UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
2004
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________.
.
Commission File Number: 0-16947
BANKNORTH GROUP, INC.
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(Exact001-31251
Banknorth Group, Inc.
(Exact name of registrant as specified in its charter)
Maine 01-0437984
-------------------------------- -----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
P.O. Box 9540
Two Portland Square
Portland, Maine 04112-9540
- - --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's
| Maine | 01-0437984 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
P.O. Box 9540 Two Portland Square Portland, Maine (Address of principal executive offices) | 04112-9540 (Zip Code) |
Registrant’s telephone number, including area code: (207) 761-8500
Securities registered pursuant to Section 12(b) of the Act: Not Applicable
| Title of Class | Name of Each Exchange on Which Registered | |
| Common Stock, $.01 par value Preferred Stock Purchase Rights | New York Stock Exchange, Inc. New York Stock Exchange, Inc. |
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE
----------------------------
Title of Class
PREFERRED STOCK PURCHASE RIGHTS
-------------------------------
Title of ClassNot Applicable
Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X]þ Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o
As of March 14, 2001,June 30, 2004, the aggregate market value of the 140,788,877the172,545,567 shares of Common Stock of the Registrant issued and outstanding on such date, excluding the 1,910,954approximately 2,772,906 shares held by all directors and executive officers of the Registrant as a group (which does not include unexercised stock options), was $2.71$5.5 billion. This figure is based on the last sale price of $19.50$32.48 per share of the Registrant'sRegistrant’s Common Stock on March 14, 2001,June 30, 2004, as reported in THE WALL
STREET JOURNAL The Wall Street Journalon March 15, 2001.July 1, 2004. Although directors of the Registrant and executive officers of the Registrant and its subsidiaries were assumed to be "affiliates"“affiliates” of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of March 14, 2001: 140,788,877
February 11, 2005: 187,401,308
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the part of the Form 10-K into which the document is incorporated:
(1) Portions of the Annual Report to Stockholders for the year ended December
31, 2000 are incorporated by reference into Part II, Items 5-8 and Part IV,
Item 14 of this Form 10-K.
(2)
Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on April 24, 2001in 2005 are incorporated by reference into Part III, Items 10-1310-14 of this Form 10-K.
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2
BANKNORTH GROUP, INC.
2000
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
PAGE
----
Item 1. BUSINESS..................................................... 1
General...................................................... 1
i
FORWARD-LOOKING STATEMENTS
In the normal course of business, we, in an effort to help keep our shareholders and the public informed about our operations, may from time to time issue or make certain statements, either in writing or orally, that are or contain forward-looking statements, as that term is defined in the U.S. federal securities laws. Generally, these statements relate to business plans or strategies, projected or anticipated benefits from acquisitions made by or to be made by us, projections involving anticipated revenues, earnings, profitability or other aspects of operating results or other future developments in our affairs or the industry in which we conduct business. Forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology such as “anticipate,” “believe,” “expect,” “intend,” “plan,” “estimate” or similar expressions.
Although we believe that the anticipated results or other expectations reflected in our forward-looking statements are based on reasonable assumptions, we can give no assurance that those results or expectations will be attained. Forward-looking statements involve risks, uncertainties and assumptions (some of which are beyond our control), and as a result actual results may differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from forward-looking statements include, but are not limited to, the following, as well as those discussed elsewhere herein:
| • | our investments in our businesses and in related technology could require additional incremental spending, and might not produce expected deposit and loan growth and anticipated contributions to our earnings; | |
| • | general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for loan and lease losses or a reduced demand for credit or fee-based products and services; | |
| • | changes in the domestic interest rate environment could reduce net interest income and could increase credit losses; | |
| • | the conditions of the securities markets could change, which could adversely affect, among other things, the value or credit quality of our assets, the availability and terms of funding necessary to meet our liquidity needs and our ability to originate loans and leases; | |
| • | changes in the extensive laws, regulations and policies governing financial holding companies and their subsidiaries could alter our business environment or affect our operations; | |
| • | the potential need to adapt to industry changes in information technology systems, on which we are highly dependent, could present operational issues or require significant capital spending; | |
| • | competitive pressures could intensify and affect our profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments such as the internet or bank regulatory reform; | |
| • | acquisitions may result in large one-time charges to income, may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated and may result in unforeseen integration difficulties; and | |
| • | acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including possible military action, could further adversely affect business and economic conditions in the United States generally and in our principal markets, which could have an adverse effect on our financial performance and that of our borrowers and on the financial markets and the price of our common stock. |
You should not put undue reliance on any forward-looking statements. Forward-looking statements speak only as of the Company...................................... 2
Acquisitions................................................. 3
Subsidiaries................................................. 3
Competition.................................................. 4
Employees.................................................... 5
Regulationdate they are made, and we undertake no obligation to update them in light of new information or future events except to the Company.................................... 5
Regulation of Banking Subsidiaries........................... 8
Taxation..................................................... 11
Item 2. PROPERTIES................................................... 11
Item 3. LEGAL PROCEEDINGS............................................ 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 12
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................ 12
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA......................... 12
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 12
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................ 12
Item 8. FINANCIAL STATEMENTS......................................... 12
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 13
(i)
3
BANKNORTH GROUP, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
(CONTINUED)
PART III
PAGE
----
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT............... 13
Item 11. EXECUTIVE COMPENSATION....................................... 13
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................. 13
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 13
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K................................................ 13
SIGNATURES................................................... 20
(ii)
4
FORWARD-LOOKING STATEMENTS
IN THE NORMAL COURSE OF BUSINESS, THE COMPANY, IN AN EFFORT TO HELP
KEEP ITS SHAREHOLDERS AND THE PUBLIC INFORMED ABOUT THE COMPANY'S OPERATIONS,
MAY FROM TIME TO TIME ISSUE OR MAKE CERTAIN STATEMENTS, EITHER IN WRITING OR
ORALLY, THAT ARE OR CONTAIN FORWARD-LOOKING STATEMENTS, AS THAT TERM IS DEFINED
IN THE U.S. FEDERAL SECURITIES LAWS. GENERALLY, THESE STATEMENTS RELATE TO
BUSINESS PLANS OR STRATEGIES, PROJECTED OR ANTICIPATED BENEFITS FROM
ACQUISITIONS MADE BY OR TO BE MADE BY THE COMPANY, PROJECTIONS INVOLVING
ANTICIPATED REVENUES, EARNINGS, PROFITABILITY OR OTHER ASPECTS OF OPERATING
RESULTS OR OTHER FUTURE DEVELOPMENTS IN THE AFFAIRS OF THE COMPANY OR THE
INDUSTRY IN WHICH IT CONDUCTS BUSINESS. THESE 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 "ANTICIPATE," "BELIEVE,"
"COMMITMENT," CONSIDER," "CONTINUE," "COULD," "ENCOURAGE," "ESTIMATE," "EXPECT,"
" INTEND," "IN THE EVENT OF," "MAY," "PLAN," "PRESENT," "PROPOSE," "PROSPECT,"
"UPDATE," "WHETHER," "WILL," "WOULD," FUTURE OR CONDITIONAL VERB TENSES, SIMILAR
TERMS, VARIATIONS ON SUCH TERMS OR NEGATIVES OF SUCH TERMS. ALTHOUGH THE COMPANY
BELIEVES THAT THE ANTICIPATED RESULTS OR OTHER EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, IT CAN GIVE NO
ASSURANCE THAT THOSE RESULTS OR EXPECTATIONS WILL BE ATTAINED. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH STATEMENTS DUE TO RISKS,
UNCERTAINTIES AND CHANGES WITH RESPECT TO A VARIETY OF FACTORS, INCLUDING, BUT
NOT LIMITED TO, THE FOLLOWING:
- COMPETITIVE PRESSURE AMONG DEPOSITORY AND OTHER FINANCIAL
INSTITUTIONS MAY INCREASE SIGNIFICANTLY;
- CHANGES IN THE INTEREST RATE ENVIRONMENT MAY REDUCE INTEREST
MARGINS AND NET INTEREST INCOME, AS WELL AS ADVERSELY AFFECT
LOAN ORIGINATIONS AND SALES ACTIVITIES AND THE VALUE OF
CERTAIN ASSETS, SUCH AS INVESTMENT SECURITIES AND MORTGAGE
SERVICING RIGHTS;
- GENERAL ECONOMIC OR BUSINESS CONDITIONS, EITHER NATIONALLY OR
IN THE STATES OR REGIONS IN WHICH THE COMPANY DOES BUSINESS,
MAY BE LESS FAVORABLE THAN EXPECTED, RESULTING IN, AMONG OTHER
THINGS, A DETERIORATION IN CREDIT QUALITY OR A REDUCED DEMAND
FOR CREDIT;
- LEGISLATION OR CHANGES IN REGULATORY REQUIREMENTS, INCLUDING
WITHOUT LIMITATION CAPITAL REQUIREMENTS, OR ACCOUNTING
STANDARDS MAY ADVERSELY AFFECT THE COMPANY AND THE BUSINESSES
IN WHICH IT IS ENGAGED;
- ADVERSE CHANGES MAY OCCUR IN THE SECURITIES MARKETS;
- COMPETITORS OF THE COMPANY MAY HAVE GREATER FINANCIAL RESOURCES
AND DEVELOP PRODUCTS AND TECHNOLOGY THAT ENABLE THOSE
COMPETITORS TO COMPETE MORE SUCCESSFULLY THAN THE COMPANY;
- THE GROWTH AND PROFITABILITY OF THE COMPANY'S NONINTEREST INCOME
MAY BE LESS THAN EXPECTED;
(iii)
5
- COSTS OR DIFFICULTIES RELATED TO THE INTEGRATION OF THE
BUSINESSES OF THE COMPANY AND ITS MERGER PARTNERS MAY BE GREATER
THAN EXPECTED;
- ESTIMATED COST SAVINGS AND REVENUE ENHANCEMENTS FROM MERGERS
INVOLVING THE COMPANY MAY NOT BE FULLY REALIZED WITHIN THE
EXPECTED TIME FRAMES; AND
- DEPOSIT ATTRITION, CUSTOMER LOSS OR REVENUE LOSS FOLLOWING
MERGERS INVOLVING THE COMPANY MAY BE GREATER THAN EXPECTED.
THE COMPANY CAUTIONS THAT THE FOREGOING LIST OF FACTORS IS NOT
EXCLUSIVE, AND NEITHER SUCH LIST NOR ANY SUCH FORWARD-LOOKING STATEMENT TAKES
INTO ACCOUNT THE IMPACT THAT ANY FUTURE ACQUISITIONS MAY HAVE ON THE COMPANY AND
ANY SUCH FORWARD-LOOKING STATEMENT. IN ADDITION, THE COMPANY DOES NOT UNDERTAKE,
AND SPECIFICALLY DISCLAIMS ANY OBLIGATION, TO RELEASE PUBLICLY THE RESULTS OF
ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR UNANTICIPATED EVENTS OR CIRCUMSTANCES AFTER THE
DATE OF SUCH STATEMENTS.
(iv)
6
extent required by federal securities laws.
ii
PART I.
ITEM 1. BUSINESS
GENERAL
| Item 1. | Business |
General
We, Banknorth Group, Inc. (the "Company") is, are a multi-bankMaine corporation and a registered bank holding company and financial services holding company which is incorporated under the lawsBank Holding Company Act of the State of
Maine. The Company conducts1956, as amended. We conduct business from its executive officesour headquarters in Portland, Maine and, as of December 31, 2000, 2852004, 386 banking offices located in Maine, New Hampshire, Massachusetts, Vermont, New York and Connecticut. At December 31, 2000, the
Company2004, we had consolidated assets of $18.2$28.7 billion and consolidated shareholders'shareholders’ equity of $1.3$3.2 billion. Based on total assets at December 31, 2000, the Company
is the largest bank holding company headquartered in northern New England and isthat date, we are one of the country's 5030 largest commercial banking companies.
The Company offersorganizations in the United States.
Our principal asset is all of the capital stock of Banknorth, NA, a broadnational bank which was initially formed as a Maine-chartered savings bank in the mid-19th century. Effective January 1, 2002, we consolidated all eight of our other banking subsidiaries and our trust company subsidiary into Banknorth, NA, which was known as “Peoples Heritage Bank” prior to these consolidations. Banknorth, NA operates under the trade name “Peoples Heritage Bank” in Maine, “Bank of New Hampshire” in New Hampshire and “Evergreen Bank” in New York to take advantage of the strong brand identity associated with the names of these predecessor banks. Banknorth, NA operates under its name elsewhere in our market areas. Through Banknorth, NA we offer a full range of commercial and consumer banking services and products to individuals, businesses and governments throughout our market areas, including commercial, consumer and trust and investment advisory and insurance brokerage
services through eight wholly-owned banking subsidiaries, all of which are
national banks. These subsidiaries are noted below.
- Peoples Heritage Bank, NA ("PHB") operates offices
throughout Maine and, through subsidiaries, engages in
financial planning, insurance brokerage and equipment leasing
activities. At December 31, 2000, PHB had consolidated assets
of $4.4 billion and consolidated shareholder's equity of $327
million.
- Bank of New Hampshire, NA ("BNH") operates offices
throughout New Hampshire. At December 31, 2000, BNH had
consolidated assets of $4.6 billion and consolidated
shareholder's equity of $303 million.
- First Massachusetts Bank, NA ("FMB") operates offices in
central and western Massachusetts, southern New Hampshire and,
through its GBT division, central Connecticut. At December 31,
2000, FMB had consolidated assets of $6.2 billion and
consolidated shareholder's equity of $438 million.
- The Howard Bank, NA, Franklin Lamoille Bank, NA and First
Vermont Bank, NA (collectively the "Vermont Banks")
collectively operate offices throughout Vermont. At December
31, 2000, in the aggregate the Vermont Banks had consolidated
assets of $2.1 billion and consolidated shareholder's equity
of $160 million.
- Evergreen Bank, NA ("EB") operates offices in upstate New
York. At December 31, 2000, EB had consolidated assets of $1.3
billion and consolidated shareholder's equity of $77 million.
- The Stratevest Group, NA ("Stratevest") is a non-depository
trust company which provides a variety of personal and
corporate fiduciary services. Stratevest is
7
headquartered in Burlington, Vermont and conducts business in
each of the states in which the Company's depository
subsidiaries have offices. At December 31, 2000, Stratevest
had approximately $8.8 billion of assets under management.
Unless the context otherwise requires, referencesthe words “Banknorth,” “we,” “our” and “us” herein refer to Banknorth Group, Inc. and its subsidiaries.
Pending Acquisition
Banknorth, Banknorth Delaware Inc., a Delaware corporation and a wholly-owned subsidiary of Banknorth, The Toronto-Dominion Bank (“TD”), a Canadian-chartered bank, and Berlin Merger Co., a Delaware corporation and a wholly-owned subsidiary of TD, are parties to an Amended and Restated Merger Agreement, dated as of August 25, 2004 (the “Merger Agreement”). Subject to the Company
include its directterms and indirect subsidiaries.
BUSINESS OF THE COMPANY
The principal businessconditions in the Merger Agreement, Banknorth will merge with and into Banknorth Delaware, and immediately thereafter Berlin Merger Co. will merge with and into Banknorth Delaware. Upon completion of the Companytransaction, each Banknorth shareholder will be entitled to receive, in exchange for the shares of Banknorth common stock owned by such shareholder, a package of consideration consisting of (1) a number of TD common shares equal to 0.2351, (2) an amount in cash equal to $12.24 and (3) a number of shares of Banknorth Delaware common stock equal to 0.49, in each case multiplied by the number of shares of Banknorth common stock owned by such shareholder, plus cash in lieu of any fractional share interests. Upon completion of the transaction, TD will hold 51% of the outstanding common stock of Banknorth Delaware, which will change its name to TD Banknorth Inc. The transaction is subject to all required regulatory approvals, approval of the shareholders of Banknorth and other customary conditions. Banknorth’s shareholders approved the Merger Agreement and related proposals at a special meeting of Banknorth shareholders held on February 18, 2005. The transaction is expected to be completed on or about March 1, 2005.
Business
Our principal business consists of attracting deposits from the general public through itsour banking offices and using suchthese deposits to originate loans secured by first mortgage liens on existing single-family (one-to-four units) residential real estate and existing multi-family (over four units) residential and commercial real estate, construction loans, commercial business loans and leases and consumer loans and leases. The Companyloans. We also providesprovide various mortgage banking services and as discussed below, various trust and
investment advisorymanagement services, as well as, engagesthrough
subsidiaries of Banknorth, NA, engage in equipment leasing, financialinvestment planning, securities brokerage and insurance brokerageagency activities. The CompanyWe also investsinvest in investment securities and other permitted investments.
The Company derives its
We derive our income principally from interest charged on loans and leases and, to a lesser extent, from interest and dividends earned on investments,investments. We also increasingly derive income from non-interest sources such as fees received in connection with the sale and servicing of loans,various lending services, deposit services, trustwealth management services, investment advisoryplanning services and othermerchant and electronic banking services, as well as insurance agency commissions and, from time to time, gains on the sale of assets. The Company'sOur principal expenses are interest expense on deposits and borrowings, operating expenses, provisions for loan and lease losses and income tax expense. Funds for activities are provided principally by deposits, advances from the Federal Home Loan Bank, ("FHLB"), securities sold under repurchase agreements, amortization and prepayments of outstanding loans, maturities and sales of investmentsinvestment securities and other sources.
The Company, through Stratevest and the Company's full-service banking
subsidiaries, provides trust
Through Banknorth, NA we provide extensive wealth management services to itsour customers. The Company offersWe offer employee benefit trust services in which it actswe act as trustee, custodian, administrator and/or investment advisor, among other things, for employee benefit plans and for corporate, self-employed, municipal and not-for-profit employers located throughout the Company'sour market areas. In addition, the Company's
serveswe serve as trustee of both living trusttrusts and trusts under wills and as such holds,
accountsin this capacity hold, account for and managesmanage financial assets, real estate and special assets. Custody, estate settlement and fiduciary tax services, among others, also are offered by the Company.us. Assets held in a fiduciary capacity by Stratevest and
the trust departments of its banking subsidiariesus are not included in the
Company'sour consolidated balance sheet for financial reporting purposes.
The Company is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended ("BHCA"), and as such is subject to
regulation and examination by the Board of Governors of the Federal Reserve
System ("Federal Reserve Board"). The Company and
2
8
its subsidiaries
We are subject to extensive regulation and supervision by various U.S.under federal and state banking laws. For additional information in this regard, see “Supervision and other regulatory authorities.
ACQUISITIONS
Regulation” below.
Acquisitions
Our profitability and market share have been enhanced in recent years through internal growth and are expected to continue to be, an
important partacquisitions of the expansion of the Company's business. Since January 1,
1994, the Company has completed five acquisitions which have been accounted for
under the pooling-of-interests methodboth financial and ten acquisitions which have been
accounted for under the purchase method. The Companynonfinancial institutions. We continually evaluatesevaluate acquisition opportunities and frequently conductsconduct due diligence in connection with possible acquisitions. As a result, acquisition discussions and, in some cases, negotiations frequently take place and future acquisitions involving cash, debt or equity securities can be expected. Acquisitions typically involve the payment of a premium over book and market values, and therefore, some pro forma dilution of our book value and net income per share of common stock of the Companyshare may occur in connection with any future transactions. SUBSIDIARIES
At December 31, 2000, the Company'sMoreover, acquisitions commonly result in significant one-time charges against earnings, although cost-savings, especially incident to in-market acquisitions, frequently are anticipated, as are revenue enhancements.
Subsidiaries and Other Equity Investments
Our only direct subsidiaries at December 31, 2004 were its
eight banking subsidiaries, North GroupBanknorth, NA, Northgroup Realty, Inc., an acquired subsidiary which holds certain commercial real estate located in Burlington, Vermont, Northgroup Captive Insurance, Inc. and the financing vehicles Peoples Heritage Capital Trust I, Banknorth Capital Trust I, Banknorth Capital Trust II, Ipswich Statutory Trust I and BanknorthCape Cod Capital Trust I. For additional information on these trusts, see Note 12 to the Consolidated Financial Statements included in Item 8 hereof. Northgroup Captive Insurance, Inc. is a subsidiary formed in 2002 to self-insure against certain of our risks.
Set forth below is a brief description of certain of theour indirect non-banking subsidiaries of the Company.
Investments in Real Estate. The Company's banking subsidiaries holdand certain investments in real estate. Exclusive of other real estate owned and
investments in office properties and facilities, which are discussed under Item
2 hereof, at December 31, 2000 the Company's banking subsidiaries' investments
in real estate consisted entirely of interests in limited partnerships formed
for the purpose of investing in real estate for lower-income families, elderly
housing projects and/or the preservation or restoration of historically or
architecturally significant buildings or structures. At December 31, 2000, the
Company's banking subsidiaries investments in these limited partnerships had a
carrying value of $44.8 million.
Equipment Leasingequity investments.
Insurance Agency Activities. PHB conducts equipment leasing We conduct insurance agency activities through Banknorth Leasing Corp. ("BLC"). BLC is headquarteredInsurance Group, which holds all of the outstanding stock of Morse, Payson & Noyes Insurance, the largest insurance agency in Portland, Maine
and engagesMaine. Morse Payson & Noyes Insurance also conducts business in direct equipment leasing activities, primarily involving office
equipment, in the States of Maine,(i) Vermont, (ii) New Hampshire under the trade names A.D. Davis Insurance and Banknorth Insurance Agency, (iii) Massachusetts Vermont,through Banknorth Insurance Agency, Inc./ MA, a wholly-owned subsidiary of Morse,
2
Payson & Noyes Insurance, (iv) Connecticut under the trade name Banknorth Insurance Agency and (v) upstate New York and Connecticut. At December 31, 2000, BLC had $63.9 million of leases
outstanding.
3
9
Financialunder the trade name Community Insurance Agencies.
Investment Planning and Securities Brokerage Activities. PHB conducts We conduct investment planning and securities brokerage activities, through Heritage
Investment Planning Group, Inc. ("HIPG"). PHB also offers through HIPGas well as offer investments in mutual funds and annuities, throughout the Company'sour market areas.
HIPG offers itsareas through Bancnorth Investment Group, Inc., an unaffiliated company and a wholly-owned subsidiary of Primevest Financial Services, Inc. (“Primevest”). Through Banknorth NA and Bancnorth Investment Group, Inc., we offer these services to individuals and small businesses from its officean offices located in Portland, Maine and from certain of the Company's other locations in Maine, Massachusetts, New Hampshire, Vermont, New York and Connecticut. Insurance and fixed annuities commissions are received through Banknorth NA’s subsidiary Bancnorth Investment Planning Group, Inc. and its subsidiary Bancnorth Investment and Insurance Agency, Inc. Sales professionals at HIPGBanknorth, NA and Bancnorth Investment Group, Inc. are registered representatives of Compulife Investor
Services,Bancnorth Investment Group, Inc., a registered broker/dealer, and all securities brokerage activities are conducted through Compulife InvestorPrimevest Financial Services, Inc., which also is a registered broker-dealer. The sales professionals receive referrals from the Company'sour branch offices throughout itsour market areas.
In addition to the foregoing, HIPGBancnorth Investment Group, Inc. conducts insurance sales activities through its wholly-owned insurance agency, First Massachusetts Insurance Agency,
Inc., and certain other agenciesdirectly in Maine, Massachusetts, New Hampshire, Connecticut, Vermont and New York. HIPGYork and Massachusetts. Bancnorth Investment Group, Inc. either directly or through other agencies, offers life insurance and long-term care insurance products in conjunction with the sales of investments and annuities.
Insurance Brokerage
Equipment Leasing Activities. PHB conducts insurance brokerage We conduct equipment leasing activities through Morse, Payson & Noyes ("MPN"),Banknorth Leasing Corp. This company engages in direct equipment leasing activities, primarily involving business and office equipment, in New England, New York and certain other states. At December 31, 2004, Banknorth Leasing Corp. had $90.2 million of leases outstanding.
Investment Activities. Northgroup Asset Management Company is a Maine corporation which iswas formed for purposes of effectively managing assets and investments for the largest insurance
brokerage firmbenefit of Banknorth, NA. Northgroup Asset Management Company employs staff in Maine. MPN also conducts businessits offices in (i) New Hampshire underPortland, Maine who are engaged in the trade name A.D. Davis, Incorporated, (ii) Massachusettsmanagement of its assets.
Other Equity Investments. We hold certain other equity investments, primarily through Catalano
Insurance Agency ("Catalano")Banknorth, NA and Four Eighty-One Corp., a wholly-owned subsidiary of MPN,Banknorth, NA. At December 31, 2004, these investments consisted of (i) $61.3 million of interests in limited partnerships formed for the purpose of investing primarily in real estate for lower-income families in our market areas, plus commitments to invest up to an additional $22.7 million in such partnerships, and (ii) an aggregate of $30.2 million of interests in limited partnerships which invest primarily in small business investment companies in our market areas, plus commitments to invest up to an additional $17.1 million in such partnerships. For additional information about these investments see Note 17 to the Palmer
Goodell Division of Catalano, and (iii) Connecticut through Arthur A. Watson &
Co., Inc., a wholly-owned subsidiary of MPN.
COMPETITION
The Company and its banking subsidiariesConsolidated Financial Statements included in Item 8 hereof.
Competition
We are subject to vigorous competition in all aspects and areas of theirour business from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, credit unions and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies. The Company and its banking subsidiariesWe also compete with non-financial institutions, including retail stores that maintain their own credit programs and governmental agencies that make available low costlow-cost or guaranteed loans to certain borrowers. Certain of these competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems and a wider array of commercial banking services than thatus. Competition from both bank and non-bank organizations will continue.
The banking industry is experiencing rapid changes in technology. In addition to improving customer services, effective use of the Companytechnology increases efficiency and its banking subsidiaries.
The Company and its banking subsidiaries generally have been able to
compete effectively with otherenables financial institutions by emphasizing customer
service, including local decision-making, by establishing long-term customer
relationships and building customer loyalty and by providing products and
services designed to address the specific needs of our customers. No assurance
can be given, however, that the Company and its banking subsidiaries will
continue to be able to compete effectively with other financial institutions in
the future.
4
10
The financial services industry isreduce costs. Technological advances are likely to become even more
competitive as further technological advances enableenhance competition by enabling more companies to provide financial services. These technical advances may diminish the importanceresources. As a result, our future success will depend in part on our ability to address our customers’ needs
3
by using technology. We cannot assure you that we will be able to effectively develop new technology-driven products and services or be successful in marketing these products to our customers. Many of depository institutions and other financial intermediariesour competitors have far greater resources than we have to invest in the transfer of
funds between parties.
EMPLOYEES
The Companytechnology.
Employees
We had approximately 5,0007,200 full-time equivalent employees as of December 31, 2000.2004. None of these employees is represented by a collective bargaining agent, and the Company believeswe believe that it enjoyswe enjoy good relations with our personnel.
Supervision and Regulation
The following discussion sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relevant to Banknorth. The regulatory framework is intended primarily for the protection of depositors and the insurance funds administered by the FDIC and not for the protection of security holders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its personnel.
REGULATION OF THE COMPANY
THE FOLLOWING DISCUSSION SETS FORTH CERTAIN OF THE MATERIAL ELEMENTS OF
THE REGULATORY FRAMEWORK APPLICABLE TO BANK HOLDING COMPANIES AND THEIR
SUBSIDIARIES AND PROVIDES CERTAIN SPECIFIC INFORMATION RELEVANT TO THE COMPANY.
THE REGULATORY FRAMEWORK IS INTENDED PRIMARILY FOR THE PROTECTION OF DEPOSITORS
AND THE FEDERAL DEPOSIT INSURANCE FUNDS AND NOT FOR THE PROTECTION OF SECURITY
HOLDERS. TO THE EXTENT THAT THE FOLLOWING INFORMATION DESCRIBES STATUTORY AND
REGULATORY PROVISIONS, IT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
PARTICULAR STATUTORY AND REGULATORY PROVISIONS.entirety by reference to the particular statutory and regulatory provisions. A CHANGE IN APPLICABLE STATUTES,
REGULATIONS OR REGULATORY POLICY MAY HAVE A MATERIAL EFFECT ON THE BUSINESS OF
THE COMPANY AND ITS SUBSIDIARIES.
change in applicable statutes, regulations or regulatory policy may have a material effect on our business.
General. The Company, Banknorth currently is registered as a bank holding company isand a financial holding company under the Bank Holding Company Act of 1956, as amended. As such, we are subject to regulation, and supervision by the Federal Reserve Board. Under the BHCA, a bank
holding company is required to file annually with the Federal Reserve Board a
report of its operations and with its subsidiaries, is subject to examination by the Federal Reserve Board. Activities and Other Limitations. The BHCA generally prohibitsWe also are registered as a bankMaine financial institution holding company from acquiring direct or indirect ownership or control of more
than 5% of the voting shares of any bank, or increasingunder Maine law and as such ownership or
control of any bank, without prior approval of the Federal Reserve Board. The
Federal Reserve Board generally may approve an application by a bank holding
company that is adequately capitalized and adequately managed to acquire control
of, or to acquire all or substantially all of the assets of, a bank located in a
state other than the home state of such bank holding company, without regard to
whether such transaction is prohibited under the law of any state, provided,
however, that the Federal Reserve Board may not approve any such application
that would have the effect of permitting an out-of-state bank holding company to
acquire a bank in a host state that has not been in existence for any minimum
period of time, not to exceed five years, specified in the statutory law of the
host state.
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The BHCA also generally prohibits a bank holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a bank and from engaging in any business other than banking or managing
or controlling banks. Under the BHCA, the Federal Reserve Board is authorized to
approve the ownership of shares by a bank holding company in any company the
activities of which the Federal Reserve Board had determined, by regulation or
by order, to be so closely related to banking or to managing or controlling
banks as to be a proper incident thereto as of November 11, 2000, the day before
the date of enactment of the Gramm-Leach Bliley Act, discussed below. In making
such determinations, the Federal Reserve Board is required to weigh the expected
benefit to the public, such as greater convenience, increased competition or
gains in efficiency, against the possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
Capital Requirements. The Federal Reserve Board has issued risk-based
and leverage capital guidelines applicable to bank holding companies. In
addition, the Federal Reserve Board may from time to time require that a bank
holding company maintain capital above the minimum levels, whether because of
its financial condition or actual or anticipated growth. The Federal Reserve
Board's risk-based guidelines define a three-tier capital framework. Tier 1
capital consists of common and qualifying preferred shareholders' equity, less
certain intangibles and other adjustments. Tier 2 capital consists of preferred
stock not qualifying as Tier 1 capital, subordinated and other qualifying debt,
and the allowance for credit losses up to 1.25 percent of risk-weighted assets.
Tier 3 capital includes subordinated debt that is unsecured, fully paid, has an
original maturity of at least two years, is not redeemable before maturity
without prior approval by the Federal Reserve Board and includes a lock-in
clause precluding payment of either interest or principal if the payment would
cause the issuing entity's risk-based capital ratio to fall or remain below the
required minimum. The sum of Tier 1 and Tier 2 capital less investments in
unconsolidated subsidiaries represents qualifying total capital, at least 50
percent of which must consist of Tier 1 capital. Risk-based capital ratios are
calculated by dividing Tier 1 and total capital by risk-weighted assets. Assets
and off-balance sheet exposures are assigned to one of four categories of
risk-weights, based primarily on relative credit risk. The minimum Tier 1
capital ratio is 4 percent and the minimum total capital ratio is 8 percent.
The leverage ratio is determined by dividing Tier 1 capital by adjusted
average total assets. Although the stated minimum ratio is 3 percent, most
banking organizations are required to maintain ratios of at least 100 to 200
basis points above 3 percent.
At December 31, 2000, the Company's capital ratios substantially
exceeded applicable requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital" included in Item 7
hereof and Note 13 to the Consolidated Financial Statements included in Item 8
hereof.
Affiliated Institutions. Under Federal Reserve Board policy, the
Company is expected to act as a source of financial strength to each subsidiary
bank and to commit resources to support each subsidiary bank in circumstances
when it might not do so absent such policy. The Federal Reserve
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Board takes the position that in implementing this policy it may
require bank holding companies to provide such support when the holding company
otherwise would not consider itself able to do so.
A bank holding company is a legal entity separate and distinct from its
subsidiary bank or banks. Normally, the major source of a holding company's
revenue is dividends a holding company receives from its subsidiary banks. The
right of a bank holding company to participate as a stockholder in any
distribution of assets of its subsidiary banks upon their liquidation or
reorganization or otherwise is subject to the prior claims of creditors of such
subsidiary banks. The subsidiary banks are subject to claimsregulation and examination by creditors for
long-termthe Superintendent of Financial Institution of the State of Maine. Banknorth, NA is a national bank subject to regulation, supervision and short-term debt obligations, including substantial obligations for
federal funds purchasedexamination by the Office of the Comptroller of the Currency (“OCC”), its chartering authority, and securities sold under repurchase agreements, as well
as deposit liabilities. Under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989, in the event of a loss suffered by the Federal Deposit Insurance Corporation ("FDIC"(“FDIC”) in connection with a banking subsidiary of a bank
holding company (whether due, which insures Banknorth, NA’s deposits to a default or the provision of FDIC assistance),
other banking subsidiaries of the holding company could be assessed for such
loss.
Federal laws limit the transfer of fundsmaximum extent permitted by a subsidiary bank to its
holding company in the form of loans or extensions of credit, investments or
purchases of assets. Transfers of this kind are limited to 10% of a bank's
capital and surplus with respect to each affiliate and to 20% in the aggregate,
and are also subject to certain collateral requirements. These transactions, as
well as other transactions between a subsidiary bank and its holding company,
also must be on terms substantially the same as, or at least as favorable as,
those prevailing at the time for comparable transactions with non-affiliated
companies or, in the absence of comparable transactions, on terms or under
circumstances, including credit standards, that would be offered to, or would
apply to, non-affiliated companies.
law.
Financial Modernization. On November 12, 1999, President Clinton signed
into law the Gramm-Leach-Bliley The Bank Holding Company Act which permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature.nature and which are not authorized for bank holding companies. A bank holding company may become a financial holding company if each of its subsidiary banks is "well capitalized"“well capitalized” under the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) and "well managed," as defined,the applicable regulations thereunder, is “well managed” and has at least a satisfactory rating under the Community Reinvestment Act by filing a declaration with the Federal Reserve Board that the bank holding company wishesseeks to become a financial holding company. Banknorth became a financial holding company effective January 25, 2002.
No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Gramm-Leach-Bliley Act defines "financial“financial in nature"nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through 7
13
a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory“satisfactory” Community Reinvestment Act rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a Community Reinvestment Act rating of satisfactory“satisfactory” or better.
As of December 31, 2000, the Company had not elected to become a
financial holding company.
State Regulation. The Company is registered as a Maine financial
institution holding company under Maine law and as such is subject to regulation
and examination by the Superintendent of Banking of the State of Maine. The
Company also is subject to varying degrees of regulation under the laws of New
Hampshire, Massachusetts, Vermont, New York and Connecticut as a result of its
ownership of banks which are located in these states.
REGULATION OF BANKING SUBSIDIARIES
General. As national banks each of the Company's banking subsidiaries
is subject to regulation and examination by the Office of the Comptroller of the
Currency ("OCC"). Each of the Company's banking subsidiaries also is subject to
regulation and examination by the FDIC, which insures the deposits of each of
the Company's deposit-taking banking subsidiaries
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Bank Acquisitions. Pursuant to the maximum extent
permitted by law, and certain requirements established byBank Holding Company Act, we are required to obtain the Federal Reserve
Board. The federal laws and regulations which are applicable to national banks
regulate, among other things, the scope of their business, their investments,
their reserves against deposits, the timing of the availability of deposited
funds and the nature and amount of and collateral for loans.
Capital Requirements. Each of the Company's banking subsidiaries is
subject to regulatory capital requirements of the OCC which are substantially
comparable to the regulatory capital requirementsprior approval of the Federal Reserve Board before acquiring more than 5% of any class of voting stock of any bank that is not already majority owned by us. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company became able to acquire banks in states other than its home state beginning September 29, 1995, without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10% of the total amount of deposits of insured depository institutions in the United States and less than 30% of such deposits in that state (or such lesser or greater amount set by state law).
The Interstate Banking and Branching Act also authorizes banks to merge across state lines, subject to certain restrictions, thereby creating interstate branches. Pursuant to the Interstate Banking and Branching Act, a bank also may open new branches in a state in which it does not already have banking operations if the state enacts a law permitting such de novo branching.
Capital and Operational Requirements. The Federal Reserve Board, the OCC and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to U.S. banking organizations such as Banknorth and Banknorth, NA. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth. The Federal Reserve Board risk-based guidelines define a three-tier capital framework. “Tier 1 capital” generally consists of common and qualifying preferred stockholders’ equity, less certain intangibles and other adjustments. “Tier 2 capital” and “Tier 3 capital” generally consist of subordinated and other qualifying debt, preferred stock that does not qualify as Tier 1 capital and the allowance for credit losses up to 1.25% of risk-weighted assets.
The sum of Tier 1, Tier 2 and Tier 3 capital, less investments in unconsolidated subsidiaries, represents qualifying “total capital,” at least 50% of which must consist of Tier 1 capital. Risk-based capital ratios are calculated by dividing Tier 1 capital and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk weights, based primarily on relative credit risk. The minimum Tier 1 risk-based capital ratio is 4% and the minimum total risk-based capital ratio is 8%. At December 31, 2004, our Tier 1 risk-based capital and total risk-based capital ratios under these guidelines were 9.96% and 12.13%, respectively.
The “leverage ratio” requirement is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum ratio is 3%, most banking organizations are required to maintain ratios of at least 100 to 200 basis points above 3%. At December 31, 2004, our leverage ratio was 7.58%.
Federal bank regulatory agencies require banking organizations that engage in significant trading activity to calculate a capital charge for market risk. Significant trading activity means trading activity of at least 10% of total assets or $1 billion, whichever is smaller, calculated on a consolidated basis for bank holding companies. Federal bank regulators may apply the market risk measure to other banks and bank holding companies such as the Company, as discussed above. At
December 31, 2000,agency deems necessary or appropriate for safe and sound banking practices. Each agency may exclude organizations that it supervises that otherwise meet the criteria under certain circumstances. The market risk charge will be included in the calculation of an organization’s risk-based capital ratios.
FDICIA identifies five capital categories for insured depository institutions (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized”) and requires the respective U.S. federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital of eachrequirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan. The liability of the Company's banking
subsidiaries substantially exceeded applicable requirements. See Note 13parent holding
5
company under any such guarantee is limited to the Consolidated Financial Statements includedlesser of 5% of the bank’s assets at the time it became undercapitalized or the amount needed to comply with the plan. Furthermore, in Item 8 hereof.
Prompt Corrective Action. Section 38the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness related generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards.
The various federal bank regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a “well capitalized” institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An “adequately capitalized” institution must have a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases. Under these guidelines, Banknorth, NA is considered “well capitalized.”
The Federal bank regulatory agencies also have adopted regulations which mandate that regulators take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. That evaluation will be made as part of the institution’s regular safety and soundness examination. Banking agencies also have adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance sheet position) in the determination of a bank’s capital adequacy. Concurrently, banking agencies have proposed a methodology for evaluating interest rate risk. The banking agencies do not intend to establish an explicit risk-based capital charge for interest rate risk but will continue to assess capital adequacy for interest rate risk under a risk assessment approach based on a combination of quantitative and qualitative factors and have provided guidance on prudent interest rate risk management practices.
Distributions. We derive funds for cash distributions to our stockholders primarily from dividends received from our banking subsidiary. Banknorth, NA is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. The appropriate U.S. federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of the bank or bank/financial holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof.
In addition to the foregoing, the ability of us and Banknorth, NA to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. Our right and the rights of our stockholders and creditors to participate in any distribution of the assets or earnings of our subsidiaries is further subject to the prior claims of creditors of such subsidiaries.
“Source of Strength” Policy. According to Federal Reserve Board policy, bank/financial holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank/financial holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, ("FDIA") provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under regulations adopted by the federal banking regulators,
an institution shall be deemed to be (i) "well capitalized" if it has total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital
8
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ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more
and is not subject to specified requirements to meet and maintain a
specific capital level for any capital measure; (ii) "adequately capitalized" if
it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized," (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances), (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%, and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. The
regulations also provide that a federal banking regulator may, after notice and
an opportunity for a hearing, reclassify a "well capitalized" institution as
"adequately capitalized" and may require an "adequately capitalized" institution
or an "undercapitalized" institution to comply with supervisory actions as if it
were in the next lower category if the institution is in an unsafeevent of a loss suffered or unsound
condition or engaging in an unsafe or unsound practice. The federal banking
regulator may not, however, reclassify a "significantly undercapitalized"
institution as "critically undercapitalized."
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with an appropriate federal banking
regulator within 45 days of the date that the institution receives notice or is
deemed to have notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Immediately upon becoming
undercapitalized, an institution becomes subject to statutory provisions which,
among other things, set forth various mandatory and discretionary restrictions
on the operations of such an institution.
At December 31, 2000, each of the Company's full-service banking
subsidiaries had capital levels which qualified it as a "well-capitalized"
institution under applicable laws and regulations.
FDIC Insurance Premiums. Each of the Company's banking subsidiaries is
a member of the Bank Insurance Fund ("BIF") administeredanticipated by the FDIC although
certain deposits— either as a result of certaindefault of these entities acquireda banking or thrift subsidiary of a bank/financial holding company such as Banknorth or related to FDIC assistance provided to a subsidiary in acquisitions are
insured bydanger of default — the Savings Association Insurance Fund ("SAIF") administered by the
FDIC.
As an FDIC-insured institution, each of the Company'sother banking subsidiaries is requiredof such bank/financial holding company may be assessed for the FDIC’s loss, subject to pay deposit insurance premiums to the FDIC.
Effective January 1, 1997, the assessment schedule for both BIF and SAIF ranges
from 0 basis points (subject to a $2,000 annual minimum) to 27 basis points. In
addition, both BIF-insured institutions and SAIF-insured institutions are
assessed amounts in order for a federally-chartered Finance Corporation to make
payments on it bonds.
Brokered Deposits. The FDIA restricts the use of brokered deposits by
certain depository institutions. Under the FDIA and applicable regulations, (i)
a "well capitalized insured depository institution" may solicit and accept,
renew or roll over any brokered deposit without restriction, (ii)
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an "adequately capitalized insured depository institution" may not accept,
renew or roll over any brokered deposit unless it has applied for and been
granted a waiver of this prohibition by the FDIC and (iii) an "undercapitalized
insured depository institution" may not (x) accept, renew or roll over any
brokered deposit or (y) solicit deposits by offering an effective yield that
exceeds by more than 75 basis points the prevailing effective yields on insured
deposits of comparable maturity in such institution's normal market area or in
the market area in which such deposits are being solicited. The term
"undercapitalized insured depository institution" is defined to mean any insured
depository institution that fails to meet the minimum regulatory capital
requirement prescribed by its appropriate federal banking agency. The FDIC may,
on a case-by-case basis and upon application by an adequately capitalized
insured depository institution, waive the restriction on brokered deposits upon
a finding that the acceptance of brokered deposits does not constitute an unsafe
or unsound practice with respect to such institution. The Company's banking
subsidiaries had $169 million of brokered deposits outstanding at December 31,
2000.
exceptions.
Community Investment and Consumer Protection Laws. In connection with its lending activities, each of the Company's banking subsidiariesBanknorth, NA is subject to a variety of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. Included among these are the federal Home Mortgage
6
Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and Community Reinvestment Act ("CRA").Act.
The CRACommunity Reinvestment Act requires insured institutions to define the communities that they serve, identify the credit needs of those communities and adopt and implement a "Community“Community Reinvestment Act Statement"Statement” pursuant to which they offer credit products and take other actions that respond to the credit needs of the community. The responsible federal banking regulator must conduct regular CRACommunity Reinvestment Act examinations of insured financial institutions and assign to them a CRACommunity Reinvestment Act rating of "outstanding," "satisfactory," "needs improvement"“outstanding,” “satisfactory,” “needs improvement” or "unsatisfactory." In
2000, the CRA“unsatisfactory.” The current Community Reinvestment Act rating, which is from a 2001 examination, of the Company's banking subsidiaries was either
"outstanding" or "satisfactory."
Limitations on Dividends. The CompanyBanknorth, NA is a legal entity separate and
distinct from its banking and other subsidiaries. The Company's principal source
of revenue consists of dividends from its banking subsidiaries. The payment of
dividends by the Company's banking subsidiaries“outstanding.”
Miscellaneous. Banknorth, NA is subject to various regulatory
requirements.
Miscellaneous. The Company's banking subsidiaries are subject to certain restrictions on loans to the CompanyBanknorth or its non-bank subsidiaries, on investments in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower, and on the issuance of a guarantee or letter of credit on behalf of the CompanyBanknorth or its non-bank subsidiaries. The Company's banking subsidiariesBanknorth, NA also areis subject to certain restrictions on most types of transactions with the CompanyBanknorth or its non-bank subsidiaries, requiring that the terms of such transactions be substantially equivalent to terms of similar transactions with non-affiliated firms.
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Regulatory Enforcement Authority. The enforcement powers available to federal banking regulators is substantial and includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.
TAXATION
The Company
Sarbanes-Oxley Act of 2002. On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002, which generally establishes a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. Among other things, the new legislation (i) created a public company accounting oversight board which is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review; (ii) strengthened auditor independence from corporate management by, among other things, limiting the scope of consulting services that auditors can offer their public company audit clients; (iii) heightened the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies; (iv) adopted a number of provisions to deter wrongdoing by corporate management; (v) imposed a number of new corporate disclosure requirements; (vi) adopted provisions which generally seek to limit and expose to public view possible conflicts of interest affecting securities analysts; and (vii) imposed a range of new criminal penalties for fraud and other wrongful acts, as well as extended the period during which certain types of lawsuits can be brought against a company or its banking subsidiariesinsiders.
Taxation
We are subject to those rules of federal income taxation generally applicable to corporations under the Internal Revenue Code. The
CompanyBanknorth and its banking subsidiaries, as members of an affiliated group of corporations within the meaning of Section 1504 of the Internal Revenue Code, file a consolidated federal income tax return, which has the effect of eliminating or deferring the tax consequences of inter-company distributions, including dividends, in the computation of consolidated taxable income.
The Company
We also isare subject to various forms of state taxation under the laws of Maine, New Hampshire, Massachusetts, Vermont, New York and Connecticut as a result of its ownership of banks locatedthe business which we conduct in these states. We are also subject to taxation in several states related to business conducted by our leasing company.
7
Statistical Disclosure by Bank Holding Companies
The following information, included under Items 6, 7 and 8 of this report, is incorporated by reference herein.
Table 2 — Three-Year Average Balance Sheets, which presents average balance sheet amounts, related taxable equivalent interest earned or paid and related average yields earned and rates paid and is included in Item 7;
Table 3 — Changes in Net Interest Income, which presents changes in taxable equivalent interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and is included in Item 7;
Table 12 — Securities Available for Sale and Held to Maturity, which presents information regarding carrying values of investment securities by category of security and is included in Item 7;
Table 13 — Maturities of Securities, which presents information regarding the maturities and weighted average yield of investment securities by category of security and is included in Item 7;
Table 14 — Composition of Loan Portfolio, which presents the composition of loans and leases by category of loan and lease and is included in Item 7;
Table 15 — Scheduled Contractual Amortization of Certain Loans and Leases at December 31, 2004, which presents maturities and sensitivities of loans and leases to changes in interest rates and is included in Item 7;
Table 22 — Five Year Schedule of Nonperforming Assets, which presents information concerning non-performing assets and accruing loans 90 days or more overdue and is included in Item 7;
“Credit Risk Management” and Note 1 to the Consolidated Financial Statements, which discuss our policies for placing loans on non-accrual status, as well as in the case of the former potential problem loans, which are included in Items 7 and 8, respectively;
Table 23 — Five-Year Table of Activity in the Allowance for Loan and Lease Losses, included in Item 7;
Table 25 — Allocation of the Allowance for Loan and Lease Losses — Five Year Schedule, included in Item 7;
Table 23 — Net Charge-offs as a Percent of Average Loans and Leases Outstanding, included in Item 7;
Table 2 — Three-Year Average Balance Sheets, which includes average balances of deposits by category of deposit and is included in Item 7;
Table 20 — Maturity of Certificates of Deposit of $100,000 or more at December 31, 2004, included in Item 7;
“Selected Financial Data,” which presents return on assets, return on equity, dividend payout and equity to assets ratios and is included in Item 6; and
Note 11 to the Consolidated Financial Statements, which includes information regarding short-term borrowings and is included in Item 8.
For additional information regarding theour business of the Company,and operations, see "Management's“Selected Financial Data” in Item 6 hereof, “Management’s Discussion and Analysis of Financial Condition and Results of Operations" includedOperations” in Item 7 hereof and the Consolidated Financial Statements in Item 8 hereof.
ITEM 2. PROPERTIES
Availability of Information
We make available on our web site, which is located athttp://www.banknorth.com, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K on the date which we
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electronically file these reports with the Securities and Exchange Commission. Investors are encouraged to access these reports and the other information about our business and operations on our web site.
| Item 2. | Properties |
At December 31, 2000, the Company2004, we conducted its business from itsour executive offices at Two Portland Square, Portland, Maine and 285386 banking offices located in Maine, New Hampshire, Massachusetts, Vermont, New York and Connecticut.
The following table sets forth certain information with respect to our offices as of December 31, 2004.
| Number of | |||||||||
| State | Banking Offices | Deposits | |||||||
| (Dollars in Thousands) | |||||||||
| Maine | 60 | $ | 2,808,559 | ||||||
| New Hampshire | 76 | 4,190,703 | |||||||
| Massachusetts | 144 | 6,987,858 | |||||||
| Vermont | 36 | 1,672,390 | |||||||
| New York | 27 | 1,157,935 | |||||||
| Connecticut | 43 | 2,410,136 | |||||||
| Total | 386 | $ | 19,227,581 | ||||||
For additional information regarding the Company'sour premises and equipment and its lease obligations, see Notes 67 and 1417 respectively, to the Consolidated Financial Statements included in Item 8 hereof.
| Item 3. | Legal Proceedings |
In the ordinary course of business, Banknorth and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions, including actions brought on behalf of various putitive classes of claimants. Certain of these actions assert claims for substantial monetary damages against Banknorth and its subsidiaries. Based on currently available information, advice of counsel, available insurance coverage and established reserves, management does not believe that the eventual outcome of pending litigation against Banknorth and its subsidiaries will have a material adverse effect on the consolidated financial position, liquidity or results of operations of Banknorth. In view of the inherent difficulty of predicting such matters, however, there can be no assurance that the outcome of any such action will not have a material adverse effect on Banknorth’s consolidated results of operations in any future reporting period.
| Item 4. | Submission of Matters to a Vote of Security Holders |
There were no matters submitted to a vote of our security holders in the fourth quarter of 2004.
9
PART II.
| Item 5. | Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information and Related Matters. Our common stock is traded on the New York Stock Exchange, Inc (“NYSE”). The following table sets forth the high and low prices of our common stock and the dividends declared per share of common stock for the periods indicated.
| Market Price | ||||||||||||
| Dividends Declared | ||||||||||||
| 2004 | High | Low | Per Share | |||||||||
| First Quarter | $ | 34.45 | $ | 30.53 | $ | 0.195 | ||||||
| Second Quarter | 34.75 | 30.25 | 0.195 | |||||||||
| Third Quarter | 36.10 | 30.49 | 0.200 | |||||||||
| Fourth Quarter | 36.71 | 34.49 | 0.200 | |||||||||
2003 | ||||||||||||
| First Quarter | $ | 24.02 | $ | 20.60 | $ | 0.160 | ||||||
| Second Quarter | 26.68 | 21.09 | 0.160 | |||||||||
| Third Quarter | 29.70 | 25.43 | 0.190 | |||||||||
| Fourth Quarter | 33.57 | 27.58 | 0.190 | |||||||||
As of December 31, 2004, there were 179,297,987 shares of common stock outstanding which were held by approximately 19,900 holders of record. Such number of record holders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees.
We have historically paid quarterly dividends on our common stock and currently intend to continue to do so in the foreseeable future. Our ability to pay dividends depends on a number of factors, however, including restrictions on the ability of Banknorth, NA to pay dividends under federal laws and regulations, and as a result there can be no assurance that dividends will be paid in the future.
Share Repurchases. The following table sets forth information with respect to any purchase made by or on behalf of Banknorth or any “affiliated purchaser,” as defined in §240.10b-18(a)(3) under the Exchange Act, of shares of Banknorth common stock during the indicated periods.
| Total Number of | ||||||||||||||||
| Shares Purchased as | Maximum Number of | |||||||||||||||
| Total Number | Average | Part of Publicly | Shares that May Yet Be | |||||||||||||
| of Shares | Price Paid | Announced Plans or | Purchased Under the | |||||||||||||
| Period | Purchased | per Share | Programs | Plans or Programs(1) | ||||||||||||
| October 1-31, 2004 | — | — | — | 2,853,200 | ||||||||||||
| November 1-30, 2004 | — | — | — | 2,853,200 | ||||||||||||
| December 1-31, 2004 | — | — | — | 2,853,200 | ||||||||||||
| Total | — | — | — | 2,853,200 | ||||||||||||
| (1) | An 8,000,000 share repurchase program was approved by the Board of Directors in February 2002. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments” in Item 7. |
10
| Item 6. | Selected Consolidated Financial Data |
| 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||
Condensed Income Statement | |||||||||||||||||||||
| Net interest income | $ | 933,382 | $ | 840,831 | $ | 796,517 | $ | 679,890 | $ | 603,550 | |||||||||||
| Provision for loan and lease losses | 40,340 | 42,301 | 44,314 | 41,889 | 23,819 | ||||||||||||||||
| Net interest income after loan and lease loss provision | 893,042 | 798,530 | 752,203 | 638,001 | 579,731 | ||||||||||||||||
| Noninterest income(1) | 339,799 | 367,159 | 274,508 | 240,505 | 211,188 | ||||||||||||||||
| Noninterest expense(2) | 765,101 | 641,270 | 579,392 | 515,317 | 502,392 | ||||||||||||||||
| Income before income taxes | 467,740 | 524,419 | 447,319 | 363,189 | 288,527 | ||||||||||||||||
| Income tax expense | 163,097 | 173,660 | 148,681 | 124,104 | 96,793 | ||||||||||||||||
| Cumulative effect of change in accounting principle, net of tax | — | — | — | (290 | ) | — | |||||||||||||||
| Net income | $ | 304,643 | $ | 350,759 | $ | 298,638 | $ | 238,795 | $ | 191,734 | |||||||||||
Per Common Share | |||||||||||||||||||||
| Basic earnings per share | $ | 1.78 | $ | 2.18 | $ | 2.01 | $ | 1.70 | $ | 1.33 | |||||||||||
| Diluted earnings per share | 1.75 | 2.15 | 1.99 | 1.68 | 1.32 | ||||||||||||||||
| Dividends per share | 0.79 | 0.70 | 0.58 | 0.53 | 0.50 | ||||||||||||||||
| Book value per share at year end | 17.71 | 15.54 | 13.70 | 11.83 | 9.42 | ||||||||||||||||
| Tangible book value per share at year end | 9.82 | 8.37 | 9.09 | 8.75 | 8.11 | ||||||||||||||||
| Stock price: | |||||||||||||||||||||
| High | 36.71 | 33.57 | 27.22 | 24.39 | 21.13 | ||||||||||||||||
| Low | 30.25 | 20.60 | 20.44 | 18.13 | 10.38 | ||||||||||||||||
| Close | 36.60 | 32.53 | 22.60 | 22.52 | 19.94 | ||||||||||||||||
| Period end common shares outstanding | 179,298 | 162,188 | 150,579 | 151,221 | 141,245 | ||||||||||||||||
| Weighted average shares outstanding — diluted | 174,158 | 163,520 | 149,829 | 141,802 | 145,194 | ||||||||||||||||
Financial Ratios | |||||||||||||||||||||
| Return on average assets | 1.08 | % | 1.37 | % | 1.39 | % | 1.29 | % | 1.05 | % | |||||||||||
| Return on average equity | 10.63 | 14.51 | 16.25 | 16.48 | 15.69 | ||||||||||||||||
| Net interest margin(3) | 3.72 | 3.66 | 4.07 | 3.99 | 3.60 | ||||||||||||||||
| Net interest rate spread(3) | 3.47 | 3.41 | 3.69 | 3.43 | 3.05 | ||||||||||||||||
| Average equity to average assets | 10.17 | 9.44 | 8.56 | 7.82 | 6.66 | ||||||||||||||||
| Efficiency ratio(4) | 60.09 | 53.09 | 54.10 | 55.34 | 61.67 | ||||||||||||||||
| Noninterest income as a percent of total income | 26.69 | 30.39 | 25.63 | 26.13 | 25.92 | ||||||||||||||||
| Tier 1 leverage capital ratio | 7.58 | 6.65 | 7.13 | 7.14 | 7.02 | ||||||||||||||||
| Tier 1 risk-based capital ratio | 9.98 | 8.96 | 9.66 | 9.59 | 10.56 | ||||||||||||||||
| Total risk-based capital ratio | 12.16 | 11.29 | 12.15 | 12.23 | 11.81 | ||||||||||||||||
| Dividend payout ratio(5) | 44.36 | 31.90 | 28.76 | 30.27 | 36.91 | ||||||||||||||||
Average Balance Sheet | |||||||||||||||||||||
| Assets | $ | 28,173,424 | $ | 25,616,347 | $ | 21,460,719 | $ | 18,545,709 | $ | 18,343,226 | |||||||||||
| Loans and leases(6) | 17,734,537 | 15,633,207 | 13,236,803 | 11,246,007 | 10,485,289 | ||||||||||||||||
| Deposits | 18,877,811 | 17,302,983 | 14,566,644 | 12,529,630 | 11,891,481 | ||||||||||||||||
| Shareholders’ equity | 2,865,540 | 2,416,926 | 1,838,064 | 1,449,353 | 1,222,378 | ||||||||||||||||
Year End Balance Sheet Data | |||||||||||||||||||||
| Assets | $ | 28,687,810 | $ | 26,453,735 | $ | 23,418,941 | $ | 21,076,586 | $ | 18,233,810 | |||||||||||
| Loans and leases, net(7) | 18,349,842 | 16,113,675 | 13,847,735 | 12,525,493 | 10,692,112 | ||||||||||||||||
| Securities(8) | 6,992,778 | 7,247,232 | 6,947,876 | 6,156,861 | 5,880,658 | ||||||||||||||||
| Goodwill and identifiable intangible assets | 1,416,156 | 1,163,054 | 695,158 | 466,633 | 185,520 | ||||||||||||||||
| Deposits | 19,227,581 | 17,901,185 | 15,664,601 | 14,221,049 | 12,107,256 | ||||||||||||||||
| Borrowings | 5,990,705 | 5,882,864 | 5,432,581 | 4,602,388 | 4,659,390 | ||||||||||||||||
| Shareholders’ equity | 3,176,114 | 2,520,519 | 2,063,485 | 1,789,115 | 1,330,857 | ||||||||||||||||
| Nonperforming assets(9) | 81,103 | 63,103 | 68,953 | 81,227 | 67,132 | ||||||||||||||||
11
| (1) | Noninterest income included net securities losses of $17.8 million and gains of $29.2 million in the fourth quarter of 2004 and second quarter of 2003, respectively, which were incurred as part of balance sheet deleveraging programs implemented during these periods. |
| (2) | Noninterest expense included prepayment penalties on borrowings of $61.5 million and $28.5 million in the fourth quarter of 2004 and the second quarter of 2003, respectively, which were incurred as part of balance sheet deleveraging programs implemented during these periods. |
| (3) | Net interest margin represents net interest income divided by average interest-earning assets and net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, in each case calculated on a fully-taxable equivalent basis. |
| (4) | Represents noninterest expenses as a percentage of net interest income and noninterest income including net securities gains. |
| (5) | Cash dividends paid divided by net income. |
| (6) | Includes loans and leases held for sale. |
| (7) | Excludes loans and leases held for sale. |
| (8) | Includes securities held to maturity. |
| (9) | Nonperforming assets consist of nonperforming loans, other real estate owned, repossessed assets and investment securities placed on non-accrual status. |
12
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (In thousands, except per share data and as noted) |
The discussion and analysis that follows focuses on the results of operations of Banknorth Group, Inc. during 2004, 2003, and 2002 and its financial condition at December 31, 2004 and 2003. The Consolidated Financial Statements and related notes should be read in conjunction with this review. Certain amounts in years prior to 2004 have been reclassified to conform to the 2004 presentation.
General
Banknorth Group, Inc. is a Maine corporation and a registered bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended. At December 31, 2004, we had consolidated assets of $28.7 billion and consolidated shareholders’ equity of $3.2 billion. Based on total assets at that date, we are one of the 30 largest commercial banking organizations in the United States.
Our principal asset is all of the capital stock of Banknorth, NA (the “Bank”), a national bank which was initially formed as a Maine-chartered savings bank in the mid-19th century. Banknorth, NA operates under the trade name “Peoples Heritage Bank” in Maine, “Bank of New Hampshire” in New Hampshire and “Evergreen Bank” in New York. Banknorth, NA operates under its name elsewhere in our market areas. At December 31, 2004, Banknorth, NA had 386 banking offices in these states and we served approximately 1.3 million households and commercial customers. Through the Bank and its subsidiaries, we offer a full range of banking services and products to individuals, businesses and governments throughout our market areas, including commercial banking, consumer banking, investment management, investment planning and insurance agency services.
We are subject to extensive regulation and supervision under federal and state banking laws. See “Regulation and Supervision” under Item 1.
| Business Strategy |
Our primary business segment is Community Banking, which represents over 90% of our consolidated net income and consolidated assets and consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans and leases, commercial real estate loans, residential mortgage loans and a variety of consumer loans. In addition to keeping loans for our own portfolio, we sell residential mortgage loans into the secondary market. We also invest in mortgage-backed securities and securities backed by the United States Government and agencies thereof, as well as other securities. In addition to Community Banking, we have Insurance Agency, Investment Planning and Wealth Management segments, each of which represents less than 5% of our consolidated net income and consolidated assets and in the aggregate represent less than 10% of our consolidated net income and consolidated assets. Our Insurance Agency business earns commissions on insurance agency activities, our investment planning business earns fees on the sales of mutual funds and third party fixed annuities and our Wealth Management business reflects fees from wealth management operations.
Our goal is to sustain profitable, controlled growth by focusing on increasing our loan and deposit market share in New England and upstate New York; developing new financial products, services and delivery channels; closely managing yields on earning assets and rates on interest-bearing liabilities; increasing noninterest income through, among other things, expanded wealth management, investment planning and insurance agency services, controlling the growth of noninterest expenses and maintaining strong asset quality. It is also part of our business strategy to supplement internal growth with targeted acquisitions of other financial institutions and insurance agencies in our current or contiguous market areas. See “Acquisitions” below and under Item 1.
We strive to maintain a diversified loan and deposit mix and strong asset quality. We are focused on improving efficiencies as we integrate all of our acquisitions. We will continue to evaluate our operations
13
and organizational structure to ensure they are closely aligned with our goal of increasing earnings per share.
Executive Overview
Our net income was $304.6 million in 2004 as compared to $350.8 million in 2003, a decrease of 13%. Our diluted earnings per share was $1.75 in 2004 as compared to $2.15 in 2003, a decrease of $0.40 per diluted share, or 18%. The decline was attributable to costs to implement our balance sheet deleveraging program in the fourth quarter of 2004 ($0.30 per diluted share) and certain merger and consolidation costs ($0.23 per diluted share), including those associated with the pending acquisition of 51% of Banknorth by The Toronto-Dominion Bank (“TD”). Return on average assets and return on average equity were 1.08% and 10.63%, respectively, in 2004 compared to 1.37% and 14.51%, respectively, in 2003. In addition to the impact of the deleveraging, the decline in the return on average equity was also impacted by the intangible equity resulting from our acquisitions. The following were significant factors related to 2004 results as compared to 2003.
| • | In October 2004, we implemented a deleveraging program under which we sold approximately $1.2 billion of securities with a weighted average yield of 2.77% and prepaid a similar amount of borrowings with a weighted average rate of 4.77%, both of which had a duration of approximately 3.5 years. A $51.6 million after-tax loss was incurred in connection with this program in the fourth quarter. This program is expected to improve our annual net interest margin by approximately 28 basis points. | |
| • | We completed the acquisitions of CCBT Financial Companies, Inc. and Foxborough Savings Bank on April 30, 2004 and an insurance agency on July 1, 2004. Acquisitions continue to be an important part of our long-term strategy for growth. | |
| • | Net interest income increased 11% in 2004 compared to 2003, primarily due to a $2.1 billion increase in average earning assets. The net interest margin increased by 6 basis points in 2004 versus 2003 primarily due to the 9% increase in earning assets. | |
| • | Noninterest income from deposit services, insurance agency commissions, merchant and electronic banking services, wealth management services and investment planning services increased by $36.9 million (or 16%) in the aggregate, due in part to acquisitions. This aggregate increase was offset by a decrease in net securities gains of $50.2 million (primarily related to the balance sheet deleveraging program) and a decrease in other noninterest income of $14.5 million. SeeTable 6for details. | |
| • | During 2004, we recorded strong growth in commercial real estate loans, commercial business loans and leases and consumer loans and leases. During the year, commercial business loans and leases increased 20%, commercial real estate loans increased 13% and consumer loans increased 11%. Excluding the effects of acquisitions, total average loans and leases increased 8%. | |
| • | Asset quality remained strong despite an increase in nonperforming assets of $18 million at December 31, 2004 as compared to December 31, 2003, which was attributable to increases in commercial real estate and commercial business loans and leases. | |
| • | Total deposits increased by 7% during 2004. Excluding acquisitions, total average deposits increased $554 million, or 3%, as average checking deposits increased 16% and savings and money market deposits increased 6%, while certificates of deposit declined 11%. |
Our financial condition and liquidity rating remain strong. The following are important factors in understanding our financial condition and liquidity:
| • | using the definitions of banking regulators, we continue to be “well-capitalized”; | |
| • | the Moody’s rating of our senior notes was “A3” at December 31, 2004; |
14
| • | we increased our annual dividend by 13% in 2004 compared to 2003; and | |
| • | our liquidity measures at December 31, 2004 continue to meet our policy guidelines. |
Recent Developments
Our board of directors has authorized us to repurchase in the coming months up to 15.3 million shares of Banknorth common stock, or 8% of the outstanding shares (which amount is inclusive of prior authorizations). Approximately 8 million of the repurchased shares will cover shares issued to our employees in the last six months upon the exercise of stock options. Repurchases are authorized to be made by Banknorth from time to time in open-market or privately-negotiated transactions as, in the opinion of management, market and business conditions warrant following completion of the acquisition of a majority interest in us by The Toronto-Dominion Bank. The repurchased shares will be held as treasury stock and may be reserved for issuance pursuant to our stock benefit plans. Shares will be purchased with cash obtained from internal resources.
Our board of directors also has authorized us to take certain actions to reduce our interest rate risk and more effectively use our capital. In this regard, our board has authorized an additional deleveraging program in the first quarter of 2005, pursuant to which we have sold or intend to sell certain medium to long-term assets and prepay certain short-term borrowings with the proceeds from such sales. Specifically, we have sold or intend to sell an aggregate of approximately $3.0 billion of assets, consisting of approximately $500 million of single-family residential loans, approximately $2.0 billion of mortgage-backed securities and approximately $500 million of fixed-rate securities of U.S. federal agencies. We will use the proceeds from the sale of these assets to prepay approximately $3.0 billion of short-term borrowings, consisting of repurchase agreements and FHLB advances.
In addition, in order to hedge the future cash flow of certain variable rate loans with interest rates tied to a designated prime rate or LIBOR, Banknorth, NA intends to enter into interest rate swap agreements which have an aggregate notional amount of $2.2 billion. We will pay a variable rate and receive a fixed rate pursuant to these agreements, which synthetically will convert variable rate assets to fixed-rate assets.
The foregoing actions will reduce the sensitivity of our operations to changes in interest rates because the assets to be sold have primarily fixed-rates and a weighted average duration of approximately 3.8 years and the borrowings to be prepaid have floating rates and are short-term. As a result, the maturities and interest rate sensitivity of our interest-earning assets and interest-bearing liabilities will be better matched. Moreover, we will sell over $2.5 billion of assets which are subject to prepayment risk.
The excess capital from the reduced asset levels resulting from the deleveraging program can be used by us to repurchase shares of Banknorth common stock or to support future growth, both internally and through acquisitions, which could result in a reduction in the capital available for repurchases. Investment securities as a percentage of our assets is expected to be approximately 19% in the first quarter as a result of purchases in the quarter to date, securities acquired in connection with the acquisition of Boston Fed Bancorp, Inc. and normal balance sheet growth.
We will incur a one-time loss of approximately $38 million after tax, or $0.21 per diluted share, in connection with the new deleveraging program, which will be included in our operations for the first quarter of 2005. Because the weighted average yield on the assets to be sold currently is approximately 4.03% and the weighted average rate on the borrowings to be prepaid currently is approximately LIBOR plus 23 basis points, the deleveraging program also will adversely affect our net income in future periods.
We estimate that the net effect of these actions on our diluted earnings per share for 2005 and future periods on an operating basis, exclusive of the one-time loss from the new deleveraging program, will not be significant.
We will remain a “well capitalized” institution for regulatory purposes upon completion of the new deleveraging program and the repurchase of shares pursuant to the new share repurchase program.
15
| Acquisitions |
We completed three acquisitions in 2004 and on January 21, 2005, we completed the acquisition of BostonFed Bancorp, Inc. The following table sets forth certain information regarding our bank acquisitions in 2004, 2003 and 2002. All acquisitions were accounted for as purchases and as such, were included in our results of operations from the date of acquisition.
Table 1 — Acquisitions 2002 – 2004
| Transaction-Related Items | ||||||||||||||||||||||||||||||||
| Balance at | ||||||||||||||||||||||||||||||||
| Acquisition Date | Other | Total | ||||||||||||||||||||||||||||||
| Acquisition | Identifiable | Cash | Shares | Purchase | ||||||||||||||||||||||||||||
| Date | Assets | Equity | Goodwill | Intangibles | Paid | Issued | Price | |||||||||||||||||||||||||
| (Dollars and shares in millions) | ||||||||||||||||||||||||||||||||
| CCBT Financial Companies, Inc. | 4/30/2004 | $ | 1,292.9 | $ | 108.5 | $ | 178.2 | $ | 19.4 | $ | — | 9.2 | $ | 298.1 | ||||||||||||||||||
| Foxbrough Savings Bank | 4/30/2004 | 241.8 | 22.8 | 62.2 | 2.2 | 88.9 | — | 88.9 | ||||||||||||||||||||||||
| First & Ocean Bancorp | 12/31/2003 | 274.4 | 15.6 | 35.1 | 1.8 | 49.7 | — | 49.7 | ||||||||||||||||||||||||
| American Financial Holdings, Inc. | 2/14/2003 | 2,690.3 | 408.2 | 422.2 | 9.3 | 328.5 | 13.4 | 711.4 | ||||||||||||||||||||||||
| Warren Bancorp, Inc. | 12/31/2002 | 466.1 | 45.3 | 90.5 | 2.7 | 59.8 | 2.7 | 136.6 | ||||||||||||||||||||||||
| Bancorp Connecticut, Inc. | 8/31/2002 | 661.7 | 61.4 | 96.9 | 8.7 | 161.2 | — | 161.2 | ||||||||||||||||||||||||
| Ipswich Bancshares, Inc. | 7/26/2002 | 318.0 | 13.9 | 22.0 | 4.8 | 19.9 | 0.9 | 40.1 | ||||||||||||||||||||||||
In addition to the bank acquisitions in the above table, we acquired four insurance agencies from 2002 to 2004. The total purchase price for these agencies was $16.8 million. For additional information regarding our bank acquisitions, see Note 3 to the Consolidated Financial Statements.
| Results of Operations |
| Comparison of 2004 and 2003 |
| Net Interest Income |
Net interest income is the difference between interest income on earning assets such as loans, leases and securities and interest expense paid on liabilities such as deposits and borrowings, and continues to be our largest source of net revenue. Net interest income is affected by changes in interest rates and by changes in the amount and composition of interest-earning assets and interest-bearing liabilities.
16
Table 2 — Three-Year Average Balance Sheets
The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income on 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; (v) net interest margin. For purposes of the table and the following discussion, (i) income from interest-earning assets and net interest income is presented on a fully-taxable equivalent basis primarily by adjusting income and yields earned on tax exempt interest received on loans to qualifying borrowers and on certain securities to make them equivalent to income and yields earned on fully-taxable investments, assuming a federal income tax rate of 35%, and (ii) unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. Information is based on average daily balances during the indicated periods.
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||||||||||||||||
| Average | Yield/ | Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||||||
| Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||||||||||
| Loans and leases(1): | ||||||||||||||||||||||||||||||||||||
| Residential real estate mortgages | $ | 2,997,572 | $ | 150,245 | 5.01% | $ | 2,839,969 | $ | 159,215 | 5.61% | $ | 2,635,952 | $ | 177,837 | 6.75% | |||||||||||||||||||||
| Commercial real estate mortgages | 5,959,510 | 345,147 | 5.79% | 5,162,413 | 312,681 | 6.06% | 4,293,816 | 298,412 | 6.95% | |||||||||||||||||||||||||||
| Commercial business loans and leases | 3,686,919 | 181,437 | 4.92% | 3,153,293 | 160,761 | 5.10% | 2,665,973 | 158,260 | 5.94% | |||||||||||||||||||||||||||
| Consumer loans and leases | 5,090,536 | 261,358 | 5.13% | 4,477,532 | 251,347 | 5.61% | 3,641,062 | 250,971 | 6.89% | |||||||||||||||||||||||||||
| Total loans and leases | 17,734,537 | 938,187 | 5.29% | 15,633,207 | 884,004 | 5.65% | 13,236,803 | 885,480 | 6.69% | |||||||||||||||||||||||||||
| Investment securities | 7,501,956 | 325,199 | 4.33% | 7,464,162 | 314,701 | 4.22% | 6,403,807 | 353,576 | 5.52% | |||||||||||||||||||||||||||
| Securities purchased under agreements to resell | 419 | 7 | 1.75% | — | — | 0.00% | — | — | 0.00% | |||||||||||||||||||||||||||
| Federal funds sold and other short-term investments | 9,567 | 83 | 0.86% | 11,004 | 160 | 1.46% | 60,257 | 1,064 | 1.77% | |||||||||||||||||||||||||||
| Total earning assets | 25,246,479 | 1,263,476 | 5.00% | 23,108,373 | 1,198,865 | 5.19% | 19,700,867 | 1,240,120 | 6.30% | |||||||||||||||||||||||||||
| Bank-owned life insurance | 503,957 | 465,446 | 359,994 | |||||||||||||||||||||||||||||||||
| Noninterest-earning assets | 2,422,988 | 2,042,528 | 1,399,858 | |||||||||||||||||||||||||||||||||
| Total assets | $ | 28,173,424 | $ | 25,616,347 | $ | 21,460,719 | ||||||||||||||||||||||||||||||
| Interest-bearing deposits: | ||||||||||||||||||||||||||||||||||||
| Regular savings | $ | 2,563,838 | 7,513 | 0.29% | $ | 2,399,179 | 10,994 | 0.46% | $ | 1,743,501 | 15,444 | 0.89% | ||||||||||||||||||||||||
| Now and money market accounts | 7,678,644 | 62,336 | 0.81% | 6,652,030 | 59,193 | 0.89% | 5,463,179 | 79,384 | 1.45% | |||||||||||||||||||||||||||
| Certificates of deposit | 4,647,746 | 91,149 | 1.96% | 5,027,739 | 118,649 | 2.36% | 4,693,518 | 149,028 | 3.18% | |||||||||||||||||||||||||||
| Brokered deposits | 272 | 6 | 2.03% | — | — | 0.00% | 43,311 | 792 | 1.83% | |||||||||||||||||||||||||||
| Total interest-bearing deposits | 14,890,500 | 161,004 | 1.08% | 14,078,948 | 188,836 | 1.34% | 11,943,509 | 244,648 | 2.05% | |||||||||||||||||||||||||||
| Borrowed funds | 6,245,995 | 162,619 | 2.60% | 5,693,420 | 163,302 | 2.87% | 4,870,795 | 193,952 | 3.98% | |||||||||||||||||||||||||||
| Total interest-bearing liabilities | 21,136,495 | 323,623 | 1.53% | 19,772,368 | 352,138 | 1.78% | 16,814,304 | 438,600 | 2.61% | |||||||||||||||||||||||||||
| Non-interest bearing deposits | 3,987,311 | 3,224,035 | 2,623,135 | |||||||||||||||||||||||||||||||||
| Other liabilities | 184,078 | 203,018 | 185,216 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity | 2,865,540 | 2,416,926 | 1,838,064 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 28,173,424 | $ | 25,616,347 | $ | 21,460,719 | ||||||||||||||||||||||||||||||
| Net earning assets | $ | 4,109,984 | $ | 3,336,005 | $ | 2,886,563 | ||||||||||||||||||||||||||||||
| Net interest income (fully-taxable equivalent) | 939,853 | 846,727 | 801,520 | |||||||||||||||||||||||||||||||||
| Less: fully-taxable equivalent adjustments | (6,471 | ) | (5,896 | ) | (5,003 | ) | ||||||||||||||||||||||||||||||
| Net interest income | $ | 933,382 | $ | 840,831 | $ | 796,517 | ||||||||||||||||||||||||||||||
| Net interest rate spread (fully-taxable equivalent) | 3.47% | 3.41% | 3.69% | |||||||||||||||||||||||||||||||||
| Net interest margin (fully-taxable equivalent) | 3.72% | 3.66% | 4.07% | |||||||||||||||||||||||||||||||||
| (1) | Loans and leases include portfolio loans and leases and loans held for sale. |
17
Table 3 — Changes in Net Interest Income
The following table presents certain information on a fully-taxable equivalent basis regarding changes in our interest income and interest expense 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 prior year volume), (2) changes in volume (change in volume multiplied by prior year rate) and (3) changes in rate/volume (change in rate multiplied by change in volume).
| Year Ended December 31, 2004 vs. 2003 | Year Ended December 31, 2003 vs. 2002 | ||||||||||||||||||||||||||||||||
| Increase (Decrease) Due to | Increase (Decrease) Due to | ||||||||||||||||||||||||||||||||
| Rate and | Total | Rate and | Total | ||||||||||||||||||||||||||||||
| Volume(1) | Rate | Volume(2) | Change | Volume(1) | Rate | Volume(2) | Change | ||||||||||||||||||||||||||
| Interest income: | |||||||||||||||||||||||||||||||||
| Loans and leases | $ | 118,725 | $ | (56,280 | ) | $ | (8,262 | ) | $ | 54,183 | $ | 160,319 | $ | (137,663 | ) | $ | (24,132 | ) | $ | (1,476 | ) | ||||||||||||
| Investment securities | 1,595 | 8,211 | 692 | 10,498 | 58,532 | (83,249 | ) | (14,158 | ) | (38,875 | ) | ||||||||||||||||||||||
| Securities purchased under agreements to resell | — | — | 7 | 7 | — | — | — | — | |||||||||||||||||||||||||
| Federal funds and other short-term investments | (21 | ) | (66 | ) | 10 | (77 | ) | (872 | ) | (187 | ) | 155 | (904 | ) | |||||||||||||||||||
| Total interest income | 120,299 | (48,135 | ) | (7,553 | ) | 64,611 | 217,979 | (221,099 | ) | (38,135 | ) | (41,255 | ) | ||||||||||||||||||||
| Interest expense: | |||||||||||||||||||||||||||||||||
| Interest-bearing deposits | |||||||||||||||||||||||||||||||||
| Regular savings | 757 | (4,079 | ) | (159 | ) | (3,481 | ) | 5,836 | (7,497 | ) | (2,789 | ) | (4,450 | ) | |||||||||||||||||||
| NOW and money market accounts | 9,137 | (5,322 | ) | (672 | ) | 3,143 | 17,238 | (30,594 | ) | (6,835 | ) | (20,191 | ) | ||||||||||||||||||||
| Certificates of deposit | (8,968 | ) | (20,111 | ) | 1,579 | (27,500 | ) | 10,628 | (38,487 | ) | (2,520 | ) | (30,379 | ) | |||||||||||||||||||
| Brokered deposits | — | — | 6 | 6 | (793 | ) | (793 | ) | 794 | (792 | ) | ||||||||||||||||||||||
| Total interest-bearing deposits | 926 | (29,512 | ) | 754 | (27,832 | ) | 32,909 | (77,371 | ) | (11,350 | ) | (55,812 | ) | ||||||||||||||||||||
| Borrowed funds | 15,859 | (15,372 | ) | (1,170 | ) | (683 | ) | 32,740 | (54,066 | ) | (9,324 | ) | (30,650 | ) | |||||||||||||||||||
| Total interest expense | 16,785 | (44,884 | ) | (416 | ) | (28,515 | ) | 65,649 | (131,437 | ) | (20,674 | ) | (86,462 | ) | |||||||||||||||||||
| Net interest income (fully taxable equivalent) | $ | 103,514 | $ | (3,251 | ) | $ | (7,137 | ) | $ | 93,126 | $ | 152,330 | $ | (89,662 | ) | $ | (17,461 | ) | $ | 45,207 | |||||||||||||
| (1) | Volume increases include the effects of the acquisitions of American Financial Holdings, Inc. on February 14, 2003, First and Ocean Bancorp on December 31, 2003, and CCBT Financial Companies, Inc. and Foxborough Savings Bank on April 30, 2004. |
| (2) | Includes changes in interest income and expense not due solely to volume or rate changes. |
18
Table 4 — Analysis of Net Interest Income
| Year Ended December 31, | Change | ||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004-2003 | 2003-2002 | |||||||||||||||||
Components of net interest income | |||||||||||||||||||||
| Income on earning assets (fully-taxable equivalent) | $ | 1,263,476 | $ | 1,198,865 | $ | 1,240,120 | $ | 64,611 | $ | (41,255 | ) | ||||||||||
| Expenses on interest-bearing liabilities | 323,623 | 352,138 | 438,600 | (28,515 | ) | (86,462 | ) | ||||||||||||||
| Net interest income (fully-taxable equivalent) | 939,853 | 846,727 | 801,520 | 93,126 | 45,207 | ||||||||||||||||
| Less: fully-taxable equivalent adjustments | (6,471 | ) | (5,896 | ) | (5,003 | ) | 575 | 893 | |||||||||||||
| Net interest income, as reported | $ | 933,382 | $ | 840,831 | $ | 796,517 | $ | 92,551 | $ | 44,314 | |||||||||||
Average yields and rates paid | |||||||||||||||||||||
| Earning assets yield (fully-taxable equivalent) | 5.00 | % | 5.19 | % | 6.30 | % | (0.19 | )% | (1.11 | )% | |||||||||||
| Rate paid on interest-bearing liabilities | 1.53 | % | 1.78 | % | 2.61 | % | (0.25 | )% | (0.83 | )% | |||||||||||
| Net interest rate spread (fully-taxable equivalent) | 3.47 | % | 3.41 | % | 3.69 | % | 0.06 | % | (0.28 | )% | |||||||||||
Net interest margin (fully-taxable equivalent) | 3.72 | % | 3.66 | % | 4.07 | % | 0.06 | % | (0.41 | )% | |||||||||||
Average balances | |||||||||||||||||||||
| Loans | $ | 17,734,537 | $ | 15,633,207 | $ | 13,236,803 | $ | 2,101,330 | $ | 2,396,404 | |||||||||||
| Investment securities | 7,501,956 | 7,464,162 | 6,403,807 | 37,794 | 1,060,355 | ||||||||||||||||
| Securities purchased under agreements to resell | 419 | — | — | 419 | — | ||||||||||||||||
| Fed funds sold and other short term investments | 9,567 | 11,004 | 60,257 | (1,437 | ) | (49,253 | ) | ||||||||||||||
| Total earning assets | 25,246,479 | 23,108,373 | 19,700,867 | 2,138,106 | 3,407,506 | ||||||||||||||||
| Total interest-bearing liabilities | 21,136,495 | 19,772,368 | 16,814,304 | 1,364,127 | 2,958,064 | ||||||||||||||||
| Net earning assets | $ | 4,109,984 | $ | 3,336,005 | $ | 2,886,563 | $ | 773,979 | $ | 449,442 | |||||||||||
Fully-taxable equivalent net interest income for 2004 increased $93.1 million, or 11%, compared to 2003. This increase was primarily attributable to an increase in net earning assets and, to a lesser extent, a decrease in the officesweighted average rate paid on interest-bearing liabilities. The decrease in funding costs was attributable in part to noninterest-bearing deposits comprising a larger share of the Companyfunding base, which allows us to be less reliant on higher-costing certificates of deposit. Together, these factors more than offset the effects of lower prevailing interest rates.
Fully-taxable equivalent interest income increased by $64.6 million in 2004, as compared to 2003, as a result of a $2.1 billion increase in total earning assets. This increase was offset in part by a decrease in the weighted average yield on earning assets from 5.19% in 2003 to 5.00% in 2004, respectively, a decline of 4%. The increases in earning assets, primarily average balances of commercial real estate loans, consumer loans and leases and commercial business loans and leases, resulted from acquisitions and, to a lesser extent, internal growth.
Interest expense decreased by $28.5 million during 2004, as compared to 2003, as a result of a decrease in the weighted average rate paid on interest-bearing liabilities from 1.78% to 1.53% during 2003 and 2004, respectively, a decline of 14%. Year over year, the weighted average cost of deposits declined by 26 basis points and the weighted average cost of borrowings declined by 27 basis points. However, during the last half of 2004, funding costs began to rise. The favorable effect of lower funding costs was offset in part by a $1.4 billion, or 7%, increase in the average balance of interest-bearing liabilities during 2004, as compared to 2003, resulting from acquisitions and, to a lesser extent, internal growth. Average deposits increased by $1.6 billion, of which approximately $1.0 billion came from acquisitions. Excluding acquisitions, average deposits increased by $554 million, or 3%, as growth in demand and money market accounts more than offset a decline in higher-costing certificates of deposit. Average borrowings increased $553 million, or 10%, in 2004 compared to 2003 due, in part, to acquisitions.
Interest rate spread, which represents the difference between the yield earned on our interest-earning assets and the rate on our interest-bearing liabilities, increased to 3.47% from 3.41% on a fully-taxable equivalent basis during 2004 and 2003, respectively, because the 25 basis point decrease in the weighted average rate paid on interest-bearing liabilities was more than the 19 basis point decrease in the weighted average yield on interest-earning assets, reflecting our liability sensitivity during the year. See “Asset-Liability Management” below.
19
The net interest margin increased six basis points during 2004, of which approximately 2 basis points related to the deleveraging program in the fourth quarter of 2004.
Our net interest margin in 2004 benefited from interest rate swap agreements that synthetically convert fixed rate debt to variable rate debt. At December 31, 2004 and 2003, we had entered into $566.5 million and $216.5 million, respectively, notional amount of interest rate swap agreements on fixed-rate debt, pursuant to which we pay a variable rate (based on LIBOR plus a margin) and receive a fixed rate. The combined effect of these interest rate swap agreements was to lower interest expense by $8.4 million and $6.5 million during 2004 and 2003, respectively. See “Asset-Liability Management” for more detailed discussion.
Provision and Allowance for Loan and Lease Losses
Table 5 — Provision for Loan and Lease Losses
| Change | ||||||||||||||||||||||||||||
| Year Ended December 31, | 2004-2003 | 2003-2002 | ||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||
| Provision for loan and lease losses | $ | 40,340 | $ | 42,301 | $ | 44,314 | $ | (1,961 | ) | (5 | )% | $ | (2,013 | ) | (5 | )% | ||||||||||||
The provision for loan and lease losses is recorded to bring the allowance for loan and lease losses to a level deemed appropriate by management based on factors discussed in the “Analysis and Determination of the Allowance for Loan and Lease Losses” in the “Risk Management” section. Although we use judgment in providing for losses, for the reasons discussed under the “Risk Management” section, there can be no assurance that we will not have to increase the amount of our provision for loan and lease losses in future periods. Since 2001, management has implemented numerous procedures to analyze the loan and lease portfolio, including the use of a corporate risk rating migration analysis and a charge-off history analysis, an industry analysis and a stress-testing analysis. As a result, our loan and lease portfolio has performed better with lower classified and criticized asset ratios. The provision in 2004 exceeded net charge-offs of $36.5 million. The provision for loan and lease losses declined slightly from the prior year as charge-offs were lower, asset quality trends remain good and the allowance was trending towards the upper end of the range. The coverage ratio (ratio of the allowance for credit losses to nonperforming loans) was 322% at December 31, 2004 compared to 389% at December 31, 2003. At December 31, 2004 the allowance for credit losses amounted to $249.8 million, or 1.34% of total portfolio loans and leases, as compared to $232.3 million, or 1.42% at December 31, 2003. As shown in Table 22, nonperforming assets amounted to $81.1 million at December 31, 2004 compared to $63.1 million at December 31, 2003.
See “Risk Management” below for further information on the provision for loan and lease losses, net charge-offs, nonperforming assets and other factors we consider in assessing the credit quality of the loan portfolio and establishing the allowance for loan and lease losses.
20
Noninterest Income
Table 6 — Noninterest Income
The following table presents noninterest income for the periods indicated.
| Change | ||||||||||||||||||||||||||||||||
| Year Ended December 31, | 2004-2003 | 2003-2002 | ||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||
| Noninterest income: | ||||||||||||||||||||||||||||||||
| Deposit services | $ | 109,321 | $ | 97,323 | $ | 82,139 | $ | 11,998 | 12 | % | $ | 15,184 | 18 | % | ||||||||||||||||||
| Insurance brokerage commissions | 50,311 | 45,714 | 44,439 | 4,597 | 10 | % | 1,275 | 3 | % | |||||||||||||||||||||||
| Merchant and electronic banking income, net | 50,564 | 41,778 | 37,643 | 8,786 | 21 | % | 4,135 | 11 | % | |||||||||||||||||||||||
| Wealth management services | 39,788 | 31,956 | 32,453 | 7,832 | 25 | % | (497 | ) | (2 | )% | ||||||||||||||||||||||
| Bank-owned life insurance | 23,282 | 22,930 | 20,002 | 352 | 2 | % | 2,928 | 15 | % | |||||||||||||||||||||||
| Investment planning services | 19,418 | 15,692 | 11,572 | 3,726 | 24 | % | 4,120 | 36 | % | |||||||||||||||||||||||
| Net securities (losses) gains | (7,701 | ) | 42,460 | 7,282 | (50,161 | ) | (118 | )% | 35,178 | 483 | % | |||||||||||||||||||||
| Other noninterest income: | ||||||||||||||||||||||||||||||||
| Covered call option premiums | 18,024 | 27,756 | 7,279 | (9,732 | ) | (35 | )% | 20,477 | 281 | % | ||||||||||||||||||||||
| Loan fee income | 26,453 | 24,831 | 21,893 | 1,622 | 7 | % | 2,938 | 13 | % | |||||||||||||||||||||||
| Mortgage banking services income | 6,562 | 10,212 | 8,539 | (3,650 | ) | (36 | )% | 1,673 | 20 | % | ||||||||||||||||||||||
| Venture capital write-downs | (2,880 | ) | (592 | ) | (2,753 | ) | (2,288 | ) | (386 | )% | 2,161 | 78 | % | |||||||||||||||||||
| Miscellaneous income | 6,657 | 7,099 | 4,020 | (442 | ) | (6 | )% | 3,079 | 77 | % | ||||||||||||||||||||||
| Total other noninterest income | 54,816 | 69,306 | 38,978 | (14,490 | ) | (21 | )% | 30,328 | 78 | % | ||||||||||||||||||||||
| Total | $ | 339,799 | $ | 367,159 | $ | 274,508 | $ | (27,360 | ) | (7 | )% | $ | 92,651 | 34 | % | |||||||||||||||||
Deposit services income increased 12% in 2004, primarily as a result of volume and fee increases in deposit accounts and an increase in the volume of overdraft fees. This increase was partially offset by a decline in service charge income on business accounts resulting from the introduction of “Free Business Checking” in 2004. Acquisitions in 2004 and 2003 accounted for a significant portion of the increased volume.
Insurance agency commissions increased 10% in 2004, primarily as a result of increases in renewals and new business in 2004 as well as from agency acquisitions.
Merchant and electronic banking income represents fees and intercharge income generated by the use of our ATMs and debit cards issued by us, along with charges to merchants for credit card transactions processed, net of third-party costs directly attributable to handling these transactions. Merchant and electronic banking income increased 21% in 2004 due to increases in the volume of transactions processed and increased market share from acquisitions.
Wealth management services income increased 25% in 2004. This increase was primarily due to an increase in assets under management, which increased to $10.3 billion at December 31, 2004 from $8.9 billion at December 31, 2003, an increase of $1.4 billion. Improvement in the stock market performance and the acquisition of CCBT accounted for the increase in assets under management in 2004. The acquisition of CCBT in April 2004 accounted for approximately $4.5 million of the $7.8 million increase in revenue.
21
Income from bank owned life insurance (“BOLI”) increased $352 thousand during 2004. BOLI represents life insurance on the lives of certain employees who have consented to allowing Banknorth, NA to be the beneficiary of such policies. The cash surrender value of BOLI was $523.1 million at December 31, 2004 compared to $488.8 million at December 31, 2003. The $34.3 million increase was primarily comprised of amounts from acquisitions and increases in the cash surrender value of policies, which were partially offset by death claims. Most of our BOLI is invested in the “general account” of quality insurance companies. Standard and Poors rated all such general account carriers AA- or better at December 31, 2004. The average carrying value of BOLI in 2004 was $504 million, compared to $465 million in 2003.
Investment planning services income increased 24% during 2004. This increase was primarily attributable to commissions earned from increased sales of mutual funds and third party fixed annuities.
Net securities losses amounted to $7.7 million during 2004 and included a $17.8 million loss recorded as part of the deleveraging program related to the sale of $1.2 billion in securities. Net securities gains in 2003 included a $29.2 million gain as part of a deleveraging program related to the sale of $901 million of securities. Gains and losses from the sale of securities are subject to market and economic conditions and, as a result, there can be no assurance that gains reported in prior periods will be achieved in the future.
Other noninterest income decreased 21% during 2004. This decrease was primarily due to lower income from covered call option premiums, mortgage banking services income and venture capital investments. Premiums received on covered call options declined by $9.7 million during 2004. The covered call option program is managed in conjunction with the fixed income securities portfolio to provide revenue opportunities in addition to the interest income earned on the securities. Covered call activity will vary from year to year as interest rates, levels of market volatility and our strategic objectives for the fixed income securities portfolio change. Reduced market volatility in 2004 compared to the same period last year reduced the income opportunities related to covered call options. Mortgage banking services income declines were due largely to reduced volumes of residential loan originations and loan sales to the secondary market. Venture capital write-downs increased primarily due to lower earnings of a publicly traded bio-science company included in the portfolio of one of our venture capital funds.
22
Noninterest Expense
Table 7 — Noninterest Expense
The following table presents noninterest expense during the periods indicated.
| Change | ||||||||||||||||||||||||||||||||
| Year Ended December 31, | 2004-2003 | 2003-2002 | ||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||
| Noninterest expense Compensation and employee benefits | $ | 356,611 | $ | 326,621 | $ | 311,385 | $ | 29,990 | 9 | % | $ | 15,236 | 5 | % | ||||||||||||||||||
| Occupancy | 63,892 | 59,200 | 52,422 | 4,692 | 8 | % | 6,778 | 13 | % | |||||||||||||||||||||||
| Equipment | 48,480 | 47,459 | 40,933 | 1,021 | 2 | % | 6,526 | 16 | % | |||||||||||||||||||||||
| Data processing | 43,141 | 40,940 | 40,702 | 2,201 | 5 | % | 238 | 1 | % | |||||||||||||||||||||||
| Advertising and marketing | 25,550 | 22,000 | 17,239 | 3,550 | 16 | % | 4,761 | 28 | % | |||||||||||||||||||||||
| Amortization of identifiable intangible assets | 8,627 | 8,946 | 6,492 | (319 | ) | (4 | )% | 2,454 | 38 | % | ||||||||||||||||||||||
| Merger and consolidation costs | 49,635 | 8,104 | 14,691 | 41,531 | 512 | % | (6,587 | ) | (45 | )% | ||||||||||||||||||||||
| Prepayment penalties on borrowings | 61,546 | 30,490 | — | 31,056 | 102 | % | 30,490 | 100 | % | |||||||||||||||||||||||
| Write-off of branch automation project | — | — | 6,170 | — | — | (6,170 | ) | (100 | )% | |||||||||||||||||||||||
| Other noninterest expense: | ||||||||||||||||||||||||||||||||
| Telephone | 14,717 | 12,858 | 13,396 | 1,859 | 14 | % | (538 | ) | (4 | )% | ||||||||||||||||||||||
| Office supplies | 10,638 | 10,513 | 10,736 | 125 | 1 | % | (223 | ) | (2 | )% | ||||||||||||||||||||||
| Postage and freight | 10,657 | 11,187 | 9,707 | (530 | ) | (5 | )% | 1,480 | 15 | % | ||||||||||||||||||||||
| Miscellaneous loan costs | 4,930 | 5,984 | 4,290 | (1,054 | ) | (18 | )% | 1,694 | 39 | % | ||||||||||||||||||||||
| Deposits and other assessments | 3,756 | 3,752 | 3,541 | 4 | 0 | % | 211 | 6 | % | |||||||||||||||||||||||
| Collection and carrying costs of non-performing assets | 2,717 | 2,694 | 2,713 | 23 | 1 | % | (19 | ) | (1 | )% | ||||||||||||||||||||||
| Miscellaneous | 60,204 | 50,522 | 44,975 | 9,682 | 19 | % | 5,547 | 12 | % | |||||||||||||||||||||||
| Total other noninterest expense | 107,619 | 97,510 | 89,358 | 10,109 | 10 | % | 8,152 | 9 | % | |||||||||||||||||||||||
| Total | $ | 765,101 | $ | 641,270 | $ | 579,392 | $ | 123,831 | 19 | % | $ | 61,878 | 11 | % | ||||||||||||||||||
Compensation and employee benefits expense increased 9% during 2004 due primarily to merit increases and the effects of additional employees from acquisitions. The total number of full-time equivalent employees approximated 7,200 at December 31, 2004 compared to 6,700 at December 31, 2003. These increases were slightly offset by reduced expense associated with our self-funded medical plan resulting from a $3.2 million benefit related to favorable claims experience covering the period July 2002 (plan inception) through June 30, 2004. Pension expense (which is included in compensation and employee benefits expense) was $11.4 million and $12.9 million for the years ended December 31, 2004 and 2003, respectively. The decline was primarily due to the increased return on plan assets. The fair value of plan assets as of December 31, 2000.
Number2004 was $263.9 million compared to $237.5 million at December 31, 2003. The increase in plan assets was primarily due to a $47 million contribution in December 2003.
Occupancy expense in 2004 increased 8%. The $4.7 million increase was due primarily to the cost of additional facilities from acquisitions. Equipment expense increased $1.0 million, or 2%, in 2004 primarily due to additional maintenance cost of equipment (including ATMs) and increased security expenses.
23
Advertising and marketing expense increased 16% in 2004. The $3.6 million increase was primarily attributable to expenses incurred to identify and attract customers who were looking for new banking opportunities following Bank of America Corporation’s acquisition of FleetBoston Financial Corporation. The increases in this expense included additional media campaigns (television and radio), new advertising promotions and corporate sponsorships (such as for the Boston Bruins, “Win a day with Ray” promotions and Tobin Bridge sponsorships), as well as expense associated with the development of a new comprehensive product catalogue for use in all of our branches.
Merger and consolidation costs increased $41.5 million during 2004 primarily due to costs incurred in connection with our proposed transaction with TD and, to a lesser extent, our acquisitions of CCBT and Foxborough in April 2004 and our pending acquisition of BostonFed Bancorp, Inc. Merger and consolidation costs relating to the transaction with TD amounted to $38.9 million in 2004, which was principally comprised of $33.2 million of long-term incentive payments pursuant to the change-in-control provision of our Executive Incentive Plan. These non-refundable payments were paid in December 2004 in advance of completion of this transaction, which constitutes a change-in-control for purposes of the Executive Incentive Plan. For a tabular analysis of our merger and consolidation costs, see Note 10 to the Consolidated Financial Statements.
Other noninterest expense increased $10.1 million, or 10%, in 2004. This increase was largely due to a $3.4 million increase in professional (audit and legal) fees, due in part to additional expense incurred for compliance with Sarbanes-Oxley requirements, a $2.7 million increase in consulting fees and a $2.3 million increase in travel and entertainment expenses.
Taxes
Table 8 — Income Tax Expense
| Change | ||||||||||||||||||||||||||||
| Year Ended December 31, | 2004-2003 | 2003-2002 | ||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||
| Income tax expense | $ | 163,097 | $ | 173,660 | $ | 148,681 | $ | (10,563 | ) | (6 | )% | $ | 24,979 | 17 | % | |||||||||||||
Our effective tax rate was 35% in 2004 and 33% in 2003. The increase in the effective tax rate to 35% was primarily due to nondeductible compensation and transaction expenses relating to the merger with TD. We expect the effective tax rate to be approximately 35% in 2005.
We are subject to examinations by various federal and state governmental tax authorities from time to time regarding tax returns we have filed. Currently, certain state income tax returns filed by us in recent years are under examination. In June 2004, the Vermont Department of Taxes assessed three Vermont-based banks, previously acquired by us, for taxes, interest and penalties for the years 2000 and 2001 on the basis that subsidiary investment companies established by these banks pursuant to Vermont law should be considered part of our banking subsidiary for purposes of calculating taxes due the State of Vermont. We believe that we have substantial defenses to this assessment and are in the process of appealing it in accordance with administrative procedures. Although not considered reasonably probable, there can be no assurance that Vermont will not ultimately prevail on this matter. Our estimate of the range of reasonably possible exposure above established reserves on this matter is from $0 to $2.0 million, after federal tax benefits.
24
Comprehensive Income
Table 9 — Comprehensive Income
| Change | ||||||||||||||||||||||||||||
| Year Ended December 31, | 2004-2003 | 2003-2002 | ||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||
| Net income | $ | 304,643 | $ | 350,759 | $ | 298,638 | $ | (46,116 | ) | (13 | )% | $ | 52,121 | 17 | % | |||||||||||||
| Unrealized gains (losses) on securities, net of reclassification adjustment and taxes | (7,231 | ) | (110,068 | ) | 77,257 | 102,837 | 93 | % | (187,325 | ) | (242 | )% | ||||||||||||||||
| Unrealized gains (losses) on cash flow hedges, net net of reclassification adjustment and taxes | 146 | 1,575 | (2,054 | ) | (1,429 | ) | (91 | )% | 3,629 | 177 | % | |||||||||||||||||
| Minimum pension liability, net of tax | (1,079 | ) | (446 | ) | (825 | ) | (633 | ) | (142 | )% | 379 | 46 | % | |||||||||||||||
| Comprehensive income | $ | 296,479 | $ | 241,820 | $ | 373,016 | $ | 54,659 | 23 | % | $ | (131,196 | ) | (35 | )% | |||||||||||||
Our available for sale investment portfolio had net unrealized gains of $669 thousand, $11.8 million and $181.3 million ($435 thousand, $7.7 million and $117.5 million net of applicable income tax effects, respectively) at December 31, 2004, 2003 and 2002, respectively. The changes from year to year reflect changes in prevailing interest rates and, to a lesser degree, the size of the available for sale investment portfolio. For additional information, see Note 4 to the Consolidated Financial Statements. The change in fair value of our interest-bearing liabilities, which would tend to offset the change in fair value of available for sale securities, is not included in other comprehensive income.
For additional information, see the Consolidated Statements of Changes in Shareholders’ Equity in the Consolidated Financial Statements.
Segment Reporting
Our primary business segment is Community Banking. During 2004 and 2003, the Community Banking Offices Deposits
----- --------------- --------
(Dollarssegment represented over 90% of the combined revenues and income of the consolidated group and, thus, this is the only reporting segment as defined by Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Insurance Agency, Investment Planning and Wealth Management each represented less than 5% of our combined revenues in Thousands)
Maine 61 $ 2,779,434
New Hampshire 80 3,464,010
Massachusetts 74 3,051,450
Vermont 37 1,569,719
New York 2004 and 2003 and consolidated assets at December 31, 2004 and 2003. Insurance Agency reflects commissions on insurance agency activities, Investment Planning reflects commissions from the sale of third party mutual funds, annuities, stocks and bonds and Wealth Management reflects fees from wealth management operations.
25
Table 10 — Business Segment Information
The following tables set forth selected operating data for our business segments in 2004 and 2003.
| Year Ended December 31, 2004 | |||||||||||||||||||||
| Community | Insurance | Investment | Wealth | ||||||||||||||||||
| Banking | Agency | Planning | Management | Total | |||||||||||||||||
| Net interest income (expense) | $ | 934,244 | $ | (574 | ) | $ | 55 | $ | (343 | ) | $ | 933,382 | |||||||||
| Provision for loan and lease losses | 40,340 | — | — | — | 40,340 | ||||||||||||||||
| Net interest income (expense) after provision for loan and lease losses | 893,904 | (574 | ) | 55 | (343 | ) | 893,042 | ||||||||||||||
| Noninterest income | 227,787 | 51,389 | 19,418 | 41,205 | 339,799 | ||||||||||||||||
| Noninterest expense: | |||||||||||||||||||||
| Compensation and employee benefits | 290,970 | 32,624 | 13,269 | 19,748 | 356,611 | ||||||||||||||||
| Occupancy and equipment | 105,966 | 4,695 | 765 | 946 | 112,372 | ||||||||||||||||
| Data processing | 35,721 | 492 | 1,758 | 5,170 | 43,141 | ||||||||||||||||
| Advertising and marketing | 24,878 | 275 | 45 | 352 | 25,550 | ||||||||||||||||
| Amortization of intangibles | 8,263 | 364 | — | — | 8,627 | ||||||||||||||||
| Merger and consolidation costs | 49,635 | — | — | — | 49,635 | ||||||||||||||||
| Other | 159,170 | 5,026 | 1,601 | 3,368 | 169,165 | ||||||||||||||||
| Total non-interest expense | 674,603 | 43,476 | 17,438 | 29,584 | 765,101 | ||||||||||||||||
| Pre-tax income | $ | 447,088 | $ | 7,339 | $ | 2,035 | $ | 11,278 | $ | 467,740 | |||||||||||
| Total assets | $ | 28,536,436 | $ | 77,179 | $ | 7,110 | $ | 67,085 | $ | 28,687,810 | |||||||||||
| Net interest income and noninterest income as a percent of total income | 91.3 | % | 4.0 | % | 1.5 | % | 3.2 | % | 100.0 | % | |||||||||||
| Percent of pre-tax income to total pre-tax income | 95.6 | % | 1.6 | % | 0.4 | % | 2.4 | % | 100.0 | % | |||||||||||
| Percent of assets to total consolidated assets | 99.5 | % | 0.3 | % | 0.0 | % | 0.2 | % | 100.0 | % | |||||||||||
26
| Year Ended December 31, 2003 | |||||||||||||||||||||
| Community | Insurance | Investment | Wealth | ||||||||||||||||||
| Banking | Agency | Planning | Management | Total | |||||||||||||||||
| Net interest income (expense) | $ | 842,058 | $ | (367 | ) | $ | 10 | $ | (870 | ) | $ | 840,831 | |||||||||
| Provision for loan and lease losses | 42,301 | — | — | — | 42,301 | ||||||||||||||||
| Net interest income (expense) after provision for loan and lease losses | 799,757 | (367 | ) | 10 | (870 | ) | 798,530 | ||||||||||||||
| Noninterest income | 271,975 | 46,687 | 15,692 | 32,805 | 367,159 | ||||||||||||||||
| Noninterest expense: | |||||||||||||||||||||
| Compensation and employee benefits | 271,395 | 29,506 | 10,305 | 15,415 | 326,621 | ||||||||||||||||
| Occupancy and equipment | 100,632 | 3,755 | 684 | 1,588 | 106,659 | ||||||||||||||||
| Data processing | 34,960 | 473 | 1,301 | 4,206 | 40,940 | ||||||||||||||||
| Advertising and marketing | 21,262 | 448 | 95 | 195 | 22,000 | ||||||||||||||||
| Amortization of intangibles | 8,642 | 304 | — | — | 8,946 | ||||||||||||||||
| Merger and consolidation costs | 8,104 | — | — | — | 8,104 | ||||||||||||||||
| Other | 118,638 | 5,316 | 1,173 | 2,873 | 128,000 | ||||||||||||||||
| Total non-interest expense | 563,633 | 39,802 | 13,558 | 24,277 | 641,270 | ||||||||||||||||
| Pre-tax income | $ | 508,099 | $ | 6,518 | $ | 2,144 | $ | 7,658 | $ | 524,419 | |||||||||||
| Total assets | $ | 26,352,435 | $ | 69,664 | $ | 4,622 | $ | 27,013 | $ | 26,453,734 | |||||||||||
| Net interest income and noninterest income as a percent of total income | 92.3 | % | 3.8 | % | 1.3 | % | 2.6 | % | 100.0 | % | |||||||||||
| Percent of pre-tax income to total pre-tax income | 96.9 | % | 1.2 | % | 0.4 | % | 1.5 | % | 100.0 | % | |||||||||||
| Percent of assets to total consolidated assets | 99.6 | % | 0.3 | % | 0.0 | % | 0.1 | % | 100.0 | % | |||||||||||
27 987,744
Connecticut 6 254,899
--- -----------
Total 285 $12,107,256
=== ===========
Fourth Quarter Summary
The following table presents operating results for the quarters ended December 31, 2004 and 2003.
Table 11 — Fourth Quarter Summary
| Three Months Ended | ||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2004 | 2003 | Amount | Percent | |||||||||||||
Condensed Income Statement | ||||||||||||||||
| Net interest income | $ | 246,063 | $ | 213,288 | $ | 32,775 | 15 | % | ||||||||
| Provision for loan and lease losses | 10,670 | 10,400 | 270 | 3 | % | |||||||||||
| Net interest income after loan and lease losses provision | 235,393 | 202,888 | 32,505 | 16 | % | |||||||||||
| Noninterest income(1) | 70,591 | 84,435 | (13,844 | ) | (16 | )% | ||||||||||
| Noninterest expense(2) | 267,359 | 155,676 | 111,683 | 72 | % | |||||||||||
| Income before income taxes | 38,625 | 131,647 | (93,022 | ) | (71 | )% | ||||||||||
| Income tax expense | 17,927 | 40,085 | (22,158 | ) | (55 | )% | ||||||||||
| Net income | $ | 20,698 | $ | 91,562 | $ | (70,864 | ) | (77 | )% | |||||||
Per Common Share | ||||||||||||||||
| Basic earnings per share | $ | 0.12 | $ | 0.56 | $ | (0.45 | ) | (79 | )% | |||||||
| Diluted earnings per share | $ | 0.12 | $ | 0.55 | $ | (0.43 | ) | (78 | )% | |||||||
Financial Ratios | ||||||||||||||||
| Return on average assets(3) | 0.29 | % | 1.39 | % | (1.11 | )bp | ||||||||||
| Return on average equity(3) | 2.66 | % | 14.72 | % | (12.06 | )bp | ||||||||||
| Net interest margin (fully-taxable equivalent)(3) | 3.87 | % | 3.65 | % | 0.22 | bp | ||||||||||
| Noninterest income as a percent of total income | 22.29 | % | 28.36 | % | (6.07 | )bp | ||||||||||
| Efficiency ratio(4) | 84.43 | % | 52.29 | % | 32.14 | bp | ||||||||||
bp — denotes basis points; 100 bp = 1%
| (1) | Noninterest income included net securities losses of $17.8 million in the fourth quarter of 2004 incurred as part of the deleveraging program. |
| (2) | Noninterest expense included prepayment penalties on borrowings of $61.5 million in the fourth quarter of 2004 incurred as part of the deleveraging program. |
| (3) | Annualized. |
| (4) | Represents noninterest expense as a percentage of net interest income and noninterest income. |
Results for the fourth quarter of 2004 were impacted by our balance sheet deleveraging program ($0.29 per diluted share) and certain merger and consolidation costs ($0.17 per diluted share) including those associated with the pending acquisition of 51% of Banknorth by TD. The deleveraging included the sale of approximately $1.2 billion of securities with a weighted average yield of 2.77% and prepayment of a similar amount of borrowings with a weighted average rate of 4.77%, both of which had a duration of approximately 3.5 years. As a result, a $51.6 million after-tax loss was incurred. Net interest income increased 15% as a result of acquisitions and, to a lesser extent, internal growth. The net interest margin for the quarter ended December 31, 2004 was 3.87%, an increase of 22 basis points from the fourth quarter last year. This increase was primarily attributable to an increase in net earning assets of $1.0 billion along with an increase of 17 ITEM 3. LEGAL PROCEEDINGSbasis points in the interest rate spread.
Noninterest income totaled $70.6 million and $84.4 million for the fourth quarters ended December 31, 2004 and 2003, respectively, which included a loss of $17.8 million and a gain of $2.7 million of net securities gains (losses), respectively. The Company is involvednet securities losses in routine legal proceedingsthe fourth quarter of
28
2004 was part of a deleveraging program mentioned above. Increases in 2004 in deposit services income, merchant and electronic banking income and wealth management services income were partially offset by lower other noninterest income. Included in other noninterest income was $4.0 million and $6.4 million of covered call option premium income and $6.9 million and $5.4 million of loan fee income for the fourth quarters ended December 31, 2004 and 2003, respectively.
Noninterest expense increased by $111.7 million in the fourth quarter of 2004, as compared to the fourth quarter of 2003, due primarily to prepayment penalties on borrowings of $61.5 million and an increase in merger and consolidation costs of $37.0 million. The prepayment penalties were incurred as part of a deleveraging program implemented in the fourth quarter of 2004, and the increase in merger and consolidation costs was attributable to costs incurred in connection with the pending transaction with TD, in each case as discussed above. The efficiency ratio was 84.43% in the fourth quarter of 2004 compared to 52.32% in the comparable period last year. See Note 24 in the Consolidated Financial Statements for selected quarterly data for the years ended December 31, 2004 and 2003.
The effective tax rate was 46% in the fourth quarter of 2004 compared to 30% in the fourth quarter of 2003. The increase in 2004 in the tax rate was primarily attributable to nondeductible compensation and transaction expenses relating to the transaction with TD. The 30% effective tax rate in the fourth quarter of 2003 was lower than the annual effective tax rate of 33% due primarily to a favorable IRS audit settlement occurring in the ordinaryfourth quarter. We expect the tax rate to be approximately 35% in 2005.
Annualized return on average equity and return on average assets were 2.66% and .029%, respectively, for the quarter ended December 31, 2004 and were 14.72% and 1.39%, respectively, for the comparable quarter last year. The declines in the ratios were attributable to the lower net income resulting from the balance sheet deleveraging and additional merger and consolidation costs mentioned above.
Comparison of 2003 and 2002
Our consolidated total assets increased by $3.0 billion, or 13%, from $23.4 billion at December 31, 2002 to $26.5 billion at December 31, 2003. This increase was primarily attributable to two banking acquisitions and two insurance agency acquisitions in 2003. Shareholders’ equity totaled $2.5 billion and $2.1 billion at December 31, 2003 and 2002, respectively. The increase was primarily attributable to net income and the issuance of our stock for acquisitions in 2003.
We reported net income of $350.8 million during 2003, or $2.15 per diluted share, compared with net income of $298.6 million, or $1.99 per diluted share, for 2002. Return on average assets and return on average equity were 1.37% and 14.51%, respectively, for 2003 and 1.39% and 16.25%, respectively, for 2002.
Net interest income on a fully taxable-equivalent basis totaled $846.7 million during 2003, as compared with $801.5 million in 2002. The $45.2 million, or 6%, increase in 2003 was primarily attributable to the combined effects of increases in the average balances of our interest-earning assets and interest-bearing liabilities as well as an $86.5 million, or 20%, decrease in interest expense on interest-bearing liabilities as a result of decreases in interest rates in a declining interest rate environment. In 2003, the net interest margin decreased 41 basis points to 3.66% from to 4.07% in 2002.
The provision for loan and lease losses amounted to $42.3 million in 2003 compared to $44.3 million in 2002. The decline in the provision for loan and lease losses of $2.0 million was due to lower net charge-offs, a higher coverage ratio of the allowance to nonperforming loans and leases and lower delinquency ratios. Nonperforming assets decreased $5.9 million from $69.0 million at December 31, 2002 to $63.1 million at December 31, 2003. The ratio of the allowance to nonperforming loans at December 31, 2003 was 389% compared to 319% at December 31, 2002. The allowance for loan and lease losses represented 1.42% of total loans at December 31, 2003 compared to 1.48% at December 31, 2002.
Noninterest income amounted to $367.2 million and $274.5 million in 2003 and 2002, respectively. The $92.7 million increase was primarily due to increases of $15.2 million in deposit services income, $35.2 million in net securities gains and $20.5 million in covered call option premium income. Deposit
29
services income of $97.3 million reflected 18% growth from 2002 as a result of increased volume, due in part to acquisitions. Net securities gains included $29.2 million recorded as part of a deleveraging program implemented in the second quarter of 2003, which included the sale of $901 million in securities. The increase in covered call option premium income was primarily due to the increased volume of call options written, as well as historically high premium rates related to high interest rate volatility.
Noninterest expense amounted to $641.3 million in 2003 compared with $579.4 million in 2002. The $61.9 million increase included $30.5 million of prepayment penalties on borrowings incurred as part of the deleveraging program in 2003 and was offset by a related gain on the sale of securities of $29.2 million recorded in noninterest income. The remaining $31.4 million increase in noninterest expense in 2003 was primarily due to increases in compensation and employee benefits expense, occupancy expense and equipment expense. The efficiency ratio improved to 53.09% during 2003 from 54.10% in 2002 primarily as a result of the integration of recent acquisitions, as well as internal operating improvements.
Our comprehensive income amounted to $241.8 million and $373.0 million during 2003 and 2002, respectively. Comprehensive income differed from our net income in 2003 primarily because of a $110.1 million net unrealized loss on securities, a $1.6 million net unrealized loss on cash flow hedges and an $446 thousand unrealized loss on a minimum pension liability. For additional information, see the Consolidated Statements of Changes in Shareholders’ Equity in the Consolidated Financial Statements.
Financial Condition
Our consolidated total assets increased by $2.2 billion, or 8%, from $26.5 billion at December 31, 2003 to $28.7 billion at December 31, 2004. Total average assets were $28.2 billion and $25.6 billion in 2004 and 2003, respectively. These increases were primarily due to acquisitions in 2004 and 2003. See “General — Acquisitions” above and Note 3 to the Consolidated Financial Statements. Total liabilities increased by $1.6 billion in 2004, primarily due to acquisitions. The increases in assets and liabilities were offset in part by the deleveraging program in 2004, under which $1.2 billion of securities were sold and a similar amount of borrowings were prepaid. Shareholders’ equity totaled $3.2 billion and $2.5 billion at December 31, 2004 and 2003, respectively.
| Investment Securities |
The securities portfolio is utilized for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, generates interest and dividend income from the investment of excess funds, provides liquidity to meet liquidity requirements and is used as collateral for public deposits and wholesale funding sources.
The average balance of the securities portfolio, which consists of securities available for sale and securities held to maturity, was $7.5 billion in 2004 and 2003. The securities portfolio consists primarily of mortgage-backed securities and collateralized mortgage obligations which include securitized residential real estate loans held in a REMIC. Other securities in the portfolio are U.S. Government and agency securities and other bonds and notes. Included in U.S. Government and federal agency securities at December 31, 2004 were $475.1 million of Federal National Mortgage Association and Federal Home Loan Mortgage Corp. securities. The majority of securities available for sale are rated AAA or equivalently rated. Mortgage-backed securities and collateralized mortgage obligations comprised 83% of the securities available for sale at December 31, 2004 compared to 58% at December 31, 2003. The average yield on securities was 4.33% during 2004, compared 4.22% during 2003.
30
Table 12 — Investment Securities
The following table sets forth our investment securities at the dates indicated.
| December 31, | |||||||||||||||||||||||||
| 2004 | 2003 | 2002 | |||||||||||||||||||||||
| % of | % of | % of | |||||||||||||||||||||||
| Amount | Total | Amount | Total | Amount | Total | ||||||||||||||||||||
| Securities available for sale: | |||||||||||||||||||||||||
| U.S. Government and federal agencies | $ | 528,973 | 7.66 | % | $ | 2,359,347 | 33.18 | % | $ | 1,539,447 | 23.50 | % | |||||||||||||
| Tax-exempt bonds and notes | 166,901 | 2.42 | % | 138,280 | 1.94 | % | 95,332 | 1.46 | % | ||||||||||||||||
| Other bonds and notes | 285,742 | 4.14 | % | 365,109 | 5.13 | % | 356,551 | 5.44 | % | ||||||||||||||||
| Mortgage-backed securities | 5,130,478 | 74.30 | % | 3,834,958 | 53.93 | % | 3,659,334 | 55.86 | % | ||||||||||||||||
| Collateralized mortgage obligations | 599,304 | 8.68 | % | 264,545 | 3.72 | % | 581,357 | 8.88 | % | ||||||||||||||||
| Total debt securities | 6,711,398 | 97.20 | % | 6,962,239 | 97.90 | % | 6,232,021 | 95.14 | % | ||||||||||||||||
| Federal Home Loan Bank stock | 116,904 | 1.69 | % | 104,397 | 1.47 | % | 275,768 | 4.21 | % | ||||||||||||||||
| Federal Reserve Bank stock | 60,338 | 0.87 | % | 37,666 | 0.53 | % | 35,250 | 0.54 | % | ||||||||||||||||
| Other equity securities | 16,456 | 0.24 | % | 6,868 | 0.10 | % | 7,177 | 0.11 | % | ||||||||||||||||
| Total equity securities | 193,698 | 2.80 | % | 148,931 | 2.10 | % | 318,195 | 4.86 | % | ||||||||||||||||
| Total securities available for sale | 6,905,096 | 100.00 | % | 7,111,170 | 100.00 | % | 6,550,216 | 100.00 | % | ||||||||||||||||
| Net unrealized gain | 669 | 11,822 | 181,251 | ||||||||||||||||||||||
| Fair value of securities available for sale | $ | 6,905,765 | $ | 7,122,992 | $ | 6,731,467 | |||||||||||||||||||
| Securities held to maturity: | |||||||||||||||||||||||||
| Collateralized mortgage obligations | $ | 87,013 | $ | 124,240 | $ | 216,409 | |||||||||||||||||||
| Amortized cost of securities held to maturity | $ | 87,013 | $ | 124,240 | $ | 216,409 | |||||||||||||||||||
| Fair value of securities held to maturity | $ | 87,507 | $ | 124,344 | $ | 221,571 | |||||||||||||||||||
| Excess of fair value over recorded value | $ | 494 | $ | 104 | $ | 5,162 | |||||||||||||||||||
| Fair value as a % of amortized cost | 100.6 | % | 100.1 | % | 102.4 | % | |||||||||||||||||||
31
Table 13 — Maturities of Debt Securities
The following table sets forth the contractual maturities and fully-taxable equivalent weighted average yields on our debt securities at December 31, 2004. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| Amortized Cost Maturing in | ||||||||||||||||||||||||||||||||||||||||
| Less Than | More than 5 to | More than | ||||||||||||||||||||||||||||||||||||||
| 1 Year | 1 to 5 Years | 10 Years | 10 Years | Total | ||||||||||||||||||||||||||||||||||||
| Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||||||||
| Available for Sale: | ||||||||||||||||||||||||||||||||||||||||
| U.S. Government and federal agencies | $ | 15,157 | 5.03% | $ | 463,816 | 3.08% | $ | 50,000 | 3.40% | $ | — | 0.00% | $ | 528,973 | 3.16% | |||||||||||||||||||||||||
| Tax-exempt bonds and notes | 89,036 | 1.89% | 8,386 | 4.24% | 11,538 | 4.44% | 57,941 | 4.42% | 166,901 | 3.06% | ||||||||||||||||||||||||||||||
| Other bonds and notes | 49,195 | 5.54% | 45,315 | 4.91% | 8,382 | 6.18% | 182,850 | 5.97% | 285,742 | 5.74% | ||||||||||||||||||||||||||||||
| Mortgage-backed securities | 38 | 5.86% | 35,589 | 5.63% | 306,335 | 5.76% | 4,788,516 | 4.60% | 5,130,478 | 4.68% | ||||||||||||||||||||||||||||||
| Collateralized mortgage obligations | — | 0.00% | 3,773 | 6.35% | 13,994 | 4.06% | 581,537 | 4.27% | 599,304 | 4.28% | ||||||||||||||||||||||||||||||
| Total | $ | 153,426 | 3.37% | $ | 556,879 | 3.43% | $ | 390,249 | 5.37% | $ | 5,610,844 | 4.61% | $ | 6,711,398 | 4.53% | |||||||||||||||||||||||||
| Held to Maturity: | ||||||||||||||||||||||||||||||||||||||||
| Collateralized mortgage obligations | $ | 118 | 7.23% | $ | 5,315 | 6.53% | $ | 26,703 | 6.22% | $ | 54,877 | 5.98% | $ | 87,013 | 6.09% | |||||||||||||||||||||||||
Securities available for sale are carried at fair value and had net unrealized gains of $669 thousand at December 31, 2004 and $11.8 million at December 31, 2003. See Note 4 to the Consolidated Financial Statements. These unrealized gains and losses do not impact net income or regulatory capital but are recorded as adjustments to shareholders’ equity, net of deferred income taxes. Unrealized gains and losses, net of related deferred income taxes, are a component of our Comprehensive Income. See the Consolidated Statement of Changes in Shareholders’ Equity in the Consolidated Financial Statements.
| Loans |
Total loans and leases (including loans held for sale) averaged $17.7 billion during 2004 compared to $15.6 billion during 2003, an increase of $2.1 billion, or 13%. Excluding acquisitions, total loans and leases increased $1.3 billion. Average loans as a percent of average earning assets amounted to 70% and 68% in 2004 and 2003, respectively.
32
Table 14 — Composition of Loan and Lease Portfolio
The following table presents the composition of our loan and lease portfolio at the dates indicated.
| December 31, | |||||||||||||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||||||||||||||||||||||
| % of | % of | % of | % of | % of | |||||||||||||||||||||||||||||||||||||
| Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | ||||||||||||||||||||||||||||||||
| Residential real estate loans | $ | 3,081,217 | 16.57 | % | $ | 2,710,483 | 16.58 | % | $ | 2,382,197 | 16.95 | % | $ | 2,627,125 | 20.66 | % | $ | 2,248,714 | 20.73 | % | |||||||||||||||||||||
| Commercial real estate loans: | |||||||||||||||||||||||||||||||||||||||||
| Permanent first mortgage loans | 5,297,812 | 28.49 | % | 4,696,428 | 28.73 | % | 4,151,674 | 29.54 | % | 3,509,311 | 27.60 | % | 2,663,775 | 24.56 | % | ||||||||||||||||||||||||||
| Construction and development loans | 951,701 | 5.12 | % | 832,434 | 5.09 | % | 640,375 | 4.55 | % | 584,728 | 4.60 | % | 291,388 | 2.69 | % | ||||||||||||||||||||||||||
| Total | 6,249,513 | 33.61 | % | 5,528,862 | 33.82 | % | 4,792,049 | 34.09 | % | 4,094,039 | 32.20 | % | 2,955,163 | 27.25 | % | ||||||||||||||||||||||||||
| Commercial business loans and leases | |||||||||||||||||||||||||||||||||||||||||
| Commercial business loans | 3,838,366 | 20.64 | % | 3,188,504 | 19.51 | % | 2,865,617 | 20.39 | % | 2,353,933 | 18.51 | % | 2,244,648 | 20.70 | % | ||||||||||||||||||||||||||
| Commercial business leases | 90,228 | 0.49 | % | 98,590 | 0.60 | % | 102,857 | 0.73 | % | 108,720 | 0.86 | % | 64,256 | 0.59 | % | ||||||||||||||||||||||||||
| Total | 3,928,594 | 21.13 | % | 3,287,094 | 20.11 | % | 2,968,474 | 21.12 | % | 2,462,653 | 19.37 | % | 2,308,904 | 21.29 | % | ||||||||||||||||||||||||||
| Consumer loans and leases | |||||||||||||||||||||||||||||||||||||||||
| Consumer loans | 5,333,448 | 28.69 | % | 4,816,217 | 29.47 | % | 3,898,638 | 27.74 | % | 3,494,979 | 27.48 | % | 3,251,268 | 29.98 | % | ||||||||||||||||||||||||||
| Consumer leases | 222 | 0.00 | % | 3,306 | 0.02 | % | 14,650 | 0.10 | % | 36,534 | 0.29 | % | 81,613 | 0.75 | % | ||||||||||||||||||||||||||
| Total | 5,333,670 | 28.69 | % | 4,819,523 | 29.49 | % | 3,913,288 | 27.84 | % | 3,531,513 | 27.77 | % | 3,332,881 | 30.73 | % | ||||||||||||||||||||||||||
| Total loans receivable | $ | 18,592,994 | 100.00 | % | $ | 16,345,962 | 100.00 | % | $ | 14,056,008 | 100.00 | % | $ | 12,715,330 | 100.00 | % | $ | 10,845,662 | 100.00 | % | |||||||||||||||||||||
Table 15 — Scheduled Contractual Amortization of Certain Loans and Leases at December 31, 2004
The following table sets forth the scheduled contractual amortization of our construction and development loans and commercial business loans and leases at December 31, 2004, as well as the amount of such loans which are scheduled to mature after one year which have fixed or adjustable interest rates.
| Commercial | |||||||||||||
| Real Estate | |||||||||||||
| Construction | Commercial | ||||||||||||
| and Development | Business Loans | ||||||||||||
| Loans | and Leases | Total | |||||||||||
| Amounts due: | |||||||||||||
| Within one year | $ | 370,026 | $ | 2,046,306 | $ | 2,416,332 | |||||||
| After one year through five years | 345,650 | 1,393,134 | 1,738,784 | ||||||||||
| Beyond five years | 236,025 | 489,154 | 725,179 | ||||||||||
| Total | $ | 951,701 | $ | 3,928,594 | $ | 4,880,295 | |||||||
| Interest rate terms on amounts due after one year: | |||||||||||||
| Fixed | $ | 55,808 | $ | 691,938 | $ | 747,746 | |||||||
| Adjustable | 525,867 | 1,190,350 | 1,716,217 | ||||||||||
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Table 16 — Average Loans and Leases
The following table presents average loans and leases during the periods indicated.
| Year Ended December 31, | Change | ||||||||||||||||
| 2004 | 2003 | Amount | Percent | ||||||||||||||
| Residential real estate mortgages | $ | 2,997,572 | $ | 2,839,969 | $ | 157,603 | 6 | % | |||||||||
| Commercial real estate mortgages | 5,959,510 | 5,162,413 | 797,097 | 15 | % | ||||||||||||
| Commercial business loans and leases | 3,686,919 | 3,153,293 | 533,626 | 17 | % | ||||||||||||
| Consumer loans and leases | 5,090,536 | 4,477,532 | 613,004 | 14 | % | ||||||||||||
| Total average loans and leases | $ | 17,734,537 | $ | 15,633,207 | $ | 2,101,330 | 13 | % | |||||||||
Residential real estate loans (including loans held for sale) averaged $3.0 billion and $2.8 billion in 2004 and 2003, respectively. Excluding acquisitions, average residential loans decreased approximately $138 million, or 4%, as a result of continued refinancing activity and prepayments in a low interest rate environment. The weighted average yield on residential real estate loans decreased from 5.61% in 2003 to 5.01% in 2004, primarily due to the repricing of adjustable-rate loans, the refinancing of fixed-rate loans at lower rates and prepayments.
Residential mortgage loans held for sale amounted to $51.7 million and $41.7 million at December 31, 2004 and 2003, respectively. We are currently selling substantially all 30-year conforming fixed-rate loans that we originate.
Commercial real estate loans averaged $6.0 billion in 2004 and $5.2 billion in 2003, a 15% increase. Excluding acquisitions, average commercial real estate loans increased $461 million, or 8%, in 2004. Most of our markets reflected increases, with the largest increases in Massachusetts and Connecticut. The average yield on commercial real estate loans during 2004 was 5.79%, as compared to 6.06% in 2003, a decrease of 27 basis points. The lower yield reflects the effect of the competitive pricing for variable-rate loans, the refinancing of fixed-rate loans at lower rates and the origination of new loans at the lower prevailing rates.
Commercial business loans and leases averaged $3.7 billion in 2004 and $3.2 billion in 2003, an increase of 17%. Excluding acquisitions, average commercial business loans and leases increased $447 million, or 14%, in 2004. Massachusetts reflected the strongest growth. The yield on commercial business loans and leases decreased to 4.92% in 2004 from 5.10% in 2003. The decrease in the yield was primarily due to lower rates on new loans and the repricing of variable-rate loans.
Table 17 — Commercial Loans by State
The following table presents commercial loans by geographical area at the dates indicated.
| Commercial Real Estate Loans | Commercial Business Loans and Leases | ||||||||||||||||||||||||||||||||
| December 31, | Change | December 31, | Change | ||||||||||||||||||||||||||||||
| 2004 | 2003 | Amount | Percent | 2004 | 2003 | Amount | Percent | ||||||||||||||||||||||||||
| Massachusetts | $ | 3,085,278 | $ | 2,565,064 | $ | 520,214 | 20 | % | $ | 1,569,911 | $ | 1,173,803 | $ | 396,108 | 34 | % | |||||||||||||||||
| Maine | 933,677 | 885,791 | 47,886 | 5 | % | 787,822 | 658,902 | 128,920 | 20 | % | |||||||||||||||||||||||
| New Hampshire | 767,590 | 732,249 | 35,341 | 5 | % | 564,604 | 494,811 | 69,793 | 14 | % | |||||||||||||||||||||||
| Vermont | 664,063 | 645,608 | 18,455 | 3 | % | 433,055 | 438,483 | (5,428 | ) | (1 | )% | ||||||||||||||||||||||
| Connecticut | 583,907 | 504,624 | 79,283 | 16 | % | 412,601 | 332,749 | 79,852 | 24 | % | |||||||||||||||||||||||
| New York | 214,998 | 195,526 | 19,472 | 10 | % | 160,601 | 188,346 | (27,745 | ) | (15 | )% | ||||||||||||||||||||||
| Total | $ | 6,249,513 | $ | 5,528,862 | $ | 720,651 | 13 | % | $ | 3,928,594 | $ | 3,287,094 | $ | 641,500 | 20 | % | |||||||||||||||||
Consumer loans and leases averaged $5.1 billion in 2004 and $4.5 billion in 2003, an increase of 14%. Acquisitions accounted for approximately $110 million, or 18%, of the $613 million increase. The growth in consumer loans was primarily in home equity loans and indirect automobile loans. The average yield on
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consumer loans and leases decreased to 5.13% in 2004 from 5.61% in 2003 due to lower rates on new loans and the repricing of adjustable rate loans.
Table 18 — Composition of Consumer Loans and Leases
The following table presents the composition of consumer loans and leases at the dates indicated.
| December 31, | Change | ||||||||||||||||||||||||
| 2004 | 2003 | 2004-2003 | |||||||||||||||||||||||
| % of | % of | ||||||||||||||||||||||||
| Amount | Total | Amount | Total | Amount | Percent | ||||||||||||||||||||
| Home equity | $ | 3,123,525 | 58.55 | % | $ | 2,472,471 | 51.31 | % | $ | 651,054 | 26.33 | % | |||||||||||||
| Automobile | 1,678,817 | 31.48 | % | 1,596,504 | 33.13 | % | 82,313 | 5.16 | % | ||||||||||||||||
| Mobile home | 111,874 | 2.10 | % | 141,407 | 2.93 | % | (29,533 | ) | (20.89 | )% | |||||||||||||||
| Vision, dental, and orthodontia fee plan | 49,934 | 0.94 | % | 120,694 | 2.50 | % | (70,760 | ) | (58.63 | )% | |||||||||||||||
| Education | 159,314 | 2.99 | % | 234,226 | 4.86 | % | (74,912 | ) | (31.98 | )% | |||||||||||||||
| Other | 210,206 | 3.94 | % | 254,221 | 5.27 | % | (44,015 | ) | (17.31 | )% | |||||||||||||||
| Total | $ | 5,333,670 | 100.00 | % | $ | 4,819,523 | 100.00 | % | $ | 514,147 | 10.67 | % | |||||||||||||
| Deposits |
Total deposits averaged $18.9 billion during 2004 compared to $17.3 billion during 2003, an increase of 9%. Acquisitions accounted for approximately $1.0 billion of the $1.6 billion increase. Money market and NOW accounts and noninterest-bearing accounts showed the largest increases. The ratio of loans to deposits was 97% and 91% at December 31, 2004 and 2003, respectively.
Included within the deposit categories are government banking deposits, which averaged $1.7 billion in 2004 and $1.2 billion in 2003. Government banking deposits include deposits received from state and local governments, school districts, public colleges/universities, utility districts, public housing authorities and court systems in our market area. Many of these deposits exceed the FDIC insurance coverage amounts and require us to pledge specific collateral or maintain private insurance.
Table 19 — Change in Average Deposit Balances by Category of Deposit
The following table presents the changes in the average balances of deposits during the periods indicated.
| Year Ended December 31, | Change | |||||||||||||||||
| 2004 | 2003 | Amount | Percent | |||||||||||||||
| Noninterest-bearing deposits | $ | 3,987,311 | $ | 3,224,035 | $ | 763,276 | 24 | % | ||||||||||
| Interest-bearing deposits: | ||||||||||||||||||
| Money market/ NOW accounts | 7,678,644 | 6,652,030 | 1,026,614 | 15 | % | |||||||||||||
| Savings accounts | 2,563,838 | 2,399,179 | 164,659 | 7 | % | |||||||||||||
| Certificates of deposit | 4,647,746 | 5,027,739 | (379,993 | ) | (8 | )% | ||||||||||||
| Brokered deposits | 272 | — | 272 | 100 | % | |||||||||||||
| Total interest-bearing deposits | 14,890,500 | 14,078,948 | 811,552 | 6 | % | |||||||||||||
| Total average deposits | $ | 18,877,811 | $ | 17,302,983 | $ | 1,574,828 | 9 | % | ||||||||||
Average noninterest-bearing deposits increased 24% in 2004 to $4.0 billion from $3.2 billion in 2003. Acquisitions accounted for approximately $203 million, or 27%, of the $763 million increase.
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Average interest-bearing deposits increased $812 million during 2004 to $14.9 billion. Excluding acquisitions, average savings, money market and NOW deposits increased $593 million, while average certificates of deposit and brokered deposits declined $599 million in the aggregate. The decline in certificates of deposits resulted from our decision to allow deposits priced above alternate funding costs to run off. The average rates paid on total interest-bearing deposits decreased by 26 basis points from 1.34% in 2003 to 1.08% in 2004, reflecting the decline in prevailing interest rates and run-off of higher-costing certificates of deposit.
Table 20 — Maturity of Certificates of Deposits of $100,000 or more
The following table presents the scheduled maturities of certificates of deposits of $100,000 or more at the date indicated.
| December 31, 2004 | ||||||||
| Balance | Percent | |||||||
| 3 months or less | $ | 320,776 | 28 | % | ||||
| Over 3 to 6 months | 236,327 | 21 | % | |||||
| Over 6 to 12 months | 236,136 | 21 | % | |||||
| More than 12 months | 336,121 | 30 | % | |||||
| $ | 1,129,360 | 100 | % | |||||
| Other Funding Sources |
We use both short-term and long-term borrowings to balance earning asset growth vis-à-vis deposit growth.
Short-term borrowings, which include federal funds purchased, securities sold under agreements to repurchase and borrowings from the U.S. Treasury and the Federal Home Loan Bank (“FHLB”), amounted to $3.8 billion at December 31, 2004, up $1.5 billion, or 63% from $2.3 billion at December 31, 2003. See Note 11 to the Consolidated Financial Statements.
At December 31, 2004, we also had a $110 million unsecured line of credit. The line is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. We did not draw on this line during 2004, and in January 2005, we replaced this line of credit with a line of credit from TD with similar terms. We also have additional borrowing capacity as more fully described under “Liquidity” below.
Long-term debt includes FHLB advances, senior notes, subordinated notes, junior subordinated debentures, wholesale securities sold under agreements to repurchase, capital lease obligations and other debt obligations, each with original terms greater than one year. Long-term debt amounted to $2.2 billion at December 31, 2004, down from $3.5 billion at December 31, 2003. The decrease in long-term debt was due in part to the prepayment of approximately $1.2 billion in debt as part of the deleveraging program in 2004. See Note 12 to the Consolidated Financial Statements.
At December 31, 2004 and 2003, FHLB borrowings amounted to $429 million and $1.5 billion, respectively. FHLB collateral consists primarily of first mortgage loans secured by single-family properties, certain unencumbered securities and other qualified assets. These borrowings had an average cost of 4.04% during 2004 as compared to 4.36% during 2003.
At December 31, 2004 and 2003, we had $150 million of 5-year senior notes carrying a fixed rate of 3.75%. These securities, which were issued in April 2003 for general corporate purposes, including share repurchases, were rated A3 by Moody’s at December 31, 2004.
At December 31, 2004 and 2003, subordinated notes consisted of $200 million of 7.625% subordinated notes due 2011 issued by our banking subsidiary in 2001. The notes qualify as Tier 2 capital for regulatory purposes.
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At December 31, 2004 and 2003, long-term wholesale securities sold under repurchase agreements amounted to $1.1 billion and $1.4 billion, respectively, and were collateralized by mortgage-backed securities and U.S. Government obligations. See Note 12 to the Consolidated Financial Statements.
At December 31, 2004 and 2003, we had outstanding $310.7 million and $305.6 million, respectively, of junior subordinated debentures issued by us to affiliated trusts. See “Capital” below.
Off-Balance Sheet Arrangements
We are party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers and to reduce our own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans, commitments to invest in real estate limited partnerships, standby letters of credit, recourse arrangements on serviced loans, forward commitments to sell loans, foreign currency forward contracts and interest rate swaps. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our Consolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and recourse arrangements is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. For forward commitments to sell loans, the contract or notional amounts do not represent exposure to credit loss. We control the credit risk of our forward commitments to sell loans through credit approvals, limits and monitoring procedures. See Note 17 to the Consolidated Financial Statements for more information regarding the nature, business purpose and the importance of off-balance sheet arrangements.
Table 21 — Contractual Obligations and Commitments
The following table summarizes our contractual cash obligations, other commitments and derivative financial instruments at December 31, 2004.
| Payments Due By Period | |||||||||||||||||||||
| Less than | After | ||||||||||||||||||||
| Contractual Obligations(1) | Total | 1 Year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
| Long-term debt | $ | 1,086,162 | $ | 278,516 | $ | 32,600 | $ | 158,819 | $ | 616,227 | |||||||||||
| Capital lease obligations | 6,720 | 62 | 471 | 1,281 | 4,906 | ||||||||||||||||
| Repurchase agreements — wholesale | 1,100,000 | 350,000 | 750,000 | — | — | ||||||||||||||||
| Total long-term debt | 2,192,882 | 628,578 | 783,071 | 160,100 | 621,133 | ||||||||||||||||
| Operating lease obligations | 123,862 | 24,396 | 38,531 | 26,702 | 34,233 | ||||||||||||||||
| Pension plan contribution(2) | 20,000 | 20,000 | — | — | — | ||||||||||||||||
| Other benefit plan payments — estimated | 46,875 | 4,318 | 9,055 | 12,602 | 20,900 | ||||||||||||||||
| Other vendor obligations | 25,683 | 10,290 | 10,290 | 5,103 | — | ||||||||||||||||
| Total contractual obligations | $ | 2,409,302 | $ | 687,582 | $ | 840,947 | $ | 204,507 | $ | 676,266 | |||||||||||
| (1) | Other liabilities are short term in nature, except for liabilities related to employee benefit plans. |
| (2) | Funding requirements for pension benefits after 2005 are excluded due to the significant variability in the assumptions required to project the timing of future cash contributions. |
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| Amount of Commitment Expiration — Per Period | |||||||||||||||||||||
| Total | |||||||||||||||||||||
| Amounts | Less than | After | |||||||||||||||||||
| Other Commitments | Committed | 1 Year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
| Unused portions on lines of credit | $ | 4,857,077 | $ | 1,334,860 | $ | 304,656 | $ | 57,889 | $ | 3,159,672 | |||||||||||
| Standby letters of credit | 464,299 | 115,737 | 89,087 | 82,479 | 176,996 | ||||||||||||||||
| Commercial letters of credit | 23,094 | 18,378 | 1,656 | 304 | 2,756 | ||||||||||||||||
| Commitments to originate loans | 1,924,832 | 1,180,640 | 391,645 | 37,071 | 315,476 | ||||||||||||||||
| Other commitments | 263,199 | 12,378 | 7,668 | 2,684 | 240,469 | ||||||||||||||||
| Total commitments | $ | 7,532,501 | $ | 2,661,993 | $ | 794,712 | $ | 180,427 | $ | 3,895,369 | |||||||||||
| Amount of Commitment Expiration — Per Period | ||||||||||||||||||||||
| Total | ||||||||||||||||||||||
| Amounts | Less than | After | ||||||||||||||||||||
| Derivative Financial Instruments | Committed | 1 Year | 1-3 Years | 4-5 Years | 5 Years | |||||||||||||||||
| Interest rate swaps (notional amount): | ||||||||||||||||||||||
| Commercial loan swap program: | ||||||||||||||||||||||
| Interest rate swaps with commercial borrowers(1) | $ | 690,856 | $ | 2,000 | $ | 28,858 | $ | 141,350 | $ | 518,648 | ||||||||||||
| Interest rate swaps with dealers(2) | 690,856 | 2,000 | 28,858 | 141,350 | 518,648 | |||||||||||||||||
| Interest rate swaps on borrowings(3) | 566,500 | 216,500 | — | 150,000 | 200,000 | |||||||||||||||||
| Forward commitments to sell loans | 83,016 | 83,016 | — | — | — | |||||||||||||||||
| Foreign currency rate contracts(4): | ||||||||||||||||||||||
| Forward contracts with customers | 33,575 | 26,760 | 6,815 | — | — | |||||||||||||||||
| Forward contracts with dealers | 33,747 | 26,913 | 6,834 | — | — | |||||||||||||||||
| Foreign exchange options to purchase | 35,713 | 25,716 | 9,997 | — | — | |||||||||||||||||
| Foreign exchange options to sell | 35,713 | 25,716 | 9,997 | — | — | |||||||||||||||||
| Rate-locked loan commitments | 35,961 | 35,961 | — | — | — | |||||||||||||||||
| (1) | Swaps with commercial loan customers (Banknorth receives fixed, pays variable). |
| (2) | Offsetting swaps with dealers (Banknorth pays fixed, receives variable), which offset the interest rate swaps with commercial borrowers. |
| (3) | Swaps on borrowings (Banknorth pays variable, receives fixed). |
| (4) | Forward contracts for customer accommodations. |
Risk Management
The primary goal of our risk management program is to determine how certain existing or emerging issues in the financial services industry affect the nature and extent of the risks faced by us. Based on a periodic self-evaluation, we determine key issues and develop plans and/or objectives to address risk. Our board of directors and management believe that there are seven applicable “risk categories,” consisting of credit, interest rate, liquidity, transaction, compliance, strategic and reputation risk. Each risk category is viewed from a quantity of risk perspective (high, medium or low) coupled with a quality of risk management perspective. In addition, an aggregate level of risk is assigned 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.
Our board of directors has established the overall strategic direction for Banknorth. It approves our overall risk policies and oversees our overall risk management process. The board has established two board committees, consisting of Audit and Board Risk Management, and has charged each committee with overseeing key risks. In addition, there is a management Operational Risk Committee, which is
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comprised of senior officers in key business lines, which identifies and monitors key operational risks. The Operational Risk Committee reports on a regular basis to the Board Risk Management Committee.
Credit Risk Management
| General |
The Board Risk Management Committee monitors our credit risk management. Our strategy for credit risk management includes centralized policies and uniform underwriting criteria for all loans. The strategy also includes diversification on a geographic, industry and customer level, regular credit examinations and quarterly management review of large loans and loans with a deterioration of credit quality. We maintain an internal rating system that provides a mechanism to regularly monitor the credit quality of our loan portfolio. The rating system is intended to identify and measure the credit quality of lending relationships. For consumer loans, we utilize standard credit scoring systems to access consumer credit risks and to price consumer products accordingly. We strive to identify potential problem loans early, take any necessary charge-offs promptly and maintain adequate reserve levels. See “Analysis and Determination of the Allowance for Loan and Lease Losses” below and Note 1 to the Consolidated Financial Statements. SeeTable 15 for information about the scheduled contractual amortization of certain parts of our loan portfolio at December 31, 2004.
Our residential loan portfolio accounted for 16% and 17% of the total loan portfolio at December 31, 2004 and 2003, respectively. Our residential loans are generally secured by single-family homes (one-to-four units) and have a maximum loan to value ratio of 80%, unless the excess is protected by mortgage insurance. At December 31, 2004, 0.25% of our residential loans was nonperforming, as compared to 0.26% at December 31, 2003. Nonperforming residential real estate loans increased by $689 thousand in 2004, while the total residential loan portfolio increased by $370.7 million.
Our commercial real estate loan portfolio accounted for 34% of the total loan portfolio at December 31, 2004 and 2003. This portfolio consists primarily of loans secured by income-producing commercial real estate (including office and industrial buildings), service industry real estate (including hotels and health care facilities), multi-family (over four units) residential properties and retail trade real estate. These loans generally are secured by properties located in the New England states and upstate New York. Generally, the investment-based real estate mortgages are diversified among various property types with somewhat higher concentration in multi-family, office and retail properties. At December 31, 2004, 0.48% of our commercial real estate loans was nonperforming, as compared to 0.36% at December 31, 2003.
Our commercial business loan and lease portfolio accounted for 21% of the total loan portfolio at December 31, 2004 compared to 20% at December 31, 2003. Commercial business loans and leases are generally made to small to medium size businesses located within our market areas. These loans are not concentrated in any particular industry, but reflect the broad-based economy of New England and upstate New York. Commercial loans consist primarily of loans secured by various equipment, machinery and other corporate assets, as well as loans to provide working capital to businesses in the form of lines of credit. Through a subsidiary, we also offer direct equipment leases, which amounted to $90.2 million at December 31, 2004. From time to time we purchase participations in syndicated commercial loans. At December 31, 2004, we had $428 million of outstanding participations in syndicated commercial loans and had an additional $337 million of unfunded commitments related to these participations. At December 31, 2004, 0.83% of our commercial business loans and leases were nonperforming, as compared to 0.74% at December 31, 2003. SeeTable 17for the geographic distribution of our commercial loans and leases at December 31, 2004 and 2003.
Consumer loans and leases accounted for 29% of our total loan portfolio at December 31, 2004 and December 31, 2003. In the fourth quarter of 2003, we ceased originating vision, dental and orthodontia fee plan loans and mobile home loans. The decrease in these loan types during 2004 reflect the run-off of these loans. At December 31, 2004, 0.14% of our consumer loans was nonperforming, as compared to
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0.18% at December 31, 2003. SeeTable 18for a breakdown of our consumer loan and lease portfolio by type of loan and lease at December 31, 2004 and 2003.
| Nonperforming Assets |
Nonperforming assets consist of nonperforming loans (which do not include accruing loans 90 days or more overdue), other real estate owned, repossessed assets and certain securities available for sale. Total nonperforming assets as a percentage of total assets amounted to 0.28% at December 31, 2004 and 0.24% at December 31, 2003. Total nonperforming assets as a percentage of total loans and other nonperforming assets amounted to 0.44% and 0.39% at December 31, 2004 and 2003, respectively. The increase from December 31, 2003 was due to a $10 million increase in nonperforming commercial real estate loans, as well as an $8 million increase in nonperforming commercial business loans and leases. The $18 million increase was due to two credit relationships.
Table 22 — Five-Year Schedule of Nonperforming Assets
The following table presents a summary of nonperforming assets at the dates indicated.
| December 31, | ||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||
| Nonaccrual loans | ||||||||||||||||||||||
| Residential real estate loans | $ | 7,846 | $ | 7,157 | $ | 5,781 | $ | 8,311 | $ | 9,894 | ||||||||||||
| Commercial real estate loans | 29,948 | 19,700 | 17,649 | 17,124 | 12,155 | |||||||||||||||||
| Commercial business loans and leases | 32,421 | 24,412 | 32,693 | 40,341 | 32,583 | |||||||||||||||||
| Consumer loans and leases | 7,344 | 8,493 | 9,194 | 9,470 | 6,329 | |||||||||||||||||
| Total nonaccrual loans | 77,559 | 59,762 | 65,317 | 75,246 | 60,961 | |||||||||||||||||
| Troubled debt restructurings | — | — | — | — | 673 | |||||||||||||||||
| Total nonperforming loans | 77,559 | 59,762 | 65,317 | 75,246 | 61,634 | |||||||||||||||||
| Other nonperforming assets: | ||||||||||||||||||||||
| Other real estate owned, net of related reserves | 1,878 | 529 | 100 | 1,861 | 4,074 | |||||||||||||||||
| Repossessions, net of related reserves | 1,666 | 2,812 | 3,536 | 2,016 | 1,424 | |||||||||||||||||
| Securities available for sale | — | — | — | 2,104 | — | |||||||||||||||||
| Total | 3,544 | 3,341 | 3,636 | 5,981 | 5,498 | |||||||||||||||||
| Total nonperforming assets | $ | 81,103 | $ | 63,103 | $ | 68,953 | $ | 81,227 | $ | 67,132 | ||||||||||||
| Accruing loans 90 days or more overdue | $ | 5,254 | $ | 4,915 | $ | 3,373 | $ | 6,227 | $ | 5,973 | ||||||||||||
| Total nonperforming loans as a percentage of total loans | 0.42 | % | 0.37 | % | 0.46 | % | 0.59 | % | 0.57 | % | ||||||||||||
| Total nonperforming assets as a percentage of total assets | 0.28 | % | 0.24 | % | 0.29 | % | 0.39 | % | 0.37 | % | ||||||||||||
| Total nonperforming assets as a percentage of total loans and other nonperforming assets | 0.44 | % | 0.39 | % | 0.49 | % | 0.64 | % | 0.62 | % | ||||||||||||
We continue to focus on asset quality issues and to allocate significant resources to the key asset quality control functions of credit policy and administration and loan review. The collection, workout and asset management functions focus on the reduction of nonperforming assets. Despite the ongoing focus on asset quality and relatively low levels of nonperforming assets, there can be no assurance that adverse changes in the real estate markets and economic conditions in our primary market areas will not result in higher nonperforming asset levels in the future and negatively impact our operations through higher provisions for loan losses, net charge-offs, decreased accrual of interest income and increased noninterest expenses as a result of the allocation of resources to the collection and workout of nonperforming assets.
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Residential real estate loans are generally placed on nonaccrual when they become 120 days past due or are in the process of foreclosure. All closed-end consumer loans 90 days or more past due and any equity lines of credit in the process of foreclosure are placed on nonaccrual status. Consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. We generally place all commercial real estate loans and commercial business loans and leases which are 90 days or more past due, unless secured by sufficient cash or other assets immediately convertible to cash, on nonaccrual status. At December 31, 2004, we had $5.3 million of accruing loans which were 90 days or more delinquent, as compared to $4.9 million of such loans at December 31, 2003. We also may place loans on nonaccrual and, therefore, nonperforming status which are currently less than 90 days past due or performing in accordance with their terms but which in our judgment are likely to present future principal and/or interest repayment problems and which thus ultimately would be classified as nonperforming.
| Net Charge-offs |
Net charge-offs amounted to $36.5 million in 2004, as compared to $37.3 million in 2003. Net charge-offs represented 0.21% and 0.24% of average loans and leases outstanding in 2004 and 2003, respectively.
Table 23 — Five-Year Table of Activity in the aggregateAllowance for Loan and Lease Losses
The following table presents net charge-offs by loan type and the activity in the allowance for loan and lease losses during the periods indicated.
| Year Ended December 31, | ||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||
| Allowance at the beginning of period | $ | 232,287 | $ | 208,273 | $ | 189,837 | $ | 153,550 | $ | 155,048 | ||||||||||||
| Additions due to acquisitions | 13,665 | 19,008 | 12,794 | 31,277 | — | |||||||||||||||||
| Charge-offs: | ||||||||||||||||||||||
| Residential real estate mortgages | 613 | 197 | (138 | ) | 626 | 1,828 | ||||||||||||||||
| Commercial real estate mortgages | 17 | 577 | 1,290 | 2,267 | 3,566 | |||||||||||||||||
| Commercial business loans and leases | 20,159 | 16,272 | 24,455 | 20,899 | 7,790 | |||||||||||||||||
| Consumer loans and leases | 29,898 | 32,563 | 26,395 | 21,860 | 21,508 | |||||||||||||||||
| Total loans and leases charged off | 50,687 | 49,609 | 52,002 | 45,652 | 34,692 | |||||||||||||||||
| Recoveries: | ||||||||||||||||||||||
| Residential real estate mortgages | 2,741 | 64 | 122 | 241 | 107 | |||||||||||||||||
| Commercial real estate mortgages | 54 | 1,761 | 117 | 222 | 2,371 | |||||||||||||||||
| Commercial business loans and leases | 6,452 | 6,367 | 8,972 | 4,800 | 2,334 | |||||||||||||||||
| Consumer loans and leases | 4,900 | 4,122 | 4,119 | 3,510 | 4,563 | |||||||||||||||||
| Total loans and leases recovered | 14,147 | 12,314 | 13,330 | 8,773 | 9,375 | |||||||||||||||||
| Net charge-offs | 36,540 | 37,295 | 38,672 | 36,879 | 25,317 | |||||||||||||||||
| Transfer for off-balance sheet loan commitments | (6,600 | ) | — | — | — | — | ||||||||||||||||
| Provision for loan and lease losses | 40,340 | 42,301 | 44,314 | 41,889 | 23,819 | |||||||||||||||||
| Allowance at the end of the period | $ | 243,152 | $ | 232,287 | $ | 208,273 | $ | 189,837 | $ | 153,550 | ||||||||||||
| Total allowances for credit losses: | ||||||||||||||||||||||
| Allowance for loan and lease losses | $ | 243,152 | ||||||||||||||||||||
| Liability for unfunded credit commitments | 6,600 | |||||||||||||||||||||
| Total allowances for credit losses | $ | 249,752 | ||||||||||||||||||||
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| Year Ended December 31, | |||||||||||||||||||||
| 2004 | 2003 | 2002 | 2001 | 2000 | |||||||||||||||||
| Ratio of net charge-offs to average loans and leases outstanding | 0.21 | % | 0.24 | % | 0.29 | % | 0.33 | % | 0.24 | % | |||||||||||
| Ratio of allowance for credit losses to total portfolio loans and leases at end of period | 1.34 | % | 1.42 | % | 1.48 | % | 1.49 | % | 1.42 | % | |||||||||||
| Ratio of allowance for credit losses to nonperforming loans and leases at end of period | 322.02 | % | 388.69 | % | 318.86 | % | 252.29 | % | 249.13 | % | |||||||||||
| Ratio of net chargeoffs (recoveries) as a percent of outstanding average loans and leases(1) | |||||||||||||||||||||
| Residential real estate mortgages | (0.07 | )% | 0.00 | % | (0.01 | )% | 0.02 | % | 0.08 | % | |||||||||||
| Commercial real estate mortgages | 0.00 | % | (0.02 | )% | 0.03 | % | 0.06 | % | 0.04 | % | |||||||||||
| Commercial business loans and leases | 0.37 | % | 0.31 | % | 0.58 | % | 0.69 | % | 0.26 | % | |||||||||||
| Consumer loans and leases | 0.49 | % | 0.64 | % | 0.61 | % | 0.54 | % | 0.54 | % | |||||||||||
| Total portfolio loans and leases at end of period | $ | 18,592,994 | $ | 16,345,962 | $ | 14,056,008 | $ | 12,715,330 | $ | 10,845,662 | |||||||||||
| Total nonperforming loans and leases at end of period | 77,559 | 59,762 | 65,317 | 75,246 | 61,634 | ||||||||||||||||
| Average loans and leases outstanding (excluding loans held for sale) | 17,697,737 | 15,574,078 | 13,182,785 | 11,173,723 | 10,449,753 | ||||||||||||||||
| (1) | Excludes residential real estate loans held for sale |
Table 24 — Foregone Interest
The following table presents the amount of foregone interest on nonperforming loans for the periods indicated.
| Year Ended | ||||||||
| December 31, | ||||||||
| 2004 | 2003 | |||||||
| Interest income that would have been recognized at original contractual terms | $ | 7,424 | $ | 4,748 | ||||
| Amount recognized as interest income on a cash basis | (3,291 | ) | (2,746 | ) | ||||
| Foregone interest | $ | 4,133 | $ | 2,002 | ||||
| Potential Problem Loans |
In addition to the nonperforming loans discussed under “Credit Risk Management” above, we also have loans that are believed30 to 89 days delinquent and still accruing. These loans amounted to $138 million and $142 million at December 31, 2004 and 2003, respectively. These loans and delinquency trends, along with accruing loans which are 90 days or more past due and performing loans which are less than 90 day past due or performing in accordance on their terms which we have placed on nonaccrual status, are considered in the evaluation of the allowance for loan and lease losses and the related determination of the provision for loans and lease losses.
| Analysis and Determination of the Allowance for Loan and Lease Losses |
The allowance for loan and lease losses is maintained at a level determined to be adequate by management to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to income and by recoveries on loans previously charged off. Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment and is determined based on management’s ongoing evaluation. As discussed under “Critical Accounting
42
Policies,” we believe that the methods used by us in determining the allowance for loan and lease losses constitute a critical accounting policy. Although we utilize judgment in providing for losses, for the reasons discussed under “Critical Accounting Policies” and “Credit Risk Management — Nonperforming Assets,” there can be immaterialno assurance that we will not have to increase the amount of our provision for loan and lease losses in future periods. Management determined that the allowance for loan and lease losses was adequate at December 31, 2004.
The allowance for loan and lease losses amounted to $243.2 million at December 31, 2004, as compared to $232.3 million at December 31, 2003. The $10.9 million increase was net of a transfer of $6.6 million to other liabilities related to reserves for off-balance sheet loan commitments. The increase was also impacted by $13.7 million from acquired banks and the effect of the provision for loan and lease losses exceeding net charge-offs during 2004. The ratio of the allowance for credit losses to total portfolio loans and leases at December 31, 2004 and 2003 was 1.34% and 1.42%, respectively. The ratio of the allowance for credit losses to nonperforming loans was 322% at December 31, 2004 and 389% at December 31, 2003. Nonperforming assets amounted to $81.1 million, or 0.28% of total assets, at December 31, 2004 as compared to $63.1 million, or 0.24% of total assets at December 31, 2003. The $18 million increase in nonperforming assets from December 31, 2003 to December 31, 2004 was primarily attributable to an increase in nonperforming commercial real estate loans and commercial business loans and leases. Accruing loans 90 days or more past due amounted to $5.3 million at December 31, 2004, as compared to $4.9 million at December 31, 2003, an increase of $339 thousand.
Table 25 — Allocation of the Allowance for Loan and Lease Losses — Five-Year Schedule
The following table sets forth the allocation of the allowance for loan and lease losses at the dates indicated.
| December 31, | ||||||||||||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||||||||||||||||||||||
| Percent of | Percent of | Percent of | Percent of | Percent of | ||||||||||||||||||||||||||||||||||||
| Loans in Each | Loans in Each | Loans in Each | Loans in Each | Loans in Each | ||||||||||||||||||||||||||||||||||||
| Category to | Category to | Category to | Category to | Category to | ||||||||||||||||||||||||||||||||||||
| Amount | Total Loans | Amount | Total Loans | Amount | Total Loans | Amount | Total Loans | Amount | Total Loans | |||||||||||||||||||||||||||||||
| Residential real estate loans | $ | 6,705 | 16.57 | % | $ | 6,850 | 16.58 | % | $ | 5,800 | 16.95 | % | $ | 5,000 | 20.66 | % | $ | 7,600 | 20.73 | % | ||||||||||||||||||||
| Commercial real estate loans | 103,530 | 33.61 | % | 115,333 | 33.82 | % | 102,294 | 34.09 | % | 98,271 | 32.20 | % | 73,423 | 27.25 | % | |||||||||||||||||||||||||
| Commercial business loans and leases | 87,483 | 21.13 | % | 70,383 | 20.11 | % | 63,940 | 21.12 | % | 58,090 | 19.37 | % | 50,486 | 21.29 | % | |||||||||||||||||||||||||
| Consumer loans and leases | 45,434 | 28.69 | % | 39,721 | 29.49 | % | 36,239 | 27.84 | % | 28,476 | 27.77 | % | 22,038 | 30.73 | % | |||||||||||||||||||||||||
| $ | 243,152 | 100.00 | % | $ | 232,287 | 100.00 | % | $ | 208,273 | 100.00 | % | $ | 189,837 | 100.00 | % | $ | 153,547 | 100.00 | % | |||||||||||||||||||||
For purposes of determining our allowance for loan and lease losses, we specifically evaluate commercial business and commercial real estate loans rated substandard and are in excess of $300 thousand. We evaluate all other loans by loan type on a pooled basis.
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Table 26 — Composition of Allowance for Loan and Lease Losses
The following table presents the amount for allowance for loan and lease losses which is attributable to specifically evaluated loans and all other loans by loan type on a pooled basis.
| December 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Residential real estate loans | $ | 6,705 | $ | 6,850 | $ | 5,800 | ||||||
| Specifically evaluated commercial loans | 44,671 | 41,800 | 27,000 | |||||||||
| Other commercial loans | 146,342 | 143,916 | 139,234 | |||||||||
| Consumer loans and leases | 45,434 | 39,721 | 36,239 | |||||||||
| $ | 243,152 | $ | 232,287 | $ | 208,273 | |||||||
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, goals and objectives that are adopted and reviewed by our board of directors and monitored periodically by the Board Risk Management Committee. The board delegates responsibility for asset-liability management strategies to achieve these goals and objectives to the financial conditionAsset Liability Management Committee (“ALCO”), which is comprised of members of senior management. Senior management determines the strategic directives that guide the day-to-day management of our activities and interest rate risk exposure. The ALCO also reviews and approves all major risk, 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 and the state presidents of our banking subsidiary.
| Interest Rate Risk |
Interest rate risk is the risk of loss to future earnings or long-term value resulting from changes in interest rates and is by far the most significant non-credit risk to which we are exposed. This risk arises directly from our core lending and deposit gathering activities and is predominantly concentrated in our mortgage-related assets, as well as in our non-maturity deposits. Mortgage-related assets typically give borrowers the option to prepay at any time without penalty. Principal cash flows that come from these assets are highly interest rate sensitive. As interest rates fall, borrowers are more likely to pay off their existing mortgages, which results in higher cash flows that we must in turn reinvest. Replacing these higher-rate mortgage assets with lower-rate mortgage assets has the potential to reduce our net interest income unless we can also reduce either our wholesale or retail funding costs. In the low interest rate environment, bank deposits can increase, especially if the market risk premium is not sufficient to adequately compensate investors. Consequently, under such circumstances, we can have even more cash to reinvest in low yielding assets. Conversely, rising rates tend to have the opposite effect on both mortgage assets and non-maturity deposits. Higher rates make borrowers less likely to refinance existing debt, resulting in lower cash flows for us to reinvest. And if the market risk premium is sufficiently high, depositors could be enticed to take additional investment risk and move deposits from banks into riskier assets, such as equity securities. This in turn could result in less cash to invest or even require us to use wholesale funding market sources more actively. In the case of operationshigher interest rates, our funding sources could reprice faster than our assets and at higher rates, thereby reducing our interest rate spread and net interest margin. The degree to which future earnings or long-term value is subject to interest rate risk depends on how closely the characteristics of our interest-earning assets match those of our interest-bearing liabilities.
In addition to directly impacting mortgage asset and deposit cash flows, interest rate changes could affect (i) the amount of loans originated and sold by us, (ii) the level and composition of deposits, (iii) the ability of borrowers to repay adjustable or variable rate loans, (iv) the average maturity of loans and investments, (v) the rate of amortization of premiums paid on securities, capitalized mortgage
44
servicing rights, deferred fees and purchase accounting adjustments, (vi) the fair value of our saleable assets, the amount of unrealized gains and losses on securities available for sale per SFAS No. 115, and the resultant ability to realize gains on the sale of such securities and (vii) per SFAS Nos. 133 and 138, the fair value of derivatives carried on our balance sheet, derivative hedge effectiveness testing and the amount of ineffectiveness recognized in earnings.
| Assessment and Measurement |
The overall objective of interest rate risk management is to deliver consistent net interest income growth and returns on equity over a wide range of possible interest rate environments. To that end, management focuses on (i) key interest rate risk metrics and assessment of Banknorth’s exposure to this risk, (ii) a careful review and consideration of modeling assumptions and (iii) asset and liability management strategies that help attain the corporate goals and objectives adopted by our board of directors.
The primary objective of interest rate risk management is to control our estimated exposure to interest rate risk within limits and guidelines established by the ALCO and approved by our Board. These limits and guidelines reflect our tolerance for interest rate risk over a wide range of both short-term and long-term measurements. In addition, we evaluate interest rate risk based on ongoing business risk measures, liquidation or run-off measures of assets and liabilities on our balance sheet and stress test measures. Ongoing measurements and runoff analysis provide management with information concerning day-to-day operations. Stress testing shows the impact of very extreme but lower probability events. The combination of these measures gives management a comprehensive view of possible risks to future earnings and long-term equity value. We attempt to control interest rate risk by identifying, quantifying and, where appropriate, hedging our exposure to these risks.
| Net Interest Income Sensitivity |
Net interest income is our largest source of revenue. Net interest income sensitivity is our primary short-term measurement used to assess the interest rate risk of our ongoing business. Management believes that net interest income sensitivity gives us the best perspective on how day-to-day decisions affect our interest rate risk profile. We subject estimated net interest income over a 12-month period to various rate movements using a simulation model for various specified interest rate scenarios. Simulations are run monthly and include scenarios where market rates are “shocked” up and down, scenarios where market rates gradually change or “ramp” up and down and scenarios where the slope of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERSmarket yield curve changes. Our base simulation assumes that rates do not change for the next 12 months. The information contained undersensitivity measurement is calculated as the section captioned "Common Stock
Prices"percentage variance of the net interest income simulations to the base simulation results. Results for the gradual “ramps” are compared to policy guidelines and are disclosed in the interest rate risk results below.
As indicated intable 27, assuming a gradual 100 and 200 basis point increase in interest rates starting on December 31, 2004, we estimate that our net interest income in the following 12 months would decrease by 0.68% and 2.13%, respectively. This is because in the event of an upward shift in rates, the simulated increase in interest income would be less than the simulated increase in interest expense because total adjustable rate interest-earning assets generally will reprice less quickly than will total interest-bearing liabilities. Also as indicated inTable 27, assuming a gradual 100 and 200 basis point decrease in interest rates starting on the inside backsame date, we estimate that our net interest income in the following 12 months would increase by 0.20% and decrease by 1.51%. These results are dependent on material assumptions such as interest rate movements, product pricing and customer behavior.
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Table 27 — Sensitivity of Net Interest Income
The following table sets forth the estimated sensitivity of our net interest income for the 12 months following the dates indicated.
| 200 Basis Point | 100 Basis Point | 100 Basis Point | 200 Basis Point | |||||||||||||
| Rate Increase | Rate Increase | Rate Decrease | Rate Decrease | |||||||||||||
| December 31, 2004 | (2.13 | )% | (0.68 | )% | 0.20 | % | (1.51 | )% | ||||||||
| December 31, 2003 | (0.26 | )% | 0.24 | % | (0.71 | )% | N/M | |||||||||
NM Not meaningful.
Our asset-liability management policy on interest rate risk simulation specifies that if market 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%. All interest rate risk measures were within compliance guidelines at December 31, 2004 and 2003.
For additional information regarding our interest rate sensitivity, see “Recent Developments” above.
Derivative Instruments
| Purpose and Benefits |
Derivative financial instruments are important tools that we use to manage interest rate risk. When appropriate, we use derivatives such as interest-rate swaps, interest rate floors, interest rate caps, interest rate corridor agreements and forward security sales, among other instruments.
Certain derivatives are used to hedge certain wholesale funding activities and the mortgage origination pipeline. These instruments are designated as hedges at inception in accordance with SFAS No. 133. At December 31, 2004, our designated hedging activities consisted of $83 million forward commitments related to hedging our mortgage banking operations, a $150 million notional amount interest rate swap at 3-month LIBOR plus 0.41% that hedged $150 million of 3.75% fixed-rate senior notes maturing on May 1, 2008, a $200 million notional amount interest rate swap at 3-month LIBOR plus 3.47% that hedged $200 million of 7.625% fixed-rate subordinated debt issued by Banknorth, NA which matures on June 15, 2011, and five interest rate swaps with an aggregate notional amount of $216.5 million and a weighted average rate of 1-month LIBOR plus 3.82%, which hedge $216.5 million of FHLB advances with a weighted average cost of 5.47% that mature throughout 2005.
We manage the interest rate risk inherent in our mortgage banking operations by entering into forward sales contracts and, to a lesser extent, by purchasing mortgage-backed security options. An increase in market interest rates between the time we commit to terms on a loan and the time we ultimately sell the loan in the secondary market generally will have the effect of reducing the gain (or increasing the loss) we record on the sale. We attempt to mitigate this risk by entering into forward sales commitments in amounts sufficient to cover 70% to 90% of the Company's Annual Report30-year fixed-rate loans which are currently closed or are anticipated to Shareholders
forclose.
For the year ended December 31, 2000 (the "Annual Report")2004, higher mortgage rates contributed to a decline in residential mortgage loan originations.
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Table 28 — Mortgage Loans Held for Sale and Related Hedges
The following table summarizes the average balances of residential mortgage loans held for sale and related hedge positions during the periods indicated.
| Year Ended | ||||||||
| December 31, | ||||||||
| 2004 | 2003 | |||||||
| Residential mortgage loans held for sale | $ | 48,567 | $ | 79,878 | ||||
| Rate-locked loan commitments | 50,710 | 88,492 | ||||||
| Forward sales contracts | 86,149 | 155,698 | ||||||
Interest rate derivatives, primarily interest rate swaps, offered to commercial borrowers through our hedging program are designated as speculative under SFAS 133. However, we believe that our exposure to commercial customer derivatives is incorporated
hereinlimited because these contracts are simultaneously matched at inception with an identical dealer transaction. The commercial customer hedging program allows us to retain variable-rate commercial loans while allowing the customer to synthetically fix the loan rate by reference.
ITEM 6. SELECTED FINANCIAL DATAentering into a variable-to-fixed interest rate swap. For the year ended December 31, 2004, we recorded a total notional amount of $408.8 million of new interest rate swaps with commercial borrowers and an equal notional amount of dealer transactions. It is anticipated that over time, customer interest rate derivatives will reduce the interest rate risk inherent in our longer-term, fixed-rate commercial business and real estate loans. The information containedcustomer-related positions summarized in the table captioned "Selectedbelow include both the customer and offsetting dealer transactions.
| Foreign Exchange or Market Risk |
Our earnings are not directly and materially impacted by movements in foreign currency rates 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.
Foreign currency forward and option contracts are contracts that we enter into as an accommodation for customers involved in international trade for the future delivery or purchase of foreign currency at a specified price. For these credit-worthy customers, we set aside a percentage of the customer’s available line of credit until the foreign currency contract is settled. Foreign exchange and trade services are provided under a private label arrangement with a correspondent bank. Risks arise from the possible inability of the seller and/or our customer to perform and from any resultant exposure to movement in foreign currency exchange rates, limiting our exposure to the replacement value of the contracts rather than the notional principal or contract amounts.
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Table 29 — Derivative Positions
The following table summarizes our derivative positions at December 31, 2004.
Asset-Liability Management Positions
| Notional Amount Maturing | |||||||||||||||||||||||||||||
| Fair | |||||||||||||||||||||||||||||
| December 31, 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | Value | ||||||||||||||||||||||
| Interest rate contracts | |||||||||||||||||||||||||||||
| Pay variable, receive fixed | $ | 216,500 | $ | — | $ | — | $ | 150,000 | $ | 200,000 | $ | 566,500 | $ | (4,420 | ) | ||||||||||||||
| Forward commitments to sell loans | 83,016 | — | — | — | — | 83,016 | (149 | ) | |||||||||||||||||||||
Customer-related Positions
| Notional Amount Maturing | |||||||||||||||||||||||||||||
| December 31, 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | Fair Value | ||||||||||||||||||||||
| Interest rate contracts | |||||||||||||||||||||||||||||
| Receive fixed, pay variable | $ | 2,000 | $ | 13,250 | $ | 15,608 | $ | 49,489 | $ | 610,510 | $ | 690,857 | $ | 17,836 | |||||||||||||||
| Pay fixed, receive variable | 2,000 | 13,250 | 15,608 | 49,489 | 610,510 | 690,857 | (17,836 | ) | |||||||||||||||||||||
| Foreign currency rate contracts | |||||||||||||||||||||||||||||
| Forward contracts with customers | 26,760 | 6,815 | — | — | — | 33,575 | 3,307 | ||||||||||||||||||||||
| Forward contracts with dealers | 26,913 | 6,834 | — | — | — | 33,747 | (3,056 | ) | |||||||||||||||||||||
| Foreign exchange options to purchase | 25,716 | 9,997 | — | — | — | 35,713 | 1,727 | ||||||||||||||||||||||
| Foreign exchange options to sell | 25,716 | 9,997 | — | — | — | 35,713 | (1,727 | ) | |||||||||||||||||||||
| Rate-locked loan commitments(1) | 35,961 | — | — | — | — | 35,961 | 147 | ||||||||||||||||||||||
| (1) | No value has been assigned to potential mortgage servicing rights related to rate-locked loan commitments. |
| 2004 Asset Liability Management Actions |
The most significant factors affecting market risk exposure of net interest income during the year ended December 31, 2004 were (i) changes in the shape of the U.S. Government securities and interest rate swap yield curves, (ii) changes in the prepayment speeds of mortgage assets, (iii) the reduction in deposit interest expense and (iv) the above-described $1.2 billion investment portfolio and wholesale borrowing deleveraging program in 2004.
The targeted federal funds rate ended 2004 at 2.25%, which was 0.50% higher than at September 30, 2004 and 1.25% higher than at December 31, 2003. Long-term interest rates at December 31, 2004 were relatively unchanged, with 10-year U.S. Treasury yields up approximately 10 basis points for the quarter ended December 31, 2004, as compared to the quarter ended September 30, 2004, and down less than 4 basis points as compared to December 31, 2003. Mortgage rates remained level in the fourth quarter, with our 30-year conforming single-family residential mortgage rate below 6%. As a result, the yield curve used to measure interest income sensitivity has flattened considerably.Table 27 incorporates the estimated net impact of these changes, as well as planned 2005 activity, the deleveraging program in the fourth quarter of 2004 and the acquisition of BostonFed on January 21, 2005, on our net interest income assuming various changes in interest rates.
For additional information regarding our interest rate sensitivity, see “Recent Developments” above.
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Liquidity
Our Board Risk Management Committee establishes policies and analyzes and manages liquidity to ensure that adequate funds are available to meet normal operating requirements in addition to unexpected customer demands for funds, such as high levels of deposit withdrawals or loan demand, in a timely and cost-effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and wholesale funds. Ultimately, public confidence is generated through profitable operations, sound credit quality and a strong capital position. Liquidity management is viewed from a long-term and a short-term perspective, as well as from an asset and liability perspective. We monitor liquidity through a regular review of loan and deposit maturities, yield and rate scenarios and loan and deposit forecasts to minimize funding risk. Other factors affecting our ability to meet liquidity needs include variations in the markets served and general economic conditions. We have various funding sources available to us on a parent-only basis as well as through our banking subsidiary, as outlined below.
On a parent-only basis, our commitments and debt service requirements at December 31, 2004 consisted primarily of $310.7 million of junior subordinated debentures and $150 million of 3.75% senior notes due May 1, 2008. See “Capital” and Notes 13 and 22 to the Consolidated Financial Highlights"Statements. The principal sources of funds for us to meet parent-only obligations are dividends from our banking subsidiary, which are subject to regulatory limitations, income from investment securities and borrowings from public and private sources, including draws on pageour $110 million unsecured line of credit which is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. At December 31, 2004 our subsidiary bank had $736.8 million available for dividends that could be paid without prior regulatory approval. In addition, the parent company had $250 million in cash or cash equivalents at December 31, 2004. See also “Financial Condition — Other Funding Sources” above. For information on restrictions on the payment of dividends by our banking subsidiary, see Note 14 to the Consolidated Financial Statements.
For a discussion of a contribution of capital we made in 2003 to our banking subsidiary to enhance its liquidity and capital for regulatory purposes, see “Capital”.
| Banking Subsidiary |
For the Bank, liquidity represents the ability to fund asset growth, accommodate deposit withdrawals and meet other contractual obligations and commercial commitments. See “Table 17 — Contractual Obligations and Commitments” above. Liquidity is measured by the ability to raise cash when needed at a reasonable cost. Many factors affect a bank’s ability to meet its 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 Bank has 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.
We continually monitor and forecast our liquidity position. There are several interdependent methods used by us for this purpose, including daily review of fed funds positions, monthly review of balance sheet changes, and monthly review of liquidity ratios, periodic liquidity forecasts and periodic review of contingent funding plans.
At December 31, 2004, the Bank had in the aggregate $4.4 billion of “immediately accessible liquidity,” defined as cash that could be raised within 1-3 days through collateralized borrowings or security sales. This represented 22% of deposits, as compared to a policy minimum of 10% of deposits.
Also at December 31, 2004, the Bank had in the aggregate “potentially volatile funds” of $3.1 billion. These are funds that might flow out of the Company's Annual ReportBank 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.
49
At December 31, 2004, the ratio of “immediately accessible liquidity” to “potentially volatile funds” was 139%, compared to a policy minimum of 100%.
In addition to the liquidity sources discussed above, we believe that our residential and consumer loan portfolios provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales or securitizations. We believe we also have significant untapped access to the national brokered deposit market. These sources are contemplated as secondary liquidity in our contingent funding plan. We believe that the level of liquidity is incorporatedsufficient to meet current and future funding requirements. For additional information regarding off-balance sheet risks and commitments, see Note 17 to the Consolidated Financial Statements.
We have a shelf registration on file with the Securities and Exchange Commission which allows us to sell up to $1.0 billion of debt securities, preferred stock, depository shares, common stock and warrants and which allows affiliated trusts to sell capital securities. We had $650 million of remaining authority under this shelf registration statement as of December 31, 2004.
In addition, at December 31, 2004, we also had an $110 million unsecured line of credit available to us. This line was replaced in January 2005 with a line of credit from TD with similar terms and conditions.
Capital
We are committed to managing capital for shareholder benefit and maintaining protection for depositors and creditors. At December 31, 2004 and 2003, our shareholders’ equity totaled $3.2 billion and $2.5 billion, respectively, or 11.07% and 9.53% of total assets, respectively.
The increase in shareholders’ equity in 2004 was attributable to our $304.6 million net income in 2004 and our issuance of our common stock with an aggregate value of $304.3 million in connection with acquisitions in 2004. These increases were partially offset by $135.1 million in dividends to shareholders and a $7.2 million net change in unrealized loss on securities available for sale.
In February 2002, our board authorized 8 million shares to be repurchased in the open market. We did not repurchase any shares in 2004. During the year ended December 31, 2003, we repurchased 4.5 million shares at an average price of $23.53. At December 31, 2004, a total of 2.9 million shares were available for repurchase under the existing Board authorization.
Capital guidelines issued by the Federal Reserve Board require us to maintain certain ratios. We maintain capital ratios to exceed “well capitalized” capital levels in accordance with capital guidelines approved by our board of directors. Our Tier 1 Capital, as defined by the Federal Reserve Board, was $2.1 billion or 7.58% of average assets at December 31, 2004, compared to $1.7 billion or 6.65% of average assets at December 31, 2003. We also are required to maintain capital ratios based on the level or our assets, as adjusted to reflect their perceived level of risk. Our regulatory capital ratios currently exceed all applicable requirements. See Note 13 to Consolidated Financial Statements.
The Bank is also subject to federal regulatory capital requirements. At December 31, 2004, the Bank was deemed to be “well capitalized” under the regulations of the Office of the Comptroller of Currency of the United States and in compliance with applicable capital requirements. See Note 13 to the Consolidated Financial Statements.
In 2003, we contributed $70 million to our banking subsidiary in advance of the acquisition of American Financial Holdings, Inc. (“American”), which closed on February 14, 2003 and was financed with 50% stock and 50% cash. The $70 million capital contribution from us to our subsidiary bank was required to maintain our subsidiary bank’s capital ratios above “well-capitalized” levels after the acquisition of American. When evaluating the issuance of long-term debt at the holding company level versus receiving dividends from its subsidiaries, management first considers the regulatory capital ratios of the banking subsidiary and the proforma impact of potential acquisitions on these capital ratios. Company policy is to maintain capital ratios at the bank and holding company at levels in excess of “well-
50
capitalized” levels — specifically a Tier 1 leverage capital ratio between 5.50% and 6.00% (compared to 5.00% needed to be considered “well-capitalized”) and total risk-based capital ratio of 10.50% (compared to 10.00% needed to be considered “well-capitalized”). Although the bank has considerable capital that it can dividend to the holding company without prior regulatory approval, its policy is to maintain capital in excess of the “well-capitalized” thresholds to support changes in the composition of its assets and growth, including by acquisition.
At December 31, 2004, we operated five affiliated trusts for the purpose of issuing to unaffiliated parties capital securities and investing the proceeds from the sale thereof in junior subordinated debentures issued by us. All of the proceeds from the issuance of the capital securities and the common securities issued by the trusts are invested in our junior subordinated debentures, which represent the sole assets of the trusts. The capital securities pay cumulative cash distributions quarterly at the same rate as the junior subordinated debentures held by the trusts. We own all of the outstanding common securities of the trusts and effectively are the guarantor of the obligations of the trusts.
Table 30 — Capital Securities
The following table provides information on each of our affiliated trusts and the outstanding capital securities of such trusts and the related junior subordinated debentures issued by us at December 31, 2004.
| Junior | ||||||||||||||||||||||||
| Issuance | Capital | Common | Subordinated | Stated | Maturity | |||||||||||||||||||
| Name | Date | Securities | Securities | Debentures(1) | Rate | Date | ||||||||||||||||||
| Peoples Heritage Capital Trust I | 1/31/1997 | $ | 61,775 | $ | 3,093 | $ | 64,868 | 9.06% | 2/1/2027 | |||||||||||||||
| Banknorth Capital Trust I | 5/1/1997 | 30,000 | 928 | 30,928 | 10.52% | 5/1/2027 | ||||||||||||||||||
| Ipswich Statutory Trust I | 2/22/2001 | 3,500 | 109 | 3,609 | 10.20% | 2/22/2031 | ||||||||||||||||||
| CCBT Statutory Trust I | 7/31/2001 | 5,000 | 155 | 5,155 | 5.74% | 7/31/2031 | ||||||||||||||||||
| Banknorth Capital Trust II | 2/22/2002 | 200,000 | 6,186 | 206,186 | 8.00% | 4/1/2032 | ||||||||||||||||||
| $ | 300,275 | $ | 10,471 | $ | 310,746 | |||||||||||||||||||
| (1) | Amounts include junior subordinated debentures acquired by affiliated trusts from us with the capital contributed by us in exchange for the common securities of such trusts. Junior subordinated debentures are equal to capital securities plus common securities. |
At December 31, 2004, trust capital securities amounted to 14.6% of Banknorth’s Tier 1 capital. Although pursuant to FIN 46(R), the trusts which issued capital securities are no longer consolidated with Banknorth and these securities therefore are no longer considered a minority interest in consolidated subsidiary for accounting purposes, pursuant to a supervisory letter sent by the Federal Reserve Board to all bank holding companies in July 2003, Banknorth has continued to include trust preferred securities in its Tier 1 capital. On May 6, 2004, the Federal Reserve Board issued a proposed regulation which proposed to permit bank holding companies to continue to include trust preferred securities in Tier 1 capital, subject to stricter quantitative and qualitative standards. Under the proposed regulation, commencing on March 31, 2007, the aggregate amount of restricted core capital elements (which include qualifying trust preferred securities, as well as qualifying cumulative perpetual preferred stock and Class B and Class C minority interests in consolidated subsidiaries, as defined) may not exceed 25% (15% for internationally active bank holding companies) of a bank holding company’s core capital elements (which consist of qualifying common stockholders’ equity, qualifying non-cumulative preferred stock and Class A minority interest in subsidiaries, as defined), net of goodwill. This test is more restrictive than the current limit for trust preferred securities, which does not deduct goodwill prior to calculating the 25% limit or explicitly include minority interests in consolidated subsidiaries, and is likely to reduce the ability of some bank holding companies, particularly those that have completed significant purchase acquisitions, to include trust preferred securities in Tier 1 capital. In addition, the proposed rule would limit the amount of qualifying trust preferred securities and Class C minority interests in excess of the restricted core capital
51
limit that can be included in Tier 2 capital by providing that the amount of such elements, together with subordinated debt and limited life preferred stock, that may be included in Tier 2 capital would be limited to 50% of Tier 1 capital. The proposed rule also would provide that during the last five years prior to maturity of the underlying subordinated note or debentures, trust preferred securities must be treated as limited-life preferred stock, excluding it from Tier 1 capital and amortizing it out of Tier 2 capital at the rate of 20% per year. If the proposed capital regulation were adopted as proposed, we believe that we would continue to qualify as “well capitalized” under Federal Reserve Board regulations. There can be no assurance that the proposed capital regulation will be adopted as proposed or at all.
At December 31, 2004 and 2003, we also had $200 million of 7.625% subordinated notes due in 2011 issued by our banking subsidiary, which qualify as Tier 2 capital for regulatory purposes.
Banking regulators have also established guidelines as to the level of investments in BOLI. These guidelines are expressed in terms of a percentage of Tier 1 capital plus loan loss reserves. Our guideline (which is consistent with regulatory guidelines) is that BOLI should not exceed 25% of our Tier 1 capital plus loan loss reserves, which we monitor monthly. The ratio of BOLI to Tier 1 capital plus loan loss reserves was 22.6% at December 31, 2004 and 25.9% at December 31, 2003. We currently do not anticipate any additional purchases or sales of BOLI.
Critical Accounting Policies
We consider the following to be our critical accounting policies due to the potential impact on our results of operations and the carrying value of certain of our assets based on any changes in judgments and assumptions required to be made by us in the application of these policies.
| Allowance for Loan and Lease Losses |
We maintain an allowance for loan and lease losses at a level which we believe is sufficient to cover potential charge-offs on loans and leases deemed to be uncollectible based on continuous review of a variety of factors. These factors consist of the character and size of the loan portfolio, business and economic conditions, loan growth, charge-off experience, delinquency trends, nonperforming loan trends, portfolio migration data and other asset quality factors. The primary means of adjusting the level of this allowance is through provisions for loan and lease losses, which are established and charged to income on a quarterly basis. Although we use available information to establish the appropriate level of the allowance for loan and lease losses, future additions to the allowance may be necessary because our estimates of the potential losses in our loan and lease portfolio are susceptible to change as a result of changes in the factors noted above. Any such increases would adversely affect our results of operations. At December 31, 2004, our allowance for loan and lease losses amounted to $243.2 million, and during 2004, 2003, and 2002 our provisions for loan and lease losses amounted to $40.3 million, $42.3 million, and $44.3 million, respectively. See also “Credit Risk Management” above.
For the commercial business loans and leases and the commercial real estate loans portfolios, we formally evaluate specific commercial and commercial real estate loans rated “substandard” or worse in excess of $300 thousand. On an ongoing basis, an independent loan review department reviews classified loans to ensure the accuracy of the loan classifications. Estimated reserves for each of these credits are determined by reviewing current collateral value, financial information, cash flow, payment history and trends and other relevant facts surrounding the particular credit. In addition, the appraisal function reviews the reasonableness of the third party appraisals related to these loans. Provisions for losses on the remaining commercial loans are based on pools of similar loans using a combination of historical loss experience and migration analysis, which considers the probability of a loan moving from one risk rating category to another over the passage of time and qualitative adjustments.
For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical charge-off and recovery experience to the current outstanding balance in each loan category, with consideration given to loan growth over the preceding twelve months.
52
Using the determined mid-point of the range, management uses various quantitative and qualitative factors to determine the appropriate point above or below the range mid-point. This process is supported by objective factors including:
| • | historical loss experience; | |
| • | trends in delinquency and nonperforming loans; | |
| • | changes in product offerings or loan terms; | |
| • | changes in underwriting and/or collections policies; | |
| • | changes in management of underwriting and collection departments; and | |
| • | regional and national economic conditions and trends. |
| Accounting for Acquisitions and Review of Goodwill and Other Intangible Assets |
In connection with acquisitions of other companies, we generally record as assets on our financial statements both goodwill and identifiable intangible assets such as core deposits intangibles, non-compete agreements and customer lists. Due to a change in an accounting standard, since January 1, 2002 we no longer amortize the amount of our goodwill through a charge to expense over the period of its expected life. Instead, we regularly evaluate whether the carrying value of our goodwill has become impaired, in which case we reduce its carrying value through a charge to our earnings. Goodwill is evaluated for impairment at the reporting unit level, and there is goodwill recorded in the following reporting units: Community Banking, Insurance Agency and Wealth Management. Core deposit and other identifiable intangible assets are amortized to expense over their estimated useful lives and are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The valuation techniques used by us to determine the carrying value of tangible and intangible assets acquired in acquisitions and the estimated lives of identifiable intangible assets involve estimates for discount rates, projected future cash flows and time period calculations, all of which are susceptible to change based on changes in economic conditions and other factors. Any change in the estimates which we use to determine the carrying value of our goodwill and identifiable intangible assets or which otherwise adversely affects their value or estimated lives would adversely affect our results of operations. At December 31, 2004, our goodwill and identifiable intangible assets amounted to $1.4 billion and $50.4 million, respectively, and during 2004, 2003, and 2002 our amortization expense amounted to $8.6 million, $8.9 million, and $6.5 million, respectively. There was no impairment recorded in 2004, 2003 or 2002.
| Accounting for Pension Plans |
We use a December 31 measurement date to determine our pension expense and related financial disclosure information. In accordance with SFAS No. 87, we set the discount rate for our retirement plans by reference to investment grade bond yields. We use Moody’s published AA yield for long-term corporate bonds as of December 31st as an index, and our discount rate is set within 25 basis points of the index. Moody’s AA yield dropped from 6.01% for December 2003 to 5.66% for December 2004. Similarly, we evaluate the expected long-term rate of return on the assets held in our defined benefit pension plan based on market and economic conditions, the plan’s asset allocation and other factors. As a consequence of our most recent annual review, we reduced the discount rate for all of our employee benefit plans from 6.25% as of December 31, 2003 to 5.75% as of December 31, 2004. Our expected rate of return on our pension plan assets was 8.5% for 2004 and is the same for 2005.
Pension expense is sensitive to changes in the expected return on assets. For example, adjusting the expected rate of return by 25 basis points (while holding other assumptions constant) would increase or decrease the forecasted 2005 expense for our defined benefit plan by approximately $650 thousand.
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Pension expense is also sensitive to changes in the discount rate. For example, adjusting the discount rate by 25 basis points (while holding other assumptions constant) would increase or decrease the forecasted 2005 expense for our defined benefit plan by approximately $1.6 million.
As with the computations on pension expense, cash contribution requirements to the pension plan are sensitive to changes in the assumed discount rate and the assumed rate of return on plan assets. We have traditionally contributed the maximum tax-deductible amount to our pension plan each year.
| Accrued Income Taxes |
We estimate income taxes payable based on the amount we expect to owe various tax authorities. Taxes are discussed in more detail in Note 9 to the Consolidated Financial Statements. Accrued income taxes represent the net estimated amount due to or to be received from taxing authorities. In estimating accrued income taxes, management assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of our tax position. We also rely on tax opinions, recent state audits and historical experience. Although we use available information to record accrued income taxes, underlying estimates and assumptions can change over time as a result of unanticipated events or circumstances such as changes in tax laws influencing our overall tax position.
Accounting Changes
For information on the impact of new accounting standards, see Note 2 to the Consolidated Financial Statements.
Forward Looking Statements
Certain statements contained herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONSare not based on historical facts and are “forward-looking statements” within the meaning of federal securities laws. See “Forward Looking Statements” at the beginning of this report.
Item 7A.Quantitative and Qualitative Disclosures about Market Risk
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
pages 18 through 33 of the Company's Annual Report is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information contained in the section captioned "Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations -— Asset Liability Management" on pages 31 and 32 of the Company's Annual ReportManagement” in Item 7 hereof is incorporated herein by reference.
ITEM
54
| Item 8. | Financial Statements and Supplementary Data |
BANKNORTH GROUP, INC.
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||||
| 2004 | 2003 | |||||||||
Assets | ||||||||||
| Cash and due from banks | $ | 541,994 | $ | 669,686 | ||||||
| Federal funds sold and other short-term investments | 2,312 | 4,645 | ||||||||
| Securities available for sale, at market value | 6,905,765 | 7,122,992 | ||||||||
| Securities held to maturity, market value $87,507 in 2004 and $124,344 in 2003 | 87,013 | 124,240 | ||||||||
| Loans held for sale, market value $52,936 in 2004 and $42,801 in 2003 | 51,693 | 41,696 | ||||||||
| Loans and leases: | ||||||||||
| Residential real estate mortgages | 3,081,217 | 2,710,483 | ||||||||
| Commercial real estate mortgages | 6,249,513 | 5,528,862 | ||||||||
| Commercial business loans and leases | 3,928,594 | 3,287,094 | ||||||||
| Consumer loans and leases | 5,333,670 | 4,819,523 | ||||||||
| Total loans and leases | 18,592,994 | 16,345,962 | ||||||||
| Less: Allowance for loan and lease losses | 243,152 | 232,287 | ||||||||
| Net loans and leases | 18,349,842 | 16,113,675 | ||||||||
| Premises and equipment, net | 300,120 | 264,818 | ||||||||
| Goodwill | 1,365,780 | 1,126,639 | ||||||||
| Identifiable intangible assets | 50,376 | 36,415 | ||||||||
| Bank-owned life insurance | 523,129 | 488,756 | ||||||||
| Other assets | 509,786 | 460,173 | ||||||||
| Total assets | $ | 28,687,810 | $ | 26,453,735 | ||||||
Liabilities and Shareholders’ Equity | ||||||||||
| Deposits: | ||||||||||
| Savings accounts | $ | 2,546,018 | $ | 2,460,522 | ||||||
| Money market and NOW accounts | 7,907,513 | 7,130,534 | ||||||||
| Certificates of deposit (including certificates of $100 thousand or more of $1,129,360 in 2004 and $998,546 in 2003) | 4,484,370 | 4,733,104 | ||||||||
| Brokered deposits | 576 | — | ||||||||
| Noninterest-bearing deposits | 4,289,104 | 3,577,025 | ||||||||
| Total deposits | 19,227,581 | 17,901,185 | ||||||||
| Short-term borrowings | 3,797,823 | 2,336,947 | ||||||||
| Long-term debt | 2,192,882 | 3,545,917 | ||||||||
| Other liabilities | 293,410 | 149,167 | ||||||||
| Total liabilities | 25,511,696 | 23,933,216 | ||||||||
| Commitments and contingencies | ||||||||||
| Shareholders’ equity: | ||||||||||
| Preferred stock, par value $0.01; 5,000,000 shares authorized, none issued | — | — | ||||||||
| Common stock, par value $0.01; 400,000,000 and 200,000,000 shares authorized, 191,672,502 issued in 2004 and 182,292,973 issued in 2003 | 1,917 | 1,823 | ||||||||
| Paid-in capital | 1,763,572 | 1,435,005 | ||||||||
| Retained earnings | 1,677,802 | 1,508,292 | ||||||||
| Treasury stock at cost (12,374,515 shares in 2004 and 20,105,254 shares in 2003) | (265,020 | ) | (430,608 | ) | ||||||
| Accumulated other comprehensive (loss) income | (2,157 | ) | 6,007 | |||||||
| Total shareholders’ equity | 3,176,114 | 2,520,519 | ||||||||
| Total liabilities and shareholders’ equity | $ | 28,687,810 | $ | 26,453,735 | ||||||
See accompanying notes to Consolidated Financial Statements.
55
BANKNORTH GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | ||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||
| Interest and dividend income: | ||||||||||||||
| Interest and fees on loans and leases | $ | 933,833 | $ | 880,185 | $ | 882,190 | ||||||||
| Interest and dividends on securities | 323,172 | 312,784 | 352,927 | |||||||||||
| Total interest and dividend income | 1,257,005 | 1,192,969 | 1,235,117 | |||||||||||
| Interest expense: | ||||||||||||||
| Interest on deposits | 161,004 | 188,836 | 244,648 | |||||||||||
| Interest on borrowed funds | 162,619 | 163,302 | 193,952 | |||||||||||
| Total interest expense | 323,623 | 352,138 | 438,600 | |||||||||||
| Net interest income | 933,382 | 840,831 | 796,517 | |||||||||||
| Provision for loan and lease losses | 40,340 | 42,301 | 44,314 | |||||||||||
| Net interest income after provision for loan and lease losses | 893,042 | 798,530 | 752,203 | |||||||||||
| Noninterest income: | ||||||||||||||
| Deposit services | 109,321 | 97,323 | 82,139 | |||||||||||
| Insurance agency commissions | 50,311 | 45,714 | 44,439 | |||||||||||
| Merchant and electronic banking income, net | 50,564 | 41,778 | 37,643 | |||||||||||
| Wealth management services | 39,788 | 31,956 | 32,453 | |||||||||||
| Bank-owned life insurance | 23,282 | 22,930 | 20,002 | |||||||||||
| Investment planning services | 19,418 | 15,692 | 11,572 | |||||||||||
| Net securities (losses) gains | (7,701 | ) | 42,460 | 7,282 | ||||||||||
| Other noninterest income | 54,816 | 69,306 | 38,978 | |||||||||||
| 339,799 | 367,159 | 274,508 | ||||||||||||
| Noninterest expense: | ||||||||||||||
| Compensation and employee benefits | 356,611 | 326,621 | 311,385 | |||||||||||
| Occupancy | 63,892 | 59,200 | 52,422 | |||||||||||
| Equipment | 48,480 | 47,459 | 40,933 | |||||||||||
| Data processing | 43,141 | 40,940 | 40,702 | |||||||||||
| Advertising and marketing | 25,550 | 22,000 | 17,239 | |||||||||||
| Amortization of identifiable intangible assets | 8,627 | 8,946 | 6,492 | |||||||||||
| Merger and consolidation costs | 49,635 | 8,104 | 14,691 | |||||||||||
| Prepayment penalties on borrowings | 61,546 | 30,490 | — | |||||||||||
| Write-off of branch automation project | — | — | 6,170 | |||||||||||
| Other noninterest expense | 107,619 | 97,510 | 89,358 | |||||||||||
| 765,101 | 641,270 | 579,392 | ||||||||||||
| Income before income tax expense | 467,740 | 524,419 | 447,319 | |||||||||||
| Applicable income tax expense | 163,097 | 173,660 | 148,681 | |||||||||||
| Net income | $ | 304,643 | $ | 350,759 | $ | 298,638 | ||||||||
| Basic earnings per share | $ | 1.78 | $ | 2.18 | $ | 2.01 | ||||||||
| Diluted earnings per share | $ | 1.75 | $ | 2.15 | $ | 1.99 | ||||||||
| Weighted average shares outstanding: | ||||||||||||||
| Basic | 170,766 | 160,914 | 148,213 | |||||||||||
| Dilutive effect of stock options | 3,392 | 2,606 | 1,616 | |||||||||||
| Diluted | 174,158 | 163,520 | 149,829 | |||||||||||
See accompanying notes to Consolidated Financial Statements.
56
BANKNORTH GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
| Accumulated | |||||||||||||||||||||||||||||||||
| Other | |||||||||||||||||||||||||||||||||
| Common | Unearned | Comprehensive | |||||||||||||||||||||||||||||||
| Shares | Par | Paid-in | Retained | Compen- | Treasury | Income | |||||||||||||||||||||||||||
| Outstanding | Value | Capital | Earnings | sation | Stock | (Loss) | Total | ||||||||||||||||||||||||||
Balances at December 31, 2001 | 151,221 | $ | 1,651 | $ | 958,764 | $ | 1,056,678 | $ | (1,017 | ) | $ | (267,529 | ) | $ | 40,568 | $ | 1,789,115 | ||||||||||||||||
| Net income | — | — | — | 298,638 | — | — | — | 298,638 | |||||||||||||||||||||||||
| Unrealized gains on securities, net of reclassification adjustment and taxes | — | — | — | — | — | — | 77,257 | 77,257 | |||||||||||||||||||||||||
| Unrealized losses on cash flow hedges, net of reclassification adjustment and taxes | — | — | — | — | — | — | (2,054 | ) | (2,054 | ) | |||||||||||||||||||||||
| Minimum pension liability, net of tax | — | — | — | — | — | �� | — | (825 | ) | (825 | ) | ||||||||||||||||||||||
| Comprehensive income | 373,016 | ||||||||||||||||||||||||||||||||
| Treasury stock issued for employee benefit plans | 1,939 | — | (6,989 | ) | — | — | 37,395 | — | 30,406 | ||||||||||||||||||||||||
| Treasury stock purchased | (6,350 | ) | — | — | — | — | (154,054 | ) | — | (154,054 | ) | ||||||||||||||||||||||
| Distribution of restricted stock | — | — | (963 | ) | — | — | 1,838 | — | 875 | ||||||||||||||||||||||||
| Common stock issued for acquisitions | 3,769 | 38 | 102,829 | — | — | — | — | 102,867 | |||||||||||||||||||||||||
| Decrease in unearned compensation — ESOP | — | — | 6,137 | — | 1,017 | — | — | 7,154 | |||||||||||||||||||||||||
| Cash dividends declared | — | — | — | (85,894 | ) | — | — | — | (85,894 | ) | |||||||||||||||||||||||
Balances at December 31, 2002 | 150,579 | 1,689 | 1,059,778 | 1,269,422 | — | (382,350 | ) | 114,946 | 2,063,485 | ||||||||||||||||||||||||
| Net income | — | — | — | 350,759 | — | — | — | 350,759 | |||||||||||||||||||||||||
| Unrealized losses on securities, net of reclassification adjustment net of tax | — | — | — | — | — | — | (110,068 | ) | (110,068 | ) | |||||||||||||||||||||||
| Unrealized gains on cash flow hedges, net of reclassification adjustment net of tax | — | — | — | — | — | — | 1,575 | 1,575 | |||||||||||||||||||||||||
| Minimum pension liability, net of tax | — | — | — | — | — | — | (446 | ) | (446 | ) | |||||||||||||||||||||||
| Comprehensive income | 241,820 | ||||||||||||||||||||||||||||||||
| Treasury stock issued for employee benefit plans | 2,674 | — | (6,546 | ) | — | — | 55,223 | — | 48,677 | ||||||||||||||||||||||||
| Treasury stock purchased | (4,466 | ) | — | — | — | — | (105,071 | ) | — | (105,071 | ) | ||||||||||||||||||||||
| Distribution of restricted stock | — | — | (896 | ) | — | — | 1,590 | — | 694 | ||||||||||||||||||||||||
| Common stock issued for acquisitions | 13,401 | 134 | 382,669 | — | — | — | — | 382,803 | |||||||||||||||||||||||||
| Cash dividends declared | — | — | — | (111,889 | ) | — | — | — | (111,889 | ) | |||||||||||||||||||||||
Balances at December 31, 2003 | 162,188 | 1,823 | 1,435,005 | 1,508,292 | — | (430,608 | ) | 6,007 | 2,520,519 | ||||||||||||||||||||||||
| Net income | — | — | — | 304,643 | — | — | — | 304,643 | |||||||||||||||||||||||||
| Unrealized losses on securities, net of reclassification adjustment net of tax | — | — | — | — | — | — | (7,231 | ) | (7,231 | ) | |||||||||||||||||||||||
| Unrealized gains on cash flow hedges, net of reclassification adjustment net of tax | — | — | — | — | — | — | 146 | 146 | |||||||||||||||||||||||||
| Minimum pension liability, net of tax | — | — | — | — | — | — | (1,079 | ) | (1,079 | ) | |||||||||||||||||||||||
| Comprehensive income | 296,479 | ||||||||||||||||||||||||||||||||
| Treasury stock issued for employee benefit plans, net of tax of $40.7 million | 7,729 | — | 24,797 | — | — | 164,837 | — | 189,634 | |||||||||||||||||||||||||
| Distribution of restricted stock | — | — | (386 | ) | — | — | 751 | — | 365 | ||||||||||||||||||||||||
| Common stock issued for acquisitions | 9,381 | 94 | 304,156 | — | — | — | — | 304,250 | |||||||||||||||||||||||||
| Cash dividends declared | — | — | — | (135,133 | ) | — | — | — | (135,133 | ) | |||||||||||||||||||||||
Balances at December 31, 2004 | 179,298 | $ | 1,917 | $ | 1,763,572 | $ | 1,677,802 | $ | — | $ | (265,020 | ) | $ | (2,157 | ) | $ | 3,176,114 | ||||||||||||||||
See accompanying notes to Consolidated Financial Statements.
57
BANKNORTH GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
| Cash flows from operating activities: | |||||||||||||
| Net income | $ | 304,643 | $ | 350,759 | $ | 298,638 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||
| Provision for loan and lease losses | 40,340 | 42,301 | 44,314 | ||||||||||
| Depreciation of banking premises and equipment | 44,199 | 43,368 | 36,360 | ||||||||||
| Net amortization of premium and discounts | 23,082 | 56,135 | 37,230 | ||||||||||
| Write-off of branch automation project | — | — | 6,170 | ||||||||||
| Amortization of intangible assets | 8,627 | 8,946 | 6,492 | ||||||||||
| Provision for deferred tax expense | 16,498 | 26,073 | 12,522 | ||||||||||
| ESOP expense | — | — | 7,154 | ||||||||||
| Distribution of restricted stock units | 365 | 694 | 875 | ||||||||||
| Net losses (gains) realized from sales of securities and loans | 6,190 | (42,460 | ) | (9,456 | ) | ||||||||
| Prepayment penalties on borrowings | 61,546 | 30,490 | — | ||||||||||
| Net (gains) realized from sales of loans held for sale | (3,660 | ) | (12,483 | ) | (12,577 | ) | |||||||
| Increase in cash surrender value of bank owned life insurance | (22,188 | ) | (22,930 | ) | (20,002 | ) | |||||||
| Net decrease in mortgage servicing rights | 1,287 | 1,287 | 5,487 | ||||||||||
| Proceeds from sales of loans held for sale | 512,700 | 923,811 | 863,560 | ||||||||||
| Residential loans originated and purchased for sale | (511,053 | ) | (821,870 | ) | (865,068 | ) | |||||||
| Net change in other assets | (55,329 | ) | 29,195 | (70,583 | ) | ||||||||
| Net change in other liabilities | 18,481 | (119,348 | ) | 63,619 | |||||||||
| Net cash provided by operating activities | 445,728 | 493,968 | 404,735 | ||||||||||
| Cash flows from investing activities: | |||||||||||||
| Proceeds from sales of securities available for sale | 3,380,300 | 3,392,506 | 1,001,605 | ||||||||||
| Proceeds from maturities and principal repayments of securities available for sale | 1,303,648 | 3,066,107 | 2,263,728 | ||||||||||
| Purchases of securities available for sale | (4,067,304 | ) | (6,370,761 | ) | (4,110,201 | ) | |||||||
| Proceeds from maturities and principal repayments of securities held to maturity | 37,227 | 92,169 | 123,214 | ||||||||||
| Net increase in loans and leases | (1,300,987 | ) | (690,512 | ) | (582,280 | ) | |||||||
| Proceeds from sales of loans | 37,097 | — | 104,366 | ||||||||||
| Net additions to premises and equipment | (47,805 | ) | (20,901 | ) | (43,503 | ) | |||||||
| Purchases of bank owned life insurance | — | — | (40,000 | ) | |||||||||
| Proceeds from policy coverage on bank owned life insurance | 1,725 | 182 | — | ||||||||||
| Cash (paid) for acquisitions, net of cash acquired | 49,061 | 10,903 | (12,074 | ) | |||||||||
| Net cash (used in) provided by investing activities | (607,038 | ) | (520,307 | ) | (1,295,145 | ) | |||||||
| Cash flows from financing activities: | |||||||||||||
| Net increase in deposits | 148,206 | 95,039 | 380,379 | ||||||||||
| Net increase in short-term borrowings | 1,200,876 | 755,480 | 182,248 | ||||||||||
| Proceeds from long-term debt | 1,570 | 885,400 | 1,335,642 | ||||||||||
| Payments on long-term debt | (1,633,868 | ) | (1,941,969 | ) | (952,525 | ) | |||||||
| Treasury stock issued for employee benefit plans | 189,634 | 48,677 | 30,406 | ||||||||||
| Purchase of treasury stock | — | (105,071 | ) | (154,054 | ) | ||||||||
| Cash dividends paid to shareholders | (135,133 | ) | (111,889 | ) | (85,894 | ) | |||||||
| Net cash (used) provided by financing activities | (228,715 | ) | (374,333 | ) | 736,202 | ||||||||
| (Decrease) increase in cash and cash equivalents | (390,025 | ) | (400,672 | ) | (154,208 | ) | |||||||
| Cash and cash equivalents at beginning of year | 316,331 | 717,003 | 871,211 | ||||||||||
| Cash and cash equivalents at end of period | $ | (73,694 | ) | $ | 316,331 | $ | 717,003 | ||||||
| Interest paid | $ | 325,614 | $ | 358,555 | $ | 434,685 | |||||||
| Income taxes paid | 90,298 | 145,600 | 104,810 | ||||||||||
| In conjunction with the purchase acquisitions detailed in Note 3 to the Consolidated Financial Statements, assets were acquired and liabilities were assumed as follows: | |||||||||||||
| Fair value of assets acquired | $ | 1,807,186 | $ | 3,347,137 | $ | 1,693,715 | |||||||
| Less liabilities assumed | 1,420,086 | 2,586,080 | 1,355,197 | ||||||||||
See accompanying notes to Consolidated Financial Statements.
58
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
(All dollar amounts expressed in thousands, except per share data)
| 1. | Summary of Significant Accounting Policies |
The accounting and reporting policies of Banknorth Group, Inc. (“Banknorth”) and its subsidiaries conform to accounting principles generally accepted in the United States of America and to general practice within the banking industry. Banknorth’s principal business activity is retail and commercial banking and, to a lesser extent, wealth management, investment planning and insurance brokerage services, and are conducted through Banknorth’s direct and indirect subsidiaries located in Maine, New Hampshire, Massachusetts, Connecticut, Vermont and New York. Banknorth and its subsidiaries are subject to regulation of, and periodic examination by, the Office of the Comptroller of Currency and the Federal Reserve Board and the Superintendent of the Maine Bureau of Financial Regulations, among other agencies. The following is a description of the more significant accounting policies.
| Financial Statement Presentation |
The Consolidated Financial Statements include the accounts of Banknorth and its subsidiaries. Banknorth’s principal operating subsidiary is Banknorth, NA (the “Bank”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain amounts in prior periods have been reclassified to conform to the current presentation.
Assets held in a fiduciary capacity are not assets of Banknorth and, accordingly, are not included in the Consolidated Balance Sheets.
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and supplementary data requiredrevenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are contained
on pages 34 through 60particularly susceptible to change relate to the determination of the Company's Annual Reportallowance for loan and lease losses, accounting for acquisitions, subsequent review of goodwill and intangible assets for impairment, accounting for pension plans and accrued income taxes.
| Cash and Cash Equivalents |
For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold and other short-term investments with maturities less than 90 days minus federal funds purchased. Generally, federal funds are sold or purchased for one-day periods.
Banknorth is required to comply with various laws and regulations of the Federal Reserve Board which require that Banknorth maintain certain amounts of cash on deposit and is restricted from investing those amounts.
| Securities |
Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and reflected at amortized cost.
Investments not classified as “held to maturity” are classified as “available for sale.” Securities available for sale consist of debt and equity securities that are available for sale in order to respond to changes in market interest rates, liquidity needs, changes in funding sources and other similar factors. These assets are specifically identified and are incorporated
hereincarried at market value. Changes in market value of available for sale securities, net of applicable income taxes, are reported as a separate component of shareholders’ equity and comprehensive income. When a decline in market value of a security is considered other than temporary, the cost basis of the individual security is written down to market value
59
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1. Summary of Significant Accounting Policies — (Continued)
as the new cost basis and the loss is charged to net securities gains (losses) in the consolidated statements of income as a writedown. Banknorth does not have a trading portfolio.
Premiums and discounts are amortized and accreted over the term of the securities on a method that approximates the interest method. Gains and losses on the sale of securities are recognized at the time of the sale using the specific identification method.
| Loans and Leases |
Loans are carried at the principal amounts outstanding adjusted by reference.
12
18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
ANDpartial charge-offs and net deferred loan costs or fees. Residential real estate loans are generally placed on nonaccrual when reaching 120 days past due or in process of foreclosure. All closed-end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on nonaccrual status. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal is reasonably assured and the loan has performed for a period of time, generally six months. Commercial real estate and commercial business loans are considered impaired when it is probable that Banknorth will not be able to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and collateral value.
Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield using methods that approximate the level yield method over the estimated lives of the related loans.
Consumer lease financing loans are carried at the amount of minimum lease payments plus residual values, less unearned income which is amortized into interest income using the interest method.
| Allowance for Loan and Lease Losses |
The allowance for loan and lease losses is maintained at a level determined to be adequate by management and approved by the Board Risk Committee to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to operating expense, by recoveries on loans previously charged off, and by allowances acquired in acquisitions and reduced by charge-offs on loans and leases.
Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment. The ongoing evaluation process includes a formal analysis of the allowance each quarter, which considers, among other factors, the character and size of the loan portfolio, business and economic conditions, loan growth, charge-off experience, delinquency trends, nonperforming loan trends, portfolio migration data and other asset quality factors.
For the commercial business loan and lease and the commercial real estate loan portfolios, we formally evaluate specific commercial and commercial real estate loans rated “substandard” or worse in excess of $300 thousand. Estimated reserves for each of these credits is determined by reviewing current collateral value, financial information, cash flow, payment history and trends and other relevant facts surrounding the particular credit. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical loss experience and
60
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL DISCLOSURES
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IncorporatedSTATEMENTS — (Continued)
1. Summary of Significant Accounting Policies — (Continued)
migration analysis (which considers the probability of a loan moving from one risk rating category to another over time), transition matrix and qualitative adjustments.
For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical charge-off and recovery experience to the current outstanding balance in each loan category, with consideration given to loan growth over the preceding twelve months.
Using the determined mid-point of the range, management uses various quantitative and qualitative factors to determine the appropriate point above or below the range mid-point. This process is supported by objective factors including:
| • | Historical loss experience; | |
| • | Trends in delinquency and nonperforming loans; | |
| • | Changes in product offerings or loan terms; | |
| • | Changes in underwriting and/or collections policies; | |
| • | Changes in management of underwriting and collection departments; | |
| • | Regional and national economic conditions and trends. |
Although management uses available information to establish the appropriate level of the allowance for loan and lease losses, future additions to the allowance may be necessary because estimates are susceptible to change as a result of changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Banknorth’s allowance for loan and lease losses. Such agencies may require Banknorth to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
| Bank-Owned Life Insurance |
Bank-owned life insurance (“BOLI”) represents life insurance on the lives of certain employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in other noninterest income, and are not subject to income taxes. The cash value is included in assets. Banknorth reviews the financial strength of the insurance carrier prior to the purchase of BOLI and annually thereafter, and BOLI with any individual carrier is limited to 10% of capital plus reserves.
| Premises and Equipment |
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of related assets; generally 25 to 40 years for premises and 3 to 7 years for furniture and equipment. Leasehold improvements are generally amortized over the lesser of the estimated life or the remaining term of the lease including the first renewal option.
Costs of software developed for internal use, such as those related to software licenses, programming, testing, configuration, direct materials and integration, are capitalized and included in premises and equipment. Included in the capitalized costs are those costs related to both Company personnel and third party consultants involved in the software development and installation. Once placed in service, the capitalized asset is amortized on a straight-line basis over its estimated useful life, generally three to five years. Capitalized costs of software developed for internal use are reviewed periodically for impairment.
61
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1. Summary of Significant Accounting Policies — (Continued)
Significant judgment is exercised in these impairment reviews including the periodic evaluation of the cost/benefit analyses of software projects under development and the determination of the remaining useful life of completed software projects.
| Goodwill and Identifiable Intangible Assets |
The price paid over the net fair value of the acquired businesses (“goodwill”) is not amortized. Goodwill is evaluated for impairment at least quarterly using several fair value techniques, including market capitalization, discounted future cash flows and multiples of revenues/earnings. The valuation techniques contain estimates such as discount rate, projected future cash flows and time period in their calculations. Furthermore, the determination of which intangible assets have finite lives is subjective, as is the determination of the amortization period for such intangible assets. Goodwill is recorded and evaluated for impairment in the following reporting units: Community Banking, Insurance Brokerage and Wealth Management.
Identifiable intangible assets consists of core deposit intangibles, noncompete agreements and customer lists and are amortized over their estimated useful lives on a method that approximates the amount of economic benefits to Banknorth. They are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The ranges of useful life are shown below:
| Core deposit intangibles | 7 – 10 years | |
| Noncompete agreements | 1 – 4 years | |
| Customer lists | estimated life of the list |
| Impairment of Long-Lived Assets Other than Goodwill |
Banknorth reviews long-lived assets, including premises and equipment and other intangible assets for impairment at least annually or whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. Banknorth performs undiscounted cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
| Mortgage Banking and Loans Held for Sale |
Residential mortgage loans originated for sale are classified as held for sale. These loans are specifically identified and carried at the lower of aggregate cost or estimated market value. Market value is estimated based on outstanding investor commitments or, in the absence of such commitments, current investor yield requirements. Forward commitments to sell residential real estate mortgages are contracts that Banknorth enters into for the purpose of reducing the market risk associated with originating loans for sale should interest rates change. Forward commitments to sell are recorded at fair value and are included with loans held for sale and changes in fair value are included in other comprehensive income and are reclassified into mortgage banking income when the related transaction affects earnings. Commitments to originate rate-locked loans are also accounted for at fair value and are classified in other assets. Gains and losses related to commitments to originate rate-locked loans are included in earnings with mortgage banking income.
62
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1. Summary of Significant Accounting Policies — (Continued)
Gains and losses on sales of mortgage loans are determined using the specific identification method and recorded as mortgage sales income, a component of mortgage banking services income. The gains and losses resulting from the sales of loans with servicing retained are adjusted to recognize the present value of future servicing fee income over the estimated lives of the related loans. Residential real estate loans originated for sale and the related servicing rights are generally sold on a flow basis.
Retained mortgage servicing rights are amortized on a method that approximates the estimated weighted average life of the underlying loans serviced for others. Amortization is recorded as a charge against mortgage service fee income, a component of mortgage banking services income. Banknorth’s assumptions with respect to prepayments, which affect the estimated average life of the loans, are adjusted quarterly to reflect current circumstances. In evaluating the realizability of the carrying values of mortgage servicing rights, Banknorth obtains third party valuations based on loan level data including note rate, type and term on the underlying loans.
Mortgage servicing fees received from investors for servicing their loan portfolios are recorded as mortgage servicing fee income when received. Loan servicing costs are charged to noninterest expense when incurred.
| Derivative Financial Instruments |
Banknorth recognizes all derivatives on the balance sheet at fair value. On the date the derivative is entered into, Banknorth designates whether the derivative is part of a hedging relationship (cash flow or fair value hedge). Banknorth formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. Banknorth also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of hedged items.
From time to time Banknorth may use certain hedging strategies which include the use of derivative financial instruments. The primary objective of Banknorth’s hedging strategies is to reduce net interest rate exposure arising from Banknorth’s asset and liability structure and mortgage banking activities. Banknorth uses forward delivery contracts to reduce interest rate risk on residential mortgage loans held for sale (which are included in loans held for sale on our balance sheet) and rate-locked loans expected to be closed and held for sale (which are included in other assets on our balance sheet). Banknorth also purchases mortgage-backed security options (which are included in other assets on our balance sheet at fair value) to modify its forward mortgage commitments. Changes in fair value of the options are included in other noninterest income.
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 related forecasted transaction affects earnings, generally within 60 to 90 days. For fair value hedges that are fully effective, the gain or loss on the hedge would exactly offset the loss or gain on the hedged item attributable to the hedged risk. Any difference that does arise would be the result of hedge ineffectiveness, which is recognized in earnings. Banknorth discontinues hedge accounting when it is determined that the derivative is no longer effective in offsetting changes in the hedged risk 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.
Banknorth offers commercial customers interest rate swap and cap products to enable these customers to synthetically fix the interest rate on variable interest rate loans. These pay variable, receive fixed interest
63
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1. Summary of Significant Accounting Policies — (Continued)
rate swaps are offset by entering into simultaneous pay fixed, receive variable rate swaps with a third party broker/ dealer. Both of these swap products are marked to market and are included with other assets and other liabilities on our balance sheet at fair value. Changes in the fair value of the commercial interest rate swaps are included in net interest income.
Banknorth has also entered into interest rate swap agreements in order to synthetically convert certain fixed-rate debt to variable-rate debt tied to 1-month or 3-month LIBOR. These swaps are accounted for as fair value hedges and included with long-term debt on our balance sheet. Changes in the fair value of the swap agreements are included in net interest income.
Foreign exchange rate contracts are contracts and options that Banknorth enters into as an accommodation for customers involved in international trade for the future delivery or purchase of foreign currency at a specified price. For these customers, Banknorth generally sets aside a percentage of their available line of credit until the foreign currency contract is settled. Generally, Banknorth enters into foreign exchange rate contracts with approved reputable dealers. Risks arise from the possible inability of the seller and/or our customer to perform and from any resultant exposure to movement in foreign currency exchange rates, limiting Banknorth’s exposure to the replacement value of the contracts rather than the notional principal or contract amounts. The foreign exchange contracts outstanding at December 31, 2004 all mature within two years. The foreign exchange rate contracts with customers and dealers are carried at fair value in other assets and other liabilities. The changes in the fair value of the foreign exchange rate contracts and the associated fees are included in other noninterest income.
| Pension, 401(k), and Other Employee Benefit Plans |
Banknorth has a qualified non-contributory defined benefit pension plan that covers most employees. The benefits are based on years of service and the employee’s career average earnings. Banknorth has historically made cash contributions to the defined benefit pension plan for the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future.
In addition to the qualified plan, Banknorth has adopted supplemental retirement plans for certain key officers. These plans, which are unfunded and nonqualified, were designed to offset the impact of changes in the pension plans that limit the benefits for highly-paid employees under qualified pension plans.
Banknorth and its subsidiaries sponsor limited post-retirement benefit programs which provide medical coverage and life insurance benefits to a closed group of employees and directors who meet minimum age and service requirements. Banknorth and its subsidiaries recognize costs related to post-retirement benefits under the accrual method, which recognizes costs over the employee’s period of active employment. The impact of adopting SFAS No. 106 is being amortized over a twenty-year period beginning January 1, 1993.
Banknorth uses a December 31 measurement date to determine its pension expense and related financial disclosure information. In accordance with SFAS No. 87, the discount rate is set for the retirement plans by reference to "Electioninvestment grade bond yields. Banknorth uses Moody’s published AA yield for long-term corporate bonds for the month of Directors"December as an index, and the discount rate is set within 25 basis points of the index. Moody’s AA yield dropped from 6.01% for December 2003 to 5.66% for December 2004. Similarly, we evaluated the expected long-term rate of return on pages 2 through
5the assets held in our defined benefit pension plan based on market and "Executive Officers whoeconomic conditions, the Plan’s asset allocation and other factors. As a consequence of the most recent annual review, the discount rate for all of our employee benefit plans was reduced from 6.25% as of December 31, 2003 to 5.75% as of December 31, 2004 and the
64
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1. Summary of Significant Accounting Policies — (Continued)
expected long-term rate of return on the pension plan assets was 8.5% for 2004 and will be the same for 2005. Pension expense is very sensitive to changes in the discount rate and the expected return on assets. Continued volatility in pension expense is expected as assumed investment returns vary from actual.
In December 2003, the Medicare Prescription Drugs, Improvement and Modernization Act (“the Act”) was signed into law. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position 106-2, “Accounting and Disclosure Requirement Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”) we have determined that the benefits we provide are at least actuarially equivalent to Medicare Part D. The effects of the federal subsidy will result in an actuarial gain of approximately $1.7 million. The gain will not have a material effect on our net periodic postretirement cost or on our accumulated postretirement benefit obligation. Therefore, we will incorporate the effects of the Act at the next measurement date, which is January 2005. As a result, we have not reflected the impact of FSP 106-2 in our net periodic postretirement cost or in our accumulated postretirement benefit obligation as of December 31, 2004 but will begin to amortize the benefit of the Act prospectively starting January 1, 2005 over a period of approximately 10 years.
Banknorth maintains Section 401(k) savings plans for substantially all of its employees. Employees are eligible to participate in the 401(k) Plan on the first day of the month following their date of hire. Under the plans, Banknorth makes a matching contribution of a portion of the amount contributed by each participating employee, up to a percentage of the employee’s annual salary. The plans allow for supplementary profit sharing contributions by Banknorth, at its discretion, for the benefit of participating employees.
| Stock Compensation Plans |
Statement of Financial Accounting Standards SFAS No. 123, “Accounting for Stock-Based Compensation” encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” whereby compensation cost is the excess, if any, of the quoted market price of the underlying stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock upon exercise of the stock option. Banknorth has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted and the effects of the Employee Stock Purchase Plan. Had Banknorth determined cost based on the fair value at the grant date for its stock options and expense related to the
65
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1. Summary of Significant Accounting Policies — (Continued)
employee stock purchase plan under SFAS No. 123, its net income and earnings per share data would have been reduced to the pro forma amounts indicated as follows:
| Year Ended December 31, | |||||||||||||||
| 2004 | 2003 | 2002 | |||||||||||||
| Net Income, as reported | $ | 304,643 | $ | 350,759 | $ | 298,638 | |||||||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (16,089 | ) | (12,723 | ) | (8,354 | ) | |||||||||
| Proforma net income | $ | 288,554 | $ | 338,036 | $ | 290,284 | |||||||||
| Earnings per share | |||||||||||||||
| Basic — As reported | $ | 1.78 | $ | 2.18 | $ | 2.01 | |||||||||
| Proforma | $ | 1.69 | $ | 2.10 | $ | 1.96 | |||||||||
| Diluted — As reported | $ | 1.75 | $ | 2.15 | $ | 1.99 | |||||||||
| Proforma | $ | 1.67 | $ | 2.08 | $ | 1.94 | |||||||||
| Investments in Limited Partnerships |
Banknorth has investments in both tax advantaged and small business investment limited partnerships. The tax advantaged limited partnerships are primarily involved in approved low income housing investment tax credit projects in Banknorth’s market area while the small business investment limited partnerships are primarily providing seed money to small businesses also in Banknorth’s market area. These investments are included in other assets and are not Directors"required to be consolidated under FIN 46. Investments in the tax advantaged limited partnerships are amortized over the same period the tax benefits are expected to be received. The investments in small business investment limited partnerships, for which Banknorth has the ability to exercise significant influence (generally, a 3% or greater ownership interest), are reviewed and adjusted quarterly based on pages 8 through 10the equity method. If Banknorth does not exercise significant influence, Banknorth’s investment is accounted for under the cost method and the carrying value is periodically evaluated for other than temporary impairment. Except for fixed capital or loan commitments agreed to in advance, the partnerships have no recourse to Banknorth.
| Income Taxes |
Banknorth uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the definitive Proxy Statementdeferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income taxes are allocated to each entity in the consolidated group based on its share of taxable income. Management exercises significant judgment in evaluating the amount and timing of recognition of the Company, dated March 21, 2001 (the "Proxy
Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to "Compensationresulting tax liabilities and assets, including projections of Executive Officersfuture taxable income. Management assesses the relative merits and Transactions with Management" on pages 14 through 18risks of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporatedappropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of our tax position. Management also relies on tax opinions, recent state audits and historical experience. These judgments and estimates are reviewed on a regular basis as regulatory and business factors change.
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BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
1. Summary of Significant Accounting Policies — (Continued)
Tax credits generated from limited partnerships are reflected in earnings when realized for federal income tax purposes.
| Earnings Per Share |
Earnings per share have been computed in accordance with SFAS No. 128, “Earnings Per Share.” Basic earnings per share have been calculated by referencedividing net income by weighted average shares outstanding before any dilution and adjusted to "Beneficial Ownershipexclude the weighted average number of Common Stockunallocated shares held by Certain Beneficial Ownersthe ESOP. Diluted earnings per share have been calculated by dividing net income by weighted average shares outstanding after giving effect to the potential dilution that could occur if the potential common shares were converted into common stock using the treasury stock method.
| Segment Reporting |
An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and Management" on pages 11evaluate performance. Banknorth’s primary business is community banking, which provided approximately 91% of its total revenues and 1296% of its pre-tax income for the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by referenceyear ended December 31, 2004 and approximately 92% of its total revenues and 97% of its pre-tax income in 2003. Accordingly, disaggregated segment information is not presented in the notes to "Certain Transactions" on page 22 of the Proxy Statement.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1)financial statements.
2. Accounting Changes
The following information addresses new or proposed accounting pronouncements related to our industry.
| Consolidations |
FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities” (“VIE’s”) (“FIN 46R”) establishes the criteria used to identify VIE’s and to determine whether or not to consolidate a VIE. VIE’s are those entities in which the total equity investment at risk does not provide the holders of that investment with the characteristics of a controlling financial statements are incorporatedinterest. Pursuant to the criteria established by reference
from Item 8 hereofFIN 46R in 2004, we deconsolidated five affiliated trusts which had been formed for the purposes of issuing capital securities to unaffiliated parties and investing the Annual Report to Shareholders included herein as
Exhibit 13:
Consolidated balance sheetsproceeds in junior subordinated debentures issued by us. Our investment in these affiliated trusts totaled $10.5 million at December 31, 2004, which funds were also used by the trusts to invest in junior subordinated debentures issued by us. The result of the deconsolidation and the accounting for these entities was to recognize our equity investments in these entities of approximately $10.5 million in the aggregate as securities available for sale and to increase long-term debt by $10.5 million. The adoption of FIN 46R did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.
Banknorth’s trust preferred securities are included in its Tier 1 capital for regulatory purposes. On May 6, 2004, the Federal Reserve Board issued a proposed regulation which proposed to permit bank holding companies to continue to include trust preferred securities in Tier 1 capital, subject to stricter quantitative and qualitative standards. For information about this proposed regulation and its possible effect on Banknorth, see Note 12.
67
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. Accounting Changes — (Continued)
| Accounting for Share-Based Payments |
In December 2004, the FASB issued FASB Statement No. 123 (Revised 2004), “Share-Based Payment” (“FAS 123R”) which requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees, including employee stock purchase plans. Current disclosure provisions under FAS 123 are still applicable (see Note 1). In addition to stock option awards granted after July 1, 2005, compensation expense on unvested equity-based awards that were granted prior to the effective date must be recognized in the income statement. FAS 123R is effective for interim or annual periods beginning after June 15, 2005. The adoption of FAS 123R is expected to decrease earnings per share by $.03 in 2005. FAS 123 R will no effect on our financial condition, or cash flows.
| Accounting for Certain Loan or Debt Securities Acquired in a Transfer |
In December 2003, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality, be recognized at their fair value. This SOP requires that the original excess of contractual cash flows over cash flows expected to be collected may not be recognized as an adjustment of yield, loss accrual, or valuation allowance. Any future excess of cash flows over the original expected cash flows is to be recognized as an adjustment of future yield. Future decreases in actual cash flow compared to the original expected cash flow are recognized as a valuation allowance and expensed immediately. Valuation allowances cannot be created or “carried over” in the initial accounting for impaired loans acquired. This SOP is effective for impaired loans acquired in a business combination in fiscal years beginning after December 15, 2004. The adoption of this SOP is not expected to have a material impact on our financial condition, results of operations, earnings per share or cash flows.
| Loan Commitments |
In March 2004, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin No. 105 (“SAB 105”), “Application of Accounting Principles to Loan Commitments,” which provided guidance on accounting for loan commitments at fair value that meet the definition of a derivative. SAB 105 is effective for commitments entered into after March 31, 2004. The guidance clarifies that expected future cash flows related to the servicing of the loan may be recognized only when the servicing asset has been contractually separated from the underlying loan by sale with servicing retained. SAB 105 did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.
| Guidance on “Other-Than-Temporary Impairment” |
In 2003, the Emerging Issues Task Force reached a consensus on EITF 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provided application guidance to assess whether there have been any events or economic circumstance to indicate that a security is impaired on an other-than-temporary basis. Factors to consider include the length of time the security has had a market value less that the cost basis, the intent and ability of the company to hold the security for a period time sufficient for a recover in value, recent events specific to the issuer or industry and for debt securities, external credit rating and recent downgrades. Securities on which there is an unrealized loss that is deemed to be other-than-temporary are written down to fair value with the write-down recorded as a realized loss.
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BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. Accounting Changes — (Continued)
In December 2004, the FASB announced that it will reconsider in its entirety all guidance on disclosing, measuring and recognizing other-than-temporary impairments of debt and equity securities. Until new guidance is issued, companies must continue to comply with the disclosure requirements of EITF 03-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” and all relevant measurement and recognition requirements in other accounting literature. Companies evaluating whether an impairment is other-than-temporary under existing requirements should continue to consider the length of time a security has been impaired, the severity of the impairment and the financial condition and near-term prospects of the issue of the security.
| Business Combinations |
In October 2004, the EITF issued EITF 04-1 “Accounting for Preexisting Relationships between the Parties to a Business Combination.” The Task Force determined that a business combination between two parties that have a preexisting relationship is a multiple-element transaction with one element being the business combination and the other element being the settlement of the preexisting relationship. This guidance is applicable to business combinations consummated and goodwill impairment tests performed in reporting periods beginning after October 13, 2004. The application of this EITF did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.
| 3. | Acquisitions |
Acquisitions are an important part of Banknorth’s strategic plans. The following table summarizes bank acquisitions completed since January 1, 2002. The acquisitions were accounted for as purchases and, as such, were included in our results of operations from the date of acquisition.
| Transaction-Related Items | ||||||||||||||||||||||||||||||||
| Balance at | ||||||||||||||||||||||||||||||||
| Acquisition Date | Other | Total | ||||||||||||||||||||||||||||||
| Acquisition | Identifiable | Cash | Shares | Purchase | ||||||||||||||||||||||||||||
| (Dollars and shares in millions) | Date | Assets | Equity | Goodwill | Intangibles | Paid | Issued | Price | ||||||||||||||||||||||||
| CCBT Financial Companies, Inc. | 4/30/2004 | $ | 1,292.9 | $ | 108.5 | $ | 178.2 | $ | 19.4 | $ | — | 9.2 | $ | 298.1 | ||||||||||||||||||
| Foxbrough Savings Bank | 4/30/2004 | 241.8 | 22.8 | 62.2 | 2.2 | 88.9 | — | 88.9 | ||||||||||||||||||||||||
| First & Ocean Bancorp | 12/31/2003 | 274.4 | 15.6 | 35.1 | 1.8 | 49.7 | — | 49.7 | ||||||||||||||||||||||||
| American Financial Holdings, Inc. | 2/14/2003 | 2,690.3 | 408.2 | 422.2 | 9.3 | 328.5 | 13.4 | 711.4 | ||||||||||||||||||||||||
| Warren Bancorp, Inc. | 12/31/2002 | 466.1 | 45.3 | 90.5 | 2.7 | 59.8 | 2.7 | 136.6 | ||||||||||||||||||||||||
| Bancorp Connecticut, Inc. | 8/31/2002 | 661.7 | 61.4 | 96.9 | 8.7 | 161.2 | — | 161.2 | ||||||||||||||||||||||||
| Ipswich Bancshares, Inc. | 7/26/2002 | 318.0 | 13.9 | 22.0 | 4.8 | 19.9 | 0.9 | 40.1 | ||||||||||||||||||||||||
In addition, Banknorth acquired four insurance agencies from 2002 to 2004. The total cost of these agencies was $16.8 million.
69
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. Acquisitions — (Continued)
On April 30, 2004, Banknorth acquired CCBT Financial Companies, Inc. (“CCBT”) and Foxborough Savings Bank (“Foxborough”). The following table summarizes the estimated fair value of the assets acquired and liabilities assumed for CCBT and Foxborough at the date of acquisition. Banknorth expects that some adjustments of the estimated fair values assigned to the assets acquired and liabilities assumed will be recorded in periods after December 31, 2004, although such adjustments are not expected to be significant. It is estimated that none of the goodwill will be deductible for income tax purposes.
| Assets: | |||||
| Investments | $ | 319,403 | |||
| Loans held for sale | 7,758 | ||||
| Loans and leases, net | 1,026,915 | ||||
| Premises and equipment | 31,508 | ||||
| Other assets | 159,610 | ||||
| Assets acquired | 1,545,194 | ||||
| Liabilities: | |||||
| Deposits | 1,188,294 | ||||
| Borrowings | 210,903 | ||||
| Other liabilities | 20,889 | ||||
| Liabilities assumed | 1,420,086 | ||||
| Net assets acquired | 125,108 | ||||
| Goodwill | 240,427 | ||||
| Identifiable intangible assets | 21,565 | ||||
| Total purchase price | $ | 387,100 | |||
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BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 4. | Securities Available for Sale and Held to Maturity |
A summary of the amortized cost and market values of securities available for sale and held to maturity follows:
| Gross | Gross | |||||||||||||||||
| Amortized | Unrealized | Unrealized | Market | |||||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||||
Available for Sale | ||||||||||||||||||
December 31, 2004: | ||||||||||||||||||
| U.S. Government obligations and obligations of U.S. Government agencies and corporations | $ | 528,973 | $ | 181 | $ | (12,722 | ) | $ | 516,432 | |||||||||
| Tax-exempt bonds and notes | 166,901 | 3,045 | (148 | ) | 169,798 | |||||||||||||
| Other bonds and notes | 285,742 | 10,674 | (644 | ) | 295,772 | |||||||||||||
| Mortgage-backed securities | 5,130,478 | 33,081 | (31,641 | ) | 5,131,918 | |||||||||||||
| Collateralized mortgage obligations | 599,304 | 1,748 | (3,129 | ) | 597,923 | |||||||||||||
| Total debt securities | 6,711,398 | 48,729 | (48,284 | ) | 6,711,843 | |||||||||||||
| Federal Home Loan Bank stock | 116,904 | — | — | 116,904 | ||||||||||||||
| Federal Reserve Bank stock | 60,338 | — | — | 60,338 | ||||||||||||||
| Other equity securities | 16,456 | 247 | (23 | ) | 16,680 | |||||||||||||
| Total equity securities | 193,698 | 247 | (23 | ) | 193,922 | |||||||||||||
| Total securities available for sale | $ | 6,905,096 | $ | 48,976 | $ | (48,307 | ) | $ | 6,905,765 | |||||||||
December 31, 2003: | ||||||||||||||||||
| U.S. Government obligations and obligations of U.S. Government agencies and corporations | $ | 2,359,347 | $ | 1,993 | $ | (41,165 | ) | $ | 2,320,175 | |||||||||
| Tax-exempt bonds and notes | 138,280 | 3,191 | (21 | ) | 141,450 | |||||||||||||
| Other bonds and notes | 365,109 | 16,279 | (886 | ) | 380,502 | |||||||||||||
| Mortgage-backed securities | 3,834,958 | 50,167 | (21,747 | ) | 3,863,378 | |||||||||||||
| Collateralized mortgage obligations | 264,545 | 4,138 | (648 | ) | 268,035 | |||||||||||||
| Total debt securities | 6,962,239 | 75,768 | (64,467 | ) | 6,973,540 | |||||||||||||
| Federal Home Loan Bank stock | 104,397 | — | — | 104,397 | ||||||||||||||
| Federal Reserve Bank stock | 37,666 | — | — | 37,666 | ||||||||||||||
| Other equity securities | 6,868 | 521 | — | 7,389 | ||||||||||||||
| Total equity securities | 148,931 | 521 | — | 149,452 | ||||||||||||||
| Total securities available for sale | $ | 7,111,170 | $ | 76,289 | $ | (64,467 | ) | $ | 7,122,992 | |||||||||
Held to Maturity: | ||||||||||||||||||
December 31, 2004: | ||||||||||||||||||
| Collateralized mortgage obligations | $ | 87,013 | $ | 494 | $ | — | $ | 87,507 | ||||||||||
| Total securities held to maturity | $ | 87,013 | $ | 494 | $ | — | $ | 87,507 | ||||||||||
December 31, 2003: | ||||||||||||||||||
| Collateralized mortgage obligations | $ | 124,240 | $ | 104 | $ | — | $ | 124,344 | ||||||||||
| Total securities held to maturity | $ | 124,240 | $ | 104 | $ | — | $ | 124,344 | ||||||||||
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BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. Securities Available for Sale and Held to Maturity — (Continued)
Included in securities in U.S. Government obligations and obligations of U.S. Government agencies and corporations at December 31, 2004 were $475.1 million of Federal National Mortgage Association and Federal Home Loan Mortgage Corp. securities.
The following presents the fair value of investments with continuous unrealized losses for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or longer as of December 31, 2004.
| Less than 1 year | More than 1 year | Total | ||||||||||||||||||||||||||||||||||
| Number of | Fair | Unrealized | Number of | Fair | Unrealized | Number of | Fair | Unrealized | ||||||||||||||||||||||||||||
| Available for Sale: | Investments | Value | Losses | Investments | Value | Losses | Investments | Value | Losses | |||||||||||||||||||||||||||
| U.S. Government obligations and obligations of U.S. Government agencies and corporations | 6 | $ | 140,522 | $ | (1,108 | ) | 5 | $ | 345,432 | $ | (11,614 | ) | 11 | $ | 485,954 | $ | (12,722 | ) | ||||||||||||||||||
| Tax-exempt bonds and notes | 54 | 83,367 | (148 | ) | — | — | — | 54 | 83,367 | (148 | ) | |||||||||||||||||||||||||
| Other bonds and notes | 10 | 20,990 | (616 | ) | 2 | 4,434 | (28 | ) | 12 | 25,424 | (644 | ) | ||||||||||||||||||||||||
| Mortgage-backed securities | 99 | 2,125,235 | (16,495 | ) | 41 | 947,126 | (15,146 | ) | 140 | 3,072,361 | (31,641 | ) | ||||||||||||||||||||||||
| Collateralized mortgage obligations | 18 | 377,830 | (3,128 | ) | 2 | 540 | (1 | ) | 20 | 378,370 | (3,129 | ) | ||||||||||||||||||||||||
| Equity securities | 1 | 5 | (10 | ) | 1 | 95 | (13 | ) | 2 | 100 | (23 | ) | ||||||||||||||||||||||||
| 188 | $ | 2,747,949 | $ | (21,505 | ) | 51 | $ | 1,297,627 | $ | (26,802 | ) | 239 | $ | 4,045,576 | $ | (48,307 | ) | |||||||||||||||||||
For securities with unrealized losses, the following information was considered in determining that the impairments are not other-than-temporary. U.S. Government securities are backed by the full faith and credit of the United States and therefore bear no credit risk. U.S. Government agencies securities have minimal credit risk as they play a vital role in the nation’s financial markets. Other bonds and notes are generally comprised of corporate securities and all investments maintain a credit rating of at least investment grade by one of the nationally recognized rating agencies. Mortgage-backed securities or collateralized mortgage obligations are either issued by federal government agencies or by private issuers with minimum security ratings of AA. No unrealized losses were determined to be other-than-temporary.
The amortized cost and market values of debt securities at December 31, 2004 by contractual maturities are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2004, Banknorth had $393.6 million of securities available for sale with call provisions.
| Available for Sale | Held to Maturity | ||||||||||||||||
| Amortized Cost | Market Value | Amortized Cost | Market Value | ||||||||||||||
December 31, 2004: | |||||||||||||||||
| Due in one year or less | $ | 153,426 | $ | 153,931 | $ | 118 | $ | 119 | |||||||||
| Due after one year through five years | 556,879 | 547,852 | 5,315 | 5,345 | |||||||||||||
| Due after five years through ten years | 390,249 | 400,335 | 26,703 | 26,854 | |||||||||||||
| Due after ten years | 5,610,844 | 5,609,725 | 54,877 | 55,189 | |||||||||||||
| Total debt securities | $ | 6,711,398 | $ | 6,711,843 | $ | 87,013 | $ | 87,507 | |||||||||
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BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. Securities Available for Sale and Held to Maturity — (Continued)
A summary of realized gains and losses on securities available for sale for the years ended December 31, 2004, 2003 and 2002 follows:
| Realized | ||||||||||||
| Gains | Losses | Net | ||||||||||
| 2004 | $ | 10,230 | $ | 17,931 | $ | (7,701 | ) | |||||
| 2003 | 44,744 | 2,284 | 42,460 | |||||||||
| 2002 | 9,823 | 2,541 | 7,282 | |||||||||
| 5. | Loans and Leases |
Banknorth’s lending activities are conducted principally in New England and upstate New York. The principal categories of loans in Banknorth’s portfolio are residential real estate loans, which are secured by single-family (one to four units) residences; commercial real estate loans, which are secured by multi-family (five or more units) residential and commercial real estate; commercial business loans and leases; and consumer loans and leases. A summary of loans and leases follows:
| December 31, | |||||||||
| 2004 | 2003 | ||||||||
| Residential real estate loans | |||||||||
| Permanent first mortgage loans | $ | 3,024,799 | $ | 2,681,925 | |||||
| Construction and development | 56,418 | 28,558 | |||||||
| 3,081,217 | 2,710,483 | ||||||||
| Commercial real estate loans: | |||||||||
| Permanent first mortgage loans | 5,297,812 | 4,696,428 | |||||||
| Construction and development | 951,701 | 832,434 | |||||||
| 6,249,513 | 5,528,862 | ||||||||
| Commercial business loans and leases | |||||||||
| Commercial business loans | 3,838,366 | 3,188,504 | |||||||
| Commercial business leases | 90,228 | 98,590 | |||||||
| 3,928,594 | 3,287,094 | ||||||||
| Consumer loans and leases | |||||||||
| Consumer loans | 5,333,448 | 4,816,217 | |||||||
| Consumer leases | 222 | 3,306 | |||||||
| 5,333,670 | 4,819,523 | ||||||||
| Total loans and leases | $ | 18,592,994 | $ | 16,345,962 | |||||
Loans and leases include net deferred charges of $23.0 million at December 31, 2004 and $21.8 million at December 31, 2003. Deferred charges include deferred loan origination costs, net of deferred loan origination fees and unearned discounts.
73
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. Loans and Leases — (Continued)
Nonperforming Loans
The following table sets forth the information regarding nonperforming loans and accruing loans 90 days or more overdue at the dates indicated:
| December 31, | |||||||||
| 2004 | 2003 | ||||||||
| Nonaccrual loans | |||||||||
| Residential real estate mortgages | $ | 7,846 | $ | 7,157 | |||||
| Commercial real estate loans | 29,948 | 19,700 | |||||||
| Commercial business loans and leases | 32,421 | 24,412 | |||||||
| Consumer loans and leases | 7,344 | 8,493 | |||||||
| Total nonperforming loans | $ | 77,559 | $ | 59,762 | |||||
| Accruing loans which are 90 days or more overdue | $ | 5,254 | $ | 4,915 | |||||
Impaired loans are commercial and commercial real estate loans which Banknorth believes will probably not result in the collection of all amounts due according to the contractual terms of the loan agreement. The definition of “impaired loans” is not the same as the definition of “nonaccrual loans,” although the two categories overlap. All commercial and commercial real estate nonaccrual loans are impaired, but not all impaired loans are on nonaccrual. Accrual of interest on commercial and commercial real estate loans is generally discontinued when collectibility of principal or interest is uncertain or on which payments of principal or interest have become contractually past due 90 days. Banknorth may choose to place a loan on nonaccrual status due to payment delinquency or uncertain collectibility. The amount of reserves for impaired loans is determined by the difference between the present value of the expected cash flows related to the loan, using the original contractual interest rate, and its recorded value, or, as a practical expedient in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. When foreclosure is probable, impairment is measured based on the fair value of the collateral less cost to sell.
The following table sets forth information on impaired loans at the dates indicated:
| At or For the Year Ended December 31, | |||||||||||||||||
| 2004 | 2003 | ||||||||||||||||
| Recorded | Valuation | Recorded | Valuation | ||||||||||||||
| Investment | Allowance | Investment | Allowance | ||||||||||||||
| Impaired loans | |||||||||||||||||
| Valuation allowance required | $ | 51,620 | $ | 13,805 | $ | 28,781 | $ | 4,662 | |||||||||
| No valuation allowance required | 10,749 | — | 15,331 | — | |||||||||||||
| Total impaired loans | $ | 62,369 | $ | 13,805 | $ | 44,112 | $ | 4,662 | |||||||||
| Average balance of impaired loans during the year | $ | 53,580 | $ | 48,917 | |||||||||||||
| Interest income recognized on a cash basis on impaired loans during the year | $ | 2,501 | $ | 1,675 | |||||||||||||
74
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 6. | Allowance for Loan and Lease Losses |
A summary of changes in the allowance for loan and lease losses follows:
| Year Ended December 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Balance at beginning of period | $ | 232,287 | $ | 208,273 | $ | 189,837 | ||||||
| Allowance related to business combinations | 13,665 | 19,008 | 12,794 | |||||||||
| Provisions charged to income | 40,340 | 42,301 | 44,314 | |||||||||
| Transfer for off-balance sheet loan commitments | (6,600 | ) | — | — | ||||||||
| Charge-offs | (50,687 | ) | (49,609 | ) | (52,002 | ) | ||||||
| Recoveries | 14,147 | 12,314 | 13,330 | |||||||||
| Balance at end of period | $ | 243,152 | $ | 232,287 | $ | 208,273 | ||||||
During 2004, a portion of the allowance for credit losses related to unfunded credit commitments was reclassified from the allowance for loan and lease losses to a separate liability account. The liability for unfunded credit commitments previously included in the allowance for loans and lease losses was $5.6 million and $3.3 million at December 31, 2003 and 2002, respectively.
| 7. | Premises and Equipment |
A summary of premises and equipment follows:
| December 31, | ||||||||
| 2004 | 2003 | |||||||
| Land | $ | 34,143 | $ | 27,558 | ||||
| Buildings and leasehold improvements | 299,712 | 268,444 | ||||||
| Capital leases on buildings | 24,275 | 23,475 | ||||||
| Furniture, fixtures and equipment | 316,833 | 274,480 | ||||||
| 674,963 | 593,957 | |||||||
| Accumulated depreciation and amortization | (371,030 | ) | (326,922 | ) | ||||
| Accumulated amortization on capital leases | (3,813 | ) | (2,217 | ) | ||||
| Net book value | $ | 300,120 | $ | 264,818 | ||||
Details for internally developed software (consisting of software and dedicated hardware which is included with furniture, fixtures and equipment in the above table) is presented as follows as of the dates indicated.
| December 31, | ||||||||
| 2004 | 2003 | |||||||
| Internally developed software in use — cost | $ | 41,129 | $ | 32,367 | ||||
| Internally developed software in use — amortization | (25,386 | ) | (15,420 | ) | ||||
| Internally developed software in development | 11,933 | 4,350 | ||||||
| $ | 27,676 | $ | 21,297 | |||||
Amortization of the asset held under the capital lease is included with depreciation expense.
75
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 8. | Goodwill and Other Intangible Assets |
The changes in the carrying amount of goodwill and other intangibles for the years ended December 31, 2004 and 2003 were as follows:
| Other | Total | ||||||||||||||||
| Core Deposit | Identifiable | Identifiable | |||||||||||||||
| Goodwill | Intangibles | Intangibles | Intangibles | ||||||||||||||
| Balance, December 31, 2002 | $ | 660,684 | $ | 28,438 | $ | 6,036 | $ | 34,474 | |||||||||
| Recorded during the year | 462,531 | 6,807 | 6,861 | 13,668 | |||||||||||||
| Adjust Warren’s estimated CDI to actual | 2,244 | (2,244 | ) | — | (2,244 | ) | |||||||||||
| Amortization expense | — | (4,574 | ) | (4,372 | ) | (8,946 | ) | ||||||||||
| Massachusetts REIT adjustment | 2,473 | — | — | — | |||||||||||||
| Other adjustment of purchase accounting estimates | (1,293 | ) | (262 | ) | (275 | ) | (537 | ) | |||||||||
| Balance, December 31, 2003 | 1,126,639 | 28,165 | 8,250 | 36,415 | |||||||||||||
| Recorded during the year | 245,930 | 21,566 | 1,042 | 22,608 | |||||||||||||
| Amortization expense | — | (5,988 | ) | (2,639 | ) | (8,627 | ) | ||||||||||
| Reclassification | — | — | — | — | |||||||||||||
| Other adjustment of purchase accounting estimates | (6,789 | ) | (20 | ) | — | (20 | ) | ||||||||||
| Balance, December 31, 2004 | $ | 1,365,780 | $ | 43,723 | $ | 6,653 | $ | 50,376 | |||||||||
| Estimated Annual Amortization Expense: | |||||||||||||||||
| 2005 | — | $ | 6,350 | $ | 1,492 | $ | 7,842 | ||||||||||
| 2006 | — | 5,679 | 745 | 6,424 | |||||||||||||
| 2007 | — | 5,194 | 745 | 5,939 | |||||||||||||
| 2008 | — | 5,190 | 375 | 5,565 | |||||||||||||
| 2009 | — | 5,190 | 375 | 5,565 | |||||||||||||
| Thereafter | — | 16,120 | 484 | 16,604 | |||||||||||||
The components of identifiable intangible assets follow:
| December 31, 2004 | |||||||||||||
| Gross Carrying | Accumulated | Net Carrying | |||||||||||
| Amount | Amortization | Amount | |||||||||||
| Identifiable intangible assets: | |||||||||||||
| Core deposit intangibles | $ | 57,858 | $ | 14,135 | $ | 43,723 | |||||||
| Other identifiable intangibles | 14,746 | 8,093 | 6,653 | ||||||||||
| Total | $ | 72,604 | $ | 22,228 | $ | 50,376 | |||||||
There was no impairment recorded in 2004 and 2003 based on the valuations at December 31, 2004 and 2003.
76
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 9. | Income Taxes |
The current and deferred components of income tax expense follow:
| Year Ended December 31, | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
| Current | |||||||||||||
| Federal | $ | 131,542 | $ | 138,722 | $ | 128,523 | |||||||
| State | 15,057 | 8,865 | 7,636 | ||||||||||
| Deferred | |||||||||||||
| Federal | 16,393 | 25,138 | 12,419 | ||||||||||
| State | 105 | 935 | 103 | ||||||||||
| $ | 163,097 | $ | 173,660 | $ | 148,681 | ||||||||
The following table reconciles the expected federal income tax expense (computed by applying the federal statutory tax rate to income before taxes) to recorded income tax expense.
| Year Ended December 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| Computed federal tax expense | $ | 163,709 | $ | 183,547 | $ | 156,561 | ||||||
| State income tax, net of federal benefits | 9,855 | 6,370 | 5,030 | |||||||||
| Benefit of tax-exempt income | (5,046 | ) | (3,412 | ) | (3,494 | ) | ||||||
| Low income/rehabilitation credits | (4,270 | ) | (2,700 | ) | (1,540 | ) | ||||||
| Increase in cash surrender value of life insurance | (8,149 | ) | (8,026 | ) | (7,000 | ) | ||||||
| Nondeductible compensation | 6,931 | — | — | |||||||||
| Other, net | 67 | (2,119 | ) | (876 | ) | |||||||
| Recorded income tax expense | $ | 163,097 | $ | 173,660 | $ | 148,681 | ||||||
77
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 9. | Income Taxes — (Continued) |
The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities, which are included in Other Assets and Other Liabilities, respectively, at December 31, 2004 and 2003 follow:
| December 31, | ||||||||||
| 2004 | 2003 | |||||||||
| Deferred tax assets | ||||||||||
| Allowance for loan and lease losses | $ | 86,505 | $ | 83,061 | ||||||
| Compensation and employee benefits | 20,268 | 18,597 | ||||||||
| Loans distributed from subsidiary | 6,616 | 13,017 | ||||||||
| Book reserves not yet realized for tax purposes | 405 | 1,304 | ||||||||
| Intangible assets | 5,696 | 2,435 | ||||||||
| Other | 2,023 | 1,643 | ||||||||
| Total gross deferred tax assets | 121,513 | 120,057 | ||||||||
| Deferred tax liabilities | ||||||||||
| Pension plan | 35,194 | 31,035 | ||||||||
| Leases | 7,488 | 7,820 | ||||||||
| Premises and equipment | 24,930 | 26,563 | ||||||||
| Partnership investments | 12,090 | 8,630 | ||||||||
| Loan basis difference | 11,439 | 12,819 | ||||||||
| Purchase accounting | 21,870 | 12,927 | ||||||||
| Unrealized appreciation on securities and hedging | 105 | 3,920 | ||||||||
| Other | 760 | 1,148 | ||||||||
| Total gross deferred tax liabilities | 113,876 | 104,862 | ||||||||
| Net deferred tax asset | $ | 7,637 | $ | 15,195 | ||||||
Banknorth has determined that a valuation allowance is not required for any of its deferred tax assets since it is more likely than not that these assets will be realized principally through carryback to taxable income in prior years and future reversals of existing taxable temporary differences and by offsetting other future taxable income.
| State Tax Assessment |
We are subject to examinations by various federal and state governmental tax authorities from time to time regarding tax returns we have filed. Currently, certain state income tax returns filed by us in recent years are under examination. In June 2004, the Vermont Department of Taxes assessed three Vermont-based banks, previously acquired by us, for taxes, interest and penalties for the years 2000 and 2001 on the basis that subsidiary investment companies established by these banks pursuant to Vermont law should be considered part of our banking subsidiary for purposes of calculating taxes due the State of Vermont. We believe that we have substantial defenses to this assessment and are in the process of appealing it in accordance with administrative procedures. Although not considered probable, there can be no assurance that Vermont will not ultimately prevail on this matter. Our estimate of the range of reasonably possible exposure above established reserves on this matter is from $0 to $2.0 million, after federal tax benefits.
78
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 10. | Merger and Consolidation Costs |
Merger and consolidation costs include merger-related, charter consolidation, asset write-downs and branch closing expenses. The following table summarizes merger and consolidation costs for the years ended December 31, 2004, 2003 and 2002.
| Year-Ended December 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
The Toronto-Dominion Bank Merger Charges | ||||||||||||
| Personnel costs | $ | 34,986 | $ | — | $ | — | ||||||
| Other costs | 3,890 | — | — | |||||||||
| 38,876 | — | — | ||||||||||
Foxborough Savings Bank Merger Charges | ||||||||||||
| Personnel costs | 611 | — | — | |||||||||
| Systems conversion and integration/customer communications | 1,274 | 1 | — | |||||||||
| Other costs | 348 | — | — | |||||||||
| 2,233 | 1 | — | ||||||||||
CCBT Financial Companies, Inc. Merger Charges | ||||||||||||
| Personnel costs | 1,795 | — | — | |||||||||
| Systems conversion and integration/customer communications | 2,720 | — | — | |||||||||
| Other costs | 1,324 | — | — | |||||||||
| 5,839 | — | — | ||||||||||
BostonFed Bancorp, Inc. Merger Charges | ||||||||||||
| Personnel costs | 26 | |||||||||||
| Systems conversion and integration/customer communications | 1,297 | — | — | |||||||||
| Other costs | 114 | — | — | |||||||||
| 1,437 | — | — | ||||||||||
Other | ||||||||||||
| American Financial Holdings, Inc. merger charges | 400 | 5,358 | 855 | |||||||||
| First & Ocean Bancorp merger charges | 1,342 | 458 | — | |||||||||
| Warren Bancorp, Inc. merger charges | 29 | 2,424 | 240 | |||||||||
| Bancorp Connecticut merger charges | 49 | 363 | 2,746 | |||||||||
| Ipswich Bancshares merger charges | — | 143 | 1,900 | |||||||||
| Andover Bancorp, Inc./MetroWest Bank merger charges | — | 12 | 5,830 | |||||||||
| Banknorth Group, Inc. (Vermont) reverse reserves for auto lease residuals | (570 | ) | (615 | ) | (574 | ) | ||||||
| Charter consolidation costs | — | — | 3,601 | |||||||||
| Branch Closings | — | (40 | ) | 93 | ||||||||
| 1,250 | 8,103 | 14,691 | ||||||||||
Total Merger and Consolidation Costs | $ | 49,635 | $ | 8,104 | $ | 14,691 | ||||||
Merger-related personnel costs on business combinations accounted for under the purchase method of accounting includes the costs of maintaining duplicate employees at the acquired bank during the systems integration period and related employee benefits and outplacement services. For business combinations accounted for under the purchase method of accounting, severance costs are accrued at merger date (and
79
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 10. | Merger and Consolidation Costs — (Continued) |
are included in the determination of goodwill) for those employees identified to be severed at the time of closing. In 2004, personnel costs for the pending transaction with The Toronto-Dominion Bank (“TD”) included $33.2 million of long-term incentive payments pursuant to the change-in-control provision of the Executive Incentive Plan. These nonrefundable amounts were paid in anticipation of completion of this transaction, which constitutes a change in control for purposes of the Executive Incentive Plan.
The following table presents the approximate number of employees that were severed in each of the banking acquisitions in 2004, 2003 and 2002.
| Number of | ||||
| Terminated | ||||
| Acquisition | Employees | |||
| CCBT Financial Companies, Inc. | 155 | |||
| Foxborough Savings Bank | 25 | |||
| First & Ocean Bancorp | 60 | |||
| American Financial Holdings, Inc. | 330 | |||
| Warren Bancorp, Inc. | 85 | |||
| Bancorp Connecticut, Inc. | 90 | |||
| Ipswich Bancshares, Inc. | 60 | |||
Systems conversions and integration costs and customer communications costs are recorded as incurred and are associated with the costs of converting the accounts, records and data processing equipment of the acquired companies to the systems maintained by Banknorth, as well as the costs of required notices to customers of the acquired bank concerning the acquisition and conversion of their accounts to Banknorth systems.
Other costs include asset write-downs/facility costs relating primarily to facility closings. The costs represent lease termination costs and impairment of assets for redundant office space, closed branches and equipment to be disposed of or abandoned.
Charter consolidation costs represent costs incurred to consolidate the charters of the Company’s eight national bank subsidiaries to a single national bank charter effective January 1, 2002.
80
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 10. | Merger and Consolidation Costs — (Continued) |
The following table presents activity in the accrual account for merger and consolidation costs for the years ended December 31, 2004 and 2003, respectively.
| Purchase | Non-cash | |||||||||||||||||||||||
| Accounting | Merger and | Write Downs | ||||||||||||||||||||||
| Balance | Adjustments at | Consolidation | Cash | and Other | Balance | |||||||||||||||||||
| 12/31/03 | Acquisition | Costs | Payments | Adjustments | 12/31/04 | |||||||||||||||||||
| The Toronto-Dominion Bank Merger | $ | — | $ | 623 | $ | 38,879 | $ | (39,070 | ) | $ | — | $ | 432 | |||||||||||
| BostonFed Bancorp, Inc. Merger | — | — | 1,436 | (1,436 | ) | — | — | |||||||||||||||||
| Foxborough Savings Bank Merger | — | 1,196 | 2,232 | (2,880 | ) | (87 | ) | 461 | ||||||||||||||||
| CCBT Financial Companies, Inc. Merger | — | 10,407 | 5,837 | (13,908 | ) | (370 | ) | 1,966 | ||||||||||||||||
| First & Ocean Bancorp Merger | 250 | 1,715 | 1,342 | (3,101 | ) | — | 206 | |||||||||||||||||
| American Financial Holdings, Inc. Merger | 266 | — | 400 | (400 | ) | (266 | ) | — | ||||||||||||||||
| Warren Bancorp, Inc. Merger | 27 | — | 29 | (29 | ) | (27 | ) | — | ||||||||||||||||
| Bancorp Connecticut, Inc. Merger | 466 | — | 50 | (516 | ) | — | — | |||||||||||||||||
| Andover/ MetroWest Merger | 84 | — | — | (6 | ) | — | 78 | |||||||||||||||||
| Other merger and consolidation costs | 4 | — | (570 | ) | (2 | ) | 568 | — | ||||||||||||||||
| Total | $ | 1,097 | $ | 13,941 | $ | 49,635 | $ | (61,348 | ) | $ | (182 | ) | $ | 3,143 | ||||||||||
| Purchase | Non-cash | |||||||||||||||||||||||
| Accounting | Merger and | Write Downs | ||||||||||||||||||||||
| Balance | Adjustments at | Consolidation | Cash | and Other | Balance | |||||||||||||||||||
| 12/31/02 | Acquisition | Costs | Payments | Adjustments | 12/31/03 | |||||||||||||||||||
| First & Ocean Bancorp Merger | $ | — | $ | 585 | $ | 458 | $ | (793 | ) | $ | — | $ | 250 | |||||||||||
| American Financial Holdings, Inc. Merger | — | 13,600 | 5,358 | (17,257 | ) | (1,435 | ) | 266 | ||||||||||||||||
| Warren Bancorp, Inc. Merger | 2,052 | — | 2,424 | (4,670 | ) | 221 | 27 | |||||||||||||||||
| Bancorp Connecticut, Inc. Merger | 3,097 | — | 363 | (1,196 | ) | (1,798 | ) | 466 | ||||||||||||||||
| Ipswich Bancshares, Inc. Merger | — | — | 143 | (143 | ) | — | — | |||||||||||||||||
| Andover/ MetroWest Merger | 321 | — | 12 | (60 | ) | (189 | ) | 84 | ||||||||||||||||
| Other Merger and Consolidation Costs | 84 | — | (654 | ) | (37 | ) | 611 | 4 | ||||||||||||||||
| Total | $ | 5,554 | $ | 14,185 | $ | 8,104 | $ | (24,156 | ) | $ | (2,590 | ) | $ | 1,097 | ||||||||||
81
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 11. | Short-term Borrowings |
A summary of short-term borrowings follows:
| December 31, | ||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | ||||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate | |||||||||||||||||||||
At year-end | ||||||||||||||||||||||||||
| Securities sold under agreements to repurchase — retail | $ | 1,234,476 | 1.29 | % | $ | 1,086,900 | 0.59 | % | $ | 1,222,466 | 1.22 | % | ||||||||||||||
| Securities sold under agreements to repurchase — wholesale | — | — | 814,650 | 0.52 | % | — | — | |||||||||||||||||||
| Federal funds purchased | 618,000 | 2.22 | % | 358,000 | 0.94 | % | 53,000 | 1.16 | % | |||||||||||||||||
| Treasury, tax and loan notes | 375,347 | 2.16 | % | 77,397 | 0.69 | % | 1,001 | 0.91 | % | |||||||||||||||||
| Federal Home Loan Bank Advances | 1,570,000 | 2.25 | % | — | — | — | — | |||||||||||||||||||
| Total Short-term borrowings | $ | 3,797,823 | $ | 2,336,947 | $ | 1,276,467 | ||||||||||||||||||||
Average for the year | ||||||||||||||||||||||||||
| Securities sold under agreements to repurchase — retail | $ | 1,094,309 | 0.99 | % | $ | 1,059,077 | 0.90 | % | $ | 955,887 | 1.40 | % | ||||||||||||||
| Securities sold under agreements to repurchase — wholesale | 948,711 | 1.07 | % | 295,618 | 0.60 | % | — | — | ||||||||||||||||||
| Federal funds purchased | 609,218 | 1.44 | % | 264,062 | 1.20 | % | 95,568 | 1.71 | % | |||||||||||||||||
| Treasury, tax and loan notes | 143,529 | 1.74 | % | 10,207 | 1.07 | % | 13,036 | 1.61 | % | |||||||||||||||||
| Federal Home Loan Bank Advances | 225,985 | 1.92 | % | — | — | — | — | |||||||||||||||||||
Maximum month-end balance | ||||||||||||||||||||||||||
| Securities sold under agreements to repurchase — retail | $ | 1,277,965 | $ | 1,167,325 | $ | 1,200,524 | ||||||||||||||||||||
| Securities sold under agreements to repurchase — wholesale | 1,764,729 | 814,650 | — | |||||||||||||||||||||||
| Federal funds purchased | 947,000 | 655,000 | 256,000 | |||||||||||||||||||||||
| Treasury, tax and loan notes | 1,196,423 | 89,287 | 94,354 | |||||||||||||||||||||||
| Federal Home Loan Bank Advances | 1,570,000 | — | — | |||||||||||||||||||||||
Retail securities sold under repurchase agreements generally have maturities of 365 days or less and are collateralized by mortgage-backed securities and U.S. Government obligations.
At December 31, 2004, Banknorth also had a $110 million unsecured line of credit. The line is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. Banknorth did not utilize the line of credit in 2004.
82
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. Long-term Debt
A summary of long-term debt (debt with original maturities of more than one year) follows:
| December 31, | ||||||||
| 2004 | 2003 | |||||||
| Federal Home Loan Bank advances | $ | 428,825 | $ | 1,495,821 | ||||
| Securities sold under agreements to repurchase — wholesale | 1,100,000 | 1,400,000 | ||||||
| Junior subordinated debentures issued to affiliated trusts | 310,746 | — | ||||||
| Capital trust securities | — | 295,275 | ||||||
| Subordinated long-term debt 7.625%, due 2011 | 200,000 | 200,000 | ||||||
| Senior notes 3.75%, due 2008 | 149,810 | 149,753 | ||||||
| Hedge-related basis adjustments on long-term debt | (4,420 | ) | (1,896 | ) | ||||
| Other long-term debt | 7,921 | 6,964 | ||||||
| Total | $ | 2,192,882 | $ | 3,545,917 | ||||
The following table presents the maturities of long-term debt outstanding at the dates indicated:
| December 31, 2004 | December 31, 2003 | |||||||||||||||||||||
| Maturity | Principal | Maturity | Principal | |||||||||||||||||||
| Dates | Amounts | Interest Rates | Dates | Amounts | Interest Rates | |||||||||||||||||
| 2005 | $ | 723,843 | 3.21 – 7.45 | % | 2004 | $ | 1,879,358 | 0.17 – 8.09 | % | |||||||||||||
| 2006 | 769,726 | 2.77 – 6.39 | % | 2005 | 625,744 | 1.72 – 7.45 | % | |||||||||||||||
| 2007 | 8,079 | 3.45 – 8.04 | % | 2006 | 291,063 | 2.24 – 6.39 | % | |||||||||||||||
| 2008 | 149,585 | 3.75 – 6.42 | % | 2007 | 9,934 | 2.70 – 8.04 | % | |||||||||||||||
| 2009 | 2,515 | 6.97 – 6.97 | % | 2008 | 151,253 | 3.07 – 6.42 | % | |||||||||||||||
| 2010 – 2032 | 539,134 | 1.00 – 10.52 | % | 2009 – 2032 | 588,565 | 1.00 – 10.52 | % | |||||||||||||||
| $ | 2,192,882 | $ | 3,545,917 | |||||||||||||||||||
Callable borrowings of $105.0 million are shown in their respective periods assuming that the callable debt is redeemed at the initial call date while all other borrowings are shown in the periods corresponding to their scheduled maturity date.
Borrowings from the Federal Home Loan Bank, which consist of both fixed and adjustable rate borrowings, are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain unencumbered investment securities and other qualified assets.
83
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. Long-term Debt — (Continued)
The following is a summary of the junior subordinated debentures outstanding as of December 31, 2004:
| Junior | ||||||||||||||||||||||||
| Issuance | Capital | Common | Subordinated | Stated | Maturity | |||||||||||||||||||
| Name | Date | Securities | Securities | Debentures(1) | Rate | Date | ||||||||||||||||||
| Peoples Heritage Capital Trust I | 1/31/1997 | $ | 61,775 | $ | 3,093 | $ | 64,868 | 9.06% | 2/1/2027 | |||||||||||||||
| Banknorth Capital Trust I | 5/1/1997 | 30,000 | 928 | 30,928 | 10.52% | 5/1/2027 | ||||||||||||||||||
| Ipswich Statutory Trust I | 2/22/2001 | 3,500 | 109 | 3,609 | 10.20% | 2/22/2031 | ||||||||||||||||||
| CCBT Statutory Trust I | 7/31/2001 | 5,000 | 155 | 5,155 | 5.74% | 7/31/2031 | ||||||||||||||||||
| Banknorth Capital Trust II | 2/22/2002 | 200,000 | 6,186 | 206,186 | 8.00% | 4/1/2032 | ||||||||||||||||||
| $ | 300,275 | $ | 10,471 | $ | 310,746 | |||||||||||||||||||
| (1) | Amounts include junior subordinated debentures acquired by affiliated trusts from us with the capital contributed by us in exchange for the common securities of such trusts. Junior subordinated debentures are equal to capital securities plus common securities. |
There were issuance costs associated with the issuance of the capital trust securities. The average cost of the securities, including the amortization of the issuance costs was 8.55%, 8.64% and 8.72% for the years ended December 31, 2004, 2003 and 2002, respectively.
At December 31, 2004, trust capital securities amounted to 14.6% of Banknorth’s Tier 1 capital. Although pursuant to FIN 46(R), the trusts which issued capital securities are no longer consolidated with Banknorth and these securities therefore are no longer considered a minority interest in consolidated subsidiary for accounting purposes, pursuant to a supervisory letter sent by the Federal Reserve Board to all bank holding companies in July 2003, Banknorth has continued to include trust preferred securities in its Tier 1 capital. On May 6, 2004, the Federal Reserve Board issued a proposed regulation which proposed to permit bank holding companies to continue to include trust preferred securities in Tier 1 capital, subject to stricter quantitative and qualitative standards. Under the proposed regulation, commencing on March 31, 2007, the aggregate amount of restricted core capital elements (which include qualifying trust preferred securities, as well as qualifying cumulative perpetual preferred stock and Class B and Class C minority interests in consolidated subsidiaries, as defined) may not exceed 25% (15% for internationally active bank holding companies) of a bank holding company’s core capital elements (which consist of qualifying common stockholders’ equity, qualifying non-cumulative preferred stock and Class A minority interest in subsidiaries, as defined), net of goodwill. This test is more restrictive than the current limit for trust preferred securities, which does not deduct goodwill prior to calculating the 25% limit or explicitly include minority interests in consolidated subsidiaries, and is likely to reduce the ability of some bank holding companies, particularly those that have completed significant purchase acquisitions, to include trust preferred securities in Tier 1 capital. In addition, the proposed rule would limit the amount of qualifying trust preferred securities and Class C minority interests in excess of the restricted core capital limit that can be included in Tier 2 capital by providing that the amount of such elements, together with subordinated debt and limited life preferred stock, that may be included in Tier 2 capital would be limited to 50% of Tier 1 capital. The proposed rule also would provide that during the last five years prior to maturity of the underlying subordinated note or debentures, trust preferred securities must be treated as limited-life preferred stock, excluding it from Tier 1 capital and amortizing it out of Tier 2 capital at the rate of 20% per year. If the proposed capital regulation were adopted as proposed, we believe that we would continue to qualify as “well capitalized” under Federal Reserve Board regulations. There can be no assurance that the proposed capital regulation will be adopted as proposed or at all.
84
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. Long-term Debt — (Continued)
Other long-term debt includes the net obligation under a capital lease of $6.0 million as of December 31, 2004. Although the gross obligation under capital lease obligation is $21.9 million, the Bank provided funding for the construction of the leased asset. Accordingly, the loan balance of $15.9 million has been reclassified to net down the capital lease obligation.
| 13. | Regulatory Matters |
Banknorth, NA must maintain noninterest-bearing cash balances on reserve with the Federal Reserve Bank (“FRB”). In the years ended December 31, 2004 and 2003, the average required reserve balances were $99.4 million and $79.5 million, respectively.
Banking regulators adopted quantitative measures which assign risk weightings to assets and off-balance sheet items and also define and set minimum regulatory capital requirements (risk-based capital ratios.) Banks are required to have core capital (Tier 1) of at least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets and a minimum Tier 1 leverage ratio of 3% of adjusted quarterly average assets. Tier 1 capital consists principally of shareholders’ equity, including qualified perpetual preferred stock but excluding unrealized gains and losses on securities available for sale, less goodwill and certain other intangibles. Total capital consists of Tier 1 capital plus certain debt instruments and the reserve for credit losses, subject to limitations. Failure to meet certain capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements. The regulations also define well-capitalized levels of Tier 1, total capital and Tier 1 leverage as 6%, 10% and 5%, respectively. At December 31, 2004 and 2003, Banknorth and its depository subsidiary were “well-capitalized”, as defined, and in compliance with all applicable regulatory capital requirements. There are no conditions or events since December 31, 2004 that management believes would cause a change in Banknorth’s well-capitalized status.
The following table summarizes Banknorth’s and its depository subsidiary’s regulatory capital requirements at December 31, 2004 and December 31, 2003.
| Actual | Capital Requirements | Excess | |||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||
As of December 31, 2004 | |||||||||||||||||||||||||
| Banknorth Group, Inc. | |||||||||||||||||||||||||
| Total capital (to risk weighted assets) | $ | 2,510,570 | 12.13% | $ | 1,655,428 | 8.00% | $ | 855,142 | 4.13% | ||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 2,060,335 | 9.96% | 827,714 | 4.00% | 1,232,621 | 5.96% | |||||||||||||||||||
| Tier 1 leverage capital ratio (to average assets) | 2,060,335 | 7.58% | 1,087,190 | 4.00% | 973,145 | 3.58% | |||||||||||||||||||
| Banknorth NA | |||||||||||||||||||||||||
| Total capital (to risk weighted assets) | 2,387,678 | 11.57% | 1,650,894 | 8.00% | 736,784 | 3.57% | |||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 1,941,151 | 9.41% | 825,447 | 4.00% | 1,115,704 | 5.41% | |||||||||||||||||||
| Tier 1 leverage capital ratio (to average assets) | 1,941,151 | 7.16% | 1,084,507 | 4.00% | 856,644 | 3.16% | |||||||||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. Regulatory Matters — (Continued)
| Actual | Capital Requirements | Excess | |||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||
As of December 31, 2003 | |||||||||||||||||||||||||
| Banknorth Group, Inc. | |||||||||||||||||||||||||
| Total capital (to risk weighted assets) | $ | 2,088,061 | 11.29% | $ | 1,479,352 | 8.00% | $ | 608,709 | 3.29% | ||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 1,656,848 | 8.96% | 739,676 | 4.00% | 917,172 | 4.96% | |||||||||||||||||||
| Tier 1 leverage capital ratio (to average assets) | 1,656,848 | 6.65% | 996,777 | 4.00% | 660,071 | 2.65% | |||||||||||||||||||
| Banknorth NA | |||||||||||||||||||||||||
| Total capital (to risk weighted assets) | 1,970,705 | 10.67% | 1,477,591 | 8.00% | 493,114 | 2.67% | |||||||||||||||||||
| Tier 1 capital (to risk weighted assets) | 1,539,814 | 8.34% | 738,796 | 4.00% | 801,018 | 4.34% | |||||||||||||||||||
| Tier 1 leverage capital ratio (to average assets) | 1,539,814 | 6.18% | 995,893 | 4.00% | 543,921 | 2.18% | |||||||||||||||||||
| 14. | Shareholders’ Equity |
In 2004 and 2003, Banknorth issued 9.4 million and 13.4 million of shares of common stock in connection with acquisitions, respectively. In February 2002, Banknorth’s Board of Directors authorized the repurchase of up to 8 million shares, or approximately 6% of the then outstanding Company common stock in addition to the 13 million share repurchase program authorized in 2001. There were no repurchases in 2004 and there were 4.5 million shares and 6.3 million shares repurchased in 2003 and 2002, respectively. At December 31, 2004, Banknorth was authorized to purchase 2.9 million shares under the 8 million share repurchase program authorized in February 2002 and no shares under the 13 million share repurchase program authorized in 2001.
| Dividend Limitations |
Dividends paid by subsidiaries are the primary source of funds available to Banknorth for payment of dividends to its shareholders. Banknorth’s banking subsidiary is subject to certain requirements imposed by federal banking laws and regulations. These requirements, among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by the banking subsidiary to Banknorth. At December 31, 2004, Banknorth, NA had $736.8 million available for dividends that could be paid without prior regulatory approval.
| Stockholder Rights Plan |
In 1989, Banknorth’s Board of Directors adopted a Stockholder Rights Plan declaring a dividend of one preferred Stock Purchase Right for each outstanding share of Company common stock. The rights will remain attached to the Common Stock and are not exercisable except under limited circumstances relating to the acquisition of, the right to acquire beneficial ownership of, or tender offer for 15% or more of the outstanding shares of Company common stock. The rights have no voting or dividend privileges and, until they become exercisable, have no dilutive effect on the earnings of Banknorth. On July 27, 1999 Consolidatedthe Board of Directors amended and restated the Stockholder Rights Plan to, among other things, extend the expiration date of the rights to September 25, 2009. On July 25, 2000, Banknorth again amended and
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BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. Shareholders’ Equity — (Continued)
restated the Stockholder Rights Plan to reflect its acquisition of Banknorth (Vermont). The Stockholder Rights Plan was amended in 2004 to exclude the merger agreement between Banknorth and TD and the transactions contemplated thereby from its terms.
| 15. | Accumulated Other Comprehensive Income, Net |
The following table presents the reconciliation of transactions affecting Accumulated Other Comprehensive Income included in shareholder’s equity for the periods indicated.
| Pre-tax | ||||||||||||
| Amount | Tax Effect | Net of Tax | ||||||||||
For the Year Ended December 31, 2004 | ||||||||||||
| Unrealized (loss) on securities available for sale | $ | (18,826 | ) | $ | 6,589 | $ | (12,237 | ) | ||||
| Unrealized (loss) on cash flow hedges | (1,929 | ) | 675 | (1,254 | ) | |||||||
| Minimum pension liability | (1,660 | ) | 581 | (1,079 | ) | |||||||
| Reclassification adjustment for net losses realized in net income | 9,855 | (3,449 | ) | 6,406 | ||||||||
| Net change in unrealized (losses) | $ | (12,560 | ) | $ | 4,396 | $ | (8,164 | ) | ||||
For the Year Ended December 31, 2003 | ||||||||||||
| Unrealized (loss) on securities available for sale | $ | (126,873 | ) | $ | 44,405 | $ | (82,468 | ) | ||||
| Unrealized (loss) on cash flow hedges | (6,226 | ) | 2,179 | (4,047 | ) | |||||||
| Minimum pension liability | (687 | ) | 241 | (446 | ) | |||||||
| Reclassification adjustment for net (gains) realized in net income | (33,812 | ) | 11,834 | (21,978 | ) | |||||||
| Net change in unrealized (losses) | $ | (167,598 | ) | $ | 58,659 | $ | (108,939 | ) | ||||
For the Year Ended December 31, 2002 | ||||||||||||
| Unrealized gain on securities available for sale | $ | 126,028 | $ | (44,038 | ) | $ | 81,990 | |||||
| Unrealized (loss) on cash flow hedges | (9,590 | ) | 3,355 | (6,235 | ) | |||||||
| Minimum pension liability | (1,270 | ) | 445 | (825 | ) | |||||||
| Reclassification adjustment for net (gains) realized in net income | (850 | ) | 298 | (552 | ) | |||||||
| Net change in unrealized gains | $ | 114,318 | $ | (39,940 | ) | $ | 74,378 | |||||
| 16. | Derivative Instruments |
In the ordinary course of business, Banknorth enters into derivative transactions to manage its interest rate and prepayment risk and to accommodate the business of its customers. Banknorth uses various types of interest rate derivative contracts to protect against changes in the fair value of its fixed-rate assets and liabilities due to fluctuations in interest rates. Banknorth also uses these contracts to protect against changes in the cash flows of its variable-rate assets and liabilities, and anticipated transactions. In 2004 and 2003, nothing was excluded from the assessment of fair value and cash flow hedge effectiveness. Banknorth did not recognize any amounts in the consolidated statements of income for eachrelated to ineffectiveness of fair value or cash flow hedges in 2004 and 2003. At December 31, 2004 and 2003, there were no hedging positions where it was probable that forecasted transactions would not occur within the originally designated time period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. Derivative Instruments — (Continued)
For cash flow hedges, gains and losses on derivative contracts reclassified from accumulated other comprehensive income to current period earnings are included consistently in the consolidated statements of income with the respective hedged item and in the same period the hedge item affects earnings. During the next 12 months, net losses on derivative instruments included in accumulated other comprehensive income of approximately $58 thousand (after-tax) are expected to be reclassified into earnings. These net losses reclassified into earnings are expected to decrease income on the respective hedge items.
| 17. | Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks |
Banknorth is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to originate loans, commitments to invest in real estate limited partnerships, standby letters of credit, recourse arrangements on serviced loans, forward commitments to sell loans, foreign currency forward contracts and commercial loan interest rate swaps. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the yearsamount recognized in the three-year periodConsolidated Balance Sheets. The contract or notional amounts of those instruments reflect the extent of involvement Banknorth has in particular classes of financial instruments.
Banknorth’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and recourse arrangements is represented by the contractual amount of those instruments. Banknorth uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Banknorth controls the credit risk of its forward commitments to sell loans through credit approvals, limits and monitoring procedures.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
17. Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks — (Continued)
Financial instruments with off-balance sheet risk at December 31, 2004 and 2003:
| Contract or Notional Amount | ||||||||||
| at December 31, | ||||||||||
| 2004 | 2003 | |||||||||
| Financial instruments with notional or contract amounts which represent credit risk: | ||||||||||
| Commitments to originate loans, unused lines, standby letters of credit and unadvanced portions of construction loans | $ | 7,269,302 | $ | 6,245,086 | ||||||
| Commitments to invest in real estate limited partnerships | 22,729 | 24,971 | ||||||||
| Commitments to invest in small business investments limited partnerships | 17,137 | 17,663 | ||||||||
| Loans serviced with recourse | 223,333 | 5,569 | ||||||||
| Financial instruments with notional or contract amounts which exceed the amount of credit risk: | ||||||||||
| Commercial loan swap program: | ||||||||||
| Interest rate swaps with commercial borrowers | 690,856 | 325,023 | ||||||||
| Interest rate swaps with dealers | 690,856 | 325,023 | ||||||||
| Interest rate swaps on borrowings | 566,500 | 566,500 | ||||||||
| Forward commitments to sell loans | 83,016 | 61,000 | ||||||||
| Foreign currency rate contracts: | ||||||||||
| Forward contracts with customers | 33,575 | 23,438 | ||||||||
| Forward contracts with dealers | 33,747 | 23,438 | ||||||||
| Foreign exchange options to purchase | 35,713 | — | ||||||||
| Foreign exchange options to sell | 35,713 | — | ||||||||
| Rate-locked loan commitments | 35,961 | 30,779 | ||||||||
Commitments to originate loans, unused lines of credit and unadvanced portions of construction loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Banknorth evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Banknorth upon extension of credit, is based on a credit evaluation of the borrower. Loan origination and commitment fees are generally deferred and amortized as an adjustment of the related loan’s yield in interest income.
Standby letters of credit are conditional commitments issued by Banknorth to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Fees received for the standby letters of credit are included in other noninterest income.
At December 31, 2004, Banknorth had $61.3 million of investments in tax advantaged limited partnerships primarily involved in approved low income housing investment tax credit projects in Banknorth’s market area and commitments to invest up to an additional $22.7 million in such partnerships. At December 31, 2004, Banknorth had $30.2 million invested in small business limited partnerships which primarily provide seed money to businesses in Banknorth’s market area and commitments to invest up to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
17. Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks — (Continued)
an additional $17.1 million in such partnerships. Investments in both of the foregoing categories of assets are included under other assets. Income or losses related to the limited partnerships are included in other noninterest income.
Loans serviced with recourse represent potential obligations under certain loan servicing agreements. In the event of foreclosure on a serviced loan, Banknorth is obligated to repay the investor to the extent of the investor’s remaining balance after application of proceeds from the sale of the underlying collateral. To date, losses related to these recourse arrangements have been insignificant and while Banknorth cannot project future losses, the fair value of this recourse obligation is deemed to be likewise insignificant.
Commercial loan swaps enable customers to synthetically convert variable interest rate loans to fixed rate loans. These pay variable, receive fixed interest rate swaps on our books are offset by entering into simultaneous pay fixed, receive variable rate swaps with a third party broker/ dealer. Both of these swap products are marked to market and carried on our balance sheet as assets and liabilities at fair value. Changes in the fair value of the commercial interest rate swaps (which largely offset) are included in net interest income.
Interest rate swap agreements on borrowings synthetically convert fixed-rate debt to variable-rate debt tied to 1-month or 3-month LIBOR. These swaps are accounted for as fair value hedges. Changes in the fair value of these swap agreements are included in net interest income.
Forward commitments to sell residential mortgage loans are contracts which Banknorth enters into for the purpose of reducing the market risk associated with originating loans for sale. Risks may arise from the possible inability of Banknorth to originate loans to fulfill the contracts, in which case Banknorth would normally purchase loans from correspondent banks or in the open market to deliver against the contract. Gains and losses related to commitments to originate rate-locked loans are included in earnings with mortgage banking income.
Foreign currency forward contracts are contracts that Banknorth enters into as an accommodation for customers involved in international trade for the future delivery or purchase of foreign currency at a specified price. For these customers, Banknorth generally sets aside a percentage of their available line of credit until the foreign currency contract is settled. Generally, Banknorth enters into forward foreign contracts with approved reputable dealers. Risks arise from the possible inability of the seller and/or our customer to perform and from any resultant exposure to movement in foreign currency exchange rates, limiting Banknorth’s exposure to the replacement value of the contracts rather than the notional principal or contract amounts. The foreign exchange contracts outstanding at December 31, 2004 all mature within two years. The foreign currency forward contracts are carried on our balance sheet at fair value. The changes in the fair value of the foreign currency contracts and the associated fees are included in other noninterest income.
| Legal Proceedings |
In the ordinary course of business, Banknorth and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions, including actions brought on behalf of various putitive classes of claimants. Certain of these actions assert claims for substantial monetary damages against Banknorth and its subsidiaries. Based on currently available information, advice of counsel, available insurance coverage and established reserves, management does not believe that the eventual outcome of pending litigation against Banknorth and its subsidiaries will have a material adverse effect on the consolidated financial position, liquidity or results of operations of Banknorth. In view of the inherent difficulty of predicting such matters, however, there can be no assurance that the outcome of any such
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
17. Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks — (Continued)
action will not have a material adverse effect on Banknorth’s consolidated results of operations in any future reporting period.
| Operating Lease Obligations |
Banknorth leases certain properties and equipment used in operations under terms of operating leases which include renewal options. Rental expense under these leases approximated $22.2 million, $20.3 million and $20.9 million for the years ended 2004, 2003 and 2002, respectively.
The following table sets forth the approximate future minimum lease payments over the remaining terms of the non-cancelable leases as of December 31, 2004.
| 2005 | $ | 24,396 | ||
| 2006 | 21,361 | |||
| 2007 | 17,170 | |||
| 2008 | 14,192 | |||
| 2009 | 12,510 | |||
| 2010 and after | 34,233 | |||
| $ | 123,862 | |||
| 18. | Other Noninterest Income |
The following table presents other noninterest income during the periods indicated.
| Year Ended December 31, | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
| Loan fee income | $ | 26,453 | $ | 24,831 | $ | 21,893 | |||||||
| Covered call premiums | 18,024 | 27,756 | 7,279 | ||||||||||
| Mortgage banking services income | 6,562 | 10,212 | 8,539 | ||||||||||
| Venture capital write-downs | (2,880 | ) | (592 | ) | (2,753 | ) | |||||||
| Miscellaneous income | 6,657 | 7,099 | 4,020 | ||||||||||
| Total | $ | 54,816 | $ | 69,306 | $ | 38,978 | |||||||
The following table presents the significant components of mortgage banking income during the periods indicated.
| Year Ended December 31, | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
| Residential mortgage sales/fee income | |||||||||||||
| Gains on sales and fee income | $ | 5,358 | $ | 9,577 | $ | 11,371 | |||||||
| Net effect of derivatives | 10 | 107 | 33 | ||||||||||
| 5,368 | 9,684 | 11,404 | |||||||||||
| Residential mortgage servicing income | 1,194 | 725 | (15 | ) | |||||||||
| Impairment charge on mortgage servicing rights | — | (197 | ) | (2,850 | ) | ||||||||
| $ | 6,562 | $ | 10,212 | $ | 8,539 | ||||||||
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BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 19. | Stock-Based Compensation Plans |
| Stock Option Plans |
As part of its employee and director compensation programs, Banknorth may grant certain stock awards under the provisions of the existing stock option and compensation plans. Banknorth has stock options outstanding under various plans at December 31, 2004, including plans assumed in acquisitions. The plans provide for grants of options to purchase shares of common stock generally at the stock’s fair market value at the date of grant. In addition, the plans provide for grants of shares of common stock that are subject to forfeiture if certain vesting requirements are not met, among other stock-based awards.
Banknorth and its shareholders have adopted various stock option plans for key employees. These plans include a stock option plan adopted in 2003 (the “2003 Equity Incentive Plan”) and in 1996 (the “1996 Equity Incentive Plan”). The 2003 Equity Incentive Plan authorizes grants of options and other stock awards covering up to 8,100,000 shares of Banknorth common stock. The 1996 Equity Incentive Plan, as amended, authorizes grants of options and other stock awards covering up to 13,000,000 shares of Banknorth common stock. Stock options are granted with an exercise price equal to the stock’s fair market value at the date of the grant and expire 10 years from the date of the grant. At December 31, 2004, there were 4,202,895 additional shares available for grant under the 2003 Equity Incentive Plan and 2,225,622 additional shares available for grant under the 1996 Equity Incentive Plan.
Banknorth and its shareholders also have adopted a stock option plan for non-employee directors. The maximum number of shares of Banknorth common stock which may be issued under this plan, as amended, is 1,060,000 shares, of which 411,750 shares had been issued upon exercise of the stock options granted pursuant to this plan through December 31, 2004. Options to purchase 109,500 shares were granted in 2004 at an exercise price of $31.57 per share, options to purchase 112,500 shares were granted in 2003 at an exercise price of $23.37 per share and options to purchase 113,500 shares were granted in 2002 at $26.34 per share. At December 31, 2004, there were 243,000 shares available for future grants under this plan.
The per share weighted-average fair value of all stock options granted by Banknorth during 2004, 2003 and 2002 was $8.47, $7.15 and $7.09 on the date of the grants using the Black Scholes option-pricing model with the following weighted average assumptions:
| 2004 | 2003 | 2002 | ||||||||||
| Expected dividend yield | 2.39 | % | 2.65 | % | 2.36 | % | ||||||
| Risk-free interest rate | 3.52 | 3.31 | 3.82 | |||||||||
| Expected life | 5.00 | years | 5.00 | years | 5.00 | years | ||||||
| Volatility | 32.22 | % | 32.22 | % | 36.26 | % | ||||||
Award authority under stock incentive plans of acquired companies is generally terminated at the merger closing dates. In stock acquisitions, option holders under such plans generally receive options to buy Banknorth common stock based on the conversion terms of the applicable merger agreement. The terms of such options are governed by the stock incentive plan of the acquired company under which they were issued.
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BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 19. | Stock-Based Compensation Plans — (Continued) |
Activity for all stock option plans during the years ended December 31, 20002004, 2003 and 2002 is summarized as follows:
| 2004 | 2003 | 2002 | |||||||||||||||||||||||
| Weighted | Weighted | Weighted | |||||||||||||||||||||||
| Number of | Average | Number of | Average | Number of | Average | ||||||||||||||||||||
| Shares | Exercise Price | Shares | Exercise Price | Shares | Exercise Price | ||||||||||||||||||||
| Outstanding at beginning of year | 16,379,053 | $ | 21.23 | 12,488,419 | $ | 19.23 | 9,655,231 | $ | 16.90 | ||||||||||||||||
| Granted | 119,075 | 31.63 | 4,185,340 | 27.84 | 3,898,047 | 23.45 | |||||||||||||||||||
| Granted in purchase acquisition | 329,403 | 21.24 | 2,402,938 | 13.92 | 714,798 | 12.51 | |||||||||||||||||||
| Exercised | (7,483,628 | ) | 19.26 | (2,441,520 | ) | 15.11 | (1,684,671 | ) | 12.58 | ||||||||||||||||
| Cancelled and forfeited | (263,447 | ) | 25.84 | (256,124 | ) | 23.45 | (94,986 | ) | 20.71 | ||||||||||||||||
| Outstanding at end of year | 9,080,456 | $ | 22.87 | 16,379,053 | $ | 21.23 | 12,488,419 | $ | 19.23 | ||||||||||||||||
| Options exercisable at year end | 5,237,604 | $ | 20.29 | 8,947,350 | $ | 17.64 | 6,729,062 | $ | 16.46 | ||||||||||||||||
The range of per share exercise prices for outstanding and exercisable stock options at December 31, 2004 was as follows:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Number | Weighted Average | Number | ||||||||||||||||||
| Range of | Outstanding | Remaining | Weighted Average | Outstanding | Weighted Average | |||||||||||||||
| Exercise Prices | at 12/31/2004 | Contractual Life | Exercise Price | at 12/31/2004 | Exercise Price | |||||||||||||||
| up to $12.99 | 195,858 | 1.8 years | $ | 9.89 | 195,858 | $ | 9.89 | |||||||||||||
| $13.00 – $16.24 | 1,066,532 | 5.1 | 13.69 | 1,066,532 | 13.69 | |||||||||||||||
| $16.25 – $19.49 | 754,488 | 4.6 | 17.27 | 754,488 | 17.27 | |||||||||||||||
| $19.50 – $22.74 | 1,294,929 | 6.2 | 20.86 | 1,144,929 | 20.93 | |||||||||||||||
| $22.75 – $25.98 | 2,417,297 | 7.7 | 23.40 | 1,218,260 | 23.38 | |||||||||||||||
| $25.99 – $29.23 | 3,256,352 | 8.7 | 28.11 | 772,877 | 27.94 | |||||||||||||||
| $29.24 – $32.48 | 95,000 | 9.3 | 31.65 | 84,660 | 31.58 | |||||||||||||||
| 9,080,456 | 7.2 | 22.87 | 5,237,604 | 20.29 | ||||||||||||||||
| 401(k) Plan |
Banknorth and its subsidiaries have 401(k) Plans covering substantially all permanent employees. Banknorth matches employee contributions based on a predetermined formula and may make additional discretionary contributions. The total expense for these plans in 2004, 2003 and 2002 was $9.6 million, $9.2 million and $7.5 million, respectively.
| Employee Stock Purchase Plan |
Banknorth and its shareholders have adopted an Employee Stock Purchase Plan that is available to employees with one year of service. Under the plan, shares of Banknorth common stock may be purchased at six-month intervals at 85% of the lower of the fair market value on the first or the last business day of each six-month period, subject to limitations set forth in the plan. Employees have the right to authorize
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BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. Stock-Based Compensation Plans — (Continued)
payroll deductions up to 10% of their salary. During 2004, 2003 and 2002, employees purchased 171,764 shares, 201,307 shares and 180,955 shares at average prices of $27.28, $20.67 and $19.24 per share, respectively. The maximum number of shares which may be issued under the Employee Stock Purchase Plan, as amended, is 2,852,000 shares. At December 31, 2004, 1,800,075 shares had been issued under this plan and 1,051,925 shares remain to be issued. The proforma expense included in the SFAS No. 123 calculation disclosed in Note 1 to the Consolidated statementsFinancial Statements approximated $1.2 million, $1.6 million and $933 thousand for 2004, 2003 and 2002, respectively.
| Restricted Stock Plan |
Banknorth and its shareholders have adopted a Restricted Stock Plan under which up to $10,000 of the annual fee payable to each non-employee Director of Banknorth and participating subsidiaries is payable solely in shares of Company common stock. Shares issued under this plan totaled 3,991, 8,869 and 5,599 in 2004, 2003 and 2002, respectively.
| Incentive Plans |
Banknorth and its shareholders have adopted an Incentive Plan covering all full and part-time employees, other than executive officers. Incentives are earned based on Banknorth’s, department or individual performance as measured against targets set in connection with the annual budget. Each employee’s incentive potential is a fixed percentage of their base pay and, for a significant number of employees, can be modified up or down based on actual performance versus target.
Banknorth and its shareholders have also adopted an Executive Incentive Plan under which Banknorth may pay cash awards to officers and other employees. Incentives payments may be short-term or long-term in nature and based on corporate performance as measured against performance targets which are established in connection with the preparation of the annual budget. As noted in Note 10, in December 2004 Banknorth paid $33.2 million of incentive awards pursuant to the change-in-control provision of the Executive Incentive Plan in anticipation of completion of the pending transaction between Banknorth and TD, which constitutes a change-in-control as defined in this plan.
| 20. | Retirement and Other Benefit Plans |
| Pension Plans |
Banknorth has a noncontributory defined benefit retirement plan covering most permanent, full-time employees. Employees are fully vested after five years of service. Benefits are based on career average earnings and length of service. Banknorth has historically made cash contributions to the defined benefit pension plan for the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Banknorth contributed $17.1 million to the plan in 2004 and estimates that the 2005 contribution will be approximately $20 million.
Banknorth has adopted supplemental retirement plans for certain key officers. These plans, which are unfunded and nonqualified, were designed to offset the impact of changes in shareholders' equitythe pension plans that limit the benefits for highly-paid employees under qualified pension plans.
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BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 20. | Retirement and Other Benefit Plans — (Continued) |
| Post-Retirement Benefits Other Than Pensions |
Banknorth and its subsidiaries sponsor limited post-retirement benefit programs which provide medical coverage and life insurance benefits to a closed group of employees and directors who meet minimum age and service requirements.
Banknorth and its subsidiaries recognize costs related to post-retirement benefits under the accrual method, which recognizes costs over the employee’s period of active employment. The impact of adopting SFAS No. 106 is being amortized over a twenty-year period beginning January 1, 1993.
The following tables set forth the funded status and amounts recognized in Banknorth’s Consolidated Balance Sheets at December 31, 2004 and 2003 for the pension plans (defined benefit and supplemental executive retirement plans) and other post-retirement benefit plans:
| Other Postretirement | ||||||||||||||||||||||||
| Qualified Pension | Nonqualified Pension | Benefits | ||||||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Change in Benefit Obligation | ||||||||||||||||||||||||
| Benefit obligation at beginning of year | $ | 204,409 | $ | 147,666 | $ | 26,264 | $ | 21,288 | $ | 18,329 | $ | 15,813 | ||||||||||||
| Service cost | 12,326 | 9,251 | 576 | 311 | 195 | 123 | ||||||||||||||||||
| Interest cost | 12,639 | 12,168 | 1,736 | 1,580 | 1,463 | 1,155 | ||||||||||||||||||
| Assumption changes | 17,825 | 14,916 | (70 | ) | (2,406 | ) | 2,307 | 517 | ||||||||||||||||
| Plan amendment | — | — | 957 | — | — | — | ||||||||||||||||||
| Actuarial loss | 1,867 | 7,408 | 3,369 | 4,111 | (800 | ) | 653 | |||||||||||||||||
| Acquisitions | 91 | 21,698 | (1,343 | ) | 2,289 | 5,570 | 1,566 | |||||||||||||||||
| Benefits paid | (9,212 | ) | (8,268 | ) | (1,408 | ) | (909 | ) | (1,431 | ) | (1,498 | ) | ||||||||||||
| Expenses paid | (621 | ) | (430 | ) | — | — | — | — | ||||||||||||||||
| Benefit obligation at end of year | $ | 239,324 | $ | 204,409 | $ | 30,081 | $ | 26,264 | $ | 25,633 | $ | 18,329 | ||||||||||||
Change in plan assets | ||||||||||||||||||||||||
| Fair value of plan assets at beginning of year | $ | 237,536 | $ | 154,902 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
| Actual return (loss) on plan assets | 19,128 | 25,929 | — | — | — | — | ||||||||||||||||||
| Employer contribution | 17,100 | 47,442 | 1,408 | 909 | 1,431 | 1,498 | ||||||||||||||||||
| Benefits paid | (9,212 | ) | (8,268 | ) | (1,408 | ) | (909 | ) | (1,431 | ) | (1,498 | ) | ||||||||||||
| Expenses paid | (621 | ) | (430 | ) | — | — | — | — | ||||||||||||||||
| Acquisitions | — | 17,961 | — | — | — | — | ||||||||||||||||||
| Fair value of plan assets at end of year | $ | 263,931 | $ | 237,536 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
95
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 20. | Retirement and Other Benefit Plans — (Continued) |
| Other Postretirement | ||||||||||||||||||||||||
| Qualified Pension | Nonqualified Pension | Benefits | ||||||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
Funded (unfunded) status | $ | 24,607 | $ | 33,127 | $ | (30,081 | ) | $ | (26,264 | ) | $ | (25,633 | ) | $ | (18,329 | ) | ||||||||
| Unrecognized net actuarial (gain) loss | 71,778 | 54,896 | 7,774 | 5,462 | 7,783 | 6,620 | ||||||||||||||||||
| Unrecognized prior service cost | 43 | 50 | 2,327 | 1,607 | 937 | 1,076 | ||||||||||||||||||
| Unrecognized net transition obligation | (498 | ) | (756 | ) | 110 | 121 | 3,292 | 3,685 | ||||||||||||||||
| Prepaid (accrued) benefit cost | $ | 95,930 | $ | 87,317 | $ | (19,870 | ) | $ | (19,074 | ) | $ | (13,621 | ) | $ | (6,948 | ) | ||||||||
Amounts recognized in the statement of financial position consist of: | ||||||||||||||||||||||||
| Prepaid (accrued) benefit cost | $ | 95,930 | $ | 87,317 | $ | (19,870 | ) | $ | (19,074 | ) | $ | (13,621 | ) | $ | (6,948 | ) | ||||||||
| Accrued benefit liability | — | — | 25,925 | 22,758 | — | — | ||||||||||||||||||
| Intangible asset | — | — | (2,437 | ) | (1,728 | ) | — | — | ||||||||||||||||
| Accumulated other comprehensive income | — | — | (3,618 | ) | (1,956 | ) | — | — | ||||||||||||||||
| Net amount recognized | $ | 95,930 | $ | 87,317 | $ | — | $ | — | $ | (13,621 | ) | $ | (6,948 | ) | ||||||||||
Accumulated benefit obligation | $ | 223,488 | $ | 193,835 | $ | 25,925 | $ | 22,760 | ||||||||||||||||
| Year Ended December 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
Components of net periodic benefit cost | ||||||||||||
Qualified Pension | ||||||||||||
| Service cost | $ | 12,326 | $ | 9,251 | $ | 6,810 | ||||||
| Interest cost | 12,639 | 12,168 | 9,223 | |||||||||
| Expected (gain) on plan assets | (19,821 | ) | (14,343 | ) | (12,373 | ) | ||||||
| Recognized actuarial loss | 3,503 | 3,865 | — | |||||||||
| Net amortization and deferral | (251 | ) | (251 | ) | (251 | ) | ||||||
| Other | 91 | — | — | |||||||||
| Net periodic benefit cost | $ | 8,487 | $ | 10,690 | $ | 3,409 | ||||||
Nonqualified Pension | ||||||||||||
| Service cost | $ | 576 | $ | 311 | $ | 208 | ||||||
| Interest cost | 1,736 | 1,580 | 1,322 | |||||||||
| Expected return on plan assets | — | — | — | |||||||||
| Recognized actuarial loss | 413 | 124 | 70 | |||||||||
| Net amortization and deferral | 248 | 183 | 258 | |||||||||
| Net periodic benefit cost | $ | 2,973 | $ | 2,198 | $ | 1,858 | ||||||
96
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 20. | Retirement and Other Benefit Plans — (Continued) |
| Year Ended December 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
Other Postretirement Benefits | ||||||||||||
| Service cost | $ | 195 | $ | 123 | $ | 99 | ||||||
| Interest cost | 1,463 | 1,155 | 1,001 | |||||||||
| Expected return on plan assets | — | — | — | |||||||||
| Recognized actuarial loss | 344 | 310 | 132 | |||||||||
| Net amortization and deferral | 532 | 532 | 532 | |||||||||
| Net periodic benefit cost | $ | 2,534 | $ | 2,120 | $ | 1,764 | ||||||
Weighted-average assumptions used to determine benefit obligations as of December 31
| 2004 | 2003 | |||||||
| Discount rate | 5.75 | % | 6.25 | % | ||||
| Rate of compensation increase | 4.50 | % | 4.50 | % | ||||
| Medical inflation rate | 8.00 | % | 9.00 | % | ||||
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31
| 2004 | 2003 | |||||||
| Discount rate | 6.25 | % | 6.75 | % | ||||
| Expected return on plan assets | 8.50 | % | 8.50 | % | ||||
| Rate of compensation increase | 4.50 | % | 4.50 | % | ||||
| Medical inflation rate | 9.00 | % | 10.00 | % | ||||
| 2004 | 2003 | |||||||
Assumed health care cost trend rates at December 31 | ||||||||
| Health care cost trend rate assumed for next year | 7.00 | % | 8.00 | % | ||||
| Rate that the cost trend rate gradually declines to | 5.00 | % | 5.00 | % | ||||
| Year that the rate reaches the rate it is assumed to remain at | 2007 | 2007 | ||||||
Effect of one-percentage change in assumed health care cost trend rates in 2004
| 1% Increase | 1% Decrease | |||||||
| Effect on total service and interest cost components | $ | 123,065 | $ | (105,563 | ) | |||
| Effect on postretirement benefit obligation | 1,948,614 | (1,672,485 | ) | |||||
97
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 20. | Retirement and Other Benefit Plans — (Continued) |
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
| Other | ||||||||||||
| Qualified | Nonqualified | Postretirement | ||||||||||
| Pension | Pension | Benefits | ||||||||||
| 2005 | $ | 8,518,186 | $ | 2,191,582 | $ | 2,126,158 | ||||||
| 2006 | 8,681,680 | 2,273,333 | 2,106,161 | |||||||||
| 2007 | 9,267,800 | 2,641,818 | 2,033,685 | |||||||||
| 2008 | 10,019,916 | 2,716,953 | 1,946,149 | |||||||||
| 2009 | 10,748,152 | 6,058,615 | 1,879,914 | |||||||||
| 2010 - 2014 | 71,262,751 | 11,687,393 | 9,212,736 | |||||||||
| $ | 118,498,485 | $ | 27,569,694 | $ | 19,304,803 | |||||||
Assumptions for long-term expected return on pension plan assets in the Banknorth qualified retirement plan are periodically reviewed. As part of the review, Banknorth’s independent consulting actuaries performed a stochastic analysis of expected returns based on the plan’s asset allocation as of both January 1, 2003 and January 1, 2004 to develop expected rates of return. This forecast reflects the actuarial firm’s expected long-term rates of return for each significant asset class or economic indicator, for example, 9.6% for US large cap stocks, 6.1% for US long-term corporate bonds, and 2.7% inflation as of January 1, 2004. The range of returns developed relies both on forecasts and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class.
The following table presents the plan assets as of December 31, 2004 and 2003 and respective target allocations.
| December 31, | ||||||||||||
| 2004 | 2003 | |||||||||||
| Actual | Actual | Target | ||||||||||
| Percentage | Percentage | Allocation | ||||||||||
| Asset category | of Fair Value | of Fair Value | Percentage | |||||||||
| Cash | 1 | % | 20 | % | 0 - 25 | % | ||||||
| Equities | 59 | % | 53 | % | 40 - 75 | % | ||||||
| Fixed Income | 40 | % | 27 | % | 25 - 60 | % | ||||||
| 100 | % | 100 | % | |||||||||
Equity securities at December 31, 2004 and 2003 do not include any Banknorth common stock.
Banknorth’s key investment objectives in managing its defined benefit plan assets are to ensure that present and future benefit obligations to all participants and beneficiaries are met as they become due (a) to provide a total return that, over the long-term, maximizes the ratio of the yearsplan assets to liabilities, while minimizing the present value of required Company contributions, at the appropriate levels of risk, (b) to meet statutory requirements and regulatory agencies’ requirements (c) and to satisfy applicable accounting standards. Banknorth periodically evaluates the asset allocations, funded status, investment manager structure, rate of return assumption and contribution strategy for satisfaction of our investment objectives. The Retirement Committee meets quarterly to review the performance management reports prepared by our investment managers.
98
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 20. | Retirement and Other Benefit Plans — (Continued) |
The expected return on plan assets equals the long-term rate of return multiplied by the market related value, plus the expected contributions, weighted for timing, plus expected expenses, minus the expected distributions, weighted for timing.
Interest cost equals the discount rate multiplied by the projected benefit obligation plus the service cost minus expected expenses, minus the expected distributions, weighted for timing.
| 21. | Fair Value of Financial Instruments |
Banknorth discloses fair value information about financial instruments for which it is practicable to estimate fair value. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. Where available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument. Also, because of differences in methodologies and assumptions used to estimate fair values, Banknorth’s fair values should not be compared to those of other banks.
Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of Banknorth. For certain assets and liabilities, the information required under SFAS No. 107 is supplemented with additional information relevant to an understanding of the fair value.
The following describes the methods and assumptions used by Banknorth in estimating the fair values of financial instruments and certain non-financial instruments:
Cash and cash equivalents, including cash and due from banks, short-term investments and federal funds sold. For these cash and cash equivalents, which have maturities of 90 days or less, the carrying amounts reported in the three-year period endedbalance sheet approximate fair values.
Securities and loans held for sale. Fair values are based on quoted bid market prices, where available. Where quoted market prices for an instrument are not available, fair values are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instrument being valued. Fair values are calculated based on the value of one unit without regard to premiums or discounts that might result from selling all of Banknorth’s holdings of a particular security in one transaction.
Loans and leases. The fair values of portfolio loans and leases are estimated by discounting the contractual cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar quality.
For certain variable-rate consumer loans, including home equity lines of credit the carrying value approximates fair value.
For nonperforming loans and certain loans where the credit quality of the borrower has deteriorated significantly, fair values are estimated by discounting cash flows at a rate commensurate with the risk associated with those cash flows.
99
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 21. | Fair Value of Financial Instruments — (Continued) |
Commitments and letters of credit not included in the table have contractual values of $7.3 billion and $6.2 billion at December 31, 2000
13
192004 and 2003, respectively. These instruments generate ongoing fees at Banknorth’s current pricing levels. Of the commitments at December 31, 2004, 36% mature within one year. At December 31, 2004, the approximate fair value of standby letters of credit was $377 thousand, of which $184 thousand was unamortized and included in other liabilities on the balance sheet. At December 31, 2003, the approximate fair value of the standby letters of credit was $696 thousand.
Mortgage Servicing Rights. The fair value of Banknorth’s mortgage servicing rights was based on a third party valuation analysis (performed as of November 30, 2004) which considered the expected present value of future mortgage servicing income, net of estimated servicing costs, considering market consensus loan prepayment predictions at that date.
Deposits. The fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is based on the discounted value of contractual cash flows, applying interest rates currently being offered on wholesale funding products of similar maturities.
The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of alternative forms of funding (“deposit base intangibles”).
Borrowings, including federal funds purchased, securities sold under repurchase agreements, borrowings from the Federal Home Loan Bank and other borrowings. The fair value of Banknorth’s long-term borrowings is estimated by discounting cash flows based on current rates available to Banknorth for similar types of borrowing arrangements taking into account any optionality. For short-term borrowings that mature or reprice in 90 days or less, carrying value approximates fair value.
Off-balance sheet financial instruments:
Forward commitments to sell loans held for sale. The fair value of Banknorth’s forward commitments to sell loans reflects the amount Banknorth would receive or pay to terminate the commitment at the reporting date. Of the $83.0 million of forward sales commitments at December 31, 2004, Banknorth had $51.7 million in loans available to sell at that date as well as sufficient loan originations subsequent to December 31, 2004 to fulfill the commitments. Consequently, Banknorth expects to meet all of its forward sales commitments.
Rate-lock commitments to originate loans held for sale. The fair values on commitment to originate residential loans at an agreed upon rate (rate-locked) are based on the estimated gain or loss that would be recognized had the underlying loans been funded and sold on the reporting date (i.e., mark-to-market value).
Commercial loan interest rate swaps. The estimated fair value of these derivative financial instruments is based on dealer quotes.
Loans sold or serviced with recourse. Under certain of Banknorth’s loan servicing or sales arrangements, Banknorth has $223.3 million of recourse obligations. In the event of foreclosure on a sold or serviced loan, Banknorth is obligated to repay the buyer or investor to the extent of the remaining balance after application of proceeds from the sale of the underlying collateral. To date, losses related to these recourse arrangements have been insignificant and while Banknorth cannot project future losses, the fair value of this recourse obligation also is deemed to be insignificant.
100
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 21. | Fair Value of Financial Instruments — (Continued) |
A summary of the carrying values and estimated fair values of Banknorth’s significant financial instruments at December 31, 2004 and 2003 follows:
| 2004 | 2003 | ||||||||||||||||
| Carrying | Fair | Carrying | Fair | ||||||||||||||
| Value | Value | Value | Value | ||||||||||||||
| Assets: | |||||||||||||||||
| Cash and cash equivalents | $ | 544,306 | $ | 544,306 | $ | 674,331 | $ | 674,331 | |||||||||
| Securities — available for sale | 6,905,765 | 6,905,765 | 7,122,992 | 7,122,992 | |||||||||||||
| Securities — held to maturity | 87,013 | 87,507 | 124,240 | 124,344 | |||||||||||||
| Loans held for sale | 51,693 | 52,936 | 41,696 | 42,801 | |||||||||||||
| Loans and leases, net | 18,349,842 | 18,510,642 | 16,113,675 | 16,153,360 | |||||||||||||
| Mortgage servicing rights | 5,155 | 5,888 | 2,783 | 3,115 | |||||||||||||
| Liabilities: | |||||||||||||||||
| Fed funds purchased | 618,000 | 618,000 | 358,000 | 358,000 | |||||||||||||
| Deposits (with no stated maturity) | 14,742,635 | 14,742,635 | 13,168,081 | 13,168,081 | |||||||||||||
| Time deposits | 4,484,946 | 4,474,769 | 4,733,104 | 4,763,865 | |||||||||||||
| Borrowings | 5,372,705 | 5,438,189 | 5,524,864 | 5,674,074 | |||||||||||||
| Financial instruments with off-balance sheet notional amounts: | |||||||||||||||||
| Forward commitments to sell loans | (149 | ) | (149 | ) | (425 | ) | (425 | ) | |||||||||
| Rate-lock commitments to originate loans held for sale | 147 | 147 | 188 | 188 | |||||||||||||
| Commercial loan interest rate swaps with borrower | 17,836 | 17,836 | 7,357 | 7,357 | |||||||||||||
| Commercial loan interest rate swaps with broker | (17,836 | ) | (17,836 | ) | (7,357 | ) | (7,357 | ) | |||||||||
| Interest rate contracts on borrowings | (4,420 | ) | (4,420 | ) | (1,896 | ) | (1,896 | ) | |||||||||
| Foreign currency forward contracts with customers | 3,307 | 3,307 | 3,132 | 3,132 | |||||||||||||
| Foreign currency forward contracts with dealers | (3,056 | ) | (3,056 | ) | (3,132 | ) | (3,132 | ) | |||||||||
| Foreign exchange options to purchase | 1,727 | 1,727 | — | — | |||||||||||||
| Foreign exchange options to sell | (1,727 | ) | (1,727 | ) | — | — | |||||||||||
101
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 22. | Condensed Financial Information — Parent Company Only |
Condensed Financial Statements of Banknorth
| December 31, | ||||||||||
| 2004 | 2003 | |||||||||
Balance Sheets | ||||||||||
| Assets: | ||||||||||
| Cash and due from banks | $ | 55,674 | $ | 27,492 | ||||||
| Interest bearing deposits with subsidiaries | 193,942 | 225,492 | ||||||||
| Securities available for sale | 54,387 | 45,216 | ||||||||
| Investment in subsidiaries | 3,361,786 | 2,710,080 | ||||||||
| Goodwill and other intangibles | 618 | 618 | ||||||||
| Amounts receivable from subsidiaries | 10,917 | — | ||||||||
| Other assets | 25,295 | 16,679 | ||||||||
| Total assets | $ | 3,702,619 | $ | 3,025,577 | ||||||
| Liabilities and shareholders’ equity | ||||||||||
| Amounts payable to subsidiaries | $ | — | $ | 978 | ||||||
| Senior notes, net of hedge | 148,330 | 149,991 | ||||||||
| Subordinated debentures supporting mandatory redeemable trust securities | 349,854 | 344,403 | ||||||||
| Other liabilities | 28,321 | 9,686 | ||||||||
| Shareholders’ equity | 3,176,114 | 2,520,519 | ||||||||
| Total liabilities and shareholders’ equity | $ | 3,702,619 | $ | 3,025,577 | ||||||
| Year Ended December 31, | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
| Operating income: | |||||||||||||
| Dividends from subsidiaries | $ | — | $ | 193,950 | $ | 112,331 | |||||||
| Net gains (losses) on sales of securities | (6 | ) | 53 | 648 | |||||||||
| Other operating income | 6,680 | 6,226 | 6,456 | ||||||||||
| Total operating income | 6,674 | 200,229 | 119,435 | ||||||||||
| Operating expenses: | |||||||||||||
| Interest on borrowings | 32,716 | 31,266 | 26,994 | ||||||||||
| Merger and consolidation costs | 5,447 | — | — | ||||||||||
| Write-off of branch automation project | — | — | 6,170 | ||||||||||
| Other operating expenses | 5,104 | 3,944 | 3,603 | ||||||||||
| Total operating expenses | 43,267 | 35,210 | 36,767 | ||||||||||
| Income before income taxes and equity in undistributed net income of subsidiaries | (36,593 | ) | 165,019 | 82,668 | |||||||||
| Income tax benefit | (12,811 | ) | (10,126 | ) | (9,736 | ) | |||||||
| Income before equity in undistributed net income of subsidiaries | (23,782 | ) | 175,145 | 92,404 | |||||||||
| Equity in undistributed net income of subsidiaries | 328,425 | 175,614 | 206,234 | ||||||||||
| Net income | $ | 304,643 | $ | 350,759 | $ | 298,638 | |||||||
102
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 22. | Condensed Financial Information — Parent Company Only — (Continued) |
| Year Ended December 31, | |||||||||||||
| 2004 | 2003 | 2002 | |||||||||||
| Cash flows from operating activities: | |||||||||||||
| Net income | $ | 304,643 | $ | 350,759 | $ | 298,638 | |||||||
| Adjustments to reconcile net income to net cash (used) provided by operating activities: | |||||||||||||
| Undistributed net income from subsidiaries | (328,425 | ) | (175,614 | ) | (206,234 | ) | |||||||
| Write-off of branch automation project | — | — | 6,170 | ||||||||||
| (Increase) decrease in amounts receivable from subsidiaries | (10,917 | ) | 83 | 23,618 | |||||||||
| Decrease (increase) in other assets | (8,380 | ) | 5,266 | (3,969 | ) | ||||||||
| Increase (decrease) in amounts payable to subsidiaries | (978 | ) | 978 | (1,029 | ) | ||||||||
| Increase (decrease) in other liabilities | 19,164 | (10,920 | ) | 4,813 | |||||||||
| Net cash provided by operating activities | (24,893 | ) | 170,552 | 122,007 | |||||||||
| Cash flows from investing activities: | |||||||||||||
| Net decrease (increase) in interest bearing deposits with subsidiaries | 31,550 | (110,040 | ) | (97,097 | ) | ||||||||
| Purchase of available for sale securities | — | (3,171 | ) | (3,037 | ) | ||||||||
| Sales of available for sale securities | 28 | 840 | — | ||||||||||
| Capital contribution to subsidiaries | — | (70,000 | ) | — | |||||||||
| Cash acquired in acquisition | 1,518 | 36,022 | 6,110 | ||||||||||
| Proceeds from sale of investment to subsidiary | 6,150 | — | — | ||||||||||
| Net cash (used in) provided by investing activities | 39,246 | (146,349 | ) | (94,024 | ) | ||||||||
| Cash flows from financing activities: | |||||||||||||
| Proceeds from line of credit | — | — | 25,000 | ||||||||||
| Payment of line of credit | — | — | (25,000 | ) | |||||||||
| Proceeds from sale of trust preferred securities | — | — | 193,150 | ||||||||||
| Proceeds from sale of senior notes | — | 148,693 | — | ||||||||||
| Payment of notes payable | — | — | (1,068 | ) | |||||||||
| Dividends paid to shareholders | (135,132 | ) | (111,889 | ) | (85,894 | ) | |||||||
| Treasury stock acquired | — | (105,071 | ) | (154,054 | ) | ||||||||
| Proceeds from stock issued in connection with employee benefit plans | 148,961 | 48,677 | 30,406 | ||||||||||
| Net cash (used in) financing activities | 13,829 | (19,590 | ) | (17,460 | ) | ||||||||
| Net increase in cash due from banks | 28,182 | 4,613 | 10,523 | ||||||||||
| Cash and due from banks at beginning of year | 27,492 | 22,879 | 12,356 | ||||||||||
| Cash and due from banks at end of year | $ | 55,674 | $ | 27,492 | $ | 22,879 | |||||||
| Supplemental disclosure information: | |||||||||||||
| Interest paid on borrowings | $ | 32,666 | $ | 30,329 | $ | 22,867 | |||||||
103
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 22. | Condensed Financial Information — Parent Company Only — (Continued) |
The parent-only Statements of Changes in Shareholders’ Equity are substantially similar to the Consolidated Statement of Changes in Shareholders’ Equity and therefore are not presented here.
Banknorth also holds an investment in a subsidiary, Northgroup Captive Insurance, Inc., which insures approximately $140,000 of the $1 million retention on the existing directors’ and officers’ liability policy of Banknorth.
| 23. | Subsequent Events (unaudited) |
On January 21, 2005, Banknorth completed the acquisition of BostonFed Bancorp, Inc. (“BostonFed”), the parent company of Boston Federal Savings Bank. BostonFed had $1.5 billion of assets and $100.0 million of shareholders’ equity at the acquisition date. Under terms of the acquisition agreement, each outstanding share of BostonFed was converted into the right to receive 1.241 shares of Banknorth common stock or, at the election of the holder of BostonFed common stock, 1.055 shares of Banknorth common stock and $6.12 in cash, plus, in each case, cash in lieu of any fractional share interest. An aggregate of 6.1 million shares of Banknorth common stock will be issued and $325 thousand of cash paid by Banknorth in connection with this transaction.
Banknorth, TD, a Canadian chartered bank, Berlin Merger Co., a Delaware corporation and a wholly-owned subsidiary of TD, and Banknorth Delaware Inc., a Delaware corporation and a wholly-owned subsidiary of Banknorth (“Banknorth Delaware”) are parties to an amended and restated agreement and plan of merger, dated as of August 25, 2004. Subject to the terms and conditions in the TD/Banknorth merger agreement, Banknorth will merge with and into Banknorth Delaware, and immediately thereafter Berlin Merger Co. will merge with and into Banknorth Delaware. Upon completion of the transaction, each Banknorth shareholder will be entitled to receive, in exchange for the shares of Banknorth common stock owned by such shareholder, a package of consideration consisting of (a) a number of TD common shares equal to 0.2351, (b) an amount in cash equal to $12.24 and (c) a number of shares of Banknorth Delaware common stock equal to 0.49, in each case multiplied by the number of shares of Banknorth common stock owned by such shareholder, plus cash in lieu of any fractional share interests. Upon completion of the transaction, TD will hold 51% of the outstanding common stock of Banknorth Delaware, which will change its name to TD Banknorth Inc. The transaction is subject to all required regulatory approvals, approval of the shareholders of Banknorth and other customary conditions. Banknorth shareholders approved the merger agreement and related proposals at a special meeting of Banknorth shareholders held on February 18, 2005. The transaction is expected to close on or about March 1, 2005.
In January 2005, Banknorth replaced an existing line of credit agreement with a similar line of credit with TD for $110 million at prevailing market terms and conditions.
In February 2005, Banknorth authorized a balance sheet restructuring under which it sold or intends to sell approximately $3.0 billion of interest-earning assets and will use the net proceeds to pay down approximately $3.0 billion of borrowings. The loss on this balance sheet restructuring will total approximately $38 million after-tax, or $0.21 per diluted share. The yield on assets sold was 4.03% and the weighted average rate on borrowings that were paid off was approximately LIBOR plus 23 basis points. As a result of these actions, the sensitivity of our balance sheet to future increases in interest rates has been reduced because the assets sold or to be sold are primarily fixed-rate and have a duration of approximately 3.8 years and the borrowings to be paid down have floating rates and are short-term.
104
BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| 24. | Selected Quarterly Data (unaudited) |
| 2004 | 2003 | ||||||||||||||||||||||||||||||||||
| Fourth | Third | Second | First | Fourth | Third | Second | First | ||||||||||||||||||||||||||||
| Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | ||||||||||||||||||||||||||||
Condensed Income Statement | |||||||||||||||||||||||||||||||||||
| Interest income | $ | 329,846 | $ | 325,361 | $ | 309,146 | $ | 292,652 | $ | 290,414 | $ | 290,750 | $ | 302,478 | $ | 309,327 | |||||||||||||||||||
| Interest expense | 83,783 | 85,701 | 79,096 | 75,043 | 77,126 | 80,918 | 90,904 | 103,190 | |||||||||||||||||||||||||||
| Net interest income | (A) | 246,063 | 239,660 | 230,050 | 217,609 | 213,288 | 209,832 | 211,574 | 206,137 | ||||||||||||||||||||||||||
| Provision for loan and lease losses | 10,670 | 10,670 | 9,500 | 9,500 | 10,400 | 10,500 | 10,500 | 10,901 | |||||||||||||||||||||||||||
| Net interest income after provision for loan and lease losses | 235,393 | 228,990 | 220,550 | 208,109 | 202,888 | 199,332 | 201,074 | 195,236 | |||||||||||||||||||||||||||
| Noninterest income(1) | (B) | 70,591 | 91,513 | 89,476 | 88,217 | 84,435 | 88,656 | 115,828 | 78,238 | ||||||||||||||||||||||||||
| Noninterest expense, excluding merger and consolidation costs(2) | (C) | 229,073 | 168,595 | 159,691 | 158,105 | 154,360 | 150,839 | 182,509 | 145,458 | ||||||||||||||||||||||||||
| Merger and consolidation costs | (D) | 38,286 | 5,603 | 4,135 | 1,614 | 1,316 | 808 | 1,530 | 4,450 | ||||||||||||||||||||||||||
| Income before income taxes | 38,625 | 146,305 | 146,200 | 136,607 | 131,647 | 136,341 | 132,863 | 123,566 | |||||||||||||||||||||||||||
| Income tax expense | 17,927 | 48,534 | 50,353 | 46,280 | 40,085 | 46,063 | 45,338 | 42,173 | |||||||||||||||||||||||||||
| �� | |||||||||||||||||||||||||||||||||||
| Net income(1)(2) | $ | 20,698 | $ | 97,771 | $ | 95,847 | $ | 90,327 | $ | 91,562 | $ | 90,278 | $ | 87,525 | $ | 81,393 | |||||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||||||||||||||
| Basic | 177,071 | 173,271 | 169,637 | 162,965 | 162,149 | 161,517 | 162,312 | 157,667 | |||||||||||||||||||||||||||
| Diluted | 179,953 | 176,756 | 173,109 | 166,657 | 165,685 | 164,446 | 164,559 | 159,328 | |||||||||||||||||||||||||||
| Basic earnings per share: | $ | 0.12 | $ | 0.56 | $ | 0.57 | $ | 0.55 | $ | 0.56 | $ | 0.56 | $ | 0.54 | $ | 0.52 | |||||||||||||||||||
| Diluted earnings per share: | $ | 0.12 | $ | 0.55 | $ | 0.55 | $ | 0.54 | $ | 0.55 | $ | 0.55 | $ | 0.53 | $ | 0.51 | |||||||||||||||||||
Financial Ratios | |||||||||||||||||||||||||||||||||||
| Return on average assets(1)(2)(3) | 0.29 | % | 1.33 | % | 1.36 | % | 1.37 | % | 1.39 | % | 1.39 | % | 1.38 | % | 1.32 | % | |||||||||||||||||||
| Return on average equity(1)(2)(3) | 2.66 | % | 13.24 | % | 13.54 | % | 14.13 | % | 14.72 | % | 14.85 | % | 14.24 | % | 14.26 | % | |||||||||||||||||||
| Net interest margin (fully-taxable equivalent)(3) | 3.87 | % | 3.68 | % | 3.66 | % | 3.68 | % | 3.65 | % | 3.63 | % | 3.71 | % | 3.66 | % | |||||||||||||||||||
| Noninterest income as a percent of total income(4) | 22.29 | % | 27.63 | % | 28.00 | % | 28.85 | % | 28.36 | % | 29.70 | % | 35.38 | % | 27.51 | % | |||||||||||||||||||
| Efficiency ratio(1)(2)(5) | 84.43 | % | 52.60 | % | 51.27 | % | 52.23 | % | 52.29 | % | 50.81 | % | 56.21 | % | 52.71 | % | |||||||||||||||||||
| (1) | Noninterest income included net securities gains (losses) of ($17.8) million and $29.2 million in the fourth quarter of 2004 and second quarter of 2003, respectively, which were incurred as part of balance sheet deleveraging programs implemented during these periods. |
| (2) | Noninterest expense included prepayment penalties on borrowings of $61.5 million and $28.5 million in the fourth quarter of 2004 and the second quarter of 2003, respectively, which were incurred as part of balance sheet deleveraging programs implemented during these periods. |
| (3) | Annualized. |
| (4) | Represents noninterest income as a percentage of net interest income and noninterest income. Noninterest income as a percent of total income is calculated as (B) divided by (A+B). |
| (5) | Represents noninterest expenses as a percentage of net interest income and noninterest income. Efficiency ratio is calculated as (C+D) divided by (A+B). |
105
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Banknorth Group, Inc.:
We have audited the accompanying consolidated balance sheets of Banknorth Group, Inc. and subsidiaries (“Banknorth”) as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 20002004. These consolidated financial statements are the responsibility of Banknorth’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banknorth Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Banknorth’s internal control over financial reporting as of December 31, 2004, based on criteria established inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.
 |
Boston, Massachusetts
February 25, 2004
106
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Banknorth Group, Inc.:
We have audited management’s assessment, included in Management’s Report on Internal Control over Financial Reporting, that Banknorth Group, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established inInternal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Banknorth’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Banknorth’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that Banknorth maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established inInternal Control — Integrated Framework issued by Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Banknorth maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Banknorth Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders’
107
equity, and cash flows for each of the years in the three-year period ended December 31, 2004, and our report dated February 25, 2005 expressed an unqualified opinion on those consolidated financial statements.
|
Boston, Massachusetts
February 25, 2005
108
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and are operating in an effective manner.
Management Report on Internal Control over Financial Reporting.Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework inInternal Control — Integrated Framework,our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by its independent registered public accounting firm, as stated in its report included in Item 8.
Changes in Internal Control Over Financial Reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| Item 9B. | Other Information |
Not applicable.
PART III.
| Item 10. | Directors and Executive Officers of the Registrant |
Incorporated by reference to “Election of Directors”, “Governance of Banknorth — Committees of the Board of Directors”, “Governance of Banknorth — Code of Conduct and Ethics” and “Executive Officers who are not Directors” in our definitive proxy statement for 2005 (the “Proxy Statement”), which will be filed with the Securities and Exchange Commission on or before April 30, 2005.
Incorporated by reference to “Beneficial Ownership of Capital Stock by Certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Incorporated by reference to “Governance of Banknorth — Code of Conduct and Ethics” in the Proxy Statement.
| Item 11. | Executive Compensation |
Incorporated by reference to “Compensation of Executive Officers and Transactions with Management” in the Proxy Statement.
109
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Security Ownership of Certain Beneficial Owners and Management. Information regarding security ownership of certain beneficial owners and management is incorporated by reference to “Beneficial Ownership of Capital Stock by Certain Beneficial Owners and Management” in the Proxy Statement.
Equity Compensation Plan Information. Equity compensation plan information is incorporated by reference to “Equity Compensation Plan Information” in the Proxy Statement.
| Item 13. | Certain Relationships and Related Transactions |
Incorporated by reference to “Compensation of Executive Officers and Transactions with Management — Indebtedness of Directors and Management and Certain Transactions” in the Proxy Statement.
| Item 14. | Principal Accountant Fees and Services |
Incorporated by reference to “Relationship with Independent Public Accountants” in the Proxy Statement.
PART IV.
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) The following financial statements are incorporated by reference from Item 8 hereof:
| Consolidated balance sheets at December 31, 2004 and 2003 | |
| Consolidated statements of income for each of the years in the three-year period ended December 31, 2004 | |
| Consolidated statements of changes in shareholders’ equity for each of the years in the three-year period ended December 31, 2004 | |
| Consolidated statements of cash flows for each of the years in the three-year period ended December 31, 2004 |
Notes to Consolidated Financial Statements
Report of Independent Auditors' ReportRegistered Public Accounting Firm
(a)(2) All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements and related notes thereto.
(a)(3) The following exhibits are included as part of this Form 10-K. EXHIBIT NO. EXHIBIT LOCATION
- - ----------- ------- --------
3(a)(1) Amended and Restated Articles of
Incorporation of the Company (1)
3(a)(2) AmendmentsWhere applicable, references to the Articles of Incorporation of
the Company (2)
3(b) Bylaws of the Company
4(a) Specimen Common Stock certificate (3)
4(b) Certificate of Trust ofBanknorth include Peoples Heritage Capital Trust I (4)
4(c) Amended and Restated Declaration of Trust relating to
Peoples Heritage Capital Trust I, dated as of January
31, 1997, between the Company and the trustees named
therein (4)
4(d) Form of Common Securities and form of Capital
Securities of Peoples Heritage Capital Trust I (included
as Exhibits to the Amended and Restated Declaration
included as Exhibit 4(d)) (4)
4(e) Indenture, dated as of January 31, 1997, between the
Company and The Bank of New York, as trustee, relating
to Junior Subordinated Deferrable Interest
Debentures due 2027 of the Company (4)
4(f) Form of Junior Subordinated Deferrable Interest
Debentures due 2027 of the Company (included as
Exhibit A to the Indenture included as Exhibit 4(f)) (4)
14
20
EXHIBIT NO. EXHIBIT LOCATION
- - ----------- ------- --------
4(g) Series A Capital Securities Guarantee Agreement, dated
as of January 31, 1997, relating to the Series A Capital
Securities of Peoples Heritage Capital Trust I (5)
4(h) Common Securities Guarantee Agreement, dated as of
January 31, 1997, relating to the Common Securities of
Peoples Heritage Capital Trust I (5)
4(i) Certificate of Trust of Banknorth Capital Trust I (6)
4(j) Amended and Restated Declaration of Trust relating to
Banknorth Capital Trust I, dated as of May 1, 1997,
between BanknorthFinancial Group, Inc. and the trustees
named therein (6)
4(k) Form of Capital Security of Banknorth Capital Trust I (6)
4(l) Indenture, dated as of May 1, 1997, between Banknorth
Group, Inc. and First National Bank of Chicago, as
trustee (6)
4(m) Form of Junior Subordinated Debenture due 2027 of
Banknorth Group, Inc. (6)
4(n) Form of Guarantee Agreement (6)
10(a) Form of Severance Agreement between the Company and
each of Messrs. Ryan and Verrill (7)
10(b) Severance Agreement between the Company and
Thomas J. Pruitt (8)
10(c) Severance Agreement between the Company and
Christopher W. Bramley
10(d) Severance Agreement between the Company and
Richard J. Fitzpatrick (8)
10(e) Form of Severance Agreement between the Company and
each other executive officer of the Company identified
in the Proxy Statement
10(f)(1) Supplemental Retirement Agreement among the
Company,, its subsidiaries and William J. Ryan (9)
10(f)(2) Amendmentname prior to the Supplemental Retirement Agreement
among the Company, its subsidiaries and William J. Ryan
10(g)(1) Supplemental Retirement Agreement among the
Company, its subsidiaries and Peter J. Verrill (9)
15
21
EXHIBIT NO. EXHIBIT LOCATION
- - ----------- ------- --------
10(g)(2) Amendment to the Supplemental Retirement Agreement
among the Company, its subsidiaries and
Peter J. Verrill
10(h) Supplemental Retirement Agreement among the Company,
its subsidiaries and John W. Fridlington (10)
10(i)(1) Form of Supplemental Retirement Agreement among the
Company, its subsidiaries and each executive officer
of the Company named in the Proxy Statement (other
than Messrs. Ryan, Verrill, Fridlington and Pruitt) (11)
10(i)(2) Form of Amendment to Supplemental Retirement Agreement
among the Company, its subsidiaries and each executive
officer of the Company named in the Proxy Statement
(other than Messrs. Ryan, Verrill and Fridlington)
10(j) Amended and Restated 2000 Deferred Compensation Plan
for Non-Employee Directors and Key Employees
10(k) 1986 Stock Option and Stock Appreciation Rights
Plan, as amended (1)(12)
10(l) 1986 Employee Stock Purchase Plan, as amended (1)(12)
10(m) Amended and Restated Restricted Stock Plan for Non-
Employee Directors (5)
10(n)(1) Amended and Restated 1995 Stock Option Plan for Non-
Employee Directors, as amended (13)
10(n)(2) Amendment to Amended and Restated 1995 Stock Option
Plan for Non-employee Directors, as amended (14)
10(o)(1) Amended and Restated 401(k) Plan (5)
10(o)(2) First Amendment to Amended and Restated 401(k) Plan (5)
10(o)(3)-(8) Second through the Seventh Amendments to the Amended
and Restated 401(k) Plan, respectively
10(p)(1) Profit Sharing Employee Stock Ownership Plan (15)
10(p)(2) First Amendment to Profit Sharing Employee Stock
Ownership Plan (16)
10(p)(3) Second Amendment to Profit Sharing Employee Stock
Ownership Plan (16)
10(p)(4) Third Amendment to Profit Sharing Employee Stock
Ownership Plan
10(q) 1996 Equity Incentive Plan, as amended (17)
16
22
EXHIBIT NO. EXHIBIT LOCATION
- - ----------- ------- --------
10(r) Bank of New Hampshire Corporation Executive Excess
Benefit Plan for Paul R. Shea (18)
10(s) Supplemental Executive Retirement Plan agreement
between The Family Mutual Savings Bank and
David D. Hindle (19)
10(t) Split Dollar Insurance Agreement between The
Family Mutual Savings Bank and David D. Hindle (20)
10(u) Consulting Agreement between the Company and
David D. Hindle (21)
10(v) Banknorth Group, Inc. Supplemental Employee
Retirement Plan, dated January 1, 1995 (which
covers only Mr. Pruitt) (22)
10(w) Supplemental Executive Retirement Plan of
Evergreen Bancorp, Inc. (which covers only
Director Dougan) (23)
10(x) Stockholder Rights Agreement, dated as of September
12, 1989 and amended and restated as of July 27, 1999
and as of July 25, 2000, between the Company and
American Stock Transfer & Trust Company,
as Rights Agent (24)
13 Annual Report to Shareholders for 2000
21 Subsidiaries of the Company
23 Consent of KPMG LLP
- - --------------
(1) Incorporated by reference to the Agreement and Plan of Merger, dated as of
October 27, 1997, between the Company and CFX Corporation, which is included as
Exhibit A to the Prospectus/Proxy Statement included in the Form S-4
Registration Statement (No. 333-23991) filed by the Company with the Securities
and Exchange Commission ("SEC") on December 31, 1997.
(2) Exhibits are incorporated by reference to (i) the proxy statement filed by
the Company with the SEC on March 23, 1998, (ii) the proxy statement filed by
the Company with the SEC on March 22, 2000 and (iii) the Form S-4 Registration
Statement (No. 333-95587) filed by the Company with the SEC on January 28, 2000,
which describes an amendment which changed the name of the Company to "Banknorth
Group, Inc."
(3) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 333-95587) filed by the Company with the SEC on January 28, 2000.
(4) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 333-23991) filed by Peoples Heritage Capital Trust I with the SEC on March
26, 1997.
17
23
(5) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1996, filed with the SEC on March 31, 1997.
(6) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 333-36257-01) filed by Banknorth Capital Trust I with the SEC on September
24, 1997.
(7) Exhibit is incorporated by reference to the Company's Form 10-Q report for
the three months ended March 31, 2000, filed with the SEC on May 15, 2000.
(8) Exhibit is incorporated by reference to the Company's Form 8-K report,
filed with the SEC on May 11, 2000.
(9) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1990, filed with the SEC on March 23, 1991.
(10) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1994, filed with the SEC on March 30, 1995.
(11) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1997, filed with the SEC on March 27, 1998.
(12) An amendment to the 1986 Stock Option and Stock Appreciation Rights Plan is
incorporated by reference to the proxy statement filed by the Company with the
SEC on March 24, 1994, and an amendment to the Employee Stock Purchase Plan is
incorporated by reference to the proxy statement filed by the Company with the
SEC on March 24, 1993.
(13) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 21, 1997.
(14) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 22, 2000.
(15) Exhibit is incorporated by reference to the Form S-1 Registration Statement
(No. 33-53236) filed by the Company with the SEC on November 23, 1992.
(16) Exhibit is incorporated by reference to the Company's Form 10-K report for
the year ended December 31, 1995, filed with the SEC on March 29, 1996.
(17) Exhibit is incorporated by reference to the proxy statement filed by the
Company with the SEC on March 21, 2001.
(18) Exhibit is incorporated by reference to the Form 10-K report filed by
Bank of New Hampshire Corporation (File No. 0-9517) for the year ended
December 31, 1994.
18
24
(19) Exhibit is incorporated by reference to the Form 10-K report filed by
Family Bancorp (File No. 0-17252) for the year ended December 31, 1993.
(20) Exhibit is incorporated by reference to the Form S-4 Registration Statement
(No. 33-18613) filed by Family Bancorp.
(21) Exhibit is incorporated by reference to the Form 10-K report filed by the
Company for the year ended December 31, 1999.
(22) Exhibit is incorporated by reference to the Form 10-K report filed by
Banknorth Group, Inc. (which merged into the Company on May 10, 2000) for the
year ended December 31, 1994.
(23) Exhibit is incorporated by reference to the Form 10-K report filed by
Evergreen Bancorp, Inc. for the year ended December 31, 1996.
(24) Exhibit is incorporated by reference to the Form 8-A/A report filed by the
Company with the SEC on July 28, 2000.
The Company's
| Exhibit No. | Exhibit | Location | ||||||
| 3 | (a)(1) | Amended and Restated Articles of Incorporation of Banknorth | (1) | |||||
| 3 | (a)(2) | Amendments to the Articles of Incorporation of Banknorth | (2) | |||||
| 3 | (b) | Bylaws of Banknorth | (3) | |||||
| 4 | (a) | Specimen Common Stock certificate | (4) | |||||
| 4 | (b) | Stockholder Rights Agreement, dated as of September 12, 1989 and amended and restated as of July 27, 1999 and as of July 25, 2000, between Banknorth and American Stock Transfer & Trust Company, as Rights Agent | (5) | |||||
| 4 | (c) | Instruments defining the rights of security holders, including indentures | (6) | |||||
110
| Exhibit No. | Exhibit | Location | ||||||
| 10 | (a) | Employment Agreement, dated as of August 25, 2004, by and among Banknorth, Banknorth Delaware, TD and William J. Ryan | (7) | |||||
| 10 | (b) | Employment Agreement, dated as of August 25, 2004, by and among Banknorth, Banknorth Delaware, TD and Peter J. Verrill | (7) | |||||
| 10 | (c) | Form of Retention Agreement, dated as of August 25, 2004, between Banknorth and David J. Ott | (7) | |||||
| 10 | (d) | Form of Retention Agreement, dated as of August 25, 2004, between Banknorth and Andrew W. Greene | (7) | |||||
| 10 | (e) | Form of Retention Agreement, dated as of August 25, 2004, between Banknorth and Wendy Suechrstedt | (7) | |||||
| 10 | (f) | Form of Retention Agreement, dated as of August 25, 2004, between Banknorth and Stephen J. Boyle | (7) | |||||
| 10 | (g) | Form of Retention Agreement, dated as of August 25, 2004, between Banknorth and John W. Fridlington | (7) | |||||
| 10 | (h) | Form of Retention Agreement, dated as of August 25, 2004, between Banknorth and Carol L. Mitchell | (7) | |||||
| 10 | (i) | Retention Agreement, dated as of September 30, 2004, between Banknorth and Edward P. Schreiber | ||||||
| 10 | (j)(1) | Amended and Restated Supplemental Retirement Agreement between Banknorth and William J. Ryan | (8) | |||||
| 10 | (j)(2) | First Amendment to Amended and Restated Supplemental Retirement Agreement between Banknorth and William J. Ryan | ||||||
| 10 | (k)(1) | Amended and Restated Supplemental Retirement Agreement between Banknorth and Peter J. Verrill | (8) | |||||
| 10 | (k)(2) | First Amendment to Amended and Restated Supplemental Retirement Agreement between Banknorth and Peter J. Verrill | ||||||
| 10 | (l)(1) | Supplemental Retirement Agreement between Banknorth and John W. Fridlington | (9) | |||||
| 10 | (l)(2) | First Amendment to Supplemental Retirement Agreement between Banknorth and John W. Fridlington | (10) | |||||
| 10 | (l)(3) | Second Amendment to Supplemental Retirement Agreement between Banknorth and John W. Fridlington | (8) | |||||
| 10 | (1)(4) | Third Amendment to Supplemental Retirement Agreement between Banknorth and John W. Fridlington | ||||||
| 10 | (m)(1) | Banknorth Group, Inc. Supplemental Retirement Plan (which covers each executive officer of Banknorth named in the Proxy Statement, other than Messrs. Ryan, Verrill and Fridlington) | (10) | |||||
| 10 | (m)(2) | First Amendment to the Banknorth Group Inc. Supplemental Retirement Plan | ||||||
| 10 | (n)(1) | Amended and Restated Deferred Compensation Plan for Non-Employee Directors and Key Employees, effective January 1, 2003 | (10) | |||||
| 10 | (n)(2) | First Amendment to the Amended and Restated Deferred Compensation Plan for Non-Employee Directors and Key Employees | ||||||
| 10 | (o) | 1986 Stock Option and Stock Appreciation Rights Plan, as amended | (11) | |||||
| 10 | (p) | Amended and Restated Employee Stock Purchase Plan | (12) | |||||
| 10 | (q) | Amended and Restated Restricted Stock Plan for Non-Employee Directors | (13) | |||||
| 10 | (r) | Amended and Restated 1995 Stock Option Plan for Non-Employee Directors | (8) | |||||
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| Exhibit No. | Exhibit | Location | ||||||
| 10 | (s)(1) | Amended and Restated 401(k) Plan, effective January 1, 2004 | (8) | |||||
| 10 | (s)(2) | First Amendment to the Amended and Restated 401(k) Plan | ||||||
| 10 | (t) | 1996 Equity Incentive Plan, as amended | (10) | |||||
| 10 | (u) | Executive Incentive Plan | (10) | |||||
| 10 | (v) | 2003 Equity Incentive Plan | (14) | |||||
| 10 | (w) | Amended and Restated 2003 Equity Incentive Plan | (15) | |||||
| 21 | Subsidiaries of Banknorth Group, Inc. | |||||||
| 23 | Consent of KPMG LLP | |||||||
| 31.1 | Certification of Chief Executive Officer under Rules 13a-14 and 15d-14 | |||||||
| 31.2 | Certification of Chief Financial Officer under Rules 13a-14 and 15d-14 | |||||||
| 32.1 | Certification of Chief Executive Officer Under 18 U.S.C. §1350 | |||||||
| 32.2 | Certification of Chief Financial Officer Under 18 U.S.C. §1350 | |||||||
| (1) | Incorporated by reference to Exhibit A to the Agreement and Plan of Merger, dated as of October 27, 1997, between Banknorth and CFX Corporation, which agreement is included as Exhibit A to the Prospectus/ Proxy Statement included in the Form S-4 Registration Statement (No. 333-23991) filed by Banknorth with the SEC on December 31, 1997. | |
| (2) | Exhibits are incorporated by reference to (i) the proxy statement filed by Banknorth with the SEC on March 23, 1998, (ii) the proxy statement filed by Banknorth with the SEC on March 22, 2000 and (iii) the Form S-4 Registration Statement (No. 333-95587) filed by Banknorth with the SEC on January 28, 2000, which describes an amendment which changed the name of the registrant to “Banknorth Group, Inc.” | |
| (3) | Exhibit is incorporated by reference to the Form 10-Q report filed by Banknorth for the three months ended September 30, 2003. | |
| (4) | Exhibit is incorporated by reference to the Form S-4 Registration Statement (No. 333-95587) filed by Banknorth with the SEC on January 28, 2000. | |
| (5) | Exhibit is incorporated by reference to the Form 8-A/ A report filed by Banknorth with the SEC on July 26, 2000. | |
| (6) | Banknorth has no instruments defining the rights of holders of its long-term debt where the amount of securities authorized under any such instrument exceeds 10% of the total assets of Banknorth and its subsidiaries on a consolidated basis. Banknorth hereby agrees to furnish a copy of any such instrument to the SEC upon request. | |
| (7) | Exhibit is incorporated by reference to the Form 8-K report filed by Banknorth on August 31, 2004. Upon completion of the TD acquisition, the indicated agreement will supersede the previously-filed severance agreement between Banknorth and such officer. | |
| (8) | Exhibit is incorporated by reference to Banknorth’s Form 10-K report for the year ended December 31, 2003. | |
| (9) | Exhibit is incorporated by reference to Banknorth’s Form 10-K report for the year ended December 31, 1995. |
| (10) | Exhibit is incorporated by reference to Banknorth’s Form 10-K report for the year ended December 31, 2002. |
| (11) | Exhibit is incorporated by reference to the Form S-4 Registration Statement (No. 33-20243) filed by Banknorth with the SEC on February 22, 1988. An amendment to the 1986 Stock Option and Stock Appreciation Rights Plan is incorporated by reference to the proxy statement filed by Banknorth with the SEC on March 24, 1994. |
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| (12) | Exhibit is incorporated by reference to the proxy statement dated March 22, 2002 filed by Banknorth with the SEC. |
| (13) | Exhibit is incorporated by reference to the Form 10-K report filed by Banknorth for the year ended December 31, 1996. |
| (14) | Exhibit is incorporated by reference to the proxy statement dated March 10, 2003 filed by Banknorth with the SEC. |
| (15) | Exhibit is incorporated by reference to Annex B to Banknorth’s proxy statement for its 2005 annual meeting of stockholders, which will be filed on or before April 30, 2005. |
Banknorth’s management contracts or compensatory plans or arrangements consist of Exhibit Nos. 10(a)-(w).
(b) Not applicable.
(c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index.
(d) There are no other financial statements and financial statement schedules which were excluded from the Annual Report to Shareholdersthis report which are required to be included herein.
19
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the CompanyBanknorth Group, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BANKNORTH GROUP, INC.
By: /s/ William J. Ryan Date: March 27, 2001
----------------------------------
William J. Ryan
Chairman, President and
| Banknorth Group, Inc. |
| By: | /s/William J. Ryan William J. Ryan Chairman, President and Chief Executive Officer | Date: February 25, 2005 | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
Date:
- - ----------------------------------
Thomas J. Amidon, Esq.
Director
/s/ Gary G. Bahre Date: March 27, 2001
- - -------------------------------------
Gary G. Bahre
Director
/s/ P. Kevin Condron Date: March 27, 2001
- - -------------------------------------
P. Kevin Condron
Director
/s/ Susan C. Crampton Date: March 27, 2001
- - --------------------------------------
Susan C. Crampton, C.P.A.
Director
/s/George W. Dougan Date: March 27, 2001
- - -------------------------------------
George W. Dougan
Director
Date:
- - -------------------------------------
Katherine M. Greenleaf
Director
/s/ Luther F. Hackett Date: March 27, 2001
- - -------------------------------------
Luther F. Hackett
Director
/s/ Douglas S. Hatfield Date: March 27, 2001
- - -------------------------------------
Douglas S. Hatfield
Director
/s/ David D. Hindle Date: March 27, 2001
- - -------------------------------------
David D. Hindle
Director
20
26
/s/ Dana S. Levenson Date: March 27, 2001
- - -------------------------------------
Dana S. Levenson
Director
/s/ Philip A. Mason Date: March 27, 2001
- - -------------------------------------
Philip A. Mason
Director
/s/ John M. Naughton Date: March 27, 2001
- - -------------------------------------
John M. Naughton
Director
/s/ Malcolm W. Philbrook, Jr. Date: March 27, 2001
- - -------------------------------------
Malcolm W. Philbrook, Jr.
Director
/s/ Angelo Pizzagali Date: March 27, 2001
- - -------------------------------------
Angelo Pizzagali
Director
/s/ Pamela P. Plumb Date: March 27, 2001
- - -------------------------------------
Pamela P. Plumb
Vice Chairman
/s/ Seth A. Resnicoff Date: March 27, 2001
- - -------------------------------------
Seth A. Resnicoff
Director
/s/ William J. Ryan Date: March 27, 2001
- - -------------------------------------
William J. Ryan
Chairman, President and Chief
Executive Officer
(principal executive officer)
Date:
- - -------------------------------------
Curtis M. Scribner
Director
/s/ Paul R. Shea Date: March 27, 2001
- - -------------------------------------
Paul R. Shea
Director
/s/ John E. Veasey Date: March 27, 2001
- - -------------------------------------
John E. Veasey
Director
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27
Date:
- - -------------------------------------
Patrick E. Welch
Director
/s/ Peter J. Verrill Date: March 27, 2001
- - -------------------------------------
Peter J. Verrill
Executive Vice President, Chief
Operating Officer, Chief Financial
Officer and Treasurer (principal
financial officer)
/s/ Steven J. Boyle Date: March 27, 2001
- - -------------------------------------
Steven J. Boyle
Executive Vice President and
Controller (principal accounting
officer)
22
| /s/Gary G. Bahre Director | Date: | |||
| /s/Robert G. Clarke Robert G. Clarke Director | Date: February 24, 2005 | |||
| /s/P. Kevin Condron P. Kevin Condron Director | Date: February 23, 2005 | |||
| /s/John Otis Drew John Otis Drew Director | Date: February 24, 2005 | |||
| /s/Colleen A. Khoury Colleen A. Khoury Director | Date: February 23, 2005 | |||
| /s/Dana S. Levenson Dana S. Levenson Director | Date: February 24, 2005 | |||
| /s/Steven T. Martin Director | Date: | |||
| /s/John M. Naughton John M. Naughton Director | Date: February 24, 2005 | |||
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| /s/Malcolm W. Philbrook, Jr. Malcolm W. Philbrook, Jr. Director | Date: February 23, 2005 | |||
| /s/Angelo P. Pizzagali Director | Date: | |||
| /s/Irving E. Rogers, III Director | Date: | |||
| /s/William J. Ryan William J. Ryan Chairman, President and Chief Executive Officer (principal executive officer) | Date: February 25, 2005 | |||
| /s/Curtis M. Scribner Curtis M. Scribner Director | Date: February 24, 2005 | |||
| /s/Gerry S. Weidema Gerry S. Weidema Director | Date: February 23, 2005 | |||
| /s/Stephen J. Boyle Stephen J. Boyle Executive Vice President and Chief Financial Officer (principal financial and accounting officer) | Date: February 24, 2005 | |||
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