UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number (0-18173)
BANKNORTH GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 03-0321189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
300 FINANCIAL PLAZA
P.O. BOX 5420
BURLINGTON, VERMONT
(Address of principal executive offices)
05401
(Zip code)
(802) 658-9959
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (l) has filed all
reports required to be filed by Section l3 or l5(d) of the Securities
Exchange Act of l934 during the preceding l2 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
15,239,296 shares of common stock, $l.00 par, outstanding on June 30, 1998.
INDEX TO FORM 10-Q
PART I PAGE
- --------------------------------------------------------------------------------
Financial Highlights (Unaudited) 1
Item l Interim Financial Statements
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 1998 and 1997 (Both unaudited) 2
Consolidated Balance Sheets at June 30, 1998 (Unaudited),
December 31, 1997 and June 30, 1997 (Unaudited) 3
Statements of Changes in Shareholders' Equity for the
Period January 1, 1997 to June 30, 1998 (Unaudited) 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1998 and 1997 (Both unaudited) 5
Notes to Unaudited Interim Consolidated Financial Statements 6
Independent Auditors' Report 8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures about Market Risk 14
PART II
- --------------------------------------------------------------------------------
Item 1 Legal Proceedings N/A
Item 2 Changes in Securities 31
Item 3 Defaults Upon Senior Securities N/A
Item 4 Submission of Matters to a Vote of Security Holders 31
Item 5 Other Information 31
Item 6 Exhibits and Reports on Form 8-K 32
Signatures 33
2nd Quarter 1998 Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- ---------------------------
(Dollars in thousands, except share and per share data) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME DATA
Net interest income, taxable equivalent $ 30,420 $ 29,997 $ 60,219 $ 58,683
Net interest margin 4.41% 4.63% 4.42% 4.68%
Net income $ 8,322 $ 7,089 $ 15,246 $ 14,139
SHARE AND PER SHARE DATA
Basic wtd. avg. number of shares outstanding 15,360,499 15,553,496 15,406,181 15,553,496
Basic earnings per share (Basic EPS) $ 0.54 $ 0.46 $ 0.99 $ 0.91
Diluted wtd. avg. number of shares outstanding 15,621,944 15,756,090 15,667,264 15,753,880
Diluted earnings per share (Diluted EPS) $ 0.53 $ 0.45 $ 0.97 $ 0.90
Shares outstanding, net of treasury shares, p.e. 15,239,296 15,653,296 15,239,296 15,653,296
Book value, p.e. $ 15.26 $ 13.85 $ 15.26 $ 13.85
Tangible book value, p.e. 13.41 11.71 13.41 11.71
Cash dividends declared 0.16 0.145 0.32 0.29
Market price:
High 39.13 23.13 39.13 23.13
Low 33.38 20.25 27.63 20.00
Average close 35.85 21.53 34.12 21.22
Last 37.00 23.13 37.00 23.13
Share volume 2,990,875 1,637,400 5,152,599 3,436,132
Average monthly share volume 996,958 545,800 858,767 572,688
Price/Tangible book value, p.e. 2.76 1.98 2.76 1.98
Price/Diluted EPS (last four reported quarters) 18.5 13.0 18.5 13.0
AVERAGE BALANCES
Assets $ 2,962,153 $ 2,743,432 $ 2,939,226 $ 2,680,834
Earning assets 2,768,913 2,590,647 2,750,091 2,524,401
Loans 1,979,596 1,914,211 1,971,756 1,889,495
Goodwill 29,073 34,334 29,712 34,964
Deposits 2,228,976 2,077,242 2,206,475 2,072,532
Short-term borrowed funds 413,953 388,903 421,154 341,640
Long-term debt 34,041 22,607 27,334 23,740
Corporation-obligated mandatorily redeemable capital securities 30,000 20,110 30,000 10,110
Shareholders' equity 229,273 210,869 228,985 209,303
KEY RATIOS
Return on average assets 1.13% 1.04% 1.05% 1.06%
Return on average shareholders' equity 14.56 13.48 13.43 13.62
Efficiency ratio 59.49 61.43 60.91 61.40
Total other operating income to gross revenue (t.e.) 21.62 17.98 20.55 18.36
Net loan charge-offs to average loans 0.12 0.34 0.13 0.34
Provision for loan losses to average loans 0.37 0.40 0.37 0.39
Allowance for loan losses to loans, p.e. 1.43 1.24 1.43 1.24
Allowance for loan losses coverage of non-performing loans, p.e. 255.81 152.21 255.81 152.21
Non-performing assets to total assets, p.e. 0.41 0.57 0.41 0.57
Total capital to risk-adjusted assets, p.e. 11.76 11.72 11.76 11.72
Tier 1 capital to risk-adjusted assets, p.e. 10.51 10.55 10.51 10.55
Tier 1 capital to quarterly average total assets (Leverage) 7.87 7.94 7.87 7.94
Tangible shareholders' equity to tangible assets, p.e. 6.89 6.51 6.89 6.51
</TABLE>
Note: All share and per share data has been restated for the effect of the
2-for-1 stock split declared February 24, 1998.
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ --------------------
(Dollars in thousands, except per share data) 1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $45,242 $43,711 $ 89,386 $ 85,543
Interest on money market investments 150 80 195 194
Interest on securities available for sale 11,425 9,987 22,819 18,435
Interest on investment securities 320 534 732 1,122
------------------------------------------
Total interest income 57,137 54,312 113,132 105,294
Interest expense:
Deposits 20,915 18,861 41,323 37,245
Short-term borrowed funds 5,488 5,211 11,144 8,866
Long-term debt 538 376 874 771
------------------------------------------
Total interest expense 26,941 24,448 53,341 46,882
------------------------------------------
Net interest income 30,196 29,864 59,791 58,412
Less: provision for loan losses 1,840 1,936 3,685 3,686
------------------------------------------
Net interest income after provision for loan losses 28,356 27,928 56,106 54,726
------------------------------------------
Other operating income:
Income from trust and investment management fees 2,394 2,081 4,616 4,103
Service charges on deposit accounts 2,223 1,981 4,386 3,837
Card product income 514 822 922 1,542
Loan servicing income 216 640 633 1,329
Net loan transactions 861 183 1,472 418
Net securities transactions 69 6 (370) 24
Bank owned life insurance 553 - 1,093 -
Other income 1,562 862 2,824 1,948
------------------------------------------
Total other operating income 8,392 6,575 15,576 13,201
Other operating expenses:
Compensation 9,746 9,443 19,588 18,409
Employee benefits 2,137 1,963 4,438 4,289
Net occupancy 1,922 1,948 3,930 3,923
Equipment and software 1,764 1,733 3,500 3,489
Data processing 1,308 1,223 2,459 2,430
Other real estate owned and repossession 116 264 338 361
Legal and professional 1,106 658 2,047 1,452
Printing and supplies 476 600 1,041 1,197
Advertising and marketing 687 630 1,375 1,244
Communications 601 611 1,193 1,197
Amortization of goodwill 1,306 1,306 2,612 2,612
Capital securities 789 526 1,578 526
Other expenses 2,688 3,129 5,603 5,886
------------------------------------------
Total other operating expenses 24,646 24,034 49,702 47,015
------------------------------------------
Income before income tax expense 12,102 10,469 21,980 20,912
Income tax expense 3,780 3,380 6,734 6,773
------------------------------------------
Net income $ 8,322 $ 7,089 $ 15,246 $ 14,139
==========================================
Basic earnings per share $ 0.54 $ 0.46 $ 0.99 $ 0.91
==========================================
Diluted earnings per share $ 0.53 $ 0.45 $ 0.97 $ 0.90
==========================================
</TABLE>
Note: All per share data has been restated for the effect of the 2-for-1
stock split declared February 24, 1998.
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(Dollars in thousands, except share and per share data) 1998 1997 1997
------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Assets
Cash and due from banks $ 98,078 $ 85,734 $ 88,422
Money market investments 37,205 50 4,502
-----------------------------------------
Cash and cash equivalents 135,283 85,784 92,924
-----------------------------------------
Securities available for sale, at fair value 723,795 710,308 701,063
Loans held for sale 36,284 24,958 17,286
Investment securities 13,912 23,972 28,041
Loans 1,969,767 1,960,629 1,931,434
Less: allowance for loan losses 28,116 25,721 23,963
-----------------------------------------
Net loans 1,941,651 1,934,908 1,907,471
-----------------------------------------
Accrued interest receivable 15,954 16,115 16,551
Premises, equipment and software, net 27,995 29,446 30,054
Other real estate owned and repossessed assets 1,196 1,574 559
Goodwill 28,307 30,919 33,530
Capitalized mortgage servicing rights 5,252 4,650 4,743
Bank-owned life insurance 41,170 40,077 -
Other assets 23,788 20,266 19,085
-----------------------------------------
Total assets $2,994,587 $2,922,977 $2,851,307
=========================================
Liabilities, Corporation-Obligated Mandatorily Redeemable
Capital securities and Shareholders' Equity
Deposits:
Non-interest bearing $ 323,973 $ 324,320 $ 302,922
NOW accounts & money market savings 1,008,833 895,682 798,798
Regular savings 176,653 185,453 205,935
Time deposits $100 thousand and greater 94,172 103,998 87,615
Time deposits under $100 thousand 658,089 690,367 706,560
-----------------------------------------
Total deposits 2,261,720 2,199,820 2,101,830
-----------------------------------------
Short-term borrowed funds:
Federal funds purchased - 700 -
Securities sold under agreements to repurchase 143,007 139,347 129,405
Borrowings from U.S. Treasury 26,046 19,730 23,329
Borrowings from Federal Home Loan Bank of Boston 225,500 263,000 305,000
-----------------------------------------
Total short-term borrowed funds 394,553 422,777 457,734
-----------------------------------------
Long-term debt:
Federal Home Loan Bank of Boston term notes 40,292 6,139 9,722
Bank term loan 9,100 10,400 11,700
-----------------------------------------
Total long-term debt 49,392 16,539 21,422
-----------------------------------------
Accrued interest payable 4,939 4,721 5,112
Other liabilities 21,383 19,248 18,343
-----------------------------------------
Total liabilities 2,731,987 2,663,105 2,604,441
-----------------------------------------
Corporation-obligated mandatorily redeemable capital securities 30,000 30,000 30,000
Shareholders' equity:
Preferred stock, $.01 par value; authorized 500,000 shares as of June
30, 1998, and no shares authorized as of December 31, 1997 and
June 30, 1997 - - -
Common stock, $1.00 par value; authorized 70,000,000 shares and issued
15,653,296 shares as of June 30, 1998, and authorized 20,000,000 shares
and issued 15,653,296 shares as of December 31, 1997, and authorized
20,000,000 shares and issued 7,826,648 shares as of June 30,1997 15,653 15,653 7,827
Surplus 84,248 83,770 87,566
Retained earnings 143,562 134,486 124,532
Unamortized employee restricted stock (1,310) (1,550) (1,047)
Accumulated other comprehensive income 3,820 2,311 (2,012)
Less: Common stock in treasury, at cost;
414,000 shares as of June 30, 1998, 154,000 shares as of
December 31, 1997 and no shares as of June 30, 1997 (13,373) (4,798) -
-----------------------------------------
Total shareholders' equity 232,600 229,872 216,866
-----------------------------------------
Total liabilities, corporation-obligated mandatorily redeemable
capital securities and shareholders' equity $2,994,587 $2,922,977 $2,851,307
=========================================
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unamortized Accumulated
Employee Other
(Dollars in thousands, Common Retained Restricted Comprehensive Treasury Comprehensive
except per share data) Stock Surplus Earnings Stock Income Stock Income Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 7,827 $87,410 $115,130 $(1,153) $(2,477) -- $206,737
Comprehensive income:
Net income -- -- 30,489 -- -- -- $30,489 30,489
-------
Other comprehensive income, net
of tax:
Unrealized net holding gains
arising during the year
(pre-tax $7,654) -- -- -- -- -- -- 4,954
Reclassification adjustment for
net gains realized in net
income during the year
(pre-tax $258) -- -- -- -- -- -- (166)
-------
Other comprehensive income 4,788 4,788 4,788
-------
Comprehensive income $35,277
-------
Cash dividends $.58 per share -- -- (9,069) -- -- -- (9,069)
Issuance of employee restricted
stock -- -- -- (315) -- -- (315)
Amortization of employee restricted
stock -- 851 -- (82) -- -- 769
Issuance of restricted stock units
under directors' deferred
compensation plan, net -- 3,335 (4) -- -- -- 3,331
Exercise of employee stock options,
net -- -- (2,060) -- -- -- (2,060)
Purchase of treasury stock, net -- -- -- -- -- (4,798) (4,798)
2-for-1 stock split 7,826 (7,826) -- -- -- -- --
---------------------------------------------------------------- --------
Balance, December 31, 1997 $15,653 $83,770 $134,486 $(1,550) $ 2,311 $ (4,798) $229,872
================================================================ ========
Comprehensive income:
Net income -- -- $ 6,924 -- -- -- $ 6,924 $ 6,924
-------
Other comprehensive income, net
of tax:
Unrealized net holding gains
arising during the quarter
(pre-tax $517) -- -- -- -- -- -- 318
Reclassification adjustment for
net losses realized in net
income during the quarter
(pre-tax $439) -- -- -- -- -- -- 284
-------
Other comprehensive income 602 602 602
-------
Comprehensive income $ 7,526
-------
Cash dividends $.16 per share -- -- (2,472) -- -- -- (2,472)
Amortization of employee restricted
stock -- 217 -- 29 -- -- 246
Issuance of restricted stock units
under directors' deferred
compensation plan, net -- 145 (3) -- -- -- 142
Exercise of employee stock options,
net -- -- (413) -- -- -- (413)
Purchase of treasury stock, net -- -- -- -- -- (5,019) (5,019)
---------------------------------------------------------------- --------
Balance, March 31, 1998 $15,653 $84,132 $138,522 $(1,521) $ 2,913 $ (9,817) $229,882
================================================================ ========
Comprehensive income:
Net income -- -- $ 8,322 -- -- -- $ 8,322 $ 8,322
-------
Other comprehensive income, net
of tax:
Unrealized net holding gains
arising during the quarter
(pre-tax $1,493) -- -- -- -- -- -- 951
Reclassification adjustment for
net gains realized in net
income during the quarter
(pre-tax $69) -- -- -- -- -- -- (44)
-------
Other comprehensive income 907 907 907
-------
Comprehensive income $ 9,229
=======
Cash dividends $ .16 per share -- -- (2,434) -- -- -- (2,434)
Amortization of employee restricted
stock -- 38 -- 211 -- -- 249
Issuance of restricted stock units
under directors' deferred
compensation plan, net -- 78 (18) -- -- -- 60
Exercise of employee stock options,
net -- -- (830) -- -- -- (830)
Purchase of treasury stock, net -- -- -- -- -- (3,556) (3,556)
---------------------------------------------------------------- --------
Balance, June 30, 1998 $15,653 $84,248 $143,562 $(1,310) $ 3,820 $(13,373) $232,600
================================================================ ========
</TABLE>
Note: All per share data has been restated for the effect of the 2-for-1
stock split declared February 24, 1998.
See accompanying notes to unaudited interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
(Dollars in thousands) 1998 1997
--------- ---------
<S> <C> <C>
Increase in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 15,246 $ 14,139
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of premises,
equipment and software 2,459 2,334
Amortization of goodwill 2,612 2,612
Net amortization of securities available for sale 1,707 1,686
Net accretion of investment securities (133) (179)
Provision for loan losses 3,685 3,686
Adjustment of other real estate owned to estimated
fair value 68 184
Provision for deferred tax benefit (465) (98)
Amortization of employee restricted stock 495 262
Exercise of employee stock options, net (1,243) (197)
Issuance of restricted stock units under directors'
deferred compensation plan, net 202 -
Net decrease in trading account assets 22 -
Net securities transactions 370 (24)
Net gain on sale of securities held for trading (22) -
Net gain on sale of other real estate owned and
repossessed assets (170) (177)
Proceeds from sale of loans held for sale 152,836 45,212
Originations and purchases of loans held for resale (162,690) (49,974)
Net gain on sale of loans held for sale (1,472) (418)
Decrease (increase) in interest receivable 161 (1,403)
Increase in interest payable 218 1,724
Decrease (increase) in other assets and other intangibles (5,181) 1,527
Increase (decrease) in other liabilities 2,137 (407)
------------------------
Total adjustments (4,404) 6,350
------------------------
Net cash provided by operating activities 10,842 20,489
------------------------
Cash flows from investing activities:
Proceeds from maturity and call of securities
available for sale 87,735 36,651
Proceeds from maturity and call of investment securities 10,206 6,355
Proceeds from sale of securities available for sale 88,403 -
Purchase of securities available for sale (189,335) (207,497)
Proceeds from sale of OREO and repossessed assets 1,630 1,623
Loans purchased - (30,023)
Net increase in originated loans (11,578) (57,690)
Capital expenditures (1,452) (2,954)
------------------------
Net cash used in investing activities (14,391) (253,535)
------------------------
Cash flows from financing activities:
Net increase in deposits 61,900 35,766
Net increase (decrease) in short-term borrowed funds (28,224) 177,273
Purchase of treasury stock, net (8,575) -
Issuance of corporation-obligated mandatorily redeemable
capital securities - 30,000
Issuance of long-term debt 37,645 -
Payments on long-term debt (4,792) (4,501)
Dividends paid (4,906) (4,540)
------------------------
Net cash provided by financing activities 53,048 233,998
------------------------
Net increase in cash and cash equivalents 49,499 952
------------------------
Cash and cash equivalents at beginning of period 85,784 91,972
------------------------
Cash and cash equivalents at end of period $ 135,283 $ 92,924
========================
Additional disclosure relative to statement of cash flows:
Interest paid $ 53,123 $ 45,158
========================
Taxes paid $ 9,049 $ 4,905
========================
Supplemental schedule of non-cash investing and
financing activities:
Net transfer of loans to OREO and repossessed assets $ 1,150 $ 1,268
Adjustment to securities available for sale to fair
value, net of tax 1,509 465
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited interim consolidated financial statements
include the accounts of the Company and its subsidiaries, First
Massachusetts Bank, N.A., North American Bank Corporation and its
wholly owned subsidiary, Farmington National Bank, The Howard Bank,
N.A., First Vermont Bank and Trust Company and its wholly owned
subsidiary, Banknorth Mortgage Company, Franklin Lamoille Bank,
Granite Savings Bank and Trust Company, Woodstock National Bank, The
Stratevest Group, N.A., North Group Realty, Inc., and Banknorth
Capital Trust I. It is the opinion of management that the accompanying
unaudited interim consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and reflect all
adjustments which are considered necessary to report fairly the
financial position as of June 30, 1998 and 1997, the Consolidated
Statements of Income for the three and six months ended June 30, 1998
and 1997, and the Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 and the Consolidated Statements of
Changes in Shareholders' Equity for the three months ended March 31,
1998 and June 30, 1998 and the year ended December 31, 1997. The
accompanying unaudited interim consolidated financial statements
should be read in conjunction with Banknorth Group, Inc.'s
consolidated year end financial statements, including notes thereto,
which are included in Banknorth Group, Inc.'s 1997 annual report to
shareholders on Form 10-K.
2. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of
common shares outstanding for the period. Issuable shares (such as
those related to the directors' restricted stock units), and
returnable shares (such as restricted stock awards) are considered
outstanding common shares and are included in the computation of basic
earnings per share as of the date that all necessary conditions have
been satisfied. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance
of common stock that then shared in the earnings of the entity (such
as the Company's stock options). All share and per share data has been
adjusted for the 2-for-1 stock split declared by the Company on
February 24, 1998.
The following table provides calculations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months Ended June 30,
------------------------------------------------------------------------
Dollars in thousands, 1998 1997
except for share and per share data ----------------------------------- ----------------------------------
Weighted Weighted
Average Per Share Average Per Share
Net Income Shares Amount Net Income Shares Amount
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $8,322 15,360,499 $0.54 $7,089 15,553,496 $0.46
Effect of dilutive securities:
Stock options 234,244 166,972
Restricted stock awards 27,201 35,622
---------- ----------
Diluted earnings per share $8,322 15,621,944 $0.53 $7,089 15,756,090 $0.45
====================================================================
<CAPTION>
Six Months Ended June 30,
------------------------------------------------------------------------
Dollars in thousands, 1998 1997
except for share and per share data ----------------------------------- -----------------------------------
Weighted Weighted
Average Per Share Average Per Share
Net Income Shares Amount Net Income Shares Amount
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $15,246 15,406,181 $0.99 $14,139 15,553,496 $0.91
Effect of dilutive securities:
Stock options 232,100 165,765
Restricted stock awards 28,983 34,619
---------- ----------
Diluted earnings per share $15,246 15,667,264 $0.97 $14,139 15,753,880 $0.90
====================================================================
</TABLE>
3. On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for
reporting and display of comprehensive income and its components.
Comprehensive income includes the reported net income of a company
adjusted for items that are currently accounted for as direct entries
to equity, such as the mark to market adjustment on securities
available for sale, foreign currency items and minimum pension
liability adjustments. At the Company, comprehensive income represents
net income plus other comprehensive income, which consists of the net
change in unrealized gains or losses on securities available for sale
for the period. Accumulated other comprehensive income represents the
net unrealized gains or losses on securities available for sale as of
the balance sheet dates. Comprehensive income for the six month
periods ended June 30, 1998 and 1997 was $16.8 million and $14.6
million, respectively.
4. In February 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," which amends the disclosure requirements of
SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Certain Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits," and SFAS
No. 106,"Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 132 standardizes the disclosure requirements of
SFAS No. 87 and No. 106 to the extent practicable and recommends a
parallel format for presenting information about pensions and other
postretirement benefits. This Statement is applicable to all entities
and addresses disclosure only. The Statement does not change any of
the measurement or recognition provisions provided for in SFAS No. 87,
No. 88, or No. 106. The Statement is effective for fiscal years
beginning after December 15, 1997. Management anticipates providing
the required disclosures in the December 31, 1998 consolidated
financial statements.
5. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Management is currently
evaluating the impact of this Statement on the Company's consolidated
financial statements.
[LOGO] KPMG Peat Marwick LLP
515 Broadway
Albany, New York 12207
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Banknorth Group, Inc.
We have reviewed the accompanying consolidated balance sheets of
Banknorth Group, Inc. and subsidiaries ("the Company") as of June 30, 1998
and 1997, and the related consolidated statements of income for the three
and six month periods ended June 30, 1998 and 1997, and the consolidated
statements of changes in shareholders' equity for the three months ended
March 31, 1998 and June 30, 1998, and cash flows for the six month periods
ended June 30, 1998 and 1997. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such
an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the consolidated financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Banknorth Group, Inc.
and subsidiaries as of December 31, 1997, and the related consolidated
statements of income and cash flows for the year then ended (not presented
herein) and the consolidated statement of changes in shareholders' equity
for the year then ended; and in our report dated January 23, 1998, except
for note 15 which is as of February 24, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1997 and the consolidated statements of changes in
shareholders' equity for the year ended December 31, 1997, is fairly stated,
in all material respects, in relation to the consolidated balance sheet and
statement of changes in shareholders' equity from which it has been derived.
/S/ KPMG PEAT MARWICK LLP
Albany, New York
July 17, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The financial review which follows focuses on the factors affecting
the consolidated financial condition and results of operations of Banknorth
Group, Inc. ("the parent company") and its subsidiaries during the three and
six months ended June 30, 1998, with comparisons to 1997, as applicable.
Collectively, the parent company and its subsidiaries are referred to herein
as "Banknorth" or "Company". Net interest income and net interest margin are
presented in this discussion on a fully taxable equivalent basis (f.t.e.).
Balances discussed are daily averages unless otherwise described. The
unaudited consolidated interim financial statements, as well as the 1997
annual report to shareholders' should be read in conjunction with this
review. Amounts in prior period consolidated financial statements are
reclassified whenever necessary to conform to the current period's
presentation.
Except for historical information contained herein, the matters
contained in this review are "forward-looking statements" that involve risk
and uncertainties, including statements concerning future events or
performance and assumptions and other statements which are other than
statements of historical facts. The Company wishes to caution readers that
the following important factors, among others, could in the future affect
the Company's actual results and could cause the Company's actual results
for subsequent periods to differ materially from those expressed in any
forward-looking statement made by or on behalf of the Company herein:
* the effect of changes in laws and regulations, including federal
and state banking laws and regulations, with which the Company and
its banking subsidiaries must comply, the cost of such compliance
and the potentially material adverse effects if the Company or any
of its banking subsidiaries were not in substantial compliance
either currently or in the future as applicable;
* the effect of changes in accounting policies and practices, as may
be adopted by the regulatory agencies as well as by the Financial
Accounting Standards Board, or changes in the Company's
organization, compensation and benefit plans;
* the effect on the Company's competitive position within its market
area of increasing consolidation within the banking industry and
increasing competition from larger "super regional" and other
banking organizations as well as non-bank providers of various
financial services;
* the effect of certain customers and vendors of critical systems or
services failing to adequately address issues relating to becoming
year 2000 compliant;
* the effect of unforeseen changes in interest rates;
* the effects of changes in the business cycle and downturns in the
local, regional or national economies.
The Company wishes to caution readers not to place undue reliance on
any forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including those described above, could
cause the Company's actual results or circumstances for future periods to
differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
ACQUISITIONS
EVERGREEN BANCORP, INC.
On July 31, 1998, Banknorth Group, Inc. announced a definitive
merger agreement to acquire Evergreen Bancorp, Inc. in exchange for stock
valued at $291.2 million ("Evergreen acquisition"). The transaction is expected
to enhance Banknorth's earnings in 1999. Under the terms of the merger
agreement, shareholders of Evergreen will receive a fixed exchange of 0.9
shares of Banknorth common stock for each share of Evergreen common stock plus
cash in lieu of any fractional shares. Banknorth will issue approximately 7.9
million shares in the transaction, bringing Banknorth's outstanding shares to
approximately 23.2 million.
The merger is subject to approval by shareholders of both companies and
is expected to be completed by the end of 1998 or early in 1999.
The proposed exchange will be tax-free and accounted for as a
pooling-of-interests. The Company also announced the recision of its previously
announced stock repurchase program.
BANKBOSTON BERKSHIRE COUNTY
On July 1, 1998, Banknorth Group, Inc. announced it entered into a
definitive agreement with BankBoston, N.A. to purchase the bank's Berkshire
County, Massachusetts, operations ("Berkshire acquisition"). Banknorth will
pay $52.5 million to acquire ten full-service branches and one limited
service branch, consisting of approximately $285 million of deposits, $78
million of commercial loans, $40 million of consumer loans, and Private Banking
services that include an investment management portfolio of approximately
$1.0 billion.
The loans and deposits will be acquired by Banknorth's Massachusetts
subsidiary, First Massachusetts Bank, N.A., based in Worcester,
Massachusetts. The Private Banking business will be acquired by Banknorth's
trust and investment subsidiary, The Stratevest Group, N.A. The acquisition,
Banknorth's second in Massachusetts, is subject to regulatory approvals and
is expected to close prior to year end.
To complete the transaction, Banknorth will reallocate capital
resources through the use of a special dividend from its subsidiary banks,
except First Massachusetts, to the parent company. All subsidiary banks
paying a special dividend are expected to remain well-capitalized after
payment. The capital (estimated to be approximately $25 million) will then
be infused into First Massachusetts to ensure adequate capital levels exist
at this subsidiary.
After completion of both of the above noted transactions, total assets
of Banknorth will be approximately $4.3 billion.
OVERVIEW
Banknorth recorded net income of $8.3 million, representing diluted
earnings per share ("EPS") of $.53 for the three months ended June 30, 1998,
compared to $7.1 million, or $.45 diluted EPS for the three months ended
June 30, 1997. For the year to date period ended June 30, 1998, net income
was $ 15.2 million, or $.97 diluted EPS, as compared to $14.1 million, or
$.90 diluted EPS.
During the second quarter of 1998:
* Banknorth's stock price closed at $37.00 per share on June 30, 1998.
* The Company completed a 2-for-1 stock split in the form of a 100% stock
dividend on April 6, 1998.
* Shareholders' voted to increase the authorized common stock from
20,000,000 shares to 70,000,000 shares and to create a class of
preferred stock; $.01 par value, 500,000 authorized shares.
COMMON AND PREFERRED STOCK
At the 1998 Annual Meeting of Shareholders of Banknorth Group, Inc. on
May 12, 1998, the shareholders voted to amend the Certificate of
Incorporation to increase the number of authorized shares of common stock
from 20,000,000 to 70,000,000 and to create a class of preferred stock.
500,000 shares of $.01 par value preferred stock was authorized and no
shares of preferred stock are currently outstanding.
On February 24, 1998, the board of directors declared a 2-for-1 split
of its common stock effected in the form of a 100% stock dividend. The new
shares were issued on April 6, 1998, to shareholders of record on March 20,
1998. The stock split was recorded as of December 31, 1997 by a transfer of
$7.8 million from surplus to common stock, representing the $1.00 par value
for each additional share issued. All share and per share data has been
restated to reflect the split.
ASSET/LIABILITY MANAGEMENT
In managing its asset portfolios, Banknorth utilizes funding and
capital sources within sound credit, investment, interest rate and liquidity
risk guidelines. Loans and securities are the Company's primary earning
assets with additional capacity invested in money market instruments.
Earning assets were 92.87% and 94.07% of total assets at June 30, 1998 and
1997, respectively.
Banknorth, through its management of liabilities, attempts to provide
stable and flexible sources of funding within established liquidity and
interest rate risk guidelines. This is accomplished through core deposit
products offered within the markets served by the Company as well as through
the prudent use of purchased liabilities.
Banknorth's objectives in managing its balance sheet are to limit the
sensitivity of net interest income to actual or potential changes in
interest rates, and to enhance profitability through strategies that promise
sufficient reward for understood and controlled risk. The Company is
deliberate in its efforts to maintain adequate liquidity, under prevailing
and forecasted economic conditions, and to maintain an efficient and
appropriate mix of core deposits, purchased liabilities and long-term debt.
Corporation-Obligated Mandatorily Redeemable Capital Securities
On May 1, 1997, Banknorth established Banknorth Capital Trust I (the
"Trust") which is a statutory business trust formed under Delaware law upon
filing a certificate of trust with the Delaware Secretary of State. The
Trust exists for the exclusive purposes of (i) issuing and selling 30 year
corporation-obligated mandatorily redeemable capital securities ("capital
securities") in the aggregate amount of $30.0 million at 10.52%, (ii) using
the proceeds from the sale of the capital securities to acquire the junior
subordinated debentures ("debentures") issued by the parent company and (iii)
engaging in only those other activities necessary, advisable or incidental
thereto. The debentures are the sole assets of the Trust and, accordingly,
payments under the debentures are the sole revenue of the Trust. All of the
common securities of the Trust are owned by the parent company. The Company has
used the net proceeds from the sale of the capital securities for general
corporate purposes. The capital securities, with associated expense that is tax
deductible, qualify as Tier I capital under regulatory definitions. The
parent company's primary sources of funds to pay interest on the debentures
are current dividends from subsidiary banks. Accordingly, the parent
company's ability to service the debentures is dependent upon the continued
ability of the subsidiary banks to pay dividends. As noted above, the
Company plans to reallocate capital resources through the use of a special
dividend from certain of its subsidiary banks to the parent company. Management
does not believe that this reallocation of capital nor the impact on the
dividend paying capacity of these subsidiary banks will adversely effect the
parent company's ability to service the debentures. See also "Capital
Resources" section of this document.
Earning Assets
Earning assets were $2.8 billion during the second quarter of 1998, an
increase of $178.3 million, or 6.9% from the second quarter of 1997
primarily due to the growth of the loan portfolio resulting from increased
loan demand and growth in the securities available for sale portfolio. For
the year to date period, earning assets were $2.8 billion as compared to
$2.5 billion in 1997. Table A, Mix of Average Earning Assets, shows how the
mix of earning assets has changed as compared to the same period in 1997.
Loans. Average total loans of $2.0 billion during the three months
ended June 30, 1998, were $65.4 million, or 3.4%, above the same period of
1997. The increase in total loans from year to year is attributable to
strong loan demand in the Massachusetts market and improved lending activity
in Vermont and New Hampshire. Table B, Loan Portfolio, provides the detailed
components of the loan portfolio as of June 30, 1998 and 1997, as well as
December 31, 1997.
Given the current economic indicators and interest rate environment,
management believes that the Company will see continued but slowing growth
in the loan portfolio during 1998. If interest rates rise, a greater slow
down in lending activity could be expected.
Loans held for sale. Loans designated as held for sale are primarily
single-family mortgages, originated by the Company's mortgage banking
subsidiary or purchased through its wholesale lending operation, awaiting
sale into the secondary market or to other Banknorth subsidiaries. Loans
originated or purchased by the mortgage company are sold on the secondary
market with some level of production, primarily adjustable rate mortgages,
retained by the Company and held in its mortgage portfolio. Loans held for
sale were $41.9 million during the second quarter of 1998, $29.2 million, or
229.3% higher than the average for the three-month period ending June 30,
1997, and $12.0 million or 40.1% higher than the average for the first
quarter of 1998. New loan originations and refinancing activity are at record
levels due to the current low market interest rates. This high production
level results in a greater level of mortgage product awaiting sale into the
secondary market. Management expects production will continue to be strong
throughout the next few months due to the high application volume in
process.
Securities available for sale. This portfolio is managed on a total
return basis with the objective of exceeding, by 50 basis points, the return
that would be experienced if investing solely in U.S. Treasury instruments.
The primary purpose of this category of investments is liquidity while
simultaneously producing earnings, and is managed under prudent policy
limits established for average duration, average convexity and average
portfolio life.
Period end balances in securities available for sale totaled $723.8
million at June 30, 1998 as compared to $701.1 million at June 30, 1997, an
increase of $22.7 million or 3.2%. The June 1998 balance is stated net of a
fair value adjustment reflecting net unrealized gains of $6.0 million,
whereas the June 1997 balance is net of a fair value adjustment reflecting
net unrealized losses of $3.2 million. The increase in the portfolio balance
noted above was primarily the result of the Company increasing its holdings
of securities available for sale in order to effectively leverage the net
proceeds of the capital securities, and the re-investment of cash flows
generated by the held-to-maturity portfolio into the available for sale
portfolio. These increases were partially offset by the Company's purchase
of $40.0 million in bank-owned life insurance ("BOLI") in the fourth quarter
of 1997. Securities available for sale were allowed to mature or were sold
in order to provide the funding necessary to implement the BOLI program.
Average balances for securities available for sale for the three months
ended June 30, 1998 and 1997 were $718.6 million and $627.9 million,
respectively.
In January 1998, Banknorth sold approximately $85.5 million of balloon
mortgage-backed securities from the available for sale portfolio. While the
sales resulted in a pre-tax net loss of $504 thousand, the enhanced yield
received through re-investment will result in recovery of the loss prior to
the end of 1998. Investment securities yielding approximately 5.12% were
sold and replaced with securities yielding approximately 6.48%. After
recovering the $504 thousand loss incurred, Banknorth anticipates additional
interest income of approximately $523 thousand during 1998 and approximately
$994 thousand in improved interest income in 1999 as a result of this sale.
The new investment securities purchased, as well as the characteristics of
the portfolio after the transaction, meet all established corporate
guidelines.
Investment securities. The designation "investment securities" is made
at the time of purchase or transfer based upon the intent and ability to
hold these securities until maturity. The management of this portfolio
focuses on yield and earnings generation, liquidity through cash flow and
interest rate risk characteristics within the framework of the entire
balance sheet. Cash flow guidelines and average duration targets have been
established for management of this portfolio. As of June 30, 1998, the
balance of securities in this category was $13.9 million, $14.1 million
below the balance at June 30, 1997. The primary cause of the reduced
portfolio size was the reinvestment of cash flows from maturities during
1997, and thus far in 1998 into the available for sale portfolio.
Table C, Securities Available for Sale and Investment Securities
contains details of investment securities at June 30, 1998 and 1997, as well
as December 31, 1997.
Money market investments. Money market investments, primarily Federal
funds sold, averaged $10.8 million during the second quarter of 1998, up
$5.1 million, or 90.0%, from the second quarter of 1997. Subsidiary banks
with excess overnight cash positions invest such funds with other subsidiary
banks that may have short term funding needs. This internal settlement,
performed prior to purchasing/selling funds in the market, reduces funding
costs and improves overall liquidity. For the year to date period ended June
30, 1998, money market investments were $6.9 million, 2.9% higher than the
average for the six months ended June 30, 1997.
Income on earning assets. Income from earning assets was $57.4 million
for the three-month period ended June 30, 1998, as compared to $54.4 million
for the same period in 1997. The increase of $3.0 million, or 5.4%, resulted
from the increases in earning assets through normal growth and asset
purchases described previously. Total earning assets during the second
quarter of 1998 of $2.8 billion yielded 8.32%, while in 1997 earning assets
of $2.6 billion yielded 8.41%. The increase in earning assets contributed
$3.5 million towards the increase in interest income, while the decline in
yield of 9 basis points resulted in $573 thousand less in interest income.
Table D, Average Balances, Yields and Net Interest Margins and Table F,
Volume and Yield Analysis contain details of changes by category of interest
income from earning assets.
For the six months ended June 30, 1998 and 1997, income from earning
assets was $113.6 million and $105.6 million, respectively. Total earning
assets of $2.8 billion, increased $225.7 million or 8.9% over the six month
average of 1997. The yield on earning assets was 8.34% during the first six
months of 1998 as compared to 8.41% during the same period of 1997. During
the first six months of 1998, the increase in earning assets contributed
$9.0 million towards the increase over the same period of 1997, while the 7
basis point reduction in yield caused a $972 thousand decrease.
Funding Sources
Banknorth utilizes various traditional sources of funding to support
its earning asset portfolios. Average total net funding increased by $188.2
million, or 7.6%, in the second quarter of 1998 in comparison to the average
for the quarter ended June 30, 1997. Table E, Average Sources of Funding,
presents the various categories of funds used and the corresponding average
balances for the second quarter of 1998 and 1997.
Deposits. Total core deposits averaged $2.1 billion during the three
month period ended June 30, 1998, $145.5 million, or 7.3%, over the second
quarter average of 1997. NOW and money market accounts increased by $181.9
million, while retail time deposits in denominations less than $100,000
decreased by $38.7 million and regular savings decreased $30.2 million. In
the current low rate environment, the indexed money market product offered
is an attractive option for our customers. Total core deposits represented
79.6% of total net funding during the second quarter of 1998 as compared to
79.8% during the same quarter of 1997.
Purchased liabilities. Total purchased liabilities increased on
average by $45.4 million to $535.2 million during the second quarter of 1998
from $489.8 million during the second quarter of 1997. The increased
borrowings, or purchased liabilities, were the result of the incremental
funding requirements related to loan and investment purchases made during
1997. As stated previously, various securities purchases were made to
increase the Company's earning asset base and effectively utilize the net
proceeds from the capital securities transaction. Banknorth constantly seeks
to fund its earning assets in the most efficient and profitable manner.
Accordingly, management expects prudent levels of short-term borrowed funds
and long-term debt to continue to be important sources of funding.
Bank Debt. Average bank debt of $9.7 million during the second quarter
of 1998 represents the 1994 funding of the acquisition of North American
Bank Corporation. Banknorth financed the transaction with a bank credit
facility whose original terms were re-negotiated in December 1996. The re-
negotiated terms provide improved pricing and an extension of the repayment
period. The balance of $9.1 million at June 30, 1998 will be repaid within
four years.
Interest expense summary. Total interest expense for the three months
ended June 30, 1998 was $26.9 million, an increase of $2.5 million or 10.2%,
as compared to the same period of 1997. Total interest bearing liabilities
of $2.4 billion, increased $155.8 million or 7.1%. Increased levels of
interest-bearing liabilities contributed $1.7 million to the increase while
the increase in rates paid increased interest expense by $768 thousand. The
cost of interest bearing liabilities was 4.57% in the second quarter of
1998, an increase of 13 basis points from the second quarter of 1997.
Total interest bearing liabilities averaged $2.3 billion during the
six months ended June 30, 1998, $189.2 million, or 8.8%, higher than in
1997. The cost of funds was 4.58% in 1998 as compared to 4.38% in 1997.
Table D, Average Balances, Yields and Net Interest Margins and Table F,
Volume and Yield Analysis contain details of changes by category of interest
bearing liabilities and interest expense.
Net Interest Income
Net interest income totaled $30.4 million and $30.0 million for the
three month periods ended June 30, 1998 and 1997, respectively. The net
interest margin was 4.41% during the second quarter of 1998 as compared to
4.63% during the same period of 1997. The yield on earning assets of 8.32%
for the second quarter of 1998, was 9 basis points below the corresponding
period of the prior year. Interest rates generally decreased during 1997 and
early 1998. This trend of the decreasing yield on earning assets was
experienced throughout 1997 and 1998. During the fourth quarter of 1997, the
net interest margin was 4.48%, 9 basis points below the margin for the full
year of 1997. The net interest margin narrowed during 1997 and to date in
1998 as competition for quality credits and retail deposits resulted in a
tighter spread between asset yields and deposit costs. A changing mix of
deposits where higher cost deposits, such as money market accounts, are
increasing whereas lower cost deposits are declining contributed to the
narrowing margin.
Also impacting the net interest margin was the issuance of $30.0
million in corporation-obligated mandatorily redeemable capital securities
in May 1997. In an effort to increase interest income sufficient to offset
the cost of the capital securities, the Company purchased approximately
$120.0 million in earning assets. This leveraging strategy is anticipated to
be short-term in nature, and use of these funds may change in response to
future corporate initiatives.
Further, the purchase of $40.0 million in BOLI adversely impacted the
net interest margin as securities available for sale were allowed to mature
or were sold in order to provide the funding necessary to implement the
bank-owned life insurance program. The earnings from BOLI are recorded as
other non-interest income and are tax exempt.
RISK MANAGEMENT
Credit Risk
Credit risk is managed through a network of loan officer authorities,
credit committees, loan policies and oversight from the corporate senior
credit officer and subsidiary boards of directors. Management follows a
policy of continually identifying, analyzing and grading credit risk
inherent in each loan portfolio. An ongoing independent review, subsequent
to management's review, of individual credits is performed on each
subsidiary bank's commercial loan portfolios by the independent Loan Review
function.
As a result of management's ongoing review of the loan portfolio,
loans are placed in non-accrual status, either due to the delinquent status
of principal and/or interest payments, or a judgment by management that,
although payments of principal and/or interest are current, such action is
prudent. Loans are generally placed in non-accrual status when principal
and/or interest is 90 days overdue, except in the case of consumer loans
which are generally charged off when loan principal and/or interest payments
are 120 days overdue.
Non-performing assets ("NPAs"). Non-performing assets include non-
performing loans, which are those loans in a non-accrual status, loans which
have been treated as troubled debt restructurings and loans past due 90 days
or more and are still accruing interest. Also included in the total non-
performing assets are foreclosed and repossessed non-real estate assets.
NPAs were $12.2 million at June 30, 1998, a decrease of $4.1 million
from both June 30, 1997 and December 31, 1997 when NPAs amounted to $16.3
million. The ratio of NPAs to loans plus other real estate owned and
repossessed assets at June 30, 1998, was .62% compared to .84% at June 30,
1997. Table G, Non-performing Assets, contains the details for June 30, 1998
and 1997, and December 31, 1997.
Non-performing loans ("NPLs") at June 30, 1998 were $11.0 million, a
net decrease of $4.8 million, or 30.2%, from June 30, 1997. The decrease in
NPLs is largely in non-accrual loans reflecting relative improvement in the
overall credit quality of the loan portfolio. Delinquency rates in the
residential portfolio are consistent with trends seen regionally and
nationally. Given the possibility of increases in interest rates, management
expects that certain credits may encounter difficulty in continuing to
perform under the contractual terms of their loans should rates actually
increase. While this occurrence might result in increases in NPLs and
subsequent charge-offs, management does not expect it to materially affect
the Company's performance during the year.
Total other real estate owned and repossessed assets were $1.2 million
at June 30, 1998, up $637 thousand from one year earlier and down $378
thousand from December 31, 1997.
Allowance for loan losses and provision. The balance of the allowance
for loan losses ("allowance") has been accumulated over the years through
periodic provisions and is available to absorb future losses on loans. The
adequacy of the allowance is evaluated monthly based on review of all
significant loans, with particular emphasis on non-performing and other
loans, if any, that management believes warrant special attention. The
balance of the allowance is maintained at a level that is, in management's
judgment, representative of the amount of risk inherent in the loan
portfolio given past, present and expected conditions.
Table H, Summary of Loan Loss Experience, includes an analysis of the
changes to the allowance for the six months ended June 30, 1998 and 1997, as
well as for the year ended December 31, 1997. Loans charged off in the first
six months of 1998 were $3.8 million, or an annualized .39% of average
loans. This represents an improvement over the prior year's six month
results when charge-offs totaled $5.5 million, or an annualized .58% of
average loans. Recoveries in the first six months of 1998 on loans
previously charged off were $2.5 million as compared to $2.3 million for the
same period of 1997.
The provision for loan losses ("provision") for the three months ended
June 30, 1998 was $1.8 million, or an annualized .37% of average loans. The
provision for the first six months of the year was $3.7 million or an
annualized .37% of average loans. Provisions of $3.7 million, or an
annualized .39% of average loans, and $7.7 million, or .40% of average loans
were experienced during the first half of 1997 and the full year of 1997,
respectively.
Provisions recorded are those necessary to maintain the allowance at a
level adequate enough to absorb reasonably predictable loan charge-offs. At
June 30, 1998, the allowance provided a coverage of non-performing loans of
255.81% as compared to 175.08% and 152.21% at December 31, 1997 and June 30,
1997, respectively.
Market Risk
Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate
risk and commodity price risk, do not arise in the normal course of the
Company's business activities.
The responsibility for balance sheet risk management oversight is the
function of the Asset/Liability Committee ("ALCO"). The corporate ALCO,
chaired by the chief financial officer and composed of various subsidiary
presidents and other members of corporate senior management, meets on a
monthly basis to review balance sheet structure, formulate strategy in light
of expected economic conditions, and review performance against guidelines
established to control exposure to the various types of inherent risk. Bank
subsidiary ALCOs meet to implement policy, review adherence to guidelines,
adjust product prices as necessary and monitor liquidity.
Interest rate risk can be defined as an exposure to a movement in
interest rates that could have an adverse effect on the Company's net
interest income. Interest rate risk arises naturally from the imbalance in
the repricing, maturity and/or cash flow characteristics of assets and
liabilities. Management's objectives are to measure, monitor and develop
strategies in response to the interest rate risk profile inherent in the
Company's consolidated balance sheet and off-balance sheet financial
instruments.
Interest rate risk is managed by the Corporate ALCO. Interest rate
risk measurement and management techniques incorporate the repricing and
cash flow attributes of balance sheet and off-balance sheet instruments as
they relate to potential changes in interest rates. The level of interest
rate risk, measured in terms of the potential future effect on net interest
income, is determined through the use of modeling and other analytical
techniques under multiple interest rate scenarios. Interest rate risk is
evaluated on a quarterly basis and reviewed by the Corporate ALCO with
subsidiary risk profiles presented to the respective boards of directors.
The Company's Asset Liability Management Policy, approved annually by
the boards of directors, establishes interest rate risk limits in terms of
variability of net interest income under rising, flat and decreasing rate
scenarios. It is the role of the ALCO to evaluate the overall risk profile
and to determine actions to maintain and achieve a posture consistent with
policy guidelines.
Certain imbalances that could potentially cause interest rate risk to
exceed policy limits are correctable through management of asset and liability
product offerings. Depending upon the specific nature of the imbalance, it may
be more efficient and less costly to utilize off-balance sheet instruments such
as interest rate swaps and interest rate cap or floor agreements, among other
things, to correct the imbalance. Banknorth has historically utilized both
swaps and floors to address certain interest rate risk exposures.
A significant portion of the Company's loans are adjustable or
variable rate resulting in reduced levels of interest income during periods
of falling rates. Certain categories of deposits reach a point in this
instance where market forces prevent further reduction in the rate paid on
those instruments. The net effect of these circumstances would be reduced
interest income offset only by a nominal decrease in interest expense, thereby
narrowing the net interest margin. To protect the Company from this
occurrence, interest rate floors in the notional amount of $295.0 million are
used to mitigate the potential reduction in interest income on certain
adjustable and variable rate loans. The notional amount of $50.0 million in
interest rate swaps previously in use were sold in May 1998 for a net gain
of $254 thousand. This gain is being amortized into interest income over the
original remaining lives of the initial swap contracts of approximately one
year. The swaps were sold in order to reduce interest rate risk sensitivity of
the Company.
The aggregate cost of the interest rate floors was $2.8 million which
is being amortized as an adjustment to the related loan yield on a straight-
line basis over the terms of the agreements. At June 30, 1998, the
unamortized balance of these interest rate floors was $1.2 million. The
estimated fair value of these floors was $845 thousand as of June 30, 1998.
Banknorth utilizes an interest rate risk model widely recognized in
the financial industry to monitor and measure interest rate risk. The model
simulates the behavior of interest income and expense of all on and off
balance sheet financial instruments under different interest rate scenarios
together with a dynamic future balance sheet. Banknorth measures its
interest rate risk in terms of potential changes in net interest income.
Liquidity Risk
Banknorth seeks to obtain favorable sources of liabilities and to
maintain prudent levels of liquid assets in order to satisfy varied
liquidity demands. Besides serving as a funding source for maturing
obligations, liquidity provides flexibility in responding to customer
initiated needs. Many factors affect the Company's ability to meet liquidity
needs, including variations in the markets served by its network of offices,
its mix of assets and liabilities, reputation and credit standing in the
marketplace, and general economic conditions.
The Company actively manages its liquidity position through target
ratios established under its liquidity policy. Continual monitoring of these
ratios, both historically and through forecasts under multiple interest rate
scenarios, allows Banknorth to employ strategies necessary to maintain
adequate liquidity. Management has also defined various degrees of adverse
liquidity situations which could potentially occur and has prepared
appropriate contingency plans should such situations arise.
The Company achieves its liability based liquidity objectives in a
variety of ways. Net liabilities can be classified into three basic
categories for the purpose of managing liability-based liquidity: core
deposits, purchased liabilities and long-term or capital market funds. Core
deposits consist of non-interest bearing demand deposits and retail
deposits. These deposits result from relatively dependable customers and
commercial banking relationships and are therefore viewed as a stable
component of total required funding. Banknorth will continue to seek funding
in the most efficient and cost effective manner as possible. Table E
reflects the components of funding for June 30, 1998 and 1997.
Among the traditional funding instruments comprising the category of
purchased liabilities are time deposits $100 thousand and greater, Federal
funds purchased, securities sold under agreement to repurchase, borrowings
from the United States Treasury Department Treasury, Tax and Loan accounts,
and short and long-term borrowings from the FHLB.
One of the principal components of short-term borrowed funds is
securities sold under agreement to repurchase. These borrowings generally
represent short-term uninsured customer investments, which are secured by
Company securities. During the second quarter of 1998, the average
securities sold under agreement to repurchase were $137.4 million, as
compared to $135.7 million in the second quarter of 1997.
Borrowings from the FHLB, both short-term and long-term were up
$39.2 million, or 16.3%, from the second quarter of 1997 to the second
quarter of 1998. The increase was needed to support asset growth and the mix
of short and long-term funding is dependent on rates and purpose of the debt.
As previously discussed, the Company utilized financial institution
borrowings pursuant to a five year credit facility to finance the NAB
acquisition. The Company's primary source of funds to pay principal and
interest under this credit facility is dependent upon the continued ability
of the subsidiary banks to pay dividends in an amount sufficient to service
such debt.
A secondary source of liquidity is represented by asset-based
liquidity. Asset-based liquidity consists of holdings of securities
available for sale and short-term money market investments that can be
readily converted to cash, as well as single-family mortgage loans which
qualify for secondary market sale.
The Company also uses the capital markets as a source of liquidity. In
May 1997, the Company established a trust to issue and sell $30.0 million in
capital securities. The net proceeds were used for general corporate
purposes. In February 1996, the Company issued 2,044,446 shares of common
stock resulting in $32.2 million in net proceeds which were used to provide
a portion of the initial capital of FMB and to help offset the reduction in
the Company's regulatory capital ratios resulting from the acquisition.
OTHER OPERATING INCOME AND EXPENSES
Other operating income is a significant source of revenue for
Banknorth and an important factor in the Company's results of operations.
Other operating income totaled $8.4 million for the second quarter of 1998,
$1.8 million or 27.6% higher than the second quarter of 1997. For the six
months ended June 30, 1998 and 1997, other operating income was $15.6
million and $13.2 million, respectively. The improvement in other operating
income resulted primarily from the implementation of performance initiatives
announced in the third quarter of 1997 and the current strong mortgage
banking environment.
Trust and investment management. The trust function contributes the
largest recurring portion of other operating income through fees generated
from the performance of trust and investment management services. Income
from trust and investment management services totaled $2.4 million in the
second quarter of 1998, an increase of $313 thousand, or 15.0% over the same
period of 1997. For the six months ended June 30, 1998, trust and investment
management income was $4.6 million, up $513 thousand, or 12.5%, over the
same period of 1997. The increase resulted from increased assets under
management by The Stratevest Group, N.A., the Company's trust bank as well
as strong financial market conditions. Opportunities for increases in the
generation of trust income lie in increased penetration of the Massachusetts
and New Hampshire markets. The company is experiencing increased sales in these
areas and, accordingly, management expects increased levels of trust and
investment management income for the entire 1998 year as compared to the
previous year.
Service charges on deposit accounts. Service charges on deposit
accounts, $2.2 million for the three months ended June 30, 1998, were $242
thousand, or 12.2% above the same period of 1997. During late 1997,
Banknorth reviewed and enhanced its policies and practices regarding service
charges and service charge waivers. Accordingly, the level of fee income
increased this quarter over the 1997 level. For the six months ended June 30,
1998, service charges on deposits were $4.4 million, an increase of
$549 thousand or 14.3% compared to the first six months of 1997.
Card product income. Card product income declined $308 thousand, to
$514 thousand, for the second quarter of 1998 as compared to the second
quarter of 1997. The decline is the result of the sale of the merchant
processing business in late 1997. Income on card products is, therefore,
expected to continue at a reduced level throughout 1998 as the gross
merchant processing income, amounting to $1.4 million in 1997, will no
longer be received by the Company. Eliminating the effect of the merchant
services sale, card product income was up $40 thousand in the second quarter
of 1998 compared to the second quarter of 1997 primarily as a result of the
increased usage of the debit and Visa card product. For the six months ended
June 30, 1998 and 1997, card product income was $922 thousand and $1.5
million, respectively.
Loan servicing income. Loan servicing income, primarily mortgage
servicing at BMC, was $216 thousand in the second quarter of 1998, a
decrease of $424 thousand, or 66.3%, from the same period of 1997. The
decline is the result of the reduction in the balance of mortgage loans
serviced for unrelated third parties from $991.5 million at June 30, 1997 to
$919.5 million at the June 30, 1998, and increased amortization of mortgage
servicing rights ("MSRs"). The amortization of MSRs was $575 thousand in the
second quarter of 1998 compared to $294 thousand for the same period in 1997.
During the second quarter of 1998, as a result of the high volume of
refinancing in the current low interest rate environment, the Company wrote
down $220 thousand of its MSR balance due to impairment considerations. The
total impairment writedown for the year amounts to $300 thousand. Further
impairment writedowns or reserves may be necessary during the remainder of the
year. For the six months ended June 30, 1998 and 1997, loan servicing income
was $633 thousand and $1.3 million, respectively.
Net loan transactions. Net loan transaction income is normally
generated through the origination and subsequent sale of mortgage products
into the secondary mortgage market. Net loan transaction income in the
second quarter of 1998 amounted to $861 thousand, $678 thousand greater than
the same period of 1997. The significant increase was the result of the
record level production and sales during the second quarter of 1998 given
the current low rate environment. This continued the record production and
sales levels started during the first quarter of the year. For the six
months ended June 30, 1998, net loan transactions were $1.5 million, $1.1
million, or 252.2%, higher than the same period of 1997. New loan
originations and refinancing activity was high for the first six months of
the year and is expected to remain strong through the third quarter as the
number of applications pending and loans in various stages of production are
at high levels as of June 30, 1998.
Net securities transactions. Net gains or losses from securities
transactions are also included in other operating income. In the second
quarter of 1998, the Company realized $69 thousand in net securities gains
as compared to net gains of $6 thousand in the second quarter of 1997. These
gains resulted primarily from the sale of three securities. For the six
months ended June 30, 1998, net losses of $370 thousand were realized
primarily as the result of the sale of approximately $85.5 million of
securities available for sale during January 1998 at a net loss of
approximately $504 thousand. The net loss is expected to be recovered
through enhanced yields within a six month period after the sale. The Company
anticipates that it will consider additional sales from the securities
available for sale portfolio during 1998 as it attempts to achieve its
objectives in the total return management of the securities available for
sale portfolio. The Company also expects that future losses incurred, if any,
would be recovered through yield improvement within a one to two year period.
BOLI income. In the fourth quarter of 1997, Banknorth purchased $40.0
million of bank-owned life insurance which resulted in $553 thousand in
other income in the second quarter of 1998 and $1.1 million for the six
month period ended at that point. Securities available for sale were allowed
to mature or were sold in order to provide the funding necessary to
implement the bank-owned life insurance program. As a result of this fourth
quarter transaction, the Company benefits in future periods from the tax-
free nature of income generated from the life insurance policies. In
general, the yield received from the bank-owned life insurance is comparable
to the yield previously received on the securities available for sale,
thereby causing the Company's earnings stream to benefit from the tax
characteristics of the bank-owned life insurance.
Other income. Other income amounted to $1.6 million for the three
months ended June 30, 1998, compared to $862 thousand for the three months
ended June 30, 1997. The increase was primarily the result of two new
initiatives implemented in the last year. First, in October 1997, the
Company commenced charging a terminal usage fee for ATM transactions by non-
customers. This fee allows the Company to recover a portion of the expense
of operating the ATM network. Additionally, a new official check process was
implemented in February 1998. For the six months ended June 30, 1998 and
1997, other income was $2.8 million and $1.9 million, respectively. Again
the above noted initiatives were primarily responsible for the majority of
the increase.
Other Operating Expenses
Other operating expenses for the second quarter of 1998 were $24.6
million, $612 million, or 2.5%, above expense levels in the second quarter
of 1997. The majority of the increase in operating expenses is the
additional $263 thousand expense of the capital securities issued in May
1997, $240 thousand in State of Vermont franchise tax and a $303 thousand
increase in compensation expense. The Company's efficiency ratio improved to
59.49% in the second quarter of 1998, down from 61.43% from the same period
one year earlier. For the six months ended June 30, 1998 and 1997, other
operating expense was $49.7 million and $47.0 million, respectively. The
efficiency ratio on a year date to basis was 60.91% for the first half of 1998
compared to 61.40% for the same period of 1997.
Compensation. Compensation expense increased by $303 thousand, or
3.2%, in the second quarter of 1998 in comparison to the second quarter of
1997, despite the $344 thousand, or 4.1%, decline in base salary expense.
The increase was primarily due to the costs associated with the early
retirement of a senior officer, and the increased costs associated with 1998
incentive compensation, including the short-term management incentives, sales
commissions, and restricted stock awards. Restricted stock awards are
directly impacted by the increase in the Company's stock price, which closed
at $37.00 as of June 30, 1998 compared to $23.13 as of June 30, 1997. For
the six months ended June 30, 1998, compensation expense was $1.2 million
greater than the same period of 1997 due primarily to incentive compensation
costs, not base salary expense. The full-time equivalent employee (FTE)
count has fallen 160 FTEs from June 30, 1997 to June 30, 1998. The current
FTE staffing count is 1,014 FTEs as of June 30, 1998.
Employee benefits. Employee benefits costs were up $174 thousand or
8.9% for the three months ended June 30, 1998 compared to the same period
one year earlier. The increase was primarily in medical insurance premiums
and pension costs. The pension actuarial assumptions were updated given the
current interest rate environment and current mortality tables. The result
was an increase in pension expense of $84 thousand more in the second
quarter of 1998 compared to the same quarter of 1997.
Data Processing. Data processing expense increased slightly from $1.2
million for the three months ended June 30, 1997 to $1.3 million for the
three months ended June 30, 1998. The Company recently extended its data
processing contract with its current vendor for an additional 30 months. The
data processing contract was extended to February 2001. For the six months
ended June 30, 1998 and 1997, the data processing expenses were $2.5 million
and $2.4 million, respectively.
Other real estate owned. Expenses relating to other real estate owned
and repossessed assets decreased for the second quarter of 1998 by $148
thousand as compared to June 30, 1997. For the six months ended June 30,
1998 and 1997, these expenses were $338 thousand and $361 thousand,
respectively. Included in this expense category in the first six months of
1998 are net gains on the sale of other real estate owned and repossessed
assets in the amount of $170 thousand. Net gains on sales in the first half
of 1997 were $177 thousand. Management anticipates the level of other real
estate owned and repossession expenses to remain steady throughout the year.
Legal and professional. Legal and professional expenses of $1.1
million during the second quarter of 1998, were $448 thousand higher than
the second quarter of 1997. For the six months ended June 30, 1998 and 1997,
legal and other professional expenses were $2.0 million and $1.5 million,
respectively.
Advertising and marketing. Advertising and marketing expenses were
$687 thousand for the three months ended June 30, 1998, $57 thousand, or
9.0% higher than the first three months of 1997. A new branding initiative
was announced in late 1997 and resulted in higher expenses this quarter in
comparison to the same quarter a year ago. Marketing expenses are expected
to be slightly higher throughout 1998 in comparison to 1997. For the six
months ended June 30, 1998 and 1997, these marketing expenses were $1.4
million and $1.2 million, respectively.
Goodwill. Amortization of goodwill amounted to $1.3 million in the second
quarters of 1998 and 1997 and $2.6 million for both of the six month
periods. The goodwill balance outstanding will increase by approximately $54
million as a result of the Berkshire acquisition. Goodwill amortization
expense will increase by $3.6 million annually.
Capital securities. The capital securities issue in May 1997, which
created Tier I capital, gave rise to expense of $789 thousand in the second
quarter of 1998 compared to $526 thousand in the second quarter of 1997. As
mentioned previously, incremental investment purchases were made in an
effort to offset the cost of the capital securities through increased net
interest income. Funding for the investments was primarily in the form of
borrowings from the FHLB.
Other. Other expenses totaled $2.7 million and $3.1 million for the
three months ended June 30, 1998 and 1997, respectively. The majority of the
$441 thousand decrease was the result of a change in the deferred
compensation plan for directors. Prior to July 1, 1997, the directors'
deferred compensation plan was a cash based plan and, therefore, its expense
was effected by the change in the stock price of Banknorth. This resulted in
$433 thousand in director's expense in the second quarter of 1997. The plan
was amended as of July 1, 1997 such that the ultimate distribution of director
deferred compensation will be made in Banknorth common stock as opposed to
cash and, therefore, this expense was eliminated. The only significant
increase in other expenses was the $240 thousand increase in State of Vermont
franchise tax mandated under the statewide education reform act. For the six
months ended June 30, 1998 and 1997, other operating expense was $5.6 million
and $5.9 million, respectively.
SUBSIDIARY BANK MERGER
On July 30, 1998, the Company announced that it plans to merge one of
its subsidiary banks, Woodstock National Bank, into another subsidiary bank,
First Vermont Bank. The combination of the two banks is subject to regulatory
approval and is expected to take place in the fall of 1998, with Woodstock
National Bank's three offices becoming branch offices of First Vermont Bank.
YEAR 2000 COMPLIANCE
Banknorth is addressing the significant issues relating to the
programming code in existing computer systems as the year 2000 ("Y2k")
approaches. The Y2k problem is pervasive and complex as virtually every
computer operation faces the potential affects of the rollover of the two
digit year value to 00. The issue is whether computer systems are programmed
to recognize date sensitive information when the year changes to 2000.
Banknorth does not write any source programming code and therefore is
dependent upon external vendors and service providers to alter their
programs to become Y2k compliant. In 1996, the Company began the process of
reviewing the compliance of all programs in use and in 1997, developed a
comprehensive plan not only to test these systems but to maintain Y2k
compliance after successful testing has occurred. Additionally, the Company
is working closely with all of its vendors of data processing systems in
order to become familiar with their plans to become compliant. The Company
has established a Y2k committee comprised of managers throughout the
organization and will track the plan to address the significant Y2k
challenges facing the Company.
The cost of ensuring that computer programs are capable of
successfully entering the year 2000 is expected to be significant in terms
of utilization of existing resources. Incremental expenses related to this
issue are not, at this time, expected to be material to the performance of
Banknorth Group. The Company is continuing to evaluate appropriate courses
of corrective action in case they become necessary.
INCOME TAXES
In the second quarter of 1998, Banknorth recognized income tax expense
of $3.8 million, as compared to $3.4 million in second quarter of 1997. The
increase in tax expense is primarily reflective of increased earnings,
despite the reduction in the effective rate from 32.3% in the second quarter
of 1997 to 31.2% in the second quarter of 1998. The tax expense on the
Company's income was lower than tax expense at the statutory rate of 35%,
due primarily to tax-exempt income, including loans, and securities as well
as BOLI, and low-income housing credits. For the six months ended June 30,
1998 and 1997, the effective tax rates were 30.6% and 32.4%, respectively.
CORE TANGIBLE PERFORMANCE
After removing the impact of the balance of goodwill and the related
period amortization, "core tangible" performance as of June 30, 1998 and
1997 was as follows:
<TABLE>
<CAPTION>
For the six months ended
June 30, 1998 June 30, 1997
-----------------------------
(Dollars in thousands, except share and per share data)
<S> <C> <C>
Net income, as reported $ 15,246 $ 14,139
Add: Amortization of goodwill, net of tax 1,672 1,672
--------------------------
"Core tangible income" $ 16,918 $ 15,811
==========================
Average tangible assets $2,909,514 $2,645,870
Average tangible equity $ 199,273 $ 174,339
Diluted weighted average shares outstanding 15,667,264 15,753,880
"Core tangible" return on average tangible assets 1.17% 1.21%
"Core tangible" return on average tangible equity 17.12% 18.29%
"Core tangible" diluted earnings per share $1.08 $1.00
</TABLE>
All share and per share data has been restated for the effect of the 2-for-1
stock split declared February 24, 1998.
CAPITAL RESOURCES
Consistent with its long-term goal of operating a sound and profitable
financial organization, Banknorth strives to maintain strong capital ratios.
Prior to 1996, new issues of equity securities had not been required since
traditionally most of its capital requirements had been provided through
retained earnings. However, to continue the Company's growth through
acquisition, Banknorth chose to raise approximately $32.2 million in equity
capital through the issuance of 2,044,446 shares of its common stock in
February 1996.
In October 1997, Banknorth announced a stock buyback plan. In connection
with the Evergreen acquisition, the stock buyback plan was rescinded on
July 31, 1998. As of June 30, 1998, the Company had repurchased 414,000 shares
which are being held as treasury stock.
On February 24, 1998, the Board of Directors approved a 2-for-1 split
of its common stock effected in the form of a 100% stock dividend. The new
shares were issued April 6, 1998, to shareholders of record on March 20,
1998. All share and per share data has been restated for this stock split.
During the second quarter of 1998, the board of directors declared a
dividend of $.16 per share, resulting in a payout of 29.3% of second quarter
1998 net income. The board of directors of the Company presently intends to
continue the payment of regular quarterly cash dividends subject to
adjustment from time to time, based upon the Company's earnings outlook and
other relevant factors. The Company's principal source of funds to pay cash
dividends is derived from dividends from its subsidiary banks. Various laws
and regulations restrict the ability of banks to pay dividends to their
shareholders.
In the first quarter of 1996, as part of its plan to capitalize FMB at
a "well-capitalized" level for regulatory capital purposes, the Company
redeployed accumulated capital of certain of its subsidiary banks which
included substantially all of the then current dividend paying capacity of
such subsidiary banks. Because the special dividend exceeded applicable
regulatory limitations, the Company obtained approval from the applicable
regulatory agencies for the payment of that portion of the dividend, which
exceeded such regulatory limitations. The Company is again planning for the
redeployment of accumulated capital of certain subsidiary banks to
capitalize FMB in order to complete the Berkshire acquisition. During the
third quarter of 1998, the Company will request regulatory approval for the
payment of a special dividend from certain subsidiary banks to the parent
company. Payment of that special dividend by certain subsidiaries will
restrict the dividend paying capacity of these subsidiary banks to 100% or
less of prospective current period net income. Banknorth also utilizes
dividends from its subsidiaries for the payment of the cost of the capital
securities and long term debt. Accordingly, the payment of dividends by the
Company in the future will require the generation of sufficient earnings by
the subsidiary banks. The Company presently expects all subsidiary banks to
be profitable and continue to pay sufficient dividends.
At June 30, 1998, Banknorth's Tier I capital was $230.5 million, or
10.51% of total risk-adjusted assets, compared to $215.3 million and 10.55%
as of June 30, 1997. The $15.1 million increase in the Tier I capital is
attributable to the strong earnings of the Company. The ratio of Tier I
capital to total quarterly average adjusted assets (leverage ratio) was
7.87%, and 7.94% as of June 30, 1998 and 1997, respectively. Banknorth, and
its subsidiaries individually, are "well capitalized" at June 30, 1998
according to regulatory definition, and thereby, exceed all minimum
regulatory capital requirements. Table I, Capital Ratios, provides the
components of capital as of various dates.
TABLE A. Mix of Average Earning Assets
<TABLE>
<CAPTION>
Three Months Percentage of
Ended June 30, % of Total Earning Assets
------------------------ Total --------------------
(Dollars in thousands) 1998 1997 Change Change 1998 1997
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income
and unamortized loan fees and costs:
Commercial, financial and agricultural $ 361,065 $ 324,951 $ 36,114 20.3% 13.0% 12.5%
Construction and land development 34,262 33,894 368 0.2 1.3 1.3
Commercial real estate 576,665 550,592 26,073 14.6 20.8 21.3
Residential real estate 745,708 760,486 (14,778) (8.3) 26.9 29.4
Credit card receivables 28,361 21,908 6,453 3.6 1.0 0.8
Lease receivables 74,846 74,387 459 0.3 2.7 2.9
Other installment 158,689 147,993 10,696 6.0 5.7 5.7
------------------------------------------------------
Total loans, net of unearned income
and unamortized loan fees and costs 1,979,596 1,914,211 65,385 36.7 71.4 73.9
Securities available for sale:
U.S. Treasuries and Agencies 118,466 139,067 (20,601) (11.6) 4.3 5.4
States and political subdivisions 7,070 2,897 4,173 2.3 0.3 0.1
Mortgage-backed securities 334,933 300,924 34,009 19.1 12.1 11.6
Corporate debt securities 219,043 151,481 67,562 37.9 7.9 5.8
Equity securities 39,053 33,528 5,525 3.1 1.4 1.3
-------------------------------------------------------------------
Total securities available for sale,
at fair value 718,565 627,897 90,668 50.8 26.0 24.2
Investment securities:
U.S. Treasuries and Agencies 4,523 10,359 (5,836) (3.3) 0.2 0.4
States and political subdivisions 777 1,124 (347) (0.2) - 0.1
Mortgage-backed securities 12,724 18,632 (5,908) (3.3) 0.5 0.7
Corporate debt securities 10 10 - - - -
-------------------------------------------------------------------
Total investment securities,
at amortized cost 18,034 30,125 (12,091) (6.8) 0.7 1.2
Loans held for sale 41,921 12,730 29,191 16.4 1.5 0.5
Money market investments 10,797 5,684 5,113 2.9 0.4 0.2
-------------------------------------------------------------------
Total earning assets $2,768,913 $2,590,647 $178,266 100.0% 100.0% 100.0%
===================================================================
</TABLE>
TABLE B. Loan Portfolio
<TABLE>
<CAPTION>
At June 30, At December 31, % Change
----------------------------------------- ------------------ --------------------
1998 1997 1997 06/30/98 06/30/98
------------------- ------------------- ------------------ versus versus
Amount Percent Amount Percent Amount Percent 06/30/97 12/31/97
--------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial, and
agricultural $ 358,155 18.2% $ 336,743 17.4% $ 332,385 17.0% 6.4% 7.8%
Real estate:
Construction and land development 35,447 1.8 31,731 1.6 36,276 1.8 11.7 (2.3)
Commercial 578,342 29.4 551,968 28.6 563,800 28.8 4.8 2.6
Residential 733,139 37.2 765,974 39.7 773,429 39.4 (4.3) (5.2)
--------------------------------------------------------------
Total real estate 1,346,928 68.4 1,349,673 69.9 1,373,505 70.0 (0.2) (1.9)
--------------------------------------------------------------
Credit card receivables 28,426 1.4 21,513 1.1 25,669 1.3 32.1 10.7
Lease receivables 74,943 3.8 74,707 3.9 76,302 3.9 0.3 (1.8)
Other installment 161,315 8.2 148,798 7.7 152,768 7.8 8.4 5.6
--------------------------------------------------------------
Total installment 264,684 13.4 245,018 12.7 254,739 13.0 8.0 3.9
--------------------------------------------------------------
Total loans 1,969,767 100.0 1,931,434 100.0 1,960,629 100.0 2.0 0.5
Less: allowance for loan losses 28,116 1.4 23,963 1.2 25,721 1.3 17.3 9.3
--------------------------------------------------------------
Net loans $1,941,651 98.6% $1,907,471 98.8% $1,934,908 98.7% 1.8% 0.3%
==============================================================
</TABLE>
TABLE C. Securities Available for Sale and Investment Securities
<TABLE>
<CAPTION>
At June 30, At December 31,
-------------------- ---------------
(Dollars in thousands) 1998 1997 1997
-------------------------------------------
<S> <C> <C> <C>
Securities available for sale:
U.S. Treasuries and Agencies $114,477 $158,494 $141,245
States and political subdivisions 7,816 4,727 5,251
Mortgage-backed securities 326,202 320,065 320,473
Corporate debt securities 230,291 181,710 200,710
Equity securities 39,044 39,245 39,044
Valuation reserve 5,965 (3,178) 3,585
----------------------------------------
Recorded value of securities available for sale $723,795 $701,063 $710,308
========================================
Investment securities:
U.S. Treasuries and Agencies $ 2,948 $ 8,847 $ 7,505
States and political subdivisions 776 1,110 781
Mortgage-backed securities 10,178 18,074 15,676
Corporate debt securities 10 10 10
----------------------------------------
Recorded value of investment securities $ 13,912 $ 28,041 $ 23,972
========================================
Fair value of investment securities $ 14,156 $ 28,173 $ 24,246
========================================
Excess of fair value versus recorded value $ 244 $ 132 $ 274
Fair value as a % of recorded value 101.8% 100.5% 101.1%
</TABLE>
TABLE D. Average Balances, Yields, and Net Interest Margins
<TABLE>
<CAPTION>
Three Months Ended June 30,
---------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Money market investments $ 10,797 $ 150 5.57% $ 5,684 $ 80 5.65%
Securities available for sale,
at fair value (1 and 2) 718,565 11,460 6.44 627,897 10,002 6.32
Loans held for sale 41,921 800 7.65 12,730 243 7.66
Investment securities (2) 18,034 325 7.23 30,125 540 7.19
Loans, net of unearned income and
unamortized loan fees (2 and 3) 1,979,596 44,626 9.04 1,914,211 43,580 9.13
-------------------- -------------------
Total earning assets 2,768,913 57,361 8.32 2,590,647 54,445 8.41
---------- ----------
Cash and due from banks 78,515 73,754
Allowance for loan losses (27,497) (24,132)
Other assets 142,222 103,163
---------- ----------
Total assets $2,962,153 $2,743,432
---------- ----------
Interest-bearing liabilities:
NOW accounts & money market savings $ 975,896 9,520 3.91 $ 794,001 7,069 3.57
Regular savings 179,147 1,087 2.43 209,308 1,249 2.39
Time deposits $100 thousand and greater 96,910 1,359 5.62 90,634 1,235 5.47
Time deposits under $100 thousand 666,013 8,949 5.39 704,687 9,308 5.30
-------------------- -------------------
Total interest-bearing deposits 1,917,966 20,915 4.37 1,798,630 18,861 4.21
Short-term borrowed funds 413,953 5,488 5.32 388,903 5,211 5.37
Long-term debt 34,041 538 6.34 22,607 376 6.67
-------------------- -------------------
Total interest-bearing liabilities 2,365,960 26,941 4.57 2,210,140 24,448 4.44
-------------------------------------------------------------
Non-interest bearing deposits 311,010 278,612
Other liabilities 25,910 23,701
Corporation-obligated mandatorily
redeemable capital securities 30,000 20,110
Shareholders' equity 229,273 210,869
---------- ----------
Total liabilities, corporation-obligated
mandatorily redeemable capital securities
and shareholders' equity $2,962,153 $2,743,432
========== ==========
Net interest income $30,420 $29,997
======= =======
Interest rate differential 3.75% 3.97%
==== ====
Net interest margin 4.41% 4.63%
==== ====
Notes:
<F1> For the purpose of the average yield computations, unrealized
gains/(losses) are excluded from the average rate calculation.
<F2> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal and state tax rates.
<F3> Includes principal balances of non-accrual loans and industrial
revenue bonds.
</TABLE>
TABLE D. Average Balances, Yields, and Net Interest Margins
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Money market investments $ 6,894 $ 195 5.70% $ 6,699 $ 194 5.84%
Securities available for sale,
at fair value (1 and 2) 714,856 22,883 6.50 584,011 18,461 6.31
Loans held for sale 35,957 1,259 7.06 12,566 481 7.72
Investment securities (2) 20,628 743 7.26 31,630 1,135 7.24
Loans, net of unearned income and
unamortized loan fees (2 and 3) 1,971,756 88,480 9.05 1,889,495 85,294 9.10
-------------------- --------------------
Total earning assets 2,750,091 113,560 8.34 2,524,401 105,565 8.41
---------- ----------
Cash and due from banks 75,545 76,968
Allowance for loan losses (26,856) (23,900)
Other assets 140,446 103,365
---------- ----------
Total assets $2,939,226 $2,680,834
========== ==========
Interest-bearing liabilities:
NOW accounts & money market savings $ 947,042 18,342 3.91 $ 788,024 13,777 3.53
Regular savings 181,189 2,184 2.43 211,290 2,490 2.38
Time deposits $100 thousand and greater 97,789 2,719 5.61 90,918 2,456 5.45
Time deposits under $100 thousand 675,458 18,078 5.40 705,140 18,522 5.30
-------------------- --------------------
Total interest-bearing deposits 1,901,478 41,323 4.38 1,795,372 37,245 4.18
Short-term borrowed funds 421,154 11,144 5.34 341,640 8,866 5.23
Long-term debt 27,334 874 6.45 23,740 771 6.55
-------------------- --------------------
Total interest-bearing liabilities 2,349,966 53,341 4.58 2,160,752 46,882 4.38
-------------------------------------------------------------
Non-interest bearing deposits 304,997 277,160
Other liabilities 25,278 23,509
Corporation-obligated mandatorily
redeemable capital securities 30,000 10,110
Shareholders' equity 228,985 209,303
---------- ----------
Total liabilities, corporation-obligated
mandatorily redeemable capital securities
and shareholders' equity $2,939,226 $2,680,834
========== ==========
Net interest income $60,219 $ 58,683
======= ========
Interest rate differential 3.76% 4.03%
==== ====
Net interest margin 4.42% 4.68%
==== ====
Notes:
<F1> For the purpose of the average yield computations, unrealized
gains/(losses) are excluded from the average rate calculation.
<F2> Tax exempt income has been adjusted to a tax equivalent basis by tax
effecting such interest at the Federal and state tax rates.
<F3> Includes principal balances of non-accrual loans and industrial
revenue bonds.
</TABLE>
TABLE E. Average Sources of Funding
<TABLE>
<CAPTION>
Three Months Percentage of
Ended June 30, Change Total Net Funding
------------------------ ------------------- -----------------
(Dollars in thousands) 1998 1997 Amount Percent 1998 1997
----------------------------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing deposits $ 311,010 $ 278,612 $ 32,398 11.6% 11.6% 11.2%
Retail deposits:
Regular savings 179,147 209,308 (30,161) (14.4) 6.7 8.4
Time deposits under $100 thousand 666,013 704,687 (38,674) (5.5) 24.9 28.3
NOW accounts & money market savings 975,896 794,001 181,895 22.9 36.4 31.9
-----------------------------------------------------------------
Total retail deposits 1,821,056 1,707,996 113,060 6.6 68.0 68.6
-----------------------------------------------------------------
Total core deposits 2,132,066 1,986,608 145,458 7.3 79.6 79.8
Time deposits $100 thousand and greater 96,910 90,634 6,276 6.9 3.6 3.6
Federal funds purchased 8,461 10,397 (1,936) (18.6) 0.3 0.4
Securities sold under agreements
to repurchase 137,388 135,718 1,670 1.2 5.1 5.5
Borrowings from U.S. Treasury 12,560 12,451 109 0.9 0.5 0.5
Short- term notes from FHLB 255,544 230,337 25,207 10.9 9.6 9.3
Long- term notes from FHLB 24,298 10,264 14,034 136.7 0.9 0.4
-----------------------------------------------------------------
Total purchased liabilities 535,161 489,801 45,360 9.3 20.0 19.7
Bank term loan 9,743 12,343 (2,600) (21.1) 0.4 0.5
-----------------------------------------------------------------
Total net funding $2,676,970 $2,488,752 $188,218 7.6% 100.0% 100.0%
=================================================================
</TABLE>
TABLE F. Volume and Yield Analysis
<TABLE>
<CAPTION>
Three Months
Ended June 30, Due to
------------------ -----------------
(Dollars in thousands) 1998 1997 Change Volume Rate
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income (FTE):
Money market investments $ 150 $ 80 $ 70 $ 72 $ (2)
Securities available for sale 11,460 10,002 1,458 1,242 216
Loans held for sale 800 243 557 557 -
Investment securities 325 540 (215) (217) 2
Loans 44,626 43,580 1,046 1,488 (442)
----------------------------
Total interest income 57,361 54,445 2,916 3,489 (573)
============================
Interest expense:
NOW accounts & money market savings 9,520 7,069 2,451 1,619 832
Regular savings 1,087 1,249 (162) (180) 18
Time deposits $100 thousand and greater 1,359 1,235 124 86 38
Time deposits under $100 thousand 8,949 9,308 (359) (511) 152
Short-term borrowed funds 5,488 5,211 277 335 (58)
Long-term debt 538 376 162 190 (28)
----------------------------
Total interest expense 26,941 24,448 2,493 1,725 768
-------------------------------------------------
Net interest income (FTE) $30,420 $29,997 $ 423 $1,764 $(1,341)
=================================================
</TABLE>
Note: Increases and decreases in interest income and interest expense due
to both rate and volume have been allocated to volume on a consistent
basis.
TABLE F. Volume and Yield Analysis
<TABLE>
<CAPTION>
Six Months
Ended June 30, Due to
------------------ ----------------
(Dollars in thousands) 1998 1997 Change Volume Rate
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income (FTE):
Money market investments $ 195 $ 194 $ 1 $ 6 $ (5)
Securities available for sale 22,883 18,461 4,422 3,757 665
Loans held for sale 1,259 481 778 895 (117)
Investment securities 743 1,135 (392) (395) 3
Loans 88,480 85,294 3,186 3,712 (526)
----------------------------
Total interest income 113,560 105,565 7,995 8,967 (972)
----------------------------
Interest expense:
NOW accounts & money market savings 18,342 13,777 4,565 2,784 1,781
Regular savings 2,184 2,490 (306) (355) 49
Time deposits $100 thousand and greater 2,719 2,456 263 186 77
Time deposits under $100 thousand 18,078 18,522 (444) (780) 336
Short-term borrowed funds 11,144 8,866 2,278 2,062 216
Long-term debt 874 771 103 117 (14)
----------------------------
Total interest expense 53,341 46,882 6,459 4,110 2,349
------------------------------------------------
Net interest income (FTE) $ 60,219 $ 58,683 $1,536 $4,857 $(3,321)
================================================
</TABLE>
Note: Increases and decreases in interest income and interest expense due
to both rate and volume have been allocated to volume on a consistent
basis.
TABLE G. Non-Performing Assets
<TABLE>
<CAPTION>
At At At
June 30, December 31, June 30,
-------- ------------ --------
(Dollars in thousands) 1998 1997 1997
----------------------------------
<S> <C> <C> <C>
Loans on a non-accrual basis:
Commercial, financial and agricultural $ 406 $ 2,749 $ 2,600
Real estate:
Construction and land development 36 - 39
Commercial 2,146 2,645 3,184
Residential 6,918 7,936 8,493
Other installment 31 8 -
---------------------------------
Total non-accrual 9,537 13,338 14,316
Restructured loans:
Real estate:
Commercial - - 378
Residential 33 36 38
Other installment 5 6 6
---------------------------------
Total restructured 38 42 422
Past-due 90 days or more and still accruing:
Commercial, financial and agricultural 187 70 119
Real estate:
Commercial 511 125 -
Residential 141 332 165
Credit card receivables 32 119 157
Lease receivables 197 151 93
Other installment 348 514 471
---------------------------------
Total past-due 90 days or more
and still accruing 1,416 1,311 1,005
---------------------------------
Total non-performing loans 10,991 14,691 15,743
Other real estate owned (OREO) 1,185 1,074 534
Non-real estate and repossessed assets 11 500 25
---------------------------------
Total foreclosed and repossessed assets (F/RA) 1,196 1,574 559
---------------------------------
Total non-performing assets $12,187 $16,265 $16,302
=================================
Allowance for loan losses (ALL) $28,116 $25,721 $23,963
ALL coverage of non-performing loans 255.81% 175.08% 152.21%
Non-performing assets as a % of (loans & F/RA) 0.62 0.83 0.84
Non-performing assets to total assets 0.41 0.56 0.57
</TABLE>
TABLE H. Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Six Months Twelve Months Six Months
Ended June 30, Ended December 31, Ended June 30,
-------------- ------------------ --------------
(Dollars in thousands) 1998 1997 1997
--------------------------------------------------
<S> <C> <C> <C>
Loans outstanding-end of period $1,969,767 $1,960,629 $1,931,434
Average loans outstanding-period to date 1,971,756 1,916,097 1,889,495
Allowance for loan losses at beginning of period $ 25,721 $ 23,520 $ 23,520
Loans charged off:
Commercial, financial and agricultural (132) (1,343) (825)
Real estate:
Commercial (133) (669) (466)
Residential (928) (1,915) (945)
----------------------------------------------
Total real estate (1,061) (2,584) (1,411)
Credit card receivables (300) (691) (349)
Lease receivables (781) (1,510) (565)
Other installment (1,559) (4,022) (2,362)
----------------------------------------------
Total installment (2,640) (6,223) (3,276)
Total loans charged off (3,833) (10,150) (5,512)
----------------------------------------------
Recoveries on loans:
Commercial, financial and agricultural 390 592 395
Real estate:
Construction and land development 9 87 71
Commercial 337 638 263
Residential 409 628 288
----------------------------------------------
Total real estate 755 1,353 622
Credit card receivables 40 109 53
Lease receivables 604 970 366
Other installment 754 1,665 833
----------------------------------------------
Total installment 1,398 2,744 1,252
Total recoveries on loans 2,543 4,689 2,269
----------------------------------------------
Loans charged off, net of recoveries (1,290) (5,461) (3,243)
----------------------------------------------
Provision for loan losses 3,685 7,662 3,686
----------------------------------------------
Allowance for loan losses at end of period $ 28,116 $ 25,721 $ 23,963
==============================================
Loans charged off, net (annualized),
as a % of average total loans 0.13% 0.29% 0.34%
Provision for loan losses (annualized)
as a % of average total loans 0.37 0.40 0.39
Allowance for loan losses
as a % of period-end total loans 1.43 1.31 1.24
</TABLE>
TABLE I. Capital Ratios
<TABLE>
<CAPTION>
At At At At At
June 30, March 30, December 31, September 30, June 30,
(Dollars in thousands) 1998 1998 1997 1997 1997
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total risk-adjusted on-balance sheet assets $2,077,236 $2,061,517 $2,024,610 $1,960,074 $1,936,981
Total risk-adjusted off-balance sheet items 115,393 106,994 108,212 107,849 104,257
-----------------------------------------------------------------------
Total risk-adjusted assets $2,192,629 $2,168,511 $2,132,822 $2,067,923 $2,041,238
=======================================================================
Total risk-adjusted assets / average total assets,
net of fair value adjustment and goodwill (1) 74.83% 75.20% 75.02% 73.44% 75.27%
Total shareholders' equity $ 232,600 $ 229,882 $ 229,872 $ 228,486 $ 216,866
Fair value adjustment (1) (3,820) (2,913) (2,311) (1,563) 2,012
Corporation-obligated manditorily redeemable 30,000 30,000 30,000 30,000 30,000
capital securities
Goodwill (28,307) (29,613) (30,919) (32,225) (33,530)
-----------------------------------------------------------------------
Total Tier I capital 230,473 227,356 226,642 224,698 215,348
Maximum allowance for loan losses (2) 27,417 26,850 25,721 25,061 23,963
-----------------------------------------------------------------------
Total capital $ 257,890 $ 254,206 $ 252,363 $ 249,759 $ 239,311
=======================================================================
Quarterly average total assets,
net of fair value adjustment and goodwill (1) $2,930,026 $2,883,474 $2,843,167 $2,815,958 $2,711,913
Allowance for loan losses 28,116 26,850 25,721 25,061 23,963
Total capital to total risk-adjusted assets 11.76% 11.72% 11.83% 12.08% 11.72%
Tier I capital to total risk-adjusted assets 10.51 10.48 10.63 10.87 10.55
Tier I capital to total quarterly average
adjusted assets (Leverage) 7.87 7.88 7.97 7.98 7.94
Notes:
<F1> The market valuation relating to securities available for sale included
in shareholders' equity and total assets on
consolidated balance sheets has been excluded in the above ratios.
<F2> The maximum allowance for loan losses used in calculating total capital
is the period-end allowance for loan losses or 1.25% of risk-adjusted
assets prior to the allowance limitation, whichever is lower.
</TABLE>
SUMMARY OF UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1998 1997
-------------------------- -----------------------------------------
(Dollars in thousands, except
share and per share data) Q2 Q1 Q4 Q3 Q2
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income:
Interest income $ 57,137 $ 55,995 $ 56,891 $ 56,321 $ 54,312
Interest expense 26,941 26,400 26,339 26,103 24,448
-----------------------------------------------------------------------
Net interest income 30,196 29,595 30,552 30,218 29,864
Provision for loan losses 1,840 1,845 2,036 1,940 1,936
-----------------------------------------------------------------------
Net interest income after provision
for loan losses 28,356 27,750 28,516 28,278 27,928
-----------------------------------------------------------------------
Other operating income:
Income from trust and investment management fees 2,394 2,222 2,263 2,270 2,081
Service charges on deposit accounts 2,223 2,163 2,279 1,910 1,981
Card product income 514 408 816 787 822
Loan servicing income 222 417 603 630 640
Gain on sale of mortgage servicing rights (6) - (23) 896 -
Net loan transactions 861 611 416 381 183
Net securities transactions 69 (439) 71 163 6
Bank-owned life insurance 553 540 77 - -
All other 1,562 1,262 3,622 964 862
-----------------------------------------------------------------------
Total other operating income 8,392 7,184 10,124 8,001 6,575
Other operating expenses:
Compensation & employee benefits 11,883 12,143 12,189 11,967 11,406
Net occupancy, equipment & software expense 3,686 3,744 3,858 3,772 3,681
Data processing 1,308 1,151 1,286 1,256 1,223
OREO and repossession 116 222 316 287 264
Amortization of goodwill 1,306 1,306 1,306 1,305 1,306
Capital securities 789 789 789 789 526
All other 5,558 5,701 5,735 5,695 5,628
-----------------------------------------------------------------------
Total other operating expenses 24,646 25,056 25,479 25,071 24,034
-----------------------------------------------------------------------
Income before income tax expense 12,102 9,878 13,161 11,208 10,469
Income tax expense 3,780 2,954 4,401 3,618 3,380
-----------------------------------------------------------------------
Net income $ 8,322 $ 6,924 $ 8,760 $ 7,590 $ 7,089
=======================================================================
Average Balances:
Loans $ 1,979,596 $ 1,963,829 $ 1,950,504 $ 1,933,960 $ 1,914,211
Loans held for sale 41,921 29,926 19,707 20,957 12,730
Securities available for sale 718,565 711,108 716,592 708,403 627,897
Investment securities 18,034 23,250 24,853 27,074 30,125
Money market investments 10,797 2,947 8,286 7,934 5,684
-----------------------------------------------------------------------
Total earning assets 2,768,913 2,731,060 2,719,942 2,698,328 2,590,647
Other assets 193,240 184,940 156,455 151,418 152,785
-----------------------------------------------------------------------
Total assets $ 2,962,153 $ 2,916,000 $ 2,876,397 $ 2,849,746 $ 2,743,432
=======================================================================
Non-interest-bearing deposits $ 311,010 $ 298,629 $ 305,831 $ 293,979 $ 278,612
Interest-bearing deposits 1,917,966 1,884,807 1,860,793 1,830,540 1,798,630
-----------------------------------------------------------------------
Total deposits 2,228,976 2,183,436 2,166,624 2,124,519 2,077,242
Short-term borrowed funds 413,953 428,723 412,502 430,360 388,903
Long-term debt 34,041 20,553 17,577 20,196 22,607
Other liabilities 25,910 24,638 21,645 21,387 23,701
Corporation-obligated mandatorily redeemable
capital securities 30,000 30,000 30,000 30,000 20,110
Shareholders' equity 229,273 228,650 228,049 223,284 210,869
-----------------------------------------------------------------------
Total liabilities, corporation-obligated
mandatorily redeemable capital securities
and shareholders' equity $ 2,962,153 $ 2,916,000 $ 2,876,397 $ 2,849,746 $ 2,743,432
=======================================================================
Loans charged off, net of recoveries $ 574 $ 716 $ 1,376 $ 842 $ 1,611
Non-performing assets, p.e. 12,187 16,282 16,265 18,545 16,302
Share and Per Share Data:
Basic wtd. avg. number of shares outstanding 15,360,499 15,450,990 15,639,784 15,694,514 15,553,496
Basic earnings per share (Basic EPS) $ 0.54 $ 0.45 $ 0.56 $ 0.48 $ 0.46
Diluted wtd. avg. number of shares outstanding 15,621,944 15,709,954 15,902,314 15,920,056 15,756,090
Diluted earnings per share (Diluted EPS) $ 0.53 $ 0.44 $ 0.55 $ 0.48 $ 0.45
Tangible book value, p.e. 13.41 13.06 12.84 12.54 11.71
Cash dividends declared 0.16 0.16 0.145 0.145 0.145
Closing price at quarter end 37.00 36.50 32.13 27.32 23.13
Cash dividends declared as a % of net income 29.25% 35.70% 25.79% 29.91% 32.02%
Key Ratios:
Return on average assets 1.13% 0.96% 1.21% 1.06% 1.04%
Return on average shareholders' equity 14.56 12.28 15.24 13.49 13.48
Net interest margin, fte 4.41 4.43 4.48 4.46 4.63
Efficiency ratio 59.49 62.39 62.41 62.93 61.43
Expense ratio 2.00 2.20 2.27 2.31 2.37
As a % of risk-adjusted assets, p.e.:
Total capital 11.76 11.72 11.83 12.08 11.72
Tier 1 capital 10.51 10.48 10.63 10.87 10.55
As a % of quarterly average total assets:
Tier 1 capital (regulatory leverage) 7.87 7.88 7.97 7.98 7.94
Tangible shareholders' equity to tangible assets, p.e. 6.89 6.84 6.88 6.91 6.51
Price / Basic EPS (last 4 reported quarters) 18.2 18.7 16.5 14.9 12.9
Price / Diluted EPS (last 4 reported quarters) 18.5 19.0 16.7 14.9 13.0
</TABLE>
Note: All share and per share data has been restated for the effect of the
2-for-1 stock split declared February 24, 1998.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
At the 1998 Annual Meeting of Shareholders, the shareholders approved an
amendment to Article Fourth of the Company's Certificate of Incorporation,
which (1) increased the number of authorized shares of common stock, $1.00
par value per share, to 70,000,000 shares (from 20,000,000 shares); (2)
authorized a class of 500,000 shares of preferred stock, $.01 par value per
share, issuable in one or more series and having such terms, conditions,
privileges and rights as the Company's Board of Directors may determine by
resolution prior to issuance; and (3) eliminated unnecessary language
relating to preemptive rights. No preferred shares have been issued.
The amendment to Article Fourth of the Company's Certificate of
Incorporation was filed with the Delaware Secretary of State on June 25,
1998. The text of the amendment is filed as Exhibit 3(i) to this Report and
is incorporated by reference herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of security holders at the
Annual Meeting of Shareholders of Banknorth Group, Inc. on May 12, 1998:
1. To elect five directors to serve until the 2001 Annual Meeting of
Shareholders
2. To amend Article Fourth of the Certificate of Incorporation to increase
the authorized common stock, create a class of preferred stock and
delete language relating to preemptive rights.
3. To ratify the selection of independent auditors of the Company for
1998.
The results of the votes were as follows:
<TABLE>
<CAPTION>
WITHHELD/ BROKER
MATTER FOR AGAINST FOR NON-VOTE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Election of Directors:
Thomas J. Amidon 6,441,300 --- 29,294 N/A
Jacqueline D. Arthur 6,432,242 --- 38,352 N/A
Robert A. Carrara 6,432,722 --- 37,872 N/A
William H. Chadwick 6,440,628 --- 29,996 N/A
Susan C. Crampton 6,422,959 --- 47,635 N/A
Amend Article Fourth of the
Certificate of Incorporation 4,305,866 1,506,507 245,525 412,696
Selection of Auditors
KPMG Peat Marwick LLP 6,443,831 18,547 8,216 N/A
</TABLE>
ITEM 5. OTHER INFORMATION
Revised By-laws
The By-laws of the Corporation were amended by the Company's Board of
Directors on June 25, 1998. The amendments (1) eliminated the provision
requiring that a special meeting of shareholders be called upon request of
at least ten percent of the outstanding shares; (2) added a requirement that
a shareholder provide advance notice to the Company for nominations of
persons for election as Directors or for presenting other matters for action
at an annual or special meeting of shareholders; (3) added a provision which
requires indemnification of directors, officers and others in certain
circumstances, establishes indemnification as a contractual right and
provides for the advancement of litigation expense to indemnified persons;
(4) authorized the issuance of shares without certificates; (5) authorized
certificates representing preferred shares; and (6) expanded the powers that
may be delegated to a committee of the Board of Directors and changed the
vote required to appoint a committee. The amended By-laws are filed as
Exhibit 3(ii) to this Report and are incorporated by reference herein.
Advance Notification Deadline
As noted above, the Company amended its By-laws on June 25, 1998. One of
the provisions added to the By-laws is a so-called advance notice bylaw
which provides that a shareholder must furnish timely notice to the Company
for nominations of persons for election as Director or for bringing other
business before an annual or special meeting. A shareholder must disclose
in the notice his name and address and the number of shares of the Company
stock he owns beneficially. A shareholder's notice of a nomination for
election of a director must include all information about the nominee(s)
that is required to be disclosed in solicitations of proxies for election of
directors in an election contest, or as otherwise required under Rule 14A
under the Securities Exchange Act of 1934. A notice of any other business a
shareholder proposes to bring before the meeting must include a brief
description of such business, the reasons for conducting such business at
the meeting and any material interest the shareholder may have in the
business to be presented. To be timely under the advance notice by-law, a
shareholder's notice must generally be delivered to the secretary of the
Company not later than the 90th day nor earlier than the 120th day prior to
the first anniversary of the previous year's annual meeting, or (in the case
of a special meeting) not later than the 10th day following public
announcement of the date of a special meeting. The advance notification
deadline for shareholder nomination of directors or presentation of other
business for consideration at the 1999 Annual Meeting is no earlier than
January 12, 1999 and no later than February 11, 1999. Director nominations
or proposals for the transaction of other business will not be presented to
the meeting unless the shareholder-proponent has complied with all of the
requirements of the advance notice by-law.
The separate advance notification deadline for any submission to the Company
of a shareholder proposal sought to be included in the Company's proxy
statement for the 1999 Annual Meeting of Shareholders is described under the
caption "Shareholder Proposals" in the Company's 1998 Annual Meeting proxy
statement, previously filed with the Commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(i) Text of amendment to Article Fourth of the Company's
Certificate of Incorporation
3(ii) Amended By-Laws of the Company
(b) Reports on Form 8-K
Form 8-K, dated July 1, 1998, Banknorth announcing it entered
into a definitive agreement with BankBoston, N.A. to purchase
its Berkshire County, Massachusetts operations. Banknorth will
pay $52.5 million to acquire ten full-service branches and one
limited service branch, approximately $285 million in deposits,
$78 million in commercial loans and $40 million of consumer
loans, and Private Banking relationships that include a trust
and investment management portfolio of approximately $1.0
billion.
Form 8-K, dated July 31, 1998, announcing Banknorth had signed
a definitive merger agreement with Evergreen Bancorp, Inc.
Under the terms of the agreement, dated July 31, 1998, Evergreen
will be merged with and into the Company, with shareholders of
Evergreen receiving as merger consideration .90 shares of
Banknorth common stock for each whole share of Evergreen common
stock, plus cash in lieu of any fractional shares.
Approximately 7.9 million shares of Banknorth common stock will
be issued in the transaction. It is expected that the merger
will be a tax-free reorganization and accounted for as a pooling
of interests. Both Banknorth and Evergreen also announced the
recision of their existing stock repurchase programs.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its
behalf by the undersigned thereunto duly authorized.
BANKNORTH GROUP, INC.
Registrant
Date: 8/12/98 /S/ William H. Chadwick
---------------------------------------
William H. Chadwick
President and Chief Executive Officer
Date: 8/12/98 /S/ Thomas J. Pruitt
---------------------------------------
Thomas J. Pruitt
Executive Vice President and Chief
Financial Officer
EXHIBIT 3(i)
TEXT OF ARTICLE FOURTH OF THE COMPANY'S CERTIFICATE OF INCORPORATION
(as amended on June 25, 1998)
FOURTH: The aggregate number of capital stock that the Corporation shall
have authority to issue is 70,500,000 shares, divided into 70,000,000 shares
of Common Stock, with a par value of $1.00 per share, and 500,000 shares of
Preferred Stock, with a par value of $.01 per share and issuable from time
to time in one or more series. The Board of Directors of the Corporation is
hereby authorized to divide the shares of Preferred Stock into one or more
series and to fix and determine by resolution the relative rights and
preferences of any series so established, to the fullest extent permitted by
law, including, without limitation, any voting powers, dividend rights,
conversion rights, preemptive rights, liquidation preferences and redemption
provisions.
EXHIBIT 3(ii)
BY-LAWS
OF
BANKNORTH GROUP, INC.
A Delaware Corporation
As Amended through June 23, 1998
BY-LAWS
OF
BANKNORTH GROUP, INC.
A Delaware Corporation
Article I
General
Section 1.1. Registered Office. The registered office of the
Corporation shall be in the City of Wilmington, County of New Castle, State
of Delaware.
Section 1.2. Offices. The principal office and place of business of
the Corporation shall be in the City of Burlington, County of Chittenden and
State of Vermont. The Corporation may also have offices at such other
places both within and without the State of Delaware as the board of
directors may from time to time determine or the business of the Corporation
may require.
Section 1.3. Seal. The seal of the Corporation shall be in the form
of a circle and shall have inscribed thereon the name of the Corporation,
the year of its organization and the words, "Corporate Seal, Delaware."
Section 1.4. Fiscal Year. The fiscal year of the Corporation shall be
the period from January 1 to December 31.
Article II
Stockholders
Section 2.1. Place of Meetings. All meetings of the stockholders shall
be held at the principal office of the Corporation, except such meetings as
the board of directors expressly determine shall be held elsewhere, in which
case meetings may be held upon notice as hereinafter provided at such other
place or places as the board of directors shall have determined and as shall
be stated in such notice.
Section 2.2. Annual Meeting. The annual meeting of the stockholders
shall be held during the month of May in each year at such date and time as
shall be designated from time to time by the board of directors and stated
in the Notice of the Meeting. In the event the annual meeting is omitted by
oversight or otherwise on the date herein provided, then a substituted
annual meeting may be held on any subsequent date prior to the close of the
corporate fiscal year, and any business transacted or elections held at such
meeting shall be as valid and effective as if transacted or held at the
regular annual meeting. A written and signed application for such
substituted annual meeting may be made by any stockholder, and notice shall
be given therefor as hereinafter provided by these Bylaws.
At each annual meeting, the stockholders entitled to vote shall elect
those directors whose terms expire at such annual meeting, in accordance
with Article Sixth of the Certificate of Incorporation, by majority vote by
ballot, and they may transact such other corporate business as may properly
be brought before the meeting. At the annual meeting any business may be
transacted, irrespective of whether the notice calling such meeting shall
have contained a reference thereto, except where notice is required by law,
the Certificate of Incorporation, or these Bylaws.
Section 2.3. Quorum. At all meetings of the stockholders the holders
of a majority of the stock issued and outstanding and entitled to vote
thereat, present in person or represented by proxy, shall constitute a
quorum requisite for the transaction of business except as otherwise
provided by law, by the Certificate of Incorporation or by these Bylaws. If,
however, such majority shall not be present or represented at any meeting of
the stockholders, the stockholders entitled to vote thereat, present in
person or by proxy, by a majority vote, shall have power to adjourn the
meeting from time to time without notice other than announcement at the
meeting until the requisite amount of voting stock shall be present. If the
adjournment is for more than thirty (30) days, or if after the adjournment a
new record date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting. At such adjourned meeting, at which the requisite
amount of voting stock shall be represented, any business may be transacted
which might have been transacted if the meeting had been held as originally
called.
The vote of a majority of the quorum shall decide any question or
matter, except as otherwise required by law, the Certificate of
Incorporation, or these Bylaws.
Section 2.4. Adjourned Meeting. Any meeting of stockholders, either
annual or special, and whether a quorum is present or not, may be adjourned
from time to time by vote of a majority of the shares, the holders of which
are either present in person or represented by proxy, but in the absence of
a quorum, no other business shall be transacted.
When any such meeting is adjourned for more than thirty (30) days,
notice of such adjourned meeting shall be given as provided in these Bylaws,
but except as aforesaid, it shall not be necessary to give any notice of an
adjournment of the business to be transacted thereat, other than by
announcement at the meeting at which such adjournment is taken.
Section 2.5. Right to Vote; Proxies. Each stockholder having the
right to vote at any meeting shall be entitled to one vote for each share of
stock held by said stockholder. Any
stockholder entitled to vote at any meeting of stockholders may vote either
in person or by proxy, but no proxy which is dated more than three years
prior to the meeting at which it is offered shall confer the right to vote
thereat unless the proxy provides that it shall be effective for a longer
period. Every proxy shall be in writing, subscribed by a stockholder or
said stockholder's duly authorized attorney in fact, and dated, but need not
be sealed, witnessed, or acknowledged.
Section 2.6. Voting. At all meetings of stockholders all questions,
except as otherwise expressly provided for by statute, the Certificate of
Incorporation or these Bylaws, shall be determined by a majority vote of the
stockholders present in person or represented by proxy. Except as otherwise
expressly provided by law, the Certificate of Incorporation, these Bylaws or
the board of directors, at all meetings of stockholders, the voting shall be
taken by ballot, each of which shall state the name of the stockholder
voting and the number of shares voted by said stockholder, and, if such
ballot be cast by a proxy, it shall also state the name of the proxy.
Except as otherwise provided in the Certificate of Incorporation or by the
Bylaws, all elections shall be decided by majority vote.
Section 2.7. Notice of Annual Meeting. Written notice of the annual
meeting of the stockholders shall be mailed to each stockholder entitled to
vote thereat at such address as appears on the stock books of the
Corporation at least ten (10) days and not more than sixty (60) days prior
to the meeting. It shall be the duty of every stockholder to furnish to the
Secretary of the Corporation or to the transfer agent, if any, the class of
stock owned by said stockholder, the stockholder's post-office address and
to notify said Secretary or transfer agent of any change therein.
Section 2.8. Stockholders' List. A complete list of the stockholders
entitled to vote at any meeting of stockholders, arranged in alphabetical
order and showing the address of each stockholder, and the number of shares
registered in the name of each stockholder, shall be prepared by the
Secretary and filed either at a place within the city where the meeting is
to be held, which place shall be specified in the notice of the meeting, or,
if not so specified, at the place where the meeting is to be held, at least
ten days before such meeting, and shall at all times during ordinary
business hours, and during the whole time of said meeting, be open to
examination of any stockholder for a purpose germane to the meeting.
Section 2.9. Special Meetings. Special meetings of the stockholders,
unless otherwise provided by statute, may be called at any time by the board
of directors, or by the President of the Corporation. The business
transacted at such special meeting shall be confined to the purpose or
purposes stated in the notice therefor.
Written notice of a special meeting of stockholders, stating the time
and place and object thereof, shall be mailed, postage prepaid, not less
than ten (10) nor more than sixty (60) days before such meeting, to each
stockholder entitled to vote thereat, at such address as appears on the
books of the Corporation.
Section 2.10. Notice of Stockholder Business and Nominations.
A. Annual Meetings of Stockholders. (1) Nominations of persons
for election to the board of directors of the Corporation and the proposal
of business to be considered by the stockholders may be made at an annual
meeting of stockholders (a) pursuant to the Corporation's notice of the
meeting, (b) by or at the direction of the board of directors or (c) by any
stockholder of the Corporation who was a stockholder of record at the time
of giving of notice provided for in this By-law, who is entitled to vote at
the meeting and who complies with the notice procedures set forth in this
By-law.
(2) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (c) of paragraph
(A)(1) of this By-law, the stockholder must have given timely notice thereof
in writing to the secretary of the Corporation and such other business must
otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the secretary at the principal
executive offices of the Corporation not later than the close of business on
the 90th day nor earlier than the close of business on the 120th day prior
to the first anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is more than
30 days before or more then 60 days after such anniversary date, notice by
the stockholder to be timely must be so delivered not earlier than the close
of business on the 120th day prior to such annual meeting and not later than
the close of business on the later of the 90th day prior to such annual
meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made by the Corporation. In no event
shall the public announcement of an adjournment of an annual meeting
commence a new time period for the giving of a stockholder's notice as
described above. Such stockholder's notice shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or re-election
as a director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors in an
election contest, or as otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and Rule 14a-11 thereunder (including such person's written
consent to being named in the proxy statement as a nominee and to serving as
a director if elected); (b) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the nomination
or proposal is made; and (c) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is made
(i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (ii) the class and
number of shares of the Corporation which are owned beneficially and of
record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of Paragraph
(A)(2) of this By-law to the contrary, in the event that the number of
directors to be elected to the board of directors of the Corporation is
increased and there is no public announcement by the Corporation naming all
of the nominees for director or specifying the size of the increased board
of directors at least 100 days prior to the first anniversary of the
preceding year's annual meeting, a stockholder's notice required by this By-
law shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to the
secretary at the principal executive offices of the Corporation not later
than the close of business on the 10th day following the day on which such
public announcement is first made by the Corporation.
(B) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of the meeting.
Nominations of persons for election to the board of directors may be made at
a special meeting of stockholders at which directors are to be elected
pursuant to the Corporation's notice of meeting (a) by or at the direction
of the board of directors or (b) provided that the board of directors has
determined that directors shall be elected at such meeting, by any
stockholder of the Corporation who is a stockholder of record at the time of
giving of notice provided for in this By-law, who shall be entitled to vote
at the meeting and who complies with the notice procedures set forth in this
By-law. In the event the Corporation calls a special meeting of
stockholders for purposes of electing one or more directors to the board of
directors, any such stockholder may nominate a person or persons (as the
case may be), for election to such position(s) as specified in the
Corporation's notice of meeting, if the stockholder's notice required by
paragraph (A)(2) of this By-law shall be delivered to the secretary at the
principal executive offices of the Corporation not earlier than the close of
business on the 120th day prior to such special meeting and not later than
the close of business on the later of the 90th day prior to such special
meeting or the 10th day following the day on which public announcement is
first made of the date of the special meeting and of the nominees proposed
by the board of directors to be elected at such meeting. In no event shall
the public announcement of an adjournment of a special meeting commence a
new time period for the giving of a stockholder's notice as described above.
(C) General. (1) Only such persons who are nominated in accordance
with the procedures set forth in this By-law shall be eligible to serve as
directors and only such business shall be conducted at a meeting of
stockholders as shall have been brought before the meeting in accordance
with the procedures set forth in this By-law. Except as otherwise provided
by law, the Certificate of Incorporation or these Bylaws, the Chairman of
the meeting shall have the power and duty to determine whether a nomination
or any business proposed to be brought before the meeting was made or
proposed, as the case may be, in accordance with the procedures set forth in
this By-law and, if any proposed nomination or business is not in compliance
with this By-law, to declare that such defective proposal or nomination
shall be disregarded.
(2) For purposes of this By-law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-law, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this By-law. Nothing in this By-law shall be deemed to
affect any rights (i) of stockholders to request inclusion of proposals in
the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange
Act or (ii) of the holders of any series of Preferred Stock to elect
directors under specified circumstances.
Section 2.11. Inspectors. One or more inspectors may be appointed by
the board of directors before or at any meeting of stockholders, or, if no
such appointment shall have been made, the presiding officer may make such
appointment, if deemed necessary, at the meeting. At the meeting for which
the inspector or inspectors are appointed, the inspectors shall open and
close the polls, receive and take charge of the proxies and the acceptance
and rejection of votes. If any inspector previously appointed shall fail to
attend or refuse or be unable to serve the presiding officer shall appoint a
substitute inspector.
Section 2.12. Stockholders' Action by Unanimous Consent. Whenever the
vote of stockholders at a meeting thereof is required or permitted to be
taken in connection with any corporate action by any provisions of law, the
Certificate of incorporation, or these Bylaws, the meeting and vote of
stockholders may be dispensed with under the conditions specified in the
Certificate of incorporation.
Section 2.13. Waiver of Notice. Any meeting at which all of the
stockholders entitled to vote are present, either in person or by proxy, or
at which those not present have waived notice in writing, either prior or
subsequent to such meeting, shall be a legal meeting for the transaction of
any business, notwithstanding that notice has not been given, provided a
quorum be present in person or by proxy. Such waivers shall not be
recognized unless filed with the Secretary, or someone acting in such
capacity.
Article III
Directors
Section 3.1. Number of Directors. Except as otherwise provided by
law, the Certificate of Incorporation or these By-laws, the property and
business of the Corporation shall be managed by or under the direction of
the Board of Directors. The Board of Directors shall be divided into three
classes (designated Class I, Class II and Class III, respectively), as
nearly equal in number as possible. The number of directors constituting
the initial Board of Directors of the Corporation is twenty (20). The
number of directors of the Corporation shall be fixed from time to time by
the Board of Directors up to a maximum of twenty (20). The current number
of directors is fixed at fourteen (14). The initial directors of the
Corporation shall serve in the respective classes and until the respective
annual meetings of the stockholders of the Corporation set forth below
opposite their names and mailing addresses, or until their successors are
elected and qualified. Thereafter, each class of directors shall be
elected to a term of office of three years. Directors need not be
stockholders, residents of Delaware or citizens of the United States. The
stockholders shall, at each annual meeting or meeting held in place
thereof, elect one class of Directors. Except as herein provided with
respect to vacancies, and except with respect to the initial Directors, as
set out in the Certificate of Incorporation, each Director shall hold
office for three years and until his successor is elected and qualified.
In case of any vacancy on the Board of Directors by reason of death,
resignation, disqualification, removal, failure to elect, increase in the
number of directors or otherwise, the remaining Directors, although more or
less than a quorum, by a majority vote of such remaining Directors may
elect a successor or successors who shall hold office for the unexpired
term.
Section 3.2. Change in Maximum Number of Directors; Vacancies. Any
alteration, change, amendment or repeal to Section 3.1 or 3.2 for the
purpose of increasing or decreasing the maximum number of directors provided
herein shall require the affirmative vote of holders of at least 80% of the
outstanding Voting Stock (as defined in Article Thirteenth of the
Certificate of Incorporation), which vote shall include the affirmative vote
of at least two-thirds (2/3) of the outstanding Voting Stock held by
stockholders other than an Interested Stockholder (as defined in Article
Thirteenth of the Certificate of Incorporation) if an interested Stockholder
exists on the record date of the meeting at which such action is submitted
to the stockholders for their consideration; provided, however, that such
higher voting requirement shall not apply to any amendment, alteration,
change, amendment or repeal recommended to the shareholders by a majority of
the Continuing Directors (as defined in Article Thirteenth of the
Certificate of Incorporation). If the number of Directors is so increased
or decreased by action of the Board of Directors or of the stockholders then
the additional Directors may be elected in the manner provided above for the
filing of vacancies in the Board of Directors or at the annual meeting of
stockholders or at a special meeting called for that purpose.
Section 3.3. Chairman of the Board. The Directors shall elect a
Chairman of the Board. The Chairman of the Board of Directors shall
preside at all meetings of the stockholders and Directors, and shall have
such other duties as may be assigned to him/her from time to time by the
Board of Directors.
Section 3.4. Resignation. Any Director of the Corporation may resign
at any time by giving written notice to the President or the Secretary of
the Corporation. Such resignation shall take effect at the time specified
therein, at the time of receipt if no time is specified therein and at the
time of acceptance if the effectiveness of such resignation is conditioned
upon its acceptance. Unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
Section 3.5. Removal. Any Director or the entire Board of Directors
may be removed only for cause, and pursuant to the procedure set forth in
Article Ninth (b) of the Certificate of Incorporation.
Section 3.6. Place of Meeting and Books. The Board of Directors may
hold their meetings and keep the books of the Corporation outside the State
of Delaware, at such places as they may from time to time determine.
Section 3.7. General Powers. In addition to the powers and authority
expressly conferred upon them by these Bylaws, the Board of Directors may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by
these Bylaws directed or required to be exercised or done by the
stockholders.
Section 3.8. Executive Committee. There may be an executive committee
of one or more Directors designated by resolution of the Board of Directors.
The act of a majority of the members of such committee shall be the act of
the committee. Said committee may meet at stated times or on notice to all
by any of their own number, and shall have and may exercise those powers of
the Board of Directors in the management of the business affairs of the
Corporation as are provided by law and may authorize the seal of the
Corporation to be affixed to all papers which may require it. Vacancies in
the membership of the committee shall be filled by the Board of Directors at
a regular meeting or at a special meeting called for that purposes.
Section 3.9. Other Committees. The Board of Directors may also
designate one or more committees in addition to the executive committee, by
resolution or resolutions of the Board of Directors; such committee or
committees shall consist of one or more Directors of the Corporation, and to
the extent provided in the resolution or resolutions designating them, shall
have and may exercise specific powers of the Board of Directors in the
management of the business and affairs of the Corporation to the extent
permitted by statute and shall have power to authorize the seal of the
Corporation to be affixed to all papers which may require it. Such committee
or committees shall have such name or names as may be determined from time
to time by resolution adopted by the Board of Directors.
Section 3.10. Powers Denied to Committees. Committees of the Board of
Directors shall not, in any event, have any power or authority in reference
to the following matters: (i) approving or adopting, or recommending to the
stockholders, any action or matter expressly required by the Delaware
General Corporation Law to be submitted to stockholders of the Corporation
for approval or (ii) adopting, amending or repealing any By-law of the
Corporation.
Section 3.11. Substitute Committee Member. In the absence or on the
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he,
she or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of such absent or
disqualified member. Any committee shall keep regular minutes of its
proceedings and report the same to the Board as may be required by the Board.
Section 3.12. Compensation of Directors. The Board of Directors shall
have the power to fix the compensation of Directors and members of
committees of the Board. The Directors may be paid their expenses, if any,
of attendance at each meeting of the Board of Directors and may be paid a
fixed sum for attendance at each meeting of the Board of Directors and/or a
stated retainer as Director. No such payment shall preclude any Director
from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be
allowed like compensation for being members of those committees and/or
attending committee meetings.
Section 3.13. Annual Meeting. The Board may meet at such place and
time as shall be fixed and announced by the presiding officer at the annual
meeting of stockholders, for the purpose of organization or otherwise, and
no further notice of such meeting shall be necessary to the Directors
(including the newly elected Directors) in order legally to constitute the
meeting, provided a quorum shall be present, or they may meet at such place
and time as shall be stated in a notice given to such Directors two (2) days
prior to such meeting, or as shall be fixed by the consent in writing of all
the Directors.
Section 3.14. Regular Meetings. The annual meeting of the Board of
Directors shall be held as soon as practical following the adjournment of
the annual meeting of stockholders upon notice from the Chairman of the
Board, if any, or the President. Other regular meetings of the Board of
Directors may be held at such times and at such places within or without the
State of Vermont as the Board may by vote determine from time to time, and,
if so determined, no notice thereof need be given, provided, however, a
regular meeting of the Board shall be held at least once each calendar
quarter.
Section 3.15. Special Meetings. Special meetings of the Board may be
called by the Chairman of the Board, if any, or the President, on two (2)
days' notice to each Director, or such shorter period of time before the
meeting as will nonetheless be sufficient for the convenient assembly of the
Directors so notified; special meetings shall be called by the Secretary in
like manner and on like notice, on the written request of two or more
Directors.
Section 3.16. Waiver of Notice. Attendance of a Director at a
meeting shall constitute a waiver of notice of such meeting, except where a
Director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened.
Section 3.17. Quorum. At all meetings of the Board of Directors, a
majority of the total number of Directors shall be necessary and sufficient
to constitute a quorum for the transaction of business, and the act of a
majority of the Directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically permitted or provided by statute, or by the Certificate of
Incorporation, or by these Bylaws. If at any meeting of the Board there
shall be less than a quorum present, a majority of those present may adjourn
the meeting to a definite date and place from time to time until a quorum is
obtained, and no further notice thereof need be given other than by
announcement at said meeting which shall be so adjourned.
Section 3.18. Telephonic Participation in Meetings. Members of the
Board of Directors or any committee designated by such Board may participate
in a meeting of the Board or committee by means of conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting pursuant
to this section shall constitute presence in person at such meeting.
Section 3.19. Action by Consent. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if written consent thereto
is signed by all members of the Board or of such committee as the case may
be and such written consent is filed with the minutes of proceedings of the
Board or committee.
Section 3.20. Minutes and Records. Minutes of all meetings of
Directors shall be taken by the Secretary, or in his/her absence, by someone
appointed by the presiding officer to take and authenticate the record of
the meeting.
Section 3.21. Director of Subsidiaries. Except for the President and
Chief Executive Officer and the Vice Chairman and Chief Operating Officer,
no person who serves as a Director of the Corporation shall also serve as a
Director of any of the Corporation's subsidiaries.
Section 3.22. Maximum Age of Director. No person shall serve as a
Director of the Corporation after the annual meeting following attainment of
age 70.
Article IV
Officers
Section 4.1. Selection; Statutory Officers. The officers of the
Corporation shall be chosen by the Board of Directors. There shall be a
President and Chief Executive Officer, a Vice Chairman and Chief Operating
Officer, one or more Vice Presidents, a Treasurer and a Secretary (Clerk).
The same person may hold more than one office except that the same person
shall not be both President and Secretary.
Section 4.2. Time of Election. The officers above named, shall be
chosen by the Board of Directors at its first meeting after each annual
meeting of stockholders. Nothing herein shall be deemed to restrict the
power of the Board to discharge or remove any officer, and to fill the
vacancy created thereby, at any time. None of said officers need be a
Director.
Section 4.3. Additional Officers. The Board may appoint such other
officers and agents as it shall deem necessary, who shall hold their offices
for such terms and shall exercise such powers and perform such duties as
shall be determined from time to time by the Board.
Section 4.4. Subordinate Officers. The Board of Directors may
appoint such subordinate officers as the business of the Corporation may
require, each of such officers to hold office at the pleasure of the Board,
and to have such authority, and perform such duties as the Board of
Directors may from time to time determine.
Section 4.5. Terms of Office. Each officer of the Corporation shall
hold office until his/her successor is chosen and qualified, or until
his/her earlier resignation or removal. Any officer elected or appointed by
the Board of Directors may be removed at any time by the Board of Directors.
Section 4.6. Resignations. Any officer may resign at any time by
giving written notice to the Board of Directors, the President or Secretary.
Any such resignation shall be effective at the date of receipt of such
notice or at any later date specified therein. Unless otherwise specified
in said resignation, acceptance shall not be necessary to make it effective.
Section 4.7. Compensation of Officers. The Board of Directors shall
have power to fix the compensation of all officers of the Corporation. It
may authorize any officer, upon whom the power of appointing subordinate
officers may have been conferred, to fix the compensation of such
subordinate officers.
Section 4.8. President. The President shall be the Chief Executive
Officer and head of the Corporation. In the absence of the Chairman of the
Board, the President shall preside at all meetings of Directors and
stockholders. Under the supervision of the Board of Directors and of the
executive committee, if any, the President shall have the general control
and management of the Corporation's business and affairs, subject, however,
to the right of the Board of Directors and of the executive committee to
confer any specific power, except such as may be by statute exclusively
conferred on the President, upon any other officer or officers of the
Corporation. The President shall perform and do all acts and things
incident to the position of President and such other duties as may be
lawfully assigned to him/her from time to time by the Board of Directors or
the executive committee.
Section 4.9. Vice Chairman and Chief Operating Officer. The Vice
Chairman and Chief Operating Officer shall perform and do all acts and
things incident to the position of Vice Chairman and Chief Operating Officer
and such other duties as may be lawfully assigned to him/her from time to
time by the Board of Directors of the Executive Committee. In the absence
of the President, the Vice Chairman and Chief Operating Officer shall
perform the President's functions.
Section 4.10. Vice Presidents. The Vice Presidents in order of their
rank as fixed by the Board of Directors, or, if not ranked, as designated by
the Board of Directors shall perform such of the duties of the President on
behalf of the Corporation as may be respectively assigned to them from time
to time by the Board of Directors or by the executive committee or by the
President. The Board of Directors or the executive committee may designate
one or more of the Vice Presidents as an Executive Vice President, and in
the absence or inability of the President and Vice Chairman and Chief
Operating Officer to act, such Executive Vice Presidents shall have and
possess all of the powers and discharge all of the duties of the President
and/or Vice Chairman and Chief Operating Officer, subject to the control of
the Board and of the executive committee.
Section 4.11. Treasurer. The Treasurer shall have the care and
custody of all the funds and securities of the Corporation which may come
into his/her hands as Treasurer, and the power and authority to endorse
checks, drafts and other instruments for the payment of money for deposit or
collection when necessary or proper and to deposit the same to the credit of
the Corporation in such bank or banks or depository as the Board of
Directors or the executive committee, or the officers or agents to whom the
Board of Directors or the executive committee may delegate such authority,
may designate, and he/she may endorse all commercial documents requiring
endorsements for or on behalf of the Corporation. The Treasurer may sign
all receipts and vouchers for the payments made to the Corporation. The
Treasurer shall render an account of his transactions to the Board of
Directors or to the executive committee as often as the Board or the
committee shall require the same. The Treasurer shall enter regularly in
the books to be kept by him/her for that purpose full and adequate account
of all moneys received and paid by him/her on account of the Corporation.
The Treasurer shall perform all acts incident to the position of Treasurer,
subject to the control of the Board of Directors or the executive committee,
give a bond to the Corporation conditioned for the faithful performance of
his duties, the expense of which bond shall be borne by the Corporation.
Section 4.12. Secretary. The Secretary shall maintain the office of
the Secretary at the place where the principal office of the Corporation is
located. The Secretary shall have and keep in his/her custody at the office
of the Secretary, the corporate seal and corporate documents and records,
including the minutes of all meetings of the Stockholders and Board of
Directors. The Secretary shall keep full and accurate minutes of all
meetings of the Board of Directors and of the stockholders; he shall attend
to the giving and serving of all notices of the Corporation. Except as
otherwise ordered by the Board of Directors or the executive committee, the
Secretary shall attest the seal of the Corporation upon all contracts and
instruments executed under such seal and shall affix the seal of the
Corporation thereto and to all certificates of shares of the Capital Stock.
The Secretary shall have charge of the stock certificate book, transfer book
and stock ledger, and such other books and papers as the Board of Directors
or the executive committee may direct. The Secretary shall, in general,
perform all the duties of the Secretary, subject to the control of the Board
of Directors and of the executive committee.
Section 4.13. Assistant Secretary. The Board of Directors may appoint
or remove one or more Assistant Secretaries of the Corporation. Any
Assistant Secretary upon appointment shall perform such duties of the
Secretary, and have any and all such other duties as the Board of Directors
may designate.
Article V
Stock
Section 5.1. Amount. The amount of the capital stock of the
Corporation shall be defined by the Certificate of Incorporation and
amendments thereto.
Section 5.2. Stock. (a) The Board of Directors may authorize the
issuance of shares of stock of the Corporation, with or without
certificates. Each holder of shares of the Corporation's stock represented
by certificates and upon request, every holder of uncertificated shares,
shall be entitled to a certificate or certificates of stock of the
Corporation in such form as the Board of Directors may from time to time
prescribe, representing the number of shares registered in certificate form.
The certificates of stock of the Corporation shall be numbered and shall be
entered in the books of the Corporation as they are issued. They shall
certify the holder's name and number and class of shares and shall be signed
by both of (a) either the President or a Vice President, and (b) any one of
the Treasurer or an Assistant Treasurer or the Secretary of an Assistant
Secretary, and shall be sealed with the corporate seal of the Corporation.
If such certificate is countersigned (a) by a transfer agent other than the
Corporation or its employee, or (b) by a registrar other than the
Corporation or its employee, the signature of the officers of the
Corporation and the registrar may be facsimiles. In case any officer or
officers who shall have signed, or whose facsimile signature or signatures
shall have been used on, any such certificate or certificates shall cease to
be such officer or officers of the Corporation, whether because of death,
resignation or otherwise, before such certificate or certificates shall have
been delivered by the Corporation, such certificate or certificates may
nevertheless be adopted by the Corporation and be issued and delivered as
though the person or persons who signed such certificate or certificates or
whose facsimile signature shall have been used thereon had not ceased to be
such officer or officers of the Corporation.
(b) If the Corporation is authorized to issue different classes of
stock or different series within a class, the powers, designations,
preferences, and relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations
or restrictions of such preference and/or rights shall be set forth in full
or summarized on the front or back of each certificate representing such
stock. Alternatively, each certificate may state conspicuously on its front
or back that the Corporation will furnish the stockholder such information
on request of the stockholder and without charge. If any such shares are
issued as uncertificated shares, within a reasonable time after the issuance
or transfer of such uncertificated stock, the Corporation shall send to the
registered owner thereof a written notice containing the information
required to be set forth or stated on certificates representing such shares
or, alternatively, such notice shall state that the Corporation will furnish
to the stockholder such information on request and without charge. Except
as otherwise expressly provided by law, the rights and obligations of the
holders of uncertificated stock and the rights and obligations of the
holders of certificates representing stock of the same class and series
shall be identical.
Section 5.3. Fractional Share Interests. The Corporation may, but
shall not be required to, issue fractions of a share with or without
certificates. If the Corporation does not issue fractions of a share, it
shall (a) arrange for the disposition of fractional interests by those
entitled thereto, (b) pay in cash the fair value of fractions of a share as
of the time when those entitled to receive such fractions are determined, or
(c) issue scrip or warrants in registered or bearer form which shall entitle
the holder to receive a certificate for a full share upon the surrender of
such scrip or warrants aggregating a full share. A fractional share (
whether or not represented by a certificate) shall, but scrip or warrants
shall not unless otherwise provided therein, entitle the holder to exercise
voting rights, to receive dividends thereon, and to participate in any of
the assets of the Corporation in the event of liquidation. The Board of
Directors may cause scrip or warrants to be issued subject to the conditions
that they shall become void if not exchanged for full shares before a
specified date, or subject to the conditions that the shares for which scrip
or warrants are exchangeable may be sold by the Corporation and the proceeds
thereof distributed to the holders of scrip or warrants, or subject to any
other conditions which the Board of Directors may impose.
Section 5.4. Transfers of Stock. Registration of the transfer of
stock of the Corporation shall be made only on the stock transfer books of
the Corporation. In order to register a transfer, the record owner of stock
represented by certificates shall surrender the stock to the Corporation for
cancellation, properly endorsed by the appropriate person or persons, and
the record owner of uncertified shares shall submit to the Corporation a
signed written request for such transfer, with assurances acceptable to the
Corporation that such endorsements or signatures are genuine and effective.
The Corporation shall be entitled to treat the holder of record of any share
or shares of stock as the holder in fact thereof and accordingly shall not
be bound to recognize any equitable or other claim to or interest in such
share on the part of any other person whether or not it shall have express
or other notice thereof save as expressly provided by the laws of Delaware.
Section 5.5. Record Date. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or the allotment of any rights, or entitled to exercise
any rights in respect of any change, conversion, or exchange of stock or for
the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) days nor
less than ten (10) days before the date of such meeting, nor more than sixty
(60) days prior to any other action. If no such record date is fixed by the
Board of Directors, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the date next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day
on which the meeting is held; the record date for determining stockholders
entitled to express consent to corporate action in writing without a
meeting, when no prior action by the Board of Directors is necessary, shall
be the day on which the first written consent is expressed; and the record
date for determining stockholders for any other purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating thereto. A determination of stockholders of record
entitled to notice of or to vote at any meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Section 5.6. Transfer Agent and Registrar. The Board of Directors may
appoint one or more transfer agents or transfer clerks and one or more
registrars and may require all certificates of stock to bear the signature
or signatures of any of them.
Section 5.7. Dividends.
1. Power to Declare. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors at any
regular or special meeting, pursuant to law. Dividends may be paid in
cash, in property, or in shares of the capital stock, subject to the
provisions of the Certificate of Incorporation and the laws of Delaware.
2. Reserves. Before payment of any dividend, there may be set
aside out of the funds of the Corporation available for dividends such
sum or sums as the Directors from time to time in their absolute
discretion, think proper as a reserve or reserves to meet contingencies,
or for equalizing dividends, or for repairing or maintaining any property
of the Corporation, or for such other purpose as the Directors shall
think conducive to interest of the Corporation, and the Directors may
modify or abolish any such reserve in the manner in which it was created.
Section 5.8. Lost, Stolen or Destroyed Certificates. No certificates
for shares of stock of the Corporation shall be issued in place of any
certificate alleged to have been lost, stolen or destroyed except upon
production of such evidence of the loss, theft or destruction and upon
indemnification of the Corporation and its agents to such extent and in such
manner as the Board of Directors may from time to time prescribe.
Section 5.9. Inspection of Books. The stockholders of the Corporation
by a majority vote at any meeting of stockholders duly called, or in case
the stockholders shall fail to act, the Board of Directors shall have power
from time to time to determine whether and to what extent and at what times
and places and under what conditions and regulations the accounts and books
of the Corporation (other than the stock ledger) or any of them, shall be
open to inspection by stockholders; and no stockholder shall have any right
to inspect any account or book or document of the Corporation except as
conferred by statute or authorized by the Board of Directors or by a
resolution of the stockholders.
Article VI
Miscellaneous Management Provisions
Section 6.1. Checks, Drafts and Notes. All checks, drafts or orders
for the payment of money, and all notes and acceptances of the Corporation
shall be signed by such officer or officers, agent or agents as the Board of
Directors may designate.
Section 6.2. Notices.
1. Notices to Directors may, and notices to stockholders shall be
in writing and delivered personally or mailed to the Directors or
stockholders at their addresses appearing on the books of the
Corporation. Notice by mail shall be deemed to be given at the time
when the same shall be mailed. Notice to Directors may also be given
by telegram or orally, by telephone or in person.
2 . Whenever any notice is required to be given under the
provisions of the statutes or of the Certificate of Incorporation or
of these Bylaws, a written waiver of notice, signed by the person or
persons entitled to said notice, whether before or after the time stated
herein, shall be deemed equivalent to notice. Attendance of a person
at a meeting shall constitute a waiver of notice of such meeting except
when the person attends a meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened.
Section 6.3. Authorization and Execution of Contracts. The Board of
Directors, except as otherwise provided in the Bylaws, may authorize any
officer or officers, agent or agents to enter into any contract or execute
any instrument in the name of and on behalf of the Corporation, and such
authority may be general or confined in specific instances.
Section 6.4. Conflict of Interest. No contract or transaction between
the Corporation and one or more of its Directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its Directors or officers are directors
or officers, or have a financial interest, shall be void or voidable solely
for this reason, or solely because the Director or officer is present at or
participates in the meeting of the Board of or committee thereof which
authorized the contract or transaction, or solely because his or her votes
are counted for such purpose, provided that the material facts as to his or
her relationship or interest as to the contract or transaction are disclosed
or are known to the Board of Directors or the committee and the Board or
committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority of the disinterested Directors, even though
the disinterested Directors be less than a quorum or provided that the
contract or transaction is otherwise authorized in accordance with the laws
of Delaware. Common or interested Directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes the contract or transaction.
Section 6.5. Voting of Securities Owned by this Corporation. Subject
always to the specific directions of the Board of Directors, (a) any shares
or other securities issued by any other corporation and owned or controlled
by the Corporation may be voted in person at any meeting of security holders
of such other corporation by the President of the Corporation if he is
present at such meeting, or in his absence by the Treasurer of the
Corporation if he is present at such meeting, and (b) whenever, in the
judgment of the President, it is desirable for the Corporation to execute a
proxy or written consent in respect to any shares or other securities issued
by any other corporation and owned by the Corporation, such proxy or consent
shall be executed in the name of the Corporation by the President, without
necessity of any authorization by the Board of Directors, affixation of
corporate seal or countersignature or attestation by another officer,
provided that if the President is unable to execute such proxy or consent by
reason of sickness, absence from the United States or other similar cause,
the Treasurer may execute such proxy or consent. Any person or persons
designated in the manner above stated as the proxy or proxies of the
Corporation shall have full right, power and authority to vote the shares or
other securities issued by such other corporation and owned by the
Corporation the same as such shares or other securities might be voted by
the Corporation.
Section 6.6. Indemnification and Insurance. (A) Each person who was
or is made a party or is threatened to be made a party to or is involved in
any action, suit, or proceeding, whether civil, criminal, administrative or
investigative (hereinafter a "proceeding"), by reason of the fact that he or
she or a person of whom he or she is the legal representative , is or was a
director or officer of the Corporation or is or was serving at the request
of the Corporation as a director, officer, employee or agent of another
corporation or of a partnership, joint venture, trust or other enterprise,
including service with respect to employee benefit plans maintained or
sponsored by the Corporation, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or
agent or in any other capacity while serving as a director, officer,
employee or agent, shall be indemnified and held harmless by the Corporation
to the fullest extent authorized by the General Corporation Law of the State
of Delaware as the same exists or may hereafter be amended (but, in the case
of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against all
expense, liability and loss (including attorneys' fees, judgments, fines,
ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of his or her heirs, executors and administrators; provided,
however, that except as provided in paragraph (C) of this By-law, the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only
if such proceeding (or part thereof) was authorized by the Board of
Directors. The right to indemnification conferred in this By-law shall be a
contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition, such advances to be paid by the Corporation within 20 days
after the receipt by the Corporation of a statement or statements from the
claimant requesting such advance or advances from time to time; provided,
however, that if the General Corporation Law of the State of Delaware
requires, the payment of such expenses incurred by a director or officer in
his or her capacity as a director or officer (and not in any other capacity
in which service was or is rendered by such person while a director of
officer, including, without limitation, service to an employee benefit plan)
in advance of the final disposition of a proceeding, shall be made only upon
delivery to the Corporation of an undertaking by or on behalf of such
director or officer, to repay all amounts so advanced if it shall ultimately
be determined that such director or officer is not entitled to be
indemnified under this By-law or otherwise.
(B) To obtain indemnification under this By-law, a claimant shall
submit to the Corporation a written request, including therein or therewith
such documentation and information as is reasonably available to the
claimant and is reasonably necessary to determine whether and to what extent
the claimant is entitled to indemnification. Upon written request by a
claimant for indemnification pursuant to the first sentence of this
paragraph (B), a determination, if required by applicable law, with respect
to the claimant's entitlement thereto shall be made as follows: (1) if
requested by the claimant, by Independent Counsel (as hereinafter defined),
or (2) if no request is made by the claimant for a determination by
Independent Counsel, (i) by the Board of Directors by a majority vote of a
quorum consisting of Disinterested Directors (as hereinafter defined), or
(ii) if a quorum of the Board of Directors consisting of Disinterested
Directors is not obtainable, or even if obtainable, such quorum of
Disinterested Directors so directs, by Independent Counsel in a written
opinion to the Board of Directors a copy of which shall be delivered to the
claimant, or (iii) if a quorum of Disinterested Directors so directs, by the
stockholders of the Corporation. In the event the determination of
entitlement to indemnification is to be made by Independent Counsel at the
request of the claimant, the Independent Counsel shall be selected by the
Board of Directors unless there shall have occurred within two years prior
to the date of the commencement of the action, suit or proceeding for which
indemnification is claimed a "Change of Control" as defined in the Banknorth
Group, Inc. 1997 Equity Compensation Plan, in which case the Independent
Counsel shall be selected by the claimant unless the claimant shall request
that such selection be made by the Board of Directors. If it is so
determined that the claimant is entitled to indemnification, payment to the
claimant shall be made within 10 days after such determination.
(C) If a claim under paragraph (A) of this By-law is not paid in full
by the Corporation within 30 days after a written claim pursuant to
paragraph (B) of this By-law has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim and, if successful in whole or in
part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in defending
any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation), that
the claimant has not met the standard of conduct which makes it permissible
under the General Corporation Law of the State of Delaware, or under the
Certificate of Incorporation, for the Corporation to indemnify the claimant
for the amount claimed, but the burden of proving such defense shall be on
the Corporation. Neither the failure of the Corporation (including its
Board of Directors, Independent Counsel or stockholders) to have made a
determination prior to the commencement of such action that indemnification
of the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the General Corporation Law of
the State of Delaware, nor an actual determination by the Corporation
(including its Board of Directors, Independent Counsel or Stockholders) that
the claimant has not met such applicable standard of conduct, shall be a
defense to the action or create a presumption that the claimant has not met
the applicable standard of conduct.
(D) If a determination shall have been made pursuant to paragraph
(B) of this By-law that the claimant is entitled to indemnification, the
Corporation shall be bound by such determination in any judicial proceeding
commenced pursuant to paragraph (C) of this By-law.
(E) The Corporation shall be precluded from asserting in any judicial
proceeding commenced pursuant to paragraph (C) of this By-law that the
procedures and presumptions of this By-law are not valid, binding and
enforceable and shall stipulate in such proceeding that the Corporation is
bound by all the provisions of this By-law.
(F) The right to indemnification and the payment of expenses incurred
in defending a proceeding in advance of its final disposition conferred in
this By-law shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or Disinterested
Directors or otherwise. No repeal or modification of this By-law shall in
any way diminish or adversely affect the rights of any director, officer,
employee or agent of the Corporation hereunder in respect of any occurrence
or matter arising prior to any such repeal or modification.
(G) The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such
expense, liability or loss under the General Corporation Law of the State of
Delaware. To the extent that the Corporation maintains any policy or
policies providing such insurance, each such director or officer, and each
such agent or employee to which rights to indemnification have been granted
as provided in paragraph (H) of this By-law, shall be covered by such policy
or policies in accordance with its or their terms to the maximum extent of
the coverage thereunder for any such director, officer, employee or agent.
(H) The Corporation may, to the extent authorized from time to time
by the Board of Directors, grant rights to indemnification, and rights to be
paid by the Corporation the expenses incurred in defending any proceeding
in advance of its final disposition, to any employee or agent of the
Corporation to the fullest extent of the provisions of this By-law with
respect to the indemnification and advancement of expenses of directors and
officers of the Corporation.
(I) If any provision or provisions of this By-law shall be held to be
invalid, illegal or unenforceable for any reason whatsoever: (1) the
validity, legality and enforceability of the remaining provisions of this
By-law (including, without limitation, each portion of any paragraph of this
By-law containing any such provision held to be invalid, illegal or
unenforceable, that is not itself held to be invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby; and (2)
to the fullest extent possible, the provisions of this By-law (including,
without limitation, each such portion of any paragraph of this By-law
containing any such provision held to be invalid, illegal or unenforceable)
shall be construed so as to give effect to the intent manifested by the
provision held invalid, illegal or unenforceable.
(J) For purposes of this By-law:
(1) "Disinterested Director" means a director of the Corporation
who is not and was not a party to the matter in respect of
which indemnification is sought by the claimant.
(2) "Independent Counsel" means a law firm, a member of a law
firm, or an independent practitioner, that is experienced in
matters of corporation law and shall include any person who,
under the applicable standards of professional conduct then
prevailing, would not have a conflict of interest in
representing either the Corporation or the claimant in an
action to determine the claimant's rights under this By-law.
(K) Any notice, request or other communication required or permitted
to be given to the Corporation under this By-law shall be in writing and
either delivered in person or sent by telecopy, telex, telegram, overnight
mail or courier service, or certified or registered mail, postage prepaid,
return receipt requested, to the Secretary of the Corporation and shall be
effective only upon receipt by the Secretary.
(L) Nothing in this By-law shall eliminate the liability of a
Director, to the extent such liability is provided by applicable law, (i)
for any breach of the Director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, (iii) under Section 174
of the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the Director derived an improper personal benefit.
Article VII
Director Emeritus
Section 7.1. Director Emeritus
a. An individual who is a Director of the Corporation on February
27, 1996 and who continues to be a Director until their retirement
from the Board at the Annual Meeting following their attainment of
age 65 and prior to the first Annual Meeting after attainment of
age 67 will thereupon be appointed to the status of Director
Emeritus and be entitled to remain as such until the Annual Meeting
following their attainment of age 72.
b. Directors appointed to the status of Director Emeritus will be
entitled to attend all Board meetings of the Corporation as
non-voting members and will continue to receive the Directors'
annual retainer so long as they remain Director Emeritus.
c. An individual who becomes a Director of the Corporation after
February 27, 1996 shall not be eligible to receive the attendant
benefits of a Director Emeritus upon his/her retirement from the
Board.
Article VIII
Amendments
Section 8.1. Amendments. Except as otherwise provided in these
Bylaws, the Bylaws of the Corporation may be altered, amended or repealed at
any regular or special meeting of the Board of Directors by a vote of at
least a majority of the Directors or by or at any meeting of the
stockholders by the vote of the holders of at least a majority of the stock
issued and outstanding and entitled to vote at such meeting, in accordance
with the provisions of the Certificate of Incorporation and of the laws of
Delaware, provided notice of the proposed amendment, alteration or repeal is
mailed to each such holder at least ten days prior to such meeting.
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