10-Q 1 b40009bne10-q.txt BANKNORTH GROUP, INC. 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2001 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. (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 July 31, 2001 is: Common stock, par value $.01 per share 137,100,669 (Class) (Outstanding) 2 INDEX BANKNORTH GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements (unaudited) Consolidated Balance Sheets June 30, 2001 and December 31, 2000 3 Consolidated Statements of Income - Three and six months months ended June 30, 2001 and 2000 4 Consolidated Statements of Changes in Shareholders' Equity - Six months ended June 30, 2001 and 2000 5 Consolidated Statements of Cash Flows - Six months ended June 30, 2001 and 2000 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 33 Signatures 33
2 3 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
June 30, 2001 December 31, 2000 ---------------- ----------------- ASSETS (Unaudited) Cash and due from banks $ 480,760 $ 515,934 Federal funds sold and other short term investments 15,472 29,058 Securities available for sale, at market value 5,437,061 5,425,111 Securities held to maturity (fair value of $409,939 and $457,110 at June 30, 2001 and December 31, 2000, respectively) 405,946 455,547 Loans held for sale 75,179 51,131 Loans and leases: Residential real estate mortgages 2,081,644 2,248,714 Commercial real estate mortgages 3,083,216 2,955,163 Commercial business loans and leases 2,395,084 2,308,904 Consumer loans and leases 3,322,514 3,332,881 ------------ ------------ 10,882,458 10,845,662 Less: Allowance for loan and lease losses 155,303 153,550 ------------ ------------ Net loans and leases 10,727,155 10,692,112 ------------ ------------ Premises and equipment 203,055 201,192 Goodwill and other intangibles 174,888 185,520 Mortgage servicing rights 495 23,225 Bank-owned life insurance 311,919 306,411 Other assets 310,595 348,569 ------------ ------------ $ 18,142,525 $ 18,233,810 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Savings accounts $ 1,405,620 $ 1,386,286 Money market access and NOW accounts 4,106,389 3,975,318 Certificates of deposit 4,454,210 4,461,983 Brokered deposits 167,847 169,069 Noninterest-bearing deposits 2,293,453 2,114,600 ------------ ------------ Total deposits 12,427,519 12,107,256 Federal funds purchased and securities sold under repurchase agreements 1,207,043 1,138,629 Borrowings from the Federal Home Loan Bank 2,416,674 3,348,242 Other borrowings 240,140 73,744 Subordinated long-term debt 200,000 -- Other liabilities 191,712 136,307 ------------ ------------ Total liabilities 16,683,088 16,804,178 ------------ ------------ Company obligated, mandatory redeemable securities of subsidiary trusts holding solely parent junior subordinated debentures 98,775 98,775 Shareholders' Equity: Preferred stock (par value $0.01 per share, 5,000,000 shares authorized, none issued) -- -- Common stock (par value $0.01 per share, 400,000,000 shares authorized 149,584,005 shares issued in 2001 and 149,584,159 shares issued in 2000) 1,496 1,496 Paid-in capital 618,307 617,234 Retained earnings 973,957 897,214 Unearned compensation (1,186) (1,354) Accumulated other comprehensive income (loss) (190) (34,487) Treasury stock, at cost (12,442,912 shares in 2001 and 8,339,556 shares in 2000) (231,722) (149,246) ------------ ------------ Total shareholders' equity 1,360,662 1,330,857 ------------ ------------ $ 18,142,525 $ 18,233,810 ============ ============
See accompanying Notes to Consolidated Financial Statements 3 4 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Interest and dividend income: Interest on loans and leases $ 221,507 $ 220,383 $ 450,330 $ 430,964 Interest and dividends on securities 95,128 110,671 192,849 225,483 --------- --------- --------- --------- Total interest and dividend income 316,635 331,054 643,179 656,447 Interest expense: Interest on deposits 95,989 101,122 200,227 195,859 Interest on borrowed funds 52,581 76,767 116,573 152,250 --------- --------- --------- --------- Total interest expense 148,570 177,889 316,800 348,109 Net interest income 168,065 153,165 326,379 308,338 Provision for loan and lease losses 9,311 5,849 16,450 10,917 --------- --------- --------- --------- Net interest income after provision for loan and lease losses 158,754 147,316 309,929 297,421 Noninterest income: Deposit services 18,401 16,781 35,947 32,336 Mortgage banking services 1,776 4,984 5,010 8,641 Insurance commissions 9,241 4,694 19,209 9,973 Trust services 8,703 8,767 17,490 17,427 Investment advisory services 1,760 1,618 3,458 3,436 Bank-owned life insurance income 4,891 4,165 9,198 9,265 Merchant and electronic banking income, net 7,971 7,879 14,462 14,284 Net securities gains 45 38 803 25 Losses on securities restructuring -- (15,895) -- (15,895) Other noninterest income 4,809 7,856 10,777 11,563 --------- --------- --------- --------- 57,597 40,887 116,354 91,055 Noninterest expenses: Salaries and employee benefits 62,856 57,425 124,550 117,286 Data processing 8,917 9,269 17,878 18,036 Occupancy 11,070 9,928 22,882 21,032 Equipment 8,746 7,791 16,907 15,566 Distributions on securities of subsidiary trusts 2,347 2,347 4,694 4,694 Amortization of goodwill and other intangibles 5,392 5,200 10,816 10,401 Special charges -- 37,271 5,608 42,608 Other noninterest expenses 24,864 25,770 48,063 50,725 --------- --------- --------- --------- 124,192 155,001 251,398 280,348 Income before income tax expense 92,159 33,202 174,885 108,128 Applicable income tax expense 32,266 14,323 59,608 39,349 --------- --------- --------- --------- Net income before cumulative effect of change in accounting principle 59,893 18,879 115,277 68,779 Cumulative effect of change in accounting principle, net of tax -- -- (290) -- --------- --------- --------- --------- Net income $ 59,893 $ 18,879 $ 114,987 $ 68,779 ========= ========= ========= ========= Weighted average shares outstanding: Basic 137,659 144,280 139,236 144,363 Diluted 138,901 145,167 140,461 145,212 Earnings per share: Basic $ 0.44 $ 0.13 $ 0.83 $ 0.48 Diluted 0.43 0.13 0.82 0.47
See accompanying Notes to Consolidated Financial Statements. 4 5 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) (Unaudited)
Unearned Par Paid-in Retained Compen- Value Capital Earnings sation ------------------------------------------------------------------ Balances at December 31, 2000 $ 1,496 $ 617,234 $ 897,214 ($ 1,354) Net income -- -- 114,987 -- Unrealized gain on securities, net of reclassification adjustment -- -- -- -- Unrealized gain on cash flow hedges -- -- -- -- Comprehensive income Common stock issued for employee benefit plans -- 297 (2,156) -- Treasury stock purchased -- -- -- -- Decrease in unearned compensation -- 790 -- 168 Issuance and distribution of restricted stock -- (12) (48) -- Payment of fractional shares -- (2) -- -- Cash dividends -- -- (36,040) -- ----------------------------------------------------------------- Balances at June 30, 2001 $ 1,496 $ 618,307 $ 973,957 ($ 1,186) ================================================================= Balances at December 31, 1999 $ 1,496 $ 617,523 $ 787,238 ($ 2,751) Net income -- -- 68,779 -- Unrealized losses on securities, net of reclassification adjustment -- -- -- -- Comprehensive income Common stock issued for employee benefit plans -- -- (3,397) -- Cancellation of treasury shares at acquisition (1) (2,206) -- -- Treasury stock purchased -- -- -- -- Decrease in unearned compensation -- 472 -- 237 Issuance and distribution of restricted stock -- 71 -- -- Amortization of restricted stock awards -- (390) -- 992 Cash dividends -- -- (34,627) -- ----------------------------------------------------------------- Balances at June 30, 2000 $ 1,495 $ 615,470 $ 817,993 ($ 1,522) =================================================================
Accumulated Other Comprehensive Treasury Income (Loss) Stock Total --------------------------------------------------- Balances at December 31, 2000 ($ 34,487) ($ 149,246) $ 1,330,857 Net income -- -- 114,987 Unrealized gain on securities, net of reclassification adjustment 33,978 -- 33,978 Unrealized gain on cash flow hedges 319 -- 319 ---------- Comprehensive income 149,284 ---------- Common stock issued for employee benefit plans -- 12,302 10,443 Treasury stock purchased -- (94,938) (94,938) Decrease in unearned compensation -- -- 958 Issuance and distribution of restricted stock -- 160 100 Payment of fractional shares -- -- (2) Cash dividends -- -- (36,040) ----------------------------------------------- Balances at June 30, 2001 ($ 190) ($ 231,722) $ 1,360,662 =============================================== Balances at December 31, 1999 ($ 125,394) ($ 85,838) $ 1,192,274 Net income -- -- 68,779 Unrealized losses on securities, net of reclassification adjustment 788 -- 788 ----------- Comprehensive income 69,567 ----------- Common stock issued for employee benefit plans -- 7,231 3,834 Cancellation of treasury shares at acquisition -- 2,207 -- Treasury stock purchased -- (12,343) (12,343) Decrease in unearned compensation -- -- 709 Issuance and distribution of restricted stock -- -- 71 Amortization of restricted stock awards -- -- 602 Cash dividends -- -- (34,627) ----------------------------------------------- Balances at June 30, 2000 ($ 124,606) ($ 88,743) $ 1,220,087 ===============================================
See accompanying Notes to Consolidated Financial Statements. 5 6 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended June 30, ------------------------- 2001 2000 ---- ---- Cash flows from operating activities: Net income $ 114,987 $ 68,779 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 16,450 10,917 Depreciation 14,669 13,646 Amortization of goodwill and other intangibles 10,816 10,401 Provision for deferred tax expense 363 (11,374) ESOP and restricted stock expense 958 709 Issuance of restricted stock units 100 673 Net (gains) losses realized from sales of securities and consumer loans (1,571) 11,135 Net (gains) losses realized from sales of loans held for sale (a component of mortgage banking services) (3,602) 192 Earnings from bank owned life insurance (9,198) (9,265) Net decrease in mortgage servicing rights 22,730 8,589 Proceeds from sales of loans held for sale 437,241 71,499 Residential loans originated for sale (457,687) (5,914) Net decrease (increase) in interest and dividends receivable and other assets 19,449 (6,329) Net increase (decrease) in other liabilities 55,405 (386) ----------- ----------- Net cash provided by operating activities 221,110 160,130 ----------- ----------- Cash flows from investing activities: Proceeds from sales of securities available for sale 280,742 106,469 Proceeds from maturities and principal repayments of securities available for sale 922,121 473,417 Purchases of securities available for sale (1,161,735) (185,832) Proceeds from maturities and principal repayments of securities held to maturity 49,601 55,500 Net (increase) decrease in loans and leases (90,028) (708,531) Proceeds from sale of loans 39,303 34,234 Net additions to premises and equipment (16,532) (9,536) Proceeds from death claim on bank owned life insurance 3,690 1,571 ----------- ----------- Net cash provided (used) by investing activities 27,162 (232,708) ----------- ----------- Cash flows from financing activities: Net (decrease) increase in deposits 320,263 234,043 Net increase (decrease) in securities sold under repurchase agreements 132,417 (308,682) Proceeds from Federal Home Loan Bank borrowings 5,152,421 6,799,300 Payments on Federal Home Loan Bank borrowings (6,083,989) (6,835,766) Net increase (decrease) in other borrowings 166,396 69,040 Issuance of subordinated long-term debt 200,000 -- Issuance of stock 10,441 3,834 Purchase of treasury stock (94,938) (12,343) Dividends paid (36,040) (34,627) ----------- ----------- Net cash provided (used) by financing activities (233,029) (85,201) ----------- ----------- Increase (decrease) in cash and cash equivalents 15,243 (157,779) Cash and cash equivalents at beginning of period 392,989 776,395 ----------- ----------- Cash and cash equivalents at end of period $ 408,232 $ 618,616 =========== ===========
For the six months ended June 30, 2001 and 2000, interest of $324,930 and $349,239 and income taxes of $41,299 and $54,249 were paid, respectively. See accompanying Notes to Consolidated Financial Statements. 6 7 BANKNORTH GROUP, INC. AND SUBSIDIARIES June 30, 2001 (In thousands, except per share data) (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 2000 Annual Report, except for the adoption of Statement of Accounting Standards No. 133, as discussed in Note 4. 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 three months and six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for any other interim period or the entire year ending December 31, 2001. 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, unrealized gains (losses) on securities available for sale and losses on hedges, net of tax. The following is a reconciliation of comprehensive income for the six months ended June 30, 2001 and 2000.
Six Months Ended June 30, ------------------------ 2001 2000 --------- --------- Net income $ 114,987 $ 68,779 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period 34,500 (9,528) Less: reclassification adjustment for gains (losses) included in net income 522 (10,316) --------- --------- 33,978 788 --------- --------- Unrealized gains (losses) on cash flow hedges, net of tax Unrealized holding losses arising during the period (224) -- Less: reclassification adjustment for losses included in net income (543) -- --------- --------- 319 -- --------- --------- Other comprehensive income, net 34,297 788 --------- --------- Comprehensive income $ 149,284 $ 69,567 ========= =========
NOTE 3 - EARNINGS PER SHARE The computations of basic and diluted net income per share and weighted average shares outstanding follow:
Three Months Ended Six Months Ended June 30, June 30, ----------------------- -------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Net income $ 59,893 $ 18,879 $114,987 $ 68,779 ======== ======== ======== ======== Weighted average shares outstanding Basic 137,659 144,280 139,236 144,363 Effect of dilutive stock options 1,242 887 1,225 849 -------- -------- -------- -------- Diluted 138,901 145,167 140,461 145,212 ======== ======== ======== ======== Net income per share: Basic $ 0.44 $ 0.13 $ 0.83 $ 0.48 Diluted 0.43 0.13 0.82 0.47
7 8 NOTE 4 - ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which sets accounting and reporting standards for derivative instruments and hedging activities. The Statement, as amended by SFAS No. 138, requires the Company to recognize all derivatives on the balance sheet at fair value. The Company adopted the Statement effective January 1, 2001 and recognized an after-tax loss from cumulative effect of adoption of $290 thousand. Starting January 1, 2001, the Company recognizes all derivatives on the balance sheet at fair value. On the date the derivative is entered into, the Company designates the derivative as either a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"), a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge") or a "held for trading" ("trading instrument") instrument. The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items. Changes in fair value of a derivative that is highly effective and that qualifies as a cash flow hedge are recorded in other comprehensive income and are reclassified into earnings when the forecasted transaction affects earnings. Changes in fair value of a derivative that is highly effective and that qualifies as a fair value hedge are recognized in earnings in the period of the change along with the gain or loss on the hedged asset attributable to the risk being hedged. Changes in fair value of derivative trading instruments are reported in current-period earnings. The Company discontinues hedge accounting when it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedge item, because it is unlikely that the forecasted transaction will occur, or management determines that the designation of the derivative as a hedging instrument is no longer appropriate. NOTE 5 PENDING ACQUISITIONS On June 11, 2001, the Company entered into agreements to acquire Andover Bancorp, Inc. ("Andover"), a multi-bank holding company headquartered in Andover, Massachusetts, and MetroWest Bank ("MetroWest"), a Massachusetts-chartered savings bank headquartered in Framingham, Massachusetts. Andover had total assets of $1.8 billion and total shareholders' equity of $163.3 million at June 30, 2001. Under terms of the agreement with Andover, shareholders of Andover will receive 2.27 shares of the Company's common stock (subject to adjustment as provided in the agreement) for each share of Banknorth common stock, plus cash in lieu of any fractional share interests. Based on the exchange ratio, the Company will issue a maximum of approximately 16.7 million shares of Company common stock in connection with the acquisition of Andover (inclusive of shares which are issuable upon exercise or conversion of outstanding Andover derivative securities). In conjuction with this transaction, the Company announced its intention to repurchase approximately one-half of the shares to be issued during the next year. MetroWest had total assets of $935.8 million and total shareholders' equity of $64.0 million at June 30, 2001. The agreement provides, among other things, that as a result of the acquisition, each outstanding share of common stock of MetroWest (subject to certain exceptions) will be converted into the right to receive $11.50, without interest. The aggregate purchase price for this acquisition is approximately $166 million. Each agreement is subject to the approval of the acquired company's shareholders, the receipt of regulatory approvals and other customary closing conditions. The acquisitions will be accounted for as purchases in accordance with Financial Accounting Standards Board No. 141, "Business Combinations" and are expected to be completed in the fourth quarter of 2001. 8 9 BANKNORTH GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS SUMMARY Banknorth Group, Inc. (the "Company") reported consolidated net income of $59.9 million, or $0.43 per diluted share, for the second quarter of 2001 as compared with $18.9 million, or $0.13 per diluted share, for the second quarter of 2000. On an operating basis, which excludes special items (which consist of merger and other special charges and losses on securities restructuring), the Company earned $59.9 million and $57.7 million or $0.43 and $0.40 per diluted share for the quarters ended June 30, 2001 and 2000, respectively. Operating cash diluted earnings per share, which excludes special items and amortization of goodwill and other intangible assets, was $0.46 and $0.43 for the quarters ended June 30, 2001 and 2000, respectively. The Company's operating return on average equity ("ROE") and operating return on average assets ("ROA"), were 17.85% and 1.32%, respectively, for the second quarter ended June 30, 2001. Operating ROE and operating ROA were 19.82% and 1.27%, respectively, for the quarter ended June 30, 2000. Operating results for the second quarter of 2001 improved over the second quarter of 2000 due to a 10% increase in net interest income, which was partially offset by expense growth of 5% and increased provisions for loan and lease losses. Net interest income increased $14.9 million and the net interest margin increased by 36 basis points. This was due largely to a decline in the rates paid on interest-bearing liabilities, as well as a change in the mix in earning assets, as loan growth replaced investment securities. Noninterest income increased by $815 thousand, excluding losses on securities restructuring, primarily due to a $1.6 million increase in deposit services income and a $4.5 million increase in insurance commissions, which were partially offset by a decrease in mortgage banking income of $3.2 million. The increase in noninterest expenses for the second quarter of 2001 was primarily due to an increase in salaries and benefits expense of $5.4 million or 9% and an increase in occupancy expense of $1.1 million or 12%, which were partially offset by a decrease of $906 thousand in other noninterest expense. The efficiency ratio (noninterest expense 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) was 54.01% in the second quarter of 2001 compared to 54.97% in the comparable period last year. Selected quarterly data, ratios and per share data, both as reported and on an operating basis, are provided in Table 1. The Company reported consolidated net income of $115.0 million, or $0.82 per diluted share, for the six months ended June 30, 2001, as compared with $68.8 million, or $0.47 per diluted share, for the six months ended June 30, 2000. Operating income for the first six months of 2001 was $118.9 million, or $0.85 per diluted share, and operating ROE and operating ROA for this period were 17.81% and 1.32%, respectively. The Company's operating income for the first six months of 2000 was $111.2 million, or $0.77 per diluted share, and operating ROE and operating ROA were 18.97% and 1.22%, respectively. The six months ended June 30, 2001 and 2000 included $5.6 million ($3.9 million net of tax) and $58.5 million ($42.4 million net of tax) of non-operating items (consisting of special charges and losses on restructuring the investment portfolio), respectively. (See Table 5 for more information related to special charges.) Operating results for the first six months of 2001 represent a 10% increase in diluted earnings per share from the comparable period last year. Net interest income for the six months ended June 30, 2001 increased 6% from the same period last year primarily due to a 27 basis point increase in net interest margin. Net interest income also benefited from accelerated accretion of discounts on certain U. S. Government Agency callable securities that were called prior to maturity. Noninterest income, excluding losses on securities restructuring, for the six months ended June 30, 2001 increased 9% compared to the first six months last year. Noninterest expense, excluding special charges, increased 3% for the six months ended June 30, 2001 compared to the same period last year primarily due to increases in salaries and benefits and occupancy expenses. 9 10 TABLE 1 - SELECTED QUARTERLY DATA (Dollars in thousands, except per share data)
2001 2001 2000 Second First Fourth ------ ----- ------ Net interest income $ 168,065 $ 158,314 $ 153,960 Provision for loan and lease losses 9,311 7,138 6,651 ----------- --------- --------- Net interest income after loan and lease loss provision 158,754 151,176 147,309 Noninterest income (1) 57,552 57,997 63,630 Net securities gains (losses) 45 759 437 Noninterest expenses (excluding special charges) (2) 124,192 121,598 119,473 Special charges (2) -- 5,608 (15) ----------- --------- --------- Income before income taxes 92,159 82,726 91,918 Income tax expense 32,266 27,343 29,554 ----------- --------- --------- Net income before cumulative effect of change in accounting principle 59,893 55,383 62,364 Cumulative effect of change in accounting principle, net of tax -- (290) -- ----------- --------- --------- Net income $ 59,893 $ 55,093 $ 62,364 =========== ========= ========= Earnings per share: Basic $ 0.44 $ 0.39 $ 0.43 Diluted 0.43 0.39 0.43 Operating earnings per share (excluding special items) (2): Basic $ 0.44 $ 0.42 $ 0.43 Diluted 0.43 0.42 0.43 Return on average assets (3) 1.32% 1.24% 1.36% Return on average equity (3) 17.85% 16.59% 19.16% Operating ratios: Return on average assets (excluding special items) (3) (4) 1.32% 1.32% 1.35% Return on average equity (excluding special items) (3) (4) 17.85% 17.78% 19.15% Net interest margin 4.03% 3.84% 3.70% Noninterest income as a percent of total income (1) 25.51% 26.81% 29.24% Efficiency ratio (5) 54.01% 55.13% 53.83% Special items, net of related income tax effect (4) $ 0 $ 3,941 ($ 38)
2000 2000 2000 Third Second First ----- ------ ----- Net interest income $ 150,713 $ 153,165 $ 155,173 Provision for loan and lease losses 6,250 5,849 5,068 --------- --------- --------- Net interest income after loan and lease loss provision 144,463 147,316 150,105 Noninterest income (1) 56,090 56,744 50,181 Net securities gains (losses) (23) (15,857) (13) Noninterest expenses (excluding special charges) (2) 111,635 117,730 120,010 Special charges (2) 414 37,271 5,337 --------- --------- --------- Income before income taxes 88,481 33,202 74,926 Income tax expense 27,890 14,323 25,026 --------- --------- --------- Net income before cumulative effect of change in accounting principle 60,591 18,879 49,900 Cumulative effect of change in accounting principle, net of tax -- -- -- --------- --------- --------- Net income $ 60,591 $ 18,879 $ 49,900 ========= ========= ========= Earnings per share: Basic $ 0.42 $ 0.13 $ 0.35 Diluted 0.42 0.13 0.34 Operating earnings per share (excluding special items) (2): Basic $ 0.42 $ 0.40 $ 0.37 Diluted 0.42 0.40 0.37 Return on average assets (3) 1.31% 0.41% 1.10% Return on average equity (3) 19.31% 6.48% 16.75% Operating ratios: Return on average assets (excluding special items) (3) (4) 1.32% 1.27% 1.17% Return on average equity (excluding special items) (3) (4) 19.49% 19.82% 17.96% Net interest margin 3.57% 3.67% 3.70% Noninterest income as a percent of total income (1) 27.12% 27.03% 24.44% Efficiency ratio (5) 52.85% 54.97% 57.30% Special items, net of related income tax effect (4) $ 545 $ 38,870 $ 3,577
------------------------------------------------------- (1) Excludes securities transactions. (2) Special charges consist of merger charges, asset write-downs and branch closing costs. (3) Annualized. (4) Special items consists of (i) special charges and (ii) losses on restructuring the investment portfolio. (5) Represents noninterest expenses, excluding distributions on securities of subsidiary trusts and special items, as a percentage of net interest income and noninterest income, excluding net securities gains and losses. 10 11 RESULTS OF OPERATIONS NET INTEREST INCOME The Company's fully-taxable equivalent net interest income for the second quarter of 2001 increased $15.0 million compared to the second quarter of 2000 while the net interest margin increased from 3.67% to 4.03% in the comparable periods. These increases were primarily due to decreases in the volume of and rate paid on interest-bearing liabilities and, to a lesser extent, an increase in the average amount of loans outstanding. Also benefiting net interest margin was a $226 million increase in noninterest-bearing deposits. Average loans as a percent of average earning assets increased to 65% at June 30, 2001, as compared to 61% at June 30, 2000. Growth in average commercial business loans (9%), average consumer loans (8%) and average commercial real estate mortgages (8%) contributed to this increase. Average securities decreased for the three months ended June 30, 2001, 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 of mortgage-backed securities. The Company's fully-taxable equivalent net interest income for the six months ended June 30, 2001 increased $18.3 million compared to the six months ended June 30, 2000 primarily for the same reasons as the increase during the three months ended June 30, 2001, as discussed above. The net interest margin increased from 3.67% for the six months ended June 30, 2000 to 3.94% for the six months ended June 30, 2001 primarily due to a 24 basis point decrease in rates paid on interest-bearing liabilities. Average net earning assets increased $499.2 million for the six months ended June 30, 2001 compared to the six months ended June 30, 2000 primarily due to an increase in non-interest-bearing deposits and equity. Table 2 shows quarterly average balances, net interest income by category and rates for each of the quarters in 2001 and 2000 and for the six months periods ended June 30, 2001 and 2000. 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)
2001 Second Quarter 2001 First Quarter ------------------- ------------------ Yield/ Yield/ Average Balance Interest Rate (1) Average Balance Interest Rate (1) --------------- -------- -------- --------------- -------- -------- Loans and leases (2): Residential real estate mortgages $2,206,518 $40,866 7.41% $2,285,219 $43,118 7.55% Commercial real estate mortgages 3,036,744 64,949 8.58 2,964,053 64,658 8.85 Commercial business loans and leases 2,322,572 46,509 8.03 2,304,625 49,439 8.70 Consumer loans and leases 3,342,216 70,166 8.42 3,373,971 72,604 8.73 ---------- ------- ---------- ------- Total loans and leases 10,908,050 222,490 8.18 10,927,868 229,819 8.51 Securities 5,931,974 95,241 6.42 5,819,082 97,939 6.74 Federal funds sold and other short-term investments 48,148 476 3.97 20,946 296 5.73 ---------- ------- ---------- ------- Total earning assets 16,888,172 318,207 7.55 16,767,896 328,054 7.89 ------- ------- Noninterest-earning assets 1,264,302 1,307,350 ----------- ----------- Total assets $18,152,474 $18,075,246 =========== =========== Interest-bearing deposits: Regular savings $1,405,540 $4,898 1.40 $1,390,834 $5,561 1.62 NOW and money market accounts 4,059,390 28,525 2.82 3,969,403 32,539 3.32 Certificates of deposit 4,484,684 60,086 5.37 4,513,295 63,502 5.71 Brokered deposits 167,419 2,480 5.94 165,065 2,637 6.48 ---------- ------- ---------- ------- Total interest-bearing deposits 10,117,033 95,989 3.81 10,038,597 104,239 4.21 Borrowed funds 4,329,605 52,581 4.82 4,474,160 63,992 5.74 ---------- ------- ---------- ------- Total interest-bearing liabilities 14,446,638 148,570 4.11 14,512,757 168,231 4.68 ------- ------- Non-interest bearing deposits 2,101,326 1,966,919 Other liabilities 159,955 150,037 Securities of subsidiary trusts 98,775 98,775 Shareholders' equity 1,345,780 1,346,758 ----------- ----------- Total liabilities and shareholders' equity $18,152,474 $18,075,246 =========== =========== Net earning assets $2,441,534 $2,255,139 =========== =========== Net interest income (fully-taxable equivalent) 169,637 159,823 Less: fully-taxable equivalent adjustments (1,572) (1,509) -------- ------- Net interest income $168,065 $158,314 ======== ======== Net interest rate spread (fully-taxable equivalent) 3.44% 3.21% Net interest margin (fully-taxable equivalent) 4.03% 3.84%
------------------------------------------------ (1) Annualized. (2) Loans and leases include loans held for sale. 12 13 TABLE 2 - Average Balances, Yields and Rates (Dollars in thousands)
2000 Fourth Quarter 2000 Third Quarter ------------------- ------------------ Yield/ Yield/ Average Balance Interest Rate (1) Average Balance Interest Rate (1) --------------- -------- -------- --------------- -------- -------- Loans and leases (2): Residential real estate mortgages $2,304,500 $43,340 7.52% $2,340,950 $43,370 7.41% Commercial real estate mortgages 2,947,644 66,428 8.97 2,935,280 65,740 8.91 Commercial business loans and leases 2,263,301 52,852 9.29 2,205,430 51,110 9.22 Consumer loans and leases 3,305,342 73,282 8.82 3,193,830 69,489 8.65 ---------- ------- ---------- ------- Total loans and leases 10,820,787 235,902 8.68 10,675,490 229,709 8.57 Securities 6,065,801 102,787 6.77 6,298,451 107,303 6.81 Federal funds sold and other short-term investments 33,591 362 4.28 63,155 958 6.04 ---------- ------- ---------- ------- Total earning assets 16,920,179 339,051 7.99 17,037,096 337,970 7.91 ------- ------- Noninterest-earning assets 1,379,667 1,408,636 ---------- ---------- Total assets $18,299,846 $18,445,732 =========== =========== Interest-bearing deposits: Regular savings $1,416,785 5,922 1.66 $1,469,374 $7,643 2.07 NOW and money market accounts 3,933,748 35,034 3.54 3,898,780 34,877 3.56 Certificates of deposit 4,522,791 65,289 5.74 4,529,819 63,160 5.55 Brokered deposits 120,020 2,027 6.72 86,953 1,439 6.58 ---------- ------ ----------- ------ Total interest-bearing deposits 9,993,344 108,272 4.31 9,984,926 107,119 4.27 Borrowed funds 4,720,402 75,049 6.24 4,962,974 78,727 6.31 ---------- ------ ----------- ------ Total interest-bearing liabilities 14,713,746 183,321 4.93 14,947,900 185,846 4.95 -------- ------- Non-interest bearing deposits 2,046,837 2,046,112 Other liabilities 145,722 104,804 Securities of subsidiary trusts 98,775 98,775 Shareholders' equity 1,294,766 1,248,141 ----------- ----------- Total liabilities and shareholders' equity $18,299,846 $18,445,732 =========== =========== Net earning assets $2,206,433 $2,089,196 ========== ========== Net interest income (fully-taxable equivalent) 155,730 152,124 Less: fully-taxable equivalent adjustments (1,770) (1,411) -------- ------- Net interest income $153,960 $150,713 ======== ======== Net interest rate spread (fully-taxable equivalent) 3.06% 2.96% Net interest margin (fully-taxable equivalent) 3.70% 3.57%
---------------------------------------------------------- (1) Annualized. (2) Loans and leases include loans held for sale. 13 14 TABLE 2 - Average Balances, Yields and Rates (Dollars in thousands)
2000 Second Quarter 2000 First Quarter ------------------- ------------------ Yield/ Yield/ Average Balance Interest Rate (1) Average Balance Interest Rate (1) --------------- -------- -------- --------------- -------- -------- Loans and leases (2): Residential real estate mortgages $2,336,378 $44,190 7.57% $2,337,127 $43,536 7.45% Commercial real estate mortgages 2,819,294 62,581 8.93 2,731,631 60,698 8.94 Commercial business loans and leases 2,132,627 48,021 9.06 1,952,209 43,019 8.86 Consumer loans and leases 3,101,735 66,598 8.64 3,036,234 64,193 8.50 ---------- ------- ---------- ------- Total loans and leases 10,390,034 221,390 8.56 10,057,201 211,446 8.45 Securities 6,478,785 109,892 6.79 6,783,530 114,163 6.74 Federal funds sold and other short-term investments 80,250 1,266 6.34 79,032 1,091 5.55 ---------- ------- ---------- ------- Total earning assets 16,949,069 332,548 7.87 16,919,763 326,700 7.75 ------- ------- Noninterest-earning assets 1,398,125 1,393,153 ----------- ----------- Total assets $18,347,194 $18,312,916 =========== =========== Interest-bearing deposits: Regular savings $1,545,893 8,037 2.09 $1,561,943 8,176 2.11 NOW and money market accounts 3,770,025 31,269 3.34 3,639,746 27,701 3.06 Certificates of deposit 4,540,737 59,822 5.30 4,505,049 56,716 5.06 Brokered deposits 123,670 1,994 6.49 131,218 2,144 6.57 ---------- ------- ---------- ------- Total interest-bearing deposits 9,980,325 101,122 4.08 9,837,956 94,737 3.87 Borrowed funds 5,086,715 76,767 6.07 5,262,911 75,483 5.77 ---------- ------- ---------- ------- Total interest-bearing liabilities 15,067,040 177,889 4.75 15,100,867 170,220 4.53 ------- ------- Non-interest bearing deposits 1,875,798 1,798,107 Other liabilities 133,627 117,311 Securities of subsidiary trusts 98,775 98,775 Shareholders' equity 1,171,954 1,197,856 ----------- ----------- Total liabilities and shareholders' equity $18,347,194 $18,312,916 =========== =========== Net earning assets $1,882,029 $1,818,896 ========== ========== Net interest income (fully-taxable equivalent) 154,659 156,480 Less: fully-taxable equivalent adjustments (1,494) (1,307) ------ ------ Net interest income $153,165 $155,173 ======== ======== Net interest rate spread (fully-taxable equivalent) 3.12% 3.22% Net interest margin (fully-taxable equivalent) 3.67% 3.70%
----------------------------------------------------------------- (1) Annualized. (2) Loans and leases include loans held for sale. 14 15 TABLE 2 - Average Balances, Yields and Rates (Dollars in thousands)
Six Months Ended Six Months Ended June 30, 2001 June 30, 2000 ------------- ------------- Yield/ Yield/ Average Balance Interest Rate (1) Average Balance Interest Rate (1) --------------- -------- -------- --------------- -------- -------- Loans and leases (2): Residential real estate mortgages $2,245,651 $83,984 7.48% $2,327,753 $87,726 7.54% Commercial real estate mortgages 3,000,600 129,607 8.71 2,784,556 123,279 8.90 Commercial business loans and leases 2,313,648 95,950 8.36 2,053,878 91,040 8.91 Consumer loans and leases 3,358,006 142,770 8.57 3,068,985 130,791 8.57 ---------- ------- ---------- ------- Total loans and leases 10,917,905 452,311 8.34 10,235,172 432,836 8.49 Securities 5,875,840 193,180 6.58 6,631,157 224,055 6.76 Federal funds sold and other short-term investments 34,622 772 4.50 80,278 2,357 5.90 ---------- ------- ---------- ------- Total earning assets 16,828,367 646,263 7.72 16,946,607 659,248 7.81 ------- ------- Noninterest earning assets 1,284,891 1,390,848 ----------- ----------- Total assets $18,113,258 $18,337,455 =========== =========== Interest-bearing deposits: Regular savings $1,398,228 10,459 1.51 $1,553,918 16,213 2.10 NOW and money market accounts 4,014,645 61,064 3.07 3,704,890 58,970 3.20 Certificates of deposit 4,498,911 123,588 5.54 4,516,074 116,538 5.19 Brokered deposits 166,248 5,117 6.21 134,264 4,138 6.20 ---------- ------- ---------- ------- Total interest-bearing deposits 10,078,032 200,228 4.01 9,909,146 195,859 3.97 Borrowed funds 4,401,513 116,573 5.29 5,187,878 152,250 5.90 ---------- ------- ---------- ------- Total interest-bearing liabilities 14,479,545 316,801 4.40 15,097,024 348,109 4.64 ------- ------- Non-interest bearing deposits 2,034,494 1,837,464 Other liabilities 153,906 125,231 Securities of subsidiary trust 98,775 98,775 Shareholders' equity 1,346,538 1,178,961 ----------- ----------- Total liabilities and shareholders' equity $18,113,258 $18,337,455 =========== =========== Net earning assets $2,348,822 $1,849,583 ========== ========== Net interest income (fully-taxable equivalent) 329,462 311,139 Less: fully-taxable equivalent adjustments (3,083) (2,801) ------ ------ Net interest income $326,379 $308,338 ======== ======== Net interest rate spread (fully-taxable equivalent) 3.32% 3.17% Net interest margin (fully-taxable equivalent) 3.94% 3.67%
---------------------------------------------------- (1) Annualized. (2) Loans and leases include loans held for sale. 15 16 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).
Three Months Ended June 30, 2001 vs. 2000 Increase (decrease) due to ------------------------------------------------------ Rate and Total Volume Rate Volume (1) Change ----------------------------------------------------- Interest income: Loans and leases $ 11,055 ($ 9,843) ($ 112) $ 1,100 Securities (9,257) (5,976) 582 (14,651) Federal funds sold and other short-term investments (507) (474) 191 (790) ------------------------------------------------------ Total interest income 1,291 (16,293) 661 (14,341) ------------------------------------------------------ Interest expense: Interest-bearing deposits Regular savings (731) (2,659) 251 (3,139) NOW and money market accounts 2,410 (4,888) (266) (2,744) Certificates of deposit (741) 792 213 264 Brokered deposits 708 (170) (52) 486 ----------------------------------------------------- Total interest-bearing deposits 1,646 (6,925) 146 (5,133) Borrowed funds (11,458) (15,852) 3,124 (24,186) ----------------------------------------------------- Total interest expense (9,812) (22,777) 3,270 (29,319) Net interest income (fully taxable equivalent) $ 11,103 $ 6,484 ($ 2,609) $ 14,978 ======== ======== ======== ========
Six Months Ended June 30, 2001 vs. 2000 Increase (decrease) due to ------------------------------------------------------------- Rate and Total Volume Rate Volume (1) Change ------------------------------------------------------------- Interest income: Loans and leases $ 28,744 ($ 7,613) ($ 1,671) $ 19,460 Securities (25,320) (5,919) 364 (30,875) Federal funds sold and other short-term investments (1,336) (557) 323 (1,570) ------------------------------------------------------------- Total interest income 2,088 (14,089) (984) (12,985) ------------------------------------------------------------- Interest expense: Interest-bearing deposits Regular savings (1,621) (4,546) 442 (5,725) NOW and money market accounts 4,915 (2,388) (462) 2,065 Certificates of deposit (442) 7,838 (346) 7,050 Brokered deposits 983 7 (11) 979 ------------------------------------------------------------- Total interest-bearing deposits 3,835 911 (377) 4,369 Borrowed funds (23,007) (15,693) 3,023 (35,677) ------------------------------------------------------------- Total interest expense (19,172) (14,782) 2,646 (31,308) Net interest income (fully taxable equivalent) $ 21,260 $ 693 ($ 3,630) $ 18,323 =============================================================
----------------------------------------------------- (1) Includes changes in interest income and expense not due solely to volume or rate changes. 16 17 NONINTEREST INCOME Second quarter noninterest income totaled $57.6 million, an increase of $815 thousand from the second quarter of 2000, excluding losses on securities restructuring. This increase was primarily due to insurance commissions income (up $4.5 million or 97%), deposit services income (up $1.6 million or 10%) and bank-owned life insurance income (up $726 thousand or 17%). Excluding a $4.7 million gain on the sale of a $29 million credit card portfolio in June 2000, other noninterest income increased $1.7 million for the quarter ended June 30, 2001 primarily due to premiums received on covered call options related to mortgage backed securities. Noninterest income, excluding securities gains and losses, as a percent of total revenues was 26% and 27% for the quarters ended June 30, 2001 and 2000, respectively. For the six months ended June 30, 2001 and 2000, noninterest income amounted to $116.4 million and $107.0 million, respectively. The 9% increase was primarily due to increases in deposit services income and insurance commissions. Deposit services income increased by $1.6 million or 10% during the three months ended June 30, 2001, as compared to the same period in the prior year, and by $3.6 million or 11% during the six months ended June 30, 2001, as compared to the same period in the prior year. For the six months ended June 30, 2001 and 2000, deposit services income amounted to $18.4 million and $16.8 million. These increases were primarily attributable to volume driven increases in checking accounts and collection of overdraft fees. Mortgage banking income was $1.8 million and $5.0 million for the quarters ended June 30, 2001 and 2000, respectively. The decrease from the same quarter of last year was primarily due to lower servicing income as a result of the sale of virtually all mortgage servicing rights in the fourth quarter of 2000 and the first quarter of 2001. The amount of loans serviced for others was $303.6 million and $3.8 billion at June 30, 2001 and 2000, respectively. The Company sold $1.8 billion of loans serviced for others in the fourth quarter of 2000 and $1.6 billion in the first quarter of 2001. For the six months ended June 30, 2001 and 2000, mortgage banking income amounted to $5.0 million and $8.6 million, respectively. The $3.6 million decrease for the six months ended June 30, 2001 was primarily due to a $3.8 million decrease in mortgage servicing revenue and $2.7 million of impairment reserves recorded in the first six months of 2000, which were partially offset by a $3.3 million increase in mortgage sales income. See Table 4 for a summary of mortgage banking services income by quarter for 2001 and 2000. Capitalized mortgage servicing rights amounted to $495 thousand at June 30, 2001, compared to $23.2 million at December 31, 2000. The decrease was due largely to the sale of mortgage servicing rights with a carrying value of $22.6 million in the first quarter of 2001. In the fourth quarter of 2000, after a comprehensive review of its mortgage banking operations, the Company decided to sell virtually all of its mortgage servicing rights and to sell mortgage servicing rights on new loan originations on a flow basis in the future. The Company began sales of this asset after it determined that it 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 due to changes in interest rates inherent in the mortgage servicing rights asset. The Company is continuing to sell mortgage servicing rights on new loan originations on a flow basis. See Table 4 for details. 17 18 TABLE 4 - MORTGAGE BANKING SERVICES (Dollars in thousands)
At or for the Three Months Ended ---------------------------------------------- 6/30/01 3/31/01 12/31/00 ---------------------------------------------- RESIDENTIAL MORTGAGES SERVICED FOR INVESTORS $ 303,590 $ 294,898 $ 1,618,610 ========================================== MORTGAGE SERVICING RIGHTS: Balance at beginning of period $ 491 $ 23,225 $ 41,029 Mortgage servicing rights capitalized -- 382 1,845 Amortization charged against mortgage servicing fee income 4 (500) (500) Change in impairment reserve -- -- -- Mortgage servicing rights sold -- (22,616) (19,149) ------------------------------------------ Balance at end of period $ 495 $ 491 $ 23,225 ========================================== MORTGAGE BANKING SERVICES INCOME: Sales income: Residential mortgage sales income $ 1,510 $ 2,236 $ 478 Lower of cost or market adjustment - Loans held for sale 52 (52) 73 ------------------------------------------ Total sales income 1,562 2,184 551 ------------------------------------------ Servicing income: Residential mortgage servicing income, net 214 344 2,430 Change in impairment reserve on mortgage servicing rights -- -- -- Valuation adjustments - interest rate floor -- -- (6) Gain on sale of capitalized mortgage servicing rights -- 706 4,176 ------------------------------------------ Total servicing income 214 1,050 6,600 ------------------------------------------ Total $ 1,776 $ 3,234 $ 7,151 ==========================================
------------------------------------------ 9/30/00 6/30/00 3/31/00 ------------------------------------------ RESIDENTIAL MORTGAGES SERVICED FOR INVESTORS $ 3,332,529 $ 3,832,996 $ 3,993,680 MORTGAGE SERVICING RIGHTS: Balance at beginning of period $ 44,135 $ 44,780 $ 52,724 Mortgage servicing rights capitalized 1,657 69 406 Amortization charged against mortgage servicing fee income (2,344) (2,442) (3,020) Change in impairment reserve 162 1,728 1,005 Mortgage servicing rights sold (2,581) -- (6,335) ------------------------------------------- Balance at end of period $ 41,029 $ 44,135 $ 44,780 =========================================== MORTGAGE BANKING SERVICES INCOME: Sales income: Residential mortgage sales income $ 1,671 $ 318 $ 169 Lower of cost or market adjustment - Loans held for sale 108 (36) 30 ------------------------------------------- Total sales income 1,779 282 199 ------------------------------------------- Servicing income: Residential mortgage servicing income, net 1,590 2,956 1,439 Change in impairment reserve on mortgage servicing rights 162 1,728 1,005 Valuation adjustments - interest rate floor 460 (106) (545) Gain on sale of capitalized mortgage servicing rights 2,181 124 1,559 ------------------------------------------- Total servicing income 4,393 4,702 3,458 ------------------------------------------- Total $ 6,172 $ 4,984 $ 3,657 ===========================================
Six Months Ended ------------------- MORTGAGE BANKING SERVICES INCOME: 6/30/01 6/30/00 -------------------- Sales income: Residential mortgage sales income $ 3,746 $ 487 Lower of cost or market adjustment - Loans held for sale -- (6) -------------------- Total sales income 3,746 481 -------------------- Servicing income: Residential mortgage servicing income, net 558 4,395 Change in impairment reserve on mortgage servicing rights -- 2,733 Valuation adjustments - interest rate floor -- (651) Gain (loss) on sale of capitalized mortgage servicing rights 706 1,683 -------------------- Total servicing income 1,264 8,160 -------------------- Total $ 5,010 $ 8,641 ====================
Insurance commissions income was $9.2 million for the second quarter of 2001 compared to $4.7 million for the same period in 2000, an increase of 97%. For the six months ended June 30, 2001 and 2000, insurance commissions amounted to $19.2 million and $10.0 million, respectively, representing an increase of 93%. The increases in 2001 were primarily attributable to two insurance agency purchase acquisitions in the third quarter of 2000. 18 19 Trust services income amounted to $8.7 million for the quarter ended June 30, 2001 compared to $8.8 million for the second quarter of 2000. For the six months ended June 30, 2001 and 2000, trust services income amounted to $17.5 and $17.4 million, respectively. Assets under management increased to $8.6 billion at June 30, 2001 from $7.7 billion at June 30, 2000 primarily reflecting a $1 billion increase in custodial accounts which generate lower fees than investment management accounts. Investment advisory services income increased $142 thousand or 9% in the second quarter of 2001 compared to the second quarter of 2000. For the six months ended June 30, 2001 and 2000, investment advisory services income amounted to $3.5 and $3.4 million, respectively, representing an increase of 1%. Investment advisory services revenues are commissions earned from the sale of third party mutual funds, annuities and bonds. Bank-owned life insurance ("BOLI") income was $4.9 million for the second quarter of 2001, compared to $4.2 million for the same period in 2000, an increase of 17%. There was a $1.2 million death benefit recorded in the first quarter of 2000 and a $616 thousand death benefit in the second quarter of 2001. Excluding the death benefits, BOLI income increased $19 thousand due to higher average levels of BOLI in 2001. For the second quarter of 2001, the average carrying value of BOLI was $310 million compared to $297 million for the second quarter of 2000. For the six months ended June 30, 2001 and 2000, BOLI income amounted to $9.2 million and $9.3 million, respectively. 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 A+ or better at June 30, 2001. Merchant and electronic banking income was $8.0 million for the second quarter of 2001 compared to $7.9 million for the second quarter of 2000. For the six months ended June 30, 2001 and 2000 merchant and electronic banking income amounted to $14.5 million and $14.3 million, respectively. This income represents fees and interchange income generated by the use of Company-issued debit cards and charges to merchants for processing credit card transactions. Excluding a $4.7 million gain on the sale of a credit card portfolio in June 2000, other noninterest income increased by $1.7 million or 52% for the quarter ended June 30, 2001 compared to the same quarter last year. The increase in the second quarter of 2001 was primarily due to higher loan fees and included $959 thousand of premium income recognized on covered call options related to mortgage backed securities in 2001. For the six months ended June 30, 2001 and 2000, other income, excluding the $4.7 million gain on the sale of the credit card portfolio in the second quarter of 2000, amounted to $10.8 million and $9.4 million, respectively and included $1.9 million of premiums on covered call options in 2001. No covered call options were outstanding as of June 30, 2001. NONINTEREST EXPENSE Noninterest expense, excluding special charges, was $124.2 million and $117.7 million for the quarters ended June 30, 2001 and 2000, respectively, representing an increase of $6.5 million, or 5%. The increase was primarily due to salaries and employee benefits expense resulting from the two insurance agency purchase acquisitions in the third quarter of 2000 and increased incentive compensation. The efficiency ratio was 54.01% and 54.97% for the quarters ended June 30, 2001 and 2000, respectively. For the six months ended June 30, 2001 and 2000, noninterest expense, excluding special charges, amounted to $245.8 million and $237.7 million, a 3% increase. The efficiency ratio was 54.56% and 56.12% for the six months ended June 30, 2001 and 2000, respectively. For a description of the methodology used by the Company to calculate the efficiency ratio, see Note 5 to Table 1. Salaries and benefits expense of $62.9 million for the quarter ended June 30, 2001 increased $5.4 million or 9% from the same quarter of last year. Salaries and benefits expense amounted to $124.6 million and $117.3 million during the six months ended June 30, 2001 and 2000, respectively, representing a $7.3 million increase or 6%. The increase was primarily due to additional employees from two insurance agency purchase acquisitions during the third quarter of 2000 and increased incentive compensation. Data processing expense of $8.9 million for the quarter ended June 30, 2001 decreased $352 thousand or 4% from the same quarter a year ago. For the six months ended June 30, 2001 and 2000, data processing expense amounted to $17.9 million and $18.0 million, respectively, a $158 thousand or 1% decrease. Occupancy expense of $11.1 million during the three months ended June 30, 2001 increased $1.1 million or 12% from the same quarter in 2000 due to additional utility and snow plowing expenses and expenses for new facilities. For the six months ended June 30, 2001 and 2000, occupancy expense amounted to $22.9 million and $21.0 million, respectively, a $1.9 million or 9% increase, largely for the same reasons as the increase in the last quarter. 19 20 Equipment expense of $8.7 million during the three months ended June 30, 2001 increased $955 thousand or 12% from the second quarter of last year. For the six months ended June 30, 2001 and 2000, equipment expense amounted to $16.9 million and $15.6 million, respectively, a $1.3 million or 9% increase. These increases were primarily due to depreciation relating to new technology equipment and software. Amortization of goodwill and other intangibles was $5.4 million and $5.2 million for the quarters ended June 30, 2001 and 2000, respectively. For the six months ended June 30, 2001 and 2000, amortization of goodwill and other intangibles amounted to $10.8 million and $10.4 million, respectively. The slight increases were related to amortization of goodwill recorded in connection with the acquisition of two insurance agencies during the third quarter of 2000. During the six months ended June 30, 2001 and 2000, special charges amounted to $5.6 million ($3.9 million after tax) and $42.6 million ($32.1 million after tax), respectively. The special charges recorded in 2001 related to severance packages for executives whose employment was terminated in connection with the acquisition of Banknorth, costs to close 10 branches and write-downs on auto lease residuals (the Company ceased originating automobile leases in June 2000). Included in 2000 special charges were $41.0 million of merger-related expenses and $1.6 million of branch closing expenses related to the closing of 11 branches. The following table summarizes activity related to special charges from December 31, 2000 through June 30, 2001. TABLE 5 - SPECIAL CHARGES (Dollars in thousands)
Other Amount Cash Amounts Balance at Included Payments Applied to Balance at 12/31/2000 in Expense Reallocations (Receipts) Reserve 6/30/2001 ---------- ---------- ------------- ---------- ------- --------- MERGER CHARGES Severance costs $ 679 $2,329 $ 0 $2,380 $ 0 $ 628 Data processing/systems integration 100 -- 79 173 -- 6 Asset write-downs/facility costs 2,119 -- (700) 556 -- 863 Other costs 217 -- 621 838 -- -- ------ ------ ------ ------ ------ ------ $3,115 $2,329 $ 0 $3,947 $ 0 $1,497 ====== ====== ====== ====== ====== ====== BRANCH CLOSINGS Severance and salary costs $ 0 $ 47 $ 0 $ 0 $ 0 $ 47 Asset write-downs/lease terminations -- 1,585 -- -- -- 1,585 Branch decommissioning costs 170 755 -- 100 -- 825 ------ ------ ------ ------ ------ ------ $ 170 $2,387 $ 0 $ 100 $ 0 $2,457 ====== ====== ====== ====== ====== ====== OTHER SPECIAL CHARGES Write-down of auto lease residuals $ 0 $ 892 $ 0 $ 0 $ 892 $ 0 ====== ====== ====== ====== ====== ======
Other non-interest expenses decreased by $906 thousand or 4% during the three months ended June 30, 2001 as compared to the comparable period in the prior year. Through the six months ended June 30, 2001 and 2000, other noninterest expenses amounted to $48.1 million and $50.7 million, respectively, a $2.7 million or 5% decrease. The following table summarizes the principal components of other noninterest expenses for the periods indicated. 20 21 TABLE 6 - OTHER NONINTEREST EXPENSES (Dollars in thousands)
2001 2001 2000 2000 2000 2000 Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter ------- ------- ------- ------- ------- ------- Advertising and marketing $ 3,324 $ 2,387 $ 2,647 $ 2,772 $ 3,606 $ 2,985 Telephone 2,853 3,007 3,709 3,473 3,134 2,945 Office supplies 2,506 2,320 2,603 2,436 2,673 2,166 Postage and freight 2,448 2,478 2,252 2,267 2,376 2,470 Miscellaneous loan costs 1,699 1,737 1,530 1,545 1,717 2,203 Deposits and other assessments 837 835 1,045 1,110 1,002 961 Collection and carrying costs of non-performing assets 482 610 (814) 618 590 746 Other 10,715 9,825 11,492 10,304 10,672 10,479 -------- -------- -------- -------- -------- -------- Total $ 24,864 $ 23,199 $ 24,464 $ 24,525 $ 25,770 $ 24,955 ======== ======== ======== ======== ======== ========
Six Months Ended -------------------- 6/30/01 6/30/00 --------- -------- Advertising and marketing $5,711 $6,591 Telephone 5,860 6,079 Office supplies 4,826 4,839 Postage and freight 4,926 4,846 Miscellaneous loan costs 3,436 3,920 Deposits and other assessments 1,672 1,963 Collection and carrying costs of non-performing assets 1,092 1,336 Other 20,540 21,151 -------- ------- Total $48,063 $50,725 ======== =======
TAXES The effective tax rate, excluding special charges and losses on securities restructuring, was 35% and 33% for the quarters ended June 30, 2001 and 2000, respectively and 34% and 32% for the six months ended June 30, 2001, and 2000, respectively. The increase is due primarily to the inclusion of amortization on investments in low income housing tax credit limited partnerships. COMPREHENSIVE INCOME Comprehensive income amounted to $149.3 million and $69.6 million during the six months ended June 30, 2001 and 2000, respectively, which were different from 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 and, in 2001, unrealized losses on cash flow hedges. For additional information, see Note 2 to the Consolidated Financial Statements included herein. The Company's available for sale investment portfolio had unrealized losses, net of applicable income tax effects, of $510 thousand, $34.5 million and $124.6 million at June 30, 2001, December 31, 2000 and June 30, 2000, respectively. The improvement over this 18-month period related to lower prevailing interest rates, scheduled amortization and prepayments of principal, and sales of investments. Although each contributed to the improvement, lower prevailing interest rates was the primary factor. At June 30, 2001, the net unrealized loss of $784 thousand, before related tax effect, represented less than 1% of securities available for sale. The Company attempts to balance the interest rate risk of its assets with its liabilities (see "Interest Rate Risk and Asset Liability Management"). However, the change in value of its liabilities, which tend to fall in rising interest rate environments and rise in falling interest rate environments, is not included in "other comprehensive income." 21 22 FINANCIAL CONDITION LOANS AND LEASES Total loans and leases (including loans held for sale) averaged $10.9 billion during the second quarter of 2001, an increase of $518 million or 5% from the second quarter of 2000. All loan categories increased except for residential real estate loans. It is currently the Company's policy to sell most of the residential real estate loans it originates into the secondary market. Average loans as a percent of average earning assets were 65% during the quarter ended June 30, 2001 compared to 61% during the quarter ended June 30, 2000. This change in balance sheet mix relates both to loan growth and reductions in the investment portfolio. Average residential real estate loans (which include mortgage loans held for sale) of $2.2 billion during the second quarter of 2001 declined $129.9 million from the second quarter of last year due to portfolio runoff. Mortgage loans held for sale amounted to $75.2 million and $16.5 million at June 30, 2001 and 2000, respectively, and $51.1 million at December 31, 2000. The increase in loans held for sale compared to last year was due primarily to higher origination volumes resulting from declining interest rates. Average commercial real estate loans of $3.0 billion increased $218 million, or 8%, from the second quarter of last year. The majority of the increase was in the Massachusetts market. The average yield on commercial real estate loans during the second quarter of 2001 was 8.58%, as compared to 8.93% in the second quarter of 2000. Commercial business loans and leases averaged $2.3 billion during the second quarter of 2001, an increase of $190 million, or 9%, over the second quarter of 2000. The largest increases were in Maine and Massachusetts. The yield on commercial business loans and leases decreased to 8.03% in the second quarter of 2001 from 9.06% in the second quarter of 2000. Average consumer loans and leases of $3.3 billion during the second quarter of 2001 increased $240 million, or 8%, from the second quarter of 2000. The increase was primarily in indirect automobile and home equity loans and lines of credit. The largest increases were in Maine and Massachusetts. The average yield on consumer loans and leases decreased to 8.42% in the second quarter of 2001 from 8.64% in the second quarter of 2000. SECURITIES AND OTHER EARNING ASSETS The Company's securities portfolio averaged $5.9 billion during the second quarter of 2001, as compared to $6.5 billion in the second quarter of 2000. The securities portfolio consisted primarily of mortgage-backed securities, most of which are seasoned 15-year federal agency securities and U.S. Treasury securities. Other securities in the portfolio are 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 average securities portfolio during 2001 was partially due to the sale of $104 million of securities to restructure the securities portfolio in the second quarter of 2000 and continued run-off of the mortgage-backed securities. The average yield on securities was 6.42% for the quarter ended June 30, 2001 and 6.79% for the quarter ended June 30, 2000. 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 had an after-tax unrealized loss of $510 thousand at June 30, 2001 and $34.5 million at December 31, 2000. ASSET QUALITY As shown in Table 7, nonperforming assets were $73.3 million at June 30, 2001, or 0.40% of total assets, compared to $60.6 million or 0.33% of total assets at June 30, 2000. All types of loans, except commercial real estate loans, experienced increases at June 30, 2001. Total nonperforming loans (excluding residential real estate loans held for sale) as a percentage of total loans was 0.62%, 0.57% and 0.48% at June 30, 2001, December 31, 2000 and at June 30, 2000, respectively. The increase in the quarter ended June 30, 2001 was primarily in commercial loans and leases, which is reflective of the slower economy affecting various industries. The Company continues to monitor asset quality with regular reviews of its portfolio in accordance with its lending and credit policies. 22 23 The Company's residential loan portfolio accounted for 19% of the total loan portfolio at June 30, 2001, as compared with 21% at December 31, 2000. The decrease was due to increased refinancing activity and prepayments in a lower interest rate environment. The Company's residential loans are generally secured by single-family homes (one to four units) and have a maximum loan to value ratio of 80%, unless they are protected by mortgage insurance. At June 30, 2001, 0.46% of the Company's residential loans were nonperforming, as compared with 0.44% at December 31, 2000 and 0.41% at June 30, 2000. The Company's commercial real estate loan portfolio accounted for 28% of the total loan portfolio at June 30, 2001, as compared with 27% at December 31, 2000. Commercial real estate loans consist primarily of loans secured by income-producing commercial real estate (including office and industrial buildings), service industry real estate (including hotels and health care facilities), multi-family (over four units) residential properties and retail trade real estate (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 June 30, 2001, 0.41% of the Company's commercial real estate loans were nonperforming, as compared with 0.41% at December 31, 2000 and 0.63% at June 30, 2000. The Company's commercial business loan and lease portfolio accounted for 22% of the total loan portfolio at June 30, 2001, as compared to 21% at December 31, 2000. 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 June 30, 2001, the Company had $176 million of participations in syndicated commercial loans and commitments to purchase an additional $155 million of such participations. At June 30, 2001, 1.64% of the Company's commercial business loans and leases were non-performing, as compared with 1.41% at December 31, 2000 and 0.76% at June 30, 2000. The Company's consumer loan and lease portfolio accounted for 31% of the total loan portfolio at June 30, 2001 and December 31, 2000. The Company has a diversified consumer loan and lease portfolio consisting of home equity, automobile, mobile home, boat and recreational vehicles and education loans, as well as loans to finance certain medical /dental procedures (vision, dental and orthodontia fee plan loans). Mobile home loans decreased to $158.9 million at June 30, 2001 from $161.3 million at December 31, 2000, reflecting the Company's strategy to emphasize other types of lending. In June 2000, the Company ceased originating automobile leases and, as a result, the auto lease portfolio continues to decline. Automobile lease receivables totaled $56.3 million, $81.6 million and $114.4 million at June 30, 2001, December 31, 2000 and June 30, 2000, respectively. At June 30, 2001, 0.17% of the Company's consumer loans and leases were nonperforming, as compared with 0.19% at December 31, 2000 and 0.16% at June 30, 2000. At June 30, 2001, the Company had $5.8 million of accruing loans which were 90 days or more delinquent, as compared to $6.0 million of such loans at December 31, 2000 and $7.2 million at June 30, 2000. The increase from December 31, 2000 was primarily attributable to one commercial customer lease and an increase in residential real estate loans over 90 days delinquent, which the Company believes are well secured and in the process of collection. 23 24 TABLE 7 - NONPERFORMING ASSETS (Dollars in thousands)
6/30/01 3/31/01 12/31/00 9/30/00 6/30/00 3/31/00 --------------------------------------------------------------- Nonaccrual loans: Residential real estate loans $ 9,590 $10,575 $ 9,894 $ 8,258 $ 9,405 $14,204 Commercial real estate loans 12,550 13,205 12,155 17,212 18,270 15,621 Commercial business loans and leases 39,208 32,233 32,583 17,396 16,570 19,818 Consumer loans and leases 5,795 5,611 6,329 5,650 5,110 4,861 ----------------------------------------------------------------- Total nonaccrual loans 67,143 61,624 60,961 48,516 49,355 54,504 ----------------------------------------------------------------- Total troubled debt restructurings -- -- 673 704 731 1,027 Total nonperforming loans 67,143 61,624 61,634 49,220 50,086 55,531 ----------------------------------------------------------------- Other nonperforming assets: Other real estate owned, net of related reserves 4,508 4,310 4,074 6,432 8,419 9,027 Repossessions, net of related reserves 1,618 1,935 1,424 1,246 2,125 2,792 ----------------------------------------------------------------- Total other nonperforming assets 6,126 6,245 5,498 7,678 10,544 11,819 ----------------------------------------------------------------- Total nonperforming assets $73,269 $67,869 $67,132 $56,898 $60,630 $67,350 ================================================================= Accruing loans which are 90 days overdue $ 5,799 $ 7,664 $ 5,973 $ 8,195 $ 7,211 $ 7,914 ================================================================= Total nonperforming loans as a percentage of total loans (1) 0.62% 0.57% 0.57% 0.46% 0.48% 0.54% Total nonperforming assets as a percentage of total assets 0.40% 0.37% 0.37% 0.31% 0.33% 0.37% Total nonperforming assets as a percentage of total loans (1) and total other nonperforming assets 0.67% 0.63% 0.62% 0.53% 0.58% 0.66%
------------------------------------------------------ (1) Total loans excludes residential real estate loans held for sale. PROVISION/ALLOWANCE FOR LOAN LOSSES The Company provided $9.3 million and $5.8 million for loan and lease losses in the quarters ended June 30, 2001 and 2000, respectively, and $16.5 million and $10.9 million for the six months ended June 30, 2001 and 2000, respectively. As shown in Table 8, net charge-offs for the second quarter of 2001 were $7.6 million, or 0.28% of average loans outstanding, compared to $4.5 million, or 0.17% of average loans outstanding, for the second quarter of 2000. The increases in the provision for loan and lease losses for the three and six months ended June 30, 2001 reflect higher levels of net charge-offs, nonperforming loans and classified loans. At June 30, 2001, the allowance for loan and lease losses amounted to $155.3 million or 1.43% of total portfolio loans and leases, as compared to $156.5 million or 1.49% at June 30, 2000. The ratio of the allowance for loan and lease losses to nonperforming loans was 231% at June 30, 2001 and 312% at June 30, 2000. 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 probable 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 factors, consideration of the character and size of the loan and lease portfolio, such as internal risk ratings and credit concentrations, trends in nonperforming loans, delinquency trends and charge-off experience, portfolio migration data, the volume of new loan originations and other asset quality factors. Although management utilizes its judgment in providing for probable 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. 24 25 TABLE 8 - ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in thousands)
2001 SECOND 2001 FIRST 2000 FOURTH QUARTER QUARTER QUARTER ---------------------------------------------------- Allowance at beginning of period $ 153,621 $ 153,550 $ 156,867 Charge-offs: Real estate mortgages 724 790 963 Commercial business loans and leases 4,864 3,774 4,639 Consumer loans and leases 4,706 4,463 6,312 ----------------------------------------------- Total loans charged off 10,294 9,027 11,914 ----------------------------------------------- Recoveries: Real estate mortgages 349 138 324 Commercial business loans and leases 1,524 890 576 Consumer loans and leases 792 932 1,046 ----------------------------------------------- Total loans recovered 2,665 1,960 1,946 ----------------------------------------------- Net charge-offs 7,629 7,067 9,968 Additions charged to operating expenses 9,311 7,138 6,651 ----------------------------------------------- Allowance at end of period $ 155,303 $ 153,621 $ 153,550 =============================================== Average loans and leases outstanding during the period (1) $10,816,524 $10,880,534 $10,771,843 =============================================== Ratio of net charge-offs to average loans and leases outstanding during the period, annualized (1) 0.28% 0.26% 0.37% Ratio of allowance to total loans and leases at end of period (1) 1.43% 1.43% 1.42% Ratio of allowance to nonperforming loans at end of period 231% 249% 249% Ratio of net charge-offs as a percent of average outstanding loans, annualized (1): Real estate mortgages 0.029% 0.051% 0.049% Commercial business loans and leases 0.577% 0.508% 0.714% Consumer loans and leases 0.470% 0.424% 0.634%
2000 THIRD 2000 SECOND 2000 FIRST QUARTER QUARTER QUARTER -------------------------------------------- Allowance at beginning of period $ 156,464 $ 155,078 $ 155,048 Charge-offs: Real estate mortgages 1,989 894 1,425 Commercial business loans and leases 807 1,519 759 Consumer loans and leases 5,046 4,382 5,956 ----------------------------------------------- Total loans charged off 7,842 6,795 8,140 ----------------------------------------------- Recoveries: Real estate mortgages 707 409 983 Commercial business loans and leases 440 619 667 Consumer loans and leases 848 1,304 1,452 ----------------------------------------------- Total loans recovered 1,995 2,332 3,102 ----------------------------------------------- Net charge-offs 5,847 4,463 5,038 Additions charged to operating expenses 6,250 5,849 5,068 ----------------------------------------------- Allowance at end of period $ 156,867 $ 156,464 $ 155,078 =============================================== Average loans and leases outstanding during the period (1) $10,648,267 $10,371,568 $10,010,690 =============================================== Ratio of net charge-offs to average loans and leases outstanding during the period, annualized (1) 0.22% 0.17% 0.20% Ratio of allowance to total loans and leases at end of period (1) 1.46% 1.49% 1.52% Ratio of allowance to nonperforming loans at end of period 319% 312% 279% Ratio of net charge-offs as a percent of average outstanding loans, annualized (1): Real estate mortgages 0.097% 0.038% 0.035% Commercial business loans and leases 0.066% 0.170% 0.019% Consumer loans and leases 0.523% 0.399% 0.596%
--------------------------------------------------- (1) Excludes residential real estate loans held for sale. 25 26 DEPOSITS Total deposits averaged $12.2 billion during the second quarter of 2001, an increase of $362 million from the second quarter of 2000. The increases in deposits were partially due to new commercial loan relationships. The ratio of loans to deposits was 88% and 90% at June 30, 2001 and December 31, 2000, respectively. Average non-interest bearing deposits of $2.1 billion during the second quarter of 2001 increased $225.5 million or 12% from the second quarter of 2000. The increase in non-interest bearing deposits reflect strong growth in commercial, government and personal accounts. Average interest-bearing deposits, excluding brokered deposits, of $9.9 billion during the second quarter of 2001 increased $93.0 million from the second quarter of 2000 primarily due to increases in NOW and money market accounts. The average rates paid on NOW and money market accounts decreased 52 basis points from 3.34% in the second quarter of 2000 to 2.82% in the second quarter of 2001 due largely to lower prevailing interest rates. The average rates paid on all deposit types decreased by 27 basis points from 4.08% in the second quarter of 2000 to 3.81% in the second quarter of 2001, reflecting a continuation of the decline in prevailing interest rates since the fourth quarter of 2000. OTHER FUNDING SOURCES The Company's primary sources of funding, other than deposits, are advances from Federal Home Loan Banks ("FHLB") and securities sold under repurchase agreements. The Company also borrows funds under the U.S. Treasury's Note Option Treasury, tax and loan program and by overnight borrowings from other banks as needed. Average borrowed funds for the second quarter of 2001 were $4.3 billion, a decrease of $757.1 million from the second quarter of 2000. Borrowing needs declined as a result of increased average deposit levels and a reduction in the securities portfolio. Average FHLB borrowings for the second quarter of 2001 were $3.0 billion, which decreased $993.3 million or 25% from the second quarter of 2000. Collateral for FHLB borrowings consists primarily of first mortgage loans secured by 1 - 4 family properties, certain unencumbered securities and other qualified assets. At June 30, 2001, the Company's FHLB borrowings amounted to $2.4 billion and its additional borrowing capacity from the FHLB was $1.8 billion. Average balances for securities sold under repurchase agreements were $1.1 billion and $997.7 million for the quarters ended June 30, 2001 and 2000, respectively, an increase of $130.5 million. These borrowings, with a cost of 4.14% for the quarter ended June 30, 2001, are secured by mortgage-backed securities and U.S. Government obligations. On June 22, 2001, one of the Company's wholly-owned subsidiaries, First Massachusetts Bank, NA, issued $200 million of 7.625% subordinated notes due in 2011. The proceeds were used to reduce other short-term indebtedness. The notes qualify as Tier 2 capital of this banking subsidiary. RISK MANAGEMENT The primary goal of the Company's risk management program is to determine how certain existing or emerging issues facing the Company or the financial services industry affect the nature and extent of the risks faced by the Company. Based on a periodic self-evaluation, the Company determines key issues and develops plans and/or objectives to address risk. The Board of Directors (the "Board") and management believe that there are seven applicable "risk categories," consisting of credit risk, interest rate risk, liquidity risk, transaction risk, compliance risk, strategic risk and reputation risk. Each risk category is viewed from a quantity of risk perspective (high, medium or low) coupled with a quality of risk perspective. In addition, an aggregate level of risk is assigned to the Company as a whole as well as the direction of risk (stable, increasing or decreasing). Each risk category and the overall risk level is compared to regulatory views on a regular basis and then reported to the Board with an accompanying explanation as to the existence of any differences. The risk program includes risk identification, measurement, control and 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 that are relative to their committees. The Board Risk Management Committee has the ultimate oversight of the seven applicable risks for the Company. 26 27 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 relating to liquidity and capital management programs, except for product pricing. Product pricing is reviewed and approved by the Pricing Committee, which is comprised of a subset of ALCO members. Market Risk Market risk is the sensitivity of income to changes in interest rates, foreign exchange rates, commodity prices and other market-driven rates or prices. The Company has no trading operations and thus is only exposed to non-trading market risk. Interest-rate risk, including mortgage prepayment risk, is by far the most significant non-credit risk to which the Company is exposed. Interest-rate risk is the sensitivity of income to changes in interest rates. Changes in interest rates, as well as fluctuations in the level and duration of assets 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 and deposit gathering. 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 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 and mortgage-backed securities). 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 loans, 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. From time to time the Company may use certain hedging strategies which include the use of derivative financial instruments. The primary objective of the Company's hedging strategies is to reduce net interest rate exposure arising from the Company's asset and liability structure. As of January 1, 2001, the Company recognizes all derivatives on the balance sheet at fair value. The Company may use a variety of derivatives as part of its interest rate risk management strategy. The Company's primary use of derivatives is to hedge the sale of mortgage loans held for sale. 27 28 The Company typically uses Treasury options and mortgage-backed securities options to modify its forward mortgage commitments. 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%. As shown in the following table, the Company was in compliance with this limit at March 31, 2001 and December 31, 2000.
200 Basis Point 100 Basis Point 100 Basis Point 200 Basis Point Rate Decrease Rate Decrease Rate Increase Rate Increase -------------- -------------- ------------- -------------- June 30, 2001 (2.87%) (0.90%) 0.03% (0.83%) ----- ----- ---- ----- December 31, 2000 0.70% 0.51% (1.46%) (3.18%) ----- ----- ---- -----
The results implied in the above table indicate estimated changes in simulated net interest income for the subsequent 12 months assuming a gradual shift up or down in market rates of 100 and 200 basis points across the entire yield curve. Assuming a downward shift in rates, savings, money market and NOW accounts have implied interest rate floors and it is assumed that the related interest expense on these accounts will not decrease in proportion to the downward shift in rates. Assuming an upward shift in rates of 200 basis points, the simulated increase in interest income would be less than the simulated increase in interest expense as the Company's fixed-rate earning assets exceed its fixed-cost paying liabilities. It should be emphasized, however, that the results are dependent on material assumptions such as those discussed above. Substantially all of the Company's remaining mortgage servicing rights were sold in January 2001. Future mortgage servicing rights originated will be sold on a flow basis shortly after the mortgages are sold. As a result, future earnings exposure to the value of mortgage servicing rights is not expected to be material. The most significant factors affecting market risk exposure of net interest income during the six months ended June 30, 2001 has been (i) the direction of interest rates, (ii) changes in the shape of the U.S. Government securities and interest rate swap yield curves, (iii) changes in the composition of mortgage assets (iv) changes in the borrowings portfolio structure, and (v) reduction of deposit interest expense. 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. 28 29 LIQUIDITY Parent Company On a parent-only basis at June 30, 2001, the Company's 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%. There was no outstanding balance on the line at June 30, 2001. Banking Subsidiaries For banking subsidiaries of the Company, liquidity represents the ability to fund asset growth or accommodate deposit withdrawals. Liquidity risk is the danger that the banks cannot meet anticipated or unexpected funding requirements or can meet them only at excessive cost. Liquidity is measured by the ability to raise cash when needed at a reasonable cost. Many factors affect a bank's ability to meet liquidity needs, including variations in the markets served, its asset-liability mix, its reputation and credit standing in the market and general economic conditions. In addition to traditional retail deposits, the banks have various other liquidity sources, including proceeds from maturing securities and loans, the sale of securities, asset securitizations and borrowed funds such as FHLB advances, reverse repurchase agreements and brokered deposits The Company continually monitors and forecasts its liquidity position. There are several interdependent methods used by the Company for this purpose, including daily review of fed funds positions, monthly review of balance sheet changes, monthly review of liquidity ratios, periodic liquidity forecasts and periodic review of contingent funding plans. As of June 30, 2001, the banks had in the aggregate $2.5 billion of "immediately accessible liquidity," defined as cash that could be raised within 1-3 days through collateralized borrowings or security sales. This represents 21% of deposits. The Company's current policy minimum is 10% of deposits. Also as of June 30, 2001, the banks had in the aggregate "potentially volatile funds" of $1.4 billion. These are funds that might flow out of the banks over a 90-day period in an adverse environment. Management estimates this figure by applying adverse probabilities to its various credit-sensitive and economically-sensitive funding sources. As of June 30, 2001, the ratio of "immediately accessible liquidity" to "potentially volatile funds" was 180%, versus a policy minimum of 100%. In addition to the liquidity sources discussed above, management believes that its consumer loan portfolio provides a significant amount of contingent liquidity that could be accessed in a reasonable time period through sale or securitization. The banks also have significant untapped access to the national brokered deposit market. Both of these sources are contemplated as secondary liquidity in the Company's contingent funding plan. Management believes that the level of liquidity is sufficient to meet current and future funding requirements. CAPITAL At June 30, 2001, shareholders' equity amounted to $1.4 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. In June, 2001, one of the Company's wholly-owned subsidiaries, First Massachusetts Bank, NA, issued $200 million of 7.625% subordinated notes due in 2011 which qualify as Tier 2 capital of this banking subsidiary. The Company paid a $0.13 per share dividend on its Common Stock during the first and second quarters of 2001. In January 2001, the Company authorized an 8,000,000 share repurchase program to be purchased from time to time in 29 30 open market transactions as market conditions warrant. The Company purchased approximately 5 million shares through June 30, 2001 at an average price of $19.85 per share or a total $94.9 million. 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 June 30, 2001: Total capital (to risk weighted assets) $1,638,699 13.15% 996,804 8.00% $ 641,895 5.15% Tier 1 capital (to risk weighted assets) 1,283,396 10.30% 498,402 4.00% 784,994 6.30% Tier 1 leverage capital ratio (to average assets) 1,283,396 7.15% 718,138 4.00% 565,258 3.15% As of December 31, 2000: Total capital (to risk weighted assets) 1,428,814 11.81% 967,752 8.00% 461,062 3.81% Tier 1 capital (to risk weighted assets) 1,277,574 10.56% 483,876 4.00% 793,698 6.56% Tier 1 leverage capital (to average assets) 1,277,574 7.02% 727,852 4.00% 549,722 3.02%
Net risk weighted assets were $12.5 billion and $12.1 billion at June 30, 2001 and December 31, 2000, respectively. The Company's banking subsidiaries are also subject to federal regulatory capital requirements. At June 30, 2001, 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. 30 31 IMPACT OF NEW ACCOUNTING STANDARDS In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires the use of purchase method of accounting for all business combinations initiated after June 30, 2001, thereby eliminating the use of the pooling-of-interests method. It also provides new criteria that determine whether an acquired intangible asset should be recognized separately from goodwill. SFAS No. 142 provides guidance on the accounting for goodwill, specifically goodwill will no longer be amortized, but will instead be tested for impairment periodically or upon the occurrence of certain triggering events. This statement is effective for fiscal years beginning after December 15, 2001. At June 30, 2001, the Company had $167.7 million of goodwill; goodwill amortization expense was $9.0 million for the six months ended June 30, 2001. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," a replacement of SFAS No. 125. SFAS No. 140 revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of the provisions of SFAS No. 125. SFAS No. 140 is effective for transactions occurring after March 31, 2001 and for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The Company does not expect the impact of adopting this standard to be material to its financial statements. 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 . (a) An annual meeting of shareholders of the Company was held on April 24, 2001 ("Annual Meeting"). (b) Not applicable. (c) There were 140,788,877 shares of Common Stock of the Company eligible to be voted at the Annual Meeting and 117,956,414 shares were represented at the meeting by the holders thereof, which constituted a quorum. The items voted upon at the Annual Meeting and the vote for each proposal were as follows: 1. Election of directors for a three-year term: Director Nominees Elected for Three Year Terms:
FOR AGAINST George W. Dougan 115,905,933 2,050,474 Dana S. Levenson 116,798,449 1,157,957 John M. Naughton 116,789,652 1,166,755 Angelo P. Pizzagalli 116,658,082 1,298,326 Election of directors for a two-year term: Director Nominee Elected for Two Year Term: Patrick W. Welch 116,690,874 1,265,532 Election of directors for a one-year term: Director Nominees Elected for One Year Term: Luther F. Hackett 116,647,452 1,308,956 Pamela P. Plumb 116,786,714 1,169,692
2. Proposal to amend the Banknorth Group, Inc. 1996 Equity Incentive Plan to authorize issuance of up to an additional 7,000,000 shares of Company Common Stock.
FOR AGAINST ABSTAIN 97,930,409 18,869,000 1,156,987
3. Proposal to ratify the appointment of KPMG LLP as the Company's independent auditors for the year ending December 31, 2001.
FOR AGAINST ABSTAIN 116,953,633 731,198 271,572
Item 5. Other Information - not applicable. 32 33 Item 6. Exhibits and Reports on Form 8-K. (a) The following exhibits are filed herewith: (i) Banknorth Group, Inc. Executive Incentive Plan; and (ii) Form of First Amendment to Severance Agreement between the Company and its executive officers. (b) The Company filed a Current Report on Form 8-K on June 11, 2001 and a Form 8-K/A on June 13, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BANKNORTH GROUP, INC. Date: August 14, 2001 By: /s/ William J. Ryan -------------------------- William J. Ryan Chairman, President and Chief Executive Officer Date: August 14, 2001 By: /s/ Peter J. Verrill --------------------------- Peter J. Verrill Executive Vice President, Chief Operating Officer and Chief Financial Officer Date: August 14, 2001 By: /s/ Stephen J. Boyle ---------------------------- Stephen J. Boyle Executive Vice President and Controller (principal accounting officer) 33