10-Q 1 b40848bge10-q.txt BANKNORTH GROUP, INC. FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended SEPTEMBER 30, 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 October 31, 2001 is: Common stock, par value $.01 per share 136,584,535 (Class) (Outstanding) INDEX BANKNORTH GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION PAGE ------- --------------------- ---- Item 1. Financial Statements Consolidated Balance Sheets September 30, 2001 and December 31, 2000 3 Consolidated Statements of Income - Three and nine months ended September 30, 2001 and 2000 4 Consolidated Statements of Changes in Shareholders' Equity - Nine months ended September 30, 2001 and 2000 5 Consolidated Statements of Cash Flows - Nine months ended September 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 33 PART II. OTHER INFORMATION Item 1. Legal proceedings 33 Item 2. Changes in securities and use of proceeds 33 Item 3. Defaults upon senior securities 33 Item 4. Submission of matters to a vote of security holders 33 Item 5 Other information 33 Item 6 Exhibits and reports on Form 8-K 33 Signatures 33
2 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
September 30, 2001 December 31, 2000 ------------------ ----------------- ASSETS (Unaudited) Cash and due from banks $ 492,035 $ 515,934 Federal funds sold and other short term investments 15,165 29,058 Securities available for sale, at market value 5,515,429 5,425,111 Securities held to maturity (fair value of $383,277 and $457,110 at September 30, 2001 and December 31, 2000, respectively) 373,120 455,547 Loans held for sale 58,203 51,131 Loans and leases: Residential real estate mortgages 1,998,663 2,248,714 Commercial real estate mortgages 3,164,501 2,955,163 Commercial business loans and leases 2,320,702 2,308,904 Consumer loans and leases 3,413,644 3,332,881 ------------ ------------ 10,897,510 10,845,662 Less: Allowance for loan and lease losses 158,534 153,550 ------------ ------------ Net loans and leases 10,738,976 10,692,112 ------------ ------------ Premises and equipment 200,336 201,192 Goodwill 163,732 176,576 Core deposit intangibles 6,306 8,944 Mortgage servicing rights 440 23,225 Bank-owned life insurance 316,392 306,411 Other assets 280,449 348,569 ------------ ------------ $ 18,160,583 $ 18,233,810 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Savings accounts $ 1,420,162 $ 1,386,286 Money market access and NOW accounts 4,240,945 3,975,318 Certificates of deposit 4,317,648 4,461,983 Brokered deposits 164,855 169,069 Noninterest-bearing deposits 2,181,233 2,114,600 ------------ ------------ Total deposits 12,324,843 12,107,256 Federal funds purchased and securities sold under repurchase agreements 1,324,164 1,138,629 Borrowings from the Federal Home Loan Bank 2,529,390 3,348,242 Other borrowings 39,666 73,744 Subordinated long-term debt 200,000 -- Other liabilities 188,178 136,307 ------------ ------------ Total liabilities 16,606,241 16,804,178 ------------ ------------ Company obligated, mandatory redeemable securities of subsidiary trusts 93,756 98,775 holding solely parent junior subordinated debentures Shareholders' Equity: Preferred stock (par value $0.01 per share, 5,000,000 shares authorized, -- -- none issued) Common stock (par value $0.01 per share, 400,000,000 shares authorized 149,583,793 shares issued in 2001 and 149,584,159 shares issued in 2000) 1,496 1,496 Paid-in capital 618,681 617,234 Retained earnings 1,017,313 897,214 Unearned compensation (1,102) (1,354) Accumulated other comprehensive income (loss) 70,630 (34,487) Treasury stock, at cost (13,036,785 shares in 2001 and 8,339,556 shares in 2000) (246,432) (149,246) ------------ ------------ Total shareholders' equity 1,460,586 1,330,857 ------------ ------------ $ 18,160,583 $ 18,233,810 ============ ============
See accompanying Notes to Consolidated Financial Statements. 3 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Interest and dividend income: Interest on loans and leases $215,992 $ 228,802 $ 666,321 $ 659,766 Interest and dividends on securities 90,133 107,757 282,983 333,240 -------- --------- --------- --------- Total interest and dividend income 306,125 336,559 949,304 993,006 Interest expense: Interest on deposits 86,524 107,119 286,751 302,978 Interest on borrowed funds 47,461 78,727 164,034 230,977 -------- --------- --------- --------- Total interest expense 133,985 185,846 450,785 533,955 Net interest income 172,140 150,713 498,519 459,051 Provision for loan and lease losses 12,061 6,250 28,510 17,167 -------- --------- --------- --------- Net interest income after provision for loan and lease losses 160,079 144,463 470,009 441,884 Noninterest income: Deposit services 17,167 16,940 53,114 49,277 Mortgage banking services 2,182 6,172 7,193 14,813 Insurance commissions 10,161 6,030 29,371 16,003 Trust services 8,481 8,612 25,971 26,039 Investment advisory services 1,869 1,679 5,327 5,115 Bank-owned life insurance income 4,769 4,216 13,967 13,481 Merchant and electronic banking income, net 9,195 7,881 23,657 22,165 Net securities gains (losses) 486 (23) 1,290 2 Losses on securities restructuring -- -- -- (15,895) Other noninterest income 6,241 4,559 17,016 16,122 -------- --------- --------- --------- 60,551 56,066 176,906 147,122 Noninterest expenses: Salaries and employee benefits 67,148 53,175 191,698 170,461 Data processing 9,768 9,024 27,647 27,060 Occupancy 11,422 9,287 34,304 30,320 Equipment 8,181 8,010 25,087 23,575 Distributions on securities of subsidiary trusts 2,338 2,346 7,031 7,040 Amortization of goodwill and other intangibles 5,384 5,268 16,200 15,669 Special charges -- 414 5,608 43,022 Other noninterest expenses 22,747 24,525 70,812 75,250 -------- --------- --------- --------- 126,988 112,049 378,387 392,397 Income before income tax expense 93,642 88,480 268,528 196,609 Applicable income tax expense 31,440 27,890 91,049 67,239 -------- --------- --------- --------- Net income before cumulative effect of change in accounting principle 62,202 60,590 177,479 129,370 Cumulative effect of change in accounting principle, net of tax -- -- (290) -- -------- --------- --------- --------- Net income $ 62,202 $ 60,590 $ 177,189 $ 129,370 ======== ========= ========= ========= Weighted average shares outstanding: Basic 137,014 144,680 138,502 144,468 Diluted 138,432 145,736 139,791 145,383 Earnings per share: Basic $ 0.45 $ 0.42 $ 1.28 $ 0.90 Diluted 0.45 0.42 1.27 0.89
See accompanying Notes to Consolidated Financial Statements. 4 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In thousands) (Unaudited)
Accumulated Unearned Other Par Paid-in Retained Compen- Comprehensive Treasury Value Capital Earnings sation Income (Loss) Stock Total ----- ------- -------- ------ ------------- ----- ----- Balances at December 31, 2000 $ 1,496 $ 617,234 $ 897,214 ($1,354) ($ 34,487) ($149,246) $ 1,330,857 Net income -- -- 177,189 -- -- -- 177,189 Unrealized gain on securities, net of reclassification adjustment -- -- -- -- 105,804 -- 105,804 Unrealized gain on cash flow hedges, net of reclassification adjustment -- -- -- -- (687) -- (687) ----------- Comprehensive income 282,306 ----------- Premium on repurchase of trust preferred securities -- (72) -- -- -- -- (72) Common stock issued for employee benefit plans -- 297 (3,109) -- -- 18,286 15,474 Treasury stock purchased -- -- -- -- -- (115,758) (115,758) Decrease in unearned compensation -- 1,235 -- 252 -- -- 1,487 Issuance and distribution of restricted stock -- (9) (128) -- -- 286 149 Payment of fractional shares -- (4) -- -- -- -- (4) Cash dividends -- -- (53,853) -- -- -- (53,853) --------- --------- ----------- ------- --------- --------- ----------- Balances at September 30, 2001 $ 1,496 $ 618,681 $ 1,017,313 ($1,102) $ 70,630 ($246,432) $ 1,460,586 ========= ========= =========== ======= ========= ========= =========== Balances at December 31, 1999 $ 1,496 $ 617,523 $ 787,238 ($2,751) ($125,394) ($ 85,838) $ 1,192,274 Net income -- -- 129,370 -- -- -- 129,370 Unrealized losses on securities, net of reclassification adjustment -- -- -- -- 42,494 -- 42,494 ----------- Comprehensive income 171,864 ----------- Common stock issued for employee benefit plans -- -- (5,708) -- -- 14,341 8,633 Common stock issued for acquisition 1 1,324 -- -- -- -- 1,325 Cancellation of treasury shares at acquisition (1) (2,206) -- -- -- 2,207 -- Treasury stock purchased -- -- -- -- -- (12,343) (12,343) Decrease in unearned compensation -- 775 -- 321 -- -- 1,096 Issuance and distribution of restricted stock -- (82) (165) -- -- 370 123 Amortization of restricted stock awards -- (390) -- 992 -- -- 602 Payment of fractional shares -- (18) -- -- -- -- (18) Cash dividends -- -- (52,617) -- -- -- (52,617) --------- --------- ----------- ------- --------- --------- ----------- Balances at September 30, 2000 $ 1,496 $ 616,926 $ 858,118 ($1,438) ($ 82,900) ($ 81,263) $ 1,310,939 ========= ========= =========== ======= ========= ========= ===========
5 BANKNORTH GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended September 30, ------------------------------- 2001 2000 ---- ---- Cash flows from operating activities: Net income $ 177,189 $ 129,370 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 28,510 17,167 Depreciation 22,031 20,466 Amortization of goodwill and other intangibles 16,200 15,669 Provision for deferred tax expense (20,196) (16,726) ESOP and restricted stock expense 1,487 1,698 Issuance of restricted stock units 149 123 Net (gains) losses realized from sales of securities and consumer loans (2,058) 11,135 Net (gains) losses realized from sales of loans held for sale (a component of mortgage banking services) (6,378) (150) Earnings from bank owned life insurance (13,669) (13,481) Net decrease in mortgage servicing rights 22,785 11,695 Proceeds from sales of loans held for sale 677,150 184,408 Residential loans originated for sale (677,844) (140,824) Net decrease (increase) in interest and dividends receivable and other assets 31,689 (39,848) Net increase (decrease) in other liabilities 51,871 8,181 ----------- ------------ Net cash provided by operating activities 308,916 188,883 ----------- ------------ Cash flows from investing activities: Proceeds from sales of securities available for sale 500,344 106,220 Proceeds from maturities and principal repayments of securities available for sale 1,295,718 729,429 Purchases of securities available for sale (1,724,070) (227,834) Proceeds from maturities and principal repayments of securities held to maturity 82,427 79,079 Net (increase) in loans and leases (113,909) (931,215) Proceeds from sale of loans 39,303 34,234 Net additions to premises and equipment (21,175) (21,716) Proceeds from policy coverage on bank owned life insurance 3,690 1,571 ----------- ------------ Net cash provided (used) by investing activities 62,328 (230,232) ----------- ------------ Cash flows from financing activities: Net increase in deposits 217,587 358,903 Net increase (decrease) in securities sold under repurchase agreements 337,538 (435,868) Proceeds from Federal Home Loan Bank borrowings 5,816,074 11,054,300 Payments on Federal Home Loan Bank borrowings (6,634,926) (11,246,094) Issuance of subordinated long-term debt 200,000 -- Net increase (decrease) in other borrowings (34,078) 100,052 Repurchase of securities of subsidiaries trusts (5,091) -- Issuance of stock 15,474 8,615 Purchase of treasury stock (115,758) (12,343) Dividends paid (53,853) (52,617) ----------- ------------ Net cash provided (used) by financing activities (257,033) (225,052) ----------- ------------ Increase (decrease) in cash and cash equivalents 114,211 (266,401) Cash and cash equivalents at beginning of period 392,989 776,395 ----------- ------------ Cash and cash equivalents at end of period $ 507,200 $ 509,994 =========== ============ For the nine months ended September 30, 2001 and 2000, interest of $454,379 and $535,742 and income taxes of $42,057 and $62,026 were paid, respectively.
See accompanying Notes to Consolidated Financial Statements. 6 BANKNORTH GROUP, INC. AND SUBSIDIARIES SEPTEMBER 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 accounting principles generally accepted in the United States of America 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 nine months ended September 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 - TOTAL COMPREHENSIVE INCOME The components of total comprehensive income for the Company are net income, unrealized gains (losses) on securities available for sale and gains (losses) on hedges, net of tax. The following is a reconciliation of comprehensive income for the nine months ended September 30, 2001 and 2000.
Nine Months Ended September 30, ------------- 2001 2000 ---- ---- Net income $ 177,189 $ 129,370 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on available for sale securities: Unrealized holding gains (losses) arising during the period 106,643 32,164 Less: reclassification adjustment for gains (losses) included in net income 839 (10,330) --------- --------- 105,804 42,494 --------- --------- Unrealized gains (losses) on cash flow hedges, net of tax Unrealized holding losses arising during the period (1,457) -- Less: reclassification adjustment for losses included in net income (770) -- --------- --------- (687) -- --------- --------- Other comprehensive income, net 105,117 42,494 --------- --------- Comprehensive income $ 282,306 $ 171,864 ========= =========
NOTE 3 - EARNINGS PER SHARE The computations of basic and diluted net income per share and weighted average shares outstanding follow:
Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 2001 2000 2001 2000 ---- ---- ---- ---- Net income $ 62,202 $ 60,590 $177,189 $129,370 ======== ======== ======== ======== Weighted average shares outstanding Basic 137,014 144,680 138,502 144,468 Effect of dilutive stock options 1,418 1,056 1,289 915 -------- -------- -------- -------- Diluted 138,432 145,736 139,791 145,383 ======== ======== ======== ======== Net income per share: Basic $ 0.45 $ 0.42 $ 1.28 $ 0.90 Diluted 0.45 0.42 1.27 0.89
7 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 the 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. The Company discontinues hedge accounting when it is determined that the derivative is no longer effective in offsetting changes in the 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 - COMPLETED ACQUISITIONS On October 31, 2001, the Company completed its acquisition of 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 $170 million at September 30, 2001. Each outstanding share of common stock of Andover was converted into the right to receive 2.27 shares of the Company's common stock, plus cash in lieu of any fractional share interests. A maximum of 16.7 million shares of Company common stock are issuable in connection with the acquisition of Andover. MetroWest had total assets of $957 million and total shareholders' equity of $65 million at September 30, 2001. MetroWest shares were purchased for $11.50 per share and vested stock options were settled at $11.50 per share less the option exercise price for a total cost of $164.8 million. The acquisitions were accounted for as purchases in accordance with Financial Accounting Standards Board No. 141, "Business Combinations." The Company will record approximately $258 million of goodwill and $52 million of core deposit premiums (both subject to final purchase accounting adjustments) in connection with these acquisitions. 8 BANKNORTH GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY Banknorth Group, Inc. (the "Company") reported consolidated net income of $62.2 million, or $0.45 per diluted share, for the third quarter of 2001 as compared with $60.6 million, or $0.42 per diluted share, for the third quarter of 2000. Operating cash diluted earnings per share, which excludes special items and amortization of goodwill and other intangible assets, was $0.48 and $0.45 for the quarters ended September 30, 2001 and 2000, respectively. The Company's operating return on average equity ("ROE") and operating return on average assets ("ROA") were 17.63% and 1.37%, respectively, for the third quarter ended September 30, 2001. Operating ROE and operating ROA were 19.49% and 1.32%, respectively, for the quarter ended September 30, 2000. Operating results for the third quarter of 2001 improved over the third quarter of 2000 due to a 14% increase in net interest income, which was partially offset by expense growth of 13% and increased provisions for loan and lease losses. Net interest income increased $21.4 million and the net interest margin increased by 57 basis points. This was due largely to a decline in the rates paid on and declines in the average balance of interest-bearing liabilities, as well as a change in the mix of earning assets, as average balances of loans grew by 2.5% while average balance of investment securities declined by 7.7%. The $5.8 million increase in the provision for loan and lease losses over the third quarter of 2000 is reflective of higher net charge-offs and a slowing economy. Noninterest income increased by $4.5 million, primarily due to a $4.1 million increase in insurance commissions, a $1.7 million increase in other noninterest income and a $1.3 million increase in merchant and electronic banking income, which were partially offset by a decrease in mortgage banking income of $4.0 million. The increase in noninterest expenses for the third quarter of 2001 was primarily due to an increase in salaries and benefits expense of $14.0 million, or 26% and an increase in occupancy expense of $2.1 million, or 23%, which were partially offset by a decrease of $1.8 million in other noninterest expense. The efficiency ratio was 53.68% in the third quarter of 2001 compared to 52.85% in the comparable period last year. For a description of the methodology used by the Company to calculate the efficiency ratio, see Note 5 to Table 1. 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 $177.2 million, or $1.27 per diluted share, for the nine months ended September 30, 2001, as compared with $129.4 million, or $0.89 per diluted share, for the nine months ended September 30, 2000. Operating income for the nine months ended September 30, 2001 was $181.1 million, or $1.30 per diluted share, and operating ROE and operating ROA for this period were 17.74% and 1.34%, respectively. The Company's operating income for the nine months ended September 30, 2000 was $172.4 million, or $1.19 per diluted share, and operating ROE and operating ROA were 19.22% and 1.25%, respectively. The nine months ended September 30, 2001 and 2000 included $5.6 million ($3.7 million net of tax) and $58.9 million ($43.0 million net of tax) of non-operating items (consisting of special charges and losses on restructuring the investment portfolio), respectively. (See Table 5 for special charge activity for the nine months ended September 30, 2001.) Operating results for the nine months ended September 30, 2001 represent a 9% increase in diluted earnings per share from the comparable period last year. Net interest income for the nine months ended September 30, 2001 increased 9% from the same period last year primarily due to a 37 basis point increase in net interest margin which also included accelerated accretion of discounts on certain U.S. Government agency callable securities that were called prior to maturity. The provision for loan and lease losses for the nine months ended September 30, 2001 increased 66% over the same period last year due to the slowing economy, higher net charge-off and loan growth. Noninterest income, excluding losses on securities restructuring, for the nine months ended September 30, 2001 increased 9% compared to the same period last year. Noninterest expense, excluding special charges, increased 7% for the nine months ended September 30, 2001 compared to the same period last year, primarily due to increases in salaries and benefits and occupancy expenses. 9 TABLE 1 - Selected Quarterly Data (Dollars in thousands, except per share data)
2001 2001 2001 2000 2000 2000 2000 Third Second First Fourth Third Second First ----- ------ ----- ------ ----- ------ ----- Net interest income $ 172,140 $ 168,065 $ 158,314 $ 153,960 $ 150,713 $ 153,165 $ 155,173 Provision for loan and lease losses 12,061 9,311 7,138 6,651 6,250 5,849 5,068 --------- --------- --------- --------- --------- --------- --------- Net interest income after loan and lease loss provision 160,079 158,754 151,176 147,309 144,463 147,316 150,105 Noninterest income (1) 60,065 57,552 57,997 63,630 56,090 56,744 50,181 Net securities gains (losses) 486 45 759 437 (23) (15,857) (13) Noninterest expenses (excluding special charges) (2) 126,988 124,192 121,598 119,473 111,635 117,730 120,010 Special charges (2) -- -- 5,608 (15) 414 37,271 5,337 --------- --------- --------- --------- --------- --------- --------- Income before income taxes 93,642 92,159 82,726 91,918 88,481 33,202 74,926 Income tax expense 31,440 32,266 27,343 29,554 27,890 14,323 25,026 --------- --------- --------- --------- --------- --------- --------- Net income before cumulative effect of change in accounting principle 62,202 59,893 55,383 62,364 60,591 18,879 49,900 Cumulative effect of change in accounting principle, net of tax -- -- (290) -- -- -- -- --------- --------- --------- --------- --------- --------- --------- Net income $ 62,202 $ 59,893 $ 55,093 $ 62,364 $ 60,591 $ 18,879 $ 49,900 ========= ========= ========= ========= ========= ========= ========= Earnings per share: Basic $ 0.45 $ 0.44 $ 0.39 $ 0.43 $ 0.42 $ 0.13 $ 0.35 Diluted 0.45 0.43 0.39 0.43 0.42 0.13 0.34 Operating earnings per share (excluding special items) (2): Basic $ 0.45 $ 0.44 $ 0.42 $ 0.43 $ 0.42 $ 0.40 $ 0.37 Diluted 0.45 0.43 0.42 0.43 0.42 0.40 0.37 Return on average assets (3) 1.37% 1.32% 1.24% 1.36% 1.31% 0.41% 1.10% Return on average equity (3) 17.63% 17.85% 16.59% 19.16% 19.31% 6.48% 16.75% Operating ratios: Return on average assets (excluding special items) (3) (4) 1.37% 1.32% 1.32% 1.35% 1.32% 1.27% 1.17% Return on average equity (excluding special items) (3) (4) 17.82% 17.85% 17.78% 19.15% 19.49% 19.82% 17.96% Net interest margin 4.14% 4.03% 3.84% 3.70% 3.57% 3.67% 3.70% Noninterest income as a percent of total income (1) 25.87% 25.51% 26.81% 29.24% 27.12% 27.03% 24.44% Efficiency ratio (5) 53.68% 54.01% 55.13% 53.83% 52.85% 54.97% 57.30% Special items, net of related income tax effect (4) $ 0 $ 0 $ 3,941 ($ 38) $ 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 RESULTS OF OPERATIONS NET INTEREST INCOME The Company's fully-taxable equivalent net interest income for the third quarter of 2001 increased $21.7 million compared to the third quarter of 2000 while the net interest margin increased from 3.57% to 4.14% in the comparable periods. These increases were primarily due to decreases in the rate paid on interest-bearing liabilities and the volume of borrowed funds and, to a lesser extent, an increase in the average amount of loans outstanding. Also benefiting net interest margin was a $166 million increase in average noninterest-bearing deposits. The rate decreases were reflective of the Federal Reserve rate cuts during 2001. Average loans as a percent of average earning assets was 65% and 63% for the quarters ended September 30, 2001 and 2000, respectively. Growth in average commercial business loans (7%), average consumer loans (5%) and average commercial real estate mortgages (6%) were offset by a decrease in residential real estate loans (10%). Average securities decreased for the three months ended September 30, 2001, as compared to the comparable period in the prior year, due primarily to the runoff of mortgage-backed securities in conjunction with a balance sheet deleveraging program achieved through a reduction in borrowings utilized to acquire, and which are secured by, such securities. As part of its asset-liability management review, the Company continuously monitors the investment portfolio and is maintaining the investment security portfolio at current levels by purchasing securities to replace portfolio run-off. The Company's fully-taxable equivalent net interest income for the nine months ended September 30, 2001 increased $40.0 million compared to the nine months ended September 30, 2000 primarily for the same reasons as the increase during the three months ended September 30, 2001, as discussed above. The net interest margin increased from 3.64% for the nine months ended September 30, 2000 to 4.01% for the nine months ended September 30, 2001 primarily due to a 56 basis point decrease in rates paid on interest-bearing liabilities. Average net earning assets increased $505.7 million for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000 primarily due to an increase in non-interest-bearing deposits and a decrease in the volume of borrowed funds. 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 nine months periods ended September 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 TABLE 2 - Average Balances, Yields and Rates (Dollars in thousands)
2001 Third Quarter 2001 Second Quarter ----------------------------------- ----------------------------------- Average Yield/ Average Yield/ Balance Interest Rate (1) Balance Interest Rate (1) ------- -------- -------- ------- -------- -------- Loans and leases (2): Residential real estate mortgages $ 2,102,988 $ 38,716 7.36% $ 2,206,518 $ 40,866 7.41% Commercial real estate mortgages 3,121,928 64,802 8.24 3,036,744 64,949 8.58 Commercial business loans and leases 2,360,191 44,482 7.48 2,322,572 46,509 8.03 Consumer loans and leases 3,359,036 69,027 8.15 3,342,216 70,166 8.42 ----------- -------- ----------- -------- Total loans and leases 10,944,143 217,027 7.88 10,908,050 222,490 8.18 Securities 5,815,678 90,657 6.23 5,931,974 95,241 6.42 Federal funds sold and other short-term investments 17,125 131 3.04 48,148 476 3.97 ----------- -------- ----------- -------- Total earning assets 16,776,946 307,815 7.30 16,888,172 318,207 7.55 -------- -------- Noninterest-earning assets 1,273,973 1,264,302 ----------- ----------- Total assets $18,050,919 $18,152,474 =========== =========== Interest-bearing deposits: Regular savings $ 1,416,784 $ 4,391 1.23 $1,405,540 $4,898 1.40 NOW and money market accounts 4,166,281 26,114 2.49 4,059,390 28,525 2.82 Certificates of deposit 4,386,194 53,692 4.86 4,484,684 60,086 5.37 Brokered deposits 165,115 2,327 5.59 167,419 2,480 5.94 ----------- -------- ----------- -------- Total interest-bearing deposits 10,134,374 86,524 3.39 10,117,033 95,989 3.81 Borrowed funds 4,034,946 47,461 4.63 4,329,605 52,581 4.82 ----------- -------- ----------- -------- Total interest-bearing liabilities 14,169,320 133,985 3.74 14,446,638 148,570 4.11 -------- -------- Non-interest bearing deposits 2,212,517 2,101,326 Other liabilities 170,672 159,955 Securities of subsidiary trusts 98,720 98,775 Shareholders' equity 1,399,690 1,345,780 ----------- ----------- Total liabilities and shareholders' equity $18,050,919 $18,152,474 =========== =========== Net earning assets $2,607,626 $ 2,441,534 =========== =========== Net interest income (fully-taxable equivalent) 173,830 169,637 Less: fully-taxable equivalent adjustments (1,690) (1,572) -------- --------- Net interest income $172,140 $168,065 ======== ========= Net interest rate spread (fully-taxable equivalent) 3.56% 3.44% Net interest margin (fully-taxable equivalent) 4.14% 4.03%
---------- (1) Annualized. (2) Loans and leases include loans held for sale. 12 TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES (Dollars in thousands)
2001 First Quarter 2000 Fourth Quarter -------------------------------------- ---------------------------------- Average Yield/ Average Yield/ Balance Interest Rate (1) Balance Interest Rate (1) ------- -------- -------- ------- -------- -------- Loans and leases (2): Residential real estate mortgages $2,285,219 $43,118 7.55% $2,304,500 $43,340 7.52% Commercial real estate mortgages 2,964,053 64,658 8.85 2,947,644 66,428 8.97 Commercial business loans and leases 2,304,625 49,439 8.70 2,263,301 52,852 9.29 Consumer loans and leases 3,373,971 72,604 8.73 3,305,342 73,282 8.82 ----------- -------- ---------- -------- Total loans and leases 10,927,868 229,819 8.51 10,820,787 235,902 8.68 Securities 5,819,082 97,939 6.74 6,065,801 102,787 6.77 Federal funds sold and other short-term investments 20,946 296 5.73 33,591 362 4.28 ----------- -------- ---------- -------- Total earning assets 16,767,896 328,054 7.89 16,920,179 339,051 7.99 -------- -------- Noninterest-earning assets 1,307,350 1,379,667 ----------- ----------- Total assets $18,075,246 $18,299,846 =========== =========== Interest-bearing deposits: Regular savings $1,390,834 $5,561 1.62 $ 1,416,785 5,922 1.66 NOW and money market accounts 3,969,403 32,539 3.32 3,933,748 35,034 3.54 Certificates of deposit 4,513,295 63,502 5.71 4,522,791 65,289 5.74 Brokered deposits 165,065 2,637 6.48 120,020 2,027 6.72 ----------- -------- ---------- -------- Total interest-bearing deposits 10,038,597 104,239 4.21 9,993,344 108,272 4.31 Borrowed funds 4,474,160 63,992 5.74 4,720,402 75,049 6.24 ----------- -------- ---------- -------- Total interest-bearing liabilities 14,512,757 168,231 4.68 14,713,746 183,321 4.93 -------- -------- Non-interest bearing deposits 1,966,919 2,046,837 Other liabilities 150,037 145,722 Securities of subsidiary trusts 98,775 98,775 Shareholders' equity 1,346,758 1,294,766 ----------- ----------- Total liabilities and shareholders' equity $18,075,246 $18,299,846 =========== =========== Net earning assets $2,255,139 $2,206,433 ========== ========== Net interest income (fully-taxable equivalent) 159,823 155,730 Less: fully-taxable equivalent adjustments (1,509) (1,770) ---------- -------- Net interest income $ 158,314 $153,960 ========== ======== Net interest rate spread (fully-taxable equivalent) 3.21% 3.06% Net interest margin (fully-taxable equivalent) 3.84% 3.70%
----------------------------------------------------- (1) Annualized. (2) Loans and leases include loans held for sale. 13 TABLE 2 - Average Balances, Yields and Rates (Dollars in thousands)
2000 Third Quarter 2000 Second Quarter ----------------------------------- -------------------------------- Average Yield/ Average Yield/ Balance Interest Rate (1) Balance Interest Rate (1) ------- -------- -------- ------- -------- -------- Loans and leases (2): Residential real estate mortgages $2,340,950 $43,370 7.41% $ 2,336,378 $44,190 7.57% Commercial real estate mortgages 2,935,280 65,740 8.91 2,819,294 62,581 8.93 Commercial business loans and leases 2,205,430 51,110 9.22 2,132,627 48,021 9.06 Consumer loans and leases 3,193,830 69,489 8.65 3,101,735 66,598 8.64 ----------- ------- ----------- -------- Total loans and leases 10,675,490 229,709 8.57 10,390,034 221,390 8.56 Securities 6,298,451 107,303 6.81 6,478,785 109,892 6.79 Federal funds sold and other short-term investments 63,155 958 6.04 80,250 1,266 6.34 ----------- ------- ----------- -------- Total earning assets 17,037,096 337,970 7.91 16,949,069 332,548 7.87 ------- -------- Noninterest-earning assets 1,408,636 1,398,125 ----------- ----------- Total assets $18,445,732 $18,347,194 =========== =========== Interest-bearing deposits: Regular savings $1,469,374 $7,643 2.07 $1,545,893 8,037 2.09 NOW and money market accounts 3,898,780 34,877 3.56 3,770,025 31,269 3.34 Certificates of deposit 4,529,819 63,160 5.55 4,540,737 59,822 5.30 Brokered deposits 86,953 1,439 6.58 123,670 1,994 6.49 ---------- ------- ---------- -------- Total interest-bearing deposits 9,984,926 107,119 4.27 9,980,325 101,122 4.08 Borrowed funds 4,962,974 78,727 6.31 5,086,715 76,767 6.07 ---------- ------- ------------ -------- Total interest-bearing liabilities 14,947,900 185,846 4.95 15,067,040 177,889 4.75 ------- -------- Non-interest bearing deposits 2,046,112 1,875,798 Other liabilities 104,804 133,627 Securities of subsidiary trusts 98,775 98,775 Shareholders' equity 1,248,141 1,171,954 ----------- ----------- Total liabilities and shareholders' equity $18,445,732 $18,347,194 =========== =========== Net earning assets $2,089,196 $1,882,029 ========== ========== Net interest income (fully-taxable equivalent) 152,124 154,659 Less: fully-taxable equivalent adjustments (1,411) (1,494) -------- -------- Net interest income $150,713 $153,165 ======== ======== Net interest rate spread (fully-taxable equivalent) 2.96% 3.12% Net interest margin (fully-taxable equivalent) 3.57% 3.67%
(1) Annualized. (2) Loans and leases include loans held for sale. 14 TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES (Dollars in thousands)
2000 First Quarter --------------------------------------------- Yield/ Average Balance Interest Rate (1) --------------------------------------------- Loans and leases (2): Residential real estate mortgages $2,337,127 $43,536 7.45% Commercial real estate mortgages 2,731,631 60,698 8.94 Commercial business loans and leases 1,952,209 43,019 8.86 Consumer loans and leases 3,036,234 64,193 8.50 ----------- -------- Total loans and leases 10,057,201 211,446 8.45 Securities 6,783,530 114,163 6.74 Federal funds sold and other short-term investments 79,032 1,091 5.55 ----------- -------- Total earning assets 16,919,763 326,700 7.75 Noninterest-earning assets 1,393,153 -------- ----------- Total assets $18,312,916 =========== Interest-bearing deposits: Regular savings $1,561,943 8,176 2.11 NOW and money market accounts 3,639,746 27,701 3.06 Certificates of deposit 4,505,049 56,716 5.06 Brokered deposits 131,218 2,144 6.57 ---------- -------- Total interest-bearing deposits 9,837,956 94,737 3.87 Borrowed funds 5,262,911 75,483 5.77 ---------- -------- Total interest-bearing liabilities 15,100,867 170,220 4.53 -------- Non-interest bearing deposits 1,798,107 Other liabilities 117,311 Securities of subsidiary trusts 98,775 Shareholders' equity 1,197,856 ----------- Total liabilities and shareholders' equity $18,312,916 =========== Net earning assets $ 1,818,896 =========== Net interest income (fully-taxable equivalent) 156,480 Less: fully-taxable equivalent adjustments (1,307) -------- Net interest income $155,173 ======== Net interest rate spread (fully-taxable equivalent) 3.22% Net interest margin (fully-taxable equivalent) 3.70%
----------------------------------------------------- (1) Annualized. (2) Loans and leases include loans held for sale. 15 TABLE 2 - AVERAGE BALANCES, YIELDS AND RATES (Dollars in thousands)
Nine Months Ended Nine Months Ended September 30, 2001 September 30, 2000 -------------------------------------- ---------------------------------- Yield/ Yield/ Average Balance Interest Rate (1) Average Balance Interest Rate (1) -------------------------------------- ---------------------------------- Loans and leases (2): Residential real estate mortgages $2,197,574 $122,700 7.44% $2,332,940 $131,110 7.49% Commercial real estate mortgages 3,041,487 194,409 8.55 2,835,199 189,019 8.91 Commercial business loans and leases 2,329,333 140,430 8.06 2,093,598 140,806 9.07 Consumer loans and leases 3,358,353 211,797 8.43 3,110,904 200,265 8.60 ---------- ------- ---------- ------- Total loans and leases 10,926,747 669,336 8.19 10,372,641 661,200 8.53 Securities 5,855,566 283,838 6.47 6,519,446 332,702 6.78 Federal funds sold and other short-term investments 28,725 903 4.21 74,078 3,316 5.98 ---------- -------- ---------- ------- Total earning assets 16,811,038 954,077 7.58 16,966,165 997,218 7.84 -------- ------- Noninterest earning assets 1,282,890 1,391,624 ----------- ----------- Total assets $18,093,928 $18,357,789 =========== =========== Interest-bearing deposits: Regular savings $1,404,481 14,850 1.41 $ 1,525,531 23,828 2.09 NOW and money market accounts 4,065,746 87,178 2.87 3,769,958 93,876 3.33 Certificates of deposit 4,460,926 177,280 5.31 4,520,689 179,697 5.31 Brokered deposits 165,866 7,443 6.00 118,379 5,577 6.29 ----------- -------- ------------- ------- Total interest-bearing deposits 10,097,019 286,751 3.80 9,934,557 302,978 4.07 Borrowed funds 4,277,620 164,034 5.08 5,100,917 230,977 6.05 ---------- -------- ------------- ------- Total interest-bearing liabilities 14,374,639 450,785 4.18 15,035,474 533,955 4.74 -------- ------- Non-interest bearing deposits 2,094,487 1,906,997 Other liabilities 160,993 118,471 Securities of subsidiary trust 98,757 98,775 Shareholders' equity 1,365,052 1,198,072 ----------- ------------- Total liabilities and shareholders' equity $18,093,928 $ 18,357,789 =========== ============= Net earning assets $2,436,399 $ 1,930,691 ========== ============== Net interest income (fully-taxable equivalent) 503,292 463,263 Less: fully-taxable equivalent adjustments (4,773) (4,212) --------- -------- Net interest income $ 498,519 $459,051 ========= ======== Net interest rate spread (fully-taxable equivalent) 3.40% 3.10% Net interest margin (fully-taxable equivalent) 4.01% 3.64%
---------------------------------------------------- (1) Annualized. (2) Loans and leases include loans held for sale. 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). TABLE 3 - RATE/VOLUME ANALYSIS (Dollars in thousands)
Three Months Ended September 30, 2001 vs. 2000 Increase (decrease) due to ---------------------------------------------------- Rate and Total Volume Rate Volume (1) Change --------------------------------------------------- Interest income: Loans and leases $5,803 ($18,567) $82 ($12,682) Securities (8,287) (9,208) 849 (16,646) Federal funds sold and other short-term investments (701) (478) 352 (827) --------------------------------------------------- Total interest income (3,185) (28,253) 1,283 (30,155) --------------------------------------------------- Interest expense: Interest-bearing deposits Regular savings (274) (3,111) 133 (3,252) NOW and money market accounts 2,400 (10,515) (648) (8,763) Certificates of deposit (2,009) (7,878) 419 (9,468) Brokered deposits 1,296 (217) (191) 888 --------------------------------------------------- Total interest-bearing deposits 1,413 (21,721) (287) (20,595) Borrowed funds (14,760) (21,016) 4,510 (31,266) --------------------------------------------------- Total interest expense (13,347) (42,737) 4,223 (51,861) Net interest income (fully taxable equivalent) $10,162 $14,484 ($2,940) $21,706 ===================================================
Nine Months Ended September 30, 2001 vs. 2000 Increase (decrease) due to ------------------------------------------------- Rate and Total Volume Rate Volume (1) Change ------------------------------------------------- Interest income: Loans and leases $35,350 ($26,378) ($836) $8,136 Securities (33,666) (15,116) (82) (48,864) Federal funds sold and other short-term investments (2,029) (981) 597 (2,413) ------------------------------------------------- Total interest income (345) (42,475) (321) (43,141) ------------------------------------------------- Interest expense: Interest-bearing deposits Regular savings (1,892) (7,759) 673 (8,978) NOW and money market accounts 7,367 (12,971) (1,094) (6,698) Certificates of deposit (2,374) - (43) (2,417) Brokered deposits 2,234 (257) (111) 1,866 ------------------------------------------------- Total interest-bearing deposits 5,335 (20,987) (575) (16,227) Borrowed funds (37,255) (37,008) 7,320 (66,943) ------------------------------------------------- Total interest expense (31,920) (57,995) 6,745 (83,170) Net interest income (fully taxable equivalent) $31,575 $15,520 ($7,066) $40,029 =================================================
---------------------------------------------------------- (1) Includes changes in interest income and expense not due solely to volume or rate changes. 17 NONINTEREST INCOME Third quarter noninterest income totaled $60.6 million, an increase of $4.5 million from the third quarter of 2000. This increase was primarily due to insurance commissions income (up $4.1 million or 69%), merchant and electronic banking income (up $1.3 million or 17%) and other noninterest income (up $1.7 million or 37%). Noninterest income, excluding securities gains and losses, as a percent of total revenues was 26% and 27% for the quarters ended September 30, 2001 and 2000, respectively. For the nine months ended September 30, 2001 and 2000, noninterest income, excluding losses on securities restructuring, amounted to $176.9 million and $163.0 million, respectively. The 9% increase was primarily due to increases in insurance commissions and deposit services income. Deposit services income increased by $227 thousand or 1% during the three months ended September 30, 2001 as compared to the same period in the prior year. The modest increase in the quarter was affected by a lower level of overdrafts as a result of lower levels of economic activity surrounding September 11. For the nine months ended September 30, 2001 and 2000, deposit services income amounted to $53.1 million and $49.3 million, respectively, an increase of $3.8 million, or 8%. These increases were primarily attributable to volume-driven increases in checking accounts and collection of overdraft fees. Mortgage banking income was $2.2 million and $6.2 million for the quarters ended September 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 Company sold the servicing rights on $1.8 billion of loans serviced for others in the fourth quarter of 2000 and $1.6 billion in the first quarter of 2001. The amount of loans serviced for others was $285.4 million and $3.3 billion at September 30, 2001 and 2000, respectively. For the nine months ended September 30, 2001 and 2000, mortgage banking income amounted to $7.2 million and $14.8 million, respectively. The $7.6 million decrease for the nine months ended September 30, 2001 was primarily due to a $10.8 million decrease in mortgage servicing revenue, which was partially offset by a $3.2 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 $440 thousand at September 30, 2001, compared to $23.2 million at December 31, 2000. The decrease was due 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 and the volatility due to changes in interest rates inherent in the mortgage servicing rights asset. See Table 4 for details. 18 TABLE 4 - MORTGAGE BANKING SERVICES (In thousands)
At or for the Three Months Ended ----------------------------------------------------------- 9/30/01 6/30/01 3/31/01 12/31/00 ------------------------------------------------------------- RESIDENTIAL MORTGAGES SERVICED FOR INVESTORS $ 285,400 $ 303,590 $ 294,898 $ 1,618,610 ============================================================= MORTGAGE SERVICING RIGHTS: Balance at beginning of period $ 495 $ 491 $ 23,225 $ 41,029 Mortgage servicing rights capitalized -- -- 382 1,845 Amortization charged against mortgage servicing fee income (55) 4 (500) (500) Change in impairment reserve -- -- -- -- Mortgage servicing rights sold -- -- (22,616) (19,149) ------------------------------------------------------------- Balance at end of period $ 440 $ 495 $ 491 $ 23,225 ============================================================= MORTGAGE BANKING SERVICES INCOME: Sales income: Residential mortgage sales income $ 1,729 $ 1,510 $ 2,236 $ 478 Lower of cost or market adjustment - Loans held for sale 5 52 (52) 73 ------------------------------------------------------------- Total sales income 1,734 1,562 2,184 551 ------------------------------------------------------------- Servicing income: Residential mortgage servicing income, net 448 214 344 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 448 214 1,050 6,600 ------------------------------------------------------------- Total $ 2,182 $ 1,776 $ 3,234 $ 7,151 =============================================================
At or for the Three Months Ended --------------------------------------------- 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 =============================================
Nine Months Ended ----------------------------------- 9/30/01 9/30/00 ----------------------------------- Mortgage banking services income: Sales income: Residential mortgage sales income $ 5,476 2,158 Lower of cost or market adjustment - Loans held for sale 5 102 --------------------------------- Total sales income 5,481 2,260 --------------------------------- Servicing income: Residential mortgage servicing income, net 1,006 5,985 Change in impairment reserve on mortgage servicing rights -- 2,895 Valuation adjustments - interest rate floor -- (191) Gain (loss) on sale of capitalized mortgage servicing rights 706 3,864 --------------------------------- Total servicing income 1,712 12,553 --------------------------------- Total $ 7,193 $ 14,813 =================================
Insurance commissions income was $10.2 million for the third quarter of 2001 compared to $6.0 million for the same period in 2000, an increase of 69%. For the nine months ended September 30, 2001 and 2000, insurance commissions amounted to $29.4 million and $16.0 million, respectively, representing an increase of 84%. The increases in 2001 were primarily attributable to two insurance agency purchase acquisitions late in the third quarter of 2000. 19 Trust services income amounted to $8.5 million for the quarter ended September 30, 2001 compared to $8.6 million for the third quarter of 2000, a decrease of 2%. For the nine months ended September 30, 2001 and 2000, trust services income amounted to $26.0 for each respective period. Assets under management decreased to $8.4 billion at September 30, 2001 from $9.3 billion at September 30, 2000 as a result of broad-based declines in the stock markets. Investment advisory services income increased $190 thousand, or 11%, in the third quarter of 2001 compared to the third quarter of 2000. For the nine months ended September 30, 2001 and 2000, investment advisory services income amounted to $5.3 and $5.1 million, respectively, representing an increase of 4%. Investment advisory services revenues are commissions earned from the sale of third party mutual funds, annuities, stocks and bonds. Bank-owned life insurance ("BOLI") income was $4.8 million for the third quarter of 2001, compared to $4.2 million for the same period in 2000, an increase of 13%. There were two policy benefits recorded in 2001, one in the second quarter for $616 thousand and one in the third quarter for $418 thousand. There was a $1.2 million policy benefit recorded in the first quarter of 2000. Excluding the policy benefits, BOLI income increased $135 thousand in the third quarter of 2001 compared to the third quarter of 2000 due to higher average levels of BOLI in 2001. For the third quarter of 2001, the average carrying value of BOLI was $314 million compared to $301 million for the third quarter of 2000. For the nine months ended September 30, 2001 and 2000, BOLI income amounted to $14.0 million and $13.5 million, respectively, an increase of 4%. 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 September 30, 2001. Merchant and electronic banking income was $9.2 million for the third quarter of 2001 compared to $7.9 million for the third quarter of 2000, an increase of 17%. For the nine months ended September 30, 2001 and 2000, merchant and electronic banking income amounted to $23.7 million and $22.2 million, respectively, an increase of 7%. 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. For the nine months ended September 30, 2000, the Company incurred $15.9 million in losses on securities restructuring. During the second quarter of 2000, the Company restructured parts of its securities portfolio by selling $104 million of securities available for sale, realizing a loss of $15.9 million pre-tax ($10.3 million after-tax). The securities, with a weighted average yield of 5.73%, were primarily perpetual preferred stocks acquired in prior acquisitions, treasury bonds (remaining maturity greater than 10 years) and below investment grade debt securities. After the restructuring, the Company no longer holds any of these types of securities. Other noninterest income increased $1.7 million, or 37%, for the quarter ended September 30, 2001 compared to the same quarter last year. The increase in the third quarter of 2001 was primarily due to higher loan fees of $1.5 million (including prepayment fees) and included $720 thousand of premium income recognized on covered call options related to mortgage-backed securities and a $929 thousand gain on the sale of an equity interest in an ATM network. For the nine months ended September 30, 2001 and 2000, other income amounted to $17.0 million and $16.1 million, respectively and included $2.7 million of premiums on covered call options in 2001 and $4.7 million gain on sale of a credit card portfolio in 2000. No covered call options were outstanding as of September 30, 2001. NONINTEREST EXPENSE Noninterest expense, excluding special charges, was $127.0 million and $111.6 million for the quarters ended September 30, 2001 and 2000, respectively, representing an increase of $15.4 million, or 14%. The increase was primarily due to salaries and employee benefits expense ($14.0 million) and occupancy expense ($2.1 million.) The efficiency ratio was 53.68% and 52.85% for the quarters ended September 30, 2001 and 2000, respectively. For the nine months ended September 30, 2001 and 2000, noninterest expense, excluding special charges, amounted to $372.8 million and $349.4 million, respectively, a 7% increase. The efficiency ratio was 54.25% and 55.03% for the nine months ended September 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 $67.1 million for the quarter ended September 30, 2001 increased $14.0 million, or 26%, from the same quarter of last year. Salaries and benefits expense amounted to $191.7 million and $170.5 million during the nine months ended September 30, 2001 and 2000, respectively, representing a $21.2 million increase, or 12%. 20 The increase was primarily due to increased incentive compensation and additional employees from two insurance agency purchase acquisitions late in the third quarter of 2000. Data processing expense of $9.8 million for the quarter ended September 30, 2001 increased $744 thousand, or 8%, from the same quarter a year ago due to recent upgrades for information technology. For the nine months ended September 30, 2001 and 2000, data processing expense amounted to $27.6 million and $27.1 million, respectively, a $587 thousand, or 2% increase. Occupancy expense of $11.4 million during the three months ended September 30, 2001 increased $2.1 million, or 23%, from the same quarter in 2000 due to cost of new facilities and higher utility expenses. For the nine months ended September 30, 2001 and 2000, occupancy expense amounted to $34.3 million and $30.3 million, respectively, a $4.0 million, or 13%, increase. This increase was primarily due to additional expenses for new facilities and higher utility and snow removal expenses. Equipment expense of $8.2 million during the three months ended September 30, 2001 increased $171 thousand, or 2%, from the third quarter of last year. For the nine months ended September 30, 2001 and 2000, equipment expense amounted to $25.1 million and $23.6 million, respectively, a $1.5 million, or 6% 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 $5.3 million for the quarters ended September 30, 2001 and 2000, respectively. For the nine months ended September 30, 2001 and 2000, amortization of goodwill and other intangibles amounted to $16.2 million and $15.7 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 nine months ended September 30, 2001 and 2000, special charges amounted to $5.6 million ($3.7 million after tax) and $43.0 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 Company's acquisition in May 2000of Banknorth Group, Inc., a multi-bank holding company headquartered in Vermont, 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 $41.4 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 September 30, 2001. TABLE 5 - SPECIAL CHARGES (In thousands)
Other Amount Cash Amounts Balance at Included in Payments Applied to Balance at 12/31/2000 Expense Reallocations (Receipts) Reserve 9/30/2001 ---------- ------- ------------- ---------- ------- --------- MERGER CHARGES Severance costs $ 679 $ 2,329 $ 0 $ 2,455 $ 0 $ 553 Data processing/systems integration 100 -- 84 184 -- -- Asset write-downs/facility costs 2,119 -- (707) 798 -- 614 Other costs 217 -- 623 840 -- -- ------- ------- ------- ------- ------- ------- $ 3,115 $ 2,329 $ 0 $ 4,277 $ 0 $ 1,167 ======= ======= ======= ======= ======= ======= BRANCH CLOSINGS Severance and salary costs $ 0 $ 47 $ 0 $ 0 $ 0 $ 47 Asset write-downs/lease terminations -- 1,585 -- 300 1,038 247 Branch decommissioning costs 170 755 -- 322 -- 603 ------- ------- ------- ------- ------- ------- $ 170 $ 2,387 $ 0 $ 622 $ 1,038 $ 897 ======= ======= ======= ======= ======= ======= OTHER SPECIAL CHARGES Write-down of auto lease residuals $ 0 $ 892 $ 0 $ 0 $ 892 $ 0 ======= ======= ======= ======= ======= =======
21 Other non-interest expenses decreased by $1.8 million, or 7%, during the three months ended September 30, 2001 as compared to the comparable period in the prior year. For the nine months ended September 30, 2001 and 2000, other noninterest expenses amounted to $70.8 million and $75.3 million, respectively, a $4.4 million, or 6% decrease. The following table summarizes the principal components of other noninterest expenses for the periods indicated. TABLE 6 - OTHER NONINTEREST EXPENSES (In thousands)
2001 2001 2001 2000 2000 2000 2000 Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter ---------- ---------- ------------ ---------- --------- ------------ --------- Advertising and marketing $2,582 $3,324 $2,387 $2,647 $2,772 $3,606 $2,985 Telephone 2,918 2,853 3,007 3,709 3,473 3,134 2,945 Office supplies 2,097 2,506 2,320 2,603 2,436 2,673 2,166 Postage and freight 2,039 2,448 2,478 2,252 2,267 2,376 2,470 Miscellaneous loan costs 1,902 1,699 1,737 1,530 1,545 1,717 2,203 Deposits and other assessments 825 837 835 1,045 1,110 1,002 961 Collection and carrying costs of non-performing assets 705 482 610 (814) 618 590 746 Other 9,679 10,715 9,825 11,492 10,304 10,672 10,479 ------- ------- ------- ------- ------- ------- ------- Total $22,747 $24,864 $23,199 $24,464 $24,525 $25,770 $24,955 ======= ======= ======= ======= ======= ======= =======
Nine Months Ended ----------------------- 9/30/01 9/30/00 ---------- ---------- Advertising and marketing $8,293 $9,363 Telephone 8,778 9,552 Office supplies 6,923 7,275 Postage and freight 6,965 7,113 Miscellaneous loan costs 5,338 5,465 Deposits and other assessments 2,497 3,073 Collection and carrying costs of non-performing assets 1,797 1,954 Other 30,221 31,455 ------- ------- Total $70,812 $75,250 ======= =======
TAXES The effective tax rate, excluding special charges and losses on securities restructuring, was 34% and 31% for the quarters ended September 30, 2001 and 2000, respectively and 34% and 33% for the nine months ended September 30, 2001 and 2000, respectively. The increases were due primarily to the inclusion of amortization on investments in low-income housing tax credit limited partnerships. COMPREHENSIVE INCOME Comprehensive income amounted to $282.3 million and $171.9 million during the nine months ended September 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 gains on cash flow hedges. For additional information, see Note 2 to the Unaudited Consolidated Financial Statements included herein. The Company's available for sale investment portfolio had unrealized gains (losses), net of applicable income tax effects, of $71.3 million, ($34.5) million and ($82.9) million at September 30, 2001, December 31, 2000 and September 30, 2000, respectively. The improvement related to lower prevailing interest rates. At September 30, 2001, the net unrealized gains of $109.1 million, before related tax effect, represented 2% of securities available for sale. The Company attempts to balance the interest rate risk of its assets with its liabilities (see "Interest Rate Risk and Asset Liability Management"). However, the change in value of its liabilities, which tend to fall in rising interest rate environments and rise in falling interest rate environments, is not included in "other comprehensive income." 22 FINANCIAL CONDITION LOANS AND LEASES Total loans and leases (including loans held for sale) averaged $10.9 billion during the third quarter of 2001, an increase of $269 million or 3% from the third quarter of 2000. All loan categories increased except for residential real estate loans. Average loans as a percent of average earning assets were 65% during the quarter ended September 30, 2001 compared to 63% during the quarter ended September 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 $2.1 billion during the third quarter of 2001 declined $238.0 million from the third quarter of last year due to increased refinancing activity and prepayments in a lower interest rate environment. Also, it is currently the Company's policy to sell most of the residential real estate loans it originates into the secondary market. Mortgage loans held for sale amounted to $58.2 million and $38.9 million at September 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 $3.1 billion increased $187 million, or 6%, from the third quarter of last year. The majority of the increase was in the Massachusetts market. The average yield on commercial real estate loans during the third quarter of 2001 was 8.24%, as compared to 8.91% in the third quarter of 2000. Commercial business loans and leases averaged $2.4 billion during the third quarter of 2001, an increase of $155 million, or 7%, over the third quarter of 2000. The largest increases were in Maine and Massachusetts. The yield on commercial business loans and leases decreased to 7.48% in the third quarter of 2001 from 9.22% in the third quarter of 2000 due to repricing of loans in response to the Federal Reserve rate cuts and to competition in the marketplace. Average consumer loans and leases of $3.4 billion during the third quarter of 2001 increased $165 million, or 5%, from the third 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 8.15% in the third quarter of 2001 from 8.65% in the third quarter of 2000. SECURITIES AND OTHER EARNING ASSETS The Company's securities portfolio averaged $5.8 billion during the third quarter of 2001, as compared to $6.3 billion in the third 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. Government and agency 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 due to continued run-off of the mortgage-backed securities due to prepayments of the underlying mortgages. The average yield on securities was 6.23% for the quarter ended September 30, 2001 and 6.81% for the quarter ended September 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 gain of $71.3 million at September 30, 2001 and an after-tax unrealized loss of $34.5 million at December 31, 2000. ASSET QUALITY As shown in Table 7, nonperforming assets were $70.9 million at September 30, 2001, or 0.39% of total assets, compared to $56.9 million or 0.31% of total assets at September 30, 2000. Total nonperforming loans (excluding residential real estate loans held for sale) as a percentage of total loans was 0.59%, 0.57% and 0.46% at September 30, 2001, December 31, 2000 and at September 30, 2000, respectively. The increase in the quarter ended September 30, 2001 was primarily in commercial loans and leases ($16.8 million) which is reflective of the slower economy and its effects on various industries. The Company continues to monitor asset quality with regular reviews of its portfolio in accordance with its lending and credit policies. 23 The Company's residential loan portfolio accounted for 18% of the total loan portfolio at September 30, 2001, as compared with 21% at December 31, 2000. The Company's residential loans are generally secured by single-family homes (one to four units) and have a maximum loan to value ratio of 80%, unless they are protected by mortgage insurance. At September 30, 2001, 0.41% of the Company's residential loans were nonperforming, as compared with 0.44% at December 31, 2000 and 0.36% at September 30, 2000. The Company's commercial real estate loan portfolio accounted for 29% of the total loan portfolio at September 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 September 30, 2001, 0.48% of the Company's commercial real estate loans were nonperforming, as compared with 0.43% at December 31, 2000 and 0.60% at September 30, 2000. The Company's commercial business loan and lease portfolio accounted for 21% of the total loan portfolio at September 30, 2001 and 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 September 30, 2001, the Company had $194 million of participations in syndicated commercial loans and commitments to purchase an additional $172 million of such participations. At September 30, 2001, 1.47% of the Company's commercial business loans and leases were non-performing, as compared with 1.41% at December 31, 2000 and 0.78% at September 30, 2000. The Company's consumer loan and lease portfolio accounted for 31% of the total loan portfolio at September 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 $157.0 million at September 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 $46.3 million, $81.6 million and $98.2 million at September 30, 2001, December 31, 2000 and September 30, 2000, respectively. At September 30, 2001 and December 31, 2000, 0.19% of the Company's consumer loans and leases were nonperforming, as compared with 0.17% at September 30, 2000. At September 30, 2001, the Company had $6.1 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 $8.2 million at September 30, 2000. In light of the slowing economy, the Company is continuing to monitor the delinquencies to minimize deterioration in the portfolio. 24 TABLE 7 - NONPERFORMING ASSETS (Dollars in thousands)
9/30/01 6/30/01 3/31/01 ------------------------------------ Nonaccrual loans: Residential real estate loans $ 8,222 $ 9,590 $10,575 Commercial real estate loans 15,145 12,550 13,205 Commercial business loans and leases 34,220 39,208 32,233 Consumer loans and leases 6,380 5,795 5,611 ----------------------------------- Total nonaccrual loans 63,967 67,143 61,624 Total troubled debt restructurings -- -- -- ----------------------------------- Total nonperforming loans 63,967 67,143 61,624 ----------------------------------- Other nonperforming assets: Other real estate owned, net of related reserves 4,468 4,508 4,310 Repossessions, net of related reserves 2,428 1,618 1,935 ----------------------------------- Total other nonperforming assets 6,896 6,126 6,245 ----------------------------------- Total nonperforming assets $70,863 $73,269 $67,869 =================================== Accruing loans which are 90 days overdue $ 6,055 $ 5,799 $ 7,664 =================================== Total nonperforming loans as a percentage of total loans (1) 0.59% 0.62% 0.57% Total nonperforming assets as a percentage of total assets 0.39% 0.40% 0.37% Total nonperforming assets as a percentage of total loans (1) and total other nonperforming assets 0.65% 0.67% 0.63%
12/31/00 9/30/00 6/30/00 3/31/00 --------------------------------------------------- Nonaccrual loans: Residential real estate loans $ 9,894 $ 8,258 $ 9,405 $14,204 Commercial real estate loans 12,155 17,212 18,270 15,621 Commercial business loans and leases 32,583 17,396 16,570 19,818 Consumer loans and leases 6,329 5,650 5,110 4,861 ------------------------------------------------- Total nonaccrual loans 60,961 48,516 49,355 54,504 Total troubled debt restructurings 673 704 731 1,027 ------------------------------------------------- Total nonperforming loans 61,634 49,220 50,086 55,531 ------------------------------------------------- Other nonperforming assets: Other real estate owned, net of related reserves 4,074 6,432 8,419 9,027 Repossessions, net of related reserves 1,424 1,246 2,125 2,792 ------------------------------------------------- Total other nonperforming assets 5,498 7,678 10,544 11,819 ------------------------------------------------- Total nonperforming assets $67,132 $56,898 $60,630 $67,350 ================================================= Accruing loans which are 90 days overdue $ 5,973 $ 8,195 $ 7,211 $ 7,914 ================================================= Total nonperforming loans as a percentage of total loans (1) 0.57% 0.46% 0.48% 0.54% Total nonperforming assets as a percentage of total assets 0.37% 0.31% 0.33% 0.37% Total nonperforming assets as a percentage of total loans (1) and total other nonperforming assets 0.62% 0.53% 0.58% 0.66%
--------------------------------------------------------- (1) Total loans excludes residential real estate loans held for sale. PROVISION/ALLOWANCE FOR LOAN AND LEASE LOSSES The Company provided $12.1 million and $6.3 million for loan and lease losses in the quarters ended September 30, 2001 and 2000, respectively, and $28.5 million and $17.2 million for the nine months ended September 30, 2001 and 2000, respectively. As shown in Table 8, net charge-offs for the third quarter of 2001 were $8.8 million, or 0.32% of average loans outstanding, compared to $5.8 million, or 0.22% of average loans outstanding, for the third quarter of 2000. The increased charge-offs during the quarter ended September 30, 2001 in the commercial loans and lease portfolio were primarily attributable to two credits. The increases in the provision for loan and lease losses for the three and nine months ended September 30, 2001 reflect higher levels of net charge-offs, nonperforming loans and classified loans. Increases in the provision reflect higher charge-offs, the downward movement in the internal risk classifications as well as the economic slowdown and the uncertain economic climate. At September 30, 2001, the allowance for loan and lease losses amounted to $158.5 million or 1.45% of total portfolio loans and leases, as compared to $156.9 million or 1.46% at September 30, 2000. The ratio of the allowance for loan and lease losses to nonperforming loans was 248% at September 30, 2001 and 319% at September 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. 25 TABLE 8 - ALLOWANCE FOR LOAN AND LEASE LOSSES (Dollars in thousands)
2001 Third 2001 Second 2001 First 2000 Fourth Quarter Quarter Quarter Quarter ------------------------------------------------------------------ Allowance at beginning of period $ 155,303 $ 153,621 $ 153,550 $ 156,867 Charge-offs: Real estate mortgages 743 724 790 963 Commercial business loans and leases 6,154 4,864 3,774 4,639 Consumer loans and leases 5,529 4,706 4,463 6,312 ----------------------------------------------------------------- Total loans charged off 12,426 10,294 9,027 11,914 ----------------------------------------------------------------- Recoveries: Real estate mortgages 72 349 138 324 Commercial business loans and leases 2,649 1,524 890 576 Consumer loans and leases 875 792 932 1,046 ----------------------------------------------------------------- Total loans recovered 3,596 2,665 1,960 1,946 ----------------------------------------------------------------- Net charge-offs 8,830 7,629 7,067 9,968 Additions charged to operating expenses 12,061 9,311 7,138 6,651 ----------------------------------------------------------------- Allowance at end of period $ 158,534 $ 155,303 $ 153,621 $ 153,550 ================================================================= Average loans and leases outstanding during the period (1) $10,869,870 $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) 0.32% 0.28% 0.26% 0.37% Ratio of allowance to total loans and leases at end of period (1) 1.45% 1.43% 1.43% 1.42% Ratio of allowance to nonperforming loans at end of period 248% 231% 249% 249% Ratio of net charge-offs as a percent of average outstanding loans, annualized (1): Real estate mortgages 0.052% 0.029% 0.051% 0.049% Commercial business loans and leases 0.589% 0.577% 0.508% 0.714% Consumer loans and leases 0.550% 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. 26 DEPOSITS Total deposits averaged $12.3 billion during the third quarter of 2001, an increase of $316 million from the third quarter of 2000. The increases in deposits were in NOW and money market accounts and non-interest bearing deposits. The ratio of loans to deposits was 88% and 90% at September 30, 2001 and December 31, 2000, respectively. Average non-interest bearing deposits of $2.2 billion during the third quarter of 2001 increased $166.4 million or 8% from the third 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 $10.0 billion during the third quarter of 2001 increased $71 million from the third quarter of 2000 primarily due to increases in NOW and money market accounts. The average rates paid on NOW and money market accounts decreased 107 basis points from 3.56% in the third quarter of 2000 to 2.49% in the third quarter of 2001 due largely to lower prevailing interest rates. The average rates paid on all deposit types decreased by 88 basis points from 4.27% in the third quarter of 2000 to 3.39% in the third 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 third quarter of 2001 were $4.0 billion, a decrease of $928 million from the third 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 third quarter of 2001 were $2.3 billion, which decreased $1.6 billion or 42% from the third 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. These borrowings had an average cost of 5.05% during the quarter ended September 30, 2001 as compared to 6.56% for the comparable period last year. The 151 basis point decrease was due to the Federal Reserve rate cuts during 2001. At September 30, 2001, the Company's FHLB borrowings amounted to $2.6 billion and its additional borrowing capacity from the FHLB was $1.7 billion. Average balances for securities sold under repurchase agreements were $1.3 billion and $922.6 million for the quarters ended September 30, 2001 and 2000, respectively, an increase of $339.2 million. These borrowings, with a cost of 3.61% for the quarter ended September 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. 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 27 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. 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 28 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. The Company typically uses forward mortgage sales commitments 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 September 30, 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 ------------- ------------- ------------- ------------- September 30, 2001 (4.33%) (2.13%) 1.50% 1.93% ----- ----- ---- ---- 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, the simulated increase in interest income would be more than the simulated increase in interest expense. 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. Mortgage servicing rights associated with current loan originations are 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 nine months ended September 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 and prepayment speeds of mortgage assets (iv) changes in the borrowings portfolio structure, (v) reduction of deposit interest expense, and (vi) extension of the assumed lives of core non-maturity deposits. The Company's earnings are not directly and materially impacted by movements in foreign currency rate or commodity prices. Virtually all transactions are denominated in the U.S. dollar. Movements in equity prices may have an indirect but modest impact on earnings by affecting the volume of activity or the amount of fees from investment-related businesses. 29 LIQUIDITY Parent Company On a parent-only basis at September 30, 2001, the Company's debt service requirements consisted primarily of junior subordinated debentures issued to two subsidiaries: $103 million to Peoples Heritage Capital Trust I and $31 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, income from the securities portfolio and borrowings, including draws on a $60 million unsecured line of credit which is renewable every 364 days and, if used, carries interest at 3 month LIBOR plus 0.75%. The Company did not draw on the line during the quarter ended September 30, 2001. The average balance outstanding on the line during the nine months ended September 30, 2001 was $1.7 million. Banking Subsidiaries For banking subsidiaries of the Company, liquidity represents the ability to fund asset growth or accommodate deposit withdrawals. Liquidity risk is the danger that the banks cannot meet anticipated or unexpected funding requirements or can meet them only at excessive cost. Liquidity is measured by the ability to raise cash when needed at a reasonable cost. Many factors affect a bank's ability to meet liquidity needs, including variations in the markets served, its asset-liability mix, its reputation and credit standing in the market and general economic conditions. In addition to traditional retail deposits, the banks have various other liquidity sources, including proceeds from maturing securities and loans, the sale of securities, asset securitizations and borrowed funds such as FHLB advances, reverse repurchase agreements and brokered deposits. The Company continually monitors and forecasts its liquidity position. There are several interdependent methods used by the Company for this purpose, including daily review of fed funds positions, monthly review of balance sheet changes, monthly review of liquidity ratios, periodic liquidity forecasts and periodic review of contingent funding plans. As of September 30, 2001, the banks had in the aggregate $2.7 billion of "immediately accessible liquidity," defined as cash that could be raised within 1-3 days through collateralized borrowings or security sales. This represents 22% of deposits. The Company's current policy minimum is 10% of deposits. Also as of September 30, 2001, the banks had in the aggregate "potentially volatile funds" of $1.5 billion. These are funds that might flow out of the banks over a 90-day period in an adverse environment. Management estimates this figure by applying adverse probabilities to its various credit-sensitive and economically-sensitive funding sources. As of September 30, 2001, the ratio of "immediately accessible liquidity" to "potentially volatile funds" was 183%, 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 September 30, 2001, shareholders' equity amounted to $1.5 billion. In addition, through subsidiary trusts, the Company had outstanding at such date $93.8 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. 30 The Company paid a $0.13 per share dividend on its Common Stock during the first two quarters of 2001. In October 2001, the Company's Board of Directors approved a $0.135 dividend and authorized an increase in its share repurchase program of 5 million shares. In January 2001, the Company authorized an 8,000,000 share repurchase program to be purchased from time to time in open market transactions as market conditions warrant. In the nine months ended September 30, 2001, the Company purchased 5.7 million shares at an average price of $20.29 per share, or a total cost of $115.8 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 September 30, 2001: Total capital (to risk weighted assets) $1,669,730 13.28% 1,006,011 8.00% $ 663,719 5.28% Tier 1 capital (to risk weighted assets) 1,312,541 10.44% 503,006 4.00% 809,535 6.44% Tier 1 leverage capital ratio (to average assets) 1,312,541 7.35% 714,274 4.00% 598,267 3.35% 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 $12.6 billion and $12.1 billion at September 30, 2001 and December 31, 2000, respectively. The Company's banking subsidiaries are also subject to federal regulatory capital requirements. At September 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. 31 IMPACT OF NEW ACCOUNTING STANDARDS In August, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." SFAS No. 144 provides additional implementation guidance and supersedes SFAS No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of." It is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company has not yet determined the impact of implementing this statement to its financial condition or results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset. It is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company has not yet determined the impact of implementing this statement to its financial condition or results of operations. In June 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. Under SFAS No. 142, goodwill is no longer amortized, but instead is tested for impairment on a regular basis and upon the occurrence of certain triggering events. This statement is effective for fiscal years beginning after December 15, 2001. The Company will first perform the required impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002, and as a result the Company has not yet determined what effect the results of these tests will have on the Company's operations and financial position. At September 30, 2001, the Company had $163.8 million of goodwill; goodwill amortization expense was $15.3 million for the nine months ended September 30, 2001. FORWARD LOOKING STATEMENTS Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue" or similar terms or variations on those terms or the negative of 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. 32 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained in the section captioned "Management's Discussion and Analysis - Asset-Liability Management" is incorporated herein by reference. PART II- OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in routine legal proceedings occurring in the ordinary course of business which in the aggregate are believed by management to be immaterial to the financial condition and results of operations of the Company. Item 2. Changes in Securities and use of proceeds - not applicable. Item 3. Defaults Upon Senior Securities - not applicable. Item 4. Submission of Matters to a Vote of Security Holders - not applicable. Item 5. Other Information - not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) The Company filed a Current Report on Form 8-K/A on July 25, 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: November 14, 2001 By: /s/ William J. Ryan ------------------- William J. Ryan Chairman, President and Chief Executive Officer Date: November 14, 2001 By: /s/ Peter J. Verrill -------------------- Peter J. Verrill Executive Vice President, Chief Operating Officer and Chief Financial Officer Date: November 14, 2001 By: /s/ Stephen J. Boyle -------------------- Stephen J. Boyle Executive Vice President and Controller (principal accounting officer) 33