| TD BANKNORTH INC Item 1A Risk Factors In analyzing whether to make or to continue to hold an investment in our securities, investors should consider, among other factors, the following risk factors |
| Our results of operations are significantly dependent on economic conditions and related uncertainties |
| Commercial banking is affected, directly and indirectly, by domestic and international economic and political conditions and by governmental monetary and fiscal policies |
| Conditions such as inflation, recession, unemployment, volatile interest rates, real estate values, government monetary policy, international conflicts, the actions of terrorists and other factors beyond our control may adversely affect our results of operations |
| Changes in interest rates, in particular, could adversely affect our net interest income and have a number of other adverse effects on our operations, as discussed in the immediately succeeding risk factor |
| Adverse economic conditions also could result in an increase in loan delinquencies, foreclosures and nonperforming assets and a decrease in the value of the property or other collateral which secures our loans, all of which could adversely affect our results of operations |
| We are particularly sensitive to changes in economic conditions and related uncertainties in New England and the mid-Atlantic states because we derive substantially all of our loans, deposits and other business from Maine, New Hampshire, Massachusetts, Vermont, Connecticut, eastern New York, New Jersey and eastern Pennsylvania |
| Accordingly, we remain subject to the risks associated with prolonged declines in national or local economies |
| 9 _________________________________________________________________ [78]Table of Contents Changes in interest rates could have a material adverse effect on our operations |
| The operations of financial institutions such as us are dependent to a large extent on net interest income, which is the difference between the interest income earned on interest-earning assets such as loans and investment securities and the interest expense paid on interest-bearing liabilities such as deposits and borrowings |
| Changes in the general level of interest rates can affect our net interest income by affecting the difference between the weighted average yield earned on our interest-earning assets and the weighted average rate paid on our interest-bearing liabilities, or interest rate spread, and the average life of our interest-earning assets and interest-bearing liabilities |
| Changes in interest rates also can affect our ability to originate loans; the value of our interest-earning assets and our ability to realize gains from the sale of such assets; our ability to obtain and retain deposits in competition with other available investment alternatives; the ability of our borrowers to repay adjustable or variable rate loans; and the fair value of the derivatives carried on our balance sheet, derivative hedge effectiveness and the amount of ineffectiveness recognized in our earnings |
| Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control |
| Although we believe that the estimated maturities of our interest-earning assets currently are well balanced in relation to the estimated maturities of our interest-bearing liabilities (which involves various estimates as to how changes in the general level of interest rates will impact these assets and liabilities), there can be no assurance that our profitability would not be adversely affected during any period of changes in interest rates |
| See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 7A — Quantitative and Qualitative Disclosure about Market Risk |
| ” There are increased risks involved with multi-family residential, commercial real estate, commercial business and consumer lending activities |
| Our lending activities include loans secured by existing multi-family residential and commercial real estate |
| In addition, from time to time we originate loans for the construction of multi-family residential real estate and land acquisition and development loans |
| Multi-family residential, commercial real estate and construction lending generally is considered to involve a higher degree of risk than single-family residential lending due to a variety of factors, including generally larger loan balances, the dependency on successful completion or operation of the project for repayment, the difficulties in estimating construction costs and loan terms which often do not require full amortization of the loan over its term and, instead, provide for a balloon payment at stated maturity |
| Our lending activities also include commercial business loans and leases to small to medium businesses, which generally are secured by various equipment, machinery and other corporate assets, and a wide variety of consumer loans, including home improvement loans, home equity loans, education loans and loans secured by automobiles, boats, mobile homes, recreational vehicles and other personal property |
| Although commercial business loans and leases and consumer loans generally have shorter terms and higher interests rates than mortgage loans, they generally involve more risk than mortgage loans because of the nature of, or in certain cases the absence of, the collateral which secures such loans |
| Our allowance for losses on loans and leases may not be adequate to cover all future losses on existing loan and lease balances outstanding |
| We have established an allowance for loan losses which we believe is adequate to offset probable losses on our existing loans and leases |
| There can be no assurance that any future declines in real estate market conditions, general economic conditions or changes in regulatory policies will not require us to increase our allowance for loan and lease losses, which would adversely affect our results of operations |
| We are subject to extensive regulation which could adversely affect our business and operations |
| We and our subsidiaries are subject to extensive federal and state governmental supervision and regulation, which are intended primarily for the protection of depositors |
| In addition, we and our subsidiaries are subject to changes in federal and state laws, as well as changes in regulations, governmental policies and accounting principles |
| The effects of any such potential changes cannot be predicted but could adversely affect the business and operations of us and our subsidiaries in the future |
| 10 _________________________________________________________________ [79]Table of Contents We face strong competition which may adversely affect our profitability |
| 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 our competitors are larger financial institutions with substantially greater resources, lending limits, larger branch systems and a wider array of commercial banking services |
| Competition from both bank and non-bank organizations will continue |
| Our ability to successfully compete may be reduced if we are unable to make technological advances |
| 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 |
| 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 |
| We and our banking subsidiary are subject to capital and other requirements which restrict our ability to pay dividends |
| Our ability to pay dividends to our shareholders depends to a large extent upon the dividends we receive from TD Banknorth, NA Dividends paid by TD Banknorth, NA are subject to restrictions under federal laws and regulations |
| In addition, we and TD Banknorth, NA must maintain certain capital levels, which may restrict the ability of TD Banknorth, NA to pay dividends to us and our ability to pay dividends to our shareholders |
| Holders of our common stock have no preemptive rights and are subject to potential dilution |
| Our certificate of incorporation does not provide any shareholder other than The Toronto-Dominion Bank with a preemptive right to subscribe for additional shares of common stock upon any increase thereof |
| Thus, upon the issuance of any additional shares of common stock or other voting securities of TD Banknorth or securities convertible into common stock or other voting securities of TD Banknorth, shareholders may be unable to maintain their pro rata voting or ownership interest in us |
| The Toronto-Dominion Bank exercises significant control over us |
| Because we are a majority-owned subsidiary of The Toronto-Dominion Bank, The Toronto-Dominion Bank generally has the ability to control the outcome of any matter submitted for the vote or consent of TD Banknorth shareholders |
| Pursuant to an amended and restated stockholders agreement, dated as of August 25, 2004, among The Toronto-Dominion Bank, TD Banknorth and Banknorth Group, Inc |
| (the “stockholders agreement”), The Toronto-Dominion Bank may increase the number of Class B directors (who are elected exclusively by The Toronto-Dominion Bank) at any time to a majority of the entire board of directors of TD Banknorth and all corporate action by the TD Banknorth board requires the affirmative vote of both a majority of the entire board as well as a majority of the Class B directors (whether or not the Class B directors then constitute a majority of the entire board) |
| Accordingly, The Toronto-Dominion Bank generally is able to control the outcome of all matters that come before the TD Banknorth board except in the specific instances where the stockholders agreement requires separate approval of certain designated independent directors |
| The stockholders agreement and related provisions of TD Banknorth’s certificate of incorporation also permit The Toronto-Dominion Bank to retain its majority position on the TD Banknorth board and certain of its governance rights for limited periods of time even after its ownership of TD Banknorth common stock has declined below 50prca (but not below 35prca) of the outstanding shares |
| 11 _________________________________________________________________ [80]Table of Contents As a result of The Toronto-Dominion Bank’s controlling interest in TD Banknorth, The Toronto-Dominion Bank has the power, subject to applicable law, to take actions that might be favorable to The Toronto-Dominion Bank but not necessarily favorable to other TD Banknorth shareholders |
| In addition, The Toronto-Dominion Bank’s ownership position and governance rights prevent TD Banknorth from participating in a change of control transaction with a third party unless The Toronto-Dominion Bank consents to such transaction |
| Moreover, The Toronto-Dominion Bank is under no obligation to purchase all of the remaining publicly-held shares of TD Banknorth at any particular time and may, in its discretion, purchase significant additional amounts of TD Banknorth common stock (but generally not in excess of 662/3prca of the outstanding shares) in the open market or otherwise without making an offer for all remaining publicly-held shares |
| As a result of The Toronto-Dominion Bank’s ownership interest in us and its related rights, our common stock could trade at prices that do not reflect a “takeover premium” to the same extent as do the stocks of similarly-situated companies that do not have a majority or significant shareholder |
| There can be no assurance that our organizational structure will enable us to successfully pursue our acquisition strategy |
| Targeted acquisitions of other banks have been an important strategy in our past |
| The ability to accomplish such acquisitions depends on a number of factors, including the selling bank’s perception of the quality of the consideration that is being offered in the transaction, expectations for the prospects of the purchaser and, where stock is part of the consideration, the anticipated performance and liquidity of the purchaser’s stock |
| There can be no assurance that future acquisition targets will view TD Banknorth, or the liquidity and growth potential of its stock, as favorably following The Toronto-Dominion Bank’s acquisition of a majority interest in us on March 1, 2005 as they did previously |
| Accordingly, while we expect that we will be able to continue to grow through acquisitions, there can be no assurance that TD Banknorth will continue to be able to identify and execute beneficial acquisition opportunities |
| Conflicts of interest may arise between The Toronto-Dominion Bank and TDBanknorth, which may be resolved in a manner that adversely affects TDBanknorth’s business, financial condition or results of operations |
| Conflicts of interest may arise between TD Banknorth, on the one hand, and The Toronto-Dominion Bank and its other affiliates, on the other hand, in areas relating to past, ongoing and future relationships, including corporate opportunities, potential acquisitions, financing transactions, sales or other dispositions by The Toronto-Dominion Bank of its interest in TD Banknorth and the exercise of The Toronto-Dominion Bank of its potential to control the management and affairs of TD Banknorth |
| Currently several of the directors on the TD Banknorth board are persons who are faced with decisions that could have materially different implications for TD Banknorth and for The Toronto-Dominion Bank |
| Our certificate of incorporation and the stockholders agreement contain provisions relating to the allocation of business opportunities that may be suitable for both TD Banknorth and The Toronto-Dominion Bank |
| TD Banknorth and The Toronto-Dominion Bank have not established any other formal procedures for TD Banknorth and The Toronto-Dominion Bank to resolve potential or actual conflicts of interest between them |
| There can be no assurance that any of the foregoing conflicts will be resolved in a manner that does not adversely affect the business, financial condition or results of operations of TD Banknorth |
| In addition, although the stockholders agreement restricts The Toronto-Dominion Bank’s ability to conduct a branch-based banking business in the United States other than through TD Banknorth, there are a number of limitations and exceptions to those restrictions, including operations conducted directly by The Toronto-Dominion Bank branches and agencies, banking support of the TD Waterhouse brokerage business (including through The Toronto-Dominion Bank’s existing US insured depository institution, TD Waterhouse Bank, NA) and the ability to at least temporarily operate banks acquired by The Toronto-Dominion Bank incidentally to a business combination between The Toronto-Dominion Bank and a third party |
| It is possible that some of those businesses may compete with TD Banknorth and may have greater resources to do so |
| Moreover, because The Toronto-Dominion Bank currently controls a depository institution in the United States the deposits of which are insured by the FDIC and may in the future control others, our subsidiary bank, TD Banknorth, NA, could be assessed for losses suffered or anticipated by the FDIC as a result of a default by, or assistance provided by the FDIC in connection with the potential default by, another insured depository institution controlled by The Toronto-Dominion Bank |
| Any such assessment would be senior to the claims of 12 _________________________________________________________________ [81]Table of Contents TD Banknorth as shareholder and may adversely affect the business, financial conditions or results of operations of TD Banknorth |
| In addition, The Toronto-Dominion Bank will have other obligations under US banking laws to any such other depository institutions in the United States that it controls, including an obligation to guarantee, subject to certain limits, any plan of “prompt corrective action” such an institution is required to undertake should it become undercapitalized |
| Should these obligations arise, they may limit The Toronto-Dominion Bank’s ability to make capital available to, and otherwise support, TD Banknorth |
| The Toronto-Dominion Bank, as the majority shareholder of TD Banknorth, has limited fiduciary duties to the minority shareholders of TD Banknorth |
| Because The Toronto-Dominion Bank is a majority shareholder of TD Banknorth, The Toronto- Dominion Bank owes fiduciary duties, under Delaware common law, to TD Banknorth and the other shareholders of TD Banknorth |
| The fiduciary duties of controlling shareholders under Delaware law, however, are limited in a number of respects |
| For example, a controlling shareholder generally may sell its shares of stock in the corporation to any buyer and at any price it wishes, as long as the shareholder does not have reason to suspect that the buyer will harm the corporation or the non-controlling shareholders |
| A controlling shareholder is also generally entitled to vote its shares as it chooses, including to advance its own financial interest |
| Moreover, Delaware courts have stated that the law generally does not require that a controlling shareholder sacrifice its own financial interest in the enterprise for the sake of the corporation or its minority shareholders |
| Accordingly, a controlling shareholder is not under a duty to sell its holdings in the corporation or to agree to a sale of the corporation merely because the sale would profit the minority |
| While the determination of the fiduciary obligations of The Toronto-Dominion Bank in any particular context will depend on the specific facts, as a controlling shareholder The Toronto-Dominion Bank will have significant discretion to act in its own interest with respect to the voting and sale of its shares and will have limited fiduciary duties to TD Banknorth and its minority shareholders with respect to these matters |