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UNITED STATES
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2003
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission File Number: 001-31251
Maine (State or other jurisdiction of incorporation or organization) | 01-0437984 (I.R.S. Employer Identification Number) | |
P.O. Box 9540 Two Portland Square Portland, Maine (Address of principal executive offices) | 04112-9540 (Zip Code) |
Registrant’s telephone number, including area code: (207) 761-8500
Securities registered pursuant to Section 12(b) of the Act:
Title of Class | Name of Each Exchange on Which Registered | |
Common Stock, $.01 par value Preferred Stock Purchase Rights | New York Stock Exchange, Inc. New York Stock Exchange, Inc. |
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
Indicate by check mark whether the Registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o
As of June 30, 2003, the aggregate market value of the 160,842,923 shares of Common Stock of the Registrant issued and outstanding on such date, excluding the approximately 1,145,533 shares held by all directors and executive officers of the Registrant as a group (which does not include unexercised stock options), was $4.1 billion. This figure is based on the last sale price of $25.52 per share of the Registrant’s Common Stock on June 30, 2003, as reported inThe Wall Street Journal on July 1, 2003. Although directors of the Registrant and executive officers of the Registrant and its subsidiaries were assumed to be “affiliates” of the Registrant for purposes of this calculation, the classification is not to be interpreted as an admission of such status.
Number of shares of Common Stock outstanding as of February 26, 2004: 162,830,806
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the part of the Form 10-K into which the document is incorporated:
Portions of the definitive Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 2004 are incorporated by reference into Part III, Items 10-14 of this Form 10-K.
BANKNORTH GROUP, INC.
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FORWARD-LOOKING STATEMENTS
In the normal course of business, we, in an effort to help keep our shareholders and the public informed about our operations, may from time to time issue or make certain statements, either in writing or orally, that are or contain forward-looking statements, as that term is defined in the U.S. federal securities laws. Generally, these statements relate to business plans or strategies, projected or anticipated benefits from acquisitions made by or to be made by us, projections involving anticipated revenues, earnings, profitability or other aspects of operating results or other future developments in our affairs or the industry in which we conduct business. Forward-looking statements may be identified by reference to a future period or periods or by the use of forward-looking terminology such as “anticipate,” “believe,” “expect,” “intend,” “plan,” “estimate” or similar expressions.
Although we believe that the anticipated results or other expectations reflected in our forward-looking statements are based on reasonable assumptions, we can give no assurance that those results or expectations will be attained. Forward-looking statements involve risks, uncertainties and assumptions (some of which are beyond our control), and as a result actual results may differ materially from those expressed in forward-looking statements. Factors that could cause actual results to differ from forward-looking statements include, but are not limited to, the following, as well as those discussed elsewhere herein:
• | our investments in our businesses and in related technology could require additional incremental spending, and might not produce expected deposit and loan growth and anticipated contributions to our earnings; | |
• | general economic or industry conditions could be less favorable than expected, resulting in a deterioration in credit quality, a change in the allowance for loan and lease losses or a reduced demand for credit or fee-based products and services; | |
• | changes in the domestic interest rate environment could reduce net interest income and could increase credit losses; | |
• | the conditions of the securities markets could change, which could adversely affect, among other things, the value or credit quality of our assets, the availability and terms of funding necessary to meet our liquidity needs and our ability to originate loans and leases; | |
• | changes in the extensive laws, regulations and policies governing financial holding companies and their subsidiaries could alter our business environment or affect our operations; | |
• | the potential need to adapt to industry changes in information technology systems, on which we are highly dependent, could present operational issues or require significant capital spending; | |
• | competitive pressures could intensify and affect our profitability, including as a result of continued industry consolidation, the increased availability of financial services from non-banks, technological developments such as the internet or bank regulatory reform; | |
• | acquisitions may result in large one-time charges to income, may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated and may result in unforeseen integration difficulties; and | |
• | acts or threats of terrorism and actions taken by the United States or other governments as a result of such acts or threats, including possible military action, could further adversely affect business and economic conditions in the United States generally and in our principal markets, which could have an adverse effect on our financial performance and that of our borrowers and on the financial markets and the price of our common stock. |
You should not put undue reliance on any forward-looking statements. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them in light of new information or future events except to the extent required by federal securities laws.
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PART I.
Item 1. | Business |
General
We, Banknorth Group, Inc., are a Maine corporation and a registered bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended. We conduct business from our headquarters in Portland, Maine and, as of December 31, 2003, 359 banking offices located in Maine, New Hampshire, Massachusetts, Vermont, New York and Connecticut. At December 31, 2003, we had consolidated assets of $26.5 billion and consolidated shareholders’ equity of $2.5 billion. Based on total assets at that date, we are one of the 35 largest commercial banking organizations in the United States.
Our principal asset is all of the capital stock of Banknorth, NA, a national bank which was initially formed as a Maine-chartered savings bank in the mid-19th century. Effective January 1, 2002, we consolidated all eight of our other banking subsidiaries and our trust company subsidiary into Banknorth, NA, which was known as “Peoples Heritage Bank” prior to these consolidations. Banknorth, NA operates under the trade name “Peoples Heritage Bank” in Maine, “Bank of New Hampshire” in New Hampshire and “Evergreen Bank” in New York to take advantage of the strong brand identity associated with the names of these predecessor banks. Banknorth, NA operates under its name elsewhere in our market areas. Through Banknorth, NA we offer a full range of banking services and products to individuals, businesses and governments throughout our market areas, including commercial, consumer and trust and investment services.
Unless the context otherwise requires, the words “Banknorth,” “we,” “our” and “us” herein refer to Banknorth Group, Inc. and its subsidiaries.
Business
Our principal business consists of attracting deposits from the general public through our banking offices and using these deposits to originate loans secured by first mortgage liens on existing single-family (one-to-four units) residential real estate and existing multi-family (over four units) residential and commercial real estate, construction loans, commercial business loans and leases and consumer loans. We also provide various mortgage banking services and investment management services, as well as, through subsidiaries of Banknorth, NA, engage in equipment leasing, investment planning, securities brokerage and insurance brokerage activities. We also invest in investment securities and other permitted investments.
We derive our income principally from interest charged on loans and leases and, to a lesser extent, from interest and dividends earned on investments. We also increasingly derive income from non-interest sources such as fees received in connection with various lending services, deposit services, trust and investment management services, investment planning services and merchant and electronic banking services, as well as insurance brokerage commissions and, from time to time, gains on the sale of assets. Our principal expenses are interest expense on deposits and borrowings, operating expenses, provisions for loan and lease losses and income tax expense. Funds for activities are provided principally by deposits, advances from the Federal Home Loan Bank, securities sold under repurchase agreements, amortization and prepayments of outstanding loans, maturities and sales of investment securities and other sources.
Through Banknorth, NA we provide extensive trust and investment management services to our customers. We offer employee benefit trust services in which we act as trustee, custodian, administrator and/or investment advisor, among other things, for employee benefit plans and for corporate, self-employed, municipal and not-for-profit employers located throughout our market areas. In addition, we serve as trustee of both living trusts and trusts under wills and in this capacity hold, account for and manage financial assets, real estate and special assets. Custody, estate settlement and fiduciary tax services, among others, also are offered by us. Assets held in a fiduciary capacity by us are not included in our consolidated balance sheet for financial reporting purposes.
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We are subject to extensive regulation and supervision under federal and state banking laws. For additional information in this regard, see “Supervision and Regulation” below.
Acquisitions
Our profitability and market share have been enhanced in recent years through internal growth and acquisitions of both financial and nonfinancial institutions. We continually evaluate acquisition opportunities and frequently conduct due diligence in connection with possible acquisitions. As a result, acquisition discussions and, in some cases, negotiations frequently take place and future acquisitions involving cash, debt or equity securities can be expected. Acquisitions typically involve the payment of a premium over book and market values, and therefore, some pro forma dilution of our book value and net income per common share may occur in connection with any future transactions. Moreover, acquisitions commonly result in significant one-time charges against earnings, although cost-savings, especially incident to in-market acquisitions, frequently are anticipated, as are revenue enhancements.
Subsidiaries and Other Equity Investments
Our only direct subsidiaries at December 31, 2003 were Banknorth, NA, Northgroup Realty, Inc., an acquired subsidiary which holds certain commercial real estate located in Burlington, Vermont, Northgroup Captive Insurance, Inc. and the following financing vehicles: Peoples Heritage Capital Trust I, Banknorth Capital Trust I, Banknorth Capital Trust II and Ipswich Statutory Trust I. For additional information on these trusts, see Note 14 to the Consolidated Financial Statements included in Item 8 hereof. Northgroup Captive Insurance, Inc. is a subsidiary formed in 2002 to self-insure against certain of our risks.
Set forth below is a brief description of certain of our indirect non-banking subsidiaries and certain other equity investments.
Insurance Brokerage Activities.We conduct insurance brokerage activities through Banknorth Insurance Group, Inc., which holds all of the outstanding stock of Morse, Payson & Noyes Insurance, the largest insurance brokerage firm in Maine. Morse Payson & Noyes Insurance also conducts business in (i) Vermont, (ii) New Hampshire under the trade name A.D. Davis Insurance, (iii) Massachusetts through Banknorth Insurance Agency, Inc./MA, a wholly-owned subsidiary of Morse, Payson & Noyes Insurance, (iv) Connecticut under the trade name Banknorth Insurance Agency and (v) upstate New York under the trade name Community Insurance Agencies.
Investment Planning and Securities Brokerage Activities.We conduct investment planning and securities brokerage activities, as well as offer investments in mutual funds and annuities, throughout our market areas through Primevest Financial Services, Inc., an unaffiliated company which uses the marketing name Bancnorth Investment Planning Group. Through Banknorth, NA, Bancnorth Investment Planning Group, Inc., a wholly-owned subsidiary of Banknorth, NA, and Primevest Financial Services, Inc., we offer these services to individuals and small businesses from an office located in Portland, Maine and from certain of our other locations in Maine, Massachusetts, New Hampshire, Vermont, New York and Connecticut. Sales professionals at Banknorth, NA and Bancnorth Investment Planning Group are registered representatives of Primevest Financial Services, Inc., a registered broker/dealer, and all securities brokerage activities are conducted through Primevest Financial Services, Inc. The sales professionals receive referrals from our branch offices throughout our market areas.
In addition to the foregoing, Bancnorth Investment Planning Group, Inc., conducts insurance sales activities directly in Maine, New Hampshire, Connecticut, Vermont and New York and indirectly, through its wholly-owned insurance agency, Bancnorth Investment and Insurance Agency, Inc., in Massachusetts. Bancnorth Investment Planning Group, either directly or through other agencies, offers life insurance and long-term care insurance products in conjunction with the sales of investments and annuities.
Equipment Leasing Activities.We conduct equipment leasing activities through Banknorth Leasing Corp. This company engages in direct equipment leasing activities, primarily involving office equipment, in
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Investment Activities. Northgroup Asset Management Company (formerly known as Northgroup (FM) Investment Company) is a Maine corporation which was formed for purposes of effectively managing assets and investments for the benefit of Banknorth, NA. Northgroup Asset Management Company employs staff in its offices in Portland, Maine who are engaged in the management of its assets. Banknorth, NA has contributed to this Company the stock of certain other subsidiaries and substantially all of the investment securities held by Banknorth, NA.
Other Investments.We hold certain other investments, primarily through Banknorth, NA and Four Eighty-One Corp., a wholly-owned subsidiary of Banknorth, NA. At December 31, 2003, these investments consisted of (i) $59.4 million of interests in limited partnerships formed for the purpose of investing primarily in real estate for lower-income families in our market areas, plus commitments to invest up to an additional $25.0 million in such partnerships, and (ii) an aggregate of $20.5 million of interests in limited partnerships which invest primarily in small business investment companies in our market areas, plus commitments to invest up to an additional $17.7 million in such partnerships. For additional information about these investments see Note 18 to the Consolidated Financial Statements included in Item 8 hereof.
Competition
We are subject to vigorous competition in all aspects and areas of our business from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, credit unions and other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies and insurance companies. We also compete with non-financial institutions, including retail stores that maintain their own credit programs and governmental agencies that make available low-cost or guaranteed loans to certain borrowers. Certain of these competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems and a wider array of commercial banking services than us. Competition from both bank and non-bank organizations will continue.
The banking industry is experiencing rapid changes in technology. In addition to improving customer services, effective use of technology increases efficiency and enables financial institutions to reduce costs. Technological advances are likely to enhance competition by enabling more companies to provide financial resources. As a result, our future success will depend in part on our ability to address our customers’ needs by using technology. We cannot assure you that we will be able to effectively develop new technology-driven products and services or be successful in marketing these products to our customers. Many of our competitors have far greater resources than we have to invest in technology.
Employees
We had approximately 6,700 full-time equivalent employees as of December 31, 2003. None of these employees is represented by a collective bargaining agent, and we believe that we enjoy good relations with our personnel.
Supervision and Regulation
The following discussion sets forth certain of the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries and provides certain specific information relevant to Banknorth. The regulatory framework is intended primarily for the protection of depositors and the insurance funds administered by the FDIC and not for the protection of security holders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. A change in applicable statutes, regulations or regulatory policy may have a material effect on our business.
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General.Banknorth currently is registered as a bank holding company and a financial holding company under the Bank Holding Company Act of 1956, as amended. As such, we are subject to regulation, supervision and examination by the Federal Reserve Board. We also are registered as a Maine financial institution holding company under Maine law and as such are subject to regulation and examination by the Superintendent of Financial Institutions of the State of Maine. Banknorth, NA is a national bank subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (“OCC”), its chartering authority, and by the Federal Deposit Insurance Corporation (“FDIC”), which insures Banknorth, NA’s deposits to the maximum extent permitted by law.
Financial Modernization. The Bank Holding Company Act permits bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature and which are not authorized for bank holding companies. A bank holding company may become a financial holding company if each of its subsidiary banks is “well capitalized” under the prompt corrective action provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) and the applicable regulations thereunder, is “well managed” and has at least a satisfactory rating under the Community Reinvestment Act by filing a declaration with the Federal Reserve Board that the bank holding company seeks to become a financial holding company. Banknorth became a financial holding company effective January 25, 2002.
No regulatory approval is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Gramm-Leach-Bliley Act defines “financial in nature” to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. A national bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a “satisfactory” Community Reinvestment Act rating. Subsidiary banks of a financial holding company or national banks with financial subsidiaries must continue to be well capitalized and well managed in order to continue to engage in activities that are financial in nature without regulatory actions or restrictions, which could include divestiture of the financial in nature subsidiary or subsidiaries. In addition, a financial holding company or a bank may not acquire a company that is engaged in activities that are financial in nature unless each of the subsidiary banks of the financial holding company or the bank has a Community Reinvestment Act rating of “satisfactory” or better.
Bank Acquisitions. Pursuant to the Bank Holding Company Act, we are required to obtain the prior approval of the Federal Reserve Board before acquiring more than 5% of any class of voting stock of any bank that is not already majority owned by us. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company became able to acquire banks in states other than its home state beginning September 29, 1995, without regard to the permissibility of such acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10% of the total amount of deposits of insured depository institutions in the United States and less than 30% of such deposits in that state (or such lesser or greater amount set by state law).
The Interstate Banking and Branching Act also authorizes banks to merge across state lines, subject to certain restrictions, thereby creating interstate branches. Pursuant to the Interstate Banking and Branching Act, a bank also may open new branches in a state in which it does not already have banking operations if the state enacts a law permitting such de novo branching.
Capital and Operational Requirements. The Federal Reserve Board, the OCC and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to U.S. banking organizations such as Banknorth and Banknorth, NA. In addition, those regulatory agencies may from time
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The sum of Tier 1, Tier 2 and Tier 3 capital, less investments in unconsolidated subsidiaries, represents qualifying “total capital,” at least 50% of which must consist of Tier 1 capital. Risk-based capital ratios are calculated by dividing Tier 1 capital and total capital by risk-weighted assets. Assets and off-balance sheet exposures are assigned to one of four categories of risk weights, based primarily on relative credit risk. The minimum Tier 1 risk-based capital ratio is 4% and the minimum total risk-based capital ratio is 8%. At December 31, 2003, our Tier 1 risk-based capital and total risk-based capital ratios under these guidelines were 8.96% and 11.29%, respectively.
The “leverage ratio” requirement is determined by dividing Tier 1 capital by adjusted average total assets. Although the stated minimum ratio is 3%, most banking organizations are required to maintain ratios of at least 100 to 200 basis points above 3%. At December 31, 2003, our leverage ratio was 6.65%.
Federal bank regulatory agencies require banking organizations that engage in significant trading activity to calculate a capital charge for market risk. Significant trading activity means trading activity of at least 10% of total assets or $1 billion, whichever is smaller, calculated on a consolidated basis for bank holding companies. Federal bank regulators may apply the market risk measure to other banks and bank holding companies as the agency deems necessary or appropriate for safe and sound banking practices. Each agency may exclude organizations that it supervises that otherwise meet the criteria under certain circumstances. The market risk charge will be included in the calculation of an organization’s risk-based capital ratios.
FDICIA identifies five capital categories for insured depository institutions (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized”) and requires the respective U.S. federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. An “undercapitalized” bank must develop a capital restoration plan and its parent holding company must guarantee that bank’s compliance with the plan. The liability of the parent holding company under any such guarantee is limited to the lesser of 5% of the bank’s assets at the time it became undercapitalized or the amount needed to comply with the plan. Furthermore, in the event of the bankruptcy of the parent holding company, such guarantee would take priority over the parent’s general unsecured creditors. In addition, FDICIA requires the various regulatory agencies to prescribe certain non-capital standards for safety and soundness related generally to operations and management, asset quality and executive compensation and permits regulatory action against a financial institution that does not meet such standards.
The various federal bank regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a “well capitalized” institution must have a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An “adequately capitalized” institution must have a Tier 1 capital ratio of at least 4%, a total capital ratio of at least 8% and a leverage ratio of at least 4%, or 3% in some cases. Under these guidelines, Banknorth, NA is considered “well capitalized.”
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The Federal bank regulatory agencies also have adopted regulations which mandate that regulators take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. That evaluation will be made as part of the institution’s regular safety and soundness examination. Banking agencies also have adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance sheet position) in the determination of a bank’s capital adequacy. Concurrently, banking agencies have proposed a methodology for evaluating interest rate risk. The banking agencies do not intend to establish an explicit risk-based capital charge for interest rate risk but will continue to assess capital adequacy for interest rate risk under a risk assessment approach based on a combination of quantitative and qualitative factors and have provided guidance on prudent interest rate risk management practices.
Distributions. We derive funds for cash distributions to our stockholders primarily from dividends received from our banking subsidiary. Banknorth, NA is subject to various regulatory policies and requirements relating to the payment of dividends, including requirements to maintain capital above regulatory minimums. The appropriate U.S. federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of the bank or bank/financial holding company that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof.
In addition to the foregoing, the ability of us and Banknorth, NA to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. Our right and the rights of our stockholders and creditors to participate in any distribution of the assets or earnings of our subsidiaries is further subject to the prior claims of creditors of such subsidiaries.
“Source of Strength” Policy. According to Federal Reserve Board policy, bank/financial holding companies are expected to act as a source of financial strength to each subsidiary bank and to commit resources to support each such subsidiary. This support may be required at times when a bank/financial holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC — either as a result of default of a banking or thrift subsidiary of a bank/ financial holding company such as Banknorth or related to FDIC assistance provided to a subsidiary in danger of default — the other banking subsidiaries of such bank/ financial holding company may be assessed for the FDIC’s loss, subject to certain exceptions.
Community Investment and Consumer Protection Laws. In connection with its lending activities, Banknorth, NA is subject to a variety of federal laws designed to protect borrowers and promote lending to various sectors of the economy and population. Included among these are the federal Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act, Equal Credit Opportunity Act, Fair Credit Reporting Act and Community Reinvestment Act.
The Community Reinvestment Act requires insured institutions to define the communities that they serve, identify the credit needs of those communities and adopt and implement a “Community Reinvestment Act Statement” pursuant to which they offer credit products and take other actions that respond to the credit needs of the community. The responsible federal banking regulator must conduct regular Community Reinvestment Act examinations of insured financial institutions and assign to them a Community Reinvestment Act rating of “outstanding,” “satisfactory,” “needs improvement” or “unsatisfactory.” In 2003, the Community Reinvestment Act rating of Banknorth, NA was “outstanding.”
Miscellaneous. Banknorth, NA is subject to certain restrictions on loans to Banknorth or its non-bank subsidiaries, on investments in the stock or securities thereof, on the taking of such stock or securities as collateral for loans to any borrower, and on the issuance of a guarantee or letter of credit on behalf of Banknorth or its non-bank subsidiaries. Banknorth, NA also is subject to certain restrictions on most types of transactions with Banknorth or its non-bank subsidiaries, requiring that the terms of such transactions be substantially equivalent to terms of similar transactions with non-affiliated firms.
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Regulatory Enforcement Authority. The enforcement powers available to federal banking regulators is substantial and includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.
Sarbanes-Oxley Act of 2002. On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002, which generally establishes a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. Certain of the new legislation’s more significant reforms are noted below.
• | The new legislation creates a public company accounting oversight board which is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review. The new board is funded by mandatory fees paid by all public companies. The new legislation also improves the Financial Accounting Standards Board, giving it full financial independence from the accounting industry. | |
• | The new legislation strengthens auditor independence from corporate management by, among other things, limiting the scope of consulting services that auditors can offer their public company audit clients. | |
• | The new legislation heightens the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies. Among other things, the new legislation provides for a strong public company audit committee that will be directly responsible for the appointment, compensation and oversight of the work of the public company auditors. | |
• | The new legislation contains a number of provisions to deter wrongdoing. CEOs and CFOs now have to certify that company financial statements fairly present the company’s financial condition. If a misleading financial statement later results in a restatement, the CEO and CFO must forfeit and return to the company any bonus, stock or stock option compensation received in the twelve months following the misleading financial report. The new legislation also prohibits any company officer or director from attempting to mislead or coerce an auditor. Among other reforms, the new legislation empowers the SEC to bar certain persons from serving as officers or directors of a public company; prohibits insider trades during pension fund “blackout periods;” directs the SEC to adopt rules requiring attorneys to report securities law violations; and requires that civil penalties imposed by the SEC go into a disgorgement fund to benefit harmed investors. | |
• | The new legislation imposes a range of new corporate disclosure requirements. Among other things, the new legislation requires public companies to report all off-balance-sheet transactions and conflicts, as well as to present any pro forma disclosures in a way that is not misleading and in accordance with requirements established by the SEC. The new legislation also accelerated the required reporting of insider transactions, which now generally must be reported by the end of the second business day following a covered transaction; requires that annual reports filed with the SEC include a statement by management asserting that it is responsible for creating and maintaining adequate internal controls and assessing the effectiveness of those controls; and requires companies to disclose whether or not they have adopted an ethics code for senior financial officers, and, if not, why not, and whether the audit committee includes at least one “financial expert,” a term which has been defined by the SEC in accordance with specified requirements. The new legislation also requires the SEC, based on certain enumerated factors, to regularly and systematically review corporate filings. |
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• | The new legislation contains provisions which generally seek to limit and expose to public view possible conflicts of interest affecting securities analysts. | |
• | Finally, the new legislation imposes a range of new criminal penalties for fraud and other wrongful acts, as well as extends the period during which certain types of lawsuits can be brought against a company or its insiders. |
Taxation
We are subject to those rules of federal income taxation generally applicable to corporations under the Internal Revenue Code. Banknorth and its subsidiaries, as members of an affiliated group of corporations within the meaning of Section 1504 of the Internal Revenue Code, file a consolidated federal income tax return, which has the effect of eliminating or deferring the tax consequences of inter-company distributions, including dividends, in the computation of consolidated taxable income.
We also are subject to various forms of state taxation under the laws of Maine, New Hampshire, Massachusetts, Vermont, New York and Connecticut as a result of the business which we conduct in these states. We are also subject to taxation in several other states related to business conducted by our leasing company.
Statistical Disclosure by Bank Holding Companies
The following information, included under Items 6, 7 and 8 of this report, is incorporated by reference herein.
Table 2 — Three-Year Average Balance Sheets, which presents average balance sheet amounts, related taxable equivalent interest earned or paid and related average yields earned and rates paid and is included in Item 7;
Table 3 — Changes in Net Interest Income, which presents changes in taxable equivalent interest income and expense for each major category of interest-earning assets and interest-bearing liabilities and is included in Item 7;
Table 10 — Securities Available for Sale and Held to Maturity, which presents information regarding carrying values of investment securities by category of security and is included in Item 7;
Table 11 — Maturities of Securities, which presents information regarding the maturities and weighted average yield of investment securities by category of security and is included in Item 7;
Table 13 — Composition of Loan Portfolio, which presents the composition of loans and leases by category of loan and lease and is included in Item 7;
Table 14 — Scheduled Contractual Amortization of Certain Loans and Leases at December 31, 2003, which presents maturities and sensitivities of loans and leases to changes in interest rates and is included in Item 7;
Table 20 — Five Year Schedule of Nonperforming Assets, which presents information concerning non-performing assets and accruing loans 90 days or more overdue and is included in Item 7;
“Credit Risk Management” and Note 1 to the Consolidated Financial Statements, which discuss our policies for placing loans on non-accrual status, as well as in the case of the former potential problem loans, which are included in Items 7 and 8, respectively;
Table 21 — Five-Year Table of Activity in the Allowance for Loan and Lease Losses, included in Item 7;
Table 22 — Allocation of the Allowance for Loan and Lease Losses — Five Year Schedule, included in Item 7;
Table 21 — Net Charge-offs as a Percent of Average Loans and Leases Outstanding, included in Item 7;
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Table 2 — Three-Year Average Balance Sheets, which includes average balances of deposits by category of deposit and is included in Item 7;
Table 18 — Maturity of Certificates of Deposit of $100,000 or more at December 31, 2003, included in Item 7;
“Selected Financial Data,” which presents return on assets, return on equity, dividend payout and equity to assets ratios and is included in Item 6; and
Note 12 to the Consolidated Financial Statements, which includes information regarding short-term borrowings and is included in Item 8.
For additional information regarding our business and operations, see “Selected Financial Data” in Item 6 hereof, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 hereof and the Consolidated Financial Statements in Item 8 hereof.
Availability of Information
We make available on our web site, which is located athttp://www.banknorth.com, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K on the date which we electronically file these reports with the Securities and Exchange Commission. Investors are encouraged to access these reports and the other information about our business and operations on our web site.
Item 2. Properties
At December 31, 2003, we conducted business from our executive offices at Two Portland Square, Portland, Maine and have 359 banking offices located in Maine, New Hampshire, Massachusetts, Vermont, New York and Connecticut.
The following table sets forth certain information with respect to our offices as of December 31, 2003.
Number of | |||||||||
State | Banking Offices | Deposits | |||||||
(Dollars in Thousands) | |||||||||
Maine | 60 | $ | 2,801,185 | ||||||
New Hampshire | 77 | 3,989,394 | |||||||
Massachusetts | 115 | 5,906,579 | |||||||
Vermont | 36 | 2,451,052 | |||||||
New York | 27 | 1,658,404 | |||||||
Connecticut | 44 | 1,094,571 | |||||||
Total | 359 | $ | 17,901,185 | ||||||
For additional information regarding our premises and equipment and lease obligations, see Notes 7 and 18 respectively, to the Consolidated Financial Statements included in Item 8 hereof.
Item 3. Legal Proceedings
We are involved in routine legal proceedings occurring in the ordinary course of business which in the aggregate are believed by us to be immaterial to our financial condition and results of operations.
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Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of our security holders in the fourth quarter of 2003.
PART II.
Item 5. | Market for Registrant’s Common Stock, Related Stockholder Matters and Issuer Purchases of Securities |
Market Information and Related Matters.Our common stock is traded on the New York Stock Exchange, Inc (“NYSE”). The following table sets forth the high and low prices of our common stock and the dividends declared per share of common stock for the periods indicated. Market price information for our common stock for periods prior to November 4, 2002 represents trading on the Nasdaq Stock Market, Inc.’s National Market, and market price information for this stock on and after that date represents trading on the NYSE.
Market Price | ||||||||||||
Dividends Declared | ||||||||||||
2003 | High | Low | Per Share | |||||||||
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 |
2002 | ||||||||||||
First Quarter | $ | 26.80 | $ | 22.25 | $ | 0.135 | ||||||
Second Quarter | 27.45 | 24.96 | 0.145 | |||||||||
Third Quarter | 27.40 | 20.71 | 0.150 | |||||||||
Fourth Quarter | 24.58 | 20.68 | 0.150 |
As of December 31, 2003, there were 162,187,719 shares of common stock outstanding which were held by approximately 19,750 holders of record. Such number of record holders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees.
We have historically paid quarterly dividends on our common stock and currently intend to continue to do so in the foreseeable future. Our ability to pay dividends depends on a number of factors, however, including restrictions on the ability of Banknorth, NA to pay dividends under federal laws and regulations, and as a result there can be no assurance that dividends will be paid in the future.
Share Repurchases.During the year ended December 31, 2003, we repurchased 4.5 million shares at an average price per share of $23.53.
The following table sets forth information with respect to any purchase made by or on behalf of Banknorth or any “affiliated purchaser,” as defined in §240.10b-18(a)(3) under the Exchange Act, of shares of Banknorth common stock during the indicated periods.
Total Number of | ||||||||||||||||
Shares Purchased as | Maximum Number of | |||||||||||||||
Total Number | Average | Part of Publicly | Shares that May Yet Be | |||||||||||||
of Shares | Price Paid | Announced Plans or | Purchased Under the | |||||||||||||
Period | Purchased | Per Share | Programs | Plans or Programs(1) | ||||||||||||
October 1-31, 2003 | 50,000 | $ | 28.15 | 50,000 | 2,853,200 | |||||||||||
November 1-30, 2003 | — | — | — | — | ||||||||||||
December 1-31, 2003 | — | — | — | — |
(1) | An 8,000,000 share repurchase program was approved by the Board of Directors in February 2002. |
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Item 6. | Selected Consolidated Financial Data |
2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||
Condensed Income Statement | |||||||||||||||||||||
Net interest income | $ | 840,831 | $ | 796,517 | $ | 679,890 | $ | 603,550 | $ | 614,395 | |||||||||||
Provision for loan and lease losses | 42,301 | 44,314 | 41,889 | 23,819 | 23,575 | ||||||||||||||||
Net interest income after loan and lease loss provision | 798,530 | 752,203 | 638,001 | 579,731 | 590,820 | ||||||||||||||||
Noninterest income | 367,159 | 274,508 | 240,505 | 211,188 | 191,795 | ||||||||||||||||
Noninterest expense | 641,270 | 579,392 | 515,317 | 502,392 | 488,308 | ||||||||||||||||
Income before income taxes | 524,419 | 447,319 | 363,189 | 288,527 | 294,307 | ||||||||||||||||
Income tax expense | 173,660 | 148,681 | 124,104 | 96,793 | 97,349 | ||||||||||||||||
Cumulative effect of change in accounting principle, net of tax | — | — | (290 | ) | — | — | |||||||||||||||
Net income | $ | 350,759 | $ | 298,638 | $ | 238,795 | $ | 191,734 | $ | 196,958 | |||||||||||
Per Common Share | |||||||||||||||||||||
Basic earnings per share | $ | 2.18 | $ | 2.01 | $ | 1.70 | $ | 1.33 | $ | 1.35 | |||||||||||
Diluted earnings per share | 2.15 | 1.99 | 1.68 | 1.32 | 1.34 | ||||||||||||||||
Dividends per share | 0.70 | 0.58 | 0.53 | 0.50 | 0.47 | ||||||||||||||||
Book value per share at year end | 15.54 | 13.70 | 11.83 | 9.42 | 8.22 | ||||||||||||||||
Tangible book value per share at year end | 8.37 | 9.09 | 8.75 | 8.11 | 6.95 | ||||||||||||||||
Stock price: | |||||||||||||||||||||
High | 33.57 | 27.22 | 24.39 | 21.13 | 20.25 | ||||||||||||||||
Low | 20.60 | 20.44 | 18.13 | 10.38 | 14.31 | ||||||||||||||||
Close | 32.53 | 22.60 | 22.52 | 19.94 | 15.06 | ||||||||||||||||
Period end common shares outstanding | 162,188 | 150,579 | 151,221 | 141,245 | 144,974 | ||||||||||||||||
Weighted average shares outstanding — Diluted | 163,520 | 149,829 | 141,802 | 145,194 | 147,428 | ||||||||||||||||
Financial Ratios | |||||||||||||||||||||
Return on average assets | 1.37 | % | 1.39 | % | 1.29 | % | 1.05 | % | 1.12 | % | |||||||||||
Return on average equity | 14.51 | 16.25 | 16.48 | 15.69 | 16.42 | ||||||||||||||||
Net interest margin(1) | 3.66 | 4.07 | 3.99 | 3.60 | 3.80 | ||||||||||||||||
Net interest rate spread(1) | 3.41 | 3.69 | 3.43 | 3.05 | 3.33 | ||||||||||||||||
Average equity to average assets | 9.44 | 8.56 | 7.82 | 6.66 | 6.81 | ||||||||||||||||
Efficiency ratio | 53.09 | 54.10 | 55.34 | 61.67 | 60.57 | ||||||||||||||||
Noninterest income as a percent of total income | 30.39 | 25.63 | 26.13 | 25.92 | 23.79 | ||||||||||||||||
Tier 1 leverage capital ratio | 6.65 | 7.13 | 7.14 | 7.02 | 6.75 | ||||||||||||||||
Tier 1 risk-based capital ratio | 8.96 | 9.66 | 9.59 | 10.56 | 10.76 | ||||||||||||||||
Total risk-based capital ratio | 11.29 | 12.15 | 12.23 | 11.81 | 12.02 | ||||||||||||||||
Dividend payout ratio(2) | 31.90 | 28.76 | 30.27 | 36.91 | 33.19 | ||||||||||||||||
Average Balance Sheet | |||||||||||||||||||||
Assets | $ | 25,616,347 | $ | 21,460,719 | $ | 18,545,709 | $ | 18,343,226 | $ | 17,607,344 | |||||||||||
Loans and leases(3) | 15,633,207 | 13,236,803 | 11,246,007 | 10,485,289 | 9,908,177 | ||||||||||||||||
Deposits | 17,302,983 | 14,566,644 | 12,529,630 | 11,891,481 | 11,784,103 | ||||||||||||||||
Shareholders’ equity | 2,416,926 | 1,838,064 | 1,449,353 | 1,222,378 | 1,199,496 | ||||||||||||||||
Year End Balance Sheet Data | |||||||||||||||||||||
Assets | $ | 26,453,735 | $ | 23,418,941 | $ | 21,076,586 | $ | 18,233,810 | $ | 18,508,264 | |||||||||||
Loans and leases, net(4) | 16,113,675 | 13,847,735 | 12,525,493 | 10,692,112 | 9,699,608 | ||||||||||||||||
Securities(5) | 7,247,232 | 6,947,876 | 6,156,861 | 5,880,658 | 6,873,182 | ||||||||||||||||
Goodwill and identifiable intangible assets | 1,163,054 | 695,158 | 466,633 | 185,520 | 184,381 | ||||||||||||||||
Deposits | 17,901,185 | 15,664,601 | 14,221,049 | 12,107,256 | 11,710,501 | ||||||||||||||||
Borrowings | 5,882,864 | 5,432,581 | 4,602,388 | 4,659,390 | 5,466,253 | ||||||||||||||||
Shareholders’ equity | 2,520,519 | 2,063,485 | 1,789,115 | 1,330,857 | 1,192,274 | ||||||||||||||||
Nonperforming assets(6) | 63,103 | 68,953 | 81,227 | 67,132 | 69,192 | ||||||||||||||||
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(1) | Net interest margin represents net interest income divided by average interest-earning assets and net interest rate spread represents the difference between the weighted average rate earned on interest-earning assets and the weighted average rate paid on interest-bearing liabilities, in each case calculated on a fully-taxable equivalent basis. |
(2) | Cash dividends paid divided by net income. |
(3) | Includes loans and leases held for sale. |
(4) | Excludes loans and leases held for sale. |
(5) | Includes securities held to maturity. |
(6) | Nonperforming assets consist of nonperforming loans, other real estate owned, repossessed assets and investment securities placed on non-accrual status. |
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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) |
The discussion and analysis that follows focuses on the results of operations of Banknorth Group, Inc. during 2003, 2002 and 2001 and its financial condition at December 31, 2003 and 2002. The Consolidated Financial Statements and related notes should be read in conjunction with this review. Certain amounts in years prior to 2003 have been reclassified to conform to the 2003 presentation.
General
Banknorth Group, Inc. is a Maine corporation and a registered bank holding company and financial holding company under the Bank Holding Company Act of 1956, as amended. At December 31, 2003, we had consolidated assets of $26.5 billion and consolidated shareholders’ equity of $2.5 billion. Based on total assets at that date, we are one of the 35 largest commercial banking organizations in the United States.
Our principal asset is all of the capital stock of Banknorth, NA (the “Bank”), a national bank which was initially formed as a Maine-chartered savings bank in the mid-19th century. The Bank operates banking divisions in Connecticut (Banknorth Connecticut), Maine (Peoples Heritage Bank), Massachusetts (Banknorth Massachusetts) New Hampshire (Bank of New Hampshire), New York (Evergreen Bank) and Vermont (Banknorth Vermont). At December 31, 2003, Banknorth NA had 359 banking offices in these states and we served approximately 1.3 million households and commercial customers. Through the Bank and its subsidiaries, we offer a full range of banking services and products to individuals, businesses and governments throughout our market areas, including commercial banking, consumer banking, investment management, investment planning and insurance brokerage services.
We are subject to extensive regulation and supervision under federal and state banking laws. See “Regulation and Supervision” under Item 1.
Business Strategy |
Our primary business segment is Community Banking which represents over 90% of our consolidated income and consists of attracting deposits from the general public and using such deposits and other sources of funds to originate commercial business loans and leases, commercial real estate loans, residential mortgage loans and a variety of consumer loans. In addition to keeping loans for our own portfolio, we sell residential mortgage loans into the secondary market. We also invest in mortgage-backed securities and securities issued by the United States Government and agencies thereof, as well as other securities. In addition to Community Banking, we have Insurance Brokerage, Investment Planning and Investment Management each of which represents less than 10% of our consolidated net income and consolidated assets. Our Insurance Brokerage business earns commissions on insurance brokerage activities, our Investment Planning business earns commissions from the sale of third party mutual funds, annuities, stocks and bonds and our Investment Management business reflects fees from trust and investment management operations.
Our goal is to sustain profitable, controlled growth by focusing on increasing our loan and deposit market share in New England and upstate New York; developing new financial products, services and delivery channels; closely managing yields on earning assets and rates on interest-bearing liabilities; increasing noninterest income through, among other things, expanded investment management, investment planning and insurance brokerage services, and controlling the growth of noninterest expenses. It is also part of our business strategy to supplement internal growth with targeted acquisitions of other financial institutions and insurance agencies in our current or contiguous market areas. See “Acquisitions” below and under Item 1.
We strive to maintain a diversified loan and deposit mix and strong asset quality. We are focused on improving efficiencies as we integrate all of our acquisitions. We will continue to evaluate our operations and organizational structures to ensure they are closely aligned with our goal of increasing earnings per share growth.
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Acquisitions
We completed four acquisitions in 2003 (including two insurance agency acquisitions) and at December 31, 2003, our proposed acquisitions of Foxborough Savings Bank and CCBT Financial Companies, Inc. were pending. The following table sets forth certain information regarding our acquisitions in 2003, 2002 and 2001. All acquisitions were accounted for as purchases and as such, were included in our results of operations from the date of acquisition.
Table 1 — Acquisitions 2001 – 2003
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) | ||||||||||||||||||||||||||||||||
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 |
For additional information regarding our acquisitions in 2003, see Note 3 to the Consolidated Financial Statements.
Executive Overview
Our net income increased by $52.1 million in 2003 as compared to 2002, an increase of 17%. Our diluted earnings per share was $2.15 in 2003 as compared to $1.99 in 2002, an increase of $0.16 per diluted share, or 8%. The following were significant factors related to 2003 results as compared to 2002:
• | Acquisitions continue to be an important part of our long-term strategy for growth. We completed the acquisition of Warren Bancorp, Inc. on December 31, 2002 and American Financial Holdings, Inc. on February 14, 2003 and completed the related systems conversions shortly thereafter. The results of these acquired companies have been included in our operations from the date of acquisition. We completed the acquisition of First & Ocean Bancorp on December 31, 2003. | |
• | The net interest margin declined by 41 basis points in 2003 versus 2002 due primarily to low interest rates which resulted in rapid prepayments of mortgage-related earning assets. | |
• | In anticipation of the continuing margin compression in 2003, we implemented a balance sheet deleveraging program that benefited our net interest margin, mitigated interest rate risk and reduced the level of assets subject to prepayment risk. Under this deleveraging program, we sold $901 million of investment securities and used the proceeds to prepay $853 million of borrowings. The gain on sale of these securities totaled $29.2 million, while the prepayment charges on the borrowings totaled $28.5 million. The deleveraging program benefited our net interest margin by 0.06%. | |
• | The effects of the decline in net interest margin were offset by asset growth, increased non-interest income and good expense control. | |
• | As a result of the low interest rate environment, we expanded our covered call premium program. Call options were written on securities we owned which generated $10.9 million of fee income in |
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2003. Call options were also written on securities we had committed to buy which generated $16.9 million of fee income in 2003. | ||
• | During 2003, we recorded strong loan growth in commercial real estate loans, commercial business loans and leases and consumer loans and leases. During this year, commercial real estate loans increased 15%, commercial business loans and leases increased 11% and consumer loans increased 23%. Excluding the effects of acquisitions, during 2003 commercial real estate loans increased 12%, commercial business loans and leases increased 6% and consumer loans and leases increased 9%. | |
• | Asset quality remained very good. Even though total assets increased by 13% during 2003, nonperforming assets declined by 8% during this period. | |
• | Total deposits increased by 14% during 2003. Excluding acquisitions, core deposits (deposits excluding certificates of deposit and brokered deposits) increased by 9%. |
Our financial condition and liquidity remain strong. The following are important factors in understanding our financial condition and liquidity:
• | using the definitions of banking regulators, we continue to be “well-capitalized”; | |
• | we issued $150 million of senior notes in 2003; | |
• | the Moody’s rating of our senior notes was Baa-1 at December 31, 2003; | |
• | we repurchased 4.5 million shares at an average price of $23.53 during 2003; | |
• | we increased our annual dividend by 21% in 2003 compared to 2002; and | |
• | all liquidity measures at December 31, 2003 met or exceeded the same measures at December 31, 2002. |
Results of Operations
Comparison of 2003 and 2002 |
Summary |
Our net income increased $52.1 million, or 17%, during 2003. The increase was attributable in part to acquisitions in 2003 and 2002 and were diminished by the effects of merger and consolidation costs of $8.1 million and $14.7 million in 2003 and 2002, respectively. Return on average assets and return on average equity were 1.37% and 14.51%, respectively, in 2003 compared to 1.39% and 16.25%, respectively, in 2002. The decline in the return on average equity related primarily to the intangible equity resulting from the acquisition of American in February 2003.
Net interest income and noninterest income increased 6% and 34%, respectively, during 2003. The increase in net interest income was primarily attributable to increased earning asset levels (from organic growth and acquisitions in 2003 and 2002), which more than offset the effects of a 41 basis point decline in the net interest margin. The margin declined primarily due to the effect of prepayments and repricing on loans, securities, deposits and borrowings in a declining rate environment and, to a lesser extent, the effects of acquisitions.
The provision for loan and lease losses of $42.3 million in 2003 decreased 5% compared to 2002 due mainly to lower net charge-offs and continued strong asset quality. The coverage ratio (allowance for loan and lease losses to nonperforming loans) was 389% at December 31, 2003 compared to 319% at December 31, 2002.
Noninterest income increased due to higher deposit services income, net securities gains and other noninterest income (primarily covered call premium income and mortgage banking services income).
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Noninterest expense increased 11% in 2003 due primarily to higher compensation and employee benefits expense and increased occupancy expense, primarily as a result of our acquisitions, as well as prepayment penalties on borrowings.
Net Interest Income |
Net interest income is the difference between interest income on earning assets such as loans, leases and securities, and interest expense paid on liabilities such as deposits and borrowings, and continues to be our largest source of net revenue. Net interest income is affected by changes in interest rates and by changes in the amount and composition of interest-earning assets and interest-bearing liabilities.
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Table 2 — Three-Year Average Balance Sheets
The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income on interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average cost; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. For purposes of the table and the following discussion, (i) income from interest-earning assets and net interest income is presented on a fully-taxable equivalent basis primarily by adjusting income and yields earned on tax-exempt interest received on loans to qualifying borrowers and on certain of our securities to make them equivalent to income and yields earned on fully-taxable investments, assuming a federal income tax rate of 35%, and (ii) unpaid interest on nonaccrual loans has not been included for purposes of determining interest income. Information is based on average daily balances during the indicated periods.
Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | ||||||||||||||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||||||||||||||||
Loans and leases(1) | ||||||||||||||||||||||||||||||||||||
Residential real estate mortgages | $ | 2,839,969 | $ | 159,215 | 5.61 | % | $ | 2,635,952 | $ | 177,837 | 6.75 | % | $ | 2,290,968 | $ | 169,962 | 7.42 | % | ||||||||||||||||||
Commercial real estate mortgages | 5,162,413 | 312,681 | 6.06 | % | 4,293,816 | 298,412 | 6.95 | % | 3,216,865 | 265,280 | 8.25 | % | ||||||||||||||||||||||||
Commercial business loans and leases | 3,153,293 | 160,761 | 5.10 | % | 2,665,973 | 158,260 | 5.94 | % | 2,342,009 | 180,705 | 7.72 | % | ||||||||||||||||||||||||
Consumer loans and leases | 4,477,532 | 251,347 | 5.61 | % | 3,641,062 | 250,971 | 6.89 | % | 3,396,165 | 280,180 | 8.25 | % | ||||||||||||||||||||||||
Total loans and leases | 15,633,207 | 884,004 | 5.65 | % | 13,236,803 | 885,480 | 6.69 | % | 11,246,007 | 896,127 | 7.97 | % | ||||||||||||||||||||||||
Investment securities | 7,464,162 | 314,701 | 4.22 | % | 6,403,807 | 353,576 | 5.52 | % | 5,924,001 | 372,788 | 6.29 | % | ||||||||||||||||||||||||
Federal funds sold and other short-term investments | 11,004 | 160 | 1.46 | % | 60,257 | 1,064 | 1.77 | % | 34,620 | 1,168 | 3.37 | % | ||||||||||||||||||||||||
Total earning assets | 23,108,373 | 1,198,865 | 5.19 | % | 19,700,867 | 1,240,120 | 6.30 | % | 17,204,628 | 1,270,083 | 7.38 | % | ||||||||||||||||||||||||
Bank-owned life insurance | 465,446 | 359,994 | 311,990 | |||||||||||||||||||||||||||||||||
Noninterest-earning assets | 2,042,528 | 1,399,858 | 1,029,091 | |||||||||||||||||||||||||||||||||
Total assets | $ | 25,616,347 | $ | 21,460,719 | $ | 18,545,709 | ||||||||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||||||||||||||
Regular savings | $ | 2,399,179 | 10,994 | 0.46 | % | $ | 1,743,501 | 15,444 | 0.89 | % | $ | 1,439,551 | 18,921 | 1.31 | % | |||||||||||||||||||||
Now and money market accounts | 6,652,030 | 59,193 | 0.89 | % | 5,463,179 | 79,384 | 1.45 | % | 4,257,428 | 109,998 | 2.58 | % | ||||||||||||||||||||||||
Certificates of deposit | 5,027,739 | 118,649 | 2.36 | % | 4,693,518 | 149,028 | 3.18 | % | 4,512,284 | 226,437 | 5.02 | % | ||||||||||||||||||||||||
Brokered deposits | — | — | 0.00 | % | 43,311 | 792 | 1.83 | % | 151,980 | 8,618 | 5.67 | % | ||||||||||||||||||||||||
Total interest-bearing deposits | 14,078,948 | 188,836 | 1.34 | % | 11,943,509 | 244,648 | 2.05 | % | 10,361,243 | 363,974 | 3.51 | % | ||||||||||||||||||||||||
Borrowed funds | 5,693,420 | 163,302 | 2.87 | % | 4,870,795 | 193,952 | 3.98 | % | 4,406,017 | 219,925 | 4.99 | % | ||||||||||||||||||||||||
Total interest-bearing liabilities | 19,772,368 | 352,138 | 1.78 | % | 16,814,304 | 438,600 | 2.61 | % | 14,767,260 | 583,899 | 3.95 | % | ||||||||||||||||||||||||
Non-interest bearing deposits | 3,224,035 | 2,623,135 | 2,168,387 | |||||||||||||||||||||||||||||||||
Other liabilities | 203,018 | 185,216 | 160,709 | |||||||||||||||||||||||||||||||||
Shareholders’ equity | 2,416,926 | 1,838,064 | 1,449,353 | |||||||||||||||||||||||||||||||||
Total liabilities and shareholders’ equity | $ | 25,616,347 | $ | 21,460,719 | $ | 18,545,709 | ||||||||||||||||||||||||||||||
Net earning assets | $ | 3,336,005 | $ | 2,886,563 | $ | 2,437,368 | ||||||||||||||||||||||||||||||
Net interest income (fully-taxable equivalent) | 846,727 | 801,520 | 686,184 | |||||||||||||||||||||||||||||||||
Less: fully-taxable equivalent adjustments | (5,896 | ) | (5,003 | ) | (6,294 | ) | ||||||||||||||||||||||||||||||
Net interest income | $ | 840,831 | $ | 796,517 | $ | 679,890 | ||||||||||||||||||||||||||||||
Net interest rate spread (fully-taxable equivalent) | 3.41 | % | 3.69 | % | 3.43 | % | ||||||||||||||||||||||||||||||
Net interest margin (fully-taxable equivalent) | 3.66 | % | 4.07 | % | 3.99 | % |
(1) | Loans and leases include portfolio loans and leases, loans held for sale and nonperforming loans, but unpaid interest on nonperforming loans has not been included for purposes of determining interest income. |
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Table 3 — Changes in Net Interest Income
The following table presents certain information on a fully-taxable equivalent basis regarding changes in our interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (1) changes in rate (change in rate multiplied by prior year volume), (2) changes in volume (change in volume multiplied by prior year rate) and (3) changes in rate/ volume (change in rate multiplied by change in volume).
Year Ended December 31, 2003 vs. 2002 | Year Ended December 31, 2002 vs. 2001 | ||||||||||||||||||||||||||||||||
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 | $ | 160,319 | $ | (137,663 | ) | $ | (24,132 | ) | $ | (1,476 | ) | $ | 158,666 | $ | (143,949 | ) | $ | (25,364 | ) | $ | (10,647 | ) | |||||||||||
Investment securities | 58,532 | (83,249 | ) | (14,158 | ) | (38,875 | ) | 30,180 | (45,615 | ) | (3,777 | ) | (19,212 | ) | |||||||||||||||||||
Federal funds sold and other short-term investments | (872 | ) | (187 | ) | 155 | (904 | ) | 864 | (554 | ) | (414 | ) | (104 | ) | |||||||||||||||||||
Total interest income | 217,979 | (221,099 | ) | (38,135 | ) | (41,255 | ) | 189,710 | (190,118 | ) | (29,555 | ) | (29,963 | ) | |||||||||||||||||||
Interest expense: | |||||||||||||||||||||||||||||||||
Interest-bearing deposits | |||||||||||||||||||||||||||||||||
Regular savings | 5,836 | (7,497 | ) | (2,789 | ) | (4,450 | ) | 3,982 | (6,046 | ) | (1,413 | ) | (3,477 | ) | |||||||||||||||||||
NOW and money market accounts | 17,238 | (30,594 | ) | (6,835 | ) | (20,191 | ) | 31,108 | (48,109 | ) | (13,613 | ) | (30,614 | ) | |||||||||||||||||||
Certificates of deposit | 10,628 | (38,487 | ) | (2,520 | ) | (30,379 | ) | 9,098 | (83,026 | ) | (3,481 | ) | (77,409 | ) | |||||||||||||||||||
Brokered deposits | (793 | ) | (793 | ) | 794 | (792 | ) | (6,162 | ) | (5,836 | ) | 4,172 | (7,826 | ) | |||||||||||||||||||
Total interest-bearing deposits | 32,909 | (77,371 | ) | (11,350 | ) | (55,812 | ) | 38,026 | (143,017 | ) | (14,335 | ) | (119,326 | ) | |||||||||||||||||||
Borrowed funds | 32,740 | (54,066 | ) | (9,324 | ) | (30,650 | ) | 23,192 | (44,501 | ) | (4,664 | ) | (25,973 | ) | |||||||||||||||||||
Total interest expense | 65,649 | (131,437 | ) | (20,674 | ) | (86,462 | ) | 61,218 | (187,518 | ) | (18,999 | ) | (145,299 | ) | |||||||||||||||||||
Net interest income (fully taxable equivalent) | $ | 152,330 | $ | (89,662 | ) | $ | (17,461 | ) | $ | 45,207 | $ | 128,492 | $ | (2,600 | ) | $ | (10,556 | ) | $ | 115,336 | |||||||||||||
(1) | Volume increases include the effects of the acquisitions of Andover Bancorp, Inc. and MetroWest Bank on October 31, 2001, Ipswich Bancshares, Inc. on July 26, 2002, Bancorp Connecticut, Inc. on August 31, 2002, Warren Bancorp, Inc. on December 31, 2002 and American Financial Holdings, Inc. on February 14, 2003. |
(2) | Includes changes in interest income and expense not due solely to volume or rate changes. |
Net interest income on a fully taxable-equivalent basis increased by $45.2 million, or 6%, during 2003. This increase reflects the combined effects of increases in the average balances of our interest-earning assets and interest-bearing liabilities, as well as an $86.5 million, or 20%, decrease in interest expense on interest-bearing liabilities as a result of decreases in interest rates in a declining interest rate environment. The weighted average rate paid on interest-bearing liabilities decreased from 2.61% during 2002 to 1.78% during 2003, a decrease of 83 basis points, or 32%. This decrease more that offset a $3.0 billion, or 18%, increase in the average balance of interest-bearing liabilities during 2003, as compared to 2002. Average interest-bearing deposits increased by $2.1 billion, or 18%, in 2003, as compared to 2002. Excluding acquisitions, average deposits increased by $232 million, or 1.4%, as strong growth in demand and money market accounts was offset by declines in higher-costing certificates of deposit. Average borrowings increased $823 million, or 17%, in 2003 compared to 2002, primarily due to acquisitions.
The decrease in interest expense in 2003 more than offset a $41.3 million, or 3.3%, decrease in tax-equivalent interest income as a result of a 111 basis point, or 18%, decrease in the weighted average yield on interest-earning assets in 2003 as compared to 2002, which reflected the declining interest rate environment. The decrease in the weighted average yield on interest-earning assets during 2003 offset the effects of a substantial increase in average interest-earning assets in this period. Average interest-earning assets increased $3.4 billion, or 17%, during 2003 compared to 2002, primarily as a result of an increase in
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Interest rate spread, which represents the difference between the yield earned on our interest-earning assets and the rate paid on our interest-bearing liabilities, decreased from 3.69% to 3.41% on a fully-taxable equivalent basis during 2003 and 2002, respectively, because the 111 basis point decrease in the weighted average yield on interest-earning assets exceeded the 83 basis point decrease in the weighted average rate paid on interest-bearing liabilities, reflecting our asset sensitivity during the year. See “Asset-Liability Management” below.
The net interest margin decreased 41 basis points during 2003. The primary reasons for this margin compression were the effects of acquisitions (8 basis points, including cash paid and lower margins at acquired banks), a heavier weighting of U.S. agency securities in our investment portfolio versus mortgage-backed securities (9 basis points) and the impact of prepayments and repricing on loans, securities, deposits and borrowings in a declining rate environment (24 basis points). The margin compression was mitigated somewhat by the positive impact of the deleveraging program completed in the second quarter of 2003. The change in the investment portfolio from mortgage-backed securities to U.S. agency securities reduced the exposure to the loan prepayments inherent in mortgage-related assets.
Our net interest margin in 2003 benefited from interest rate swap agreements that synthetically converted fixed rate debt to variable rate debt. In 2003, we entered into $566.5 million of notional amount swap agreements on fixed rate debt, pursuant to which we pay a variable rate (based on LIBOR plus a margin) and receive a fixed rate. The combined effect of these interest rate swaps was to lower interest expense by $6.5 million during 2003. See “Asset-Liability Management” for more detailed discussion.
Provision and Allowance for Loan and Lease Losses
The provision for loan and lease losses is recorded to bring the allowance for loan and lease losses to a level deemed appropriate by management based on factors discussed in the “Analysis and Determination of the Allowance for Loan and Lease Losses” in the “Risk Management” section. Although we utilize judgment in providing for losses, for the reasons discussed under the “Risk Management” section, there can be no assurance that we will not have to increase the amount of our provision for loans and lease losses in future periods. We recorded a provision for loan and lease losses in 2003 of $42.3 million, as compared to a $44.3 million provision in 2002. The decline in the provision for loan and lease losses of $2.0 million was due to lower net-charge-offs, a higher coverage ratio of the allowance to non-performing loans and leases and lower delinquency ratios. As shown in Table 18, nonperforming assets amounted to $63.1 million at December 31, 2003 compared to $69.0 million at December 31, 2002. At December 31, 2003, the allowance for loan and lease losses amounted to $232.3 million, or 1.42% of total portfolio loans and leases, as compared to $208.3 million, or 1.48%, at December 31, 2002. The ratio of the allowance for loan and lease losses to nonperforming loans was 389% at December 31, 2003, as compared to 319% at December 31, 2002, due primarily to a decrease of $5.5 million in nonperforming loans.
See “Risk Management” below for further information on the provision for loan and lease losses, net charge-offs, nonperforming assets and other factors we consider in assessing the credit quality of the loan portfolio and establishing the allowance for loan and lease losses.
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Noninterest Income
Table 4 — Noninterest Income
The following table presents noninterest income for the periods indicated.
Change | ||||||||||||||||||||||||||||||||
Year Ended December 31, | 2003-2002 | 2002-2001 | ||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||
Noninterest income: | ||||||||||||||||||||||||||||||||
Deposit services | $ | 97,323 | $ | 82,139 | $ | 72,634 | $ | 15,184 | 18 | % | $ | 9,505 | 13 | % | ||||||||||||||||||
Insurance brokerage commissions | 45,714 | 44,439 | 39,360 | 1,275 | 3 | % | 5,079 | 13 | % | |||||||||||||||||||||||
Merchant and electronic banking income, net | 41,778 | 37,643 | 32,115 | 4,135 | 11 | % | 5,528 | 17 | % | |||||||||||||||||||||||
Trust and investment management services | 31,956 | 32,453 | 34,060 | (497 | ) | (2 | )% | (1,607 | ) | (5 | )% | |||||||||||||||||||||
Bank-owned life insurance | 22,930 | 20,002 | 18,392 | 2,928 | 15 | % | 1,610 | 9 | % | |||||||||||||||||||||||
Investment planning services | 15,692 | 11,572 | 8,286 | 4,120 | 36 | % | 3,286 | 40 | % | |||||||||||||||||||||||
Net securities gains | 42,460 | 7,282 | 1,329 | 35,178 | 483 | % | 5,953 | 448 | % | |||||||||||||||||||||||
Other noninterest income: | ||||||||||||||||||||||||||||||||
Covered call premiums | 27,756 | 7,279 | 3,251 | 20,477 | 281 | % | 4,028 | 124 | % | |||||||||||||||||||||||
Loan fee income | 24,831 | 21,893 | 14,501 | 2,938 | 13 | % | 7,392 | 51 | % | |||||||||||||||||||||||
Mortgage banking services income | 10,212 | 8,539 | 11,130 | 1,673 | 20 | % | (2,591 | ) | (23 | )% | ||||||||||||||||||||||
Venture capital write-downs | (592 | ) | (2,753 | ) | (1,514 | ) | 2,161 | 78 | % | (1,239 | ) | (82 | )% | |||||||||||||||||||
Miscellaneous income | 7,099 | 4,020 | 6,961 | 3,079 | 77 | % | (2,941 | ) | (42 | )% | ||||||||||||||||||||||
Total other noninterest income | 69,306 | 38,978 | 34,329 | 30,328 | 78 | % | 4,649 | (14 | )% | |||||||||||||||||||||||
Total | $ | 367,159 | $ | 274,508 | $ | 240,505 | $ | 92,651 | 34 | % | $ | 34,003 | 14 | % | ||||||||||||||||||
Deposit services income increased 18% in 2003, primarily as a result of increases in deposit accounts and cash management and overdraft fees. Acquisitions in 2003 and 2002 accounted for a significant portion of the increased volume.
Merchant and electronic banking income increased 11% in 2003 due to increases in the volume of transactions processed and increased market share from acquisitions. This increase was net of the impact of decreased debit card fee revenue due to the reductions in interchange rates resulting from the settlement of antitrust litigation brought against VISA and Mastercard by Wal-Mart, Sears and other retailers. Merchant and electronic banking income represents fees and interchange income generated by the use of our ATMs and debit cards issued by us, along with charges to merchants for credit card transactions processed, net of third-party costs directly attributable to handling these transactions.
Income from bank owned life insurance (“BOLI”) increased 15% during 2003. BOLI represents life insurance on the lives of certain employees who have consented to allowing the Bank to be the beneficiary of such policies. The increase in BOLI income in 2003 reflected BOLI purchased in 2002 and $85.6 million of BOLI acquired in the American merger in the first quarter of 2003. The cash surrender value of BOLI was $488.8 million at December 31, 2003 compared to $380.4 million at December 31, 2002. Most of our BOLI is invested in the “general account” of quality insurance companies. Standard and Poors rated all such general account carriers AA- or better at December 31, 2003. The BOLI investment provides a means to mitigate increasing employee benefit costs. The average carrying value of BOLI in 2003 was $465 million compared to $360 million in 2002.
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Investment planning services income increased 36% during 2003. This increase was primarily attributable to commissions earned from increased sales of third party mutual funds and annuities, which benefited from the rise in investor confidence in the stock market as well as the impact of our acquisition of American in 2003.
Net securities gains increased $35.2 million during 2003. This increase included $29.2 million recorded as part of the deleveraging program related to the sale of $901 million in securities. Gains from the sale of securities are subject to market and economic conditions and, as a result, there can be no assurance that gains reported in prior periods will be achieved in the future.
Other noninterest income increased 78% during 2003. Covered call premium income included income resulting from call options written on securities we own as well as securities we had committed to buy. The $20.5 million increase in 2003 was primarily due to the increased volume of call options written as well as historically high premium rates related to high interest rate volatility. Loan fee income included $4.6 million and $897 thousand of fees to arrange for interest rate swap agreements between commercial borrowers and third parties in 2003 and 2002, respectively. See “Asset-Liability Management — Derivative Instruments” below. The commercial swap program began in the fourth quarter of 2002.
Noninterest Expense
Table 5 — Noninterest Expense
The following table presents noninterest expense during the periods indicated.
Change | ||||||||||||||||||||||||||||||||
Year Ended December 31, | 2003-2002 | 2002-2001 | ||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||
Noninterest expense | ||||||||||||||||||||||||||||||||
Compensation and employee benefits | $ | 326,621 | $ | 311,385 | $ | 261,317 | $ | 15,236 | 5 | % | $ | 50,068 | 19 | % | ||||||||||||||||||
Occupancy | 59,200 | 52,422 | 45,921 | 6,778 | 13 | % | 6,501 | 14 | % | |||||||||||||||||||||||
Equipment | 47,459 | 40,933 | 34,572 | 6,526 | 16 | % | 6,361 | 18 | % | |||||||||||||||||||||||
Data processing | 40,940 | 40,702 | 38,670 | 238 | 1 | % | 2,032 | 5 | % | |||||||||||||||||||||||
Advertising and marketing | 22,000 | 17,239 | 11,907 | 4,761 | 28 | % | 5,332 | 45 | % | |||||||||||||||||||||||
Amortization of goodwill | — | — | 11,061 | — | — | (11,061 | ) | (100 | )% | |||||||||||||||||||||||
Amortization of identifiable intangible assets | 8,946 | 6,492 | 11,023 | 2,454 | 38 | % | (4,531 | ) | (41 | )% | ||||||||||||||||||||||
Merger and consolidation costs | 8,104 | 14,691 | 7,614 | (6,587 | ) | (45 | )% | 7,077 | 93 | % | ||||||||||||||||||||||
Prepayment penalties on borrowings | 30,490 | — | 5,995 | 30,490 | 100 | % | (5,995 | ) | (100 | )% | ||||||||||||||||||||||
Write-off of branch automation project | — | 6,170 | — | (6,170 | ) | (100 | )% | 6,170 | 100 | % | ||||||||||||||||||||||
Other noninterest expense: | ||||||||||||||||||||||||||||||||
Telephone | 12,858 | 13,396 | 11,574 | (538 | ) | (4 | )% | 1,822 | 16 | % | ||||||||||||||||||||||
Office supplies | 10,513 | 10,736 | 9,106 | (223 | ) | (2 | )% | 1,630 | 18 | % | ||||||||||||||||||||||
Postage and freight | 11,187 | 9,707 | 9,366 | 1,480 | 15 | % | 341 | 4 | % | |||||||||||||||||||||||
Miscellaneous loan costs | 5,984 | 4,290 | 7,380 | 1,694 | 39 | % | (3,090 | ) | (42 | )% | ||||||||||||||||||||||
Deposits and other assessments | 3,752 | 3,541 | 3,460 | 211 | 6 | % | 81 | 2 | % | |||||||||||||||||||||||
Collection and carrying costs of non-performing assets | 2,694 | 2,713 | 3,511 | (19 | ) | (1 | )% | (798 | ) | (23 | )% | |||||||||||||||||||||
Miscellaneous | 50,522 | 44,975 | 42,840 | 5,547 | 12 | % | 2,135 | 5 | % | |||||||||||||||||||||||
Total other noninterest expense | 97,510 | 89,358 | 87,237 | 8,152 | 9 | % | 2,121 | 2 | % | |||||||||||||||||||||||
Total | $ | 641,270 | $ | 579,392 | $ | 515,317 | $ | 61,878 | 11 | % | $ | 64,075 | 12 | % | ||||||||||||||||||
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Noninterest expense increased $61.9 million, or 11%, during 2003. Included in this increase was $30.5 million of prepayment penalties on borrowings related to the aforementioned deleveraging program in the second quarter. This amount represented 49% of the total increase of $61.9 million and was offset by a related gain on the sale of securities of $29.2 million. It was recorded as net securities gains in noninterest income. The efficiency ratio improved to 53.09% during 2003 from 54.10% in 2002 primarily as a result of the efficiencies created by the integration of recent acquisitions, as well as internal operating improvements.
Compensation and employee benefits expense increased 5% during 2003 primarily due to the effects of additional employees from acquisitions and higher benefits expense, which were partially offset by lower incentive compensation. The total number of full-time equivalent employees approximated 6,700 at December 31, 2003 compared to 6,600 at December 31, 2002. Pension expense (which is included in compensation and employee benefits expense) was $12.9 million and $5.3 million for the years ended December 31, 2003 and 2002, respectively. It increased primarily due to a lower discount rate, a lower expected rate of return on plan assets and additional employees from purchase acquisitions. The fair value of plan assets as of December 31, 2003 was $237.5 million as compared to $154.9 million at December 31, 2002.
Occupancy expense in 2003 increased 13%. The $6.8 million increase was primarily due to the cost of additional facilities from acquisitions and a new back-office facility in West Falmouth, Maine. Equipment expense increased $6.5 million or 16% in 2003 compared to 2002 primarily due to depreciation expense on new technology equipment and software (e.g., check imaging and e-commerce) and additional depreciation and maintenance of equipment obtained through acquisitions.
Advertising and marketing expense increased 28% in 2003. The $4.8 million increase was primarily attributable to new advertising promotions and corporate sponsorships (such as for the Boston Bruins and “Win a day with Ray” promotions) and additional expenses incurred in connection with the introduction of our products in new market areas.
Amortization of identifiable intangible assets increased 38% during 2003 due to core deposit intangibles and other amortizing intangible assets recorded in connection with our 2003 and 2002 acquisitions.
Merger and consolidation costs decreased $6.6 million, or 45%, during 2003. Merger and consolidation costs include expenses related to acquisitions, charter consolidation costs, branch closing costs and certain asset write-downs. The decrease in 2003 was due to lower acquisition expenses and the completion of our charter consolidation in 2002. For a tabular analysis of our merger and consolidation costs, see Note 10 to the Consolidated Financial Statements.
During 2002, we wrote off $6.2 million in connection with a branch automation project. These were costs incurred during the early phases of a multi-phase project to update all teller and platform workstations and software in our branch network. These costs included direct vendor fees, capitalized salaries, hardware and project specific software. Design concerns and cost overruns prompted a thorough review of the long-term viability of the project in its current form. We determined it was not prudent to continue development and decided to abandon the project. A total of $9.1 million had been capitalized on this project. The impairment charge was determined based on a review of all costs incurred. Management concluded that $6.2 million should be written-off related to the abandonment of that project and that $2.9 million of hardware and off-the-shelf software programs were of on-going value and could be redeployed throughout the Bank.
Other noninterest expense, which is comprised primarily of general and administrative expenses, increased $8.2 million, or 9%, in 2003.
The increase in miscellaneous expenses during 2003 was largely due to increased insurance and consulting expenses.
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Taxes
Our effective tax rate was 33% in 2003 and 2002. We expect the effective tax rate to be approximately 33% during 2004.
Comprehensive Income
Our comprehensive income amounted to $241.8 million and $373.0 million during 2003 and 2002, respectively. Comprehensive income differed from our net income in 2003 because of a $110.1 million net unrealized loss on securities, a $1.6 million net unrealized gain on cash flow hedges and a $446 thousand unrealized loss on a minimum pension liability. For additional information, see the Consolidated Statements of Changes in Shareholders’ Equity in the Consolidated Financial Statements.
Our available for sale investment portfolio had net unrealized gains of $11.8 million, $181.3 million and $62.0 million ($7.7 million, $117.5 million and $40.3 million net of applicable income tax effects, respectively) at December 31, 2003, 2002 and 2001, respectively. The changes from year to year are due mainly to changes in prevailing interest rates and, to a lesser degree, the size of the available for sale investment portfolio. For additional information, see Note 4 to the Consolidated Financial Statements. The change in fair value of our interest-bearing liabilities, which would tend to offset the change in fair value of available for sale securities, is not included in other comprehensive income.
Segment Reporting
Our primary business segment is Community Banking. During 2003 and 2002, the Community Banking segment represented over 90% of the combined revenues and income of the consolidated group and, thus, this is the only reporting segment as defined by Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information.” Insurance Brokerage, Investment Planning and Investment Management each represented less than 10% of our combined revenues in 2003 and 2002 and consolidated assets at December 31, 2003 and 2002. Insurance Brokerage reflects commissions on insurance brokerage activities, Investment Planning reflects commissions from the sale of third party mutual funds, annuities, stocks and bonds and Investment Management reflects fees from trust and investment management operations.
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Table 6 — Business Segment Information
The following tables set forth selected operating data for our business segments in 2003 and 2002, which are included for information purposes only.
Year Ended December 31, 2003 | ||||||||||||||||||||
Community | Insurance | Investment | Investment | |||||||||||||||||
Banking | Brokerage | 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: | ||||||||||||||||||||
Salaries and 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 | % |
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Year Ended December 31, 2002 | ||||||||||||||||||||
Community | Insurance | Investment | Investment | |||||||||||||||||
Banking | Brokerage | Planning | Management | Total | ||||||||||||||||
Net interest income (expense) | $ | 796,859 | $ | (341 | ) | $ | (12 | ) | $ | 11 | $ | 796,517 | ||||||||
Provision for loan and lease losses | 44,314 | — | — | — | 44,314 | |||||||||||||||
Net interest income (expense) after provision for loan and lease losses | 752,545 | (341 | ) | (12 | ) | 11 | 752,203 | |||||||||||||
Noninterest income | 184,802 | 44,840 | 11,571 | 33,295 | 274,508 | |||||||||||||||
Noninterest expense: | ||||||||||||||||||||
Salaries and benefits | 260,948 | 27,285 | 8,021 | 15,131 | 311,385 | |||||||||||||||
Occupancy and equipment | 87,727 | 3,587 | 494 | 1,547 | 93,355 | |||||||||||||||
Data processing | 35,039 | 635 | 742 | 4,286 | 40,702 | |||||||||||||||
Advertising and marketing | 16,436 | 287 | 200 | 316 | 17,239 | |||||||||||||||
Amortization of intangibles | 6,360 | 132 | — | — | 6,492 | |||||||||||||||
Merger and consolidation costs | 14,691 | — | — | — | 14,691 | |||||||||||||||
Other | 87,158 | 4,861 | 917 | 2,592 | 95,528 | |||||||||||||||
Total non-interest expense | 508,359 | 36,787 | 10,374 | 23,872 | 579,392 | |||||||||||||||
Pre-tax income | $ | 428,988 | $ | 7,712 | $ | 1,185 | $ | 9,434 | $ | 447,319 | ||||||||||
Total assets | $ | 23,327,921 | $ | 69,385 | $ | 2,411 | $ | 19,224 | $ | 23,418,941 | ||||||||||
Net interest income and noninterest income as a percent of total income | 91.6 | % | 4.2 | % | 1.1 | % | 3.1 | % | 100.0 | % | ||||||||||
Percent of pre-tax income to total pre-tax income | 95.9 | % | 1.7 | % | 0.3 | % | 2.1 | % | 100.0 | % | ||||||||||
Percent of assets to total consolidated assets | 99.6 | % | 0.3 | % | 0.0 | % | 0.1 | % | 100.0 | % |
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Fourth Quarter Summary
The following table presents operating results for the quarters ended December 31, 2003 and 2002.
Table 7 — Fourth Quarter Summary
Three Months Ended | ||||||||||||||||
December 31, | Change | |||||||||||||||
2003 | 2002 | Amount | Percent | |||||||||||||
Condensed Income Statement | ||||||||||||||||
Net interest income | $ | 213,288 | $ | 199,563 | $ | 13,725 | 6.88 | % | ||||||||
Provision for loan and lease losses | 10,400 | 10,829 | (429 | ) | (3.96 | )% | ||||||||||
Net interest income after loan and lease losses provision | 202,888 | 188,734 | 14,154 | 7.50 | % | |||||||||||
Noninterest income | 84,435 | 84,441 | (6 | ) | (0.01 | )% | ||||||||||
Noninterest expense | 155,676 | 158,126 | (2,450 | ) | (1.55 | )% | ||||||||||
Income before income taxes | 131,647 | 115,049 | 16,598 | 14.43 | % | |||||||||||
Income tax expense | 40,085 | 37,911 | 2,174 | 5.73 | % | |||||||||||
Net income | $ | 91,562 | $ | 77,138 | $ | 14,424 | 18.70 | % | ||||||||
Per Common Share | ||||||||||||||||
Basic earnings per share | $ | 0.56 | $ | 0.52 | $ | 0.04 | 8.51 | % | ||||||||
Diluted earnings per share | $ | 0.55 | $ | 0.52 | $ | 0.03 | 6.52 | % | ||||||||
Financial Ratios | ||||||||||||||||
Return on average assets(1) | 1.39 | % | 1.35 | % | 0.04 | bp | ||||||||||
Return on average equity(1) | 14.72 | % | 15.75 | % | (1.03 | )bp | ||||||||||
Net interest margin (fully-taxable equivalent)(1) | 3.65 | % | 3.86 | % | (0.21 | )bp | ||||||||||
Noninterest income as a percent of total income | 28.36 | % | 29.73 | % | (1.37 | )bp | ||||||||||
Efficiency ratio(2) | 52.29 | % | 55.68 | % | (3.39 | )bp |
bp — denotes basis points; 100 bp = 1%
(1) | Annualized. |
(2) | Represents noninterest expenses as a percentage of net interest income and noninterest income. |
Results for the fourth quarter of 2003 improved over the fourth quarter of 2002 due primarily to increased net interest income, which increased by 7% as a result of acquisitions and, to a lesser extent, internal growth. The net interest margin for the quarter ended December 31, 2003 was 3.65%, a decrease of 21 basis points from the fourth quarter last year. The primary reasons for this decrease were the effects of acquisitions (9 basis points, including cash paid and lower margins at acquired banks), a heavier weighting of U.S. agency securities in our investment portfolio versus mortgage-backed securities (8 basis points) and the impact of prepayments and repricing on loans, securities, deposits and borrowings in a declining rate environment (14 basis points). These factors were partially offset by the positive impact of the deleveraging program of approximately 10 basis points.
Noninterest income totaled $84.4 million for the fourth quarters ended December 31, 2003 and 2002, respectively, which included $2.7 million and $6.7 million of net securities gains, respectively. Increases in 2003 in deposit services and investment planning services income were partially offset by lower other noninterest income. Included in other noninterest income was $6.4 million and $2.2 million of covered call premium income for the fourth quarters ended December 31, 2003 and 2002, respectively. Noninterest expense decreased by 2% in the fourth quarter of 2003, as compared to the fourth quarter of 2002, due primarily to lower merger and consolidation costs (which include merger-related costs, branch consolidation costs and branch closings) and the write-down of a branch automation project which was abandoned in December 2002. The efficiency ratio was 52.29% in the fourth quarter of 2003 compared to
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The effective tax rate was 30% in the fourth quarter of 2003 compared to 33% in the fourth quarter of 2002. The lower effective tax rate resulted primarily from the results of an IRS audit.
Annualized return on average equity and return on average assets were 14.72% and 1.39%, respectively, for the quarter ended December 31, 2003 and were 15.75% and 1.35%, respectively, for the comparable quarter last year. The decline in return on average equity related primarily to the intangible equity created in the acquisition of American in February 2003.
Comparison of 2002 and 2001
Our consolidated total assets increased by $2.3 billion, or 11%, from $21.1 billion at December 31, 2001 to $23.4 billion at December 31, 2002. This increase was primarily attributable to three banking acquisitions and one insurance agency acquisition in 2002. Shareholders’ equity totaled $2.1 billion and $1.8 billion at December 31, 2002 and 2001, respectively. The increase was primarily attributable to net income in 2003 and the issuance of stock for acquisitions in 2002.
We reported net income of $298.6 million for 2002, or $1.99 per diluted share, compared with net income of $238.8 million, or $1.68 per diluted share, for 2001. Return on average assets and return on average equity were 1.39% and 16.25%, respectively, for 2002 and 1.29% and 16.48%, respectively, for 2001.
Net interest income on a fully taxable-equivalent basis totaled $801.5 million during 2002, as compared with $686.2 million in 2001. The $115.3 million, or 17%, increase in 2002 was primarily attributable to the combined effects of increases in the average balances of our interest-earning assets and interest-bearing liabilities. In 2002, the net interest margin increased 8 basis points to 4.07%, compared to 3.99% in 2001.
The provision for loan and lease losses amounted to $44.3 million in 2002 compared to $41.9 million in 2001. Net charge-offs were $38.7 million in 2002 compared to $36.9 million in 2001. The ratio of the allowance to nonperforming loans at December 31, 2002 was 319% compared to 252% at December 31, 2001. The allowance for loan and lease losses represented 1.48% of total loans at December 31, 2002 compared to 1.49% at December 31, 2001. Nonperforming assets decreased $12.3 million from $81.2 million, or 0.39% of total assets, at December 31, 2001 to $68.9 million, or 0.29% of total assets, at December 31, 2002. This decrease was primarily due to a $7.6 million decrease in nonperforming commercial business loans and leases and a $2.5 million decrease in nonperforming residential real estate loans.
Noninterest income amounted to $274.5 million and $240.5 million in 2002 and 2001, respectively. The increase was primarily due to increases of $9.5 million in deposit services income, $5.9 million in net securities gains and $5.7 million in merchant and electronic banking income. Deposit services income of $82.1 million reflected 8% growth from 2001. The increases were due in part to acquisitions.
Noninterest expense amounted to $579.4 million in 2002 compared with $515.3 million for 2001. The $64.1 million increase included an increase of $7.1 million in merger and consolidation costs and a $6.2 million write-off of a branch automation project, which were partially offset by the cessation of the amortization of goodwill in 2002 (which had amounted to $11.1 million in 2001.) The increase in noninterest expense in 2002 was primarily due to increases in compensation and employee benefits expense, equipment expense and occupancy expense. The efficiency ratio improved to 54.10% during 2002 from 55.34% in 2001 primarily as a result of the integration of recent acquisitions, as well as internal operating improvements.
Our comprehensive income amounted to $373.0 million and $313.9 million during 2002 and 2001, respectively. Comprehensive income differed from our net income in 2002 primarily because of a $77.3 million net unrealized gain on securities, a $2.1 million net unrealized loss on cash flow hedges and
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Financial Condition
Our consolidated total assets increased by $3.0 billion, or 13%, from $23.4 billion at December 31, 2002 to $26.5 billion at December 31, 2003. Total average assets were $25.6 billion and $21.5 billion in 2003 and 2002, respectively. These increases were primarily due to acquisitions and internal growth in 2003 and 2002. See the acquisitions table under “General — Acquisitions.” Total liabilities increased by $2.6 billion in 2003, primarily due to a growth in total deposits. Shareholders’ equity totaled $2.5 billion and $2.1 billion at December 31, 2003 and 2002, respectively.
Investment Securities |
The securities portfolio is utilized for several purposes. It serves as a vehicle to manage interest rate and prepayment risk, generates interest and dividend income from the investment of excess funds, provides liquidity to meet liquidity requirements and is used as collateral for public deposits and wholesale funding sources.
The average balance of the securities portfolio, which consists of securities available for sale and securities held to maturity, was $7.5 billion in 2003 and $6.4 billion in 2002, an increase of $1.1 billion. This increase was primarily due to acquisitions. The securities portfolio consists primarily of mortgage-backed securities and U.S. Government and agency securities. Other securities in the portfolio are collateralized mortgage obligations, which include securitized residential real estate loans held in REMICS, and asset-backed securities. The majority of securities available for sale are rated AAA or equivalently rated. In 2003, we invested more heavily in U.S. Government and federal agency securities to reduce exposure to the loan prepayment risk inherent in mortgage-related assets. Mortgage-backed securities and collateralized mortgage obligations comprised 58% of the securities portfolio at December 31, 2003 compared to 65% at December 31, 2002. The average yield on securities was 4.22% during 2003, compared to 5.52% during 2002, which reflects declines in interest rates during 2003 and 2002.
Table 8 — Investment Securities
The following table sets forth our investment securities at the dates indicated.
December 31, | |||||||||||||||||||||||||
2003 | 2002 | 2001 | |||||||||||||||||||||||
% of | % of | % of | |||||||||||||||||||||||
Amount | Total | Amount | Total | Amount | Total | ||||||||||||||||||||
Securities available for sale: | |||||||||||||||||||||||||
U.S. Government and federal agencies | $ | 2,359,347 | 33.18 | % | $ | 1,539,447 | 23.50 | % | $ | 531,256 | 9.23 | % | |||||||||||||
Tax-exempt bonds and notes | 138,280 | 1.94 | % | 95,332 | 1.46 | % | 112,845 | 1.96 | % | ||||||||||||||||
Other bonds and notes | 365,109 | 5.13 | % | 356,551 | 5.44 | % | 560,090 | 9.73 | % | ||||||||||||||||
Mortgage-backed securities | 3,834,958 | 53.93 | % | 3,659,334 | 55.86 | % | 3,577,405 | 62.16 | % | ||||||||||||||||
Collateralized mortgage obligations | 264,545 | 3.72 | % | 581,357 | 8.88 | % | 681,366 | 11.84 | % | ||||||||||||||||
Total debt securities | 6,962,239 | 97.90 | % | 6,232,021 | 95.14 | % | 5,462,962 | 94.92 | % | ||||||||||||||||
Federal Home Loan Bank stock | 104,397 | 1.47 | % | 275,768 | 4.21 | % | 264,943 | 4.61 | % | ||||||||||||||||
Federal Reserve Bank stock | 37,666 | 0.53 | % | 35,250 | 0.54 | % | 23,159 | 0.40 | % | ||||||||||||||||
Other equity securities | 6,868 | 0.10 | % | 7,177 | 0.11 | % | 4,183 | 0.07 | % | ||||||||||||||||
Total equity securities | 148,931 | 2.10 | % | 318,195 | 4.86 | % | 292,285 | 5.08 | % | ||||||||||||||||
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December 31, | ||||||||||||||||||||||||
2003 | 2002 | 2001 | ||||||||||||||||||||||
% of | % of | % of | ||||||||||||||||||||||
Amount | Total | Amount | Total | Amount | Total | |||||||||||||||||||
Total securities available for sale | 7,111,170 | 100.00 | % | 6,550,216 | 100.00 | % | 5,755,247 | 100.00 | % | |||||||||||||||
Net unrealized gain | 11,822 | 181,251 | 61,991 | |||||||||||||||||||||
Fair value of securities available for sale | $ | 7,122,992 | $ | 6,731,467 | $ | 5,817,238 | ||||||||||||||||||
Securities held to maturity: | ||||||||||||||||||||||||
Collateralized mortgage obligations | $ | 124,240 | $ | 216,409 | $ | 339,623 | ||||||||||||||||||
Amortized cost of securities held to maturity | $ | 124,240 | $ | 216,409 | $ | 339,623 | ||||||||||||||||||
Fair value of securities held to maturity | $ | 124,344 | $ | 221,571 | $ | 340,737 | ||||||||||||||||||
Excess of fair value over recorded value | $ | 104 | $ | 5,162 | $ | 1,114 | ||||||||||||||||||
Fair value as a % of amortized cost | 100.1 | % | 102.4 | % | 100.3 | % |
Table 9 — Maturities of Debt Securities
The following table sets forth the contractual maturities and fully-taxable equivalent weighted average yields of our debt securities at December 31, 2003. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Cost Maturing in | ||||||||||||||||||||||||||||||||||||||||
Less Than | More than 5 to | More than | ||||||||||||||||||||||||||||||||||||||
1 Year | 1 to 5 Years | 10 Years | 10 Years | Total | ||||||||||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||||||||
Available for Sale: | ||||||||||||||||||||||||||||||||||||||||
U.S. Government and federal agencies | $ | 18,508 | 3.66 | % | $ | 1,966,576 | 2.95 | % | $ | 374,263 | 3.13 | % | $ | — | 0.00 | % | $ | 2,359,347 | 2.98 | % | ||||||||||||||||||||
Tax-exempt bonds and notes | 67,921 | 3.04 | % | 7,810 | 4.32 | % | 4,384 | 4.67 | % | 58,165 | 4.41 | % | 138,280 | 3.74 | % | |||||||||||||||||||||||||
Other bonds and notes | 29,925 | 4.43 | % | 113,464 | 5.59 | % | 22,356 | 6.38 | % | 199,364 | 6.15 | % | 365,109 | 5.85 | % | |||||||||||||||||||||||||
Mortgage-backed securities | 3,369 | 6.26 | % | 27,192 | 5.49 | % | 423,179 | 5.36 | % | 3,381,218 | 4.71 | % | 3,834,958 | 4.79 | % | |||||||||||||||||||||||||
Collateralized mortgage obligations | — | 0.00 | % | 6,313 | 6.49 | % | 50,310 | 4.45 | % | 207,922 | 4.55 | % | 264,545 | 4.57 | % | |||||||||||||||||||||||||
Total | $ | 119,723 | 3.57 | % | $ | 2,121,355 | 3.13 | % | $ | 874,492 | 4.37 | % | $ | 3,846,669 | 4.77 | % | $ | 6,962,239 | 4.20 | % | ||||||||||||||||||||
Held to Maturity: | ||||||||||||||||||||||||||||||||||||||||
Collateralized mortgage obligations | — | — | — | — | — | — | $ | 124,240 | 5.96 | % | $ | 124,240 | 5.96 | % | ||||||||||||||||||||||||||
Securities available for sale are carried at fair value and had net unrealized gains of $11.8 million and $181.3 million at December 31, 2003 and 2002, respectively. See Note 4 to the Consolidated Financial Statements. These unrealized gains do not impact net income or regulatory capital but are recorded as adjustments to shareholders’ equity, net of related deferred income taxes. Unrealized gains, net of related
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Loans |
Total loans and leases (including loans held for sale) averaged $15.6 billion during 2003 compared to $13.2 billion during 2002, an increase of $2.4 billion, or 18%. Excluding acquisitions, total loans and leases increased $260.8 million. Average loans as a percent of average earning assets amounted to 68% and 67% in 2003 and 2002, respectively.
Table 10 — Average Loans and Leases
The following table presents average loans and leases during the periods indicated.
Year Ended December 31, | Change | ||||||||||||||||
2003 | 2002 | Amount | Percent | ||||||||||||||
Residential real estate mortgages | $ | 2,839,969 | $ | 2,635,952 | $ | 204,017 | 7.74 | % | |||||||||
Commercial real estate mortgages | 5,162,413 | 4,293,816 | 868,597 | 20.23 | % | ||||||||||||
Commercial business loans and leases | 3,153,293 | 2,665,973 | 487,320 | 18.28 | % | ||||||||||||
Consumer loans and leases | 4,477,532 | 3,641,062 | 836,470 | 22.97 | % | ||||||||||||
Total average loans and leases | $ | 15,633,207 | $ | 13,236,803 | $ | 2,396,404 | 18.10 | % | |||||||||
Table 11 — Composition of Loan and Lease Portfolio
The following table presents the composition of our loan and lease portfolio at the dates indicated.
December 31, | |||||||||||||||||||||||||||||||||||||||||
2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | % of | |||||||||||||||||||||||||||||||||||||
Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | Amount | Loans | ||||||||||||||||||||||||||||||||
Residential real estate loans | $ | 2,710,483 | 16.58 | % | $ | 2,382,197 | 16.95 | % | $ | 2,627,125 | 20.66 | % | $ | 2,248,714 | 20.73 | % | $ | 2,270,417 | 23.04 | % | |||||||||||||||||||||
Commercial real estate loans: | |||||||||||||||||||||||||||||||||||||||||
Permanent first mortgage loans | 4,696,428 | 28.73 | % | 4,151,674 | 29.54 | % | 3,509,311 | 27.60 | % | 2,663,775 | 24.56 | % | 2,493,492 | 25.30 | % | ||||||||||||||||||||||||||
Construction and development loans | 832,434 | 5.09 | % | 640,375 | 4.55 | % | 584,728 | 4.60 | % | 291,388 | 2.69 | % | 202,825 | 2.06 | % | ||||||||||||||||||||||||||
Total | 5,528,862 | 33.82 | % | 4,792,049 | 34.09 | % | 4,094,039 | 32.20 | % | 2,955,163 | 27.25 | % | 2,696,317 | 27.36 | % | ||||||||||||||||||||||||||
Commercial business loans and leases | 3,287,094 | 20.11 | % | 2,968,474 | 21.12 | % | 2,462,653 | 19.37 | % | 2,308,904 | 21.29 | % | 1,924,201 | 19.53 | % | ||||||||||||||||||||||||||
Consumer loans and leases | 4,819,523 | 29.49 | % | 3,913,288 | 27.84 | % | 3,531,513 | 27.77 | % | 3,332,881 | 30.73 | % | 2,963,721 | 30.07 | % | ||||||||||||||||||||||||||
Total loans receivable | $ | 16,345,962 | 100.00 | % | $ | 14,056,008 | 100.00 | % | $ | 12,715,330 | 100.00 | % | $ | 10,845,662 | 100.00 | % | $ | 9,854,656 | 100.00 | % | |||||||||||||||||||||
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Table 12 — Scheduled Contractual Amortization of Certain Loans and Leases at December 31, 2003
The following table sets forth the scheduled contractual amortization of our construction and development loans and commercial business loans and leases at December 31, 2003, as well as the amount of such loans which are scheduled to mature after one year which have fixed or adjustable interest rates.
Commercial | |||||||||||||
Real Estate | |||||||||||||
Construction | Commercial | ||||||||||||
and Development | Business Loans | ||||||||||||
Loans | and Leases | Total | |||||||||||
Amounts due: | |||||||||||||
Within one year | $ | 299,079 | $ | 1,634,808 | $ | 1,933,887 | |||||||
After one year through five years | 328,165 | 1,179,902 | 1,508,067 | ||||||||||
Beyond five years | 205,190 | 472,384 | 677,574 | ||||||||||
Total | $ | 832,434 | $ | 3,287,094 | $ | 4,119,528 | |||||||
Interest rate terms on amounts due after one year: | |||||||||||||
Fixed | $ | 71,033 | $ | 747,399 | $ | 818,432 | |||||||
Adjustable | 462,322 | 904,887 | 1,367,209 |
Residential real estate loans (including loans held for sale) averaged $2.8 billion and $2.6 billion in 2003 and 2002, respectively. Excluding acquisitions, average residential loans decreased approximately $896 million, or 24%, as a result of increased refinancing activity and prepayments in a low interest rate environment. Residential mortgage loans held for sale amounted to $41.7 million and $128.6 million at December 31, 2003 and 2002, respectively. This decrease was due primarily to lower origination volumes in the fourth quarter of 2003. We are currently selling substantially all 30-year conforming fixed-rate loans that we originate.
Commercial real estate loans averaged $5.2 billion in 2003 and $4.3 billion in 2002, a 20% increase. Excluding acquisitions, average commercial real estate loans increased $532 million, or 11%, in 2003. Although most of our markets reflected increases, the largest increases were in Massachusetts and Connecticut. The average yield on commercial real estate loans during 2003 was 6.06%, as compared to 6.95% in 2002, a decrease of 89 basis points. The lower yield reflects the effect of the downward repricing of variable-rate loans, the refinancing of fixed-rate loans at lower rates and the origination of new loans at the lower prevailing rates.
Commercial business loans and leases averaged $3.2 billion in 2003 and $2.7 billion in 2002, an increase of 18%. Excluding acquisitions, average commercial business loans and leases increased $291 million, or 10%, in 2003. Massachusetts reflected the greatest amount of growth. The yield on commercial business loans and leases decreased to 5.10% in 2003 from 5.94% in 2002. The decrease in the yield was primarily due to lower rates on new loans and the repricing of variable-rate loans.
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Table 13 — Commercial Loans by State
The following table presents commercial loans by geographical area at the dates indicated.
Commercial Real Estate Loans | Commercial Business Loans and Leases | ||||||||||||||||||||||||||||||||
December 31, | Change | December 31, | Change | ||||||||||||||||||||||||||||||
2003 | 2002 | Amount | Percent | 2003 | 2002 | Amount | Percent | ||||||||||||||||||||||||||
Massachusetts | $ | 2,565,064 | $ | 2,174,534 | $ | 390,530 | 17.96 | % | $ | 1,173,803 | $ | 982,078 | $ | 191,725 | 19.52 | % | |||||||||||||||||
Maine | 885,791 | 868,091 | 17,700 | 2.04 | % | 658,902 | 640,258 | 18,644 | 2.91 | % | |||||||||||||||||||||||
New Hampshire | 732,249 | 703,743 | 28,506 | 4.05 | % | 494,811 | 461,079 | 33,732 | 7.32 | % | |||||||||||||||||||||||
Vermont | 645,608 | 594,849 | 50,759 | 8.53 | % | 438,483 | 419,291 | 19,192 | 4.58 | % | |||||||||||||||||||||||
Connecticut | 504,624 | 286,658 | 217,966 | 76.04 | % | 332,749 | 265,503 | 67,246 | 25.33 | % | |||||||||||||||||||||||
New York | 195,526 | 164,174 | 31,352 | 19.10 | % | 188,346 | 200,265 | (11,919 | ) | (5.95 | %) | ||||||||||||||||||||||
Total | $ | 5,528,862 | $ | 4,792,049 | $ | 736,813 | 15.38 | % | $ | 3,287,094 | $ | 2,968,474 | $ | 318,620 | 10.73 | % | |||||||||||||||||
Consumer loans and leases averaged $4.5 billion in 2003 and $3.6 billion in 2002, an increase of 23%. Acquisitions accounted for approximately $502 million of the $836 million increase. The growth in consumer loans was primarily in home equity loans and indirect automobile loans. The average yield on consumer loans and leases decreased to 5.61% in 2003 from 6.89% in 2002.
Table 14 — Composition of Consumer Loans and Leases
The following table presents the composition of consumer loans and leases at the dates indicated.
December 31, 2003 | December 31, 2002 | ||||||||||||||||
% of | % of | ||||||||||||||||
Amount | Total | Amount | Total | ||||||||||||||
Home equity | $ | 2,274,793 | 47.20 | % | $ | 1,572,816 | 40.19 | % | |||||||||
Automobile | 1,596,504 | 33.13 | % | 1,478,228 | 37.77 | % | |||||||||||
Mobile home | 141,407 | 2.93 | % | 171,715 | 4.39 | % | |||||||||||
Vision, dental, and orthodontia fee plan | 120,694 | 2.50 | % | 172,861 | 4.42 | % | |||||||||||
Education | 234,226 | 4.86 | % | 135,386 | 3.46 | % | |||||||||||
Other | 451,899 | 9.38 | % | 382,282 | 9.77 | % | |||||||||||
Total | $ | 4,819,523 | 100.00 | % | $ | 3,913,288 | 100.00 | % | |||||||||
Deposits
Total deposits averaged $17.3 billion during 2003 compared to $14.6 billion during 2002, an increase of 19%. Acquisitions accounted for approximately $2.5 billion of the $2.7 billion increase. Excluding acquisitions, average core deposits (deposits excluding certificates of deposit and brokered deposits) increased $1.0 billion as compared to last year, or 9%. Excluding acquisitions, the average balances of certificates of deposit and brokered deposits decreased $790 million from 2002, or 14%.
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Table 15 — Change in Average Deposit Balances by Category of Deposit
The following table presents the changes in the average balances of deposits during the periods indicated.
Year Ended December 31, | Change | |||||||||||||||||
2003 | 2002 | Amount | Percent | |||||||||||||||
Noninterest-bearing deposits | $ | 3,224,035 | $ | 2,623,135 | $ | 600,900 | 22.91 | % | ||||||||||
Interest-bearing deposits: | ||||||||||||||||||
Money market access/ NOW accounts | 6,652,030 | 5,463,179 | 1,188,851 | 21.76 | % | |||||||||||||
Savings accounts | 2,399,179 | 1,743,501 | 655,678 | 37.61 | % | |||||||||||||
Certificates of deposit | 5,027,739 | 4,693,518 | 334,221 | 7.12 | % | |||||||||||||
Brokered deposits | — | 43,311 | (43,311 | ) | (100.00 | %) | ||||||||||||
Total interest-bearing deposits | 14,078,948 | 11,943,509 | 2,135,439 | 17.88 | % | |||||||||||||
Total average deposits | $ | 17,302,983 | $ | 14,566,644 | $ | 2,736,339 | 18.78 | % | ||||||||||
Average noninterest-bearing deposits increased 23% in 2003 to $3.2 billion from $2.6 billion in 2002. Acquisitions accounted for approximately $194 million of the $601 million increase. The remainder of the increase reflected strong growth in commercial, government and personal accounts.
Average interest-bearing deposits increased $2.1 billion during 2003 to $14.1 billion. Excluding acquisitions, average money market and NOW deposits increased $458 million and average regular savings deposits increased $157 million, while average certificates of deposit and brokered deposits declined $790 million in the aggregate. The decline in certificates of deposits resulted from our decision to allow deposits priced above alternate funding costs to run off. The average rates paid on NOW and money market accounts decreased 56 basis points from 1.45% in 2002 to 0.89% in 2003 due largely to lower prevailing interest rates. The average rates paid on all interest-bearing deposits decreased by 71 basis points from 2.05% in 2002 to 1.34% in 2003, reflecting the decline in prevailing interest rates.
Table 16 — Maturity of Certificates of Deposits of $100,000 or more
The following table presents the scheduled maturities of certificates of deposits of $100,000 or more at the date indicated.
December 31, 2003 | ||||||||
Balance | Percent | |||||||
3 months or less | $ | 222,759 | 22 | % | ||||
Over 3 to 6 months | 196,982 | 20 | % | |||||
Over 6 to 12 months | 223,822 | 22 | % | |||||
More than 12 months | 354,983 | 36 | % | |||||
$ | 998,546 | 100 | % | |||||
Included within the deposit categories are government banking deposits, which averaged $1.2 billion in 2003 and $1.1 billion in 2002. Government banking deposits include deposits received from state and local governments, school districts, public colleges/ universities, utility districts, public housing authorities and court systems in our market area. Many of these deposits exceed the FDIC insurance coverage amounts and require us to pledge specific collateral or maintain private insurance.
Other Funding Sources |
We use both short-term and long-term borrowings to balance earning asset growth. Short-term borrowings, which include federal funds purchased, retail securities sold under agreements to repurchase and other short-term borrowings, amounted to $1.5 billion at December 31, 2003, up $246 million, or 19%, from $1.3 billion at December 31, 2002. See Note 11 to the Consolidated Financial Statements.
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At December 31, 2003, we also had a $110 million unsecured line of credit. The line is renewable every 364 days and, if used, carries interest at LIBOR plus 0.625%. We did not draw on this line during 2003 and we continue to meet the financial covenants required for the line of credit.
Long-term debt includes FHLB advances, senior notes, subordinated notes, capital trust securities, wholesale securities sold under agreements to repurchase, capital lease obligation and other debt with original terms greater than one year. Long-term debt amounted to $4.4 billion at December 31, 2003, up from $4.2 billion at December 31, 2002. The increase in long-term debt was primarily due to borrowings assumed in acquisitions.
At December 31, 2003 and 2002, FHLB borrowings amounted to $1.5 billion and $2.5 billion, respectively. FHLB collateral consists primarily of first mortgage loans secured by single-family properties, certain unencumbered securities and other qualified assets. These borrowings had an average cost of 4.36% during 2003 as compared to 4.50% during 2002. Our additional borrowing capacity with the FHLB at December 31, 2003 was approximately $2.5 billion. See Note 12 to the Consolidated Financial Statements.
In April 2003, we issued $150 million of 5-year senior notes carrying a fixed rate of 3.75%. These securities were rated Baa-1 by Moody’s at December 31, 2003.
Subordinated notes consisted of $200 million of 7.625% subordinated notes due 2011 issued by our banking subsidiary in 2001. The notes qualify as Tier 2 capital for regulatory purposes.
At December 31, 2003 and 2002, wholesale securities sold under repurchase agreements amounted to $2.2 billion and $1.2 billion, respectively, and were collateralized by mortgage-backed securities and U.S. Government obligations. See Note 12 to the Consolidated Financial Statements.
At December 31, 2003, through subsidiary trusts, we had outstanding $295.3 million of capital securities which currently qualify as Tier 1 capital for regulatory purposes. See “Capital” below.
Contractual Obligations and Commitments
Table 17 — Contractual Obligations and Commitments
The following table summarizes our contractual cash obligations and other commitments at December 31, 2003.
Payments Due By Period | |||||||||||||||||||||
Less than | After | ||||||||||||||||||||
Contractual Obligations(1) | Total | 1 Year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
Long-term debt | $ | 2,139,882 | $ | 38,677 | $ | 801,607 | $ | 178,313 | $ | 1,121,285 | |||||||||||
Capital lease obligations | 6,035 | 57 | 197 | 875 | 4,906 | ||||||||||||||||
Repurchase agreements — wholesale | 2,214,650 | 914,650 | 1,200,000 | 100,000 | — | ||||||||||||||||
Total long-term debt | 4,360,567 | 953,384 | 2,001,804 | 279,188 | 1,126,191 | ||||||||||||||||
Operating lease obligations | 160,740 | 24,658 | 43,026 | 31,043 | 62,013 | ||||||||||||||||
Pension plan contribution | 20,000 | 20,000 | — | — | — | ||||||||||||||||
Other benefit plan payments | 35,022 | 3,130 | 6,196 | 5,955 | 19,741 | ||||||||||||||||
Other vendor obligations | 35,431 | 10,123 | 20,246 | 5,062 | — | ||||||||||||||||
Total contractual obligations | $ | 4,611,760 | $ | 1,011,295 | $ | 2,071,272 | $ | 321,248 | $ | 1,207,945 | |||||||||||
(1) | Other liabilities are short term in nature, except for liabilities related to employee benefit plans. |
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Amount of Commitment Expiration — Per Period | |||||||||||||||||||||
Total | |||||||||||||||||||||
Amounts | Less than | After | |||||||||||||||||||
Other Commitments | Committed | 1 Year | 1-3 Years | 4-5 Years | 5 Years | ||||||||||||||||
Unused portions on lines of credit | $ | 4,268,079 | $ | 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 | — | — | — |
(1) | Swaps with commercial loan customers (Banknorth receives fixed, pays variable). |
(2) | Offsetting swaps with dealers (Banknorth pays fixed, receives variable), which offset the interest rate swaps with commercial borrowers. |
(3) | Swaps on borrowings (Banknorth pays variable, receives fixed). |
(4) | Forward contracts for customer accommodations. |
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) coupled with a quality of risk management perspective. In addition, an aggregate level of risk is assigned as a whole as well as the direction of risk (stable, increasing or decreasing). Each risk category and the overall risk level is compared to regulatory views on a regular basis and then reported to the board with an accompanying explanation as to the existence of any differences. The risk program includes risk identification, measurement, control and monitoring.
Our board of directors has established the overall strategic direction for Banknorth. It approves our overall risk policies and oversees our overall risk management process. The board has established two board committees, consisting of Audit and Board Risk Management, and has charged each committee with overseeing key risks. In addition, there is a management Operational Risk Committee, which is
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Credit Risk Management
General |
The Board Risk Management Committee monitors our credit risk management. Our strategy for credit risk management includes centralized policies and uniform underwriting criteria for all loans. The strategy also includes diversification on a geographic, industry and customer level, regular credit examinations and quarterly management review of large loans and loans with a deterioration of credit quality. We maintain an internal rating system that provides a mechanism to regularly monitor the credit quality of our loan portfolio. The rating system is intended to identify and measure the credit quality of lending relationships. For consumer loans, we utilize standard credit scoring systems to assess consumer credit risks and to price consumer products accordingly. We strive to identify potential problem loans early, take any necessary charge-offs promptly and maintain adequate reserve levels. See “Analysis and Determination of the Allowance for Loan and Lease Losses” below and Note 1 to the Consolidated Financial Statements. SeeTable 10 for information about the composition of our loan portfolio for the last five years andTable 12 for information about the scheduled contractual amortization of certain parts of our loan portfolio at December 31, 2003.
Our residential loan portfolio accounted for 17% of the total loan portfolio at December 31, 2003 and 2002. Our residential loans are generally secured by single-family homes (one-to-four units) and have a maximum loan to value ratio of 80%, unless the excess is protected by mortgage insurance. At December 31, 2003, 0.26% of our residential loans were nonperforming, as compared to 0.24% at December 31, 2002. Nonperforming residential real estate loans increased by $1.4 million in 2003, while the total residential loan portfolio increased by $328.3 million. These increases were primarily due to acquisitions.
Our commercial real estate loan portfolio accounted for 34% of the total loan portfolio at December 31, 2003 and 2002. This portfolio consists primarily of loans secured by income-producing commercial real estate (including office and industrial buildings), service industry real estate (including hotels and health care facilities), multi-family (over four units) residential properties and retail trade real estate. These loans generally are secured by properties located in the New England states and upstate New York. At December 31, 2003, 0.36% of our commercial real estate loans were nonperforming, as compared to 0.37% at December 31, 2002.
Our commercial business loan and lease portfolio accounted for 20% of the total loan portfolio at December 31, 2003 compared to 21% at December 31, 2002. Commercial business loans and leases are generally made to small to medium size businesses located within our market areas. These loans are not concentrated in any particular industry, but reflect the broad-based economy of New England and upstate New York. Commercial loans consist primarily of loans secured by various equipment, machinery and other corporate assets, as well as loans to provide working capital to businesses in the form of lines of credit. Through a subsidiary, we also offer direct equipment leases, which amounted to $98.1 million at December 31, 2003. We do not emphasize the purchase of participations in syndicated commercial loans. At December 31, 2003, we had $373 million of outstanding participations in syndicated commercial loans and had an additional $343 million of unfunded commitments related to these participations. At December 31, 2003, 0.74% of our commercial business loans and leases were nonperforming, as compared to 1.10% at December 31, 2002. SeeTable 13 for the geographic distribution of our commercial loans and leases at December 31, 2003 and 2002.
Consumer loans and leases accounted for 29% of our total loan portfolio at December 31, 2003 compared to 28% at December 31, 2002. At December 31, 2003, 0.18% of our consumer loans were nonperforming, as compared to 0.23% at December 31, 2002.
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Nonperforming Assets |
Nonperforming assets consist of nonperforming loans (which do not include accruing loans 90 days or more overdue), other real estate owned, repossessed assets and certain securities available for sale. Total nonperforming assets as a percentage of total assets amounted to 0.24% 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
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We also may place loans on nonaccrual and, therefore, nonperforming status which are currently less than 90 days past due or performing in accordance with their terms but which in our judgment are likely to present future principal and/or interest repayment problems and which thus ultimately would be classified as nonperforming.
Net Charge-offs |
Net charge-offs amounted to $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 | ||||||||||||
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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 |
(1) | Excludes residential real estate loans held for sale |
Potential Problem Loans |
In addition to the 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 considered in the evaluation of the allowance for 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 Losses |
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, 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 decrease 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.
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Table 20 — | Allocation of the Allowance for Loan and Lease Losses — Five-Year Schedule |
The following table sets forth the allocation of the allowance for loan and lease losses at the dates indicated.
December 31, | ||||||||||||||||||||||||||||||||||||||||
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 Management
The goal of asset-liability management is the prudent control of market risk, liquidity and capital. Asset-liability management is governed by policies, goals, and objectives that are adopted and reviewed by our board of directors and monitored periodically by the Board Risk Management Committee. The board delegates responsibility for asset-liability management strategies to achieve these goals and objectives to the 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 activities and interest rate risk exposure. The ALCO also reviews and approves all major risk, liquidity and capital management programs, except for product pricing. Product pricing is reviewed and approved by the Pricing Committee, which is comprised of a subset of ALCO members and the state presidents of our banking subsidiary.
Interest Rate Risk |
Interest rate risk is the risk of loss to future earnings or long-term value resulting from changes in interest rates and is by far the most significant non-credit risk to which we are exposed. This risk arises directly from our core lending and deposit gathering activities and is predominantly concentrated in our mortgage-related assets as well as our non-maturity deposits. Mortgage related assets typically give borrowers the option to prepay at any time without penalty. Principal cash flows that come from these assets are highly interest rate sensitive. As interest rates fall, borrowers are more likely to pay off their existing mortgages, which results in higher cash flows that we must in turn reinvest. Replacing these higher-rate mortgage assets with lower-rate mortgage assets has the potential to reduce our net interest income unless we can also reduce either our wholesale or retail funding costs. In the low interest rate
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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.
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Economic Value of Equity |
Economic 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 Assumptions |
Key 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.
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Future Business Activity |
Future 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 Instruments
Purpose and Benefits |
Derivative financial instruments are important tools that we use to manage interest rate risk. When appropriate, we use derivatives such as interest-rate swaps, interest rate floors, interest rate caps 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% that
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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.
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Table 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 and
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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.
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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 — An
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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 Policies
We consider the following to be our critical accounting policies due to the potential impact on our results of operations and the carrying value of certain of our assets based on any changes in judgments and assumptions required to be made by us in the application of these policies.
Allowance for Loan and Lease Losses |
We maintain an allowance for loan and lease losses at a level which we believe is sufficient to cover potential charge-offs on loans and leases deemed to be uncollectible based on continuous review of a variety of factors. These factors consist of the character and size of the loan portfolio, business and economic conditions, loan growth, charge-off experience, delinquency trends, nonperforming loan trends, portfolio migration data and other asset quality factors. The primary means of adjusting the level of this allowance is through provisions for loan and lease losses, which are established and charged to income on a quarterly basis. Although we use available information to establish the appropriate level of the allowance for loan and lease losses, future additions to the allowance may be necessary because our estimates of the potential losses in our loan and lease portfolio are susceptible to change as a result of changes in the factors noted above. Any such increases would adversely affect our results of operations. At December 31, 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 determined
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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 Assets |
In connection with acquisitions of other companies, we generally record as assets on our financial statements both goodwill and identifiable intangible assets such as core 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 value of our goodwill and identifiable intangible assets or which otherwise adversely affects their value or estimated lives would adversely affect our results of operations. At December 31, 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.
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.
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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 Statements
Certain 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.
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Item 8. | Financial Statements and Supplementary Data |
BANKNORTH GROUP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||||
2003 | 2002 | |||||||||
Assets | ||||||||||
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 | ||||||
Liabilities and Shareholders’ Equity | ||||||||||
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.
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BANKNORTH 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.
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BANKNORTH 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 | ||||||||||||||||||||||||||
Balances at December 31, 2000 | 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 | ) | ||||||||||||||||||||||
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 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 | ) | |||||||||||||||||||||||
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 | |||||||||||||||||
See accompanying notes to Consolidated Financial Statements.
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BANKNORTH 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.
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BANKNORTH GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. | Summary of Significant Accounting Policies |
The accounting and reporting policies of Banknorth Group, Inc. (“Banknorth”) and its subsidiaries conform to accounting principles generally accepted in the United States of America and to general practice within the banking industry. Banknorth’s principal business activity is retail and commercial banking and, to a lesser extent, 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.
Cash and Cash Equivalents |
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.
Securities |
Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and reflected at amortized cost.
Investments not classified as “held to maturity” are classified as “available for sale.” Securities available for sale consist of debt and equity securities that are available for sale in order to respond to changes in market interest rates, liquidity needs, changes in funding sources and other similar factors. These assets are specifically identified and are 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
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
considered other than temporary, generally six months or longer, the cost basis of the individual security is written down to market value as the new cost basis and the loss is charged to net securities gains (losses) in the consolidated statements of income as a writedown. Banknorth does not have a trading portfolio.
Premiums and discounts are amortized and accreted over the term of the securities on a method that approximates the interest method. Gains and losses on the sale of securities are recognized at the time of the sale using the specific identification method.
Loans and Leases |
Loans are carried at the principal amounts outstanding adjusted by partial charge-offs and net deferred loan costs or fees. Residential real estate loans are generally placed on nonaccrual when reaching 120 days past due or in process of foreclosure. All closed-end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on nonaccrual status. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal is reasonably assured and the loan has performed for a period of time, generally six months. Commercial real estate and commercial business loans are considered impaired when it is probable that Banknorth will not be able to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status and collateral value.
Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount is amortized as an adjustment of the related loan’s yield using methods that approximate the level yield method over the estimated lives of the related loans.
Consumer lease financing loans are carried at the amount of minimum lease payments plus residual values, less unearned income which is amortized into interest income using the interest method.
Allowance for Loan and Lease Losses |
The allowance for loan and lease losses is maintained at a level determined to be adequate by management and approved by the Board Risk Committee to absorb future charge-offs of loans and leases deemed uncollectable. This allowance is increased by provisions charged to operating expense, by recoveries on loans previously charged off, and by allowances acquired in acquisitions and reduced by charge-offs on loans and leases.
Arriving at an appropriate level of allowance for loan and lease losses necessarily involves a high degree of judgment. The ongoing evaluation process includes a formal analysis of the allowance each quarter, which considers, among other factors, the character and size of the loan portfolio, business and economic conditions, loan growth, charge-off experience, delinquency trends, nonperforming loan trends, portfolio migration data and other asset quality factors.
For the commercial business loan and lease and the commercial real estate loan portfolios, we evaluate specific loan status reports on certain commercial and commercial real estate loans rated “substandard” or worse in excess of a specified dollar amount. Estimated reserves for each of these credits is determined by reviewing current collateral value, financial information, cash flow, payment history and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
trends and other relevant facts surrounding the particular credit. Provisions for losses on the remaining commercial and commercial real estate loans are based on pools of similar loans using a combination of historical loss experience and migration analysis, which considers the probability of a loan moving from one risk rating category to another over the passage of time, transition matrix and qualitative adjustments.
For the residential real estate and consumer loan portfolios, the range of reserves is calculated by applying historical charge-off and recovery experience to the current outstanding balance in each loan category, with consideration given to loan growth over the preceding twelve months.
Although management uses available information to establish the appropriate level of the allowance for loan and lease losses, future additions to the allowance may be necessary because estimates are susceptible to change as a result of changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review Banknorth’s allowance for loan and lease losses. Such agencies may require Banknorth to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.
Bank Owned Life Insurance |
Bank owned life insurance (“BOLI”) represents life insurance on the lives of certain employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in other noninterest income, and are not subject to income taxes. The cash value is included in assets. Banknorth reviews the financial strength of the insurance carrier prior to the purchase of BOLI and annually thereafter, and BOLI with any individual carrier is limited to 10% of capital plus reserves.
Premises and Equipment |
Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of related assets; generally 25 to 40 years for premises and 3 to 7 years for equipment. Leasehold improvements are generally amortized over the lesser of the estimated life or the remaining term of the lease including the first renewal option.
Costs of software developed for internal use, such as those related to software licenses, programming, testing, configuration, direct materials and integration, are capitalized and included in premises and equipment. Included in the capitalized costs are those costs related to both Company personnel and third party consultants involved in the development and installation. Once placed in service, the capitalized asset is amortized on a straight-line basis over its estimated useful life, generally three to five years. Capitalized costs of software developed for internal use are reviewed periodically for impairment. Significant judgment is exercised in these impairment reviews including the periodic evaluation of the cost/benefit analyses of software projects under development and the determination of the remaining useful life of completed software projects.
Goodwill and Identifiable Intangible Assets |
The price paid over the net fair value of the acquired businesses (“goodwill”) is not amortized. Goodwill is evaluated for impairment quarterly using several fair value techniques, including market capitalization, discounted future cash flows and multiples of revenues/earnings. The valuation techniques contain estimates such as discount rate, projected future cash flows and time period in their calculations. Furthermore, the determination of which intangible assets have finite lives is subjective, as is the
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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 | |||
Noncompete agreements | 1 – 4 years | |||
Customer lists | 1 – 8 years |
Impairment of Long-Lived Assets Other than Goodwill |
Banknorth reviews long-lived assets, including premises and equipment and other intangible assets for impairment at least annually or whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. Banknorth performs undiscounted cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Mortgage Banking and Loans Held for Sale |
Residential mortgage loans originated for sale are classified as held for sale. These loans are specifically identified and carried at the lower of aggregate cost or estimated market value. Market value is estimated based on outstanding investor commitments or, in the absence of such commitments, current investor yield requirements. Forward commitments to sell residential real estate mortgages are contracts that Banknorth enters into for the purpose of reducing the market risk associated with originating loans for sale should interest rates change. Forward commitments to sell are recorded at fair value and are included with loans held for sale. Commitments to originate rate-locked loans are also accounted for at fair value and are classified in loans held for sale.
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 serviced for others. Amortization is recorded as a charge against mortgage service fee income, a component of mortgage banking services income. Banknorth’s assumptions with respect to prepayments, which affect the estimated average life of the loans, are adjusted periodically to reflect current circumstances. In evaluating the realizability of the carrying values of mortgage servicing rights, Banknorth obtains third party valuations based on loan level data including note rate, type and term on the underlying loans.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Mortgage servicing fees received from investors for servicing their loan portfolios are recorded as mortgage servicing fee income when received. Loan servicing costs are charged to noninterest expense when incurred.
Derivative Financial Instruments |
Banknorth recognizes all derivatives on the balance sheet at fair value. On the date the derivative is entered into, Banknorth designates whether the derivative is part of a hedging relationship (cash flow or fair value hedge). Banknorth formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking hedge transactions. Banknorth also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pension, 401(k), and Other Employee Benefit Plans |
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.
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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.
Stock Compensation Plans |
Statement of Financial Accounting Standards SFAS No. 123, “Accounting for Stock-Based Compensation” encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees,” whereby compensation cost is the excess, if any, of the quoted market price of the underlying stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock upon exercise of the stock option. Banknorth has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, must make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied. The pro forma disclosures include the effects of all awards granted 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 |
Investments in Limited Partnerships |
Banknorth has investments in both tax advantaged and small business investment limited partnerships. The tax advantaged limited partnerships are primarily involved in approved low income housing investment tax credit projects in Banknorth’s market area while the small business investment limited partnerships are primarily providing seed money to small businesses also in Banknorth’s market area. These investments are included in other assets and are not required to be consolidated under FIN 46. Investments in the tax advantaged limited partnerships are amortized over the same period the tax benefits are expected to be received. The investments in small business investment limited partnerships, for which Banknorth has the ability to exercise significant influence (generally, a 3% or greater ownership interest), are reviewed and
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adjusted quarterly based on the equity method. If Banknorth does not exercise significant influence, Banknorth’s investment is accounted for under the cost method and the carrying value is periodically evaluated for other than temporary impairment. Except for fixed capital or loan commitments agreed to in advance, the partnerships have no recourse to Banknorth.
Income Taxes |
Banknorth uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Income taxes are allocated to each entity in the consolidated group based on its share of taxable income. Management exercises significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. 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. Management also relies on the opinions, recent state audits and historical experience. These judgments and estimates are reviewed on a regular basis as regulatory and business factors change.
Tax credits generated from limited partnerships are reflected in earnings when realized for federal income tax purposes.
Earnings Per Share |
Earnings per share have been computed in accordance with SFAS No. 128, “Earnings Per Share.” Basic earnings per share have been calculated by dividing net income by weighted average shares outstanding before any dilution and adjusted to exclude the weighted average number of unallocated shares held by the ESOP. Diluted earnings per share have been calculated by dividing net income by weighted average shares outstanding after giving effect to the potential dilution that could occur if the potential common shares were converted into common stock using the treasury stock method.
Segment Reporting |
An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and evaluate performance. Banknorth’s primary business is community banking, which provided approximately 92% of its total revenues and 97% of its pre-tax income in 2003 and approximately 92% of its total revenues and 96% of its pre-tax income in 2002. Accordingly, disaggregated segment information is not presented in the notes to the financial statements.
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2. Accounting Changes
The following information addresses new or proposed accounting pronouncements related to our industry.
Liabilities and Equity |
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement applies generally to freestanding financial instruments that embody obligations of the issuing entity to redeem the instrument or to settle the obligation by repurchasing its equity shares through the transfer of assets or through issuance of its own shares. Such freestanding instruments must be classified as liabilities or, in some cases, assets. SFAS No. 150 requires that financial instruments containing obligations to repurchase the issuing entity’s equity shares and, under certain circumstances, obligations that are settled by delivery of the issuer’s shares, be classified as liabilities. This statement is effective for financial instruments entered into or modified after May 31, 2003 and for contracts in existence at the start of the first interim period beginning after June 15, 2003. The adoption of this standard did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.
Derivatives |
In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, resulting in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and should be applied prospectively. Implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 continued to be applied in accordance with their respective effective dates. The adoption of this standard on July 1, 2003 did not have a material impact on our financial condition, results of operations, earnings per share or cash flows.
Consolidations |
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51” (“FIN 46”). FIN 46 provides a new framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of activities of a VIE in its consolidated financial statements. Our application of the provisions of FIN 46 as of December 31, 2003 with respect to variable-interest entities formed after its issuance resulted in no significant impact on our financial condition, results of operations, earnings per share or cash flows.
In December 2003, the FASB issued a revised FIN No. 46, FIN 46R, which in part specifically addresses limited purpose trusts formed to issue trust preferred securities. The guidance will require Banknorth to deconsolidate its investment in its capital trusts as of March 31, 2004. In July 2003, the Board of Governors of the Federal Reserve issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier 1 capital for regulatory capital purposes until notice is given to the contrary. The Federal Reserve intends to review the regulatory implications of an accounting treatment changes and, if necessary or warranted, provide further appropriate guidance. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier 1 capital for regulatory capital purposes. As of December 31, 2003 assuming Banknorth was not allowed to include the $295.3 million in trust preferred securities issued in Tier 1 capital, Banknorth would still exceed the regulatory required minimums for capital adequacy purposes. If
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2. Accounting Changes — (Continued)
the trust preferred securities were no longer allowed to be included in Tier 1 capital, Banknorth would also be permitted to redeem the capital securities without penalty. The adoption of this standard for these entities will not have a material effect on our financial condition, results of operations, earnings per share or cash flows.
Accounting for Certain Loan or Debt Securities Acquired in a Transfer |
In December 2003, the American Institute of Certified Public Accountants issued Statement of Position (“SOP”) 03-3. SOP 03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality, be recognized at their fair value. This SOP requires that the original excess of contractual cash flows over cash flows expected to be collected will not be recognized as an adjustment of yield, loss accrual or valuation allowance. Any future excess of contractual cash flows over the original expected cash flows is to be recognized as an adjustment of future yield. Future decreases in actual cash flow over the original expected cash flow is recognized as a valuation allowance and expensed immediately. Valuation allowances can not be created or “carried over” in the initial accounting for loans acquired in a transfer of loans subject to SFAS 114 “Accounting by Creditor’s for Impairment of a Loan (an amendment of FASB Statement No. 5 and 15)”. This SOP is effective for impaired loans acquired in a business combination after December 31, 2004.
Extraordinary Items |
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 |
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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 | |||
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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 | ||||||||||
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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 | |||||||||
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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.
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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.
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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 | ||||||
7. Premises and Equipment
A summary of premises and equipment follows:
December 31, | ||||||||
2003 | 2002 | |||||||
Land | $ | 27,558 | $ | 23,079 | ||||
Buildings and leasehold improvements | 268,444 | 245,400 | ||||||
Capital lease on building | 23,475 | 23,475 | ||||||
Furniture, fixtures and equipment | 425,862 | 388,903 | ||||||
745,339 | 680,857 | |||||||
Accumulated depreciation and amortization | (478,304 | ) | (408,528 | ) | ||||
Accumulated amortization on capital lease | (2,217 | ) | (652 | ) | ||||
Net book value | $ | 264,818 | $ | 271,677 | ||||
Details for internally developed software (consisting of software and dedicated hardware and is included with furniture, fixtures and equipment in the above table) is presented as follows as of the dates indicated.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. | Premises and Equipment — (Continued) |
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 and Other Intangible Assets |
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 | ||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. | Goodwill and Other Intangible Assets — (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 | |||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. | Goodwill and Other Intangible Assets — (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 | |||||||
9. | Income Taxes |
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 | ||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. | Income Taxes — (Continued) |
The following table reconciles the expected federal income tax expense (computed by applying the federal statutory tax rate to income before taxes) to recorded income tax expense:
Year Ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Computed federal tax expense | $ | 183,547 | $ | 156,561 | $ | 127,116 | ||||||
State income tax, net of federal benefits | 6,370 | 5,030 | 4,714 | |||||||||
Benefit of tax-exempt income | (3,412 | ) | (3,494 | ) | (4,319 | ) | ||||||
Amortization of goodwill and other intangibles | — | — | 3,271 | |||||||||
Low income/rehabilitation credits | (2,700 | ) | (1,540 | ) | (1,530 | ) | ||||||
Increase in cash surrender value of life insurance | (8,026 | ) | (7,000 | ) | (6,437 | ) | ||||||
Other, net | (2,119 | ) | (876 | ) | 1,289 | |||||||
Recorded income tax expense | $ | 173,660 | $ | 148,681 | $ | 124,104 | ||||||
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, 2003 and 2002 follow:
December 31, | ||||||||||
2003 | 2002 | |||||||||
Deferred tax assets | ||||||||||
Allowance for loan and lease losses | $ | 83,061 | $ | 75,214 | ||||||
Compensation and employee benefits | 18,597 | 15,788 | ||||||||
Loan basis difference | 13,017 | — | ||||||||
Book reserves not yet realized for tax purposes | 1,304 | 7,093 | ||||||||
Intangible asset | 2,435 | 5,010 | ||||||||
Other | 1,643 | 3,426 | ||||||||
Total gross deferred tax assets | 120,057 | 106,531 | ||||||||
Deferred tax liabilities | ||||||||||
Pension plan | 31,035 | — | ||||||||
Leases | 7,820 | 10,889 | ||||||||
Premises and equipment | 26,563 | 22,377 | ||||||||
Partnership investments | 8,630 | 7,119 | ||||||||
Loan origination costs | 12,819 | 10,143 | ||||||||
Purchase accounting | 12,927 | 13,239 | ||||||||
Deferred Income | — | 20,122 | ||||||||
Tax bad debt reserve | — | 1,739 | ||||||||
Unrealized appreciation on securities and hedging | 3,920 | 62,338 | ||||||||
Other | 1,148 | 1,386 | ||||||||
Total gross deferred tax liabilities | 104,862 | 149,352 | ||||||||
Net deferred tax (liability) asset | $ | 15,195 | $ | (42,821 | ) | |||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. | Income Taxes — (Continued) |
Banknorth has determined that a valuation allowance is not required for any of its deferred tax assets since it is more likely than not that these assets will be realized principally through carryback to taxable income in prior years and future reversals of existing taxable temporary differences and by offsetting other future taxable income.
State Tax Assessment |
During the second quarter of 2003, we entered into a settlement with the Massachusetts Department of Revenue (“DOR”) concerning the dividends received deduction relating to certain banks that we had acquired prior to 2003. Legislation was enacted on March 5, 2003, which disallowed the dividends-received deduction for dividends received from a Real Estate Investment Trust (“REIT”) retroactive to 1999.
The aggregate assessment of $5.9 million (net of Federal income tax benefit) was recorded in the first quarter of 2003 as an increase to goodwill related to the acquired banks. During the second quarter of 2003, we entered into (and paid) a settlement of $2.5 million, net of Federal income tax benefit, to the DOR, which was part of a global settlement negotiated with the DOR by approximately 50 similarly-situated financial institutions doing business in Massachusetts. Goodwill was reduced to reflect the final settlement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. | Merger and Consolidation Costs |
Merger and consolidation costs include merger-related, charter consolidation, asset write-downs and branch closing expenses. The following table summarizes special charges for the years ended December 31, 2003, 2002 and 2001.
2003 | 2002 | 2001 | ||||||||||
First & Ocean Bancorp | ||||||||||||
Personnel costs | $ | 25 | $ | — | $ | — | ||||||
Systems conversion and integration/customer communications | 357 | — | — | |||||||||
Other costs | 76 | — | — | |||||||||
458 | — | — | ||||||||||
American Merger Charges | ||||||||||||
Personnel costs | 1,101 | — | — | |||||||||
Systems conversion and integration/customer communications | 2,410 | 735 | — | |||||||||
Other costs | 1,847 | 120 | — | |||||||||
5,358 | 855 | — | ||||||||||
Warren Merger Charges | ||||||||||||
Personnel costs | 899 | — | — | |||||||||
Systems conversion and integration/customer communications | 1,134 | 207 | — | |||||||||
Other costs | 391 | 33 | — | |||||||||
2,424 | 240 | — | ||||||||||
Bancorp Connecticut Merger Charges | ||||||||||||
Personnel costs | (10 | ) | 684 | — | ||||||||
Systems conversion and integration/customer communications | 24 | 1,486 | — | |||||||||
Other costs | 349 | 576 | — | |||||||||
363 | 2,746 | — | ||||||||||
Ipswich Merger Charges | ||||||||||||
Personnel costs | 16 | 62 | — | |||||||||
Systems conversion and integration/customer communications | — | 1,537 | — | |||||||||
Other costs | 127 | 301 | — | |||||||||
143 | 1,900 | — | ||||||||||
Andover/ MetroWest Merger Charges | ||||||||||||
Personnel costs | 1 | 735 | 1,710 | |||||||||
Systems conversion and integration/customer communications | — | 4,365 | 1,131 | |||||||||
Other costs | 11 | 730 | 932 | |||||||||
12 | 5,830 | 3,773 | ||||||||||
Banknorth Group, Inc. (Vermont) Merger Charges (pooling of interest method acquisition) | ||||||||||||
Personnel costs | — | — | 2,329 | |||||||||
Asset write-downs/facility costs | — | 29 | — | |||||||||
Reversal of prior accruals | (615 | ) | (125 | ) | — | |||||||
Gain on regulatory-mandated branch sales | — | (478 | ) | (2,906 | ) | |||||||
Other costs | — | — | 595 | |||||||||
(615 | ) | (574 | ) | 18 | ||||||||
Charter consolidation costs | — | 3,601 | 974 | |||||||||
Branch closings | (40 | ) | 93 | 1,957 | ||||||||
Other Merger Charges | ||||||||||||
Foxborough merger charges | 1 | — | — | |||||||||
Write-down of auto lease residuals | — | — | 892 | |||||||||
1 | — | 892 | ||||||||||
Total Merger and Consolidation Costs | $ | 8,104 | $ | 14,691 | $ | 7,614 | ||||||
Merger-related personnel costs on business combinations accounted for under the purchase method of accounting includes the costs of maintaining duplicate employees at the acquired bank during the systems integration period and related employee benefits and outplacement services. For business combinations
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. | Merger and Consolidation Costs — (Continued) |
accounted for under the purchase method of accounting, severance costs are accrued at merger date (and are included in the determination of goodwill) for those employees identified to be severed at the time of closing. Merger-related personnel costs on business combinations accounted for under the pooling of interests method include severance costs, the costs of maintaining duplicate employees at the acquired bank during the systems integration period, and related employee benefits and outplacement services. The following table presents the approximate number of employees that were severed in each of the banking acquisitions.
Number of | ||||
Terminated | ||||
Acquisition | Employees | |||
First & Ocean Bancorp | 30 | |||
American Financial Holdings, Inc. | 140 | |||
Warren Bancorp, Inc. | 60 | |||
Bancorp Connecticut, Inc. | 75 | |||
Ipswich Bancshares, Inc. | 30 | |||
Andover Bancorp, Inc./Metrowest Bank | 220 | |||
Banknorth Vermont | 220 |
Systems conversions and integration costs and customer communications costs are recorded as incurred and are associated with the costs of converting the accounts, records and data processing equipment of the acquired companies to the systems maintained by Banknorth, as well as the costs of required notices to customers of the acquired bank concerning the acquisition and conversion of their accounts to Banknorth systems.
Asset write-downs/facility costs relate primarily to branch closings and acquisitions accounted for under the pooling of interests. The costs represent lease termination costs and impairment of assets for redundant office space, closed branches and equipment to be disposed of or abandoned.
Charter consolidation costs represent costs incurred to consolidate the charters of the Company’s eight national bank subsidiaries to a single national bank charter effective January 1, 2002.
Other merger and consolidation costs include write-downs of $892 thousand in 2001 on the residual values assigned to auto lease receivables that were acquired in mergers completed prior to 2001. Banknorth ceased making auto leases in 1997.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. | Merger and Consolidation Costs — (Continued) |
The following table presents activity in the accrual account for merger and consolidation costs for the years ended December 31, 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 | ||||||||
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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.
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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 junior subordinated debentures issued by Banknorth. The proceeds from the offering to Banknorth, which was net of $6.8 million of issuance costs, were used for general corporate purposes. These securities pay interest quarterly, are mandatorily redeemable on April 1, 2032 and may be redeemed by the Trust at par any time on or after April 1, 2007.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. Regulatory Matters
Banknorth, NA must maintain noninterest-bearing cash balances on reserve with the Federal Reserve Bank (“FRB”). In 2003 and 2002, the average required reserve balances were $79.5 million and $60.0 million, respectively.
FRB adopted quantitative measures which assign risk weightings to assets and off-balance sheet items and also define and set minimum regulatory capital requirements (risk-based capital ratios.) Banks are required to have core capital (Tier 1) of at least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets and a minimum Tier 1 leverage ratio of 3% of adjusted quarterly average assets. Tier 1 capital consists principally of shareholders’ equity, including qualified perpetual preferred stock but excluding unrealized gains and losses on securities available for sale, less goodwill and certain other intangibles. Total capital consists of Tier 1 capital plus certain debt instruments and the reserve for credit losses, subject to limitations. Failure to meet certain capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements. The regulations also define well-capitalized levels of Tier 1, total capital and Tier 1 leverage as 6%, 10% and 5%, respectively. At December 31, 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 | % |
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14. Shareholders’ Equity
In 2003, Banknorth issued 13.4 million shares of common stock in connection with acquisitions. In February 2002, Banknorth’s Board of Directors authorized the repurchase of up to 8 million shares, or approximately 6% of the outstanding Company common stock in addition to the 13 million share repurchase program authorized in 2001. During 2003, Banknorth repurchased 4.5 million shares at a total cost of $105.1 million. A total of 2.9 million shares remain under this authorization at December 31, 2003.
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.
Stockholder Rights Plan |
In 1989, Banknorth’s Board of Directors adopted a Stockholder Rights Plan declaring a dividend of one preferred Stock Purchase Right for each outstanding share of Company common stock. The rights will remain attached to the Common Stock and are not exercisable except under limited circumstances relating to the acquisition of, the right to acquire beneficial ownership of, or tender offer for 15% or more of the outstanding shares of Company common stock. The rights have no voting or dividend privileges and, until they become exercisable, have no dilutive effect on the earnings of Banknorth. On July 27, 1999 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).
15. Accumulated Other Comprehensive Income, Net
The following table presents the reconciliation of transactions affecting Accumulated Other Comprehensive Income included in shareholder’s equity for the periods indicated.
Pre-tax | ||||||||||||
Amount | Tax Effect | Net of Tax | ||||||||||
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 (gains) realized in net income | (33,812 | ) | 11,834 | (21,978 | ) | |||||||
Net change in unrealized (losses) | $ | (167,598 | ) | $ | 58,659 | $ | (108,939 | ) | ||||
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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 sell
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17. | Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks — (Continued) |
loans, the contract or notional amounts do not represent exposure to credit loss. Banknorth controls the credit risk of its forward commitments to sell loans through credit approvals, limits and monitoring procedures.
Financial instruments with off-balance sheet risk at December 31, 2003 and 2002 follow:
Contract or Notional Amount | ||||||||||
at December 31, | ||||||||||
2003 | 2002 | |||||||||
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 | $ | 6,245,086 | $ | 5,523,827 | ||||||
Commitments to invest in real estate limited partnerships | 24,971 | 24,863 | ||||||||
Commitments to invest in small business investments limited partnerships | 17,663 | 15,751 | ||||||||
Loans serviced with recourse | 5,569 | 13,103 | ||||||||
Financial instruments with notional or contract amounts which exceed the amount of credit risk: | ||||||||||
Forward commitments to sell loans | 61,000 | 234,651 | ||||||||
Foreign currency forward contracts (notional amount) | ||||||||||
Forward contracts with customers | 23,438 | 22,275 | ||||||||
Forward contracts with dealers | 23,438 | 22,275 | ||||||||
Commercial loan swap program: | ||||||||||
Interest rate swaps with commercial borrowers | 325,023 | 60,325 | ||||||||
Interest rate swaps with dealers | 325,023 | 60,325 | ||||||||
Interest rate swaps on borrowings | 566,500 | — | ||||||||
Rate-locked loan commitments | 30,779 | 83,791 |
Commitments to originate loans, unused lines of credit and unadvanced portions of construction loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Banknorth evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Banknorth upon extension of credit, is based on management’s credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by Banknorth to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
At December 31, 2003, Banknorth had $59.4 million of investments in tax advantaged limited partnerships primarily involved in approved low income housing investment tax credit projects in Banknorth’s market area and commitments to invest up to an additional $25.0 million in such partnerships. At December 31, 2003, Banknorth had $20.5 million invested in small business limited partnerships which primarily provide seed money to businesses in Banknorth’s market area and commitments to invest up to
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17. Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks — (Continued)
an additional $17.7 million in such partnerships. Investments in both of the foregoing categories of assets are included under other assets.
Loans serviced with recourse represent Banknorth’s recourse obligations in certain of Banknorth’s servicing arrangements with investors for serviced loan portfolios. In the event of foreclosure on a serviced loan, Banknorth is obligated to repay the investor to the extent of the investor’s remaining balance after application of proceeds from the sale of the underlying collateral. To date, losses related to these recourse arrangements have been insignificant and while Banknorth cannot project future losses, the fair value of this recourse obligation is deemed to be likewise insignificant.
Forward commitments to sell residential mortgage loans are contracts which Banknorth enters into for the purpose of reducing the market risk associated with originating loans for sale. Risks may arise from the possible inability of Banknorth to originate loans to fulfill the contracts, in which case Banknorth would normally purchase loans from correspondent banks or in the open market to deliver against the contract.
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.
Commercial loan swaps enable customers to synthetically convert variable interest rate loans to fixed rate loans. These pay variable, receive fixed interest rate swaps on our books are offset by entering into simultaneous pay fixed, receive variable rate swaps with a third party broker/ dealer. Both of these swap products are marked to market and carried on our balance sheet at fair value.
Interest rate swap agreements on borrowings synthetically convert fixed-rate debt to variable-rate debt tied to 1-month or 3-month LIBOR. These swaps are accounted for as fair value hedges.
Legal Proceedings |
Banknorth and certain of its subsidiaries have been named as defendants in various legal proceedings arising from their normal business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of management, based upon the opinions of counsel, any such liability will not have a material effect on the consolidated financial position, results of operations or liquidity of Banknorth and its subsidiaries.
Operating Lease Obligations |
Banknorth leases certain properties and equipment used in operations under terms of operating leases which include renewal options. Rental expense under these leases approximated $20.3 million, $20.9 million and $19.9 million for the years ended 2003, 2002 and 2001, respectively.
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17. | Commitments, Contingent Liabilities and Other Off-Balance Sheet Risks — (Continued) |
The following table sets forth the approximate future minimum lease payments over the remaining terms of the leases as of December 31, 2003.
2004 | $ | 24,658 | ||
2005 | 22,492 | |||
2006 | 20,534 | |||
2007 | 16,636 | |||
2008 | 14,407 | |||
2009 and after | 62,013 | |||
$ | 160,740 | |||
18. Other Noninterest Income
The following table presents other noninterest income during the periods indicated.
Change | |||||||||||||||||||||||||||||
Year Ended December 31, | 2003-2002 | 2002-2001 | |||||||||||||||||||||||||||
2003 | 2002 | 2001 | Amount | Percent | Amount | Percent | |||||||||||||||||||||||
Covered call premiums | $ | 27,756 | $ | 7,279 | $ | 3,251 | $ | 20,477 | 281 | % | $ | 4,028 | 124 | % | |||||||||||||||
Loan fee income | 24,831 | 21,893 | 14,501 | 2,938 | 13 | % | 7,392 | 51 | % | ||||||||||||||||||||
Mortgage banking services income | 10,212 | 8,539 | 11,130 | 1,673 | 20 | % | (2,591 | ) | (23 | )% | |||||||||||||||||||
Venture capital write-downs | (592 | ) | (2,753 | ) | (1,514 | ) | 2,161 | 78 | % | (1,239 | ) | (82 | )% | ||||||||||||||||
Miscellaneous income | 7,099 | 4,020 | 6,961 | 3,079 | 77 | % | (2,941 | ) | (42 | )% | |||||||||||||||||||
Total | $ | 69,306 | $ | 38,978 | $ | 34,329 | $ | 30,328 | 78 | % | $ | 4,649 | 14 | % | |||||||||||||||
19. Stock-Based Compensation Plans
Stock Option Plans |
As part of its employee and director compensation programs, Banknorth may grant certain stock awards under the provisions of the existing stock option and compensation plans. Banknorth has stock options outstanding under various plans at December 31, 2003, including plans assumed in acquisitions. The plans provide for grants of options to purchase shares of common stock generally at the stock’s fair market value at the date of grant. In addition, the plans provide for grants of shares of common stock that are subject to forfeiture if certain vesting requirements are not met.
Banknorth has adopted or assumed in acquisitions various stock option plans for key employees. These plans include a stock option plan adopted in 2003 (the “2003 Equity Incentive Plan”) and in 1996 (the “1996 Option Plan”). The 2003 Equity Incentive Plan authorizes grants of options and other stock awards covering up to 8,100,000 shares of Common Stock. The 1996 Option Plan, as amended, authorizes grants of options and other stock awards covering up to 13,000,000 shares of Common Stock. Stock options are granted with an exercise price equal to the stock’s fair market value at the date of the grant and expire 10 years from the date of the grant. At December 31, 2003, there were 4,067,960 additional shares available for grant under the 2003 Equity Incentive Plan and 2,116,576 additional shares available for grant under the 1996 Option Plan.
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19. | Stock-Based Compensation Plans — (Continued) |
In 1995, Banknorth adopted a stock option plan for non-employee directors, which was amended and restated in 2000 to authorize the issuance of up to an additional 530,000 shares. The maximum number of shares which may be issued under the amended plan is 1,060,000 shares, of which 205,750 shares had been issued upon exercise of the stock options granted pursuant to this plan through December 31, 2003. Options to purchase 112,500 shares were granted in 2003 at an exercise price of $23.37 per share, options to purchase 113,500 shares were granted in 2002 at $26.34 per share and options to purchase 109,750 shares were granted in 2001 at $19.80 per share. At December 31, 2003, there were 350,250 shares available for future grants under this plan.
The per share weighted-average fair value of all stock options granted by Banknorth during 2003, 2002 and 2001 was $7.15, $7.09 and $6.10 on the date of the grants using the Black Scholes option-pricing model with the following weighted average assumptions:
2003 | 2002 | 2001 | ||||||||||
Expected dividend yield | 2.65 | % | 2.36 | % | 2.48 | % | ||||||
Risk-free interest rate | 3.31 | 3.82 | 4.50 | |||||||||
Expected life | 5.00 | years | 5.00 | years | 5.00 | years | ||||||
Volatility | 32.22 | % | 36.26 | % | 33.91 | % |
Stock incentive plans of acquired companies are generally terminated at the merger closing dates. Option holders under such plans generally receive options to buy Banknorth common stock based on the conversion terms of the various merger agreements.
Activity for all stock option plans during the three-year period ended December 31, 2003 is summarized as follows:
2003 | 2002 | 2001 | |||||||||||||||||||||||
Weighted | Weighted | Weighted | |||||||||||||||||||||||
Number of | Average | Number of | Average | Number of | Average | ||||||||||||||||||||
Shares | Exercise Price | Shares | Exercise Price | Shares | Exercise Price | ||||||||||||||||||||
Outstanding at beginning of year | 12,488,419 | $ | 19.23 | 9,655,231 | $ | 16.90 | 7,195,939 | $ | 15.00 | ||||||||||||||||
Granted | 4,185,340 | 27.84 | 3,898,047 | 23.45 | 3,193,168 | 20.81 | |||||||||||||||||||
Granted in purchase acquisition | 2,402,938 | 13.92 | 714,798 | 12.51 | 1,018,863 | 10.01 | |||||||||||||||||||
Exercised | (2,441,520 | ) | 15.11 | (1,684,671 | ) | 12.58 | (1,589,917 | ) | 11.46 | ||||||||||||||||
Forfeited | (256,124 | ) | 23.45 | (94,986 | ) | 20.71 | (162,822 | ) | 18.76 | ||||||||||||||||
Outstanding at end of year | 16,379,053 | $ | 21.23 | 12,488,419 | $ | 19.23 | 9,655,231 | $ | 16.90 | ||||||||||||||||
Options exercisable at year end | 8,947,350 | $ | 17.64 | 6,729,062 | $ | 16.46 | 5,935,610 | $ | 14.98 | ||||||||||||||||
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19. | Stock-Based Compensation Plans — (Continued) |
The range of per share exercise prices for outstanding and exercisable stock options at December 31, 2003 was as follows:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Number | Weighted Average | Number | ||||||||||||||||||
Range of | Outstanding | Remaining | Weighted Average | Outstanding | Weighted Average | |||||||||||||||
Exercise Prices | at 12/31/2003 | Contractual Life | Exercise Price | at 12/31/2003 | Exercise Price | |||||||||||||||
up to $12.99 | 833,520 | 2.7 years | $ | 10.22 | 833,520 | $ | 10.22 | |||||||||||||
$13.00 – $16.24 | 2,269,986 | 6.2 | 13.67 | 2,269,986 | 13.67 | |||||||||||||||
$16.25 – $19.49 | 2,055,112 | 5.9 | 17.25 | 2,055,112 | 17.25 | |||||||||||||||
$19.50 – $22.74 | 3,394,049 | 7.1 | 20.79 | 2,372,986 | 20.78 | |||||||||||||||
$22.75 – $25.98 | 3,754,071 | 8.7 | 23.37 | 1,274,142 | 23.36 | |||||||||||||||
$25.99 – $29.23 | 4,070,315 | 9.7 | 28.10 | 141,604 | 26.30 | |||||||||||||||
$29.24 – $32.48 | 2,000 | 10.0 | 32.48 | — | — | |||||||||||||||
16,379,053 | 7.6 | 21.23 | 8,947,350 | 17.64 | ||||||||||||||||
401(k) Plan |
Banknorth and its subsidiaries have 401(k) Plans covering substantially all permanent employees. Banknorth matches employee contributions based on a predetermined formula and may make additional discretionary contributions. The total expense for these plans in 2003, 2002 and 2001 was $9.2 million, $7.5 million and $5.2 million, respectively.
Employee Stock Purchase Plan |
Banknorth has an Employee Stock Purchase Plan that is available to employees with one year of service. Under the plan, shares of Banknorth’s 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 payroll deductions up to 10% of their salary. During 2003, 2002 and 2001, employees purchased 201,307 shares, 180,955 shares and 139,427 shares at average prices of $20.67, $19.24 and $17.51 per share, respectively. The maximum number of shares which may be issued under the Employee Stock Purchase Plan is 2,852,000 shares, of which an additional 1,500,000 shares was approved by shareholders in April 2002. As of December 31, 2003, 1,628,311 shares have been issued out of this plan with 1,223,689 shares remaining to be issued. The proforma expense included in the SFAS No. 123 calculation disclosed in Note 1 to the Consolidated Financial Statements approximated $1.6 million, $933 thousand and $709 thousand for 2003, 2002 and 2001, respectively.
Restricted Stock Plan
In 1990, Banknorth adopted a Restricted Stock Plan under which up to $10,000 of the annual fee payable to each non-employee Director of Banknorth and participating subsidiaries is payable solely in shares of Company common stock. Shares issued under this plan totaled 8,869, 5,599 and 6,358 in 2003, 2002 and 2001, respectively.
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19. | Stock-Based Compensation Plans — (Continued) |
Incentive Plans
Banknorth has an Incentive Plan covering all full and part-time employees. Incentives are earned based on Banknorth’s, department or individual performance as measured against targets set in connection with the annual budget. Each employee’s incentive potential is a fixed percentage of their base pay and, for a significant number of employees, can be modified up or down based on actual performance versus target.
In 2002, shareholders approved the Executive Incentive Plan under which Banknorth may pay cash incentive awards to selected officers based on Banknorth’s performance over specified periods. The Executive Incentive Plan is administered by a committee of the Board of Directors.
20. | Retirement and Other Benefit Plans |
Pension Plans
Banknorth has a noncontributory defined benefit plan covering most permanent, full-time employees. Employees are fully vested after five years of service. Benefits are based on career average earnings and length of service. Banknorth has historically made cash contributions to the defined benefit pension plan for the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Banknorth contributed $47.4 million to the plan in 2003 and estimates that the 2004 contribution will be between $15 and $20 million.
Banknorth has adopted supplemental retirement plans for certain key officers. These plans, which are unfunded and nonqualified, were designed to offset the impact of changes in the pension plans that limit the benefits for highly-paid employees under qualified pension plans.
Post Retirement Benefits Other Than Pensions |
Banknorth and its subsidiaries sponsor limited post-retirement benefit programs which provide medical coverage and life insurance benefits to a closed group of employees and directors who meet minimum age and service requirements.
Banknorth and its subsidiaries recognize costs related to post-retirement benefits under the accrual method, which recognizes costs over the employee’s period of active employment. The impact of adopting SFAS No. 106 is being amortized over a twenty-year period beginning January 1, 1993.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
20. | Retirement and Other Benefit Plans — (Continued) |
The following tables set forth the funded status and amounts recognized in Banknorth’s Consolidated Balance Sheets at December 31, 2003 and 2002 for the pension plans (defined benefit and supplemental executive retirement plans) and other post-retirement benefit plans:
Other Postretirement | ||||||||||||||||||||||||
Qualified Pension | Nonqualified Pension | Benefits | ||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |||||||||||||||||||
Change in benefit obligation | ||||||||||||||||||||||||
Benefit obligation at beginning of year | $ | 147,666 | $ | 121,331 | $ | 21,288 | $ | 17,491 | $ | 15,813 | $ | 12,416 | ||||||||||||
Service cost | 9,251 | 6,810 | 311 | 208 | 123 | 99 | ||||||||||||||||||
Interest cost | 12,168 | 9,223 | 1,580 | 1,322 | 1,155 | 1,001 | ||||||||||||||||||
Assumption changes | 14,916 | 10,130 | (2,406 | ) | 1,058 | 517 | 1,788 | |||||||||||||||||
Plan amendment | — | — | — | 892 | — | — | ||||||||||||||||||
Actuarial loss | 7,408 | 2,562 | 4,111 | 293 | 653 | 1,777 | ||||||||||||||||||
Acquisitions | 21,698 | 6,410 | 2,289 | 1,311 | 1,566 | 307 | ||||||||||||||||||
Benefits paid | (8,268 | ) | (8,236 | ) | (909 | ) | (1,287 | ) | (1,498 | ) | (1,575 | ) | ||||||||||||
Expenses paid | (430 | ) | (564 | ) | — | — | — | |||||||||||||||||
Benefit obligation at end of year | $ | 204,409 | $ | 147,666 | $ | 26,264 | $ | 21,288 | $ | 18,329 | $ | 15,813 | ||||||||||||
Change in plan assets | ||||||||||||||||||||||||
Fair value of plan assets at beginning of year | $ | 154,902 | $ | 140,971 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Actual return (loss) on plan assets | 25,929 | (12,576 | ) | — | — | — | — | |||||||||||||||||
Employer contribution | 47,442 | 30,300 | 909 | 1,287 | 1,498 | 1,575 | ||||||||||||||||||
Benefits paid | (8,268 | ) | (8,236 | ) | (909 | ) | (1,287 | ) | (1,498 | ) | (1,575 | ) | ||||||||||||
Expenses paid | (430 | ) | (564 | ) | — | — | — | |||||||||||||||||
Acquisitions | 17,961 | 5,007 | — | — | — | |||||||||||||||||||
Fair value of plan assets at end of year | $ | 237,536 | $ | 154,902 | $ | — | $ | — | $ | — | $ | — | ||||||||||||
Funded (unfunded) status | $ | 33,127 | $ | 7,236 | $ | (26,264 | ) | $ | (21,288 | ) | $ | (18,329 | ) | $ | (15,813 | ) | ||||||||
Unrecognized net actuarial (gain) loss | 54,896 | 47,233 | 5,462 | 3,882 | 6,620 | 5,107 | ||||||||||||||||||
Unrecognized prior service cost | 50 | 57 | 1,607 | 1,778 | 1,076 | 1,215 | ||||||||||||||||||
Unrecognized net transition obligation | (756 | ) | (1,014 | ) | 121 | 132 | 3,685 | 4,078 | ||||||||||||||||
Prepaid (accrued) benefit cost | $ | 87,317 | $ | 53,512 | $ | (19,074 | ) | $ | (15,496 | ) | $ | (6,948 | ) | $ | (5,413 | ) | ||||||||
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20. | Retirement and Other Benefit Plans — (Continued) |
Other Postretirement | ||||||||||||||||||||||||
Qualified Pension | Nonqualified Pension | Benefits | ||||||||||||||||||||||
2003 | 2002 | 2003 | 2002 | 2003 | 2002 | |||||||||||||||||||
Amounts recognized in the statement of financial position consist of: | ||||||||||||||||||||||||
Prepaid (accrued) benefit cost | $ | 87,317 | $ | 53,512 | $ | (19,074 | ) | $ | (15,496 | ) | $ | (6,948 | ) | $ | (5,413 | ) | ||||||||
Accrued benefit liability | — | — | 22,758 | 18,676 | — | — | ||||||||||||||||||
Intangible asset | — | — | (1,728 | ) | (1,910 | ) | — | — | ||||||||||||||||
Accumulated other comprehensive income | — | — | (1,956 | ) | (1,270 | ) | — | — | ||||||||||||||||
Net amount recognized | $ | 87,317 | $ | 53,512 | $ | — | $ | — | $ | (6,948 | ) | $ | (5,413 | ) | ||||||||||
Accumulated benefit obligation | $ | 193,835 | $ | 135,569 | $ | 22,760 | $ | 17,365 | ||||||||||||||||
Year Ended December 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Components of net periodic benefit cost | ||||||||||||
Qualified Pension | ||||||||||||
Service cost | $ | 9,251 | $ | 6,810 | $ | 4,733 | ||||||
Interest cost | 12,168 | 9,223 | 8,076 | |||||||||
Expected (gain) on plan assets | (14,343 | ) | (12,373 | ) | (10,670 | ) | ||||||
Recognized actuarial loss | 3,865 | — | — | |||||||||
Net amortization and deferral | (251 | ) | (251 | ) | (896 | ) | ||||||
Net periodic benefit cost | $ | 10,690 | $ | 3,409 | $ | 1,243 | ||||||
Nonqualified Pension | ||||||||||||
Service cost | $ | 311 | $ | 208 | $ | 330 | ||||||
Interest cost | 1,580 | 1,322 | 1,197 | |||||||||
Expected return on plan assets | — | — | — | |||||||||
Recognized actuarial loss | 124 | 70 | 10 | |||||||||
Net amortization and deferral | 183 | 258 | 242 | |||||||||
Net periodic benefit cost | $ | 2,198 | $ | 1,858 | $ | 1,779 | ||||||
Other Postretirement Benefits | ||||||||||||
Service cost | $ | 123 | $ | 99 | $ | 87 | ||||||
Interest cost | 1,155 | 1,001 | 883 | |||||||||
Expected return on plan assets | — | — | — | |||||||||
Recognized actuarial loss | 310 | 132 | 2 | |||||||||
Net amortization and deferral | 532 | 532 | 532 | |||||||||
Net periodic benefit cost | $ | 2,120 | $ | 1,764 | $ | 1,504 | ||||||
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20. | Retirement and Other Benefit Plans — (Continued) |
Weighted-average assumptions used to determine benefit obligations as of December 31
2003 | 2002 | |||||||
Discount rate | 6.25 | % | 6.75 | % | ||||
Rate of compensation increase | 4.50 | % | 4.50 | % | ||||
Medical inflation rate | 9.00 | % | 10.00 | % |
Weighted-average assumptions used to determine net periodic benefit cost for years ended December 31
2003 | 2002 | |||||||
Discount rate | 6.75 | % | 7.25 | % | ||||
Expected return on plan assets | 8.50 | % | 8.50 | % | ||||
Rate of compensation increase | 4.50 | % | 4.50 | % | ||||
Medical inflation rate | 10.00 | % | 5.86 | % |
2003 | 2002 | |||||||
Assumed health care cost trend rates at December 31 | ||||||||
Health care cost trend rate assumed for next year | 8.00 | % | 9.00 | % | ||||
Rate that the cost trend rate gradually declines to | 5.00 | % | 5.00 | % | ||||
Year that the rate reaches the rate it is assumed to remain at | 2007 | 2007 |
Effect of one-percentage change in assumed health care cost trend rates in 2003
1% Increase | 1% Decrease | |||||||
Effect on total service and interest cost components | $ | 66,961 | $ | (59,508 | ) | |||
Effect on postretirement benefit obligation | 1,014,703 | (901,834 | ) |
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Other | ||||||||||||
Qualified | Nonqualified | Postretirement | ||||||||||
Pension | Pension | Benefits | ||||||||||
2004 | $ | 6,331 | $ | 1,362 | $ | 1,768 | ||||||
2005 | 6,700 | 1,365 | 1,766 | |||||||||
2006 | 6,939 | 1,317 | 1,748 | |||||||||
2007 | 7,472 | 1,316 | 1,710 | |||||||||
2008 | 8,192 | 1,290 | 1,639 | |||||||||
2009 — 2013 | 55,374 | 12,299 | 7,442 | |||||||||
$ | 91,008 | $ | 18,949 | $ | 16,073 | |||||||
Assumptions for long-term expected return on pension plan assets in the qualified Banknorth Group, Inc. Retirement Plan are periodically reviewed. As part of the review, the Banknorth’s independent consulting actuaries performed a stochastic analysis of expected returns based on the plan’s asset allocation as of both January 1, 2003 and January 1, 2004 to develop expected rates of return. This forecast reflects the actuarial firm’s expected long-term rates of return for each significant asset class or economic
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20. | Retirement and Other Benefit Plans — (Continued) |
indicator, for example, 9.8% for US large cap stocks, 6.0% for US long-term corporate bonds, and 2.4% inflation as of January 1, 2003. The range of returns developed relies both on forecasts and on broad-market historical benchmarks for expected return, correlation, and volatility for each asset class.
The following table presents the plan assets as of December 31, 2003 and 2002 and respective target allocations.
December 31, | ||||||||||||
2003 | 2002 | |||||||||||
Actual | Actual | Target | ||||||||||
Percentage | Percentage | Allocation | ||||||||||
Asset category | of Fair Value | of Fair Value | Percentage | |||||||||
Cash | 20 | % | 21 | % | 0 - 25 | % | ||||||
Equities | 53 | % | 45 | % | 40 - 75 | % | ||||||
Fixed Income | 27 | % | 34 | % | 25 - 60 | % | ||||||
100 | % | 100 | % | |||||||||
Equity securities at December 31, 2003 and 2002 do not include any Banknorth common stock.
Banknorth’s key investment objectives in managing its defined benefit plan assets are to ensure that present and future benefit obligations to all participants and beneficiaries are met as they become due; to provide a total return that, over the long-term, maximizes the ratio of the plan assets to liabilities, while minimizing the present value of required Company contributions, at the appropriate levels of risk; to meet statutory requirements and regulatory agencies’ requirements; and to satisfy applicable accounting standards. Banknorth periodically evaluates the asset allocations, funded status, investment manager structure, rate of return assumption and contribution strategy for satisfaction of our investment objectives. The Retirement Committee meets quarterly to review the performance management reports prepared by our investment managers.
The expected return on plan assets equals the long-term rate of return multiplied by the market related value, plus the expected contributions, weighted for timing, plus expected expenses, minus the expected distributions, weighted for timing.
Interest cost equals the discount rate multiplied by the projected benefit obligation plus the service cost minus expected expenses, minus the expected distributions, weighted for timing.
21. | Fair Value of Financial Instruments |
Banknorth discloses fair value information about financial instruments for which it is practicable to estimate fair value. Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. Where available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument. Also, because of differences in methodologies and assumptions used to estimate fair values, Banknorth’s fair values should not be compared to those of other banks.
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21. | Fair Value of Financial Instruments — (Continued) |
Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of Banknorth. For certain assets and liabilities, the information required under SFAS No. 107 is supplemented with additional information relevant to an understanding of the fair value.
The following describes the methods and assumptions used by Banknorth in estimating the fair values of financial instruments and certain non-financial instruments:
Cash and cash equivalents, including cash and due from banks, short-term investments and federal funds sold.For these cash and cash equivalents, which have maturities of 90 days or less, the carrying amounts reported in the balance sheet approximate fair values.
Securities and loans held for sale.Fair values are based on quoted bid market prices, where available. Where quoted market prices for an instrument are not available, fair values are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instrument being valued. Fair values are calculated based on the value of one unit without regard to premiums or discounts that might result from selling all of Banknorth’s holdings of a particular security in one transaction.
Loans and leases.The fair values of portfolio loans and leases are estimated by discounting the contractual cash flows using interest rates currently being offered for loans with similar terms to borrowers of similar quality.
For certain variable-rate consumer loans, including home equity lines of credit the carrying value approximates fair value.
For nonperforming loans and certain loans where the credit quality of the borrower has deteriorated significantly, fair values are estimated by discounting cash flows at a rate commensurate with the risk associated with those cash flows.
Commitments and letters of credit not included in the table have contractual values of $6.2 billion and $5.5 billion at December 31, 2003 and 2002, respectively. These instruments generate ongoing fees at Banknorth’s current pricing levels. Of the commitments at December 31, 2003, 24% mature within one year. At December 31, 2003, the approximate fair value of standby letter of credit was $696 thousand, of which $312 thousand was unamortized and included in other liabilities on the balance sheet. At December 31, 2002, the approximate fair value of the standby letter of credit was $590 thousand. The fair value of the issuance of the guarantees was recorded on January 1, 2003 in accordance with the implementation of FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”
Mortgage Servicing Rights.The fair value of Banknorth’s mortgage servicing rights was based on a third party valuation analysis (performed as of November 30, 2003) which considered the expected present value of future mortgage servicing income, net of estimated servicing costs, considering market consensus loan prepayment predictions at that date.
Deposits.The fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of time deposits is based on the discounted value of contractual cash flows, applying interest rates currently being offered on wholesale funding products of similar maturities.
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21. | Fair Value of Financial Instruments — (Continued) |
The fair value estimates for deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of alternative forms of funding (“deposit base intangibles”).
Borrowings, including federal funds purchased, securities sold under repurchase agreements, borrowings from the Federal Home Loan Bank and other borrowings.The fair value of Banknorth’s long-term borrowings is estimated by discounting cash flows based on current rates available to Banknorth for similar types of borrowing arrangements taking into account any optionality. For short-term borrowings that mature or reprice in 90 days or less, carrying value approximates fair value.
Off-balance sheet financial instruments:
Forward commitments to sell loans held for sale.The fair value of Banknorth’s forward commitments to sell loans reflects the amount Banknorth would receive or pay to terminate the commitment at the reporting date. Of the $61.0 million of forward sales commitments at December 31, 2003, Banknorth had $41.7 million in loans available to sell at that date as well as sufficient loan originations subsequent to December 31, 2003 to fulfill the commitments. Consequently, Banknorth expects to meet all of its forward sales commitments.
Rate-lock commitments to originate loans held for sale.The fair values on commitment to originate residential loans at an agreed upon rate (rate-locked) are based on the estimated gain or loss that would be recognized had the underlying loans been funded and sold on the reporting date (i.e., mark-to-market value).
Commercial loan interest rate swaps.The estimated fair value of these derivative financial instruments is based on dealer quotes.
Loans serviced with recourse.Under certain of Banknorth’s servicing arrangements with investors, Banknorth has $5.6 million of recourse obligations to those serviced loan portfolios. In the event of foreclosure on a serviced loan, Banknorth is obligated to repay the investor to the extent of the investor’s remaining balance after application of proceeds from the sale of the underlying collateral. To date, losses related to these recourse arrangements have been insignificant and while Banknorth cannot project future losses, the fair value of this recourse obligation is deemed to be likewise insignificant.
A summary of the carrying values and estimated fair values of Banknorth’s significant financial instruments at December 31, 2003 and 2002 follows:
2003 | 2002 | ||||||||||||||||
Carrying | Fair | Carrying | Fair | ||||||||||||||
Value | Value | Value | Value | ||||||||||||||
Assets: | |||||||||||||||||
Cash and cash equivalents | $ | 316,331 | $ | 316,331 | $ | 717,003 | $ | 717,003 | |||||||||
Securities — available for sale | 7,122,992 | 7,122,992 | 6,731,467 | 6,731,467 | |||||||||||||
Securities — held to maturity | 124,240 | 124,344 | 216,409 | 221,571 | |||||||||||||
Loans held for sale | 41,696 | 42,801 | 128,622 | 135,799 | |||||||||||||
Loans and leases, net | 16,113,675 | 16,153,360 | 13,847,735 | 14,202,064 | |||||||||||||
Mortgage servicing rights | 2,783 | 3,115 | 3,598 | 3,598 |
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21. | Fair Value of Financial Instruments — (Continued) |
2003 | 2002 | ||||||||||||||||
Carrying | Fair | Carrying | Fair | ||||||||||||||
Value | Value | Value | Value | ||||||||||||||
Liabilities: | |||||||||||||||||
Deposits (with no stated maturity) | 13,168,081 | 13,168,081 | 11,005,823 | 11,005,823 | |||||||||||||
Time deposits | 4,733,104 | 4,763,865 | 4,658,778 | 4,719,291 | |||||||||||||
Borrowings | 5,524,864 | 5,674,074 | 5,432,581 | 5,595,742 | |||||||||||||
Financial instruments with off-balance sheet notional amounts: | |||||||||||||||||
Forward commitments to sell loans | (425 | ) | (425 | ) | (3,532 | ) | (3,532 | ) | |||||||||
Rate-lock commitments to originate loans held for sale | 188 | 188 | 766 | 766 | |||||||||||||
Commercial loan interest rate swaps with borrower | 7,357 | 7,357 | 1,546 | 1,546 | |||||||||||||
Commercial loan interest rate swaps with broker | (7,357 | ) | (7,357 | ) | (1,546 | ) | (1,546 | ) | |||||||||
Interest rate contracts on borrowings | (1,896 | ) | (1,896 | ) | — | — | |||||||||||
Foreign currency forward contracts with customers | 3,132 | 3,132 | 175 | 175 | |||||||||||||
Foreign currency forward contracts with dealers | (3,132 | ) | (3,132 | ) | (175 | ) | (175 | ) |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
22. | Condensed Financial Information — Parent Company Only |
Condensed Financial Statements of Banknorth
December 31, | ||||||||||
2003 | 2002 | |||||||||
Balance Sheets | ||||||||||
Assets: | ||||||||||
Cash and due from banks | $ | 27,492 | $ | 22,879 | ||||||
Interest bearing deposits with subsidiaries | 225,492 | 115,452 | ||||||||
Securities available for sale | 45,216 | 42,180 | ||||||||
Investment in subsidiaries | 2,710,080 | 2,234,291 | ||||||||
Goodwill and other intangibles | 618 | 618 | ||||||||
Amounts receivable from subsidiaries | — | 83 | ||||||||
Other assets | 16,679 | 16,917 | ||||||||
Total assets | $ | 3,025,577 | $ | 2,432,420 | ||||||
Liabilities and shareholders’ equity | ||||||||||
Amounts payable to subsidiaries | $ | 978 | $ | — | ||||||
Senior notes, net of hedge | 149,991 | — | ||||||||
Subordinated debentures supporting mandatory redeemable trust securities | 344,403 | 344,424 | ||||||||
Other liabilities | 9,686 | 24,511 | ||||||||
Shareholders’ equity | 2,520,519 | 2,063,485 | ||||||||
Total liabilities and shareholders’ equity | $ | 3,025,577 | $ | 2,432,420 | ||||||
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22. | Condensed Financial Information — Parent Company Only — (Continued) |
Statements of Income
Year Ended December 31, | |||||||||||||
2003 | 2002 | 2001 | |||||||||||
Operating income: | |||||||||||||
Dividends from subsidiaries | $ | 193,950 | $ | 112,331 | $ | 175,793 | |||||||
Net gains (losses) on sales of securities | 53 | 648 | — | ||||||||||
Other operating income | 6,226 | 6,456 | 4,989 | ||||||||||
Total operating income | 200,229 | 119,435 | 180,782 | ||||||||||
Operating expenses: | |||||||||||||
Interest on borrowings | 31,266 | 26,994 | 12,900 | ||||||||||
Amortization of goodwill and other intangibles | — | — | 1,847 | ||||||||||
Merger and consolidation costs | — | — | 4,277 | ||||||||||
Write-off of branch automation project | — | 6,170 | — | ||||||||||
Other operating expenses | 3,944 | 3,603 | 224 | ||||||||||
Total operating expenses | 35,210 | 36,767 | 19,248 | ||||||||||
Income before income taxes and equity in undistributed net income of subsidiaries | 165,019 | 82,668 | 161,534 | ||||||||||
Income tax benefit | (10,126 | ) | (9,736 | ) | (4,485 | ) | |||||||
Income before equity in undistributed net income of subsidiaries | 175,145 | 92,404 | 166,019 | ||||||||||
Equity in undistributed net income of subsidiaries | 175,614 | 206,234 | 72,776 | ||||||||||
Net income | $ | 350,759 | $ | 298,638 | $ | 238,795 | |||||||
The Parent Company’s Statement of Changes in Shareholders’ Equity are identical to the Consolidated Statement of Changes in Shareholders’ Equity and therefore are not presented here.
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22. | Condensed Financial Information — Parent Company Only — (Continued) |
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 (used) provided by operating activities: | |||||||||||||
Undistributed net income from subsidiaries | (175,614 | ) | (206,234 | ) | (72,776 | ) | |||||||
Amortization of goodwill and other intangibles | — | — | 1,847 | ||||||||||
Decrease in unearned compensation | — | — | 2,005 | ||||||||||
Write-off of branch automation project | — | 6,170 | — | ||||||||||
(Increase) decrease in amounts receivable from subsidiaries | 83 | 23,618 | (19,869 | ) | |||||||||
Decrease (increase) in other assets | 5,266 | (3,969 | ) | (13,705 | ) | ||||||||
Increase (decrease) in amounts payable to subsidiaries | 978 | (1,029 | ) | (5,920 | ) | ||||||||
Increase (decrease) in other liabilities | (10,920 | ) | 4,813 | 24,931 | |||||||||
Other, net | — | — | 68 | ||||||||||
Net cash provided by operating activities | 170,552 | 122,007 | 155,376 | ||||||||||
Cash flows from investing activities: | |||||||||||||
Net decrease (increase) in interest bearing deposits with subsidiaries | (110,040 | ) | (97,097 | ) | 49,539 | ||||||||
Purchase of available for sale securities | (3,171 | ) | (3,037 | ) | (4,990 | ) | |||||||
Sales of available for sale securities | 840 | — | — | ||||||||||
Capital contribution to subsidiaries | (70,000 | ) | — | — | |||||||||
Cash acquired in acquisition | 36,022 | 6,110 | 6,328 | ||||||||||
Net cash (used in) provided by investing activities | (146,349 | ) | (94,024 | ) | 50,877 | ||||||||
Cash flows from financing activities: | |||||||||||||
Proceeds from line of credit | — | 25,000 | 35,000 | ||||||||||
Payment of line of credit | — | (25,000 | ) | (35,000 | ) | ||||||||
Proceeds from sale of trust preferred securities | — | 193,150 | — | ||||||||||
Proceeds from sale of senior notes | 148,693 | — | — | ||||||||||
Payment of notes payable | — | (1,068 | ) | (356 | ) | ||||||||
Dividends paid to shareholders | (111,889 | ) | (85,894 | ) | (72,277 | ) | |||||||
Treasury stock acquired | (105,071 | ) | (154,054 | ) | (151,546 | ) | |||||||
Proceeds from stock issued in connection with employee benefit plans | 48,677 | 30,406 | 26,148 | ||||||||||
Net cash (used in) financing activities | (19,590 | ) | (17,460 | ) | (198,031 | ) | |||||||
Net increase in cash due from banks | 4,613 | 10,523 | 8,222 | ||||||||||
Cash and due from banks at beginning of year | 22,879 | 12,356 | 4,134 | ||||||||||
Cash and due from banks at end of year | $ | 27,492 | $ | 22,879 | $ | 12,356 | |||||||
Supplemental disclosure information: | |||||||||||||
Interest paid on borrowings | $ | 30,329 | $ | 22,867 | $ | 13,033 |
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23. Subsequent Events (unaudited)
On November 25, 2003, Banknorth announced that it had entered into an agreement to acquire Foxborough Savings Bank (“Foxborough”) for $89.6 million in a cash transaction. Foxborough had $248.9 million of assets and $27.6 million of shareholders’ equity at December 31, 2003. The Banknorth and Foxborough boards of directors have approved the agreement. The transaction is expected to close in the first quarter of 2004 and is subject to the approval of the shareholders of Foxborough and the receipt of all regulatory approvals and other customary conditions.
On December 9, 2003, Banknorth announced that it had entered into an agreement to acquire CCBT Financial Companies, Inc. (“CCBT”), the parent company of Cape Cod Bank and Trust Company NA. CCBT had $1.3 billion of assets and $114.5 million of shareholders’ equity at December 31, 2003. Under terms of the agreement, each outstanding share of CCBT will be converted into 1.084 shares of Banknorth common stock, plus cash in lieu of any fractional share interest. The Banknorth and CCBT boards of directors have approved the agreement. The transaction is expected to close in the second quarter of 2004 and is subject to the approval of the shareholders of CCBT and the receipt of all regulatory approvals and other customary conditions.
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24. Selected Quarterly Data (unaudited)
2003 | 2002 | ||||||||||||||||||||||||||||||||||
Fourth | Third | Second | First | Fourth | Third | Second | First | ||||||||||||||||||||||||||||
Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | Quarter | ||||||||||||||||||||||||||||
Interest income | $ | 290,414 | $ | 290,750 | $ | 302,478 | $ | 309,327 | $ | 306,569 | $ | 313,156 | $ | 309,387 | $ | 306,006 | |||||||||||||||||||
Interest expense | 77,126 | 80,918 | 90,904 | 103,190 | 107,006 | 112,160 | 109,914 | 109,520 | |||||||||||||||||||||||||||
Net interest income | (A) | 213,288 | 209,832 | 211,574 | 206,137 | 199,563 | 200,996 | 199,473 | 196,486 | ||||||||||||||||||||||||||
Provision for loan and lease losses | 10,400 | 10,500 | 10,500 | 10,901 | 10,829 | 10,829 | 10,828 | 11,828 | |||||||||||||||||||||||||||
Net interest income after provision for loan and lease losses | 202,888 | 199,332 | 201,074 | 195,236 | 188,734 | 190,167 | 188,645 | 184,658 | |||||||||||||||||||||||||||
Noninterest income(1) | (B) | 84,435 | 88,656 | 115,828 | 78,238 | 84,441 | 65,505 | 62,986 | 61,576 | ||||||||||||||||||||||||||
Noninterest expense(2) | (C) | 155,676 | 151,647 | 184,039 | 149,908 | 158,126 | 141,577 | 136,791 | 142,897 | ||||||||||||||||||||||||||
Income before income taxes | 131,647 | 136,341 | 132,863 | 123,566 | 115,049 | 114,095 | 114,840 | 103,337 | |||||||||||||||||||||||||||
Income tax expense | 40,085 | 46,063 | 45,338 | 42,173 | 37,911 | 37,233 | 38,680 | 34,859 | |||||||||||||||||||||||||||
Net income | $ | 91,562 | $ | 90,278 | $ | 87,525 | $ | 81,393 | $ | 77,138 | $ | 76,862 | $ | 76,160 | $ | 68,478 | |||||||||||||||||||
Weighted average shares outstanding: | |||||||||||||||||||||||||||||||||||
Basic | 162,149 | 161,517 | 162,312 | 157,667 | 148,226 | 148,099 | 147,233 | 149,347 | |||||||||||||||||||||||||||
Diluted | 165,685 | 164,446 | 164,559 | 159,328 | 149,389 | 149,662 | 149,064 | 151,116 | |||||||||||||||||||||||||||
Basic earnings per share: | $ | 0.56 | $ | 0.56 | $ | 0.54 | $ | 0.52 | $ | 0.52 | $ | 0.52 | $ | 0.52 | $ | 0.46 | |||||||||||||||||||
Diluted earnings per share: | $ | 0.55 | $ | 0.55 | $ | 0.53 | $ | 0.51 | $ | 0.52 | $ | 0.51 | $ | 0.51 | $ | 0.45 | |||||||||||||||||||
Return on average assets(3) | 1.39% | 1.39% | 1.38% | 1.32% | 1.35% | 1.40% | 1.46% | 1.36% | |||||||||||||||||||||||||||
Return on average equity(3) | 14.72% | 14.85% | 14.24% | 14.26% | 15.75% | 16.25% | 17.45% | 15.73% | |||||||||||||||||||||||||||
Net interest margin (fully-taxable equivalent)(3) | 3.65% | 3.63% | 3.71% | 3.66% | 3.86% | 4.03% | 4.18% | 4.23% | |||||||||||||||||||||||||||
Noninterest income as a percent of total income(4) | 28.36% | 29.70% | 35.38% | 27.51% | 29.73% | 24.58% | 24.00% | 23.86% | |||||||||||||||||||||||||||
Efficiency ratio(5) | 52.29% | 50.81% | 56.21% | 52.71% | 55.68% | 53.12% | 52.12% | 55.37% |
(1) | In the second quarter of 2003 noninterest income included $29.2 million of net securities gains incurred as part of the deleveraging program. |
(2) | In the second quarter of 2003, noninterest expense included $28.5 million of prepayment penalties on borrowings incurred as part of the deleveraging program. |
(3) | Annualized. |
(4) | Represents noninterest income as a percentage of net interest income and noninterest income. Noninterest income as a percent of total income is calculated as (B) divided by (A+B). |
(5) | Represents noninterest expenses as a percentage of net interest income and noninterest income. Efficiency ratio is calculated as (C) divided by (A+B). |
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Independent Auditors’ Report
The Board of Directors
We have audited the accompanying consolidated balance sheets of Banknorth Group, Inc. and subsidiaries (“Banknorth”) as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of Banknorth’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 8 to the Consolidated Financial Statements, effective January 1, 2002, Banknorth adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” and SFAS No. 147, “Acquisitions of Certain Financial Institutions.”
Boston, Massachusetts
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A. | 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.
PART III.
Item 10. | Directors and Executive Officers of the Registrant |
Incorporated by reference to “Election of Directors” on pages 14 through 17 of our definitive proxy statement, dated March 22, 2004 (the “Proxy Statement”), “Governance of Banknorth — Committees of the Board of Directors” on pages 6 and 7 of the Proxy Statement, “Governance of Banknorth — Code of Conduct and Ethics” on pages 10 and 11 of the Proxy Statement and “Executive Officers who are not Directors” on pages 18 and 19 of the Proxy Statement.
Incorporated by reference to “Section 16(a) Beneficial Ownership Reporting Compliance” on page 22 of the Proxy Statement.
Incorporated by reference to “Code of Conduct and Ethics” on pages 10 to 11 of the Proxy Statement.
Item 11. | Executive Compensation |
Incorporated by reference to “Compensation of Executive Officers and Transactions with Management” on pages 23 through 30 of the Proxy Statement.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Security Ownership of Certain Beneficial Owners and Management. Information regarding security ownership of certain beneficial owners and management is incorporated by reference to “Beneficial Ownership of Common Stock by Certain Beneficial Owners and Management” on pages 20 and 21 of the Proxy Statement.
Equity Compensation Plan Information.The following table provides information as of December 31, 2003 with respect to shares of Banknorth Common Stock that may be issued under our existing equity compensation plans, which consist of the following plans: 2003 Equity Incentive Plan, 1996 Equity Incentive Plan, as amended, Amended and Restated 1995 Stock Option Plan for Non-Employee Directors, as amended, Amended and Restated Restricted Stock Plan for Non-Employee Directors and our Amended and Restated Employee Stock Purchase Plan, all of which have been approved by our stockholders.
The table does not include information with respect to shares of Common Stock subject to outstanding options granted under equity compensation plans assumed by us in connection with mergers and acquisitions of the companies which originally granted those options. Note 5 to the table sets forth the total number of shares of Common Stock issuable upon the exercise of assumed options as of
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Number of securities | |||||||||||||
Number of securities | Weighted-average | remaining available for | |||||||||||
to be issued | exercise price of | future issuance under | |||||||||||
upon exercise of | outstanding | equity compensation plans | |||||||||||
outstanding options, | options, warrants | (excluding securities | |||||||||||
warrants and rights | and rights | reflected in column (a)) | |||||||||||
Plan Category | (a) | (b) | (c) | ||||||||||
Equity compensation plans approved by security holders | 13,543,087 | (1)(2) | $ | 21.23 | (1)(2) | 3,690,515 | (3)(4) | ||||||
Equity compensation plans not approved by security holders | — | — | — | ||||||||||
Total | 13,543,087 | $ | 21.23 | 3,690,515 | |||||||||
(1) | Excludes purchase rights accruing under the Employee Stock Purchase Plan, which has a stockholder approved reserve of 2,852,000 shares. Under the Employee Stock Purchase Plan, each eligible employee may purchase shares of Common Stock at semi-annual intervals each year at a purchase price determined by the committee of our board of directors which administers the plan, which shall not be less than the lesser of (i) 85% of the fair market value of a share of Common Stock on the first business day of the applicable semi-annual offering period or (ii) 85% of the fair market value of a share of Common Stock on the last business day of such offering period. In no event may the amount of Common Stock purchased by a participant in the Employee Stock Purchase Plan in a calendar year exceed $25,000, measured as of the time an option under the plan is granted. |
(2) | Includes information about Banknorth’s 1986 Stock Option and Stock Appreciation Rights Plan, which was approved by stockholders of Banknorth and has expired. No additional options may be granted under this plan. |
(3) | Does not take into account shares available for future issuance under the Restricted Stock Plan for Non-Employee Directors, under which up to $10,000 of the annual fee payable to each non-employee director of Banknorth and participating subsidiaries is payable in shares of Common Stock. Because the number of shares of Common Stock issuable under the Restricted Stock Plan for Non-Employee Directors is based on a formula and not a specific reserve amount, the number of shares which may be issued pursuant to this plan in the future is not determinable. During 2003, 2002 and 2001, a total of 8,869, 5,599 and 6,358 shares were issued under this plan, respectively. |
(4) | Includes shares available for future issuance under the Employee Stock Purchase Plan. As of December 31, 2003, an aggregate of 1,223,689 shares of Common Stock were available for issuance under this plan. |
(5) | The table does not include information for equity compensation plans assumed by us in connection with mergers and acquisitions of the companies which originally established those plans. As of December 31, 2003, a total of 2,835,966 shares of Common Stock were issuable upon exercise of outstanding options under those assumed plans and the weighted average exercise price of those outstanding options was $14.00 per share. No additional options may be granted under any assumed plans. |
Item 13. | Certain Relationships and Related Transactions |
Incorporated by reference to “Indebtedness of Directors and Management and Certain Transactions” on page 27 of the Proxy Statement.
Item 14. | Principal Accountant Fees and Services |
Incorporated by reference to “Relationship with Independent Public Accountants” on pages 11 and 12 of the Proxy Statement.
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PART IV.
Item 15. | Exhibits, Financial Statement Schedules and Reports on Form 8-K |
(a)(1) The following financial statements are incorporated by reference from Item 8 hereof:
Consolidated balance sheets at December 31, 2003 and 2002 | |
Consolidated statements of income for each of the years in the three-year period ended December 31, 2003 | |
Consolidated statements of changes in shareholders’ equity for each of the years in the three-year period ended December 31, 2003 | |
Consolidated statements of cash flows for each of the years in the three-year period ended December 31, 2003 | |
Notes to Consolidated Financial Statements |
Independent Auditors’ Report
(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.
Exhibit No. | Exhibit | Location | ||||||
3 | (a)(1) | Amended and Restated Articles of Incorporation of Banknorth | (1) | |||||
3 | (a)(2) | Amendments to the Articles of Incorporation of Banknorth | (2) | |||||
3 | (b) | Bylaws of Banknorth | (3) | |||||
4 | (a) | Specimen Common Stock certificate | (4) | |||||
4 | (b) | Stockholder Rights Agreement, dated as of September 12, 1989 and amended and restated as of July 27, 1999 and as of July 25, 2000, between Banknorth and American Stock Transfer & Trust Company, as Rights Agent | (5) | |||||
4 | (c) | Instruments defining the rights of security holders, including indentures | (6) | |||||
10 | (a) | Severance Agreement between Banknorth and William J. Ryan | ||||||
10 | (b) | Form of Severance Agreement between Banknorth and each executive officer of Banknorth identified in the Proxy Statement, other than William J. Ryan | ||||||
10 | (c) | Amended and Restated Supplemental Retirement Agreement between Banknorth and William J. Ryan | ||||||
10 | (d) | Amended and Restated Supplemental Retirement Agreement between Banknorth and Peter J. Verrill | ||||||
10 | (e)(1) | Supplemental Retirement Agreement between Banknorth and John W. Fridlington | (7) | |||||
10 | (e)(2) | First Amendment to Supplemental Retirement Agreement between Banknorth and John W. Fridlington | (8) | |||||
10 | (e)(3) | Second Amendment to Supplemental Retirement Agreement between Banknorth and John W. Fridlington | ||||||
10 | (f) | Banknorth Group, Inc. Supplemental Retirement Plan (which covers each executive officer of Banknorth named in the Proxy Statement, other than Messrs. Ryan, Verrill and Fridlington) | (8) | |||||
10 | (g) | Amended and Restated Deferred Compensation Plan for Non-Employee Directors and Key Employees, effective January 1, 2003 | (8) | |||||
10 | (h) | 1986 Stock Option and Stock Appreciation Rights Plan, as amended | (9) |
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Exhibit No. | Exhibit | Location | ||||||
10 | (i) | Amended and Restated Employee Stock Purchase Plan | (10) | |||||
10 | (j) | Amended and Restated Restricted Stock Plan for Non-Employee Directors | (11) | |||||
10 | (k) | Amended and Restated 1995 Stock Option Plan for Non-Employee Directors | ||||||
10 | (l) | Amended and Restated 401(k) Plan, effective January 1, 2004 | ||||||
10 | (m) | 1996 Equity Incentive Plan, as amended | (8) | |||||
10 | (n) | Executive Incentive Plan | (8) | |||||
10 | (o) | Bank of New Hampshire Corporation Executive Excess Benefit Plan for Paul R. Shea | (12) | |||||
10 | (p) | Supplemental Executive Retirement Plan of Evergreen Bancorp, Inc. (which covers only Director Dougan) | (13) | |||||
10 | (q) | 2003 Equity Incentive Plan | (14) | |||||
21 | Subsidiaries of Banknorth Group, Inc. | |||||||
23 | Consent of KPMG LLP | |||||||
31.1 | Certification of Chief Executive Officer under Rules 13a-14 and 15d-14 | |||||||
31.2 | Certification of Chief Financial Officer under Rules 13a-14 and 15d-14 | |||||||
32.1 | Certification of Chief Executive Officer Under 18 U.S.C. § 1350 | |||||||
32.2 | Certification of Chief Financial Officer Under 18 U.S.C. § 1350 |
(1) | Incorporated by reference to Exhibit A to the Agreement and Plan of Merger, dated as of October 27, 1997, between Banknorth and CFX Corporation, which agreement is included as Exhibit A to the Prospectus/ Proxy Statement included in the Form S-4 Registration Statement (No. 333-23991) filed by Banknorth with the SEC on December 31, 1997. |
(2) | Exhibits are incorporated by reference to (i) the proxy statement filed by Banknorth with the SEC on March 23, 1998, (ii) the proxy statement filed by Banknorth with the SEC on March 22, 2000 and (iii) the Form S-4 Registration Statement (No. 333-95587) filed by Banknorth with the SEC on January 28, 2000, which describes an amendment which changed the name of the registrant to “Banknorth Group, Inc.” |
(3) | Exhibit is incorporated by reference to the Form 10-Q report filed by Banknorth for the three months ended September 30, 2003. |
(4) | Exhibit is incorporated by reference to the Form S-4 Registration Statement (No. 333-95587) filed by Banknorth with the SEC on January 28, 2000. |
(5) | Exhibit is incorporated by reference to the Form 8-A/ A report filed by Banknorth with the SEC on July 26, 2000. |
(6) | Banknorth has no instruments defining the rights of holders of its long-term debt where the amount of securities authorized under any such instrument exceeds 10% of the total assets of Banknorth and its subsidiaries on a consolidated basis. Banknorth hereby agrees to furnish a copy of any such instrument to the SEC upon request. |
(7) | Exhibit is incorporated by reference to Banknorth’s Form 10-K report for the year ended December 31, 1995. |
(8) | Exhibit is incorporated by reference to Banknorth’s Form 10-K report for the year ended December 31, 2002. |
(9) | Exhibit is incorporated by reference to the Form S-4 Registration Statement (No. 33-20243) filed by Banknorth with the SEC on February 22, 1988. An amendment to the 1986 Stock Option and Stock Appreciation Rights Plan is incorporated by reference to the proxy statement filed by Banknorth with the SEC on March 24, 1994. |
(10) | Exhibit is incorporated by reference to the proxy statement dated March 22, 2002 filed by Banknorth with the SEC. |
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(11) | Exhibit is incorporated by reference to the Form 10-K report filed by Banknorth for the year ended December 31, 1996. |
(12) | Exhibit is incorporated by reference to the Form 10-K report filed by Bank of New Hampshire Corporation (File No. 0-9517) for the year ended December 31, 1994. |
(13) | Exhibit is incorporated by reference to the Form 10-K report filed by Evergreen Bancorp, Inc. for the year ended December 31, 1996. |
(14) | Exhibit is incorporated by reference to the proxy statement dated March 10, 2003 filed by Banknorth with the SEC. |
Banknorth’s management contracts or compensatory plans or arrangements consist of Exhibit Nos. 10(a)-(q).
(b) During the fourth quarter of the period covered by this report, Banknorth filed a Current Report on Form 8-K on October 16, 2003, November 5, 2003, November 10, 2003, November 26, 2003 and December 10, 2003.
(c) See (a)(3) above for all exhibits filed herewith and the Exhibit Index.
(d) There are no other financial statements and financial statement schedules which were excluded from this report which are required to be included herein.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Banknorth has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BANKNORTH GROUP, INC. |
By: | /s/ WILLIAM J. RYAN |
William J. Ryan | |
Chairman, President and | |
Chief Executive Officer |
Date: February 27, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
Gary G. Bahre | Director | |||||
/s/ ROBERT G. CLARKE Robert G. Clarke | Director | Date: February 27, 2004 | ||||
/s/ P. KEVIN CONDRON P. Kevin Condron | Director | Date: February 27, 2004 | ||||
/s/ GEORGE W. DOUGAN George W. Dougan | Director | Date: February 27, 2004 | ||||
/s/ COLLEEN KHOURY Colleen Khoury | Director | Date: February 27, 2004 | ||||
Dana S. Levenson | Director | |||||
/s/ STEVEN T. MARTIN Steven T. Martin | Director | Date: February 27, 2004 | ||||
John M. Naughton | Director | |||||
/s/ MALCOLM W. PHILBROOK, JR. Malcolm W. Philbrook, Jr. | Director | Date: February 27, 2004 | ||||
/s/ ANGELO P. PIZZAGALI Angelo P. Pizzagali | Director | Date: February 27, 2004 |
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/s/ IRVING E. ROGERS, III Irving E. Rogers, III | Director | Date: February 27, 2004 | ||||
/s/ WILLIAM J. RYAN William J. Ryan | Chairman, President and Chief Executive Officer (principal executive officer) | Date: February 27, 2004 | ||||
Curtis M. Scribner | Director | |||||
/s/ PAUL R. SHEA Paul R. Shea | Director | Date: February 27, 2004 | ||||
/s/ GERRY S. WEIDEMA Gerry S. Weidema | Director | Date: February 27, 2004 | ||||
/s/ STEPHEN J. BOYLE Stephen J. Boyle | Executive Vice President and Chief Financial Officer (principal financial and accounting officer) | Date: February 27, 2004 |
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