10-Q 1 b37152bne10-q.txt BANKNORTH GROUP, INC. 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2000 OR [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: 0-16947 BANKNORTH GROUP, INC. (formerly Peoples Heritage Financial Group, Inc.) ------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Maine 01-0437984 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Two Portland Square, Portland, Maine 04112 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (207) 761-8500 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] The number of shares outstanding of the Registrant's common stock and related stock purchase rights as of October 31, 2000 is: Common stock, par value $.01 per share 144,820,551 -------------------------------------- ------------- (Class) (Outstanding) 2 INDEX BANKNORTH GROUP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION PAGE --------------------- ---- Item 1. Financial Statements (unaudited) Consolidated Balance Sheets September 30, 2000 and December 31, 1999 3 Consolidated Statements of Income - Three months and nine months ended September 30, 2000 and 1999 4 Consolidated Statements of Changes in Shareholders' Equity - Nine months ended September 30, 2000 and 1999 5 Consolidated Statements of Cash Flows - Nine months ended September 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 32 PART II. OTHER INFORMATION Item 1. Legal proceedings 32 Item 2. Changes in securities and use of proceeds 32 Item 3. Defaults upon senior securities 32 Item 4. Submission of matters to a vote of security holders 32 Item 5 Other information 32 Item 6 Exhibits and reports on Form 8-K 32 Signatures 32 2 3 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
September 30, December 31, 2000 1999 ------------- ------------ ASSETS (Unaudited) Cash and due from banks $ 482,730 $ 546,816 Federal funds sold and other short term investments 27,264 229,579 Securities available for sale, at market value 5,761,558 6,316,031 Securities held to maturity (fair value of $473,228 and $535,605 at September 30, 2000 and December 31, 1999, respectively) 474,978 557,151 Loans held for sale 38,884 82,318 Loans and leases: Residential real estate mortgages 2,267,650 2,270,417 Commercial real estate mortgages 2,969,332 2,696,317 Commercial business loans and leases 2,245,803 1,924,201 Consumer loans and leases 3,258,239 2,963,721 ------------ ------------ 10,741,024 9,854,656 Less: Allowance for loan and lease losses 156,867 155,048 ------------ ------------ Net loans and leases 10,584,157 9,699,608 ------------ ------------ Premises and equipment 189,710 192,540 Goodwill and other intangibles 191,245 184,381 Mortgage servicing rights 41,029 52,724 Bank-owned life insurance 302,191 288,783 Other assets 368,577 358,333 ------------ ------------ $ 18,462,323 $ 18,508,264 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Regular savings $ 1,445,146 $ 1,567,776 Money market and NOW accounts 3,940,488 3,698,934 Certificates of deposit 4,554,514 4,448,229 Brokered deposits 65,591 173,798 Demand deposits 2,063,665 1,821,764 ------------ ------------ Total deposits 12,069,404 11,710,501 Federal funds purchased and securities sold under repurchase agreements 866,953 1,302,821 Borrowings from the Federal Home Loan Bank of Boston 3,806,025 3,997,819 Other borrowings 166,890 66,838 Other liabilities 143,337 139,236 ------------ ------------ Total liabilities 17,052,609 17,217,215 ------------ ------------ Company obligated, mandatory redeemable securities of subsidiary trusts 98,775 98,775 holding solely parent junior subordinated debentures Shareholders' Equity: Preferred stock (par value $0.01 per share, 5,000,000 shares authorized, -- -- none issued) Common stock (par value $0.01 per share, 400,000,000 and 200,000,000 shares authorized, 149,584,289 and 149,623,204 shares issued) 1,496 1,496 Paid-in capital 616,926 617,523 Retained earnings 858,118 787,238 Unearned compensation (1,438) (2,751) Accumulated other comprehensive income (loss) (82,900) (125,394) Treasury stock, at cost (4,627,254 shares and 4,649,306 shares) (81,263) (85,838) ------------ ------------ Total shareholders' equity 1,310,939 1,192,274 ------------ ------------ $ 18,462,323 $ 18,508,264 ============ ============
See accompanying Notes to Consolidated Financial Statements. 3 4 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except share data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------------- ------------------------------- 2000 1999 2000 1999 ------------- ------------ ------------- ------------ Interest and dividend income: Interest on loans and leases $ 228,802 $ 203,925 $ 659,766 $ 619,643 Interest and dividends on securities 107,757 113,404 333,240 284,590 ------------- ------------ ------------- ------------ Total interest and dividend income 336,559 317,329 993,006 904,233 Interest expense: Interest on deposits 107,119 91,971 302,978 280,622 Interest on borrowed funds 78,727 65,358 230,977 159,243 ------------- ------------ ------------- ------------ Total interest expense 185,846 157,329 533,955 439,865 Net interest income 150,713 160,000 459,051 464,368 Provision for loan and lease losses 6,250 6,165 17,167 17,570 ------------- ------------ ------------- ------------ Net interest income after provision for loan and lease losses 144,463 153,835 441,884 446,798 Noninterest income: Customer services 20,801 18,390 59,882 49,830 Mortgage banking services 6,172 4,220 14,813 17,615 Insurance commissions 6,030 4,681 16,003 14,277 Trust services 8,612 8,382 26,039 25,374 Investment advisory services 1,679 1,696 5,115 4,402 Bank-owned life insurance income 4,216 3,811 13,481 11,608 Merchant and card product income, net 4,021 3,674 11,560 9,213 Net securities gains (losses) (23) 9 2 655 Losses on securities restructuring -- -- (15,895) -- Other noninterest income 4,559 2,917 16,122 8,910 ------------- ------------ ------------- ------------ 56,067 47,780 147,122 141,884 Noninterest expenses: Salaries and employee benefits 53,175 57,922 170,461 171,381 Data processing 9,024 9,364 27,060 29,421 Occupancy 9,287 9,803 30,320 29,695 Equipment 8,010 7,726 23,575 22,245 Distributions on securities of subsidiary trusts 2,346 2,347 7,040 7,496 Amortization of goodwill and other intangibles 5,268 5,166 15,669 15,465 Special charges 414 -- 43,022 31,891 Other noninterest expenses 24,525 24,881 75,250 73,253 ------------- ------------ ------------- ------------ 112,049 117,209 392,397 380,847 Income before income tax expense 88,481 84,406 196,609 207,835 Applicable income tax expense 27,890 28,132 67,239 69,712 ------------- ------------ ------------- ------------ Net income $ 60,591 $ 56,274 $ 129,370 $ 138,123 ============= ============ ============= ============ Weighted average shares outstanding: Basic 144,680,123 145,628,899 144,468,306 146,118,999 Diluted 145,736,317 147,188,579 145,382,650 147,868,635 Earnings per share: Basic $ 0.42 $ 0.39 $ 0.90 $ 0.95 Diluted 0.42 0.38 0.89 0.93
See accompanying Notes to Consolidated Financial Statements. 4 5 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) (Unaudited)
Accumulated Unearned Other Par Paid-in Retained Compen- Comprehensive Treasury Value Capital Earnings sation Income (Loss) Stock Total -------- -------- -------- -------- ------------- --------- ---------- Balances at December 31, 1999 $ 1,496 $617,523 $787,238 $(2,751) $(125,394) $(85,838) $1,192,274 Net income -- -- 129,370 -- -- -- 129,370 Unrealized gain on securities, net of reclassification adjustment -- -- -- -- 42,494 -- 42,494 ---------- Comprehensive income 171,864 ---------- Common stock issued for employee benefit plans -- -- (5,708) -- -- 14,341 8,633 Common stock issued for acquisition 1 1,324 -- -- -- -- 1,325 Cancellation of treasury shares at acquisition (1) (2,206) -- -- -- 2,207 -- Treasury stock purchased -- -- -- -- -- (12,343) (12,343) Decrease in unearned compensation -- 775 -- 321 -- -- 1,096 Issuance of restricted stock -- (82) (165) -- -- 370 123 Amortization of restricted stock awards -- (390) -- 992 -- -- 602 Payment of fractional shares -- (18) -- -- -- -- (18) Cash dividends -- -- (52,617) -- -- -- (52,617) -------- -------- -------- ------- --------- -------- ---------- Balances at September 30, 2000 $ 1,496 $616,926 $858,118 $(1,438) $( 82,900) $(81,263) $1,310,939 ======== ======== ======== ======= ========= ======== ========== Balances at December 31, 1998 $ 1,496 $618,624 $669,357 $(3,756) $ 1,858 $(65,189) $1,222,390 Net income -- -- 138,123 -- -- -- 138,123 Unrealized losses on securities, net of reclassification adjustment -- -- -- -- (85,626) -- (85,626) ---------- Comprehensive income 52,497 ---------- Common stock issued for employee benefit plans -- -- (9,792) -- -- 26,391 16,599 Treasury stock purchased -- -- -- -- -- (53,745) (53,745) Decrease in unearned compensation -- 1,167 -- 576 -- -- 1,743 Issuance of restricted stock -- 160 (271) (655) -- 1,189 423 Amortization of restricted stock awards -- (571) -- 699 -- -- 128 Premium on repurchase of trust preferred securities -- (1,801) -- -- -- -- (1,801) Payment of fractional shares -- (3) -- -- -- -- (3) Cash dividends -- -- (49,109) -- -- -- (49,109) -------- -------- -------- ------- --------- -------- ---------- Balances at September 30, 1999 $ 1,496 $617,576 $748,308 $(3,136) $( 83,768) $(91,354) $1,189,122 ======== ======== ======== ======= ========= ======== ==========
See accompanying Notes to Consolidated Financial Statements. 5 6 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Nine Months Ended September 30, ------------------------------- 2000 1999 ------------- ------------- Cash flows from operating activities: Net income $ 129,370 $ 138,123 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 17,167 17,570 Depreciation 20,466 20,119 Amortization of goodwill and other intangibles 15,669 15,465 Provision for deferred tax expense (16,726) (1,082) ESOP expense 1,096 1,743 Issuance and amortization of restricted stock 725 551 Net (gains) losses realized from sales of securities and consumer loans 11,135 (655) Net losses realized from sales of loans held for sale (a component of mortgage banking services) (150) 130 Earnings from bank owned life insurance (13,481) (12,201) Net (increase) decrease in mortgage servicing rights 11,695 (8,015) Proceeds from sales of loans held for sale 184,408 1,012,031 Residential loans originated and purchased for sale (140,824) (567,448) Net decrease (increase) in interest and dividends receivable and other assets (38,277) (35,760) Net increase (decrease) in other liabilities 8,181 29,546 ------------ ----------- Net cash provided (used) by operating activities $ 190,454 $ 610,117 ------------ ----------- Cash flows from investing activities: Proceeds from sales of securities available for sale $ 106,220 $ 49,653 Proceeds from maturities and principal repayments of securities available for sale 729,429 1,384,779 Purchases of securities available for sale (227,834) (3,758,742) Proceeds from maturities and principal repayments of securities held to maturity 79,079 71,059 Net (increase) decrease in loans and leases (931,215) (369,620) Proceeds from sale of loans 34,234 -- Purchase of bank owned life insurance -- (165,406) Net additions to premises and equipment (21,716) (16,721) ------------ ----------- Net cash provided (used) by investing activities $( 231,803) $(2,804,998) ------------ ----------- Cash flows from financing activities: Net (decrease) increase in deposits $ 358,903 $( 286,725) Net increase (decrease) in securities sold under repurchase agreements (435,868) (39,414) Proceeds from Federal Home Loan Bank of Boston borrowings 11,054,300 2,982,240 Payments on Federal Home Loan Bank of Boston borrowings (11,246,094) (627,532) Net increase (decrease) in other borrowings 100,052 19,385 Repurchase of trust preferred securities -- (33,026) Issuance of stock 8,633 16,596 Purchase of treasury stock (12,343) (53,745) Dividends paid (52,617) (49,109) Other shareholders' equity, net (18) -- ------------ ----------- Net cash provided by financing activities $( 225,052) $ 1,928,670 ------------ ----------- Increase (decrease) in cash and cash equivalents $( 266,401) $( 266,211) Cash and cash equivalents at beginning of period 776,395 838,594 ------------ ----------- Cash and cash equivalents at end of period $ 509,994 $ 572,383 ============ ===========
For the nine months ended September 30, 2000 and 1999, interest of $535,742 and $436,198 and income taxes of $62,026 and $37,643 were paid, respectively. See accompanying Notes to Consolidated Financial Statements. 6 7 BANKNORTH GROUP, INC. AND SUBSIDIARIES SEPTEMBER 30, 2000 (IN THOUSANDS) (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles and predominant practices within the banking industry. The Company has not changed its accounting and reporting policies from those disclosed in its 1999 Annual Report. In the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the consolidated financial statements have been included. The results of operations and other data for the nine months ended September 30, 2000 are not necessarily indicative of the results that may be expected for any other interim period or the entire year ending December 31, 2000. Certain amounts in the prior periods have been reclassified to conform to the current presentation. NOTE 2 - OTHER COMPREHENSIVE INCOME (LOSS) The components of total comprehensive income for the Company are net income and unrealized gains (losses) on securities available for sale, net of tax. The following is a reconciliation of comprehensive income for the nine months ended September 30, 2000 and 1999.
Nine Months Ended September 30, ------------------------ 2000 1999 --------- --------- Net income $ 129,370 $ 138,123 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period 32,164 (85,200) Less: reclassification adjustment for gains (losses) included in net income (10,330) 426 --------- --------- Other comprehensive income (loss), net 42,494 (85,626) --------- --------- Comprehensive income $ 171,864 $ 52,497 ========= =========
NOTE 3 - EARNINGS PER SHARE The computations of basic and diluted net income per share and weighted average shares outstanding follow (dollars in thousands, except per share amounts):
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net income $ 60,591 $ 56,274 $ 129,370 $ 138,123 ============ ============ ============ ============ Weighted average shares outstanding Basic: 144,680,123 145,628,899 144,468,306 146,118,999 Effect of dilutive securities: Stock options 1,056,194 1,559,680 914,344 1,749,636 ------------ ------------ ------------ ------------ Diluted 145,736,317 147,188,579 145,382,650 147,868,635 ============ ============ ============ ============ Net income per share: Basic $ 0.42 $ 0.39 $ 0.90 $ 0.95 Diluted 0.42 0.38 0.89 0.93
7 8 NOTE 4 - COMPLETED ACQUISITION On May 10, 2000, Peoples Heritage Financial Group, Inc. ("the Company") completed the acquisition of Banknorth Group, Inc., which was effected by means of the merger of Banknorth Group, Inc. with and into the Company. The Company changed its name to "Banknorth Group, Inc." as a result of the merger. As a result of the merger and the change in the name of the Company, the Company's symbol on the Nasdaq stock market is now BKNG. Upon consummation of the merger, each share of former Banknorth common stock outstanding was automatically converted into the right to receive 1.825 shares of Company common stock, including each attached right issued pursuant to the Company's shareholder rights plan (collectively, the "Common Stock"), with cash in lieu of fractional share interests. Approximately 42.9 million shares of Common Stock were issued or are issuable in connection with the merger. The Company accounted for the acquisition of Banknorth under the pooling-of-interests method and, as a result, the consolidated financial statements of the Company have been restated to reflect the acquisition at the beginning of each period presented. At December 31, 1999, the former Banknorth had total assets of $4.6 billion and total shareholders' equity of $341.3 million. During the three months ended September 30, 2000, the Company completed the acquisition of two insurance agencies based in Massachusetts and Connecticut for a combination of cash and stock. These acquisitions were accounted for under the purchase method and, as a result, the acquired assets and liabilities were added to those of the Company at their respective fair values and the excess of the purchase price over the fair value of net assets acquired, which aggregated $22.5 million, was recorded as goodwill which will be amortized to expense over 20 years. In addition, under this method of accounting the results of operations of the acquired agencies are included in the Company's results of operations only from their respective dates of acquisition. 8 9 BANKNORTH GROUP, INC. AND SUBSIDIARIES, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS SUMMARY Banknorth Group, Inc. (the "Company") reported consolidated net income of $60.6 million, or $0.42 per diluted share, for the third quarter of 2000 as compared with $56.3 million, or $0.38 per diluted share, for the third quarter of 1999. This represents an 11% increase in diluted earnings per share. The Company's return on average equity ("ROE") and return on average assets ("ROA") were 19.31% and 1.31%, respectively, for the third quarter ended September 30, 2000. ROE and ROA were 18.77% and 1.23%, respectively, for the quarter ended September 30, 1999. The nine months ended September 30, 2000 included $58.9 million of non-operating items ($43.0 million net of tax). The nine months ended September 30, 1999 included "special items" of $31.9 million ($23.2 million after tax). "Special items" consist of special charges (see Table 5) and losses on securities restructuring. The Company's operating income for the nine months ended September 30, 2000 was $172.4 million, or $1.19 per diluted share, and ROE and ROA were 19.22% and 1.25%, respectively. Operating income for the nine months ended September 30, 1999 was $161.3 million, or $1.09 per diluted share, and ROE and ROA were 17.93% and 1.24%, respectively. Operating results for the nine months ended September 30, 2000 represent a 9% increase in diluted earnings per share from the comparable period last year. The improved operating results for the third quarter of 2000 over the third quarter of 1999 were largely due to strong fee income and lower operating expenses which combined to more than offset lower net interest income. Noninterest income increased 17% compared to the third quarter of 1999. The growth in noninterest income was primarily due to a $2.4 million increase in customer service income, a $2.0 million increase in mortgage banking services income, a $1.3 million increase in insurance commissions and a $347 thousand increase in merchant and card product income. Noninterest expenses for the third quarter of 2000 decreased 4% from the same quarter in 1999. Contributing to the decrease was a $4.7 million decrease in salaries and benefits and a $340 thousand decrease in data processing expenses. The efficiency ratio (noninterest expense excluding distributions on securities of subsidiary trust and special charges, as a percentage of net interest income and noninterest income, excluding net securities gains and losses, including losses on securities restructuring) was 52.85% in the third quarter of 2000 compared to 55.28% in the comparable period last year. Net interest income declined by $9.3 million due to lower margins related to higher prevailing interest rates. Selected quarterly data, ratios and per share data, both as reported and on an operating basis, are provided in Table 1. 9 10 TABLE 1 - SELECTED QUARTERLY DATA (Dollars in thousands, except per share data)
2000 2000 2000 1999 1999 1999 1999 Third Second First Fourth Third Second First --------- --------- --------- --------- -------- -------- -------- Net interest income $ 150,713 $ 153,165 $ 155,173 $ 159,861 $160,000 $153,328 $151,040 Provision for loan and lease losses 6,250 5,849 5,068 6,005 6,165 5,840 5,565 --------- --------- --------- --------- -------- -------- -------- Net interest income after loan and lease loss provision 144,463 147,316 150,105 153,856 153,835 147,488 145,475 Noninterest income (excluding securities transactions) 56,090 56,744 50,181 49,910 47,771 50,340 43,118 Net securities gains (losses) (23) (15,857) (13) -- 9 403 243 Noninterest expenses (excluding special charges) (1) 111,635 117,730 120,010 121,183 117,209 117,637 114,110 Special charges (1) 414 37,271 5,337 (3,889) -- 60 31,831 --------- --------- --------- --------- -------- -------- -------- Income before income taxes 88,481 33,202 74,926 86,472 84,406 80,534 42,895 Income tax expense 27,890 14,323 25,026 27,637 28,132 25,633 15,947 --------- --------- --------- --------- -------- -------- -------- Net income $ 60,591 $ 18,879 $ 49,900 $ 58,835 $ 56,274 $ 54,901 $ 26,948 ========= ========= ========= ========= ======== ======== ======== Earnings per share: Basic $ 0.42 $ 0.13 $ 0.35 $ 0.41 $ 0.39 $ 0.37 $ 0.18 Diluted 0.42 0.13 0.34 0.40 0.38 0.37 0.18 Operating earnings per share (excluding special items) (1): Basic $ 0.42 $ 0.40 $ 0.37 $ 0.39 $ 0.39 $ 0.37 $ 0.34 Diluted 0.42 0.40 0.37 0.39 0.38 0.37 0.34 Return on average assets (2) 1.31% 0.41% 1.10% 1.28% 1.23% 1.26% 0.66% Return on average equity (2) 19.31% 6.48% 16.75% 19.64% 18.77% 17.89% 9.06% Operating ratios: Return on average assets (excluding special items) (1)(2) 1.32% 1.27% 1.17% 1.22% 1.23% 1.27% 1.23% Return on average equity (excluding special items) (1)(2) 19.49% 19.82% 17.96% 18.84% 18.77% 17.91% 16.87% Efficiency ratio (3) 52.85% 54.97% 57.30% 56.65% 55.28% 56.59% 57.34% Special items, net of related income tax effect (1) $ 545 $ 38,870 $ 3,577 $( 2,389) $ 0 $ 40 $ 23,205
(1) Special items consists of (i) special charges which consist of merger- related expenses, branch closing costs and, in the first quarter of 1999, one-time charges related to the discontinuance of the Company's correspondent mortgage business and (ii) losses on restructuring the investment portfolio. (2) Annualized. (3) Represents noninterest expenses, excluding distributions on securities of subsidiary trusts and special charges, as a percentage of net interest income and noninterest income, excluding net securities gains and losses. COMPLETED ACQUISITIONS During the third quarter of 2000, the Company completed the acquisition of the Palmer Goodell Insurance Agency, Inc. (based in Springfield, Massachusetts) and Arthur A. Watson & Co., Inc. (an insurance agency based in Wethersfield, Connecticut). These agencies, which were acquired for a combination of cash and stock, had combined annual revenues of approximately $18 million in 1999. The acquisitions resulted in goodwill of approximately $22.5 million being recorded, which is being amortized over 20 years. These insurance agency acquisitions are a key part of the Company's strategy to offer our customers a full range of financial services in all the markets served by it. On May 10, 2000, the Company completed the acquisition of Banknorth Group, Inc., which was effected by means of the merger of Banknorth Group, Inc. with and into the Company under the pooling-of-interests method of accounting. The Company changed its name to "Banknorth Group, Inc." as a result of the merger. As a result of the merger and the change in the name of the Company, the Company's symbol on the Nasdaq stock market is now BKNG. Upon consummation of the merger, each share of Banknorth common stock outstanding was automatically converted into the right to receive 1.825 shares of Company common stock including each attached right issued pursuant to the Company's shareholder rights plan (collectively, the "Common Stock") with cash in lieu of fractional share interests. 10 11 NEW INITIATIVES The Company has begun an e-commerce initiative which is expected to be rolled out in three phases starting in the fourth quarter of this year. The e-commerce initiative will be designed to complement the Company's existing delivery channels and be competitive with web-based products offered by most regional banks. The total investment is expected to be $30 to $40 million over the next three years which is expected to be offset through operating efficiencies and enhanced revenue. RESULTS OF OPERATIONS NET INTEREST INCOME The Company's fully-taxable equivalent net interest income in the third quarter of 2000 decreased $9.2 million compared to the third quarter of 1999. The net interest margin declined from 3.79% in the third quarter of 1999 to 3.57% in the third quarter of 2000. The decrease was primarily attributable to higher prevailing interest rates and the net liability sensitive position of the Company. Average total earning assets increased by $171 million from the third quarter of 1999 to the third quarter of 2000. Average commercial real estate, commercial business and consumer loans all experienced significant growth while average residential real estate loans declined. Average securities decreased during the three months ended September 30, 2000, as compared to the comparable period in the prior year, due primarily to the repositioning of the securities portfolio in the second quarter of 2000 and continued runoff on mortgage-backed securities. The Company's fully-taxable equivalent net interest income for the nine months ended September 30, 2000 decreased $4.6 million compared to the nine months ended September 30, 1999. The net interest margin declined from 3.88% for the nine months ended September 30, 1999 to 3.64% for the nine months ended September 30, 2000. Average total earning assets increased $861 million while interest-bearing liabilities increased $873 million. The decrease in fully-taxable equivalent net interest income was primarily attributable to the increased cost of interest-bearing liabilities. Table 2 shows quarterly average balances, net interest income by category and rates for each of the quarters in 2000 and 1999 as well as for the nine months ended September 30, 2000 and 1999. Table 3 shows the changes in fully taxable equivalent net interest income by category due to changes in rate and volume. See also "Interest Rate Risk and Asset Liability Management" below. The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin (net interest income divided by average interest-earning assets). For purposes of the tables and the following discussion, (i) income from interest-earning assets and net interest income is presented on a fully-taxable equivalent basis primarily by adjusting income and yields earned on tax-exempt interest received on loans to qualifying borrowers and on certain of the Company's securities to make them equivalent to income and yields earned on fully-taxable investments, assuming a federal income tax rate of 35%, and (ii) nonaccrual loans have been included in the appropriate average balance loan category, but unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. Average balances are based on average daily balances during the indicated periods. 11 12 TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES (Dollars in thousands)
2000 Third Quarter 2000 Second Quarter ------------------------------------------ --------------------------------- Yield/ Average Yield/ Average Balance Interest Rate(1) Balance Interest Rate(1) --------------- ------------ ------- ----------- -------- ------- Loans and leases (2): Residential real estate mortgages $ 2,340,950 $ 43,370 7.41% $ 2,336,378 $ 44,190 7.57% Commercial real estate mortgages 2,935,280 65,740 8.91 2,819,294 62,581 8.93 Commercial business loans and leases 2,205,430 51,110 9.22 2,132,627 48,021 9.06 Consumer loans and leases 3,193,830 69,489 8.65 3,101,735 66,598 8.64 ------------ ------------ ----------- -------- Total loans and leases 10,675,490 229,709 8.57 10,390,034 221,390 8.56 Securities 6,298,451 107,303 6.81 6,478,785 109,892 6.79 Federal funds sold and other short-term investments 63,155 958 6.04 80,250 1,266 6.34 ------------ ------------ ----------- -------- Total earning assets 17,037,096 337,970 7.91 16,949,069 332,548 7.87 ------------ -------- Noninterest-earning assets 1,408,636 1,398,125 ------------ ----------- Total assets $ 18,445,732 $18,347,194 ============ =========== Interest-bearing deposits: Regular savings $ 1,469,374 $ 7,643 2.07 $ 1,545,893 8,037 2.09 NOW and money market accounts 3,898,780 34,877 3.56 3,770,025 31,269 3.34 Certificates of deposit 4,529,819 63,160 5.55 4,540,737 59,822 5.30 Brokered deposits 86,953 1,439 6.58 123,670 1,994 6.49 ------------ ------------ ----------- -------- Total interest-bearing deposits 9,984,926 107,119 4.27 9,980,325 101,122 4.08 Borrowed funds 4,962,974 78,727 6.31 5,086,715 76,767 6.07 ------------ ------------ ----------- -------- Total interest-bearing liabilities 14,947,900 185,846 4.95 15,067,040 177,889 4.75 ------------ -------- Non-interest bearing deposits 2,046,112 1,875,798 Other liabilities 104,804 133,627 Securities of subsidiary trusts 98,775 98,775 Shareholders' equity 1,248,141 1,171,954 ------------ ----------- Total liabilities and shareholders' equity $ 18,445,732 $18,347,194 ============ =========== Net earning assets $ 2,089,196 $ 1,882,029 ============ =========== Net interest income (fully-taxable equivalent) 152,124 154,659 Less: fully-taxable equivalent adjustments (1,411) (1,494) ------------ -------- Net interest income $ 150,713 $153,165 ============ ======== Net interest rate spread (fully-taxable equivalent) 2.96% 3.12% Net interest margin (fully-taxable equivalent) 3.57% 3.67%
------------------- (1) Annualized. (2) Loans and leases include loans held for sale. 12 13 TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES (Dollars in thousands)
2000 First Quarter 1999 Fourth Quarter ------------------------------------------ --------------------------------- Yield/ Average Yield/ Average Balance Interest Rate(1) Balance Interest Rate(1) --------------- ------------ ------- ----------- -------- ------- Loans and leases (2): Residential real estate mortgages $ 2,337,127 $ 43,536 7.45% $ 2,356,697 $ 43,190 7.33% Commercial real estate mortgages 2,731,631 60,698 8.94 2,695,579 60,710 8.94 Commercial business loans and leases 1,952,209 43,019 8.86 1,865,582 40,957 8.71 Consumer loans and leases 3,036,234 64,193 8.50 2,908,574 63,008 8.59 ------------ ------------ ----------- -------- Total loans and leases 10,057,201 211,446 8.45 9,826,432 207,865 8.39 Securities 6,783,530 114,163 6.74 7,030,811 115,643 6.58 Federal funds sold and other short-term investments 79,032 1,091 5.55 80,898 1,208 5.92 ------------ ------------ ----------- -------- Total earning assets 16,919,763 326,700 7.75 16,938,141 324,716 7.61 ------------ -------- Noninterest-earning assets 1,393,153 1,362,000 ------------ ----------- Total assets $ 18,312,916 $18,300,141 ============ =========== Interest-bearing deposits: Regular savings $ 1,561,943 $ 8,176 2.11 $ 1,604,451 8,427 2.08 NOW and money market accounts 3,639,746 27,701 3.06 3,644,631 26,356 2.87 Certificates of deposit 4,505,049 56,716 5.06 4,511,629 56,058 4.93 Brokered deposits 131,218 2,144 6.57 143,328 2,062 5.71 ------------ ------------ ----------- -------- Total interest-bearing deposits 9,837,956 94,737 3.87 9,904,039 92,903 3.72 Borrowed funds 5,262,911 75,483 5.77 5,142,011 70,522 5.44 ------------ ------------ ----------- -------- Total interest-bearing liabilities 15,100,867 170,220 4.53 15,046,050 163,425 4.31 ------------ -------- Non-interest bearing deposits 1,798,107 1,861,423 Other liabilities 117,311 105,295 Securities of subsidiary trusts 98,775 98,775 Shareholders' equity 1,197,856 1,188,598 ------------ ----------- Total liabilities and shareholders' equity $ 18,312,916 $18,300,141 ============ =========== Net earning assets $ 1,818,896 $ 1,892,091 ============ =========== Net interest income (fully-taxable equivalent) 156,480 161,291 Less: fully-taxable equivalent adjustments (1,307) (1,430) ------------ -------- Net interest income $ 155,173 $159,861 ============ ======== Net interest rate spread (fully-taxable equivalent) 3.22% 3.30% Net interest margin (fully-taxable equivalent) 3.70% 3.78%
------------------- (1) Annualized. (2) Loans and leases include loans held for sale. 13 14 TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES (Dollars in thousands)
1999 Third Quarter 1999 Second Quarter ------------------------------------------ --------------------------------- Yield/ Average Yield/ Average Balance Interest Rate(1) Balance Interest Rate(1) --------------- ------------ ------- ----------- -------- ------- Loans and leases (2): Residential real estate mortgages $ 2,535,350 $ 46,886 7.40% $ 2,687,207 $ 49,778 7.41% Commercial real estate mortgages 2,626,837 57,882 8.74 2,517,706 55,123 8.78 Commercial business loans and leases 1,862,931 40,058 8.53 1,796,819 38,421 8.58 Consumer loans and leases 2,754,214 59,996 8.64 2,683,791 58,311 8.71 ------------ ------------ ----------- -------- Total loans and leases 9,779,332 204,822 8.31 9,685,523 201,633 8.35 Securities 6,989,116 112,508 6.44 6,257,096 95,808 6.12 Federal funds sold and other short-term investments 97,563 1,313 5.34 208,006 2,542 4.90 ------------ ------------ ----------- -------- Total earning assets 16,866,011 318,643 7.50 16,150,625 299,983 7.45 ------------ -------- Noninterest-earning assets 1,303,766 1,266,088 ------------ ----------- Total assets $ 18,169,777 $17,416,713 ============ =========== Interest-bearing deposits: Regular savings $ 1,640,217 $ 8,627 2.09 $ 1,613,609 8,480 2.11 NOW and money market accounts 3,607,758 25,277 2.78 3,545,448 24,057 2.72 Certificates of deposit 4,541,065 55,791 4.87 4,671,041 57,914 4.97 Brokered deposits 163,886 2,275 5.51 201,244 2,811 5.60 ------------ ------------ ----------- -------- Total interest-bearing deposits 9,952,926 91,970 3.67 10,031,342 93,262 3.73 Borrowed funds 5,015,825 65,358 5.17 4,148,710 52,208 5.05 ------------ ------------ ----------- -------- Total interest-bearing liabilities 14,968,751 157,328 4.17 14,180,052 145,470 4.11 ------------ -------- Non-interest bearing deposits 1,810,848 1,779,277 Other liabilities 101,867 126,708 Securities of subsidiary trusts 98,775 99,987 Shareholders' equity 1,189,536 1,230,689 ------------ ----------- Total liabilities and shareholders' equity $ 18,169,777 $17,416,713 ============ =========== Net earning assets $ 1,897,260 $ 1,970,573 ============ =========== Net interest income (fully-taxable equivalent) 161,315 154,513 Less: fully-taxable equivalent adjustments (1,315) (1,185) ------------ -------- Net interest income $ 160,000 $153,328 ============ ======== Net interest rate spread (fully-taxable equivalent) 3.33% 3.34% Net interest margin (fully-taxable equivalent) 3.79% 3.84%
------------------- (1) Annualized. (2) Loans and leases include loans held for sale. 14 15 TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES (Dollars in thousands)
1999 First Quarter ------------------------------------------ Yield/ Average Balance Interest Rate(1) --------------- ------------ ------- Loans and leases (2): Residential real estate mortgages $ 3,461,965 $ 64,656 7.47% Commercial real estate mortgages 2,438,735 54,024 8.98 Commercial business loans and leases 1,708,703 38,096 9.04 Consumer loans and leases 2,739,169 58,788 8.70 ------------ ------------ Total loans and leases 10,348,572 215,564 8.45 Securities 4,730,964 71,543 6.05 Federal funds sold and other short-term investments 205,919 2,022 3.98 ------------ ------------ Total earning assets 15,285,455 289,129 7.67 ------------ Noninterest-earning assets 1,233,435 ------------ Total assets $ 16,518,890 ============ Interest-bearing deposits: Regular savings $ 1,622,257 $ 8,486 2,12 NOW and money market accounts 3,482,796 23,549 2.74 Certificates of deposit 4,749,889 60,722 5.18 Brokered deposits 211,412 2,632 5.05 ------------ ------------ Total interest-bearing deposits 10,066,354 95,389 3.84 Borrowed funds 3,301,978 41,677 5.12 ------------ ------------ Total interest-bearing liabilities 13,368,332 137,066 4.16 ------------ Non-interest bearing deposits 1,731,140 Other liabilities 95,770 Securities of subsidiary trusts 118,000 Shareholders' equity 1,205,648 ------------ Total liabilities and shareholders' equity $ 16,518,890 ============ Net earning assets $ 1,917,123 ============ Net interest income (fully-taxable equivalent) 152,063 Less: fully-taxable equivalent adjustments (1,023) ------------ Net interest income $ 151,040 ============ Net interest rate spread (fully-taxable equivalent) 3.51% Net interest margin (fully-taxable equivalent) 4.03%
------------------- (1) Annualized. (2) Loans and leases include loans held for sale. 15 16 TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES (Dollars in thousands)
Nine Months Ended Nine Months Ended September 30, 2000 September 30, 1999 ---------------------------------------- ---------------------------------- Yield/ Average Yield/ Average Balance Interest Rate(1) Balance Interest Rate(1) --------------- ----------- ------- ----------- -------- ------- Loans and leases (2): Residential real estate mortgages $ 2,332,940 $ 131,110 7.49% $ 2,891,447 $161,320 7.44% Commercial real estate mortgages 2,835,199 189,019 8.91 2,528,449 167,029 8.83 Commercial business loans and leases 2,093,598 140,806 9.07 1,790,049 116,575 8.71 Consumer loans and leases 3,110,904 200,265 8.60 2,725,780 177,095 8.69 ------------ ----------- ----------- -------- Total loans and leases 10,372,641 661,200 8.53 9,935,725 622,019 8.37 Securities 6,519,446 332,702 6.78 5,999,481 279,859 6.22 Federal funds sold and other short-term investments 74,078 3,316 5.98 170,099 5,877 4.62 ------------ ----------- ----------- -------- Total earning assets 16,966,165 997,218 7.84 16,105,305 907,755 7.54 ----------- -------- Noninterest earning assets 1,391,624 1,268,534 ------------ ----------- Total assets $ 18,357,789 $17,373,839 ============ =========== Interest-bearing deposits: Regular savings $ 1,525,531 23,828 2.09 $ 1,609,813 25,593 2.13 NOW and money market accounts 3,769,958 93,876 3.33 3,545,791 72,883 2.75 Certificates of deposit 4,520,689 179,697 5.31 4,653,203 174,427 5.01 Brokered deposits 118,379 5,577 6.29 192,037 7,718 5.37 ------------ ----------- ----------- -------- Total interest-bearing deposits 9,934,557 302,978 4.07 10,000,844 280,621 3.75 Borrowed funds 5,100,917 230,977 6.05 4,161,769 159,243 5.12 ------------ ----------- ----------- -------- Total interest-bearing liabilities 15,035,474 533,955 4.74 14,162,613 439,864 4.15 ----------- ----------- Non-interest bearing deposits 1,906,997 1,789,674 Other liabilities 118,471 113,887 Securities of subsidiary trust 98,775 104,528 Shareholders' equity 1,198,072 1,203,137 ------------ ----------- Total liabilities and shareholders' equity $ 18,357,789 $17,373,839 ============ =========== Net earning assets $ 1,930,691 $ 1,942,692 ============ =========== Net interest income (fully-taxable equivalent) 463,263 467,891 Less: fully-taxable equivalent adjustments (4,212) (3,523) ----------- ----------- Net interest income $ 459,051 $ 464,368 =========== =========== Net interest rate spread (fully-taxable equivalent) 3.10% 3.39% Net interest margin (fully-taxable equivalent) 3.64% 3.88%
--------------------------- (1) Annualized. (2) Loans and leases include loans held for sale. 16 17 The following table presents certain information on a fully-taxable equivalent basis regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by old volume), (2) changes in volume (change in volume multiplied by old rate) and (3) changes in rate/volume (change in rate multiplied by change in volume). TABLE 3 - RATE/VOLUME ANALYSIS (Dollars in thousands)
Three Months Ended September 30, 2000 vs. Nine Months Ended September 30, 2000 vs. 1999 Increase (decrease) due to 1999 Increase (decrease) due to ----------------------------------------- ------------------------------------------- Rate and Total Rate and Total Volume Rate Volume(1) Change Volume Rate Volume(1) Change -------- -------- --------- -------- -------- -------- --------- -------- Interest income: Loans and leases $ 18,719 $ 6,391 $(223) $ 24,887 $ 27,377 $ 11,901 $ (97) $ 39,181 Securities (11,180) 6,500 (525) (5,205) 24,212 25,152 3,479 52,843 Federal funds sold and other short-term investments (462) 172 (65) (355) (3,321) 1,732 (972) (2,561) -------- -------- ----- -------- -------- -------- ------- -------- Total interest income 7,077 13,063 (813) 19,327 48,268 38,785 2,410 89,463 -------- -------- ----- -------- -------- -------- ------- -------- Interest expense: Interest-bearing deposits Regular savings (898) (82) (4) (984) (1,344) (482) 61 (1,765) NOW and money market accounts 2,034 7,074 492 9,600 4,615 15,396 982 20,993 Certificates of deposit (138) 7,762 (255) 7,369 (4,970) 10,451 (211) 5,270 Brokered deposits (1,066) 441 (211) (836) (2,961) 1,323 (503) (2,141) -------- -------- ----- -------- -------- -------- ------- -------- Total interest-bearing deposits (68) 15,195 22 15,149 (4,660) 26,688 329 22,357 Borrowed funds (687) 14,373 (317) 13,369 36,381 28,975 6,378 71,734 -------- -------- ----- -------- -------- -------- ------- -------- Total interest expense (755) 29,568 (295) 28,518 31,721 55,663 6,707 94,091 Net interest income (fully taxable equivalent) $ 7,832 $(16,505) $(518) $ (9,191) $ 16,547 $(16,878) $(4,297) $ (4,628) ======== ======== ===== ======== ======== ======== ======= ========
------------------- (1) Includes changes in interest income and expense not due solely to volume or rate changes. 17 18 NONINTEREST INCOME Third quarter noninterest income totaled $56.1 million, a 17% increase from the third quarter of 1999. This increase was primarily due to customer service income (up $2.4 million or 13%), mortgage banking services income (up $2.0 million or 46%), insurance commissions income (up $1.3 million or 29%) and merchant and card product income (up $347 thousand or 9%). Other income increased $1.6 million or 56% due to increased loan fees and gains realized on venture capital and other investments. Noninterest income, excluding securities gains and losses, as a percent of total revenues was 27% and 23% for the quarters ended September 30, 2000 and 1999, respectively. For the nine months ended September 30, 2000 and 1999, noninterest income amounted to $147.1 million and $141.9 million, respectively. The 17.3% increase was primarily due to increases in customer services income, merchant and card product income, insurance commissions income and bank owned life insurance income. Customer services income in the third quarter of 2000 increased 13% from the third quarter of 1999. For the nine months ended September 30, 2000 and 1999, customer service income amounted to $59.9 million and $49.8 million, respectively, an increase of $10.1 million or 20.2%. These increases were primarily attributable to volume driven increases in checking account income, particularly increases in overdraft fees and ATM fee income. Combined trust and investment advisory services income increased 2% from the third quarter of 1999 to the third quarter of 2000. For the nine months ended September 30, 2000 and 1999, combined trust and investment advisory services income amounted to $31.2 million and $29.8 million, respectively, an increase of 5%. Assets under management were $9.3 billion and $7.2 billion at September 30, 2000 and 1999, respectively. Insurance commissions income was $6.0 million for the third quarter of 2000 compared to $4.7 million for the same period in 1999, an increase of 29%. For the nine months ended September 30, 2000 and 1999, insurance commissions income amounted to $16.0 million and $14.3 million, respectively, an increase of 12%. The increases in 2000 were partially attributable to the acquisition of an agency during August 2000. Bank-owned life insurance ("BOLI") income was $4.2 million for the third quarter of 2000, compared to $3.8 million for the same period in 1999, an increase of 11%. For the nine months ended September 30, 2000 and 1999, BOLI income was $13.5 million and $11.6 million, respectively, an increase of 16%. There was a $1.2 million death benefit recorded in the first quarter of 2000 while the second quarter of 1999 included a $1.4 million death benefit. There was also increased income on higher average levels of BOLI in 2000. For the third quarter of 2000, the average carrying value of BOLI was $301 million compared to $281 million for the third quarter of 1999. BOLI covers certain employees of the Company's bank subsidiaries. Most of the Company's BOLI is invested in the "general account" of quality insurance companies. Standard and Poors rated all such companies AA- or better at September 30, 2000. Merchant and card product income was $4.0 million for the third quarter of 2000, compared to $3.7 million for the same period in 1999, an increase of 9%. For the nine months ended September 30, 2000 and 1999, merchant and card product income was $11.6 million and $9.2 million, respectively, an increase of 25%. This income represents fees and interchange income generated by the use of Company-issued credit and debit cards and charges to merchants for credit card deposits. The increases were largely due to increased transaction volume. Mortgage banking services income of $6.2 million and $4.2 million provided 11% and 9% of non-interest income for the quarters ended September 30, 2000 and 1999, respectively. The $2.0 million or 46% increase from the same quarter of last year was due to a $2.2 million gain on sale of mortgage servicing rights. The amount of loans serviced for others was $3.3 billion and $4.7 billion at September 30, 2000 and 1999, respectively. For the nine months ended September 30, 2000 and 1999, mortgage banking services income amounted to $14.8 million and $17.6 million, or 10% and 12% of noninterest income, respectively. The decrease was largely due to lower mortgage originations. See Table 4 for a summary of mortgage banking services income by quarter for 2000 and 1999. Capitalized mortgage servicing rights amounted to $41.0 million at September 30, 2000, compared to $52.7 million at December 31, 1999. The decrease was due largely to the sale of mortgage servicing rights totaling $2.6 million in the third quarter of 2000 and $6.3 million in the first quarter of 2000. See Table 4 for details. Because mortgage servicing rights are an interest-rate sensitive asset, the value of the Company's mortgage servicing rights and the related mortgage banking services income may be adversely impacted if mortgage interest rates decline and actual or expected loan prepayments increase. To mitigate the prepayment risk associated with adverse changes in interest rates and the resultant impairment to 18 19 capitalized mortgage servicing rights and effects on mortgage banking services income, the Company has established a hedge program against a portion of its capitalized mortgage servicing rights to help protect its value and mortgage banking services income. Notwithstanding the foregoing, there can be no assurance that significant declines in interest rates will not have a material adverse impact on the Company's mortgage servicing rights and mortgage banking income or that the hedge program will be successful in mitigating the effects of such a decline. TABLE 4 - MORTGAGE BANKING SERVICES (Dollars in thousands)
At or for the Three Months Ended ---------------------------------------------------------------------------------------- 9/30/00 6/30/00 3/31/00 12/31/99 9/30/99 6/30/99 3/31/99 ---------- ---------- ---------- ---------- ---------- ---------- ---------- RESIDENTIAL MORTGAGES SERVICED FOR INVESTORS $3,332,529 $3,832,996 $3,993,680 $4,540,948 $4,682,347 $4,840,625 $5,259,768 ========== ========== ========== ========== ========== ========== ========== MORTGAGE SERVICING RIGHTS: Balance at beginning of period $ 44,135 $ 44,780 $ 52,724 $ 54,132 $ 53,352 $ 50,924 $ 45,409 Mortgage servicing rights capitalized and purchased 1,657 69 406 1,244 3,352 3,279 8,316 Amortization charged against mortgage servicing fee income (2,344) (2,442) (3,020) (3,137) (3,073) (3,103) (3,197) Change in impairment reserve 162 1,728 1,005 485 1,343 2,597 875 Mortgage servicing rights sold (2,581) - (6,335) - (842) (345) (479) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance at end of period $ 41,029 $ 44,135 $ 44,780 $ 52,724 $ 54,132 $ 53,352 $ 50,924 ========== ========== ========== ========== ========== ========== ========== MORTGAGE BANKING SERVICES INCOME: Sales income: Residential mortgage sales income $ 1,671 $ 318 $ 169 $ (386) $ 1,524 $ 3,395 $ 4,275 Lower of cost or market adjustment - Loans held for sale 108 (36) 30 1,028 731 (1,934) - ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total sales income 1,779 282 199 642 2,255 1,461 4,275 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Servicing income: Residential mortgage servicing income, net 1,590 2,956 1,439 1,810 1,641 2,359 1,996 Change in impairment reserve on mortgage servicing rights 162 1,728 1,005 485 1,343 2,597 875 Valuation adjustments - interest rate floor 460 (106) (545) 78 (953) (1,475) (1,600) Gain (loss) on sale of capitalized mortgage servicing rights 2,181 124 1,559 (207) (66) 2,924 (17) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total servicing income 4,393 4,702 3,458 2,166 1,965 6,405 1,254 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total $ 6,172 $ 4,984 $ 3,657 $ 2,808 $ 4,220 $ 7,866 $ 5,529 ========== ========== ========== ========== ========== ========== ==========
Nine Months Ended ------------------------ 9/30/00 9/30/99 --------- --------- MORTGAGE BANKING SERVICES INCOME: Sales income: Residential mortgage sales income $ 2,158 $ 9,194 Lower of cost or market adjustment - Loans held for sale 102 (1,203) -------- -------- Total sales income 2,260 7,991 -------- -------- Servicing income: Residential mortgage servicing income, net 5,985 5,996 Change in impairment reserve on mortgage servicing rights 2,895 4,815 Valuation adjustments - interest rate floor (191) (4,028) Gain (loss) on sale of capitalized mortgage servicing rights 3,864 2,841 -------- -------- Total servicing income 12,553 9,624 -------- -------- Total $ 14,813 $ 17,615 ======== ======== 19 20 The Company has reached agreement to sell the servicing rights on all residential mortgage loans which it now services for others. The sale will be in two installments and is expected to be completed by March 31, 2001. The Company anticipates a combined gain of approximately $7 million when the sale is completed. The Company also expects to sell the interest rate floor contracts which are used to hedge the prepayment risk related to the mortgage servicing rights asset. As these interest rate floor contracts are carried at market value, the Company does not expect to incur a significant gain or loss on their sale. The Company determined this asset could no longer meet its internal investment targets because of the relatively small size of its loans serviced for others portfolio, the increasing level of sophistication of the national competitors and the volatility inherent in the mortgage servicing rights asset. For the nine months ended September 30, 2000, the Company incurred $15.9 million in losses on securities restructuring. During the second quarter of 2000, the Company restructured parts of its securities portfolio by selling $104 million of securities available for sale, realizing a loss of $15.9 million pre-tax ($10.3 million after-tax). The securities, with a weighted average yield of 5.73%, were primarily perpetual preferred stocks acquired in prior acquisitions, treasury bonds (remaining maturity greater than 10 years) and below investment grade debt securities. After the restructuring, the Company no longer holds any of these types of securities. Other income increased by $1.6 million or 56% and by $7.2 million or 81% during the three and nine months ended September 30, 2000 and 1999, respectively, in each case as compared to the comparable period in the prior year. The increase in the third quarter was due to increases in loan fees and gains realized on venture capital and other investments. The increase for the nine months was attributable to these items as well as a $4.7 million gain on the sale of a $29 million credit card portfolio in June 2000. NON-INTEREST EXPENSE Non-interest expense was $112.0 million and $117.2 million for the quarters ended September 30, 2000 and 1999, respectively, representing a decrease of $5.2 million, or 4%. The efficiency ratio was 52.85% and 55.28% for the quarters ended September 30, 2000 and 1999, respectively. For the nine months ended September 30, 2000 and 1999, noninterest expense, excluding special charges amounted to $349.4 million and $349.0 million, respectively, an increase of $400 thousand. The efficiency ratio was 55.03% and 56.38% for the nine months ended September 30, 2000 and 1999, respectively. For a description of the methodology used by the Company to calculate the efficiency ratio, See Note 3 to Table 1. Salaries and benefits expense of $53.2 million for the quarter ended September 30, 2000 decreased $4.7 million or 8% from the same quarter of last year. The decline was due to favorable pension experience, lower incentive compensation and merger-related savings. On a year to date basis, salaries and benefits expense amounted to $170.5 million in 2000 compared to $171.4 million in 1999, representing a decrease of $920 thousand or 0.5%. Data processing expense of $9.0 million for the quarter ended September 30, 2000 decreased $340 thousand or 4% from the same quarter a year ago. For the nine months ended September 30, 2000 and 1999, data processing expense amounted to $27.1 million and $29.4 million, respectively, a $2.3 million or 8% decrease. These decreases were primarily attributable to the absence in the current periods of costs incurred in 1999 in order to ensure that the Company's computer systems properly recognized the year 2000 as well as merger-related savings. Occupancy expense of $9.3 million during the three months ended September 30, 2000 decreased $516 thousand or 5% from the same quarter in 1999 due to savings related to a decrease in the Company's branch network through the closing/sale of selected branch offices. For the nine months ended September 30, 2000 and 1999, occupancy expense amounted to $30.3 million and $29.7 million, a $625 thousand or 2% increase. Equipment expense increased $284 thousand during the three months ended September 30, 2000 from the third quarter of last year. For the nine months ended September 30, 2000 and 1999, equipment expense was $23.6 million and $22.2 million, respectively, a $1.4 million or 6% increase. These increases were primarily due to depreciation relating to new equipment and software. Amortization of goodwill and other intangibles was $5.3 million and $5.2 million for the quarters ended September 30, 2000 and 1999, respectively, and $15.7 million and $15.5 million for the nine months ended September 30, 2000 and 1999, respectively. The slight increase related to amortization of goodwill recorded in connection with the acquisition of an insurance agency during the quarter ended September 30, 2000. 20 21 Through September 30, 2000, special charges amounted to $43.0 million pre-tax ($32.1 million after tax) in 2000 and $31.9 million pre-tax ($23.2 million after tax) in 1999. Included in 2000 special charges were $41.6 million of merger- related expenses and $1.4 million of branch closing expenses related to the closing of 11 branches. Special charges in 1999 included merger-related expenses of $24.5 million and $7.4 million related to the discontinuance of the Company's correspondent mortgage lending business. The Company also incurred a $15.9 million pre-tax loss on the restructuring of the securities portfolio in the second quarter of 2000. The Company incurred $414 thousand of special charges in the quarter ended September 30, 2000 related to the Banknorth merger and to contract terminations. There were no special charges in the quarter ended September 30, 1999. The following table summarizes activity related to special charges recorded from December 31, 1999 through September 30, 2000. TABLE 5 - SPECIAL CHARGES (Dollars in thousands)
Non-Cash Amount Cash Reductions Balance Included in Payments Applied to Balance at 12/31/1999 Expense Reallocations (Receipts) Reserve 9/30/2000 ---------- ----------- ------------- ---------- ---------- --------- BANKNORTH MERGER CHARGES Severance costs $ - $13,050 $ - $11,094 $ 725 $ 1,231 Data processing/systems integration - 5,167 (506) 2,600 - 2,061 Professional fees and transaction costs - 8,250 506 8,406 - 350 Asset write-downs/facility costs - 11,798 - 1,759 6,120 3,919 Gain on divestiture of branch - (4,250) - (4,250) - - Customer communications - 6,314 - 5,043 - 1,271 Other costs - 2,962 - 2,466 - 496 ------ ------- ------ ------- ------ ------- Sub-total - 43,291 $ - $27,118 $6,845 $ 9,328 ====== ======= ====== ======= Gain on curtailment of benefit plans - (8,100) ------ ------- $ - $35,191 ====== ======= BRANCH CLOSINGS Severance and salary costs $ - $ 68 $ - $ - $ - $ 68 Asset write-downs/lease terminations - 1,063 - 310 753 -- Other costs - 256 - 134 - 122 ------ ------- ------ ------- ------ ------- $ - $ 1,387 $ - $ 444 $ 753 $ 190 ====== ======= ====== ======= ====== ======= OTHER SPECIAL CHARGES Write-down of auto lease residuals $ - $ 2,500 $ - $ - $2,500 $ - Facility write-downs - Evergreen merger - 1,253 - - 1,253 - Contract termination - merchant processing - 3,091 - 3,091 - - Balance forward from CFX/SIS mergers 1,628 (400) - 905 - 323 ------ ------- ------ ------- ------ ------- $1,628 $ 6,444 $ - $ 3,996 $3,753 $ 323 ====== ======= ====== ======= ====== =======
Other non-interest expenses decreased by $356 thousand or 1% and increased by $2.0 million or 3% during the three and nine months ended September 30, 2000, respectively, in each case as compared to the comparable periods in the prior year. The increase in the nine months ended September 30, 2000 related mainly to higher legal and professional service costs. The following table summarizes the principal components of other non-interest expenses for the periods indicated. 21 22 TABLE 6 - OTHER NON-INTEREST EXPENSES (Dollars in thousands)
2000 2000 2000 1999 1999 1999 1999 Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- ------- Advertising and marketing $ 2,772 $ 3,606 $ 2,985 $ 3,774 $ 3,418 $ 3,498 $ 3,482 Telephone 3,473 3,134 2,945 3,291 3,844 3,506 3,524 Office supplies 2,436 2,673 2,166 2,232 2,232 2,664 2,208 Postage and freight 2,267 2,376 2,470 2,254 2,185 2,218 2,640 Miscellaneous loan costs 1,545 1,717 2,203 1,108 2,420 2,180 2,194 Deposits and other assessments 1,110 1,002 961 957 1,219 1,033 962 Collection and carrying costs of non-performing assets 618 590 746 204 499 366 855 Other 10,304 10,672 10,479 12,307 9,064 10,612 6,430 ------- ------- ------- ------- ------- ------- ------- Total $24,525 $25,770 $24,955 $26,127 $24,881 $26,077 $22,295 ======= ======= ======= ======= ======= ======= =======
Nine Months Ended ------------------------ 9/30/00 9/30/99 ------- ------- Advertising and marketing $ 9,363 $10,398 Telephone 9,552 10,874 Office supplies 7,275 7,104 Postage and freight 7,113 7,043 Miscellaneous loan costs 5,465 6,794 Deposits and other assessments 3,073 3,214 Collection and carrying costs of non-performing assets 1,954 1,720 Other 31,455 26,106 ------- ------- Total $75,250 $73,253 ======= ======= TAXES The effective tax rate, excluding the effect of special charges, was 31% and 33% for the quarters ended September 30, 2000 and 1999, respectively, and 33% for each of the nine months ended September 30, 2000 and 1999, respectively. The 31% effective tax rate in the quarter ended September 30, 2000 related to lower state taxes. OTHER COMPREHENSIVE INCOME FASB Statement No. 130 requires disclosure of "Other comprehensive income." Comprehensive income amounted to $171.9 million and $52.5 million during the nine months ended September 30, 2000 and 1999, respectively, which were significantly greater and less than the Company's reported net income during the respective periods as a result of changes in the amount of unrealized gains and losses on the Company's portfolio of securities available for sale. For additional information, see Note 2 to the Consolidated Financial Statements included herein. As a result of realized losses on available for sale securities and the effects of market conditions, the unrealized loss on the Company's securities portfolio declined $42.5 million, net of taxes, from December 31, 1999 to September 30, 2000. At September 30, 2000, the net unrealized loss of $127.2 million, before related tax effect, represented 2.2% of securities available for sale. The Company attempts to balance the interest rate risk of its assets with its liabilities (see "Interest Rate Risk and Asset Liability Management"). However, the change in value of its liabilities, which tends to improve in rising interest rate environments, is not included in "other comprehensive income." 22 23 FINANCIAL CONDITION LOANS AND LEASES Total loans and leases (including loans held for sale) averaged $10.7 billion during the third quarter of 2000, an increase of $896 million or 9.2% from the third quarter of 1999. All loan categories experienced increases except for residential real estate loans. Average loans as a percent of average earning assets were 63% during the quarter ended September 30, 2000 compared to 60% during the quarter ended September 30, 1999. Average residential real estate loans (which include mortgage loans held for sale) of $2.3 billion during the third quarter of 2000 declined $194 million from the third quarter of last year. The decline was primarily attributable to lower loans held for sale as a result of discontinuing the correspondent mortgage business in January 1999. Mortgage loans held for sale amounted to $38.9 million and $116.0 million at September 30, 2000 and 1999, respectively, and $82.3 million at December 31, 1999. The decline in loans held for sale was due primarily to the retention of a higher portion of residential real estate loan originations in portfolio and lower refinancing activity. Average commercial real estate loans of $2.9 billion increased 12% from the third quarter of last year. The average yield on commercial real estate loans during the third quarter of 2000 was 8.91%, as compared to 8.74% in the third quarter of 1999. Commercial loans and leases averaged $2.2 billion during the third quarter of 2000, an increase of 18% over the third quarter of 1999. The yield on commercial loans and leases increased to 9.22% in the third quarter of 2000 from 8.53% in the third quarter of 1999. Average consumer loans and leases of $3.2 billion during the third quarter of 2000 increased 16% from the third quarter of 1999. The increase was primarily in indirect automobile and home equity loans. The average yield on consumer loans and leases increased from 8.64% in the third quarter of 1999 to 8.65% in the third quarter of 2000. SECURITIES AND OTHER EARNING ASSETS The Company's securities portfolio averaged $6.3 billion during the third quarter of 2000, as compared to $7.0 billion in the third quarter of 1999, and consisted primarily of mortgage-backed securities, most of which are seasoned 15 year federal agency securities and U.S. Treasury securities. Other securities consisted of collateralized mortgage obligations, which include securitized residential real estate loans held in a REMIC, and asset-backed securities. The majority of securities available for sale are rated AAA or equivalently rated. The decrease in the Company's securities portfolio during 2000 was partially due to the sale of $104 million of securities to restructure the securities portfolio in the second quarter of 2000, as discussed above. The average yield on securities was 6.81% and 6.44% for the quarters ended September 30, 2000 and 1999, respectively. With the exception of the securitized residential real estate loans held in a REMIC that are classified as held to maturity and carried at cost, all of the Company's securities are classified as available for sale and carried at market value. Securities available for sale are carried at fair value and had an after-tax unrealized loss of $82.6 million and $125.1 million September 30, 2000 and December 31, 1999, respectively. The unrealized loss was 2.2% of total securities available for sale at September 30, 2000. ASSET QUALITY As shown in Table 7, nonperforming assets were $56.9 million at September 30, 2000, or 0.31% of total assets, compared to $72.6 million or 0.40% of total assets at September 30, 1999. There were declines in all loan categories except for commercial real estate loans, which had a nominal increase. Significant declines were experienced in nonperforming residential real estate loans and commercial business loans. The Company continues to monitor asset quality with regular reviews of its portfolio in accordance with its lending and credit policies. The Company's residential loan portfolio accounted for 21% of the total loan portfolio at September 30, 2000, as compared with 23% at December 31, 1999. The Company's residential loans are generally secured by single-family homes (one to four units) and have a maximum loan to value ratio of 80%, unless they are protected by mortgage insurance. At September 30, 2000, 0.36% of the Company's residential loans were nonperforming, as compared with 0.76% at December 31, 1999 and 0.76% at September 30, 1999. 23 24 The Company's commercial real estate loan portfolio accounted for 28% of the total loan portfolio at September 30, 2000, as compared with 27% at December 31, 1999. Commercial real estate loans consist primarily of loans secured by income-producing commercial real estate (including office and industrial buildings), service industries real estate (including hotels and health care facilities), multi-family (over four units) residential properties and retail trade real estate (including food stores). These loans generally are secured by properties located in the New England states and New York, particularly Maine, Massachusetts, New Hampshire and Vermont. At September 30, 2000, 0.60% of the Company's commercial real estate loans were nonperforming, as compared with 0.66% at December 31, 1999 and 0.67% at September 30, 1999. The Company's commercial business loan and lease portfolio accounted for 21% of the total loan portfolio at September 30, 2000, as compared with 20% at December 31, 1999. Commercial business loans and leases are not concentrated in any particular industry, but reflect the broad-based economies of Maine, New Hampshire, Massachusetts and, to a lesser extent, Vermont, New York and Connecticut. The Company's commercial business loans and leases are generally to small and medium size businesses located within its geographic market area. The Company generally does not emphasize the purchase of participations in syndicated commercial loans. At September 30, 2000, the Company had $179 million of participations in syndicated commercial loans and commitments to purchase an additional $136 million of such participations. At September 30, 2000, 0.78% of the Company's commercial business loans and leases were non-performing, as compared with 0.89% at December 31, 1999 and 1.10% at September 30, 1999. The Company's consumer loan and lease portfolio accounted for 30% of the total loan portfolio at September 30, 2000, and at December 31, 1999. The Company has a diversified consumer loan and lease portfolio consisting of home equity, automobile, mobile home, boat and recreational vehicles and education loans. The Company's auto lease portfolio totaled $98.2 million at September 30, 2000. The Company stopped auto lease production following the acquisition of CFX Corporation in 1998 and Banknorth in the second quarter of 2000. At September 30, 2000, 0.17% of the Company's consumer loans and leases were nonperforming, as compared with 0.20% at December 31, 1999 and 0.23% at September 30, 1999. At September 30, 2000, the Company had $8.2 million of accruing loans which were 90 days or more delinquent, as compared to $12.1 million of such loans at December 31, 1999. The decrease was primarily attributable to a decrease in residential real estate loans over 90 days delinquent, which the Company believes are well secured and in the process of collection. 24 25 TABLE 7 - NONPERFORMING ASSETS (Dollars in thousands)
9/30/00 6/30/00 3/31/00 12/31/99 9/30/99 6/30/99 3/31/99 ------- ------- ------- -------- ------- ------- ------- Residential real estate loans: Nonaccrual loans $ 8,258 $ 9,405 $14,204 $17,283 $16,978 $17,729 $16,412 Troubled debt restructurings - - 27 28 30 30 31 ------- ------- ------- ------- ------- ------- ------- Total 8,258 9,405 14,231 17,311 17,008 17,759 16,443 ------- ------- ------- ------- ------- ------- ------- Commercial real estate loans: Nonaccrual loans 17,212 18,270 15,621 16,754 16,536 21,605 23,415 Troubled debt restructurings 665 692 961 1,002 1,282 1,391 1,110 ------- ------- ------- ------- ------- ------- ------- Total 17,877 18,962 16,582 17,756 17,818 22,996 24,525 ------- ------- ------- ------- ------- ------- ------- Commercial business loans and leases: Nonaccrual loans 17,396 16,570 19,818 17,027 20,440 22,944 18,827 Troubled debt restructurings 39 39 39 82 83 80 40 ------- ------- ------- ------- ------- ------- ------- Total 17,435 16,609 19,857 17,109 20,523 23,024 18,867 ------- ------- ------- ------- ------- ------- ------- Consumer loans and leases: Nonaccrual loans 5,650 5,110 4,861 5,951 6,446 6,199 8,465 Troubled debt restructurings - - - - - 5 5 ------- ------- ------- ------- ------- ------- ------- Total 5,650 5,110 4,861 5,951 6,446 6,204 8,470 ------- ------- ------- ------- ------- ------- ------- Total nonperforming loans: Nonaccrual loans 48,516 49,355 54,504 57,015 60,400 68,477 67,119 Troubled debt restructurings 704 731 1,027 1,112 1,395 1,506 1,186 ------- ------- ------- ------- ------- ------- ------- Total 49,220 50,086 55,531 58,127 61,795 69,983 68,305 ------- ------- ------- ------- ------- ------- ------- Other nonperforming assets: Other real estate owned, net of related reserves 6,432 8,419 9,027 8,154 8,042 7,903 9,058 Repossessions, net of related reserves 1,246 2,125 2,792 2,911 2,773 3,411 4,457 ------- ------- ------- ------- ------- ------- ------- Total other nonperforming assets 7,678 10,544 11,819 11,065 10,815 11,314 13,515 ------- ------- ------- ------- ------- ------- ------- Total nonperforming assets $56,898 $60,630 $67,350 $69,192 $72,610 $81,297 $81,820 ======= ======= ======= ======= ======= ======= ======= Accruing loans which are 90 days overdue $ 8,195 $ 7,211 $ 7,914 $12,131 $15,561 $19,342 $26,908 ======= ======= ======= ======= ======= ======= ======= Total nonperforming loans as a percentage of total loans (1) 0.46% 0.48% 0.54% 0.59% 0.64% 0.74% 0.69% Total nonperforming assets as a percentage of total assets 0.31% 0.33% 0.37% 0.37% 0.40% 0.45% 0.48% Total nonperforming assets as a percentage of total loans and leases (1) and total other nonperforming assets 0.53% 0.58% 0.66% 0.70% 0.75% 0.85% 0.83%
-------------------------- (1) Total loans and leases are exclusive of loans held for sale. 25 26 PROVISION/ALLOWANCE FOR LOAN LOSSES The Company provided $6.3 million and $6.2 million for loan and lease losses in the quarters ended September 30, 2000 and 1999, respectively. As shown in Table 8, net charge-offs for the third quarter of 2000 were $5.8 million, or 0.22% of average loans outstanding, compared to $7.0 million, or 0.28% of average loans outstanding, for the third quarter of 1999. The provisions for loan and lease losses during the quarter ended September 30, 2000 exceeded net charge-offs during the period in order to provide coverage for the increase in the loan portfolio during the period. At September 30, 2000, the allowance for loan and lease losses amounted to $156.9 million or 1.46% of total portfolio loans and leases, as compared to $157.0 million or 1.63% at September 30, 1999. The ratio of the allowance for loan and lease losses to nonperforming loans was 319% at September 30, 2000 and 254% at September 30, 1999. Provisions are made to the allowance for loan and lease losses in order to maintain the allowance at a level which management believes is reasonable and reflective of the overall risk of loss inherent in the loan portfolio. Management considers the allowance appropriate and adequate to cover potential losses inherent in the loan portfolio based on the current economic environment. Provisions for loan losses are attributable to management's ongoing evaluation of the adequacy of the allowance for loan and lease losses, which includes, among other procedures, consideration of the character and size of the loan and lease portfolio, such as internal risk ratings and credit concentrations, trends in nonperforming loans, delinquent loans and net charge-offs, the volume of new loan originations and other asset quality factors. Although management utilizes its judgment in providing for possible losses, there can be no assurance that the Company will not have to change its provisions for loan and lease losses in subsequent periods. Changing economic and business conditions in the Company's market areas, particularly northern New England, fluctuations in local markets for real estate, future changes in nonperforming asset trends, large movements in market-based interest rates or other reasons could affect the Company's future provisions for loan and lease losses. TABLE 8 - ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in thousands)
2000 Third 2000 Second 2000 First 1999 Fourth 1999 Third 1999 Second 1999 First Quarter Quarter Quarter Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- ----------- ----------- ----------- Average loans and leases outstanding during the period (1) $10,675,490 $10,390,034 $10,057,201 $9,826,432 $9,779,332 $9,685,523 $10,348,572 =========== =========== =========== ========== ========== ========== =========== Allowance at beginning of period $ 156,464 $ 155,078 $ 155,048 $ 156,953 $ 157,774 $ 156,231 $ 155,098 Charge-offs: Real estate mortgages 1,989 894 1,425 2,609 2,868 2,516 705 Commercial business loans and leases 807 1,519 759 1,949 1,457 513 1,206 Consumer loans and leases 5,046 4,382 5,956 5,678 5,434 5,539 5,560 ----------- ----------- ----------- ---------- ---------- ---------- ----------- Total loans charged off 7,842 6,795 8,140 10,236 9,759 8,568 7,471 ----------- ----------- ----------- ---------- ---------- ---------- ----------- Recoveries: Real estate mortgages 707 409 983 212 529 1,692 720 Commercial business loans and leases 440 619 667 600 826 872 890 Consumer loans and leases 848 1,304 1,452 1,514 1,418 1,707 1,429 ----------- ----------- ----------- ---------- ---------- ---------- ----------- Total loans recovered 1,995 2,332 3,102 2,326 2,773 4,271 3,039 ----------- ----------- ----------- ---------- ---------- ---------- ----------- Net charge-offs 5,847 4,463 5,038 7,910 6,986 4,297 4,432 Additions charged to operating expenses 6,250 5,849 5,068 6,005 6,165 5,840 5,565 ----------- ----------- ----------- ---------- ---------- ---------- ----------- Allowance at end of period $ 156,867 $ 156,464 $ 155,078 $ 155,048 $ 156,953 $ 157,774 $ 156,231 =========== =========== =========== ========== ========== ========== =========== Ratio of net charge-offs to average loans and leases outstanding during the period, annualized (1) 0.22% 0.17% 0.20% 0.32% 0.28% 0.18% 0.17% Ratio of allowance to total loans and leases at end of period (2) 1.46% 1.49% 1.52% 1.57% 1.63% 1.66% 1.58% Ratio of allowance to nonperforming loans at end of period 319% 312% 279% 267% 254% 225% 229% Ratio of net charge-offs as a percent of average outstanding loans, annualized (1): Real estate mortgages 0.097% 0.038% 0.035% 0.188% 0.180% 0.063% -0.001% Commercial business loans and leases 0.066% 0.170% 0.019% 0.287% 0.134% -0.080% 0.075% Consumer loans and leases 0.523% 0.399% 0.596% 0.568% 0.578% 0.573% 0.612%
(1) Average loans and leases include portfolio loans and loans held for sale. (2) Total loans and leases are exclusive of loans held for sale. 26 27 DEPOSITS Average deposits of $12.0 billion during the third quarter of 2000 increased $267 million from the third quarter of 1999. Excluding brokered deposits, average total deposits increased $344 million compared to the third quarter of 1999. The increases in deposits were partially due to new commercial loan relationships. The ratio of loans to deposits was 89% and 85% at September 30, 2000 and December 31, 1999, respectively. Average non-interest bearing deposit accounts of $2.0 billion during the third quarter of 2000 increased $235.3 million or 13% from the third quarter of 1999. The increase in these non-interest bearing deposits is consistent with the Company's marketing of these lower-cost accounts. Average interest-bearing deposit accounts, excluding brokered deposits, of $9.9 billion during the third quarter of 2000 increased $108.9 million from the third quarter of 1999 primarily due to increases in NOW and money market accounts. The average rates paid on all deposit types increased from 3.67% in the third quarter of 1999 to 4.27% in the third quarter of 2000. The Company has agreed to sell eight branches in northern Maine. The sale is scheduled to close in November 2000. Approximately $98 million of deposits and $15 million of consumer loans are covered by this sale, which is expected to generate a gain of approximately $1.0 million net of tax, with the potential for additional gains over the next 5 years based on deposit retention rates. OTHER FUNDING SOURCES The Company's primary source of funding, other than deposits, are securities sold under repurchase agreements and advances from the Federal Home Loan Bank of Boston ("FHLB"). Average borrowed funds for the third quarter of 2000 were $5.0 billion, a decrease of $52.9 million from the third quarter of 1999. The proceeds from the sale of securities in the second quarter of 2000 were partially utilized to decrease the outstanding borrowings. Average FHLB borrowings for the third quarter of 2000 were $3.9 billion, which decreased $278 million or 7% from the third quarter of 1999. FHLB collateral consists primarily of first mortgage loans secured by 1 - 4 family properties, certain unencumbered securities and other qualified assets. At September 30, 2000, the Company's FHLB borrowings amounted to $3.8 billion and its additional borrowing capacity from the FHLB was $1.4 billion. Average balances for securities sold under repurchase agreements were $922.6 million and $751.4 million for the quarters ended September 30, 2000 and 1999, respectively, an increase of $171.2 million. These borrowings, with a cost of 5.43% for the quarter ended September 30, 2000, are secured by mortgage-backed securities and U.S. Government obligations. RISK MANAGEMENT The primary goal of the Company's risk management program is to determine how certain existing or emerging issues facing the Company or the financial services industry affect the nature and extent of the risks faced by the Company. Based on 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. 27 28 ASSET-LIABILITY MANAGEMENT The goal of asset-liability management is the prudent control of market risk, liquidity and capital. Asset-liability management is governed by policies reviewed and approved annually by the Company's Board of Directors (the "Board") and monitored periodically by a committee of the Board. The Board delegates responsibility for asset-liability management to the Asset Liability Management Committee ("ALCO"), which is comprised of members of senior management who set strategic directives that guide the day-to-day asset-liability management activities of the Company. The ALCO also reviews and approves all major risk, liquidity and capital management programs. 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 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 and liabilities, affect net interest income, the Company's primary source of revenue. This risk arises directly from the Company's core banking activities - lending, deposit gathering and loan servicing. In addition to directly impacting net interest income, changes in the level of interest rates can also affect (i) the amount of loans originated and sold by the institution, (ii) the ability of borrowers to repay adjustable or variable rate loans, (iii) the average maturity of loans, (iv) the rate of amortization of capitalized mortgage servicing rights and premiums paid on securities, (v) the amount of unrealized gains and losses on securities available for sale and (vi) the fair value of the Company's saleable assets and derivatives and the resultant ability to realize gains. The primary objective of interest-rate risk management is to control the Company's exposure to interest-rate risk both within limits approved by the Board of Directors and guidelines established by the ALCO. These limits and guidelines reflect the Company's tolerance for interest-rate risk over both short-term and long-term horizons. The Company attempts to control interest-rate risk by identifying, quantifying and, where appropriate, hedging its exposure. The Company quantifies and measures interest-rate exposure using a model to dynamically simulate net interest income under various interest rate scenarios over a 12-month period. Simulated scenarios include deliberately extreme interest rate "shocks" and more gradual interest rate "ramps." Key assumptions in these simulation analyses relate to behavior of interest rates and spreads, increases or decreases of product balances and the behavior of the Company's deposit and loan customers. The most material assumption relates to the prepayment of mortgage assets (including mortgage loans, mortgage-backed securities and mortgage servicing rights). The risk of prepayment tends to increase when interest rates fall. Since future prepayment behavior of loan customers is uncertain, the resultant interest rate sensitivity of loan assets cannot be determined exactly. Complicating management's efforts to measure interest rate risk is the uncertainty of the maturity, repricing and/or runoff of some of the Company's assets and liabilities. To cope with these uncertainties, management gives careful attention to its assumptions. For example, many of the Company's interest-bearing deposit products (e.g. interest checking, savings and money market deposits) have no contractual maturity and based on historical experience have only a limited sensitivity to movements in market rates. Because management believes it has some control with respect to the extent and timing of rates paid on non-maturity deposits, certain assumptions regarding rate changes are built into the model. In the case of prepayment of mortgage assets, assumptions are derived from published dealer median prepayment estimates for comparable mortgage loans. The Company manages the interest-rate risk inherent in its core banking operations primarily using on-balance sheet instruments that sometimes contain embedded options, mainly fixed-rate portfolio securities and borrowed fund maturities. When appropriate, the Company will utilize off-balance sheet interest rate instruments such as interest-rate swaps, interest rate floors and interest rate corridor agreements, among other instruments. At September 30, 2000, the Company had interest rate floor agreements in the notional amount of $200 million which are used to hedge mortgage servicing rights, as discussed below. These floors will mature no later than June 2001 and may expire worthless as their strike prices are currently well below market prices. In conjunction with the expected sale of the mortgage servicing rights asset which is to be completed by the first quarter of 2001, the Company sold $100 million in interest rate floor agreements in November 2000 at carrying value. In September 2000, the Company sold interest rate swaps with a $50 million notional amount and interest rate corridors contracts with a notional amount of $50 million at a combined gain of $1.6 million pretax. This gain was deferred and is being amortized over a two-year period. 28 29 The Company's policy on interest-rate risk simulation specifies that if interest rates were to shift gradually up or down 200 basis points, estimated net interest income for the subsequent 12 months should decline by less than 5%. The Company was in compliance with this limit at September 30, 2000. The Company also monitors gradual changes in market interest rates which it believes better represents its exposure to net interest income. The following table reflects the estimated percentage exposure of the Company's net interest income for the 12 months following the date indicated assuming a gradual shift in market interest rates of 100 and 200 basis points, respectively.
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point Rate Decrease Rate Decrease Rate Increase Rate Increase --------------- --------------- --------------- --------------- September 30, 2000 0.97% 0.99% (1.45%) (3.36%)
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. These results are dependent on material assumptions utilized by the Company. For example, the Company believes that savings, money market and NOW accounts have implied interest rate floors and that, as a result, in the event of a decrease in market rates of interest, 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 Company believes that an increase in interest income would be less than the increase in interest expense because the Company's fixed-rate earning assets exceed its fixed-cost paying liabilities. The Company uses interest rate floors, U.S. Treasury debt instruments and principal only strips to mitigate the prepayment risk associated with mortgage servicing rights (see "Non-Interest Income" for further details). At September 30, 2000, the Company had $200 million notional amount in interest rate floors and $16 million in principal only strips designated as hedges. For mortgage servicing rights, the adverse impact of current movements in interest rates on expected future cash flows must be recognized immediately through an adjustment to their carrying value. If interest rates decline, estimated future fee income from mortgage servicing rights is reduced because of an expected increase in mortgage prepayments. The following table sets forth the net exposure at September 30, 2000 of the carrying value of mortgage servicing rights and identified hedging instruments, assuming an immediate shift by the indicated amount in market interest rates.
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point Rate Decrease Rate Decrease Rate Increase Rate Increase ------------------------------------------------------------------ (Dollars in thousands) Mortgage servicing rights ($20,500) ($8,100) $5,400 $7,700 Interest rate floors 7,300 2,800 (900) (1,100) Principal only strips 6,000 2,400 (1,300) (2,500) --------------------------------------------------------- Net exposure ($7,200) ($2,900) $3,200 $4,100 =========================================================
The foregoing estimates of the effects of specified changes in interest rates on the Company's net interest income and the carrying value of its mortgage servicing rights are based on various assumptions, as discussed above, which approximate actual experience and which management of the Company considers to be reasonable. The effects of changes in interest rates on the Company could vary substantially if different assumptions were used or actual experience differs from the historical experience on which the assumptions are based. The most significant factors affecting market risk exposure of net interest income during 2000 has been (i) the increase in interest rates, (ii) changes in the yield curve for U.S. Government securities, (iii) changes in the composition of mortgage assets (iv) increases in adjustable rate borrowings with embedded interest rate caps and (v) the decreases of assets and off-balance sheet interest-rate instruments used to hedge mortgage servicing rights. The Company's earnings are not directly and materially impacted by movements in foreign currency rate or commodity prices. Virtually all transactions are denominated in the U.S. dollar. Movements in equity prices may have an indirect but modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related businesses. 29 30 LIQUIDITY Parent Company On a parent-only basis at September 30, 2000, the Company's commitments or debt service requirements consisted primarily of junior subordinated debentures 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. 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, and borrowings, including draws on a $60 million unsecured line of credit which is renewable every 364 days and, if used, carries interest at 3 month LIBOR plus 0.75%. The line has not been used to date. Banking Subsidiaries For banking subsidiaries of the Company, liquidity represents the ability to fund asset growth or accommodate deposit withdrawals. Liquidity risk is the danger that the banks cannot meet anticipated or unexpected funding requirements or can meet them only at excessive cost. Liquidity is measured by the ability to raise cash when needed at a reasonable cost. Many factors affect a bank's ability to meet liquidity needs, including variations in the markets served, its asset-liability mix, its reputation and credit standing in the market and general economic conditions. In addition to traditional retail deposits, the banks have various other liquidity sources, including proceeds from maturing securities and loans, the sale of securities, asset securitizations and borrowed funds such as FHLB advances, reverse repurchase agreements and brokered deposits. The Company continually monitors and forecasts its liquidity position. There are several interdependent methods used by the Company for this purpose, including daily review of fed funds positions, monthly review of balance sheet changes, monthly review of liquidity ratios, periodic liquidity forecasts and periodic review of contingent funding plans. As of September 30, 2000, the banks had in the aggregate $1.9 billion of "immediately accessible liquidity", defined as cash that could be raised within 1-3 days through collateralized borrowings or security sales. This represents 16% of deposits or 10% of assets. The Company's current policy minimum is 10% of deposits. Also as of September 30, 2000, the banks had in the aggregate "potentially volatile funds" of $1.3 billion. These are funds that might flow out of the banks over a 90-day period in an adverse environment. Management estimates this figure by applying adverse probabilities to its various credit-sensitive and economically-sensitive funding sources. As of September 30, 2000, the ratio of "immediately accessible liquidity" to "potentially volatile funds" was 146%, versus a policy minimum of 100%. In addition to the liquidity sources discussed above, management believes that its consumer loan portfolios provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sale or securitization. The banks also have significant untapped access to the national brokered deposit market. Both of these sources are contemplated as secondary liquidity in the Company's contingent funding plan. Management believes that the level of liquidity is sufficient to meet current and future funding requirements. CAPITAL At September 30, 2000, shareholders' equity amounted to $1.3 billion. In addition, through subsidiary trusts, the Company had outstanding at such date $98.8 million of capital securities which mature in 2027 and qualify as Tier 1 Capital. The Company paid a $0.125 per share dividend on its Common Stock during each of the quarters of 2000. In July 1999, the Company authorized a 4,000,000 share repurchase program. The Company completed this repurchase program in the first quarter of 2000 at a total cost of $66.1 million, having repurchased 912,500 shares for $12.3 million, or an average price of $13.53 per share. On October 18, 2000, the Company announced its intention to repurchase up to 625,000 shares from time to time in open market transactions as market conditions warrant, and on October 31, 2000, the Company approved a $0.125 per share cash dividend on its Common Stock payable November 20, 2000 to shareholders of record on November 10, 2000. 30 31 Capital guidelines issued by the Federal Reserve Board require the Company to maintain certain ratios, set forth in Table 9. As indicated in such table, the Company's regulatory capital currently substantially exceeds all applicable requirements. TABLE 9 - REGULATORY CAPITAL REQUIREMENTS (Dollars in thousands)
For Capital Adequacy Actual Purposes Excess ------------------- -------------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ---------- ----- -------- ------ --------- ----- As of September 30, 2000: Total capital (to risk weighted assets) $1,452,903 11.95% 972,383 8.00% $ 480,520 3.95% Tier 1 capital (to risk weighted assets) 1,300,968 10.70% 486,191 4.00% 814,777 6.70% Tier 1 leverage capital ratio (to average assets) 1,300,968 7.07% 735,980 4.00% 564,988 3.07% As of December 31, 1999: Total capital (to risk weighted assets) 1,376,171 12.02% 916,232 8.00% 459,939 4.02% Tier 1 capital (to risk weighted assets) 1,232,863 10.76% 458,115 4.00% 774,748 6.76% Tier 1 leverage capital (to average assets) 1,232,863 6.75% 730,693 4.00% 502,170 2.75%
Net risk weighted assets were $12.2 billion and $11.5 billion at September 30, 2000 and December 31, 1999, respectively. The Company's banking subsidiaries are also subject to federal regulatory capital requirements. At September 30, 2000, each of the Company's depository institutions was deemed to be "well capitalized" under the regulations of the applicable federal banking agency and in compliance with applicable capital requirements. IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which sets accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. This Statement, as amended by SFAS No. 138, currently is scheduled to be effective for the Company for years beginning January 1, 2001 and is not expected to have a significant impact on the Company's financial condition or results of operations. FORWARD LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue" or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements. 31 32 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained in the section captioned "Management's Discussion and Analysis - Asset-Liability Management" is incorporated herein by reference. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in routine legal proceedings occurring in the ordinary course of business which in the aggregate are believed by management to be immaterial to the financial condition and results of operations of the Company. Item 2. Changes in securities and use of proceeds - not applicable. Item 3. Defaults upon senior securities - not applicable. Item 4. Submission of matters to a vote of security holders - not applicable. Item 5. Other Information - not applicable. Item 6. Exhibits and reports on Form 8-K. (a) Exhibit 27 - Financial Data Schedule. (b) The Company filed a Current Report on Form 8-K on July 26, 2000 and August 22, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BANKNORTH GROUP, INC. Date: November 14, 2000 By: /s/ William J. Ryan ------------------------------- William J. Ryan Chairman, President and Chief Executive Officer Date: November 14, 2000 By: /s/ Peter J. Verrill ------------------------------- Peter J. Verrill Executive Vice President, Chief Operating Officer and Chief Financial Officer Date: November 14, 2000 By: /s/ Stephen J. Boyle ------------------------------- Stephen J. Boyle Executive Vice President and Controller (principal accounting officer) 32