<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1995
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-16947
PEOPLES HERITAGE FINANCIAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
MAINE 01-0137770
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
ONE PORTLAND SQUARE, PORTLAND, MAINE 04112
(Address of principal executive offices)
(Zip Code)
(207) 761-8500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 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 ____
The number of shares outstanding of each of the Registrant's classes of common
stock as of November 6, 1995 is:
COMMON STOCK, PAR VALUE $.01 PER SHARE 16,944,901
(CLASS) (OUTSTANDING)
<PAGE>
INDEX
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited).
Consolidated Balance Sheets -- September 30, 1995 and
December 31, 1994.
Consolidated Statements of Income -- Three months
ended September 30, 1995 and 1994; nine months ended
September 30, 1995 and 1994.
Consolidated Statements of Changes in Shareholders'
Equity -- Nine months ended September 30, 1995 and 1994.
Consolidated Statements of Cash Flows -- nine months ended
September 30, 1995 and 1994.
Notes to Consolidated Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal proceedings.
Item 2. Changes in securities.
Item 3. Defaults upon senior securities.
Item 4. Submission of matters to a vote of security holders.
Item 5. Other information.
Item 6. Exhibits and Reports on Form 8-K.
-2-
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Cash and due from banks........................... $ 95,045 $ 99,741
Federal funds sold................................ 23,220 30,735
Securities available for sale, at market value.... 508,093 429,003
Loans held for sale (market value $65,058 and
$11,163, respectively)........................... 64,150 11,092
Loans and leases:
Residential real estate mortgages............... 626,606 632,361
Commercial real estate mortgages................ 619,491 595,355
Commercial business loans and leases............ 331,720 265,644
Consumer loans and leases....................... 644,693 604,918
------------- ------------
2,222,510 2,098,278
Less: Allowance for loan and lease losses...... 48,834 50,484
------------- ------------
Net loans and leases.......................... 2,173,676 2,047,794
------------- ------------
Bank premises and equipment....................... 41,469 35,915
Goodwill and other intangibles.................... 21,744 18,985
Mortgage servicing rights......................... 19,571 17,275
Other real estate and repossessed assets owned.... 8,220 10,730
Deferred income taxes............................. 26,528 30,542
Interest and dividends receivable................. 21,587 18,929
Other assets...................................... 33,910 32,441
------------- ------------
$3,037,213 $2,783,182
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Regular savings................................. $ 316,939 $ 361,657
Money market access accounts.................... 414,008 276,064
Certificates of deposit (including certificates
of $100 or more of $93,805 and $81,911,
respectively).................................. 1,129,401 1,012,326
NOW accounts.................................... 207,830 195,161
Demand deposits................................. 262,787 218,559
------------- ------------
Total deposits................................ 2,330,965 2,063,767
------------- ------------
Federal funds purchased........................... 600 4,404
Securities sold under repurchase agreements....... 116,653 86,631
Borrowings from Federal Home Loan Bank of
Boston........................................... 275,948 362,450
Other borrowings.................................. 21,711 7,902
Deferred income taxes............................. 9,490 4,884
Other liabilities................................. 20,252 23,879
------------- ------------
Total liabilities............................. 2,775,619 2,553,917
------------- ------------
Shareholders' Equity:
Preferred stock (par value $0.01 per share,
5,000,000 shares authorized, none issued or
outstanding)..................................... -- --
Common stock (par value $0.01 per share,
30,000,000 shares authorized, 17,468,220 shares
issued).......................................... 175 175
Paid-in capital................................... 186,900 186,900
Retained earnings................................. 81,998 62,235
Net unrealized gain (loss) on securities available
for sale......................................... 710 (9,085)
Treasury stock at cost (550,100 shares and 760,327
shares, respectively)............................ (8,189) (10,960)
------------- ------------
Total shareholders' equity........................ 261,594 229,265
------------- ------------
$3,037,213 $2,783,182
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
-3-
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans and leases................... $ 53,057 $ 43,748 $ 150,237 $ 123,846
Interest on mortgage-backed investments................. 3,262 3,235 9,420 9,185
Interest on other investments........................... 4,762 3,396 12,777 8,852
Dividends on equity securities.......................... 428 380 1,297 1,063
------------ ------------ ------------ ------------
Total interest and dividend income.................... 61,509 50,759 173,731 142,946
------------ ------------ ------------ ------------
Interest expense:
Interest on deposits.................................... 23,228 17,105 62,371 50,934
Interest on borrowed funds.............................. 5,975 4,838 19,182 12,940
------------ ------------ ------------ ------------
Total interest expense................................ 29,203 21,943 81,553 63,874
------------ ------------ ------------ ------------
Net interest income................................... 32,306 28,816 92,178 79,072
Provision for loan losses................................. 630 -- 1,800 1,752
------------ ------------ ------------ ------------
Net interest income after provision for loan losses... 31,676 28,816 90,378 77,320
------------ ------------ ------------ ------------
Noninterest income:
Customer services....................................... 2,240 1,732 6,120 5,029
Mortgage banking services............................... 3,050 1,743 7,742 6,158
Loan related services................................... 283 223 789 761
Trust and investment advisory services.................. 433 357 1,163 1,177
Net securities gains (losses)........................... 39 2 (106) 354
Net gains on sales of consumer loans.................... -- -- -- 33
Other noninterest income................................ 29 775 97 1,408
------------ ------------ ------------ ------------
6,074 4,832 15,805 14,920
------------ ------------ ------------ ------------
Noninterest expenses:
Salaries and employee benefits.......................... 13,022 11,756 35,668 32,358
Occupancy............................................... 1,840 1,838 5,580 5,642
Data processing......................................... 1,778 1,629 5,222 4,490
Deposit and other assessments........................... 212 1,437 2,958 4,335
Equipment............................................... 1,275 1,240 3,461 3,385
Collection and carrying costs of nonperforming assets... 221 964 1,180 3,228
Advertising and marketing............................... 867 871 2,662 2,381
Other noninterest expenses.............................. 4,294 4,425 12,393 11,587
------------ ------------ ------------ ------------
23,509 24,160 69,124 67,406
------------ ------------ ------------ ------------
Income before income tax.................................. 14,241 9,488 37,059 24,834
Applicable income tax..................................... 4,902 1,941 12,536 6,578
------------ ------------ ------------ ------------
Net income............................................ $ 9,339 $ 7,547 $ 24,523 $ 18,256
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Weighted average shares outstanding....................... 16,881,519 16,742,322 16,445,433 16,700,198
Earnings per share........................................ $ 0.55 $ 0.45 $ 1.49 $ 1.09
</TABLE>
See accompanying notes to Consolidated Financial Statements.
-4-
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER NET
OF SHARES PAR PAID IN RETAINED UNREALIZED TREASURY
ISSUED VALUE CAPITAL EARNINGS GAIN (LOSS) STOCK TOTAL
------------ ----------- ----------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December
31, 1993.............. 17,468,220 $ 175 $ 186,900 $ 41,780 $ 2,609 $ (12,353) $ 219,111
Treasury stock sold
(128,927 shares at an
average price of
$6.34)................ -- -- -- (860) -- 1,908 1,048
Change in unrealized
gains (losses) on
securities available
for sale, net of
tax................... -- -- -- -- (7,950) -- (7,950)
Net income............. -- -- -- 18,256 -- 18,256
Cash dividends $0.14... -- -- -- (2,275) -- -- (2,275)
------------ ----- ----------- ----------- ------- ----------- -----------
Balances at September
30, 1994.............. 17,468,220 $ 175 $ 186,900 $ 56,901 $ (5,341) $ (10,445) $ 228,190
------------ ----- ----------- ----------- ------- ----------- -----------
------------ ----- ----------- ----------- ------- ----------- -----------
Balances at December
31, 1994.............. 17,468,220 $ 175 $ 186,900 $ 62,235 $ (9,085) $ (10,960) $ 229,265
Treasury stock
purchased (646,600
shares at an average
price of $12.84)...... -- -- -- -- -- (8,301) (8,301)
Treasury stock sold
(105,227 shares at an
average price of
$9.34)................ -- -- -- (387) -- 1,508 1,121
Reissuance of treasury
stock pursuant to
acquisition (751,600
shares at $15.00)..... -- -- -- -- 1,710 9,564 11,274
Changes in unrealized
gains (losses) on
securities available
for sale, net of
tax................... -- -- -- -- 9,795 -- 9,795
Net income............. -- -- -- 24,523 -- -- 24,523
Cash dividends $0.37... -- -- -- (6,083) -- -- (6,083)
------------ ----- ----------- ----------- ------- ----------- -----------
Balances at September
30, 1995.............. 17,468,220 $ 175 $ 186,900 $ 81,998 $ 710 $ (8,189) $ 261,594
------------ ----- ----------- ----------- ------- ----------- -----------
------------ ----- ----------- ----------- ------- ----------- -----------
</TABLE>
See accompanying notes to Consolidated Financial Statements.
-5-
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income.......................................................................... $ 24,523 $ 18,256
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Provision for loan losses......................................................... 1,800 1,752
Provision for depreciation........................................................ 3,150 3,000
Provision for losses and writedowns of other real estate owned.................... (983) (114)
Amortization of goodwill and other intangibles.................................... 1,530 1,961
Amortization of servicing rights.................................................. 2,802 917
Net losses realized from sales of other real estate owned......................... 897 470
Net (gains) losses realized from sales of securities and consumer loans........... 55 (365)
Net gains realized from sales of loans held for sale (a component of mortgage
banking services)................................................................ (3,052) (1,813)
Gains on capitalized servicing.................................................... (2,730) (1,235)
Proceeds from sales of loans held for sale........................................ 353,569 203,578
Residential loans originated and purchased for sale............................... (403,575) (162,106)
Net decrease in net deferred tax assets........................................... 3,015 1,663
Net increase in interest and dividends receivable and other assets................ (4,127) (4,099)
Net increase (decrease) in other liabilities...................................... (3,627) 9,112
------------ ------------
Net cash provided (used) by operating activities...................................... (26,753) 70,977
------------ ------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale................................ 10,444 17,222
Proceeds from maturities and principal repayments of securities available for
sale............................................................................... 75,640 89,846
Purchases of securities available for sale.......................................... (149,829) (133,910)
Net (increase) in loans and leases.................................................. (132,642) (108,591)
Proceeds from sales of loans........................................................ -0- 557
Purchase of mortgage servicing rights............................................... (2,367) (5,139)
Premiums paid on deposits purchased................................................. (4,290) (75)
Net additions to premises and equipment............................................. (8,704) (3,424)
Proceeds from sales of other real estate owned...................................... 7,255 3,792
Net (increase) decrease in repossessed assets owned................................. 301 3,592
------------ ------------
Net cash used by investing activities................................................. (204,192) (136,130)
------------ ------------
</TABLE>
-6-
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- CONTINUED
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Net increase (decrease) in deposits................................................. $ 267,198 $ (29,138)
Net increase in securities sold under repurchase agreements......................... 30,022 24,662
Advances from Federal Home Loan Bank of Boston borrowings........................... 274,498 215,284
Payments on Federal Home Loan Bank of Boston borrowings............................. (361,000) (168,094)
Net increase in other borrowings.................................................... 13,809 8,095
Sale of treasury stock.............................................................. 1,121 1,048
Purchase of treasury stock.......................................................... (8,301) -0-
Issuance of treasury stock for acquisition.......................................... 11,274 -0-
Cash dividends paid to shareholders................................................. (6,083) (2,275)
------------ ------------
Net cash provided by financing activities............................................. 222,538 49,582
------------ ------------
Decrease in cash and cash equivalents................................................. (8,407) (15,571)
Cash and cash equivalents at beginning of period...................................... 126,072 80,724
------------ ------------
Cash and cash equivalents at end of period............................................ $ 117,665 $ 65,153
------------ ------------
------------ ------------
Supplemental disclosures of information:
Interest paid on deposits, advances and borrowings.................................... $ 80,982 $ 63,467
Income taxes paid..................................................................... 5,205 -0-
Income tax refunds.................................................................... 2,900 3,716
Noncash investing transactions:
Loans transferred to other real estate owned........................................ 9,761 2,755
Loans originated to finance the sales of other real estate owned.................... 4,801 9,908
Increases (decreases) resulting from the adoption of SFAS No. 115:
Securities available for sale......................................................... 15,400 (12,664)
Deferred income taxes - liabilities................................................... 5,605 (4,700)
Net change in unrealized gain (loss) on securities available for sale................. 9,795 (7,964)
</TABLE>
-7-
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
primarily of normal recurring accruals) necessary for a fair presentation of the
consolidated financial statements have been included. The results of operations
and other data for the three and nine months ended September 30, 1995 are not
necessarily indicative of results that may be expected for any other interim
period or the entire year ending December 31, 1995. Certain amounts in prior
periods have been reclassified to conform to the current presentation.
-8-
<PAGE>
PEOPLES HERITAGE FINANCIAL GROUP, INC. AND SUBSIDIARIES
PART I - ITEM 2
Management's discussion and analysis of financial condition and results of
operations.
GENERAL
Peoples Heritage Financial Group, Inc. (the "Company") is a multi-bank
holding company which is incorporated under the laws of the State of Maine and
headquartered in Portland, Maine. The Company's direct subsidiaries, both of
which are wholly-owned, are Peoples Heritage Savings Bank (the "Bank") and First
Coastal Banks, Inc. ("First Coastal"), which wholly owns The First National Bank
of Portsmouth ("Portsmouth").
The Bank conducts business from its headquarters in Portland, Maine and 60
additional offices located throughout the State of Maine. At September 30, 1995,
the Bank had total assets of $2.5 billion and total shareholder's equity of
$184.3 million.
Portsmouth conducts business from its headquarters in Portsmouth, New
Hampshire and 14 additional offices located throughout the eastern half of New
Hampshire. At September 30, 1995, Portsmouth had $541.8 million of total assets
and $39.3 million of shareholder's equity.
On July 1, 1995, Bankcore, Inc. ("Bankcore"), the New Hampshire-based
holding company for North Conway Bank, was acquired and North Conway Bank merged
into Portsmouth. At the time of acquisition, Bankcore had $132.8 million in
total assets and shareholders' equity of $17.8 million. The Bankcore acquisition
was treated as a purchase for accounting purposes and, accordingly, the
Company's financial statements reflect the acquisition from the time of purchase
only. As a result of the transaction, $3.4 million of goodwill was created and
is being amortized over 15 years.
On June 15, 1995, the Company purchased all the branches and associated
deposits, as well as certain loans, of Fleet Bank of Maine located in Aroostook
County, Maine. Five of the seven branches purchased were merged with and into
existing branches of the Bank. The purchase resulted in the transfer of $46.1
million in deposits and $17.1 million in loans.
On July 31, 1994, Mid Maine Savings Bank, F.S.B. ("MMSB"), headquartered in
Auburn, Maine, was merged into the Bank, and was accounted for under the
pooling-of-interests method. Accordingly, the consolidated financial statements
of the Company have been restated to reflect the acquisition at the beginning of
each period presented. At July 31, 1994, MMSB had total assets of $170.5 million
and total shareholders' equity of $11.4 million. Immediately upon consummation
of the merger of MMSB into the Bank, the Bank sold the assets and liabilities
relating to MMSB's Hampton (New Hampshire) Division to Portsmouth.
-9-
<PAGE>
RESULTS OF OPERATIONS
The Company reported net income of $9.3 million and $24.5 million for the
three and nine months ended September 30, 1995, respectively, compared with $7.5
million and $18.3 million for the comparable periods in 1994. The improved
results in 1995 were primarily attributable to the improvement in net interest
income as a result of both an increase in earning assets and the Company's net
interest margin, along with controlled increases in total noninterest expenses.
NET INTEREST INCOME. For purposes of the following table and the following
discussion, income from interest-earning assets and net interest income are
presented on a fully-taxable equivalent basis primarily by adjusting income and
yields earned from tax-exempt interest received on qualified tax-exempt
securities and on loans to qualifying borrowers to make them equivalent to
income and yields earned on fully-taxable securities and loans, assuming tax
rates of 35%. In addition, nonaccrual loans have been included in the
appropriate average balance loan category, but unpaid interest on nonaccrual
loans has not been included for purposes of determining interest income.
-10-
<PAGE>
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, THREE MONTHS ENDED SEPTEMBER 30,
1995 1994
------------------------------------- -------------------------------------
AVERAGE YIELD/(1) AVERAGE YIELD/(1)
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------- --------- ----------- ------------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages... $ 705,434 $ 14,071 7.91% $ 605,287 $ 11,772 7.72%
Commercial real estate mortgages.... 612,319 15,705 10.18 577,569 12,996 8.93
Commercial loans and leases......... 325,412 8,232 10.04 249,168 6,004 9.56
Consumer loans and leases........... 640,070 15,200 9.42 586,331 13,066 8.84
------------- --------- ------------- ---------
Total loans and leases............ 2,283,235 53,208 9.25 2,018,355 43,838 8.62
------------- --------- ------------- ---------
Investment securities (3)............. 527,687 8,290 6.23 462,617 6,926 5.94
Federal funds sold.................... 18,582 279 5.96 12,089 150 4.91
------------- --------- ------------- ---------
Total earning assets.............. 2,829,504 61,777 8.66 2,493,061 50,914 8.10
------------- --------- ------------- ---------
Nonearning assets..................... 179,790 193,208
------------- -------------
Total assets...................... $ 3,009,294 $ 2,686,269
------------- -------------
------------- -------------
Interest-bearing deposits:
Regular savings..................... $ 324,787 2,343 2.86 $ 324,299 2,268 2.77
NOW accounts........................ 206,347 649 1.25 177,856 746 1.66
Money market access accounts........ 397,094 3,988 3.98 303,355 2,020 2.64
Certificates of deposit............. 1,124,253 16,248 5.73 1,036,335 12,071 4.62
------------- --------- ------------- ---------
Total interest-bearing deposits... 2,052,481 23,228 4.49 1,841,845 17,105 3.68
Borrowed funds........................ 407,138 5,975 5.82 389,770 4,838 4.92
------------- --------- ------------- ---------
Total interest-bearing
liabilities...................... 2,459,619 29,203 4.71 2,231,615 21,943 3.90
------------- --------- ------------- ---------
Demand accounts....................... 258,848 202,126
Other liabilities (3)................. 37,085 26,852
Shareholders' equity (3).............. 253,742 225,677
------------- -------------
Total liabilities and
shareholders' equity............. $ 3,009,294 $ 2,686,270
------------- -------------
------------- -------------
Net earning assets.................... $ 369,885 $ 261,446
------------- -------------
------------- -------------
Net interest income (fully-taxable
equivalent).......................... 32,574 28,971
Less: fully-taxable equivalent
adjustments.......................... (268) (155)
--------- ---------
Net interest income................... $ 32,306 $ 28,816
--------- ---------
--------- ---------
Net interest rate spread (fully-
taxable equivalent).................. 3.95% 4.20%
Net interest margin (fully-taxable
equivalent).......................... 4.57% 4.61%
</TABLE>
(1) Annualized.
(2) Loans and leases includes loans available for sale.
(3) Excludes effect of unrealized gains or losses on investment securities.
-11-
<PAGE>
The following table sets forth, for the periods indicated, information
regarding (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average cost; (iii) net interest income; (iv) interest rate spread; and (v) net
interest margin. Information is based on average daily balances during the
indicated periods.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1995 1994
------------------------------------- --------------------------------------
AVERAGE YIELD/(1) AVERAGE YIELD/(1)
BALANCE INTEREST RATE BALANCE INTEREST RATE
------------- --------- ----------- ------------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans and leases (2):
Residential real estate mortgages.... $ 667,234 $ 39,990 8.01% $ 625,504 $ 34,120 7.29%
Commercial real estate mortgages..... 597,810 44,506 9.95 562,018 36,407 8.67
Commercial loans and leases.......... 295,510 22,473 10.17 241,019 16,470 9.14
Consumer loans and leases............ 620,333 43,722 9.42 554,005 37,038 8.94
------------- --------- ------------- ---------
Total loans and leases............. 2,180,887 150,691 9.24 1,982,546 124,035 8.37
------------- --------- ------------- ---------
Investment securities (3).............. 474,572 22,683 6.39 458,581 18,932 5.52
Federal funds sold..................... 24,052 1,106 6.15 9,995 355 4.49
------------- --------- ------------- ---------
Total earning assets............... 2,679,511 174,480 8.71 2,451,122 143,322 7.82
------------- --------- ------------- ---------
Nonearning assets...................... 181,158 191,970
------------- -------------
Total assets....................... $ 2,860,669 $ 2,643,092
------------- -------------
------------- -------------
Interest-bearing deposits:
Regular savings...................... $ 323,695 6,981 2.88 $ 270,797 5,701 2.81
NOW accounts......................... 190,858 1,755 1.23 170,127 2,220 1.74
Money market access accounts......... 343,823 9,734 3.79 325,925 6,709 2.75
Certificates of deposit.............. 1,066,161 43,901 5.51 1,085,401 36,304 4.47
------------- --------- ------------- ---------
Total interest-bearing deposits.... 1,924,537 62,371 4.33 1,852,250 50,934 3.68
Borrowed funds......................... 437,068 19,182 5.87 354,208 12,940 4.88
------------- --------- ------------- ---------
Total interest-bearing
liabilities....................... 2,361,605 81,553 4.62 2,206,458 63,874 3.87
------------- --------- ------------- ---------
Demand accounts........................ 220,654 184,091
Other liabilities (3).................. 34,286 30,159
Shareholders' equity (3)............... 244,124 222,384
------------- -------------
Total liabilities and shareholders'
equity............................ $ 2,860,669 $ 2,643,092
------------- -------------
------------- -------------
Net earning assets..................... $ 317,906 $ 244,664
------------- -------------
------------- -------------
Net interest income (fully-taxable
equivalent)........................... 92,927 79,448
Less: fully-taxable equivalent
adjustments........................... (749) (376)
--------- ---------
Net interest income.................... $ 92,178 $ 79,072
--------- ---------
--------- ---------
Net interest rate spread (fully-taxable
equivalent)........................... 4.09% 3.95%
Net interest margin (fully-taxable
equivalent)........................... 4.64% 4.33%
</TABLE>
(1) Annualized.
(2) Loans and leases includes loans available for sale.
(3) Excludes effect of unrealized gains or losses on investment securities.
-12-
<PAGE>
Net interest income on a fully-taxable equivalent basis increased by $3.5
million and $13.1 million for the three and nine months ended September 30,
1995, respectively, compared with the same periods in 1994. The increase in net
interest income for the nine months ended September 30, 1995 was attributable to
both an increase in net earning assets and an increase in the net interest
margin. The increase in net interest income for the three months ended September
30, 1995 was primarily attributable to an increase in net earning assets which
was offset in part by a slight decrease in the net interest margin.
The weighted average yield on loans increased to 9.25% from 8.62% and the
average outstanding balances increased by $264.8 million, or 13.1%, for the
three months ended September 30, 1995 as compared with the same period in 1994.
For the nine months ended September 30, 1995, the weighted average yield on
loans increased to 9.24% from 8.37%, and the average outstanding balance
increased $198.3 million, or 10.0%, as compared with the same period in 1994.
The increases in the weighted average yield on loans and leases were
attributable to the upward repricing of adjustable and variable rate loans as a
result of rising interest rates during the latter half of 1994, the decrease in
the level of loans classified as nonperforming and the increase in higher
yielding commercial business loans.
Interest expense on deposits increased by $6.1 million and $11.4 million, or
35.8% and 22.5%, for the three and nine months ended September 30, 1995,
respectively, as compared with the same respective periods in 1994. The most
significant impact on the increase in interest expense on deposits was an
increase in the weighted average rate paid, which increased from 3.68% and 3.68%
for the three and nine months ended September 30, 1994, respectively, to 4.49%
and 4.33% for the three and nine months ended September 30, 1995, respectively.
In particular, the Company has paid higher rates on certificates of deposit in
1995 as compared with 1994 as a result of lower costing certificates maturing
and being repriced in a more competitive and higher interest rate environment.
In addition, the Company has seen a change in the mix of its deposits, with
lower yielding regular savings deposits being replaced by higher costing money
market access account balances. Total average interest-bearing deposit balances
outstanding increased by $210.6 million or 11.4% for the three months ended
September 30, 1995, as compared with the same period in 1994, and increased
$72.3 million, or 3.9%, for the nine months ended September 30, 1995, as
compared with the same period in 1994.
Interest expense on borrowed funds increased by $1.1 million and $6.2
million, or 23.5% and 48.2%, for the three and nine months ended September 30,
1995, respectively, as compared with the same respective periods in 1994. The
increases in interest expense on borrowed funds were attributable to both an
increase in average outstanding borrowings in 1995 as well as an increase in the
weighted average rate paid.
The Company's net interest rate spread decreased from 4.20% for the three
months ended September 30, 1994 to 3.95% for the three months ended September
30, 1995 and increased from 3.95% for the nine months ended September 30, 1994
to 4.09% for the nine months ended September 30, 1995. The decrease in the net
interest rate spread for the three months ended September 30, 1995 as compared
with the same period in 1994 was attributable to increased rates on
interest-bearing liabilities exceeding increased rates on earning assets. The
increase in the net interest rate spread for the nine months ended September 30,
1995 as compared with the same period in 1994 was attributable to increased
rates on earning assets exceeding the increase in rates paid on interest-bearing
liabilities.
-13-
<PAGE>
The Company's net interest margin decreased from 4.61% for the three months
ended September 30, 1994 to 4.57% for the three months ended September 30,
1995. The decrease in the net interest margin for the three months ended
September 30, 1995 as compared with the same period in 1994 was attributable
to the decrease in the net interest rate spread, the effects of which were
more than offset by an increase in the level of net earning assets. The net
interest margin increased from 4.33% for the nine months ended September 30,
1994 to 4.64% for the nine months ended September 30, 1995. The increase in
the net interest margin for the nine months ended September 30, 1995 as
compared with the same period in 1994 was attributable both to the increased
net interest rate spread and to higher levels of net earning assets.
PROVISION FOR LOAN LOSSES. The provision for loan losses of $630 thousand
and $1.8 million for the three and nine months ended September 30, 1995
increased $630 thousand and $48 thousand compared to the same respective
periods in 1994. The provisions resulted from management's ongoing evaluation
of the adequacy of the allowance for loan losses after taking into account
recent trends in nonperforming loans, delinquent loans and net loan
chargeoffs, as well as other asset quality factors. See "Financial Condition
- -- Nonperforming Assets" below.
Although management utilizes its best judgment in providing for possible
losses, there can be no assurance that the Company will not have to increase its
provisions for possible loan and lease losses in the future as a result of
changing markets for real estate and economic conditions in the Company's
primary market area, future changes in nonperforming assets or for other
reasons, which would affect the Company's results of operations. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan and lease losses. Such
agencies may require the Company to recognize changes to the allowance for loan
and lease losses based on their judgments about information available to them at
the time of the examination. The Company was most recently examined by the
Federal Reserve Board as of December 31, 1994; the Bank was most recently
examined by the FDIC and the Maine Bureau of Banking as of December 31, 1994;
and Portsmouth was most recently examined by the Comptroller of the Currency as
of December 31, 1994.
-14-
<PAGE>
NONINTEREST INCOME
Noninterest income increased $1.2 million, or 25.7%, and $885 thousand,
or 5.9%, for the three and nine months ended September 30, 1995,
respectively, as compared to the same periods in 1994.
The following table shows the composition of net gains (losses) on the
sales of securities for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1995 1994 1995 1994
-------- -------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Securities losses $ -0- $ -0- $ (174) $ -0-
Securities gains 39 2 68 354
------ ------ ------ ------
$ 39 $ 2 $ (106) $ 354
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
Included in securities gains during the nine months ended September 30,
1994 is a $296 thousand recovery on a security previously written down to
zero.
The following table sets forth certain information relating to mortgage
banking services income for the periods indicated:
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
1995 1994 1995 1994
---------- ---------- ---------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Residential mortgages serviced
for investors at end
of period $2,391,742 $1,932,368 $2,391,742 $1,932,368
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Residential mortgage
sales income (loss) $ 1,052 $ (41) $ 2,612 $ 1,813
Gain on sale of residential
mortgage servicing rights 440 -0- 440 -0-
Residential mortgage
servicing income 1,558 1,784 4,690 4,345
---------- ---------- ---------- ----------
Total $ 3,050 $ 1,743 $ 7,742 $ 6,158
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The Company's portfolio of mortgages serviced for investors increased by
$459 million, or 23.8%, net of amortization and prepayments, from
September 30, 1994 to September 30, 1995. The Company's portfolio of
mortgages serviced for others continues to increase as a result of its
strategy to originate and sell primarily fixed rate residential mortgages
to the secondary market while retaining the rights to service these loans
for the investors purchasing them. In addition, the outstanding amount
of residential mortgages serviced for investors is impacted, from time to
time, by the purchase and sale of mortgage servicing rights for
portfolios of residential mortgage loans.
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting
for Mortgage Servicing Rights"--An Amendment of FASB Statement No. 65,"
which changes the method of accounting for certain mortgage banking
activities. The Company elected early adoption of SFAS No. 122 and as a
result capitalized $908 thousand and $1.6 million of originated mortgage
servicing rights during the three months and nine months ended September
30, 1995, respectively. Income related to the capitalization of
originated mortgage servicing rights is included in residential mortgage
sales income.
-15-
<PAGE>
Residential mortgage sales income was $1.1 million for the three months
ended September 30, 1995 compared with a $41 thousand loss for the same
period in 1994 and $2.6 million for the nine months ended September 30,
1995 compared with $1.8 million for the same period in 1994. A
significant portion of the increase in residential mortgage sales income
in 1995 was related to the adoption of SFAS No. 122 as noted above.
Excluding the income related to the Company's adoption of SFAS No. 122,
residential mortgage sales income would have increased $185 thousand for
the three months ended September 30, 1995 as compared with the same
period in 1994 and would have decreased $831 thousand for the nine months
ended September 30, 1995, compared with the same period in 1994. The
decrease in mortgage sales income, excluding the income related to SFAS
No. 122, for the nine months period ending September 30, 1995 compared
with 1994 was attributable in part to a more competitive market for
retail and correspondent originations resulting in lower gains on sales
of residential mortgages and an increase in the amount of costs directly
allocated to retail mortgage originations. The $41 thousand loss for the
three months ended September 30, 1994 reflected a rising interest rate
environment which resulted in a significantly decreased level of
refinancing activity and a more competitive environment for purchased
mortgage originations.
The generation of mortgage sales income and the recognition of net gains
on the sales of securities and nonresidential mortgage loans are
dependent on market and economic conditions and, accordingly, there can
be no assurance that the income and net gains reported in prior periods
can be achieved in the future or that there will not be significant inter-
period variations in the results from such activities.
The Company recorded a $440 thousand gain on the sale of residential
mortgage servicing rights during the three months ended September 30,
1995. The sale of mortgage servicing rights was associated with $107.5
million of residential mortgages serviced for others.
Residential mortgage servicing income decreased $226 thousand, or 12.7%,
for the three months ended September 30, 1995 compared with the same
period in 1994, and increased $345 thousand, or 7.9%, for the nine months
ended September 30, 1995, as compared with the same period in 1994.
Mortgage servicing income during 1995 was negatively impacted by the
Company's adoption of SFAS No. 122, which has effectively accelerated
mortgage servicing income into the current period as a component of
residential mortgage sales income and increased the amount of capitalized
mortgage servicing rights. The mortgage servicing rights that have been
created as a result of the implementation of SFAS No. 122 are amortized
and recorded as an offset to mortgage servicing income. In conjunction
with the adoption of SFAS No. 122, the Company elected to accelerate the
amortization of capitalized mortgage servicing rights and excess
servicing fees related to numerous pools of loans with small outstanding
balances which, from an ongoing operational standpoint, were inefficient
to amortize on a monthly basis. The cumulative impact of accelerating
amortization of capitalized mortgage servicing rights and excess
servicing fees associated with small pools of loans with small
outstanding balances and the amortization expense related to adoption of
SFAS No. 122 during the three and nine months ended September 30, 1995
were $81 thousand and $358 thousand, respectively.
In order to mitigate the prepayment risk associated with mortgage
servicing rights and protect economic value, the Company purchased a $30
million (notional amount) constant maturity treasury floor (CMT) for $555
thousand. The cost of the CMT is being amortized over five years using
the straight line method of amortization and is recorded at the lower of
amortized cost or market value. The CMT's value is related to movements
in market interest rates to which it is indexed (the 10 year Constant
Maturity Treasury Daily Yield) and
-16-
<PAGE>
the remaining term of the CMT. The CMT's value is inversely related to
movements in market interest rates. As interest rates decline, the value of
the CMT increases. Market interest rate movements also influence the
behavior of borrowers, which impacts the value of mortgage servicing rights
as a result of an increase or decrease in mortgage loan prepayment speeds.
The value of mortgage servicing rights, generally, increases as market
interest rates increase and declines as rates decrease. While not accorded
hedge accounting treatment due to the uncertainty of strict correlation, in
the event that interest rates fall any resulting increase in the value of the
CMT is intended to offset, in part, the prospective impairment to mortgage
servicing rights. The CMT is included in other assets on the Company's
balance sheet at September 30, 1995 at amortized cost of $501 thousand
(market value approximates amortized cost).
Other categories of noninterest income include customer services income,
which increased $1.1 million, or 21.7%, loan related services income,
which increased $28 thousand, or 3.7%, and trust and investment advisory
services, which decreased $14 thousand,or 1.2%, for the nine months ended
September 30, 1995 as compared with the same period in 1994. The changes
in these categories of noninterest income resulted primarily from the
related volume of customer transactions.
Other noninterest income decreased $1.3 million for the nine months ended
September 30, 1995, compared with the same period in 1994, primarily as a
result of $1.3 million in interest income accrued and received on federal
income tax receivables during 1994.
NONINTEREST EXPENSES
Total noninterest expenses decreased $651 thousand, or 2.7%, and
increased $1.7 million, or 2.6%, for the three and nine months ended
September 30, 1995, respectively, compared to the same respective periods
in 1994.
Salaries and employee benefits increased $1.3 million, or 10.8%, and $3.3
million, or 10.2%, for the three and nine months ended September 30,
1995, respectively, as compared to the same periods in 1994. These
increases were principally the result of normal salary and wage
increases, the addition of five branches and associated employee costs
related to the Bankcore acquisition, staff additions related to start-up
costs associated with the establishment of a trust department at the
Bank, expanded telephone banking services, implementation of supermarket
banking and expanded operations staff to support new deposit products.
Deposit and other assessments expenses decreased $1.2 million, or 85.2%,
and $1.4 million, or 31.8%, for the three and nine months ended September
30, 1995, respectively, as compared with the same periods in 1994. These
decreases were attributable to the reduction in deposit insurance
premiums from $0.23 per $100 of deposits to $0.04 per $100 of deposits
beginning in June, 1995 paid by the Bank and Portsmouth to the Bank
Insurance Fund ("BIF") which is administered by the FDIC. See Item 5
below, however.
Collection and carrying costs of nonperforming assets decreased $743
thousand, or 77.1%, and $2.0 million, or 63.4%, for the three and nine
months ended September 30, 1995, respectively, compared to the same
respective periods in 1994. The decrease in collection and carrying
expenses reflects the lower level of nonperforming assets at the Company
in recent periods.
Data processing expenses increased $149 thousand, or 9.1%, and $732
thousand, or 16.3%, for the three and nine months ended September 30,
1995, respectively, compared with the same respective periods in 1994.
The investment in expanded
-17-
<PAGE>
operational capabilities to support new product offerings and improve
customer service, as well as a higher level of transactions related to the
larger mortgage servicing portfolio, were the primary factors behind the
increase in data processing expenses in 1995.
Advertising and marketing expense increased $281 thousand, or 11.8%, for
the nine months ended September 30, 1995 as compared to the same period
in 1994. The increase in advertising and marketing expense reflected the
Company's business strategy to improve the visibility of its products and
services, communicate its improved financial condition and take advantage
of the opportunity created by the confusion and related consumer
dissatisfaction caused by the major changes that have occurred and are
anticipated to occur in the structure of the banking industries in Maine
and New Hampshire.
Other categories of noninterest expenses include net occupancy expense,
which decreased $62 thousand for the nine months ended September 30, 1995
compared to the same period in 1994, and equipment expense, which
increased $76 thousand for the nine months ended September 30, 1995
compared to the same period in 1994.
Other noninterest expenses decreased $131 thousand, or 3.0%, and
increased $806 thousand, or 7.0%, for the three and nine months ended
September 30, 1995, respectively, compared with the same respective
periods in 1994.
The following table sets forth information relating to other noninterest
expenses during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1995 1994 1995 1994
-------- --------- --------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Postage and Freight $ 413 $ 316 $ 1,324 $ 1,032
Office Supplies 524 367 1,404 1,227
Amortization of goodwill 479 515 1,332 1,267
Telephone 436 360 1,220 999
Other 2,442 2,867 7,113 7,062
------- ------- ------- -------
$ 4,294 $ 4,425 $12,393 $11,587
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
INCOME TAX EXPENSE
Income tax expense was $4.9 million and $1.9 million for the three months
ended September 30, 1995 and 1994, respectively, which amounted to
effective income tax rates of 34.4% and 20.5%, respectively. Income tax
expense was $12.5 million and $6.6 million for the nine months ended
September 30, 1995 and 1994, respectively, which amounted to effective
income tax rates of 33.8% and 26.5%, respectively. The lower effective
income tax rates for the three and nine months ending September 30, 1994
as compared with the same periods in 1995 are primarily attributable to
the recording of a one-time $1.7 million tax benefit from the recognition
of net deferred tax assets related to the merger of MMSB.
-18-
<PAGE>
FINANCIAL CONDITION
Set forth below is a discussion of the material changes in the Company's
financial condition from December 31, 1994 to September 30, 1995.
SECURITIES AVAILABLE FOR SALE
Securities available for sale increased $79.1 million, or 18.4%.
Securities available for sale are reported at fair value, with unrealized
gains and losses reported as a separate component of shareholders'
equity. At September 30, 1995, $710 thousand of net unrealized gain (net
of related taxes) was included in shareholders' equity. A summary of
the carrying values of securities available for sale follows:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
(In Thousands)
<S> <C> <C>
U.S. Government obligations and
obligations of U.S. Government
agencies and corporations $265,283 $219,220
Other bonds and notes 30,471 13,792
Mortgage-backed securities 188,154 172,465
-------- --------
Total debt securities 483,908 405,477
Equity securities 24,185 23,526
-------- --------
Total securities available for sale $508,093 $429,003
-------- --------
-------- --------
</TABLE>
LOANS HELD FOR SALE
Loans held for sale, all of which were residential mortgage loans,
increased $53.1 million. The outstanding dollar amount of loans held for
sale can vary greatly from period to period as a result of mortgage
origination levels, timing and delivery of loan sales, changes in market
interest rates and asset liability management strategies. The change in
loans held for sale from December 31, 1994 to September 30, 1995 was
primarily attributable to the higher level of fixed rate mortgage
originations in the months preceding September 30, 1995 as compared with
December 31, 1994. At September 30, 1995 and December 31, 1994, loans
held for sale had a weighted average rate of 7.42% and 7.71%,
respectively.
-19-
<PAGE>
LOANS AND LEASES
Total loans and leases held for investment increased $124.2 million, or
5.9%, for the nine months ended September 30, 1995. The increase was
attributable to $78.0 million of loans acquired through the Bankcore
acquisition and $16.5 million in loans in connection with an acquisition
of branch offices in Aroostook County, Maine, as discussed above, as well
as increases in commercial business loan originations. Sales of
residential real estate loans substantially offset residential loan
originations.
The following table sets forth total loans and leases originated or
purchased and sold, repaid or otherwise reduced, by loan type, for the
periods indicated including loans held for sale:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1995 1994 1995 1994
--------- --------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
Originations and purchases:
Residential real estate loans $231,947 $130,761 $ 408,273 $311,356
Commercial real estate loans 31,240 63,330 81,119 120,742
Commercial business loans
and leases 110,207 79,417 285,434 199,957
Consumer loans 77,728 89,067 197,745 219,520
--------- --------- ---------- --------
451,122 362,575 972,571 851,575
--------- --------- ---------- --------
Loans acquired through
acquisitions 77,994 -0- 94,452 -0-
--------- --------- ---------- --------
Total originations,
purchases and
acquisitions 529,116 362,575 1,067,023 851,575
--------- --------- ---------- --------
Sales and principal reductions:
Sales 189,873 34,422 350,517 202,344
Principal reductions 200,951 263,057 539,216 574,138
--------- --------- ---------- --------
Total sales and principal
reductions 390,824 297,479 889,733 776,482
--------- --------- ---------- --------
Increase in loans held for sale
and loans and leases $138,292 $ 65,096 $ 177,290 $ 75,093
--------- --------- ---------- --------
--------- --------- ---------- --------
</TABLE>
Residential real estate loan originations increased $101.2 million for
the three months ended September 30, 1995 as compared with the same
period in 1994 and increased $96.9 million for the nine months ended
September 30, 1995 as compared with the same period in 1994. The
increase in residential loan originations during the three months ended
September 30, 1995 reflected a lower interest rate environment and a
substantial increase in loans originated through the Bank's correspondent
network.
Commercial real estate loan originations decreased $32.1 million and
$39.6 million for the three and nine months ended September 30, 1995,
respectively, as compared with the same respective periods in 1994. The
decrease in commercial real estate loan originations reflects the Bank's
strategy to reduce its relative exposure to commercial real estate loans
in favor of other types of loans. The increase in the balance of
commercial real estate loans from December 31, 1994 to September 30, 1995
was attributable to the Company's acquisitions during the period.
Commercial business loan and lease originations increased $30.8 million
and $85.5 million for the three and nine months ended September 30, 1995,
respectively, as compared with the same periods in 1994. The increase in
-20-
<PAGE>
commercial business loans and lease originations is consistent with the
Company's strategy to focus on lending to sound small business customers
within its geographic market as well as an increase in tax exempt loans
to municipalities.
Originations of consumer loans continue to include a significant amount
of consumer loans accounted for approximately 24.7% of the total
originations of consumer loans during the nine months ended September 30,
1995 and amounted to $304.5 million or 47.2% of the Company's consumer
loan portfolio at September 30, 1995.
NONPERFORMING ASSETS
The following table sets forth information regarding nonperforming assets
at the dates indicated:
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31,
1995 1995 1995 1994
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate loans:
Nonaccrual loans $ 5,231 $ 4,517 $ 4,040 $ 1,799
Accruing loans which are 90 days overdue 2.013 2,833 2,174 2,883
------- ------- ------- -------
Total 7,244 7,350 6,214 4,682
------- ------- ------- -------
Commercial real estate mortgages:
Nonaccrual loans 16,106 15,327 22,336 20,413
Troubled debt restructurings 3,946 4,870 6,113 5,704
------- ------- ------- -------
Total 20,052 20,197 28,449 26,117
------- ------- ------- -------
Commercial business loans and leases:
Nonaccrual loans 5,940 6,620 5,589 6,270
Troubled debt restructurings 1,953 2,098 1,455 2,013
------- ------- ------- -------
Total 7,893 8,718 7,044 8,283
------- ------- ------- -------
Consumer loans and leases:
Nonaccrual loans 3,190 2,963 2,840 2,727
Accruing loans which are 90 days overdue 343 112 303 468
------- ------- ------- -------
Total 3,533 3,075 3,143 3,195
------- ------- ------- -------
Total nonperforming loans:
Nonaccrual loans 30,467 29,427 34,805 31,209
Accruing loans which are 90 days overdue 2,356 2,945 2,477 3,351
Troubled debt restructurings 5,899 6,968 7,568 7,717
------- ------- ------- -------
Total nonperforming loans 38,722 39,340 44,850 42,277
------- ------- ------- -------
Other nonperforming assets:
Other real estate owned, net of
related reserves 6,589 8,555 4,173 6,651
In-substance foreclosures, net of
related reserves -0- -0- -0- 2,096
Repossessions, net of related reserves 1,629 1,591 1,930 1,983
------- ------- ------- -------
Total other nonperforming assets 8,218 10,146 6,103 10,730
------- ------- ------- -------
Total nonperforming assets $46,940 $49,486 $50,953 $53,007
------- ------- ------- -------
------- ------- ------- -------
Total nonperforming loans as a percentage
of total loans (1) 1.74% 1.86% 2.12% 2.01%
Total nonperforming assets as a percentage
of total assets 1.55% 1.73% 1.82% 1.90%
Total nonperforming assets as a percentage
of total loans (1) and total other
nonperforming assets 2.10% 2.33% 2.40% 2.51%
</TABLE>
(1) Exclusive of loans held for sale.
It is the policy of the Company to place all commercial real estate loans
and commercial business loans which are 90 days or more past due, unless
secured by
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<PAGE>
sufficient cash or other assets immediately convertible to cash, on
nonaccrual status. All such loans 90 days or more past due, whether on
nonaccrual status or not are considered as nonperforming loans. Residential
real estate loans and consumer loans are placed on nonaccrual and
nonperforming status generally when they are 90 days or more past due or when
in management's judgment the collectibility of interest and/or principal is
doubtful.
It is also the policy of the Company to place on nonaccrual and
nonperforming status loans currently performing in accordance with their
terms but which in management's judgment are likely to present future
principal and/or interest repayment problems and thus ultimately could be
classified as nonperforming. At September 30, 1995, $17.4 million of
commercial real estate and commercial business loans and leases, or 62.3%
of total nonperforming commercial real estate and commercial business
loans, were on nonaccrual status and thus disclosed as nonperforming
loans even though they were less than 90 days past due.
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan," and SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
These statements require changes in both the disclosure and impairment
measurement of nonperforming loans. Certain loans which had previously
been reported as nonperforming and certain in-substance foreclosures are
currently required to be disclosed as impaired loans. At adoption, the
Company reclassified $2.2 million of in-substance foreclosures and
related reserves of $96 thousand to loans and the allowance for loan
losses, respectively. Prior year balances were not reclassified as
management deemed the amounts to be immaterial.
Restructured accruing loans entered into subsequent to the adoption of
these statements are reported as impaired loans. In the year subsequent
to restructure these loans may be removed from impaired loan status
provided that the loan bears a market rate of interest at the time of
restructure and is performing under the restructured terms.
Restructured, accruing loans entered into prior to the adoption of these
statements are not required to be reported as impaired loans unless such
loans are not performing in accordance with the restructured terms.
Commercial business and commercial real estate loans are considered
impaired when it is probable that the Company will not be able to collect
all amounts due according to the original contractual terms of the loan
agreement. The amount of impairment for impaired loans is determined by
the difference between the present value of the expected cash flows
related to the loan, using the original contractual interest rate, and
its recorded value, or, in the case of collateralized loans, the
difference between the fair value of the collateral and the recorded
amount of the loan. When foreclosure is probable, impairment is measured
based on the fair value of the collateral. The Company recognizes income
on impaired loans also classified as nonperforming on a cash basis when
the ability to collect the principal balance is not in doubt.
At September 30, 1995, total impaired loans were $28.2 million, of which
$24.9 million had related allowances of $6.3 million. During the three
months ended September 30, 1995, the income recognized related to
impaired loans was $351 thousand and the average balance of outstanding
impaired loans was $31.3 million. During the nine months ended September
30, 1995, the income recognized related to impaired loans was $883
thousand and the average balance of outstanding impaired loans was $30.1
million.
Real estate acquired by the Company as a result of foreclosure or by deed-
in-lieu of foreclosure generally is classified as other real estate owned
until it is sold. When property is acquired, it is recorded at the lower
of carrying or
-22-
<PAGE>
fair value less estimated selling costs at the date of acquisition or
classification and any writedown resulting therefrom is charged to the
allowance for loan losses. Interest accrual ceases on the date of
acquisition and all costs incurred from that date in maintaining the property
and subsequent reductions in value are expensed.
Nonperforming assets at September 30, 1995 included $6.6 million of other
real estate owned and $1.6 million of repossessed assets, in each case
net of related reserves.
The following table summarizes the gross activity in other real estate
owned for the nine months ended September 30, 1995.
<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
Balance at beginning of period $ 6,658
Property acquired through foreclosure or acceptance
of a deed-in-lieu of foreclosure 9,855
Property acquired through purchase acquisition 2,910
Sales and rental proceeds (13,190)
Writedowns and provisions for losses
(credit to operations) (356)
--------
Balance at end of period $ 6,589
--------
--------
</TABLE>
POTENTIAL NONPERFORMING ASSETS
At September 30, 1995, the Company had classified a total of $81.7
million of commercial real estate loans and commercial business loans and
leases as substandard or lower on its risk rating system, as compared to
$99.9 million at December 31, 1994. Included in this amount was the
Company's $27.9 million of nonperforming commercial business and
commercial real estate loans. In the opinion of management, the
remaining $53.8 million of commercial real estate loans and commercial
business loans and leases classified as substandard or lower at September
30, 1995 evidence one or more weaknesses or potential weaknesses and,
depending on the regional economy and other factors, may become
nonperforming assets in future periods. These loans are net of any
previously established specific reserves which have resulted in
chargeoffs, but not general reserves which have been established based on
the Company's internal rating of such loans and evaluation of the
adequacy of its allowance for loan losses.
-23-
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The following table sets forth information regarding activity in the
allowance for loan losses for the three and nine months ended September
30, 1995 and 1994, as well as certain related ratios:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Average loans and leases
outstanding during the period $2,283,235 $2,018,355 $2,180,887 $1,982,546
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Allowance at beginning of period $ 45,832 $ 53,306 $ 50,484 $ 52,804
Chargeoffs:
Residential real estate 420 588 944 1,432
Commercial real estate 699 1,336 6,614 3,490
Commercial business loans and
leases 368 459 1,453 2,381
Consumer 644 376 1,694 1,159
---------- ---------- ---------- ----------
Total loans charged off 2,131 2,759 10,705 8,462
---------- ---------- ---------- ----------
Recoveries:
Residential real estate 47 175 120 397
Commercial real estate 1,666 1,168 3,132 3,198
Commercial business loans and
leases 473 630 1,458 2,591
Consumer 3 107 231 347
---------- ---------- ---------- ----------
Total loans recovered 2,189 2,080 4,941 6,533
---------- ---------- ---------- -----------
Net chargeoffs (recoveries) (58) 679 5,764 1,929
Additions charged to operating
expenses 630 -0- 1,800 1,752
Additions due to purchase
acquisition 2,314 -0- 2,314 -0-
---------- ---------- ---------- -----------
Allowance at end of period $ 48,834 $ 52,627 $ 48,834 $ 52,627
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Ratio of net chargeoffs to average
loans and leases outstanding
during the period -
annualized (1) (0.01)% 0.13% 0.35% 0.10%
Ratio of allowance to total loans
and leases at end of period (2) 2.20% 2.60% 2.20% 2.60%
Ratio of allowance to nonperforming
loans at end of period 126.11% 124.50% 126.11% 124.50%
</TABLE>
(1) Average loans and leases include portfolio loans and loans held for sale.
(2) Excludes loans held for sale.
-24-
<PAGE>
The following table sets forth the manner in which the Company's total
allowance for loan losses was allocated by type of loan at the dates
indicated:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
-------------------------- ---------------------------
Percent of Total Percent of Total
Amount Loans by Category Amount Loans by Category
-------- ----------------- ------- -----------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate loans $ 3,315 0.53% $ 3,078 0.49%
Commercial real estate loans 28,322 4.57 30,545 5.13
Commercial business loans
and leases 8,410 2.54 8,219 3.09
Consumer Loans 8,787 1.36 8,642 1.43
------- -------
$48,834 2.20 $50,484 2.91
------- -------
------- -------
</TABLE>
DEPOSITS AND BORROWINGS
Total deposits increased by $267.2 million, or 12.9%, during the nine
months ended September 30, 1995. This increase resulted from an
increase in money market accounts of $137.9 million, or 50.0%, an
increase in certificates of deposit of $117.1 million, or 11.6%, a
combined increase in NOW and demand deposits of $56.9 million, or 13.8%,
and a decrease in regular savings of $44.7 million, or 12.4%. The
changes in deposit balances reflect the Company's current strategy to
emphasize relationship banking, cash management services, core deposits
and the deposit mix of acquisitions completed in 1995. The Bank
introduced a new money market account in December 1994 which has
attracted new customer deposits as well as resulted in the transfer of
customer funds from regular savings accounts during the first nine months
of 1995. The new money market account is only available to relationship
customers of the Company who are required to maintain minimum overall
balances and a transaction account. The increase in deposits during the
nine months ended September 30, 1995 was in part attributable to the
purchase of $46.1 million in deposits in Northern Maine and $110.8
million of deposits acquired in the Bankcore transaction, as described
above.
Total borrowings decreased by $46.5 million, or 10.1%, for the nine
months ended September 30, 1995. The decrease in total borrowings was
primarily attributable to an $86.5 million decrease in Federal Home Loan
Bank borrowings offset in part by a $30.0 million increase in securities
sold under repurchase agreements and a net increase in other borrowings
(including Federal funds purchased) of $10.0 million. Included in other
borrowings are the five-year debentures which were issued in conjunction
with the Bankcore acquisition on July 1, 1995, which had an outstanding
balance of $8.3 million at September 30, 1995. The decrease in total
borrowings reflects the Company's efforts to replace higher-costing
borrowings with lower-costing core deposits. The Company maintains the
ability to access Federal Home Loan Bank borrowings if market conditions
or business strategy warrants. At September 30, 1995, the Company
estimates its additional available borrowing capacity from the Federal
Home Loan Bank to be approximately $323.3 million.
SHAREHOLDERS' EQUITY
Total shareholders' equity increased by $32.3 million during the nine
months ended September 30, 1995. This increase was the result of $24.5
million of net income, a $9.8 million net unrealized gain (net of tax
effect) in the market value of securities available for sale, $1.1
million of treasury stock sales related to various employee benefit plans
of the Company, and $11.3 million related to the issuance of treasury
stock in conjunction with the Bankcore
-25-
<PAGE>
acquisition, the effects of which were offset in part by $8.3 million in
treasury stock purchases and cash dividends of $6.1 million.
As authorized by the Board of Directors, the Company initiated a share
repurchase program on December 20, 1994 and repurchased 751,600 shares of
its common stock at a total cost of $9.6 million. A total of 646,600 of
these shares, with a total cost of $8.3 million, were purchased during
the three months ended March 31, 1995. No additional shares were
repurchased during the six months ended September 30, 1995. The Company
currently does not anticipate repurchasing any additional shares.
REGULATORY CAPITAL REQUIREMENTS
At September 30, 1995 the Company and each of its subsidiaries were in
compliance with all applicable regulatory capital requirements.
The following table sets forth the minimum regulatory capital
requirements and the actual capital ratios of the Company and its two
banking subsidiaries at September 30, 1995:
<TABLE>
<CAPTION>
Actual
------------------------------
Required The The
Minimums Bank Portsmouth Company
-------- ----- ---------- -------
<S> <C> <C> <C> <C>
Risk-based capital ratios:
Tier I 4% 10.84% 10.37% 11.82%
Total 8 12.10 11.63 13.09
Tier I leverage capital ratios 3 (1) 7.45 6.39 8.07
</TABLE>
(1) The federal banking agencies have indicated that the most highly-rated
institutions which meet certain criteria will be subject to a 3% requirement
and all other institutions will be required to maintain an additional 1% to 2%
of capital. The federal banking agencies have not specified any requirements
in this regard with respect to the Company and its subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity increased slightly during the nine months ended
September 30, 1995. Net cash, short term and marketable assets amounted
to $497.0 million, or 21.0% of net deposits and short term liabilities at
September 30, 1995. This compares to a ratio of 20.0% at December 31,
1994. Liquidity is considered adequate by the Company to meet
anticipated cash needs in the foreseeable future.
ASSET AND LIABILITY MANAGEMENT
The Company analyzes the future impact on net interest income as a result
of changing interest rates based on budget projections, including
anticipated business activity, anticipated changes in interest rates and
other variables which are adjusted periodically to reflect the interest
rate environment and other factors. Based on this analysis and the
information and assumptions in effect at September 30, 1995, management
of the Company estimates that a 100 to 200 basis point gradual change in
interest rates would not significantly affect the Company's annualized
net interest income. This assessment is primarily based on management's
ability to exert some control with respect to the extent and timing of
the change in rates paid on the Company's interest-bearing liabilities
and, therefore, to manage the effects of a negative or positive gap
position on net interest income.
The Company's methods for analyzing the effects of changes in interest
rates on its operations incorporate assumptions concerning, among other
things, the amortization and prepayment of assets and liabilities.
Management believes
-26-
<PAGE>
that these assumptions approximate actual experience
and considers them reasonable, although the actual amortization and
repayment of assets and liabilities may vary substantially.
PROSPECTIVE BRANCH, DEPOSIT AND LOAN ACQUISITION IN NEW HAMPSHIRE
Portsmouth has entered into an agreement with Shawmut Bank NH ("Shawmut")
dated as of September 29, 1995 and amended as of October 31, 1995 to
acquire five branches of Shawmut that are being divested as part of the
planned merger of Fleet Financial Group, Inc. and Shawmut National
Corporation. The purchase is expected to be completed during the first
quarter of 1996 and will result in the transfer of approximately $250
million in loans to the Company and its assumption of approximately $172
million in deposits.
PROSPECTIVE ACQUISITION OF BANK OF NEW HAMPSHIRE CORPORATION
On October 25, 1995, the Company, First Coastal and Bank of New Hampshire
Corporation ("BNHC") entered into an Agreement and Plan of Merger (the
"Agreement"), pursuant to which, among other things, First Coastal will
merge into BNHC (the "Merger"). Simultaneous with the Merger, each share
of common stock of BNHC will be converted into and represent the right to
receive two shares of common stock of the Company. As of November 1,
1995, BNHC had 4,064,156 shares of common stock outstanding. As part of
the Agreement, BNHC gave the Company an option to purchase 19.9% of its
outstanding common stock under certain circumstances and the Company gave
BNHC an option to purchase 9.9% of its outstanding common stock under
certain circumstances. At September 30, 1995, BNHC had total assets of
$962.3 million and total shareholders' equity of $82.8 million.
Consummation of the Merger is subject to, among other things, the receipt
of all necessary regulatory and shareholder approvals and other customary
conditions.
-27-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
The Company is involved in routine legal proceedings occurring in the
ordinary course of business which in the aggregate are believed by
management to be immaterial to the financial condition and results of
operations of the Company.
Item 2. Changes in securities - not applicable.
Item 3. Defaults upon senior securities - not applicable.
Item 4. Submission of matters to a vote of security holders - not applicable.
Item 5. Other Information.
In October 1995, the U.S. Senate and the U.S. House of Representatives
approved bills which would, among other things, recapitalize the Savings
Association Insurance Fund ("SAIF") administered by the FDIC by a one-
time assessment on the deposits of all SAIF-insured institutions and
provide for an eventual merger of the SAIF and the BIF. The deposit
assessment rate will be determined by the FDIC and set at a level which
will be sufficient to recapitalize the SAIF to the designated statutory
reserve ratio. Currently, it is anticipated that the assessment rate
will be approximately $.85 for every $100.00 of assessable deposits as of
March 31, 1995 and that the one-time assessment will be due January 1,
1996.
Each of the foregoing bills contains provisions which provide certain
relief for institutions, such as the Bank and Portsmouth, which are
members of the BIF but have acquired SAIF-insured deposits as a result of
acquisitions of savings institutions in transactions effected pursuant to
Section 5(d)(3) of the Federal Deposit Insurance Act (FDIA"). Such
institutions do not pay SAIF assessments based on the actual amount of
the SAIF deposits acquired, as adjusted to reflect increases or decreases
in such deposits subsequent to the date of acquisition, but on the actual
amount of the SAIF deposits acquired as adjusted by a growth attribution
rule set forth in Section 5(d)(3) of the FDIA.. The bill passed by the
U.S. House of Representatives provides that the assessment rate
determined for all SAIF-insured institutions may be adjusted by the FDIC,
after consideration of specified factors, for BIF-insured institutions
which have acquired SAIF-insured deposits pursuant to Section 5(d)(3) of
the FDIA, provided that any such adjustment may be not less than two
thirds of the general assessment rate for SAIF-insured institutions. The
bill passed by the U.S. Senate provides that the amount of any deposits
which are treated as insured by SAIF under Section 5(d)(3) of the FDIA
shall be reduced by ten percent if the adjusted attributable amount of
SAIF deposits of the BIF member is less than fifty percent of the total
deposits of that member as of June 30, 1995 (which is the case for both
the Bank and Portsmouth). The Company currently is unable to predict the
likelihood of legislation effecting the foregoing changes, although a
consensus among legislators, regulators and bankers appears to be
developing in this regard.
At March 31, 1995, the adjusted attributable amount of SAIF deposits of
the Company's banking subsidiaries amounted to $352.4 million, or 17.0%,
of the Company's total deposits. If an assessment of $.85 per $100.00 of
assessable deposits was effected on these deposits (and assuming no
downward adjustment on the assessment rate for institutions such as the
Bank and Portsmouth), the one-time assessment which would be payable by
the Company's banking subsidiaries would aggregate approximately $3.0
million on a pre-tax basis.
-28-
<PAGE>
Item 6. Exhibits and reports on Form 8-K.
On November 3, 1995 the Company filed a report on Form 8-K regarding the
signing of a definitive agreement to Bank of New Hampshire Corporation
and the agreement to acquire branch offices from Shawmut Bank NH.
-29-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES HERITAGE FINANCIAL GROUP, INC.
Date November 8, 1995 By: /s/ William J. Ryan
-------------------- ------------------------------
William J. Ryan
Chairman, President and
Chief Executive Officer
Date November 8, 1995 By: /s/ Peter J. Verrill
------------------- -----------------------------
Peter J. Verrill
Executive Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
-35-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 95,045
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 23,220
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 508,093
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 2,286,660
<ALLOWANCE> 48,834
<TOTAL-ASSETS> 3,037,213
<DEPOSITS> 2,330,965
<SHORT-TERM> 117,253
<LIABILITIES-OTHER> 327,101
<LONG-TERM> 0
<COMMON> 187,075
0
0
<OTHER-SE> 74,519
<TOTAL-LIABILITIES-AND-EQUITY> 3,037,213
<INTEREST-LOAN> 150,237
<INTEREST-INVEST> 23,494
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 173,731
<INTEREST-DEPOSIT> 62,371
<INTEREST-EXPENSE> 81,553
<INTEREST-INCOME-NET> 92,178
<LOAN-LOSSES> 1,800
<SECURITIES-GAINS> (106)
<EXPENSE-OTHER> 69,124
<INCOME-PRETAX> 37,059
<INCOME-PRE-EXTRAORDINARY> 24,523
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,523
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 1.49
<YIELD-ACTUAL> 4.64
<LOANS-NON> 30,467
<LOANS-PAST> 2,356
<LOANS-TROUBLED> 5,899
<LOANS-PROBLEM> 81,700
<ALLOWANCE-OPEN> 45,832
<CHARGE-OFFS> 2,131
<RECOVERIES> 2,189
<ALLOWANCE-CLOSE> 48,834
<ALLOWANCE-DOMESTIC> 48,834
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
