to a lower level of residential real estate loans. Noninterest income was $167.5 million and $137.0 million for the years ended December 31, 1998 and 1997, respectively. Increases of $8.3 million in customer services income, $5.6 million in trust and investment advisory services income and $11.1 million in insurance commissions contributed to the $30.6 million, or 22%, increase in 1998. Customer services income of $54.9 million reflected an 18% growth from 1997. In 1998, the Company recorded a full year of insurance commissions compared to 1997 since the Company entered the insurance business in the fourth quarter of 1997. Noninterest expense was $519.5 million for 1998 compared with $463.9 million for 1997, a 12% increase. The 1998 increase was primarily attributable to an increase in special charges, salaries and benefits, higher data processing expense and higher intangible amortization due to recent purchase acquisitions. The efficiency ratio, which excludes special charges and dividends on the capital securities, improved from 61.37% in 1997 to 59.35% in 1998. Average earning assets increased $1.6 billion or 12% in 1998 primarily due to internal growth in loans and loans held for sale. Average interest-bearing liabilities increased 13% in 1998 in order to fund the growth in assets. 15 12 FINANCIAL CONDITION The Company's consolidated total assets increased by $2.1 billion, or 12%, from $16.5 billion at December 31, 1998 to $18.5 billion at December 31, 1999. Shareholders' equity totaled $1.2 billion at December 31, 1999 and 1998. Earnings for 1999 of $197 million were offset by an increase in the net unrealized loss on available for sale securities of $127.3 million, as well as the effects of dividends and share repurchases. Investment Securities and Other Earning Assets The average balance of the securities portfolio, which consists of securities available for sale and securities held to maturity, was $6.3 billion in 1999 and $3.7 billion in 1998. The increase was primarily in mortgage backed securities and due to a program undertaken by the Company to offset lower levels of residential real estate loans and to increase balance sheet leverage. The portfolio is comprised primarily of U.S. Treasury securities and mortgage-backed securities, most of which are seasoned 15-year federal agency securities. Other bonds and notes consist of asset-backed securities, corporate bonds and trust preferred securities. Other equity securities consist of corporate preferred stock with no stated maturity. TABLE 6 - SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY The following table sets forth the Company's investment securities at the dates indicated.
(Dollars in thousands) December 31, -------------------------------------------------------- 1999 1998 1997 -------------------------------------------------------- Securities available for sale: U.S. Government and federal agencies $ 709,497 $ 518,105 $ 762,266 Tax-exempt bonds and notes 56,903 42,455 32,908 Other bonds and notes 455,435 193,167 284,698 Mortgage-backed securities 4,264,364 2,674,133 1,560,627 Collateralized mortgage obligations 723,290 471,159 485,338 -------------------------------------------------------- Total debt securities 6,209,489 3,899,019 3,125,837 Federal Home Loan Bank of Boston stock 261,391 163,227 134,719 Other equity securities 38,422 48,504 59,062 -------------------------------------------------------- Total equity securities 299,813 211,731 193,781 -------------------------------------------------------- Net unrealized gain (loss) (193,271) 3,246 17,801 -------------------------------------------------------- Fair value of securities available for sale $ 6,316,031 $ 4,113,996 $ 3,337,419 ======================================================== Securities held to maturity: U.S. Government and federal agencies $ 2,797 $ 3,582 $ 39,506 Tax-exempt bonds and notes 7,753 9,612 24,856 Other bonds and notes 1,480 2,171 2,924 Asset-backed securities -- 65,350 46,046 Mortgage-backed securities 3,789 174,064 163,192 Collateralized mortgage obligations 541,332 10,999 3,293 -------------------------------------------------------- Amortized cost of securities held to maturity $ 557,151 $ 265,778 $ 279,817 ======================================================== Fair value of securities held to maturity $ 535,605 $ 267,161 $ 281,723 ======================================================== Excess of fair value over recorded value $ (21,546) $ 1,383 $ 1,906 ======================================================== Fair value as a % of amortized cost 96.1% 100.5% 100.7%
16 13 TABLE 7 - MATURITIES OF SECURITIES The following table sets forth the contractual maturities and fully-taxable equivalent weighted average yields of the Company's debt securities available for sale at December 31, 1999.
Amortized Cost Maturing in ------------------------------------------------------------------------------------------- More than Less Than 1 Year 1 to 5 Years 5 to 10 Years More than 10 Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ---------------- --------------- --------------- ------------------ ---------------- (Dollars in thousands) U.S. Government and federal agencies $65,641 5.46% $491,089 5.64% $ 84,550 6.93% $ 68,217 5.71% $ 709,497 5.78% Tax-exempt bonds and notes 3,893 6.78% 11,556 6.86% 4,493 7.23% 10,914 8.01% 30,856 7.31% Other bonds and notes 4,793 6.52% 68,607 6.53% 162,143 6.70% 245,939 7.37% 481,482 7.02% Mortgage-backed securities 911 5.48% 33,966 6.75% 231,215 6.77% 3,998,272 6.51% 4,264,364 6.52% Collateralized mortgage obligations 106 5.01% 14,308 6.27% 45,758 6.77% 663,118 6.54% 723,290 6.55% ------- -------- -------- ---------- ---------- Total $75,344 5.60% $619,526 5.84% $528,159 6.78% $4,986,460 6.55% $6,209,489 6.49% ======= ======== ======== ========== ==========
The following table sets forth the maturities and weighted average yields of the Company's debt securities held to maturity at December 31, 1999.
Amortized Cost Maturing in ------------------------------------------------------------------------------------------ More than Less Than 1 Year 1 to 5 Years 5 to 10 Years More than 10 Years Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ---------------- --------------- --------------- ------------------ ---------------- (Dollars in thousands) U.S. Government and federal agencies $ 795 5.45% $ 0 0.00% $ 0 0.00% $ 2,002 8.06% $ 2,797 7.32% Tax-exempt bonds and notes 1,201 8.53% 3,213 8.85% 2,750 8.66% 571 8.73% 7,753 8.72% Other bonds and notes -- 0.00% 1,470 10.00% 10 7.00% -- 0.00% 1,480 9.98% Asset-backed securities -- 0.00% 0 0.00% -- 0.00% -- 0.00% -- 0.00% Mortgage-backed securities 2,415 5.85% 1,328 6.00% 46 8.50% -- 0.00% 3,789 5.94% Collateralized mortgage obligations -- 0.00% -- 0.00% -- 0.00% 541,332 7.30% 541,332 7.30% -------- -------- -------- -------- -------- Total $ 4,411 6.51% $ 6,029 8.50% $ 2,806 8.65% $543,905 7.30% $557,151 7.32% ======== ======== ======== ======== ========
Securities available for sale are carried at fair value and had a net unrealized loss of $193.3 million at December 31, 1999 as compared to a net unrealized gain of $3.2 million at December 31, 1998. See Note 3 to the Consolidated Financial Statements. These unrealized losses do not impact net income or regulatory capital but are recorded as adjustments to shareholders' equity, net of related deferred income taxes. Unrealized losses, net of related deferred income taxes, are a component of the Company's "Comprehensive Income" contained in the Consolidated Statement of Changes in Shareholders' Equity. The Company does not consider any of the unrealized losses to be other than temporary. Collateralized mortgage obligations ("CMOs") increased in 1999 primarily due to the Company's securitization of $633 million of single-family residential loans during the period. Mortgage-backed securities and CMOs generally are backed by residential mortgages with original maturities in excess of 10 years. Such securities have been included in the above table based on the estimated maturity characteristics of the underlying loans and not on the scheduled maturities of the securities. Loans Residential real estate loans (including loans held for sale) averaged $2.9 billion in 1999 compared to $4.3 billion in 1998, a decrease of 33%. The decrease in the 1999 average balance resulted primarily from the discontinuation of the correspondent mortgage business in January 1999 and the securitization of $633 million of residential real estate loans. Commercial real estate loans averaged $2.6 billion in 1999 and $2.2 billion in 1998, a 16% increase. The Company is continuing to focus on lending to small and medium size business customers within its geographic markets. These loans consist of loans secured primarily by income-producing commercial real estate, service industry real estate, multi-family residential real estate and retail trade real estate, as well as loans for the acquisition, development and construction of such commercial real estate. Commercial loans and leases averaged $1.8 billion in 1999 and $1.7 billion in 1998, an increase of 8%. Included in these amounts are commercial business leases originated through a subsidiary of one of the Company's banking subsidiaries. These leases are direct equipment leases, primarily office equipment, and amounted to $51.2 million at December 31, 1999. Consumer loans and leases averaged $2.6 billion in 1999 and $2.4 billion in 1998, an increase of 7%. The growth in consumer loans was primarily in indirect automobile loans and home equity loans. Mobile home loans, which amounted to $194.0 million at 17 14 December 31, 1999, continue to decline, reflecting the Company's strategy to emphasize other types of consumer loans. In June 2000, the Company ceased originating automobile lease receivables. Automobile lease receivables totaled $138.2 million at December 31, 1999 compared to $175.9 million at December 31, 1998. TABLE 8 - COMPOSITION OF LOAN PORTFOLIO The following table sets forth the composition of the Company's loan portfolio at the dates indicated.
December 31, ------------------------------------------------------------------------------------------ (Dollars in thousands) 1999 1998 1997 1996 --------------------- --------------------- --------------------- --------------------- % of % of % of % of Amount Loans Amount Loans Amount Loans Amount Loans --------------------- --------------------- --------------------- --------------------- Residential real estate loans $ 2,270,417 23.04% $ 3,088,864 31.12% $ 3,798,423 37.94% $ 3,170,151 37.19% Commercial real estate loans: Permanent first mortgage loans 2,493,492 25.30% 2,078,725 20.94% 2,022,896 20.20% 1,847,814 21.68% Construction and development loans 202,825 2.06% 204,372 2.06% 169,053 1.69% 116,707 1.37% -------------------- -------------------- -------------------- -------------------- Total 2,696,317 27.36% 2,283,097 23.00% 2,191,949 21.89% 1,964,521 23.05% -------------------- -------------------- -------------------- -------------------- Commercial business loans and leases 1,924,201 19.53% 1,836,412 18.50% 1,569,429 15.67% 1,353,451 15.88% Consumer loans and leases 2,963,721 30.07% 2,716,764 27.37% 2,452,917 24.50% 2,036,399 23.89% -------------------- -------------------- -------------------- -------------------- Total loans receivable 9,854,656 100.00% 9,925,137 100.00% 10,012,718 100.00% 8,524,522 100.00% ====== ====== ====== ====== Allowances for loan and lease losses 155,048 155,098 150,615 142,682 ----------- ----------- ----------- ----------- Net loans receivable $ 9,699,608 $ 9,770,039 $ 9,862,103 $ 8,381,840 =========== =========== =========== ===========
December 31, ------------------------- 1995 ------------------------- % of Amount Loans ------------------------- Residential real estate loans $2,395,822 35.44% Commercial real estate loans: Permanent first mortgage loans 1,543,380 22.83% Construction and development 86,671 1.28% ------------------------ Total 1,630,051 24.11% ------------------------ Commercial business loans and leases 1,145,379 16.94% Consumer loans and leases 1,588,594 23.50% ------------------------ Total loans receivable 6,759,846 100.00% ====== Allowances for loan and lease losses 133,043 ---------- Net loans receivable $6,626,803 ==========
TABLE 9 - SCHEDULED CONTRACTUAL AMORTIZATION OF LOANS AT DECEMBER 31, 1999 The following table sets forth the scheduled contractual amortization of the Company's construction and development loans and commercial business loans and leases at December 31, 1999, as well as the amount of loans which are scheduled to mature after one year which have fixed or adjustable interest rates. Demand loans, loans having no schedule of repayments and no stated maturity and overdraft loans are reported as due in one year or less.
Real Estate Construction Commercial and Development Business Loans Loans and Leases --------------- -------------- (In thousands) Amounts due: Within one year $ 75,371 $ 934,356 After one year through five years 79,008 601,665 Beyond five years 48,446 388,180 ---------- ---------- Total $ 202,825 $1,924,201 ========== ========== Interest rate terms on amounts due after one year: Fixed $ 63,999 $ 591,113 Adjustable 63,455 398,732
18 15 ASSET QUALITY General The Company monitors its asset quality with lending and credit policies which require the regular review of its portfolio. The Company maintains an internal rating system which provides a mechanism to regularly monitor the credit quality of its loan portfolio. The Company's residential loan portfolio accounted for 23% of the total loan portfolio at December 31, 1999, down from 31% at the end of 1998. The decrease in 1999 resulted primarily from the securitization of $633 million of residential real estate loans, as well as increased levels of prepayments, particularly early in the year. The Company's strategy generally is to originate fixed-rate residential loans for sale to investors in the secondary market. The Company's residential loans are generally secured by single-family homes (one-to-four units) and have a maximum loan to value ratio of 80%, unless they are protected by mortgage insurance. At December 31, 1999, 0.76% of the Company's residential loans were nonperforming, as compared to 0.50% at December 31, 1998, as nonperforming residential real estate loans increased by $1.8 million while the total residential loan portfolio declined by $818 million due to prepayments, loans sales and the securitization of $633 million of single- family residential real estate loans in 1999. The Company's commercial real estate loan portfolio accounted for 27% of the total loan portfolio at December 31,1999, compared to 23% at December 31, 1998. This portfolio consists primarily of loans secured by income-producing commercial real estate (including office and industrial buildings), service industry real estate (including hotels and health care facilities), multi-family (over four units) residential properties and retail trade real estate (food stores). At December 31, 1999, 0.66% of the Company's commercial real estate loans were nonperforming, as compared to 1.25% at December 31, 1998. The Company's commercial business loan and lease portfolio accounted for 20% of the total loan portfolio at December 31, 1999, compared to 19% at December 31, 1998. Commercial business loans and leases are generally made to small to medium size businesses located within the Company's geographic market area. These loans are not concentrated in any particular industry, but reflect the broad-based economy of New England. Commercial loans consist primarily of loans secured by various equipment, machinery and other corporate assets, as well as loans to provide working capital to business in the form of lines of credit. At December 31, 1999, 0.89% of the Company's commercial business loans were nonperforming, as compared to 1.07% at December 31, 1998. Consumer loans and leases accounted for 30% of the Company's total loan portfolio at December 31, 1999, compared to 27% at December 31, 1998. At December 31, 1999, the Company's diversified consumer loan portfolio included $1.1 billion of automobile loans and leases, $1.1 billion of home equity loans, $194 million of mobile home loans, $141 million of education loans and $65 million of boat and recreational vehicle loans. The increase in consumer loans over the prior year was due primarily to growth in automobile and home equity loans. The growth was consistent with the Company's strategy to provide a full range of financial services to its customers and to originate loans which are short-term and offer a higher yield than longer-term mortgage loans. At December 31, 1999, 0.20% of the Company's consumer loans were nonperforming, as compared to 0.42% at December 31, 1998. Nonperforming Assets Nonperforming assets consist of nonperforming loans (which do not include accruing loans 90 days or more overdue) and other real estate owned and repossessed assets. Total nonperforming assets as a percentage of total assets decreased to 0.37% at December 31, 1999, compared to 0.54% at December 31, 1998. In addition, total nonperforming assets as a percentage of total loans and other nonperforming assets was 0.70% and 0.90% at December 31, 1999 and 1998, respectively. See Table 11 for a summary of nonperforming assets for the last five years. The Company continues to focus on asset quality issues and to allocate significant resources to the key asset quality control functions of credit policy and administration and loan review. The collection, workout and asset management functions focus on the reduction of nonperforming assets. Despite the ongoing focus on asset quality and reductions of nonperforming asset levels, there can be no assurance that adverse changes in the real estate markets and economic conditions in the Company's primary market areas will not result in higher nonperforming asset levels in the future and negatively impact the Company's operations through higher provisions for loan losses, net loan chargeoffs, decreased accrual of interest income and increased noninterest expenses as a result of the allocation of resources to the collection and workout of nonperforming assets. 19 16 It is the policy of the Company to generally place all commercial real estate loans and commercial business loans and leases which are 90 days or more past due, unless secured by sufficient cash or other assets immediately convertible to cash, on nonaccrual status. Residential real estate loans and consumer loans and leases are placed on nonaccrual status generally when in management's judgment the collectability of interest and/or principal is doubtful. At December 31, 1999, the Company had $12.1 million of accruing loans which were 90 days or more delinquent, as compared to $24.5 million and $11.0 million of such loans at December 31, 1998 and 1997, respectively. The increase at year-end 1998 was primarily attributable to an increase in residential real estate loans over 90 days delinquent, which were well secured and in the process of collection. It is also the policy of the Company to place on nonaccrual and therefore nonperforming status loans currently less than 90 days past due or performing in accordance with their terms but which in management's judgment are likely to present future principal and/or interest repayment problems and which thus ultimately would be classified as nonperforming. Net Charge-offs Net charge-offs were $23.6 million during 1999, as compared to $21.5 million in 1998. Net charge-offs in 1999 represented .24% of average loans and leases outstanding, as compared to .20% in 1998. Decreased gross charge-offs in 1999 compared to 1998 were primarily due to real estate loans, while decreased recoveries related primarily to commercial real estate loans. See Table 3. TABLE 10 - NET CHARGE-OFFS AS A PERCENT OF AVERAGE LOANS OUTSTANDING The following table sets forth net charge-offs to average loans outstanding by type of loan during the periods indicated.
Net Charge-offs to Average Loans Outstanding ------------------------- 1999 1998 ---- ---- Real estate loans 0.10% 0.05% Commercial business loans and leases 0.11% 0.22% Consumer loans and leases 0.58% 0.55% ---- ---- Total 0.24% 0.20% ==== ====
See Table 3 for more information concerning charge-offs and recoveries during each of the past five years. 20 17 TABLE 11 - FIVE YEAR SCHEDULE OF NON-PERFORMING ASSETS The following table sets forth information regarding nonperforming assets at the dates indicated.
December 31, (Dollars in thousands) 1999 1998 1997 1996 1995 ---------------------------------------------------------------- Residential real estate loans: Nonaccrual loans $ 17,283 $ 15,503 $ 24,344 $ 21,568 $ 23,410 Troubled debt restructurings 28 32 36 39 85 ---------------------------------------------------------------- Total 17,311 15,535 24,380 21,607 23,495 ---------------------------------------------------------------- Commercial real estate loans: Nonaccrual loans 16,754 22,481 23,769 26,410 29,666 Troubled debt restructurings 1,002 5,946 3,428 5,181 8,351 ---------------------------------------------------------------- Total 17,756 28,427 27,197 31,591 38,017 ---------------------------------------------------------------- Commercial business loans and leases: Nonaccrual loans 17,027 18,736 22,305 18,046 14,731 Troubled debt restructurings 82 874 114 615 1,897 ---------------------------------------------------------------- Total 17,109 19,610 22,419 18,661 16,628 ---------------------------------------------------------------- Consumer loans: Nonaccrual loans 5,951 11,455 9,743 5,805 4,189 Troubled debt restructurings -- 5 6 10 55 ---------------------------------------------------------------- Total 5,951 11,460 9,749 5,815 4,244 ---------------------------------------------------------------- Total nonperforming loans: Nonaccrual loans 57,015 68,175 80,161 71,829 71,996 Troubled debt restructurings 1,112 6,857 3,584 5,845 10,388 ---------------------------------------------------------------- Total 58,127 75,032 83,745 77,674 82,384 ---------------------------------------------------------------- Other nonperforming assets: Other real estate owned, net of related reserves 8,154 10,354 10,508 17,008 20,950 Repossession, net of related reserves 2,911 3,635 3,872 2,325 1,629 ---------------------------------------------------------------- Total 11,065 13,989 14,380 19,333 22,579 ---------------------------------------------------------------- Total nonperforming assets $ 69,192 $ 89,021 $ 98,125 $ 97,007 $104,963 ================================================================ Accruing loans 90 days overdue $ 12,131 $ 24,450 $ 11,048 $ 11,090 $ 7,376 ================================================================ Total nonperforming loans as a percentage of total loans 0.59% 0.76% 0.84% 0.91% 1.22% Total nonperforming assets as a percentage of total assets 0.37% 0.54% 0.64% 0.75% 1.02% Total nonperforming assets as a percentage of total loans and other non-performing assets 0.70% 0.90% 0.98% 1.14% 1.55%
Deposits Average interest-bearing deposits increased by $183 million, or 2%, during 1999 to $10.0 billion. Average retail certificates of deposit decreased $78.9 million during 1999 to $4.6 billion. The average rate paid on certificates of deposit decreased from 5.45% in 1998 to 5.02% in 1999. See Table 13 for the scheduled maturities of certificates of deposits of $100,000 or more. As part of its overall funding strategy, the Company uses deposits obtained through investment banking firms which obtain funds from their customers for deposit with the Company ("brokered deposits"). These brokered deposits (which include short-term certificates of deposit and money market accounts) averaged $180 million and $283 million in 1999 and 1998, respectively. The average rate paid on brokered deposits was 5.37% in 1999 compared to 5.83% in 1998. Other interest-bearing deposits (savings, NOW and money market accounts), increased 8% in 1999 to $5.2 billion from $4.8 billion in 1998. The average rate paid on these deposits declined from 2.77% in 1998 to 2.55% in 1999. Average demand deposit accounts increased 10% in 1999 to $1.8 billion from $1.6 billion in 1998. The increase in demand deposits was consistent with the Company's increased marketing of these accounts. 21 18 TABLE 12 - CHANGE IN DEPOSIT BALANCES BY CATEGORY OF DEPOSITS The following table presents the changes in the balances of deposits outstanding at the dates indicated.
Year Ended December 31, 1999-1998 Change ----------------------------------------------------- ------------------------- (Dollars in thousands) 1999 1998 1997 Amount Percent ----------------------------------------------------- ------------------------- Demand deposits $ 1,821,764 $ 1,851,929 $ 1,585,700 $ (30,165) -1.63% Money market access/NOW accounts 3,698,934 3,564,737 2,933,066 134,917 3.76% Savings accounts 1,567,776 1,613,060 1,665,187 (45,284) -2.81% Certificates of deposit 4,448,229 4,728,916 4,654,467 (280,687) -5.94% Brokered deposits 173,798 257,570 249,990 (83,772) -32.52% ----------------------------------------------------- ------------------------ Total deposits $11,710,501 $12,016,212 $11,088,410 $ (305,711) -2.54% ===================================================== ========================
TABLE 13 - MATURITY OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT DECEMBER 31, 1999 The following table sets forth the scheduled maturity of certificates of deposit of $100,000 or more at December 31, 1999.
Balance Percent ------- ------- (Dollars in thousands) 3 months or less $400,251 42.02% Over 3 to 6 months 248,221 26.06% Over 6 to 12 months 195,932 20.57% More than 12 months 108,142 11.35% -------- ------ $952,546 100.00% ======== ======
Other Funding Sources Average borrowed funds for 1999 were $4.4 billion, compared with $2.8 billion in 1998. The increase in borrowed funds was utilized in part to fund higher levels of investment securities. The Company's primary sources of funds, other than deposits, are securities sold under repurchase agreements and advances from the Federal Home Loan Bank of Boston ("FHLB"). Average FHLB borrowings increased because growth in average earning assets exceeded growth in deposits. FHLB collateral consists primarily of first mortgage loans secured by single-family properties, certain unencumbered securities and other qualified assets. At December 31, 1999, FHLB borrowings amounted to $4.0 billion. The Company's additional borrowing capacity with the FHLB at December 31, 1999 was approximately $1.5 billion. See Note 11 to the Consolidated Financial Statements. At December 31, 1999 and 1998, securities sold under repurchase agreements amounted to $1.3 billion and $800.5 million, respectively, and were collateralized by mortgage-backed securities and U.S. Government obligations. See Note 10 to the Consolidated Financial Statements. RISK MANAGEMENT The primary goal of the Company's risk management program is to determine how certain existing or emerging issues facing the Company or the financial services industry affect the nature and extent of the risks faced by the Company. Based on a periodic self-evaluation, the Company determines key issues and develops plans and/or objectives to address risk. The Board of Directors (the "Board") and management believe that there are seven applicable "risk categories," consisting of credit risk, interest rate risk, liquidity risk, transaction risk, compliance risk, strategic risk and reputation risk. Each risk category is viewed from a quantity of risk perspective (high, medium or low) coupled with a quality of risk perspective. In addition, an aggregate level of risk is assigned to the Company as a whole as well as the direction of risk (stable, increasing or decreasing). Each risk category and the overall risk level is compared to regulatory views on a regular basis and then reported to the Board with an accompanying explanation as to the existence of any differences. The risk program includes risk identification, risk measurement, risk control and risk monitoring. The Board has established the overall strategic direction of the Company. It approves the overall risk policies of the Company and oversees the overall risk management process for the Company. The Board has delegated authority to three Board Committees, consisting of Audit, Board Risk Management and Asset Review Committees, and has charged each Committee with overseeing key risks. The executive risk management committee, which reports to the Board, evaluates the seven key risk areas of the Company and makes recommendations to the Board Risk Management Committee. 22 19 ASSET-LIABILITY MANAGEMENT The goal of asset-liability management is the prudent control of market risk, liquidity and capital. Asset-liability management is governed by policies reviewed and approved annually by the Board and monitored periodically by a committee of the Board. The Board delegates responsibility for asset-liability management to the corporate Liquidity and Funds Management Committee ("LFMC"), which is comprised of members of senior management and sets strategic directives that guide the day-to-day asset-liability management activities of the Company. The LFMC also reviews and approves all major risk, liquidity and capital management programs. Market Risk Market risk is the sensitivity of income to changes in interest rates, foreign exchange rates, commodity prices and other market-driven rates or prices. The Company has no trading operations and thus is only exposed to non-trading market risk. Interest-rate risk, including mortgage prepayment risk, is by far the most significant non-credit risk to which the Company is exposed. Interest-rate risk is the sensitivity of income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets, affect net interest income, the Company's primary source of revenue. This risk arises directly from the Company's core banking activities - lending, deposit gathering and loan servicing. In addition to directly impacting net interest income, changes in the level of interest rates can also affect, (i) the amount of loans originated and sold by the institution, (ii) the ability of borrowers to repay adjustable or variable rate loans, (iii) the average maturity of loans, (iv) the rate of amortization of capitalized mortgage servicing rights and premiums paid on securities, (v) the amount of unrealized gains and losses on securities available for sale and (vi) the value of the Company's investment securities and mortgage loans and the resultant ability to realize gains on the sale of such assets. The primary objective of interest-rate risk management is to control the Company's exposure to interest-rate risk both within limits approved by the Board of Directors and guidelines established by the LFMC. These limits and guidelines reflect the Company's tolerance for interest-rate risk over both short-term and long-term horizons. The Company attempts to control interest-rate risk by identifying, quantifying and, where appropriate, hedging its exposure. The Company quantifies and measures interest-rate exposures using a model to dynamically simulate net-interest income under various interest rate scenarios over a 12 month period. Simulated scenarios include deliberately extreme interest rate "shocks" and more gradual interest rate "ramps." Key assumptions in these simulation analyses relate to behavior of interest rates and spreads, the increases or decreases of product balances and the behavior of the Company's deposit and loan customers. The most material assumption relates to the prepayment of mortgage assets (including mortgage loans, securities and mortgage servicing rights). The risk of prepayment tends to increase when interest rates fall. Since future prepayment behavior of loan customers is uncertain, the resultant interest rate sensitivity of loan assets cannot be determined exactly. Complicating management's efforts to measure interest rate risk is the uncertainty of the maturity, repricing and/or runoff of some of the Company's assets and liabilities. To cope with these uncertainties, management gives careful attention to its assumptions. For example, many of the Company's interest-bearing deposit products (e.g. interest checking, savings and money market deposits) have no contractual maturity and based on historical experience have only a limited sensitivity to movements in market rates. Because management believes it has some control with respect to the extent and timing of rates paid on non-maturity deposits, certain assumptions regarding rate changes are built in to the model. In the case of prepayment of mortgage assets, assumptions are derived from published dealer median prepayment estimates for comparable mortgage loans. 23 20 The Company manages the interest-rate risk inherent in its core banking operations primarily using on-balance sheet instruments, mainly fixed-rate portfolio securities and borrowed fund maturities. When appropriate, the Company will utilize off-balance sheet interest rate instruments such as interest-rate swaps, interest rate floors and interest rate corridor agreements, among other instruments. At December 31, 1999, the Company had interest rate floor agreements in the notional amount of $495 million, of which $200 million were used to hedge mortgage servicing rights as discussed below, and $295 million were purchased to hedge variable rate loans. These floors will mature no later than June 2001 and may expire worthless as their strike prices are currently well below market prices. At December 31, 1999, the Company also had $50 million notional amount of interest rate swaps that mature in January 2001, pursuant to which the Company pays a fixed rate of 4.99% and receives a floating rate equal to 3-month LIBOR. At December 31, 1999 the Company also has $50 million notional amount of interest rate corridor agreements that mature in December 2003, which benefit the Company when the 3-month LIBOR is over 6%. The Board's policy on interest-rate risk simulation specifies that if interest rates were to shift immediately up or down 200 basis points, estimated net interest income for the subsequent 12 months should decline by less than 10%. The Company was in compliance with this limit at December 31, 1999. The Company also monitors gradual changes in market interest rates, which it believes better represents its exposure to net interest income. The following table reflects the estimated percentage exposure of the Company's net interest income for the following 12 months assuming a gradual shift in market interest rates of 100 and 200 basis points, respectively.
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point Rate Increase Rate Increase Rate Decrease Rate Decrease --------------- --------------- --------------- --------------- December 31, 1999 (3.11)% (1.72)% 1.57% 0.96% ==== ==== ==== ====
The results implied in the above table indicate estimated changes in simulated net interest income for the subsequent 12 months assuming a gradual shift up or down in market rates of 100 and 200 basis points across the entire yield curve. Assuming a downward shift in rates, savings, money market and NOW accounts have implied interest rate floors and it is assumed that the related interest expense on these accounts will not decrease in proportion to the downward shift in rates. Assuming an upward shift in rates of 200 basis points, the simulated increase in interest income would be less than the simulated increase in interest expense as the Company's fixed-rate earning assets exceed its fixed-cost paying liabilities. It should be emphasized, however, that the results are dependent on material assumptions such as those discussed above. The Company uses interest rate floors and various cash instruments to mitigate the prepayment risk associated with mortgage servicing rights (see "Non-Interest Income" for further details). For mortgage servicing rights, the adverse impact of current movements in interest rates on expected future cash flows must be recognized immediately through an adjustment to their carrying value. If interest rates decline, estimated future fee income from mortgage servicing rights is reduced because of an expected increase in mortgage prepayments. The following table sets forth the net exposure at the date indicated of the carrying value of mortgage servicing rights and identified hedge instruments assuming an immediate shift by the indicated amount in market interest rates.
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point December 31, 1999 Rate Decrease Rate Decrease Rate Increase Rate Increase ------------------------------------------------------------------------ (Dollars in thousands) Mortgage servicing rights $(21,200) $ (8,800) $ 7,000 $ 10,600 Interest rate floors 7,100 2,600 (1,000) (1,200) U.S. Treasury bonds 6,000 2,600 (2,200) (3,900) Principal only strips 5,700 2,800 (1,600) (2,200) --------------------------------------------------------------------- Net exposure $ (2,400) $ (800) $ 2,200 $ 3,300 =====================================================================
The foregoing estimates of the effects of specified changes in interest rates on the Company's net interest income and the carrying value of its mortgage servicing rights are based on various assumptions, as discussed above, which approximate actual experience and which management of the Company considers to be reasonable. The effects of changes in interest rates on the Company could vary substantially if different assumptions were used or actual experience differs from the historical experience on which the assumptions are based. 24 21 The most significant factors affecting market risk exposure of net interest income during 1999 were (i) the increases in market interest rates, (ii) changes in the composition of mortgage assets, (iii) increase and diversification of assets and off-balance sheet interest-rate instruments used to hedge mortgage servicing rights and (iv) changes in the composition of interest-bearing deposits and borrowings. The Company's earnings are not directly and materially impacted by movements in foreign currency rate or commodity prices. Virtually all transactions are denominated in the U.S. dollar. Movements in equity prices may have an indirect but modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related businesses. LIQUIDITY On a parent-only basis, the Company's commitments and debt service requirements at December 31, 1999, consisted primarily of $98.8 million of junior subordinated debentures (including accrued interest) issued to two subsidiaries, $68.8 million to Peoples Heritage Capital Trust I and $30 million to Banknorth Capital Trust I, in connection with the issuance of 9.06% Capital Securities due 2027 and 10.52% Capital Securities due 2027, respectively. See Notes 12 and 18 to the Consolidated Financial Statements. The principal sources of funds for the Company to meet parent-only obligations are dividends from its banking subsidiaries, which are subject to regulatory limitations. See Note 13 to the Consolidated Financial Statements. Other sources of funds available to the Company on a parent-only basis include borrowings from public and private sources. For banking subsidiaries of the Company, liquidity represents the ability to meet both loan commitments and deposit withdrawals. Funds to meet these needs generally can be obtained by converting liquid assets to cash or by attracting new deposits or other sources of funding. Many factors affect a bank's ability to meet liquidity needs, including variations in the markets served, its asset-liability mix, its reputation and credit standing in the market and general economic conditions. In addition to traditional in-market deposit sources, banks have many other sources of liquidity, including proceeds from maturing securities and loans, the sale of securities, asset securitizations and other non-relationship funding sources, such as FHLB borrowings, senior or subordinated debt, commercial paper and wholesale purchased funds. Management believes that the high proportion of residential and installment consumer loans in its banks' loan portfolios also provides a significant amount of contingent liquidity through the conventional securitization programs that exist today. Management believes that the level of liquidity is sufficient to meet current and future funding requirements. For additional information regarding off-balance sheet risks and commitments, see Note 14 to the Consolidated Financial Statements. CAPITAL At December 31, 1999 and 1998, shareholders' equity totaled $1.2 billion or 6.44% and 7.43% of total assets at December 31, 1999 and 1998, respectively. The changes in shareholders' equity included the $127.3 million increase in net unrealized loss on securities available for sale, $54 million of stock repurchases (2,941,800 shares) and $65 million in dividends to shareholders, which were partially offset by the Company's net income during 1999. Capital guidelines issued by the Federal Reserve Board require the Company to maintain certain ratios. The Company's Tier 1 Capital, as defined by the Federal Reserve Board, was $1.2 billion or 6.75% of average assets at December 31, 1999, compared to $1.1 billion or 7.22% of average assets at December 31, 1998. The Company's regulatory capital ratios currently exceed all applicable requirements. See Note 13 to the Consolidated Financial Statements. The Company's banking subsidiaries also are subject to federal regulatory capital requirements. At December 31, 1999, each of the Company's banking subsidiaries was deemed to be "well capitalized" under the regulations of the applicable federal banking agency and in compliance with applicable regulatory capital requirements. 25 22 YEAR 2000 The Company has not experienced any significant disruptions to its financial or operating activities caused by failure of its computerized systems resulting from Year 2000 issues. Management does not expect Year 2000 issues to have a material adverse effect on the Company's operations or financial results in 2000. The Company does not separately track the internal costs incurred for the Year 2000 expenses, except for the dedicated salary of the project coordinator. The vast majority of internal costs related to the payroll cost for staff assigned to the Year 2000 project team and Company personnel assigned to testing the changes resulting from the Year 2000 effort. The Company incurred approximately $2.9 million in incremental costs in 1999 for Year 2000 work. All Year 2000 costs were expensed as incurred and were funded out of the Company's operating cash flow. IMPACT ON NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which sets accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. This Statement, which is effective for years beginning January 1, 2000, is not expected to have a significant impact on the Company's financial condition or results of operations. In May 1999, the FASB issued an exposure draft to amend SFAS No. 133 to defer the effective date to January 1, 2001. FORWARD LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary polices of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. 26 23 BANKNORTH GROUP, INC. CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares and per share data) December 31, --------------------------- 1999 1998 ---- ---- ASSETS Cash and due from banks $ 546,816 $ 580,261 Federal funds sold and other short-term investments 229,579 288,778 Securities available for sale, at market value 6,316,031 4,113,996 Securities held to maturity, market value $535,605 in 1999 and $267,161 in 1998 557,151 265,778 Loans held for sale, market value $82,382 in 1999 and $561,620 in 1998 82,318 560,750 Loans and leases 9,854,656 9,925,137 Less: Allowance for loan and lease losses 155,048 155,098 ----------- ----------- Net loans and leases 9,699,608 9,770,039 ----------- ----------- Premises and equipment 192,540 195,510 Goodwill and other intangibles 184,381 204,587 Mortgage servicing rights 52,724 45,439 Bank owned life insurance 288,783 109,250 Other assets 358,333 318,732 ----------- ----------- Total assets $18,508,264 $16,453,120 =========== =========== LIABILITIES AND SHAREHOLDERS'S EQUITY Deposits: Savings accounts $ 1,567,776 $ 1,613,060 Money market access and NOW accounts 3,698,934 3,564,737 Certificates of deposit (including certificates of $100 or more of $952,546 in 1999 and $970,808 in 1998) 4,448,229 4,728,916 Brokered deposits 173,798 257,570 Demand deposits 1,821,764 1,851,929 ----------- ----------- Total deposits 11,710,501 12,016,212 Federal funds purchased and securities sold under repurchase agreements 1,302,821 830,926 Borrowings from the Federal Home Loan Bank of Boston 3,997,819 2,032,647 Other borrowings 66,838 46,600 Other liabilities 139,236 174,345 ----------- ----------- Total liabilities 17,217,215 15,100,730 ----------- ----------- Company obligated, mandatorily redeemable securities of subsidiary trusts holding solely parent junior subordinated debentures 98,775 130,000 Shareholders' equity: Preferred stock, par value $0.01; 5,000,000 shares authorized, none issued -- -- Common stock, par value $0.01; 200,000,000 shares authorized, 149,623,204 issued in 1999 and 149,624,400 in 1998 1,496 1,496 Paid-in capital 617,523 618,624 Retained earnings 787,238 669,357 Unearned compensation (2,751) (3,756) Accumulated other comprehensive income (125,394) (1,858) Treasury stock at cost (4,649,306 shares in 1999 and 3,519,704 shares in 1998) (85,838) (65,189) ----------- ----------- Total shareholders' equity 1,192,274 1,222,390 ----------- ----------- $18,508,264 $16,453,120 =========== ===========
See accompanying notes to Consolidated Financial Statements. 27 24 BANKNORTH GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except number of shares and per share data) Year Ended December 31, ------------------------------------------------ 1999 1998 1997 ---- ---- ---- Interest and dividend income: Interest and fees on loans and leases $ 826,565 $ 908,944 $ 823,414 Interest and dividends on securities 400,954 237,216 232,613 ------------ ------------ ------------ Total interest and dividend income 1,227,519 1,146,160 1,056,027 ------------ ------------ ------------ Interest expense: Interest on deposits 373,526 405,416 370,921 Interest on borrowed funds 229,764 150,228 118,760 ------------ ------------ ------------ Total interest expense 603,290 555,644 489,681 ------------ ------------ ------------ Net interest income 624,229 590,516 566,346 Provision for loan and lease losses 23,575 23,775 15,763 Net interest income after provision for loan and lease losses 600,654 566,741 550,583 ------------ ------------ ------------ Noninterest income: Customer services 69,197 54,897 46,619 Mortgage banking services 20,423 32,694 33,346 Trust and investment advisory services 39,378 29,428 23,844 Insurance commissions 20,289 13,006 1,899 Net securities gains 655 6,423 2,837 Bank owned life insurance 15,522 5,934 2,328 Merchant and card product income 13,126 9,615 7,920 Other noninterest income 13,205 15,550 18,188 ------------ ------------ ------------ 191,795 167,547 136,981 ------------ ------------ ------------ Noninterest expenses: Salaries and employee benefits 231,500 230,433 219,191 Data processing 40,486 32,288 27,065 Occupancy 39,326 36,637 35,000 Equipment 30,205 30,013 31,039 Amortization of goodwill and deposit premiums 20,642 17,354 14,029 Distributions of securities of subsidiary trusts 9,834 12,216 10,455 Advertising and marketing 14,172 14,675 14,426 Special charges 28,002 61,140 23,559 Other noninterest expenses 83,975 84,710 89,124 ------------ ------------ ------------ 498,142 519,466 463,888 ------------ ------------ ------------ Income before income tax expense 294,307 214,822 223,676 Applicable income tax expense 97,349 73,078 78,188 ------------ ------------ ------------ Net income $ 196,958 $ 141,744 $ 145,488 ============ ============ ============ Weighted average shares outstanding: Basic 145,757,788 146,119,422 145,481,258 Diluted 147,427,667 148,964,639 148,600,118 Earnings per share: Basic $ 1.35 $ 0.97 $ 1.00 Diluted 1.34 0.95 0.98
See accompanying notes to Consolidated Financial Statements. 28 25 BANKNORTH GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands, except number of shares and per share data)
Unearned Par Paid-in Retained Compen- Value Capital Earnings sation --------------------------------------------------------------- Balances at December 31, 1996 $ 1,337 $ 595,470 $ 503,588 $ (5,654) Net income -- -- 145,488 -- Unrealized gains on securities, net of reclassification adjustment(1) -- -- -- -- Comprehensive income Common stock issued for employee benefit plans 7 4,846 -- -- Treasury stock issued for employee benefit plans -- 23 (3,102) (98) Treasury stock purchased -- -- -- -- Issuance of restricted stock -- 3,335 (4) (315) Amortization of employee restricted stock -- 851 -- (82) Common stock issued for acquisitions -- (5) 2,572 -- Decrease in unearned compensation - ESOP -- 901 -- 836 Cash dividends paid -- -- (57,608) -- Common stock dividends declared 1 1,761 (1,769) -- 2 for 1 stock split 143 (143) -- -- Pooled company transactions (4) (4,405) (382) -- -------------------------------------------------------------- Balances at December 31, 1997 1,484 602,634 588,783 (5,313) Net income -- -- 141,744 -- Unrealized losses on securities, net of reclassification adjustment(1) -- -- -- -- Minimum pension liability Comprehensive income Cancellation of treasury shares at acquisition (3) (4,996) -- -- Common stock issued for employee benefit plans 11 10,387 -- (545) Treasury stock issued for employee benefit plans -- -- (4,164) -- Treasury stock purchased -- -- -- -- Issuance of restricted stock -- 426 (37) (254) Amortization of employee restricted stock -- 259 -- 538 Common stock issued for acquisitions 4 8,538 -- -- Decrease in unearned compensation - ESOP -- 1,376 -- 1,818 Cash dividends paid -- -- (57,231) -- Pooled company transactions 262 -------------------------------------------------------------- Balances at December 31, 1998 1,496 618,624 669,357 (3,756) Net income -- -- 196,958 -- Unrealized losses on securities, net of reclassification adjustment(1) -- -- -- -- Comprehensive income Premium on repurchase of trust preferred securities -- (1,801) -- -- Treasury stock issued for employee benefit plans -- (4) (13,396) -- Treasury stock purchased -- -- -- -- Issuance of restricted stock -- 176 (313) (655) Amortization of employee restricted stock -- (813) -- 929 Decrease in unearned compensation - ESOP -- 1,341 -- 731 Cash dividends paid -- -- (65,368) -- -------------------------------------------------------------- Balances at December 31, 1999 $ 1,496 $ 617,523 $ 787,238 $ (2,751) ==============================================================
Accumulated Other Treasury Comprehensive Stock Income (Loss) Total -------------------------------------------- Balances at December 31, 1996 $ (5,758) $ (1,093) $ 1,087,890 Net income -- -- 145,488 Unrealized gains on securities, net of reclassification adjustment(1) -- 12,349 12,349 ----------- Comprehensive income 157,837 ----------- Common stock issued for employee benefit plans -- -- 4,853 Treasury stock issued for employee benefit plans 14,356 -- 11,179 Treasury stock purchased (50,105) -- (50,105) Issuance of restricted stock 315 -- 3,331 Amortization of employee restricted stock -- -- 769 Common stock issued for acquisitions 6,731 -- 9,298 Decrease in unearned compensation - ESOP -- -- 1,737 Cash dividends paid -- -- (57,608) Common stock dividends declared -- -- (7) 2 for 1 stock split -- -- (0) Pooled company transactions -- -- (4,791) --------------------------------------------- Balances at December 31, 1997 (34,461) 11,256 1,164,383 Net income -- -- 141,744 Unrealized losses on securities, net of reclassification adjustment(1) -- (9,148) (9,148) Minimum pension liability (250) (250) ----------- Comprehensive income 132,346 ----------- Cancellation of treasury shares at acquisition (41) -- (5,040) Common stock issued for employee benefit plans -- -- 9,853 Treasury stock issued for employee benefit plans 17,479 -- 13,315 Treasury stock purchased (50,300) -- (50,300) Issuance of restricted stock -- -- 348 Amortization of employee restricted stock -- -- 797 Common stock issued for acquisitions -- -- 8,542 Decrease in unearned compensation - ESOP -- -- 3,194 Cash dividends paid -- -- (57,231) Pooled company transactions 1,921 2,183 --------------------------------------------- Balances at December 31, 1998 (65,189) 1,858 1,222,390 Net income -- -- 196,958 Unrealized losses on securities, net of reclassification adjustment(1) -- (127,252) (127,252) ----------- Comprehensive income 69,706 ----------- Premium on repurchase of trust preferred securities -- -- (1,801) Treasury stock issued for employee benefit plans 31,752 -- 18,352 Treasury stock purchased (53,745) -- (53,745) Issuance of restricted stock 1,344 -- 552 Amortization of employee restricted stock -- -- 116 Decrease in unearned compensation - ESOP -- -- 2,072 Cash dividends paid -- -- (65,368) --------------------------------------------- Balances at December 31, 1999 $ (85,838) $ (125,394) $ 1,192,274 =============================================
(1) Disclosure of reclassification amount (all amounts net of tax):
December 31, --------------------------------------- 1999 1998 1997 --------------------------------------- Unrealized holding gains (losses) arising during the period $(126,842) $ (4,946) $ 14,190 Less: reclassification adjustment for net gains included in net income 410 4,202 1,841 --------------------------------------- Net unrealized gains (losses) on securities $(127,252) $ (9,148) $ 12,349 =======================================
See accompanying notes to Consolidated Financial Statements. 29 26 BANKNORTH GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year Ended December 31, -------------------------------------------------------- 1999 1998 1997 -------------------------------------------------------- Cash flows from operating activities: Net income $ 196,958 $ 141,744 $ 145,488 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan and lease losses 23,575 23,775 15,763 Provision for depreciation 26,975 25,939 25,648 Amortization of goodwill and other intangibles 20,642 17,354 14,029 Net (increase) decrease in net deferred tax assets (920) 18,693 12,040 ESOP and restricted stock expense 2,072 3,194 1,737 Amortization of employee restricted stock 116 797 769 Issuance of restricted stock units 552 348 100 Net (gains) losses realized from sales of securities and consumer loans (655) (6,423) (2,750) Net (gains) losses realized from sales of loans held for sale 415 (21,870) (13,031) Earnings from bank owned life insurance (14,133) (5,934) (2,328) Net decrease (increase) in mortgage servicing rights (7,285) 20,164 (20,189) Proceeds from sales of loans held for sale 1,118,166 5,532,324 3,349,449 Residential loans originated and purchased for sale (640,149) (5,639,625) (3,556,865) Net decrease (increase) in interest and dividends receivable and other assets (11,300) (42,290) (51,091) Net increase (decrease) in other liabilities 13,957 6,796 (3,182) ------------------------------------------------------- Net cash provided (used) by operating activities 728,986 74,986 (84,413) ------------------------------------------------------- Cash flows from investing activities: Proceeds from maturities and principal repayments of securities held to maturity 96,226 134,625 121,327 Purchase of securities held to maturity -- (148,553) (93,921) Proceeds from sales of securities available for sale 44,330 787,459 337,505 Proceeds from maturities and principal repayments of securities available for sale 1,754,826 1,434,137 1,073,213 Purchases of securities available for sale (3,958,537) (2,983,722) (1,950,205) Net (increase) decrease in loans and leases (586,876) 173,153 (1,257,719) Proceeds from sales of loans -- -- 36,502 Net additions to premises and equipment (24,006) (27,992) (26,166) Purchase of bank owned life insurance (165,400) -- (40,000) Payment for acquisitions, net of cash acquired -- 122,526 (28,261) ------------------------------------------------------- Net cash provided (used) by investing activities (2,839,437) (508,367) (1,827,725) ------------------------------------------------------- Cash flows from financing activities: Net increase (decrease) in deposits (305,711) 637,791 737,776 Net increase (decrease) in securities sold under repurchase agreements 502,340 88,569 60,672 Proceeds from Federal Home Loan Bank of Boston borrowings 5,003,333 3,357,550 2,050,283 Payments on Federal Home Loan Bank of Boston borrowings (3,038,162) (3,197,979) (1,184,822) Proceeds from issuance (repurchase) of securities of subsidiary trusts (33,026) -- 128,361 Net increase (decrease) in other borrowings 20,238 (8,052) (8,234) Issuance of common stock 18,353 23,673 17,105 Purchase of treasury stock (53,745) (55,340) (55,981) Cash dividends paid to shareholders (65,368) (57,231) (57,608) ------------------------------------------------------- Net cash provided by financing activities 2,048,252 788,981 1,687,552 ------------------------------------------------------- Increase (decrease) in cash and cash equivalents (62,199) 355,600 (224,586) Cash and cash equivalents at beginning of period 838,594 482,994 707,580 -------------------------------------------------------- Cash and cash equivalents at end of period $ 776,395 $ 838,594 $ 482,994 ======================================================= In conjunction with the purchase acquisitions detailed in Note 2 to the Consolidated Financial Statements, assets were acquired and liabilities were assumed as follows: Fair value of assets acquired -- $ 123,311 $ 21,424 Less liabilities assumed -- 292,079 12,122
-------------------------------------------------------------------------------- For the years ended December 31, 1999, 1998 and 1997, interest of $ 599,981, $563,557 and $ 481,280 and income taxes of $ 77,436, $ 56,995 and $ 58,747 were paid, respectively. During 1999 and 1998, $ 245,233 and $ 28,184 of investment securities were transferred to securities available for sale. During 1999, $632,735 of portfolio loans were transferred to loans held to maturity. -------------------------------------------------------------------------------- See accompanying notes to Consolidated Financial Statements. 30 27 BANKNORTH GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts expressed in thousands, except share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Banknorth Group, Inc. (the "Company") and its subsidiaries conform to generally accepted accounting principles and to general practice within the banking industry. The Company's principal business activities are retail, commercial and mortgage banking as well as trust, investment advisory and insurance brokerage services, and are conducted through the Company's direct and indirect subsidiaries located in Maine, New Hampshire, Massachusetts and Connecticut, Vermont and New York, consisting of Peoples Heritage Bank, N.A., Bank of New Hampshire, N.A., First Massachusetts, N.A., Franklin Lamoille Bank, N.A., First Vermont Bank, N.A., The Howard Bank, N.A.,The Stratevest Group, N.A., and Evergreen Bank N.A., respectively (collectively, the "Banks"), as well as wholly-owned subsidiaries of the Banks. The Company and its subsidiaries are subject to regulation of, and periodic examination by, the Office of the Comptroller of Currency and the Federal Reserve Board, among other agencies. The following is a description of the more significant accounting policies. Financial Statement Presentation. The Consolidated Financial Statements include the accounts of Banknorth Group, Inc. and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in prior periods have been reclassified to conform to the current presentation. The Consolidated Financial Statements have been restated to reflect the Company's acquisition of Banknorth Group, Inc. on May 10, 2000 which was accounted for as a pooling-of-interests. In accordance with accounting requirements for pooling-of-interests business combinations, the financial statements of the Company and Banknorth have been combined based on historical financial statements as previously reported by each company. See Note 2 - "Acquisitions". Assets held in a fiduciary capacity by subsidiary trust departments are not assets of the Company and, accordingly, are not included in the Consolidated Balance Sheets. In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan and lease losses, deferred tax assets and the valuation of mortgage servicing rights. Cash and Cash Equivalents. The Company is required to comply with various laws and regulations of the Federal Reserve Bank which require that the Company maintain certain amounts of cash on deposit and is restricted from investing those amounts. For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks federal funds sold and other short-term investments minus federal funds purchased. Generally, federal funds are sold or purchased for one-day periods. Securities. Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and reflected at amortized cost. Investments not classified as "held to maturity" are classified as "available for sale." Securities available for sale consist of debt and equity securities that are available for sale in response to changes in market interest rates, liquidity needs, changes in funding sources and other similar factors. These assets are specifically identified and are carried at market value. Changes in market value, net of applicable income taxes, are reported as a separate component of shareholders' equity and comprehensive income. When a decline in market value of a security is considered other than temporary, the loss is charged to net securities gains (losses) in the consolidated statements of income as a writedown. Premiums and discounts are amortized and accreted over the term of the securities on a level yield method adjusted for prepayments. Gains and losses on the sale of securities are recognized at the time of the sale using the specific identification method. 31 28 Loans. Loans are carried at the principal amounts outstanding adjusted by partial charge-offs and net deferred loan costs or fees. Except for residential real estate and consumer loans, loans are generally placed on nonaccrual status when they are past due 90 days as to either principal or interest, or when in management's judgment the collectibility of interest or principal of the loan has been significantly impaired. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal is reasonably assured and the loan has performed for a period of time, generally six months. Loans are classified as impaired when it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and collateral value. Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount is amortized as an adjustment of the related loan's yield using the interest method over the contractual life of the related loans. Consumer lease financing loans are carried at the amount of minimum lease payments plus residual values, less unearned income which is amortized into interest income using the interest method. Allowance for Loan and Lease Losses. The allowance for loan and lease losses is maintained at a level determined to be adequate by management to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off, and reduced by charge-offs on loans and leases. Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment. Primary considerations in this evaluation are prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and management's estimation of future potential losses. The Company evaluates the commercial loan portfolio by using a loan by loan analysis of a significant portion of "classified" loans and calculating a reserve requirement on these loans. Based on these results, loss factors are applied to the remaining portfolio to calculate a range of possible loan losses. Loss factors are calculated based on the assigned risk rating, and are regularly updated based on the Company's actual loss experience. Residential real estate and consumer loans are evaluated as a group by applying historical charge-off and recovery experience to the current outstanding balance in each loan category, with consideration given to loan growth over the preceding twelve months. Although management uses available information to establish the appropriate level of the allowance for loan and lease losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan and lease losses. Such agencies may require the Company to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. Bank Owned Life Insurance Bank owned life insurance (BOLI) represents life insurance on the lives of certain employees. The Company is the beneficiary of the insurance policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in other income, and are not subject to income taxes. The cash value is included in other assets. Premises and Equipment. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of related assets. Long-lived assets are evaluated periodically for impairment. An assessment of recoverability is performed prior to any writedown of the asset. If circumstances suggest that their value may be impaired, an expense would then be charged in the current period. Goodwill and Other Intangibles. Goodwill is amortized on a straight-line basis over various periods not exceeding twenty years; core deposit premiums are amortized on a level-yield basis over the estimated life of the associated deposits. Goodwill and other intangible assets are reviewed for possible impairment when it is determined that events or changed circumstances may affect the underlying basis of the asset. 32 29 Mortgage Banking and Loans Held for Sale. Loans originated for sale are classified as held for sale. These loans are specifically identified and carried at the lower of aggregate cost or estimated market value. Forward commitments to sell residential real estate mortgages are contracts that the Company enters into for the purpose of reducing the market risk associated with originating loans for sale. Market value is estimated based on outstanding investor commitments or, in the absence of such commitments, current investor yield requirements. Gains and losses on sales of mortgage loans are determined using the specific identification method and recorded as mortgage sales income, a component of mortgage banking services income. The gains and losses resulting from the sales of loans with servicing retained are adjusted to recognize the present value of future servicing fee income over the estimated lives of the related loans. Purchased mortgage servicing rights are recorded at cost upon acquisition. Mortgage servicing rights are amortized on an accelerated method over the estimated weighted average life of the loans. Amortization is recorded as a charge against mortgage service fee income, a component of mortgage banking services income. The Company's assumptions with respect to prepayments, which affect the estimated average life of the loans, are adjusted periodically to reflect current circumstances. In evaluating the realizability of the carrying values of mortgage servicing rights, the Company assesses the estimated life of its servicing portfolio based on data which is disaggregated to reflect note rate, type and term on the underlying loans. Mortgage servicing fees received from investors for servicing their loan portfolios are recorded as mortgage servicing fee income when received. Loan servicing costs are charged to noninterest expenses when incurred. Derivative Financial Instruments The Company uses a variety of off-balance sheet derivatives as part of its interest rate risk management strategy. The instruments most frequently used are interest rate swap, floor and corridor contracts. These contracts are designated and are effective as hedges of existing risk positions. These instruments are used to modify the repricing or maturity characteristics of specified assets or liabilities, and are linked to the related assets or liabilities being hedged. Changes in the fair value of the derivative are not included in the consolidated financial statements. The net interest income or expense associated with such derivatives is accrued and recognized as an adjustment to the interest income or interest expense of the asset or liability being hedged. The related interest receivable or payable from such contracts is recorded in accrued interest receivable or payable on the consolidated balance sheet. Premiums paid are amortized as an adjustment to the interest income or interest expense of the asset or liability being hedged. Realized gains and losses, if any, resulting from early termination of derivatives are deferred as an adjustment to the carrying value of the hedged item and recognized as an adjustment to the yield or interest cost of the hedged item over the remaining term of the original swap, floor or corridor contract. The Company may purchase interest rate floors tied to the CMT index to mitigate the prepayment risk associated with mortgage servicing rights which are accounted for as trading instruments and are carried at fair value. Changes in fair value are reported as a component of mortgage banking income. The Company also utilizes Treasury options to modify its forward mortgage commitments. Changes in fair value of the options are included in the calculation of the carrying value of loans held for sale. Investments in Limited Partnerships The Company has several investments in tax advantaged limited partnerships. These investments are included in other assets and are amortized over the same period the tax benefits are expected to be received. Pension, 401(k), and Other Employee Benefit Plans The Company and its subsidiaries have defined benefit and defined contribution pension plans which cover most full-time employees. The benefits are based on years of service and the employee's career average earnings. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. The Company maintains Section 401(k) savings plans for substantially all employees of the Company and its subsidiaries. Under the plans, the Company makes a matching contribution of a portion of the amount contributed by each participating employee, up to a percentage of the employee's annual salary. The plans allow for supplementary profit sharing contributions by the Company, at its discretion, for the benefit of participating employees The Company has a Profit Sharing Employee Stock Ownership Plan which is designed to invest primarily in Common Stock of the Company. Substantially all employees are eligible to participate in the Plan following one year of service. Employees may not make contributions to the Plan but may receive a discretionary contribution from the Company based on their pro-rata share of eligible compensation. The Company sponsors a leveraged employee stock ownership plan (the "ESOP"). The Company is required to make annual contributions to the ESOP equal to the ESOP's debt service and the unallocated shares are pledged as collateral for 33 30 the debt. As the debt is repaid, shares are released from collateral and allocated to eligible employees. The Company accounts for this ESOP in accordance with AICPA SOP 93-6 "Employers' Accounting for Employee Stock Ownership Plans." Accordingly, the debt of the ESOP is recorded as long-term debt and the shares pledged as collateral are reported as unearned compensation on the balance sheet. As shares are released from collateral, the Company records compensation expense equal to the current market price of the shares, and the shares are treated as outstanding for purposes of calculating earnings per share. Stock Compensation Plans Statement of Financial Accounting Standards (SFAS No. 123), "Accounting for Stock-Based Compensation" encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted on or after January 1, 1995. See Note 15 - Stock Based Compensation Plans. Income Taxes The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income taxes are allocated to each entity in the consolidated group based on its share of taxable income. Tax credits generated from limited partnerships are reflected in earnings when realized for federal income tax purposes. Earnings Per Share Earnings per share have been computed in accordance with SFAS No. 128, "Earnings Per Share". Basic earnings per share have been calculated by dividing net income by weighted average shares outstanding before any dilution adjusted to exclude the weighted average number of unallocated shares held by the ESOP. Diluted earnings per share have been calculated by dividing net income by weighted average shares outstanding after giving effect to the potential dilution that could occur if the common stock equivalents were converted into common stock using the treasury stock method. Segment Reporting An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. The Company's primary business is banking, which provides over 90% of its revenues and profits. Banking services are provided within the framework of seven community banks which have similar economic characteristics, products and services, distribution channels and regulatory environments. Accordingly disaggregated segment information is not presented. 2. ACQUISITIONS On May 10, 2000, the Company completed the acquisition of Banknorth Group, Inc. ("Banknorth"). Banknorth was headquartered in Burlington, Vermont and had 100 offices located throughout Vermont, Massachusetts, New Hampshire and upstate New York. Shareholders of Banknorth exchanged their shares for 1.825 newly issued shares of the Company's common stock, plus cash in lieu of any fractional share interests. The acquisition was accounted for using the pooling-of-interests method. As of December 31, 1999, Banknorth had total assets of $4.6 billion and total shareholders' equity of $341 million. On January 1, 1999, the Company completed the acquisition of SIS Bancorp, Inc. ("SIS"). Approximately 16,255,885 shares of common stock of the Company (the "Common Stock") were issued in connection with this acquisition, which was accounted for as a pooling-of-interests. SIS had total assets of $2.0 billion and shareholders' equity of $139 million at December 31, 1998. 34 31 During 1998, the Company completed the acquisition of three insurance agencies for an aggregate of 454,864 shares of Common Stock. These acquisitions were accounted for as purchases and, accordingly, the Company's financial statements reflect them from the date of acquisition. The Company recorded $9.3 million of goodwill in connection with these purchases. The acquired agencies have been integrated into the Company's existing insurance agency operations. On April 10, 1998, the Company completed the acquisition of CFX Corporation ("CFX"). Approximately 32,796,280 shares of Common Stock were issued in connection with this transaction. At December 31, 1997, CFX had total assets of $2.9 billion and total shareholders' equity of $245.7 million. The acquisition of CFX was accounted for as a pooling-of-interests and, accordingly, financial information for all periods presented prior to the date of acquisition has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. In the fourth quarter of 1997, the Company purchased Atlantic Bancorp ("Atlantic"), the parent company of Atlantic Bank N.A. headquartered in Portland, Maine, for $70.8 million. Atlantic had total assets of $462.9 million and total shareholders' equity of $37.7 million. The Company recorded $34.7 million of goodwill with this transaction. During the same period, the Company also acquired all of the outstanding stock of MPN Holdings ("MPN"), the holding company of Morse, Payson & Noyes Insurance. The transaction was effected through the exchange of MPN stock for 445,678 shares of Common Stock and resulted in $7.8 million of goodwill. Both acquisitions were accounted for as purchases and, accordingly, the Company's financial statements reflect them from the date of acquisition. The Company incurred various merger related and restructuring charges in connection with the foregoing acquisitions and certain other matters (collectively, "special charges"). On a pre-tax basis special charges amounted to $28.0 million, $61.1 million and $23.6 million in 1999, 1998 and 1997, respectively. For additional information, see Note 9 - Special Charges. 35 32 3. SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY A summary of the amortized cost and market values of securities available for sale and held to maturity follows:
Amortized Gross Unrealized Gross Unrealized Market Cost Gains Losses Value ----------------------------------------------------------------------- AVAILABLE FOR SALE DECEMBER 31, 1999: U. S. Government obligations and obligations of U.S.Government agencies and corporations $ 709,497 $ 21 $ (22,702) $ 686,816 Tax-exempt bonds and notes 56,903 82 (322) 56,663 Other bonds and notes 455,435 141 (12,159) 443,417 Mortgage-backed securities 4,264,364 1,629 (133,354) 4,132,639 Collateralized mortgage obligations 723,290 190 (23,914) 699,566 ----------------------------------------------------------------------- Total debt securities 6,209,489 2,063 (192,451) 6,019,101 Federal Home Loan Bank of Boston stock 261,391 -- -- 261,391 Other equity securities 38,422 74 (2,957) 35,539 ----------------------------------------------------------------------- Total equity securities 299,813 74 (2,957) 296,930 ----------------------------------------------------------------------- Total securities available for sale $6,509,302 $ 2,137 $ (195,408) $6,316,031 ======================================================================= DECEMBER 31, 1998: U. S. Government obligations and obligations of U.S. Government agencies and corporations $ 518,105 $ 2,383 $ (913) $ 519,575 Tax-exempt bonds and notes 42,455 1,077 -- 43,532 Other bonds and notes 193,167 2,580 (144) 195,603 Mortgage-backed securities 2,674,133 6,041 (9,397) 2,670,777 Collateralized mortgage obligations 471,159 2,476 (1,619) 472,016 ----------------------------------------------------------------------- Total debt securities 3,899,019 14,557 (12,073) 3,901,503 Federal Home Loan Bank of Boston stock 163,227 -- -- 163,227 Other equity securities 48,504 1,321 (559) 49,266 ----------------------------------------------------------------------- Total equity securities 211,731 1,321 (559) 212,493 ----------------------------------------------------------------------- Total securities available for sale $4,110,750 $ 15,878 $ (12,632) $4,113,996 ======================================================================= HELD TO MATURITY: DECEMBER 31, 1999: U. S. Government obligations and obligations of U.S.Government agencies and corporations $ 2,797 $ 5 $ (35) $ 2,767 Tax-exempt bonds and notes 7,753 114 (29) 7,838 Other bonds and notes 1,480 70 -- 1,550 Asset backed securities -- -- -- -- Mortgage-backed securities 3,789 46 (110) 3,725 Collateralized mortgage obligations 541,332 -- (21,607) 519,725 ----------------------------------------------------------------------- Total securities held to maturity $ 557,151 $ 235 $ (21,781) $ 535,605 ======================================================================= DECEMBER 31, 1998: U.S. Treasuries and Agencies $ 3,582 $ 87 $ 0 $ 3,669 States and political Subdivisions 9,612 659 -- 10,271 Other bonds and notes 2,171 126 (4) 2,293 Asset backed securities 65,350 328 (104) 65,574 Mortgage-backed securities 174,064 730 (521) 174,273 Collateralized mortgage obligations 10,999 90 (8) 11,081 ----------------------------------------------------------------------- Total securities held to maturity $ 265,778 $ 2,020 $ (637) $ 267,161 =======================================================================
36 33 The amortized cost and market values of debt securities available for sale at December 31, 1999 by contractual maturities are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 1999, the Company had $285.9 million of securities available for sale with call provisions.
Available for Sale Held to Maturity ------------------------------------------------------------------------- Amortized Cost Market Value Amortized Cost Market Value ------------------------------------------------------------------------- December 31, 1999: ------------------ Due in one year or less $ 75,344 $ 75,161 $ 4,411 $ 4,340 Due after one year through five years 619,526 608,782 6,029 6,162 Due after five years through ten years 528,159 510,532 2,806 2,821 Due after ten years 4,986,460 4,824,626 543,905 522,282 ---------------------------------------------------------------------- Total debt securities $6,209,489 $6,019,101 $ 557,151 $ 535,605 ======================================================================
A summary of realized gains and losses on securities available for sale for 1999, 1998 and 1997 follows:
Gross Realized ---------------------- Gains Losses ------ ------ 1999 $ 885 $ 361 1998 7,003 696 1997 5,584 2,783
37 34 4. LOANS AND LEASES The Company's lending activities are conducted principally in New England and upstate New York. The principal categories of loans in the Company's portfolio are residential real estate loans, which are secured by single-family (one to four units) residences; commercial real estate loans, which are secured by multi-family (five or more units) residential and commercial real estate; commercial business loans and leases; and consumer loans and leases. A summary of loans and leases follows:
December 31, ------------------------------ 1999 1998 ----------- ---------- Residential real estate mortgages $2,270,417 $3,088,864 Commercial real estate mortgages: Commercial real estate 2,493,492 2,078,725 Construction and development 202,825 204,372 ---------- ---------- 2,696,317 2,283,097 Commercial business loans and leases 1,924,201 1,836,412 Consumer loans and leases 2,963,721 2,716,764 ---------- ---------- Total loans and leases $9,854,656 $9,925,137 ========== ==========
Loans and leases include unearned income and net deferred loan costs of $4.5 million at December 31, 1999 and $2.5 million at December 31, 1998. The following table sets forth information regarding nonperforming loans and accruing loans 90 days or more overdue at the dates indicated:
1999 1998 ------- ------- Residential real estate mortgages : Nonaccrual loans $17,283 $15,503 Troubled debt restructurings 28 32 ------- ------- Total 17,311 15,535 Commercial real estate loans: Nonaccrual loans 16,754 22,481 Troubled debt restructurings 1,002 5,946 ------- ------- Total 17,756 28,427 Commercial business loans and leases: Nonaccrual loans 17,027 18,736 Troubled debt restructurings 82 874 ------- ------- Total 17,109 19,610 Consumer loans: Nonaccrual loans 5,951 11,455 Troubled debt restructurings -- 5 ------- ------- Total 5,951 11,460 Total nonperforming loans: Nonaccrual loans 57,015 68,175 Troubled debt restructurings 1,112 6,857 ------- ------- Total $58,127 $75,032 ======= ======= Accruing loans which are 90 days overdue $12,131 $24,450 ======= =======
The ability and willingness of borrowers to repay loans is generally dependent on current economic conditions and real estate values within the borrowers' geographic areas. 38 35 Interest income that would have been recognized for 1999 if nonperforming loans at December 31, 1999 had been performing in accordance with their original terms approximated $5.6 million. Impaired loans are commercial, commercial real estate, and individually significant mortgage and consumer loans for which it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. The definition of "impaired loans" is not the same as the definition of "nonaccrual loans," although the two categories overlap. Nonaccrual loans include impaired loans and loans on which the accrual of interest is discontinued when collectibility of principal or interest is uncertain or on which payments of principal or interest have become contractually past due 90 days. The Company may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility, while not classifying the loan as impaired, if (i) it is probable that the Company will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is not a commercial, commercial real estate or an individually significant mortgage or consumer loan. The amount of impairment for these types of impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral. Mortgage and consumer loans which are not individually significant are measured for impairment collectively. Loans that experience insignificant payment delays and insignificant shortfalls in payment amounts generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record and the amount of the shortfall in relation to the principal and interest owed. At December 31, 1999 and 1998, total impaired loans were $49.5 million and $60.8 million, of which $25.9 million and $35.5 million had related allowances of $4.3 million and $9.6 million, respectively. During the years ended December 31, 1999 and 1998, the income recognized related to impaired loans was $4.3 million and $4.2 million respectively, and the average balance of outstanding impaired loans was $59.6 million and $54.6 million, respectively. The Company recognizes interest on impaired loans on the cash basis when the ability to collect the principal balance is not in doubt; otherwise, cash received is applied to the principal balance of the loan. 5. ALLOWANCE FOR LOAN AND LEASE LOSSES A summary of changes in the allowance for loan and lease losses follows:
Year Ended December 31, ------------------------------------------------- 1999 1998 1997 ------------------------------------------------- Balance at beginning of period $ 155,098 $ 150,615 $ 142,682 Allowance on acquired loans -- 2,200 7,361 Provisions charged to operations 23,575 23,775 15,763 Loans and leases charged off (36,034) (38,410) (35,212) Recoveries 12,409 16,918 20,021 ------------------------------------------------- Balance at end of period $ 155,048 $ 155,098 $ 150,615 =================================================
6. PREMISES AND EQUIPMENT A summary of premises and equipment follows:
December 31, -------------------------- 1999 1998 -------------------------- Land $ 20,571 $ 23,307 Buildings and leasehold improvements 198,221 202,850 Furniture, fixtures and equipment 194,777 188,424 -------------------------- 413,569 414,581 Less accumulated depreciation and amortization 221,029 219,071 -------------------------- $192,540 $195,510 ==========================
39 36 7. MORTGAGE SERVICING RIGHTS An analysis of mortgage servicing rights for the years ended December 31, 1999, 1998 and 1997 follows:
Mortgage Valuation Total Servicing Allowance Rights --------------------------------------------------------------------------------------------------------------------------------- Balance as of December 31, 1996 $ 45,291 $ 0 $ 45,291 Mortgage servicing rights capitalized 58,442 -- 58,442 Mortgage servicing rights acquired through acquisition 586 -- 586 Amortization charged against mortgage servicing fee income (9,159) -- (9,159) Impairment reserve charged against mortgage servicing fee income -- -- -- Mortgage servicing rights sold (29,872) -- (29,872) ---------------------------------------------- Balance as of December 31, 1997 65,288 0 65,288 Mortgage servicing rights capitalized 84,041 -- 84,041 Amortization charged against mortgage servicing fee income (15,731) -- (15,731) Impairment reserve charged against mortgage servicing fee income -- (11,586) (11,586) Mortgage servicing rights sold (76,573) -- (76,573) ---------------------------------------------- Balance as of December 31, 1998 57,025 (11,586) 45,439 Mortgage servicing rights capitalized 16,149 -- 16,149 Amortization charged against mortgage servicing fee income (12,498) -- (12,498) Reduction of impairment reserve (credit to mortgage servicing fee income) -- 5,300 5,300 Mortgage servicing rights sold (1,666) -- (1,666) ---------------------------------------------- Balance as of December 31, 1999 $ 59,010 $ (6,286) $ 52,724 ==============================================
December 31, -------------------------------------------------- 1999 1998 1997 -------------------------------------------------- Residential real estate loans serviced for investors $4,540,948 $5,178,281 $7,050,511 ==================================================
The Company generally continues to service residential real estate mortgages after the loans have been sold into the secondary market. The Company pays the investor that purchased the loan a pass-through rate which is less than the interest rate the Company receives from the borrower. The difference is retained by the Company as a fee for servicing the residential real estate mortgages. The Company capitalizes mortgage servicing rights at their allocated cost, based on relative fair values upon sale of the related loans. The Company periodically sells residential mortgage servicing rights to other servicers. 40 37 8. INCOME TAXES The current and deferred components of income tax expense follow:
1999 1998 1997 --------------------------------------------- Current Federal $ 90,930 $ 48,125 $ 59,599 State 7,339 4,350 4,734 Deferred Federal (572) 17,039 12,805 State (348) 3,564 1,050 --------------------------------------------- $ 97,349 $ 73,078 $ 78,188 =============================================
The following table reconciles the expected federal income tax expense (computed by applying the federal statutory tax rate to income before taxes) to recorded income tax expense:
1999 1998 1997 ------------------------------------------------- Computed federal tax expense $ 103,007 $ 75,188 $ 78,287 State income tax, net of federal benefits 4,544 5,144 3,760 Benefit of tax-exempt income (3,211) (2,778) (2,113) Nondeductible merger expenses 1,740 4,908 1,854 Amortization of goodwill and other intangibles 3,519 3,034 2,380 Low income/rehabilitation credits (4,913) (4,152) (3,823) Restructuring of legal entities within affiliated group -- (5,069) -- Increase in cash surrender value of life insurance (5,433) (2,077) (765) Other, net (1,904) (1,120) (1,392) ------------------------------------------------- Recorded income tax expense $ 97,349 $ 73,078 $ 78,188 =================================================
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities which are included in Other Assets and Other Liabilities, respectively, at December 31, 1999 and 1998 follow:
At December 31, -------------------------- Deferred tax assets 1999 1998 -------------------------- Allowance for loan and lease losses $ 55,574 $ 56,048 Reserve for mobile home dealers 806 1,404 Accrued pension expense 2,559 5,641 Difference of tax and book basis of OREO 129 229 Interest accrued and payments received on non-performing loans for tax purposes 760 1,408 Compensation and employee benefits 15,213 12,960 Book reserves not yet realized for tax purposes 478 1,629 Unrealized depreciation on securities 68,112 -- Employee stock awards -- 501 Intangible asset 2,228 1,530 Investment tax credit carryforward -- 2,245 Other 942 1,477 -------------------------- Total gross deferred tax assets 146,801 85,072 -------------------------- Deferred tax liabilities Leases $ 26,407 $ 26,044 Premises & equipment 8,503 1,547 Partnership investments 6,165 8,731 Loans 6,431 6,788 Mortgage servicing rights 11,397 14,630 Tax bad debt reserve 977 8,660 Unrealized appreciation of securities -- 1,105 Other 1,768 2,551 -------------------------- Total gross deferred tax liabilities 61,648 70,056 -------------------------- Net deferred tax asset $ 85,153 $ 15,016 ==========================
41 38 9. SPECIAL CHARGES Special charges include merger expenses of $20.6 million, $61.1 million and $16.4 million in 1999, 1998 and 1997, respectively, and $7.4 million of costs to discontinue the correspondent mortgage lending business in 1999 and $7.2 million of charges related to exiting the lease securitization business (conducted through CFX Funding) in 1997. Special charges recorded in 1999 totaled $28.0 million (pre-tax) and $20.8 million (post-tax). The total pre-tax charges consisted of $34.5 million recorded in the first quarter of 1999 less reversal of previous merger charges of $3.9 million recorded in the fourth quarter of 1999 and a $2.6 million pension curtailment gain recorded in the first quarter of 1999 in connection with the acquisition of Evergreen Bancorp by Banknorth. The $3.9 million reversal related mainly to lower than anticipated payments for severance, losses on lease residuals, legal fees and claims related to guarantees on a securitized lease portfolio, as well as higher than anticipated pension curtailment gain in connection with the SIS and CFX acquisitions. The following table summarizes special charges recorded in 1999 by type and shows the balance in the accrued liability account as of December 31, 1999 and 1998. These special charges related to the acquisitions of CFX and SIS by the Company and Evergreen Bancorp by Banknorth and the discontinuance of the correspondent mortgage business.
Non-Cash Original Amount Reductions Balance Expense Expense Included in Cash Applied to Balance at 12/31/98 Recorded Adjustment Expense Reallocations Payments Reserve 12/31/1999 -------- -------- ---------- ----------- ------------- -------- ---------- ---------- SIS MERGER Severance costs $ -- $ 10,890 $ (500) $ 10,390 $ (613) $ (9,777) $ -- $ -- Pension curtailment gain (4,000) (869) (4,869) -- 4,869 -- Data processing/systems integration -- 4,669 -- 4,669 (395) (4,274) -- -- Professional fees -- 2,978 -- 2,978 219 (3,197) -- -- Asset write-downs / lease terminations -- 1,800 -- 1,800 749 (577) (1,612) 360 Customer communications 1,100 -- 1,100 13 (1,113) -- Fund charitable foundation 3,000 -- 3,000 -- (3,000) -- -------- -------- -------- -------- -------- -------- -------- ------ Other costs -- 1,621 -- 1,621 27 (1,648) -- -- $ -- $ 22,058 $ (1,369) $ 20,689 $ -- $(23,586) $ 3,257 $ 360 ======== ======== ======== ======== ======== ======== ======== ====== CFX MERGER Severance costs $ 32 $ 455 $ -- $ 455 $ (385) $ (102) $ -- $ -- Pension curtailment gain -- -- (515) (515) -- -- 515 -- Data processing/systems integration -- 507 507 -- (507) -- -- Professional fees -- 336 336 -- (336) -- -- Asset write-downs / lease terminations -- 2,267 (1,156) 1,111 (100) (308) (297) 406 Customer communications -- 48 48 -- (48) -- Other costs 1,131 200 (849) (649) 485 (105) -- 862 -------- -------- -------- -------- -------- -------- -------- ------ $ 1,163 $ 3,813 $ (2,520) $ 1,293 $ -- $ (1,406) $ 218 $1,268 ======== ======== ======== ======== ======== ======== ======== ====== EVERGREEN MERGER Severance costs $ -- $ 233 $ -- $ 233 $ -- $ (233) $ -- $ -- Pension curtailment gain -- (2,577) -- (2,577) -- -- 2,577 -- Other costs -- 1,000 1,000 -- (1,000) -- -- -------- -------- -------- -------- -------- -------- -------- ------ $ -- $ (1,344) $ -- $ (1,344) $ -- $ (1,233) $ 2,577 $ -- ======== ======== ======== ======== ======== ======== ======== ====== DISCONTINUANCE OF THE CORRESPONDENT LENDING BUSINESS Severance costs $ -- $ 1,986 $ -- $ 1,986 $ 264 $ (2,250) $ -- $ -- Professional fees -- 1,793 -- 1,793 (678) (1,115) -- -- Asset write-downs -- 1,293 -- 1,293 -- -- (1,293) -- Correspondent losses 957 -- 957 988 (1,945) -- -- Other exit costs -- 1,335 -- 1,335 (574) (761) -- -- -------- -------- -------- -------- -------- -------- -------- ------ $ -- $ 7,364 $ -- $ 7,364 $ -- $ (6,071) $ (1,293) $ -- ======== ======== ======== ======== ======== ======== ======== ======
The severance payments made in connection with the SIS merger covered approximately 100 employees whose positions were eliminated as a result of the merger. Property and asset write-downs related to the SIS merger related mainly to duplicate facilities and fixed assets. Special charges were also recorded by SIS during the fourth quarter of 1998 totaling $3.8 million, which were related mainly to certain employee benefits which were fully vested as a result of the merger and certain professional fees. The special charges recorded in 1999 for CFX related mainly to higher write-downs of duplicate facilities and fixed assets and additional systems integration costs. The special charges recorded in 1999 for the Evergreen merger related to additional conversion costs for the core systems and the investment management business. The special charges recorded in connection with discontinuing the correspondent mortgage business included severance payments to terminated employees, professional and legal fees, write-off of remaining goodwill applicable to a prior acquisition of a mortgage company, and losses on sales of certain loans originated by correspondents. Write-downs to estimated fair value were based on independent appraisals where practical and on management estimates for the remaining assets. 42 39 10. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
December 31, ---------------------------- 1999 1998 ---------- ---------- Federal funds purchased $ 0 $ 30,445 Securities sold under repurchases agreements 1,302,821 800,481 ---------- ---------- $1,302,821 $ 830,926 ========== ==========
A summary of securities sold under short term repurchase agreements follows:
At or for the Year Ended December 31, -------------------------------------------- 1999 1998 1997 ---------- -------- -------- Balance outstanding at end of period $1,302,821 $800,481 $711,912 Market value of collateral at end of period 1,536,101 941,634 856,761 Amortized cost of collateral at end of period 1,579,486 942,449 885,287 Average balance outstanding 768,500 736,714 684,072 Maximum outstanding at any month end during the period 1,302,821 828,377 848,715 Average interest rate during the period 4.34% 4.68% 4.77% Average interest rate at end of period 4.58% 4.26% 4.89%
Securities sold under repurchase agreements generally have maturities of 365 days or less and are collateralized by mortgage-backed securities and U.S. Government obligations. 11. BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON A summary of the borrowings from the Federal Home Loan Bank of Boston is as follows:
At December 31, 1999 At December 31, 1998 --------------------------------------- --------------------------------------- Maturity Principal Maturity Principal Dates Amounts Interest Rates Dates Amounts Interest Rates -------- --------- -------------- -------- --------- --------------- 2000 $795,445 4.70-7.75% 1999 $260,694 4.84-8.13% 2001 562,100 5.38-6.44% 2000 445,444 4.70-6.49% 2002 2,090,130 5.12-7.79% 2001 1,008,220 4.98-6.44% 2003 149,077 5.00-6.43% 2002 10,425 6.70-7.79% 2004 235,405 5.28-7.11% 2003 124,108 5.00-6.59% 2005-2018 165,662 3.60-8.14% 2004-2016 183,756 3.60-8.14% ---------- ---------- $3,997,819 $2,032,647 ========== ==========
Callable borrowings of $50 million are shown in their respective periods assuming that the callable debt is redeemed at the initial call date while all other borrowing are shown in the periods corresponding to their scheduled maturity date. Short and long-term borrowings from the Federal Home Loan Bank of Boston, which consist of both fixed and adjustable rate borrowings, are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain unencumbered investment securities and other qualified assets. The Company has the ability to prepay most of its borrowings without penalty. 43 40 12. CAPITAL TRUST SECURITIES On January 24, 1997, the Company sponsored the creation of Peoples Heritage Capital Trust I (the "Trust"), a statutory business trust created under the laws of Delaware. The Company is the owner of all of the common securities of the Trust (the "Common Securities"). On January 31, 1997, the Trust issued $100 million of 9.06% Capital Securities (the "Capital Securities," and with the common securities, the "Trust Securities"), the proceeds from which were used by the Trust, along with the Company's $3.1 million capital contribution for the Trust's Common Securities, to acquire $103.1 million aggregate principal amount of the Company's 9.06% Junior Subordinated Deferrable Interest Debentures due February 1, 2027 (the "Debentures"), which constitute the sole assets of the Trust. The Company has, through the Declaration of Trust establishing the Trust, Common Securities and Capital Securities Guarantee Agreements, the Debentures and a related Indenture, taken together, fully irrevocably and unconditionally guaranteed all of the Trust's obligations under the Trust Securities. In 1999, the Company repurchased $31.2 million of the Capital Securities. On May 1, 1997, Banknorth (now the Company) sponsored the creation of Banknorth Capital Trust I ("Trust 1"), a statutory business trust created under the laws of Delaware. The Company is the owner of all of the common securities of Trust 1 (the "Common Securities"). Trust 1 issued $30 million of 10.52% Capital Securities (the "Capital Securities," and with the common securities, the "Trust Securities"), the proceeds from which were used by Trust 1, along with the Company's $998 thousand capital contribution for Trust Common Securities, to acquire $31 million aggregate principal amount of the Company's 10.52% Junior Subordinated Deferrable Interest Debentures due February 1, 2027 (the "Debentures"), which constitute the sole assets of Trust 1. The Company has, through the Declaration of Trust establishing the Trust, Common Securities and Capital Securities Guarantee Agreements, the Debentures and a related Indenture, taken together, fully irrevocably and unconditionally guaranteed all of Trust 1's obligations under the Trust Securities. Separate financial statements of the Trusts are not required pursuant to Staff Accounting Bulletin 53 of the Securities and Exchange Commission. 13. SHAREHOLDERS' EQUITY In April 1998, the stockholders of the Company approved an increase in the authorized number of shares of Common Stock from 100,000,000 to 200,000,000, and in April 2000, the stockholders of the Company approved an increase in the authorized number shares of Common Stock From 200,000,000 to 400,000,000. In May 1998, the Company declared a two-for-one split for each share of Common Stock then outstanding and for all then outstanding options to purchase shares of Common Stock. All references in the Consolidated Financial Statements to the number of shares and per share amounts have been adjusted retroactively for the increases in authorized capitalization and the stock split. Regulatory Capital Requirements. Bank regulatory agencies have established capital adequacy standards which are used extensively in their monitoring and control of the industry. Certain of these standards relate capital to level of risk by assigning different weightings to assets and certain off-balance sheet activity. The Company must maintain a minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below.
Actual Capital Requirements Excess ---------------------- -------------------- -------------------- Amount Ratio Amount Ratio Amount Ratio ---------------------- -------------------- -------------------- As of December 31, 1999 Total capital (to risk weighted assets) $1,376,171 12.02% $916,232 8.00% $459,939 4.02% Tier 1 capital (to risk weighted assets) 1,232,863 10.76% 458,115 4.00% 774,748 6.76% Tier 1 leverage capital ratio (to average assets) 1,232,863 6.75% 730,693 4.00% 502,170 2.75% As of December 31, 1998 Total capital (to risk weighted assets) 1,274,598 12.14% 839,886 8.00% 434,712 4.14% Tier 1 capital (to risk weighted assets) 1,143,072 10.89% 419,943 4.00% 723,129 6.89% Tier 1 leverage capital ratio (to average assets) 1,143,072 7.22% 633,419 4.00% 509,653 3.22%
At December 31, 1999 and 1998, the Company and each of its banking subsidiaries were well-capitalized and in compliance with all applicable regulatory capital requirements. 44 41 Dividend Limitations. Dividends paid by subsidiaries are the primary source of funds available to the Company for payment of dividends to its shareholders. The Banks are subject to certain requirements imposed by federal banking laws and regulations. These requirements, among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by the Banks to the Company. Stockholder Rights Plan. In 1989, the Company's Board of Directors adopted a Stockholder Rights Plan declaring a dividend of one preferred Stock Purchase Right for each outstanding share of Common Stock. The rights will remain attached to the Common Stock and are not exercisable except under limited circumstances relating to acquisition of, the right to acquire beneficial ownership of, or tender offer for 20% or more of the outstanding shares of Common Stock. The Rights have no voting or dividend privileges and, until they become exercisable, have no dilutive effect on the earnings of the Company. On July 27, 1999 the Board of Directors amended and restated the Stockholder Rights Plan to, among other things, extend the expiration date of the rights to September 25, 2009. On July 25, 2000, the Company again amended and restated the Stockholder Rights Plan to reflect its acquisition of Banknorth. Earnings per share The following table presents a reconciliation of earnings per share as of the dates indicated:
For the Year Ended December 31, ------------------------------------------------ (Dollars in thousands, except per share 1999 1998 1997 amounts) ---- ---- ---- Net income $ 196,958 $ 141,744 $ 145,488 ============ ============ ============ Weighted average shares outstanding Basic 145,767,788 146,119,422 145,481,258 Effect of dilutive securities: Stock options 1,659,879 2,845,217 3,118,860 ------------ ------------ ------------ Diluted 147,427,667 148,964,639 148,600,118 ============ ============ ============ Net income per share: Basic $ 1.35 $ 0.97 $ 1.00 Diluted 1.34 0.95 0.98
14. COMMITMENTS, CONTINGENT LIABILITIES AND OTHER OFF-BALANCE SHEET RISKS The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans, standby letters of credit, recourse arrangements on serviced loans and forward commitments to sell loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and recourse arrangements is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For forward commitments to sell loans, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its forward commitments to sell loans through credit approvals, limits and monitoring procedures. 45 42 Financial instruments with off-balance sheet risk at December 31, 1999 and 1998 follow:
Contract or Notional Amount at December 31, ------------------------------ 1999 1998 ------------------------------ Financial instruments with notional or contract amounts which represent credit risk: Commitments to originate loans, unused lines, standby letters of credit and unadvanced portions of construction loans $3,132,878 $3,059,495 Loans serviced with recourse 23,147 25,792 Loans sold with credit enhancements 706 3,294 Leases serviced with credit enhancements 4,933 6,227 Financial instruments with notional or contract amounts which exceed the amount of credit risk: Forward commitments to sell loans 73,700 315,327 Interest rate floors - notional amount 495,000 415,000 - fair value 1,354 6,490 Interest rate swap agreements (pay fixed) - notional amount 50,000 50,000 - fair value 1,749 292 Interest rate corridor agreements (pay fixed) - notional amount 50,000 50,000 - fair value 898 440
Commitments to originate loans, unused lines of credit and unadvanced portions of construction loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company has retained credit risk on certain residential mortgage loans sold with full or partial recourse and on certain residential mortgage loans whose servicing rights were acquired during 1990. Forward commitments to sell residential mortgage loans are contracts which the Company enters into for the purpose of reducing the market risk associated with originating loans for sale. Risks may arise from the possible inability of the Company to originate loans to fulfill the contracts, in which case the Company would normally purchase loans from correspondent banks or in the open market to deliver against the contract. At December 31, 1999, the Company was committed to invest up to $18.1 million in real estate development limited partnerships. At December 31, 1999 and 1998 the Company had $32.8 million and $30.1 million, respectively, invested in such partnerships, which are included in other assets. Legal Proceedings. The Company and certain of its subsidiaries have been named as defendants in various legal proceedings arising from their normal business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of management, based upon the opinions of counsel, any such liability will not have a material effect on the consolidated financial position, results of operations or liquidity of the Company and its subsidiaries. 46 43 Lease Obligations. The Company leases certain properties used in operations under terms of operating leases which include renewal options. Rental expense under these leases approximated $16.5 million, $13.3 million, and $11.0 million for the years ended 1999, 1998 and 1997, respectively. Approximate minimum lease payments over the remaining terms of the leases at December 31, 1999 follow: 2000 $14,099 2001 12,912 2002 11,344 2003 8,289 2004 7,784 2005 and after 36,875 ------- $91,303 ======= 15. STOCK-BASED COMPENSATION PLANS Employee Stock Ownership Plans. In 1989 the Company adopted a Profit Sharing Employee Stock Ownership Plan which is designed to invest primarily in Common Stock of the Company. Substantially all employees are eligible to participate in the Plan following one year of service. Employees may not make contributions to the Plan but may receive a discretionary contribution from the Company based on their pro-rata share of eligible compensation. For 1999, 1998 and 1997, the Company contributed 2%, 3% and 4% of eligible compensation, respectively. The approximate expense of this contribution for 1999, 1998 and 1997 was $1.8 million, $2.1 million and $1.3 million, respectively. Stock Option Plans. In 1995, the Company adopted a stock option plan for non-employee directors, which was amended and restated in 1997. The maximum number of shares which may be granted under the amended plan is 1,060,000 shares, of which 114,000 were granted in 1999 at $18.06 per share, 110,000 were granted in 1998 at $24.31 per share and 59,000 were granted in 1997 at $15.82 per share. A total of 26,500 shares had been issued upon exercise of the stock options granted pursuant to this plan through December 31, 1999. The Company has adopted various stock option plans for key employees. These plans include a stock option plan adopted in 1996 (the "1996 Option Plan") and a stock option plan adopted in 1986 (the "1986 Option Plan"). The 1986 Option Plan, as amended, authorized the issuance of 3,340,000 shares of Common Stock, substantially all of which have been issued. The 1996 Option Plan, as amended, authorizes grants of options and other stock awards covering up to 6,000,000 shares of Common Stock. Stock options are granted with an exercise price equal to the stock's fair market value at the date of the grant and expire 10 years from the date of the grant. At December 31, 1999, there were 2,959,705 additional shares available for grant under the 1996 Option Plan. The per share weighted-average fair value of stock options granted by the Company during 1999, 1998 and 1997 was $5.72, $6.61 and $7.03 and on the date of the grants using the Black Scholes option-pricing model with the following average assumptions:
1999 1998 1997 ---- ---- ---- Expected dividend yield 2.74% 2.50% 2.50% Risk-free interest rate 5.53 5.50 5.82 Expected life 5.00 years 5.00 years 5.00 years Volatility 35.90% 32.87% 32.90%
47 44 The Company applies APB Opinion No. 25 in accounting for its stock option plans and, accordingly, no cost has been recognized for its stock options in the financial statements. Had the Company determined cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income would have been reduced to the pro forma amounts indicated as follows:
1999 1998 1997 ------------------------------------ Net Income As reported $196,958 $141,744 $145,488 Pro forma $191,396 $136,856 $141,160 Basic Earnings per share As reported $ 1.35 $ 0.97 $ 1.00 Proforma $ 1.31 $ 0.94 $ 0.97 Diluted Earnings per share As reported: $ 1.34 $ 0.95 $ 0.98 Proforma $ 1.30 $ 0.92 $ 0.95
Proforma net income reflects only stock options granted since January 1, 1995. Therefore, the full impact of calculating cost for stock options under SFAS No. 123 is not reflected in the proforma net income amounts presented above because cost is reflected over the options' vesting period and cost for options granted prior to January 1, 1995 is not considered. Stock option activity is as follows:
Weighted Number of Average Shares Exercise Price --------- -------------- Balance at December 31, 1997 8,537,701 8.53 Granted 1,857,424 18.55 Exercised 2,302,194 6.71 Forfeited 87,548 14.76 --------- Balance at December 31, 1998 8,005,383 11.83 Granted 1,680,656 17.83 Exercised 1,713,368 8.26 Forfeited 281,540 16.72 --------- Balance at December 31, 1999 7,691,131 13.72 =========
The range of per share exercise prices for outstanding and exercisable stock options at December 31, 1999 was as follows:
Options Outstanding Options Exercisable -------------------------------------------------- ------------------------------- Number Weighted Average Number Range of Outstanding Remaining Weighted Average Outstanding Weighted Average Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price --------------- ----------- ---------------- --------------- ----------- ---------------- up to $5.00 530,571 2.9 years $3.57 525,571 $3.61 $ 5.01 - $10.00 1,557,197 4.9 7.40 1,557,197 7.40 $10.01 - $15.00 1,610,125 5.9 11.57 1,325,125 11.57 $15.01 - $20.00 3,684,838 7.8 18.00 2,362,630 18.26 Over $20.00 308,400 7.0 23.26 214,075 23.53 --------- --------- 7,691,131 6.4 13.72 5,984,598 12.86 ========= =========
48 45 Employee Stock Purchase Plan. The Company has an Employee Stock Purchase Plan covering all full-time employees with one year of service. The maximum number of shares which may be issued under the Employee Stock Purchase Plan is 1,352,000 shares. Employees have the right to authorize payroll deductions up to 10% of their salary. As of December 31, 1999, 893,591 shares had been purchased under this plan. Restricted Stock Plan. In 1990, the Company adopted a Restricted Stock Plan under which up to $10,000 of the annual fee payable to each non-employee Director of the Company and participating subsidiaries is payable solely in shares of Common Stock. Directors of the Company and certain participating subsidiaries who are not full-time employees of the Company or any of its subsidiaries are eligible to participate. Shares issued were 7,376, 6,420 and 3,840 in 1999, 1998 and 1997, respectively. 16. RETIREMENT AND OTHER BENEFIT PLANS Pension Plans. The Company and its subsidiaries have noncontributory defined benefit plans covering most permanent, full-time employees. Benefits are based on career average earnings and length of service. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. The Company has adopted supplemental retirement plans for several key officers. These plans were designed to offset the impact of changes in the Pension Plans which reduced benefits for highly paid employees. The Company also has entered into deferred compensation agreements with certain key officers. The cost of these agreements is accrued but not funded. The Company purchased corporate-owned life insurance policies on the lives of certain retirees. The death benefits are payable to the Company and will assist in the funding of the deferred compensation liability. The Company will recover the costs of premium payments from the cash value of these policies. Post Retirement Benefits Other Than Pensions. The Company and its subsidiaries sponsor post-retirement benefit programs which provide medical coverage and life insurance benefits to employees and directors who meet minimum age and service requirements. The Company and its subsidiaries recognize costs related to post retirement benefits under the accrual method, which recognizes costs over the employee's period of active employment. The impact of adopting SFAS No. 106 is being amortized over a twenty year period beginning January 1, 1993. 49 46 The following tables set forth the funded status and amounts recognized in the Company's Consolidated Balance Sheets at December 31, 1999 and 1998 for the pension plans and other post retirement benefit plans:
Pension Plans Other Post Retirement Benefits -------------------------- ------------------------------ 1999 1998 1999 1998 -------------------------- ------------------------------ CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 128,017 $ 109,152 $ 11,388 $ 10,668 Service cost 7,537 6,789 336 262 Interest cost 8,945 7,969 852 733 Assumption changes (12,921) 3,713 (833) 299 Actuarial (gain) loss 1,666 8,369 1,380 294 Curtailment gain (8,935) (924) -- -- Acquisitions 3,253 -- -- -- Benefits paid (8,353) (7,051) (1,019) (868) -------------------------- ------------------------------ Benefit obligation at end of year $ 119,209 $ 128,017 $ 12,104 $ 11,388 ========================== ============================== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year $ 123,078 $ 111,441 $ -- $ -- Actual return on plan assets 16,039 16,895 -- -- Employer contribution 1,057 1,793 1,019 868 Benefits paid (8,353) (7,051) (1,019) (868) Administrative expenses (232) -- -- -- -------------------------- ------------------------------ Fair value of plan assets at end of year $ 131,589 $ 123,078 $ -- $ -- ========================== ============================== Funded status $ 12,380 $ (4,939) $ (12,104) ($ 11,388) Unrecognized net actuarial (gain) loss (29,623) (12,761) (94) (629) Unrecognized prior service cost 1,660 2,263 1,633 1,772 Unrecognized net transition obligation (1,675) (2,462) 5,257 5,649 -------------------------- ------------------------------ Prepaid (accrued) benefit cost $ (17,258) $ (17,899) $ (5,308) ($ 4,596) ========================== ============================== WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate 7.75% 6.50% 7.75% 6.50% Expected return on plan assets 8.50% 8.50% -- -- Rate of compensation increase 4.50% 4.50% -- --
Year Ended December 31, Year Ended December 31, --------------------------------- --------------------------- 1999 1998 1997 1999 1998 1997 --------------------------------- --------------------------- Components of net periodic benefit cost Service cost $ 7,537 $ 6,789 $ 5,358 $ 336 $ 262 $ 213 Interest cost 8,945 7,969 6,950 852 733 741 Expected return on plan assets (10,464) (9,435) (7,729) -- -- -- Net amortization and deferral (207) (305) (288) 545 523 484 Curtailment gain -- 668 -- -- -- -- Amortization of net gain -- (75) (135) -- -- -- --------------------------------- --------------------------- Net periodic benefit cost $ 5,811 $ 5,611 $ 4,156 $1,733 $1,518 $1,438 ================================= ===========================
Curtailment gains of $8.0 million in 1999 were recorded as a reduction of special charges relating to the Evergreen, SIS and CFX acquisitions. 50 47 Multi-Employer Pension Plan An acquired company participated in a multi-employer pension plan in 1998 and 1997. The plan was fully funded in 1998 and there is no future obligation relating to this plan. Pension expense attributable to the plan for the years ended December 31, 1998 and 1997 was $377,000 and $396,000, respectively. Thrift Incentive Plan. The Company has a contributory Thrift Incentive Plan covering substantially all permanent employees after completion of one year of service. The Company matches employee contributions based on a predetermined formula and may make additional discretionary contributions. Banknorth also had an Employee Savings Plan. The total expense for these plans in 1999, 1998 and 1997 was $3.2 million, $4.7 million, and $4.1 million, respectively. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company discloses fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate fair value. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. Where available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument. Also, because of differences in methodologies and assumptions used to estimate fair values, the Company's fair values should not be compared to those of other banks. Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company. For certain assets and liabilities, the information required under SFAS No. 107 is supplemented with additional information relevant to an understanding of the fair value. Also, fair values are presented for certain assets that are not financial instruments under the definition in SFAS No. 107. The following describes the methods and assumptions used by the Company in estimating the fair values of financial instruments and certain non-financial instruments: CASH AND CASH EQUIVALENTS, INCLUDING CASH AND DUE FROM BANKS, SHORT-TERM INVESTMENTS AND FEDERAL FUNDS SOLD. For these cash and cash equivalents, which have maturities of 90 days or less, the carrying amounts reported in the balance sheet approximate fair values. SECURITIES AND LOANS HELD FOR SALE. Fair values are based on quoted bid market prices, where available. Where quoted market prices for an instrument are not available, fair values are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instrument being valued. Fair values are calculated based on the value of one unit without regard to premiums or discounts that might result from selling all of the Company's holdings of a particular security in one transaction. LOANS AND LEASES. The fair values of commercial, commercial real estate, residential real estate, and certain consumer loans and leases are estimated by discounting the contractual cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar quality. For certain variable-rate consumer loans, including home equity lines of credit the carrying value approximates fair value. For nonperforming loans and certain loans where the credit quality of the borrower has deteriorated significantly, fair values are estimated by discounting cash flows at a rate commensurate with the risk associated with those cash flows. MORTGAGE SERVICING RIGHTS. The fair value of the Company's mortgage servicing rights is based on the expected present value of future mortgage servicing income, net of estimated servicing costs, considering market consensus loan prepayment predictions. 51 48 DEPOSITS. The fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is based on the discounted value of contractual cash flows, applying interest rates currently being offered on the deposit products of similar maturities. The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of alternative forms of funding ("deposit base intangibles") BORROWINGS, INCLUDING FEDERAL FUNDS PURCHASED, SECURITIES SOLD UNDER REPURCHASE AGREEMENTS, BORROWINGS FROM THE FEDERAL HOME LOAN BANK OF BOSTON AND OTHER BORROWINGS. The fair value of the Company's long-term borrowings is estimated based on quoted market prices for the issues for which there is a market, or by discounting cash flows based on current rates available to the Company for similar types of borrowing arrangements. For short-term borrowings that mature or reprice in 90 days or less, carrying value approximates fair value. OFF-BALANCE SHEET INSTRUMENTS: COMMITMENTS TO ORIGINATE LOANS AND COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT. In the course of originating loans and extending credit and standby letters of credit, the Company will charge fees in exchange for its lending commitment. While these commitment fees have value, the Company has not estimated their value due to the short-term nature of the underlying commitments. FORWARD COMMITMENTS TO SELL LOANS. The fair value of the Company's forward commitments to sell loans reflects the value of origination fees and servicing rights recognizable upon sale of loans net of any cost to the Company if it fails to meet its sale obligation. Of the $74 million of forward sales commitments at December 31, 1999, the Company had $67.2 million in loans available to sell at that date as well as sufficient loan originations subsequent to December 31, 1999 to fulfill the commitments. Consequently, the Company has no unmet sales obligation to value and due to the short-term nature of the commitments has not estimated the value of the fees and servicing. LOANS SERVICED WITH RECOURSE. Under certain of the Company's servicing arrangements with investors, the Company has recourse obligation to those serviced loan portfolios. In the event of foreclosure on a serviced loan, the Company is obligated to repay the investor to the extent of the investor's remaining balance after application of proceeds from the sale of the underlying collateral. To date, losses related to these recourse arrangements have been insignificant and while the Company cannot project future losses, the fair value of this recourse obligation is deemed to be likewise insignificant. A summary of the fair values of the Company's significant financial instruments at December 31, 1999 and 1998 follows:
1999 1998 ---------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value ---------------------------------------------------- Assets: Cash and cash equivalents $ 776,395 $ 776,395 $ 869,039 $ 869,039 Securities - available for sale 6,316,031 6,316,031 4,113,996 4,113,996 Securities - held to maturity 557,151 535,605 265,778 267,161 Loans held for sale 82,318 82,382 560,750 561,620 Loans and leases, net 9,699,608 9,626,579 9,770,039 9,869,083 Mortgage servicing rights 52,724 59,254 45,439 46,577 Interest rate swaps, floor & corridor contracts 2,023 4,001 4,746 7,222 Liabilities: Deposit (with no stated maturity) 7,212,557 7,212,557 7,227,677 7,227,677 Time deposits 4,497,944 4,506,223 4,788,535 4,808,479 Borrowings 5,367,478 5,340,259 2,910,173 2,917,732
52 49 18. CONDENSED PARENT INFORMATION Condensed Financial Statements of the Parent Company
December 31, ----------------------------- Balance Sheets 1999 1998 ----------------------------- Assets: Cash and due from banks $ 5,612 $ 7,681 Interest bearing deposits with subsidiaries 65,885 21,857 Securities purchased under agreements to resell to a subsidiary bank 12,250 18,317 Securities available for sale 36,892 6,078 Investment in subsidiaries 1,159,979 1,281,542 Goodwill and other intangibles 12,910 14,716 Amounts receivable from subsidiaries 61,537 14,360 Other assets 41,329 35,531 ----------------------------- Total assets $1,396,394 $1,400,082 ============================= Liabilities and shareholders' equity Amounts payable to subsidiaries $ 28,720 $ 8,953 Subordinated debentures supporting mandatory redeemable trust securities 134,021 136,633 Other liabilities 41,379 32,106 Shareholders' equity 1,192,274 1,222,390 ----------------------------- Total liabilities and shareholders' equity $1,396,394 $1,400,082 =============================
Year Ended December 31, ----------------------------------------- 1999 1998 1997 ----------------------------------------- Operating income: Dividends from subsidiaries $203,983 $132,091 $95,721 Other operating income 6,931 6,277 8,697 ----------------------------------------- Total operating income 210,914 138,368 104,418 ----------------------------------------- Operating expenses: Interest on borrowings 13,222 13,343 12,161 Amortization of intangibles 1,847 1,843 1,869 Merger expenses 14,710 26,299 354 Other operating expenses 6,595 11,220 13,126 ----------------------------------------- Total operating expenses 36,374 52,705 27,510 ----------------------------------------- Income before income taxes and equity in undistributed net income of subsidiaries 174,540 85,663 76,908 Income tax expense (benefit) (10,733) (11,964) (4,804) ----------------------------------------- Income before equity in undistributed net income of subsidiaries 185,273 97,627 81,712 Equity in undistributed net income of subsidiaries 11,685 44,117 63,776 ----------------------------------------- Net income $196,958 $141,744 $145,488 =========================================
(1) Amounts in parenthesis represent the excess of dividends over net income from subsidiaries. 53 50
Year Ended December 31, ------------------------------------- 1999 1998 1997 ------------------------------------- Statements of Cash Flows Cash flows from operating activities: Net income $ 196,958 $ 141,744 $ 145,488 Adjustments to reconcile net income to net cash (used) provided by operating activities: Undistributed net income from subsidiaries (11,685) (44,117) (63,776) Amortization of goodwill and other intangibles 1,847 1,844 1,869 Securities losses (gains) -- (187) (333) Decrease in unearned compensation 2,072 177 168 (Increase) decrease in amounts receivable from subsidiaries (47,177) (6,173) 6,938 Decrease (increase) in other assets (11,661) (1,465) (11,868) Increase (decrease) in amounts payable to subsidiaries 19,767 19,366 (11,868) Increase (decrease) in other liabilities 17,466 (3,589) 11,338 Other, net 668 1,182 (2,440) ------------------------------------- Net cash provided by operating activities $ 168,255 $ 108,782 $ 75,516 ===================================== Cash flows from investing activities: Net decrease (increase) in interest bearing deposits with subsidiaries ($ 37,961) ($ 4,210) $ (10,734) Maturities of securities available for sale -- 4,556 $ 1,346 Sales of available for sale securities 1,432 4,494 510 Purchase of available for sale securities (34,119) -- (15,970) Sales of held to maturity securities -- -- 4,337 Purchase of held to maturity securities -- -- (4,017) Capital contribution from (to) subsidiary 11,890 (46,498) (51,206) ------------------------------------- Net cash (used) provided by investing activities $ (58,758) $ (41,658) $ (75,734) ===================================== Cash flows from financing activities: Issuance of notes payable (net) $ 0 $ 0 $ 133,093 Payment of notes payable (10,805) (4,517) (4,873) Other shareholders' equity, net -- -- 3,118 Dividends paid to shareholders (65,368) (57,231) (57,608) Treasury stock acquired (53,745) (55,340) (55,981) Common stock issued 18,352 19,291 16,516 ------------------------------------- Net cash provided (used) by financing activities $(111,566) $ (97,797) $ 34,265 ===================================== Net increase (decrease) in cash due from banks $ (2,069) $ (30,673) $ 34,047 Cash and due from banks at beginning of year 7,681 38,354 4,207 ------------------------------------- Cash and due from banks at end of year $ 5,612 $ 7,681 $ 38,254 ===================================== Supplemental disclosure information: Interest paid on borrowings $ 9,956 $ 9,799 $ 6,088
54 51 19. SELECTED QUARTERLY DATA (UNAUDITED)
1999 1998 --------------------------------------------- ------------------------------------------- Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------- Interest income $323,286 $317,329 $298,798 $288,106 $287,611 $287,427 $285,689 $285,433 Interest expense 163,425 157,329 145,470 137,066 138,828 139,437 138,763 138,616 ------------------------------------------------------------------------------------------ Net interest income 159,861 160,000 153,328 151,040 148,783 147,990 146,926 146,817 Provision for loan and lease losses 6,005 6,165 5,840 5,565 6,308 6,308 5,570 5,589 ------------------------------------------------------------------------------------------ Net interest income after provision for loan and lease losses 153,856 153,835 147,488 145,475 142,475 141,682 141,356 141,228 Noninterest income 49,910 47,780 50,743 43,361 44,952 41,593 42,004 38,998 Special charges (3,889) 0 60 31,831 25,766 0 34,474 900 Noninterest expenses 121,183 117,209 117,637 114,110 116,297 111,171 113,278 117,580 ------------------------------------------------------------------------------------------ Income before income taxes 86,472 84,406 80,534 42,895 45,364 72,104 35,608 61,746 Income tax expense 27,637 28,132 25,633 15,947 17,796 22,744 11,808 20,730 ------------------------------------------------------------------------------------------ Net income $ 58,835 $ 56,274 $ 54,901 $ 26,948 $ 27,568 $ 49,360 $ 23,800 $ 41,016 ========================================================================================== Earnings per share: Basic $0.41 $0.39 $0.37 $0.18 $0.19 $0.34 $0.16 $0.28 Diluted $0.40 $0.38 $0.37 $0.18 $0.19 $0.33 $0.16 $0.28 Operating earnings per share (1): Basic $0.39 $0.39 $0.37 $0.34 $0.33 $0.34 $0.33 $0.29 Diluted $0.39 $0.38 $0.37 $0.34 $0.32 $0.33 $0.32 $0.28
(1) Earnings before special charges 55 52 INDEPENDENT AUDITORS' REPORT The Board of Directors Banknorth Group, Inc.: We have audited the accompanying consolidated balance sheets of Banknorth Group, Inc.(formerly Peoples Heritage Financial Group, Inc.) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banknorth Group, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. Boston, Massachusetts /s/ KPMG LLP August 2, 2000 56