þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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) |
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. |
11, 2005: 187,401,308
i
• | 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. |
ii
Item 1. | Business |
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4
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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 insiders.
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Item 2. Properties
Item 2. | Properties |
Number of | Number of | |||||||||||||||||
State | State | Banking Offices | Deposits | State | Banking Offices | Deposits | ||||||||||||
(Dollars in Thousands) | (Dollars in Thousands) | |||||||||||||||||
Maine | Maine | 60 | $ | 2,801,185 | Maine | 60 | $ | 2,808,559 | ||||||||||
New Hampshire | New Hampshire | 77 | 3,989,394 | New Hampshire | 76 | 4,190,703 | ||||||||||||
Massachusetts | Massachusetts | 115 | 5,906,579 | Massachusetts | 144 | 6,987,858 | ||||||||||||
Vermont | Vermont | 36 | 2,451,052 | Vermont | 36 | 1,672,390 | ||||||||||||
New York | New York | 27 | 1,658,404 | New York | 27 | 1,157,935 | ||||||||||||
Connecticut | Connecticut | 44 | 1,094,571 | Connecticut | 43 | 2,410,136 | ||||||||||||
Total | 359 | $ | 17,901,185 | Total | 386 | $ | 19,227,581 | |||||||||||
1817 respectively, to the Consolidated Financial Statements included in Item 8 hereof.
Item 3. Legal Proceedings
We are involved in routine legal proceedings occurring in
Item 3. | Legal Proceedings |
9
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. |
9
Item 5. | Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities |
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 |
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 | ||||||||||||||||
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(1) | Noninterest income included net securities losses of $17.8 million and gains of $29.2 million in the fourth quarter of
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (In thousands, except per share data and as noted) |
Business Strategy |
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• | 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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
• | Noninterest income from deposit services, insurance agency commissions, merchant and electronic banking services, wealth management services and investment planning services increased by
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• | During 2004, we recorded strong growth
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• | Asset quality remained strong despite an increase in nonperforming assets of $18 million | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
• | 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%. |
• | 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; |
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• | 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. |
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Acquisitions |
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 |
Results of Operations |
Comparison of 2004 and 2003 |
Net Interest Income |
16
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
|
17
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
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(2) | Includes changes in interest income and expense not due solely to
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18
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 | |||||||||||
19
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 | )% | ||||||||||||
20
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 | % | |||||||||||||||||
21
22
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 | % | ||||||||||||||||||
23
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 | % | |||||||||||||
24
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 | )% | |||||||||||||
25
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
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 |
(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. |
28
29
Investment Securities |
30
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
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% | |||||||||||||||||||||||||
Loans |
32
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 | % | |||||||||||||||||||||
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 |
33
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 | % | |||||||||
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 | % | |||||||||||||||||
34
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 |
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 | % | ||||||||||
35
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 |
36
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. |
34
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 | $ | 4,268,079 | $ | 314,512 | $ | 235,120 | $ | 31,428 | $ | 3,687,019 | |||||||||||
Standby letters of credit | 407,395 | 95,268 | 78,812 | 93,179 | 140,136 | ||||||||||||||||
Commitments to originate loans | 1,569,612 | 1,063,842 | 247,390 | 37,942 | 220,438 | ||||||||||||||||
Other commitments | 48,203 | 18,218 | 4,818 | 1,935 | 23,232 | ||||||||||||||||
Total commitments | $ | 6,293,289 | $ | 1,491,840 | $ | 566,140 | $ | 164,484 | $ | 4,070,825 | |||||||||||
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) | $ | 325,023 | $ | 23,225 | $ | — | $ | 54,609 | $ | 247,189 | ||||||||||||
Interest rate swaps with dealers(2) | 325,023 | 23,225 | — | 54,609 | 247,189 | |||||||||||||||||
Interest rate swaps on borrowings(3) | 566,500 | — | 216,500 | 150,000 | 200,000 | |||||||||||||||||
Forward commitments to sell loans | 61,000 | 61,000 | — | — | — | |||||||||||||||||
Foreign currency forward contracts(4) | ||||||||||||||||||||||
Forward contracts with customers | 23,438 | 15,213 | 8,225 | — | — | |||||||||||||||||
Forward contracts with dealers | 23,438 | 15,213 | 8,225 | — | — | |||||||||||||||||
Rate-locked loan commitments | 30,779 | 30,779 | — | — | — |
37
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 |
See Note 17 to the Consolidated Financial Statements for more information regarding the nature and business purpose and the importance of off-balance sheet arrangements.
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) coupledswaps 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 viewscommercial borrowers.
Our board of directors has established the overall strategic directionborrowings (Banknorth pays variable, receives fixed).
35
Credit Risk Management
customer accommodations. |
38
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 assessGeneral
39
Nonperforming Assets |
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 | % |
40
Net Charge-offs |
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 | ||||||||||||||||||||
41
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 |
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 |
Analysis and Determination of the Allowance for Loan and Lease |
42
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 | % | |||||||||||||||||||||
43
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 | |||||||
Interest Rate Risk |
44
Assessment and |
Net Interest Income Sensitivity |
45
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 | |||||||||
Purpose and Benefits |
46
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 |
Foreign Exchange or Market Risk |
47
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 | ) |
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
|
2004 Asset Liability Management Actions |
48
Banking Subsidiary |
49
50
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. |
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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 0.24% at December 31, 2003 and 0.29% at December 31, 2002. Total nonperforming assets as a percentage of total loans and other nonperforming assets amounted to 0.39% and 0.49% at December 31, 2003 and 2002, respectively.
Table 18 — Five-Year Schedule of Nonperforming Assets
The following table presents a summary of nonperforming assets at the dates indicated.
December 31, | ||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||
Nonaccrual loans | ||||||||||||||||||||||
Residential real estate loans | $ | 7,157 | $ | 5,781 | $ | 8,311 | $ | 9,894 | $ | 17,283 | ||||||||||||
Commercial real estate loans | 19,700 | 17,649 | 17,124 | 12,155 | 16,754 | |||||||||||||||||
Commercial business loans and leases | 24,412 | 32,693 | 40,341 | 32,583 | 17,027 | |||||||||||||||||
Consumer loans and leases | 8,493 | 9,194 | 9,470 | 6,329 | 5,951 | |||||||||||||||||
Total nonaccrual loans | 59,762 | 65,317 | 75,246 | 60,961 | 57,015 | |||||||||||||||||
Troubled debt restructurings | — | — | — | 673 | 1,112 | |||||||||||||||||
Total nonperforming loans | 59,762 | 65,317 | 75,246 | 61,634 | 58,127 | |||||||||||||||||
Other nonperforming assets: | ||||||||||||||||||||||
Other real estate owned, net of related reserves | 529 | 100 | 1,861 | 4,074 | 8,154 | |||||||||||||||||
Repossessions, net of related reserves | 2,812 | 3,536 | 2,016 | 1,424 | 2,911 | |||||||||||||||||
Securities available for sale | — | — | 2,104 | — | — | |||||||||||||||||
Total | 3,341 | 3,636 | 5,981 | 5,498 | 11,065 | |||||||||||||||||
Total nonperforming assets | $ | 63,103 | $ | 68,953 | $ | 81,227 | $ | 67,132 | $ | 69,192 | ||||||||||||
Accruing loans 90 days or more overdue | $ | 4,915 | $ | 3,373 | $ | 6,227 | $ | 5,973 | $ | 12,131 | ||||||||||||
Total nonperforming loans as a percentage of total loans | 0.37 | % | 0.46 | % | 0.59 | % | 0.57 | % | 0.59 | % | ||||||||||||
Total nonperforming assets as a percentage of total assets | 0.24 | % | 0.29 | % | 0.39 | % | 0.37 | % | 0.37 | % | ||||||||||||
Total nonperforming assets as a percentage of total loans and other nonperforming assets | 0.39 | % | 0.49 | % | 0.64 | % | 0.62 | % | 0.70 | % |
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 reductions of nonperforming asset levels, 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 loan 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.
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
37
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 amounted to $37.3 million in 2003, as compared to $38.7 million in 2002. Net charge-offs represented 0.24% and 0.29% of average loans and leases outstanding in 2003 and 2002, respectively.
Table 19 — Five-Year Table of Activity in the Allowance 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, | ||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | ||||||||||||||||||
Allowance at the beginning of period | $ | 208,273 | $ | 189,837 | $ | 153,550 | $ | 155,048 | $ | 155,098 | ||||||||||||
Additions due to acquisitions | 19,008 | 12,794 | 31,277 | — | — | |||||||||||||||||
Charge-offs: | ||||||||||||||||||||||
Residential real estate mortgages | 197 | (138 | ) | 626 | 1,828 | 3,622 | ||||||||||||||||
Commercial real estate mortgages | 577 | 1,290 | 2,267 | 3,566 | 5,076 | |||||||||||||||||
Commercial business loans and leases | 16,272 | 24,455 | 20,899 | 7,790 | 5,125 | |||||||||||||||||
Consumer loans and leases | 32,563 | 26,395 | 21,860 | 21,508 | 22,211 | |||||||||||||||||
Total loans and leases charged off | 49,609 | 52,002 | 45,652 | 34,692 | 36,034 | |||||||||||||||||
Recoveries: | ||||||||||||||||||||||
Residential real estate mortgages | 64 | 122 | 241 | 107 | 626 | |||||||||||||||||
Commercial real estate mortgages | 1,761 | 117 | 222 | 2,371 | 2,527 | |||||||||||||||||
Commercial business loans and leases | 6,367 | 8,972 | 4,800 | 2,334 | 3,188 | |||||||||||||||||
Consumer loans and leases | 4,122 | 4,119 | 3,510 | 4,563 | 6,068 | |||||||||||||||||
Total loans and leases recovered | 12,314 | 13,330 | 8,773 | 9,375 | 12,409 | |||||||||||||||||
Net charge-offs | 37,295 | 38,672 | 36,879 | 25,317 | 23,625 | |||||||||||||||||
Provision for loan and lease losses | 42,301 | 44,314 | 41,889 | 23,819 | 23,575 | |||||||||||||||||
Allowance at the end of the period | $ | 232,287 | $ | 208,273 | $ | 189,837 | $ | 153,550 | $ | 155,048 | ||||||||||||
38
Year Ended December 31, | |||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
Ratio of net charge-offs to average loans and leases outstanding | 0.24 | % | 0.29 | % | 0.33 | % | 0.24 | % | 0.25 | % | |||||||||||
Ratio of allowance to total portfolio loans and leases at end of period | 1.42 | % | 1.48 | % | 1.49 | % | 1.42 | % | 1.57 | % | |||||||||||
Ratio of allowance to nonperforming loans and leases at end of period | 388.69 | % | 318.86 | % | 252.29 | % | 249.13 | % | 266.74 | % | |||||||||||
Ratio of net chargeoffs (recoveries) as a percent of outstanding average loans and leases(1) | |||||||||||||||||||||
Residential real estate mortgages | 0.00 | % | (0.01 | )% | 0.02 | % | 0.08 | % | 0.12 | % | |||||||||||
Commercial real estate mortgages | (0.02 | )% | 0.03 | % | 0.06 | % | 0.04 | % | 0.10 | % | |||||||||||
Commercial business loans and leases | 0.31 | % | 0.58 | % | 0.69 | % | 0.26 | % | 0.11 | % | |||||||||||
Consumer loans and leases | 0.64 | % | 0.61 | % | 0.54 | % | 0.54 | % | 0.58 | % | |||||||||||
Total portfolio loans and leases at end of period | $ | 16,345,962 | $ | 14,056,008 | $ | 12,715,330 | $ | 10,845,662 | $ | 9,854,656 | |||||||||||
Total nonperforming loans and leases at end of period | 59,762 | 65,317 | 75,246 | 61,634 | 58,127 | ||||||||||||||||
Average loans and leases outstanding (excluding loans held for sale) | 15,574,078 | 13,182,785 | 11,173,723 | 10,449,753 | 9,616,914 |
52
• | historical loss experience; |
53 54In addition to the• trends in delinquency and nonperforming loans discussed under “Credit Risk Management” above, we also have loans that are 30 to 89 days delinquent and still accruing. These loans amounted to $142 million and $139 million at December 31, 2003 and 2002, respectively. These loans and delinquency trends are consideredloans;• changes in the evaluation of the allowance forproduct offerings or loan and lease losses and the related determination of the provision for loan and lease losses.Analysis and Determination of the Allowance for Loan and Lease Lossesterms; The allowance for loan and lease losses amounted to $232.3 million at December 31, 2003, as compared to $208.3 million at December 31, 2002. The $24.0 million increase was due to acquisitions and the provision for loan and lease losses exceeding net charge-offs during 2003. The ratio of the allowance to total portfolio loans and leases at December 31, 2003 and 2002 was 1.42% and 1.48%, respectively. The ratio of the allowance for loan and lease losses to nonperforming loans was 389% at December 31, 2003 and 319% at December 31, 2002. Nonperforming assets amounted to $63.1 million, • changes in underwriting and/or 0.24% of total assets, at December 31, 2003 as compared to $69.0 million, or 0.29% of total assets, at December 31, 2002. The $5.9 million decreasecollections policies;• changes in nonperforming assets from December 31, 2002 to December 31, 2003 was primarily attributable to a decrease in nonperforming commercial business loans and leases. Accruing loans 90 days or more past due amounted to $4.9 million at December 31, 2003, as compared to $3.4 million at December 31, 2002, an increase of $1.5 million. This increase was due primarily to acquisitions.39Table 20 —Allocation of the Allowance for Loan and Lease Losses — Five-Year ScheduleThe following table sets forth the allocation of the allowance for loan and lease losses at the dates indicated. December 31, 2003 2002 2001 2000 1999 Percent of Percent of Percent of Percent of Percent of Loans in Each Loans in Each Loans in Each Loans in Each Loans in Each Category to Category to Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Real estate loans $ 122,183 50.41 % $ 108,094 51.04 % $ 103,271 52.86 % $ 81,026 47.98 % $ 79,147 50.40 % Commercial business loans and leases 70,383 20.11 % 63,940 21.12 % 58,090 19.37 % 50,486 21.29 % 49,316 19.53 % Consumer loans and leases 39,721 29.48 % 36,239 27.84 % 28,476 27.77 % 22,038 30.73 % 26,585 30.07 % $ 232,287 100.00 % $ 208,273 100.00 % $ 189,837 100.00 % $ 153,550 100.00 % $ 155,048 100.00 % The allowance for loan and leases losses is maintained at a level determined to be adequate by management to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to 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 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 no 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, 2003.For information about the activity and the allocation of our allowance for loan and lease losses, seeTables 19 and 20.Asset-Liability ManagementThe 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 Asset 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 activitiesunderwriting and interest rate risk exposure. The ALCO also reviewscollection departments; and approves all major risk, liquidity• regional 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 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 rate40environment, 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 equities. 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 higher 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 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 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 1) key interest rate risk metrics and assessment of Banknorth’s exposure to this risk 2) a careful review and consideration of modeling assumptions and 3) 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 measured exposure to interest rate risk both 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 the existing 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.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 risk to our ongoing business. Management believes that net interest income sensitivity gives us the best perspective of how day-to-day decisions affect our interest rate risk profile. We subject 12-month net interest income 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 market yield curve changes. Our base simulation assumes that rates do not change for the next 12 months. The sensitivity measurement is calculated as the 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.41Economic Value of EquityEconomic value of equity is a theoretical long-term liquidation measure of interest rate risk. It is a useful measure because it attempts to capture all cash flow optionality on the balance sheet at a particular point in time. Using this analysis, we can compute additional interest rate measures, such as effective duration and convexity, for internal asset or liability classifications. While these measurements are an integral part of our risk management process, they are not based on on-going measurements of interest rate risk because they do not consider the effects of future business activity. For this reason, management believes that net interest income sensitivity is a more appropriate measurement when making day-to-day interest rate risk management decisions. To calculate the theoretical economic value of equity, we subtract the calculated value of liabilities from the calculated value of assets at a particular point in time, usually month end. Where observable market prices are available, market values are used. For financial assets or liabilities with no or few observable market prices, we compute a net present value of cash flows using an assigned risk premium. However, in the case of certain assets or liabilities, cash flows or risk premiums may not be known with certainty. This requires us to use material modeling assumptions.Review of Modeling AssumptionsKey assumptions related to the above measurements include interest rate movements, product pricing and customer behavior. In the case of mortgage asset cash flows, the majority of our assumptions are derived from a vendor supported prepayment model that is periodically tested using actual loan portfolio behavior. Both ALCO and the Pricing Committee carefully monitor deposit retention, pricing and product behavior.Interest Rates The net interest income simulation and economic value of equity model use the same parallel interest rate “shocks” of 1%. We consider these scenarios to be stress tests that measure the impact of sudden and severe market rate movements on our short and long term interest rate risk measures. Another stress test periodically performed is asymmetric interest rate behavior that measures the impact of yield curve slope changes on interest rate risk measures.Not all interest rates are modeled to move with the market. Because we control the extent and timing of rates paid on non-maturity deposits, certain assumptions regarding rate changes are built into the model. Many of these non-maturity interest-bearing deposit products (e.g. interest checking, savings and money market deposits) are modeled to have only a limited sensitivity to market rate movements based on historical experience. These product rates change with only a small fraction of market rate movements and are assumed to have pricing floors. Other accounts, such as home equity lines of credit, price off the prime rate applied on a lagged basis. New commercial business and commercial real estate loans generally price off average spreads to LIBOR and the swap curve. Most new fixed rate commercial loans have standard yield maintenance language, which reduces the likelihood of prepayments in portfolios that typically have higher turnover rates due to business activity. More and more large commercial customers are opting to hedge LIBOR and prime loan rates using interest rate derivatives, including interest rate swaps, which allows us to reduce our interest rate risk. In turn, this affects the mix of new loans as more of the commercial portfolio becomes variable.Borrower Cash Flows One of the most material assumptions relates to varying cash flows and prepayment risk. Assets that have prepayment risk include mortgage and home equity loans and lines of credit, mortgage-backed securities, collateralized mortgage obligations and mortgage servicing rights. The likelihood for a borrower to prepay usually increases when interest rates fall. Since the future prepayment behavior of borrowers is uncertain, the resulting loan cash flows cannot be determined exactly. Complicating our efforts to measure interest rate risk is the uncertainty of the maturity, repricing and/or runoff of some of our assets and liabilities.42Future Business ActivityFuture business activity is projected in the net interest income sensitivity analysis and includes new loan originations, deposit growth, planned investment transactions, funding actions, and non-interest income and expense projections. The basis for future business activity combines budget projections, current balance sheet and income statement run rates, as well as business forecasts to simulate balance sheet and income statement growth over the next 12 months. Because future business activity forecasts are uncertain, assumptions are more likely to impact the net interest income results. Therefore, the net interest income simulation is thought to contain more assumption risk than the economic value of equity liquidation analysis.Asset Liability Management and Strategies We manage the interest rate risk inherent in our core banking operations using both cash based investments and wholesale funding sources, as well as interest rate derivatives. For example, the types of investments available for sale or wholesale borrowings can have widely varying interest rate risk characteristics. Either of these instruments might also contain embedded options, such as calls, caps, floors and collars. Depending on our overall risk position, these investment or funding transactions can be used to further change our overall interest rate risk profile. Our asset-liability management policy on interest rate risk simulation specifies that if market interest rates were to shift gradually up or down 2%, estimated net interest income for the subsequent 12 months should decline by less than 5%. As indicated in the table below, the gradual 2% falling rate scenario was slightly outside policy guidelines at December 31, 2002. The ALCO voted to approve the December 31, 2002 guidelines exception because a gradual 2% decreasing rate scenario was deemed unlikely based on the level of interest rates at the time. All interest rate risk measures were within compliance guidelines at December 31, 2003. The ALCO currently is more focused on strategies that prove beneficial to income should rates rise and the yield curve flattens, as well as on the gradual decreasing 1% rate scenario.The table below sets forth information regarding estimated changes in net interest income for the 12 months following the indicated dates, assuming a gradual shift up or down in market rates of 100 and 200 basis points across the entire yield curve. Assuming a downward shift in rates, because most deposit accounts have implied interest rate floors, it is assumed that the related interest expense on these accounts will not decrease in proportion to the downward shift in rates. Assuming an upward shift in rates of 200 basis points, the simulated increase in interest income would be more than the simulated increase in interest expense because total adjustable interest-earning assets will reprice more quickly than will total adjustable interest-bearing liabilities. These results are dependent on material assumptions such as those discussed above. 200 Basis Point 100 Basis Point 100 Basis Point Rate Increase Rate Increase Rate Decrease December 31, 2003 (0.26 )% 0.24 % (0.71 )% December 31, 2002 3.40 % 2.15 % (2.64 )% Derivative InstrumentsPurpose 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 and 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, 2003, our designated hedging activities consisted of forward commitments related to hedging our mortgage banking operations, a $150 million interest rate swap at 3-month LIBOR plus 0.41% that43hedged $150 million of 3.75% fixed-rate senior notes maturing on May 1, 2008, a $200 million interest rate swap at 3-month LIBOR plus 3.47% that hedged $200 million of 7.625% fixed-rate subordinated debt issued by the Bank which matures on June 15, 2011, and five interest rate swaps totaling $216.5 million with a weighted average of 1-month LIBOR plus 3.82%, which hedge $216.5 million of FHLB advances with a weighted average cost of 5.47% and which 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 30-year fixed-rate loans which are currently closed or are anticipated to close. Purchased mortgage-backed security options are also used to hedge rate-locked loans.During 2003, higher mortgage rates and record levels of residential mortgage loan originations contributed to a reduction in residential mortgages held for sale. 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, 2003 2002 Residential mortgage loans held for sale $ 79,878 $ 85,337 Rate-locked loan commitments 88,492 94,397 Forward sales contracts 155,698 158,092 Purchased mortgage-backed security options 1,667 13,333 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 limited 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 entering into a variable-to-fixed interest rate swap. In 2003, we recorded a total notional amount of $273 million of 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 customer-related positions summarized in the table below includes 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 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 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.44Table 21 — Derivative Positions The following table summarizes our derivative positions at December 31, 2003.Asset-Liability Management Positions Notional Amount Maturing Fair December 31, 2003 2004 2005 2006 2007 Thereafter Total Value Interest rate contracts Pay variable, receive fixed $ — $ 216,500 $ — $ — $ 350,000 $ 566,500 $ (1,896 ) Forward commitments to sell loans 61,000 — — — — 61,000 (425 ) Customer-related Positions Notional Amount Maturing Fair December 31, 2003 2004 2005 2006 2007 Thereafter Total Value Interest rate contracts Receive fixed, pay variable $ 23,225 $ — $ — $ 13,454 $ 288,344 $ 325,023 $ 7,357 Pay fixed, receive variable 23,225 — — 13,454 288,344 325,023 (7,357 ) Foreign currency forward contracts Forward contracts with customers 15,213 8,225 — — — 23,438 3,132 Forward contracts with dealers 15,213 8,225 — — — 23,438 (3,132 ) Rate-locked loan commitments 30,779 — — — — 30,779 188 2003 Asset Liability Management Actions The most significant factors affecting market risk exposure of net interest income during 2003 were (i) changes in the shape of the U.S. Government securities and interest rate swap yield curves, (ii) changes in the composition of the investment portfolio, including a “deleveraging strategy” completed in the second quarter whereby approximately $901 million in investments yielding about 5.05% were sold, (iii) changes in the composition of mortgage assets and prepayment speeds of mortgage assets, (iv) reduction of deposit interest expenses and (v) changes in the wholesale funding structure, including $853 million of borrowings costing about 4.49% related to the “deleveraging strategy”. Interest rates in the fourth quarter of 2003 fluctuated, with 10-year Treasury yields rising over 50 basis points and ending the fourth quarter approximately 32 basis points higher. Mortgage rate changes during 2003 resulted in significant mortgage loan activity for 2003. With higher rates in the fourth quarter, projected mortgage loan prepayments are forecasted to slow considerably in 2004. Because of historically low rates in early to mid 2003 and increased loan cash inflows, effective duration estimates for loans and mortgage-backed securities were lower than normal, thus increasing asset sensitivity during the first half of 2003. Further rises in interest rates since mid-2003 reduced simulated asset sensitivity. Asset and liability management actions implemented during 2003 were done to further reduce simulated asset sensitivity. These actions included the purchase of securities less susceptible to prepayments, replacing approximately $700 million of existing borrowings, some of which were callable, hedging $200 million of fixed rate subordinated debt, $150 million of fixed rate senior notes and $216.5 million of FHLB fixed borrowings with interest rate swaps, and the deleveraging strategy discussed above. The above net interest income table reflects the net impact of these changes. We remain asset sensitive, albeit to a lesser degree than mid-2003. Without further actions, net interest income is projected to increase modestly if short and long interest rates move symmetrically higher.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 and45cost-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, 2003 consisted primarily of $295.3 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 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 our $110 million unsecured line of credit. At December 31, 2003, our subsidiary bank had $491.8 million available for dividends that could be paid without prior regulatory approval. In addition, the parent company had $253 million in cash or cash equivalents at December 31, 2003. 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.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, monthly review of liquidity ratios, periodic liquidity forecasts and periodic review of contingent funding plans. As of December 31, 2003, the Bank had in the aggregate $3.9 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 as of December 31, 2003, the Bank had in the aggregate “potentially volatile funds” of $2.4 billion. These are funds that might flow out of the Bank over a 90-day period in an adverse environment. Management estimates this figure by applying adverse probabilities to its various credit-sensitive and economically-sensitive funding sources. As of December 31, 2003, the ratio of “immediately accessible liquidity” to “potentially volatile funds” was 165%, 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 sufficient to meet current and future funding requirements.46For 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 subsidiary trusts to sell capital securities. We had $650 million of remaining authority under this shelf registration statement as of December 31, 2003. In addition, at December 31, 2003, we also had 100% of our $110 million unsecured line of credit available to us.Capital We are committed to managing capital for shareholder benefit and maintaining protection for depositors and creditors. At December 31, 2003 and 2002, our shareholders’ equity totaled $2.5 billion and $2.1 billion, respectively, or 9.53% and 8.81% of total assets, respectively. The increase in shareholders’ equity in 2003 was attributable to our $350.8 million net income in 2003 and our issuance of our common stock with an aggregate value of $382.8 million in connection with acquisitions in 2003. These increases were partially offset by a $110.1 million net unrealized loss on securities available for sale, $105.1 million of stock repurchases (4,465,900 shares) and $111.9 million in dividends to shareholders. In February 2002, our board authorized 8 million shares to be repurchased in the open market. During the year ended December 31, 2003, we repurchased 4.5 million shares at an average price of $23.53. As of December 31, 2003, a total of 2.9 million shares were available for repurchase under existing Board authorizations. 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 $1.7 billion or 6.65% of average assets at December 31, 2003, compared to $1.6 billion or 7.13% of average assets at December 31, 2002. We also are required to maintain capital ratios based on the level of our assets, as adjusted to reflect their perceived level of risk. Our regulatory capital ratios currently exceed all applicable requirements. See Note 13 to the Consolidated Financial Statements. The Bank is also subject to federal regulatory capital requirements. At December 31, 2003, 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. At December 31, 2003, we had outstanding $295.3 million of capital securities issued by subsidiary trusts, which are classified as long-term debt by us in our consolidated balance sheet.The following table summarizes our capital securities at December 31, 2003. Issuance Stated Maturity Name Date Amount Rate Date Peoples Heritage Capital Trust I 1/31/1997 $ 61,775 9.06 % 2/1/2027 Banknorth Capital Trust I 5/1/1997 30,000 10.52 % 5/1/2027 Ipswich Statutory Trust I 2/22/2001 3,500 10.20 % 2/22/2031 Banknorth Capital Trust II 2/22/2002 200,000 8.00 % 4/1/2032 $ 295,275 The regulatory capital treatment of capital securities issued by subsidiary trusts of bank holding companies is currently under review by the banking regulators in light of the issuance by the Financial Accounting Standards Board of Interpretation No. 46R, Consolidation of Variable Interest Entities — An47Interpretation of ARB No. 51 (“FIN 46”). See Note 2 to the Consolidated Financial Statements. Our capital securities are currently included in the Tier 1 capital of Banknorth and, at December 31, 2003, amounted to 17.8% of its Tier 1 capital. Depending on the future determination of banking regulators, capital securities issued by certain subsidiary trusts may no longer qualify for Tier 1 capital treatment, but instead may qualify for Tier 2 capital treatment. Outstanding capital securities may or may not be grandfathered by the Federal Reserve Board for treatment as Tier 1 capital for regulatory purposes. On July 2, 2003, the Federal Reserve Board issued a Supervision and Regulation Letter requiring that bank holding companies continue to follow the current instructions for reporting capital securities in their regulatory reports. The effect of the letter is that we will continue to report our capital securities in Tier 1 capital until further notice from the Federal Reserve Board. As noted above, at December 31, 2003, we were classified as “well capitalized” for regulatory purposes, the highest classification. We believe that our classification would have remained “well-capitalized” were the capital securities issued by subsidiary trusts included in our Tier 2 capital and not in Tier 1 capital. If our trust capital securities were no longer allowed to be included in Tier 1 capital as a result of accounting and regulatory developments, we would be permitted to redeem the capital securities without penalty. If capital securities issued by subsidiary trusts were not granted Tier 2 status, we believe that we would remain in compliance with existing minimum capital requirements. At December 31, 2003 and 2002, 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 25.9% at December 31, 2003 and 21.5% at December 31, 2002. This increase was the result of the $85.6 million of BOLI acquired in the merger with American on February 14, 2003. We currently do not anticipate any additional purchases or sales of BOLI.Critical Accounting PoliciesWe 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, 2003, our allowance for loan and lease losses amounted to $232.3 million, and during 2003, 2002 and 2001 our provisions for loan and lease losses amounted to $42.3 million, $44.3 million and $41.9 million, respectively. See also “Credit Risk Management” section. For the commercial business loans and leases and the commercial real estate loans portfolios, we evaluate specific loan status reports on certain loans rated “substandard” or worse in excess of a specified dollar amount. 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 determined48by 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.Our Board Risk Management Committee is responsible for the review and approval of the allowance for loan and lease losses as well as policies and procedures surrounding the calculation of the allowance. We continuously monitor qualitative and quantitative trends in the loan portfolio, including changes in the levels of past due, criticized and nonperforming loans. As a result, our historical experience has provided for an adequate allowance for loan and lease losses.Accounting for Acquisitions and Review of Goodwill and Other Intangible AssetsIn connection with acquisitions of other companies, we generally record as assets on our financial statements both goodwill and identifiable intangible assets such as core deposit 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 Brokerage and Investment 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 changes in the estimates which we use to determine the carrying valuetrends.Accounting for Acquisitions and Review of our goodwillGoodwill and identifiable intangible assets or which otherwise adversely affects their value or estimated lives would adversely affect our results of operations. At December 31, 2003, our goodwill and identifiable intangible assets amounted to $1.1 billion and $36.4 million, respectively, and during 2003, 2002 and 2001 our amortization expense amounted to $8.9 million, $6.5 million and $22.1 million, respectively (which reflects our cessation of the amortization of goodwill in 2002). There was no impairment recorded in 2003 or 2002.Other Intangible Assets Accounting for Pension Plans Accrued Income Taxes Item 8. 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 6.63% for December 2002 to 6.01% for December 2003. 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 6.75% as of December 31, 2002 to 6.25% as of December 31, 2003. Our expected rate of return on our pension plan assets was 8.5% for 2003 and is the same for 2004.49 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 2004 expense for the our defined benefit plan by approximately $600,000. 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 2004 expense for our defined benefit plan by approximately $1.5 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 the pension plan each year, and we do not anticipate that any increases in contribution requirements generated by recent poor stock market performance will have a material impact on future cash flows.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 of 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 StatementsCertain statements contained herein are 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 — Asset Liability Management” in Item 7 hereof is incorporated herein by reference.50Item 8. Financial Statements and Supplementary DataBANKNORTH GROUP, INC.CONSOLIDATED BALANCE SHEETS December 31, 2003 2002 Cash and due from banks $ 669,686 $ 690,250 Federal funds sold and other short-term investments 4,645 79,753 Securities available for sale, at market value 7,122,992 6,731,467 Securities held to maturity, market value $124,344 in 2003 and $221,571 in 2002 124,240 216,409 Loans held for sale, market value $42,801 in 2003 and $135,799 in 2002 41,696 128,622 Loans and leases: Residential real estate mortgages 2,710,483 2,382,197 Commercial real estate mortgages 5,528,862 4,792,049 Commercial business loans and leases 3,287,094 2,968,474 Consumer loans and leases 4,819,523 3,913,288 Total loans and leases 16,345,962 14,056,008 Less: Allowance for loan and lease losses 232,287 208,273 Net loans and leases 16,113,675 13,847,735 Premises and equipment, net 264,818 271,677 Goodwill 1,126,639 660,684 Identifiable intangible assets 36,415 34,474 Bank-owned life insurance 488,756 380,405 Other assets 460,173 377,465 Total assets $ 26,453,735 $ 23,418,941 Deposits: Savings accounts $ 2,460,522 $ 1,940,195 Money market access and NOW accounts 7,130,534 6,091,429 Certificates of deposit (including certificates of $100 or more of $998,546 in 2003 and $1,090,731 in 2002) 4,733,104 4,658,778 Noninterest-bearing deposits 3,577,025 2,974,199 Total deposits 17,901,185 15,664,601 Short-term borrowings 1,522,297 1,276,467 Long-term debt 4,360,567 4,156,114 Other liabilities 149,167 258,274 Total liabilities 23,933,216 21,355,456 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, 182,292,973 issued in 2003 and 168,892,284 issued in 2002 1,823 1,689 Paid-in capital 1,435,005 1,059,778 Retained earnings 1,508,292 1,269,422 Treasury stock at cost (20,105,254 shares in 2003 and 18,313,517 shares in 2002) (430,608 ) (382,350 ) Accumulated other comprehensive income 6,007 114,946 Total shareholders’ equity 2,520,519 2,063,485 Total liabilities and shareholders’ equity $ 26,453,735 $ 23,418,941 See accompanying notes to Consolidated Financial Statements.51BANKNORTH GROUP, INC.CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 2003 2002 2001 Interest and dividend income: Interest and fees on loans and leases $ 880,185 $ 882,190 $ 892,197 Interest and dividends on securities 312,784 352,927 371,592 Total interest and dividend income 1,192,969 1,235,117 1,263,789 Interest expense: Interest on deposits 188,836 244,648 363,974 Interest on borrowed funds 163,302 193,952 219,925 Total interest expense 352,138 438,600 583,899 Net interest income 840,831 796,517 679,890 Provision for loan and lease losses 42,301 44,314 41,889 Net interest income after provision for loan and lease losses 798,530 752,203 638,001 Noninterest income: Deposit services 97,323 82,139 72,634 Insurance brokerage commissions 45,714 44,439 39,360 Merchant and electronic banking income, net 41,778 37,643 32,115 Trust and investment management services 31,956 32,453 34,060 Bank-owned life insurance 22,930 20,002 18,392 Investment planning services 15,692 11,572 8,286 Net securities gains 42,460 7,282 1,329 Other noninterest income 69,306 38,978 34,329 367,159 274,508 240,505 Noninterest expense: Compensation and employee benefits 326,621 311,385 261,317 Occupancy 59,200 52,422 45,921 Equipment 47,459 40,933 34,572 Data processing 40,940 40,702 38,670 Advertising and marketing 22,000 17,239 11,907 Amortization of goodwill — — 11,061 Amortization of identifiable intangible assets 8,946 6,492 11,023 Merger and consolidation costs 8,104 14,691 7,614 Prepayment penalties on borrowings 30,490 — 5,995 Write-off of branch automation project — 6,170 — Other noninterest expense 97,510 89,358 87,237 641,270 579,392 515,317 Income before income tax expense 524,419 447,319 363,189 Applicable income tax expense 173,660 148,681 124,104 Net income before cumulative effect of change in accounting principle 350,759 298,638 239,085 Cumulative effect of change in accounting principle, net of tax — — (290 ) Net income $ 350,759 $ 298,638 $ 238,795 Basic earnings per share: Net income before cumulative effect of change in accounting principle $ 2.18 $ 2.01 $ 1.70 Cumulative effect of change in accounting principle, net of tax — — — Net income $ 2.18 $ 2.01 $ 1.70 Diluted earnings per share: Net income before cumulative effect of change in accounting principle $ 2.15 $ 1.99 $ 1.68 Cumulative effect of change in accounting principle, net of tax — — — Net income $ 2.15 $ 1.99 $ 1.68 Weighted average shares outstanding: Basic 160,914 148,213 140,473 Diluted 163,520 149,829 141,802 See accompanying notes to Consolidated Financial Statements.52BANKNORTH GROUP, INC.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Common Unearned Accumulated Other Shares Par Paid-in Retained Compen- Treasury Comprehensive Outstanding Value Capital Earnings sation Stock Income (Loss) Total 141,245 $ 1,496 $ 617,234 $ 897,214 $ (1,354 ) $ (149,246 ) $ (34,487 ) $ 1,330,857 Net income — — — 238,795 — — — 238,795 Unrealized gains on securities, net of reclassification adjustment and taxes — — — — — — 74,781 74,781 Unrealized gains on cash flow hedges, net of reclassification adjustment and taxes — — — — — — 274 274 Comprehensive income 313,850 Premium on repurchase of trust preferred securities — — (71 ) — — — — (71 ) Treasury stock issued for employee benefit plans 1,772 — 297 (6,811 ) — 32,662 — 26,148 Treasury stock purchased (7,336 ) — — — — (151,546 ) — (151,546 ) Distribution of restricted stock — — (161 ) (243 ) — 601 — 197 Common stock issued for acquisitions 15,540 155 339,804 — — — — 339,959 Decrease in unearned compensation — ESOP — — 1,668 — 337 — — 2,005 Payment of fractional shares — — (7 ) — — — — (7 ) Cash dividends declared �� — — — (72,277 ) — — — (72,277 ) 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 net of tax — — — — — — 77,257 77,257 Unrealized losses on cash flow hedges, net of reclassification adjustment net of tax — — — — — — (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 ) 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 ) 162,188 $ 1,823 $ 1,435,005 $ 1,508,292 $ — $ (430,608 ) $ 6,007 $ 2,520,519 See accompanying notes to Consolidated Financial Statements.53BANKNORTH GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2003 2002 2001 Cash flows from operating activities: Net income $ 350,759 $ 298,638 $ 238,795 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan and lease losses 42,301 44,314 41,889 Depreciation of banking premises and equipment 43,368 36,360 30,248 Net amortization of premium and discounts 56,135 37,230 30,705 Write-off of branch automation project — 6,170 — Amortization of intangible assets 8,946 6,492 22,084 Provision for deferred tax expense 26,073 12,522 6,940 ESOP expense — 7,154 2,005 Distribution of restricted stock units 694 875 197 Net (gains) realized from sales of securities (42,460 ) (9,456 ) (1,325 ) Prepayment penalties on borrowings 30,490 — 5,995 Net (gains) realized from sales of loans held for sale (12,483 ) (12,577 ) (11,066 ) Increase in cash surrender value of bank owned life insurance (22,930 ) (20,002 ) (18,392 ) Net decrease in mortgage servicing rights 1,287 5,487 23,451 Proceeds from sales of loans held for sale 923,811 863,560 911,347 Residential loans originated and purchased for sale (821,870 ) (865,068 ) (966,824 ) Net (increase) decrease in other assets 29,195 (70,583 ) 21,924 Net (decrease) increase in other liabilities (119,348 ) 63,619 (22,278 ) Net cash provided by operating activities 493,968 404,735 315,695 Cash flows from investing activities: Proceeds from sales of securities available for sale 3,392,506 1,001,605 717,514 Proceeds from maturities and principal repayments of securities available for sale 3,066,107 2,263,728 1,779,234 Purchases of securities available for sale (6,370,761 ) (4,110,201 ) (1,905,296 ) Proceeds from maturities and principal repayments of securities held to maturity 92,169 123,214 115,924 Net (increase) in loans and leases (690,512 ) (582,280 ) (35,603 ) Proceeds from sales of loans — 104,366 39,303 Net additions to premises and equipment (20,901 ) (43,503 ) (41,759 ) Purchases of bank owned life insurance — (40,000 ) — Proceeds from policy coverage on bank owned life insurance 182 — 3,690 Cash (paid) for acquisitions, net of cash acquired 10,903 (12,074 ) 14,877 Net cash (used) provided by investing activities (520,307 ) (1,295,145 ) 687,884 Cash flows from financing activities: Net increase in deposits 95,039 380,379 114,042 Net increase in securities sold under repurchase agreements 818,119 729,645 583,929 Proceeds from Federal Home Loan Bank borrowings 4,804 10,092 5,737,151 Payments on Federal Home Loan Bank borrowings (1,348,638 ) (324,114 ) (6,925,917 ) Net increase (decrease) in other borrowings 75,933 (43,408 ) (29,772 ) Issuance of senior notes, net 148,693 — — Issuance of subordinated long-term debt — — 197,982 Proceeds from issuance (repurchase) of securities of subsidiary trusts, net — 193,150 (5,090 ) Treasury stock issued for employee benefit plans 48,677 30,406 26,141 Purchase of treasury stock (105,071 ) (154,054 ) (151,546 ) Cash dividends paid to shareholders (111,889 ) (85,894 ) (72,277 ) Net cash (used) provided by financing activities (374,333 ) 736,202 (525,357 ) (Decrease) increase in cash and cash equivalents (400,672 ) (154,208 ) 478,222 Cash and cash equivalents at beginning of year 717,003 871,211 392,989 Cash and cash equivalents at end of year $ 316,331 $ 717,003 $ 871,211 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 $ 3,347,137 $ 1,693,715 $ 3,025,847 Less liabilities assumed 2,586,080 1,355,197 2,521,054 Interest paid $ 358,555 $ 434,685 $ 596,315 Income taxes paid 145,600 104,810 121,592 See accompanying notes to Consolidated Financial Statements.54BANKNORTH GROUP INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(All dollar amounts expressed in thousands, except per share data)1.Summary of Significant Accounting PoliciesThe 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, trust and investment 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan and lease losses, accounting for acquisitions and review of goodwill and intangible assets, accounting for pension plans and accrued income taxes.Supplementary Data
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 | ||||||
55
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 | |||||||||||
56
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 | ||||||||||||||||
57
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 |
58
1. | |
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.
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.
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 carried 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
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Statement Presentation |
considered other than temporary, generally six months
Cash and Cash Equivalents |
Securities |
59
Loans and Leases |
Allowance for Loan and Lease Losses |
60
• | Historical loss experience; | |||||||||
• | Trends in delinquency and nonperforming loans; | |||||||||
• | Changes in product offerings or | |||||||||
• | Changes in underwriting and/or collections policies; | |||||||||
• | Changes in management of
| |||||||||
• | Regional and
|
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
61
Goodwill and
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
determination of the amortization period for such intangible assets. Goodwill is evaluated for impairment at the reporting unit level, and there is goodwill recorded in the following reporting units: Community Banking, Insurance Brokerage and Investment 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 useful lives are shown below:
Core deposit intangibles | 7 – 10 years |
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.
Noncompete agreements | 1 – 4 years |
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
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 and the related servicing rights are sold on a flow basis.
Mortgage servicing rights are amortized on a method that approximates the estimated weighted average life of the underlying loans servicedlist
Impairment of Long-Lived Assets Other than Goodwill |
Mortgage Banking and Loans Held for |
62
Derivative Financial Instruments |
63
Pension, 401(k), and
|
64
Stock Compensation Plans |
65
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 |
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 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 closed residential mortgage loans held for sale and rate-locked loans expected to be closed and held for sale. Banknorth also purchases mortgage-backed security options to modify its forward mortgage commitments. Changes in fair value of the options are included in earnings.
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.
In 2002, Banknorth began offering 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 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 are carried on our balance sheet at fair value.
Banknorth also enters into interest rate swap agreements in order to synthetically convert its fixed-rate debt to variable-rate debt tied to 1-month or 3-month LIBOR. These swaps are accounted for as fair value hedges.
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, 2003 all mature within two years. The foreign currency forward contracts are carried on our balance sheet at fair value.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Banknorth has non-contributory defined benefit pension plans that cover 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 investment grade bond yields. Banknorth uses Moody’s published AA yield for long-term corporate bonds for the month of December as an index, and the discount rate is set within 25 basis points of the index. Moody’s AA yield dropped from 6.63% for December 2002 to 6.01% for December 2003. Similarly, we evaluated 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 the most recent annual review, the discount rate for all of our employee benefit plans was reduced from 6.75% as of December 31, 2002 to 6.25% as of December 31, 2003 and the expected long-term rate of return on the pension plan assets was 8.5% for 2003 and will be the same for 2004. 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.
On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act expanded Medicare to include, for the first time, coverage for prescription drugs. Banknorth sponsors retiree medical programs for certain of its employees and retirees and the Company expects that this legislation will eventually reduce the Company’s costs for some of these programs.
Due to various uncertainties, the amount of the savings related to the Act can not yet be estimated. Therefore, we have elected to defer financial recognition of this legislation, as permitted under FSP FAS 106-1, until the FASB issues final accounting guidance. When issued, that final guidance could require the Company to change previously reported information. The adoption of FSP FAS 106-1 is not expected to materially affect our financial condition, results of operations, earnings per share or cash flows.
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.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Banknorth previously sponsored a Profit Sharing Employee Stock Ownership Plan (the “ESOP”) which was designed to invest primarily in Banknorth common stock. The ESOP was merged into the 401(k) Plan effective January 1, 2001. Banknorth previously sponsored a leveraged employee stock ownership plan which was merged with and into the ESOP. The debt of the ESOP was fully paid in the fourth quarter of 2002.
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 on or after January 1, 1995 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 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, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Net Income, as reported | $ | 350,759 | $ | 298,638 | $ | 238,795 | ||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (12,723 | ) | (8,354 | ) | (5,613 | ) | ||||||
Proforma net income | $ | 338,036 | $ | 290,284 | $ | 233,182 | ||||||
Earnings per share | ||||||||||||
Basic — As reported | $ | 2.18 | $ | 2.01 | $ | 1.70 | ||||||
Proforma | $ | 2.10 | $ | 1.96 | $ | 1.66 | ||||||
Diluted — As reported | $ | 2.15 | $ | 1.99 | $ | 1.68 | ||||||
Proforma | $ | 2.08 | $ | 1.94 | $ | 1.64 |
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 required to be consolidated under FIN 46. Investments in Limited Partnerships
Income Taxes |
66
Earnings Per Share |
Segment Reporting |
Consolidations |
67
Accounting for
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.
|
Loan |
Guidance on “Other-Than-Temporary Impairment” |
68
Business Combinations |
3. | Acquisitions |
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 |
69
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 | |||
70
4. | |
In April 2002, the FASB issued SFAS No. 145 which rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Additionally, SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. We adopted SFAS 145 on January 1, 2003. Upon adoption, we reclassified to other expense an extraordinary item from the early extinguishment of debt of $3.9 million after-tax, or $.03 per diluted share, in the fourth quarter of 2001.
3. Acquisitions
Acquisitions are an important part of Banknorth’s strategic plans. The following table summarizes acquisitions completed since January 1, 2001. 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 | ||||||||||||||||||||||||
First & Ocean Bancorp | 12/31/2003 | $ | 274.4 | $ | 15.6 | $ | 33.8 | $ | 1.8 | $ | 49.7 | — | $ | 49.7 | ||||||||||||||||||
American Financial Holdings, Inc. | 2/14/2003 | 2,690.3 | 408.2 | 426.3 | 9.3 | 328.5 | 13.4 | 711.4 | ||||||||||||||||||||||||
Insurance agency acquisitions | 2003 | 1.2 | 0.1 | 2.4 | 0.7 | 3.2 | — | 3.2 | ||||||||||||||||||||||||
Warren Bancorp, Inc. | 12/31/2002 | 466.1 | 45.3 | 91.8 | 2.7 | 59.8 | 2.7 | 136.6 | ||||||||||||||||||||||||
Bancorp Connecticut, Inc. | 8/31/2002 | 661.7 | 61.4 | 97.0 | 8.7 | 161.2 | — | 161.2 | ||||||||||||||||||||||||
Ipswich Bancshares, Inc. | 7/26/2002 | 318.0 | 13.9 | 22.2 | 4.8 | 19.9 | 0.9 | 40.1 | ||||||||||||||||||||||||
Insurance agency acquisitions | 2002 | 2.5 | — | 5.7 | 2.2 | — | 0.2 | 7.4 | ||||||||||||||||||||||||
Andover Bancorp, Inc. | 10/31/2001 | 1,796.0 | 162.9 | 188.5 | 13.2 | — | 16.5 | 340.0 | ||||||||||||||||||||||||
Metrowest Bank | 10/31/2001 | 907.7 | 62.0 | 96.5 | 5.0 | 164.8 | — | 164.8 |
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2003, Banknorth acquired American Financial Holdings, Inc. (“American”) and First & Ocean Bancorp (“F&O”). The following table summarizes the estimated fair value of the assets acquired and liabilities assumed for American and F&O at the dates of acquisition. Banknorth expects that some adjustments of the estimated fair values assigned to the assets acquired and liabilities assumed will be recorded in 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 | $ | 650,701 | |||
Loans and leases, net | 1,647,304 | ||||
Premises and equipment | 15,607 | ||||
Mortgage servicing rights | 472 | ||||
Goodwill | 460,102 | ||||
Other intangibles | 11,065 | ||||
Other assets | 561,886 | ||||
Total assets acquired | 3,347,137 | ||||
Liabilities: | |||||
Deposits | 2,152,098 | ||||
Borrowings | 423,741 | ||||
Other liabilities | 10,241 | ||||
Total liabilities assumed | 2,586,080 | ||||
Net assets acquired | $ | 761,057 | |||
65
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, 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 | |||||||||
December 31, 2002: | ||||||||||||||||||
U.S. Government obligations and obligations of U.S. Government agencies and corporations | $ | 1,539,447 | $ | 21,514 | $ | (13 | ) | $ | 1,560,948 | |||||||||
Tax-exempt bonds and notes | 95,332 | 2,053 | (7 | ) | 97,378 | |||||||||||||
Other bonds and notes | 356,551 | 14,796 | (3,192 | ) | 368,155 | |||||||||||||
Mortgage-backed securities | 3,659,334 | 139,974 | (87 | ) | 3,799,221 | |||||||||||||
Collateralized mortgage obligations | 581,357 | 7,112 | (1,143 | ) | 587,326 | |||||||||||||
Total debt securities | 6,232,021 | 185,449 | (4,442 | ) | 6,413,028 | |||||||||||||
Federal Home Loan Bank stock | 275,768 | 0 | 0 | 275,768 | ||||||||||||||
Federal Reserve Bank stock | 35,250 | 0 | 0 | 35,250 | ||||||||||||||
Other equity securities | 7,177 | 415 | (171 | ) | 7,421 | |||||||||||||
Total equity securities | 318,195 | 415 | (171 | ) | 318,439 | |||||||||||||
Total securities available for sale | $ | 6,550,216 | $ | 185,864 | $ | (4,613 | ) | $ | 6,731,467 | |||||||||
Held to Maturity: | ||||||||||||||||||
December 31, 2003: | ||||||||||||||||||
Collateralized mortgage obligations | $ | 124,240 | $ | 104 | $ | — | $ | 124,344 | ||||||||||
Total securities held to maturity | $ | 124,240 | $ | 104 | $ | — | $ | 124,344 | ||||||||||
December 31, 2002: | ||||||||||||||||||
Collateralized mortgage obligations | $ | 216,409 | $ | 5,162 | $ | — | $ | 221,571 | ||||||||||
Total securities held to maturity | $ | 216,409 | $ | 5,162 | $ | — | $ | 221,571 | ||||||||||
66
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 | ||||||||||
71
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 | ) | |||||||||||||||||||
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 | |||||||||
72
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 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. Securities Available for Sale and Held to Maturity — (Continued)
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, 2003.
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 | 31 | $ | 1,924,041 | $ | (41,165 | ) | — | $ | — | $ | — | 31 | $ | 1,924,041 | $ | (41,165 | ) | |||||||||||||||||||
Tax-exempt bonds and notes | 1 | 390 | (21 | ) | — | — | — | 1 | 390 | (21 | ) | |||||||||||||||||||||||||
Other bonds and notes | 16 | 20,781 | (743 | ) | 6 | 9,372 | (143 | ) | 22 | 30,153 | (886 | ) | ||||||||||||||||||||||||
Mortgage-backed securities | 109 | 1,652,061 | (21,739 | ) | 5 | 434 | (8 | ) | 114 | 1,652,495 | (21,747 | ) | ||||||||||||||||||||||||
Collateralized mortgage obligations | 14 | 96,875 | (647 | ) | 3 | 441 | (1 | ) | 17 | 97,316 | (648 | ) | ||||||||||||||||||||||||
171 | $ | 3,694,148 | $ | (64,315 | ) | 14 | $ | 10,247 | $ | (152 | ) | 185 | $ | 3,704,395 | $ | (64,467 | ) | |||||||||||||||||||
For securities exhibiting 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 nations 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.
The amortized cost and market values of debt securities at December 31, 2003 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, 2003, Banknorth had $404.5 million of securities available for sale with call provisions.
Available for Sale | Held to Maturity | ||||||||||||||||
Amortized | Market | Amortized | Market | ||||||||||||||
Cost | Value | Cost | Value | ||||||||||||||
December 31, 2003: | |||||||||||||||||
Due in one year or less | $ | 119,723 | $ | 120,506 | $ | — | $ | — | |||||||||
Due after one year through five years | 2,121,355 | 2,101,956 | — | — | |||||||||||||
Due after five years through ten years | 874,492 | 881,262 | — | — | |||||||||||||
Due after ten years | 3,846,669 | 3,869,816 | 124,240 | 124,344 | |||||||||||||
Total debt securities | $ | 6,962,239 | $ | 6,973,540 | $ | 124,240 | $ | 124,344 | |||||||||
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of realized gains and losses on securities available for sale for 2003, 2002, and 2001 follows:
Gross Realized | ||||||||
Gains | Losses | |||||||
2003 | $ | 44,744 | $ | 2,284 | ||||
2002 | 9,823 | 2,541 | ||||||
2001 | 4,291 | 2,962 |
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, 2003 2002 Residential real estate loans: Permanent first mortgage loans $ 2,681,925 $ 2,354,001 Construction and development 28,558 28,196 2,710,483 2,382,197 Commercial real estate loans: Permanent first mortgage loans 4,696,428 4,151,674 Construction and development 832,434 640,375 5,528,862 4,792,049 Commercial business loans and leases: Commercial business loans 3,188,504 2,865,617 Commercial business leases 98,590 102,857 3,287,094 2,968,474 Consumer loans and leases 4,819,523 3,913,288 Total loans and leases $ 16,345,962 $ 14,056,008 Loans and leases include net deferred charges of $21.8 million at December 31, 2003 and $14.5 million at December 31, 2002. Deferred charges include deferred loan origination costs, net of deferred loan origination fees, and unearned discounts.68
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 | |||||
73
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 | |||||
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
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, | |||||||||
2003 | 2002 | ||||||||
Nonaccrual loans | |||||||||
Residential real estate mortgages | $ | 7,157 | $ | 5,781 | |||||
Commercial real estate loans | 19,700 | 17,649 | |||||||
Commercial business loans and leases | 24,412 | 32,693 | |||||||
Consumer loans and leases | 8,493 | 9,194 | |||||||
Total nonperforming loans | $ | 59,762 | $ | 65,317 | |||||
Accruing loans which are 90 days or more overdue | $ | 4,915 | $ | 3,373 | |||||
The following table presents the amount of foregone revenue on nonperforming loans for the periods indicated.
Year Ended | ||||||||
December 31, | ||||||||
2003 | 2002 | |||||||
Interest income that would have been recognized at original contractual terms | $ | 4,748 | $ | 5,839 | ||||
Amount recognized as interest income on a cash basis | 2,746 | 2,900 | ||||||
Forgone revenue | $ | 2,002 | $ | 2,939 | ||||
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.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth information on impaired loans at the dates indicated:
As of or for the Year Ended December 31, | |||||||||||||||||
2003 | 2002 | ||||||||||||||||
Recorded | Valuation | Recorded | Valuation | ||||||||||||||
Investment | Allowance | Investment | Allowance | ||||||||||||||
Impaired loans | |||||||||||||||||
Valuation allowance required | $ | 28,781 | $ | 4,662 | $ | 33,585 | $ | 10,924 | |||||||||
No valuation allowance required | 15,331 | — | 16,757 | — | |||||||||||||
Total impaired loans | $ | 44,112 | $ | 4,662 | $ | 50,342 | $ | 10,924 | |||||||||
Average balance of impaired loans during the year | $ | 48,917 | $ | 53,265 | |||||||||||||
Interest income recognized on a cash basis on impaired loans during the year | $ | 1,675 | $ | 1,784 | |||||||||||||
6. Allowance for Loan and Lease Losses A summary of changes in the allowance for loan and lease losses follows: Year Ended December 31, 2003 2002 2001 Balance at beginning of period $ 208,273 $ 189,837 $ 153,550 Allowance related to business combinations 19,008 12,794 31,277 Provisions charged to income 42,301 44,314 41,889 Loans and leases charged off (49,609 ) (52,002 ) (45,652 ) Recoveries 12,314 13,330 8,773 Balance at end of period $ 232,287 $ 208,273 $ 189,837
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 | ||||||
7. | Premises and Equipment
|
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 | ||||
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 | |||||
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
75
December 31, | ||||||||
2003 | 2002 | |||||||
Internally developed software in use — cost | $ | 32,367 | $ | 20,904 | ||||
Internally developed software in use — amortization | (15,420 | ) | (8,535 | ) | ||||
Internally developed software in development | 4,350 | 8,923 | ||||||
$ | 21,297 | $ | 21,292 | |||||
A project to develop software to automate teller stations and customer service platforms was abandoned in December 2002. As a result, $6.2 million of previously capitalized costs that have no future benefit were written-off in December 2002.
During 2002, Banknorth entered into a 15-year lease to occupy 140,000 square feet of office space in the Greater Portland, Maine area. This lease is being accounted for as a capital lease. As of December 31, 2003, the gross amount of premises and equipment under the capital lease was $23.5 million. Amortization of the asset held under the capital lease is included with depreciation expense. As of December 31, 2003, the $22.5 million capital lease obligation was partially offset by a $16.5 million loan held by the Bank. The net obligation under the capital lease obligation of $6.0 million is included in other long-term debt.
8. | |
Goodwill |
At December 31, 2003, Banknorth had $36.4 million in unamortized identifiable intangible assets consisting of core deposit intangibles, noncompete agreements and customer lists.
The changes in the carrying amount of goodwill and other intangibles for the years ended December 31, 2003 and 2002 are as follows:
Other | Total | |||||||||||||||
Core Deposit | Identifiable | Identifiable | ||||||||||||||
Goodwill | Intangibles | Intangibles | Intangibles | |||||||||||||
Balance, December 31, 2001 | $ | 409,340 | $ | 21,321 | $ | 35,972 | $ | 57,293 | ||||||||
Recorded during the year | 215,586 | 14,817 | 5,754 | 20,571 | ||||||||||||
Reclassification under SFAS No. 147 | 34,695 | — | (34,695 | ) | (34,695 | ) | ||||||||||
Other reclassification | 2,214 | (2,214 | ) | (2,214 | ) | |||||||||||
Amortization expense | — | (5,486 | ) | (1,006 | ) | (6,492 | ) | |||||||||
Adjustment of purchase accounting estimates | (1,151 | ) | — | 11 | 11 | |||||||||||
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 | ||||||||
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other | Total | ||||||||||||||||
Core Deposit | Identifiable | Identifiable | |||||||||||||||
Goodwill | Intangibles | Intangibles | Intangibles | ||||||||||||||
Estimated Annual Amortization Expense: | |||||||||||||||||
2004 | — | $ | 3,878 | $ | 2,628 | $ | 6,506 | ||||||||||
2005 | — | 3,562 | 1,471 | 5,033 | |||||||||||||
2006 | — | 3,365 | 724 | 4,089 | |||||||||||||
2007 | — | 3,244 | 724 | 3,968 | |||||||||||||
2008 | — | 3,238 | 353 | 3,591 | |||||||||||||
Thereafter | — | 10,878 | 621 | 11,499 |
The components of identifiable intangible assets follow:
December 31, 2003 | |||||||||||||
Gross Carrying | Accumulated | Net Carrying | |||||||||||
Amount | Amortization | Amount | |||||||||||
Identifiable intangible assets: | |||||||||||||
Core deposit intangibles | $ | 55,145 | $ | 26,980 | $ | 28,165 | |||||||
Other identifiable intangibles | 13,703 | 5,453 | 8,250 | ||||||||||
Total | $ | 68,848 | $ | 32,433 | $ | 36,415 | |||||||
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Banknorth adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) effective January 1, 2002. As of the date of adoption, we had unamortized goodwill totaling $409.3 million and unamortized identifiable intangible assets totaling $57.3 million, all of which were subject to the transition provisions of SFAS No. 141, “Business Combinations” and SFAS No. 142. The following table sets forth the reconcilement of net income and earning per share excluding goodwill and SFAS No. 72 intangible amortization for the years ended December 31, 2003, 2002 and 2001:
Year Ended December 31, | |||||||||||||
2003 | 2002 | 2001 | |||||||||||
Reported net income | $ | 350,759 | $ | 298,638 | $ | 238,795 | |||||||
Add back, on a net of tax basis: | |||||||||||||
Goodwill amortization | — | — | 10,986 | ||||||||||
SFAS No. 72 Intangible amortization | — | — | 4,666 | ||||||||||
Adjusted net income | $ | 350,759 | $ | 298,638 | $ | 254,447 | |||||||
Basic earnings per share: | |||||||||||||
Reported net income | $ | 2.18 | $ | 2.01 | $ | 1.70 | |||||||
Add back, on a net of tax basis: | |||||||||||||
Goodwill amortization | — | — | 0.08 | ||||||||||
SFAS No. 72 Intangible amortization | — | — | 0.03 | ||||||||||
Adjusted basic earnings per share | $ | 2.18 | $ | 2.01 | $ | 1.81 | |||||||
Diluted earnings per share: | |||||||||||||
Reported net income | $ | 2.15 | $ | 1.99 | $ | 1.68 | |||||||
Add back, on a net of tax basis: | |||||||||||||
Goodwill amortization | — | — | 0.08 | ||||||||||
SFAS No. 72 Intangible amortization | — | — | 0.03 | ||||||||||
Adjusted diluted earnings per share | $ | 2.15 | $ | 1.99 | $ | 1.79 | |||||||
Assets | |
The current and deferred components of income tax expense follow:
Year Ended December 31, | |||||||||||||
2003 | 2002 | 2001 | |||||||||||
Current | |||||||||||||
Federal | $ | 138,722 | $ | 128,523 | $ | 123,472 | |||||||
State | 8,865 | 7,636 | 7,572 | ||||||||||
Deferred | |||||||||||||
Federal | 25,138 | 12,419 | (6,620 | ) | |||||||||
State | 935 | 103 | (320 | ) | |||||||||
$ | 173,660 | $ | 148,681 | $ | 124,104 | ||||||||
73
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 |
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 | |||||||
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. | Income Taxes |
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 | ||||||||
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
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:
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.
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State Tax Assessment |
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. | Merger and Consolidation Costs |
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 | ||||||
79
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.
|
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. | Merger and Consolidation Costs — (Continued) |
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
11. | Short-term Borrowings |
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 | — | — |
82
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 | ||||
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 | |||||||||||||||||||
83
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 | |||||||||||||||||||
The following table presents activity in the accrual account for merger and consolidation costs for the years ended December 31, 2003 and 2002, respectively.
Merger & | Non-cash Write | |||||||||||||||||||||||
Balance | Accrued at | Consolidation | Cash | Downs and Other | Balance | |||||||||||||||||||
12/31/02 | Acquisition | Costs | Payments | Adjustments | 12/31/03 | |||||||||||||||||||
First & Ocean | $ | — | $ | 585 | $ | 458 | $ | (792 | ) | $ | — | $ | 251 | |||||||||||
American Merger | — | 13,600 | 5,358 | (17,257 | ) | (1,435 | ) | 266 | ||||||||||||||||
Warren Merger | 2,052 | — | 2,424 | (4,670 | ) | 221 | 27 | |||||||||||||||||
Bancorp Connecticut Merger | 3,097 | — | 363 | (1,196 | ) | (1,798 | ) | 466 | ||||||||||||||||
Ipswich Merger | — | — | 143 | (143 | ) | — | — | |||||||||||||||||
Andover/MetroWest Merger | 321 | — | 12 | (60 | ) | (189 | ) | 84 | ||||||||||||||||
Other Merger and Consolidation Costs | 84 | — | (654 | ) | (38 | ) | 611 | 3 | ||||||||||||||||
Total | $ | 5,554 | $ | 14,185 | $ | 8,104 | $ | (24,156 | ) | $ | (2,590 | ) | $ | 1,097 | ||||||||||
Merger & | Non-cash Write | |||||||||||||||||||||||
Balance | Accrued at | Consolidation | Cash | Downs and Other | Balance | |||||||||||||||||||
12/31/01 | Acquisition | Costs | Payments | Adjustments | 12/31/02 | |||||||||||||||||||
Andover/MetroWest Merger | $ | 11,207 | $ | — | $ | 5,830 | $ | (16,474 | ) | $ | (242 | ) | $ | 321 | ||||||||||
Ipswich Merger | — | 1,791 | 1,900 | (3,155 | ) | (536 | ) | — | ||||||||||||||||
Bancorp Connecticut Merger | — | 4,413 | 2,746 | (4,062 | ) | — | 3,097 | |||||||||||||||||
Warren Merger | — | 2,250 | 240 | (438 | ) | — | 2,052 | |||||||||||||||||
American Merger | — | — | 855 | (855 | ) | — | — | |||||||||||||||||
Banknorth Group, Inc. (Vermont) Merger | 330 | — | (574 | ) | 244 | — | — | |||||||||||||||||
Charter Consolidation | — | — | 3,601 | (2,927 | ) | (674 | ) | — | ||||||||||||||||
Branch Closings | 296 | — | 93 | (310 | ) | 5 | 84 | |||||||||||||||||
Total | $ | 11,833 | $ | 8,454 | $ | 14,691 | $ | (27,977 | ) | $ | (1,447 | ) | $ | 5,554 | ||||||||||
11. Short-term Borrowings
A summary of short-term borrowings follows:
At or for the Year Ended December 31, | |||||||||||||
2003 | 2002 | 2001 | |||||||||||
Balance outstanding at end of period | |||||||||||||
Securities sold under agreements to repurchase — retail | $ | 1,086,900 | $ | 1,222,466 | $ | 999,506 | |||||||
Federal funds purchased | 358,000 | 53,000 | 50,000 | ||||||||||
Treasury, tax and loan notes | 77,397 | 1,001 | 41,713 | ||||||||||
$ | 1,522,297 | $ | 1,276,467 | $ | 1,091,219 | ||||||||
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At or for the Year Ended December 31, | |||||||||||||
2003 | 2002 | 2001 | |||||||||||
Securities sold under agreements to repurchase — retail | |||||||||||||
Balance outstanding at end of period | $ | 1,086,900 | $ | 1,222,466 | $ | 999,506 | |||||||
Market value of collateral at end of period | 1,352,308 | 1,614,686 | 1,072,288 | ||||||||||
Amortized cost of collateral at end of period | 1,350,568 | 1,563,198 | 1,056,099 | ||||||||||
Average balance outstanding during the year | 1,059,077 | 955,887 | 803,186 | ||||||||||
Maximum outstanding at any month end during the year | 1,167,325 | 1,200,524 | 999,506 | ||||||||||
Average interest rate during the year | 0.90 | % | 1.40 | % | 3.31 | % | |||||||
Average interest rate at end of year | 0.59 | % | 1.22 | % | 1.72 | % |
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, 2003, 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 2003.
12. Long-term Debt
A summary of long-term debt (debt with original maturities of more than one year) follows:
December 31, | ||||||||
2003 | 2002 | |||||||
Federal Home Loan Bank advances | $ | 1,495,821 | $ | 2,482,582 | ||||
Securities sold under agreements to repurchase — wholesale | 2,214,650 | 1,171,049 | ||||||
Capital trust securities | 295,275 | 295,056 | ||||||
Subordinated long-term debt 7.625%, due 2011 | 200,000 | 200,000 | ||||||
Senior notes 3.75%, due 2008 | 149,753 | — | ||||||
Hedge-related basis adjustments on long-term debt | (1,896 | ) | — | |||||
Other long-term debt | 6,964 | 7,427 | ||||||
Total | $ | 4,360,567 | $ | 4,156,114 | ||||
Wholesale securities sold under agreements to repurchase have maturities greater than one year and are generally sold to broker/dealers.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. Long-term Debt — (Continued)
The following table presents the maturities of long-term debt outstanding at the dates indicated:
December 31, 2003 | December 31, 2002 | |||||||||||||||||||||
Maturity | Principal | Maturity | Principal | |||||||||||||||||||
Dates | Amounts | Interest Rates | Dates | Amounts | Interest Rates | |||||||||||||||||
2004 | $ | 2,694,008 | 0.17 – 8.09 | % | 2003 | $ | 1,170,870 | 1.68 – 7.14 | % | |||||||||||||
2005 | 625,744 | 1.72 – 7.45 | % | 2004 | 1,134,062 | 1.15 – 6.45 | % | |||||||||||||||
2006 | 291,063 | 2.24 – 6.39 | % | 2005 | 718,134 | 2.32 – 7.45 | % | |||||||||||||||
2007 | 9,934 | 2.70 – 8.04 | % | 2006 | 440,579 | 2.72 – 6.39 | % | |||||||||||||||
2008 | 151,253 | 3.07 – 6.42 | % | 2007 | 8,199 | 3.45 – 8.04 | % | |||||||||||||||
2009 – 2032 | 588,565 | 1.00 – 10.52 | % | 2008 – 2032 | 684,270 | 2.51 – 10.52 | % | |||||||||||||||
$ | 4,360,567 | $ | 4,156,114 | |||||||||||||||||||
Callable borrowings of $1.8 billion 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.
The following is a summary of the capital trust securities outstanding as of December 31, 2003:
Issuance | Stated | Maturity | ||||||||||||||
Name | Date | Amount | Rate | Date | ||||||||||||
Peoples Heritage Capital Trust I | 1/31/1997 | $ | 61,775 | 9.06 | % | 2/1/2027 | ||||||||||
Banknorth Capital Trust I | 5/1/1997 | 30,000 | 10.52 | % | 5/1/2027 | |||||||||||
Ipswich Statutory Trust I | 2/22/2001 | 3,500 | 10.20 | % | 2/22/2031 | |||||||||||
Banknorth Capital Trust II | 2/22/2002 | 200,000 | 8.00 | % | 4/1/2032 | |||||||||||
$ | 295,275 | |||||||||||||||
There were issuance costs associated with the issuance of the capital trust securities. The net interest cost of the securities, including the amortization of the issuance costs was 8.64% and 8.72% for the years ended December 31, 2003 and 2002, respectively.
On February 22, 2002, Banknorth Capital Trust II, a subsidiary of Banknorth issued $200 million of 8% trust preferred securities to the public and invested the proceeds from this offering in an equivalent amount of
The trust preferred securities currently qualify as Tier 1 capital for regulatory purposes. See additional discussion in Note 2 regarding the impact of FIN 46R on trust preferred securities.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. Regulatory Matters
Banknorth, NA must maintain noninterest-bearing cash balances on reserveus with the Federal Reserve Bank (“FRB”). In 2003 and 2002,capital contributed by us in exchange for the average required reserve balances were $79.5 million and $60.0 million, respectively.
FRB adopted quantitative measures which assign risk weightingscommon securities of such trusts. Junior subordinated debentures are equal 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, 2003 and 2002, 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, 2003 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, 2003 and 2002.
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 | % | ||||||||||||||||
As of December 31, 2002 | |||||||||||||||||||||||||
Banknorth Group, Inc. | |||||||||||||||||||||||||
Total capital (to risk weighted assets) | $ | 1,960,869 | 12.15 | % | $ | 1,291,616 | 8.00 | % | $ | 669,253 | 4.15 | % | |||||||||||||
Tier 1 capital (to risk weighted assets) | 1,558,974 | 9.66 | % | 645,808 | 4.00 | % | 913,166 | 5.66 | % | ||||||||||||||||
Tier 1 leverage capital ratio (to average assets) | 1,558,974 | 7.13 | % | 874,180 | 4.00 | % | 684,794 | 3.13 | % | ||||||||||||||||
Banknorth NA | |||||||||||||||||||||||||
Total capital (to risk weighted assets) | 1,822,307 | 11.31 | % | 1,288,562 | 8.00 | % | 533,745 | 3.31 | % | ||||||||||||||||
Tier 1 capital (to risk weighted assets) | 1,421,995 | 8.83 | % | 644,281 | 4.00 | % | 777,714 | 4.83 | % | ||||||||||||||||
Tier 1 leverage capital ratio (to average assets) | 1,421,995 | 6.52 | % | 871,830 | 4.00 | % | 550,165 | 2.52 | % |
81common securities.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. Regulatory Matters
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% |
85
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
|
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, 2003, Banknorth, NA had $491.8 million available for dividends that could be paid without prior regulatory approval.
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 the Board of Directors amended and restated the Stockholder Rights Plan to, among other things, extend the expiration date of the rights to September 25, 2009. On July 25, 2000, Banknorth again amended and restated the Stockholder Rights Plan to reflect its acquisition of Banknorth (Vermont).
86
15. | Accumulated Other Comprehensive Income, Net
|
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 | |||||
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. | Derivative Instruments |
87
Pre-tax | ||||||||||||
Amount | Tax Effect | Net of Tax | ||||||||||
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 (gains) realized in net income | (850 | ) | 298 | (552 | ) | |||||||
Net change in unrealized gains | $ | 114,318 | $ | (39,940 | ) | $ | 74,378 | |||||
December 31, 2001 | ||||||||||||
Unrealized gain on securities available for sale | $ | 116,377 | $ | (40,732 | ) | $ | 75,645 | |||||
Unrealized (loss) on cash flow hedges | (1,365 | ) | 478 | (887 | ) | |||||||
Reclassification adjustment for losses realized in net income | 457 | (160 | ) | 297 | ||||||||
Net change in unrealized gains | $ | 115,469 | $ | (40,414 | ) | $ | 75,055 | |||||
16. Earnings Per Share
The following table presents a computation of earnings per share for the periods indicated.
Year Ended December 31, | ||||||||||||||
2003 | 2002 | 2001 | ||||||||||||
Net income | $ | 350,759 | $ | 298,638 | $ | 238,795 | ||||||||
Weighted average shares outstanding | ||||||||||||||
Basic | 160,914 | 148,213 | 140,473 | |||||||||||
Dilutive effect of stock options | 2,606 | 1,616 | 1,329 | |||||||||||
Diluted | 163,520 | 149,829 | 141,802 | |||||||||||
Net income per share: | ||||||||||||||
Basic | $ | 2.18 | $ | 2.01 | $ | 1.70 | ||||||||
Diluted | 2.15 | 1.99 | 1.68 |
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 amount recognized in the Consolidated 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. For forward commitments to sell83
88
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 |
89
Legal Proceedings |
90
Operating Lease Obligations |
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 |
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 | |||||||
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 | ||||||||
91
19. | Stock-Based Compensation Plans |
Stock Option Plans |
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 | % |
92
19. | Stock-Based Compensation Plans — (Continued) Activity for all stock option plans during the years ended December 31, 2004, 2003 and 2002 is summarized as follows:
The range of per share exercise prices for outstanding and exercisable stock options at December 31, 2004 was as follows:
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.
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 93 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 Financial Statements approximated $1.2 million, $1.6 million and $933 thousand for 2004, 2003 and 2002, respectively.
Restricted Stock Plan
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Incentive Plans
Banknorth has
20. | Retirement and
|
Pension Plans
94
20. | Retirement and Other Benefit Plans — (Continued) |
Post-Retirement Benefits Other Than Pensions |
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
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
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 | ||||||
2004 | 2003 | |||||||
Discount rate | 5.75 | % | 6.25 | % | ||||
Rate of compensation increase | 4.50 | % | 4.50 | % | ||||
Medical inflation rate | 8.00 | % | 9.00 | % |
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 |
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
20. | Retirement and Other Benefit Plans — (Continued) |
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 | |||||||
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 | % | |||||||||
98
20. | Retirement and Other Benefit Plans — (Continued) |
21. | Fair Value of Financial Instruments |
99
21. | Fair Value of Financial Instruments — (Continued) |
100
21. | Fair Value of Financial Instruments — (Continued) |
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
22. | Condensed Financial Information — Parent Company Only |
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
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
22. | Condensed Financial Information — Parent Company Only — (Continued) |
23. | Subsequent Events (unaudited) |
104
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
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(2) | Noninterest expense included prepayment penalties on borrowings of $61.5 million and $28.5 million in the
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, 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
None.
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.
Not applicable. PART III.
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.
Incorporated by reference to “Compensation of Executive Officers and Transactions with Management” in the Proxy Statement. 109
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.
Incorporated by reference to “Compensation of Executive Officers and Transactions with Management — Indebtedness of Directors and Management and Certain Transactions” in the Proxy Statement.
Incorporated by reference to “Relationship with Independent Public Accountants” in the Proxy Statement. PART IV.
(a)(1) The following financial statements are incorporated by reference from Item 8 hereof:
Notes to Consolidated Financial Statements Report of Independent Registered 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. Where applicable, references to Banknorth include Peoples Heritage Financial Group, Inc., its name prior to May 10, 2000.
111
Incorporated by reference to | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(2) | Exhibits are
113 114 115 |